Attached files
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8-K - FORM 8-K - TOYS R US INC | d8k.htm |
EX-99.2 - TOYS DELAWARE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - TOYS R US INC | dex992.htm |
Exhibit 99.1
CONDENSED FINANCIAL STATEMENTS
OF
TOYS R US PROPERTY COMPANY II, LLC
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2010
TOYS R US PROPERTY COMPANY II, LLC
TABLE OF CONTENTS
PAGE | ||
Item 1. Financial Statements (Unaudited) |
||
Condensed Balance Sheets as of July 31, 2010 and January 30, 2010 |
3 | |
Condensed Statements of Operations for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 |
4 | |
Condensed Statements of Cash Flows for the twenty-six weeks ended July 31, 2010 and August 1, 2009 |
5 | |
Condensed Statements of Changes in Members Deficit for the twenty-six weeks ended July 31, 2010 and August 1, 2009 |
6 | |
Notes to Condensed Financial Statements |
7 | |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
11 |
2
Item 1. | Financial Statements |
TOYS R US PROPERTY COMPANY II, LLC
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands ) |
July 31, 2010 |
January 30, 2010 |
||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash |
$ | 10,464 | $ | 13,741 | ||||
Net properties held for sale |
- | 978 | ||||||
Due from affiliates, net |
442 | 258 | ||||||
Total current assets |
10,906 | 14,977 | ||||||
Real Estate, Net: |
||||||||
Land |
169,937 | 168,340 | ||||||
Buildings, net |
174,655 | 176,287 | ||||||
Leasehold improvements, net |
56,151 | 60,443 | ||||||
Total real estate, net |
400,743 | 405,070 | ||||||
Straight-line rent receivable from affiliates |
37,933 | 30,720 | ||||||
Debt issuance costs, net |
25,803 | 27,287 | ||||||
$ | 475,385 | $ | 478,054 | |||||
LIABILITIES AND MEMBERS DEFICIT |
||||||||
Current Liabilities: |
||||||||
Accrued interest and other current liabilities |
$ | 10,308 | $ | 13,647 | ||||
Deferred related party revenue |
- | 243 | ||||||
Total current liabilities |
10,308 | 13,890 | ||||||
Deferred rent liabilities |
12,908 | 9,981 | ||||||
Long-term debt |
715,339 | 714,849 | ||||||
Members deficit |
(263,170 | ) | (260,666 | ) | ||||
$ | 475,385 | $ | 478,054 | |||||
See Notes to Condensed Financial Statements.
3
TOYS R US PROPERTY COMPANY II, LLC
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks Ended | 26 Weeks Ended | |||||||||||
(In thousands ) |
July 31, 2010 |
August 1, 2009 |
July 31, 2010 |
August 1, 2009 | ||||||||
Rental revenues: |
||||||||||||
Base rents |
$ | 27,198 | $ | 18,431 | $ | 53,760 | $ | 36,862 | ||||
Tenant reimbursements |
3,214 | 3,353 | 6,546 | 6,639 | ||||||||
Total revenues |
30,412 | 21,784 | 60,306 | 43,501 | ||||||||
Depreciation |
3,027 | 3,149 | 6,089 | 6,308 | ||||||||
Common area maintenance expenses |
3,214 | 3,353 | 6,546 | 6,639 | ||||||||
Rental expense |
1,295 | 755 | 2,056 | 1,510 | ||||||||
Other operating expenses, net |
416 | 577 | 835 | 1,155 | ||||||||
Total operating expenses |
7,952 | 7,834 | 15,526 | 15,612 | ||||||||
Operating earnings |
22,460 | 13,950 | 44,780 | 27,889 | ||||||||
Interest expense, net |
16,460 | 3,701 | 33,014 | 7,509 | ||||||||
Earnings from continuing operations |
6,000 | 10,249 | 11,766 | 20,380 | ||||||||
Earnings from discontinued operations |
- | 2,384 | - | 4,722 | ||||||||
Net earnings |
$ | 6,000 | $ | 12,633 | $ | 11,766 | $ | 25,102 | ||||
See Notes to Condensed Financial Statements.
4
TOYS R US PROPERTY COMPANY II, LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
26 Weeks Ended | ||||||||
(In thousands ) |
July 31, 2010 |
August 1, 2009 |
||||||
Cash Flows from Operating Activities: |
||||||||
Net earnings |
$ | 11,766 | $ | 25,102 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Depreciation |
6,089 | 8,347 | ||||||
Amortization of debt issuance costs |
1,746 | 1,689 | ||||||
Amortization of original issue discount |
490 | - | ||||||
Changes in operating assets and liabilities: |
||||||||
Straight-line rent assets and deferred rent liabilities |
(6,452 | ) | (3,756 | ) | ||||
Accrued interest and other current liabilities |
(3,478 | ) | 1,838 | |||||
Deferred related party revenue |
(243 | ) | (212 | ) | ||||
Due from affiliates, net |
(184 | ) | 925 | |||||
Net cash provided by operating activities |
9,734 | 33,933 | ||||||
Cash Flows from Investing Activities: |
||||||||
Increase in restricted cash |
- | (1,818 | ) | |||||
Net cash used in investing activities |
- | (1,818 | ) | |||||
Cash Flows from Financing Activities: |
||||||||
Capital contributions |
1,238 | - | ||||||
Capitalized debt issuance/extension costs |
(123 | ) | - | |||||
Distributions |
(14,126 | ) | (32,115 | ) | ||||
Net cash used in financing activities |
(13,011 | ) | (32,115 | ) | ||||
Cash: |
||||||||
Net decrease during period |
(3,277 | ) | - | |||||
Cash at beginning of period |
13,741 | - | ||||||
Cash at end of period |
$ | 10,464 | $ | - | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Interest paid |
$ | 32,696 | $ | 6,896 | ||||
Non-Cash Financing Information |
||||||||
Decrease in carrying value of net assets previously acquired |
$ | (2,166 | ) | $ | - | |||
Contribution of properties, net |
$ | 784 | $ | - |
See Notes to Condensed Financial Statements.
5
TOYS R US PROPERTY COMPANY II, LLC
CONDENSED STATEMENTS OF CHANGES IN MEMBERS DEFICIT
(Unaudited)
(In thousands) |
Members Deficit | |||
Balance, January 31, 2009 |
$ | (193,086 | ) | |
Net earnings for the period |
25,102 | |||
Total comprehensive income |
25,102 | |||
Distributions |
(32,115 | ) | ||
Balance, August 1, 2009 |
$ | (200,099 | ) | |
Balance, January 30, 2010 |
$ | (260,666 | ) | |
Net earnings for the period |
11,766 | |||
Total comprehensive income |
11,766 | |||
Capital contributions |
1,238 | |||
Contribution of properties, net |
784 | |||
Adjustment to the carrying value of net assets previously acquired |
(2,166 | ) | ||
Distributions |
(14,126 | ) | ||
Balance, July 31, 2010 |
$ | (263,170 | ) | |
See Notes to Condensed Financial Statements.
6
TOYS R US PROPERTY COMPANY II, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation
As used herein, the Company, we, us, or our means Toys R Us Property Company II, LLC (formerly known as Giraffe Properties, LLC (TRU Propco II)), except as expressly indicated or unless the context otherwise requires. TRU Propco II was formed on July 21, 2005 as part of a legal reorganization of the businesses of Toys R Us, Inc. (TRU). TRU owns or licenses Toys R Us and Babies R Us stores in the United States and foreign countries and jurisdictions. We are ultimately owned by TRU through our indirect parent, Toys R Us-Delaware, Inc. (Toys-Delaware), to whom we lease or sublease substantially all of our properties and from whom we derive substantially all of our revenues and cash flows.
As a result of the reorganization, the Company received, as contributions from Toys-Delaware and other affiliates, certain properties which we now lease to Toys-Delaware. As the reorganization was between entities under common control, the net assets transferred were recorded at their historical costs.
Fiscal 2009 Reorganization and Acquisition of Assets Under Common Control
On November 20, 2009, we acquired substantially all of the net assets (the Transaction) of our affiliate, MPO Holdings, LLC and its consolidated subsidiaries. MPO Holdings, LLC (MPO) was directly owned by TRU and also leased or subleased substantially all of its 46 properties to Toys-Delaware. MPO was also formed on July 21, 2005 as a result of the reorganization referred to above and received properties from affiliated entities which were recorded at their historical costs. As the Transaction was between entities under common control, we are required to reflect the Transaction in these financial statements as if it had occurred as of the beginning of the earliest period presented with prior year MPO financial information combined retrospectively for all periods presented and the net assets transferred were recorded at their historical costs. Additionally, in connection with the Transaction, we transferred six properties to Toys-Delaware in exchange for a portion of the properties formerly owned by MPO (refer to Note 3 entitled Discontinued operations for further details). As a result of the Transaction, we now own or lease a total of 129 properties in the United States all of which we lease or sublease to Toys-Delaware.
The Condensed Balance Sheets as of July 31, 2010 and January 30, 2010, the Condensed Statements of Operations, the Condensed Statements of Cash Flows and the Condensed Statements of Changes in Members Deficit for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009, have been prepared by us in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim reporting. Our interim Condensed Financial Statements are unaudited and are subject to year-end adjustments. In the opinion of management, the financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six weeks then ended. The Condensed Balance Sheet at January 30, 2010, presented herein, has been derived from our audited balance sheet in our Annual Report furnished as an exhibit to TRUs Form 8-K filed on April 30, 2010 for the fiscal year ended January 30, 2010, but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the financial statements and footnotes thereto included within our Annual Report furnished as an exhibit to TRUs Form 8-K filed on April 30, 2010 for the fiscal year ended January 30, 2010, as well as the registration statement under the Securities Act of 1933 which was filed on August 4, 2010. The results of operations for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 are not necessarily indicative of operating results of the full year.
Prior Period Correction
In the second quarter of fiscal 2010, we recorded an approximate $3 million adjustment to increase Deferred rent liabilities on our Condensed Balance Sheet to correct a cumulative prior period straight-line lease accounting error. A portion of this correction related to the understatement of straight-line lease expense that occurred prior to the fiscal 2005 reorganization transactions when the related assets were sold to us from affiliates. As a result, the carrying value of the net assets sold to us during these transactions was overstated by approximately $2 million and was recorded as an increase in Members Deficit. The remaining portion of the correction of approximately $1 million increased Rental expense on the Condensed Statement of Operations. In addition, in connection with our master lease agreements, a corresponding correcting adjustment was recorded of approximately $1 million to increase Base rents on the Condensed Statement of Operations and Straight-line rent receivable from affiliates on the Condensed Balance Sheet for the period subsequent to the fiscal 2005 reorganization. Management concluded that this correction did not have a material impact on the current or any previously reported financial statements.
7
Subsequent Events
We have performed an evaluation of subsequent events through September 14, 2010, the date these financial statements were issued. Subsequent events, if any, have been disclosed in the related footnotes.
2. Real estate, net
(In thousands) |
July 31, 2010 |
January
30, 2010 | ||||||
Land |
$ | 169,937 | $ | 168,340 | ||||
Buildings |
273,285 | 273,059 | ||||||
Capital improvements |
132,173 | 134,268 | ||||||
575,395 | 575,667 | |||||||
Less: accumulated depreciation |
(174,652) | (170,597) | ||||||
Total |
$ | 400,743 | $ | 405,070 | ||||
Net properties held for sale
The following asset was classified as held for sale:
(In thousands) |
January
30, 2010 | |||
Land |
$ | 332 | ||
Buildings |
841 | |||
Leasehold improvements |
489 | |||
1,662 | ||||
Less: accumulated depreciation |
(684) | |||
Total |
$ | 978 | ||
The above classified as Net properties held for sale on the Condensed Balance Sheet as of January 30, 2010 has been distributed to our indirect parent, Toys-Delaware in exchange for a contribution of properties. These transactions resulted in a Contribution of properties, net of approximately $1 million which has been recorded in our Condensed Statement of Changes in Members Deficit as of July 31, 2010.
3. Discontinued operations
On November 20, 2009, we transferred six properties, including four distribution centers to Toys-Delaware (the Transferred Properties) and received in exchange a portion of the properties formerly owned by MPO. The carrying amount of the net assets transferred out was approximately $149 million. We have reported the operating results for the Transferred Properties as Earnings from discontinued operations in our Condensed Statements of Operations for the thirteen and twenty-six weeks ended August 1, 2009.
The operating results of discontinued operations through November 20, 2009 were derived from our historical financial information and have been segregated from continuing operations and reported separately in the Condensed Statement of Operations for the thirteen and twenty-six weeks ended August 1, 2009. These amounts have been summarized for fiscal periods presented below:
8
Thirteen weeks ended August 1,2009: | |||||
(In thousands) | |||||
Total revenues |
$ | 4,930 | |||
Earnings from discontinued operations |
$ | 2,384 | |||
Twenty-six weeks ended August 1, 2009: | |||||
(In thousands ) | |||||
Total revenues |
$ | 9,860 | |||
Earnings from discontinued operations |
$ | 4,722 | |||
4. Long-term debt
On November 20, 2009, we completed the offering of $725 million aggregate principal amount of senior secured 8.50% notes due 2017 (the Secured Notes). The indenture governing the Secured Notes contains covenants, including, among other things, covenants that restrict our ability to incur additional indebtedness, pay dividends or make other distributions, make other restricted payments and investments and create liens. The indenture governing the Secured Notes also contains covenants that limit the ability of TRU to cause or permit Toys-Delaware to incur indebtedness or make restricted payments.
On August 4, 2010, pursuant to a registration rights agreement that we entered into in connection with the offering of the Secured Notes, we filed a registration statement under the Securities Act of 1933 for an exchange offer for the Secured Notes. As of the date of this filing, this registration statement had not been declared effective.
Refer to the annual financial statements included within our registration statement filed on August 4, 2010 for further details on indebtedness.
As of each of July 31, 2010 and January 30, 2010, the carrying value of our debt was $715 million, with fair values of approximately $761 million and $747 million, respectively. The fair values of our long-term debt are estimated using the quoted market prices for the same or similar issues.
5. Members deficit
Giraffe Junior Holdings, LLC, an indirect wholly-owned subsidiary of TRU, is the direct owner of 100% of the limited liability company interest in us. We evaluate our cash balances on an ongoing basis and periodically distribute cash to our parent companies. During the twenty-six weeks ended July 31, 2010, we made cash distributions of $12 million and $2 million in dividends and return of capital, respectively. During the twenty-six weeks ended August 1, 2009, we made cash distributions of $25 million and $7 million in dividends and return of capital, respectively.
During the twenty-six weeks ended August 31, 2009, MPO made cash distributions of $6 million and $2 million in dividends and return of capital, respectively.
During the twenty-six weeks ended July 31, 2010, we received a capital contribution of approximately $1 million from Giraffe Junior Holdings, LLC.
As described in Note 1 entitled Basis of presentation, we have recorded an approximate $2 million Adjustment to the carrying value of net assets previously acquired on the Condensed Statement of Changes in Members Deficit to correct the initial carrying value of net assets contributed to us as part of the fiscal 2005 reorganization transactions. Management concluded that this correction did not have a material impact on the current or any previously reported financial statements.
Additionally, during the twenty-six weeks ended July 31, 2010, we received a contribution of properties of approximately $0.8 million from our indirect parent, Toys-Delaware. Refer to Note 2 entitled Real estate, net for further details.
6. Related party transactions
Rental Revenues
Our rental revenue reflected in these Condensed Financial Statements was derived from leasing arrangements we have entered into with Toys-Delaware. The master lease agreements provided for Toys-Delaware to reimburse us for property related costs including real estate taxes and common area maintenance charges. Some of these costs are directly paid by Toys-Delaware and we record such costs both as an expense and a tenant reimbursement. During the thirteen weeks ended July 31, 2010 and August 1, 2009, we earned related party Base rent revenues of approximately $27 million and $22 million, respectively. During the twenty-six weeks ended July
9
31, 2010 and August 1, 2009, we earned related party Base rent revenues of approximately $54 million and $45 million, respectively. In addition, under our leasing arrangements with Toys-Delaware, during the thirteen weeks ended July 31, 2010 and August 1, 2009, we recorded Tenant reimbursements of approximately $3 million and $4 million, respectively, and during the twenty-six weeks ended July 31, 2010 and August 1, 2009, we recorded Tenant reimbursements of approximately $7 million and $9 million, respectively.
Management Service Fees
Toys-Delaware provides a majority of the centralized corporate functions, including accounting, human resources, legal, tax and treasury services to TRU, other affiliates and us under a Domestic Service Agreement (Agreement). The costs are based on a formula for each affiliate, as defined in the Agreement. During each of the thirteen week periods ended July 31, 2010 and August 1, 2009, the amount charged to us for these services was less than $1 million. During each of the twenty-six week periods ended July 31, 2010 and August 1, 2009, the amount charged to us for these services was approximately $1 million.
Additionally, during the twenty-six weeks ended July 31, 2010, we received a contribution of properties of approximately $0.8 million from our indirect parent, Toys-Delaware. Refer to Note 2 entitled Real estate, net for further details.
7. Due from affiliates, net
As of July 31, 2010 and January 30, 2010, Due from affiliates, net of less than $1 million, respectively, primarily represents base rents owed to us by Toys-Delaware.
8. Recent accounting pronouncements
In March 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11). ASU 2010-11 clarifies the only form of embedded credit derivative that is exempt from embedded derivative bifurcation requirements is one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in this ASU are effective at the beginning of a reporting entitys first fiscal quarter beginning after June 15, 2010. The adoption of ASU 2010-11 is not expected to have a material impact on the Condensed Financial Statements.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
As used herein the Company, we, us, or our means Toys R Us Property Company II, LLC (formerly known as Giraffe Properties, LLC (TRU Propco II)), except as expressly indicated or unless the content otherwise requires. The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with our Condensed Financial Statements and the accompanying notes thereto, and contains forward-looking statements that involve risks and uncertainties. See Forward-Looking Statements below.
Our Business
We are a special purpose entity owned indirectly by Toys R Us Delaware, Inc (Toys-Delaware). We own fee and leasehold interests in 129 properties in various retail markets throughout the United States. Under an operating company/property company structure, we lease these properties on a triple-net basis to Toys-Delaware, the operating entity for all of Toys R Us, Inc.s (TRU) North American businesses. Substantially all of our revenues and cash flows are derived from payments from Toys-Delaware under the Amended and Restated Master Lease Agreement (the TRU Propco II Master Lease). For quarterly financial statements and other information about our master tenant, Toys-Delaware, see exhibit number 99.2 within the Current Report on Form 8-K furnished by TRU on September 14, 2010.
Results of Operations
Earnings from Continuing Operations
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||
Earnings from continuing operations |
$ 6,000 | $ 10,249 | $ (4,249) | (41.5)% | $ 11,766 | $ 20,380 | $ (8,614) | (42.3)% | ||||||||
Earnings from continuing operations decreased by $4.2 million, or 41.5%, to $6.0 million for the thirteen weeks ended July 31, 2010, compared to $10.2 million for the thirteen weeks ended August 1, 2009. Earnings from continuing operations decreased primarily due to an increase of $12.8 million in Interest expense, net, partially offset by an increase of $8.6 million in Total revenues due primarily to an increase in Base rents.
| ||||||||||||||||
Earnings from continuing operations decreased by $8.6 million, or 42.3%, to $11.8 million for the twenty-six weeks ended July 31, 2010, compared to $20.4 million for the twenty-six weeks ended August 1, 2009. Earnings from continuing operations decreased primarily due to an increase of $25.5 million in Interest expense, net, partially offset by an increase of $16.8 million in Total revenues due primarily to an increase in Base rents.
| ||||||||||||||||
Total Revenues
| ||||||||||||||||
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 | $ Change | % Change | ||||||||
Total revenues |
$ 30,412 | $ 21,784 | $ 8,628 | 39.6% | $ 60,306 | $ 43,501 | $ 16,805 | 38.6% | ||||||||
Total revenues increased by $8.6 million, or 39.6%, to $30.4 million for the thirteen weeks ended July 31, 2010, compared to $21.8 million for the thirteen weeks ended August 1, 2009, and increased by $16.8 million, or 38.6%, to $60.3 million for the twenty-six weeks ended July 31, 2010, compared to $43.5 million for the twenty-six weeks ended August 1, 2009. The increases in both periods were primarily due to increases in Base rents as a result of the amendments in the TRU Propco II Master Lease on November 20, 2009 and a $0.6 million straight-line lease accounting non-cash charge related to prior periods
| ||||||||||||||||
Depreciation
| ||||||||||||||||
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||
Depreciation |
$ 3,027 | $ 3,149 | $ (122) | (3.9)% | $ 6,089 | $ 6,308 | $ (219) | (3.5)% |
Depreciation decreased by $0.1 million, or 3.9%, to $3.0 million for the thirteen weeks ended July 31, 2010, compared to $3.1 million
11
for the thirteen weeks ended August 1, 2009, and decreased by $0.2 million, or 3.5%, to $6.1 million for the twenty-six weeks ended July 31, 2010, compared to $6.3 million for the twenty-six weeks ended August 1, 2009.
Common Area Maintenance Expenses
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||
Common area maintenance expenses |
$ 3,214 | $ 3,353 | $ (139) | (4.1)% | $ 6,546 | $ 6,639 | $ (93) | (1.4)% |
Common area maintenance expenses decreased by $0.1 million, or 4.1%, to $3.2 million for the thirteen weeks ended July 31, 2010, compared to $3.3 million for the thirteen weeks ended August 1, 2009, and decreased by $0.1 million, or 1.4%, to $6.5 million for the twenty-six weeks ended July 31, 2010, compared to $6.6 million for the twenty-six weeks ended August 1, 2009. These expenses are fully reimbursed by our tenant under the TRU Propco II Master Lease, and are reflected in Tenant reimbursements, which is a component of Total revenues.
Rental Expense
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||
Rental expense |
$ 1,295 | $ 755 | $ 540 | 71.5% | $ 2,056 | $ 1,510 | $ 546 | 36.2% |
Rental expense increased by $0.5 million, or 71.5%, to $1.3 million for the thirteen weeks ended July 31, 2010, compared to $0.8 million for the thirteen weeks ended August 1, 2009, and increased by $0.5 million, or 36.2%, to $2.0 million for the twenty-six weeks ended July 31, 2010, compared to $1.5 million for the twenty-six weeks ended August 1, 2009. The increases for both periods were primarily due to a $0.6 million straight-line lease accounting non-cash charge related to prior periods. These expenses are fully reimbursed by our tenant under the TRU Propco II Master Lease, and are reflected in Base rents, which is a component of Total revenues.
Other Operating Expenses, net
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||
Other operating expenses, net |
$ 416 | $ 577 | $ (161) | (27.9)% | $ 835 | $ 1,155 | $ (320) | (27.7)% |
Other operating expenses, net decreased by $0.2 million, or 27.9%, to $0.4 million for the thirteen weeks ended July 31, 2010, compared to $0.6 million for the thirteen weeks ended August 1, 2009, and decreased by $0.3 million, or 27.7%, to $0.8 million for the twenty-six weeks ended July 31, 2010, compared to $1.1 million for the twenty-six weeks ended August 1, 2009. The decreases in both periods were primarily due to decreases in management service fees. See Note 6 to the Condensed Financial Statements entitled Related party transactions for further details.
Interest Expense, net
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
($ In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||
Interest expense, net |
$ 16,460 | $ 3,701 | $ 12,759 | 344.7% | $ 33,014 | $ 7,509 | $ 25,505 | 339.7% |
Interest expense, net increased by $12.8 million, or 344.7%, to $16.5 million for the thirteen weeks ended July 31, 2010, compared to $3.7 million for the thirteen weeks ended August 1, 2009, and increased by $25.5 million, or 339.7%, to $33.0 million for the twenty-six weeks ended July 31, 2010, compared to $7.5 million for the twenty-six weeks ended August 1, 2009. The increases in Interest expense, net were primarily due to higher effective interest rates related to the Secured Notes, partially offset by a reduction in average debt balances due to the prior year refinancing.
12
Earnings from Discontinued Operations
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||
($ In thousands ) |
July 31, 2010 |
August 1, 2009 |
$ Change | % Change | July 31, 2010 |
August 1, 2009 |
$ Change | % Change | ||||||||||||||||||
Earnings from discontinued operations |
$ | - | $ | 2,384 | $ | (2,384 | ) | (100 | )% | $ | - | $ | 4,722 | $ | (4,722 | ) | (100 | )% |
Earnings from discontinued operations decreased by $2.4 million, or 100%, for the thirteen weeks ended July 31, 2010, compared to the thirteen weeks ended August 1, 2009, and decreased by $4.7 million, or 100%, for the twenty-six weeks ended August 1, 2009. The decreases were due to the operations of the six properties transferred to Toys-Delaware being included in our operating results for the thirteen and twenty-six weeks ended August 1, 2009, respectively, while no longer being included in current year operating results as they were sold on November 20, 2009. See Note 3 to the Condensed Financial Statements entitled Discontinued operations for further details.
Liquidity and Capital Resources
Overview
As of July 31, 2010, we were in compliance with all of our covenants related to the Secured Notes.
Our largest source of operating cash flows is cash collections from our lessee, Toys-Delaware. In general, we utilize our cash to service debt, pay normal operating costs and, at the discretion of our board of directors and as permitted by the indenture governing the Secured Notes, declare and pay dividends to our indirect parent, Toys-Delaware. We have been able to meet our operating cash needs principally by using cash on hand and cash flows from operations and we believe that cash generated from operations along with existing cash will be sufficient to fund expected cash flow requirements for the next twelve months.
Cash Flows
26 Weeks Ended | ||||||||||||
(In thousands) |
July 31, 2010 |
August 1, 2009 |
$ Change | |||||||||
Net cash provided by operating activities |
$ | 9,734 | $ | 33,933 | $ | (24,199 | ) | |||||
Net cash used in investing activities |
- | (1,818 | ) | 1,818 | ||||||||
Net cash used in financing activities |
(13,011 | ) | (32,115 | ) | 19,104 | |||||||
Net decrease during period in cash |
$ | (3,277 | ) | $ | - | $ | (3,277 | ) | ||||
Cash Flows Provided by Operating Activities
Net cash provided by operating activities for the twenty-six weeks ended July 31, 2010 was $9.7 million, a decrease of $24.2 million compared to the same period last year. The decrease in cash provided by operating activities was primarily due to higher effective interest rates, which resulted in a $25.8 million increase in interest payments made during the period.
Cash Flows Used in Investing Activities
Net cash used in investing activities for the twenty-six weeks ended July 31, 2010 decreased by $1.8 million compared to the same period last year. The decrease in net cash used in investing activities was due to the release of all restricted cash.
Cash Flows Used in Financing Activities
Net cash used in financing activities for the twenty-six weeks ended July 31, 2010 was $13.0 million, a decrease of $19.1 million compared to the same period last year. The decrease in net cash used in financing activities was primarily due to a decrease of $18.0 million in Distributions and an increase in Capital contributions of $1.2 million.
Debt
During the thirteen weeks ended July 31, 2010, there have been no significant changes to our debt structure. Refer to Note 4 to our Condensed Financial Statements entitled Long-term debt for further details related to our debt structure.
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Subsequent event
On August 4, 2010, pursuant to a registration rights agreement that we entered into in connection with the November 2009 offering of the 8.50% Senior Secured Notes, due fiscal 2017, we filed a registration statement under the Securities Act of 1933. As of the date of this filing, this registration statement had not been declared effective.
Contractual Obligations and Commitments
Our contractual obligations consist mainly of payments related to Long-term debt and related interest and operating leases related to real estate used in the operation of our business. Refer to the Contractual Obligations and Commitments section of the Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report furnished as an exhibit to TRUs Form 8-K filed on April 30, 2010 for the fiscal year ended January 30, 2010, for details on our contractual obligations and commitments.
Critical Accounting Policies
Our Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical experience and on other factors that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and could have a material impact on our Condensed Financial Statements. Refer to the Critical Accounting Policies section of the Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report furnished as an exhibit to TRUs Form 8-K filed on April 30, 2010 for the fiscal year ended January 30, 2010, for a discussion of critical accounting policies.
Recently Adopted Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06). This ASU provides amendments that will require more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 did not have impact on the Condensed Financial Statements.
Refer to Note 8 to the Condensed Financial Statements entitled Recent accounting pronouncements for a discussion of accounting standards which we have not yet been required to implement and may be applicable to our future operations, and their impact on our Condensed Financial Statements.
Forward-Looking Statements
This Managements Discussion and Analysis of Financial Condition and Results of Operations 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. All statements herein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases, such as anticipate, estimate, plan, expect, believe, intend, foresee, will, may, and similar words or phrases. These statements discuss, among other things, our strategy, future financial or operational performance, anticipated cost savings, results of restructurings, cash generated from operating activities, anticipated developments, future financings, targets and future occurrences and trends.
These statements are subject to risks, uncertainties, and other factors, including, among others, competition in the retail industry, seasonality of Toys-Delawares business, changes in consumer preferences and consumer spending patterns, general economic conditions in the United States and other countries in which we and Toys-Delaware conduct our business, Toys-Delawares ability to implement its strategy, our, Toys-Delawares and TRUs respective substantial level of indebtedness and related debt-service obligations and the covenants in their and our respective debt agreements, availability of adequate financing to us, Toys-Delaware and TRU, Toys-Delawares dependence on key vendors of merchandise, international events affecting the delivery of toys and other products to Toys-Delawares stores, and such risks, uncertainties and factors associated with ours, Toys-Delawares and TRUs business. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or
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outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in any forward-looking statement.
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