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 30, 1999__
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
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 21093, Seattle, WA 98111-3093
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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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PO Box 2573, Seattle WA 98111-2573
- -----------------------------------------------
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, 1999: $270,000.
The number of shares of common stock outstanding as of October 30, 1999:
19,473,728.
Documents incorporated by reference: None.
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Page 1 of 25
<PAGE>
PART I
ITEM 1 - BUSINESS
- -----------------
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 a pass-through and participation certificate 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 30, 1999, the Company's principal assets consisted of
approximately $3.1 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 Condition 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 and capital resources
are primarily dependent.
ITEM 2 - PROPERTIES
- -------------------
None
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
None.
2
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------------
MATTERS
- -------
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 30, 1999 were reported as being
less than $0.01 per share.
HOLDERS
As of December 1, 1999, there were 967 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
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
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 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
OCTOBER 30, OCTOBER 31, NOVEMBER 1, NOVEMBER 2, OCTOBER 28,
1999 1998 1997 1996 1995
----------------------------------------------------------------
(thousands of dollars)
STATEMENT OF CHANGES IN NET LIABILITIES DATA:
<S> <C> <C> <C> <C> <C>
Increase in Net Liabilities $ (2,290) $ (2,265) $ (2,265) $ (3,020) $ (4,231)
OCTOBER 30, OCTOBER 31, NOVEMBER 1, NOVEMBER 2, OCTOBER 28,
----------------------------------------------------------------
1999 1998 1997 1996 1995
STATEMENTS OF NET LIABILITIES DATA:
Total Assets $ 3,268 $ 3,984 $ 4,829 $ 5,591 $ 5,927
Short-term borrowings 2,641 3,270 4,073 4,922 5,278
Long-term debt 28,178 28,178 28,178 28,178 28,178
Total Liabilities 45,014 43,440 42,020 40,517 37,833
Net Liabilities $ (41,746) $ (39,456) $ (37,191) $ (34,926) $ (31,906)
</TABLE>
4
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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 30, 1999, the Company's principal assets consisted of approximately
$3.1 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 30, 1999, the Company had assets of approximately $3.27 million and
liabilities, other than Senior Notes and Debentures including accrued interest
and liquidation costs, of $2.8 million, thus having a net difference of
approximately $470,000 available for holders of Senior Notes and Debentures. At
October 30, 1999, 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, 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 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.
5
<PAGE>
Results of Operations
- ---------------------
Investment income
-----------------
Interest income for each of the years ended October 30, 1999, October 31, 1998,
and November 1, 1997, 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 7.3%, 7.7% and 7.7% during the years ended October 30, 1999,
October 31, 1998 and November 1, 1997, 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 years ended October 30, 1999 and October 31, 1998 by $84,000 and
$47,000, respectively. Increases in market values resulted in an increase in
unrealized appreciation during the year ended November 1, 1997 of $64,000.
Interest expense
----------------
Interest expense for each of the years ended October 30, 1999, October 31, 1998
and November 1, 1997 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 5.8%, 6.0% and 6.0% during
the years ended October 30, 1999, October 31, 1998 and November 1, 1997,
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
- --------------------------------------------------------------------
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
$3.3 million, $4.1 million and $4.9 million during the fiscal years ended
October 30, 1999, October 31, 1998 and November 1, 1997, 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 three 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 7.3% and
7.7% during fiscal 1999 and 1998, respectively, and the interest rate at October
30, 1999 approximated 7.0%. The investment in mortgage certificates and interest
rate at October 30, 1999 approximated $3.1 million and 7.0%, respectively.
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 $2.9 million, $3.7 million and $4.6 million during the fiscal years
ended October 30, 1999, October 31, 1998 and November 1, 1997, 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
5.8% and 6% during the years ended October 30, 1999 and October 31, 1998,
respectively, and the interest rate at October 30, 1999 approximated 5.9%.
Borrowings and related interest rate at October 30, 1999 approximated $2.6
million and 5.9%, respectively.
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 $5.26 million of 12 1/8% Senior Notes and $22.92 million of 7
1/8% Debentures, both of which are in default, and its financial statements are
presented on a liquidation basis utilizing a liquidation date in October 2000,
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
Selected quarterly financial data (unaudited) 19
---------------------------------------------
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 in
liquidation of PSS, Inc. and its subsidiaries as of October 30, 1999 and October
31, 1998, and the related consolidated statements of changes in net liabilities
and of cash flows in liquidation for the years ended October 30, 1999, October
31, 1998 and November 1, 1997. 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.
As described in Note 2 of the consolidated financial statements, as of October
28, 1995, the Company adopted the liquidation basis of accounting.
In our opinion, the consolidated financial statements referred to in first
paragraph present fairly, in all material respects, the financial position of
PSS, Inc. and its subsidiaries at October 30, 1999 and October 31, 1998, and the
changes in their net liabilities and their cash flows in liquidation for the
years ended October 30, 1999, October 31, 1998 and November 1, 1997, in
conformity with generally accepted accounting principles applied on the basis
described in the preceding paragraph.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
December 15, 1999
9
<PAGE>
<TABLE>
<CAPTION>
PSS, INC.
Consolidated Statements of Net Liabilities
(Liquidation Basis)
(thousands of dollars)
October 30, October 31,
1999 1998
---------- ---------
<S> <C> <C>
Cash and short-term investments $172 $239
Investment in mortage certificates 3,061 3,700
Accrued interest receivable 35 45
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Total Assets 3,268 3,984
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Borrowings under mortgage certificate financing agreement 2,641 3,270
Accounts payable and accrued liabilities 156 177
Reserve for estimated costs during period of liquidation 62 102
PNS 12 1/8% senior notes 5,258 5,258
Accrued interest payable on PNS notes 3,060 2,424
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 8,652 7,024
Reserve for interest on PSS debentures during period of liquidation 1,629 1,629
---------- ---------
Total Liabilities 45,014 43,440
---------- ---------
Net Liabilities ($41,746) ($39,456)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
PSS, INC.
Consolidated Statements of Changes in Net Liabilities
(Liquidation Basis)
(thousands of dollars)
Year Ended
----------
October 30, 1October 31, November 1,
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Investment income $ 156 $ 270 $446
Interest expense (2,432) (2,490) (2,546)
General and administrative expense (54) (94) (104)
Decrease in reserve for estimated costs
and interest during period of liquidation 2,330 2,314 2,204
Provision for estimated costs and interest
during period of liquidation (2,290) (2,265) (2,265)
------ ------ ------
Increase in Net Liabilities $ (2,290) $ (2,265) $ (2,265)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Year ended
October October November
30, 1999 31, 1998 1, 1997
---------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Increase in Net Liabilities $(2,290) $(2,265) $(2,265)
Decrease (increase) in unrealized appreciation 84 47 (64)
Adjustments to reconcile to net cash flows
from operating activities:
Increase (decrease) in estimated costs and interest
during period of liquidation (40) (49) 61
Increase in accrued interest payable 2,264 2,264 2,265
Other (11) 20 34
---- -- --
Net cash provided by operating activities 7 17 31
- -- --
Cash flows from investing activities:
Principal repayments on mortgage certificates 555 712 855
--- --- ---
Net cash provided by investing activities 555 712 855
--- --- ---
Cash flows from financing activities:
Repayment of mortgage certificate borrrowings (629) (803) (849)
---- ---- ----
Net cash used by financing activities (629) (803) (849)
---- ---- ----
Net increase (decrease) in cash and short-term investments (67) (74) 37
Cash and short-term investments at beginning of year 239 313 $ 276
--- --- -----
Cash and short-term investments at end of year $ 172 $ 239 $ 313
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
PSS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
- --------------------
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 a pass-through and participation certificate
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, 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 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 30, 1999, the Company had assets of approximately $3.27 million and
liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of approximately $2.8 million, thus having a net
difference of approximately $470,000 available for holders of Senior Notes and
Debentures. At October 30, 1999, approximately $5.26 million of Senior Notes and
$22.92 million of Debentures remain outstanding and annual interest on the
principle 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
13
<PAGE>
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, cash and short term
investments, investments in mortgage certificates and accrued interest
receivable are stated at their net realizable value, net deferred tax assets are
stated at zero, liabilities are stated at contractual face value with accrued
interest through the liquidation date, 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 28, 2000, has been
utilized as the liquidation date for the October 30, 1999
financial statements, the October 30, 1999 fiscal year end was
utilized as the liquidation date for the October 31, 1998
financial statements, and the October 31, 1998 fiscal year end
was utilized as the liquidation date for the November 1, 1997
financial statements.
o Mortgage Certificates are stated at estimated market value and
related interest receivable at face value.
o Deferred tax assets relating to net operating loss carry
forwards, net of valuation allowance, are stated at zero.
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 contractual 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 30, 1999, October 31, 1998 and November 1,
1997 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.
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 $2.6 million and 5.9% at
October 30, 1999 and $3.3 million and 6% at October 31, 1998, respectively.
During the years ended October 30, 1999, October 31, 1998 and November 1, 1997,
the average balance of mortgage related borrowings outstanding approximated $2.9
million, $3.7 million and $4.6 million, and the weighted annual average interest
expense rates approximated 5.8%, 6.0% and 6.0%, respectively.
At October 30, 1999, the interest rate to be earned on the Mortgage Certificates
approximated 7.0%. 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 7.3%, 7.7% and 7.7%, during the years
ended October 30, 1999, October 31, 1998 and November 1, 1997, respectively.
NOTE 5 - SUBORDINATED DEBT
- --------------------------
Subordinated debt and related interest payable through the balance sheet dates
are summarized as follows (thousands of dollars):
October 30, October 31,
1999 1998
---- ----
PNS 12-1/8% Senior Notes $ 5,258 $ 5,258
Interest payable on Senior Notes 3,060 2,424
------ ------
$ 8,318 $ 7,682
====== ======
PSS 7-1/8% Debentures $ 22,920 $ 22,920
Interest payable on Debentures 8,652 7,024
------ ------
$ 31,572 $ 29,944
====== ======
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 and PSS sold 3.25
million shares of its common stock and issued $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
inter-company debenture between PNS and PSS in the amount of $150 million with
substantially the same interest rate and redemption provisions as the
Debentures. 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, 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 redemption's 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 30, 1999, October 31, 1998 and
November 1, 1997, there was no provision for income taxes recorded.
As of October 30, 1999, for income tax purposes, net operating loss
carry-forwards, which begin to expire in 2001, approximate $145 million. As
Company management cannot determine that it is more likely than not that the
Company will receive the benefit of deferred tax assets relating to these loss
carry-forwards, a valuation allowance equal to the deferred tax asset has been
established. If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of the carry-forwards
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.
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 31, August 1, May 2, January 31,
1998 1998 1998 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) --- --- ---
Fiscal Quarters Ended
---------------------
October 30, July 31, May 1, January 30,
1999 1999 1999 1999
------------------------------------------
Decrease in reserve for estimated costs and
interest during period of liquidation $ 570 $ 604 $ 580 $ 576
Provision for estimated costs and interest
during period of liquidation (2,290) --- --- ---
Increase in Net Liabilities (2,290) --- --- ---
</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.
<TABLE>
<CAPTION>
Present Principal
Name and Position Occupation or Employment
With the Company Age and Five Year Employment History
---------------- --- --------------------------------
<S> <C> <C>
Mark Todes 44 President and Director of the Company since
President and Director 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 64 Director of the Company since October 1986.
Director 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
Vice President, Secretary 51 Vice President, Secretary and Treasurer of
and Treasurer the Company since 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 thereto.
</TABLE>
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 1, 1999, 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
- --------
<TABLE>
<CAPTION>
(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:
<S> <C>
3.1 Restated Certificate of Incorporated by referenced from Exhibit 3.1
Incorporation of the Registrant 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 Exhibit 3.2
Certificate of Incorporation of to the Registration Statement.
the Registrant
3.3 Certificate of Amendment of Incorporated by reference from Exhibit 3.1
Certificate of Incorporation to Quarterly Report on Form 10-Q for the
of the Registrant quarter ended July 30, 1988.
3.4 Certificate of Amendment of Incorporated by reference from Exhibit 3.4
Certificate of Incorporation to the Annual Report on Form 10-K for the
of the Registrant 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 Exhibit 4.1
Inc. and United States Trust to the Registration Statement.
Company of New York, as Trustee,
relating to the 7-1/8% Con-
veritable Debentures due July 15, 2006
(including the form of
Convertible Debenture).
4.2 First Supplemental Indenture be- Incorporated by reference from Exhibit 4.1
tween the Registrant and to the Quarterly Report on Form 10-Q for
United States Trust Company of 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 Exhibit 4.1
Norwest Bank Minneapolis, Nat- to the Registration Statement on Form S-1
ional Association as Trustee, (File No. 33-5591) of PNS Inc.
relating to the 12-1/8% Senior
Subordinated Notes due July 15,
1996 (including the form of
Senior Subordinated Note.
4.4 First Supplemental Indenture be- Incorporated by reference from Exhibit 4.2
tween PNS Inc., and Norwest Bank to the Quarterly Report on Form 10-Q for
Minnesota, National Association the quarter ended April 30, 1988.
as Trustee, relating to the 12-1/8%
Senior Subordinated Notes due July 15, 1996.
10.5 Letter Agreement dated Incorporated by reference from Exhibit (i)
February 9, 1990 by and among to Quarterly Report on form 10-Q for the
PSSC Inc. and Bear Stearns & quarter ended February 3, 1990.
Co., Inc. for the purchase and the
financing of adjustable-rate
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.
</TABLE>
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: January 28, 2000 By: /s/ MARK TODES
--------------------------------
Mark Todes, President and Director
25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date Title Signature
---- ----- ---------
January __, 2000 Director
---------------------------------
Gerald Nathanson
January 28, 2000 Director /s/ Mark Todes
---------------------------------
Mark Todes
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-30-1999
<CASH> 172
<SECURITIES> 3,061
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,268
<CURRENT-LIABILITIES> 2,859
<BONDS> 42,155
0
0
<COMMON> 0
<OTHER-SE> (41,746)
<TOTAL-LIABILITY-AND-EQUITY> 2,859
<SALES> 0
<TOTAL-REVENUES> 156
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (54)
<LOSS-PROVISION> (2,290)
<INTEREST-EXPENSE> (2,432)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,290)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
