FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of June, 2003
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite R, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F
Form 20-F X Form 40-F
----- -----
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): _________
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): _________
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
----- -----
If "yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-__________
Contents:
1. Quarterly Report for the Quarter Ended March 31, 2003
2. Annual Report to Stockholders
3. Management Information Circular / Proxy Statement dated
April 14, 2003
4. Press Release dated May 9, 2003
5. Press Release dated April 15, 2003
6. Press Release dated February 18, 2003
7. Press Release dated January 8, 2003
This Report on Form 6-K shall be deemed to be incorporated by reference
into the Registrant's Registration Statements on Form S-8 (No. 33-86960, No.
333-7000, No. 333-59737 and 333-61260) and on Form F-3 (No. 333-7526 and No.
333-79005).
QUARTERLY REPORT *
For the quarterly period ended March 31, 2003
Commission File Number 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in charter)
Bermuda N/A
(Country of Incorporation) (I.R.S. Employer Identification No.)
Suite R, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2693 2238
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _x_ No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 2003
----------------------------------------- -----------------------------
Common Stock, par value $0.01 per share 17,922,052
________________________
* As a foreign private issuer, the registrant is not required to file reports on
Form 10-Q. It intends to make voluntary quarterly reports to its stockholders
which generally follow the Form 10-Q format. Such reports, of which this is one,
are furnished to the Commission pursuant to Form 6-K.
2
RADICA GAMES LIMITED
INDEX TO QUARTERLY REPORT ON FORM 6-K
QUARTER ENDED MARCH 31, 2003
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................4
Condensed Consolidated Balance Sheets
March 31, 2003 (unaudited) and December 31, 2002....................4
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2003 (unaudited)
and 2002 (unaudited)................................................5
Condensed Consolidated Statements of Shareholders'
Equity (unaudited) for the Three Months Ended
March 31, 2003 (unaudited) and 2002 (unaudited).....................6
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 2003 (unaudited)
and 2002 (unaudited)................................................7
Notes to the Condensed Consolidated Financial Statements............8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........17
Item 4. Controls and Procedures............................................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................18
Item 2. Changes in Securities and Use of Proceeds..........................18
Item 3. Defaults Upon Senior Securities....................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
Item 5. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
RADICA GAMES LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(US Dollars in thousands, except share data) March 31, December 31,
----------- ---------
2003 2002
----------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 34,773 $ 32,692
Accounts receivable, net of allowances for doubtful accounts
of $344 ($315 as at December 31, 2002) 5,493 15,139
Inventories 18,999 20,385
Prepaid expenses and other current assets 3,043 1,674
Income taxes receivable 931 931
-------- --------
Total current assets 63,239 70,821
-------- --------
Property, plant and equipment, net 13,600 14,034
-------- --------
Intangible assets, net 9,551 9,551
-------- --------
Other assets (Note 6) 891 896
-------- --------
Total assets $ 87,281 $ 95,302
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 846 $ 846
Accounts payable 5,547 9,014
Current portion of long-term debt 913 1,825
Accrued payroll and employee benefits 2,074 2,753
Accrued expenses 3,290 5,840
Income taxes payable 342 309
Deferred income taxes 79 79
-------- --------
Total current liabilities 13,091 20,666
-------- --------
Total liabilities 13,091 20,666
-------- --------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
17,922,052 shares outstanding (17,796,131 as
at December 31, 2002) 179 178
Additional paid-in capital 2,616 2,320
Retained earnings 72,342 72,946
Accumulated other comprehensive loss (947) (808)
-------- --------
Total shareholders' equity 74,190 74,636
-------- --------
Total liabilities and shareholders' equity $ 87,281 $ 95,302
======== ========
See accompanying notes to the condensed consolidated financial statements.
4
RADICA GAMES LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(US Dollars in thousands, Three months ended March 31,
except per share data) -------------------------------
2003 2002*
------------ ------------
(unaudited) (unaudited)
Revenues:
Net sales $ 16,045 $ 17,503
Cost of goods sold (exclusive of items
shown separately below) (9,791) (11,395)
------------ ------------
Gross profit 6,254 6,108
------------ ------------
Operating expenses:
Selling, general and administrative expenses (5,447) (5,626)
Research and development (915) (1,033)
Depreciation and amortization (592) (719)
------------ ------------
Total operating expenses (6,954) (7,378)
------------ ------------
Operating loss (700) (1,270)
Other income 55 15
Foreign currency gain (loss), net 13 (242)
Net interest income 60 1
------------ ------------
Loss before income taxes (572) (1,496)
Provision for income taxes (32) (79)
------------ ------------
Net loss $ (604) $ (1,575)
============ ============
Basic and diluted loss per share $ (0.03) $ (0.09)
============ ============
Basic and diluted weighted average
number of common shares 17,842,297 17,667,315
============ ============
* Reclassified to conform with 2003 presentation.
See accompanying notes to the condensed consolidated financial statements.
5
RADICA GAMES LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2003
(US dollars in thousands) Common stock Accumulated
------------ Additional other Total
Number paid-in Retained comprehensive shareholders'
of shares Amount capital earnings loss equity
--------------- ------------- ------------- ------------- ---------------- -------------
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ 72,946 $ (808) $ 74,636
Stock options exercised 125,079 1 293 - - 4
Issuance of stock 842 - 3 - - 293
Net loss - - - (604) - (604)
Foreign currency translation - - - - (139) (139)
--------------- ------------- ------------- ------------- ---------------- -------------
Balance at March 31, 2003 17,922,052 $ 179 $ 2,616 $ 72,342 $ (947) $ 74,190
=============== ============= ============= ============= ================ =============
See accompanying notes to the condensed consolidated financial statements.
6
RADICA GAMES LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(US dollars in thousands) 2003 2002
------------------- -------------------
(unaudited) (unaudited)
Cash flow from operating activities:
Net loss $ (604) $ (1,575)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred income taxes - 7
Depreciation 592 614
Amortization - 105
Loss on disposal and write off of property, plant and equipment 2 -
Changes in assets and liabilities:
Decrease in accounts receivable 9,646 5,806
Decrease (increase) in inventories 1,386 (1,910)
Increase in prepaid expenses and other assets (1,364) (249)
Decrease in accounts payable (2,847) (2,542)
Decrease in accrued payroll and employee benefits (679) (289)
Decrease in accrued warranty expenses (620) (180)
Decrease in other accrued liabilities (2,550) (1,266)
Decrease (increase) income taxes 33 (185)
------------------- -------------------
Net cash provided by (used in) operating activities 2,995 (1,664)
------------------- -------------------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 2 71
Purchase of property, plant and equipment (162) (105)
------------------- -------------------
Net cash used in investing activities (160) (34)
------------------- -------------------
Cash flow from financing activities:
Funds from issuance of stock 3 5
Funds from stock options exercised 294 86
Repayment of long-term debt (912) (912)
------------------- -------------------
Net cash used in financing activities (615) (821)
------------------- -------------------
Effect of currency exchange rate change (139) 73
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 2,081 (2,446)
Cash and cash equivalents:
Beginning of period 32,692 25,810
------------------- -------------------
End of period $ 34,773 $ 23,364
=================== ===================
See accompanying notes to the condensed consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2003)
(US dollars in thousands)
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PRESENTATION
The Condensed Consolidated Financial Statements of Radica Games Limited
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
accompanying unaudited condensed consolidated financial statements contain
all normal and recurring adjustments, which, in the opinion of management,
are necessary to present fairly the financial position of the Company as of
March 31, 2003, and its results of operations and cash flows for the
periods presented herein. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report
on Form 20-F for the year ended December 31, 2002.
Because the Company's business is seasonal, revenues, expenses, assets and
liabilities can vary during each quarter of the year. Accordingly, the
operating results and trends in these unaudited condensed consolidated
interim financial statements are not necessarily indicative of future
results that may be expected for any other interim period or the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
of certain assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities as of and during the reporting periods.
Significant items subject to such estimates and assumptions include the
carrying amount of goodwill, property, plant and equipment, valuation
allowances for receivables, inventories and deferred income tax assets and
reserves for product returns and warranties, as well as in estimates used
in accounting for legal contingencies. Actual results could differ from the
estimated results. Differences from those estimates are recorded in the
period they become known.
ACCOUNTING FOR STOCK BASED COMPENSATION
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 SFAS 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 SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements of the effects of stock-based
compensation. The provisions of SFAS are effective for fiscal years ending
after December 15, 2002.
The Company has adopted the disclosure-only provisions of SFAS No. 123 and
SFAS No. 148. As permitted by SFAS No. 123, the Company has elected to
retain the intrinsic-value-based method of accounting. Accordingly, 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, 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.
8
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2003)
(US dollars in thousands)
1. BASIS OF PRESENTATION (CONTINUED)
In accordance with SFAS No. 148, the following table summarizes the
Company's results on a pro forma basis as if it had recorded compensation
expense based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123 for the
three months ended March 31, 2003 and 2002:
Three months
ended March 31,
----------------
2003 2002
------ ------
Net loss
As reported $ (604) $(1,575)
Add: Total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of related tax effects (142) (195)
------- --------
Pro forma $ (746) $(1,770)
======= ========
Basic and diluted loss per share
As reported $(0.03) $ (0.09)
Pro forma $(0.04) $ (0.10)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
("FIN 45"). FIN 45 requires a guarantor to recognize a liability at the
inception of the guarantee for the fair value of the obligation undertaken
in issuing the guarantee and include more detailed disclosure with respect
to guarantees. The types of contracts the Company enters into that meet the
scope of this interpretation are financial and performance standby letters
of credit on behalf of wholly-owned subsidiaries. FIN 45 is effective for
guarantees issued or modified after December 31, 2002. The initial adoption
of this accounting pronouncement did not have a material effect on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities that a
company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003
and to existing entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply
to all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. Although the Company is
in the process of assessing the impact of adopting FIN 46 on its financial
position and results of operations, the Company believes that it does not
have any investments which meet the criteria to be considered a variable
interest entity in relation to the Company.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." While the effective date of this
announcement for the Company is not until Q3 2003, the company is currently
evaluating the provisions of SFAS No. 149.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2003)
(US dollars in thousands)
1. BASIS OF PRESENTATION (CONTINUED)
In May 2003 SFAS No. 150 "Accounting for Financial Instruments with
Characteristics of Liabilities, Equity or Both" was issued. SFAS 150
requires changes to the classification of certain freestanding financial
instruments that are currently classified as equity. This announcement is
effective for instruments entered into after May 31, 2003 and for all
instruments outstanding after June 30, 2003. The company is currently
evaluating the provisions of SFAS 150.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation.
2. EARNINGS 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.
The following table sets forth the computations of basic and diluted loss
income per share as of March 31:
Three months ended March 31,
----------------------------
2003 2002
------------ -----------
Numerator for basic and diluted loss per share:
Net loss $ (604) $ (1,575)
============= ===========
Denominator for basic and diluted loss per share: 17,842,297 17,667,315
Basic and diluted loss per share: $ (0.03) $ (0.09)
============= ===========
3. BUSINESS SEGMENTS
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company has two reportable segments from which
it derives its revenues: the Games business that sells product under the
Company's Radica(R) and Girl Tech(R) brand names, and the Video Game
Accessory ("VGA") business that sells product under the Company's
Gamester(R) brand name. The Company also sources certain VGA and other
electronic products through third party manufacturers for retailers to sell
under their own brands; this is also included in the VGA segment. The
reportable segments are strategic businesses that offer different products.
The Company measures segment performance based on net 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.
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2003)
(US dollars in thousands)
3. BUSINESS SEGMENTS (CONTINUED)
A summary of the Company's two reportable segments is set forth below.
Three months ended March 31,
----------------------------
2003 2002
-------- --------
Revenues from external customers
Games and Youth Electronics $ 12,050 $ 12,426
VGA 3,995 5,077
-------- --------
Total revenues from external customers $ 16,045 $ 17,503
======== ========
Segment loss
Games and Youth Electronics $ 189 $ (173)
VGA (876) (1,339)
-------- --------
Total segment loss $ (687) $ (1,512)
Corporate
Net interest and other income 115 16
Provision for income taxes (32) (79)
-------- --------
Total consolidated net loss $ (604) $ (1,575)
======== ========
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2003)
(US dollars in thousands)
4. GOODWILL
At March 31, 2003 and December 31, 2002, the Company's cost in excess of
fair value of assets purchased ("goodwill") related primarily to the 1999
acquisition of Leda Media Products Limited, now called Radica UK Limited
("Radica UK"). 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 thereafter or an
interim basis if an event or change in circumstances indicates that the
asset might be impaired. Goodwill is deemed to be impaired if the carrying
amount of a reporting unit's goodwill exceeds its estimated fair value.
The Company has undertaken goodwill impairment testing to determine whether
the goodwill carried on the books was impaired and the extent of such
impairment. The goodwill arising from the 1999 acquisition of Radica UK was
allocated to the VGA reporting unit. In December 2002, the Company
completed its annual goodwill impairment assessment, which indicated no
impairment of goodwill. There have been no events since December 31, 2002,
which would cause the Company to change this assessment.
5. INVENTORIES
Inventories by major categories are summarized as follows:
March 31, December 31,
2003 2002
--------- ------------
Raw materials $ 2,683 $ 3,004
Work in progress 3,742 3,462
Finished goods 12,030 13,308
Consigned finished goods 544 611
--------- ------------
$18,999 $20,385
========= ============
6. PROPERTY, PLANT AND EQUIPMENT
Property and Plant and Equipment consists of the following:
March 31, December 31,
2003 2002
--------- ------------
Land and buildings $ 12,193 $ 12,230
Plant and machinery 7,470 7,520
Furniture and equipment 7,321 7,303
Leasehold improvements 2,918 2,879
-------- --------
Total 29,902 29,932
Less:Accumulated depreciation and amortization (16,302) (15,898)
-------- --------
Total, net $ 13,600 $ 14,034
======== ========
In November 2002, the AICPA international practices task force (the "Task
Force") discussed an issue relating to accounting for land use rights in
the People's Republic of China ("PRC"). The Task Force view is that PRC
land use rights generally would be considered operating leases, as they are
long-term leases of lands, which do not transfer title. On January 01,
2003, the Company followed this guidance and reclassified $891 and $896 to
other assets from property, plant and equipment as of March 31, 2003 and
December 31, 2002, respectively.
12
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED MARCH 31, 2003)
(US dollars in thousands)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31, December 31,
2003 2002
--------- ------------
Accrued advertising expenses $1,037 $1,243
Accrued license and royalties 620 1,479
Commissions payable 102 191
Other accrued liabilities 1,531 2,927
------ ------
Total $3,290 $5,840
====== ======
8. PLEDGE OF ASSETS
At March 31, 2003, the Company's loan agreements and general banking
facilities including overdraft and trade facilities were collateralized as
follows:
Leasehold land and buildings $10,206
Bank balances 8,951
Inventories 7,557
Other assets 891
-------
$27,605
=======
9. 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. While these matters are substantially covered by
insurance, the Company cannot predict the outcome of the Lemelson case or
the effect of such litigation on the financial results of the Company. No
accrual has been recorded at March 31, 2003, 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
financial statements and notes thereto, and with the audited financial
statements, accounting policies and notes included in the Company's Annual
Report on Form 20-F for the year ended December 31, 2002, as filed with the
United States Securities and Exchange Commission.
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 provides "Manufacturing Services" including
manufacturing for other companies in the electronic game industry and providing
sourcing services for retail customers. The business is divided into two
reportable segments: Games, which includes the electronic games and youth
electronics product lines as well as Manufacturing Services, and Video Game
Accessories ("VGA") which relates to the Gamester product line.
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 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).
RESULTS OF OPERATIONS - FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002
The following table sets forth items from the Company's Consolidated Statements
of Operations as a percentage of net revenues:
Three months ended March 31,
----------------------------
2003 2002
---------- -------------
Net sales 100.0% 100.0%
Cost of sales 61.0% 65.1%
Gross margin 39.0% 34.9%
Selling, general and administrative expenses 34.0% 32.1%
Research and development 5.7% 5.9%
Depreciation and amortization 3.7% 4.1%
Operating loss (4.4%) (7.2%)
Other income 0.3% 0.1%
Foreign currency gain (loss), net 0.1% (1.4%)
Interest income, net 0.4% 0.0%
Loss before income taxes (3.6%) (8.5%)
Provision for income taxes (0.2%) (0.5%)
Net loss (3.8%) (9.0%)
The Company reported a net loss for the first quarter of $0.6 million or $0.03
per diluted share compared to a net loss of $1.6 million or $0.09 per diluted
share in the first quarter of 2002.
14
Summary of sales achieved from each category of products:
Three months ended March 31,
--------------------------------------------------
2003 2002
------------------------ ------------------------
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
---------------------------------------- ----------- ----------- -----------
(US$ in thousands)
Electronic Games 51.5% $ 8,265 39.0% $ 6,830
Youth Electronics 10.4% 1,678 11.5% 2,011
VGA 20.2% 3,234 20.9% 3,663
Manufacturing Services 17.9% 2,868 28.6% 4,999
-------- ------- -------- -------
Total 100.0% $16,045 100.0% $17,503
======== ======= ======== =======
Gross profit margin for the first quarter of 2003 was 39.0% as compared to 34.9%
in the first quarter of 2002 due to a shift in product mix from lower margin
manufacturing services revenues to higher margin business segments. Total sales
in the first quarter of 2003 decreased by $1.5 million to $16.0 million compared
to $17.5 million in the first quarter of 2002. This is mainly due to the
decrease in lower margin Manufacturing Services revenues due to the
discontinuation of manufacturing of eKara for Shinsedai Co., Ltd. ("SSD").
However, Electronic Games revenues increased by $1.5 million to $8.3 million in
the first quarter of 2003 from $6.8 million in the first quarter of 2002,
largely offsetting the drop in lower margin Manufacturing Services revenues
which were down by $2.1 million from Q1 2002 to $ 2.9 million. Girl's
Electronics revenues were at $1.7 million in the first quarter of 2003 compared
to $2.0 million in the first quarter of 2002. The Girl's Electronics decrease
was caused by the later Easter holiday in 2003 compared to 2002 and its effect
on timing of national advertising for Password Journal. Video Game Accessories
revenues stood at $3.2 million for first quarter 2003 compared to $3.7 million
for first quarter of 2002 as a result of increased sales of VGA in the United
States offset by a decrease in European sales which were higher during this
quarter last year due to the launch of Game Boy Advance in Europe.
Operating expenses for the first quarter of 2003 were $7.0 million compared to
$7.4 million in the first quarter of 2002. The decrease in expenditure was as a
result of a decrease in advertising expenditures during the first quarter of
2003 due to the later timing of Easter in 2003, reduced amortization costs and
reduced R&D costs during the period as part of the on-going benefits derived
from the reorganization in 2002.
The following table shows the major operating expenses:
Three months ended March 31,
----------------------------
(US dollars in millions) 2003 2002
---------- ---------
Advertising expenses 0.7 1.1
Other selling and promotion expenses 0.7 0.7
Indirect salaries and wages 2.1 2.1
Research and development expenses 0.9 1.0
Depreciation and amortization 0.6 0.7
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had $34.8 million of cash and net assets of $74.2
million compared to $32.7 million and $74.7 million, respectively, at December
31, 2002. The Company continues to maintain a high level of working capital,
which was approximately $51 million at March 31, 2003 and December 31, 2002.
The Company generates the 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 March 31, 2003, cash
and cash equivalents, net of short-term borrowings, were $33.9 million of which
$9.0 million of cash deposits have been pledged as security for undrawn or
substantially repaid banking 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
15
outstanding borrowings. This compares with cash and cash equivalents, net of
short-term borrowings of $31.8 million at December 31, 2002.
Net cash provided by operating activities was $3.0 million in the three months
ended March 31, 2003 as compared to net cash used in operating activities of
$1.7 million in 2002. The increase in cash provided by operating activities for
2003 is mainly attributable to accounts receivable inflows in 2003 of $9.6
million during the first quarter of 2003 vs. the first quarter of 2002.
Net cash used in investing activities was a net utilization of $0.2 million and
$0.03 million in the three months ended March 31, 2003 and 2002, respectively.
Net cash used in financing activities was $0.6 million in the three months ended
March 31, 2003 compared with $0.8 million in the three months ended March 31,
2002. This change was primarily due to funds received from the issuance of
stock.
Current liabilities were $13.1 million at December 31, 2002 compared to $20.7
million at December 31, 2002. The decrease was the result of reduction in
accounts payable, accrued expenses and current portion of long-term debt from
2002.
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 cash during the year. As of March 31, 2003, the Company had
more than $5.0 million of various lines of credit available. A breakdown of the
Company's short-term and long-term financing during 2003 is as follows:
As of Debt As of Date of
Bank Jan 01, 2003 Repayment Mar 31, 2003 Maturity
------------------------- ---------------- -------------- ---------------- ---------------
(US$ in thousands)
China Construction Bank $ 846 $ -- $ 846 Aug 7, 2003
(Humen, China)
HSBC $ 1,825 $ (912) $ 913 Jun 22, 2003
Both loans are payable in installments. Loan installments due within twelve
months of period-end are included in short-term liabilities; installment
payments scheduled beyond twelve months from period-end are included in
long-term debt. The term loan is secured by certain properties and deposits of
the Company. The agreements contain covenants that, among other things, require
the Company to maintain a minimum of tangible net worth, leverage ratio and
other financial ratios. The Company is in compliance with these covenants as at
March 31, 2003.
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.
The Company had no derivative instruments or off balance sheet financing
activities during the first quarter of 2003. 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.
CRITICAL ACCOUNTING POLICIES
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For a discussion of the Company's critical accounting policies, see Item 5,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in the Company's 2002 Form 20-F.
RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and the estimated
impact on the Company is set out in note 1 to the condensed consolidated
financial statements.
RISK FACTORS
For a discussion of the Company's risk factors, see "Item 3. Key Information -
Risk Factors" in the Company's 2002 Form 20-F. Additional risk factors:
Severe Acute Respiratory Syndrome ("SARS")
Countries or regions significantly affected by the SARS epidemic have included
China, Hong Kong, Taiwan and Canada. Although the Company's operations have not
been affected by SARS, this could change in the future. The adverse effects
could result from the imposition of quarantines or travel restrictions, the
inability to operate the Company's factory under normal conditions or to obtain
necessary supplies, components and services, and, in general, the reduction in
economic activity and confidence in the affected regions. The Company is unable
to predict the severity of the SARS epidemic or the impact of any of these
factors on the Company's business.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995)
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this Form 6-K, other filings or
reports filed with the Securities and Exchange Commission, press releases,
conferences, or otherwise, contain certain "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify these forward-looking
statements by the fact they use words such as "should", "expect", "anticipate",
"estimate", "may", "will", "project", "guidance", "intend", "plan", "believe"
and other words and terms of similar meaning and expression in connection with
any discussion of future operating or financial performance. One can also
identify forward-looking statements by the fact that they do not relate strictly
to historical or current facts. Such forward-looking statements are based on
current expectations and involve inherent risks and uncertainties, including
factors that could delay, divert or change any of them, and financial position,
results of operations, market position, product development, product approvals,
sales efforts, expenses, performance or results of current and anticipated
products and the outcome of contingencies such as legal proceedings. Management
cautions you that forward-looking statements involve risks and uncertainties
that may cause actual results to differ materially from the forward-looking
statements. In addition to the important factors detailed herein and from time
to time in other reports filed by the Company with the Securities and Exchange
Commission, including Forms 6-K and 20-F, the following important factors could
cause actual results to differ materially from past results or those suggested
by any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk disclosures have not materially changed from those appearing in
the Company's 2002 Form 20-F (see Item 5).
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to the accompanying Financial Statements.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on May 12, 2003, the
shareholders of the Company elected the management nominees, who were named in
the Company's Proxy Statement dated April 14, 2003, to serve as directors for
the period until the next annual meeting of shareholders or until his respective
successor is elected or appointed in accordance with applicable law and the
Company's bye-laws. Immediately following the annual meeting of shareholders,
the board of directors consisted of eight members: Patrick S. Feely, Jon N.
Bengtson, Timothy R. Busch, Albert J. Crosson, David C.W. Howell, Henry Hai-Lin
Hu, James O'Toole and Peter L. Thigpen. On May 12, 2003, Henry Hai-Lin Hu
resigned from the board of directors and was replaced by Theodore J. Eischeid.
Mr. Eischeid will assume Mr. Hu's responsibilities as Chairman of the Audit
Committee. At such meeting, the shareholders also reappointed KPMG as
independent auditor and authorized the directors to fix the independent
auditor's remuneration.
The shareholder votes were as follows:
For Withheld Abstain
Election of Directors
---------------------
Patrick S. Feely 16,750,247 7,411 -
Jon N. Bengtson 16,749,847 7,811 -
Timothy R. Busch 16,750,347 7,311 -
Albert J. Crosson 16,749,447 8,211 -
David C.W. Howell 16,750,147 7,511 -
Henry Hai-Lin Hu 16,746,764 10,894 -
James O'Toole 16,750,347 7,311 -
Peter L. Thigpen 16,750,647 7,100 -
Reappointment of Auditor
------------------------
KPMG 16,750,287 4,741 2,630
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RADICA GAMES LIMITED
Date: June 9, 2003 /s/ Craig D. Storey
-------------------- -------------------------------
Craig D. Storey
Chief Accounting Officer
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