Bankruptcy filing

Chapter 11 Proceedings

On the U.S. Petition Date, the Debtors filed Bankruptcy Petitions for reorganization under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The Debtors’ Chapter 11 cases are being jointly administered for procedural purposes under the caption In re Toys “R” Us, Inc., et al., Case No. 17-34665 (KLP). Documents and other information related to the Chapter 11 Proceedings is available free of charge online at https://cases.primeclerk.com/toysrus/. In addition, Toys-Canada voluntarily commenced parallel proceedings under the CCAA in Canada in the Ontario Superior Court of Justice, Case No. CV-17-00582960-00CL. Certain subsidiaries and affiliates of the Company (collectively, the “Non-Filing Entities”) were not part of the Chapter 11 cases. The Debtors will continue to operate their businesses as “debtors-in-possession” in the ordinary course under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Non-Filing Entities will continue to operate their businesses in the normal course and their results are included in our Condensed Consolidated Financial Statements.

Financing During the Chapter 11 Cases

See Note 3 entitled “Short-term borrowings, long-term debt and debt subject to compromise” for discussion of the DIP Financing, which provides up to $3,125 million in senior secured, super-priority financing, subject to the terms, conditions, and priorities set forth in the applicable definitive documentation and orders of the Bankruptcy Court.

Significant Bankruptcy Court Actions

On September 19, 2017 and October 24, 2017, the Bankruptcy Court held first and second day hearings of the Chapter 11 cases, and the Bankruptcy Court issued certain interim and final orders relating to the Debtors’ businesses. These orders authorized, but not required, the Debtors to, among other things, enter into the DIP Financing (described in Note 3 entitled “Short-term borrowings, long-term debt and debt subject to compromise”), pay certain pre-petition employee and retiree expenses and benefits, use their existing cash management system, maintain and administer customer programs, pay certain critical and foreign vendors and pay certain pre-petition taxes and related fees.

These orders are significant because they allow us to operate our businesses in the normal course. The Debtors have been paying and intend to pay undisputed post-petition liabilities.

Financial Reporting in Reorganization

Effective on September 18, 2017, the Company began to apply ASC, No. 852, “Reorganizations,” which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as Reorganization items, net in the Condensed Consolidated Statements of Operations. In addition, the balance sheet must distinguish debtor pre-petition liabilities subject to compromise (“LSTC”) from liabilities of Non-Filing Entities, pre-petition liabilities that are not subject to compromise and from post-petition liabilities in the accompanying Condensed Consolidated Balance Sheet. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired under the Chapter 11 proceedings, we have classified the entire amount of the claim as a liability subject to compromise.

Deconsolidation of Toys-Canada

As of the U.S. Petition Date, the Debtors operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors’ power to make significant business decisions has been transferred to the Bankruptcy Court. Additionally, in the case of Toys-Canada, as parallel proceedings were also filed in the Canadian Court, any significant business decision which would impact our Canadian business requires the approval of both the U.S. and Canadian Courts as they have equal and plenary authority. As joint control by the U.S. and Canadian Courts does not constitute continued common control by the parent, the Company has deconsolidated Toys-Canada effective as of the Canadian Petition Date. Additionally, as the Company does not have significant influence over Toys-Canada while in bankruptcy, Toys “R” Us, Inc. will record its investment in Toys-Canada using the cost method as of the date of deconsolidation. The operating results of Toys-Canada are reflected in our condensed consolidated statements of operations through the date of deconsolidation.

We recorded a $156 million loss in Reorganization items, net related to the deconsolidation of Toys-Canada during the thirteen weeks ended October 28, 2017. The loss reflects the re-measurement of our net investment in Toys-Canada to its estimated fair value of zero, which is based on restrictions imposed on the equity of Toys-Canada as a result of the bankruptcy filing. Included in the loss was the write-off of $77 million of cumulative Foreign currency translation adjustments related to Toys-Canada in Accumulated other comprehensive loss.

As of September 18, 2017, Toys-Canada had $6 million of cash, $480 million of total assets, $255 million of total long-term debt and $401 million of total liabilities. For the fiscal 2017 period prior to the deconsolidation, Toys-Canada had net revenues of $404 million and net earnings attributable to Toys “R” Us, Inc. of $17 million.

Liabilities Subject to Compromise

As a result of the Chapter 11 filing, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized, but not required, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, critical vendors and debt.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events. The following table presents LSTC as reported in the Condensed Consolidated Balance Sheet at October 28, 2017:



(In millions)	October 28, 2017
Debt (1)	$	2,750
Accounts payable	908
Deferred rent liabilities	178
Gift card liabilities	151
Self-insurance reserve	92
Due to Toys-Canada	82
Accrued interest on debt subject to compromise	19
Accrued expenses and other liabilities	169
Total liabilities subject to compromise	$	4,349


(1)	Refer to Note 3 entitled “Short-term borrowings, long-term debt and debt subject to compromise” for details of pre-petition debt reported as liabilities subject to compromise.

Reorganization Items, Net

Reorganization items, net represent amounts incurred after the U.S. Petition Date as a direct result of the Bankruptcy and are comprised of the following for the thirteen weeks ended October 28, 2017:



	13 Weeks Ended
(In millions)	October 28, 2017
Loss on deconsolidation of Toys-Canada	$	156
DIP financing costs	82
DIP debt discounts	22
Write-off of pre-petition debt issuance costs and debt discount	59
Professional fees	33
(Gain) or loss on settlement of pre-petition claims	(18		)
Total reorganization items, net (1)	$	334


(1)	Cash paid for reorganization items, net was $92 million for the thirteen weeks ended October 28, 2017.