ITEM 1 - BUSINESS
PSS, Inc. ("PSS"), through its wholly owned subsidiary, PNS Inc. ("PNS"), owns PSSC Inc. ("PSSC"); together, PSS, PNS and PSSC are referred to collectively as the "Company".
The Company owns pass-through and participation certificates issued by the Federal Home Loan Mortgage Corporation backed by whole pool real estate mortgages ("Mortgage Certificates"), and as a result, is primarily engaged in the business of owning mortgages and other liens on and interests in real estate. At October 28, 1995, the Company's principal assets consisted of approximately $5.8 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 PSS 7-1/8% Convertible Debentures due July 15, 2006 (the "Debentures"), and the PNS 12- 1/8% Senior Subordinated Notes due July 15, 1996 (the "Senior Notes"), upon which interest expense is incurred.
From July 1986, when the Company was organized, until June 1988, subsidiaries of PNS (the "Sellers") operated retail stores that sold a variety of traditional drugstore and general merchandise items. In June 1988, pursuant to an Agreement for the Purchase and Sale of Assets the Sellers sold substantially all of their assets, comprising the Sellers' entire retail operations, to Thrifty Corporation (a subsidiary of Pacific Enterprises). In consideration for such sale of assets (the "Asset Sale"), the Sellers received 5.2 million shares of Pacific Enterprises common stock (the "PET Shares"). During 1990 through 1993, the Company sold its PET Shares for the purpose of servicing and repurchasing some of the Debentures and Senior Notes.
ITEM 2
ITEM 2 - PROPERTIES
As a result of the Asset Sale, the Company disposed of all its properties.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
In the opinion of management, there are no material legal proceedings pending to which the Company is a party or of which any of its assets is the subject.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5
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. The high and low prices for the stock by quarter for the two years ended October 28, 1995 were as follows:
The high and low prices for each quarter are the high and low bids as reported by National Quotation Bureau, Incorporated, which are those quoted by dealers to each other, exclusive of markups, markdowns or commissions, and do not represent actual transactions.
HOLDERS
As of November 1, 1995, there were 940 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. Any determination as to the payment of dividends will depend upon future earnings, results of operations, capital requirements, the financial condition of the Company and such other factors as the Board of Directors of the Company may consider. 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).
ITEM 6
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 relating to October 28, 1995 is presented on a liquidation basis, which reports an excess of liabilities over assets. Presentation of per share information on a liquidation basis is not considered meaningful and has been omitted.
(1) Includes net realized and unrealized losses on Pacific Enterprises common stock of approximately $37 million and $68 million during the years ended October 31, 1992 and November 2, 1991, respectively.
(2) Includes pre-tax extraordinary gains on early extinguishment of debt of approximately $13 million, $49 million, $77 million and $20 million during the years ended October 29, 1994, October 30, 1993, October 31, 1992, and November 2, 1991, respectively.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At October 28, 1995, the Company's principal assets consisted of approximately $5.8 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 October 28, 1995, the Company had tangible assets of approximately $5.92 million and liabilities secured by such assets of approximately $5.37 million, thus having a net difference of approximately $550,000 available for holders of Senior Notes and Debentures. At October 28, 1995, approximately $5.26 million of Senior Notes and $22.92 million of Debentures remain outstanding and annual interest thereon, in the absence of additional repurchases, approximates $638,000 and $1.63 million, respectively.
The Company failed to pay the interest due January 15, 1995 and July 15, 1995 on its Convertible Debentures and such default has continued beyond the 30 day "grace" period. However, the trustee for the Convertible Debentures has indicated to the holders of the Debentures that it does not intend to accelerate payment of the Debentures "because it is unlikely that the Debenture holders would receive any payment if the Debentures were accelerated."
Although the Company's subsidiary, PNS, paid the interest due on January 15, 1995 on its Senior Notes within the 30 day "grace" period, it failed to make the interest payment due on July 15, 1995 and such default has continued beyond the 30 day "grace" period. Claiming that PNS is in default because it is "unable to pay its debts as the same become due" and due to its failure to make the July 15, 1995 interest payment, the trustee for the Senior Notes has accelerated and declared the principal and interest on the Senior Notes immediately due and payable. The trustee has since been advised by a representative of the holders of a substantial portion of the Senior Notes that such holders are in the process of developing a proposal to reorganize the Company and PNS and has asked the trustee to forbear from taking any action for so long as discussions are pending with the Company. Although the Company has not yet received a proposal, it has been contacted by the representative of such holders and anticipates that such a proposal will be forthcoming. In the interim, the trustee has taken no legal action with respect to the default.
The Company's future operating results, liquidity, capital resources and requirements are primarily dependent upon actions which may be taken by the trustees for the Senior Notes and 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 Senior Notes and Debentures.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for each of the years ended October 28, 1995, October 29, 1994 and October 30, 1993 decreased as compared to the immediate preceding year as a result of lower balances of investments in Mortgage Certificates, and for the years ended October 29, 1994 and October 30, 1993 lower annual interest income rates earned on the adjustable rate Mortgage Certificates. Included in investment income for the year ended October 28, 1995 is approximately $100,000 of unrealized gains resulting from mark-to-market adjustments. The weighted average interest income rate earned on the Mortgage Certificates, net of amortization of premiums, approximated 7.3%, 5.0% and 5.8% during the years ended October 28, 1995, October 29, 1994 and October 30, 1993, respectively.
INTEREST EXPENSE
Interest expense for each of the years ended October 28, 1995, October 29, 1994 and October 30, 1993 decreased as compared to the immediate preceding year primarily due to lower investments in Mortgage Certificates and related borrowings upon which interest expense is incurred. The weighted average interest expense rate on Mortgage Certificate related borrowings approximated 6.0%, 3.9% and 3.4% during the years ended October 28, 1995, October 29, 1994 and October 30, 1993, respectively. Interest expense also decreased during each of the years ended October 28, 1995, October 29, 1994 and October 30, 1993 as compared to the preceding year as a result of having fewer Debentures and Senior Notes outstanding due to bond repurchases.
REALIZED AND UNREALIZED LOSS
During the year ended October 30, 1993, the Company disposed of its remaining PET Shares and recorded a realized loss of approximately
$40 million and a decrease in unrealized loss of approximately $42 million, representing the previously recognized unrealized loss for PET Shares sold during the year.
WRITE OFF OF DEFERRED FINANCING COSTS AND ORIGINAL ISSUE DISCOUNT
As a result of the continued default due to the non-payment of interest on the Convertible Debentures and Senior Notes, the Company has expensed remaining deferred financing costs and original issue discount.
EXTRAORDINARY ITEMS
During the year ended October 29, 1994, the Company purchased approximately $14 million and $6 million of its Senior Notes and Debentures, respectively, and as a result, after the write-off of related deferred financing costs, recorded an extraordinary gain on early extinguishment of debt, before income taxes, of approximately $13 million.
During the year ended October 30, 1993, the Company purchased approximately $65 million and $14 million of its Senior Notes and Debentures, respectively, and as a result, after the write-off of related deferred financing costs, recorded an extraordinary gain on early extinguishment of debt, before income taxes, of approximately $49 million.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS Page
Report of Independent Accountants 9 Consolidated Statement of Net Liabilities (Liquidation Basis) 10 Consolidated Balance Sheet (Going Concern Basis) 10 Consolidated Statement of Change in Net Liabilities (Liquidation Basis) 11 Consolidated Statements of Operations (Going Concern Basis) 11 Consolidated Statements of Cash Flows 12 Notes to Financial Statements 13
FINANCIAL STATEMENT SCHEDULES
Financial statement schedule information is presented in the financial statements.
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PSS, Inc.:
We have audited the consolidated balance sheet of PSS, Inc. as of October 29, 1994, the related consolidated statements of operations, and cash flows for each of the two years in the period ended October 29, 1994. In addition, we have audited the consolidated statement of net liabilities (liquidation basis) as of October 28, 1995, and the related consolidated statement of changes in net liabilities (liquidation basis) and cash flows (liquidation basis) for the period from October 30, 1994 to October 28, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, effective October 28, 1995 the Company adopted the liquidation basis of accounting for presenting its consolidated financial statements. As a result, the Company has changed its basis of accounting for periods subsequent to October 29, 1994 from the going concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PSS, Inc. and its subsidiaries as of October 29, 1994, the results of their operations and their cash flows for each of the two years then ended and their net liabilities in liquidation as of October 28, 1995, and the changes in their net liabilities (liquidation basis) and cash flows (liquidation basis) for the period from October 30, 1994 to October 28, 1995, in conformity with generally accepted accounting principles applied on the basis described in the preceding paragraph.
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
Seattle, Washington January 25, 1996
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
PSS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars)
The accompanying notes are an integral part of these financial statements.
PSS, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
The consolidated financial statements of PSS, Inc. ("PSS"), includes its direct subsidiary PNS Inc. ("PNS") and its subsidiary PSSC, Inc. ("PSSC"), collectively, the "Company". The Company is principally owned by Seacorp, Inc. ("Seacorp") and Zimmerman Retailing Group Limited ("Zimco"). Seacorp and Zimco own approximately 41% and 38%, respectively, of the Company's outstanding common stock, with the remainder publicly owned.
The Company, through PSSC, owns pass-through and participation certificates 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, 1995 and July 15, 1995 on its Debentures and such default has continued beyond the 30 day "grace" period. The Company has also failed to make the January 15, 1996 interest payment. However, the trustee for the Debentures has indicated to the holders of the Debentures that it does not intend to accelerate payment of the Debentures "because it is unlikely that the Debenture holders would receive any payment if the Debentures were accelerated."
Although PNS paid the interest due on January 15, 1995 on its Senior Notes within the 30 day "grace" period, it failed to make the interest payment due on July 15, 1995 and such default has continued beyond the 30 day "grace" period. The Company has also failed to make the January 15, 1996 interest payment. Claiming that PNS is in default because it is "unable to pay its debts as the same become due" and due to its failure to make the July 15, 1995 interest payment, the trustee for the Senior Notes has accelerated and declared the principal and interest on the Senior Notes immediately due and payable. The trustee has since been advised by a representative of the holders of a substantial portion of the Senior Notes that such holders are in the process of developing a proposal to the Company and PNS and has asked the trustee to forbear from taking any action for so long as discussions are pending with the Company. Although the Company has not yet received a proposal, it has been contacted by the representative of such holders and anticipates that such a proposal will be forthcoming. In the interim, the trustee has taken no legal action with respect to the default.
NOTE 1 - THE COMPANY (continued)
At October 28, 1995, the Company had tangible assets of approximately $5.92 million and liabilities secured by such assets of approximately $5.37 million, thus having a net difference of approximately $550,000 available for holders of Senior Notes and Debentures. At October 28, 1995, approximately $5.26 million of Senior Notes and $22.92 million of Debentures remain outstanding and, annual interest thereon, in the absence of additional repurchases, approximates $638,000 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 trustees for the Senior Notes and 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.
NOTE 2 - LIQUIDATION BASIS OF ACCOUNTING
The consolidated financial statements for fiscal 1994 and 1993 were prepared on a going concern basis of accounting which contemplates realization of assets and satisfaction of liabilities in the normal course of business. Effective October 28, 1995, the Company has 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 assets are reasonably determinable. Under this basis of accounting, assets and liabilities are stated at their net realizable value 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 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 has accrued future liabilities and estimated future net revenues from interest or other income associated with mortgage certificates.
NOTE 2 - LIQUIDATION BASIS OF ACCOUNTING (CONTINUED)
The conversion from the going concern to liquidation basis of accounting has required the determination of significant estimates and judgments. A summary of significant estimates and judgments utilized in preparation of the October 28, 1995 consolidated financial statements on a liquidation basis follows:
* The Senior Notes July 15, 1996 due date has been utilized as the liquidation date.
* Mortgage Certificates and related interest receivable are stated at estimated market value.
* Borrowings secured by Mortgage Certificates are stated at face value.
* The reserve for estimated costs during the period of liquidation represents estimates of costs (primarily legal and trustee fees) to be incurred in the future to the liquidation date.
* Net estimated interest income to be earned on Mortgage Certificates in excess of interest expense on related borrowings is considered in determining the reserve for estimated costs during the period of liquidation.
* Senior Notes and Debentures and related interest accrued through October 28, 1995 are stated at face value.
* The reserve for interest during the period of liquidation represents interest on Senior Notes and Debentures for the period from October 29, 1995 to July 15, 1996.
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.
NOTE 3 - SUMMARY OF ACCOUNTING PRINCIPLES
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments, having maturities of three months or less when purchased, are primarily comprised of interest-bearing short-term bank deposits.
INVESTMENT IN MORTGAGE CERTIFICATES
The investment in Mortgage Certificates is recorded at estimated fair value, based upon market prices obtained from traders. Gains and losses realized on sale are determined utilizing the specific identification method. Premiums paid are amortized utilizing the interest method. 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.
INCOME (LOSS) PER COMMON SHARE
As explained in Note 2, effective October 28, 1995, the Company adopted the liquidation basis of accounting, which reports an excess of liabilities over assets. Accordingly, the presentation of per common share information on a liquidation basis is not considered meaningful and has been omitted.
Income (loss) per common share data for periods prior to October 28, 1995 have been computed on the basis of 19,473,728 shares outstanding. For purposes of calculating income (loss) per common share, the conversion of the PSS 7-1/8% Convertible Debentures would be antidilutive and thus was not assumed.
RECLASSIFICATIONS
Certain reclassifications have been made in prior years' financial statements.
NOTE 4 - INVESTMENT IN MORTGAGE CERTIFICATES
Mortgage Certificates are financed with borrowings provided by an investment bank pursuant to a letter agreement (the "Financing Agreement"). Borrowings pursuant to the Financing Agreement (the "Mortgage Financing") are secured by the Mortgage Certificates. In the event of a decrease in the aggregate market value of the Mortgage Certificates below the requirements of the Financing Agreement, additional collateral is required. Principal and interest payments received on Mortgage Certificates are maintained in an interest earning account and are released to the Company, at its request, after all interest and any "mark-to-market" indebtedness then due have been paid. The Mortgage Financing is payable on demand and generally bears interest at rates approximating LIBOR plus 10 basis points. Mortgage Financing borrowings and related interest rates approximated $5.3 million and 6.0% at October 28, 1995 and $10 million and 5.1% at October 29, 1994, respectively. During the years ended October 28, 1995, October 29, 1994 and October 30, 1993, the average balance of mortgage related borrowings outstanding approximated $5 million, $91 million and $143 million, and the weighted annual average interest expense rates approximated 6.0%, 3.9%, and 3.4%, respectively.
At October 28, 1995, the average annual interest rate to be earned on the Mortgage Certificates approximated 8.0% as determined on a basis that interest rates do not change. 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, net of amortization of premiums, approximated 7.4%, 5.0% and 5.8% during the years ended October 28, 1995, October 29, 1994 and October 30, 1993, respectively.
The Company sold approximately $1 million, $99 million and $13 million of Mortgage Certificates during the years ended October 28, 1995, October 29, 1994 and October 30, 1993, respectively.
NOTE 5 - SUBORDINATED DEBT
Subordinated debt and related interest payable through the balance sheet dates are summarized as follows (thousands of dollars):
In July 1986, the Company completed three public securities offerings (the "Public Offerings"). PNS issued $150 million of Senior Notes (at a price of 98.6%) and PSS sold 3.25 million shares of its common stock and issued at par $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). Debt financing costs and the discount on the Senior Notes have been amortized over the term of the borrowings. 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 (the "Intercompany Debenture") in the amount of $150 million with substantially the same interest rate and redemption provisions as the Debentures. At October 28, 1995, the Intercompany Debenture approximated $9 million.
As explained in Note 1, the Company is in default due to the non-payment of interest on the Senior Notes and Debentures. As a result, during the year ended October 28, 1995 the Company expensed remaining deferred financing costs and original issue discount.
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 (to the extent payments are not made to PSS when due pursuant to the Intercompany Debenture), provided that no event of default (as defined in the Senior Notes indenture) has occurred and is continuing. PNS, like its parent company, has a stockholder's deficit.
The Senior Notes and Debentures provide for semiannual interest payments and are unsecured. Principal repayment on the Senior Notes is due in full on July 15, 1996. The Debentures require annual principal payments of approximately $11 million commencing July 15, 1996 until July 15, 2006 when the balance is due; by utilizing Debentures which the Company has previously acquired, there will be no scheduled maturity payments required before 2006.
NOTE 5 - SUBORDINATED DEBT (continued)
The indentures for the Senior Notes and Debentures contain certain restrictive covenants which, among other things, limit dividends and similar distributions to stockholders, redemptions and retirements of the Company's equity, essentially prohibiting such transactions as of October 28, 1995, 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, and under certain conditions, require accelerated redemption payments.
During the year ended October 29, 1994, the Company purchased approximately $14 million of Senior Notes and $6 million of Debentures and, as a result, after the write-off of related deferred financing costs, recorded an extraordinary gain on early extinguishment of debt of approximately $13 million.
During the year ended October 30, 1993, the Company purchased approximately $64 million of Senior Notes and $14 million of Debentures in exchange for 500,000 PET Shares and approximately $23 million cash (such total price including accrued interest), and as a result, after the write-off of related deferred financing costs, recorded an extraordinary gain on early extinguishment of debt of approximately $49 million.
Interest paid approximated $319,000, $8 million and $14 million during the years ended October 28, 1995, October 29, 1994 and October 30, 1993, respectively.
NOTE 6 - INVESTMENT IN PACIFIC ENTERPRISES COMMON STOCK
In June 1988, pursuant to an Agreement for the Purchase and Sale of Assets, subsidiaries of PNS (the "Sellers") sold substantially all of their assets, comprising the Sellers' entire retail operations, to Pacific Enterprises. In consideration for the sale of such assets, the Sellers received approximately 5.2 million shares of Pacific Enterprises common stock (the "PET Shares").
During the year ended October 30, 1993, the Company disposed of its remaining PET Shares and recorded a realized loss of approximately $40 million and a decrease in unrealized loss of approximately $42 million, representing the previously recognized unrealized loss for PET Shares sold during the year.
NOTE 7 - RELATIONSHIP WITH AFFILIATES
Prior to fiscal 1995, affiliates of Seacorp provided the Company with accounting, legal, tax and other services. Fees for services approximated $56,000 and $167,000 for the years ended October 29, 1994 and October 30, 1993, respectively.
NOTE 8 - INCOME TAXES
Due to losses reported for the year ended October 28, 1995, there was no provision for income taxes recorded. During each of the years ended October 29, 1994 and October 30, 1993, the Company recognized an income tax benefit as a result of income taxes provided on the extraordinary gain on early extinguishment of debt. The Company also recorded a provision for income taxes representing a charge in lieu of income taxes that would have been provided in the absence of net operating loss carryforwards. The income tax benefit resulting from utilization of net operating loss carryforwards is presented as an extraordinary item.
For income tax purposes, net operating loss carryforwards, which begin to expire in 2001, approximate $137 million, and capital loss carryforwards approximate $120 million, $115 million of which expire in 1997 and 1998. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of the carryforwards which could be utilized.
NOTE 9 - STOCKHOLDERS' DEFICIT
There have been no changes in common stock or additional paid in capital since October 29, 1994. As a result of presenting October 28, 1995 financial statements on the liquidation basis, changes in components of stockholders' deficit are not presented. The Company's stockholders' deficit and the changes therein during the two years ended October 29, 1994, are summarized as follows (thousands of dollars):
NOTE 10 - Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are as follows (thousands of dollars, except per share data):
(a) As explained in Note 3, per share information has not been presented on a liquidation basis.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company
The following table sets forth certain information concerning each of the directors 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 Occupation or Employment Name and Position and Five Year with the Company Age Employment History - ----------------- --- --------------------------
Larry Chroman 44 Director of the Company since July 1991. President of Director USA Global Link since July 1995 Co-manages investments for the William Zimmerman family for more than five years.
James M. Lieb 45 Director of the Company since May 1989. Executive Vice Director President of The Trump Group (a private investment group) since October 1995 and Senior Vice President thereof for more than five years.
Gerald P. Nathanson 58 Director of the Company since October 1986. Chief Director Executive Officer, L.Luria (a retail company) since January 1996. Chief Executive Officer, US Holographics (marketing company for holographic products) from April 1992 to December 1995. Managing Director, C4 Marketing (an import company) until January 1992.
Eddie Trump 49 Director of the Company since May 1986. President of Director The Trump Group for more than five years.
Pursuant to the terms of the Subscription and Stockholders' Agreement, dated May 7, 1986 (the "Stockholders' Agreement"), as amended as of November 25, 1987 (the "November 1987 Agreement" and, as amended, the "Amended Stockholders' Agreement"), between the Company's two major stockholders, Zimco and Seacorp, Seacorp was, subject to certain conditions, entitled to nominate as directors one-half the Company's Nonindependent Directors (as defined in the Company's Restated Certificate of Incorporation) plus one, and Zimco was entitled to nominate one-half the Nonindependent Directors minus one. Messrs. Lieb and Trump were nominees of Seacorp; Mr. Chroman was the nominee of Zimco. The Amended Stockholders' Agreement terminated in accordance with its terms on October 31, 1995. See the discussion under Item 13 - Certain Relationships and Related Transactions.
The Trump Group, of which Mr. Trump is a director and officer and Mr. Lieb is an officer, through affiliates controls Seacorp. See the discussion under Item 12 - Security Ownership of Certain Beneficial Owners and Management.
EXECUTIVE OFFICERS OF THE COMPANY
Since January 1995, the Company has no executive officers.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has no employees or executive officers. 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
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 1, 1995, 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 Messrs. Larry Chroman and Christopher Podoll is the address set forth below for Zimmerman Retailing Group Limited.
(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.
(c) Assumes the conversion of all Debentures beneficially owned by an affiliate of Seacorp. Does not include shares owned by Zimco. Mr. Chroman, who is a director of the Company, is co- manager of investments for the William Zimmerman family and Mr. Podoll, who is also such a manager, is, as noted above, the sole executive officer and director of affiliates of Zimco.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
GENERAL. On May 7, 1986, Zimco, Seacorp and the Company entered into the Stockholders' Agreement. Under the Stockholders' Agreement, Zimco and Seacorp exchanged all of their common stock in Pay'n Save for all of the issued and outstanding Common Stock of the Company. Subsequently, in consideration of Seacorp causing to be made available short-term borrowing facilities aggregating $20 million to the Company, Seacorp, Zimco and certain related parties entered into an agreement amending the Stockholders' Agreement (the "November 1987 Amendment") in certain respects. In connection with the November 1987 Amendment, the parent of Seacorp guaranteed Company borrowings by Pay'n Save under such short-term borrowing facilities (which have since expired) in an amount up to $15 million.
The Stockholders' Agreement and the November 1987 Amendment were entered into by Seacorp and Zimco and certain of its related parties on their own behalf and on behalf of their respective permitted transferees, for the exclusive benefit of Seacorp and its permitted transferees (the "Seacorp Group"), and Zimco and its permitted transferees and certain of its related parties (the "Zimco Group"). The Stockholders' Agreement, as amended by the November 1987 Amendment, terminated in accordance with its terms on October 31, 1995.
The November 1987 Amendment contains certain indemnities in favor of (and for the benefit of) the Company which remain effective.
Pursuant to separate agreements, the Company has granted certain registration rights to each group and certain of each group's transferees, including Zimco, with respect to the shares of common stock acquired pursuant to the Stockholders' Agreement.
NOMINATION OF DIRECTORS. The Stockholders' Agreement had provided that each group would nominate and vote for an equal number of nominees on the Company's Board of Directors and vote as stockholders in favor of each matter previously approved by a majority of the directors nominated by Zimco and Seacorp and vote against each matter not so approved. The November 1987 Amendment amended the Stockholders' Agreement to provide that so long as Julius or Eddie Trump or their affiliates or certain related parties and certain other designated parties (collectively, the "Trump Group") remained the beneficial owners, directly or indirectly, of at least a majority of the shares of common stock owned by Seacorp as of November 25, 1987, Seacorp would be entitled to nominate as directors one-half the number of Nonindependent Directors plus one and Zimco would be entitled to nominate one-half the number of Nonindependent Directors minus one, and that at all times at least four seats on the Company's Board of Directors would be reserved for Nonindependent Directors. The Stockholders' Agreement, as amended, terminated in accordance with its terms on October 31, 1995. Consequently, the Company's two major stockholders, Zimco and Seacorp, are no longer obligated to nominate and vote for each other's nominees to the Company's Board of Directors, or to vote as stockholders in favor of each matter previously approved by a majority of the directors nominated by Zimco and Seacorp.
The Company's Certificate of Incorporation provides that actions by the Company's Board of Directors generally require the affirmative vote of that number of directors equal to the sum of (i) the number of Independent Directors (as defined) plus (ii) a majority of the Nonindependent Directors.
CERTAIN VOTING ARRANGEMENTS. The November 1987 Amendment provided that Seacorp and the Zimco Group would use their best efforts to cause the Seacorp Directors and the Zimco Directors to vote against any issuance of capital stock of the Company or its subsidiaries (i) to any affiliate of Seacorp unless the Zimco Group was first offered the opportunity to purchase a portion of such shares pro rata in accordance with their then ownership of shares of common stock, for the same consideration that was to be paid by such affiliate, or (ii) to any entity not affiliated with Seacorp without the consent or approval of the holders of a majority of the outstanding shares of common stock, subject in each case to waiver by the Zimco Directors. This voting arrangement terminated on October 31, 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation or similar committee.
PART IV. OTHER INFORMATION
ITEM 14
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 reference Incorporation of Pay'n Save Inc. from 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 Certificate of Incorporation from Exhibit 3.2 to the of Pay'n Save Inc. Registration Statement.
3.3 Certificate of Amendment of Incorporated by reference Certificate of Incorporation from Exhibit 3.1 to of Pay'n Save Inc. Quarterly Report on Form 10-Q for the quarter ended July 30, 1988.
3.4 Certificate of Amendment of Incorporated by reference Certificate of Incorporation from Exhibit 3.4 to the of PSS, Inc. Annual Report on Form 10-K for the year ended October 31, 1992.
3.5 By-Laws of Pay'n Save Inc. Incorporated by reference from Exhibit 3.3 to the Registration Statement.
4.1 Indenture between Pay'n Save Incorporated by reference Inc. and United States Trust from Exhibit 4.1 Company of New York, as Trustee, to the
relating to the 7-1/8% Con- Registration Statement. vertible Debentures due July 15, 2006 (including the form of Convertible Debenture).
4.2 First Supplemental Indenture be- Incorporated by reference tween Pay'n Save Inc., and from Exhibit 4.1 to the United States Trust Company of Quarterly Report on Form New York as Trustee, relating 10-Q for the quarter ended to the 7-1/8% Convertible De- April 30, 1988. bentures due July 15, 2006.
4.3 Indenture between PNS Inc. and Incorporated by reference Norwest Bank Minneapolis, Nat- from Exhibit 4.1 to the ional Association as Trustee, Registration Statement on relating to the 12-1/8% Senior Form S-1 (File No. 33-5591) Subordinated Notes due July 15, of PNS Inc. 1996 (including the form of Senior Subordinated Note).
4.4 First Supplemental Indenture be- Incorporated by reference tween PNS Inc., and Norwest Bank from Exhibit 4.2 to the Minnesota, National Association Quarterly Report on Form as Trustee, relating to the 10-Q for the quarter ended 12-1/8% Senior Subordinated April 30, 1988. Notes due July 15, 1996.
10.1 Subscription and Stockholders' Incorporated by reference Agreement, dated as of May 7, from Exhibit 2.3 to the 1986, by and among Zimmerman Registration Statement. Retailing Group Limited, Seacorp, Inc. and Pay'n Save Inc.
10.2 Amended Stockholders' Agreement Incorporated by reference between Pay'n Save Inc., Seacorp, from Exhibit 10.25 to the Inc., Zimmerman Retailing Group Annual Report on Form 10-K Limited and related parties dated for the year ended October November 25, 1987. 31, 1987.
10.3 Registration Rights Agreement, Incorporated by reference dated as of May 7, 1986, by from Exhibit 10.7 to the and among Pay'n Save Inc., Registration Statement. Seacorp, Inc. and Zimmerman Retailing Group Limited.
10.4 Agreement for purchase and sale Incorporated by reference of assets by and among Pay'n from Exhibit 2.1 to Save Stores, Inc., The Bi-Mart
Company, Pay'n Save Drugs Inc. Form 8-K dated May 13, 1988. and Thrifty Corporation, dated as of May 12, 1988.
10.5 Letter Agreement dated Incorporated by reference February 9, 1990 by and among from Exhibit (i) to the PSSC Inc. and Bear Stearns & Quarterly Report on Form Co., Inc. for the purchase and 10-Q for the quarter ended financing of adjustable-rate February 3, 1990. mortgages.
10.6 Agreements dated as of Incorporated by reference January 14, 1993 with respect from Exhibit 10.7 to the to the acquisition by PSS, Inc. Annual Report on Form and PNS Inc. of up to $64.475 10-K for the year ended million of Senior Notes and October 31, 1992. $14 million of Debentures.
22.1 Subsidiaries of the Registrant. Incorporated by reference from Exhibit 22.1 to the Annual Report on Form 10-K for the year ended October 31, 1992.
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 26, 1996 By: /s/ James Lieb ----------------- ------------------- James M. Lieb, Director
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 26, 1996 Director By: /s/ Larry Chroman --------------------------- Larry Chroman
January 26, 1996 Director By: /s/ James M. Lieb --------------------------- James M. Lieb
January 26, 1996 Director By: /s/ Gerald Nathanson --------------------------- Gerald Nathanson
January 26, 1996 Director By:/s/ Eddie Trump --------------------------- Eddie Trump