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
ENDED MARCH 31, 1998 COMMISSION FILE NUMBER: 0-3777
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.)
150 MEADOWLANDS PARKWAY
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 13,
1998, there were 52,350,238 Units of Beneficial Interest
outstanding.
PETRIE STORES LIQUIDATING TRUST
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Statements of Net Assets in Liquidation - March 31, 1998
(Unaudited) and December 31, 1997............................. 2
Statements of Changes in Net Assets in Liquidation
(Unaudited) - For the Three Months Ended March 31, 1998
and the Three Months Ended March 31, 1997..................... 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...............................................16
Item 6. Exhibits and Reports on Form 8-K................................16
PETRIE STORES LIQUIDATING TRUST
STATEMENTS OF NET ASSETS IN LIQUIDATION
(IN THOUSANDS)
MARCH 31, 1998 DECEMBER 31,
(UNAUDITED) 1997
-------------- ------------
ASSETS
Cash and cash equivalents.................... $ 218 $ 399
U.S. Treasury Obligations.................... 98,691 98,189
U.S. Treasury Obligations held in escrow..... 37,500 37,500
Investments in common stock (including
3,493,450 shares of Toys "R" Us
common stock held in escrow).............. 123,377 127,497
--------- ---------
Total assets................................. 259,786 263,585
LIABILITIES
Accrued expenses and other liabilities....... 52,452 50,960
Commitments and contingencies
Net assets in liquidation.................... $ 207,334 $ 212,625
========= =========
See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
Net assets in liquidation at
beginning of period................ $ 212,625 $ 223,329
--------- ---------
Investment income.................... 1,855 1,909
Corporate overhead................... (2,887) (7,129)
Net realized and unrealized
loss on investments............... (4,259) (12,493)
--------- --------
Net loss for the period.............. (5,291) (17,713)
--------- --------
Decrease in net assets............... (5,291) (17,713)
--------- --------
Net assets in liquidation at
end of period...................... $ 207,334 $ 205,616
========= =========
Net loss per unit.................... $ (.10) $ (.34)
========= =========
Weighted average number of units..... 52,350 52,350
========= =========
See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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 three
months ended March 31, 1998 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 year
ended December 31, 1997.
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 of Shareholders, held on December 6, 1994, Petrie's
shareholders approved the sale of Petrie's retail operations (the "Sale").
At Petrie's Reconvened Annual Meeting of Shareholders, 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 and the terms of various agreements
with Canadian Imperial Bank of Commerce ("CIBC") (Note 3) pursuant to which
the Liquidating Trust has pledged for the benefit of CIBC 2,000,000 shares
of Toys Common Stock. 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, 1998 and December 31, 1997 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 federal 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, 1998, the Liquidating Trust's investments in common
stock consisted of 4,055,576 shares of common stock 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. While the
shares of Toys Common Stock held by the Liquidating Trust generally are
carried at market value, at March 31, 1998, 2,000,000 of such shares (which
are subject to the terms of the Master Agreement described below) were
carried at the Put Price (as defined below) because the market value of
Toys Common Stock on March 31, 1998 was below the Put Price.
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 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 were placed into the
Escrow Account pursuant to the Escrow Agreement to provide for 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 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
in the Collateral Account. In connection with the previously disclosed
settlement of a dispute with the Internal Revenue Service (the "IRS"),
approximately $32 million in U.S. Treasury obligations held in the
Collateral Account were transferred to the Liquidating Trust on May 20,
1997. The Liquidating Trust is currently required to maintain at least
$37.5 million in the Collateral Account. The U.S. Treasury obligations 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).
The Liquidating Trust has also entered into a Master Agreement (based
on the International Swaps and Derivatives Association Form), dated as of
November 19, 1997 (the "Master Agreement"), with CIBC, to protect the
Liquidating Trust against certain investment risks associated with
2,000,000 shares of Toys Common Stock held by the Liquidating Trust.
Pursuant to the Master Agreement, if, on December 3, 1999, the price of
Toys Common Stock is below $30.7264 (the "Put Price"), CIBC will be
obligated to pay the Liquidating Trust the difference between the Put Price
and the then prevailing price of Toys Common Stock, multiplied by
2,000,000. If, on December 3, 1999, the price of Toys Common Stock is above
$47.1137 (the "Call Price"), the Liquidating Trust will be obligated to pay
CIBC the difference between the Call Price and the then prevailing market
price of Toys Common Stock, multiplied by 2,000,000. Any payment required
to be made by the Liquidating Trust under the Master Agreement may, at the
option of the Liquidating Trust, be made in cash or Toys Common Stock. To
secure the covenants made by the Liquidating Trust pursuant to the Master
Agreement and a Secured Term Note, dated as of December 31, 1997 (the
"Secured Term Note"), between the Liquidating Trust and the CIBC, the
Liquidating Trust has pledged for the benefit of CIBC 2,000,000 shares of
Toys Common Stock pursuant to a Stock Pledge Agreement, dated as of
December 31, 1997, and a Tri-Party Custody Agreement, dated as of December
31, 1997, among the United States Trust Company of New York, the
Liquidating Trust and CIBC.
In connection with the Master Agreement, the Liquidating Trust and
CIBC have also entered into the Secured Term Note, which provides for CIBC
to make available to the Liquidating Trust a loan facility permitting
borrowings of up to $55,000,000. This facility, if drawn upon, will mature
on December 3, 1999 and will bear interest at a floating rate equal to the
three-month LIBOR rate plus 0.35%, which rate will be reset quarterly.
Interest on any borrowings under the Secured Term Note is compounded and
payable quarterly and on the maturity date. As discussed above, the Secured
Term Note is secured by 2,000,000 shares of Toys Common Stock. There was no
principal outstanding under the Secured Term Note at March 31, 1998.
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 31-7/16 per share at December
31, 1997 to $30-1/8 per share at March 31, 1998 and then further decreased
to $28-5/16 per share at May 13,
1998.
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 for which
Petrie Retail or an affiliate thereof has assumed liability, 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, 1998 and December 31, 1997,
the Liquidating Trust, as successor to Petrie, had accrued approximately
$50 million and $49 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"). In connection with its filing for bankruptcy
protection, 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 for which Petrie Retail or
an affiliate thereof has assumed liability, state and federal 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.
On December 23, 1997, the Liquidating Trust filed over 110 claims in
the Bankruptcy Court against Petrie Retail and certain of its affiliates
with respect to an aggregate of approximately $14 million in payments which
have been made by the Liquidating Trust as a result of the failure by
Petrie Retail or an affiliate thereof to perform or pay certain of the
Assumed Obligations. The Liquidating Trust also filed approximately 600
additional claims in the Bankruptcy Court against Petrie Retail and certain
of its affiliates with respect to payments which the Liquidating Trust may
in the future be required to make as a result of the failure by Petrie
Retail or its affiliates to perform or pay Assumed Obligations. With
respect to these claims, the Liquidating Trust's status is that of an
unsecured creditor. There can be no assurance as to the timing or
probability of the collection of these claims against Petrie Retail or any
of its affiliates or the amount of the payments, if any, that Petrie Retail
and its affiliates will make to creditors asserting unsecured claims.
Accordingly, no amounts have been accrued as receivables for potential
reimbursement or recoveries from Petrie Retail and its affiliates.
On April 10, 1998, PS Stores, the parent of Petrie Retail, filed a
voluntary petition for reorganization relief under Chapter 11 of the United
States Bankruptcy Code with the Bankruptcy Court. The Liquidating Trust
may, at the appropriate time, file claims in the Bankruptcy Court against
PS Stores similar to those filed against Petrie Retail. There can be no
assurance as to the timing or probability of the collection of these claims
against PS Stores or the amount of the payments, if any, that PS Stores
will make to creditors asserting unsecured claims. Accordingly, no amounts
have been accrued as receivables for potential reimbursement or recoveries
from PS Stores.
Since filing its petition for bankruptcy protection, Petrie Retail
has (according to its filings with the Bankruptcy Court) closed more than
1090 of the roughly 1600 stores it operated prior to filing the petition,
including approximately 235 stores closed since January 1, 1998. According
to such filings, of the more than 1090 closed stores, approximately 675
relate to rejected leases, approximately 85 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.
After taking into account settlements and releases obtained from landlords,
the Liquidating Trust, as successor to Petrie, remains a guarantor of
approximately 97 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 $41 million, which amount is
included in the Liquidating Trust's accrued expenses and other liabilities
at March 31, 1998.
According to Petrie Retail's filings with the Bankruptcy Court,
Petrie Retail is in the process of disposing of, through liquidation or
sale, substantial portions of its remaining operations. In this regard,
Petrie Retail has assigned or rejected 49 leases relating to stores
operated by its Winkelman Stores Incorporated division and has closed such
division. In addition, Petrie Retail has indicated in its filings with the
Bankruptcy Court that it intends to sell its G&G Shops Inc. division, which
currently operates over 400 stores, by June 30, 1998. According to such
filings, Petrie Retail intends to continue to operate approximately 104 of
its other stores as part of a proposed plan of reorganization which has not
yet been filed with the Bankruptcy Court.
Petrie Retail has also discontinued operations at its former
headquarters building located at 70 Enterprise Avenue in Secaucus, New
Jersey and assigned the lease for such premises to P335 Leasing Corp.
("P335"), an affiliate of the Liquidating Trust's real estate advisor. The
Liquidating Trust currently pays rent due under the 70 Enterprise Avenue
lease, and P335, in cooperation with the Liquidating Trust, has sublet the
premises to a third party for the four years remaining on the term of such
lease. The Liquidating Trust's aggregate guarantee liability with respect
to the 70 Enterprise Avenue lease, assuming the sublease of the premises
remains in full force and effect, is approximately $4 million, which amount
is included in the Liquidating Trust's accrued expenses and other
liabilities at March 31, 1998. In the event that the subtenant defaults
with respect to its obligations under the 70 Enterprise Avenue lease, the
Liquidating Trust's aggregate liability on such lease would be
approximately $9 million. Petrie Retail continues to operate and pay rent
with respect to its headquarters building located at 150 Meadowlands
Parkway in Secaucus, New Jersey and has not disclosed its intended plans
with respect to such building in its filings with the Bankruptcy Court.
According to Petrie Retail's filings with the Bankruptcy Court,
Petrie Retail is now operating approximately 510 stores. No assurance can
be given that Petrie Retail will consummate a plan of reorganization or any
of the other transactions referred to in its filings with the Bankruptcy
Court. Additionally, no assurance can be given that Petrie Retail or any
third party who purchases any of the assets or operations of Petrie Retail
will not close additional stores or as to the number of additional stores
to be closed by Petrie Retail or a third party with respect to which the
Liquidating Trust has guarantor liability. If Petrie Retail were to close
every store and the headquarters building 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 $71 million. Such exposure includes the
approximately $41 million in aggregate liability related to the rejected
store leases described above and the approximately $9 million of liability
related to the 70 Enterprise Avenue headquarters building lease described
above. With respect to the approximately $21 million of potential liability
relating to leases that have not yet expired or been assigned, rejected or
terminated (and excluding the full $9 million of liability related to the
70 Enterprise Avenue headquarters building lease), approximately $5 million
relates to Petrie Retail's G&G Stores Inc. division, approximately $4
million relates to the 150 Meadowlands Parkway headquarters building lease
and approximately $12 million relates to Petrie Retail's other store
leases. Of the $21 million in potential liability, approximately $3 million
is due in the remainder of the year ending December 31, 1998, approximately
$5 million is due in 1999, approximately $4 million is due in 2000 and
approximately $9 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 (without prejudice to the Liquidating
Trust's right to assert claims against Petrie Retail and its affiliates)
with respect to 21 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 $41 million in liability with
respect to rejected leases includes $11 million in guarantee liability
relating to the disputed leases; and (ii) the $71 million in maximum
theoretical exposure includes $15 million relating to the disputed leases
with respect to which the Liquidating Trust has not settled its liability
with the landlord.
As previously disclosed, 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
after 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 such alleged guarantor liability currently represents approximately
$59 million in lease payments. 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 respective
agreements with Petrie. The total cost of these settlements to the
Liquidating Trust was approximately $3.2 million, of which approximately
$615,000 (relating to certain unfunded pension obligations) remained unpaid
and was included in the Liquidating Trust's accrued expenses and other
liabilities at March 31, 1998.
As previously disclosed, effective January 31, 1995, Petrie Retail
withdrew from the Multiemployer Plan. Due to the Multiemployer Plan's
underfunded status, 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 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 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 or PS Stores' bankruptcy filings may
have upon the timing and amount of any payments the Liquidating Trust may
be required to make under the Retail Operations Stock Purchase 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 or PS Stores' bankruptcy filings.
As previously disclosed, Zurich Insurance Company ("Zurich"), a
former insurer of Petrie, billed the Liquidating Trust, as successor to
Petrie, for retrospective premium adjustments pursuant to general
liability, automobile and workers' compensation insurance agreements (the
"Insurance Agreements") between Zurich and Petrie relating to policy terms
1988/1989 through and including 1994/1995. During the year ended December
31, 1997, the Liquidating Trust paid Zurich approximately $3.2 million in
respect of such retrospective premium adjustments based on the value of
claims made as of December 31, 1994, 1995 and 1996. The Liquidating Trust
has received a refund of approximately $125,000 for retrospective premium
adjustments under the Insurance Agreements based on the value of claims
made as of December 31, 1997. Settlement negotiations are ongoing with
respect to the retrospective premium adjustments in respect of claims made
under the workers' compensation portion of the Insurance Agreements for all
periods subsequent to December 31, 1997.
As previously disclosed, in a letter dated March 17, 1998 from IBM
Credit Corporation ("IBM") to the Liquidating Trust, IBM has demanded
payment of approximately $2.9 million, plus late charges, costs and
attorneys' fees, for amounts due as of December 31, 1997 under certain
lease agreements between Petrie and IBM relating to Petrie's lease of
computer equipment from IBM, which lease agreements were rejected by Petrie
Retail in connection with its bankruptcy. In addition, the letter claims
that, as of December 31, 1997, approximately $140,000 was also due under
certain of the lease agreements which were not rejected by Petrie Retail.
The Liquidating Trust is currently reviewing IBM's claims. Accordingly, no
amounts have been included in accrued expenses and other liabilities at
March 31, 1998 in respect of any potential liability relating to these
claims.
The Liquidating Trust believes, based on the most recently available
information, that appropriate 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 with respect to
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 the Sale. While the Liquidating Trust cannot predict with any
certainty its liability resulting from the disposition of these legal
proceedings, based on (i) developments to date, (ii) the Liquidating
Trust's estimate of the likely outcome of these matters and (iii) the
Liquidating Trust's experience (including that of its predecessor, Petrie)
in contesting, litigating and settling matters, the Liquidating Trust
believes that it has made appropriate 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, 1998 and the three months ended
March 31, 1997, 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 loss for the three months ended March 31,
1998 was $5,291,000 as compared to a net loss of $17,713,000 for the three
months ended March 31, 1997.
As of May 13, 1998, the closing price per share of Toys Common Stock
as reported on the New York Stock Exchange Composite Tape was $28-5/16 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 ended March 31, 1998 of $4,120,000
as compared to an unrealized loss of $7,605,000 for the three months ended
March 31, 1997. 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. The Liquidating Trust realized a
loss with respect to such sale of approximately $4,375,000.
For the three months ended March 31, 1998, the Liquidating Trust
incurred corporate overhead of $2,887,000 as compared to $7,129,000 for the
three months ended March 31, 1997. 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 in connection with its bankruptcy filing, legal fees, real
estate advisory fees, insurance, salaries for the Liquidating Trust's two
part-time employees, trustee fees, accounting fees, transfer agent fees and
printing and related expenses. The higher corporate overhead charges
incurred during the three months ended March 31, 1997 were primarily due to
relatively higher costs and expenses incurred by the Liquidating Trust
during such period related to Petrie Retail's failure to perform its
obligations in connection with its bankruptcy filing.
During the three months ended March 31, 1998, the Liquidating Trust
earned $1,855,000 in investment income as compared to $1,909,000 earned
during the period ended March 31, 1997.
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 to provide for 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.
Of such 3,493,450 shares of Toys Common Stock, 2,000,000 shares are pledged
to CIBC to secure the Liquidating Trust's covenants under the Master
Agreement and the Secured Term Note, as more fully described below. In
addition, $37.5 million in U.S. Treasury obligations are required to be
held by the Liquidating Trust in a collateral account to secure the
Liquidating Trust's obligation to indemnify PS Stores for certain
liabilities relating to Petrie Retail's withdrawal from a multiemployer
pension plan.
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 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.
In accordance with the Plan of Liquidation, 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. While the Liquidating Trustees have not, as of the
date of this report, approved any further sales of Toys Common Stock, no
assurances can be given that they will not determine to approve further
sales of Toys Common Stock.
The Liquidating Trust has entered into the Master Agreement with CIBC
to protect the Liquidating Trust against certain investment risks
associated with 2,000,000 shares of Toys Common Stock held by the
Liquidating Trust. Pursuant to the Master Agreement, if, on December 3,
1999 (the "Expiration Date"), the price of Toys Common Stock is below
$30.7264, CIBC will be obligated to pay the Liquidating Trust the
difference between the Put Price and the then prevailing price of Toys
Common Stock, multiplied by 2,000,000. If, on the Expiration Date, the
price of Toys Common Stock is above $47.1137, the Liquidating Trust will be
obligated to pay CIBC the difference between the Call Price and the then
prevailing market price of Toys Common Stock, multiplied by 2,000,000. Any
payment required to be made by the Liquidating Trust under the Master
Agreement may, at the option of the Liquidating Trust, be made in cash or
Toys Common Stock.
In connection with the Master Agreement, the Liquidating Trust and
CIBC have also entered into the Secured Term Note, which provides for CIBC
to make available to the Liquidating Trust a loan facility in the amount of
approximately $55 million. This facility, if drawn upon, will bear interest
at a floating rate equal to the three-month LIBOR rate plus thirty-five
basis points. The Liquidating Trust does not presently anticipate that it
will need to draw upon such facility. Any determination to draw upon the
facility will be based upon the Liquidating Trust's then anticipated
liquidity needs, including the status of its contingent liabilities. To
secure the covenants made by the Liquidating Trust pursuant to the Master
Agreement and the Secured Term Note, the Liquidating Trust has pledged for
the benefit of CIBC 2,000,000 shares of Toys Common Stock pursuant to the
Stock Pledge Agreement and the Tri-Party Custody Agreement.
Although the Liquidating Trust does not presently expect to seek to
terminate the transactions contemplated by the Master Agreement prior to
the Expiration Date, should it determine to do so (including in order to
provide additional liquidity for the payment of contingent liabilities
which become actual liabilities of the Liquidating Trust or to permit the
distribution of any shares of Toys Common Stock pledged to secure any
amounts due under the Master Agreement and the Secured Term Note), the
Liquidating Trust understands that, in accordance with industry practice,
it would be able to do so upon terms to be agreed upon with CIBC based on
then prevailing market conditions.
As of May 13, 1998, the Liquidating Trust's 4,055,576 shares of Toys
Common Stock had a value of approximately $119.7 million, based upon (i) a
closing price per share of $28-5/16 as reported on the New York Stock
Exchange Composite Tape on such date with respect to 2,055,576 shares of
Toys Common Stock held by the Liquidating Trust and (ii) the Put Price with
respect to 2,000,000 shares of Toys Common Stock held by the Liquidating
Trust which are subject to the Master Agreement. During the fifty-two weeks
prior to May 13, 1998, the price per share of Toys Common Stock has
fluctuated from a high of $37-1/8 to a low of $24-7/8. No assurance can be
given as to the future market prices of Toys Common Stock.
As of May 13, 1998, the Liquidating Trust had approximately $135
million in cash, 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
foreseeable liabilities of the Liquidating Trust (including, without
limitation, costs and expenses related to the administration of the
Liquidating Trust such as legal fees, real estate advisory fees, insurance,
salaries for the Liquidating Trust's two part-time employees, trustee fees,
accounting fees, transfer agent fees and printing and related 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 (subject to the provisions of agreements entered into with third
parties) of the remaining shares of Toys Common Stock that it holds. In
addition, the Liquidating Trust also has available approximately $55
million under the Secured Term Note facility with CIBC. 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 for which Petrie Retail or an affiliate
thereof has assumed liability, 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, 1998, the Liquidating Trust, as successor to Petrie, had accrued
approximately $50 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,
liquidity and future ability to make liquidating distributions:
(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;
(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.
Aventura Malls Venture et al. v. Petrie Stores Corporation et al.
As previously disclosed, on February 7, 1996, a complaint was filed
in New York State Supreme Court against Petrie, the Liquidating Trust and
the Liquidating Trustees by five landlords and certain of their affiliates
seeking declaratory relief and unspecified damages for breach of contract
and fraud with respect to 146 store leases. The complaint alleged that the
Liquidating Trust, as successor to Petrie, has liability as a guarantor of
certain of these leases, notwithstanding Petrie's receipt from these
landlords of releases with respect to substantially all of the purported
lease guarantees. On December 2, 1996, the plaintiffs served an amended
complaint, which sought damages only against Petrie and the Liquidating
Trust, added a claim for negligent misrepresentation and reduced to 135 the
number of store leases subject to the action. On April 7, 1997, the trial
court dismissed the plaintiffs' claims for fraud and negligent
misrepresentation with respect to the releases of the guarantees. On
November 10, 1997, the plaintiffs appealed the decision of the trial court.
On April 21, 1998, the trial court's decision was upheld on appeal. While
no assurances can be given, the defendants believe that they have
meritorious defenses to the plaintiffs' remaining breach of contract claims
and will defend themselves vigorously.
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 January 22, 1998, reporting
the execution of the Master Agreement and related documents.
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, 1998 By /s/ Stephanie R. Joseph
_____________________________________
Stephanie R. Joseph
Manager and Chief Executive Officer
Dated: May 15, 1998 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, 1998 and the Liquidating
Trust's statement of changes in net assets in liquidation
for the three months ended March 31, 1998, 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 136,409
<SECURITIES> 123,377
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 259,786
<CURRENT-LIABILITIES> 52,452
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 207,334
<TOTAL-LIABILITY-AND-EQUITY> 259,786
<SALES> 0
<TOTAL-REVENUES> 1,855
<CGS> 0
<TOTAL-COSTS> 2,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,291)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
