<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 07094
SECAUCUS, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (201) 422-0496
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Beneficial Interest
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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 [_]
As of March 27, 1998, the most recent practicable date prior to the printing
of this report, there were 52,350,238 Units of Beneficial Interest
outstanding; and the aggregate market value of the Units of Beneficial
Interest held by non-affiliates was $77,904,900, based upon the average of the
bid and asked prices on March 27, 1998 of $3.21875 per Unit of Beneficial
Interest (as quoted on the OTC Bulletin Board).
DOCUMENTS INCORPORATED BY REFERENCE:
None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<C> <S> <C>
PART I
Item 1. Business........................................................ 2
Item 2. Properties...................................................... 4
Item 3. Legal Proceedings............................................... 4
Item 4. Submission of Matters to a Vote of Security Holders............. 5
PART II
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters.................................................. 5
Item 6. Selected Financial Data......................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 7
Item 8. Financial Statements and Supplementary Data..................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 15
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 16
Item 11. Executive Compensation.......................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 18
Item 13. Certain Relationships and Related Transactions.................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 20
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
The Petrie Stores Liquidating Trust (the "Liquidating Trust") is the
successor to Petrie Stores Corporation, a New York corporation that was
dissolved effective February 5, 1997 ("Petrie"). Since January 24, 1995,
Petrie (and from January 22, 1996, the Liquidating Trust) has been in
liquidation pursuant to Petrie's shareholder-approved Plan of Liquidation and
Dissolution (the "Plan of Liquidation"). Prior to December 9, 1994, the date
on which Petrie sold its retail operations (as more fully described below),
Petrie and its subsidiaries operated a chain of retail stores that specialized
in the sale of women's apparel.
During its fiscal year ended January 28, 1995, Petrie undertook a
reorganization of its operations in order to separate its investment in Toys
"R" Us, Inc. ("Toys 'R' Us") from its retail operations and distribute its
shares of Toys "R" Us common stock, par value $.01 per share ("Toys Common
Stock"), to Petrie's shareholders without the incurrence of any significant
federal income tax by Petrie or its shareholders. In connection with such
reorganization, on December 9, 1994, Petrie completed the sale (the "Sale") to
PS Stores Acquisition Corp. ("PS Stores") of all of the stock of Petrie's
former subsidiary, Petrie Retail, Inc. ("Petrie Retail"), which then owned all
of Petrie's retail operations, for $190 million in cash plus the assumption of
certain of Petrie's liabilities. The Sale was consummated pursuant to a Stock
Purchase Agreement, dated as of August 23, 1994 and amended as of November 3,
1994, between Petrie and WP Investors, Inc., an affiliate of E.M. Warburg,
Pincus & Co., Inc. (the "Retail Operations Stock Purchase Agreement").
On January 24, 1995, Petrie exchanged (the "Exchange") with Toys "R" Us
39,853,403 shares of Toys Common Stock held by Petrie, plus $165 million in
cash derived from the Sale, for 42,076,420 shares of Toys Common Stock,
pursuant to an Acquisition Agreement, dated as of April 20, 1994 and amended
as of May 10, 1994, between Petrie and Toys "R" Us (the "Toys Acquisition
Agreement"). The Toys Acquisition Agreement had required, among other things,
that Petrie sell its retail operations prior to the consummation of the
Exchange and that, following the Exchange, Petrie liquidate and dissolve and
distribute to its shareholders all of its remaining assets, less an adequate
provision for Petrie's actual and contingent liabilities.
Since January 24, 1995, the date on which Petrie's shareholders approved the
Plan of Liquidation, Petrie has (i) placed 3,493,450 shares of Toys Common
Stock into an escrow account to provide for the payment of Petrie's 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; (ii) made two liquidating distributions to its
shareholders of an aggregate of 31,410,144 shares of Toys Common Stock; and
(iii) sold an aggregate of 6,610,700 shares of Toys Common Stock (including
1,000,000 shares sold by the Liquidating Trust).
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 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 obligation of the Liquidating
Trust, as successor to Petrie, to indemnify PS Stores for certain liabilities
relating to Petrie Retail's withdrawal from a multiemployer pension plan. See
Item 7 and Notes to Financial Statements.
2
<PAGE>
The Liquidating Trust has entered into a Master Agreement (based on the
International Swaps and Derivatives Association Form), dated as of November
19, 1997 (the "Master Agreement"), with Canadian Imperial Bank of Commerce
("CIBC"), to protect the Liquidating Trust against certain investment risks
associated with 2,000,000 shares of the 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 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 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 (the "Stock Pledge Agreement"), and a Tri-Party Custody Agreement,
dated as of December 31, 1997 (the "Tri-Party Custody Agreement"), among the
United States Trust Company of New York, the Liquidating Trust and CIBC. See
Item 7.
Accordingly, as a result of the transactions described in the three
preceding paragraphs, of the 4,055,576 shares of Toys Common Stock currently
held by the Liquidating Trust, 3,493,450 shares of Toys Common Stock are held
in an escrow account. Of these 3,493,450 shares of Toys Common Stock,
2,000,000 shares have been pledged to CIBC to secure the Liquidating Trust's
covenants under the Master Agreement and the Secured Term Note.
The Liquidating Trust was established pursuant to an Agreement and
Declaration of Trust, dated as of December 6, 1995, between Petrie and the
trustees named therein (the "Liquidating Trust Agreement"). Pursuant to the
Liquidating Trust Agreement, on January 22, 1996 (the "Succession Date"),
Petrie transferred its 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. Each holder of Petrie common stock, par
value $1.00 per share ("Petrie Common Stock"), as of the close of business on
the Succession Date, became the holder of one unit of beneficial interest in
the Liquidating Trust ("Unit of Beneficial Interest") for each share of Petrie
Common Stock owned by such shareholder. Certificates representing shares of
Petrie Common Stock were automatically deemed to represent a corresponding
number of Units of Beneficial Interest.
The Liquidating Trust's activities are limited to winding up Petrie's
affairs in furtherance of the Plan of Liquidation. The Liquidating Trust was
established to enable Petrie to liquidate prior to fully winding up its
affairs, in accordance with the terms of a private letter ruling received by
Petrie from the IRS on November 15, 1994. The Liquidating Trust Agreement
prohibits the Liquidating Trustees from entering into or engaging in any trade
or business on behalf of the Liquidating Trust or the Beneficiaries and from
receiving any property, making any distribution, satisfying or discharging any
claims, expenses, charges, liabilities or obligations or otherwise taking any
action which, in any case, is inconsistent with Petrie's complete liquidation
(as such term is used in and interpreted under Sections 368(a)(1)(C) and
(a)(2)(G) of the Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder).
The Liquidating Trust is a complete pass-through entity for federal income
tax purposes and, accordingly, is not 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.
The principal executive offices of the Liquidating Trust are located at 150
Meadowlands Parkway, Secaucus, New Jersey 07094 (telephone (201) 422-0496).
3
<PAGE>
EMPLOYEES
The Liquidating Trust has two part-time employees, Stephanie R. Joseph and
H. Bartlett Brown. Ms. Joseph serves as Manager and Chief Executive Officer of
the Liquidating Trust. Mr. Brown serves as Assistant Manager and Chief
Financial Officer of the Liquidating Trust.
ITEM 2. PROPERTIES.
Other than the Liquidating Trust's principal executive offices, which are
subleased from Petrie Retail, the Liquidating Trust neither owns nor leases
any real property.
As successor to Petrie, the Liquidating Trust is a guarantor of certain
leases for which Petrie Retail or an affiliate thereof has assumed liability.
See Item 7 and Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
In connection with Petrie's liquidation, Petrie and its former directors,
the Liquidating Trust and the Liquidating Trustees have been named as parties
in various actions, some of which are discussed below. The majority of these
actions relate to obligations that Petrie Retail assumed in connection with
the Sale but has failed to perform in connection with its bankruptcy filing on
October 12, 1995 with the U.S. Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court"). See Item 7 and Notes to Financial
Statements. As discussed further in Item 7, the Liquidating Trust has filed
claims against Petrie Retail and its affiliates in the Bankruptcy Court in
respect of such obligations. The Liquidating Trust is unable to predict the
timing or probability of any 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.
See Item 7 and Notes to Financial Statements.
(1) 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. Plaintiffs' appeal was argued and submitted
for decision on March 24, 1998. While no assurances can be given, the
defendants believe that they have meritorious defenses to this action and will
defend themselves vigorously. See Item 7--"Liquidity and Capital Resources--
Contingent Liabilities."
(2) LaSalle National Trust, N.A., et al. v. Petrie Stores Corporation et al.
On or about January 30, 1997, a complaint was filed in the New York State
Supreme Court, alleging that Petrie and the Liquidating Trust breached nine
lease guarantees. The plaintiffs allege that the defendants are liable for
$505,720 with respect to the nine leases, including $413,445 in rent and other
charges relating to two of the subject guaranteed leases, which leases have
been rejected by their tenants in connection with Petrie Retail's bankruptcy
case, and $92,275 in rent and other charges relating to the remaining seven
guaranteed leases, which have not been rejected. The plaintiffs seek monetary
damages, attorneys' fees, costs and disbursements, as well as a declaration
that the defendants are liable under the guarantees for all unpaid amounts
that may become due in the future and that the defendants not make any further
distributions unless and until they have set aside adequate funds to cover the
liabilities, present and prospective, asserted in the action. The defendants
have not yet answered or otherwise responded to the complaint.
4
<PAGE>
(3) Weingart Foundation v. Petrie Stores Corporation
As previously disclosed, in June 1988, a complaint was filed in California
Superior Court against Petrie, as successor-in-interest on a lease, and other
defendants by a landlord for cleanup costs associated with a gasoline leakage
from storage tanks at the site of a former gas station. On June 16, 1992, the
trial court found Petrie liable for $470,000 in compensatory damages and
$163,284 in costs and attorneys' fees, plus interest on such amounts from
October 1, 1992. On September 19, 1996, the trial court's decision was
affirmed by the California Court of Appeals. Leave for rehearing was
subsequently denied, and judgment was entered against Petrie. In February and
March 1997, the Liquidating Trust paid to the plaintiff an aggregate of
approximately $911,000. The Liquidating Trust has recovered $365,000 of such
payments from various insurers and has filed claims against Petrie Retail for
the balance of such payments. There can be no assurance as to the recovery of
any additional payments in respect of such claims.
In addition to the foregoing, the Liquidating Trust is involved in other
legal proceedings relating to its liquidation and defaults by Petrie Retail in
respect of obligations assumed by Petrie Retail in connection with the Sale.
Though no assurances may be given, the Liquidating Trust believes, based on
available information, that it is unlikely that these additional items,
individually or in the aggregate, will have a material adverse effect on the
Liquidating Trust's liquidity or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
UNITS OF BENEFICIAL INTEREST
Since January 23, 1996, the Units of Beneficial Interest have been quoted on
the OTC Bulletin Board under the symbol "PSTLS." The high and low closing
prices per Unit of Beneficial Interest are shown below:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Period Ended December 31, 1996:
First quarter (from January 23, 1996 to March 31,
1996).............................................. $2 15/16 $2
Second quarter (ended June 30, 1996)................ $2 15/16 $2 11/16
Third quarter (ended September 30, 1996)............ $2 3/4 $2 1/4
Fourth quarter (ended December 31, 1996)............ $2 3/4 $2 5/16
Year Ended December 31, 1997:
First quarter (ended March 31, 1997)................ $2 15/16 $2 1/4
Second quarter (ended June 30, 1997)................ $3 3/16 $2 3/4
Third quarter (ended September 30, 1997)............ $3 5/32 $3 5/8
Fourth quarter (ended December 31, 1997)............ $3 25/64 $2 31/32
Year Ending December 31, 1998:
First quarter (through March 27, 1998).............. $3 1/8 $2 31/32
</TABLE>
As of March 27, 1998, the most recent practicable date prior to the printing
of this report, there were approximately 2,945 holders of record of Units of
Beneficial Interest. The Liquidating Trust has not made any liquidating
distributions since its establishment on January 22, 1996. The Liquidating
Trustees have determined not to approve any liquidating distributions of cash
or Toys Common Stock to holders of Units of Beneficial Interest until the
status of the Liquidating Trust's contingent liabilities is clarified.
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below are selected consolidated financial data of the Liquidating
Trust (which includes financial data of Petrie) as of and for the year ended
December 31, 1997, for the periods ended December 31, 1996 and January 22,
1996, and for each of the fiscal years in the two-year period ended January
28, 1995. For financial statement presentation purposes, a liquidation basis
of accounting was implemented as of, and for the periods subsequent to,
January 28, 1995. Operating results and financial data for each of the fiscal
years in the two-year period ended January 28, 1995 are presented on a going-
concern basis.
<TABLE>
<CAPTION>
PERIOD ENDED FISCAL YEAR ENDED
------------------------ --------------------------
YEAR ENDED
DECEMBER 31, DECEMBER 31, JANUARY 22, JANUARY 28, JANUARY 29,
1997(5) 1996(5) 1996(4)(5) 1995(1) 1994(1)(2)(3)
------------ ------------ ----------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Corporate overhead...... $ (24,717) $ (30,304) $ (25,321) $ (430) --
Income tax refund....... 4,066 -- -- -- --
Interest expense........ -- -- -- (8,605) $ (10,066)
Investment income....... 8,164 6,467 1,793 1,293 --
Net realized and
unrealized gain (loss)
on investments......... 1,783 44,572 (244,583) -- --
--------- --------- --------- ---------- ----------
Income (loss) from con-
tinuing operations be-
fore income tax bene-
fit.................... (10,704) 20,735 (268,111) (7,742) (10,066)
--------- --------- --------- ---------- ----------
Income (loss) from con-
tinuing operations..... (10,704) 20,735 (154,277) (6,628) (6,543)
Income (loss) from
discontinued
operations, net of
income taxes........... -- -- -- (410,027) (42,140)
Cumulative effect of
changes in accounting
principles............. -- -- -- -- 10,685
--------- --------- --------- ---------- ----------
Net income (loss)...... $ (10,704) $ 20,735 $(154,277) $ (416,655) $ (37,998)
========= ========= ========= ========== ==========
Income (loss) per unit:
Income (loss) from con-
tinuing operations.... $ (.20) $ .40 $ (2.95) $ (.14) $ (.14)
Income (loss) from dis-
continued operations.. -- -- -- (8.61) (.90)
Cumulative effect of
changes in accounting
principles............ -- -- -- -- .23
--------- --------- --------- ---------- ----------
Net income (loss)...... $ (.20) $ .40 $ (2.95) $ (8.75) $ (.81)
========= ========= ========= ========== ==========
Dividends per share or
unit................... -- $ -- $ -- $ .15 $ .20
========= ========= ========= ========== ==========
Weighted average number
of units............... 52,350 52,350 52,350 47,600 46,768
========= ========= ========= ========== ==========
Total assets............ $ 263,585 $ 275,707 $ 237,916 $1,274,147 $2,187,807
========= ========= ========= ========== ==========
Long-term obligations... $ -- $ -- $ -- $ -- $ 124,952
========= ========= ========= ========== ==========
</TABLE>
- --------
(1) Effective December 9, 1994, Petrie sold its retail operations to PS
Stores. Accordingly, the assets related to the retail operations are
excluded from the total assets at January 28, 1995. Operating results for
prior years have been restated to conform to the fiscal year 1995
presentation.
(2) Fiscal year ended January 29, 1994 includes a restructuring charge of
$35,000,000 ($22,225,000 net of taxes or $.48 per share) and cumulative
effect of changes in accounting for investments and income taxes, which
decreased the net (loss) by $10,685,000 ($.23 per share).
(3) Total assets at January 29, 1994 include an increase of $1,340,462,000 as
a result of carrying investments in common stock at a fair market value of
$1,517,677,000 due to the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(4) Total assets at January 22, 1996 reflect Petrie's first and second
liquidating distributions of 26,175,109 shares (including 1,391 shares of
Toys Common Stock distributed to certain former shareholders of Winkelman
Stores Incorporated (a former subsidiary of Petrie) in respect of their
interests in the first distribution) and 5,235,035 shares of Toys Common
Stock on March 24, 1995 and August 15, 1995, respectively, and the sales
of (a) 610,700 shares of Toys Common Stock on May 26, 1995, (b) an
aggregate of 3,000,000 shares of Toys Common Stock on October 25 and 26,
1995 and (c) an aggregate of 2,000,000 shares of Toys Common Stock from
December 28, 1995 through January 4, 1996.
(5) Corporate overhead charges during the year ended December 31, 1997 and the
periods ended December 31, 1996 and January 22, 1996, relate primarily to
accruals for costs and expenses related to Petrie Retail's bankruptcy. For
the year ended December 31, 1997 and the periods ended December 31, 1996
and January 22, 1996, such overhead includes $18 million, $22 million and
$15 million, respectively, relating to the liability of the Liquidating
Trust, as successor to Petrie, as a guarantor of certain leases for which
Petrie Retail or one of its affiliates has assumed liability and $3
million, $4 million and $5 million, respectively, relating to certain
other liabilities related to Petrie Retail's bankruptcy. Corporate
overhead also consists of other costs and expenses related to the
liquidation and dissolution of Petrie including, but not limited to, 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.
6
<PAGE>
ITEM 7. 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 of the Liquidating Trust, as successor to
Petrie.
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
periods ended January 22, 1996 and December 31, 1996 and the year ended
December 31, 1997, the Liquidating Trust's activities have been limited to
continuing Petrie's liquidation in furtherance of the Plan of Liquidation. For
financial statement purposes, the Liquidating Trust is deemed to be the
successor to Petrie, and the results of operations of Petrie are presented in
the financial statements of the Liquidating Trust. Beginning with the period
ended December 31, 1996, the Liquidating Trust adopted the calendar year as
its fiscal year.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to the Period Ended December 31, 1996
The Liquidating Trust's net loss for the year ended December 31, 1997 was
$10,704,000, as compared to net income of $20,735,000 for the period ended
December 31, 1996.
The market price per share of Toys Common Stock fluctuated during the year
ended December 31, 1997 as follows:
<TABLE>
<CAPTION>
CLOSING
DATE PRICE
---- -------
<S> <C>
December 31, 1996............................. $29 7/8
March 31, 1997................................ $28
June 30, 1997................................. $35
September 30, 1997............................ $35 7/16
December 31, 1997............................. $31 7/16
</TABLE>
As of March 27, 1998, the most recent practicable date prior to the printing
of this report, the closing price per share of Toys Common Stock, as reported
on the New York Stock Exchange (the "NYSE") Composite Tape, was $30 7/16 per
share. In applying a liquidation basis of accounting, the Liquidating Trust,
as successor to Petrie, has given effect in its results of operations to
fluctuations in the market price of the Toys Common Stock held by it during
the year ended December 31, 1997 and the period ended December 31, 1996, and
has recorded an unrealized gain on the Toys Common Stock for the year ended
December 31, 1997 of $6,336,000, as compared to an unrealized gain of
$44,236,000 for the period ended December 31, 1996. 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. The Liquidating Trust realized a loss with respect to such sale
of approximately $4,375,000 for the year ended December 31, 1997.
For the year ended December 31, 1997, the Liquidating Trust, as successor to
Petrie, incurred corporate overhead of $24,717,000 as compared to $30,304,000
for the period ended December 31, 1996. The Liquidating Trust's 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 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, salaries for the Liquidating Trust's two part-time
employees, trustee fees, accounting fees, transfer agent fees and printing and
related expenses. Included in corporate overhead for the year ended December
31, 1997 are accruals for additional costs and expenses related to Petrie
Retail's failure to perform its obligations in connection with its bankruptcy
filing, including approximately $18 million relating to the liability of the
Liquidating Trust, as successor to Petrie, as a guarantor of certain leases
under which Petrie Retail or one of its
7
<PAGE>
affiliates has failed to perform and an amount in respect of retrospective
insurance premium adjustments of which approximately $1.5 million was paid in
1997. Included in corporate overhead for the period from January 22, 1996 to
December 31, 1996 were accruals of $22 million for the Liquidating Trust's
liability as a guarantor of leases under which Petrie Retail or one of its
affiliates has failed to perform and $4 million relating to certain other
liabilities that the Liquidating Trust incurred in connection with Petrie
Retail's bankruptcy filing. See "Notes to Financial Statements."
During the year ended December 31, 1997, the Liquidating Trust, as successor
to Petrie, earned $8,164,000 in investment income, as compared to $6,467,000
earned during the period ended December 31, 1996. The increase in investment
income earned during the year ended December 31, 1997 is the result of the
Liquidating Trust's sale of shares of Toys Common Stock and the investment of
the proceeds therefrom in U.S. Treasury obligations.
During the year ended December 31, 1997, $4,066,000 in income tax refunds,
plus interest thereon, were released to the Liquidating Trust from escrow in
offset of certain claims that the Liquidating Trust had against Petrie Retail
relating to Petrie Retail's failure to perform certain of the obligations that
it assumed in connection with the Sale. The income tax refunds were released
from escrow following the previously disclosed settlement of an action
commenced by Petrie Retail in the Bankruptcy Court to recover income tax
refunds received by the Liquidating Trust in respect of taxes paid by Petrie
prior to the Sale. Pursuant to the settlement, approved by the Bankruptcy Court
on June 25, 1997, the Liquidating Trust reserved the right to assert future
claims against Petrie Retail to the extent that such claims relate to amounts
in excess of the amounts offset in the settlement. Additionally, Petrie Retail
and the Liquidating Trust agreed to share equally in the proceeds of any
similar tax refunds received in the future.
On December 23, 1997, the Liquidating Trust filed claims against Petrie
Retail and its affiliates in the Bankruptcy Court in respect of certain
payments which have been made or may in the future be made by the Liquidating
Trust in respect of obligations that Petrie Retail or an affiliate thereof has
assumed and failed to perform or pay. The Liquidating Trust is unable to
predict 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. See "--Liquidity and Capital Resources."
Period Ended December 31, 1996 Compared to the Period Ended January 22, 1996
The Liquidating Trust's net income for the period ended December 31, 1996 was
$20,735,000, as compared to a net loss of $154,277,000 for the period ended
January 22, 1996.
The market price per share of Toys Common Stock fluctuated during the period
ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
CLOSING
DATE PRICE
---- -------
<S> <C>
January 22, 1996............................... $21 1/8
March 29, 1996................................. $27
June 28, 1996.................................. $28 1/2
September 30, 1996............................. $29 1/8
December 31, 1996.............................. $29 7/8
</TABLE>
In applying a liquidation basis of accounting, the Liquidating Trust gave
effect in its results of operations to fluctuations in the market price of its
Toys Common Stock and the sale of 5,610,700 shares of Toys Common Stock during
the period ended January 22, 1996, and recorded an unrealized gain on the Toys
Common Stock for the period ended December 31, 1996 of $44,236,000, as compared
to a net realized and unrealized loss of $244,583,000 for the period ended
January 22, 1996.
For the period ended December 31, 1996, the Liquidating Trust incurred
corporate overhead of $30,304,000, as compared to $25,321,000 for the period
ended January 22, 1996. The increase in corporate overhead charges
8
<PAGE>
during the period ended December 31, 1996 was primarily due to accruals during
such period for additional costs and expenses related to Petrie Retail's
bankruptcy, including $22 million relating to the liability of the Liquidating
Trust, as successor to Petrie, as a guarantor of certain leases under which
Petrie Retail or one of its affiliates has failed to perform, as compared to
$15 million relating to such liability in the period ended January 22, 1996,
and $4 million relating to certain other liabilities the Liquidating Trust
incurred in connection with Petrie Retail's bankruptcy filing, as compared to
$5 million relating to such other liabilities during the period ended January
22, 1996.
During the period ended December 31, 1996, the Liquidating Trust earned
$6,467,000 in investment income as compared to $1,793,000 earned during the
period ended January 22, 1996. The increase in investment income earned during
the period ended December 31, 1996, as compared to the period ended January
22, 1996, was 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 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 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. 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 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 the 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
9
<PAGE>
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 March 27, 1998, the most recent practicable date prior to the printing
of this report, the Liquidating Trust's 4,055,576 shares of Toys Common Stock
had a market value of approximately $123.4 million, based upon a closing price
per share of $30 7/16, as reported on the NYSE Composite Tape on such date.
During the fifty-two weeks prior to March 27, 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 March 27, 1998, the Liquidating Trust had approximately $136 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, 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 liquidating 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 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 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
December 31, 1997 and December 31, 1996, the Liquidating Trust, as successor
to Petrie, had accrued approximately $49 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.
10
<PAGE>
Petrie Retail's Bankruptcy. On October 12, 1995, Petrie Retail filed a
voluntary petition for reorganization relief under Chapter 11 of the United
States Bankruptcy Code with the Bankruptcy Court. In connection with its
filing for bankruptcy protection, Petrie Retail has failed to perform or make
payments 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.
Store Leases. 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 95 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 $40 million,
which amount is included in the Liquidating Trust's accrued expenses and other
liabilities at December 31, 1997.
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 is in the process of assigning) 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, is attempting to mitigate damages with respect to
such lease by subleasing the premises to a third party for the four years
remaining on the term of such lease. A sublease with respect to such premises
has been executed and is being held in escrow pending the satisfaction of
certain closing conditions. The Liquidating Trust's aggregate guarantee
liability with respect to the 70 Enterprise Avenue lease, assuming the
sublease of the premises is released from escrow and 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 December 31,
1997. In the event that the attempt to mitigate damages with respect to the 70
Enterprise Avenue lease is unsuccessful, 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.
11
<PAGE>
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 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 $73 million. Such exposure includes the approximately
$40 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 $24 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 relating 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 $15
million relates to Petrie Retail's other store leases. Of the $24 million in
potential liability, approximately $4 million is due in the remainder of the
year ending December 31, 1998, approximately $5 million is due in 1999,
approximately $5 million is due in 2000 and approximately $10 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 $40 million in liability with respect to rejected store leases
includes $11 million in guarantee liability relating to the disputed leases;
and (ii) the $73 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 the 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
12
<PAGE>
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.
Employment Agreements. 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 $640,000
(relating to certain unfunded pension obligations) remained unpaid and was
included in the Liquidating Trust's accrued expenses and other liabilities at
December 31, 1997.
Multiemployer Plan. 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 bankruptcy filing 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 bankruptcy
filing.
IRS Tax Dispute. As previously disclosed, in connection with an audit
conducted by the IRS, the agent examining Petrie's federal tax return for its
fiscal year ended January 28, 1989 raised an issue regarding the manner
pursuant to which Petrie computed the basis of its Toys "R" Us, Inc. common
stock transferred in connection with the exchange of certain of its
exchangeable subordinated debentures. The examining agent had proposed an
adjustment to Petrie's taxable income which would have resulted in an
additional federal tax liability, including interest, of approximately $53
million. On March 14, 1997, a settlement agreement was entered into with the
IRS pursuant to which the IRS and the Liquidating Trust agreed to an
adjustment to Petrie's taxable income for its 1989 fiscal year, which resulted
in the Liquidating Trust's settling the additional federal tax liability,
including interest, for approximately $11.3 million.
Retrospective Insurance Premiums. 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. Pursuant to a
1997 agreement with Zurich, Zurich will bill the Liquidating Trust in April
1998 for retrospective premium adjustments due under the Insurance Agreements
based on the value of
13
<PAGE>
claims made as of December 31, 1997. The estimated liability in respect of
such retrospective insurance premiums, which are expected to be billed in
April 1998, are included in the Liquidating Trust's accrued expenses and other
liabilities at December 31, 1997. Settlement negotiations are ongoing with
respect to the Liquidating Trust's obligation to pay premiums for claims made
under the workers' compensation portion of the Insurance Agreements as of
December 31, 1997 and for subsequent periods.
Computer Equipment Leases. 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. The letter also claims that, as of December 31, 1997, an
additional approximately $140,000 was 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 December 31, 1997 in respect of
any potential liability relating to these claims.
The Liquidating Trust believes, based upon the most currently 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 adequate accruals for the likely
outcome of such proceedings.
YEAR 2000
The Liquidating Trust's principal information technology software package is
compliant with respect to year 2000 issues.
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-K 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 in Item 7 and the Notes
to the Financial Statements.
The Liquidating Trust wishes to caution readers that, in addition to factors
that may be described elsewhere in this Form 10-K, 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;
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<PAGE>
(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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages F-1 through F-14 annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
LIQUIDATING TRUSTEES AND EXECUTIVE OFFICERS
The following table shows, as of March 27, 1998, the Liquidating Trustees
and the Liquidating Trust's executive officers, their respective ages, the
year each person became a Liquidating Trustee or officer of the Liquidating
Trust and all positions currently held with the Liquidating Trust by each such
person:
<TABLE>
<CAPTION>
TRUSTEE OR
NAME AGE OFFICER SINCE POSITION WITH THE LIQUIDATING TRUST
- ---- --- ------------- -----------------------------------
<S> <C> <C> <C>
Stephanie R. Joseph. 51 1995 Manager and Chief Executive Officer;
Liquidating Trustee
H. Bartlett Brown... 62 1995 Assistant Manager and Chief Financial
Officer
Joseph H. Flom...... 74 1995 Liquidating Trustee
Bernard Petrie...... 72 1995 Liquidating Trustee
Laurence A. Tisch... 75 1995 Liquidating Trustee
Chairman of the Board of the Liquidating
Raymond S. Troubh... 71 1995 Trustees
</TABLE>
Biographical information concerning the Liquidating Trustees and the
Liquidating Trust's executive officers is provided below.
Stephanie R. Joseph became Secretary and Principal Legal Officer of Petrie
in February 1995 and Manager, Chief Executive Officer and Liquidating Trustee
of the Liquidating Trust in December 1995. She is the founder and President of
The Directors' Network Inc., a corporate consulting firm that prepares
directors for their boardroom responsibilities, since March 1994. From May
1984 until June 1992, she was employed as the Associate General Counsel of
American Express Company.
H. Bartlett Brown became Treasurer, Chief Financial Officer and Principal
Accounting Officer of Petrie in February 1995 and Assistant Manager and Chief
Financial Officer of the Liquidating Trust in December 1995. Mr. Brown is a
tax consultant. He was a partner in Ernst & Young LLP, an accounting firm,
from October 1970 until September 1994.
Joseph H. Flom became a Liquidating Trustee in December 1995. He has been a
partner in Skadden, Arps, Slate, Meagher & Flom LLP, a law firm and counsel to
Petrie, the Liquidating Trust and the Estate of Milton Petrie, for more than
the past five years. Mr. Flom is a director of The Warnaco Group, Inc.;
Chairman of the Board of Trustees of the Woodrow Wilson International Center
for Scholars; a director of United Way of New York City; a director of the
American-Israel Friendship League; and a trustee of the New York University
Medical Center.
Bernard Petrie became both a director of Petrie and a Liquidating Trustee in
December 1995. He is an attorney and has been self-employed for more than the
past five years.
Laurence A. Tisch became a Liquidating Trustee in December 1995. Since
October 1994, Mr. Tisch has been the Co-Chairman and Co-Chief Executive
Officer of Loews Corporation, a diversified holding company. From May 1960 to
October 1994, Mr. Tisch was the Chairman of the Board and Chief Executive
Officer of Loews Corporation. Since March 1990, he has also been the Chairman
of the Board of CNA Financial Corp., an insurance and financial services
company and a publicly-held subsidiary of Loews Corporation. From January 1987
to November 1995, Mr. Tisch was Chairman of the Board, President and Chief
Executive Officer of CBS Inc., a television and radio network. Mr. Tisch is a
director of Loews Corporation; a director of Automatic Data Processing, Inc.,
a provider of payroll and other data processing services; a director of Bulova
Corporation, a watch manufacturer and a publicly-held subsidiary of Loews
Corporation; a director of Federated Department Stores, Inc., an operator of
department stores; a trustee of the New York Public Library; a trustee of the
Metropolitan Museum of Art; and a director of United Jewish Appeal.
16
<PAGE>
Raymond S. Troubh became a Liquidating Trustee and Chairman of the Board of
Liquidating Trustees in December 1995. Mr. Troubh served as Treasurer of
Petrie from December 9, 1994 to February 7, 1995. He is a financial
consultant, a former governor of the American Stock Exchange and a former
general partner of Lazard Freres & Co., an investment banking firm. Mr. Troubh
is a director of America West Airlines, Inc., an airline; ARIAD
Pharmaceuticals, Inc., a pharmaceutical company; Becton, Dickinson and
Company, a healthcare products manufacturer; Diamond Offshore Drilling, Inc.,
an offshore drilling company; Foundation Health Corporation, a healthcare
company; General American Investors Company, an investment and advisory
company; Olsten Corporation, a temporary personnel and healthcare services
company; Time-Warner, Inc., a media and entertainment company; WHX
Corporation, a holding company; and Triarc Companies, Inc., a diversified
holding company. Mr. Troubh also serves as trustee of the MicroCap Liquidating
Trust, a liquidating trust that holds the assets of The MicroCap Fund, Inc.,
an investment company.
MEETINGS AND STANDING COMMITTEES
The Liquidating Trustees met eight times during the year ended December 31,
1997. During such period, the Liquidating Trustees had no committees.
ITEM 11. EXECUTIVE COMPENSATION.
GENERAL
The following table sets forth the total annual compensation paid by the
Liquidating Trust to its Manager and Chief Executive Officer, who is the only
executive officer of the Liquidating Trust whose compensation exceeded
$100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION COMPENSATION(1)
------------------------- ---------------
PERIOD
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS
--------------------------- -------- -------- -------
<S> <C> <C> <C> <C>
Stephanie R. Joseph............... 12/31/97 $130,000 -- $45,000
Manager, Chief Executive Officer
and Liquidating Trustee 12/31/96 $ 94,167 $25,000 $45,000
</TABLE>
- --------
(1) Ms. Joseph receives $45,000 per fiscal year for her service as a
Liquidating Trustee.
COMPENSATION OF LIQUIDATING TRUSTEES
Liquidating Trustees are compensated for their service as Liquidating
Trustees in the amount of $30,000 per fiscal year, with the exception of
Raymond S. Troubh and Stephanie R. Joseph, who are each compensated $45,000
per fiscal year for their service as Liquidating Trustees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, the Liquidating Trustees did not
have a compensation committee, and each of the Liquidating Trustees other than
Stephanie R. Joseph participated in deliberations of the Liquidating Trustees
concerning executive officer compensation. During the year ended December 31,
1997, no executive officer of the Liquidating Trust served as a member of the
compensation committee (or other board committee performing equivalent
functions, or in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Liquidating Trustee.
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
UNITS OF BENEFICIAL INTEREST
The following table sets forth certain information with respect to (i) the
only persons who, to the best knowledge of the Liquidating Trust, are the
beneficial owners of more than five percent of the outstanding Units of
Beneficial Interest and (ii) the number of Units of Beneficial Interest owned
by each of the Liquidating Trustees, the officers of the Liquidating Trust and
the Liquidating Trustees and officers as a group.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
UNITS PERCENT OF
OF BENEFICIAL INTEREST OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIAL INTERESTS
- ------------------------ ---------------------- --------------------
<S> <C> <C>
The Estate of Milton Petrie(1)
919 Third Avenue
New York, N.Y. 10022-3897......... 28,111,274 53.7%
HBK Investments L.P.
HBK Finance L.P.(2)
777 Main Street, Suite 2750
Fort Worth, Texas 76102........... 6,804,453 13.0%
T. Rowe Price Associates, Inc.(3)
100 E. Pratt Street
Baltimore, Maryland 21202......... 4,633,500 8.8%
H. Bartlett Brown.................. -- --
Joseph H. Flom(1).................. -- --
Stephanie R. Joseph................ -- --
Bernard Petrie(1).................. 34,500 *
Laurence A. Tisch(1)............... 1,000 *
Raymond S. Troubh.................. -- --
All managers and Liquidating
Trustees as a group (6
individuals, including those named
above)............................ 35,500 *
</TABLE>
- --------
* Less than one percent of the outstanding Units of Beneficial Interest.
(1) Based on information contained in the Statement on Schedule 13D filed by
the Estate of Milton Petrie (the "Estate") with the Securities and
Exchange Commission on January 31, 1996. Mr. Flom, Hilda K. Gerstein,
Jerome A. Manning, Bernard Petrie, Carroll Petrie, Dorothy Stern Ross, Mr.
Tisch and David Zack serve as the executors of the Estate. The executors
of the Estate share equally the power to dispose of, and to vote, the
Units of Beneficial Interest held by the Estate. Messrs. Flom, Petrie and
Tisch disclaim beneficial ownership of the Units of Beneficial Interest
held by the Estate.
(2) Based on information contained in the Statement on Schedule 13G filed by
HBK Investments L.P. and HBK Finance L.P. with the Securities and Exchange
Commission on March 19, 1998.
(3) Based on information contained in Amendment No. 2 to the Statement on
Schedule 13G filed by T. Rowe Price Associates, Inc. ("Price Associates")
with the Securities and Exchange Commission on February 10, 1998. These
securities are owned by various individual and institutional investors
which Price Associates serves as investment adviser with power to direct
investments and sole power to vote the securities. For purposes of the
reporting requirements of the Securities Exchange Act of 1934, as amended,
Price Associates is deemed to be a beneficial owner of such securities.
Price Associates has, however, expressly disclaimed that it is, in fact,
the beneficial owner of such securities.
18
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Skadden, Arps, Slate, Meagher & Flom LLP serves as legal counsel to the
Liquidating Trust and the Estate of Milton Petrie, which owns approximately
53.7% of the Liquidating Trust's outstanding Units of Beneficial Interest, and
has provided services to each during the year ended December 31, 1997. Joseph
H. Flom, a Liquidating Trustee and an executor of the Estate of Milton Petrie,
is a partner in Skadden, Arps, Slate, Meagher & Flom LLP.
The Liquidating Trust maintains directors' and officers' liability insurance
provided by Continental Casualty Company, an affiliate of CNA Financial Corp.
Laurence A. Tisch, a Liquidating Trustee and an executor of the Estate of
Milton Petrie, is Chairman of the Board of CNA Financial Corp.
Messrs. Flom, Petrie and Tisch are executors of the Estate of Milton Petrie
and are entitled to executors' commissions. Mr. Petrie is also a beneficiary
of the Estate of Milton Petrie.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1),(2) LIST OF FINANCIAL STATEMENTS.
See Index to Financial Statements set forth herein at page F-1.
(a)(3) LIST OF EXHIBITS.
<TABLE>
<C> <S>
2.1 Plan of Liquidation and Dissolution of Petrie (incorporated herein by
reference to Exhibit 2.2 to the Liquidating Trust's Registration
Statement on Form 8-B, filed with the Securities and Exchange Commission
on December 19, 1995).
3.1 Agreement and Declaration of Trust, dated as of December 6, 1995, by and
between Petrie and Joseph H. Flom, Stephanie R. Joseph, Bernard Petrie,
Laurence A. Tisch and Raymond S. Troubh, as trustees (incorporated
herein by reference to Exhibit 3.1 to the Liquidating Trust's
Registration Statement on Form 8-B, filed with the Securities and
Exchange Commission on December 19, 1995).
10.1 Acquisition Agreement, dated as of April 20, 1994, between Petrie and
Toys "R" Us (incorporated herein by reference to Annex B to Petrie's
Proxy Statement, dated as of November 3, 1994).
10.2 Amendment No. 1 to the Acquisition Agreement, dated as of May 10, 1994,
between Petrie and Toys "R" Us (incorporated by reference to Annex B to
Petrie's Proxy Statement, dated as of November 3, 1994).
10.3 Stock Purchase Agreement, dated as of August 23, 1994, between Petrie
and WP Investors (incorporated herein by reference to Annex A to
Petrie's Proxy Statement, dated as of November 3, 1994).
10.4 Amendment No. 1 to the Stock Purchase Agreement, dated as of December 9,
1994, among WP Investors, PS Stores and Petrie (incorporated herein by
reference to Annex A to Petrie's Proxy Statement, dated as of November
3, 1994).
10.5 Assignment and Assumption Agreement, dated as of December 9, 1994,
between Petrie and Petrie Retail (agreements of a substantially similar
nature were entered into between Petrie and the following affiliates of
Petrie Retail on or about December 9,1994: Franklin 203 Corporation, G&G
Shops of North Carolina, Inc., Hartfield Stores, Inc., Whitney Stores,
Inc, Marianne Clearwater Corporation, Davids Woodbridge, Inc. and Jean
Nicole, Inc.) (incorporated herein by reference to Exhibit 10.5 to the
Liquidating Trust's Annual Report on Form 10-K for the period ended
January 22, 1996).
10.6 Cross-Indemnification and Procedure Agreement, dated as of December 9,
1994, between PS Stores and Petrie (incorporated herein by reference to
Exhibit 10.5 to Petrie's Annual Report on Form 10-K for the fiscal year
ended January 28, 1995).
10.7 Buyer Indemnification Agreement, dated as of December 9, 1994, among
Toys "R" Us, Petrie, PS Stores, Petrie Retail and all subsidiaries of PS
Stores (incorporated herein by reference to Exhibit 10.6 to Petrie's
Annual Report on Form 10-K for the fiscal year ended January 28, 1995).
10.8 Seller Indemnification Agreement, dated as of December 9, 1994, among
Toys "R" Us, Petrie, PS Stores, Petrie Retail and all subsidiaries of PS
Stores (incorporated herein by reference to Exhibit 10.7 to Petrie's
Annual Report on Form 10-K for the fiscal year ended January 28, 1995).
10.9 Side Letter Agreement, dated as of January 24, 1995, between Petrie and
Toys "R" Us (incorporated herein by reference to Exhibit 10.3 to
Petrie's Current Report on Form 8-K, dated as of January 24, 1995).
10.10 Escrow Agreement, dated as of January 24, 1995, between Petrie and
Custodial Trust Company (incorporated herein by reference to Exhibit
10.1 to Petrie's Current Report on Form 8-K, dated as of January 24,
1995).
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.11 Amended and Restated Cash Collateral Agreement, dated as of December 9,
1994 as amended as of January 24, 1995 and as of December 19, 1995,
among Petrie, Custodial Trust Company as Collateral Agent, and PS Stores
(incorporated herein by reference to Exhibit 10.1 to Petrie's Current
Report on Form 8-K, dated as of December 26, 1995).
10.12 Master Agreement, dated as of November 19, 1997, by and between Petrie
Stores Liquidating Trust and Canadian Imperial Bank of Commerce
(incorporated herein by reference to Exhibit 99.1 to the Liquidating
Trust's Current Report on Form 8-K, dated as of January 22, 1998).
10.13 Confirmation, dated as of January 28, 1998, of the Master Agreement by
and between Petrie Stores Liquidating Trust and Canadian Imperial Bank
of Commerce.
10.14 Secured Term Note, dated as of December 31, 1997, by and between Petrie
Stores Liquidating Trust and Canadian Imperial Bank of Commerce
(incorporated herein by reference to Exhibit 99.3 to the Liquidating
Trust's Current Report on Form 8-K, dated as of January 22, 1998).
10.15 Stock Pledge Agreement, dated as of December 31, 1997, by and between
Petrie Stores Liquidating Trust and Canadian Imperial Bank of Commerce
(incorporated herein by reference to Exhibit 99.4 to the Liquidating
Trust's Current Report on Form 8-K, dated as of January 22, 1998).
10.16 Tri-Party Custody Agreement, dated as of December 31, 1997, by and among
the United States Trust Company of New York, Petrie Stores Liquidating
Trust and Canadian Imperial Bank of Commerce (incorporated herein by
reference to Exhibit 99.5 to the Liquidating Trust's Current Report on
form 8-K, dated as of January 22, 1998).
27 Financial Data Schedule.
</TABLE>
(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.
(c) See Item 14(a)(3) above. The Liquidating Trust will furnish to any
holder of Units of Beneficial Interest, upon written request, any exhibit
listed in response to Item 14(a)(3) upon payment by such holder of the
Liquidating Trust's reasonable expenses in furnishing any such exhibit.
(d) See Item 14(a)(2) above.
21
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Petrie Stores Liquidating Trust
/s/ Stephanie R. Joseph
By: _________________________________
STEPHANIE R. JOSEPH
MANAGER AND CHIEF EXECUTIVE
OFFICER
Dated: March 31, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
Dated: March 31, 1998
/s/ H. Bartlett Brown
By: _________________________________
H. BARTLETT BROWN
ASSISTANT MANAGER, CHIEF FINANCIAL
OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
/s/ Stephanie R. Joseph
By: _________________________________
STEPHANIE R. JOSEPH
MANAGER, CHIEF EXECUTIVE OFFICER
AND TRUSTEE
By: _________________________________
JOSEPH H. FLOM
TRUSTEE
/s/ Bernard Petrie
By: _________________________________
BERNARD PETRIE
TRUSTEE
/s/ Laurence A. Tisch
By: _________________________________
LAURENCE A. TISCH
TRUSTEE
/s/ Raymond S. Troubh
By: _________________________________
RAYMOND S. TROUBH
TRUSTEE
22
<PAGE>
PETRIE STORES LIQUIDATING TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Auditors.......................................... F-2
Statements of Net Assets in Liquidation--December 31, 1997 and December
31, 1996............................................................... F-3
Statements of Changes in Net Assets in Liquidation--For the year ended
December 31, 1997 and the periods ended December 31, 1996 and January
22, 1996............................................................... F-4
Notes to Financial Statements........................................... F-5
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees and Holders of Units of Beneficial Interest
Petrie Stores Liquidating Trust
We have audited the accompanying statements of net assets in liquidation of
the Petrie Stores Liquidating Trust (successor to Petrie Stores Corporation
and its former subsidiaries) as of December 31, 1997 and December 31, 1996,
the related statements of changes in net assets in liquidation for the year
ended December 31, 1997 and the periods ended December 31, 1996 and January
22, 1996. These financial statements are the responsibility of the management
of the Petrie Stores Liquidating Trust. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets in liquidation of the Petrie Stores
Liquidating Trust (successor to Petrie Stores Corporation and its former
subsidiaries) as of December 31, 1997 and December 31, 1996 and the changes in
net assets in liquidation for the year ended December 31, 1997 and the periods
ended December 31, 1996 and January 22, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
MetroPark, New Jersey
March 26, 1998
F-2
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
STATEMENTS OF NET ASSETS IN LIQUIDATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 399 $ 229
U.S. Treasury Obligations............................ 98,189 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).. 127,497 151,035
-------- --------
Total assets....................................... 263,585 275,707
LIABILITIES
Accrued expenses and other liabilities............... 50,960 52,378
Commitments and contingencies
-------- --------
Net assets in liquidation............................ $212,625 $223,329
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, 1996 JANUARY 29, 1995
YEAR ENDED TO TO
DECEMBER 31, 1997 DECEMBER 31, 1996 JANUARY 22, 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net assets in liquidation
at beginning of period... $223,329 $202,594 $ 836,470
-------- -------- ---------
Investment income......... 8,164 6,467 1,793
Corporate overhead........ (24,717) (30,304) (25,321)
Income tax refund......... 4,066
Net realized and
unrealized gain (loss) on
investments.............. 1,783 44,572 (244,583)
-------- -------- ---------
(Loss) income before
income tax credit........ (10,704) 20,735 (268,111)
Income tax credit......... -- -- 113,834
-------- -------- ---------
Net (loss) income for the
period................... (10,704) 20,735 (154,277)
Distributions of
31,410,144 shares of Toys
"R" Us common stock, net
of related deferred
taxes.................... -- -- (479,599)
-------- -------- ---------
(Decrease) increase in net
assets................... (10,704) 20,735 (633,876)
-------- -------- ---------
Net assets in liquidation
at end of period......... $212,625 $223,329 $ 202,594
======== ======== =========
Net (loss) income per
unit..................... $ (.20) $ .40 $ (2.95)
======== ======== =========
Weighted average number of
units.................... 52,350 52,350 52,350
======== ======== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Petrie Stores Liquidating Trust (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 2)
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 2) pursuant to which the Liquidating Trust is
required to retain a substantial portion of its assets to provide for its
liabilities and various agreements with Canadian Imperial Bank of Commerce
("CIBC") (Note 2) 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 to beneficiaries of the Liquidating Trust until the status of
such contingent liabilities is clarified.
Since the Succession Date, Petrie has been preparing for its dissolution. On
November 6, 1996, Petrie filed Articles of Dissolution with the Secretary of
State of the State of New York. Effective February 5, 1997, Petrie was
dissolved.
Beginning with the period ended December 31, 1996, the Liquidating Trust has
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 December 31, 1997 and December 31, 1996 do not
distinguish between current and long-term balances as would be reflected if
such statements had been prepared on a going-concern basis.
Principles of Consolidation
In December 1994, as part of the reorganization of Petrie's retail
operations in connection with their sale, all of Petrie's former subsidiaries
with retail operations were transferred to Petrie Retail, Inc., then a wholly-
owned subsidiary of Petrie ("Petrie Retail"), and all of the shares of Toys
Common Stock held by Petrie's former subsidiaries were transferred to Petrie.
Thereafter, Petrie Retail was sold to PS Stores Acquisition Corp. (hereafter,
including its subsidiaries and affiliates unless the context requires
otherwise, "PS Stores").
Cash Equivalents
Cash equivalents consist of highly liquid investments of less than 90 days'
maturity from the date of purchase. These investments are carried at cost plus
accrued interest, which approximates fair market value.
F-5
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments in U.S. Treasury Obligations
Investments in U.S. Treasury obligations are carried at fair market value
and unrealized gains or losses thereon are recognized in the statement of
changes in net assets in liquidation.
Income Taxes
The Liquidating Trust is a complete pass-through entity for federal income
tax purposes and, accordingly, is not itself subject to federal income tax.
Instead, for federal income tax purposes, each Petrie shareholder (i) is
deemed to have received on the Succession Date, and therefore own, a pro rata
share of the assets transferred by Petrie to the Liquidating Trust, subject to
a pro rata share of Petrie's liabilities assumed by the Liquidating Trust, and
(ii) is subject to the same federal income tax consequences with respect to
the receipt, ownership or disposition of such assets as if such shareholder
had directly received, owned or disposed of such assets, subject to such
liabilities.
Earnings Per Unit
Earnings per unit have been computed based on the weighted average number of
units outstanding. Since there are no dilutive securities outstanding for any
of the periods presented, basic and diluted earnings per unit are the same.
Concentration of Credit Risk
Certain financial instruments potentially subject the Liquidating Trust to
concentrations of credit risk. These financial instruments consist primarily
of temporary cash investments and U.S. Treasury obligations. The Liquidating
Trust places its temporary cash investments with high credit quality financial
institutions to limit its credit exposure.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts have been reclassified to conform with the
current year presentation.
2. INVESTMENTS IN COMMON STOCK
At December 31, 1997 and December 31, 1996, the Liquidating Trust's
investments in common stock consist of 4,055,576 and 5,055,576 shares,
respectively, 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).
F-6
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 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 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 of the 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 CIBC,
the Liquidating Trust has pledged for the benefit of CIBC 2,000,000 shares of
Toys
F-7
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. 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 December 31, 1997.
In accordance with the Plan of Liquidation, Petrie made an initial
liquidating distribution on March 24, 1995 of 26,173,718 shares of Toys Common
Stock (market value on March 24, 1995 of approximately $644.5 million). Petrie
subsequently distributed 1,391 shares of Toys Common Stock to certain former
shareholders of Winkelman Stores Incorporated (a former subsidiary of Petrie)
in respect of their interests in the March 24, 1995 distribution. On August
15, 1995, Petrie made a second liquidating distribution of 5,235,035 shares of
Toys Common Stock (market value on August 15, 1995 of approximately $139.4
million).
At various times during the period ended January 22, 1996, Petrie sold an
aggregate of 5,610,700 shares of Toys Common Stock for approximately $126.9
million in proceeds. 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.
In November 1994, Petrie received a favorable private letter ruling from the
IRS to the effect that the Exchange and the subsequent distribution of Toys
Common Stock to Petrie's shareholders would qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended. The ruling
further provided that Petrie would not recognize any gain on these
transactions.
3. INCOME TAXES
At the Succession Date, and as a result of the Succession, Petrie ceased to
be a taxable entity. As a result, during the period ended January 22, 1996,
the remaining deferred income tax liability was reversed. The income tax
credit of $113.8 million for the period ended January 22, 1996 results from
such reversal. Subsequent to January 22, 1996, the Liquidating Trust, as
successor to Petrie, is a complete pass-through entity for federal income
taxes and, accordingly, is not itself subject to federal income tax.
During the year ended December 31, 1997, $4,066,000 in income tax refunds,
plus interest thereon, were released to the Liquidating Trust from escrow in
offset of certain claims that the Liquidating Trust had against Petrie Retail
relating to Petrie Retail's failure to perform certain of the obligations that
it assumed in connection with the Sale. The income tax refunds were released
from escrow following the previously disclosed settlement of an action
commenced by Petrie Retail in the Bankruptcy Court to recover income tax
refunds received by the Liquidating Trust in respect of taxes paid by Petrie
prior to the Sale. Pursuant to the settlement, approved by the Bankruptcy
Court on June 25, 1997, the Liquidating Trust reserved the right to assert
future claims against Petrie Retail to the extent that such claims relate to
amounts in excess of the amounts offset in the settlement. Additionally,
Petrie Retail and the Liquidating Trust agreed to share equally in the
proceeds of any similar tax refunds received in the future.
F-8
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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
December 31, 1997 and December 31, 1996, the Liquidating Trust, as successor
to Petrie, had accrued approximately $49 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 Bankruptcy Court. In connection with its filing for bankruptcy
protection, Petrie Retail has failed to perform or make payments 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.
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 95 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 $40 million,
which amount is included in the Liquidating Trust's accrued expenses and other
liabilities at December 31, 1997.
F-9
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 is in the process of assigning) 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, is attempting to mitigate damages with respect to
such lease by subleasing the premises to a third party for the four years
remaining on the term of such lease. A sublease with respect to such premises
has been executed and is being held in escrow pending the satisfaction of
certain closing conditions. The Liquidating Trust's aggregate guarantee
liability with respect to the 70 Enterprise Avenue lease, assuming the
sublease of the premises is released from escrow and 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 December 31,
1997. In the event that the attempt to mitigate damages with respect to the 70
Enterprise Avenue lease is unsuccessful, 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 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 $73 million. Such exposure includes the approximately
$40 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 $24 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 $15 million
relates to Petrie Retail's other store leases. Of the $24 million in potential
liability, approximately $4 million is due in the remainder of the year ending
December 31, 1998, approximately $5 million is due in 1999, approximately $5
million is due in 2000 and approximately $10 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
F-10
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $40 million
in liability with respect to rejected store leases includes $11 million in
guarantee liability relating to the disputed leases; and (ii) the $73 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 the 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 $640,000 (relating to certain unfunded
pension obligations) remained unpaid and was included in the Liquidating
Trust's accrued expenses and other liabilities at December 31, 1997.
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
F-11
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$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 bankruptcy filing 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 bankruptcy
filing.
As previously disclosed, in connection with an audit conducted by the IRS,
the agent examining Petrie's federal tax return for its fiscal year ended
January 28, 1989 raised an issue regarding the manner pursuant to which Petrie
computed the basis of its Toys "R" Us, Inc. common stock transferred in
connection with the exchange of certain of its exchangeable subordinated
debentures. The examining agent had proposed an adjustment to Petrie's taxable
income which would have resulted in an additional federal tax liability,
including interest, of approximately $53 million. On March 14, 1997, a
settlement agreement was entered into with the IRS pursuant to which the IRS
and the Liquidating Trust agreed to an adjustment to Petrie's taxable income
for its 1989 fiscal year, which resulted in the Liquidating Trust's settling
the additional federal tax liability, including interest, for approximately
$11.3 million.
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. Pursuant to a 1997 agreement with Zurich, Zurich will bill the
Liquidating Trust in April 1998 for retrospective premium adjustments due
under the Insurance Agreements based on the value of claims made as of
December 31, 1997. The estimated liability in respect of such retrospective
insurance premiums, which are expected to be billed in April 1998, are
included in the Liquidating Trust's accrued expenses and other liabilities at
December 31, 1997. Settlement negotiations are ongoing with respect to the
Liquidating Trust's obligation to pay premiums for claims made under the
workers' compensation portion of the Insurance Agreements as of December 31,
1997 and for subsequent periods.
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.
The letter also claims that, as of December 31, 1997, an additional
approximately $140,000 was 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 December 31, 1997 in respect of any
potential liability relating to these claims.
F-12
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Liquidating Trust believes, based upon 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 adequate accruals for the likely
outcome of such proceedings.
5. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the year ended December 31, 1997 and
the period ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Year ended December 31,
1997:
Net income (loss)....... $ (17,713)(1) $ 33,316(2) $ (4,733)(3) $ (21,574)(4)
========== ========= ========= ==========
Net income (loss) per
unit................... $ (.34) $ .64 $ (.09) $ (.41)
========== ========= ========= ==========
<CAPTION>
QUARTER
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Period ended December
31, 1996:
Net income (loss)....... $ 29,947(5) $ (7,471)(6) $ 4,066(7) $ (5,807)(8)
========== ========= ========= ==========
Net income (loss) per
unit................... $ .57 $ (.14) $ .08 $ (.11)
========== ========= ========= ==========
</TABLE>
- --------
(1) The first quarter of the year ended December 31, 1997 includes an
unrealized loss related to a decrease in the market value of Toys Common
Stock of $7,605,000. 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. The
Liquidating Trust realized a loss with respect to such sale of
approximately $4,375,000.
(2) The second quarter of the year ended December 31, 1997 includes an
unrealized gain related to an increase in the market value of Toys Common
Stock of $28,389,000.
(3) The third quarter of the year ended December 31, 1997 includes an
unrealized gain of $1,774,000 related to an increase in the market value
of Toys Common Stock, offset by accruals of $8.0 million for contingent
guarantee liabilities relating to store leases with respect to which
Petrie Retail announced going-out-of-business sales.
(4) The fourth quarter of the year ended December 31, 1997 includes an
unrealized loss related to a decrease in the market value of Toys Common
Stock of $16,222,000.
(5) The first quarter of the period ended December 31, 1996 includes an
unrealized gain related to the increase in the market value of the Toys
Common Stock of $29,702,000.
F-13
<PAGE>
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) The second quarter of the period ended December 31, 1996 includes an
unrealized gain related to an increase in the market value of the Toys
Common Stock of $7,583,000, more than offset by additional accruals of
$15,000,000 for lease guarantees related to store leases with respect to
which Petrie Retail announced plans to conduct going-out-of business
sales.
(7) The third quarter of the period ended December 31, 1996 includes an
unrealized gain related to an increase in the market value of the Toys
Common Stock of $3,160,000.
(8) The fourth quarter at the period ended December 31, 1996 includes an
unrealized gain related to an increase in the market value of the Toys
Common Stock of $3,792,000, offset by additional accruals of $6,000,000
for lease guarantees related to store leases with respect to which Petrie
Retail announced plans to conduct going-out-of-business sales and an
additional $4,000,000 of accruals related to certain assumed obligations
of the Liquidating Trust, as successor to Petrie.
F-14
<PAGE>
EXHIBIT 10.13
- --------------------------------------------------------------------------------
DATE: January 28, 1998
TO: Petrie Stores Liquidating Trust FROM: Canadian Imperial Bank of
Commerce
ATTENTION: Stephanie R. Joseph CONTACT: Gina S. Ghent
PHONE NUMBER: 212-754-3086 PHONE NUMBER: 212-856-6538
FACSIMILE NUMBER: 212-754-3087 FACSIMILE NUMBER: 212-885-4378
RE: Equity Collar Confirmation
CIBC Reference Number: NY EQT 0522
- --------------------------------------------------------------------------------
THIS CONFIRMATION SUPERSEDES AND REPLACES ANY PREVIOUSLY EXECUTED CONFIRMATION
OF THIS TRANSACTION. FOR EASE OF REFERENCE, ALL CHANGES ARE IN BOLD TYPE.
The purpose of this letter agreement (the "Confirmation") is to confirm the
terms and conditions of the Transaction entered into between Canadian Imperial
Bank of Commerce ("CIBC") and Petrie Stores Liquidating Trust ("Counterparty")
on the Trade Date specified below (the "Transaction"). This Confirmation
constitutes a "Confirmation" as referred to in the Master Agreement specified
below.
The definitions and provisions contained in the 1996 ISDA Equity Derivatives
Definitions (the "Equity Definitions"), as published by the International Swaps
and Derivatives Association, Inc., are incorporated into this Confirmation. In
the event of any inconsistency between the Equity Definitions and this
Confirmation, this Confirmation will govern.
1. This Confirmation supplements, forms part of, and is subject to, the Master
Agreement dated as of November 19, 1997, as amended and supplemented from
time to time (the "Agreement"), between CIBC and Counterparty. All
provisions contained in the Agreement shall govern this Confirmation except
as expressly modified below.
This Transaction shall be subject to all laws, rules and regulations
applicable thereto, including, but not by way of limitation, the provisions
of the Securities Act of 1933 (the "Act"), and the Securities Exchange Act
of 1934 (the "Exchange Act"), as amended and all rules and regulations,
promulgated or to be promulgated thereunder. The parties hereto each
acknowledges that the options acquired under this Transaction will not be
registered under the Act and are being sold in reliance upon the exemption
for private placements pursuant to Section 4(2) of the Act.
2. The terms of the particular Transaction to which this Confirmation relates
are as follows:
GENERAL TERMS:
AGENT: CIBC, New York Agency, has acted as agent in
confirming this Transaction.
TRANSACTION I:
--------------
Trade Date: November 26, 1997
Effective Date: November 26, 1997
Option Style: European
Option Type: Call
Seller: Counterparty
Buyer: CIBC
<PAGE>
Shares: The common shares of stock issued by Toys "R"
Us, Inc. (New York Stock Exchange Ticker
Symbol = "TOY").
Number of Options: 2,000,000
Option Entitlement: 1 Share per Option
Multiple Exercise: Inapplicable
Strike Price: 47.1137
Exchange: The New York Stock Exchange or any successor
to such exchange or quotation system.
Related Exchange: Chicago Board Options Exchange
Calculation Agent: CIBC. Whenever the Calculation Agent is
required to act, it will do so in good faith,
and its determinations and calculations will
be binding in the absence of manifest error.
TRANSACTION II:
---------------
Trade Date: November 26, 1997
Effective Date: November 26, 1997
Option Style: European
Option Type: Put
Seller: CIBC
Buyer: Counterparty
Shares: The common shares of stock issued by Toys "R"
Us, Inc. (New York Stock Exchange Ticker
Symbol = "TOY").
Number of Options: 2,000,000
Option Entitlement: 1 Share per Option
Multiple Exercise: Inapplicable
Strike Price: 30.7264
Exchange: The New York Stock Exchange or any successor
to such exchange or quotation system.
Related Exchange: Chicago Board Options Exchange
Calculation Agent: CIBC. Whenever the Calculation Agent is
required to act, it will do so in good faith,
and its determinations and calculations will
be binding in the absence of manifest error.
2
<PAGE>
PROCEDURE FOR EXERCISE:
Expiration Time: 4:00 p.m. (local time in New York).
Expiration Date: December 3, 1999
Automatic Exercise: Applicable
Settlement Price: The actual average price per share of the
Shares purchased by CIBC to close out its
hedging position during the period extending
from the fifth (5/th/) Exchange Business Day
immediately preceding the Exercise Date
through the Exercise Date, such period
subject to modification upon mutual agreement
of CIBC and Counterparty.
Put Seller's Telephone Mr. Eamon McCooey
Number and Telex and/or (P) 212-885-4361
Facsimile Number and Contact (F) 212-856-4266
Details for Purpose of
Giving Notice:
COUNTERPARTY PHYSICAL UPON WRITTEN NOTICE TO CIBC AT LEAST FIVE (5)
- --------------------- EXCHANGE BUSINESS DAYS BEFORE THE EXPIRATION
SETTLEMENT OPTION: DATE, COUNTERPARTY MAY ELECT PHYSICAL
- ------------------ SETTLEMENT PROVIDED THAT, AT THE TIME OF SUCH
--------
ELECTION, COUNTERPARTY DOES NOT HAVE ANY
OUTSTANDING LOANS WITH CIBC IN RELATION TO
THIS TRANSACTION.
IF NO SUCH ELECTION IS MADE OR IN THE EVENT
THAT THE ABOVE CONDITIONS ARE NOT MET, THEN
CASH SETTLEMENT WILL BE THE MANNER OF
SETTLEMENT AND THE "SETTLEMENT TERMS: CASH
----------------------
SETTLEMENT" SECTION SHALL APPLY.
----------
SETTLEMENT TERMS: PHYSICAL SETTLEMENT
- -------------------------------------
PHYSICAL SETTLEMENT: APPLICABLE
FAILURE TO DELIVER: APPLICABLE
ASSIGNMENT OF SETTLEMENT NOTWITHSTANDING ANY OTHER PROVISION IN THIS
OBLIGATION: CONFIRMATION TO THE CONTRARY REQUIRING CIBC
TO PURCHASE, SELL, DELIVER OR RECEIVE ANY
SECURITIES TO OR FROM THE COUNTERPARTY, CIBC
MAY DESIGNATE ANY OF ITS AFFILIATES TO SO
PURCHASE, SELL, DELIVER OR RECEIVE SUCH
SECURITIES AND OTHERWISE TO PERFORM CIBC'S
OBLIGATIONS IN RESPECT OF THIS TRANSACTION
AND ANY SUCH DESIGNEE MAY ASSUME SUCH
OBLIGATIONS. THE COUNTERPARTY NEED NOT BE
NOTIFIED OF SUCH DESIGNATION AND SUCH
DESIGNATION SHALL NOT RELIEVE CIBC OF ANY OF
ITS OBLIGATIONS HEREUNDER. IF CIBC'S
DESIGNEE SHALL HAVE PERFORMED THE OBLIGATIONS
OF CIBC HEREUNDER, THEN CIBC SHALL BE
DISCHARGED OF ITS OBLIGATIONS TO THE
COUNTERPARTY TO THE EXTENT OF SUCH PERFOR-
MANCE.
CLEARANCE SYSTEM: DEPOSITORY TRUST COMPANY ("DTC")
3
<PAGE>
DELIVERY OF SHARES: COUNTERPARTY AGREES TO DELIVER FULLY REGIS-
TERED, FREELY TRANSFERABLE SHARES.
SETTLEMENT TERMS: CASH SETTLEMENT
- ---------------------------------
CASH SETTLEMENT: APPLICABLE
CASH SETTLEMENT AMOUNT: AN AMOUNT, AS CALCULATED BY THE CALCULATION
AGENT IN THE SETTLEMENT CURRENCY, EQUAL TO
THE NUMBER OF OPTIONS EXERCISED ON THE
EXPIRATION DATE MULTIPLIED BY (I) THE STRIKE
PRICE DIFFERENTIAL, AND (II) ANY OPTION
ENTITLEMENT SPECIFIED ABOVE
STRIKE PRICE DIFFERENTIAL AN AMOUNT EQUAL TO THE GREATER OF (I) THE
(PUT): EXCESS OF THE STRIKE PRICE OVER THE
SETTLEMENT PRICE, AND (II) ZERO.
STRIKE PRICE DIFFERENTIAL AN AMOUNT EQUAL TO THE GREATER OF (I) THE
(CALL): EXCESS OF THE SETTLEMENT PRICE OVER THE
STRIKE PRICE, AND (II) ZERO.
CASH SETTLEMENT PAYMENT DATE: THREE (3) CURRENCY BUSINESS DAYS AFTER THE
VALUATION DATE
ADJUSTMENTS:
Method of Adjustment: Options Exchange Adjustment
Additional Potential The issuer of the Shares distributes a cash
Adjustment Event: dividend greater than $0.00 to shareholders
of record during the term of the Transaction.
EXTRAORDINARY EVENTS:
Share for Share: Alternative Obligation, provided, however,
-------- -------
that if the trading volatility of the New
Shares differs such that CIBC is unable to
maintain a leading position then CIBC shall
have the right to terminate the Transaction
in accordance with the provisions of
Cancellation and Payment.
Share for Other: Cancellation and Payment.
Share for Combined: The Calculation Agent, at its discretion,
will either (a) terminate the Option as of
the Exchange Day immediately preceding the
day on which such declaration is made ("Early
Termination Date") and the Seller will pay
to the Buyer an amount that the Calculation
Agent reasonably determines would be payable
by the Buyer to a Dealer in consideration of
an agreement between the Buyer and such
Dealer that has the effect of preserving for
the Buyer the economic equivalent of the
payment obligations of the parties under this
Transaction, including but not limited to
factors such as time decay and intrinsic
value, that, but for the occurrence of the
Early Termination Date, would have fallen
due after the Early Termination Date, or (b)
adjust the Strike Price,
4
<PAGE>
the Number of Options and any other relevant
variable in a manner which will preserve the
economic equivalent of the payment
obligations of the parties under this
Transaction that, but for the occurrence of
the Early Termination Date, would have fallen
due after the Early Termination Date.
Consequences of Nationalization The Calculation Agent, at its discretion,
or Insolvency: will terminate the Option as of the Exchange
Day immediately preceding the day on which
such declaration is made ("Early Termination
Date") and the Seller will pay to the Buyer
an amount that the Calculation Agent
reasonably determines would be payable by the
Buyer to a Dealer in consideration of an
agreement between the Buyer and such Dealer
that has the effect of preserving for the
Buyer the economic equivalent of the payment
obligations of the parties under this
Transaction, including but not limited to
factors such as time decay and intrinsic
value, that, but for the occurrence of the
Early Termination Date, would have fallen due
after the Early Termination Date.
3. ACCOUNT DETAILS:
Payments to CIBC:
----------------
Account for Payments: Chase Manhattan Bank N.Y.
For the Account of: Canadian Imperial Bank of Commerce, Toronto
Account No.: 544-708-234
ABA No.: 021 000 021
Attention: Financial Products
Payments to Counterparty:
------------------------
Account for Payments: PLEASE ADVISE.
For the Account of:
Account No.:
Attention:
4. OTHER PROVISIONS:
Pledge: As security for the payment of all amounts
and delivery of all securities due or that
may become due from Counterparty to CIBC
under each Transaction, Counterparty ("Credit
Support Provider") has pledged, assigned,
transferred and granted to CIBC a first lien
on, and a security interest in, 2,000,000
Shares (the "Pledged Collateral") in
accordance with the terms of the Stock Pledge
Agreement dated as of December 31, 1997 (the
"Pledge Agreement").
Credit Support Documentation: Counterparty agrees to provide the following
Credit Support Document: Pledge Agreement
dated as of December 31, 1997.
5
<PAGE>
Governing Law: The Laws of the State of New York (without
reference to the choice of law doctrine).
Transfer: Unless otherwise specified in the Master
Agreement, neither the Transaction nor any
interest or obligation in or under the
Transaction may be transferred (whether by
way of security or otherwise) by either
party without the prior written consent of
the other party. Any purported transfer that
is not in compliance with this provision will
be void.
5. OFFICES:
(a) The Office of CIBC for the Transaction is 161 Bay Street, 5th Floor,
Toronto, Canada M5J 2S8.
(b) The Office of Counterparty for the Transaction is PLEASE ADVISE.
6. BROKER/ARRANGER: None
7. This Confirmation may be executed in one or more counterparts, either in
original or facsimile form, each of which shall constitute an original and
all of which together shall constitute one and the same agreement. When
executed by the parties through facsimile transmission, this Confirmation
shall constitute the original agreement between the parties and the parties
hereby adopt the signatures printed by the receiving facsimile machine as the
original signatures of the parties.
- --------------------------------------------------------------------------------
Entering into a derivative transaction involves certain risks. An identification
of the principal risks is provided in the CIBC Oppenheimer Financial Products
Risk Disclosure Statement, which has been delivered to you. If you have not
received a copy, please let us know and one will be provided to you. You should
always consider those risks in determining whether to enter into derivatives
transactions.
Except as if expressly agreed to by you or us in writing, neither of us has
acted as advisor to the other with respect to the desirability or
appropriateness of entering into the Transaction confirmed hereby or with
respect to the other party's risk management needs generally. This pertains not
only to the financial and market risk management risks and consequences of the
confirmed or any proposed Transaction, but also to any legal, regulatory, tax,
accounting and credit issues generated by such transactions, which each party
must evaluate for itself and in reliance on its own professional advisors. THE
TRANSACTION CONFIRMED HEREBY MIGHT BE ONE WHICH INCLUDES ONE OR MORE ELEMENTS
NOT FOUND IN MORE BASIC SWAP STRUCTURES WITH WHICH YOU SHOULD BE FAMILIAR, SUCH
AS SINGLE CURRENCY INTEREST RATE SWAPS. THESE ELEMENTS, IF PRESENT, COULD
INCLUDE LEVERAGE, ONE OR MORE EMBEDDED OPTIONS OR ONE OR MORE EMBEDDED FORWARDS
OR SOME OTHER STRUCTURAL ELEMENTS WHICH COULD SIGNIFICANTLY AFFECT THE
TRANSACTIONS' PRICE BEHAVIOR. AS WITH ANY OTHER FINANCIAL MARKET TRANSACTION,
YOU SHOULD MONITOR THE TRANSACTION'S VALUE FREQUENTLY THROUGHOUT ITS TERM TO
PROTECT YOURSELF AS WELL AS POSSIBLE AGAINST UNANTICIPATED OR UNDESIRED CHANGES
IN ITS VALUE AND TO INSURE ITS CONTINUED UTILITY RELATIVE TO YOUR FINANCIAL
MANAGEMENT NEEDS AND YOUR APPETITE FOR THE MARKET, LEGAL, REGULATORY, CREDIT,
TAX AND ACCOUNTING RISKS THAT CAN ATTEND THE TRANSACTION.
- --------------------------------------------------------------------------------
6
<PAGE>
Please confirm the foregoing correctly sets forth the terms of our agreement by
executing the copy of this Confirmation enclosed for that purpose and returning
it to us or by sending to us a letter or telex substantially similar to this
letter, which letter or telex sets forth the material terms of the Transaction
to which this Confirmation relates and indicates your agreement to those terms.
Yours Sincerely,
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Gina S. Ghent
---------------------------------
Name: Gina S. Ghent
Title:Executive Director
Confirmed as of the date first written:
PETRIE STORES LIQUIDATING TRUST
By: /s/ Stephanie R. Joseph
------------------------------
Name: Stephanie R. Joseph
Title:Manager and Chief Executive Officer
7
<PAGE>
Canadian Imperial Bank of Commerce
425 Lexington Ave. - 5th Floor
New York, New York 10017
January 28, 1998
Attn: Petrie Stores Liquidating Trust
Re: Canadian Imperial Bank of Commerce Transaction #: NY EQT 0522
Trade Date: November 26, 1997
Dear Ms. Joseph:
Reference is made to the above transaction (see confirmation to follow for
details). Canadian Imperial Bank of Commerce, New York Agency has acted as
agent under Securities and Exchange Commission Rule 15a-6 in confirming this
transaction.
If you have any questions, please call us at (212) 885-4413.
Sincerely,
/s/ Gina S. Ghent
-------------------------------
Name: Gina S. Ghent
Title:Executive Director
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
LIQUIDATING TRUST'S STATEMENT OF NET ASSETS IN LIQUIDATION AT DECEMBER 31,1997
AND TEH LIQUIDATING TRUST'S STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 399
<SECURITIES> 263,186
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 263,585
<CURRENT-LIABILITIES> 50,960
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 212,625
<TOTAL-LIABILITY-AND-EQUITY> 263,585
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,704)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,704)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
