UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____________________ to ________________________
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(Jurisdiction of incorporation or organization)
SUITE V, 6/FL. 2-12 AU PUI WAN ST.
FO TAN, HONG KONG
(Address of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.01
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Title of each class Amount Outstanding
------------------- ------------------
Common Stock, Par Value $.01 18,225,204
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 by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 X
--------- ---------
RADICA GAMES LIMITED
INDEX TO ANNUAL REPORT ON FORM 20-F
YEAR ENDED DECEMBER 31, 2003
ITEMS IN FORM 20-F
Page
----
PART I 4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
ITEM 4. INFORMATION ON THE COMPANY 13
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 27
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 35
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 42
ITEM 8. FINANCIAL INFORMATION 43
ITEM 9. THE OFFER AND LISTING 44
ITEM 10. ADDITIONAL INFORMATION 44
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 50
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 51
PART II 51
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 51
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 51
ITEM 15. CONTROLS AND PROCEDURES 51
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 51
ITEM 16B. CODE OF ETHICS 51
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 52
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 52
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 52
PART III 52
ITEM 17. FINANCIAL STATEMENTS 52
ITEM 18. FINANCIAL STATEMENTS 52
ITEM 19. EXHIBITS 52
2
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
elsewhere in this Annual Report on Form 20-F for the fiscal year ended December
31, 2003. See "Item 3. Key Information - Risk Factors" in this 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.
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
Set forth below is the selected income statement and balance sheet data
for each of the five years in the period ended December 31, 2003. This data is
derived from the financial statements included herein and from those previously
reported for earlier periods. This summary should be read in conjunction with
"Operating and Financial Review and Prospects" and the consolidated financial
statements and notes thereto included elsewhere in this document.
(in thousands, except per share YEAR ENDED DECEMBER 31,
data and margins) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $ 105,200 $ 124,646 $ 98,554 $ 106,696 $ 136,716
Cost of sales 64,571 77,481 64,698 83,041 80,910
--------- --------- --------- --------- ---------
Gross profit 40,629 47,165 33,856 23,655 55,806
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative 25,779 27,695 26,279 32,322 28,353
Research and development 3,895 4,094 5,775 5,210 6,036
Depreciation and amortization 2,033 2,858 4,013 5,427 4,956
Restructuring charge 87 -- 1,551 1,190 --
--------- --------- --------- --------- ---------
Total operating expenses 31,794 34,647 37,618 44,149 39,345
--------- --------- --------- --------- ---------
Operating income (loss) 8,835 12,518 (3,762) (20,494) 16,461
Other income 317 306 24 781 718
Foreign currency gain (loss), net 178 1,744 (219) 49 304
Share of loss of affiliated company -- -- -- -- (1,748)
Net interest income 295 35 136 664 1,469
--------- --------- --------- --------- ---------
Income (loss) before income taxes 9,625 14,603 (3,821) (19,000) 17,204
Credit (provision) for income taxes 2,866 (2,669) (553) 901 (149)
--------- --------- --------- --------- ---------
Net income (loss) $ 12,491 $ 11,934 $ (4,374) $ (18,099) $ 17,055
========= ========= ========= ========= =========
Net income (loss) per share - basic $ 0.69 $ 0.67 $ (0.25) $ (1.03) $ 0.94
========= ========= ========= ========= =========
Weighted average number of common shares 18,017 17,726 17,612 17,608 18,144
Net income (loss) per share - diluted $ 0.66 $ 0.65 $ (0.25) $ (1.03) $ 0.90
========= ========= ========= ========= =========
Weighted average number of common shares
and common equivalent shares 19,060 18,336 17,612 17,608 18,979
(continued)
4
(in thousands, except per share YEAR ENDED DECEMBER 31,
data and margins) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
STATISTICAL DATA:
Gross margin 38.6% 37.8% 34.4% 22.2% 40.8%
Operating margin 8.4% 10.0% (3.8%) (19.2%) 12.0%
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 65,616 $ 50,155 $ 36,709 $ 42,619 $ 65,123
Total assets 102,214 95,302 88,407 99,315 122,174
Long-term debt -- -- 1,825 5,473 10,946
Total debt -- 2,671 6,319 12,901 13,809
Common stock 182 178 176 176 176
Shareholders' equity 89,156 74,636 63,052 67,388 86,062
RISK FACTORS
Our common stock involves a significant degree of risk. You should
carefully consider the following risk factors and the other information
contained or incorporated by reference in this annual report before investing in
our common stock. Any of the following factors, depending upon the severity and
circumstances of a particular occurrence, could result in a material adverse
effect on our business, prospects, financial condition and results of
operations.
RISK OF MANUFACTURING IN CHINA
Our factory is in Southern China and our headquarters are in Hong Kong,
which is a Special Administrative Region of China.
Risk of China Losing Normal Trade Relations Status or of Changes in
Tariff or Trade Policies. We manufacture in China and export from Hong Kong and
China to the United States and worldwide. Our products sold in the United States
are currently not subject to U.S. import duties. On September 19, 2000, the U.S.
Senate voted to permanently normalize trade with China, which provides a
favorable category of U.S. import duties. In addition, on December 11, 2001
China was accepted into the World Trade Organization (WTO), a global
international organization of 144 countries that regulates international trade.
As a result of opposition to certain policies of the Chinese government
and China's growing trade surpluses with the United States, there has been, and
in the future may be, opposition to the extension of Normal Trade Relations, or
NTR, status for China. The loss of NTR status for China, changes in current
tariff structures or adoption in the United States of other trade policies
adverse to China could have an adverse effect on our business.
Chinese Political, Economic and Legal Risks. Our current and future
operations in China and Hong Kong are highly dependent on the Chinese
government's continued support of economic reform programs that encourage
private investment, and particularly foreign private investment. Although the
Chinese government has adopted an "open door" policy with respect to foreign
investment, we cannot assure you that this policy will continue. A change in
policies by the Chinese government could adversely affect our business by, among
other things, imposing confiscatory taxation, restricting currency conversion,
imports and sources of supplies, or expropriating private enterprises. Although
the Chinese government has been pursuing economic reform policies for nearly two
decades, we cannot assure you that the Chinese government will continue to
pursue these policies or that these policies may not be significantly altered,
especially in the event of a change in leadership or other social or political
disruption.
5
Our production and shipping capabilities could be adversely effected by
ongoing tensions between the Chinese and Taiwanese governments. In the event
that Taiwan does not adopt a plan for unifying with China, the Chinese
government has threatened military action against Taiwan. As of yet, Taiwan has
not indicated that it intends to propose and adopt a reunification plan. If an
invasion were to occur, our supply of components from Taiwanese suppliers,
including computer processing units (CPUs), could be cut off, potentially
limiting our production capabilities. Invasion could also lead to sanctions or
military action by the U.S. and/or European countries, which could materially
affect our sales to those countries.
China Does Not Have a Comprehensive System of Laws. Enforcement of
existing laws in China may be sporadic and implementation and interpretation of
laws may be inconsistent. The Chinese judiciary is relatively inexperienced in
enforcing the laws that exist, leading to a higher than usual degree of
uncertainty as to the outcome of any litigation. Even where adequate law exists
in China, it may be impossible to obtain swift and equitable enforcement of such
law, or to obtain enforcement of a judgment by a court of another jurisdiction.
Dependence on Local Government. We operate our Factory in China under
agreements with the local government. These agreements and our factory
operations are dependent on our relationship with the local government and
existing trade practices. This relationship could be subject to adverse change
in the future, especially in the event of a change in leadership or other social
or political disruption.
Chinese Taxation. We paid $365,000 in foreign enterprise tax on our
joint venture in China in 2003. This is the fifth year we have paid foreign
enterprise tax in China. We were granted 50% relief from foreign enterprise tax
through December 31, 2001 under the Foreign Enterprise Income Tax Law of The
People's Republic of China, or PRC, and were therefore taxed at 12%. In 2002 and
2003, we were taxed at the full rate of tax of 27%; however, we successfully
applied to be designated as an "Export Oriented Enterprise" in 2002, which
reduced our tax rate to 12% for 2002. The application to be designated as an
"Export Oriented Enterprise" is required to be made on a yearly basis. We are
applying for the same designation for 2003 and if our application is successful,
we will reduce our tax rate for 2003 to 12%. These rates do not include the
local tax of 3%, that would result in an effective rate of 15%.
The PRC assesses tax on us based on a joint venture contract. The joint
venture contract is a joint venture with the local township that lasts through
August 12, 2024 and tax is payable quarterly based on tax rates determined upon
entering the agreement.
The Chinese tax system is subject to substantial uncertainties and has
been subject to recently enacted changes, the interpretation and enforcement of
which are also uncertain. We cannot assure you that changes in Chinese tax laws,
their interpretation or their application will not subject us to substantial
Chinese taxes in the future. In addition, the negotiation and settlement of tax
obligations with the local tax authorities are a normal occurrence.
Chinese Customs. We have intercompany invoicing whereby our Chinese
subsidiary invoices the Hong Kong and Macau entities who then invoice the U.S.
and U.K. entities for sales rendered. As required by Chinese customs and the
Chinese tax authority in each jurisdiction, our Chinese subsidiary seeks to
apply arms length pricing to this process. Should the customs or tax authority
in any jurisdiction consider the pricing not to be arms-length, it may deem the
prices charged to be different from those we have applied. If this decision were
to be applied unilaterally, it could lead to an increase in our overall customs
duties and taxes. In addition, we may have to expend resources in defending our
position, irrespective of the outcome determined.
6
Chinese Value Added Tax. China's turnover tax system consists of
value-added tax, or VAT, consumption tax and business tax. Export sales are
exempted under VAT rules and an exporter who incurs input VAT on purchase or
manufacture of goods should be able to claim a refund from Chinese tax
authorities. However, due to a reduction in the VAT export refund rate of some
goods, exporters might bear part of the VAT they incurred in conjunction with
the exported goods. In 2003, changes to the Chinese Value Added Tax system were
announced affecting the recoverability of input VAT beginning January 1, 2004.
Our VAT expense will depend on the reaction of both our suppliers and customers.
Continued efforts by the Chinese government to increase tax revenues could
result in revisions to tax laws or their interpretation, which could increase
our VAT and various tax liabilities.
We establish provisions for our known and estimated customs duties and
tax obligations. However, we may be exposed to additional taxation whether
through a challenge by one of the many tax authorities in international
jurisdictions of our transfer pricing, our claim regarding lack of permanent
establishment, or other interpretations regarding our tax obligations.
Limited Infrastructure. Electricity, water, sewage, telephone and other
infrastructure are limited in the locality of our factory. In the past, we have
experienced temporary shortages of electricity and water supply. We have
installed seven back-up electrical generators in our factory which can support
it in the event of a power shortage. We cannot assure you that the
infrastructure on which our factory is dependent will be adequate to operate the
factory successfully.
DEPENDENCE ON CURRENT PRODUCT APPEAL AND NEW PRODUCT INTRODUCTIONS
Our operating results depend largely upon the appeal of our products to
consumers. Consumer preferences are highly subjective, and there can be no
assurance that consumers will continue to find existing products appealing or
will find new products appealing. Also, we continue to offer a relatively
limited range of products that are all in the categories of electronic toys and
games or video game accessories. This exposes us to the risks of any narrowly
focused business. Changes in consumer preferences away from the kinds of
products we offer could have an adverse effect on our business.
Some of our products have been only recently introduced and although
they may experience good initial sales growth, we cannot assure you that this
initial success is indicative of significant future sales. As a general matter,
we expect that the sales of these products will eventually decline. We cannot
predict how long the product cycle will last for any product. In order to
control costs, and take advantage of the finite shelf space available to us, we
need to delete products from our line periodically. Our long-term operating
results will therefore depend largely upon our continued ability to conceive,
develop and introduce new appealing products at competitive prices.
Once a new product is conceived, the principal steps to the
introduction of the product include design, sourcing and testing of the
electronic components, tooling, and purchase and design of graphics and
packaging. At any stage in the process, there may be difficulties or delays in
completing the necessary steps to meet the contemplated product introduction
schedule. It is, for example, common in new product introductions or product
revisions to encounter technical and other difficulties affecting manufacturing
efficiency and, at times, the ability to manufacture at all, that will typically
be corrected or improved over a period of time with continued manufacturing
experience and engineering efforts. If one or more aspects necessary for
introduction of products are not met in a timely fashion, or if technical
difficulties take longer than anticipated to overcome, the anticipated product
introductions will be delayed, or in some cases may be terminated. Therefore we
cannot assure you that products will be introduced in a timely fashion.
7
Future products may utilize different technologies and require
knowledge of markets in which we do not presently participate. Significant
delays in the introduction of, or the failure to introduce, new products or
improved products would have an adverse effect on our operating results.
We cannot assure you that retailers will react positively to new
product introductions. There is also a risk that the demand for new or existing
products could drop suddenly. As a result, we may build excess quantities of
certain products and subsequently have to put inventory provisions in place to
mark the value of excess inventory quantities down to their estimated market
value.
There are often technical challenges in bringing a product into
production. We may announce and sell a product but later find it must be delayed
or abandoned due to difficulties in engineering and manufacturing. We cannot
assure you that an announced product will ship on time or not be abandoned.
NO ASSURANCE OF GROWTH
We cannot assure you that we will achieve future growth in net sales or
that we will be able to maintain our present levels of net sales or
profitability. Our current business strategy emphasizes the sale of a controlled
number of products, while representing a more diverse range of products than in
the past. Our products include handheld games, Barbie(TM) electronic games, the
Girl Tech(R) line, Play TV(R) products, the Twinkleberries(TM) electronic doll
line, the Off Limits(TM) boys electronics line, the Nitro Battlerz(TM) remote
control car line, video game accessories sold under the Gamester(R) brand,
original design manufacturing, or ODM, and original equipment manufacturing, or
OEM, products. In any period, our financial results are likely to vary with the
success or lack of success of newly introduced products, which are inherently
uncertain. We cannot simply rely on continuing sales of existing products.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a significant portion of our sales have been concentrated
with a few large retail customers. These customer concentrations are disclosed
in the notes to our consolidated financial statements in this annual report.
Most of our retail customers operate on a purchase order basis and we do not
have long-term contracts with our retail customers. While we believe we have
good relationships with our major retail customers, the loss of one or more
these retail customers would have an adverse effect on our operating results.
On January 22, 2002 the Kmart Corporation filed for protection from its
creditors under Chapter 11 of the United States Bankruptcy Code. Our receivable
exposure to Kmart was entirely provided for during 2001 and no additional
write-downs or expenses related to the bankruptcy were incurred during 2002. We
continue to sell our products to Kmart and closely monitor our account with them
in order to minimize future exposure.
During 2003, both FAO, the parent company of FAO Schwartz and Zany
Brainy stores, and KB Toys, Inc. filed for Chapter 11 protection. Our exposure
was limited in both of these cases and any outstanding receivables were provided
for during 2003. Currently, we are not selling to either retailer, but may sell
to them in the future under a debtor-in-possession agreement. As with Kmart, the
accounts will be closely monitored in order to minimize future exposure.
During 2003, a significant portion of our OEM sales came from Hasbro,
which is also one of our competitors. We do not have a specific contract with
Hasbro regarding these projects and there is no assurance that we will continue
to receive orders from Hasbro, which could have an adverse effect on our
business.
8
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS
We are dependent on suppliers for the components and parts that we
assemble to produce our products. We generally purchase the specific liquid
crystal displays, or LCDs, and semiconductor chips for any particular product
model from a single supplier. An interruption of the supply of LCDs,
semiconductor chips or other supplies from a supplier could result in
significant production delays.
SSD Company Limited, or SSD, supplies the chips used in Radica's Play
TV and Connectv(R) lines of products. If SSD refused or were unable to provide
these chips, we would be unable to manufacture and distribute these product
lines.
We also rely on outside manufacturers for production of some of our
electronic games and video game accessories. While we have moved the majority of
this production into our own factory, manufacturer delays or shutdowns could
have a significant impact on future sales of certain products.
CONCENTRATED MANUFACTURING FACILITIES
A disruption of operations at our factory due to fire, labor dispute,
dispute with the local government or otherwise, would have an adverse effect on
our operating results. In such event, we believe that we could partially
mitigate the effect of a disruption by increasing the use of subcontractors to
assemble our products, but we cannot assure you that we would be able to do so.
In addition, our manufacturing facilities are dependent on our relationship with
the local government.
NO ASSURANCE OF SUCCESS IN NEW BUSINESS
From time to time, we expand into related or new businesses in order to
diversify and grow. Examples include the development of its ODM and OEM
operations and our expansion into the video game accessories market. We cannot
assure you that such businesses can be retained or that we will be successful in
such ventures.
NO ASSURANCE OF CONTINUED ODM/OEM BUSINESS
We manufacture goods for third parties, often without a contract. Our
contracts with ODM and OEM customers can generally be terminated by either party
on short notice, therefore we cannot assure you that such business can be
retained for an extended period of time. Loss of such business would materially
effect our revenues.
DEPENDENCE ON KEY PERSONNEL
Our success is substantially dependent upon the expertise and services
of our senior management personnel. The loss of the services of senior
executives would have an adverse effect on our business.
SEASONALITY
We experience a significant seasonal pattern in our operating results
and working capital requirements. We typically generate most of our sales in the
third and fourth quarters of our fiscal year, prior to the traditional gift
season. The high level of seasonality causes us to take large risks in the
purchase of inventory and extending credit to customers for the holiday season.
We cannot assure you that we or our customers will sell all their inventories.
Excess inventory at year-end may result in financial losses from obsolescence
reserves, returns, markdowns and bad debts.
Our operating results may also fluctuate during the year due to other
factors such as the timing of the introduction of new products. The market price
of our common stock may be subject to significant fluctuations in response to
variations in quarterly operating results and other factors. These fluctuations
are reflected in our statement regarding selected quarterly financial data
attached as Exhibit 12.1 to this annual report.
9
INDUSTRY AND PRODUCT LINE VOLATILITY
The toy and game industry is known for a high level of volatility as a
result of changing consumer tastes, competition and over saturation of popular
products. We have experienced significant volatility in its results in our past
history. While we have diversified our business in recent years to reduce
volatility, there can be no guarantee that this history of volatility will not
continue.
COMPETITION
The electronic games, youth electronics and video game accessories
businesses are highly competitive. We currently face direct competition from a
number of other producers of handheld electronic games and video game
accessories. The barriers for new producers to enter into our markets are
relatively low and we expect that we will face increased competition in the
future. Some competitors offer products at lower prices, are better established
in the industry and are larger than we are. In addition, with respect to ODM and
OEM, we compete with a number of substantially larger and more experienced
manufacturers. As we enter other markets and businesses, we expect to face new
competition.
INTELLECTUAL PROPERTY RISKS
From time to time, other companies and individuals may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies or marks that are important to our industry generally or to our
business specifically. We will evaluate each claim relating to our products or
other aspects of our business and, if appropriate, will seek a license to use
the protected technology. There can be no assurance that we will be able to
obtain licenses to intellectual property of third parties on commercially
reasonable terms, if at all. In addition, we could be at a disadvantage if our
competitors obtain licenses for protected technologies on more favorable terms
than we do. If we or our suppliers are unable to license protected technology
used in our products, we could be prohibited from marketing those products or
may have to market products without desirable features. We could also incur
substantial costs to redesign our products or to defend any legal action taken
against us. If our products or manufacturing methods should be found to infringe
protected technology, we could be enjoined from further infringement and
required to pay damages to the infringed party. Any of the foregoing could have
an adverse effect on our operating results and financial position.
PRODUCT LIABILITY
Historically, we have received only minor complaints relating to
injuries or other damages caused by our products. However, in recent years we
have introduced products that involved more active play including our Play TV(R)
baseball, snowboard and boxing games. In fiscal 2000, we received a number of
consumer complaints that bats used in the Play TV baseball game could be broken
resulting in a projectile striking a game participant. We recalled the bats for
replacement with a reengineered bat. We are in the process of handling all
remaining claims resulting from damages from the recalled bat and all pending
claims are covered by our product liability insurance. We may be exposed to
claims for damages in these or other circumstances, some or all of which may not
be covered by insurance. We cannot guarantee you that current or future products
may not result in claims or that our insurance will be adequate.
INCREASED TAXATION
We cannot predict whether our tax rates will remain as low as they have
been in the past as tax regulations and the application or interpretation in the
various jurisdictions where we operate are always subject to change. Our taxes
are subject to audit. We cannot guarantee that additional taxes will not be due
as a result of audits or other factors.
PRODUCT "KNOCK-OFFS"
On occasion in the electronic games and video game accessories
industries, successful products are "knocked-off" or copied. While we strive to
protect our intellectual property we cannot guarantee that knock-offs will not
have a significant effect on our business. The costs incurred in protecting our
intellectual property rights could be significant and there is no assurance that
we will be able to successfully protect our rights.
10
BAD DEBTS AND RETURNS
While we perform full credit checks on all of our customers we cannot
be assured that any customer will not default on a payment of debt. A default
could have a significant effect on our operating results. It is our policy in
North America to only take back defective products and while we believe we will
be able to enforce this policy under normal industry conditions, it may not be
possible to enforce this policy in all cases. The video game accessories market
generally experiences a higher rate of defective and overstock returns than the
electronic and mechanical game market does. Generally, defective video game
accessories that are manufactured by third party manufacturers are returned to
the manufacturer or destroyed on site for credit. In such cases, there is no
guarantee that we will be paid by the manufacturer.
In certain instances, where retailers are unable to sell the quantity
of products which have been ordered from us, we may, in accordance with industry
practice, assist retailers to enable them to sell such excess inventory by
offering discounts or accepting returns. A portion of firm orders, by their
terms, may be canceled if shipment is not made by a certain date. We minimize
the related costs of such discounts and returns by engaging personnel to visit
selected customers and assist in the management of our product returns. We
establish provisions based on historical experience at the time of sale of the
related products. The return of non-defective products occurs infrequently in
the U.S. In the UK market, accepting non-defective product returns occurs more
frequently, requiring higher provisions.
CONTROL BY EXISTING SHAREHOLDERS
Our largest shareholders, including a group that consists of Dito
Devcar Corporation and certain related persons, and a group that consists of RAD
Partners 1999 LLC and certain related persons, own beneficially in the aggregate
a majority of our outstanding common stock. Assuming that they were in
agreement, such persons would have the power to elect our directors and to
approve or disapprove all other matters requiring shareholder approval
regardless of the vote of any other shareholders.
DIFFICULTIES IN ENFORCING CIVIL LIABILITIES
We are a Bermuda holding company, and a substantial portion of our
assets are located outside the United States. In addition, many of our directors
and officers and the experts named herein reside outside the United States
(principally in Hong Kong, the United Kingdom and the People's Republic of
China), and all or a substantial portion of their assets are or may be located
outside the United States. As a result, it may not be possible for investors to
effect service of process within the United States upon them, or to enforce
judgments against them or us obtained in the United States courts predicated
upon the civil liability provisions of the United States securities laws. Among
other things, we understand that there is doubt as to the enforceability in
Bermuda and other foreign jurisdictions, in original actions or in actions for
enforcement of judgments of United States courts, of civil liabilities
predicated solely upon the United States securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
At December 31, 2003, we had 18,225,204 shares of common stock
outstanding. We estimate that most of these shares were previously sold in
registered offerings or in transactions under Rule 144, and therefore are
tradable without restriction, other than any shares purchased by our
"affiliates." The remaining shares owned by existing shareholders are restricted
securities under the Securities Act of 1933, as amended, and may be sold only
pursuant to a registration statement or an applicable exemption from the
registration requirements, including Rule 144. Most of these restricted shares
are currently eligible for sale pursuant to Rule 144, subject to the limitations
of that rule. Market sales of shares by existing shareholders or the
availability of shares for future sale may depress the market price of our
common stock.
11
LICENSES AND ROYALTIES
We have entered into various license and royalty agreements in which we
pay fees in exchange for rights to use product inventions or trademarked names,
shapes and likenesses for use in development of our product line. The agreements
generally include minimum fee guarantees based on a reasonable expectation of
the product sales to be generated throughout the life of the agreement. We
cannot assure you that we will be able to meet these expectations and may be
obligated to pay unearned fees as a result. Our license and royalty agreements
are for fixed terms and often contain performance-related covenants. We cannot
assure you that we will be able to maintain or extend the rights to our existing
licenses.
LABOR
Labor disputes initiated by unions and trade groups could negatively
impact our business or the business of our vendors and customers. Such disputes
could ultimately cause shipping delays, increased costs and lost revenues
resulting from failure to deliver product to customers. We have no way of
anticipating when such actions will occur.
SOURCING
We source batteries, power sources and various electronic devices from
several manufacturers for our customers and receive most of our sourcing revenue
from one customer. This revenue is subject to bid and we cannot assure you that
this customer will not find another agent or method of sourcing.
DEPENDENCE ON VIDEO GAME ACCESSORIES ("VGA") PLATFORM PROVIDERS
Our VGA product range (Gamester(R)), is dependent on first party
manufacturers of video game consoles such as Sony, Microsoft and Nintendo to
continue to support and market existing games platforms like PlayStation(R) 2,
Xbox(TM), Game Boy(R) Advance and Game Boy(R) Advance SP(TM), and to continue to
develop gaming formats and accompanying software in the future. We cannot
guarantee success in this category without the ongoing support of these platform
providers. If a platform is withdrawn from the market or fails to sell, we may
be forced to liquidate our inventories or accept returns resulting in
significant losses.
UNPROFITABILITY OF THE VGA BUSINESS
Our VGA product line, Gamester(R), has yet to be profitable and
incurred losses of $2.9 million in 2003, primarily related to inventory
write-downs associated with leaving the commodity video game accessory market in
Europe. Several factors contributed to losses incurred in prior years, including
delays in third-party platform introductions, slower than expected realization
of full U.S. distribution and price wars on certain commodity VGA items. While
we believe that we have taken measures to ensure that the line will be
successful in 2004 and in the future, we cannot guarantee that the VGA line will
be profitable in the future or that we will continue to manufacture and
distribute the line in future years. Insufficient future profits and positive
cash flows or withdrawal from VGA business would result in significant
write-downs of our assets, including goodwill.
We have goodwill totaling $9.6 million related to the acquisition of
our Gamester(R) video game accessory line in 1999. Effective January 1, 2002, we
adopted SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is required
to be tested on an annual basis for impairment at the reporting unit level.
Furthermore, goodwill is required to be tested on an interim basis if an event
or change in circumstances indicates that the asset might be impaired. Our
testing included a discounted future cash flow analysis based on a five-year
financial projection of the Gamester line. The financial projection assumed
year-on-year sales growth and profitability of the line in all five years. The
analysis showed future cash flows in excess of the total goodwill at December
31, 2003 and therefore it was determined that no impairment exists. We believe
we have made progress in making our Gamester(R) line profitable by eliminating
commodity items from the line and concentrating on the innovative, higher margin
sector of the market. We have projected that our Gamester(R) line will be
profitable beginning in 2004 and every year following through 2008. However, the
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line has not been profitable since the acquisition of Leda Media Products in
1999 and we cannot assure you that the measures taken in 2003 will equate to
future profitability. If the Gamester(R) line does not become profitable and
generate sufficient cash flows, we will have to write down our related goodwill.
SEVERE ACUTE RESPIRATORY SYNDROME ("SARS") OR OTHER COMMUNICABLE DISEASES
In 2003, several economies in Asia, including Hong Kong and southern
China, where our operations are located, were affected by the outbreak of SARS.
If there is a recurrence of an outbreak of SARS, or similar infectious or
contagious diseases such as avian flu, it could adversely affect our business
and operating results. For example, a future SARS outbreak could result in
quarantines or closures to our factory, and our operations could be seriously
disrupted as the majority of our work force is housed in a single dormitory. In
addition, ongoing concerns regarding SARS, particularly its effect on travel,
could negatively impact our customers and suppliers, in particular their
willingness to travel to do business.
ADVERSE WORLDWIDE ECONOMIC CONDITIONS
Several factors, including the war in Iraq, increased worldwide
unemployment, threats of global terrorist attacks and softening global economies
have caused uncertainties in the U.S. and other countries. These uncertainties
make it difficult for us to estimate growth in the regional economies in which
we sell our products and therefore may negatively affect our sales, increase our
exposure to bad debt or increase our operating cost.
VOLATILE MASS MARKET RETAIL SECTOR
Most of our sales are made to mass-market retailers. The mass-market
retail channel in the U.S. has experienced significant shifts in market share
among competitors in recent years, causing several of our customers to
experience liquidity problems, including several customers that have filed for
bankruptcy during the past two years. While we attempt to minimize our credit
exposure, there is always a risk that our customers will not pay or that they
will delay payment, subjecting us to exposure to bad debt losses. In addition,
if these customers were to cease doing business as a result of bankruptcy, it
could have a material adverse effect on our sales.
HONG KONG REAL ESTATE
We own certain commercial and residential properties in Hong Kong, some
of which we occupy and some of which we lease to third parties. Market values of
Hong Kong real estate have dropped in recent years and while we expect real
estate values to recover, we cannot assure you that they will do so. In general,
we currently intend to retain ownership of our properties and either occupy or
lease them, but if we were to decide to make any of the properties available for
sale prior to a recovery of the market, we could suffer permanent losses.
CHINA CURRENCY VALUATION
Currently China's currency, the Yuan Renminbi, or RMB, is pegged to the
U.S. dollar. The Chinese Government is receiving pressure from other governments
to trade its currency on the open market. If the Chinese Government were to
trade its currency on the open market and the RMB were to increase in value
relative to the U.S. dollar, we would experience increased factory and
production costs, including labor and certain raw materials that could have a
material impact on the cost of our product.
ITEM 4. INFORMATION ON THE COMPANY
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.
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We manufacture and market a diverse line of electronic entertainment
products covering multiple product lines - electronic games carrying the Radica
and Play TV(R) brand names, Gamester(R) branded video game controllers &
accessories, girls' lifestyle electronics carrying the Girl Tech(R) and
Barbie(TM) brand names and two new categories being introduced in 2004. Our
factory also manufactures for other companies in the electronic game industry
and provides sourcing services for retail customers. We market our products
through subsidiaries in the United States, the United Kingdom, Canada and Hong
Kong. Our largest market is in the United States where in 2003 we had the second
largest market share in the electronic handheld and tabletop electronic games
according to industry data source, The NPD Group, Inc.
We employ about 4,000 people worldwide in our group of companies. Our
largest retail customers include Wal-Mart, Target, Toys`R'Us, Kmart, Kohl's,
Argos and Best Buy. Our largest manufacturing customer is Hasbro.
Internationally we sell products in approximately 30 countries.
HISTORY OF PRODUCT LINES
ELECTRONIC GAMES
We have operated as a marketer and manufacturer of games since 1983,
starting a small operation in Hong Kong providing souvenir casino games for the
Las Vegas market including mechanical bank slot machines. We expanded into the
electronic game business setting up a factory in China in 1991 and a
distribution operation in the United States in 1992. The business grew
substantially from that point and we became the leading supplier of casino type
electronic handheld games in the U.S. market with games such as Video Poker and
Video Blackjack. Our electronic game products are sold under the Radica and Play
TV brand names.
In 1995 we began to diversify our product line into other electronic
handheld game areas beyond casino themed games. We began to offer classic games
such as Solitaire, Hearts and Gin Rummy, and sports games such as its World
Class Golf(TM) and Football. In addition to the casino and classic games that
helped build the company, in recent years we have expanded our electronic game
offerings to a very broad line of electronic games including virtual fishing
games such as Bass Fishin'(R), virtual hunting games such as Buckmasters(R) Deer
Huntin'(TM), a line of games based on popular EA SPORTS(TM) products, TETRIS(R)
and Rush Hour(TM), and other games such as Talking Bingo(TM) and Ultimate
Pinball(TM). New in 2004 is 20Q(TM)!, based on the classic guessing game.
During our history we have become known as a leader in the creative use
of technology. For example, our line of fishing games, one of the top-selling
product lines in the history of electronic games, revolutionized the electronic
handheld games category after its introduction in 1996. The games feature
virtual motion-sensing technology that allows the player to use the physical
game as a rod and reel. The player casts, feels the fish bite, sets the hook
with a jerk, and reels in the fish with a real handle. This product started an
industry trend in creating virtual reality games where the product provides the
feel of the real sport. This is delivered by uniquely realistic game shapes,
featuring motion sensors and tactile feedback. We have expanded our line of
virtual motion sensing games beyond the fishing category. An example of this is
our Buckmasters(R) Deer Huntin' 3(TM) game.
In 2000, we pioneered virtual reality further when we introduced
NASCAR(R) I-Racer(TM). The full headset complete with headphones, produces 3D
graphics and digital dimensional sound. The steering wheel provides vibration
feedback. In 1999, we also introduced a line of Tiger Woods licensed electronic
golf games shaped like a real golf club that were able to sense direction and
velocity of swing as an input to the game.
In 2000, we introduced Radica Play TV games featuring XaviX(R)
technology licensed from SSD. The technology provides consumers with easy-to-use
Play TV games, which are freestanding devices that plug directly into the TV and
use the screen as the display. This single-chip, multi-processor integrated
circuit is designed to generate high-quality graphics and sound on a television
set without the use of a video game console. Most importantly the technology
allows motion sensing control devices to interact with the TV images such as
using a physical baseball bat controller to hit video pitches or a physical
snowboard controller to control a race down a video ski slope. Play TV Baseball,
Play TV Snowboarder, and Play TV Buckmasters(R) Huntin' were successfully
introduced in 2000 and 2001. For 2004, we entered into a licensing agreement
with EA Sports(TM) to translate their popular Madden Football(TM) and SSX Tricky
video game titles into the Play TV format.
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In 2001 we introduced Skannerz(R). Targeting boys 7-12, Skannerz
utilizes UPC scanner technology to create a collectible-driven, interactive
battle game. The game can be played alone or linked to battle with another unit.
Building on this success for 2003 we launched Skannerz Commander and Skannerz
Battle Orbz, two variations on the original version. In 2004, the Skannerz line
will be extended by incorporating the Yu Yu Hakusho and Dragon Ball GT licenses
from the anime company Funimation.
In 2004, we have a license with Sega Toys to manufacture and distribute
Arcade Legends(TM) Sega(R) Genesis(TM). It is the first official Sega Genesis
multi-game unit, which replicates in detail the classic popular Genesis games,
game codes and graphics and utilizes an exact replica of the original Genesis
control pad. All of the software and content are stored in the game pad. We have
also licensed games from Taito including their Space Invaders(TM) game, as well
as Tetris(R) for our new Arcade Legends product line.
In 2004, we will also introduce a line of multiplayer tabletop
electronic games. Total Meltdown is a skill and action game that challenges
players to four code-breaking games. Tetris(R) Tower 3D incorporates the Tetris
game play into a tabletop format. Mind Scrambler(TM) asks players to follow a
series of lights to match the pattern while the game turns and reverses itself.
GAMESTER VIDEO GAME CONTROLLERS & ACCESSORIES
In June 1999, we announced the acquisition of Leda Media Products, a UK
company that, with its Gamester brand, is a leader in video game controllers in
Europe (now known as Radica UK Ltd.). To date, we have established video game
controller and accessory products to enhance game play and performance on video
game consoles for Nintendo, Sony and Microsoft including game control pads,
steering wheels and memory cards. All Gamester products are designed to make the
game more fun or make the user a better player, bringing the unfair
advantage(TM) to the gamer.
We began shipping and selling the Gamester product line to the United
States and Canada during the second half of 2001 and have moved most of the
manufacturing of controllers into our factory in China. Product development is
designed and built in house for the Gamester brand, except for a few less
technically demanding items which are outsourced to officially approved third
parties.
In 2001 we signed a worldwide licensing agreement with Microsoft to
design, manufacture and market peripherals for the Xbox(TM) video game system.
Xbox peripherals include the Vortex(TM) Controller, and the Pro Racer(TM)
Hand-Held Wheel. We recently introduced the Phoenix game pad for all Xbox games.
The portable video game segment expanded in 2001 with the introduction
of Nintendo's Game Boy(R) Advance (GBA). We have introduced products for the GBA
including the Flood Light(TM), which provides an illumination of the GVA screen
using a fluorescent light. We have licensed NXT(R), manufacturers of sound
technology, to develop speakers to enhance surround sound of GBA software
titles. The licensing agreement has created the GBA Mini Woofer. The GBA line
includes a broad selection of cases, bags, chargers, adaptors and accessory
packs. With the 2003 introduction to Nintendo's Game Boy Advance SP, we are
introducing several products for the SP under the Gamester brand.
We introduced new peripherals in 2002 including the pressure-sensitive
slim line Sportsboard(TM), an interactive skateboard/snowboard for top selling
PS2 "boarding" games such as Tony Hawk, Shaun Palmer and SSX. We licensed
Lotus(R) in order to develop official replica racing wheels to enhance play on
some of the most popular racing game titles. Under the licensing agreement, we
have produced the popular Lotus Pro Racer and the Lotus Xbox Steering Wheel.
In 2003, we introduced the FPS Master(TM), a first person shooter game
for both PS2 and Xbox. The FPS features symmetrical left and right analog
sticks, rubber grips, programmable buttons and an ergonomic shape.
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YOUTH ELECTRONICS
In 1998 we acquired the start up Girl Tech Company. Girl Tech's product
line targets girls ages 8-12. These products are designed with girls' play
preferences in mind addressing issues that are important to them such as privacy
and communication.
In 1999, Girl Tech introduced a line of products for girls, including
the Password Journal(R), which uses voice recognition technology to unlock the
journal. In 2001, 2002, and 2003, Password Journal was among the top ten
products in the Youth Electronics market according to The NPD Group. In 2003 we
updated and improved the Password Journal with a new Password Journal product.
While maintaining the voice recognition lock and other features of the two
previous versions of this product, the new Password Journal allowed girls to
customize their journal by designing their own cover. Password Journal includes
a gel pen and custom fit paper.
We continue to expand the Password segment for 2004 with the
introduction of new accessory items designed to expand the Password Journal:
Password Journal Scrapbook(TM) allows girls to customize the inside cover of
their journal and record messages to accompany photos or mementos. Password
Journal Jam N Shred Pen(TM) combines an FM radio with ear bud and a built-in
shredder to shred private notes. Both products fit into the Password Journal.
In 2003, Girl Tech introduced Dare Ya!(TM), an electronic version of
the children's game of "Truth or Dare". Girls can create their own dares by
recording them into the game. Dare Ya! has a "truth detector" to determine if
the girls are telling the truth.
In 2004, Friend Chips(TM) is being introduced. Friend Chips uses
instant messaging lingo to create password protected, digitally encoded messages
on the four included chips that can be passed on and used in other units. Friend
Chips includes two reader units and four chips to share with a friend.
Another new addition to the Girl Tech line is My Photo Booth(TM). My
Photo Booth gives the photo booth experience at home. Girls set the timer, pose
in the mirror and watch the lights that countdown to the flash. My Photo Booth
uses Polaroid iZone film for refill.
In February of 2002 we received a license to bring to market electronic
girls lifestyle products and electronic games under the Barbie(TM) brand name.
The new Barbie electronics product line was led by the Barbie Dance
Party(TM) game. This product allows girls to dance with Barbie on TV through the
use of the XaviX technology that is used on our Play TV line. The player is
asked to follow Barbie's lead in dance moves and steps demonstrated on the TV
set. In 2003, we introduced Scanimals(TM) Pet Rescue applying the same
technology used in our Skannerz product. Girls scan UPC codes in search of lost
pets. Based on Password Journal, we also introduced My Secret Diary(TM) for the
Barbie age girl. My Secret Diary opens electronically with a magnetic pen. For
2004, we are introducing the Barbie Doorbell(TM), a motion sensing door device
allowing girls to personalize their message and keep their room private. We will
also introduce Barbie Balance Beam(TM), a game of lights and sounds designed to
simulate a gymnastic balance beam routine. Additional games and accessories are
planned for the future.
During 2004, we will introduce Off Limits for boys. Voice MegaVault
uses voice recognition technology and opens to the owner's voice. It has high
and low security modes, adjustable shelves for storage, and can be mounted to
the wall or used as a desktop safe. The Track `N Blast Room Defender uses a
motion sensor to identify and detect intruders. It then fires twelve soft
projectiles at the offender.
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NEW ELECTRONIC TOY CATEGORIES
We are diversifying the product line with two new category entries in
2004. The first is Nitro Battlerz, a remote control racing game. Kids customize
their cars, then race them in the "dome" track. The object of the game is to be
the last car in the dome, as you force others over the edge to crash to pieces
on the floor. The starter set includes the battle dome track, two cars and
controllers, extra body parts, and decorative decals.
In our second new category for 2004, we are introducing Twinkleberries,
a new line of interactive dolls that respond to the "teacher/child". When the
child slides a card into the chalkboard and presses the chalk to the card, each
doll responds to the teacher. The starter set includes one interactive doll,
chalkboard, chalk and a set of cards. Add-on dolls with cards are sold
separately to expand the classroom.
MANUFACTURING SERVICES
Since 1996 we have designed, engineered and manufactured products for
other companies in the electronic games business. Our factory in Tai Ping,
Dongguan, Southern China has 524,000 square feet of factory space and 308,000
square feet of dormitory space, which has the capacity to house in excess of
5,000 people, currently employs approximately 3,500 people and employment
typically varies from 3,000 to 6,000 depending upon seasonal demands. The
factory is capable of manufacturing up to 800,000 units per week. We manufacture
for other companies on an ODM (original design and manufacture) basis. We
currently design and manufacture games for Hasbro, as well as other companies in
the U.S. and Japan. We also provide sourcing services for customers in the UK
market, the largest customer of which is Argos.
BUSINESS STRATEGY
As a result of our efforts toward diversification, we now have a
significant presence in four core product lines including electronic games,
youth electronics, video game accessories and manufacturing services. We believe
that these product lines are significantly related to each other in terms of
their entertainment value and the expertise that is involved in delivering
products in each category of electronic entertainment. As a result there are
synergistic skills that can be used to benefit each area of our four core
product lines. Within these product lines we are focused on building five brands
including the Radica brand of electronic games, the Play TV brand of electronic
games, the Girl Tech and Barbie(TM) brands of youth electronics and game
products, and the Gamester brand of video game accessories. It is our strategy
to focus on building each of these product lines and brands through aggressive
product development and marketing programs.
Our products are sold to retailers and foreign distributors who sub
distribute to retailers in certain other worldwide markets. We sell direct to
retailers in North America and the United Kingdom. While we may occasionally
sell directly to retailers in other worldwide markets we usually sell through
sub distributors.
We also manufacture most of our own products in our factory in China in
order to maintain quality and to minimize inventories of long lead-time
electronic components. A small percentage of product sales come from products
that are sourced from other factories by our sourcing group. We utilize the
excess capacity of our factory to manufacture products of a similar nature to
our own products for other companies such as the Hasbro Games Group and SSD in
Japan. We also provide sourcing services to certain retailers such as Argos in
the United Kingdom. By providing such manufacturing and sourcing services to
other companies we seek to spread the overhead cost of our manufacturing and
sourcing operations in order to improve profitability.
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PRODUCT LINE SALES
The following table sets forth a breakdown of our sales by major
product category for the last four fiscal years.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------- --------------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
PRODUCT LINES SALES VALUE SALES VALUE SOLD MODELS* SALES VALUE SALES VALUE SOLD MODELS*
------------------------------------------ -------------- ---------- --------- -------------- ------------- ---------- ---------
(in thousands, except percentage and no. of models information)
Games and Youth Electronics Segment
Electronic Games 59.3% $ 62,374 6,422 97 50.3% $ 62,684 6,277 101
Youth Electronics 14.5% 15,227 1,324 27 13.4% 16,744 1,208 22
Manufacturing Services 9.8% 10,385 3,924 23 19.8% 24,634 6,666 30
------------- -------------- ---------- --------- -------------- ------------- ---------- ---------
83.6% 87,986 11,670 147 83.5% 104,062 14,151 153
VGA Segment
Video Game Accessories 13.6% 14,294 2,150 152 12.7% 15,844 2,118 150
Manufacturing Services 2.8% 2,920 N/A N/A 3.8% 4,740 N/A N/A
------------- -------------- ---------- --------- -------------- ------------- ---------- ---------
16.4% 17,214 2,150 152 16.5% 20,584 2,118 150
Total 100.0% 105,200 13,820 299 100.0% 124,646 16,269 303
============= ============== ========== ========= ============== ============= ========== =========
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------- --------------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
PRODUCT LINES SALES VALUE SALES VALUE SOLD MODELS* SALES VALUE SALES VALUE SOLD MODELS*
------------------------------------------ -------------- ---------- --------- -------------- ------------- ---------- ---------
(in thousands, except percentage and no. of models information)
Games and Youth Electronics Segment
Electronic Games 53.0% $ 52,268 6,007 137 54.2% $ 57,868 6,933 114
Youth Electronics 11.9% 11,720 1,042 16 13.0% 13,897 1,211 12
Manufacturing Services 19.2% 18,941 3,973 15 18.1% 19,271 4,686 22
------------- -------------- ---------- --------- -------------- ------------- ---------- ---------
84.1% 82,929 11,022 168 85.3% 91,036 12,830 148
VGA Segment
Video Game Accessories 10.5% 10,335 2,070 130 9.5% 10,116 1,752 108
Manufacturing Services 5.4% 5,290 N/A N/A 5.2% 5,544 N/A N/A
------------- -------------- ---------- --------- -------------- ------------- ---------- ---------
15.9% 15,625 2,070 130 14.7% 15,660 1,752 108
Total 100.0% 98,554 13,092 298 100.0% 106,696 14,582 256
============= ============== ========== ========= ============== ============= ========== =========
* Number of models includes new and continuing products as well as a significant number of discontinued items often sold in small
quantities from existing closeout inventories.
NEW PRODUCT INTRODUCTION
Each year we plan to introduce new products to refresh and extend our
product line. In fiscal 2004, we intend to update our product line by
introducing approximately 44 new products.
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2004 vs. 2003 New Product Introductions (by category)
2004 2003
------------- ----------
PRODUCT LINES
Games and Youth Electronics Segment
Electronic Games 15 23
Youth Electronics 14 10
New 7 -
------------- ----------
36 33
VGA Segment 8 22
------------- ----------
Total 44 55
============= ==========
We believe that our strategy of offering various game models with
differing features enables us to market our games to a wide age range of
consumers with different tastes and financial means.
We anticipate that new product introductions in fiscal 2004 will be
concentrated in the second and third quarters of that year. It is possible that
we will determine not to proceed with any given product or that certain
anticipated product introductions will be delayed due to one or more future
developments.
LICENSING
During fiscal 2003, we engaged in several licensing agreements in which
we were given permission to use the name, logo, game concept and/or license of a
person, company or brand in exchange for a royalty fee.
Among the licensors were Electronic Arts, Group Lotus plc, UK,
Buckmasters, Harley-Davidson, Elvis Presley Enterprises, the Tetris(R) Company,
New Transducers Limited, developers of NXT(R) manufacturing sound technology,
SSD, developers of XaviX(R) technology, Microsoft, developers of Microsoft
Xbox(TM), Mattel, makers of Barbie(TM), Taito(R) Corporation, creators of Arcade
Legends Space Invaders, Sega(R), makers of the original Sega Genesis system,
Funimation(R), developers of Yu Yu Hakusho(R) and Dragon Ball GT(R) anime, and
20Q.net Inc, developers of the "artificial intelligence" version of 20
Questions.
We intend to incorporate some of these licenses into our 2004 product
line and will pursue new licenses in instances where management feels it will
enhance the value and marketability of a particular product.
MANUFACTURING
Our manufacturing is generally limited to integrated chip bonding,
plastic injection, clamshell production, mold manufacture, surface mount
technology, or SMT, and assembly operations. We order customized components and
parts from suppliers and use subcontractors for more complicated operations such
as masking of our proprietary software onto the semiconductor chips used in our
games, LCD tooling and a proportion of tooling of molds for its plastic parts.
In 2003 we assembled most of the Radica and Girl Tech lines of products
in order to control our costs, quality, production and delivery schedules. VGA
were assembled both in-house and by third party manufacturers.
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Our products are not required to obtain any quality approvals prior to
sales in the United States. However, we are required to have and have obtained
CE approval, Europe's toy safety standard, for products sold in Europe. We have
been granted a Chinese toy quality license from the Chinese Import and Export
Commodity Inspection Bureau, which is required of toy and game manufacturers in
China to export toys or games. In addition, we voluntarily comply with ASTM 963,
a U.S. toy safety standard.
We received renewal of our ISO 9001 quality certification from
Underwriters Laboratory on February 9, 2004 which runs through February 8, 2007.
The scope of the registration covers the design, sales and distribution of
electronic and electro-mechanical games and related gift products.
MANUFACTURING FACILITIES
We currently manufacture our products at our Tai Ping 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 our design specifications on a 3.7 acre site and contains 524,000 sq. ft. of
factory space and 308,000 sq. ft. of dormitory space, capable of housing over
5,000 workers. 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 our
product in the U.S. 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 peak production season. The unit capacity of the factory depends on the
product mix produced. In any event, there can be no assurance that we will be
able to operate at full capacity or have sufficient sales to warrant doing so.
In June 1994 we entered into a joint venture agreement with the local
government to operate the factory. We contributed the cost of the construction
of the factory to the joint venture while the local village contributed the
land-use rights. The joint venture is for 30 years after which it may be
renegotiated. The construction cost of the factory is being treated as a prepaid
30-year leasehold on the factory. Upon the commencement of production, the local
government received a fixed annual fee as the joint venture partner. The annual
fee is subject to increases every three years and had originally been set at a
20% increase every 3 years but has been successfully renegotiated to be 10%
every 3 years. Aside from the fixed annual fee paid to the joint venture
partner, we are the sole beneficiary of the results of the joint venture, and we
solely control the joint venture's operations, including the operating and
capital decisions of the joint venture in the ordinary course of business.
Formerly, we manufactured in the factory under a processing agreement
with the local government. A processing agreement provides by its terms that the
local government will provide manufacturing facilities and supply workers to the
company and that the company will pay a management fee and processing fee and
certain other charges. The management fee is paid to the local government and
was based on a negotiated sum per worker at the factory. The processing fee is
based on the value of raw materials shipped into the factory and the value of
products shipped from the factory and was established in production agreements
agreed upon with local government officials. We paid the processing fees through
the Bank of China in Hong Kong and the funds were then placed in an operating
account including other company funds in China, all of which were used to pay
the costs of the factory including fees due to the local government as part of
the processing agreement. Changes in PRC tax and customs law have made it
increasingly difficult to use the processing agreement. During 2001, we made a
decision to end its use of the processing agreement and as of December 31, 2003,
we had completely phased out use of processing agreement.
20
All of our operations in the PRC, whether within the joint venture or
the processing agreement are accounted for as wholly-owned operations and
included in our consolidated financial statements.
In practice, we operate all aspects of the factory, including hiring,
paying and terminating workers. Most of the factory workers are hourly employees
and are provided room and board in addition to their wages. In addition, we bear
all other costs of operating the factory, including utilities and certain
employee social welfare charges established by the local government. Many
aspects of the operation of the factory are dependent on our relationship with
the local government and existing trade practices. We believe that our
relationship with the local government is good.
Should we decide to curtail our manufacturing activities in China, we
may be required to pay back certain tax benefits we have received and may be
held liable for certain fees. Such liabilities may be substantial.
MATERIALS
Major components used in our products are liquid crystal displays, or
LCDs, semiconductor chips, printed circuit boards, or PCBs, and molded plastic
parts. We purchase LCDs, PCBs, and semiconductor chips from several suppliers.
We generally provide six to nine months order indications to our semiconductor
chip suppliers and must place firm orders a minimum of six weeks in advance of
delivery. This lead time in some cases extends to twenty weeks when the market
is in short supply. We generally try to maintain about two months supply of
semiconductor chips, which may constrain increased production of our products on
short notice. We pay for most of our materials in U.S. dollars.
Our major suppliers of electronic and mechanical handheld and tabletop
game materials in fiscal 2003 included BASF China Limited (plastic resin), C & L
Electric Mfg. Co., Ltd. (cables), Evergreen PCB Factory Limited (PCBs), GPI
International Limited (batteries), Lead Jump Development Limited (PCBs), Ngai
Hing Hong Plastic Materials Ltd. (plastic resin), Senmax, Limited (keypads),
Sensory, Inc. (semiconductor chips), Safe Power Industrial Ltd. (printing),
Silicon Application Co., Ltd (semi-conductor chips), SSD Company Limited
(semi-conductor chips), Vbest Electronics Ltd. (LCDs), Wintek Corporation (LCDs)
and Yu Lee Printing Co. (printing).
Our major suppliers of VGA in fiscal 2003 included Hip Hing Cables &
Plug Mfy Ltd. (cables and plugs), Mascotte Industrial Associates (HK) Ltd. (bags
and cases) and Minwa Electronics Co. Ltd. (power adaptors),
SALES AND DISTRIBUTION
Our products are sold in approximately 30 countries, with the United
States accounting for approximately 70% of net sales in fiscal 2003. We sell our
products directly to over 350 active retailers in the U.S. and UK and to
approximately 30 distributors worldwide. We participate in the electronic data
interchange ("EDI") program maintained by 14 customers in the U.S. including
Wal-Mart, Target, Kmart, Kohl's, Toys`R'Us and Best Buy, and 4 customers in the
UK: Argos, Comet, Dixon's and John Lewis. In fiscal 2003, our largest customer,
Wal-Mart, accounted for 31.9% of net sales. All sales to third party
distributors and retail customers are final upon transfer of title. The top five
customers were as follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
------------- -------------------
2003 2002
---- ----
1. Wal-Mart (USA) 31.9% 24.7%
2. Toys`R'Us (USA) 8.9% 8.5%
3. Hasbro (USA) 8.2% 7.4%
4. Argos (UK) 8.0% 8.1%
5. Target (USA) 5.5% 7.4%
21
The following table sets forth certain of our major customers in 2003,
including distributors (alphabetical order).
CATALOG SHOWROOMS DRUG/MASS MERCHANDISERS ELECTRONICS/GROCERY/ CONVENIENCE
----------------- ----------------------- --------------------------------
Argos Army Airforce Exchange About Time
Brookstone Fred Meyer Argos
Index Kmart Best Buy
Sharper Image Meijer Biggs Hypermarket
Pamida Blockbuster
QVC Circuit City
Target Comet
DEPARTMENT STORES Wal-Mart Corner Distributors
----------------- Zellers Dixon's
Dillard's Electronics Boutique
J.C. Penney's Game
John Lewis Gamestop
Kohl's Ingram Entertainment
Macy Mill's Fleet Farm
Woolworth's (UK) Musicland
Production Solutions
Radioshack
MAIL ORDER/SPECIALTY GIFT SHOP OPERATORS SPORTING GOODS STORES DISTRIBUTORS (RADICA)
---------------------------------------- --------------------- ---------------------
Avon Bass Pro Shops Algos Corp. (Japan)
Buckmaster Dunham's Amo oy (Finland)
Dufferin Game Room Stores Automaten Hoffmann (Germany)
Figis Caesars Gauteng (South Africa)
Fingerhut TOY RETAILERS Edu Toys (Russia)
Hammacher Schlemmer ------------- Galeria 765 S.A. de C.V. (Mexico)
Host Marriott Corp Kay Bee Gromart Import & Marketing (Israel)
Littlewoods Toymaster Importadora Maduro S.A. (Panama)
Next Retail Toys`R'Us Irwin Pacific Pty, Ltd. (Australia)
Spiegel John Hansen Co. (USA)
Spillsbury Koch (Germany)
Spencer Gifts DISTRIBUTORS (VGA) Lansay (France)
Starboard Cruise Services ------------------ Planet Fun (New Zealand)
Wish Book First Game (Korea) Playthings Pte Ltd. (Singapore)
Forte Co., Ltd. (Japan)
Imbi Mario Trading (Malaysia)
Master Genius (Thailand) S. I. D. Cadeaux (France)
Nobilis (France) Souvenirworld (USA)
OEM Replay Interactive (Singapore) The Oriental Trading Co. (Hong Kong)
--- Super Chi-Yuen (Taiwan) Top Toy (Denmark)
Hasbro, Inc. Top Toy (Denmark) Universal Electronics (Lebanon)
SSD Company Limited Universal Electronics (Lebanon)
In the United States, we use regional sales managers working for us to
manage our customers as well as manufacturers representatives and brokers that
sell our products to certain retailers. These manufacturers representatives are
not our employees and work on a commission basis. In the United Kingdom, we use
brand sales managers and manufacturers representatives to sell our products in
the UK and Europe.
Our customers normally provide indications of interest, which may be
canceled at any time, from three to six months prior to scheduled delivery, but
only confirm orders eight weeks in advance of delivery. Accordingly we generally
operate without a significant backlog of regular orders.
22
In certain instances, where retailers are unable to sell the quantity
of products which have been ordered, we may, in accordance with industry
practice, assist retailers to enable them to sell such excess inventory by
offering discounts or accepting returns. A portion of firm orders, by their
terms, may be canceled if shipment is not made by a certain date. We minimize
the related costs of such discounts and returns by engaging personnel to visit
selected customers and assist in the management of product returns. We establish
provisions based on historical experience at the time of sale of the related
products. The return of non-defective products occurs infrequently in the U.S.
In the UK market, accepting non-defective product is regular industry practice
and we establish our return provisions on such sales based on experience.
Our Radica, Girl Tech, Play TV and Connectv products carry a 90 days
consumer warranty from the date of sale. Our VGA products carry a one year
warranty from the date of sale. In each of the last three years, warranty costs
incurred have been less than 3% of net sales and substantially all warranty
claims are received within 90 days of invoice.
INDUSTRY
NPD Group, the service that has historically tracked our retail sales,
no longer provides this service for us. It does, however, continue to provide
industry data. According to NPD, the toy industry in the U.S. saw a significant
overall decline in 2003. Toy sales in gross dollars were down 4.1% in 2003 from
2002 among top 10 retailers and were down 3% overall. Electronic handheld and
tabletop games were down 17.1% in 2003 from 2002 in the U.S. and youth
electronics and communication devices were down 7.2%. Management believes that
these declines were the result of weaker overall retail sales and discounted
excess inventories from prior years and limited new product introductions in the
categories in 2003. Our U.S. sales declined less sharply, falling 3.8% for
electronic games. Our U.S. sales of Youth Electronics fell 25.2%, primarily as a
result of decline in sales of Barbie licensed products.
NPD's UK data showed a 5% increase in the toy market in 2003 from 2002.
Electronic and tabletop games were up 5% and youth electronics were up 1%. As of
the reporting date, we do not have similar data for the rest of Europe. Our UK
sales of electronic games and youth electronics increased 62.7% and 0.6%,
year-on-year, respectively.
Annual industry-wide video game accessory sales were flat in the U.S.
in 2003. According to the NPD Group, VGA sales in gross dollars were down only
0.3% in 2003 from 2002. Our U.S. sales of video game accessories were up 16.3%
in 2003.
The UK and Europe do not have a reliable retail tracking service for
video game accessories. During 2003, our UK operations changed their
distribution strategy in the UK and Europe from providing a full line of VGA
product, including low-margin commodity items, to selling a smaller line of
innovative, higher margin products. As a result of this restructuring, sales for
VGA product in the UK dropped 63.4% in 2003 from 2002. During 2003, we secured a
VGA distributor in France and Germany and as a result, European sales increased
58.0% in 2003 from 2002.
PRODUCT DEVELOPMENT
At the end of 2003, our engineering and development department had
approximately 87 staff worldwide. Our product development starts with a design
team in Dallas, Texas and continues through to the engineering teams in Shenzhen
and in the Dongguan factory. We have a formalized product development process
that includes quarterly meetings of its worldwide product development and sales
departments. In fiscal 2001, 2002 and 2003, we spent approximately $5.8 million,
$4.1 million and $3.9
23
million respectively, on research and development. Our research and development
is heavily oriented toward market demand. Based on our ongoing contact with
consumers, retailers and distributors worldwide, our sales and marketing
departments seek to understand and assist the product development teams in
responding to consumer and retailer preferences. The sales department also
targets certain retail price points for new products which drive our product
development, with designs, features, materials, manufacturing and distribution
all developed within the parameters of the target retail price. We also review
product submission from a network of third party inventors that have been
approved by management. These submissions are subject to the same product
development process and market demand considerations as internal submissions.
In January of 2002, we executed our December 2001 reorganization plan
that included the closure of the San Francisco research and development office
and the relocating of the Hong Kong engineering positions to offices in China.
During 2003, we eliminated our Hertfordshire, England design team. These
reorganizations significantly reduced costs without decreasing efficiency. We
expect to continue developing the majority of products internally during 2004.
However, changes in business philosophy or unforeseen circumstances may arise
that could force us to outsource a larger than expected amount of our
development work.
SEGMENT INFORMATION
See Note 17 of the Notes to the Consolidated Financial Statements
included herein.
ORIGINAL DESIGN MANUFACTURING AND ORIGINAL EQUIPMENT MANUFACTURING
In 1995, we were successful in establishing a relationship with the
Hasbro Games Group to design and manufacture products for them. We continue to
manufacture for Hasbro, which is also our largest competitor, as well as a
number of other customers including Lexibook, SSD, B,D&A and Kemco. We intend to
pursue other ODM and OEM business in the future. However it is uncertain whether
we can retain our current business on a long-term basis or successfully attract
additional ODM business or that it will be profitable.
INTELLECTUAL PROPERTY
We own a number of patents, trademarks and copyrights and we are in the
process of registering other intellectual properties. We will continue to apply
for intellectual property registrations on new products as management deems
necessary.
We anticipate that patents, trademarks, copyrights and other
intellectual property rights will become increasingly important in the
electronic entertainment industry in which we operate, particularly since we are
introducing a wider range of products. As the industry focuses on intellectual
property matters, there will be opportunities for us to protect our products
through patents, trademarks and other formalized filings, although the efficacy
of these protections is uncertain. By the same token, we will be exposed to
risks that our products or other aspects of our business will be found to
infringe the intellectual property rights of others. See "Item 3. Key
Information - Risk Factors - Intellectual Property Risks".
COMPETITION
The games business is highly competitive. We believe that we are one of
the leading sellers of electronic games and youth electronics. Our primary
competitor is the Hasbro Games Group ("Hasbro"), which is also an OEM customer.
Hasbro procures its products from manufacturers in China including Radica. Other
competitors include Jakks Pacific, Wild Planet and MGA. The barriers for new
producers to enter our markets are relatively low and we expect that we will
face strong competition. We compete for consumer purchases on the basis of
price, quality and game features and for retail shelf space also on the basis of
24
service, including reliability of delivery, and breadth of product line. Some
competitors offer products at lower prices than we do, are better established in
the toy and games industry and are larger than we are. Our products also compete
with other gifts and games for consumer purchases. In addition, with respect to
ODM/OEM activities, we compete with a number of substantially larger and more
experienced manufacturers. As we enter other markets and businesses, we expect
to face strong competition.
The VGA market is also highly competitive. The market share in the U.S.
is spread primarily amongst ten companies that have approximately 60% of the
market. We began significant distribution of VGA in the U.S. market in 2001.
Like the handheld electronic games market, we compete for customer purchases on
the basis of price, quality, and features and for retail shelf space on the
basis of service. Major competitors are MadCatz, Pelican, Logitech and Joytech.
TAXATION OF OUR COMPANY AND OUR SUBSIDIARIES
There is currently no Bermuda income, corporation or profits tax
payable by our company. As an exempted company, we are liable to pay to the
Bermuda government an annual registration fee calculated on a sliding scale
basis by reference to our assessable capital, that is, our authorized share
capital plus any share premium on our issued shares of Common Stock currently at
a rate not exceeding $25,000 per annum.
The Hong Kong profits tax rate for 2003 is 17.5%, which is an increase
from the 16% tax rate during the past several years. Currently, our subsidiary
Radica HK pays Hong Kong profits tax on service and sales income.
On July 1, 1994, our manufacturing operations were transferred to a
Sino-Foreign joint venture. As our company itself does not carry on any business
in China, it is not subject to tax. The joint venture enjoyed a two year tax
holiday which expired in 1999. From January 1, 1999 to December 31, 2001 the
joint venture's profits were taxed at a reduced rate of 12%, half the regular
tax rate of 24%. In 2002, the joint venture was taxed at the regular tax rate
plus a local tax rate of 3%, but successfully applied to be designated as an
"Export Oriented Enterprise", which reduced its regular tax rate to 12%. This
designation led to the refund of the excess tax to the joint venture. On the
basis of the success of this application, we are optimistic that we will be able
to maintain the effective tax rate of 15% for the joint venture.
Our subsidiaries Radica USA, Radica Canada and Disc Inc. are fully
subject to U.S. and Canada federal taxation, as well as any applicable state or
local taxation, on their taxable income. Currently, the highest marginal rate of
U.S. federal corporate income tax is 35%; the highest marginal rate of Canada
federal corporate income tax is 25%. In addition, dividends paid by Radica USA
and Disc Inc. to our company will be subject to a 28% U.S. federal withholding
tax, resulting in an effective rate of U.S. federal taxation on distributed
profits of up to 53.2%.
Our subsidiary Radica UK is fully subject to UK corporate taxation. The
UK profits tax rate currently applying to corporations is 30%.
During 2003, we formed Radica (Macau Commercial Offshore) Ltd., a
company incorporated in The Special Administrative Region of Macau, for the
purpose of carrying on export trade activities. To the extent that Radica Macau
sells all of its products outside of Macau, it is exempt from tax in Macau.
EMPLOYEES
As of December 31, 2003 our workforce was comprised of the following:
Production Sales and R&D Finance Operations Total by
Marketing & Admin location
--------------------------------------------------------------------------------
Asia 3,321 11 73 24 124 3,553
USA 1 26 14 8 16 65
Europe 1 9 -- 5 7 22
Total 3,323 46 87 37 147 3,640
25
At December 31, 2002 and 2001 our workforce comprised 4,332 persons and
4,185 persons, respectively.
None of our employees are subject to a collective bargaining agreement
and we have never experienced a work stoppage. Management believes that our
employee relations are good.
DESCRIPTION OF PROPERTIES
See "Manufacturing Facilities" above. We completed the first phase of
construction of our factory (241,000 sq. ft.) on a 3.7 acre parcel of land in
May 1995 and the second phase (223,000 sq. ft.) in August 1998. The factory
currently contains 524,000 sq. ft. of factory space and 308,000 sq. ft. of
dormitory space, capable of housing over 5,000 workers. An extension of the
factory commenced in December of 1999 to add 202,000 square feet of factory
space and 178,000 square feet of dormitory space. As a result of the drop in
demand for our product in the U.S. during 2000, work towards completion of this
addition has been postponed and will continue when market demand warrants use of
the additional space. We own a long-term leasehold on our executive offices
(21,500 sq. ft. inclusive of one leased unit of 2,300 sq. ft.) and warehouse
space (7,900 sq. ft.) in Fo Tan, Hong Kong as well as a house (2,100 sq. ft) in
Hong Kong. We operate our factory under the terms of the joint venture
agreement. We lease additional office space in Hertfordshire, UK; Macau and
Shenzhen, China; Dallas, Texas and Pasadena, California. We lease showrooms in
Tsim Sha Tsui, Hong Kong and New York, New York and provide individual offices
for sales personnel employed in Massachusetts and Illinois. During 2003, we
leased one of our executive units in Fo Tan, Hong Kong totaling 2,390 sq. ft.,
and plan to lease one and sell one Fo Tan unit (2,500 sq. ft each) in 2004. In
addition, during 2003 we sold one house and leased out another one that had been
made available to Mr. Howell and Mr. Scott and we are currently paying rent on
two different houses for Mr. Howell and Mr. Scott in Hong Kong. We also leased a
flat in Macau which has been made available to Mr. Chu, an officer of our
company.
LEGAL PROCEEDINGS
We are subject to pending claims and litigation. On April 4, 2000 a
lawsuit was filed by the Lemelson Foundation ("Lemelson") against us 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 our 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 we are 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 had some bearing on our case
with Lemelson. On January 23, 2004, the U.S. District Court in Nevada issued a
ruling in favor of Cognex. The Court ruled that all of the Lemelson patent
claims at issue were invalid and unenforceable. It is believed that Lemelson
will appeal. We cannot predict the outcome of the anticipated Lemelson appeals
or the effect of such litigation on our financial results. No accrual has been
recorded at December 31, 2003 in respect of the Lemelson case or other claims or
legal actions, in accordance with SFAS No. 5 Accounting for Contingencies.
We have other pending litigation against us. Management does not
believe that the ultimate disposition of the other matters will have a material
adverse effect on our consolidated financial position, results of operations or
liquidity.
26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
The following table sets forth items from our Consolidated Statements
of Operations as a percentage of net revenues:
Year ended December 31,
----------------------
2003 2002
-------- --------
Net sales 100.0% 100.0%
Cost of sales 61.4% 62.2%
-------- --------
Gross profit 38.6% 37.8%
Selling, general and administrative expenses 24.5% 22.2%
Research and development 3.7% 3.3%
Depreciation and amortization 1.9% 2.3%
Restructuring charge 0.1% 0.0%
-------- --------
Operating income 8.4% 10.0%
Other income 0.3% 0.3%
Foreign currency gain, net 0.2% 1.4%
Interest income, net 0.3% 0.0%
-------- --------
Income before income taxes 9.2% 11.7%
Credit (provision) for income taxes 2.7% (2.1%)
-------- --------
Net income 11.9% 9.6%
======== ========
We reported net income for the year of $12.5 million or $.66 per
diluted share compared to $11.9 million or $.65 per diluted share for the same
period in 2002. Sales for the year decreased by 15.6% to $105.2 million from
$124.6 million in 2002 due to the reduction in "one-off" manufacturing business
generated by the production of the "Ekara" karaoke product manufactured for
Takara in 2002, reduced sales in the United Kingdom which was impacted by a
particularly weak fourth quarter retail environment and weaker than expected
sales of Barbie(TM) licensed products.
Our UK subsidiary experienced a large shift in its sales mix and gross
sales during 2003. Sales of video game accessories fell from $6.1 million in
2002 to $2.2 million in 2003. This was primarily due to our decision to stop
selling less profitable commodity-type video game accessories such as memory
cards, cables and carrying bags and begin selling a more focused, profitable
line that includes products with unique, trademark and patent protected
features. In the fourth quarter of 2003, we wrote down our UK video game
accessory inventory by $1.25 million with plans to sell our remaining commodity
product in 2004. Our sales of electronic games in the UK were $8.0 million in
2003, up from $7.0 million in 2002. This was the result of management's focus on
broadening our electronic game distribution in the UK, which was achieved
through increased promotional spending and pursuing new retail outlets. Going
forward, management expects sales in the UK to grow by broadening its electronic
games line and getting better placement of its video game accessories at retail.
We anticipate the 2004 sales mix to be similar to that in 2003.
27
Summary of sales achieved from each category of products:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002
---------------------------- ----------------------------
% OF NET NET % OF NET NET
PRODUCT LINES SALES VALUE SALES VALUE SALES VALUE SALES VALUE
------------------------------------------ -------------- ------------- --------------
(US$ in thousands)
Games and Youth Electronics
Segment
Electronic Games 59.3% $ 62,374 50.3% $ 62,684
Youth Electronics 14.5% 15,227 13.4% 16,744
Manufacturing Services 9.8% 10,385 19.8% 24,634
------------- -------------- ------------- --------------
83.6% 87,986 83.5% 104,062
VGA Segment
Video Game Accessories 13.6% 14,294 12.7% 15,844
Manufacturing Services 2.8% 2,920 3.8% 4,740
------------- -------------- ------------- --------------
16.4% 17,214 16.5% 20,584
Total 100.0% 105,200 100.0% 124,646
============= ============== ============= ==============
Gross profit margin for the year was 38.6% compared to 37.8% for the
year ended December 31, 2002 as a result of a favorable product mix shifting
from lower margin OEM sales offset by a charge taken in the fourth quarter of
$1.25 million to reflect inventory write-downs related to our decision to exit
the commodity side of the video game accessories business and concentrate on the
higher margin, innovative product sector of the video game accessories market.
Operating expenses for the year decreased to $31.8 million from $34.6
million for the year ended December 31, 2002. The decrease was the result of a
decrease in variable expenses. In addition, depreciation and amortization
charges dropped by $0.8 million for the year due to certain fixed assets that
have become fully amortized during the year.
During the fourth quarter we released our deferred tax provisions in
the U.S. This, combined with a larger than expected tax reimbursement in China,
resulted in a net tax credit for the year of $2.9 million.
The following table shows the major operating expenses and income
taxes:
Year ended December 31,
------------------------------
(US$ in millions) 2003 2002
------------ ------------
Advertising and Co-op expenses $ 7.6 $ 7.4
Other selling and promotion expenses 1.8 2.4
Indirect salaries and bonus 8.3 10.0
Research and development expenses 3.9 4.1
Depreciation and amortization 2.0 2.9
(Credit) Provision for income taxes (2.9) 2.7
28
CAPITAL RESOURCES AND LIQUIDITY
Our cash and investment securities totaled $42 million at December 31,
2003. We had cash and cash equivalents of $13.9 million at December 31, 2003. We
generated $10.0 million in cash from operating activities during 2003, down from
$12.0 million generated in 2002. This decrease in 2003 from 2002 was primarily
the result of decreased gross profit and earnings before income tax. There was a
$4.9 million decrease in inventories, in part due to a $1.25 million write-down
taken against excess video game accessories inventories in the UK and
management's decision to limit fourth quarter production due to the soft
worldwide retail markets.
Our accounts receivable increased $0.2 million during the year ended
December 31, 2003. The aggregate of the (i) allowance for sales, marketing and
the (ii) advertising expenses and allowance for sales returns as a percentage of
total accounts receivable was 21.5% and 23.8% as of December 31, 2003 and 2002,
respectively. The reserve for doubtful accounts as a percentage of total
accounts receivable was 1.3% and 1.6% as of December 31, 2003 and 2002,
respectively. These changes in accounts receivable are due to fluctuations in
revenues and the timing of customer payments. Management monitors and analyzes
the accounts receivable for doubtful accounts, sales expenses and returns
allowances and adjusts these reserves accordingly.
Current liabilities were $13.1 million at December 31, 2003, down $7.6
million from the $20.7 reported at December 31, 2002. As a result of the reduced
fourth quarter factory production, accounts payable decreased $1.6 million from
December 31, 2002 to December 31, 2003. Accrued payroll and employee benefits
dropped $1.4 million from $2.8 million at December 31, 2002 to $1.4 million at
December 31, 2003. This was due to the reduction of accrued employee profit
sharing distributions and management incentive bonuses over the prior year.
Cash used from investing activities was $28.0 million, up from a net
utilization of $1.1 million in 2002. The large increase was the result of the
purchase of $28.1 million of investment securities during 2003. The investment
securities are liquid, of investment grade and are in U.S. dollars. The
investment portfolio is primarily invested in short-term securities to minimize
interest rate risk and facilitate deployment for cash needs.
Cash used in financing activities during 2003 was $1.5 million, down
from $3.3 million in 2002. The reduction in cash used was the result of
repayment of the remaining short-term loan balance with HSBC during the year.
At December 31, 2003, we had net assets of $89.2 million compared with
$74.6 million at December 31, 2002. Our business generates a significant
majority of its cash from its normal operations but seasonal cash requirements
have been met with the use of short-term borrowings, which included borrowings
under secured lines of credit.
During the normal course of business, we enter into debt arrangements,
licensing agreements and commitments with various third parties for the use of
their inventor concepts and intellectual property. Certain of these agreements
and commitments containing provisions for guaranteed or minimum royalty amounts
during the term of the contracts. Additionally, we lease certain offices,
warehouses and equipment under various operating lease arrangements. In the
normal course of business, leases that expire will be renewed or replaced. Under
the terms of a joint venture agreement with the local government in Dongguan, we
are also committed to pay the fees over the next 21 years (please see "Item 3,
Key Financial Data, Risk Factors, Risk of Manufacturing in China - China
Taxation").
29
As of December 31, 2003, we were obligated under various licensing and
joint venture agreements and non-cancelable operating leases requiring future
minimum payments as follows:
(US$ in thousands)
Licensing commitments $ 507
Operating leases 3,314
Joint venture fees 3,426
------
Total minimum payments $7,247
======
We had no derivative instruments or off-balance sheet financing
activities during fiscal years 2002 and 2003. We believe that our existing cash
and cash equivalents and cash generated from operations are sufficient to
satisfy the current anticipated working capital needs of our core business.
Management believes that our existing credit lines are sufficient to
meet future short-term cash demands, including seasonal build up of inventory.
We fund our operations and liquidity needs primarily through cash flow from
operations, as well as utilizing borrowings under secured and unsecured credit
facilities when needed. During 2004, we expect to continue to fund our working
capital needs through operations and the revolving credit facility and we
believe that the funds are available to meet our needs. However, unforeseen
circumstances such as severe softness in, or a collapse of, the retail
environment may result in a significant decline in revenues and operating
results, thereby causing us to exhaust our cash resources. If this were to
occur, we may be required to seek alternative financing of working capital.
On January 5, 2004, we announced a quarterly dividend program. For the
first dividend, our Board of Directors declared a dividend of $.04 per share
payable on January 30, 2004, to shareholders of record as of January 20, 2004.
The Board has also approved an initial target quarterly dividend of $.04 for
subsequent quarters; however, the actual amount of each quarterly dividend, as
well as each declaration date, record date and payment date, is subject to the
discretion of the Board, and the target dividend level may be adjusted during
the year at the discretion of the Board. The factors the Board is expected to
consider in determining the actual amount of each quarterly dividend will
include our financial performance and on-going capital needs, our ability to
declare and pay dividends in light of other financial requirements, and other
factors deemed relevant.
FISCAL 2002 COMPARED TO FISCAL 2001
We reported net income of $11.9 million for fiscal year 2002 or $0.65
per diluted share versus a net loss of $4.4 million or $0.25 per diluted share
for fiscal year 2001.
30
Summary of sales achieved from each category of products:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001
---------------------------- ----------------------------
% OF NET NET % OF NET NET
PRODUCT LINES SALES VALUE SALES VALUE SALES VALUE SALES VALUE
------------------------------------------ -------------- ------------- --------------
(US$ in thousands)
Games and Youth Electronics
Segment
Electronic Games 50.3% $ 62,684 53.0% $ 52,268
Youth Electronics 13.4% 16,744 11.9% 11,720
Manufacturing Services 19.8% 24,634 19.2% 18,941
------------- -------------- ------------- --------------
83.5% 104,062 84.1% 82,929
VGA Segment
Video Game Accessories 12.7% 15,844 10.5% 10,335
Manufacturing Services 3.8% 4,740 5.4% 5,290
------------- -------------- ------------- --------------
16.5% 20,584 15.9% 15,625
Total 100.0% 124,646 100.0% 98,554
============= ============== ============= ==============
Gross margin for the year was 37.8% compared to 34.4% for the year
ended December 31, 2001 as a result of improved cost control, factory
efficiencies and product mix.
Operating expenses for the year were $34.6 million compared to $37.6
million for the year ended December 31, 2001. The decrease in expenditure was as
a result of cost reductions, including R&D due to the restructuring announced in
the fourth quarter of 2001, offset by increased variable costs due to the 26.5%
increase in sales. In addition depreciation and amortization charges dropped by
$1.2 million of which $0.8 million was due to the adoption of SFAS 142 and the
resulting cessation of amortization of goodwill.
The following table shows the major operating expenses and income
taxes:
Year ended December 31,
-------------------------------
(US$ in millions) 2002 2001
------------ -------------
Advertising and Co-op expenses $ 7.4 $ 7.0
Other selling and promotion expenses 2.4 2.8
Indirect salaries and bonus 10.0 8.3
Research and development expenses 4.1 5.8
Depreciation and amortization 2.9 4.0
(Credit) Provision for income taxes 2.7 (0.6)
Research and development costs in 2002 decreased from 2001 as a result
of the 2001 reorganization (see "Item 4. Information on the Company -
Description of Business - Product Development"). The increase in the provision
for income taxes from 2001 was primarily the result of a valuation allowance put
in place to offset the UK deferred tax asset.
31
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with
generally accepted accounting principles in the United States of America.
Management is required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and the reported amounts of revenue
and expenses. Below is a listing of accounting policies that we consider
critical in preparing our consolidated financial statements. These policies
include estimates made by management using the information available to them at
the time the estimates are made, but these estimates could change considerably
if different information or assumptions were used.
BAD DEBT ALLOWANCE
The bad debt allowance is an adjustment to customer trade receivables
for amounts that are determined to be uncollectible or partially uncollectible.
The bad debt allowance offsets gross trade receivables and is computed based on
management's best assessment of the impact on trade receivables of the business
environment, customers' financial condition, historical trends and customer
disputes.
The movement of the doubtful accounts allowance by region was as
follows for 2003:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Allowance for Doubtful
Accounts
North America $ 194 $ 95 $ (81) $ 208
Europe 121 19 (97) 43
----- ----- ----- -----
$ 315 $ 114 $(178) $ 251
===== ===== ===== =====
The North American provision increase was primarily for accruals made
in anticipation of unpaid receivables related to the Chapter 11 bankruptcy
filing made by Kay Bee Toy in 2003. The utilization of the provision was
principally to write off receivables that were uncollectible as a result of the
Ames liquidation in 2002. The UK provision utilization was predominately related
to the write-off of uncollectible receivables due from a former video game
accessory distributor in Australia.
Management believes that the current Doubtful Accounts allowance is
adequate to provide for our expected probable bad debt losses. However,
deterioration in the retail environment or the economy could adversely impact
the trade receivables valuation which would increase our bad debt allowance thus
decreasing our earnings.
ALLOWANCE FOR SALES RETURNS
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.
32
The movement in the allowance for estimated sales returns by region was
as follows for 2003:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Allowance for Estimated
Sales Returns
North America $ 531 $ 353 $ (600) $ 284
Europe 716 726 (336) 1,106
------- ------- ------- -------
$ 1,247 $ 1,079 $ (936) $ 1,390
======= ======= ======= =======
The utilization of the provision was mostly related to a) the return of
various defective product (net of warranty cost) and b) a one-time return of a
specific product from a major customer. The Company's sales terms and policies
do not allow for the return of non-defective products, however such a return may
occur infrequently if the Company can maintain the same economic benefit by
reselling the product at a similar margin. The Company increases its provision
for returns based on the estimated impact, if any, of such non-defective
returns. The UK took additional return provisions in the fourth quarter of the
year in anticipation of returns resulting from the slow fourth quarter at retail
in the UK. Utilization of the provision was consistent with anticipated
overstock and defective returns (net of warranty cost) during the year.
Management believes that the current Allowance for Estimated Sales
Returns is adequate to provide for sales returns during 2004. If defective
returns were to exceed historical estimates, or if we were to experience large
overstock returns in the UK, then we may have to take higher than anticipated
charges in order to adequately increase the allowance which would decrease our
earnings.
ALLOWANCE FOR SALES, MARKETING AND ADVERTISING EXPENSES
We record an allowance for sales, marketing and advertising costs
agreed with certain customers. These allowances are based on specific
dollar-value programs or percentages of sales, depending on how the program is
negotiated with the individual customer. The largest of these allowances is for
Accrued Sales Expenses; the movement of this allowance by region in 2003 was as
follows:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Accrued Sales Expenses
Allowance
North America $ 2,345 $ 1,824 $(1,741) $ 2,428
Europe 1,246 985 (1,766) 465
------- ------- ------- -------
$ 3,591 $ 2,809 $(3,507) $ 2,893
======= ======= ======= =======
The increases to the North American allowance were expensed monthly
based on the cumulative total of the amounts granted under individual customer
sales programs, including volume rebates and co-op advertising credits. The
utilization of the provisions related to sales discounts subsequently provided
and customer claims made under various sales programs throughout the year.
33
Management has reviewed its existing allowances for sales, marketing
and advertising and believes them to be adequate at year-end. Several factors,
including poor sell-through of our product at retail could result in management
having to authorize higher than anticipated increases to the allowance, which
would decrease our earnings.
WARRANTY
We record a warranty allowance for costs related to defective product
sold to customers. The warranty allowance is based on historical trends and
management's best assessment of what the defective return percentage will be for
a given product. Projecting defective return percentages on new products can
lead to deviations between recorded warranty allowances and actual defective
returns. Significant negative deviations could have a significant impact on our
financial results, if large amounts of finished goods were found to be
defective.
INVENTORIES
We state our inventory values at the lower of cost or market. Inventory
write-downs are recorded for slow-moving and obsolete inventory. Management uses
estimates to record these write-downs. Slow-moving and obsolete inventories are
written-down depending on the length of time the product has been in inventory
and the forecast sales for the product over the course of the following year.
Changes in public and consumer preferences and demand for product or changes in
the buying patterns and inventory management of customers could adversely impact
the inventory valuation.
The write-down for slow-moving and obsolete inventory as a percentage
of total inventory was 12.6% and 17.1% as of December 31, 2003 and 2002,
respectively. Inventories are valued at lower of cost or market. The inventory
write-downs reflect a decrease below inventory cost as result of slow-moving,
markdown or closeout in market. For the purposes of this calculation, the
current market situation is generally to be considered. Management monitors and
analyzes the inventory for obsolescence and adjusts the carrying amount of the
inventory accordingly.
After experiencing difficulties during the 2003 holiday season in
selling off excess stock of commodity VGA items in the UK and Europe, we marked
down related inventories $1.25 million in the fourth quarter of 2003. At
December 31, 2003, we had $1.7 million in inventory write-downs against $7.0
million in gross video game accessory inventories and $0.5 million in inventory
write-downs against $10.7 million in gross Toy inventories.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Long-lived assets have been reviewed for impairment based on Statement
of Financial Accounting Standards ("SFAS") No. 144.
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are
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 the estimated discounted future 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. Based on our
analysis, no impairment existed at December 31, 2003.
34
In accordance with SFAS No. 142, goodwill and intangible assets not
subject to amortization are tested annually for impairment, and are tested for
impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. Based on our analysis, no
impairment existed at December 31, 2003.
Prior to the adoption of SFAS No. 144, we accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of.
Prior to the adoption of SFAS No. 142, we accounted for goodwill in
accordance with APB Opinion No. 17, Intangible Assets.
DEFERRED TAX ASSETS
We record valuation allowances against our deferred tax assets. In
determining the allowance, management considers all available evidence for
certain tax credit, net operating loss and capital loss carryforwards. The
evidence used in assessing the need for valuation allowances includes the use of
business planning, projections of future taxable income and corporate-wide tax
planning. Differences in actual results from projections used in determining the
valuation allowances could result in future adjustments to the allowance.
In the fourth quarter of 2003, we reversed the valuation allowance
against our deferred tax asset in the U.S. An assessment of our track record and
projected profitability in the U.S. market was conducted and subsequently the
release was made in accordance with SFAS No. 109. This release does not
guarantee future profitability of our U.S. division and future losses in the
market could prompt reinstatement of the valuation allowance.
During 2003, we put a new management team in place in the UK and
altered the distribution strategy in that market. We expect these moves to
return our UK operations to profitability. If this occurs, depending on the
level of actual and projected profitability, we would then reverse the valuation
allowance, potentially creating a one-time credit to income tax expense in the
future.
RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and their
estimated impacts is set out in note 2 to the consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The following table sets forth the directors and executive officers of
the Company in fiscal 2003.
Term
Name Expires Residency Position
---- ------- --------- --------
Jon N. Bengtson (3) 2004 USA Chairman of the Board and Director
Timothy R. Busch (1) 2004 USA Director
Albert J. Crosson (1)(2) 2004 USA Director
Theodore J. Eischeid (1)(3) 2004 USA Director
Patrick S. Feely (3) 2004 USA President, Chief Executive Officer and Director
David C.W. Howell 2004 Hong Kong President Asia Operations,
Chief Financial Officer and Director
James J. O'Toole (2)(4) 2004 USA Director
Peter L. Thigpen (2)(4) 2004 USA Director
Jeanne M. Olson N/A USA President North American Operations
35
Term
Name Expires Residency Position
---- ------- --------- --------
Denis Horton N/A UK Managing Director, Radica UK
James M. Romaine N/A USA Senior Vice President Sales
Laurence M. Scott Jr. N/A Hong Kong Senior Vice President of Asia Operations
Craig D. Storey N/A USA Vice President and Chief Accounting Officer
Larry C.N. Cheng N/A Hong Kong Vice President Engineering
Tiki K.K. Ho N/A Hong Kong Vice President Engineering
Louis S.W. Kwok N/A Hong Kong Assistant General Manager, DRGM
Eric K.W. Chan N/A Hong Kong Quality Director
Vincent K.M. Ching N/A Hong Kong Manufacturing Director
Rick C.K. Chu N/A Hong Kong Director of Customer Service
Robert E. Esterbrook N/A UK Finance & Operations Director
Paul Fogarty N/A UK Sales Director
Donny K.W. So N/A Hong Kong Director of Project Management
Hermen H.L. Yau N/A Hong Kong MIS Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
(4) Member of the Corporate Governance and Nominations Committee.
We annually prepare a proxy statement/management information circular
for distribution to our shareholders in connection with the annual meeting of
shareholders. Additional information is contained in such proxy statement with
respect to the ownership of shares of our common stock by directors and
executive officers, the ages of such persons, and the functions or board
practices of the committees of our board of directors. The information contained
in such proxy statement for the current fiscal year is incorporated herein by
reference. Such proxy statement is furnished as part of our report on Form 6-K
for the period in which the proxy statement is sent to shareholders. The proxy
does not necessarily contain all the information required by the SEC for a
domestic registrant since such information is not required for foreign private
issuers.
Jon N. Bengtson, formerly the Executive Vice President and Chief
Operating Officer of the Company, became the Chairman of the Board of the
Company in January 1996, and has been a director of the Company since January
1994. He was Chief Financial Officer of the Company from January 1994 to
September 1995, and was appointed President and Chief Executive Officer of
Radica USA in December 1993. Mr. Bengtson joined The Sands Regent in 1984 and
served in various positions, including Vice President of Finance and
Administration, Chief Financial Officer, Treasurer and Director, Senior Vice
President and Director and Executive Vice President and Chief Operating Officer
and Director until December 1993. From 1980 to 1984, Mr. Bengtson was a director
and served in various positions with International Game Technology ("IGT"),
including Treasurer and Vice President of Finance and Administration and Vice
President of Marketing. Mr. Bengtson is currently the Chairman of The Sands
Regent.
36
Timothy R. Busch is CEO and founder of The Busch Firm. Founded in 1979,
The Busch Firm specializes in estate planning, asset protection, tax, corporate
law, partnership and real estate matters. He is also founder of Pacific
Hospitality Group, an Irvine-based hotel firm that constructs and operates
hotels; St. Anne School of Laguna Niguel, California, a private Christian
elementary school; and the new private JSerra High School. Mr. Busch serves on a
number of private and public boards in various industries, including Advanced
Materials, Inc. of Rancho Dominguez, California. Mr. Busch received his Juris
Doctor degree from the Wayne State University of Law, and his B.B.A., summa cum
laude, degree from Western Michigan University. He is an attorney licensed in
Michigan, California, Texas, and Washington, D.C., and a CPA licensed in
Michigan, California, and Nevada. He is a member of the Orange County and Palm
Springs Chapters of Legatus, an organization of Catholic CEOs.
Albert J. Crosson was appointed a director of the Company in May 2001.
He became a director of International Game Technology ("IGT") in 1988. He became
Vice Chairman of the Board of IGT in July 1996 and an employee of such company.
He resigned as an employee in December 2000 and as Vice Chairman of IGT in
August 2001. Mr. Crosson was employed for 34 years by ConAgra, Inc. and its
predecessor companies. He was President of ConAgra Grocery Products Companies
from 1993 until January 1996 when he retired. From 1986 until January 1993, he
was President of Hunt-Wesson Foods, Inc., a ConAgra company.
Theodore J. Eischeid was appointed a director of the Company in May
2003. Mr. Eischeid is currently Vice President - Global CDMA Partnership and
Product Management for Motorola, Inc., a global leader in wireless, automotive
and broadband communications. Prior to that, he was Senior Vice President and
Chief Financial Officer of K12 Inc., a developer of online curriculum for grades
K-12; formerly President and CEO of Educational Insights, Inc., a publicly
traded developer, manufacturer and marketer of educational products; and prior
to that served as President of Revell-Monogram, Inc., an international
manufacturer and marketer of plastic hobby kits, where he lead a successful
initial public offering in 1991 and continued as President when the company was
acquired by Hallmark Inc. in 1994. Mr. Eischeid also served as Chief Financial
Officer of Arvey Corporation, a manufacturer and retailer of paper and paper
products, and began his career with Arthur Andersen & Co. He is a past Chairman
of the Toy Manufacturers of America, and is a member of the Board of Directors
of K.I.D.S. (Kids in Distressed Situations). Mr. Eischeid received his Juris
Doctor, cum laude, degree from the Loyola University of Chicago School of Law,
his MBA from Northwestern University's Kellogg Graduate School of Management,
and his BS degree from Iowa State University. He is a Certified Public
Accountant and a member of the Illinois Bar.
Patrick S. Feely has been Chief Executive Officer since April 1999. He
has been Chief Operating Officer and President of the Company since July 1997
and a director of the Company since July 1996. Previously, he was President and
CEO of Spectrum HoloByte, Inc. from 1993 to 1995; President of Bandai America,
Inc. from 1991 to 1992; founder and President of Toy Soldiers, Inc. (which
merged with Bandai America) from 1988 to 1991; and President of the Tonka
Products Division of Tonka, Inc. from 1986 to 1988, after previously serving as
Senior Vice President Commercial Operations from 1982 to 1986. As President of
Tonka, Mr. Feely was responsible for the successful launch of the Sega video
game system into the U.S. market. Mr. Feely was an executive at Mattel Toys from
1977 to 1982 and began his career at RCA Corporation in 1970. Mr. Feely is also
an advisor to the Toy Industry Association Board of Directors, where he was
Chairman from 2000 to 2002. He is currently Chairman of the Board of Trustees of
the Toy Industry Foundation. He has a BA from Duke University and an MBA from
the University of Michigan.
David C.W. Howell was appointed President Asia Operations in December
1998. He has been Executive Vice President and Chief Financial Officer and a
director of the Company since September 1995. Prior to that, he was Vice
President and Chief Accounting Officer and a director of the Company from
January 1994 to September 1995. From 1992 to 1994, Mr. Howell was the Finance
Director and Company Secretary of Radica HK. From 1984 to 1991, Mr. Howell was
employed by Ernst & Young in London, Hong Kong and Vietnam. He has a B.Sc. from
Nottingham University, is a Fellow of the Institute of Chartered Accountants in
England and Wales and is a Fellow of the Hong Kong Society of Accountants.
37
James J. O'Toole has been a director of the Company since June 1994. He
is Research Professor in the Center for Effective Organization at the University
of Southern California's Marshall School of Business. He is the Mortimer J.
Adler Senior Fellow of the Aspen Institute.
Peter L. Thigpen has been a Director of the Company since June 1998. He
is a Lecturer in Ethics & Great Books in the Graduate Business School at the
University of California, Berkeley, a Senior Fellow & Moderator at the Aspen
Institute, and is on the Board of Trustees of the Kentfield, California School
District and the Board of Trustees of Branson High School in Ross, California.
Prior to 1992, Mr. Thigpen was Senior Vice President - U.S. Operations and a
member of the Executive Management Committee at Levi Strauss & Company, retiring
after 23 years with the San Francisco-based apparel company. During his tenure
at Levi Strauss, Mr. Thigpen held positions of President of European Operations,
President - Levi Strauss USA, President - The Jeans Company and was a member of
the Board of Directors.
Jeanne M. Olson is President North American Operations. Prior to
joining the company in 2000, she was Senior Vice President of Sales & Marketing
at Lyrick Studios, a privately-held children's entertainment company. Ms. Olson
has over 15 years of experience in the toy industry, having held executive
marketing and management positions at Mattel Toys, Hasbro Inc., and Tonka Toys.
She started her career in marketing research with The Pillsbury Company and with
Custom Research Inc.
Denis Horton has been Managing Director of Radica UK, Ltd. since April
2003. He has over 18 years of experience in the toy industry, previously having
held Managing Director positions at Mattel UK, Fisher Price and Tonka Europe.
Prior to entering the toy industry, Mr. Horton worked in the food industry and
held management positions at United Biscuits and H J Heinz Co., Ltd. He received
his BA (Honors) degree in Business Studies from Nottingham Trent University, and
is a Fellow of the Chartered Institute of Marketing in the UK.
James M. Romaine joined Radica USA in September 1999 as Senior Vice
President of Sales for Radica USA. He has been an executive in the Toy Industry
for over 31 years. He spent the 1980's and into the early 90's at Parker
Brothers where he was Senior Vice President of Sales. Mr. Romaine was the
President of Play Tech Inc., a VTech company, for seven years before joining
Radica USA. His most recent educational credentials include the completion of
the Executive Program for General Managers at the University of Michigan's
School of Business.
Laurence M. Scott, Jr. was appointed Senior Vice President Asia
Operations in April 2002. Previously he was Managing Director - Asian Operations
for iLogistix Singapore Supply Chain Management Pte. Limited. Prior to that he
was Managing Director for MGA Entertainment (Hong Kong) Limited (1998 - 2000);
Vice President - Operations for Atari Corporation (1992 - 1996) and then Vice
President - Worldwide Materials for JTS Corporation (1996 - 1997) after Atari
merged with JTS; and President and Managing Director for Radofin Electronics
(Far East) Limited. (1975 - 1991). Mr. Scott has over 25 years experience with
Asian Manufacturing Operations. He has a BSc. and MBA from the University of
Southern California.
Craig D. Storey has been Vice President and Chief Accounting Officer of
the Company since July of 1999. Prior to that, he was the Financial Controller
of Radica USA from 1995 to 1999. From 1993 to 1995, Mr. Storey was employed by
Kafoury, Armstrong and Company in Reno, Nevada. He has a BS from Arizona State
University and is a member of the American Institute of Certified Public
Accountants and the Nevada Society of CPA's.
Larry C.N. Cheng has been Vice President Engineering of the Company
since April 2003. Prior to that, he was an Engineering Director from April 1999
to March 2003. Mr. Cheng joined the Company in 1991 and was an Engineering
Manager from April 1993 to March 1999. Mr. Cheng has more than 15 years
experience in ODM and the toy industry. He has a Higher Diploma in Marine
Electronics from the Hong Kong Polytechnic University.
38
Tiki K.K. Ho has been Vice President Engineering of the Company since
April 2003. Prior to his present position, he was an Engineering Director of the
Company from April 1, 1999 to March 31, 2003 and a manager in the engineering
department since joining the Company in 1994. Mr. Ho worked in STD Company
Limited and Management, Investment and Technology Company Limited. He has had
over 15 years experience in manufacturing, product design, and engineering
management and plastic mold shop management. He has a B.Sc. Honors in Mechanical
Engineering from University of Manchester, Institute of Science and Technology.
Louis S.W. Kwok has been the Assistant General Manager, DRGM from April
2003. Prior to that, he was the Materials and Logistics Director of the Company
from March 2002 to March 2003 and the Plant Administration Director from January
2001 to February 2002. He has over 15 years experience in manufacturing plant
operations. Major companies he has worked with are Pymetics (Hong Kong) Limited,
Management, Investment and Technology Company Limited, and Sunciti Manufacturers
Limited. He has a Higher Diploma in Mechanical Engineering, Diploma in
Mechanical Engineering (Manufacturing Technology), and National Diploma in
Mechanical Engineering.
Eric K.W. Chan has been the Quality Director of the Company since July
2, 2001. Prior to that, he was Senior QA Manager/Quality Director in various
major toy companies such as Tonka Kenner Parker, Hasbro and Galoob. Mr. Chan has
over 20 years of solid experience in QA/QC operations in the toy industry. He
has a Diploma in Production and Industrial Engineering, Diploma in Management
Study and Diploma in Industrial Management (UK).
Vincent K.M. Ching joined the Company as the Manufacturing Director in
September 2002. He has over 16 years experience in research, consultancy and
manufacturing sectors, has been working in PRC for 10 years at a managerial
level with Philips, Procter & Gamble (P & G) and previously as Manufacturing
Director in Honeywell Consumer Products (H.K.) Ltd. from June 1999. He has
achieved a number of prizes and awards in both academic and industrial sectors
including the Ford Design Prize from Ford Motor (UK) Co. Ltd. in 1985, First
Class Honors degree in Mechanical Engineering in 1986, Overseas Research
Students Award from the Committee of Vice-Chancellors and Principals of
Universities (UK) in 1987, Postdoctoral Research Fellowship from the Croucher
Foundation of Hong Kong in 1990 and Hong Kong Productivity Council Productivity
Award for the 2002 Hong Kong Awards for Industry.
Rick C.K. Chu has been the Director of Customer Service of the Company
since January 2004. Prior to that, he was the International Sales Director of
the Company from April 1996 to December 2003 and the International Sales
Administration Manager of the Company from April 1994 to April 1996. He has more
than 17 years experience in international trade and business management. From
1988 to 1994, he was the Senior Manager managing the sales administration
function and marketing of industrial materials for a leading trading company in
Hong Kong.
Robert E. Esterbrook joined Radica UK as Finance Director and Company
Secretary during July 2001. He has held executive positions in the UK toy
industry for over 25 years. He has previously worked at Tonka Toys, Playmates
Toys and Ideal Toys as Finance Director and was involved with the establishment
of Mattel Toys in the UK in 1980. He re-joined Invicta Plastics, Ltd,
originators of the board game Mastermind, as Managing Director from 1989 to
1991. He is a fellow member of the Chartered Institute of Management Accountants
and completed a program in legal studies at Demontfort University.
Paul Fogarty commenced working as Sales Director for Radica UK in
January 2004. He has over 9 years experience in the toy industry previously
having held senior management positions for Mattel UK, Tyco Toys UK and JAKKS
Pacific. Prior to this Mr. Fogarty worked in the paper industry for Scott Paper
Ltd. Mr. Fogarty, who is originally from New Zealand, moved to England in 1989.
He received his Bachelor of Commerce degree in Marketing from the University of
Auckland.
39
Donny K.W. So joined the Company as Director of Project Management in
September 2002. Before joining the Company, he held management positions in
product development at VTech HK for 4 years. Mr. So has 16 years experience in
project management and product development in major appliances, electronics and
toys industries. He obtained his 6 Sigma experience while working for General
Electric Company, and led the development of Total Cycle Time management skill
at VTech. He has a Postgraduate Certificate in Business Administration from the
Open University of Hong Kong, a BA in Industrial Design from the Hong Kong
Polytechnic University and a Diploma in Product Design from LWL Technical
Institute.
Hermen H.L. Yau has been the MIS Director of the Company since March 1,
1994. From 1982 to 1994, he worked in Outboard Marine Corporation Asia Ltd in
various positions in the Systems & Data Processing Department. He has more than
18 years experience in Information Technology and particular experience in IBM
mid-range computer systems and solutions. He has a Higher Diploma in Computer
Studies from the National Computing Center UK and a Diploma in Management
Studies from the Hong Kong Polytechnic and Hong Kong Management Association.
COMPENSATION OF OFFICERS AND DIRECTORS
COMPENSATION
In fiscal 2003, the aggregate amount of compensation paid to all
executive officers and directors for services in all capacities was
approximately $2.5 million. In addition, bonus payments made to certain
executive officers as a group in April of 2004 related to 2003 performance that
was accrued at the end of 2003 was $17,000.
In fiscal 2003, each outside (i.e., non-employee and non-affiliated)
director of the Company received a $10,000 annual fee paid in quarterly
installments. Directors could elect to receive some or all of this fee payable
in shares of the Company's Common Stock valued at the then current market price.
Each outside director of the Company also received a fee of $600 for attendance
at each Committee meeting.
Commencing in fiscal 2004, each outside director will receive
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 $2,000 annually
retainer
Payments will be 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.
Upon each annual re-election to the Board of Directors, each outside
director receives stock options to purchase 2,500 shares per quarter (i.e.
10,000 shares per annum) of Common Stock of the Company at an exercise price
equal to the then current market price of the Company's Common Stock. The
average exercise price was $6.41 per share in 2003. These options are
exercisable after one year from the date of grant.
The Company also follows the practice that upon the initial election or
appointment of a new outside director to the Board of Directors, such director
receives a stock option to purchase 30,000 shares of the Company's Common Stock
at an exercise price equal to the then-current market price, and these options
are exercisable after one year from the date of grant.
40
EMPLOYMENT AGREEMENTS
Messrs. Feely, Howell, Bengtson, Horton and Ms. Jeanne Olson have each
entered into individual employment agreements with the Company. After giving
effect to the latest renewals, the employment agreements are renewed
automatically on an annual basis unless 90 days notice is given by either party,
for periods of two years each, from July 2001 for Mr. Feely, from December 2001
for Messrs. Howell, Bengtson and Ms. Olson and from March 2003 for Mr. Horton.
Each employment agreement is terminable by the Company for cause. Under their
agreements Messrs. Feely, Howell, Bengtson, Horton and Ms. Olson shall each
receive minimum annual base salaries of $332,600, $250,000, $43,200, $212,500
and $250,000 (the amount for Mr. Horton is stated in UK currency as
(pound)125,000), respectively. The agreement with Mr. Bengtson, in operation
since December 1995, is for part-time services. Under the terms of their
employment agreements Messrs. Feely, Howell, Bengtson, Horton and Ms. Olson are
eligible to participate in the Company's bonus plan. The employment agreements
for Messrs. Feely, Howell, Horton and Ms. Olson contain certain restrictions on
their involvement in businesses other than the Company during the course of
their employment and certain provisions applicable after termination of
employment which prohibit the solicitation of customers and other employees of
the Company, employment or engagement with competing entities, or the disclosure
of proprietary information of the Company. The Company provides residences for
Mr. Howell and Mr. Scott in Hong Kong. In the agreement for Mr. Feely, he was
granted 300,000 stock options of the Company common stock at market price at
$3.625 per share, another 60,000 stock options at market price at $14.125 per
share in November 1998 and a further 60,000 stock options at market price at
$3.00 per share in May 2000, subject to the terms and conditions of the
agreement and the 1994 Stock Option Plan. Additionally, in May 2001, Mr. Feely
would have been granted 60,000 stock options at market price provided he
achieved certain conditions as stated in the agreements, however, these were not
achieved. In the agreements for Mr. Howell, he was granted 25,000 stock options
per annum of the Company common stock at market price at $3.00 and $2.90 per
share in May 2000 and 2001 respectively. In June 2002, Mr. Howell was granted
25,000 stock options at market price, subject to the terms and conditions of the
agreement and the 1994 Stock Option Plan. In the agreement for Ms. Olson, she
had been granted 60,000 stock options upon initial employment and was granted an
additional 40,000 stock options at market price at $3.45 per share in January
2002 subject to the terms and conditions of the agreement and the 1994 Stock
Option Plan. In the agreement for Mr. Horton, he had been granted 60,000 stock
options of the Company common stock at market price at $4.43 in March 2003 upon
initial employment subject to the terms and conditions of the agreement and the
1994 Stock Option Plan. Additionally, Messrs. Feely, Howell and Ms. Olson were
granted 60,000, 25,000 and 25,000 stock options at market price, respectively in
February 2001. Mr. Howell was granted 3,750 stock options in March 2002 for
achieving certain requirements under an incentive plan. Based upon 2002
performance the Company's Compensation Committee voted in March 2003 to
accelerate the vesting of 60,000 options for Mr. Feely and 25,000 options for
Ms. Olson and Mr. Howell. The acceleration of the stock options was approved in
accordance with the original terms of the contract and these options would
become vested in five years regardless of the achievement of the performance
goals and therefore the acceleration did not result in a new measurement of
compensation costs for accounting purposes. In March 2003, Mr. Feely was granted
120,000 options at market price at $4.43 per the Company's prior practices.
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company's 1994 Stock Option Plan provides for the granting of stock
options to directors, officers and employees of the Company. The Stock Option
Plan is administered by the Compensation Committee of the Board of Directors.
Subject to the provisions of the Stock Option Plan, the Compensation Committee
shall have sole authority to determine which of the eligible directors and
employees of the Company shall receive stock options, the terms, including
applicable vesting periods, of such options, and the number of shares for which
such options shall be granted.
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The total number of shares of the Company's Common Stock that may be
purchased pursuant to stock options under the Stock Option Plan shall not exceed
in the aggregate 3.7 million shares. The option price per share with respect to
each such option shall be determined by the Compensation Committee but shall be
not less than 100% of the fair market value of the Company's Common Stock on the
date such option is granted as determined by the Compensation Committee.
Ordinarily, either twenty percent or thirty-three and a third percent of the
stock options vest and become exercisable on each of the first five or three
anniversaries of the date of grant, respectively and all of the options expire
in ten years. The Stock Option Plan terminates in 2004 unless terminated
earlier. The Company anticipated that it will ask shareholders to approve a new
plan, the 2004 Omnibus Equity Incentive Plan, at the 2004 Annual Shareholders
Meeting.
In fiscal year 2001, an aggregate of 432,600 options (exclusive of the
outside directors' options and net of stock options that were both issued and
forfeited in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at exercise prices
ranging from $1.63 to $4.15 per share.
In fiscal year 2002, an aggregate of 448,150 options (exclusive of the
outside directors' options and net of stock options that were both issued and
forfeited in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at exercise prices
ranging from $2.74 to $4.51 per share.
In fiscal year 2003, an aggregate of 259,200 options (exclusive of the
outside directors' options and net of stock options that were both issued and
forfeited in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at exercise prices
ranging from $4.21 to $6.54 per share.
As a result of the foregoing, at the end of fiscal year 2003, after
giving effect to all prior exercises and forfeitures of options, an aggregate of
1,732,172 options (exclusive of the outside directors' options) were outstanding
at exercise prices ranging from $1.09 to $19.63 per share, and of such amount a
total of 1,279,200 options were held by directors and executive officers of the
Company as a group. Also, an aggregate of 215,000 outside director's options
were outstanding at exercise prices ranging from $2.00 to $12.63 per share.
During 2003, a total of 426,000 shares were issued upon the exercise of options,
at exercise prices ranging from $1.09 to $6.78 per share. Prior to 2003, a total
of 1,210,042 shares had been issued upon the exercise of options at exercise
prices ranging from $0.57 to $11.00 per share.
Additional information with respect to stock options is contained in
Note 11 of the Notes to the Consolidated Financial Statements included in this
filing.
Information with respect to employees is contained in Item 4 above.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
CONTROL OF REGISTRANT
(a) The registrant is not controlled by another corporation or any foreign
government.
(b) The following table is based on information available to the Company and
identifies the owners of more than five percent (5%) of the registrant's
common stock and the amount of common stock beneficially owned by the
officers and directors as a group, as of January 31, 2004. The Company must
rely on information provided by individual shareholders and therefore
cannot verify its accuracy:
42
Identity of
Title of Class Person or Group Amount Owned Percent of Class
-------------- --------------- ------------ ----------------
Common stock Dito Devcar Corporation, et al. 8,686,780 46.8%
Common stock RAD Partners 1999 LLC, et al. 1,651,200 8.9%
Common stock Officers & Directors as a Group 3,042,738 16.4%
(c) There are no arrangements known to the registrant which may at a subsequent
date result in a change of control of the registrant.
(d) As of January 31, 2004, the Company had approximately 110 record holders of
its Common Stock, and approximately 80% of such stock was held by U.S.
holders.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
At the time of the Company's IPO in 1994, certain members of management
who were also the principal shareholders of the Company, were parties to a
shareholders agreement (the "Shareholders Agreement") with the Company which
provided for certain matters relating to the management of the Company and
ownership of its Common Stock. In January 1998, the Shareholders Agreement was
amended to eliminate provisions respecting the election and removal of
directors, restrictions on transfer and a right of first refusal. The
registration rights provisions of the Shareholders Agreement remained operative.
Pursuant to the Shareholders Agreement, the Company agreed, at any time
after February 16, 1996 and subject to certain specified conditions, to use its
reasonable efforts to prepare and file one registration statement on behalf of
each shareholder that is a party to the Shareholders Agreement (collectively,
the "Shareholders") under the Securities Act of 1933, and to use its reasonable
efforts to qualify the shares for offer and sale under any applicable U.S. state
securities laws. The Shareholders Agreement also grants each Shareholder certain
"piggyback" registration rights entitling each Shareholder, at any time after
February 16, 1996, to sell Common Stock in certain registered offerings of
equity securities of the Company. These "piggyback" registration rights are
exercisable by each Shareholder only twice. The foregoing registration rights
are subject to other limitations set forth in the Shareholders Agreement.
Albert J. Crosson, one of the Company's directors, owns no Radica Games
Limited stock shares ("shares") directly. However, he owns 1% of the beneficial
interest in Crossfire, LLC ("Crossfire") which beneficially owns 200,000 shares
through its class A membership interest in RAD Partners 2001, LLC ("RAD 2001").
RAD 2001 is controlled by RAD Partners 1999 LLC which is one of the Company's
major stockholders. Mr. Crosson's 1% ownership of Crossfire constitutes voting
control of Crossfire and Crossfire has the right to withdraw such 200,000 shares
from RAD 2001. Additionally, under an economic arrangement involving its
membership interest in RAD 2001, Crossfire may acquire beneficial ownership in
an additional 400,000 shares over time from RAD 2001; however, Crossfire cannot
vote or dispose of such shares without the consent of all the members of RAD
2001. In December 2002, Crossfire purchased 250,000 shares bringing its
ownership of the Company's stock to 450,000 shares including the 200,000 shares
beneficially owned through its class A membership interest in RAD 2001.
Crossfire is owned beneficially by Mr. Crosson and his four children.
Additional information on management transactions is contained under
Item 6 above.
ITEM 8. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements are included herein.
43
ITEM 9. THE OFFER AND LISTING
The Company's common stock is traded on the Nasdaq National Market
under the symbol RADA. The Company's common stock is not traded on any foreign
trading market. The following table lists the high and low closing stock price
for each quarter of fiscal 2003 and fiscal 2002:
Fiscal year ended Fiscal year ended
December 31, 2003 December 31, 2002
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter 6.540 4.200 4.400 3.400
Second Quarter 8.000 5.540 4.600 3.800
Third Quarter 8.170 6.880 4.029 3.560
Fourth Quarter 7.950 6.300 4.600 3.450
The annual high and low closing stock prices in fiscal 2001 were $4.9
and $1.625; in fiscal 2000 were $10 and $1.625; and in fiscal 1999 were $16 and
$7.25.
The monthly high and low closing stock prices over the last six months
in fiscal 2003 were $8.17 and $6.90 in July 2003; $8.056 and $7.01 in August
2003; $7.34 and $6.88 in September 2003; $7.349 and $6.3 in October 2003; $7.211
and $6.461 in November 2003; and $7.95 and $6.89 in December 2003.
Radica Games Limited was formed in 1993 as a holding company and,
through fiscal 2003, had not paid any dividends. Except to the extent set forth
below, the Company intends to retain its earnings for operations and expansion
of its business for the foreseeable future.
On January 5, 2004, the Company announced a quarterly dividend program
(see "Item 4. Information on the Company, Capital Resources and Liquidity" for
details of the program).
The Company intends to make cash distributions at the end of its
taxable year at least equal to 50% of its foreign personal holding company
income for any year in which it is a foreign personal holding company (see Item
10. Additional Information - Taxation).
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND BY-LAWS
A summary of the Company's memorandum and bye-laws and other provisions
pertaining to its common stock is contained in the Company's registration
statement on Form F-3 filed with the Securities and Exchange Commission on May
21, 1999 (file no. 33-79005). Such summary in that registration statement is
incorporated herein by reference.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
The Company has been designated as a non-resident of Bermuda for
exchange control purposes by the Bermuda Monetary Authority.
The transfer of shares of the Company between persons regarded as
non-resident of Bermuda for exchange control purposes and the issue of shares
within the authorized share capital of the Company of US$1,000,000 to or by such
persons may be effected without specific consent under the Exchange Control Act
1972 and regulations thereunder subject to such shares being listed on the
National Association of Securities Dealers Automated Quotation System. Issues
and transfers of shares involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under the Exchange
Control Act 1972.
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There are no limitations on the rights of non-Bermuda resident holders
of the Common Stock to hold or vote their shares. Because the Company has been
designated as non-resident for Bermuda exchange control purposes, there are no
restrictions on its ability to transfer funds in and out of Bermuda or to pay
dividends to United States residents who are holders of the Common Stock, other
than in respect of local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in
the names of corporations or individuals. In the case of an applicant acting in
a special capacity (for example, as an executor or trustee), certificates may,
at the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.
As an exempted company, the Company is exempt from the usual Bermuda
requirement which restricts the percentage of share capital that may be held by
non-Bermudians, but as an exempted company the Company may not, unless
authorized by its memorandum of association and with the consent of the Minister
of Finance, participate in certain business transactions, including: (1) the
acquisition and holding of land in Bermuda (except that required for its
business and held by way of lease or tenancy for terms of not more than 50 years
or with the Minister's consent, land by way of lease or tenancy agreement for a
term not exceeding 21 years in order to provide accommodation or recreational
facilities for its officers and employees); (2) the taking of mortgages on land
in Bermuda to secure an amount in excess of $50,000; (3) the acquisition of any
bonds or debentures secured on any land in Bermuda except bonds or debentures
issued by the Bermuda Government or a public authority; or (4) the carrying on
of business of any kind or type whatsoever in Bermuda, either alone or in
partnership, except the carrying on of business of the Company with persons
outside Bermuda or under a license granted by the Minister of Finance of
Bermuda.
TAXATION
The following discussion is a summary of certain anticipated tax
consequences of the ownership of Common Stock under Bermuda tax laws, Hong Kong
income tax laws, Macau income tax laws, and United States Federal income tax
laws. The discussion does not deal with all possible tax consequences relating
to the Company's operations or to the ownership of Common Stock. In particular,
the discussion does not address the tax consequences under State, local and
other (e.g., non-Bermuda, non-Hong Kong, non-Macau and non-United States
Federal) tax laws. Accordingly, each owner should consult his tax advisor
regarding the tax consequences of the ownership of Common Stock. The discussion
is based upon laws and relevant interpretations thereof in effect as of the date
of this report, all of which are subject to change.
BERMUDA TAXATION
The Company is incorporated in Bermuda. At date of this filing, there
is no Bermuda income, corporation or profits tax, withholding tax, capital gains
tax, capital transfer tax, estate duty or inheritance tax payable by
shareholders of the Company other than shareholders ordinarily resident in
Bermuda. The Company is not subject to stamp or other similar duty on the issue,
transfer or redemption of its shares of Common Stock. Furthermore, the Company
has received from the Minister of Finance of Bermuda under The Exempted
45
Undertakings Tax Protection Act 1966, an assurance that, in the event that
Bermuda enacts any legislation imposing any tax computed on profits or income,
or computed on any capital assets, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, the imposition of such tax shall not
be applicable to the Company or any of its operations, or to the shares,
debentures or other obligations of the Company, until March 28, 2016. This
assurance does not, however, prevent the imposition of any such tax or duty on
such persons as are ordinarily resident in Bermuda and holding such shares,
debentures or obligations of the Company or on land in Bermuda leased or let to
the Company.
The United States does not have a comprehensive income tax treaty with
Bermuda.
HONG KONG TAXATION
Under the laws of Hong Kong, a holder of shares of a company is not
subject to Hong Kong tax on dividends paid with respect to such shares. Further,
there is no tax on capital gain realized upon the disposal of investments,
including investments in Common Stock, except that Hong Kong profits tax may be
chargeable on assessable profits, to the extent that they arise in or derive
from Hong Kong, arising on the sale or disposal of such investments where the
transactions are or form part of a trade, profession or business carried on in
Hong Kong. Hong Kong does not impose a withholding tax on dividends paid by the
Company or its subsidiaries. In addition, the Company will not be subject to
Hong Kong taxes as a result of its receipt of dividends from any of its
subsidiaries.
Hong Kong stamp duty is levied on the transfer of Common Stock of Hong
Kong companies at the rate of 0.02% on the fair consideration of the transfer.
For companies not incorporated in Hong Kong, no stamp duty is chargeable on the
transfer so long as the shareholders' registers are kept outside of Hong Kong.
Hong Kong also levies an estate duty on the estate of a person who
holds Common Stock in a Hong Kong company at the time of his death. No such duty
is levied where the company is not incorporated in Hong Kong and where its share
register is kept outside of Hong Kong.
MACAU TAXATION
Under the Macau Offshore Law, there is no tax to be levied on the
profits of a company generated from its offshore activities, defined as economic
activities dedicated to foreign markets, pursued exclusively with non-residents,
and by means of transactions in currencies other than the Macau pataca.
UNITED STATES FEDERAL INCOME TAXATION
General. The following is a general discussion of the material U.S.
federal income tax consequences to a U.S. Holder (as defined below) of the
ownership of Common Stock and does not address the U.S. tax treatment of certain
types of investors (e.g., individual retirement and other tax-deferred accounts,
life insurance companies, tax-exempt organizations, dealers in securities,
traders in securities that elect to mark to market, persons liable for
alternative minimum tax, persons that hold common stock as part of a straddle or
a hedging or conversion transaction, persons whose functional currency is not
the U.S. dollar and persons owning directly or indirectly (under constructive
ownership rules) 10% or more of the Common Stock), all of whom may be subject to
tax rules that differ significantly from those summarized below.
A "U.S. Holder" is a beneficial owner of Common Stock that is a U.S.
citizen or resident, a domestic corporation, an estate subject to U.S. federal
income taxation on a net income basis, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust.
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Dividends. Under the United States federal income tax laws, and subject
to the passive foreign investment company, or PFIC, foreign personal holding
company, or FPHC and controlled foreign corporation, or CFC rules discussed
below, if you are a U.S. holder, the gross amount of any dividend we pay out of
our current or accumulated earnings and profits (as determined for United States
federal income tax purposes) is subject to United States federal income
taxation. If you are a noncorporate U.S. holder, dividends paid to you in
taxable years beginning after December 31, 2002 and before January 1, 2009 that
constitute qualified dividend income will be taxable to you at a maximum tax
rate of 15% provided that you hold the shares for more than 60 days during the
120-day period beginning 60 days before the ex-dividend date and meet other
holding period requirements. On February 19, 2004, the IRS announced that it
will permit taxpayers to apply a proposed legislative change to the holding
period requirement described in the preceding sentence as if such change were
already effective. This legislative "technical correction" would change the
minimum required holding period, retroactive to January 1, 2003, to more than 60
days during the 121-day period beginning 60 days before the ex-dividend date.
Dividends we pay with respect to the shares generally will be qualified dividend
income provided that, in the year that you receive the dividend, the shares are
readily tradable on an established securities market in the United States.
Distributions in excess of the earnings and profits of the Company will
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital to the extent of the U.S. Holder's basis in the Common Stock and then as
gain from the sale or exchange of a capital asset. A corporate shareholder will
not be eligible for the dividends-received deduction.
Sale or Exchange of Common Stock. Subject to the PFIC, FPHC and CFC
rules discussed below, if you are a U.S. holder and you sell or otherwise
dispose of your shares, you will recognize capital gain or loss for United
States federal income tax purposes equal to the difference between the U.S.
dollar value of the amount that you realize and your tax basis, determined in
U.S. dollars, in your shares. Capital gain of a noncorporate U.S. holder that is
recognized on or after May 6, 2003 and before January 1, 2009 is generally taxed
at a maximum rate of 15% where the holder has a holding period greater than one
year.
PFIC Rules. We believe that shares should not be treated as stock of a
PFIC for United States federal income tax purposes, but this conclusion is a
factual determination that is made annually and thus may be subject to change.
In general, if you are a U.S. holder, we will be a PFIC with respect to
you if for any taxable year in which you held our shares:
o at least 75% of our gross income for the taxable year is passive
income or
o at least 50% of the value, determined on the basis of a quarterly
average, of our assets is attributable to assets that produce or are
held for the production of passive income.
Passive income generally includes dividends, interest, royalties, rents
(other than certain rents and royalties derived in the active conduct of a trade
or business), annuities and gains from assets that produce passive income. If a
foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation's income.
If we are treated as a PFIC, and you are a U.S. holder that did not
make a mark-to-market election, as described below, you will be subject to
special rules with respect to:
o any gain you realize on the sale or other disposition of your shares
and
47
o any excess distribution that we make to you (generally, any
distributions to you during a single taxable year that are greater
than 125% of the average annual distributions received by you in
respect of the shares during the three preceding taxable years or, if
shorter, your holding period for the shares).
Under these rules:
o the gain or excess distribution will be allocated ratably over your
holding period for the shares,
o the amount allocated to the taxable year in which you realized the
gain or excess distribution will be taxed as ordinary income,
o the amount allocated to each prior year, with certain exceptions, will
be taxed at the highest tax rate in effect for that year, and
o the interest charge generally applicable to underpayments of tax will
be imposed in respect of the tax attributable to each such year.
If you own shares in a PFIC that are treated as marketable stock, you
may also make a mark-to-market election. If you make this election, you will not
be subject to the PFIC rules described above. Instead, in general, you will
include as ordinary income each year the excess, if any, of the fair market
value of your shares at the end of the taxable year over your adjusted basis in
your shares. These amounts of ordinary income will not be eligible for the
favorable tax rates applicable to qualified dividend income or long-term capital
gains. You will also be allowed to take an ordinary loss in respect of the
excess, if any, of the adjusted basis of your shares over their fair market
value at the end of the taxable year (but only to the extent of the net amount
of previously included income as a result of the mark-to-market election). Your
basis in the shares will be adjusted to reflect any such income or loss amounts.
In addition, notwithstanding any election you make with regard to the
shares, dividends that you receive from us will not constitute qualified
dividend income to you if we are a PFIC either in the taxable year of the
distribution or the preceding taxable year. Dividends that you receive that do
not constitute qualified dividend income are not eligible for taxation at the
15% maximum rate applicable to qualified dividend income. Instead, you must
include the gross amount of any such dividend paid by us out of our accumulated
earnings and profits (as determined for United States federal income tax
purposes) in your gross income, and it will be subject to tax at rates
applicable to ordinary income.
If you own shares during any year that we are a PFIC, you must file
Internal Revenue Service Form 8621.
Foreign Personal Holding Company Rules. We believe that we are not and
are not likely to become a foreign personal holding company for United States
tax purposes (on the basis that last year we did not meet the asset test) but
this conclusion is a factual determination that is made annually and thus is
subject to change. In general, if we are a foreign personal holding company:
o if you are a U.S. holder, you will be taxed currently on certain
categories of our undistributed passive income,
o a U.S. person who acquires shares from a decedent will not have a
stepped-up basis in the shares or but will have a tax basis equal to
the lower of the fair market value of the shares or the decedent's
basis in the shares, and
if you are a U.S. holder, any dividends that we pay in a taxable year
that we are a foreign personal holding company and the next taxable year
thereafter will be taxable to you at rates applicable to ordinary income rather
than the special rates applicable to qualified dividend income.
48
CFC Rules. A foreign corporation generally is treated as a controlled
foreign corporation ("CFC") for U.S. federal income tax purposes if more than
50% of its stock is owned by certain 10% shareholders. The Company believes that
it is not currently a CFC because such shareholder test is not met. The
treatment of the Company as a CFC would not in any event adversely affect any
person who owns (directly or indirectly or by attribution) less than 10% of the
Common Stock.
Backup Withholding and Information Reporting. If you are a noncorporate
U.S. holder, information reporting requirements, on Internal Revenue Service
Form 1099, generally will apply to:
o dividend payments or other taxable distributions made to you within
the United States, and
o the payment of proceeds to you from the sale of shares effected at a
United States office of a broker.
Additionally, backup withholding may apply to such payments if you are
a noncorporate U.S. holder that:
o fails to provide an accurate taxpayer identification number,
o is notified by the Internal Revenue Service that you have failed to
report all interest and dividends required to be shown on your federal
income tax returns, or
o in certain circumstances, fails to comply with applicable
certification requirements.
If you are a non-U.S. holder, you are generally exempt from backup
withholding and information reporting requirements with respect to:
o dividend payments made to you outside the United States by us or
another non-United States payor and
o other dividend payments and the payment of the proceeds from the sale
of shares effected at a United States office of a broker, as long as
the income associated with such payments is otherwise exempt from
United States federal income tax, and:
o the payor or broker does not have actual knowledge or reason to
know that you are a United States person and you have furnished
the payor or broker:
o an Internal Revenue Service Form W-8BEN or an acceptable
substitute form upon which you certify, under penalties of
perjury, that you are a non-United States person, or
o other documentation upon which it may rely to treat the
payments as made to a non-United States person in accordance
with U.S. Treasury regulations, or
o you otherwise establish an exemption.
Payment of the proceeds from the sale of shares or effected at a
foreign office of a broker generally will not be subject to information
reporting or backup withholding. However, a sale of shares or that is effected
at a foreign office of a broker will be subject to information reporting and
backup withholding if:
49
o the proceeds are transferred to an account maintained by you in the
United States,
o the payment of proceeds or the confirmation of the sale is mailed to
you at a United States address, or
o the sale has some other specified connection with the United States as
provided in U.S. Treasury regulations,
unless the broker does not have actual knowledge or reason to know that you are
a United States person and the documentation requirements described above are
met or you otherwise establish an exemption.
In addition, a sale of shares or effected at a foreign office of a
broker will be subject to information reporting if the broker is:
o a United States person,
o a controlled foreign corporation for United States tax purposes,
o a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a
specified three-year period, or
o a foreign partnership, if at any time during its tax year:
o one or more of its partners are "U.S. persons", as defined in
U.S. Treasury regulations, who in the aggregate hold more than
50% of the income or capital interest in the partnership, or
o such foreign partnership is engaged in the conduct of a United
States trade or business,
unless the broker does not have actual knowledge or reason to know that you are
a United States person and the documentation requirements described above are
met or you otherwise establish an exemption. Backup withholding will apply if
the sale is subject to information reporting and the broker has actual knowledge
that you are a United States person.
You generally may obtain a refund of any amounts withheld under the
backup withholding rules that exceed your income tax liability by filing a
refund claim with the United States Internal Revenue Service.
DOCUMENTS ON DISPLAY
The documents concerning the Company which are referred to in this
report may be inspected on-line at websites maintained by the Securities and
Exchange Commission and by private companies offering access to the SEC
database. See, e.g., www.sec.gov.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
50
INTEREST RATE SENSITIVITY
The Company currently has no debt and borrowings that are sensitive to
interest rate.
FOREIGN CURRENCY RISK
The Company has net monetary asset and liability balances in foreign
currencies other than the U.S. dollar, including the Pound Sterling, the
Canadian dollar, the Hong Kong dollar and the RMB. International distribution
and sales revenues usually are made by 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 Pound Sterling or the Canadian dollar. The Company does not
currently hedge its foreign exchange risk, which is not significant at this
time. 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. Due to the
rearrangement of the Group's internal financing structure, exposure to movements
in exchange rates has been limited going forward. See also "Item 3. Key
Information - Risk Factors - China Currency Valuation".
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None or Not Applicable
ITEM 15. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) at December 31, 2003. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that these disclosure controls and
procedures were effective. In addition, no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act or 1934) occurred during the fiscal year ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
On May 12, 2003, Theodore J. Eischeid was named Chairman of the
Company's Audit Committee (please see "Item 6. Directors, Senior Management and
Employees" for Mr. Eischeid's experience and qualifications). The Board has
determined Mr. Eischeid meets all of the criteria required to be named a
"Financial Expert," as defined in applicable rules of the Securities and
Exchange Commission.
ITEM 16B. CODE OF ETHICS
The Company has adopted a Code of Ethics that is applicable to all its
directors, senior management and employees. The Code of Ethics contains general
guidelines for conducting the business of the Company.
51
The Company will make available a copy of the Code of Ethics to any
person without charge, if a written request is made to its Company Secretary at
the Company's registered address at Suite V, 6th Floor, 2-12 Au Pui Wan St., Fo
Tan, N.T., Hong Kong.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(US$ in thousands) Audit fees Audit-related fees Tax fees Total
---------- ------------------ -------- -----
2002 $ 186 $ 8 $ 53 $ 247
2003 250 5 137 392
AUDIT-RELATED FEES
Services provided primarily consist of statutory audit of pension
contributions to the Company's defined contribution plan.
TAX FEES
Services provided primarily consist of corporate tax advisory services
and preparation of corporate income tax returns.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Not Applicable
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Independent Auditors' Reports F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity
and Comprehensive Income (Loss) F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
ITEM 19. EXHIBITS
The exhibit index appears at page I-2 of this report, immediately
following the signature page.
52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Radica Games Limited:
We have audited the accompanying consolidated balance sheets of Radica Games
Limited and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Radica Games Limited
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Notes 2 and 6 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002.
/S/ KPMG
HONG KONG
February 13, 2004
F-1
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
(US dollars in thousands, except share data) 2003 2002
-------- --------
Current assets:
Cash and cash equivalents $ 13,944 $ 32,692
Investment securities 28,009 --
Accounts receivable, net of allowances for doubtful accounts
of $251 ($315 in 2002) 15,360 15,139
Inventories 15,503 20,385
Prepaid expenses and other current assets 2,748 1,674
Income taxes receivable 1,404 931
Deferred income taxes 1,706 --
-------- --------
Total current assets 78,674 70,821
-------- --------
Property, plant and equipment, net 11,908 14,034
Goodwill 9,551 9,551
Other asset 875 896
Deferred income taxes, noncurrent 1,206 --
-------- --------
Total assets $102,214 $ 95,302
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 846
Accounts payable 6,350 7,974
Current portion of long-term debt -- 1,825
Accrued payroll and employee benefits 1,353 2,753
Accrued warranty expenses 1,040 1,040
Other accrued liabilities 3,976 5,840
Income taxes payable 339 309
Deferred income taxes -- 79
-------- --------
Total current liabilities 13,058 20,666
-------- --------
Total liabilities 13,058 20,666
-------- --------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
18,225,204 shares issued and outstanding (17,796,131 in 2002) 182 178
Additional paid-in capital 3,517 2,320
Retained earnings 85,437 72,946
Accumulated other comprehensive income (loss) 20 (808)
-------- --------
Total shareholders' equity 89,156 74,636
-------- --------
Total liabilities and shareholders' equity $102,214 $ 95,302
======== ========
See accompanying notes to the consolidated financial statements.
F-2
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(US dollars in thousands, 2003 2002 2001
except per share data) ------------ ------------ ------------
Revenues:
Net sales $ 105,200 $ 124,646 $ 98,554
Cost of goods sold (exclusive of items
shown separately below) (64,571) (77,481) (64,698)
------------ ------------ ------------
Gross profit 40,629 47,165 33,856
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses (25,779) (27,695) (26,279)
Research and development (3,895) (4,094) (5,775)
Depreciation (2,033) (2,438) (2,631)
Amortization of goodwill and intangible assets -- (420) (1,382)
Restructuring charge (87) -- (1,551)
------------ ------------ ------------
Total operating expenses (31,794) (34,647) (37,618)
------------ ------------ ------------
Operating income (loss) 8,835 12,518 (3,762)
Other income 317 306 24
Foreign currency gain (loss), net 178 1,744 (219)
Interest income 344 253 733
Interest expense (49) (218) (597)
------------ ------------ ------------
Income (loss) before income taxes 9,625 14,603 (3,821)
Credit (provision) for income taxes 2,866 (2,669) (553)
------------ ------------ ------------
Net income (loss) $ 12,491 $ 11,934 $ (4,374)
============ ============ ============
Net income (loss) per share:
Basic $ 0.69 $ 0.67 $ (0.25)
============ ============ ============
Diluted $ 0.66 $ 0.65 $ (0.25)
============ ============ ============
Weighted average number of common and
common equivalent shares
Basic 18,016,789 17,725,879 17,611,886
============ ============ ============
Diluted 19,059,974 18,335,827 17,611,886
============ ============ ============
See accompanying notes to the consolidated financial statements.
F-3
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(US dollars in thousands) Common stock Accumulated
------------ 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, 2000 17,564,297 $ 176 $ 1,188 $ 667 $ 65,386 $ (29) $ 67,388
Issuance of stock 6,847 -- 22 -- -- -- 22
Stock options exercised 75,596 -- 117 -- -- -- 117
Expiration of stock warrants -- -- 222 (222) -- -- --
Net loss -- -- -- -- (4,374) -- (4,374)
Foreign currency translation -- -- -- -- -- (101) (101)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 17,646,740 $ 176 $ 1,549 $ 445 $ 61,012 $ (130) $ 63,052
Issuance of stock 4,945 1 20 -- -- -- 21
Stock options exercised 144,446 1 306 -- -- -- 307
Expiration of stock warrants -- -- 445 (445) -- -- --
Net income -- -- -- -- 11,934 -- 11,934
Foreign currency translation -- -- -- -- -- (678) (678)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ -- $ 72,946 $ (808) $ 74,636
Issuance of stock 3,073 -- 20 -- -- -- 20
Stock options exercised, inclusive 426,000 4 1,177 -- -- -- 1,181
of $44 tax benefit
Net income -- -- -- -- 12,491 -- 12,491
Unrealized loss on investment -- -- -- -- -- (46) (46)
securities available-for-sale,
net of nil tax
Foreign currency translation, -- -- -- -- -- 874 874
net of nil tax
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ -- $ 85,437 $ 20 $ 89,156
========== ========== ========== ========== ========== ========== ==========
The comprehensive income (loss) of the Company, which represents the aggregate of the net income (loss), tax benefit from stock
options exercised and the foreign currency translation adjustments, was $13,319, $11,256 and $(4,475) for the years ended December
31, 2003, 2002 and 2001, respectively.
See accompanying notes to the consolidated financial statements.
F-4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(US dollars in thousands) 2003 2002 2001
-------- -------- --------
Cash flow from operating activities:
Net income (loss) $ 12,491 $ 11,934 $ (4,374)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes (2,947) 2,134 (918)
Depreciation 2,033 2,438 2,631
Amortization -- 420 1,382
Loss on disposal and write off of property, plant and equipment 102 57 73
Compensatory elements of stock issuances 20 21 22
Unrealized gain on trading investments (55) -- --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (221) (1,271) 8,678
Decrease (increase) in inventories 4,882 (3,206) (3,208)
(Increase) decrease in prepaid expenses and other current assets (1,074) 609 (709)
(Decrease) increase in accounts payable (1,624) (1,227) 2,124
(Decrease) increase in accrued payroll and employee benefits (1,400) 1,810 (7)
Increase (decrease) in accrued warranty expenses -- 140 (50)
(Decrease) increase in other accrued liabilities (1,864) (1,645) 1,036
(Decrease) increase in income taxes payable (443) (198) 3,638
-------- -------- --------
Net cash provided by operating activities 9,900 12,016 10,318
-------- -------- --------
Cash flow from investing activities:
Purchases of investment securities (28,000) -- --
Proceeds from sale of property, plant and equipment 955 201 64
Purchase of property, plant and equipment (943) (1,316) (1,103)
-------- -------- --------
Net cash used in investing activities (27,988) (1,115) (1,039)
-------- -------- --------
Cash flow from financing activities:
Funds from stock options exercised 1,137 307 117
Decrease in short-term borrowings (846) -- (2,934)
Repayment of long-term debt (1,825) (3,648) (3,648)
-------- -------- --------
Net cash used in financing activities (1,534) (3,341) (6,465)
-------- -------- --------
Effect of currency exchange rate change 874 (678) (101)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (18,748) 6,882 2,713
Cash and cash equivalents:
Beginning of year 32,692 25,810 23,097
-------- -------- --------
End of year $ 13,944 $ 32,692 $ 25,810
======== ======== ========
Supplementary disclosures of cash flow information:
Interest paid $ 50 $ 220 $ 594
Income taxes paid 538 1,314 433
See accompanying notes to the consolidated financial statements.
F-5
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
The Company manufactures and markets a diverse line of electronic games,
youth electronics and video game accessories including electronic games
carrying the Radica(R) and Play TV(R) brand names, Gamester(R) branded
video game controllers & accessories, and girls' lifestyle electronics
carrying the Girl Tech(R) and Barbie(TM) brand names. The Company is
headquartered in Hong Kong and manufactures its products in its factory in
Southern China. The primary markets for the Company's products are North
America and Europe.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation. The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
and are presented in US dollars.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in bank accounts,
interest-bearing savings accounts, and time certificates with an initial
term of less than three months. For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.
Trade Receivables
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on
historical write-off experience. The Company reviews its allowance for
doubtful accounts monthly. Past due balances over 90 days and over a
specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance-sheet credit exposure
related to its customers.
Investment Securities
Investment securities at December 31, 2003 consist of certificates of
deposits and money-market mutual fund investments. The Company classifies
its investment securities in one of three categories: trading, available
for sale, or held to maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity debt securities are those securities in which the Company
has the ability and intent to hold the security until maturity. All
securities not included in trading or held to maturity are classified as
available for sale.
Trading and available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of other comprehensive income until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis.
F-6
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A decline in the market value of any available-for-sale security below cost
that is deemed to be other-than-temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. To determine whether an
impairment is other-than-temporary, the Company considers whether it has
the ability and intent to hold the investment until a market price recovery
and considers whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in this
assessment includes the reasons for the impairment, the severity and
duration of the impairment, changes in value subsequent to year-end and
forecast performance of the investee.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity or available-for-sale security as an adjustment to
yield using the effective-interest method. Dividend and interest income are
recognized when earned.
Inventories
Inventories are stated at the lower of cost, determined by the weighted
average method, or market. Write-downs are provided for potentially slow
moving and obsolete inventory or inventory of which estimated net
realizable value is below its carrying value based on management's analysis
of inventory levels and future expected sales.
Depreciation and Amortization of Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation of plant and
equipment is expensed using the straight-line method at rates based upon
the estimated useful lives of the asset, ranging from 3 to 5 years.
All of the Company's land and building holdings in the PRC and Hong Kong
are considered to be leasehold property and are amortized on a
straight-line basis over the term of the lease, ranging from 30 to 50
years. The buildings on the land are also depreciated over the same period.
Costs of leasehold improvements and capital leased assets are amortized
over the useful life of the related asset or the term of the lease,
whichever is shorter.
The Company expenses all mold costs in the year of purchase or, for
internally produced molds, in the year of construction. Upon sale or
retirement, the costs and related accumulated depreciation or amortization
are eliminated and any resulting gain or loss is included in the statement
of operations.
Goodwill
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill
and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions
of SFAS No. 142. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-lived Assets.
F-7
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 142 requires the Company to perform an assessment of whether there
was an indication that goodwill is impaired. To accomplish this, the
Company is required to determine the fair value of each reporting unit and
compare it to the carrying amount of the reporting unit. In estimating the
fair value of the reporting unit, the Company used discounted projected
cash flows, EBITDA, and market-multiple approaches to valuation.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation in 2002, the Statement required the Company to perform an
assessment of whether there was an indication that goodwill is impaired as
of the date of adoption. To accomplish this, the Company was required to
identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. The Company was required to determine the fair value of
each reporting unit and compare it to the carrying amount of the reporting
unit within six months of January 1, 2002. To the extent the carrying
amount of a reporting unit exceeded the fair value of the reporting unit,
the Company would be required to perform the second step of the
transitional impairment test, as this is an indication that the reporting
unit goodwill may be impaired. Management determined that no indications of
impairment existed as the fair value of the reporting unit was higher than
the carrying amount and accordingly, the second step was not required to be
performed. The fair value of the reporting unit was determined using
discounted projected cash flows, EBITDA, and market-multiple approaches to
valuation.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 15
years, and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life could be
recovered through undiscounted future operating cash flows of the acquired
operation. The Company's other intangible asset was amortized on a
straight-line basis over its estimated useful lives.
Impairment of Long-lived Assets
The Company evaluates the recoverability of long-lived assets with finite
lives in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 requires long-lived assets,
such as property, plant, and equipment, and purchased intangibles subject
to amortization, are 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 estimated undiscounted
future 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.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount
exceeds the asset's fair value.
F-8
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of.
Revenue Recognition
Revenue from product sales are recognized at the time of shipment and
passage of title, which is in accordance with the terms of the sale, FOB
shipping point. This represents the point at which the customer takes
ownership and assumes risk of loss. Prior to 2003, the Company had
consignment agreements with certain European distributors and recorded
these shipments as revenues upon confirmation of sell-through by the
distributor.
The Company records reductions to gross revenue for customer incentive
programs, such as discounts to retailers and volume-based cash incentives.
The Company also records provisions against the gross revenue for estimated
product returns and allowances in the period when the related revenue is
recorded. These estimates are based on factors that include, but are not
limited to, historical sales returns, analyses of credit memo activities
and current known trends. Should these actual product returns and
allowances exceed those estimates, additional reductions to the Company's
revenue would result.
Shipping and Handling Costs
The Company records costs incurred for the shipping and handling of the
products as cost of goods sold in the consolidated statement of operations.
Warranty
The Company provides reserves for the estimated cost of product warranties
at the time revenue is recognized. The estimated cost of warranty
obligations is based on historical experience of known product failure
rates and the terms of product warranties.
Advertising
Advertising costs are expensed as incurred. The cost of media related
advertising is incurred by the Company the sooner of the first time that
the advertising takes place or the invoice date for the media purchase. In
addition, the Company offers discounts to customers who advertise Radica
products. These Co-op advertising costs associated with customer benefit
programs are accrued as the related revenues are recognized. Co-op
advertising costs are characterized as a cost if the Company receives a
benefit that is sufficiently separable from the retailer's purchase of the
Company's products and the fair value of the co-op advertising benefit is
determinable and greater than or equal to the co-op advertising allowance
provided to the retailer. Co-op advertising costs not meeting these
criteria are recorded as reductions in revenue. Advertising and Co-op
advertising expenses are recorded as selling, general and administrative
expenses in the consolidated statement of operations. They were
approximately $7,614, $7,350 and $6,982 for the years ended December 31,
2003, 2002 and 2001, respectively.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $3,895, $4,094 and $5,775 in 2003, 2002 and
2001, respectively.
F-9
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation
Foreign currency assets and liabilities are translated into US dollars
using the exchange rate on the balance sheet date. Revenues and expenses
are translated at average rates prevailing during each reporting period.
Current earnings (loss) include gains or losses resulting from foreign
currency transactions. Other gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of other comprehensive income (loss) within shareholders' equity.
Cumulative translation adjustments are recognized as income or expense upon
disposal or liquidation of a foreign entity.
Post-retirement and Post-employment Benefits
The Company does not have any material post-retirement or post-employment
benefit plans. The Company makes contributions to certain defined
contribution arrangements with groups of employees. The Company's
contributions and any related costs are immaterial and are expensed as
incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method for
financial accounting and reporting of income taxes. Deferred income tax
liabilities and assets are recorded to reflect the tax consequences in
future years of differences between the taxable bases of assets and
liabilities and the respective financial statement carrying amounts at each
period end using enacted tax rates expected to apply in the year temporary
differences are expected to reverse. A valuation allowance is recognized
for any portion of the deferred tax asset for which realization is not
deemed to be more likely than not. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Stock-based Compensation
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-based Compensation, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123 (See Note 11). The following table illustrates
the effect on net income (loss) if the fair value based method had been
applied to all outstanding and unvested awards in the period:
2003 2002 2001
-------- -------- --------
Net income as reported $ 12,491 $ 11,934 $ (4,374)
Add back total stock-based employee compensation -- -- --
expenses under APB 25
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (657) (746) (793)
-------- -------- --------
Prof forma net income $ 11,834 $ 11,188 $ (5,167)
======== ======== ========
F-10
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
Basic earnings (loss) per share is based on the weighted average number of
shares of common stock, and with respect to diluted earnings (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 are excluded from the computation in loss
making periods as their inclusion would be anti-dilutive.
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and
losses that under accounting principles generally accepted in the United
States of America are included in comprehensive income (loss) but are
excluded from net income (loss) as these amounts are recorded as a
component of shareholders' equity. The Company's other comprehensive income
(loss) represented foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities, net of tax.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
of certain assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities as of and during the reporting periods.
Significant items subject to such estimates and assumptions include the
carrying amount of goodwill, property, plant and equipment, valuation
allowances for receivables, inventories and deferred income tax assets and
reserves for warranties and product returns. Actual results may differ from
such estimates. Differences from those estimates are recorded in the period
they become known.
Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment can be
reasonably estimated.
Recently Adopted Accounting Standards
In June 2001, FASB Statement No. 143, Accounting for Asset Retirement
Obligations, was issued. Statement 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period
in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also would record
a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation would be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying
the obligation. The Company was required to adopt Statement 143 on January
1, 2003. The adoption of Statement 143 had no effect on the Company's
financial statements.
F-11
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In April 2002, FASB Statement No. 145, Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
was issued. Statement 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the
gain or loss as extraordinary, as the use of such extinguishments have
become part of the risk management strategy of many companies. Statement
No. 145 also amends FASB Statement No. 13, Accounting for Leases, to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of
Statement 145 related to the rescission of FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, were applied in fiscal years
beginning after May 15, 2002. The provisions of Statement 145 related to
Statement 13 were effective for transactions occurring after May 15, 2002.
The adoption of Statement 145 had no effect on the Company's financial
statements.
In June 2002, FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, was issued. Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of Statement 146 were effective for exit or disposal
activities initiated after December 31, 2002, with early application
encouraged. Costs relating to closure of the Company's research and
development center in the UK have been accounted for in these consolidated
financial statements pursuant to Statement 146 (see note 9).
In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and
107 and a rescission of FASB Interpretation No. 34, was issued. This
Interpretation enhances the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation were applicable to guarantees
issued or modified after December 31, 2002 and the disclosure requirements
were effective for financial statements of interim or annual periods ending
after December 15, 2002. During 2003 and as at December 31, 2003, the
Company did not issue any guarantees or indirect guarantees which would
require recognition or disclosure in the consolidated financial statements
pursuant to FIN 45.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002
and are included in the notes to these consolidated financial statements.
F-12
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On December 17, 2003, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition,
which supersedes SAB No. 101, Revenue Recognition in Financial Statements.
SAB No. 104's primary purpose is to rescind the accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements
that was superseded as a result of the issuance of EITF 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables. Additionally, SAB No.
104 rescinds the SEC's related Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers issued with SAB No. 101 that had
been codified in SEC Topic 13, Revenue Recognition. While the wording of
SAB No. 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB No. 101 remain largely unchanged by the
issuance of SAB No. 104, which was effective upon issuance. The Company's
adoption of SAB No. 104 did not have a material effect on its financial
position or results of operations.
In December 2003, FASB Statement No. 132 (revised), Employers' Disclosures
about Pensions and Other Postretirement Benefits, was issued. Statement 132
(revised) prescribes employers' disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains and revises the
disclosure requirements contained in the original Statement 132. It also
requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The Statement generally is effective for
fiscal years ending after December 15, 2003. The adoption of Statement 132
had no effect on the Company's financial statements.
Recently Issued Accounting Pronouncements
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, which
was issued in January 2003. The Company will be required to apply FIN 46R
to variable interests in VIEs created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will
be applied beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would
be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE.
The Company has evaluated the impact of applying FIN 46R and believes that,
other than those entities already consolidated in the Company's
consolidated financial statements, no additional entities would need to be
consolidated by the Company.
F-13
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not have a
material affect on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock.
For the Company, the Statement was effective for instruments entered into
or modified after May 31, 2003 and otherwise will be effective as of
January 1, 2004, except for mandatorily redeemable financial instruments.
For certain mandatorily redeemable financial instruments, the Statement
will be effective for the Company on January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. The Company currently does not have any
financial instruments that are within the scope of this Statement.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation.
3. INVESTMENT SECURITIES
At December 31, 2003, investment securities represent municipal fixed
income and money market funds with readily determinable fair market values
and original maturities in excess of three months. Investments with
maturities beyond one year have been classified as short-term based on
their highly liquid nature and because such marketable securities represent
the investment of cash that is available for current operations.
Management classifies investments in marketable securities at the time of
purchase and reevaluates such classification at each balance sheet date. At
December 31, 2003, investments in certificates of deposits of $9.9 million
were classified as "available-for-sale" and accordingly are reported at
fair value with unrealized losses of approximately $46 reported as a
component of shareholder's equity and comprehensive loss. The fair value of
these investments is based on market information available to management as
of balance sheet date presented. Unrealized losses are charged against
income when a decline in the fair market value of an individual security is
determined to be other than temporary. Realized gains and losses on
investments are included in interest income.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value of available-for-sale securities at December
31, 2003 and 2002 were as follows:
F-14
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
3. INVESTMENT SECURITIES (Continued)
Gross Gross
Amortized unrealized unrealized
cost holding gains holding losses Fair value
------------- ------------- --------------- -----------
At December 31, 2003
Available for sale:
Certificates of deposits $10,000 $-- $ (46) $ 9,954
At December 31, 2002
Available for sale: $ -- $-- $ -- $ --
The unrealized losses on the investments in certificates of deposits were
caused by interest rate changes. The fair value amount above reflects the
market price provided by the issuer of the security, assuming an early sale
were to occur. The contractual terms of these securities do not permit the
issuer to settle the securities at a price less than amortized cost of the
investment. Because the company has the ability and intent to hold these
investments until a market price recovery or maturing, these securities are
not considered other-than-temporarily impaired.
There was no sale of investment securities in 2003 and 2002. The Company
also maintains a $18,055 portfolio of investment securities classified as
trading. These investments represent primarily municipal fixed income and
money market funds subject to price volatility associated with any
interest-bearing instrument. There were no net realized gains on trading
securities during the years ended December 31, 2003 and 2002. Net
unrealized holding gains on these investments held at year end and included
in other income for 2003 and 2002 were $55 and $0, respectively.
4. INVENTORIES
Inventories by major categories, net of provisions are summarized as
follows:
2003 2002
--------------- ---------------
Raw materials $ 1,554 $ 3,004
Work in progress 2,758 3,462
Finished goods 11,191 13,308
Consigned finished goods - 611
--------------- ---------------
$ 15,503 $ 20,385
=============== ===============
F-15
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
2003 2002
-------- --------
Land and buildings $ 10,953 $ 12,230
Plant and machinery 7,754 7,520
Furniture and equipment 7,514 7,303
Leasehold improvements 2,943 2,879
-------- --------
Total $ 29,164 $ 29,932
Less: Accumulated depreciation and amortization (17,256) (15,898)
-------- --------
Total, net $ 11,908 $ 14,034
======== ========
In November 2002, the AICPA international practices task force (the "Task
Force") discussed an issue relating to accounting for land use rights in
the People's Republic of China ("PRC"). The Task Force view is that PRC
land use rights generally would be considered operating leases, as they are
long-term leases of lands, which do not transfer title. Effective January
1, 2003, the Company followed this guidance and reclassified $875 and $896
to other asset from property, plant and equipment as of December 31, 2003
and 2002, respectively.
6. GOODWILL AND INTANGIBLE ASSETS
At December 31, 2003 and 2002, the Company's cost in excess of fair value
of 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
$12,100 resulting from the adjusted purchase price. Accumulated
amortization related to goodwill of $2,518 arising prior to the adoption of
SFAS No. 142 has been reflected in the gross carrying amount of goodwill as
of December 31, 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Goodwill is required to be tested for impairment
on an annual basis at the reporting unit level. Furthermore, goodwill is
required to be tested on an interim basis if an event or change in
circumstances indicates that the asset might be impaired. The goodwill
arising from the purchase of Radica UK was allocated to the Video Games
Accessories ("VGA") reporting unit and the Company has undertaken goodwill
impairment testing as described in note 2 to determine whether the goodwill
was impaired and the extent of such impairment. After performing this
evaluation there was no impairment of goodwill as at December 31, 2003 and
2002 as the fair value of the reporting unit (as determined using the
expected present value of future cash flows) exceeded the carrying amount
of the reporting unit (including goodwill).
F-16
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
6. GOODWILL AND INTANGIBLE ASSETS (Continued
In 2000, the Company entered into a licensing agreement with SSD Company
Limited ("SSD") for the rights to use their patented XaviX technology. As
part of its agreement with SSD, the Company became an exclusive
sublicensing agent for the XaviX technology in the North American market
for use in entertainment applications. The fair value of the exclusive
sublicensing right of $1,260, which is the Company's contractual obligation
to SSD as defined in the Sublicensing Agreement between the two parties,
was recorded as an intangible asset and has been fully amortized as at
December 31, 2002.
Amortization of goodwill and other intangible assets totaled $0, $420 and
$1,382 for the years ended December 31, 2003, 2002 and 2001, respectively.
Net income (loss) and net income (loss) per share adjusted to exclude
amortization of goodwill as if the provision of SFAS 142 were in effect in
prior periods are as follows (in thousands, except per share data):
2003 2002 2001
---------- ---------- ---------
Reported net income (loss) $ 12,491 $ 11,934 $ (4,374)
Add back: Goodwill amortization -- -- 796
---------- ---------- ---------
Adjusted net income (loss) $ 12,491 $ 11,934 $ (3,578)
========== ========== =========
Basic income (loss) per share:
Reported net income (loss) $ 0.69 $ 0.67 $ (0.25)
Goodwill amortization -- -- 0.05
---------- ---------- ---------
Adjusted net income (loss) $ 0.69 $ 0.67 $ (0.20)
========== ========== =========
Diluted income (loss) per share:
Reported net income (loss) $ 0.66 $ 0.65 $ (0.25)
Goodwill amortization -- -- 0.05
---------- ---------- ---------
Adjusted net income (loss) $ 0.66 $ 0.65 $ (0.20)
========== ========== =========
F-17
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
2003 2002
------ ------
Accrued advertising expenses $1,091 $1,243
Accrued license and royalty fees 1,062 1,479
Commissions payable 166 191
Other accrued liabilities 1,657 2,927
------ ------
Total $3,976 $5,840
====== ======
8. INCOME TAXES
The components of income (loss) before income taxes are as follows:
2003 2002 2001
-------- -------- --------
United States $ 9,964 $ 10,807 $ (5,523)
International (339) 3,796 1,702
-------- -------- --------
$ 9,625 $ 14,603 $ (3,821)
======== ======== ========
As the Company's subsidiary in the People's Republic of China ("PRC") is a
sino-foreign joint venture enterprise, it is eligible for an exemption from
income tax for two years starting from the first profitable year of
operations and thereafter a 50 percent relief from income tax for the
following three years under the Income Tax Law of the PRC. That subsidiary
had its first profitable year of operations in the year ended December 31,
1997 and the statutory, net of rebate, tax rate was 27%, 12% and 12% for
the years ended December 31, 2003, 2002 and 2001, respectively.
The provisions (credits) for income taxes consist of the following:
2003 2002 2001
------- ------- -------
Current:
US federal and state $ 39 $ 51 $ 644
International 42 950 827
------- ------- -------
Total current income tax provision $ 81 $ 1,001 $ 1,471
------- ------- -------
Deferred:
US federal $(2,857) $ -- $ --
International (90) 1,668 (918)
------- ------- -------
Total deferred income tax (credit) provision $(2,947) $ 1,668 $ (918)
------- ------- -------
Total income taxes (credit) provision $(2,866) $ 2,669 $ 553
======= ======= =======
F-18
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
8. INCOME TAXES (Continued)
The income taxes for the years ended December 31, 2003, 2002 and 2001 were
allocated as follows:
2003 2002 2001
------- ------- -------
Income from continuing operations $(2,866) $ 2,669 $ 553
Stockholders' equity - compensation expense for
tax purposes in excess of amounts recognized
for financial reporting purposes 44 -- --
------- ------- -------
$(2,822) $ 2,669 $ 553
======= ======= =======
A reconciliation between income tax expense (benefit) and amounts
calculated using the US statutory rate is as follows:
2003 2002 2001
------- ------- -------
The US statutory rate 35% 34% 34%
Computed "expected" tax expense (benefit)
at the US statutory rate $ 3,369 $ 4,965 $(1,299)
State tax, net of federal tax benefit 1 4 13
Foreign tax rate differential (807) (763) (647)
Change in valuation allowance (4,476) (1,282) 2,163
Effect of change in deferred tax effective rate (478) -- --
Other, net (475) (255) 323
------- ------- -------
Income tax (credit) provision $(2,866) $ 2,669 $ 553
======= ======= =======
The US statutory rate has been used since the majority of the Company's
taxable income arises in the US. Other, net in the tax reconciliation above
primarily includes China tax rebates of $472 in 2003 and $nil for 2002 and
2001, the tax effect of foreign exchange rate changes and the tax effect of
non-deductible expenses.
F-19
8. INCOME TAXES (Continued)
The tax effects of the Company's temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are as
follows:
2003 2002
--------------- ---------------
Deferred tax assets:
Property, plant and equipment $ 386 $ 239
Net operating loss carryforwards 4,169 5,456
Advertising allowances 399 413
Accounts receivable 75 56
Inventories 232 405
Sales allowance and returns 968 974
Other 366 616
--------------- ---------------
Total gross deferred tax assets 6,595 8,159
Valuation allowance (3,683) (8,159)
--------------- ---------------
Net deferred tax assets $ 2,912 $ -
=============== ===============
Deferred tax liabilities:
Property, plant and equipment $ - $ (79)
=============== ===============
The following table represents the classification of the Company's net
deferred tax (liabilities) assets:
2003 2002
------ ------
Current deferred tax assets $1,706 $ --
Long-term deferred tax (liabilities) assets 1,206 (79)
------ ------
Total net deferred tax (liabilities) assets $2,912 $ (79)
====== ======
F-20
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
8. INCOME TAXES (Continued)
As of December 31, 2003, the Company's US subsidiary had approximately
$1,900 of tax net operating loss carryforwards which will begin to expire
after 2020. In addition, as of December 31, 2003, the Company's UK
subsidiary had approximately $11,400 tax net operating loss carryforwards
which will carryforward indefinitely.
Under the provisions of SFAS No. 109, Accounting for Income Taxes, the
realization of the future tax benefits of a deferred tax asset is dependent
on future taxable income against which such tax benefits can be applied.
All available evidence must be considered in the determination of whether
sufficient future taxable income will exist. Such evidence includes, but is
not limited to, the company's financial performance, the market environment
in which the company operates, the utilization of past tax credits, and the
length of relevant carryback and carryover periods. Sufficient negative
evidence, such as cumulative net losses during a three-year period that
includes the current year and the prior two years, may require that a
valuation allowance be established with respect to existing and future
deferred tax assets. Differences in actual results from available evidence
used in determining the valuation allowances could result in future
adjustments to the allowance.
Based on management's assessment of the need for a valuation allowance as
at the balance sheet dates, the Company views the recoverability of the
deferred tax assets, net of existing valuation allowances, as more likely
than not realizable. Movement in the valuation allowance during 2003
reflected the net effect of the change in deferred tax assets in respect of
tax losses carried forward, which increased in the UK and decreased in the
US, as well as the reversal of the remaining valuation allowance in the US.
The Company's operations involve a significant amount of transactions which
cross a number of international borders. In addition, the Company's
manufacturing operations are in China, where the negotiation and settlement
of tax obligations with the local tax authorities are a normal occurrence.
The Company establishes provisions for its known and estimated income tax
obligations. However, whether through a challenge by one of the many tax
authorities in international jurisdictions where the Company and its
subsidiaries operate of the Company's transfer pricing, the Company's claim
regarding lack of permanent establishment, or other matters that may exist,
the Company is exposed to possible additional taxation that has not been
accrued.
F-21
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
9. RESTRUCTURING CHARGE
In the second quarter of 2003, the Company recorded a restructuring charge
of $87 for personnel costs relating to the closure of the UK R&D office,
Radica Innovations (UK) Limited. The restructuring resulted in a workforce
reduction of approximately 5 positions. The reductions in workforce are
permanent and affected the Company's VGA segment. During the year, the
Company has completed the process of closing the UK R&D office. There was
no restructuring reserve as at December 31, 2003.
During December 2001, the Board of Directors approved a company wide
restructuring plan which included 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 pre-tax restructuring charges
in fiscal 2001. 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. These
restructuring actions occurred in the Company's first and second fiscal
quarters, and were taken to align the Company's cost structure with
prevailing market conditions. The localization and consolidation of product
development and manufacturing operations resulted in a workforce reduction
of approximately 170 employees worldwide.
The accrued restructuring charges were substantially disbursed during 2002.
The total restructuring charges consisted of $1,514 of cash outlays, the
majority of which occurred in fiscal 2002, and $40 of non-cash charges,
primarily for leasehold improvements write-offs. The remaining
restructuring reserve as at December 31, 2002 consisted of $34, primarily
related to certain termination benefits which were paid in 2003.
The components of restructuring charges are as follows:
Balance Balance
at beginning Charges / Amount at end
of year (Release) incurred of year
------------ --------- ---------- ----------
2003
Severance and other compensation $ 34 $ 87 $ (121) $ --
======= ======= ======= =======
2002
Severance and other compensation $ 1,389 $ (78) $(1,277) $ 34
Lease termination costs and 199 78 (277) --
related asset writedowns
------- ------- ------- -------
$ 1,588 $ -- $(1,554) $ 34
======= ======= ======= =======
2001
Severance and other compensation $ 246 $ 1,352 $ (209) $ 1,389
Lease termination costs and
related asset writedowns -- 199 -- 199
------- ------- ------- -------
$ 246 $ 1,551 $ (209) $ 1,588
======= ======= ======= =======
F-22
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands, except per share data)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share as of December 31:
2003 2002 2001
------------ ------------ ------------
Numerator for basic and diluted
earnings (loss) per share:
Net income (loss) $ 12,491 $ 11,934 $ (4,374)
============ ============ ============
Denominator:
Basic weighted average shares 18,016,789 17,725,879 17,611,886
Effect of dilutive options and
warrants 1,043,185 609,948 --
------------ ------------ ------------
Diluted weighted average shares 19,059,974 18,335,827 17,611,886
============ ============ ============
Basic net income (loss) per share $ 069 $ 0.67 $ (0.25)
============ ============ ============
Diluted net income (loss) per share $ 0.66 $ 0.65 $ (0.25)
============ ============ ============
Options and warrants on 136,500, 441,700 and 2,440,867 shares of common
stock for the years ended December 31, 2003, 2002 and 2001, respectively
were not included in computing diluted earnings per share since their
effects were antidilutive. Stock options and warrants were antidilutive
because they had an exercise price greater than the average market price
during the year or due to the net loss in 2001.
11. STOCK-BASED COMPENSATION
The Company's 1994 Stock Option Plan for employees and directors (the
"Stock Option Plan") provided for options to be granted for the purchase of
an aggregate of 1,600,000 shares of common stock at per share prices not
less than 100% of the fair market value at the date of grant as determined
by the Compensation Committee of the Board of Directors. Following approval
at the annual shareholders meetings in April 1997 and 1998, the meeting of
the Board of Directors in June 1999 and the annual shareholders meeting in
May 2000, the Stock Option Plan's aggregated common stock increased by
400,000, 800,000, 60,000 and 840,000, respectively bringing the total
number of shares of the Company's common stock that may be purchased
pursuant to options under such plan to 3,700,000 shares. Options to
employees are generally exercisable over three to five years from the date
of grant and vest, or are exercisable, in equal installments, the period
beginning one year after the date of grant unless otherwise provided.
Options granted to employees under the stock option plan must be exercised
no later than ten years from the date of grant. The Company also maintains
plans under which it offers stock options to directors. Pursuant to the
terms of the plans under which directors are eligible to receive options,
each director is entitled to receive options to purchase common stock upon
initial election to the Board and at each subsequent quarterly Board
meeting. Options are exercisable during the period beginning one year after
the date of grant.
F-23
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands, except share and per share data)
11. STOCK-BASED COMPENSATION (continued)
In 2001, the Company issued some stock options to management based on the
terms of various employment contracts. Based upon 2002 performance, the
Company's Compensation Committee voted in March 2003 to accelerate the
vesting of 110,000 options. The acceleration of the stock options was
approved in accordance with the original terms of the contract and these
options would become vested in five years regardless of the achievement of
the performance goals and therefore the acceleration did not result in a
new measurement of compensation costs in the consolidated statement of
operations.
A summary of option activity is as follows:-
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
(Shares in thousands) Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 2,313 $ 4.05 2,191 $ 3.88 2,354 $ 5.81
Options granted 370 5.10 585 3.75 521 2.64
Options exercised (426) 2.67 (145) 2.13 (76) 1.56
Options forfeited (310) 11.24 (318) 3.21 (608) 10.60
---------- ---------- ----------
Outstanding at end of year 1,947 2,313 $ 4.05 2,191 $ 3.88
Options exercisable
at year end 1,232 $ 2.88 1,352 $ 4.52 1,151 $ 4.54
The following is additional information relating to options outstanding as
of December 31, 2003:
Options outstanding Options exercisable
----------------------------------------------------------- ------------------------------
Weighted average
Weighted average remaining Weighted average
Exercise Number exercise price contractual Number exercise price
price range of shares per share life (years) of shares per share
----------- --------- --------- ------------ ---------- ---------
(Shares in thousands)
$ 1.090 to 2.000 365 $ 1.40 3.29 359 $ 1.39
$ 2.001 to 4.000 1,088 3.21 6.32 794 3.14
$ 4.001 to 6.000 346 4.36 8.90 38 4.29
$ 6.001 to 8.000 124 6.74 8.69 17 6.76
$ 8.001 to 10.000 7 8.57 4.29 7 8.14
$ 12.001 to 14.000 16 12.63 5.25 16 12.44
$ 18.001 to 20.000 1 19.00 4.00 1 20.00
----------------- ------------
1,947 $ 3.41 6.35 1,232 $ 2.88
================= ============
F-24
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands, except share and per share data)
11. STOCK-BASED COMPENSATION (continued)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS No. 123. The weighted average fair value of stock options at date of
grant were $1.47, $1.51 and $1.24 per option for the years ended December
31, 2003, 2002 and 2001, respectively. The values were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002 2001
--------- --------- -------
Expected life of options 3.6 years 3.4 years 4 years
Risk-free interest rate 2.8% 4.1% 4.5%
Expected volatility of underlying stock 33% 51% 55%
Dividends 0% 0% 0%
The Black-Scholes option pricing models require the input of highly
subjective assumptions, including the expected volatility of stock price.
Because changes in subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing model does not
necessarily represent the estimated fair value of freely tradable fully
transferable options without vesting restrictions which differ from the
Company's stock option awards.
If the Company had accounted for its stock option plans by recording
compensation expenses based on the fair value at grant date for such awards
consistent with the method of SFAS No. 123, the Company's net income (loss)
and earnings (loss) per share would have been adjusted to the pro forma
amounts as follows:
2003 2002 2001
---------- ---------- ----------
Reported net income (loss) $ 12,491 $ 11,934 $ (4,374)
Pro forma net income (loss) 11,995 11,188 (5,167)
Reported net income (loss) per share
Basic $ 0.69 $ 0.67 $ (0.25)
Diluted 0.66 0.65 (0.25)
Pro forma net income (loss) per share
Basic $ 0.66 $ 0.63 $ (0.29)
Diluted 0.62 0.61 (0.29)
F-25
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands, except share and per share data)
12. RETIREMENT PLAN
In Hong Kong, the Company has both mandatory provident fund and defined
contribution retirement plans covering substantially all employees. Under
these plans, eligible employees contribute amounts through payroll
deductions which are 5% or more of individual salary, supplemented by
employer contributions ranging from 5% to 10% of individual salary
depending on the years of service. The expenses related to these plans were
$253, $142 and $240 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Radica's US and UK employees are eligible to participate in savings plans
sponsored by the Company and its subsidiaries, all of which are defined
contribution plans. The Company makes company contributions and both
individual and company contributions are invested into a balanced variety
of investment funds. The Company contributed approximately $74, $60 and $59
to these plans for the years ended December 31, 2003, 2002 and 2001,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts reported for cash and cash equivalents, trade accounts
receivable, certain other current assets, trade accounts payable, and
accrued expenses (nonderivatives) are considered to approximate fair values
because of the short duration of these instruments.
Investment securities (both available-for-sale and trading securities) are
carried at fair values which are based on quoted prices at the reporting
date for those or similar investments.
14. PLEDGE OF ASSETS
At December 31, 2003, the Company's general banking facilities including
overdraft and trade facilities were collateralized by leasehold land and
buildings with an aggregate net book value of $2,302.
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain offices, warehouses and equipment under various
operating lease arrangements. The rental expense under the operating leases
was approximately $589, $509 and $491 for the years ended December 31,
2003, 2002 and 2001, respectively. In the normal course of business, leases
that expire will be renewed or replaced by leases on other properties. As
of December 31, 2003, the Company was obligated under non-cancelable
operating leases requiring future minimum rental payments as follows:
Operating leases
---------------
2004 $ 680
2005 537
2006 480
2007 373
2008 301
Thereafter 943
---------------
Total minimum lease payments $ 3,314
===============
F-26
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
15. COMMITMENTS AND CONTINGENCIES (Continued)
Joint Venture Agreement
Under the terms of a joint venture agreement with the local government in
Dongguan the Company is committed to pay a total of $3,426 in varying
amounts over the next 21 years.
Warranties
The Company provides product warranties to its customers for a period of 90
days from the date of purchase for games and one year for VGA products.
Details of the movement in the warranty provision during the year are set
out in note 18.
Licensing Commitments
In the normal course of business, the Company enters into certain licensing
agreements and commitments with various third parties for the use of their
inventor concepts and intellectual property. Certain of these agreements
and commitments contain provisions for guaranteed or minimum royalty
amounts during the term of the contracts. Under the terms of agreements
which contain provisions for future minimum payments, the Company is
obligated to pay royalty amounts as follows:
Minimum
Payments
-------------
2004 $ 66
2005 371
2006 30
2007 30
2008 10
-------------
$ 507
=============
Litigation
On April 4, 2000 a lawsuit was filed by the Lemelson Foundation
("Lemelson") against the Company in Arizona Court for patent infringement.
Lemelson claims to be owners of nearly 800 issued and pending patents,
including the patent on Machine Vision and Automatic Identification (Auto
ID) operations. The Auto ID operation is used in machines that are part of
the Company's bonding and heat-sealing manufacturing processes. Lemelson is
contesting that the use of machines that incorporate this patented
technology infringes on their IP rights and therefore the Company is
obligated to pay a royalty based on the use of this technology. The suit by
Lemelson has been stayed pending the outcome of Lemelson vs. Cognex, a
similar suit filed by Lemelson, which will have some bearing on the Radica
case with Lemelson. On January 23, 2004 a declaratory judgment was given in
the Cognex case that the Lemelson's patent claims are invalid. If this
judgment is upheld following appeal, assuming an appeal is made, the
Company believes that this result is favorable to the Company's defense of
the Lemelson lawsuit.
F-27
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
15. COMMITMENTS AND CONTINGENCIES (Continued)
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 December 31, 2003 in respect of the Lemelson case or other
claims or legal actions, in accordance with SFAS No. 5 Accounting for
Contingencies. Management does not believe that the ultimate disposition of
the other matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
16. CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND MAJOR SUPPLIERS
Accounts receivable of the Company are subject to a concentration of credit
risk with customers in the North American and the United Kingdom retail
sector and customers in the Company's manufacturing services. This risk is
somewhat limited due to the large number of customers composing the
Company's customer base and their geographic dispersion, though the
Company's Games business had one customer which accounted for more than
thirty-one percent of consolidated net sales for the year ended December
31, 2003, one customer which accounted for more than twenty-four percent of
consolidated net sales for the year ended December 31, 2002 and two
customers which accounted for more than twenty-two percent and eleven
percent of consolidated net sales for the year ended December 31, 2001. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
During 2003, $18,672 of the Company' sales came from the Play TV line of
products. Each of these products contains a XaviX CPU which is purchased
from SSD under the terms of the Basic License Agreement dated July 1, 1999.
If this CPU were to become unavailable, the Company would need to source an
alternative CPU which would require all software to be re-written and may
involve additional cost to achieve a similar level of quality. In addition
the Company purchases other CPUs from other suppliers around the world
which are specific to individual products, however, no individual product
accounted for more than nine percent of sales during the year.
17. 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) and Girl Tech(R) brand names, and the Video Game
Accessory ("VGA") business that sells product under the Company's
Gamester(R) brand name. The Company also sources certain VGA and other
electronic products through third party manufacturers for retailers to sell
under their own brands; this is also included in the VGA segment. The
reportable segments are strategic businesses that offer different products.
The accounting policies of the reportable segments are the same as those
described elsewhere in these Notes to the Company's consolidated financial
statements for the year ended December 31, 2003. 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.
F-28
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
17. 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. The
segment assets are comprised of accounts receivable, inventories and
intangible assets. Other assets included in corporate principally are cash
and cash equivalents, investment securities, deferred tax assets, property,
plant and equipment, and all other insignificant assets not reportable
under other segments. Information by segment and a reconciliation to
reported amounts for the year ended December 31, 2003, 2002 and 2001 are as
follows:
A summary of the Company's two reportable segments is set forth below.
2003 2002 2001
--------------- --------------- ---------------
Revenues from external customers
Games and Youth Electronics $ 87,986 $ 104,062 $ 82,929
VGA 17,214 20,584 15,625
--------------- --------------- ---------------
Total revenues from external customers $ 105,200 $ 124,646 $ 98,554
=============== =============== ===============
Depreciation and amortization
Games and Youth Electronics $ 1,671 $ 2,446 $ 3,120
VGA 362 412 893
--------------- --------------- ---------------
Total depreciation and amortization $ 2,033 $ 2,858 $ 4,013
=============== =============== ===============
Segment income (loss)
Games and Youth Electronics $ 11,777 $ 16,459 $ 990
VGA (2,942) (3,941) (4,752)
--------------- --------------- ---------------
Total segment income (loss) $ 8,835 $ 12,518 $ (3,762)
Corporate
Net interest and other income 790 2,085 (59)
Credit (Provision) for income taxes 2,866 (2,669) (553)
--------------- --------------- ---------------
Total consolidated net income (loss) $ 12,491 $ 11,934 $ (4,374)
=============== =============== ===============
Segment assets
Games and Youth Electronics $ 23,061 $ 26,037 $ 22,712
VGA 17,353 19,038 18,306
Corporate 61,800 50,227 47,389
--------------- --------------- ---------------
Total consolidated assets $ 102,214 $ 95,302 $ 88,407
=============== =============== ===============
Revenues and costs related to the manufacturing services product category
are allocated between Games and Youth Electronics and VGA based on product
type.
F-29
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
17. SEGMENT INFORMATION (Continued)
Revenues from external customers by product category are summarized as
follows:
2003 2002 2001
------------- ------------ ------------
Electronic Games $ 62,374 $ 62,684 $ 52,268
Youth Electronics 15,227 16,744 11,720
VGA 14,294 15,844 10,335
Manufacturing Services 13,305 29,374 24,231
------------- ------------ ------------
Total net revenues $ 105,200 $ 124,646 $ 98,554
============= ============ ============
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 and intangible assets:
2003 2002 2001
------------ ----------- -----------
Net sales:
United States and Canada $ 74,711 $ 79,205 $ 59,584
Asia Pacific and other countries 14,008 25,690 21,300
Europe 16,481 19,751 17,670
------------ ----------- -----------
$ 105,200 $ 124,646 $ 98,554
============ =========== ===========
Long-lived assets:
United States and Canada $ 9,937 $ 771 $ 1,662
Asia Pacific and other countries 12,283 13,977 14,851
Europe 114 9,733 9,768
------------ ----------- -----------
$ 22,334 $ 24,481 $ 26,281
============ =========== ===========
F-30
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(YEARS ENDED DECEMBER 31, 2003, 2002 and 2001)
(US dollars in thousands)
18. VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
beginning Charged to Utilization / end of
of year income statement write-offs year
------- ---------------- ---------- ----
2003
Allowance for doubtful accounts $ 315 $ 114 $ (178) $ 251
Allowance for estimated product returns 1,247 1,079 (936) 1,390
Accrued warranty expenses 1,040 2,495 (2,495) 1,040
Accrued sales allowance 3,591 2,809 (3,507) 2,893
------- ------- ------- -------
$ 6,193 $ 6,497 $(7,116) $ 5,574
======= ======= ======= =======
2002
Allowance for doubtful accounts $ 2,207 $ 60 $(1,952) $ 315
Allowance for estimated product returns 1,555 390 (698) 1,247
Accrued warranty expenses 900 1,771 (1,631) 1,040
Accrued sales allowance 3,912 1,864 (2,186) 3,590
------- ------- ------- -------
$ 8,574 $ 4,085 $(6,467) $ 6,192
======= ======= ======= =======
2001
Allowance for doubtful accounts $ 2,073 $ 1,056 $ (922) $ 2,207
Allowance for estimated product returns 1,494 1,528 (1,467) 1,555
Accrued warranty expenses 950 1,911 (1,961) 900
Accrued sales allowance 3,717 2,914 (2,719) 3,912
------- ------- ------- -------
$ 8,234 $ 7,409 $(7,069) $ 8,574
======= ======= ======= =======
19. SUBSEQUENT EVENT (UNAUDITED)
On January 5, 2004, we announced a quarterly dividend program. For the
first dividend, our Board of Directors declared a dividend of $.04 per
share payable on January 30, 2004, to shareholders of record as of January
20, 2004. The Board has also approved an initial target quarterly dividend
of $.04 for subsequent quarters; however, the actual amount of each
quarterly dividend, as well as each declaration date, record date and
payment date, is subject to the discretion of the Board, and the target
dividend level may be adjusted during the year at the discretion of the
Board. The factors the Board is expected to consider in determining the
actual amount of each quarterly dividend will include our financial
performance and on-going capital needs, our ability to declare and pay
dividends in light of other financial requirements, and other factors
deemed relevant.
--------------------------------------------------------------------------------
F-31
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RADICA GAMES LIMITED
Date: March 25, 2004 /S/ Craig D. Storey
----------------- -----------------------------------
Craig D. Storey
Chief Accounting Officer
I-1
EXHIBIT INDEX
1.1 Memorandum of Association (incorporated by
reference to exhibit 3.1 to the filing of the
registrant identified in footnote 1 below).
1.2 Bye-Laws (incorporated by reference to exhibit
3.2 to the filing of the registrant identified in
footnote 1 below).
1.3 Certificate of Incorporation on Change of Name
(incorporated by reference to exhibit 3.3 to the
filing of the registrant identified in footnote 1
below)
2.1 Specimen Certificate for the Shares of Common
Stock (incorporated by reference to exhibit 4.1
to the filing of the registrant identified in
footnote 1 below).
4.1 Cooperative Joint Venture Contract of D.G. Radica
Games Manufacturing Co., Ltd., dated June 24,
1994 (incorporated by reference to exhibit 10.16
to the filing of the registrant identified in
footnote 2 below).
4.2 Shareholders Agreement, dated January 12, 1994,
among the Company and the shareholders parties
thereto (incorporated by reference to exhibit
10.4 to the filing of the registrant identified
in footnote 1 below)
4.3 Amendment to Shareholders Agreement, dated as of
February 16, 1994, among the Company and the
shareholders party thereto (incorporated by
reference to exhibit 10.5 to the filing of the
registrant identified in footnote 1 below).
4.4 Amendment to Shareholders Agreement, dated as of
September 5, 1997, among the Company and the
shareholders party thereto (incorporated by
reference to exhibit 10.5(a) to the filing of the
registrant identified in footnote 5 below).
4.5 Employment Agreement, dated as of December 15,
2001, between Radica USA and Jeanne Olson
(incorporated by reference to exhibit 10.6 to the
filing of the registrant identified in footnote 7
below).
* 4.6 Amendment No. 1 to Employment Agreement, dated as
of March 31, 2003, between Radica USA and Jeanne
Olson.
* 4.7 Change in Control Bonus Agreement, dated as of
March 31, 2003, between Radica USA and Jeanne
Olson.
* 4.8 Agreement (in connection with Executive's
sale of shares), dated as of March 31, 2003,
between Radica USA and Jeanne Olson.
I-2
4.9 Employment Agreement, dated as of November 28,
1993, among Radica HK, Radica USA and Jon N.
Bengtson (incorporated by reference to exhibit
10.8 to the filing of the registrant identified
in footnote 1 below).
4.10 Form of Amendment to Employment Agreement among
Radica Games Limited, Radica HK, Radica USA and
Jon N. Bengtson (incorporated by reference to
exhibit 10.8(a) to the filing of the registrant
identified in footnote 1 below).
4.11 December 1995 Amendment to such Employment
Agreement (incorporated by reference to exhibit
10.8(b) to the filing of the registrant
identified in footnote 3 below).
4.12 December 1997 Amendment to such Employment
Agreement (incorporated by reference to exhibit
10.8(c) to the filing of the registrant
identified in footnote 4 below).
4.13 1994 Stock Option Plan, most recent amendment
restated in May 2000 to increase options
(incorporated by reference to exhibit 10.9 to the
filing of the registrant identified in footnote 6
below).
* 4.14 2004 Omnibus Equity Incentive Plan.
4.15 Amendment and Restatement to Employment Agreement
among Radica USA, Radica Games Limited and
Patrick Feely dated September 27, 2000
(incorporated by reference to exhibit 10.11 to
the filing of the registrant identified in
footnote 6 below).
* 4.16 Amendment No. 1 to Employment Agreement, dated as
of March 31, 2003, among Radica USA, Radica Games
Limited and Patrick Feely.
* 4.17 Change in Control Bonus Agreement, dated as
of March 31, 2003, among Radica USA, Radica Games
Limited and Patrick Feely.
* 4.18 Agreement (in connection with Executive's
sale of shares), dated as of March 31, 2003,
among Radica USA, Radica Games Limited and
Patrick Feely.
4.19 Amendment and Restatement to Employment Agreement
between Radica Games Limited and David C.W.
Howell dated September 29, 2000 (incorporated by
reference to exhibit 10.13 to the filing of the
registrant identified in footnote 6 below).
* 4.20 Amendment No. 1 to Employment Agreement, dated as
of March 31, 2003, between Radica Games Limited
and David C.W. Howell.
* 4.21 Change in Control Bonus Agreement, dated as of
March 31, 2003, between Radica Games Limited and
David C.W. Howell.
* 4.22 Employment Agreement, dated as of April 7, 2003,
between Radica UK Limited, Radica Games Limited
and Denis Horton.
I-3
* 6.1 Statement re Computation of Per Share Earnings.
* 8.1 List of subsidiaries
* 12.1 Section 302 Certification of Patrick S. Feely
* 12.2 Section 302 Certification of David C.W. Howell
* 13.1 Section 906/1350 Certification of Patrick S.
Feely
* 13.2 Section 906/1350 Certification of David C.W.
Howell
* 14.1 Statement re Selected Quarterly Financial Data
* 14.2 Consent of KPMG
----------
1 Incorporated by reference to Registration Statement on Form F-1, File No.
33-75794, filed by the Registrant.
2 Incorporated by reference to Form 20-F for the year ended October 31, 1994.
3 Incorporated by reference to Form 20-F for the year ended October 31, 1996.
4 Incorporated by reference to Form 20-F for the year ended October 31, 1997.
5 Incorporated by reference to Form 20-F for the year ended October 31, 1998.
6 Incorporated by reference to Form 20-F for the year ended December 31,
2000.
7 Incorporated by reference to Form 20-F for the year ended December 31,
2001.
The file number for each of the above reports on Form 20-F is 0-23696.
The exhibits marked with an asterisk are included as part of this filing.
I-4