TYCO TOYS INC, 10-Q, 1994-11-14

TYCO TOYS INC
10-Q, 1994-11-14
GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES)

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<PAGE>

SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1994
------------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____

Commission File Number 1-9357
------

TYCO TOYS, INC.
--------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Delaware 13-3319358
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)

6000 Midlantic Drive, Mt. Laurel, New Jersey 08054
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code (609) 234-7400
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.

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, and (2) has been subject to such filing requirements
for the past 90 days.

YES X NO
------- -------

Number of shares outstanding of each class of Registrant's Stock as of
November 11, 1994:
Common, $.01 par value.............................. 34,702,726 shares
Preferred, 6% Series B, $.10 par value.............. 48,928 shares
<PAGE>

TYCO TOYS, INC. AND SUBSIDIARIES

FORM 10-Q

SEPTEMBER 30, 1994

INDEX

Part I.Financial Information Page
- ---------------------------- ----

Item 1. Financial Statements

Consolidated Balance Sheets - September 30, 1994 and 1993
and December 31, 1993 3

Consolidated Statements of Operations - Quarters and
Nine Months Ended September 30, 1994 and 1993 4

Consolidated Statements of Stockholders' Equity -
Nine Months Ended September 30, 1994 and
Year Ended December 31, 1993 5

Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1994 and 1993 6

Notes to Consolidated Financial Statements 7-11

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-14

Part II. Other Information
- -----------------------------

Item 1. Legal Proceedings 15

Item 5. Other Information 15

Item 6. Exhibits and Reports on Form 8-K 15

- 2 -
<PAGE>

Part I. Financial Information.
Item 1. Financial Statements.

TYCO TOYS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>

September 30, December 31,
----------------- ------------
1994 1993 1993
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 16,488 $ 13,214 $ 32,036
Receivables, net 289,161 283,384 219,232
Inventories, net 113,224 154,231 93,902
Prepaid expenses and
other current assets 23,086 27,416 27,187
Deferred taxes 17,389 26,113 16,489
------- ------- -------
Total current assets 459,348 504,358 388,846

Property and equipment, net 50,211 68,840 50,182

Other assets
Goodwill, net 232,738 243,492 235,824
Deferred taxes 25,635 - 25,635
Other assets 18,375 19,808 14,682
------- ------- -------
Total other assets 276,748 263,300 276,141
------- ------- -------
Total assets $786,307 $836,498 $715,169
======= ======= =======

Liabilities and Stockholders' Equity
Current liabilities
Notes and acceptances payable $117,533 $106,827 $ 68,963
Current portion of long-term debt 25,272 15,133 15,259
Accounts payable 53,346 69,063 62,602
Accrued expenses and other current
liabilities 125,608 113,332 109,681
------- ------- -------
Total current liabilities 321,759 304,355 256,505

Long-term debt, net of current portion 147,302 184,312 179,771
Deferred income taxes and other liabilities 1,758 5,910 1,444

Stockholders' Equity
Preferred stock, 6% Series B voting
convertible, exchangeable, $.10 par
value, 1,000,000 shares authorized;
48,214 shares issued and outstanding 5 - -
Common stock, $.01 par value, 50,000,000
shares authorized; 34,878,316 shares
issued as of September 30, 1994 and
34,847,316 shares issued as of
September 30, 1993 and December 31, 1993 347 347 347
Additional paid-in capital 343,010 294,045 294,500
Retained earnings (deficit) (14,348) 65,444 7,298
Treasury stock, at cost; 175,590 shares (1,595) (1,595) (1,595)
Cumulative translation adjustment (11,931) (16,320) (23,101)
------- ------- -------
Total stockholders' equity 315,488 341,921 277,449
------- ------- -------
Total liabilities and stockholders' equity $786,307 $836,498 $715,169
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

-3-
<PAGE>

Tyco Toys, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

For the Quarters Ended For the Nine Months Ended
September 30, September 30,
---------------------- -------------------------
1994 1993 1994 1993
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $241,085 $235,251 $506,330 $482,238
Cost of goods sold 143,501 134,613 295,086 272,365
------- ------- ------- -------
Gross profit 97,584 100,638 211,244 209,873

Marketing, advertising and
promotion 50,535 49,798 114,999 111,910
Selling, distribution and
administrative expenses 30,425 35,181 86,645 92,789
Restructuring charge 4,700 - 4,700 -
Amortization of goodwill 1,617 1,685 4,769 4,883
------- ------- ------- -------
Total operating expenses 87,277 86,664 211,113 209,582
------- ------- ------- -------
Operating income (loss) 10,307 13,974 131 291

Interest and debt expense 8,298 6,561 21,732 17,518
Foreign exchange (gain)
loss (290) 1,232 799 1,982
Other (income) expense, net 263 (272) (2,129) (1,744)
------- ------- ------- -------
Interest and other
expense, net 8,271 7,521 20,402 17,756
------- ------- ------- -------
Income (loss) before income
taxes (benefit) 2,036 6,453 (20,271) (17,465)
Provision (benefit) for
income taxes 10,139 1,767 - (5,671)
------- ------- ------- -------
Net income (loss) (8,103) 4,686 (20,271) (11,794)

Preferred stock dividend 750 - 1,375 -
------- ------- ------- -------
Net income (loss)
available to common
shareholders $ (8,853) $ 4,686 $(21,646) $(11,794)
======= ======= ======= =======
Net income (loss) per
common share:
Primary $ (0.26) $ 0.14 $ (0.62) $ (0.35)
Fully diluted $ (0.26) $ 0.13 $ (0.62) $ (0.35)

Weighted average number of
common shares outstanding:
Primary 34,683 34,669 34,679 33,232
Fully diluted 34,683 36,104 34,679 33,232
Dividends per common share $ - $ 0.025 $ - $ 0.075
</TABLE>

See accompanying notes to consolidated financial statements.

-4-
<PAGE>

Tyco Toys, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Year ended December 31, 1993
and Nine Months Ended September 30, 1994 (unaudited)
(in thousands)

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock
--------------- ------------ --------------------------- --------------
Number Number Retained Number Cumulative
of Par of Par Preferred Common Earnings of Translation
Shares Value Shares Value Stock Stock (Deficit) Shares Amount Adjustment
------ ----- ------ ----- --------- ------ --------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 - $- 31,830 $320 $ - $271,417 $ 79,769 176 $(1,595) $(14,670)

Exercise of stock options - - 170 1 - 612 - - - -
Exercise of warrants - - 2,672 26 - 22,017 - - - -
Foreign currency translation - - - - - - - - - (8,431)
Dividends declared - - - - - - (2,531) - - -
Tax benefit from exercise of
stock options - - - - - 454 - - - -
Net loss - - - - - - (69,940) - - -
-- -- ------ ---- ------- -------- -------- --- ------- --------
Balance at December 31, 1993 - - 34,672 347 - 294,500 7,298 176 (1,595) (23,101)

Exercise of stock options - - 31 - - 139 - - - -
Issuance of preferred stock 48 5 - - 46,996 - - - - -
Preferred stock dividend - - - - 1,375 - (1,375) - - -
Foreign currency translation - - - - - - - - - 11,170
Net loss - - - - - - (20,271) - - -
-- -- ------ ---- ------- -------- -------- --- ------- --------
Balance at September 30, 1994 48 $5 34,703 $347 $48,371 $294,639 $(14,348) 176 $(1,595) $(11,931)
== == ====== ==== ======= ======== ======== === ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

-5-
<PAGE>

Tyco Toys, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1994 1993
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(20,271) $ (11,794)
Adjustments to reconcile net loss to net cash
utilized by operating activities:
Depreciation 16,579 17,329
Amortization 6,240 5,068
Decrease in allowance for bad debts, returns,
discounts and other receivable reserves (13,246) (31,519)
Decrease in allowance for obsolescence and
other inventory reserves (2,176) (5,951)
Change in assets and liabilities:
Increase in receivables (47,457) (28,192)
Increase in inventories (9,789) (53,684)
Decrease in prepaid expenses and other current assets 5,041 1,517
(Increase) in other assets (4,874) (2,342)
Decrease in accounts payable (11,022) (10,707)
Increase in accrued expenses and other current
liabilities 13,209 12,441
------- ---------
Total adjustments (47,495) (96,040)
------- ---------
Net cash utilized by operating activities (67,766) (107,834)
------- ---------
Cash Flows From Investing Activities:
Disposition of property and equipment - 5,061
Capital expenditures (18,157) (24,084)
------- ---------
Net cash utilized by investing activities (18,157) (19,023)
------- ---------
Cash Flows From Financing Activities:
Repayment of long-term debt (10,894) (6,223)
Increase in notes and acceptances payable, net 48,570 79,686
Proceeds from issuance of preferred stock 47,000 -
Proceeds from issuance of common stock 139 22,655
Dividends paid to common shareholders - (1,664)
------- ---------
Net cash provided by financing activities 84,815 94,454
------- ---------
Effect of exchange rate changes on cash (14,440) (5,564)
------- ---------
Net Decrease in Cash and Cash Equivalents (15,548) (37,967)
Cash and Cash Equivalents, Beginning of Year 32,036 51,181
------- ---------
Cash and Cash Equivalents, End of Period $ 16,488 $ 13,214
======= =========
Cash Payments During Period For:
Interest $ 25,145 $ 20,289
Taxes 343 1,603

Non cash Financing Activities:
Convertible bonds issued in lieu of interest payments $ 962 $ -
Preferred stock dividends 1,375 -
</TABLE>

See accompanying notes to consolidated financial statements.

-6-
<PAGE>

TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements
include the accounts of Tyco Toys, Inc. (the Company, Tyco or Tyco Toys) and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in unconsolidated joint ventures and
other companies are accounted for on the equity method or cost basis depending
upon the level of the investment and/or the Company's ability to exercise
influence over operating and financial policies. In the opinion of management,
all adjustments (consisting of a normal recurring nature) considered necessary
for a fair presentation of results for interim periods have been made. Certain
items in the prior period's financial statements have been reclassified to
conform with the current year's presentation. Due to the seasonal nature of the
Company's business, the results of operations for the interim periods are not
necessarily indicative of the results for a full year. The unaudited financial
statements herein should be read in conjunction with the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 which was filed with the
Securities and Exchange Commission.

(2) Accounting For Income Taxes
---------------------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective January 1, 1993. There was
no cumulative effect on the deferred tax balances as a result of adopting this
pronouncement.

In accordance with SFAS 109, deferred income taxes reflect the impact of
temporary differences between values recorded for assets and liabilities for
financial reporting purposes and the values utilized for measurement in
accordance with current tax laws.

-7-
<PAGE>

TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The tax effects of the significant temporary differences giving rise to the
Company's deferred tax assets (liabilities) for the year ended December 31,
1993, which the adoption of SFAS 109 has required the Company to recognize, are
as follows (in thousands):

<TABLE>
<S> <C>
Current:
Sales and product allowances $ 4,790
Co-operative advertising 4,738
Receivable reserves 4,230
Obsolescence reserve 3,934
------
17,692
Valuation allowance (1,203)
------
$16,489
======
Noncurrent:
Net operating losses $48,461
State temporary differences 10,411
Foreign tax credits 5,269
Depreciation (1,885)
Other 5,983
------
68,239
Valuation allowance (42,604)
------
$25,635
======
</TABLE>

Management believes, considering all available evidence, including the Company's
history of earnings from prior years (after adjustments for nonrecurring items,
restructuring charges and permanent differences), it is more likely than not
that the Company will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of certain net operating losses and
tax credit carryforwards, and other temporary differences. The total net
deferred tax assets (both current and noncurrent) have been reduced by
establishing valuation allowances aggregating $43,807,000.

The valuation allowances have been established recognizing that certain tax
credit carryforwards and net operating loss carryforwards, which are limited
under income tax laws, may expire prior to their full utilization. The
valuation allowances include $16,836,000 related to the preacquisition net
operating losses of Matchbox and $174,000 related to the Company's Belgium
subsidiaries. Any subsequently recognized benefits related to these net
operating losses will be allocated to reduce goodwill. The valuation allowances
are generally established annually, when management undertakes a comprehensive
analysis. During interim periods, management makes its best estimate of year-
end balances in order to determine the interim tax provision. Changes to the
valuation allowance on an interim basis, however, are and will be made if
appropriate.

Based on the results for the first nine months of 1994, the Company announced in
October that it does not expect to be profitable for the year. Accordingly, the
$10,139,000 tax benefit recorded through June 30, 1994 was reversed in the third
quarter of 1994.

-8-
<PAGE>

TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

(3) Receivables, Net (in thousands):
----------------
<TABLE>
<CAPTION>
September 30,
----------------- December 31,
1994 1993 1993
------- ------- -----------
<S> <C> <C> <C>
Trade $323,256 $300,183 $262,330
Other receivables 9,325 10,197 13,568
Less:
Doubtful accounts 7,465 9,906 11,201
Returns, discounts and
other reserves 35,955 17,090 45,465
------- ------- -------
$289,161 $283,384 $219,232
======= ======= =======
</TABLE>

(4) Inventories, Net (in thousands):
----------------

September 30,
---------------- December 31,
1994 1993 1993
------- ------- -----------
<S> <C> <C> <C>
Raw materials $ 22,515 $ 32,647 $ 27,836
Work-in-process 2,606 3,823 2,355
Finished goods 102,348 125,257 80,132
Less obsolescence and other
reserves 14,245 7,496 16,421
------- ------- -------
$113,224 $154,231 $ 93,902
======= ======= =======
</TABLE>

(5) Legal Proceedings
-----------------
Italian Litigation
- ------------------
The former managing director of the Company's Italian sales and marketing
subsidiary initiated two court actions against the Company in Italy as the
result of the Company's previously announced decision to close or sell the
subsidiary. One action, alleging violations of Italian employment laws and
regulations, has been dismissed. The second action, alleging breach of a letter
of intent with the plaintiff for the sale of the subsidiary, resulted in the
sequestration of the Company's shares in the subsidiary and has prevented the
completion of the announced sale of the subsidiary to Giochi Preziosi S.A., an
Italian toy distributor. In the opinion of management and its outside counsel,
the Company has meritorious legal and factual defenses to the claims made in
this litigation; therefore, the outcome is not likely to have a material adverse
impact on the Company's earnings, financial condition or liquidity.

Lego Litigation
- ---------------

Tyco Industries, Inc. (Tyco Industries), a wholly-owned subsidiary of the
Company, has been a defendant in proceedings in Italy, the Netherlands, and in
the Federal Court of Canada in which Interlego A.G. (Lego) has asserted unfair
competition claims. The Company received a favorable ruling in the Italian
proceedings, the final appeal taken by Lego has been completed, and the parties
are awaiting final judgement. An adverse determination in any of these cases is
not, in the opinion of management, likely to have a material adverse impact on
the earnings, financial condition or liquidity of the Company.

-9-
<PAGE>

TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

Shareholder Suits
- -----------------
In October 1994, the U.S. District Court in New Jersey entered judgement in
favor of the Company in litigation filed in 1992 on behalf of the stockholders
alleging violations of federal securities laws. The plaintiff has appealed this
judgement.

In December 1993 and January 1994, two additional stockholders filed litigation
in the same court asserting claims under federal and state securities laws as a
result of the Company's financial performance in 1993. Both are class action
cases and have been consolidated.

The Company's outside counsel is of the opinion that the Company has substantial
and meritorious defenses to these claims and there is a likelihood that the
Company will prevail. Accordingly, it is the opinion of management that the
outcome of this litigation is not likely to have a material adverse effect on
the earnings, financial condition or liquidity of the Company.

U.S. Customs
- ------------
The U.S. Customs Service has issued a penalty notice of an assessment for lost
duty in the amount of $1,500,000, penalties for gross negligence of $5,800,000,
and penalties for fraud of $5,600,000. All of the claims arise from activities
of the Company's View-Master subsidiary for the period prior to its acquisition
by the Company in 1989. Management and the Company's outside counsel are of the
opinion that the Company has legal and factual defenses to the penalty claims
made by the U.S. Customs Service, and that the outcome of the proceedings
relating to these claims, which proceedings may be protracted, are not likely to
have a material adverse impact on the earnings, financial condition or liquidity
of the Company.

Environmental Litigation
- ------------------------
Tyco Industries is a party to three matters arising out of waste hauled by a
transporter to various sites, including the GEMS Landfill. In litigation
relating directly to remediation of the landfill, Tyco Industries has signed a
Consent Order and Trust Agreement and made a settlement contribution of an
amount not material to Tyco Industries. In another matter, the court has
certified class action claims of homeowners near the GEMS Landfill against
approximately 150 defendants, including Tyco Industries, for various types of
unspecified monetary damages, including punitive damages. In the third matter,
the New Jersey Department of Environmental Protection is asserting claims for
remediation expenses at a different site in Sewell, New Jersey, used as a waste
transfer station by the same transporter involved in the other two matters. In
management's opinion, there are meritorious factual and legal defenses to these
claims. Management of the Company and its outside counsel are of the opinion
that these three matters are not likely to have a material adverse impact on the
earnings, financial condition or liquidity of the Company. In addition, the
Company will receive a contribution from a third party towards certain expenses
in these matters.

-10-
<PAGE>

TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

Other Litigation
- ----------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact on the
Company's earnings, financial condition or liquidity.

(6) Net Income (Loss) Per Share
---------------------------
Net income (loss) per share was calculated using the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the period. Outstanding options, convertible debentures and preferred shares
were determined to be anti-dilutive for the quarter and nine months ended
September 30, 1994 and for the nine months ended September 30, 1993; therefore,
these items were excluded from the per share calculations.

-11-
<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
-----------------------------------

Results of Operations
- ---------------------
Net sales for the quarter and nine months ended September 30, 1994 were
$241,085,000 and $506,330,000, respectively, compared to $235,251,000 and
$482,238,000, respectively, for the same periods last year, representing an
increase of 2.5% and 5.0%, respectively. Increased sales for the quarter and
nine months ended September 30, 1994 resulted from higher domestic shipments of
Matchbox vehicles, activity toys and large dolls, in addition to slightly higher
sales by Tyco International, partially offset by lower sales experienced by the
Company's direct import business, Tyco Playtime, as a result of product delays.

Gross profit for the quarter and nine months ended September 30, 1994 was
$97,584,000 and $211,244,000, respectively (40.5% and 41.7%, respectively, of
net sales), compared to $100,638,000 and $209,873,000, respectively (42.8% and
43.5%, respectively, of net sales), for the comparable periods last year. Gross
profit margins decreased for the quarter and nine months ended September 30,
1994 due primarily to product mix and reduced prices realized on carryover
inventory from 1993.

Total operating expenses for the quarter and nine months ended September 30,
1994 were $87,277,000 and $211,113,000, respectively (36.2% and 41.7%,
respectively, of net sales), compared to $86,664,000 and $209,582,000,
respectively (36.8% and 43.5%, respectively, of net sales), for the same periods
last year. Included in the operating expenses for the quarter and nine months
ended September 30, 1994 is a $4,700,000 charge associated with the closure of
the Company's Italian subsidiary. For 1995, an agreement has been made for an
Italian distributor to market the Company's products in Italy. Total operating
expenses, expressed as a percentage of net sales, were lower for the quarter and
nine months ended September 30, 1994 reflecting the Company's continued cost-
containment efforts.

Interest and debt expense for the quarter and nine months ended September 30,
1994 was $8,298,000 and $21,732,000, respectively, compared to $6,561,000 and
$17,518,000, respectively, for the same periods last year. The increase reflects
higher borrowings under the Company's credit facilities. Total average debt for
the nine months ended September 30, 1994 was $257,622,000 at an effective
interest rate of 12.6% compared to total average debt of $210,111,000 with an
effective rate of 13.1% for the first nine months of 1993.

In accordance with generally accepted accounting principles, the quarterly tax
provision reflects the projected full year tax rate. Based on the results for
the first nine months of 1994, the Company announced in October that it does not
expect to be profitable for the year. In addition, the Company does not have
any remaining taxable income in the carryback period to utilize the net
operating loss. Accordingly, for the quarter ended September 30, 1994, the
Company recorded a tax provision which reversed the $10,139,000 tax benefit
recorded through June 30, 1994. For the nine months ended September 30, 1993,
the Company was able to realize a tax benefit of $5,671,000.

-12-
<PAGE>

Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", the Company is required to record a deferred tax asset for the
future tax benefits of a tax loss, as well as other items, if realization is
more likely than not. Based on the weight of available evidence, management has
concluded that, more likely than not, the Company's future domestic taxable
income will be sufficient over the appropriate carryforward periods to realize
the tax benefit represented by its 1993 domestic net operating loss, certain tax
credits and certain temporary differences. Certain of the Company's
international subsidiaries have net operating loss carryforwards to reduce
future taxable income. Management has determined on a jurisdictional basis
whether it is likely operating income will be sufficient to fully utilize the
loss carryforwards and temporary differences prior to their expiration date.

In 1994, the Company expanded its products in both core and promotional toy
lines, including diecast vehicles, activity toys and dolls. For the first nine
months of 1994, domestic sales have increased by 13.5% compared to the same
period last year. The Company's domestic subsidiaries have royalty arrangements
with its international subsidiaries. As a result of recent growth in the
international business, and anticipated future growth, management believes that
increased royalty income will contribute to future domestic profitability.

Realization of tax benefits is dependent upon the Company's ability to generate
taxable income from the appropriate sources within the carryforward period
established under the tax law. Based on the Company's expanded product line,
continuing benefits of its profit improvement plan and the Company's prior
history of earnings, management expects that the Company will be able to return
to profitability. Accordingly, management believes the Company's future taxable
income will be at a level sufficient to fully utilize the 1993 domestic net
operating loss carryforward, certain tax credit carryforwards and other
temporary differences. Taxable income (as adjusted for changes in temporary
differences, certain permanent items, nonrecurring charges and other appropriate
adjustments) for the four-year period ending December 31, 1994 is estimated to
be $8,300,000. Using this $8,300,000 estimate as a base and anticipated
increases in royalties from the Company's international subsidiaries future
taxable income would be sufficient to realize the tax benefits represented by
the net operating loss carryforward, tax credit carryforwards and other
temporary differences prior to their expiration.

While management expects that the Company will be able to return to
profitability, future levels of operating income are dependent upon general
economic conditions, including competitive pressures on sales and margins, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for full utilization of
the net operating loss and tax credit carryforwards and other temporary
differences. Management has considered these factors in reaching its conclusion
that it is likely that operating income will be sufficient to fully utilize the
net operating loss and tax credit carryforwards and other temporary differences
prior to their expiration.

-13-
<PAGE>

In connection with an examination of the consolidated federal income tax returns
of Tyco Toys, Inc. and Subsidiaries for the fiscal years ended August 31, 1987
through August 31, 1990, the Internal Revenue Service has issued a deficiency
notice to the Company. The Company has elected to appeal this determination and
management believes that the final outcome of this appeal will not materially
affect the results of operations (including realization of net operating loss
carryforwards and tax credit carryforwards), financial condition or liquidity of
the Company.

Net loss available to common shareholders for the quarter ended September 30,
1994 was $8,853,000 or $0.26 per share compared to net income of $4,686,000 or
$0.14 per share ($0.13 on a fully diluted basis) for the same period last year.
The net loss available to common shareholders for the nine months ended
September 30, 1994 was $21,646,000 or $0.62 per share compared to $11,794,000 or
$0.35 per share for the same period last year. Average shares outstanding for
the quarter and nine months ended September 30, 1994 were 34,683,000 and
34,679,000, respectively, compared to 34,669,000 (36,104,000 fully diluted) and
33,232,000, respectively, for the same periods during 1993.

Financial Condition
- -------------------
Nine Months Ended September 30, 1994
- ------------------------------------
The net cash utilization of $15,548,000 for the nine months ended September 30,
1994 is due primarily to the increased funding of receivables as a result of
higher domestic and international sales in addition to the Company's operating
losses during the period, offset by net proceeds of $47,000,000 from the
issuance of preferred stock and increased borrowings under the Company's
existing credit facilities. During the first nine months of 1994, most European
currencies in which the Company transacts business, especially the Belgium
Franc, strengthened against the United States Dollar. The effects of currency
rate changes on receivables and inventories, in particular, resulted in a
$14,440,000 utilization of cash.

Nine Months Ended September 30, 1994 vs. Nine Months Ended September 30, 1993
- -----------------------------------------------------------------------------
On a comparative basis, net receivables for the first nine months of 1994
increased by $6,000,000 as a result of increased domestic and international
sales. The $41,000,000 decline in net inventories reflects the Company's
efforts to maintain lower worldwide inventory levels. The increase in accrued
expenses and other current liabilities of $12,000,000 reflects higher corporate
tax accruals and advertising expenditures, offset by the utilization of purchase
accounting reserves established in conjunction with the 1992 Matchbox
acquisition.

At September 30, 1994, the Company was not in compliance with certain financial
covenants of its principal credit facility. The Company is negotiating with its
lenders and expects to receive a waiver of such defaults. The Company has
received a commitment for a replacement facility and expects that sufficient
cash will be available from operations and its credit facilities to meet its
requirements for the foreseeable future.

-14-
<PAGE>

Part II. Other Information

Item 1. Legal Proceedings.
- ------ -----------------
Reference is made to Note 5 of Notes to Consolidated Financial
Statements included in Part I, Item 1 of this report.

Item 5. Other Information.
- ------ -----------------
President and Chief Operating Officer
-------------------------------------
During September 1994, the Company named Gary Baughman as President and
Chief Operating Officer reporting to Richard E. Grey, Chairman and
Chief Executive Officer. Mr. Baughman also was appointed Director of
the Company. The provisions of his employment agreement call for Mr.
Baughman to become Chief Executive Officer of the Company in January
1996.

Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
--------
11. Statements Regarding Computation of Income (Loss) Per Share -
Quarters and Nine Months Ended September 30, 1994 and 1993.

12. Employment Agreements:
12.1 Richard E. Grey
12.2 Gary Baughman
12.3 Harry J. Pearce

27. Financial Data Schedule.

(b) Reports on Form 8-K.
-------------------
None.

-15-
<PAGE>

SIGNATURE
---------

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.

TYCO TOYS, INC.
--------------
Registrant

Date November 11, 1994
-----------------
By: /s/ Harry J. Pearce
---------------------
Harry J. Pearce
Vice Chairman,
Chief Financial Officer

-16-
<PAGE>

EXHIBIT INDEX

Exhibit No. Description Page
- ----------- ----------- ----
11.1 Statements regarding computation
of income (loss) per share for the quarters
ended September 30, 1994 and 1993. 18-19

11.2 Statements regarding computation
of loss per share for the nine months ended
September 30, 1994 and 1993. 20-21

12.1 Employment Agreement between the Company and
Richard E. Grey 22-42

12.2 Employment Agreement between the Company and
Gary Baughman 43-65

12.3 Employment Agreement between the Company and
Harry J. Pearce 66-85

27 Financial Data Schedule 86

-17-
<PAGE>

Exhibit 11.1

Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Loss Per Share
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
For the Quarter Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(8,853) $ - $(8,853) $(8,853) $ 1,003 $(7,850)
====== ====== ====== ====== ====== ======
<CAPTION>
Fully
SHARES Primary Diluted
------- -------
<S> <C> <C>
Average shares outstanding 34,683 34,683
Additional shares issued assuming conversion of:
Debentures (2) - 1,446
Preferred Stock (3) - 5,000
------ ------
Total average shares outstanding 34,683 41,129
====== ======
NET LOSS PER COMMON SHARE (4) $(0.26) $(0.19)
==== ====

</TABLE>

Note: Reference is made to Note 6 to Consolidated Financial Statements in Part
I, Item 1 of this report.

(1) Reflects (a) interest savings, net of taxes, from the conversion of
debentures (reference note 2 below) at the beginning of the year (or date
of issuance, if later) and (b) the elimination of preferred stock
dividends during the period assuming the conversion of the preferred
stock (see note 3 below ).

(2) Assumes the conversion (for fully diluted earnings per share only) of
the $14,462,000 of 7% convertible debentures into common stock of the
Company at a conversion price of $10 per share as of the beginning of
the period presented (or date of issuance, if later).

(3) Assumes the conversion (for fully diluted earnings per share only) of the
$50,000,000 of 6% Series B voting convertible, exchangeable preferred
stock into 4,999,995 shares of the Company's common stock at a conversion
price of $10 per share as of April 15, 1994, the date of issuance.
Accordingly, the additional shares issued as a result of quarterly
preferred stock dividends have not been included in the calculation for
fully diluted purposes.

(4) Fully diluted earnings per share is not presented in the Consolidated
Statements of Operations since it is anti-dilutive.

-18-
<PAGE>

Exhibit 11.1

Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Per Share Earnings
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Quarter Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME $4,686 $ - $ 4,686 $ 4,686 $ 142 $ 4,828
===== ======== ===== ===== === =====
<CAPTION>
Fully
SHARES Primary Diluted
------- -------
<S> <C> <C>
Average shares outstanding 34,665 34,665
Incremental shares issued assuming exercise of
stock options (2) 4 89
Additional shares issued assuming conversion of
debentures (3) - 1,350
------ ------
Total average shares outstanding 34,669 36,104
====== ======
NET INCOME PER COMMON SHARE $ 0.14 $ 0.13
==== ====
</TABLE>

Note: Reference is made to Note 6 to Consolidated Financial Statements in
Part I, Item 1 of this report.

(1) Reflects the interest savings, net of taxes, from the conversion of
debentures (reference note 3 below), at the beginning of the period
presented.

(2) Reflects the shares issuable upon the assumed conversion of all the
outstanding stock options as of the beginning of the period presented (or
date of issuance, if later), net of shares repurchased with the exercise
proceeds.

(3) Assumes the conversion (for fully diluted earnings per share only) of the
$13,500,000 of 7% convertible debentures into common stock of the Company
at a conversion price of $10 per share as of the beginning of the period
presented.

-19-
<PAGE>

Exhibit 11.2

Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Loss Per Share
(in thousands, except per share amounts)

NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(21,646) $ - $(21,646) $(21,646) $2,134 $(19,512)
====== ======= ====== ====== ===== ======
<CAPTION>
Fully
SHARES Primary Diluted
------- -------
Average shares outstanding 34,679 34,679
Additional shares issued assuming conversion of:
Debentures (2) - 1,446
Preferred stock (3) - 3,076
------ ------
Total average shares outstanding 34,679 39,201
====== ======
NET LOSS PER COMMON SHARE (4) $(0.62) $(0.50)
==== ====
</TABLE>

Note: Reference is made to Note 6 to Consolidated Financial Statements in Part
I, Item 1 of this report.

(2) Assumes the conversion (for fully diluted earnings per share only) of the
$14,462,000 of 7% convertible debentures into common stock of the Company
at a conversion price of $10 per share as of the beginning of the year (or
date of issuance, if later).

(4) Fully diluted loss per share is not presented in the Consolidated
Statements of Operations since it is anti-dilutive.

-20-
<PAGE>

Exhibit 11.2

Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Loss Per Share
(in thousands, except per share amounts)

For the Nine Months Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
NET LOSS $(11,794) $ - $(11,794) $(11,794) $425 $(11,369)
====== ===== ====== ====== === ======
<CAPTION>
Fully
SHARES Primary Diluted
------- -------
<S> <C> <C>
Average shares outstanding 33,232 33,232
Incremental shares issued assuming exercise of
stock options (2) 49 52
Incremental shares issued assuming exercise of
warrants (3) 455 522
Additional shares issued assuming conversion of
debentures (4) - 1,350

Total average shares outstanding (5) 33,736 35,156
====== ======
NET LOSS PER COMMON SHARE (6) $(0.35) $(0.32)
==== ====

</TABLE>

Note: Reference is made to Note 6 to Consolidated Financial Statements in Part
I, Item 1 of this report.

(1) Reflects the interest savings, net of taxes, from the conversion of
debentures (reference note 3 below) at the beginning of the year.

(3) Reflects the shares issuable upon the assumed conversion of all the
outstanding warrants as of the beginning of the year. The warrants, which
expired June 30, 1993, were exercisable into shares of the Company's stock
at an exercise price of $8.25 per share.

(4) Assumes the conversion (for fully diluted earnings per share only) of the
$13,500,000 of 7% convertible debentures into common stock of the Company
at a conversion price of $10 per share as of the beginning of the year.

(5) For financial statement purposes, incremental shares have been excluded
from the calculation of primary loss per share, as the effect is anti-
dilutive.

(6) Fully diluted loss per share is not presented in the Consolidated
Statements of Operations since it is anti-dilutive.

-21-

<PAGE>

EXHIBIT 12.1

EMPLOYMENT AGREEMENT

AGREEMENT, effective as of January 1, 1995, by and between TYCO TOYS, INC.,
a Delaware corporation having an office at 6000 Midlantic Drive, Mt. Laurel, New
Jersey 08054 (the "Company"), and RICHARD E. GREY, residing at 440 Windrow
Clusters Drive, Moorestown, New Jersey 08057 ("Mr. Grey").

WITNESSETH:

WHEREAS, Mr. Grey is currently employed by the Company pursuant to an
Employment Agreement between the Company and Mr. Grey dated January 15, 1992, as
amended as of June 27, 1994, for a term expiring December 31, 1994 (the "Current
Agreement"); and

WHEREAS, the parties are desirous of continuing such employment after
December 31, 1994 on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto agree as follows:

1. DEFINITIONS. For purposes of this Agreement:
-----------

a. "Board" means the Board of Directors of the Company.

b. "Cause" means (1) repeated violations by Mr. Grey of Mr. Grey's
obligations under Section 2. of this Agreement (other than as a result
of incapacity due to physical or mental illness) which are
demonstrably willful and deliberate on Mr. Grey's part, which are
committed in bad faith or

-22-
<PAGE>

without reasonable belief that such violations are in the best
interests of the Company and which are not remedied in a reasonable
period of time after receipt of written notice from the Company
specifying such violations or (2) the conviction of Mr. Grey of a
felony involving moral turpitude.

c. "Change of Control" means the occurrence during the Term of:

(1) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any
'Person' (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than the Company or any of its affiliates, immediately
after which such Person has 'Beneficial Ownership' (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of more than fifty
percent (50%) of the combined voting power of the Company's then
outstanding Voting Securities; provided, however, in determining
-------- -------
whether a Change of Control has occurred, Voting Securities which are
acquired in a 'Non-Control Acquisition' (as hereinafter defined) shall
not constitute an acquisition which would cause a Change of Control.
A 'Non-Control Acquisition' shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part thereof) maintained
by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or equity
interest is owned, directly or indirectly, by the Company (for
purposes of this definition, a 'Subsidiary') (ii) the Company or its
Subsidiaries, or (iii) any Person in connection with a 'Non-Control
Transaction' (as hereinafter defined);

-23-
<PAGE>

(2) The individuals who, as of January 1, 1995, are members of
the Board of Directors of the Company (the "Incumbent Board") cease
for any reason to constitute at least two-thirds of the members of the
Board; provided, however, that if the election, or nomination for
-------- -------
election by the Company's common stockholders, of any new director was
approved by a vote of at least two-thirds of the Incumbent Board, such
new director shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further, however, that no
-------- ------- -------
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened 'Election Contest' (as described in Rule 14a-11 promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board
(a "Proxy Contest"), including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest; or

(3) Approval by stockholders of the Company of:

(i) A merger, consolidation or reorganization involving
the Company, unless

(A) the stockholders of the Company immediately before
such merger, consolidation or reorganization own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least sixty percent (60%) of the combined
voting power of the outstanding Voting Securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the
same proportion as

-24-
<PAGE>

their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization, and

(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
Surviving Corporation, and

(C) no Person (other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation, or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of more
than fifty percent (50%) of the then outstanding Voting
Securities) has Beneficial Ownership of more than fifty percent
(50%) of the combined voting power of the Surviving Corporation's
then outstanding voting securities.

A transaction described in clauses (A) through (C) shall
herein be referred to as a 'Non-Control Transaction';

(ii) A complete liquidation or dissolution of the
Company; or

(iii) The sale or other disposition of 50% or more of the
net assets of the Company to any Person (other than a transfer to
a Subsidiary).

Notwithstanding the foregoing, a Change of Control shall not be
deemed to occur solely because any Person (the "Subject Person") acquired

-25-
<PAGE>

Beneficial Ownership of more than the permitted amount of the outstanding
Voting Securities as a result of the acquisition of Voting Securities by
the Company which, by reducing the number of Voting Securities outstanding,
increases the proportional number of shares Beneficially Owned by the
Subject Person, provided that if a Change of Control would occur (but for
the operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such share acquisition by the Company,
the Subject Person becomes the Beneficial Owner of any additional Voting
Securities which increases the percentage of the then outstanding Voting
Securities Beneficially Owned by the Subject Person, then a Change of
Control shall occur.

d. "Compensation Committee" means the compensation committee of the
Board of Directors of the Company, which shall consist solely of two
or more persons each of whom are "outside directors" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended.

e. "Competing Enterprise" means any entity which is, or has an
affiliate which is, engaged primarily in the design, development,
manufacture or distribution of toy products.

f. "Good Reason" means (i) except as contemplated by Section 2.d.
hereof, a demotion in Mr. Grey's status, title or position, or the
regular assignment to Mr. Grey of duties or responsibilities which are
inconsistent with such status, title or position; (ii) a material
breach of this Agreement by the Company if the Company has not cured
such breach within thirty days of Mr. Grey's notifying the Company of
such breach. Mr. Grey shall notify the Company of his belief that
such a breach has occurred within thirty days of the occurrence of
such breach; or (iii) a relocation of the

-26-
<PAGE>

executive offices of the Company to a location outside the 20-mile
radius of Mt. Laurel, New Jersey, without Mr. Grey's written consent
given to the Company within 30 days of Mr. Grey's receipt of
notification of such relocation by the Company. The Company agrees to
give Mr. Grey at least three (3) months prior written notice of any
such relocation.

g. "Term" means the period from January 1, 1995 through the close
of business on December 31, 1997, or if this Agreement is renewed and
extended pursuant to Section 3. hereof, December 31, 1998.

2. EMPLOYMENT.
----------

a. The Company hereby agrees to employ Mr. Grey as Chairman of the
Board and Chief Executive Officer of the Company for the period
January 1, 1995 through the remainder of the Term. Mr. Grey hereby
accepts such employment.

b. Mr. Grey shall have such powers and duties as generally pertain
to the offices of Chairman of the Board and Chief Executive Officer
for the periods during which he holds such offices pursuant to
Sections 2.a. and 2.d., including without limitation the hiring and
firing of subordinates; provided, however, that in the case of persons
-------- -------
occupying, or whose employment is being considered for, positions
higher than Senior Vice President, such hiring and firing shall be
with the consent of the Board.

c. Mr. Grey shall be responsible to, and report directly to, the
Board and shall perform those executive duties consistent with the
foregoing as shall be designated from time to time by the Board and on
the terms and conditions of this Agreement.

-27-
<PAGE>

d. At any time on or after January 1, 1996, the Company may replace
Mr. Grey as Chief Executive Officer of the Company. At any time on or
after January 1, 1996, Mr. Grey may resign as Chief Executive Officer
of the Company. If either of such events takes place, Mr. Grey shall
serve as Chairman of the Board and an officer (other than Chief
Executive Officer) of the Company for the remainder of the Term.

3. TERM. Subject to Section 7. hereof, Mr. Grey's employment hereunder
----
shall commence on January 1, 1995 and terminate on December 31, 1997. Subject
to Section 7 hereof, on December 31, 1997, the term of Mr. Grey's employment
shall be renewed and extended for an additional one-year period unless by June
30, 1997 either party has given written notice to the other that the term of Mr.
Grey's employment shall not be so renewed and extended.

4. COMPENSATION.
------------

a. The Company shall pay to Mr. Grey during the Term, except as
otherwise expressly provided herein:

(1) For the period of January 1, 1995 through the
expiration of the Term, a base salary of Six Hundred Thousand Dollars
($600,000); provided, however, that for any period after January 1, 1996
during which Mr. Grey does not serve as Chief Executive Officer of the
Company, the base salary shall be at an annual rate of Four Hundred
Thousand Dollars ($400,000), which, with respect to periods after January
1, 1997, shall be reviewed annually beginning in 1996 by the Board and
which may be increased (but not decreased) at the sole discretion of the
Board.

-28-
<PAGE>

The base salary set forth in this Section 4.a.(1) shall
hereinafter be referred to as the "Base Salary." The Base Salary shall be
payable in bi-weekly installments and subject to such deductions as
required by law.

(2) An annual incentive bonus (the "Annual Bonus"), based
on a target amount equal to 90% of the Base Salary during the period to
which the bonus relates, payable pursuant to the Annual Bonus Plan (as
defined below) upon the attainment by the Company of specific performance
criteria to be established by the Compensation Committee and approved by
the Board. Payment of the Annual Bonus may be, in the sole discretion of
the Compensation Committee, subject to approval by holders of a majority of
the voting shares of the Company of the material terms of the plan or
arrangement pursuant to which the Annual Bonus is paid (the "Annual Bonus
Plan"); and

(3) The benefits of a long term incentive plan (the
"LTIP") to be established by the Compensation Committee and approved by the
Board on or before September 30, 1994. Adoption of the LTIP may be, in the
sole discretion of the Compensation Committee, subject to approval by
holders of a majority of the voting shares of the Company.

b. The Company shall provide to Mr. Grey, subject to his
insurability, those fringe benefits currently available to all
senior executive employees, as well as those which the Company may
generally make available to its senior executive employees,
including without limitation, life insurance, medical and hospital
coverage .

c. The Company shall reimburse Mr. Grey for all reasonable
ordinary and necessary business expenditures made by him in
connection with, or in furtherance of, his employment, upon
presentation and approval of expense

-29-
<PAGE>

statements, receipts or vouchers or such other supporting
information as may from time to time be reasonably requested by the
Company.

d. During the Term, the Company shall provide Mr. Grey with a
private office, secretarial help and such other facilities and
services reasonably suitable to his position and adequate for the
performance of his duties, including a current model automobile that
is comparable to the automobile used by Mr. Grey on the Company's
business during 1994.

e. The parties acknowledge and agree that the LTIP and the
Annual Bonus Plan shall contain such provisions and be administered
in such manner as the Compensation Committee shall, upon advice of
legal counsel, determine may be necessary so that compensation
attributable thereto is not subject to the deductibility limitations
of Section 162(m) of the Code.

f. The Company shall have the right to deduct from any payment
hereunder an amount equal to the federal, state and local income
taxes and other amounts as may be required by law to be withheld.

5. FULL TIME DEVOTED TO COMPANY. Mr. Grey shall devote his full time and
----------------------------
attention to the business of the Company for the period January 1, 1995 through
the expiration of the Term; provided, however, that during such period as Mr.
Grey is not Chief Executive Officer of the Company, Mr. Grey shall devote such
time and attention to the business of the Company as is reasonable and
consistent with the office or offices which he holds. Mr. Grey shall not during
the Term be engaged in any other business activity, whether or not such business
activity is pursued for gain, profit or other pecuniary advantage, but this
shall not be construed as preventing Mr. Grey from:

-30-
<PAGE>

a. investing his assets in such form or manner as will not
require any services on his part in the operation of the affairs of
the entities in which such investments are made;

b. serving as an officer or director of a trade or business
association related to the toy industry, such as, for example, The
Toy Manufacturer's Association or The Hobby Industries Association;

c. serving as a member of the board of directors of
corporations which are not, and whose affiliates are not, engaged in
the toy industry; and

d. serving as a member of the Board, a parent, or a subsidiary
thereof, provided that Mr. Grey in his sole discretion agrees to so
serve. If Mr. Grey (with his consent) is elected or appointed a
director of any such entity (and, if so appointed, as a member of
any committee of the Board) during the Term, he shall serve in such
capacity without further compensation.

e. for periods during which Mr. Grey does not serve as Chief
Executive Officer of the Company, devoting up to 20% of his time to
other business activities, but only to the extent Mr. Grey has time
available after satisfying his obligations under this Section 5. and
provided such activities are unrelated to a Competing Enterprise.

-31-
<PAGE>

The Company shall notify Mr. Grey if it believes that Mr. Grey has breached
any of his obligations under this Section 5.; in such event, Mr. Grey shall have
fifteen days within which to cure such breach.

6. NON-COMPETITION; CONFIDENTIALITY.
--------------------------------

a. During the Non-Competition Period (as defined below), Mr. Grey
will not directly or indirectly engage in the business of, or own or
control any interest in (except as a passive investor in a publicly
owned company whose primary business is not a Competing Enterprise and
owning less than 5% of the equity securities thereof), or act as
director, officer of, employee of, or consultant to, or participate in
or render any service to or be in any other way connected with, any
individual, partnership, joint venture, corporation or other business
entity directly or indirectly engaged anywhere in the United States in
any Competing Enterprise. In addition, during the Non-Competition
Period Mr. Grey will not solicit suppliers or customers (or potential
suppliers or customers) of the Company for any Competing Business or
entice any individual to terminate his employment with the Company or
of any of the Company's subsidiaries. In the event (1) the Company
terminates Mr. Grey's employment for Cause or pursuant to Section 7.f.
hereof or Mr. Grey's employment terminates as of the expiration of the
Term and (2) the provisions of Sections 7.b., 7.c. and 7.e. do not
apply, this Section 6.a. shall not apply unless it is specifically
invoked by the Company and the Company agrees to pay Mr. Grey during
the Non-Competition Period in bi-weekly installments at an annual rate
equal to the Base Salary in effect on the date of termination. For
purposes of the foregoing, the Non-Competition Period is the period
commencing on January 1, 1995 and terminating on the first anniversary
of the June 30th which occurs during the year in

-32-
<PAGE>

which Mr. Grey's employment with the Company terminates for any
reason.

b. Mr. Grey agrees that all trade secrets, confidential information
with respect to marketing plans, manufacturing plans or techniques and
confidential financial matters of the Company and its subsidiaries
(collectively "Confidential Information") which is learned by him in
the course of his employment by the Company and any other Confidential
Information received, developed or hereafter learned in the course of
such employment or in association with the Company (or its
subsidiaries) shall be, until the date one year after Mr. Grey's
employment terminates hereunder, or, if later, the last day of the
Non-Competition Period, treated as confidential by him and shall not
be disclosed by him unless expressly authorized by the Company, or
unless the Confidential Information becomes generally available to the
public otherwise than through disclosure by Mr. Grey.

c. Mr. Grey shall not be deemed to have learned any Confidential
Information on the basis of inference or circumstantial evidence. It
shall be the burden of the Company to establish by a preponderance of
proof that Mr. Grey actually learned the Confidential Information.
For example, it would be insufficient as proof for the Company merely
to establish that Mr. Grey had access to the Confidential Information
and that the Confidential Information was in his possession and
learned by him. Similarly, in the case of alleged disclosure by Mr.
Grey of Confidential Information, the Company will be required to
prove by a preponderance of proof that Mr. Grey actually divulged such
Confidential Information contrary to the provisions of this Agreement.
For example, it would be insufficient merely

-33-
<PAGE>

to establish that Mr. Grey knew of the Confidential Information or
that he would be required to make use of such knowledge in the course
of an activity or that he was in a position to divulge the
Confidential Information. Proof of the actual divulgence of such
Confidential Information would be required before the Company could
invoke any remedy provided under Section 6. hereof for a breach of
Section 6.b. hereof.

d. Mr. Grey acknowledges and agrees that in view of the unique
quality of his services provided to the Company and the fact that the
Company's business heavily depends upon his proprietary information,
the remedies of the Company at law for breach by Mr. Grey of any of
the restrictions contained in Sections 6.a. or 6.b. hereof will be
inadequate and that the Company shall be entitled to enforce such
restrictions by temporary or permanent injunctive or mandatory relief
obtained in an action or proceeding instituted in any court of
competent jurisdiction without the necessity of proving irreparable
damages. It is understood by the Company and Mr. Grey that the
covenants contained in Sections 6.a. and 6.b. hereof are essential
elements of this Agreement and that, but for Mr. Grey's agreement to
comply with such covenants, the Company would not have entered into
this Agreement. Mr. Grey acknowledges that such covenants are
reasonable and valid.

7. TERMINATION.
-----------

a. Subject to the provisions of this Section 7., the Company and Mr.
Grey may terminate this Agreement on fifteen days written notice to
the other party, which notice shall specify the exact cause for
termination.

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<PAGE>

b. Subject to Section 7.i. hereof, if within six months following a
Change of Control occurring during the Term the Company terminates Mr.
Grey's employment hereunder without Cause or Mr. Grey terminates his
employment hereunder other than by reason of death or disability, the
Company shall pay to Mr. Grey (1) the portion of the Base Salary
accrued through the date of termination, and (2) an amount equal to
the product of 2.99 and the average of the sum of the Base Salary and
the Annual Bonus for the last five calendar years prior to the date of
termination (including, if applicable, any year covered by the Current
Agreement) (the "Five-Year Compensation Average").

c. Subject to Section 7.i. hereof, in the event that (1) during the
Term the Company enters into a binding written agreement to engage in
a transaction which, if consummated, would result in a Change of
Control, (2) such transaction is consummated after the last date of
the Term and within four months thereof, and (3) subsequent to
entering into such agreement and during the Term the Company
terminates Mr. Grey's employment without Cause or Mr. Grey terminates
his employment for Good Reason, the Company shall pay to Mr. Grey an
amount equal to the payment set forth in Section 7.b. hereof.

d. If the Company terminates Mr. Grey's employment hereunder for
Cause or, except as provided in Section 7.b. hereof, Mr. Grey
terminates his employment hereunder without Good Reason, the Company's
sole obligation hereunder shall be to pay Mr. Grey the portion of the
Base Salary accrued through the date of termination.

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<PAGE>

e. If the Company terminates Mr. Grey's employment hereunder without
Cause or Mr. Grey terminates his employment hereunder for Good Reason
and, in either case, Sections 7.b. and 7.c. hereof do not apply, the
Company shall pay to Mr. Grey (1) the portion of the Base Salary
accrued through the date of termination, and (2) an amount equal to
the product of 2.0 and the Five-Year Compensation Average.

f. If Mr. Grey becomes physically or mentally disabled during the
Term so that he is unable to perform the services required of him
pursuant to this Agreement for a period of six (6) successive months,
or an aggregate of six (6) months in any 12-month period, the Company
may terminate Mr. Grey's services hereunder, in which event the
Company's only obligations hereunder shall be (i) to have paid Mr.
Grey the portion of the Base Salary accrued during such period, (ii)
to have afforded Mr. Grey the full benefits provided in Section 4.b.
above during such period, (iii) to the extent provided under the terms
of the Annual Bonus Plan, to pay Mr. Grey a pro rata share of the
Annual Bonus for the year in which his employment is terminated, and
(iv) to provide Mr. Grey those benefits set forth in the LTIP which he
would be entitled to in the event his employment terminates by reason
of his disability.

g. In the event of Mr. Grey's death during the Term, the Company
shall (i) pay to his spouse, if he is survived by a spouse, or if not,
to the estate of Mr. Grey, the portion of the Base Salary accrued
through the date of his death, (ii) pay to his spouse, if he is
survived by his spouse, or if not, to the estate of Mr. Grey, an
amount equal to one-half of Mr. Grey's annual Base Salary as of the
date of his death, payable in a lump sum or over six months in equal
bi-weekly installments as the Board shall determine, (iii) to the

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<PAGE>

extent provided under the terms of the Annual Bonus Plan, pay to
Mr. Grey a pro rata share of the Annual Bonus for the year of his
death, and (iv) provide Mr. Grey those benefits set forth in the LTIP
which he would be entitled to in the event of his death.

h. The Company shall pay to Mr. Grey any amounts owing pursuant to
Sections 7.b., 7.c. or 7.e. in a single lump sum within fifteen (15)
days following Mr. Grey's termination of employment.

i. (1) Notwithstanding anything contained in this Agreement to the
contrary, to the extent that the payments and benefits provided under this
Agreement or provided to or for the benefit of Mr. Grey under any other plan
or agreement of or with the Company (each such payment or benefit, a
"Payment," and such payments and benefits collectively, the "Payments") would
be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of
the Code, the Payments shall be reduced if and to the extent necessary so
that no Payment shall be subject to the Excise Tax (such reduced amount, the
"Limited Payment Amount"). The Company shall reduce or eliminate the Payments
by first reducing or eliminating the payments due under Sections 7.b. or 7.c.
hereof, then by reducing or eliminating any other amounts payable in cash,
and then by reducing or eliminating benefits which are not payable in cash,
in each case in reverse order beginning with payments or benefits which are
to be paid the farthest in time from the date of the Determination (as
hereinafter defined).

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<PAGE>

The Accounting Firm shall provide its determination (the "Determination"),
together with detailed supporting calculations and documentation, to the
Company and Mr. Grey within 15 days of the date Mr. Grey's employment is
terminated, and if the Accounting Firm determines that no Excise Tax is
payable it shall furnish Mr. Grey with an opinion to such effect reasonably
acceptable to Mr. Grey. Within ten (10) days of the delivery of the
Determination to Mr. Grey, Mr. Grey shall have the right to dispute the
Determination (the "Dispute"). If there is no Dispute, the Determination
shall be binding, final and conclusive upon the Company, subject to the
application of subparagraph (3) below.

(3) If it is established pursuant to a final determination of a
court or an Internal Revenue Service (the "IRS") proceeding which has been
finally and conclusively resolved, that any portion of the Payments or the
Limited Payment Amount is subject to the Excise Tax, such portion shall be
deemed for all purposes to be a loan to Mr. Grey made on the date received by
Mr. Grey, and Mr. Grey shall repay such portion to the Company on demand (but
on not less than ten (10) days' written notice) together with interest at the
"Applicable Federal Rate" (as defined in Section 1274(d) of the Code).

8. NON-ASSIGNMENT. This Agreement and all of Mr. Grey's rights and
--------------
obligations hereunder are personal to Mr. Grey and shall not be assignable;
provided, however, that upon his death all of Mr. Grey's rights to cash payments
- -------- -------
under this Agreement shall inure to the benefit of his widow, personal
representatives, designees or other legal representatives, as the case may be.
Any person, firm or corporation succeeding to the business of the Company by
merger, purchase, consolidation or otherwise shall assume by contract or
operation of law the obligations of the Company hereunder, provided, however,
-------- -------
that the Company shall, notwithstanding such assumption, remain liable and
responsible for the fulfillment of its obligations under this Agreement.

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<PAGE>

9. ARBITRATION.
-----------

a. Subject to Sections 6.d. and 7.i. hereof, the Company and Mr.
Grey agree that any dispute, controversy or claim which may arise out
of or relate to this Agreement (including, but not limited to, any
claim relating to the purported validity, interpretation,
enforceability or breach of any portion of this Agreement) or any
other claim, dispute or controversy arising out of the relationship
between Mr. Grey and the Company, which is not settled by agreement
between the parties, shall be settled by arbitration of three
arbitrators. One arbitrator shall be selected by Mr. Grey, one by the
Company and the third by the two persons so selected, all in
accordance with the labor arbitration rules of the American
Arbitration Association then in effect. In the event that the
arbitrator selected by Mr. Grey and the arbitrator selected by the
Company are unable to agree upon a third arbitrator, then the third
arbitrator shall be selected from a list of seven provided by the
office of the American Arbitration Association nearest to Mr. Grey's
residence with the parties striking names in order and the party
striking first to be determined by the flip of a coin. The arbitration
shall be held in a location to be mutually agreed upon by the parties.

b. In consideration of the parties' agreement under Section 9.a.
hereof, and in further consideration of the anticipated expedition and
minimization of expense of the arbitration remedy, the arbitration
provisions of this Agreement shall provide the exclusive remedy for
settling disputes, controversies or claims hereunder or arising out of
the relationship between the Company and Mr. Grey, and each party
expressly waives any right he or it may have to seek redress in any
other forum.

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<PAGE>

c. Any claim which either party has against the other which could be
submitted for resolution pursuant to this Section 9. must be presented
in writing by the claiming party to the other within one year of the
date the claiming party knew or should have known of the facts giving
rise to the claim, except that claims arising out of or related to the
termination of Mr. Grey's employment must be presented by him within
one (1) year of the date of termination. Unless the party against whom
any claim is asserted waives the time limits set forth above, any
claim not brought within the time periods specified shall be waived
and forever barred.

d. Each party shall bear the cost of its own legal fees and related
expenses (including the cost of experts, evidence and counsel)
incurred in connection with any arbitration, but the Company and Mr.
Grey shall bear equally the cost of the arbitrators' fees and
expenses.

e. Any decision and award or order of the majority of the
arbitrators shall be binding upon the parties hereto and judgment
thereon may be entered in any court having jurisdiction.

f. Each of the above terms and conditions of this Section 9. shall
have separate validity, and the invalidity of any part thereof shall
not affect the remaining parts.

g. Any decision and award or order of the majority of the
arbitrators shall be final and binding between the parties as to all
claims which were or could have been raised in connection with the
dispute to the fullest extent permitted by law.

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<PAGE>

10. INVALIDITY. The invalidity or unenforceability of any provision of
----------
this Agreement shall in no way affect the validity or enforceability of any
other provision.

11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
----------------
among the parties respecting the subject matter hereof and supersedes any prior
agreement respecting the subject matter hereof. No amendment to this Agreement
shall be deemed valid unless in writing and signed by the parties, and no
discharge of the terms of this Agreement shall be deemed valid unless by full
performance by the parties or by a writing signed by the parties. No waiver by a
party of any provisions or conditions of this Agreement shall be deemed a waiver
of similar or dissimilar provisions and conditions at the same time or any prior
or subsequent time.

12. NOTICE. Any notice, statement, report, request or demand required or
------
permitted to be given by this Agreement shall be effective only if in writing,
delivered personally against receipt therefor or mailed by certified or
registered mail, return receipt requested, to the parties at the addresses
hereinafter set forth, or at such other places that either party may designate
by notice to the other.

Notice to the Company shall be addressed to:

Tyco Toys, Inc.
6000 Midlantic Drive
Mt. Laurel, New Jersey 08054
Attn: R. Michael Kennedy, Jr., Esq.

Notice to Mr. Grey shall be addressed to him at the executive offices of
the Company, with a copy to his home address at:

440 Windrow Clusters Drive
Moorestown, New Jersey 08057

and with an additional copy to:

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<PAGE>

Salamon, Gruber, Newman, Blaymore & Rothschild, P.C.
97 Powerhouse Road
Roslyn Heights, New York 11577
Attn: Frederick Newman, Esq.

Such notice shall be deemed effectively given five (5) days after the same
has been deposited in a post box under the exclusive control of the United
States Postal Service.

13. GOVERNING LAW. This Agreement has been made in and shall be
-------------
interpreted according to the laws of the State of New York without any reference
to the conflicts of laws rules thereof. Subject to Section 9. hereof, the
parties hereto submit to the jurisdiction of the courts of the State of New York
for the purpose of any actions or proceedings which may be required to enforce
the provisions of this Agreement or an award made in any arbitration proceeding
initiated.

IN WITNESS WHEREOF, the parties have executed these presents as of the day
and year first above written.

TYCO TOYS, INC.

By:________________________________

___________________________________
Richard E. Grey

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<PAGE>

EXHIBIT 12.2

EMPLOYMENT AGREEMENT

AGREEMENT, dated as of September 8, 1994, by and between TYCO TOYS, INC., a
Delaware corporation having an office at 6000 Midlantic Drive, Mt. Laurel, New
Jersey 08054 (the "Company"), and GARY BAUGHMAN, residing at 2094 Sampson
Circle, Hudson, Ohio 44236 ("Mr. Baughman").

WITNESSETH:

WHEREAS, the parties are desirous of formalizing the terms of Mr.
Baughman's employment by the Company on the terms and conditions set forth
herein;

NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto agree as follows:

1. EMPLOYMENT.
----------

a. Subject to Section 6 hereof, the Company hereby agrees to employ
Mr. Baughman (i) for the period of the Term ending on December 31,
1995 (the "Initial Period") as President and Chief Operating Officer
of the Company and (ii) for the remainder of the Term (the "Remainder
Period") as President and Chief Executive Officer of the Company. Mr.
Baughman hereby accepts such employment.

b. Mr. Baughman shall have such powers and duties as generally
pertain to the offices set forth in Section 1.a. hereof, including
without

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<PAGE>

limitation the hiring and firing of subordinates; provided, however,
-------- -------
that in the case of persons occupying, or whose employment is being
considered for, positions directly reporting to Mr. Baughman, such
hiring and firing shall be with the consent of the Chief Executive
Officer for the Initial Period and the Board for the Remainder Period.

c. Mr. Baughman shall be responsible to, and report directly to, the
Chief Executive Officer during the Initial Period, and to the Board
for the Remainder Period. Mr. Baughman shall perform those executive
duties consistent with the foregoing as shall be designated from time
to time by the Chief Executive Officer during the Initial Period, and
by the Board for the Remainder Period and on the terms and conditions
of this Agreement.

2. TERM. Subject to Section 6. hereof, Mr. Baughman's employment
----
hereunder shall commence on ________, 1994 and terminate on December 31, 1998.
Subject to Section 7 hereof, on December 31, 1998, the term of Mr. Baughman's
employment shall be renewed and extended for an additional one-year period
unless by September 30, 1998 either party has given written notice to the other
that the term of Mr. Baughman's employment shall not be so renewed and extended.

3. COMPENSATION.
------------

a. The Company shall pay or grant, as the case may be, to Mr.
Baughman during the Term, except as otherwise expressly provided
herein:

(1) Base salary (the "Base Salary") at an annual rate of (A)
Four Hundred Fifty Thousand Dollars ($450,000) for the Initial Period and
(B) not less than Five Hundred Fifty Thousand Dollars ($550,000) for the
Remainder

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<PAGE>

Period. The Base Salary shall be payable in bi-weekly installments and
subject to such deductions as are required by law. The Compensation
Committee shall review the amount of the Base Salary annually commencing
with the Base Salary payable for the calendar year 1997.

(2) An annual incentive bonus (the "Annual Bonus"), based on
a target amount equal to 90% (and a maximum amount equal to 135%) of the
Base Salary during the period to which the bonus relates, payable pursuant
to the Annual Bonus Plan (as defined below) upon the attainment by the
Company of specific performance criteria to be established by the
Compensation Committee and approved by the Board. Subject to such terms as
are set forth in the Annual Bonus Plan (as defined below), (i) thirty
percent of the Annual Bonus will be payable in restricted Common Stock
(valued for this purpose by the Compensation Committee in its sole
discretion at eighty percent of the fair market value of such stock on the
date of issuance) (the "Restricted Stock"), which stock will not be
transferable by Mr. Baughman for a period of two years from the date of
issuance and which will be subject to forfeiture upon termination for Cause
or resignation without Good Reason (for the lesser of cost and fair market
value on the date of termination or resignation) within such two-year
period, and (ii) the remaining seventy percent of the Annual Bonus will be
payable in cash or the Restricted Stock in such proportion as Mr. Baughman
may elect. The Restricted Stock which has not been forfeited will not be
subject to restriction on transferability at any time that Mr. Baughman is
not an employee of the Company. The Annual Bonus payable to Mr. Baughman
with respect to calendar year 1995 shall be an amount not less than Two
Hundred Twenty-Five Thousand Dollars ($225,000), a minimum of 30% of which
shall be payable in the Restricted Stock. The Annual

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<PAGE>

Bonus shall be paid to Mr. Baughman no later than March 31 of the year
following the calendar year to which the Annual Bonus relates, but, except
with respect to the $225,000 bonus for 1995 referred to immediately above,
no earlier than the date the Compensation Committee determines that the
relevant performance criteria have been satisfied. Payment of the Annual
Bonus may be, in the sole discretion of the Compensation Committee, subject
to approval by holders of a majority of the voting shares of the Company of
the material terms of the plan or arrangement pursuant to which the Annual
Bonus is paid (the "Annual Bonus Plan"). The provisions of this Section
3.a.(2) are subject to the adoption by the Compensation Committee and the
Board of the Annual Bonus Plan, the terms and conditions thereof, and the
granting of specific awards thereunder; and

(3) (i) On January 1, 1995, options to acquire Common Stock
(the "Options") and performance accelerated restricted stock units of the
Company (the "PARS") with an aggregate value on such date equal to $787,500
and (ii) on January 1, 1996, Options and PARS with an aggregate value on
such date equal to $313,500. Subject to such terms as are set forth in the
LTIP (as defined below), (i) the actual number of PARS and Options to be
granted will be determined based on the fair market value of the PARS and
the Options on the date of the grant as determined by the Compensation
Committee in its sole discretion, (ii) one-third of the Options will become
exercisable on each of the first three anniversaries of the date of grant,
(iii) the PARS will become transferable and no longer subject to forfeiture
on the seventh anniversary of the date of grant, subject to earlier vesting
in whole or in part as set forth in the LTIP commencing on the third
anniversary of the date of grant and (iv) the exercise price of each of the
Options will be no less than the fair market value of the Common Stock on
the

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<PAGE>

date of grant. Adoption of the LTIP (as defined below) may be, in the sole
discretion of the Compensation Committee, subject to approval by holders of
a majority of the voting shares of the Company. The provisions of this
Section 3.a.(3) are subject to the adoption by the Compensation Committee
and the Board of a long term incentive plan (the "LTIP"), the terms and
conditions thereof, and the granting of awards thereunder.

(4) On ____, 40,000 shares of restricted Common Stock on
terms set forth in a restricted stock agreement, which terms will include
the vesting of such stock on the first anniversary of the date of grant
unless, prior to such anniversary, Mr. Baughman terminates his employment
with the Company without Good Reason or the Company terminates Mr.
Baughman's employment for Cause.

b. The Company shall provide to Mr. Baughman, subject to his
insurability, $500,000 of group life insurance and such other fringe
benefits as are currently available to all senior executive employees,
as well as those which the Company may generally make available to its
senior executive employees in the future, including without
limitation, group medical and hospital coverage.

c. The Company shall reimburse Mr. Baughman for all reasonable
ordinary and necessary business expenditures made by him in connection
with, or in furtherance of, his employment, upon presentation and
approval of expense statements, receipts or vouchers or such other
supporting information as may from time to time be reasonably
requested by the Company.

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<PAGE>

d. During the Term, the Company shall provide Mr. Baughman with a
private office, secretarial help and such other facilities and
services reasonably suitable to his position and adequate for the
performance of his duties, including an automobile allowance equal to
$900 per month.

e. The parties acknowledge and agree that the LTIP and the Annual
Bonus Plan shall contain such provisions and be administered in such
manner as the Compensation Committee shall, upon advice of legal
counsel, determine may be necessary so that compensation attributable
thereto is not subject to the deductibility limitations of Section
162(m) of the Code.

f. The Company shall have the right to deduct from any payment
hereunder an amount equal to the federal, state and local income taxes
and other amounts as may be required by law to be withheld.

4. FULL TIME DEVOTED TO COMPANY. Mr. Baughman shall devote his full time
----------------------------
and attention to the business of the Company and shall not during the Term be
engaged in any other business activity, whether or not such business activity is
pursued for gain, profit or other pecuniary advantage, but this shall not be
construed as preventing Mr. Baughman from:

a. investing his assets in such form or manner as will not require
any services on his part in the operation of the affairs of the
entities in which such investments are made;

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<PAGE>

b. serving as an officer or director of a trade or business
association related to the toy industry, such as, for example, The Toy
Manufacturer's Association;

c. serving as a member of the board of directors of corporations
which are not, and whose affiliates are not, engaged in the toy
industry; and

d. serving as a member of the Board, a parent, or a subsidiary
thereof, provided that Mr. Baughman in his sole discretion agrees to
so serve. If Mr. Baughman (with his consent) is elected or appointed
a director of any such entity (and, if so appointed, as a member of
any committee of the Board) during the Term, he shall serve in such
capacity without further compensation.

5. NON-COMPETITION; CONFIDENTIALITY.
--------------------------------

a. During the Non-Competition Period (as defined below), Mr. Baughman
will not directly or indirectly engage in the business of, or own or
control any interest in (except as a passive investor in a publicly
owned company whose primary business is not a Competing Enterprise and
owning less than 5% of the equity securities thereof), or act as
director, officer of, employee of, or consultant to, or participate in
or render any service to or be in any other way connected with, any
individual, partnership, joint venture, corporation or other business
entity directly or indirectly engaged anywhere in the United States in
any Competing Enterprise. In addition, during the Non-Competition
Period Mr. Baughman will not solicit suppliers or customers (or
potential suppliers or customers) of the Company for any Competing
Enterprise or entice any individual to

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<PAGE>

terminate his employment with the Company or of any of the Company's
subsidiaries. In the event (1) the Company terminates Mr. Baughman's
employment for Cause or pursuant to Section 6.f. hereof or Mr.
Baughman's employment terminates as of the expiration of the Term and
(2) the provisions of Sections 6.b., 6.c. and 6.e. do not apply, this
Section 5.a. shall not apply unless it is specifically invoked by the
Company and the Company agrees to pay Mr. Baughman during the Non-
Competition Period in bi-weekly installments at an annual rate equal to
the Base Salary in effect on the date of termination. For purposes of
the foregoing, the Non-Competition Period is the period commencing on
______________, 1994 and terminating on the first anniversary of the
June 30th which occurs during the year in which Mr. Baughman's
employment with the Company terminates for any reason, including
expiration of the Term.

b. Mr. Baughman agrees that during the Term and thereafter all trade
secrets, confidential information with respect to marketing plans,
manufacturing plans or techniques and confidential financial matters
of the Company and its subsidiaries (collectively "Trade Secrets")
which are learned by him in the course of his employment by the
Company and any other Trade Secrets received, developed or hereafter
learned in the course of such employment or in association with the
(or its subsidiaries) shall be treated as confidential by him
shall not be disclosed by him unless expressly authorized by the
Company, or unless the Trade Secrets become generally available to the
public otherwise than through disclosure by Mr. Baughman.

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<PAGE>

c. Mr. Baughman acknowledges and agrees that in view of the unique
quality of his services provided to the Company and the fact that the
Company's business heavily depends upon its proprietary information,
the remedies of the Company at law for breach by Mr. Baughman of any
of the restrictions contained in Sections 5.a. or 5.b. hereof will be
inadequate and that the Company shall be entitled to enforce such
restrictions by temporary or permanent injunctive or mandatory relief
obtained in an action or proceeding instituted in any court of
competent jurisdiction without the necessity of proving irreparable
damages. It is understood by the Company and Mr. Baughman that the
covenants contained in Sections 5.a. and 5.b. hereof are essential
elements of this Agreement and that, but for Mr. Baughman's agreement
to comply with such covenants, the Company would not have entered into
this Agreement. Mr. Baughman acknowledges that such covenants are
reasonable and valid.

6. TERMINATION.
-----------

a. Subject to the provisions of this Section 6., the Company and Mr.
Baughman may terminate this Agreement on fifteen days written notice
to the other party, which notice shall specify the exact cause for
termination.

b. Subject to Section 6.i. hereof, if within six months following a
Change of Control occurring during the Term the Company terminates Mr.
Baughman's employment hereunder without Cause or Mr. Baughman
terminates his employment for Good Reason, the Company shall pay to
Mr. Baughman (1) the portion of the Base Salary accrued through the
date of

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<PAGE>

termination, and (2) an amount equal to the product of 2.99
and the average of the sum of the Base Salary and the Annual Bonus for
the last five calendar years prior to the date of termination (or if
shorter, the period of Mr. Baughman's employment hereunder) (the
"Five-Year Compensation Average"). If termination pursuant to this
Section 6.b. occurs during 1995, the Annual Bonus, for purposes of
calculating the payment to be made pursuant to this Section 6.b.,
shall be equal to the full annual incentive bonus that Mr. Baughman
would have received with respect to calendar year 1995 if his
employment with the Company had continued through December 31, 1995.

c. Subject to Section 6.i. hereof, in the event that (1) during the
Term the Company enters into a binding written agreement to engage in
a transaction which, if consummated, would result in a Change of
Control, (2) such transaction is consummated after the last date of
the Term and within four months thereof, and (3) subsequent to
entering into such agreement and during the Term the Company
terminates Mr. Baughman's employment without Cause or Mr. Baughman
terminates his employment for Good Reason, the Company shall pay to
Mr. Baughman an amount equal to the payment set forth in Section 6.b.
hereof.

d. If the Company terminates Mr. Baughman's employment hereunder for
Cause or Mr. Baughman terminates his employment hereunder without Good
Reason, the Company's sole obligation hereunder shall be to pay Mr.
Baughman the portion of the Base Salary accrued through the date of
termination.

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<PAGE>

e. If the Company terminates Mr. Baughman's employment hereunder
without Cause or Mr. Baughman terminates his employment hereunder for
Good Reason and, in either case, Sections 6.b. and 6.c. hereof do not
apply, the Company shall pay to Mr. Baughman (1) the portion of the
Base Salary accrued through the date of termination, (2) an amount
equal to the product of the Base Salary in effect on the date of such
termination and 2.0 (if termination occurs after December 31, 1995) or
3.0 (if termination occurs prior to January 1, 1996) and (3) to the
extent provided under the terms of the Annual Bonus Plan, a pro rata
share of the Annual Bonus for the year of termination. In addition,
to the extent provided under the terms of the LTIP, Options and/or
PARS previously granted to Mr. Baughman under the LTIP shall become
exercisable or immediately vest, as the case may be.

f. If Mr. Baughman becomes physically or mentally disabled during the
Term so that he is unable to perform the services required of him
pursuant to this Agreement for a period of six (6) successive months,
or an aggregate of six (6) months in any 12-month period, the Company
may terminate Mr. Baughman's services hereunder, in which event the
Company's only obligations hereunder shall be (i) to have paid Mr.
Baughman the portion of the Base Salary accrued during such period,
(ii) to have afforded Mr. Baughman the full benefits provided in
Section 3.b. above during such period, (iii) to the extent provided
under the terms of the Annual Bonus Plan, to pay Mr. Baughman a pro
rata share of the Annual Bonus for the year in which his employment is
terminated, and (iv) to provide Mr. Baughman those benefits set forth
in the LTIP which he would

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<PAGE>

be entitled to in the event his employment terminates by reason of his
disability.

g. In the event of Mr. Baughman's death during the Term, the Company
shall (i) pay to his spouse, if he is survived by a spouse, or if not,
to the estate of Mr. Baughman, the portion of the Base Salary accrued
through the date of his death, (ii) pay to his spouse, if he is
survived by his spouse, or if not, to the estate of Mr. Baughman, an
amount equal to one-half of Mr. Baughman's annual Base Salary as of
the date of his death, payable in a lump sum or over six months in
equal bi-weekly installments as the Board shall determine, (iii) to
the extent provided under the terms of the Annual Bonus Plan, pay to
Mr. Baughman a pro rata share of the Annual Bonus for the year of his
death and (iv) provide Mr. Baughman those benefits set forth in the
LTIP which he would be entitled to in the event of his death.

h. The Company shall pay to Mr. Baughman any amounts owing pursuant
to Sections 6.b., 6.c. or 6.e. in two equal installments on the date
fifteen days following termination and the first anniversary of such
date.

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<PAGE>

The Company shall reduce or eliminate the Payments by first reducing or
eliminating the payments due under Sections 6.b. or 6.c. hereof, then
by reducing or eliminating any other amounts payable in cash, and then
by reducing or eliminating benefits which are not payable in cash, in
each case in reverse order beginning with payments or benefits which
are to be paid the farthest in time from the date of the Determination
(as hereinafter defined).

(2) An initial determination as to whether the Payments shall be
reduced and the amount of the Limited Payment Amount shall be made at
the Company's expense by an accounting firm selected by the Company
which is one of the five largest accounting firms in the United States
(the "Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed supporting
calculations and documentation, to the Company and Mr. Baughman within
15 days of the date Mr. Baughman's employment is terminated, and if the
Accounting Firm determines that no Excise Tax is payable it shall
furnish Mr. Baughman with an opinion to such effect reasonably
acceptable to Mr. Baughman. Within ten (10) days of the delivery of the
Determination to Mr. Baughman, Mr. Baughman shall have the right to
dispute the Determination (the "Dispute"). If there is no Dispute, the
Determination shall be binding, final and conclusive upon the Company,
subject to the application of subparagraph (3) below.

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<PAGE>

Mr. Baughman shall repay such portion to the Company on demand (but on
not less than ten (10) days' written notice) together with interest at
the "Applicable Federal Rate" (as defined in Section 1274(d) of the
Code).

7. NON-ASSIGNMENT. This Agreement and all of Mr. Baughman's rights
--------------
and obligations hereunder are personal to Mr. Baughman and shall not be
assignable; provided, however, that upon his death all of Mr. Baughman's rights
-------- -------
to cash payments under this Agreement shall inure to the benefit of his widow,
personal representatives, designees or other legal representatives, as the case
may be. Any person, firm or corporation succeeding to the business of the
Company by merger, purchase, consolidation or otherwise shall assume by contract
or operation of law the obligations of the Company hereunder, provided, however,
-------- -------
that the Company shall, notwithstanding such assumption, remain liable and
responsible for the fulfillment of its obligations under this Agreement.

8. ARBITRATION.
-----------

a. Subject to Sections 5.c. and 6.i. hereof, the Company and Mr.
Baughman agree that any dispute, controversy or claim which may arise
out of or relate to this Agreement (including, but not limited to, any
claim relating to the purported validity, interpretation,
enforceability or breach of any portion of this Agreement) or any other
claim, dispute or controversy arising out of the relationship between
Mr. Baughman and the Company, which is not settled by agreement between
the parties, shall be settled by arbitration of three arbitrators. One
arbitrator shall be selected by Mr. Baughman, one by the Company and
the third by the two persons so selected, all in accordance with the
labor arbitration rules of the American Arbitration Association then in
effect. In the event that the arbitrator selected by Mr. Baughman and
the arbitrator selected by the Company are unable to agree upon a third
arbitrator, then the third arbitrator shall be selected from a list of
seven provided by the office of the American

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<PAGE>

Arbitration Association nearest to Mr.
Baughman's residence with the parties striking names in order and the
party striking first to be determined by the flip of a coin. The
arbitration shall be held in a location to be mutually agreed upon by
the parties.

b. In consideration of the parties' agreement under Section 9.a.
hereof, and in further consideration of the anticipated expedition and
minimization of expense of the arbitration remedy, the arbitration
provisions of this Agreement shall provide the exclusive remedy for
settling disputes, controversies or claims hereunder or arising out of
the relationship between the Company and Mr. Baughman, and each party
expressly waives any right he or it may have to seek redress in any
other forum.

c. Any claim which either party has against the other which could be
submitted for resolution pursuant to this Section 8. must be presented
in writing by the claiming party to the other within one year of the
date the claiming party knew or should have known of the facts giving
rise to the claim, except that claims arising out of or related to the
termination of Mr. Baughman's employment must be presented by him
within one (1) year of the date of termination. Unless the party
against whom any claim is asserted waives the time limits set forth
above, any claim not brought within the time periods specified shall
be waived and forever barred.

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<PAGE>

d. Each party shall bear the cost of its own legal fees and related
expenses (including the cost of experts, evidence and counsel)
incurred in connection with any arbitration, but the Company and Mr.
Baughman shall bear equally the cost of the arbitrators' fees and
expenses.

e. Any decision and award or order of the majority of the arbitrators
shall be binding upon the parties hereto and judgment thereon may be
entered in any court having jurisdiction.

f. Each of the above terms and conditions of this Section 8. shall
have separate validity, and the invalidity of any part thereof shall
not affect the remaining parts.

g. Any decision and award or order of the majority of the arbitrators
shall be final and binding between the parties as to all claims which
were or could have been raised in connection with the dispute to the
fullest extent permitted by law.

9. INVALIDITY. The invalidity or unenforceability of any provision of
----------
this Agreement shall in no way affect the validity or enforceability of any
other provision.

10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
----------------
among the parties respecting the subject matter hereof and supersedes any prior
agreement respecting the subject matter hereof. No amendment to this Agreement
shall be deemed valid unless in writing and signed by the parties, and no
discharge of the terms of this Agreement shall be deemed valid unless by full
performance by the parties or by a writing signed by the parties. No waiver by a
party of any provisions or conditions of

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<PAGE>

this Agreement shall be deemed a waiver of similar or dissimilar provisions and
conditions at the same time or any prior or subsequent time.

11. NOTICE. Any notice, statement, report, request or demand required or
------
permitted to be given by this Agreement shall be effective only if in writing,
delivered personally against receipt therefor or mailed by certified or
registered mail, return receipt requested, to the parties at the addresses
hereinafter set forth, or at such other places that either party may designate
by notice to the other.

Notice to the Company shall be addressed to:

Tyco Toys, Inc.
6000 Midlantic Drive
Mt. Laurel, New Jersey 08054
Attn: R. Michael Kennedy, Jr., Esq.

Notice to Mr. Baughman shall be addressed to him at the executive offices
of the Company, with a copy to his home address at:

2094 Sampson Circle
Hudson, Ohio 44236

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<PAGE>

and with an additional copy to:

Stanley E. Everett
Brouse & MacDowell
500 First National Tower
Akron, Ohio 44308-1471

Such notice shall be deemed effectively given five (5) days after the same
has been deposited in a post box under the exclusive control of the United
States Postal Service.

12. GOVERNING LAW. This Agreement has been made in and shall be
-------------
interpreted according to the laws of the State of New York without any reference
to the conflicts of laws rules thereof. Subject to Section 8. hereof, the
parties hereto submit to the jurisdiction of the courts of the State of New York
for the purpose of any actions or proceedings which may be required to enforce
the provisions of this Agreement or an award made in any arbitration proceeding
initiated.

13. DEFINITIONS. For purposes of this Agreement:
-----------

a. "Board" means the Board of Directors of the Company.

b. "Cause" means Mr. Baughman's (i) intentional failure to perform
his assigned duties hereunder, (ii) willful misconduct in the
performance of such duties or (iii) willful violation of any law, rule
or regulation in connection with the performance of such duties (other
than a misdemeanor) or a violation of any law, rule or regulation
involving matters of moral turpitude, including any such violation or
misdemeanor.

c. "Change of Control" means the occurrence during the Term of:

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<PAGE>

(1) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any
'Person' (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than the Company or any of its affiliates, immediately
after which such Person has 'Beneficial Ownership' (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of more than fifty
percent (50%) of the combined voting power of the Company's then
outstanding Voting Securities; provided, however, in determining
-------- -------
whether a Change of Control has occurred, Voting Securities which are
acquired in a 'Non-Control Acquisition' (as hereinafter defined) shall
not constitute an acquisition which would cause a Change of Control. A
'Non-Control Acquisition' shall mean an acquisition by (i) an employee
benefit plan (or a trust forming a part thereof) maintained by (A) the
Company or (B) any corporation or other Person of which a majority of
its voting power or its voting equity securities or equity interest is
owned, directly or indirectly, by the Company (for purposes of this
definition, a 'Subsidiary') (ii) the Company or its Subsidiaries, or
(iii) any Person in connection with a 'Non-Control Transaction' (as
hereinafter defined);

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<PAGE>

for purposes of this Agreement, be considered as a member of the
Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened 'Election
Contest' (as described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest"),
including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or

(3) Approval by stockholders of the Company of:

(i) A merger, consolidation or reorganization involving the
Company, unless

(A) the stockholders of the Company immediately before such
merger, consolidation or reorganization own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least sixty percent (60%) of the combined
voting power of the outstanding Voting Securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the
same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization,
and

(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least

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<PAGE>

two-thirds of the members of the board of directors of the
Surviving Corporation, and

A transaction described in clauses (A) through (C) shall
herein be referred to as a 'Non-Control Transaction';

(ii) A complete liquidation or dissolution of the Company; or

(iii) The sale or other disposition of 50% or more of the net
assets of the Company to any Person (other than a transfer to a
Subsidiary).

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<PAGE>

Person, provided that if a Change of Control would occur (but for the operation
of this sentence) as a result of the acquisition of Voting Securities by the
Company, and after such share acquisition by the Company, the Subject Person
becomes the Beneficial Owner of any additional Voting Securities which increases
the percentage of the then outstanding Voting Securities Beneficially Owned by
the Subject Person, then a Change of Control shall occur.

d. "Common Stock" means the common stock of the Company, par value
$.01 per share.

e. "Compensation Committee" means the compensation committee of the
Board of Directors of the Company, which shall consist solely of two or
more persons each of whom are "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended.

f. "Competing Enterprise" means any entity which is, or has an
affiliate which is, engaged primarily in the design, development,
manufacture or distribution of toy products.

g. "Good Reason" means a significant demotion in Mr. Baughman's
status, title or position, or the regular assignment to Mr. Baughman of
duties or responsibilities which are significantly inconsistent with
such status, title or position.

h. "Term" means the period from _________, 1994 through the close
of business on December 31, 1998, or if this Agreement is renewed and
extended pursuant to Section 2. hereof, December 31, 1999.

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<PAGE>

IN WITNESS WHEREOF, the parties have executed these presents as of the day
------------------
and year first above written.

TYCO TOYS, INC.

By:______________________________

_________________________________

Gary Baughman

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<PAGE>

EXHIBIT 12.3

EMPLOYMENT AGREEMENT

AGREEMENT, dated as of July ___, 1994, by and between TYCO TOYS, INC., a
Delaware corporation having an office at 6000 Midlantic Drive, Mt. Laurel, New
Jersey 08054 (the "Company"), and HARRY J. PEARCE, residing at 325 Tom Brown
Road, Moorestown, New Jersey 08057 ("Mr. Pearce").

WITNESSETH:

WHEREAS, Mr. Pearce is currently employed by the Company pursuant to an
Employment Agreement between the Company and Mr. Pearce dated January 15, 1992,
as amended as of June 27, 1994, for a term expiring December 31, 1994 (the
"Current Agreement"); and

WHEREAS, Mr. Pearce has heretofore been appointed to the position of Vice
Chairman of the Company and is the Chief Financial Officer of the Company; and

WHEREAS, the parties are desirous of continuing such employment after
December 31, 1994 on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto agree as follows:

1. DEFINITIONS. For purposes of this Agreement:
-----------

a. "Board" means the Board of Directors of the Company.

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<PAGE>

b. "Cause" means (1) repeated violations by Mr. Pearce of Mr.
Pearce's obligations under Section 2. of this Agreement (other than as
a result of incapacity due to physical or mental illness) which are
demonstrably willful and deliberate on Mr. Pearce's part, which are
committed in bad faith or without reasonable belief that such
violations are in the best interests of the Company and which are not
remedied in a reasonable period of time after receipt of written
notice from the Company specifying such violations or (2) the
conviction of Mr. Pearce of a felony involving moral turpitude.

c. "Change of Control" means the occurrence during the Term of:

(1) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any
'Person' (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than the Company or any of its affiliates,
immediately after which such Person has 'Beneficial Ownership' (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of more
than fifty percent (50%) of the combined voting power of the Company's
then outstanding Voting Securities; provided, however, in determining
-------- -------
whether a Change of Control has occurred, Voting Securities which are
acquired in a 'Non-Control Acquisition' (as hereinafter defined) shall
not constitute an acquisition which would cause a Change of Control.
A 'Non-Control Acquisition' shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part thereof) maintained
by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or equity
interest is owned, directly or indirectly, by the Company (for
purposes of this definition, a 'Subsidiary') (ii) the Company

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<PAGE>

or its Subsidiaries, or (iii) any Person in connection with a 'Non-
Control Transaction' (as hereinafter defined);

(3) Approval by stockholders of the Company of:

(i) A merger, consolidation or reorganization involving the
Company, unless

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<PAGE>

resulting from such merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization, and

A transaction described in clauses (A) through (C) shall
herein be referred to as a 'Non-Control Transaction';

(ii) A complete liquidation or dissolution of the Company;
or

(iii) The sale or other disposition of 50% or more of the
net assets of the Company to any Person (other than a transfer to a
Subsidiary).

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<PAGE>

Notwithstanding the foregoing, a Change of Control shall not
be deemed to occur solely because any Person (the "Subject Person")
acquired Beneficial Ownership of more than the permitted amount of the
outstanding Voting Securities as a result of the acquisition of Voting
Securities by the Company which, by reducing the number of Voting
Securities outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person, provided that if a Change of
Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and
after such share acquisition by the Company, the Subject Person becomes
the Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting Securities
Beneficially Owned by the Subject Person, then a Change of Control
shall occur.

e. "Competing Enterprise" means any entity which is, or has an
affiliate which is, engaged primarily in the design, development,
manufacture or distribution of toy products.

f. "Good Reason" means (i) a demotion in Mr. Pearce's status, title
or position, or the regular assignment to Mr. Pearce of duties or
responsibilities which are inconsistent with such status, title or
position; (ii) a material breach of this Agreement by the Company if
the Company has not cured such breach within thirty days of Mr.
Pearce's notifying the Company of such breach. Mr. Pearce shall
notify the Company of his

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<PAGE>

belief that such a breach has occurred within thirty days of the
occurrence of such breach; or (iii) a relocation of the executive
offices of the Company to a location outside the 20-mile radius of Mt.
Laurel, New Jersey, without Mr. Pearce's written consent given to the
Company within 30 days of Mr. Pearce's receipt of notification of such
relocation by the Company. The Company agrees to give Mr. Pearce at
least three (3) months prior written notice of any such relocation.

g. "Term" means the period from January 1, 1995 through the close of
business on December 31, 1997, or if this Agreement is renewed and
extended pursuant to Section 3. hereof, December 31, 1998.

2. EMPLOYMENT.
----------

a. The Company hereby agrees to employ Mr. Pearce for the Term as
Vice Chairman and Chief Financial Officer of the Company and Mr.
Pearce hereby accepts such employment. Notwithstanding Section 2. of
the Current Agreement, the term of Mr. Pearce's employment pursuant to
the Current Agreement shall not be renewed and extended for an
additional one-year period after December 31, 1994. The terms and
provisions of the Current Agreement shall otherwise remain in full
force and effect through December 31, 1994.

b. Mr. Pearce shall have such powers and duties as generally pertain
to the offices of Vice Chairman and Chief Financial Officer, including
without limitation the hiring and firing of subordinates; provided,
--------
however, that in the case of persons occupying, or whose employment is
-------
being considered

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<PAGE>

for, positions directly reporting to Mr. Pearce, such hiring and firing
shall be with the consent of the chief executive officer.

c. Mr. Pearce shall be responsible to, and report directly to, the
chief executive officer and shall perform those executive duties
consistent with the foregoing as shall be designated from time to time
by the chief executive officer and on the terms and conditions of this
Agreement.

3. TERM. Subject to Section 7. hereof, Mr. Pearce's employment hereunder
----
shall commence on January 1, 1995 and terminate on December 31, 1997. Subject
to Section 7 hereof, on December 31, 1997, the term of Mr. Pearce's employment
shall be renewed and extended for an additional one-year period unless by June
30, 1997 either party has given written notice to the other that the term of Mr.
Pearce's employment shall not be so renewed and extended.

4. COMPENSATION.
------------

a. The Company shall pay to Mr. Pearce during the Term, except as
otherwise expressly provided herein:

(1) Base salary (the "Base Salary") at an annual rate
of Four Hundred Thousand Dollars ($400,000), which shall be reviewed
annually by the Board and which may be increased (but not decreased) at the
sole discretion of the Board. The Base Salary shall be payable in bi-weekly
installments and subject to such deductions as are required by law;

(2) An annual incentive bonus (the "Annual Bonus"),
based on a target amount equal to 70% of the Base Salary during the period
to which the bonus relates, payable pursuant to the Annual Bonus Plan (as
defined below) upon the attainment by the Company of specific performance
criteria to be

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<PAGE>

established by the Compensation Committee and approved by the Board.
Payment of the Annual Bonus may be, in the sole discretion of the
Compensation Committee, subject to approval by holders of a majority of
the voting shares of the Company of the material terms of the plan or
arrangement pursuant to which the Annual Bonus is paid (the "Annual
Bonus Plan"); and

b. The Company shall provide to Mr. Pearce, subject to his
insurability, those fringe benefits currently available to all senior
executive employees, as well as those which the Company may generally
make available to its senior executive employees, including without
limitation, life insurance, medical and hospital coverage.

c. The Company shall reimburse Mr. Pearce for all reasonable ordinary
and necessary business expenditures made by him in connection with, or
in furtherance of, his employment, upon presentation and approval of
expense statements, receipts or vouchers or such other supporting
information as may from time to time be reasonably requested by the
Company.

d. During the Term, the Company shall provide Mr. Pearce with a
private office, secretarial help and such other facilities and
services reasonably suitable to his position and adequate for the
performance of his

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<PAGE>

duties, including a current model automobile that is comparable to the
automobile used by Mr. Pearce on the Company's business during 1994.

e. The parties acknowledge and agree that the LTIP and the Annual
Bonus Plan shall contain such provisions and be administered in such
manner as the Compensation Committee shall, upon advice of legal
counsel, determine may be necessary so that compensation attributable
thereto is not subject to the deductibility limitations of Section
162(m) of the Code.

f. The Company shall have the right to deduct from any payment
hereunder an amount equal to the federal, state and local income taxes
and other amounts as may be required by law to be withheld.

5. FULL TIME DEVOTED TO COMPANY. Mr. Pearce shall devote his full time
----------------------------
and attention to the business of the Company and shall not during the Term be
engaged in any other business activity, whether or not such business activity is
pursued for gain, profit or other pecuniary advantage, but this shall not be
construed as preventing Mr. Pearce from:

a. investing his assets in such form or manner as will not require
any services on his part in the operation of the affairs of the
entities in which such investments are made;

b. serving as an officer or director of a trade or business
association related to the toy industry, such as, for example, The Toy
Manufacturer's Association or The Hobby Industries Association;

c. serving as a member of the board of directors of corporations
which are not, and whose affiliates are not, engaged in the toy
industry; and

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<PAGE>

d. serving as a member of the Board, a parent, or a subsidiary
thereof, provided that Mr. Pearce in his sole discretion agrees to so
serve. If Mr. Pearce (with his consent) is elected or appointed a
director of any such entity (and, if so appointed, as a member of any
committee of the Board) during the Term, he shall serve in such
capacity without further compensation.

6. NON COMPETITION; CONFIDENTIALITY.
--------------------------------

a. During the Non-Competition Period (as defined below), Mr. Pearce
will not directly or indirectly engage in the business of, or own or
control any interest in (except as a passive investor in a publicly
owned company whose primary business is not a Competing Enterprise and
owning less than 5% of the equity securities thereof), or act as
director, officer of, employee of, or consultant to, or participate in
or render any service to or be in any other way connected with, any
individual, partnership, joint venture, corporation or other business
entity directly or indirectly engaged anywhere in the United States in
any Competing Enterprise. In addition, during the Non-Competition
Period Mr. Pearce will not solicit suppliers or customers (or
potential suppliers or customers) of the Company for any Competing
Business or entice any individual to terminate his employment with the
Company or of any of the Company's subsidiaries. In the event (1) the
Company terminates Mr. Pearce's employment for Cause or pursuant to
Section 7.f. hereof or Mr. Pearce's employment terminates as of the
expiration of the Term and (2) the provisions of Sections 7.b., 7.c.
and 7.e. do not apply, this Section 6.a. shall not apply unless it is
specifically invoked by the Company and the Company agrees to pay Mr.
Pearce during the Non-Competition Period in bi-weekly installments at
an annual rate

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<PAGE>

equal to the Base Salary in effect on the date of termination. For
purposes of the foregoing, the Non-Competition Period is the period
commencing on January 1, 1995 and terminating on the first anniversary
of the June 30th which occurs during the year in which Mr. Pearce's
employment with the Company terminates for any reason.

b. Mr. Pearce agrees that all trade secrets, confidential information
with respect to marketing plans, manufacturing plans or techniques and
confidential financial matters of the Company and its subsidiaries
(collectively "Confidential Information") which is learned by him in
the course of his employment by the Company and any other Confidential
Information received, developed or hereafter learned in the course of
such employment or in association with the Company or its subsidiaries)
shall be, until the date one year after Mr. Pearce's employment
terminates hereunder, or, if later, the last day of the Non-Competition
Period, treated as confidential by him and shall not be disclosed by
him unless expressly authorized by the Company, or unless the
Confidential Information becomes generally available to the public
otherwise than through disclosure by Mr. Pearce.

c. Mr. Pearce shall not be deemed to have learned any Confidential
Information on the basis of inference or circumstantial evidence. It
shall be the burden of the Company to establish by a preponderance of
proof that Mr. Pearce actually learned the Confidential Information.
For example, it would be insufficient as proof for the Company merely
to establish that Mr. Pearce had access to the Confidential
Information and that the Confidential Information was in his
possession and learned by him. Similarly, in the case of alleged
disclosure by Mr. Pearce of Confidential Information, the

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<PAGE>

Company will be required to prove by a preponderance of proof that Mr.
Pearce actually divulged such Confidential Information contrary to the
provisions of this Agreement. For example, it would be insufficient
merely to establish that Mr. Pearce knew of the Confidential
Information or that he would be required to make use of such knowledge
in the course of an activity or that he was in a position to divulge
the Confidential Information. Proof of the actual divulgence of such
Confidential Information would be required before the Company could
invoke any remedy provided under Section 6. hereof for a breach of
Section 6.b. hereof.

d. Mr. Pearce acknowledges and agrees that in view of the unique
quality of his services provided to the Company and the fact that the
Company's business heavily depends upon his proprietary information,
the remedies of the Company at law for breach by Mr. Pearce of any of
the restrictions contained in Sections 6.a. or 6.b. hereof will be
inadequate and that the Company shall be entitled to enforce such
restrictions by temporary or permanent injunctive or mandatory relief
obtained in an action or proceeding instituted in any court of
competent jurisdiction without the necessity of proving irreparable
damages. It is understood by the Company and Mr. Pearce that the
covenants contained in Sections 6.a. and 6.b. hereof are essential
elements of this Agreement and that, but for Mr. Pearce's agreement to
comply with such covenants, the Company would not have entered into
this Agreement. Mr. Pearce acknowledges that such covenants are
reasonable and valid.

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<PAGE>

7. TERMINATION.
-----------

a. Subject to the provisions of this Section 7., the Company and Mr.
Pearce may terminate this Agreement on fifteen days written notice to
the other party, which notice shall specify the exact cause for
termination.

b. Subject to Section 7.i. hereof, if within six months following a
Change of Control occurring during the Term the Company terminates Mr.
Pearce's employment hereunder without Cause or Mr. Pearce terminates
his employment hereunder other than by reason of death or disability,
the Company shall pay to Mr. Pearce (1) the portion of the Base Salary
accrued through the date of termination, and (2) an amount equal to the
product of 2.99 and the average of the sum of the Base Salary and the
Annual Bonus for the last five calendar years prior to the date of
termination (including, if applicable, any year covered by the Current
Agreement)(the "Five-Year Compensation Average").

c. Subject to Section 7.i. hereof, in the event that (1) during the
Term the Company enters into a binding written agreement to engage in a
transaction which, if consummated, would result in a Change of Control,
(2) such transaction is consummated after the last date of the Term and
within four months thereof, and (3) subsequent to entering into such
agreement and during the Term the Company terminates Mr. Pearce's
employment without Cause or Mr. Pearce terminates his employment for
Good Reason, the Company shall pay to Mr. Pearce an amount equal to the
payment set forth in Section 7.b. hereof.

d. If the Company terminates Mr. Pearce's employment hereunder for
Cause or, except as provided in Section 7.b. hereof, Mr. Pearce
terminates

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<PAGE>

his employment hereunder without Good Reason, the Company's sole
obligation hereunder shall be to pay Mr. Pearce the portion of the Base
Salary accrued through the date of termination.

e. If the Company terminates Mr. Pearce's employment hereunder
without Cause or Mr. Pearce terminates his employment hereunder for
Good Reason and, in either case, Sections 7.b. and 7.c. hereof do not
apply, the Company shall pay to Mr. Pearce (1) the portion of the Base
Salary accrued through the date of termination, and (2) an amount equal
to the product of 2.0 and the Five-Year Compensation Average.

f. If Mr. Pearce becomes physically or mentally disabled during the
Term so that he is unable to perform the services required of him
pursuant to this Agreement for a period of six (6) successive months,
or an aggregate of six (6) months in any 12-month period, the Company
may terminate Mr. Pearce's services hereunder, in which event the
Company's only obligations hereunder shall be to (i) to have paid Mr.
Pearce the portion of the Base Salary accrued during such period, (ii)
to have afforded Mr. Pearce the full benefits provided in Section 4.b.
above during such period, (iii) to the extent provided under the terms
of the Annual Bonus Plan, to pay Mr. Pearce a pro rata share of the
Annual Bonus for the year in which his employment is terminated, and
(iv) to provide Mr. Pearce those benefits set forth in the LTIP which
he would be entitled to in the event his employment terminates by
reason of his disability.

g. In the event of Mr. Pearce's death during the Term, the Company
shall (i) pay to his spouse, if he is survived by a spouse, or if not,
to the estate of Mr. Pearce, the portion of the Base Salary accrued
through the

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<PAGE>

date of his death, (ii) pay to his spouse, if he is survived by his
spouse, or if not, to the estate of Mr. Pearce, an amount equal to one-
half of Mr. Pearce's annual Base Salary as of the date of his death,
payable in a lump sum or over six months in equal bi-weekly
installments as the Board shall determine, (iii) to the extent provided
under the terms of the Annual Bonus Plan, pay to Mr. Pearce a pro rata
share of the Annual Bonus for the year of his death and (iv) provide
Mr. Pearce those benefits set forth in the LTIP which he would be
entitled to in the event of his death.

h. The Company shall pay to Mr. Pearce any amounts owing pursuant to
Sections 7.b., 7.c. or 7.e. in a single lump sum within fifteen (15)
days following Mr. Pearce's termination of employment.

i. (1) Notwithstanding anything contained in this Agreement to the
contrary, to the extent that the payments and benefits provided under this
Agreement or provided to or for the benefit of Mr. Pearce under any other
plan or agreement of or with the Company (each such payment or benefit, a
"Payment," and such payments and benefits collectively, the "Payments")
would be subject to the excise tax (the "Excise Tax") imposed under Section
4999 of the Code, the Payments shall be reduced if and to the extent
necessary so that no Payment shall be subject to the Excise Tax (such
reduced amount, the "Limited Payment Amount"). The Company shall reduce or
eliminate the Payments by first reducing or eliminating the payments due
under Sections 7.b. or 7.c. hereof, then by reducing or eliminating any
other amounts payable in cash, and then by reducing or eliminating benefits
which are not payable in cash, in each case in reverse order beginning with
payments or benefits which are to be paid the farthest in time from the date
of the Determination (as hereinafter defined).

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<PAGE>

(2) An initial determination as to whether the Payments shall be
reduced and the amount of the Limited Payment Amount shall be made at the
Company's expense by an accounting firm selected by the Company which is
one of the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its determination
(the "Determination"), together with detailed supporting calculations and
documentation, to the Company and Mr. Pearce within 15 days of the date Mr.
Pearce's employment is terminated, and if the Accounting Firm determines
that no Excise Tax is payable it shall furnish Mr. Pearce with an opinion
to such effect reasonably acceptable to Mr. Pearce. Within ten (10) days of
the delivery of the Determination to Mr. Pearce, Mr. Pearce shall have the
right to dispute the Determination (the "Dispute"). If there is no Dispute,
the Determination shall be binding, final and conclusive upon the Company,
subject to the application of subparagraph (3) below.

(3) If it is established pursuant to a final determination of a
court or an Internal Revenue Service (the "IRS") proceeding which has been
finally and conclusively resolved, that any portion of the Payments or the
Limited Payment Amount is subject to the Excise Tax, such portion shall be
deemed for all purposes to be a loan to Mr. Pearce made on the date
received by Mr. Pearce, and Mr. Pearce shall repay such portion to the
Company on demand (but on not less than ten (10) days' written notice)
together with interest at the "Applicable Federal Rate" (as defined in
Section 1274(d) of the Code).

8. NON-ASSIGNMENT. This Agreement and all of Mr. Pearce's rights and
--------------
obligations hereunder are personal to Mr. Pearce and shall not be assignable;
provided, however, that upon his death all of Mr. Pearce's rights to cash
payments under this Agreement shall inure to the benefit of his widow, personal
representatives, designees or

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<PAGE>

other legal representatives, as the case may be. Any person, firm or corporation
succeeding to the business of the Company by merger, purchase, consolidation or
otherwise shall assume by contract or operation of law the obligations of the
Company hereunder, provided, however, that the Company shall, notwithstanding
-------- -------
such assumption, remain liable and responsible for the fulfillment of its
obligations under this Agreement.

9. ARBITRATION.
-----------

a. Subject to Sections 6.d. and 7.i. hereof, the Company and Mr.
Pearce agree that any dispute, controversy or claim which may arise out
of or relate to this Agreement (including, but not limited to, any
claim relating to the purported validity, interpretation,
enforceability or breach of any portion of this Agreement) or any other
claim, dispute or controversy arising out of the relationship between
Mr. Pearce and the Company, which is not settled by agreement between
the parties, shall be settled by arbitration of three arbitrators. One
arbitrator shall be selected by Mr. Pearce, one by the Company and the
third by the two persons so selected, all in accordance with the labor
arbitration rules of the American Arbitration Association then in
effect. In the event that the arbitrator selected by Mr. Pearce and the
arbitrator selected by the Company are unable to agree upon a third
arbitrator, then the third arbitrator shall be selected from a list of
seven provided by the office of the American Arbitration Association
nearest to Mr. Pearce's residence with the parties striking names in
order and the party striking first to be determined by the flip of a
coin. The arbitration shall be held in a location to be mutually agreed
upon by the parties.

b. In consideration of the parties' agreement under Section 9.a.
hereof, and in further consideration of the anticipated expedition and
minimization

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<PAGE>

of expense of the arbitration remedy, the arbitration
provisions of this Agreement shall provide the exclusive remedy for
settling disputes, controversies or claims hereunder or arising out of
the relationship between the Company and Mr. Pearce, and each party
expressly waives any right he or it may have to seek redress in any
other forum.

c. Any claim which either party has against the other which could be
submitted for resolution pursuant to this Section 9. must be presented
in writing by the claiming party to the other within one year of the
date the claiming party knew or should have known of the facts giving
rise to the claim, except that claims arising out of or related to the
termination of Mr. Pearce's employment must be presented by him within
one (1) year of the date of termination. Unless the party against whom
any claim is asserted waives the time limits set forth above, any claim
not brought within the time periods specified shall be waived and
forever barred.

d. Each party shall bear the cost of its own legal fees and related
expenses (including the cost of experts, evidence and counsel) incurred
in connection with any arbitration, but the Company and Mr. Pearce
shall bear equally the cost of the arbitrators' fees and expenses.

e. Any decision and award or order of the majority of the arbitrators
shall be binding upon the parties hereto and judgment thereon may be
entered in any court having jurisdiction.

f. Each of the above terms and conditions of this Section 9. shall
have separate validity, and the invalidity of any part thereof shall
not affect the remaining parts.

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<PAGE>

g. Any decision and award or order of the majority of the arbitrators
shall be final and binding between the parties as to all claims which were
or could have been raised in connection with the dispute to the fullest
extent permitted by law.

10. INVALIDITY. The invalidity or unenforceability of any provision of
----------
this Agreement shall in no way affect the validity or enforceability of any
other provision.

12. NOTICE. Any notice, statement, report, request or demand required
------
or permitted to be given by this Agreement shall be effective only if in
writing, delivered personally against receipt therefor or mailed by certified or
registered mail, return receipt requested, to the parties at the addresses
hereinafter set forth, or at such other places that either party may designate
by notice to the other.

Notice to the Company shall be addressed to:

Tyco Toys, Inc.
6000 Midlantic Drive
Mt. Laurel, New Jersey 08054
Attn: R. Michael Kennedy, Jr., Esq.

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<PAGE>

Notice to Mr. Pearce shall be addressed to him at the executive offices of
the Company, with a copy to his home address at:

325 Tom Brown Road
Moorestown, New Jersey 08057

and with an additional copy to:

Salamon, Gruber, Newman, Blaymore & Rothschild, P.C.
97 Powerhouse Road
Roslyn Heights, New York 11577
Attn: Frederick Newman, Esq.

Such notice shall be deemed effectively given five (5) days after the same
has been deposited in a post box under the exclusive control of the United
States Postal Service.

IN WITNESS WHEREOF, the parties have executed these presents as of the
day and year first above written.

TYCO TOYS, INC.

By:_________________________________

___________________________________
Harry J. Pearce

-85-

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-START> Jan-01-1994
<PERIOD-END> Sep-30-1994
<CASH> 16,488
<SECURITIES> 0
<RECEIVABLES> 323,256
<ALLOWANCES> 7,465
<INVENTORY> 113,224
<CURRENT-ASSETS> 459,348
<PP&E> 133,199
<DEPRECIATION> (82,988)
<TOTAL-ASSETS> 786,307
<CURRENT-LIABILITIES> 321,759
<BONDS> 146,154
<COMMON> 294,986
0
48,376
<OTHER-SE> (27,874)
<TOTAL-LIABILITY-AND-EQUITY> 786,307
<SALES> 506,330
<TOTAL-REVENUES> 506,330
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<OTHER-EXPENSES> 209,783
<LOSS-PROVISION> 2,689
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<INCOME-PRETAX> (21,646)
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<NET-INCOME> (21,646)
<EPS-PRIMARY> (0.62)
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</TABLE>