PETRIE STORES LIQUIDATING TRUST, 10-K405, 1997-03-31

PETRIE STORES LIQUIDATING TRUST
10-K405, 1997-03-31
WOMEN'S CLOTHING STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

----------------

FOR THE PERIOD ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-3777

PETRIE STORES LIQUIDATING TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEW YORK 22-6679945
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)

70 ENTERPRISE AVENUE SECAUCUS, NEW 07094
JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)

Registrant's telephone number, including area code: (201) 422-0496

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Units of Beneficial Interest

(Title of Class)

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]

As of March 25, 1997, the most recent practicable date prior to the printing
of this report, there were 52,350,238 Units of Beneficial Interest
outstanding; and the aggregate market value of the Units of Beneficial
Interest held by nonaffiliates was $68,072,243, based upon the average of the
bid and asked prices on March 25, 1997 of $2.8125 per Unit of Beneficial
Interest (as quoted on the OTC Bulletin Board).

DOCUMENTS INCORPORATED BY REFERENCE:

None.

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<PAGE>

INDEX

PART I

<TABLE>
<C> <S> <C>
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 2
Item 3. Legal Proceedings............................................... 2
Item 4. Submission of Matters to a Vote of Security Holders............. 4
PART II
Market for the Registrant's Common Equity and Related Security
Item 5. Holder Matters.................................................. 5
Item 6. Selected Financial Data......................................... 6
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations........................................... 7
Item 8. Financial Statements and Supplementary Data..................... 14
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure............................................ 14
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 15
Item 11. Executive Compensation.......................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 17
Item 13. Certain Relationships and Related Transactions.................. 18
PART IV
Exhibits, Financial Statements, Schedules and Reports on Form 8-
Item 14. K............................................................... 19
</TABLE>

i
<PAGE>

PART I

ITEM 1. BUSINESS.

GENERAL

The Petrie Stores Liquidating Trust (the "Liquidating Trust") is the
successor to Petrie Stores Corporation, a New York corporation that was
dissolved effective February 5, 1997 ("Petrie"). Since January 24, 1995,
Petrie (and from January 22, 1996, the Liquidating Trust) has been in
liquidation pursuant to Petrie's shareholder-approved Plan of Liquidation and
Dissolution (the "Plan of Liquidation"). Prior to December 9, 1994, the date
on which Petrie sold its retail operations (as more fully described below),
Petrie and its subsidiaries operated a chain of retail stores that specialized
in the sale of women's apparel.

During its fiscal year ended January 28, 1995, Petrie undertook a
reorganization of its operations in order to separate its investment in Toys
"R" Us, Inc. ("Toys 'R' Us") from its retail operations and distribute its
shares of Toys "R" Us common stock, par value $.01 per share ("Toys Common
Stock"), to Petrie's shareholders without the incurrence of any significant
federal income tax by Petrie or its shareholders. In connection with such
reorganization, on December 9, 1994, Petrie completed the sale (the "Sale") to
PS Stores Acquisition Corp. ("PS Stores") of all of the stock of Petrie's
former subsidiary, Petrie Retail, Inc. ("Petrie Retail"), which then owned all
of Petrie's retail operations, for $190 million in cash plus the assumption of
certain of Petrie's liabilities. The Sale was consummated pursuant to a Stock
Purchase Agreement, dated August 23, 1994 and amended on November 3, 1994,
between Petrie and WP Investors, Inc., an affiliate of E.M. Warburg, Pincus &
Co., Inc. (the "Retail Operations Stock Purchase Agreement").

On January 24, 1995, Petrie exchanged (the "Exchange") with Toys "R" Us
39,853,403 shares of Toys Common Stock held by Petrie, plus $165 million in
cash derived from the Sale, for 42,076,420 shares of Toys Common Stock,
pursuant to an Acquisition Agreement, dated April 20, 1994 and amended on May
10, 1994, between Petrie and Toys "R" Us (the "Toys Acquisition Agreement").
The Toys Acquisition Agreement had required, among other things, that Petrie
sell its retail operations prior to the consummation of the Exchange and that,
following the Exchange, Petrie liquidate and dissolve and distribute to its
shareholders all of its remaining assets, less an adequate provision for
Petrie's actual and contingent liabilities.

Since January 24, 1995, the date on which Petrie's shareholders approved the
Plan of Liquidation, Petrie has (i) placed 3,493,450 shares of Toys Common
Stock into an escrow account to secure the payment of Petrie's contingent
liabilities pursuant to the terms of the Toys Acquisition Agreement, the
Retail Operations Stock Purchase Agreement and other agreements with Toys "R"
Us and/or PS Stores; (ii) made two liquidating distributions to its
shareholders of an aggregate of 31,410,144 shares of Toys Common Stock; and
(iii) sold an aggregate of 6,610,700 shares of Toys Common Stock (including
1,000,000 shares sold by the Liquidating Trust).

Petrie had also placed 3,200,082 shares of Toys Common Stock in a collateral
account (the "Collateral Account") pursuant to the terms of an Amended and
Restated Cash Collateral and Pledge Agreement, dated as of December 9, 1994
and amended as of January 24, 1995, among Petrie, PS Stores, certain
subsidiaries of PS Stores, and Custodial Trust Company, as Collateral Agent
(the "Amended and Restated Cash Collateral Agreement"). On December 19, 1995,
the Amended and Restated Cash Collateral Agreement was further amended and
restated and, pursuant thereto, the 3,200,082 shares of Toys Common Stock held
in the Collateral Account were released to Petrie in exchange for Petrie's
deposit of $67.5 million in cash equivalents into the Collateral Account. The
cash equivalents placed in the Collateral Account pursuant to the Amended and
Restated Cash Collateral Agreement secure the obligation of the Liquidating
Trust, as successor to Petrie, to indemnify PS Stores for liabilities relating
to (i) Petrie Retail's withdrawal from a multiemployer pension plan and (ii) a
dispute with the Internal Revenue Service (the "IRS"), which was settled for
approximately $11.3 million on March 14, 1997. In connection with such
settlement, PS Stores has agreed, and Petrie Retail has agreed subject to
approval by the U.S. Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court"), to request the Collateral Agent to transfer $30
million in short-term investments from the Collateral Account to an account of
the Liquidating Trust. See Item 7 and Notes to Financial Statements.

1
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The Liquidating Trust was established pursuant to an Agreement and
Declaration of Trust, dated as of December 6, 1995, between Petrie and the
trustees named therein (the "Liquidating Trust Agreement"). Pursuant to the
Liquidating Trust Agreement, on January 22, 1996 (the "Succession Date"),
Petrie transferred its assets (then consisting of approximately $131 million
in cash, cash equivalents and short-term investments and 5,055,576 shares of
Toys Common Stock) to, and its remaining fixed and contingent liabilities were
assumed by (the "Succession"), the Liquidating Trust. Each holder of Petrie
common stock, par value $1.00 per share ("Petrie Common Stock"), as of the
close of business on the Succession Date, became the holder of one unit of
beneficial interest in the Liquidating Trust ("Unit of Beneficial Interest")
for each share of Petrie Common Stock owned by such shareholder. Certificates
representing shares of Petrie Common Stock were automatically deemed to
represent a corresponding number of Units of Beneficial Interest.

The Liquidating Trust's activities are limited to winding up Petrie's
affairs in furtherance of the Plan of Liquidation. The Liquidating Trust was
established to enable Petrie to liquidate prior to fully winding up its
affairs, in accordance with the terms of a private letter ruling received by
Petrie from the IRS on November 15, 1994. The Liquidating Trust Agreement
prohibits the Liquidating Trustees from entering into or engaging in any trade
or business on behalf of the Liquidating Trust or the Beneficiaries and from
receiving any property, making any distribution, satisfying or discharging any
claims, expenses, charges, liabilities or obligations or otherwise taking any
action which, in any case, is inconsistent with Petrie's complete liquidation
(as such term is used in and interpreted under Sections 368(a)(1)(C) and
(a)(2)(G) of the Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder).

The Liquidating Trust is a complete pass-through entity for federal income
tax purposes and, accordingly, is not subject to federal income tax. Instead,
each holder of Units of Beneficial Interest in the Liquidating Trust is
required to take into account, in accordance with such holder's method of
accounting, his pro rata share of the Liquidating Trust's items of income,
gain, loss, deduction or credit, regardless of the amount or timing of
distributions to such holder.

The principal executive offices of the Liquidating Trust are located at 70
Enterprise Avenue, Secaucus, New Jersey 07094 (telephone (201) 422-0496).

EMPLOYEES

The Liquidating Trust has two part-time employees, Stephanie R. Joseph and
H. Bartlett Brown. Ms. Joseph serves as Manager and Chief Executive Officer of
the Liquidating Trust. Mr. Brown serves as Assistant Manager and Chief
Financial Officer of the Liquidating Trust.

ITEM 2. PROPERTIES.

Other than the Liquidating Trust's principal executive offices, which are
subleased from Petrie Retail, the Liquidating Trust neither owns nor leases
any real property.

As successor to Petrie, the Liquidating Trust is a guarantor of certain
leases to which Petrie Retail or an affiliate is a party. See Item 7 and Notes
to Financial Statements.

ITEM 3. LEGAL PROCEEDINGS.

In connection with Petrie's liquidation, Petrie and its former directors,
the Liquidating Trust and the Liquidating Trustees have been named as parties
in various actions, some of which are discussed below. The majority of these
suits relate to obligations that Petrie Retail assumed in connection with the
Sale but has failed to perform as a result of its bankruptcy filing on October
12, 1995 with the Bankruptcy Court. See Item 7 and Notes to Financial
Statements. As discussed further in Item 7, to the extent that the Liquidating
Trust makes any payments with respect to such actions, the Liquidating Trust
intends to file claims against Petrie Retail in the Bankruptcy Court in
respect of such payments. The Liquidating Trust is unable to predict the
timing or

2
<PAGE>

probability of the collection of these claims against Petrie Retail.
Additionally, tax refunds aggregating $7,535,192, to which Petrie Retail
claims it is entitled, are being held in an escrow account. The Liquidating
Trust will assert a setoff right against such escrowed funds as a result of
payments made by the Liquidating Trust in respect of obligations of Petrie
Retail. As noted below, Petrie Retail has filed a complaint in the Bankruptcy
Court alleging that Petrie and the Liquidating Trust are improperly
withholding such tax refunds and is seeking, among other things, the immediate
release of such funds to Petrie Retail.

(1) Aventura Malls Venture, et al. v. Petrie Stores Corporation et al.

As previously disclosed, on February 7, 1996, a complaint was filed in New
York State Supreme Court against Petrie, the Liquidating Trust and the
Liquidating Trustees by five landlords and certain of their affiliates seeking
declaratory relief and unspecified damages for breach of contract and fraud
with respect to 146 store leases. The complaint alleged that the Liquidating
Trust, as successor to Petrie, has liability as a guarantor of certain of
these leases, notwithstanding Petrie's receipt from these landlords of
releases with respect to substantially all of the purported lease guarantees.
On March 11, 1996, the defendants filed a motion to dismiss the complaint. On
September 18, 1996, the plaintiffs represented to the court that they intended
to file an amended complaint, and, as a result, the defendants withdrew their
motion to dismiss. On December 2, 1996, the plaintiffs served their amended
complaint, which now seeks damages only against Petrie and the Liquidating
Trust, adds a claim for negligent misrepresentation and reduces to 135 the
number of store leases subject to the action. The defendants moved to dismiss
the amended complaint and oral argument was heard on January 24, 1997. The
court has not rendered its decision on the defendants' motion to dismiss.
While no assurances can be given, the defendants believe that they have
meritorious defenses to this action and will defend themselves vigorously. See
Item 7 "--Contingent Liabilities."

(2) Petrie Retail, Inc. v. Petrie Stores Corporation and Petrie Stores
Liquidating Trust

On February 28, 1997, an adversary complaint was filed by Petrie Retail in
the Bankruptcy Court alleging that Petrie and the Liquidating Trust are
improperly withholding tax refunds in the amount of $7,535,192 purportedly due
to Petrie Retail. Petrie Retail seeks, among other things, (i) a declaration
that those funds are the property of Petrie Retail, (ii) a turnover of these
funds to Petrie Retail plus accrued interest, (iii) a mandatory injunction
requiring the release of those funds to Petrie Retail, (iv) the imposition of
a constructive trust on those funds, (v) a finding of contempt against Petrie
and the Liquidating Trust for purportedly violating the automatic stay
provisions of section 362(a)(3), (6) and (7) of the United States Bankruptcy
Code, and (vi) an order requiring the defendants to pay attorneys' fees, costs
and disbursements incurred by Petrie Retail in connection with this action.
While no assurances can be given, the defendants believe that they have
meritorious defenses to this action and will defend themselves vigorously.

(3) Zurich Insurance Company, et al. v. Petrie Stores Corporation et al.

As previously disclosed, on or about October 30, 1996, a complaint was filed
in New York State Supreme Court by an insurance company and its affiliates
against Petrie and the Liquidating Trust, as successor to Petrie, seeking
payment of retrospective premium adjustments relating to insurance agreements
entered into by Petrie for the policy terms 1988/89 through and including
1994/95. The plaintiffs seek an amount no less than $1,728,183 with interest
from October 31, 1996 plus damages in respect of defendants' alleged
anticipatory breach of their obligations to pay future premium adjustments and
attorneys' fees and costs. The parties have agreed in principle, subject to
the execution of definitive documentation, to settle the case for the
principal amount claimed, without interest thereon, fees or other costs.

(4) Roseville Square Partners v. Carlsbad Apparel Corporation et al.

On or about November 7, 1996, a complaint was filed in the Superior Court of
Orange County, California against Carlsbad Apparel Corporation (a former
subsidiary of Petrie), Petrie and certain unnamed agents or

3
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employees of the defendants. The complaint alleges breach of contract with
respect to a lease to which Carlsbad Apparel Corporation is a party. The
complaint also alleges that Petrie has liability as a guarantor of the lease,
notwithstanding Petrie's receipt from the landlord of a release with respect
to that guaranty. The plaintiff alleges, among other things, that it did not
accept the amendment to the lease which provided for Petrie's eventual release
from its guaranty and the substitution of a new guarantor of the lease, that
it did not receive the new Petrie Retail guaranty and that Petrie Retail was
an inappropriate guarantor of the lease. The subject lease was rejected by its
tenant on or about August 15, 1996 in connection with the bankruptcy case of
Petrie Retail. The plaintiff seeks past rent in an amount in excess of
$14,833, common area maintenance charges in an amount in excess of $2,348,
taxes in an amount in excess of $4,637, interest, late charges as liquidated
damages, attorneys' fees and costs, and the additional amount due under the
remainder of the lease which totals in excess of $562,000. The plaintiff seeks
to hold Petrie liable for these amounts as guarantor. The defendants filed an
answer to the complaint on January 27, 1997. While no assurances can be given,
the Liquidating Trust believes that, as successor to Petrie, it has
meritorious defenses to this action and will defend itself vigorously.

(5) LaSalle National Trust, N.A., et al. v. Petrie Stores Corporation et al.

On or about January 30, 1997, a complaint was filed in the New York State
Supreme Court, alleging that Petrie and the Liquidating Trust breached nine
lease guarantees. The plaintiffs allege that the defendants are liable for
$505,720 with respect to the nine leases, including $413,445 in rent and other
charges on two of the subject guaranteed leases, which leases have been
rejected by their tenants in connection with the bankruptcy case of Petrie
Retail, and $92,275 in rent and other charges on the remaining seven
guaranteed leases, which leases have not been rejected. The plaintiffs seek
monetary damages, attorneys' fees, costs and disbursements, as well as a
declaration that the defendants are liable under the guarantees for all unpaid
amounts that may become due in the future and that the defendants not make any
further distributions unless and until they have set aside adequate funds to
cover liabilities, present and prospective, asserted in the action. The
defendants have not yet answered or otherwise responded to the complaint.

(6) Weingart Foundation v. Petrie Stores Corporation

As previously disclosed, in June 1988, a complaint was filed in California
Superior Court against Petrie, as successor-in-interest on a lease, and other
defendants by a landlord for cleanup costs associated with a gasoline leakage
from storage tanks at the site of a former gas station. On June 16, 1992, the
trial court found Petrie liable for $470,000 in compensatory damages and
$163,284 in costs and attorneys' fees, plus interest on such amounts from
October 1, 1992. On September 19, 1996, the trial court's decision was
affirmed by the California Court of Appeals. Leave for rehearing was
subsequently denied, and judgment was entered against Petrie. In February and
March 1997, the Liquidating Trust paid to the plaintiff an aggregate of
approximately $911,000. The Liquidating Trust intends to seek reimbursement
from its insurer, certain of the other defendants and Petrie Retail, but there
can be no assurance that the Liquidating Trust will be able to obtain
reimbursement.

In addition to the foregoing, the Liquidating Trust is involved in other
legal proceedings relating to its liquidation and defaults by Petrie Retail in
respect of obligations assumed by Petrie Retail in connection with the Sale.
Though no assurances may be given, the Liquidating Trust believes, based on
available information, that it is unlikely that these additional items,
individually or in the aggregate, will have a material adverse effect on the
Liquidating Trust's liquidity or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.

UNITS OF BENEFICIAL INTEREST

Since January 23, 1996, the Units of Beneficial Interest have been quoted on
the OTC Bulletin Board under the symbol "PSTLS." The high and low closing bid
prices per Unit of Beneficial Interest and per Unit cash dividends are shown
below:

<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
Period Ended December 31, 1996:
First quarter (from January 23, 1996 to March 31,
1996).............................................. $2.9375 $2 $ .00
Second quarter (ended June 30, 1996)................ $2.9375 $2.6875 $ .00
Third quarter (ended September 30, 1996)............ $2.75 $2.25 $ .00
Fourth quarter (ended December 31, 1996)............ $2.75 $2.3125 $ .00
Year Ending December 31, 1997:
First quarter (through March 25, 1997).............. $2.875 $2.25 $ .00
</TABLE>

As of March 25, 1997, the most recent practicable date prior to the printing
of this report, there were approximately 3,100 holders of record of Units of
Beneficial Interest. The Liquidating Trust has not made any liquidating
distributions since its establishment. The Liquidating Trustees have
determined not to approve any liquidating distributions of cash or Toys Common
Stock to holders of Units of Beneficial Interest until the status of the
Liquidating Trust's contingent liabilities is clarified.

5
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

Set forth below are selected consolidated financial data of the Liquidating
Trust (which includes financial data of Petrie) at and for the periods ended
January 22, 1996 and December 31, 1996 and for each of the fiscal years in the
three-year period ended January 28, 1995. For financial statement presentation
purposes, a liquidation basis of accounting was implemented as of, and for the
periods subsequent to, January 28, 1995. Operating results and financial data
for each of the fiscal years in the three-year period ended January 28, 1995
are presented on a going-concern basis.
<TABLE>
<CAPTION>
PERIOD ENDED FISCAL YEAR ENDED
------------------------ --------------------------------------
DECEMBER 31, JANUARY 22, JANUARY 28, JANUARY 29, JANUARY 30,
1996(6) 1996(5)(6) 1995(1) 1994(1)(2)(3) 1993(1)(4)
------------ ----------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Corporate overhead...... $(30,304) $ (25,321) $ (430) -- --
Interest expense........ (8,605) $ (10,066) $(10,066)
Investment income....... 6,467 1,793 1,293 -- --
Net realized and
unrealized gain (loss)
on investments......... 44,572 (244,583) -- -- --
-------- --------- ---------- ---------- --------
Income (loss) from
continuing operations
before income tax
benefit................ 20,735 (268,111) (7,742) (10,066) (10,066)
-------- --------- ---------- ---------- --------
Income (loss) from
continuing operations.. 20,735 (154,277) (6,628) (6,543) (6,141)
Income (loss) from
discontinued
operations, net of
income taxes........... -- -- (410,027) (42,140) 20,983
Cumulative effect of
changes in accounting
principles............. -- -- -- 10,685 --
-------- --------- ---------- ---------- --------
Net income (loss)... $ 20,735 $(154,277) $ (416,655) $ (37,998) $ 14,842
======== ========= ========== ========== ========
Income (loss) per share
or unit:
Income (loss) from
continuing
operations........... $ .40 $ (2.95) $ (.14) $ (.14) $ (.13)
Income (loss) from
discontinued
operations........... -- -- (8.61) (.90) .45
Cumulative effect of
changes in accounting
principles........... -- -- -- .23 --
-------- --------- ---------- ---------- --------
Net income (loss)... $ .40 $ (2.95) $ (8.75) $ (.81) $ .32
======== ========= ========== ========== ========
Dividends per share or
unit................... $ -- $ -- $ .15 $ .20 $ .20
======== ========= ========== ========== ========
Weighted average number
of shares or units..... 52,350 52,350 47,600 46,768 46,758
======== ========= ========== ========== ========
Total assets............ $275,707 $ 237,916 $1,274,147 $2,187,807 $906,062
======== ========= ========== ========== ========
Long-term obligations... $ -- $ -- $ -- $ 124,952 $124,974
======== ========= ========== ========== ========
</TABLE>
- --------
(1) Effective December 9, 1994, Petrie sold its retail operations to PS
Stores. Accordingly, the assets related to the retail operations are
excluded from the total assets at January 28, 1995. Operating results for
prior years have been restated to conform to the fiscal year 1995
presentation.
(2) Fiscal year ended January 29, 1994 includes a restructuring charge of
$35,000,000 ($22,225,000 net of taxes or $.48 per share) and cumulative
effect of changes in accounting for investments and income taxes, which
decreased the net (loss) by $10,685,000 ($.23 per share).
(3) Total assets at January 29, 1994, include an increase of $1,340,462,000 as
a result of carrying investments in common stock at a fair market value of
$1,517,677,000 due to the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(4) Fiscal year ended January 30, 1993 includes a charge against earnings in
connection with the granting of stock options to two executive officers
amounting to approximately $3,400,000 ($2,100,000 net of taxes or $.04 per
share).
(5) Total assets at January 22, 1996, reflect Petrie's first and second
liquidating distributions of 26,175,109 shares (including 1,391 shares of
Toys Common Stock distributed to certain former shareholders of Winkelman
Stores Incorporated (a former subsidiary of Petrie) in respect of their
interests in the first distribution) and 5,235,035 shares of Toys Common
Stock on March 24, 1995 and August 15, 1995, respectively, and the sales
of (a) 610,700 shares of Toys Common Stock on May 26, 1995, (b) an
aggregate of 3,000,000 shares of Toys Common Stock on October 25 and 26,
1995 and (c) an aggregate of 2,000,000 shares of Toys Common Stock from
December 28, 1995 through January 4, 1996.
(6) The increase in corporate overhead charges during the periods ended
January 22, 1996 and December 31, 1996, is primarily due to accruals made
for additional costs and expenses that the Liquidating Trust may have
incurred as a result of Petrie Retail's bankruptcy. For the periods ended
December 31, 1996 and January 22, 1996, such overhead includes $22 million
and $15 million, respectively, relating to the liability of the
Liquidating Trust, as successor to Petrie, as a guarantor of certain
leases to which Petrie Retail or one of its affiliates is a party and $4
million and $5 million, respectively, relating to certain other
liabilities Petrie may have incurred as a result of Petrie Retail's
bankruptcy. Corporate overhead also consists of other costs and expenses
related to the liquidation and dissolution of Petrie including, but not
limited to, legal fees, accounting fees, salaries, insurance, real estate
advisory fees, transfer agent fees and printing and shareholder
communications expenses.

6
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto of the Liquidating Trust, as successor to
Petrie.

As previously disclosed, Petrie sold its retail operations to PS Stores on
December 9, 1994, and on January 24, 1995 (the date on which Petrie's
shareholders approved the Plan of Liquidation), Petrie commenced its
liquidation. As a result, effective January 28, 1995, Petrie changed its basis
of accounting from a going-concern basis to a liquidation basis. During the
periods ended December 31, 1996 and January 22, 1996, the Liquidating Trust's
activities have been limited to continuing Petrie's liquidation in furtherance
of the Plan of Liquidation. For financial statement purposes, the Liquidating
Trust is deemed to be the successor to Petrie, and the results of operations
of Petrie are presented in the financial statements of the Liquidating Trust.
Beginning with the period ended December 31, 1996, the Liquidating Trust has
adopted the calendar year as its fiscal year.

RESULTS OF OPERATIONS

Period Ended December 31, 1996 Compared to the Period Ended January 22, 1996

The Liquidating Trust's net income for the period ended December 31, 1996
was $20,735,000, as compared to a net loss of $154,277,000 for the period
ended January 22, 1996.

The market price per share of Toys Common Stock fluctuated during the period
ended December 31, 1996 as follows:

<TABLE>
<CAPTION>
CLOSING
DATE PRICE
---- -------
<S> <C>
January 22, 1996............................... $21 1/8
March 29, 1996................................. $ 27
June 28, 1996.................................. $28 1/2
September 30, 1996............................. $29 1/8
December 31, 1996.............................. $29 7/8
</TABLE>

As of March 25, 1997, the most recent practicable date prior to the printing
of this report, the closing price per share of Toys Common Stock as reported
on the New York Stock Exchange (the "NYSE") Composite Tape was $29 1/4 per
share. In applying a liquidation basis of accounting, the Liquidating Trust,
as successor to Petrie, has given effect in its results of operations to the
fluctuation in the market price of its Toys Common Stock during the periods
ended December 31, 1996 and January 22, 1996, and the sale of 5,610,700 shares
of Toys Common Stock during the period ended January 22, 1996 and has recorded
an unrealized gain on the Toys Common Stock for the period ended December 31,
1996 of $44,236,000 compared with a net realized and unrealized loss of
$244,583,000 for the period ended January 22, 1996. As a result of the
succession of the Liquidating Trust to the assets and liabilities of Petrie,
the Liquidating Trust recorded an income tax credit for the period ended
January 22, 1996 of $113,834,000 resulting from a reduction in deferred taxes.
Prior to adopting a liquidation basis of accounting, unrealized gains/losses
on the Toys Common Stock, net of related taxes, resulted in adjustments to
shareholders' equity.

For the period ended December 31, 1996, the Liquidating Trust, as successor
to Petrie, incurred corporate overhead of $30,304,000 compared with
$25,321,000 for the period ended January 22, 1996. 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 may have incurred as a result of Petrie Retail's
bankruptcy, legal fees, insurance, accounting fees, salaries, real estate
advisory fees, transfer agent fees and printing and shareholder communications
expenses. The increase in corporate overhead charges during the period ended
December 31, 1996 is primarily due to the accrual in such period of an
additional $22 million relating to the liability of the Liquidating Trust, as
successor to Petrie, as a guarantor of certain leases to which Petrie Retail
or one of its subsidiaries is a party, as compared to $15 million in the
period ended January 22, 1996, and the

7
<PAGE>

accrual in the period ended December 31, 1996 of an additional $4 million
relating to certain other liabilities the Liquidating Trust may have incurred
as a result of Petrie Retail's bankruptcy filing, as compared to $5 million
during the period ended January 22, 1996. The Liquidating Trust intends to
file a claim against Petrie Retail in the Bankruptcy Court in respect of any
payments which are made by the Liquidating Trust for obligations that Petrie
Retail or an affiliate thereof has failed to perform as a result of Petrie
Retail's bankruptcy. Additionally, tax refunds aggregating $7,535,192, to
which Petrie Retail claims it is entitled, are being held in an escrow
account. The Liquidating Trust will assert a setoff right against such
escrowed funds as a result of payments made by the Liquidating Trust in
respect of obligations of Petrie Retail. As noted above, Petrie Retail has
filed a complaint in the Bankruptcy Court alleging that Petrie and the
Liquidating Trust are improperly withholding such tax refunds and is seeking,
among other things, the immediate release of such funds to Petrie Retail. See
"--Liquidity and Capital Resources."

During the period ended December 31, 1996, the Liquidating Trust, as
successor to Petrie, earned $6,467,000 in investment income as compared to
$1,793,000 earned during the period ended January 22, 1996. The increase in
investment income earned during the period ended December 31, 1996, as
compared to the period ended January 22, 1996, is the result of the
Liquidating Trust's sale of shares of Toys Common Stock and the investment of
the proceeds therefrom in short-term investments.

Period Ended January 22, 1996 Compared to the Year Ended January 28, 1995

The Liquidating Trust's net loss for the period ended January 22, 1996 was
$154,277,000, as compared to a loss from continuing operations of $6,628,000
for the fiscal year ended January 28, 1995.

The market price per share of Toys Common Stock fluctuated during the period
ended January 22, 1996 as follows:
<TABLE>
<CAPTION>
CLOSING
DATE PRICE
---- -------
<S> <C>
January 28, 1995............................... $30
April 29, 1995................................. $25 3/8
July 29, 1995.................................. $28 3/4
October 28, 1995............................... $22 1/8
January 22, 1996............................... $21 1/8
</TABLE>

In applying a liquidation basis of accounting, the Liquidating Trust, as
successor to Petrie, gave effect in its results of operations to the
fluctuation in the market price of its Toys Common Stock and the sale of
5,610,700 shares of Toys Common Stock during the period and recorded a net
realized and unrealized loss on the Toys Common Stock for the period ended
January 22, 1996 of $244,583,000. As a result of the net realized and
unrealized loss and the succession of the Liquidating Trust to the assets and
liabilities of Petrie, the Liquidating Trust recorded an income tax credit for
the period ended January 22, 1996 of $113,834,000 resulting from a reduction
in deferred taxes.

For the period ended January 22, 1996, the Liquidating Trust, as successor
to Petrie, incurred corporate overhead of $25,321,000 compared with $430,000
for the fiscal year ended January 28, 1995. The increase in corporate overhead
charges during the period ended January 22, 1996 was primarily due to accruals
made for additional costs and expenses that the Liquidating Trust may have
incurred as a result of Petrie Retail's bankruptcy, including $15 million
relating to the liability of the Liquidating Trust, as successor to Petrie, as
a guarantor of certain leases for which no releases had been obtained and
which Petrie Retail or one of its affiliates has failed to perform, and $5
million relating to certain other liabilities the Liquidating Trust may have
incurred as a result of Petrie Retail's bankruptcy filing.

During the period ended January 22, 1996, the Liquidating Trust, as
successor to Petrie, earned $1,793,000 in investment income as compared to
$1,293,000 earned during fiscal year 1995.

8
<PAGE>

Petrie's 8% Convertible Subordinated Debentures due December 31, 2010 were
fully redeemed or converted in the fiscal year ended January 28, 1995. As a
result, no interest expense was incurred by the Liquidating Trust, as
successor to Petrie, for the period ended January 22, 1996.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

As previously disclosed, the Liquidating Trust is required to hold 3,493,450
shares of Toys Common Stock in an escrow account and, prior to the settlement
with the IRS discussed below, $67.5 million in short-term investments in a
collateral account. These assets were placed into these accounts to secure
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 PS Stores. See
"--Contingent Liabilities."

The assets of the Liquidating Trust are subject to the terms of a letter
agreement dated as of January 24, 1995 (the "Side Letter Agreement"), pursuant
to which Petrie agreed with Toys "R" Us that, until such time as a hedge or
similar arrangement is in place, Petrie would retain, either individually or
in combination, (i) cash in an amount of at least $177.5 million (the
"Reserved Amount") or (ii) shares of Toys Common Stock having a market value
(using the per share price on January 20, 1995) of at least twice the Reserved
Amount, to secure the payment of Petrie's contingent liabilities. Pursuant to
the terms of the letter agreement, the Liquidating Trust, as successor to
Petrie, is presently required to retain substantially all of its assets.

In accordance with the Plan of Liquidation, at various times between January
23, 1997 and February 5, 1997, the Liquidating Trust sold an aggregate of
1,000,000 shares of Toys Common Stock for approximately $25.5 million (after
brokerage commissions and fees). Such sales were made in order for the
Liquidating Trust to reduce its exposure to the risk associated with holding
equity securities of one issuer. While the Liquidating Trustees have not, as
of the date of this report, approved any further sales of Toys Common Stock,
no assurances can be given that they will not determine to approve further
sales of Toys Common Stock.

As of March 25, 1997, the Liquidating Trust's 4,055,576 shares of Toys
Common Stock (including the 3,493,450 shares of Toys Common Stock held in the
Escrow Account) had a market value of approximately $118.6 million, based upon
a closing price per share of $29 1/4, as reported on the NYSE Composite Tape.
During the fifty-two weeks prior to the close of business on March 25, 1997,
the price per share of Toys Common Stock has fluctuated from a high of $37 5/8
to a low of $23 3/4. No assurance can be given as to the future market prices
of Toys Common Stock.

As of March 25, 1997, the Liquidating Trust had approximately $137 million
in cash, cash equivalents and investments in U.S. Treasury obligations. The
Liquidating Trust believes that it has sufficient liquid funds available to
satisfy the liabilities of the Liquidating Trust that are likely to occur in
the near future (including, without limitation, costs and expenses related to
the administration of the Liquidating Trust such as legal fees, insurance,
accounting fees, salaries, real estate advisory fees, transfer agent fees and
printing and shareholder communication 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 of the remaining shares
of Toys Common Stock that it holds. The Liquidating Trust will also sell some
or all of the remaining shares of Toys Common Stock that it holds to the
extent that the Liquidating Trustees determine that such dispositions are
necessary to reduce the Liquidating Trust's exposure to the risk associated
with holding equity securities of one issuer. The Liquidating Trust has not
made any liquidating distributions since its establishment. The Liquidating
Trustees have determined not to approve liquidating distributions of cash or
Toys Common Stock to holders of Units of Beneficial Interest until the status
of the Liquidating Trust's contingent liabilities is clarified. See "--
Contingent Liabilities."

9
<PAGE>

CONTINGENT LIABILITIES

As successor to Petrie, the Liquidating Trust has certain contingent
liabilities with respect to existing or potential claims, lawsuits and other
proceedings, which primarily relate to (i) guarantees of certain retail store
leases, expiring at various times through 2011, to which Petrie Retail or an
affiliate thereof is a party, and certain other liabilities that were assumed
by Petrie Retail (but as to which Petrie's liability has not been released) in
connection with the Sale (collectively, the "Assumed Obligations") to the
extent that Petrie Retail fails to perform, and (ii) Petrie's agreement with
Petrie Retail to indemnify it for certain liabilities relating to Petrie
Retail's withdrawal from the United Auto Workers District 65 Security Plan
Pension Fund (the "Multiemployer Plan"). The Liquidating Trust accrues
liabilities when it is probable that future costs will be incurred and when
such costs can be reasonably estimated. Such accruals are based on
developments to date, the Liquidating Trust's estimates of the outcome of
these matters and its experience (including that of its predecessor, Petrie)
in contesting, litigating and settling matters. At December 31, 1996, 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 or
liquidity.

Petrie Retail's Bankruptcy

On October 12, 1995, Petrie Retail filed a voluntary petition for
reorganization relief under Chapter 11 of the Federal Bankruptcy Code with the
Bankruptcy Court. As a result of its bankruptcy filing, Petrie Retail has
failed to perform or make payment with respect to certain of the Assumed
Obligations, including, but not limited to, Assumed Obligations relating to
store leases to which Petrie Retail or an affiliate thereof is a party, state
taxes, employment agreements 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.
The Liquidating Trust intends to file a claim in the Bankruptcy Court against
Petrie Retail in respect of any such payments. The Liquidating Trust is unable
to predict the timing or probability of the collection of these claims against
Petrie Retail. Additionally, tax refunds aggregating $7,535,192, to which
Petrie Retail claims it is entitled, are being held in an escrow account. The
Liquidating Trust will assert a setoff right against such escrowed funds as a
result of payments made by the Liquidating Trust in respect of obligations of
Petrie Retail. As noted below, Petrie Retail has filed a complaint in the
Bankruptcy Court alleging that Petrie and the Liquidating Trust are improperly
withholding such tax refunds and is seeking, among other things, the immediate
release of such funds to Petrie Retail.

Store Leases. Since filing its petition for bankruptcy protection, Petrie
Retail has closed approximately 655 of the roughly 1600 stores it operated
prior to filing the petition. According to Petrie Retail's filings with the
Bankruptcy Court, of the 655 closed stores, approximately 455 relate to
rejected leases and the remainder of the leases generally have expired or were
terminated by mutual landlord and tenant consent. Petrie had guaranteed
approximately 75 of the rejected leases. After taking into effect settlements
and releases obtained from landlords, the Liquidating Trust, as successor to
Petrie, remains a guarantor of 43 of the rejected leases and its aggregate
guarantee liability with respect to these leases, without giving effect to any
present value discount and assuming the landlord in each case is unable to
mitigate its damages, is approximately $20 million, which amount is included
in the Liquidating Trust's accrued expenses and other liabilities at December
31, 1996.

10
<PAGE>

to the approximately 110 stores where Petrie Retail is conducting going-out-
of-business sales. If Petrie Retail were to close all 32 of the stores under
such leases, the Liquidating Trust's aggregate guarantee liability with
respect to such 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 $14 million, which amount is included in the
Liquidating Trust's accrued expenses and other liabilities at December 31,
1996.

No assurance can be given as to the number of additional stores to be closed
by Petrie Retail with respect to which the Liquidating Trust has guarantee
liability. If Petrie Retail were to close every store for which the
Liquidating Trust, as successor to Petrie, believes it has liability as a
lease guarantor (giving effect to all the lease guarantee releases executed by
landlords) and every store for which the Liquidating Trust disputes its
guarantor liability (as more fully discussed in the following paragraph),
assuming that no mitigation or defense were successful, the Liquidating
Trust's theoretical exposure relating to such leases, without giving effect to
any present value discount, would be approximately $100 million, with
approximately $12 million coming due in the remainder of the year ending
December 31, 1997, approximately $16 million due in 1998, approximately $14
million due in 1999, and approximately $58 million due thereafter. Such
exposure includes the $20 million in aggregate liability relating to the
rejected leases and the $14 million in aggregate liability relating to store
leases which are the subject of the going-out-of-business sales described
above.

The Liquidating Trust, on the one hand, and Petrie Retail and its
affiliates, on the other, are in dispute as to whether the Liquidating Trust,
as successor to Petrie, or Petrie Retail and its affiliates is responsible as
guarantor of 43 leases. The following amounts, which have been calculated
using the same assumptions set forth above and without giving effect to any
present value discount, have been included in the Liquidating Trust's lease
liability calculations in the preceding three paragraphs with respect to the
disputed leases: (i) the $20 million in liability with respect to rejected
leases includes $5 million in guarantee liability with respect to the disputed
leases; (ii) the $14 million in liability with respect to stores where Petrie
Retail is conducting going-out-of-business sales includes $9 million with
respect to the disputed leases; and (iii) the $100 million in maximum
theoretical exposure includes $24 million with respect to the disputed leases.

As discussed in Item 3 above, 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 giving effect
to rental payments made by Petrie Retail since the complaints were filed and
assuming that all of the 135 stores which are the subject of these landlords'
claims are closed and that the landlord in each case is unable to mitigate its
damages, the Liquidating Trust estimates that the alleged guarantor liability
currently represents approximately $67 million in lease payments. The
Liquidating Trust believes it has substantial legal defenses to these
landlords' claims and is vigorously contesting such claims. While a decision
by a court in favor of these 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.

11
<PAGE>

Employment Agreements. 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. Pursuant to such settlement agreements, the
Liquidating Trust agreed to pay each substantially all the amounts due under
their respective agreements with Petrie. The total cost of these settlements
to the Liquidating Trust was approximately $2.9 million (of which
approximately $900,000 remained unpaid and was included in the Liquidating
Trust's accrued expenses and other liabilities at December 31, 1996).

On January 27, 1997, the Liquidating Trust entered into a settlement
agreement with the estate of the third executive. Pursuant to such settlement
agreement, the Liquidating Trust agreed to pay the former executive's estate
substantially all the amounts due under such executive's agreement with
Petrie. The total cost of such settlement to the Liquidating Trust was
approximately $345,000, which amount was included in the Liquidating Trust's
accrued expenses and other liabilities at December 31, 1996.

State Taxes. On January 12, 1996, Petrie received a notice of final
determination from the New Jersey Division of Taxation of a liability for New
Jersey corporate income tax in the aggregate amount (including interest) of
approximately $3.1 million. The liability, which related to Petrie's 1987,
1989, 1990, 1991, 1992 and 1993 tax years, was assumed by Petrie Retail in
connection with the Sale. Additionally, the Liquidating Trust, as successor to
Petrie, was assessed approximately $270,000 (excluding interest) in sales and
use taxes for the years 1989 through 1995. In May 1996, the Liquidating Trust
paid the New Jersey Division of Taxation approximately $1.2 million in full
settlement of the liability for New Jersey corporate income tax and sales and
use taxes for the respective periods described above in connection with New
Jersey's tax amnesty program, which provided for interest to be forgiven and
future penalties to be avoided upon receipt of payment for taxes owed.

Multiemployer Plan.

Effective January 31, 1995, Petrie Retail withdrew from the Multiemployer
Plan. Due to underfunding of the Multiemployer Plan, Petrie Retail and its
affiliates have incurred liability under the Employee Retirement Income
Security Act of 1974, as amended. By letter dated May 30, 1996 (the
"Assessment Letter"), the Multiemployer Plan assessed withdrawal liability
against Petrie Retail in the amount of approximately $9.4 million plus
interest, to be paid in quarterly installments of approximately $317,000
commencing August 1, 1996 through and including August 1, 2006, with a final
payment of approximately $18,000 due on November 1, 2006. In addition, the
Multiemployer Plan assessed liability against Petrie Retail of approximately
$2 million attributable to the Multiemployer Plan's failure to meet certain
Internal Revenue Code minimum funding standards, which amount was payable on
August 1, 1996. To the knowledge of the Liquidating Trust, as of February 28,
1997, Petrie Retail has not yet paid any amounts for its liabilities in
connection with the Multiemployer Plan. In the event of a mass withdrawal by
contributing employers from the Multiemployer Plan, the withdrawal liability
allocated to Petrie Retail and its affiliates may be higher. Pursuant to the
Retail Operations Stock Purchase Agreement, Petrie Retail and its affiliates
are responsible for the first $10 million in withdrawal and related
liabilities, with the next $50 million of such liabilities allocated 75
percent to the Liquidating Trust, as successor to Petrie, and 25 percent to
Petrie Retail and its affiliates. It is unclear what effect, if any, Petrie
Retail's bankruptcy filing may have upon the timing and amount of any payments
the Liquidating Trust may be required to make under the agreement with respect
to the Multiemployer Plan, but in no event does the Liquidating Trust believe
that its maximum contractual liability will be increased as a result of Petrie
Retail's bankruptcy filing. On August 26, 1996, Petrie Retail and the
Multiemployer Plan entered into a Standstill Agreement, pursuant to which the
parties agreed, among other things, to temporarily toll any statutory time
period for the taking of any action which is or may be triggered by the
Assessment Letter, without precluding the Multiemployer Plan from filing or
pursuing its claims against Petrie Retail (and all business organizations
under common control with Petrie Retail) as part of the claims process being
conducted in the Bankruptcy Court in connection with Petrie Retail's
bankruptcy filing.

12
<PAGE>

IRS Tax Dispute

On March 14, 1997, a settlement agreement was entered into with the IRS
pursuant to which the IRS and the Liquidating Trust agreed to an adjustment to
Petrie's taxable income for its 1989 fiscal year which resulted in the
Liquidating Trust's incurring additional federal tax liability, including
interest, of approximately $11.3 million. Such liability was included in the
Liquidating Trust's accrued expenses and other liabilities at December 31,
1996. In connection with such settlement, PS Stores has agreed, and Petrie
Retail has agreed subject to approval by the Bankruptcy Court, to request the
Collateral Agent to transfer $30 million in short-term investments from the
Collateral Account to an account of the Liquidating Trust.

13
<PAGE>

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Except for historical matters, the matters discussed in this Form 10-K are
forward-looking statements that involve risks and uncertainties. Forward-
looking statements include, but are not limited to, statements relating to the
Liquidating Trust's contingent liabilities contained in Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Notes to the Financial Statements.

The Liquidating Trust wishes to caution readers that, in addition to factors
that may be described elsewhere in this Form 10-K, the following important
factors, among others, could cause the Liquidating Trust's assets and
liabilities to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Liquidating Trust, and could
materially affect the Liquidating Trust's financial condition and liquidity:

(1) A decision by Petrie Retail to close additional stores for which the
Liquidating Trust, as successor to Petrie, has liability as a
guarantor;

(2) A decision by Petrie Retail to liquidate while in Chapter 11 or the
conversion of Petrie Retail's bankruptcy case from Chapter 11 to a case
under Chapter 7;

(3) Other actions by Petrie Retail which cause the default of obligations
assumed by Petrie Retail in connection with the Sale for which the
Liquidating Trust, as successor to Petrie, may be deemed to have
liability as the primary obligor;

(4) A decision by a court that the Liquidating Trust, as successor to
Petrie, has liability as a guarantor of certain leases notwithstanding
Petrie's receipt from the landlords thereof of releases of guarantees
with respect to such leases;

(5) A material decline in the price per share of Toys Common Stock;

(6) An adverse material change in general economic conditions and the
interest rate environment;

(7) The effects of, and changes in, laws and regulations and other
activities of federal and local governments, agencies and similar
organizations; and

(8) The costs and other effects of other legal and administrative cases and
proceedings, settlements and claims relating to the Liquidating Trust's
contingent liabilities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See pages F-1 through F-16 annexed hereto. The schedule required under
Regulation S-X is included herein on page S-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

14
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

THE LIQUIDATING TRUST

The following table shows, as of March 26, 1997, the Liquidating Trustees
and the Liquidating Trust's executive officers, their respective ages, the
year each person became a Liquidating Trustee or officer of the Liquidating
Trust and all positions currently held with the Liquidating Trust by each such
person:

<TABLE>
<CAPTION>
TRUSTEE OR
NAME AGE OFFICER SINCE POSITION WITH THE LIQUIDATING TRUST
---- --- ------------- -----------------------------------
<S> <C> <C> <C>
Stephanie R. Joseph..... 50 1995 Manager and Chief Executive Officer;
Liquidating Trustee
H. Bartlett Brown....... 61 1995 Assistant Manager and Chief Financial Officer
Joseph H. Flom.......... 73 1995 Liquidating Trustee
Bernard Petrie.......... 71 1995 Liquidating Trustee
Laurence A. Tisch....... 74 1995 Liquidating Trustee
Raymond S. Troubh....... 70 1995 Chairman of the Board of Liquidating
Trustees
</TABLE>

Biographical information concerning the Liquidating Trustees and the
Liquidating Trust's executive officers is provided below.

Stephanie R. Joseph became Secretary and Principal Legal Officer of Petrie
in February 1995 and Manager, Chief Executive Officer and Liquidating Trustee
of the Liquidating Trust in December 1995. She is the founder and President of
The Directors' Network Inc., a corporate consulting firm that prepares
directors for their boardroom responsibilities, since March 1994. From May
1984 until June 1992, she was employed as the Associate General Counsel of
American Express Company.

H. Bartlett Brown became Treasurer, Chief Financial Officer and Principal
Accounting Officer of Petrie in February 1995 and Assistant Manager and Chief
Financial Officer of the Liquidating Trust in December 1995. Mr. Brown is a
tax consultant. He was a partner in Ernst & Young LLP, an accounting firm,
from October 1970 until September 1994.

Joseph H. Flom became a Liquidating Trustee in December 1995. He has been a
partner in Skadden, Arps, Slate, Meagher & Flom LLP, a law firm and counsel to
Petrie, the Liquidating Trust and the Estate of Milton Petrie, for more than
the past five years. Mr. Flom is a director of The Warnaco Group, Inc.;
Chairman of the Board of Trustees of the Woodrow Wilson International Center
for Scholars; a director of United Way of New York City; a director of the
American-Israel Friendship League; and a trustee of the New York University
Medical Center.

Bernard Petrie became both a director of Petrie and a Liquidating Trustee in
December 1995. He is an attorney and has been self-employed for more than the
past five years.

Laurence A. Tisch became a Liquidating Trustee in December 1995. Since
October 1994, Mr. Tisch has been the Co-Chairman and Co-Chief Executive
Officer of Loews Corporation, a diversified holding company. From May 1960 to
October 1994, Mr. Tisch was the Chairman of the Board and Chief Executive
Officer of Loews Corporation. Since March 1990, he has also been the Chairman
of the Board of CNA Financial Corp., an insurance and financial services
company and a publicly-held subsidiary of Loews Corporation. From January 1987
to November 1995, Mr. Tisch was Chairman of the Board, President and Chief
Executive Officer of CBS Inc., a television and radio network. Mr. Tisch is a
director of Loews Corporation; a director of Automatic Data Processing, Inc.,
a provider of payroll and other data processing services; a director of Bulova
Corporation, a watch manufacturer and a publicly-held subsidiary of Loews
Corporation; a director of Federated Department

15
<PAGE>

Stores, Inc., an operator of department stores; a trustee of the New York
Public Library; a trustee of the Metropolitan Museum of Art; and a director of
United Jewish Appeal.

Raymond S. Troubh became a Liquidating Trustee and Chairman of the Board of
Liquidating Trustees in December 1995. Mr. Troubh served as Treasurer of
Petrie from December 9, 1994 to February 7, 1995. He is a financial
consultant, a former governor of the American Stock Exchange and a former
general partner of Lazard Freres & Co., an investment banking firm. Mr. Troubh
is a director of ADT Limited, a security systems company; America West
Airlines, Inc., an airline; ARIAD Pharmaceuticals, Inc., a pharmaceutical
company; Becton, Dickinson and Company, a healthcare products manufacturer;
Diamond Offshore Drilling, Inc., an offshore drilling company; Foundation
Health Corporation, a healthcare company; General American Investors Company,
an investment and advisory company; Olsten Corporation, a temporary personnel
and healthcare services company; Time-Warner, Inc., a media and entertainment
company; WHX Corporation, a holding company; and Triarc Companies, Inc., a
diversified holding company. Mr. Troubh also serves as trustee of The MicroCap
Liquidating Trust, a liquidating trust that holds the assets of The MicroCap
Fund, Inc., an investment company.

MEETINGS AND STANDING COMMITTEES

The Liquidating Trustees met seven times during the period ended December
31, 1996. During such period, the Liquidating Trustees had no committees.

ITEM 11. EXECUTIVE COMPENSATION.

GENERAL

The following table sets forth the total annual compensation paid by the
Liquidating Trust to its Manager and Chief Executive Officer, who is the only
executive officer of the Liquidating Trust whose compensation for the period
ended December 31, 1996 exceeded $100,000:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION LONG-TERM COMPENSATION COMPENSATION(1)
------------------------ ----------------------- ---------------
RESTRICTED OPTIONS/SARS
PERIOD STOCK (NO. OF
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS AWARDS SHARES)
- --------------------------- -------- ------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stephanie R. Joseph...... 12/31/96 $94,167 $25,000 -- -- $45,000
Manager, Chief Executive
Officer, and Liquidating
Trustee
</TABLE>
- --------
(1) Ms. Joseph receives $45,000 per fiscal year for her service as a
Liquidating Trustee.

COMPENSATION OF LIQUIDATING TRUSTEES

Liquidating Trustees are compensated for their service as Liquidating
Trustees in the amount of $30,000 per fiscal year, with the exception of
Raymond S. Troubh and Stephanie R. Joseph, who are each compensated $45,000
per fiscal year for their service as Liquidating Trustees.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the period ended December 31, 1996, the Liquidating Trustees did not
have a compensation committee and each of the Liquidating Trustees other than
Stephanie R. Joseph participated in deliberations of the Liquidating Trustees
concerning executive officer compensation. During the period ended December
31, 1996, no executive officer of the Liquidating Trust served as a member of
the compensation committee (or other board committee performing equivalent
functions, or in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Liquidating Trustee.

16
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

UNITS OF BENEFICIAL INTEREST

The following table sets forth certain information with respect to (i) the
only persons who, to the best knowledge of the Liquidating Trust, are the
beneficial owners of more than five percent of the outstanding Units of
Beneficial Interest and (ii) the number of Units of Beneficial Interest owned
by each of the Liquidating Trustees, the officers of the Liquidating Trust and
the Liquidating Trustees and officers as a group.

<TABLE>
<CAPTION>
TOTAL NUMBER OF UNITS PERCENT OF
OF BENEFICIAL INTEREST OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIAL INTERESTS
- ------------------------ ---------------------- --------------------
<S> <C> <C>
The Estate of Milton Petrie (1)
919 Third Avenue
New York, N.Y. 10022-3897.......... 28,111,274 53.7%
HBK Investments L.P. (2)
777 Main Street, Suite 2750
Fort Worth, Texas 76102............ 5,211,400 9.5%
T. Rowe Price Associates, Inc. (3)
100 E. Pratt Street
Baltimore, Maryland 21202.......... 4,441,200 8.4%
H. Bartlett Brown.................. -- --
Joseph H. Flom (1)................. -- --
Stephanie R. Joseph................ -- --
Bernard Petrie (1)................. 34,500 *
Laurence A. Tisch (1).............. 1,000 *
Raymond S. Troubh.................. -- --
All managers and Liquidating
Trustees as a group
(6 individuals, including those
named above)...................... 35,500 *
</TABLE>
- --------
* Less than one percent of the outstanding Units of Beneficial Interest.
(1) Based on information contained in the Statement on Schedule 13D filed by
the Estate of Milton Petrie (the "Estate") with the Securities and
Exchange Commission on January 31, 1996. Mr. Flom, Hilda K. Gerstein,
Jerome A. Manning, Mr. Bernard Petrie, Carroll Petrie, Dorothy Stern Ross,
Mr. Tisch and David Zack have been appointed executors of the Estate. The
executors of the Estate share equally the power to dispose of, and to
vote, the Units of Beneficial Interest held by the Estate. Mr. Flom, Mr.
Bernard Petrie and Mr. Tisch disclaim beneficial ownership of the Units of
Beneficial Interest held by the Estate.
(2) Based on information contained in the Statement on Schedule 13D filed by
HBK Investments L.P. with the Securities and Exchange Commission on
February 25, 1997.
(3) Based on information contained in the Statement on Schedule 13G filed by
T. Rowe Price Associates, Inc. ("Price Associates") with the Securities
and Exchange Commission on February 14, 1997. These securities are owned
by various individual and institutional investors which Price Associates
serves as investment adviser with power to direct investments and sole
power to vote the securities. For purposes of the reporting requirements
of the Securities Exchange Act of 1934, as amended, Price Associates is
deemed to be a beneficial owner of such securities. Price Associates has,
however, expressly disclaimed that it is, in fact, the beneficial owner of
such securities.

17
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Skadden, Arps, Slate, Meagher & Flom LLP serves as counsel to the
Liquidating Trust and the Estate of Milton Petrie and has provided services to
each. Joseph H. Flom, a Liquidating Trustee and an executor of the Estate of
Milton Petrie, is a partner in Skadden, Arps, Slate, Meagher & Flom LLP.

During the period ended December 31, 1996, the Liquidating Trust secured
directors' and officers' liability insurance from Continental Casualty
Company, an affiliate of CNA Financial Corp. Laurence A. Tisch, a Liquidating
Trustee and an executor of the Estate of Milton Petrie, is Chairman of the
Board of CNA Financial Corp.

Messrs. Flom, Petrie and Tisch are executors of the Estate of Milton Petrie,
which holds approximately 53.7% of the Liquidating Trust's outstanding Units
of Beneficial Interest. Mr. Petrie is also a beneficiary of the Estate of
Milton Petrie.

18
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1),(2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.

See Index to Financial Statements and Financial Statement Schedule set forth
herein at page F-1.

(a)(3) LIST OF EXHIBITS.
<TABLE>
<C> <S>
2.1 Plan of Liquidation and Dissolution of Petrie (incorporated herein by reference to
Exhibit 2.2 to the Liquidating Trust's Registration Statement on Form 8-B, filed with
the Securities and Exchange Commission on December 19, 1995).
3.1 Agreement and Declaration of Trust, dated as of December 6, 1995, by and between
Petrie and Joseph H. Flom, Stephanie R. Joseph, Bernard Petrie, Laurence A. Tisch and
Raymond S. Troubh, as trustees (incorporated herein by reference to Exhibit 3.1 to
the Liquidating Trust's Registration Statement on Form 8-B, filed with the Securities
and Exchange Commission on December 19, 1995).
10.1 Acquisition Agreement, dated as of April 20, 1994, between Petrie and Toys "R" Us
(incorporated herein by reference to Annex B to Petrie's Proxy Statement, dated as of
November 3, 1994).
10.2 Amendment No. 1 to the Acquisition Agreement, dated as of May 10, 1994, between
Petrie and Toys "R" Us (incorporated by reference to Annex B to Petrie's Proxy
Statement, dated as of November 3, 1994).
10.3 Stock Purchase Agreement, dated as of August 23, 1994, between Petrie and WP
Investors (incorporated herein by reference to Annex A to Petrie's Proxy Statement,
dated as of November 3, 1994).
10.4 Amendment No. 1 to the Stock Purchase Agreement, dated as of December 9, 1994, among
WP Investors, PS Stores and Petrie (incorporated herein by reference to Annex A to
Petrie's Proxy Statement, dated as of November 3, 1994).
10.5 Assignment and Assumption Agreement, dated as of December 9, 1994, between Petrie and
Petrie Retail (agreements of a substantially similar nature were entered into between
Petrie and the following affiliates of Petrie Retail on or about December 9,1994:
Franklin 203 Corporation, G&G Shops of North Carolina, Inc., Hartfield Stores, Inc.,
Whitney Stores, Inc, Marianne Clearwater Corporation, Davids Woodbridge, Inc. and
Jean Nicole, Inc.) (incorporated herein by reference to Exhibit 10.5 to the
Liquidating Trust's Annual Report on Form 10-K for the period ended January 22,
1996).
10.6 Cross-Indemnification and Procedure Agreement, dated as of December 9, 1994, between
PS Stores and Petrie (incorporated herein by reference to Exhibit 10.5 to Petrie's
Annual Report on Form 10-K for the fiscal year ended January 28, 1995).
10.7 Buyer Indemnification Agreement, dated as of December 9, 1994, among Toys "R" Us,
Petrie, PS Stores, Petrie Retail and all subsidiaries of PS Stores (incorporated
herein by reference to Exhibit 10.6 to Petrie's Annual Report on Form 10-K for the
fiscal year ended January 28, 1995).
10.8 Seller Indemnification Agreement, dated as of December 9, 1994, among Toys "R" Us,
Petrie, PS Stores, Petrie Retail and all subsidiaries of PS Stores (incorporated
herein by reference to Exhibit 10.7 to Petrie's Annual Report on Form 10-K for the
fiscal year ended January 28, 1995).
10.9 Side Letter Agreement, dated as of January 24, 1995, between Petrie and Toys "R" Us
(incorporated herein by reference to Exhibit 10.3 to Petrie's Current Report on Form
8-K, dated as of January 24, 1995).
</TABLE>

19
<PAGE>

<TABLE>
<S> <C>
10.10 Escrow Agreement, dated as of January 24, 1995, between Petrie and Custodial Trust
Company (incorporated herein by reference to Exhibit 10.1 to Petrie's Current Report
on Form 8-K, dated as of January 24, 1995).
10.11 Amended and Restated Cash Collateral Agreement, dated as of December 9, 1994 as
amended as of January 24, 1995 and as of December 19, 1995, among Petrie, Custodial
Trust Company as Collateral Agent, and PS Stores (incorporated herein by reference to
Exhibit 10.1 to Petrie's Current Report on Form 8-K, dated as of December 26, 1995).
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K

None.

(c) See Item 14(a)(3) above. The Liquidating Trust will furnish to any
holder of Units of Beneficial Interest, upon written request, any exhibit
listed in response to Item 14(a)(3) upon payment by such holder of the
Liquidating Trust's reasonable expenses in furnishing any such exhibit.

(d) See Item 14(a)(2) above.

20
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

PETRIE STORES LIQUIDATING TRUST

/s/ Stephanie R. Joseph
By _________________________________
STEPHANIE R. JOSEPH
MANAGER AND CHIEF EXECUTIVE
OFFICER

Dated: March 26, 1997

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.

Dated: March 26, 1997

/s/ H. Bartlett Brown
By _________________________________
H. BARTLETT BROWN
ASSISTANT MANAGER, CHIEF FINANCIAL
OFFICER
AND PRINCIPAL ACCOUNTING OFFICER

/s/ Stephanie R. Joseph
By _________________________________
STEPHANIE R. JOSEPH
MANAGER, CHIEF EXECUTIVE OFFICER
AND TRUSTEE

/s/ Joseph H. Flom
By _________________________________
JOSEPH H. FLOM
TRUSTEE

/s/ Bernard Petrie
By _________________________________
BERNARD PETRIE
TRUSTEE

/s/ Laurence A. Tisch
By _________________________________
LAURENCE A. TISCH
TRUSTEE

/s/ Raymond S. Troubh
By _________________________________
RAYMOND S. TROUBH
TRUSTEE

<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors.......................................... F-2
<CAPTION>
Statements of Net Assets in Liquidation--December 31, 1996 and January
22, 1996................................................................ F-3
<S> <C>
Statements of Changes in Net Assets in Liquidation--For the periods
ended December 31, 1996 and January 22, 1996........................... F-4
Consolidated Statement of Operations--For the year ended January 28,
1995.................................................................... F-5
Consolidated Statement of Shareholders' Equity--For the year ended
January 28, 1995........................................................ F-6
Consolidated Statement of Cash Flows--For the year ended January 28,
1995.................................................................... F-7
Notes to Financial Statements........................................... F-8

FINANCIAL STATEMENT SCHEDULE

II. Valuation and Qualifying Accounts................................... S-1
</TABLE>

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Trustees and Holders of Units of Beneficial Interest
Petrie Stores Liquidating Trust

We have audited the accompanying statements of net assets in liquidation of
the Petrie Stores Liquidating Trust (successor to Petrie Stores Corporation
and its former subsidiaries) as of December 31, 1996 and January 22, 1996, the
related statements of changes in net assets in liquidation for the periods
ended December 31, 1996 and January 22, 1996, and the consolidated statements
of operations, shareholders' equity and cash flows for the fiscal year ended
January 28, 1995. Our audit for the fiscal year ended January 28, 1995 also
included the financial statement schedule listed at Item 14(a)(2). These
financial statements and schedule are the responsibility of the management of
the Petrie Stores Liquidating Trust. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As described in Note 1 to the financial statements, the shareholders of
Petrie Stores Corporation approved a plan of liquidation on January 24, 1995,
and Petrie Stores Corporation commenced its liquidation shortly thereafter. As
a result, Petrie Stores Corporation changed its basis of accounting at, and
for periods subsequent to, January 28, 1995 from the going-concern basis to a
liquidation basis.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets in liquidation of the Petrie Stores
Liquidating Trust (successor to Petrie Stores Corporation and its former
subsidiaries) as of December 31, 1996 and January 22, 1996, the changes in net
assets in liquidation for the periods ended December 31, 1996 and January 22,
1996, applied on the basis described in the preceding paragraph, and the
consolidated results of operations and cash flows of Petrie Stores Corporation
for the year ended January 28, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule for the year ended January 28, 1995, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

ERNST & YOUNG LLP

MetroPark, New Jersey
March 14, 1997

F-2
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

STATEMENTS OF NET ASSETS IN LIQUIDATION (NOTES 1, 3 AND 5)

(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 22,
1996 1996
ASSETS ------------ -----------
<S> <C> <C>
Cash and cash equivalents............................ $ 229 $ 24,093
Cash and cash equivalents held in escrow............. 67,470
Short-term investments............................... 56,943 39,554
Short-term investments held in escrow................ 67,500
Investments in common stock (including 3,493,450
shares of Toys "R" Us common stock held in escrow).. 151,035 106,799
-------- --------
Total assets....................................... 275,707 237,916
<CAPTION>
LIABILITIES
<S> <C> <C>
Accrued expenses and other liabilities............... $ 52,378 $ 35,322
Commitments and contingencies........................
-------- --------
Net assets in liquidation............................ $223,329 $202,594
======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (NOTES 1, 3 AND 5)

(IN THOUSANDS, EXCEPT PER UNIT AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, 1996 JANUARY 29, 1995
TO TO
DECEMBER 31, 1996 JANUARY 22, 1996
----------------- ----------------
<S> <C> <C>
Net assets in liquidation at beginning of
period..................................... $202,594 $ 836,470
-------- ---------
Investment income........................... 6,467 1,793
Corporate overhead.......................... (30,304) (25,321)
Net realized and unrealized gain (loss) on
investments................................ 44,572 (244,583)
-------- ---------
Income (loss) before income tax credit...... 20,735 (268,111)
Income tax credit........................... -- 113,834
-------- ---------
Net income (loss) for the period............ 20,735 (154,277)
Distributions of 31,410,144 shares of Toys
"R" Us common stock, net of related
deferred taxes............................. -- (479,599)
-------- ---------
Increase (decrease) in net assets........... 20,735 (633,876)
-------- ---------
Net assets in liquidation at end of period.. $223,329 $ 202,594
======== =========
Net income (loss) per unit or share......... $ .40 $ (2.95)
======== =========
Weighted average number of units or shares.. 52,350 52,350
======== =========
</TABLE>

See accompanying notes.

F-4
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

CONSOLIDATED STATEMENT OF OPERATIONS (NOTE 2)

FOR THE YEAR ENDED JANUARY 28, 1995

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<S> <C>
Corporate overhead.................................................. $ (430)
Interest expense.................................................... (8,605)
Investment income................................................... 1,293
---------
Loss from continuing operations before income tax benefit........... (7,742)
Income tax benefit.................................................. 1,114
---------
Loss from continuing operations..................................... (6,628)
Loss from discontinued operations, net of income tax benefit........ (410,027)
---------
Net loss............................................................ $(416,655)
=========
Loss per share:
Loss from continuing operations..................................... $ (.14)
Loss from discontinued operations................................... (8.61)
---------
$ (8.75)
=========
Weighted average number of shares................................... 47,600
=========
</TABLE>

See accompanying notes.

F-5
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NOTE 2)

(IN THOUSANDS)

<TABLE>
<CAPTION>
TREASURY STOCK
--------------
UNREALIZED
COMMON GAIN ON
STOCK ADDITIONAL INVESTMENT TOTAL
($1 PAR PAID-IN RETAINED IN COMMON SHAREHOLDERS'
VALUE) CAPITAL EARNINGS STOCK, NET SHARES AMOUNT EQUITY
------- ---------- -------- ---------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30,
1994................... $46,770 $ 93,973 $462,079 $761,777 1,669 $ (36) $1,364,563
Net loss for the year. (416,655) (416,655)
Cash dividends on com-
mon
stock--$.15 per
share................ (7,021) (7,021)
Shares issued--conver-
sion of
debentures........... 5,564 121,119 126,683
Common stock issued as
compensation to offi-
cers................. 18 432 450
Unrealized loss on in-
vestments in
common stock, net.... (231,550) (231,550)
------- -------- -------- -------- ------- ------ ----------
Balance at January 28,
1995................... $52,352 $215,524 $ 38,403 $530,227 1,669 $ (36) $ 836,470
======= ======== ======== ======== ======= ====== ==========
</TABLE>

See accompanying notes.

F-6
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

CONSOLIDATED STATEMENT OF CASH FLOWS (NOTE 2)

FOR THE YEAR ENDED JANUARY 28, 1995

(IN THOUSANDS)

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................ $(416,655)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on disposal of discontinued operations...................... 303,660
Gain on sale of investments in common stock...................... (336)
Depreciation and amortization of property and equipment.......... 45,905
Other amortization............................................... 2,506
Provision for doubtful accounts.................................. 5,450
Fair market value of stock issued as compensation................ 450
Changes in assets and liabilities:
Accounts receivable............................................ (9,132)
Merchandise inventories........................................ (32,080)
Prepaid expenses............................................... (3,676)
Other assets................................................... 25
Accounts payable............................................... 10,731
Accrued expenses and other liabilities......................... 25,360
Income taxes................................................... (2,030)
Other long-term liabilities.................................... (480)
---------
Net cash used in operating activities............................... (70,302)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of retail operations, net of cash sold of
$37,950............................................................ 139,550
Additions to property and equipment................................. (42,172)
Sale of investments in common stock................................. 36,076
Purchase of investments in common stock............................. (165,000)
---------
Net cash used in investing activities............................... (31,546)
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings........................................... 83,277
Cash dividends...................................................... (7,021)
Redemption of principal amount of convertible subordinated deben-
tures.............................................................. (1,844)
---------
Net cash provided by financing activities........................... 74,412
---------
Net decrease in cash and cash equivalents........................... (27,436)
Cash and cash equivalents, beginning of year........................ 39,290
---------
Cash and cash equivalents, end of year.............................. $ 11,854
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................ $ 6,475
Income taxes........................................................ 1,573
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
39,853,403 shares of Toys "R" Us common stock held by Petrie were exchanged
for 36,526,704 shares of Toys "R" Us common stock held by Toys "R" Us in its
treasury.
$123,108,000 principal amount of convertible subordinated debentures were
exchanged for 5,563,829 shares of Petrie common stock during the fiscal year
ended January 28, 1995. At the date of conversion, accrued interest of
$4,731,000 payable on the convertible subordinated debentures was contributed
to additional paid-in-capital.

See accompanying notes.

F-7
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Petrie Stores Liquidating Trust (the "Liquidating Trust") is the
successor to Petrie Stores Corporation ("Petrie"). Prior to December 9, 1994,
Petrie operated a chain of retail stores that specialized in women's apparel
and were located throughout the United States (including Puerto Rico and the
U.S. Virgin Islands). At Petrie's Annual Meeting, held on December 6, 1994,
Petrie's shareholders approved the sale of Petrie's retail operations (the
"Sale") (Note 2). At Petrie's Reconvened Annual Meeting, held on January 24,
1995, Petrie's shareholders approved (i) an exchange of shares of Toys "R" Us,
Inc. ("Toys 'R' Us") common stock ("Toys Common Stock") with Toys "R" Us (Note
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 5), 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. Accordingly, the Liquidating Trustees have determined not to
approve any distributions of Toys Common Stock to beneficiaries of the
Liquidating Trust until the status of such contingent liabilities is
clarified.

Since the Succession Date, Petrie has been preparing for its dissolution. On
November 6, 1996, Petrie filed Articles of Dissolution with the Secretary of
State of the State of New York. Effective February 5, 1997, Petrie was
dissolved.

Beginning with the period ended December 31, 1996, the Liquidating Trust has
adopted the calendar year as its fiscal year. A liquidation basis of
accounting was implemented as of January 28, 1995. The statements of net
assets in liquidation at December 31, 1996 and January 22, 1996, do not
distinguish between current and long-term balances as would be reflected if
such statements had been prepared on a going-concern basis. The accompanying
consolidated statements of operations, cash flows and shareholders' equity for
the year ended January 28, 1995 are presented on a going-concern basis.

Principles of Consolidation

In December 1994, as part of the reorganization of Petrie's retail
operations in connection with their sale (Note 2), all of Petrie's former
subsidiaries with retail operations were transferred to Petrie Retail, Inc.,
then a wholly-owned subsidiary of Petrie ("Petrie Retail"), and all of the
shares of Toys Common Stock held by Petrie's former subsidiaries were
transferred to Petrie. Thereafter, Petrie Retail was sold to PS Stores
Acquisition Corp. (hereafter, including its subsidiaries and affiliates unless
the context requires otherwise, "PS Stores").

The consolidated financial statements for the years ended January 28, 1995,
include the accounts of Petrie and its former subsidiaries, all of which were
wholly-owned. All significant intercompany transactions were eliminated in
consolidation.

F-8
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents

Cash equivalents consist of highly liquid investments of less than 90 days'
maturity from the date of purchase. These investments are carried at cost plus
accrued interest, which approximates fair market value.

Short-Term Investments

Short-term investments consist of U.S. Treasury obligations which mature
within one year. Short-term investments are carried at fair market value and
unrealized gains or losses thereon are recognized in the statement of changes
in net assets in liquidation.

Income Taxes

The Liquidating Trust is a complete pass-through entity for federal income
tax purposes and, accordingly, is not itself subject to federal income tax.
Instead, for federal income tax purposes, each Petrie shareholder (i) is
deemed to have received on the Succession Date, and therefore own, a pro rata
share of the assets transferred by Petrie to the Liquidating Trust, subject to
a pro rata share of Petrie's liabilities assumed by the Liquidating Trust, and
(ii) is subject to the same federal income tax consequences with respect to
the receipt, ownership or disposition of such assets as if such shareholder
had directly received, owned or disposed of such assets, subject to such
liabilities.

Earnings Per Share or Units

Primary earnings per share and earnings per unit have been computed based on
the weighted average number of shares or units outstanding. Shares issuable
upon the exercise of stock options were not included in the primary earnings
per share computation for the year ended January 28, 1995, because the effect
of such would be anti-dilutive.

Concentration of Credit Risk

Certain financial instruments potentially subject the Liquidating Trust to
concentrations of credit risk. These financial instruments consist primarily
of temporary cash investments and U.S. Treasury obligations. The Liquidating
Trust places its temporary cash investments with high credit quality financial
institutions to limit its credit exposure.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Reclassification

Certain prior period amounts have been reclassified to conform with the
current year presentation.

2. DISCONTINUED OPERATIONS

On December 9, 1994, pursuant to the terms of a Stock Purchase Agreement, as
amended (the "Retail Operations Stock Purchase Agreement"), Petrie completed
the sale of the stock of Petrie Retail. The stock of Petrie Retail was sold to
PS Stores for $190 million and the assumption by PS Stores of various
liabilities, including but not limited to, all of the leases to which Petrie
or any of its subsidiaries was a party (Note 5). Taking into effect the
approximately $12.5 million in expenses incurred by Petrie in connection with
such sale, the net cash purchase price was approximately $177.5 million. The
results of the retail operations are accounted for as discontinued operations
in the accompanying consolidated statement of operations for the year ended
January 28, 1995.

F-9
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Components of loss from discontinued operations for the year ended January
28, 1995 are as follows (in thousands):

<TABLE>
<S> <C>
Net sales..................................................... $1,024,865
==========
Loss from discontinued operations before income tax benefit... $ (58,290)
Income tax benefit............................................ 6,631
----------
Loss from discontinued operations............................. (51,659)
Loss on disposal.............................................. (358,368)
----------
$ (410,027)
==========
</TABLE>

The loss on disposal represented a provision for estimated operating losses
through the disposal date and the excess of the net assets of the retail
operations over the net cash proceeds received.

3. INVESTMENTS IN COMMON STOCK

At December 31, 1996 and January 22, the Liquidating Trust's investments in
common stock consist of 5,055,576 shares, which are carried at market value,
of Toys "R" Us, which operates a chain of specialty retail stores principally
engaged in the sale of toys and children's clothing in the United States and
abroad.

On January 24, 1995, pursuant to the terms of an Acquisition Agreement dated
as of April 20, 1994, and amended as of May 10, 1994 (the "Toys Acquisition
Agreement"), between Petrie and Toys "R" Us, Petrie exchanged (the "Exchange")
with Toys "R" Us all of its shares of Toys "R" Us common stock (39,853,403
shares), plus $165 million in cash, for 42,076,420 shares of Toys "R" Us
common stock (approximately 15.0% of the outstanding Toys "R" Us common stock
at January 28, 1995). In accordance with the Toys Acquisition Agreement, the
number of shares of Toys "R" Us common stock received by Petrie in the
Exchange was approximately 3.3 million shares less than the sum of the number
of shares transferred by Petrie plus the number of shares purchased with the
$165 million cash payment. The market value of these 3.3 million shares
retained by Toys "R" Us was approximately $100 million 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 placed into the Escrow Account
pursuant to the Escrow Agreement secure the payment of certain obligations of
the Liquidating Trust, as successor to Petrie, to Toys "R" Us arising (i)
under (x) the Toys Acquisition Agreement, (y) the Seller Indemnification
Agreement, dated as of December 9, 1994, among Petrie, Toys "R" Us, Petrie
Retail, PS Stores, and certain subsidiaries of PS Stores and (z) the Retail
Operations Stock Purchase Agreement, 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, until such time as a hedge or similar arrangement is in
place, Petrie will retain, either individually or in combination, (i) cash in
an amount of at least $177.5 million (the "Reserved Amount") or (ii) shares of
Toys Common Stock having a market value (using the per share price on January
20, 1995) of at least twice the Reserved Amount, to secure the payment of
Petrie's contingent liabilities (Note 5). 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.

F-10
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 short-term investments into
the Collateral Account. The cash equivalents placed 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 5). In connection with
the settlement of a dispute with the Internal Revenue Service (the "IRS"), as
more fully explained below, PS Stores has agreed, and Petrie Retail has agreed
subject to approval by the U.S. Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court"), to request the Collateral Agent to transfer
$30 million in short-term investments from the Collateral Account to an
account of the Liquidating Trust.

In accordance with the Plan of Liquidation, Petrie made an initial
liquidating distribution on March 24, 1995 of 26,173,718 shares of Toys Common
Stock (market value on March 24, 1995, of approximately $644.5 million).
Petrie subsequently distributed 1,391 shares of Toys Common Stock to certain
former shareholders of Winkelman Stores Incorporated (a former subsidiary of
Petrie) in respect of their interests in the March 24, 1995 distribution. On
August 15, 1995, Petrie made a second liquidating distribution of 5,235,035
shares of Toys Common Stock (market value on August 15, 1995 of approximately
$139.4 million).

At various times during the period ended January 22, 1996, Petrie sold an
aggregate of 5,610,700 shares of Toys Common Stock for approximately $126.9
million in proceeds. Between January 23, 1997 and February 5, 1997, the
Liquidating Trust sold an aggregate of 1,000,000 shares of Toys Common Stock
for approximately $25.5 million in proceeds. All such sales were made in order
to reduce the risk associated with holding equity securities of one issuer.

In November 1994, Petrie received a favorable private letter ruling from the
IRS to the effect that the Exchange and the subsequent distribution of Toys
Common Stock to Petrie's shareholders would qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended. The ruling
further provided that Petrie would not recognize any gain on these
transactions.

4. INCOME TAXES

At the Succession Date, and as a result of the Succession, Petrie ceased to
be a taxable entity. As a result, during the period ended January 22, 1996,
the remaining deferred income tax liability was reversed. The income tax
credit of $113,834,000 for the period ended January 22, 1996, results from
such reversal. Subsequent to January 22, 1996, the Liquidating Trust, as
successor to Petrie, is a complete pass-through entity for federal income
taxes and, accordingly, is not itself subject to federal income tax.

A reconciliation of the benefit for income taxes and the amount computed by
applying the statutory federal income tax rate to the loss from continuing
operations before income taxes for the year ended January 28, 1995, is as
follows (in thousands):

<TABLE>
<S> <C>
Tax benefit computed at federal statutory rate.................... $2,632
Unpaid interest accrued on Debentures............................. 1,518
------
Total........................................................... $1,114
======
</TABLE>

F-11
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES

As successor to Petrie, the Liquidating Trust has certain contingent
liabilities with respect to existing or potential claims, lawsuits and other
proceedings, which primarily relate to (i) guarantees of certain retail store
leases, expiring at various times through 2011 to which Petrie Retail or an
affiliate thereof is a party, and certain other liabilities that were assumed
by Petrie Retail (but as to which Petrie's liability has not been released) in
connection with the Sale (collectively, the "Assumed Obligations") to the
extent that Petrie Retail fails to perform; and (ii) Petrie's agreement with
Petrie Retail to indemnify it for certain liabilities relating to Petrie
Retail's withdrawal from the United Auto Workers District 65 Security Plan
Pension Fund (the "Multiemployer Plan"). The Liquidating Trust accrues
liabilities when it is probable that future costs will be incurred and when
such costs can be reasonably estimated. Such accruals are based on
developments to date, the Liquidating Trust's estimates of the outcome of
these matters and its experience (including that of its predecessor, Petrie)
in contesting, litigating and settling matters. At December 31, 1996 and
January 22, 1996, the Liquidating Trust, as successor to Petrie, had accrued
approximately $38,000,000 and $33,000,000, 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.

The Liquidating Trust intends to file a claim in the Bankruptcy Court
against Petrie Retail in respect of any such payments. The Liquidating Trust
is unable to predict the timing or probability of the collection of these
claims against Petrie Retail. Additionally, tax refunds aggregating
$7,535,192, to which Petrie Retail claims it is entitled, are being held in an
escrow account. The Liquidating Trust will assert a setoff right against such
escrowed funds as a result of payments made by the Liquidating Trust in
respect of obligations of Petrie Retail. No amounts have been accrued as
receivables for potential reimbursement or recoveries from Petrie Retail. On
February 28, 1997, an adversary complaint was filed by Petrie Retail in the
Bankruptcy Court alleging that Petrie and the Liquidating Trust are improperly
withholding such tax refunds from Petrie Retail. Petrie Retail is seeking,
among other things, (i) a declaration that those funds are the property of
Petrie Retail, (ii) a turnover of those funds plus accrued interest to Petrie
Retail, (iii) a mandatory injunction requiring the release of those funds to
Petrie Retail, (iv) the imposition of a constructive trust on those funds, (v)
a finding of contempt against Petrie and the Liquidating Trust for purportedly
violating the automatic stay provisions of section 362(a)(3), (6) and (7) of
the United States Bankruptcy Code, and (vi) an order requiring defendants to
pay attorneys' fees, costs and disbursements incurred by Petrie Retail in
connection with this action.

Since filing its petition for bankruptcy protection, Petrie Retail has
closed approximately 655 of the roughly 1600 stores it operated prior to
filing the petition. According to Petrie Retail's filings with the Bankruptcy
Court, of the 655 closed stores, approximately 455 relate to rejected leases
and the remainder of the leases generally have expired or were terminated by
mutual landlord and tenant consent. Petrie had guaranteed approximately 75 of
the rejected leases. After taking into effect settlements and releases
obtained from landlords, the Liquidating Trust, as successor to Petrie,
remains a guarantor of 43 of the rejected leases and its aggregate guarantee
liability with respect to these leases, without giving effect to any present
value discount and assuming the landlord in each case is unable to mitigate
its damages, is approximately $20 million, which amount is included in the
Liquidating Trust's accrued expenses and other liabilities at December 31,
1996.

F-12
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

On January 16, 1997, Petrie Retail obtained approval from the Bankruptcy
Court to conduct going-out-of-business sales at an aggregate of approximately
110 stores. While conducting its going-out-of-business sales at these
locations, Petrie Retail is attempting to assign, with Bankruptcy Court
approval, the subject leases to third party retailers. According to Petrie
Retail's filings with the Bankruptcy Court, during 1995 and 1996, of the over
500 stores at which Petrie Retail conducted going-out-of-business sales,
Petrie Retail was able to assign approximately 20 leases to third party
retailers. Petrie Retail has already rejected approximately 35 of these leases
(which is included in the number of rejected leases in the preceding
paragraph) and if Petrie Retail is not able to locate a suitable assignee for
the remaining leases, Petrie Retail will likely reject such remaining leases
in the near future. The Liquidating Trust, as successor to Petrie, is a
guarantor of 32 of the leases relating to the approximately 110 stores where
Petrie Retail is conducting going-out-of-business sales. If Petrie Retail were
to close all 32 of the stores under such leases, the Liquidating Trust's
aggregate guarantee liability with respect to such 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 $14 million, which
amount is included in the Liquidating Trust's accrued expenses and other
liabilities at December 31, 1996.

No assurance can be given as to the number of additional stores to be closed
by Petrie Retail with respect to which the Liquidating Trust has guarantee
liability. If Petrie Retail were to close every store for which the
Liquidating Trust, as successor to Petrie, believes it has liability as a
lease guarantor (giving effect to all the lease guarantee releases executed by
landlords) and every store for which the Liquidating Trust disputes its
guarantor liability (as more fully discussed in the following paragraph),
assuming that no mitigation or defense were successful, the Liquidating
Trust's theoretical exposure relating to such leases, without giving effect to
any present value discount, would be approximately $100 million, with
approximately $12 million coming due in the remainder of the year ending
December 31, 1997, approximately $16 million due in 1998, approximately $14
million due in 1999, and approximately $58 million due thereafter. Such
exposure includes the $20 million in aggregate liability relating to the
rejected leases and the $14 million in aggregate liability relating to leases
underlying stores which are the subject of the going-out-of-business sales
described above.

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 giving effect to rental payments
made by Petrie Retail since the complaints were filed and assuming that all of
the 135 stores which are the subject of these landlords' claims are closed and
that the landlord in each case is unable to mitigate its damages, the
Liquidating Trust estimates that the alleged guarantor liability currently
represents approximately $67 million in lease payments. The Liquidating Trust
believes it has substantial legal defenses to these landlords' claims and is
vigorously contesting such claims. While a decision by a court in favor of
these 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.

F-13
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.

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 January 27, 1997, the Liquidating Trust entered into a settlement
agreement with the estate of the third executive. Pursuant to such settlement
agreement, the Liquidating Trust agreed to pay the former executive's estate
substantially all the amounts due under such executive's agreement with
Petrie. The total cost of such settlement to the Liquidating Trust was
approximately $345,000 (which was included in the Liquidating Trust's accrued
expenses and other liabilities, at December 31, 1996).

Effective January 31, 1995, Petrie Retail withdrew from the Multiemployer
Plan. Due to underfunding of the Multiemployer Plan, Petrie Retail and its
affiliates have incurred withdrawal liability under the Employee Retirement
Income Security Act of 1974, as amended. By letter dated May 30, 1996 (the
"Assessment Letter"), the Multiemployer Plan assessed withdrawal liability
against Petrie Retail in the amount of approximately $9.4 million plus
interest, to be paid in quarterly installments of approximately $317,000
commencing August 1, 1996 through and including August 1, 2006, with a final
payment of approximately $18,000 due on November 1, 2006. In addition, the
Multiemployer Plan assessed liability against Petrie Retail of approximately
$2 million attributable to the Multiemployer Plan's failure to meet certain
Internal Revenue Code minimum funding standards, which amount was payable on
August 1, 1996. To the knowledge of the Liquidating Trust, as of February 28,
1997, Petrie Retail has not yet paid any amounts for its liabilities in
connection with the Multiemployer Plan. In the event of a mass withdrawal by
contributing employers from the Multiemployer Plan, the withdrawal liability
allocated to Petrie Retail and its affiliates may be higher. Pursuant to the
Retail Operations Stock Purchase Agreement, Petrie Retail and its affiliates
are responsible for the first $10 million in withdrawal and related
liabilities, with the next $50 million of such liabilities allocated 75
percent to the Liquidating Trust, as successor to Petrie, and 25 percent to
Petrie Retail and its affiliates. It is unclear what effect, if any, Petrie
Retail's bankruptcy filing may have upon the timing and amount of any payments
the Liquidating Trust may be required to make under the agreement with respect
to the Multiemployer Plan, but in no event will the Liquidating Trust's
maximum contractual liability be increased as a result of Petrie Retail's
bankruptcy filing. On August 26, 1996, Petrie Retail and the Multiemployer
Plan entered into a Standstill Agreement, pursuant to which the parties
agreed, among other things, to temporarily toll any statutory time period for
the taking of any

F-14
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
action which is or may be triggered by the Assessment Letter, without
precluding the Multiemployer Plan from filing or pursuing its claims against
Petrie Retail (and all business organizations under common control with Petrie
Retail) as part of the claims process being conducted in the Bankruptcy Court
in connection with Petrie Retail's bankruptcy filing.

On January 12, 1996, Petrie received a notice of final determination from
the New Jersey Division of Taxation of a liability for New Jersey corporate
income tax in the aggregate amount (including interest) of approximately $3.1
million. The liability, which related to Petrie's 1987, 1989, 1990, 1991, 1992
and 1993 tax years, was assumed by Petrie Retail in connection with the Sale.
Additionally, the Liquidating Trust, as successor to Petrie, was assessed
approximately $270,000 (excluding interest) in sales and use taxes for the
years 1989 through 1995. In May 1996, the Liquidating Trust paid the New
Jersey Division of Taxation approximately $1.2 million in full settlement of
the liability for New Jersey corporate income tax and sales and use taxes for
the respective periods described above in connection with New Jersey's tax
amnesty program, which provided for interest to be forgiven and future
penalties to be avoided upon receipt of payment for taxes owed.

In connection with an audit conducted by the IRS, the agent examining
Petrie's federal tax return for its fiscal year ended January 28, 1989 raised
an issue regarding the manner pursuant to which Petrie computed the basis of
its Toys Common Stock transferred in connection with the exchange of certain
of its exchangeable subordinated debentures. The examining agent had proposed
an adjustment to Petrie's taxable income for its 1989 fiscal year which would
have resulted in an additional federal tax liability, including interest, of
approximately $53 million. On March 14, 1997, a settlement was entered into
with the IRS pursuant to which the IRS and the Liquidating Trust agreed to an
adjustment to Petrie's taxable income for its 1989 fiscal year which will
result in the Liquidating Trust's incurring additional federal tax liability,
including interest, of approximately $11.3 million. Such liability was
included in the Liquidating Trust's accrued expenses and other liabilities at
December 31, 1996. In connection with such settlement, PS Stores has agreed,
and Petrie Retail has agreed subject to approval by the Bankruptcy Court, to
request the Collateral Agent to transfer $30 million in short-term investments
from the Collateral Account to an account of the Liquidating Trust.

The Liquidating Trust believes adequate accruals have been established in
the accompanying financial statements to provide for any losses that may be
incurred with respect to the aforementioned contingencies.

In addition to the contingent liabilities discussed above, the Liquidating
Trust or Petrie is a defendant in various legal proceedings relating to Petrie
Retail's failure to perform certain retail store leases and other liabilities
assumed by Petrie Retail (but as to which Petrie's liability has not been
released) in connection with Petrie's sale of the retail operations. While the
Liquidating Trust cannot predict with any certainty what its liability will be
from the disposition of these legal proceedings, based on developments to
date, the Liquidating Trust's estimate of the likely outcome of these matters
and its experience (including that of its predecessor, Petrie) in contesting,
litigating and settling matters, the Liquidating Trust believes that it has
made adequate accruals for the likely outcome of such proceedings.

F-15
<PAGE>

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

6. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for the periods ended December 31, 1996
and January 22, 1996 are as follows:

Period ended December 31, 1996:

<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FIRST SECOND THIRD FOURTH
--------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss)........... $ 29,947(1) $(7,471)(2) $ 4,066(3) $(5,807)(4)
========= ======= ======== =======
Net income (loss) per unit.. $ .57 $ (.14) $ .08 $ (.11)
========= ======= ======== =======
Period ended January 22, 1996:

<CAPTION>
QUARTER
----------------------------------------------
FIRST SECOND THIRD FOURTH
--------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss)........... $(130,265)(5) $28,750(6) $(73,471)(7) $20,709(8)
========= ======= ======== =======
Net income (loss) per share. $ (2.49) $ .55 $ (1.40) $ .39
========= ======= ======== =======
</TABLE>
- --------
(1) The first quarter of the period ended December 31, 1996 includes an
unrealized gain related to the increase in the market value of the Toys
Common Stock of $29,702,000.
(2) The second quarter of the period ended December 31, 1996 includes an
unrealized gain related to an increase in the market value of the Toys
Common Stock of $7,583,000, more than offset by additional accruals of
$15,000,000 for lease guarantees related to store leases with respect to
which Petrie Retail announced plans to conduct going-out-of business
sales.
(3) The third quarter of the period ended December 31, 1996 includes an
unrealized gain related to an increase in the market value of the Toys
Common Stock of $3,160,000.
(4) The fourth quarter at the period ended December 31, 1996 includes an
unrealized gain related to an increase in the market value of the Toys
Common Stock of $3,792,000, offset by additional accruals of $6,000,000
for lease guarantees related to store leases with respect to which Petrie
Retail announced plans to conduct going-out-of-business sales and an
additional $4,000,000 of accruals related to certain assumed obligations
of the Liquidating Trust, as successor to Petrie.
(5) The first quarter of the period ended January 22, 1996 includes an
unrealized loss related to a decline in the market price of the Toys
Common Stock of $214,234,000 offset by a related reduction in the deferred
tax liability of $85,693,000.
(6) The second quarter of the period ended January 22, 1996 includes net
realized and unrealized gains of $51,118,000 with respect to the Toys
Common Stock offset by income tax expenses of $21,707,000.
(7) The third quarter of the period ended January 22, 1996 includes net
realized and unrealized losses on the Toys Common Stock of $78,051,000
offset by a related reduction in the deferred tax liability of
$21,970,000. Additionally, $15,000,000 was accrued for lease guarantees
related to stores closed by Petrie Retail as a result of Petrie Retail's
bankruptcy and $2,000,000 was accrued for certain other contractual
obligations defaulted upon by Petrie Retail with respect to which Petrie
may be deemed to be the primary obligor.
(8) The fourth quarter of the period ended January 22, 1996 includes an income
tax benefit of $27,878,000, net realized and unrealized losses on the Toys
Common Stock of $3,416,000 and an additional accrual of $3,000,000 for
certain contractual obligations defaulted upon by Petrie Retail as a
result of its bankruptcy with respect to which Petrie may be deemed to be
the primary obligor.

F-16
<PAGE>

SCHEDULE II

PETRIE STORES LIQUIDATING TRUST
(SUCCESSOR TO PETRIE STORES CORPORATION)

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEAR ENDED JANUARY 28, 1995

(IN THOUSANDS)

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ---------- ----------- ----------
ADDITIONS
(1)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS* PERIOD
----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Fiscal Year ended January 28,
1995......................... $2,450 $5,450 $7,900 $-0-
</TABLE>
- --------
* Write-offs of specific uncollectible accounts include an adjustment due to
the disposal of the retail operations. Column C (2) not applicable.

S-1

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Liquidating Trust's statement of net assets in liquidation at December 31, 1996
and the Liquidating Trust's statements of changes in net assets in liquidation,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-22-1996
<PERIOD-END> DEC-31-1996
<CASH> 229
<SECURITIES> 275,478
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 275,707
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 275,707
<CURRENT-LIABILITIES> 52,378
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 223,329
<TOTAL-LIABILITY-AND-EQUITY> 275,707
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,735
<EPS-PRIMARY> .40
<EPS-DILUTED> .40

</TABLE>