Other Matters

On March 19, 2002, we refinanced our note payable originally due 2005 and increased the amount outstanding to $160 million from $100 million. This borrowing is repayable in semi-annual installments, with the final installment due on February 20, 2008. The effective cost of this borrowing is 2.23% and is secured by expected future cash flows from license fees due from Toys - Japan.

On March 13, 2002, we filed registration statements with the Securities and Exchange Commission indicating our intention to issue $550 million of equity and equity-linked securities. These securities take the form of $350 million of equity security units and $200 million of Toys“R”Us common stock. We plan to issue these securities promptly after the registration statements are declared effective. We will use the net proceeds from these offerings as an alternative to short-term borrowings and for other general corporate purposes.

On February 24, 2000, we entered into an agreement with SOFTBANK, which included an investment by SOFTBANK of $60 million in Toysrus.com for a 20% ownership interest. Accordingly, we have recorded a 20% minority interest in the net losses of Toysrus.com in selling, general and administrative expenses. In addition, Toysrus.com received additional capital contributions of $37 million from SOFTBANK representing its proportionate share of funding required for the operation of Toysrus.com.

In connection with the agreement with SOFTBANK, we issued 1.2 million stock purchase 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. These warrants have not been exercised.

In August 2000, Toysrus.com entered into a 10-year strategic alliance with Amazon.com to operate a co-branded toy and video game on-line store, which was launched in the third quarter of 2000. In addition, a co-branded baby products on-line store was launched in May 2001 and a co-branded creative and learning products on-line store was launched in July 2001. Under this alliance, Toysrus.com and Amazon.com are responsible for specific aspects of the on-line stores. Toysrus.com is responsible for merchandising and content for the co-branded store. Toysrus.com also identifies, buys, owns and manages the inventory. Amazon.com handles web-site development, order fulfillment, guest service, and the housing of Toysrus.com’s inventory in Amazon.com’s U.S. distribution centers. Also in August 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. This warrant has not been exercised.

In the third quarter of 2000, Toysrus.com recorded $118 million in non-recurring costs and charges as a result of the transition to the co-branded site, of which, $10 million were included in cost of sales and $108 million were included in selling, general and administrative expenses. These costs and charges related primarily to the closure of three distribution centers and web-site asset write-offs, as well as other costs associated with migrating data and merchandise to the new site and facilities. At the end of 2001, Toysrus.com had remaining reserves of approximately $42 million, primarily for the exit of its Memphis Tennessee distribution center, which is being actively marketed. We believe that these remaining reserves are adequate to complete all remaining action plans.

We recorded a non-operating gain of $315 million ($200 million net of taxes) resulting from the initial public offering of shares of Toys - Japan, which was completed in April 2000. Of this gain, $91 million resulted from an adjustment to the basis of our 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, we 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. As a result of this transaction, our ownership percentage in the common stock of Toys - Japan was reduced from 80% to 48%. Toys - Japan is a licensee.

In August 1999, we acquired all of the capital stock of Imaginarium Toy Centers, Inc. for approximately $43 million in cash and the assumption of certain liabilities. In addition to currently operating 42 Imaginarium toy stores throughout the U.S., we have incorporated the Imaginarium learning center concept in our Mission Possible store format. The operating results of Imaginarium were not material to our overall results or financial condition.

In August 1999, Robert C. Nakasone resigned as our Chief Executive Officer and as a director. We entered into a Separation and Release Agreement with Mr. Nakasone providing for cash payments, the immediate vesting of all unvested options and unvested profit shares held by Mr. Nakasone, as well as the prorated vesting of other unvested equity based awards on the second anniversary of the termination date. We accrued all costs related to this matter as of January 29, 2000. These amounts were not material to our overall results or financial condition.

Quantitative and Qualitative Disclosures About Market Risks

We are exposed to market risk from potential changes in interest rates and foreign exchange rates. We regularly evaluate these risks and have taken the following measures to mitigate these risks: the countries in which we own assets and operate stores are politically stable; our foreign exchange risk management objectives are to stabilize cash flow from the effects of foreign currency fluctuations; we do not participate in speculative hedges; and we will, whenever practical, offset local investments in foreign currencies with borrowings denominated in the same currencies. We also enter into derivative financial instruments to hedge a variety of risk exposures including interest rate and currency risks.

Our foreign currency exposure is primarily concentrated in the United Kingdom, Europe, Canada, and Australia. We face currency exposures that arise from translating the results of our worldwide operations into U.S. dollars from exchange rates that have fluctuated from the beginning of the period. We also face transactional currency exposures relating to merchandise that we purchase in foreign currencies. We enter into forward exchange contracts to minimize and manage the currency risks associated with these transactions. The counter-parties to these contracts are highly rated financial institutions and we do not have significant exposure to any counter-party. Gains or losses on these derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. For foreign currency derivative instruments, market risk is determined by calculating the impact on fair value of an assumed one-time change in foreign rates relative to the U.S. dollar. Fair values were estimated based on market prices where available, or dealer quotes. With respect to derivative instruments outstanding at February 2, 2002, a 10% appreciation of the U.S. dollar would have increased pre-tax earnings by $13 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings by $13 million. Comparatively, considering our derivative instruments outstanding at February 3, 2001, a 10% appreciation of the U.S. dollar would have increased pre-tax earnings by $9 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings by $10 million.