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, 2002.
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 R, 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 17,796,131
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, 2002
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 11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 23
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 28
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 34
ITEM 8. FINANCIAL INFORMATION 35
ITEM 9. THE OFFER AND LISTING 35
ITEM 10. ADDITIONAL INFORMATION 36
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 39
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 39
PART II 39
ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES 39
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS 39
ITEM 15. CONTROLS AND PROCEDURES 40
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 40
ITEM 16B. CODE OF ETHICS 40
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 40
PART III 40
ITEM 17. FINANCIAL STATEMENTS 40
ITEM 18. FINANCIAL STATEMENTS 40
ITEM 19. EXHIBITS 40
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, 2002. 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 the year ended October 31, 1998, the two months in the period ended December
31, 1998 (the Company's year end having changed from October 31 to December 31
in that year) and each of the four years in the period ended December 31, 2002.
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.
TWO MONTHS YEAR
ENDED ENDED
(in thousands, except per share data and margins) YEAR ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31,
2002 2001 2000 1999 1998 1998
---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $124,646 $98,554 $106,696 $136,716 $21,071 $155,618
Cost of sales 77,481 64,698 83,041 80,910 10,717 70,576
------- ------ ------- ------- ------ -------
Gross profit 47,165 33,856 23,655 55,806 10,354 85,042
------- ------ ------- ------- ------ -------
Operating expenses:
Selling, general and administrative 27,695 26,279 32,322 28,353 3,639 27,507
Research and development 4,094 5,775 5,210 6,036 730 3,710
Acquired research and development -- -- -- -- -- 1,500
Depreciation and amortization 2,858 4,013 5,427 4,956 612 3,423
Restructuring charge -- 1,551 1,190 -- -- --
------- ------ ------- ------- ------ -------
Total operating expenses 34,647 37,618 44,149 39,345 4,981 36,140
------- ------ ------- ------- ------ -------
Operating income (loss) 12,518 (3,762) (20,494) 16,461 5,373 48,902
Other income 306 24 781 718 471 807
Foreign currency gain (loss), net 1,744 (219) 49 304 (18) (281)
Share of loss of affiliated company -- -- -- (1,748) (120) (334)
Net interest income 35 136 664 1,469 289 1,896
------- ------ ------- ------- ------ -------
Income (loss) before income taxes 14,603 (3,821) (19,000) 17,204 5,995 50,990
(Provision) credit for income taxes (2,669) (553) 901 (149) (176) 226
------- ------ ------- ------- ------ -------
Net income (loss) $11,934 $(4,374) $(18,099) $17,055 $5,819 $51,216
======= ====== ======= ======= ====== =======
Net income (loss) per share - basic $0.67 $(0.25) $(1.03) $0.94 $0.31 $2.53
======= ====== ======= ======= ====== =======
Weighted average number of common shares 17,726 17,612 17,608 18,144 18,883 20,240
Net income (loss) per share - diluted $0.65 $(0.25) $(1.03) $0.90 $0.29 $2.39
======= ====== ======= ======= ====== =======
Weighted average number of common shares
and common equivalent shares 18,336 17,612 17,608 18,979 20,094 21,488
(continued)
4
TWO MONTHS YEAR
ENDED ENDED
(in thousands, except per share data and margins) YEAR ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31,
2002 2001 2000 1999 1998 1998
---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
STATISTICAL DATA:
Gross margin 37.8% 34.4% 22.2% 40.8% 49.1% 54.6%
Operating margin 10.0% (3.8%) (19.2%) 12.0% 25.5% 31.4%
BALANCE SHEET DATA (AT PERIOD END):
Working capital $50,155 $36,709 $42,619 $65,123 $65,776 $59,913
Total assets 95,302 88,407 99,315 122,174 108,190 113,521
Long-term debt - 1,825 5,473 10,946 - -
Total debt 2,671 6,319 12,901 13,809 - -
Common stock 178 176 176 176 189 189
Shareholders' equity 74,636 63,052 67,388 86,062 85,735 79,839
RISK FACTORS
Investment in the shares of Common Stock of Radica Games Ltd ("the
Company") involves a significant degree of risk. Prospective investors should
carefully consider the following factors together with the other information
contained or incorporated by reference herein prior to making any investment
decision regarding the Company or its securities.
MANUFACTURING IN CHINA
The Company's factory (the "Factory") location is in Southern China and
its headquarters are in Hong Kong, which is a Special Administrative Region of
China. See "Item 4. Information on the Company - Description of Business -
Manufacturing Facilities".
Risk of China Losing Normal Trade Relations ("NTR") Status or of
Changes in Tariff or Trade Policies. The Company manufactures in China and
exports from Hong Kong and China to the United States and worldwide. Its
products sold in the United States are currently not subject to US import
duties. On September 19, 2000, the US Senate voted to permanently normalize
trade with China, which provides a favorable category of US 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 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 the Company's business.
Chinese Political, Economic and Legal Risks. The success of the
Company's current and future operations in China and Hong Kong is 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, there can be no assurance that such policy
will continue. A change in policies by the Chinese government could adversely
affect the Company 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, no assurance can be
given that the Chinese government will continue to pursue such policies or that
such policies may not be significantly altered, especially in the event of a
change in leadership or other social or political disruption.
The Company's 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 they intend to propose and adopt a reunification plan. If an
invasion were to occur, Radica's supply of components from Taiwanese suppliers,
including computer processing units (CPUs), could be cut off, potentially
limiting the Company's production capabilities. Invasion could also lead to
sanctions or military action by the US and/or European countries, which could
materially effect sales to those countries.
5
China does not have a comprehensive system of laws. Enforcement of
existing laws may be sporadic and implementation and interpretation thereof
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. It is widely
believed that China's entry into the WTO should expedite the uniform
interpretation and enforcement of laws throughout China.
Dependence on Local Government. The Company operates its Factory in
China under agreements with the local government. Many aspects of such
agreements and operation of the Factory are dependent on the Company's
relationship with the local government and existing trade practices. The
relationship of the Company with the local government 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. The Company paid $920,000 in foreign enterprise tax
on its Joint Venture in China in 2002, the fourth year it has paid foreign
enterprise tax in China. The Company was granted 50% relief from foreign
enterprise tax through December 31, 2001 under the Foreign Enterprise Law of The
People's Republic of China ("PRC"), and was therefore taxed at 12%. In 2002, the
Company was taxed at the full rate of tax of 24%; however, the Company is
applying to be designated as an "Export Oriented Enterprise", which will reduce
its tax rate to 12% if the application is successful. In addition, under the
existing processing arrangement and in accordance with the current tax
regulations in the PRC, manufacturing income generated in the PRC is not subject
to PRC foreign enterprise taxes (see "Item 4. Information on the Company -
Description of Business - Manufacturing Facilities").
The PRC assesses tax on the Company based on two separate contracts: a
Processing Agreement (PA) and a Joint Venture (JV) contract. The JV 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 tax on a PA is assessed on labor and raw material costs submitted
periodically to the PRC customs offices throughout the year. During 2001, the
Company made a decision to end its use of PA contracts. As of the date of this
report, the Company had one outstanding PA contract for which a discharge has
been applied. The Company does not expect to have any open PA contracts by June
30, 2003.
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. There can be no assurance that changes in Chinese tax
laws or their interpretation or their application will not subject the Company
to substantial Chinese taxes in the future.
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.
Limited Infrastructure. Electricity, water, sewage, telephone and other
infrastructure are limited in the locality of the Factory. In the past, the
Company has experienced temporary shortages of electricity and water supply. The
Company has installed seven back-up electrical generators in the Factory which
can support it in the event of a power shortage. There can be no assurance that
the infrastructure on which the Factory is dependent will be adequate to operate
the Factory successfully.
DEPENDENCE ON CURRENT PRODUCT APPEAL AND NEW PRODUCT INTRODUCTIONS
The Company's operating results depend largely upon the appeal of its
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, the Company continues to offer a
relatively limited range of products that are all in the categories of games or
video game accessories. This exposes the Company to the risks of any narrowly
focused business. Changes in consumer preferences away from the kinds of
products offered by the Company could have an adverse effect on the Company.
Some of the Company's products have been only recently introduced and
although they may experience good initial sales growth, there is no assurance
that such initial success is indicative of significant future sales. As a
general matter, the
6
Company expects that the sales of these products will eventually decline. The
Company 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 the Company, it will also need to delete products from its line periodically.
The Company's long-term operating results will therefore depend largely upon its
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 no
assurances can be given that products will be introduced in a timely fashion.
For most of the Company's history, electronic games made up a
significant portion of the Company's overall sales (see chart on page 16). In
1998 and 1999, electronic games made up 77.1% and 64.2%, respectively. In
response to the heavy concentration of sales within this category, Radica has
worked to diversify its product lines. Electronic games accounted for 54.2%,
53.0% and 50.3% of sales in 2000, 2001 and 2002, respectively.
Future products may utilize different technologies and require
knowledge of markets in which the Company does 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 the Company's
operating results.
There is no assurance 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, the Company 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. The Company may announce and sell a product but later find it must
be delayed or abandoned due to difficulties in engineering and manufacturing.
There can be no assurance that an announced product will ship on time or not be
abandoned.
NO ASSURANCE OF GROWTH
There can be no assurance that the Company will achieve future growth
in net sales or that it will be able to maintain its present levels of net sales
or profitability. The Company's current business strategy emphasizes the sale of
a controlled number of products, while representing a more diverse range of
products, e.g., Handheld games, Barbie(TM) electronic games, the Girl Tech(R)
line, Play TV(R) products, video game accessories ("VGA") sold under the
Gamester(R) brand, Original Design Manufacturing ("ODM") and Original Equipment
Manufacturing ("OEM") products.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a significant portion of the Company's sales have been
concentrated with a few large retail customers. See Note 18 of Notes to the
Consolidated Financial Statements included herein. Most of the Company's retail
customers operate on a purchase order basis and the Company does not have
long-term contracts with its retail customers. While management considers the
Company's relationships with its major retail customers to be good, the loss of
one or more of its major retail customers would have an adverse effect on the
Company's results of operations.
On January 22, 2002 the Kmart Corporation filed for protection from its
creditors under Chapter 11 of the United States Bankruptcy Code. The Company's
receivable exposure was entirely provided for during 2001 and no additional
write-downs or expenses related to the bankruptcy were incurred during 2002. The
Company continued to sell to Kmart under a debtor-in-possession agreement during
2002 and will closely monitor its account with Kmart in order to minimize future
exposure.
During 2002, a significant portion of the Company's sales also came
from Shinsedai Co., Ltd. ("SSD") in the form of OEM projects. Additionally, a
significant portion of OEM sales came from Hasbro, which is also a competitor of
the Company.
7
The Company does not have a specific contract with SSD or Hasbro regarding these
projects and there is no assurance that the Company will continue to receive
orders from SSD or Hasbro, which could have an adverse effect on the Company.
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS
The Company is dependent on suppliers for the components and parts that
it assembles to produce its products. The Company generally purchases the
specific LCDs or 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 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, the Company
would be unable to manufacture and distribute these product lines.
The Company also relies on outside manufacturers for production of some
of its video game accessories. While the Company has moved the majority of this
production into its own Factory, manufacturer delays or shut downs could have a
significant impact on future sales of VGA products.
CONCENTRATED MANUFACTURING FACILITIES
A disruption of operations at the Factory due to fire, labor dispute,
dispute with the local government or otherwise, would have an adverse effect on
the Company's results of operations. In such event, the Company believes that it
could partially mitigate the effect of a disruption by increasing the use of
subcontractors to assemble its products, but there can be no assurance that it
would be able to do so. In addition, the Company's manufacturing facilities are
dependent on the Company's relationship with the local government.
NO ASSURANCE OF SUCCESS IN NEW BUSINESS
From time to time, Radica expands into related or new businesses in
order to diversify and grow. Examples include the development of its ODM and OEM
partnerships and its expansion into the VGA market. There is no assurance that
such businesses can be retained or that the Company will be successful in such
ventures.
NO ASSURANCE OF CONTINUED ODM/OEM BUSINESS
The Company manufactures goods for third parties, often without a
contract. The Company's contracts with ODM/OEM customers can generally be
terminated by either party on short notice, therefore there can be no assurance
that such business can be retained for an extended period of time. Loss of such
business would materially affect the Company's revenues.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is substantially dependent upon the
expertise and services of its senior management personnel. The loss of the
services of senior executives would have an adverse effect on the Company's
business.
SEASONALITY
The Company experiences a significant seasonal pattern in its operating
results and working capital requirements. The Company typically generates most
of its sales in the third and fourth quarters of its fiscal year, prior to the
traditional gift season. The high level of seasonality causes the Company to
take large risks in the purchase of inventory and extending credit to customers
for the holiday season. There can be no guarantee that the Company or its
customers will sell all their inventories. Excess inventory at year-end may
result in financial losses from obsolescence reserves, returns, markdowns and
bad debts.
The Company's 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 the Common Stock may be subject to significant fluctuations in
response to variations in quarterly operating results and other factors. See
Exhibit 12.1 Statement re Selected Quarterly Financial Data included herein.
8
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. Radica has experienced significant volatility in its results in its
past history. While the Company has diversified its 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 VGA businesses are highly
competitive. The Company currently faces direct competition from a number of
other producers of handheld electronic games and video game accessories. The
barriers for new producers to enter into the Company's markets are relatively
low and the Company expects that it will face increased competition in the
future. Some competitors offer products at lower prices, are better established
in the industry and are larger than the Company. In addition, with respect to
ODM/OEM manufacturing, the Company competes with a number of substantially
larger and more experienced manufacturers. As the Company enters other markets
and businesses, it expects 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 the Company's industry generally or
to the Company's business specifically. The Company will evaluate each claim
relating to its products or other aspects of its business and, if appropriate,
will seek a license to use the protected technology. There can be no assurance
that the Company will be able to obtain licenses to intellectual property of
third parties on commercially reasonable terms, if at all. In addition, the
Company could be at a disadvantage if its competitors obtain licenses for
protected technologies on more favorable terms than does the Company. If the
Company or its suppliers are unable to license protected technology used in the
Company's products, the Company could be prohibited from marketing those
products or may have to market products without desirable features. The Company
could also incur substantial costs to redesign its products or to defend any
legal action taken against the Company. If the Company's products or
manufacturing methods should be found to infringe protected technology, the
Company 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 the
results of operations and financial position of the Company. See "Item 8.
Financial Information - Legal Proceedings".
PRODUCT LIABILITY
Historically, the Company has had only a minor experience of complaints
relating to injuries or other damages caused by its products. However, in recent
years the Company has introduced products that involved more active play
including its Play TV baseball, snowboard and boxing games. In fiscal 2000, the
Company 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. The Company recalled the bats for replacement with a reengineered
bat. The Company is in the process of handling all remaining claims resulting
from damages from the recalled bat and all pending claims are covered by the
Company's product liability insurance. The Company may be exposed to claims for
damages in these or other circumstances, some or all of which may not be covered
by insurance. There can be no guarantee that current or future products may not
result in claims or that the Company's insurance will be adequate.
TAXATION
The Company cannot predict whether its tax rates will change as tax
regulations and the application or interpretation thereof in the various
jurisdictions within which the Company operates are always subject to change.
See "Item 4. Information on the Company - Description of Business - Taxation of
the Company and its Subsidiaries". Taxes are subject to audit. There can be no
guarantee that additional taxes may be due as a result of audits or other
factors. See also "Risk Factors - Manufacturing in China - Chinese Taxation".
COPY PRODUCT
On occasion in the electronic games and VGA industries, successful
products are "knocked-off" or copied. While the Company strives to protect its
intellectual property there can be no guarantee that knock-offs will not have a
significant effect on
9
its business. The costs incurred in protecting the Company's intellectual
property rights could be significant and there is no assurance that the Company
will be able to successfully protect its rights.
BAD DEBTS AND RETURNS
While the Company performs full credit checks on all of its customers
it cannot be assured that any customer will not default on a payment of debt.
Such a default could have a significant effect on the Company's results. It is
industry practice for retailers to hold back payments on slow moving stock or to
request markdowns or returns on such stock. It is the Company's policy in North
America to only take back defective product and while the Company believes it
will be able to enforce this policy under normal industry conditions, it may not
be possible to enforce this policy in all cases. The VGA market generally
experiences a higher rate of defective and overstock returns than the electronic
and mechanical game market does. Generally, defective VGA 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 the Company will be
paid by the manufacturer.
In certain instances, where retailers are unable to sell the quantity
of products which have been ordered from the Company, the Company 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. The Company minimizes the related costs of such discounts and returns by
engaging personnel to visit selected customers and assist in the management of
Radica product returns. The Company establishes provisions based on historical
experience at the time of sale of the related products. The return of
non-defective products occurs infrequently in the US. In the UK market,
accepting non-defective product returns is regular industry practice and is
required in certain vendor agreements.
CONTROL BY EXISTING SHAREHOLDERS
The Company's largest shareholders (see "Item 7. Major Shareholders and
Related Party Transactions - Control of Registrant") 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 and/or Mary
Hansen, own beneficially in the aggregate a majority of the outstanding Common
Stock. Assuming that they were in agreement, such persons would have the power
to elect the Company's directors and to approve or disapprove all other matters
requiring shareholders' approval regardless of the vote of any other
shareholders.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a Bermuda holding company, and a substantial portion of
its assets are located outside the United States. In addition, certain of the
Company's directors and officers and certain of the experts named herein are
resident 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 the
assets of such persons 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 such persons, or to enforce against them or the Company
judgments obtained in the United States courts predicated upon the civil
liability provisions of the United States securities laws. Among other things,
the Company understands that there is doubt as to the enforceability in Bermuda
and Hong Kong, respectively, 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, 2002, the Company had 17,796,131 shares of Common Stock
outstanding. The Company estimates that most of such shares were sold in a
registered offering or in a transaction under Rule 144, and therefore such
shares (other than any shares purchased by "affiliates" of the Company) are
tradable without restriction. The remaining shares owned by existing
shareholders are restricted securities under the Securities Act of 1933, as
amended (the "Securities Act") and may be sold only pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144 thereunder.
Most of these restricted shares are currently eligible for sale pursuant to Rule
144, subject to the limitations of such rule. In addition, the Company has
granted to the Hansen Trust certain registration rights with respect to its
shares. (See "Item 7. Major Shareholders and Related Party Transactions -
Interest of Management in Certain Transactions") No predictions can be made as
to the effect, if any, that market sales of shares by existing shareholders or
the availability of such shares for future sale will have on the market price of
Common Stock prevailing from time to time. The prevailing market price of Common
Stock could be adversely affected by future sales of Common Stock by existing
shareholders.
10
LICENCES AND ROYALTIES
The Company has entered into various license and royalty agreements in
which it pays fees in exchange for rights to the use of product inventions or
trademarked names, shapes and likenesses for use in development of the Company's
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. There can be no assurance that the Company will be able to
meet these projected expections and may be obligated to pay unearned fees as a
result. Licence and royalty agreements are for fixed terms and often contain
performance-related covenants. There is no assurance that the Company will be
able to maintain or extend the rights to its existing licences.
CONSIGNMENT INVENTORY
During 2001, the Company entered into distribution agreements in France
and Germany in which inventory is sold to the distributors on a consignment
basis. The Company has implemented controls to ensure that the physical
inventory is regularly matched to the Company's internal records. There is no
assurance that the consumer demand for the product in France and Germany will
match the distributors' anticipated demand and there is a risk that the Company
will be left with excess inventories in these markets, which would need to be
closed out at prices below cost.
LABOR
Labor disputes initiated by unions and trade groups could negatively
impact the business of the Company's vendors and customers. Such disputes could
ultimately cause shipping delays, increased costs and lost revenues resulting
from failure to deliver product to customers. The Company has no way of
anticipating when such actions will occur.
SOURCING
The Company sources batteries, power sources and various electronic
devices from various manufacturers for certain customers and receives most of
its sourcing revenue from one customer. This revenue is subject to bid and there
can be no assurance that this customer will not find another agent or method of
sourcing.
DEPENDENCE ON VGA PLATFORM PROVIDERS
The Company's VGA Product Range (Gamester), 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) and Game Boy(R) Advance, and to continue to develop gaming formats and
accompanying software in the future. Radica 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, the Company may be forced to
liquidate its inventories or accept returns resulting in significant losses.
PROFITABILITY OF THE VGA BUSINESS
The Company's VGA product line, Gamester, has not been profitable since
the acquisition of the line in 1999. Several factors have contributed to the
losses including delays in third-party platform introductions, slower than
expected realization of full US distribution and price wars on certain commodity
VGA items. While the Company believes that it has taken measures during 2002 to
ensure that the line will be successful in 2003, there is no guarantee that the
VGA line will be profitable in the future or that the Company will continue to
manufacture and distribute the line in future years. Continued future losses or
withdrawal from the VGA business may result in significant write downs of
certain Company assets.
ITEM 4. INFORMATION ON THE COMPANY
DESCRIPTION OF BUSINESS
Radica Games Limited (NASDAQ: RADA) manufactures and markets a diverse
line of electronic entertainment products covering three product lines -
electronic games carrying the Radica and Play TV brand names, Gamester branded
video game controllers & accessories, and youth electronics carrying the Girl
Tech and Barbie(TM) brand names. Radica also manufactures for other companies in
the electronic game industry and provides sourcing services for retail
customers. Manufacturing services are classified as a fourth product line while
sourcing services are included within the results of other product lines as
appropriate. The business is divided into two reportable segments: Games, which
includes the electronic games
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and youth electronics product lines as well as manufacturing services, and Video
Game Accessories ("VGA") which relates to the Gamester product line. Sourcing
services are provided within both reporting segments.
Founded in 1983 by Americans living in Hong Kong, the Company is
headquartered in Hong Kong and manufactures its products in its Factory in
southern China. The Company markets its products through subsidiaries in the
United States, the United Kingdom, Canada and Hong Kong. Its largest market is
in the United States where in 2002 it had the second largest market share in the
electronic handheld and tabletop electronic games according to industry data
source, The NPD Group, Inc. In the United Kingdom, the Company's subsidiary had
the largest market share of the video game controller market among third-party
manufacturers in 2001 according to industry data source, Chart Track. In 1994
the Company went public when its shares began trading on the NASDAQ exchange and
are traded under the RADA symbol. A complete description of Radica's product
line and company information can be found on its website (www.radicagames.com).
Radica employs about 4,000 people worldwide in its group of companies.
The Company's largest retail customers include Wal-Mart, Target, Toys R Us,
Kmart, Kohl's, Argos and Kay Bee. Its largest manufacturing customers are SSD
Company (Japan) and Hasbro. Internationally the Company sells products in
approximately 30 countries.
HISTORY OF PRODUCT LINES
ELECTRONIC GAMES
The Company has 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, toy, bank slot machines. Radica
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 the Company became the leading supplier of
casino type electronic handheld games in the US market with games such as Video
Poker and Video Blackjack. The Company's electronic game products are sold under
the Radica and Play TV brand names.
In 1995 Radica began to diversify its product line into other
electronic handheld game areas beyond casino themed games. The Company 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 Radica has expanded
its electronic game offerings to a very broad line of electronic games including
virtual fishing games such as Bass Fishin'(TM), virtual hunting games such as
Buckmasters(R) Deer Huntin'(TM), a line of games based on EA SPORTS(TM)
products, TETRIS(R) and Rush Hour(TM), Harley-Davidson(R) licensed games, and
other games such as King Pin Bowling(TM), Talking Bingo(TM) and Ultimate
Pinball(TM).
During its history Radica has become known as an industry leader in
innovation and creative use of technology. For example, Radica's 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 realistic game
shapes, motion sensors and tactile feed back. For 2003 Radica is introducing
Castmaster Bass Fishin'(R). Castmaster has a portable unit which detaches from
the main rod to slip into a briefcase and allows the fisherman on the go to take
practice fishing on the road. Place the unit back in the rod and you have a
full-featured fishing game with all the realism and feedback for which Radica is
known. Radica has expanded its line of virtual motion sensing games beyond the
fishing category. An example of this is the Company's Buckmasters(R) Bow Huntin'
II(TM) game. Motion sensors in the game mean you just tilt the game left and
right and up and down to get the deer in you sight.
In 2000, Radica developed virtual reality further when it introduced
NASCAR(R) I-Racer(TM). The full headset complete with headphones, produce 3D
graphics and digital dimensional sound for a virtual reality experience.
Vibration feedback in the steering wheel puts you in the race. Radica also
introduced in 1999 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, Radica once again brought innovation to the electronic games
category with the introduction of Radica Play TV games featuring XaviX(R)
technology licensed from SSD Co., Ltd. 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 your
12
race down a video ski slope. Play TV Baseball, Play TV Snowboarder, and Play TV
Buckmasters(R) Huntin' were introduced in 2000 and 2001. In 2002 Radica expanded
the Play TV line to include Play TV Baseball 2(TM), Play TV Boxing(TM), Play TV
Soccer(TM) and Play TV Junior Construction(TM). In 2003 Radica will update its
top selling Play TV Buckmasters(R) Huntin' by introducing Huntin' 2. Play TV
will reach a whole new audience with Play TV Rescue Heroes(TM), an interactive
vehicle playset based on Fisher-Price's(R) preschool vehicle, action figure and
playset line.
In 2001 Radica introduced Skannerz(R). Targeting boys 7-12, Skannerz
utilizes UPC scanner technology to create a fun, collectible-driven game. Use
Skannerz to scan the UPC code of any consumer product to download monsters,
magic potions and weapons to use in battle. Play alone or link two game units to
battle against a friend. Each game unit includes a comic book. Building on this
line for 2003 Radica will launch Skannerz Commander for Spring and Skannerz
Battle Orbz in Fall. Skannerz Commander allows kids to create and control their
own tribe of all new monsters. Train the strong, banish the weak and compete
head-to-head against your friends. Skannerz Battle Orbz is a whole new way to
battle. Players collect "monster disks," create their team, train and battle
them against their opponents using"Rolling Battle Action." You can learn more
about Skannerz and Radica's new Skannerz products on its website
(www.skannerz.com).
In 2003 Radica will introduce its first multiplayer table top
electronic game. Total Meltdown(TM) is a skill and action game which appeals to
the whole family. Total Meltdown is a race against time that challenges players
to test their mind and agility with four intense code-breaking games. With
flashing lights, ticking clock and a taunting voice, players must complete the
series of games: decipher the correct port for each of the "live wires;"
complete a circuit with 12 perplexing pieces; crack the code to access the core
and be agile enough to remove the core without touching the sides before it
suffers a Total Meltdown.
VIDEO GAME ACCESSORIES
In June of 1999, Radica 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, Radica has
established unique and successful 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.
Radica began shipping and selling the Gamester product line to the
United States and Canada during the second half of 2001 and has moved most of
the manufacturing of controllers into its Factory in China. The addition of
Radica's wholly owned manufacturing plant in China served to boost the brand's
credibility after the acquisition in 1999 with use of a thoroughly modern,
high-tech, ISO 9001 certified facility. As a result, new product development is
specially designed and built by Radica for the Gamester brand, except for
certain items which are outsourced to third parties.
Radica introduced many new innovative 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(TM). Radica licensed Lotus(R) in order to develop Official
replica racing wheels to enhance play on some of the most popular racing game
titles. Lotus and Radica share commitment to quality and innovation, and the
licensing agreement has produced the popular Lotus Pro Racer and the Lotus
Xbox(TM) Steering Wheel.
In 2001 Radica signed a worldwide licensing agreement with Microsoft to
design, manufacture and market peripherals for the Xbox(TM) video game system.
Xbox(TM) peripherals include the Vortex(TM) Controller, and the Pro Racer(TM)
Hand-Held Wheel. Recognizing market demand, Radica recently introduced the
Compact Pro game pad for all Xbox(TM) games.
The portable video game category expanded in 2001 with the introduction
of Nintendo's Game Boy(R) Advance (GBA). Radica has introduced several products
for the GBA including the new Flood Light(TM) that provides a superior
illumination of the GVA screen using a fluorescent light. The UK has licensed
NXT(R), creators of sound technology, to develop speakers to enhance surround
sound of all GBA software titles. The licensing agreement has created the
popular GBA Mini Woofer. The GBA line includes a broad selection of cases, bags,
chargers, adaptors and accessory packs. A detailed description of the Gamester
line can be found on the Internet at www.gamesterusa.com (US) or
www.gamesteruk.com (UK).
YOUTH ELECTRONICS
In 1998 Radica acquired the start up Girl Tech Company. Girl Tech's
mission is to enhance girls' lives and foster their use of technology by
bringing to market personal, technology enhanced lifestyle electronics just for
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
13
communication. Girl Tech's products and services are tied by the common theme of
encouraging girls to have fun with and benefit from the use of technology. The
web site (www.girltech.com) contains over 600 pages of content to help address
girls issues and acquaint girls with the uses of technology. It has been the
recipient of website awards and is also a great place to see the Girl Tech
product line.
In 1999, Girl Tech introduced of a line of breakthrough products for
girls, including the Password Journal(R), which uses voice recognition
technology to keep a girl's journal safe from intruders. In 2001 and 2002,
Password Journal 2 was among the top ten products in the Youth Electronics
market according to The NPD Group. Based on this success, Radica continues to
expand its Password line for 2002 with the introduction of a new item: Password
Room Control(TM), the first electronic device that allows a girl to turn on or
off electric appliances in her bedroom with the sound of her voice. Also added
to the Girl Tech line for 2002 was Eye-Lock(TM) Room Guard, the high-tech way
for girls to "snoop-proof" their bedroom. The high tech "eye-code" allows girls
to enter their private color combination and secure their doorknob. Blink the
correct code and you can enter, blink the wrong code and an alarm sounds. In
2003 Radica will continue to update and improve the Password Journal with a new
Password Journal product. While maintaining the voice recognition lock and other
features that have made the two previous versions of this product so popular,
the new Password Journal allows girls to customize their journal by designing
their own cover. The new Password Journal includes a gel pen and custom fit
paper for girls to use their creativity to personalize their journal.
Another introduction for Girl Tech in 2003 is Dare Ya!(TM), "The
Ultimate Game of Truth or Dare." Girls can create their own double dares by
recording them into the game. The game comes with traditional truth or dare
cards in different categories such as gross, dreamy and performance. Truth or
Dare has been a classic game for years and the new Dare Ya! from Girl Tech is
taking it to a new level.
In February of 2002 Radica and Mattel announced that Radica received a
license to bring to market electronic girls lifestyle products and electronic
games under the Barbie(TM) brand name. The product line previewed at the 2002
Toy Fair and featured products intended for a younger age range than its Girl
Tech line and targets girls 3 to 7 years old. Barbie(TM) is the dominant brand
in girls' toys
The new Barbie(TM) electronics product line was led by the Barbie(TM)
Dance Party(TM) game. This product allows girls to dance with Barbie(R) on TV
through the use of the XaviX(R) technology that is used on the Company's Play TV
line. The player is asked to follow Barbie(R)'s lead in fun dance moves and
steps all demonstrated on the TV set. In 2003, Radica will introduce
Scanimals(TM) Pet Rescue applying the same technology used in the Company's
Skannerz product. Girls scan UPC codes in search of lost pets. There are 50 pets
in all with different games such as Match and Obstacle Course. Based on the
success of Password Journal, Radica will introduce My Secret Diary for the
Barbie(TM) age girl. My Secret Diary opens electronically with a magnetic
glitter pen. Additional games and accessories are planned for the future.
MANUFACTURING SERVICES
Since 1996 Radica has designed, engineered and manufactured products
for other companies in the electronic games business. The Company's Factory in
Tai Ping, Dongguan, Southern China has 524,000 square feet of factory space and
308,000 square feet of dormitory space. It has the capacity to house in excess
of 5,000 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. Radica manufactures for other companies on an ODM (original
design and manufacture) basis. Radica currently designs and manufactures games
for Hasbro, WiZ and their customer Bandai, as well as SSD and their customers
Takara and Epoch. Radica also provides sourcing services for customers in the UK
market, the largest customer of which is Argos.
BUSINESS STRATEGY
As a result of its efforts toward diversification, the Company now has
a significant presence in four core product lines including electronic games,
youth electronics, video game accessories and manufacturing services. The
Company believes 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 of its categories of electronic entertainment. As
a result there are synergistic skills that can be used to benefit each area of
the Company's four core product lines. Within these product lines the Company is
focused on building its 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 the Company's strategy to focus on building each of
these product lines and brands to their fullest potential through aggressive
product development and marketing programs.
14
The Company's products are sold to retail customers and foreign
distributors who sub distribute to retail customers in certain other worldwide
markets. The Company sells direct to retail customers in North America and the
United Kingdom. While the Company may occasionally sell directly to retailers in
other worldwide markets it usually sells through sub distributors.
The Company also manufacturers most of its own products in its 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 Radica's sourcing group. The
Company utilizes the excess capacity of its Factory to manufacture products of a
similar nature to its own products for other companies such as the Hasbro Games
Group and SSD in Japan. The Company also provides sourcing services to certain
retailers such as Argos in the United Kingdom. By providing such manufacturing
and sourcing services to other companies Radica seeks to spread the overhead
cost of its manufacturing and sourcing operations in order to improve
profitability.
PRODUCT LINE SALES
The following table sets forth a breakdown of the Company's sales by
major product category for the last four fiscal years.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------- -----------------------------------------------
% 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)
Electronic Games 50.3% $ 62,684 6,277 101 53.0% $ 52,268 6,007 137
Youth Electronics 13.4% 16,744 1,208 22 11.9% 11,720 1,042 16
VGA 12.7% 15,844 2,118 150 10.5% 10,335 2,070 130
Manufacturing Services 23.6% 29,374 6,666 30 24.6% 24,231 3,973 15
100.0% 124,646 16,269 303 100.0% 98,554 13,092 298
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------- -----------------------------------------------
% 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)
Electronic Games 54.2% $ 57,868 6,933 114 64.2% $ 87,775 8,667 100
Youth Electronics 13.0% 13,897 1,211 12 5.4% 7,444 594 6
VGA 9.5% 10,116 1,752 108 7.0% 9,558 1,871 139
Manufacturing Services 23.3% 24,815 4,686 22 23.4% 31,939 6,109 22
Total 100.0% 106,696 14,582 256 100.0% $136,716 17,241 267
* 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.
Radica sells a broad range of electronic and mechanical handheld and
tabletop games under the Radica brand name. These games simulate sports and
recreational activities, such as fishing, hunting, golf, baseball and
snowboarding; casino games, such as blackjack, poker and slots; and popular
heritage games such as solitaire, checkers, Tetris(R) and crossword puzzles.
During 1999, Radica introduced its Girl Tech line of electronic
products. The Girl Tech line provides unique and innovative gadgets for girls
that utilize technologies such as the electronic voice recognition used in
Password Journal and Password Room Control.
In June of 1999, the Company acquired Radica UK, which expanded its
product portfolio to include VGA such as steering wheels, joypads, memory cards
and other video game accessories for PlayStation(R), PlayStation(R) 2, Nintendo
64,
15
Nintendo Game Boy(R) and PC Platforms. The Company currently sells products for
the following platforms: Sony PlayStation(R), Sony PlayStation(R) 2, Nintendo
Game Boy(R) Advance, Nintendo GameCube(TM) and Microsoft Xbox(TM).
During 2000, Radica introduced its Play TV line, featuring the XaviX(R)
technology which allows users to plug games directly into their television set
for display of the game contact on the screen without requiring connection
through a video game system.
During 2001, Radica entered into an agreement to become an approved
licensed vendor of video game accessories for the Microsoft Xbox(TM). Xbox(TM)
peripherals include the Xbox(TM) Pro Racer and the Xbox(TM) Vortex Assortment.
NEW PRODUCT INTRODUCTION
Each year Radica plans to introduce new products to refresh and extend
its product line. The company is currently following a strategy in the VGA
business segment to reduce the number of stock keeping units (SKUs), focusing on
only the highest potential products. In fiscal 2003, the Company intends to
update its product line by introducing approximately 60 new products. This would
represent a reduction of 31 new introductions from 2002 in the VGA line. In
2002, VGA introductions were higher than would be expected in 2003 due to the
fact that new video game platform introductions required a higher level of
supporting new products than in subsequent years.
2003 vs. 2002 New Product Introductions (by category)
2003 2002
---- ----
Electronic Games 23 14
Youth Electronics 12 8
VGA 25 56
-- --
TOTAL 60 78
The Company believes that its strategy of offering various game models
with differing features enables it to market its games to a wide age range of
consumers with different tastes and financial means.
The Company anticipates that new product introductions in fiscal 2003
will be concentrated in the second and third quarters of that year. It is
possible that the Company will determine not to proceed with any given product
or that one or more aspects necessary for introduction of the products in fiscal
2003 will be delayed, which could delay or prevent certain anticipated product
introductions.
LICENSING
During fiscal 2002, Radica engaged in several licensing agreements in
which the Company was 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, Sony Pictures, makers
of Men in Black II(TM), 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) and Mattel, makers of
Barbie(TM).
The Company intends to incorporate some of these licenses into its 2003
product line and will pursue new licenses in instances where management feels it
will enhance the value and marketability of a particular product.
MANUFACTURING
Radica's manufacturing is generally limited to IC bonding, plastic
injection, clamshell production, mold manufacture, surface mount technology
("SMT") and assembly operations. The Company orders customized components and
parts from suppliers and uses subcontractors for more complicated operations
such as masking of the Company's proprietary software onto the semiconductor
chips used in its games, LCD tooling and a proportion of tooling of molds for
its plastic parts.
In 2002 the Company assembled most of the Radica and Girl Tech lines of
products in order to control its costs, quality, production and delivery
schedules. VGA were assembled both in-house and by third party manufacturers.
16
The Company's products are not required to obtain any quality approvals
prior to sales in the United States. The Company, however, is required to have
and has obtained CE approval, Europe's toy safety standard, for its products
sold in Europe. The Company has 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, the
Company voluntarily complies with ASTM 963, a US toy safety standard.
The Company received renewal of its ISO 9001 quality certification from
Underwriters Laboratory on January 24, 2001. The scope of the registration
covers the design, sales and distribution of electronic and electro-mechanical
games and related gift products.
MANUFACTURING FACILITIES
Radica currently manufactures its products at its 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 the Company's 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 Radica product in the US during 2000, work towards completion of this
addition has been postponed and may continue when market demand warrants use of
the additional space. The expansion has been sufficiently completed to the point
that no impairment issues exist and it is currently being used for storage
during peak production season. The unit capacity of the Factory depends on the
product mix produced. In any event, there can be no assurance that the Company
will be able to operate at full capacity or have sufficient sales to warrant
doing so.
In June 1994 the Company entered into a joint venture agreement ("Joint
Venture Agreement") with the local government to operate the Factory. The
Company 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 Company's joint venture partner, the
Company is the sole beneficiary of the results of the joint venture, and the
Company solely controls the joint venture's operations, including the operating
and capital decisions of the joint venture in the ordinary course of business.
The Company also manufactures in the Factory under a processing
agreement ("Processing Agreement") with the local government. The 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 is 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 is established in production agreements agreed upon with local
government officials. The Company pays the processing fees through the Bank of
China in Hong Kong and the funds are then placed in an operating account
including other Company funds in China, all of which are 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.
All of the Company's operations in the PRC, whether within the joint
venture or the Processing Agreement are accounted for as wholly-owned operations
and included in the Company's consolidated financial statements.
During 2001, the Company made a decision to end its use of the
Processing Agreement. As of the date of this report, the Company has one
outstanding Processing Agreement contract which requires PRC tax authority
approval before it can be transferred to the joint venture. An application has
been made for this approval. The Company does not expect to have any open
Processing Agreement contracts by June 30, 2003.
In order to completely discontinue its use of Processing Agreement
contracts, the Company must transfer all existing assets held under the
Processing Agreement. This may require the Company to incur a one-time payment
to increase the capital reserves of the Joint Venture Agreement. The amount of
this payment has yet to be determined. The payment would not result in any
outflow of funds in the Company's consolidated financial statements.
17
In practice, the Company operates all aspects of the Factory, including
hiring, paying and terminating workers. Most of the Company's Factory workers
are hourly employees and are provided room and board in addition to their wages.
In addition, the Company bears all other costs of operating the Factory,
including utilities and certain employee social welfare charges established by
the local government. Many aspects of the Processing Agreement and operation of
the Factory are dependent on the Company's relationship with the local
government and existing trade practices in addition to the terms of the
Processing Agreement. The Company believes that its relationship with the local
government is good.
Should the Company decide to curtail its manufacturing activities in
China, it may be required to pay back certain tax benefits it has received and
may be held liable for certain fees. Such liabilities may be substantial.
MATERIALS
Major components used in the Company's products are liquid crystal
displays ("LCDs"), semiconductor chips, printed circuit boards ("PCBs") and
molded plastic parts. The Company purchases LCDs, PCBs, and semiconductor chips
from several suppliers, although specific LCDs, PCBs or semiconductor chips for
any particular model are generally purchased from a single supplier. The Company
generally provides six to nine months order indications to its semiconductor
chip suppliers and must place firm orders a minimum of eight weeks in advance of
delivery. This lead time in some cases extends to twenty weeks when the market
is in short supply. The Company generally tries to maintain only two months
supply of semiconductor chips, which may constrain increased production of its
products on short notice. The Company pays for most of its materials in US
dollars.
The Company's major suppliers of electronic and mechanical handheld and
tabletop game materials in fiscal 2002 included Arrow / Components Agent Limited
(semi-conductor chips), Epson Hong Kong Limited (semi-conductor chips),
Evergreen PCB Factory Limited (PCBs), GPI International Limited (batteries),
Lead Jump Development Limited (PCBs), Meise Label Printing Fty (printing),
Senmax, Limited (keypads), Sensory, Inc. (semiconductor chips), SSD Company, Ltd
(semi-conductor chips), United Radiant Technology (HK) Limited (LCDs), Wintek
Corporation (LCDs) and Yu Lee Printing Co. (printing).
The Company's major suppliers of VGA in fiscal 2002 included Minwa
Electronics Co. Ltd. (power adaptors), Mascotte Industrial Associates (HK) Ltd.
(game accessories) and Jesmay Electronics Co. Ltd. (cables).
SALES AND DISTRIBUTION
Radica's products are sold in approximately 30 countries, with the
United States accounting for over 60% of net sales in fiscal 2002. The Company
sells its products directly to over 350 active retailers in the US and UK and to
approximately 30 distributors worldwide. The Company participates in the
electronic data interchange ("EDI") program maintained by 15 customers in the
USA including Wal-Mart, Target, Kmart, Kohl's, J.C. Penney's and Sears, and 7
customers in the UK, including Argos, Comet and Dixon's. In fiscal 2002, the
largest customer of the Company, Wal-Mart, accounted for 24.7% of net sales; in
addition ODM/OEM work for SSD accounted for 9.2% of net sales. All sales to
third party distributors and retail customers are final upon transfer of title.
In the case of the consignment distributors in France and Germany, sales are
recognized only upon verification of sell-through to the customers of
distributors. The top five customers were as follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
2002 2001
---- ----
1. Wal-Mart (USA) 24.7% 22.8%
2. SSD (Japan) 9.2% 11.1%
3. TRU (USA) 8.5% 5.0%
4. Argos (UK) 8.3% 7.3%
5. Target (USA) 7.4% 6.1%
The following table sets forth certain of the Company's major customers
in 2002, including distributors (alphabetical order).
18
CATALOG SHOWROOMS DRUG/MASS MERCHANDISERS ELECTRONICS/GROCERY/ CONVENIENCE
----------------- ----------------------- --------------------------------
Brookstone Ames About Time
Sharper Image Army Airforce Exchange Best Buy
BJ Stores Biggs Hypermarket
Cokem Circuit City
Dollar General Comet
DEPARTMENT STORES Fred Meyer Corner Distributors
-----------------
J.C. Penney's Kmart Dixon's
Kohl's Meijer Electronics Boutique
Woolworth's Milton D Myer Co. Fry's
Pamida Gamestop
QVC Ingram Entertainment
Ross Stores Musicland
Shopko Transworld Entertainment
Snyder Drugs W.H. Smith
Target
Wal-Mart
Zellers
MAIL ORDER/SPECIALTY GIFT SHOP OPERATORS SPORTING GOODS STORES DISTRIBUTORS (RADICA)
---------------------------------------- --------------------- ---------------------
Avon Sports Authority Amoy oy (Finland)
Buckmaster Bass Pro Shops Estona Inc. (Japan)
Custom Souvenir and Novelty Forte Co. Ltd. (Japan)
DFS North America Galeria 765 S.A. de C.V. (Mexico)
Dufferen Game Room Stores Gemini Industria F Comericio (Brazil)
Figis TOY RETAILERS Imbi Mario Trading (Malaysia)
-------------
Hammacher Schlemmer Kay Bee Importadora Maduro S.A. (Panama)
Home Shopping Network Toys'R'Us Irwin Pacific Pty, Ltd. (Australia)
Host Marriott Corp John Hansen Co. (USA)
Spiegel Lansay (France)
Spillsbury Masudaya Corp. (Japan)
Spencer Gifts DISTRIBUTORS (VGA) Playthings Pte Ltd. (Singapore)
------------------
Starboard Cruise Services Giochi Preziosi (Italy) Replay Interactive (Singapore)
Wish Book Koch (Germany) Souvenirworld (USA)
Zany Brainy Nobilis (France) The Oriental Trading Co. (Hong Kong)
Pifa S.A. (Belgium) Universal Electronics (Lebanon)
Top Toy (Denmark)
Unsaco AS (Norway)
The acquisition of Radica UK gave the Company the resources to move UK
sales of Radica product in-house. Subsequently, Radica terminated its
distribution agreement with its UK distributor in 1999.
Radica USA uses regional sales managers working for the Company to
manage its customers as well as the manufacturers representatives and brokers
that sell its products to certain retailers. These manufacturers representatives
are not employees of the Company and work on a commission basis.
The Company's 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 the Company generally operates without a significant backlog of
regular orders.
During 2002, the Company sold on consignment to two of its
distributors: Nobilis in France and Koch in Germany (see "Item 3. Key
Information - Risk Factors - Risk of Consignment Inventory"). At the end of
2002, the Company terminated its current agreement with Nobilis and is in the
process of negotiating a distributor agreement with them. The impact of this
decision has been accrued for as at 31 December 2002.
In certain instances, where retailers are unable to sell the quantity
of products which have been ordered from the Company, the Company may, in
accordance with industry practice, assist retailers to enable them to sell such
excess inventory
19
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. The Company
minimizes the related costs of such discounts and returns by engaging personnel
to visit selected customers and assist in the management of Radica product
returns. The Company establishes provisions based on historical experience at
the time of sale of the related products. The return of non-defective products
occurs infrequently in the US. In the UK market, accepting non-defective product
is regular industry practice and the Company establishes its return provisions
on such sales based on experience.
In February 2003, the Company gave notice of termination to both
Nobilis and Koch of their distributor agreements. The Company took a provision
against the consignment inventories held by these distributors that was accrued
for as of 31 December 2002. While the Company believes the accrual is adequate
to cover potential losses, there can be no guarantee it will be adequate.
The Company's Radica, Girl Tech, Play TV and Connectv products carry a
90 days consumer warranty from the date of sale. The Company's 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.
PRODUCT DEVELOPMENT
At the end of 2002, Radica's engineering and development department had
approximately 97 staff worldwide. The Company's product development starts with
design teams in Dallas, Texas; and Hertfordshire, England and continues through
to the engineering teams in Shenzhen and in the Dongguan Factory. The Company
has a formalized product development process that includes quarterly meetings of
its worldwide product development and sales departments. In fiscal 2000, 2001
and 2002, the Company spent approximately $5,210,000, $5,775,000 and $4,094,000
respectively, on research and development. The Company's research and
development is heavily oriented toward market demand. Based on its ongoing
contact with consumers, retailers and distributors worldwide, the Company's
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
the Company's product development, with designs, features, materials,
manufacturing and distribution all developed within the parameters of the target
retail price. The Company also reviews product submission from a network of
third party inventors that have been approved by management. These submissions
are subjected to the same product development process and market demand
considerations as internal submissions.
In January of 2002, the Company executed its 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. This reorganization significantly reduced costs without
decreasing efficiency. By trimming the breadth of its product lines going
forward, the Company expects to continue developing the majority of products
internally during 2003. However, changes in business philosophy or unforeseen
circumstances may arise that could force the Company to outsource a larger than
expected amount of its development work.
SEGMENT INFORMATION
See Note 19 of the Notes to the Consolidated Financial Statements
included herein.
ORIGINAL DESIGN MANUFACTURING AND ORIGINAL EQUIPMENT MANUFACTURING
In 1995, the Company was successful in establishing a relationship with
the Hasbro Games Group to design and manufacture products for them. The Company
continues to manufacture for Hasbro, which is also Radica's largest competitor,
and also has OEM and ODM business with SSD of Japan. In 2002 the Company used
the technology developed for its Skannerz product line to build D-Scanner for
WiZ of Japan. The Company intends to pursue other ODM and OEM business in the
future. However it is uncertain whether the Company can retain its current
business on a long-term basis or successfully attract additional ODM business or
that it will be profitable.
INTELLECTUAL PROPERTY
The Company owns many patents, trademarks and copyrights and is in the
process of registering other intellectual properties. It will continue to apply
for intellectual property registrations on new products as management deems
necessary.
The Company anticipates that patents, trademarks, copyrights and other
intellectual property rights will become increasingly important in the
electronic entertainment industry in which the Company operates, particularly
since the Company is introducing a wider range of products. As the industry
focuses on intellectual property matters, there will be opportunities for
20
the Company to protect its products through patents, trademarks and other
formalized filings, although the efficacy of these protections is uncertain. By
the same token, the Company will be exposed to risks that its products or other
aspects of its 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. Radica believes that it is
one of the leading sellers of electronic games and youth electronics. The
Company's primary competitor is the Hasbro Games Group ("Hasbro"), which is also
an OEM customer of the Company. Hasbro procures its products from manufacturers
in China including Radica. The barriers for new producers to enter the Company's
markets are relatively low and the Company expects that it will face strong
competition. The Company competes for consumer purchases on the basis of price,
quality and game features and for retail shelf space also on the basis of
service, including reliability of delivery, and breadth of product line. Some
competitors offer products at lower prices than the Company, are better
established in the toy and games industry and are larger than the Company. The
Company's products also compete with other gifts and games for consumer
purchases. In addition, with respect to ODM/OEM activities, the Company competes
with a number of substantially larger and more experienced manufacturers. As the
Company enters other markets and businesses, it expects to face strong
competition.
The VGA market is also highly competitive. The market share in the UK
is spread primarily amongst ten companies that have 63.5% of the overall market.
The Company began significant distribution of VGA in the US market in 2001. Like
the handheld electronic games market, the Company competes 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, Guillemot
and Big Ben.
In January 2003 the Company established Radica (Macao Commercial
Offshore) Limited in Macao, China to handle all sales administration on behalf
of the Factory in Dongguan.
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
There is currently no Bermuda income, corporation or profits tax
payable by the Company. As an exempted company, the Company is liable to pay to
the Bermuda government an annual registration fee calculated on a sliding scale
basis by reference to its assessable capital, that is, its authorized share
capital plus any share premium on its issued shares of Common Stock currently at
a rate not exceeding $25,000 per annum.
The Hong Kong profits tax rate currently applying to corporations is
16%. The Hong Kong government has recently announced that this rate will
increase to 17.5% in 2003. Currently, Radica HK and one other Hong Kong-based
subsidiary pay Hong Kong profits tax on service and sales income.
On July 1, 1994, the Company's manufacturing operations were
transferred to a Sino-Foreign Joint Venture. As Radica Games 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 its profits were taxed at a reduced rate of 12%, half the
regular tax rate of 24%. In 2002, the Company was taxed at the regular tax rate
plus a local tax rate of 3%, but has applied to be designated as an "Export
Oriented Enterprise", which will reduce its tax rate to 12% if the application
is successful. The excess tax paid in 2002 will offset the profit tax of 2003 if
the application for a reduced rate is approved in May 2003.
Radica USA and Disc Inc. are fully subject to US and Canada federal
taxation, as well as any applicable state or local taxation, on their taxable
income. Currently, the highest marginal rate of US 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 the Company will be
subject to a 30% US federal withholding tax, resulting in an effective rate of
US federal taxation on distributed profits of up to 54.5%.
Radica UK is fully subject to UK corporate taxation. The UK profits tax
rate currently applying to corporations is 30%.
21
EMPLOYEES
As of December 31, 2002 the Company's workforce was comprised of the
following:
Production Sales and R&D Finance Operations Total by
Marketing & Admin location
--------------------------------------------------------------------------------
Asia 4,015 6 79 24 124 4,248
--------------------------------------------------------------------------------
USA - 21 13 9 14 57
--------------------------------------------------------------------------------
Europe - 10 5 5 7 27
--------------------------------------------------------------------------------
Total 4,015 37 97 38 145 4,332
--------------------------------------------------------------------------------
At December 31, 2001 and 2000 the Company's workforce comprised 4,185
persons and 4,378 persons, respectively.
None of the Company's employees are subject to a collective bargaining
agreement and the Company has never experienced a work stoppage. Management
believes that its employee relations are good.
DESCRIPTION OF PROPERTIES
See "Manufacturing Facilities" above. The Company completed the first
phase of construction of its 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 Radica product in the US during 2000, work towards completion of this
addition has been postponed and will continue when market demand warrants use of
the additional space. The Company owns a long-term leasehold on its executive
offices (13,561 sq. ft. inclusive of 2 leased units of 4,482 sq. ft.) and
warehouse space (7,900 sq. ft.) in Fo Tan, Hong Kong as well as two houses for
employees in Hong Kong (2,100 sq. ft. each) which have been made available to
Mr. Howell and Mr. Scott, officers of the Company. Radica operates its Factory
under the terms of the Joint Venture Agreement and Processing Agreement. The
Company leases additional office space in Hertfordshire, UK and Macau, Dallas,
Texas and Pasadena, California. The Company leases showrooms in Tsim Sha Tsui,
Hong Kong and New York, New York and provides individual offices for sales
personnel employed in Massachusetts and Illinois. During 2002, the Company sold
one of its executive units in Fo Tan, Hong Kong totaling 1,843 sq. ft., leased
one of its Fo Tan units totaling 2,589 sq. ft. and plans to lease additional
space in another Fo Tan unit totaling 2,500 sq. ft in 2003. In addition, during
2002 the Company leased out the house that had been made available to Mr. Howell
and is currently paying rent on a different house for Mr. Howell in Hong Kong.
22
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
The following table sets forth items from the Company's Consolidated
Statements of Operations as a percentage of net revenues:
Year ended December 31,
-----------------------
2002 2001
--------- ---------
Net sales 100.0% 100.0%
Cost of sales 62.2% 65.6%
Gross margin 37.8% 34.4%
Selling, general and administrative expenses 22.2% 26.7%
Research and development 3.3% 5.8%
Depreciation and amortization 2.3% 4.1%
Restructuring charge 0.0% 1.6%
Operating income (loss) 10.0% (3.8%)
Other income 0.3% 0.0%
Foreign currency gain (loss), net 1.4% (0.2%)
Interest income, net 0.0% 0.1%
Income (loss) before income taxes 11.7% (3.9%)
Provision for income taxes (2.1%) (0.5%)
Net income (loss) 9.6% (4.4%)
The Company 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 $0.25 per
diluted share for fiscal year 2001.
Summary of sales achieved from each category of products:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001
-------------------------------- ---------------------------------
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
--------------------------------------- ---------------- ---------------- ----------------
(US$ in thousands)
Electronic Games 50.3% $ 62,684 53.0% $ 52,268
Youth Electronics 13.4% 16,744 11.9% 11,720
VGA 12.7% 15,844 10.5% 10,335
Manufacturing Services 23.6% 29,374 24.6% 24,231
--------------- ---------------- ---------------- ----------------
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
Q4 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.
23
The following table shows the major operating expenses and income
taxes:
Year ended December 31,
--------------------------------
(US dollars in millions) 2002 2001
-------------- -------------
Commissions $ 0.6 $ 0.7
Indirect salaries and wages 8.1 8.2
Advertising and promotion expenses 8.5 8.1
Research and development expenses 4.1 5.8
Provision for income taxes 2.7 0.6
Research and development costs 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.
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 2002 the Company had $32.7 million of cash and net
assets of $74.6 million compared to $25.8 million and $63.1 million,
respectively at December 31, 2001. The Company generates a significant majority
of its cash from its normal operations but seasonal cash requirements have been
met with the use of short-term borrowings, which included borrowings under
secured lines of credit.
At December 31, 2002, cash and cash equivalents, net of short-term
borrowings, were $31.8 million of which $9.0 million of cash deposits have been
pledged as security for undrawn or substantially repaid facilities. Management
does not consider that there are any significant restrictions on its ability to
gain access to these deposits given the significant excess of pledged assets
over outstanding borrowings. This compares with cash and cash equivalents, net
of short-term borrowings of $25.0 million at December 31, 2001. The Company
generated approximately $12.0 million, $10.3 million and $(4.7 million) of net
cash from its operating activities in 2002, 2001 and 2000, respectively. The
increase in 2002 from 2001 was primarily a result of higher sales revenue and
higher gross margins in 2002 compared to 2001, combined with decreased
expenditure as a result of cost reductions in operations. Receivables increased
to $15.1 million from the December 31, 2001 level of $13.9 million. This was the
result of higher sales during the second half of 2002 compared to the same
period in 2001. Inventories increased to $20.4 million from $17.2 million at
December 31, 2001 primarily as a result of inventory buildup in preparation for
the first quarter of 2003. The reserves for doubtful accounts, customer returns,
warranty expenses and accrued sales allowance were as follows:
Balance at Balance at
beginning Charged to Utilization / end of
(US dollars in thousands) of year expense write-offs year
------- ------- ---------- ----
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
=============== =============== =============== ===============
Current liabilities were $20.7 million at December 31, 2002 compared to
$23.5 million at December 31, 2001. The decrease was the result of reduction in
accounts payable, current portion of long-term debt and accrued expenses from
2001.
24
Prepaid assets decreased to $1.7 million from $2.3 million at December 31, 2001.
This was the result of a decrease in prepaid license and royalty fees. Accrued
payroll and employee benefits increased to $2.8 million at December 31, 2002
from $0.9 million at December 31, 2001 primarily as a result of accrued bonuses
relating to the 2002 fiscal year. Total debt stood at $2.7 million at December
31, 2002, down $3.6 million from $6.3 million at December 31, 2001.
Cash flows from investing activities were a net utilization of $1.1
million, $1.0 million and $4.3 million in 2002, 2001, and 2000, respectively.
During 2002 and 2001, the Company invested in the purchase of property, plant
and equipment.
Cash used in financing activities was $3.3 million in 2002 compared
with $6.4 million in 2001. This change was primarily due to repayment of
short-term debt during 2001.
The Company commits to inventory production, advertising and marketing
expenditures prior to the peak third and fourth quarter retail-selling season.
Accounts receivable increase during the third and fourth quarter as customers
increase their purchases to meet customer demand during the holiday season. Due
to the concentrated time frame of this selling period, payments for these
accounts receivable are generally not due until the fourth quarter or early in
the first quarter of the subsequent year. This timing difference between
expenses paid and revenues collected sometimes makes it necessary for the
Company to borrow amounts during the year. As of December 31, 2002, the Company
had more than $5.0 million of various lines of credit available. A breakdown of
the Company's short-term and long-term financing during 2002 is as follows:
Loan Amount Debt Loan Amount Date of
Bank as at 1/1/2002 Repayment as at 12/31/2002 Maturity
------------------------- -------------- ----------- ---------------- --------------
(US$ in thousands)
China Construction Bank $ 846 $ -- $ 846 August 7, 2003
(Humen, China)
HSBC $ 5,473 $ (3,648) $ 1,825 June 22, 2003
Both loans are payable in installments. Loan installments due within twelve
months of year-end are included in short-term liabilities; installment payments
scheduled beyond twelve months from year-end are included in long-term debt (See
Note 9 of the Consolidated Financial Statements). The term loan is secured by
certain properties and deposits of the Company (see Note 16 of the Consolidated
Financial Statements). The agreements contain covenants that, among other
things, require the Company to maintain a minimum of tangible net worth, gearing
ratio and other financial ratios. The Company is in compliance with these
covenants as at December 31, 2002.
In the normal course of business, the Company enters 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 contain provisions for guaranteed or minimum
royalty amounts during the term of the contracts.
Total 2003 2004 2005 2006 2007 Thereafter
------ ------ ------ ------ ------ ------ ----------
(US$ in thousands)
Long-term debt $1,825 $1,825 $ -- $ -- $ -- $ -- $ --
Licensing minimums 80 63 1 16 -- -- --
Operating leases 2,744 475 350 252 245 242 1,180
Joint venture fee 3,808 126 130 130 138 143 3,141
------ ------ ------ ------ ------ ------ ------
Total $8,457 $2,489 $ 481 $ 398 $ 383 $ 385 $4,321
====== ====== ====== ====== ====== ====== ======
Management believes that the Company's existing credit lines are
sufficient to meet future short-term cash demands. The Company funds its
operations and liquidity needs primarily through cash flow from operations, as
well as utilizing borrowings under the Company's secured and unsecured credit
facilities when needed. During 2003, the Company expects to continue to fund its
working capital needs through operations and its revolving credit facility and
believes that the funds available to it are adequate to meet its needs. The
Company expects to be in compliance with its covenants in 2003. However,
unforeseen circumstances, such as severe softness in or a collapse of the retail
environment may result in a significant decline in revenues and operating
results of the Company, thereby causing the Company to exhaust its cash
resources. If this were to occur, the Company may be required to seek
alternative financing of its working capital. In addition, this may cause the
Company to be in non-compliance with its debt covenants and to be unable to
utilize its revolving credit facility.
25
The Company had no derivative instruments or off balance sheet
financing activities during fiscal years 2001 and 2002. The Company believes
that its existing cash and cash equivalents and cash generated from operations
are sufficient to satisfy the current anticipated working capital needs of its
core business.
FISCAL 2001 COMPARED TO FISCAL 2000
The Company experienced a net loss of $4.4 million for fiscal year 2001
or $0.25 per diluted share versus a net loss of $18.1 million or $1.03 per
diluted share for fiscal year 2000.
Net sales for 2001 were $98.6 million, compared to $106.7 million in
2000. The decline in net sales during 2001 resulted from worldwide economic
recession; and the effect of the September 11 terrorist attacks in New York,
which eroded US consumer confidence and as a result caused retailers to exercise
caution in their buying. Several top US retailers cancelled holiday reorders in
the wake of the attacks.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000
-------------------------------- ---------------------------------
% OF NET NET % OF NET NET
PRODUCT LINES SALES VALUE SALES VALUE SALES VALUE SALES VALUE
--------------------------------------- ---------------- ---------------- ----------------
(US$ in thousands)
Electronic Games 53.0% $ 52,268 54.2% $ 57,868
Youth Electronics 11.9% 11,720 13.0% 13,897
VGA 10.5% 10,335 9.5% 10,116
Manufacturing Services 24.6% 24,231 23.3% 24,815
--------------- ---------------- ---------------- ----------------
Total 100.0% $ 98,554 100.0% $ 106,696
=============== ================ ================ ================
Gross margin for the year was 34.4% compared to 22.2% in fiscal year
2000 as a result of a combination of improvements to inventory control allowing
for less closeout product and continued cost reduction on products.
Operating expenses for 2001, excluding $1.6 million of restructuring
costs, were $36.1 million compared to operating expenses of $43.0 million,
excluding $1.2 million of restructuring costs in fiscal year 2000. The 2001
restructuring plan was approved by the Board of Directors in December 2001 for
implementation in February of 2002 and included the elimination of the San
Francisco R&D office, the elimination of several R&D and operational provisions
in Hong Kong with the intent of replacing many of these positions with new staff
at the factory in China, the elimination of certain other positions worldwide
and the transfer of two employees to other offices. The estimated costs related
to the reorganization were accrued in the fourth quarter of 2001 and include
$1.4 million in severance-related costs and $0.2 million in office shutdown and
other reorganization related costs.
The 2000 restructuring plan occurred in the second quarter of 2000 and
included the elimination of several positions worldwide. The costs included $1.1
million in severance-related costs and $0.1 million in office shutdown and other
reorganization related costs.
The following table shows the major operating expenses, other income
and income taxes:
Year ended December 31,
---------------------------------
(US dollars in millions) 2001 2000
--------------- --------------
Commissions $ 0.7 $ 2.3
Indirect salaries and wages 8.2 7.5
Advertising and promotion expenses 8.1 11.1
Research and development expenses 5.8 5.2
Other income - 0.8
Provision (credit) for income taxes 0.6 (0.9)
The decrease in commissions in 2001 was the result of both the decrease
in sales from 2000 and Radica USA's decision to increase efficiency by changing
its sales force from third party sales representatives to an in-house sales
team. Because the
26
Play TV line of products was in its second year and required less promotion,
advertising and promotional costs decreased in 2001 from 2000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted 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 the
Company considers critical in preparing its 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. Deterioration in the retail environment or the economy could adversely
impact the trade receivables valuation.
ALLOWANCE FOR SALES RETURNS, MARKETING AND ADVERTISING
A sales return allowance is recorded for estimated sales returns from
customers. The allowance is based on historical trends and management's best
assessment of sales returns as a percentage of overall sales. The Company also
records an allowance for marketing and advertising costs agreed with certain
customers. These allowances are based on other specific dollar-value programs or
percentages of sales, depending on how the program is negotiated with the
individual customer.
WARRANTY
The Company records 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. Due to the introduction of new product, actual warranty costs
could deviate significantly from the recorded allowance. This deviation could
have a material impact on the financial results of the Company.
INVENTORIES
The Company states its inventory values at the lower of cost or market.
Inventory reserves are accrued for slow-moving and obsolete inventory. Radica's
management uses estimates to record these reserves. Slow-moving and obsolete
inventories may be partially or fully reserved 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.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Long-lived assets, identifiable intangibles and goodwill 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 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.
27
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.
DEFERRED TAX ASSETS
The Company records valuation allowances against its 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and the
estimated impact on the Company 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 2002.
Term
Name Expires Residency Position
---- ------- --------- --------
Jon N. Bengtson (3) 2003 USA Chairman of the Board and Director
Albert J. Crosson (1)(2) 2003 USA Director
Robert E. Davids 2003 USA Vice-Chairman of the Board and Director
Patrick S. Feely (3) 2003 USA President, Chief Executive Officer and Director
David C.W. Howell 2003 Hong Kong President Asia Operations,
Chief Financial Officer and Director
Henry Hai-Lin Hu (1)(3) 2003 Australia Director
Siu Wing Lam 2003 USA Director
James J. O'Toole (2)(4) 2003 USA Director
Millens W. Taft (1)(4) 2003 USA Director
Peter L. Thigpen (1)(2)(4) 2003 USA Director
Jeanne M. Olson N/A USA Executive Vice President/General Manager, Radica USA
John J. Doughty 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 Engineering Director
Vincent K.M. Ching N/A Hong Kong Manufacturing Director
28
Rick C.K. Chu N/A Hong Kong International Sales Director
Robert E. Esterbrook N/A UK Finance & Operations Director
Tiki K.K. Ho N/A Hong Kong Engineering Director
Louis S.W. Kwok N/A Hong Kong Plant Administration Director
Donny K.W. So N/A Hong Kong Director of Project Management
Lavinia K.W. Wong N/A Hong Kong Director of VGA & Sourcing
Hermen H.L. Yau N/A Hong Kong MIS Director
(1) Current member of the Audit Committee.
(2) Current member of the Compensation and Organization Committee.
(3) Current member of the Executive Committee.
(4) Current member of the Governance Committee.
The Company annually prepares a proxy statement/management information
circular for distribution to its shareholders in connection with its annual
meeting of shareholders. Additional information is contained in such proxy
statement with respect to the ownership of shares of the Company's common stock
by directors and executive officers, the ages of such persons, and the functions
or board practices of the committees of the Company's 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
the Company's annual 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 a director of The Sands
Regent.
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.
Robert E. Davids became Chairman of the Executive Committee of the
Board of Directors, Vice Chairman of the Board and Chief Executive
Officer-Emeritus in April 1999 and has been a director since December 1989. He
was Chief Executive Officer of the Company from January 1994 to April 1999, and
President of the Company from December 1993 to July 1997. Prior to 1993, Mr.
Davids had been the Co-Chief Executive Officer and director of Radica HK since
he joined the Company in 1988. Mr. Davids has over 30 years experience in the
development, design and engineering of non-gambling casino gifts, commercial
gaming machines, automobiles and other products. From 1984 until he joined the
Company, he was the General Manager of Prospector Gaming Enterprises Inc., a
casino in Reno, Nevada. From 1978 through 1984, Mr. Davids served in various
positions at IGT, including Director of Special Projects and Director of
Engineering.
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
29
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 US 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.
Henry Hai-Lin Hu was appointed a director of the Company in December
1998. He is currently the Principal of Business Plus Consultants Limited
providing services to Hong Kong toy companies on business development. From 1993
through 1996, he was Chairman and Chief Executive Officer of Zindart Industrial
Co. Ltd., a NASDAQ listed manufacturer of die cast car replicas and premium
giftware. He co-founded Wah Shing Toy Group in 1982, a Singapore listed toy
company, and retired from Wah Shing in 1991. Mr. Hu has served in director and
senior officer roles in several toy companies in Hong Kong since 1967. He has a
B.Sc. in Mechanical Engineering from Hong Kong University, is a Registered
Professional Engineer, and a member of the Institution of Electrical Engineers,
Hong Kong.
Siu Wing Lam has been a director of the Company since January 1994. He
was the Executive Vice President, Engineering of the Company from 1998 to
February 2002, Vice President, Engineering and the head of Radica HK engineering
department from 1988 to 1998, and joined the Company in 1985. Mr. Lam has over
20 years of experience in manufacturing, product design and engineering
management. He is currently the President of Providence International Limited,
providing services on new product development to US and HK companies. Mr. Lam
has an Associateship in Production and Industrial Engineering from Hong Kong
Polytechnic University and a Postgraduate Diploma in Engineering Management from
City University of Hong Kong. He is a Chartered Engineer and a corporate member
of the Institute of Electrical Engineers of the UK.
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 Chairman of the
Board of Academic Advisors of the Booz Allen Hamilton Strategic Leadership
Center.
Millens W. Taft has been a director of the Company since April 1997. He
brings with him five decades of toy and games experience and currently advises
companies in the toy industry on marketing, product development and licensing in
both the domestic and international markets. He retired from the Milton Bradley
Company in 1984, where he was Corporate Senior Vice President of Research and
Development and was also a Director of the firm. Mr. Taft had been with Milton
Bradley since graduating from Harvard Business School in June of 1949 with the
degree of Master of Business Administration. From 1942 to 1945 he was in the
military service with the 8th Air Force as First Lieutenant and Pilot. Upon his
early retirement from Milton Bradley, he started his own company, Mel Taft &
Associates in 1984, which helps companies in the USA and around the world with
marketing, product development and licensing projects primarily in the Toy,
Games, Craft, Specialty and International Markets.
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 - US 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 the Executive Vice President/General Manager of
Radica USA. 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.
30
John J. Doughty has been Managing Director with Radica UK since May
2001, having previously held the positions General Manager, Head of Sales and
Marketing, Head of Sales, and UK Sales Manager since joining in March 1998. He
personally manages Radica UK's major European Accounts, and also oversees the
day to day running of the UK operation. Mr. Doughty has had 15 years experience
in the 'gaming' industry having previously worked at Entertainment UK, part of
the Kingfisher Group, as Senior Buyer, and prior to that having worked at HMV
UK, as a Buyer.
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 29 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 an Engineering Director since April 1999. 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.
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 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 International Sales Director of the Company
since April 1996. Prior to that, Mr. Chu was 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.
Tiki K.K. Ho has been an Engineering Director of the Company since
April 1, 1999. Prior to his present position, he was 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 Materials and Logistics Director of the
Company from March 2002 and was the Plant Administration Director of the Company
from January 2001 to February 2002. He has had over 15 years experience in
31
manufacturing plant operations throughout his career. 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.
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 15 years experience in
project management and product development in major appliances, electronics and
toys. He obtained his 6 Sigma experience while working for GE, and led the
development of Total Cycle Time management skill at VTech. He has a BA in
Industrial Design from Hong Kong Polytechnic University and a Diploma in Product
Design from LWL Technical Institute.
Lavinia K.W. Wong was appointed as a Director of VGA & Sourcing of the
Company in April 2001. Since joining the Company in June 1999, she has been
supervising the management of both the sourcing business and out-sourced video
game accessories. Prior to that, she was a Director of LMP HK, where she set up
the Hong Kong office of LMP UK and managed the day-to-day operations, which
included sourcing, finance and management. Miss Wong has over 10 years
experience in the electronics and games business and has held an executive
marketing position in a publicly listed electronics company in Hong Kong.
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 2002, the aggregate amount of compensation paid to all
executive officers and directors as a group for services in all capacities was
approximately $2.3 million. In addition, bonus payments made to all executive
officers as a group in April of 2003 related to 2002 performance that was
accrued at the end of 2002 was $0.56 million.
Each outside (i.e., non-employee and non-affiliated) director of the
Company receives a $10,000 annual fee paid in quarterly installments. Directors
may elect to receive half 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 receives a fee of $600 for attendance at each Committee meeting.
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 $4.00 per share in 2002. 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.
EMPLOYMENT AGREEMENTS
Messrs. Feely, Howell, Bengtson, Doughty 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 for periods of two
years each, from July 2001 for Mr. Feely, from December 2001 for Messrs. Howell,
Bengtson and Ms. Olson and from May 25, 2001 for Mr. Doughty. Each employment
agreement is terminable by the Company for cause. Under their agreements Messrs.
Feely, Howell, Bengtson, Doughty and Ms. Olson shall each receive minimum annual
base salaries of $282,600, $225,000, $43,200, $116,000 and $200,000 (the amount
for Mr. Doughty is stated in UK currency as (pound)80,000), respectively.
Messrs. Feely and Howell took voluntary pay cuts from 2000 and their full
salaries were reinstated on January 1, 2003. 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, Doughty and Ms.
Olson are eligible to participate in the Company's bonus plan.
32
The employment agreements for Messrs. Feely, Howell, Doughty 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 $3.625 per share, another 60,000 stock options at $14.125 per
share in November 1998 and a further 60,000 stock options 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 $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 $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. Doughty, he had been
granted 26,400 stock options of the Company common stock at $3.00 and $1.625 per
share in May 2000 and January 2001, respectively upon initial employment and was
granted an additional 6,000 stock options at $3.00 per share in May 2001 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, respectively in February 2001 and Mr. Doughty was
granted 25,000 stock options in May 2001 under an incentive plan. 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.
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, Organization and Nominating Committee
of the Board of Directors. Subject to the provisions of the Stock Option Plan,
the Compensation, Organization and Nominating 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.
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, Organization and
Nominating 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, Organization and Nominating 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.
In fiscal year 2000, an aggregate of 788,000 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 $3.25 per share.
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.
As a result of the foregoing, at the end of fiscal year 2002, after
giving effect to all prior exercises and forfeitures of options, an aggregate of
2,008,223 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 1,337,950 options were held by directors and executive officers of the
Company as a group. Also, an aggregate of 305,000 outside director's options
were outstanding at exercise prices ranging from $2.00 to $18.75 per share.
During 2002, a total of 144,446 shares were issued upon the exercise of options,
33
at exercise prices ranging from $1.09 to $3.25 per share. Prior to 2002, a total
of 1,065,596 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 12 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 owned by the officers and
directors as a group, as of December 31, 2002. The Company must rely on
information provided by individual shareholders and therefore cannot verify
its accuracy:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
-------------- --------------- ------------ ----------------
Common stock Dito Devcar Corporation, et al. 7,843,938 44.1%
Common stock Mary Hansen / Hansen Trust 1,450,000 8.2%
Common stock RAD Partners 1999 LLC, et al. 1,626,200 9.1%
Common stock Officers & Directors as a Group 516,921 2.9%
(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 December 31, 2002, the Company had approximately 120 record holders
of its Common Stock, and approximately 80% of such stock was held by US
holders.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Robert E. Davids, the Hansen Trust, certain other former stockholders
and the Company were parties to a shareholders agreement (the "Shareholders
Agreement") 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 remain 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 US 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.
34
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.
LEGAL PROCEEDINGS
The Company is subject to pending claims and 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. As of the reporting date, no judgment had been
handed out in the Cognex case. 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, 2002 in respect of the
Lemelson case or other claims or legal actions, in accordance with the Company's
accounting policy.
The Company has other pending litigation against it. 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.
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 2002 and fiscal 2001:
Fiscal year ended Fiscal year ended
December 31, 2002 December 31, 2001
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter 4.400 3.400 3.375 1.625
Second Quarter 4.600 3.800 3.500 2.500
Third Quarter 4.029 3.560 4.250 2.400
Fourth Quarter 4.600 3.450 4.900 2.531
The annual high and low closing stock prices in fiscal 2000 were $10
and $1.625; in fiscal 1999 were $16 and $7.25; and in fiscal 1998 were $21 and
$10.438.
The monthly high and low closing stock prices over the last six months
in fiscal 2002 were $4.029 and $3.6 in July 2002; $4 and $3.7 in August 2002; $4
and $3.56 in September 2002; $3.9 and $3.45 in October 2002; $4.42 and $3.65 in
November 2002; and $4.6 and $4.21 in December 2002.
Radica Games Limited was formed in 1994 as a holding company and has
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. The payment of any future dividends will be at the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, financial condition, capital requirements and general
business outlook at the time the payment is considered. 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
personal foreign holding company (see Item 10. Additional Information -
Taxation).
35
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.
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 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 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.
36
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
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, as currently in effect, a holder of Common
Stock is not subject to Hong Kong tax on dividends paid with respect to such
shares and no holder of Common Stock is liable for Hong Kong tax on gains
realized on sale or other disposition of such 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 the Common
Stock where such 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 0.03% 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.
UNITED STATES FEDERAL INCOME TAXATION
General. The following is a general discussion of the material US
federal income tax consequences to a US Holder (as defined below) of the
ownership of Common Stock and does not address the US 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 US 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 "US Holder" is a beneficial owner of Common Stock that is a US
citizen or resident, a domestic corporation, an estate subject to US 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.
Dividends. Subject to the FPHC, PFIC, and CFC discussions below, a US
Holder receiving a distribution on Common Stock will be required to include such
distribution in gross income as a dividend to the extent such distribution is
paid from current or accumulated earnings and profits of the Company as
determined under US federal income tax law. Distributions in excess of the
earnings and profits of the Company will be treated, for US federal income tax
purposes, as a nontaxable return of capital to the extent of the US Holder's
basis in the Common Stock and then as gain from the sale or exchange of a
capital asset. Dividend income with respect to the Common Stock generally will
constitute foreign source "passive" income, or in the case of certain US
Holders, "financial services" income for purposes of the foreign tax credit
limitation. A corporate shareholder will not be eligible for the
dividends-received deduction.
37
Sale or Exchange of Common Stock. Subject to the FPHC, PFIC, and CFC
discussions below, gain or loss on the sale or exchange of the Common Stock by a
US Holder generally will be treated as capital gain or loss and will be
long-term capital gain or loss if the US Holder has held the Common Stock for
more than one year at the time of the sale or exchange. Gain or loss realized by
a US Holder will generally be US source gain. Long-term capital gain of a
non-corporate US Holder is generally subject to a maximum tax rate of 20%.
FPHC Rules. A foreign corporation will be classified as a foreign
personal holding company ("FPHC") if (i) five or fewer individuals who are US
citizens or residents directly or indirectly own more than 50% of the
corporation's stock (measured either by voting power or value) (the "shareholder
test") and (ii) more than 50% (or 60%, in certain years) of its gross income, as
specially adjusted, consists of foreign personal holding company income (defined
generally to include dividends, interest, royalties, rents, gains from the sale
of stock or securities and certain other types of passive income) (the "income
test").
The Company believes that it is not currently a FPHC because the income
test was not met in 2002. However, this conclusion is a factual determination
that is made annually and thus is subject to change. The Company intends to
manage its business such that it will not meet the income test until such time
that it begins to receive significant dividends from its subsidiaries, which is
not expected to occur in the foreseeable future. The Company would then be a
FPHC only if, in the same taxable year, it also met the shareholder test.
If the Company is a FPHC for any year, each US shareholder who holds
Common Stock on the last day of the Company's taxable year or, if earlier, on
the last day on which the ownership test is met, would be required to include in
income as a dividend its pro rata share of the Company's undistributed foreign
personal holding company income. The shareholder's tax basis in the Common Stock
would be increased by the amount included in income. Such income would be
taxable to any such US shareholder as a dividend whether or not distributed in
cash. For any year in which the Company is a FPHC, any 5% or greater US
shareholder would be required to report on its tax return the gross income,
deductions and credits, taxable income, FPHC income and undistributed FPHC
income of a FPHC. The Company will furnish any shareholder required so to report
the information required to be reported. In addition, any holder who acquires
Common Stock from a decedent would be denied the date of death value as the tax
basis for such Common Stock (which would have a basis equal to the lower of fair
market value or the decedent's basis) if the Company was a FPHC with respect to
its taxable year next preceding the date of the decedent's death.
For any year in which it is a FPHC, the Company intends to make cash
distributions to shareholders of record on the last day of its taxable year in
an amount at least equal to 50% of its foreign personal holding company income
(which amount should be sufficient for shareholders to pay US federal and state
income taxes on such distributions and any undistributed foreign personal
holding company income taxable as a dividend).
PHC Rules. A corporation (including a foreign corporation that is not a
FPHC) will be classified as a personal holding company ("PHC") if (i) five or
fewer individuals (without regard to their citizenship or residence) directly or
indirectly own more than 50% in value of the corporation's stock (the
"shareholder test") and (ii) at least 60% of its ordinary gross income, as
specially adjusted, consists of personal holding company income (defined
generally to include dividends, interest, royalties, rents and certain other
types of passive income) (the "income test"). A PHC is subject to a US federal
income tax on its undistributed personal holding company income (generally
limited, in the case of a foreign corporation, to US source income).
The Company believes that it is not currently a PHC because the income
test was not met in 2002. The Company intends to cause any subsidiary that is a
PHC to make distributions on a basis such that it will not have undistributed
personal holding company income.
CFC Rules. A foreign corporation generally is treated as a controlled
foreign corporation ("CFC") for US 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.
PFIC Rules. The Company believes that the Common Stock should not be
treated as stock of a passive foreign investment company (a "PFIC") for United
States federal income tax purposes, but this conclusion is a factual
determination made annually and thus may be subject to change. If the Company
were to be treated as a PFIC, a gain realized on the sale or other disposition
of Common Stock would in general not be treated as a capital gain, and a US
Holder would be treated as if such holder had realized such a gain and certain
"excess distributions" ratably over the holder's holding period for the Common
Stock and would be taxed at the highest tax rate in effect for each such year to
which the gain was allocated, together with an interest charge in respect of the
tax attributable to each such year.
38
In general, the Company will be a PFIC with respect to a US Holder if,
for any taxable year in which the US Holder held the Company's Common Stock,
either (i) at least 75% of the gross income of the Company for the taxable year
is passive income or (ii) at least 50% of the value (determined on the basis of
a quarterly average) of the Company's assets is attributable to assets that
produce or are held for the production of passive income. For this purpose,
passive income generally includes dividends, interests, 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.
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.
INTEREST RATE SENSITIVITY
The Company's long-term loan agreement is based upon the US$ Singapore
Interbank Offered Rate ("SIBOR") and, as such, is sensitive to changes in
interest rates. The Company has not used derivative financial instruments in its
indebtedness. At December 31, 2002, the result of a hypothetical one percentage
change in the underlying US$ SIBOR rates would have resulted in less than $0.1
million change in the annual amount of interest payable on such debt. If SIBOR
went up by 1% from the interest rate of the long-term loan agreement at December
31, 2001, the effect on the P&L would be $6,800.
FOREIGN CURRENCY RISK
The Company has net monetary asset and liability balances in foreign
currencies other than the US dollar, including the Pound Sterling, the Canadian
dollar, the Hong Kong dollar and the Renminbi. International distribution and
sales revenues usually are made by the Company's subsidiaries in the United
States, United Kingdom and Canada, and are denominated typically in their local
currency. However, the expenses incurred by these subsidiaries are also
denominated in the local currency. As a result, the operating results of the
Company are exposed to changes in exchange rates between the United States
Dollar and the 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.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None or Not Applicable
39
ITEM 15. CONTROLS AND PROCEDURES
Within a 90-day period prior to the filing of this report, 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-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that these disclosure controls and procedures were
effective to collect, process and disclose the information that is required to
disclose in this report filed with the SEC. No significant changes were made in
such controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not Applicable
ITEM 16B. CODE OF ETHICS
Not Applicable
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not Applicable
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Independent Auditors' Reports F-1, 2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
ITEM 19. EXHIBITS
* 3.1 Memorandum of Association
* 3.2 Bye-Laws
* 3.3 Certificate of Incorporation on Change of Name
* 4.1 Specimen Certificate for the Shares of Common Stock
* 10.1 Processing Agreement, dated December 4, 1991, between
Radica HK and foreign Economic Development Co. of
Humen Town, Dongguan, relating to the Tai Ping
Factory
40
* 10.2 Processing Agreement, dated December 27, 1993,
between Radica HK and Foreign Economic Development
Co. of Humen Town, Dongguan
@ 10.3 Cooperative Joint Venture Contract of D.G. Radica
Games Manufacturing Co., Ltd., dated June 24, 1994
(see exhibit 10.16 to 20-F for year ended October 31,
1994)
* 10.4 Shareholders Agreement, dated January 12, 1994, among
the Company and the shareholders parties thereto
* 10.5 Amendment to Shareholders Agreement, dated as of
February 16, 1994, among the Company and the
shareholders party thereto.
** 10.5(a) Amendment to Shareholders Agreement, dated as of
September 5, 1997, among the Company and the
shareholders party thereto.
^ 10.6 Employment Agreement, dated as of December 15, 2001,
between Radica USA and Jeanne Olson
* 10.8 Employment Agreement, dated as of November 28, 1993,
among Radica HK, Radica USA and Jon N. Bengtson
* 10.8(a) Form of Amendment to Employment Agreement among
Radica Games Limited, Radica HK, Radica USA and Jon
N. Bengtson.
# 10.8(b) December 1995 Amendment to such Employment Agreement.
~ 10.8(c) December 1997 Amendment to such Employment Agreement.
> 10.9 1994 Stock Option Plan, most recent amendment
restated in May 2000 to increase options
> 10.11 Amendment and Restatement to Employment Agreement
among Radica USA, Radica Games Limited and Patrick
Feely dated September 27, 2000
> 10.13 Amendment and Restatement to Employment Agreement
between Radica Games Limited and David C.W. Howell
dated September 29, 2000
> 10.14 Amendment and Restatement to Employment Agreement
between Radica Games Limited and Siu Wing Lam dated
October 4, 2000
^ 10.15 Employment Agreement, dated as of May 25, 2001,
between Radica UK Limited and John Doughty
## 10.16 Share Purchase Agreement dated as of June 24, 1999,
relating to the acquisition of the entire issued
share capital of Leda Media Products Limited (now
Radica UK Limited).
11.1 Statement re Computation of Per Share Earnings
12.1 Statement re Selected Quarterly Financial Data
21.1 List of subsidiaries
23.1 Consent of KPMG
23.2 Consent of Deloitte Touche Tohmatsu
99.1 Section 906 Certification of Patrick S. Feely
99.2 Section 906 Certification of David C.W. Howell
41
* Incorporated by reference to Registration Statement on Form F-1, File No.
33-75794 filed by the Registrant.
@ Incorporated by reference to Form 20-F for the year ended October 31, 1994.
# Incorporated by reference to Form 20-F for the year ended October 31, 1996.
~ Incorporated by reference to Form 20-F for the year ended October 31, 1997.
** Incorporated by reference to Form 20-F for the year ended October 31, 1998.
## Incorporated by reference to Form 20-F for the year ended December 31,
1999.
> Incorporated by reference to Form 20-F for the year ended December 31,
2000.
^ Incorporated by reference to Form 20-F for the year ended December 31,
2001.
The other exhibits not footnoted are included as part of this filing.
42
RADICA GAMES LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports ....................................... F-1, 2
Consolidated Balance Sheets ......................................... F-3
Consolidated Statements of Operations ............................... F-4
Consolidated Statements of Shareholders' Equity
and Comprehensive Income ............................................ F-5
Consolidated Statements of Cash Flows ............................... F-6
Notes to the Consolidated Financial Statements ...................... F-7
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for the years then ended. 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, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 5 to the consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002.
/S/ KPMG
HONG KONG
February 18, 2003
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Radica Games Limited
We have audited the consolidated balance sheet (not presented herein)
of Radica Games Limited and subsidiaries as of December 31, 2000 and the
accompanying related statements of operations, shareholders' equity and
comprehensive income, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Radica Games Limited and
subsidiaries as of December 31, 2000 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/S/ Deloitte Touche Tohmatsu
HONG KONG
February 12, 2001 (April 15, 2003 as to the last paragraph of Note 5)
F-2
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
(US dollars in thousands, except share data) 2002 2001
------------------ ------------------
Current assets:
Cash and cash equivalents
(Pledged deposits of $8,951 in 2002 and $8,955 in 2001 ) $ 32,692 $ 25,810
Accounts receivable, net of allowances for doubtful accounts
of $315 ($2,207 in 2001) 15,139 13,868
Inventories, net of provision of $4,193 ($3,997 in 2001) 20,385 17,179
Prepaid expenses and other current assets 1,674 2,283
Income taxes receivable 931 931
Deferred income taxes - 168
------------------ ------------------
Total current assets 70,821 60,239
------------------ ------------------
Property, plant and equipment, net 14,930 16,310
Goodwill 9,551 9,551
Purchased intangible assets, net of accumulated amortization of $6,260
($5,840 in 2001) - 420
Deferred income taxes, noncurrent - 1,887
------------------ ------------------
Total assets $ 95,302 $ 88,407
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 846 $ 846
Accounts payable 7,974 9,201
Current portion of long-term debt 1,825 3,648
Accrued payroll and employee benefits 2,753 943
Accrued warranty expenses 1,040 900
Other accrued liabilities 5,840 7,485
Income taxes payable 309 507
Deferred income taxes 79 -
------------------ ------------------
Total current liabilities 20,666 23,530
------------------ ------------------
Long-term debt - 1,825
------------------ ------------------
Total liabilities 20,666 25,355
------------------ ------------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
17,796,131 shares issued and outstanding (17,646,740 in 2001) 178 176
Additional paid-in capital 2,320 1,549
Warrants to acquire common stock - 445
Retained earnings 72,946 61,012
Accumulated other comprehensive loss (808) (130)
------------------ ------------------
Total shareholders' equity 74,636 63,052
------------------ ------------------
Total liabilities and shareholders' equity $ 95,302 $ 88,407
================== ==================
See accompanying notes to the consolidated financial statements.
F-3
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(US dollars in thousands, 2002 2001 2000
except per share data) ------------------ ----------------- ------------------
Revenues:
Net sales $ 124,646 $ 98,554 $ 106,696
Cost of goods sold (exclusive of items
shown separately below) (77,481) (64,698) (83,041)
------------------ ----------------- ------------------
Gross profit 47,165 33,856 23,655
------------------ ----------------- ------------------
Operating expenses:
Selling, general and administrative expenses (27,695) (26,279) (32,322)
Research and development (4,094) (5,775) (5,210)
Depreciation (2,438) (2,631) (2,601)
Amortization of intangible assets and goodwill (420) (1,382) (2,826)
Restructuring charge - (1,551) (1,190)
------------------ ----------------- ------------------
Total operating expenses (34,647) (37,618) (44,149)
------------------ ----------------- ------------------
Operating income (loss) 12,518 (3,762) (20,494)
Other income 306 24 781
Foreign currency gain (loss), net 1,744 (219) 49
Interest income 253 733 1,472
Interest expense (218) (597) (808)
------------------ ----------------- ------------------
Income (loss) before income taxes 14,603 (3,821) (19,000)
(Provision) credit for income taxes (2,669) (553) 901
------------------ ----------------- ------------------
Net income (loss) $ 11,934 $ (4,374) $ (18,099)
================== ================= ==================
Net income (loss) per share:
Basic $ 0.67 $ (0.25) $ (1.03)
================== ================= ==================
Diluted $ 0.65 $ (0.25) $ (1.03)
================== ================= ==================
Weighted average number of common and
common equivalent shares
Basic 17,725,879 17,611,886 17,608,167
================== ================= ==================
Diluted 18,335,827 17,611,886 17,608,167
================== ================= ==================
See accompanying notes to the consolidated financial statements.
F-4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2002
Common Stock Accumulated
(US dollars in thousands) ------------ 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, 1999 17,639,594 $ 176 $ 1,090 $ 667 $ 84,100 $ 29 $ 86,062
Issuance of stock 9,158 - 23 - - - 23
Cancellation of repurchased stock (156,055) (1) (25) - (615) - (641)
Stock options exercised 71,600 1 100 - - - 101
Net loss - - - - (18,099) - (18,099)
Foreign currency translation - - - - - (58) (58)
------------- ----------- ------------ ------------- ------------ ------------- -----------
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
============= =========== ============ ============= ============ ============= ===========
The comprehensive income (loss) of the Company, which represents the aggregate of the net income (loss) and the foreign
currency translation adjustments, was $11,256, $(4,475) and $(18,157) for the years ended December 31, 2002, 2001 and 2000,
respectively.
See accompanying notes to the consolidated financial statements.
F-5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(US dollars in thousands) 2002 2001 2000
----------------- ----------------- -----------------
Cash flow from operating activities:
Net income (loss) $ 11,934 $ (4,374) $ (18,099)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes 2,134 (918) 2,541
Depreciation 2,438 2,631 2,601
Amortization 420 1,382 2,826
Loss on disposal and write off of property, plant and equipment 57 73 10
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (1,271) 8,678 (2,181)
(Increase) decrease in inventories (3,206) (3,208) 10,654
Decrease (increase) in prepaid expenses and other current assets 609 (709) 3,178
(Decrease) increase in accounts payable (1,227) 2,124 (3,852)
Increase (decrease) in accrued payroll and employee benefits 1,810 (7) (1,561)
Increase (decrease) in accrued warranty expenses 140 (50) (150)
(Decrease) increase in other accrued liabilities (1,645) 1,036 2,220
(Decrease) increase in income taxes payable (198) 3,638 (2,875)
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities 11,995 10,296 (4,688)
----------------- ----------------- -----------------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 201 64 75
Purchase of property, plant and equipment (1,316) (1,103) (3,138)
Purchase of intangible assets - - (1,260)
----------------- ----------------- -----------------
Net cash used in investing activities (1,115) (1,039) (4,323)
----------------- ----------------- -----------------
Cash flow from financing activities:
Funds from issuance of stock $ 21 $ 22 23
Funds from stock options exercised 307 117 101
(Decrease) increase in short-term borrowings - (2,934) 2,316
Proceeds from bank loan - - 10,945
Repayment of long-term debt (3,648) (3,648) (12,737)
Repurchase of common stock - - (641)
----------------- ----------------- -----------------
Net cash (used in) provided by financing activities (3,320) (6,443) 7
----------------- ----------------- -----------------
Effect of currency exchange rate change (678) (101) (58)
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 6,882 2,713 (9,062)
Cash and cash equivalents:
Beginning of year 25,810 23,097 32,159
----------------- ----------------- -----------------
End of year $ 32,692 $ 25,810 $ 23,097
================= ================= =================
Supplementary disclosures of cash flow information:
Interest paid $ 220 $ 594 $ 797
Income taxes paid 1,314 433 109
Non-cash investing and financing activities:
Loan notes forfeited $ - $ - $ 1,399
Inventory exchanged for advertising and development
of Internet arcade game - - 177
See accompanying notes to the consolidated financial statements.
F-6
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(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 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 of deposit with a
maturity at purchase date of three months or less.
Inventories
Inventories are stated at the lower of cost, determined by the weighted
average method, or market. Provision for potentially obsolete or
slow-moving inventory is made based on management's analysis of inventory
levels and future expected sales.
Depreciation and Amortization of Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
on the straight-line method at rates based upon the estimated useful lives
of the property, generally not more than seven years except for leasehold
land and buildings which are 50 years or where shorter, the remaining term
of the lease, by equal annual installments. 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 from the respective
accounts and any resulting gain or loss is included in income.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002. 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, 2002, 2001 and 2000)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, 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.
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. The amount of goodwill
and other intangible asset impairment, if any, was measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
Impairment of Long-lived Assets
The Company adopted SFAS No. 144 Accounting for the Impairment or Disposal
of Long-lived Assets effective January 1, 2002. SFAS No. 144 provides a
single accounting model for long-lived assets to be disposed of. SFAS No.
144 also changes the criteria for classifying an asset as held for sale;
and broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of recognizing
losses on such operations. The adoption of SFAS No. 144 did not affect the
Company's financial statements.
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 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.
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
Revenues are recognized as sales when merchandise is shipped, which is in
accordance with the terms of the sale which are FOB shipping point, except
in a few cases where terms of sale are FOB destination. This represents the
point at which the customer takes ownership and assumes risk of loss. The
Company has consignment agreements with certain European distributors and
records these shipments as revenues upon confirmation of sell-through by
the distributor.
F-8
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Allowance for Doubtful Accounts
The Company is required to estimate the collectibility of trade
receivables. A considerable amount of judgment is required in assessing the
realization of these receivables including the current creditworthiness of
each customer and related aging of the past due balances. In order to
assess the collectibility of these receivables, ongoing credit evaluations
of the customers' financial condition are performed. Through these
evaluations the Company may become aware of a situation where a customer
may not be able to meet its financial obligations due to deterioration of
its financial viability, credit ratings or bankruptcy. The allowance for
doubtful accounts is based on the best facts available to the Company and
are reevaluated and adjusted as additional information is received. The
Company does not have any off-balance sheet credit exposures relating to
its customers.
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 expensed by the Company the first time that the advertising
takes place. 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 expense was approximately $7,200, $6,600 and $11,100 for the
years ended December 31, 2002, 2001 and 2000, respectively.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $4,094, $5,775 and $5,210 in 2002, 2001 and
2000, respectively.
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 are accumulated as a separate component of accumulated
other comprehensive income (loss) in shareholders' equity.
F-9
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 12). 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:
2002 2001
------------ ----------
Net income (loss), as reported $ 11,934 $ (4,374)
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (746) (793)
------------ ----------
Prof forma net income (loss) $ 11,188 $ (5,167)
============ ==========
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 were excluded from the computation in loss
making periods as their inclusion would have been 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.
F-10
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 Issued Accounting Pronouncement
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 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 records a
corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation will 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 is required to adopt SFAS No. 143 on January 1,
2003. The adoption of SFAS No. 143 is not expected to have a material
effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 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. SFAS No. 145
also amends SFAS No. 13 to require sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of
Statement No. 4 is applied in fiscal years beginning after May 15, 2002.
Earlier application of these provisions is encouraged. The provisions of
the Statement related to Statement No. 13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS No. 145 is not expected to have a material effect on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. The provisions of this Statement are effective
for exit or disposal activities that are initiated after December 31, 2002,
with early application encouraged. The adoption of SFAS No. 146 is not
expected to have a material effect on the Company's financial statements.
F-11
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In November 2002, the FASB issued 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. This
Interpretation elaborates on 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 are applicable to guarantees
issued or modified after December 31, 2002 and are not expected to have a
material effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002.
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.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. The
application of this Interpretation is not expected to have a material
effect on the Company's financial statements. The Interpretation requires
certain disclosures in financial statements issued after January 1, 2003 if
it is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the Interpretation
becomes effective.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation.
3. INVENTORIES
Inventories by major categories, net of provisions are summarized as
follows:
2002 2001
----------- -----------
Raw materials $ 3,004 $ 3,165
Work in progress 3,462 3,176
Finished goods 13,308 10,137
Consigned finished goods 611 701
----------- -----------
$ 20,385 $ 17,179
=========== ===========
F-12
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
2002 2001
------------ ------------
Land and buildings $ 13,281 $ 13,374
Plant and machinery 7,520 7,274
Furniture and equipment 7,303 7,560
Leasehold improvements 2,879 2,803
------------ ------------
Total $ 30,983 $ 31,011
Less: Accumulated depreciation and amortization (16,053) (14,701)
------------ ------------
Total, net $ 14,930 $ 16,310
============ ============
Included in land and buildings are land use rights for the Company's
factory in Southern China carried at $896 (2001: $917).
5. GOODWILL AND INTANGIBLE ASSETS
At December 31, 2002 and 2001, 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.
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on
January 01, 2002. Under SFAS 142, 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 1 to determine whether the goodwill
carried on the books was impaired and the extent of such impairment. After
performing this evaluation there was no indication that goodwill was
impaired as of December 31, 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).
In 2000, the Company entered into a licensing agreement with Shinsedai Co.,
Ltd. ("SSD") for the rights to use their patented XaviX(R) technology. As
part of its agreement with SSD, the Company became an exclusive
sublicensing agent for the XaviX(R) 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.
F-13
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands, except per share data)
5. GOODWILL AND INTANGIBLE ASSETS (Continued)
Amortization of goodwill and other intangible assets totaled $420, $1,382
and $2,826 for the years ended December 31, 2002, 2001 and 2000,
respectively. Net income (loss) and net income (loss) per share adjusted to
exclude amortization of goodwill in fiscal years prior to 2002 are as
follows (in thousands, except per share data):
2002 2001 2000
---------- --------- ----------
Reported net income (loss) $ 11,934 $ (4,374) $ (18,099)
Add back: Goodwill amortization -- 796 822
---------- --------- ----------
Adjusted net income (loss) $ 11,934 $ (3,578) $ (17,277)
========== ========= ==========
Diluted income (loss) per share:
Reported net income (loss) $ 0.65 $ (0.25) $ (1.03)
Goodwill amortization -- 0.05 0.05
---------- --------- ----------
Adjusted net income (loss) $ 0.65 $ (0.20) $ (0.98)
========== ========= ==========
Basic income (loss) per share:
Reported net income (loss) $ 0.67 $ (0.25) $ (1.03)
Goodwill amortization -- 0.05 0.05
---------- --------- ----------
Adjusted net income (loss) $ 0.67 $ (0.20) $ (0.98)
========== ========= ==========
6. SHORT-TERM BORROWINGS
As of December 31, 2002, the Company had line-of-credit agreements with
various banks that provided for borrowings of up to approximately $5,800,
including uncommitted credit facilities and amounts available for the
issuance of letters of credit. Substantially all of the short-term
borrowings outstanding as of December 31, 2002 and 2001 represent
borrowings made under these lines of credit. The weighted average interest
rate of the outstanding borrowing was approximately 5.7, 5.9 and 6.0
percent for the years ended December 31, 2002, 2001 and 2000, respectively.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
2002 2001
----------- -----------
Accrued advertising expenses $ 1,243 $ 1,105
Accrued license and royalty fees 1,479 2,346
Commissions payable 191 149
Other accrued liabilities 2,927 3,885
----------- -----------
Total $ 5,840 $ 7,485
=========== ===========
F-14
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
8. INCOME TAXES
The components of income (loss) before income taxes are as follows:
2002 2001 2000
-------- -------- --------
United States $ 10,807 $ (5,523) $(20,240)
International 3,796 1,702 1,240
-------- -------- --------
$ 14,603 $ (3,821) $(19,000)
======== ======== ========
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 effective tax rate was 27%, 12% and 12% for the years ended
December 31, 2002, 2001 and 2000, respectively.
The provisions (credits) for income taxes consist of the following:
2002 2001 2000
------- ------- -------
Current:
US federal and state $ 51 $ 644 $(3,236)
International 950 827 (206)
------- ------- -------
Total current income tax provision (credit) $ 1,001 $ 1,471 $(3,442)
------- ------- -------
Deferred:
US federal $ -- $ -- $ 3,375
International 1,668 (918) (834)
------- ------- -------
Total deferred income tax provision (credit) $ 1,668 $ (918) $ 2,541
------- ------- -------
Total income taxes provision (credit) $ 2,669 $ 553 $ (901)
======= ======= =======
A reconciliation between income tax expense (benefit) and amounts
calculated using the US statutory rate of 34 percent is as follows:
2002 2001 2000
------- ------- -------
Computed "expected" tax expense (benefit)
at the US statutory rate of 34% $ 4,965 $(1,299) $(6,460)
State tax 4 13 9
International tax effect, net (763) (647) (1,646)
Change in valuation allowance (1,282) 2,163 7,052
Other, net (255) 323 144
------- ------- -------
Income tax expense (benefit) $ 2,669 $ 553 $ (901)
======= ======= =======
The US statutory rate has been used since the majority of the Company's
taxable income arises in the US. As of December 31, 2002, the Company's US
subsidiary had approximately $9,700 of tax net operating loss carryforwards
which will begin to expire after 2020. In addition, as of December 31,
2002, the Company's UK subsidiary had approximately $6,900 tax net
operating loss carryforwards which will carryforward indefinitely.
F-15
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
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:
2002 2001
-------- --------
Deferred tax assets:
Excess of financial reporting depreciation
over tax depreciation $ 239 $ 176
Net operating loss carryforwards 5,456 8,325
Advertising allowances 413 348
Bad debt allowance 56 337
Inventory obsolescence reserve 288 345
Sales allowance and returns 974 1,329
Other 733 715
-------- --------
Total gross deferred tax assets 8,159 11,575
Valuation allowance (8,159) (9,441)
-------- --------
Net deferred tax assets $ -- $ 2,134
======== ========
Deferred tax liabilities:
Excess of tax over financial reporting depreciation $ (79) $ (79)
======== ========
The following table represents the classification of the Company's net
deferred tax (liabilities) assets:
2002 2001
-------- --------
Current deferred tax assets $ -- $ 168
Long-term deferred tax (liabilities) assets (79) 1,887
-------- --------
Total net deferred tax (liabilities) assets $ (79) $ 2,055
======== ========
The Company records valuation allowances against its deferred tax assets.
In determining the allowance, management considers all available evidence
for certain tax credit, net operating loss and capital loss carryforwards
that would likely expire prior to their utilization. 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.
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 net
deferred tax assets as not more likely than not. Movement in the valuation
allowance during 2002 reflected the change in deferred tax assets in
respect of tax losses carried forward.
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-16
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
9. LONG-TERM DEBT
The Company has $1,825 outstanding under a term loan related to the
financing of the Radica UK acquisition in 1999. The loan bears interest at
the three month Singapore Interbank Offered Rate ("SIBOR") plus 2% (3.38%
at December 31, 2002). The agreement requires quarterly principal and
interest payments and matures in June 2003. The balance outstanding of the
$1,825 loan is classified as current liabilities in the consolidated
balance sheet at December 31, 2002.
The term loan is secured by certain properties and deposits of the Company
(see Note 16). The agreement contains covenants that, among other things,
require the Company to maintain a minimum tangible net worth, gearing
ratio, and other financial ratios. The Company is in compliance with these
covenants as at December 31, 2002.
Long-term debt is as follows:
2002 2001
------- -------
Term loan payable $ 1,825 $ 5,473
Less: Current portion (1,825) (3,648)
------- -------
$ -- $ 1,825
======= =======
10. RESTRUCTURING CHARGE
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 have been substantially expended 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 are payable in 2003.
During 2000, the Company recorded a restructuring charge of $1,190 as a
result of the Company's plan to change its business strategy to address
changes in the market for handheld games and to allow the Company to adjust
the overall cost structure given current revenue levels. Specific actions
taken included reducing the Company's workforce, consolidating facilities,
and closing one office. The employee separations related to approximately
150 employees worldwide, predominantly occurring in Asia and North America.
Total restructuring costs were approximately composed of $1,100 in
connection with severance and benefits and $90 for the write-off of certain
assets associated with closing one office. Total remaining restructuring
expenses accrued at December 31, 2000 was $246, primarily related to the
remaining amount of termination benefit payments.
F-17
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands, except share and per share data)
10. RESTRUCTURING CHARGE (Continued)
The components of restructuring charges are as follows:
Balance Balance
at beginning Charges / Amount at end
of year (Release) incurred of year
------------ --------- ------ ------
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
======= ======= ======= =======
2000
Severance and other compensation $ -- $ 1,100 $ (854) $ 246
Lease termination costs and
related asset writedowns -- 90 (90) --
------- ------- ------- -------
$ -- $ 1,190 $ (944) $ 246
======= ======= ======= =======
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share as of December 31:
2002 2001 2000
----------- ------------ --------------
Numerator for basic and diluted
earnings (loss) per share:
Net income (loss) $ 11,934 $ (4,374) $ (18,099)
=========== ============ ==============
Denominator:
Basic weighted average shares 17,725,879 17,611,886 17,608,167
Effect of dilutive options and warrants 609,948 -- --
----------- ------------ --------------
Diluted weighted average shares 18,335,827 17,611,886 17,608,167
=========== ============ ==============
Basic net income (loss) per share: $ 0.67 $ (0.25) $ (1.03)
=========== ============ ==============
Diluted net income (loss) per share: $ 0.65 $ (0.25) $ (1.03)
=========== ============ ==============
Options and warrants on 441,700, 2,440,867 and 2,728,800 shares of common
stock for the years ended December 31, 2002, 2001 and 2000, 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 and 2000.
F-18
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands, except share and per share data)
12. STOCK OPTIONS
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.
A summary of option activity is as follows:-
2002 2001 2000
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
(Shares in thousands) Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 2,191 $ 3.88 2,354 $ 5.81 2,000 $ 7.93
Options granted 585 3.75 521 2.64 853 2.79
Options exercised (145) 2.13 (76) 1.56 (72) 1.41
Options forfeited (318) 3.21 (608) 10.60 (427) 10.43
---------- ---------- ----------
Outstanding at end of year 2,313 $ 4.05 2,191 $ 3.88 2,354 $ 5.81
Options exercisable
at year end 1,352 $ 4.52 1,151 $ 4.54 910 $ 7.52
F-19
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands, except share and per share data)
12. STOCK OPTIONS (continued)
The following is additional information relating to options outstanding as
of December 31, 2002:
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 2.000 491 $ 1.41 4.25 451 $ 1.37
$ 2.001 to 4.000 1,440 3.20 7.50 646 3.24
$ 4.001 to 6.000 132 4.17 9.23 19 4.26
$ 6.001 to 8.000 27 6.78 4.59 27 6.78
$ 8.001 to 10.000 8 9.13 5.88 7 9.00
$ 12.001 to 14.000 61 12.62 6.28 61 12.54
$ 14.001 to 16.000 60 14.13 5.85 48 14.13
$ 16.001 to 18.000 60 16.82 5.70 60 16.82
$ 18.001 to 20.000 34 18.85 5.26 33 18.94
------------- ------------
2,313 $ 4.05 6.72 1,352 $ 4.52
============= ============
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 $1.51, $1.24 and $1.57 per option for the years ended December
31, 2002, 2001 and 2000, respectively. The values were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2002 2001 2000
------------ ----------- ---------
Expected life of options 3.4 years 4 years 5 years
Risk-free interest rate 4.1% 4.5% 6.0%
Expected volatility of underlying stock 51% 55% 58%
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.
F-20
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands, except per share data)
12. STOCK OPTIONS (Continued)
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:
2002 2001 2000
---------- ---------- -----------
Reported net income (loss) $ 11,934 $ (4,374) $ (18,099)
Pro forma net income (loss) 11,188 (5,167) (19,306)
Reported net income (loss) per share
Basic $ 0.67 $ (0.25) $ (1.03)
Diluted 0.65 (0.25) (1.03)
Pro forma net income (loss) per share
Basic $ 0.63 $ (0.29) $ (1.10)
Diluted 0.61 (0.29) (1.10)
13. WARRANTS
During 1999, in connection with Electronic Arts ("EA") worldwide licensing
agreement, the Company issued warrants to purchase 375,000 shares of the
Company's common stock at various exercise prices. Using the Black-Scholes
option pricing model, the fair value of the warrants of $667 was recorded
as an intangible asset and has been fully amortized in 2001. As of December
31, 2002, all warrants have expired or been forfeited.
14. 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
$142, $240 and $170 for the years ended December 31, 2002, 2001 and 2000,
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 $60, $59, and
$74 to these plans for the years ended December 31, 2002, 2001 and 2000,
respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and bank borrowings are reasonable estimates of their fair
value because of the short-term maturity of these instruments or, in the
case of long-term debt, the market rate of interest which is charged at
variable rates.
F-21
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
16. PLEDGE OF ASSETS
At December 31, 2002, the Company's loan agreements and general banking
facilities including overdraft and trade facilities were collateralized as
follows:
Leasehold land and buildings $ 11,164
Bank balances 8,951
Inventories 7,290
---------------
$ 27,405
===============
17. 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 $509, $491, and $1,113 for the years ended December 31,
2002, 2001 and 2000, respectively. In the normal course of business, leases
that expire will be renewed or replaced by leases on other properties. As
of December 31, 2002, the Company was obligated under non-cancellable
operating leases requiring future minimum rental payments as follows:
Operating leases
---------------
2003 $ 475
2004 350
2005 252
2006 245
2007 242
Thereafter 1,180
---------------
Total minimum lease payments $ 2,744
===============
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 $3,808 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 20.
F-22
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
17. COMMITMENTS AND CONTINGENCIES (Continued)
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
-----------
2003 $ 63
2004 1
2005 16
-----------
$ 80
===========
Litigation
The Company is subject to pending claims and 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. As of the reporting date, no judgment had
been handed out in the Cognex case. The Company has other pending
litigation against it. These matters are substantially covered by
insurance, however 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, 2002 in respect of
the Lemelson case or other claims or legal actions, in accordance with the
Company's accounting policy. 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.
F-23
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
18. 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
twenty-four percent of consolidated net sales for the year ended December
31, 2002, two customers which accounted for more than twenty-two percent
and eleven percent of consolidated net sales for the year ended December
31, 2001 and two customers which accounted for more than seventeen percent
and sixteen percent for the year ended December 31, 2000. The Company
performs ongoing credit evaluations of its customers' financial condition
and, generally, requires no collateral from its customers.
During 2002, $19,144 of the Company' sales came from the Play TV line of
products. Each of these products contains a XaviX CPU which is purchased
from Shinsedai Co., Ltd. ("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 9% of sales during
the year.
19. 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
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, 2002. 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.
A large proportion of the Company's assets are utilized by both segments
and are therefore not suitable for allocating to specific assets. In 2002,
the Company has further refined the segment assets. The segment assets are
comprised of accounts receivable, inventories and intangible assets. Other
assets included in corporate principally are cash and cash equivalents,
deferred tax assets, property, plant and equipment, and all other
insignificant assets not reportable under other segments. Certain
information presented in the tables below has been restated to conform to
the current management structure as of January 2002. Information by segment
and a reconciliation to reported amounts for the year ended December 31,
2002, 2001 and 2000 are as follows:
F-24
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
19. SEGMENT INFORMATION (Continued)
A summary of the Company's two reportable segments is set forth below.
2002 2001 2000
--------- --------- ---------
Revenues from external customers
Games and Youth Electronics $ 104,062 $ 82,929 $ 91,036
VGA 20,584 15,625 15,660
--------- --------- ---------
Total revenues from external customers $ 124,646 $ 98,554 $ 106,696
========= ========= =========
Depreciation and amortization
Games and Youth Electronics $ 2,446 $ 3,120 $ 4,449
VGA 412 893 978
--------- --------- ---------
Total depreciation and amortization $ 2,858 $ 4,013 $ 5,427
========= ========= =========
Segment income (loss)
Games and Youth Electronics $ 16,459 $ 990 $ (15,029)
VGA (3,941) (4,752) (5,465)
--------- --------- ---------
Total segment income (loss) $ 12,518 $ (3,762) $ (20,494)
Corporate
Net interest and other income 2,085 (59) 1,494
(Provision) credit for income taxes (2,669) (553) 901
--------- --------- ---------
Total consolidated net income (loss) $ 11,934 $ (4,374) $ (18,099)
========= ========= =========
Segment assets
Games and Youth Electronics $ 26,037 $ 22,712
VGA 19,038 18,306
Corporate 50,227 47,389
--------- ---------
Total consolidated assets $ 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-25
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
19. SEGMENT INFORMATION (Continued)
Revenues from external customers by product category are summarized as
follows:
2002 2001 2000
-------- -------- --------
Electronic Games $ 62,684 $ 52,268 $ 57,868
Youth Electronics 16,744 11,720 13,897
VGA 15,844 10,335 10,116
Manufacturing Services 29,374 24,231 24,815
-------- -------- --------
Total net revenues $124,646 $ 98,554 $106,696
======== ======== ========
Information about the Company's operations in different geographic areas is
set forth in the table below. Net sales are attributed to countries based
on the location of customers, while long-lived assets are reported based on
their location. Long-lived assets principally include property, plant and
equipment, intangible assets and long-term investment:
2002 2001 2000
-------- -------- --------
Net sales:
United States and Canada $ 79,205 $ 59,584 $ 66,637
Asia Pacific and other countries 25,690 21,300 21,359
Europe 19,751 17,670 18,700
-------- -------- --------
$124,646 $ 98,554 $106,696
======== ======== ========
Long-lived assets:
United States and Canada $ 771 $ 1,662
Asia Pacific and other countries 13,977 14,851
Europe 9,733 9,768
-------- --------
$ 24,481 $ 26,281
======== ========
F-26
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(YEARS ENDED DECEMBER 31, 2002, 2001 and 2000)
(US dollars in thousands)
20. VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
beginning Charged to Utilization / end of
of year expense write-offs year
------- ------- ---------- ----
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
=============== =============== =============== ===============
2000
Allowance for doubtful accounts $ 389 $ 2,648 $ (964) $ 2,073
Allowance for estimated product returns 624 1,423 (553) 1,494
Accrued warranty expenses 1,100 1,113 (1,263) 950
Accrued sales allowance 1,726 4,260 (2,269) 3,717
--------------- --------------- --------------- ---------------
$ 3,839 $ 9,444 $ (5,049) $ 8,234
=============== =============== =============== ===============
F-27
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: April 15, 2003 /S/ Craig D. Storey
--------------- ---------------------------------
Craig D. Storey
Chief Accounting Officer
I-1
CERTIFICATIONS
I, Patrick S. Feely, certify that:
1. I have reviewed this annual report on Form 20-F of Radica Games Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and internal
controls and procedures for financial reporting (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
...............
/s/ Patrick S. Feely
-------------------------------------
Patrick S. Feely
President and Chief Executive Officer
I-2
CERTIFICATIONS
I, David C.W. Howell, certify that:
1. I have reviewed this annual report on Form 20-F of Radica Games Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and internal
controls and procedures for financial reporting (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
...............
/s/ David C.W. Howell
-----------------------------
David C.W. Howell
President Asia Operations and
Chief Financial Officer
EXHIBIT INDEX
* 3.1 Memorandum of Association
* 3.2 Bye-Laws
* 3.3 Certificate of Incorporation on Change of Name
* 4.1 Specimen Certificate for the Shares of Common Stock
* 10.1 Processing Agreement, dated December 4, 1991, between
Radica HK and Foreign Economic Development Co. of
Humen Town, Dongguan, relating to the Tai Ping
Factory
* 10.2 Processing Agreement, dated December 27, 1993,
between Radica HK and Foreign Economic Development
Co. of Humen Town, Dongguan
@ 10.3 Cooperative Joint Venture Contract of D.G. Radica
Games Manufacturing Co., Ltd., dated June 24, 1994
(see exhibit 10.16 to 20-F for year ended October 31,
1994)
* 10.4 Shareholders Agreement, dated January 12, 1994, among
the Company and the shareholders parties thereto
* 10.5 Amendment to Shareholders Agreement, dated as of
February 16, 1994, among the Company and the
shareholders party thereto.
** 10.5(a) Amendment to Shareholders Agreement, dated as of
September 5, 1997, among the Company and the
shareholders party thereto.
^ 10.6 Employment Agreement, dated as of December 15, 2001,
between Radica USA and Jeanne Olson
* 10.8 Employment Agreement, dated as of November 28, 1993,
among Radica HK, Radica USA and Jon N. Bengtson
* 10.8(a) Form of Amendment to Employment Agreement among
Radica Games Limited, Radica HK, Radica USA and Jon
N. Bengtson.
# 10.8(b) December 1995 Amendment to such Employment Agreement.
~ 10.8(c) December 1997 Amendment to such Employment Agreement.
> 10.9 1994 Stock Option Plan, most recent amendment
restated in May 2000 to increase options
> 10.11 Amendment and Restatement to Employment Agreement
among Radica USA, Radica Games Limited and Patrick
Feely dated September 27, 2000
> 10.13 Amendment and Restatement to Employment Agreement
between Radica Games Limited and David C.W. Howell
dated September 29, 2000
> 10.14 Amendment and Restatement to Employment Agreement
between Radica Games Limited and Siu Wing Lam dated
October 4, 2000
^ 10.15 Employment Agreement, dated as of May 25, 2001,
between Radica UK Limited and John Doughty
I-4
## 10.16 Share Purchase Agreement dated as of June 24, 1999,
relating to the acquisition of the entire issued
share capital of Leda Media Products Limited (now
Radica UK Limited).
11.1 Statement re Computation of Per Share Earnings
12.1 Statement re Selected Quarterly Financial Data
21.1 List of subsidiaries
23.1 Consent of KPMG
23.2 Consent of Deloitte Touche Tohmatsu
99.1 Section 906 Certification of Patrick S. Feely
99.2 Section 906 Certification of David C.W. Howell
* Incorporated by reference to Registration Statement on Form F-1, File No.
33-75794 filed by the Registrant.
@ Incorporated by reference to Form 20-F for the year ended October 31, 1994.
# Incorporated by reference to Form 20-F for the year ended October 31, 1996.
~ Incorporated by reference to Form 20-F for the year ended October 31, 1997.
** Incorporated by reference to Form 20-F for the year ended October 31, 1998.
## Incorporated by reference to Form 20-F for the year ended December 31,
1999.
> Incorporated by reference to Form 20-F for the year ended December 31,
2000.
^ Incorporated by reference to Form 20-F for the year ended December 31,
2001.
The other exhibits not footnoted are included as part of this filing.
I-5