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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 2, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14900
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PSS, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 91-1335798
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 21093, Seattle, WA 98111-3093
- ---------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 901-3790
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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 January 27, 2003: $90,000.
The number of shares of common stock outstanding as of January 27, 2003:
19,473,728.
Documents incorporated by reference: None
Page 1 of 29
PART I
ITEM 1 - BUSINESS
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PSS, Inc. ("PSS"), through its wholly owned subsidiary, PNS Inc. ("PNS"), owns
PSSC Inc. ("PSSC"); together, PSS, PNS and PSSC are referred to collectively as
the "Company". At November 2, 2002, the Company, through PSSC, owned 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, was primarily engaged in the business of owning
mortgages and other liens on and interests in real estate. At November 2, 2002,
the Company's principal assets consisted of approximately $1.6 million of
Mortgage Certificates and $414,000 of cash and short-term investments from which
interest income is earned. The Mortgage Certificates were 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.
In June 1988 the Company sold substantially all of its assets comprising its
entire retail operations and received in partial payment of the purchase price,
shares of common stock of the purchaser's parent corporation. Since 1993, when
the Company sold the balance of the securities received by it in the 1988 sale,
it has not engaged in any business other than holding mortgages and other liens
on and interests in real estate, which have constituted its only assets. For
these past ten years the Company has relied exclusively on the Mortgage
Certificates it owned as its source for funds. Due to the limited available
cash, since 1995 the Company has failed to pay the interest due on its
Debentures and its Senior Notes, and it failed to pay the outstanding principal
on its Senior Notes when it became due in July 1996. With no prospects for any
change in the Company's business or in its ability to generate a greater
ultimate recovery for the holders of the Senior Notes (the only class of
creditors who stand to receive any recovery due to their senior position and the
Company's very limited resources), on January 27, 2003, the Company consummated
the sale of the Mortgage Certificates. After repaying the Company's margin debt
associated with the Mortgage Certificates and setting aside a reserve of
approximately $25,000 (for the purposes of an orderly discharge of miscellaneous
obligations and expenses incurred during the distribution period), the Company
will distribute to the holders of its Senior Notes the remaining cash balance of
approximately $569,000. Following the distribution, the Company will no longer
have any cash or other assets (except for the limited expense reserve) and
expects to terminate all operations on or prior to February 28, 2003.
The anticipated distribution of the net proceeds from the sale of the Mortgage
Certificates to the holders of the Senior Notes will cause them to receive
approximately 11% of the past due principal (with no recovery on account of the
defaulted interest). The issuer of the Debentures (PSS, Inc.) has no assets
other than the stock of PNS, Inc. and, accordingly, stands behind the issuer of
the Senior Notes with respect to its rights to the net proceeds from the sale of
the Mortgage Certificates. Upon completion of the distribution to the holders of
the Senior Notes, no assets will remain to allow for any recovery for the
holders of the Debentures or the Company's stockholders.
Affiliates of the Company's principal stockholders, Seacorp, Inc. and Zimmerman
Retailing Group Limited, which own an aggregate of 52% of the outstanding shares
of PSS Common Stock, also hold $159,000 and $352,000 principal amount of
Debentures, respectively. Neither Seacorp, Inc. nor Zimmerman Retailing Group
(nor any of their respective affiliates) will receive any distributions on
account of their holdings.
2
ITEM 2 - PROPERTIES
----------
None
ITEM 3 - LEGAL PROCEEDINGS
-----------------
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
3
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
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MARKET INFORMATION
The Company's common stock is traded over-the-counter. High and low prices are
the high and low bids as reported by National Quotation Bureau, Inc., which are
those quoted by dealers to each other, exclusive of markups, markdowns or
commissions, and do not represent actual transactions. The high and low prices
for the stock during the two years ended November 2, 2002 were reported as being
less than $0.01 per share.
HOLDERS
As of January 1, 2003, 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).
4
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.
YEAR ENDED
NOVEMBER 2, NOVEMBER 3, OCTOBER 28, OCTOBER 30, OCTOBER 31,
2002 2001 2000 1999 1998
-------------------------------------------------------------------------
(thousands of dollars)
STATEMENT OF CHANGES IN NET LIABILITIES DATA:
Decrease (Increase) in Net Liabilities $ 48,326 $ (2,290) $ (2,290) $ (2,290) $ (2,265)
NOVEMBER 2, NOVEMBER 3, OCTOBER 28, OCTOBER 30, OCTOBER 31,
2002 2001 2000 1999 1998
-------------------------------------------------------------------------
STATEMENTS OF NET LIABILITIES DATA:
Total Assets $ 2,034 $ 2,236 $ 2,863 $ 3,268 $ 3,984
Short-term borrowings 1,394 1,615 2,255 2,641 3,270
Long-term debt 569 28,178 28,178 28,178 28,178
Total Liabilities 2,034 48,625 46,899 45,014 43,440
Net Liabilities $ -- $(46,326) $(44,036) $(41,746) $(39,456)
5
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Liquidity and Capital Resources
- -------------------------------
At November 2, 2002, the Company's principal assets consisted of approximately
$1.6 million of Mortgage Certificates and $414,000 of cash and short-term
investments 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 2, 2002, the Company had total assets of approximately $2.03 million
and liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of $1.46 million, thus having a net difference
of approximately $569,000 available for holders of Senior Notes. After
distribution of such proceeds (subject to a small reserve for expenses), all
holders of the remaining obligations associated with the Senior Notes and
Debentures in the amounts of $4.69 million and $22.92 million, respectively,
plus the accured interest thereon will not receive any future proceeds.
In June 1988 the Company sold substantially all of its assets comprising its
entire retail operations and received in partial payment of the purchase price,
shares of common stock of the purchaser's parent corporation. Since 1993, when
the Company sold the balance of the securities received by it in the 1988 sale,
it has not engaged in any business other than holding mortgages and other liens
on and interests in real estate, which have constituted its only assets. For
these past ten years the Company has relied exclusively on the Mortgage
Certificates it owned as its source for funds. Due to the limited available
cash, since 1995 the Company has failed to pay the interest due on its
Debentures and its Senior Notes, and it failed to pay the outstanding principal
on its Senior Notes when it became due in July 1996. With no prospects for any
change in the Company's business or in its ability to generate a greater
ultimate recovery for the holders of the Senior Notes (the only class of
creditors who stand to receive any recovery due to their senior position and the
Company's very limited resources), on January 27, 2003, the Company consummated
the sale of the Mortgage Certificates. After repaying the Company's margin debt
associated with the Mortgage Certificates and setting aside a reserve of
approximately $25,000 (for the purposes of an orderly discharge of miscellaneous
obligations and expenses incurred during the distribution period), the Company
will distribute to the holders of its Senior Notes the remaining cash balance of
approximately $569,000. Following the distribution, the Company will no longer
have any cash or other assets (except for the limited expense reserve) and
expects to terminate all operations on or prior to February 28, 2003.
The anticipated distribution of the net proceeds from the sale of the Mortgage
Certificates to the holders of the Senior Notes will cause them to receive
approximately 11% of the past due principal (with no recovery on account of the
defaulted interest). The issuer of the Debentures (PSS, Inc.) has no assets
other than the stock of PNS, Inc. and, accordingly, stands behind the issuer of
the Senior Notes with respect to its rights to the net proceeds from the sale of
the Mortgage Certificates. Upon completion of the distribution to the holders of
the Senior Notes, no assets will remain to allow for any recovery for the
holders of the Debentures or the Company's stockholders.
Affiliates of the Company's principal stockholders, Seacorp, Inc. and Zimmerman
Retailing Group Limited, which own an aggregate of 52% of the outstanding shares
of PSS Common Stock, also hold $159,000 and $352,000 principal amount of
Debentures, respectively. Neither Seacorp, Inc. nor
6
Zimmerman Retailing Group (nor any of their respective affiliates) will receive
any distributions on account of their holdings.
In anticipation of the intended distribution to holders of Senior Notes in
February 2003, the Company revised estimates utilized in the liquidation basis
of accounting such that at November 2, 2002, Senior Notes and Debentures and
related accrued and reserved interest, and all other liabilities are stated at
fair value, which are determined as amounts to be received in distribution.
Accordingly, as holders of Debentures will not receive any proceeds of the
distribution, the Debentures and related interest are stated at zero. The
holders of Senior Notes will receive the remaining cash, which amount is
considered the fair value of the Senior Notes at November 2, 2002. The $48.6
million decrease in the previous carrying value of liabilities and resultant
value at November 2, 2002 is included in decrease in reserve for estimated costs
and interest during period of liquidation and adjustment to fair value
liabilities in the accompanying statement of changes in net liabilities.
Results of Operations
- ---------------------
Investment income
-----------------
Investment income for each of the years ended November 2, 2002 and 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. The weighted average interest income rate earned on the Mortgage
Certificates approximated 5.6 %, 7.5% and 7.5% during the years ended November
2, 2002, November 3, 2001, and October 28, 2000, 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. Increases in market values
offset decreases in unrealized appreciation due to principal repayments,
resulting in a net decrease in unrealized appreciation during the years ended
November 2, 2002 and November 3, 2001 of $7,000, and $3,000, respectively, and a
net increase in unrealized appreciation during the year ended October 28, 2000
of $1,000.
Interest expense
----------------
Interest expense for each of the years ended November 2, 2002 and November 3,
2001 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. 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 3.0%, 5.8%, and 6.9% during the years ended November 2,
2002, November 3, 2001, and October 28, 2000, respectively.
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
utilizing a liquidation date of February 28, 2003. A
7
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 assets.
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. This investment was sold in January 2003. The
Company's average investment approximated $1.8 million, $2.5 million, and $3.0
million, during the fiscal years ended November 2, 2002, November 3, 2001, and
October 28, 2000, respectively. The investment in 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 were 19%, 25%, and 11% of the mortgage investment during the fiscal
years ended November 2, 2002, November 3, 2001, and October 28, 2000,
respectively. 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 5.6% and 7.5% during fiscal
2002 and 2001, respectively, and the interest rate at November 2, 2002
approximated 5.0%.
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 $1.3 million, $2.0 million, and $2.5 million, during the fiscal
years ended November 2, 2002, November 3, 2001, and October 28, 2000,
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 3.0%, 5.8% and 6.9% during the years ended November 2,
2002, November 3, 2001, and October 28, 2000, respectively, and the interest
rate at November 2, 2002 approximated 3.0%. Borrowings at November 2, 2002
approximated $1.4 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 of February 28,
2003, additional quantitative and qualitative disclosures about market risk,
including projections of future cash flows, are not considered meaningful and
have not been presented.
8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Financial statements Page
-------------------- ----
Report of Independent Accountants 10
Consolidated Statements of Net Liabilities 11
Consolidated Statements in Changes in Net Liabilities 12
Notes to Financial Statements 13
SUPPLEMENTARY FINANCIAL INFORMATION
- -----------------------------------
Selected quarterly financial data (unaudited) 18
---------------------------------------------
9
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 2, 2002 and November
3, 2001, and related consolidated statements of changes in net liabilities in
liquidation for the years ended November 2, 2002, November 3, 2001 and October
28, 2000. These financial statements are the responsibilities 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 from material misstatement. An audit also 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 estimated made by management, as well as evaluating the
overall financial statement presentation. We believe 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. As described
in Note 1 to the consolidated financial statements, on January 27, 2003 the
Company consummated the sale of its Mortgage Certificate and after repaying the
Company's margin debt associated with the Mortgage Certificate, intends to
distribute the remaining cash, less an estimated reserves of approximately
$25,000, to the holders of the Senior Notes and cease all operations on or prior
to February 28, 2003.
In our opinion, the consolidated financial statements referred to in first
paragraph present fairly, in all material respects, the net liabilities in
liquidation of PSS, Inc. and its subsidiaries at November 2, 2002 and November
3, 2001, and the changes in their net liabilities in liquidation for the years
ended November 2, 2002, November 3, 2001 and October 28, 2000, 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 31, 2003
10
PSS, INC.
CONSOLIDATED STATEMENTS OF NET LIABILITIES
(LIQUIDATION BASIS - SEE NOTE 2)
(THOUSANDS OF DOLLARS)
November 2, November 3,
2002 2001
---------------------------------
Cash and short-term investments $ 414 $ --
Related party receivable -- 56
Investment in mortgage certificates 1,606 2,155
Accrued interest receivable 14 25
----------- ----------
Total Assets 2,034 2,236
----------- ----------
Borrowings under mortgage certificate financing agreement 1,394 1,615
Accounts payable and accrued liabilities 46 160
Reserve for estimated costs during period of liquidation 25 59
PNS 12 1/8% senior notes 569 5,258
Accrued interest payable on PNS notes -- 4,344
Reserve for interest on PNS notes during period of liquidation -- 636
PSS 7 1/8% debentures -- 22,920
Accrued interest payable on PSS debentures -- 11,941
Reserve for interest on PSS debentures during period of liquidation -- 1,629
----------- ----------
Total Liabilities 2,034 48,562
----------- ----------
Net Liabilities $ -- ($46,326)
=========== ==========
The accompanying notes are an integral part of these financial statements.
11
PSS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES
(LIQUIDATION BASIS - SEE NOTE 2)
(THOUSANDS OF DOLLARS)
Year Ended
----------
November November October 28,
2, 2002 3, 2001 2000
----------------------------------------
Investment income $ 102 $270 $ 217
Interest expense (2,304) (2,490) (2,436)
General and administrative expense (58) (94) (70)
Decrease in reserve for estimated costs
and interest during period of liquidation 2,256 2,314 2,289
Adjustment to fair value liability (Note 2) 46,355 -- --
Provision for estimated costs and interest
during period of liquidation (25) (2,290) (2,290)
--------- --------- ----------
Decrease (Increase) in Net Liabilities $ 46,326 $ (2,290) $ (2,290)
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
12
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, owned 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, was 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").
In June 1988 the Company sold substantially all of its assets comprising its
entire retail operations and received in partial payment of the purchase price,
shares of common stock of the purchaser's parent corporation. Since 1993, when
the Company sold the balance of the securities received by it in the 1988 sale,
it has not engaged in any business other than holding mortgages and other liens
on and interests in real estate, which have constituted its only assets. For
these past ten years the Company has relied exclusively on the Mortgage
Certificates it owned as its source for funds. Due to the limited available
cash, since 1995 the Company has failed to pay the interest due on its
Debentures and its Senior Notes, and it failed to pay the outstanding principal
on its Senior Notes when it became due in July 1996. With no prospects for any
change in the Company's business or in its ability to generate a greater
ultimate recovery for the holders of the Senior Notes (the only class of
creditors who stand to receive any recovery due to their senior position and the
Company's very limited resources), on January 27, 2003, the Company consummated
the sale of the Mortgage Certificates. After repaying the Company's margin debt
associated with the Mortgage Certificates and setting aside a reserve of
approximately $25,000 (for the purposes of an orderly discharge of miscellaneous
obligations and expenses incurred during the distribution period), the Company
will distribute to the holders of its Senior Notes the remaining cash balance of
approximately $569,000. Following the distribution, the Company will no longer
have any cash or other assets (except for the limited expense reserve) and
expects to terminate all operations on or prior to February 28, 2003.
The anticipated distribution of the net proceeds from the sale of the Mortgage
Certificates to the holders of the Senior Notes will cause them to receive
approximately 11% of the past due principal (with no recovery on account of the
defaulted interest). The issuer of the Debentures (PSS, Inc.) has no assets
other than the stock of PNS, Inc. and, accordingly, stands behind the issuer of
the Senior Notes with respect to its rights to the net proceeds from the sale of
the Mortgage Certificates. Upon completion of the distribution to the holders of
the Senior Notes, no assets will remain to allow for any recovery for the
holders of the Debentures or the Company's stockholders.
Affiliates of the Company's principal stockholders, Seacorp, Inc. and Zimmerman
Retailing Group Limited, which own an aggregate of 52% of the outstanding shares
of PSS Common Stock, also hold $159,000 and $352,000 principal amount of
Debentures, respectively. Neither Seacorp, Inc. nor Zimmerman Retailing Group
(nor any of their respective affiliates) will receive any distributions on
account of their holdings.
13
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 February 28, 2003 has been utilized as the liquidation date for the
November 2, 2002 financial statements. The Company's then next fiscal
year end, the Saturday closest to the end of October, November 2, 2002
was utilized as the liquidation date for the November 3, 2001 financial
statements and the November 3, 2001 fiscal year end was utilized as the
liquidation date for the October 28, 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 Prior to November 2, 2002, Senior Notes and Debentures and related
interest accrued were stated at contractual face value.
o Prior to November 2, 2002, 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.
In anticipation of the intended distribution to holders of Senior Notes in
February 2003, the Company revised its estimates utilized in the liquidation
basis of accounting such that at November 2, 2002, Senior
14
Notes and Debentures and related accrued and reserved interest, and all other
liabilities are stated at fair value, which are determined as amounts to be
received in distribution. Accordingly, as holders of Debentures will not receive
any proceeds of the distribution, the Debentures and related interest are stated
at zero. The holders of Senior Notes will receive the remaining cash after
payment of the borrowings under the mortgage certificate financing agreement,
accounts payable and accrued liabilities and reserve for estimated costs during
the period of liquidation, such amount is considered the fair value of the
Senior Notes at November 2, 2002. The $48.6 million decrease in the previous
carrying value of liabilities and resultant value at November 2, 2002 is
included in decrease in reserve for estimated costs and interest during period
of liquidation and adjustment to fair value liabilities in the accompanying
statement of changes in net liabilities.
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 2, 2002, November 3, 2001, and October
28, 2000 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
certificates of deposits. During the years ended November 2, 2002 and 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. At November 2, 2002, the Company had no such investment and future
investments are not anticipated.
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 accounting principles
generally accepted in the United States 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.
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
15
"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 $1.4 million and 3.0% at November 2, 2002
and $1.6 million and 3.8% at November 3, 2001, respectively. During the years
ended November 2, 2002 and November 3, 2001, and October 28, 2000, the average
balance of mortgage related borrowings outstanding approximated $1.3 million,
$2.0 million, and $2.5 million, and the weighted annual average interest expense
rates approximated 3.0%, 5.8%, and 6.9%, respectively.
At November 2, 2002, the interest rate to be earned on the Mortgage Certificates
approximated 5.0%. 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 5.6%, 7.5%, and 7.5%, during the years
ended November 2, 2002, November 3, 2001, and October 28, 2000, respectively.
As further described in Note 1, in January 2003, the Company sold its investment
in Mortgage Certificates and repaid related Mortgage Financing borrowings.
NOTE 5 - SUBORDINATED DEBT
- --------------------------
Subordinated debt and related interest payable through the balance sheet dates
are summarized as follows (thousands of dollars):
November 2, November 3,
2002 2001
----------- -----------
PNS 12-1/8% Senior Notes $ 569 $ 5,258
Interest payable on Senior Notes -- 4,344
----------- -----------
$ 569 $ 9,602
=========== ===========
PSS 7-1/8% Debentures $ 0 $ 22,920
Interest payable on Debentures 0 11,941
----------- -----------
$ 0 $ 34,861
=========== ===========
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.
16
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 2,2002, November 3, 2001, and
October 28, 2000, there was no provision for income taxes recorded.
As of November 2, 2002, for income tax purposes, the Company has net operating
loss carry-forwards available to offset future taxable income and a portion of
such carry-forwards expires at the end of fiscal 2003. 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.
17
NOTE 8 - SELECTED FINANCIAL DATA (UNAUDITED)
- --------------------------------------------
Selected quarterly financial data are as follows (thousands of dollars):
Fiscal Quarters Ended
---------------------
November August 3 May 4, February 2,
2, 2002 2002 2002 2002
------------------------------------------------
Decrease in reserve for estimated costs and
interest during period of liquidation $ 581 $ 551 $ 568 $ 556
Adjustment to fair value liability
(Note 2) 46,355 --
Provision for estimated costs and interest
during period of liquidation (25) -- -- --
Decrease in Net Liabilities 46,326 -- -- --
Fiscal Quarters Ended
---------------------
November July 28, April 28, January 27,
3, 2001 2001 2001 2001
------------------------------------------------
Decrease in reserve for estimated costs and
interest during period of liquidation $ 618 $ 556 $ 556 $ 565
Provision for estimated costs and interest
during period of liquidation (2,290) -- -- --
Increase in Net Liabilities (2,290) -- -- --
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
None.
18
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 47 President and Director of the Company
President and Director for more than 5 years. President of City
Realty, Inc. (a real estate holding
company) and President of 200 West
Holdings, Ltd. (a subsidiary of City
Realty) for more than 5 years. Vice
President of Seacorp for more than 5
years.
Gerald P. Nathanson 67 Director of the Company since October
Director 1986 and a private investor for more
than 5 years.
Carite L. Torpey 54 Vice President, Secretary and Treasurer
Vice President, Secretary of the Company for more than 5 years.
and Treasurer 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.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of January 1, 2003, 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.
19
Amount and Nature
of Beneficial
Name Ownership Percent 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 0 0%
as a Group (3 persons)
(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 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 years ended November 2, 2002 and 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
ITEM 14 - CONTROLS AND PROCEDURES
-----------------------
(a) The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of
January 31, 2003, and they concluded that these controls and procedures
are effective.
(b) There are no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to
January 31, 2003.
21
PART IV
OTHER INFORMATION
ITEM 15 - 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 Incorporation of Incorporated by referenced from Exhibit 3.1 to the
the Registrant Registration Statement on Form S-1 (File No. 33-5560)
of the Company (the "Registration Statement").
3.2 Certificate of Amendment of Certificate Incorporated by reference from Exhibit 3.2 to the
of Incorporation of the Registrant Registration Statement.
3.3 Certificate of Amendment of Certificate Incorporated by reference from Exhibit 3.1 to
of Incorporation of the Registrant Quarterly Report on Form 10-Q for the quarter ended
July 30, 1988.
3.4 Certificate of Amendment of Certificate Incorporated by reference from Exhibit 3.4 to the
of Incorporation of the Registrant Annual Report on Form 10-K for the year ended
October 31, 1992.
3.5 By-Laws of the Registrant Incorporated by reference from Exhibit 3.3 to the
Registration Statement.
4.1 Indenture between the Registrant Inc. Incorporated by reference from Exhibit 4.1 to the
and United States Trust Company of New Registration Statement.
York, as Trustee, relating to the 7-1/8%
Convertible Debentures due July 15, 2006
(including the form of Convertible
Debenture).
4.2 First Supplemental Indenture between the Incorporated by reference from Exhibit 4.1 to the
Registrant and United States Trust Quarterly Report on Form 10-Q for quarter ended April
Company of New York as Trustee, relating 30, 1988.
to the 7-1/8% Convertible Debentures due
July 15, 2006.
22
4.3 Indenture between PNS Inc. and Norwest Incorporated by reference from Exhibit 4.1 to the
Bank Minneapolis, National Association Registration Statement on Form S-1 (File No. 33-5591)
as Trustee, relating to the 12-1/8% of PNS Inc.
Senior Subordinated Notes due
July 15, 1996 (including the form of
Senior Subordinated Note.
4.4 First Supplemental Indenture between PNS Incorporated by reference from Exhibit 4.2 to the
Inc., and Norwest Bank Minnesota, Quarterly Report on Form 10-Q for the quarter ended
National Association as Trustee, April 30, 1988.
relating to the 12-1/8% Senior
Subordinated Notes due July 15, 1996.
10.5 Letter Agreement dated February 9, 1990 Incorporated by reference from Exhibit (i) to
by and among PSSC Inc. and Bear Stearns Quarterly Report on form 10-Q for the quarter ended
& Co., Inc. for the purchase and the February 3, 1990.
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.
99.1 Certification pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sabanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sabanes-Oxley Act of 2002.
23
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 31, 2003 By: /s/ MARK TODES
---------------------------
Mark Todes, President and
Director
24
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 31, 2003 Director /s/ GERALD NATHANSON
--------------------
Gerald Nathanson
January 31, 2003 Director /s/ MARK TODES
--------------
Mark Todes
25
CERTIFICATIONS
I, Mark Todes, President and Chief Executive Officer of the Company, certify
that:
1) I have reviewed this Annual Report on Form 10-K of PSS, Inc. (the
"Report");
2) Based on my knowledge, this 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 Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 Report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Report (the "Evaluation Date"); and
c) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ MARK TODES
--------------------------
Mark Todes
President and Chief
Executive Officer
January 31, 2003
26
CERTIFICATIONS
I, Carite Torpey, Vice President and Chief Financial Officer of the Company,
certify that:
1) I have reviewed this Annual Report on Form 10-K of PSS, Inc. (the
"Report");
2) Based on my knowledge, this 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 Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 Report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Report (the "Evaluation Date"); and
c) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ CARITE TORPEY
---------------------------
Carite Torpey
Vice President and Chief
Financial Officer
January 31, 2003
27