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Toys R US Inc – ‘8-K’ for 7/13/16 – ‘EX-99.1’

On:  Thursday, 7/14/16, at 6:02am ET   ·   For:  7/13/16   ·   Accession #:  1193125-16-647678   ·   File #:  1-11609

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/14/16  Toys R US Inc                     8-K:7,8,9   7/13/16    3:542K                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 8-K         Current Report                                      HTML     17K 
 2: EX-99.1     Miscellaneous Exhibit                               HTML    184K 
 3: EX-99.2     Miscellaneous Exhibit                               HTML     30K 

Exhibit 99.1

RECENT DEVELOPMENTS

The following information is based on data obtained for the eight-week period ended June 25, 2016. The eight-week period refers to May 1, 2016 to June 25, 2016, as compared to May 3, 2015 to June 27, 2015. This information has been prepared by our management and is estimated, preliminary and unaudited and subject to adjustment based upon, among other things, additional data becoming available, the completion of the final fiscal month of the second fiscal quarter ending July 30, 2016, and the finalization of our quarter-end closing and reporting processes. Accordingly, the preliminary estimates for the first two fiscal months ended June 25, 2016 may not be indicative of our actual reported results for the second quarter ending July 30, 2016 and our reported results may reflect different information for the first two fiscal months of the second fiscal quarter and any differences may be significant. In light of the foregoing, Eligible Holders are cautioned not to place undue reliance on such financial information. In addition, our auditors have not audited, reviewed, compiled or performed any procedures with respect to the following information.

For the eight-week period ended June 25, 2016, same store sales for our Domestic and International segments increased by approximately 0.3% and 1.6%, respectively, and same store sales for Toys Europe and its subsidiaries increased by approximately 0.8% (assuming the Reorganization Transactions had been effectuated at the beginning of the period). Consolidated net sales for the eight-week period ended June 25, 2016 were approximately $1,387 million, a decrease of approximately $15 million as compared to the prior year, when excluding an approximate $9 million benefit from foreign currency translation. The decline in net sales was primarily due to the closure of our Times Square and FAO Schwarz flagship stores.

REORGANIZATION TRANSACTIONS

Prior to the consummation of the exchange offers, the Company and its subsidiaries have effected certain initial internal corporate reorganization transactions, including the formation of the following entities as wholly-owned direct or indirect subsidiaries of Toys “R” Us Europe LLC (“Toys Europe”): TRU Taj Holdings 1, LLC (“Taj 1”), TRU Taj Holdings 2 Limited (“Taj 2”), TRU Taj Holdings 3, LLC (“Taj 3”), the Issuer, TRU (Japan) Holdings Parent Ltd (“New Japan Parent”) and TRU Taj (Spain) Holdings, LLC (“Spain Holdings”). Prior to, or substantially concurrently with the consummation of the exchange offers, the Company and Toys Europe will transfer equity interests in certain foreign and domestic subsidiaries to the Issuer or to subsidiaries of the Issuer, as described in the Support Agreement. Such transferred subsidiaries will comprise (i) the Japan, Europe and Australia operations of the Company, (ii) TRU Asia, LLC, which is the indirect parent company of the Company’s ownership interest in the Asia JV, and (iii) Wayne Real Estate Parent Company LLC (“Wayne”) and its subsidiaries.

1

We refer to the reorganization transactions described above as the “Reorganization Transactions.” The final structure after giving effect to the Reorganization Transactions and the exchange offers is depicted in the chart below:

SUMMARY HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA

Set forth below is summary historical condensed consolidated financial data for Toys Europe and its subsidiaries for the dates and for the periods indicated. The summary historical condensed consolidated financial data has been presented to show the assets, liabilities and results of operations of such entities assuming the Reorganization Transactions (but not the exchange offers) had been effectuated at the beginning of the periods presented. Tax balances are presented on a combined basis, allocated to Toys Europe and its subsidiaries.

The financial data set forth below was derived from the Company’s historical internal financial statements, and has not been audited or reviewed by our independent accountants. The financial data set forth below should be read in conjunction with, and is qualified in its entirety by reference to our Annual Report on Form 10-K for the fiscal year ended January 30, 2016 and our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2016, as well as our consolidated financial statements and condensed consolidated interim financial statements and the related notes thereto incorporated by reference herein.

Toys Europe and Subsidiaries

Condensed Consolidated Operations Data

3

The Issuer Leverage Ratio is primarily a covenant calculation, and therefore would not be entirely comparable to a leverage ratio calculated for the Company on a consolidated basis.

4

A reconciliation of net earnings (loss) attributable to Toys Europe and its subsidiaries to EBITDA, Adjusted EBITDA and Issuer Consolidated Adjusted EBITDA is as follows:

5

6

Toys Europe and Subsidiaries

Condensed Consolidated Balance Sheet Data

7

RISK FACTORS

A significant portion of the Company’s and the Issuer’s and the applicable Guarantor’s respective assets and liabilities are attributable to non-guarantor subsidiaries.

For the purposes of your decision whether to participate in the exchange offers, you should assume that a significant portion of the Company’s assets and liabilities are attributable to non-guarantor subsidiaries and that the assets of the Guarantors may not be sufficient to satisfy claims of holders of New Secured Notes in the event of the bankruptcy, liquidation or insolvency of the Issuer. Other than the operating entities in Australia, Germany and the UK that guarantee the New Secured Notes, the Issuer and the Guarantors are holding companies with no operations and no material assets (other than equity interests in their respective subsidiaries). For the fiscal year ended January 30, 2016 and the thirteen weeks ended April 30, 2016, the Issuer and the Guarantors (excluding their consolidated subsidiaries), accounted for approximately 10% of the Company’s consolidated net sales. As of April 30, 2016, the Issuer and the Guarantors (excluding their consolidated subsidiaries) accounted for less than 10% of the Company’s total assets. The New Secured Notes and the Guarantees will be structurally subordinated to indebtedness and other liabilities of the Company’s non-guarantor subsidiaries.

The Issuer may not have access to sufficient cash to make payments on the New Secured Notes.

The Issuer conducts its operations through its subsidiaries. As a result, the Issuer is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its outstanding debt service and other obligations. The Issuer’s subsidiaries may not generate sufficient cash from operations to enable it to make principal and interest payments on its indebtedness, including the New Secured Notes. In addition, the terms of loans and credit lines at Toys-Japan, the terms of the European ABL Facility and the terms of certain other indebtedness of the Company’s subsidiaries prevent payments of cash from certain subsidiaries to the Issuer. As a result, we expect that cash from operations of PropCo I will be the primary source of funding for payments on the New Secured Notes. In addition, PropCo I has approximately $912 million of outstanding indebtedness as of April 30, 2016 under its senior unsecured term loan facility and such indebtedness contains restrictions on dividends and distributions in respect of Propco I’s equity.

Furthermore, any payment of dividends, distributions, loans or advances to the Issuer by its subsidiaries may be subject to restrictions on dividends or repatriation of earnings under applicable local law and monetary transfer restrictions in the jurisdictions in which the Issuer’s subsidiaries operate. In addition, payments to the Issuer by its subsidiaries will be contingent upon the Issuer’s subsidiaries’ earnings or financial condition and various business considerations. The Issuer’s subsidiaries are permitted under the terms of its indebtedness, including the New Secured Notes Indenture, to incur additional indebtedness that may restrict payments from subsidiaries to the Issuer. The Issuer cannot assure you that agreements governing current and future indebtedness of its subsidiaries will permit them to provide it with sufficient cash to fund payments on the New Secured Notes when due.

As of April 30, 2016, on a pro forma basis, after giving effect to the consummation of the exchange offers and the Concurrent Private Placements (including fees and expenses) and assuming that (i) all of the Senior Notes have been tendered prior to the Early Tender Date and have, subject to the 2017 Cap and the Total Cap, been accepted by the Issuer and (ii) all of the participating holders of the 2017 Notes (other than the Notes Only Parties) selected the Notes and Cash Option, the Company’s consolidated cash and cash equivalents balance would have been $406 million.

Cash and cash equivalents at each respective legal entity are subject to restrictions on transfers imposed by applicable law, including restrictions on certain foreign subsidiaries that may prohibit or limit their ability to distribute amounts to the Company’s domestic entities, and may be subject to debt covenant restrictions as well as seasonal working capital needs, which primarily represent the purchase of inventory and operating expenses. The Company’s cash and cash equivalent balance is typically highest during the fourth quarter, in conjunction with the holiday season. As of April 30, 2016, the cash and cash equivalent balance consisted of the following:

8

The Issuer’s subsidiaries and the Company’s subsidiaries are separate and distinct legal entities and, except for subsidiaries that act as Guarantors of the New Secured Notes, they will have no obligation, contingent or otherwise, to pay amounts due under the New Secured Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment.

If the Company’s subsidiaries are unable to repay or refinance their indebtedness, they may be forced to take other actions to satisfy such indebtedness, which may not be successful and which may have adverse consequences to the financial position of the Company and its subsidiaries, including the Issuer.

Certain subsidiaries of the Company have indebtedness they will need to repay or refinance in the near or intermediate term. Market conditions and other factors beyond the control of the Company and its subsidiaries could impact their ability to refinance their indebtedness on favorable terms or at all. If they are unable to repay or refinance such indebtedness, they could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure their indebtedness. These alternative measures may not be successful and may not permit such subsidiaries to meet their respective debt obligations, or to continue to provide funds to the Company, the Issuer, or their respective subsidiaries for them to finance their respective operations or meet their respective debt obligations.

For example, as of April 30, 2016, Toys “R” Us Properties (UK) Limited (“UK Propco”), an indirect wholly-owned subsidiary of the Issuer, has $374 million of indebtedness (collectively, the “UK Propco Loan”) under a real estate credit facility that matures on July 7, 2020. Under an operating company/property company structure, UK Propco leases these properties on a triple-net basis to Toys “R” Us Limited (“UK Opco”). Substantially all of UK Propco’s revenues and cash flows are derived from payments from UK Opco under a series of amended lease agreements. Although the UK Propco Loan is not guaranteed by the Company or the Issuer, a default under the UK Propco Loan would entitle the lender thereunder to proceed against UK Propco and its real estate property and leasehold interests in property.

Additionally, as of April 30, 2016, Toys “R” Us Property Company II, LLC (“Propco II”), an indirect wholly-owned subsidiary of the Company, has $717 million of 8.500% senior secured notes (the “Propco II Notes”) that mature on December 1, 2017. The Company and Propco II are currently contemplating various alternatives for the repayment or refinancing of the Propco II Notes, and have begun to engage in discussions with potential lenders and other sources of financing. Although the Propco II Notes are not guaranteed by the Company or any subsidiary of the Company, a default under the Propco II Notes would entitle the holders of such Propco II Notes to proceed against Propco II and the real estate property and leasehold collateral granted to secure the Propco II Notes.

Furthermore, a subsidiary’s default under its indebtedness, or a bankruptcy or insolvency proceeding involving a subsidiary of the Company, could, depending on the amount of such indebtedness and/or the size of such subsidiary, also entitle holders of other debt, including holders of the Senior Notes and the New Secured Notes, to accelerate their indebtedness or otherwise proceed against the Issuer and the Guarantors. In such an event, it is possible that the Company and its subsidiaries, including the Issuer, will not have sufficient funds to repay accelerated indebtedness. As such a default could affect the creditworthiness of the Company and its subsidiaries, the Company and its subsidiaries could be unable to obtain financing necessary to repay accelerated indebtedness on acceptable terms or at all.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations. These factors could also have a material adverse effect on our ability to meet our liquidity needs and could negatively impact the price of our New Secured Notes and our Senior Notes.

9

SOURCES AND USES

We will not receive any cash proceeds in the exchange offers. The Senior Notes exchanged by holders in the exchange offers will be retired and cancelled and will not be reissued.

The following table summarizes the estimated sources and uses in connection with the exchange offers and related transactions (including the Concurrent Private Placements), assuming maximum participation in the exchange offers, that all of the participating holders of 2017 Notes (other than the Notes Only Parties) elect the Notes and Cash Option, and that the exchange offers are consummated on August 16, 2016. Actual amounts set forth in the table and accompanying footnotes will vary from estimated amounts depending on several factors, including differences between actual participation rates and elections in the exchange offers as compared to our assumptions, our estimates of the fees and expenses as compared to actual fees and expenses, and the actual closing date of the exchange offers.

10

CAPITALIZATION

The following table sets forth as of April 30, 2016:

11

This table should be read in conjunction with the consolidated financial statements and the related notes thereto and the other financial information included and incorporated by reference in this Offering Memorandum.

12

The following table sets forth as of April 30, 2016:

13

This table should be read in conjunction with the other financial information included and incorporated by reference in this Offering Memorandum.

14

15

DESCRIPTION OF SUPPORT AGREEMENT

On June 13, 2016, the Support Parties entered into the Support Agreement with the Company, whereby, subject to the terms and conditions contained in the Support Agreement: (i) such Support Parties agreed to tender approximately $421 million (approximately 50% of the outstanding principal amount) in aggregate principal amount of Senior Notes in the exchange offers, and (ii) certain of the Support Parties (representing approximately 25% of the outstanding principal amount of the 2017 Notes) have agreed to elect the Notes Only Option with respect to such 2017 Notes being tendered in the exchange offers. Following its formation, the Issuer executed a Joinder to the Support Agreement and became a party to the Support Agreement. For purposes of the Support Agreement, the Issuer and the Company are collectively referred to as the “Company Parties.”

The Support Agreement contains representations, warranties and other agreements by the Company Parties and the Support Parties. The Company Parties’ and the Support Parties’ obligations under the Support Agreement are subject to various customary conditions set forth in the Support Agreement, including the negotiation, execution and delivery definitive documentation for the exchange offers. The Support Agreement terminates upon certain events, including, upon notification, if the Settlement Date has not occurred by the date 30 business days after the date hereof (such date, the “Drop Dead Date”).

Among other things, the obligations of the Support Parties under the Support Agreement are subject to the following conditions, which may be waived by the Support Parties:

16

Pursuant to and subject to the terms and conditions of the Support Agreement, the Backstop Party has agreed to purchase, and the Issuer has agreed to issue, upon consummation of the exchange offers, up to $50.0 million in aggregate principal amount of the Backstop Notes, which will be of the same series as, and fungible with, the New Secured Notes. The Backstop Notes will be issued, pursuant to Section 4(a)(2) under the Securities Act, in the Backstop Notes Private Placement, which is separate from the exchange offers. The Backstop Notes will be issued as financing for a portion of the cash consideration payable to the Eligible Holders of the 2017 Notes that elect the Notes and Cash Option in the exchange offers, and will be funded solely to the extent and in the amount necessary to fund such cash consideration, as follows (subject to original issue discount on the Backstop Notes):

Pursuant to and subject to the terms and conditions of the Support Agreement, the Support Parties will receive certain premiums and payments in connection with the exchange offers (including, among other payments, a 2.0% lock-up premium payable with respect to the aggregate principal amount of Senior Notes they tender in the exchange offers) that will be payable in cash and as Premium Notes, which will be of the same series as, and fungible with, the New Secured Notes. The maximum aggregate principal amount of Premium Notes that will be issued, assuming the Support Parties do not acquire and tender additional Senior Notes subsequent to the date hereof, is approximately $7 million. The Premium Notes will be issued, pursuant to Section 4(a)(2) under the Securities Act, in the Premium Notes Private Placement, which is separate from the exchange offers. The Backstop Notes and Premium Notes issued in the Concurrent Private Placements are not being offered or issued in the exchange offers, and will not count towards the Total Cap. Therefore, the aggregate principal amount of notes issued under the New Secured Notes Indenture on the closing date that are of the same series as, and fungible with, the New Secured Notes issued in the exchange offers will exceed the Total Cap to the extent of the aggregate principal amount of the Backstop Notes and Premium Notes issued on such date.

In addition, in connection with the Support Agreement, two of the Support Parties (including the Backstop Party) were granted the MFN Right, in each case with respect to up to $50.0 million of their New Secured Notes (such that the two Support Parties collectively have an MFN Right with respect to up to $100.0 million of New Secured Notes). The MFN right will apply to any subsequent debt issuance, exchange transaction, or other transaction that (i) involves the issuance of new notes that are issued or guaranteed by the Issuer or any of the subsidiary guarantors or (ii) is otherwise offered to holders of the Senior Notes following the exchange offers (irrespective of the form of consideration involved, except that the MFN Right does not apply to any such transactions set forth in this clause (ii) in which the sole consideration offered is cash, including cash tender offers). Upon exercise, the MFN Right will entitle the holder to an effective adjustment (such adjustment to take the form contemplated in the immediately succeeding sentence) in the terms of their New Secured Notes such that they have received terms no less favorable (including, without limitation, with respect to interest rate, exchange ratio, premiums, fees or original issue discount, for backstop services or otherwise) than those terms offered in the applicable subsequent transaction triggering the MFN Right. The adjustment in terms will be effected pursuant to a private exchange transaction, payment, debt issuance, or other transaction required to implement the MFN Right. The Backstop Notes and other New Secured Notes held by the other Support Parties will be the same series, and be fungible with, the other New Secured Notes issued in the exchange offers. The MFN Right will be exercisable once with respect to any principal amount of New Secured Notes, and in any event will terminate on the maturity date of the New Secured Notes. In addition, the aggregate principal amount of New Secured Notes that are subject to the MFN Right will be reduced on a pro rata basis to the extent repurchased or treated as repurchased in any repurchase offer for the New Secured Notes. The MFN Right is personal to the party to which it was originally granted, and is not transferable in connection with a transfer of the New Secured Notes or otherwise. The MFN right will be subject to further definitive documentation to be agreed.

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Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘8-K’ Filing		Date		Other Filings
		7/7/20
		6/29/18
		12/1/17
		8/16/16
		8/15/16
		7/30/16
Filed on:		7/14/16
For Period End:		7/13/16
		6/30/16
		6/25/16
		6/13/16		8-K
		5/1/16
		4/30/16		10-Q
		1/30/16		10-K
		6/27/15
		5/3/15
		5/2/15		10-Q
		1/31/15		10-K
		2/1/14		10-K
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Filing Submission 0001193125-16-647678   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

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