STOCK-BASED COMPENSATION

Management Equity Plan

On July 21, 2005, we adopted the Toys “R” Us, Inc. 2005 Management Equity Plan (the “Management Equity Plan”). Under the Management Equity Plan, outstanding awards during fiscal 2014 included service-based options and restricted stock to officers and other key employees of the Company and its subsidiaries. In connection with Amendment No. 2 to the 2010 Incentive Plan (“Amendment No. 2”) effective September 2014, the Company made the determination to no longer issue any awards under the Management Equity Plan.

The service-based options generally follow a graded vesting schedule of 40% on the second anniversary of the award with the remaining portion vesting in equal annual installments over the subsequent three years, subject to the participant’s continued employment with the Company, and vest automatically upon a change of control of the Company. All options generally expire on the tenth anniversary of the date of the grant, unless the terms are amended pursuant to the Management Equity Plan.

In November 2013, the Company extended the expiration dates of certain outstanding option awards under the Management Equity Plan, which were originally scheduled to expire in fiscals 2015 and 2016, to August 6, 2017. We accounted for the modification in accordance with ASC 718. Management concluded that the modification resulted in incremental compensation costs of $1 million, which were recorded in SG&A in fiscal 2013.

Under the Management Equity Plan, each participant’s restricted shares or shares issued or issuable pursuant to stock options will be subject to repurchase rights by the Company in the event of a termination of employment due to death or disability and under specific circumstances upon retirement. In connection with the 2014 Option Exchange described below, the exercise of any put rights on any shares held by the participants who elected to participate will be subject to the prior approval of the Board. The Company has no plans to open a transaction window for participants to put the shares to the Company in the foreseeable future.

2010 Incentive Plan

In fiscal 2010, we adopted the Toys “R” Us, Inc. 2010 Incentive Plan (the “2010 Incentive Plan”). The 2010 Incentive Plan provides that the total number of shares of our common stock that may be issued is 3,750,000 and the maximum number of such shares of common stock for which incentive stock options may be granted is 500,000. In connection with Amendment No. 2, the number of shares available for issuance under the 2010 Incentive Plan were increased by the number of shares available for issuance under the Management Equity Plan as of July 17, 2014 and any shares that after July 17, 2014 would have otherwise been available for issuance thereunder. The Board of Directors of the Company has discretion over the amount of shares available for future issuances of stock awards.

All outstanding options issued under the 2010 Incentive Plan and Management Equity Plan are scheduled to expire at dates ranging from August 6, 2017 to October 10, 2024. We expect to satisfy future option exercises by issuing shares held in treasury or authorized but unissued new shares.

Stock options

In fiscals 2014, 2013 and 2012, we granted options under the 2010 Incentive Plan. The options were granted at an exercise price equal to grant date fair market value. Options granted in fiscal 2014, except for the options granted under the 2014 Option Exchange described below, generally follow a graded vesting schedule of four equal annual installments commencing on the first anniversary of the awards. Additionally, certain options issued in fiscal 2014 will be subject to performance and time vesting and will only be deemed fully vested when they have both time vested and performance vested. Options granted in fiscals 2013 and 2012 generally follow a graded vesting schedule of 50% on the second anniversary of the awards with the remaining portion vesting in equal annual installments over the subsequent two years, subject to the participant’s continued employment with us, and will vest automatically upon a change of control of the Company. Options generally expire ten years from the date of the grant, however, the options issued in connection with the 2014 Option Exchange will expire the later of five years after the final vesting date of the New Options or the original expiration date of the respective Old Options.

Restricted Stock

Additionally, in connection with the services they provide as the Company’s Board of Directors, certain members of our Board of Directors were granted restricted stock units in fiscal 2014, which were valued at a fair market value on the grant date of $8.00 per share. These restricted stock units granted to certain members of our Board of Directors cliff vest 100% on the first anniversary of the grant date. In fiscals 2013 and 2012, concurrent with the grant of the options, additional awards were granted under the 2010 Incentive Plan consisting of service-based restricted stock and restricted stock units, which were valued at a fair market value on the date of grant of $30.00 per share and $44.00 per share in fiscals 2013 and 2012, respectively. The restricted stock units issued in fiscal 2013 for certain officers follow the same graded vesting schedule as the options granted in the same year, while the restricted stock units for other officers cliff vest 100% on the second anniversary of the award, subject to the participant’s continued employment with the Company, and will vest automatically upon a change in control of the Company. The service-based restricted stock and restricted stock units for fiscal 2012 follow the same graded vesting schedule as the options granted in the same year.

In fiscal 2012, certain officers were awarded performance-based restricted stock and restricted stock units valued at a fair market value on the date of the grant of $44.00. The performance-based awards cliff vest 100% on the third anniversary of the awards if the performance criteria have been met. The performance metrics are based 50% on our consolidated Adjusted Compensation EBITDA performance results and 50% on our total return on invested capital (ROIC) results, each over a three year period.

Option Exchanges

In November 2013, certain participants under the 2010 Incentive Plan were offered an opportunity to exchange certain of their outstanding stock options (“2013 Old Options”) and all outstanding performance shares or units for a grant of one new stock option (“2013 New Options”) for every two 2013 Old Options canceled, which 2013 New Options have an exercise price of $22.00. On December 23, 2013, the Company closed its offer with a total of 919,599 and 104,240 2013 Old Options and performance shares or units canceled, respectively, and a total of 459,805 2013 New Options issued under the 2010 Incentive Plan. The 2013 New Options follow a vesting schedule of 50% on the second anniversary of the awards with the remaining portion vesting in equal annual installments over the subsequent two years (subject to the earlier expiration in accordance with the 2013 New Option award agreement), subject to the participant’s continued employment with the Company, and will vest automatically upon a change of control of the Company. We accounted for the modification in accordance with ASC 718. Management has concluded that the modification had a nominal impact on compensation costs.

In September 2014, certain participants were offered an opportunity to exchange their outstanding stock options that were granted prior to fiscal 2014 (“Old Options”) under the Management Equity Plan or the 2010 Incentive Plan for new stock options granted under the 2010 Incentive Plan (“New Options”) on a one-for-one basis (the “2014 Option Exchange”). On October 10, 2014, the Company closed its offer with a total of 1,566,307 Old Options canceled and an equal amount of New Options issued under the 2010 Incentive Plan. The New Options have an exercise price of $8.00 and vest as follows: (i) New Options granted in exchange for Old Options originally granted during the period commencing on January 1, 2005 and ending on December 31, 2012 vest 50% on the award exchange date and 25% on each of the first and second anniversaries of the award exchange date and (ii) New Options granted in exchange for Old Options originally granted in fiscal 2013 vest in equal annual installments over the subsequent four years from the award exchange date. We accounted for the modification in accordance with ASC 718. Management concluded that the modification resulted in incremental compensation costs of $2 million in fiscal 2014, which were recorded in SG&A.

One-time awards

In connection with the appointment of Antonio Urcelay as CEO announced on October 16, 2013, the Company entered into an employment agreement which provided a one-time award of restricted stock units under the 2010 Incentive Plan, which had a grant date of November 5, 2013. The one-time award had a grant date fair value of $8 million, or $22.00 per share, 50% of which vested on October 16, 2014 and the remainder of which was scheduled to vest in equal installments at the end of each fiscal quarter commencing January 31, 2015, with the last portion scheduled to vest on October 31, 2015, subject to continued employment through the applicable vesting dates.

In October 2014, Mr. Urcelay exchanged the one-time restricted stock unit award described above for new options under the 2010 Incentive Plan. Pursuant to the terms of the amendment to Mr. Urcelay’s employment agreement, Mr. Urcelay forfeited certain of his outstanding restricted stock units in exchange for new options (the “Urcelay Options”). Fifty percent and 12.5% of the Urcelay Options vested on October 31, 2014, and January 31, 2015, respectively and 12.5% will vest on each of April 30, 2015, July 31, 2015 and October 31, 2015, subject to Mr. Urcelay’s continued employment on each such date. The Urcelay Options have the same exercise price per share as the New Options. We accounted for the modification in accordance with ASC 718. Management has concluded that the modification did not result in incremental compensation costs.

On November 5, 2013 the Company entered into an employment agreement with Harry J. Mullany III to serve as President, Toys “R” Us, US. The employment agreement provided a one-time award of stock options and restricted stock units under the 2010 Incentive Plan with grant date fair values of $5 million and $2 million, respectively, each at $22.00 per share. Fifty percent of the options were scheduled to vest in four equal annual installments beginning on the first anniversary of the grant date. The remaining option awards were subject to time and performance vesting and would have only been deemed fully vested when the performance obligations pursuant to Mr. Mullany’s employment agreement were satisfied. The restricted stock units were scheduled to vest in four equal annual installments beginning on the first anniversary of the grant date. Additionally, Mr. Mullany purchased 22,728 shares of stock at a price of $22.00 per share.

In October 2014, the Company and Mr. Mullany entered into an option exchange pursuant to which Mr. Mullany exchanged his outstanding time-based and performance-based options described above for equal amounts of new time-based and performance-based options. The new time-based options have the same terms and exercise price per share as the New Options issued as part of the 2014 Option Exchange. Mr. Mullany’s new performance-based options, will be subject to time and performance vesting and will only be deemed fully vested when the performance criteria is satisfied. Additionally, Mr. Mullany forfeited certain of his outstanding restricted stock units in exchange for new time-based options (the “Mullany Options”). The Mullany Options have the same exercise price per share as the New Options and will vest in four equal annual installments commencing on November 5, 2014. We accounted for the modification in accordance with ASC 718. Management has concluded that the modification had a nominal impact on compensation costs.

In June 2014, the Company entered into an employment agreement with Michael J. Short to serve as Chief Financial Officer. The employment agreement provided (i) a one-time award of stock options under the 2010 Incentive Plan, which had a grant date of October 10, 2014 and will vest in four equal annual installments beginning on the first anniversary of the grant date and (ii) a one-time award of additional options, fifty percent of which will vest in four equal annual installments beginning on the first anniversary of the grant date and the remaining fifty percent of which are subject to time and performance vesting and will only be deemed fully vested when the performance obligations pursuant to Mr. Short’s employment agreement are satisfied. These one-time awards have a grant date fair value of $1 million, at $8.00 per share.

Award Acceleration

In September 2014, the Company accelerated the vesting of certain restricted share units and restricted share awards issued under the 2010 Incentive Plan (the “Award Acceleration”). This acceleration provided that these unvested restricted shares for eligible participants became immediately vested as of September 8, 2014. We accounted for the modification of these awards in accordance with ASC 718. Management concluded that the acceleration resulted in incremental compensation costs of $1 million in fiscal 2014, which were included in SG&A.

In addition, the Company has no plans to open a transaction window for participants to put the shares to the Company in the foreseeable future, and therefore, the put right for these awards has effectively been eliminated. In accordance with ASC 718 and ASC 480, the shares have been reclassified from temporary equity to permanent equity as redemption of these equity awards is no longer considered probable or redeemable at the option of the holder.

Additional Amendments

Effective March 2012, participants in the Management Equity Plan are bound by the terms and conditions of Amendment No. 4 to the Management Equity Plan (“Amendment No. 4”). This amendment provided for, among other things, a longer exercise period, expiring no later than the original term of the option, and the right to a cashless exercise of options held by a participant who was terminated without cause after four or more years of continuous service. Option holders under the 2010 Incentive Plan had the same rights to a longer exercise period and a cashless exercise right in the event such participant’s employment was terminated without cause (or the participant resigns for good reason) after four or more years of continuous service and in certain cases of retirement, as further described in the form of option award agreement. We accounted for the modification of awards impacted by the terms of Amendment No. 4 in accordance with ASC 718. Management concluded that the modification had a nominal impact on compensation costs. In connection with the 2014 Option Exchange, the New Options will be subject to repurchase rights by the Company following a termination of employment and any cashless exercises will be subject to prior approval of the Board.

Effective May 2012, we adopted Amendment No. 5 (“Amendment No. 5”) to the Management Equity Plan. Amendment No. 5 allowed any plan participant, as long as he or she remains employed by the Company or its affiliates, the right to put up to 25%, calculated as provided in Amendment No. 5, of his or her Original Investment Shares, the number of shares that would be equal to the value of their original investment to us, during permitted transaction windows, until the occurrence of an initial public offering of the Company. The purchase price per share payable by us in connection with any such put rights would be the fair market value as of a date determined by our Board of Directors that would be the anticipated closing date of the repurchase. We accounted for the modification of awards impacted by the terms of Amendment No. 5 in accordance with ASC 718. As these awards allowed the plan participant the right to put a portion of their rollover options, we were required to account for them as liability-classified awards. These liability awards were remeasured at their fair market value as of each reporting period through the date of settlement. Management concluded that the modification resulted in incremental compensation costs of $2 million, which was recorded in SG&A in fiscal 2012. In connection with the 2014 Option Exchange, all shares issued under the Management Equity Plan will be subject to repurchase rights by the Company following a termination of employment and the exercise of any put rights on the shares will be subject to the prior approval of the Board. The Company has no plans to open a transaction window for participants to put the shares to the Company in the foreseeable future.

Effective March 2013, we adopted Amendment No. 6 (“Amendment No. 6”) to the Management Equity Plan which provides that any participant in the Management Equity Plan, who is a former employee of the Company or its affiliates as of March 1, 2013 or who continues to be employed by the Company or its affiliates, has the right to put to the Company (i) in 2013, up to 50% of his or her Original Investment Shares held at March 1, 2013 and (ii) in 2014, any or all of the participant’s then remaining Original Investment Shares, in each case, during permitted transaction windows, until the occurrence of an initial public offering of the Company. In each case, the purchase price per share payable by the Company in connection with any such put rights would be the fair market value determined as of a date determined by the Board of Directors that would be the anticipated closing date of the repurchase. Additionally effective in March 2013, certain participants under the 2010 Incentive Plan were granted the right to put to the Company any or all of the restricted stock that becomes vested as well as any net shares acquired upon vesting of restricted stock units beginning 6 months after the applicable vesting date of these awards. We accounted for the modification of these awards impacted under the Management Equity Plan and 2010 Incentive Plan in accordance with ASC 718 and ASC 480, and determined that the impacted awards retained equity classification. However, as these equity awards were redeemable for cash at the option of the holder and redemption was probable, the shares were recorded in temporary equity at their redemption value and the redemption amount was adjusted to fair market value as of each reporting period through the date of settlement. Management concluded that the modifications did not have an impact to compensation costs.

Commencing September 2014, concurrent with the Award Acceleration, the Company informed participants that it no longer has plans to open a transaction window for participants to put the shares to the Company in the foreseeable future, and therefore, the put right for these awards described above has effectively been eliminated. The shares previously recorded in temporary equity as a result of the adoption of Amendment No. 6 have been reclassified from temporary equity to permanent equity as redemption of these equity awards is no longer considered probable or redeemable at the option of the holder.

Valuation Assumptions

The fair value of each option award modified or granted under the 2010 Incentive Plan and Management Equity Plan is estimated on the date of modification or grant using a lattice option-pricing model that uses the assumptions noted in the following table, along with the associated weighted-average fair values. We use historical data to estimate pre-vesting option forfeitures. To the extent actual results of forfeitures differ from the estimates, such amounts will be recorded as an adjustment in the period the estimates are revised. The expected volatilities are based on a combination of implied and historical volatilities of a peer group of companies, as the Company is a non-publicly traded company. The risk-free rate is based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The expected term represents the median time until exercise and is based on contractual terms of the awards, expectations of employee exercise behavior and expectations of liquidity for the underlying shares. The expected dividend yield is based on an assumption that no dividends are expected to be approved in the near future. The following are the weighted-average assumptions used:



	Fiscal Years Ended
	January 31, 2015		February 1, 2014	February 2, 2013
Volatility	45.0	%	40.0%-45.0%	50.0	%
Risk-free interest rate	1.4%-2.4%		2.0%-2.7%	1.8	%
Expected term	4.0-5.5 years		3.8-5.2 years	5.1 years
Dividend Yield	—		—	—
Weighted-average grant-date fair value per option:	$2.55		$9.67	$20.27

For fiscals 2014 and 2013, the range of assumptions presented includes the assumptions used for the modified option awards as well as the grants issued under the 2010 Incentive Plan.

Options

A summary of option activity under the 2010 Incentive Plan and Management Equity Plan during fiscals 2014, 2013 and 2012 is presented below:



	Fiscal Years Ended
	January 31, 2015				February 1, 2014				February 2, 2013
	Options		Weighted-average Exercise Price		Options		Weighted-average Exercise Price		Options		Weighted-average Exercise Price
Outstanding at beginning of fiscal year	2,661,025		$	29.40	3,483,283		$	36.02	3,895,776		$	32.73
Granted	3,901,217		8.00		1,587,057		25.25		640,756		44.00
Exercised	—		—		(1,057,773	)	26.37		(735,576	)	21.61
Forfeited/Canceled	(2,639,871	)	29.23		(1,351,542	)	43.97		(317,673	)	45.13
Outstanding at end of fiscal year	3,922,371		$	8.23	2,661,025		$	29.40	3,483,283		$	36.02



	Options	Weighted-average Exercise Price		Weighted-average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Options vested or expected to vest at January 31, 2015	3,883,928	$	8.17	8.5	$	—
Options exercisable at January 31, 2015	—	$	—	—	$	—

There were no options exercised in fiscal 2014. The aggregate intrinsic value of options exercised, which includes options exercised on a net settlement basis, was $4 million and $16 million in fiscals 2013 and 2012, respectively. The total fair value of options vested was $2 million, $19 million and $23 million in fiscals 2014, 2013 and 2012, respectively. We received no proceeds from the exercise of options in fiscal 2013, and less than $1 million in fiscal 2012. We did not cash settle share-based liability awards in fiscal 2014. We paid a nominal amount and $2 million in fiscals 2013 and 2012, respectively, to cash settle share-based liability awards. We did not repurchase shares in fiscal 2014. We paid $8 million and less than $3 million in fiscals 2013 and 2012, respectively, to repurchase shares. We did not recognize any tax benefits as a result of options exercised in fiscal 2013 and recognized tax benefits of $6 million for options exercised in fiscal 2012.

As of January 31, 2015, there was $10 million of total unrecognized compensation cost related to option share-based compensation arrangements granted under the 2010 Incentive Plan and Management Equity Plan. This cost is expected to be recognized over a weighted-average period of 2.6 years.

Restricted Shares and Units

A summary of nonvested restricted share activity under the 2010 Incentive Plan during fiscals 2014, 2013 and 2012 is presented below:



	Fiscal Years Ended
	January 31, 2015				February 1, 2014				February 2, 2013
	Shares		Weighted-average Grant-date Fair Value		Shares		Weighted-average Grant-date Fair Value		Shares		Weighted-average Grant-date Fair Value
Nonvested shares at beginning of fiscal year	39,182		$	60.00	91,632		$	60.00	105,714		$	60.00
Granted	—		—		—		—		—		—
Shares vested	(35,472	)	60.00		(45,192	)	60.00		—		—
Forfeited/Canceled	(3,710	)	60.00		(7,258	)	60.00		(14,082	)	60.00
Nonvested shares at end of fiscal year	—		$	—	39,182		$	60.00	91,632		$	60.00

A summary of outstanding restricted stock unit activity under the 2010 Incentive Plan during fiscals 2014, 2013 and 2012 is presented below:



	Fiscal Years Ended
	January 31, 2015				February 1, 2014				February 2, 2013
	Units		Weighted-average Grant-date Fair Value		Units		Weighted-average Grant-date Fair Value		Units		Weighted-average Grant-date Fair Value
Outstanding units at beginning of fiscal year	945,878		$	29.05	215,849		$	46.04	30,804		$	60.00
Granted	50,000		8.00		791,165		25.40		199,428		44.00
Units converted	(156,079	)	45.20		(20,694	)	51.93		(2,001	)	49.49
Forfeited/Canceled	(549,799	)	30.49		(40,442	)	36.66		(12,382	)	47.34
Outstanding units at end of fiscal year	290,000		$	14.01	945,878		$	29.05	215,849		$	46.04

As of January 31, 2015, there was $1 million of total unrecognized compensation cost related to restricted share-based compensation arrangements under the 2010 Incentive Plan. This cost is expected to be recognized over a weighted-average period of 1.1 years.

The fair value of restricted shares vested and restricted stock units converted was $9 million and $4 million for fiscals 2014 and 2013, respectively, and we did not recognize any tax benefits as a result of the vesting and conversion. The fair value of restricted shares vested and restricted stock units converted, and the tax benefits recognized as a result of the vesting and conversion, were nominal for fiscal 2012.

Performance-Based Shares and Units

A summary of performance-based stock unit activity under the 2010 Incentive Plan during fiscals 2014, 2013 and 2012 is presented below:



	Fiscal Years Ended
	January 31, 2015				February 1, 2014				February 2, 2013
	Units		Weighted-average Grant-date Fair Value		Units		Weighted-average Grant-date Fair Value		Units		Weighted-average Grant-date Fair Value
Outstanding units at beginning of fiscal year	39,370		$	45.34	175,104		$	46.24	25,863		$	60.00
Granted	—		—		—		—		160,187		44.00
Units converted	—		—		(1,677	)	50.36		—		—
Forfeited/Canceled	(9,761	)	49.42		(134,057	)	46.45		(10,946	)	45.95
Outstanding units at end of fiscal year	29,609		$	44.00	39,370		$	45.34	175,104		$	46.24

As of January 31, 2015, we did not have outstanding performance-based share awards as the performance-based share awards granted on May 26, 2011 were canceled as of the third anniversary date of the award due to the inability to meet the performance criteria for vesting.

The amount of stock-based compensation expense recognized in SG&A and the tax benefit recognized in Income tax expense in fiscals 2014, 2013 and 2012 was as follows:



	Fiscal Years Ended
(In millions)	January 31, 2015		February 1, 2014		February 2, 2013
SG&A	$	15	$	15	$	16
Total recognized tax benefit	—		—		6