FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of August, 2004
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite V, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F
Form 20-F X Form 40-F
------- -------
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
------- -------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-___________
Contents:
1. Quarterly Report for the Quarter Ended June 30, 2004
2. Press Release dated June 21, 2004
3. Press Release dated August 9, 2004 (2 releases)
This Report on Form 6-K shall be deemed to be incorporated by reference
into the Registrant's Registration Statements on Form S-8 (No. 33-86960, No.
333-7000, No. 333-59737 and 333-61260) and on Form F-3 (No. 333-7526 and No.
333-79005).
QUARTERLY REPORT *
For the quarterly period ended June 30, 2004
Commission File Number 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in charter)
Bermuda N/A
(Country of Incorporation) (I.R.S. Employer Identification No.)
Suite V, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2693 2238
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x_ No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 2004
--------------------------------------- ----------------------------
Common Stock, par value $0.01 per share 18,626,228
------------------------
* As a foreign private issuer, the registrant is not required to file reports on
Form 10-Q. It intends to make voluntary quarterly reports to its stockholders
which generally follow the Form 10-Q format. Such reports, of which this is one,
are furnished to the Commission pursuant to Form 6-K.
2
RADICA GAMES LIMITED
INDEX TO QUARTERLY REPORT ON FORM 6-K
QUARTER ENDED JUNE 30, 2004
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................4
Condensed Consolidated Balance Sheets June 30, 2004
(unaudited) and December 31, 2003...............................4
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2004
(unaudited) and 2003 (unaudited)................................5
Condensed Consolidated Statements of Shareholders'
Equity (unaudited) for the Six Months Ended June 30,
2004 (unaudited) and 2003 (unaudited)...........................6
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 2004 (unaudited) and 2003
(unaudited).....................................................7
Notes to the Condensed Consolidated Financial
Statements......................................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...........................................................17
Item 4. Controls and Procedures........................................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................18
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities.................................18
Item 3. Defaults Upon Senior Securities................................18
Item 4. Submission of Matters to a Vote of Security Holders............18
Item 5. Other Information..............................................18
Item 6. Exhibits and Reports on Form 8-K...............................18
3
Item 1. Financial Information
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(US dollars in thousands, except share data) June 30, December 31,
--------- ---------
2004 2003
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,966 $ 13,944
Investment securities 26,444 28,009
Accounts receivable, net of allowances for doubtful accounts
of $210 ($251 as at December 31, 2003) 9,059 15,360
Inventories 26,648 15,503
Prepaid expenses and other current assets 5,225 2,748
Income taxes receivable 931 1,404
Deferred income taxes 1,706 1,706
--------- ---------
Total current assets 79,979 78,674
--------- ---------
Property, plant and equipment, net 12,430 11,908
--------- ---------
Goodwill 9,551 9,551
--------- ---------
Other assets 864 875
--------- ---------
Deferred income taxes, noncurrent 899 1,206
--------- ---------
Total assets $ 103,723 $ 102,214
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,365 $ 6,350
Accrued warranty expenses 500 1,040
Accrued payroll and employee benefits 1,277 1,353
Accrued liabilities 3,942 3,976
Income taxes payable 4 339
--------- ---------
Total current liabilities 17,088 13,058
--------- ---------
Total liabilities 17,088 13,058
--------- ---------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares
authorized, 18,626,228 shares issued and outstanding
18,225,204 as at December 31, 2003) 186 182
Additional paid-in capital 4,309 3,517
Retained earnings 82,261 85,437
Accumulated other comprehensive income (loss) (121) 20
--------- ---------
Total shareholders' equity 86,635 89,156
--------- ---------
Total liabilities and shareholders' equity $ 103,723 $ 102,214
========= =========
See accompanying notes to the consolidated financial statements.
4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(US dollars in thousands, Three months ended June 30, Six months ended June 30,
except per share data) ------------------------------ ------------------------------
2004 2003* 2004 2003*
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net sales $ 18,799 $ 16,944 $ 30,924 $ 32,989
Cost of goods sold
(exclusive of items shown separately below) (12,647) (11,452) (19,632) (21,396)
------------ ------------ ------------ ------------
Gross profit 6,152 5,492 11,292 11,593
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses (5,206) (5,028) (10,195) (10,322)
Research and development (869) (920) (1,798) (1,835)
Depreciation and amortization (429) (524) (850) (1,116)
Restructuring charge -- (87) -- (87)
------------ ------------ ------------ ------------
Total operating expenses (6,504) (6,559) (12,843) (13,360)
------------ ------------ ------------ ------------
Operating loss (352) (1,067) (1,551) (1,767)
Other income 48 108 130 163
Foreign currency gain, net 72 147 44 160
Net interest income 139 46 288 106
------------ ------------ ------------ ------------
Loss before income taxes (93) (766) (1,089) (1,338)
Credit (provision) for income taxes 264 (23) 148 (55)
------------ ------------ ------------ ------------
Net profit (loss) $ 171 $ (789) $ (941) $ (1,393)
============ ============ ============ ============
Net profit (loss) per share:
Basic $ 0.01 $ (0.04) $ (0.05) $ (0.08)
============ ============ ============ ============
Diluted $ 0.01 $ (0.04) $ (0.05) $ (0.08)
============ ============ ============ ============
Weighted average number of
Common and common equivalent shares:
Basic 18,620,108 17,963,983 18,595,387 17,903,140
============ ============ ============ ============
Diluted 19,499,899 17,963,983 18,595,387 17,903,140
============ ============ ============ ============
Cash dividends declared per share
(4 cents declared and paid for each
quarter ended March 31, June 30,
and September 30, 2004) $ 0.04 $ -- $ 0.12 $ --
============ ============ ============ ============
* Reclassified to conform with 2004 presentation.
See accompanying notes to the consolidated financial statements.
5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(US dollars in thousands) Common stock Accumulated
------------ Additional other Total
Number paid-in Retained comprehensive shareholders'
of shares Amount capital earnings income (loss) equity
---------- ---------- ---------- ---------- ------------- -------------
Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ 85,437 $ 20 $ 89,156
Issuance of stock 1,156 -- 11 -- -- 11
Stock options exercised 399,868 4 781 -- -- 785
Dividends declared -- -- -- (2,235) -- (2,235)
Net loss -- -- -- (941) -- (941)
Unrealized loss on investment
securities available-for-sale,
net of nil tax -- -- -- -- (121) (121)
Foreign currency translation,
net of nil tax -- -- -- -- (20) (20)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2004 18,626,228 $ 186 $ 4,309 $ 82,261 $ (121) $ 86,635
========== ========== ========== ========== ========== ==========
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ 72,946 $ (808) $ 74,636
Issuance of stock 1,379 -- 7 -- -- 7
Stock options exercised 201,739 2 524 -- -- 526
Net loss -- -- -- (1,393) -- (1,393)
Foreign currency translation,
net of nil tax -- -- -- -- 184 184
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2003 17,999,249 $ 180 $ 2,851 $ 71,553 $ (624) $ 73,960
========== ========== ========== ========== ========== ==========
The comprehensive loss of the Company, which represents the aggregate of the net
loss, unrealized loss on investment securities, and the foreign currency
translation adjustments, was $(1,082) and $(1,209) for the six months ended June
30, 2004 and 2003.
See accompanying notes to the consolidated financial statements.
6
RADICA GAMES LIMITED
CONSLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(US dollars in thousands) 2004 2003
-------- --------
(unaudited) (unaudited)
Cash flow from operating activities:
Net loss $ (941) $ (1,393)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes 307 --
Depreciation 850 1,116
Loss on disposal and write off of property, plant and equipment -- 3
Compensatory elements of stock issuances 11 --
Unrealized gain on trading investments (56) --
Changes in current assets and liabilities:
Decrease in accounts receivable 6,301 7,297
Increase in inventories (11,145) (3,161)
Increase in prepaid expenses and other current assets (2,477) (749)
Increase in accounts payable 5,015 197
Decrease in accrued payroll and employee benefits (76) (1,684)
Decrease in accrued warranty expenses (540) (630)
Decrease in other accrued liabilities (782) (2,652)
Decrease (increase) in income taxes receivable 138 (305)
-------- --------
Net cash used in operating activities (3,395) (1,961)
-------- --------
Cash flow from investing activities:
Proceeds from sale of investment securities 1,500 --
Proceeds from sale of property, plant and equipment 222 2
Purchase of property, plant and equipment (1,583) (378)
-------- --------
Net cash provided by (used in) investing activities 139 (376)
-------- --------
Cash flow from financing activities:
Funds from issuance of stock -- 7
Funds from stock options exercised 785 526
Dividends paid (1,487) --
Repayment of long-term debt -- (1,825)
-------- --------
Net cash used in financing activities (702) (1,292)
-------- --------
Effect of currency exchange rate change (20) 184
-------- --------
Net decrease in cash and cash equivalents (3,978) (3,445)
Cash and cash equivalents:
Beginning of period 13,944 32,692
-------- --------
End of period $ 9,966 $ 29,247
======== ========
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2004)
(US dollars in thousands)
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements of Radica Games Limited
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
accompanying condensed consolidated financial statements contain all normal
and recurring adjustments, which, in the opinion of management, are
necessary to present fairly the financial position of the Company as of
June 30, 2004, and its results of operations and cash flows for the periods
presented herein. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report
on Form 20-F for the year ended December 31, 2003.
Because the Company's business is seasonal, revenues, expenses, assets and
liabilities can vary during each quarter of the year. Accordingly, the
operating results and trends in these unaudited condensed consolidated
interim financial statements are not necessarily indicative of future
results that may be expected for any other interim period or the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
of certain assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities as of and during the reporting periods.
Significant items subject to such estimates and assumptions include the
carrying amount of goodwill, property, plant and equipment, valuation
allowances for receivables and deferred income tax assets and provisions
for product returns and warranties, as well as in estimates used in
accounting for legal contingencies. Actual results could differ from the
estimated results. Differences from those estimates are recorded in the
period they become known.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-based Compensation, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on
net profit (loss) if the fair value based method had been applied to all
outstanding and unvested awards in the period:
8
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2004)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
-------- ---------- ---------- ---------
Net profit (loss)
As reported $ 171 $ (789) $ (941) $ (1,393)
-------- ---------- ---------- ---------
Less: Total stock-based employee
compensation expense determined
under fair-value-based method
for all rewards, net of related
tax effects (124) (162) (250) (304)
-------- ---------- ---------- ---------
Pro forma $ 47 $ (951) $ (1,191) $ (1,697)
======== ========== ========== =========
Reported net profit (loss) per share
Basic $ 0.01 $ (0.04) $ (0.05) $ (0.08)
Diluted 0.01 (0.04) (0.05) (0.08)
Pro forma net profit (loss) per share
Basic $ - $ (0.05) $ (0.06) $ (0.09)
Diluted - (0.05) (0.06) (0.09)
In April 2003, the Financial Accounting Standards Board ("FASB") announced
that it would mandate the fair value method of accounting for all
stock-based awards. The FASB issued an Exposure Draft of a proposed
statement on March 31, 2004, which is subject to a comment period. If
enacted, the change in accounting is not expected to be effective for the
Company until fiscal 2005. Until a final statement is issued, the Company
cannot estimate the effect that this change in accounting would have on its
consolidated statement of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, which
was issued in January 2003. The Company will be required to apply FIN 46R
to variable interests in VIEs created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will
be applied beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would
be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE.
The Company has evaluated the impact of applying FIN 46R and believes that,
other than those entities already consolidated in the Company's
consolidated financial statements, no additional entities would need to be
consolidated by the Company.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2004)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 establishes standards for classification and measurement in the balance
sheets for certain financial instruments which possess characteristics of
both a liability and equity. The Company currently does not have any
financial instruments that are within the scope of this Statement. The
company adopted SFAS No. 150, effective January 1, 2004. The adoption of
SFAS No. 150 did not result in any classification of the company's
consolidated financial statements in all prior periods presented.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation. These reclassifications had no effect
on net profit (loss) or shareholders' equity.
2. NET PROFIT (LOSS) PER SHARE
Basic net profit (loss) per share is based on the weighted average number
of shares of common stock, and with respect to diluted net profit per
share, also includes the effect of all dilutive potential common stock
outstanding. Dilutive potential common stock results from dilutive stock
options and warrants. The effect of such dilutive potential common stock on
net profit per share is computed using the treasury stock method. Dilutive
potential common stock has no effect on net loss per share as the effect
would be anti-dilutive.
The following table sets forth the computations of net profit (loss) per
share for the three-month and six-month periods ended June 30:
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
Numerator for basic and diluted net profit
(loss) per share:
Net profit (loss) $ 171 $ (789) $ (941) $ (1,393)
=========== =========== ============ ============
Denominator:
Basic weighted average shares 18,620,108 17,963,983 18,595,387 17,903,140
Effect of dilutive options 879,791 - - -
----------- ----------- ------------ ------------
Diluted weighted average shares 19,499,899 17,963,983 18,595,387 17,903,140
=========== =========== ============ ============
Basic net profit (loss) per share: $ 0.01 $ (0.04) $ (0.05) $ (0.08)
=========== =========== ============ ============
Diluted net profit (loss) per share: $ 0.01 $ (0.04) $ (0.05) $ (0.08)
=========== =========== ============ ============
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2004)
(US dollars in thousands)
3. BUSINESS SEGMENTS
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company has two reportable segments from which
it derives its revenues: the Games business that sells product under the
Company's Radica(R) and Girl Tech(R) brand names, and the Video Game
Accessory ("VGA") business that sells product under the Company's
Gamester(R) brand name. The Company also sources certain VGA and other
electronic products through third party manufacturers for retailers to sell
under their own brands; this is also included in the VGA segment. The
reportable segments are strategic businesses that offer different products.
The Company measures segment performance based on net profit before
interest and other income and income taxes. Inter-segment sales and
transfers have been eliminated and are not included in the following table.
Certain corporate expenses are managed outside of the operating segments.
Corporate expenses consist primarily of costs related to business
integration and other general and administrative expenses. All corporate
and indirect costs have been apportioned on the basis of corresponding
sales and direct costs.
Information by segment for the three months and six months ended June 30,
2004 and 2003 are as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues from external customers
Games and Youth Electronics $ 16,734 $ 13,697 $ 26,533 $ 25,747
VGA 2,065 3,247 4,391 7,242
--------- --------- --------- ---------
Total revenues from external customers $ 18,799 $ 16,944 $ 30,924 $ 32,989
========= ========= ========= =========
Segment profit (loss)
Games and Youth Electronics $ 47 $ (226) $ (903) $ (37)
VGA (327) (694) (604) (1,570)
--------- --------- --------- ---------
Total segment loss $ (280) $ (920) $ (1,507) $ (1,607)
Corporate
Net interest and other income 187 154 418 269
Income tax benefit (expense) 264 (23) 148 (55)
--------- --------- --------- ---------
Net profit (loss) $ 171 $ (789) $ (941) $ (1,393)
========= ========= ========= =========
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2004)
(US dollars in thousands)
4. GOODWILL
At June 30, 2004 and December 31, 2003, the Company's cost in excess of
fair value of assets purchased (goodwill) related to the 1999 acquisition
of Leda Media Products Limited, now called Radica UK Limited ("Radica UK").
On June 24, 1999, the Company purchased Radica UK for approximately
$15,970. During the quarter ended June 30, 2000, upon claiming certain
breaches of warranty at Radica UK, the Company and the ex-shareholders of
Radica UK mutually agreed to cancel certain loan notes such that the
purchase price was reduced by $1,399. The Company recorded goodwill of
approximately $12,100 resulting from the adjusted purchase price.
Accumulated amortization related to goodwill of $2,518 arising prior to the
adoption of SFAS No. 142 has been reflected in the gross carrying amount of
goodwill as of December 31, 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Goodwill is required to be tested for impairment
on an annual basis at the reporting unit level. Furthermore, goodwill is
required to be tested on an interim basis if an event or change in
circumstances indicates that the asset might be impaired. The goodwill
arising from the purchase of Radica UK was allocated to the Video Games
Accessories ("VGA") reporting unit. In December 2003, the Company has
undertaken goodwill impairment testing to determine whether the goodwill
was impaired and the extent of such impairment. After performing this
evaluation there was no impairment of goodwill as at December 31, 2003 as
the fair value of the reporting unit (as determined using the expected
present value of future cash flows) exceeded the carrying amount of the
reporting unit (including goodwill). There have been no events since
December 31, 2003 which would cause the Company to change this assessment.
5. INVENTORIES
Inventories by major categories are summarized as follows:
June 30, December 31,
2004 2003
-------- ------------
Raw materials $ 6,279 $ 1,554
Work in progress 7,168 2,758
Finished goods 13,201 11,191
-------- ------------
$ 26,648 $ 15,503
======== ============
6. PROPERTY, PLANT AND EQUIPMENT
Property and Plant and Equipment consists of the following:
June 30, December 31,
2004 2003
-------- ------------
Land and buildings $ 10,692 $ 10,953
Plant and machinery 7,859 7,754
Furniture and equipment 8,055 7,514
Leasehold improvements 3,104 2,943
-------- ------------
Total 29,710 29,164
Less: Accumulated depreciation and
amortization (17,280) (17,256)
-------- ------------
Total, net $ 12,430 $ 11,908
======== ============
12
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2004)
(US dollars in thousands)
7. ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30, December 31,
2004 2003
-------- ------------
Accrued advertising expenses $ 849 $ 1,091
Accrued license and royalty fees 687 1,062
Commissions payable 54 166
Dividends payable 748 -
Other accrued liabilities 1,604 1,657
-------- ------------
Total $ 3,942 $ 3,976
======== ============
8. PLEDGE OF ASSETS
At June 30, 2004, the Company's general banking facilities including
overdraft and trade facilities were collateralized by leasehold land and
buildings and bank balances with an aggregate net book value of $2,248 and
$1,909, respectively.
9. LITIGATION
On April 4, 2000 a lawsuit was filed by the Lemelson Foundation
("Lemelson") against the Company in Arizona Court for patent infringement.
Lemelson claims to be owners of nearly 800 issued and pending patents,
including the patent on Machine Vision and Automatic Identification (Auto
ID) operations. The Auto ID operation is used in machines that are part of
the Company's bonding and heat-sealing manufacturing processes. Lemelson is
contesting that the use of machines that incorporate this patented
technology infringes on their IP rights and therefore the Company is
obligated to pay a royalty based on the use of this technology. The suit by
Lemelson has been stayed pending the outcome of Lemelson vs. Cognex, a
similar suit filed by Lemelson, which will have some bearing on the Radica
case with Lemelson. On January 23, 2004 a declaratory judgment was given in
the Cognex case that the Lemelson's patent claims are invalid. If this
judgment is upheld following appeal, the Company believes that this result
is favorable to the Company's defense of the Lemelson lawsuit. On June 29,
2004, Lemelson filed its notice of appeal to the Court of Appeals for the
Federal Circuit. The briefing is not expected to be completed until the
first quarter of 2005 and a decision from the Court will likely not be
issued until 2006.
The Company cannot predict the outcome of the Lemelson case or the effect
of such litigation on the financial results of the Company. No accrual has
been recorded at June 30, 2004 and December 31, 2003 in respect of the
Lemelson case or other claims or legal actions, in accordance with SFAS No.
5 Accounting for Contingencies. Management does not believe that the
ultimate disposition of the other matters will have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
financial statements and notes thereto, and with the audited financial
statements, accounting policies and notes included in the Company's Annual
Report on Form 20-F for the year ended December 31, 2003, as filed with the
United States Securities and Exchange Commission.
DESCRIPTION OF BUSINESS
Founded in 1983 by Americans living in Hong Kong, Radica Games Limited (NASDAQ:
RADA) was incorporated in Bermuda in 1993. We are headquartered in Hong Kong and
manufacture our products in our factory in southern China. In 1994 we went
public when our shares began trading on the Nasdaq National Market.
We manufacture and market a diverse line of electronic entertainment products
covering multiple product lines - electronic games carrying the Radica(R), Play
TV(R) and Arcade Legends (TM) brand names, Gamester(R) branded video game
controllers & accessories, girls' lifestyle electronics carrying the Girl
Tech(R) and Barbie(TM) brand names and three new categories being introduced in
2004, a doll line carrying the Twinkleberries(TM) brand name, an infra red car
line carrying the Nitro Battlerz(TM) brand name and a remote control combination
truck and plane product being distributed in the United Kingdom under the Atlas
brand name. Product sales data for these three new brands are displayed in the
sales summary under "Other Electronic Toys". Our factory also manufactures for
other companies in the electronic game industry. We market our products through
subsidiaries in the United States, the United Kingdom, Canada, Macau and Hong
Kong. Our largest market is in the United States where in 2003 we had the second
largest market share in the electronic handheld and tabletop electronic games
categories according to industry data source, The NPD Group, Inc.
RESULTS OF OPERATIONS
The following table sets forth items from our Consolidated Statements of
Operations as a percentage of net revenues:
Three months ended June 30,
---------------------------
2004 2003
---------- ---------
Net sales 100.0% 100.0%
Cost of goods sold (67.3%) (67.6%)
Gross margin 32.7% 32.4%
Selling, general and administrative expenses (27.7%) (29.7%)
Research and development (4.6%) (5.4%)
Depreciation and amortization (2.3%) (3.1%)
Restructuring charge 0.0% (0.5%)
Operating loss (1.9%) (6.3%)
Net interest and other income 1.0% 0.9%
Foreign currency gain, net 0.4% 0.9%
Loss before income taxes (0.5%) (4.5%)
Credit (provision) for income taxes 1.4% (0.2%)
Net profit (loss) 0.9% (4.7%)
We reported a net profit for the second quarter of 2004 of $0.2 million or $0.01
per diluted share compared to a net loss of $0.8 million or $0.04 per diluted
share in the second quarter of 2003.
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Summary of sales achieved from each category of products:
Three months ended June 30,
-----------------------------------------------------
2004 2003
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
------------- ----------- ----------- ----------- -----------
(US dollars in thousands)
Electronic Games 58.8% $ 11,059 49.1% $ 8,329
Youth Electronics 15.2% 2,848 13.0% 2,196
Other Electronic Toys 3.0% 565 0.0% -
VGA 10.7% 2,016 15.0% 2,537
Manufacturing Services 12.3% 2,311 22.9% 3,882
----------- ----------- ----------- -----------
Total 100.0% $ 18,799 100.0% $ 16,944
=========== =========== ========== ===========
Gross profit margin for the second quarter of 2004 was 32.7% compared to 32.4%
in the second quarter of 2003. This was due to the reduction of lower margin
manufacturing services business offset partially by the impact of a higher
proportion of import shipments on FOB terms and sales to international
distributors which also have lower margin. The margin was also impacted by
higher freight costs related to relocating the U.S. inventories from Nevada to
Kentucky, a move which is expected to provide cost savings for the remainder of
the year. In addition, demand for products in Q3 has meant we have outsourced
manufacturing of more product than usual resulting in increased cost. 2003
comparable numbers have been reclassified to reflect the reallocation of certain
costs in Asia which were included in operating costs in 2003 but are now
categorized as costs of goods sold.
Radica branded sales (excluding Manufacturing Services) increased by 26.2% for
the quarter. Our product lines were aided by new brands in other electronics
toys which were launched during the quarter. The new product line generated $0.6
million sales in the second quarter. Electronic Games and Youth Electronics grew
by 32.8% and 29.7%, respectively. Increases in the Electronics Games and Youth
Electronics revenues were tempered by volume decline and pricing pressure in the
United Kingdom in the soft Video Game Accessories ("VGA") retail markets. VGA
decreased by 20.5% for the quarter.
In Manufacturing Services, our strategy to move away from this business and
increase our focus on the more profitable Radica branded sales resulted in a
$1.6 million reduction in Manufacturing Services sales compared to the second
quarter of 2003.
Operating expenses decreased to $6.5 million for the quarter from $6.6 million
in the second quarter of 2003. The decrease was mainly due to a reduction in
depreciation and amortization charges together with a restructuring charge
during the second quarter of 2003 totaling $87,000, offset by increases in
variable expenses due to the increase in sales.
The following table shows the major operating expenses:
Three months ended June 30,
---------------------------
(US dollars in millions) 2004 2003
------------- -----------
Advertising expenses 0.4 0.6
Other selling and promotion expenses 0.8 0.7
Indirect salaries and bonus 2.1 2.1
Other general & administrative expenses 1.9 1.7
Research and development expenses 0.9 0.9
Depreciation and amortization 0.4 0.5
15
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investment securities totaled $36.4 million at June 30, 2004 as
compared to $42.0 million at December 31, 2003. The decrease was primarily due
to the net loss ($0.9 million), changes in assets and liabilities ($2.3 million)
primarily consisting of increases in inventories, prepaid expenses and other
assets, dividend paid ($1.5 million) and the purchase of property, plant and
equipment ($1.6 million) and offset by decreases in accounts receivable and
increases in accounts payable. The decrease was partially offset by receipt of
cash proceeds related to the exercise of stock options ($0.8 million).
Changes in assets and liabilities result primarily from the timing of
production, sales and purchases. Such changes in assets and liabilities
generally tend to even out over time and result in trends in cash flows from
operating activities generally reflecting earnings trends. Our inventories
increased to $26.6 million from $15.5 million at December 31, 2003. Accounts
receivables were $9.1 million at June 30, 2004 as compared to $15.4 million at
December 31, 2003. Our business is inherently seasonal. Normally our sales have
been lowest during the first and second quarters and highest during the third
and fourth quarters. Receivables have been lowest during the succeeding first
and second quarters. Likewise, inventory buildup is seasonal. The increase in
accounts receivables for 2004 relate primarily to the increased sales in the
second quarter of 2004 compared to the second quarter of 2003. The increase in
inventory was due primarily to a greater increase in inventory buildup for next
quarter's demands.
Current liabilities were $17.1 million at June 30, 2004, up $4 million from the
$13.1 million reported at December 31, 2003. It was mainly due to an increase in
payables related to inventory purchases and dividends payable. There was no debt
at June 30, 2004 and December 31, 2003.
At June 30, 2004, we had net assets of $86.7 million compared with $89.2 million
at December 31, 2003. Our business generates a significant majority of its cash
from its normal operations but seasonal cash requirements have been met with the
use of short-term borrowings, which included borrowings under secured lines of
credit. We had no derivative instruments or off-balance sheet financing
activities during the quarter ended June 30, 2004. We believe that our existing
cash and cash equivalents and cash generated from operations are sufficient to
satisfy the current anticipated working capital needs of our core business.
Management believes that our existing credit lines are sufficient to meet future
short-term cash demands, including seasonal build up of inventory. We fund our
operations and liquidity needs primarily through cash flow from operations, as
well as utilizing borrowings under secured and unsecured credit facilities when
needed. During 2004, we expect to continue to fund our working capital needs
through operations and the revolving credit facility and we believe that the
funds are available to meet our needs. However, unforeseen circumstances such as
severe softness in, or a collapse of, the retail environment may result in a
significant decline in revenues and operating results, thereby causing us to
exhaust our cash resources. If this were to occur, we may be required to seek
alternative financing of working capital.
On January 5 and March 29, 2004, we declared first and second dividends each of
4 cents per share which were paid on January 30, 2004 and April 30, 2004,
respectively. On June 21, 2004, we declared a third dividend of 4 cents per
share which was paid on July 30, 2004.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies, see "Item 5, operating and
financial review and prospects" in our 2003 Form 20-F.
RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and the estimated
impact on us is set out in note 1 to the condensed consolidated financial
statements.
RISK FACTORS
For a discussion of our risk factors, see "Item 3. Key Information - Risk
Factors" and "Item 5. Operating and Financial Review and Prospects" in our 2003
Form 20-F. Additional risk factors:
16
Foreign Currency Risk
Efforts to increase worldwide distribution have made our business increasingly
global. We expect that international sales may continue to represent a
significant portion of our revenue. Although most of our international sales are
denominated in the US dollars, fluctuations in foreign currencies may have an
impact on our financial results. We are prepared to hedge against fluctuations
in foreign currencies if the exposure is material, although we have not engaged
in hedging activities to date.
We have monetary asset and liability balances in foreign currencies other than
the U.S. dollar, including the Pound Sterling, the Canadian dollar, the Hong
Kong dollar and the RMB. International distribution and sales revenues usually
are made by our subsidiaries in the United States, United Kingdom and Canada,
and are denominated typically in their local currency. However, the expenses
incurred by these subsidiaries are also denominated in the local currency. As a
result, our operating results are exposed to changes in exchange rates between
the United States Dollar and the Pound Sterling or the Canadian dollar. Our
operating results could also be affected by changes in the exchange rate between
the US dollar and the RMB if the Chinese currency were to stop being pegged to
the US dollar.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995)
Certain written and oral statements made or incorporated by reference from time
to time by us or our representatives in this Form 6-K, other filings or reports
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise, contain certain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify these forward-looking statements by the
fact they use words such as "should", "expect", "anticipate", "estimate", "may",
"will", "project", "guidance", "intend", "plan", "believe" and other words and
terms of similar meaning and expression in connection with any discussion of
future operating or financial performance. One can also identify forward-looking
statements by the fact that they do not relate strictly to historical or current
facts. Such forward-looking statements are based on current expectations and
involve inherent risks and uncertainties, including factors that could delay,
divert or change any of them, or depend on the outcome of contingencies such as
legal proceedings. Management cautions you that forward-looking statements
involve risks and uncertainties that may cause actual results to differ
materially from the forward-looking statements. For a more complete discussion
of our risk factors, you are referred to the sections in our Form 20-F and Form
6-K identified above under the caption "Risk Factors". The forward-looking
statements made in this Form 6-K speak only as of the date on which the
statements are made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk disclosures have not materially changed from those
appearing in our 2003 Form 20-F (see Item 11).
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to the accompanying Financial Statements.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RADICA GAMES LIMITED
Date: August 31, 2004 /s/ Craig D. Storey
----------------- ------------------------------
Craig D. Storey
Chief Accounting Officer
19