-----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, AhTXD/B+y09KDnZ8I3Dgrimaet18Vl2iUez2ETQEFBjjnliiODACy3WBwC0OmpaT JwbQjZLmTJHfoogyHqK4vw== 0000891092-00-000344.txt : 20000427 0000891092-00-000344.hdr.sgml : 20000427 ACCESSION NUMBER: 0000891092-00-000344 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000426 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: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11609 FILM NUMBER: 609520 BUSINESS ADDRESS: STREET 1: 461 FROM RD CITY: PARAMUS STATE: NJ ZIP: 07652 BUSINESS PHONE: 2012627800 10-K 1 FORM 10-K UNITED STATES 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 29, 2000 Commission file number 1-11609 TOYS "R" US, INC. Incorporated pursuant to the Laws of Delaware Internal Revenue Service - Employer Identification No. 22-3260693 225 Summit Avenue, Montvale, New Jersey 07645 (201) 802-5000 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 Exhange 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. [ ] At April 10, 2000, the aggregate market value of voting stock held by non-affiliates was $3,216,995,592 based on the 224,768,251 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 29, 2000 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 7, 2000 are incorporated by reference into Part III of this Form 10-K. INDEX ----- PAGE ---- PART I. Item 1. Business ...................................................... 2 Item 2. Properties .................................................... 9 Item 3. Legal Proceedings ............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders ........... 11 PART II. Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ....................... 11 Item 6. Selected Financial Data ....................................... 11 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ......... 11 Item 7a. Qualitative and Quantitative Disclosures About Market Risk .... 11 Item 8. Financial Statements and Supplementary Data ................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................ 12 PART III. Item 10. Directors and Executive Officers of the Registrant ............ 13 Item 11. Executive Compensation ........................................ 15 Item 12. Security Ownership of Certain Beneficial Owners and Management ................................. 15 Item 13. Certain Relationships and Related Transactions ................ 16 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................... 16 1 PART I ------ ITEM 1. BUSINESS Toys "R" Us, Inc. and its subsidiaries (the "company") is the world's leading resource on kids, families and fun, bringing toys, apparel and baby needs to children and their families. As of January 29, 2000, the company was engaged in the operation of 1,548 retail stores consisting of 1,086 United States locations comprised of 710 toy stores under the name "Toys "R" Us," 205 children's clothing stores under the name "Kids "R" Us," 131 infant-toddler stores under the name "Babies "R" Us", and 40 educational specialty stores under the name "Imaginarium." Internationally, the company operates 462 toy stores, including franchise and joint venture stores, under the name "Toys "R" Us." The company also sells merchandise through its Internet sites at www.toysrus.com and www.imaginarium.com and through mail order catalogues. The company is incorporated in the state of Delaware. (a) General Development of the Business Acquisition of Imaginarium Toy Centers, Inc. On August 20, 1999, the company acquired all of the capital stock of Imaginarium Toy Centers, Inc., ("Imaginarium") a leading educational specialty retailer, for approximately $43 million in cash and the assumption of certain liabilities. The company believes this acquisition will accelerate its strategy to establish a leadership position in the learning and educational category by incorporating "Imaginarium" sections into certain existing and future C-3 format stores. This new division operated 40 leased store locations in 13 states under the "Imaginarium" brand name as of January 29, 2000. The company accounted for the acquisition under the purchase method of accounting and the results of Imaginarium operations have been combined with those of the company from the date of acquisition. The operating results of Imaginarium from the date of acquisition are not material to the overall results of the company. On-line Retailing Strategic Initiatives The company announced several major strategic initiatives regarding on-line retailing, as part of the company's strategy to become a global leader in the on-line retail market for toys and children's products. Although on-line sales currently represent only a very small percentage of the overall toy business, it is a rapidly growing retail channel. Over the next five years, the number of on-line users around the world are forecasted to increase more than three-fold to over 400 million. The key initiatives included the establishment of Toysrus.com as a separate subsidiary of the company, a partnership with SOFTBANK Venture Capital and affiliates that included an investment of $57 million in Toysrus.com, and the acquisition of a 500 thousand square foot distribution center dedicated solely to the fulfillment of orders placed by on-line customers. Toysrus.com also plans to add two additional distribution centers in time for the 2000 Holiday season. During the last few months of 1999, Toysrus.com became one of the fastest growing web sites on the Internet. The company plans to continue strategic investments in Toysrus.com to capitalize on the company's brand names, brick and mortar assets, and SOFTBANK's internet expertise to achieve the goal of making Toysrus.com a global leader in the on-line retail market for toys and children's products. For further discussion of Toysrus.com 2 refer to Management's Discussion and Analysis of Results of Operations and Financial Condition on pages 21 to 24 in the company's 1999 Annual Report. Restructuring and Other Charges During 1998, the company announced strategic initiatives to reposition its worldwide business. These strategic initiatives included 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 strategic initiatives also included the planned conversion of approximately 28 existing toy stores in the United States into Toys "R" Us/Kids "R" Us combo stores in the C-3 format in conjunction with the closing of approximately 31 nearby Kids "R" Us stores. The strategic plans also included the closing of several distribution centers and administrative offices worldwide with their functions absorbed within the remaining 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. As of January 29, 2000, the company had closed two underperforming toy stores in the United States, had reached agreements to close four other such stores, and was actively marketing the remaining stores to be closed. With regard to the closing and/or disposition of International toy store locations, 33 such locations have been closed as of January 29, 2000. The company is continuing to actively negotiate for the closure or other disposition of the remaining identified International locations. As of January 29, 2000, 11 Kids "R" Us stores have been closed as part of the restructuring announced in 1998. The company is continuing to actively market the remaining Kids "R" Us locations identified as part of the restructuring. In addition, the company closed four distribution centers and seven area offices in the United States since these strategic initiatives were announced. In 1998, the company also announced markdowns and other charges of $345 million ($229 net of tax benefits, or $0.86 per share). A significant portion of these charges related to markdowns required to clear excess inventory from stores. These markdowns were intended to enable the company to achieve its optimal inventory assortment and streamline systems so that it could proceed with the C-3 conversions on a more efficient 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. As of January 29, 2000, the unutilized portion of these announced markdowns and other charges totaled $14 million. These unused reserves are expected to be utilized in 2000 as a result of certain store closing activities. 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 result in continuing improvement to the company's free cash flow and increase operating earnings. Details on the components of the charges mentioned above as well as the related update to the restructuring plan are described in the Notes to the Consolidated Financial Statements on pages 33 and 34 of the company's 1999 Annual Report, as well as in Management's Discussion and Analysis of 3 Results of Operations and Financial Position on page 22 of the company's 1999 Annual Report, which sections are incorporated herein by reference. The company has completed its restructuring program that was announced in 1995, with the exception of long-term lease commitment reserves that will be utilized until such obligations expire. The company believes that reserves are adequate to complete the restructuring and other programs described above. Acquisition of Baby Superstore, Inc. 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. For a further discussion of the company's infant-toddler stores, see "Item 1. Business - Narrative Description of the Business - Babies "R" Us." (b) Financial Information About Industry Segments Information about industry segments, as set forth in the Notes to the Consolidated Financial Statements on page 33 of the company's 1999 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 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 and value offered. The company will also continue brand power enhancements by seeking vendor alliances for dual marketing and optimal product placements in the stores, and by seeking promotional alliances such as the sponsorships of Major League Baseball and the Women's World Cup Soccer Team Victory Tour in 1999. Toys "R" Us will also continue to promote itself as an event destination by continuing such events as Pokemon Leagues in our stores. The merchandising strategy going forward for Toys "R" Us is to strengthen its core business (top 1,500 selling items) to allow consistent comparable store for store sales growth and to lessen the dependence on "hot" merchandise items to drive sales growth. By focusing on the core business, the company hopes to strengthen its relationships with vendors by allowing vendors to better plan production and meet agreed upon delivery timetables. Ensuring a sufficient supply of core business items will allow the company to satisfy consumer demand for these items and maximize sales. Currently, most Toys "R" Us stores conform to a traditional 45,000 square feet prototype design, with 30,000 and 20,000 square feet stores existing in smaller markets, and are generally freestanding units or located in strip malls. Of the 710 stores currently operated by Toys "R" Us, 4 287 are in the traditional format, 170 are in the company's new C-3 format, 90 are designed in the company's "Concept 2000" format and 163 additional stores have retrofitted C-3 "front-ends". The company also plans to convert approximately 70 existing Toys "R" Us traditional format stores into Toys "R" Us/Kids "R" Us C-3 combo stores in 2000. A combo store is a Toys "R" Us store with approximately 5,000 square feet dedicated to apparel. Kids "R" Us personnel are responsible for the operation of the apparel section within the combo store. As of January 29, 2000, Kids "R" Us personnel oversaw the operation of apparel sections in 90 Toys "R" Us/Kids "R" Us combo stores. There were 62 combo stores as of January 29, 2000, which are a subset of the 287 traditional format Toys "R" Us stores noted above. As of January 29, 2000, there were 28 C-3 combo stores that are a subset of the 170 new C-3 format stores noted above. 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 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 plans to refine the C-3 format in 2000 and has implemented a 16 store test program. The test program includes experimenting with new concepts such as "store within a store" like Imaginarium shops and a "Teentronics" shop (electronic products aimed at teenagers), exclusive product areas featuring items such as "Animal Planet" merchandise and enhanced training for store associates in product knowledge, sales and service. The test program will also include more selling specialist employees available to enhance the shopping experiences for our guests. All new toy stores in the United States will be formatted in the C-3 store concept. The company also introduced 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" established its own business plan and has a complete support team to develop its business from product sourcing to advertising and promotion. The "worlds" presently are: o R Zone (video, electronics, computer software, related products) o Action Central (vehicles, action figures, etc.) o Dolls and Dress up (collectibles, accessories and lifestyle products) o Seasonal (Christmas, Halloween, Summer, bikes, sports, playsets, etc.) o Juvenile (baby products and newborn to age 4 apparel) o Learning Center (educational and developmental products, accessories, games and puzzles) Toys "R" Us opened seven new toy stores while closing one store in 1999. The company utilizes demographic data to determine which markets to enter. This year the company will focus on continuing to refine the C-3 store concept rather than on opening new stores. The number of C-3 stores that will be refined depends on the outcome of the previously discussed 16 store C-3 refinement test program. Toys "R" Us believes the flexibility afforded by its warehouse/distribution system and by ownership of a majority of its own fleet of trucks to distribute merchandise 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 5 to allocate merchandise to each store and keep the stores adequately stocked at all times. Furthermore, the company has accelerated the 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. The distribution centers employ state of the art warehouse management systems, radio frequency technology and material handling equipment that help to minimize overall inventory levels and distribution costs while maintaining optimal in-stock positions at the store level. The company will utilize these state of the art warehouse systems to allow certain distribution centers to service more stores than they presently service. This will allow the company to distribute merchandise more efficiently in 2000. Certain product processing and ticketing activities are performed at the distribution centers to improve labor efficiency and to allow store employees to concentrate on guest service and store presentation. Toys "R" Us - International Toys "R" Us - International ("International") operates or franchises toy stores in 26 countries outside the United States. These stores generally conform to traditional prototypical designs similar to those used by Toys "R" Us. International also employs computerized inventory systems similar to those utilized by Toys "R" Us. International added 41 new toy stores, including 21 franchise stores while closing 31 stores in 1999. Utilizing demographic data to determine which markets to enter, the company plans to add approximately 30 new toy stores in 2000, including approximately 10 franchise stores. The company also plans to close approximately 15 underperforming International toy stores in 2000 as part of the company's strategic restructuring initiatives to reposition its worldwide business. On March 20, 2000, the company announced the initial public offering ("IPO") in Japan of shares of Toys "R" Us - Japan, Ltd. ("Toys - Japan"). Under the IPO plan, Toys - Japan and the company will offer primary and secondary shares, respectively, to the public in Japan during the first half of fiscal 2000. The IPO is subject to Japanese government approval and risks associated with market conditions. After the IPO, the company will own less than 50% of the then outstanding shares and will no longer be in a position to exert significant influence over the management of Toys - Japan. Accordingly, the company will no longer consolidate the financial statements of Toys - Japan. Toys - Japan will operate as a licensee of the company. 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 of space and are typically freestanding units or located in strip centers in the United States. In 1999, Kids "R" Us opened one new store and closed eight underperforming stores. The underperforming locations were closed as outlined in the 1998 restructuring program. The company plans to close approximately 20 additional Kids "R" Us stores in 2000. Kids "R" Us is also responsible for the operation of apparel sections in Toys "R" Us/Kids "R" Us combo stores. Refer to the narrative description of the business for Toys "R" Us - United States for combo store information. The retail apparel business fluctuates according to changes in consumer preferences dictated in part by fashion, perceived value and season. These fluctuations affect the 6 merchandise in stock, since purchase orders are made well in advance of the season and at times before fashion trends and "hot" brands are evidenced by consumer purchases. Competition in the retail apparel business consists of national and local department, specialty and discount store chains as well as Internet and catalog businesses. Kids "R" Us is vulnerable to demand and pricing shifts and to less than optimal selection as the result of these factors. Kids "R" Us reviews its merchandise assortments in order to identify slow-moving items and uses markdowns to clear such inventory. The Kids "R" Us division has its own dedicated distribution network for the distribution of apparel items to stores. The company is reevaluating all aspects of this segment of the business. Kids "R" Us is attempting to reposition its business by focusing on store layouts, visual presentations and merchandise assortments that are more appealing to consumers. Apparel is also currently a key element of the C-3 combo store format and Babies "R" Us shopping experiences. Babies "R" Us The company launched 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. In select markets Babies "R" Us has opened smaller 30,000 square feet prototype stores to serve less densely populated areas. As of January 29, 2000, Babies "R" Us operated 10 locations that conformed to the 30,000 square feet prototype store. All Babies "R" Us 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. Babies "R" Us registers more expectant parents than any other retailer in the domestic market. 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, in 1997, of Baby Superstore, Inc., 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 mid-west. The company has converted substantially all of the existing Baby Superstore stores to the Babies "R" Us operating format. The company, which utilizes demographic data to determine which markets to enter, opened 18 Babies "R" Us stores in 1999 and operated 131 Babies "R" Us stores in the United States as of January 29, 2000. As part of the company's long-range growth plan for this successful concept, approximately 20 new Babies "R" Us stores are planned to open in 2000. The company utilizes its existing distribution network to service the needs of the Babies "R" Us division. Toysrus.com Toysrus.com is a recent addition to the "R" Us family, selling merchandise directly to the public via the Internet at www.toysrus.com as a subsidiary of the company. The company opened its virtual doors to the public in June 1998. A redesigned web site was launched in May 1999, offering a broad selection of toys, games, computer software, video systems, video software, and more. Thousands of unique products are offered to the on-line public. The company believes the Internet poses substantial opportunities as a medium for retail commerce and therefore plans to continue the growth of the on-line business. Toysrus.com experienced 7 rapid demand growth in 1999. This rapid growth and seasonal nature of the toy retail industry led to less than optimal order fulfillment during the 1999 Holiday Season. Toysrus.com addressed this challenge in the short-term by notifying affected customers and compensating such customers with $100 worth of Geoffrey Money, which could be redeemed for merchandise in Toys "R" Us, Kids "R" Us or Babies "R" Us stores. The long-term solution to ensuring optimal customer service in the rapid growth and highly seasonal on-line toy retail business will be achieved through the initiatives discussed above under "On-line Retailing Strategic Initiatives" and various web site enhancements, increased product availability and other infrastructure investments. In addition, the recognition of the Toys "R" Us name along with the ability to leverage existing company store locations that can accept customer returns and exchanges will lend a competitive advantage to the on-line business. (d) Trademarks "TOYS "R" US", "KIDS "R" US", "BABIES "R" US" and "Imaginarium", 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 38 of the company's 1999 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 21 through 24 of the company's 1999 Annual Report, which section is incorporated herein by reference. (g) Competition All aspects of the retailing industry are highly competitive. Most 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 retailers of toy and children-related products, on-line retailers, department stores and discount and mass merchandise type retail stores. Discount and mass merchandise type retailers use aggressive pricing policies and enlarged toy selling areas during the holiday season to build traffic for other store departments. The company addresses these competitive tactics by continually building brand image to attract customers, offering consumers exclusive product, high value items, the best available selection of toys and toy related products relative to the discount and mass merchandise type retailers, and remaining competitive on price. 8 (h) Employees At January 29, 2000, the company employed approximately 76,000 individuals. Due to the seasonality of the company's business, employment rose to approximately 119,000 during the 1999 Holiday Season. ITEM 2. PROPERTIES See the Note, "Leases," in the company's Notes to Consolidated Financial Statements included on page 30 of the company's 1999 Annual Report, which note is incorporated herein by reference. Also see the section "Store Locations" on page 38 of the company's 1999 Annual Report, which section is incorporated herein by reference. The following information related to properties is as of January 29, 2000: 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 710 toy stores, 439 of which are owned and 271 are leased and 11 distribution centers, 9 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 a corporate office in Paramus, New Jersey and owns a corporate office building in Montvale, New Jersey and a data center in Parsippany, New Jersey. Toys "R" Us - International International operates 371 stores, excluding 20 joint ventures and 71 franchised stores, 105 of which are owned and 266 are leased. International also operates 8 distribution centers, 4 of which are owned and 4 are leased. Kids "R" Us Kids "R" Us operates 205 stand alone children's clothing stores, 99 of which are owned and 106 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 131 juvenile retail stores, 16 of which are owned and 115 are leased. Babies "R" Us stores are serviced by existing Toys "R" Us and Kids "R" Us distribution centers discussed above. 9 ITEM 3. LEGAL PROCEEDINGS The company is a party to the legal proceedings discussed below, which have arisen in the normal course of business. In view of the inherent difficulty of predicting the outcome of litigation and other legal proceedings, the company cannot state what the eventual outcome of these pending proceedings will be. It is the opinion of management, after consultation with outside counsel, that the legal proceedings referred to below will not, individually or in the aggregate, have a material adverse effect on the company's financial position or results of operations. In the Matter of Toys "R" Us, Inc.; In Re: Toys "R" Us Antitrust Litigation. 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. The appeal was argued on May 18, 1999 and is awaiting decision from the Court. 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 had 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 had 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 filed a suit against the company in their capacity as representatives of the consumers of their states, alleging that the company had violated federal and state antitrust laws as a consequence of the behavior alleged in the FTC complaint. These suits sought damages in unspecified amounts and other relief under state and/or federal law and were consolidated in the United States District Court for the Eastern District of New York. 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 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 Court granted final approval of the agreement on February 17, 2000. The company had accrued all anticipated costs relating to this matter as of January 30, 1999. 10 FAO Schwarz, et al. v. Toys "R" Us, Inc., et al. On February 10, 2000, an action was commenced in the Supreme Court of the State of New York, New York County by FAO Schwarz ("FAO") and Vendex KBB N.V. against the company and John H. Eyler, Jr. The complaint alleges, among other things, that Mr. Eyler breached his employment agreement with FAO and that the company committed tortious interference with contractual relations in connection with Mr. Eyler joining the company as President and Chief Executive Officer and a member of its board of directors. The complaint seeks compensatory and punitive damages in unspecified amounts and injunctive relief preventing Mr. Eyler from continuing his employment with the company. Also on February 10, 2000, plaintiffs filed a motion for a temporary restraining order and a preliminary injunction in which they sought to remove Mr. Eyler from his positions at the company and prevent him from working for the company. On February 10, 2000, the court denied plaintiffs' motion for a temporary restraining order. The court has not yet issued a ruling on plaintiff's request for a preliminary injunction. On March 1, 2000, defendants filed answers to the complaint in which they denied liability and asserted affirmative defenses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted for a vote of stockholders during the fourth quarter of the fiscal year ending January 29, 2000. 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 38 of the company's 1999 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Selected financial data is hereby incorporated by reference to page 3 of the company's 1999 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 21 through 24 of the company's 1999 Annual Report. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative and quantitative disclosures about market risk are hereby incorporated by reference to page 24 of the company's 1999 Annual Report. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are hereby incorporated by reference to pages 25 to 35 of the company's 1999 Annual Report. (a) Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999 (b) Consolidated Statements of Earnings for each of the three years in the period ended January 29, 2000 (c) Consolidated Statements of Cash Flows for each of the three years in the period ended January 29, 2000 (d) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 29, 2000 (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 currently 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. 12 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 Proxy Statement for the Annual Meeting of Stockholders to be held June 7, 2000 ("2000 Proxy Statement"). Executive Officers of the company (a) The following persons are the Executive Officers of the company as of April 10, 2000, 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 58 Chairman of the Board - -------------------------------------------------------------------------------- John H. Eyler Jr. 52 President and Chief Executive Officer, and Director - -------------------------------------------------------------------------------- Michael G. Shannon 48 President of Administration and Logistics - -------------------------------------------------------------------------------- James E. Feldt 45 Executive Vice President and President Merchandising and Marketing of Toys "R" Us United States Division - -------------------------------------------------------------------------------- Warren F. Kornblum 47 Executive Vice President - Worldwide Marketing and Brand Management - -------------------------------------------------------------------------------- Louis Lipschitz 55 Executive Vice President and Chief Financial Officer - -------------------------------------------------------------------------------- Richard L. Markee 46 Executive Vice President and President of Babies "R" Us Division and Chairman of Kids "R" Us Division - -------------------------------------------------------------------------------- Gregory R. Staley 52 Executive Vice President and President of Toys "R" Us United States Division - -------------------------------------------------------------------------------- Francesca L. Brockett 40 Senior Vice President - Strategic Planning and Business Development - -------------------------------------------------------------------------------- Roger C. Gaston 44 Senior Vice President - Human Resources - -------------------------------------------------------------------------------- 13 (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 August 1999 to January 2000 he served as Interim Chief Executive Officer. Prior to 1995 to February 1998, he was Vice Chairman of the Board and Chief Executive Officer. Mr. Eyler has been employed by the company since January 2000 as President and Chief Executive Officer. Prior to his employment with the company he served as Chairman and Chief Executive Officer of FAO Schwarz. He had held this position since prior to 1995. Mr. Shannon has been employed by the company since October 1998. Effective March 2000, he was appointed President - Administration and Logistics for the company. From March 1999 to March 2000, he served as 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. Mr. Feldt has been employed by the company since March 1999. Effective March 2000, he was appointed Executive Vice President of the company and President Merchandising and Marketing of Toys "R" Us United States Division. From March 1999 to March 2000, he was Executive Vice President - Merchandising of Toys "R" Us United States Division. From May 1997 to February 1999, he was Executive Vice President, Merchandise and Marketing of Value City Department Stores. From May 1995 to April 1997, he was Executive Vice President Merchandising, Allocation and Merchandise Distribution of Hills Department Stores. Prior to 1995 to May 1995, he was Vice President, Hard Lines of Hills Department Stores. Mr. Kornblum has been employed by the company since January 1999. Effective March 2000, he was appointed Executive Vice President - Worldwide Marketing and Brand Management. From January 1999 to March 2000, he was Senior Vice President and Chief Marketing Officer. From November 1996 to January 1999, he was Managing Partner of Bozell Worldwide. Prior to 1995 to November 1996, he was President, US Operations of Prism Communications. 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 1995 to January 1996, he was Senior Vice President - Finance and Chief Financial Officer. Mr. Markee has been employed by the company for more than five years. Effective October 1999, he was appointed Chairman of Kids "R" Us Division. Effective February 1996, he became Executive Vice President of the company and he has served as President of Babies "R" Us Division since its inception in September 1995. From prior to 1995 to October 2000, he also served as President of Kids "R" Us Division. 14 Mr. Staley has been employed by the company for more than five years. Effective March 2000, he was appointed President of Toys "R" Us United States Division. Effective February 1996, he became Executive Vice President of the company and he also served as President of Toys "R" Us International Division from August 1995 to February 2000. Prior to July 1995, he was Senior Vice President - General Merchandise Manager for 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. Prior to 1995 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 1995 to November 1996, he was Executive Vice President - Human Resources of Carson, Pirie, Scott and Company. 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 2000 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 - Toys "R" Us, Inc.", "Option Grants in Last Fiscal Year Toysrus.com, Inc.", "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 2000 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 2000 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. 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 2000 Proxy Statement. 15 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS High Ridge LLC ("High Ridge"), a limited liability company in which Robert A. Bernhard, a director of the company who is not standing for re-election to the Board of Directors, owns a 25% interest, leases property to a Babies "R" Us store in Tulsa, Oklahoma. The lease period runs from August 1, 1996 through to August 1, 2011, and is renewable thereafter every five years at the company's option for three successive five-year periods. The company made rental payments to High Ridge of $344,000 in fiscal year 1999. The company believes that the lease for the store space was made on terms comparable to those that could have been obtained from an unaffiliated lessor. 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 company conducts business (such as interest rates and consumer confidence) and normal 16 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 None. 17 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 26, 2000 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 26th day of April, 2000. Signature Title --------- ----- /s/ John H. Eyler Jr. Director, President and Chief Executive Officer - ---------------------------- (Principal Executive Officer) John H. Eyler Jr. /s/ Louis Lipschitz Executive Vice President and Chief Financial - ---------------------------- Officer (Principal Financial and Accounting Louis Lipschitz Officer) * Chairman of the Board - ---------------------------- Michael Goldstein * Director - ---------------------------- Robert A. Bernhard * Director - ---------------------------- RoAnn Costin * Director - ---------------------------- Calvin Hill * Director - ---------------------------- Shirley Strum Kenny * Director, Chairman Emeritus - ---------------------------- Charles Lazarus 18 Signature Title --------- ----- * 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 19 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. 3 i) Restated Certificate of Incorporation of registrant (filed on January 2, 1996). Incorporated herein by reference to Exhibit 3.1 to the Form 8-B. ii) 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. 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. 20 Exhibit ------- No. Document --- -------- 4 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. Incorporated herein by reference to Exhibit 10B to registrant's Annual Report on Form 10-K for the year ended January 30, 1999. 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. 10D* Amended and Restated Toys "R" Us, Inc. Non-Employee Directors' Stock Option Plan effective as of September 19, 1990. Incorporated herein by reference to Exhibit C to registrant's Proxy Statement for the year ended February 1, 1997. 21 Exhibit ------- No. Document --- -------- 10E* 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. 10F* 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. 10G* Amended and Restated Toys "R" Us, Inc. 1994 Stock Option and Performance Incentive Plan effective as of November 1, 1993. Incorporated herein by reference to Exhibit A to registrant's Proxy Statement for the year ended February 1, 1997. 10H* Stock Unit Plan for Non-Employee Directors of Toys "R" Us, Inc., effective as of May 1, 1997. Incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 30, 1999. 10I* 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. 10J* 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. 10K* 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. 10L* 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. 10M* 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. Incorporated herein by reference to Exhibit 10P to registrant's Annual Report on Form 10-K for the year ended January 30, 1999. 22 Exhibit ------- No. Document --- -------- 10N 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. 10O* 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 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. 10P* Amendment to Retention Agreement between Toys "R" Us, Inc. and Richard L. Markee dated May 6, 1999. 10Q* Amendments to Retention Agreement between Toys "R" Us, Inc. and Gregory R. Staley dated May 6, 1999 and March 2, 2000, respectively. 10R 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). 10S* 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. 23 Exhibit ------- No. Document --- -------- 10T* 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. 10U* Separation agreement between Toys "R" Us, Inc. and Bruce Krysiak dated as of March 25, 1999. Incorporated herein by reference to Exhibit 10X to registrant's Annual Report on Form 10-K for the year ended January 30, 1999. 10V* Retention Agreement between Toys "R" Us, Inc. and Michael G. Shannon dated October 12, 1998. Incorporated herein by reference to Exhibit 10Y to registrant's Annual Report on Form 10-K for the year ended January 30, 1999. 10W* Form of Retention Agreement for executive officers of Toys "R" Us, Inc. 10X* Separation Agreement between Toys "R" Us, Inc. and Keith Van Beek dated as of June 9, 1999. 10Y* Separation and Release Agreement between Toys "R" Us, Inc. and Robert C. Nakasone dated as of August 26, 1999. Incorporated herein by reference to Exhibit 10.1 to registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1999. 10AA* Separation Agreement between Toys "R" Us, Inc. and Michael J. Madden dated as of September 24, 1999. 10BB* Retention Agreement between Toys "R" Us, Inc. and John H. Eyler, Jr. dated January 6, 2000. 10CC* Toys "R" Us, Inc. Non-Employee Directors' Stock Unit Plan, effective as of June 10, 1999. Incorporated herein by reference to Exhibit A to registrant's Proxy Statement for the year ended January 30, 1999. 10DD* Toys "R" Us, Inc. Non-Employee Directors' Stock Option Plan, effective as of June 10, 1999. Incorporated herein by reference to Exhibit B to registrant's Proxy Statement for the year ended January 30, 1999. 10EE* Toys "R" Us, Inc. Non-Employee Directors' Deferred Compensation Plan, effective as of June 10, 1999. Incorporated herein by reference to Exhibit C to registrant's Proxy Statement for the year ended January 30, 1999. 24 Exhibit ------- No. Document --- -------- 13 Registrant's Annual Report to Stockholders for the year ended January 29, 2000. 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 Power of Attorney, dated in April 2000. 27 Financial Data Schedule for the year ended January 29, 2000. * 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. 25 EX-10.P 2 AMENDMENT TO RETENTION AGREEMENT Exhibit 10P May 6, 1999 Richard L. Markee 709 Barrister Court Franklin Lakes, New Jersey 07417 Dear Mr. Markee: The purpose of this letter is to confirm our agreement requiring you to provide notice to Toys "R" Us, Inc. ("TRU") if you were to terminate your employment with TRU at any time. This letter constitutes an amendment of your employment contract dated May 1, 1997 (the "Contract") pursuant to Section 13(c) of the Contract. Specifically, we have agreed that, in exchange for TRU providing you with additional consideration to the consideration provided to you under the Contract, including the issuance of additional restricted stock units, you shall provide TRU with not less than four months advance notice (the "Mandatory Notice Period") prior to your terminating for any reason other than Good Reason (as described in the Contract) your employment with TRU. You have agreed that during the Mandatory Notice Period you shall continue to perform all of your duties in accordance, and in compliance, with the terms of the Contract. You have also agreed that, prior to and during the term of the Mandatory Notice Period, you shall not disclose to any third parties, other than executive search firms, prospective employers (collectively, the "Permitted Third Parties") and your wife, your intention and/or decision to terminate employment with TRU. Prior to any disclosure of any such information to any Permitted Third Party, you shall secure from each Permitted Third Party the Permitted Third Party's written agreement not to disclose such information until after the Mandatory Notice Period to anyone other than officers and directors of such Permitted Third Party who need to know such information. You acknowledge that the provisions of this letter agreement are reasonable and necessary for the protection of TRU and its subsidiaries and affiliates. In addition, you acknowledge that TRU and its subsidiaries and affiliates will be irrevocably damaged if you fail to provide TRU with at least four months advance notice of termination or otherwise fail to comply with the terms of this letter, as provided for herein. Accordingly, you agree that, in addition to any other relief to which TRU may be entitled, TRU 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 you from any actual or threatened breach of your obligations hereunder. If this letter accurately sets forth in full the terms of our agreement concerning the matters set forth herein, please execute this letter where indicated. Sincerely, TOYS "R" US, INC. By:/s/ Robert C. Nakasone --------------------------- Robert C. Nakasone Chief Executive Officer SO AGREED /s/ Richard L. Markee - -------------------------- Richard L. Markee EX-10.Q 3 AMENDMENTS TO RETENTION AGREEMENT Exhibit 10Q March 2, 2000 Mr. Gregory R. Staley 286 Autumn Terrace Franklin Lakes, NJ 07417 Dear Greg: The purpose of this letter is to confirm our agreement with regard to your rights to terminate your employment in the event of a change in reporting relationship. This letter constitutes an amendment of your Retention Agreement dated May 1, 1997 (the "Agreement") pursuant to Section 13[c] of the Agreement. Specifically, we have agreed that, in view of the recent changes in the senior management of the Company, Section 4[b][ii] of the Agreement is hereby amended to read as follows: "[ii] Due to the unique nature of the Company's International Division and the resulting burdens imposed on the Executive thereby, notwithstanding anything to the contrary contained herein, the Executive's employment may be terminated during the Employment Period by the Executive by providing written notice to the Company within 30 days of the first day on which the Executive no longer reports directly to the Chief Executive Officer of the Company, in which event the "Date of Termination" for purposes hereof shall be the date set forth in such notice (which shall not be less than 60 days from the date of such notice unless the Company consents thereto in writing)." This letter does not constitute a consent or waiver to or modification of any other provision, term or condition of the Agreement, all of which remain in full force and effect. If this letter accurately sets forth in full the terms of our agreement concerning the matter set forth herein, please execute this letter where indicated. Sincerely, TOYS "R" US, INC. SO AGREED: By: /s/ John H. Eyler Jr. /s/ Gregory R. Staley -------------------------- ----------------------------------- John H. Eyler, Jr. Gregory R. Staley Exhibit 10Q May 6, 1999 Gregory R. Staley 286 Autumn Terrace Franklin Lakes, New Jersey 07417 Dear Mr. Staley: The purpose of this letter is to confirm our agreement requiring you to provide notice to Toys "R" Us, Inc. ("TRU") if you were to terminate your employment with TRU at any time. This letter constitutes an amendment of your employment contract dated May 1, 1997 (the "Contract") pursuant to Section 13(c) of the Contract. Specifically, we have agreed that, in exchange for TRU providing you with additional consideration to the consideration provided to you under the Contract, including the issuance of additional restricted stock units, you shall provide TRU with not less than four months advance notice (the "Mandatory Notice Period") prior to your terminating for any reason other than Good Reason (as described in the Contract) your employment with TRU. You have agreed that during the Mandatory Notice Period you shall continue to perform all of your duties in accordance, and in compliance, with the terms of the Contract. You have also agreed that, prior to and during the term of the Mandatory Notice Period, you shall not disclose to any third parties, other than executive search firms, prospective employers (collectively, the "Permitted Third Parties") and your wife, your intention and/or decision to terminate employment with TRU. Prior to any disclosure of any such information to any Permitted Third Party, you shall secure from each Permitted Third Party the Permitted Third Party's written agreement not to disclose such information until after the Mandatory Notice Period to anyone other than officers and directors of such Permitted Third Party who need to know such information. You acknowledge that the provisions of this letter agreement are reasonable and necessary for the protection of TRU and its subsidiaries and affiliates. In addition, you acknowledge that TRU and its subsidiaries and affiliates will be irrevocably damaged if you fail to provide TRU with at least four months advance notice of termination or otherwise fail to comply with the terms of this letter, as provided for herein. Accordingly, you agree that, in addition to any other relief to which TRU may be entitled, TRU 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 you from any actual or threatened breach of your obligations hereunder. If this letter accurately sets forth in full the terms of our agreement concerning the matters set forth herein, please execute this letter where indicated. Sincerely, TOYS "R" US, INC. By: /s/ Robert C. Nakasone ---------------------- Robert Nakasone Chief Executive Officer SO AGREED /s/ Gregory R. Staley - --------------------- Gregory R. Staley EX-10.W 4 FORM OF RETENTION AGREEMENT Exhibit 10W RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND --------------- (executive officer name) DATED AS OF (AGREEMENT DATE) TABLE OF CONTENTS 1. Employment Period.................................................... 2. Terms of Employment.................................................. (a) Position.............................................................. (b) Compensation......................................................... (i) Base Salary................................................... (ii) Incentive Bonus............................................... (iii) Participation in Other Plans.................................. (iv) Stock Units................................................... 3. Termination of Employment Upon Death, Disability or Retirement....... 4. Other Termination of Employment...................................... (a) Company Termination.................................................. (b) Good Reason.......................................................... (c) Notice of Termination................................................ (d) Obligations of the Company Upon Termination Under Section 4.......... (e) Cause................................................................ 5. Release Agreement.................................................... 6. Offset............................................................... 7. Compensation and Benefits Following Change of Control................ 8. Nonexclusivity of Rights............................................. 9. Full Settlement; Legal Fees.......................................... (b) Expenses of Contests................................................. 10. Certain Additional Payments by the Company........................... 11. Restrictions and Obligations of the Officer.......................... (a) Consideration for Restrictions and Covenants......................... (b) Confidentiality...................................................... (d) Non-Competition and Consulting....................................... (e) Definitions. For purposes of this Section 11........................ i (f) Relief............................................................... 12. Successors........................................................... 13. Miscellaneous........................................................ (a) Governing Law........................................................ (b) Captions............................................................. (c) Amendment............................................................ (d) Notices.............................................................. (e) Assistance to Company................................................ (f) Severability of Provisions........................................... (g) Withholding.......................................................... (h) Waiver............................................................... (i) Arbitration.......................................................... EXHIBIT A Separation and Release Agreement EXHIBIT B Definitions EXHIBIT C Change of Control and Tax Gross-Up ANNEX A Stock Unit Agreement ii TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and _______________ (the "Officer"), dated as of (Agreement Date). 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 continue to serve in the Officer's current position at the Company or such other senior Officer position to which the Officer may be appointed by the Company. The Officer shall be based in (location to be determined). (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 Officer's current grants and the Officer's current position 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. -2- (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 (number to be determined) 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 Company's 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 (the "Mandatory Notice Period") prior to the effective date of such resignation. During the Mandatory Notice Period, the Officer shall continue to perform all of his duties in accordance, and in compliance, with the terms of this Agreement. Prior to and during the Mandatory Notice Period, the Officer shall not disclose to any third parties, other than executive search firms, prospective employers (collectively, the "Permitted Third Parties") and the Officer's spouse, his intention and/or decision to terminate employment with the Company. The Officer shall, prior to any disclosure of such information to any Permitted Third Party, secure such Permitted Third Party's written agreement not to disclose such information until after the Mandatory Notice Period to anyone other than officers and directors of such Permitted Third Party who need to know such information. (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 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; -3- (ii) the Company shall pay to the Officer in equal installments, made at least monthly, over the (number to be determined) months following the Date of Termination an aggregate amount equal to (1) (number to be determined) times the Officer's Annual Base Salary in effect on the Date of Termination, (2) (number to be determined) 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) (number to be determined) times the targeted amount of the long-term incentive award, if any, 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 (number to be determined) 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 paid 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 (number to be determined) years after the Date of Termination, and all remaining unvested options held by the Officer shall vest on the (number to be determined) 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 (number to be determined) years after the Date of Termination and all remaining profit shares shall vest on the (number to be determined) 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 share 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 (number to be determined) 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 (number to be determined) 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, $.10 par value per share, of the Company, (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 (v) the Officer will be entitled to continuation of health benefits under the Plans at a level commensurate with the Officer's current 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 (number to be determined) 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 -4- 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 (number to be determined) 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 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. -5- (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 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. -6- (b) Confidentiality. The confidential and proprietary information and in any material respect 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 (number to be determined)-year period following the termination of the Officer's employment for any reason, the Officer shall not, 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 (number to be determined)-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 -7- (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 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, mail order 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 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. -8- (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. 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 -9- scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. (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. -10- 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. --------------- ------------------------------- 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 __________, ____, 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 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 A-1 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. 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 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 A-2 executing this Agreement. Additionally, the Officer acknowledges that the Officer has been afforded the opportunity of at least 21 days to consider this Agreement. A-3 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: _________________ ____________________________ A-4 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 the annual base salary of the Officer as of the date of the Agreement as may be increased from time to time in the discretion of the Committee. "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. "Change of Control" - See Exhibit C. "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 B-1 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 the 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, except that a request by the Company for the Officer to relocate outside (location to be determined) shall constitute "Good Reason"; (ii) 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; (iii) any failure by the Company to comply with and satisfy Section 12(c) of the Agreement; or (iv) notice by the Company that it is not extending the termination date of the Employment Period. "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. B-2 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 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 1 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 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. (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 2 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). 3 ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of (Agreement Date) (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and _______________ (the "Officer"). W I T N E S S E T H: WHEREAS, the Company has approved 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"); WHEREAS, concurrently herewith, 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 (number to be determined) 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 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 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: 4 (i) the Officer's employment with the Company terminates prior to the (number to be determined) 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 (date to be determined), 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 (date to be determined) 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. 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 5 (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. 6 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: ____________________________ Name: Title: I hereby acknowledge receipt of the Stock Units and agree to the provisions set forth in this Agreement. _______________________________ ____________________ 7 EXHIBIT A Performance Objective Under Section 3(ii) of the Stock Unit Agreement The consolidated net earnings of the Company in any fiscal quarter (beginning with the first fiscal quarter in ____) of the Company's ____, ____, ____ or ____ fiscal year is at least equal to the amount of any corresponding quarter in ____. For these purposes, "consolidated net earnings" shall exclude extraordinary or unusual items reported by the Company as such. EX-10.X 5 SEPARATION AGREEMENT Exhibit 10X SEPARATION AGREEMENT THIS SEPARATION AGREEMENT (this "Agreement"), dated as of June 9, 1999, is by and between TOYS "R" US, INC., a Delaware corporation (the "Company"), and KEITH VAN BEEK (the "Executive"). RECITALS WHEREAS, pursuant to a Retention Agreement dated as of February 25, 1998 between the Company and the Executive (the "Retention Agreement"), Executive is employed by the Company as President - Toys "R" Us -- U.S. Merchandising and Marketing; and WHEREAS, pursuant to a Stock Unit Agreement dated as of February 25, 1998 between the Company and the Executive (the "Stock Unit Agreement"), on February 25, 1998, the Company granted Executive 30,000 Stock Units (the "Stock Units"); and WHEREAS, pursuant to the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan"), on May 17, 1995, the Company granted Executive options to acquire 47,200 shares of Common Stock (the "May 17, 1995 Grant"), 10,000 shares of common stock on May 30, 1995 (the "May 30, 1995 Grant"), 15,000 shares of common stock on March 14, 1996 (the "March 14, 1996 Grant"), 20,000 shares of common stock on November 3, 1997 (the "November 3, 1997 Grant"), 80,000 shares of common stock on March 13, 1998 (the "March 13, 1998 Grant"), 240,000 shares of common stock on September 8, 1998 (the "September 8, 1998 Grant") and 90,000 shares of common stock on April 7, 1999 (the "April 7, 1999 Grant"); and WHEREAS, Executive desires to resign, for personal reasons, his employment with the Company and his position as President - Toys "R" Us -- U.S. Merchandising and Marketing and all other officer and employee positions, if any, held by Executive in the Company and any of its subsidiaries effective as of June 9, 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 position as President - Toys "R" Us -- U.S. Merchandising and Marketing and all other 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 $26,875 per month, 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) Prorated Bonus. The Company will pay Executive the bonus which Executive would have been entitled to receive for fiscal year 1999, prorated at 4/12ths of the actual amount that would have been earned by Executive, and payable on or about April 1, 2000. (c) Relocation Expenses. If, during the two year period commencing on the Termination Date the Executive relocates his household to an area other than Northeastern New Jersey for any reason, the Company will reimburse the Executive's relocation expenses, up to a maximum reimbursement of thirty thousand dollars ($30,000). A new employer would be expected to pay relocation costs if such a program exists for newly-hired executives. (d) 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 which offers health benefits, the Company will permit Executive to continue to participate in the medical, prescription and dental plans maintained by the Company from time to time at a level commensurate with the level at which senior executives of the Company participate. (e) Stock Units. Executive hereby forfeits all of the Stock Units in their entirety, except 7,500 of such Units which will vest on February 25, 2003, irrespective of the fact that the Executive is no longer employed by the Company, subject to the achievement of the performance objective set forth on Exhibit A to the Stock Unit Agreement. Except as modified by the preceding sentence, the Stock Unit Agreement shall continue in full force and effect. (f) Stock Options. The stock options granted to Executive as part of the Plan will be treated as follows: Executive shall retain all of the options granted pursuant to the May 17, 1995 Grant, the May 30, 1995 Grant and the March 14, 1996 Grant; the Executive shall also retain 6,333 of the 20,000 options granted in the November 3, 1997 Grant; 20,000 of the 80,000 options granted in the March 13, 1998 Grant; 36,000 of the 240,000 options granted in the September 8, 1998 Grant; and 5,000 of the 90,000 options granted in the April 7, 1999 Grant. All stock options retained by Executive pursuant to this paragraph (d) shall be subject to the terms and conditions (including vesting requirements) of the original grants; provided, however, Executive shall vest in options on the scheduled vesting date, irrespective of the fact that 2 Executive is no longer employed by the Company and Executive shall have the period for exercise of such options preserved. All stock options not retained by Executive pursuant to this paragraph shall be deemed terminated and canceled as of the Termination Date. (g) 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 which in the normal course of business would provide these benefits, the Company will permit Executive to continue to participate in the Company's basic life insurance and accidental death and dismemberment policy for a benefit equal to two times the annual compensation payable by the Company pursuant to Section 2(a) of this Agreement. (h) SERP. Upon the vesting of Executive's interest in the Company's Supplemental Executive Retirement Plan on February 1, 2001, Executive shall be entitled to his interest in such plan. The Company will make no further contributions to this Plan. Payment shall be made to Executive in a lump sum (with interest from the date of this Agreement through February 1, 2001) as soon as practicable after such date. (i) Automobile. Executive will retain use of the automobile currently leased for him by the Company until the earlier to occur of (i) Automobile. Executive will retain use of the automobile currently leased for him by the Company until the earlier to occur of (i) June 1, 2001 or (ii) the date Executive commences employment with another employer. (j) Profit Sharing/401(k). Executive will no longer participate in the Company's Profit Sharing/401(k) plan. Distribution may occur as soon after the separation date as practicable. (k) The Executive's Residence Petition. The Company shall continue to sponsor given the Executive is on the payroll and functions in a consulting capacity, to the extent permitted by law, the Permanent Residence petition. (l) No Other Benefits. 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. (m) Effectiveness of Payments. No payments shall be made under this Section 2 until this Agreement becomes effective pursuant to Section 20 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(c) above) and the Partnership Option Agreements dated as of May 17, 1995, May 30, 1995, March 14, 1996, November 3, 1997, March 13, 1998, September 8, 1998 and April 7, 1999, between the Company and Executive (as modified by Section 2(d) above) shall continue in full force and effect. 4. No Solicitation of Employees 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 3 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, 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 the Termination Date (the "Consulting Period"), the Executive shall not, directly or indirectly and, provided that prior written consent is requested of the Executive and no response is received from the Company within 14 business days, approval shall be deemed to be granted: (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 (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). The Company will reimburse Executive for his reasonable expenses incurred in rendering such duties. (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 4 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. 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), (ii) all personal property of the Executive located on the premises of the Company, and (iii) Executive will be provided the opportunity to purchase the current Company computer equipment currently in use by the Executive at a fair price to be determined by 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 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, at its own expense, 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 5 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 parties, 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. 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. 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. 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 reasonable and ordinary expenses, including the advancement of reasonable attorneys fees, 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 6 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 (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. Employment Inquiries. All employment inquiries in regard to Executive shall be referred to the Head of Human Resources at the time the inquiry is made. 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/ Roger C. Gaston ------------------------------------- Name: Roger C. Gaston Title: Senior Vice President - Human Resources EXECUTIVE /s/ Keith Van Beek ------------------------------------------ Keith Van Beek Original Document issued to Keith Van Beek on June 7, 1999 8 June 9, 1999 Board of Directors Toys "R" Us, Inc. Ladies and Gentlemen: I, Keith Van Beek, hereby resign for personal reasons from (i) my positions as President - Toys "R" Us U.S. Merchandising and Marketing of Toys "R" Us, Inc., (the "Company"), its subsidiaries and affiliates and (ii) all officer or employee positions held by me in the Company, its subsidiaries and affiliates, all effective as of June 9, 1999. Very truly yours, Keith Van Beek RELEASE Except as specifically provided in the following paragraph, and in consideration of and except for the obligations of the Company set forth in the Separation Agreement dated as of June 9, 1999 (the "Agreement") and in consideration of the Agreement which provides for payments and other benefits to Keith Van Beek (the "Releasor"), in addition to payments and benefits to which the Releasor would otherwise be entitled, the Releasor, on behalf of the Releasor and the Releasor's heirs, executors and assigns, hereby releases and forever discharges Toys "R" Us, Inc. (the "Company"), its past and present stockholders, its past and present divisions, subsidiaries, affiliates and related entities, its successors and assigns and all past and present directors, officers, employees, agents, heirs, executors and administrators and the 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 plans (collectively, the "Releasees"), from all actions, causes of action in law or in equity, administrative proceedings, suits, claims, debts, liens, sums of money, charges, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, whether known or unknown, which against the Releasees the Releasor or the Releasor's successors and assigns ever had, now have or hereafter can, shall or may have, for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Release, including without limitation, any claims the Releasor may have arising from or relating to the Releasor's employment or termination from employment with the Company, including a release of any rights or claims the Releasor 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 Releasor of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Releasor'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 Releasor be advised to consult with an attorney before the Releasor waives any claim under ADEA. In addition, the ADEA provides the Releasor with at least 21 days to decide whether to waive claims under ADEA and seven days after the Releasor signs the Agreement to revoke that waiver. This release does not encompass any rights or claims under the ADEA that may arise after the date of the Releasor's signing of the Agreement, and shall in no way be construed to affect either party's right to enforce any and all terms of the Agreement. THIS LANGUAGE MEANS THAT, BY SIGNING THIS RELEASE, THE RELEASOR HAS WAIVED ANY RIGHTS HE MAY HAVE TO BRING A LAWSUIT OR MAKE ANY CLAIM AGAINST 2 THE RELEASEES BASED ON ANY ACTS OR OMISSIONS TAKEN BY THE RELEASEES UP TO JUNE 9, 1999. Releasor represents and warrants that he has not assigned or otherwise transferred any actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, embarrassment, injury to business, injury to reputation, judgments, executions, claims, or demands whatsoever, whether known or unknown, suspected or unsuspected, disclosed or undisclosed, fixed or contingent, accrued or unaccrued, asserted or unasserted, which against the Releasees, the Releasor and his administrators, agents, successors and assigns ever had, now have or hereafter can, shall or may have from the beginning of the world to the date of this Release. Releasor and his administrators, agents, successors and assigns shall indemnify Releasees, and hold them harmless from, all damages, losses, costs and expenses which Releasees may suffer or incur as a result of the assertion against them of any of the foregoing matters which were assigned or otherwise transferred by Releasor in a transaction which constitutes a breach of the representation and warranty contained in the immediately preceding sentence. This Release may not be changed orally. The Company has informed Executive that it does not know of any conduct which may cause the Company to take any legal action against the Executive at this time. This Release shall be governed by the substantive law of the State of New Jersey without regard to its principles of conflicts of laws. 3 This release shall in no way be construed to affect Releasor's rights as a stockholder of the Company. IN WITNESS WHEREOF, the Releasor has caused this Release to be executed as of June 9,1999. _______________________________________ Keith Van Beek STATE OF ____________, County of ___________ ss: On this ______ day of __________, 1999, before me personally came KEITH VAN BEEK, to me known and known to me to be the individual described in and who executed the foregoing instrument, and he duly acknowledged to me that he executed the same. _______________________________________ Notary Public 4 EX-10.AA 6 SEPARATION AGREEMENT Exhibit 10AA September 20, 1999 Mr. Michael J. Madden 10 Finn Court Mahwah, NJ 07430 Dear Mr. Madden: Toys "R" Us, Inc. (the "Company") regretfully accepts your resignation from all officer positions you hold in the Company, its subsidiaries and affiliates, effective as of September 24, 1999 (the "Resignation Date"). The employment relationship between the Company and you will terminate on the Resignation Date. In consideration of your agreement to continue to be bound by the restrictions set forth in Sections 11(b), 11(c), 11(f) and 13(e) of the Retention Agreement dated as of May 1, 1997 between you and the Company (the "Retention Agreement") through January 31, 2002, the Company agrees as follows: (a) As soon as practicable following January 31, 2000, the Company will calculate the value of your interest in the Company's Supplemental Executive Retirement Plan (the "SERP"), including the Company's January 31, 2000 notional contribution. (b) As soon as practicable after January 31, 2002, the Company will calculate the value of your interest in the SERP and pay you an equal amount in cash, provided you have complied with the restrictions set forth in Sections 11(b), 11(c), 11(f) and 13(e) of the Retention Agreement through January 31, 2002. (c) At all times, your interest in the SERP will be administered in accordance with the SERP and the Grantor Trust established by the Company. Except as provided in this letter or as otherwise provided by applicable law, you will not be entitled to any further benefits or payments from the Company from and after the Resignation Date. Except as provided herein with respect to Sections 11(b), 11(c), 11(f) and 13(e) of the Retention Agreement, all rights and obligations of you and the Company under the Retention Agreement and any other agreement, arrangement or understanding between you and the Company are hereby cancelled and terminated as of the Resignation Date. Mr. Michael J. Madden September 20, 1999 Page 2 If the foregoing satisfactorily reflects the understanding between us, please sign and return the enclosed copy of this letter, which will then constitute our agreement with respect to the foregoing matters. This letter may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Very truly yours, /s/ Roger C. Gaston Roger C. Gaston Senior Vice President Human Resources Accepted and Agreed: /s/ Michael J. Madden - ---------------------------- Michael J. Madden EX-10.BB 7 RETENTION AGREEMENT Exhibit 10BB RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND JOHN H. EYLER, JR. DATED AS OF January 6, 2000 TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and John H. Eyler, Jr. (the "Executive"), dated as of January 6, 2000. 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 employ the Executive and the Executive 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 January 17, 2000 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, based upon a determination by the Board, shall give notice to the Executive that the Employment Period shall not be so extended. 2. Terms of Employment. (a) Position. (i) Commencing on January 17, 2000 and for the remainder of the Employment Period, the Executive shall serve as President and Chief Executive Officer of the Company. The Executive shall be based in Paramus, New Jersey. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote his full time during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently such responsibilities. The Executive shall be entitled to not less than four weeks of paid vacation during each calendar year of the Employment Period. (iii) During the Employment Period, the Executive may, so long as such activities do not materially interfere with the performance of his responsibilities to the Company in accordance with this Agreement, continue the corporate directorships on which the Executive serves, if any, as of the date hereof and such other corporate directorships as are consented to by the Committee. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive 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. (iv) The Board shall appoint or nominate and recommend Executive for election, and shall use its best efforts to cause Executive to be elected and reelected to (1) membership on the Board effective from and after January 17, 2000 through the remainder of the Employment Period and (2) the position of Chairman of the Board effective from and after not later than June 30, 2001, through the remainder of the Employment thereafter. Executive shall also be a member of the Board's Executive Committee and a member ex-officio of the Board's Nominating Committee. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive his 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 Executive shall also be eligible, for each fiscal year ending during the Employment Period, to receive an Incentive Bonus, in accordance with guidelines established by the Committee. Each such Incentive Bonus shall be paid in accordance with the Company's Incentive Bonus plan. (iii) Participation in Plans. During the Employment Period, the Executive shall be eligible to participate in all Plans (including, without limitation, stock option and other equity-based award programs) at a level not less than that which is commensurate with other senior executives of the Company. (iv) Stock Units. As further inducement for the Executive to enter into this Agreement and to continue in the employ of the Company, the Company agrees to grant to the Executive 200,000 stock units contingent on performance and future service, pursuant to the Stock Unit Agreement to be executed and delivered by the Company in the form attached as Annex A hereto. (v) Internet Subsidiary Stock Options. As further inducement to enter into this Agreement and to continue in the employ of the Company, the Company agrees to cause the Internet Subsidiary to grant to the Executive options to acquire 300,000 shares of the Internet Subsidiary's common stock pursuant the Stock Option Agreement to be executed and delivered by the Internet Subsidiary (the "Internet Subsidiary Stock Option Agreement"). Notwithstanding any provision of the Internet Subsidiary Stock Option Agreement, the options granted to the Executive in the Internet Subsidiary shall be governed by this Agreement. (vi) TRU Stock Options. As further inducement for the Executive to enter into this Agreement and to continue in the employ of the Company, the Company agrees to grant to the Executive stock options to acquire (A) 700,000 shares of common stock of the Company, pursuant to the Partnership Option Agreement to be executed and delivered by the Company (the "Partnership Option Agreement") and (B) subject to approval by the Company's stockholders of a new employee stock option plan at the Company's next annual meeting of stockholders, 300,000 shares of common stock of the Company, pursuant to the Stock Option Agreement to be executed and delivered by the Company (the "Stock Option Agreement" and together the Partnership Option Agreement, the "TRU Stock Option Agreements"). As of April 1 of each year during the Employment Period, commencing with April 1, 2001, the Company shall grant to the Executive additional stock options to acquire shares of common stock of the Company. Each such annual grant shall consist of options to acquire not less than 300,000 shares of common stock of the Company. 2 (vii) Supplemental Executive Retirement Plans. All contributions to the Executive's Supplemental Executive Retirement Plan account shall be fully vested immediately upon contribution. (viii) Company's Long-Term Incentive Performance Awards. The Executive acknowledges that the Company may issue restricted stock as an award to employees in connection with the elimination of the Company's outstanding long-term incentive performance awards and that the Executive will not be eligible to receive any shares of restricted stock in the Company in connection with the elimination of such awards; provided, however, that Executive shall be eligible to participate in any incentive compensation program that replaces or is otherwise established following elimination of the current long-term incentive award program. 3. Termination of Employment. (a) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. Notice of Termination by the Company for Cause shall be subject to, and may be given only in full compliance with the substantive and procedural requirements set forth in clauses (a), (b) and (c) of the definition of "Cause" appearing in Exhibit B to this Agreement. (b) Termination for Death, Disability or Retirement. The Executive's employment shall terminate upon his death, Disability or Retirement during the Employment Period. In the event of such termination: (i) the Company shall make a lump sum cash payment to the Executive (or, in the event that termination results from the death of the Executive, to his estate) within 30 days after the Date of Termination in an amount equal to the sum of: (A) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not already paid; (B) the targeted amount of the Executive's Incentive Bonus that would have been payable with respect to the fiscal year in which the Date of Termination occurs, absent the termination of the Executive'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; (C) the Executive's actual earned Incentive Bonus for any completed fiscal year or period not theretofore paid; and (D) the account balances provided for under the Plans subject to the terms and conditions of the Plans; and (ii) (1) all unvested options to acquire stock of the Company or of the Internet Subsidiary held by the Executive shall vest on the Date of Termination, (2) all unvested 3 profit shares held by the Executive or for the benefit of the Executive by a grantor trust established by the Company shall vest on the Date of Termination and shall be promptly delivered to the Executive or his estate, (3) all other unvested equity-based awards (including, without limitation, restricted stock and stock units together with all property attributable thereto) held by the Executive or for the benefit of the Executive by a grantor trust established by the Company shall vest on the Date of Termination and shall be promptly delivered to the Executive, or in the event of termination due to his death, the Executive's estate, entirely in the form of Common Stock, $.10 par value per share ("Common Stock") of the Company, (4) all options to acquire stock of the Company or of the Internet Subsidiary (including, without limitation, options that vest pursuant to this clause (ii)) held by the Executive shall remain exercisable in whole or in part at all times, and from time to time, following the Date of Termination through the expiration date of such options, and (5) the Executive shall not be entitled to any additional grants of any stock options, restricted stock, or other equity-based or long-term awards following the Date of Termination; and (iii) the Executive (and his spouse and dependent children) will be entitled to continuation of health benefits under the Plans at a level commensurate with the Executive's current position and if the Executive (or his spouse and dependent children upon his death) elects to receive such health benefits, the Executive shall pay the premium charged to former employees of the Company pursuant to Section 4980B of the Code; provided, that the Executive and his spouse will only be entitled to receive such health benefits until attaining the age of sixty-five (65) and dependent children will only be entitled to receive such health benefits as long as such children qualify as dependent children for federal income tax purposes. The Company can amend or otherwise alter the Plans to provide health benefits to the Executive that are no less than those commensurate with the Executive's current position. To the extent such health benefits cannot be provided to the Executive 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 Executive, on an after-tax basis, an amount necessary for the Executive to acquire such benefits from an independent insurance carrier. The obligations of the Company under this clause (iii) shall be terminated if, at any time after the Date of Termination, the Executive is employed by or is otherwise affiliated with a party that offers comparable health benefits to the Executive and his spouse and dependent children. (c) Termination by the Company for Cause. If the Executive's employment shall be terminated for Cause during the Employment Period as provided in this Agreement, the Employment Period shall terminate without further obligations to the Executive other than (i) the obligation to pay him (x) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (y) the Executive's actual earned Incentive Bonus for any completed fiscal year or period not theretofore paid, and (z) all payments and benefits due, in accordance with the Company's Plans through the Date of Termination and (ii) the obligations of the Company and Internet Subsidiary under all stock options, stock units and other equity-based awards that are vested as of the date of Termination. 4 (d) Termination by the Company Without Cause or By the Executive for Good Reason. If the Executive's employment shall be terminated during the Employment Period by the Company without Cause, or by the Executive for Good Reason, then: (i) the Company shall make a lump sum cash payment to the Executive within 30 days after the Date of Termination of (x) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (y) the targeted amount of the Executive's Incentive Bonus that would have been payable with respect to the fiscal year in which the Date of Termination occurs, absent the termination of the Executive'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 (z) the Executive's actual earned Incentive Bonus for any completed fiscal year or period not theretofore paid; and (ii) the Company shall pay to the Executive 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 Executive's Annual Base Salary in effect on the Date of Termination and (2) two times the targeted amount of the Incentive Bonus that would have been paid or accrued to the Executive with respect to the Company's fiscal year in which such Date of Termination occurs; and (iii) the Company shall continue to provide, in the manner and timing provided for in the Plans (other than as provided in clauses (i), (ii), (iv) and (v) of this Section 3(d)), the benefits provided under the Plans that the Executive would receive if the Executive's employment continued for two years after the Date of Termination, assuming for this purpose that the Executive's compensation during such two-year period is the amount paid pursuant to clause (ii) above, and the Executive shall be fully vested in any account balance and all other benefits under the Plans; provided, however, that the benefits provided under the Plans under this clause (iii) shall be limited to the amounts permitted by law or as would otherwise not potentially adversely impact on the tax qualification of any Plans; and provided, further, that if any such benefits may not be continued under the Plans, the Company shall pay to the Executive an amount equal to the amount that the Executive would have received had such benefits been continued under the Plans; and (iv) (1) all unvested options to acquire stock of the Company or of the Internet Subsidiary held by the Executive shall vest on the Date of Termination, (2) all unvested profit shares held by the Executive or for the benefit of the Executive by a grantor trust established by the Company shall vest on the Date of Termination and 50% of such vested profit shares shall be delivered to the Executive promptly following the Date of Termination and 50% of such vested profit shares shall be delivered to the Executive on the first anniversary of the Date of Termination, (3) all other unvested equity-based awards (including, without limitation, restricted stock and stock units together with all property attributable thereto) held by the Executive or for the benefit of the Executive by a grantor trust established by the Company shall vest on the Date of Termination and 50% of such vested awards shall be delivered to the Executive promptly following the Date of Termination and 50% of such vested awards shall be delivered to 5 the Executive on the first anniversary of the Date of Termination, (4) all options to acquire stock of the Company or of the Internet Subsidiary (including, without limitation, options that vest pursuant to this clause (iv)) held by the Executive shall remain exercisable in whole or in part at all times, and from time to time, following the Date of Termination through the expiration date of such options and (5) the Executive shall not be entitled to any additional grants of any stock options, restricted stock, or other equity-based or long-term awards following the Date of Termination; and (v) the Executive, his spouse and dependent children shall be entitled to the benefits set forth under Section 3(b)(iii). 4. Obligations of the Company Relating to a Change of Control. (a) Notwithstanding any provision of this Agreement or any Plan, in no event shall the compensation or benefits, individually or in the aggregate, to which the Executive shall be entitled for the three years following a Change of Control be less favorable than that to which the Executive would have been entitled based upon the most favorable of the Company's Plans in effect for the Executive at any time during the 120-day period immediately preceding such Change of Control. (b) If the Executive's employment shall have been terminated by the Company (other than for Cause) or by the Executive for Good Reason during a Change of Control Period: (i) the Company shall make a lump sum cash payment to the Executive within 30 days after the Date of Termination in an amount equal to the sum of the amounts provided by Sections 3(d)(i) and (ii) except that all references in Section 3(d)(ii) therein to "two times" shall be "three times"; and (ii) the Company shall make a lump sum cash payment to the Executive within 30 days after the Date of Termination in an amount equal to the cumulative amounts that would have been provided by Section 3(d)(iii) if the Executive's employment continued for three years after the Date of Termination, assuming for this purpose that the Executive's compensation during such three-year period is the amount payable pursuant to clause (i) above; and (iii) (1) all unvested options to acquire stock of the Company or of the Internet Subsidiary held by the Executive shall vest on the Date of Termination, (2) all unvested profit shares held by the Executive or for his benefit by a grantor trust established by the Company shall vest on the Date of Termination and shall be delivered to Executive promptly, (3) all other unvested equity awards (including, without limitation, restricted stock and stock units together with all property attributable thereto) held by the Executive or for his benefit by a grantor trust established by the Company shall vest on the Date of Termination and be promptly delivered to the Executive entirely in the form of Common Stock, (4) all options to acquire stock of the Company or of the Internet Subsidiary (including, without limitation, options that vest pursuant to this Section 4(c)) held by the Executive may be exercised until the expiration date of the options, and (5) the Executive 6 shall not be entitled to any additional grants of any stock options, restricted stock, and other equity-based or long term awards following the Date of Termination; and (iv) the Executive, his spouse and dependent children shall be entitled to the benefits set forth in Section 3(b)(iii). 5. Release Agreement. The benefits pursuant to Section 3 are contingent upon the Executive (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 Executive under this Agreement against any amounts owed by the Executive to the Company, and nothing in this Agreement shall prevent the Company from pursuing any other available remedies against the Executive. 7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any Plan for which the Executive may qualify nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Amounts that are vested benefits or that the Executive 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. 8. Full Settlement; Legal Fees. (a) No Obligation to Mitigate. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive 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 Executive obtains other employment. (b) Expenses of Contests. The following shall apply for any dispute arising hereunder, under the Release Agreement or under either the Stock Unit Agreement or the TRU Stock Option Agreements: (i) Other than with respect to claims brought by the Executive against, or defenses by the Executive of any claim of, the Company with respect to this Agreement, the Release Agreement or either of the Stock Unit Agreement or the TRU Stock Option Agreements that were determined to have been made or asserted by the Executive in bad faith or frivolously, the Company agrees to pay all reasonable legal and professional fees and expenses that the Executive may reasonably incur as a result of any contest by the Executive, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Release Agreement or either the Stock Unit Agreement or the TRU Stock Option Agreements (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each 7 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 Executive shall reimburse the Company for its reasonable legal and professional fees and expenses, to the extent there is a final determination that such fees or expenses relate to claims brought by the Executive against, or defenses by the Executive of any claim of, the Company with respect to this Agreement, the Release Agreement or either the Stock Unit Agreement or the TRU Stock Option Agreements that were determined to have been made or asserted by the Executive in bad faith or frivolously. 9. 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 Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, either the Stock Unit Agreement or the TRU Stock Option Agreements 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. 10. Restrictions and Obligations of the Executive. (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 Executive and the grant to the Executive of the stock options and stock units of the Company as set forth in Section 2 hereof is the Executive's compliance with the undertakings set forth in this Section 10. Specifically, the Executive agrees to comply with the provisions of this Section 10 irrespective of whether the Executive is entitled to receive any payments under Section 3 or 4 of this Agreement. (b) Confidentiality. The confidential and proprietary information and in any material respect 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 Executive 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 Executive during the Executive's employment by the Company and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or 8 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 three-year period following the Date of Termination, the Executive shall not, 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; provided, however, that if the Executive terminates the Agreement for "Good Reason" or the Company terminates the Executive's employment hereunder without Cause, the obligations under this Section 10(c) shall survive for only a two-year period following the Date of Termination. (d) Non-Competition and Consulting. (i) During the Employment Period and for a two-year period following the Date of Termination, the Executive 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 (z) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any customer, supplier, lessor, lessee, employee, consultant, research partner or investor of the Company. (e) Litigation Assistance. The Executive agrees to cooperate with the Company and its counsel in regard to any litigation presently pending or subsequently initiated involving matters of which the Executive has particular knowledge as a result of your employment with the Company. Such cooperation shall consist of the Executive making himself available at reasonable times for consultation with officers of the Company and its counsel and for depositions or other similar activity should the occasion arise. Reasonable travel costs and out-of-pocket expenses in connection with such cooperation shall be reimbursed by the Company. The Executive shall not receive any additional compensation for providing assistance pursuant to this Section 10(e) following the Date of Termination; provided that such assistance, together with any assistance provided by the Executive pursuant to Section 12(e), does not 9 require an aggregate of more than 10 days during the entire period following the Date of Termination. If such assistance requires more than 10 days during the entire period following the Date of Termination, the Company will pay Executive an amount per day equal to the Executive's Annual Base Salary on the Date of Termination divided by 250, for each day on which assistance is provided that exceeds the foregoing limits. The obligations under this Section 10(e) shall survive for a five-year period following the Date of Termination. (f) Exceptions. Sections 10(c) and (d) shall not bind the Executive during any period following the termination of the Executive'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. (g) Permitted Investments. Nothing contained in Section 10(d) 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 Restricted Business if either (i) such entity is a public entity and 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. (h) Definitions. For purposes of this Section 10: (i) "Restricted Business" means any retail store, mail order, electronic commerce or Internet business or any business, in each case if it is involved in the manufacture, sale or marketing of toys, juvenile or baby products (other than children's clothing), juvenile furniture or any other business in which the Company may be engaged on the Date of Termination, provided that such entity derives at least 10% or more of its revenues in the aggregate from such products and/or business in its most recent fiscal year. Notwithstanding the foregoing, a Restricted Business shall not include non-discount department stores, such as Federated Department Stores (whether or not such a non-discount department store would otherwise meet the definition set forth in the preceding sentence), but shall include discount stores, such as Wal-Mart, K-Mart and Target to the extent such a discount department store meets the definition set forth in the preceding sentence. (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. (i) Relief. The parties hereto hereby acknowledge that the provisions of this Section 10 are reasonable and necessary for the protection of the Company and its subsidiaries. In addition, the Executive further acknowledges that the Company and its subsidiaries will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Executive 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 10 the purposes of restraining the Executive from any actual or threatened breach of such covenants. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive'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. 12. 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 Executive, 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. 11 (e) Assistance to Company. At all times during and after the Employment Period and at the Company's expense for out-of-pocket expenses actually and reasonably incurred by the Executive in connection therewith, the Executive shall provide reasonable assistance to the Company in the collection of information and documents and shall make the Executive 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 Executive's duties, responsibilities and authority during the Employment Period. The Executive shall not receive any additional compensation for providing assistance pursuant to this Section 12(e) following the Date of Termination; provided that such assistance, together with any assistance provided by the Executive pursuant to Section 10(e) does not require an aggregate of more than 10 days during the entire period following the Date of Termination. If such assistance requires more than 10 days during the entire period following the Date of Termination, the Company will pay Executive an amount per day equal to the Executive's Annual Base Salary on the Date of Termination divided by 250, for each day on which assistance is provided that exceeds the foregoing limits. (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 Executive acknowledges that the restrictive covenants contained in Section 10 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 10, 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. (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 Executive'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 Executive 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 12 all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. 13. Indemnification; Directors and Officers Liability Coverage. (a) Indemnification. The Executive shall be indemnified and held harmless by the Company to the greatest extent permitted under applicable Delaware law as the same now exists or may hereafter be amended if Executive was, is or is threatened to be made, a party to any pending, completed or threatened action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, and whether formal or informal, by reason of the fact that Executive is or was, or had agreed to become, a director, officer, employee, agent or fiduciary of the Company or any other entity which Executive is or was serving at the request of the Company ("Proceeding"), against all expenses (including, without limitation, all reasonable attorneys' fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other reasonable disbursements or expenses customarily required in connection with asserting or defending claims) ("Expenses") and all claim, damages, liabilities and losses (including, without limitation, judgments; fines; liabilities under the Code or the Employee Retirement Income Security Act of 1974, as amended, for damages, excise taxes or penalties; damages, fines or penalties arising out of violation of any law related to the protection of the public health, welfare or the environment; and amounts paid or to be paid in settlement) incurred or suffered by any person or to which the Executive may become subject for any reason. (b) Advancement of Expenses and Costs. All Expenses incurred by or on behalf of the Executive in defending or otherwise being involved in a Proceeding shall be paid by the Company in advance of the final disposition of a Proceeding, including any appeal therefrom, within ten (10) days after the receipt by the Company of a statement or statements from the Executive requesting such advance or advances from time to time. Such statement or statements shall reasonably evidence the Expenses incurred by the Executive in connection therewith. (c) Effect of Certain Proceedings. The termination of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendre or its equivalent, except, in each case, to the extent that the terms thereof expressly so provide, shall not, of itself (1) adversely affect the rights of the Executive to indemnification, or (2) create a presumption that the Executive did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification or contribution is not permitted by applicable law. (d) Other Rights to Indemnification. The Executive's rights of indemnification and advancement of Expenses provided by this Section shall not be deemed exclusive of any other rights to which the Executive may now or in the future be entitled under applicable law, the certificate of incorporation, by-laws, agreement, vote of stockholders, or resolution of the Board of the Company, or other provisions of this Agreement or any other agreement, or otherwise. 13 (e) Expenses Incurred By the Executive to Enforce This Agreement. Expenses incurred by the Executive in connection with the Executive's request for, or efforts to secure, preserve, establish entitlement to or obtain indemnification or advances hereunder shall be reimbursed by the Company on a current basis in accordance with the provisions of Section 13(b). (f) Representations. The Company represents and warrants that this Section does not conflict with or violate its certificate of incorporation or by-laws, and agrees that it will not amend its certificate of incorporation or by-laws in a manner that would limit the rights of the Executive hereunder. The Company represents that the execution, delivery and performance of this Agreement by the Company has been duly and validly authorized by its Board. (g) Survival of Indemnity. This Section shall survive any termination of the relationship of the Executive with the Company and shall be binding on, and inure to the benefit of the successors and assigns of the Company and the successors, assigns, heirs and personal representatives of the Executive. (h) Directors and Officers Liability Coverage. The Company shall at all time maintain directors and officers liability insurance coverage for the benefit of Executive in a form that is no less broad than that which is currently in effect, a copy of which is set forth as Exhibit D hereto. 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive'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. JOHN H. EYLER, JR. /s/ John H. Eyler, Jr. ------------------------------- TOYS "R" US, INC. By: /s/ Michael Goldstein --------------------------- Name: Michael Goldstein Title: Chairman of the Board Accepted and Agreed: TOYRSRUS.COM, INC. By: /s/ Michael Goldstein ----------------------------- Name: Michael Goldstein Title: Chairman of the Board EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this __ day of __________________, ____, among TOYS "R" US, INC., a Delaware corporation, and any successor thereto ("TRU"), TOYSRUS.COM, INC. and any successor thereto (.COM and collectively with TRU, the "Company") and John H. Eyler, Jr. (the "Executive"). The Executive and the Company agree as follows: 1. The employment relationship between the Executive and the Company terminated on __________________________________ (the "Termination Date"). 2. In accordance with the Executive's Retention Agreement (the "Retention Agreement"), the Company has agreed to pay the Executive certain payments and to make certain benefits available after the Date of Termination as set forth in Section 3 of the Retention Agreement. No payments shall be made under this Agreement or the Retention Agreement until the seven (7) day revocation period set forth in Section 12 hereof has expired. 3. In consideration of the above, the sufficiency of which the Executive hereby acknowledges, the Executive, on behalf of the Executive and the Executive'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 Executive may have arising from or relating to the Executive's employment or termination from employment with the Company, including a release of any rights or claims the Executive 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 Executive of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Executive'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 A-1 ("ADEA"). The ADEA requires that the Executive be advised to consult with an attorney before the Executive waives any claim under ADEA. In addition, the ADEA provides the Executive with at least 21 days to decide whether to waive claims under ADEA and seven days after the Executive signs the Agreement to revoke that waiver. Notwithstanding the foregoing provisions of this Section 3, the release given by Executive hereunder shall not apply to, and the Executive shall retain and shall be entitled to enforce by arbitration as provided in the Retention Agreement, all rights arising under or with respect to (i) the obligations of the Company to indemnify and hold harmless the Executive whether pursuant to the provisions of Section 13 of the Retention Agreement, the certificate of incorporation or by-laws of the Company, or otherwise; (ii) any and all directors and officers liability insurance coverage applicable to the Executive, and (iii) any and all benefits under the Plans to which the Executive shall be entitled in the ordinary course. Additionally, the Company agrees to discharge and release the Executive and the Executive'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 Executive's employment and/or affiliation with, or termination and separation from the Company; provided that such release shall not release the Executive from any loan or advance by the Company or any of its subsidiaries, any act that would constitute "Cause" under the Executive's Retention Agreement or a breach under Sections 8(b), 10 or 12(e) of the Executive's Retention Agreement. 4. This Agreement is not an admission by either the Executive or the Company of any wrongdoing or liability. 5. The Executive waives any right to reinstatement or future employment with the Company following the Executive's separation from the Company on the Termination Date. 6. The Executive 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 Executive. Executive is required to request and receive approval of the Company of the content of any voluntary statements, whether oral or written, to be made by Executive to any media-third party regarding Executive's employment with the Company, termination of employment with the Company, or the reputation, goodwill, business, business relationships, prospects or operations of the Company, its past and present divisions, affiliates, officers, directors, stockholders, employees or agents. The Company is required to request and receive approval of the Executive of the content of any voluntary statements, whether oral or written, to be made by the Company or any representative thereof to any media-third party regarding Executive's employment with the Company, termination of employment with the Company, or the reputation, business or prospects of the Executive. Executive and the Company each hereby covenants and agrees not to make any public statements to any media-third party, including, without limitation, to any representative of any news organization, which is inconsistent in any material respect with the A-2 agreed upon statements to the public. "Media-Third Party" refers to the press, news organizations, public relations firms and research analysts for securities firms. 7. The Executive shall continue to be bound by Sections 8(b), 10 and 12(e) of the Executive's Retention Agreement. 8. The Executive shall promptly return all the Company property in the Executive'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 Executive shall return any leased or Company automobile at the expiration of the restrictions under Section 10(d) of the Executive'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 Executive's Retention Agreement. 10. This Agreement represents the complete agreement between the Executive 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 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 Executive may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. 13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Executive acknowledges that the Executive 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 Executive acknowledges that the Executive has been afforded the opportunity of at least 21 days to consider this Agreement. A-3 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: TOYSRUS.COM, INC. By: ------------------------------- Name: Title: ----------------------------- JOHN H. EYLER, JR. A-4 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 $1,000,000 per annum or such greater amount as may be determined from time to time in the discretion of either the Board, the Committee or any appropriate committee of the Board. After any such increase, Annual Base Salary shall not be reduced and the term "Annual Base Salary" shall thereafter refer to the increased amount. "Board" means the Board of Directors of the Company. "Cause" means: (a) (i) the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude which conviction is non-appealable or for which the period for filing an appeal has expired; (ii) the willful commission of any fraud, misappropriation or misconduct which causes demonstrable injury to the Company and its affiliates taken as a whole; (iii) a willful act of dishonesty resulting or intended to result, directly or indirectly, in material gain or personal enrichment to the Executive at the expense of the Company and its affiliates taken as a whole; (iv) any willful and material breach of the Executive's fiduciary duties to the Company as an employee or director; (v) a serious and willful violation of the Toys "R" Us Ethics Agreement or any other serious and willful violation of a Company policy which causes demonstrable injury to the Company and its affiliates taken as a whole; (vi) the willful and continued failure of the Executive to perform substantially the Executive'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 Executive by the Board, which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties; (vii) the willful failure by the Executive to comply, in any material respect, with the provisions of Section 10 of the Agreement; or (viii) the willful failure by the Executive to comply with any other undertaking set forth in the Agreement which causes demonstrable injury to the Company and its affiliates taken as a whole. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in or not opposed to the 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 counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (b) Notwithstanding the foregoing, Cause shall not include any or more of the following: (i) an error in judgment or negligence; (ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interests of the Company; (iii) any act or omission with respect to which a determination could properly have been made by the Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under the Company's by-laws, any applicable indemnification agreement, or B-1 applicable law, in each case in effect at the time of such act or omission or (iv) any act or omission with respect to which notice of termination of employment of the Executive is given more than six months after the earliest date on which any member of the Board, not a party to the act or omission, knew or should have known of such act or omission. (c) The Company may not terminate the Executive's employment for Cause unless: (i) no fewer than 60 days prior to the Date of Termination, the Company provides Executive with written notice (the "Notice of Consideration") of its intent to consider termination of Executive's employment for Cause, including a detailed description of the specific reasons which form the basis for such consideration; (ii) Executive shall have the opportunity to appear before the Board, with or without legal representation, at Executive's election, to present arguments and evidence on his own behalf; and (iii) following the presentation to the Board provided in (ii) above or following Executive's failure to appear before the Board at a date and time specified in the Notice of Consideration (which date shall not be less than 30 days after the date the Notice of Consideration is provided), Executive may be terminated for Cause only if (x) the Board, by the affirmative vote of not less than a majority of all of its members (excluding Executive and any other member of the Board reasonably believed by the Board to be involved in the events leading the Board to terminate Executive for Cause), determines that the actions or inactions of the Executive specified in the Notice of Consideration occurred, that such actions or inactions constitute Cause, and that Executive's employment should accordingly be terminated for Cause; and (y) the Board provides Executive with a Notice of Termination together with a written determination (a "Determination of Cause") setting forth in specific detail the basis of such termination of employment for Cause, which Determination of Cause shall be consistent with the reasons set forth in the Notice of Consideration. Unless the Company establishes by clear and convincing evidence, both (x) its full compliance with the substantive and procedural requirements of clauses (a), (b) and (c) of this provision prior to giving Notice of Termination, and (y) that Executive's action or inaction specified in the Determination of Cause did occur and constitutes Cause, any Notice of Termination and any termination of employment thereby resulting shall, for all purposes of this Agreement, be deemed to be other than for Cause, and the obligations of the Company to the Executive shall be governed by Section 3(d) of the Retention Agreement. "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 B-2 complies with clauses (i), (ii) and (iii) of subsection (c) below, or (iv) any acquisition by any entity in which the Executive 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, any 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 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 Executive 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 B-3 (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. "Change of Control Period" means the period commencing 120 days prior to a Change of Control and expiring on the third anniversary date of a Change of Control. "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 Executive's employment is terminated by the Company for Cause, or by the Executive 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 Executive'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 Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the effective date of the Disability, as the case may be, (iv) if the Executive's Employment is terminated by the Executive without Good Reason, the Date of Termination shall be the last day on which the Executive is employed by the Company as a regular employee, or (v) the last day of the Employment Period during which the Company shall have given notice to the Executive that the Employment Period shall not be extended. "Disability" means the determination that the Executive is disabled pursuant to the terms of the 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 Executive's prior written consent, the occurrence of any of the following, provided that the Executive delivers a Notice of Termination specifying such occurrence within six months after Executive first has knowledge of such occurrence: (i) the assignment of the Executive to a position other than President and Chief Executive Officer; or (ii) any failure by the Company to comply in any material respect with any of the provisions of the Retention 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 Executive; (iii) any failure by the Company to comply with and satisfy Section 11(c) of the Retention Agreement; or (iv) notice by the Company that it is not extending the termination date of the Employment Period; or B-4 (v) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 2(a) of the Retention Agreement, or any other action by the Company, which results in a diminution or other adverse changes in such position, authority or duties or in the status, responsibilities or perquisites of the Executive; or (vi) failure of the Executive to be elected or reelected to membership on the Board; or (vii) from and after June 30, 2001, failure of the Executive to be elected or reelected Chairman of the Board; or (viii) the Company's requiring the Executive to be based at any office or location that is more than 35 miles distance from Paramus, New Jersey; or (ix) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by the Retention Agreement; or (x) the delivery to Executive of a Notice of Consideration pursuant to clause (c) of the definition of Cause if, within a period of 90 days thereafter, the Board fails for any reason to terminate the Executive for Cause in compliance with all of the substantive and procedural requirements set forth in clauses (a), (b) and (c) of the definition of Cause. Any termination of employment by the Executive for Good Reason shall be communicated to the Company by Notice of Termination. "Incentive Bonus" means the sum of (i) an incentive payment, calculated annually, targeted at 100% of the Executive's Annual Base Salary and based on financial measurements approved by the Committee following consideration of the Executive's recommendations with regard thereto, and (ii) (A) for the fiscal year ending February 4, 2001 only, a strategic incentive payment, targeted at 50% of the Executive Annual Base Salary and (B) for the fiscal years ending after February 4, 2001, an incentive payment that is of equivalent value to the strategic incentive payment for the fiscal year ending February 4, 2001, in each case based on qualitative criteria approved by the Committee following consideration of the Executive's recommendations with regard thereto. The Incentive Bonus may be modified from time to time in the discretion of the Board, the Committee, or any appropriate Committee of the Board following consideration of the Executive's recommendations with regard thereto, provided the Incentive Bonus for the other senior executives of the Company is similarly modified and any such modification does not reduce Executive's then current total annual compensation. "Internet Subsidiary" means Toysrus.com, Inc., a Delaware corporation. "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 B-5 Executive'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. "Partnership Plan" means the Partnership Group Deferred Compensation Plan of the Company. "Plans" means all employee compensation, benefit and welfare plans, policies and programs of the Company, including, without limitation, incentive, savings, retirement, stock option, restricted stock, supplemental executive retirement, the Partnership Plan, medical, prescription, dental, disability, salary continuance, 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 Executive or, if such meaning is inapplicable, the term shall mean a termination of employment with the Company or a subsidiary on a voluntary basis after attaining the age of sixty (60). The term "Retirement" shall also include "early" retirement prior to the age of sixty (60) provided that the Committee, in its sole discretion, consents in writing to accept such early retirement. B-6 EXHIBIT C TAX GROSS-UP (a) If required by Section 9 of the Agreement, in addition to the payments described in Section 4 of the Agreement, the grants described in the Stock Unit Agreement, and all other obligations of the Company to the Executive whether under the Retention Agreement or otherwise, the Company shall pay to the Executive an amount (the "Gross-up") equal to the product of (i) the amount of Excise Taxes multiplied by (ii) the Gross-up Multiple (as hereinafter defined). The Gross-up is intended to compensate the Executive for the Excise Taxes and any Federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up. The "Gross-up Multiple" shall equal a fraction, the numerator of which is one (1.0) and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all Federal, state, local and other taxes and any Excise Taxes applicable to the Gross-up after taking into account the deductibility of state, local and other taxes. If different rates of tax are applicable to various portions of the Gross-up, the weighted average of such rates shall be used. For purposes of determining the amount of any Gross-up, it shall be assumed that (i) the Executive 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 (and any limitations on the use thereof) available in respect of any such tax and (ii) the deduction available for state and local income taxes in computing Federal income taxes is subject to the maximum adjusted gross income limitations. (b) Subject to the provisions of paragraph (c) of this Exhibit C, the determination of whether a Gross-up is required and the amount of such Gross-up 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 Executive and reasonably acceptable to the Company. (c) The Executive 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 payment. The Executive 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 Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive 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 Executive 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 Executive from and against all costs and expenses incurred in connection with such contest; provided further, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and at no net after-tax cost to the Executive. If the Executive 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 Executive shall promptly pay to the Company the amount of such refund C-1 (together with any interest paid or credited thereon) plus the amount of any tax benefit available to the Executive as a result of making such payment (any such benefit calculated based on the assumptions that (i) the Executive is subject to the highest marginal statutory rates of Federal, state and local income tax for the relevant periods after taking into account any deductions (and limitations on the use thereof) available in respect to any such tax and (ii) any deduction available for state and local taxes or other Form 1040 Schedule A amounts is subject to the maximum adjusted gross income limitations). C-2 ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of January 17, 2000 (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and JOHN H. EYLER, JR. (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive and the Company have entered into a Retention Agreement, dated as of January 6, 2000 (the "Retention Agreement"); WHEREAS, as further inducement for the Executive to execute the Retention Agreement and continue in the employ of the Company and subject to the terms of the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan"), the Management Compensation and Stock Option Committee (the "Committee") has determined to grant the Executive Performance Shares (as defined in the Plan and referred to herein as "Stock Units") as described in this Stock Unit Agreement based on performance criteria that may be utilized by the Committee, 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. WHEREAS, shares of the Company's common stock to be issued hereunder to Executive will be issued pursuant to a registration statement on Form S-8 filed with and declared effective by the Securities and Exchange Commission. 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 and in the Retention Agreement. 2. Stock Unit Grant. Subject to the terms and conditions set forth in this Unit Agreement and in Section 10 of the Plan, the Executive is hereby granted 200,000 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 Executive's account in the Trust (as defined below) in respect of the Stock Units, the "Shares"). The 200,000 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 by the Company, the "Trust") and shall be allocated by the Trust to the Executive's account therein subject to the vesting and payment provisions of Sections 3 and 4 Annex A-1 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 Executive's account therein subject to the vesting and payment provisions of Sections 3 and 4 below. 3. Vesting. (a) Subject to earlier vesting, as provided in the Retention Agreement and subject to Section 4(b), the Stock Units shall vest at the rate of thirty-three and one-third percent (33 1/3 %) per annum on February 1 of each year, beginning on February 1, 2002, throughout the Employment Period; provided that, the Committee has determined that the Performance Objective set forth in Exhibit A has been achieved. (b) The Committee shall determine whether the Performance Objective set forth on Exhibit A has been achieved as soon as practicable, but no later than the earlier of (x) February 1, 2004 or (y) the Date of Termination. 4. Payment of Stock Units. (a) Subject to Executive's election to defer receipt thereby, the Shares, together with any property attributable thereto (including, without limitation, dividends and distributions thereon), shall be delivered to the Executive immediately upon vesting as provided in Section 3 or upon such earlier vesting as provided in the Retention Agreement. (b) The provisions of Sections 8(b) and 9 of the Retention Agreement shall apply to the Stock Units and related Shares, whether or not the Retention Agreement is then in effect. 5. Registration Representation. The Company represents that the Shares acquired by the Executive under this Unit Agreement are registered under the Securities Act of 1933, as amended (the "Act"). 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. 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 Annex A-2 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 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 Executive, 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 shall be made by the Committee. 13. Successors. This Unit Agreement shall be binding upon the Company and its successors and assigns. Annex A-3 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. --------------------------------- Name: Title: I hereby acknowledge receipt of the Stock Units and agree to the provisions set forth in this Agreement. --------------------------------- John H. Eyler, Jr. Annex A-4 EXHIBIT A Performance Objective Under Section 3(ii) of the Stock Unit Agreement For any fiscal quarter in the Company's 2000, 2001, 2002 or 2003 fiscal year, the consolidated net earnings of the Company is at least equal to the amount of any corresponding quarter in the Company's fiscal year ending January 29, 2000. For these purposes, "consolidated net earnings" shall exclude extraordinary or unusual items reported by the Company as such. Annex A-5 EX-13 8 ANNUAL REPORT EXHIBIT 13 2000 & Beyond: "R" Winning Strategies [Logo] Toys "R" Us(R) 1999 Annual Report [Photo Omitted] Table of Contents Financial Highlights .................................................. page 3 Letter to Our Shareholders ............................................ page 5 Divisional Highlights ................................................. page 8 Management's Discussion and Analysis of Results of Operations and Financial Condition ...................... page 21 Financial Statements .................................................. page 25 Report of Management and Report of Independent Auditors ........................................ page 35 Directors and Officers ................................................ page 36 Quarterly Financial Data, Market Information and Store Locations ................................ page 38 Corporate Data and Citizenship ........................................ page 39 2 Financial Highlights TOYS"R"US, INC. AND SUBSIDIARIES
(Dollars in millions except per share data) Fiscal Year Ended ================================================================================================================================== Jan. 29, Jan. 30, Jan. 31, Feb.1, Feb. 3, Jan. 28, Jan. 29, Jan. 30, Feb. 1, Feb. 2, 2000* 1999** 1998 1997** 1996** 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net Sales $11,862 $11,170 $11,038 $ 9,932 $ 9,427 $ 8,746 $ 7,946 $ 7,169 $ 6,124 $ 5,510 Net Earnings/(Loss) 279 (132) 490 427 148 532 483 438 340 326 Basic Earnings/(Loss) Per Share 1.14 (0.50) 1.72 1.56 0.54 1.88 1.66 1.51 1.18 1.12 Diluted Earnings/(Loss) Per Share 1.14 (0.50) 1.70 1.54 0.53 1.85 1.63 1.47 1.15 1.11 FINANCIAL POSITION AT YEAR END: Working Capital $ 35 $ 106 $ 579 $ 619 $ 326 $ 484 $ 633 $ 797 $ 328 $ 177 Real Estate-Net 2,342 2,354 2,435 2,411 2,336 2,271 2,036 1,877 1,751 1,433 Total Assets 8,353 7,899 7,963 8,023 6,738 6,571 6,150 5,323 4,583 3,582 Long-Term Debt 1,230 1,222 851 909 827 785 724 671 391 195 Stockholders' Equity 3,680 3,624 4,428 4,191 3,432 3,429 3,148 2,889 2,426 2,046 NUMBER OF STORES AT YEAR END: Toys"R"Us - United States 710 704 700 682 653 618 581 540 497 451 Toys"R"Us - International 462 452 441 396 337 293 234 167 126 97 Kids"R"Us - United States 205 212 215 212 213 204 217 211 189 164 Babies"R"Us - United States 131 113 98 82 -- -- -- -- -- -- Imaginarium 40 -- -- -- -- -- -- -- -- -- Total Stores 1,548 1,481 1,454 1,372 1,203 1,115 1,032 918 812 712
* Includes the company's Internet subsidiary, toysrus.com. ** After restructuring and other charges. 3 [Photo Omitted] 4 To Our Shareholders [Photo Omitted] This is my first formal opportunity to communicate with many of you, and I'm pleased to share with you my enthusiasm for the future of Toys"R"Us. As a relative newcomer, I have a different perspective of the company, and I'd like you to take a moment to see it through my eyes. When I look at Toys"R"Us, I see a great family of brands and a financially healthy company with a solid cash flow. I also see lots of opportunity. It comes as no surprise to anyone that Toys"R"Us needs to improve its performance. No doubt many of you have been frustrated by the performance of the company over the last few years, including the holiday season of 1999 which yielded disappointing results. Those financials are thoroughly examined in this report. While we can't change the past, we can learn from it. I believe we have, and I want to tell you why I'm optimistic about the future of Toys"R"Us, and what our priorities are for the next 24 months. We've got a strong organization of talented and dedicated people, a brand that is second to none in the toy industry, and a solid financial foundation. Let me share with you the strategies that we are focused on executing in 2000 and 2001. Differentiation. We're going to focus on four key priorities, beginning with our merchandise offering. It is essential that we differentiate our content from that of our competitors. We will still be the headquarters for the toy brands known and loved by our customers, but we'll be more. We are committed to offering new and exciting products first, and to that end we will be focusing a significant amount of time and attention on developing exclusive new concepts and technologies to offer more unique, fun and interesting products. We made important strides in that effort here in the U.S. recently. In February, we announced a new line of exclusive branded products with Animal Planet. Animal Planet is the fastest growing cable station in the U.S., and this unique, interactive product line will be unlike anything else on the market. The Animal Planet line will be introduced in our stores this fall, and it is only the beginning of new, exclusive products to come. The company has also entered into an exclusive partnership with Home Depot. Together with Home Depot, we'll be the store where kids and their parents can buy "real" tools for kids -- actual working tools that are scaled appropriately to a kid's size and capability. These will come complete with accessories like tool belts, safety goggles and work aprons. We'll also offer construction kits for kids that will enable them to build things such as a birdhouse or a bookshelf on their own or under the guidance of an adult. And the Home Depot line of toys will also include role-play items like workbenches or drills that actually simulate the motion of a real drill. We will begin introducing these products in our stores in May with a full assortment rolled out by the end of the summer. We are very excited about this partnership and this line of creative and interactive toys available only at Toys"R"Us. We've signed a unique licensing agreement with OshKosh B'Gosh, Inc., for a line of baby products under the well-known OshKosh brand. These products, which will be available in our stores in August, bring additional equity to our juvenile line and will include items such as basic juvenile toys, dolls, plush, soft toys and other items. Toys"R"Us will also develop exclusive products with our most important resources that support their principal brands. This will further strengthen our relationships with key manufacturers while providing interesting and unique products available only at Toys"R"Us. [Photo Omitted] The Animal Planet Line is only the beginning of new, exclusive products to come. 5 [Photo Omitted] Our focus is on better category segmentation Refining our Store Format. There is no question that we have made significant financial investment in remodeling stores over the last few years, both in the C-3 and the Concept 2000 formats. The good news is that the new store formats are out performing the old ones -- and the gap continues to widen with this more customer-friendly format. The new format is a major step forward, and provides a solid foundation on which to build. We also think it provides us with further opportunity to unlock additional performance gains. The best news, though, is that even with the progress we've made, we're not yet close to maximizing the potential of our new format. That's why we've developed 16 test stores across the country to provide us with laboratories for experimenting with new concepts and refinements. This test store effort focuses on the reconfiguration of fixturing, better category segmentation and clear projection of merchandising concepts -- all designed to make the shopping experience more pleasant and productive for our guests, the customers who shop at Toys"R"Us. It also includes the addition of many new business categories, the addition of Imaginarium as a child development center, demonstration areas where we can delight our guests with the newest products, and a redefinition of our service level. These test stores include selling specialists and a truly service-focused management commitment. We believe the opportunities for sales growth and guest satisfaction are material. As these concepts are validated, we expect to execute significant rollout by holiday season 2000. Redeployment of Inventory Investment. We are redeploying inventory investment to ensure major intensification supporting the most important volume-producing toys in our assortment. We missed many selling opportunities during the holiday season in 1999 by not having enough investment behind the top 1,000 items. We will dramatically improve this process in 2000, and have already begun substantial order placements to ensure key item availability. Our objective this year is to fund a doubling of the investment in our top 1,000 items by reducing our current levels of non-key inventory and by working with our resources to more tightly focus our investment behind their most important properties. We will still offer the broadest selection of any bricks and mortar store in the world, but this redeployment of inventory depth behind the most important items will help to energize our sales this coming holiday season by ensuring that we have the most wanted items. Redeployment of Expense Dollars. We have challenged each operating and support division worldwide to analyze every expense dollar and to eliminate spending that does not productively serve our guests, generate sales or improve productivity. Those expense dollars are being redeployed to fund guest service, pricing and marketing initiatives designed to drive sales growth in our stores. Unlocking the Value of our Assets. There are many assets within this company that offer tremendous value to our shareholders. This was evident in our recent announcement regarding an initial public offering (IPO) plan for Toys"R"Us - Japan. Under the IPO plan, Toys"R"Us - - Japan and the company will offer primary and secondary shares, respectively, to the public in Japan. Such shares should begin trading on the Demonstration areas delight our customers [Photo Omitted] 6 [Photo Omitted] Babies "R" US ia a clear winner Japanese OTC market on April 25, 2000. Following that offering, the company will retain a 48% ownership stake of Toys"R"Us - Japan. This action is beneficial to our shareholders in several ways: we will continue to derive benefits from our 48% share of Toys"R"Us - Japan's future earnings, as well as through royalty income. In addition, the IPO will enable Toys"R"Us - Japan to fund its future growth without support from the company, therefore greatly enhancing our financial flexibility. Furthermore, we expect that the sale of shares, which reduces our ownership position from 80% to 48%, will result in a significant gain for the company. We will continue to explore other opportunities and alternatives as appropriate to further unlock the value of our assets. Other Aspects of the Business. We have begun many initiatives in our U.S. toy stores already, and more are planned in the months ahead. But we're making strides in other areas of our business as well. Babies"R"Us is a clear winner in the juvenile products market. This division marked the new millenium by reaching the billion-dollar sales mark in January. Babies"R"Us has excelled in all areas of the business, including outstanding guest service, terrific juvenile assortment and strong merchandising and operational capabilities. In addition, the success we have had with our Baby Registry is second to none -- Babies"R"Us registers more expectant parents than any other retailer in the U.S. We're pleased with the strong growth of Babies"R"Us and expect to open 20 new stores this year. Performance of Kids"R"Us has reached a plateau, but we are making substantial progress in rethinking how to rekindle growth in sales and profits for this division. We have seen significant success with leveraging our Kids"R"Us buying expertise and infrastructure up to our combo stores -- essentially placing Kids"R"Us stores within Toys"R"Us stores -- and we expect to roll out many more of these in 2000. I mentioned the addition of Imaginarium child development centers within our Toys"R"Us stores earlier in this letter. Based on the tremendous success of the 19 initial tests of this concept, we plan to have upwards of 100 Imaginarium worlds within our Toys"R"Us stores by year-end. In addition, we expect to open five or more free-standing Imaginarium "neighborhood stores" this year as well. Our International business had a terrific year with a much-improved performance, as the financials indicate. Our International stores have been the vanguard of the redeployment of expense and inventory dollars to maximize their opportunities for this past holiday. We think the future has never been brighter for that segment of our business. A major milestone for the year 2000 will include the opening of our 100th store in Japan, our largest International market. Finally, our toysrus.com business has proven the power of our brand on the Internet, and we are confident that our "clicks and mortar" strategy will be a long-term winner. During the last few months of 1999, toysrus.com became one of the fastest growing Web sites on the Internet. With its new management, the advantage of an unbeatable brand name, and brick and mortar assets, we are confident that toysrus.com will become the undisputed one-stop shop for kids, parents and grandparents anywhere in the world. We took a giant step forward in achieving that goal in February when we announced an exciting strategic partnership between Toys"R"Us, toysrus.com and SOFTBANK, the world's leading Internet venture capital firm. SOFTBANK's $57 million investment is a strong endorsement of our Internet business. SOFTBANK's investment capital will be used to accelerate the development of toysrus.com's infrastructure to support further growth. Their track record, international savvy and unbeatable industry experience will help us in building a world-class e-commerce platform. Conclusion. As we look at the months ahead and as we begin to write a new chapter in Toys"R"Us history, it's important to remember that we're building on a strong foundation. Ours is a profitable business that can and will do much better. We're moving ahead aggressively with our store refinements, adding new products and pockets of excitement as we go. Our stores are going to be more fun and interactive, and more guest-friendly. Our merchandise assortments will be more interesting and captivating with greater guest appeal than competitors can offer. These are realistic, achievable goals, and my commitment to you is that our company will put every resource we have against these goals. We're going to get better, we're going to perform better, and we're going to maintain that momentum. Many people have asked me over the past few months about my decision to join Toys"R"Us. I can say in all honesty that after working with this organization and looking at what needs to be done, I am even more optimistic and enthusiastic than I was when I first joined. We know what we need to do. Some of you may be skeptical and say that you've heard this before. My request to you, as a shareholder, is to have the patience and the faith in Toys"R"Us to let this strategy unfold. We are moving forward with the greatest possible energy, emotion and commitment. When I look ahead to the future of Toys"R"Us, I see a bright future, and I know that the best days of this company are still in front of us. /s/ John H. Eyler Jr. - --------------------- John H. Eyler Jr. President and Chief Executive Officer March 27, 2000 7 vision [Photo Omitted] 8 [Photo Omitted] The power of our brand strengthens our connection with our customer and inspires us to create a shopping experience that is truly satisfying and memorable. The Toys"R"Us brand has become synonymous with family fun and kids' wishes come true. Such positive associations have made Toys"R"Us among the top-ranked brands for kids, in the company of giants like Disney and McDonald's. We recognize that the quality of the shopping experience in our stores must be superior to our competition to ensure the continuing strength of our brand. We are committed to making our customers - now referred to as our guests - central to everything we work for in our company. We have taken actions to ensure that our guests will find the products they are shopping for when they visit our stores. We have improved our forecasting and inventory replenishment process so that we do a better job of being in-stock on the products our guests want - including the most requested and unusual items which are not available in other retail outlets. [Logo] Toys "R" Us When kids refer to Toys"R"Us as their favorite store, we are motivated to be even better for them. To meet this objective, we are enhancing the layout of our stores to create greater interactivity and provide more opportunities to demonstrate products. Our desire to bring products to life in a better shopping environment is certain to create more fun and excitement for all our guests. Our guests have told us that friendly and knowledgeable sales associates are important factors in bringing the shopping experience to a satisfying conclusion. With that in mind, we have undertaken a major initiative to upgrade the quality of our store management and associate teams, as well as to provide funding for improved levels of customer service. These significant new dimensions to serve our guests better reinforce the single premise that Toys"R"Us is the one place that's all for them. Improving merchandise offerings and customer service are ongoing priorities for all stores; and we anticipate completing the remodeling of all our U.S. stores in two years. We will work every day to continually give our guests more reasons to choose Toys"R"Us over other retailers. Toys"R"Us will be the brand and the store that captures the most share of heart and mind, the source of all the best for kids, family and fun. [Two Photos Omitted] Our remodeled stores feature exciting "worlds" that make shopping easier and more fun for all our guests. 9 teamwork [Photo Omitted] 10 [Logo] TOYS "R" US INTERNATIONAL With 462 stores in 26 countries, Toys"R"Us is a global leader in retailing for kids and families. Our powerhouse brand is recognized by children everywhere, and no matter what language is spoken, Toys"R"Us translates universally into the best store for fun, excitement, and learning for the whole family. Our extraordinary success in Japan is a prime example of the strength of our International Brand plus our ability to leverage our global resources. Our incredible growth since we opened our first store in Arakawaoki in 1991 has enabled us to become market leaders for toys and juvenile products in Japan. In 1999, we surpassed the one billion dollar sales level in that market. We have recently announced an initial public offering of stock in Toys"R"Us-Japan; and we will achieve another milestone there in the year 2000 when we open our 100th store. Our worldwide presence has enabled us to identify trends, and provide our guests with unique products and proprietary brands that are available only at Toys"R"Us. In most of our countries worldwide, we have successfully expanded our juvenile merchandise offerings through the Babies"R"Us departments in our toy stores. These examples prove that our global leverage is one of our greatest assets. Excellent management and dedicated associates in each international market, combined with strategic assistance from the corporate support team enables us to serve a record number of customers in "R"World. Our international presence gives us great opportunities to learn and share the best practices from around the world with the introduction of new and unique product lines, enhanced merchandise presentations and innovative marketing campaigns. Our goal is to make the Toys"R"Us shopping experience even better, store by store and country by country. These success stories are a tribute to the continuing excellence displayed by our international associates and their partnership with the corporate support team. We will continue to work together to build the brand that kids and their families love worldwide. Our on-going emphasis on maintaining the best merchandise assortments, presenting in-store excitement and excellent customer service will reinforce our global commitment to kids, family and fun. [Photo Omitted] 11 opportunity [Photo Omitted] 12 [Logo] toysrus.com Toysrus.com experienced massive growth in the fourth quarter of 1999, during the key holiday selling season. We accomplished these successes on a new website (launched in October), with a new management team, and using a fraction of the marketing and promotion investment of our online competitors - a testament to the drawing power of the "R"Us brand. We learned valuable lessons and made some tough calls, including the proactive decision to inform a small percentage of our guests that their orders may not arrive on time. (Over 97% of our shipments arrived by Dec. 25th.) We can and will rise to the challenge of retailing on the Internet, bringing customers a better and more confident online presence and responding to the needs of the Internet shopper. The growth and acceptance of shopping for goods and services on the worldwide web presents a major sales opportunity. Over the next five years, the number of online users around the world is projected to increase more than three-fold to 400 million. Our goal is to build a world-class e-commerce infrastructure, taking toysrus.com forward into an exciting future. In the fourth quarter of 1999, with heightened website traffic and orders, toysrus.com was the... Number One* o fastest growing e-commerce site on the Internet o online toy site, the first traditional retailer to surpass a pure e-tailer o e-commerce site for women o bricks-and-mortar site Number Five* o e-commerce site overall * Source:Media Metrix. [Photo Omitted] As we enter a revolutionary period in retail and consumer marketing, toysrus.com is uniquely positioned to become a global leader on the Internet. 13 [Photo Omitted] 14 [Photo Omitted] Our guests can look forward to a more focused assortment of key items and the newest fashion trends. [Photo Omitted] Through extensive consumer research, our Kids"R"Us customers have given us a clear picture of the store that they would like us to be. Our guests want an exciting store that's easier to shop, with a more focused assortment of key items and the newest fashion trends. They want us to offer them the best value propositions. They want us to be more available to assist them with their shopping needs. Our focus for the year ahead is clear: make it happen for our guests. We will continue to grow by adding over 70 more Kids"R"Us combo stores within Toys"R"Us stores by the end of the year, bringing our guests added convenience and leveraging our "R"Us family connection. In addition, programs are underway that focus on "guest delight" and elevating service levels, with associate training and recognition components. Our customer communications will be more targeted as well. A fresh new look in our advertising and direct mail efforts will enable us to present clear branding and value messages to our guests throughout the year. [Photo Omitted] focus We're sharpening our merchandise mix, making shopping more rewarding for our guests, and taking Kids"R"Us forward in the competitive marketplace. 15 [Photo Omitted] 16 [Logo] BABIES"R"US (R) Baby Superstore (R) In January 2000, Babies"R"Us reached the billion dollar sales mark. We could not have asked for a better way to enter the new millennium. The growth and success of this "Billion Dollar Baby" is testimony to our commitment to excellence at all levels of our organization. Looking ahead, we will continue to establish Babies"R"Us as the premier retailer of baby products, and to grow our market share. As we open more new stores, the guest focus that is pervasive throughout the "R"Us Family will drive our initiatives in marketing, merchandising and human resources. We will reach our guests through strategic marketing and advertising, with messages that build the strength of our brand and communicate the benefits and services at our stores. Local events like our BabyFest Weekends, combined with programs that allow us to partner with childbirth educators, OB-GYNs, and hospitals will also help us reach potential customers as early as possible. We will make our in-store experience even more unique, through merchandise that is exclusive to our stores. As we expand and develop our Koala Baby and Especially for Baby brands, our guests can look forward to quality products that can only be found at Babies"R"Us. [Photo Omitted] The success we have had with our Baby Registry is second to none. Babies"R"Us registers more expectant parents than any other retailer in the U.S. To make sure that we provide our guests with the best service possible, programs that focus on product training and product knowledge are in place for all our associates. Our guests have paid us the ultimate compliment by returning to our stores again and again. They expect and deserve the best selection and the highest level of service. Babies"R"Us will deliver - for 2000 and beyond. [Photo Omitted] growth 1999 was a banner year for Babies"R"Us, with our chain that grew to 131 total stores across the country. We directed our resources towards establishing our leadership position in the juvenile retail market. 17 [Photo Omitted] 18 [Photo Omitted] The addition of Imaginarium stores to the "R"Us Family enables us to explore new ways to delight our customers. Imaginarium stores immerse children and adults in a fun environment that stimulates all the senses - where play and exploration are encouraged to the fullest. Children and their parents quickly become part of a memorable in-store experience. From the children's music that fills the store, to the many product demonstrations and in-store craft classes they can participate in, Imaginarium offers children and their parents something to enjoy and remember. Our neighborhood stores are located in 40 towns (and growing) across the country. Each Imaginarium store carries the finest collection of quality toys from around the world. Every item in our "Galaxy of Toys"(a) is specially chosen by our "Master Toyologist"(a), whose criteria for selection includes high play and learning values, excellent quality and, most of all, fun! [Logo] Imaginarium(R) A Galaxy of Toys(R) The attraction and appeal of the Imaginarium neighborhood stores and specialty merchandise was recreated inside 19 Toys"R"Us stores in October 1999. New specialty brands, known for their quality and educational value, were introduced to Toys"R"Us and presented along with traditional favorites for a successful merchandise mix. These test stores generated positive sales results and customer feedback. Moving forward into the year 2000, Imaginarium will focus on three key initiatives. The first is the expansion of the Imaginarium "worlds" within the Toys"R"Us stores. The second is the addition of new neighborhood stores; and the third is the expansion of our Imaginarium.com site (integrating with the toysrus.com site). Imaginarium is committed to merchandise the finest playthings to promote learning and fun, while providing outstanding customer service - all in an environment of fun and discovery. [Photo Omitted] discovery 19 [Photo Omitted] Financial Section Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. page 21 Financial Statements ........................... page 25 Report of Management and Report of Independent Auditors .................. page 35 Directors and Officers .......................... page 36 Quarterly Financial Data, Market Information and Store Locations ............................. page 38 Corporate Data and Citizenship ..................................... page 39 20 Manangement's Discussion and Analysis OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS* Comparison of Fiscal Year 1999 to 1998 The company's total sales increased 6% to $11.9 billion from $11.2 billion. The total sales growth was primarily driven by a 3% increase in comparable store sales, as well as continued new store expansion, partially offset by the closing of 46 under-performing stores in 1999 and 1998 (see "Restructuring and Other Charges" below). Comparable store sales for the USA toy store division increased 3% . The USA comparable toy store sales increases were driven primarily by improved merchandising trends and strong sales of Pokemon and electronic and video products. These gains were partially offset by the deflationary impact of video hardware sales, and were limited by industry-wide shortages of electronic and other products during the holiday season. The International toy store division results of operations discussed below include the results of Toys"R"Us - - Japan. Total sales for the International toy store division increased 7% and comparable international toy store sales, on a local currency basis, increased 2%. The comparable international toy store sales increases reflect improved performances in several merchandise categories, in particular, the juvenile, toy and electronics categories. Total sales for the Babies"R"Us division exceeded the $1 billion milestone in 1999 and increased 28%. Comparable store sales for Babies"R"Us increased 9%. The Kids"R"Us division reported a 3% comparable store sales decrease. The company's toysrus.com Internet subsidiary reported total sales of $49 million from its inception in May 1999. International sales were favorably impacted by the translation of local currency into U.S. dollars by approximately $59 million in 1999 and unfavorably impacted by approximately $30 million in 1998. Neither the translation of currency into U.S. dollars nor inflation had a material effect on the company's operating results for 1999. In 1998, the company recorded restructuring and other non-recurring charges of $698 million to reposition its world-wide business, as set forth below. For comparability purposes, the following discussion regarding results of operations excludes the impact of these charges. On a consolidated basis, 1999's cost of sales as a percentage of sales was 70.1% versus 70.2%. The USA toy store division reported cost of sales as a percentage of sales of 71.6% as compared to 71.0%. This increase was a result of increased markdowns to keep inventory fresh. The International toy store division reported cost of sales as a percentage of sales of 69.2% versus 69.1%. The Babies"R"Us division reported cost of sales as a percentage of sales of 67.2% versus 69.0%, reflecting a favorable change in the sales mix. On a consolidated basis, selling, general and administrative expenses (SG&A) as a percentage of sales increased to 23.1% from 21.3%. This increase was due in part to establishing and operating toysrus.com, the company's Internet subsidiary, the implementation of strategic initiatives targeted to improve the company's long-term performance, and costs related to the reformatting of the company's toy stores to the C-3 format. The USA toy store division reported SG&A as a percentage of sales of 19.8% versus 18.6%, while the International toy store division reported SG&A as a percentage of sales of 23.4% versus 23.6%. The Babies"R"Us division reported SG&A as a percentage of sales of 24.0% versus 25.0%. Depreciation and amortization increased to $278 million from $255 million. This increase was due in part to additional new stores and renovations to the C-3 format, as well as strategic investments to improve management information systems. Interest expense decreased by $11 million. This decrease was due primarily to lower average interest rates in 1999. Also included in 1998 interest expense is $6 million relating to the early extinguishment of long-term debt. Included in the company's 1999 results are net costs to establish and operate the company's Internet subsidiary, toysrus.com. Excluding the impact of these net costs, 1999 earnings before income taxes, net earnings and diluted earnings per share would have been $526 million, $334 million and $1.36, respectively. The company's effective tax rate was unchanged at 36.5%, excluding the restructuring and other charges. Comparison of Fiscal Year 1998 to 1997 The company's total sales increased to $11.2 billion from $11.0 billion. 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 from the prior year. 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 USA toy store division declined 4%, while the International toy store division had a 2% comparable store sales decline, in local currency. The Babies"R"Us division reported a 19% comparable store sales increase and the Kids"R"Us division reported a 2% comparable store sales decrease. International sales were unfavorably impacted by the translation of local currency into U.S. dollars by approximately $30 million in 1998 and $250 million in 1997. Neither the translation of currency into U.S. dollars nor inflation had a material effect on the company's operating results for 1998 and 1997. * References to 1999, 1998, and 1997, are for the 52 weeks ended January 29, 2000, January 30, 1999 and January 31, 1998, respectively. 21 Manangement's Discussion and Analysis OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On a consolidated basis, cost of sales as a percentage of sales was 70.2% versus 69.8%. The USA toy store division reported cost of sales as a percentage of sales of 71.0% versus 70.5%. The International toy store division reported cost of sales as a percentage of sales of 69.1% versus 68.8%. These increases were due to a shift in the sales mix to lower margin video software merchandise from higher margin action figures and virtual pet products. The Babies"R"Us division reported cost of sales as a percentage of sales of 69.0% versus 70.7%. On a consolidated basis, SG&A as a percentage of sales was 21.3% versus 20.2%. The USA toy store division reported SG&A as a percentage of sales of 18.6% versus 17.5%, the International toy store division reported SG&A as a percentage of sales of 23.6% versus 23.1%. These increases were primarily a result of the implementation of strategic initiatives, as well as store expansion. The Babies"R"Us division reported SG&A as a percentage of sales of 25.0% versus 27.1%. Depreciation, amortization and write-offs were $255 million as compared to $253 million. Interest expense increased by $17 million primarily due to higher average borrowings outstanding throughout the year as a result of the company's share repurchase programs. Also included in 1998 interest expense is $6 million relating to the early extinguishment of long-term debt. The company's effective tax rate for 1998 was unfavorably affected by the restructuring and other charges recorded in 1998. Excluding the impact of these charges, the company's effective tax rate was unchanged at 36.5%. Restructuring and Other Charges 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, all of 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 consisted of changes in accounting estimates and provisions for legal settlements. The company has closed 46 underperforming stores and 7 administrative offices, as well as 4 distribution centers. The company is continuing to aggressively negotiate the closing/downsizing of the remaining stores and distribution centers included in its repositioning program and intends to execute the remainder of the initiatives included in the program. Details on the components of the charges are described in the notes to the consolidated financial statements and are as follows: Reserve Reserve Utilized Balance Utilized Balance Description Charge in 1998 1/30/99 in 1999 1/29/00 - -------------------------------------------------------------------------------- Closings/downsizings: Lease commitments $ 81 $ -- $ 81 $19 $62 Severance and other closing costs 29 4 25 11 14 Write-down of property, plant and equipment 155 155 -- -- -- Other 29 5 24 13 11 - -------------------------------------------------------------------------------- Total restructuring $294 $164 $130 $43 $87 ================================================================================ Changes in accounting estimates and provisions for legal settlements $ 59 $ 20 $ 39 $ 9 $30 ================================================================================ In 1998, the company also announced markdowns and other charges of $345 million ($229 million net of tax benefits, or $0.86 per share). Of this charge, $253 million related to markdowns required to clear excess inventory from stores, primarily to enable the company to 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 29, 2000 are expected to be utilized in the company's upcoming business cycle. Details of the markdowns and other charges are as follows: Reserve Reserve Utilized Balance Utilized Balance Description Charge in 1998 1/30/99 in 1999 1/29/00 - -------------------------------------------------------------------------------- Markdowns Clear excess inventory $253 $179 $ 74 $72 $ 2 Store closings 29 2 27 15 12 Change in accounting estimates and other 63 57 6 6 -- - -------------------------------------------------------------------------------- Total cost of sales $345 $238 $107 $93 $14 ================================================================================ The company has substantially completed its restructuring program that was announced in 1995, with the exception of long-term lease commitment reserves that will be utilized throughout 2000 and thereafter. The company believes all reserves are adequate to complete its restructuring programs. Liquidity and Capital Resources The company's cash flow from operations were $865 million in 1999 and $964 million in 1998. The difference relates primarily to the non-cash portion of the 1998 restructuring charge as well as a significant decrease in inventories in 1998, partially offset by higher net earnings in 1999. 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. 22 Manangement's Discussion and Analysis OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Cash flows used for investing activities increased by $182 million in 1999, due to new store expansion in the Babies"R"Us division and International toy store division, USA toy store conversions to the C-3 format, as well as capital requirements to establish and operate the company's toysrus.com Internet subsidiary. The company now operates 170 toy stores in the U.S. in the C-3 format and 163 additional toy stores in the U.S. with retrofitted "front-ends". In addition, the company invested $43 million for the purchase of Imaginarium (see "Other Matters" below). Cash flows used for investing activities decreased by $94 million in 1998 from 1997, primarily due to fewer new store openings in 1998, as well as fewer store conversions in 1998. Cash flows used for financing activities decreased to $102 million in 1999 from $344 million in 1998. As discussed above, the company increased the number of toy stores converted to its C-3 format in 1999 and thus decreased the amount of cash used for its share repurchase program to $200 million in 1999, from $723 million in 1998. In addition, net borrowings decreased by $279 million for 1999 verses 1998. 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. For 2000, capital requirements for new stores, conversions of existing stores and other capital investments are estimated at approximately $550 million. These plans include the addition of approximately 20 new Babies"R"Us stores in the United States, approximately 30 new International toy stores, including 17 new stores in Japan and 10 franchise stores. The company is also planning the conversion of approximately 70 toy stores in the U.S. into C-3 combo stores. In addition, the company's capital investment plans also include major revisions to its distribution center structure and enhancements to its management information systems. In 1999, the company repurchased 12 million shares of its common stock through its share repurchase programs for a total of $200 million. At January 29, 2000, the company has $130 million remaining in its $1 billion share repurchase program announced in January 1998. On March 20,2000, the company announced that its Board of Directors approved a new $1 billion share repurchase program. The company will continue to repurchase additional shares when appropriate. The company announced several major strategic initiatives regarding online retailing, as part of the company's strategy to become a global leader in the online retail market for toys and children's products. Although online sales currently represent only a very small percentage of the overall toy business, it is a rapidly growing retail segment. Over the next five years, the number of online users around the world is forecasted to increase more than three fold to over 400 million. The key initiatives include the establishment of toysrus.com as a separate subsidiary of the company and the acquisition of a 500,000 square foot distribution center dedicated solely to the fulfillment of orders placed with toysrus.com. In addition, on February 24, 2000, the company entered into a partnership with SOFTBANK Venture Capital and affiliates that included an investment of $57 million in toysrus.com. During the last few months of 1999, toysrus.com became one of the fastest growing web sites on the Internet. The company plans to continue making strategic investments in toysrus.com to capitalize on the company's brand names, brick and mortar assets, and SOFTBANK's Internet expertise to reach the goal of making toysrus.com a global leader in the online retail market for toys and children's products. The seasonal nature of the business (approximately 42% 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 2000, 1999 and 1998. Cash requirements for operations, capital expenditures, lease commitments and the share repurchase program will be met primarily through operating activities, borrowings under the $1 billion revolving credit facility, issuance of commercial paper and/or other bank borrowings of foreign subsidiaries. Other Matters On August 20, 1999, the company acquired all of the capital stock of Imaginarium Toy Centers, Inc. for approximately $43 million in cash and the assumption of certain liabilities. The company believes this acquisition will accelerate its strategy to establish a leadership position in the learning and educational category and will provide further opportunities for new growth. The company is currently operating existing Imaginarium stores under the Imaginarium name. The operating results of Imaginarium from the date of acquisition were not material to the overall results or financial condition of the company. On August 26, 1999, Robert C. Nakasone resigned as the company's Chief Executive Officer and as a director. Also on that date Michael Goldstein, Chairman of the Board of Directors, was named Chief Executive Officer on an interim basis. Mr. Goldstein was Chief Executive Officer of the company from 1994 to 1998. On January 17, 2000, John H. Eyler, Jr. was named President and Chief Executive Officer and a director of the company. Mr. Goldstein remains Chairman of the Board of Directors. In connection with the resignation of Mr. Nakasone as Chief Executive Officer and a director, the company entered into a Separation and Release Agreement with Mr. Nakasone providing for cash payments, the immediate vesting of all unvested options and unvested profit shares held by Mr. Nakasone, as well as the prorated vesting of other unvested equity based awards on the second anniversary of the termination date. The company accrued all costs related to this matter as of January 29, 2000. These amounts were not material to the overall results or financial condition of the company. 23 Manangement's Discussion and Analysis OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On March 20, 2000, the company announced the planned initial public offering ("IPO") in Japan of shares of Toys"R"Us - Japan. Under the initial public offering plan, Toys"R"Us - Japan and the company will offer primary and secondary shares respectively, to the public in Japan during the first half of fiscal 2000. This offering is subject to Japanese government approval and risks associated with market conditions. After the offering, the company will retain a significant ownership stake of Toys"R"Us - Japan, although less than 50% of the then outstanding shares. Accordingly, subsequent to the completion of the planned IPO, the company will no longer consolidate the financial statements of Toys"R"Us - Japan. Toys"R"Us - Japan will operate as a licensee of Toys"R"Us, Inc. 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 In prior years, the company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The company will continue to monitor its mission-critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. Recent Accounting Pronouncements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. This pronouncement requires the company to adopt SFAS No 133, Accounting for Derivative Instruments and Hedging Activities, on February 4, 2001. SFAS No. 133 requires the company to recognize all derivative instruments as assets or liabilities in its balance sheet and measure them at fair value. The company does not expect the adoption of SFAS No. 133 to have a material impact on its financial position, results of operations or cash flows. 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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, 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. 24 Consolidated Statements of Earnings TOYS"R"US, INC. AND SUBSIDIARIES
Year Ended ------------------------------------------------ January 29, January 30, January 31, (In millions except per share data) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ Net sales $11,862 $11,170 $ 11,038 Cost of sales 8,321 8,191 7,710 - ------------------------------------------------------------------------------------------------------------ Gross Profit 3,541 2,979 3,328 - ------------------------------------------------------------------------------------------------------------ Selling, general and administrative expenses 2,743 2,443 2,231 Depreciation, amortization and asset write-offs 278 255 253 Restructuring charge -- 294 -- - ------------------------------------------------------------------------------------------------------------ Total Operating Expenses 3,021 2,992 2,484 - ------------------------------------------------------------------------------------------------------------ Operating Income/(Loss) 520 (13) 844 Interest expense 91 102 85 Interest and other income (11) (9) (13) - ------------------------------------------------------------------------------------------------------------ Interest Expense, Net 80 93 72 - ------------------------------------------------------------------------------------------------------------ Earnings/(loss) before income taxes 440 (106) 772 Income taxes 161 26 282 - ------------------------------------------------------------------------------------------------------------ Net earnings/(loss) $ 279 $ (132) $ 490 ============================================================================================================ Basic earnings/(loss) per share $ 1.14 $ (0.50) $ 1.72 ============================================================================================================ Diluted earnings/(loss) per share $ 1.14 $ (0.50) $ 1.70 ============================================================================================================
See notes to consolidated financial statements. [Photo Omitted] 25 [Photo Omitted] Consolidated Balance Sheets TOYS"R"US, INC. AND SUBSIDIARIES
January 29, January 30, (In millions) 2000 1999 - ---------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 584 $ 410 Accounts and other receivables 182 204 Merchandise inventories 2,027 1,902 Prepaid expenses and other current assets 80 81 - ---------------------------------------------------------------------------------------- Total current assets 2,873 2,597 Property and Equipment: Real estate, net 2,342 2,354 Other, net 2,113 1,872 - ---------------------------------------------------------------------------------------- Total property and equipment 4,455 4,226 Goodwill, net 374 347 Other assets 651 729 - ---------------------------------------------------------------------------------------- $ 8,353 $ 7,899 ======================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings $ 278 $ 156 Accounts payable 1,617 1,415 Accrued expenses and other current liabilities 836 696 Income taxes payable 107 224 - ---------------------------------------------------------------------------------------- Total current liabilities 2,838 2,491 Long-Term Debt 1,230 1,222 Deferred Income Taxes 362 333 Other Liabilities 243 229 Stockholders' Equity: Common stock 30 30 Additional paid-in capital 453 459 Retained earnings 4,757 4,478 Foreign currency translation adjustments (137) (100) Treasury shares, at cost (1,423) (1,243) - ---------------------------------------------------------------------------------------- Total stockholders' equity 3,680 3,624 - ---------------------------------------------------------------------------------------- $ 8,353 $ 7,899 ========================================================================================
See notes to consolidated financial statements. 26 Consolidated Statements of Cash Flows TOYS"R"US, INC. AND SUBSIDIARIES
Year Ended -------------------------------------------------- January 29, January 30, January 31, (In millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Earnings/(Loss) $ 279 $ (132) $ 490 Adjustments to reconcile net earnings/(loss) to net cash provided by operating activities: Depreciation, amortization and asset write-offs 278 255 253 Deferred income taxes 156 (90) 18 Restructuring and other charges -- 546 -- Changes in operating assets and liabilities: Accounts and other receivables 35 (43) (40) Merchandise inventories (192) 233 (265) Prepaid expenses and other operating assets (69) (27) (9) Accounts payable, accrued expenses and other liabilities 497 229 22 Income taxes payable (119) (7) 40 - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 865 964 509 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, net (533) (373) (494) Other assets (28) (49) (22) Purchase of Imaginarium, net of cash acquired (43) -- -- - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (604) (422) (516) ======================================================================================================================= CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net 95 4 (142) Long-term borrowings 593 771 11 Long-term debt repayments (604) (412) (176) Exercise of stock options 14 16 62 Share repurchase program (200) (723) (253) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (102) (344) (498) ======================================================================================================================= Effect of exchange rate changes on cash and cash equivalents 15 (2) (42) CASH AND CASH EQUIVALENTS Increase/(decrease) during year 174 196 (547) Beginning of year 410 214 761 - ----------------------------------------------------------------------------------------------------------------------- End of Year $ 584 $ 410 $ 214 ======================================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income tax payments $ 126 $ 122 $ 192 Interest payments $ 92 $ 109 $ 83 =======================================================================================================================
See notes to consolidated financial statements. 27 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 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 - -------------------------------------------------------------------------------------------------------------------------------- Net earnings for the year -- -- -- -- -- -- 279 279 Foreign currency translation adjustments -- -- -- -- -- (37) -- (37) -------- Comprehensive income 242 Share repurchase program -- -- (12.0) (200) -- -- -- (200) Issuance of restricted stock, net -- -- -- 3 (4) -- -- (1) Exercise of stock options, net -- -- .7 17 (2) -- -- 15 ================================================================================================================================ Balance, January 29, 2000 300.4 $ 30 (61.1) $(1,423) $ 453 $ (137) $ 4,757 $ 3,680 ================================================================================================================================
See notes to consolidated financial statements. [Photo Omitted] 28 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. References to 1999, 1998 and 1997 are for the 52 weeks ended January 29, 2000, January 30, 1999 and January 31, 1998, respectively. Reclassification Certain amounts in the 1998 Consolidated Balance Sheet have been reclassified to conform with the 1999 presentation. Principles of Consolidation The consolidated financial statements include the accounts of the company and its subsidiaries. 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 29, 2000 or January 30, 1999. 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. Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents and short and long-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 29, 2000 or January 30, 1999. The related receivable, payable and deferred gain or loss are included on a net basis in the balance sheet. The company had $59 and $209 of short term outstanding forward contracts at January 29, 2000 and January 30, 1999, maturing in 2000 and 1999, 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 29, 2000 and January 30, 1999, respectively, 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. 29 PROPERTY AND EQUIPMENT Useful Life January 29, January 30, (in years) 2000 1999 - --------------------------------------------------------------------- Land $ 827 $ 829 Buildings 45-50 1,859 1,842 Furniture and equipment 5-20 2,046 1,861 Leaseholds and leasehold improvements 12 1/2-35 1,432 1,213 Construction in progress 42 42 Leased property under capital leases 26 27 - --------------------------------------------------------------------- 6,232 5,814 Less accumulated depreciation and amortization 1,777 1,588 ===================================================================== $ 4,455 $ 4,226 ===================================================================== SEASONAL FINANCING AND LONG-TERM DEBT January 29, January 30, 2000 1999 - ---------------------------------------------------------------------- Commercial Paper interest rates from 5.64% to 5.98% $ 368 $ 368 475 Swiss franc note payable, due 2004(a) 342 342 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 242 198 Industrial revenue bonds, net of expenses(b) 52 60 7% British pound sterling loan payable, due quarterly through 2001(c) 19 33 8 1/4% sinking fund debentures, due 2017, net of discounts 12 24 Mortgage notes payable at annual interest rates from 10.16% to 11.00%(d) 10 11 Obligations under capital leases 8 11 - ---------------------------------------------------------------------- 1,251 1,245 Less current portion (e) 21 23 ====================================================================== $ 1,230 $ 1,222 ====================================================================== (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 95 basis points. (b) Bank letters of credit of $35, expiring in 2001, 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 4.1% and 3.6% at January 29, 2000 and January 30, 1999, respectively. (c) Collateralized by property with a carrying value of $156 and $160 at January 29, 2000 and January 30, 1999, respectively. (d) Collateralized by property and equipment with an aggregate carrying value of $12 and $15 at January 29, 2000 and January 30, 1999, respectively. (e) 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 29, 2000 and January 30, 1999, exclusive of commercial paper, was approximately $932 and $980, 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 of $368 is classified as long-term debt at January 29, 2000 and 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 $152 at January 29, 2000 was included in short-term debt. Additionally, the company has lines of credit with various banks to meet the short-term financing needs of its foreign subsidiaries. The weighted-average interest rates on short-term borrowings outstanding at January 29, 2000 and January 30, 1999 were 4.8% and 3.8%, respectively. The annual maturities of long-term debt at January 29, 2000, excluding commercial paper of $368, are as follows: - --------------------------------------------------------------- 2000 $ 21 2001 55 2002 10 2003 352 2004 10 2005 and subsequent 435 =============================================================== $ 883 =============================================================== 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 29, 2000 are as follows: Gross Net minimum Sublease minimum rentals income rentals - --------------------------------------------------------------- 2000 $ 353 $ 23 $ 330 2001 349 20 329 2002 344 18 326 2003 341 15 326 2004 333 12 321 2005 and subsequent 2,968 59 2,909 =============================================================== $ 4,688 $ 147 $ 4,541 =============================================================== Total rent expense, net of sublease income was $350, $334 and $309 in 1999, 1998 and 1997, respectively. 30 STOCKHOLDERS' EQUITY The common shares of the company, par value $0.10 per share, were as follows: January 29, January 30, 2000 1999 - --------------------------------------------------------------- Authorized shares 650.0 650.0 - --------------------------------------------------------------- Issued shares 300.4 300.4 - --------------------------------------------------------------- Treasury shares 61.1 49.8 =============================================================== Issued and outstanding shares 239.3 250.6 =============================================================== EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: 1999 1998 1997 - --------------------------------------------------------------- Numerator: Net income/(loss) available to common stockholders $ 279 $ (132) $ 490 Denominator for basic earnings per share - weighted average shares 244.8 265.4 285.3 Effect of diluted securities: Stock options, etc. .6 -- 3.1 Denominator for diluted earnings per share - adjusted weighted average shares 245.4 265.4 288.4 =============================================================== Basic earnings/(loss) per share $ 1.14 $ (0.50) $ 1.72 =============================================================== Diluted earnings/(loss) per share $ 1.14 $ (0.50) $ 1.70 =============================================================== Options to purchase approximately 38.7, 25.0 and 6.0 shares of common stock were outstanding during 1999, 1998 and 1997, respectively, but were not included in the computation of diluted earnings/(loss) per share because either the option exercise prices were greater than the average market price of the common shares, or the effect would be antidilutive. TAXES ON INCOME The provisions for income taxes consist of the following: 1999 1998 1997 - ---------------------------------------------------------------- Current: Federal $ (12) $ 78 $ 199 Foreign 17 18 35 State -- 20 30 - ---------------------------------------------------------------- 5 116 264 - ---------------------------------------------------------------- Deferred: Federal 31 (64) 32 Foreign 124 (9) (17) State 1 (17) 3 - ---------------------------------------------------------------- 156 (90) 18 ================================================================ Total tax provision $ 161 $ 26 $ 282 ================================================================ 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 29, January 30, 2000 1999 - ---------------------------------------------------------------- Deferred tax assets: Foreign loss carryforwards $ 330 $ 311 Restructuring 67 92 Other 48 51 - ---------------------------------------------------------------- Gross deferred tax assets 445 454 Valuation allowances related to foreign loss carryforwards (273) (141) - ---------------------------------------------------------------- $ 172 $ 313 - ---------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 316 281 LIFO inventory 30 50 - ---------------------------------------------------------------- Gross deferred tax liabilities $ 346 $ 331 ================================================================ Net deferred tax liability $ 174 $ 18 ================================================================ On January 29, 2000, the company had $845 of foreign loss carryforwards of which $340 must be utilized within the next five years and $505 over an indefinite period. The valuation allowances related to foreign loss carryforwards increased to $273 from $141 in recognition of the uncertainty of obtaining tax benefit from foreign loss carryforwards. A reconciliation of the federal statutory tax rate with the effective tax rate follows: 1999 1998 1997 - ----------------------------------------------------------------- Statutory tax rate 35.0% (35.0)% 35.0% State income taxes, net of federal income tax benefit 0.6 4.2 3.2 Foreign taxes (2.6) (22.4) (2.3) Valuation allowances for foreign loss carryforwards 30.0 74.7 -- Tax benefit of branch election (22.5) -- -- Subpart F income 1.0 8.5 -- Foreign tax credits (1.6) (6.8) -- Amortization of goodwill 0.7 3.0 0.4 Other, net (4.1) (1.7) 0.2 ================================================================= Effective tax rate 36.5% 24.5% 36.5% ================================================================= In 1999, the company elected to treat two of its foreign subsidiaries as U.S. branches, claimed deductions for its investments in these subsidiaries, and reduced its current tax expense. In future years, income earned by these foreign subsidiaries can be offset by foreign loss carryforwards but will be subject to current U.S. income tax. In 1998, certain foreign tax benefits have been offset by valuation allowances related to foreign loss carryforwards due in part to the restructuring and other charges recorded in 1998. 31 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 $568 at January 29, 2000. Net income taxes of approximately $167 would be due if these earnings were to be remitted. 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 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. Prior to June 10, 1999, options granted to directors are exercisable 20% each year on a cumulative basis commencing one year from the date of grant. Effective June 10, 1999, the options granted to directors are exercisable one-third on a cumulative basis commencing on the third, fourth and fifth anniversaries 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, 0.25 options vest 20% each 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. Of this total, 0.25 options became vested on September 5, 1999, 1998 and 1997. 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 29, 2000, an aggregate of 45.3 shares of authorized common stock were reserved for all of the Plans noted above, of which 5.5 were available for future grants. All outstanding options expire at dates ranging from January 31, 2000 to January 17, 2010. Stock option transactions are summarized as follows: Exercise Price Weighted-Average Shares Per Share Exercise Price - -------------------------------------------------------------------------------- Outstanding at February 1, 1997 23.2 $12.33 - $40.94 $ 25.82 Granted 6.8 25.38 - 36.47 34.74 Exercised (3.3) 12.33 - 33.13 22.11 Canceled (2.6) 13.00 - 40.94 28.82 - -------------------------------------------------------------------------------- Outstanding at January 31, 1998 24.1 14.78 - 40.94 29.12 - -------------------------------------------------------------------------------- Granted 17.7 16.94 - 28.38 22.18 Exercised (0.7) 14.78 - 27.81 17.99 Canceled (4.3) 14.99 - 39.88 28.89 - -------------------------------------------------------------------------------- Outstanding at January 30, 1999 36.8 14.78 - 40.94 26.02 - -------------------------------------------------------------------------------- Granted 9.7 11.69 - 24.22 18.63 Exercised (1.3) 18.16 - 25.44 17.71 Canceled (5.4) 18.16 - 39.88 25.34 - -------------------------------------------------------------------------------- Outstanding at January 29, 2000 39.8 $11.69 - $40.94 $ 24.59 ================================================================================ Options exercisable and the weighted-average exercise prices were 8.4 and $26.38 at January 31, 1998, 10.8 and $28.25 at January 30, 1999, and 20.7 and $23.94 at January 29, 2000, respectively. 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 interpretations 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: 1999 1998 1997 - ---------------------------------------------------------------- Net income/(loss) - as reported $ 279 $ (132) $ 490 Net income/(loss) - pro forma 232 (162) 470 Basic earnings/(loss) per share - as reported 1.14 (0.50) 1.72 Basic earnings/(loss) per share - pro forma 0.95 (0.61) 1.65 Diluted earnings/(loss) per share - as reported 1.14 (0.50) 1.70 Diluted earnings/(loss) per share - pro forma 0.95 (0.61) 1.63 ================================================================ 32 The weighted-average fair value at date of grant for options granted in 1999, 1998 and 1997 was $6.26, $5.31 and $7.66, 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 1997 through 1999, a range of assumptions are provided below: 1999 1998 1997 - -------------------------------------------------------------------------------- Expected stock price volatility .351 - .568 .283 - .347 .294 - .334 Risk-free interest rate 4.7% - 6.7% 4.7% - 5.8% 5.0% - 6.9% 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 $48, $41 and $39 have been charged to earnings in 1999, 1998 and 1997, respectively. ACQUISITION On August 20, 1999, the company acquired all of the capital stock of Imaginarium Toy Centers, Inc. ("Imaginarium"), a leading educational specialty retailer with 41 stores in 13 states, for approximately $43 in cash and the assumption of certain liabilities. The acquisition is accounted for using the purchase method of accounting and the results of Imaginarium operations have been combined with those of the company from the date of acquisition. The excess of purchase price over net assets acquired of approximately $38 has been recorded as goodwill and is being amortized on a straight-line basis over the estimated useful life of 10 years. The operating results of Imaginarium from the date of acquisition were not material to the overall results or financial condition of the company, as such, proforma information has not been provided. SEGMENTS The company's reportable segments are Toys"R"Us-USA, Toys"R"Us - International, Toys"R"Us-Japan, Babies"R"Us and toysrus.com. The division that does not meet quantitative reportable thresholds is Kids"R"Us. Toys"R"Us - USA 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 income/(loss) before income taxes, are as follows: Year ended - --------------------------------------------------------------------------- January 29, January 30, January 31, 2000 1999 1998 - --------------------------------------------------------------------------- Sales Toys"R"Us - USA $ 6,819 $ 6,581 $ 6,814 Toys"R"Us - International(b) 1,990 2,090 2,072 Toys"R"Us - Japan(c) 1,208 906 795 Babies"R"Us 1,036 810 563 toysrus.com 49 -- -- Kids"R"Us 760 783 794 - --------------------------------------------------------------------------- Total $11,862 $11,170 $11,038 - --------------------------------------------------------------------------- Operating earnings/(loss) Toys"R"Us - USA $ 386 $ 501 $ 654 Toys"R"Us - International(b) 73 85 106 Toys"R"Us - Japan, net of minority interest(c) 88 61 59 Babies"R"Us 69 30 (6) toysrus.com (86) -- -- Kids"R"Us 18 29 47 General corporate expenses (28) (21) (16) Interest expense, net (80) (93) (72) Restructuring and other charges -- (698) -- - --------------------------------------------------------------------------- Earnings/(loss) before taxes on income $ 440 $ (106) $ 772 =========================================================================== Identifiable assets Toys"R"Us - USA $ 4,801 $ 4,300 $ 4,732 Toys"R"Us - International(b) 1,274 1,742 1,734 Toys"R"Us - Japan(c) 813 680 548 Babies"R"Us 389 295 232 toysrus.com 65 -- -- Kids"R"Us 427 472 504 Corporate(a) 584 410 213 =========================================================================== Total $ 8,353 $ 7,899 $ 7,963 =========================================================================== Depreciation, amortization and asset write-offs Toys"R"Us - USA $ 172 $ 154 $ 158 Toys"R"Us - International(b) 47 52 52 Toys"R"Us - Japan(c) 16 11 9 Babies"R"Us 22 19 15 toysrus.com 2 -- -- Kids"R"Us 19 19 19 =========================================================================== Total $ 278 $ 255 $ 253 =========================================================================== (a) Consists primarily of cash and cash equivalents. (b) Excludes Toys"R"Us - Japan. (c) 80% owned. 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 included the closing of 50 toy stores in the International division, predominately in continental Europe, and 9 in the United States that did not meet the company's return on investment objectives. The plan also included the closing of 33 31 Kids"R"Us stores and conversion of 28 nearby USA toy stores into combination stores in the company's C-3 format. Combination stores include toys and an apparel selling space of approximately 5,000 square feet. Other charges consisted 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 related to domestic operations and $184 related to international operations. 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 $0.86 per share). Of this charge, $253 related to markdowns required to clear excess inventory from its stores so the company could 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 related to domestic operations and $57 related to International operations. Remaining reserves of $14 are expected to be used in the company's upcoming business cycle. Additionally, in the fourth quarter of 1998 the company recorded a charge of $20 ($13 net of tax benefits, or $0.05 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). The company intends to execute the remainder of the initiatives included in its repositioning program and will utilize the remaining reserves of $117 as these initiatives are completed. The company has substantially completed its restructuring program that was announced in 1995, with the exception of long-term lease commitment reserves that will be utilized throughout 2000 and thereafter. The company believes all reserves are adequate to complete its restructuring programs. 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. The appeal was argued on May 18, 1999 and is awaiting decision from the Court. 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 had 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 had 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 filed a suit against the company in their capacity as representatives of the consumers of their states, alleging that the company had violated federal and state antitrust laws as a consequence of the behavior alleged in the FTC complaint. These suits sought damages in unspecified amounts and other relief under state and/or federal law and were consolidated in the United States District Court for the Eastern District of New York. 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 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 Court granted final approval of the agreement on February 17, 2000. The company had accrued all anticipated costs relating to this matter as of January 30, 1999. The company is party to certain other litigation which, in management's judgement, based in part on the opinion of legal counsel, will not have a material adverse effect on the company's financial position. [Photo Omitted] 34 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 auditing standards generally accepted in the United States, including a review of financial reporting matters and internal controls to the extent necessary to express an opinion on the consolidated financial statements. /s/ Louis Lipschitz - ------------------- Louis Lipschitz 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 29, 2000 and January 30, 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended January 29, 2000. 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 auditing standards generally accepted in the United States. 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 29, 2000 and January 30, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP - --------------------- New York, New York March 8, 2000 35 Directors and Officers Note of Thanks On behalf of the "R"Us family, we would like to express our deep appreciation to Robert A. Bernhard and Howard W. Moore who are retiring from our Board of Directors this year. Bob became a member of the Board of Directors in 1980 and Howard in 1984. They both served our Board and our company with distinction, and their insight and counsel will be greatly missed. Their commitment and dedication to our company was exemplary, and we sincerely thank them for their tireless efforts on behalf of us all. Bob and Howard may be leaving our Board of Directors, but we know that in their hearts they will always be true Toys"R"Us kids. With deepest appreciation, The"R"Us Family 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. JOHN H. EYLER, JR. President and Chief Executive Officer of the company CALVIN HILL Consultant SHIRLEY STRUM KENNY President, State University of New York at Stony Brook NORMAN S. MATTHEWS Consultant and former Vice Chairman of the Board and President of Federated Department Stores HOWARD W. MOORE Consultant ARTHUR B. NEWMAN Senior Managing Director, Blackstone Group Corporate and Administrative JOHN H.EYLER, JR. President and Chief Executive Officer MICHAEL G. SHANNON President - Administration and Logistics WARREN F. KORNBLUM Executive Vice President - Worldwide Marketing and Brand Management LOUIS LIPSCHITZ Executive Vice President - Chief Financial Officer 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 REBECCA A. CARUSO Vice President - Corporate Communications MICHAEL J. CORRIGAN Vice President - Compensation and Benefits RICHARD N. CUDRIN Vice President - Associate Relations MARIANITA HOWARD Vice President - Creative Services JON W. KIMMINS Vice President - Treasurer DAVID P. PICOT Vice President - Real Estate, Design and Construction DION C. ROONEY Vice President - Systems Development MICHAEL L. TUMOLO Vice President - Counsel PETER W. WEISS Vice President - Taxes DENNIS J. BLOCK Secretary Partner - Cadwalader, Wickersham & Taft 36 Toys"R"Us United States GREGORY R. STALEY President JAMES E. FELDT Executive Vice President President - Merchandising and Marketing DENNIS J. WILLIAMS Senior Vice President - Operations KRISTOPHER M. BROWN Vice President - Logistics STEVEN M. COOK Vice President - Distribution Operations THOMAS F. DELUCA Vice President - Imports, Product Development and Safety Assurance ANDREW R. GATTO Vice President - Product Development ALBERT FORTIER Vice President - World Leader EMANUEL J. FRANCIONE Vice President - World Leader JONATHAN M. FRIEDMAN Vice President - Chief Financial Officer DANIEL D. HLAVATY Vice President - Loss Prevention JEREL G. HOLLENS Vice President - Merchandise Planning FREDERICK L. HURLEY Vice President - World Leader ELIZABETH S. JORDAN Vice President - Human Resources MITCHELL B. LOUKOTA Vice President - World Leader JULIE E. LYNN Vice President - World Leader THOMAS J. LYNN Vice President and President of Imaginarium Stores CHARLENE MADY Vice President - Area Merchandise Planning GERALD S. PARKER Vice President - Sales and Service TIMOTHY J. SLADE Vice President - Store Planning WILLIAM A. STEPHENSON Vice President - Merchandise Planning and Allocation DAVID S. WALKER Vice President - Advertising THOMAS A. DRUGAN Regional Vice President - Midwest HARVEY J. FINKEL Regional Vice President - Northeast MICHAEL K. HEFFNER Regional Vice President - West SAMUEL M. MARTIN Regional Vice President - Pacific JOHN J. PRAWLOCKI Regional Vice President - Southeast EDWARD F. SIEGLER Regional Vice President - Mid-Atlantic KEVIN VANDERGRIEND Regional Vice President - Great Lakes Toys"R"Us International ERNEST V. SPERANZA Senior Vice President - Marketing ROBERT J. BAKER Vice President - Finance JOAN W. DONOVAN Vice President - General Merchandise Manager LARRY D. GARDNER Vice President - Operations 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 MONIKA MERZ President - Toys"R"Us Canada JOHN SCHRYVER Managing Director - Toys"R"Us Australia MANABU TAZAKI President - Toys"R"Us Japan ANTONIO URCELAY Managing Director - Toys"R"Us Iberia Babies"R"Us and Kids"R"Us RICHARD L. MARKEE President - Babies"R"Us and Chairman - Kids"R"Us JAMES G. PARROS Senior Vice President - Stores and Distribution Center Operations THERESE R. DENA Vice President - Planning and Allocation JAMES L. EASTON Vice President - General Merchandise Manager MARTIN E. FOGELMAN Vice President - General Merchandise Manager Babies"R"Us and Toys"R"Us VINCENT A. SCARFONE Vice President - Human Resources CHRISTOPHER M. SCHERM Vice President - Advertising DAVID E. SCHOENBECK Vice President - Operations - Babies"R"Us SANDEE A. SPRINGER Vice President - Divisional Merchandise Manager PAMELA B. WALLACK Vice President - Divisional Merchandise Manager ROBERT S. ZARRA Vice President - Chief Financial Officer Kids"R"Us and Babies"R"Us * Kids"R"Us Officer, unless otherwise indicated. toysrus.com JOHN BARBOUR Chief Executive Officer JONATHAN F. FOSTER Executive Vice President - Chief Operating Officer and Chief Financial Officer JOEL D. ANDERSON Vice President - General Manager RAYMOND L. ARTHUR Vice President - Finance and Controller LAWRENCE MC GUIRE Vice President - Human Resources JOHN P. SULLIVAN Vice President - General Manager GREGG TREADWAY Vice President - Logistics 37 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 - ------------------------------------------------------------ 1999 - ------------------------------------------------------------ Net Sales $2,166 $2,204 $2,465 $5,027 Cost of Sales 1,505 1,522 1,704 3,590 Net Earnings 17 12(a) 15(a) 235(a) Basic Earnings per Share $ .07 $ .05 $ .06 $ .98 Diluted Earning s per Share $ .07 $ .05 $ .06 $ .98 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)(b) 310(c) Basic Earnings/(Loss) per Share $ .07 $ .05 $(1.85) $ 1.23 Diluted Earnings/(Loss) per Share $ .07 $ .05 $(1.85) $ 1.23 (a) Includes costs to establish and operate toysrus.com, the company's Internet subsidiary as follows: Second quarter - $5 million ($3 million net of tax, or $0.01 per share). Third quarter - $17 million ($11 million net of tax, or $0.04 per share). Fourth quarter - $64 million ($41million net of tax, or $0.17 per share). (b) Includes restructuring and other charges of $678 ($495 net of tax benefits, or $1.93 per share) (c) Includes 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 January 31, 1998. The company has not paid any cash dividends, however, the Board of Directors of the company reviews this policy annually. The company had approximately 31,100 Stockholders of Record on March 7, 2000. High Low - --------------------------------------------------------------- 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 - --------------------------------------------------------------- 1999 1st Quarter 23 1/4 13 5/8 2nd Quarter 24 3/4 15 15/16 3rd Quarter 17 3/16 13 1/8 4th Quarter 19 9 3/4 Store Locations Stores Across the United States Toys Kids Babies Imaginarium - -------------------------------------------------------------------------------- Alabama 8 1 2 -- Alaska 1 -- -- -- Arizona 12 -- 3 1 Arkansas 4 -- -- -- California 88 22 13 7 Colorado 11 -- 2 -- Connecticut 11 5 -- 2 Delaware 2 1 1 -- Florida 47 10 10 -- Georgia 20 4 6 -- Hawaii 1 -- -- -- Idaho 2 -- -- -- Illinois 35 19 6 2 Indiana 13 7 2 -- Iowa 8 1 -- -- Kansas 5 1 1 -- Kentucky 8 -- 2 1 Louisiana 11 -- 1 -- Maine 2 1 -- -- Maryland 19 8 3 4 Massachusetts 19 6 4 -- Michigan 25 13 6 -- Minnesota 11 2 1 2 Mississippi 5 -- -- -- Missouri 13 4 3 -- Montana 1 -- -- -- Nebraska 3 -- -- -- Nevada 4 -- 2 -- New Hampshire 5 2 -- -- New Jersey 26 18 8 7 New Mexico 4 -- -- -- New York 47 24 6 3 North Carolina 16 1 5 -- North Dakota 1 -- -- -- Ohio 33 18 8 5 Oklahoma 5 -- 1 -- Oregon 8 -- 2 1 Pennsylvania 33 15 3 -- Rhode Island 1 1 1 -- South Carolina 9 -- 3 -- South Dakota 2 -- -- -- Tennessee 15 2 4 -- Texas 54 8 13 -- Utah 6 3 1 -- Vermont 1 -- -- -- Virginia 22 5 6 2 Washington 15 -- 2 3 West Virginia 4 -- -- -- Wisconsin 10 3 -- -- Puerto Rico 4 -- -- -- ================================================================================ 710 205 131 40 ================================================================================ Toys"R"Us International - 462 - -------------------------------------------------------------------------------- Australia - 23 Austria - 7 Bahrain - 1(a) Canada - 63 Denmark - 10(a) France - 31 Germany - 53 Hong Kong - 5(a) Indonesia - 3(a) Israel - 19(a) Japan - 91(b) Malaysia - 5(a) Netherlands - 10(a) Norway - 1(a) Portugal - 6 Qatar - 1(a) Saudi Arabia - 3(a) Singapore - 4(a) South Africa - 7(a) Spain - 30 Sweden - 7(a) Switzerland - 4 Taiwan - 6(a) Turkey - 7(a) United Arab Emirates - 2(a) United Kingdom - 63 (a) Franchise or joint venture. (b) 80 % owned. 38 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 200 Fifth Club, 200 Fifth Avenue, New York, New York, on June 7, 2000 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 its 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 29, 2000, 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 15, 2000 1st Quarter Results Aug. 14, 2000 2nd Quarter Results Nov. 13, 2000 3rd Quarter Results Jan. 4, 2001 Holiday Sales Results Mar. 14, 2001 2000 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 above address. Visit us on the Internet at www.toysrus.com and www.imaginarium.com. [Photo Omitted] 39 [Logo] Toys "R" Us [Logo] Kids "R" Us(R) [Logo] Babies "R" Us(R) [Logo] toysrus.com(R) Imaginarium(R) EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT AS OF JANUARY 29, 2000 - -------------------------------------------------------------------------------- Name Jurisdiction of Incorporation - -------------------------------------------------------------------------------- ABG Corp. Nevada - -------------------------------------------------------------------------------- Baby Superstore, Inc. South Carolina - -------------------------------------------------------------------------------- Geoffrey, Inc. Delaware - -------------------------------------------------------------------------------- MLK, Inc. Missouri - -------------------------------------------------------------------------------- MMT, Inc. Utah - -------------------------------------------------------------------------------- Toysrus.com, Inc. Delaware - -------------------------------------------------------------------------------- Toysrus.com, LLC Delaware - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- Toys "R" Us - Value, Inc. Arkansas - -------------------------------------------------------------------------------- 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 Trust Pennsylvania - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Name Jurisdiction of Incorporation - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- TRU (HK) Limited Hong Kong - -------------------------------------------------------------------------------- IOCA Limited Ireland - -------------------------------------------------------------------------------- Toys "R" Us - Japan, Ltd. Japan - -------------------------------------------------------------------------------- Toys "R" Us (Luxembourg) S.A. Luxembourg - -------------------------------------------------------------------------------- Toys (Labuan) Ltd. Malaysia (Labuan) - -------------------------------------------------------------------------------- Sumus Nos Limited Mauritius - -------------------------------------------------------------------------------- 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, Iberia, S.A. Spain - -------------------------------------------------------------------------------- Toys "R" Us, Aktiebolag Sweden - -------------------------------------------------------------------------------- Toys R Us AG Switzerland - -------------------------------------------------------------------------------- Toys "R" Us Holdings PLC United Kingdom - -------------------------------------------------------------------------------- Toys "R" Us Holdings (UK) Limited United Kingdom - -------------------------------------------------------------------------------- Toys "R" Us Limited United Kingdom - -------------------------------------------------------------------------------- Toys "R" Us Properties Limited United Kingdom - -------------------------------------------------------------------------------- Tru Toys (UK) Limited United Kingdom - -------------------------------------------------------------------------------- EX-23 10 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 8, 2000, included in the 1999 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, 33-11461, 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, 333-61827 and 333-82377) of Toys "R" Us, Inc. and subsidiaries of our report dated March 8, 2000, with respect to the consolidated financial statements incorporated herein by reference. /s/ Ernst & Young LLP New York, New York April 26, 2000 EX-24 11 POWER OF ATTORNEY Exhibit 24 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 29, 2000, 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 7th day of March, 2000. Name Title Signature ---- ----- --------- 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 ------------------------- Howard W. Moore Director /s/ Howard W. Moore ------------------------- Arthur B. Newman Director /s/ Arthur B. Newman ------------------------- EX-27 12 FDS --
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and 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. YEAR JAN-29-2000 JAN-31-1999 JAN-29-2000 584,000 0 182,000 0 2,027,000 2,873,000 6,232,000 1,777,000 8,353,000 2,838,000 1,230,000 30,000 0 0 3,650,000 8,353,000 11,862,000 11,862,000 8,321,000 0 278,000 0 80,000 440,000 161,000 279,000 0 0 0 279,000 1.14 1.14
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