-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, LypQdrw/Pd6JBu0gldfb6GkIvbauq6+vNsY1GVx20y3CKR9YbhkVqror7G6GPX3t vzd1LNmO5FTn4HAJt1Bj/Q== 0000950109-94-002083.txt : 19941116 0000950109-94-002083.hdr.sgml : 19941116 ACCESSION NUMBER: 0000950109-94-002083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TYCO TOYS INC CENTRAL INDEX KEY: 0000786130 STANDARD INDUSTRIAL CLASSIFICATION: 3944 IRS NUMBER: 133319358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09357 FILM NUMBER: 94559506 BUSINESS ADDRESS: STREET 1: 6000 MIDLANTIC DR CITY: MT LAUREL STATE: NJ ZIP: 08054-1516 BUSINESS PHONE: 6092347400 MAIL ADDRESS: STREET 1: 6000 MIDLANTIC DRIVE CITY: MOUNT LAUREL STATE: NJ ZIP: 08054-1516 10-Q 1 FORM 10-Q 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 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 - Part I. Financial Information. Item 1. Financial Statements. TYCO TOYS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share amounts)
September 30, December 31, ----------------- ------------ 1994 1993 1993 ------- ------- ------------ (unaudited) 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 ======= ======= =======
See accompanying notes to consolidated financial statements. -3-
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 ---------- -------- -------- -------- 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
See accompanying notes to consolidated financial statements. -4- 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)
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 ------ ----- ------ ----- --------- ------ --------- ------ ------ ----------- 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) == == ====== ==== ======= ======== ======== === ======= ========
See accompanying notes to consolidated financial statements. -5- Tyco Toys, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited)
Nine Months Ended September 30, ------------------- 1994 1993 -------- --------- 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 -
See accompanying notes to consolidated financial statements. -6- 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- 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): 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 ======
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- TYCO TOYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (3) Receivables, Net (in thousands): ----------------
September 30, ----------------- December 31, 1994 1993 1993 ------- ------- ----------- 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 ======= ======= =======
(4) Inventories, Net (in thousands): ----------------
September 30, ---------------- December 31, 1994 1993 1993 ------- ------- ----------- 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 ======= ======= =======
(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- 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- 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- 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- 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- 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- 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- 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- 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- Exhibit 11.1 Tyco Toys, Inc. and Subsidiaries Statement Regarding Computation of Loss Per Share (in thousands, except per share amounts)
For the Quarter Ended September 30, 1994 ---------------------------------------------------------------- Primary Fully Diluted ------------------------------- ------------------------------- As As As (1) As Reported Adjustments Adjusted Reported Adjustments Adjusted -------- ----------- -------- -------- ----------- -------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(8,853) $ - $(8,853) $(8,853) $ 1,003 $(7,850) ====== ====== ====== ====== ====== ====== Fully SHARES Primary Diluted ------- ------- 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) ==== ====
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- Exhibit 11.1 Tyco Toys, Inc. and Subsidiaries Statement Regarding Computation of Per Share Earnings (in thousands, except per share amounts)
For the Quarter Ended September 30, 1994 ---------------------------------------------------------------- Primary Fully Diluted ------------------------------- ------------------------------- As As As (1) As Reported Adjustments Adjusted Reported Adjustments Adjusted -------- ----------- -------- -------- ----------- -------- NET INCOME $4,686 $ - $ 4,686 $ 4,686 $ 142 $ 4,828 ===== ======== ===== ===== === ===== Fully SHARES Primary Diluted ------- ------- 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 ==== ====
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- 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 -------- ----------- -------- -------- ----------- -------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(21,646) $ - $(21,646) $(21,646) $2,134 $(19,512) ====== ======= ====== ====== ===== ====== 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) ==== ====
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 year (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 loss per share is not presented in the Consolidated Statements of Operations since it is anti-dilutive. -20- 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 -------- ----------- -------- -------- ----------- -------- NET LOSS $(11,794) $ - $(11,794) $(11,794) $425 $(11,369) ====== ===== ====== ====== === ====== Fully SHARES Primary Diluted ------- ------- 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) ==== ====
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. (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) 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- EX-12.1 2 EMPLOYMENT AGREEMENT 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- 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- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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. -34- 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. -35- 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 -36- 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). (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"). -37- 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. -38- 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. -39- 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. -40- 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: -41- 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 -42- EX-12.2 3 EMPLOYMENT AGREEMENT 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 -43- 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 -44- 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 -45- 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 -46- 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. -47- 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; -48- 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 -49- 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. -50- 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 -51- 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. -52- 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 -53- 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. 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. Baughman 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 to the extent necessary so that no Payment shall be subject to the Excise Tax (such reduced amount, the "Limited Payment Amount"). -54- 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. (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. Baughman made on the date received by Mr. Baughman, and -55- 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 -56- 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. -57- 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 -58- 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 -59- 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: -60- (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); (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, -61- 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 -62- 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 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. -63- 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. -64- IN WITNESS WHEREOF, the parties have executed these presents as of the day ------------------ and year first above written. TYCO TOYS, INC. By:______________________________ _________________________________ Gary Baughman -65- EX-12.3 4 EMPLOYMENT AGREEMENT 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. -66- 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 -67- or its Subsidiaries, or (iii) any Person in connection with a 'Non- Control Transaction' (as hereinafter defined); (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 -68- 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 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). -69- 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. 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) 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 -70- 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 -71- 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 -72- 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. 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 -73- 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 -74- 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 -75- 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 -76- 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. -77- 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 -78- 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 -79- 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). -80- (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 -81- 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 -83- 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. -83- 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. 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. -84- 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. 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:_________________________________ ___________________________________ Harry J. Pearce -85- EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 9-mos Dec-31-1994 Jan-01-1994 Sep-30-1994 16,488 0 323,256 7,465 113,224 459,348 133,199 (82,988) 786,307 321,759 146,154 294,986 0 48,376 (27,874) 786,307 506,330 506,330 295,086 295,086 209,783 2,689 21,732 (21,646) 0 (21,646) 0 0 0 (21,646) (0.62) (0.62)
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