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 December, 2002
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 September 30, 2002
2. Press Release dated November 4, 2002
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 September 30, 2002
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 September 30, 2002
----------------------------------------- ---------------------------------
Common Stock, par value $0.01 per share 17,764,003
------------------------
* 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, 2002
ITEMS IN FORM 6-K
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 5
Condensed Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001 5
Condensed Consolidated Statements of Operations
for the Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) 6
Condensed Consolidated Statements of Shareholders' Equity
for the Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) 7
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 2002 (unaudited) & 2001 (unaudited) 8
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 17
Item 3. Qualitative and Quantitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "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. For example, statements included in this report regarding
our financial position, business strategy and other plans and objectives for
future operations, and assumptions and predictions about future product demand,
supply, manufacturing, costs, marketing and pricing factors are all
forward-looking statements. We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information available to us on the date hereof, but we cannot assure you that
these assumptions and expectations will prove to have been correct or that we
will take any action that we may presently be planning. Forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from projected results. These risks include those set forth in
our Annual Report on Form 20-F for the fiscal year ended December 31, 2001, as
filed with the Securities and Exchange Commission. See "Item 3. Key Information
- Risk Factors" in such report on Form 20-F. We are not undertaking to publicly
update or revise any forward-looking statement if we obtain new information or
upon the occurrence of future events or otherwise.
4
Item 1. Financial Statements
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(US Dollars in thousands, except share data) September 30, December 31,
------------------- --------------------
2002 2001
------------------- --------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,956 $ 25,810
Accounts receivable, net of allowances for doubtful accounts
of $702 ($2,207 in 2001) 26,294 17,290
Inventories, net of provision of $3,920 ($3,997 in 2001) 26,168 17,179
Prepaid expenses and other current assets 2,792 2,283
Income taxes receivable 931 931
Deferred income taxes 168 168
------------------- --------------------
Total current assets 78,309 63,661
------------------- --------------------
Property, plant and equipment, net 15,183 16,310
------------------- --------------------
Intangible assets, net 9,656 9,971
------------------- --------------------
Deferred income taxes, noncurrent 1,421 1,887
------------------- --------------------
Total assets $ 104,569 $ 91,829
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 846 $ 846
Accounts payable 16,336 10,101
Current portion of long-term debt 2,737 3,648
Accrued payroll and employee benefits 1,898 943
Accrued expenses 10,462 10,907
Income taxes payable 728 507
------------------- --------------------
Total current liabilities 33,007 26,952
------------------- --------------------
Long-term debt - 1,825
------------------- --------------------
Total liabilities 33,007 28,777
------------------- --------------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
17,764,003 shares outstanding (17,646,740 in 2001) 178 176
Additional paid-in capital 2,245 1,549
Warrants to acquire common stock - 445
Retained earnings 69,778 61,012
Accumulated other comprehensive income (639) (130)
------------------- --------------------
Total shareholders' equity 71,562 63,052
------------------- --------------------
Total liabilities and shareholders' equity $ 104,569 $ 91,829
=================== ====================
See accompanying notes to the consolidated financial statements.
5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(US Dollars in thousands, Three months ended September 30, Nine months ended September 30,
-------------------------------------- -------------------------------------
except per share data) 2002 2001 2002 2001
----------------- ----------------- ---------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net sales $ 47,305 $ 37,233 $ 85,315 $ 59,301
Cost of goods sold (exclusive of items
shown separately below) (28,366) (23,259) (54,246) (38,597)
----------------- ----------------- ---------------- -----------------
Gross profit 18,939 13,974 31,069 20,704
----------------- ----------------- ---------------- -----------------
Operating expenses:
Selling, general and administrative expenses (7,813) (7,677) (17,583) (16,655)
Research and development (1,067) (1,467) (3,053) (4,228)
Depreciation and amortization (714) (1,021) (2,150) (3,035)
Foreign exchange gain (loss) 374 371 1,098 (93)
----------------- ----------------- ---------------- -----------------
Total operating expenses (9,220) (9,794) (21,688) (24,011)
----------------- ----------------- ---------------- -----------------
Operating income (loss) 9,719 4,180 9,381 (3,307)
Other income (loss) 115 (6) 170 18
Net interest income 4 41 20 118
----------------- ----------------- ---------------- -----------------
Income (loss) before income taxes 9,838 4,215 9,571 (3,171)
Provision for income taxes (459) (106) (805) (179)
----------------- ----------------- ---------------- -----------------
Net income (loss) 9,379 4,109 8,766 (3,350)
================= ================= ================ =================
Net income (loss) per share:
Basic $ 0.53 $ 0.23 $ 0.50 $ (0.19)
================= ================= ================ =================
Diluted $ 0.51 $ 0.23 $ 0.48 $ (0.19)
================= ================= ================ =================
Weighted average number of common
and common equivalent shares:
Basic 17,740,167 17,628,216 17,708,692 17,602,694
================= ================= ================ =================
Diluted 18,301,965 18,250,229 18,308,820 17,602,694
================= ================= ================ =================
See accompanying notes to the consolidated financial statements.
6
Accumulated
(US dollars in thousands) Common stock Additional Warrants to other Total
Number paid-in acquire Retained comprehensive shareholders'
of shares Amount capital common stock earnings income (loss) equity
----------- --------- ---------- ------------- ----------- -------------- -------------
Balance at December 31, 2001 17,646,740 $ 176 $ 1,549 $ 445 $ 61,012 $ (130) $ 63,052
Issuance of stock 3,808 1 15 - - - 16
Stock options exercised 113,455 1 236 - - - 237
Expiration of stock warrants - - 445 (445) - - -
Net income - - - - 8,766 - 8,766
Foreign currency translation - - - - - (509) (509)
----------- --------- ---------- ------------- ----------- -------------- -------------
Balance at September 30, 2002 17,764,003 $ 178 $ 2,245 $ - $ 69,778 $ (639) $ 71,562
=========== ========= ========== ============= =========== ============== =============
Balance at December 31, 2000 17,564,297 $ 176 $ 1,188 $ 667 $ 65,386 $ (29) $ 67,388
Issuance of stock 5,731 - 17 - - - 17
Stock options exercised 63,197 - 98 - - - 98
Expiration of warrants - - 222 (222) - - -
Net loss - - - - (3,350) - (3,350)
Foreign currency translation - - - - - (122) (122)
----------- --------- ---------- ------------- ----------- -------------- -------------
Balance at September 30, 2001 17,633,225 $ 176 $ 1,525 $ 445 $ 62,036 $ (151) $ 64,031
=========== ========= ========== ============= =========== ============== =============
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(US dollars in thousands) 2002 2001
------------------- -------------------
(unaudited) (unaudited)
Cash flow from operating activities:
Net income (loss) $ 8,766 $ (7,459)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes 466 -
Depreciation 1,835 1,323
Amortization 315 691
Loss on disposal and write off of property, plant and equipment 23 40
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (9,004) 17,816
Increase in inventories (8,989) (5,521)
Increase in prepaid expenses and other current assets (509) (1,322)
Increase in accounts payable 6,053 228
Increase in accrued payroll and employee benefits 955 241
Increase (decrease) in accrued warranty expenses 182 (610)
Decrease in other accrued liabilities (445) (3,017)
Decrease in income taxes 221 386
------------------- -------------------
Net cash (used in) provided by operating activities (131) 2,796
------------------- -------------------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 227 47
Purchase of property, plant and equipment (958) (449)
------------------- -------------------
Net cash used in investing activities (731) (402)
------------------- -------------------
Cash flow from financing activities:
Funds from issuance of stock $ 15 $ 12
Funds from stock options exercised 238 78
Decrease in short-term borrowings - (1,966)
Repayment of long-term debt (2,736) (1,824)
------------------- -------------------
Net cash used in financing activities (2,483) (3,700)
------------------- -------------------
Effect of currency exchange rate change (509) 46
------------------- -------------------
Net decrease in cash and cash equivalents (3,854) (1,260)
Cash and cash equivalents:
Beginning of period 25,810 23,097
------------------- -------------------
End of period $ 21,956 $ 21,837
=================== ===================
See accompanying notes to the consolidated financial statements.
8
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
1. BASIS OF FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in the financials statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the consolidated
financial statements, accounting policies and related notes included in the
Form 20F for the year ended December 31, 2001 as filed with the SEC.
The information provided in this report reflects all adjustments
(consisting solely of normal recurring accruals) that are, in the opinion
of management and subject to year-end audit, necessary to present fairly
the financial position of the Company as of September 30, 2002, and the
results of operations and cash flows for the periods then ended. Because
the Company's business is seasonal, the results for interim periods are not
necessarily indicative of the results to be expected for the full year.
2. SEGMENT INFORMATION
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), Radica Gold(R) and Girl Tech(R) brand names, and the
Video Game Accessory ("VGA") business that sells product under the
Company's Gamester(TM) 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 accounting policies of the reportable segments are the same as those
described in the Notes to the Company's consolidated financial statements
for the year ended December 31, 2001, except for the Company's adoption of
Statements of Financial Accounting Standards Nos. 142 and 144.
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.
9
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
2. SEGMENT INFORMATION (Continued)
A large proportion of the Company's assets are utilized by both segments
and are therefore not suitable for allocating to specific assets. In 2002,
the Company has further refined the segment assets. The segment assets are
comprised of accounts receivable, inventories and intangible assets. Other
assets included in corporate principally are cash and cash equivalents,
deferred tax assets, property, plant and equipment, and all other
insignificant assets not reportable under other segments. Certain
information presented in the tables below has been restated to conform to
the current management structure as of January 2002. Information by segment
and a reconciliation to reported amounts for the nine months ended
September 30, 2002 and 2001 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Revenues
Games $ 43,048 $ 33,194 $ 72,082 $ 51,776
VGA 4,257 4,039 13,233 7,525
---------------- ---------------- --------------- ---------------
Total revenues $ 47,305 $ 37,233 $ 85,315 $ 59,301
================ ================ =============== ===============
Segment income (loss)
Games $ 10,006 $ 4,502 $ 11,096 $ (1,156)
VGA (287) (322) (1,715) (2,151)
---------------- ---------------- --------------- ---------------
Total segment income (loss) $ 9,719 $ 4,180 $ 9,381 $ (3,307)
Net Interest and other income 119 35 190 136
Provision for income taxes (459) (106) (805) (179)
---------------- ---------------- --------------- ---------------
Total consolidated net income (loss) $ 9,379 $ 4,109 $ 8,766 $ (3,350)
================ ================ =============== ===============
September 30, December 31,
--------------------------------------
2002 2001
--------------- ---------------
Segment assets
Games $ 40,646 $ 25,592
VGA 21,472 18,848
Corporate 42,451 47,389
--------------- ---------------
Total consolidated assets $ 104,569 $ 91,829
=============== ===============
10
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
2. SEGMENT INFORMATION (Continued)
Revenues from external customers by product category are summarized as
follows:
Three months ended Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Electronics Games $ 24,480 $ 19,881 $ 39,917 $ 31,418
Girls Electronics 6,986 4,256 10,799 7,855
ODM/OEM 11,582 9,057 21,366 12,503
VGA - Sourcing 1,429 1,435 3,641 2,583
VGA 2,828 2,604 9,592 4,942
---------------- ---------------- --------------- ---------------
Total net revenues $ 47,305 $ 37,233 $ 85,315 $ 59,301
================ ================ =============== ===============
Information about the Company's operations in different geographic areas is
set forth in the table below. Net sales are attributed to countries based
on the location of customers, while long-lived assets are reported based on
their location. Long-lived assets principally include property, plant and
equipment, intangible assets and long-term investment:
Three months ended Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Net sales:
United States and Canada $ 33,711 $ 25,972 $ 60,333 $ 41,165
Asia Pacific and other countries 9,785 6,190 14,705 8,954
Europe 3,809 5,071 10,277 9,182
---------------- ---------------- --------------- ---------------
$ 47,305 $ 37,233 $ 85,315 $ 59,301
================ ================ =============== ===============
September 30, December 31,
--------------------------------------
2002 2001
--------------- ---------------
Long-lived assets
United States and Canada $ 948 $ 1,662
Asia Pacific and other countries 14,143 14,851
Europe 9,748 9,768
--------------- ---------------
$ 24,839 $ 26,281
=============== ===============
11
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share as of September 30:
Three months ended Nine months ended
September 30, September 30,
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Numerator for basic and
diluted earnings per share:
Net income (loss) $ 9,379 $ 4,109 $ 8,766 $ (3,350)
================ ================ ================ ================
Denominator for
earnings (loss) per share - Basic 17,740,167 17,628,216 17,708,692 17,602,694
Effect of dilutive options 561,798 622,013 600,128 -
---------------- ---------------- ---------------- ----------------
Denominator for earnings (loss)
per share - Diluted 18,301,965 18,250,229 18,308,820 17,602,694
================ ================ ================ ================
Earnings (loss) per share - Basic $ 0.53 $ 0.23 $ 0.50 $ (0.19)
================ ================ ================ ================
Earnings (loss) per share - Diluted $ 0.51 $ 0.23 $ 0.48 $ (0.19)
================ ================ ================ ================
Basic earnings (loss) per share is based on the weighted average number of
shares of common stock, and with respect to diluted earnings (loss) 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. All
potentially dilutive securities were excluded from the computation in loss
making periods as their inclusion would have been anti-dilutive.
12
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
4. RESTRUCTURING CHARGE
During December 2001, the Board of Directors approved a company wide
restructuring plan which includes the consolidation of operations in Hong
Kong and the China factory, the closure of the Company's San Francisco R&D
office, the consolidation of the Company's product development operations
as well as other head count reductions in the US, UK and Hong Kong offices.
The Company recorded an accrual of $1,551 of total pre-tax restructuring
charge in Q4 2001, of which approximately $199 related to the closure of
the Company's San Francisco R&D office.
The consolidation of operations in Hong Kong and China consisted of the
localization in the China factory of a number of departments, which
previously operated out of Hong Kong. The localization and consolidation of
product development and manufacturing operations resulted in a workforce
reduction of approximately 170 employees worldwide. This workforce
reduction resulted in an accrual of approximately $1,389 for severance and
contractual termination costs and benefits payments. The consolidation
occurred during the first half of 2002. The components of restructuring
charges are as follows:
Balance Balance
December 31, Amount September 30,
2001 Charges incurred 2002
--------------- --------------- --------------- ---------------
Severance and other compensation $ 1,389 $ (79) $ (1,212) $ 98
Lease termination costs and
related asset writedowns 199 79 (278) -
--------------- --------------- --------------- ---------------
$ 1,588 $ - $ (1,490) $ 98
=============== =============== =============== ===============
5. INVENTORIES
Inventories by major categories are summarized as follows:
September 30, December 31,
----------------------------------
2002 2001
--------------- ---------------
Raw materials $ 5,381 $ 3,165
Work in progress 3,702 3,176
Finished goods 15,786 10,137
Consigned finished goods 1,299 701
--------------- ---------------
$ 26,168 $ 17,179
=============== ===============
13
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
September 30, December 31,
----------------------------------
2002 2001
--------------- ---------------
Accrued advertising expenses $ 1,388 $ 1,105
Accrued license and royalties 2,157 2,346
Accrued sales expenses 3,205 3,422
Commissions payable 181 149
Other accrued liabilities 3,531 3,885
--------------- ---------------
Total $ 10,462 $ 10,907
=============== ===============
7. PLEDGE OF ASSETS
The Company entered into guaranteed loan agreements and general banking
facilities with one of its banks. The agreement contains covenants that,
among other things, require the Company to maintain a minimum tangible net
worth, gearing ratio and other financial ratios. At September 30, 2002, the
loan agreements and general banking facilities including trade and
overdraft facilities were collateralized as follows:
Leasehold land and buildings $ 11,231
Bank balances 8,955
Inventories 11,126
---------------
$ 31,312
===============
8. LITIGATION
The Company is a party to certain claims and legal actions that have arisen
in the ordinary course of business. Some of these matters are substantially
covered by insurance. The resolution of these matters is not expected to
have a material impact on the Company. The Company currently has no
contingent obligations for which management views the crystallization to be
probable or reasonably possible, and has therefore made no disclosures over
current or pending legal actions taken against the Company.
14
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
9. RECENT ACCOUNTING PRONOUNCEMENTS
Effective on January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which superceded Accounting Principles Board ("APB") Opinion No.
17, Intangible Assets. This statement addresses the accounting and
reporting of goodwill and other intangible assets subsequent to their
acquisition. In accordance with the adoption of SFAS No. 142, the Company
ceased amortization of goodwill and tested its goodwill and other
intangible assets for impairment based on the requirements included in
Statement 141 and reassessed the useful lives and residual values of those
intangible assets other than goodwill. As of September 30, 2002, there was
no impairment to the underlying value of the assets.
The effect of the adoption of SFAS No. 142 for the current and prior
year is as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- ---------------- ----------------
Reported net income (loss) $ 9,379 $ 4,109 $ 8,766 $ (3,350)
Add back: Amortization of goodwill - 199 - 597
and other intangibles, net of tax effect
--------------- --------------- ---------------- ----------------
Net income (loss) as adjusted $ 9,379 $ 4,308 $ 8,766 $ (2,753)
Earnings (loss) per share - Basic $ 0.53 $ 0.23 $ 0.50 $ (0.19)
Add back: Amortization of goodwill - 0.01 - 0.03
and other intangibles, net of tax effect
--------------- --------------- ---------------- ----------------
Net earnings (loss) as adjusted $ 0.53 $ 0.24 $ 0.50 $ (0.16)
=============== =============== ================ ================
Earnings (loss) per share - Diluted $ 0.51 $ 0.23 $ 0.48 $ (0.19)
Add back: Amortization of goodwill - 0.01 - 0.03
and other intangibles, net of tax effect
--------------- --------------- ---------------- ----------------
Net earnings (loss) as adjusted $ 0.51 $ 0.24 $ 0.48 $ (0.16)
=============== =============== ================ ================
15
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2002)
(US dollars in thousands)
9. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Effective on January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized
by the amount by which the carrying amount of the asset exceeds the fair
value of the asset. SFAS No. 144 requires companies to separately report
discontinued or discontinuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for
sale. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
16
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, 2001 as filed with the
United States Securities and Exchange Commission.
OVERVIEW
Radica Games Limited (the "Company") manufactures and markets a
diverse line of electronic entertainment products including handheld and
tabletop games, girls' lifestyle products, high-tech toys, and video game
accessories. The Company is headquartered in Hong Kong at the address set forth
on the cover of this report and manufactures its products in its factory in
southern China. The Company markets its products through subsidiaries in the
United States, the United Kingdom, Canada and Hong Kong. Its largest market is
in the United States where in 2001 it had the second largest market share in
handheld and tabletop electronic games according to the NPD Group, Inc., the
primary source for such industry data. In the United Kingdom, the Company's
subsidiary had the largest market share of the video game controller market
among third-party manufacturers in 2001 according to industry data source, Chart
Track.
The Company's products currently include 1) handheld electronic and
tabletop games sold under the Company's Radica and Radica Gold brand names, 2)
technology enhanced games and gadgets for girls under the Girl Tech brand name,
3) Radica Play TV(TM) games, featuring XaviX(R) technology and 4) video game
accessories sold under the Gamester brand name.
The Company employs a team of designers and engineers in its US, UK
and Asia offices. Most of Radica's product concepts are generated internally,
however on occasion the Company acquires product concepts from third party
inventors. Inventors are compensated through royalties that are generally paid
as a percentage of worldwide sales of the related product. Radica expects to
continue to develop most of its product in-house going forward, but also plan to
use outside inventors as a source for new product concepts.
Radica currently manufactures its products at its Tai Ping factory
(the "Factory") in Dongguan, Southern China approximately 40 miles northwest of
Hong Kong. The Factory was constructed with the cooperation of the local
government according to the Company's design specifications on a 3.7-acre site.
An extension of the Factory commenced in December 1999 to add 202,000 square
feet of factory space and 178,000 square feet of dormitory space allowing for up
to an additional 3,000 employees to be housed. The cost of construction of the
extension would have been approximately $3.0 million, exclusive of manufacturing
equipment. As a result of the drop in demand for Radica product in the US during
2000, work towards completion of this addition has been postponed and may
continue when market demand warrants use of the additional space. The expansion
has been sufficiently completed to the point that no impairment issues exist and
it is currently being used for storage during the peak production season. The
unit capacity of the Factory depends on the product mix produced. In any event,
there can be no assurance that the Company will be able to operate at full
capacity or have sufficient sales to warrant doing so.
The Company's offices in Dallas, Texas and Hertfordshire, UK manage
its North American and UK distribution, respectively. Third-party distributors
manage distribution throughout the rest of the
17
world. Substantial portions of the Company's sales are sold to its distributors
and retail customers on letter of credit basis or open account, and title of
goods is taken in Hong Kong. Radica also sells product from domestic inventories
held in various US, Canadian and UK warehouses. The Company currently has
agreements with distributors in Germany and France that allow them to sell the
Company's product on a consignment basis. The inventory is recorded in the
Company's balance sheet and sales are recorded upon confirmation from the
distributor that the inventory has been sold.
A sales return allowance is recorded for estimated sales returns
from customers. The allowance is based on historical trends and management's
best assessment of sales returns as a percentage of overall sales. The Company
also records an allowance for marketing and advertising costs agreed to with
certain customers. These allowances are based on other specific dollar-value
programs or percentages of sales, depending on how the program is negotiated
with the individual customer.
The Company's cost of sales is comprised primarily of the cost of
goods of its product manufactured in its Dongguan factory and sourced from
third-party manufacturers. Other costs include inbound and outbound freight
costs for goods that are shipped domestically from its distribution operations
in North America and the UK, obsolescence provisions, warranty provisions for
defective product and license and royalty expenses. The largest factor affecting
the Company's gross margin percentages is the product sales mix; the different
product lines make different gross margins and can have a significant impact on
the overall gross margin of the Company.
The Company's selling, general and administrative ("SG&A") expenses
are comprised of selling expenses such as sales commissions and product
advertising, as well as non manufacturing-related labor expenses, general
corporate expenses and depreciation and amortization. As a result of SFAS 142,
beginning January 1, 2002, the Company ceased amortization of goodwill and
tested its goodwill and other intangible assets for impairment based on the
requirements included in SFAS 141. As of September 30, 2002, there was no
impairment to the underlying value of the assets.
18
RESULTS OF OPERATIONS
The following unaudited table sets forth items from the Company's Consolidated
Statements of Operations as a percentage of net sales:
Three month ended
September 30,
----------------------------------
--------------- ---------------
2002 2001
--------------- ---------------
Net sales 100.0% 100.0%
Cost of sales (60.0%) (62.5%)
--------------- ---------------
Gross margin 40.0% 37.5%
Selling, general and administrative expenses (16.5%) (20.6%)
Research and development (2.3%) (3.9%)
Depreciation and amortization (1.5%) (2.8%)
Foreign exchange gain (loss) 0.8% 1.0%
--------------- ---------------
Operating income (loss) 20.5% 11.2%
Other income 0.3% 0.0%
Interest income, net 0.0% 0.1%
--------------- ---------------
Income (loss) before income taxes 20.8% 11.3%
Provision for income taxes (1.0%) (0.3%)
--------------- ---------------
Net income (loss) 19.8% 11.0%
=============== ===============
Net profit for the quarter was $9.4 million or $0.51 per fully diluted
share compared to $4.1 million or $0.23 per full diluted share in the third
quarter of 2001.
Sales for the quarter increased by 27.1% to $47.3 million compared to
$37.2 million in the third quarter of 2001. Revenues for the quarter were
comprised of 51.7% Electronic Games (Handheld Games and Play TV(TM)), 14.8%
Girls' Electronics (Girl Tech(R) and Barbie(TM)), 6.0% VGA and 27.5%
Manufacturing Services (ODM, OEM and Sourcing) compared to 53.4%, 11.4%, 7.0%
and 28.2% for the same period in 2001. In US dollar terms this represents sales
growth of 23.1% for Electronic Games, 64.1% for Girls' Electronics, 8.6% for VGA
and 24.0% for Manufacturing Services.
19
Net sales by product category are summarized as follows ($ in
thousands):
Three months ended
September 30,
----------------------------------
2002 2001
--------------- ---------------
Electronic Games $ 24,480 $ 19,881
Girls Electronics 6,986 4,256
ODM/OEM 11,582 9,057
VGA - Sourcing 1,429 1,435
VGA 2,828 2,604
--------------- ---------------
Total Net Sales $ 47,305 $ 37,233
=============== ===============
The Company's third quarter gross profit increased to $18.9 million in
2002 from $14.0 million in 2001. The Company's gross margin for the third
quarter of 2002 was 40.0% compared to 37.5% in the third quarter of 2001 as a
result of product mix shifting to higher margin Electronic Games and Girls
Electronics.
Operating expenses for the quarter were $9.2 million compared to $9.8
million in Q3 of 2001. The decrease in expenditure was as a result of a drop in
Research and Development costs due to the Company's reorganization in the first
quarter and a reduction in Depreciation and Amortization charges offset by
increased variable costs due to the increase in sales.
CAPITAL RESOURCES AND LIQUIDITY
Receivables were at $26.3 million at September 30, 2002 compared to
$17.3 million at December 31, 2001 and $20.2 million at September 30, 2001 as a
result of the growth of revenues. Net sales for the quarter increased by $10.1
million compared to the third quarter of 2001. Inventories increased to $26.2
million from $17.2 million at December 31, 2001 and $22.4 million at September
30, 2001. This increase of $3.8 million is due to expansion of the UK toy
business levels and also an increase in Xbox accessories for Europe compared to
September 2001. Current liabilities were $33.0 million at September 30, 2002
compared to $27.0 million at December 31, 2001. This was primarily the result of
an increase in accounts payable.
At September 30, 2002 the Company had $22.0 million of cash and net
assets of $71.6 million compared to $25.8 million and $63.1 million,
respectively at December 31, 2001. The Company 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.
At September 30, 2002, cash and cash equivalents, net of borrowings,
were $18.4 million of which $9.0 million of cash deposits have been pledged as
security for undrawn or substantially repaid facilities. Management does not
consider that there are any significant restrictions on its ability to gain
access to these deposits. This compares with cash and cash equivalents, net of
borrowings of $19.5 million at December 31, 2001 and $12.8 million at September
30, 2001. The Company believes that
20
during 2002 and beyond, its most significant cash source will be from its
operating profits. The Company's management believes that it will realize an
operating profit in 2002 and will successfully convert its receivables and
inventories into sufficient cash needed to fund the business. The Company gives
no assurances that it will successfully be able to achieve an operating profit
in 2002.
Net cash used in financing activities was $2.5 million in 2002. This
was primarily due to the repayment of an installment of a term loan, partially
offset by the proceeds from the exercise of stock options. Loan installments due
within twelve months of the reported quarter-end are included in short-term
liabilities. The term loan and revolving loan are secured by certain properties
and deposits of the Company (see Notes to the Consolidated Financial
Statements). The agreement contains covenants that, among other things, require
the Company to maintain a minimum of tangible net worth, gearing ratio and other
financial ratios.
Management believes that the Company's existing credit lines are
sufficient to meet future short-term cash demands. The Company funds its
operations and liquidity needs primarily through cash flow from operations, as
well as utilizing borrowings under the Company's secured and unsecured credit
facilities when needed. During 2002, the Company expects to continue to fund its
working capital needs through operations and its revolving credit facility and
believes that the funds available to it are adequate to meet its needs. The
Company expects to be in compliance with its covenants in 2002. 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 of the Company, thereby causing the Company to exhaust its cash
resources. If this were to occur, the Company may be required to seek
alternative financing of its working capital. In addition, this may cause the
Company to be in non-compliance with its debt covenants and to be unable to
utilize its revolving credit facility.
The Company had no derivative instruments or off balance sheet
financing activities during the quarter ended September 30, 2002. The Company
believes that its existing cash and cash equivalents and cash generated from
operations are sufficient to satisfy the current anticipated working capital
needs of its core business.
21
Item 3. Qualitative and Quantitative Disclosures About Market Risk
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are subject to
risks and uncertainties. Actual results could differ materially from those
discussed in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign currency exchange rates.
The Company does not have derivative financial instruments for hedging,
speculative, or trading purposes.
INTEREST RATE SENSITIVITY
The Company's long-term loan agreement is based upon the US$ Singapore
Interbank Offered Rate ("SIBOR") and, as such, is sensitive to changes in
interest rates. The Company has not used derivative financial instruments in its
indebtedness. At September 30, 2002, the result of a hypothetical one percentage
change in the underlying US$ SIBOR rates would have resulted in less than $0.1
million change in the annual amount of interest payable on such debt.
FOREIGN CURRENCY RISK
The Company has net monetary asset and liability balances in foreign
currencies other than the U.S. dollar, mainly including the Pounds Sterling, the
Canadian dollar, the Hong Kong dollar and the Chinese Renminbi. International
distribution and sales revenues usually are made by the Company's 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, the operating results
of the Company are exposed to changes in exchange rates between the United
States Dollar and the Pounds Sterling or the Canadian dollar. The Company's
primary exposure relates to the intercompany debt that exists between Radica
China, its manufacturing company that records its intercompany receivables in US
Dollars, and Radica UK, its UK distribution company that records its
intercompany payable to Radica China in Pounds Sterling. Were there to be a
significant fluctuation in exchange rates, this could have a material impact on
the financial results of the Company. The Company does not currently hedge its
foreign exchange risk. The Company will continue to monitor its exposure to
currency fluctuations, and, where appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations. There can
be no assurance that exchange rate fluctuations will not harm the business in
the future.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
23
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: December 23, 2002 /s/ Craig D. Storey
----------------------- -----------------------------------
Craig D. Storey
Chief Accounting Officer
24
RADICA GAMES LIMITED
REPORTS THIRD QUARTER
NET INCOME GROWTH OF 128%
FOR IMMEDIATE RELEASE CONTACT: PATRICK S. FEELY
NOVEMBER 4, 2002 PRESIDENT & CEO
(LOS ANGELES, CALIFORNIA)
(626) 744 1150
DAVID C.W. HOWELL
PRESIDENT ASIA OPERATIONS
& CFO
(HONG KONG)
(852) 2688 4201
(HONG KONG) Radica Games Limited (NASDAQ: RADA) announced today its results for
the third quarter of 2002. The company reported net income growth of 128.3% to
$9.4 million or $0.51 per fully diluted share from $4.1 million or $0.23 per
fully diluted share in the third quarter of 2001. Net income for the nine-month
period ended September 30, 2002 was $8.8 million or $0.48 per fully diluted
share compared to a loss of ($3.4) million or ($0.19) per fully diluted share
for the same period of 2001.
Sales for the quarter increased by 27.1% to $47.3 million compared to $37.2
million for the same period in 2001. Year-to-date sales increased by 43.9% to
$85.3 million from $59.3 million in 2001. Revenues for the quarter were
comprised of 51.7% Electronic Games (Play TV and Handheld Games), 14.8% Girl's
Electronics (Girl Tech and Barbie branded), 6.0% Video Game Accessories ("VGA"),
and 27.5% Manufacturing Services (ODM and Sourcing). The Electronic Games
business segment grew by 23.1% for the quarter and 27.1% year-to-date. Girl's
Electronics grew by 64.1% for the quarter and 37.5% year-to-date. Video Game
Accessories grew by 8.6% for the quarter and 94.1% year-to-date. Manufacturing
Services grew by 24.0% for the quarter and 65.8% year to date.
Pat Feely, President and CEO, said "Our third quarter and year-to-date results
demonstrate the dramatic turnaround we have engineered at Radica as a result of
our joint strategies of diversification and cost reduction. These results
exceeded our expectations and are the best quarterly results at Radica since
1998. We are particularly pleased to be showing double-digit, nine-month growth
in each of our major business segments considering the difficult conditions in
the marketplace this year."
"The recent problems at the West Coast docks have created significant
uncertainties for the fourth quarter. As a result we are not commenting on our
forecast for the full year at this time. It should be noted that this is an
unusual event in our industry and is unlikely to impact the long-term outlook
for the industry or Radica", said Feely.
Gross margin for the quarter was 40.0% compared to 37.5% in Q3 of 2001 as a
result of product mix shifting to higher margin Electronic Games and Girls
Electronics.
Operating expenses for the quarter were $9.2 million compared to $9.8 million in
Q3 of 2001. The decrease in expenditure was as a result of a drop in Research
and Development costs due to the reorganization in the first quarter and a
reduction in Depreciation and Amortization costs offset by increased variable
costs due to the increase in sales.
At September 30, 2002 the Company had $22.0 million of cash and net assets of
$71.6 million compared to $25.8 million and $63.1 million, respectively at
December 31, 2001. At September 30, 2001, cash levels were at $21.0 million with
net assets at $64.0 million. Inventories increased to $26.2 million from $17.2
million at December 31, 2001 and $22.4 million at September 30, 2001.
Receivables were at $26.3 million at September 30, 2002 compared to $17.3
million at December 31, 2001 and $20.2 million at September 30, 2001.
The foregoing discussion contains forward-looking statements that
involve risks and uncertainties that could cause actual results to
differ materially from projected results. Forward-looking statements
include statements about efforts to attract or prospects for additional
or increased business, new product introductions and other statements
of a non-historical nature. Actual results may differ from projected
results due to various Risk Factors, including Risks of Manufacturing
in China, Dependence on Product Appeal and New Product Introductions,
and Dependence on Major Customers, as set forth in the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2001, as
filed with the Securities and Exchange Commission. See "Item 3. Key
Information -- Risk Factors" in such report on Form 20-F.
Radica Games Limited (Radica) is a Bermuda company headquartered in Hong Kong
(NASDAQ: RADA). Radica is a leading developer, manufacturer and distributor of a
diverse line of electronic products including handheld and tabletop games,
girls' lifestyle products, high-tech toys and video game accessories. Radica has
subsidiaries in the U.S.A., Canada and the U.K., and a factory in Dongguan,
Southern China. More information about Radica can be found on the Internet at
www.radicagames.com.
-- END --
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(US Dollars in thousands, Three months ended September 30, Nine months ended September 30,
except per share data) ------------------------------------------------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net sales $ 47,305 $ 37,233 $ 85,315 $ 59,301
Cost of goods sold (exclusive of items
shown separately below) (28,366) (23,259) (54,246) (38,597)
----------------- ----------------- ----------------- -----------------
Gross profit 18,939 13,974 31,069 20,704
----------------- ----------------- ----------------- -----------------
Operating expenses:
Selling, general and administrative expenses (7,813) (7,677) (17,583) (16,655)
Research and development (1,067) (1,467) (3,053) (4,228)
Depreciation and amortization (714) (1,021) (2,150) (3,035)
Foreign exchange gain (loss) 374 371 1,098 (93)
----------------- ----------------- ----------------- -----------------
Total operating expenses (9,220) (9,794) (21,688) (24,011)
----------------- ----------------- ----------------- -----------------
Operating income (loss) 9,719 4,180 9,381 (3,307)
Other income (loss) 115 (6) 170 18
Net interest income 4 41 20 118
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes 9,838 4,215 9,571 (3,171)
Provision for income taxes (459) (106) (805) (179)
----------------- ----------------- ----------------- -----------------
Net income (loss) 9,379 4,109 8,766 (3,350)
================= ================= ================= =================
Net income (loss) per share:
Basic $ 0.53 $ 0.23 $ 0.50 $ (0.19)
================= ================= ================= =================
Diluted $ 0.51 $ 0.23 $ 0.48 $ (0.19)
================= ================= ================= =================
Weighted average number of common
and common equivalent shares:
Basic 17,740,167 17,628,216 17,708,692 17,602,694
================= ================= ================= =================
Diluted 18,301,965 18,250,229 18,308,820 17,602,694
================= ================= ================= =================
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
(US Dollars in thousands, except share data) September 30, December 31,
----------------- -----------------
2002 2001
----------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,956 $ 25,810
Accounts receivable, net of allowances for doubtful accounts
of $702 ($2,207 in 2001) 26,294 17,290
Inventories, net of provision of $3,920 ($3,997 in 2001) 26,168 17,179
Prepaid expenses and other current assets 2,792 2,283
Income taxes receivable 931 931
Deferred income taxes 168 168
----------------- -----------------
Total current assets 78,309 63,661
----------------- -----------------
Property, plant and equipment, net 15,183 16,310
----------------- -----------------
Intangible assets, net 9,656 9,971
----------------- -----------------
Deferred income taxes, noncurrent 1,421 1,887
----------------- -----------------
Total assets $ 104,569 $ 91,829
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 846 $ 846
Accounts payable 16,336 10,101
Current portion of long-term debt 2,737 3,648
Accrued payroll and employee benefits 1,898 943
Accrued expenses 10,462 10,907
Income taxes payable 728 507
----------------- -----------------
Total current liabilities 33,007 26,952
----------------- -----------------
Long-term debt - 1,825
----------------- -----------------
Total liabilities 33,007 28,777
----------------- -----------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
17,764,003 shares outstanding (17,646,740 in 2001) 178 176
Additional paid-in capital 2,245 1,549
Warrants to acquire common stock - 445
Retained earnings 69,778 61,012
Accumulated other comprehensive income (639) (130)
----------------- -----------------
Total shareholders' equity 71,562 63,052
----------------- -----------------
Total liabilities and shareholders' equity $ 104,569 $ 91,829
================= =================