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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER: 0-3777
MARCH 31, 1997
PETRIE STORES LIQUIDATING TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 22-6679945
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
70 ENTERPRISE AVENUE
SECAUCUS, NEW JERSEY 07094
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 422-0496
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT:
Not Applicable.
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 the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of May 14,
1997, there were 52,350,238 Units of Beneficial Interest outstanding.
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PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements (unaudited)
Statements of Net Assets in Liquidation -
March 31, 1997 and December 31, 1996......................... 2
Statements of Changes in Net Assets in Liquidation - For
the Three Months Ended March 31, 1997
and for the Period from January 23,
1996 to March 31, 1996.................................... 3
Notes to Financial Statements................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
STATEMENTS OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
---------- -----------
ASSETS
Cash and cash equivalents $ 138 $ 229
U.S. Treasury Obligations 69,940 56,943
U.S. Treasury Obligations held in escrow 67,500 67,500
Investments in common stock (including 3,493,450 113,556 151,035
shares of Toys "R" Us common stock held in
escrow) ---------- -----------
Total assets 251,134 275,707
LIABILITIES
Accrued expenses and other liabilities 45,518 52,378
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Commitments and contingencies
Net assets in liquidation $ 205,616 $ 223,329
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See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
PERIOD FROM
THREE MONTHS ENDED JANUARY 23, 1996
MARCH 31, 1997 TO MARCH 31, 1996
----------------- -----------------
Net assets in liquidation at beginning of $223,329 $202,594
period ------------- ----------
Investment income 1,909 1,261
Corporate overhead (7,129) (1,016)
Net realized and unrealized (loss) gain (12,493) 29,702
on investments ------------- ----------
Net (loss) income for the period (17,713) 29,947
------------ ----------
(Decrease) increase in net assets (17,713) 29,947
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Net assets in liquidation at
end of period $205,616 $232,541
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Net (loss) income per unit $ (.34) $ .57
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Weighted average number of units 52,350 52,350
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See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
1. INTERIM REPORTING
The accompanying unaudited financial statements of the Petrie
Stores Liquidating Trust (the "Liquidating Trust") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Liquidating Trust, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation have been
included. Results for the quarter ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the
current fiscal year. For further information, reference is made to the
financial statements and footnotes thereto included in the Liquidating
Trust's Annual Report on Form 10-K for the period ended December 31,
1996.
2. BASIS OF PRESENTATION
The Liquidating Trust is the successor to Petrie Stores Corporation
("Petrie"). Prior to December 9, 1994, Petrie operated a chain of
retail stores that specialized in women's apparel and were located
throughout the United States (including Puerto Rico and the U.S. Virgin
Islands). At Petrie's Annual Meeting, held on December 6, 1994, Petrie's
shareholders approved the sale of Petrie's retail operations (the
"Sale"). At Petrie's Reconvened Annual Meeting, held on January 24, 1995,
Petrie's shareholders approved (i) an exchange of shares of Toys "R" Us,
Inc. ("Toys 'R' Us") common stock ("Toys Common Stock") with Toys "R" Us
(Note 3) and (ii) the liquidation and dissolution of Petrie pursuant to a
plan of liquidation and dissolution (the "Plan of Liquidation").
Pursuant to the Plan of Liquidation and the Agreement and
Declaration of Trust, dated as of December 6, 1995 (the "Liquidating
Trust Agreement"), between Petrie and the trustees named therein (the
"Liquidating Trustees"), effective as of the close of business on January
22, 1996 (the "Succession Date"), Petrie transferred its remaining assets
(then consisting of approximately $131 million in cash and cash
equivalents and 5,055,576 shares of Toys Common Stock) to, and its
remaining fixed and contingent liabilities were assumed by (the
"Succession"), the Liquidating Trust. The assets of the Liquidating Trust
are subject to various contingent liabilities, the status of which is
presently unclear (Note 5), as well as the terms of a letter agreement
with Toys "R" Us (Note 3) pursuant to which the Liquidating Trust is
required to retain a substantial portion of its assets to provide for its
liabilities. Accordingly, the Liquidating Trustees have determined not to
approve any distributions of Toys Common Stock or other assets of the
Liquidating Trust to beneficiaries of the Liquidating Trust until the
status of such contingent liabilities is clarified.
Beginning with the period ended December 31, 1996, the Liquidating
Trust adopted the calendar year as its fiscal year. A liquidation basis
of accounting was implemented as of January 28, 1995. The statements of
net assets in liquidation at March 31, 1997 and December 31, 1996 do not
distinguish between current and long-term balances as would be reflected
if such statements had been prepared on a going-concern basis.
At the Succession Date, and as a result of the Succession, Petrie
ceased to be a taxable entity. The Liquidating Trust is a complete
pass-through entity for federal income taxes and, accordingly, is not
itself subject to income tax. Instead, each holder of units of beneficial
interest in the Liquidating Trust is required to take into account, in
accordance with such holder's method of accounting, his pro rata share of
the Liquidating Trust's items of income, gain, loss, deduction or credit,
regardless of the amount or timing of distributions to such holder.
3. INVESTMENTS IN COMMON STOCK
At March 31, 1997, the Liquidating Trust's investments in common
stock consist of 4,055,576 shares, which are carried at market value, of
Toys "R" Us, which operates a chain of specialty retail stores
principally engaged in the sale of toys and children's clothing in the
United States and abroad.
On January 24, 1995, pursuant to the terms of an Acquisition
Agreement dated as of April 20, 1994, and amended as of May 10, 1994 (the
"Toys Acquisition Agreement"), between Petrie and Toys "R" Us, Petrie
exchanged (the "Exchange") with Toys "R" Us all of its shares of Toys
Common Stock (39,853,403 shares), plus $165 million in cash, for
42,076,420 shares of Toys Common Stock (approximately 15.0% of the
outstanding Toys Common Stock at January 28, 1995).
Simultaneously with the closing of the Exchange, Petrie placed
3,493,450 shares of its Toys Common Stock into an escrow account (the
"Escrow Account") pursuant to the terms of an escrow agreement, dated as
of January 24, 1995, between Petrie and Custodial Trust Company, as
Escrow Agent (the "Escrow Agreement"). The shares of Toys Common Stock
placed into the Escrow Account pursuant to the Escrow Agreement secure
the payment of certain obligations of the Liquidating Trust, as successor
to Petrie, to Toys "R" Us arising (i) under (x) the Toys Acquisition
Agreement, (y) the Seller Indemnification Agreement, dated as of December
9, 1994, among Petrie, Toys "R" Us, Petrie Retail, Inc. ("Petrie
Retail"), PS Stores Acquisition Corp. ("PS Stores"), and certain
subsidiaries of PS Stores and (z) the Retail Operations Stock Purchase
Agreement, dated as of August 23, 1994 and amended on November 3, 1994
(the "Retail Operations Stock Purchase Agreement"), between Petrie and PS
Stores, and (ii) otherwise.
The assets of the Liquidating Trust are subject to the terms of a
letter agreement, dated as of January 24, 1995, pursuant to which Petrie
agreed with Toys "R" Us that, until such time as a hedge or similar
arrangement is in place, Petrie will retain, either individually or in
combination, (i) cash in an amount of at least $177.5 million (the
"Reserved Amount") or (ii) shares of Toys Common Stock having a market
value (using the per share price on January 20, 1995) of at least twice
the Reserved Amount, to secure the payment of Petrie's contingent
liabilities (Note 4). Pursuant to the terms of the letter agreement, the
Liquidating Trust, as successor to Petrie, is presently required to
retain substantially all of its assets.
Petrie had also placed 3,200,082 shares of Toys Common Stock in a
collateral account (the "Collateral Account") pursuant to the terms of an
Amended and Restated Cash Collateral and Pledge Agreement, dated as of
December 9, 1994 and amended as of January 24, 1995, among Petrie, PS
Stores, certain subsidiaries of PS Stores, and Custodial Trust Company,
as Collateral Agent (the "Amended and Restated Cash Collateral
Agreement"). On December 19, 1995, the Amended and Restated Cash
Collateral Agreement was further amended and restated and, pursuant
thereto, the 3,200,082 shares of Toys Common Stock held in the Collateral
Account were released to Petrie in exchange for Petrie's deposit of $67.5
million in U.S. Treasury obligations into the Collateral Account. The
U.S. Treasury obligations placed in the Collateral Account pursuant to
the Amended and Restated Cash Collateral Agreement secure the payment of
certain obligations of the Liquidating Trust, as successor to Petrie, to
PS Stores arising under (i) the Retail Operations Stock Purchase
Agreement and (ii) the Cross-Indemnification and Procedure Agreement,
dated as of December 9, 1994, between Petrie and PS Stores (Note 4). In
connection with the settlement of a dispute with the Internal Revenue
Service (the "IRS"), as more fully described below, PS Stores and Petrie
Retail have agreed that the Liquidating Trust may transfer to an account
of the Liquidating Trust the U.S. Treasury obligations held in the
Collateral Account in excess of $37.5 million.
As previously disclosed, during the three months ended March 31,
1997, the Liquidating Trust sold an aggregate of 1,000,000 shares of Toys
Common Stock for approximately $25.5 million in proceeds. Such sales were
made in order to reduce the risks associated with holding equity
securities of one issuer.
The price per share of Toys Common Stock, as reported on the New
York Stock Exchange Composite Tape, decreased from $29-7/8 per share at
December 31, 1996 to $28 per share at March 31, 1997 and then increased
to $29-1/4 per share at May 14, 1997.
4. COMMITMENTS AND CONTINGENCIES
As successor to Petrie, the Liquidating Trust has certain
contingent liabilities with respect to existing or potential claims,
lawsuits and other proceedings, which primarily relate to (i) guarantees
of certain retail store leases, expiring at various times through 2011 to
which Petrie Retail or an affiliate thereof is a party, and certain other
liabilities that were assumed by Petrie Retail (but as to which Petrie's
liability has not been released) in connection with the Sale
(collectively, the "Assumed Obligations") to the extent that Petrie
Retail fails to perform; and (ii) Petrie's agreement with Petrie Retail
to indemnify it for certain liabilities relating to Petrie Retail's
withdrawal from the United Auto Workers District 65 Security Plan Pension
Fund (the "Multiemployer Plan"). The Liquidating Trust accrues
liabilities when it is probable that future costs will be incurred and
when such costs can be reasonably estimated. Such accruals are based on
developments to date, the Liquidating Trust's estimates of the outcome of
these matters and its experience (including that of its predecessor,
Petrie) in contesting, litigating and settling matters. At March 31, 1997
and December 31, 1996, the Liquidating Trust, as successor to Petrie, had
accrued approximately $42 million and $38 million, respectively, for
contingent liabilities. As the scope of these liabilities becomes better
defined, there may be changes in the estimates of future costs, which
could have a material effect on the Liquidating Trust's financial
condition, liquidity and future ability to make liquidating
distributions.
On October 12, 1995, Petrie Retail filed a voluntary petition for
reorganization relief under Chapter 11 of the United States Bankruptcy
Code with the U.S. Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court"). As a result of its bankruptcy filing, Petrie
Retail has failed to perform or make payment with respect to certain of
the Assumed Obligations, including, but not limited to, Assumed
Obligations relating to store leases to which Petrie Retail or an
affiliate thereof is a party, state taxes, employment agreements,
insurance premiums and certain other claims and contractual obligations.
Accordingly, the Liquidating Trust has been and may continue to be
required to make payments in respect of certain of the Assumed
Obligations. The Liquidating Trust intends to file claims in the
Bankruptcy Court against Petrie Retail in respect of any such payments.
The Liquidating Trust is unable to predict the timing or probability of
the collection of these claims against Petrie Retail. No amounts have
been accrued as receivables for potential reimbursement or recoveries
from Petrie Retail.
Additionally, tax refunds aggregating $7,579,998, plus interest, to
which Petrie Retail claims it is entitled, are being held in an escrow
account pursuant to a Bankruptcy Court order. On February 28, 1997, an
adversary complaint was filed by Petrie Retail in the Bankruptcy Court
alleging that Petrie and the Liquidating Trust are improperly withholding
such tax refunds from Petrie Retail. Petrie Retail is seeking, among
other things, (i) a declaration that those funds are the property of
Petrie Retail, (ii) a turnover of those funds plus accrued interest to
Petrie Retail, (iii) a mandatory injunction requiring the release of
those funds to Petrie Retail, (iv) the imposition of a constructive trust
on those funds, (v) a finding of contempt against Petrie and the
Liquidating Trust for purportedly violating the automatic stay
provisions of section 362(a)(3), (6) and (7) of the United States
Bankruptcy Code, and (vi) an order requiring defendants to pay attorneys'
fees, costs and disbursements incurred by Petrie Retail in connection
with the action. The parties are currently engaged in discovery with
respect to this action. While no assurance can be given, the Liquidating
Trust believes that it has meritorious defenses to this action, including
but not limited to the affirmative defenses of setoff and recoupment, and
will defend itself vigorously.
Since filing its petition for bankruptcy protection, Petrie Retail
has, according to its filings with the Bankruptcy Court, closed more than
730 of the roughly 1600 stores it operated prior to filing the petition.
According to such filings, of the more than 730 closed stores,
approximately 460 relate to rejected leases, 30 were assigned to third
party retailers and the remainder of the leases generally have expired or
were terminated by mutual landlord and tenant consent. Petrie had
guaranteed approximately 85 of the rejected leases. After taking into
account settlements and releases obtained from landlords, the Liquidating
Trust, as successor to Petrie, remains a guarantor of 42 of the re-
jected leases and its aggregate guarantee liability with respect to these
leases, without giving effect to any present value discount and assuming
the landlord in each case is unable to mitigate its damages, is
approximately $28 million, which amount is included in the Liquidating
Trust's accrued expenses and other liabilities at March 31, 1997.
On May 5, 1997, Petrie Retail obtained approval from the Bankruptcy
Court to conduct going-out-of-business sales at an additional of 76
stores and stated that it would close 22 other stores in the ordinary
course of business. While conducting its going-out-of-business sales at
these locations, Petrie Retail is attempting to sell and assign, with
Bankruptcy Court approval, the subject leases to third parties. If Petrie
Retail can not assign the leases that are the subject of the May 5, 1997
motion, Petrie Retail will likely reject such remaining leases in the
near future. The Liquidating Trust, as successor to Petrie, is a
guarantor of 21 of the leases relating to the 76 stores in which Petrie
Retail is conducting going-out-of-business sales. If Petrie Retail were
to reject all 21 of these leases, the Liquidating Trust's aggregate
guarantee liability with respect to such leases, without giving effect to
any present value discount and assuming the landlord in each case is
unable to mitigate its damages, would be approximately $9 million, which
amount is included in the Liquidating Trust's accrued expenses and other
liabilities at March 31, 1997.
According to Petrie Retail's filings with the Bankruptcy Court,
once Petrie Retail closes all of the stores that are the subject of the
Bankruptcy Court motions discussed above (including the 22 stores which
are being closed in the ordinary course of business), it will be
operating approximately 770 stores. No assurance can be given as to the
number of additional stores to be closed by Petrie Retail with respect to
which the Liquidating Trust has guarantee liability. If Petrie Retail
were to close every store for which the Liquidating Trust believes it has
liability as a lease guarantor (giving effect to all the lease guarantee
releases executed by landlords) and every store for which the Liquidating
Trust disputes its guarantor liability (as more fully discussed in the
following paragraph), assuming that no mitigation or defense were
successful, the Liquidating Trust's theoretical exposure relating to such
leases, without giving effect to any present value discount, would be
approximately $93 million, with approximately $9 million coming due in
the remainder of the year ending December 31, 1997, approximately $14
million due in 1998, approximately $13 million due in 1999, and
approximately $57 million due thereafter. Such exposure includes the $28
million in aggregate liability relating to the rejected leases and the $9
million in aggregate liability relating to leases which are the subject
of the May 5, 1997 order of the Bankruptcy Court described above.
The Liquidating Trust, on the one hand, and Petrie Retail and its
affiliates, on the other, are in dispute as to whether the Liquidating
Trust, as successor to Petrie, or Petrie Retail and its affiliates are
responsible as guarantor of 43 leases. The Liquidating Trust has settled
its liability with the landlords (but not Petrie Retail and its
affiliates) with respect to eight of these leases. The following amounts,
which have been calculated using the same assumptions set forth above and
without giving effect to any present value discount, have been included
in the Liquidating Trust's lease liability calculations in the preceding
paragraphs with respect to the disputed leases: (i) the $28 million in
liability with respect to rejected leases includes $10 million in
guarantee liability with respect to the disputed leases; (ii) the $9
million in liability with respect to stores where Petrie Retail is
conducting going-out-of-business sales pursuant to the May 5, 1997 order
of the Bankruptcy Court includes $1 million with respect to the disputed
leases; and (iii) the $93 million in maximum theoretical exposure
includes $19 million with respect to 35 disputed leases where the
Liquidating Trust has not settled its liability with the landlord.
Landlords under leases relating to 135 stores operated by Petrie
Retail or an affiliate thereof have alleged in a complaint that the
Liquidating Trust, as successor to Petrie, has liability as a guarantor
of certain leases notwithstanding Petrie's receipt from these landlords
of releases of guarantees with respect to substantially all of such
leases. Without giving effect to any present value discount, but giving
effect to rental payments made by Petrie Retail since the complaints were
filed and assuming that all of the 135 stores which are the subject of
these landlords' claims are closed and that the landlord in each case is
unable to mitigate its damages, the Liquidating Trust estimates that the
alleged guarantor liability currently represents approximately $66
million in lease payments. On April 7, 1997, the trial court dismissed
the landlords' claims for fraud and negligent misrepresentation with
respect to the releases of the guarantees, and the landlords have filed a
notice of appeal of such dismissal. The parties are currently engaged in
discovery with respect to the landlords' remaining claims for breach of
contract and declaratory judgment. The Liquidating Trust believes it has
substantial legal defenses to the landlords' claims and is vigorously
contesting such claims. While a decision by a court in favor of such
landlords could have a material adverse effect on the Liquidating Trust's
liquidity and financial condition, based on available information and
developments to date, the Liquidating Trust believes that such an outcome
is unlikely.
The Liquidating Trust's lease exposure calculations reflect the
estimated sum of all base rent and additional rent (such as taxes and
common area charges) due under a lease through the end of the current
lease term, but do not reflect potential penalties, interest and other
charges to which a landlord may be entitled. Such additional charges
(which may in part be unenforceable) are not expected to materially
increase the Liquidating Trust's lease guarantee liability.
A significant number of leases discussed above under which a
landlord might claim that the Liquidating Trust, as successor to Petrie,
has liability as a lease guarantor either expressly contain mitigation
provisions or relate to property in states that imply such provisions as
a matter of law. Mitigation generally requires, among other things, that
a landlord of a closed store seek to reduce its damages, including by
attempting to locate a new tenant.
As previously disclosed, on October 23, 1995, Petrie Retail
notified three former executives of Petrie that, as a result of Petrie
Retail's bankruptcy filing, Petrie Retail would no longer honor its
obligations under the employment agreements each executive had entered
into with Petrie which had been assumed by Petrie Retail in connection
with the sale of the retail operations. On April 25, 1996, the
Liquidating Trust entered into settlement agreements with two of the
former executives and on January 27, 1997 entered into a settlement
agreement with the estate of the third executive. Pursuant to such
settlement agreements, the Liquidating Trust agreed to pay each
substantially all the amounts due under their respective agreements with
Petrie. The total cost of these settlements to the Liquidating Trust was
approximately $3.2 million (of which approximately $700,000 remained
unpaid and was included in the Liquidating Trust's accrued expenses and
other liabilities at March 31, 1997).
As previously disclosed, effective January 31, 1995, Petrie Retail
withdrew from the Multiemployer Plan. Due to underfunding of the
Multiemployer Plan, Petrie Retail and its affiliates have incurred
withdrawal liability under the Employee Retirement Income Security Act of
1974, as amended. By letter dated May 30, 1996 (the "Assessment Letter"),
the Multiemployer Plan assessed withdrawal liability against Petrie
Retail in the amount of approximately $9.4 million plus interest, to be
paid in quarterly installments of approximately $317,000 commencing
August 1, 1996 through and including August 1, 2006, with a final payment
of approximately $18,000 due on November 1, 2006. In addition, the
Multiemployer Plan assessed liability against Petrie Retail of
approximately $2 million attributable to the Multiemployer Plan's failure
to meet certain Internal Revenue Code minimum funding standards, which
amount was payable on August 1, 1996. To the knowledge of the Liquidating
Trust, Petrie Retail has not yet paid any amounts for its liabilities in
connection with the Multiemployer Plan. In the event of a mass withdrawal
by contributing employers from the Multiemployer Plan, the withdrawal
liability allocated to Petrie Retail and its affiliates may be higher.
Pursuant to the Retail Operations Stock Purchase Agreement, Petrie Retail
and its affiliates are responsible for the first $10 million in
withdrawal and related liabilities, with the next $50 million of such
liabilities allocated 75 percent to the Liquidating Trust, as successor
to Petrie, and 25 percent to Petrie Retail and its affiliates. It is
unclear what effect, if any, Petrie Retail's bankruptcy filing may have
upon the timing and amount of any payments the Liquidating Trust may be
required to make under the agreement with respect to the Multiemployer
Plan, but in no event will the Liquidating Trust's maximum contractual
liability be increased as a result of Petrie Retail's bankruptcy filing.
As previously disclosed, in connection with an audit conducted by
the IRS, the agent examining Petrie's federal tax return for its fiscal
year ended January 28, 1989 raised an issue regarding the manner pursuant
to which Petrie computed the basis of its Toys Common Stock transferred
in connection with the exchange of certain of its exchangeable
subordinated debentures. The examining agent had proposed an adjustment
to Petrie's taxable income for its 1989 fiscal year which would have
resulted in an additional federal tax liability, including interest, of
approximately $53 million. On March 14, 1997, a settlement was entered
into with the IRS pursuant to which the IRS and the Liquidating Trust
agreed to an adjustment to Petrie's taxable income for its 1989 fiscal
year which resulted in the Liquidating Trust's incurring additional
federal tax liability, including interest, of approximately $11.3
million. Such liability was paid on such date. In connection with such
settlement, PS Stores and Petrie Retail have agreed that the Liquidating
Trust may transfer to an account of the Liquidating Trust the U.S.
Treasury obligations held in the Collateral Account in excess of $37.5
million.
Zurich Insurance Company ("Zurich"), an insurer of Petrie, has
billed the Liquidating Trust $1,554,836 in respect of retrospective
premium adjustments pursuant to insurance agreements between Zurich and
Petrie. The amount claimed by Zurich relates to policy terms 1988/1989
through and including 1994/1995, and is based on the value of claims made
as of December 31, 1996. Such amount is in addition to the amount paid to
Zurich based on the value of claims made as of December 31, 1995 and
December 31, 1994. As discussed above, the Liquidating Trust intends to
file claims in the Bankruptcy Court against Petrie Retail in respect of
any amounts paid by the Liquidating Trust for such retrospective premium
adjustments.
The Liquidating Trust believes adequate accruals have been
established in the accompanying financial statements to provide for any
losses that may be incurred with respect to the aforementioned
contingencies.
In addition to the contingent liabilities discussed above, the
Liquidating Trust or Petrie is a defendant in various other legal
proceedings relating to Petrie Retail's failure to perform certain retail
store leases and other liabilities assumed by Petrie Retail (but as to
which Petrie's liability has not been released) in connection with
Petrie's sale of the retail operations. While the Liquidating Trust
cannot predict with any certainty what its liability will be from the
disposition of these legal proceedings, based on developments to date,
the Liquidating Trust's estimate of the likely outcome of these matters
and its experience (including that of its predecessor, Petrie) in
contesting, litigating and settling matters, the Liquidating Trust
believes that it has made adequate accruals for the likely outcome of
such proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Financial Statements and the Notes thereto provided herein.
As previously disclosed, Petrie sold its retail operations to PS
Stores on December 9, 1994, and on January 24, 1995 (the date on which
Petrie's shareholders approved the Plan of Liquidation), Petrie commenced
its liquidation. As a result, effective January 28, 1995, Petrie changed
its basis of accounting from a going-concern basis to a liquidation
basis. During the three months ended March 31, 1997 and the period ended
March 31, 1996, the Liquidating Trust's activities have been limited to
continuing Petrie's liquidation in furtherance of the Plan of
Liquidation. For financial statement purposes, the Liquidating Trust is
deemed to be the successor to Petrie, and the results of operations of
Petrie are presented in the financial statements of the Liquidating
Trust. Beginning with the period ended December 31, 1996, the Liquidating
Trust adopted the calendar year as its fiscal year.
RESULTS OF OPERATIONS
The Liquidating Trust's net loss for the three months ended March
31, 1997 was $17,713,000 as compared to net income of $29,947,000 for the
period from January 23, 1996 to March 31, 1996.
As of May 14, 1997, the closing price per share of Toys Common
Stock as reported on the New York Stock Exchange Composite Tape was
$29-1/4 per share. In applying a liquidation basis of accounting, the
Liquidating Trust has given effect in its results of operations to
fluctuations in the market price of its Toys Common Stock, and has
recorded an unrealized loss on the Toys Common Stock for the three months
ending March 31, 1997 of $7,605,000 as compared to an unrealized gain of
$29,702,000 for the period ended March 31, 1996. In addition, during the
three months ended March 31, 1997, the Liquidating Trust sold an
aggregate of 1,000,000 shares of Toys Common Stock for approximately
$25.5 million. As a result of the sale, the Liquidating Trust realized a
loss of approximately $4,375,000.
For the three months ended March 31, 1997, the Liquidating Trust
incurred corporate overhead of $7,129,000 compared with $1,016,000 for
the period ended March 31, 1996. Corporate overhead generally consists of
costs and expenses related to the liquidation and dissolution of Petrie
including, but not limited to, costs and expenses that the Liquidating
Trust has incurred as a result of Petrie Retail's failure to perform its
obligations as a result of its bankruptcy filing, legal fees, insurance,
accounting fees, salaries, real estate advisory fees, transfer agent fees
and printing and shareholder communications expenses. The increase in
corporate overhead charges during the three months ended March 31, 1997
was primarily due to accruals made for additional costs and expenses that
the Liquidating Trust incurred in connection with Petrie Retail's failure
to perform its obligations as a result of its bankruptcy filing,
including approximately $4 million relating to the liability of the
Liquidating Trust, as successor to Petrie, as a guarantor of certain
leases which Petrie Retail or one of its affiliates has failed to perform
and approximately $1.5 million in respect of retrospective insurance
premium adjustments. See "Notes to Financial Statements."
The Liquidating Trust intends to file claims against Petrie Retail
in the Bankruptcy Court in respect of any payments which are made by the
Liquidating Trust for obligations that Petrie Retail or an affiliate
thereof fails to perform. Additionally, tax refunds aggregating
$7,579,998, to which Petrie Retail claims it is entitled, are being held
in an escrow account. As noted above, Petrie Retail has filed a complaint
in the Bankruptcy Court alleging that Petrie and the Liquidating Trust
are improperly withholding such tax refunds and is seeking, among other
things, the immediate release of such funds to Petrie Retail. See
"--Liquidity and Capital Resources."
During the three months ended March 31, 1997, the Liquidating Trust
earned $1,909,000 in investment income as compared to $1,261,000 earned
during the period ended March 31, 1996. The increase in investment income
during the three months ended March 31, 1997 is the result of the
Liquidating Trust's sale of shares of Toys Common Stock and the
investment of the proceeds therefrom in U.S. Treasury obligations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As previously disclosed, the Liquidating Trust has placed 3,493,450
shares of Toys Common Stock into an escrow account and, prior to the
settlement with the IRS, $67.5 million in U.S. Treasury obligations into
a collateral account. These assets were placed into these accounts to
secure Petrie's obligations relating to certain contingent liabilities
pursuant to the terms of the Toys Acquisition Agreement, the Retail
Operations Stock Purchase Agreement and other agreements with Toys "R" Us
and/or PS Stores. See "--Contingent Liabilities."
The assets of the Liquidating Trust are subject to the terms of a
letter agreement dated as of January 24, 1995 (the "Side Letter
Agreement"), pursuant to which Petrie agreed with Toys "R" Us that, until
such time as a hedge or similar arrangement is in place, Petrie would
retain, either individually or in combination, (i) cash in an amount of
at least $177.5 million (the "Reserved Amount") or (ii) shares of Toys
Common Stock having a market value (using the per share price on January
20, 1995) of at least twice the Reserved Amount, to secure the payment of
Petrie's contingent liabilities. Pursuant to the terms of this letter
agreement, the Liquidating Trust, as successor to Petrie, is presently
required to retain substantially all of its assets.
As of May 14, 1997, the Liquidating Trust's 4,055,576 shares of
Toys Common Stock had a market value of approximately $118.6 million,
based upon a closing price per share of $29-1/4, as reported on the New
York Stock Exchange Composite Tape on such date. During the fifty-two
weeks prior to May 14, 1997, the price per share of Toys Common Stock has
fluctuated from a high of $37-5/8 to a low of $23-3/4. No assurance can
be given as to the future market prices of Toys Common Stock.
As of May 14, 1997, the Liquidating Trust had approximately $130
million in cash and cash equivalents and investments in U.S. Treasury
obligations. The Liquidating Trust believes that it has sufficient liquid
funds available to satisfy the liabilities of the Liquidating Trust that
are likely to occur in the near future (including, without limitation,
costs and expenses related to the administration of the Liquidating Trust
such as legal fees, insurance, accounting fees, salaries, real estate
advisory fees, transfer agent fees and printing and shareholder
communication expenses). To the extent that the Liquidating Trust's
liquid funds are insufficient to satisfy such liabilities, however, the
Liquidating Trust will sell some or all of the remaining shares of Toys
Common Stock that it holds. The Liquidating Trust has not made any
liquidating distributions since its establishment. The Liquidating
Trustees have determined not to approve any further distributions of
cash or shares of Toys Common Stock to holders of Units of Beneficial
Interest until the status of the Liquidating Trust's contingent
liabilities is clarified. See "--Contingent Liabilities."
CONTINGENT LIABILITIES
As more fully described in Item 1 of Part I, the Liquidating Trust,
as successor to Petrie, has certain contingent liabilities with respect
to existing or potential claims, lawsuits and other proceedings, which
primarily relate to (i) guarantees of certain retail store leases,
expiring at various times through 2011 to which Petrie Retail or an
affiliate thereof is a party, and certain other liabilities that were
assumed by Petrie Retail (but as to which Petrie's liability has not been
released) in connection with the Sale to the extent that Petrie Retail
fails to perform; and (ii) Petrie's agreement with Petrie Retail to
indemnify it for certain liabilities relating to Petrie Retail's
withdrawal from the United Auto Workers District 65 Security Plan Pension
Fund. At March 31, 1997, the Liquidating Trust, as successor to Petrie,
had accrued approximately $42 million for contingent liabilities. As the
scope of these liabilities becomes better defined, there may be changes
in the estimates of future costs, which could have a material effect on
the Liquidating Trust's financial condition, liquidity and future ability
to make liquidating distributions. See "Notes to Financial Statements."
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical matters, the matters discussed in this Form
10-Q are forward-looking statements that involve risks and
uncertainties. Forward-looking statements include, but are not limited
to, statements relating to the Liquidating Trust's contingent liabilities
contained above in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Notes to Financial Statements."
The Liquidating Trust wishes to caution readers that in addition to
factors that may be described elsewhere in this Form 10-Q, the following
important factors, among others, could cause the Liquidating Trust's
assets and liabilities to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Liquidating
Trust, and could materially affect the Liquidating Trust's financial
condition and liquidity:
(1) A decision by Petrie Retail to close additional stores
for which the Liquidating Trust, as successor to Petrie,
has liability as a guarantor;
(2) A decision by Petrie Retail to liquidate while in Chapter
11 or the conversion of Petrie Retail's bankruptcy case
from Chapter 11 to a case under Chapter 7;
(3) Other actions by Petrie Retail which cause the default
of obligations assumed by Petrie Retail in connection
with the Sale for which the Liquidating Trust, as
successor to Petrie, may be deemed to have liability as
the primary obligor;
(4) A decision by a court that the Liquidating Trust, as
successor to Petrie, has liability as a guarantor of
certain leases notwithstanding Petrie's receipt from the
landlords thereof of releases of guarantees with respect
to such leases;
(5) A material decline in the price per share of Toys Common
Stock;
(6) An adverse material change in general economic conditions
and the interest rate environment;
(7) The effects of, and changes in, laws and regulations and
other activities of federal and local governments,
agencies and similar organizations; and
(8) The costs and other effects of other legal and adminis-
trative cases and proceedings, settlements and claims
relating to the Liquidating Trust's contingent
liabilities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The description of legal proceedings involving the Liquidating
Trust provided in Item 1 of Part I is herein incorporated by reference as
though fully set forth herein.
Zurich Insurance Company et al. v. Petrie Stores Corporation et
al. As previously disclosed, on or about October 30, 1996, a complaint
was filed in New York State Supreme Court by an insurance company and its
affiliates against Petrie and the Liquidating Trust, as successor to
Petrie, seeking payment of retrospective premium adjustments relating to
insurance agreements entered into by Petrie for the policy terms
1988/1989 through and including 1994/1995, based on the value of claims
as of December 31, 1994 and December 31, 1995. The plaintiffs sought an
amount no less than $1,728,183 with interest from October 31, 1996 plus
damages in respect of defendants' alleged anticipatory breach of their
obligations to pay future premium adjustments and attorneys' fees and
costs. This action was settled on April 14, 1997 for the principal amount
claimed, without interest, fees or other costs.
Roseville Square Partners v. Carlsbad Apparel Corporation et al.
As previously disclosed, on or about November 7, 1996, a complaint was
filed in the Superior Court of Orange County, California, California
against Carlsbad Apparel Corporation (a former subsidiary of Petrie),
Petrie and certain unnamed agents or employees of the defendants. The
complaint alleged breach of contract and sought to recover past rent,
common area maintenance charges, taxes, interest, late charges,
attorneys' fees and costs, and the additional amount due under the
remainder of the lease, which totaled in excess of $562,000. The parties
have agreed in principle, subject to the execution of definitive
documentation, to settle the case for an amount not deemed material to
the Liquidating Trust.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS
Exhibit 27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
Current Report on Form 8-K, dated as of March 17, 1997,
reporting the sale of 1,000,000 shares of Toys "R" Us common
stock and the settlement of a tax dispute with the Internal
Revenue Service.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PETRIE STORES LIQUIDATING TRUST
Dated: May 15, 1997 By /s/ STEPHANIE R. JOSEPH
-----------------------
Stephanie R. Joseph
Manager and Chief Executive Officer
Dated: May 15, 1997 By /s/ H. BARTLETT BROWN
---------------------
H. Bartlett Brown
Assistant Manager and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Liquidating Trust's statement of
net assets in liquidation at March 31, 1997 and the
Liquidating Trust's statement of changes in net assets
in liquidation for the three months ended March 31, 1997,
and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 137,578
<SECURITIES> 113,556
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 251,134
<CURRENT-LIABILITIES> 45,518
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 205,616
<TOTAL-LIABILITY-AND-EQUITY> 251,134
<SALES> 0
<TOTAL-REVENUES> 1,909
<CGS> 0
<TOTAL-COSTS> 7,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,713)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
