FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of December, 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 September 30, 2003
2. Press Release dated December 1, 2003
3. Press Release dated November 17, 2003
4. Press Release dated November 5, 2003
5. Press Release dated October 30, 2003
6. Press Release dated October 14, 2003
7. Press Release dated September 15, 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 September 30, 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 September 30, 2003
--------------------------------------- ---------------------------------
Common Stock, par value $0.01 per share 18,146,063
------------------------
* As a foreign private issuer, the registrant is not required to file reports on
Form 10-Q. It intends to make voluntary quarterly reports to its stockholders
which generally follow the Form 10-Q format. Such reports, of which this is one,
are furnished to the Commission pursuant to Form 6-K.
2
RADICA GAMES LIMITED
INDEX TO QUARTERLY REPORT ON FORM 6-K
QUARTER ENDED SEPTEMBER 30, 2003
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................4
Condensed Consolidated Balance Sheets September 30, 2003
(unaudited) and December 31, 2002................................4
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2003
(unaudited) and 2002 (unaudited).................................5
Condensed Consolidated Statements of Shareholders'
Equity (unaudited) for the Nine Months Ended September
30, 2003 (unaudited) and 2002 (unaudited)........................6
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 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
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(US dollars in thousands, except share data) September 30, December 31,
------------- ------------
2003 2002
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,866 $ 32,692
Investment securities 19,823 $ --
Accounts receivable, net of allowances for doubtful accounts 20,067 15,139
of $153 ($315 as at December 31, 2002)
Inventories 21,559 20,385
Prepaid expenses and other current assets 2,870 1,674
Income taxes receivable 931 931
-------- --------
Total current assets 77,116 70,821
-------- --------
Property, plant and equipment, net 12,224 14,034
-------- --------
Intangible assets 9,551 9,551
-------- --------
Other assets (Note 6) 880 896
-------- --------
Total assets $ 99,771 $ 95,302
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ -- $ 846
Accounts payable 12,311 9,014
Current portion of long-term debt -- 1,825
Accrued payroll and employee benefits 1,238 2,753
Accrued expenses 5,045 5,840
Income taxes payable 263 309
Deferred income taxes 79 79
-------- --------
Total current liabilities 18,936 20,666
-------- --------
Total liabilities 18,936 20,666
-------- --------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
18,146,063 shares outstanding (17,796,131 as
at December 31, 2002) 181 178
Additional paid-in capital 3,296 2,320
Retained earnings 78,178 72,946
Accumulated other comprehensive loss (820) (808)
-------- --------
Total shareholders' equity 80,835 74,636
-------- --------
Total liabilities and shareholders' equity $ 99,771 $ 95,302
======== ========
See accompanying notes to the condensed consolidated financial statements.
4
RADICA GAMES LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
(US dollars in thousands, Three months ended September 30, Nine months ended September 30,
except per share data) -------------------------------- -------------------------------
2003 2002* 2003 2002*
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net sales $ 37,655 $ 47,305 $ 70,644 $ 85,315
Cost of goods sold (exclusive of items
shown separately below) (23,057) (29,028) (44,145) (54,428)
------------ ------------ ------------ ------------
Gross profit 14,598 18,277 26,499 30,887
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses (6,452) (7,151) (17,082) (17,401)
Research and development (985) (1,067) (2,820) (3,053)
Depreciation and amortization (460) (714) (1,576) (2,150)
Restructuring charge -- -- (87) --
------------ ------------ ------------ ------------
Total operating expenses (7,897) (8,932) (21,565) (22,604)
------------ ------------ ------------ ------------
Operating income 6,701 9,345 4,934 8,283
Net interest and other income 120 119 389 190
Foreign currency gain, net 76 374 236 1,098
------------ ------------ ------------ ------------
Income before income taxes 6,897 9,838 5,559 9,571
Provision for income taxes (272) (459) (327) (805)
------------ ------------ ------------ ------------
Net income 6,625 9,379 5,232 8,766
============ ============ ============ ============
Net income per share:
Basic $ 0.37 $ 0.53 $ 0.29 $ 0.50
============ ============ ============ ============
Diluted $ 0.34 $ 0.51 $ 0.28 $ 0.48
============ ============ ============ ============
Weighted average number of common
and common equivalent shares:
Basic 18,085,226 17,740,167 17,964,728 17,708,692
============ ============ ============ ============
Diluted 19,263,343 18,301,965 19,004,858 18,308,820
============ ============ ============ ============
* 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
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(US dollars in thousands) Common stock Accumulated
------------ Additional Warrants to other Total
Number paid-in acquire Retained comprehensive shareholders'
of shares Amount capital common stock earnings loss (1) equity
------------ ----------- ---------- ------------ ---------- -------------- -------------
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ -- $ 72,946 $ (808) $ 74,636
Stock options exercised 347,692 3 963 -- -- -- 966
Issuance of stock 2,240 -- 13 -- -- -- 13
Net income -- -- -- -- 5,232 -- 5,232
Unrealized loss on investment
securities -- -- -- -- -- (200) (200)
Foreign currency translation -- -- -- -- -- 188 188
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2003 18,146,063 $ 181 $ 3,296 $ -- $ 78,178 $ (820) $ 80,835
========== ========== ========== ========== ========== ========== ==========
Balance at December 31, 2001 17,646,740 $ 176 $ 1,549 $ 445 $ 61,012 $ (130) $ 63,052
Issuance of stock 3,808 1 15 -- -- -- 16
Stock options exercised 113,455 1 236 -- -- -- 237
Expiration of stock warrants -- -- 445 (445) -- -- --
Net income -- -- -- -- 8,766 -- 8,766
Foreign currency translation -- -- -- -- -- (509) (509)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2002 17,764,003 $ 178 $ 2,245 $ -- $ 69,778 $ (639) $ 71,562
========== ========== ========== ========== ========== ========== ==========
(1) The comprehensive income for the nine-month periods ended September 30, 2003 and September 30, 2002 was $12 and $(509),
respectively.
See accompanying notes to the condensed consolidated financial statements.
6
RADICA GAMES LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(US dollars in thousands) 2003 2002
----------- -----------
(unaudited) (unaudited)
Cash flow from operating activities:
Net income $ 5,232 $ 8,766
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred income taxes -- 466
Depreciation 1,576 1,835
Amortization -- 315
Gain on sales of investment securities (23) --
Loss on disposal and write off of property, plant and equipment 132 23
Changes in assets and liabilities:
Increase in accounts receivable (4,928) (9,004)
Increase in inventories (1,174) (8,989)
Increase in prepaid expenses and other assets (1,196) (509)
Increase in accounts payable 3,297 6,053
(Decrease) increase in accrued payroll and employee benefits (1,515) 955
Increase in accrued warranty expenses -- 182
Decrease in other accrued liabilities (795) (445)
(Increase) decrease in income taxes (46) 221
-------- --------
Net cash provided by (used in) operating activities 560 (131)
-------- --------
Cash flow from investing activities:
Purchase of investment securities (20,000) --
Proceeds from sale of property, plant and equipment 915 227
Purchase of property, plant and equipment (797) (958)
-------- --------
Net cash used in investing activities (19,882) (731)
-------- --------
Cash flow from financing activities:
Funds from issuance of stock 13 15
Funds from stock options exercised 966 238
Decrease in short-term borrowings (846) --
Repayment of long-term debt (1,825) (2,736)
-------- --------
Net cash used in financing activities (1,692) (2,483)
-------- --------
Effect of currency exchange rate change 188 (509)
-------- --------
Net decrease in cash and cash equivalents (20,826) (3,854)
Cash and cash equivalents:
Beginning of period 32,692 25,810
-------- --------
End of period $ 11,866 $ 21,956
======== ========
See accompanying notes to the condensed consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 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 financials 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
September 30, 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 SEPTEMBER 30, 2003)
(US dollars in thousands except per share data)
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 and nine months ended September 30, 2003 and 2002:
Three month ended September 30, Nine month ended September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
Net income
As reported $ 6,625 $ 9,379 $ 5,232 $ 8,766
Less: Total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of related tax effects (174) (178) (478) (564)
--------------- ---------------- --------------- ----------------
Pro forma $ 6,451 $ 9,201 $ 4,754 $ 8,202
=============== ================ =============== ================
Reported net income per share
Basic $ 0.37 $ 0.53 $ 0.29 $ 0.50
Diluted $ 0.34 $ 0.51 $ 0.28 $ 0.48
Pro forma net income per share
Basic $ 0.36 $ 0.52 $ 0.26 $ 0.46
Diluted $ 0.33 $ 0.50 $ 0.25 $ 0.45
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 as deferred by FASB Staff Position No. 46-6, to existing entities
created before February 1, 2003 in the first fiscal year or interim period
ending after December 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 interests in variable interest entities that will require
consolidation.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2003)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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." The Company had no derivative
instruments or hedging activities during or at the end of the third quarter
of 2003.
In May 2003 SFAS No. 150 "Accounting for Financial Instruments with
Characteristics of Liabilities, Equity or Both" was issued. SFAS No. 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 does not expect
the adoption of SFAS No. 150 to have a material impact on its financial
position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation. These reclassifications had no effect
on net income or shareholders' equity.
2. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
of common stock, and with respect to diluted earnings 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.
The following table sets forth the computations of basic and diluted income
per share for the three-month and nine-month periods ended September 30:
Three months ended September 30, Nine months ended September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
Numerator for basic and diluted
earnings per share:
Net income $ 6,625 $ 9,379 $ 5,232 $ 8,766
=============== ================ =============== ================
Denominator :
Basic weighted average shares 18,085,226 17,740,167 17,964,728 17,708,692
Effect of dilutive options and warrants 1,178,117 561,798 1,040,130 600,128
--------------- ---------------- --------------- ----------------
Diluted weighted average shares 19,263,343 18,301,965 19,004,858 18,308,820
=============== ================ =============== ================
Net income per share:
Basic $ 0.37 $ 0.53 $ 0.29 $ 0.50
=============== ================ =============== ================
Diluted $ 0.34 $ 0.51 $ 0.28 $ 0.48
=============== ================ =============== ================
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2003)
(US dollars in thousands)
3. BUSINESS SEGMENTS
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company has two reportable segments from which
it derives its revenues: the Games and Youth Electronics 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.
A summary of the Company's two reportable segments is set forth below.
Three months ended September 30, Nine months ended September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
Revenues from external customers
Games and Youth Electronics $ 33,352 $ 43,048 $ 59,099 $ 72,082
VGA 4,303 4,257 11,545 13,233
--------------- ---------------- --------------- ----------------
Total revenues from external customers $ 37,655 $ 47,305 $ 70,644 $ 85,315
=============== ================ =============== ================
Segment (loss) income
Games and Youth Electronics $ 7,049 $ 10,006 $ 7,012 $ 11,096
VGA (272) (287) (1,842) (1,715)
--------------- ---------------- --------------- ----------------
Total segment income $ 6,777 $ 9,719 $ 5,170 $ 9,381
Corporate
Net interest and other income 120 119 389 190
Provision for income taxes (272) (459) (327) (805)
--------------- ---------------- --------------- ----------------
Total consolidated net income $ 6,625 $ 9,379 $ 5,232 $ 8,766
=============== ================ =============== ================
4. GOODWILL
At September 30, 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 1, 2002. Under SFAS 142, goodwill is required
to be tested for impairment on an annual basis thereafter on 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 implied 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.
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2003)
(US dollars in thousands)
5. INVENTORIES
Inventories by major categories are summarized as follows:
September 30, December 31,
2003 2002
--------------- ----------------
Raw materials $ 3,705 $ 3,004
Work in progress 2,701 3,462
Finished goods 15,153 13,308
Consigned finished goods - 611
--------------- ----------------
$ 21,559 $ 20,385
=============== ================
6. PROPERTY, PLANT AND EQUIPMENT
Property and Plant and Equipment consists of the following:
September 30, December 31,
2003 2002
--------------- ----------------
Land and buildings $ 10,941 $ 12,230
Plant and machinery 7,802 7,520
Furniture and equipment 7,458 7,303
Leasehold improvements 2,971 2,879
--------------- ----------------
Total 29,172 29,932
Less: Accumulated depreciation
and amortization (16,948) (15,898)
--------------- ----------------
Total, net $ 12,224 $ 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 1, 2003,
the Company followed this guidance and reclassified $880 and $896 to other
assets from property, plant and equipment as of September 30, 2003 and
December 31, 2002, respectively.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
September 30, December 31,
2003 2002
--------------- ----------------
Accrued advertising expenses $ 1,239 $ 1,243
Accrued license and royalties 1,298 1,479
Commissions payable 206 191
Other accrued liabilities 2,302 2,927
--------------- ----------------
Total $ 5,045 $ 5,840
=============== ================
12
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED SEPTEMBER 30, 2003)
(US dollars in thousands)
8. PLEDGE OF ASSETS
At September 30, 2003, the Company's general banking facilities including
overdraft and trade facilities were collateralized as follows:
Leasehold land and buildings $ 7,985
Other assets 880
----------
$ 8,865
==========
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 intellectual property 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 September 30, 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 claims or legal actions will have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
10. RESTRUCTURING CHARGE
In the second quarter of 2003, the Company recorded a restructuring charge
of $87 for personnel costs relating to the closure of the UK R&D office,
Radica Innovations (UK) Limited. The restructuring resulted in a workforce
reduction of approximately 5 positions. The reductions in workforce are
permanent and affected the Company's VGA segment. As of September 30, 2003,
the Company has completed the process of closing the UK R&D office. There
was no restructuring reserve as at September 30, 2003.
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, youth electronics carrying
the Girl Tech and Barbie(TM) brand names, and Gamester branded video game
controllers & accessories. Radica also provides "Manufacturing Services"
including manufacturing for other companies in the electronic game industry and
provides 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
The following table sets forth items from the Company's Consolidated Statements
of Operations as a percentage of net revenues:
Three months ended September 30,
--------------------------------
2003 2002
----------- ------------
Net sales 100.0% 100.0%
Cost of sales (61.2%) (61.4%)
Gross Margin 38.8% 38.6%
Selling, general and adminstrative expenses (17.2%) (15.1%)
Research and development (2.6%) (2.2%)
Depreciation and amortization (1.2%) (1.5%)
Operating income 17.8% 19.8%
Net interest and other income 0.3% 0.2%
Foreign currency gain, net 0.2% 0.8%
Income before income taxes 18.3% 20.8%
Provision for income taxes (0.7%) (1.0%)
Net income 17.6% 19.8%
The Company reported a net profit for the third quarter of $6.6 million or $0.34
per diluted share compared to a net profit of $9.4 million or $0.51 per diluted
share in the third quarter of 2002.
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Summary of sales achieved from each category of products:
Three months ended September 30,
---------------------------------------------------------------
2003 2002
---------------------------------------------------------------
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
--------------------------------------------- -------------- -------------- --------------
(US dollars in thousands)
Electronic Games 62.5% $ 23,511 51.7% $ 24,480
Youth Electronics 15.7% 5,925 14.8% 6,986
VGA 9.2% 3,479 6.0% 2,828
Manufacturing Services 12.6% 4,740 27.5% 13,011
------------ -------------- -------------- --------------
Total 100.0% $ 37,655 100.0% $ 47,305
============ ============== ============== ==============
The Company's continued movement away from its lower margin Manufacturing
Services business and the discontinuation of production of eKara for Takara
resulted in an $8.3 million reduction in low margin Manufacturing Services sales
for the Company in Q3 and was the primary factor in the decrease in sales for
the quarter to $37.7 million as compared to $47.3 million in Q3 2002, a drop of
$9.7 million or 20.4%. Year to date sales were $70.6 million compared to $85.3
million in 2002, a decrease of 17.2%; however, excluding Manufacturing Services
the sales decrease was only 1.9%. As a result of the discontinuation of eKara
production, Manufacturing Services sales decreased by 63.6% for the quarter and
54.1% on a year-to-date basis. Electronic Games sales decreased by 4.0% for the
quarter due to deferred shipments by retail customers but increased 0.5%
year-to-date. Youth Electronics sales decreased by 15.2% for the quarter and
9.3% year-to-date for similar reasons. Video Game Accessories ("VGA") sales grew
by 23.0% for the quarter due to the recent launch of new Gamester products,
including the GBA Game Changer, the GBA Jukebox and the Xbox FPS Master; but,
were down by 3.6% year to date due to the lack of new platform launches and
related pipeline fill that had occurred during the first six months of 2002 in
Europe.
Gross profit margin for the third quarter of 2003 was 38.8% as compared to 38.6%
in the same quarter of 2002 due to a change in product mix to higher margin
Radica branded products largely offset by increased sales of closeouts of VGA
and other products in Q3 as well as related inventory reserves.
Operating expenses for the quarter were $7.9 million as compared to $8.9 million
in Q3 2002. The decrease in expenditure was as a result of reduction in variable
expenses and bonus partially offset by a charge of $0.1 million relating to the
disposal of a property valued on the balance sheet at $1.0 million and sold at
$0.9 million.
The following table shows the major operating expenses:
Three months ended September 30,
--------------------------------
(US dollars in millions) 2003 2002
----------- ------------
Advertising expenses 1.0 1.0
Other selling and promotion expenses 1.1 1.3
Indirect salaries and bonus 2.1 2.9
Research and development expenses 1.0 1.1
Depreciation and amortization 0.5 0.7
LIQUIDITY AND CAPITAL RESOURCES
The Company generates the majority of its cash from its normal operations but
the Company's business is inherently seasonal. 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 quarter as customers increase their purchases to meet consumer demand
during the holiday season. The Company's emphasis on inventory and credit
management has allowed us to maintain lower inventory and receivables levels. As
at September 30, 2003, inventories increased to $21.6 million from $20.4 million
at December 31, 2002, but were lower than September 2002 inventories by $4.6
million. Receivables stood at $20.1 million at September 30, 2003 as compared to
$15.1 million at December 31, 2002 and $22.4 million at September 30, 2002.
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At September 30, 2003, the Company had $31.7 million of cash and investment
securities, and net assets of $80.8 million as compared to $32.7 million and
$74.6 million, respectively at December 31, 2002 and $22.0 million and $71.6
million respectively as of September 30, 2002. Total debt fell to zero at
September 30, 2003 compared to $2.7 million at December 31, 2002 and $3.6
million at September 30, 2002.
Net cash provided by operating activities was $0.6 million in the nine months
ended September 30, 2003 as compared to net cash used in operating activities of
$0.1 million in 2002. Net cash used in investing activities was $20 million and
$0.7 million in the nine months ended September 30, 2003 and 2002, respectively.
This change was primarily due to purchases of investment securities in the third
quarter of 2003.
Net cash used in financing activities was $1.7 million in the nine months ended
September 30, 2003 compared with $2.5 million in the nine months ended September
30, 2002. In 2003, the Company repaid all short-term borrowings and long-term
debt.
Current liabilities were $18.9 million at September 30, 2003 compared to $20.7
million at December 31, 2002. The decrease was the result of reduction in
accrued payroll & employee benefits, short term borrowings and current portion
of long-term debt from 2002.
As previous mentioned, total debt fell to zero at September 30, 2003. The
Company has approximately $4.0 million of various lines of credit available.
Management believes that the Company's existing cash & cash equivalents and
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. 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.
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 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
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" and "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" in the Company's 2002 Form
20-F and Form 6K for the first quarter of 2003, respectively. We have added two
risk disclosures during 2003:
ADVERSE WORLDWIDE ECONOMIC CONDITIONS
Several factors, including the war in Iraq, increased worldwide
unemployment, threats of global terrorist attacks and softening global economies
have caused uncertainties in the US and other global economies. These
uncertainties make it difficult for the Company to estimate growth in the
regional economies in which it sells its product and therefore may negatively
affect the Company's sales, increase its exposure to bad debt or increase its
operating cost.
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VOLATILE MASS MARKET RETAIL SECTOR
Most of the Company's sales are made to mass-market retailers. The
mass-market retail channel in the US has experienced significant shifts in
market share among competitors in recent years, causing several of the Company's
customers to experience liquidity problems, including several customers that
have filed for bankruptcy during the past two years. While the Company makes
every attempt to minimize its credit exposure, there is always a risk that
customers will not pay or that they will delay payment, subjecting the Company
to exposure to bad debt losses. In addition, if these customers were to cease
doing business as a result of bankruptcy, it could have a material adverse
affect on the Company's sales.
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, or depend on the outcome
of contingencies such as legal proceedings. Management cautions you that
forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from the forward-looking statements. For a more
complete discussion of the Company's risk factors, you are referred to the
sections in the Company's Form 20-F and Form 6-K identified above under the
caption "Risk Factors". The forward-looking statements made in this Form 6-K
speak only as of the date on which the statements are made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk disclosures have not materially changed from those
appearing in the Company's 2002 Form 20-F (see Item 5). We have added two risk
disclosures during 2003 under business risk.
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
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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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RADICA GAMES LIMITED
Date: December 19, 2003 /s/ Craig D. Storey
------------------------------ -------------------------------
Craig D. Storey
Chief Accounting Officer
19