-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EYkwQuemU6jBQ+dNO7Vxk8PC8rsakwColDDNvl1B67bCWUhhU8L1NBW0t3ad9cBf uJcNjCE3XA1a6168RKNwYg== 0000950172-99-000577.txt : 19990518 0000950172-99-000577.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950172-99-000577 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETRIE STORES LIQUIDATING TRUST CENTRAL INDEX KEY: 0000077808 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 226679945 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06166 FILM NUMBER: 99626640 BUSINESS ADDRESS: STREET 1: 150 MEADOWLANDS PARKWAY CITY: SECAUCUS STATE: NJ ZIP: 07094 BUSINESS PHONE: 2125569600 FORMER COMPANY: FORMER CONFORMED NAME: PETRIE STORES CORP DATE OF NAME CHANGE: 19920703 10-Q 1 ============================================================================= SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------- FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 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 - March 31, 1999 (Unaudited) and December 31, 1998.......................... 2 Statements of Changes in Net Assets in Liquidation (Unaudited) - For the Three Months Ended March 31, 1999 and 1998....... 3 Notes to Financial Statements................................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................. 16 Item 6. Exhibits and Reports on Form 8-K.............................. 16 PETRIE STORES LIQUIDATING TRUST STATEMENTS OF NET ASSETS IN LIQUIDATION (IN THOUSANDS) MARCH 31, 1999 DECEMBER 31, (UNAUDITED) 1998 ------------- ------------ ASSETS Cash and cash equivalents......................... $ 127 $ 138 U.S. Treasury Obligations......................... 91,780 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).................................... 100,123 96,269 ------------- ------------ Total assets...................................... 229,530 225,524 LIABILITIES Accrued expenses and other liabilities............ 39,854 40,811 Commitments and contingencies ------------- ------------ Net assets in liquidation......................... $189,676 $184,713 ============= ============ See accompanying notes. PETRIE STORES LIQUIDATING TRUST STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, MARCH 31, 1999 1998 ------------- ------------ Net assets in liquidation at beginning of period. $184,713 $212,625 ------------- ------------ Investment income................................ 1,522 1,855 Corporate overhead............................... (413) (2,887) Net realized and unrealized gain (loss) on investments...................................... 3,854 (4,259) ------------- ------------ Net income (loss) for the period................. 4,963 (5,291) ------------- ------------ Net assets in liquidation at end of period....... 189,676 207,334 ============= ============ Net income (loss) per unit....................... $ .09 $ (.10) ============= ============ Weighted average number of units................. 52,350 52,350 ============= ============ See accompanying notes. PETRIE STORES LIQUIDATING TRUST NOTES TO FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 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 months ended March 31, 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 March 31, 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 March 31, 1999, the Liquidating Trust's investments in common stock consisted of 4,055,576 shares of common stock of Toys "R" Us, which operates a chain of specialty retail stores principally engaged in the sale of toys and children's clothing in the United States and abroad. While the shares of Toys Common Stock held by the Liquidating Trust generally are carried at market value, at March 31, 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 March 31, 1999 was below the Put Price. As discussed below, the Liquidating Trust sold a total of 367,000 shares of Toys Common Stock between April 28, 1999 and May 7, 1999. Accordingly, as of May 12, 1999, the Liquidating Trust held a total of 3,688,576 shares of Toys Common Stock. 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 $23.8 million, based upon the market price of the Toys Common Stock on March 31, 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 March 31, 1999. 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. 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 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. As of May 12, 1999, the price per share of Toys Common Stock was $22. 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 March 31, 1999 and December 31, 1998, the Liquidating Trust, as successor to Petrie, had accrued approximately $38 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. 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 and its affiliates. 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 and PS Stores has until October 31, 1999 to file objections to the claims asserted by creditors in those cases. 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 170 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 $53 million. Such exposure includes (i) approximately $32 million in potential liability related to 76 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 March 31, 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 March 31, 1999, and (iii) approximately $18 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 $21 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 $4 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 $515,000 (relating to certain unfunded pension obligations) remained unpaid and was included in the Liquidating Trust's accrued expenses and other liabilities at March 31, 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 months ended March 31, 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 months ended March 31, 1999 was $4,963,000, as compared to a net loss of $5,291,000 for the three months ended March 31, 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 months ended March 31, 1999 of $3,854,000, as compared to a net unrealized loss of $4,120,000 for the three months ended March 31, 1998. For the three months ended March 31, 1999, the Liquidating Trust incurred corporate overhead of $413,000, as compared to $2,887,000 for the three months ended March 31, 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. During the three months ended March 31, 1999, the Liquidating Trust's total accrual for lease liabilities was reduced by approximately $400,000 following the settlement and release of claims asserted by landlords. Included in corporate overhead for the three months ended March 31, 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 months ended March 31, 1999, the Liquidating Trust earned investment income of $1,522,000, as compared to $1,855,000 earned during the three months ended March 31, 1998. The decrease in investment income for the three-month period ended March 31, 1999 is due to a reduced amount of funds available for investment and lower prevailing interest rates during such period. 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 $23.8 million, based upon the market price of the Toys Common Stock on March 31, 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 May 12, 1999, the Liquidating Trust's 3,688,576 shares of Toys Common Stock had a value of approximately $98.7 million, based upon (i) a closing price per share of $22 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 May 12, 1999, the price per share of Toys Common Stock has fluctuated from a high of $28-5/8 to a low of $13-5/8. No assurance can be given as to the future market prices of Toys Common Stock. As of May 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 March 31, 1999, the Liquidating Trust, as successor to Petrie, had accrued approximately $38 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 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. This statement is effective for fiscal years beginning after June 15, 1999. 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: May 17, 1999 By /s/ STEPHANIE R. JOSEPH --------------------------------------------- Stephanie R. Joseph Manager and Chief Executive Officer Dated: May 17, 1999 By /s/ H. BARTLETT BROWN ------------------------------------------- H. Bartlett Brown Assistant Manager and Chief Financial Officer EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Liquidating Trust's statement of net assets in liquidation at March 31, 1999 and the Liquidating Trust's statement of changes in net assets in liquidation for the three months ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 DEC-31-1999 MAR-31-1999 3-MOS 129,407 100,123 0 0 0 0 0 0 229,530 39,854 0 0 0 0 189,676 229,530 0 1,522 0 413 0 0 0 4,963 0 4,963 0 0 0 4,963 .09 .09
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