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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
FOR THE QUARTERLY PERIOD COMMISSION FILE NUMBER: 0-3777
ENDED JUNE 30, 1997
PETRIE STORES LIQUIDATING TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 22-6679945
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 August 12, 1997, there were
52,350,238 Units of Beneficial Interest outstanding.
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
- June 30, 1997 and December 31,
1996 . . . . . . . . . . . . . . . . . 2
Statements of Changes in Net Assets in
Liquidation - For the Three Months
ended June 30, 1997 and 1996, the
Six Months ended June 30, 1997 and
the Period from January 23, 1996
to June 30, 1996 . . . . . . . . . . . 3
Notes to Financial Statements . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . 14
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
STATEMENTS OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
(IN THOUSANDS)
June 30, December 31,
1997 1996
Assets
Cash and cash equivalents $ 1,042 $ 229
U.S. Treasury Obligations 98,831 56,943
U.S. Treasury Obligations held in escrow 37,500 67,500
Investments in common stock (including
3,493,450 shares of Toys "R" Us common
stock held in escrow) 141,945 151,035
------------ ---------
Total assets 279,318 275,707
Liabilities
Accrued expenses and other liabilities 40,386 52,378
------------ ---------
Total liabilities 40,386 52,378
Commitments and contingencies
------------ ---------
Net assets in liquidation $ 238,932 $223,329
============ =========
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 Three January
Months Months Six Months 23, 1996
Ended Ended Ended to
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------------------------------------------
Net assets in
liquidation
at beginning
of period $205,616 $232,541 $223,329 $202,594
--------- -------- -------- ---------
Investment income 2,325 1,721 4,233 2,982
Corporate overhead (1,557) (16,775) (8,686) (17,791)
Income tax refund 3,965 - 3,965 -
Net realized and
unrealized gain
on investments 28,583 7,583 16,091 37,285
--------- -------- -------- ---------
Net income (loss)
for the period 33,316 (7,471) 15,603 22,476
========= ======== ======= =======
Net assets in
liquidation at
end of period $238,932 $225,070 $238,932 $225,070
========= ======== ======= =======
Net income
(loss) per unit $ .64 $ (.14) $ .30 $ .43
========= ======== ======= =======
Weighted average
number of units 52,350 52,350 52,350 52,350
========= ======== ======= =======
See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. INTERIM REPORTING
The accompanying unaudited financial statements of 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 six months ended
June 30, 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 4), 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 June 30, 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 June 30, 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. In connection with
the previously disclosed settlement of a dispute with the Internal
Revenue Service (the IRS ), on May 20, 1997, approximately $32
million in U.S. Treasury obligations held in the Collateral Account
were transferred to the Liquidating Trust, and the Liquidating Trust
is now required to maintain at least $37.5 million in the Collateral
Account. The U.S. Treasury obligations currently held 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).
As previously disclosed, at various times between January 23,
1997 and February 5, 1997, the Liquidating Trust sold an aggregate
of 1,000,000 shares of Toys Common Stock for approximately $25.5
million in proceeds.
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 $35 per share at June 30, 1997. As of August 12,
1997, the price per share of Toys Common Stock was $34.
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 both June 30, 1997
and December 31, 1996, the Liquidating Trust, as successor to
Petrie, had accrued approximately $35 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.
On February 28, 1997, an adversary complaint was filed by
Petrie Retail in the Bankruptcy Court alleging that Petrie and the
Liquidating Trust were improperly withholding tax refunds
aggregating $7,579,998 (plus interest thereon) from Petrie Retail.
Such tax refunds, which relate to taxes paid by Petrie prior to the
Sale, were being held in an escrow account pursuant to an order of
the Bankruptcy Court. By an order dated June 25, 1997, the
Bankruptcy Court approved a settlement of the action, pursuant to
which the tax refunds (with accrued interest) were released from
escrow and shared equally by the Liquidating Trust and Petrie Retail
in offset of certain claims that the Liquidating Trust had against
Petrie Retail. In addition, pursuant to the settlement, Petrie
Retail and the Liquidating Trust have agreed to share equally in the
proceeds of any similar tax refunds received in the future. The
Liquidating Trust has expressly reserved the right to assert future
claims against Petrie Retail to the extent that such claims (i) were
not offset pursuant to the settlement or (ii) relate to amounts in
excess of the amounts permitted for offset in the settlement.
Since filing its petition for bankruptcy protection, Petrie
Retail has, according to its filings with the Bankruptcy Court,
closed more than 830 of the roughly 1600 stores it operated prior to
filing the petition, including approximately 220 stores closed since
January 1, 1997. According to such filings, of the more than 830
closed stores, approximately 520 relate to rejected leases,
approximately 35 relate to leases that were assigned to third party
retailers and the remainder of the leases generally have expired or
were terminated by mutual landlord and tenant consent. Additionally,
approximately 10 closed store leases may be assigned to third
parties or rejected, subject to Bankruptcy Court resolution. After
taking into account settlements and releases obtained from
landlords, the Liquidating Trust, as successor to Petrie, remains a
guarantor of 54 of the rejected 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 $25 million, which
amount is included in the Liquidating Trust's accrued expenses and
other liabilities at June 30, 1997. In addition, subject to the same
assumptions, the 10 closed store leases which have not been rejected
or terminated represent a maximum aggregate guarantee liability of
approximately $6 million, which amount has been included in the
Liquidating Trust's accrued expenses and other liabilities at June
30, 1997.
According to Petrie Retail's filings with the Bankruptcy Court,
Petrie Retail is now operating approximately 770 stores and plans to
close 12 additional stores within the next few months. No assurance
can be given that Petrie Retail will not close additional stores or
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 $86 million. Such exposure includes the approximately
$25 million in aggregate liability relating to the rejected leases
described above. With respect to the approximately $61 million of
liability relating to leases that have not yet expired or been
assigned, rejected or terminated (including the $6 million of
guarantor liability related to stores that have been closed where
the related leases have not been rejected or assigned),
approximately $5 million is due in the remainder of the year ending
December 31, 1997, approximately $12 million is due in 1998,
approximately $12 million is due in 1999, approximately $10 million
is due in 2000 and approximately $22 million is due thereafter.
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 19 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 $25 million in
liability with respect to rejected leases includes $8 million in
guarantee liability with respect to the disputed leases; and (ii)
the $86 million in maximum theoretical exposure includes $17 million
with respect to 24 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 $64 million
in lease payments. As previously disclosed, 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 (relating to certain unfunded pension
obligations) remained unpaid and was included in the Liquidating
Trust's accrued expenses and other liabilities at June 30, 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 made any payments with respect to such
liabilities. 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, Zurich Insurance Company ("Zurich"),
an insurer of Petrie, billed the Liquidating Trust, as successor to
Petrie, $1,554,836 in respect of retrospective premium adjustments
pursuant to insurance agreements between Zurich and Petrie. The
amount claimed by Zurich related to policy terms 1988/1989 through
and including 1994/1995, and was based on the value of claims made
as of December 31, 1996. On June 27, 1997, the Liquidating Trust
paid Zurich $1,520,589 in respect of the retrospective premium
adjustments based on the value of claims made as of December 31,
1996. Such amount is in addition to the $1,728,183 in retrospective
premium adjustments paid to Zurich on April 14, 1997 based on the
value of claims made as of December 31, 1994 and 1995. As discussed
above, the Liquidating Trust intends to file a claim in the
Bankruptcy Court against Petrie Retail in respect of the $1,520,589
paid to Zurich.
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 six months ended June 30,
1997 and the period from January 23, 1996 to June 30, 1996, the
Liquidating Trust's activities have been limited to continuing
Petrie's liquidation in furtherance of the Plan of Liquidation.
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 income for the three and six months
ended June 30, 1997 was $33,316,000 and $15,603,000, respectively,
as compared to a net loss of $7,471,000 for the three months ended
June 30, 1996 and net income of $22,476,000 for the period from
January 23, 1996 to June 30, 1996.
As of August 12, 1997, the most recent practicable date prior
to the filing of this Form 10-Q, the closing price per share of Toys
Common Stock as reported on the New York Stock Exchange Composite
Tape was $34 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 a net unrealized gain on the Toys Common
Stock for the three and six months ended June 30, 1997 of
$28,389,000 and $20,802,000 respectively, as compared to an
unrealized gain of $7,583,000 and $37,285,000 for the three months
ended June 30, 1996 and the period from January 23, 1996 to June 30,
1996, respectively. In addition, at various times between January
23, 1997 and February 5, 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 with respect to such sale of approximately
$4,375,000 for the six months ended June 30, 1997.
For the three and six months ended June 30, 1997, the
Liquidating Trust incurred corporate overhead of $1,557,000 and
$8,686,000, as compared to $16,775,000 and $17,791,000 for the three
months ended June 30, 1996 and the period from January 23, 1996 to
June 30, 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 for the
Liquidating Trust's two part-time employees, trustee fees, real
estate advisory fees, transfer agent fees and printing and
shareholder communications expenses. The decrease in corporate
overhead charges during the three and six months ended June 30, 1997
was primarily due to accruals of $15 million made during the three
month period ended June 30, 1996 for contingent guarantee
liabilities relating to store leases with respect to which Petrie
Retail announced going-out-of-business sales. Included in corporate
overhead charges for the six months ended June 30, 1997 are 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 certain payments which
are made by the Liquidating Trust for obligations that Petrie Retail
or an affiliate thereof fails to perform. The Liquidating Trust is
unable to predict the timing or probability of the collection of
these claims against Petrie Retail.
On February 28, 1997, an adversary complaint was filed by
Petrie Retail in the Bankruptcy Court alleging that Petrie and the
Liquidating Trust were improperly withholding tax refunds
aggregating $7,579,998 (plus interest thereon) from Petrie Retail.
Such tax refunds, which relate to taxes paid by Petrie prior to the
Sale, were being held in an escrow account pursuant to an order of
the Bankruptcy Court. By an order dated June 25, 1997, the
Bankruptcy Court approved a settlement of the action, pursuant to
which the tax refunds (with accrued interest) were released from
escrow and shared equally by the Liquidating Trust and Petrie Retail
in offset of certain claims that the Liquidating Trust had against
Petrie Retail. In addition, pursuant to the settlement, Petrie
Retail and the Liquidating Trust have agreed to share equally in the
proceeds of any similar tax refunds received by the Liquidating
Trust in the future. The Liquidating Trust has expressly reserved
the right to assert future claims against Petrie Retail to the
extent that such claims (i) were not offset pursuant to the
settlement or (ii) relate to amounts in excess of the amounts
permitted for offset in the settlement.
During the three and six months ended June 30, 1997, the
Liquidating Trust earned $2,325,000 and $4,233,000 in investment
income, as compared to $1,721,000 and $2,982,000 earned during the
three months ended June 30, 1996 and the period from January 23,
1996 to June 30, 1996. The increase in investment income during the
three and six months ended June 30, 1997 is principally 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, 3,493,450 shares of Toys Common Stock
are held by the Liquidating Trust in an escrow account and
approximately $37.5 million in U.S. Treasury obligations are held by
the Liquidating Trust in a collateral account. These assets 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 August 12, 1997, the most recent practicable date prior
to the filing of this Form 10-Q, the Liquidating Trust's 4,055,576
shares of Toys Common Stock had a market value of approximately
$137.9 million, based upon a closing price per share of $34, as
reported on the New York Stock Exchange Composite Tape on such date.
During the fifty-two weeks prior to August 12, 1997, the price per
share of Toys Common Stock has fluctuated from a low of $24 3/8 to a
high of $37 5/8. No assurance can be given as to the future market
prices of Toys Common Stock.
As of August 12, 1997, the Liquidating Trust had approximately
$137 million in cash and cash equivalents and investments in U.S.
Treasury obligations (including those held in escrow). 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 June 30,
1997, the Liquidating Trust, as successor to Petrie, had accrued
approximately $35 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
administrative 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. The amount paid in
such action is in addition to the $1,520,589 in retrospective
premium adjustments paid by the Liquidating Trust to Zurich on June
27, 1997 based on the value of claims made as of December 31, 1996.
See "Notes to Financial Statements."
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 settled 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
None.
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: August 14, 1997 By /s/ STEPHANIE R. JOSEPH
------------------------------------
Stephanie R. Joseph
Manager and Chief Executive Officer
Dated: August 14, 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 June 30, 1997 and the
Liquidating Trust's statement of changes in net
assets in liquidation for the three months ended
June 30, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 137,373
<SECURITIES> 141,945
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 279,318
<CURRENT-LIABILITIES> 40,386
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 238,932
<TOTAL-LIABILITY-AND-EQUITY> 279,318
<SALES> 0
<TOTAL-REVENUES> 4,233
<CGS> 0
<TOTAL-COSTS> 8,686
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,603
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,603
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
