-----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, FEpgwgqlvh0Jmtcq0cAssc+GQVgcvzSPKJ/yTk775uNN4IiDZSWrfuGSxssC0ZEb zLudgOwjxSAI0+BGTXe14A== 0001005414-98-000005.txt : 19980427 0001005414-98-000005.hdr.sgml : 19980427 ACCESSION NUMBER: 0001005414-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980424 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOYS R US INC CENTRAL INDEX KEY: 0001005414 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 223260693 STATE OF INCORPORATION: DE FISCAL YEAR END: 0203 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11609 FILM NUMBER: 98600249 BUSINESS ADDRESS: STREET 1: 461 FROM RD CITY: PARAMUS STATE: NJ ZIP: 07652 BUSINESS PHONE: 2012627800 10-K 1 TOYS "R" US FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K ------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1998 ------------------- Commission file number 1-11609 TOYS "R" US, INC. Incorporated pursuant to the Laws of Delaware Internal Revenue Service - Employer Identification No. 22-3260693 461 From Road, Paramus, New Jersey 07652 (201) 262-7800 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.10 par value New York Stock Exchange Registrant has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At April 13, 1998, the aggregate market value of voting stock held by non-affiliates was $8,092,191,726 based on the 279,041,094 shares of Common Stock which were outstanding at that date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 1998 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 3, 1998, are incorporated by reference into Part III of this Form 10-K. INDEX ----- PAGE ---- PART I. Item 1. Business...................................................... 2 Item 2. Properties.................................................... 5 Item 3. Legal Proceedings............................................. 6 Item 4. Submission of Matters to a Vote of Security Holders........... 7 PART II. Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................ 7 Item 6. Selected Financial Data....................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 7 Item 7a. Qualitative and Quantitative Disclosures About Market Risk.... 7 Item 8. Financial Statements and Supplementary Data................... 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 8 PART III. Item 10. Directors and Executive Officers of the Registrant............ 8 Item 11. Executive Compensation........................................ 11 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 11 Item 13. Certain Relationships and Related Transactions................ 11 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 11 1 PART I ------ ITEM 1. BUSINESS Toys "R" Us, Inc. and its subsidiaries (the "Company") is the world's premier retailer of children's products, bringing toys, apparel and baby needs to children and their families. As of January 31, 1998, the Company was engaged in the operation of 1,454 children's specialty retail stores consisting of 1,013 United States locations comprised of 698 toy stores under the name "Toys "R" Us", 215 children's clothing stores under the name "Kids "R" Us," 98 infant-toddler stores under the name "Babies "R" Us", and two superstores combining all of the "R" Us" formats mentioned above under the name "Toys "R" Us KidsWorld". Internationally, the Company operates 441 toy stores, including franchise stores, under the name "Toys "R" Us." The Company is incorporated in the state of Delaware. (a) General Development of the Business Merger with Baby Superstore On February 3, 1997, the Company acquired Baby Superstore, Inc. ("Baby Superstore") in a tax-free exchange of common stock valued at approximately $376 million. The Baby Superstore acquisition was accounted for as a purchase for financial reporting purposes as of February 1, 1997. For a further discussion of Baby Superstore, see "Item 1. Business - Narrative Description of the Business - Babies "R" Us." Worldwide Restructuring The Company has substantially completed its 1995 restructuring program action plan, including the strategic inventory repositioning, the closing of 3 toy stores and 7 Kids "R" Us stores in the United States and the franchising of 9 Toys "R" Us stores in the Netherlands, pending certain regulatory approvals. In addition, the Company consolidated 3 distribution centers and various administrative facilities in the United States and Europe. At January 31, 1998, the Company had approximately $62 million of liabilities remaining for its restructuring program primarily relating to long-term lease obligations and other commitments. The Company believes these reserves are adequate to complete the restructuring program. (b) Financial Information About Geographic Segments Information about geographic segments, as set forth in the notes to the Consolidated Financial Statements on page 22 of the Company's 1997 Annual Report, is incorporated herein by reference. (c) Narrative Description of the Business See the section "Store Locations" on page 27 of the Company's 1997 Annual Report, which section is incorporated herein by reference. 2 Toys "R" Us - United States Toys "R" Us - United States ("Toys "R" Us") operates in 49 states and Puerto Rico and sells both children's and adult's toys, games, bicycles, sporting goods, VHS video tapes, electronic and video games, small pools, books, infant and juvenile furniture and similar items, as well as educational and entertainment computer software for children. The overall merchandising philosophy of Toys "R" Us is the development of strong consumer recognition and acceptance of its name by the use of mass media advertising that promotes its broad selection. Toys "R" Us believes the flexibility afforded by its warehouse/distribution system and by ownership of its own fleet of trucks provides maximum efficiency and capacity, particularly in light of the seasonality of its business. Toys "R" Us utilizes a computerized inventory system which allows management to constantly monitor the current activity and inventory in each region and in each store. This system permits management to allocate merchandise to each store and keep the stores adequately stocked at all times. In 1996, an improved replenishment system was installed in approximately one-third of the United States toy stores. This system pinpoints the exact location of merchandise throughout the store. Ninety-two additional United States toy stores have installed this system in 1997. Furthermore, during 1997 Toys "R" Us introduced a state of the art centralized distribution system in Lees Summit, Missouri. Substantially all video game and computer software merchandise are nationally distributed through this facility for all domestic divisions. This facility has enabled Toys "R" Us to improve its in-stock position and timeliness of replenishments of these products through this facility. Most Toys "R" Us stores conform to a 46,000 square feet prototype design, with 30,000 and 20,000 square feet stores opened in smaller markets, and are generally freestanding units or located in strip malls. Of its 698 stores, 609 are in the traditional format and 89 are designed in its "Concept 2000" format. In addition, there are 2 KidsWorld superstores incorporating the "Toys "R" Us, "Babies "R" Us" and "Kids "R" Us store concepts all under one roof, averaging approximately 90,000 square feet. Toys "R" Us opened 19 new toy stores and closed 1 store in 1997. The Company will continue its long range growth plan by opening approximately 5 new toy stores in the United States in 1998. The Company utilizes demographic data to determine which markets to enter. Toys "R" Us - International Toys "R" Us - International ("International") operates or franchises toy stores in 26 countries outside the United States. These stores generally conform to prototypical designs similar to those used by Toys "R" Us. International owns and maintains its own fleet of tractors and trailers in most of the countries in which it operates stores. International also employs computerized inventory systems similar to those utilized by Toys "R" Us. As part of the Company's long range growth plans, International added 45 toy stores, including 18 franchise stores in 1997. The Company plans to continue its International expansion with approximately 35 new toy stores in 1998, including approximately 15 franchise stores. The Company utilizes demographic data to determine which markets to enter. 3 Kids "R" Us Kids "R" Us children's clothing stores feature brand name and private label first quality children's clothing. These stores conform to prototypical designs consisting of approximately 15,500 to 21,500 square feet and are typically freestanding units or located in strip centers. Using demographic data to determine which markets to enter, Kids "R" Us opened 3 children's clothing stores in 1997. Babies "R" Us The Company launched its new Babies "R" Us division with six stores opened in 1996. These stores target the newborn to preschool market in a 38,000 to 42,000 square feet prototype that offers up to 40 room settings of juvenile furniture such as cribs and dressers as well as playards, bumper seats, high chairs, strollers, car seats, infant toddler and preschool toys, infant plush, and gifts. These stores devote over 5,000 square feet of specialty name brand and private label clothing and a wide range of feeding supplies, health and beauty aides and infant care products. In addition, a computerized baby registry service is offered. Babies "R" Us is designed with low profile merchandise displays in the center of the stores providing a sweeping view of the entire merchandise selection. The Company accelerated the growth of the Babies "R" Us division with the acquisition of Baby Superstore, a leading large format retailer of newborn to preschool products in the United States. At the date of acquisition, Baby Superstore operated 76 stores in 23 states, primarily in the southeast and midwest. The Company has converted substantially all of the existing Baby Superstore stores to the Babies "R" Us operating format. The Company opened 19 Babies "R" Us stores and closed 3 of the acquired Baby Superstore stores in 1997, and plans on opening approximately 15 to 20 stores in 1998. The Company utilizes demographic data to determine which markets to enter. (d) Trademarks "TOYS "R" US", "KIDS "R" US", and "BABIES "R" US", as well as various of the Company's family of "R" Us marks either have been registered, or have trademark applications pending, with the United States Patent and Trademark Office and with the trademark registries of many foreign countries. The Company believes that its rights to these properties are adequately protected. (e) Seasonality Retail sales of toy and toy related products are highly seasonal, with a majority of retail sales occurring during the period from September through December. Consequently, a large portion of the Company's sales and earnings occur during its fourth quarter. See the quarterly financial data contained on page 26 of the Company's 1997 Annual Report, which section is incorporated herein by reference. 4 (f) Working Capital For a discussion of the Company's working capital requirements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 12 and 13 of the Company's 1997 Annual Report, which section is incorporated herein by reference. (g) Competition All aspects of the retailing industry are highly competitive. All of the merchandise sold by the Company, in markets in which the Company operates, is available from various retailers at competitive prices. The Company's competitors consist of other specialty retailers of toy and children related products, department stores and discount and supercenter type retail stores. (h) Employees At January 31, 1998, the total number of persons employed by the Company was approximately 68,000. The number of persons employed by the Company increased to approximately 116,000 during the 1997 Holiday Season. ITEM 2. PROPERTIES See the Note, "Leases," in the Company's Notes to Consolidated Financial Statements included on page 19 of the Company's 1997 Annual Report, which note is incorporated herein by reference. Also see the section "Store Locations" on page 27 of the Company's 1997 Annual Report, which section is incorporated herein by reference. Toys "R" Us - United States A significant portion of the properties operated by Toys "R" Us are owned. Toys "R" Us either purchases or leases properties depending on the economic terms available. Where properties are leased, Toys "R" Us generally has long-term leases with multiple renewal options. Toys "R" Us operates 698 toy stores, 438 of which are owned and 260 are leased. Toys "R" Us also operates 2 KidsWorld stores, 1 of which is owned and 1 is leased. Toys "R" Us operates 17 distribution centers, 14 of which are owned and 3 are leased. These distribution centers average approximately 443,000 square feet each in size and are strategically located throughout the United States to efficiently service these stores. The Company also leases corporate offices in Paramus and Rochelle Park, New Jersey and owns a data center in Parsippany, New Jersey. The Company recently purchased a new office building in Montvale, New Jersey which will replace the Rochelle Park office. Toys "R" Us - International International operates 367 stores, excluding 16 joint ventures and 58 franchised stores, 111 of which are owned and 256 are leased. International also operates 12 distribution centers, 4 of which are owned and 8 are leased. 5 Kids "R" Us Kids "R" Us operates 215 children's clothing stores, 99 of which are owned and 116 are leased. Kids "R" Us operates 4 distribution centers, including a new center in Lawrenceville, Georgia, 3 of which are owned and 1 is leased. These distribution centers average approximately 281,000 square feet each in size. Babies "R" Us Babies "R" Us operates 98 juvenile retail stores, 10 of which are owned and 88 are leased. Babies "R" Us stores are serviced by existing Toys "R" Us and Kids "R" Us distribution centers discussed above. ITEM 3. LEGAL PROCEEDINGS On July 12, 1996, an arbitrator rendered an award in favor of Yusuf Ahmed Alghanim & Sons, W.L.L. ("Alghanim") and against the Company and awarded Alghanim $46 million plus interest from December 1994. This award was rendered in connection with a dispute between Alghanim and the Company involving rights under a 1982 license agreement for toy store operations in the Middle East. Accordingly, the Company recorded a provision of $60 million in 1996 representing all expected costs in connection with this matter. The Company contested this award in the United States District Court. That motion was denied on December 13, 1996 and the arbitration award was confirmed. On September 10, 1997, the Second Circuit affirmed the District Court's decision. The Company sought review in the Supreme Court of the United States. On February 23, 1998, the Supreme Court denied review. The Company paid the judgment on February 26, 1998. On May 22, 1996, the Staff of the Federal Trade Commission (the "FTC") filed an administrative complaint against the Company alleging that the Company is in violation of Section 5 of the Federal Trade Commission Act for its practices relating to warehouse clubs. The complaint alleges that the Company reached understandings with various suppliers that such suppliers not sell to the clubs the same items that they sell to the Company. The complaint also alleges that the Company "facilitated understandings" among the manufacturers that such manufacturers not sell to clubs. The complaint seeks an order that the Company cease and desist from this practice. The matter was tried before an administrative law judge in the period from March through May of 1997. On September 30, 1997, the administrative law judge filed an Initial Decision upholding the FTC's complaint against the Company. The Company has appealed the Initial Decision to the Commissioners of the FTC. That appeal was argued on February 19, 1998. The Company will be entitled to have the United States Court of Appeals review any adverse decision by the FTC. 6 After the filing of the FTC complaint, several class action suits were filed against the Company in State courts in Alabama and California, alleging that the Company has violated certain state competition laws as a consequence of the behavior alleged in the FTC complaint. After the Initial Decision was handed down, more than thirty purported class actions were filed in federal and state courts in various jurisdictions alleging that the Company has violated the federal antitrust laws as a consequence of the behavior alleged in the FTC complaint. In addition, the attorneys general of thirty-eight states, the District of Columbia and Puerto Rico have filed a suit against the Company in their capacity as representatives of the consumers of their states, alleging that the Company has violated federal and state antitrust laws as a consequence of the behavior alleged in the FTC complaint. These suits seek damages in unspecified amounts and other relief under state and/or federal law. The Company believes that both its policy and its conduct in connection with the foregoing are within the law. The Company also believes that these actions will not have a material adverse effect on its financial condition, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market prices and other information with respect to the Company's common stock are hereby incorporated by reference to page 26 of the Company's 1997 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Selected financial data is hereby incorporated by reference to page 3 of the Company's 1997 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 12 and 13 of the Company's 1997 Annual Report. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative and quantitative disclosures about market risk is hereby incorporated by reference to page 13 of the Company's 1997 Annual Report. 7 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are hereby incorporated by reference to pages 14 to 23 of the Company's 1997 Annual Report. (a) Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 (b) Consolidated Statements of Earnings for each of the three years in the period ended January 31, 1998 (c) Consolidated Statements of Cash Flows for each of the three years in the period ended January 31, 1998 (d) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 31, 1998 (e) Notes to Consolidated Financial Statements; and (f) Report of Ernst & Young LLP. Individual financial statements of the registrant's subsidiaries are not furnished because consolidated financial statements are furnished. The registrant is primarily a holding company, the expenses and obligations of which are paid by its consolidated subsidiaries through a fee based on expenses incurred for its consideration for management services provided to such subsidiaries by the registrant. All subsidiaries of the registrant are at least 80% owned. Financial statements of 50%-owned joint ventures are not submitted because such companies, considered in the aggregate, are not considered a significant subsidiary as defined in Regulation S-X. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 1997 Proxy Statement. 8 Executive Officers of the Company (a) The following persons are the executive officers of the Company as of April 15, 1998, 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 ---- --- ------------------------- Robert C. Nakasone 50 Chief Executive Officer Bruce W. Krysiak 47 President and Chief Operating Officer, and President of U.S. Toy Store Division Louis Lipschitz 53 Executive Vice President and Chief Financial Officer Michael J. Madden 49 Executive Vice President - President of Operations of U.S. Toy Store Division Richard L. Markee 45 Executive Vice President - President of Kids "R" Us and Babies "R" Us Divisions Gregory R. Staley 50 Executive Vice President - President of Toys "R" Us International Division Keith Van Beek 51 Executive Vice President - President of Merchandising and Marketing of U.S. Toy Store Division Roger Gaston 42 Senior Vice President - Human Resources Joseph J. Lombardi 36 Vice President - Controller (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. Nakasone has been employed by the Company for more than five years. Effective February 1998, he became Chief Executive Officer. From February 1994 to February 1998, he was President and Chief Operating Officer. From prior to 1993 to February 1994, he was Vice Chairman of the Board and President of Worldwide Toy Stores. 9 Mr. Krysiak has been employed by the Company since April 1998 as President and Chief Operating Officer and President of U.S. Toy Store Division. From January 1997 to April 1998, he was President and Chief Operating Officer of Dollar General Corporation. From April 1995 to June 1996, he was Chief Operating Officer of Circle K Corporation. From prior to 1993 to December 1994, he was Chairman of Giant Joint Venture. Mr. Lipschitz has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President and Chief Financial Officer. From February 1993 to January 1996, he was Senior Vice President - Finance and Chief Financial Officer. Mr. Madden has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President of the Company and President of Operations of U.S. Toy Store Division. From March 1995 to January 1996, he was Group Vice President of Store Operations - U.S. Toy Store Division. From February 1993 to February 1995, he was Senior Vice President, Regional Operations and Distribution - U.S. Toy Store Division. Mr. Markee has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President of the Company and has served as President of Kids "R" Us Division since March 1993 and Babies "R" Us Division since its inception in September 1995. Mr. Staley has been employed by the Company for more than five years. Effective February 1996, he became Executive Vice President of the Company and has served as President of Toys "R" Us International Division since August 1995. From prior to 1993 to July 1995, he was Senior Vice President - General Merchandise Manager for Toys "R" Us International Division. Mr. Van Beek has been employed by the Company for more than five years. Effective February 1998, he became Executive Vice President of the Company and President of Merchandising and Marketing of U.S. Toy Store Division. Effective August 1995, he became President - Toys "R" Us (Canada) Ltd. From prior to 1993 to August 1995, he was Vice President - Business Development of Toys "R" Us International Division. Mr. Gaston has been employed by the Company since December 1996 as Senior Vice President - Human Resources. From September 1993 to November 1996, he was Executive Vice President - Human Resources of Carson, Pirie, Scott and Company. From prior to 1993 to August 1993, he was Group Vice President - Human Resources and Administration of Finest Supermarkets-AHOLD, USA. Mr. Lombardi has been employed by the Company since August 1995 as Vice President - Controller. From October 1994 to July 1995, he was a Partner with Ernst & Young LLP, a public accounting firm, and was a Senior Manager with Ernst & Young LLP, since prior to 1993 to September 1994. 10 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" and "Long-Term Incentive Plans - Awards in Last Fiscal Year" in the Company's 1997 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 1997 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 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements (1) The response to this portion of Item 14 is set forth in Item 8 of Part II of this report on Form 10-K. (2) Financial Statement Schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto. (3) See accompanying Index to Exhibits. The Company will furnish to any stockholder, upon written request, any exhibit listed in the accompanying Index to Exhibits upon payment by such stockholder of the Company's reasonable expenses in furnishing any such exhibit. 11 (b) Cautionary Statement Regarding Forward Looking Information All of the statements made on this Form 10-K, other than historical facts, are forward looking statements made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. As such, they involve risks and uncertainties that could cause actual results to differ materially. The Company's forward looking statements are based on assumptions about many important factors, including ongoing competitive pressures in the retail industry, changes in consumer spending, general United States economic conditions (such as higher interest rates and consumer confidence), the anticipated decline in credit results from historical levels and normal business uncertainty. While the Company believes that its assumptions are reasonable, it cautions that it is impossible to predict the impact of certain factors which could cause actual results to differ materially from expected results. (c) Reports on Form 8-K On January 8, 1998, the Company filed a Form 8-K in connection with the Company's announced adoption of a Stockholder Rights Plan. 12 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 Louis Lipschitz, Executive Vice President and Chief Financial Officer Date: April 24, 1998 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 24th day of April, 1998. Signature Title --------- ----- Michael Goldstein Chairman of the Board Robert C. Nakasone Director and Chief Executive Officer (Principal Executive Officer) Bruce W. Krysiak Director, President and Chief Operating Officer Louis Lipschitz Executive Vice President and Chief Financial Officer (Principal Financial Officer) Joseph J. Lombardi Vice President - Controller (Principal Accounting Officer) Robert A. Bernhard Director RoAnn Costin Director Calvin Hill Director Shirley Strum Kenny Director Charles Lazarus Director, Chairman Emeritus Norman S. Matthews Director Howard W. Moore 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. 13 INDEX TO EXHIBITS - ----------------- The following is a list of all exhibits filed as part of this Report: Exhibit No. Document ----------- -------- 2A Agreement and Plan of Merger, dated as of December 8, 1995, by and among registrant, Toys "R" Us - Delaware, Inc. (f/k/a Toys "R" Us, Inc.) and TRU Interim, Inc. Incorporated herein by reference to Exhibit 2.1 to registrant's Registration of Securities of Certain Successor Issuers on Form 8-B dated January 3, 1996 (the "Form 8-B"). 2B Agreement and Plan of Merger, dated as of October 1, 1996, and as amended and restated as of December 26, 1996, among registrant, BSST Acquisition Corp., Baby Superstore, Inc. and Jack P. Tate. Incorporated by reference to Annex A to the Proxy Statement/Prospectus Statement No. 333-18863. 3A Restated Certificate of Incorporation of registrant (filed on January 2, 1996). Incorporated herein by reference to Exhibit 3.1 to the Form 8-B. 3B Amended and Restated By-Laws of registrant (as of January 1, 1996). Incorporated herein by reference to Exhibit 3.2 to the Form 8-B. An amendment dated March 11, 1997 to Amended and Restated By-Laws is filed herewith. 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. 14 Exhibit No. Document ----------- -------- 4 v) Substantially all other long-term debt of registrant (which other debt does not exceed on an aggregate basis 10% of the total assets of the registrant and its subsidiaries on a consolidated basis) is evidenced by, among other things, (i) industrial revenue bonds issued by industrial development authorities and guaranteed by registrant, (ii) mortgages held by third parties on real estate owned by registrant, (iii) stepped coupon guaranteed bonds held by a third party and guaranteed by registrant and (iv) an agreement under which registrant guaranteed certain yen-denominated loans made by a third party subsidiary of registrant. Registrant will file with the Securities and Exchange Commission (the "Commission")copies of constituent documents relating to such upon request of the Commission. 10A* Stock Option Plan of the registrant, as amended as of April 22, 1993. Incorporated herein by reference to Exhibit 10A to registrant's Annual Report on Form 10-K for the year ended January 30, 1993. 10B* 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). * 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. 15 Exhibit No. Document ----------- -------- 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* Stock Option Agreement dated as of February 1, 1988 between registrant and Robert Nakasone. Incorporated herein by reference to Exhibit 10G to registrant's Annual Report on Form 10-K for the year ended January 31, 1988, Commission File Number 1-117. The first amendment dated as of April 1, 1989 to such agreement (incorporated herein by reference to Exhibit 10G to registrant's Annual Report on Form 10-K for the year ended January 29, 1989, Commission File Number 1-1117). The second amendment dated as of September 19, 1989 to such agreement (incorporated herein by reference to Exhibit 10G to registrant's Annual Report on Form 10-K for the year ended January 28, 1990, Commission File Number 1-1117). 10E* Stock Option Agreement dated as of February 1, 1988 between registrant and Michael Goldstein (incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 31, 1988, Commission File Number 1-1117). The first amendment dated as of April 1, 1989 to such agreement (incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 29, 1989, Commission File Number 1-1117). The second amendment dated as of September 19, 1989 to such agreement (incorporated herein by reference to Exhibit 10H to registrant's Annual Report on Form 10-K for the year ended January 28, 1990, Commission File Number 1-1117). * 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. 16 Exhibit No. Document ----------- -------- 10F* Stock Option Plan and Agreement dated as of March 14, 1989 between registrant and Charles Lazarus, and a First Amendment thereto dated as of September 19, 1989. Incorporated by reference to Exhibit 10I to registrant's Annual Report on Form 10-K for the year ended January 28, 1990, Commission File Number 1-1117. 10G* Non-Employee Directors' Stock Option Plan as adopted by the Board of Directors on September 19, 1990 and approved by the registrant's stockholders on June 3, 1991, and amended and restated as of December 6, 1995. Incorporated herein by reference to Exhibit 10A to registrant's Proxy Statement for the year ended February 3, 1996. 10H* 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. 10I* 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. 10J* Toys "R" Us, Inc. 1994 Stock Option and Performance Incentive Plan effective November 1, 1993, as amended. Incorporated herein by reference to Exhibit 4.1 to registrant's Registration Statement No. 33-64315. 10K* Toys "R" Us, Inc. Management Incentive Compensation Plan adopted March 28, 1994 (incorporated herein by reference to Exhibit 10L to registrant's Annual Report on Form 10-K for the year ended January 29, 1994). The first amendment to such plan adopted on April 20, 1995 (incorporated herein by reference to Exhibit 10.11 to the Form 8-B). * 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. 17 Exhibit No. Document ----------- -------- 10L* 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. 10M* 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. 10N* 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. 10O Shareholders Agreement, dated October 1, 1996, by and among registrant, Jack P.Tate and Linda M. Robertson. Incorporated by reference to Exhibit A to Exhibit 2 to registrant's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996, File No. 1-11609 (the "Form 10-Q"). * 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. 18 Exhibit No. Document ----------- -------- 10P* Retention Agreements -------------------- - Retention Agreement between Toys "R" Us, Inc. and Roger Gaston dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Louis Lipschitz dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Michael J. Madden dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Richard L. Markee dated as of May 1, 1997. - Retention Agreement between Toys "R" Us, Inc. and Gregory R. Staley dated as of May 1, 1997. Each incorporated herein by reference to Exhibit 10P to registrant's Quarterly Report on Form 10-Q for the quarterly period ended May 3, 1997. 10Q Form of Rights Agreement, dated as of January 7, 1998, 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 January 7, 1998). 10R* Retention Agreement between Toys "R" Us, Inc. and Michael Goldstein dated as of February 25, 1998. 10S* Retention Agreement between Toys "R" Us, Inc. and Robert C. Nakasone dated as of February 25, 1998. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14 (c) hereof. 19 Exhibit No. Document ----------- -------- 10T* Retention Agreement between Toys "R" Us, Inc. and Keith Van Beek dated as of February 25, 1998. 10U* Retention Agreement between Toys "R" Us, Inc. and Bruce W. Krysiak dated as of February 12, 1998. 13 Registrant's Annual Report to Stockholders for the year ended January 31, 1998. 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. 27.1 Financial Data Schedule for the year ended January 31, 1998. 27.2 Financial Data Schedule for the year ended February 1, 1997 - Restated. 27.3 Financial Data Schedule for the year ended February 3, 1996 - Restated. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14 (c) hereof. 20 EX-10 2 EXHIBIT 10R - RETENTION AGREEMENT EXECUTION COPY RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND MICHAEL GOLDSTEIN DATED AS OF February 25, 1998 EXECUTION COPY TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and Michael Goldstein ("Goldstein"), dated as of February 25, 1998. Capitalized terms used in this Agreement and in Exhibit A hereto that are not defined in the operative provisions shall have the meanings ascribed to them on Exhibit B hereto. 1. Employment Period. The Company hereby agrees to continue to employ Goldstein and Goldstein hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the Employment Period. The term "Employment Period" means the period commencing on the date hereof and ending on the last day of the Company's 1999 fiscal year as automatically extended for successive additional one-fiscal year periods unless, at least six months prior to the scheduled expiration of the Employment Period, the Company, based upon a determination by the Committee, shall give notice to Goldstein 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, Goldstein shall serve as the Chairman of the Board. Goldstein shall be based in Northeastern New Jersey. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which Goldstein is entitled, Goldstein agrees to devote full time during normal business hours to the business and affairs of the Company up to June 30, 1998, and thereafter to devote up to 500 hours each year (pro rated for partial years) during normal business hours to the business and affairs of the Company, and to use his best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, Goldstein may, so long as such activities do not interfere with the performance of his responsibilities to the Company in accordance with this Agreement, continue the corporate directorships on which Goldstein serves, if any, as of the date hereof and such other corporate directorships as are consented to by the Committee. It is expressly understood and agreed that to the extent that any such activities have been conducted by Goldstein with the knowledge of the Company prior to a Change of Control, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to a Change of Control shall not thereafter be deemed to violate this Agreement. (b) Compensation. (i) Base Salary. During the Employment Period, Goldstein shall receive his Annual Base Salary, which will be paid in accordance with the Company's regular payroll policies as in effect from time to time. (ii) Incentive Bonus. Goldstein shall also be eligible, for each fiscal year ending during the Employment Period, to receive (A) an annual incentive bonus, in accordance with targets established by the Committee, of one-hundred percent (100%) of Annual Base Salary at the target and up to two-hundred percent (200%) of Annual Base Salary and (B) long-term incentive awards pursuant to the Company's incentive Plans and subject to the terms thereof at a level commensurate with his current grants and his current position adjusted to take into account the actual Annual Base Salary in any fiscal year. Each such incentive bonus shall be paid in accordance with the Company's incentive Plans. (iii) Participation in Other Plans. During the Employment Period, Goldstein shall continue to participate in all other Plans at a level commensurate with his participation in such Plans as of the date hereof, including continued vesting of outstanding option grants and profits shares. (iv) Stock Units. As further inducement for Goldstein to enter into this Agreement and to continue in the employ of the Company, the Company has granted to Goldstein stock units contingent on performance and future service, pursuant to the Stock Unit Agreement executed and delivered by the Company on the date hereof in the form attached as Annex A hereto. (v) Partnership Plan Units. During the Employment Period Goldstein shall be granted units under the Partnership Plan in accordance with targets established by the Committee in an amount equal to forty percent (40%) of the actual Annual Base Salary for any fiscal year at such target. (vi) Expense Reimbursement. The Company shall reimburse Goldstein, upon submission of appropriate evidence of incurrence, his reasonable business expenses and disbursements incurred in the course of the performance of his duties. (vii) Office. During the employment period, Goldstein shall be entitled to retain his office or a comparable office, and shall be entitled to part-time secretarial services. (viii) Automobile Lease. Until June 30, 1998, Goldstein shall be entitled to his current benefits relating to his automobile and driver. Beginning July 1, 1998, during the Employment Period, the Company shall reimburse Goldstein's expenses in leasing, maintaining and insuring an automobile on a basis equivalent to his current automobile benefit. 3. Termination of Employment. (a) Notice of Termination. Any termination by the Company for Cause, or by Goldstein for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. The failure by Goldstein 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 Goldstein or the Company, respectively, hereunder or preclude Goldstein or the Company, respectively, from asserting such fact or circumstance in enforcing Goldstein's or the Company's rights hereunder. (b) Termination for Death, Disability or Retirement. Goldstein's employment shall terminate upon his death, Disability or Retirement during the Employment Period. In the event of such termination: (i) the Company shall make a lump sum cash payment to Goldstein (or, in the event that termination results from the death of Goldstein, to his estate) within 30 days after the Date of Termination in an amount equal to the sum of: (A) Goldstein's pro rata Annual Base Salary payable through the Date of Termination to the extent not already paid; (B) the targeted amount of Goldstein's annual bonus, long-term incentive awards and Partnership Plan Units that would have been awarded with respect to the fiscal year in which the Date of Termination occurs, in each case absent the termination of Goldstein's employment, prorated for the portion of such fiscal year through the Date of Termination taking into account the number of complete months during such fiscal year through the Date of Termination; (C) Goldstein's actual earned annual bonus and long-term incentive awards and Partnership Plan Units for any completed fiscal year or period not theretofore paid; and (D) the account balance provided for under the Plans, including the Company's supplemental executive retirement plan, which shall be fully vested; and (ii) (1) all unvested options held by Goldstein shall vest on the Date of Termination, (2) all unvested profit shares held by Goldstein or for the benefit of Goldstein by a grantor trust established by the Company shall vest on the Date of Termination and shall be promptly delivered to Goldstein or his estate, (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by Goldstein shall vest on the Date of Termination and shall be delivered to Goldstein or, in the event of termination due to death, his estate, entirely in the form of Common Stock, $.10 par value per share ("Common Stock") of the Company immediately to his estate in the event of termination due to death, or, in the event of termination due to Retirement or Disability upon the later of May 1, 2002, or the expiration of the period that Goldstein's activities are restricted under Section 10(c), subject to his compliance with the terms of this Agreement through such date, (4) any options held by Goldstein may be exercised until the expiration date of such options and (5) Goldstein shall not be entitled to any additional grants of any stock options, restricted stock, or other equity based or long-term awards; and (iii) Goldstein (and his spouse and dependent children) will be entitled to continuation of health benefits under the Plans at a level commensurate with Goldstein's current position and if Goldstein (or his spouse and dependent children upon his death) elects to receive such health benefits, Goldstein shall pay the premium charged to former employees of the Company pursuant to Section 4980B of the Code; provided, that the Company can amend or otherwise alter the Plans to provide benefits to Goldstein that are no less than those commensurate with Goldstein's current position; provided, that to the extent such benefits cannot be provided to Goldstein 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 Goldstein, on an after-tax basis, an amount necessary for Goldstein to acquire such benefits from an independent insurance carrier; and provided further, that the obligations of the Company under this clause (iii) shall be terminated if, at any time after the Date of Termination, Goldstein is employed by or is otherwise affiliated with a party that offers comparable health benefits to Goldstein. (c) Resignation by Goldstein Without Good Reason. If Goldstein desires to resign from his position as Chairman of the Board of the Company without Good Reason, Goldstein shall provide the Company with a Notice of Termination at least six (6) months prior to the commencement of the Transition Period. In the event of such resignation: (i) Goldstein shall continue to be nominated by the Company as a director of the Board and will serve as a member of the Board if elected by the Company's stockholders to serve during the Transition Period. For as long as Goldstein serves as a director of the Company during the Transition Period, he shall receive the same compensation in the same form and at the same times as would be paid to him if he were a non-employee director of the Company, however, if he is not elected or chooses not to serve as a director during the Transition Period, he shall continue to be employed by the Company during the balance of the Transition Period for nominal compensation; (ii) the Company shall make a lump sum cash payment to Goldstein within 30 days after the commencement of the Transition Period in an amount equal to the sum of: (A) Goldstein's pro rata Annual Base Salary payable through the Date of Termination to the extent not already paid; (B) Goldstein's actual earned annual bonus and long-term incentive awards for any completed fiscal year or period not theretofore paid or deferred unless the Committee determines not to permit the cancellation of such deferral; and (C) the account balance provided for under the Plans, including the Company's supplemental executive retirement plan, which shall be fully vested; and (iii) (1) all unvested options held by Goldstein that otherwise do not vest on the commencement of the Transition Period shall continue to vest in accordance with their terms during the Transition Period, and all remaining unvested options held by Goldstein shall be forfeited at the end of such Transition Period, (2) all unvested profit shares held by Goldstein or for the benefit of Goldstein by a grantor trust established by the Company that otherwise do not vest upon commencement of the Transition Period shall continue to vest in accordance with their terms during the Transition Period at the rate of 20% per annum and all remaining unvested profit shares shall be forfeited at the end of such two-year period 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 (iii) and any such unvested profit share that would otherwise vest in accordance with this clause (iii) but that is not permitted to be so held shall vest immediately, (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by Goldstein shall be forfeited, (4) any other vested equity award (including, without limitation, restricted stock and stock units) shall be delivered to Goldstein upon the later of May 1, 2002 and the expiration of the period that Goldstein's activities are restricted under Sections 10(c) and (d), subject to his compliance with the terms of this Agreement through such date, (5) any options held by Goldstein that are vested upon commencement of the Transition Period or vest thereafter pursuant to this clause (iii) may be exercised until the earlier of (x) 30 days after the expiration of the Transition Period and (y) the expiration date of such options, and (6) Goldstein shall not be entitled to any additional grants of any stock options, restricted stock or other equity based or long-term awards; and (iv) Goldstein, his spouse and dependent children will be entitled to the benefits set forth under Section 3(b)(iii). (d) Termination by the Company for Cause. If Goldstein's employment shall be terminated for Cause during the Employment Period, the Employment Period shall terminate without further obligations to Goldstein other than the obligation to pay him all payments and benefits due, in accordance with the Company's Plans through the Date of Termination. All stock units held by Goldstein, whether or not vested, shall be forfeited on the Date of Termination. (e) Termination by the Company Without Cause or by Goldstein for Good Reason. If Goldstein's employment shall be terminated by the Company without Cause during the Employment Period, or by Goldstein for Good Reason, then: (i) the Company shall make a lump sum cash payment to Goldstein within 30 days after the Date of Termination of (x) Goldstein's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (y) the targeted amount of Goldstein's annual incentive bonus, long-term incentive awards and Partnership Plan Units 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 Goldstein's employment, prorated for the portion of such fiscal year through the Date of Termination taking into account the number of complete months during such fiscal year through the Date of Termination and (z) Goldstein's actual earned annual incentive bonus, long-term incentive awards and Partnership Plan Units for any completed fiscal year or period not theretofore paid or deferred; (ii) the Company shall pay to Goldstein 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 Goldstein's Annual Base Salary in effect on the Date of Termination, (2) two times the targeted amount of the annual incentive bonus that would have been paid or accrued to Goldstein with respect to the Company's fiscal year in which such Date of Termination occurs and (3) two times the targeted amount of the long-term incentive award and Partnership Plan Units that would have been paid or accrued to Goldstein with respect to such fiscal year; (iii) the Company shall continue to provide, in the manner and timing provided for in the Plans (other than as provided in clauses (i), (ii), (iv) and (v) of this Section 3(e)), the benefits provided under the Plans that Goldstein would receive if Goldstein's employment continued for two years after the Date of Termination, assuming for this purpose that Goldstein's compensation is the amount paid pursuant to clause (ii) above, and Goldstein shall be fully vested in any account balance and all other benefits under the Plans; provided, however, that the benefits provided under this clause (iii) shall be limited to the amounts permitted by law or as would otherwise not potentially adversely impact on the tax qualification of any Plans; provided, further, that if such benefits may not be continued under the Plans, the Company shall pay to Goldstein an amount equal to the Company's cost had such benefits been continued. (iv) (1) all unvested options held by Goldstein shall vest on the Date of Termination, (2) all unvested profit shares held by Goldstein or for the benefit of Goldstein by a grantor trust established by the Company shall vest on the Date of Termination, (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by Goldstein 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 delivered to Goldstein entirely in the form of Common Stock upon the later of May 1, 2002 and the expiration of the period of that Goldstein's activities are restricted under Section 10(c), subject to compliance with this Agreement through such date, (4) any options held by Goldstein that are vested on the Date of Termination or vest thereafter pursuant to this clause (iv) may be exercised until the expiration date of such options and (5) Goldstein shall not be entitled to any additional grants of any stock options, restricted stock, or other equity based or long-term awards; and (v) Goldstein, his spouse and dependent children shall be entitled to the benefits set forth under Section 3(b)(iii). 4. Obligations of the Company Relating to a Change of Control. (a) Notwithstanding any provision of this Agreement or any Plan, in no event shall any compensation or benefits, individually or in the aggregate, to which Goldstein would be entitled be less favorable for the two years following a Change of Control than to which Goldstein would have been entitled based upon the most favorable of the Company's Plans in effect for Goldstein at any time during the 120-day period immediately preceding such Change of Control. (b) If Goldstein's employment shall have been terminated by the Company (other than for Cause) or by Goldstein for Good Reason during a Change of Control Period: (i) the Company shall make a lump sum cash payment to Goldstein within 30 days after the Date of Termination in an amount equal to the sum of the amounts provided by Sections 3(e)(i), (ii) and (iii) except that all references therein to "two times" shall be "three times"; and (ii) (1) all unvested options held by Goldstein shall vest on the Date of Termination, (2) all unvested profit shares held by Goldstein or for his benefit by a grantor trust shall vest on the Date of Termination, (3) any other unvested equity awards (including, without limitation, restricted stock and stock units) held by Goldstein shall vest immediately and be promptly delivered to Goldstein entirely in the form of Common Stock, (4) any options held by Goldstein may be exercised until the expiration date of the options, and (5) Goldstein shall not be entitled to any additional grants of any stock options, restricted stock, and other equity based or long term awards; and (iii) Goldstein, his spouse and dependent children shall be entitled to the benefits set forth in Section 3(b)(iii). 5. Release Agreement. The benefits pursuant to Section 3 are contingent upon Goldstein (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 Goldstein under this Agreement against any amounts owed by Goldstein to the Company, and nothing in this Agreement shall prevent the Company from pursuing any other available remedies against Goldstein. 7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit Goldstein's continuing or future participation in any Plan for which Goldstein may qualify nor shall anything herein limit or otherwise affect such rights as Goldstein may have under any contract or agreement with the Company. Amounts that are vested benefits or that Goldstein is otherwise entitled to receive under any Plan, contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such Plan, or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement; Legal Fees. (a) No Obligation to Mitigate. In no event shall Goldstein be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Goldstein 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 Goldstein 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: Other than with respect to claims brought by Goldstein against, or defenses by Goldstein 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 Goldstein in bad faith or frivolously, the Company agrees to pay all reasonable legal and professional fees and expenses that Goldstein may reasonably incur as a result of any contest by Goldstein, 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 Goldstein about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code or any successor Section of the Code. (ii) The following shall apply for any dispute arising hereunder, under the Release Agreement or under the Stock Unit Agreement upon or following a Change of Control: The Company agrees to advance to Goldstein all reasonable legal and professional fees and expenses that Goldstein may reasonably incur as a result of any contest by Goldstein, 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 Goldstein 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) Goldstein 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 Goldstein against, or defenses by Goldstein 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 Goldstein in bad faith or frivolously. 9. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any actual or constructive payment or distribution by the Company to or for the benefit of Goldstein (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. 10. Restrictions and Obligations of Goldstein. (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 Goldstein and the grant to Goldstein of the stock units of the Company as set forth in Section 2 hereof is Goldstein's compliance with the undertakings set forth in this Section 10. Specifically, Goldstein agrees to comply with the provisions of this Section 10 irrespective of whether Goldstein is entitled to receive any payments under Section 3 or 4 of this Agreement. (b) Confidentiality. The confidential and proprietary information and in any material respect trade secrets of the Company are among its most valuable assets, including but not limited to, its customer and vendor lists, database, computer programs, frameworks, models, its marketing programs, its sales, financial, marketing, training and technical information, and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Company creates, develops, acquires or maintains its products and marketing plans, targets its potential customers and operates its retail and other businesses. The Company has invested, and continues to invest, considerable amounts of time and money in obtaining and developing the goodwill of its customers, its other external relationships, its data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form, would irreparably harm the Company. Goldstein 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 Goldstein during Goldstein's employment by the Company and which shall not be or become public knowledge (other than by acts by Goldstein or representatives of Goldstein in violation of this Agreement). After termination of Goldstein's employment with the Company, Goldstein 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 three-year period following the Date of Termination, Goldstein shall not, directly or indirectly (i) employ or seek to employ any person who is at the Date of Termination, or was at any time within the six-month period preceding the Date of Termination, an officer, general manager or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period) or (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company; provided, however, that if Goldstein terminates the Agreement for "Good Reason" or the Company terminates Goldstein's employment hereunder without Cause, the obligations under this Section 10(c) shall survive for only a two-year period following the Date of Termination. (d) Non-Competition and Consulting. (i) During the Employment Period and for a two-year period following the Date of Termination, Goldstein shall not, directly or indirectly: (x) engage in any managerial, administrative, advisory, consulting, operational or sales activities in a Restricted Business anywhere in the Restricted Area, including, without limitation, as a director or partner of such Restricted Business, or (y) organize, establish, operate, own, manage, control or have a direct or indirect investment or ownership interest in a Restricted Business or in any corporation, partnership (limited or general), limited liability company enterprise or other business entity that engages in a Restricted Business anywhere in the Restricted Area; and (z) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any customer, supplier, lessor, lessee, employee, consultant, research partner or investor of the Company. (e) Litigation Assistance. Goldstein agrees to cooperate with the Company and its counsel in regard to any litigation presently pending or subsequently initiated involving matters of which Goldstein has particular knowledge as a result of your employment with the Company. Such cooperation shall consist of Goldstein making himself available at reasonable times for consultation with officers of the Company and its counsel and for depositions or other similar activity should the occasion arise. Goldstein shall not receive any additional compensation for rendering such assistance. Reasonable travel costs and out-of-pocket expenses in connection with such cooperation shall be reimbursed by the Company. The obligations under the Section 10(e) shall survive for a five-year period following the Date of Termination. (f) Exceptions. Sections 10(c) and (d) shall not bind Goldstein during any period following the termination of Goldstein's employment if there has been a Change of Control, irrespective of whether the Change of Control occurs before or after the Date of Termination. (g) Permitted Investments. Nothing contained in Section 10(d) shall prohibit or otherwise restrict Goldstein 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 Goldstein (A) is not a controlling Person of, or a member of a group that controls, such entity and (B) does not own, directly or indirectly, more than 1% of any class of equity securities of such entity. (h) Definitions. For purposes of this Section 10: (i) "Restricted Business" means, (A) if Goldstein's employment is terminated for Cause or if Goldstein terminates his employment other than for Good Reason, any retail store or mail order business or any business, in each case if it is involved in the manufacture or marketing of toys, juvenile or baby products, juvenile furniture or children's clothing or any other business in which the Company may be engaged on the Date of Termination, and (B) if Goldstein's employment is terminated for any other reason, Restricted Business shall be limited to any such entity if it derives 10% or more of its revenues in the aggregate from such products and/or business in its most recent fiscal year. (ii) "Restricted Area" means any country in which the Company or its subsidiaries owns or franchises any retail store operations or otherwise has operations on the Date of Termination. (i) Relief. The parties hereto hereby acknowledge that the provisions of this Section 10 are reasonable and necessary for the protection of the Company and its subsidiaries. In addition, Goldstein further acknowledges that the Company and its subsidiaries will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, Goldstein 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 Goldstein from any actual or threatened breach of such covenants. In addition, without limiting the Company's remedies for any breach of any restriction on Goldstein set forth in Section 10, except as required by law, Goldstein shall not be entitled to any payments set forth in Section 3 or 4 hereof if Goldstein willfully breaches in any material respect any of the covenants applicable to Goldstein contained in this Section 10, Goldstein will immediately return to the Company 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. 11. Successors. (a) This Agreement is personal to Goldstein and without the prior written consent of the Company shall not be assignable by Goldstein otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Goldstein's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will, within thirty days after a Change of Control, and the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company within thirty days after any such event of succession to, assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. (b) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to Goldstein, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (e) Assistance to Company. At all times during and after the Employment Period and at the Company's expense for significant out-of-pocket expenses actually and reasonably incurred by Goldstein in connection therewith, Goldstein shall provide reasonable assistance to the Company in the collection of information and documents and shall make Goldstein 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 Goldstein'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. Goldstein acknowledges that the restrictive covenants contained in Section 10 are a condition of this Agreement and are reasonable and valid in geographical and temporal scope and in all other respects. If any court or arbitrator determines that any of the covenants in Section 10, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. (g) Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Waiver. Goldstein'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 Goldstein or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (i) Arbitration. Except as otherwise provided for herein, any controversy arising under, out of, in connection with, or relating to, this Agreement, and any amendment hereof, or the breach hereof or thereof, shall be determined and settled by arbitration in New York, New York, by a three person panel mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrators, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons of such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. IN WITNESS WHEREOF, Goldstein has hereunto set Goldstein's hand and the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. MICHAEL GOLDSTEIN /s/ Michael Goldstein TOYS "R" US, INC. By: /s/ Robert C. Nakasone Name: Robert C. Nakasone Title: Chief Executive Officer EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this __ day of ___________________________, 19__, between TOYS "R" US, INC., a Delaware corporation, and any successor thereto (collectively, the "Company") and Michael Goldstein ("Goldstein"). Goldstein and the Company agree as follows: 1. The employment relationship between Goldstein and the Company terminated on __________________________________ (the "Termination Date"). 2. In accordance with Goldstein's Retention Agreement (the "Retention Agreement"), the Company has agreed to pay Goldstein certain payments and to make certain benefits available after the Date of Termination. 3. In consideration of the above, the sufficiency of which Goldstein hereby acknowledges, Goldstein, on behalf of Goldstein and Goldstein's heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this letter agreement, including, without limitation, any claims Goldstein may have arising from or relating to Goldstein's employment or termination from employment with the Company, including a release of any rights or claims Goldstein may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by Goldstein of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to Goldstein's employment with or resignation or termination from the Company. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended ("ADEA"). The ADEA requires that Goldstein be advised to consult with an attorney before Goldstein waives any claim under ADEA. In addition, the ADEA provides Goldstein with at least 21 days to decide whether to waive claims under ADEA and seven days after Goldstein signs the Agreement to revoke that waiver. Additionally, the Company agrees to discharge and release Goldstein and Goldstein'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 Goldstein's employment and/or affiliation with, or termination and separation from the Company; provided that such release shall not release Goldstein from any loan or advance by the Company or any of its subsidiaries, any act that would constitute "Cause" under Goldstein's Retention Agreement or a breach under Section ________ or _______ of Goldstein's Retention Agreement. 4. This Agreement is not an admission by either Goldstein or the Company of any wrongdoing or liability. 5. Goldstein waives any right to reinstatement or future employment with the Company following Goldstein's separation from the Company on the Termination Date. 6. Goldstein agrees not to engage in any act after execution of the Separation and Release Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company further agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of Goldstein. 7. Goldstein shall continue to be bound by Sections _____ and _____ of Goldstein's Retention Agreement. 8. Goldstein shall promptly return all the Company property in Goldstein's possession, including, but not limited to, the Company keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company business. Goldstein shall return any leased or Company automobile at the expiration of the restrictions under Section 10(d) of Goldstein's Retention Agreement. 9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in Goldstein's Retention Agreement. 10. This Agreement represents the complete agreement between Goldstein and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, Goldstein 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 Goldstein shall be effective unless the Company has received within the 7-day revocation period, written notice of any revocation, all monies received by Goldstein under this Agreement and all originals and copies of this Agreement. 13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. Goldstein acknowledges that Goldstein has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, Goldstein acknowledges that Goldstein 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: MICHAEL GOLDSTEIN ___________________________________ 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 an annual rate of $900,000 until June 30, 1998, and, the annual rate of $300,000 thereafter, subject to annual review and as may be increased in the discretion of the Committee. "Board" means the Board of Directors of the Company. "Cause" means: (i) the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude; (ii) the commission of any fraud, misappropriation or misconduct which causes demonstrable injury to the Company or a subsidiary; (iii) an act of dishonesty resulting or intended to result, directly or indirectly, in material gain or personal enrichment to Goldstein at the expense of the Company or a subsidiary; (iv) any willful and material breach of Goldstein's fiduciary duties to the Company as an employee or director; (v) a serious and willful violation of the Toys "R" Us Ethics Agreement or any other serious and willful violation of a Company policy; (vi) the willful and continued failure of Goldstein to perform substantially Goldstein'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 Goldstein by the Board, which specifically identifies the manner in which the Board believes that Goldstein has not substantially performed Goldstein's duties; (vii) the failure by Goldstein to comply, in any material respect, with the provisions of Section 10 of the Agreement; or (viii) the failure by Goldstein to comply with any other undertaking set forth in the Agreement or any breach by Goldstein 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 Goldstein, shall be considered "willful" unless it is done, or omitted to be done, by Goldstein in bad faith or without reasonable belief that Goldstein's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of regular outside counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Goldstein in good faith and in the best interests of the Company. The cessation of employment of Goldstein shall not be deemed to be for Cause unless and until there shall have been delivered to Goldstein 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 Goldstein and Goldstein is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Goldstein is guilty of the conduct described, and specifying the particulars thereof in detail. "Change of Control" means, after the date hereof: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (iii) any acquisition by any Person pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below, or (iv) any acquisition by any entity in which Goldstein 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 Goldstein has a material equity interest, or any "Affiliate" (as defined in Rule 405 under the Securities Act of 1933, as amended) of such entity) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. "Change of Control Period" means the period commencing 120 days prior to a Change of Control and expiring on the second anniversary date of a Change of Control. "Committee" means the Company's Management Compensation and Stock Option Committee of the Board of Directors or any successor committee of the Board performing equivalent functions. "Date of Termination" means (i) if Goldstein's employment is terminated by the Company for Cause, or by Goldstein for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with the Agreement), (ii) if Goldstein's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date so designated by the Company in its notification to Goldstein of such termination, (iii) if Goldstein's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Goldstein or the effective date of the Disability, as the case may be, (iv) if Goldstein's position as Chairman of the Board is terminated by Goldstein without Good Reason, the Date of Termination shall be the last day of the Transition Period during which Goldstein is employed by the Company as a regular employee, or (v) the last day of the Employment Period during which the Company shall have given notice to Goldstein that the Employment Period shall not be extended. "Disability" means the determination that Goldstein is disabled pursuant to the terms of the TRU Partnership Employees' Savings and Profit Sharing Plan, as amended and restated as of October 1, 1993, as the same may be amended from time to time. "Good Reason" means, without Goldstein's prior written consent, the occurrence of any of the following, provided that Goldstein delivers a Notice of Termination specifying such occurrence within 30 days thereof: (i) the assignment of Goldstein to a position other than Chairman of the Board;" (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 Goldstein; (iii) any failure by the Company to comply with and satisfy Section 11(c) of the Agreement; or (iv) notice by the Company that it is not extending the termination date of the Employment Period. "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Goldstein's employment under the provision so indicated and (iii) if the Date of Termination (as defined above) is other than the date of receipt of such notice, specifies the termination date. "Partnership Plan" means the Partnership Group Deferred Compensation Plan of the Company. "Plans" means all employee compensation, benefit and welfare plans, policies and programs of the Company, which may include, without limitation, incentive, savings, retirement, stock option, restricted stock, supplemental executive retirement, the Partnership Plan, 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 Goldstein or, if such meaning is inapplicable, the term shall mean a termination of employment with the Company or a subsidiary on a voluntary basis prior to the age of sixty (60). The term "Retirement" shall also include "early" retirement prior to the age of sixty (60) provided that the Committee, in its sole discretion, consents in writing to accept such early retirement. "Transition Period" means the two-year period commencing on the date that Goldstein has terminated his position as chairman of the Board without Good Reason. EXHIBIT C TAX GROSS-UP (a) If required by Section 9 of the Agreement, in addition to the payments described in Section 4 of the Agreement and the grants described in the Stock Unit Agreement, the Company shall pay to Goldstein an amount (the "Gross-up") such that the net amount retained by Goldstein, after deduction of any Excise Tax and any Federal, state and local income taxes, equals the amount of such payments that Goldstein would have retained had such Excise Tax not been imposed. In addition, the Company shall indemnify and hold Goldstein 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 Goldstein 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 Goldstein and reasonably acceptable to the Company. (c) Goldstein 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. Goldstein 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 Goldstein in writing prior to the expiration of such period that it desires to contest such claim, Goldstein 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 Goldstein 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 Goldstein from and against all costs and expenses incurred in connection with such contest; provided further, however, that if the Company directs Goldstein to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Goldstein on an interest-free basis and at no net after-tax cost to Goldstein. If Goldstein 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), Goldstein 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 Goldstein as a result of making such payment (any such benefit calculated based on the assumption that any deduction available to Goldstein offsets income that would otherwise be taxed at the highest marginal statutory rates of Federal, state and local income tax for the relevant periods). EXECUTION COPY ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of February 25, 1998 (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and MICHAEL GOLDSTEIN ("Goldstein"). W I T N E S S E T H: WHEREAS, the Company proposed for the approval of the stockholders of the Company at the 1997 Annual Meeting of Stockholders an Amendment (the "Amendment") to the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan") providing for performance criteria that may be utilized by the Management Compensation and Stock Option Committee (the "Committee") in connection with the grant of Performance Shares (as defined in the Plan and referred to herein as "Stock Units"), and the Stockholders approved such Amendment; WHEREAS, concurrently herewith, Goldstein and the Company are entering into a Retention Agreement, dated as of even date herewith (the "Retention Agreement"); WHEREAS, as further inducement for Goldstein to execute the Retention Agreement and continue in the employ of the Company, the Committee has determined to grant Goldstein 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 and in the Retention Agreement. 2. Stock Unit Grant. Subject to the terms and conditions set forth in this Unit Agreement and in Section 10 of the Plan, Goldstein is hereby granted 52,700 Stock Units. Each Stock Unit represents the right to receive one share of Common Stock (collectively, with other shares of Common Stock relating to the Stock Units and held in Goldstein's account in the Trust (as defined below) in respect of the Stock Units, the "Shares"). The 52,700 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 Goldstein's account therein subject to the vesting conditions of Sections 3 and 4 below. Any property attributable to the Shares, including, without limitation, dividends and distributions thereon shall be deposited into the Trust, shall as promptly as practicable be reinvested in shares of Common Stock, and shall be allocated by the Trust to Goldstein's account therein subject to the vesting conditions of Sections 3 and 4 below. 3. Vesting. (a) Except as provided in the Retention Agreement and subject to Section 4(b), the Stock Units shall vest at the rate of twenty percent (20%) per annum on May 1 of each year, beginning on May 1, 1998, throughout the Employment Period; provided that the Committee has determined that the Performance Objective set forth in Exhibit A has been achieved. (b) As soon as practicable, but no later than the earlier of (x) May 1, 2002 or (y) the Date of Termination, the Committee shall determine whether the Performance Objective set forth on Exhibit A has been achieved. 4. Payment of Stock Units. (a) The Shares, together with any property attributable thereto (including, without limitation, dividends and distributions thereon), shall be delivered to Goldstein as provided in the Retention Agreement. (b) The provisions of Sections 8(b) and 9 of the Retention Agreement shall apply to the Stock Unit and related Shares, whether or not the Retention Agreement is then in effect. 5. Investment Representation. The Shares acquired by Goldstein under this Unit Agreement will be acquired for Goldstein's account and not with a view to the distribution thereof, and Goldstein 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 Goldstein shall furnish the Company with an opinion of counsel reasonably satisfactory to the Company that such registration is not required, and a legend to such effect may be placed on the certificate for the Shares. 6. Liability; Indemnification. No member of the Committee, nor any person to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to this Unit Agreement, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability such member may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and Bylaws, as amended from time to time, or under any agreement between any such member and the Company. 7. Severability. Each of the Sections contained in this Unit Agreement shall be enforceable independently of every other section in this Unit Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Unit Agreement. 8. Governing Law. This Unit Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Unit Agreement shall be settled by arbitration as provided in the Retention Agreement. 9. Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 10. Amendment. This Unit Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to Goldstein, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 12. Interpretation. The interpretation and decision with regard to any question arising under this Unit Agreement or with respect to the Stock Units made by the Committee shall be final and conclusive on Goldstein. 13. 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 officers as of the date specified above. TOYS "R" US, INC. By: /s/ Robert C. Nakasone Title: Chief Executive Officer I hereby acknowledge receipt of the Stock Units and agree to the provisions set forth in this Agreement. /s/ Michael Goldstein Signature of Executive EX-10 3 EXHIBIT 10S - RETENTION AGREEMENT EXECUTION COPY RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND ROBERT C. NAKASONE DATED AS OF February 25, 1998 NAKASONE AGREEMENT EXECUTION COPY TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and Robert C. Nakasone (the "Executive"), dated as of February 25, 1998. Capitalized terms used in this Agreement and in Exhibit A hereto that are not defined in the operative provisions shall have the meanings ascribed to them on Exhibit B hereto. 1. Employment Period. The Company hereby agrees to continue to employ the Executive and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the Employment Period. The term "Employment Period" means the period commencing on 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, based upon a determination by the Board, shall give notice to the Executive that the Employment Period shall not be so extended. 2. Terms of Employment. (a) Position. (i) Commencing on the date hereof and for the remainder of the Employment Period, the Executive shall serve as the Chief Executive Officer of the Company. The Executive shall be based in Northeastern New Jersey. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote his full time during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, the Executive may, so long as such activities do not interfere with the performance of his responsibilities to the Company in accordance with this Agreement, continue the corporate directorships on which the Executive serves, if any, as of the date hereof and such other corporate directorships as are consented to by the Committee. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive with the knowledge of the Company prior to a Change of Control, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to a Change of Control shall not thereafter be deemed to violate this Agreement. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive his Annual Base Salary, which will be paid in accordance with the Company's regular payroll policies as in effect from time to time. (ii) Incentive Bonus. The Executive shall also be eligible, for each fiscal year ending during the Employment Period, to receive (A) an annual incentive bonus, in accordance with targets established by the Committee, of one-hundred percent (100%) of Annual Base Salary at the target and up to two-hundred percent (200%) of Annual Base Salary and (B) long-term incentive awards pursuant to the Company's incentive Plans and subject to the terms thereof at a level commensurate with his current grants and his current position. Each such incentive bonus shall be paid in accordance with the Company's incentive Plans. (iii) Participation in Other Plans. During the Employment Period, the Executive shall be eligible to participate in all other Plans at a level commensurate with his participation in such Plans as of the date hereof, including continued vesting of outstanding option grants and profits shares. (iv) Stock Units. As further inducement for the Executive to enter into this Agreement and to continue in the employ of the Company, the Company has granted to the Executive stock units contingent on performance and future service, pursuant to the Stock Unit Agreement executed and delivered by the Company on the date hereof in the form attached as Annex A hereto. (v) Partnership Plan Units. During the Employment Period the Executive shall be granted units under the Partnership Plan in accordance with targets established by the Committee in an amount equal to forty percent (40%) of the actual Annual Base Salary at such target. 3. Termination of Employment. (a) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. 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. (b) Termination for Death, Disability or Retirement. the Executive's employment shall terminate upon his death, Disability or Retirement during the Employment Period. In the event of such termination: (i) the Company shall make a lump sum cash payment to the Executive (or, in the event that termination results from the death of the Executive, to his estate) within 30 days after the Date of Termination in an amount equal to the sum of: (A) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not already paid; (B) the targeted amount of the Executive's annual bonus, long-term incentive awards and Partnership Plan Units that would have been awarded 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; (C) the Executive's actual earned annual bonus and long-term incentive awards and Partnership Plan Units for any completed fiscal year or period not theretofore paid; and (D) the account balance provided for under the Plans, including the Company's supplemental executive retirement plan, which shall be fully vested; 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 shall be promptly delivered to the Executive or his estate, (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 shall be delivered to the Executive, or in the event of termination due to his death, the Executive's estate, entirely in the form of Common Stock, $.10 par value per share ("Common Stock") of the Company immediately upon termination in the event of the Executive's death, or, in the event of termination due to Retirement or Disability upon the later of May 1, 2002; or the expiration of the period that the Executive's activities are restricted under Section 10(c), subject to his compliance with the terms of this Agreement through such date, (4) any options held by the Executive may be exercised until the expiration date of such options and (5) the Executive shall not be entitled to any additional grants of any stock options, restricted stock, or other equity based or long-term awards; and (iii) the Executive (and his spouse and dependent children) will be entitled to continuation of health benefits under the Plans at a level commensurate with the Executive's current position and if the Executive (or his spouse and dependent children upon his death) elects to receive such health benefits, the Executive shall pay the premium charged to former employees of the Company pursuant to Section 4980B of the Code; provided, that the 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; 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 (iii) shall be terminated if, at any time after the Date of Termination, the Executive is employed by or is otherwise affiliated with a party that offers comparable health benefits to the Executive. (c) Resignation by the Executive Without Good Reason. If the Executive shall resign his employment with the Company without Good Reason, the Executive shall provide the Company with a Notice of Termination at least six (6) months prior to the Date of Termination. In the event of such resignation: (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: (A) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not already paid; (B) the Executive's actual earned annual incentive awards for any completed fiscal year or period not theretofore paid or deferred unless the Committee determines not to permit the cancellation of such deferral; and (C) the account balance provided for under the Plans, including the Company's supplemental executive retirement plan, which shall be fully vested; and (ii) (1) all unvested options held by the Executive that otherwise do not vest on the Date of Termination 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 be forfeited at the end of such two-year period, (2) all unvested profit shares held by the Executive or for the benefit of the Executive by a grantor trust established by the Company that otherwise do not vest on the Date of Termination shall continue to vest in accordance with their terms for two years after the Date of Termination at the rate of 20% per annum and all remaining unvested profit shares shall be forfeited at the end of such two-year period 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 (ii) and any such unvested profit share that would otherwise vest in accordance with this clause (ii) but that is not permitted to be so held shall vest immediately, (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by the Executive shall be forfeited, (4) any other vested equity award (including, without limitation, restricted stock and stock units) shall be delivered to the Executive upon the later of May 1, 2002; or the expiration of the period that the Executive's activities are restricted under Sections 10(c) and (d), subject to his compliance with the terms of this Agreement through such date, (5) any options held by the Executive that are vested on the Date of Termination or vest thereafter pursuant to this clause (ii) may be exercised until the earlier of (x) 30 days after the twenty-four month anniversary date of the Date of Termination and (y) the expiration date of such options, and (6) the Executive shall not be entitled to any additional grants of any stock options, restricted stock or, other equity based or long-term awards; and (iii) the Executive, his spouse and dependent children will be entitled to the benefits set forth under Section 3(b)(iii). (d) Termination by the Company for Cause. If the Executive's employment shall be terminated for Cause during the Employment Period, the Employment Period shall terminate without further obligations to the Executive other than the obligation to pay him all payments and benefits due, in accordance with the Company's Plans through the Date of Termination. All stock units held by the Executive, whether or not vested, shall be forfeited on the Date of Termination. (e) Termination by the Company Without Cause or By the Executive for Good Reason. If the Executive's employment shall be terminated by the Company without Cause during the Employment Period, or by the Executive for Good Reason, then: (i) the Company shall make a lump sum cash payment to the Executive within 30 days after the Date of Termination of (x) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (y) the targeted amount of the Executive's annual incentive bonus and long-term incentive awards and Partnership Plan Units 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 (z) the Executive's actual earned annual incentive bonus or long-term incentive awards and Partnership Plan Units 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, (2) two times the targeted amount of the annual incentive bonus that would have been paid or accrued to the Executive with respect to the Company's fiscal year in which such Date of Termination occurs and (3) two times the targeted amount of the long-term incentive award and Partnership Plan Units that would have been paid or accrued to the Executive with respect to such fiscal year; (iii) the Company shall continue to provide, in the manner and timing provided for in the Plans (other than as provided in clauses (i), (ii), (iv) and (v) of this Section 3(e)), the benefits provided under the Plans that the Executive would receive if the Executive's employment continued for two years after the Date of Termination, assuming for this purpose that the Executive's compensation is the amount paid pursuant to clause (ii) above, and the Executive shall be fully vested in any account balance and all other benefits under the Plans; provided, however, that the benefits provided under this clause (iii) shall be limited to the amounts permitted by law or as would otherwise not potentially adversely impact on the tax qualification of any Plans; 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 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, (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 delivered to the Executive entirely in the form of Common Stock upon the later of May 1, 2002 and the expiration of the period of that the Executive's activities are restricted under Section 10(c), subject to compliance with this Agreement through such date, (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 expiration date of such options and (5) the Executive shall not be entitled to any additional grants of any stock options, restricted stock, or other equity based or long-term awards; and (v) the Executive, his spouse and dependent children shall be entitled to the benefits set forth under Section 3(b)(iii). 4. Obligations of the Company Relating to a Change of Control. (a) Notwithstanding any provision of this Agreement or any Plan, in no event shall 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 to which the Executive would have been entitled based upon the most favorable of the Company's Plans in effect for the Executive at any time during the 120-day period immediately preceding such Change of Control. (b) If the Executive's employment shall have been terminated by the Company (other than for Cause) or by the Executive for Good Reason during a Change of Control Period: (i) the Company shall make a lump sum cash payment to the Executive within 30 days after the Date of Termination in an amount equal to the sum of the amounts provided by Sections 3(e)(i), (ii) and (iii) except that all references therein to "two times" shall be "three times"; 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 his benefit by a grantor trust shall vest on the Date of Termination, (3) any other unvested equity awards (including, without limitation, restricted stock and stock units) held by the Executive shall vest immediately and be promptly delivered to the Executive entirely in the form of Common Stock, (4) any options held by the Executive may be exercised until the expiration date of the options, and (5) the Executive shall not be entitled to any additional grants of any stock options, restricted stock, and other equity based or long term awards; and (iii) the Executive, his spouse and dependent children shall be entitled to the benefits set forth in Section 3(b)(iii). 5. Release Agreement. The benefits pursuant to Section 3 are contingent upon the Executive (i) executing a Separation and Release Agreement (the "Release Agreement") upon or after any Date of Termination, a copy of which is attached as Exhibit A to this Agreement and (ii) not revoking or challenging the enforceability of the Release Agreement or this Agreement. 6. Offset. The Company shall have the right to offset the amounts required to be paid to the Executive under this Agreement against any amounts owed by the Executive to the Company, and nothing in this Agreement shall prevent the Company from pursuing any other available remedies against the Executive. 7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any Plan for which the Executive may qualify nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any Plan, contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such Plan, or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement; Legal Fees. (a) No Obligation to Mitigate. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and, except as specifically provided in this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. (b) Expenses of Contests. (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: Other than with respect to claims brought by the Executive against, or defenses by the Executive of any claim of, the Company with respect to this Agreement, the Release Agreement or the Stock Unit Agreement that were determined to have been made or asserted by the Executive in bad faith or frivolously, the Company agrees to pay all reasonable legal and professional fees and expenses that the Executive may reasonably incur as a result of any contest by the Executive, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Release Agreement or 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. (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. 9. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any actual or constructive payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, 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. 10. Restrictions and Obligations of the Executive. (a) Consideration for Restrictions and Covenants. The parties hereto acknowledge and agree that the principal consideration for the agreement to make the payments provided in Sections 3 and 4 hereof from the Company to the Executive and the grant to the Executive of the stock units of the Company as set forth in Section 2 hereof is the Executive's compliance with the undertakings set forth in this Section 10. Specifically, the Executive agrees to comply with the provisions of this Section 10 irrespective of whether the Executive is entitled to receive any payments under Section 3 or 4 of this Agreement. (b) Confidentiality. The confidential and proprietary information and in any material respect trade secrets of the Company are among its most valuable assets, including but not limited to, its customer and vendor lists, database, computer programs, frameworks, models, its marketing programs, its sales, financial, marketing, training and technical information, and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Company creates, develops, acquires or maintains its products and marketing plans, targets its potential customers and operates its retail and other businesses. The Company has invested, and continues to invest, considerable amounts of time and money in obtaining and developing the goodwill of its customers, its other external relationships, its data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form, would irreparably harm the Company. The Executive shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information relating to the Company and its business, which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate, divulge or use any such information, knowledge or data to anyone other than the Company and those designated by it. (c) Non-Solicitation or Hire. During the Employment Period and for a three-year period following the Date of Termination, the Executive shall not, directly or indirectly (i) employ or seek to employ any person who is at the Date of Termination, or was at any time within the six-month period preceding the Date of Termination, an officer, general manager or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period) or (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company; provided, however, that if the Executive terminates the Agreement for "Good Reason" or the Company terminates the Executive's employment hereunder without Cause, the obligations under this Section 10(c) shall survive for only a two-year period following the Date of Termination. (d) Non-Competition and Consulting. (i) During the Employment Period and for a two-year period following the Date of Termination, the Executive shall not, directly or indirectly: (x) engage in any managerial, administrative, advisory, consulting, operational or sales activities in a Restricted Business anywhere in the Restricted Area, including, without limitation, as a director or partner of such Restricted Business, or (y) organize, establish, operate, own, manage, control or have a direct or indirect investment or ownership interest in a Restricted Business or in any corporation, partnership (limited or general), limited liability company enterprise or other business entity that engages in a Restricted Business anywhere in the Restricted Area; and (z) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any customer, supplier, lessor, lessee, employee, consultant, research partner or investor of the Company. (e) Litigation Assistance. The Executive agrees to cooperate with the Company and its counsel in regard to any litigation presently pending or subsequently initiated involving matters of which the Executive has particular knowledge as a result of your employment with the Company. Such cooperation shall consist of the Executive making himself available at reasonable times for consultation with officers of the Company and its counsel and for depositions or other similar activity should the occasion arise. The Executive shall not receive any additional compensation for rendering such assistance. Reasonable travel costs and out-of-pocket expenses in connection with such cooperation shall be reimbursed by the Company. The obligations under the Section 10(e) shall survive for a five-year period following the Date of Termination. (f) Exceptions. Sections 10(c) and (d) shall not bind the Executive during any period following the termination of the Executive's employment if there has been a Change of Control, irrespective of whether the Change of Control occurs before or after the Date of Termination. (g) Permitted Investments. Nothing contained in Section 10(d) shall prohibit or otherwise restrict the Executive from acquiring or owning, directly or indirectly, for passive investment purposes not intended to circumvent this Agreement, securities of any entity engaged, directly or indirectly, in a Restricted Business if either (i) such entity is a public entity and 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. (h) Definitions. For purposes of this Section 10: (i) "Restricted Business" means, (A) if the Executive's employment is terminated for Cause or if the Executive terminates his employment other than for Good Reason, any retail store or mail order business or any business, in each case if it is involved in the manufacture or marketing of toys, juvenile or baby products, juvenile furniture or children's clothing or any other business in which the Company may be engaged on the Date of Termination, and (B) if the Executive's employment is terminated for any other reason, Restricted Business shall be limited to any such entity if it derives at least 10% or more of its revenues in the aggregate from such products and/or business in its most recent fiscal year. (ii) "Restricted Area" means any country in which the Company or its subsidiaries owns or franchises any retail store operations or otherwise has operations on the Date of Termination. (i) Relief. The parties hereto hereby acknowledge that the provisions of this Section 10 are reasonable and necessary for the protection of the Company and its subsidiaries. In addition, the Executive further acknowledges that the Company and its subsidiaries will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Executive agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for 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 10, 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 willfully breaches in any material respect any of the covenants applicable to the Executive contained in this Section 10, the Executive will immediately return to the Company 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. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will, within thirty days after a Change of Control, and the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company within thirty days after any such event of succession to, assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. (b) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Executive, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (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 10 are a condition of this Agreement and are reasonable and valid in geographical and temporal scope and in all other respects. If any court or arbitrator determines that any of the covenants in Section 10, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. (g) Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (i) Arbitration. Except as otherwise provided for herein, any controversy arising under, out of, in connection with, or relating to, this Agreement, and any amendment hereof, or the breach hereof or thereof, shall be determined and settled by arbitration in New York, New York, by a three person panel mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrators, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons of such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and 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. ROBERT C. NAKASONE /s/ Robert C. Nakasone TOYS "R" US By: /s/ Roger C. Gaston Name: Roger C. Gaston Title: Sr. V.P. - Human Resources EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this __ day of ___________________________, 19__, between TOYS "R" US, INC., a Delaware corporation, and any successor thereto (collectively, the "Company") and Robert C. Nakasone (the "Executive"). the Executive and the Company agree as follows: 1. The employment relationship between the Executive and the Company terminated on __________________________________ (the "Termination Date"). 2. In accordance with the Executive's Retention Agreement (the "Retention Agreement"), the Company has agreed to pay the Executive certain payments and to make certain benefits available after the Date of Termination. 3. In consideration of the above, the sufficiency of which the Executive hereby acknowledges, the Executive, on behalf of the Executive and the Executive's heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this letter agreement, including, without limitation, any claims the Executive may have arising from or relating to the Executive's employment or termination from employment with the Company, including a release of any rights or claims the Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Executive of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Executive's employment with or resignation or termination from the Company. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended ("ADEA"). The ADEA requires that the Executive be advised to consult with an attorney before the Executive waives any claim under ADEA. In addition, the ADEA provides the Executive with at least 21 days to decide whether to waive claims under ADEA and seven days after the Executive signs the Agreement to revoke that waiver. Additionally, the Company agrees to discharge and release the Executive and the Executive's heirs from any claims, demands, and/or causes of action whatsoever, presently known or unknown, that are based upon facts occurring prior to the date of this Agreement, including, but not limited to, any claim, matter or action related to the Executive's employment and/or affiliation with, or termination and separation from the Company; provided that such release shall not release the Executive from any loan or advance by the Company or any of its subsidiaries, any act that would constitute "Cause" under the Executive's Retention Agreement or a breach under Section ________ or _______ of the Executive's Retention Agreement. 4. This Agreement is not an admission by either the Executive or the Company of any wrongdoing or liability. 5. the Executive waives any right to reinstatement or future employment with the Company following the Executive's separation from the Company on the Termination Date. 6. the Executive agrees not to engage in any act after execution of the Separation and Release Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company further agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of the Executive. 7. the Executive shall continue to be bound by Sections _____ and _____ of the Executive's Retention Agreement. 8. the Executive shall promptly return all the Company property in the Executive's possession, including, but not limited to, the Company keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company business. The Executive shall return any leased or Company automobile at the expiration of the restrictions under Section 10(d) of the Executive's Retention Agreement. 9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Executive's Retention Agreement. 10. This Agreement represents the complete agreement between the Executive and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, the Executive may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. 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. 13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Executive acknowledges that the Executive has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Executive acknowledges that the Executive has been afforded the opportunity of at least 21 days to consider this Agreement. 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: ROBERT C. NAKASONE _______________________________ 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 in effect as of the date of the Agreement as may be increased in the discretion of the Committee. "Board" means the Board of Directors of the Company. "Cause" means: (i) the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude; (ii) the commission of any fraud, misappropriation or misconduct which causes demonstrable injury to the Company or a subsidiary; (iii) an act of dishonesty resulting or intended to result, directly or indirectly, in material gain or personal enrichment to the Executive at the expense of the Company or a subsidiary; (iv) any willful and material breach of the Executive's fiduciary duties to the Company as an employee or director; (v) a serious and willful violation of the Toys "R" Us Ethics Agreement or any other serious and willful violation of a Company policy; (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 10 of the Agreement; or (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 interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of regular outside counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the 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" means, after the date hereof: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (iii) any acquisition by any Person pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below, or (iv) any acquisition by any entity in which the 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 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. "Change of Control Period" means the period commencing 120 days prior to a Change of Control and expiring on the second anniversary date of a Change of Control. "Committee" means the Company's Management Compensation and Stock Option Committee of the Board of Directors or any successor committee of the Board performing equivalent functions. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with the Agreement), (ii) if the Executive's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date so designated by the Company in its notification to the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the effective date of the Disability, as the case may be, (iv) if the Executive's Employment is terminated by the Executive without Good Reason, the Date of Termination shall be the last day on which the Executive is employed by the Company as a regular employee, or (v) the last day of the Employment Period during which the Company shall have given notice to the Executive that the Employment Period shall not be extended. "Disability" means the determination that the Executive is disabled pursuant to the terms of the TRU Partnership Employees' Savings and Profit Sharing Plan, as amended and restated as of October 1, 1993, as the same may be amended from time to time. "Good Reason" means, without the Executive's prior written consent, the occurrence of any of the following, provided that the Executive delivers a Notice of Termination specifying such occurrence within 30 days thereof: (i) the assignment of the Executive to a position other than Chief Executive Officer; (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 and satisfy Section 11(c) of the Agreement; or (iv) notice by the Company that it is not extending the termination date of the Employment Period. "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined above) is other than the date of receipt of such notice, specifies the termination date. "Partnership Plan" means the Partnership Group Deferred Compensation Plan of the Company. "Plans" means all employee compensation, benefit and welfare plans, policies and programs of the Company, which may include, without limitation, incentive, savings, retirement, stock option, restricted stock, supplemental executive retirement, the Partnership Plan, 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 or, if such meaning is inapplicable, the term shall mean a termination of employment with the Company or a subsidiary on a voluntary basis prior to the age of sixty (60). The term "Retirement" shall also include "early" retirement prior to the age of sixty (60) provided that the Committee, in its sole discretion, consents in writing to accept such early retirement. EXHIBIT C TAX GROSS-UP (a) If required by Section 9 of the Agreement, in addition to the payments described in Section 4 of the Agreement 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 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). EXECUTION COPY ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of February 25, 1998 (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and ROBERT C. NAKASONE (the "Executive"). W I T N E S S E T H: WHEREAS, the Company proposed for the approval of the stockholders of the Company at the 1997 Annual Meeting of Stockholders an Amendment (the "Amendment") to the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan") providing for performance criteria that may be utilized by the Management Compensation and Stock Option Committee (the "Committee") in connection with the grant of Performance Shares (as defined in the Plan and referred to herein as "Stock Units"), and the Stockholders approved such Amendment; WHEREAS, concurrently herewith, the Executive and the Company are entering into a Retention Agreement, dated as of even date herewith (the "Retention Agreement"); WHEREAS, as further inducement for the Executive to execute the Retention 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 and in the Retention Agreement. 2. Stock Unit Grant. Subject to the terms and conditions set forth in this Unit Agreement and in Section 10 of the Plan, the Executive is hereby granted 158,000 Stock Units. Each Stock Unit represents the right to receive one share of Common Stock (collectively, with other shares of Common Stock relating to the Stock Units and held in the Executive's account in the Trust (as defined below) in respect of the Stock Units, the "Shares"). The 158,000 Shares shall be promptly deposited after the date hereof in the grantor trust created pursuant to the Grantor Trust Agreement, dated as of October 1, 1995 between the Company and American Express Trust Company, a Minnesota trust company (together with any grantor trust subsequently established by the Company, the "Trust") and shall be allocated by the Trust to the Executive's account therein subject to the vesting conditions of Sections 3 and 4 below. Any property attributable to the Shares, including, without limitation, dividends and distributions thereon shall be deposited into the Trust, shall as promptly as practicable be reinvested in shares of Common Stock, and shall be allocated by the Trust to the Executive's account therein subject to the vesting conditions of Sections 3 and 4 below. 3. Vesting. (a) Except as provided in the Retention Agreement and subject to Section 4(b), the Stock Units shall vest at the rate of twenty percent (20%) per annum on May 1 of each year, beginning on May 1, 1998, throughout the Employment Period; provided that, the Committee has determined that the Performance Objective set forth in Exhibit A has been achieved. (b) The Committee shall determine whether the Performance Objective set forth on Exhibit A has been achieved as soon as practicable, but no later than the earlier of (x) May 1, 2002 or (y) the Date of Termination. 4. Payment of Stock Units. (a) The Shares, together with any property attributable thereto (including, without limitation, dividends and distributions thereon), shall be delivered to the Executive as provided in the Retention Agreement. (b) The provisions of Sections 8(b) and 9 of the Retention Agreement shall apply to the Stock Unit and related Shares, whether or not the Retention Agreement is then in effect. 5. Investment Representation. The Shares acquired by the Executive under this Unit Agreement will be acquired for the Executive'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. 6. Liability; Indemnification. No member of the Committee, nor any person to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to this Unit Agreement, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability such member may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and Bylaws, as amended from time to time, or under any agreement between any such member and the Company. 7. Severability. Each of the Sections contained in this Unit Agreement shall be enforceable independently of every other section in this Unit Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Unit Agreement. 8. Governing Law. This Unit Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Unit Agreement shall be settled by arbitration as provided in the Retention Agreement. 9. Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 10. Amendment. This Unit Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Executive, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 12. Interpretation. The interpretation and decision with regard to any question arising under this Unit Agreement or with respect to the Stock Units made by the Committee shall be final and conclusive on the Executive. 13. 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 officers as of the date specified above. TOYS "R" US, INC. By: Roger C. Gaston Title: Sr. V.P. - Human Resources I hereby acknowledge receipt of the Stock Units and agree to the provisions set forth in this Agreement. /s/ Robert C. Nakasone Signature of Executive EX-10 4 EXHIBIT 10T - RETENTION AGREEMENT EXECUTION COPY RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND KEITH VAN BEEK DATED AS OF February 25, 1998 VAN BEEK TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and Keith Van Beek (the "Officer"), dated as of February 25, 1998. Capitalized terms used in this Agreement and in Exhibit A hereto that are not defined in the operative provisions shall have the meanings ascribed to them on Exhibit B hereto. 1. Employment Period. The Company hereby agrees to continue to employ the Officer and the Officer hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the Employment Period. The term "Employment Period" means the period commencing on the date hereof and ending on the second anniversary of such date as automatically extended for successive additional one-year periods unless, at least six months prior to the scheduled expiration of the Employment Period, the Company shall give notice to the Officer that the Employment Period shall not be so extended. 2. Terms of Employment. (a) Position. (i) Commencing on the date hereof and for the remainder of the Employment Period, the Officer shall serve in the position of President - Toys "R" Us U.S. Merchandising and Marketing of the Company or such other senior Officer position to which the Officer may be appointed by the Company. The Officer shall be based in Northeastern New Jersey. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Officer is entitled, the Officer agrees to devote full time during normal business hours to the business and affairs of the Company and to use the Officer's best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, the Officer may, so long as such activities do not interfere with the performance of the Officer's responsibilities as an employee of the Company in accordance with this Agreement, continue the corporate directorships on which the Officer serves, if any, as of the date hereof and such other corporate directorships as are consented to by the Chief Executive Officer. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Officer with the knowledge of the Company prior to a Change of Control, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to a Change of Control shall not thereafter be deemed to violate this Agreement. (b) Compensation. (i) Base Salary. During the Employment Period, the Officer shall receive the Officer's Annual Base Salary which will be paid in accordance with the Company's regular payroll policies as in effect from time to time. (ii) Incentive Bonus. The Officer shall also be eligible, for each fiscal year ending during the Employment Period, to receive an annual incentive bonus and long-term incentive awards pursuant to the Company's incentive Plans and subject to the terms thereof at a level commensurate with the Company's grants to the officer currently serving as President - Toys "R" Us U.S. Merchandising and Marketing or any more senior position(s) to which the Officer may be appointed. Each such incentive bonus shall be paid in accordance with the Company's incentive Plans. (iii) Participation in Other Plans. During the Employment Period, the Officer shall be eligible to participate in all other Plans at a level commensurate with the Officer's position. (iv) Stock Units. As further inducement for the Officer to enter into this Agreement and to continue in the employ of the Company, the Company has granted to the Officer stock units contingent on performance and future service, pursuant to the Stock Unit Agreement executed and delivered by the Company on the date hereof in the form attached as Annex A hereto. 3. Termination of Employment Upon Death, Disability or Retirement. The Officer's employment shall terminate upon the Officer's death, Disability or Retirement during the Employment Period and the obligations of the Company upon such termination shall be limited to those benefits provided by the Plans at the Date of Termination, except as specifically set forth herein or in the Stock Unit Agreement. 4. Other Termination of Employment. (a) Company Termination. The Company may terminate the Officer's employment during the Employment Period with or without Cause. (b) Good Reason. The Officer's employment may be terminated during the Employment Period by the Officer for Good Reason. (c) Notice of Termination. Any termination by the Company for Cause, or by the Officer for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. The failure by the Officer or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Officer or the Company, respectively, hereunder or preclude the Officer or the Company, respectively, from asserting such fact or circumstance in enforcing the Officer's or the Company's rights hereunder. (d) Obligations of the Company Upon Termination Under Section 4. If the Officer's employment shall have been terminated under Section 4(a) (other than for Cause) or 4(b): (i) the Company shall make a lump sum cash payment to the Officer within 30 days after the Date of Termination in an amount equal to the sum of (1) the Officer's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (2) the targeted amount of the Officer's annual bonus and long-term incentive awards that would have been payable with respect to the fiscal year in which the Date of Termination occurs in each case absent the termination of the Officer's employment prorated for the portion of such fiscal year through the Date of Termination taking into account the number of complete months during such fiscal year through the Date of Termination and (3) the Officer's actual earned annual or long-term incentive awards for any completed fiscal year or period not theretofore paid or deferred; (ii) the Company shall pay to the Officer in equal installments, made at least monthly, over the twenty-four months following the Date of Termination an aggregate amount equal to (1) two times the Officer's Annual Base Salary in effect on the Date of Termination, (2) two times the targeted amount of the annual incentive bonus that would have been paid to the Officer with respect to the Company's fiscal year in which such Date of Termination occurs and (3) two times the targeted amount of the long-term incentive award that would have been paid to the Officer with respect to such fiscal year; (iii) the Company shall continue to provide, in the manner and timing provided for in the Plans (other than stock options and except as set forth in this Section 4(d) and in Section 7(b)), the benefits provided under the Plans that the Officer would receive on an after-tax basis if the Officer's employment had continued for two years after the Date of Termination assuming for this purpose that the Officer's compensation for each such year would have been one-half of the amount paid pursuant to clause (ii) above, and the Officer shall be fully vested in any account balance and all other benefits continuation under such Plans; provided, however that the benefits provided under this clause (iii) shall be limited to the coverage permitted by law or as would otherwise not potentially adversely impact on the tax qualification of any Plans; provided, further, that if such benefits may not be continued under the Plans, the Company shall pay to the Officer an amount equal to the Company's cost had such benefits been continued. (iv) (1) all unvested options held by the Officer shall continue to vest in accordance with their terms for two years after the Date of Termination, and all remaining unvested options held by the Officer shall vest on the two year anniversary date of the Date of Termination, (2) all unvested profit shares held by the Officer or for the benefit of the Officer by a grantor trust established by the Company shall continue to vest in accordance with their terms for two years after the Date of Termination and all remaining profit shares shall vest on the two year anniversary date of the Date of Termination, provided that, if permitted by the terms of any such trust, any unvested profit shares shall continue to be held by such grantor trust until such profit shares vest pursuant to this clause (iv) and any such unvested profit share not permitted to be so held shall vest immediately and be delivered to the Officer, (3) any other unvested equity based award (including, without limitation, restricted stock and stock units) held by the Officer shall vest on the two year anniversary date of the Date of Termination on a pro rata basis determined by a fraction, the numerator of which is the number of months elapsed from the grant of such equity award through the Date of Termination plus the twenty-four months after the Date of Termination and the denominator of which is the total number of months in the vesting period for such award and shall be promptly delivered to the Officer entirely in the form of Common Stock, (4) any options held by the Officer that are vested on the Date of Termination or vest thereafter pursuant to this clause (iv) may be exercised until the earlier of (x) the thirty-month anniversary date of the Date of Termination and (y) the expiration date of such options and (5) the Officer shall not be entitled to any additional grants of any stock options, restricted stock, other equity based or long-term awards; and (v) the Officer will be entitled to continuation of health benefits under the Plans at a level commensurate with the Officer's current position or more senior position(s) to which the Officer may be appointed, and if the Officer elects to receive such health benefits, the Company shall pay the medical premiums therefore for the first twenty-four months after the Date of Termination, and thereafter the Officer shall pay the premium charged to former employees of the Company pursuant to Section 4980B of the Code until the Officer is sixty-five years of age; provided, that the Company can amend or otherwise alter the Plans to provide benefits to the Officer that are no less than those commensurate with the Officer's current position or more senior position(s) to which the Officer may be appointed; provided, that to the extent such benefits cannot be provided to the Officer under the terms of the Plans or the Plans cannot be so amended in any manner not adverse to the Company, the Company shall pay the Officer, on an after-tax basis, an amount necessary for the Officer to acquire such benefits from an independent insurance carrier; and provided, further, that the obligations of the Company under this clause (v) shall be terminated if, at any time after the Date of Termination, the Officer is employed by or is otherwise affiliated with a party that offers comparable health benefits to the Officer. (e) Cause. If the Officer's employment shall be terminated for Cause during the Employment Period or if the Officer voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, death, Disability or Retirement, the Employment Period shall terminate without further obligations to the Officer other than the obligation to pay to the Officer all payments and benefits due, in accordance with the Company's Plans through the Date of Termination. 5. Release Agreement. The benefits pursuant to Section 4 are contingent upon the Officer (i) executing a Separation and Release Agreement (the "Release Agreement") upon or after any Date of Termination, a copy of which is attached as Exhibit A to this Agreement and (ii) not revoking or challenging the enforceability of the Release Agreement or this Agreement. 6. Offset. The Company shall have the right to offset the amounts required to be paid to the Officer under this Agreement against any amounts owed by the Officer to the Company, and nothing in this Agreement shall prevent the Company from pursuing any other available remedies against the Officer. 7. Compensation and Benefits Following Change of Control. (a) Notwithstanding any provision of this Agreement or any Plan, in no event shall any compensation or benefits, individually or in the aggregate, to which the Officer would be entitled be less favorable for the two years following a Change of Control than the Officer would have been entitled based upon the most favorable of the Company's Plans in effect for the Officer at any time during the 120-day period immediately preceding such Change of Control. (b) In the event of termination of the Officer's employment under Section 4(a) (other than for Cause) or 4(b), whether before or after a Change of Control, following a Change of Control: (i) any remaining amounts payable under Sections 4(d)(i), (ii) and (iii) shall be payable in a lump sum within 30 days after the later of the Date of Termination or the Change of Control and (ii) in lieu of the Company's obligations under Section 4(d)(iv), all unvested options and equity based awards shall vest immediately on the later of the Date of Termination or the Change of Control and all such options may be exercised until the earlier of (x) the thirty-month anniversary date of the Date of Termination and (y) the expiration date of such options. 8. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Officer's continuing or future participation in any Plan for which the Officer may qualify nor shall anything herein limit or otherwise affect such rights as the Officer may have under any contract or agreement with the Company. Amounts that are vested benefits or that the Officer is otherwise entitled to receive under any Plan, contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such Plan, or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Legal Fees. (a) No Obligation to Mitigate. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement, and, except as specifically provided in this Agreement, such amounts shall not be reduced whether or not the Officer obtains other employment. (b) Expenses of Contests. (i) The following shall apply for any dispute arising hereunder, under the Release Agreement or under the Stock Unit Agreement prior to a Change of Control: In each case solely to the extent that the Officer is successful with respect thereto, the Company agrees to pay all reasonable legal and professional fees and expenses that the Officer may reasonably incur as a result of any contest by the Officer, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Release Agreement or the Stock Unit Agreement (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code or any successor Section of the Code. (ii) The following shall apply for any dispute arising hereunder, under the Release Agreement or under the Stock Unit Agreement upon or following a Change of Control: The Company agrees to advance to the Officer all reasonable legal and professional fees and expenses that the Officer may reasonably incur as a result of any contest by the Officer, by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Release Agreement or the Stock Unit Agreement (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code or any successor Section of the Code. (iii) The Officer shall reimburse the Company for its reasonable legal and professional fees and expenses, and in the case of advances made pursuant to paragraph (ii) above, shall refund the Company the amount of such advances, to the extent there is a final determination that such fees, expenses or advances relate to claims brought by the Officer against, or defenses by the Officer of any claim of, the Company with respect to this Agreement, the Release Agreement or the Stock Unit Agreement that were determined to have been made or asserted by the Officer in bad faith or frivolously. 10. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any actual or constructive payment or distribution by the Company to or for the benefit of the Officer (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, the Stock Unit Agreement or otherwise) is subject to the excise tax imposed by Section 4999 of the Code or any successor provision of the Code (the "Excise Tax"), then the Company shall make the payments described on Exhibit C hereto. 11. Restrictions and Obligations of the Officer. (a) Consideration for Restrictions and Covenants. The parties hereto acknowledge and agree that the principal consideration for the agreement to make the payments provided in Sections 3 and 4 hereof from the Company to the Officer and the grant to the Officer of the stock units of the Company as set forth in Section 2 hereof is the Officer's compliance with the undertakings set forth in this Section 11. Specifically, Officer agrees to comply with the provisions of this Section 11 irrespective of whether the Officer is entitled to receive any payments under Section 3 or 4 of this Agreement. (b) Confidentiality. The confidential and proprietary information and in any material respect trade secrets of the Company are among its most valuable assets, including but not limited to, its customer and vendor lists, database, computer programs, frameworks, models, its marketing programs, its sales, financial, marketing, training and technical information, and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Company creates, develops, acquires or maintains its products and marketing plans, targets its potential customers and operates its retail and other businesses. The Company has invested, and continues to invest, considerable amounts of time and money in obtaining and developing the goodwill of its customers, its other external relationships, its data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Company. The Officer shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information relating to the Company and its business, which shall have been obtained by the Officer during the Officer's employment by the Company and which shall not be or become public knowledge (other than by acts by the Officer or representatives of the Officer in violation of this Agreement). After termination of the Officer's employment with the Company, the Officer shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate, divulge or use any such information, knowledge or data to anyone other than the Company and those designated by it. (c) Non-Solicitation or Hire. During the Employment Period and for a two-year period following the termination of the Officer's employment for any reason, the Officer shall not, directly or indirectly (i) employ or seek to employ any person who is at the Date of Termination, or was at any time within the six-month period preceding the Date of Termination, an officer, general manager or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period) or (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company. (d) Non-Competition and Consulting. (i) During the Employment Period and for a two-year period (the "Consulting Period") following the termination of the Officer's employment for any reason, the Officer shall not, directly or indirectly: (x) engage in any managerial, administrative, advisory, consulting, operational or sales activities in a Restricted Business anywhere in the Restricted Area, including, without limitation, as a director or partner of such Restricted Business, or (y) organize, establish, operate, own, manage, control or have a direct or indirect investment or ownership interest in a Restricted Business or in any corporation, partnership (limited or general), limited liability company enterprise or other business entity that engages in a Restricted Business anywhere in the Restricted Area; and (ii) During the Consulting Period, the Officer shall (x) be available to render services to the Company as an independent contractor/consultant but not as an employee of the Company; and (y) perform such duties as may be reasonably requested in writing from time to time during the Consulting Period by the Chief Executive Officer; provided that such duties shall not conflict with the duties of the Officer for a new employer if such employment does not violate the terms of Section 11(d)(i) hereof. (iii) Section 11(d) shall not bind the Officer during any period following the termination of the Officer's employment if there has been a Change of Control irrespective of whether the Change of Control occurs before or after the Date of Termination. (iv) Nothing contained in this Section 11(d) shall prohibit or otherwise restrict the Officer from acquiring or owning, directly or indirectly, for passive investment purposes not intended to circumvent this Agreement, securities of any entity engaged, directly or indirectly, in a Restricted Business if either (i) such entity is a public entity and such Officer (A) is not a controlling Person of, or a member of a group that controls, such entity and (B) owns, directly or indirectly, no more than 3% of any class of equity securities of such entity or (ii) such entity is not a public entity and the Officer (A) is not a controlling Person of, or a member of a group that 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 TC "(e) Definitions. For purposes of this Section 11" \f C \l "2" : (i) "Restricted Business" means the retail store or mail order business or any business, in each case if it is involved in the manufacture or marketing of toys, juvenile or baby products, juvenile furniture or children's clothing or any other business in which the Company may be engaged on the Date of Termination. (ii) "Restricted Area" means any country in which the Company or its subsidiaries owns or franchises any retail store operations or otherwise has operations on the Date of Termination. (f) Relief. The parties hereto hereby acknowledge that the provisions of this Section 11 are reasonable and necessary for the protection of the Company and its subsidiaries. In addition, the Officer further acknowledges that the Company and its subsidiaries will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Officer agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining the Officer from any actual or threatened breach of such covenants. In addition, without limiting the Company's remedies for any breach of any restriction on the Officer set forth in Section 11, except as required by law, the Officer shall not be entitled to any payments set forth in Section 3 or 4 hereof if the Officer breaches any of the covenants applicable to the Officer contained in this Section 11, the Officer will immediately return to the Company any such payments previously received upon such a breach, and, in the event of such breach, the Company will have no obligation to pay any of the amounts that remain payable by the Company under Section 3 or 4. 12. Successors. (a) This Agreement is personal to the Officer and without the prior written consent of the Company shall not be assignable by the Officer otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Officer's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will, within thirty days after a Change of Control, and the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company within thirty days after any such event of succession to, assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. (b) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Officer, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (e) Assistance to Company. At all times during and after the Employment Period and at the Company's expense for significant out-of- pocket expenses actually and reasonably incurred by the Officer in connection therewith, the Officer shall provide reasonable assistance to the Company in the collection of information and documents and shall make the Officer available when reasonably requested by the Company in connection with claims or actions brought by or against third parties or investigations by governmental agencies based upon events or circumstances concerning the Officer's duties, responsibilities and authority during the Employment Period. (f) Severability of Provisions. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. The Officer acknowledges that the restrictive covenants contained in Section 11 are a condition of this Agreement and are reasonable and valid in geographical and temporal scope and in all other respects. If any court or arbitrator determines that any of the covenants in Section 11, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. (g) Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Waiver. The Officer's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Officer or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (i) Arbitration. Except as otherwise provided for herein, any controversy arising under, out of, in connection with, or relating to, this Agreement, and any amendment hereof, or the breach hereof or thereof, shall be determined and settled by arbitration in New York, New York, by a three person panel mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrators, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons of such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. (j) Resignation. Without limiting the obligations of the Officer, or the rights of the Company, in connection with, or relating to, this Agreement, the Officer agrees that in order for the Officer to resign his employment with the Company or any of its Subsidiaries, the Officer shall provide the Company with six (6) months notice of resignation prior to the effective date of such resignation. IN WITNESS WHEREOF, the Officer has hereunto set the Officer's hand and the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. KEITH VAN BEEK /s/ Keith Van Beek TOYS "R" US, INC. By: /s/ Roger C. Gaston Name: Roger C. Gaston Title: Sr. V.P. - Human Resources EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this day of , 19 , between TOYS "R" US, INC. and any successor thereto (collectively, the "Company") and Keith Van Beek (the "Officer"). The Officer and the Company agree as follows: 1. The employment relationship between the Officer and the Company terminated on (the "Termination Date"). 2. In accordance with the Officer's Retention Agreement, the Company has agreed to pay the Officer certain payments and to make certain benefits available after the Termination Date. 3. In consideration of the above, the sufficiency of which the Officer hereby acknowledges, the Officer, on behalf of the Officer and the Officer's heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this letter agreement, including, without limitation, any claims the Officer may have arising from or relating to the Officer's employment or termination from employment with the Company, including a release of any rights or claims the Officer may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Officer of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Officer's employment with or resignation or termination from the Company. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended ("ADEA"). The ADEA requires that the Officer be advised to consult with an attorney before the Officer waives any claim under ADEA. In addition, the ADEA provides the Officer with at least 21 days to decide whether to waive claims under ADEA and seven days after the Officer signs the Agreement to revoke that waiver. This release does not release the Company from any obligations due to the Officer under Section 4, 7, 9(b), 10, 11 or 13(e) of the Officer's Retention Agreement, the Officer's Indemnification Agreement with the Company or under this Agreement. Additionally, the Company agrees to discharge and release the Officer and the Officer's heirs from any claims, demands, and/or causes of action whatsoever, presently known or unknown, that are based upon facts occurring prior to the date of this Agreement, including, but not limited to, any claim, matter or action related to the Officer's employment and/or affiliation with, or termination and separation from the Company; provided that such release shall not release the Officer from any loan or advance by the Company or any of its subsidiaries, any act that would constitute "Cause" under the Officer's Retention Agreement or a breach under Section 9(b), 11 or 13(e) of the Officer's Retention Agreement. 4. This Agreement is not an admission by either the Officer or the Company of any wrongdoing or liability. 5. The Officer waives any right to reinstatement or future employment with the Company following the Officer's separation from the Company on the Termination Date. 6. The Officer agrees not to engage in any act after execution of the Separation and Release Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company further agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of the Officer. 7. The Officer shall continue to be bound by Sections 11 and 13(e) of the Officer's Retention Agreement. 8. The Officer shall promptly return all the Company property in the Officer's possession, including, but not limited to, the Company keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company business. The Officer shall return any leased or Company car at the expiration of the Consulting Period (as defined in the Officer's Retention Agreement). 9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Officer's Retention Agreement. 10. This Agreement represents the complete agreement between the Officer and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, the Officer may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. No revocation of this Agreement by the Officer shall be effective unless the Company has received within the 7-day revocation period, written notice of any revocation, all monies received by the Officer under this Agreement and all originals and copies of this Agreement. 13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Officer acknowledges that the Officer has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Officer acknowledges that the Officer 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: KEITH VAN BEEK _____________________________ 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 $375,000 per annum as may be increased from time to time in the discretion of either the Committee, the Board or any appropriate committee of the Board. "Board" means the Board of Directors of the Company. "Cause" means: (i) the conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude; (ii) the commission of any fraud, misappropriation or misconduct which causes demonstrable injury to the Company or a subsidiary; (iii) an act of dishonesty resulting or intended to result, directly or indirectly, in material gain or personal enrichment to the Officer at the expense of the Company or a subsidiary; (iv) any material breach of the Officer's fiduciary duties to the Company as an employee or officer; (v) a serious violation of the Toys "R" Us Ethics Agreement or any other serious violation of a Company policy; (vi) the willful and continued failure of the Officer to perform substantially the Officer's duties with the Company or one of its subsidiaries (other than any such failure resulting from incapacity due to physical or mental illness resulting in a Disability), within a reasonable time after a written demand for substantial performance is delivered to the Officer by the Board, which specifically identifies the manner in which the Board believes that the Officer has not substantially performed the Officer's duties; (vii) the failure by the Officer to comply, in any material respect, with the provisions of Section 11 of the Agreement; or (viii) the failure by the Officer to comply with any other undertaking set forth in the Agreement or any breach by the Officer hereof that is reasonably likely to result in a material injury to the Company. For purposes of this provision, no act or failure to act, on the part of the Officer, shall be considered "willful" unless it is done, or omitted to be done, by the Officer in bad faith or without reasonable belief that the Officer's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of regular outside counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Officer in good faith and in the best interests of the Company. The cessation of employment of the Officer shall not be deemed to be for Cause unless and until there shall have been delivered to the Officer a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Officer and the Officer is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Officer is guilty of the conduct described, and specifying the particulars thereof in detail. "Change of Control" - See Exhibit C. "Committee" means the Company's Management Compensation and Stock Option Committee of the Board of Directors or any successor committee of the Board performing equivalent functions. "Date of Termination" means (i) if the Officer's employment is terminated by the Company for Cause, or by the Officer for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with the Agreement), (ii) if the Officer's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date so designated by the Company in its notification to the Officer of such termination, (iii) if the Officer's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Officer or the effective date of the Disability, as the case may be, and (iv) the last day of the Employment Period during which the Company shall have given notice to the Officer that the Employment Period shall not be extended. "Disability" means the determination that the Officer is disabled pursuant to the terms of the TRU Partnership Employees' Savings and Profit Sharing Plan, as amended and restated as of October 1, 1993, as the same may be amended from time to time. "Good Reason" means, without the Officer's prior written consent, the occurrence of any of the following, provided that the Officer delivers a Notice of Termination specifying such occurrence within 30 days thereof: (i) the assignment of the Officer to a position materially inconsistent with the requirements of Section 2(a) of the Agreement, excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Officer; provided, however, that the foregoing shall not constitute "Good Reason" if it is not attendant to a reduction in the Officer's Annual Base Salary or total target compensation except that a request by the Company for the Officer to relocate outside 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 Officer; (iii) any failure by the Company to comply with and satisfy Section 12(c) of the Agreement; or (iv) notice by the Company that it is not extending the termination date of the Employment Period. "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Officer's employment under the provision so indicated and (iii) if the Date of Termination (as defined above) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). "Plans" means all employee compensation, benefit and welfare plans, policies and programs of the Company, which may include, without limitation, incentive, savings, retirement, stock option, restricted stock, supplemental Officer retirement, pension, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans, vacation practices, fringe benefit practices and policies relating to the reimbursement of business expenses. "Retirement" shall have the meaning ascribed to that term in the Plan under which benefits are being sought by the Officer. EXHIBIT C CHANGE OF CONTROL AND TAX GROSS-UP I. Certain Definitions "Change of Control" means, after the date hereof: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (iii) any acquisition by any Person pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below, or (iv) any acquisition by any entity in which the Officer has a material direct or indirect equity interest; or (b) The cessation of the "Incumbent Board" for any reason to constitute at least a majority of the Board. "Incumbent Board" means the members of the Board on the date hereof and any member of the Board subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board, except that the Incumbent Board shall not include any member of the Board whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (c) The consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, immediately following such Business Combination each of the following would be correct: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Person resulting from such Business Combination (including, without limitation, a Person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, and (ii) no Person (excluding (A) any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, or such corporation resulting from such Business Combination or any Affiliate of such corporation, or (B) any entity in which the Officer has a material equity interest, or any "Affiliate" (as defined in Rule 405 under the Securities Act of 1933, as amended) of such entity) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. II. Tax Gross-Up (a) If required by Section 10 of the Agreement, in addition to the payments described in Sections 4 and 7 of the Agreement and the grants described in the Stock Unit Agreement, the Company shall pay to the Officer an amount (the "Gross-up") such that the net amount retained by the Officer, after deduction of any Excise Tax and any United States Federal, state and local income taxes, equals the amount of such payments that the Officer would have retained had such Excise Tax not been imposed. In addition, the Company shall indemnify and hold the Officer harmless on an after-tax basis from any Excise Tax imposed on or with respect to any such payment (including, without limitation, any interest, penalties and additions to tax) payable in connection with any such Excise Tax. For purposes of determining the amount of any Gross-up or the amount required to make an indemnity payment on an after-tax basis, it shall be assumed that the Officer is subject to Federal, state and local income tax at the highest marginal statutory rates in effect for the relevant period after taking into account any deduction available in respect of any such tax (e.g., if state and local taxes are deductible for Federal income tax purposes in the relevant period, it shall be assumed that such taxes offset income that would otherwise be subject to Federal income tax at the highest marginal statutory rate in effect for such period). (b) Subject to the provisions of paragraph (c) of this Exhibit C , the determination of (i) whether a Gross-up is required and the amount of such Gross-up and (ii) the amount necessary to make any payment on an after-tax basis, shall be made in accordance with the assumptions set forth in paragraph (a) of this Exhibit C by Ernst & Young LLP or such other "Big Six" accounting firm designated by the Officer and reasonably acceptable to the Company. (c) The Officer shall notify the Company as soon as practicable in writing of any claim by the Internal Revenue Service that, if successful, would require any Gross-up or indemnity payment. The Officer shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company. If the Company notifies the Officer in writing prior to the expiration of such period that it desires to contest such claim, the Officer shall take all actions necessary to permit the Company to control all proceedings taken in connection with such contest. In that connection, the Company may, at its sole option, pursue or forgo any and all administrative appeals, proceedings, hearings and conferences in respect of such claim and may, at its sole option, either direct the Officer to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; provided, however, that the Company shall pay and indemnify the Officer from and against all costs and expenses incurred in connection with such contest; provided further, however, that if the Company directs the Officer to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Officer on an interest-free basis and at no net after-tax cost to the Officer. If the Officer becomes entitled to receive any refund or credit with respect to such claim (or would be entitled to a refund or credit but for a counterclaim for taxes not indemnified hereunder), the Officer shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon) plus the amount of any tax benefit available to the Officer as a result of making such payment (any such benefit calculated based on the assumption that any deduction available to the Officer offsets income that would otherwise be taxed at the highest marginal statutory rates of Federal, state and local income tax for the relevant periods). ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of February 25, 1998 (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and Keith Van Beek (the "Officer"). W I T N E S S E T H: WHEREAS, the Company proposed for the approval of the stockholders of the Company at the 1997 Annual Meeting of Stockholders an Amendment (the "Amendment") to the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan") providing for performance criteria that may be utilized by the Management Compensation and Stock Option Committee (the "Committee") in connection with the grant of Performance Shares (as defined in the Plan and referred to herein as "Stock Units"), and the Stockholders approved such Amendment; WHEREAS, the Officer and the Company are entering into a Retention Agreement, dated as of even date herewith (the "Retention Agreement"); WHEREAS, as further inducement for the Officer to execute the Retention Agreement and continue in the employ of the Company, the Committee has determined to grant the Officer the Stock Units as described in this Unit Agreement, and WHEREAS, the Board and the Committee desire that the compensation arising from the Stock Units shall qualify as "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. NOW, THEREFORE, in consideration of the covenants set forth herein and for other good and valuable consideration, the parties agree as follows: 1. Definitions. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Plan. 2. Stock Unit Grant. Subject to the terms and conditions set forth in this Unit Agreement and in Section 10 of the Plan, the Officer is hereby granted 20,000 Stock Units. Each Stock Unit represents the right to receive one share of Common Stock (collectively, with other shares of Common Stock relating to the Stock Units and held in the Officer's account in the Trust (as defined below) in respect of the Stock Units, the "Shares"). The 20,000 Shares shall be promptly deposited after the date hereof in the grantor trust created pursuant to the Grantor Trust Agreement, dated as of October 1, 1995 between the Company and American Express Trust Company, a Minnesota trust company (together with any grantor trust subsequently established by the Company, the "Trust") and shall be allocated by the Trust to the Officer's account therein subject to the forfeiture conditions of Section 3 below. Any property attributable to the Shares, including, without limitation, dividends and distributions thereon, shall be deposited into the Trust, shall as promptly as practicable be reinvested in shares of Common Stock, and shall be allocated by the Trust to the Officer's account therein subject to the forfeiture conditions of Section 3 below. 3. Forfeiture Conditions. The Stock Units granted to the Officer hereunder shall be forfeited in their entirety, subject to the terms of the Retention Agreement, if: (i) the Officer's employment with the Company terminates prior to the fifth anniversary of the date hereof ; or (ii) the Performance Objective set forth on Exhibit A hereto is not achieved. 4. Payment of Stock Units. As soon as practicable but no later than February 25, 2003, the Committee shall determine whether the Performance Objective set forth on Exhibit A has been achieved. The Shares, together with any property attributable thereto (including, without limitation, dividends and distributions thereon), shall be delivered to the Officer promptly following February 25, 2003 unless the Officer has elected to defer receipt of such Shares in accordance with the terms and conditions of any deferred compensation program maintained by the Company or has failed to satisfy the condition set forth in Section 3(i) hereof. 5. Investment Representation. The Shares acquired by the Officer under this Unit Agreement will be acquired for the Officer's account and not with a view to the distribution thereof, and the Officer will not sell or otherwise dispose of the Shares unless the Shares are registered under the Securities Act of 1933, as amended (the "Act"), or the Officer shall furnish the Company with an opinion of counsel reasonably satisfactory to the Company that such registration is not required, and a legend to such effect may be placed on the certificate for the Shares. 6. Liability; Indemnification. No member of the Committee, nor any person to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to this Unit Agreement, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability such member may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and Bylaws, as amended from time to time, or under any agreement between any such member and the Company. 7. Severability. Each of the Sections contained in this Unit Agreement shall be enforceable independently of every other section in this Unit Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Unit Agreement 8. Governing Law. This Unit Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Unit Agreement shall be settled by arbitration as provided in the Retention Agreement. 9. Captions. The captions of this Unit Agreement are not part of the provisions hereof and shall have no force or effect. 10. Amendment. This Unit Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 11. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Officer, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 12. Interpretation. The interpretation and decision with regard to any question arising under this Unit Agreement or with respect to the Stock Units made by the Committee shall be final and conclusive on the Officer. 13. Successors. This Unit Agreement shall be binding upon the Company and its successors and assigns. IN WITNESS WHEREOF, this Agreement has been executed by the Company by one of its duly authorized officers as of the date specified above. TOYS "R" US, INC. By: /s/ Roger C. Gaston Title: Sr. V.P. - Human Resources I hereby acknowledge receipt of the Stock Units and agree to the provisions set forth in this Agreement. /s/ Keith Van Beek KEITH VAN BEEK EX-10 5 EXHIBIT 10U - RETENTION AGREEMENT EXECUTION COPY RETENTION AGREEMENT BETWEEN TOYS "R" US, INC. AND BRUCE W. KRYSIAK DATED AS OF FEBRUARY 12, 1998 TOYS "R" US, INC. RETENTION AGREEMENT AGREEMENT (this "Agreement"), by and between Toys "R" Us, Inc., a Delaware corporation (the "Company"), and BRUCE W. KRYSIAK (the "Executive"), dated as of February 12, 1998. Capitalized terms used in this Agreement and in Exhibit A hereto that are not defined in the operative provisions shall have the meanings ascribed to them on Exhibit B hereto. 1. Employment Period. The Company hereby agrees to continue to employ the Executive and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the Employment Period. The term "Employment Period" means the period commencing on 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 , the Executive shall be President and Chief Operating Officer of Toys "R" Us, Inc. and President - U.S. Toy Stores Division. The Executive shall be elected to the Board of Directors immediately following the first Board Meeting following the Executive's start date. The Executive shall be based in Northeastern New Jersey. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote 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. During the Employment Period, the Executive may, so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement, continue the corporate directorships on which the Executive serves, if any, as of the date hereof and such other corporate directorships as are consented to by the Chief Executive Officer. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive with the knowledge of the Company prior to a Change of Control, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to a Change of Control shall not thereafter be deemed to violate this Agreement. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive the Executive's Annual Base Salary which will be paid in accordance with the Company's regular payroll policies as in effect from time to time. (ii) Incentive Bonus. The Executive shall also be eligible, for each fiscal year ending during the Employment Period, to receive an annual incentive bonus with a target of 100% of Annual Base Salary and long-term incentive awards of 468,700 units for the cycle ending January 1999 and 664,000 units for the cycle ending January 2000 pursuant to the Company's incentive Plans and subject to the terms thereof and thereafter at a level commensurate with such grants and the Executive's position. Each such incentive bonus shall be paid in accordance with the Company's incentive Plans. (iii) Participation in Other Plans. During the Employment Period, the Executive shall be eligible to participate in all other Plans at a level commensurate with the Executive's position. (iv) Stock Units. As further inducement for the Executive to enter into this Agreement and to continue in the employ of the Company, the Company has granted to the Executive stock units pursuant to the Stock Unit Agreement executed and delivered by the Company on the date hereof. 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 at the Date of Termination, except as specifically set forth herein or in the Stock Unit Agreement. 4. Other Termination of Employment. (a) Company Termination. The Company may terminate the Executive's employment during the Employment Period with or without Cause. (b) Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. (c) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with this Agreement. 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. (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 of (x) the Executive's pro rata Annual Base Salary payable through the Date of Termination to the extent not theretofore paid, (y) the targeted amount of the Executive's 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 (z) the Executive's actual earned annual or long-term incentive awards for any completed fiscal year or period not theretofore paid or deferred; (ii) the Company shall pay to the 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, (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 occurs and (3) two times the targeted amount of the long-term incentive award that would have been paid to the Executive with respect to such fiscal year; (iii) the Company shall continue to provide, in the manner and timing provided for in the Plans (other than provided in clauses (I), (ii), (iv) and (v)), 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 is the amount paid pursuant to clause (ii) above, and the Executive shall be fully vested in any account balance and all other benefits under such Plans; provided, however that the benefits provided under this clause (iii) shall be limited to the amounts permitted by law or as would otherwise not potentially adversely impact on the tax qualification of any Plans; 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 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, 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, stock, other equity based or long-term 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 until the Executive is sixty-five years of age; 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 Plan or the Plan 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) 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 Plan, in no event shall any 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 (x) the thirty-month anniversary date of the Date of Termination and (y) the expiration date of such options. 8. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the 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 in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code or any successor Section of the Code. (ii) The following shall apply for any dispute arising hereunder, under the Release Agreement or under the Stock Unit Agreement upon or following a Change of Control: The Company agrees to advance to the 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 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 or otherwise) is subject to the excise tax imposed by Section 4999 of the Code or any successive Section 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, 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 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 officer, general manager or director or equivalent or more senior level employee of the Company or any of its subsidiaries or otherwise solicit, encourage, cause or induce any such employee of the Company or any of its subsidiaries to terminate such employee's employment with the Company or such subsidiary for the employment of another company (including for this purpose the contracting with any person who was an independent contractor (excluding consultant) of the Company during such period) or (ii) take any action that would interfere with the relationship of the Company or its subsidiaries with their suppliers and franchisees without, in either case, the prior written consent of the Company's Board of Directors, or engage in any other action or business that would have a material adverse effect on the Company. (d) Non-Competition and Consulting. (i) During the Employment Period and for a two-year period (the "Consulting Period") following the termination of the 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 Area, including, without limitation, as a director or partner of such Restricted Business, or (y) organize, establish, operate, own, manage, control or have a direct or indirect investment or ownership interest in a Restricted Business or in any corporation, partnership (limited or general), limited liability company enterprise or other business entity that engages in a Restricted Business anywhere in the Area; and (ii) During the Consulting Period, the Executive shall (x) be available to render services to the Company as an independent contractor/ consultant but not as an employee of the Company; and (y) perform such duties as may be reasonably requested in writing from time to time during the Consulting Period by the 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 Executive's employment if there has been a Change of Control irrespective of whether the Change of Control occurs before or after the Date of Termination. (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 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 the retail store or mail order business or any business, in each case if it is involved in the manufacture or marketing of toys, juvenile or baby products, juvenile furniture or children's clothing or any other business in which the Company may be engaged on the Date of Termination. (ii) "Restricted Area" means any country in which the Company or its subsidiaries owns or franchises any retail store operations or otherwise has operations on the Date of Termination. (f) Relief. The parties hereto hereby acknowledge that the provisions of this Section 11 are reasonable and necessary for the protection of the Company and its subsidiaries and affiliates. In addition, the Executive further acknowledges that the Company and its subsidiaries and affiliates 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 hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. (b) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Executive, to the address on file with the Company; and (ii) If to the Company, to it at Toys "R" Us, Inc., 461 From Road, Paramus, New Jersey 07652, Attention: Senior Vice President - Human Resources; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (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 deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (i) Arbitration. Except as otherwise provided for herein, any controversy arising under, out of, in connection with, or relating to, this Agreement, and any amendment hereof, or the breach hereof or thereof, shall be determined and settled by arbitration in New York, New York, by a three person panel mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrators, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons of such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. (j) 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 with the Company or any of its Subsidiaries, the Executive shall provide the Company with six (6) months notice of resignation prior to the effective date of such resignation. 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. BRUCE W. KRYSIAK /s/ Bruce W. Krysiak TOYS "R" US, INC. By: /s/ Robert C. Nakasone Name: Robert C. Nakasone Title: Chief Executive Officer EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this __ day of _____________________________, 19__, between TOYS "R" US, INC. and any successor thereto (collectively, the "Company") and BRUCE W. KRYSIAK (the "Executive"). The Executive and the Company agree as follows: 1. The employment relationship between the Executive and the Company terminated on __________________________________ (the "Termination Date"). 2. In accordance with the Executive's Retention Agreement, the Company has agreed to pay the Executive certain payments and to make certain benefits available after the Termination Date. 3. In consideration of the above, the sufficiency of which the Executive hereby acknowledges, the Executive, on behalf of the Executive and the Executive's heirs, executors and assigns, hereby releases and forever discharges the Company and its members, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, and any and all employee pension benefit or welfare benefit plans of the Company, including current and former trustees and administrators of such employee pension benefit and welfare benefit plans, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this letter agreement, including, without limitation, any claims the Executive may have arising from or relating to the Executive's employment or termination from employment with the Company, including a release of any rights or claims the Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Executive of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Executive's employment with or resignation or termination from the Company. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended ("ADEA"). The ADEA requires that the Executive be advised to consult with an attorney before the Executive waives any claim under ADEA. In addition, the ADEA provides the Executive with at least 21 days to decide whether to waive claims under ADEA and seven days after the Executive signs the Agreement to revoke that waiver. This release does not release the Company from any obligations due to the Executive under Section 4, 7(b), 9(b) or 10 of the Executive's Employment Agreement, the Executive's Indemnification Agreement with the Company or under this Agreement. Additionally, the Company agrees to discharge and release the Executive and the Executive's heirs from any claims, demands, and/or causes of action whatsoever, presently known or unknown, that are based upon facts occurring prior to the date of this Agreement, including, but not limited to, any claim, matter or action related to the Executive's employment and/or affiliation with, or termination and separation from the Company; provided that such release shall not release the Executive from any loan or advance by the Company or any of its subsidiaries, any act that would constitute "Cause" under the Executive's Employment Agreement or a breach under Section 9(b) or 11 of the Executive's Employment Agreement. 4. This Agreement is not an admission by either the Executive or the Company of any wrongdoing or liability. 5. The Executive waives any right to reinstatement or future employment with the Company following the Executive's separation from the Company on the Termination Date. 6. The Executive agrees not to engage in any act after execution of the Separation and Release Agreement that is intended, or may reasonably be expected to harm the reputation, business, prospects or operations of the Company, its officers, directors, stockholders or employees. The Company further agrees that it will engage in no act which is intended, or may reasonably be expected to harm the reputation, business or prospects of the Executive. 7. The Executive shall continue to be bound by Sections 11 of the Executive's Retention Agreement. 8. The Executive shall promptly return all the Company property in the Executive's possession, including, but not limited to, the Company keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company business. The Executive shall return any leased or Company car at the expiration of the Consulting Period (as defined in the Executive's Employment Agreement). 9. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Executive's Employment Agreement. 10. This Agreement represents the complete agreement between the Executive and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. 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. 11. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 12. It is further understood that for a period of 7 days following the execution of this Agreement in duplicate originals, the Executive may revoke this Agreement, and this Agreement shall not become effective or enforceable until the revocation period has expired. 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. 13. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Executive acknowledges that the Executive has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Executive acknowledges that the Executive has been afforded the opportunity of at least 21 days to consider this Agreement. 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: BRUCE W. KRYSIAK _______________________________ 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; (ii) the commission of any fraud, misappropriation or willful 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 willful material breach of the Executive's fiduciary duties to the Company as an employee or officer; (v) a serious willful violation of the Toys "R" Us Ethics Agreement or any other serious willful 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 willful failure by the Executive to comply, in any material respect, with the provisions of Section 11 of the Agreement; or (viii) the willful 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 interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of regular outside counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the 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 the Company's Management Compensation and Stock Option Committee of the Board of Directors or any successor committee of the Board performing equivalent functions. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with the Agreement), (ii) if the Executive's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date so designated by the Company in its notification to the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the effective date of the Disability, as the case may be, and (iv) the last day of the Employment Period during which the Company shall have given notice to the Executive that the Employment Period shall not be extended. "Disability" means the determination that the Executive is disabled pursuant to the terms of the TRU Partnership Employees' Savings and Profit Sharing Plan, as amended and restated as of October 1, 1993, as the same may be amended from time to time. "Good Reason" means, without the Executive's prior written consent, the occurrence of any of the following, provided that the Executive delivers a Notice of Termination specifying such occurrence within 30 days thereof: (i) the assignment of the Executive to a position materially inconsistent with the requirements of Section 2(a) of the Agreement, exclusing 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 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 and satisfy Section 12(c) of the Agreement; or (iv) notice by the Company that it is not extending the termination date of the Employment Period. "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined above) is other than the date of receipt of such notice, specifies the termination date (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, 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. EXHIBIT C CHANGE OF CONTROL AND TAX GROSS-UP I. Certain Definitions "Change of Control" means, after the date hereof: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (iii) any acquisition by any Person pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below, or (iv) any acquisition by any entity in which the 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 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 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). ANNEX A STOCK UNIT AGREEMENT STOCK UNIT AGREEMENT, dated as of February 12th, 1998 (the "Unit Agreement"), between TOYS "R" US, INC., a Delaware corporation (the "Company"), and BRUCE W. KRYSIAK (the "Executive"). W I T N E S S E T H: WHEREAS, the Company's 1994 Stock Option and Performance Incentive Plan (the "Plan") provides 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/Retention Agreement, dated as of even date herewith (the "Retention Agreement"); WHEREAS, as further inducement for the Executive to execute the Retention 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 200,000 Stock Units. Each Stock Unit represents the right to receive one share of Common Stock (collectively, the shares of Common Stock underlying the Stock Units, the "Shares"). 3. Forfeiture Conditions. The Stock Units granted to the Executive hereunder shall be forfeited in their entirety, subject to the terms of the Retention Agreement, if: (i) the Executive's employment with the Company terminates prior to the fifth anniversary of the date hereof ; or (ii) the Performance Objective set forth on Exhibit A hereto is not achieved. 4. Payment of Stock Units. As soon as practicable following the fifth anniversary of the date hereof, the Committee shall determine whether the Performance Objective set forth on Exhibit A has been achieved. If the Committee determines that such Objective has been achieved, as oon as reasonably practicable thereafter, Executive's Restricteed Stock Units, to the extent that such Stock Units have not been forfeited pursuant to Section 3 hereof, shall be converted into an equivalent number of shares of Common Stock, which shall be delivered to the Executive entirely in the form of Common Stock unless the Executive has elected to defer receipt of such Shares in accordance with the terms and conditions of any deferred compensation program maintained by the Company. 5. Investment Representation. Upon conversion of the Stock Units, the Executive will acquire the Shares for the Executive'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. 6. Liability; Indemnification. No member of the Committee, nor any person to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to this Unit Agreement, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability such member may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and Bylaws, as amended from time to time, or under any agreement between any such member and the Company. 7. Severability. If any provision of this Unit Agreement shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of this Unit Agreement, and this Unit Agreement shall be construed and enforced as if the illegal or invalid provision had not been included. 8. Governing Law. This Unit Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Unit Agreement shall be settled by arbitration as provided in the Retention Agreement. 9. 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. 10. Notices. All notices hereunder shall be sufficiently made if pesonally delivered to the Executive or sent by regular mail or telecopier addressed (a) to the Executive at the Executive's address as set forth in the books and records of the Company or any subsidiary, or (b) to the Company or the Committee at the principal office of the Company clearly marked "Attention: Management Compensation and Stock Option Committee." 11. Successors. This 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 officers as of the date specified above. TOYS "R" US, INC. By: /s/ Robert C. Nakasone Title: Chief Executive Officer I hereby acknowledge receipt of the Stock Units and agree to the provision set forth in this Agreement. /s/ Bruce W. Krysiak BRUCE W. KRYSIAK EX-13 6 1997 ANNUAL REPORT TOYS "R" US ANNUAL REPORT 1997 Fifty years ago it was a single baby store in post - World War II Washington, DC. Today, it is an $11 billion Company, and the world's unsurpassed leader in toys and juvenile products. How did it all begin? With the vision of one man, Charles Lazarus. But Charles' vision did more than that. He changed the shopping habits of more than three generations of parents. He created more than a chain of toy stores - he created an industry and forever altered the way America, and now the world, shops for toys. Along the way, Charles nurtured and developed hundreds of executives who owe much of their knowledge of the retail business to the example he set, the high standards he developed and the lessons he taught. Charles has been a constant presence among us-leading, supporting and encouraging. Toys"R"Us will always be imbued with the uncompromising dedication, the uniquely refreshing personality, and the vision for a strong future that is truly Charles Lazarus. Those of us who follow him do so with a vivid awareness of the legacy he created, and with a commitment to carrying on the strong tradition of excellence he established back in 1948. We salute you, Charles, on this momentous anniversary, and look forward to your counsel as Chairman Emeritus. Michael Goldstein Robert C. Nakasone Chairman of the Board Chief Executive Officer /s/ Michael Goldstein /s/ Robert C. Nakasone Toys"R"Us The Worldwide Authority on Kids, Families and Fun Table of Contents Financial Highlights.................................................... page 3 Letter to Our Stockholders.............................................. page 4 Management's Discussion and Analysis of Results of Operations and Financial Condition................................................ page 12 Financial Statements.................................................... page 14 Report of Management and Report of Independent Auditors............. page 23 Directors, Officers and General Managers............................. page 24 Quarterly Financial Data and Market Information....................... page 26 Store Locations and Corporate Data...................................... page 27 2 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- TOYS"R"US, INC. AND SUBSIDIARIES
(Dollars in millions except per share data) Fiscal Year Ended - --------------------------------------------------------------------------------------------------------------------------- Jan. 31, Feb.1, Feb. 3, Jan. 28, Jan. 29, Jan. 30, Feb. 1, Feb. 2, Jan. 28, Jan. 29, 1998 1997* 1996* 1995 1994 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net Sales $ 11,038 $ 9,932 $ 9,427 $ 8,746 $7,946 $ 7,169 $ 6,124 $ 5,510 $ 4,788 $ 4,000 Net Earnings 490 427 148 532 483 438 340 326 321 268 Basic Earnings Per Share 1.72 1.56 0.54 1.88 1.66 1.51 1.18 1.12 1.11 0.92 Diluted Earnings Per Share 1.70 1.54 0.53 1.85 1.63 1.47 1.15 1.11 1.09 0.91 FINANCIAL POSITION AT YEAR END: Working Capital $ 579 $ 619 $ 326 $ 484 $ 633 $ 797 $ 328 $ 177 $ 238 $ 255 Real Estate-Net 2,435 2,411 2,336 2,271 2,036 1,877 1,751 1,433 1,142 952 Total Assets 7,963 8,023 6,738 6,571 6,150 5,323 4,583 3,582 3,075 2,555 Long-Term Debt 851 909 827 785 724 671 391 195 173 174 Stockholders' Equity 4,428 4,191 3,432 3,429 3,148 2,889 2,426 2,046 1,705 1,424 NUMBER OF STORES AT YEAR END: Toys"R"Us - United States 698 680 653 618 581 540 497 451 404 358 Toys"R"Us - International 441 396 337 293 234 167 126 97 74 52 Kids"R"Us - United States 215 212 213 204 217 211 189 164 137 112 Babies"R"Us - United States 98 82 - - - - - - - - KidsWorld - United States 2 2 - - - - - - - - Total Stores 1,454 1,372 1,203 1,115 1,032 918 812 712 615 522
*After other charges as described in the Notes to Consolidated Financial Statements. CONSOLIDATED NET SALES (billions) 10 year annual compounded sales growth of 13.4% (GRAPHIC MATERIAL OMITTED) Fiscal Year 1988 4.0 1989 4.8 1990 5.5 1991 6.1 1992 7.2 1993 7.9 1994 8.7 1995 9.4 1996 9.9 1997 11.0 3 TO OUR STOCKHOLDERS I am pleased to be writing to you for the first time as Chief Executive Officer of Toys"R"Us. As only the third CEO in our Company's fifty year history, I feel truly privileged to play a role in moving our Company to greater heights. I am committed to upholding the rich traditions and culture that have made us so successful. I am also keenly aware of the need for changes to our priorities if we are to develop winning strategies that will move our Company forward. I enthusiastically welcome the challenge and appreciate the opportunity to lead this great Company. 1997 Financial Highlights Before I outline our strategic direction for 1998, let us take a quick look at 1997. In short, despite delivering our 19th consecutive year of record sales since Toys"R"Us became a public company, 1997 was not the year we hoped it would be. Our sales reached the $11 billion mark which was an 11% increase over the $9.9 billion reported last year. While our net earnings also increased to $490 million, we did not deliver the record earnings goal we set out to achieve. Nonetheless, 1997 was a year of substantial improvements on many significant developmental fronts that will make us a stronger competitor in the future. I will touch on some of these as I outline our plans for 1998 and the future. 1998 Strategies and Direction In my new role as Chief Executive Officer, I have made it clear that strategic planning and management development will be my top priorities. We have already begun analyzing and developing a number of short and long-term initiatives to better position Toys"R"Us for the future. These plans are designed to meet a variety of issues. Most of all, they are intended to address our primary objective: to increase stockholder value. [Photograph of Robert C. Nakasone, Chief Executive Officer] Economic Value Added: EVA_ Beginning in 1998 we plan on moving Toys"R"Us from a Company focused on building stores and expanding to new countries to a Company more focused on maximizing asset productivity and free cash flow, together with profitable growth. To achieve this goal it is imperative that our entire organization makes a very significant, but subtle shift in mindset and attitude. In order for this change to permeate every level in our organization, we have adopted an "Economic Value Added" management system - or EVA_ - to determine whether our business initiatives and investments provide an adequate return to our stockholders. The focus on EVA_ is to instill value-creating thinking into our management's every day thought processes so that they scrutinize each investment to insure that it meets or exceeds our cost of capital. We have retained the services of Stern, Stewart & Co., the leaders in EVA_ implementation, and we are in the process of developing an EVA_- based management system to be used throughout our entire organization. We are very serious about increasing our asset productivity and, therefore, the annual incentive compensation plan for our senior executives, beginning in 1998, will be tied to EVA_ improvement. Our goal is to have all incentive plans tied to EVA_ commencing in 1999. To show further support for this initiative, our Board of Directors approved another $1 billion share repurchase program, which we announced in January. We intend to continue to repurchase the Company's stock in a very aggressive manner. Asset Productivity Another crucial priority for 1998 will be to increase our free cash flow by operating our business with significantly lower asset levels. We are targeting a reduction of $500 million in same store inventories by the year 2000 and expect at least half of this reduction to occur this year. Key to achieving this ambitious objective will be a major overhaul of our purchasing and distribution systems. We have retained Andersen Consulting to work with a team of our key merchandising, distribution and operating executives and anticipate that this project will take three years to complete. "Toys"R"Us... The Worldwide Authority on Kids, Families and Fun" Over the past several months we have been focusing on the changing profile of our customers to determine how we can better meet their needs. While we have been doing a lot of things right, it is clear that there are areas which require radically new approaches in how we do business. Our current vision of 4 being the "preeminent worldwide retailer of toys and juvenile products" is quite narrow and no longer consistent with how our business is evolving. Without weakening that position, we think it is important for us to break the boundaries of how we perceive ourselves, thereby allowing us to sell not only products, but services... to serve not only children, but families... and to provide not only toys, but also fun. Our strategy, therefore, is to broaden and capitalize on our brand equity as a Company focused on fun - not just for kids, but for the entire family. By expanding the definition of merchandise and services we offer, we believe we can capitalize on our established name and image. We plan to expand our vision statement to the following: "Toys"R"Us... The Worldwide Authority on Kids, Families and Fun." Store Design In order to make our stores more flexible, we are rethinking how all of our stores can be redesigned so that flexibility becomes central to the business. This is particularly relevant during our "out of season" time period where our average sales per square foot runs at less than 1/4 of our average sales level during the November/December Holiday selling season. Our Concept 2000 pilot stores have taught us a great deal about what our customers are looking for and they are a vital step in the evolution of our stores. Our customer research indicates that the appeal of the Concept 2000 store emanates from the ease of shopping, enhanced store ambiance, freedom of movement and improved displays and fixtures. One priority in 1998 will be to apply the newly expanded definition of our core business to additional products and services, thereby broadening our offering. It's clear that the look and feel of Concept 2000 is "on target" with customers; however, we also recognize that the biggest and fastest rewards to our stockholders can come from creating new excitement through the expansion of the merchandise offering in our traditional store format, which comprises over 85% of our stores. As a result, we will be applying new strategies to both store formats and taking the best of what we learned to create an even more exciting store...based on the Concept 2000 design but with more to offer. Therefore, 1998 will be a year of enormous experimentation as we look to expand the core definition of our business. Exclusive Product Development Product differentiation will be critical to our long-term success. We feel this is an unusually fertile area for margin enhancement and customer loyalty. This will include private label development, branded exclusives produced by key toy manufacturers and exclusive licenses. We realize this is a long-term commitment requiring patience and brand management expertise. To that end, we recently hired one of the most respected principals in the toy manufacturing industry to spearhead this effort. Andy Gatto, our new Vice President of Product Development, comes to us with over 25 years of toy manufacturing, marketing and distribution experience as a principal with Fisher-Price, LJN, Matchbox, V-Tech and Toy Biz. Andy is now in the process of formulating an aggressive five-year business plan which we will begin to execute in 1998. New Venues for Selling Electronic commerce represents an outstanding opportunity to extend our presence beyond our stores. Our plans include expanding our existing Home Page to allow for easy customer shopping as we begin selling merchandise through the Internet. We will begin selling about 1,500 items during the second quarter of this year from www.toysrus.com. In light of the growing importance of "e-tail" selling, we have promoted Joel Anderson to the newly created post of Vice President, Toys"R"Us Direct. Catalogue shopping is another venue we will be exploring in the fourth quarter of 1998, making shopping by mail even easier for customers and giving them another reason to choose Toys"R"Us. Finally, "Buy Here/Pick Up There" is a new service that we will be testing in 1998 with the goal of making it simple for customers to order selected large, bulk items (such as swing sets, battery operated ride-on vehicles, play houses, etc.) for family members or friends who live a long distance away. Rather than incurring high shipping charges, the "Buy Here/Pick Up There" concept allows for the purchase in one store and the pick-up in another. Database Marketing Currently, we have 38 million customers in our "R"Us database. Our Kids"R"Us division has been very successful in leveraging off this data by distributing the majority of its direct mail circulars to targeted customers. This has also enabled us to mail specific advertising vehicles to our customers based on prior purchases and targeted demographics. Given that 30 percent of our customers generate 80 percent of our business, our database marketing will become an increasingly powerful tool - not only for Kids"R"Us, but for Babies"R"Us and Toys"R"Us as well. [Map of Toys "R" Us Around the World - 27 Countries Worldwide] 5 Babies"R"Us With the consolidation of the Baby Superstore acquisition into the Babies"R"Us family, we became the clear leader of the $25 billion juvenile market. We ended 1997 with a total of 98 Babies"R"Us stores and plan to open an additional 15 to 20 stores in 1998. Our unrivaled assortment coupled with our database marketing and automated Baby Registry are key strengths in targeting new mothers and gift givers for the roughly 4 million children born each year. In addition, the introduction of in-store "Baby Fest" weekends have been a proven winner with customers. These weekends, which offer demonstrations, seminars and educational programs, reinforce our brand identity and build customer loyalty. There is no question that the investment we made in developing this business has put the newest member of the "R"Us family on a firm footing and should serve us well in the years ahead. International Business Another priority in 1998 will be to continue to accelerate the positive earnings momentum in our international toy stores. In 1997, our international sales increased to $2.9 billion. More importantly, our operating profit increased 28% to $168 million. These accomplishments resulted from stronger sales trends in toys, video games and juvenile products around the world, coupled with improved operating efficiency. In Japan, we have achieved market share leadership in just over 5 years. Japan is now our largest business outside of the United States. The poor economic climate in most of Europe continues to challenge our business. Despite the tough business environment, we improved our operating profit in every market with the exception of France. In an effort to improve productivity, we are expanding our juvenile category in most of these markets as well as piloting several Concept 2000 prototype stores. In addition, we have recently appointed Johannes Dercks as President of Toys"R"Us Central Europe. Johannes brings over 20 years of mass merchandising experience with the Metro Group, Promodes Group and Aral Shop, Ltd. Management Management excellence is the most fundamental ingredient to enhancing stockholder value. I am very proud of the strong management exemplified by our Toys"R"Us associates throughout the world, and even happier to introduce you to the newest members of our senior executive team. It is a group I am particularly excited about since it clearly comprises some of the best talent in the retail industry. NUMBER OF STORES WORLDWIDE (GRAPHIC MATERIAL OMITTED) FISCAL YEAR 1988 522 1989 615 1990 712 1991 812 1992 918 1993 1,032 1994 1.115 1995 1,203 1996 1,372 1997 1,454 Bruce Krysiak, our new President and Chief Operating Officer, joins us officially on April 15 from Dollar General, where he served in a similar capacity. In Bruce, we have an executive with extraordinary retail experience and knowledge of merchandising, marketing and operations. Prior to Dollar General, Bruce was COO of Circle K, and he spent the early years of his career in senior marketing and merchandising roles at Southland's 7-11 stores. Bruce also had the unique experience of working in the former Soviet Union as chairman of the joint venture that built that country's first fully-integrated food distribution system. We also promoted Keith Van Beek to President of Toys USA Merchandising and Marketing. Most recently, Keith served as President of Toys"R"Us Canada. Under his helm, our Canadian business has experienced back-to-back years of double digit comparable store sales increases powered by innovative marketing and in-store promotional programs - all in the midst of a highly competitive retail climate. We think Keith's track record and skill set make him uniquely qualified to rethink and expand our marketing and merchandising offerings with a heavy emphasis on in-store presentation. To better capitalize on pan-European initiatives by having top level senior management "on the ground" in Europe, David Rurka was named Chairman of our newly-formed European Management Board. David joined the Company in 1984 and started our UK Operations. As a result of his efforts over the last 13 years, our UK Operations have consistently achieved the highest levels of performance. With David coordinating key initiatives with our Managing Directors throughout Europe, we expect to see some dramatic benefits in the near future. And finally, we named Bruno Roqueplo Senior Vice President, Finance and Administration for Toys"R"Us International. Bruno brings with him an established career in international business affairs. Most recently, he served as Chairman and Managing Director of Campbell Distillers, a subsidiary of Group Pernod Ricard, a leading wine and beverage 6 company in Europe. Bruno had a distinguished career at Campbell, where he served in numerous positions including Managing Director of divisions in the UK, France and Australia. Looking To The Future I think it is fair to say that no CEO has ever started out with a better team. From the strength of our associates around the world to the caliber of our senior management, we have a superb infrastructure to both establish the vision and develop and implement the plan for growing our business and building value for you. In reflecting on this past year and in looking ahead, I feel inextricably linked with Toys"R"Us in several ways. Both of us celebrate 50 years this year (although Geoffrey is aging far more gracefully!), and as we stand on the brink of a new millennium, we are presented with the unparalleled opportunity to seize new challenges and broaden our vision for the future. All of us affiliated with Toys"R"Us are recipients of a great legacy started by Charles Lazarus half a century ago. Those of us who follow Charles do so with a keen awareness of the dedication, creativity and drive that it took to earn his reputation. We also recognize that this is an exciting time for our company; a time to move ahead in further defining who we are and what we mean to our customers. It is true that no one knows what the future holds. But with a clear vision and strategic initiatives well in place, I do know that we hold the keys to the future. 1998 will be the beginning of re-energizing and revitalizing Toys"R"Us - creating a company truly dedicated to reasserting itself and its position as the Worldwide Authority on Kids, Families and Fun! Sincerely, /s/ Robert C. Nakasone Robert C. Nakasone Chief Executive Officer March 24, 1998 STOCKHOLDERS' EQUITY (billions) 10 year growth of $3 billion (GRAPHIC MATERIAL OMITTED) 1988 1.4 1989 1.7 1990 2.0 1991 2.4 1992 2.9 1993 3.1 1994 3.4 1995 3.4 1996 4.2 1997 4.4 (Photo of Michael Goldstein, Chairman of the Board) MESSAGE FROM THE CHAIRMAN The past 15 years I've spent as part of the Toys"R"Us family have undoubtedly been the most rewarding of my business career. I've been fortunate to have been a part of so many significant milestones for the Company - from the rollout of our toy stores across the USA tot he start-up of our Kids"R"Us and international businesses, to the birth of Babies"R"Us and the acquisition of Baby Superstore. I'm proud to say that in every instance our Company has consistently set high standards of performance and has successfully risen to the challenge. I am also confident that our management team will continue in the strong tradition while looking toward an exciting future. As you know, last year I made the decision to relinquish my day to day involvement as your CEO in 1998 to devote more time and energy to my family and charity work. I will, however, remain actively in the Company as Chairman of the Board, and - for the record - I'll always be a Toys"R"Us Kid. MICHAEL GOLDSTEIN Chairman of the Board /s/ Michael Goldstein 7 (Photograph of Charles Lazarus in 1948) A TIME TO CELEBRATE! In 1948, Charles Lazarus began a business totally dedicated to kids and their needs - just in time for the post-war baby boom. He had no idea that his first baby furniture store would evolve and mushroom into an eleven billion dollar worldwide chain of toy stores. He did believe that if he was innovative and imaginative, he could make his concept work. He was right. The continuing strength of his vision, coupled with the dedication and hard work of every individual in the Toys"R"Us organization, has carried the company to its present day success. In 1998, we celebrate and take pride in our shared history - five decades full of challenge, change and creativity. 8 LOOKING BACK "I came out of service after the war and everyone I talked to said they were going to go home, get married, have children and live in the suburbs...live the American Dream...I had saved a few dollars in the service, so I decided that I would open a store where my father had a bicycle repair shop. I opened a baby store and sold cribs, carriages, strollers, high chairs...everything for the baby. It was a one-man business and that was nice." Charles Lazarus begins his story with a smile, sitting in his office at the Corporate Headquarters of the world's biggest toy store, Toys"R"Us. His narrative, peppered with memorable experiences, recollections of business challenges and creative decision-making, contains all the elements of a real success story. Against the backdrop of a country restoring its spirit after the Second World War, 25-year-old Charles set up his business. As he learned the ins and outs of running his first store, he realized that one of the most valuable skills he could acquire was to listen. He listened to his customers, and provided what they needed. "I need a toy for my baby..." was something he heard over and over again. So he began to stock and sell baby toys...and then toys for older kids, responding each time to what the customers asked for. "Listening to the customer is probably the best thing in the world. Almost all that we have here and how we expanded the business came from the customer saying 'I need...' or 'I want...' or 'Don't you have...'?" Charles affirms. As if timed by some fortunate coincidence, toy manufacturers in the United States were also growing and becoming more innovative and aggressive, taking a stronger stand in a market previously dominated by European toy companies. Charles could not have picked a better time to set some new ideas in motion. "The idea of selling toys in a bigger environment? What I did was I copied the supermarket. I said, 'If they can go into a supermarket and pick products right off the shelf, they can go into my store and pick toys right off the shelf'." "So, in the original store people used to come and bring their own boxes or bring their own bags and it was cash and carry. And we sold things very cheaply. That's how the business got going." Introducing a "supermarket environment" for his shoppers and offering a bigger selection of merchandise at lower prices also enabled Charles to extend the toy shopping season - from Christmas to all year-round! 9 MOVING FORWARD "We were probably the first ones selling toys and juvenile product at a discount. Here we were, located in the middle of Washington, DC - and customers had to go find parking, which was really hard to do! But one customer told another, and all the word-of-mouth really worked for us." By the late 1950's, Charles had two stores in the Washington, DC area that had become popular with parents. Shopping at his Baby Furniture and Toy Supermarket stores meant finding almost every style of stroller or crib... in stock and at a good price. Toys were still the top ticket, though. In 1957, making another bold business move, Charles opened a toy store with a peculiar but catchy little name: Toys"R"Us, the store with the backwards "R". Once again, his timing could not have been better as the growing popularity of television gave rise to the phenomenon of "hot toys". Every child wanted them, and parents knew just where to go: Toys"R"Us! By 1966, Charles had four stores that sold about $12 million worth of toys each year. To raise the capital he needed to expand, he sold these four stores to Interstate Stores, a large retail conglomerate. After the sale, Interstate gave Charles Lazarus the responsibility of running the stores and the toy division of their business. Toys"R"Us continued to grow under his leadership. Interstate Stores, however, faced major difficulties with the rest of its business - despite the profitability of the toy stores - eventually filing for bankruptcy in the mid-1970's. Charles persuaded the court to allow him to run Interstate during this critical period. With a combination of persistence, determination, careful business decisions, excellent business relationships, and investments in talent and technology he began to restructure the company. Charles sold or liquidated the unprofitable operations and retained his toy stores. After only four years, Interstate emerged from bankruptcy and was renamed Toys"R"Us. LEADING THE WAY Moving into the 80's fueled by energy, enthusiasm and optimism, Toys"R"Us opened even more stores in the U.S. and began expanding internationally. Hot toys, now powered by television and blockbuster movies, brought kids and parents through the doors. The company was constantly challenged by competitors, but continued to utilize winning strategies. "I think we have the edge over competition in our knowledge of product. There's a long history in the company of understanding and analyzing merchandise... much more intensely than anyone else," Charles says with confidence. Venturing out and thinking big, the company opened the first Kids"R"Us store in July, 1983 to offer the same selection and value to our customers, this time in kids' fashion. Toys"R"Us International opened its first stores in 1984, in Singapore and Canada, marking the Company's expansion to a bigger world of children and opportunity. Toys"R"Us was a name every parent and grown-up knew, a store every child loved, a place where kids could be kids in the best possible way. 10 The backwards "R" logo was recognized everywhere, and Toys"R"Us moved into the position of an industry leader. At that time, Charles realized that this leadership position came with a certain responsibility as well. Toys"R"Us wanted to give back to its employees, customers and to the communities where its stores operated. The Company became a leader in offering equal opportunity employment and diversity in the work force. In addition, the Toys"R"Us Children's Benefit Fund was established to provide support for programs and health initiatives that benefit children. The Children's Benefit Fund has contributed more than $15 million to hospitals and children's charities. Toys"R"Us is also a leader in recognizing the needs of differently-abled children. The Company, in partnership with the National Lekotek Center, produces the Toy Guide for Differently-Abled Kids, featuring toys that have been tested and evaluated based on 10 developmental categories. The Guide is designed to assist parents, families and friends in making informed decisions about toy selection for children with special needs. FACING THE FUTURE Toys"R"Us continues to focus on what today's experienced, value-conscious consumer wants - with bright, redesigned stores, improved customer service, and baby and gift registries. The Company is also exploring ways to reach consumers through a number of new avenues, including the Internet. The traditional offerings of a huge merchandise selection and value pricing are as strong today as they were 50 years ago. With over 1,450 stores in 27 countries, Toys"R"Us continues to mark milestone after milestone. In 1996, with the merger of Babies"R"Us and Baby Superstore, we expanded our business to encompass all babies' needs. In a unique move, the Company has come full circle to Charles Lazarus' original store concept! What has remained constant throughout the past five decades is the company's business focus: kids. Kids of all ages. What's good for them is good for us. We have many reasons to celebrate this anniversary of Toys"R"Us - 50 years of incredible growth, 50 years of bringing great value to customers and, of course, 50 years of making kids' eyes grow wide with wonder... 50 years of FUN! Speaking with the same excitement and pride today, Charles says: "I think our business is fascinating. So much is new in toys every year! That's exciting because you're challenged all the time." "I still do get a buzz when I visit the stores. I walk around and I see customers who are happy walking in the store. I think we are in the best business in the whole world." 11 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS* In 1997, the Company posted its 19th consecutive year of record sales, reporting sales of $11 billion. Sales increased by 11.1% in 1997, 5.4% in 1996 and 7.8% in 1995. The sales growth is primarily attributable to the increase in comparable U.S.A. toy store sales of 6% in 1997, the acquisition of Baby Superstore and the Company's continued store expansion. The Company opened 84 new U.S.A. toy stores, 149 international toy stores, including franchise and joint venture stores, 19 children's clothing stores, 25 baby specialty stores, 2 superstores, and acquired 76 baby specialty stores during the three year period. Comparable U.S.A. toy store sales increased 2% in 1996 and decreased 2% in 1995. Cost of sales as a percentage of sales increased to 69.8% in 1997 from 69.4% in 1996 as a result of higher costs related to the Company's promotional holiday selling program, higher than historical inventory shrinkage and the continued strengthening of the Company's lower margin video business. Cost of sales as a percentage of sales decreased in 1996 from 69.9% in 1995 primarily due to improved markup on basic toy products, partially offset by the strengthening of the lower margin video hardware business. Selling, advertising, general and administrative expenses as a percentage of sales were 20.2% in 1997, 20.3% in 1996 and 20.1% in 1995. The slight decrease in 1997 from 1996 was primarily due to expense control and sales leveraging, partially offset by additional distribution and handling costs related to higher than planned inventory levels. The increase in 1996 was primarily due to heavier advertising and promotional efforts, as well as the Company's increased emphasis on customer service. Depreciation, amortization and asset write-offs as a percentage of sales were 2.3% in 1997, 2.1% in 1996 and 2.0% in 1995. The increase in 1997 was due primarily to $19 million in asset write-offs for the 56 stores converted to the "Concept 2000" store design as well as $9 million of goodwill amortization related to the acquisition of Baby Superstore. The Company's 1996 results were impacted by a charge of $60 million ($38 million, net of tax benefits or $.14 cents per share) relating to an arbitration award rendered against the Company involving a dispute over a 1982 franchise agreement to operate stores in the Middle East. The Company's 1995 results were impacted by charges of $397 million ($269 million, net of tax benefits or $.98 cents per share) to restructure its worldwide operations and to adopt SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. Elements of the restructuring plan are described below and in the notes to the consolidated financial statements and consisted of certain asset write-offs and established reserves for certain contractual obligations, primarily in the United States and Europe. The Company has substantially completed its restructuring program action plan, including the strategic inventory repositioning initiative, the closing of 3 Toys"R"Us and 7 Kids "R"Us stores in the United States, the consolidation of 3 distribution centers and various administrative facilities in the United States and Europe and the franchising of 9 toy stores in the Netherlands. At January 31, 1998, the Company had approximately $62 million of liabilities remaining for its restructuring program primarily relating to long-term lease obligations and other commitments. The Company believes these reserves are adequate to complete the restructuring program. Interest expense decreased by 13.3% in 1997 as compared to 1996, primarily due to lower average short-term borrowings and to a $325 million medium-term financing late in the third quarter of 1996, which replaced borrowings carrying higher interest rates. Interest expense decreased in 1996 as compared to 1995 due to the Company's improved cash flow as a result of increased earnings, the benefits from its worldwide restructuring program and the $325 million medium-term financing referred to above. The Company's effective tax rate was 36.5% in 1997 and 1996, and 44.2% in 1995. The higher effective tax rate in 1995 was primarily due to the restructuring of its worldwide operations. International sales were unfavorably impacted by the translation of local currency results into U.S. dollars by approximately $250 million and $150 million in 1997 and 1996, respectively. In 1995 International sales were favorably impacted by approximately $140 million. Neither the translation of local currency results into U.S. dollars nor inflation had a material effect on the Company's operating results for the last three years. LIQUIDITY AND CAPITAL RESOURCES The Company's impressive financial position is evidenced by its working capital and cash flows provided by operating activities. Working capital at January 31, 1998, and February 1, 1997, were $579 million and $619 million, respectively. *References to 1997, 1996, and 1995 are for the 52 weeks ended January 31, 1998 and February 1, 1997 and for the 53 weeks ended February 3, 1996. 12 The Company's newest division, Babies"R"Us opened its first 6 stores in 1996. The Company accelerated the growth of this division with the acquisition of Baby Superstore, Inc. on February 3, 1997 for 13 million treasury shares of the Company's common stock valued at approximately $376 million. This acquisition was accounted for as a purchase as of February 1, 1997, and the excess of purchase price over net assets acquired in the amount of $365 million has been recorded as goodwill and is being amortized over 40 years. Baby Superstore, with 76 stores primarily in the southeast and midwest United States, was a leading retailer of baby and young children's products. The Company has converted substantially all of the existing Baby Superstore stores to the Babies"R"Us operating format. The Company's cash and cash equivalents have decreased to $214 million at January 31, 1998 from $761 million at February 1, 1997. This decrease is primarily attributable to the following factors: lower levels of short-term and long-term debt, repurchase of shares under the share repurchase program, capital expenditures, and higher than planned inventory levels. In 1998, the Company plans to open approximately 5 toy stores in the United States and approximately 35 international toy stores, including 15 franchise stores. Our newest division, Babies"R"Us, will open approximately 15 to 20 stores in the United States. The Company opened 64 toy stores in 1997, 89 in 1996 and 80 in 1995. In addition to the stores closed in 1996 that were part of the Company's worldwide restructuring program, the Company closed 2 toy stores from 1995 through 1997 which did not meet expectations. These closures did not have a significant impact on the Company's financial position. For 1998, capital requirements for real estate, store and warehouse fixtures and equipment, leasehold improvements and other additions to property and equipment are estimated at $450 million. In January 1998, the Company announced an additional authorization of $1 billion to repurchase shares of the Company's outstanding common stock over the next several years. As of January 31, 1998, the Company had repurchased 29.5 million shares of its common stock for $947 million under its prior $1 billion share repurchase program announced in January of 1994. The seasonal nature of the business (approximately 45% of sales take place in the fourth quarter) typically causes cash to decline from the beginning of the year through October as inventory increases for the holiday selling season and funds are used for land purchases and construction of new stores, which usually open in the first ten months of the year. The Company has a $1 billion multi-currency unsecured committed revolving credit facility expiring in December 2002, from a syndicate of financial institutions. Cash requirements for operations, capital expenditures, lease commitments and the share repurchase program will be met primarily through operating activities, borrowings under the revolving credit facility, issuance of short-term commercial paper and/or other bank borrowings for foreign subsidiaries. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to market risk from change in interest rates and foreign exchange rates. The Company regularly evaluates these risks and has taken the following measures to mitigate these risks: the countries in which the Company owns assets and operates stores are politically stable; the Company's foreign exchange risk management objectives are to stabilize cash flow from the effects of foreign currency fluctuations; the Company will, whenever practical, offset local investments in foreign currencies with borrowings denominated in the same currencies; the Company also enters into foreign exchange contracts or purchases options to eliminate specific transaction risk. The market risk related to these derivative contracts is offset by the changes in value of the underlying items being hedged. Substantially all of the Company's long-term debt is at fixed interest rates and therefore, the fair value is affected by changes in market interest rates. The Company believes the amount of risk and the use of derivative financial instruments described above are not material to the Company's financial condition or results of operations. IMPACT OF YEAR 2000 The Company is modifying significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. In addition, the Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's operations are vulnerable to the failure of those third parties to remediate their own Year 2000 issues. The Company is utilizing both internal and external resources to renovate and test its software and anticipates substantially completing the project by the end of 1998. The total cost for the Year 2000 project is not material to any one year and is being expensed as incurred. The costs of the project and the time frame in which the Company believes it will complete the Year 2000 modifications are based on management's best estimates; however, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include continued availability of resources, the ability of third parties to complete their modification plans, and similar uncertainties. 13 CONSOLIDATED STATEMENTS OF EARNINGS - -------------------------------------------------------------------------------- TOYS"R"US, INC. AND SUBSIDIARIES
Year Ended ----------------------------------------- January 31, February 1, February 3, (In millions except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Net Sales $11,038 $ 9,932 $ 9,427 Cost of sales 7,710 6,892 6,592 - ----------------------------------------------------------------------------------------------------- Gross Profit 3,328 3,040 2,835 - ----------------------------------------------------------------------------------------------------- Selling, advertising, general and administrative expenses 2,231 2,020 1,894 Depreciation, amortization and asset write-offs 253 206 192 Other charges - 60 397 - ----------------------------------------------------------------------------------------------------- Total Operating Expenses 2,484 2,286 2,483 - ----------------------------------------------------------------------------------------------------- Operating Income 844 754 352 Interest expense 85 98 103 Interest and other income (13) (17) (17) - ----------------------------------------------------------------------------------------------------- Interest Expense, Net 72 81 86 - ----------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 772 673 266 Income Taxes 282 246 118 - ----------------------------------------------------------------------------------------------------- Net Earnings $ 490 $ 427 $ 148 - ----------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 1.72 $ 1.56 $ 0.54 - ----------------------------------------------------------------------------------------------------- Diluted Earnings Per Share $ 1.70 $ 1.54 $ 0.53 - -----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 14 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- TOYS"R"US, INC. AND SUBSIDIARIES
January 31, February 1, (In millions) 1998 1997 - -------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 214 $ 761 Accounts and other receivables 175 142 Merchandise inventories 2,464 2,215 Prepaid expenses and other current assets 51 42 - -------------------------------------------------------------------------------------- Total Current Assets 2,904 3,160 Property and Equipment: Real estate, net 2,435 2,411 Other, net 1,777 1,636 - -------------------------------------------------------------------------------------- Total Property and Equipment 4,212 4,047 Goodwill, net 356 365 Other Assets 491 451 - -------------------------------------------------------------------------------------- $ 7,963 $ 8,023 - -------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings $ 134 $ 304 Accounts payable 1,280 1,346 Accrued expenses and other current liabilities 680 720 Income taxes payable 231 171 - -------------------------------------------------------------------------------------- Total Current Liabilities 2,325 2,541 Long-Term Debt 851 909 Deferred Income Taxes 219 222 Other Liabilities 140 160 Stockholders' Equity: Common stock 30 30 Additional paid-in capital 467 489 Retained earnings 4,610 4,120 Foreign currency translation adjustments (122) (60) Treasury shares, at cost (557) (388) - -------------------------------------------------------------------------------------- Total Stockholders' Equity 4,428 4,191 - -------------------------------------------------------------------------------------- $ 7,963 $ 8,023 - --------------------------------------------------------------------------------------
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- TOYS"R"US, INC. AND SUBSIDIARIES
Year Ended ----------------------------------------- January 31, February 1, February 3, (In millions) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 490 $ 427 $ 148 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and asset write-offs 253 206 192 Deferred income taxes 18 23 (67) Other charges - - 397 Changes in operating assets and liabilities: Accounts and other receivables (40) (14) (11) Merchandise inventories (265) (195) (193) Prepaid expenses and other operating assets (9) (10) (16) Accounts payable, accrued expenses and other liabilities 22 262 (151) Income taxes payable 40 44 (49) - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 509 743 250 - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, net (494) (415) (468) Other assets (22) (36) (67) Cash received with the acquisition of Baby Superstore - 67 - - ----------------------------------------------------------------------------------------------------- Net cash used in investing activities (516) (384) (535) - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net (142) (10) 210 Long-term borrowings 11 326 82 Long-term debt repayments (176) (133) (9) Exercise of stock options 62 28 16 Share repurchase program (253) - (200) - ----------------------------------------------------------------------------------------------------- Net cash (used in) / provided by financing activities (498) 211 99 - ----------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (42) (12) 19 CASH AND CASH EQUIVALENTS (Decrease)/increase during year (547) 558 (167) Beginning of year 761 203 370 - ----------------------------------------------------------------------------------------------------- End of year $ 214 $ 761 $ 203 - ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income Tax Payments $ 192 $ 177 $ 235 Interest Payments $ 83 $ 109 $ 118 - -----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- TOYS"R"US, INC. AND SUBSIDIARIES
Common Stock ---------------------------------- Foreign Issued In Treasury Additional currency ---------------------------------- paid-in Retained translation (In millions) Shares Amount Shares Amount capital earnings adjustments - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 28, 1995 298.0 $ 30 (18.2) $ (642) $ 521 $ 3,545 $ (25) Net earnings for the year - - - - - 148 - Share repurchase program - - (7.6) (200) - - - Exercise of stock options, net - - 0.9 34 (16) - - Corporate inversion 2.4 - (2.4) (38) 38 - - Foreign currency translation adjustments - - - - - - 38 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, February 3, 1996 300.4 30 (27.3) (846) 543 3,693 13 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings for the year - - - - - 427 - Acquisition of Baby Superstore, Inc. - - 13.0 400 (24) - - Exercise of stock options, net - - 1.7 58 (30) - - Foreign currency translation adjustments - - - - - - (73) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, February 1, 1997 300.4 30 (12.6) (388) 489 4,120 (60) - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings for the year - - - - - 490 - Share repurchase program - - (8.2) (253) - - - Exercise of stock options, net - - 2.8 84 (22) - - Foreign currency translation adjustments - - - - - - (62) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1998 300.4 $ 30 (18.0) $ (557) $ 467 $ 4,610 $ (122) - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (Amounts in millions except per share data) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company's fiscal year ends on the Saturday nearest to January 31. Reference to 1997, 1996 and 1995 are for the 52 weeks ended January 31, 1998 and February 1, 1997, and for the 53 weeks ended February 3, 1996, respectively. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. The 1996 consolidated balance sheet and statement of cash flows also reflect the acquisition of Baby Superstore, Inc. All material intercompany balances and transactions have been eliminated. Assets and liabilities of foreign operations are translated at current rates of exchange at the balance sheet date while results of operations are translated at average rates in effect for the period. Translation gains or losses are shown as a separate component of stockholders' equity. Cash and Cash Equivalents The Company considers its highly liquid investments purchased as part of daily cash management activities to be cash equivalents. Merchandise Inventories Merchandise inventories for the U.S.A. toy store operations, which represent over 60% of total inventories, are stated at the lower of LIFO (last-in, first-out) cost or market, as determined by the retail inventory method. If inventories had been valued at the lower of FIFO (first-in, first-out) cost or market, inventories would show no change at January 31, 1998 or February 1, 1997. 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 recognizes impairment losses relating to long-lived assets based on several factors including, but not limited to, management's plans for future operations, recent operating results and projected cash flows. Preopening Costs Preopening costs, which consist primarily of advertising, occupancy and payroll expenses, are amortized over expected sales to the end of the fiscal year in which the store opens. Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents and short-term borrowings approximate their fair market values. Forward Foreign Exchange Contracts The Company enters into forward foreign exchange contracts to eliminate the risk associated with currency movement relating to its short-term intercompany loan program with foreign subsidiaries and inventory purchases denominated in foreign currency. Gains and losses, which offset the movement in the underlying transactions, are recognized as part of such transactions. Gross deferred unrealized gains and losses on the forward contracts were not material at either January 31, 1998 or February 1, 1997. The related receivable, payable and deferred gain or loss are included on a net basis in the balance sheet. The Company had $439 and $205 of short term outstanding forward contracts at January 31, 1998 and February 1, 1997, maturing in 1998 and 1997, 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 $325 currency swap obligation outstanding at January 31, 1998 related to its (pound)200 note payable due 2001. Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 - Reporting Comprehensive Income, which requires the separate reporting of all changes to stockholders' equity, and SFAS No. 131 - Disclosures About Segments of an Enterprise and Related Information, which revises existing guidelines about the level of financial disclosure of a Company's operations. Both statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has determined that the new standards will not have any impact on the Company's financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 18 PROPERTY AND EQUIPMENT
Useful Life January 31, February 1, (in years) 1998 1997 - ------------------------------------------------------------------------------------------ Land $ 817 $ 821 Buildings 45-50 1,849 1,834 Furniture and equipment 5-20 1,711 1,522 Leaseholds and leasehold improvements 12 1\2-35 1,158 1,060 Construction in progress 46 37 Leased property under capital leases 29 31 - ------------------------------------------------------------------------------------------ 5,610 5,305 Less accumulated depreciation and amortization 1,398 1,258 - ------------------------------------------------------------------------------------------ $ 4,212 $ 4,047 - ------------------------------------------------------------------------------------------
SEASONAL FINANCING AND LONG-TERM DEBT
January 31, February 1, 1998 1997 - ------------------------------------------------------------------------------------------ 5.78% (pound)200 note payable, due 2001(a) $ 325 $ 325 8 3\4% debentures, due 2021, net of expenses 198 198 Japanese yen loans with interest payable at annual rates from 2.80% to 6.47%, due in varying amounts through 2012 123 150 8 1\4% sinking fund debentures, due 2017, net of discounts 89 89 Industrial revenue bonds, net of expenses (b) 60 70 7% British pound sterling loan payable, due quarterly through 2001(c) 49 67 Mortgage notes payable at annual interest rates from 10.13% to 11.00% (d) 14 13 Obligations under capital leases 14 17 4 7\8 % notes payable (e) - 115 - ------------------------------------------------------------------------------------------ 872 1,044 Less current portion (f) 21 135 - ------------------------------------------------------------------------------------------ $ 851 $ 909 - ------------------------------------------------------------------------------------------
(a) Supported by a (pound)200 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 93 basis points. (b) Bank letters of credit of $41, expiring in 1999, support certain of these industrial revenue bonds. The Company expects that the bank letters of credit will be renewed. The bonds have fixed or variable interest rates with an average rate of 3.5% at January 31, 1998. (c) Collateralized by property with a carrying value of $161 at January 31, 1998. (d) Collateralized by property and equipment with an aggregate carrying value of $18 at January 31, 1998. (e) Obligation of Baby Superstore. Convertible into shares of the Company's common stock at the conversion price of $66.34. These notes were redeemed on April 16, 1997. (f) Included in accrued expenses and other current liabilities on the consolidated balance sheets. The fair market value of the Company's long-term debt at January 31, 1998 was approximately $1,004. The fair market value was estimated using quoted market rates for publicly traded debt and estimated interest rates for non-public debt. The Company has a $1 billion unsecured committed revolving credit facility expiring in December 2002. This multi-currency facility permits the Company to borrow at the lower of LIBOR plus a fixed spread or a rate set by competitive auction. The facility is available to support domestic commercial paper borrowings and to meet worldwide cash requirements. Additionally, the Company also has lines of credit with various banks to meet the short-term financing needs of its foreign subsidiaries. The weighted average interest rate on short-term borrowings outstanding at January 31, 1998 and February 1, 1997 was 5.0% and 3.1%, respectively. The annual maturities of long-term debt at January 31, 1998 are as follows:
- --------------------------------- 1998 $ 21 1999 24 2000 21 2001 332 2002 6 2003 and subsequent 468 - --------------------------------- $ 872 - ---------------------------------
LEASES The Company leases a portion of the real estate used in its operations. Most leases require the Company to pay real estate taxes and other expenses; some require additional amounts based on percentages of sales. Minimum rental commitments under noncancelable operating leases having a term of more than one year as of January 31, 1998 are as follows:
Gross Net minimum Sublease minimum rentals income rentals - ------------------------------------------------------- 1998 $ 338 $ 17 $ 321 1999 334 16 318 2000 330 14 316 2001 327 13 314 2002 321 10 311 2003 and subsequent 3,098 57 3,041 - ------------------------------------------------------- $ 4,748 $ 127 $ 4,621 - -------------------------------------------------------
Total rent expense, net of sublease income was $309, $282 and $273 in 1997, 1996 and 1995, respectively. 19 STOCKHOLDERS' EQUITY The common shares of the Company, par value $.10 per share, were as follows:
January 31, February 1, 1998 1997 - ------------------------------------------------------------- Authorized shares 650.0 650.0 - ------------------------------------------------------------- Issued shares 300.4 300.4 - ------------------------------------------------------------- Treasury shares 18.0 12.6 - ------------------------------------------------------------- Issued and outstanding shares 282.4 287.8 - -------------------------------------------------------------
Effective January 1, 1996, the Company formed a new parent company (the "Surviving Company") thus making the former parent company (the "Predecessor Company"), a wholly-owned subsidiary of the Surviving Company. As a result of this corporate inversion, each share of common stock of the Predecessor Company was converted into one share of common stock of the Surviving Company. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. This statement replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and no restatement was needed to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 - ---------------------------------------------------------------------------- Numerator: Net income available to common stockholders $ 490 $ 427 $ 148 Denominator for basic earnings per share - weighted average shares 285.3 274.0 275.0 Effect of diluted securities: Stock options, etc. 3.1 3.5 1.9 Denominator for diluted earnings per share - adjusted weighted average shares 288.4 277.5 276.9 - ---------------------------------------------------------------------------- Basic Earnings per share $ 1.72 $ 1.56 $ 0.54 - ---------------------------------------------------------------------------- Diluted Earnings per share $ 1.70 $ 1.54 $ 0.53 - ----------------------------------------------------------------------------
Options to purchase approximately 6.0 shares of common stock were outstanding during 1997, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares, and, therefore, the effect would be antidilutive. TAXES ON INCOME The provisions for income taxes consist of the following: 1997 1996 1995 - --------------------------------------------------------------------------- Current: Federal $ 199 $ 136 $ 137 Foreign 35 57 27 State 30 30 21 - --------------------------------------------------------------------------- 264 223 185 - --------------------------------------------------------------------------- Deferred: Federal 32 58 (22) Foreign (17) (39) (42) State 3 4 (3) - --------------------------------------------------------------------------- 18 23 (67) - --------------------------------------------------------------------------- Total tax provision $ 282 $ 246 $ 118 - ---------------------------------------------------------------------------
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
1997 1996 1995 - -------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 214 $ 155 $ 109 Restructuring 20 53 122 Other 42 32 21 - --------------------------------------------------------------------------- Gross deferred tax assets 276 240 252 Valuation allowance (43) (37) (29) - --------------------------------------------------------------------------- $ 233 $ 203 $ 223 - --------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 277 249 245 LIFO inventory 88 64 64 Other tax - 4 5 - --------------------------------------------------------------------------- Gross deferred tax liabilities $ 365 $ 317 $ 314 - --------------------------------------------------------------------------- Net deferred tax liability $ 132 $ 114 $ 91 - ---------------------------------------------------------------------------
A reconciliation of the federal statutory tax rate with the effective tax rate follows:
1997 1996 1995 - --------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 3.2 3.7 3.4 Foreign (2.3) (2.3) (1.3) Amortization of goodwill 0.4 - - Restructuring and other charges - - 7.2 Other, net 0.2 0.1 (0.1) - --------------------------------------------------------------------------- Effective tax rate 36.5% 36.5% 44.2% - ---------------------------------------------------------------------------
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 $455 at January 31, 1998. Net income taxes of approximately $139 would be due if these earnings were to be remitted. 20 STOCK OPTIONS The Company has Stock Option Plans (the "Plans") which provide for the granting of options to purchase the Company's common stock to substantially all employees and non-employee directors of the Company. Included in the Plans is the adoption of an additional 15.0 and 0.3 shares, in 1997, for the issuance to Company employees (other than officers) and non-employee directors, respectively. The Plans provide for the issuance of non-qualified options, incentive stock options, performance share options, performance units, stock appreciation rights, restricted shares, restricted units and unrestricted shares. Of the total number of shares reserved for the Plans, 3.0 shares of Company stock have been reserved for the issuance of restricted shares, restricted units, performance units, and unrestricted shares. The Plans provide for a variety of vesting dates with the majority of the options vesting approximately five years from the date of grant. The options granted to non-employee directors are exercisable 20% each year on a cumulative basis commencing one year from the date of grant. In addition to the aforementioned plans, 2.2 stock options were granted to certain senior executives during the period from 1989 to 1996 pursuant to stockholder approved individual plans. Of this total, 1.6 options vest 20% each year on a cumulative basis commencing one year from the date of grant with the balance of the options vesting five years from the date of grant. The exercise price per share of all options granted has been the average of the high and low market price of the Company's common stock on the date of grant. Most options must be exercised within ten years from the date of grant. At January 31, 1998, an aggregate of 47.7 shares of authorized common stock were reserved for all of the Plans noted above, of which 23.7 were available for future grants. All outstanding options expire at dates ranging from May 2, 1998 to February 2, 2008. Stock option transactions are summarized as follows:
Weighted-Average Shares Exercise Price - ------------------------------------------------------------------ Outstanding February 1, 1997 23.2 $ 25.82 Granted 6.8 34.74 Exercised (3.3) 22.11 Canceled (2.6) 28.82 - ------------------------------------------------------------------ Outstanding January 31, 1998 24.1 $ 29.12 - ------------------------------------------------------------------ Options exercisable at January 31, 1998 8.4 $ 26.38 - ------------------------------------------------------------------
The Company utilizes a restoration feature to encourage the early exercise of options and retention of shares, thereby promoting increased employee ownership. This feature provides for the grant of new options when previously owned shares of Company stock are used to exercise existing options. Restoration option grants are non-dilutive as they do not increase the combined number of shares of Company stock and options held by an employee prior to exercise. The new options are granted at a price equal to the fair market value on the date of the new grant, and generally expire on the same date as the original options that were exercised. The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, issued in October 1995. In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
1997 1996 1995 - -------------------------------------------------------------------------- Net income-as reported $ 490 $ 427 $148 Net income-pro forma 470 411 140 Basic earnings per share-as reported 1.72 1.56 0.54 Basic earnings per share-pro forma 1.65 1.50 0.51 Diluted earnings per share-as reported 1.70 1.54 0.53 Diluted earnings per share-pro forma 1.63 1.48 0.50 - --------------------------------------------------------------------------
The weighted-average fair value at date of grant for options granted in 1997, 1996 and 1995 were $33.92, $31.49, and $24.58, 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 1995 through 1997, a range of assumptions are provided below:
1997 1996 1995 - ------------------------------------------------------------------------------ Expected stock price volatility .294 - .334 .284 - .328 .241 - .308 Risk-free interest rate 5.0% - 6.9% 5.0% - 6.8% 5.6% - 7.1% Weighted average expected life of options 6 years 6 years 6 years - ------------------------------------------------------------------------------
The effects of applying SFAS No. 123 and the results obtained through the use of the Black-Scholes option pricing model are not necessarily indicative of future values. PROFIT SHARING PLAN The Company has a profit sharing plan with a 401(k) salary deferral feature for eligible domestic employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors, subject to certain limitations. The profit sharing plan may be terminated at the Company's discretion. Provisions of $39, $31 and $32 have been charged to earnings in 1997, 1996, and 1995, respectively. 21 FOREIGN OPERATIONS Certain information relating to the Company's foreign operations is set forth below. Corporate assets include all cash and cash equivalents and other related assets.
Year ended - --------------------------------------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 - --------------------------------------------------------------------------- Sales Domestic $ 8,171 $ 7,151 $ 6,792 Foreign 2,867 2,781 2,635 - --------------------------------------------------------------------------- Total $ 11,038 $ 9,932 $ 9,427 - --------------------------------------------------------------------------- Operating Profit Domestic $ 688 $ 692 $ 433(b) Foreign 168 131 (74)(c) General corporate expenses (12) (69)(a) (7) Interest expense, net (72) (81) (86) - --------------------------------------------------------------------------- Earnings before taxes on income $ 772 $ 673 $ 266 - --------------------------------------------------------------------------- Identifiable Assets Domestic $ 5,432 $ 4,878 $ 4,013 Foreign 2,282 2,345 2,483 Corporate 249 800 242 - --------------------------------------------------------------------------- Total $ 7,963 $ 8,023 $ 6,738 - ---------------------------------------------------------------------------
(a) After an arbitration award charge of $60. (b) After restructuring and other charges of $209. (c) After restructuring and other charges of $188. ACQUISITION On February 3, 1997, the Company acquired all of the outstanding common shares of Baby Superstore, Inc. ("Baby Superstore") for 13 million shares of its treasury stock valued at approximately $376. This acquisition was accounted for as a purchase as at February 1, 1997. The excess of purchase price over net assets acquired of $365 has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. OTHER CHARGES On July 12, 1996, an arbitrator rendered an award against the Company in connection with a dispute involving rights under a 1982 license agreement for toy store operations in the Middle East. Accordingly, the Company recorded a provision of $60 during 1996, ($38 after tax or $.14 cents per share), representing all costs in connection with this matter. On February 1, 1996, the Company recorded charges of $397 ($269after tax or $.98 cents per share) to restructure its worldwide operations (the "restructuring") and to adopt SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. The restructuring charge included $184 related to strategic inventory repositioning, $84 related to the closing or franchising of 25 stores, $72 for the consolidation of three distribution centers and seven administrative facilities and $33 of other costs. Total restructuring and other charges were comprised of $209 relating to operations in the United States and $188 for international operations. The charge to adopt SFAS No.121 was $24, primarily related to a write down of certain store assets to fair value, based on discounted cash flows. At January 31, 1998, the Company had approximately $62 of liabilities remaining for its restructuring program primarily relating to long-term lease obligations and other commitments. The Company believes these reserves are adequate to complete the restructuring program. OTHER MATTERS On May 22, 1996, the Staff of the Federal Trade Commission (the "FTC") filed an administrative complaint against the Company alleging that the Company is in violation of Section 5 of the Federal Trade Commission Act for its practices relating to warehouse clubs. The complaint alleges that the Company reached understandings with various suppliers that such suppliers not sell to the clubs the same items that they sell to the Company. The complaint also alleges that the Company "facilitated understandings" among the manufacturers that such manufacturers not sell to clubs. The complaint seeks an order that the Company cease and desist from this practice. The matter was tried before an administrative law judge in the period from March through May of 1997. On September 30, 1997, the administrative law judge filed an Initial Decision upholding the FTC's complaint against the Company. The Company has appealed the Initial Decision to the Commissioners of the FTC. That appeal was argued on February 19, 1998. The Company will be entitled to have the United States Court of Appeals review any adverse decision by the FTC. After the filing of the FTC complaint, several class action suits were filed against the Company in State courts in Alabama and California, alleging that the Company has violated certain state competition laws as a consequence of the behavior alleged in the FTC complaint. After the Initial Decision was handed down, more than thirty purported class actions were filed in federal and state courts in various jurisdictions alleging that the Company has violated the federal antitrust laws as a consequence of the behavior alleged in the FTC complaint. In addition, the attorneys general of thirty-eight states, the District of Columbia and Puerto Rico have filed a suit against the Company in their capacity as representatives of the consumers of their states, alleging that the Company has violated federal and state antitrust laws as a consequence of the behavior alleged in the FTC complaint. These suits seek damages in unspecified amounts and other relief under state and/or federal law. The Company believes that both its policy and its conduct in connection with the foregoing are within the law. The Company also believes that these actions will not have a material adverse effect on its financial condition, results of operations or cash flows. 22 REPORT OF MANAGEMENT Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with the management of Toys"R"Us. The accompanying financial statements have been prepared from accounting records which management believes fairly and accurately reflect the operations and financial position of the Company. Management has established a system of internal controls to provide reasonable assurance that assets are maintained and accounted for, in accordance with its policies and that transactions are recorded accurately on the Company's books and records. The Company's comprehensive internal audit program provides for constant evaluation of the adequacy of the adherence to management's established policies and procedures. The Company has distributed to key employees its policies for conducting business affairs in a lawful and ethical manner. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, provides oversight to the financial reporting process through periodic meetings with our independent auditors, internal auditors and management. The financial statements of the Company have been audited by Ernst & Young LLP, independent auditors, in accordance with generally accepted auditing standards, including a review of financial reporting matters and internal controls to the extent necessary to express an opinion on the consolidated financial statements. /s/ Robert C. Nakasone /s/Louis Lipschitz Robert C. Nakasone Louis Lipschitz Chief Executive Officer Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Toys"R"Us, Inc. We have audited the accompanying consolidated balance sheets of Toys"R"Us, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Toys"R"Us, Inc. and subsidiaries at January 31, 1998 and February 1, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York March 11, 1998 23 DIRECTORS, OFFICERS AND GENERAL MANAGERS - -------------------------------------------------------------------------------- DIRECTORS Charles Lazarus Chairman Emeritus of the Company Michael Goldstein Chairman of the Board of the Company Robert A. Bernhard Real Estate Developer RoAnn Costin President, Reservoir Capital Management, Inc. Calvin Hill Consultant Shirley Strum Kenny President, State University of New York at Stony Brook Bruce W. Krysiak President and Chief Operating Officer of the Company* Norman S. Matthews Consultant Howard W. Moore Consultant Robert C. Nakasone Chief Executive Officer of the Company Arthur B. Newman Senior Managing Director, Blackstone Group OFFICERS - CORPORATE AND ADMINISTRATIVE Robert C. Nakasone Chief Executive Officer Bruce W. Krysiak* President and Chief Operating Officer Louis Lipschitz Executive Vice President and Chief Financial Officer Roger C. Gaston Senior Vice President - Human Resources Michael P. Miller Senior Vice President - Real Estate Thomas J. Reinebach Senior Vice President and Chief Information Officer Gayle C. Aertker Vice President - Real Estate Dan Booher Vice President - Architecture and Construction Rebecca A. Caruso Vice President - Corporate Communications Michael J. Corrigan Vice President - Compensation and Benefits Eileen C. Gabriel Vice President - Information Systems Elizabeth S. Jordan Vice President - Organizational Development Jon W. Kimmins Vice President - Treasurer Joseph J. Lombardi Vice President - Controller Matthew J. Lombardi Vice President - Information Technology Dion C. Rooney Vice President - Systems Development Michael L. Tumolo Vice President - Counsel Peter W. Weiss Vice President - Taxes Robert S. Zarra Vice President - Internal Audit Andre Weiss Secretary - Partner-Schulte Roth & Zabel, LLP TOYS"R"US UNITED STATES - OFFICERS Bruce W. Krysiak* President Michael J. Madden President - Store Operations Keith C. Van Beek President - Merchandising and Marketing Robert J. Weinberg Senior Vice President - General Merchandise Manager Ernest V. Speranza Senior Vice President - Advertising/Marketing Van H. Butler Senior Vice President - Divisional Merchandise Manager Joel D. Anderson Vice President - Toys "R" Us Direct David M. Brewi Vice President - Divisional Merchandise Manager Kristopher M. Brown Vice President - Distribution and Traffic Richard N. Cudrin Vice President - Human Resources and Associate Relations Thomas F. DeLuca Vice President - Imports, Product Development and Safety Assurance Harvey J. Finkel Vice President - Regional Operations Philip S. Foussekis Vice President - Loss Prevention Andrew R. Gatto Vice President - Product Development Jerel G. Hollens Vice President - PIPS Integration Marianita Howard Vice President - Creative Services Mitchell B. Loukota Vice President - Divisional Merchandise Manager Charlene Mady Vice President - Area Merchandise Planning Gerald S. Parker Vice President - Regional Operations Debra M. Rood Vice President - Toys"R"Us Direct Fulfillment Timothy J. Slade Vice President - Operations Development William A. Stephenson Vice President - Merchandise Planning and Allocation John P. Sullivan Vice President - Divisional Merchandise Manager Gregg Treadway Vice President - Store Planning Dennis J. Williams Vice President - Regional Operations *Effective April 15, 1998 24 TOYS"R"US INTERNATIONAL - OFFICERS AND COUNTRY MANAGEMENT Gregory R. Staley President Bruno A. Roqueplo Senior Vice President - Finance and Administration Joan W. Donovan Vice President - General Merchandise Manager Joseph Giamelli Vice President - Information Systems Jeff Handler Vice President - Advertising Larry S. Johnson Vice President - Franchise Markets Lawrence H. Meyer Vice President - Business Development Michael C. Taylor Vice President - Logistics David Rurka Managing Director - Toys"R"Us United Kingdom and Chairman of the European Management Board Johannes Dercks President - Toys"R"Us Central Europe Jacques LeFoll President - Toys"R"Us France/Belgium John Schryver Managing Director - Toys"R"Us Australia Manabu Tazaki President - Toys"R"Us Japan Antonio Urcelay Managing Director - Toys"R"Us Iberia Keith C. Van Beek Acting President - Toys "R" Us Canada Larry D. Gardner Vice President - Toys"R"Us Asia Scott W.K. Chen General Manager - Toys"R"Us Taiwan Joe Tang General Manager - Toys"R"Us Hong Kong Michael S.M. Yeo General Manager - Toys"R"Us Singapore KIDS"R"US/BABIES"R"US - OFFICERS* Richard L. Markee President - Kids"R"Us and Babies"R"Us Gwen Manto Senior Vice President - General Merchandise Manager James G. Parros Senior Vice President - Stores and Distribution Center Operations Martin E. Fogelman Vice President - Divisional Merchandise Manager - Babies"R"Us Jonathan M. Friedman Vice President - Chief Financial Officer - Kids"R"Us and Babies"R"Us James L. Easton Vice President - Divisional Merchandise Manager William K. Farrell Vice President - Physical Distribution Christopher M. Scherm Vice President - Divisional Merchandise Manager David E. Schoenbeck Vice President - Operations - Babies "R" Us David S. Walker Vice President - Advertising *Kids"R"Us Officer, unless otherwise indicated. TOYS"R"US UNITED STATES - GENERAL MANAGERS Barbara A. Fitzgerald Vice President - New York/Northern New Jersey Robert F. Price Vice President - Southern California/ Arizona/Nevada/Hawaii Thomas A. Drugan Illinois/Wisconsin/Minnesota Cathy Filion Michigan/N.W. Ohio Mark H. Haag Pacific Northwest/Alaska Truvillus Hall Northern California/Utah Michael K. Heffner Alabama/Georgia/South Carolina/Tennessee Daniel D. Hlavaty Central Ohio/Indiana/Kentucky Samuel M. Martin North Texas/Oklahoma/New Mexico Richard A. Moyer S.Texas/Louisiana/Mississippi John J. Prawlocki Florida/Puerto Rico Edward F. Siegler Maryland/Virginia/North Carolina Carl P. Spaulding New England Kevin VanDerGriend N.E. Ohio/W. Pennsylvania/ W. New York 25 QUARTERLY FINANCIAL DATA AND MARKET INFORMATION - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------- 1997 - -------------------------------------------------------------------- Net Sales $ 1,924 $ 1,989 $ 2,142 $ 4,983 Cost of Sales 1,326 1,355 1,455 3,574 Net Earnings 29 37 46 378 Basic Earnings per Share $ 0.10 $ 0.13 $ 0.16 $ 1.33 Diluted Earnings per Share $ 0.10 $ 0.13 $ 0.16 $ 1.32 1996 - -------------------------------------------------------------------- Net Sales $ 1,645 $ 1,736 $ 1,883 $ 4,668 Cost of Sales 1,124 1,177 1,281 3,310 Other Charges - 55 - 5 Net Earnings (Loss) 19 (8) 33 383 Basic Earnings (Loss) per Share $ 0.07 $ (0.03) $ 0.12 $ 1.39 Diluted Earnings (Loss) per Share $ 0.07 $ (0.03) $ 0.12 $ 1.37
MARKET INFORMATION - -------------------------------------------------------------------------------- The Company's common stock is listed on the New York Stock Exchange. The following table reflects the high and low prices (rounded to the nearest one-sixteenth) based on New York Stock Exchange trading since February 3, 1996. The Company has not paid any cash dividends, however, the Board of Directors of the Company reviews this policy annually. The Company had approximately 31,700 Stockholders of Record on March 10, 1998.
High Low - --------------------------------------------------------------- 1996 1st Quarter 29 7/8 21 7/8 2nd Quarter 30 7/8 23 3/4 3rd Quarter 34 1/16 25 7/8 4th Quarter 37 5/8 24 3/8 - --------------------------------------------------------------- 1997 1st Quarter 29 7/8 24 1/2 2nd Quarter 34 13/16 28 1/4 3rd Quarter 37 1/8 29 1/8 4th Quarter 35 7/16 24 7/8
26 STORE LOCATIONS AND CORPORATE DATA - -------------------------------------------------------------------------------- STORES ACROSS THE UNITED STATES - -------------------------------
Toys Kids Babies - ---------------------------------------------------- Alabama 8 1 2 Alaska 1 - - Arizona 11 - 1 Arkansas 4 - - California 86 24 5 Colorado 11 - 2 Connecticut 11 7 - Delaware 2 1 1 Florida 46 10 10 Georgia 18 4 6 Hawaii 1 - - Idaho 2 - - Illinois 35 20 5 Indiana 12 7 2 Iowa 8 1 - Kansas 5 1 1 Kentucky 8 - 1 Louisiana 11 - 1 Maine 2 1 1 Maryland 19 9 3 Massachusetts 19 6 - Michigan 25 13 2 Minnesota 12 2 1 Mississippi 5 - - Missouri 13 5 3 Montana 1 - - Nebraska 3 1 - Nevada 4 - 2 New Hampshire 5 2 - New Jersey 26* 18 6 New Mexico 4 - - New York 46 23 3 North Carolina 16 1 5 North Dakota 1 - - Ohio 33 18 5 Oklahoma 5 - 1 Oregon 8 - - Pennsylvania 33 15 2 Rhode Island 1 1 - South Carolina 8 - 3 South Dakota 2 - - Tennessee 14 2 4 Texas 53 9 13 Utah 6 3 - Vermont 1 - - Virginia 22* 7 7 Washington 14 - - West Virginia 5 - - Wisconsin 10 3 - Puerto Rico 4 - - - -------------------------------------------------- 700 215 98 - --------------------------------------------------
*Includes a KidsWorld location. TOYS"R"US INTERNATIONAL - 441 - ----------------------------- Australia - 24 Austria - 8 Belgium - 3 Canada - 62 Denmark - 9 (a) France - 44 Germany - 58 Hong Kong - 4 (a) Indonesia - 3 (a) Israel - 5 (a) Italy - 12 (a) Japan - 64 (b) Luxembourg - 1 Malaysia - 6 (a) Netherlands - 9 (a) Portugal - 5 Saudi Arabia - 1 (a) Singapore - 4 South Africa - 8 (a) Spain - 29 Sweden - 4 Switzerland - 5 Taiwan - 6 (a) Turkey - 3 (a) United Arab Emirates - 4 (a) United Kingdom - 60 (a) Franchise or joint venture (b) 80% owned ANNUAL MEETING - -------------- The Annual Meeting of the Stockholders of Toys"R"Us will be held at the Toys"R"Us Distribution Center, 703 Bartley - Chester Road, in Flanders, New Jersey on Wednesday, June 3, 1998 at 10:00 A.M. THE OFFICE OF THE COMPANY IS LOCATED AT - --------------------- 461 From Road Paramus, New Jersey 07652 Telephone: 201-262-7800 GENERAL COUNSEL - --------------- Schulte Roth & Zabel, LLP 900 Third Avenue New York, New York 10022 INDEPENDENT AUDITORS - -------------------- Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 REGISTRAR AND TRANSFER AGENT - -------------- American Stock Transfer and Trust Company 40 Wall Street, New York, New York 10005 Telephone: 718-921-8200 COMMON STOCK LISTED - ------------------- New York Stock Exchange, Symbol: TOY STOCKHOLDER INFORMATION - ----------------------- The Company will supply to any owner of Common Stock, upon written request to Mr. Louis Lipschitz of the Company at the above address and without charge, a copy of the Annual Report on Form 10-K for the year ended January 31, 1998, which has been filed with the Securities and Exchange Commission. Stockholder information, including quarterly earnings and other corporate news releases, can be obtained by calling 800-785-TOYS, or at our web site on the internet at www.toysrus.com Significant news releases are anticipated to be available as follows: CALL AFTER...FOR THE FOLLOWING... - --------------------------------- May 20, 1998 1st Quarter Results Aug. 17, 1998 2nd Quarter Results Nov. 16, 1998 3rd Quarter Results Jan. 7, 1999 Holiday Sales Results Mar. 10, 1999 1998 Results CORPORATE CITIZENSHIP - --------------------- Toys"R"Us maintains a company-wide giving program focused on improving the health care needs of children by supporting many national and regional children's health care organizations. The Counsel on Economic Priority awarded Toys"R"Us the Pioneer Award in Global Ethics. This award was the direct result of the implementation of our Code of Conduct for suppliers which outlines the Company's position against child labor and unsafe working conditions. In order for a vendor's product to be sold in any of our stores, they must comply with our Code of Conduct. If you would like to receive more information on Toys"R"Us' corporate citizenship please write to Mr. Roger Gaston of the Company at the Company's address. Visit us on the internet at www.toysrus.com. 27 EX-21 7 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT AS OF JANUARY 31, 1998 Name Jurisdiction of Incorporation - ---- ----------------------------- ABG Corp. Nevada Baby Superstore, Inc. South Carolina Geoffrey, Inc. Delaware MLK, Inc. Missouri MMT, Inc. Utah Toys "R" Us - Belgium, Inc. Delaware Toys "R" Us - Delaware, Inc. Delaware Toys "R" Us - Del. Operations, Inc. Delaware Toys "R" Us Group, Inc. Delaware Toys "R" Us, 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. New York Toys "R" Us - Ohio, Inc. Delaware Toys "R" Us - Penn, Inc. Pennsylvania Toys "R" Us - Texas LLC Texas TRU (ANTS) Inc. Delaware TRU Belgium Holdings II, Inc. Delaware TRU Distribution, Inc. Delaware TRU Foreign Sales Corporation California TRU Gulf Services, Inc. Delaware TRU, Inc. Delaware TRU - LSM Redevelopment Corporation Missouri TRU Mass Properties Holdings, Inc. Delaware TRU Mass Properties, Inc. Delaware TRU Netherlands Holdings I, Inc. Delaware TRU Netherlands Holdings II, Inc. Delaware TRU Ohio Properties Holdings, Inc. Delaware TRU Ohio Properties, Inc. Delaware TRU Penn Properties Holdings, Inc. Delaware TRU Penn Properties, Inc. Delaware TRU Properties Holdings, Inc. Delaware TRU Properties, Inc. Delaware TRU Urban Renewal Corp. New Jersey TRU (Vermont), Inc. Vermont Toys "R" Us (Australia) Pty, Ltd. Australia Toys "R" Us (Head Office) Pty. Ltd. Australia Toys "R" Us (Wholesale) Pty. Ltd. Australia TRU (Aust) Superannuation Pty. Ltd. Australia Toys "R" Us Handelsgesellschaft m.b.H. Austria TRU (Barbados), Ltd. Barbados Toys "R" Us - Belgium SCA Belgium TRU (NRO III) Investments Ltd. Alberta, Canada Toys "R" Us (Canada) Ltd. Ontario, Canada TRU (Cayman Islands) Limited Cayman Islands TRU (Cayman Islands) Investments LLC Cayman Islands Toys "R" Us A/S Denmark Societe Anonyme Galeries du Mobilier France Toys "R" Us S.A.R.L. France Toys "R" Us GmbH Germany Toys "R" Us Logistik GmbH Germany Toys "R" Us Operations GmbH Germany Toys "R" Us Service GmbH Germany Toys "R" Us - Lifung Limited Hong Kong Toys "R" Us Asia Limited Hong Kong TRU (HK) Limited Hong Kong Toys "R" Us - Japan, Ltd. Japan Toys "R" Us (Luxembourg) S.A. Luxembourg Toys "R" Us (Malaysia) SDN. BHN. Malaysia Toys "R" Us (Netherlands), B.V. Netherlands TRU (Netherlands) B.V. Netherlands TRU (Netherlands) Investments B.V. Netherlands Toys R Us Portugal, Limitada Portugal TRU of Puerto Rico, Inc. Puerto Rico Toys "R" Us - Singapore (Pte) Limited Singapore Toys R Us, Iberia, S.A. Spain Toys "R" Us, Aktiebolag Sweden Toys R Us AG Switzerland TRU AG Switzerland Toys "R" Us - Lifung Taiwan Limited Taiwan Toys "R" Us Holdings PLC United Kingdom Toys "R" Us Limited United Kingdom Toys "R" Us Properties Limited United Kingdom Tru Toys (UK) Limited United Kingdom EX-23 8 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 11, 1998, included in the 1997 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 33-18863 Form S-3 Numbers 2-87794, 33-23264, 33-34273, 33-42237, 33-51359 and 33-64315; Form S-8 Numbers 2-64887, 2-91834, 33-42627, 333-11861, 333-15841, 333-23441 and 333-20385) of Toys "R" Us, Inc. and subsidiaries of our report dated March 11, 1998, with respect to the consolidated financial statements incorporated herein by reference. /s/ Ernst & Young LLP New York, New York April 24, 1998 EX-27.1 9 1997 10-K FDS
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and Consolidated Statements of Earnings as reported in Exhibit 13 of the Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 YEAR Jan-31-1998 Feb-2-1997 Jan-31-1998 282,600 0 173,600 0 3,923,500 4,453,800 5,627,500 1,422,000 9,488,900 4,092,800 901,200 0 0 30,000 4,100,600 9,488,900 6,055,000 6,055,000 4,136,500 0 171,100 0 57,800 176,000 64,200 111,800 0 0 0 111,800 1.72 1.70
EX-27.2 10 1997 10-K FDS
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and Consolidated Statements of Earnings as reported in Exhibit 13 of the Form 10-K and is qualified in its entirety by reference to such financial statements. RESTATED 1,000 YEAR Feb-1-1997 Feb-4-1996 Feb-1-1997 761,000 0 142,000 0 2,215,000 3,160,000 5,305,000 1,258,000 8,023,000 2,541,000 909,000 0 0 30,000 4,161,000 8,023,000 9,932,000 9,932,000 6,892,000 0 266,000 0 81,000 673,000 246,000 427,000 0 0 0 427,000 1.56 1.54
EX-27.3 11 1997 10-K FDS
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and Consolidated Statements of Earnings as reported in Exhibit 13 of the Form 10-K and is qualified in its entirety by reference to such financial statements. RESTATED 1,000 YEAR Feb-3-1996 Jan-29-1995 Feb-3-1996 203,000 0 129,000 0 2,000,000 2,419,000 4,929,000 1,071,000 6,738,000 2,093,000 827,000 0 0 30,000 3,402,000 6,738,000 9,427,000 9,427,000 6,592,000 0 589,000 0 86,000 266,000 118,000 148,000 0 0 0 148,000 0.54 0.53
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