10-K 1 form10k110301.txt FORM 10-K - DATED 11/03/01 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 November 3, 2001 -------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ -------------------------------------------------------------------------------- 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 21093, Seattle, WA 98111-3093 ---------------------------------------- ------------------------------- (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, 2001: $90,000. The number of shares of common stock outstanding as of December 1, 2001: 19,473,728. Documents incorporated by reference: None. ----------------------------------- Page 1 of 23 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, 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. At November 3, 2001, the Company's principal assets consisted of approximately $2.2 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 ITEM 4 - SUBMISSON 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 November 3, 2001 were reported as being less than $0.01 per share. Holders As of December 1, 2001, there were 969 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 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.

4 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- Liquidity and Capital Resources ------------------------------- At November 3, 2001, the Company's principal assets consisted of approximately $2.2 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 November 3, 2001, the Company had total assets of approximately $2.24 million and liabilities, other than the Senior Notes and Debentures including accrued interest and liquidation costs, of $1.78 million, thus having a net difference of approximately $460,000 available for holders of Senior Notes and Debentures. At November 3, 2001, 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, 1999, 2000 and 2001 on its Debentures and such default continues. The trustee for the Debentures has informed 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 Results of Operations --------------------- Investment income ----------------- Investment income for the year ended November 3, 2001 decreased as compared to the prior year primarily as a result of lower balances of investments in Mortgage Certificates. Investment income for the year ended October 28, 2000 increased as compared to the prior year as a result of the change in Mortgage Certificates unrealized appreciation offset by a decrease in interest income due to lower balances of investments in Mortgage Certificates. Investment income decreased during the year ended October 30, 1999, as compared to the immediate preceding year primarily as a result of lower balances of investments in Mortgage Certificates as well as decreases in unrealized appreciation. The weighted average interest income rate earned on the Mortgage Certificates approximated 7.5 %, 7.5% and 7.3% during the years ended November 3, 2001, October 28, 2000 and October 30, 1999, 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 principal repayments on Mortgage Certificates, unrealized appreciation resulting from mark-to-market adjustments decreased during the year ended October 30, 1999 by $83,000. Increases in market values offset decreases in unrealized appreciation due to principal repayments, resulting in a net decrease in unrealized appreciation during the year ended October 28, 2000 of $1,000, and a net increase in unrealized appreciation during the year ended November 3, 2001 of $3,000. Interest expense ---------------- Interest expense for each of the years ended November 3, 2001 and October 30, 1999 decreased as compared to the immediate preceding year primarily due to lower average balances of Mortgage Financing borrowings outstanding during the periods, as well as lower interest rates in 2001. Interest expense increased during the year ended October 28, 2000 as compared to the prior year due to higher interest rates offset by lower average balances of Mortgage Certificate borrowings. The weighted average interest expense rate on Mortgage Certificate related borrowings approximated 5.8%, 6.9%, and 5.8% during the years ended November 3, 2001, October 28, 2000 and October 30, 1999, respectively. 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 $2.5 million, $3.0 million, and $3.3 million during the fiscal years ended November 3, 2001, October 28, 2000, and October 30, 1999, respectively. The investment in 6 mortgage certificates has declined over the past three years due primarily to principal repayments from the underlying mortgages within the mortgage certificate pool. Principal repayments have approximated 12% to 21% 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 7.5% and 7.5% during fiscal 2001 and 2000, respectively, and the interest rate at November 3, 2001 approximated 7.0%. Mortgage certificates are financed with borrowings from an investment bank, such borrowings 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 $2.0 million, $2.5 million, and $2.9 million during the fiscal years ended November 3, 2001, October 28, 2000, and October 30, 1999, 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 6.9% during the years ended November 3, 2001, and October 28, 2000, respectively, and the interest rate at November 3, 2001 approximated 3.8%. Borrowings at November 3, 2001 approximated $1.6 million. 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 November 2002, additional quantitative and qualitative disclosures about market risk, including projections of future cash flows, are not considered meaningful and have not been presented. 7 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- INDEX TO FINANCIAL STATEMENTS ----------------------------- Financial statements Page -------------------- ---- Report of Independent Accountants 9 Consolidated Statements of Net Liabilities 10 Consolidated Statements in Changes in Net Liabilities 11 Notes to Financial Statements 12 SUPPLEMENTARY FINANCIAL INFORMATION ----------------------------------- Selected quarterly financial data (unaudited) 17 --------------------------------------------- 8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of PSS, Inc. We have audited the accompanying consolidated statements of net liabilities of PSS, Inc. and its subsidiaries in liquidation as of November 3, 2001 and October 28, 2000 and the related consolidated statements of changes in net liabilities in liquidation for the years ended November 3, 2001, October 28, 2000, and October 30, 1999. 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 auditing standards generally accepted in the United States of America. 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 the first paragraph present fairly, in all material respects, the net liabilities in liquidation of PSS, Inc. and its subsidiaries at November 3, 2001 and October 28, 2000 and the changes in their net liabilities in liquidation for the years ended November 3, 2001, October 28, 2000, and October 30, 1999, in conformity with accounting principles generally accepted in the United States of America applied on the basis described in the preceding paragraph. PricewaterhouseCoopers LLP Seattle, Washington January 22, 2002 9 PSS, INC. Consolidated Statements of Net Liabilities (Liquidation Basis) (thousands of dollars)

The accompanying notes are an integral part of these financial statements. 10 PSS, INC. Consolidated Statements of Changes in Net Liabilities (Liquidation Basis) (thousands of dollars)

The accompanying notes are an integral part of these financial statements. 11 PSS, INC. NOTES TO FINANCIAL STATEMENTS 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 is principally owned by Seacorp, Inc. ("Seacorp") and Zimmerman Retailing Group Limited ("Zimco"). Seacorp and Zimco own approximately 41% and 12%, 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, 1999, 2000 and 2001on its Debentures and such default continues. The trustee for the Debentures has informed 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 November 3, 2001, the Company had total assets of approximately $2.24 million and liabilities, other than the Senior Notes and Debentures including accrued interest and liquidation costs, of approximately $1.78 million, thus having a net difference of approximately $460,000 available for holders of Senior Notes and Debentures. At November 3, 2001, approximately $5.26 million of Senior Notes and $22.92 million of Debentures remain outstanding and, annual interest thereon, 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 12 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 it's 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, the Saturday closest to the end of October, November 2, 2002, has been utilized as the liquidation date for the November 3, 2001 financial statements, November 3, 2001 was utilized on the liquidation date for the October 28, 2001 financial statements and the October 28, 2000 fiscal year end was utilized as the liquidation date for the October 30, 1999 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 13 reserve for estimated costs during the period of liquidation. 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 November 3, 2001, October 28, 2000, and October 30, 1999, 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 and Related Party Receivables ------------------------------------------------------------- Cash and short-term investments, having maturities of three months or less when purchased, are primarily comprised of interest-bearing short-term bank deposits. During the year ended November 3, 2001, the Company, along with other companies affiliated with Seacorp, invested cash with an affiliate of Seacorp, a related party, in 7 day certificates of deposit and has received, together with the other parties whose funds have been invested, its pro rata portion of the interest earned and has reported this amount as a related party receivable in the Statement of Net Liabilities. 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 14 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. 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 amounts in excess of required collateral are released to the Company at its request. 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 $1.6 million and 3.8% at November 3, 2001 and $2.3 million and 7.5% at October 28, 2000, respectively. During the years ended November 3, 2001, October 28, 2000, and October 30, 1999, the average balance of mortgage related borrowings outstanding approximated $2.0 million, $2.5 million, and $2.9 million, and the weighted annual average interest expense rates approximated 5.8%, 6.9% and 5.8%, respectively. At November 3, 2001, 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 7.5%, 7.5% and 7.3%, during the years ended November 3, 2001, October 28, 2000 and October 30, 1999, respectively. NOTE 5 - Subordinated Debt -------------------------- Subordinated debt and related interest payable through the balance sheet dates are summarized as follows (thousands of dollars): November 3, October 28, 2001 2000 ---- ---- PNS 12-1/8% Senior Notes $ 5,258 $ 5,258 Interest payable on Senior Notes 4,344 3,696 ------- ------- $ 9,602 $ 8,954 ======= ======= PSS 7-1/8% Debentures $22,920 $22,920 Interest payable on Debentures 11,941 10,280 ------- ------- $34,861 $33,200 ======= ======= 15 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 intercompany 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. 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 November 3, 2001, October 28, 2000 and October 30, 1999, there was no provision for income taxes recorded. As of November 3, 2001, for income tax purposes, the Company has approximately $83 million of net operating loss carry-forwards available to offset future taxable income and a portion of such carry-forwards expires at the end of fiscal 2002. 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. 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. 16 NOTE 8 - Selected Quarterly Financial Data (Unaudited) ------------------------------------------------------ Selected quarterly financial data are as follows (thousands of dollars):

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- None. 17 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 President and Director 46 President and Director of the Company for more than 5 years. President of City Realty, Inc. (a real estate holding company) and Vice President of 200 West Holdings, Ltd. (a subsidiary of City Realty) for more than 5 years prior thereto. Vice President of Seacorp for more than 5 years. Gerald P. Nathanson 66 Director of the Company since Director October 1986 and a private investor for more than 5 years. Carite L. Torpey 53 Vice President, Secretary and Vice President, Secretary Treasurer of the Company since July and Treasurer 1997 and Assistant Secretary for more than 5 years prior thereto. Vice President or Assistant vice President of TG Services, Inc.(a private investment company) for more than 5 years. 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. 18 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ------------------------------------------------------------------------ The following table sets forth, as of December 1, 2001, 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 12.3% Zimmerman Retailing Group Limited (a) 2,391,079 12.3% 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 (3 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 19 deemed to be, the beneficial owner(s) of 8,014,705 shares of common stock. Such amount includes 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 -------------------------------------------------------- During the year ended November 3, 2001, the Company, along with other companies affiliated with Seacorp, invested cash with an affiliate of Seacorp, a related party, in 7 day certificates of deposit and has received, together with the other parties whose funds have been invested, its pro rata portion of the interest earned and has reported this amount as a related party receivable in the Statement of Net Liabilities. 20 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 from Incorporation of the Registrant 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 Registration the Registrant Statement. 3.3 Certificate of Amendment of Incorporated by reference from Certificate of Incorporation Exhibit 3.1 to Quarterly Report on of the Registrant 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 Report on of the Registrant 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 Incorporated by reference from Registrant Inc. and United Exhibit 4.1 to the Registration States Trust Company of Statement. New York, as Trustee, relating to the 7-1/8% Con- vertible Debentures due July 15, 2006 (including the form of Convertible Debenture). 4.2 First Supplemental Indenture Incorporated by reference from between the Registrant and Exhibit 4.1 to the Quarterly Report United States Trust Company of on Form 10-Q for quarter ended April 30, 1988. 21 New York as Trustee, relating to the 7-1/8% Convertible De- bentures due July 15, 2006. 4.3 Indenture between PNS Inc. and Incorporated by reference from Norwest Bank Minneapolis, Nat- Exhibit 4.1 to the Registration ional Association as Trustee, Statement on Form S-1 (File No. relating to the 12-1/8% Senior 33-5591) of PNS Inc. Subordinated Notes due July 15, 1996 (including the form of Senior Subordinated Note. 4.4 First Supplemental Indenture Incorporated by reference from between PNS Inc., and Norwest Exhibit 4.2 to the Quarterly Report Bank Minnesota, National on Form 10-Q for the quarter ended Association as Trustee, April 30, 1988. relating to the 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 Report on PSSC Inc. and Bear Stearns & form 10-Q for the quarter ended Co., Inc. for the purchase and February 3, 1990. 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. 22 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 23, 2002 By: /s/ MARK TODES --------------- Mark Todes, President and Director 23 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 23, 2002 Director /s/ Gerald Nathanson ------------------------------------- Gerald Nathanson January 23, 2002 Director /s/ Mark Todes ------------------------------------- Mark Todes 24

PSS INC 10-K