===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
============
FORM 10-Q
============
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 28, 2000
============
Commission file number 1-11609
TOYS "R" US, INC.
Incorporated pursuant to the Laws of Delaware
============
Internal Revenue Service - Employer Identification No. 22-3260693
225 Summit Avenue, Montvale, New Jersey 07645
(201) 802-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
197,357,964 shares of the registrant's Common Stock were outstanding on December
4, 2000.
==============================================================================
<PAGE>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................2
Condensed Consolidated Statements of Operations.............3
Condensed Consolidated Statements of Cash Flows.............4
Notes to Condensed Consolidated Financial
Statements..................................................5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................9
PART II - OTHER INFORMATION..................................................15
SIGNATURES...................................................................17
1
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
==========================================
(In millions)
<CAPTION>
<S>
ASSETS October 28, October 30, January 29,
2000 1999 2000
------------ ------------- -----------
<C> <C> <C>
Current Assets:
Cash and cash equivalents $ 452 $ 297 $ 584
Accounts and other receivables 145 170 182
Merchandise inventories 3,296 3,101 2,027
Prepaid expenses and other current assets 85 132 80
------------ ------------- -----------
Total current assets 3,978 3,700 2,873
Property and equipment, net and other assets 4,491 5,147 5,106
Investment in Toys "R" Us - Japan, Ltd.
(market value of $772 at October 28, 2000) 96 - -
Goodwill, net 364 377 374
------------ ------------- -----------
$ 8,929 $ 9,224 $ 8,353
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,495 $ 1,130 $ 278
Accounts payable 1,848 2,132 1,617
Accrued expenses and other
current liabilities 531 586 836
Income taxes payable 154 121 107
------------ ------------- -----------
Total current liabilities 4,028 3,969 2,838
Long-term debt 1,141 1,240 1,230
Deferred income taxes 351 334 362
Other liabilities 204 204 243
Minority interest in Toysrus.com 53 - -
Stockholders' equity 3,152 3,477 3,680
------------ ------------- -----------
$ 8,929 $ 9,224 $ 8,353
============ ============= ===========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
===================================================
(In millions except per share data)
<CAPTION>
13 Weeks Ended 39 Weeks Ended
----------------- ---------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,220 $ 2,465 $ 6,533 $6,835
Cost of sales 1,522 1,704 4,481 4,731
----------- ------------ --------- ---------
Gross profit 698 761 2,052 2,104
Selling, general and
administrative expenses 707 641 1,853 1,767
Depreciation and amortization 68 71 207 203
Equity in net earnings of
Toys "R" Us - Japan, Ltd. (4) - (9) -
----------- ----------- ---------- ---------
Operating (loss) earnings (73) 49 1 134
Other income (expense):
Gain from IPO of
Toys "R" Us - Japan, Ltd. - - 315 -
Interest expense - net (29) (25) (75) (64)
----------- ----------- ----------- ----------
(Loss) earnings before
taxes on income (102) 24 241 70
Taxes on income (37) 9 88 26
----------- ----------- ----------- ---------
Net(loss)earnings $ (65) $ 15 $ 153 $ 44
=========== ============ =========== ==========
Basic (loss)earnings per share $ (0.32) $ 0.06 $ 0.70 $0.18
=========== ============ =========== ==========
Weighted average basic shares
outstanding 202.6 243.3 215.7 246.5
=========== ============= =========== ==========
Diluted (loss) earnings
per share $ (0.32) $ 0.06 $ 0.70 $ 0.18
=========== ============= =========== =========
Weighted average diluted
shares outstanding 202.6 243.4 219.6 247.2
=========== ============= =========== =========
<FN>
</FN>
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
====================================================
(In millions)
<CAPTION>
39 Weeks Ended
--------------- ---------------
October 28, October 30,
2000 1999
<S> <C> <C>
---------------- ---------------
Cash flows from operating activities:
Net earnings $ 153 $ 44
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 207 203
Deferred income taxes 33 -
Minority interest in Toysrus.com (25) -
Equity in net earnings of Toys "R" Us - Japan, Ltd. (9) -
Gain from initial public offering of
Toys "R" Us - Japan, Ltd. (315) -
Toysrus.com related non-cash costs and charges 81 -
Changes in operating assets and liabilities:
Merchandise inventories (1,492) (1,186)
Accounts payable and
other operating liabilities 355 473
Other operating assets (65) (51)
--------------- --------------
Net cash used in operating activities (1,077) (517)
--------------- --------------
Cash flows from investing activities:
Capital expenditures, net (245) (364)
Purchase of Imaginarium, net of cash acquired - (43)
Net proceeds from sale of
Toys "R" Us - Japan, Ltd. common stock 267 -
Reduction in cash due to deconsolidation
of Toys "R" Us - Japan, Ltd. (15) -
-------------- --------------
Net cash provided by
(used in) investing activities 7 (407)
-------------- --------------
Cash flows from financing activities:
Short-term borrowings, net 1,326 989
Long-term borrowings 147 -
Long-term debt repayment (37) (8)
Proceeds received from investors in Toysrus.com 77 -
Issuance of stock warrants 10 -
Exercise of stock options - 17
Share repurchase program (618) (179)
--------------- -------------
Net cash provided by financing activities 905 819
--------------- -------------
Effect of exchange rate changes on cash
and cash equivalents 33 (8)
Cash and cash equivalents:
Decrease during period (132) (113)
Beginning of period 584 410
--------------- -------------
End of period $ 452 $ 297
=============== =============
Supplemental disclosures of cash flow information:
Income tax (refunds) payments, net $ (22) $ 123
=============== =============
Interest paid $ 94 $ 71
=============== =============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
==========================================================
1. Interim reporting
The interim condensed consolidated financial statements are unaudited and
are subject to year-end adjustments. However, in the opinion of management,
all known adjustments (which consist primarily of normal recurring
accruals), have been made and the interim financial statements present
fairly the consolidated financial condition and operating results for the
unaudited periods. Because of the seasonal nature of the company's
business, results for interim periods are not indicative of results to be
expected for the fiscal year.
The financial statements and notes are presented in accordance with the
rules and regulations of the Securities and Exchange Commission and do not
contain certain information included in the company's annual report.
Therefore, the interim statements should be read in conjunction with the
company's annual report for the fiscal year ended January 29, 2000.
2. Commercial paper
Commercial paper of $368 million is classified as long-term debt. The
company maintains long-term committed credit agreements to support these
borrowings and intends to refinance them on a long-term basis through
commercial paper borrowings. Additionally, commercial paper of $1,464
million and $800 million are included in short-term borrowings at October
28, 2000 and October 30, 1999, respectively.
3. Comprehensive income
Comprehensive loss was $132 million and $1 million for the third quarter
ended October 28, 2000 and October 30, 1999, respectively, as a result of
the change in foreign currency translation. Comprehensive income was $52
million and $22 million as a result of the change in foreign currency
translation for the 39 weeks ended October 28, 2000 and October 30, 1999,
respectively.
4. Gain from initial public offering of Toys "R" Us - Japan, Ltd.
The company recorded a non-operating gain of $315 million ($200 million net
of taxes) resulting from the initial public offering of shares of Toys "R"
Us - Japan, Ltd. ("Toys - Japan"), which was completed on April 24, 2000.
Of this gain, $91 million resulted from an adjustment to the basis of the
company's investment in Toys - Japan and $224 million related to the sale
of a portion of company-owned common stock of Toys - Japan. In connection
with this transaction the company also received net cash proceeds of $267
million and recorded a provision for current income taxes of $82 million
and a provision for deferred income taxes of $33 million, respectively. As
a result of this transaction, the company's ownership percentage in the
common stock of Toys - Japan was reduced from 80% to 48%. Toys - Japan is a
licensee of the company.
5
<PAGE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
==========================================================
5. Investment in Toys - Japan
The company accounts for its investment in the common stock of Toys - Japan on
the "equity method" of accounting since the Toys - Japan initial public offering
on April 24, 2000. Prior to this event, the company had consolidated the
financial statements of Toys - Japan for all periods presented. At October 28,
2000 the market value of the company's investment in Toys - Japan was $772
million based on the quoted closing market price at that date.
6. Toysrus.com
On February 24, 2000, the company entered into a partnership agreement with
SOFTBANK Venture Capital and affiliates ("SOFTBANK") which included an
investment by SOFTBANK of $60 million in Toysrus.com for a 20% ownership
interest. Accordingly, the company has recorded a 20% minority interest in the
net losses of Toysrus.com in selling, general and administrative expenses for
the third quarter and nine months ended October 28, 2000.
In connection with the partnership with SOFTBANK, the company issued 1.2 million
stock purchase warrants ("warrants") for $8.33 per warrant. Each warrant gives
the holder thereof the right to purchase one share of Toys "R" Us common stock
at an exercise price of $13 per share, until the expiration date of February 24,
2010. As of October 28, 2000, none of these warrants have been exercised.
On August 9, 2000, Toysrus.com entered into a 10-year strategic alliance with
Amazon.com to create a co-branded toy and video games on-line store, which was
launched in the third quarter 2000 and a co-branded baby products on-line store,
which will begin early in 2001. Under this alliance each company will be
responsible for specific aspects of the on-line stores. Toysrus.com will be
responsible for merchandising and content for the co-branded store and will
identify, buy, own and manage the inventory. Amazon.com will handle site
development, order fulfillment, customer service, and the housing of
Toysrus.com's inventory in Amazon.com's U.S. distribution centers. Also on
August 9, 2000, Amazon.com was granted a warrant entitling it to acquire up to
5% (subject to dilution under certain circumstances) of the capital of
Toysrus.com at the then market value. As of October 28, 2000, this warrant has
not been exercised.
As a result of the transition to the co-branded site, the company's Toysrus.com
subsidiary incurred non-recurring costs and charges totaling approximately $118
million, $10 million of which were included in cost of sales and $108 million of
which were included in selling, general and administrative expenses, primarily
relating to the closure of three distribution centers, the write-off of web site
assets, as well as other costs associated with migrating data and merchandise to
the new site and facilities. These costs and charges were recorded in the
quarter ended October 28, 2000.
In October 2000, Toysrus.com received an additional $17 million capital
contribution from SOFTBANK representing its appropriate share of the funding
required for the operations of Toysrus.com.
6
<PAGE>
<TABLE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
==========================================================
<CAPTION>
7. Replacement of certain stock option grants with restricted stock
On March 24, 2000, the company authorized the exchange of certain stock
options, having an exercise price above $22 per share, for an economically
equivalent grant of restricted stock. The exchange, which was voluntary,
replaced approximately 14.4 million options with approximately 1.7 million
restricted shares. Shares of restricted stock resulting from the exchange
vest over a period of three years, with one-half of the grant vesting on
April 1, 2002 and the remainder vesting on April 1, 2003. Accordingly, the
company recognizes compensation expense on a straight-line basis throughout
the vesting period of the restricted stock.
8. Segments
Information related to the various company segments is as follows:
(In millions)
--------------------------------------------------------------------------
13 Weeks Ended 39 Weeks Ended
---------------- ---------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------
Net sales
Toys "R" Us - USA $ 1,323 $ 1,336 $ 3,803 $ 3,790
Toys "R" Us - International 339 383 965 1,055
Toys "R" Us - Japan - 269 277 698
Babies "R" Us 337 263 975 775
Toysrus.com 23 5 40 7
Kids "R" Us 198 209 473 510
---------------------------------------------------------------------------
Total $ 2,220 $ 2,465 $ 6,533 $ 6,835
---------------------------------------------------------------------------
Operating (loss) earnings
Toys "R" Us - USA $ 8 $ 28 $ 91 $ 114
Toys "R" Us - International 6 (2) (17) (46)
Toys "R" Us - Japan, net of
minority interest - 14 17 37
Babies "R" Us 30 19 83 56
Toysrus.com,
net of minority interest (124) (17) (158) (22)
Other 7 7 (15) (5)
----------------------------------------------
Operating (loss) earnings (73) 49 1 134
Interest expense, net (29) (25) (75) (64)
Gain from IPO of
Toys "R" Us - Japan - - 315 -
---------------------------------------------------------------------------
(Loss) earnings before
income taxes $ (102) $ 24 $ 241 $ 70
---------------------------------------------------------------------------
<FN>
</FN>
</TABLE>
Included in the category classified as "Other" are the operating
results of the Kids "R" Us division and equity in the net
earnings of Toys - Japan, as well as other corporate related
items.
7
<PAGE>
TOYS "R" US, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
==========================================================
9. Long term debt
On July 21, 2000, the company borrowed the yen equivalent of $147 million.
This borrowing is repayable in semi-annual installments, with the final
installment due on August 17, 2005. The effective cost of this borrowing is
2.32% and is secured by expected future cash flows from the license fees
due from Toys - Japan.
10. Loss related to store closing
During the third quarter of 2000, the company announced its intention to
open a new flagship store in Times Square, New York City during 2001. In
conjunction with this plan, the company has committed to close and exit its
store in Herald Square, New York City, which is expected to close in
mid-2001. Accordingly, the company has accrued $11 million as of October
28, 2000, representing anticipated costs to exit this location.
11. Restructuring and other charges
In 1998, the company recorded restructuring and other non-recurring charges
of $698 million ($508 million net of tax benefits) to strategically
reposition its worldwide business. During the third quarter of 2000, the
company determined that an excess $11 million reserve existed with respect
to restructuring initiatives which have been completed in its Far East
operations. Accordingly, the company has reversed this reserve. See the
company's annual report for the year ended January 29, 2000 for details on
these charges. Also see the section "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in this report for an
update on the initiatives and the status of related reserves.
12. Commitments and contingencies
See Part II - Item I - Legal Proceedings.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
Results of Operations
Net sales were $2.2 billion compared with $2.5 billion reported for the
third quarter of 1999. For the first nine months of 2000, sales were $6.5
billion versus $6.8 billion in the same period last year. Total sales,
excluding sales of Toys "R" Us - Japan in each period, which is accounted
for on the "equity method" since its initial public offering on April 24,
2000, increased 1% and 2% for the quarter and the nine months ended October
28, 2000, respectively, as compared with the same period in 1999.
Foreign currency exchange had an unfavorable impact on net sales of
approximately $45 million and $63 million, respectively, for the third
quarter and nine months ended October 28, 2000, as compared with the same
periods in 1999. Net sales, excluding sales of Toys "R" Us - Japan in each
period and the impact of currency translation, increased 3% for both the
quarter and nine months.
On a consolidated basis, comparable store sales, in local currencies,
increased by 2% for both the third quarter and the nine months ended
October 28, 2000, as compared with the same periods in 1999. Comparable
store sales for the Toys "R" Us - USA division decreased 1% for the third
quarter of 2000 and were flat for the first nine months of 2000, as
compared with the same periods in 1999. The sales performance for the
quarter is built on top of a 13% comparable toy store increase in the third
quarter of 1999 primarily due to last year's Pokemon phenomenon.
Internationally, the company's overall comparable toy store sales, on a
local currency basis, increased 2% for the third quarter of 2000, and 4%
for the nine months ended October 28, 2000, as compared with the same
periods in 1999. The company's Babies "R" Us division reported double-digit
comparable store sales increases for both the third quarter and first nine
months of this year, as compared with the same periods in 1999. These
increases were driven by strong sales in most categories.
On a consolidated basis, cost of sales as a percentage of sales decreased
by approximately 0.6% for both the third quarter of 2000 and the nine
months ended October 28, 2000, as compared with the same periods in 1999.
On a consolidated basis, excluding non-recurring cost of sales related to
the alliance between Toysrus.com and Amazon.com ("Amazon Alliance"), cost
of sales, as a percentage of sales, decreased 1% and 0.8% for the third
quarter and the nine months ended October 28, 2000, respectively. Cost of
sales for the Toys "R" Us - USA division, as a percentage of sales,
decreased by 1.2% for the third quarter of 2000, and 1% for the nine months
ended October 28, 2000, respectively, as compared with the same periods in
1999. This decrease is primarily due to the change in sales mix from lower
margin video products to higher margin products. Cost of sales for the Toys
"R" Us - International division, as a percentage of sales, decreased by
2.2% for the third quarter of 2000, and 1% for the nine months ended
October 28 2000, respectively, as compared with the same periods in 1999.
This decrease was largely due to higher initial markup due to a favorable
sales shift in product. Cost of sales, as a percentage of sales, for the
Babies "R" Us division were flat for the quarter and decreased 0.7% for the
nine months ended October 28, 2000, respectively, as compared with the same
periods in 1999.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
On a consolidated basis, selling, general and administrative expenses (SG&A), as
a percentage of sales, increased by 5.8% for the third quarter of 2000 and 2.5%
for the nine months of 2000, as compared with the same periods in 1999.
Non-recurring costs and charges related to the Amazon Alliance accounted for
3.8% and 1.4% of the consolidated increase in SG&A, as a percentage of sales,
for the third quarter and the nine months ended October 28, 2000, respectively.
SG&A for Toys"R" Us - USA, as a percentage of sales, increased by 2.9% and
1.9%, respectively, for the third quarter and nine months ended October 28,
2000, as compared with the same periods in 1999. These increases are primarily
due to increased payroll costs related to the implementation of the company's
new customer-focused initiatives and rising distribution center costs due to
higher inventory levels. SG&A for the International division, as a percentage of
sales, excluding the impact of Toys "R" Us - Japan, decreased by 0.6% and 1.5%
for the third quarter and nine months ended October 28, 2000, as compared with
the same period in 1999. These improvements are a result of the strategic store
closures in Central Europe and France, which have improved the overall
profitability of this division. SG&A as a percentage of sales for the Babies "R"
Us division decreased 1.7% and 0.8%, respectively, for the third quarter of 2000
and nine months ended October 28, 2000, as compared with the same periods in
1999.
Included in the company's results for the third quarter and nine months ended
October 28, 2000 is $80 million and $102 million, respectively, representing the
company's share of the net losses of Toysrus.com.
Depreciation and amortization increased by $4 million for the nine months ended
October 28, 2000, as compared with 1999. This increase is primarily due to the
company's continued store expansion, remodels and front end conversions,
strategic investments to improve management information systems and amortization
of goodwill relating to its acquisition of Imaginarium Toy Centers, Inc. in the
second half of 1999.
Net interest expense increased $11 million for the nine months ended October 28,
2000, as compared with 1999. This increase is mainly attributable to the funding
of the company's stock repurchase program, higher interest rates, and the mix of
currencies in which the company borrowed.
Foreign currency exchange did not have a material effect on net earnings for
either the third quarter or nine months ended October 28, 2000.
Restructuring and Other Charges
During 1998, the company announced strategic initiatives to reposition its
worldwide business and other charges including the customer-focused reformatting
of its toy stores into the new C-3 format, as well as the restructuring of its
International operations, which resulted in a charge of $353 million ($279
million net of tax benefits, or $1.05 per share). Details on the components of
the company's strategic initiatives and other charges are described in the
company's annual report for the year ended January 29, 2000; the reserve
balances and subsequent utilization are as follows:
10
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Reserve Balance Reserve Balance
Description @ 1/29/00 Utilized * @ 10/28/00
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Closings/downsizings:
Lease commitments $62 $13 $49
Severance and other closing costs 14 2 12
Other 11 11 -
--------------------------------------------------------------------------------
Total restructuring $87 $26 $61
--------------------------------------------------------------------------------
Provisions for legal settlements $30 $13 $17
--------------------------------------------------------------------------------
* Includes the reversal of an $11 million reserve, as described below.
<FN>
</FN>
</TABLE>
The company continues to aggressively negotiate the closing/downsizing of the
remaining stores and distribution centers included in its repositioning program
and intends to execute the remainder of the initiatives included in the program.
During the third quarter of 2000, the company determined that an excess $11
million reserve existed with respect to restructuring initiatives which have
been completed in its Far East operations. Accordingly, the company has reversed
this reserve.
In 1998, the company also announced markdowns and other charges of $345 million
($229 million net of tax benefits, or $.86 per share). As of January 29, 2000,
the company had remaining markdown reserves of $2 million to clear excess
inventories and $12 million for store closings. At October 28, 2000, the company
had remaining markdown reserves of $8 million for store closings.
The company believes all reserves are adequate to complete its restructuring
program.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Financial Condition
By February 3, 2001, the company expects to be operating approximately 1,579
stores, consisting of: 707 toy stores in the United States; 487 International
toy stores (including 211 franchise and joint venture stores); 198 Kids "R" Us
children's clothing stores; 148 Babies "R" Us stores and 39 Imaginarium stores.
The company now has 180 combo stores, 108 of which are in the refined C-3
format. The company is continuing its C-3 store refinement program in its 17
test stores, aimed to find the optimal configuration of fixturing, better
segmentation and ultimate presentation of merchandise concepts. The company has
substantially completed refining 166 stores and expects all U.S. toy stores to
be updated by Holiday 2002. In addition, the company sells merchandise through
its internet sites at www.toysrus.com, www.babiesrus.com and www.imaginarium.com
and through mail order catalogues.
For 2000, capital requirements for the company's expansion plans mentioned
above, as well as other capital requirements are estimated to be approximately
$500 to $550 million.
Total borrowings, net of cash and cash equivalents, increased by approximately
$97 million at October 28, 2000, as compared with October 30, 1999. This
increase is due to the increased share repurchase program, increased inventory
levels to support in-stock positions in key items for Holiday 2000 and the
funding of Toysrus.com, offset by the deconsolidation of the balance sheet of
Toys - Japan.
On July 21, 2000, the company borrowed the yen equivalent of $147 million. This
borrowing is repayable in semi-annual installments, with the final installment
due on August 17, 2005. The effective cost of this borrowing is 2.32% and is
secured by expected future cash flows from the license fees due from Toys-
Japan.
The company repurchased 41 million shares of its common stock through its share
repurchase program for $618 million during the first nine months ended October
28, 2000, as compared with 11 million shares for approximately $179 million in
the same period in 1999.
Cash requirements for operations, capital expenditures, lease commitments and
the share repurchase program will be met primarily through operating activities,
borrowings under the $1 billion revolving credit facility, issuance of
commercial paper and bank borrowings by foreign subsidiaries.
Weighted-average diluted shares outstanding decreased to 219.6 million during
the first nine months ended October 28, 2000 from 247.2 million during the nine
months ended October 30, 1999, due primarily to the impact of shares repurchased
by the company under its share repurchase program.
The company's cash outflows from operations increased to $1,077 billion for the
nine months ended October 28, 2000 from $517 million for the nine months ended
October 30, 1999, primarily due to increases in merchandise inventories as well
as lower accrued expenses and other liabilities. The increase in merchandise
inventory is a result of the company's strategy to improve its in-stock position
for the upcoming holiday season.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
On February 24, 2000, the company entered into a partnership agreement with
SOFTBANK Venture Capital and affiliates ("SOFTBANK") which included an
investment by SOFTBANK of $60 million in Toysrus.com for a 20% ownership
interest. Accordingly, the company has recorded a 20% minority interest in the
net losses of Toysrus.com in selling, general and administrative expenses for
the third quarter and nine months ended October 28, 2000.
In connection with the partnership with SOFTBANK, the company issued 1.2 million
stock purchase warrants ("warrants") for $8.33 per warrant. Each warrant gives
the holder thereof the right to purchase one share of Toys "R" Us common stock
at an exercise price of $13 per share, until the expiration date of February 24,
2010. As of October 28, 2000, none of these warrants have been exercised.
On August 9, 2000, Toysrus.com entered into a 10-year strategic alliance with
Amazon.com to create a co-branded toy and video games on-line store, which was
launched in the third quarter 2000 and a co-branded baby products on-line store,
which will begin early in 2001. Under this alliance each company will be
responsible for specific aspects of the on-line stores. Toysrus.com will be
responsible for merchandising and content for the co-branded store and will
identify, buy, own and manage the inventory. Amazon.com will handle site
development, order fulfillment, customer service, and the housing of
Toysrus.com's inventory in Amazon.com's U.S. distribution centers. Also on
August 9, 2000, Amazon.com was granted a warrant entitling it to acquire up to
5% (subject to dilution under certain circumstances) of the capital of
Toysrus.com at the then market value. As of October 28, 2000, this warrant has
not been exercised.
As a result of the transition to the co-branded site, the company's Toysrus.com
subsidiary incurred non-recurring costs and charges totaling approximately $118
million, $10 million of which were included in cost of sales and $108 million of
which were included in selling, general and administrative expenses, primarily
relating to the closure of three distribution centers, the write-off of web site
assets, as well as other costs associated with migrating data and merchandise to
the new site and facilities. These costs and charges were recorded in the
quarter ended October 28, 2000.
In October 2000, Toysrus.com received an additional $17 million capital
contribution from SOFTBANK representing its appropriate share of the funding
required for the operation of Toysrus.com.
The company recorded a non-operating gain of $315 million ($200 million net of
taxes) resulting from the initial public offering of shares of Toys "R" Us -
Japan, Ltd. ("Toys - Japan"), which was completed on April 24, 2000. Of this
gain, $91 million resulted from an adjustment to the basis of the company's
investment in Toys - Japan and $224 million related to the sale of a portion of
company-owned common stock of Toys - Japan. In connection with this transaction
the company also received net cash proceeds of $267 million and recorded a
provision for current income taxes of $82 million and a provision for deferred
income taxes of $33 million, respectively. As a result of this transaction, the
company's ownership percentage in the common stock of Toys - Japan was reduced
from 80% to 48%. Toys - Japan is a licensee of the company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
==================================================================
(continued)
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board approved the deferral of
Statement No. 133 ("SFAS No. 133") - Accounting for Derivatives Instruments and
Hedging Activities, which the company is required to adopt in its fiscal year
beginning February 2001. SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. The company does not believe the adoption
of SFAS No. 133 will have a material effect on the consolidated financial
position, results of operations and cash flows of the company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements", which
is effective beginning in the company's fourth quarter 2000. The company does
not believe the adoption of SAB 101 will have a material impact on the
consolidated financial position, results of operations and cash flows of the
company.
Forward-Looking Statements
This Form 10-Q contains "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. The company may also make forward-looking
statements in other documents filed with the Securities and Exchange Commission,
its annual report to shareholders, its proxy statement and in press releases.
All statements that are not historical facts, including statements about the
company's beliefs or expectations, are forward-looking statements. Such
statements involve risks and uncertainties that exist in the company's
operations and business environment that could render actual outcomes and
results materially different than predicted. The company's forward-looking
statements are based on assumptions about many factors, including, but not
limited to, ongoing competitive pressures in the retail industry, changes in
consumer spending, general economic conditions in the United States and other
jurisdictions in which the company conducts business (such as interest rates and
consumer confidence) and normal business uncertainty. While the company believes
that its assumptions are reasonable at the time forward-looking statements were
made, it cautions that it is impossible to predict the actual outcome of
numerous factors and, therefore, readers should not place undue reliance on such
statements. Forward-looking statements speak only as of the date they are made,
and the company undertakes no obligation to update such statements in light of
new information or future events that involve inherent risks and uncertainties.
Actual results may differ materially from those contained in any forward-looking
statement.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Class Action Suits against Toys "R" Us, Inc., et al.
As previously reported in the company's Report on Form 10-Q for
the quarter ended July 29, 2000, the company and its affiliates
Toysrus.com, Inc. and Toysrus.com, LLC are defendants in eleven
purported class action lawsuits (six in the United States
District Court for the District of New Jersey, three in the
United States District Court for the Northern District of
California, one in the United States District Court for the
Western District of Texas and one in the Superior Court of the
State of California, County of San Bernardino). In September
2000, three additional purported class action lawsuits were filed
(two in the United States District Court for the District of New
Jersey and one in the United States District Court for the
Western District of Texas). These actions generally purport to
bring claims on behalf of all persons who have visited one or
more of the company's websites and either made an online purchase
or allegedly had information about them unlawfully "intercepted,"
"monitored," "transmitted" or "used." All of the suits (except
one filed in the United States District Court for the District of
New Jersey) also name Coremetrics, Inc. ("Coremetrics"), an
internet marketing company, as a defendant.
These suits assert various claims under the federal privacy and
computer fraud statutes, as well as under state statutory and
common law, arising out of an agreement between the Company and
Coremetrics, alleging that the Company tracks its website users'
activities online and shares that information with third parties
in violation of the law. These suits seek damages in unspecified
amounts and other relief under state and/or federal law.
The Company and Coremetrics filed a joint application with the
Multidistrict Litigation Panel (the "MDL Panel") to have all of
the federal actions consolidated and transferred to the Northern
District of California. A hearing on that application was held on
November 17, 2000, and the Company is awaiting a decision from
the MDL Panel. All of the actions (including the state action)
are currently stayed pending that decision.
The Company believes that it has substantial defenses to these
claims and plans to vigorously defend these lawsuits.
FAO Schwarz, et al. v. Toys "R" Us, Inc., et al.
As previously reported in the company's Report on Form 10-K for
the fiscal year ended January 29, 2000 and Report on Form 10-Q
for the quarter ended April 29, 2000, the company is a defendant
in litigation pending in the Supreme Court of the State of New
York, New York County.
On September 25, 2000, the parties reached an agreement to settle
this action. On October 4, 2000, the parties filed a stipulation
of dismissal pursuant to which this action was dismissed with
prejudice.
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Item 5. Other Information
Stockholder Proposals
Sec. 2.1(b) of the company's By-Laws provides for the
company to provide notice of an upcoming Annual Meeting of
Stockholders at least 100 days in advance of such meeting.
Notice is hereby given that the company's 2001 Annual
Meeting of Stockholders is expected to be held on June 6,
2001. Pursuant to Sec. 2.1(b) of the By-Laws, stockholder
nominations of persons for election to the Board of
Directors of the company must be received by the company at
its executive office, 461 From Road, Paramus, New Jersey
07652, Attention: Christopher K. Kay, Executive Vice
President - General Counsel and Secretary, no later than
March 8, 2001 in order to be considered timely.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Financial Data Schedule for the quarter ended
October 28, 2000.
(b) Report on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements 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.
Date: December 12, 2000 Toys "R" Us, Inc.
------------------
(Registrant)
s/ Louis Lipschitz
--------------------
(Signature)
Louis Lipschitz
Executive Vice President and
Chief Financial Officer
17
