SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 0-3777
PETRIE STORES LIQUIDATING TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 22-6679945
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
150 MEADOWLANDS PARKWAY
SECAUCUS, NEW JERSEY 07094
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 422-0496
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT:
Not Applicable.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of November
12, 1998, there were 52,350,238 Units of Beneficial
Interest outstanding.
PETRIE STORES LIQUIDATING TRUST
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Statements of Net Assets in Liquidation -
September 30, 1998(Unaudited) and December 31, 1997......... 2
Statements of Changes in Net Assets in Liquidation
(Unaudited) - For the Three and Nine Months Ended
September 30, 1998 and 1997................................. 3
Notes to Financial Statements.................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................16
Item 6. Exhibits and Reports on Form 8-K.............................16
PETRIE STORES LIQUIDATING TRUST
STATEMENTS OF NET ASSETS IN LIQUIDATION
(IN THOUSANDS)
SEPTEMBER 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------------ ------------
ASSETS
Cash and cash equivalents.................... $ 13 $ 399
U.S. Treasury Obligations.................... 91,135 98,189
U.S. Treasury Obligations held in escrow..... 37,500 37,500
Investments in common stock (including
3,493,450 shares of Toys "R" Us
common stock held in escrow).............. 94,727 127,497
--------- ---------
Total assets................................. 223,375 263,585
LIABILITIES
Accrued expenses and other liabilities....... 41,644 50,960
Commitments and contingencies
--------- ---------
Net assets in liquidation.................... $ 181,731 $ 212,625
========= =========
See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net assets in liquidation
at beginning of period ........ $ 195,236 $ 238,932 $ 212,625 $ 223,329
Investment income ............... 1,762 1,910 5,481 6,143
Corporate overhead .............. (364) (8,518) (3,466) (17,204)
Income tax refund ............... 101 4,066
Net realized and unrealized
gain (loss) on investments..... (14,903) 1,774 (32,909) 17,865
--------- --------- --------- ---------
Net income (loss) for the
period ........................ (13,505) (4,733) (30,894) 10,870
--------- --------- --------- ---------
Net assets in liquidation
at end of period .............. $ 181,731 $ 234,199 $ 181,731 $ 234,199
========= ========= ========= =========
Net income (loss) per unit ...... ($ .26) ($ .09) ($ .59) $ .21
========= ========= ========= =========
Weighted average number
of units ...................... 52,350 52,350 52,350 52,350
========= ========= ========= =========
</TABLE>
See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
1. INTERIM REPORTING
The accompanying unaudited financial statements of Petrie Stores
Liquidating Trust (the "Liquidating Trust") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Liquidating Trust, all
adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Results for the nine
months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the current fiscal year. For further
information, reference is made to the financial statements and footnotes
thereto included in the Liquidating Trust's Annual Report on Form 10-K for
the year ended December 31, 1997.
2. BASIS OF PRESENTATION
The Liquidating Trust is the successor to Petrie Stores Corporation
("Petrie"). Prior to December 9, 1994, Petrie operated a chain of retail
stores that specialized in women's apparel and were located throughout the
United States (including Puerto Rico and the U.S. Virgin Islands). At
Petrie's Annual Meeting of Shareholders, held on December 6, 1994, Petrie's
shareholders approved the sale of Petrie's retail operations (the "Sale").
At Petrie's Reconvened Annual Meeting of Shareholders, held on January 24,
1995, Petrie's shareholders approved (i) an exchange of shares of Toys "R"
Us, Inc. ("Toys 'R' Us") common stock ("Toys Common Stock") with Toys "R"
Us (Note 3) and (ii) the liquidation and dissolution of Petrie pursuant to
a plan of liquidation and dissolution (the "Plan of Liquidation").
Pursuant to the Plan of Liquidation and the Agreement and Declaration
of Trust, dated as of December 6, 1995 (the "Liquidating Trust Agreement"),
between Petrie and the trustees named therein (the "Liquidating Trustees"),
effective as of the close of business on January 22, 1996 (the "Succession
Date"), Petrie transferred its remaining assets (then consisting of
approximately $131 million in cash and cash equivalents and 5,055,576
shares of Toys Common Stock) to, and its remaining fixed and contingent
liabilities were assumed by (the "Succession"), the Liquidating Trust. The
assets of the Liquidating Trust are subject to various contingent
liabilities, the status of which is presently unclear (Note 4), as well as
the terms of a letter agreement with Toys "R" Us (Note 3) pursuant to which
the Liquidating Trust is required to retain a substantial portion of its
assets to provide for its liabilities and the terms of various agreements
with Canadian Imperial Bank of Commerce ("CIBC") (Note 3) pursuant to which
the Liquidating Trust has pledged for the benefit of CIBC 2,000,000 shares
of Toys Common Stock. Accordingly, the Liquidating Trustees have determined
not to approve any distributions of Toys Common Stock or other assets of
the Liquidating Trust to beneficiaries of the Liquidating Trust until the
status of such contingent liabilities is clarified.
Beginning with the period ended December 31, 1996, the Liquidating
Trust adopted the calendar year as its fiscal year. A liquidation basis of
accounting was implemented as of January 28, 1995. The statements of net
assets in liquidation at September 30, 1998 and December 31, 1997 do not
distinguish between current and long-term balances as would be reflected if
such statements had been prepared on a going-concern basis.
At the Succession Date, and as a result of the Succession, Petrie
ceased to be a taxable entity. The Liquidating Trust is a complete
pass-through entity for federal income taxes and, accordingly, is not
itself subject to federal income tax. Instead, each holder of units of
beneficial interest in the Liquidating Trust is required to take into
account, in accordance with such holder's method of accounting, his pro
rata share of the Liquidating Trust's items of income, gain, loss,
deduction or credit, regardless of the amount or timing of distributions to
such holder.
3. INVESTMENTS IN COMMON STOCK
At September 30, 1998, the Liquidating Trust's investments in common
stock consisted of 4,055,576 shares of common stock of Toys "R" Us, which
operates a chain of specialty retail stores principally engaged in the sale
of toys and children's clothing in the United States and abroad. While the
shares of Toys Common Stock held by the Liquidating Trust generally are
carried at market value, at September 30, 1998, 2,000,000 of such shares
(which are subject to the terms of the Master Agreement described below)
were carried at the Put Price (as defined below) because the market value
of Toys Common Stock on September 30, 1998 was below the Put Price.
On January 24, 1995, pursuant to the terms of an Acquisition
Agreement dated as of April 20, 1994, and amended as of May 10, 1994 (the
"Toys Acquisition Agreement"), between Petrie and Toys "R" Us, Petrie
exchanged (the "Exchange") with Toys "R" Us all of its shares of Toys
Common Stock (39,853,403 shares), plus $165 million in cash, for 42,076,420
shares of Toys Common Stock (approximately 15.0% of the outstanding Toys
Common Stock at January 28, 1995).
Simultaneously with the closing of the Exchange, Petrie placed
3,493,450 shares of Toys Common Stock into an escrow account (the "Escrow
Account") pursuant to the terms of an escrow agreement, dated as of January
24, 1995, between Petrie and Custodial Trust Company, as Escrow Agent (the
"Escrow Agreement"). The shares of Toys Common Stock were placed into the
Escrow Account pursuant to the Escrow Agreement to provide for the payment
of certain obligations of the Liquidating Trust, as successor to Petrie, to
Toys "R" Us arising (i) under (x) the Toys Acquisition Agreement, (y) the
Seller Indemnification Agreement, dated as of December 9, 1994, among
Petrie, Toys "R" Us, Petrie Retail, Inc. ("Petrie Retail"), PS Stores
Acquisition Corp. ("PS Stores") and certain subsidiaries of PS Stores and
(z) the Retail Operations Stock Purchase Agreement, dated as of August 23,
1994 and amended on November 3, 1994 (the "Retail Operations Stock Purchase
Agreement"), between Petrie and PS Stores, and (ii) otherwise.
The assets of the Liquidating Trust are subject to the terms of a
letter agreement, dated as of January 24, 1995, pursuant to which Petrie
agreed with Toys "R" Us that Petrie will retain, either individually or in
combination, (i) cash in an amount of at least $177.5 million (the
"Reserved Amount") or (ii) shares of Toys Common Stock having a market
value (using the per share price on January 20, 1995) of at least twice the
Reserved Amount, to secure the payment of Petrie's contingent liabilities
(Note 4). Pursuant to the terms of the letter agreement, the Liquidating
Trust, as successor to Petrie, is presently required to retain
substantially all of its assets.
Petrie had also placed 3,200,082 shares of Toys Common Stock in a
collateral account (the "Collateral Account") pursuant to the terms of an
Amended and Restated Cash Collateral and Pledge Agreement, dated as of
December 9, 1994 and amended as of January 24, 1995, among Petrie, PS
Stores, certain subsidiaries of PS Stores, and Custodial Trust Company, as
Collateral Agent (the "Amended and Restated Cash Collateral Agreement"). On
December 19, 1995, the Amended and Restated Cash Collateral Agreement was
further amended and restated and, pursuant thereto, the 3,200,082 shares of
Toys Common Stock held in the Collateral Account were released to Petrie in
exchange for Petrie's deposit of $67.5 million in U.S. Treasury obligations
in the Collateral Account. In connection with the previously disclosed
settlement of a dispute with the Internal Revenue Service (the "IRS"),
approximately $32 million in U.S. Treasury obligations held in the
Collateral Account were transferred to the Liquidating Trust on May 20,
1997. The Liquidating Trust is currently required to maintain at least
$37.5 million in the Collateral Account. The U.S. Treasury obligations held
in the Collateral Account pursuant to the Amended and Restated Cash
Collateral Agreement secure the payment of certain obligations of the
Liquidating Trust, as successor to Petrie, to PS Stores arising under (i)
the Retail Operations Stock Purchase Agreement and (ii) the
Cross-Indemnification and Procedure Agreement, dated as of December 9,
1994, between Petrie and PS Stores (Note 4).
The Liquidating Trust has also entered into a Master Agreement (based
on the International Swaps and Derivatives Association Form), dated as of
November 19, 1997 (the "Master Agreement"), with CIBC, to protect the
Liquidating Trust against certain investment risks associated with
2,000,000 shares of Toys Common Stock held by the Liquidating Trust.
Pursuant to the Master Agreement, if, on December 3, 1999, the price of
Toys Common Stock is below $30.7264 (the "Put Price"), CIBC will be
obligated to pay the Liquidating Trust the difference between the Put Price
and the then prevailing price of Toys Common Stock, multiplied by
2,000,000. If, on December 3, 1999, the price of Toys Common Stock is above
$47.1137 (the "Call Price"), the Liquidating Trust will be obligated to pay
CIBC the difference between the Call Price and the then prevailing market
price of Toys Common Stock, multiplied by 2,000,000. Any payment required
to be made by the Liquidating Trust under the Master Agreement may, at the
option of the Liquidating Trust, be made in cash or Toys Common Stock. To
secure the covenants made by the Liquidating Trust pursuant to the Master
Agreement and a Secured Term Note, dated as of December 31, 1997 (the
"Secured Term Note"), between the Liquidating Trust and the CIBC, the
Liquidating Trust has pledged for the benefit of CIBC 2,000,000 shares of
Toys Common Stock pursuant to a Stock Pledge Agreement, dated as of
December 31, 1997, and a Tri-Party Custody Agreement, dated as of December
31, 1997, among the United States Trust Company of New York, the
Liquidating Trust and CIBC.
In connection with the Master Agreement, the Liquidating Trust and
CIBC have also entered into the Secured Term Note, which provides for CIBC
to make available to the Liquidating Trust a loan facility permitting
borrowings of up to $55,000,000. This facility, if drawn upon, will mature
on December 3, 1999 and will bear interest at a floating rate equal to the
three-month LIBOR rate plus 0.35%, which rate will be reset quarterly.
Interest on any borrowings under the Secured Term Note is compounded and
payable quarterly and on the maturity date. As discussed above, the Secured
Term Note is secured by 2,000,000 shares of Toys Common Stock. There was no
principal outstanding under the Secured Term Note at September 30, 1998.
As previously disclosed, at various times between January 23, 1997
and February 5, 1997, the Liquidating Trust sold an aggregate of 1,000,000
shares of Toys Common Stock for approximately $25.5 million in proceeds.
The price per share of Toys Common Stock, as reported on the New York
Stock Exchange Composite Tape, decreased from $31-7/16 per share at
December 31, 1997 to $30-1/8 per share at March 31, 1998, then further
decreased to $23-7/16 per share at June 30, 1998 and then further decreased
to $16-3/16 per share at September 30, 1998. As of November 12, 1998, the
price per share of Toys Common Stock was $19-13/16.
4. COMMITMENTS AND CONTINGENCIES
As successor to Petrie, the Liquidating Trust has certain contingent
liabilities with respect to existing or potential claims, lawsuits and
other proceedings, which primarily relate to (i) guarantees of certain
retail store leases, expiring at various times through 2011 for which
Petrie Retail or an affiliate thereof has assumed liability, and certain
other liabilities that were assumed by Petrie Retail (but as to which
Petrie's liability has not been released) in connection with the Sale
(collectively, the "Assumed Obligations") to the extent that Petrie Retail
fails to perform; and (ii) Petrie's agreement with Petrie Retail to
indemnify it for certain liabilities relating to the funding of, and 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 September 30,
1998 and December 31, 1997, the Liquidating Trust, as successor to Petrie,
had accrued approximately $40 million and $49 million, respectively, for
contingent liabilities. As the scope of these liabilities becomes better
defined, there may be changes in the estimates of future costs, which could
have a material effect on the Liquidating Trust's financial condition,
liquidity and future ability to make liquidating distributions.
On October 12, 1995, Petrie Retail filed a voluntary petition for
reorganization relief under Chapter 11 of the United States Bankruptcy Code
with the U.S. Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court"). In connection with its filing for bankruptcy
protection, Petrie Retail has failed to perform or make payment with
respect to certain of the Assumed Obligations, including, but not limited
to, Assumed Obligations relating to store leases for which Petrie Retail or
an affiliate thereof has assumed liability, state and federal taxes,
employment agreements, insurance premiums and certain other claims and
contractual obligations. Accordingly, the Liquidating Trust has been and
may continue to be required to make payments in respect of certain of the
Assumed Obligations.
On December 23, 1997, the Liquidating Trust filed over 110 claims in
the Bankruptcy Court against Petrie Retail and certain of its affiliates
with respect to an aggregate of approximately $14 million in payments which
had then 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 has since amended these claims
to assert fixed claims representing a total of approximately $16.9 million
against Petrie Retail's estate. 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 might 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 its claims against Petrie Retail and its
affiliates, the Liquidating Trust's status is that of an unsecured
creditor. In a disclosure statement approved by the Bankruptcy Court in
connection with Petrie Retail's proposed plan of reorganization (described
below), Petrie Retail estimated that its unsecured creditors would receive
a distribution amounting to 0-4% of their claims. There can be no assurance
as to the timing or probability of the collection of the Liquidating
Trust's claims against Petrie Retail or any of its affiliates or the amount
of the payments, if any, that Petrie Retail and its affiliates will make to
creditors asserting unsecured claims. Accordingly, no amounts have been
accrued as receivables for potential reimbursement or recoveries from
Petrie Retail and its affiliates.
On April 10, 1998, PS Stores, the parent of Petrie Retail, filed a
voluntary petition for reorganization relief under Chapter 11 of the United
States Bankruptcy Code with the Bankruptcy Court. On August 7, 1998, the
Liquidating Trust filed claims in the Bankruptcy Court against PS Stores
substantially similar to those filed against Petrie Retail. According to a
disclosure statement approved by the Bankruptcy Court in connection with PS
Stores' proposed plan of reorganization, PS Stores has only $245,000, or
approximately $0.002 for every $1.00 in claims, to distribute to its
unsecured creditors. There can be no assurance as to the timing or
probability of the collection of any claims against PS Stores or the amount
of the payments, if any, that PS Stores will make to creditors asserting
unsecured claims. Accordingly, no amounts have been accrued as receivables
for potential reimbursement or recoveries from PS Stores.
Since filing its petition for bankruptcy protection, Petrie Retail
has (according to its filings with the Bankruptcy Court) closed more than
1130 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 1130 closed stores, approximately 700
relate to rejected leases, approximately 100 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 74 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 $33 million, which amount is
included in the Liquidating Trust's accrued expenses and other liabilities
at September 30, 1998. Additionally, subject to the same assumptions set
forth in the preceding sentence, the Liquidating Trust, as successor to
Petrie, remains a guarantor of approximately 24 of the leases that were
assigned to third party retailers, and its aggregate guarantee liability
with respect to these leases is approximately $8 million.
According to Petrie Retail's filings with the Bankruptcy Court,
Petrie Retail has disposed of, through liquidation or sale, substantial
portions of its remaining operations. In this regard, Petrie Retail has
assigned or rejected all store leases relating to its Winkelman Stores
Incorporated division and has sold its G&G Shops Inc. division, which
operated over 410 stores, to an investor group led by Pegasus Partners,
L.P. and certain executives of the G&G Shops Inc. division. Petrie Retail
continues to operate and pay rent with respect to its headquarters building
located at 150 Meadowlands Parkway in Secaucus, New Jersey but 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 100 stores and intends to
continue to operate such stores as part of a proposed plan of
reorganization filed by Petrie Retail and Warburg Pincus Ventures, L.P.
with the Bankruptcy Court on August 6, 1998. A Bankruptcy Court hearing on
the confirmation of the proposed plan of reorganization is currently
scheduled for December 4, 1998. No assurance can be given that Petrie
Retail will consummate its proposed plan of reorganization or any of the
other transactions referred to in its filings with the Bankruptcy Court.
Additionally, no assurance can be given that Petrie Retail or any third
party who purchases any of the assets or operations of Petrie Retail will
not close additional stores or as to the number of additional stores to be
closed by Petrie Retail or a third party with respect to which the
Liquidating Trust has guarantor liability. If Petrie Retail were to close
every store and its 150 Meadowlands Parkway headquarters building for which
the Liquidating Trust believes it has liability as a lease guarantor
(giving effect to all the lease guarantee releases executed by landlords)
and every store for which the Liquidating Trust disputes its guarantor
liability (as more fully discussed in the following paragraph), assuming
that no mitigation or defense were successful, the Liquidating Trust's
theoretical exposure relating to such leases, without giving effect to any
present value discount, would be approximately $57 million. Such exposure
includes the approximately $33 million in aggregate liability related to
the rejected store leases described above and the $8 million in aggregate
liability related to the assigned store leases described above. With
respect to the approximately $16 million of potential liability relating to
leases that have not yet expired or been assigned, rejected or terminated,
approximately $4 million relates to Petrie Retail's former G&G Shops Inc.
division, approximately $3 million relates to Petrie Retail's remaining
headquarters building lease and approximately $9 million relates to Petrie
Retail's other store leases. Of the $16 million in potential liability,
less than $1 million is due in the remainder of the year ending December
31, 1998, approximately $4 million is due in 1999, approximately $4 million
is due in 2000 and approximately $8 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 23 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 which have not yet been settled: (i) the $33
million in liability with respect to rejected leases includes $9 million in
guarantee liability relating to the disputed leases; (ii) the $8 million in
liability with respect to assigned leases includes $1 million in guarantee
liability relating to the disputed leases and (iii) the $57 million in
maximum theoretical exposure includes $14 million relating to the disputed
leases.
As previously disclosed, landlords under leases relating to 135
stores operated by Petrie Retail or an affiliate thereof have alleged in a
complaint that the Liquidating Trust, as successor to Petrie, has liability
as a guarantor of certain leases notwithstanding Petrie's receipt from
these landlords of releases of guarantees with respect to substantially all
of such leases. Without giving effect to any present value discount, but
after giving effect to rental payments made by Petrie Retail since the
complaints were filed and assuming that all of the 135 stores which are the
subject of these landlords' claims are closed and that the landlord in each
case is unable to mitigate its damages, the Liquidating Trust estimates
that such alleged guarantor liability currently represents approximately
$57 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
$565,000 (relating to certain unfunded pension obligations) remained unpaid
and was included in the Liquidating Trust's accrued expenses and other
liabilities at September 30, 1998.
As previously disclosed, effective January 31, 1995, Petrie Retail
withdrew from the Multiemployer Plan. Due to the Multiemployer Plan's
underfunded status, Petrie Retail and its affiliates have incurred
withdrawal liability under the Employee Retirement Income Security Act of
1974, as amended. By letter dated May 30, 1996, the Multiemployer Plan
assessed withdrawal liability against Petrie Retail in the amount of
approximately $9.4 million plus interest, to be paid in quarterly
installments of approximately $317,000 commencing August 1, 1996 through
and including August 1, 2006, with a final payment of approximately $18,000
due November 1, 2006. In addition, the Multiemployer Plan assessed
liability against Petrie Retail of approximately $2 million attributable to
the Multiemployer Plan's failure to meet certain Internal Revenue Code
minimum funding standards, which amount was payable on August 1, 1996.
Furthermore, as a result of a mass withdrawal by contributing employers
from the Multiemployer Plan, the Multiemployer Plan has assessed additional
liability of approximately $11.2 million against Petrie Retail. To the
knowledge of the Liquidating Trust, Petrie Retail has not made any payments
with respect to such liabilities. Pursuant to the Retail Operations Stock
Purchase Agreement, Petrie Retail and its affiliates are responsible for
payment of the first $10 million in withdrawal and related liabilities and
are entitled to be reimbursed by the Liquidating Trust, as successor to
Petrie, for 75% of the next $50 million paid by Petrie Retail and its
affiliates in respect of such liabilities. It is unclear what effect, if
any, Petrie Retail's or PS Stores' bankruptcy filings may have upon the
timing and amount of any payments the Liquidating Trust may be required to
make under the Retail Operations Stock Purchase Agreement with respect to
the Multiemployer Plan, but in no event will the Liquidating Trust's
maximum contractual liability be increased as a result of Petrie Retail's
or PS Stores' bankruptcy filings.
On or about September 25, 1998, the Internal Revenue Service issued
an examination report asserting that "Petrie Stores, Inc." is liable for
excise taxes and penalties of approximately $192,000 relating to the
Multiemployer Plan's funding deficiencies for the three plan years ended
January 31, 1993, 1994 and 1995. The Liquidating Trust is currently engaged
in discussions with the Internal Revenue Service regarding the examination
report and has not yet determined what liability, if any, the Liquidating
Trust may have with respect thereto.
The Liquidating Trust believes, based on the most recently available
information, that appropriate accruals have been established in the
accompanying financial statements to provide for any losses that may be
incurred with respect to the aforementioned contingencies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Financial Statements and the Notes thereto provided herein.
As previously disclosed, Petrie sold its retail operations to PS
Stores on December 9, 1994, and on January 24, 1995 (the date on which
Petrie's shareholders approved the Plan of Liquidation), Petrie commenced
its liquidation. As a result, effective January 28, 1995, Petrie changed
its basis of accounting from a going-concern basis to a liquidation basis.
During the nine months ended September 30, 1998 and 1997, the Liquidating
Trust's activities have been limited to continuing Petrie's liquidation in
furtherance of the Plan of Liquidation. Beginning with the period ended
December 31, 1996, the Liquidating Trust adopted the calendar year as its
fiscal year.
RESULTS OF OPERATIONS
The Liquidating Trust's net loss for the three and nine months ended
September 30, 1998 was $13,505,000 and $30,894,000, respectively, as
compared to a net loss of $4,733,000 for the three months ended September
30, 1997 and net income of $10,870,000 for the nine months ended September
30, 1997.
As of November 12, 1998, the closing price per share of Toys Common
Stock as reported on the New York Stock Exchange Composite Tape was
$19-13/16 per share. In applying a liquidation basis of accounting, the
Liquidating Trust has given effect in its results of operations to
fluctuations in the market price of its Toys Common Stock, and has recorded
an unrealized loss on the Toys Common Stock for the three and nine months
ended September 30, 1998 of $14,903,000 and $32,770,000, respectively, as
compared to a net unrealized gain of $1,774,000 and $22,240,000 for the
three and nine months ended September 30, 1997. In addition, during the
nine months ended September 30, 1997, the Liquidating Trust sold an
aggregate of 1,000,000 shares of Toys Common Stock for approximately $25.5
million. The Liquidating Trust realized a loss with respect to such sale of
approximately $4,375,000.
For the three and nine months ended September 30, 1998, the
Liquidating Trust incurred corporate overhead of $364,000 and $3,466,000,
respectively, as compared to $8,518,000 and $17,204,000 for the three and
nine months ended September 30, 1997. Corporate overhead generally consists
of costs and expenses related to the liquidation and dissolution of Petrie
including, but not limited to, costs and expenses that the Liquidating
Trust has incurred as a result of Petrie Retail's failure to perform its
obligations in connection with its bankruptcy filing, legal fees, real
estate advisory fees, insurance, salaries for the Liquidating Trust's two
part-time employees, trustee fees, accounting fees, transfer agent fees and
printing and related expenses. The decrease in corporate overhead for the
three and nine months ended September 30, 1998 is due primarily to the fact
that corporate overhead for the three and nine months ended September 30,
1997 included the Liquidating Trust's provision of additional amounts for
its lease guarantor liability following the announcement by Petrie Retail
of a significant number of store closings during such periods, while no
similar provision was required to be made during 1998.
During the three and nine months ended September 30, 1998, the
Liquidating Trust earned investment income of $1,762,000 and $5,481,000,
respectively, as compared to $1,910,000 and $6,143,000 earned during the
three and nine months ended September 30, 1997. The decrease in investment
income for the three and nine month periods ended September 30, 1998 is due
to a reduced amount of funds available for investment and lower prevailing
interest rates during such periods.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As previously disclosed, 3,493,450 shares of Toys Common Stock are
held by the Liquidating Trust in an escrow account to provide for Petrie's
obligations relating to certain contingent liabilities pursuant to the
terms of the Toys Acquisition Agreement, the Retail Operations Stock
Purchase Agreement and other agreements with Toys "R" Us and/or PS Stores.
Of such 3,493,450 shares of Toys Common Stock, 2,000,000 shares are pledged
to CIBC to secure the Liquidating Trust's covenants under the Master
Agreement and the Secured Term Note, as more fully described below. In
addition, $37.5 million in U.S. Treasury obligations are required to be
held by the Liquidating Trust in a collateral account to secure the
Liquidating Trust's obligation to indemnify PS Stores for certain
liabilities relating to Petrie Retail's withdrawal from a multiemployer
pension plan.
The assets of the Liquidating Trust are subject to the terms of a
letter agreement dated as of January 24, 1995 (the "Side Letter
Agreement"), pursuant to which Petrie agreed with Toys "R" Us that Petrie
would retain, either individually or in combination, (i) cash in an amount
of at least $177.5 million (the "Reserved Amount") or (ii) shares of Toys
Common Stock having a market value (using the per share price on January
20, 1995) of at least twice the Reserved Amount, to secure the payment of
Petrie's contingent liabilities. Pursuant to the terms of this letter
agreement, the Liquidating Trust, as successor to Petrie, is presently
required to retain substantially all of its assets.
In accordance with the Plan of Liquidation, at various times between
January 23, 1997 and February 5, 1997, the Liquidating Trust sold an
aggregate of 1,000,000 shares of Toys Common Stock for approximately $25.5
million in proceeds. While the Liquidating Trustees have not, as of the
date of this report, approved any further sales of Toys Common Stock, no
assurances can be given that they will not determine to approve further
sales of Toys Common Stock.
The Liquidating Trust has entered into the Master Agreement with CIBC
to protect the Liquidating Trust against certain investment risks
associated with 2,000,000 shares of Toys Common Stock held by the
Liquidating Trust. Pursuant to the Master Agreement, if, on December 3,
1999 (the "Expiration Date"), the price of Toys Common Stock is below
$30.7264, CIBC will be obligated to pay the Liquidating Trust the
difference between the Put Price and the then prevailing price of Toys
Common Stock, multiplied by 2,000,000. If, on the Expiration Date, the
price of Toys Common Stock is above $47.1137, the Liquidating Trust will be
obligated to pay CIBC the difference between the Call Price and the then
prevailing market price of Toys Common Stock, multiplied by 2,000,000. Any
payment required to be made by the Liquidating Trust under the Master
Agreement may, at the option of the Liquidating Trust, be made in cash or
Toys Common Stock.
In connection with the Master Agreement, the Liquidating Trust and
CIBC have also entered into the Secured Term Note, which provides for CIBC
to make available to the Liquidating Trust a loan facility in the amount of
approximately $55 million. This facility, if drawn upon, will bear interest
at a floating rate equal to the three-month LIBOR rate plus thirty-five
basis points. The Liquidating Trust does not presently anticipate that it
will need to draw upon such facility. Any determination to draw upon the
facility will be based upon the Liquidating Trust's then anticipated
liquidity needs, including the status of its contingent liabilities. To
secure the covenants made by the Liquidating Trust pursuant to the Master
Agreement and the Secured Term Note, the Liquidating Trust has pledged for
the benefit of CIBC 2,000,000 shares of Toys Common Stock pursuant to the
Stock Pledge Agreement and the Tri-Party Custody Agreement.
Although the Liquidating Trust does not presently expect to seek to
terminate the transactions contemplated by the Master Agreement prior to
the Expiration Date, should it determine to do so (including in order to
provide additional liquidity for the payment of contingent liabilities
which become actual liabilities of the Liquidating Trust or to permit the
distribution of any shares of Toys Common Stock pledged to secure any
amounts due under the Master Agreement and the Secured Term Note), the
Liquidating Trust understands that, in accordance with industry practice,
it would be able to do so upon terms to be agreed upon with CIBC based on
then prevailing market conditions.
As of November 12, 1998, the Liquidating Trust's 4,055,576 shares of
Toys Common Stock had a value of approximately $102.2 million, based upon
(i) a closing price per share of $19-13/16 as reported on the New York
Stock Exchange Composite Tape on such date with respect to 2,055,576 shares
of Toys Common Stock held by the Liquidating Trust and (ii) the Put Price
with respect to 2,000,000 shares of Toys Common Stock held by the
Liquidating Trust which are subject to the Master Agreement. During the
fifty-two weeks prior to November 12, 1998, the price per share of Toys
Common Stock has fluctuated from a high of $35-7/16 to a low of $15-5/8. No
assurance can be given as to the future market prices of Toys Common Stock.
As of November 12, 1998, the Liquidating Trust had approximately $129
million in cash, cash equivalents and investments in U.S. Treasury
obligations (including those held in escrow). The Liquidating Trust
believes that it has sufficient liquid funds available to satisfy the
foreseeable liabilities of the Liquidating Trust (including, without
limitation, costs and expenses related to the administration of the
Liquidating Trust such as legal fees, real estate advisory fees, insurance,
salaries for the Liquidating Trust's two part-time employees, trustee fees,
accounting fees, transfer agent fees and printing and related expenses). To
the extent that the Liquidating Trust's liquid funds are insufficient to
satisfy such liabilities, however, the Liquidating Trust will sell some or
all (subject to the provisions of agreements entered into with third
parties) of the remaining shares of Toys Common Stock that it holds. In
addition, the Liquidating Trust also has available approximately $55
million under the Secured Term Note facility with CIBC. The Liquidating
Trust has not made any liquidating distributions since its establishment.
The Liquidating Trustees have determined not to approve any further
distributions of cash or shares of Toys Common Stock to holders of Units of
Beneficial Interest until the status of the Liquidating Trust's contingent
liabilities is clarified. See "--Contingent Liabilities."
CONTINGENT LIABILITIES
As more fully described in Item 1 of Part I, the Liquidating Trust,
as successor to Petrie, has certain contingent liabilities with respect to
existing or potential claims, lawsuits and other proceedings, which
primarily relate to (i) guarantees of certain retail store leases, expiring
at various times through 2011 for which Petrie Retail or an affiliate
thereof has assumed liability, and certain other liabilities that were
assumed by Petrie Retail (but as to which Petrie's liability has not been
released) in connection with the Sale to the extent that Petrie Retail
fails to perform; and (ii) Petrie's agreement with Petrie Retail to
indemnify it for certain liabilities relating to Petrie Retail's withdrawal
from the United Auto Workers District 65 Security Plan Pension Fund. At
September 30, 1998, the Liquidating Trust, as successor to Petrie, had
accrued approximately $40 million for contingent liabilities. As the scope
of these liabilities becomes better defined, there may be changes in the
estimates of future costs, which could have a material effect on the
Liquidating Trust's financial condition, liquidity and future ability to
make liquidating distributions. See Notes to Financial Statements.
YEAR 2000
The Liquidating Trust's principal information technology software
package is compliant with respect to year 2000 issues. In addition,
according to the public filings of Toys "R" Us and information provided to
the Liquidating Trust by Petrie Retail, the computer systems of Toys "R" Us
and Petrie Retail will be year 2000 compliant on a timely basis and, as a
result, year 2000 issues are not expected to have a material adverse effect
on Toys "R" Us or Petrie Retail. Based on the foregoing, the Liquidating
Trust believes that year 2000 issues will not pose significant problems
for, or result in the imposition of material costs on, the Liquidating
Trust. If, however, all year 2000 issues are not properly identified or
effectively remedied, there can be no assurance that year 2000 issues will
not have a material adverse effect on the Liquidating Trust. Additionally,
there can be no assurance that the impact of year 2000 issues on other
entities will not have a material adverse effect on the Liquidating Trust.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical matters, the matters discussed in this Form
10-Q are forward-looking statements that involve risks and uncertainties.
Forward-looking statements include, but are not limited to, statements
relating to the Liquidating Trust's contingent liabilities contained above
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Notes to Financial Statements.
The Liquidating Trust wishes to caution readers that in addition to
factors that may be described elsewhere in this Form 10-Q, the following
important factors, among others, could cause the Liquidating Trust's assets
and liabilities to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Liquidating Trust, and
could materially affect the Liquidating Trust's financial condition,
liquidity and future ability to make liquidating distributions:
(1) A decision by Petrie Retail to close additional stores for
which the Liquidating Trust, as successor to Petrie, has
liability as a guarantor;
(2) A decision by Petrie Retail to liquidate while in Chapter 11 or
the conversion of Petrie Retail's bankruptcy case from Chapter
11 to a case under Chapter 7;
(3) Other actions by Petrie Retail which cause the default of
obligations assumed by Petrie Retail in connection with the
Sale for which the Liquidating Trust, as successor to Petrie,
may be deemed to have liability;
(4) A decision by a court that the Liquidating Trust, as successor
to Petrie, has liability as a guarantor of certain leases
notwithstanding Petrie's receipt from the landlords thereof of
releases of guarantees with respect to such leases;
(5) A material decline in the price per share of Toys Common Stock;
(6) An adverse material change in general economic conditions and
the interest rate environment;
(7) The effects of, and changes in, laws and regulations and other
activities of federal and local governments, agencies and
similar organizations;
(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; and
(9) The failure of the Liquidating Trust, Toys "R" Us, Petrie
Retail or other third parties on whom the Liquidating Trust's
financial condition and results of operations are dependent to
properly identify and effectively remedy on a timely basis all
year 2000 issues affecting their operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See the discussion contained in the Notes to Financial Statements in
Part I, Item 1 of this Quarterly Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS
Exhibit 27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PETRIE STORES LIQUIDATING TRUST
Dated: November 16, 1998 By /s/ Stephanie R. Joseph
------------------------------------------
Stephanie R. Joseph
Manager and Chief Executive Officer
Dated: November 16, 1998 By /s/ H. Bartlett Brown
-------------------------------------------
H. Bartlett Brown
Assistant Manager and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Liquidating Trust's statement of net
assets in liquidation at September 30, 1998 and the
Liquidating Trust's statement of changes in net assets
in liquidation for the nine months ended September 30,
1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 128,648
<SECURITIES> 94,727
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 223,375
<CURRENT-LIABILITIES> 41,644
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 181,731
<TOTAL-LIABILITY-AND-EQUITY> 223,375
<SALES> 0
<TOTAL-REVENUES> 5,481
<CGS> 0
<TOTAL-COSTS> 3,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (30,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,894)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
