10-Q 1 form10q080302.txt FORM 10-Q (08/03/2002) 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 August 3, 2002 ---------------------- 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 August 3, 2002 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, 2002: 19,473,728. Page 1 of 13 INDEX Page ---- PART I. FINANCIAL INFORMATION 1. Consolidated 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 9 4. Submission of Matters to a Vote of Security Holders (a) 5. Other Information (a) 6. Exhibits and Reports on Form 8-K 10 --------------------------------------------------- (a) These items are inapplicable or have a negative response and have therefore been omitted. 2 PSS, INC. CONSOLIDATED BALANCE SHEETS LIQUIDATION BASIS (unaudited) (thousands of dollars)

0403-~~May~~Aug-02 03-Nov-01 ---------------- ---------------- Cash and short-term investments $ - $ - Related party receivable 2019 56 Investment in mortgage certificates 1,~~851~~613 2,155 Interest receivable 1915 25 ---------------- ---------------- Total Assets 1,~~890~~647 2,236 ---------------- ---------------- Borrowings under mortgage certificate financing agreement 1,~~282~~020 1,615 Accounts payable and accrued liabilities ~~140~~143 160 Reserve for estimated costs during period of liquidation 6783 59 PNS 12-1/8% senior notes 5,258 5,258 Interest payable on PNS notes 4,~~662~~821 4,344 Reserve for interest on PNS notes during period of liquidation ~~318~~159 636 PSS 7-1/8% debentures 22,920 22,920 Interest payable on PSS debentures 1213,~~754~~162 11,941 Reserve for interest PSS debentures during period of liquidation ~~815~~407 1,629 ---------------- ---------------- Total liabilities 4847,~~216~~973 48,562 ---------------- ---------------- Net liabilities ($46,326) ($46,326) ================ ================

The accompanying notes are an integral part of the consolidated financial statements. 3 PSS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES LIQUIDATION BASIS (unaudited) (thousands of dollars)

Three months ended ------------------ 0403-~~May~~Aug-02 28-~~Apr~~Jul-01 ----------~~---~~ ----------~~---~~ Investment income $ 1928 $ 5541 Interest expense (~~576~~575) (~~600~~592) General and administrative expense (114) (115) Decrease in net reserve for estimated costs and interest during period of liquidation ~~568~~551 556 ----------~~---~~ ----------~~---~~ Change in net liabilities $ - $ - ==========~~===~~ ==========~~===~~ ~~Six~~Nine months ended ----------------- 0403-~~May~~Aug-02 28-~~Apr~~Jul-01 ----------~~---~~ ----------~~---~~ Investment income $ 4573 $ ~~108~~149 Interest expense (1,~~154~~729) (1,~~208~~800) General and administrative expenses (1519) (2126) Decrease in net reserve for estimated costs and interest during period of liquidation 1,~~124~~675 1,~~121~~677 ----------~~---~~ ----------~~---~~ Change in net liabilities $ - $ - ==========~~===~~ ==========~~===~~

The accompanying notes are an integral part of the consolidated financial statements. 4 PSS, INC. Notes to Consolidated 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, 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, 2001 and 2002 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 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 August 3, 2002, the Company had assets of approximately $1.64 million and liabilities, other than the Senior Notes and Debentures including accrued interest and liquidation costs, of approximately $1.16 million, thus having a net difference of approximately $480,000 available for holders of Senior Notes and Debentures. At August 3, 2002, 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 5 statements include all adjustments, consisting of normal recurring 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 2001 audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K. 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 estimated liquidation date, and estimated costs through the estimated 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 2, 2002, has been utilized as the liquidation date for the August 3, 2002 financial statements, and November 3, 2001 was utilized as the liquidation date for the July 28, 2001 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. 6 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. 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. NOTE 4 - Related Party Receivable --------------------------------- The Company, along with other companies affiliated with Seacorp, Inc. ("Seacorp", owner of 41% of the Company's common stock), invests 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. Amounts invested are reported as a related party receivable in the Statement of Net Liabilities. 7 PSS, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- At August 3, 2002, the Company's principal assets consisted of approximately $1.6 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 August 3, 2002, the Company had assets of approximately $1.64 million and liabilities, other than Senior Notes and Debentures including accrued interest and liquidation costs, of approximately $1.16 million, thus having a net difference of approximately $480,000 available for holders of Senior Notes and Debentures. At August 3, 2002, 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, 2001 and 2002 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 on July 15, 1995, January 15, 1996 and July 15, 1996 and failed to pay the outstanding principal which became due on July 15, 1996. All such defaults continue. In 1997 the Company was advised by the trustee for the Senior Notes that, after concluding that the Company lacks sufficient assets to pay the Senior Notes, the trustee had petitioned a district court for the State of Minnesota to authorize and instruct it to refrain from pursuing any default remedy against the Company and to discharge it as trustee, and that the Court had granted the trustee's requests. The Company's future operating results, liquidity, capital resources and requirements are primarily dependent upon actions which may be taken by the trustee for the Debentures to collect amounts due thereunder, the payment of amounts due on and purchases of Senior Notes and Debentures and, to a lesser extent, interest rate fluctuations as they relate to the market value of Mortgage Certificates and to the spread of interest income therefrom over interest expense on related borrowings. The Company is exclusively invested in Mortgage Certificates, and, accordingly, is presently relying solely on such as its source of cash funds. It has not been determined what course of action the Company may pursue with respect to debt service on the Senior Notes and Debentures. 8 Critical Accounting Policies ---------------------------- Certain accounting policies related to presentation of the Company's consolidated financial statements on the liquidation basis and valuation of deferred tax assets are considered to be critical accounting policies due to the estimation processes involved. As described in Note 2 to the consolidated financial statements, the Company's consolidated financial statements are presented on the liquidation basis. A summary of significant estimates and judgments are also described in Note 2. Estimates and judgments may be subject to change as facts and circumstances change, and actual costs and expenses may differ significantly depending on a number of factors, particularly the length of the liquidation period. The Company has provided a full valuation allowance related to its substantial deferred tax assets. If sufficient evidence of the Company's ability to generate sufficient future taxable income becomes apparent, the Company may be required to reduce its valuation allowance, which would result in recognizing an income tax benefit. Results of Operations --------------------- Investment income ----------------- Investment income decreased during the three and nine months ended August 3, 2002 as compared to the prior year periods primarily as a result of lower balances of investments in Mortgage Certificates and lower average interest rates earned on the investment. Interest expense ---------------- Interest expense decreased during the three and nine months ended August 3, 2002 as compared to the prior year periods due to decreases in interest rates and lower average balances of Mortgage Financing borrowings outstanding during current year periods. ITEM 3 - Defaults Upon Senior Securities ------------------------------- PNS failed to pay interest due on July 15, 1995, January 15, 1996 and July 15, 1996 and failed to pay the outstanding principal which became due on July 15, 1996. All such defaults continue. In 1997 the Company was advised by the trustee for the Senior Notes that, after concluding that the Company lacks sufficient assets to pay the Senior Notes, the trustee had petitioned a district court for the State of Minnesota to authorize and instruct it to refrain from pursuing any default remedy against the Company and to discharge it as trustee, and that the Court had granted the trustee's requests. ITEM 6 - Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 9 Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (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 17, 2002 By: /s/ MARK TODES --------------------- Mark Todes, President We, Mark Todes and Carite Torpey, each certifies that: 1. I have reviewed this quarterly report on Form 10-Q of PSS, Inc.; Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 2. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition and results of operations of the registrant as of, and for, the periods presented in this quarterly report; Date: September 17, 2002 /s/ MARK TODES -------------- Mark Todes, President and Principal Executive Officer /s/ CARITE TORPEY ----------------- Carite Torpey, Vice President, Treasurer and Principal Financial Officer 11

Filing Compare · PSS INC