SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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.)
201 ROUTE 17, SUITE 300
RUTHERFORD, NEW JERSEY 07070
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 635-9637
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT:
Not Applicable.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of August 12,
1999, 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 - June 30,
1999 (Unaudited) and December 31, 1998........................ 2
Statements of Changes in Net Assets in Liquidation
(Unaudited) - For the Three and Six Months Ended
June 30, 1999 and 1998........................................ 3
Notes to Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................16
Item 6. Exhibits and Reports on Form 8-K...............................16
PETRIE STORES LIQUIDATING TRUST
STATEMENTS OF NET ASSETS IN LIQUIDATION
(IN THOUSANDS)
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
ASSETS
Cash and cash equivalents....................... $ 117 $ 138
U.S. Treasury obligations....................... 100,595 91,617
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)................. 96,385 96,269
------------- ------------
Total assets.................................... 234,597 225,524
LIABILITIES
Accrued expenses and other liabilities.......... 38,153 40,811
Commitments and contingencies
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Net assets in liquidation....................... $196,444 $184,713
============= ============
See accompanying notes.
PETRIE STORES LIQUIDATING TRUST
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ---------- -------- ---------
<S> <C> <C> <C> <C>
Net assets in liquidation at
beginning of period............... $189,676 $207,334 $184,713 $212,625
------------ ---------- -------- ---------
Investment income................... 1,539 1,863 3,061 3,719
Corporate overhead (expense)
benefit........................... 491 (214) 78 (3,102)
Net realized and unrealized
gain (loss) on investments........ 4,738 (13,747) 8,592 (18,006)
------------ ---------- -------- ---------
Net income (loss) for the period.... 6 ,768 (12,098) 11,731 (17,389)
------------ ---------- -------- ---------
Net assets in liquidation at
end of period..................... $196,444 $195,236 $196,444 $195,236
============ ========== ======== =========
Net income (loss) per unit.......... $ .13 ($ .23) $ .22 ($ .33)
============ ========== ======== =========
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)
JUNE 30, 1999
1. INTERIM REPORTING
The accompanying unaudited financial statements of Petrie Stores
Liquidating Trust (the "Liquidating Trust") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Liquidating Trust, all
adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Results for the three
and six months ended June 30, 1999 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, 1998.
2. BASIS OF PRESENTATION
The Liquidating Trust is the successor to Petrie Stores Corporation,
a New York corporation that was dissolved effective February 5, 1997
("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 June 30, 1999 and December 31, 1998 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 June 30, 1999, the Liquidating Trust's investments in common stock
consisted of 3,688,576 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 June 30, 1999, 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 June 30, 1999 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 $28-5/8 per share, the average of the high and low trading
prices per share 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
the event that CIBC were to fail to perform its obligations under the
Master Agreement, the Liquidating Trust would incur additional unrealized
losses of approximately $20 million, based upon the market price of the
Toys Common Stock on June 30, 1999.
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 June 30, 1999.
As previously disclosed, (i) 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 and (ii) at various times between April 28, 1999 and May 7, 1999,
the Liquidating Trust sold an additional 367,000 shares of Toys Common
Stock for approximately $8.5 million in proceeds. The Liquidating Trustees
may determine to approve future sales of Toys Common Stock in the future.
The price per share of Toys Common Stock, as reported on the New York
Stock Exchange Composite Tape, increased from $16-15/16 per share at
December 31, 1998 to $18-13/16 per share at March 31, 1999 and increased to
$20-11/16 per share at June 30, 1999. As of August 12, 1999, the price per
share of Toys Common Stock was $15-11/16.
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 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 or its
successor 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
June 30, 1999 and December 31, 1998, the Liquidating Trust, as successor to
Petrie, had accrued approximately $37 million and $39 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.
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 U.S. Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). In connection with
its filing for bankruptcy protection, Petrie Retail 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 had 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 subsequently amended these
claims such that it asserted fixed claims representing a total of
approximately $16.1 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 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
the reorganized Petrie Retail entity or the amount of the payments, if any,
that the reorganized Petrie Retail entity will make to creditors asserting
unsecured claims. Accordingly, no amounts have been accrued as receivables
for potential reimbursement or recoveries from the reorganized Petrie
Retail entity.
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.
On December 8, 1998, the Bankruptcy Court confirmed the proposed plan
of reorganization for Petrie Retail (the "Petrie Retail Plan"), which
modified the plan of reorganization filed by Petrie Retail and Warburg
Pincus Ventures, L.P. ("Warburg") with the Bankruptcy Court on August 6,
1998, as amended. Under the confirmed Petrie Retail Plan, Petrie Retail
sold substantially all of its remaining operating assets to Urban
Acquisition Corp., an affiliate of Urban Brands, Inc., a retailer that
operates under the Ashley Stewart trade name, for $52.25 million, and
retained 13 of its store leases, for which Warburg was required to
contribute $12 million to the bankruptcy estate, assume $3.1 million of
Petrie Retail's executive severance obligations and waive approximately
$3.8 million in fees and expenses allegedly owed to it under Petrie
Retail's debtor-in-possession financing arrangement. In addition, on
December 8, 1998, the Bankruptcy Court confirmed PS Stores' proposed plan
of reorganization. The administrator of the Petrie Retail Plan has until
October 31, 1999 to file objections to the claims asserted by creditors in
that case. On August 5, 1999, the Bankruptcy Court in the PS Stores
bankruptcy case approved a stipulation between the Liquidating Trust and PS
Stores, which provides, among other things, that the Liquidating Trust
would have an allowed general unsecured claim in that case and that PS Stores
would make a distribution to the Liquidating Trust in an amount not less than
$175,000 in respect of such claim.
Store Leases. As described above, in December 1998, Petrie Retail
disposed of substantially all its remaining operations and store leases as
part of the Petrie Retail Plan. Of the roughly 1600 stores that Petrie
Retail operated prior to filing its bankruptcy petition in October 1995,
(i) 722 leases were rejected, (ii) 615 leases were assigned to third party
retailers, including (A) 410 leases which were part of Petrie Retail's
former G&G Shops Inc. division and were included in the sale of such
division to an investor group led by Pegasus Partners, L.P. and certain
executives of such division, (B) 85 leases which were sold to Urban
Acquisition Corp. as part of the Petrie Retail Plan and (C) 120 leases
which were not part of Petrie Retail's former G&G Shops Inc. division and
which were sold to third party retailers other than Urban Acquisition
Corp., (iii) 13 leases were retained by the reorganized Petrie Retail
entity for stores which are currently managed by Urban Acquisition Corp.
and which Urban Acquisition Corp. has the right to purchase at a later date
and (iv) approximately 250 leases expired or were terminated by mutual
landlord and tenant consent. In addition, an affiliate of the Liquidating
Trust's real estate advisor has assumed Petrie Retail's former headquarters
lease at 150 Meadowlands Parkway in Secaucus, New Jersey, which lease is
guaranteed by the Liquidating Trust. The Liquidating Trust's real estate
advisor has sublet a portion of the former headquarters space and is
seeking to sublet the remainder of the space in an effort to mitigate the
Liquidating Trust's liability under this lease, although no assurance can
be given that such efforts will be successful.
After taking into account settlements and releases obtained from
landlords, the Liquidating Trust, as successor to Petrie, remains the
guarantor of 168 of the retail leases and the headquarters lease described
above. The Liquidating Trust's theoretical exposure relating to these
leases, without giving effect to any present value discount and assuming
the landlord in each case is unable to mitigate its damages, would be
approximately $49 million. Such exposure includes (i) approximately $30
million in potential liability related to 73 of the rejected store leases
described above and 43 of the leases which have expired or were terminated
by mutual landlord and tenant consent described above, which amount is
included in the Liquidating Trust's accrued expenses and other liabilities
at June 30, 1999, (ii) approximately $3 million in potential liability
relating to the headquarters lease, which amount is included in the
Liquidating Trust's accrued expenses and other liabilities at June 30,
1999, and (iii) approximately $16 million in potential liability related to
51 of the store leases which were either assigned to third party retailers
or are still held by the successor of Petrie Retail. Of the $19 million in
potential liability related to the assigned leases, the leases that are
still held by the successor of Petrie Retail and the headquarters lease,
approximately $2 million is due in 1999, approximately $5 million is due in
2000 and approximately $12 million is due thereafter.
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
$52 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.
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
$490,000 (relating to certain unfunded pension obligations) remained unpaid
and was included in the Liquidating Trust's accrued expenses and other
liabilities at June 30, 1999.
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
incurred withdrawal liability under the Employee Retirement Income Security
Act of 1974, as amended. By letter dated May 30, 1996, the Multiemployer
Plan initially 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 initially
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. In December 1998, the Multiemployer Plan also submitted amended
proofs of claim indicating that, among other entities, PS Stores and Petrie
Retail were indebted to the Multiemployer Plan in the aggregate amount of
approximately $17.3 million, consisting of withdrawal liability of $4.7
million, funding deficiencies of $1.4 million and an additional $11.2
million as a result of a mass withdrawal by contributing employers from the
Multiemployer Plan. To the knowledge of the Liquidating Trust, Petrie
Retail never 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 three and six months ended June 30, 1999 and 1998, the
Liquidating Trust's activities were limited to continuing Petrie's
liquidation in furtherance of the Plan of Liquidation. Beginning with the
period ended December 31, 1996, the Liquidating Trust adopted the calendar
year as its fiscal year.
RESULTS OF OPERATIONS
The Liquidating Trust's net income for the three and six months ended
June 30, 1999 was $6,768,000 and $11,731,000, respectively, as compared to
a net loss of $12,098,000 and $17,389,000, respectively, for the three and
six months ended June 30, 1998.
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 gain on the
Toys Common Stock for the three and six months ended June 30, 1999 of
$3,166,000 and $7,020,000, respectively, as compared to a net unrealized
loss of $13,747,000 and $17,867,000, respectively, for the three and six
months ended June 30, 1998. In addition, during the three and six months
ended June 30, 1999, the Liquidating Trust recognized a gain of $1,572,000
on the sale of 367,000 shares of Toys Common Stock.
For the three and six months ended June 30, 1999, the Liquidating
Trust realized a benefit in corporate overhead of $491,000 and $78,000,
respectively, as compared to expense of $214,000 and $3,102,000,
respectively, for the three and six months ended June 30, 1998. 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
Liquidating Trust's benefit in corporate overhead during the three and six
months ended June 30, 1999 was due primarily to (i) the Liquidating Trust's
receipt in April 1999 of $312,382 from Petrie Retail pursuant to a
stipulation approved by the Bankruptcy Court in respect of certain income
taxes previously paid by the Liquidating Trust, as successor to Petrie,
(ii) the Liquidating Trust's receipt in April 1999 of $407,722 from
Zurich-American Insurance Group in respect of certain retrospective
insurance premium adjustments based on claims made as of December 31, 1998
and (iii) the reduction by $200,000 and $600,000, respectively, of the
Liquidating Trust's total accrual for lease liabilities following the
settlement and release of claims asserted by landlords. Included in
corporate overhead for the three and six months ended June 30, 1998 are
accruals of $2 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 failed to perform.
During the three and six months ended June 30, 1999, the Liquidating
Trust earned investment income of $1,539,000 and $3,061,000, respectively,
as compared to $1,863,000 and $3,719,000, respectively, earned during the
three and six months ended June 30, 1998. The decrease in investment income
for the three and six month periods ended June 30, 1999 is due to 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 $28-5/8 per share, the average of
the high and low trading prices per share 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. In addition, at various times between April 28, 1999
and May 7, 1999, the Liquidating Trust sold an additional 367,000 shares of
Toys Common Stock for approximately $8.5 million in proceeds. The
Liquidating Trustees may determine to approve further sales of Toys Common
Stock in the future.
The Liquidating Trust 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 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. In the event
that CIBC were to fail to perform its obligations under the Master
Agreement, the Liquidating Trust would incur additional unrealized losses
of approximately $20 million, based upon the market price of the Toys
Common Stock on June 30, 1999.
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 August 12, 1999, the Liquidating Trust's 3,688,576 shares of
Toys Common Stock had a value of approximately $87.9 million, based upon
(i) a closing price per share of 15-11/16 as reported on the New York Stock
Exchange Composite Tape on such date with respect to 1,688,576 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 August 12, 1999, the price per share of Toys Common Stock has
fluctuated from a high of $24-3/4 to a low of $13-5/8. No assurance can be
given as to the future market prices of Toys Common Stock.
As of August 12, 1999, the Liquidating Trust had approximately $138
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 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 or its
successor fails to perform; and (ii) Petrie's agreement with Petrie Retail
to indemnify it for certain liabilities relating to Petrie Retail's
withdrawal from the United Auto Workers District 65 Security Plan Pension
Fund. At June 30, 1999, the Liquidating Trust, as successor to Petrie, had
accrued approximately $37 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.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement requires
that all derivatives be recorded in a company's balance sheet as either an
asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statements No. 133." This statement defers for
one year the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Liquidating Trust is in the process of evaluating this
statement and has not yet determined the future impact on its consolidated
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 and its successor, the computer
systems of Toys "R" Us and Petrie Retail's successor 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's successor. 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's successor to close additional
stores for which the Liquidating Trust, as successor to Petrie,
has liability as a guarantor;
(2) Other actions by Petrie Retail's successor 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;
(3) 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;
(4) A material decline in the price per share of Toys Common Stock;
(5) An adverse material change in general economic conditions and
the interest rate environment;
(6) The effects of, and changes in, laws and regulations and other
activities of federal and local governments, agencies and
similar organizations;
(7) The costs and other effects of other legal and administrative
cases and proceedings, settlements and claims relating to the
Liquidating Trust's contingent liabilities;
(8) The failure of the Liquidating Trust, Toys "R" Us, Petrie
Retail's successor 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; and
(9) The failure of CIBC to perform its obligations under the Master
Agreement.
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: August 16, 1999 By /s/ Stephanie R. Joseph
--------------------------------------
Stephanie R. Joseph
Manager and Chief Executive Officer
Dated: August 16, 1999 By /s/ H. Bartlett Brown
--------------------------------------
H. Bartlett Brown
Assistant Manager and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Liquidating Trust's statement of net assets in liquidation at June 30,
1999 and the Liquidating Trust's statement of changes in net assets in
liquidation for the three and six months ended June 30, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 138,212
<SECURITIES> 96,385
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 234,597
<CURRENT-LIABILITIES> 38,153
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 196,444
<TOTAL-LIABILITY-AND-EQUITY> 234,597
<SALES> 0
<TOTAL-REVENUES> 3,061
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (78)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,731
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,731
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
