-----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, S5UQe0Z//Uc9IC+F5uZy8p+hfC6OUxAr76nqFLJWLxMGs+l1mPGi50c0Jj/kJAe1 KANVhmZI0mRCR7M25AUgug== 0000891092-01-500098.txt : 20010503 0000891092-01-500098.hdr.sgml : 20010503 ACCESSION NUMBER: 0000891092-01-500098 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010203 FILED AS OF DATE: 20010502 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: 1620463 BUSINESS ADDRESS: STREET 1: 225 SUMMIT AVENUE STREET 2: C/O TOYS R US NATIONAL OFFICES CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2012627800 MAIL ADDRESS: STREET 1: C/O TOYS R US NATIONAL OFFICES STREET 2: 258 SUMMIT AVENUE CITY: MONTVALE STATE: NJ ZIP: 07645 10-K 1 file001.txt 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 February 3, 2001 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 Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At April 11, 2001, the aggregate market value of voting stock held by non-affiliates was $4,988,189,004 based on the 197,552,040 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 February 3, 2001 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 6, 2001 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 .............. 12 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ................................ 12 Item 6. Selected Financial Data .......................................... 12 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition .................. 12 Item 7a. Qualitative and Quantitative Disclosures About Market Risk ....... 12 Item 8. Financial Statements and Supplementary Data ...................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 13 PART III Item 10. Directors and Executive Officers of the Registrant ............... 14 Item 11. Executive Compensation ........................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................................... 16 Item 13. Certain Relationships and Related Transactions ................... 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................................................... 17 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 February 3, 2001, the company was engaged in the operation of 1,581 retail stores consisting of 1,090 United States locations comprised of 710 toy stores under the name "Toys "R" Us," 198 children's clothing stores under the name "Kids "R" Us," 145 infant-toddler stores under the name "Babies "R" Us", and 37 educational specialty stores under the name "Imaginarium". Internationally, the company operates 491 toy stores, including franchise stores, under the name "Toys "R" Us." The company also sells merchandise through its Internet sites at www.toysrus.com, www.babiesrus.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 Initial Public Offering of Toys "R" Us - Japan, ltd. ("Toys - Japan") On April 24, 2000, the company completed the initial public offering in Japan of shares of Toys - Japan. As a result of this transaction, the company's ownership percentage in the common stock of Toys - Japan was reduced from 80% to 48%. The company is no longer in a position to exert control over the operations of Toys - - Japan. Accordingly, the company no longer consolidates the financial statements of Toys - Japan. Toys - Japan operates as a licensee of the company. The company has accounted for its investment in the common stock of Toys - Japan under the equity method of accounting since April 24, 2000. For further discussion of this transaction refer to Management's Discussion and Analysis of Results of Operations and Financial Condition and to Notes to Consolidated Financial Statements on pages 24 and 30, respectively, in the company's 2000 Annual Report On-line Retailing Strategic Initiatives As part of the company's strategy to become the global leader in the on-line retail market for toys, children's and baby products, several major strategic initiatives were implemented during 2000. On February 24, 2000, the company entered into a partnership agreement with SOFTBANK Venture Capital and affiliates ("SOFTBANK") which included an investment of $60 million in Toysrus.com for a 20% ownership interest. Subsequent to that date, Toysrus.com received additional capital contributions totaling $37 million from SOFTBANK representing its proportionate share of funding required for the operation of Toysrus.com. On August 9, 2000, Toysrus.com entered into a 10-year strategic alliance with Amazon.com to create a co-branded toy and video game on-line store, which was launched on September 14, 2000. In addition, a co-branded baby products on-line store is scheduled to be opened in the first half of 2001. This alliance capitalizes on the strengths of these two organizations. Toysrus.com will be responsible for merchandising and content for the co-branded store and will identify, purchase, own and manage the inventory. Amazon.com will handle site development, order 2 fulfillment, customer service and the housing of Toysrus.com's inventory in Amazon.com's U.S. distribution centers. The company plans to continue strategic investments in Toysrus.com to capitalize on the company's brand names, brick and mortar assets, SOFTBANK's internet experience and the strength of Amazon.com's internet presence and distribution capabilities. By capitalizing on the strengths of each of these organizations, the company believes it will achieve the goal of making Toysrus.com the global leader in the on-line retail market for toys, children's and baby products. For further discussion of Toysrus.com refer to Management's Discussion and Analysis of Results of Operations and Financial Condition and to Notes to Consolidated Financial Statements on pages 24 and 34, respectively, in the company's 2000 Annual Report. 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 accelerated 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. Refer to Item I. (c) - "Toys "R" Us - United States" for a description of C-3 format stores. In addition, this division operated 37 leased store locations in 13 states under the "Imaginarium" brand name as of February 3, 2001. 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. In addition to incorporating Imaginarium shops with its refined C-3 format stores, the company plans on opening approximately 12 Imaginarium stores in 2001. 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 into the company's new C-3 format, the closing of certain underperforming toy stores and the consolidation of certain distribution centers. The strategic plans also included the closing of 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. During 2000, the company updated its review of all of these initiatives including the closing of stores, distribution centers and other restructuring actions. Based upon this review, the company's revised estimates to complete these initiatives indicated that certain reserves were either no longer required or were in excess of the required amount, while other initiatives required additional reserves. As a result, the company reversed an $11 million reserve in 2000. The company believes the unused reserves existing at February 3, 2001 are reasonable estimates of what is required to complete these actions. These reserves are expected to be utilized in the company's upcoming business cycle, with the exception of long-term lease commitment reserves that will be utilized throughout 2001 and thereafter. 3 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 February 3, 2001, the unutilized portion of these announced markdowns and other charges totaled $7 million. The company believes the unused reserves existing at February 3, 2001 are reasonable estimates of what is required to complete the store closing initiatives. The implementation of the strategic initiatives, markdowns and other charges described above are expected to continue to have a 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 page 35 of the company's 2000 Annual Report, as well as in Management's Discussion and Analysis of Results of Operations and Financial Position on pages 22 and 23 of the company's 2000 Annual Report, which sections are incorporated herein by reference. 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 2001 and thereafter. (b) Financial Information About Industry Segments Information about industry segments, as set forth in the Notes to the Consolidated Financial Statements on page 35 of the company's 2000 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 differentiates its core merchandise content as well as its greatly improved customer service and consistent in-stock position. 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 promotional alliances include the new line of toy tool products carrying the Home 4 Depot name, Scholastic boutiques offering a unique line of Scholastic branded educational products, and other exclusive branded product relationships including Animal Planet and OshKosh B'Gosh. The merchandising strategy for Toys "R" Us is to continually 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 believes it will maintain strong 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. Toys "R" Us operated 710 stores in the United States as of February 3, 2001, comprised of 165 refined C-3 format stores, 179 Toys "R" Us/Kids "R" Us combo stores, of which 103 are included in the refined C-3 format, and 469 traditional and other format stores. A combo store is a Toys "R" Us store with approximately 4,000 to 6,000 square feet dedicated to apparel. The company intends to convert approximately 250 additional existing traditional format stores to the refined C-3 format in 2001, including approximately 100 to the refined C-3 combo format. Therefore, approximately 415 stores, or almost 60% of the division's stores will be operating in the refined C-3 format by the 2001 Holiday Season. The company's strategic initiative to convert existing Toys "R" Us stores into a refined 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 improved C-3 enhanced store layout creates lower gondolas, 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 new C-3 sales floor is extended by 20% and has a one-third reduction in the size of the backroom. The company is continually refining the C-3 format based on consumer preferences. The enhanced C-3 store layout includes 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" and "Home Depot" merchandise and enhanced training for store associates in product knowledge, sales and service. In conjunction with the layout and content changes, the stores also included 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 new C-3 store concept. The company utilizes a merchandise "world" concept in Toys "R" Us stores. 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) 5 Toys "R" Us opened 3 new toy stores while closing 3 stores in 2000. The company utilizes demographic data to determine which markets to enter. In 2001, the company intends to focus on continuing to implement the refined C-3 store concept rather than on opening new stores. The company is planning the conversion of approximately 250 stores into the refined C-3 format in 2001. The company is building the world's biggest toy store in New York's Times Square, which is scheduled to be open in the Fall of 2001. The flagship store will feature approximately 115,000 square feet with attractions, such as a ferris wheel, life size Barbie dollhouse, giant video screens and other unique elements and special events as well as a large assortment of merchandise for children and their families. This site will also be used as a launching site for vendors to introduce new products. 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 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 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 enhance these 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 2001. 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 27 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 31 new toy stores, including 30 franchise stores while closing 2 stores in 2000. Utilizing demographic data to determine which markets to enter, the company plans to add approximately 20 new toy stores in 2001, including approximately 17 franchise stores. International intends to introduce new proprietary brands and shopping "worlds" within certain store locations in 2001. The initiatives to be rolled out include Animal Alley, Imaginarium-type Learning Centers, Teentronics, Animal Planet and Babies "R" Us shops. International will also be introducing elements from the refined C-3 store format being utilized in certain Toys "R" Us -United States store locations as described above. These elements will include more guest-friendly features and standardized graphics that will make these stores easier to shop. 6 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 2000, Kids "R" Us closed seven underperforming stores. The underperforming locations were closed as outlined in the 1998 restructuring program. The company plans to close approximately 15 additional Kids "R" Us stores in 2001. Kids "R" Us is also responsible for the merchandising 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. In November 2000, a new store prototype was opened incorporating significant design changes from a traditional Kids "R" Us apparel store. The new store prototype is intended to allow ease of shopping, have better store layouts, improved visual presentations and merchandise assortments that are more appealing to consumers. Initial results have been encouraging. The company intends to remodel an additional seven stores to the new prototype in 2001. Kids "R Us is also testing a "Lifestyle Shop" concept in certain stores. These 2000 square foot sections of the stores are filled with an assortment of non-apparel merchandise such as fashion accessories, bath and body products, cosmetics, home decor, kids' electronics, Animal Alley plush merchandise and other items. Approximately 100 Lifestyle Shops will be created in Kids "R" Us stores in 2001. Apparel also continues to be a key element of the C-3 combo store format and Babies "R" Us shopping experiences. The retail apparel business fluctuates according to changes in consumer preferences dictated in part by fashion, perceived value and season. These fluctuations affect the 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. Babies "R" Us The company launched Babies "R" Us with its first six store openings in 1996. These stores target the pre-natal to preschool market in a 24,000 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. As of February 3, 2001, Babies "R" Us operated 17 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 7 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 16 Babies "R" Us stores in 2000, closed 2 underperforming stores and operated 145 Babies "R" Us stores in the United States as of February 3, 2001. 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 2001, some of which will be the new 24,000 square foot prototype. The company utilizes its existing distribution network to service the needs of the Babies "R" Us division. Toysrus.com Toysrus.com sells merchandise directly to the public via the Internet at www.toysrus.com and www.babiesrus.com as a subsidiary of the company. The company opened its virtual doors to the public in June 1998. A redesigned website was launched in May 1999. In July 2000, the company launched babiesrus.com, which specializes in baby and infant products. In order to provide optimal customer service and order fulfillment in the rapid growth and highly seasonal on-line toy retail business, a strategic alliance was formed with Amazon.com and a co-branded store was launched in September of 2000. This co-branded store offers a broad selection of toys, games, video game software, video game hardware 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. (d) Trademarks "TOYS "R" US", "KIDS "R" US", "BABIES "R" US" and "Imaginarium", as well as variations 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 40 of the company's 2000 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 page 23 of the 8 company's 2000 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. (h) Employees At February 3, 2001, the company employed approximately 69,000 individuals. Due to the seasonality of the company's business, employment rose to approximately 121,000 during the 2000 Holiday Season. ITEM 2. PROPERTIES See the Note, "Leases," in the company's Notes to Consolidated Financial Statements included on page 32 of the company's 2000 Annual Report, which note is incorporated herein by reference. Also see the section "Store Locations" on the inside back cover page of the company's 2000 Annual Report, which section is incorporated herein by reference. The following information related to properties is as of February 3, 2001: Toys "R" Us - United States 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, 436 of which are owned and 274 are leased and 11 distribution centers, 6 of which are owned and 5 are leased. This division also operates 37 Imaginarium stores, all of which are leased. The distribution centers average approximately 464,000 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 279 stores, excluding 212 franchised stores, 107 of which are owned and 172 are leased. International also operates 6 distribution centers, 4 of which are owned and 2 9 are leased. Kids "R" Us Kids "R" Us operates 198 stand alone children's clothing stores, 101 of which are owned and 97 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 145 juvenile retail stores, 34 of which are owned and 111 are leased. Babies "R" Us stores are serviced by existing Toys "R" Us and Kids "R" Us distribution centers discussed above. Toysrus.com Toysrus.com leased three distribution centers as of February 3, 2001. These distribution centers will cease operation during 2001 in conjunction with the planned expansion of the strategic alliance with Amazon.com to include a co-branded baby products on-line store as mentioned in Item 1 (a) "On-line Retailing Strategic Initiatives" section. Toysrus.com leases a corporate office in Fort Lee, New Jersey. 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.; 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 was in violation of Section 5 of the Federal Trade Commission Act for its practices relating to warehouse clubs. The complaint alleged that the company reached understandings with various suppliers that such suppliers would not sell to the clubs the same items that they sell to the company. The complaint also alleged that the company "facilitated understandings" among the manufacturers that such manufacturers would not sell to clubs. The complaint sought 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. On August 1, 2000, the United States Court of Appeals affirmed the FTC's final order. 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 10 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 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 accrued all anticipated costs relating to this matter as of January 30, 1999. Class Action Suits against Toys "R" Us, Inc., et al. In August 2000, eleven purported class action lawsuits were filed (six in the United States District Court for the District of New Jersey, three in the United States District court for the Northern District of California, one in the United States District Court for the Western District of Texas and one in the Superior Court of the State of California, County of San Bernadino), against the company and its affiliates Toysrus.com, Inc. and Toysrus.com, LLC. In September 2000, three additional purported class action lawsuits were filed (two in the Untied States District Court for the District of New Jersey and one in the United States District Court for the Western District of Texas). These actions generally purport to bring claims on behalf of all persons who have visited one or more of the company's web sites and either made an online purchase or allegedly had information about them unlawfully "intercepted," "monitored," "transmitted," or "used." All the suits (except one filed in the United States District Court for the District of New Jersey) also named Coremetrics, Inc. ("Coremetrics"), an internet marketing company, as a defendant. These lawsuits assert various claims under the federal privacy and computer fraud statutes, as well as under state statutory and common law, arising out of an agreement between the company and Coremetrics, alleging that the company tracks its web site users' activities online and shares that information with third parties in violation of the law. These suits seek damages in unspecified amounts and other relief under state and federal law. The company and Coremetrics filed a joint application with the Multidistrict litigation panel (the "MDL Panel") to have all of the federal actions consolidated and transferred to the United States District court for the Northern District of California. A hearing on that application was held on November 17, 2000, and all matters have now been consolidated in the United States District Court for the Northern District of California. The company believes that it has substantial defenses to these claims and plans to vigorously defend these lawsuits. 11 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 February 3, 2001. 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 40 of the company's 2000 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Selected financial data is hereby incorporated by reference to page 1 of the company's 2000 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 25 of the company's 2000 Annual Report. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative and quantitative disclosures about market risk are hereby incorporated by reference to pages 24 and 25 of the company's 2000 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are hereby incorporated by reference to pages 26 to 37 of the company's 2000 Annual Report. (a) Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000 (b) Consolidated Statements of Earnings for each of the three years in the period ended February 3, 2001 (c) Consolidated Statements of Cash Flows for each of the three years in the period ended February 3, 2001 (d) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended February 3, 2001 (e) Notes to Consolidated Financial Statements; and 12 (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 unconsolidated investees 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. 13 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 6, 2001 ("2001 Proxy Statement"). Executive Officers of the company (a) The following persons are the Executive Officers of the company as of April 11, 2001, 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 ---- --- ------------------------- - -------------------------------------------------------------------------------- John H. Eyler Jr. 53 President and Chief Executive Officer, and Director - -------------------------------------------------------------------------------- Michael G. Shannon 49 President - Administration and Logistics - -------------------------------------------------------------------------------- Francesca L. Brockett 41 Executive Vice President - Strategic Planning and Business Development - -------------------------------------------------------------------------------- James E. Feldt 46 Executive Vice President and President Merchandising and Marketing of Toys "R" Us United States Division - -------------------------------------------------------------------------------- Christopher K. Kay 49 Executive Vice President - General Counsel and Corporate Secretary - -------------------------------------------------------------------------------- Warren F. Kornblum 48 Executive Vice President - Worldwide Marketing and Brand Management - -------------------------------------------------------------------------------- Louis Lipschitz 56 Executive Vice President - Chief Financial Officer - -------------------------------------------------------------------------------- Richard L. Markee 47 Executive Vice President and President of Babies "R" Us Division and Chairman of Kids "R" Us Division - -------------------------------------------------------------------------------- Gregory R. Staley 53 Executive Vice President and President of Toys "R" Us United States Division - -------------------------------------------------------------------------------- Dorvin D. Lively 42 Senior Vice President - Corporate Controller - -------------------------------------------------------------------------------- 14 (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. 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 1996. 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 Toys "R" Us United States Division. From October 1998 to March 1999, he was Executive Vice President and Chief Administrative Officer. From prior to January 1996 to October 1998, he was President and Chief Executive Officer of Gayfer's/Maison Blanche. Ms. Brockett has been employed by the company since September 1998. Effective October 2000 she was appointed as Executive Vice President - Strategic Planning and Business Development. From September 1998 to October 2000, she was Senior Vice President - Strategic Planning and Business Development of the company. From August 1997 to September 1998, she was Senior Vice President - Strategic Planning of Tricon Global Restaurants. From prior to January 1996 to August 1997, she was Vice President - Business Development of Taco Bell Corporation. 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 prior to January 1996 to April 1997, he was Executive Vice President Merchandising, Allocation and Merchandise Distribution of Hills Department Stores. Mr. Kay has been employed by the company since September 2000 as Executive Vice President - General Counsel and Corporate Secretary. From April 1996 to September 2000, he was the founding partner of Kay, Gronek & Latham. From prior to January 1996 to April 1996, he was a partner at Foley & Lardner as well as Co-Chairman of Foley & Lardner's national antitrust litigation section. 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 January 1996 to November 1996, he was President, US Operations of Prism Communications. 15 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. 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 1996 to October 2000, he also served as President of Kids "R" Us Division. 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. Mr. Lively has been employed by the company since January 2001 as Senior Vice President - Corporate Controller. From October 1998 to January 2001, he was Vice President - Corporate Controller of Readers Digest Corporation. From prior to January 1996 to September 1998, he was Chief Financial Officer of Silverado Foods, Inc. 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 2001 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is hereby incorporated herein by reference to the sections, "Election of Directors", "Compensation of Directors", "Executive Compensation", "Summary Compensation Table", "Option Grants in Last Fiscal Year. "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Long-Term Incentive Plans - Awards in Last Fiscal Year" and "Employment Agreements" in the company's 2001 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 2001 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 2001 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 16 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 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. (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: May 2, 2001 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 2nd day of May, 2001. Signature Title --------- ----- * 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 Officer) Louis Lipschitz /s/ Dorvin D. Lively Senior Vice President - Corporate Controller - --------------------- (Principal Accounting Officer) Dorvin D. Lively * Michael Goldstein Chairman of the Board * RoAnn Costin Director * Calvin Hill Director * Nancy Karch Director * Shirley Strum Kenny Director 18 * Charles Lazarus Director, Chairman Emeritus * Norman S. Matthews Director * Arthur B. Newman Director 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 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 (v) Euro bond public indebtedness issued to refinance outstanding commercial paper obligations and (vi) yen denominated note payable collateralized by the expected future yen cash flows from license fees from Toys -- Japan. 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 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. Incorporated herein by reference to Exhibit 10P to registrant's Annual Report on Form 10-K for the year ended January 29, 2000. 10Q* Amendments to Retention Agreement between Toys "R" Us, Inc. and Gregory R. Staley dated May 6, 1999 and March 2, 2000, respectively. Incorporated herein by reference to Exhibit 10P to registrant's Annual Report on Form 10-K for the year ended January 29, 2000. 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 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. 10U* Amended Form of Retention Agreement for Executive Officers of Toys "R" Us, Inc. 10V* Retention Agreement between Toys "R" Us, Inc. and John H. Eyler, Jr. dated January 6, 2000. Incorporated herein by reference to Exhibit 10BB to registrant's Annual Report on Form 10-K for the year ended January 29, 2000. 10W* 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. 10X* 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. 10Y* 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. 10Z* 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. 10AA* Separation agreement between Toys "R" Us, Inc. and Keith Van Beek dated as of June 9, 1999. Incorporated herein by reference to Exhibit 10X to registrant's Annual Report on Form 10-K for the year ended January 29, 2000. 10BB* 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 ended July 31, 1999. 10CC* Separation agreement between Toys "R" Us, Inc. and Michael J. Madden dated as of September 24, 1999. Incorporated herein by reference to Exhibit 10AA to registrant's Annual Report on Form 10-K for the year ended January 29, 2000. 24 Exhibit No. Document ----------- -------- 13 Registrant's Annual Report to Stockholders for the year ended February 3, 2001. 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 March 2001. * 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.U 2 file002.txt EMPLOYMENT BETWEEN TOYS EMPLOYMENT AGREEMENT BETWEEN TOYS "R" US, INC. AND ---------- DATED AS OF ---------- TABLE OF CONTENTS 1. Employment Period.......................................................... 1 2. Terms of Employment........................................................ 1 (a) Position ......................................................... 1 (b) Compensation ..................................................... 1 (i) Base Salary.............................................. 1 (ii) Incentive Bonus.......................................... 1 (iii) Housing Allowance........................................ 2 (iv) Supplemental Executive Retirement Plan................... 2 (v) Stock Units.............................................. 2 (vi) Stock Options............................................ 2 (vii) Deferred Compensation Plan............................... 2 (viii) Participation in Other Plans............................. 2 (ix) Toys "R" Us Health Plan.................................. 2 (x) Life Insurance Plan...................................... 3 (xi) Long Term Disability Plan................................ 3 (xii) Savings and Profit Sharing Plan.......................... 3 (xiii) Stock Purchase Plan...................................... 3 (xiv) Vacation................................................. 3 (xv) Relocation............................................... 3 (xvi) Miscellaneous............................................ 3 3. Termination of Employment Upon Death, Disability or Retirement............. 4 4. Other Termination of Employment............................................ 4 (a) Company Termination............................................... 4 (b) Executive's Termination........................................... 4 (c) Notice of Termination............................................. 4 (d) Obligations of the Company Upon Termination Under Section 4....... 4 (e) Contract Non-Renewal............................................. 6 (f) Cause............................................................ 7 5. Release Agreement......................................................... 7 6. Offset.................................................................... 7 7. Compensation and Benefits Following Change of Control..................... 7 8. Nonexclusivity of Rights.................................................. 8 9. Full Settlement; Legal Fees............................................... 8 (a) No Obligation to Mitigate........................................ 8 (b) Expenses of Contests............................................. 8 10. Certain Additional Payments by the Company.............................. 9 11. Restrictions and Obligations of the Executive........................... 9 (a) Consideration for Restrictions and Covenants..................... 9 (b) Confidentiality.................................................. 9 (c) Non-Solicitation or Hire......................................... 10 (d) Non-Competition and Consulting................................... 10 (e) Definitions For purposes of this Section 11...................... 11 (f) Relief........................................................... 11 12. Successors............................................................... 12 13. Miscellaneous............................................................ 12 (a) Governing Law.................................................... 12 (b) Captions......................................................... 12 (c) Amendment........................................................ 12 (d) Notices.......................................................... 12 (e) Assistance to Company............................................ 13 (f) Severability of Provisions....................................... 13 (g) Withholding...................................................... 13 (h) Waiver........................................................... 13 (i) Arbitration...................................................... 13 EXHIBIT A Separation and Release Agreement EXHIBIT B Definitions EXHIBIT C Change of Control EXHIBIT D Stock Unit Agreement TOYS "R" US, INC. EMPLOYMENT AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and ____________________ (the "Executive"), dated as of __________________. 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 be employed by 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 Executive 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 Executive shall serve as __________________________ ("current position"), or such other Executive position to which the Executive may be appointed by the Company. The Executive shall be based in ------------------. (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 full time during normal business hours to the business and affairs of the Company and to use the Executive's best efforts to perform faithfully and efficiently such responsibilities. (b) Compensation (i) Base Salary The Executive will be paid an annual base salary of $_______________ per annum, which will be paid in accordance with the Company's regular payroll policies. The Executive will receive a performance and compensation evaluation annually, effective on or about April 1st of each year, the first of which will occur on or about ____________________. (ii) Incentive Bonus The Executive shall also be eligible, for each fiscal year ending during the Employment Period, to receive an annual incentive bonus and incentive awards pursuant to the Company's Incentive Plans and subject to the terms thereof at a level commensurate with the Executive's current grants and the Executive's current position or any more senior position(s) to which the Executive may be appointed. Each such incentive bonus shall be paid in accordance with the Company's incentive 1 Plans, prorated for the number of months the Executive is employed during each such fiscal year. For the period ending January 31, 2002, the Executive will be eligible for an annual incentive guaranteed to be no less than _____% of base salary regardless of performance with a target of ______% of base salary. Thereafter, there will be no guarantee. Instead, the Executive will be eligible for the incentive, as are other Company executives, based upon the following formula: two-thirds (2/3) of the annual incentive will be based on improvement on Economic Value Added (EVA) or such other financial measurement as determined by the Company, and one-third (1/3) will be based on individual strategic, non-financial goals. The Executive shall receive the first award under this plan on or about ___________________. [(iii) Housing Allowance The Executive shall receive, in lieu of a $___________ sign on bonus, a temporary monthly housing allowance for mutually acceptable accommodations in the ___________________ area for a period not exceeding ___________ months.] (iv) Supplemental Executive Retirement Plan Each year as of January 31st, a contribution will be made on the Executive's behalf equal to 11% of that portion of the Executive's actual cash compensation in the prior calendar year that exceeds the IRS limit (currently $170,000). The first contribution on the Executive's behalf will be made as of ___________________, based on _______ income. This is a non-qualified plan, which has been secured to the extent allowed by law through the use of a rabbi trust. In addition, this Plan includes a pre-retirement death benefit equal to five (5) times Executive's annual target cash compensation. The Executive insurance coverage will become effective as soon as the required underwriting can be completed. (v) Stock Units As further inducement for the Executive to enter into this Agreement and to continue in the employ of the Company, the Company has granted to the Executive ______________ shares of Restricted Stock, pursuant to the Stock Unit Agreement executed and delivered by the Company on the date hereof in the form attached as Exhibit D hereto. The Restricted Stock will become vested at the rate of fifty (50) percent after (2) years following the award date and one hundred (100) percent after (3) three years following the award date. (vi) Stock Options The Executive will receive a sign-on grant of ______________ stock options, which pending Board of Directors approval, will be effective as of the date of this agreement. The option price will be the average of the high and low trading prices on the date of the grant. Executive options are exercisable beginning 6 months following the grant date. These options will become vested at the rate of fifty (50) percent after two (2) years following the grant date, and one hundred (100) percent after three (3) years following the grant date. The Executive will also be eligible for an annual stock option grant of ____________ shares in _______________. (vii) Deferred Compensation Plan A variety of investment funds are available for deferral. (viii) Participation in Other Plans During the Employment Period, the 2 Executive shall be eligible to participate in all other Plans at a level commensurate with the Executive's position. (ix) Toys "R" Us Health Plan The Executive will be eligible to enroll in the Toys "R" Us Health Plan as of the Executive's employment date. In addition, the Executive will participate in the Company's Executive Medical Plan, which will reimburse the Executive for deductibles and co-payments required under the basic health plan. The Company's health plans include a pre-existing conditions limitation. Any health condition for which the Executive or a dependent has been diagnosed, received treatment or incurred expenses during the 90 days prior to the Executive's employment date may be excluded for a one-year period. (x) Life Insurance Plan The Company will provide life insurance and accidental death and dismemberment insurance equal to two times the Executive's total annual target cash compensation. The Executive will be covered from the Executive's employment date. The Company pays the full cost of this plan. Please note that this insurance is in addition to the 5x total cash benefit under the SERP. (xi) Long Term Disability Plan The Company will pay 60% of the Executive's base salary if the Executive becomes totally disabled for more than 90 days. The long term disability coverage will begin 90 days following the Executive's employment date. The Company pays the full cost of this plan. The Executive will also be able to purchase supplemental long term disability insurance to protect the Executive's bonus income. (xii) Savings and Profit Sharing Plan This Plan, which includes both a Company funded profit sharing contribution and voluntary 401(k) savings vehicle with Company matching contributions, is available one year following the Executive's employment date. (xiii) Stock Purchase Plan This Plan enables the Executive to purchase Toys "R" Us stock deductions through payroll. The Company will match 10% of your contributions and pay all commissions and fees on the purchase of Company stock. This Plan is available 90 days following your employment date. (xiv) Vacation The Executive will be eligible for four (4) weeks vacation beginning with the Executive's first year of employment. (xv) Relocation The Executive will be provided with a relocation package upon request from the date of this agreement until ________________ consisting of direct expenses for movement of Executive's household goods from ____________ to the ______________________ area, closing costs on the purchase of a new home and third party home purchase of Executive's existing home. (xvi) Miscellaneous The Executive will be provided with a leased automobile equal in value to a _____________. In addition, all insurance, gas, repairs, parking and 3 tolls are paid by the Company. The Executive will be responsible for all other costs associated with the use of the Company car. The Company will be responsible for _____________monthly parking garage fees incurred by the Executive for the duration of Executive's current position. 3. Termination of Employment Upon Death, Disability or Retirement The Executive's employment shall terminate upon the Executive'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 on the Date of Termination, except as specifically set forth herein or in the Stock Unit Agreement. 4. Other Termination of Employment (a) Company's Termination The Company may terminate the Executive's employment during the Employment Period with or without Cause. (b) Executive's Termination The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. (c) Notice of Termination (i) 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. The failure by the Executive 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 Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (ii) Resignation Without limiting the obligations of the Executive, or the rights of the Company, in connection with, or relating to, this Agreement, the Executive agrees that in order for the Executive to resign his employment without Good Reason with the Company or any of its Subsidiaries, the Executive 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 Executive 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 Executive shall not disclose to any third parties, other than executive search firms, prospective employers (collectively, the "Permitted Third Parties") and the Executive's spouse, his intention and/or decision to terminate employment with the Company. The Executive 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 Executives and directors of such Permitted Third Party who need to 4 know such information. (d) Obligations of the Company Upon Termination Under Section 4 If the Executive'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 Executive within 30 days after the Date of Termination in an amount equal to the sum of: (l) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid; (2) the targeted amount of the Executive'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 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; (3) the Executive's actual earned annual or incentive awards for any completed fiscal year or period not theretofore paid or deferred; (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 annual incentive bonus that would have been paid to the Executive with respect to the Company's fiscal year in which such Date of Termination occurred; (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 Executive would receive on an after-tax basis if the Executive's employment had continued for two years after the Date of Termination assuming for this purpose that the Executive's compensation for each such year would have been one-half of the amount paid pursuant to clause (ii) above, and the Executive 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 Executive an amount equal to the Company's cost had such benefits been continued; (iv) (1) All unvested options held by the Executive shall continue to vest in accordance with their terms for two years after the Date of Termination, and all remaining unvested options held by the Executive shall vest on the two year anniversary date of the Date of Termination; (2) all unvested profit shares held by the Executive or for the benefit of the Executive by a grantor trust 5 established by the Company shall continue to vest in accordance with their terms for two years after the Date of Termination and all remaining profit shares shall vest on the two year anniversary date of the Date of Termination, provided that, if permitted by the terms of any such trust, any unvested profit shares shall continue to be held by such grantor trust until such profit shares vest pursuant to this clause (iv) and any such unvested profit share not permitted to be so held shall vest immediately and be delivered to the Executive; (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by the Executive shall vest on the two year anniversary date of the Date of Termination on a pro rata basis determined by a fraction, the numerator of which is the number of months elapsed from the grant of such equity award through the Date of Termination plus the twenty-four months after the Date of Termination and the denominator of which is the total number of months in the vesting period for such award and shall be promptly delivered to the Executive entirely in the form of Common Stock, $.10 par value per share, of the Company; (4) any options held by the Executive 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 Executive shall not be entitled to any additional grants of any stock options, restricted stock, other equity based or incentive awards; and (v) The Executive will be entitled to continuation of health benefits under the Plans at a level commensurate with the Executive's current position or more senior position(s) to which the Executive may be appointed, and if the Executive elects to receive such health benefits, the Company shall pay the medical premiums therefore for the first twenty-four months after the Date of Termination, and thereafter the Executive shall pay the premium charged to former employees of the Company pursuant to Section 4980B of the Code for the twenty-fifth through forty-second months following the Date of Termination, after which such health benefits shall terminate; provided, that the Company can amend or otherwise alter the Plans to provide benefits to the Executive that are no less than those commensurate with the Executive's current position or more senior position(s) to which the Executive may be appointed; provided, that to the extent such 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; 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 Executive is employed by or is otherwise affiliated with a party that offers comparable health benefits to the Executive. (e) Contract Non-Renewal If the Executive's employment terminates upon the expiration of the initial two-year Employment Period due to the decision not to renew or extend the Employment Period other than for Cause (as to the Company's decision) or 6 Good Reason (as to the Executive's decision): (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 (l) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid; (2) the targeted amount of the Executive's annual bonus and 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 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 (3) the Executive's actual earned annual or incentive awards for any completed fiscal year or period not theretofore paid or deferred; and (ii) (1) All unvested options 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 be delivered to the Executive; (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by the Executive shall vest on the Date of Termination; and (4) any options held by the Executive that are vested on the Date of Termination or vest thereupon pursuant to this clause (ii) may be exercised until the earlier of (x) the thirty-month anniversary date of the Date of Termination and the expiration date of such options. (f) Cause If the Executive's employment shall be terminated for Cause during the Employment Period or if the Executive 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 Executive other than the obligation to pay to the Executive 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 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. Compensation and Benefits Following Change of Control (a) Notwithstanding any provision of this Agreement or any I Plan, in no 7 event shall any compensation or benefits, individually or in the aggregate, to which the Executive would be entitled be less favorable for the two years following a Change of Control than 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) In the event of termination of the Executive'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 the thirty-month anniversary date of the Date of Termination and the expiration date of such options. 8. 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. 9. 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 (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 Executive is successful with respect thereto, 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 the Stock Unit Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986 ("Code"), as amended, or any successor Section of the Code. 8 (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 Executive 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 the Stock Unit Agreement (including as a result of any contest by the Executive 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 Executive 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 Executive against, or defenses by the Executive 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 Executive 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 Executive (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 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 units of the Company as set forth in Section 2 hereof is the Executive's compliance with the undertakings set forth in this Section 11. Specifically, Executive agrees to comply with the provisions of this Section 11 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, 9 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 as may otherwise be required by law or legal process, communicate, divulge or use any such information, knowledge or data to anyone other than the Company and those designated by it. (c) Non-Solicitation or Hire During the Employment Period and for a two-year period following the termination of the Executive's employment for any reason, 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 Executive, general manager or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period), or; (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company. (d) Non-Competition and Consulting (i) During the Employment Period and for a two-year period (the "Consulting Period") following the termination of the Executive's employment for any reason, 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 10 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 Executive shall: (x) Be available to render services to the Company as an independent contract or/consultant but not as an employee of the Company; and (y) perform such duties as may be reasonably requested in writing from time to time during the Consulting Period by the Chief Executive Officer; provided that such duties shall not conflict with the duties of the Executive 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 Executive during any period following the termination of the Executives 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 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 such 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. (e) Definitions For purposes of this Section 11: (i) "Restricted Business" means Wal-Mart, K-Mart, Target, Kohl's, Noodle Kadoodle/Zany Brainy, e-toys, KB Toys, FAO Schwarz, Buy Buy Baby or any other business, including mail order or internet business, if more than one-third of the business' revenues are generated by the manufacture, marketing or sale of toys (including, without limitation, video games and computer software for kids, electronic toys and wheel goods), juvenile or baby products, juvenile furniture and children's clothing. (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. 11 (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 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 the purposes of restraining the Executive 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 Executive set forth in Section 11, except as required by law, the Executive shall not be entitled to any payments set forth in Section 3 or 4 hereof if the Executive breaches any of the covenants applicable to the Executive contained in this Section 11, the Executive 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 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 herein before 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. 12 (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: General Counsel; 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 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. (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 11 are a condition of this Agreement and are reasonable and valid in geographical and temporal scope and in all other respects. If any court or arbitrator determines that any of the covenants in Section 11, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion, if any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. (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 13 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 Northeastern New Jersey 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 for such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. IN WITNESS WHEREOF, the 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. ------------------------------ EXECUTIVE TOYS "R" US, INC. By: -------------------------- Name: ------------------------ Title: ----------------------- 14 EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Release Agreement") is entered into as of this ______ day of _____________, between Toys "R" Us, Inc. and any successor thereto (the "Company") and ______________________ (the "Executive"). The Executive and the Company agree as follows: 1. The employment relationship between the Executive and the Company will be terminated effective __________________ (the "Termination Date"). 2. In accordance with the rights, responsibilities, and obligations contained in Executive's Employment Agreement ("Employment Agreement") dated ____________ and the rights, responsibilities, and obligations contained herein, the Company agrees to pay the Executive certain payments after the Termination Date as follows: a. The Executive shall receive, on _____________, $__________, which represents __________ percent (____%) of Executive's targeted annual bonus and incentive awards for the fiscal year of _________. The Executive will receive an additional bonus for year ________ over the pro-rata period if the calculated bonus for the year ______ exceeds the targeted bonus for the year ______. b. The Executive will receive a total of $__________ payable in equal bi-weekly installments, over the eighteen (18) months following the Termination Date. This total sum represents an aggregate amount equal to (1) two times the Executive's Annual Base Salary in effect on the Termination Date, (2) two times the targeted amount of the annual incentive award and bonus for year ______. The first payment of $___________ shall be payable with the pay period ending __________. c. All unvested options held by the Executive shall continue to vest in accordance with their terms for two years after the Termination Date and all remaining unvested options held by the Executive shall vest on the two year anniversary of the Termination Date. All unvested profit shares continue to vest in accordance with their terms for two years after the Termination Date. Any options held by the Executive that are vested on the Termination Date or vest thereafter pursuant to this clause may be exercised until the earlier of the thirty-month anniversary date of the Termination Date and the expiration date of such options and the Executive shall not be entitled to any additional grants of any stock options, restricted stock, other equity based or long-term awards. d. The Executive will be eligible for participation in the Company's benefit plans, as set forth in paragraphs 4(d) of the Executive's Employment Agreement dated December 11, 2000. 3. 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 15 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 or affiliates or any act that would constitute "Cause" under the Employment Agreement or a breach under the Employment Agreement. 4. In accordance with the rights, responsibilities, and obligations contained within the Employment Agreement and the rights, responsibilities, and obligations contained within the Release Agreement, the Executive agrees as follows: a) In consideration of the rights, responsibilities, and obligations contained in the Employment Agreement and the rights, responsibilities, and obligations contained in the Release Agreement, 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, Executives, 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 (that 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 ("ADEA"); New Jersey Law Against Discrimination Equal Pay Act of 1963; and, the Consolidated Omnibus Budget Reconciliation Act of 1985. 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. b) The Executive waives any right to reinstatement or future employment with the Company or with any of it's subsidiaries or affiliates following the Executive's separation from the Company on the Termination Date. 5. This Agreement is not an admission by either the Executive or the Company of any wrongdoing or liability. 16 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 Executives, directors, stockholders or employees. The Company further agrees that it will engage in no act that is intended, or may reasonably be expected to harm the reputation, business or prospects of the Executive. 7. The Executive agrees that he shall not disparage or comment negatively about the Company to anyone, including, but not limited to, its customers, competitors or members of the general public that may avail themselves of services rendered by Company. Likewise, the Company agrees that it will make no disparaging remarks about Executive. 8. The Executive and the Company agree that the Executive will only speak about the Company by means of a joint press release that shall be prepared and approved, in advance, by both parties. 9. The Executive and the Company agree to keep the existence, terms and conditions of this Release Agreement completely and strictly confidential except as required by law, or provided by paragraph 8 above. 10. The Executive and the Company agree that certain provisions of the Employment Agreement including, specifically, those set forth in paragraphs 9(a), 9(b), 11(b), and 11(c), are binding and in full force and effect during the period of time set forth in the Release Agreement. 11. The Executive agrees that for a two year period following the Termination Date the Executive shall not, directly or indirectly, engage in any managerial, administrative, advisory, consulting, operational or sales activities or organize, establish, operate, own, manage, or control a direct or indirect investment or ownership interest in Wal-Mart, K-Mart, Target, Kohl's, Noodle Kadoodle/Zany Brainy, e-toys, KB Toys, FAO Schwarz, Buy Buy Baby or any other business, including mail order or internet business, if more than one-third of the business' revenues are generated by the manufacture, marketing or sale of toys (including, without limitation, video games and computer software for kids, electronic toys and wheel goods), juvenile or baby products, juvenile furniture or children's clothing. 12. The Executive shall promptly return all the Company's property in the Executive's possession, including, but not limited to, the Company's keys, credit cards, cellular phones, computer, software and peripherals and originals or copies of books, records, or other information pertaining to the Company's business. The Executive shall return any leased or Company car at the expiration of the Consulting Period (as defined in the Employment Agreement), or at that time when he is entitled to receive a car from his future employer, whichever comes first. While the Executive is using the Company car, the Company will continue to reimburse the Executive for routine automobile maintenance, automobile repairs and automobile insurance. The Executive is personally responsible for all other costs associated with the use of the Company car. 13. 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 Employment Agreement. 14. This Agreement represents the complete agreement between the Executive and the 17 Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. No attempted modification or waiver of any of the provisions of this Agreement shall be binding on either party unless in writing and signed by both the Executive and the Company. 15. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or non-enforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 16. 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. No revocation of this Agreement by the Executive shall be effective unless the Company has received, within the 7-day revocation period, written notice of any revocation, all monies received by the Executive under this Agreement and all originals and copies of this Agreement. 17. 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. 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: EXECUTIVE ------------------------------ 18 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 Executive 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: 9Ii) 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 Executive at the expense of the Company or a subsidiary; (iv) any material breach of the Executive's fiduciary duties to the Company as an employee or Executive; (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 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 failure by the Executive to comply, in any material respect, with the provisions of Section 11 of the Agreement; of (viii) the failure by the Executive to comply with any other undertaking set forth in the Agreement or any breach by the Executive 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 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 the best interest of the Company. Any act, or failure to act, based upon authority given pursuant to the 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 Executive in good faith and in the best interests of the Company. the cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive 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 Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described, and specifying the particulars thereof in detail. "Change of Control" - See Exhibit C. "Committee" means that Company's Management Compensation and Stock Option Committed of the Board of Directors or any successor committed 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 cause 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 19 termination 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, and (iv) the last day of the Employment Period during with 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 February 1, 1997, 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 30 days thereof: (i) the assignment of the Executive 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 Executive; provided, however, that the foregoing shall not constitute "Good Reason" if it is not attendant to a reduction in the Executive's Annual Base Salary or total target compensation, except that a request by the Company for the Executive to relocate outside Northeastern New Jersey 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 Executive; (iii) any failure by the Company to comply with an satisfy Section 12(c) of the Agreement, or (iv) notice by the Company that it is not extending the termination date of the (v) (vi) 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 Executive's employment under the provisions 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 Executive 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 Executive. 20 EXHIBIT C CHANGE OF CONTROL 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(dX3) or 14(dX2) 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 of the Company of 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 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 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 Executive has a material equity interest, or any "Affiliate" (as defined in Rule 405 under the 21 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 Executive an amount (the "Gross-up") such that the net amount retained by the Executive, after deduction of any Excise Tax and any Federal, state and local income taxes, equals the amount of such payments that the Executive would have retained had such Excise Tax not been imposed. In addition, the Company shall indemnify and hold the Executive 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 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 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 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 or indemnity 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 22 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 (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 assumption that any deduction available to the Executive offsets income that would otherwise be taxed at the highest marginal statutory rates of Federal, state and local income tax for the relevant periods). 23 EXHIBIT D STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of _________________ (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and ______________________ (the "Executive"). WITNESSETH: 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 Executive and the Company are entering into an Employment Agreement, dated as of even date herewith (the "Employment Agreement"); WHEREAS, as further inducement for the Executive to execute the Employment Agreement and continue in the employ of the Company, the Committee has determined to grant the Executive 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 Executive is hereby granted 10,000 Stock Units. Each Stock Unit represents the right to receive one share of Restricted Stock (collectively, with other shares of 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 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 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 stock, and shall be allocated by the Trust to the Executive's account therein subject to the forfeiture conditions of Section 3 below. 3. Forfeiture Conditions The Stock Units granted to the Executive hereunder shall be forfeited: (i) in their entirety, if the Executive's employment with the Company terminates prior to the second anniversary of the date hereof, 24 (ii) with respect to 50% of the Shares, if the Executive's employment with the Company terminates on or after the second anniversary of the date hereof and prior to the third anniversary of the date hereof. 4. Investment Representation The Shares acquired by the Executive under this Unit Agreement will be acquired for the Office's account and not with a view to the distribution thereof, and the Executive 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 Executive 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. 5. 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. 6. 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 7. 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 Employment Agreement. 8. Captions The captions of this Unit Agreement are not part of the provisions hereof and shall have no force or effect. 9. 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. 10. 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: General Counsel; 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. 25 11. 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 Executive. 12. Successors This Unit Agreement shall be binding upon the Company and its successors and assigns. IN WITNESS WHEREOF, this Agreement has been executed by the Company by one of its duly authorized Executives 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. - ---------------------- EXECUTIVE 26 EX-13 3 file003.txt ANNUAL REPORT TO SHAREHOLDERS FINANCIAL HIGHLIGHTS Toys"R"Us, Inc. and Subsidiaries
(Dollars in millions, except per share data) Fiscal Year Ended - ------------------------------------------------------------------------------------------------------------------------- Feb. 3, Jan. 29, Jan. 30, Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29, Jan. 30, Feb. 1, 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- OPERATIONS Total Enterprise Sales*$ 12,774 $12,118 $ 11,459 $ 11,315 $10,113 $ 9,498 $ 8,819 $ 8,018 $ 7,232 $ 6,176 Net Sales 11,332 11,862 11,170 11,038 9,932 9,427 8,746 7,946 7,169 6,124 Net Earnings/(Loss) 404 279 (132) 490 427 148 532 483 438 340 Basic Earnings/(Loss) Per Share 1.92 1.14 (0.50) 1.72 1.56 0.54 1.88 1.66 1.51 1.18 Diluted Earnings/(Loss) Per Share 1.88 1.14 (0.50) 1.70 1.54 0.53 1.85 1.63 1.47 1.15 FINANCIAL POSITION AT YEAR END Working Capital $ 556 $ 35 $ 106 $ 579 $ 619 $ 326 $ 484 $ 633 $ 797 $ 328 Real Estate-Net 2,348 2,342 2,354 2,435 2,411 2,336 2,271 2,036 1,877 1,751 Total Assets 8,003 8,353 7,899 7,963 8,023 6,738 6,571 6,150 5,323 4,583 Long-Term Debt 1,567 1,230 1,222 851 909 827 785 724 671 391 Stockholders' Equity 3,418 3,680 3,624 4,428 4,191 3,432 3,429 3,148 2,889 2,426 Common Shares Outstanding 197.5 239.3 250.6 282.4 287.8 273.1 279.8 289.5 293.1 289.3 NUMBER OF STORES AT YEAR END Toys"R"Us - U.S. 710 710 704 700 682 653 618 581 540 497 Toys"R"Us - International 491 462 452 441 396 337 293 234 167 126 Kids"R"Us - U.S. 198 205 212 215 212 213 204 217 211 189 Babies"R"Us - U.S. 145 131 113 98 82 - - - - - Imaginarium 37 40 - - - - - - - - Total Stores 1,581 1,548 1,481 1,454 1,372 1,203 1,115 1,032 918 812
*Total enterprise sales include sales by all stores, whether operated by the company, by franchisees or under joint-venture agreements. More toys, more trains, more fun, more games... more reasons to smile... it's a great time to be a part of Toys"R"Us. [PHOTO OMITTED] CONTENTS Financial Highlights ............................................ page 1 Letter to Our Shareholders ...................................... page 3 Divisional Highlights ........................................... page 8 Management's Discussion and Analysis of Results of Operations and Financial Condition ................ page 21 Financial Statements ............................................ page 26 Report of Management and Report of Independent Auditors .................................. page 37 Directors and Officers .......................................... page 38 Quarterly Financial Data and Market Information ................. page 40 Store Locations, Corporate Data and Citizenship ................. page 41 [PHOTO OMITTED] To Our Shareholders In last year's letter to our shareholders, I acknowledged the challenges of the past and asked for your patience in letting the strategies that we were putting in place in 2000 unfold. I am very pleased, therefore, to report on the tremendous progress that our company has made over the past year. We posted a solid year in 2000 and, in fact, gained back market share in the process. Ours is a company ripe with opportunity. Everywhere we look, we see opportunities to grow our business, and it's no exaggeration to say that I'm even more excited and energized about the Toys"R"Us organization now than I was when I first joined the company in January, 2000. Progress and Accomplishments The progress that has been made at Toys"R"Us is substantive. It encompasses all areas of the company and represents a solid foundation for future growth. As we look to the future, we will continue to focus on our key strategies: content differentiation, improved guest service, better presentation, consistent in-stock position and recreating an atmosphere where it is fun to shop for both children and adults. These are proven strategies that have made a positive impact on our business over the last year, and our guests are noticing the difference. In Our U.S. Toy Stores We made great progress in our U.S. toy stores in 2000. There is no doubt that the gains we achieved in market share were directly related to the strides we made in strengthening and differentiating our core merchandise content, converting our stores to create a more enjoyable shopping experience for our guests, and improving our overall guest service. [PHOTO OMITTED] As we look to the future, we will continue to focus on our key strategies: content differentiation, improved guest service, better presentation, consistent in-stock position and recreating an atmosphere where it is fun to shop for both children and adults. -- John Eyler, CEO With the greatest possible energy, emotion and commitement, we turned our focus to change, creativity and growth. [LOGO OMITTED] 3 [PHOTO OMITTED] We converted 165 stores to the refined C-3 format, and have already begun the conversion of an additional 250 stores for 2001. As a result, we will have approximately 415 stores, or almost 60% of the division, operating in the new format by Holiday 2001. The work to differentiate our content continues, and our objective is to have products exclusive to Toys"R"Us represent 20% of sales in 2001, up from 5% in 1999. Over the past year, we announced exclusive licensing agreements with Animal Planet, Home Depot and OshKosh B'Gosh, enabling us to offer our guests exceptional products they won't find anywhere else. Together with Universal Studios Consumer Products Group and Amblin Entertainment, we announced an unprecedented three-year merchandise program to support the 20th anniversary of Steven Spielberg's E.T., The Extra Terrestrial, and Universal's re-release of the film in 2002. Toys"R"Us will develop a full range of exclusive E.T. products across all categories, and the merchandise will launch worldwide in Toys"R"Us, Kids"R"Us, Babies"R"Us and Imaginarium stores as well as at Toysrus.com in fall 2001. In September, we announced a major branding initiative partnering with Scholastic, the most trusted brand synonymous with kids and learning. Together with Scholastic, we will offer a unique line of Scholastic branded products in Toys"R"Us and Imaginarium stores worldwide, as well as through Toysrus.com. In addition, we worked diligently at strenthening our relationships with key vendors, and are committed to working with these manufacturers to build their brand equity as well as our own. Our discussions have centered on building strong core businesses that can deliver quality financial performance for both of us without relying on "hot products" to achieve our planned sales and earnings. Our commitment to these brands was a major reason for our Holiday 2000 success despite the lack of hot items. We increased our business with 19 of our top 20 volume brands this past year, and believe that our volume will grow with all 20 in 2001. We also saw great success with Animal Alley, our own proprietary brand of plush animals, and are rolling the Animal Alley concept out to our stores worldwide. Our focus on guest service remains a priority, and we will continue our guest service initiatives coupled with enhanced training in 2001. Last December, we saw significant results in this area when Toys"R"Us had our highest guest delight scores for the year - a real accomplishment in the midst of our busiest month of the year. We plan to roll the enhanced training initiative out to all 710 stores this year, completing the investment made in 220 stores in 2000. [PHOTO OMITTED] Over the past year, we announced exclusive licensing deals... enabling us to offer guests exceptional products they won't find anywhere else. 4 All stores in the major media markets will have been rebuilt, re-merchandised and service enhanced by Holiday 2001. This will allow us to advertise these changes for the first time, and we can't wait to let everyone know that our stores are better than ever. It is our strong belief that the results we achieved in 2000 confirm the strategic initiatives set in place last year, and will continue to rekindle growth in our U.S. toy store business. Throughout Our Divisions We are also very pleased with the progress made throughout all divisions of the company. Our core strategies are similar across all divisions and are beginning to show sound results. Babies"R"Us has maintained its position as the undisputed leader in the juvenile category, indicative of the vitality of this business. Once again, Babies"R"Us enjoyed double-digit comparable store sales growth in addition to opening 16 new stores. Babies"R"Us will proceed with its strategic growth plan of opening an additional 20 new stores in 2001. In addition, even without advertising, Babiesrus.com already has a solid presence on the Internet - -- further testimony to the strength of the brand. Kids"R"Us had a productive year in terms of developing a strategic plan for long-term growth and shareholder value. We are encouraged by the success we've had in leveraging our Kids"R"Us buying expertise and infrastructure up to our combo stores, and expect to continue to convert more of those in 2001. We have also seen very exciting results with our newly-converted prototype store in Freehold, NJ. The store opened in mid-November and has already produced significant sales increases over last year. We will convert seven more stores to this prototype by back-to-school 2001, and if they continue to be as successful as we hope, we'll roll them out aggressively, chain-wide. Imaginarium turned in a strong performance last year. Our freestanding Imaginarium stores experienced a double-digit increase in sales performance for the Holiday season, and Imaginarium worlds within Toys"R"Us stores continue to meet with great response from our guests. We will move forward with our plans to create these worlds both domestically as well as internationally. And finally, Toysrus.com tripled its sales in Holiday Season 2000, reflecting the success of our alliance with Amazon.com. We will continue to improve our web site, and will transition the Babiesrus.com web site onto the Amazon.com platform. We will add our Imaginarium area to our online toy store later this year. Our International business celebrated its best year in its history, focusing on the same strategic initiatives as those being implemented in the U.S. We will be adding an Imaginarium-type learning concept inside our International stores, as well as Animal Alley, Teentronics and Animal Planet. We will also offer Babies"R"Us shops within our Toys"R"Us stores. We are quite pleased with the outlook in our International division. [PHOTOS OMITTED] Imaginarium worlds within Toys"R"Us stores continue to meet with great response from our guests. We also saw very exciting results with our new prototype Kids"R"Us store in Freehold, NJ. The store opened in mid-November and has already produced significant sales increases over last year. 5 Strategic Plan for Growth During this past year, the Senior Management Team of Toys"R"Us, Inc., spent a considerable amount of time refining our long-term strategic plans, designed to grow the business significantly in the years ahead and build shareholder value. We are more determined than ever to aggressively follow through on our key strategic initiatives across every division. [PHOTO OMITTED] We will continue to focus on differentiating our content and improving our in-stock position because we have seen that those strategies deliver sound results. We'll continue to refine our presentation and improve our service levels because we know these initiatives are important to our guests. In the third quarter of 2001, there will be an exciting new marketing campaign to tell the world that Toys"R"Us really has changed -- because it's true. As we head into 2001 a stronger and more confident company, we are working to create a competitive advantage by intimately understanding and building a proprietary relationship with our core customer: Mom. We will accomplish this by giving Mom compelling reasons to visit "R"Us, offering her unique and exciting content at a good value. We will also further enhance Mom's shopping experience within the "R"Us family of brands. Our goal is to help Mom successfully complete her mission by having the products she wants, and by providing information and services she needs to enhance our position as the authority on children's merchandise. We are also working to ensure that Mom has a good environment in which to shop when she visits an "R"Us store, making the process as easy and convenient for her as possible. And finally, we are going to communicate the changes taking place within the "R"Us family of brands through a strategic marketing campaign beginning later this year, and by building a lasting relationship with Mom. [PHOTO OMITTED] Our goal is to help Mom successfully complete her mission by having the products she wants, and by providing information and services she needs to enhance our position as the authority on children's merchandise. The best is yet to come, Not a promise but a fact. Our guests will see the changes, feel the 6 In Conclusion We will continue to move forward on these strategies with unprecedented speed and passion. The groundwork to build on the successes of the past year has been laid. We've seen the initiatives we've executed bear significant results, and ultimately begin to change the face of our business. As important, we've seen our guests - and our employees - embrace the changes that are taking place within the "R"Us family and rekindle a sense of pride and trust in our organization. By growing our existing businesses and by moving forward exploring new venues and opportunities to expand our businesses, Toys"R"Us will proceed into the new millennium bearing a proud past and solidly on course to a brighter future. We will pay tribute to our heritage and the strength of our brand this fall when we celebrate the opening of our new Flagship store in Times Square. It will be a milestone for our company, but only the first of many to come in the future. Every member of the "R"Us team is committed to the success of our long-term strategy to build our business and enhance shareholder value. Our strategies will ultimately benefit and build value for our four key stakeholders: guests, associates, suppliers and shareholders. We have proven that we can regain market share and add luster to our proud name. I truly am more excited than ever by what I see taking place within our organization, and I look forward to sharing more good news with you, our shareholders, in the coming year. There really never has been a better time to be part of Toys"R"Us. John H. Eyler, Jr. - ---------------------- John H. Eyler, Jr. President and Chief Executive Officer March 26, 2001 [PHOTO OMITTED] We've seen our guests - and our employees - embrace the changes that are taking place within the "R"Us family and rekindle a sense of pride and trust in our organization. excitement, share the wonder in every "R"Us store. [LOGO OMITTED] We will build our brands and build our future with confidence. 7 TOYS R US [LOGO] [PHOTO OMITTED] We want Toys"R"Us to become the Best of the Best among large scale specialty retailers. We want our future to be as rich in GROWTH as our past. THE FUN IS GROWING Changing for the Better Re-energized, revitalized, and primed for growth. This best describes Toys"R"Us at the close of the year 2000. A 14% increase in 4th quarter earnings versus the previous year reflected our guests' warm welcome to the changes we made in our stores and throughout our business. We transformed 165 Toys"R"Us stores -- including 17 test stores -- to create a more interactive and fulfilling shopping experience. We were on a mission to aggressively build our brand, and build for the future. Our guests were delighted with the addition of our new shopping worlds like Imaginarium, Animal Alley, "R"Zone and, in combo stores, kids' fashion via Kids"R"Us. New, exclusive brands introduced in 2000 added a definite "wow factor" to our stores: Animal Planet, Home Depot and Imaginarium. An essential component to our mission was our renewed focus on guest satisfaction. We embraced this effort on a company-wide basis and initiated leadership programs, elevated the standards of our associate training to include product knowledge and selling skills, and increased our service staff significantly. Our guests did more than take notice, they gave us the highest guest-delight (customer service) scores in our history in December. Charging into the Future We have tremendous momentum moving into 2001. We will continue to transform and improve 250 additional stores, including major media markets in the U.S. With sharper content strategies in place, our guests can expect more exclusive brands and products. We will be introducing the Scholastic educational line, in conjunction with the leading children's educational publisher. The hottest entertainment licenses and the most innovative and exciting toys will be found at Toys"R"Us first. Our selection will be more amazing than ever, our values more exceptional. In the fall of 2001, we will unveil our ultimate showcase with the grand opening of our Flagship Store -- The Center of the Toy Universe -- in Times Square, New York City. It will be a toy store unlike any other. It will house a 60-foot high ferris wheel, a two-story, life-size Barbie house, a 30-foot animatronic dinosaur, E.T.'s Spaceship... kids can even visit the real Candyland, modeled after the game. Many other exciting attractions within the Times Square store will make it our most impressive, most entertaining store -- and our guests will know it's all for them. [PHOTOS OMITTED] Our remodeled stores feature exciting "worlds" that make shopping easier and more fun for all our guests. Toys "R" Us is taking FUN to a new dimension: [LOGO OMITTED] new look, new worlds, new brands... WOW! 9 TOYS"R"US [LOGO] INTERNATIONAL [PHOTO OMITTED] We want our Toys"R"Us stores around the world to deliver a shopping experience like no other. We want to harness the power of our global brands and initiatives to grow the "R"Us World. GROWING OUR WORLD Wowing Toys"R"Us Kids Around the World Unprecedented growth around the world was a major success story for Toys"R"Us International in 2000. Our International division posted its best performance ever -- achieving an increase of 27% in operating earnings with 31 new store openings expanding our reach around the globe. All eyes were on Toys"R"Us Japan, as its Initial Public Offering of stock was successfully completed in April 2000. Toys"R"Us opened its 100th store in Japan with unparalleled fanfare and excitement. The U.S. Ambassador, Thomas Foley, and other dignitaries were present to celebrate this milestone with us. We now operate 111 stores in Japan with substantial growth opportunities still available for the "R"Us brands. We marked milestones in other countries. We celebrated our 15th anniversary in the United Kingdom and our 10th in France. Exciting marketing programs enabled us to continue to grow our share of market in these two important European countries. We continue to update our existing stores around the world adding new, brighter and more open formats that are proving to be a big hit with our guests. The addition of Animal Alley and Learning Center shops to many of our stores, showcases the strength of our global presence and adaptability of worldwide initiatives. New International Initiatives In 2001, Moms and kids from Japan to Germany will be introduced to new proprietary brands and new shopping worlds within Toys"R"Us stores. We will continue to bring the best of our corporate initiatives and proprietary brands to the four corners of the world. Animal Alley, Learning Centers and Babies"R"Us are just a few of the worldwide initiatives that will continue to be rolled out and strengthen our position as the world leader in toys and juvenile products. Leveraging partnerships with global vendors, we also bring to our stores the hottest merchandise from entertainment licenses and our major toy suppliers. More focused promotional events will make the Toys"R"Us image bigger and better in the eyes of our guests. We have initiated our first worldwide research program that will give us valuable insights into the ever-evolving wants and needs of our expanding and diverse guest base. Based on the Toys"R"Us corporate strategy, our key focus will be finding ways to delight Moms and children alike through unique product content, superior guest services, and an overall satisfying and fun shopping experience. Our new store environment will feature guest-friendly formats and standardized graphics that will make us more contemporary and easier to shop. Most importantly, well-defined training for associates will enhance our face-to-face interaction with our guests. We will stay on track for global growth through global teamwork -- building the "R"Us brand in every country, each and every day of the year. [PHOTOS OMITTED] All eyes were on Toys"R"Us Japan, as its Initial Public Offering of stock was successfully completed in April. Toys"R"Us opened its 100th store in Japan with unparalleled fanfare and excitement. East + West + North + South: GROWTH is what we're all about! [LOGO OMITTED] North + South + East + West: FUN is what we do best! 11 TOYSRUS.COM [PHOTO OMITTED] We want to be the worldwide authority online for kids, family and fun by delighting every guest, every day. We want to build value for our stakeholders in all our pursuits, and foster leadership at every level of our company. CLICK HERE FOR GROWTH Point...Click...Cheer! Toysrus.com made amazing strides in 2000. The site became an online retailing success story, by more than tripling its sales and number of orders from the prior year, and most important, by giving consumers a terrific online toy-buying experience. [GRAPHIC OMITTED] One of Toysrus.com's most exciting developments in 2000 was the alliance it formed with Amazon.com, the world's premier online retailer. This alliance combines Toysrus.com's merchandising expertise and trusted brand name with Amazon.com's world-class web site operations, online customer service and reliable fulfillment. As a result, the two companies delivered in every sense of the word - guests shopped at Toysrus.com for its great selection of toys and video games in an easy-to-navigate site, and more than 99% of purchases were delivered by Amazon.com on time for Holiday 2000. The Toysrus.com teamed with Amazon.com sites became the #1 most-visited e-commerce destination for the Holiday season* - topping the traffic of Walmart.com, Kmart's Bluelight.com, Sears.com, Target.com and eToys combined. Multiplying Success The outlook looks even better for 2001 and beyond. Online toy sales are expected to grow significantly, at a projected average annual growth rate of 30% to 40%**. Sales and traffic momentum continue to build. In January 2001, we've seen strong traffic and a healthy boost in orders compared to the prior year. And, building with the experience gained in our first season with Amazon.com, we are working toward giving our shoppers even greater convenience, exclusive offerings and a seamless "bricks and clicks" shopping experience. All in the e-Commerce Family The Web will continue to provide excellent growth opportunities for the entire "R"Us Family. In the Spring of 2001, we will transition Babiesrus.com to the Amazon.com platform. This online destination for the #1 baby and juvenile brand gives Web shoppers convenient access to the world's #1 Baby Registry -- the only one to offer the ability to create, update and buy from registries, both online and in stores. The added exposure of this site to the Amazon.com customer base will fuel its already impressive, growth: each day, an average of 500 Moms create registries online (and each sends an email notification to 4-5 friends). The registry eliminates guess-work and geographic barriers from baby gift-buying so that friends and relatives everywhere can easily go online to see what parents need, then shop, buy and send gifts -- beautifully wrapped -- either online or in stores. Later this year, Toysrus.com will also re-launch the fastest-growing specialty toy retail chain on the Web by introducing an Imaginarium area in its online store. [GRAPHIC AND PHOTO OMITTED] Toyrus.com will build upon its success in 2001 by offering shoppers even greater convenience, exclusive offerings and a seamless "bricks and clicks" shopping experience. *Nielson/NetRatings 1/01 **Jupiter Communications 2/01 :-) today! Ask Mom to GO TO www.Toysrus.com with you -- [LOGO OMITTED] it's the best link to FUN on the Net! 13 KIDS"R"US [PHOTO OMITTED] We want Kids"R"Us to become a one-stop-shop for Mom. We want to make it the Store of Choice for kids' clothes and accessories. GROWING UP IN STYLE Looking Good! Kids"R"Us was determined to make a difference in the year 2000, applying new strategies to move our business forward. We sharpened our merchandise focus and built aggressively on the success of our convenient, value-centered combo store format. Last year, 89 new combos opened within Toys"R"Us stores. Our private label brands -- New Legends, Little Legends and Miniwear Classics -- enabled us to offer exclusive products at great value. More importantly, we put resources behind innovative concepts to reinforce our renewed energy to create a winning brand. A Showcase for the Future In November 2000, Freehold, New Jersey became the first market to experience the future at Kids"R"Us. We completely remodeled our Freehold store featuring clean and inviting displays, an impressive assortment of up-to-date fashion, lifestyle trends and interactive areas for kids. This Kids"R"Us prototype store helped us demonstrate our commitment to redefining our brand and growing our business. Our guests, in return, showed us their resounding approval through ratings as high as 100% in Guest Delight surveys, and a double digit sales increase at the Freehold store. We also tested a Lifestyle Shop concept in select Kids"R"Us stores. We created a 2000-square foot "shop-within-a-shop" filled with a wide assortment of non- apparel merchandise. Fashion accessories, bath and body, cosmetics, home decor, kids' electronics, stationery, Animal Alley and books made up the appealing mix. Guests gave the shops high marks. Sales are tracking very well, presenting new possibilities for making our store experience more unique. 2001... Here We Come We eagerly anticipate a productive 2001. Seven more Freehold-model stores are scheduled to be reformatted through the year. Approximately 100 Kids"R"Us stores will be fitted with Lifestyle Shops. We also plan to maximize our combo store potential by converting as many as 100 locations. More importantly, we will continue to improve our product offerings and enhance guest services to give our guests the motivation they need to shop our stores again and again. Our goal: make Kids"R"Us Mom's "Store of Choice" for kids clothes and accessories. [PHOTOS OMITTED] We completely remodeled our Freehold store featuring an impressive assortment of up-to-date fashion, lifestyle trends, and interactive areas for kids. [LOGO OMITTED] How cool is this? Styles kids want, values Moms need. Fashion that totally fits! 15 BABIES"R"US The Baby Superstore [PHOTO OMITTED] We want Babies"R"Us to become the #1 Brand for babies. We want to see this "R"Us baby grow with the superior brand hallmarks of service, merchandise choice and innovative and informative shopping. See baby Grow... A Record-Breaking Year Record total sales - up 26% over last year; record operating earnings - up 59% over last year; plus 16 new stores; and countless happy new families. Babies"R"Us had a lot to celebrate at the close of the year 2000. The numbers tell the story. Guests recognize Babies"R"Us as the leading authority when they shop for baby. They know when they visit our stores they'll find a wide selection, knowledgeable, friendly associates and affordable prices. Events such as our Expectant Parents Seminars, BabyFest Weekends and live product demonstrations have also successfully attracted guests and encouraged return visits to the stores. In 2000, we also enhanced the performance of one of our greatest assets: our popular Baby Registry system. Last year, we improved our Baby Registry by enabling our guests to create, view and change their personal registry via the Internet, 24 hours a day, seven days a week. Their friends and family also have the ability to view a registry and even make a purchase directly online. Our Baby Registry is invaluable -- it helps us grow our guest base, and provides insight on how we can better serve our guests and meet their needs. More To Grow On Our business priorities for 2001 are mapped out clearly. To grow as the #1 Brand for babies, we have to provide the highest levels of service and do our very best for our core guests (expectant Moms and Dads). We will continue to grow our Baby Registry, building on the proven strengths of this key asset. Our stores will also continue to promote our proprietary brands. Especially for Baby and Koala Baby -- available only at Babies"R"Us -- will give our guests value-focused choices. We want our stores to deliver what Moms want most: a comfortable shopping environment, an excellent assortment of current and innovative products for baby, and friendly associates who are well-informed and totally service-oriented. [PHOTOS AND GRAPHICS OMITTED] We want our store to deliver what Moms want most: a comfortable shopping environment, an excellent assortment of current and innovative products for Baby, and friendly associates that are well-informed and totally service-oriented. Just like your baby... we'll be growing and giving you reasons to smile year after year. 17 Imaginarium [PHOTO OMITTED] We want to maximize the potential of the Imaginarium brand. Imaginarium will be the destination for discovery, learning & fun! LEARNING + DISCOVERY = GROWTH Today, Your Neighborhood... What a difference a year makes. With 170 new Imaginarium Worlds inside select Toys"R"Us stores -- including six in Japan and three in Canada and three new neighborhood stores in the U.S. -- Imaginarium helped us discover a galaxy of possibilities for the year 2000 and beyond. It has grown from a small acquisition to a key strategic element in the growth agenda of the corporation. The Imaginarium shopping experience has received praise from Moms seeking quality toys with high play and learning values for their children. Unique events such as the award-winning Raggedy Ann Anniversary Promotion* made our store not just a place to shop, but a real destination for entertainment and education. Our store "Toyologists" have succeeded in delivering a winning combination of product knowledge and expert service that guests have responded to with delight - and return visits. As a result, we ended the year with stellar comparative sales increases. Tomorrow, The World! Our success in 2000 provides the momentum for bigger and better prospects. We will boldly take our enterprise forward in 2001 and expand our "Galaxy of Toys." We will fulfill the growth agenda of the company globally as more Imaginarium Worlds open in the coming year. By year's end, Moms, Dads and Children will find Imaginarium in 425 Toys"R"Us stores in the U.S. -- as well as in half of all stores in Japan, Australia, Canada, the U.K., France, Germany and Spain under the name:Universe of Imagination. The biggest and most impressive Imaginarium World will be within the Times Square Toys"R"Us flagship store -- with a gigantic Cosmo, inviting play tables and a unique character shop. In addition, watch for 12 new Imaginarium neighborhood stores, coming soon to a U.S. neighborhood near you. Exciting initiatives like Imaginarium.com will give us dynamic opportunities via the World Wide Web. We will also explore how we can bring the Imaginarium specialty environment to our youngest guests with Imaginarium Baby in select Babies"R"Us stores. *Winner, Playthings Magazine Award for Promotion of the Year [PHOTOS OMITTED] Our store "Toyologists" have succeeded in delivering a winning combination of product knowledge and expert service that guests have responded to with delight - - and return visits. [LOGO OMITTED](Children + Friends + Discovery) x (Learning + Fund) = Excitement + Growth 19 FINANCIAL SECTION [PHOTO OMITTED] Management's Discussion and Analysis of Results of Operations and Financial Condition ................ page 21 Financial Statements ............................................ page 26 Report of Management and Report of Independent Auditors .................................. page 37 Directors and Officers .......................................... page 38 Quarterly Financial Data and Market Information ................. page 40 Store Locations, Corporate Data and Citizenship ................. page 41 MANAGEMENT'S DISCUSSION AND ANALYSIS of Results of Operations and Financial Condition RESULTS OF OPERATIONS* Comparison of Fiscal Year 2000 to 1999 For comparability purposes, the following comparison of 2000 to 1999 excludes the impact of the initial public offering of Toys"R"Us - Japan, Ltd. ("Toys - Japan"), as well as non-recurring charges resulting from the Toysrus.com alliance with Amazon.com. See "Other Matters" for additional details of these items. Net sales were $11.3 billion versus $11.9 billion. Excluding the impact of Toys - - Japan in both periods, the company's net sales increased 4% to $11.1 billion from $10.7 billion. Further, excluding the negative impact of currency translation of $172 million, the company's net sales increased 5%. The net sales growth was primarily driven by a 2% increase in comparable store sales, as well as new store growth in the Babies"R"Us division. Comparable store sales for the U.S. toy store division increased 1%, reflecting the strength of its core merchandise, improved customer service and in-stock inventory position, despite acute shortages in video product. Comparable store sales for the International toy store division, on a local currency basis, increased 6% mainly due to the implementation of strategies similar to those being implemented in the U.S.A., along with adding/improving Babies"R"Us shops within its toy stores. Net sales for the Babies"R"Us division increased 26% and comparable store sales grew at a double-digit rate. These increases were driven by strong sales in most merchandise categories and continued customer acceptance of the Babies"R"Us brand. Toysrus.com reported net sales of $180 million, up from $49 million in 1999, reflecting increased market share and the success of its strategic alliance with Amazon.com, which combined the two companies' expertise to create a compelling online shopping experience. Total gross margin, as a percentage of sales, improved to 31.1% from 29.9%. This increase was primarily attributable to shifts in the merchandise mix and growth in higher margin categories, primarily exclusive product offerings, as well as the implementation of a new strategic pricing system. Gross margin for the U.S. toy store division increased to 30.3% from 28.4%, while gross margin for the Babies"R"Us division grew to 33.8% from 32.8%. The International toy store division reported gross margin of 31.7% versus 30.8%. Total selling, general and administrative expenses (SG&A), as a percentage of sales, increased to 24.0% from 23.1%. SG&A for the U.S. toy store division increased to 21.5% from 19.8%. This increase is primarily due to increased payroll costs related to the implementation of the company's new customer-focused initiatives, higher distribution center costs due to changes in the handling and amount of inventory, costs associated with actions being taken to improve store ambiance, and systems enhancements. SG&A for the International toy store division decreased to 22.7% from 23.4%. This improvement was primarily a result of the strategic store closures in Central Europe and France, which have improved the overall profitability of this division. The Babies"R"Us division reported SG&A of 23.4% versus 24.0%. This improvement was primarily due to leveraging against sales growth. Depreciation and amortization increased to $290 million from $278 million. This increase is primarily due to the company's continued store expansion, remodels and front end conversions, strategic investments to improve management information systems and amortization of goodwill related to its acquisition of Imaginarium Toy Centers, Inc. in the second half of 1999. Interest expense - net, increased to $104 million from $80 million. This increase is mainly attributable to the funding of the company's stock repurchase program, higher interest rates, and the funding of Toysrus.com. International operating earnings were unfavorably impacted by the translation of local currency into U.S. dollars by approximately $14 million in 2000. The effect of inflation had no material effect on the company's operating results for 2000. The company's effective tax rate remained unchanged at 36.5%. Excluding the impact of the company's share of Toysrus.com, 2000 earnings before income taxes, net earnings and diluted earnings per share were $534 million, $339 million and $1.58, respectively. Comparison of Fiscal Year 1999 to 1998 In 1998, the company recorded restructuring and other non-recurring charges of $698 million to reposition its worldwide business, as set forth below. For comparability purposes, the following discussion regarding results of operations excludes the impact of these charges. The company's net sales increased 6% to $11.9 billion from $11.2 billion. The net 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 U.S. toy store division increased 3%. The U.S. 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 - 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%. Toysrus.com reported total sales of $49 million from its inception in May 1999. * References to 2000, 1999, and 1998 are for the 53 weeks ended February 3, 2001, and for the 52 weeks ended January 29, 2000, and January 30, 1999, respectively. 21 International sales were favorably impacted by the translation of local currency into U.S. dollars by approximately $59 million in 1999. Neither the translation of currency into U.S. dollars nor inflation had a material effect on the company's operating results for 1999. On a consolidated basis, 1999's gross margin, as a percentage of sales, was 29.9% versus 29.8%. The U.S. toy store division reported gross margin of 28.4% as compared to 29.0%. This decrease was a result of increased markdowns to keep inventory fresh. The International toy store division reported gross margin of 30.8% versus 30.9%. The Babies"R"Us division reported gross margin of 32.8% versus 31.0%, 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 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 U.S. toy store division reported SG&A of 19.8% versus 18.6%, while the International toy store division reported SG&A of 23.4% versus 23.6%. The Babies"R"Us division reported SG&A of 24.0% versus 25.0%. This improvement was primarily due to leveraging against sales growth. 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. The company's effective tax rate remained unchanged at 36.5%, excluding the restructuring and other charges. Included in the company's 1999 results are net costs to establish and operate 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. Restructuring and Other Charges During 1998, the company announced certain strategic initiatives and other actions to reposition its worldwide business, including the closing of certain underperforming toy stores, the consolidation of certain distribution center facilities and the reformatting of its toy stores into the C-3 format, 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. Other charges of $59 million consisted primarily of changes in accounting estimates and provisions for legal settlements. Details on the components of the charges are described in the notes to the consolidated financial statements and are as follows:
Reserve Reserve Reserve Initial Balance Utilized Balance Utilized Balance Description Charge 1/30/99 in 1999 1/29/00 in 2000* 2/03/01 - ------------------------------------------------------------------------------------------------------ Closings/ downsizings: Lease commitments $ 81 $ 81 $ 19 $ 62 $ 13 $ 49 Severance and other closing costs 29 25 11 14 6 8 Write-down of property, plant and equipment 155 -- -- -- -- -- Other 29 24 13 11 11 -- - ------------------------------------------------------------------------------------------------------ Total restructuring $ 294 $ 130 $ 43 $ 87 $ 30 $ 57 - ------------------------------------------------------------------------------------------------------ Provisions for legal settlements $ 59 $ 39 $ 9 $ 30 $ 19 $ 11 - ------------------------------------------------------------------------------------------------------
* Includes the reversal of an $11 million reserve, as described below. During 2000, the company updated its review of all of these initiatives including the closing of stores, distribution centers and other restructuring actions. Based upon this review, the company's revised estimates to complete these initiatives indicated that certain reserves were either no longer required or were in excess of the required amount, while other initiatives required additional reserves. As a result, the company reversed an $11 million reserve in 2000. The company believes the unused reserves existing at February 3, 2001 are reasonable estimates of what is required to complete these actions. These reserves are expected to be utilized in the company's upcoming business cycle, with the exception of long-term lease commitment reserves that will be utilized throughout 2001 and thereafter. 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. 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. Details of the markdowns and other charges are as follows:
Reserve Reserve Reserve Initial Balance Utilized Balance Utilized Balance Description Charge 1/30/99 in 1999 1/29/00 in 2000 2/03/01 - ------------------------------------------------------------------------------------------------------ Markdowns: Clear excess inventory $253 $ 74 $ 72 $ 2 $ 2 $ -- Store closings 29 27 15 12 5 7 Change in accounting estimates and other 63 6 6 -- -- -- - ------------------------------------------------------------------------------------------------------ Total cost of sales $ 345 $107 $ 93 $ 14 $ 7 $ 7 - ------------------------------------------------------------------------------------------------------
22 The company believes the unused reserves existing at February 3, 2001 are reasonable estimates of what is required to complete its store closing initiatives. These reserves are expected to be utilized in the company's upcoming business cycle. 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 2001 and thereafter. Liquidity and Capital Resources The company has a $1 billion multi-currency unsecured committed revolving credit facility expiring in December 2002, from a syndicate of financial institutions. On December 8, 2000, the company obtained a $400 million unsecured committed revolving credit facility expiring in December 2001, from a syndicate of financial institutions. These facilities are available to support the company's domestic commercial paper borrowings. There were no outstanding balances under these revolvers at year-end 2000, 1999 or 1998. Cash requirements for operations, capital expenditures, lease commitments and the share repurchase program will be met primarily through operating activities, issuance of commercial paper and/or other borrowings. The seasonal nature of the business 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 construction of new stores, remodelings and other initiatives that normally occur in this period. The fourth quarter, including the Holiday season, accounted for approximately 42% of net sales in 2000 and 1999 and 44% in 1998, respectively. Operating Activities The company's net cash from operating activities was ($151) million in 2000, $865 million in 1999 and $964 million in 1998. The primary changes in cash from operating activities between 2000 and 1999 were due to working capital changes related to merchandise inventories and accounts payable. The cash used for merchandise inventories, net of accounts payable, was significantly higher in 2000 than 1999 as a result of the company's strategy to maintain adequate levels of the best selling merchandise. The changes in cash from operating activities in 1999 compared to 1998 primarily related to a significant decrease in inventories in 1998, partially offset by higher net earnings in 1999. Investing Activities In 2000, investing activities included the receipt of $267 million in proceeds received from the initial public offering of shares of Toys - Japan (see "Other Matters" below). Additionally, the company incurred $402 million in net capital expenditures due, in part, to the C-3 refinements, the opening of 16 Babies"R"Us stores and systems refinements. In 1999, major investing activities included $533 million in net capital expenditures related to new store expansion in the Babies"R"Us division and International toy store division, U.S. toy store conversions to the C-3 format, as well as capital requirements to establish and operate Toysrus.com. In addition, the company invested $43 million for the purchase of Imaginarium (see "Other Matters" below). Financing Activities Financing activities included proceeds of the yen equivalent borrowing of $147 million. This borrowing is repayable in semi-annual installments, with the final installment due on August 17, 2005. The effective cost of this borrowing is 2.32% and is secured by expected future cash flows from the license fees due from Toys - Japan. The company repurchased a total of 42 million shares of its common stock through its share repurchase program, resulting in a cash outflow of $632 million. The company received a total of $97 million from SOFTBANK Venture Capital and affiliates ("SOFTBANK") relating to its 20% minority interest in Toysrus.com (see "Other Matters" below). Net borrowings increased $521 million in 2000, including the yen equivalent of $147 million, due to the increased share repurchase, increased inventory levels and the funding of Toysrus.com, offset by the deconsolidation of the balance sheet of Toys - Japan. Cash flows used for financing activities decreased to $102 million in 1999 from $344 million in 1998. This change was due to the increased number of toy stores converted to the C-3 format in 1999 and the decreased amount of cash used for the share repurchase program to $200 million in 1999, from $723 million in 1998. In addition, net borrowings were $84 million in 1999 versus $363 million in 1998. On February 13, 2001, the company borrowed 500 million EURO through the public issuance of a EURO bond bearing interest at 6.375% per annum. The obligation was swapped into a $466 million fixed rate obligation with an effective rate of 7.43% per annum with interest payments due annually and principal due February 13, 2004. The proceeds were used to reduce outstanding commercial paper obligations. Accordingly, the company has reclassified $466 million from short-term borrowings to long-term debt at February 3, 2001. Capital Expenditures Capital expenditures - net of dispositions, amounted to $402 million, $533 million and $373 million for 2000, 1999 and 1998, respectively. The significant decrease from 1999 to 2000 was primarily due to the disposal of distribution centers and other facilities in 2000. Capital expenditures consisted primarily of new stores, conversions of existing stores and refinements to the new C-3 format along with enhancements to the company's management information systems. For 2001, capital requirements for new stores, conversions of existing stores and other capital investments are estimated at approximately $600 million. These plans include the addition of approximately 20 new Babies"R"Us stores in the United States, approximately 3 new International toy stores and approximately 12 Imaginarium stores. The company is also planning the conversion of approximately 250 toy stores in the U.S. into the refined C-3 format. 23 Other Matters On February 24, 2000, the company entered into an agreement with SOFTBANK, which included an investment by SOFTBANK of $60 million in Toysrus.com for a 20% ownership interest. Accordingly, the company has recorded a 20% minority interest in the net losses of Toysrus.com in selling, general and administrative expenses. As of February 3, 2001, Toysrus.com received additional capital contributions of $37 million from SOFTBANK representing its proportionate share of funding required for the operation of Toysrus.com. In connection with the agreement with SOFTBANK, the company issued 1.2 million stock purchase warrants ("warrants") for $8.33 per warrant. Each warrant gives the holder thereof the right to purchase one share of Toys"R"Us common stock at an exercise price of $13 per share, until the expiration date of February 24, 2010. As of February 3, 2001, none of these warrants have been exercised. On August 9, 2000, Toysrus.com entered into a 10-year strategic alliance with Amazon.com to create a co-branded toy and video game on-line store, which was launched in the third quarter of 2000 and a co-branded baby products on-line store, which will commence operations in 2001. Under this alliance each company is responsible for specific aspects of the on-line stores. Toysrus.com is responsible for merchandising and content for the co-branded store. Toysrus.com also identifies, buys, owns and manages the inventory. Amazon.com handles web site development, order fulfillment, customer service, and the housing of Toysrus.com's inventory in Amazon.com's U.S. distribution centers. Also on August 9, 2000, Amazon.com was granted a warrant entitling it to acquire up to 5% (subject to dilution under certain circumstances) of the capital of Toysrus.com at the then market value. As of February 3, 2001, this warrant has not been exercised. As a result of the transition to the co-branded site, the company's Toysrus.com subsidiary incurred non-recurring costs and charges totaling approximately $118 million, $10 million of which were included in cost of sales and $108 million of which were included in selling, general and administrative expenses, primarily relating to the closure of three distribution centers, the write-off of web site assets, as well as other costs associated with migrating data and merchandise to the new site and facilities. These costs and charges were recorded in the third quarter of 2000. These initiatives are expected to be completed in the company's upcoming business cycle. At February 3, 2001, reserves of approximately $80 million, primarily related to exit costs for distribution centers, are reasonable estimates of what is required to complete these initiatives. The company recorded a non-operating gain of $315 million ($200 million net of taxes) resulting from the initial public offering of shares of Toys - Japan, which was completed on April 24, 2000. Of this gain, $91 million resulted from an adjustment to the basis of the company's investment in Toys - Japan and $224 million related to the sale of a portion of company-owned common stock of Toys - Japan. In connection with this transaction, the company also received net cash proceeds of $267 million and recorded a provision for current income taxes of $82 million and a provision for deferred income taxes of $33 million, respectively. As a result of this transaction, the company's ownership percentage in the common stock of Toys - Japan was reduced from 80% to 48%. Toys - - Japan is a licensee of the company. 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. This acquisition was intended to accelerate the company's strategy to establish a leadership position in the learning and educational category and to provide further opportunities for new growth. At February 3, 2001, the company operated 37 Imaginarium toy stores in the U.S. In addition, the company has adopted the Imaginarium concept in its new toy store format. The operating results of Imaginarium 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. Michael Goldstein, the company's Chairman of the Board of Directors, assumed the role of Chief Executive Officer on an interim basis. 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. On January 17, 2000, John H. Eyler, Jr. was named President and Chief Executive Officer and a director of the company, replacing Mr. Goldstein. On March 7, 2001, the company announced that Mr. Eyler will replace Mr. Goldstein as Chairman of the Board of Directors at the Annual Stockholders meeting on June 6, 2001. Mr. Eyler will also continue as President and Chief Executive Officer of the company while Mr. Goldstein will remain as a director of the company. 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 24 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 consolidated financial condition, results of operations or cash flows. Recent Accounting Pronouncements In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities" ("SFAS 133") which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133 was later amended by SFAS No. 137 and SFAS No. 138. This standard requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The standard becomes effective in the first quarter of the company's fiscal year 2001. The cumulative effect of adoption of this statement will not be material to the company's consolidated financial condition, results of operations or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements". The company's adoption of SAB 101 in fiscal 2000 did not have a material impact on the consolidated financial condition, results of operations or cash flows. In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for Certain Sales Incentives", which changes the way companies must account for certain sales incentives. The company will adopt EITF 00-14 in the first quarter of its fiscal year 2001. The adoption of this EITF 00-14 is not expected to have a material impact on the company's consolidated financial condition, 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 impact on its consolidated financial condition, results of operations or cash flows. 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. [PHOTO OMITTED] 25 Consolidated Statements of Earnings Toys"R"Us, Inc. and Subsidiaries
Year Ended --------------------------------------------------------- February 3, January 29, January 30, (In millions, except per share data) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Net sales $ 11,332 $ 11,862 $ 11,170 Cost of sales 7,815 8,321 8,191 - -------------------------------------------------------------------------------------------------------------------- Gross Margin 3,517 3,541 2,979 - -------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 2,832 2,743 2,443 Depreciation and amortization 290 278 255 Equity in net earnings of Toys - Japan (31) - -- Restructuring charge - - 294 - -------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 3,091 3,021 2,992 - -------------------------------------------------------------------------------------------------------------------- Operating Earnings/(Loss) 426 520 (13) Other income (expense): Gain from IPO of Toys - Japan 315 -- -- Interest expense (127) (91) (102) Interest and other income 23 11 9 - -------------------------------------------------------------------------------------------------------------------- Earnings/(loss) before income taxes 637 440 (106) Income taxes 233 161 26 - -------------------------------------------------------------------------------------------------------------------- Net earnings/(loss) $ 404 $ 279 $ (132) - -------------------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share $ 1.92 $ 1.14 $ (0.50) - -------------------------------------------------------------------------------------------------------------------- Diluted earnings/(loss) per share $ 1.88 $ 1.14 $ (0.50) - --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. [PHOTO OMITTED] 26 Consolidated Balance Sheets Toys"R"Us, Inc. and Subsidiaries
February 3, January 29, (In millions) 2001 2000 - -------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 275 $ 584 Accounts and other receivables 225 182 Merchandise inventories 2,307 2,027 Prepaid expenses and other current assets 100 80 - -------------------------------------------------------------------------------------------- Total current assets 2,907 2,873 Property and Equipment: Real estate, net 2,348 2,342 Other, net 1,909 2,113 - -------------------------------------------------------------------------------------------- Total property and equipment 4,257 4,455 Investment in Toys - Japan (market value of $583 at February 3, 2001) 108 - Goodwill, net 361 374 Other assets 370 651 - -------------------------------------------------------------------------------------------- $ 8,003 $ 8,353 - -------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current Liabilities: Short-term borrowings $ 121 $ 278 Accounts payable 1,152 1,617 Accrued expenses and other current liabilities 837 836 Income taxes payable 241 107 - -------------------------------------------------------------------------------------------- Total current liabilities 2,351 2,838 Long-term debt 1,567 1,230 Deferred income taxes 402 362 Other liabilities 195 243 Minority interest in Toysrus.com 70 - Stockholders' Equity: Common stock 30 30 Additional paid-in capital 439 453 Retained earnings 5,161 4,757 Foreign currency translation adjustments (211) (137) Treasury shares, at cost (2,001) (1,423) - -------------------------------------------------------------------------------------------- Total stockholders' equity 3,418 3,680 - -------------------------------------------------------------------------------------------- $ 8,003 $ 8,353 - --------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 27 Consolidated Statements of Cash Flows Toys"R"Us, Inc. and Subsidiaries
Year Ended --------------------------------------- February 3, January 29, January 30, (In millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net earnings/(loss) $ 404 $ 279 $(132) Adjustments to reconcile net earnings/(loss) to net cash from operating activities: Depreciation and amortization 290 278 255 Deferred income taxes 67 156 (90) Minority interest in Toysrus.com (33) -- -- Equity in net earnings of Toys - Japan (31) -- -- Gain from initial public offering of Toys - Japan (315) -- -- Toysrus.com related non-cash costs and charges 81 -- -- Restructuring and other charges -- -- 546 Changes in operating assets and liabilities: Accounts and other receivables (69) 35 (43) Merchandise inventories (486) (192) 233 Prepaid expenses and other operating assets (54) (69) (27) Accounts payable, accrued expenses and other liabilities (178) 497 229 Income taxes payable 173 (119) (7) - ------------------------------------------------------------------------------------------------------------ Net cash from operating activities (151) 865 964 - ------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Capital expenditures, net (402) (533) (373) Purchase of Imaginarium, net of cash acquired -- (43) -- Net proceeds from sale of Toys - Japan common stock 267 -- -- Reduction in cash due to deconsolidation of Toys - Japan (15) -- -- Other assets -- (28) (49) - ------------------------------------------------------------------------------------------------------------ Net cash from investing activities (150) (604) (422) - ------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Short-term borrowings, net 419 95 4 Long-term borrowings 147 593 771 Long-term debt repayments (45) (604) (412) Proceeds received from investors in Toysrus.com 97 -- -- Issuance of stock warrants 10 -- -- Exercise of stock options 2 14 16 Share repurchase program (632) (200) (723) - ------------------------------------------------------------------------------------------------------------ Net cash from financing activities (2) (102) (344) - ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents (6) 15 (2) Cash and Cash Equivalents (Decrease)/increase during year (309) 174 196 Beginning of year 584 410 214 - ------------------------------------------------------------------------------------------------------------ End of year $ 275 $ 584 $ 410 - ------------------------------------------------------------------------------------------------------------ Supplemental Disclosures of Cash Flow Information Income tax (refunds) payments, net $ (2) $ 126 $ 122 - ------------------------------------------------------------------------------------------------------------ Interest payments $ 128 $ 92 $ 109 - ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 28 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, 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 - ------------------------------------------------------------------------------------------------------------------------------ Net earnings for the year -- -- -- -- -- -- 404 404 Foreign currency translation adjustments -- -- -- -- -- (74) -- (74) - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 330 Share repurchase program -- -- (42.1) (632) -- -- -- (632) Issuance of restricted stock, net -- -- -- 50 (21) -- -- 29 Exercise of stock options, net -- -- .3 4 (3) -- -- 1 Issuance of stock warrants -- -- -- -- 10 -- -- 10 - ------------------------------------------------------------------------------------------------------------------------------ Balance, February 3, 2001 300.4 $ 30 (102.9) $(2,001) $ 439 $ (211) $ 5,161 $ 3,418 - ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. [GARPHIC OMITTED] 29 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 2000, 1999 and 1998 are for the 53 weeks ended February 3, 2001, and for the 52 weeks ended January 29, 2000 and January 30, 1999, respectively. Reclassification Certain amounts in 1999 and 1998 have been reclassified to conform to the 2000 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. Revenue Recognition The company recognizes retail sales at the time the customer takes possession of merchandise - that is, the point of sale. Revenues from the sale of gift cards and issuance of store credits are recognized when they are redeemed. Total Enterprise Sales Total enterprise sales include sales by all stores, whether operated by the company, by franchisees or under joint-venture agreements. Total enterprise sales were $12,774, $12,118 and $11,459 for 2000, 1999 and 1998, respectively. Advertising Costs Net advertising costs are included in selling, general and administrative expenses and are expensed as incurred. 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. toy store division, which represent approximately 68% 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 February 3, 2001 or January 29, 2000. 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 February 3, 2001 or January 29, 2000. The related receivable, payable and deferred gain or loss are included on a net basis in the balance sheet. The company had $95 and $59 of short-term outstanding forward contracts at February 3, 2001 and January 29, 2000, maturing in 2001 and 2000, 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 February 3, 2001 and January 29, 2000, respectively, related to its 475 Swiss franc note payable due fiscal 2003. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. GAIN FROM INITIAL PUBLIC OFFERING OF TOYS-JAPAN The company recorded a non-operating gain of $315 ($200 net of taxes) resulting from the initial public offering of shares of Toys - Japan, which was completed on April 24, 2000. Of this gain, $91 resulted from an adjustment to the basis of the company's investment in Toys - Japan and $224 related to the sale of a portion of company-owned common stock of Toys - Japan. In connection with this transaction the company also received net cash proceeds of $267 and recorded a provision for current income taxes of $82 and a provision for deferred income taxes of $33, respectively. As a result of this transaction, the company's ownership percentage in the common stock of Toys - Japan was reduced from 80% to 48%. Toys - Japan is a licensee of the company. 30 PROPERTY AND EQUIPMENT Useful Life February 3, January 29, (in years) 2001 2000 - -------------------------------------------------------------------------------- Land $ 810 $ 827 Buildings 45-50 1,849 1,859 Furniture and equipment 5-20 2,218 2,046 Leaseholds and leasehold improvements 12 1/2-35 1,291 1,432 Construction in progress 97 42 Leased property and equipment under capital lease 56 26 - -------------------------------------------------------------------------------- 6,321 6,232 Less accumulated depreciation and amortization 2,064 1,777 - -------------------------------------------------------------------------------- $4,257 $4,455 - -------------------------------------------------------------------------------- Included in accumulated depreciation and amortization is approximately $24 and $21 related to assets under capital lease at February 3, 2001 and January 29, 2000, respectively. SEASONAL FINANCING AND LONG-TERM DEBT February 3, January 29, 2001 2000 - -------------------------------------------------------------------------------- Commercial Paper, interest rates from 6.37% to 6.75% for 2000 and 5.64% to 5.98% for 1999(a) $ 834 $ 368 475 Swiss franc note payable, due fiscal 2003(b) 342 342 83/4% debentures, due fiscal 2021, net of expenses 198 198 16 billion yen note payable at an effective cost of 2.32% due in semi-annual installments through fiscal 2005(c) 147 -- Industrial revenue bonds, net of expenses(d) 41 52 Obligations under capital leases 32 8 Mortgage notes payable at annual interest rates from 10.16% to 11.00%(e) 9 10 Japanese yen loans with interest payable at annual rates from 1.49% to 6.47%, due in varying amounts through 2012 -- 242 7% British pound sterling loan payable, due quarterly through 2001 -- 19 81/4% sinking fund debentures, due 2017, net of discounts -- 12 - -------------------------------------------------------------------------------- 1,603 1,251 Less current portion(f) 36 21 - -------------------------------------------------------------------------------- $1,567 $1,230 - -------------------------------------------------------------------------------- (a) Included in this amount for 2000 is the EURO equivalent of $466 used to refinance outstanding commercial paper obligations (see "Subsequent Event" footnote). (b) 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 100 basis points. (c) Collateralized by the expected future yen cash flows from license fees due from Toys - Japan. (d) Bank letters of credit of $21, expiring in 2002, 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 5.5% and 4.1% at February 3, 2001 and January 29, 2000, respectively. (e) Collateralized by property and equipment with an aggregate carrying value of $9 and $12 at February 3, 2001 and January 29, 2000, respectively. (f) Included in accrued expenses and other current liabilities on the consolidated balance sheets. The fair market value of the company's long-term debt at February 3, 2001 and January 29, 2000, exclusive of commercial paper, was approximately $770 and $932, 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. On December 8, 2000, the company obtained a $400 unsecured committed revolving credit facility expiring in December 2001, from a syndicate of financial institutions. These facilities are available to support the company's domestic commercial paper borrowings. Commercial paper of $368 is classified as long-term debt, 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. In addition, the company has reclassified $466 of commercial paper to long-term debt as of February 3, 2001, in conjunction with the EURO borrowings (see "Subsequent Event" footnote). Commercial paper of $121 and $152 at February 3, 2001 and January 29, 2000, respectively, was included in short-term debt. Additionally, the company has lines of credit with various banks to meet short-term financing needs of its foreign subsidiaries. The weighted-average interest rates on short-term borrowings outstanding at February 3, 2001 and January 29, 2000 were 6.6% and 4.8%, respectively. The annual maturities of long-term debt at February 3, 2001, excluding commercial paper of $368, are as follows: - -------------------------------------------------------------------------------- 2001 $ 36 2002 36 2003 378 2004 502 2005 35 2006 and subsequent 248 - -------------------------------------------------------------------------------- $1,235 - -------------------------------------------------------------------------------- 31 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 February 3, 2001 are as follows: Gross Net minimum Sublease minimum rentals income rentals - -------------------------------------------------------------------------------- 2001 $ 250 $ 19 $ 231 2002 247 17 230 2003 239 15 224 2004 230 12 218 2005 220 10 210 2006 and subsequent 1,682 50 1,632 - -------------------------------------------------------------------------------- $2,868 $ 123 $2,745 - -------------------------------------------------------------------------------- Total rent expense, net of sublease income was $291, $350 and $334 in 2000, 1999 and 1998, respectively. STOCKHOLDERS' EQUITY The common shares of the company, par value $0.10 per share, were as follows: February 3, January 29, 2001 2000 - -------------------------------------------------------------------------------- Authorized shares 650.0 650.0 - -------------------------------------------------------------------------------- Issued shares 300.4 300.4 - -------------------------------------------------------------------------------- Treasury shares 102.9 61.1 - -------------------------------------------------------------------------------- Issued and outstanding shares 197.5 239.3 - -------------------------------------------------------------------------------- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: 2000 1999 1998 - ------------------------------------------------------------------------------- Numerator: Net earnings/(loss) available to common stockholders $ 404 $ 279 $ (132) Denominator for basic earnings per share - weighted average shares 210.9 244.8 265.4 Effect of dilutive securities: Stock options, etc 4.1 .6 -- Denominator for diluted earnings per share - adjusted weighted average shares 215.0 245.4 265.4 - ------------------------------------------------------------------------------- Basic earnings/(loss) per share $ 1.92 $ 1.14 $ (0.50) - ------------------------------------------------------------------------------- Diluted earnings/(loss) per share $ 1.88 $ 1.14 $ (0.50) - ------------------------------------------------------------------------------- Options to purchase approximately 3.0, 38.7 and 25.0 shares of common stock were outstanding during 2000, 1999 and 1998, 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. STOCK PURCHASE WARRANTS The company issued 1.2 stock purchase warrants to SOFTBANK Venture Capital and affiliates ("SOFTBANK") for $8.33 per warrant. Each warrant gives the holder thereof the right to purchase one share of Toys"R"Us common stock at an exercise price of $13 per share, until the expiration date of February 24, 2010. As of February 3, 2001, none of these warrants have been exercised. In addition, the company granted a warrant on August 9, 2000 entitling Amazon.com to acquire up to 5% (subject to dilution under certain circumstances) of the capital of Toysrus.com at the then market value. As of February 3, 2001, this warrant has not been exercised. INVESTMENT IN TOYS - JAPAN The company accounts for its investment in the common stock of Toys - Japan on the "equity method" of accounting since the initial public offering on April 24, 2000. At February 3, 2001, the quoted market value of the company's investment was $583. The valuation represents a mathematical calculation based on the closing quotation published by the Tokyo over-the-counter market and is not necessarily indicative of the amount that could be realized upon sale. TAXES ON INCOME The provisions for income taxes consist of the following: 2000 1999 1998 - ------------------------------------------------------------------------------- Current: Federal $ 120 $ (12) $ 78 Foreign 36 17 18 State 10 -- 20 - ------------------------------------------------------------------------------- 166 5 116 - ------------------------------------------------------------------------------- Deferred: Federal 50 31 (64) Foreign 13 124 (9) State 4 1 (17) - ------------------------------------------------------------------------------- 67 156 (90) - ------------------------------------------------------------------------------- Total tax provision $ 233 $ 161 $ 26 - ------------------------------------------------------------------------------- The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following: February 3, January 29, 2001 2000 - ------------------------------------------------------------------------------- Deferred tax assets: Foreign loss carryforwards $ 290 $ 330 Restructuring 42 67 Other 25 48 - ------------------------------------------------------------------------------- Gross deferred tax assets 357 445 Valuation allowances, primarily related to foreign loss carryforwards (266) (273) - ------------------------------------------------------------------------------- $ 91 $ 172 - ------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 316 316 LIFO inventory 16 30 - ------------------------------------------------------------------------------- Gross deferred tax liabilities $ 332 $ 346 - ------------------------------------------------------------------------------- Net deferred tax liability $ 241 $ 174 - ------------------------------------------------------------------------------- 32 On February 3, 2001, the company had $758 of foreign loss carryforwards of which $232 must be utilized within the next seven years and $526 over an indefinite period. A reconciliation of the federal statutory tax rate with the effective tax rate follows: 2000 1999 1998 - ------------------------------------------------------------------------------ Statutory tax rate 35.0% 35.0% (35.0)% State income taxes, net of federal income tax benefit 1.4 0.6 4.2 Foreign taxes 4.1 (2.6) (22.4) Valuation allowances for foreign loss carryforwards (1.5) 30.0 74.7 Tax benefit of branch election (1.4) (22.5) -- Subpart F income 0.6 1.0 8.5 Foreign tax credits (3.8) (1.6) (6.8) Tax on previously unremitted earnings 3.7 -- -- Amortization of goodwill 0.5 0.7 3.0 Other, net (2.1) (4.1) (1.7) - ------------------------------------------------------------------------------ Effective tax rate 36.5% 36.5% 24.5% - ------------------------------------------------------------------------------ In 2000, the company elected to treat one of its foreign subsidiaries as a U.S. branch, claimed deductions for its investment in this subsidiary, and reduced its current tax expense. In 1999, the company also elected to treat two of its other foreign subsidiaries as U.S. branches. 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. 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 $321 at February 3, 2001. Net income taxes of approximately $87 would be due if these earnings were 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 three years from the date of grant, 50% over the first two years and the remaining 50% over three years. 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. 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 February 3, 2001, an aggregate of 45.4 shares of authorized common stock were reserved for all of the Plans noted above, of which 17.7 were available for future grants. All outstanding options expire at dates ranging from November 1, 2001 to January 30, 2011. Stock option transactions are summarized as follows: Exercise Price Weighted-Average Shares Per Share Exercise Price - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- Granted 7.5 10.25 - 26.25 15.29 Exercised (0.4) 14.78 - 22.06 18.96 Canceled (22.2) 14.63 - 40.94 28.60 - -------------------------------------------------------------------------------- Outstanding at February 3, 2001 24.7 $10.25 - $40.94 $18.36 - -------------------------------------------------------------------------------- Options exercisable and the weighted-average exercise prices were 10.8 and $28.25 at January 30, 1999, 20.7 and $23.94 at January 29, 2000, and 11.3 and $19.60 at February 3, 2001, respectively. At February 3, 2001, the company's Toysrus.com internet subsidiary had approximately 15.0 stock options outstanding to both employees and non-employees of the company, representing approximately 15% of the authorized common stock of Toysrus.com at February 3, 2001. These outstanding options, with exercise prices ranging between $0.30 and $2.25 per share, entitle each option holder the right to purchase one share of the common stock of Toysrus.com. 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 33 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 earnings/(loss) and earnings/(loss) per share would have been reduced to the pro forma amounts indicated in the table below: 2000 1999 1998 - ------------------------------------------------------------------------------- Net earnings/(loss) - as reported $ 404 $ 279 $ (132) Net earnings/(loss) - pro forma 385 232 (162) Basic earnings/(loss) per share - as reported 1.92 1.14 (0.50) Basic earnings/(loss) per share - pro forma 1.83 0.95 (0.61) Diluted earnings/(loss) per share - as reported 1.88 1.14 (0.50) Diluted earnings/(loss) per share - pro forma 1.79 0.95 (0.61) - ------------------------------------------------------------------------------- The weighted-average fair value at date of grant for options granted in 2000, 1999 and 1998 was $5.88, $6.26 and $5.31, 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 1998 through 2000, a range of assumptions are provided below: 2000 1999 1998 - -------------------------------------------------------------------------------- Expected stock price volatility .434 - .585 .351 - .568 .283 - .347 Risk-free interest rate 5.0% - 6.8% 4.7% - 6.7% 4.7% - 5.8% Weighted average expected life of options 5 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. REPLACEMENT OF CERTAIN STOCK OPTION GRANTS WITH RESTRICTED STOCK The company authorized the exchange of certain stock options, having an exercise price above $22 per share, for an economically equivalent grant of restricted stock. The exchange, which was voluntary, replaced approximately 14.4 options with approximately 1.7 restricted shares. Shares of restricted stock resulting from the exchange vest over a period of three years, with one-half of the grant vesting on April 1, 2002 and the remainder vesting on April 1, 2003. Accordingly, the company recognizes compensation expense throughout the vesting period of the restricted stock. During 2000, the company recorded $8 in compensation expense related to this restricted stock. 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 $50, $48 and $41 have been charged to earnings in 2000, 1999 and 1998, respectively. TOYSRUS.COM The company entered into an agreement with SOFTBANK which included an investment by SOFTBANK of $60 in Toysrus.com for a 20% ownership interest. Accordingly, the company has recorded a 20% minority interest in the net losses of Toysrus.com in selling, general and administrative expenses. Toysrus.com received additional capital contributions of $37 from SOFTBANK representing its proportionate share of funding required for the operations of Toysrus.com In connection with the agreement with SOFTBANK, the company issued 1.2 stock purchase warrants ("warrants") for $8.33 per warrant. Each warrant gives the holder thereof the right to purchase one share of Toys"R"Us common stock at an exercise price of $13 per share, until the expiration date of February 24, 2010. As of February 3, 2001, none of these warrants have been exercised. Toysrus.com entered into a 10-year strategic alliance with Amazon.com to create a co-branded toy and video game on-line store, which was launched in the third quarter 2000 and a co-branded baby products on-line store, which will commence operations in 2001. Under this alliance each company is responsible for specific aspects of the on-line stores. Toysrus.com is responsible for merchandising and content for the co-branded store. Toysrus.com also identifies, buys, owns and manages the inventory. Amazon.com handles web site development, order fulfillment, customer service, and the housing of Toysrus.com's inventory in Amazon.com's U.S. distribution centers. Amazon.com was granted on August 9, 2000 a warrant entitling it to acquire up to 5% (subject to dilution under certain circumstances) of the capital of Toysrus.com at the then market value. As of February 3, 2001, this warrant has not been exercised. As a result of the transition to the co-branded site, the company's Toysrus.com subsidiary incurred non-recurring costs and charges totaling approximately $118, $10 of which were included in cost of sales and $108 of which were included in selling, general and administrative expenses, primarily relating to the closure of three distribution centers, the write-off of web site assets, as well as other costs associated with migrating data and merchandise to the new site and facilities. These costs and charges were recorded in the third quarter of 2000. These initiatives are expected to be completed in the company's upcoming business cycle. At February 3, 2001, reserves of approximately $80, primarily related to exit costs for distribution centers, are reasonable estimates of what is required to complete these initiatives. ACQUISITION On August 20, 1999, the company acquired all of the capital stock of Imaginarium Toy Centers, Inc., 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 34 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 - U.S., Toys"R"Us - International, Toys"R"Us - Japan, Babies"R"Us and Toysrus.com. Included in the category classified as "Other" are the operating results of the Kids"R"Us division and equity in the net earnings of Toys"R"Us - Japan, as well as other corporate related items. Toys"R"Us - U.S. operates toy stores in 49 states and Puerto Rico, Toys"R"Us - International operates or franchises toy stores in 27 countries outside the United States and Babies"R"Us operates stores in 33 states. Information on segments and a reconciliation to earnings/(loss) before income taxes, are as follows: Year ended - ------------------------------------------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 - ------------------------------------------------------------------------------- Net sales Toys"R"Us - U.S. $ 7,073 $ 6,911 $ 6,658 Toys"R"Us - International(a) 1,872 1,990 2,090 Toys"R"Us - Japan(b) 277 1,208 906 Babies"R"Us 1,310 1,036 810 Toysrus.com 180 49 -- Kids"R"Us 620 668 706 - ------------------------------------------------------------------------------- Total $ 11,332 $ 11,862 $ 11,170 - ------------------------------------------------------------------------------- Operating earnings/(loss) Toys"R"Us - U.S. $ 407 $ 392 $ 508 Toys"R"Us - International(a) 124 98 103 Toys"R"Us - Japan, net of minority interest(b) 8 64 43 Babies"R"Us 110 69 30 Toysrus.com, net of minority interest (212) (86) -- Restructuring and other charges -- -- (698) Other (11) (17) 1 - ------------------------------------------------------------------------------- Operating earnings/(loss) 426 520 (13) Interest expense, net (104) (80) (93) Gain from IPO of Toys - Japan 315 -- -- - ------------------------------------------------------------------------------- Earnings/(loss) before income taxes $ 637 $ 440 $ (106) - ------------------------------------------------------------------------------- Identifiable assets Toys"R"Us - U.S. $ 5,384 $ 4,801 $ 4,300 Toys"R"Us - International(a) 1,235 1,274 1,742 Toys"R"Us - Japan(b) -- 813 680 Babies"R"Us 486 389 295 Toysrus.com 141 65 -- Other 757 1,011 882 - ------------------------------------------------------------------------------- Total $ 8,003 $ 8,353 $ 7,899 - ------------------------------------------------------------------------------- Depreciation and amortization Toys"R"Us - U.S. $ 193 $ 172 $ 154 Toys"R"Us - International(a) 42 47 52 Toys"R"Us - Japan(b) 4 16 11 Babies"R"Us 26 22 19 Toysrus.com 6 2 -- Other 19 19 19 - ------------------------------------------------------------------------------- Total $ 290 $ 278 $ 255 - -------------------------------------------------------------------------------- (a) Excludes Toys"R"Us - Japan. (b) Toys"R"Us - Japan has been accounted for under the equity method since its initial public offering on April 24, 2000. The company had consolidated the results of Toys"R"Us - Japan prior to this event. RESTRUCTURING AND OTHER CHARGES In 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 $353 ($279 net of tax benefits, or $1.05 per share). These 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 31 Kids"R"Us stores and conversion of 28 nearby U.S. toy stores into combination stores in the company's C-3 format. Other charges consisted primarily of changes in accounting estimates and provisions for legal settlements of $59 recorded in selling, general and administrative expenses. Of the total restructuring and other charges, $169 related to domestic operations and $184 related to international operations. During 2000, the company updated its review of all of these initiatives including the closing of stores, distribution centers and other restructuring actions. Based upon this review, the company's revised estimates to complete these initiatives indicated that certain reserves were either no longer required or were in excess of the required amount, while other initiatives required additional reserves. As a result, the company reversed an $11 reserve in 2000. The company believes the unused reserves existing at February 3, 2001 are reasonable estimates of what is required to complete these actions. These reserves are expected to be utilized in the company's upcoming business cycle, with the exception of long-term lease commitment reserves that will be utilized throughout 2001 and thereafter. Also in 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. The company believes the unused reserves of $7 are reasonable estimates of what is required to complete its store closing initiatives. These reserves are expected to be utilized in the company's upcoming business cycle. 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 2001 and thereafter. 35 LOSS RELATED TO STORE CLOSING During the third quarter of 2000, the company announced its intention to open a new flagship store in Times Square, New York City during 2001. In conjunction with this plan, the company has committed to close and exit its store in Herald Square, New York City, which is expected to close in mid-2001. Accordingly, the company has accrued $11 in the quarter ended October 28, 2000, representing anticipated costs to exit this location. SUBSEQUENT EVENT On February 13, 2001, the company borrowed 500 EURO through the public issuance of a EURO bond bearing interest at 6.375% per annum. The obligation was swapped into a $466 fixed rate obligation with an effective rate of 7.43% per annum with interest payments due annually and principal due February 13, 2004. The proceeds were used to reduce outstanding commercial paper obligations. Accordingly, the company has reclassified $466 from short-term borrowings to long-term debt at February 3, 2001. 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 was in violation of Section 5 of the Federal Trade Commission Act for its practices relating to warehouse clubs. The complaint alleged that the company reached understandings with various suppliers that such suppliers would not sell to the clubs the same items that they sell to the company. The complaint also alleged that the company "facilitated understandings" among the manufacturers that such manufacturers would not sell to clubs. The complaint sought 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. On August 1, 2000, the United States Court of Appeals affirmed the FTC's final order. 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 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 has accrued all anticipated costs relating to this matter as of January 30, 1999. In August 2000, eleven purported class action lawsuits were filed (six in the United Stated District Court for the District of New Jersey, three in the United Stated District Court for the Northern District of California, one in the United Stated District Court for the Western District of Texas and one in the Superior Court of the State of California, County of San Bernadino), against the company and its affiliates Toysrus.com, Inc. and Toysrus.com, LLC. In September 2000, three additional purported class action lawsuits were filed (two in the United Stated District Court for the District of New Jersey and one in the United Stated District Court for the Western District of Texas). These actions generally purport to bring claims on behalf of all persons who have visited one or more of the company's web sites and either made an online purchase or allegedly had information about them unlawfully "intercepted," "monitored," "transmitted," or "used." All the suits (except one filed in the United Stated District Court for the District of New Jersey) also named Coremetrics, Inc. ("Coremetrics"), an internet marketing company, as a defendant. These lawsuits assert various claims under the federal privacy and computer fraud statutes, as well as under state statutory and common law, arising out of an agreement between the company and Coremetrics, alleging that the company tracks its web site users' activities online and shares that information with third parties in violation of the law. These suits seek damages in unspecified amounts and other relief under state and federal law. The company and Coremetrics filed a joint application with the Multidistrict litigation panel (the "MDL Panel") to have all of the federal actions consolidated and transferred to the United States District Court for the Northern District of California. A hearing on that application was held on November 17, 2000, and all matters have now been consolidated in the United States District Court for the Northern District of California. The company believes that it has substantial defenses to these claims and plans to vigorously defend these lawsuits. 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. 36 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/ John H. Eyler, Jr. /s/ Louis Lipschitz John H. Eyler, Jr. Louis Lipschitz President and Executive Vice President Chief Executive Officer 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 February 3, 2001 and January 29, 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended February 3, 2001. 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 February 3, 2001 and January 29, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York March 7, 2001 [GRAPHIC OMITTED] 37 DIRECTORS AND OFFICERS Directors Charles Lazarus Chairman Emeritus of the company Michael Goldstein Chairman of the Board of the company RoAnn Costin President, Reservoir Capital Management, Inc. John H. Eyler, Jr. President and Chief Executive Officer of the company Calvin Hill Consultant Nancy Karch Consultant and former Director (Senior Partner) of McKinsey & Company 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 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 Francesca L. Brockett Executive Vice President - Strategic Planning/ Business Development Christopher K. Kay Executive Vice President - General Counsel, Corporate Secretary Warren F. Kornblum Executive Vice President - Worldwide Marketing and Brand Management Louis Lipschitz Executive Vice President - Chief Financial Officer John Holohan Senior Vice President - Chief Information Officer Jon W. Kimmins Senior Vice President - Treasurer Dorvin D. Lively Senior Vice President - Corporate Controller Peter W. Weiss Senior Vice President - Taxes David Braxton Vice President - Enterprise Guest Relations Rebecca A. Caruso Vice President - Corporate Communications Michael J. Corrigan Vice President - Compensation and Benefits Richard N. Cudrin Vice President - Human Resources, Distribution and Associate Relations Marianita Howard Vice President - Creative Services Ronald V. Lombardi Vice President - Real Estate Counsel Amy L. Muntner Vice President - Strategic Planning and Business Development David Picot Vice President - Real Estate, Design and Construction Dion C. Rooney Vice President - Systems Development David J. Schwartz Vice President - Corporate Attorney Michael L. Tumolo Vice President - Counsel Monica L. Wood Vice President - Consumer Insights [GRAPHIC OMITTED] 38 Toys"R"Us United States Gregory R. Staley President James E. Feldt President - Merchandising and Marketing James R. Bodemuller Senior Vice President - Planning and Allocation Jonathan M. Friedman Senior Vice President - Chief Financial Officer Andrew R. Gatto Senior Vice President - Product Development Dennis J. Williams Senior Vice President - Operations Kristopher M. Brown Vice President - Logistics Thomas F. DeLuca Vice President - Imports, Product Development and Safety Assurance Alfred Fortier Vice President - World Leader Emanual J. Francione Vice President - World Leader Daniel D. Hlavaty Vice President - Loss Prevention Frederick L. Hurley Vice President - World Leader Michael C. Jacobs Vice President - Worldwide Transportation Elizabeth S. Jordan Vice President - Human Resources J. Thomas Lynn Vice President and President of Imaginarium Stores Julie E. Lynn Vice President - World Leader Charlene Mady Vice President - Merchandise Allocation Gerald S. Parker Vice President - Customer Support and Administration Timothy J. Slade Vice President - Store Planning William A. Stephenson Vice President - Merchandise Planning and Allocation Elliott Wahle Vice President - General Manager David S. Walker Vice President - U.S. Marketing and Advertising Steven M. Whealon Vice President - World Leader, Special Projects Wayne T. Yodzio Vice President - World Leader Harvey J. Finkel Regional Vice President - Northeast Michael K. Heffner Regional Vice President - Midwest 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 Joan W. Donovan Senior Vice President - General Merchandise Manager Ernest V. Speranza Senior Vice President - Marketing Robert J. Baker Vice President - Finance Larry D. Gardner Vice President - Operations Arthur J. Mason Vice President - Management Information Systems 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 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 Janet L. Emerson President - Kids"R"Us Martin E. Fogelman Senior Vice President - General Merchandise Manager - Juvenile James G. Parros Senior Vice President - Stores and Distribution Center Operations Kids"R"Us David E. Schoenbeck Senior Vice President - Operations Babies"R"Us Pamela B. Wallack Senior Vice President - General Merchandise Manager Kids"R"Us Cari Cox Vice President - Divisional Merchandise Manager Kids"R"Us Therese R. Dena Vice President - Planning and Allocation Kids"R"Us Deborah Derby Vice President - Human Resources Babies"R"Us Daniel C. DeYoe Vice President - Sourcing and Quality Assurance Kids"R"Us Nora Gomez Vice President - Divisional Merchandise Manager Kids"R"Us Julie Jardine-Bobrow Vice President - Divisional Merchandise Manager Kids"R"Us Susan Montecallo Pagano Vice President - Marketing Babies"R"Us Vincent A. Scarfone Vice President - Human Resources Kids"R"Us Christopher M. Scherm Vice President - Marketing Kids"R"Us Robert S. Zarra Vice President - Chief Financial Officer Kids"R"Us and Babies"R"Us Toysrus.com John Barbour Chief Executive Officer Raymond L. Arthur Senior Vice President - Chief Financial Officer Joel D. Anderson Vice President - General Manager Babiesrus.com Greg Ahearn Vice President - Marketing and Business Development James M. Gorenc Vice President - Human Resources John Harper Vice President - Managing Director International Daniel J. Kochenash Vice President - Operations Jeanne Meyer Vice President - Corporate Communications Edward J. Roth Vice President - Research John P. Sullivan Vice President - General Merchandising Manager 39 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 - ----------------------------------------------------------------------------- 2000 - ----------------------------------------------------------------------------- Net Sales $ 2,319 $ 1,994 $ 2,220 $ 4,799 Cost of Sales 1,601 1,358 1,522 3,334 Net Earnings/(Loss) 215(a)(b) 3(b) (65)(b) 251(b) Basic Earnings/(Loss) per Share $ .93 $ .01 $ (.32) $ 1.27 Diluted Earnings/(Loss) per Share $ .93 $ .01 $ (.32) $ 1.23 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(b) 15(b) 235(b) Basic Earnings per Share $ .07 $ .05 $ .06 $ .98 Diluted Earnings per Share $ .07 $ .05 $ .06 $ .98 (a) Includes the gain from the initial public offering of Toys - Japan of $315 ($200 net of tax, or $0.93 per share). (b) Includes the net loss of Toysrus.com, net of minority interest as follows: 2000 First quarter - $14 ($9 net of tax, or $0.04 per share). Second quarter - $20 ($13 net of tax, or $0.06 per share). Third quarter - $126 ($80 net of tax, or $0.39 per share). Fourth quarter - $52 ($33 net of tax, or $0.16 per share). 1999 Second quarter - $5 ($3 net of tax, or $0.01 per share). Third quarter - $17 ($11 net of tax, or $0.04 per share). Fourth quarter - $64 ($41 net of tax, or $0.17 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 hundreth) based on New York Stock Exchange trading since January 30, 1999. The company has not paid any cash dividends, however, the Board of Directors of the company reviews this policy annually. The company had approximately 30,207 Stockholders of Record on March 6, 2001. High Low - -------------------------------------------------------------------------------- 1999 1st Quarter $ 23.25 $ 13.63 2nd Quarter 24.75 15.94 3rd Quarter 17.19 13.13 4th Quarter 19.00 9.75 - -------------------------------------------------------------------------------- 2000 1st Quarter $ 15.50 $ 10.06 2nd Quarter 18.00 13.44 3rd Quarter 19.25 14.88 4th Quarter 26.69 14.50 - -------------------------------------------------------------------------------- 40 Store Locations Stores Across the U.S. at Feb. 3, 2001 Toys Kids Babies Imaginarium - -------------------------------------------------------------------------------- Alabama 8 1 2 -- Alaska 1 -- -- -- Arizona 11 -- 3 1 Arkansas 5 -- -- -- California 88 21 16 7 Colorado 10 -- 4 -- Connecticut 11 5 1 3 Delaware 2 1 1 -- Florida 47 10 11 -- Georgia 20 4 7 -- Hawaii 1 -- -- -- Idaho 2 -- -- -- Illinois 36 18 7 2 Indiana 13 6 2 -- Iowa 8 -- -- -- Kansas 5 1 1 -- Kentucky 8 -- 2 1 Louisiana 11 -- 1 -- Maine 2 1 -- -- Maryland 20 7 3 5 Massachusetts 19 6 4 -- Michigan 25 13 6 -- Minnesota 11 2 2 2 Mississippi 5 -- -- -- Missouri 13 4 4 -- Montana 1 -- -- -- Nebraska 3 -- -- -- Nevada 4 -- 2 -- New Hampshire 5 2 -- -- New Jersey 25 18 8 7 New Mexico 4 -- -- -- New York 47 22 7 3 North Carolina 16 1 5 -- North Dakota 1 -- -- -- Ohio 33 18 9 4 Oklahoma 4 -- 2 -- Oregon 8 -- 2 -- Pennsylvania 34 15 3 -- Rhode Island 1 1 1 -- South Carolina 9 -- 3 -- South Dakota 2 -- -- -- Tennessee 15 2 4 -- Texas 55 8 14 -- Utah 6 3 1 -- Vermont 1 -- -- -- Virginia 22 5 5 2 Washington 15 -- 2 -- West Virginia 4 -- -- -- Wisconsin 9 3 -- -- Puerto Rico 4 -- -- -- - -------------------------------------------------------------------------------- 710 198 145 37 - -------------------------------------------------------------------------------- Toys"R"Us International - 491 Australia - 23 Austria - 8 Bahrain - 1(a) Canada - 63 Denmark - 10(a) France - 31 Germany - 51 Hong Kong - 6(a) Indonesia - 3(a) Israel - 20(a) Japan - 111(b) Malaysia - 5(a) Mauritius - 1(a) Netherlands - 12(a) Norway - 2(a) Portugal - 6 Qatar - 1(a) Saudi Arabia - 4(a) Singapore - 4(a) South Africa - 7(a) Spain - 30 Sweden - 9(a) Switzerland - 4 Taiwan - 6(a) Turkey - 8(a) United Arab Emirates-2(a) United Kingdom - 63 (a) Franchise or joint venture. (b) 48% owned. Significant news releases are anticipated to be available as follows: Call after... For the following... May 21, 2001 1st Quarter Results Aug. 20, 2001 2nd Quarter Results Nov. 19, 2001 3rd Quarter Results Jan. 10, 2002 Holiday Sales Results Mar. 6, 2002 2001 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 organizations. Since it was established in 1992, the Toys"R"Us Children's Fund has contributed millions of dollars to hospitals and children's charities around the country. Children are important to us and the Toys"R"Us Children's Fund will continue to support charities that offer the promise of a happier, more fulfilling life for children everywhere. In support of this philosophy, we have also established the Hospital Playroom program. Designed as a safe haven of fun and play within a medical setting, Toys"R"Us Kids Playrooms were developed in cooperation with child life specialists to create a special fun-filled room that is warm and inviting. There are currently 50 rooms in 17 states helping children get better through the magic of play and love of toys. If you would like to receive more information about Toys"R"Us corporate citizenship, please write to the Community Relations Coordinator, Toys"R"Us Children's Fund, at 461 From Road, Paramus, NJ 07652. Visit us on the Internet at www.toysrus.com, www.babiesrus.com and www.imaginarium.com. Annual Meeting The Annual Meeting of the Stockholders of Toys"R"Us, Inc. will be held at The 200 Fifth Club, 200 Fifth Avenue, New York, New York, on June 6, 2001 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 Christopher K. Kay Executive Vice President of the company 461 From Road Paramus, New Jersey 07652 Independent Auditors Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 Registrar and Transfer Agent American Stock Transfer and Trust Company 59 Maiden Lane New York, New York 10007 Telephone: 212-936-5100 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 February 3, 2001, which has been filed with the Securities and Exchange Commission. Stockholder information, including quarterly earnings and other corporate new releases, can be obtained by calling 800-785-TOYS, or at our web site on the Internet at www.toysrus.com. EX-21 4 file004.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT AS OF FEBRUARY 3, 2001 Name Jurisdiction of Incorporation - ---- ----------------------------- ABG Corp. Nevada - -------------------------------------------------------------------------------- Babiesrus.com, LLC Delaware - -------------------------------------------------------------------------------- Baby Superstore, Inc. South Carolina - -------------------------------------------------------------------------------- Geoffrey, Inc. Delaware - -------------------------------------------------------------------------------- Geoffrey International, Inc. Delaware - -------------------------------------------------------------------------------- MLK, Inc. Missouri - -------------------------------------------------------------------------------- MMT, Inc. Utah - -------------------------------------------------------------------------------- Toysrus.comassetholdco, LLC Delaware - -------------------------------------------------------------------------------- Toysrus.comdc, LLC Delaware - -------------------------------------------------------------------------------- Toysrus.com, Inc. Delaware - -------------------------------------------------------------------------------- Toysrus.com, LLC Delaware - -------------------------------------------------------------------------------- Toys "R" Us - Belgium, Inc. Delaware - -------------------------------------------------------------------------------- Toys "R" Us - Delaware, 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-Services, Inc. Delaware - -------------------------------------------------------------------------------- Toys "R" Us - Texas LLC Delaware - -------------------------------------------------------------------------------- Toys "R" Us - Value, Inc. Arkansas - -------------------------------------------------------------------------------- TRU Belgium Holdings II, Inc. Delaware - -------------------------------------------------------------------------------- TRU Foreign Sales Corporation California - -------------------------------------------------------------------------------- TRU Gulf Services, Inc. Delaware - -------------------------------------------------------------------------------- TRU, Inc. Delaware - -------------------------------------------------------------------------------- TRU Investments, Inc. Delaware - -------------------------------------------------------------------------------- TRU - LSM Redevelopment Corporation Missouri - -------------------------------------------------------------------------------- TRU Netherlands Holdings I, Inc. Delaware - -------------------------------------------------------------------------------- TRU Netherlands Holdings II, 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 - -------------------------------------------------------------------------------- Toys "R" Us (Wholesale) Pty. Ltd. Australia - -------------------------------------------------------------------------------- 26 Name Jurisdiction of Incorporation - ---- ----------------------------- - -------------------------------------------------------------------------------- TRU (Aust) Superannuation Pty. Ltd. Australia - -------------------------------------------------------------------------------- Toys "R" Us Handelsgesellschaft m.b.H. Austria - -------------------------------------------------------------------------------- TRU (Barbados), Ltd. Barbados - -------------------------------------------------------------------------------- Toys "R" Us - Belgium SCA Belgium - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- Toysrus.com (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) 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 (IFSC) Unlimited United Kingdom - -------------------------------------------------------------------------------- Toys "R" Us Limited United Kingdom - -------------------------------------------------------------------------------- Toys "R" Us Properties Limited United Kingdom - -------------------------------------------------------------------------------- Tru Toys (UK) Limited United Kingdom - -------------------------------------------------------------------------------- 27 EX-23 5 file005.txt 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 7, 2001, included in the 2000 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 7, 2001, with respect to the consolidated financial statements of Toys "R" Us, Inc. and Subsidiaries incorporated by reference in this Annual Report (Form 10-K) for the year ended February 3, 2001. /s/ Ernst & Young LLP New York, New York May 2, 2001 EX-24 6 file006.txt 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 Christopher Kay 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 February 3, 2001, 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 6th day of March, 2001. Name Title Signature ---- ----- --------- Michael Goldstein Chairman of the Board /s/ Michael Goldstein ----------------------- RoAnn Costin Director /s/ RoAnn Costin ----------------------- John H. Eyler Director /s/ John H. Eyler ----------------------- Calvin Hill Director /s/ Calvin Hill ----------------------- Nancy Karch Director /s/ Nancy Karch ----------------------- Shirley Strum Kenny Director /s/ Shirley Strum Kenny ----------------------- Charles Lazarus Director, Chairman Emeritus /s/ Charles Lazarus ----------------------- Norman S. Matthews Director /s/ Norman S. Matthews ----------------------- Arthur B. Newman Director /s/ Arthur B. Newman ----------------------- -----END PRIVACY-ENHANCED MESSAGE-----