FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of June, 2004
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite R, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F
Form 20-F X Form 40-F
------- -------
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): ____________
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): ____________
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
------- -------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-___________
Contents:
1. Quarterly Report for the Quarter Ended March 31, 2004
2. Press Release dated May 10, 2004
3. Press Release dated March 29, 2004
4. Press Releases dated February 17, 2004 (3 releases)
5. Press Release dated January 5, 2004
6. Annual Report to Stockholders
7. Management Information Circular / Proxy Statement dated
April 26, 2004
This Report on Form 6-K shall be deemed to be incorporated by reference
into the Registrant's Registration Statements on Form S-8 (No. 33-86960, No.
333-7000, No. 333-59737 and 333-61260) and on Form F-3 (No. 333-7526 and No.
333-79005).
QUARTERLY REPORT *
For the quarterly period ended March 31, 2004
Commission File Number 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in charter)
Bermuda N/A
(Country of Incorporation) (I.R.S. Employer Identification No.)
Suite R, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2693 2238
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 2004
--------------------------------------- -----------------------------
Common Stock, par value $0.01 per share 18,611,888
------------------------
* As a foreign private issuer, the registrant is not required to file reports on
Form 10-Q. It intends to make voluntary quarterly reports to its stockholders
which generally follow the Form 10-Q format. Such reports, of which this is one,
are furnished to the Commission pursuant to Form 6-K.
2
RADICA GAMES LIMITED
INDEX TO QUARTERLY REPORT ON FORM 6-K
QUARTER ENDED SEPTEMBER 30, 2003
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................4
Condensed Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003.................4
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2004 (unaudited)
and 2003 (unaudited).............................................5
Condensed Consolidated Statements of Shareholders' Equity
(unaudited) for the Three Months Ended March 31, 2004
(unaudited) and 2003 (unaudited).................................6
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 2004 (unaudited) and
2003 (unaudited).................................................7
Notes to the Condensed Consolidated Financial Statements.........8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk......17
Item 4. Controls and Procedures.........................................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................18
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities..................................18
Item 3. Defaults Upon Senior Securities.................................18
Item 4. Submission of Matters to a Vote of Security Holders.............18
Item 5. Other Information...............................................18
Item 6. Exhibits and Reports on Form 8-K................................18
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
-----------------------------
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
(US dollars in thousands, except share data) March 31, December 31,
------------ ------------
2004 2003
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,882 $ 13,944
Investment securities 28,097 28,009
Accounts receivable, net of allowances for doubtful accounts 4,617 15,360
of $253 ($251 as at December 31, 2003)
Inventories 17,952 15,503
Prepaid expenses and other current assets 3,836 2,748
Income taxes receivable 931 1,404
Deferred income taxes 1,706 1,706
------------ ------------
Total current assets 75,021 78,674
------------ ------------
Property, plant and equipment, net 11,775 11,908
------------ ------------
Goodwill 9,551 9,551
------------ ------------
Other asset 870 875
------------ ------------
Deferred income taxes, noncurrent 932 1,206
------------ ------------
Total assets $ 98,149 $ 102,214
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 6,590 $ 7,390
Accrued payroll and employee benefits 995 1,353
Accrued liabilities 3,022 3,976
Income taxes payable - 339
------------ ------------
Total current liabilities 10,607 13,058
------------ ------------
Total liabilities 10,607 13,058
------------ ------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
18,611,888 shares outstanding (18,225,204 as at
December 31, 2003) 186 182
Additional paid-in capital 4,262 3,517
Retained earnings 82,838 85,437
Accumulated other comprehensive income 256 20
------------ ------------
Total shareholders' equity 87,542 89,156
------------ ------------
Total liabilities and shareholders' equity $ 98,149 $ 102,214
============ ============
See accompanying notes to the consolidated financial statements.
4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2004 and 2003
(US dollars in thousands, Three months ended March 31,
except per share data) ---------------------------------------
2004 2003*
----------------- -----------------
(unaudited) (unaudited)
Revenues:
Net sales $ 12,125 $ 16,045
Cost of goods sold (exclusive of items shown (6,985) (9,944)
separately below)
----------------- -----------------
Gross profit 5,140 6,101
----------------- -----------------
Operating expenses:
Selling, general and administrative expenses (4,989) (5,294)
Research and development (929) (915)
Depreciation and amortization (421) (592)
----------------- -----------------
----------------- -----------------
Total operating expenses (6,339) (6,801)
----------------- -----------------
Operating loss (1,199) (700)
Other income 82 55
Foreign currency (loss) gain, net (28) 13
Net interest income 149 60
----------------- -----------------
Loss before income taxes (996) (572)
Provision for income taxes (116) (32)
----------------- -----------------
Net loss $ (1,112) $ (604)
================= =================
Loss per share $ (0.06) $ (0.03)
================= =================
Basic and diluted weighted average number of common and 18,570,938 17,842,297
common equivalent shares:
================= =================
Cash dividends declared per share
(4 cents declared and paid for quarter ended March 31, 2004 $ 0.08 $ -
and 4 cents declared for quarter ending June 30, 2004)
================= =================
* Reclassified to conform with 2004 presentation.
See accompanying notes to the consolidated financial statements.
5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2004 and 2003
(US dollars in thousands) Common stock Accumulated
------------ Additional other Total
Number paid-in Retained comprehensive shareholders'
of shares Amount capital earnings income (loss) equity
--------------- ------------- ------------- ------------- --------------- -------------
Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ 85,437 $ 20 $ 89,156
Issuance of stock 616 - 6 - - 6
Stock options exercised 386,068 4 739 - - 743
Dividends declared - - - (1,487) - (1,487)
Net loss - - - (1,112) - (1,112)
Unrealized loss on investment - - - - 49 49
securities available-for-sale,
net of nil tax
Foreign currency translation, - - - - 187 187
net of nil tax
--------------- ------------- ------------- ------------- --------------- -------------
Balance at March 31, 2004 18,611,888 $ 186 $ 4,262 $ 82,838 $ 256 $ 87,542
=============== ============= ============= ============= =============== =============
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ 72,946 $ (808) $ 74,636
Issuance of stock 842 - 3 - - 3
Stock options exercised 125,079 1 293 - - 294
Net loss - - - (604) - (604)
Foreign currency translation, - - - - (139) (139)
net of nil tax
--------------- ------------- ------------- ------------- --------------- -------------
Balance at March 31, 2003 17,922,052 $ 179 $ 2,616 $ 72,342 $ (947) $ 74,190
=============== ============= ============= ============= =============== =============
The comprehensive loss of the Company, which represents the aggregate of the net
loss and the foreign currency translation adjustments, was $(743) and $(876) for
the three months ended March 31, 2004 and 2003.
See accompanying notes to the consolidated financial statements.
6
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2003
(US dollars in thousands) 2004 2003
----------- -----------
(unaudited) (unaudited)
(unaudited)
Cash flow from operating activities:
Net loss $ (1,112) $ (604)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes 274 -
Depreciation 421 592
Loss on disposal and write off of property, plant and equipment - 2
Compensatory elements of stock issuances 6 -
Unrealized gain on trading investments (39) -
Changes in current assets and liabilities:
Decrease in accounts receivable 10,743 9,646
(Increase) decrease in inventories (2,449) 1,386
Increase in prepaid expenses and other current assets (1,088) (1,364)
Decrease in accounts payable (90) (2,847)
Decrease in accrued payroll and employee benefits (358) (679)
Decrease in accrued warranty expenses (710) (620)
Decrease in other accrued liabilities (1,699) (2,550)
Increase in income taxes payable 134 33
--------- ----------
Net cash provided by operating activities 4,033 2,995
--------- ----------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 161 2
Purchase of property, plant and equipment (444) (162)
--------- ----------
Net cash used in investing activities (283) (160)
--------- ----------
Cash flow from financing activities:
Funds from issuance of stock - 3
Funds from stock options exercised 743 294
Dividends paid (742) -
Repayment of long-term debt - (912)
--------- ----------
Net cash provided by (used in) financing activities 1 (615)
--------- ----------
Effect of currency exchange rate change 187 (139)
--------- ----------
Net increase in cash and cash equivalents 3,938 2,081
Cash and cash equivalents:
Beginning of period 13,944 32,692
--------- ----------
End of period $ 17,882 $ 34,773
========= ==========
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED March 31, 2004)
(US dollars in thousands)
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements of Radica Games Limited
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
accompanying unaudited condensed consolidated financial statements contain
all normal and recurring adjustments, which, in the opinion of management,
are necessary to present fairly the financial position of the Company as of
March 31, 2004, and its results of operations and cash flows for the
periods presented herein. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report
on Form 20-F for the year ended December 31, 2003.
Because the Company's business is seasonal, revenues, expenses, assets and
liabilities can vary during each quarter of the year. Accordingly, the
operating results and trends in these unaudited condensed consolidated
interim financial statements are not necessarily indicative of future
results that may be expected for any other interim period or the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
of certain assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities as of and during the reporting periods.
Significant items subject to such estimates and assumptions include the
carrying amount of goodwill, property, plant and equipment, valuation
allowances for receivables, inventories and deferred income tax assets and
reserves for product returns and warranties, as well as in estimates used
in accounting for legal contingencies. Actual results could differ from the
estimated results. Differences from those estimates are recorded in the
period they become known.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-based Compensation, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on
net loss if the fair value based method had been applied to all outstanding
and unvested awards in the period:
8
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2004)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
Three months ended March 31,
----------------------------
2004 2003
------------ ------------
Net loss
As reported $ (1,112) $ (604)
Less: Total stock-based employee
compensation expense determined
under fair-value-based method
for all rewards, net of related tax effects (127) (142)
------------ ------------
Pro forma $ (1,239) $ (746)
============ ============
Reported net loss per share $ (0.06) $ (0.03)
============ ============
Pro forma net loss per share $ (0.07) $ (0.04)
============ ============
In April 2003, the Financial Accounting Standards Board ("FASB") announced
that it would mandate the fair value method of accounting for all
stock-based awards. The FASB issued an Exposure Draft of a proposed
statement on March 31, 2004, which is subject to a comment period. If
enacted, the change in accounting is not expected to be effective for the
Company until fiscal 2005. Until a final statement is issued, the Company
cannot estimate the effect that this change in accounting would have on its
consolidated statement of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, which
was issued in January 2003. The Company will be required to apply FIN 46R
to variable interests in VIEs created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will
be applied beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would
be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE.
The Company has evaluated the impact of applying FIN 46R and believes that,
other than those entities already consolidated in the Company's
consolidated financial statements, no additional entities would need to be
consolidated by the Company.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not have a
material affect on the Company's results of operations or financial
position.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2004)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock.
For the Company, the Statement was effective for instruments entered into
or modified after May 31, 2003 and otherwise will be effective as of
January 1, 2004, except for mandatorily redeemable financial instruments.
For certain mandatorily redeemable financial instruments, the Statement
will be effective for the Company on January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. The Company currently does not have any
financial instruments that are within the scope of this Statement.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation. These reclassifications had no effect
on net loss or shareholders' equity.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted average number of
shares of common stock, and with respect to diluted earnings per share,
also includes the effect of all dilutive potential common stock
outstanding. Dilutive potential common stock results from dilutive stock
options and warrants. The effect of such dilutive potential common stock on
net income per share is computed using the treasury stock method. Dilutive
potential common stock has no effect on net loss per share.
The following table sets forth the computations of loss per share for the
three-month periods ended March 31:
Three months ended March 31,
------------------------------------
2004 2003
--------------- ----------------
Numerator for Loss per share:
Net loss $ (1,112) $ (604)
=============== ================
Denominator for loss per share: 18,570,938 17,842,297
=============== ================
Loss per share $ (0.06) $ (0.03)
=============== ================
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2004)
(US dollars in thousands)
3. BUSINESS SEGMENTS
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company has two reportable segments from which
it derives its revenues: the Games business that sells product under the
Company's Radica(R) and Girl Tech(R) brand names, and the Video Game
Accessory ("VGA") business that sells product under the Company's
Gamester(R) brand name. The Company also sources certain VGA and other
electronic products through third party manufacturers for retailers to sell
under their own brands; this is also included in the VGA segment. The
reportable segments are strategic businesses that offer different products.
The Company measures segment performance based on net income before
interest and other income and income taxes. Inter-segment sales and
transfers have been eliminated and are not included in the following table.
Certain corporate expenses are managed outside of the operating segments.
Corporate expenses consist primarily of costs related to business
integration and other general and administrative expenses. All corporate
and indirect costs have been apportioned on the basis of corresponding
sales and direct costs.
Information by segment for the three months ended March 31, 2004 and 2003
are as follows:
Three months ended March 31,
-----------------------------
2004 2003
------------- ------------
Revenues from external customers
Games and Youth Electronics $ 9,799 $ 12,050
VGA 2,326 3,995
------------- ------------
Total revenues from external customers $ 12,125 $ 16,045
============= ============
Segment gain (loss)
Games and Youth Electronics $ (950) $ 189
VGA (277) (876)
------------- ------------
Total segment loss $ (1,227) $ (687)
Corporate
Net interest and other income 231 115
Provision for income taxes (116) (32)
------------- ------------
Total consolidated net loss $ (1,112) $ (604)
============= ============
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2004)
(US dollars in thousands)
4. GOODWILL
At March 31, 2004 and December 31, 2003, the Company's cost in excess of
fair value of assets purchased (goodwill) related to the 1999 acquisition
of Leda Media Products Limited, now called Radica UK Limited ("Radica UK").
On June 24, 1999, the Company purchased Radica UK for approximately
$15,970. During the quarter ended June 30, 2000, upon claiming certain
breaches of warranty at Radica UK, the Company and the ex-shareholders of
Radica UK mutually agreed to cancel certain loan notes such that the
purchase price was reduced by $1,399. The Company recorded goodwill of
approximately $12,100 resulting from the adjusted purchase price.
Accumulated amortization related to goodwill of $2,518 arising prior to the
adoption of SFAS No. 142 has been reflected in the gross carrying amount of
goodwill as of December 31, 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Goodwill is required to be tested for impairment
on an annual basis at the reporting unit level. Furthermore, goodwill is
required to be tested on an interim basis if an event or change in
circumstances indicates that the asset might be impaired. The goodwill
arising from the purchase of Radica UK was allocated to the Video Games
Accessories ("VGA") reporting unit. In December 2003, the Company has
undertaken goodwill impairment testing to determine whether the goodwill
was impaired and the extent of such impairment. After performing this
evaluation there was no impairment of goodwill as at December 31, 2003 as
the fair value of the reporting unit (as determined using the expected
present value of future cash flows) exceeded the carrying amount of the
reporting unit (including goodwill). There have been no events since
December 31, 2003 which would cause the Company to change this assessment.
5. INVENTORIES
Inventories by major categories are summarized as follows:
March 31, December 31,
2004 2003
--------------- ---------------
Raw materials $ 2,803 $ 1,554
Work in progress 4,096 2,758
Finished goods 11,053 11,191
--------------- ---------------
$ 17,952 $ 15,503
=============== ===============
6. PROPERTY, PLANT AND EQUIPMENT
Property and Plant and Equipment consists of the following:
March 31, December 31,
2004 2003
-------------- --------------
Land and buildings $ 10,746 $ 10,953
Plant and machinery 7,376 7,754
Furniture and equipment 7,698 7,514
Leasehold improvements 3,046 2,943
-------------- --------------
Total 28,866 29,164
Less: Accumulated depreciation and
amortization (17,091) (17,256)
-------------- --------------
Total, net $ 11,775 $ 11,908
============== ==============
12
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2004)
(US dollars in thousands)
7. ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31, December 31,
2004 2003
--------------- ----------------
Accrued advertising expenses $ 877 $ 1,091
Accrued license and royalty fees 277 1,062
Commissions payable 77 166
Dividends payable 745 -
Other accrued liabilities 1,046 1,657
--------------- ----------------
Total $ 3,022 $ 3,976
=============== ================
8. PLEDGE OF ASSETS
At March 31, 2004, the Company's general banking facilities including
overdraft and trade facilities were collateralized by leasehold land and
buildings and bank balances with an aggregate net book value of $2,262 and
$2,288, respectively.
9. LITIGATION
On April 4, 2000 a lawsuit was filed by the Lemelson Foundation
("Lemelson") against the Company in Arizona Court for patent infringement.
Lemelson claims to be owners of nearly 800 issued and pending patents,
including the patent on Machine Vision and Automatic Identification (Auto
ID) operations. The Auto ID operation is used in machines that are part of
the Company's bonding and heat-sealing manufacturing processes. Lemelson is
contesting that the use of machines that incorporate this patented
technology infringes on their IP rights and therefore the Company is
obligated to pay a royalty based on the use of this technology. The suit by
Lemelson has been stayed pending the outcome of Lemelson vs. Cognex, a
similar suit filed by Lemelson, which will have some bearing on the Radica
case with Lemelson. On January 23, 2004 a declaratory judgment was given in
the Cognex case that the Lemelson's patent claims are invalid. If this
judgment is upheld following appeal, assuming an appeal is made, the
Company believes that this result is favorable to the Company's defense of
the Lemelson lawsuit.
The Company cannot predict the outcome of the Lemelson case or the effect
of such litigation on the financial results of the Company. No accrual has
been recorded at March 31, 2004 and December 31, 2003 in respect of the
Lemelson case or other claims or legal actions, in accordance with SFAS No.
5 Accounting for Contingencies. Management does not believe that the
ultimate disposition of the other matters will have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
---------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------------------------------------------
The following discussion should be read in conjunction with the attached
financial statements and notes thereto, and with the audited financial
statements, accounting policies and notes included in the Company's Annual
Report on Form 20-F for the year ended December 31, 2003, as filed with the
United States Securities and Exchange Commission.
DESCRIPTION OF BUSINESS
Founded in 1983 by Americans living in Hong Kong, Radica Games Limited (NASDAQ:
RADA) was incorporated in Bermuda in 1993. We are headquartered in Hong Kong and
manufacture our products in our factory in southern China. In 1994 we went
public when our shares began trading on the Nasdaq National Market.
We manufacture and market a diverse line of electronic entertainment products
covering multiple product lines - electronic games carrying the Radica, Play
TV(R) and Arcade Legends(TM) brand names, Gamester(R) branded video game
controllers & accessories, girls' lifestyle electronics carrying the Girl
Tech(R) and Barbie(TM) brand names and two new categories being introduced in
2004, a doll line carrying the Twinkleberries(TM) brand name and a remote
control car line carrying the Nitro Battlerz(TM) brand name. Our factory also
manufactures for other companies in the electronic game industry and provides
sourcing services for retail customers. We market our products through
subsidiaries in the United States, the United Kingdom, Canada and Hong Kong. Our
largest market is in the United States where in 2003 we had the second largest
market share in the electronic handheld and tabletop electronic games categories
according to industry data source, The NPD Group, Inc.
RESULTS OF OPERATIONS
The following table sets forth items from our Consolidated Statements of
Operations as a percentage of net revenues:
Three months ended March 31,
------------------------------
2004 2003
------------- -------------
Net sales 100.0% 100.0%
Cost of sales (57.6%) (62.0%)
Gross Margin 42.4% 38.0%
Selling, general and adminstrative expenses (41.1%) (32.9%)
Research and development (7.6%) (5.7%)
Depreciation and amortization (3.5%) (3.7%)
Operating loss (9.8%) (4.3%)
Net interest and other income 1.9% 0.7%
Foreign currency (loss) gain, net (0.3%) 0.0%
Loss before income taxes (8.2%) (3.6%)
Provision for income taxes (1.0%) (0.2%)
Net loss (9.2%) (3.8%)
We reported a net loss for the first quarter of $1.1 million or $0.06 per
diluted share compared to a net loss of $0.6 million or $0.03 per diluted share
in the first quarter of 2003.
14
Summary of sales achieved from each category of products:
Three months ended March 31,
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
------------------------------------ --------------- ---------------- ---------------- ----------------
(US dollars in thousands)
Electronic Games 53.7% $ 6,512 51.5% $ 8,265
Youth Electronics 16.3% 1,978 10.4% 1,678
VGA 16.4% 1,992 20.2% 3,234
Manufacturing Services 13.6% 1,643 17.9% 2,868
--------------- ---------------- ---------------- ----------------
Total 100.0% $ 12,125 100.0% $ 16,045
=============== ================ ================ ================
Gross profit margin for the first quarter of 2004 was 42.4% compared to 38.0% in
the first quarter of 2003 due to the decrease of lower margin Manufacturing
Services business, together with improved margin in other product lines. In the
first quarter of 2004, the continued movement away from our lower margin
Manufacturing Services business resulted in a $1.2 million reduction in
Manufacturing Services sales compared to the first quarter of 2003.
Total sales of Radica Brands (excluding Manufacturing Services) for the quarter
decreased by 20.5% to $10.5 million from $13.2 million due to a reluctance of
certain major retailers to take in inventory during January and February. Video
Game Accessories ("VGA") sales were down by 38.4% compared to the first quarter
of last year due to the soft VGA retail markets. A 21.2% decline in Electronic
Games sales was partially offset by sales growth of 17.9% in Youth Electronics
sales. The decrease in Electronics Games sales was largely due to $1.0 million
in Q1 2003 sales of our handheld Tetris game to Avon that did not recur in Q1
2004.
Operating expenses decreased to $6.3 million for the quarter from $6.8 million
in the first quarter of 2003. The decrease was mainly due to a reduction of
depreciation and amortization costs combined with lower variable costs.
The following table shows the major operating expenses:
Three months ended March 31,
-----------------------------------
(US dollars in millions) 2004 2003
--------------- ----------------
Advertising expenses 0.5 0.7
Other selling and promotion expenses 0.5 0.7
Indirect salaries and bonus 2.0 2.0
Other general & administrative expenses 2.0 1.9
Research and development expenses 0.9 0.9
Depreciation and amortization 0.4 0.6
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investment securities totaled $46.0 million at March 31, 2004. We
had cash and cash equivalents of $17.9 million at March 31, 2004. We generated
$4.0 million in cash from operating activities during the first quarter of 2004,
up from $3.0 million generated in the first quarter of 2003. This increase from
the same period of last year was primarily the result of higher accounts
receivable collections. Our inventories increased to $18.0 million from $15.5
million at December 31, 2003 but were lower than March 31, 2003 inventories by
$1.0 million. This was due to a combination of lower inventory build compared
with the same period last year and large inventory write-downs taken in the
fourth quarter of 2003.
Accounts receivables were $4.6 million at March 31, 2004 as compared to $15.4
million at December 31, 2003 and $5.5 million at March 31, 2003. The $0.9
million drop in receivables compared at March 31, 2003 was due to lower
comparative first quarter sales. Our business is inherently seasonal. Normally
our sales have been lowest during the first and second quarters. Receivables
have been lowest during the succeeding first and second quarters.
15
Current liabilities were $10.6 million at March 31, 2004, down $2.5 million from
the $13.1 reported at December 31, 2003. As a result of lower sales in the first
quarter of 2004 from the fourth quarter of 2003, accrued warranty, royalty and
advertising expenses decreased from December 31, 2003.
Cash used from investing activities was $0.3 million, up from a net utilization
of $0.2 million in the first quarter of 2003. The increase was the result of
purchases of property, plant and machinery during the quarter.
During the first quarter of 2004, $0.7 million in funds were received from stock
options exercised. This was offset by $0.7 million in dividends paid. On January
5, 2004, we declared a dividend of 4 cents per share which was paid on January
30, 2004. On March 29, 2004, we declared a second dividend of 4 cents per share
which was paid on April 30, 2004.
At March 31, 2004, we had net assets of $87.5 million compared with $89.2
million at December 31, 2003. Our business generates a significant majority of
its cash from its normal operations but seasonal cash requirements have been met
with the use of short-term borrowings, which included borrowings under secured
lines of credit. We had no derivative instruments or off-balance sheet financing
activities during the quarter ended March 31, 2004. We believe that our existing
cash and cash equivalents and cash generated from operations are sufficient to
satisfy the current anticipated working capital needs of our core business.
Management believes that our existing credit lines are sufficient to meet future
short-term cash demands, including seasonal build up of inventory. We fund our
operations and liquidity needs primarily through cash flow from operations, as
well as utilizing borrowings under secured and unsecured credit facilities when
needed. During 2004, we expect to continue to fund our working capital needs
through operations and the revolving credit facility and we believe that the
funds are available to meet our needs. However, unforeseen circumstances such as
severe softness in, or a collapse of, the retail environment may result in a
significant decline in revenues and operating results, thereby causing us to
exhaust our cash resources. If this were to occur, we may be required to seek
alternative financing of working capital.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies, see "Item 5, operating and
financial review and prospects" in our 2003 Form 20-F.
RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and the estimated
impact on us is set out in note 1 to the condensed consolidated financial
statements.
RISK FACTORS
For a discussion of our risk factors, see "Item 3. Key Information - Risk
Factors" in our Form 20-F and "Item 5. Operating and Financial Review and
Prospects" in our 2003 Form 20-F. Additional risk factors:
Foreign Currency Risk
Efforts to increase worldwide distribution have made our business increasingly
global, with international revenue representing 35% of total revenue in the
first three months of 2004. We expect that international sales may continue to
represent a significant portion of our revenue. Fluctuations in foreign
currencies may have an impact on our financial results, although to date the
impact has not been material. We are prepared to hedge against fluctuations in
foreign currencies if the exposure is material, although we have not engaged in
hedging activities to date.
We have net monetary asset and liability balances in foreign currencies other
than the U.S. dollar, including the Pound Sterling, the Canadian dollar, the
Hong Kong dollar and the RMB. International distribution and sales revenues
usually are made by our subsidiaries in the United States, United Kingdom and
Canada, and are denominated typically in their local currency. However, the
expenses incurred by these subsidiaries are also denominated in the local
currency. As a result, our operating results are exposed to changes in exchange
rates between the United States Dollar and the Pound Sterling or the Canadian
dollar. Our operating results could also be affected by changes in the exchange
rate between the US dollar and the RMB if the Chinese currency were to stop
being pegged to the US dollar.
16
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995)
Certain written and oral statements made or incorporated by reference from time
to time by us or our representatives in this Form 6-K, other filings or reports
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise, contain certain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify these forward-looking statements by the
fact they use words such as "should", "expect", "anticipate", "estimate", "may",
"will", "project", "guidance", "intend", "plan", "believe" and other words and
terms of similar meaning and expression in connection with any discussion of
future operating or financial performance. One can also identify forward-looking
statements by the fact that they do not relate strictly to historical or current
facts. Such forward-looking statements are based on current expectations and
involve inherent risks and uncertainties, including factors that could delay,
divert or change any of them, or depend on the outcome of contingencies such as
legal proceedings. Management cautions you that forward-looking statements
involve risks and uncertainties that may cause actual results to differ
materially from the forward-looking statements. For a more complete discussion
of our risk factors, you are referred to the sections in our Form 20-F and Form
6-K identified above under the caption "Risk Factors". The forward-looking
statements made in this Form 6-K speak only as of the date on which the
statements are made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The market risk disclosures have not materially changed from those
appearing in our 2003 Form 20-F (see Item 11).
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Not Applicable.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
See Note 9 to the accompanying Financial Statements.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
----------------------------------------------------------------------
Equity Securities
-----------------
None.
Item 3. Defaults Upon Senior Securities
---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
At the Company's annual meeting of shareholders held on May 24, 2004, the
shareholders of the Company elected the management nominees, who were named in
the Company's Proxy Statement dated April 26, 2004, to serve as directors for
the period until the next annual meeting of shareholders or until his respective
successor is elected or appointed in accordance with applicable law and the
Company's bye-laws. Immediately following the annual meeting of shareholders,
the board of directors consisted of eight members: Patrick S. Feely, Jon N.
Bengtson, Timothy R. Busch, Albert J. Crosson, Theodore J. Eischeid, David C.W.
Howell, James O'Toole and Peter L. Thigpen. At such meeting, the shareholders
also adopted the 2004 Omnibus Equity Incentive Plan and reappointed KPMG as
independent auditor and authorized the directors to fix the independent
auditor's remuneration.
The shareholder votes were as follows:
For Withheld
--- --------
Election of Directors
---------------------
Patrick S. Feely 18,270,691 22,408
Jon N. Bengtson 18,275,091 18,008
Timothy R. Busch 18,275,741 17,358
Albert J. Crosson 18,275,441 17,658
Theodore J. Eischeid 18,276,041 17,058
David C.W. Howell 18,274,091 19,008
James J. O'Toole 18,275,741 17,358
Peter L. Thigpen 18,272,441 20,658
For Against Abstain Broker Non-votes
--- ------- ------- ----------------
2004 Omnibus Equity Incentive Plan 12,873,194 430,583 700,757 4,288,563
----------------------------------
Reappointment of Auditor
------------------------
KPMG 18,272,740 7,050 13,309 -
Item 5. Other Information
-------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
18
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RADICA GAMES LIMITED
Date: June 10, 2004 /s/ Craig D. Storey
------------------------------ -------------------------------
Craig D. Storey
Chief Accounting Officer
19