-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V1RUL2tuJg4ffTOALnksQ7KnJcShvBuOFPydTsX/V0mhysXJ4RbOlvSodtlBn32W WIoS8+WTRC7b3AVpXn2ZwA== 0000891092-99-000206.txt : 19990429 0000891092-99-000206.hdr.sgml : 19990429 ACCESSION NUMBER: 0000891092-99-000206 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOYS R US INC CENTRAL INDEX KEY: 0001005414 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 223260693 STATE OF INCORPORATION: DE FISCAL YEAR END: 0203 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11609 FILM NUMBER: 99603203 BUSINESS ADDRESS: STREET 1: 461 FROM RD CITY: PARAMUS STATE: NJ ZIP: 07652 BUSINESS PHONE: 2012627800 10-K405 1 FORM 10-K405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-K -------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 30, 1999 -------------- Commission file number 1-11609 TOYS "R" US, INC. Incorporated pursuant to the Laws of Delaware Internal Revenue Service - Employer Identification No. 22-3260693 461 From Road, Paramus, New Jersey 07652 (201) 262-7800 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.10 par value New York Stock Exchange Registrant has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. 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 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] At April 12, 1999, the aggregate market value of voting stock held by non-affiliates was $4,722,000,612 based on the 248,526,348 shares of Common Stock which were outstanding at that date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended January 30, 1999 are incorporated by reference into Parts I and II of this Form 10-K. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held June 9, 1999, are incorporated by reference into Part III of this Form 10-K. ================================================================================ INDEX PAGE ---- PART I. Item 1. Business........................................................ 2 Item 2. Properties...................................................... 7 Item 3. Legal Proceedings............................................... 8 Item 4. Submission of Matters to a Vote of Security Holders............. 9 PART II. Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................................... 9 Item 6. Selected Financial Data......................................... 9 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition....................................... 9 Item 7a. Qualitative and Quantitative Disclosures About Market Risk...... 9 Item 8. Financial Statements and Supplementary Data..................... 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 10 PART III. Item 10. Directors and Executive Officers of the Registrant.............. 11 Item 11. Executive Compensation.......................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 14 Item 13. Certain Relationships and Related Transactions.................. 14 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................... 14 1 PART I ITEM 1. BUSINESS Toys "R" Us, Inc. and its subsidiaries (the "Company") is the worldwide authority on kids, families and fun, bringing toys, apparel and baby needs to children and their families. As of January 30, 1999, the Company was engaged in the operation of 1,481 children's specialty retail stores consisting of 1,029 United States locations comprised of 704 toy stores under the name "Toys "R" Us," 212 children's clothing stores under the name "Kids "R" Us," and 113 infant-toddler stores under the name "Babies "R" Us". Internationally, the Company operates 452 toy stores, including franchise and joint venture stores, under the name "Toys "R" Us." The Company is incorporated in the state of Delaware. (a) General Development of the Business Restructuring and other charges During 1998, the Company announced strategic initiatives to reposition its worldwide business. These strategic initiatives consist of, amongst other matters, the reformatting of its toy stores in the United States into the Company's new C-3 format, the closing of nine underperforming toy stores in the United States and the restructuring of the Company's International operations, including the closing and/or disposition of approximately 50 toy stores, primarily in Continental Europe. The Company plans to convert approximately 28 existing toy stores in the United States into Toys "R" Us/Kids "R" Us combo stores in the C-3 format. This step will permit the Company to close approximately 31 nearby Kids "R" Us stores. Additionally, the Company plans to close several distribution centers and administrative offices worldwide and have their functions absorbed within the existing support structure. Finally, the Company recorded certain changes in accounting estimates and provisions for legal settlements. All of the foregoing resulted in charges of $353 million ($279 million net of tax benefits, or $1.05 per share). In 1998, the Company also announced markdowns and other charges of $345 million ($229 net of tax benefits, or $.86 per share). A significant portion of these charges relate to markdowns required to clear excess inventory from stores. These markdowns should enable the Company to achieve its optimal inventory assortment and streamline systems so that it can proceed with the C-3 conversions on an accelerated basis. In addition, the Company recorded markdowns relating to the store closings discussed above and charges to cost of sales relating to inventory system refinements and changes in accounting estimates. The implementation of the strategic initiatives, markdowns and other charges described above are expected to have a significant positive effect on the Company's Economic Value Added or "EVA(R)". EVA(R) is the management system adopted by the Company to determine whether its business initiatives and investments provide an adequate return on investment. The strategic initiatives, markdowns and other charges are also expected to improve the Company's free cash flow and increase operating earnings. Details on the components of the charges mentioned above are described in the Notes to the Consolidated Financial Statements on pages 21 and 22 of the Company's 1998 Annual Report, as well as in Management's Discussion and Analysis of Results of Operations and Financial Position on pages 2 21 and 22 of the Company's 1998 Annual Report, as well as in Management's Discussion and Analysis of Results of Operations and Financial Position on pages 9 through 12 of the Company's 1998 Annual Report, which sections are incorporated herein by reference. At January 30, 1999, the Company had approximately $45 million of reserves remaining for its restructuring program announced in 1995 which relate primarily to long-term lease obligations. The Company believes that reserves are adequate to complete the restructuring and other programs described above. Merger with Baby Superstore On February 3, 1997, the Company acquired Baby Superstore, Inc. ("Baby Superstore") in a tax-free exchange of common stock valued at approximately $376 million. The Baby Superstore acquisition was accounted for as a purchase for financial reporting purposes as of February 1, 1997. For a further discussion of Baby Superstore, see "Item 1. Business - Narrative Description of the Business - Babies "R" Us." (b) Financial Information About Geographic Segments Information about geographic segments, as set forth in the Notes to the Consolidated Financial Statements on page 21 of the Company's 1998 Annual Report, is incorporated herein by reference. (c) Narrative Description of the Business Toys "R" Us - United States Toys "R" Us - United States ("Toys "R" Us") operates in 49 states and Puerto Rico and sells both children's and adult's toys, games, bicycles, sporting goods, VHS video tapes, electronic and video games, small pools, books, infant and juvenile furniture and similar items and electronics, as well as educational and entertainment computer software for children. The overall merchandising philosophy of Toys "R" Us is the development of strong consumer recognition and acceptance of its name by the use of mass media advertising that promotes its broad selection. Toys "R" Us believes the flexibility afforded by its warehouse/distribution system and by ownership of its own fleet of trucks provides maximum efficiency and capacity, particularly in light of the seasonality of its business. Toys "R" Us utilizes a computerized inventory system which allows management to constantly monitor the current activity and inventory in each region and in each store. This system permits management to allocate merchandise to each store and keep the stores adequately stocked at all times. Toys "R" Us introduced a state of the art centralized distribution system in Lees Summit, Missouri in 1997. Substantially all video game and computer software merchandise are nationally distributed through this facility for all domestic divisions. This facility has enabled Toys "R" Us to improve its in-stock position and timeliness of replenishments of these products. Furthermore, the Company has accelerated the 3 implementation of its major initiative to improve its supply chain management, which is aimed at optimizing its inventory assortment and presentation. In addition, the Company is expanding its automated replenishment system to maximize inventory turnover. Currently, most Toys "R" Us stores conform to a traditional 46,000 square feet prototype design, with 30,000 and 20,000 square feet stores opened in smaller markets, and are generally freestanding units or located in strip malls. Of the 703 stores currently operated by Toys "R" Us, 597 are in the traditional format, nine are in the Company's new C-3 format and 97 are designed in the Company's "Concept 2000" format. The Company's new C-3 store design concept conforms to a 46,000 square feet prototype. The Company's strategic initiative to convert existing Toys "R" Us stores into C-3 format stores is intended to make the Toys "R" Us stores easier to shop and present merchandise in a more dynamic selling environment. The C-3 store layout creates wider aisles, more feature opportunities and end-caps, more shops, and logical category adjacencies to improve customer shopping patterns as compared with the traditional Toys "R" Us format. The C-3 sales floor is extended by 20% and has a one-third reduction in the size of the backroom. The Company is planning to roll out the new C-3 store design concept to approximately 200 existing toy stores in the United States in 1999 and to 325 more stores in 2000. In 1999, the Company also plans to implement some of the high potential elements of the C-3 concept in about 125 of the 325 stores slated for conversion in 2000. In addition, all new toy stores in the United States will be formatted in the C-3 store concept. The Company is also planning to introduce the merchandise "world" concept in Toys "R" Us stores in 1999. Each "world" has a unique customer franchise from juvenile to R Zone electronics and video products. Each "world" will establish its own business plan and has a complete support team to develop its business from product sourcing to customer advertising and promotion. The "worlds" presently being developed are: o R Zone (video, electronics, computer software, related products) o Action and Adventure (action figures, diecast cars, etc.) o Girls (dolls, collectibles, accessories, lifestyle products) o Outdoor Fun (bikes, sports, playsets) o Pre-School (toys, accessories) o Seasonal (Christmas, Halloween, Summer, etc.) o Juvenile (baby products and 0-4 apparel) o Learning Center (educational and developmental products) o Family Fun (games and puzzles) The Company is planning to include a majority of the new "world" product selection and merchandising in the C-3 rollouts in 1999. Toys "R" Us opened five new toy stores while closing one store in 1998. The Company utilizes demographic data to determine which markets to enter and plans to open approximately 10 new toy stores in the United States in 1999. The Company is also planning to close approximately nine underperforming toy stores (two of which have been closed to date) as part of the Company's strategic initiatives to reposition its worldwide business. 4 Toys "R" Us - International Toys "R" Us - International ("International") operates or franchises toy stores in 25 countries outside the United States. These stores generally conform to traditional prototypical designs similar to those used by Toys "R" Us. International owns and maintains its own fleet of trailers in most of the countries in which it operates stores. International also employs computerized inventory systems similar to those utilized by Toys "R" Us. International added 28 new toy stores, including 10 franchise stores while closing three stores in 1998. Utilizing demographic data to determine which markets to enter, the Company plans to add approximately 25 new toy stores in 1999, including approximately 10 franchise stores. The Company terminated a franchise agreement for 14 toy stores in Italy in January 1999. The Company also plans to close approximately 50 underperforming International toy stores in 1999 (four of which have been closed to date) as part of the Company's strategic restructuring initiatives to reposition its worldwide business. Kids "R" Us Kids "R" Us children's clothing stores feature brand name and private label first quality children's clothing. These stores conform to prototypical designs consisting of approximately 15,500 to 21,500 square feet and are typically freestanding units or located in strip centers. In 1998, Kids "R" Us closed three underperforming stores as outlined in the Company's most recent restructuring program and plans to close approximately 28 additional stores in 1999. These stores will be replaced by converting approximately 28 nearby existing Toys "R" Us stores into Toys "R" Us/Kids "R" Us combo stores. Babies "R" Us The Company launched its newest division, Babies "R" Us, with its first six store openings in 1996. These stores target the newborn to preschool market in a 38,000 to 42,000 square feet prototype that offers up to 40 room settings of juvenile furniture such as cribs and dressers as well as playards, bumper seats, high chairs, strollers, car seats, infant toddler and preschool toys, infant plush, and gifts. These stores devote over 5,000 square feet to specialty name brand and private label clothing and a wide range of feeding supplies, health and beauty aids and infant care products. In addition, a computerized baby registry service is offered. The Babies "R" Us stores are designed with low profile merchandise displays in the center of the stores providing a sweeping view of the entire merchandise selection. The Company accelerated the growth of the Babies "R" Us division with the acquisition of Baby Superstore, a leading large format retailer of newborn to preschool products in the United States. At the date of acquisition, Baby Superstore operated 76 stores in 23 states, primarily in the southeast and midwest. The Company has converted substantially all of the existing Baby Superstore stores to the Babies "R" Us operating format. The Company utilizes demographic data to determine which markets to enter and opened 15 Babies "R" Us stores in 1998 and currently operates 118 Babies "R" Us stores in the United States. As part of the 5 Company's long range growth plan of its Babies "R" Us division, approximately 20 new Babies "R" Us stores are planned to open in 1999 (five of which have been opened to date). TRU Direct TRU Direct is the newest division to the "R" Us family, selling merchandise directly to the public via the internet at www.toysrus.com and through mail order catalogs. The Company opened its virtual doors to the public in June 1998, offering a broad selection of toys, games, computer software, video systems, video software, and more. Approximately 2,000 unique products were offered in 1998 representing over 200 vendors. The Company believes the internet poses substantial opportunities as a medium for retail commerce and therefore plans to continue the growth of the online business. This will be achieved through various site enhancements, increased product availability and differentiation. In addition, the recognition of the TRU name along with the ability to leverage existing Company assets will lend a competitive advantage to the online business. The Company entered the mail order business this year with the introduction of two catalogs, "Differently Abled" and "Holiday Toys". The catalogs are also posted on the website, allowing customers the ability to place an order either over the phone or via the internet. The Company plans to mail several catalogs in 1999, branching into the juvenile and collectible markets. (d) Trademarks "TOYS "R" US", "KIDS "R" US", and "BABIES "R" US", as well as various of the Company's family of "R" Us marks either have been registered, or have trademark applications pending, with the United States Patent and Trademark Office and with the trademark registries of many foreign countries. The Company believes that its rights to these properties are adequately protected. (e) Seasonality Retail sales of toy and toy related products are highly seasonal, with a majority of retail sales occurring during the period from September through December. Consequently, a large portion of the Company's sales and earnings occur during its fourth quarter. See the section, "Quarterly Financial Data", contained on page 26 of the Company's 1998 Annual Report, which section is incorporated herein by reference. (f) Working Capital For a discussion of the Company's working capital requirements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 12 of the Company's 1998 Annual Report, which section is incorporated herein by reference. 6 (g) Competition All aspects of the retailing industry are highly competitive. All of the merchandise sold by the Company, in markets in which the Company operates, is available from various retailers at competitive prices. The Company's competitors consist of other specialty retailers of toy and children-related products, department stores and discount and supercenter type retail stores. (h) Employees At January 30, 1999, the Company employed approximately 70,000 individuals. Due to the seasonality of the Company's business, employment rose to approximately 114,000 during the 1998 Holiday Season. ITEM 2. PROPERTIES See the Note, "Leases," in the Company's Notes to Consolidated Financial Statements included on page 18 of the Company's 1998 Annual Report, which note is incorporated herein by reference. Also see the section "Store Locations" on page 26 of the Company's 1998 Annual Report, which section is incorporated herein by reference. The following information related to properties is as of April 12, 1999: Toys "R" Us - United States A significant portion of the properties operated by Toys "R" Us are owned. Toys "R" Us either purchases or leases properties depending on the economic terms available. Where properties are leased, Toys "R" Us generally has long-term leases with multiple renewal options. Toys "R" Us operates 703 toy stores, 439 of which are owned and 264 are leased and 15 distribution centers, 13 of which are owned and 2 are leased. The distribution centers average approximately 427,000 square feet each in size and are strategically located throughout the United States to efficiently service these stores. The Company leases corporate offices in Paramus and Rochelle Park, New Jersey and owns a data center in Parsippany, New Jersey. The Rochelle Park lease expires in 1999. In November 1998, the Company moved from its Rochelle Park location to a newly purchased office building in Montvale, New Jersey. Toys "R" Us - International International operates 385 stores, excluding 16 joint ventures and 52 franchised stores, 111 of which are owned and 274 are leased. International also operates 15 distribution centers, 6 of which are owned and 9 are leased. 7 Kids "R" Us Kids "R" Us operates 212 children's clothing stores, 105 of which are owned and 107 are leased. Kids "R" Us operates 4 distribution centers, of which 2 are owned and 2 are leased. These distribution centers average approximately 158,000 square feet each in size. Babies "R" Us Babies "R" Us operates 118 juvenile retail stores, 25 of which are owned and 93 are leased. Babies "R" Us stores are serviced by existing Toys "R" Us and Kids "R" Us distribution centers discussed above. ITEM 3. LEGAL PROCEEDINGS On May 22, 1996, the Staff of the Federal Trade Commission (the "FTC") filed an administrative complaint against the Company alleging that the Company is in violation of Section 5 of the Federal Trade Commission Act for its practices relating to warehouse clubs. The complaint alleges that the Company reached understandings with various suppliers that such suppliers not sell to the clubs the same items that they sell to the Company. The complaint also alleges that the Company "facilitated understandings" among the manufacturers that such manufacturers not sell to clubs. The complaint seeks an order that the Company cease and desist from this practice. The matter was tried before an administrative law judge in the period from March through May of 1997. On September 30, 1997, the administrative law judge filed an Initial Decision upholding the FTC's complaint against the Company. On October 13, 1998, the FTC issued a final Order and Opinion upholding the FTC's complaint against the Company. The Company has appealed the FTC's decision to the United States Court of Appeals for the Seventh Circuit. After the filing of the FTC complaint, several class action suits were filed against the Company in state courts in Alabama and California, alleging that the Company has violated certain state competition laws as a consequence of the behavior alleged in the FTC complaint. After the Initial Decision was handed down, more than thirty purported class actions were filed in federal and state courts in various jurisdictions alleging that the Company has violated the federal antitrust laws as a consequence of the behavior alleged in the FTC complaint. In addition, the attorneys general of forty-four states, the District of Columbia and Puerto Rico have filed a suit against the Company in their capacity as representatives of the consumers of their states, alleging that the Company has violated federal and state antitrust laws as a consequence of the behavior alleged in the FTC complaint. These suits seek damages in unspecified amounts and other relief under state and/or federal law. The Company believes that it has always acted fairly and in the best interests of its customers and that both its policy and its conduct in connection with the foregoing have been and are within the law. However, to avoid the cost and uncertainty of protracted litigation, the Company has reached an agreement in principle to settle all of the class action and attorney general lawsuits in a manner which will not have a material adverse effect on its financial condition, results of operations or cash flow. The Company has accrued all anticipated costs related to this matter as of January 30, 1999. 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market prices and other information with respect to the Company's common stock are hereby incorporated by reference to page 26 of the Company's 1998 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Selected financial data is hereby incorporated by reference to page 3 of the Company's 1998 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion and analysis of results of operations and financial condition is hereby incorporated by reference to pages 9 through 12 of the Company's 1998 Annual Report. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative and quantitative disclosures about market risk is hereby incorporated by reference to page 11 of the Company's 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are hereby incorporated by reference to pages 13 to 23 of the Company's 1998 Annual Report. (a) Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 (b) Consolidated Statements of Earnings for each of the three years in the period ended January 30, 1999 (c) Consolidated Statements of Cash Flows for each of the three years in the period ended January 30, 1999 9 (d) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 30, 1999 (e) Notes to Consolidated Financial Statements; and (f) Report of Ernst & Young LLP. Individual financial statements of the registrant's subsidiaries are not furnished because consolidated financial statements are furnished. The registrant is primarily a holding company, the expenses and obligations of which are paid by its consolidated subsidiaries through a fee based on expenses incurred for management services provided to such subsidiaries by the registrant. All subsidiaries of the registrant are at least 80% owned. Financial statements of 50%-owned joint ventures are not submitted because such companies, considered in the aggregate, are not considered a significant subsidiary as defined in Regulation S-X. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the directors of the Company is hereby incorporated herein by reference to the section, "Election of Directors", in the Company's 1998 Proxy Statement. Executive Officers of the Company (a) The following persons are the Executive Officers of the Company as of April 12, 1999, having been elected to their respective offices by the Board of Directors of the Company to serve until the election and qualification of their respective successors: Name Age Position with the Company ---- --- ------------------------- Michael Goldstein 57 Chairman of the Board Robert C. Nakasone 51 Chief Executive Officer and Director Louis Lipschitz 54 Executive Vice President and Chief Financial Officer Michael J. Madden 50 Executive Vice President - President of Operations of U.S. Toy Store Division Richard L. Markee 45 Executive Vice President - President of Kids "R" Us and Babies "R" Us Divisions Michael G. Shannon 47 Executive Vice President and President of U.S. Toy Store Division Gregory R. Staley 51 Executive Vice President - President of Toys "R" Us International Division Keith C. Van Beek 52 Executive Vice President - President of Merchandising and Marketing of U.S. Toy Store Division Francesca L. Brockett 39 Senior Vice President - Strategic Planning and Business Development Roger C. Gaston 43 Senior Vice President - Human Resources Raymond L. Arthur 40 Vice President - Controller 11 (b) The following is a brief account of the business experience during the past five years for each of the Executive Officers of the Company: Mr. Goldstein has been employed by the Company for more than five years. Effective February 1998, he retired from the position of Chief Executive Officer and was elected Chairman of the Board. From February 1994 to February 1998, he was Vice Chairman of the Board and Chief Executive Officer. Mr. Nakasone has been employed by the Company for more than five years. Effective February 1998, he became Chief Executive Officer. From February 1994 to February 1998, he was President and Chief Operating Officer. Mr. Lipschitz has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President and Chief Financial Officer. From prior to 1994 to January 1996, he was Senior Vice President - Finance and Chief Financial Officer. Mr. Madden has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President of the Company and President of Operations of U.S. Toy Store Division. From March 1995 to January 1996, he was Group Vice President of Store Operations - U.S. Toy Store Division. From prior to 1994 to March 1995, he was Senior Vice President, Regional Operations and Distribution - U.S. Toy Store Division. Mr. Markee has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President of the Company and has served as President of Kids "R" Us Division since prior to 1994, as well as President of Babies "R" Us Division since its inception in September 1995. Mr. Shannon has been employed by the Company since October 1998. Effective March 1999, he became Executive Vice President of the Company and President of U.S. Toy Store Division. From October 1998 to March 1999, he was Executive Vice President and Chief Administrative Officer. From January 1995 to October 1998, he was President and Chief Executive Officer of Gayfer's/Maison Blanche. From February 1994 to January 1995, he was President and Chief Executive Officer of Gayfer's/J.B. White. Mr. Staley has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President of the Company and has served as President of Toys "R" Us International Division since August 1995. From prior to 1994 to July 1995, he was Senior Vice President - General Merchandise Manager for Toys "R" Us International Division. 12 Mr. Van Beek has been employed by the Company for more than five years. Effective February 1998, he became Executive Vice President of the Company and President of Merchandising and Marketing of U.S. Toy Store Division. From August 1995 to February 1998, he was President - Toys "R" Us (Canada) Ltd. From prior to 1994 to August 1995, he was Vice President - Business Development of Toys "R" Us International Division. Ms. Brockett has been employed by the Company since September 1998 as Senior Vice President - Strategic Planning and Business Development. From August 1997 to September 1998, she was Senior Vice President - Strategic Planning of Tricon Global Restaurants. From October 1995 to August 1997, she was Vice President - Business Development of Taco Bell Corporation. From prior to 1994 to October 1995, she was Vice President - Corporate Development of PepsiCo. Mr. Gaston has been employed by the Company since December 1996 as Senior Vice President - Human Resources. From prior to 1994 to November 1996, he was Executive Vice President - Human Resources of Carson, Pirie, Scott and Company. Mr. Arthur has been employed by the Company since January 1999 as Vice President - Controller. From March 1997 to October 1998, he was Vice President - Controller of General Signal Corporation. From June 1996 to February 1997, he was Assistant Vice President -Director of Compliance of American Home Products Corporation. From May 1995 to May 1996, he was Assistant Controller of American Cyanamid Company. From December 1994 to April 1995, he was Senior Director - Operations Support Finance of Wyeth Ayerst. From prior to 1994 to November 1994 he was Plant Controller of Lederle Laboratories. Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended is hereby incorporated by reference to the section "Compliance with Section 16(a)" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held June 9, 1999 ("1999 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is hereby incorporated herein by reference to the sections, "Election of Directors", "Compensation of Directors", "Executive Compensation", "Summary Compensation Table", "Option Grants in Last Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Long-Term Incentive Plans - Awards in Last Fiscal Year" and "Employment Agreements" in the Company's 1999 Proxy Statement. The sections, "Report of the Management Compensation and Stock Option Committee on Executive Compensation" and "Five-Year Stockholder Return Comparison", in the Company's 1999 Proxy Statement are not incorporated by reference herein. Such sections are furnished solely for information and shall not be deemed to be soliciting material or to be "filed" as a part of this report. 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is hereby incorporated by reference to the sections, "Principal Stockholders" and "Election of Directors", in the Company's 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements (1) The response to this portion of Item 14 is set forth in Item 8 of Part II of this report on Form 10-K. (2) Financial Statement Schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto. (3) See accompanying Index to Exhibits. The Company will furnish to any stockholder, upon written request, any exhibit listed in the accompanying Index to Exhibits upon payment by such stockholder of the Company's reasonable expenses in furnishing any such exhibit. (b) Cautionary Statement Regarding Forward Looking Information This Form 10-K contains certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. The Company may also make forward-looking statements in other documents filed with the Securities and Exchange Commission, its annual report to shareholders, its proxy statement and in press releases. All statements that are not historical facts, including statements about the Company's beliefs or expectations, are forward-looking statements. Such statements involve risks and uncertainties that exist in the Company's operations and business environment that could render actual outcomes and results materially different than predicted. The Company's forward-looking statements are based on assumptions about many factors, including, but not limited to, ongoing competitive pressures in the retail industry, changes in consumer spending, general economic conditions in the United States and other jurisdictions in which the 14 Company conducts business (such as interest rates and consumer confidence) and normal business uncertainty. While the Company believes that its assumptions are reasonable at the time forward-looking statements were made, it cautions that it is impossible to predict the actual outcome of numerous factors and, therefore, readers should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update such statements in light of new information or future events. (c) Reports on Form 8-K On September 17, 1998, the Company filed a Form 8-K in connection with the repositioning of its worldwide business. On October 16, 1998, the Company filed a Form 8-K in connection with the initial decision upheld by the Federal Trade Commission. 15 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. TOYS "R" US, INC. (Registrant) By /s/ Louis Lipschitz ---------------------------- Louis Lipschitz Executive Vice President and Chief Financial Officer Date: April 28, 1999 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 indicated on the 28th day of April, 1999. Signature Title --------- ----- * - -------------------- Director and Chief Executive Officer (Principal Robert C. Nakasone Executive Officer) /s/ Louis Lipschitz Executive Vice President and Chief Financial Officer - -------------------- (Principal Financial Officer) Louis Lipschitz * Vice President - Controller (Principal Accounting - -------------------- Officer) Raymond L. Arthur * Chairman of the Board - -------------------- Michael Goldstein * Director - -------------------- Robert A. Bernhard * Director - -------------------- RoAnn Costin * Director - -------------------- Calvin Hill 16 * Director - -------------------- Shirley Strum Kenny * Director, Chairman Emeritus - -------------------- Charles Lazarus * Director - -------------------- Norman S. Matthews * Director - -------------------- Howard W. Moore * Director - -------------------- Arthur B. Newman The foregoing constitute all of the Board of Directors and the Principal Executive, Financial and Accounting Officers of the Registrant. * By /s/ Louis Lipschitz - --------------------------------- Louis Lipschitz, Attorney-In-Fact 17 INDEX TO EXHIBITS The following is a list of all exhibits filed as part of this Report: Exhibit No. Document - ----------- -------- 2A Agreement and Plan of Merger, dated as of December 8, 1995, by and among registrant, Toys "R" Us - Delaware, Inc. (f/k/a Toys "R" Us, Inc.) and TRU Interim, Inc. Incorporated herein by reference to Exhibit 2.1 to registrant's Registration of Securities of Certain Successor Issuers on Form 8-B dated January 3, 1996 (the "Form 8-B"). 2B Agreement and Plan of Merger, dated as of October 1, 1996, and as amended and restated as of December 26, 1996, among registrant, BSST Acquisition Corp., Baby Superstore, Inc. and Jack P. Tate. Incorporated by reference to Annex A to the Proxy Statement/Prospectus Statement No. 333-18863. 3A Restated Certificate of Incorporation of registrant (filed on January 2, 1996). Incorporated herein by reference to Exhibit 3.1 to the Form 8-B. 3B Amended and Restated By-Laws of registrant (as of January 1, 1996). Incorporated herein by reference to Exhibit 3.2 to the Form 8-B. An amendment dated March 11, 1997 to Amended and Restated By-Laws. Incorporated herein by reference to Exhibit 3B to registrant's Annual Report on Form 10-K for the year ended January 31, 1998. 4 i) Form of Indenture dated as of January 1, 1987 between registrant and United Jersey Bank, as Trustee, pursuant to which securities in one or more series in an unlimited amount may be issued by registrant. Incorporated herein by reference to Exhibit 4(a) to Registration Statement No. 33-11461. ii) Form of the registrant's 8 1/4% Sinking Fund Debentures due 2017. Incorporated herein by reference to Exhibit 4(a) to Registration Statement No. 33-11461. iii) Form of Indenture between registrant and United Jersey Bank, as Trustee, pursuant to which one or more series of debt securities up to $300,000,000 in principal amount may be issued to registrant. Incorporated herein by reference to Exhibit 4 to registrant's Registration Statement No. 33-42237. 18 Exhibit No. Document - ----------- -------- 4 iv) Form of registrant's 8 3/4% Debentures due 2021. Incorporated herein by reference to Exhibit 4 to registrant's Report on Form 8-K dated August 29, 1991. v) Substantially all other long-term debt of registrant (which other debt does not exceed on an aggregate basis 10% of the total assets of the registrant and its subsidiaries on a consolidated basis) is evidenced by, among other things, (i) commercial paper (ii) industrial revenue bonds issued by industrial development authorities and guaranteed by registrant, (iii) mortgages held by third parties on real estate owned by registrant, (iv) stepped coupon guaranteed bonds held by a third party and guaranteed by registrant and (v) an agreement under which registrant guaranteed certain yen-denominated loans made by a third party subsidiary of registrant. Registrant will file with the Securities and Exchange Commission (the "Commission") copies of constituent documents relating to such upon request of the Commission. 10A* Employment Agreement dated March 14, 1978 between registrant and Charles Lazarus and an amendment thereto dated November 20, 1979 (incorporated herein by reference to Exhibit 2 in Schedule 13D dated February 1, 1980 filed by Charles Lazarus, et al). An amendment dated March 23, 1982 to such employment agreement (incorporated herein by reference to Exhibit 10B to registrant's Annual Report on Form 10-K for the year ended January 31, 1982, Commission File Number 1-1117). An amendment dated December 7, 1982 to such employment agreement (incorporated herein by reference to Exhibit 10B to registrant's Annual Report on Form 10-K for the year ended January 30, 1983, Commission File Number 1-1117). An amendment dated April 10, 1984 to such employment agreement (incorporated herein by reference to Exhibit 10B to registrant's Annual Report on Form 10-K for the year ended January 29, 1989, Commission File Number 1-1117). 10B* Amendment dated as of June 10, 1998 to Employment Agreement between registrant and Charles Lazarus. 10C* Form of Indemnification Agreement between registrant and each director. Incorporated herein by reference to Exhibit 10F to registrant's Annual Report on Form 10-K for the year ended February 1, 1987, Commission File Number 1-1117. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) hereof. 19 Exhibit No. Document - ----------- -------- 10D* Stock Option Agreement dated as of February 1, 1988 between registrant and Robert Nakasone. Incorporated herein by reference to Exhibit 10G to registrant's Annual Report on Form 10-K for the year ended January 31, 1988, Commission File Number 1-117. The first amendment dated as of April 1, 1989 to such agreement (incorporated herein by reference to Exhibit 10G to registrant's Annual Report on Form 10-K for the year ended January 29, 1989, Commission File Number 1-1117). The second amendment dated as of September 19, 1989 to such agreement (incorporated herein by reference to Exhibit 10G to registrant's Annual Report on Form 10-K for the year ended January 28, 1990, Commission File Number 1-1117). 10E* Stock Option Agreement dated as of February 1, 1988 between registrant and Michael Goldstein (incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 31, 1988, Commission File Number 1-1117). The first amendment dated as of April 1, 1989 to such agreement (incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 29, 1989, Commission File Number 1-1117). The second amendment dated as of September 19, 1989 to such agreement (incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 28, 1990, Commission File Number 1-1117). 10F* Stock Option Plan and Agreement dated as of March 14, 1989 between registrant and Charles Lazarus, and a First Amendment thereto dated as of September 19, 1989. Incorporated by reference to Exhibit 10I to registrant's Annual Report on Form 10-K for the year ended January 28, 1990, Commission File Number 1-1117. 10G* Non-Employee Directors' Stock Option Plan as adopted by the Board of Directors on September 19, 1990 and approved by the registrant's stockholders on June 3, 1991, and amended and restated as of December 6, 1995. Incorporated herein by reference to Exhibit 10A to registrant's Proxy Statement for the year ended February 3, 1996. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) hereof. 20 Exhibit No. Document - ----------- -------- 10H* Non-Employee Director's Stock Unit Plan, effective as of May 1, 1997. 10I* Stock Option Plan and Agreement dated as of December 2, 1992 between the registrant and Robert C. Nakasone. Incorporated herein by reference to Exhibit 10I to registrant's Annual Report on Form 10-K for the year ended January 30, 1993. 10J* Stock Option Plan and Agreement dated as of December 2, 1992 between the registrant and Michael Goldstein. Incorporated herein by reference to Exhibit 10J to registrant's Annual Report on Form 10-K for the year ended January 30, 1993. 10K* Amended and Restated Toys "R" Us, Inc. 1994 Stock Option and Performance Incentive Plan effective November 1, 1993. Incorporated herein by reference to Exhibit A to registrant's Proxy Statement for the year ended February 1, 1997. 10L* Amended and Restated Toys "R" Us, Inc. Management Incentive Compensation Plan, effective beginning with the registrant's fiscal year ending January 28, 1995. Incorporated herein by reference to Exhibit B to registrant's Proxy Statement for the year ended February 1, 1997. 10M* Toys "R" Us, Inc. Partnership Group Deferred Compensation Plan effective as of May 17, 1995. Incorporated herein by reference to Exhibit 10.13 to the Form 8-B. 10N* Toys "R" Us, Inc. Grantor Trust Agreement dated as of October 1, 1995 between registrant and American Express Trust Company. Incorporated herein by reference to Exhibit 10.14 to the Form 8-B. 10O* Toys "R" Us, Inc. Supplemental Executive Retirement Plan, effective as of December 6, 1995. Incorporated by reference to Exhibit 10N to registrant's Annual Report on Form 10-K for the year ended February 3, 1996. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) hereof. 21 Exhibit No. Document - ----------- -------- 10P* Toys "R" Us, Inc. Grantor Trust Agreement dated as of April 1, 1996 between registrant and Allmerica Trust Company, N.A. Amendment No. 1 to Grantor Trust Agreement, effective as of April 1, 1996. Amendment No. 2 to Grantor Trust Agreement, effective as of April 1, 1996. 10Q Shareholders Agreement, dated October 1, 1996, by and among registrant, Jack P. Tate and Linda M. Robertson. Incorporated by reference to Exhibit A to Exhibit 2 to registrant's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996, File No. 1-11609 (the "Form 10-Q"). 10R* Retention Agreements - Retention Agreement between Toys "R" Us, Inc. and Roger Gaston dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Louis Lipschitz dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Michael J. Madden dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Richard L. Markee dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Gregory R. Staley dated as of May 1, 1997. Each incorporated herein by reference to Exhibit 10P to registrant's Quarterly Report on Form 10-Q for the quarterly period ended May 3, 1997. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) hereof. 22 Exhibit No. Document - ----------- -------- 10S Amended and Restated Rights Agreement, dated as of April 16, 1999, between Toys "R" Us, Inc. and American Stock Transfer & Trust Company, which includes as Exhibit A the Form of Rights Certificate and, as Exhibit B, the Summary of Rights to Purchase Common Stock (incorporated herein by reference to Exhibit 1 to registrant's Report on Form 8-K dated April 16, 1999). 10T* Retention Agreement between Toys "R" Us, Inc. and Michael Goldstein dated as of February 25, 1998. Incorporated herein by reference to Exhibit 10R to registrant's Annual Report on Form 10-K for the year ended January 31, 1998. 10U* Retention Agreement between Toys "R" Us, Inc. and Robert C. Nakasone dated as of February 25, 1998. Incorporated herein by reference to Exhibit 10S to registrant's Annual Report on Form 10-K for the year ended January 31, 1998. 10V* Retention Agreement between Toys "R" Us, Inc. and Keith Van Beek dated as of February 25, 1998. Incorporated herein by reference to Exhibit 10T to registrant's Annual Report on Form 10-K for the year ended January 31, 1998. 10W* Retention Agreement between Toys "R" Us, Inc. and Bruce W. Krysiak dated as of February 12, 1998. Incorporated herein by reference to Exhibit 10U to registrant's Annual Report on Form 10-K for the year ended January 31, 1998. 10X* Separation agreement between Toys "R" Us, Inc. and Bruce Krysiak dated as of March 25, 1999. 10Y* Retention Agreement between Toys "R" Us, Inc. and Michael G. Shannon dated October 12, 1998. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14 (c) hereof. 23 Exhibit No. Document - ----------- -------- 13 Registrant's Annual Report to Stockholders for the year ended January 30, 1999. Except for the portions thereof that are expressly incorporated by reference into this report, such Annual Report is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this report. 21 Subsidiaries of registrant. 23 Consent of Independent Auditors, Ernst & Young LLP. 24.1 Power of Attorney, dated in April 1999. 24.2 Certified copy of resolution of the Board of Directors of Toys "R" Us, Inc. authorizing signatures pursuant to Power of Attorney. 27 Financial Data Schedule for the year ended January 30, 1999. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14 (c) hereof. 24 EX-10.B 2 AMENDMENT TO EMPLOYMENT AGREEMENT EXECUTION COPY Exhibit 10B* AMENDMENT TO EMPLOYMENT AGREEMENT EIGHTH AMENDMENT AGREEMENT (the "Amendment"), dated as of June 10, 1998, between TOYS "R" US, INC., a Delaware corporation (the "Corporation"), and CHARLES LAZARUS (the "Employee"); WHEREAS, the Employee served as Chief Executive Officer of the Corporation since its founding; WHEREAS, the Corporation and the Employee are parties to an employment agreement originally dated March 14, 1978 and subsequently amended by agreements dated November 20, 1979, February 2, 1981, March 23, 1982, December 7, 1982, April 10, 1984, May 20, 1988 and March 14, 1989 (collectively referred to as the "Employment Agreement"). WHEREAS, pursuant to Section 1(b) of the Employment Agreement, the Employee elected, effective January 31, 1994, to terminate the term of full-time employment and to become a consultant to the Corporation for a five-year period (the "Consulting Period") commencing on the date set forth in such election; WHEREAS, commencing at the end of the Consulting Period (January 31, 1999), the Employee shall receive a retirement benefit payable for a five-year period (the "Retirement Period") in accordance with Section 13 thereof; WHEREAS, the Employee continues to serve as a director and has been named by the Company to serve as Chairman Emeritus of the Corporation; WHEREAS, the advice of the Employee continues to be a valuable resource for the Corporation; and WHEREAS, in consideration of the Employee serving as Chairman Emeritus of the Corporation, the Board of Directors has determined that it is fair and reasonable to provide the Employee with certain corporate benefits during the Retirement Period in addition to the payments due to him under Section 13 of the Employment Agreement. NOW, THEREFORE, it is hereby agreed as follows. 1. Section 13 of the Employment Agreement shall be amended as follows: (a) The first paragraph of Section 13 shall be amended by (i) adding "(the "Retirement Period")" to the end of the first sentence thereof; (ii) by replacing the phrase "Such 5-year period" with the phrase "Such Retirement Period" at the beginning of the second sentence thereof; and (iii) by replacing the words "five year" in the third sentence thereof with the words "Retirement Period"; and (b) The following paragraph shall be added to Section 13 after the first paragraph: "During the Retirement Period: (i) the Corporation shall provide the Employee with, or reimburse the Employee for the expense of, a car and driver when he is in the New York metropolitan area or on business for the Corporation; (ii) the Corporation shall provide the Employee office space and secretarial services (by an individual to be chosen by the Employee) comparable to those services provided to him during the last year of the consulting period; (iii) the Corporation shall reimburse the Employee, upon submission of appropriate record of incurrence, his reasonable business expenses and disbursements incurred in the course of the performance of his duties as Chairman Emeritus; and (iv) the Employee will be entitled to continuation (which shall also continue after the Retirement Period) of health benefits under the Corporation's health plans at a level commensurate with such benefits as are generally made available to the Corporation's executive officers; provided, that to the extent such benefits cannot be provided to the Employee under the terms of such plan or such plan cannot be amended in any manner not adverse to the Corporation, the Corporation shall pay the Employee, on an after-tax basis, an amount necessary for the Employee to acquire such benefits from an independent insurance carrier; and provided further, that the obligations of the Corporation under this clause (iv) shall be terminated if, at any time during the Retirement Period, the Employee is employed by or is otherwise affiliated with a party that offers comparable health benefits to the Employee." 2. Except as specifically modified herein, all other provisions of the Employment Agreement shall remain in full force and effect. 3. This Amendment shall be governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such State. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. TOYS "R" US, INC. By: ___________________________ Name: Title: CHARLES LAZARUS _______________________________ EX-10.H 3 STOCK UNIT PLAN FOR NON-EMPLOYEE DIRECTORS Exhibit 10H* STOCK UNIT PLAN FOR NON-EMPLOYEE DIRECTORS OF TOYS "R" US, INC. (Effective as of May 1, 1997) 1. Purpose. The purpose of the Stock Unit Plan for Non-Employee Directors of Toys "R" Us, Inc. (the "Plan") is to provide certain directors of Toys "R" Us, Inc. (the "Corporation") with a vehicle for acquiring shares of common stock, $.10 par value per share, of the Corporation ("Common Stock") with elective deferrals of compensation (as defined below) due to them for their service and participation on the Board of Directors of the Corporation (the "Board") or any Committee thereof, or in the capacity of Chairman thereon or participation in meetings of the Board or any such Committee. 2. Effective Date. The Plan shall become effective as of May 1, 1997. 3. Eligibility. All directors of the Corporation who are not employees of the Corporation or of any subsidiary of the Corporation at the date of any Elective Deferral (as defined below) shall be eligible to participate in the Plan with respect to such Deferral (each, an "eligible director"). 4. Source of Shares. Shares of Common Stock utilized pursuant to the Plan shall be issued shares reacquired by the Corporation. 5. Elective Deferral of Compensation. (a) Timing of Election. An Elective Deferral must be made prior to the beginning of each fiscal year of the Corporation with respect to compensation for such fiscal year, provided that any eligible director initially elected to the Board shall be entitled to elect to defer his or her compensation for the fiscal year (or remainder thereof) in which such election occurs by making an Elective Deferral at any time prior to the date of such eligible director's initial election as a director of the Corporation, and provided, further, that each eligible director may elect to defer such director's remaining compensation for the fiscal year in which the Plan is approved by the stockholders of the Corporation if such election is made at any time prior to the next meeting of the Board (or any Committee thereof of which such eligible director is a member) held after such approval. An election made under this paragraph 5 shall continue in effect until the end of the fiscal year of the Corporation (unless a longer period is specified) or until the death, resignation, removal or "retirement" (as defined below) of the eligible director, whichever shall occur first. Deferrals under this paragraph 5 shall be known as "Elective Deferrals." (b) Amount of Deferral. An eligible director may elect to defer receipt of all or a specified portion of his or her (i) annual retainer, (ii) fees for chairing a Committee, serving as a member of the Executive Committee and attending meetings, and (iii) other similar compensation (collectively, "compensation"), receivable by such director for service as a director of the Corporation or on any Committee of the Board or as Chairman of any such Committee. (c) Manner of Electing Deferral. An eligible director shall elect to make an Elective Deferral by giving written notice to the Corporation in the form attached hereto as Exhibit A. Such notice shall include the percentage or amount of the Elective Deferral and the manner of payment of the Elective Deferrals upon termination of service as a director in a single sum or in annual installments not to exceed five. 6. Deferred Compensation Account. The Corporation shall establish one or more deferred compensation accounts for each eligible director as provided below. (a) Stock Account. All Elective Deferrals shall be credited to a Stock Account established and maintained on the books of the Corporation subject to the terms and conditions set forth below. The Corporation shall credit to the Stock Account that number of shares of Common Stock (also referred to as "Stock Units") that are purchased with the portion of each deferred amount that the Broker has acquired for the benefit of the eligible director with respect to his or her Elective Deferrals, in the manner provided in paragraphs 7 and 8. (b) Dividend Account. On the date dividend payments are made on outstanding shares of Common Stock (the "Dividend Payment Date"), an amount equal to all dividends that would have been paid on shares of Common Stock credited to an eligible director's Stock Account shall be credited automatically to a Dividend Account established and maintained on the books of the Corporation. Any credit balance in the Dividend Account shall be used by the Broker to purchase additional shares of Common Stock in the manner provided in paragraph 8. 7. Designation of Broker and Account With Broker. (a) Broker. Subject to paragraph 14, the Corporation has designated Smith Barney, Inc. (the "Broker") to open an account in the name of the Corporation for the benefit of each eligible director (an "Account"). The Corporation reserves the right to change such designation at any time without prior notice to eligible directors, and the Broker has reserved the right to terminate its services as Broker under the Plan at any time. (b) Allocation of Shares. Shares purchased by the Broker shall be allocated to the individual Account established for the benefit of each eligible director, in proportion to the respective amounts received for such eligible director's Account. Allocations shall be made in whole shares and in fractional shares. (c) Voting Rights. Shares of Common Stock held in an Account shall not be voted and shall not be deemed to be outstanding. 2 8. Purchase of Common Stock. From time to time, but no later than the 15th day of the month following the month any amounts would otherwise have been payable, the Corporation shall forward to the Broker (i) funds equivalent to the amount of each eligible director's Elective Deferrals, and (ii) funds equivalent to the amount of each eligible director's Dividend Account. As soon as the Broker considers it advisable, it shall apply such funds to the purchase of Common Stock in the market or in private transactions at prevailing market prices for the Accounts of the eligible directors. 9. Value of Deferred Compensation Accounts. Within 90 days following the close of each fiscal year of the Corporation a statement will be sent to each eligible director as to the balance in the eligible director's Account as of the end of such fiscal year, including the number of Stock Units and the market price as of the close of such fiscal year with respect to the shares of Common Stock held in the Account by the Broker. 10. Payment of Deferred Compensation. An eligible director's Stock Units shall be paid in shares of Common Stock in the manner elected in accordance with the provisions of paragraph 5(c) above. If annual installments are elected, the amount of the first payment shall be a fraction of the number of shares in the eligible director's Account, the numerator of which is one and the denominator of which is the total number of installments elected, rounded to the nearest whole share. The amount of each subsequent payment shall be a fraction of the number of shares in the eligible director's Account, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid, rounded to the nearest whole share. During any such installment payment period, the Corporation shall continue to maintain the Account as provided above and shall on each Dividend Payment Date transfer the credit balance from the Dividend Account to the Stock Account as provided above. In the event the eligible director has not made an election to have his or her Stock Units paid in installments before the time his or her Stock Units becomes payable, his or her Stock Units shall be paid in a lump sum in shares of Common Stock of the Corporation. 11. Amount Payable on Death. In the event of an eligible director's death, the shares of Common Stock in the eligible director's Account shall be determined as of the date of death, and the shares shall be paid as soon as reasonably possible thereafter in the manner elected by the eligible director in accordance with the provisions of paragraph 5(c) above to the beneficiary or beneficiaries previously designated by the eligible director. Any such designation shall be in writing and delivered to the Corporation and may be changed by a later-dated designation. If there is no designation in effect, the Account shall be paid to the eligible director's estate. 12. Resignation, Removal or Retirement. In the event of an eligible director's resignation, removal or retirement from the Board, the balance in the eligible director's Account shall be determined as of the effective date of such resignation, removal or retirement, and the Account shall be paid as soon as reasonably possible thereafter to the eligible director in the manner elected in accordance with the provisions of paragraph 5(c) above. For purposes of 3 the Plan, retirement shall mean an eligible director's cessation of service on the Board on or after such eligible director's attainment of age 60. 13. Financial Emergency. Notwithstanding the provisions of paragraphs 11 and 12 to the contrary, if, upon the written application of an eligible director, the Board determines that the eligible director has a financial emergency of such a substantial nature and beyond the director's individual control that payment of his or her Account is warranted, the Board may direct the payment to the eligible director of all or a portion of the Account and the time and manner of such payment, and the Board may direct such payments in other circumstances if, in the exercise of its independent judgment, it determines that circumstances beyond the eligible director's control warrant such action. 14. Unfunded Promise to Pay: No Segregation of Funds or Assets. Neither anything contained in this Plan nor the establishment or maintenance of the Account shall require the segregation of any assets of the Corporation or any type of funding by the Corporation of such Accounts or the amounts payable therefrom, it being the intention of the parties that the Plan or the establishment and maintenance of the Account, be an unfunded arrangement for federal income tax purposes. No eligible director shall have any rights to or interests in any specific assets or shares of Common Stock by reason of the Plan, and his or her only rights to enforce payment of the obligations of the Corporation hereunder shall be those of a general creditor of the Corporation. In the event the Corporation establishes a trust or any other method of providing for its payment of the obligations created hereunder, such trust shall conform to the terms of the model trust described in Revenue Procedure 92-64, and it is expressly understood that no eligible director will have any interest therein other than as a general creditor of the Corporation. 15. Changes in Capitalization. The number of Stock Units credited to each eligible director's Stock Account shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or combination of shares or the payment of a stock dividend in shares of Common Stock to holders of outstanding shares or any other increase or decrease in the number of such shares effected without receipt of consideration by the Corporation. Appropriate adjustments shall also be made to reflect any recapitalization, reclassification of shares or reorganization affecting the capital structure of the Corporation. In the event of a merger or consolidation in which the Corporation is not the surviving corporation or in which the Corporation survives only as a subsidiary of another corporation, and in such transaction the holders of Common Stock of the Corporation become entitled to receive shares of stock or securities of the surviving corporation or any affiliate thereof, the eligible director's Stock Account shall be credited with that number of shares of securities of the surviving corporation (or affiliate) that would be exchanged for the shares of Common Stock of the Corporation in such transaction if such shares of Common Stock had been outstanding, and any cash or other consideration that would be receivable if such shares had been outstanding shall be paid to the eligible director. 16. Compliance with Law. No shares of Common Stock shall be issued or transferred to an eligible director pursuant to the Plan unless and until all legal requirements 4 applicable to the issuance or transfer of such shares have been complied with to the satisfaction of the Board. 17. Rights Unsecured. The right of an eligible director to receive any unpaid portion of the eligible director's Account shall be an unsecured claim against the general assets of the Corporation. 18. Nonassignability. The right of an eligible director to receive any unpaid portion of the eligible director's Accounts shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation. 19. Administration. This Plan shall be administered by the Board, which shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions thereof. Any decision of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Board may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their number or the Secretary or any other officer of the Corporation to execute and deliver documents on behalf of the Board. No member of the Board shall be liable for an act or failure to act by such member or by any other member of the Board in connection with the Plan, except for such member's own willful misconduct or as expressly provided by statute. 20. Amendment and Termination. This Plan may be amended, modified or terminated at any time by the Board, provided, that no such amendment, modification or termination shall, without the consent of an eligible director, adversely affect such eligible director's rights with respect to amounts theretofore credited to the eligible director's Account. 21. Governing Law. To the extent not preempted by Federal law, the Plan shall be construed in accordance with and governed by the laws of the State of New York. EX-10.P 4 GRANTOR TRUST AGREEMENT EXHIBIT 10P TOYS "R" US, INC. - -------------------------------------------------------------------------------- Grantor Trust Agreement - -------------------------------------------------------------------------------- EXHIBIT 10P* TOYS "R" US, INC. - -------------------------------------------------------------------------------- Grantor Trust Agreement - -------------------------------------------------------------------------------- Page ---- Section 1. Establishment of Trust............................................1 Section 2. Duties of the Company and Plan Administrator, Payment to Plan Participants and Their Beneficiaries.........................2 Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When the Company is Insolvent....................4 Section 4. Payments to the Company...........................................5 Section 5. Investment Authority..............................................6 Section 6. Additional Powers and Duties of the Trustee.......................6 Section 6A Life Insurance Policies...........................................8 Section 7. Disposition of Income.............................................8 Section 8. Accounting by the Trustee.........................................8 Section 9. Responsibility and Indemnification of the Trustee.................9 Section 10. Compensation and Expenses of the Trustee.........................10 Section 11. Resignation and Removal of the Trustee...........................10 Section 12. Appointment of Successor Trustee.................................10 Section 13. Amendment or Termination.........................................11 Section 14. Miscellaneous....................................................11 Section 15. Effective Date...................................................11 TRUST UNDER THE TOYS "R" US, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This Trust Agreement, effective on the first day of April, 1996, is made by and between TOYS "R" US, Inc. (the "Company") and Allmerica Trust Company, N.A., a nationally chartered trust company whose principal office is located at 440 Lincoln Street, Worcester, Massachusetts 01653 (the "Trustee"). WHEREAS, the Company has adopted the Toys "R" Us, Inc. Supplemental Executive Retirement Plan (hereinafter called the "Plan"); and WHEREAS, the Company has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan; and WHEREAS, the Company wishes to establish a trust (hereinafter called the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event the Company becomes Insolvent, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; and WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist in the meeting of its liabilities under the Plan; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of Trust. (a) The Company hereby initially assigns to and deposits with the Trustee in trust the group life insurance policy certificates on the lives of Plan participants (the "Policies") listed on Appendix A, which shall become the principal of the Trust, to be held administered and disposed of by the Trustee as provided in this Trust Agreement. (b) Subject to Section 4, the Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth, other than as set forth in Section 2(f). Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event that the Company becomes Insolvent, as defined in Section 3(a) herein. (e) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property acceptable to the Trustee, including additional life insurance policies, in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Plan participant or his or her beneficiaries shall have any right to compel such additional deposits. (f) The Company represents that it shall restrict participation in the Plan to a "select group of management or highly compensated employees," as that phrase is used in and defined under Sections 201, 301, and 401 of ERISA. The Company agrees to indemnify against, and hold the Trustee harmless from, any and all claims, judgments, settlements and related costs or damages incurred by the Trustee resulting from the Trustee's reliance on such representation. (g) The Trustee shall hold, manage, invest, reinvest and otherwise administer the assets of the Trust pursuant to the terms of this Trust Agreement, The Trustee shall be responsible only for contributions and deposits actually received by it hereunder. The Trustee shall have no duty or authority to ascertain whether any contribution should be made to it pursuant to the Plan or to bring any action or proceeding to enforce any obligation to make any such contribution. The duties and obligations of the Trustee hereunder shall be limited to those expressly imposed upon it by this Trust Agreement, notwithstanding any reference herein to the Plan. Section 2. Duties of the Company and Plan Administrator, Payment to Plan Participants and Their Beneficiaries. (a) The Company, acting through the Compensation Committee of its Board of Directors (the "Compensation Committee"), may amend or terminate the Plan and, through a Plan Administrator, control and manage the operation of the Plan. The Plan Administrator (the "Administrative Committee") shall be appointed by the Compensation Committee. The Administrative Committee shall be responsible for instructing the Trustee in the disbursement of Plan benefits and performing those Plan administration functions specified in the Plan. The Company shall provide the Trustee with a certified copy of the Plan and all amendments thereto and of the resolutions of the Board of Directors of the Company approving the Plan and all amendments thereto, promptly upon their adoption. After the execution of this Trust Agreement, the Company shall promptly file with the Trustee a certified list of names and - 2 - titles of any persons properly designated and authorized to exercise any discretionary authority, responsibility or control in the management or administration of the Plan or the Trust. Until receipt by the Trustee of notice that any person is no longer authorized so to act, the Trustee may continue to rely on the authority of the person. All certifications, notices and directions by any such person or persons to the Trustee shall be in writing signed by such person or persons, and the Trustee may rely on any such certification, notice or direction purporting to have been signed by or on behalf of such person or persons that the Trustee believes to have signed thereby. The Trustee may rely on any certification, notice or direction of the Company that the Trustee reasonably believes to have been signed by a duly authorized officer or agent of the Company. (b) The establishment of the Trust and the payment or delivery to the Trustee of money or other property acceptable to the Trustee shall not vest in any Plan participant or his or her beneficiaries any right, title or interest in and to any assets of the Trust. (c) The Company shall remain primarily liable to pay benefits under the Plan. However, the Company's liability under the Plan shall be reduced or offset to the extent payments are made to Plan participants and their beneficiaries from the Trust. (d) The Administrative Committee shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts so payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement of payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. The Trustee may delegate to the Company or the Administrative Committee the responsibility for the reporting and withholding as described above. (e) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by the Compensation Committee or such party as the Compensation Committee shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures adopted by the Compensation Committee or the Administrative Committee in accordance with the terms of the Plan. (f) The Administrative Committee may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. The Administrative Committee shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Plan participants or their beneficiaries. Upon presentation of proof of payment, the Company shall be reimbursed by the Trustee from Trust assets in an amount equal to any benefit payment made directly to a Plan participant or beneficiary. In addition, if the principal of the Trust, and any earnings thereon, (i) are not - 3 - sufficient to make payments of benefits to any Plan participant in accordance with the terms of the Plan, the Administrative Committee shall make the balance of each such payment as it falls due, or (ii) exceed the amount necessary to make a full and complete payment of all benefits owing to any Plan participant in accordance with the terms of the Plan (the "Excess"), the Administrative Committee shall have the right to request the Trustee to return out of applicable Trust assets an amount equal to all or any portion of such Excess in any Policy maintained with respect to such Plan participant. (g) Except as provided in Section 3, but notwithstanding any other provision of this Trust Agreement to the contrary, if at any time (i) the Trust is finally determined by the Internal Revenue Service (the "IRS") not to be a "grantor trust," with the result that the income of the Trust is not treated as income of the Company pursuant to Sections 671 through 679 of the Code, (ii) a federal tax is finally determined by the IRS to be payable by the Trust beneficiaries with respect to the entire value of the assets maintained under the Trust prior to the final distribution of such assets to the Trust beneficiaries, or (iii) the Trustee receives an opinion of counsel satisfactory to it to the effect that it is likely that the IRS will determine that a tax will be payable by Trust beneficiaries as described in (ii) above and it is likely that such determination will be upheld, then, upon the written direction of the Administrative Committee, the Trustee shall immediately terminate the Trust and the assets attributable to each Trust beneficiary, as specified in writing by the Administrative Committee, shall be liquidated and paid in cash in a lump sum, subject to Section 6A, as soon as practicable by the Trustee to the Trust beneficiary for whom such assets were attributable, regardless of whether such Trust beneficiary's employment with the Company has terminated and regardless of the form and time of payment specified in any applicable Payment Schedule. All remaining assets (less any expenses or costs due under Section 10 hereof) shall then be paid by the Trustee to the Company. If the IRS determination referred to in (ii) above or the opinion referred to in (iii) above applies to less than the entire value of the Trust, then, upon the written direction of the Administrative Committee, that part of the assets of the Trust to which such determination or opinion relates shall be liquidated and paid in cash in a lump sum, subject to Section 6A, as soon as practicable by the Trustee to the Trust beneficiary upon whom such tax is or will be imposed, and the Trust shall continue in effect. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When the Company is Insolvent. (a) The Trust shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section l(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. - 4 - (1) The Administrative Committee shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any right of Plan participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plan or otherwise. (4) The Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has received a determination that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by the Company in lieu of the payment provided for hereunder during any such period of discontinuance. Section 4. Payments to the Company. Subject to the provisions of Sections 2, 3 and 13, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to any other person any of the Trust assets before all payments of benefits have been made to the Plan participants or their beneficiaries pursuant to the terms of the Payment Schedules. The Administrative Committee shall certify to the Trustee in writing whether all payments of benefits under the Trust have been made. The Trustee may conclusively rely upon such certification. - 5 - Section 5. Investment Authority. The Trustee shall invest and reinvest the principal and income of the Trust and keep the Trust invested, without distinction between principal and income, in such equity, fixed income or other investments acceptable to the Trustee, including life insurance policies pursuant to Section 6A hereof, as directed by the Administrative Committee or as are permitted in accordance with the Investment Guidelines, if any, which are, or when adopted shall be, attached hereto as Appendix B, as the same may be modified from time to time by the Administrative Committee. Section 6. Additional Powers and Duties of the Trustee. Subject to the provisions of Section 5 and the Investment Guidelines attached as Appendix B hereto, the Trustee shall have the following additional powers and authority with respect to property constituting a part of the Trust: (1) To exercise all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein; provided, however, that if a life insurance policy is held as an asset of the Trust, the Trustee shall have only those powers specified in Section 6A hereof with respect to such Policy. (2) To sell, exchange or transfer any such property at public or private sale for cash or on credit and grant options for the purchase or exchange thereof. (3) To participate in any plan or reorganization, consolidation, merger, combination, liquidation or other similar plan relating to any such property, and to consent to or oppose any such plan or any action thereunder, or any contract, lease, mortgage, purchase, sale or other action by any corporation or other entity. (4) To deposit any such property with any protective, reorganization or similar committee; to delegate discretionary power to any such committee; and to pay part of the expenses and compensation of any such committee and any assessments levied with respect to any property so deposited. (5) To exercise any conversion privilege or subscription right available in connection with any such property; to oppose or consent to the reorganization, consolidation, merger or readjustment of the finances of any corporation, company or association, or to the sale, mortgage, pledge or lease of the property of any corporation, company or association any of the securities of which may at any time be held in the Trust and to do any act with reference thereto, including the exercise of options, the making of agreements or subscriptions and the payment of expenses, assessments or subscriptions, which may be deemed necessary or advisable in connection therewith, and to hold and retain any securities or other property which it may so acquire. - 6 - (6) To commence or defend suits or legal proceedings and to represent the Trust in all suits or legal proceedings; to settle, compromise or submit to arbitration, any claims, debts or damages, due or owing to or from the Trust. (7) To exercise, personally or by general or limited power of attorney, any right, including the right to vote, appurtenant to any securities or other such property. (8) To borrow money from any lender in such amounts and upon such terms and conditions as shall be deemed advisable or proper to carry out the purposes of the Trust and to pledge any securities or other property for the repayment of any such loan. (9) To engage suitable actuaries, agents, custodians, record keepers, depositories and legal counsel, who may be legal counsel for the Company, to assist the Trustee in the performance of its duties hereunder, and to pay their reasonable expenses and compensation, to the extent not paid by the Company. (10) To register any securities held by it in its own name or in the name of any custodian of such property or of its nominee, including the nominee of any system for the central handling of securities, with or without the addition of words indicating that such securities are held in a fiduciary capacity, to deposit or arrange for the deposit of any such securities with such a system and to hold any securities in bearer form. (11) To make, execute and deliver, as the Trustee, any and all deeds, leases, notes, bonds, guarantees, mortgages. conveyances, contracts, waivers, releases or other instruments in writing necessary or proper for the accomplishment of any of the foregoing powers. (12) To transfer assets of the Trust to a successor trustee. (13) To exercise, generally, any of the powers which an individual owner might exercise in connection with property, either real, personal or mixed, held by the Trust, and to do all other acts that the Trustee may deem necessary or proper to carry out any of the powers set forth in this Section 6 or otherwise in the best interests of the Trust. (14) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. (15) Notwithstanding anything in this Trust Agreement to the contrary, the Trustee may, when directed by the Administrative Committee, invest Trust assets in individual and group life insurance Policies issued by an insurance company affiliated with the Trustee and in shares of regulated investment companies for which an affiliate of the Trustee may act as investment adviser. - 7 - Section 6A. Life Insurance Policies. (a) The Trustee shall receive and hold in the Trust, subject to the following, all Policies obtained, the proceeds of any sale, assignment or surrender of any such Policy, and any and all dividends and other payments of any kind received with respect to any such Policy. (b) Subject to any split dollar arrangement that the Trustee is directed to enter into by the Administrative Committee, the Trustee shall be the complete and absolute owner of all Policies held in the Trust. The Trustee, upon the written direction of the Administrative Committee or pursuant to any Payment Schedule forwarded by the Administrative Committee to the Trustee, shall deliver any Policy held in the Trust to such person as specified in the direction or Payment Schedule. (c) Upon the Administrative Committee's written direction, or subject to the Investment Guidelines attached as Appendix B hereto, the Trustee shall pay from the Trust premiums, assessments, dues, charges and interest, if any, upon any Policy held in the Trust. Notwithstanding anything in this Trust Agreement to the contrary, the Company may pay Policy premiums directly to the issuing insurance company and such payments shall be deemed a contribution to the Trust to the same extent as if payment had been made to the Trustee. Section 7. Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses and taxes (other than taxes on income earned by the Trust which will be borne by the Company), shall be accumulated and reinvested. Section 8. Accounting by the Trustee. (a) The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within 30 days following the close of each fiscal year (January 31) and within 90 days after the removal or resignation of the Trustee, the Trustee shall deliver to the Administrative Committee a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. (b) At the direction of the Administrative Committee, the Trustee shall from time to time permit an independent public accountant selected by the Administrative Committee to have access during ordinary business hours to such records as may be necessary to audit the Trustee's accounts. - 8 - (c) As of the last day of each fiscal year, and at such other times as the Administrative Committee may reasonably direct, the fair market value of the assets held in the Trust shall be determined. (d) Nothing contained in this Trust Agreement shall be construed as depriving the Trustee or the Administrative Committee of the right to have a judicial settlement of the Trustee's account, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions, the only necessary parties thereto in addition to the Trustee shall be the Administrative Committee and the Trust beneficiaries. (e) In the event of the removal or resignation of the Trustee, the Trustee shall deliver to the successor trustee all records which shall be required by the successor trustee to enable it to carry out the provisions of this Trust Agreement. (f) In addition to any returns required of the Trustee by law, the Trustee shall prepare and file such tax reports and other returns as the Administrative Committee and the Trustee may from time to time agree. Section 9. Responsibility and Indemnification of the Trustee. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such material would use in the conduct of an enterprise of a like character and with like aims; provided, however, that the Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the assets of the Trust, if it acts in good faith and in accordance with the terms of this Trust Agreement and in accordance with applicable federal or state laws, rules or regulations. Notwithstanding the foregoing and anything in this Trust Agreement to the contrary, the Trustee shall incur no liability to any person for any action taken pursuant to a written direction, request or approval given by the Administrative Committee. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against the Trustee's reasonable costs, expenses and liabilities (including, without limitation, reasonable attorneys' fees and expenses) relating thereto and to be liable for such payments, unless the Trustee is judicially determined not to have acted in good faith, as required by Section 9(a). (c) The Company shall indemnify and save harmless the Trustee from and against any and all claims, losses, damages, expenses (including reasonable attorneys' fees and expenses) and liability to which the Trustee may be subjected by reason of any act done or omitted to be done in its capacity as Trustee hereunder, except where the same is due to the negligence or willful misconduct of the Trustee. - 9 - Section 10. Compensation and Expenses of the Trustee. The Company shall pay all reasonable expenses incurred by the Trustee in its administration of the Trust. The Company shall also pay the Trustee such compensation as may be mutually agreed upon for its services hereunder. The compensation of the Trustee and any reasonable expenses, including reasonable attorneys' fees, incurred by the Trustee in the administration of the Trust, shall be paid by the assets of the Trust unless paid by the Company and unless or until so paid, shall constitute a charge upon the Trust. Section 11. Resignation and Removal of the Trustee. (a) The Trustee may resign at any time by written notice to the Company, which shall be effective 60 days after receipt of such notice unless the Company and the Trustee agree otherwise. (b) The Trustee may be removed by the Compensation Committee on 60 days' notice or upon shorter notice accepted by the Trustee. (c) Upon resignation or removal of the Trustee and appointment of a successor trustee, subject to the Trustee's rights to deduct fees and expenses pursuant to Section 10, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within 90 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (d) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this Section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All reasonable expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 12. Appointment of Successor Trustee. (a) If the Trustee resigns (or is removed) in accordance with Section 11 (a) or (b) hereof, the Compensation Committee may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Compensation Committee or the successor trustee to evidence the transfer. (b) The successor trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 8 and 9 hereof. - 10 - Section 13. Amendment or Termination. (a) This Trust Agreement, including the Appendices hereto, may be amended by a written instrument executed by the Trustee and the Compensation Committee. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1 (b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan unless sooner revoked in accordance with Section 2(g) hereof. Upon termination of the Trust and payment of benefits to Plan participants as provided under the terms of the Plan, any Excess (as defined in Section 2(f) hereof) in any Policy maintained with respect to a Plan participant shall be returned to the Company. Section 14. Miscellaneous. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of, and the Trust created hereunder shall have its situs in, the Commonwealth of Massachusetts. Section 15. Effective Date. Upon the execution by the Trustee, the effective date of this Trust Agreement shall be as of April 1, 1996. - 11 - IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be executed as of the day and year first above written. TOYS "R" US, INC. By:_______________________________ Title:____________________________ Date:________________, 1996 Allmerica Trust Company, N.A. By:_______________________________ Title:____________________________ Date:________________, 1996 - 12 - Appendix A Insurance Policies - 13 - Appendix B Investment Guidelines - 14 - EXHIBIT 10P* AMENDMENT NO. 1 TO GRANTOR TRUST AGREEMENT AMENDMENT NO. 1, effective as of April 1, 1996, to the Grantor Trust Agreement, effective as of April 1, 1996, by and between Toys "R" Us, Inc. and Allmerica Trust Company, N.A. 1. Section 3(b)(1) is amended by deleting the words "Administrative Committee" therefrom and inserting therein in their stead the words "Chief Executive Officer and the Board of Directors of the Company". IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed effective as of the day and year first above written. TOYS "R" US, INC. By: __________________________ Name: Peter W. Weiss Title: Vice President - Assistant Secretary Date: ________________________ ALLMERICA TRUST COMPANY, N.A. By: _______________________ Name: _______________________ Title: _______________________ Date: _______________________ 2 EXHIBIT 10P* AMENDMENT NO. 2 TO GRANTOR TRUST AGREEMENT AMENDMENT NO. 2, effective as of April 1, 1996, to the Grantor Trust Agreement, effective as of April 1, 1996, by and between Toys "R" Us, Inc. and Allmerica Trust Company, N.A. 1. Section 1(d) is amended by deleting the final sentence thereof and inserting, in its stead, the following sentence: "Any assets held by the Trust will be subject to the claims of the general creditors of the Company and those affiliated entities, if any, that have adopted the Plan (an "Adopting Affiliate") under federal and state law in the manner provided for under Section 3(b) herein in the event that the Company or an Adopting Affiliate becomes Insolvent, as defined in Section 3(a) herein." 2. Section 3(a) is amended in its entirety to read as follows: (a) If the Company or Adopting Affiliate is Insolvent, the Trustee shall cease payment of benefits to those Plan participants who are employed by the Insolvent Company or Adopting Affiliate, as the case may be, and such participants' beneficiaries. The Company or an Adopting Affiliate shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company or Adopting Affiliate, as the case may be, is unable to pay its debts as they become due, or (ii) the Company or Adopting Affiliate, as the case may be, is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 3. Section 3(b) is amended in its entirety to read as follows: (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the portion of the principal and income of the Trust attributable to Plan participants who are employed by the Company or an Adopting Affiliate, and such participants' beneficiaries, shall be subject to claims of the respective general creditors of the Company and the Adopting Affiliate, as the case may be, under federal and state law as set forth below. (1) The Chief Executive Officer and Board of Directors of the Company or Adopting Affiliate, as the case may be, (or, if an Adopting Affiliate is an entity other than a corporation, the person and body occupying positions analogous to those of Chief Executive Officer and Board of Directors) shall have a duty to inform the Trustee in writing of such Company's or Adopting Affiliate's Insolvency. If a person claiming to be a creditor of the Company or of an Adopting Affiliate alleges in writing to the Trustee that the Company or an Adopting Affiliate has become Insolvent, the Trustee shall determine whether such Company or Adopting Affiliate is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to those Plan participants who are employed by the Insolvent Company or Adopting Affiliate, as the case may be, and such participants' beneficiaries. (2) Unless the Trustee has actual knowledge that the Company or Adopting Affiliate is Insolvent, or has received notice from the Company, the Adopting Affiliate or a creditor of the Company or Adopting Affiliate alleging that the Company or Adopting Affiliate is Insolvent, the Trustee shall have no duty to inquire whether such Company or Adopting Affiliate, as the case may be, is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's or Adopting Affiliate's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning such Company's or Adopting Affiliate's solvency. (3) If at any time the Trustee has determined that the Company or an Adopting Affiliate is Insolvent, the Trustee shall discontinue payments to those Plan participants who are employed by the Insolvent Company or Adopting Affiliate, as the case may be, and such participants' beneficiaries and shall hold the portion of the assets of the Trust attributable to Plan participants who are employed by the Insolvent Company or Insolvent Adopting Affiliate, as the case may be, and such participants' beneficiaries, for the benefit of the respective general creditors of such Insolvent Company or Adopting Affiliate. 2 (4) The Trustee shall resume payment of benefits to the Plan participants and beneficiaries described in Section 3(b)(3) in accordance with Section 2 of this Trust Agreement only after the Trustee has received a determination that the Company or Adopting Affiliate, as the case may be, is not Insolvent (or is no longer Insolvent). (5) For purposes of this Section 3(b), the portion of the principal and income of the Trust that is attributable to each of the Company and any Adopting Affiliate is based upon the aggregate certificate values of the respective employees of each such Company or Adopting Affiliate who are Plan participants, and such participants' respective beneficiaries. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be executed effective as of the day and year first above written. TOYS "R" US, INC. By: _________________________ Name: Peter W. Weiss Title: Vice President - Assistant Secretary Date: _______________________ 3 ALLMERICA TRUST COMPANY, N.A. By: _______________________ Name: _______________________ Title: _______________________ Date: _______________________ EX-10.X 5 SEPARATION AGREEMENT EXHIBIT 10X SEPARATION AGREEMENT THIS SEPARATION AGREEMENT (this "Agreement"), dated as of March 25, 1999, is by and between TOYS "R" US, INC., a Delaware corporation (the "Company"), and BRUCE W. KRYSIAK (the "Executive"). RECITALS WHEREAS, pursuant to a Retention Agreement dated as of February 12, 1998 between the Company and the Executive (the "Retention Agreement"), Executive is a Director of the Company and is employed by the Company as President and Chief Operating Officer ("COO"), and as President - U.S. Toy Stores Division; and WHEREAS, pursuant to a Stock Unit Agreement dated as of February 12, 1998 between the Company and the Executive (the "Stock Unit Agreement"), on February 12, 1998, the Company granted Executive 200,000 Stock Units (the "Stock Units"); and WHEREAS, pursuant to the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan"), on May 4, 1998, the Company granted Executive options to acquire 300,000 shares of common stock (the "Initial Grant") and, on September 8, 1998, the Company granted Executive options to acquire 600,000 shares of common stock (the "September Grant"); and WHEREAS, Executive desires to resign his employment with the Company and his position as President and COO and all other director, officer and employee positions, if any, held by Executive in the Company and any of its subsidiaries effective as of March 26, 1999 (the "Termination Date"); and WHEREAS, the parties desire to set forth their respective rights and obligations in respect of Executive's resignation from the above positions; NOW, THEREFORE, in consideration of the covenants and conditions set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: AGREEMENT 1. Resignation. (a) Effective as of the Termination Date, Executive will resign from his positions as a Director and President and COO, and all other director, officer and employee positions, if any, held by Executive in the Company and any of its subsidiaries. It is agreed by the parties that, on and as of the Termination Date, all rights and obligations of Executive and the Company with respect to such employment shall terminate. (b) On the Termination Date, Executive will deliver to the Company a letter of resignation in the form of Exhibit A hereto and a certificate of release in the form of Exhibit B hereto. 2. Benefits. In consideration of the agreements of Executive herein, Executive will be entitled to the benefits set forth in this Section 2. (a) Salary. From the Termination Date through the Second Anniversary of the Termination Date and regardless of whether Executive obtains other employment, the Company will pay Executive $800,000 per year, such amount to be payable in accordance with the Company's regular payroll policies as in effect from time to time. All payments to Executive under this Section 2(a) will be less applicable withholdings for federal, state and local taxes. (b) Relocation Expenses. If, during the two year period commencing on the Termination Date and regardless of whether Executive obtains other employment during such period, the Executive relocates his family to an area other than Northeastern New Jersey, the Company will purchase at fair market value the house currently being constructed for Executive in Ridgewood, NJ, subject to the terms of the Company's relocation policy as from time to time in effect and provided that the Executive has taken possession of such house. (c) Health Benefits. From the Termination Date until the earlier to occur of (i) the Second Anniversary of the Termination Date or (ii) the date Executive commences employment with another employer, the Company will permit Executive to continue to participate in the medical, prescription, dental and disability plans maintained by the Company from time to time at a level commensurate with the level at which senior executives of the Company participate. (d) Stock Units. Executive hereby forfeits all of the Stock Units in their entirety, except that on the second anniversary of the Termination Date, subject to the achievement of the performance objective set forth on Exhibit A to the Stock Unit Agreement, 40,000 of such units shall be converted into an equivalent number of shares of common stock of the Company, which shares shall be delivered to the Executive on the second anniversary of the Termination Date. Except as modified by the preceding sentence, the Stock Unit Agreement shall continue in full force and effect. (e) Stock Options. All Stock Options granted to Executive as part of the Initial Grant and the September Grant are hereby canceled, except that of the 300,000 options granted in the Initial Grant, Executive shall retain 60,000 options and of the 600,000 options granted in the September Grant, Executive shall retain 120,000 options. All stock options retained by Executive pursuant to this paragraph (e) shall be subject to the terms and conditions (including vesting requirements) of the original grants. (f) Life Insurance. From the Termination Date until the earlier to occur of (i) the Second Anniversary of the Termination Date or (ii) the date Executive commences employment with another employer, the Company will permit Executive to continue to participate in the Company's basic life insurance and accidental death and dismemberment 2 policy for a benefit equal to two times the annual payment to be made by the Company pursuant to Section 2(a) of this Agreement. (g) Automobile. Executive will retain use of the automobile currently leased for him by the Company until the end of the term of the lease for such automobile (i.e., February 28, 2001). (h) Executive acknowledges that he is not entitled to receive benefits from the Company other than as set forth in this Section 2, except for any benefits afforded Executive by applicable law. (i) No payments shall be made under this Section 2 until this Agreement becomes effective pursuant to Sections 20 and 24 hereof. 3. Termination of All Existing Agreements. All rights and obligations of the Company and the Executive under any employment agreement, arrangement or understanding and any other agreement between the Company and the Executive are hereby canceled and terminated as of the Termination Date without liability of any party hereunder, except that this Agreement, the Stock Unit Agreement (as modified by Section 2(d) above) and the Partnership Option Agreements dated as of September 8, 1998 and May 4, 1998 between the Company and Executive (each as modified by Section 2(e) above) shall continue in full force and effect. 4. No Solicitation of Executives or Customers. Executive hereby represents and warrants that during the six month period preceding the date of this Agreement he has not (i) solicited any customers of the Company or induced any customer of the Company to enter into a business relationship with Executive or any other person or (ii) solicited for employment or induced any person employed by the Company to terminate employment. During the two year period commencing on the Termination Date, the Executive shall not, directly or indirectly, (i) employ or seek to employ any person who is as of the Termination Date, or was at any time during the six month period preceding the Termination Date, an officer, general manager, or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period) or (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company. 5. Non-competition and Consulting. (a) During the two year period commencing on tshe Termination Date (the "Consulting Period"), the Executive shall not, directly or indirectly: (x) engage in any managerial, administrative, advisory, consulting or operational or sales activities in Restricted Business anywhere in the Restricted Area, including, without limitation, as a director or partner of such Restricted Business, or 3 (y) organize, establish, operate, own, manage or control or have a direct or indirect investment or ownership interest in a Restricted Business or in any corporation, partnership (limited or general), limited liability company enterprise or other business entity that engages in a Restricted Business anywhere in the Restricted Area. (b) During the Consulting Period, the Executive shall: (x) be available to render services to the Company as an independent contractor/consultant but not as an employee of the Company; and (y) perform such duties as may be reasonably requested in writing from time to time during the Consulting Period by the Company's Chief Executive Officer, provided that such duties shall not conflict with the duties of the Executive for a new employer if such employment does not violate the terms of Section 5(a). (c) Nothing in this Section 5 shall prohibit or otherwise restrict the Executive from acquiring or owning, directly or indirectly, for passive investment purposes not intended to circumvent this Agreement, securities of any entity engaged, directly or indirectly, in a Business if either (i) such entity is a public entity and the Executive (A) is not a controlling Person of, or a member of a group that controls, such entity and (B) owns, directly or indirectly, no more than 3% of any class of equity securities of such entity or (ii) such entity is not a public entity and the Executive (A) is not a controlling Person of, or a member of a group that controls, such entity and (B) does not own, directly or indirectly, more than 1% of any class of equity securities of such entity. (d) For purposes of this Section 5, "Restricted Business" shall mean the retail store or mail order business or internet business or any business, in each case if it is involved in the manufacture or marketing of toys, juvenile or baby products, juvenile furniture or children's clothing or any other business in which the Company may be engaged on the Termination Date. "Restricted Area" means any country in which the Company or its subsidiaries owns or franchises any retail store operations or otherwise has operations on the Termination Date. 6. Retained Property. Subject to Section 2(g), no later than the Termination Date, Executive shall return all property of the Company in his possession, including, but not limited to, credit cards, security key cards, telephone cards, car service cards, computer software or hardware, Company identification cards, Company records and copies of records, correspondence and copies of correspondence and other books or manuals issued by the Company. Executive also warrants that he has no debts to or loans from the Company. Notwithstanding the foregoing, Executive shall have the right to retain (i) duplicate photocopies of books and records of the Company that do not fall within the category of "Confidential Information" (as defined below) and (ii) all personal property of the Executive located on the premises of the Company. 7. Confidentiality. Executive acknowledges that he has had and through the Termination Date will continue to have access to Confidential Information (as hereinafter defined) of the Company. Executive agrees not to disclose, communicate or divulge to, or use for the direct or indirect benefit of, any person (including Executive), firm, association or other 4 entity (other than the Company or its affiliates) any Confidential Information. "Confidential Information" includes, but is not limited to, customer and vendor lists, database, computer programs, frameworks, models, marketing programs, sales, financial, marketing, training and technical information, business methods, business policies, procedures, techniques, research or development projects or results, trade secrets (which Executive agrees include the Company's customer and prospective customer lists), pricing policies, business plans, computer software, intellectual property, information concerning how the Company creates, develops, acquires or maintains its products and marketing plans, targets its potential customers, and operates its retail and other businesses, and any other information not otherwise available to the general public. If any person (including any government employee) requests the disclosure or release of Confidential Information, Executive shall (i) promptly notify the Company of such request so that the Company may pursue any available remedies to prevent the disclosure or release of such Confidential Information and (ii) furnish the Company a copy of all written materials pertaining to such request for Confidential Information as the Company shall deem appropriate. 8. No Inducements. Executive warrants that he is entering into this Agreement voluntarily, and that, except as set forth herein, no promises or inducements for this Agreement have been made, and he is entering into this Agreement without reliance upon any statement or representation by any of the Company and its affiliates, and its and their present and former stockholders, directors, officers, employees, agents, attorneys, successors and assigns or any other person, concerning any fact material hereto. 9. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes any and all prior agreements or understandings between the parties arising out of or relating to the Executive's employment and the cessation thereof. This Agreement may only be changed by written agreement executed by the parties. 10. Governing Law. This Agreement shall be governed by the laws of the State of New Jersey, without giving effect to the conflicts of law principles thereof. 11. Representations and Warranties. Each party represents and warrants to the other party that (i) the execution and delivery of this Agreement has been duly authorized and all actions necessary for the due execution of this Agreement have been taken, (ii) this Agreement constitutes the legal, valid and binding obligation of the party, and (iii) this Agreement has been executed and delivered as its own free act and deed and not as the result of duress by the other party hereto. Executive specifically acknowledges that he has been advised to consult legal counsel prior to executing this Agreement, and has been afforded the opportunity of at least 21 days to consider this Agreement. 12. Non-Disparagement. Executive covenants and agrees not to engage in any act or say anything that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of Executive. 5 13. Public Announcement. Except as required by law, Executive agrees not to make any public disclosure with respect to this Agreement, the events leading up to this Agreement, and the transactions contemplated by this Agreement. 14. No Admissions. Nothing contained in this Agreement shall be considered an admission by either party of any wrongdoing or liability under any Federal, state or local statute, public policy, tort law, contract law, common law or otherwise. 15. Expenses. Subject to the following sentence, each party shall pay its own costs incident to the negotiation, preparation, performance, execution, and enforcement of this Agreement, and all fees and expenses of its or his counsel, accountants, and other consultants, advisors and representatives for all activities of such persons undertaken in connection with this Agreement. Notwithstanding the immediately preceding sentence, solely to the extent that the Executive is successful with respect thereto, the Company agrees to pay all reasonable legal fees and expenses of one counsel that the Executive may reasonably incur as result of any contest by Executive, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement). 16. Cooperation. Upon reasonable notice, Executive agrees to cooperate reasonably with the Company and its affiliated corporation entities in the defense of any claim asserted against them and as to which Executive has, or may have, knowledge. The Company agrees to reimburse Executive for any regular and ordinary expenses incurred in connection with such cooperation. 17. No Third Party Claims. Executive represents and warrants that no other person or entity has, or to the best knowledge of Executive, claims, any interest in any potential claims, demands, causes of action, obligations, damages or suits pursuant to this Agreement; that he is the owner of all other claims, demands, causes of action, obligations, damages or suits pursuant to this Agreement; that he has full and complete authority to execute this Agreement; and that he has not sold, assigned, transferred, conveyed or otherwise disposed of any claim, demand, cause of action, obligation or liability subject to this Agreement. 18. No Third Party Beneficiaries. Except as expressly stated herein, the parties do not intend to make any person or entity who is not a party to this Agreement a beneficiary hereof, and this Agreement should not be construed as being made for the benefit of any person or entity not expressly provided for herein. 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be one and the same instrument. 20. Acceptance and Revocation. Executive shall have a period of twenty-one (21) days from the date of receipt of this Agreement to review and accept this Agreement. Executive shall have seven (7) days following his execution of this Agreement during which time he may revoke this Agreement by providing the Company with written notice of the revocation. This Agreement shall become effective and enforceable after the expiration of seven 6 (7) days following Executive's execution of the Agreement, and is not enforceable until after the seven-day revocation period expires. 21. Future Employment. Executive hereby waives any right to reinstatement or future employment with the Company following the Termination Date. 22. Arbitration. Except as otherwise provided for herein, any controversy arising under, out of, in connection with, or relating to, this Agreement, and any amendment hereof, or the breach hereof or thereof, shall be determined and settled by arbitration in New York, New York, by a three person panel mutually agreed upon, or in the event of a disagreement as to the selection of arbitrators, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons of such award, with references to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. 23. Merger, Consolidation, Sale of Assets by the Company. The Company shall not merge or consolidate with any other person or sell or otherwise dispose of all or substantially of its assets unless (i) the Company is the continuing person in such merger or consolidation or (ii) the entity surviving such consolidation or merger (if other than the Company) or to which such sale or disposition is made assumes all of the obligations of the Company under this Agreement. 24. Executive Committee Approval. This Agreement shall be subject to the approval of the Executive Committee of the Company's Board of Directors. 1. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Toys "R" Us, Inc. By: /s/ Robert C. Nakasone --------------------------------- Name: Robert C. Nakasone Title: Chief Executive Officer EXECUTIVE /s/ Bruce W. Krysiak ------------------------------------- Bruce W. Krysiak Original Document issued to Bruce W. Krysiak on March __, 1999 EX-10.Y 6 RETENTION AGREEMENT Exhibit 10Y* RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND MICHAEL SHANNON DATED AS OF OCTOBER 12, 1998 TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and MICHAEL SHANNON (the "Officer"), dated as of October 12, 1998. Capitalized terms used in this Agreement and in Exhibit A hereto that are not defined in the operative provisions shall have the meanings ascribed to them on Exhibit B hereto. 1. Employment Period. The Company hereby agrees to continue to employ the Officer and the Officer hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the Employment Period. The term "Employment Period" means the period commencing on the date hereof and ending on the second anniversary of such date as automatically extended for successive additional one-year periods unless, at least six months prior to the scheduled expiration of the Employment Period, the Company shall give notice to the Officer that the Employment Period shall not be so extended. 2. Terms of Employment. (a) Position. (i) Commencing on the date hereof and for the remainder of the Employment Period, the Officer shall serve in the position of Executive Vice President and Chief Administrative Officer of the Company or such other senior position to which the Officer may be appointed by the Company. The Officer shall be based in Northeastern New Jersey. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Officer is entitled, the Officer agrees to devote full time during normal business hours to the business and affairs of the Company and to use the Officer's best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, the Officer may, so long as such activities do not interfere with the performance of the Officer's responsibilities as an employee of the Company in accordance with this Agreement, continue the corporate directorships on which the Officer serves, if any, as of the date hereof and such other corporate directorships as are consented to by the Chief Executive Officer. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Officer with the knowledge of the Company prior to a Change of Control, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to a Change of Control shall not thereafter be deemed to violate this Agreement. (b) Compensation. (i) Base Salary. During the Employment Period, the Officer shall receive the Officer's Annual Base Salary which will be paid in accordance with the Company's regular payroll policies as in effect from time to time. (ii) Incentive Bonus. The Officer shall also be eligible, for each fiscal year ending during the Employment Period, to receive an annual incentive bonus and long-term incentive awards pursuant to the Company's incentive Plans and subject to the terms thereof at a level commensurate with the Company's grants to the officer currently serving as Executive Vice -2- President or any more senior position(s) to which the Officer may be appointed. Each such incentive bonus shall be paid in accordance with the Company's incentive Plans. (iii) Participation in Other Plans. During the Employment Period, the Officer shall be eligible to participate in all other Plans at a level commensurate with the Officer's position. (iv) Stock Units. As further inducement for the Officer to enter into this Agreement and to continue in the employ of the Company, the Company has granted to the Officer stock units contingent on performance and future service, pursuant to the Stock Unit Agreement executed and delivered by the Company on the date hereof in the form attached as Annex A hereto. 3. Termination of Employment Upon Death, Disability or Retirement. The Officer's employment shall terminate upon the Officer's death, Disability or Retirement during the Employment Period and the obligations of the Company upon such termination shall be limited to those benefits provided by the Plans at the Date of Termination, except as specifically set forth herein or in the Stock Unit Agreement. 4. Other Termination of Employment. (a) Company Termination. The Company may terminate the Officer's employment during the Employment Period with or without Cause. (b) Good Reason. The Officer's employment may be terminated during the Employment Period by the Officer for Good Reason. (c) Notice of Termination. (i) Any termination by the Company for Cause, or by the Officer for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. The failure by the Officer or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Officer or the Company, respectively, hereunder or preclude the Officer or the Company, respectively, from asserting such fact or circumstance in enforcing the Officer's or the Company's rights hereunder. (ii) Resignation. Without limiting the obligations of the Officer, or the rights of the Company, in connection with, or relating to, this Agreement, the Officer agrees that in order for the Officer to resign his employment without Good Reason with the Company or any of its Subsidiaries, the Officer shall provide the Company with six (6) months notice of resignation prior to the effective date of such resignation. (d) Obligations of the Company Upon Termination Under Section 4. If the Officer's employment shall have been terminated under Section 4(a) (other than for Cause) or 4(b): (i) the Company shall make a lump sum cash payment to the Officer within 30 days after the Date of Termination in an amount equal to the sum of (1) the Officer's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (2) the targeted amount of the Officer's annual bonus and long-term incentive awards that would have been payable with respect to the fiscal year in which the Date of Termination occurs in each case -3- absent the termination of the Officer's employment prorated for the portion of such fiscal year through the Date of Termination taking into account the number of complete months during such fiscal year through the Date of Termination and (3) the Officer's actual earned annual or long-term incentive awards for any completed fiscal year or period not theretofore paid or deferred; (ii) the Company shall pay to the Officer in equal installments, made at least monthly, over the twenty-four months following the Date of Termination an aggregate amount equal to (1) two times the Officer's Annual Base Salary in effect on the Date of Termination, (2) two times the targeted amount of the annual incentive bonus that would have been paid to the Officer with respect to the Company's fiscal year in which such Date of Termination occurs and (3) two times the targeted amount of the long-term incentive award that would have been paid to the Officer with respect to such fiscal year; (iii) the Company shall continue to provide, in the manner and timing provided for in the Plans (other than stock options and except as set forth in this Section 4(d) and in Section 7(b)), the benefits provided under the Plans that the Officer would receive on an after-tax basis if the Officer's employment had continued for two years after the Date of Termination assuming for this purpose that the Officer's compensation for each such year would have been one-half of the amount payable pursuant to clause (ii) above, and the Officer shall be fully vested in any account balance and all other benefits continuation under such Plans; provided, however that the benefits provided under this clause (iii) shall be limited to the coverage permitted by law or as would otherwise not potentially adversely impact on the tax qualification of any Plans; provided, further, that if such benefits may not be continued under the Plans, the Company shall pay to the Officer an amount equal to the Company's cost had such benefits been continued. (iv) (1) all unvested options held by the Officer shall continue to vest in accordance with their terms for two years after the Date of Termination, and all remaining unvested options held by the Officer shall vest on the two year anniversary date of the Date of Termination, (2) all unvested profit shares held by the Officer or for the benefit of the Officer by a grantor trust established by the Company shall continue to vest in accordance with their terms for two years after the Date of Termination and all remaining profit shares shall vest on the two year anniversary date of the Date of Termination, provided that, if permitted by the terms of any such trust, any unvested profit shares shall continue to be held by such grantor trust until such profit shares vest pursuant to this clause (iv) and any such unvested profit shares not permitted to be so held shall vest immediately and be delivered to the Officer, (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by the Officer shall vest on the two year anniversary date of the Date of Termination on a pro rata basis determined by a fraction, the numerator of which is the number of months elapsed from the grant of such equity award through the Date of Termination plus the twenty-four months after the Date of Termination and the denominator of which is the total number of months in the vesting period for such award and shall be promptly delivered to the Officer entirely in the form of Common Stock, (4) any options held by the Officer that are vested on the Date of Termination or vest thereafter pursuant to this clause (iv) may be exercised until the earlier of (x) the thirty month anniversary date of the Date of Termination and (y) the expiration date of such options and (5) the Officer shall not be entitled to any additional grants of any stock options, restricted stock, other equity based or long-term awards; and -4- (v) the Officer will be entitled to continuation of health benefits under the Plans at a level commensurate with the Officer's position or more senior position(s) to which the Officer may be appointed, and if the Officer elects to receive such health benefits, the Company shall pay the medical premiums therefore for the first twenty-four months after the Date of Termination, and thereafter the Officer shall pay the premium charged to former employees of the Company pursuant to Section 4980B of the Code until the Officer is sixty-five years of age; provided, that the Company can amend or otherwise alter the Plans to provide benefits to the Officer that are no less than those commensurate with the Officer's current position or more senior position(s) to which the Officer may be appointed; provided, that to the extent such benefits cannot be provided to the Officer under the terms of the Plans or the Plans cannot be so amended in any manner not adverse to the Company, the Company shall pay the Officer, on an after-tax basis, an amount necessary for the Officer to acquire such benefits from an independent insurance carrier; and provided, further, that the obligations of the Company under this clause (v) shall be terminated if, at any time after the Date of Termination, the Officer is employed by or is otherwise affiliated with a party that offers comparable health benefits to the Officer. (e) Cause. If the Officer's employment shall be terminated for Cause during the Employment Period or if the Officer voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, death, Disability or Retirement, the Employment Period shall terminate without further obligations to the Officer other than the obligation to pay to the Officer all payments and benefits due, in accordance with the Company's Plans through the Date of Termination. 5. Release Agreement. The benefits pursuant to Section 4 are contingent upon the Officer (i) executing a Separation and Release Agreement (the "Release Agreement") upon or after any Date of Termination, a copy of which is attached as Exhibit A to this Agreement and (ii) not revoking or challenging the enforceability of the Release Agreement or this Agreement. 6. Offset. The Company shall have the right to offset the amounts required to be paid to the Officer under this Agreement against any amounts owed by the Officer to the Company, and nothing in this Agreement shall prevent the Company from pursuing any other available remedies against the Officer. 7. Compensation and Benefits Following Change of Control. (a) Notwithstanding any provision of this Agreement or any Plan, in no event shall any compensation or benefits, individually or in the aggregate, to which the Officer would be entitled be less favorable for the two years following a Change of Control than the Officer would have been entitled based upon the most favorable of the Company's Plans in effect for the Officer at any time during the 120-day period immediately preceding such Change of Control. (b) In the event of termination of the Officer's employment under Section 4(a) (other than for Cause) or 4(b), whether before or after a Change of Control, following a Change of Control: (i) any remaining amounts payable under Sections 4(d)(i), (ii) and (iii) shall be payable in a lump sum within 30 days after the later of the Date of Termination or the Change of Control and (ii) in lieu of the Company's obligations under Section 4(d)(iv), all unvested options and -5- equity based awards shall vest immediately on the later of the Date of Termination or the Change of Control and all such options may be exercised until the earlier of (x) the thirty-month anniversary date of the Date of Termination and (y) the expiration date of such options. 8. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Officer's continuing or future participation in any Plan for which the Officer may qualify nor shall anything herein limit or otherwise affect such rights as the Officer may have under any contract or agreement with the Company. Amounts that are vested benefits or that the Officer is otherwise entitled to receive under any Plan, contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such Plan, or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Legal Fees. (a) No Obligation to Mitigate. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement, and, except as specifically provided in this Agreement, such amounts shall not be reduced whether or not the Officer obtains other employment. (b) Expenses of Contests. (i) The following shall apply for any dispute arising hereunder, under the Release Agreement or under the Stock Unit Agreement prior to a Change of Control: In each case solely to the extent that the Officer is successful with respect thereto, the Company agrees to pay all reasonable legal and professional fees and expenses that the Officer may reasonably incur as a result of any contest by the Officer, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Release Agreement or the Stock Unit Agreement (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code or any successor Section of the Code. (ii) The following shall apply for any dispute arising hereunder, under the Release Agreement or under the Stock Unit Agreement upon or following a Change of Control: The Company agrees to advance to the Officer all reasonable legal and professional fees and expenses that the Officer may reasonably incur as a result of any contest by the Officer, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Release Agreement or the Stock Unit Agreement (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code or any successor Section of the Code. (iii) The Officer shall reimburse the Company for its reasonable legal and professional fees and expenses, and in the case of advances made pursuant to paragraph (ii) above, shall refund the Company the amount of such advances, to the extent there is a final determination that -6- such fees, expenses or advances relate to claims brought by the Officer against, or defenses by the Officer of any claim of, the Company with respect to this Agreement, the Release Agreement or the Stock Unit Agreement that were determined to have been made or asserted by the Officer in bad faith or frivolously. 10. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any actual or constructive payment or distribution by the Company to or for the benefit of the Officer (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, the Stock Unit Agreement or otherwise) is subject to the excise tax imposed by Section 4999 of the Code or any successor provision of the Code (the "Excise Tax"), then the Company shall make the payments described on Exhibit C hereto. 11. Restrictions and Obligations of the Officer. (a) Consideration for Restrictions and Covenants. The parties hereto acknowledge and agree that the principal consideration for the agreement to make the payments provided in Sections 3 and 4 hereof from the Company to the Officer and the grant to the Officer of the stock units of the Company as set forth in Section 2 hereof is the Officer's compliance with the undertakings set forth in this Section 11. Specifically, Officer agrees to comply with the provisions of this Section 11 irrespective of whether the Officer is entitled to receive any payments under Section 3 or 4 of this Agreement. (b) Confidentiality. The confidential and proprietary information and trade secrets of the Company are among its most valuable assets, including but not limited to, its customer and vendor lists, database, computer programs, frameworks, models, its marketing programs, its sales, financial, marketing, training and technical information, and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Company creates, develops, acquires or maintains its products and marketing plans, targets its potential customers and operates its retail and other businesses. The Company has invested, and continues to invest, considerable amounts of time and money in obtaining and developing the goodwill of its customers, its other external relationships, its data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Company. The Officer shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information relating to the Company and its business, which shall have been obtained by the Officer during the Officer's employment by the Company and which shall not be or become public knowledge (other than by acts by the Officer or representatives of the Officer in violation of this Agreement). After termination of the Officer's employment with the Company, the Officer shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate, divulge or use any such information, knowledge or data to anyone other than the Company and those designated by it. (c) Non-Solicitation or Hire. During the Employment Period and for a two-year period following the termination of the Officer's employment for any reason, the Officer shall not, -7- directly or indirectly (i) employ or seek to employ any person who is at the Date of Termination, or was at any time within the six-month period preceding the Date of Termination, an officer, general manager or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period) or (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company. (d) Non-Competition and Consulting. (i) During the Employment Period and for a two-year period (the "Consulting Period") following the termination of the Officer's employment for any reason, the Officer shall not, directly or indirectly: (x) engage in any managerial, administrative, advisory, consulting, operational or sales activities in a Restricted Business anywhere in the Restricted Area, including, without limitation, as a director or partner of such Restricted Business, or (y) organize, establish, operate, own, manage, control or have a direct or indirect investment or ownership interest in a Restricted Business or in any corporation, partnership (limited or general), limited liability company enterprise or other business entity that engages in a Restricted Business anywhere in the Restricted Area; and (ii) During the Consulting Period, the Officer shall (x) be available to render services to the Company as an independent contractor/consultant but not as an employee of the Company; and (y) perform such duties as may be reasonably requested in writing from time to time during the Consulting Period by the Chief Executive Officer; provided that such duties shall not conflict with the duties of the Officer for a new employer if such employment does not violate the terms of Section 11(d)(i) hereof. (iii) Section 11(d) shall not bind the Officer during any period following the termination of the Officer's employment if there has been a Change of Control irrespective of whether the Change of Control occurs before or after the Date of Termination. (iv) Nothing contained in this Section 11(d) shall prohibit or otherwise restrict the Officer from acquiring or owning, directly or indirectly, for passive investment purposes not intended to circumvent this Agreement, securities of any entity engaged, directly or indirectly, in a Restricted Business if either (i) such entity is a public entity and such Officer (A) is not a controlling Person of, or a member of a group that controls, such entity and (B) owns, directly or indirectly, no more than 3% of any class of equity securities of such entity or (ii) such entity is not a public entity and the Officer (A) is not a controlling Person of, or a member of a group that -8- controls, such entity and (B) does not own, directly or indirectly, more than 1% of any class of equity securities of such entity. (e) Definitions. For purposes of this Section 11: (i) "Restricted Business" means the retail store or mail order business or any business, in each case if it is involved in the manufacture or marketing of toys, juvenile or baby products, juvenile furniture or children's clothing or any other business in which the Company may be engaged on the Date of Termination. (ii) "Restricted Area" means any country in which the Company or its subsidiaries owns or franchises any retail store operations or otherwise has operations on the Date of Termination. (f) Relief. The parties hereto hereby acknowledge that the provisions of this Section 11 are reasonable and necessary for the protection of the Company and its subsidiaries. In addition, the Officer further acknowledges that the Company and its subsidiaries will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Officer agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining the Officer from any actual or threatened breach of such covenants. In addition, without limiting the Company's remedies for any breach of any restriction on the Officer set forth in Section 11, except as required by law, the Officer shall not be entitled to any payments set forth in Section 3 or 4 hereof if the Officer breaches any of the covenants applicable to the Officer contained in this Section 11, the Officer will immediately return to the Company any such payments previously received upon such a breach, and, in the event of such breach, the Company will have no obligation to pay any of the amounts that remain payable by the Company under Section 3 or 4. 12. Successors. (a) This Agreement is personal to the Officer and without the prior written consent of the Company shall not be assignable by the Officer otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Officer's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will, within thirty days after a Change of Control, and the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company within thirty days after any such event of succession to, assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. -9- 13. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. (b) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Officer, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (e) Assistance to Company. At all times during and after the Employment Period and at the Company's expense for significant out-of-pocket expenses actually and reasonably incurred by the Officer in connection therewith, the Officer shall provide reasonable assistance to the Company in the collection of information and documents and shall make the Officer available when reasonably requested by the Company in connection with claims or actions brought by or against third parties or investigations by governmental agencies based upon events or circumstances concerning the Officer's duties, responsibilities and authority during the Employment Period. (f) Severability of Provisions. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. The Officer acknowledges that the restrictive covenants contained in Section 11 are a condition of this Agreement and are reasonable and valid in geographical and temporal scope and in all other respects. If any court or arbitrator determines that any of the covenants in Section 11, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. -10- (g) Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Waiver. The Officer's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Officer or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (i) Arbitration. Except as otherwise provided for herein, any controversy arising under, out of, in connection with, or relating to, this Agreement, and any amendment hereof, or the breach hereof or thereof, shall be determined and settled by arbitration in New York, New York, by a three person panel mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrators, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons of such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. IN WITNESS WHEREOF, the Officer has hereunto set the Officer's hand and the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. __________________________ Michael Shannon TOYS "R" US, INC. By: _____________________ Name: Title: -11- EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this day of , 19 , between TOYS "R" US, INC. and any successor thereto (collectively, the "Company") and ___________ (the "Officer"). The Officer and the Company agree as follows: 1. The employment relationship between the Officer and the Company terminated on (the "Termination Date"). 2. In accordance with the Officer's Retention Agreement, the Company has agreed to pay the Officer certain payments and to make certain benefits available after the Termination Date. 3. In consideration of the above, the sufficiency of which the Officer hereby acknowledges, the Officer, on behalf of the Officer and the Officer's heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this letter agreement, including, without limitation, any claims the Officer may have arising from or relating to the Officer's employment or termination from employment with the Company, including a release of any rights or claims the Officer may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Officer of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Officer's employment with or resignation or termination from the Company. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended ("ADEA"). The ADEA requires that the Officer be advised to consult with an attorney before the Officer waives any claim under ADEA. In addition, the ADEA provides the Officer with at least 21 days to decide whether to waive -12- claims under ADEA and seven days after the Officer signs the Agreement to revoke that waiver. This release does not release the Company from any obligations due to the Officer under Section 4, 7, 9(b), 10, 11 or 13(e) of the Officer's Retention Agreement, the Officer's Indemnification Agreement with the Company or under this Agreement. Additionally, the Company agrees to discharge and release the Officer and the Officer's heirs from any claims, demands, and/or causes of action whatsoever, presently known or unknown, that are based upon facts occurring prior to the date of this Agreement, including, but not limited to, any claim, matter or action related to the Officer's employment and/or affiliation with, or termination and separation from the Company; provided that such release shall not release the Officer from any loan or advance by the Company or any of its subsidiaries, any act that would constitute "Cause" under the Officer's Retention Agreement or a breach under Section 9(b), 11 or 13(e) of the Officer's Retention Agreement. 4. This Agreement is not an admission by either the Officer or the Company of any wrongdoing or liability. 5. The Officer waives any right to reinstatement or future employment with the Company following the Officer's separation from the Company on the Termination Date. 6. The Officer agrees not to engage in any act after execution of the Separation and Release Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company further agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of the Officer. This paragraph shall not prohibit either party from cooperating with government agencies. 7. The Officer shall continue to be bound by Sections 11 and 13(e) of the Officer's Retention Agreement. 8. The Officer shall promptly return all the Company property in the Officer's possession, including, but not limited to, the Company keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company business. The Officer shall return any leased or Company car at the expiration of the Consulting Period (as defined in the Officer's Retention Agreement). 9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Officer's Retention Agreement. 10. This Agreement represents the complete agreement between the Officer and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise -13- than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, the Officer may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. No revocation of this Agreement by the Officer shall be effective unless the Company has received within the 7-day revocation period, written notice of any revocation, all monies received by the Officer under this Agreement and all originals and copies of this Agreement. 13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Officer acknowledges that the Officer has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Officer acknowledges that the Officer has been afforded the opportunity of at least 21 days to consider this Agreement. -14- The parties to this Agreement have executed this Agreement as of the day and year first written above. TOYS "R" US, INC. By: ________________________ Name: Title: _______________________ Michael Shannon -15- EXHIBIT B Capitalized terms used in the Agreement that are not elsewhere defined in the Agreement have the definitions set forth below: "Annual Base Salary" means $555,000 per annum as may be increased from time to time in the discretion of either the Board, the Committee, or any appropriate committee of the Board. "Board" means the Board of Directors of the Company. "Cause" means: (i) the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude; (ii) the commission of any fraud, misappropriation or misconduct which causes demonstrable injury to the Company or a subsidiary; (iii) an act of dishonesty resulting or intended to result, directly or indirectly, in material gain or personal enrichment to the Officer at the expense of the Company or a subsidiary; (iv) any material breach of the Officer's fiduciary duties to the Company as an employee or officer; (v) a serious violation of the Toys "R" Us Ethics Agreement or any other serious violation of a Company policy; (vi) the willful and continued failure of the Officer to perform substantially the Officer's duties with the Company or one of its subsidiaries (other than any such failure resulting from incapacity due to physical or mental illness resulting in a Disability), within a reasonable time after a written demand for substantial performance is delivered to the Officer by the Board, which specifically identifies the manner in which the Board believes that the Officer has not substantially performed the Officer's duties; (vii) the failure by the Officer to comply, in any material respect, with the provisions of Section 11 of the Agreement; or (viii) the failure by the Officer to comply with any other undertaking set forth in the Agreement or any breach by the Officer hereof that is reasonably likely to result in a material injury to the Company. For purposes of this provision, no act or failure to act, on the part of the Officer, shall be considered "willful" unless it is done, or omitted to be done, by the Officer in bad faith or without reasonable belief that the Officer's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of regular outside counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Officer in good faith and in the best interests of the Company. The cessation of employment of the Officer shall not be deemed to be for Cause unless and until there shall have been delivered to the Officer a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Officer and the Officer is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Officer is guilty of the conduct described, and specifying the particulars thereof in detail. Notwithstanding the foregoing, the Company shall have the right to suspend the Officer without reducing the Officer's compensation and benefits. "Change of Control" - See Exhibit C. -16- "Committee" means the Company's Management Compensation and Stock Option Committee of the Board of Directors or any successor committee of the Board performing equivalent functions. "Date of Termination" means (i) if the Officer's employment is terminated by the Company for Cause, or by the Officer for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with the Agreement), (ii) if the Officer's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date so designated by the Company in its notification to the Officer of such termination, (iii) if the Officer's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Officer or the effective date of the Disability, as the case may be, and (iv) the last day of the Employment Period during which the Company shall have given notice to the Officer that the Employment Period shall not be extended. "Disability" means the determination that the Officer is disabled pursuant to the terms of th TRU Partnership Employees' Savings and Profit Sharing Plan, as amended and restated as of October 1, 1993, as the same may be amended from time to time. "Good Reason" means, without the Officer's prior written consent, the occurrence of any of the following, provided that the Officer delivers a Notice of Termination specifying such occurrence within 30 days thereof: (i) the assignment of the Officer to a position materially inconsistent with the requirements of Section 2(a) of the Agreement, excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Officer; provided, however, that the foregoing shall not constitute "Good Reason" if it is not attendant to a reduction in the Officer's Annual Base Salary or total target compensation; (ii) the relocation or attempted relocation by the Company of the Officer outside Northeastern New Jersey; (iii) any failure by the Company to comply in any material respect with any of the provisions of Section 2(b) of the Agreement, other than failure not occurring in bad faith and that is remedied by the Company within a reasonable time after receipt of notice thereof given by the Officer; (iv) any failure by the Company to comply with and satisfy Section 12(c) of the Agreement; or (v) notice by the Company that it is not extending the termination date of the Employment Period. -17- "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Officer's employment under the provision so indicated and (iii) if the Date of Termination (as defined above) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). "Plans" means all employee compensation, benefit and welfare plans, policies and programs of the Company, which may include, without limitation, incentive, savings, retirement, stock option, restricted stock, supplemental Officer retirement, pension, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans, vacation practices, fringe benefit practices and policies relating to the reimbursement of business expenses. "Retirement" shall have the meaning ascribed to that term in the Plan under which benefits are being sought by the Officer and pursuant to which the Officer is first considered retired. -18- EXHIBIT C CHANGE OF CONTROL AND TAX GROSS-UP I. Certain Definitions "Change of Control" means, after the date hereof: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (iii) any acquisition by any Person pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below, or (iv) any acquisition by any entity in which the Officer has a material direct or indirect equity interest; or (b) The cessation of the "Incumbent Board" for any reason to constitute at least a majority of the Board. "Incumbent Board" means the members of the Board on the date hereof and any member of the Board subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board, except that the Incumbent Board shall not include any member of the Board whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (c) The consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, immediately following such Business Combination each of the following would be correct: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Person resulting from such Business Combination (including, without limitation, a Person which as a result of such transaction owns the Company -19- or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, and (ii) no Person (excluding (A) any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, or such corporation resulting from such Business Combination or any Affiliate of such corporation, or (B) any entity in which the Officer has a material equity interest, or any "Affiliate" (as defined in Rule 405 under the Securities Act of 1933, as amended) of such entity) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. II. Tax Gross-Up (a) If required by Section 10 of the Agreement, in addition to the payments described in Sections 4 and 7 of the Agreement and the grants described in the Stock Unit Agreement, the Company shall pay to the Officer an amount (the "Gross-up") such that the net amount retained by the Officer, after deduction of any Excise Tax and any United States Federal, state and local income taxes, equals the amount of such payments that the Officer would have retained had such Excise Tax not been imposed. In addition, the Company shall indemnify and hold the Officer harmless on an after-tax basis from any Excise Tax imposed on or with respect to any such payment (including, without limitation, any interest, penalties and additions to tax) payable in connection with any such Excise Tax. For purposes of determining the amount of any Gross-up or the amount required to make an indemnity payment on an after-tax basis, it shall be assumed that the Officer is subject to Federal, state and local income tax at the highest marginal statutory rates in effect for the relevant period after taking into account any deduction available in respect of any such tax (e.g., if state and local taxes are deductible for Federal income tax purposes in the relevant period, it shall be assumed that such taxes offset income that would otherwise be subject to Federal income tax at the highest marginal statutory rate in effect for such period). (b) Subject to the provisions of paragraph (c) of this Exhibit C , the determination of (i) whether a Gross-up is required and the amount of such Gross-up and (ii) the amount necessary to make any payment on an after-tax basis, shall be made in accordance with the assumptions set forth in paragraph (a) of this Exhibit C by Ernst & Young LLP or such other "Big Six" accounting firm designated by the Officer and reasonably acceptable to the Company. -20- (c) The Officer shall notify the Company as soon as practicable in writing of any claim by the Internal Revenue Service that, if successful, would require any Gross-up or indemnity payment. The Officer shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company. If the Company notifies the Officer in writing prior to the expiration of such period that it desires to contest such claim, the Officer shall take all actions necessary to permit the Company to control all proceedings taken in connection with such contest. In that connection, the Company may, at its sole option, pursue or forgo any and all administrative appeals, proceedings, hearings and conferences in respect of such claim and may, at its sole option, either direct the Officer to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; provided, however, that the Company shall pay and indemnify the Officer from and against all costs and expenses incurred in connection with such contest; provided further, however, that if the Company directs the Officer to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Officer on an interest-free basis and at no net after-tax cost to the Officer. If the Officer becomes entitled to receive any refund or credit with respect to such claim (or would be entitled to a refund or credit but for a counterclaim for taxes not indemnified hereunder), the Officer shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon) plus the amount of any tax benefit available to the Officer as a result of making such payment (any such benefit calculated based on the assumption that any deduction available to the Officer offsets income that would otherwise be taxed at the highest marginal statutory rates of Federal, state and local income tax for the relevant periods). -21- ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of November 2, 1998 (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and Michael Shannon (the "Officer"). W I T N E S S E T H: WHEREAS, the Company proposed for the approval of the stockholders of the Company at the 1997 Annual Meeting of Stockholders an Amendment (the "Amendment") to the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan") providing for performance criteria that may be utilized by the Management Compensation and Stock Option Committee (the "Committee") in connection with the grant of Performance Shares (as defined in the Plan and referred to herein as "Stock Units"), and the Stockholders approved such Amendment; WHEREAS, the Officer and the Company are entering into a Retention Agreement, dated as of even date herewith (the "Retention Agreement"); WHEREAS, as further inducement for the Officer to execute the Retention Agreement and continue in the employ of the Company, the Committee has determined to grant the Officer the Stock Units as described in this Unit Agreement, and WHEREAS, the Board and the Committee desire that the compensation arising from the Stock Units shall qualify as "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. NOW, THEREFORE, in consideration of the covenants set forth herein and for other good and valuable consideration, the parties agree as follows: 1. Definitions. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Plan. 2. Stock Unit Grant. Subject to the terms and conditions set forth in this Unit Agreement and in Section 10 of the Plan, the Officer is hereby granted fifty thousand (50,000) Stock Units. Each Stock Unit represents the right to receive one share of Common Stock (collectively, with other shares of Common Stock relating to the Stock Units and held in the Officer's account in the Trust (as defined below) in respect of the Stock Units, the "Shares"). The 50,000 Shares shall be promptly deposited after the date hereof in the grantor trust created pursuant to the Grantor Trust Agreement, dated as of October 1, 1995 between the Company and American Express Trust Company, a Minnesota trust company (together with any grantor trust subsequently established -22- by the Company, the "Trust") and shall be allocated by the Trust to the Officer's account therein subject to the forfeiture conditions of Section 3 below. Any property attributable to the Shares, including, without limitation, dividends and distributions thereon, shall be deposited into the Trust, shall as promptly as practicable be reinvested in shares of Common Stock, and shall be allocated by the Trust to the Officer's account therein subject to the forfeiture conditions of Section 3 below. 3. Forfeiture Conditions. The Stock Units granted to the Officer hereunder shall be forfeited in their entirety, subject to the terms of the Retention Agreement, if: (i) the Officer's employment with the Company terminates prior to the fifth anniversary of the date hereof ; or (ii) the Performance Objective set forth on Exhibit A hereto is not achieved. 4. Payment of Stock Units. As soon as practicable but no later than November 2, 2003, the Committee shall determine whether the Performance Objective set forth on Exhibit A has been achieved. The Shares, together with any property attributable thereto (including, without limitation, dividends and distributions thereon), shall be delivered to the Officer promptly following November 2, 2003 unless the Officer has elected to defer receipt of such Shares in accordance with the terms and conditions of any deferred compensation program maintained by the Company or has failed to satisfy the condition set forth in Section 3(i) hereof. 5. Investment Representation. The Shares acquired by the Officer under this Unit Agreement will be acquired for the Officer's account and not with a view to the distribution thereof, and the Officer will not sell or otherwise dispose of the Shares unless the Shares are registered under the Securities Act of 1933, as amended (the "Act"), or the Officer shall furnish the Company with an opinion of counsel reasonably satisfactory to the Company that such registration is not required, and a legend to such effect may be placed on the certificate for the Shares. 6. Liability; Indemnification. No member of the Committee, nor any person to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to this Unit Agreement, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability such member may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and Bylaws, as amended from time to time, or under any agreement between any such member and the Company. 7. Severability. Each of the Sections contained in this Unit Agreement shall be enforceable independently of every other section in this Unit Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Unit Agreement -23- 8. Governing Law. This Unit Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Unit Agreement shall be settled by arbitration as provided in the Retention Agreement. 9. Captions. The captions of this Unit Agreement are not part of the provisions hereof and shall have no force or effect. 10. Amendment. This Unit Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Officer, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 12. Interpretation. The interpretation and decision with regard to any question arising under this Unit Agreement or with respect to the Stock Units made by the Committee shall be final and conclusive on the Officer. 13. Successors. This Unit Agreement shall be binding upon the Company and its successors and assigns. -24- IN WITNESS WHEREOF, this Agreement has been executed by the Company by one of its duly authorized officers as of the date specified above. TOYS "R" US, INC. By: ______________________ Title: ___________________ I hereby acknowledge receipt of the Stock Units and agree to the provisions set forth in this Agreement. _____________________________ Michael Shannon -25- EXHIBIT A Performance Objective Under Section 3(ii) of the Stock Unit Agreement The consolidated net earnings of the Company in any fiscal year (beginning with the first fiscal quarter in 1999) of the Company's 1999, 2000, 2001 or 2002 fiscal year is at least equal to the amount of any corresponding quarter in 1998. For these purposes, "consolidated net earnings" shall exclude extraordinary or unusual items reported by the Company as such. -26- EX-13 7 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 Tomorrow Begins With Us [LOGO] Toys "R" Us(R) Annual Report 1998 [PHOTO OMITTED] Toys"R"Us The Worldwide Authority on Kids, Families and Fun Table of Contents Financial Highlights .................................................. page 3 Letter to Our Stockholders ............................................ page 4 Management's Discussion and Analysis of Results of Operations and Financial Condition ...................... page 9 Financial Statements .................................................. page 13 Report of Management and Report of Independent Auditors ........................................ page 23 Directors and Officers ................................................ page 24 Quarterly Financial Data, Market Information and Store Locations ................................ page 26 Corporate Data and Citizenship ........................................ page 27 2 Financial Highlights Toys"R"Us, Inc. and subsidiaries
(Dollars in millions except per share data) Fiscal Year Ended ============================================================================================================================= Jan. 30, Jan. 31, Feb.1, Feb. 3, Jan. 28, Jan. 29, Jan. 30, Feb. 1, Feb. 2, Jan. 28, 1999* 1998 1997* 1996* 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net Sales $11,170 $11,038 $ 9,932 $ 9,427 $ 8,746 $ 7,946 $ 7,169 $ 6,124 $ 5,510 $ 4,788 Net (Loss)/Earnings (132) 490 427 148 532 483 438 340 326 321 Basic (Loss)/Earnings Per Share (0.50) 1.72 1.56 0.54 1.88 1.66 1.51 1.18 1.12 1.11 Diluted (Loss)/Earnings Per Share (0.50) 1.70 1.54 0.53 1.85 1.63 1.47 1.15 1.11 1.09 FINANCIAL POSITION AT YEAR END: Working Capital $ 106 $ 579 $ 619 $ 326 $ 484 $ 633 $ 797 $ 328 $ 177 $ 238 Real Estate-Net 2,354 2,435 2,411 2,336 2,271 2,036 1,877 1,751 1,433 1,142 Total Assets 7,899 7,963 8,023 6,738 6,571 6,150 5,323 4,583 3,582 3,075 Long-Term Debt 1,222 851 909 827 785 724 671 391 195 173 Stockholders' Equity 3,624 4,428 4,191 3,432 3,429 3,148 2,889 2,426 2,046 1,705 NUMBER OF STORES AT YEAR END: Toys"R"Us - United States 704 700 682 653 618 581 540 497 451 404 Toys"R"Us - International 452 441 396 337 293 234 167 126 97 74 Kids"R"Us - United States 212 215 212 213 204 217 211 189 164 137 Babies"R"Us - United States 113 98 82 -- -- -- -- -- -- -- Total Stores 1,481 1,454 1,372 1,203 1,115 1,032 918 812 712 615
* After restructuring and other charges. 3 [PHOTO] ROBERT C. NAKASONE Chief Executive Officer To Our Stockholders 1998 was indeed a year of enormous challenge and change. We've spent the year intensively reviewing every aspect of our business and making some tough calls aimed at repositioning our worldwide business. Key elements of our strategic plan include a Total Solutions Strategy focused on our C-3 plan, which includes the reformatting and repositioning of our toy stores; development of a customer- driven culture; expanding product development; improving our customer value proposition; accelerating our supply chain management program; and expanding our channels of selling. In conjunction with these restructuring efforts, we have been proactively rebuilding and reshaping a stronger management team which will serve to build the foundation for repositioning your Company in the years ahead. We believe that the sum total of these efforts will serve as the springboard toward implementing our expanded vision for the future: to position Toys"R"Us as the worldwide authority on kids, families and fun. Before outlining our strategic initiatives, let's take a quick look at 1998. 1998 Financial Summary From a financial standpoint, 1998 was a disappointing year. Our sales totaled $11.2 billion, which represented a 1.2% increase over the $11.0 billion reported last year. Comparable store sales in our U.S. toy stores declined by 4% while our International toy store sales declined by 2%, in local currency. A key factor behind these sales declines was the much-publicized weakness in the overall worldwide toy industry which was cycling against very strong sales of virtual pets, action figures and plush a year ago. In addition, the lower sales also reflect retail price deflation in the video game hardware and software category, as well as the deflationary impact of clearance merchandise sales related to our previously-announced inventory reduction programs. Comparable sales at Kids"R"Us were down 2%. Nonetheless, it is worth noting that comparable store apparel sales were considerably stronger in our 65 "combo" stores where we have reallocated roughly 6,000 square feet of Kids"R"Us apparel into existing Toys"R"Us stores. We believe this underscores the important role of apparel in all our future "R"Us store configurations. At Babies"R"Us, we're very pleased to report a record performance for 1998. Comparable store sales were up almost 20%. We now operate 118 Babies"R"Us stores nationwide and are the market share leader in the juvenile specialty category. Needless to say, we are extremely pleased with the performance of this division and plan to continue our aggressive expansion with approximately 20 new stores slated for '99. Largely as a result of these sales trends, our net earnings, before restructuring and other charges, were $376 million or $1.41 per share. Including the restructuring and other charges of $698 million, ($508 million net of taxes) the Company incurred a net loss of $132 million or $0.50 per share for 1998. 4 1998 Restructuring Benefits We ended 1998 a much healthier and vibrant company. This was attributable to some tough strategic decisions that will shape the Company's future. We recorded restructuring and other charges of $508 million net of taxes, which caused the Company to incur a net loss in 1998. The impact of making these tough calls will be evident in our future operations, growth and financial performance. These charges are the result of an exhaustive review of all our operations in 1998 from both a strategic and an Economic Value Added ("EVA(R)") perspective. These reviews prompted the following significant actions: o The closing and/or downsizing of approximately 50 toy stores in the International arena, predominantly in continental Europe, and about 9 U.S. toy stores which do not meet the Company's strategic or financial objectives. This will free our management to focus on higher return opportunities; o The conversion of 28 existing U.S. toy stores into "combo" stores, which will enable us to close 31 nearby Kids"R"Us stores. In addition to reducing operating costs and releasing working capital, this will allow us to enhance our productivity by further expanding kids' apparel into additional Toys"R"Us stores; o The consolidation of several distribution centers and over half a dozen administrative offices. These actions will reduce administrative support functions in the U.S. and Europe, which will not only generate selling, general and administrative efficiencies, but "flatten" our organization and bring our management even closer to our stores and customers; o The continuation of taking aggressive markdowns on clearance product to optimize inventory levels, accommodate new product offerings and accelerate our store reformatting. In conjunction with the initial stages of our supply chain re-engineering, we have already been able to reduce same store inventories in all our divisions by over $560 million or 24% at year end 1998, with roughly $480 million or 31% of this favorable swing coming from reduced inventory in the U.S. toy stores division alone. This brought us into the new year with heightened merchandise flexibility and increased "open to buy" as we begin the rollout of the initial phase of our store reformat program in 1999. One of our other key priorities in 1998 was to build a strong executive team, and we are well on our way towards assembling a truly outstanding management team. Since the beginning of '98, more than 50 percent of our officer team has either joined the company from the outside, or has been promoted or transferred to new assignments, bringing fresh perspectives and proven skills to our business. It is obvious our 1998 sales and earnings were not what we wanted them to be. However, we've spent a year making tough calls and hard decisions, and we're now ready to move forward stronger and more focused than ever. Total Solutions Strategy Our restructuring program, in September 1998, was the first step required to launch a winning strategy for Toys"R"Us - a strategy which will realign our assets, organization and thinking based on customer-driven priorities in a more competitive marketplace. In the "R"Us brand, we have one of the best-known brand names in the world: our challenge is to more effectively develop this strong customer franchise potential. Today's retail marketplace demands stores that are exciting, easy to shop and customer-friendly. While our selection is still superior to our competitors, that alone is not compelling enough to rebuild market share and brand loyalty. We must become more focused on developing greater everyday customer value in terms of price, service and the total shopping experience. To fulfill these objectives, we are moving into the second phase of our Total Solutions Strategy in 1999. [PHOTO] We are rebuilding our "worlds" around theirs. 5 C-3 - More Than Just a Store Over the next two years, the C-3 plan will include the implementation of new merchandise as well as customer service, store layout, price/value and supply chain improvements that provide an integrated approach to maximizing customer potential. This has led our new management team to develop an initiative that is a Customer driven . . .Cost effective . . . Concept delivering sustainable, long-term performance. C-3 is a total customer solution involving every facet of our Company from merchandising and replenishment to operations and people development. In October 1998, we started our C-3 development operationally in nine stores to "stress test" a new, more customer-friendly store layout during our high sales season. We proved that our operations could handle high velocity seasonal inventory flow despite a 33% smaller backroom, and that we could maintain acceptable in-stock conditions despite an entirely new operating approach. We are encouraged by the positive customer reaction to these stores, and are experiencing positive sales trends, even though a majority of C-3 merchandise enhancements will not be implemented until mid-1999. Based on the positive results of this initial operational phase of C-3, we are even more committed to the 1999 conversion of approximately 200 U.S. stores, which will include the development of many new merchandising "worlds." We will also retrofit the front end in an additional 125 stores this year to include the R Zone (teen electronics), promotional product and easier customer access. The C-3 Total Solutions Strategy consists of an easier-to-shop store layout, an expanded merchandise offering, a higher standard of customer service and a more effective supply chain approach that will enable us to build long-term performance improvement. Over the next few years we will align our organization, capital investments and operating approach to fully focus on the following C-3 objectives: o Store Repositioning Our stores must be made easier to shop and present merchandise in a more dynamic selling environment. The C-3 store layout creates wider aisles, more feature opportunities and end-caps, shops and logical category adjacencies - all designed to improve customer shopping patterns and experience. The sales floor has been expanded by 20% with a one-third reduction in the size of our backrooms. o Customer-Driven Culture The customer must experience a higher level of service in our stores. To accomplish this, we are streamlining our organization and operating processes to allow us to invest more in sales floor staffing, associate product knowledge training, and improving overall customer-friendly service. We are also intensifying our in-store informational graphics and product inter-activity to give our customers access to more substantial product knowledge on a "self-service" basis. [PHOTO] R Zone, the new "hot spot" for teens, features the newest in electronics and videos. 6 [PHOTO] Families love shopping at our newest location: www.toysrus.com. o Product Development We must give our customers more reasons to shop our stores. Based on the results of extensive customer research, we have created merchandise "worlds." Each "world" has a unique customer franchise from juvenile (Mom and her baby), to R Zone electronics and video products (the "cool" spot for teenage customers). Each "world" will establish its own business plan and has a complete support team to develop its business from product sourcing to customer advertising and promotion. The "worlds" presently being developed are: o R Zone (video, electronics, computer software related products) o Action and Adventure (action figures, diecast cars, etc.) o Girls (dolls, collectibles, accessories, lifestyle products) o Outdoor Fun (bikes, sports, playsets) o Pre-School (toys, accessories) o Seasonal (Christmas, Halloween, Summer, etc.) o Juvenile (baby products and 0-4 apparel) o Learning Center (educational and developmental products) o Family Fun (games and puzzles) 1999 will see a majority of the new "world" product selection and merchandising included in our C-3 rollout. In addition, emphasis on proprietary product, private label, and branded exclusives will continue to be a significant part of our product development strategy. Retail sale of proprietary exclusive and private label merchandising was up significantly in 1998, and we are targeting to double this business over the next three years. Customer Value Proposition The "R"Us brand must take on new dimensions of significant value to our customers. We are evaluating our pricing model to assure an everyday, competitive position on key products. We are more aggressively pursuing high demand and closeout product opportunities to bring more special price values to our customers in 1999. We also see a great opportunity to further leverage our substantial "R"Us customer database through the creation of a Loyalty Marketing Program, which will be piloted in several metropolitan markets in 1999. The mandate for our new team in marketing is quite clear: sharpen our advertising, promotion and "R"Us brand-building efforts. Supply Chain The first step in improving our supply chain management in 1998 was to unclog slow turning inventory from our stores. Our inventory reduction program will allow us to transform our stores' physical and merchandising layout. This will be completed in 1999. These actions will allow us to create a more customer-driven product flow, improve turns, effectively manage space for product productivity and operationally have the right product ...at the right place ...at the right time. E-Commerce We are extending our presence beyond our stores by expanding our channels of selling to our customers. We will be wherever our customers are, and that includes mediums such as mail-order catalogs and electronic commerce. 1998 marked our entry into the exciting world of electronic commerce with the introduction of Internet shopping through www.toysrus.com. Following our launch on the Internet last June, traffic to our website has grown significantly. We are upgrading our capacity to meet the growing demand and we are committed to making this site a dominant force in online retailing. We are presently aligning our distribution, buying and brand strengths to more broadly impact the Internet in 1999. 7 [PHOTO] Everyday, a new customer is born. "Worldwide Authority on Kids, Families and Fun" - The "R"Us Potential Most of us grew up as Toys"R"Us kids. We strongly believe that our Company's success and growth as we proceed into the next millennium will be tied to our unique ability to delight our valued customers - past, present and future. We must captivate their imaginations and introduce them to the exciting and fun world of limitless possibilities that the "R"Us family is committed to providing: a world where they know they are the most important ingredient in everything we do. These are aggressive goals that require a total commitment to our customers, dramatic cultural change in our organization and a clear, strategic vision that effectively mobilizes the substantial resources of our Company. It will take time. It will not be easy. But we believe in the strength and potential of the "R"Us customer franchise, and we most importantly believe that the people in the Toys"R"Us organization worldwide have what it takes to create a strong, successful future for all of us. That future begins now. Sincerely, /s/Robert C. Nakasone Robert C. Nakasone Chief Executive Officer March 29, 1999 8 Management's Discussion and Analysis RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations* The Company's total sales increased to $11.2 billion for 1998, a 1.2% increase from total sales of $11.0 billion last year. Sales increased by 11.1% in 1997 and 5.4% in 1996. In 1998 sales were negatively impacted by the overall weakness in the worldwide toy industry which was cycling against strong sales of virtual pets, action figures and plush a year ago. In addition, sales were negatively impacted by sales of video hardware and software at lower price points as well as the deflationary effect from sales of clearance merchandise related to the Company's inventory reduction program. Comparable store sales for the Toys USA division declined 4% while the Toys International division had a 2% comparable store sales decline, in local currency. Kids"R"Us reported a 2% comparable store sales decrease in 1998. The softness in Toys and Kids was offset to some extent by an almost 20% comparable store sales gain in Babies"R"Us. The Company's three-year sales growth is primarily attributable to the acquisition of Baby Superstore and the Company's continued store expansion. The Company opened 56 new U.S.A. toy stores, 133 international toy stores, including franchise and joint venture stores, 10 children's clothing stores, 40 baby specialty stores, and acquired 76 baby specialty stores during the three year period. The Company closed 23 stores from 1996 through 1998 and terminated a franchise agreement in Italy for 14 stores. These closures did not have a significant impact on the Company's financial position. Cost of sales as a percentage of sales increased to 73.3% in 1998 from 69.8% in 1997. Cost of sales was negatively impacted by clearance markdowns of $253 million, markdowns related to strategic initiatives of $29 million, and inventory system refinements and changes in accounting estimates of $63 million. Before the impact of these charges, cost of sales as a percentage of sales was 70.2%. Excluding these charges, the Toys USA division reported cost of sales as a percentage of sales of 71.0% in 1998 and 70.5% in 1997. The Toys International division, also excluding the charges, reported cost of sales as a percentage of sales of 69.1% in 1998 and 68.8% in 1997. These increases were due to a change in the sales mix consisting of a decrease in sales of higher margin action figures and virtual pets, as well as higher sales of lower margin video software merchandise. Consolidated cost of sales as a percentage of sales increased by 0.4% in 1997 from 69.4% in 1996 as a result of higher costs related to the Company's promotional holiday selling program, higher than historical inventory shrinkage and the continued strengthening of the Company's lower margin video business. Selling, advertising, general and administrative expenses (SG&A) as a percentage of sales were 21.9% in 1998, 20.2% in 1997, and 20.3% in 1996. SG&A for 1998 includes $59 million of changes in accounting estimates and provisions for legal settlements discussed below. Before the impact of these charges, SG&A as a percentage of sales for 1998 was 21.3%. Excluding these charges, the Toys USA division reported SG&A as a percentage of sales of 18.6% in 1998 and 17.5% in 1997, while Toys International's SG&A as a percentage of sales was 23.6% in 1998 and 23.1% in 1997. These increases were the result of the implementation of strategic initiatives and store expansion, not offset by sales leveraging. The slight decrease in consolidated SG&A in 1997 was primarily due to expense control and sales leveraging, partially offset by additional distribution and handling costs related to higher than planned inventory levels. Depreciation, amortization and asset write-offs were $255 million, $253 million and $206 million in 1998, 1997 and 1996, respectively. The increase in 1997 included $19 million in asset write-offs for store conversions. During 1998 the Company announced strategic initiatives to reposition its worldwide business and other charges including the customer-focused reformatting of its toy stores into the new C-3 format, as well as the restructuring of its International operations which resulted in a charge of $353 million ($279 million net of tax benefits, or $1.05 per share). The strategic initiatives resulted in a restructuring charge of $294 million. The other charges of $59 million primarily consist of changes in accounting estimates and provisions for legal settlements. The Company is closing and/or downsizing underperforming stores and consolidating distribution centers and administrative offices. As a result, approximately 2,600 employees will be terminated worldwide. Stores expected to be closed had aggregate store sales and net operating losses of approximately $322 million and $5 million, respectively, for the year ended January 30, 1999. The write-down of property, plant and equipment relating to the above mentioned closures and downsizings were based on both internal and independent appraisals. Unused reserves at January 30, 1999, should be utilized in 1999, with the exception of long-term lease commitments, which will be utilized in 1999 and thereafter. Details on the components of the charges are described in the Notes to the Consolidated Financial Statements and are as follows: * References to 1998, 1997 and 1996, are for the 52 weeks ended January 30, 1999, January 31, 1998 and February 1, 1997. 9 Management's Discussion and Analysis RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reserve Balance Description Charge Utilized @1/30/99 - -------------------------------------------------------------------------------- Closings/Downsizings: Lease commitments $ 81 $ -- $ 81 Severance and other closing costs 29 4 25 Write-down of property, plant & equipment 155 155 -- Other 29 5 24 - -------------------------------------------------------------------------------- Total Restructuring $ 294 $164 $130 ================================================================================ Changes in accounting estimates and provisions for legal settlements $ 59 $ 20 $ 39 ================================================================================ In 1998 the Company also announced markdowns and other charges of $345 million ($229 million net of tax benefits, or $.86 per share). Of this charge, $253 million relates to markdowns required to clear excess inventory from stores. These markdowns should enable the Company to achieve its optimal inventory assortment and streamline systems so that it can proceed with the C-3 conversions on an accelerated basis. The Company's objective with its new C-3 concept is to provide customers with a better shopping experience leading to increased sales and higher inventory turns. In addition, the Company recorded $29 million in markdowns related to the store closings discussed previously. The Company also recorded charges to cost of sales of $63 million related to inventory system refinements and changes in accounting estimates. Unused reserves at January 30, 1999 are expected to be utilized in 1999. Details of the markdowns and other charges are as follows: Reserve Balance Description Charge Utilized @1/30/99 - -------------------------------------------------------------------------------- Markdowns Clear excess inventory $253 $179 $ 74 Store closings 29 2 27 Change in accounting estimates and other 63 57 6 ================================================================================ Total Cost of Sales $345 $238 $107 ================================================================================ The strategic initiatives, markdowns and other charges described above are expected to improve the Company's free cash flow and increase operating earnings. The Company's 1996 results were impacted by a charge of $60 million ($38 million net of tax benefits, or $.14 cents per share), relating to an arbitration award rendered against the Company involving a dispute over a 1982 franchise agreement to operate stores in the Middle East. At January 30, 1999, the Company had approximately $45 million of reserves remaining from its restructuring program announced in 1995, primarily relating to long-term lease obligations. The Company believes these reserves are adequate to complete the restructuring program. Interest expense increased by $17 million in 1998, as compared to 1997, primarily due to higher borrowings throughout the year as a result of the Company's share repurchase programs. Also included in 1998 interest expense is $6 million for the early extinguishment of long-term debt. Interest expense decreased in 1997 as compared to 1996 primarily due to lower average short-term borrowings and to a $325 million medium-term financing which replaced borrowings carrying higher interest rates. The Company's effective tax rate for 1998 was unfavorably affected by the restructuring and other charges recorded in the third quarter of 1998. Excluding the impact of these charges, the Company's effective tax rate was 36.5% in 1998, as well as in 1997 and 1996. International sales were unfavorably impacted by the translation of local currency results into U.S. dollars by approximately $30 million, $250 million and $150 million in 1998, 1997 and 1996, respectively. Neither the translation of local currency results into U.S. dollars nor inflation had a material effect on the Company's operating results for the last three years. Liquidity & Capital Resources The Company's cash flows from operations increased to $964 million in 1998 from $509 million in 1997 primarily due to a significant reduction in inventories during 1998 as well as higher accounts payable, accrued expenses and other liabilities at January 30, 1999. Cash flows from operations decreased by $234 million in 1997 compared with 1996 primarily due to higher inventories. Cash flows used for investing activities decreased by $94 million in 1998, primarily due to fewer new store openings in 1998, as well as fewer store conversions in 1998 compared with 1997. Store conversions were the primary factor in the $79 million capital expenditure increase in 1997. Cash flows used for financing activities decreased to $344 million in 1998 from $498 million in 1997 primarily due to repayment of a $115 million Baby Superstore obligation in 1997. The Company repurchased over 32 million shares of its stock for $723 million in 1998, which was the primary reason for the increase in total borrowings net of cash of 10 Management's Discussion and Analysis RESULTS OF OPERATIONS AND FINANCIAL CONDITION $200 million in 1998 as compared with 1997. Cash flows used for financing activities increased by $709 million in 1997 compared with 1996 primarily due to the $325 million medium term financing in 1996, as well as $253 million expended for the Company's stock repurchase program in 1997. On February 3, 1997, the Company acquired Baby Superstore, Inc. for 13 million treasury shares of the Company's common stock valued at approximately $376 million. This acquisition was accounted for as a purchase as of February 1, 1997, and the excess of purchase price over net assets acquired in the amount of $365 million has been recorded as goodwill and is being amortized over 40 years. In 1999, the Company plans to open approximately 10 toy stores in the United States and approximately 25 international toy stores, including 10 franchise stores. Our newest division, Babies"R"Us, will open approximately 20 stores in the United States. For 1999, capital requirements for real estate, store and warehouse fixtures and equipment, leasehold improvements and other additions to property and equipment are estimated at approximately $550 million. These plans include the full conversion of approximately 200 toy stores and the partial conversion of an additional 125 toy stores in the United States to the C-3 format. In 1998 the Company repurchased over 32 million shares of its common stock through its share repurchase programs for a total of $723 million. In 1998 the Company completed its $1 billion share repurchase program announced in January 1994, and has $330 million remaining in its $1 billion share repurchase program announced in January 1998. The seasonal nature of the business (approximately 45% of sales take place in the fourth quarter) typically causes cash to decline from the beginning of the year through October as inventory increases for the holiday selling season and funds are used for land purchases and construction of new stores, which usually open in the first ten months of the year. The Company has a $1 billion multi-currency unsecured committed revolving credit facility expiring in December 2002, from a syndicate of financial institutions. There were no outstanding balances under this revolver at January 1999, 1998, and 1997. Cash requirements for operations, capital expenditures, lease commitments and the share repurchase program will be met primarily through operating activities, borrowings under the revolving credit facility, issuance of commercial paper and/or other bank borrowings for foreign subsidiaries. Quantitative and Qualitative Disclosures About Market Risks The Company is exposed to market risk from potential changes in interest rates and foreign exchange rates. The Company regularly evaluates these risks and has taken the following measures to mitigate these risks: the countries in which the Company owns assets and operates stores are politically stable; the Company's foreign exchange risk management objectives are to stabilize cash flow from the effects of foreign currency fluctuations; the Company will, whenever practical, offset local investments in foreign currencies with borrowings denominated in the same currencies; the Company also enters into foreign exchange contracts or purchases options to eliminate specific transaction risk. The market risk related to these derivative contracts is offset by the changes in value of the underlying items being hedged. Approximately half of the Company's long-term debt is at fixed interest rates and therefore, the fair value is affected by changes in market interest rates. The Company believes the amount of risk and the use of derivative financial instruments described above are not material to the Company's financial condition or results of operations. Impact of Year 2000 Year 2000 issues are those related to the inability of certain computer systems to properly recognize and process date-sensitive information relative to the year 2000 and beyond. The Company's Year 2000 project which began in 1997, includes four major elements: 1) information technology (IT) systems, 2) non-IT systems, 3) relationships with key business partners and 4) contingency planning. The Company has substantially completed the required coding conversions and testing on IT and non-IT systems as of January 30, 1999. The Company will continue to perform full integrated testing in 1999. The Company has utilized both internal and external resources to implement the conversion of its systems for Year 2000 compliance. The total estimated cost to achieve Year 2000 compliance is approximately $25 million, which is being expensed as incurred. These estimates exclude internal labor and related costs. Approximately $20 million of these costs have been incurred as of January 30, 1999. All of these costs are being funded through cash flows from operations. The Company has identified significant business partners and is working closely with them to understand their Year 2000 compliance status. The Company anticipates minimal business interruption to occur as a result of Year 2000 issues within its control. However, possible consequences include, but are not limited to, loss of communication links with store locations, loss of electric power, delayed product deliveries from major suppliers, and 11 Management's Discussion and Analysis RESULTS OF OPERATIONS AND FINANCIAL CONDITION the inability to process transactions or engage in similar normal business activities. In addition, not all customer situations can be anticipated. The Company may experience an increase of sales returns of products containing hardware or software components. Such returns, if they occur, are likely to be the responsibility of the manufacturers and are not expected to be material to the Company's financial condition or results of operations. The Company believes the readiness of third parties is the most significant area of risk to the Company related to Year 2000. However, the Company also believes that ongoing communication with and assessment of readiness of these third parties will minimize this risk. The Company has begun to develop but has not yet finalized a contingency plan for possible Year 2000 issues. Contingency plans are expected to be in place by the end of the second quarter of 1999. The total cost of the Year 2000 project is not expected to have a material effect on the Company's financial condition or results of operations. The costs of conversion and the completion dates for the project are management's best estimates. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 - Reporting Comprehensive Income, which requires the separate reporting of all changes to stockholders' equity, and SFAS No. 131 - Disclosures About Segments of an Enterprise and Related Information, which revises existing guidelines about the level of financial disclosure of a Company's operations. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, Accounting for Computer Software Developed for Internal Use, which requires capitalization of certain costs to develop internal use computer software. These statements were adopted by the Company in fiscal 1998 and did not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 - - Accounting for Derivative Instruments and Hedging Activities, which the Company is required to adopt in its fiscal year beginning February 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. While not expected to be material, the Company is in the process of determining the impact that the adoption of SFAS No. 133 will have on the consolidated financial position, results of operations and cash flows of the Company. Euro Conversion The Company has developed a plan to ensure business and systems continuity during the introduction of the Euro currency in certain of the Company's European operations. The initial phase of this plan was implemented prior to the January 1, 1999 (Phase 1) introduction of the Euro. Further implementation of this plan is scheduled to coincide with the transition phases (Phases 2 and 3) of completely converting from local denominated currencies to the Euro (the "Euro conversion"). Total costs for the entire Euro conversion program are not expected to be material. Based on the actions taken to date, the Company does not expect the Euro conversion to have a material effect on the consolidated financial position, results of operations or cash flows of the Company. Forward Looking Statements This annual report contains "forward looking" statements which are intended to be covered by the safe harbors created thereby. All statements that are not historical facts, including statements about the Company's beliefs or expectations, are forward-looking statements. Such statements involve risks and uncertainties that exist in the Company's operations and business environment that could render actual outcomes and results materially different than predicted. The Company's forward-looking statements are based on assumptions about many factors, including, but not limited to, ongoing competitive pressures in the retail industry, changes in consumer spending, general economic conditions in the United States and other jurisdictions in which the Company conducts business (such as interest rates and consumer confidence) and normal business uncertainty. While the Company believes that its assumptions are reasonable at the time forward-looking statements were made, it cautions that it is impossible to predict the actual outcome of numerous factors and, therefore, readers should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update such statements in light of new information or future events that involve inherent risks and uncertainties. Actual results may differ materially from those contained in any forward looking statement. 12 Consolidated Statements of Earnings TOYS "R"US, INC. AND SUBSIDIARIES Year Ended ------------------------------------- January 30, January 31, February 1, (In millions except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------- Net Sales $ 11,170 $ 11,038 $ 9,932 Cost of sales 8,191 7,710 6,892 - ------------------------------------------------------------------------------- Gross Profit 2,979 3,328 3,040 - ------------------------------------------------------------------------------- Selling, advertising, general and administrative expenses 2,443 2,231 2,020 Depreciation, amortization and asset write-offs 255 253 206 Restructuring and other charges 294 -- 60 - ------------------------------------------------------------------------------- Total Operating Expenses 2,992 2,484 2,286 - ------------------------------------------------------------------------------- Operating (Loss)/Income (13) 844 754 Interest expense 102 85 98 Interest and other income (9) (13) (17) - ------------------------------------------------------------------------------- Interest Expense, Net 93 72 81 - ------------------------------------------------------------------------------- (Loss)/Earnings Before Income Taxes (106) 772 673 Income Taxes 26 282 246 - ------------------------------------------------------------------------------- Net (Loss)/Earnings $ (132) $ 490 $ 427 =============================================================================== Basic (Loss)/Earnings Per Share $ (0.50) $ 1.72 $ 1.56 =============================================================================== Diluted (Loss)/Earnings Per Share $ (0.50) $ 1.70 $ 1.54 =============================================================================== See notes to consolidated financial statements [PHOTO] The "R"Us brand has successfully captured young imaginations and a significant market share. 13 [PHOTO] Our ever-expanding outdoor and sports headquarters features everything fun under the sun. Consolidated Balance Sheets TOYS "R"US INC. AND SUBSIDIARIES January 30, January 31, (In millions) 1999 1998 - ------------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $ 410 $ 214 Accounts and other receivables 204 175 Merchandise inventories 1,902 2,464 Prepaid expenses and other current assets 81 51 - ------------------------------------------------------------------------------ Total Current Assets 2,597 2,904 Property and Equipment: Real estate, net 2,354 2,435 Other, net 1,872 1,777 - ------------------------------------------------------------------------------ Total Property and Equipment 4,226 4,212 Goodwill, net 347 356 Other assets 729 491 - ------------------------------------------------------------------------------ $ 7,899 $ 7,963 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings $ 156 $ 134 Accounts payable 1,415 1,280 Accrued expenses and other current liabilities 696 680 Income taxes payable 224 231 - ------------------------------------------------------------------------------ Total Current Liabilities 2,491 2,325 Long-Term Debt 1,222 851 Deferred Income Taxes 333 219 Other Liabilities 229 140 Stockholders' Equity: Common stock 30 30 Additional paid-in capital 459 467 Retained earnings 4,478 4,610 Foreign currency translation adjustments (100) (122) Treasury shares, at cost (1,243) (557) - ------------------------------------------------------------------------------ Total Stockholders' Equity 3,624 4,428 - ------------------------------------------------------------------------------ $ 7,899 $ 7,963 ============================================================================== See notes to consolidated financial statements. 14 Consolidated Statements of Cash Flows TOYS "R"US, INC. AND SUBSIDIARIES
Year Ended ------------------------------------ January 30, January 31, February 1, (In millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss)/earnings $(132) $ 490 $ 427 Adjustments to reconcile net (loss)/earnings to net cash provided by operating activities: Depreciation, amortization and asset write-offs 255 253 206 Deferred income taxes (90) 18 23 Restructuring and other charges 546 -- -- Changes in operating assets and liabilities: Accounts and other receivables (43) (40) (14) Merchandise inventories 233 (265) (195) Prepaid expenses and other operating assets (27) (9) (10) Accounts payable, accrued expenses and other liabilities 229 22 262 Income taxes payable (7) 40 44 - ---------------------------------------------------------------------------------------------------- Net cash provided by operating activities 964 509 743 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, net (373) (494) (415) Other assets (49) (22) (36) Cash received with the acquisition of Baby Superstore -- -- 67 - ---------------------------------------------------------------------------------------------------- Net cash used in investing activities (422) (516) (384) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net 4 (142) (10) Long-term borrowings 771 11 326 Long-term debt repayments (412) (176) (133) Exercise of stock options 16 62 28 Share repurchase program (723) (253) -- - ---------------------------------------------------------------------------------------------------- Net cash (used in)/provided by financing activities (344) (498) 211 - ---------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (2) (42) (12) CASH AND CASH EQUIVALENTS Increase/(decrease) during year 196 (547) 558 Beginning of year 214 761 203 - ---------------------------------------------------------------------------------------------------- End of year $ 410 $ 214 $ 761 ==================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income Tax Payments $ 122 $ 192 $ 177 Interest Payments $ 109 $ 83 $ 109 ====================================================================================================
See notes to consolidated financial statements 15 Consolidated Statements of Stockholders' Equity TOYS "R" US, INC. AND SUBSIDIARIES
Common Stock ------------------------------ Foreign Issued In Treasury Additional currency Total ------------- -------------- paid-in translation Retained stockholders' (In millions) Shares Amount Shares Amount capital adjustments earnings equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, February 3, 1996 300.4 $30 (27.3) $ (846) $ 542 $ 13 $ 3,693 $ 3,432 Net earnings for the year -- -- -- -- -- -- 427 427 Foreign currency translation adjustments -- -- -- -- -- (73) -- (73) Comprehensive Income 354 Acquisition of Baby Superstore, Inc. -- -- 13.0 400 (23) -- -- 377 Exercise of stock options, net -- -- 1.7 58 (30) -- -- 28 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, February 1, 1997 300.4 30 (12.6) (388) 489 (60) 4,120 4,191 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings for the year -- -- -- -- -- -- 490 490 Foreign currency translation adjustments -- -- -- -- -- (62) -- (62) Comprehensive Income 428 Share repurchase program -- -- (8.2) (253) -- -- -- (253) Exercise of stock options, net -- -- 2.8 84 (22) -- -- 62 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1998 300.4 30 (18.0) (557) 467 (122) 4,610 4,428 - ------------------------------------------------------------------------------------------------------------------------------------ Net loss for the year -- -- -- -- -- -- (132) (132) Foreign currency translation adjustments -- -- -- -- -- 22 -- 22 Comprehensive loss (110) Share repurchase program -- -- (32.2) (723) -- -- -- (723) Issuance of restricted stock -- -- -- 15 (2) -- -- 13 Exercise of stock options, net -- -- .4 22 (6) -- -- 16 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 30, 1999 300.4 $30 (49.8) $(1,243) $ 459 $(100) $ 4,478 $ 3,624 ====================================================================================================================================
See notes to consolidated financial statements [PHOTO] #1 for Family Fun! For generations Toys"R"Us has given families ways to spend quality time together. 16 Notes to Consolidated Financial Statements TOYS "R"US, INC. AND SUBSIDIARIES (Amounts in millions except per share data) Summary of Significant Accounting Policies Fiscal Year The Company's fiscal year ends on the Saturday nearest to January 31. Reference to 1998, 1997 and 1996 are for the 52 weeks ended January 30, 1999, January 31, 1998, and February 1, 1997, respectively. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. The 1996 consolidated statement of cash flows also reflects the acquisition of Baby Superstore, Inc. All material intercompany balances and transactions have been eliminated. Assets and liabilities of foreign operations are translated at current rates of exchange at the balance sheet date while results of operations are translated at average rates in effect for the period. Translation gains or losses are shown as a separate component of stockholders' equity. Cash and Cash Equivalents The Company considers its highly liquid investments with original maturities of less than three months to be cash equivalents. Merchandise Inventories Merchandise inventories for the U.S.A. toy store operations, which represent approximately 60% of total inventories, are stated at the lower of LIFO (last-in, first-out) cost or market, as determined by the retail inventory method. If inventories had been valued at the lower of FIFO (first-in, first-out) cost or market, inventories would show no change at January 30, 1999 or January 31, 1998. All other merchandise inventories are stated at the lower of FIFO cost or market as determined by the retail inventory method. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets or, where applicable, the terms of the respective leases, whichever is shorter. The Company evaluates the need to recognize impairment losses relating to long-lived assets based on several factors including, but not limited to, management's plans for future operations, recent operating results and projected cash flows. Preopening Costs Preopening costs, which consist primarily of advertising, occupancy and payroll expenses, are amortized over expected sales to the end of the fiscal year in which the store opens. Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents and short-term borrowings approximate their fair market values. Forward Foreign Exchange Contracts The Company enters into forward foreign exchange contracts to eliminate the risk associated with currency movement relating to its short-term intercompany loan program with foreign subsidiaries and inventory purchases denominated in foreign currency. Gains and losses, which offset the movement in the underlying transactions, are recognized as part of such transactions. Gross deferred unrealized gains and losses on the forward contracts were not material at either January 30, 1999 or January 31, 1998. The related receivable, payable and deferred gain or loss are included on a net basis in the balance sheet. The Company had $209 and $439 of short term outstanding forward contracts at January 30, 1999 and January 31, 1998, maturing in 1999 and 1998, respectively. These contracts are entered into with counterparties that have high credit ratings and with which the Company has the contractual right to net forward currency settlements. In addition, the Company had a $342 currency swap obligation outstanding at January 30, 1999 related to its 475 Swiss franc note payable due 2004. 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 17 PROPERTY AND EQUIPMENT Useful Life January 30, January 31, (in years) 1999 1998 - ------------------------------------------------------------------------------- Land $ 829 $ 817 Buildings 45-50 1,842 1,849 Furniture and equipment 5-20 1,861 1,711 Leaseholds and leasehold improvements 12 1/2-35 1,213 1,158 Construction in progress 42 46 Leased property under capital leases 27 29 - ------------------------------------------------------------------------------- 5,814 5,610 Less accumulated depreciation and amortization 1,588 1,398 =============================================================================== $ 4,226 $ 4,212 =============================================================================== Seasonal Financing and Long-Term Debt January 30, January 31, 1999 1998 - ------------------------------------------------------------------------------- Commercial Paper $ 368 $ -- interest rates from 4.87% to 4.89% 475 Swiss franc note payable, due 2004(a) 342 -- 8 3/4% debentures, due 2021, net of expenses 198 198 Japanese yen loans with interest payable at annual rates from 1.49% to 6.47%, due in varying amounts through 2012 198 123 Industrial revenue bonds, net of expenses (b) 60 60 7% British pound sterling loan payable, due quarterly through 2001(c) 33 49 8 1/4% sinking fund debentures, due 2017, net of discounts 24 89 Mortgage notes payable at annual interest rates from 10.16% to 11.00% (d) 11 14 Obligations under capital leases 11 14 5.78% 200 British pound sterling note payable (e) -- 325 - ------------------------------------------------------------------------------- 1,245 872 Less current portion (f) 23 21 - ------------------------------------------------------------------------------- $ 1,222 $ 851 =============================================================================== (a) Supported by a 406 Swiss franc bank letter of credit. This note has been converted by an interest rate and currency swap to a floating rate, US dollar obligation at 3 month LIBOR less approximately 107 basis points. (b) Bank letters of credit of $41, expiring in 2000, support certain of these industrial revenue bonds. The Company expects that the bank letters of credit will be renewed. The bonds have fixed or variable interest rates with an average rate of 3.6% at January 30, 1999. (c) Collateralized by property with a carrying value of $160 at January 30, 1999. (d) Collateralized by property and equipment with an aggregate carrying value of $15 at January 30, 1999. (e) Supported by a 200 British pound sterling bank letter of credit. This note was redeemed on January 29, 1999. (f) Included in accrued expenses and other current liabilities on the consolidated balance sheets. The fair market value of the Company's long-term debt at January 30, 1999, exclusive of commercial paper, and January 31, 1998 were approximately $980 and $1,004, respectively. The fair market value was estimated using quoted market rates for publicly traded debt and estimated interest rates for non-public debt. The Company has a $1 billion unsecured committed revolving credit facility expiring in December 2002. This multi-currency facility permits the Company to borrow at the lower of LIBOR plus a fixed spread or a rate set by competitive auction. The facility is available to support domestic commercial paper borrowings and to meet worldwide cash requirements. Commercial paper is classified as long-term debt at January 30, 1999 as the company maintains long-term committed credit agreements, as described above, to support these borrowings and intends to refinance them on a long-term basis through continued commercial paper borrowings. Commercial paper of $70 at January 31, 1998 was included in short-term borrowings. Additionally, the Company also has lines of credit with various banks to meet the short-term financing needs of its foreign subsidiaries. The weighted average interest rate on short-term borrowings outstanding at January 30, 1999 and January 31, 1998 was 3.8% and 5.0%, respectively. The annual maturities of long-term debt at January 30, 1999, excluding commercial paper of $368, are as follows: - ------------------------------------------------------------------------ 1999 $ 23 2000 65 2001 7 2002 8 2003 7 2004 and subsequent 767 ======================================================================== $ 877 ======================================================================== Leases The Company leases a portion of the real estate used in its operations. Most leases require the Company to pay real estate taxes and other expenses; some require additional amounts based on percentages of sales. Minimum rental commitments under noncancelable operating leases having a term of more than one year as of January 30, 1999 are as follows: Gross Net minimum Sublease minimum rentals income rentals - ------------------------------------------------------------------------------- 1999 $ 355 $ 20 $ 335 2000 352 18 334 2001 346 15 331 2002 339 13 326 2003 338 11 327 2004 and subsequent 2,964 60 2,904 - ------------------------------------------------------------------------------- $ 4,694 $ 137 $ 4,557 =============================================================================== Total rent expense, net of sublease income was $334, $309 and $282 in 1998, 1997 and 1996, respectively. 18 STOCKHOLDERS' EQUITY The common shares of the Company, par value $.10 per share, were as follows: January 30, January 31, 1999 1998 - -------------------------------------------------------------------------------- Authorized shares 650.0 650.0 - -------------------------------------------------------------------------------- Issued shares 300.4 300.4 - -------------------------------------------------------------------------------- Treasury shares 49.8 18.0 - -------------------------------------------------------------------------------- Issued and outstanding shares 250.6 282.4 ================================================================================ EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: 1998 1997 1996 - -------------------------------------------------------------------------------- Numerator: Net(loss)/income available to common stockholders $ (132) $ 490 $ 427 Denominator for basic earnings per share - weighted average shares 265.4 285.3 274.0 Effect of diluted securities: Stock options, etc -- 3.1 3.5 Denominator for diluted earnings per share - adjusted weighted average shares 265.4 288.4 277.5 - -------------------------------------------------------------------------------- Basic (Loss)/Earnings per share $ (0.50) $ 1.72 $ 1.56 - -------------------------------------------------------------------------------- Diluted (Loss)/Earnings per share $ (0.50) $ 1.70 $ 1.54 ================================================================================ Options to purchase approximately 25.0 shares of common stock were outstanding during 1998, but were not included in the computation of diluted loss per share as the effect would be antidilutive. Taxes on Income The provisions for income taxes consist of the following: 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $ 78 $ 199 $ 136 Foreign 18 35 57 State 20 30 30 - -------------------------------------------------------------------------------- 116 264 223 - -------------------------------------------------------------------------------- Deferred: Federal (64) 32 58 Foreign (9) (17) (39) State (17) 3 4 - -------------------------------------------------------------------------------- (90) 18 23 - -------------------------------------------------------------------------------- Total tax provision $ 26 $ 282 $ 246 ================================================================================ The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following: January 30, January 31, 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets: Foreign net operating loss carryforwards $ 311 $ 214 Restructuring 92 20 Other 27 42 - -------------------------------------------------------------------------------- Gross deferred tax assets 430 276 Valuation allowance related to net operating losses (141) (43) - -------------------------------------------------------------------------------- $ 289 $ 233 - -------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 281 277 LIFO inventory 50 88 Other tax -- -- - -------------------------------------------------------------------------------- Gross deferred tax liabilities $ 331 $ 365 ================================================================================ Net deferred tax liability $ 42 $ 132 ================================================================================ A reconciliation of the federal statutory tax rate with the effective tax rate follows: 1998 1997 1996 - -------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit (4.2) 3.2 3.7 Foreign taxes, net of valuation allowances (52.3) (2.3) (2.3) Subpart F income (8.5) -- -- Foreign tax credits 6.8 -- -- Amortization of goodwill (3.0) 0.4 -- Other, net 1.7 0.2 0.1 - -------------------------------------------------------------------------------- Effective tax rate (24.5)% 36.5% 36.5% ================================================================================ Certain foreign tax benefits have been offset by valuation allowances related to net operating losses due in part to the restructuring and other charges recorded in 1998. Deferred income taxes are not provided on unremitted earnings of foreign subsidiaries that are intended to be indefinitely invested. Exclusive of amounts, that if remitted would result in little or no tax under current U.S. tax laws, unremitted earnings were approximately $515 at January 30, 1999. Net income taxes of approximately $139 would be due if these earnings were to be remitted. 19 STOCK OPTIONS The Company has Stock Option Plans (the "Plans") which provide for the granting of options to purchase the Company's common stock. The plans cover substantially all employees and non-employee directors of the Company and provide for the issuance of non-qualified options, incentive stock options, performance share options, performance units, stock appreciation rights, restricted shares, restricted units and unrestricted shares. Of the total number of shares reserved for the Plans, 3.0 shares of Company stock have been reserved for the issuance of restricted shares, restricted units, performance units, and unrestricted shares. The Plans provide for a variety of vesting dates with the majority of the options vesting approximately five years from the date of grant. The options granted to non-employee directors are exercisable 20% each year on a cumulative basis commencing one year from the date of grant. In addition to the aforementioned plans, 1.0 stock options were granted to certain senior executives during the period from 1993 to 1996 pursuant to stockholder approved individual plans. Of this total, 0.5 options vest 20% each year on a cumulative basis commencing one year from the date of grant with the balance of the options vesting five years from the date of grant. The exercise price per share of all options granted has been the average of the high and low market price of the Company's common stock on the date of grant. All options must be exercised within ten years from the date of grant. At January 30, 1999, an aggregate of 46.3 shares of authorized common stock were reserved for all of the Plans noted above, of which 9.5 were available for future grants. All outstanding options expire at dates ranging from July 5, 1999 to November 30, 2008. Stock option transactions are summarized as follows: Weighted-Average Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding January 31, 1998 24.1 $ 29.12 Granted 17.7 22.18 Exercised (0.7) 17.99 Canceled (4.3) 28.89 - -------------------------------------------------------------------------------- Outstanding January 30, 1999 36.8 $ 26.02 - -------------------------------------------------------------------------------- Options exercisable at January 30, 1999 10.8 $ 28.25 ================================================================================ The Company utilizes a restoration feature to encourage the early exercise of certain options and retention of shares, thereby promoting increased employee ownership. This feature provides for the grant of new options when previously owned shares of Company stock are used to exercise existing options. Restoration option grants are non-dilutive as they do not increase the combined number of shares of Company stock and options held by an employee prior to exercise. The new options are granted at a price equal to the fair market value on the date of the new grant, and generally expire on the same date as the original options that were exercised. The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, issued in October 1995. In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpre-tations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below: 1998 1997 1996 - -------------------------------------------------------------------------------- Net (loss)/income - as reported $ (132) $ 490 $ 427 Net (loss)/income - pro forma (162) 470 411 Basic (loss)/earnings per share - as reported (0.50) 1.72 1.56 Basic (loss)/earnings per share - pro forma (0.61) 1.65 1.50 Diluted (loss)/earnings per share - as reported (0.50) 1.70 1.54 Diluted (loss)/earnings per share - pro forma (0.61) 1.63 1.48 - -------------------------------------------------------------------------------- The weighted-average fair value at date of grant for options granted in 1998, 1997 and 1996 were $5.31, $7.66 and $7.35, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. As there were a number of options granted during the years of 1996 through 1998, a range of assumptions are provided below: 1998 1997 1996 - -------------------------------------------------------------------------------- Expected stock price volatility .283 - .347 .294 - .334 .284 - .328 Risk-free interest rate 4.7% - 5.8% 5.0% - 6.9% 5.0% - 6.8% Weighted average expected life of options 6 years 6 years 6 years - -------------------------------------------------------------------------------- The effects of applying SFAS No. 123 and the results obtained through the use of the Black-Scholes option pricing model are not necessarily indicative of future values. PROFIT SHARING PLAN The Company has a profit sharing plan with a 401(k) salary deferral feature for eligible domestic employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors, subject to certain limitations. The profit sharing plan may be terminated at the Company's discretion. Provisions of $41, $39 and $31 have been charged to earnings in 1998, 1997, and 1996, respectively. 20 SEGMENTS As a result of the adoption of SFAS No. 131 - Disclosures About Segments of an Enterprise and Related Information, segment information for 1997 and 1996 has been restated to conform to the 1998 presentation. The Company's reportable segments are Toys"R"Us - United States and Toys"R"Us - International. Divisions that do not meet quantitative reportable thresholds are included in the category classified as Other. This category is comprised of the Kids"R"Us and Babies"R"Us divisions. Toys"R"Us - United States operates toy stores in 49 states and Puerto Rico and Toys"R"Us - International operates or franchises toy stores in 26 countries outside the United States. Information on segments and a reconciliation to (loss)/income before income taxes, are as follows: Year ended - -------------------------------------------------------------------------------- January 30, January 31, February 1, 1999 1998 1997 - -------------------------------------------------------------------------------- Sales Toys"R"Us - USA $ 6,581 $ 6,814 $ 6,336 Toys"R"Us - International 2,996 2,867 2,781 Other 1,593 1,357 815 - -------------------------------------------------------------------------------- Total $ 11,170 $ 11,038 $ 9,932 - -------------------------------------------------------------------------------- Operating Profit Toys"R"Us - USA $ 501 $ 654 $ 650 Toys"R"Us - International 146 165 126 Other 59 41 48 General corporate expenses (21) (16) (10) Interest expense, net (93) (72) (81) Restructuring & other charges (698)(a) -- (60)(b) - -------------------------------------------------------------------------------- (Loss)/earnings before taxes on income $ (106) $ 772 $ 673 ================================================================================ Identifiable Assets Toys"R"Us - USA $ 5,075 $ 5,193 $ 3,889 Toys"R"Us - International 2,095 2,282 2,346 Other 303 243 993 Corporate(c) 426 245 795 - -------------------------------------------------------------------------------- Total $ 7,899 $ 7,963 $ 8,023 ================================================================================ (a) The Company recorded charges of $698 ($508 net of tax benefits) for restructuring and other charges. (b) Arbitration award charge of $60 ($38 net of tax benefits). (c) Consists primarily of cash and cash equivalents. ACQUISITION On February 3, 1997, the Company acquired all of the outstanding common shares of Baby Superstore, Inc. ("Baby Superstore") for 13 shares of its treasury stock valued at approximately $376. This acquisition was accounted for as a purchase as at February 1, 1997. The excess of purchase price over net assets acquired of $365 has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. RESTRUCTURING AND OTHER CHARGES On September 16, 1998, the Company announced strategic initiatives to reposition its worldwide business. The cost to implement these initiatives, as well as other charges resulted in a total charge of $333 ($266 net of tax benefits, or $1.00 per share). The Company determined that the strategic initiatives required a restructuring charge of $294 to close and/or downsize stores, distribution centers and administrative functions. This worldwide plan includes the closing of 50 toy stores in the International division, predominately in continental Europe, and 9 in the United States that do not meet the Company's return on investment objectives. The Company will also close 31 Kids"R"Us stores and convert 28 nearby US toy stores into combination stores in the new C-3 format discussed below. Combination stores include toys and an apparel selling space of approximately 5,000 square feet. Other charges consist primarily of changes in accounting estimates and provisions for legal settlements of $39 recorded in selling, general and administrative expenses. Of the total restructuring and other charges, $149 relates to domestic operations and $184 relates to International operations. Remaining reserves of $149 should be utilized in 1999, with the exception of long-term lease commitments, which will be utilized in 1999 and thereafter. Also on September 16, 1998, the Company announced mark-downs and other charges to cost of sales of $345 ($229 net of tax benefits, or $.86 per share). The Company has designed a new store format called C-3. The Company plans to convert approximately 200 US toy stores to the new C-3 format in 1999. Of this charge, $253 related to markdowns required to clear excess inventory from its stores so the Company can proceed with its new C-3 store format on an accelerated basis. Another component of the charge was inventory markdowns of $29 related to the closing and/or downsizing of stores discussed above. The Company also recorded charges to cost of sales of $63 related to inventory system refinements and changes in accounting estimates. Of these charges, $288 relate to domestic operations and $57 relate to International operations. Remaining reserves of $107 are expected to be utilized in 1999. Additionally, in the fourth quarter of 1998 the Company recorded a charge of $20 ($13 net of tax benefits, or $.05 per share), related to the resolution of third party claims asserted from allegations made by the Federal Trade Commission. This charge was in addition to a $15 charge relating to the same matter, included in the charges mentioned above. (See Other Matters). 21 At January 30, 1999, the Company had approximately $45 of liabilities remaining for its restructuring program announced in 1995 primarily relating to long-term lease obligations. The Company believes that reserves are adequate to complete the restructuring and other programs described previously. On July 12, 1996, an arbitrator rendered an award against the Company in connection with a dispute involving rights under a 1982 license agreement for toy store operations in the Middle East. Accordingly, the Company recorded a provision of $60 during 1996, ($38 net of tax benefits, or $.14 cents per share), representing all costs in connection with this matter. OTHER MATTERS On May 22, 1996, the Staff of the Federal Trade Commission (the "FTC") filed an administrative complaint against the Company alleging that the Company is in violation of Section 5 of the Federal Trade Commission Act for its practices relating to warehouse clubs. The complaint alleges that the Company reached understandings with various suppliers that such suppliers not sell to the clubs the same items that they sell to the Company. The complaint also alleges that the Company "facilitated understandings" among the manufacturers that such manufacturers not sell to clubs. The complaint seeks an order that the Company cease and desist from this practice. The matter was tried before an administrative law judge in the period from March through May of 1997. On September 30, 1997, the administrative law judge filed an Initial Decision upholding the FTC's complaint against the Company. On October 13, 1998, the FTC issued a final order and opinion upholding the FTC's complaint against the Company. The Company has appealed the FTC's decision to the United States Court of Appeals for the Seventh Circuit. After the filing of the FTC complaint, several class action suits were filed against the Company in State courts in Alabama and California, alleging that the Company has violated certain state competition laws as a consequence of the behavior alleged in the FTC complaint. After the Initial Decision was handed down, more than thirty purported class actions were filed in federal and state courts in various jurisdictions alleging that the Company has violated the federal antitrust laws as a consequence of the behavior alleged in the FTC complaint. In addition, the attorneys general of forty-four states, the District of Columbia and Puerto Rico have filed a suit against the Company in their capacity as representatives of the consumers of their states, alleging that the Company has violated federal and state antitrust laws as a consequence of the behavior alleged in the FTC complaint. These suits seek damages in unspecified amounts and other relief under state and/or federal law. The Company believes that it has always acted fairly and in the best interests of its customers and that both its policy and its conduct in connection with the foregoing have been and are within the law. However, to avoid the cost and uncertainty of protracted litigation the Company has reached an agreement in principle to settle all of the class action and attorney general lawsuits in a manner which will not have a material adverse effect on its financial condition, results of operations or cash flow. The Company has accrued all anticipated costs relating to this matter as of January 30, 1999. Some of the most popular electronic systems, video games and computer software are seem first at Toys "R" Us! [Photo] 22 REPORT OF MANAGEMENT Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with the management of Toys"R"Us. The accompanying financial statements have been prepared from accounting records which management believes fairly and accurately reflect the operations and financial position of the Company. Management has established a system of internal controls to provide reasonable assurance that assets are maintained and accounted for in accordance with its policies and that transactions are recorded accurately on the Company's books and records. The Company's comprehensive internal audit program provides for constant evaluation of the adequacy of the adherence to management's established policies and procedures. The Company has distributed to key employees its policies for conducting business affairs in a lawful and ethical manner. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, provides oversight to the financial reporting process through periodic meetings with our independent auditors, internal auditors and management. The financial statements of the Company have been audited by Ernst & Young LLP, independent auditors, in accordance with generally accepted auditing standards, including a review of financial reporting matters and internal controls to the extent necessary to express an opinion on the consolidated financial statements. /s/ Robert C. Nakasone /s/ Louis Lipschitz - ----------------------- --------------------------- Robert C. Nakasone Louis Lipschitz Chief Executive Officer Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Toys"R"Us, Inc. We have audited the accompanying consolidated balance sheets of Toys"R"Us, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended January 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Toys"R"Us, Inc. and subsidiaries at January 30, 1999 and January 31, 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. Ernst & Young LLP New York, New York March 10, 1999 23 Directors and Officers Directors CHARLES LAZARUS Chairman Emeritus of the Company MICHAEL GOLDSTEIN Chairman of the Board of the Company ROBERT A. BERNHARD Real Estate Developer ROANN COSTIN President, Reservoir Capital Management, Inc. CALVIN HILL Consultant SHIRLEY STRUM KENNY President, State University of New York at Stony Brook NORMAN S. MATTHEWS Consultant HOWARD W. MOORE Consultant ROBERT C. NAKASONE Chief Executive Officer of the Company ARTHUR B. NEWMAN Senior Managing Director, Blackstone Group Corporate and Administrative ROBERT C. NAKASONE Chief Executive Officer LOUIS LIPSCHITZ Executive Vice President and Chief Financial Officer MICHAEL G. SHANNON Executive Vice President and President U.S. Toy Stores FRANCESCA L. BROCKETT Senior Vice President - Strategic Planning/Business Development ROGER C. GASTON Senior Vice President - Human Resources JOHN HOLOHAN Senior Vice President - Chief Information Officer RAYMOND L. ARTHUR Vice President - Corporate Controller DAN BOOHER Vice President - Architecture and Construction KRISTOPHER M. BROWN Vice President - Distribution and Traffic REBECCA A. CARUSO Vice President - Corporate Communications MICHAEL J. CORRIGAN Vice President - Compensation and Benefits RICHARD N. CUDRIN Vice President - Associate Relations EILEEN C. GABRIEL Vice President - Information Systems ELIZABETH S. JORDAN Vice President - Organizational Development JON W. KIMMINS Vice President - Treasurer DION C. ROONEY Vice President - Systems Development MICHAEL L. TUMOLO Vice President - Counsel PETER W. WEISS Vice President - Taxes ROBERT S. ZARRA Vice President - Internal Audit DENNIS J. BLOCK Secretary Partner-Cadwalader, Wickersham & Taft Toys"R"Us United States MICHAEL G. SHANNON President MICHAEL J. MADDEN President - Store Operations KEITH C. VAN BEEK President - Merchandising and Marketing JAMES E. FELDT Executive Vice President - Merchandising WARREN F. KORNBLUM Senior Vice President - Chief Marketing Officer ROBERT J. WEINBERG Senior Vice President - General Merchandise Manager JOEL D. ANDERSON Vice President - Toys"R"Us Direct DAVID M. BREWI Vice President - World Leader THOMAS F. DELUCA Vice President - Imports, Product Development and Safety Assurance BARBARA A. FITZGERALD Vice President - People Development PHILIP S. FOUSSEKIS Vice President - Loss Prevention ANDREW R. GATTO Vice President - Product Development DANIEL D. HLAVATY Vice President - Business Reengineering JEREL G. HOLLENS Vice President - Merchandising Planning MARIANITA HOWARD Vice President - Creative Services FREDERICK L. HURLEY Vice President - World Leader JOSEPH J. LOMBARDI Vice President - Controller MITCHELL B. LOUKOTA Vice President - World Leader CHARLENE MADY Vice President - Area Merchandise Planning GERALD S. PARKER Vice President - Customer Support and Administration DAVID P. PICOT Vice President - Real Estate DEBRA M. ROOD Vice President - Toys"R"Us Direct Fulfillment TIMOTHY J. SLADE Vice President - Store Planning WILLIAM A. STEPHENSON Vice President - Merchandise Planning and Allocation JOHN P. SULLIVAN Vice President - World Leader GREGG TREADWAY Vice President - C-3 Development DENNIS J. WILLIAMS Vice President - Sales THOMAS A. DRUGAN Regional Vice President - Midwest HARVEY J. FINKEL Regional Vice President - Northeast TRUVILLUS HALL Regional Vice President - Northwest MICHAEL K. HEFFNER Regional Vice President - Gulf States SAMUEL M. MARTIN Regional Vice President - West JOHN J. PRAWLOCKI Regional Vice President - Southeast EDWARD F. SIEGLER Regional Vice President - Mid-Atlantic KEVIN VANDERGRIEND Regional Vice President - Ohio Valley 24 Toys"R"US International GREGORY R. STALEY President BRUNO A. ROQUEPLO Senior Vice President - Finance and Administration ERNEST V. SPERANZA Senior Vice President - Marketing JOAN W. DONOVAN Vice President - General Merchandise Manager JEFF HANDLER Vice President - Advertising LARRY S. JOHNSON Vice President - Franchise Markets MICHAEL C. TAYLOR Vice President - Franchising/Logistics DAVID RURKA Managing Director - Toys"R"Us United Kingdom and Chairman of the European Management Board JOHANNES DERCKS President - Toys"R"Us Central Europe JACQUES LEFOLL President - Toys"R"Us France/Belgium ROBERT F. MORAN President - Toys "R" Us (Canada) Ltd. JOHN SCHRYVER Managing Director - Toys"R"Us Australia MANABU TAZAKI President - Toys"R"Us Japan ANTONIO URCELAY Managing Director - Toys"R"Us Iberia LARRY D. GARDNER Vice President - Toys"R"Us Asia SCOTT W.K. CHEN* General Manager - Toys"R"Us Taiwan JOE TANG* General Manager - Toys"R"Us Hong Kong MICHAEL S.M. YEO* General Manager - Toys"R"Us Singapore *Country Management Kids"R"Us/Babies"R"Us* RICHARD L. MARKEE President - Kids"R"Us and Babies"R"Us JAMES G. PARROS Senior Vice President - Stores and Distribution Center Operations MARTIN E. FOGELMAN Vice President - World Leader Juvenile Products LAURA J. FREEMAN Vice President - Divisional Merchandise Manager JONATHAN M. FRIEDMAN Vice President - Chief Financial Officer - Kids"R"Us and Babies"R"Us JAMES L. EASTON Vice President - General Merchandise Manager VINCENT A. SCARFONE Vice President - Human Resources CHRISTOPHER M. SCHERM Vice President - Divisional Merchandise Manager DAVID E. SCHOENBECK Vice President - Operations - Babies "R" Us SANDEE A. SPRINGER Vice President- Divisional Merchandise Manager DAVID S. WALKER Vice President - Advertising PAMELA B. WALLACK Vice President - Product Development *Kids"R"Us Officer, unless otherwise indicated. Parents and children discover amazing ways to play and learn in our Learning Center. [Photo] 25 Quarterly Financial Data and Market Information TOYS"R"US, INC. AND SUBSIDIARIES Quarterly Financial Data (In millions except per share data) The following table sets forth certain unaudited quarterly financial information. First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------- Net Sales $2,043 $2,020 $ 2,171 $4,936 Cost of Sales 1,417 1,390 1,831 3,553 Net Earnings/(Loss) 19 14 (475)(a) 310(b) Basic Earnings/(Loss) per Share $ .07 $ .05 $ (1.85) $ 1.23 Diluted Earnings/(Loss) per Share $ .07 $ .05 $ (1.85) $ 1.23 1997 - -------------------------------------------------------------------------------- Net Sales $1,924 $1,989 $ 2,142 $4,983 Cost of Sales 1,326 1,355 1,455 3,574 Net Earnings 29 37 46 378 Basic Earnings per Share $ 0.10 $ 0.13 $ 0.16 $ 1.33 Diluted Earnings per Share $ 0.10 $ 0.13 $ 0.16 $ 1.32 (a) Third quarter results include restructuring and other charges of $678 ($495 net of tax benefits, or $1.86 per share). (b) Fourth quarter results include provisions for legal settlements of $20 ($13 net of tax benefits, or $.05 per share). Market Information The Company's common stock is listed on the New York Stock Exchange. The following table reflects the high and low prices (rounded to the nearest one-sixteenth) based on New York Stock Exchange trading since February 1, 1997. The Company has not paid any cash dividends, however, the Board of Directors of the Company reviews this policy annually. The Company had approximately 31,200 Stockholders of Record on March 9, 1999. High Low - -------------------------------------------------------------------------------- 1997 1st Quarter 29 7/8 24 1/2 2nd Quarter 34 13/16 28 1/4 3rd Quarter 37 1/8 29 1/8 4th Quarter 35 7/16 24 7/8 - -------------------------------------------------------------------------------- 1998 1st Quarter 30 7/8 25 7/8 2nd Quarter 29 1/2 22 5/16 3rd Quarter 23 13/16 15 5/8 4th Quarter 21 1/2 14 7/16 Store Locations Stores Across the United States Toys Kids Babies - -------------------------------------------------------------------------------- Alabama 8 1 2 Alaska 1 -- -- Arizona 11 -- 2 Arkansas 4 -- -- California 87 23 8 Colorado 11 -- 2 Connecticut 11 6 -- Delaware 2 1 1 Florida 47 10 10 Georgia 18 4 6 Hawaii 1 -- -- Idaho 2 -- -- Illinois 34 19 5 Indiana 13 7 2 Iowa 8 1 -- Kansas 5 1 1 Kentucky 8 -- 1 Louisiana 11 -- 1 Maine 2 1 1 Maryland 19 9 3 Massachusetts 19 6 1 Michigan 25 13 5 Minnesota 12 2 1 Mississippi 5 -- -- Missouri 13 5 3 Montana 1 -- -- Nebraska 3 1 -- Nevada 4 -- 2 New Hampshire 5 2 -- New Jersey 26 18 7 New Mexico 4 -- -- New York 46 23 3 North Carolina 16 1 5 North Dakota 1 -- -- Ohio 33 18 6 Oklahoma 5 -- 1 Oregon 8 -- 1 Pennsylvania 33 15 3 Rhode Island 1 1 1 South Carolina 9 -- 3 South Dakota 2 -- -- Tennessee 14 2 4 Texas 54 9 13 Utah 6 3 1 Vermont 1 -- -- Virginia 22 7 7 Washington 14 -- 1 West Virginia 5 -- -- Wisconsin 10 3 -- Puerto Rico 4 -- -- - -------------------------------------------------------------------------------- 704 212 113 ================================================================================ TOYS"R"US International - 452 - ----------------------------- Australia - 24 Austria - 8 Belgium - 3 Canada - 64 Denmark - 10(a) France - 44 Germany - 59 Hong Kong - 5(a) Indonesia - 3(a) Israel - 5(a) Japan - 76(b) Luxembourg - 1 Malaysia - 5(a) Netherlands - 9(a) Portugal - 6 Saudi Arabia - 3(a) Singapore - 4 South Africa - 8(a) Spain - 29 Sweden - 5 Switzerland - 5 Taiwan - 6(a) Turkey - 5(a) United Arab Emirates - 4(a) United Kingdom - 61 (a) Franchise or joint venture. (b) 80% owned 26 Corporate Data and Citizenship TOYS"R"US, INC. AND SUBSIDIARIES Annual Meeting The Annual Meeting of the Stockholders of Toys"R"Us will be held at the Westin Hotel Atlanta North at Perimeter, 7 Concourse Parkway in Atlanta, Georgia, on June 9, 1999 at 10:00 A.M. The Offices of The Company are Located at 461 From Road Paramus, New Jersey 07652 Telephone: 201-262-7800 225 Summit Avenue Montvale, New Jersey 07645 Telephone: 201-802-5000 General Counsel Cadwalader, Wickersham & Taft 100 Maiden Lane New York, New York 10036 Independent Auditors Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 Registrar and Transfer Agent American Stock Transfer and Trust Company 40 Wall Street, New York, New York 10005 Telephone: 718-921-8200 Common Stock Listed New York Stock Exchange, Symbol: TOY Stockholder Information The Company will supply to any owner of Common Stock, upon written request to Mr. Louis Lipschitz of the Company at the above address and without charge, a copy of the Annual Report on Form 10-K for the year ended January 30, 1999, which has been filed with the Securities and Exchange Commission. Stockholder information, including quarterly earnings and other corporate news releases, can be obtained by calling 800-785-TOYS, or at our web site on the internet at www.toysrus.com Significant news releases are anticipated to be available as follows: Call after... For the following... May 17, 1999 1st Quarter Results Aug. 16, 1999 2nd Quarter Results Nov. 15, 1999 3rd Quarter Results Jan. 6, 2000 Holiday Sales Results Mar. 8, 2000 1999 Results Corporate Citizenship Toys"R"Us maintains a company-wide giving program focused on improving the health care needs of children by supporting many national and regional children's health care organizations. The Counsel on Economic Priority awarded Toys"R"Us the Pioneer Award in Global Ethics. This award was the direct result of the implementation of our Code of Conduct for suppliers which outlines the Company's position against child labor and unsafe working conditions. In order for a vendor's product to be sold in any of our stores, they must comply with our Code of Conduct. If you would like to receive more information on Toys"R"Us' corporate citizenship please write to Mr. Roger Gaston of the Company at the Company's address. Visit us on the internet at www.toysrus.com. Undoubtedly, the brand kids love most! [Photo] 27 TOYS "R" US KIDS "R" US BABIES "R" US EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT AS OF JANUARY 30, 1999 Name Jurisdiction of Incorporation - ---- ----------------------------- ABG Corp. Nevada Baby Superstore, Inc. South Carolina Geoffrey, Inc. Delaware MLK, Inc. Missouri MMT, Inc. Utah Toys "R" Us - Belgium, Inc. Delaware Toys "R" Us - Delaware, Inc. Delaware Toys "R" Us - Del. Operations, Inc. Delaware Toys "R" Us Group, Inc. Delaware Toys "R" Us - Mass, Inc. Massachusetts Toys "R" Us - NY/Texas Holdings, Inc. Delaware Toys "R" Us - NY LLC New York Toys "R" Us - NYTEX, Inc. Delaware Toys "R" Us - Ohio, Inc. Delaware Toys "R" Us - Penn, Inc. Pennsylvania Toys "R" Us - Texas LLC Delaware TRU (ANTS) Inc. Delaware TRU Belgium Holdings II, Inc. Delaware TRU Foreign Sales Corporation California TRU Gulf Services, Inc. Delaware TRU, Inc. Delaware TRU - LSM Redevelopment Corporation Missouri TRU Mass Properties Holdings, Inc. Delaware TRU Mass Properties, Inc. Delaware TRU Netherlands Holdings I, Inc. Delaware TRU Netherlands Holdings II, Inc. Delaware TRU Ohio Properties Holdings, Inc. Delaware TRU Ohio Properties, Inc. Delaware TRU Penn Properties Holdings, Inc. Delaware TRU Penn Properties, Inc. Delaware TRU Properties Holdings, Inc. Delaware TRU Properties, Inc. Delaware TRU (Vermont), Inc. Vermont Toys "R" Us (Australia) Pty, Ltd. Australia Toys "R" Us (Head Office) Pty. Ltd. Australia Toys "R" Us (Wholesale) Pty. Ltd. Australia TRU (Aust) Superannuation Pty. Ltd. Australia Toys "R" Us Handelsgesellschaft m.b.H. Austria TRU (Barbados), Ltd. Barbados Toys "R" Us - Belgium SCA Belgium TRU (NRO III) Investments Ltd. Alberta, Canada Toys "R" Us (Canada) Ltd. Ontario, Canada Sumus Nos Limited Cayman Islands TRU (Cayman Islands) Limited Cayman Islands TRU (Cayman Islands) Investments LLC Cayman Islands Toys "R" Us A/S Denmark Toys "R" Us S.A.R.L. France Toys "R" Us GmbH Germany Toys "R" Us Logistik GmbH Germany Toys "R" Us Operations GmbH Germany Toys "R" Us - Lifung Limited Hong Kong Toys "R" Us Asia Limited Hong Kong TRU (HK) Limited Hong Kong IOCA Limited Ireland Toys "R" Us - Japan, Ltd. Japan Toys "R" Us (Luxembourg) S.A. Luxembourg Toys "R" Us (Malaysia) SDN. BHN. Malaysia Toys "R" Us (Netherlands), B.V. Netherlands TRU (Netherlands) B.V. Netherlands TRU (Netherlands) Investments B.V. Netherlands Toys R Us Portugal, Limitada Portugal TRU of Puerto Rico, Inc. Puerto Rico Toys "R" Us - Singapore (Pte) Limited Singapore Toys R Us, Iberia, S.A. Spain Toys "R" Us, Aktiebolag Sweden Toys R Us AG Switzerland Toys "R" Us - Lifung Taiwan Limited Taiwan Toys "R" Us Holdings PLC United Kingdom Toys "R" Us Limited United Kingdom Toys "R" Us Properties Limited United Kingdom Tru Toys (UK) Limited United Kingdom EX-23 9 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Toys "R" Us, Inc. and subsidiaries of our report dated March 10, 1999, included in the 1998 Annual Report to Stockholders of Toys "R" Us, Inc. and subsidiaries. We also consent to the incorporation by reference in Registration Statements (Form S-4 Number 33-56303 and 333-18863; Form S-3 Numbers 2-87794, 33-23264, 33-34273, 33-42237 and 33-51359; Form S-8 Numbers 2-64887, 2-91834, 33-42627, 333-11861, 333-15841, 333-23441, 333-20385, 33-64315 and 333-61827) of Toys "R" Us, Inc. and subsidiaries of our report dated March 10, 1999, with respect to the consolidated financial statements incorporated herein by reference. /s/ Ernst & Young LLP New York, New York April 28, 1999 EX-24.1 10 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Louis Lipschitz and Dennis J. Block and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Toys "R" Us, Inc. for the fiscal year ended January 30, 1999, and any amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform such and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in separate counterparts, each of which shall be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the __ day of April, 1999. Name Title Signature ---- ----- --------- Robert C. Nakasone Director and Chief Executive Officer (Principal Executive /s/ Robert C. Nakasone Officer) ----------------------- Raymond L. Arthur Vice President - Controller (Principal Accounting Officer) /s/ Raymond L. Arthur ----------------------- Michael Goldstein Chairman of the Board /s/ Michael Goldstein ----------------------- Robert A. Bernhard Director /s/ Robert A. Bernhard ----------------------- RoAnn Costin Director /s/ RoAnn Costin ----------------------- Calvin Hill Director /s/ Calvin Hill ----------------------- Shirley Strum Kenny Director /s/ Shirley Strum Kenny ----------------------- Charles Lazarus Director, Chairman Emeritus /s/ Charles Lazarus ----------------------- Norman S. Matthews Director /s/ Norman S. Matthews ----------------------- Name Title Signature ---- ----- --------- Howard W. Moore Director /s/ Howard W. Moore ----------------------- Arthur B. Newman Director /s/ Arthur B. Newman ----------------------- EX-24.2 11 SECRETARY'S CERTIFICATE EXHIBIT 24.2 TOYS "R" US, INC. Secretary's Certificate I, Dennis J. Block, Secretary of Toys "R" Us, Inc., a Delaware corporation (the "Company"), DO HEREBY CERTIFY that the following is a true and complete copy of the resolution duly adopted by the Board of Directors of the company at a meeting duly held on March 9, 1999. Said resolution has not been modified or rescinded since its adoption and is in full force and effect as of the date hereof. RESOLVED, that the execution of the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999, and any amendments thereto (the "Form 10-K"), by each of Robert C. Nakasone, Chief Executive Officer of the Company (as Principal Executive Officer), Louis Lipschitz, Executive Vice President and Chief Financial Officer of the Company (as Principal Financial Officer) and Raymond L. Arthur, Vice President - Controller of the Company (as Principal Accounting Officer) pursuant to a Power of Attorney (the "Power of Attorney"), substantially in the form approved by the Board of Directors, be and hereby is approved, and that the Power of Attorney along with a certified copy of this resolution be filed as an exhibit to the Form 10-K pursuant to the requirements of Item 601(b)(24) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. IN WITNESS WHEREOF, I have hereunto set my hand this 1st of April, 1999. /s/ Dennis J. Block ---------------------------- Dennis J. Block Secretary EX-27 12 FDS --
5 This schedule contains summary financial information extracted from the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Earnings as reported in Exhibit 13 of the Form 10-K and is qualified in its entirety by reference to such financial statements. 1000 YEAR JAN-30-1999 FEB-01-1998 JAN-30-1999 410,000 0 204,000 0 1,902,000 2,597,000 5,814,000 1,588,000 7,899,000 2,491,000 1,222,000 30,000 0 0 3,594,000 7,899,000 11,170,000 11,170,000 8,191,000 0 549,000 0 93,000 (106,000) 26,000 (132,000) 0 0 0 (132,000) (0.50) (0.50)
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