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, 2005
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite V, 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. Quarter Report for the Quarter ended March 31, 2005
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, No. 333-61260 and No. 333-122248) and on Form F-3 (No.
333-7526 and No. 333-79005).
QUARTERLY REPORT *
For the quarterly period ended March 31, 2005
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 V, 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, 2005
--------------------------------------- -----------------------------
Common Stock, par value $0.01 per share 18,991,146
------------------------
* 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 MARCH 31, 2005
ITEMS IN FORM 6-K
Page
PART I - FINANCIAL INFORMATION.................................................4
Item 1. Financial Statements..............................................4
Condensed Consolidated Balance Sheets
March 31, 2005 (unaudited) and December 31, 2004..................4
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2005 (unaudited)
and 2004 (unaudited)..............................................5
Condensed Consolidated Statements of Shareholders' Equity
for the Three Months Ended March 31, 2005 (unaudited)
and 2004 (unaudited)..............................................6
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 2005 (unaudited)
and 2004 (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.......18
Item 4. Controls and Procedures..........................................18
PART II - OTHER INFORMATION...................................................19
Item 1. Legal Proceedings................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......19
Item 3. Defaults Upon Senior Securities..................................19
Item 4. Submission of Matters to a Vote of Security Holders..............19
Item 5. Other Information................................................19
Item 6. Exhibits.........................................................19
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
--------------------------------
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(US dollars in thousands, except share data) March 31, December 31,
---------------- ----------------
2005 2004
---------------- ----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,660 $ 27,614
Investment securities 12,419 12,456
Accounts receivable, net of allowances for doubtful accounts
of $141 ($148 as at December 31, 2004) 13,455 18,359
Inventories 29,710 26,818
Prepaid expenses and other current assets 3,969 3,374
Income taxes receivable 168 168
Deferred income taxes 1,953 1,850
---------------- ----------------
Total current assets 87,334 90,639
Property, plant and equipment, net 12,015 11,480
Goodwill 6,015 6,015
Other assets 849 854
Deferred income taxes, noncurrent 715 953
---------------- ----------------
Total assets $ 106,928 $ 109,941
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,065 $ 10,770
Accrued warranty expenses 550 1,070
Accrued payroll and employee benefits 1,299 1,486
Other accrued liabilities 4,831 5,251
Income taxes payable 98 287
---------------- ----------------
Total current liabilities 15,843 18,864
---------------- ----------------
Total liabilities 15,843 18,864
---------------- ----------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
18,991,146 shares outstanding (18,738,112 as at December 31, 2004) 190 187
Additional paid-in capital 5,632 4,610
Retained earnings 85,557 85,909
Deferred compensation (195) -
Accumulated other comprehensive (loss) income (99) 371
---------------- ----------------
Total shareholders' equity 91,085 91,077
---------------- ----------------
Total liabilities and shareholders' equity $ 106,928 $ 109,941
================ ================
See accompanying notes to the consolidated financial statements.
4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2005 and 2004
(US dollars in thousands, Three months ended March 31,
---------------------------------
except per share data) 2005 2004
--------------- ---------------
(unaudited) (unaudited)
Revenues:
Net sales $ 22,474 $ 12,125
Cost of goods sold
(exclusive of items shown separately below) (13,758) (6,985)
--------------- ---------------
Gross profit 8,716 5,140
--------------- ---------------
Operating expenses:
Selling, general and administrative expenses (6,659) (4,989)
Research and development (1,197) (929)
Depreciation and amortization (404) (421)
--------------- ---------------
Total operating expenses (8,260) (6,339)
--------------- ---------------
Operating income (loss) 456 (1,199)
Net interest and other income 219 231
Foreign currency loss, net (25) (28)
--------------- ---------------
Profit (loss) before income taxes 650 (996)
Provision for income taxes (155) (116)
--------------- ---------------
Net profit (loss) $ 495 $ (1,112)
=============== ===============
Net profit (loss) per share:
Basic $ 0.03 $ (0.06)
=============== ===============
Diluted $ 0.03 $ (0.06)
=============== ===============
Weighted average number of common and common equivalent shares:
Basic 18,860,682 18,570,938
=============== ===============
Diluted 19,571,477 18,570,938
=============== ===============
Cash dividends declared per share
(4.5 cents and 4 cents declared and paid for quarter ended
March 31, 2005 and 2004, respectively) $ 0.045 $ 0.040
=============== ===============
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, 2005 and 2004
(US dollars in thousands)
Common stock
------------ Accumulated
Additional other Total
Number paid-in Deferred Retained comprehensive shareholders'
of shares Amount capital compensation earnings income (loss) equity
------------- ------- ---------- ------------- ----------- ------------- -------------
Balance at December 31, 2004 18,738,112 $ 187 $ 4,610 $ - $ 85,909 $ 371 $ 91,077
Issuance of stock 25,000 1 203 (204) - - -
Stock options exercised 228,034 2 819 - - - 821
Amortization of unearned restricted shares - - - 9 - - 9
Dividends declared - - - - (847) - (847)
Net income - - - - 495 - 495
Unrealized loss on investment
securities available-for-sale,
net of nil tax - - - - - (51) (51)
Foreign currency translation,
net of nil tax - - - - - (419) (419)
------------- ------- --------- ------------ ---------- ------------ ----------
Balance at March 31, 2005 18,991,146 $ 190 $ 5,632 $ (195) $ 85,557 $ (99) $ 91,085
============= ======= ========= ============ ========== ============ ==========
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 income on investment
securities available-for-sale,
net of nil tax - - - - - 49 49
Foreign currency translation,
net of nil tax - - - - - 187 187
------------- ------- --------- ------------ ---------- ------------ ----------
Balance at March 31, 2004 18,611,888 $ 186 $ 4,262 $ - $ 82,838 $ 256 $ 87,542
============= ======= ========= ============ ========== ============ ==========
The comprehensive income (loss) of the Company, which represents the aggregate
of the net income (loss), unrealized income (loss) on investment securities
available-for-sale and the foreign currency translation adjustments, was $25 and
$(876) for the three months ended March 31, 2005 and 2004.
See accompanying notes to the consolidated financial statements.
6
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2004
(US dollars in thousands) 2005 2004
--------------- ---------------
(unaudited) (unaudited)
Cash flow from operating activities:
Net income (loss) $ 495 $ (1,112)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes 135 274
Depreciation 404 421
Gain on disposal and write off of property, plant and equipment (38) -
Compensatory elements of stock issuances 9 6
Unrealized gain on trading securities (15) (39)
Changes in current assets and liabilities:
Decrease in accounts receivable 4,904 10,743
Increase in inventories (2,892) (2,449)
Increase in prepaid expenses and other current assets (595) (1,088)
Decrease in accounts payable (1,705) (90)
Decrease in accrued payroll and employee benefits (187) (358)
Decrease in accrued warranty expenses (520) (710)
Decrease in other accrued liabilities (420) (1,699)
(Increase) decrease in income taxes payable (189) 134
--------------- ---------------
Net cash (used in) provided by operating activities (614) 4,033
--------------- ---------------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 38 161
Purchase of property, plant and equipment (934) (444)
--------------- ---------------
Net cash used in investing activities (896) (283)
--------------- ---------------
Cash flow from financing activities:
Proceeds from stock options exercised 821 743
Dividends paid (847) (742)
--------------- ---------------
Net cash (used in) provided by financing activities (26) 1
--------------- ---------------
Effect of currency exchange rate change (418) 187
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,954) 3,938
Cash and cash equivalents:
Beginning of period 27,614 13,944
--------------- ---------------
End of period $ 25,660 $ 17,882
=============== ===============
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2005)
(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 generally accepted
accounting principles in the United States 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
generally accepted accounting principles in the United States have been
condensed or omitted pursuant to such rules and regulations. The
accompanying 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, 2005, 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, 2004.
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 generally
accepted accounting principles in the United States 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 and deferred income tax assets and provisions 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
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations including Financial Accounting Standards Board (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 then
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 income 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, 2005)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
Three months ended March 31,
--------------------------
2005 2004
----------- -----------
Net income (loss) as reported $ 495 $ (1,112)
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (131) (127)
----------- -----------
Pro forma net income (loss) $ 364 $ (1,239)
=========== ===========
Reported net income (loss) per share $ 0.03 $ (0.06)
=========== ===========
Pro forma net income (loss) per share $ 0.03 $ (0.07)
=========== ===========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs
-- An Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
spoilage should be expensed as incurred and not included in overhead.
Further, SFAS 151 requires that allocation of fixed and production
facilities overhead to conversion costs should be based on normal capacity
of the production facilities. The provisions in SFAS 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company does not believe that the adoption of SFAS 151 will have a
significant effect on its consolidated financial statements.
In November 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets -- An Amendment of APB Opinion No. 29 ("SFAS 153"). The provisions
of this statement are effective for non monetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. This statement eliminates
the exception to fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions that do not
have commercial substance -- that is, transactions that are not expected to
result in significant changes in the cash flows of the reporting entity.
The Company does not believe that the adoption of SFAS 153 will have a
significant effect on its financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. The new pronouncement replaces the existing requirements under
SFAS No. 123 and APB 25. According to SFAS No. 123(R), all forms of
share-based payments to employees, including employee stock options and
employee stock purchase plans, would be treated the same as any other form
of compensation by recognizing the related cost in the statement of
operations. This pronouncement eliminates the ability to account for
stock-based compensation transactions using APB No. 25 and generally would
require that such transactions be accounted for using a fair-value based
method. SFAS 123R is effective for all interim and annual periods beginning
after June 15, 2005. In April 2005, the U.S. Securities and Exchange
Commission issued a new rule that a company may elect to adopt the
provisions of SFAS 123R at the beginning of their first annual period
beginning after June 15, 2005. Consequently, the Company has elected to
defer the adoption of SFAS 123R until January 1, 2006. The Company is in
the process of evaluating the impact of this standard on its financial
statements. The pro forma results disclosed above are not necessarily
indicative of what the impact of SFAS 123R will be upon adoption.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2005)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
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 profit or shareholders' equity.
2. NET PROFIT (LOSS) PER SHARE
Basic net profit (loss) per share is based on the weighted average number
of shares of common stock, and with respect to diluted net profit 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 profit per share is computed using the treasury stock method. Dilutive
potential common stock has no effect on net loss per share as the effect
would be anti-dilutive.
The following table sets forth the computations of net profit (loss) per
share for the three-month ended March 31:
Three months ended March 31,
----------------------------
2005 2004
----------- -------------
Numerator for basic and diluted net profit per share:
Net profit (loss) per share $ 495 $ (1,112)
=========== =============
Denominator:
Basic weighted average shares 18,860,682 18,570,938
Effect of dilutive options 710,795 -
----------- -------------
Diluted weighted average shares 19,571,477 18,570,938
=========== =============
Basic net profit (loss) per share: $ 0.03 $ (0.06)
=========== =============
Diluted net profit (loss) per share: $ 0.03 $ (0.06)
=========== =============
3. SEGMENT INFORMATION
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company historically had two reportable segments from
which it derives its revenues: the Games and Youth Electronics business that
sells product under the Company's Radica(R), Play TV(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. During the period ended 31 March 2005, the
Games and Youth Electronics business represented over 90% of the consolidated
revenue, profits and assets. While senior management still view Gamester(R) as a
successful ongoing brand and the Company will continue to develop, manufacture
and sell video game accessories under the Gamester(R) brand name going forward,
they no longer view the video game accessory business as a separate segment for
either internal reporting purposes or for making decisions about resource
allocation. Accordingly, for the quarter ended March 31, 2005, the Company has
only one reportable segment which is the Games and Youth Electronics segment.
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2005)
(US dollars in thousands)
4. GOODWILL
At March 31, 2005 and December 31, 2004, the Company's cost in excess of
fair value of net assets purchased (goodwill) related primarily 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 $12,069 resulting from the adjusted purchase
price. The goodwill was allocated to the VGA reporting unit and is not tax
deductible. Accumulated amortization related to goodwill of $2,518 arose
prior to the adoption of SFAS No. 142.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Upon implementation of SFAS 142, and annually
thereafter, the Company tested goodwill for impairment. The goodwill
arising from the purchase of Radica UK was allocated to the Video Games
Accessories ("VGA") reporting unit and the Company has undertaken goodwill
impairment testing as follows to determine whether the goodwill was
impaired and the extent of such impairment.
The methods used in the Company's testing of goodwill impairment were as
follows: 1) the Company determined the fair market value of the VGA segment
by estimating the expected discounted future cash flows of the VGA
reporting unit. In estimating the discounted future cash flows, the Company
followed FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements, by taking into account the
Company's expectations about possible variations in the amount or timing of
those cash flows, the risk-free rate of interest and the discounted
interest rate. 2) The Company then compared the estimated fair value of the
VGA reporting unit with the carrying value of the VGA reporting unit,
including goodwill. 3) Since the fair value of the VGA reporting unit was
less than the carrying value, the second step was performed which compared
the implied fair value of the VGA reporting unit's goodwill to the book
value of the goodwill. After performing this quarter evaluation, the
Company recognized an impairment charge related to goodwill of $3,536 for
the year ended December 31, 2004. The impairment charge recorded at
December 31, 2004 adjusted the carrying value of the VGA reporting unit's
goodwill to its implied fair value. The reason for the impairment was
primarily the result of lower sales forecasts for fiscal years 2005 through
2009. The adjustment to projected annual sales from prior year was based on
the Company's current strategy of concentrating on the innovative, higher
margin sector of the market. This improved the projected gross margins and
operating margins as a percentage of sales, but decreased the total
operating margin and cash flows. Management believes that the revised
forecast portrays a more accurate picture of the Company's future cash
flows and that the new strategy limits the large closeout returns and price
pressures that made the VGA business unprofitable from 1999 through 2003.
5. INVENTORIES
Inventories by major categories are summarized as follows:
March 31, December 31,
2005 2004
---------------- ----------------
Raw materials $ 4,058 $ 4,017
Work in progress 9,831 6,830
Finished goods 15,821 15,971
---------------- ----------------
$ 29,710 $ 26,818
================ ================
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2005)
(US dollars in thousands)
6. PROPERTY, PLANT AND EQUIPMENT
Property and Plant and Equipment consists of the following:
March 31, December 31,
2005 2004
------------- -------------
Land and buildings $ 9,428 $ 9,431
Plant and machinery 7,972 8,142
Furniture and equipment 8,126 8,196
Leasehold improvements 3,117 3,067
Construction-in-progress 839 265
------------- -------------
Total $ 29,482 $ 29,101
Less: Accumulated depreciation and amortization (17,467) (17,621)
------------- -------------
Total, net $ 12,015 $ 11,480
============= =============
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31, December 31,
2005 2004
------------- -------------
Accrued advertising expenses $ 1,328 $ 910
Accrued license and royalty fees 1,292 1,963
Commissions payable 50 93
Other accrued liabilities 2,161 2,285
------------- -------------
Total $ 4,831 $ 5,251
============= =============
8. PLEDGE OF ASSETS
At March 31, 2005, the Company has general banking facilities including
overdraft and trade facilities totaling $3,796 available to be drawn upon.
The facilities are collateralized by leasehold land and buildings with an
aggregate net book value of $2,231.
12
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2005)
(US dollars in thousands)
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 owner 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, the Company believes that this result
is favorable to the Company's defense of the Lemelson lawsuit. On June 29,
2004, Lemelson filed its notice of appeal to the Court of Appeals for the
Federal Circuit. The briefing is not expected to be completed until the
first half of 2005 and a decision from the Court will likely not be issued
until 2006.
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, 2005 and December 31, 2004 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, 2004, 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 - our products include casino and heritage
electronic games, mechanical slot banks, youth electronic games, tabletop games,
Play TV(R) games, Girl Tech(R) and Barbie(TM) girls electronic lines, the
Cupcakes(R) doll lines, the Nitro Battlerz(TM) remote control car product, the
Street Muttz(TM) plush line and video game accessories sold under the
Gamester(R) brand. Our factory also manufactures for other companies in the
electronic game industry. We market our products through subsidiaries in the
United States, the United Kingdom, Canada, Macau and Hong Kong. Our largest
market is in the United States where in 2004 we had the third largest market
share in the electronic handheld and tabletop electronic games 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 sales:
Three months ended March 31,
-----------------------------
2005 2004
------------- -------------
Net sales 100.0% 100.0%
Cost of goods sold (61.2%) (57.6%)
Gross margin 38.8% 42.4%
Selling, general and administrative expenses (29.6%) (41.1%)
Research and development (5.4%) (7.6%)
Depreciation and amortization (1.8%) (3.5%)
Operating income (loss) 2.0% (9.8%)
Net interest and other income 1.0% 1.9%
Foreign currency gain, net (0.1%) (0.3%)
Profit (loss) before income taxes 2.9% (8.2%)
Provision for income taxes (0.7%) (1.0%)
Net profit (loss) 2.2% (9.2%)
We reported a net profit for the first quarter of 2005 of $0.5 million or $0.03
per diluted share compared to a net loss of ($1.1) million or ($0.06) per
diluted share in the first quarter of 2004.
14
Summary of sales achieved from each category of products and services:
Three months ended March 31,
-----------------------------
Product and Services 2005 2004
--------------------
------------- -------------
(US$ in thousands)
Electronic Games and Toys $ 16,948 $ 6,512
Youth Electronics 2,446 1,978
Video Game Accessories 1,594 1,992
Manufacturing Services 1,486 1,643
------------- -------------
Total $ 22,474 $ 12,125
============= =============
Sales for the quarter increased by 85% to $22.5 million from $12.1 million due
to sales of 20Q ($7.9 million for the quarter) plus growth of other product
lines of 21%. Branded sales grew by 100% with U.S. branded sales increasing by
114% compared to the sales for the same period in 2004.
Gross profit margin for Q1 2005 was 38.8% compared to 42.4% in Q1 2004 due to
the impact of the sales of lower margin Play TV Legends products in Q1 2005.
Operating expenses increased to $8.3 million for the quarter from $6.3 million
in Q1 2004. The increase was due to sales-related variable expenses plus the
impact of $0.3 million of increased advertising incurred in Q1 this year due to
an earlier Easter. During the quarter, the Company also finalized discussions
with Immersion Corporation (NASDAQ: IMMR) for use of its force feedback
technology in video game accessories. This negotiation resulted in an agreement
for the past and future royalties for a technology license. The expense related
to the settlement of past royalties and related legal costs in the quarter was
$250,000. Research and development costs were up from $0.9 million to $1.2
million due to costs related to the development of Play TV software.
The following table shows the major operating expenses:
Three months ended March 31,
-----------------------------
(US dollars in millions) 2005 2004
------------- -------------
Advertising expenses $ 0.8 $ 0.5
Other selling and promotion expenses 1.0 0.5
Indirect salaries and bonus 2.3 2.0
Other general & administrative expenses 2.6 2.0
Research and development expenses 1.2 0.9
Depreciation and amortization 0.4 0.4
15
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investment securities totaled $38.0 million at March 31, 2005 as
compared to $40.1 million at December 31, 2004. The $2.1 million decrease was
due to a variety of factors, including a dividend payment ($0.8 million), the
purchase of property plant and equipment ($0.9 million) and the net affect of
currency rate changes ($0.4 million) and cash used for operating activities
($0.6 million), caused primarily by seasonal increases in inventories and
decreases in accounts payable and accrued expenses, offset by a decrease in
accounts receivable. These decreases were partially offset by proceeds from
stock options exercised during the quarter ($0.8 million).
Our accounts receivable were $13.5 million at March 31, 2005 as compared to
$18.4 million at December 31, 2004. Inventories increased to $29.7 million from
$26.8 million at December 31, 2004. Our business is inherently seasonal.
Normally our sales have been lowest during the first and second quarters and
highest during the third and fourth quarters. Receivables have been lowest
during the succeeding first and second quarters. The decrease in accounts
receivable related primarily to the decrease in sales in the first quarter of
2005 compared to the fourth quarter of 2004. The inventory increase from
December 31, 2004 was primarily due to a company initiative to accelerate annual
production of certain staple electronic games and toys, primarily from our
casino/heritage and 20Q lines, in order to free factory capacity during the peak
production period of Summer and early Fall. Such seasonal changes in assets and
liabilities are typical for the toy industry and should partially reverse by
year-end.
Current liabilities were $15.8 million at March 31, 2005, down $3.1 million from
the $18.9 million reported at December 31, 2004. This was due to a decrease in
payables related to purchases and a decrease in accruals for license fees and
warranty expenses. There was no debt at March 31, 2005 and December 31, 2004.
At March 31, 2005, net assets were $91.1 million, unchanged from December 31,
2004. Our business generates a significant majority of its cash from its normal
operations but seasonal cash requirements have been met in the past 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, 2005. 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.
We believe 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 2005, 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.
On January 4 and April 12, 2005, we declared first and second dividends each of
4.5 cents per share which were paid on January 31, 2005 and April 29, 2005,
respectively.
In April 2005, we purchased $9.0 million of Chinese Remninbi ("RMB"), which is
on deposit at HSBC in China. This will be used to offset the effect of a
revalued RMB on goods and services paid for in China in RMB.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies, see "Item 5, operating and
financial review and prospects" in our 2004 Form 20-F.
16
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.
COMPENSATION OF OFFICERS AND DIRECTORS
Since fiscal 2004, each outside (i.e., non-employee and non-affiliated) director
of the Company receives compensation according to the following schedule:
o Board retainer $10,000 annually
o Quarterly board meeting fee $1,250 per meeting
o Committee retainer $4,000 annually (excluding
Executive Committee)
o Audit chair additional retainer $4,000 annually
o Other committee chairs additional retainer $2,000 annually
Payments are made quarterly. Any director may elect to receive some or all of
the above fees payable in shares of the Company's Common Stock valued at the
then current market price.
Directors who are employees or affiliates of the Company are not paid any fees
or additional remuneration for service as members of the Board of Directors or
its Committees.
Commencing in May 2005, upon each annual re-election to the Board of Directors,
each outside director receives restricted shares of the Company's Common Stock
at the rate of 600 shares per quarter (i.e. 2,400 shares per annum). In general,
the restricted shares will vest two years from the date of grant. Previously,
each outside director received stock options to purchase 2,500 shares per
quarter (i.e., 10,000 shares per annum) at an exercise price equal to the then
current market price of the Company's Common Stock.
In May 2005, the Company also changed the equity component of compensation that
applies to the initial election or appointment of a new outside director to the
Board of Directors. Under the revised arrangement, a new outside director
receives a one-time grant of 5,000 restricted shares (previously, the new
outside director was granted an option to purchase 30,000 shares of the
Company's Common Stock). In general, these restricted shares will also vest two
years from the date of grant.
The executive officers' compensation disclosures have not materially changed
from those appearing in our 2004 Form 20-F (see Item 6. Directors, Senior
Management and Employees - Compensation of Officers and Directors - Employment
Agreements).
RISK FACTORS
For a discussion of our risk factors, see "Item 3. Key Information - Risk
Factors" and "Item 5. Operating and Financial Review and Prospects" in our 2004
Form 20-F.
As reported in our 2004 annual report on Form 20-F, in March 2005 we received a
letter from a third party (AtGames Holdings Ltd., or AtGames) challenging the
exclusivity of our manufacturing, vendor and distributor agreement with Sega
Toys, which was represented to give us exclusive rights to the Play TV Sega
Genesis games in the United States and certain other countries. Subsequently, we
have worked closely with Sega Toys and Sega Corporation in an attempt to clarify
our rights. We continue to believe that we have a strong position on the merits
of the dispute as well as certain rights to indemnification from Sega Toys. Sega
Corporation has advised us in writing that its position is that Sega has not
granted AtGames any right to license Sega's Genesis/Mega Drive game titles for
incorporation in TV game pads intended for worldwide markets. AtGames contends
otherwise. Sega and AtGames have submitted their dispute to arbitration, and the
arbitration hearing is currently scheduled to begin on September 26, 2005. Sega
further stated its understanding that under the agreement between Radica and
Sega Toys, Sega Toys has granted Radica the exclusive right to sell Play TV
products incorporating selected Sega Genesis game titles in the United States
and certain other territories under a license granted by Sega to Sega Toys.
17
We are presently unable to predict the outcome of the foregoing dispute. We
intend to vigorously defend our rights, and continue to believe in the strength
of our position with respect to exclusive rights in the United States and
certain other territories concerning Play TV Sega Genesis games. Nevertheless,
as we stated in our 2004 Form 20-F, this situation illustrates that in certain
cases we may face additional unanticipated competition from another party who
also has rights, or who asserts that it has rights, in the intellectual property
that we are using or intending to use, this may have a material adverse effect
on the sales and profitability of the products concerned. We may also incur
substantial costs and management time in defending, or attempting to defend, our
rights.
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 speaks 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 2004 Form 20-F (see Item 11).
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to the accompanying Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 23, 2005, the
shareholders of the Company elected the management nominees, who were named in
the Company's Proxy Statement dated April 22, 2005, 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 nine members: Jon N. Bengtson, Timothy R.
Busch, John A.F.H. Coulter, Albert J. Crosson, Theodore J. Eischeid, Patrick S.
Feely, Floyd W. Glisson, Frank J. O'Connell and Richard E. Wenz. At such
meeting, the shareholders also reappointed KPMG as independent registered public
accounting firm and authorized the directors to fix the independent registered
public accounting firm's remuneration.
The shareholder votes were as follows:
For Withheld
--- --------
Election of Directors
Jon N. Bengtson 15,890,898 9,937
Timothy R. Busch 15,885,201 15,634
John A.F.H. Coulter 15,891,102 9,733
Albert J. Crosson 15,891,001 9,834
Theodore J. Eischeid 15,880,737 20,098
Patrick S. Feely 15,889,398 11,437
Floyd W. Glisson 15,891,102 9,733
Frank J. O'Connell 15,891,102 9,733
Richard E. Wenz 15,890,542 10,293
For Against Abstain
--- ------- -------
Reappointment of independent registered
public accounting firm
KPMG 15,895,905 3,511 1,419
Item 5. Other Information
None.
Item 6. Exhibits
None.
19
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 7, 2005 /s/ Craig D. Storey
------------------------------ -------------------------------
Craig D. Storey
Chief Accounting Officer
20