10-Q 1 pss10q72801.txt FORM 10-Q FOR JULY 28, 2001 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 28, 2001 ---------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- --------------- -------------------------------------------------------------------------------- For Quarter ended July 28, 2001 Commission file number 0-14900 --------------- ------- PSS, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 91-1335798 ------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 2573, Seattle, WA 98111-2573 ------------------------------------------------ ------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (206) 901-3790 -------------- -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of common stock outstanding as of September 1, 2001: 19,473,728. Page 1 of 11 INDEX Page ---- PART I. FINANCIAL INFORMATION 1. Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION 1. Legal Proceedings (a) 2. Changes in Securities (a) 3. Defaults Upon Senior Securities 10 4. Submission of Matters to a Vote of Security Holders (a) 5. Other Information (a) 6. Exhibits and Reports on Form 8-K (a) -------------------------------------------------------------------------------- (a) These items are inapplicable or have a negative response and have therefore been omitted. 2 PSS, INC. CONSOLIDATED STATEMENTS OF NET LIABILITIES LIQUIDATION BASIS (unaudited) (thousands of dollars) Assets: 28-Jul-01 28-Oct-00 --------- --------- Cash and short-term investments $ 64 $ 115 Investment in mortgage certificates 2,438 2,712 Interest receivable 30 36 --------- --------- Total Assets 2,532 2,863 --------- --------- Liabilities: Borrowings under mortgage certificate financing agreement 1,928 2,255 Accounts payable and accrued liabilities 136 161 Reserve for estimated costs during period of liquidation 86 64 PNS 12-1/8% senior notes 5,258 5,258 Interest payable on PNS notes 4,173 3,696 Reserve for interest on PNS notes during 159 636 period of liquidation PSS 7-1/8% debentures 22,920 22,920 Interest payable on PSS debentures 11,501 10,280 Reserve for interest on PSS debentures during period of liquidation 407 1,629 --------- --------- Total liabilities 46,568 46,899 --------- --------- Net liabilities $(44,036) $(44,036) ========= ========= The accompanying notes are an integral part of these financial statements. 3 PSS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES LIQUIDATION BASIS (unaudited) (thousands of dollars)

PSS, INC. CONSOLIDATED STATEMENTS OF NET LIABILITIES LIQUIDATION BASIS (UNAUDITED) (THOUSANDS OF DOLLARS) Assets: 28-Apr-01 28-Oct-00 ------------- --------------- Cash and short-term investments $ 78 $ 115 Investment in mortgage certificates 2,546 2,712 Interest receivable 34 36 ------------- --------------- Total Assets 2,658 2,863 ------------- --------------- Liabilities: Borrowings under mortgage certificate financing agreement 2,056 2,255 Accounts payable and accrued liabilities 144 161 Reserve for estimated costs during period of liquidation 75 64 PNS 12-1/8% senior notes 5,258 5,258 Interest payable on PNS notes 4,014 3,696 Reserve for interest on PNS notes during 318 636 period of liquidation PSS 7-1/8% debentures 22,920 22,920 Interest payable on PSS debentures 11,094 10,280 Reserve for interest on PSS debentures during period of liquidation 815 1,629 ------------- --------------- Total liabilities 46,694 46,899 ------------- --------------- Net liabilities $ (44,036) $ (44,036) ============= =============== The accompanying notes are an integral part of these financial statements. 3 PSS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES LIQUIDATION BASIS (UNAUDITED) (THOUSANDS OF DOLLARS) Three months ended ------------------ 28-~~Apr~~Jul-01 29-~~Apr~~Jul-00 --------- --------- Investment income $ 5541 $ 3674 Interest expense (~~600~~592) (~~607~~612) General and administrative expenses (115) (1614) Decrease in reserve for estimated costs and interest during period of liquidation 556 ~~587~~552 ~~--------- ---------~~ Increase in net liabilities $ - $ - ~~=========~~Nine ~~========= Six~~ months ended ----------------- 28-~~Apr~~Jul-01 29-~~Apr~~Jul-00 --------- --------- Investment income $ ~~108~~149 $ ~~116~~190 Interest expense (1,~~208~~800) (1,~~214~~826) General and administrative expenses (2126) (4054) Decrease in reserve for estimated costs and interest during period of liquidation 1,~~121~~677 1,~~138~~690 --------- --------- Increase in net liabilities $ - $ - ========= ========= The accompanying notes are an integral part of these financial statements. 4 PSS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS LIQUIDATION BASIS (~~UNAUDITED~~unaudited) (~~THOUSANDS~~thousands OFof ~~DOLLARS~~dollars) ~~Six~~Nine months ended ----------------- 28-~~Apr~~Jul-01 29-~~Apr~~Jul-00 ----------- ---------- Cash flows from operating activities: Change in net liabilities $ - $ - Adjustments to reconcile to net cash flows from operating activities: ~~Increase~~Decrease/(increase) in unrealized appreciation on MBSI ~~(1)~~5 (929) Decrease in estimated costs and interest during period of liquidation (1,~~121~~677) (1,~~138~~690) Increase in accrued interest payable 1,~~132~~698 1,~~133~~698 Other (1519) (51) ----------- ---------- Net cash provided (used) by operating activities ~~(5)~~7 (1922) ----------- ---------- Cash flows from investing activities: Principal repayments on mortgage certificates ~~167~~269 ~~118~~136 ----------- ---------- Net cash provided by investing activities ~~167~~269 ~~118~~136 ----------- ---------- Cash flows from financing activities: Repayment of borrowings under mortgage certificate financing agreement (~~199~~327) (~~140~~164) ----------- ---------- Net cash used by financing activities (~~199~~327) (~~140~~164) ----------- ---------- Net decrease in cash and short-term investments (3751) (4150) Cash and short-term investments- beginning of period 115 172 ----------- ---------- end of period $ 7864 $ ~~131~~122 =========== ========== The accompanying notes are an integral part of these financial statements. 5

PSS, INC. Notes to Financial Statements July 28, 2001 NOTE 1 - The Company -------------------- The consolidated financial statements of PSS, Inc. ("PSS") include its direct subsidiary, PNS Inc. ("PNS") and its subsidiary PSSC, Inc. ("PSSC"), collectively, the "Company". The Company, through PSSC, owns 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 interest due January 15 and July 15, 1995, 1996, 1997, 1998, 1999, 2000 and 2001 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 1997 the Company was advised by the trustee for the Senior Notes that, after concluding that the Company lacks sufficient assets to pay the Senior Notes, the trustee had petitioned a district court for the State of Minnesota to authorize and instruct it to refrain from pursuing any default remedy against the Company and to discharge it as trustee, and that the Court had granted the trustee's requests. At July 28, 2001, the Company had assets of approximately $2.53 million and liabilities, other than the Senior Notes and Debentures including accrued interest and liquidation costs, of approximately $2.06 million, thus having a net difference of approximately $470,000 available for holders of Senior Notes and Debentures. At July 28, 2001, approximately $5.26 million of Senior Notes and $22.92 million of Debentures remain outstanding. The Company's future operating results, liquidity, capital resources and requirements are primarily dependent upon actions which may be taken by the trustee for the Debentures to collect amounts due thereunder, the payment of amounts due on and purchases of Senior Notes and Debentures and, to a lesser extent, interest rate fluctuations as they relate to the market value of Mortgage Certificates and to the spread of interest income therefrom over interest expense on related borrowings. The Company is exclusively invested in Mortgage Certificates, and, accordingly, is presently relying solely on such as its source of cash funds. It has not been determined what course of action the Company may pursue with respect to debt service on the Senior Notes and Debentures. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of Company management, these financial statements include all adjustments, consisting of normal adjustments, necessary for a fair statement of the Company's financial position and results of operation for the interim periods presented. The unaudited consolidated financial statements should be read in conjunction with the Company's 2000 audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K. 6 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. 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, the Saturday closest to the end of October, November 3, 2001, has been utilized as the liquidation date for the July 28, 2001 financial statements, and October 28, 2000 was utilized as the liquidation date for the July 29, 2000 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. 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. Presentation of per common share information on a liquidation basis is not considered meaningful and has been omitted. NOTE 3 - Income Taxes --------------------- As a result of losses for each of the interim periods, there was no provision for income taxes recorded. 7 PSS, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- At July 28, 2001, the Company's principal assets consisted of approximately $2.4 million of Mortgage Certificates from which interest income is earned and its principal obligations consisted of Mortgage Financing borrowings, Debentures and Senior Notes upon which interest expense is incurred. PNS is restricted by terms of its Senior Notes Indenture from paying dividends or making other payments to PSS, except that PNS may pay dividends to PSS in amounts sufficient to enable PSS to meet its obligation on its Debentures when due. PNS, like its parent company, has a stockholder's deficit. At July 28, 2001, the Company had assets of approximately $2.53 million and liabilities, other than Senior Notes and Debentures including accrued interest and liquidation costs, of approximately $2.06 million, thus having a net difference of approximately $470,000 available for holders of Senior Notes and Debentures. At July 28, 2001, approximately $5.26 million of Senior Notes and $22.92 million of Debentures remain outstanding. The Company failed to pay interest due January 15 and July 15, 1995, 1996, 1997, 1998, 1999, 2000 and 2001 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 1997 the Company was advised by the trustee for the Senior Notes that, after concluding that the Company lacks sufficient assets to pay the Senior Notes, the trustee had petitioned a district court for the State of Minnesota to authorize and instruct it to refrain from pursuing any default remedy against the Company and to discharge it as trustee, and that the Court had granted the trustee's requests. The Company's future operating results, liquidity, capital resources and requirements are primarily dependent upon actions which may be taken by the trustee for the Debentures to collect amounts due thereunder, the payment of amounts due on and purchases of Senior Notes and Debentures and, to a lesser extent, interest rate fluctuations as they relate to the market value of Mortgage Certificates and to the spread of interest income therefrom over interest expense on related borrowings. The Company is exclusively invested in Mortgage Certificates, and, accordingly, is presently relying solely on such as its source of cash funds. It has not been determined what course of action the Company may pursue with respect to debt service on the Senior Notes and Debentures. 8 Results of Operations --------------------- Investment income ----------------- Investment income decreased during the three and nine months ended July 28, 2001 as compared to the prior year periods due to year 2000 periods having more unrealized appreciation in mortgage certificates than the current year periods. Interest expense ---------------- Interest expense for the three and nine months ended July 28, 2001 decreased from that of the comparative prior year periods due primarily to having lower average balances of borrowings outstanding. 9 ITEM 3 - Defaults Upon Senior Securities ---------------------------------------- PNS failed to pay interest due on July 15, 1995, January 15, 1996 and July 15, 1996 and failed to pay the outstanding principal on its Senior Notes which became due on July 15, 1996. All such defaults continue. In 1997 the Company was advised by the trustee for the Senior Notes that, after concluding that the Company lacks sufficient assets to pay the Senior Notes, the trustee had petitioned a district court for the State of Minnesota to authorize and instruct it to refrain from pursuing any default remedy against the Company and to discharge it as trustee, and that the Court had granted the trustee's requests. ITEM 6 - Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits - none filed with this report. (b) None 10 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PSS, INC. (Registrant) Date: September 11, 2001 By: /s/ MARK TODES ------------------------- Mark Todes, President 11

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