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, 2001.
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 17,646,740
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, 2001
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 12
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 35
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 42
ITEM 8. FINANCIAL INFORMATION 43
ITEM 9. THE OFFER AND LISTING 43
ITEM 10. ADDITIONAL INFORMATION 44
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 49
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 49
PART II 49
ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES 49
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS 50
ITEM 15. RESERVED 50
ITEM 16. RESERVED 50
PART III 50
ITEM 17. FINANCIAL STATEMENTS 50
ITEM 18. FINANCIAL STATEMENTS 50
ITEM 19. EXHIBITS 50
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, 2001. See "Item 3. Key Information - Risk Factors" in this report on Form
20-F. We are not undertaking to publicly update or revise any forward-looking
statement if we obtain new information or upon the occurrence of future events
or otherwise.
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
Set forth below is the selected income statement and balance sheet data
for each of the two years in the period ended October 31, 1998, of two months in
the period ended December 31, 1998 and of the three years in the period ended
December 31, 2001. This summary should be read in conjunction with "Operating
and Financial Review and Prospects" and the combined financial statements and
notes thereto included elsewhere in this document.
TWO MONTHS ENDED
(in thousands, except per share data YEAR ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED
and margins) OCTOBER 31,
2001 2000 1999 1998 1998 1997
---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $98,554 $106,696 $136,716 $21,071 $155,618 $87,760
Cost of sales 64,698 83,041 80,910 10,717 70,576 40,888
------- -------- -------- ------- -------- -------
Gross profit 33,856 23,655 55,806 10,354 85,042 46,872
------- -------- -------- ------- -------- -------
Operating expenses:
Selling, general and administrative 26,498 32,273 28,049 3,657 27,788 14,403
Research and development 5,775 5,210 6,036 730 3,710 2,099
Acquired research and development - - - - 1,500 -
Depreciation and amortization 4,013 5,427 4,956 612 3,423 2,278
Restructuring charge 1,551 1,190 - - - -
------- -------- -------- ------- -------- -------
Total operating expenses 37,837 44,100 39,041 4,999 36,421 18,780
------- -------- -------- ------- -------- -------
Operating (loss) income (3,981) (20,445) 16,765 5,355 48,621 28,092
Other income 24 781 718 471 807 915
Share of loss of affiliated company - - (1,748) (120) (334) (141)
Net interest income 136 664 1,469 289 1,896 913
------- -------- -------- ------- -------- -------
(Loss) income before income taxes (3,821) (19,000) 17,204 5,995 50,990 29,779
(Provision) credit for income taxes (553) 901 (149) (176) 226 (193)
------- -------- -------- ------- -------- -------
Net (loss) income $(4,374) $(18,099) $17,055 $5,819 $51,216 $29,586
======= ======== ======= ====== ======= =======
Net (loss) earnings per share - basic $(0.25) $(1.03) $0.94 $0.31 $2.53 $1.43
======= ======== ======= ====== ======= =======
Weighted average number of shares 17,612 17,608 18,144 18,883 20,240 20,761
(continued)
4
TWO MONTHS ENDED
(in thousands, except per share data YEAR ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED
and margins) OCTOBER 31,
2001 2000 1999 1998 1998 1997
---- ---- ---- ---- ---- ----
Net (loss) earnings per share and dilutive
potential common stock $(0.25) $(1.03) $0.90 $0.29 $2.39 $1.37
======= ======== ======= ====== ======= =======
Weighted average number of shares and
dilutive potential common stock used 17,612 17,608 18,979 20,094 21,488 21,636
in computation
STATISTICAL DATA:
Gross margin 34.4% 22.2% 40.8% 49.1% 54.6% 53.4%
Operating margin (4.0%) (19.2%) 12.3% 25.4% 31.2% 32.0%
BALANCE SHEET DATA (AT PERIOD END):
Working capital $36,709 $42,619 $65,123 $65,776 $59,913 $48,860
Total assets 91,829 99,315 122,174 108,190 113,521 79,449
Long-term debt 1,825 5,473 10,946 - - -
Total debt 6,319 12,901 13,809 - - -
Capital stock 176 176 176 189 189 209
Shareholders' equity 63,052 67,388 86,062 85,735 79,839 61,593
RISK FACTORS
The shares of Common Stock of the Company involve 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.
RISKS OF MANUFACTURING IN CHINA
The Company's factory location is in Southern China and its
headquarters are in Hong Kong, which is a Special Administrative Region of
China.
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
5
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.
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 $271,766 in income tax on the Joint
Venture in China in 2001, the third year it has paid income tax in China. The
Company was granted 50% relief from income tax through December 31, 2001 under
the Income Tax Law of the PRC, and was therefore taxed at 12% during this
period. After this it will be taxed at the full rate of income tax; however, the
Company is applying for extension of the reduced rate. 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 income 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.
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
6
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 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 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
7
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 handheld games made up a
significant portion of the Company's overall sales. In 1998 and 1999, electronic
handheld games made up 77.1% and 65.7%, respectively. In response to the heavy
concentration of sales within this category, Radica has worked to diversify its
product lines. Electronic handheld games accounted for 46.2% and 38.5% of sales
in 2000 and 2001, 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.
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 return to 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., Sports games, Heritage card games, the Girl Tech(R)
line, Play TV(TM), video game accessories ("VGA"), Original Design Manufacturing
("ODM") and Original Equipment Manufacturing ("OEM") products.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a significant portion of the Company's sales has been
concentrated in 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 are expected in 2002. The
Company has decided to continue 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' sales also came from
Shinsedai Co., Ltd. ("SSD") in the form of ODM/OEM projects. The Company does
not have a specific contract with SSD regarding these projects and there is no
assurance that the Company will continue to receive orders from SSD, 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. While the Company believes that there are alternative
8
sources for all of its supplies, an interruption of the supply of LCDs,
semiconductor chips or other supplies from a supplier could result in
significant production delays.
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
In order to sustain growth, Radica intends to expand into related
businesses, including ODM and OEM production for third parties. Until 1999,
Radica had only been successful in developing an ODM relationship with Hasbro.
During 2000, Radica entered into an ODM/OEM agreement with Konami Co., Ltd.
("Konami") and SSD, and also manufactured Othello product for Mattel, Inc.
During 2001, Radica manufactured several products for SSD. The Company intends
to maintain relationships with its existing ODM and OEM partners while
continuing to pursue new partners.
NO ASSURANCE OF CONTINUED ODM/OEM BUSINESS
The Company's contract with the Hasbro Games Group expired on December
31, 2001. However the Company continues to manufacture under the same terms as
specified in the expired contract. The Company's contracts with Konami and SSD
can be ended on 180 days notice. There can be no assurance that such business
can be retained beyond the next 180 days. Loss of such business would materially
effect 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 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.
9
COMPETITION
Both the games 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 toy and games 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 electronic handheld and
mechanical games 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 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.
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 baseball and golf games. In fiscal 2000, the Company received a
number of consumer complaints that bats used in the 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.
TAXATION
The Company cannot predict whether its tax rates will remain as low as
they have been in the past 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".
10
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 its business.
BAD DEBTS AND RETURNS
While the Company does 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 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 for credit. It is the general
policy of the Company to refuse the return of non-defective products and
management believes that there is little risk of significant levels of future
returns of non-defective product.
CONTROL BY EXISTING SHAREHOLDERS
The Company's largest shareholders (see "Item 7. Major Shareholders and
Related Party Transactions - Control of Registrant") including Mr. Robert E.
Davids, Vice Chairman of the Company, and a group that consists of Dito Devcar
Corporation and certain related persons, and a group that consists of RAD
Partners 1999 LLC and certain related persons, own beneficially in the aggregate
a majority of 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
11
At December 31, 2001, the Company had 17,646,740 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 Mr. Davids and another shareholder, the Hansen Trust, certain
registration rights with respect to their shares. (See "Item 7. Major
Shareholders and Related Party Transactions - Interest of Management in Certain
Transactions") Mr. Davids has exercised his registration rights for all his
outstanding shares. 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 effected by future sales of Common Stock by existing shareholders.
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.
REPLACEMENT OF HONG KONG STAFF
During January of 2002, the Company replaced a significant portion of
its Hong Kong operations staff with similarly qualified staff in China and
required certain other staff to spend more time in China. The move was intended
to reduce costs and increase efficiency. While the management of the Company
believes that the plan will achieve its intended objectives, there is no
assurance that this decision will not result in production delays, new product
development delays or other problems (see "Item 5. Operating and Financial
Review and Prospects - Fiscal 2001 Compared to Fiscal 2000").
RISK OF 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.
ITEM 4. INFORMATION ON THE COMPANY
DESCRIPTION OF BUSINESS
12
Radica Games Limited (the "Company") manufactures and markets a diverse
line of electronic entertainment products including handheld and tabletop games,
high-tech toys, and video game accessories. The Company is headquartered in Hong
Kong at the address set forth on the cover of this report 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 2001 it had the second
largest market share in handheld and tabletop electronic games according to the
NPD Group, Inc., the primary source for such industry data. 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.
The Company has operated as a manufacturer of games since 1983,
starting with a small operation in Hong Kong providing souvenir casino games for
the Las Vegas market including mechanical 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 U.S. market with games such as
Video Poker and Video Blackjack. In 1994 the Company went public and its shares
began trading on the NASDAQ exchange under the RADA symbol.
In 1995 Radica began to diversify its product line into other
electronic handheld and tabletop game areas. The Company began to offer heritage
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 heritage games
that helped build the company, Radica offers a broad line of electronic games
including virtual fishing games such as Sport Bass Fishin'(TM), virtual hunting
games such as Buckmasters(R) Deer Huntin' II(TM), a line of games based on
popular EA SPORTS(TM) products, and NASCAR(R) and Harley-Davidson(R) licensed
games.
Radica's line of fishing games feature motion-sensing technology that
allows the player to use the games as a rod and reel. The player casts, feels
the fish bite, sets the hook with a jerk, and reels in the fish with a real
handle. This product started an industry trend in creating virtual reality games
where the product provides the feel of the real sport. This is delivered by
uniquely realistic game shapes, motion sensors and tactile feed back. An example
of this is the Company's Airforce iCombat. This virtual reality fighter pilot
game provides the sights and sounds of real air combat with a full handset
complete with headphones and 3D graphics along with a handheld pitch and roll
joystick featuring motion sensors and vibration feedback.
In 2001, Radica introduced Skannerz(TM). Targeting boys 7-12, Skannerz
utilizes UPC scanner technology to create a fun, collectible-driven game.
Players use Skannerz to scan the UPC code of any consumer product to download
monsters, magic potions and weapons to use in battle. Each game unit includes a
comic book and collectible poster. The product was successful in 2001 and is a
continuing item in 2002.
The Company continues to pursue licensed properties and added the
Tetris license to the Radica line for 2001. With over 50 million fans, Tetris is
the world's most popular and best selling video game of all time. Radica is
introducing two versions of Tetris, one in the mass market and a second game in
the specialty channel. Both games feature classic Tetris play with added
features such as backlighting and head to head play through an IR link.
13
Radica introduced Radica Play TV(TM) games featuring XaviX(R)
technology in 2000. 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. Play
TV Baseball, Buckmasters(R) Huntin', Play TV Bass Fishin', Play TV Snowboard and
Play TV Cardnight shipped during 2001. Radica is expanding this line of product
in 2002 with Play TV Soccer, Play TV Boxing, Play TV Construction, and Play TV
Baseball 2.
In 2002, Radica will introduce its Barbie(TM) licensed line of
products. The 2002 line will consist of five products, including Barbie(TM)
Dance Party, a TV dance mat game that utilizes the XaviX technology and
Barbie(TM) Secret Treasure Box, a decorative storage box that is opened by a
magnetic butterfly pendant.
Girl Tech, which was acquired in 1998, was created to design,
manufacture and market personal electronics for girls ages 8-12. Girl Tech is
dedicated to creating technology enhanced toys designed with girls' play
patterns and preferences in mind and that address issues that are important to
them such as privacy and communication. Girl Tech's products and services are
tied by the common theme of encouraging girls' to have fun with the use of
technology. The web site (www.girltech.com) currently receives almost 75,000
hits per month from girls from over 85 countries.
In June of 1999, Radica announced the acquisition of Leda Media
Products Limited, now called Radica UK Limited ("Radica UK"), a UK company that,
with its Gamester(TM) brand, is a leader in video game controllers in Europe.
Radica UK brings Radica into a new market that is closely aligned with handheld
games. Controllers are handheld devices that plug into video games platforms
such as those that Nintendo, Microsoft and Sony manufacture. They provide the
control of the game as a peripheral device. Included in this range are game
pads, steering wheels, memory cards and other accessories used to enhance game
play and performance. Radica UK is the current leader among third-party
companies in the UK and has a strong position in Europe as well. Radica began
shipping and selling the product line to the United States and Canada during the
second half of 2001 and hopes to significantly increase its market share in
those markets during 2002. Radica had success with its Gamester brand Pro Racer
and Sportsboard controllers during 2001 and recently introduced the innovative
Floodlight(TM) for Nintendo's Game Boy Advance.
The Company undertakes Original Design Manufacturing ("ODM") for the
Hasbro Games Group, producing well-known electronic versions of games such as
Yahtzee(TM), Trivial Pursuit(TM) and Monopoly(TM). During 2001 the Company also
undertook ODM/OEM products for SSD, producing Excite Ping Pong, Excite Striker,
Gingin Boarders and e-Kara.
The Company also sources batteries, power sources and various
electronic devices from various manufacturers for Argos, a catalog retailer in
the United Kingdom. Radica expects to continue operating in this capacity for
Argos in 2002.
BACKGROUND
The Company completed an Initial Public Offering (IPO) in May 1994.
Prior to the IPO, the principal shareholders of the Company conducted the
Company's business through two separate, jointly owned companies (Radica
Limited, which manufactured the Company's products, and Radica USA, which
distributed and currently distributes products in the United States) and through
a third company, Disc Inc., 14
that was solely owned by Robert E. Davids, Vice Chairman of the Company, which
provided certain design and engineering services to Radica Limited ("Radica
HK"), and now provides similar services to Radica China Limited ("Radica China")
and Radica Games Limited ("Radica Games").
Radica HK was established in Hong Kong in September 1983 by James J.
Sutter and John N. Hansen and originally sold two models of souvenir slot
machine banks. In 1988, Robert E. Davids joined the Company as General Manager
and led the Company's development of one of the first souvenir electronic
tabletop poker games. In 1989, Mr. Davids became an equal shareholder in the
Company with Mr. Sutter and Mr. Hansen. In 1991, the Company introduced one of
the first handheld electronic poker games.
Radica initially had its products assembled in Hong Kong by
subcontractors and sold through distributors in the United States. Between 1988
and 1990, the Company brought certain of its production activities in house. At
the beginning of 1992, the Company opened a factory in Tai Ping, China, moving
its production activities from Hong Kong to southern China. In April 1992, Mr.
Sutter, Mr. Hansen and Mr. Davids established Radica USA to take greater control
of the distribution of the Company's products in the United States. The Company
made over 60% of its sales through Radica USA in fiscal 2001.
In December 1993, Radica Games was incorporated in Bermuda and was
established as a holding company of Radica HK. Prior to the closing of the IPO,
Radica Games acquired all of the outstanding common stock of Radica USA from Mr.
Davids, Mr. Sutter and Mr. Hansen in exchange for additional shares of the
Company's common stock and acquired all of the outstanding common stock of Disc
from Mr. Davids. In May 1995 the Company opened its purpose built factory in Tai
Ping, China on a 3.7 acre site under the terms of a cooperative joint venture
agreement with the local government.
In April 1998 the Company acquired the assets and business of Girl Tech
from KidActive, LLC.
In June 1999, the Company acquired Radica UK, formerly Leda Media
Products Limited, a leading supplier of video game controllers in the United
Kingdom.
During the fourth quarter of 1999, the Company commenced construction
of a $3 million extension to its factory 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. 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.
BUSINESS STRATEGY
The Company intends to provide a broad line of electronic and
mechanical games and video game accessories. In order to provide innovative,
high quality games at low prices, Radica employs a strategy of product design in
the United States and United Kingdom, where a substantial majority of the
Company's products are sold, combined with engineering and low cost materials
procurement in Asia and low cost manufacturing in China, where the Company
operates its Factory. The Company also consults a select group of outside
inventors for product concepts. The Company's current products and planned
products are intended to reach retail price points covering the range of large
volume gift products. The Company historically focused primarily on products
that combine knowledge of the casino gaming industry with experience in new
product introduction, electronic game design and low cost manufacturing. Since
1996 the Company has placed more emphasis on non-casino games and with the
acquisition of
15
Radica UK in 1999, has expanded beyond electronic games, to include a line of
video game joypads, steering wheels, memory cards and other assorted
accessories. The Company also designs and manufactures electronic games and VGA
on behalf of third parties under ODM/OEM agreements. The games and VGA are
generally based on third party games.
To provide differentiation between high-end and low-end markets,
products are packaged under the name 'RADICA:(R)' for the low-end mass markets
and under the name 'Radica:(R) Gold' for the more exclusive high-end markets.
Girl Tech products are packaged under the name of "Girl Tech(R)". Video game
accessories are packaged under the Gamester name. Radica's line of products
using the XaviX technology are packaged under the name of Connectv(R) in Europe
and Play TV(TM) in the US and other world markets.
Radica believes its ability to develop and introduce innovative
products is enhanced by its established innovative product design and
engineering in the United States and the United Kingdom, and its multiple
channel distribution capabilities, which allow for close customer contact. Large
manufacturing volumes and low cost production activities in China have allowed
the Company to keep its prices competitive. In addition, electronic parts and
subassemblies can be purchased efficiently and at low cost in Asia.
The Company has expanded and continues to expand distribution of its
existing products, both inside and outside the United States. As part of this
goal, Radica Canada and a predecessor of Radica UK were established in 1995 to
distribute products in these markets. UK distribution was assumed by Radica UK
upon its acquisition by the Company in 1999. The Company intends to pursue
related business opportunities that leverage off the Company's product
development expertise to access new markets. Related business opportunities
include ODM/OEM for other companies, of which the manufacturing for the Hasbro
Games Group and SSD are examples.
PRODUCTS
At the end of fiscal year 2001, Radica's principal products by product
line were as follows:
FISHING HUNTING SPORTS
Ultimate Bass Fishin'(TM) Buckmasters(R)Deer Huntin'(TM) Harley Davidson(R)Game Glove(TM)
Sport Bass Fishin'(TM) Buckmasters(R)Mini Huntin'(TM) Tiger Woods Ultimate Golf(TM)
Pro Guide Bass Fishin'(TM) Buckmasters(R)Deer Huntin'(TM)II Tiger Woods Tournament Golf(TM)
Mini Bass Fishin'(TM) Nascar(R)I-Racer(TM)
EA Premium League Football
Manager(TM)
EA Stadium Football(TM)
EA Stadium Baseball(TM)
EA Mouse Hockey(TM)
EA Mouse Basketball(TM)
Soccer Striker
HERITAGE CASINO GIRL TECH(R)
-------- ------ ------------
Big Screen Solitaire(TM) Pocket Draw Deuces Poker(TM) Password Journal(R)2
Travel Solitaire(TM) Pocket Poker(R) Password Journal(R)
Freecell Solitaire(TM) Pocket Blackjack 21(R) Keep Safe Box(TM)
16
2-in-1 Solitaire(TM) Pocket Slot(TM) Password Notes(TM)
Solitaire Lite(TM) Jackpot Slot(TM) Plan Girl(TM)
Travel Checkers(TM) Color Poker(TM) Password Phone(TM)
Travel Tic-Tac-Toe(TM) Draw Poker(TM) Personology(TM)
Pocket Word Scramble(TM) Password Keepsafe Box(TM)
3-in-1 Tetris(R)Light(TM)
17
PLAY TV(TM) ODM/OEM VGA (PLAYSTATION)
----------- ------- -----------------
Radica Play TV Baseball(TM) Connect Four(TM) PS2 Vibra Force 2 Controller
Radica Play TV Ping Pong(TM) Battleship(TM) PS2 Vibra Force 2 Racing Wheel
Radica Play TV Bass Fishin'(TM) Yahtzee(TM) PS2 Dual Force Joypad
Radica Play TV Buckmasters(R)Huntin'(TM) Hangman(TM) PS2 Dual Force Steering Wheel
Radica Play TV Snowboard(TM) Mr. Potato Head(TM) PS2 Pro Racer
Radica Play TV Cardnight(TM) CandyLand(TM) PS2 Sportsboard
Monopoly(TM) PS2 DVD Remote Control
ACTION Excite Ping Pong Playstation Dualshock
------ Gingin Boarders Analog Joypad
Skannerz(TM) Excite Striker Assorted Color Memory Cards
Air Force iCombat(TM) e-Kara
Radica Rock(TM)
VGA (HANDHELD) VGA (XBOX(TM))
-------------- --------------
GBA Powerpack Xbox(TM) Pro Racer
GBA Profold Light Xbox(TM) Vortex Assortment
Magnifying Glass Xbox(TM)Cortex Pack
GBA Ultimate Essentials Xbox(TM)Arcade Stick
GBA Wallet (Adult) Xbox(TM)8 MB Memory Card
GBA Trap Light
GBA Main Adaptor
GBA Essentials
Gameboy Essentials Pack
Gameboy Powerpack
GBA Link Lead 4
GBA Car Adaptor
GBA Link Lead 2
GBA Power Station
GBA Kit Bag
In addition the Company has a number of discontinued lines, which,
unless the market warrants reintroduction, the Company only intends to continue
selling so long as inventories exist. The Company intends to introduce
approximately 64 new models in 2002 (including 33 VGA products). In fiscal 2000,
the Company's products had retail prices ranging from $5 to $500.
The following table sets forth a breakdown of the Company's sales by
major product category for the last four fiscal years.
18
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
2001 2000
------------------------------------------------- -------------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
Product Lines Sales Value Sales Value Sold Models Sales Value Sales Value Sold Models
--------------------------------- ------------- ---------- --------- ------------- ------------- ---------- ---------
(in thousands, except percentage and no. of models information)
Handheld 38.5% $ 38,001 5,505 130 46.2% $ 49,307 6,644 110
Play TV 14.5% 14,315 502 7 8.0% 8,561 289 4
Girl Tech 11.9% 11,723 1,042 16 13.0% 13,897 1,211 12
ODM / OEM 19.2% 18,890 3,973 15 18.1% 19,271 4,686 22
VGA 10.5% 10,337 2,070 130 9.5% 10,116 1,752 108
---- ------ ----- --- --- ------ ----- ---
94.6% 93,266 13,092 298 94.8% 101,152 14,582 256
Sourcing 5.4% 5,288 5.2% 5,544
----- -------- ----- ---------
Total 100.0% $ 98,554 100.0% $ 106,696
===== ======== ===== =========
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------- -------------------------------------------------
% 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)
Handheld 64.2% $ 87,775 8,667 100 77.1% $ 122,902 11,903 110
Girl Tech 5.4% 7,444 594 6 0.1% 145 11 2
ODM / OEM 20.4% 27,897 6,109 22 22.8% 36,322 6,144 20
VGA 7.0% 9,558 1,871 139 - - - -
------ --------- ------ --- ------ --------- ------ ---
Total 97.0% $ 132,674 17,241 267 100.0% $ 159,369 18,058 132
Sourcing 3.0% 4,042 - -
------ --------- ------ ---------
Total 100.0% $ 136,716 100.0% $ 159,369
====== ========= ====== =========
Radica sells a broad range of electronic and mechanical handheld and
tabletop games under the Radica and Radica Gold brand names. 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 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(R) and Password Door Pass(TM).
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, PlayStation 2, Nintendo 64,
Nintendo Gameboy and PC Platforms.
During 2000, Radica introduced its Play TV line, featuring the new
XaviX 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). Several
new items were introduced for Xbox(TM) in 2001, including the Xbox(TM) Pro Racer
and the Xbox(TM) Vortex Assortment and the Xbox(TM).
19
NEW PRODUCT INTRODUCTION
In fiscal 2002, Radica intends to update its line of games by
introducing approximately 64 new games/accessories in the following categories:
Handhelds, with Radica Fishing (1 game), Radica Sports (4 games), Radica
Heritage (9 games), Radica Hunting (1 game), Barbie(TM) (4 games), Pino(TM)
Robot (2 games) and Radica Casino (2 games); Girl Tech (5 games), Play TV (3
games) and VGA (33 products). 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 will also continue to provide its Radica Gold brand products to higher
end retailers.
2002 vs. 2001 New Product Introductions (by category)
-----------------------------------------------------
2002 2001
---- ----
Handheld 23 45
Play TV 3 5
Girl Tech 5 9
VGA 33 46
-- --
TOTAL 64 109
The Company anticipates that new product introductions in fiscal 2002
will be concentrated in the second and third quarters of that year. By the end
of fiscal 2002, the Company expects its product line to include approximately
180 models, of which 91 will be in VGA. However, 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 2002 will be delayed, which
could delay or prevent certain anticipated product introductions.
LICENSING
During fiscal 2001, Radica engaged in several licensing agreements in
which Radica 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 NASCAR (NASCAR(R) Racer(TM) and NASCAR (R)
Speedzone(TM)), Tiger Woods (Tiger Woods Ultimate Golf(TM), Tiger Woods Tee
Time(TM) and Tiger Woods Tournament Golf(TM)), Electronic Arts (EA No Hitter(TM)
and EA Madden Football(TM)), Sloane Vision Unlimited, developers of Chicken Soup
for the Soul (Chicken Soup for the Soul(R), Chicken Soup for the Teenage
Soul(TM)), Anjar Co, developers of Othello, Buckmasters (Buckmasters(R) Deer
Huntin'(TM) II and Buckmasters(R) Elk Huntin'(TM), Buckmasters(R) Bow
Huntin'(TM)), Hank Parker (Ultimate Bass Fishin'(TM), Pro Guide Bass Fishin'(TM)
and Sport Bass Fishin'(TM)), Elvis Presley Enterprises (Elvis Slot), the Tetris
Company (Tetris Lite and Tetris Challenge) and SSD, developers of Xavix
technology (Play TV series TV games) and Microsoft(TM), developers of Microsoft
Xbox(TM) (VGA line of products specifically made for the Xbox(TM)).
The Company intends to incorporate some of these licenses into its 2002
product line and will pursue new licenses in instances where management feels it
will enhance the value and marketability of a particular product.
MANUFACTURING
20
Radica's manufacturing is generally limited to IC chip 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 2001 the Company assembled all 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
during 2001.
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 (the
"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. 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.
21
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. The Company intends to
phase out the use of the Processing Agreement in 2002 and manufacture the
majority of future products through the JV.
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.
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 2001 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), Just
Technology Co., 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 2001 included Minwa
(power adaptors), Mascotte (game accessories) and Hip Hing (cables).
SALES AND DISTRIBUTION
22
Radica's products are sold in 33 countries, with the United States
accounting for over 60% of net sales in fiscal 2001. The Company sells its
products directly to over 350 active retailers in the United States and to
approximately 30 distributors worldwide. The Company participates in the
electronic data interchange ("EDI") program maintained by 15 customers including
J.C. Penney's, Sears, Target, Wal-Mart, Kohl's and Kmart. In fiscal 2001, the
largest customer of the Company, Wal-Mart, accounted for 22.8% of net sales; in
addition ODM/OEM work for SSD accounted for 11.1% of net sales. All other sales
to third party distributors and retail customers are final upon transfer of
title. In the case of the 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
2001 2000
---- ----
1. Wal-Mart (USA) 22.8% 17.0%
2. SSD (Japan) 11.1% 1.0%
3. Hasbro (worldwide) 7.9% 16.7%
4. Target (USA) 6.1% 9.3%
5. Kmart (USA) 5.3% 5.0%
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 are expected in 2002. The
Company has decided to continue 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.
The following table sets forth certain of the Company's major customers
in 2001, including distributors (alphabetical order).
DEPARTMENT STORES DRUG STORES MASS MERCHANDISERS CATALOG SHOWROOMS
----------------- ----------- ------------------ -----------------
Dayton Hudson Arbor Drugs Inc. Ames Argos
Dillards Eckerd Corporation Army Airforce Exch. Brookstone
Foley's Genovese Drugs Bradlees Index
J.C. Penney's London Drugs Fred Meyer Intermediates
John Lewis Long's Drugs Kmart Littlewoods / Index
Kohl's Osco Drug Mervyns Sharper Image
Macy's Thrifty Payless Drug QVC
Marshall Fields Shopko
Neimann Marcus Target
Robinson's-May Bust
Woolworth's Wal-Mart
Woolworths
Zellers
23
CONSUMER GROCERY &
MAIL ORDER RETAILERS SPECIALTY GIFT SHOP OPERATORS ELECTRONICS STORES CONVENIENCE STORES
-------------------- ----------------------------- ------------------ ------------------
Fingerhut Bass Pro Best Buy Albertsons
Home Shopping Network Caesar's World Comat Emro Marketing
H. Schneider Circus Circus Dixon's Kroger
Wish Book Dufferen Game Room Stores Electronics Boutique L&L Jiroch
Innovations Spencer Gifts Fry's M.W. Kasch
Zany Brainy KF Group (Tempo) W.H. Smith
Westfair Super Stores
TOY RETAILERS SPORTING GOODS STORES INTERNET RETAILERS DISTRIBUTORS (RADICA)
------------- --------------------- ------------------ ---------------------
Hamleys Sports Authority e-Toys.com Agerex (Finland)
Kay Bee Bass Pro Shops Amazon.com Black Jack Int., S.A. (Panama)
Toys`R'Us Caterways Co. Ltd (Cyprus)
Cherry Wood Int. Corp (Columbia)
Danzes S.A. (Uruguay)
Distribution Y Servicio D & S S.A. (Chile)
Gemini Industria F Comericio (Brazil)
Hiro Co., Ltd (Japan)
Importadora Maduro S.A. (Panama)
Irwin Pacific Pty, Ltd. (Australia)
Lansay (France)
Playthings Pte Ltd. (Singapore)
Popular de Juguetes (Spain)
SMP Enterprises (Hawaii)
The Oriental Trading Co. (Hong Kong)
Universal Electronics (Lebanon)
DISTRIBUTORS (VGA)
Infogrames Benelux (Netherlands) Infogrames Portugal (Portugal)
Infogrames Espania (Spain) Koch (Germany)
Infogrames Israel (Israel) Manta Co. (Poland)
Nobilis (France) Toptronics Oy (Finland)
Unsaco AS (Norway)
The Company has improved the quality of its distribution network by
adding new VGA distributors in fiscal 2001, in Germany and France. 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's USA distribution operations use regional sales managers
working for the Company to manage manufacturers representatives and brokers that
sell its products. 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.
24
The Company sells 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").
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, accepting returns and other concessions.
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 return of non-defective
products occurs infrequently. The Company establishes provisions based on
historical experience at the time of sale of the related products.
The Company's Radica, Radica Gold, Girl Tech, Play TV and Connectv
products carry a 90 days consumer warranty from the date of sale, and the
Company generally honors warranty claims even after that period. The Company's
VGA products carry a one year warranty from the date of sale. In each of the
last two years, warranty costs incurred have been less than 3% of net sales and
substantially all warranty claims are received within 120 days of invoice.
PRODUCT DEVELOPMENT
At the end of 2001, Radica's engineering and development department had
approximately 130 staff worldwide. The Company's product development starts with
teams in Dallas, Texas; San Francisco, California; and Hertfordshire, England
and continues through to the engineering teams in Hong Kong, 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 1999, 2000 and 2001, the Company spent approximately
$6,036,000, $5,210,000 and $5,775,000 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 several Hong Kong engineering positions
to offices in China. It is the Company's belief that this reorganization will
significantly reduce costs without decreasing efficiency (see "Item 3. Key
Information - Risk Factors - Replacement of Hong Kong Staff"). By trimming the
breadth of its product lines going forward, the Company expects to continue
developing the majority products internally during 2002. 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.
25
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 product for them. In April
1999, the Company signed two new agreements with Hasbro. The first, a new ODM
agreement and the second, a license agreement allowing Radica to continue to
sell high end versions of Yahtzee(TM), Connect Four(TM) and Battleship(TM) under
its Radica Gold brand name. The ODM agreement ended on December 31, 2001,
however, the Company continues to manufacture for Hasbro under the terms of the
expired agreement. It also has several ongoing OEM and ODM projects with SSD 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 original design manufacturing
business or that it will be profitable.
INTELLECTUAL PROPERTY
The Company currently owns 42 design patents, 9 utility patents, 57
trademarks and has 14 copyrights over its artwork. It also has 5 design patents,
3 utility patents and 21 trademarks applications in process and will continue to
obtain copyrights, trademarks, design and utility patents for new products.
The Company anticipates that patents, trademarks, copyrights and other
intellectual property rights will become increasingly important in the
electronic handheld and mechanical games industry in which the Company operates,
particularly since the Company is introducing a wider range of products with
themes and features that do not duplicate casino or heritage games. As the
industry focuses on intellectual property matters, there will be opportunities
for the Company to protect its products through patents, trademarks and other
formalized filings, although the efficacy of these protections is variable at
best. 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 dominant sellers of handheld electronic games. The Company's primary
competitor is the Hasbro Games Group, which includes Tiger Electronics, Inc.
Hasbro procures its products from manufacturers in China. The barriers for new
producers to enter the Company's markets are relatively low and the Company
expects that it will face increased 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 will compete with a number of substantially larger and
more experienced manufacturers. As the Company enters other markets and
businesses, it expects to face new competition.
In the VGA market, Radica UK was the largest third-party distributor of
VGA in the UK in 2001 according to Chart Track. The VGA market share is spread
primarily amongst ten companies which have 54.5% 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
26
the basis of price, quality, and features and for retail shelf space on the
basis of service. Major competitors are MadCatz, InterAct, Pelican, Guillemot
and Big Ben.
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%. 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%. After this the Company will be taxed at the regular tax
rate, but has applied for a continued tax holiday amounting to 50% of the
regular tax rate.
Radica USA and Disc are fully subject to US 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%. In
addition, dividends paid by Radica USA and Disc 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%.
EMPLOYEES
As of December 31, 2001 the Company's workforce was comprised of the
following:
Production Sales and R&D Finance Operations Total by
Marketing & Admin location
Asia 3757 9 105 21 191 4083
USA 4 21 26 9 8 68
Europe 5 12 8 5 4 34
Total 3766 42 139 35 203 4185
At December 31, 2000 and 1999 the Company's workforce comprised 4,378
persons and 3,048 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.
27
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. 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 (15,400 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.
Storey, officers of the Company. Radica operates its Factory under the terms of
the Joint Venture Agreement and Processing Agreement. The Company leases
additional storage and office space in Hertfordshire, UK and office space in
Dallas, Texas, Pasadena, California and San Francisco, California. Following the
implementation of the December 2001 restructuring plan Mr. Storey has now been
relocated to Dallas and the San Francisco office closed. The Company is
obligated to pay $74,880 and $38,938 for 2002 and 2003 under the terms of the
San Francisco lease. It intends to sublease this property.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
RESULTS OF OPERATIONS
In December of 1998, Radica Games' Board of Directors approved a change
in the Company's fiscal year end from October 31 to December 31. This resulted
in a transition period from November 1, 1998 to December 31, 1998, which has
been audited.
FISCAL 2001 COMPARED TO FISCAL 2000
The following table sets forth items from the Company's Consolidated
Statements of Operations as a percentage of net revenues:
28
Year ended December 31,
----------------------------
2001 2000
---- ----
Net sales 100.0% 100.0%
Cost of sales 65.6% 77.8%
Gross margin 34.4% 22.2%
Selling, general and administrative
expenses 26.9% 30.3%
Research and development 5.8% 4.9%
Depreciation and amortization 4.1% 5.1%
Restructuring charge 1.6% 1.1%
Operating loss (4.0%) (19.2%)
Other income 0.0% 0.7%
Interest income, net 0.1% 0.6%
Loss before income taxes (3.9%) (17.9%)
(Provision) credit for income taxes (0.5%) 0.9%
Net loss (4.4%) (17.0%)
The Company experienced an after tax loss of $4.4 million for fiscal
year 2001 or $0.25 per diluted share versus a 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 $106.7 million in
2000. The decline in net sales during 2001 resulted from worldwide economic
recession; and the effect of the September 11 terrorist attacks in New York,
which eroded US consumer confidence and as a result caused retailers to exercise
caution in their buying. Several top US retailers cancelled holiday reorders in
the wake of the attacks.
Summary of sales achieved from each category of products:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2001 2000
---------------------------- ----------------------------
% OF NET NET % OF NET NET
PRODUCT LINES SALES VALUE SALES VALUE SALES VALUE SALES VALUE
------------- ----------- ------------ ----------- -----------
(US$ in thousands)
Handheld 38.5% $ 38,001 46.2% $ 49,307
Play TV 14.5% 14,315 8.0% 8,561
Girl Tech 11.9% 11,723 13.0% 13,897
ODM/OEM 19.2% 18,890 18.1% 19,271
VGA 10.5% 10,337 9.5% 10,116
Sourcing 5.4% 5,288 5.2% 5,544
----- -------- ----- ---------
Total 100.0% $ 98,554 100.0% $ 106,696
===== ======== ===== =========
29
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.
Management expects 2002 gross margins to remain consistent with 2001
margins. The Company will continue to look for ways to improve product costs
without affecting product quality and will endeavor to avoid excess inventories.
The Company continues its plans to diversify by expanding its VGA lines, finding
new ODM and OEM partners and expanding sales of its product in Europe. While
successes in these areas should increase gross profits, the increase of VGA and
ODM sales as a percentage of total Company sales may cause total gross margin to
decrease.
Operating expenses for 2001, excluding $1.6 million of restructuring
costs, were $36.3 million compared to operating expenses of $42.9 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 China factory, 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. Through the restructuring, the Company believes it
will significantly decrease operating costs without decreasing efficiency.
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 Play TV line of products was in its second year and required
less promotion, advertising and promotional costs decreased in 2001 from 2000.
The Company expects to see significant drops in its SG&A costs in 2002
and beyond. With the adoption of SFAS No. 142 concerning Goodwill and Intangible
Assets, the Company anticipates amortization expense to decrease by
approximately $0.8 million during 2002. As a result of the
30
reorganization that took place during 2002, the Company expects to realize up to
$4 million in reduced salaries expense, office rents and miscellaneous other
general and administrative costs. The Company gives no assurances that it will
realize these reduced SG&A costs going forward and changes in market conditions
could create dramatic variances from the Company's expectations.
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 2001 the Company had $25.8 million of cash and net
assets of $63.1 million. 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. Long-term debt decreased from $5.5 million at December 31, 2000
to $1.8 million at December 31, 2001. The long-term debt was originally used to
purchase LMP in 1999. During 2001, the Company made no acquisitions.
At December 31, 2001, cash and cash equivalents, net of short-term
borrowings, were $25.0 million of which $8.9 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. This compares with cash and cash equivalents, net
of short-term borrowings of $19.3 million and $30.7 million at December 31, 2000
and December 31, 1999, respectively. The Company generated approximately $10.3
million, $(4.7 million) and $8.5 million of net cash from its operating
activities in 2001, 2000 and 1999, respectively. The increase in 2001 from 2000
was primarily the result of a decrease in operating losses for the year and
better management of the Company's receivables. Receivables decreased to $17.3
million from the December 31, 2000 level of $25.9 million and fourth quarter
days sales outstanding in 2001 improved to 40 days from 67 days in 2000.
Accounts receivable at year-end is primarily composed of fourth quarter
revenues. Inventories increased to $17.2 million from $14.0 million at December
31, 2000 primarily as a result of in-transit inventory to the United States of
video game accessory product and Skannerz for Q1 2002. Current liabilities were
$27.0 million at December 31, 2001 compared to $26.5 million at December 31,
2000. The increase was primarily the result of increased 4th quarter materials
costs related to the increased inventories. Prepaid assets increased from $1.6
million in 2000 to $2.3 million in 2001 as a result of prepaid US federal income
tax in 2001. Income taxes receivable dropped $3.6 million from 2000 due to
repayment of an outstanding US federal income tax receivable. The Company
believes that during 2002 and beyond, its most significant cash source will be
from its operating profits. The Company's management believes that it will
realize an operating profit in 2002 and will successfully convert its
receivables into the cash used to fund the business. The Company gives no
assurances that it will successfully be able to achieve an operating profit in
2002.
Cash flows from investing activities were a net utilization of $1.0
million, $4.3 million and $6.8 million in 2001, 2000 and 1999, respectively.
During 2001, the Company expended approximately $1.0 million on the purchase of
property, plant and equipment, while in 2000 it expended $3.1 million. The
factory expansion comprised most of the expenditures during 2000. The Company
plans on making limited fixed asset expenditures during 2002.
Cash used in financing activities was $6.4 million in 2001 compared
with $0 in 2000. This change was primarily due to repayment of short-term and
long-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
31
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 makes it necessary for
the Company to sometimes borrow amounts during the year. As of December 31,
2001, the Company had more than $6.6 million of various lines of credit
available. A breakdown of the Company's short-term and long-term financing
during 2001 is as follows:
Loan Amount Debt Loan Amount Date of
Bank as at 1/1/2001 Repayment as at 12/31/2001 Maturity
--------------------------------- ------------------- ------------------ ------------------ ------------------
(US$ in thousands)
China Construction Bank $ 1,814 $ (968) $ 846 Aug. 3, 2002
(Humen, China)
HSBC $ 11,087 $ (5,614) $ 5,473 Jun. 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 and revolving
loan are secured by certain properties and deposits of the Company (see Note 16
of the Consolidated Financial Statements). The agreement contains covenants
that, among other things, require the Company to maintain a minimum of tangible
net worth, gearing ratio and other financial ratios.
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 2002, 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 2002. 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 fiscal years 2000 and 2001. 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 2000 COMPARED TO FISCAL 1999
The Company experienced an after tax loss of $18.1 million for fiscal
year 2000 or $1.03 per diluted share versus an after tax profit of $17.1 million
or $0.90 per diluted share for fiscal year 1999.
Net sales for 2000 were $106.7 million, compared to $136.7 million for
1999. The sales decline during 2000 resulted primarily from severely adverse
market conditions in the electronic handheld game
32
category which were only partially offset by the growth of the Company's Girl
Tech product line and the introduction of Radica's new Play TV line of games.
Net sales for the year ended December 31, 2000 were $106.7 million,
decreasing 21.9% from $136.7 million for the prior year. Approximately 46.2% of
sales related to handheld games, 8.0% to Play TV, 13.0% to Girl Tech games, 9.5%
to VGA, 5.2% to Sourcing and 18.1% to ODM/OEM sales during the year ended
December 31, 2000 in comparison to 64.2%, 0%, 5.4%, 7.0%, 3.0% and 20.4% in the
same period in 1999.
During the year ended December 31, 2000, Radica recorded a charge of
$10.2 million consisting of $1.4 million in organization restructuring charges,
$4.6 million in provisions against inventories, $1.8 million in provisions
against prepaid royalties and $2.4 million in provisions against receivables and
bad debts as a result of the downturn in its handheld games business. Gross
margin for the year was 22.2% compared to 40.8% in fiscal year 1999 as a result
of these charges and a mix shift to lower margin Gamester business.
Operating expenses for the year including restructuring charges
incurred in Q2 were $44.1 million compared to $39.0 million in fiscal year 1999.
The following table shows the major operating expenses, other income
and income taxes:
Year ended December 31,
----------------------------------------
(US dollars in millions) 2000 1999
----------------- -----------------
Commissions $ 2.3 $ 2.9
Indirect salaries and wages 7.5 8.2
Advertising and promotion expenses 11.1 8.9
Research and development expenses 5.2 6.0
Other income 0.8 0.7
(Credit) provision for income taxes (0.9) 0.1
The decrease in commissions in 2000 was the result of both the decrease
in sales from 1999 and Radica USA's decision to increase efficiency by changing
its sales force from third party sales representative to an in-house sales team.
The decrease in indirect salaries and wages in 2000 was the result of the
Company's reorganization in the second quarter. Advertising and promotional
costs increased in 2000 due to the introduction of the Play TV line in the US.
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
33
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 to 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
inventory 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
Long-lived assets, identifiable intangibles and goodwill have been
reviewed for impairment based on Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This statement requires that an impairment
loss be recognized whenever the sum of the expected future cash flows
(undiscounted and without interest charges) resulting from the use and ultimate
disposal of an asset is less than the carrying amount of the asset. Radica's
management reviews for indicators that might suggest an impairment loss exists.
Testing long-lived assets, identifiable intangibles and goodwill for
recoverability requires estimates of expected cash flows to be generated from
the use of the assets. Various uncertainties, including changes in consumer
preferences, deterioration in the political situation in a country or adverse
changes in the general economic conditions in the US and internationally, could
adversely impact the expected cash flows to be generated by an asset or group of
assets. See discussion under "New Accounting Pronouncements" regarding SFAS No.
144, which supercedes SFAS No. 121 effective the first quarter of 2002.
34
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 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.
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 2001.
Term
Name Expires Residency Position
---- ------- --------- --------
Jon N. Bengtson 2002 USA Chairman of the Board and Director
Albert J. Crosson (1)(2) 2002 USA Director
Robert E. Davids (2) (3) 2002 USA Vice-Chairman of the Board and Director
Patrick S. Feely 2002 USA President, Chief Executive Officer and Director
David C.W. Howell 2002 Hong Kong President Asia Operations,
Chief Financial Officer and Director
Henry Hai-Lin Hu (1)(2)(3) 2002 Australia Director
Siu Wing Lam 2002 USA Executive Vice President, Engineering and Director
James O'Toole (2)(3) 2002 USA Director
Millens W. Taft (1)(2)(3) 2002 USA Director
Peter L. Thigpen (1)(2)(3) 2002 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
Craig D. Storey N/A USA Vice President and Chief Accounting Officer
Kam Cheong Wong N/A Hong Kong Vice President of China Operations
Milly M.L. Chan N/A Hong Kong Engineering Director
35
Larry C.N. Cheng N/A Hong Kong Engineering Director
Rick C.K. Chu N/A Hong Kong International Sales Director
Tiki K.K. Ho N/A Hong Kong Engineering Director
Louis S.W. Kwok N/A Hong Kong Plant Administration Director
Mark K. Liddle N/A UK Business Development Director
Lavinia K.W. Wong N/A Hong Kong Director of VGA & Sourcing
Hermen H.L. Yau N/A Hong Kong MIS Director
(1) Member of the Audit Committee.
(2) Member of the Executive Committee.
(3) Member of the Compensation, Organization and Nominating 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 filed as part of the
Company's report on Form 6-K for the period in which the proxy statement is sent
to shareholders.
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
36
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 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
a Director and Chairman of the Toy Industry Association. 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 an 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 21
years of experience in manufacturing, product design and engineering management.
He has an Associateship in Production and Industrial Engineering from Hong Kong
Polytechnic, a postgraduate diploma in Engineering Management from City
Polytechnic of Hong Kong, and is an associate member of the Institute of
Electrical Engineers of the UK.
James 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
37
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 on the Board of Trustees of the Kentfield, California School
District. 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.
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 14 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 28 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.
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.
Kam Cheong Wong has been the Vice President of China Operations for the
Company since May 1998. Prior to that, he was the Director of Manufacturing for
the Company from June 1994 to May 1998. Mr. Wong has over 20 years of experience
in product design, R&D, production and sales in toys, consumer electronics and
the electrical appliance industry. Mr. Wong has a B.Sc. in Mechanical
Engineering from Taiwan University, a post graduate diploma in Manufacturing
Technology from City University, London and is a member of the Institute of
Management, UK.
Milly M.L. Chan has been an Engineering Director since April 1999,
having previously held the positions of Engineering Manager, Project Supervisor,
and Project engineer since joining in June 1993. She has a B.Eng in Electronic
Engineering from Hong Kong Polytechnic University, an MBA from Heriot-Watt
University and is a Chartered Engineer and a Member of the Institution of
Electrical Engineers.
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
38
experience in ODM and the toy industry. He has a Higher Diploma in Marine
Electronics from the Hong Kong Polytechnic University.
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.
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 Plant Administration Director of the
Company from January 2, 2001. Effective from March 11, 2002, Mr. Kwok will be
appointed the Materials and Logistics Director of the Company. He has had over
15 years experience in 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.
Mark K. Liddle has been Business Development Director since January
2002, having previously held the position of Quality/Sourcing Manager since
joining in September 1997. He personally manages the Direct Sourcing business
within the UK and Europe and oversees all aspects of product quality and safety
within Europe and the UK. Mr. Liddle has had 13 years experience of quality and
manufacturing having previously been involved in aerospace and automotive
industries.
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 2001, the aggregate amount of compensation paid to all
executive officers and directors as a group for services in all capacities was
approximately $2.2 million.
39
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 non-qualified 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 $3.28 per share in 2001. 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 non-qualified 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, Lam, 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. Mr. Lam's
employment agreement was not renewed and with effect from March 2002, he will be
no longer an executive officer but will remain an outside director of the
Company. 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. From 2000, Messrs. Feely and Howell took voluntary
pay cuts and do not receive the minimum annual base salaries. The agreement with
Mr. Bengtson, in operation since December 1995, is for part-time services. 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 a
residence for Mr. Howell and previously provided a residence for Mr. Storey 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 and Mr. Lam, they were granted each 25,000 stock
options of the Company common stock at $3.00 and $2.90 per share in May 2000 and
2001 respectively. In June 2002, Mr. Howell will be granted 25,000 stock options
(up to 25,000 shares in the aggregate) at market price, subject to the terms and
conditions of the agreement and the 1994 Stock Option Plan, and provided certain
conditions are achieved as stated in the agreement. 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
40
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, respectively in Feb 2001 and Mr. Doughty was granted 25,000 in May
2001 under the Performance Driver Incentive Plan.
CONSULTING AGREEMENT
In 2001, Mr. Henry Hu, one of the Company's outside directors, acted as
an independent contractor to review and advise the Company on social
accountability standards and its R&D/manufacturing operation. Mr. Hu was paid
consulting fees of $15,000 and $8,974 in April and August 2001, respectively.
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 1999, an aggregate of 235,000 options (exclusive of the
outside directors' options and net of stock options that were both issued and
canceled 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 $8.38 to $15 per share.
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
canceled 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
canceled in the year) were granted to directors, officers
41
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.
As a result of the foregoing, at the end of fiscal year 2001, after
giving effect to all prior exercises and cancellations of options, an aggregate
of 1,910,867 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 1,156,000 options were held by directors and executive
officers of the Company as a group. Also, an aggregate of 280,000 outside
director's options were outstanding at exercise prices ranging from $1.50 to
$18.75 per share. During 2001, a total of 75,596 shares were issued upon the
exercise of options, at exercise prices ranging from $1.38 to $3.0 per share.
Prior to 2001, a total of 990,000 shares had been issued upon the exercise of
options at exercise prices ranging from $0.57 to $11.0 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 January 31, 2002:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
-------------- --------------- ------------ ----------------
Common stock Dito Devcar Corporation, et al. 7,191,638 40.7%
Common stock RAD Partners 1999 LLC, et al. 1,686,200 9.6%
Common stock Robert E. Davids 1,499,500 8.5%
Common stock Officers & Directors as a Group 2,012,114 11.4%
Over the last three years, the identity of the foregoing major shareholders
has not changed but the relative percentages owned by them have changed
somewhat. Since December 1, 1998, the amount owned by Mr. Davids has
decreased by approximately 8 percentage points, and the amounts owned by
Dito Devcar Corporation and RAD Partners 1999 LLC have increased by
approximately 9 percentage points and less than 1 percentage point,
respectively.
(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, 2001, 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
42
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. In
1997, the Company effected a demand registration at the request of Mr. Davids
and also included certain shares at the request of the Hansen Trust. Such
registration covered an aggregate of 1,855,000 million shares. In 1999, the
Company effected a further registration for Mr. Davids that covered 2,815,800
shares.
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. Crossfire is owned beneficially by Mr. Crosson and his four children.
Additional information on management transactions is contained under
Item 6 above.
ITEM 8. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements are included herein.
LEGAL PROCEEDINGS
The company is subject to pending claims and litigation. Management,
after review and consultation with counsel, considers that any liability from
the disposition of such lawsuits would not have a material adverse effect on the
consolidated financial condition and results of operations of the Company.
ITEM 9. THE OFFER AND LISTING
43
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 2001 and fiscal 2000:
Fiscal year ended Fiscal year ended
December 31, 2001 December 31, 2000
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter 3 3/8 1 5/8 10 6 3/4
Second Quarter 3 1/2 2 1/2 7 1/16 2 11/16
Third Quarter 4 1/4 2 2/5 3 1/2 2 5/8
Fourth Quarter 4 9/10 2 17/32 2 3/4 1 5/8
The annual high and low closing stock prices in fiscal 1999 were $16
and $7 1/4, in fiscal 1998 were $21 and $10 7/16; and in fiscal 1997 were $15
3/16 and $1 1/16.
The monthly high and low closing stock prices over the last six months
in fiscal 2001 were $4 1/4 and $3 11/20 in July 2001; $4 1/4 and $3 9/17 in
August 2001; $4 2/25 and $2 2/5 in September 2001; $3 23/50 and $2 17/32 in
October 2001; $4 9/10 and $3 9/53 in November 2001; and $4 7/10 and $4 1/33 in
December 2001.
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).
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND BYE-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
44
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.
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
45
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 in respect of the Common Stock, or a trust
if a court within the United States is able to exercise primary supervision over
46
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.
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, if any, 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%. The
gain or loss will generally be income or loss transactions within the United
States for foreign tax credit limitation purposes.
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"). US citizens or residents, domestic corporations, domestic partnerships
and estates or trusts other than foreign estates or trusts who are shareholders
of FPHCs ("US shareholders") are required to include in income the undistributed
income of a FPHC.
The Company believes that it is not currently a FPHC because the income
test was not met in 2001. 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
47
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 2001. 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.
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
48
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, 2001, the result of a hypothetical one percentage
change in the underlying US$ SIBOR rates would have resulted in an approximate
$0.1 million change in the annual amount of interest payable on such debt.
FOREIGN CURRENCY RISK
The Company has net monetary asset and liability balances in foreign
currencies other than the U.S. dollar, including the Pound Sterling, the
Canadian dollar, the Hong Kong dollar and the 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. There can be no
assurance that exchange rate fluctuations will not harm the business in the
future.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES
None
49
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
None or Not Applicable
ITEM 15. RESERVED
ITEM 16. RESERVED
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
* 10.2 Processing Agreement, dated December 27, 1993,
between Radica HK and Foreign Economic
Development Co. of Humen Town, Dongguan
50
@ 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, as most recently
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
51
21.1 List of subsidiaries
23.1 Consent of KPMG
23.2 Consent of Deloitte Touche Tohmatsu
* 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.
The other exhibits not footnoted are included as part of this filing.
52
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 sheet of Radica Games
Limited and subsidiaries as of December 31, 2001, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for the year then ended. The consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated 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, 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, 2001, 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.
(signed) KPMG
HONG KONG
February 8, 2002
F - 1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Radica Games Limited
We have audited the accompanying consolidated balance sheet of Radica Games
Limited and subsidiaries as of December 31, 2000 and the related consolidated
statements of operations, shareholders' equity and comprehensive income and cash
flows for the years ended December 31, 2000 and 1999. 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 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, 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 years ended December 31, 2000 and 1999, in conformity with accounting
principles generally accepted in the United States of America.
/S/ Deloitte Touche Tohmatsu
HONG KONG
February 12, 2001
F - 2
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
(US dollars in thousands, except share data) 2001 2000
-------- --------
Current assets:
Cash and cash equivalents
(Pledged deposits of $8,955 in 2001 and $11,139 in 2000) $ 25,810 $ 23,097
Accounts receivable, net of allowances for doubtful accounts
of $2,207 ($2,073 in 2000) 17,290 25,931
Inventories, net of provision of $3,997 ($5,788 in 2000) 17,179 13,971
Prepaid expenses and other current assets 2,283 1,574
Income taxes receivable 931 4,277
Deferred income taxes 168 223
-------- --------
Total current assets 63,661 69,073
-------- --------
Property, plant and equipment, net 16,310 17,975
Goodwill, net of accumulated amortization of $2,518 ($1,722 in 2000) 9,551 10,347
Purchased intangible assets, net of accumulated amortization of $5,840
($5,254 in 2000) 420 1,006
Deferred income taxes, noncurrent 1,887 914
-------- --------
Total assets $ 91,829 $ 99,315
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 846 $ 3,780
Current portion of long-term debt 3,648 3,648
Accounts payable 9,201 7,077
Accrued warranty expenses 900 950
Accrued payroll and employee benefits 943 950
Other accrued liabilities 10,907 9,834
Income taxes payable 507 215
-------- --------
Total current liabilities 26,952 26,454
-------- --------
Long-term debt 1,825 5,473
-------- --------
Total liabilities 28,777 31,927
-------- --------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
17,646,740 shares issued and outstanding (17,564,297 in 2000) 176 176
Additional paid-in capital 1,549 1,188
Warrants to acquire common stock 445 667
Retained earnings 61,012 65,386
Accumulated other comprehensive loss (130) (29)
-------- --------
Total shareholders' equity 63,052 67,388
-------- --------
Total liabilities and shareholders' equity $ 91,829 $ 99,315
======== ========
See accompanying notes to the consolidated financial statements.
F-3
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(US dollars in thousands, 2001 2000 1999
except per share data) ------------ ------------ ------------
Revenues:
Net sales $ 98,554 $ 106,696 $ 136,716
Cost of goods sold (exclusive of items
shown separately below) (64,698) (83,041) (80,910)
------------ ------------ ------------
Gross profit 33,856 23,655 55,806
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses (26,498) (32,273) (28,049)
Research and development (5,775) (5,210) (6,036)
Depreciation (2,631) (2,601) (2,389)
Amortization of goodwill and intangible assets (1,382) (2,826) (2,567)
Restructuring charge (1,551) (1,190) --
------------ ------------ ------------
Total operating expenses (37,837) (44,100) (39,041)
------------ ------------ ------------
Operating (loss) income (3,981) (20,445) 16,765
Other income 24 781 718
Share of loss of affiliated company -- -- (1,748)
Interest income 733 1,472 1,800
Interest expense (597) (808) (331)
------------ ------------ ------------
(Loss) income before income taxes (3,821) (19,000) 17,204
(Provision) credit for income taxes (553) 901 (149)
------------ ------------ ------------
Net (loss) income $ (4,374) $ (18,099) $ 17,055
============ ============ ============
Net (loss) income per share:
Basic $ (0.25) $ (1.03) $ 0.94
============ ============ ============
Diluted $ (0.25) $ (1.03) $ 0.90
============ ============ ============
Weighted average number of common and
common equivalent shares
Basic 17,611,886 17,608,167 18,144,179
============ ============ ============
Diluted 17,611,886 17,608,167 18,979,349
============ ============ ============
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, 2001, 2000 AND 1999
(US dollars in thousands) Common stock Accumulated
------------ Additional Warrants to other Total
Number paid-in acquire Retained comprehensive shareholders'
of shares Amount capital common stock earnings income (loss) equity
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 18,896,694 $ 189 $ 9,382 $ -- $ 76,215 $ (51) $ 85,735
Cancellation of repurchased stock (1,538,500) (16) (8,821) -- (9,170) -- (18,007)
Stock options exercised 281,400 3 529 -- -- -- 532
Issue of stock warrants -- -- -- 667 -- -- 667
Net income -- -- -- -- 17,055 -- 17,055
Foreign currency translation -- -- -- -- -- 80 80
----------- ----------- ----------- ----------- ----------- ----------- -----------
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
=========== =========== =========== =========== =========== =========== ===========
The comprehensive (loss) income of the Company, which represents the aggregate of the net (loss) income and the foreign currency
translation adjustments, was $(4,475), $(18,157) and $17,135 for the years ended December 31, 2001, 2000 and 1999, respectively.
See accompanying notes to the consolidated financial statements.
F-5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(US dollars in thousands) 2001 2000 1999
-------- -------- --------
Cash flow from operating activities:
Net (loss) income $ (4,374) $(18,099) $ 17,055
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Deferred income taxes (918) 2,541 82
Depreciation 2,631 2,601 2,389
Amortization 1,382 2,826 2,567
Share of loss of affiliated company -- -- 1,748
Loss on disposal and write off of property, plant and
equipment 73 10 62
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable 8,641 (2,181) (7,601)
(Increase) decrease in inventories (3,208) 10,654 (2,986)
(Increase) decrease in prepaid expenses and other
current assets (709) 3,178 (3,572)
Increase (decrease) in accounts payable 2,124 (3,852) 3,365
(Decrease) increase in accrued payroll and employee
benefits (7) (1,561) (177)
(Decrease) increase in accrued warranty expenses (50) (150) (1,400)
Increase (decrease) in other accrued liabilities 1,073 2,220 (753)
Decrease (increase) income taxes 3,638 (2,875) (2,286)
-------- -------- --------
Net cash provided by (used in) operating activities 10,296 (4,688) 8,493
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 64 75 47
Purchase of property, plant and equipment (1,103) (3,138) (3,306)
Purchase of Radica UK, net of cash acquired -- -- (2,511)
Purchase of intangible assets -- (1,260) --
Investment in affiliated company -- -- (1,045)
-------- -------- --------
Net cash used in investing activities (1,039) (4,323) (6,815)
-------- -------- --------
Cash flow from financing activities:
Funds from issuance of stock $ 22 23 --
Funds from stock options exercised 117 101 532
(Decrease) increase in short-term borrowings (2,934) 2,316 349
Proceeds from bank loan -- 10,945 --
Repayment of long-term debt (3,648) (12,737) --
Repurchase of common stock -- (641) (18,007)
-------- -------- --------
Net cash (used in) provided by financing activities (6,443) 7 (17,126)
-------- -------- --------
Effect of currency exchange rate change (101) (58) 80
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,713 (9,062) (15,368)
Cash and cash equivalents:
Beginning of year 23,097 32,159 47,527
-------- -------- --------
End of year $ 25,810 $ 23,097 $ 32,159
======== ======== ========
Supplementary disclosures of cash flow information:
Interest paid $ 594 $ 797 $ 331
Income taxes paid 433 109 1,983
Non-cash investing and financing activities:
Loan notes forfeited $ -- $ 1,399 $ --
Inventory exchanged for advertising and development
of Internet arcade game -- 177 --
Loan notes for purchase of Radica UK -- -- 12,345
Grant of warrants -- -- 667
See accompanying notes to the consolidated financial statements.
F-6
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
The Company designs, develops, manufactures and markets a diverse line of
electronic entertainment devices including handheld and tabletop games,
high-tech toys and video game accessories. The Company is headquartered in
Hong Kong, has subsidiaries in the USA, Canada and the UK, and a factory in
Dongguan, Southern China.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated. 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
(a) 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.
(b) 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.
(c) 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 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.
F-7
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Long-lived assets and certain identifiable intangibles 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 future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(d) Goodwill and other intangibles - Goodwill represents the excess of the
purchase price of acquisition of a business over the fair value of the
net assets acquired. Goodwill and other intangibles are amortized on a
straight-line basis over the estimated benefit period, but not to
exceed 20 years. The Company assesses the recoverability of goodwill
by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are
not achieved.
(e) Revenue recognition - Revenues are generally recognized as sales when
merchandise is shipped, which is in accordance with the terms of the
sale which are FOB shipping point. This represents the point at which
the customer takes ownership and assumes risk of loss. The Company
does have consignment agreements with certain European distributors
and records these shipments as sales upon confirmation of sell-through
by the distributor. The Company permits the return of damaged or
defective products. Accordingly, the Company provides allowances for
the estimated amounts of these returns at the time of revenue
recognition, based on historical experience adjusted for known trends
and issues, such as warranty allowances that are accrued based on
historical data about product reliability.
The Company also provides certain customers with discounts and credit
for return of non-defective products. These credits are accrued by the
Company at the time of revenue recognition.
Shipping and handling costs are classified as costs of goods sold in
the statement of operations and totaled $5,514, $5,912 and $6,973
during 2001, 2000 and 1999 respectively.
F-8
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Investments - The Company has no trading securities. Debt securities
which the Company has both the positive intent and ability to hold to
maturity are classified as held-to-maturity and carried at amortized
cost adjusted for accretion of premiums or discounts. All other debt
securities are classified as available-for-sale and recorded at fair
value. The Company determines the appropriate classification of
securities at the time of purchase and evaluates such classification
as of each balance sheet date. Any material unrealized gains and
losses related to available-for-sale investments, net of applicable
taxes, are excluded from earnings and are included in other
comprehensive income. Dividend and interest income are recognized when
earned.
(g) 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 basis of assets and liabilities and the 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.
(h) Advertising - Advertising costs are expensed as incurred. The cost of
communicating 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. Advertising expense
was approximately $6,600, $11,100, $8,900 for the years ended December
31, 2001, 2000 and 1999, respectively.
(i) Research and development - Research and development costs are expensed
as incurred. Research and development costs amounted to $5,775, $5,210
and $6,036 in 2001, 2000 and 1999, respectively.
(j) 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, 2001, 2000 and 1999)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Post-retirement and post-employment benefits - The Company does not
provide any material post-retirement or post-employment benefits. The
Company does provide a pension that includes certain defined
contribution arrangements with groups of employees. The Company's
contributions and any related costs are immaterial and are expensed as
incurred.
(l) Warranty - Future warranty costs are provided for at the time of
revenue recognition based on management's estimate by reference to
historical experience adjusted for known trends.
(m) Stock-based compensation - The Company applies the intrinsic
value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees; and
related interpretations in accounting for its employee 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 (SFAS No. 123), 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 the pro forma
information regarding net income (loss) and net income (loss) per
share and other disclosure requirements of SFAS No. 123.
(n) 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.
(o) 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. The related tax
benefit of other comprehensive earnings items was $4, $14 and $54 for
the years ended December 31, 2001, 2000 and 1999, respectively.
F-10
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) 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 as of and for the reporting
periods. Actual results may differ from such estimates. Differences
from those estimates are recorded in the period they become known.
(q) Recently issued accounting standards - In June 2001, the FASB issued
SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized
and reported separately from goodwill. SFAS No. 142 will require that
goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead be 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. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible
assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but
before SFAS No. 142 is adopted in full, are not amortized. Goodwill
and intangible assets acquired in business combinations completed
before July 1, 2001 continued to be amortized and tested for
impairment prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in
order to conform with the new classification criteria in SFAS No. 141
for recognition separate from goodwill. The Company will be required
to reassess the useful lives and residual values of all intangible
assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If
an intangible asset is identified as having an indefinite useful life,
the Company will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 within
the first interim period. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an
indefinite life. Any impairment loss will be measured as of the date
of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
F-11
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an
assessment of whether there is an indication that goodwill is impaired
as of the date of adoption. To accomplish this, the Company must
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 will then have up to six months from
January 1, 2002 to determine the fair value of each reporting unit and
compare it to the carrying amount of the reporting unit. To the extent
the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, an indication exists that the reporting unit goodwill
may be impaired and the Company must perform the second step of the
transitional impairment test. The second step is required to be
completed as soon as possible, but no later than the end of the year
of adoption. In the second step, the Company must compare the implied
fair value of the reporting unit goodwill with the carrying amount of
the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in
a manner similar to a purchase price allocation, in accordance with
SFAS No. 141. The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. Any transitional
impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of income.
As of the date of adoption of SFAS No. 142, the Company expects to
have unamortized goodwill in the amount of $9,551, which will be
subject to the transition provisions of SFAS No. 142. Amortization
expense related to goodwill was $796, $822 and $900 for the years
ended December 31, 2001, 2000 and 1999, respectively. Based on current
amortization amounts, the Company estimates that the impact of
adopting SFAS No. 142 will be an annual reduction of approximately
$796 of amortization.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). 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 assets. The Company also records a corresponding asset which 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
Company expects that the adoption of SFAS No. 143 will not have a
material impact on the financial position and results of operations of
the Company.
F-12
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In August, 2001, FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No.
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement requires that long-lived
assets be 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 future net 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. SFAS No. 144 requires companies
to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of
(by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. The
Company has adopted SFAS No. 144 on January 1, 2002. The Company does
not expect the adoption of SFAS No. 144 to have a material impact on
the financial position and results of operations at the Company.
(r) Reclassifications - Certain reclassifications have been made to prior
year amounts to conform to the current year's presentation.
3. INVENTORIES
Inventories by major categories are summarized as follows:
2001 2000
--------------- ---------------
Raw materials $ 3,165 $ 2,643
Work in progress 3,176 3,138
Finished goods 10,137 8,190
Consigned finished goods 701 -
--------------- ---------------
$ 17,179 $ 13,971
=============== ===============
F-13
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
2001 2000
------------ ------------
Land and buildings $ 13,374 $ 12,296
Plant and machinery 7,274 6,853
Furniture and equipment 7,560 7,328
Leasehold improvements 2,803 2,727
Construction in progress - 1,079
------------ ------------
Total $ 31,011 $ 30,283
Less: Accumulated depreciation and amortization (14,701) (12,308)
------------ ------------
Total $ 16,310 $ 17,975
============ ============
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill is related to the excess of purchase price over the estimated fair
value of net assets acquired in respect of the 1999 acquisition of Leda
Media Products Limited, now called Radica U.K. 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 aggregate purchase price. The goodwill
is being amortized on a straight-line basis over a fifteen year fiscal
period.
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 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,
has been recorded as an intangible asset, which is being amortized on a
straight-line basis over a three year period.
Amortization of goodwill and other intangible assets totaled $1,382, $2,826
and $2,567 for the years ended December 31, 2001, 2000 and 1999,
respectively.
F-14
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
6. SHORT-TERM BORROWINGS
As of December 31, 2001, the Company had line-of-credit agreements with
various banks that provided for borrowings of up to approximately $6,600,
including amounts available for uncommitted credit facilities, the issuance
of letters of credit and foreign currency exchange activity. Substantially
all of the short-term borrowings outstanding as of December 31, 2001 and as
of December 31, 2000 represent borrowings made under these lines of credit.
The weighted average interest rate of the outstanding borrowing was
approximately 5.9, 6.0 and 6.0 percent for the years ended December 31,
2001, 2000 and 1999, respectively.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
2001 2000
--------------- ---------------
Accrued advertising expenses $ 1,105 $ 1,384
Accrued license and royalties 2,346 2,397
Accrued sales expenses 3,422 2,833
Commissions payable 149 497
Other accrued liabilities 3,885 2,723
--------------- ---------------
Total $ 10,907 $ 9,834
=============== ===============
8. INCOME TAXES
The components of (loss) income before income taxes are as follows:
2001 2000 1999
--------------- --------------- ---------------
United States $ (5,523) $ (20,240) $ (1,349)
International 1,702 1,240 18,553
--------------- --------------- ---------------
$ (3,821) $ (19,000) $ 17,204
=============== =============== ===============
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 2001 effective tax rate was 12%.
F-15
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
8. INCOME TAXES (Continued)
The (credit) provisions for income taxes consist of the following:
2001 2000 1999
----------- ----------- ----------
Current:
US federal and state $ 644 $ (3,236) $ 145
International 827 (206) (78)
----------- ----------- ----------
Total current income tax provision (credit) $ 1,471 $ (3,442) $ 67
----------- ----------- ----------
Deferred:
US federal $ - $ 3,375 $ 39
International (918) (834) 43
----------- ----------- ----------
Total deferred income tax (credit) provision $ (918) $ 2,541 $ 82
----------- ----------- ----------
Total income taxes provision (credit) $ 553 $ (901) $ 149
=========== =========== ==========
A reconciliation between income tax (benefit) expense and amounts
calculated using the US statutory rate of 34 percent is as follows:
2001 2000 1999
------------- ------------- -------------
Computed "expected" tax (benefit) expense
at the US statutory rate $ (1,299) $ (6,460) $ 5,849
State tax 13 9 8
International tax effect, net (647) (1,646) (6,016)
Accounting losses for which deferred
income tax cannot be recognized - - 212
Change in valuation allowance 2,163 7,052 226
Other, net 323 144 (130)
------------- ------------- -------------
Income tax expense (benefit) $ 553 $ (901) $ 149
============= ============= =============
The Company's US subsidiary had approximately $19,200 of net operating
losses for federal income tax purposes at December 31, 2001 of which
$15,000 and $4,200 expire in 2020 and 2021, respectively. In addition, as
of December 31, 2001, the Company's UK subsidiary had approximately $6,000
net operating loss carryforwards which will carryforward indefinitely.
F-16
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(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:
2001 2000
---------- ----------
Deferred tax assets (liabilities):
Excess of tax over financial reporting depreciation $ 97 $ (79)
Net operating loss 8,325 4,852
Bad debt allowance 337 561
Advertising allowances 348 435
Inventory obsolescence 345 903
Accrued sales adjustments and returns 1,329 967
Other 715 776
---------- ----------
Total gross deferred tax assets 11,496 8,415
Valuation allowance (9,441) (7,278)
---------- ----------
Net deferred tax assets $ 2,055 $ 1,137
========== ==========
The following table represents the classification of the Company's net
deferred tax assets:
2001 2000
--------------- ---------------
Current deferred tax assets $ 168 $ 223
Long-term deferred tax assets 1,887 914
--------------- ---------------
Total net deferred tax assets $ 2,055 $ 1,137
=============== ===============
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 more likely than not. Movement in the valuation
allowance during 2001 reflected the increase in deferred tax assets in
respect of tax losses carried forward.
F-17
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
8. INCOME TAXES (Continued)
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.
9. LONG-TERM DEBT
On June 24, 1999, the Company entered into a $12,345 guaranteed loan
agreement with the vendors as part of financing of the Radica UK
acquisition. Interest on the loan notes was based on US$ LIBOR minus 130
basis points. In June 2000, the Company entered into a new agreement with
one of its banks. The new agreement provided for converting the guaranteed
loan into a three-year term US dollar loan, and used the proceeds to retire
and pay back the outstanding guaranteed loan notes in full. The Company has
$5,473 outstanding under the new loan agreement as of December 31, 2001
(2000: $9,121), which bears interest at the three month Singapore Interbank
Offered Rate ("SIBOR") plus 2% (3.88% at December 31, 2001). The agreement
requires quarterly principal and interest payments and matures in June
2003. Additionally, the Company has a revolving loan with the bank, which
permits borrowings of up to $2,000. This revolving loan bears interest at
the three month SIBOR plus 2.5%. At December 31, 2001, no amount was
outstanding on this revolving loan.
The term loan and revolving loan are 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.
Long-term debt is as follows:
2001 2000
--------------- ---------------
Term loan payable $ 5,473 $ 9,121
Less: Current portion (3,648) (3,648)
--------------- ---------------
$ 1,825 $ 5,473
=============== ===============
F-18
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
9. LONG-TERM DEBT (Continued)
The annual principal maturities of the long-term debts are as follows:
2002 3,648
2003 1,825
-----------
$ 5,473
===========
10. RESTRUCTURING CHARGE
During December 2001, the Board of Directors approved a company wide
restructuring plan which includes 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 charge.
Of the $1,551 in restructuring charge, $811, $706 and $34 related to
restructuring activities within US, Asia Pacific and Europe, respectively.
The closure of the Company's San Francisco R&D office resulted in an
accrual of approximately $199 related to lease termination costs and
leasehold improvements and asset write-downs. 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. The localization and consolidation of product development and
manufacturing operations resulted in a workforce reduction of approximately
170 employees worldwide. This workforce reduction resulted in an accrual of
approximately $1,352 for severance and contractual termination costs and
benefits payments. The consolidation and closing of facilities occurred
during the first quarter of 2002, and the remaining components of the
restructuring are expected to be completed during the second quarter of
2002.
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 approximately $200, primarily
related to the remaining amount of termination benefit payments.
F-19
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(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 Amount at end
of year Charges incurred of year
------------- ------------ ------------ ----------
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
(loss) income per share as of December 31:
2001 2000 1999
---------- ---------- -----------
Numerator for basic and diluted
(loss) earnings per share:
Net (loss) income $ (4,374) $ (18,099) $ 17,055
========== ========== ===========
Denominator:
Basic weighted average shares 17,611,886 17,608,167 18,144,179
Effect of dilutive options and warrants -- -- 835,170
---------- ---------- -----------
Diluted weighted average shares 17,611,886 17,608,167 18,979,349
========== ========== ===========
Basic net (loss) income per share: $ (0.25) $ (1.03) $ 0.94
========== ========== ===========
Diluted net (loss) income per share: $ (0.25) $ (1.03) $ 0.90
========== ========== ===========
Options and warrants on 2,440,867, 2,728,800 and 1,286,000 shares of common
stock for the years ended December 31, 2001, 2000 and 1999, respectively
were not included in computing diluted earnings per share since their
effects were antidilutive.
F-20
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(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. At December 31, 2001,
the Stock Option Plan's aggregate common stock were 3,700,000 shares
available for options. 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:-
2001 2000 1999
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
(Shares in thousands) Shares price Shares price Shares price
------ --------- ------ --------- ------ ----------
Outstanding at
beginning of year 2,354 $ 5.81 2,000 $ 7.93 2,041 $ 6.58
Options granted 521 2.64 853 2.79 307 11.48
Options exercised (76) 1.56 (72) 1.41 (282) 1.89
Options cancelled (608) 10.60 (427) 10.43 (66) 8.27
------ ------ ------
Outstanding at end of year 2,191 $ 3.88 2,354 $ 5.81 2,000 $ 7.93
Options exercisable
at year end 1,151 $ 4.54 910 $ 7.52 492 $ 8.26
F-21
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands, except per share data)
12. STOCK OPTIONS (Continued)
The following is additional information relating to options outstanding as
of December 31, 2001:
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 2.000 642 $ 1.43 5.71 496 $ 1.34
$ 2.001 to 4.000 1,260 3.04 7.96 429 3.26
$ 4.001 to 6.000 22 4.36 9.00 2 5.00
$ 6.001 to 8.000 34 6.74 5.53 26 6.73
$ 8.001 to 10.000 17 8.94 7.00 9 8.67
$ 10.001 to 12.000 -- -- -- -- --
$ 12.001 to 14.000 61 12.62 7.28 60 12.72
$ 14.001 to 16.000 60 14.13 6.85 36 14.14
$ 16.001 to 18.000 60 16.82 6.70 60 16.82
$ 18.001 to 20.000 35 18.66 6.20 33 18.82
--------- -----
2,191 $ 3.88 7.15 1,151 $ 4.54
========= =====
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 of $1.24, $1.57 and $4.54 per option for the years ended December 31,
2001, 2000 and 1999, respectively. The values were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2001 2000 1999
------- ------- -------
Expected life of options 4 years 5 years 5 years
Risk-free interest rate 4.5% 6.0% 5.1%
Expected volatility of underlying stock 55% 58% 35%
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 provide a reliable single measure of the fair value of the
stock options.
F-22
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(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 (loss) income
and (loss) earnings per share would have been adjusted to the pro forma
amounts as follows:
2001 2000 1999
--------- ---------- --------
Reported net (loss) income $ (4,374) $ (18,099) $ 17,055
Pro forma net (loss) income (5,167) (19,306) 15,719
Reported net (loss) income per share
Basic $ (0.25) $ (1.03) $ 0.94
Diluted (0.25) (1.03) 0.90
Pro forma net (loss) income per share
Basic $ (0.29) $ (1.10) 0.87
Diluted (0.29) (1.10) 0.83
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 intangible asset. As of December 31, 2001, the asset was fully
amortized.
The first 125,000 warrants expired on June 1, 2001, with the remaining
warrants expiring at January 1, 2002 and June 1, 2002. As of December 31,
2001, 250,000 of these warrants remained outstanding and were fully vested.
14. RETIREMENT PLAN
In Hong Kong, the Company has both a 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
$240, $170 and $192 for the years ended December 31, 2001, 2000 and 1999,
respectively.
F-23
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments is made in accordance
with the requirements of SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. The estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and bank borrowings are reasonable estimates of their fair
value.
16. PLEDGE OF ASSETS
At December 31, 2001, the Company's loan agreements and general banking
facilities including overdraft and trade facilities were collateralized as
follows:
Leasehold land and buildings $11,402
Bank balances 8,955
Inventories 8,289
-------
$28,646
=======
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 $491, $1,113 and $534 for the years ended December 31,
2001, 2000 and 1999, respectively. In the normal course of business, leases
that expire will be renewed or replaced by leases on other properties. As
of December 31, 2001, the Company was obligated under non-cancellable
operating leases requiring future minimum rental payments as follows:
Operating leases
----------------
2002 $ 539
2003 480
2004 366
2005 310
2006 250
Thereafter 1,235
-----------
Total minimum lease payments $ 3,180
===========
F-24
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(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
------------
2002 $ 1,060
2003 130
------------
$ 1,190
============
Litigation
The Company is a party to certain claims and legal actions that have arisen
in the ordinary course of business. These matters are substantially covered
by insurance. The resolution of these matters is not expected to have a
material impact on the Company. The Company currently has no contingent
obligations for which management views the crystallization to be probable
or reasonably possible, and has therefore made no disclosures over current
or pending legal actions taken against the Company.
18. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Accounts receivable of the Company are subject to a concentration of credit
risk with customers in the retail sector primarily in North America. 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 business had two customers which accounted for more than
twenty-two percent and eleven percent of net sales for the year ended
December 31, 2001, two customers which accounted for more than seventeen
percent and sixteen percent of net sales for the year ended December 31,
2000 and two customers which accounted for more than twenty percent and
eighteen percent for the year ended December 31, 1999. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers.
F-25
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
18. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (Continued)
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 are expected
in 2002. The Company has decided to continue 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.
19. SEGMENT INFORMATION
The Company has adopted the SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Prior to the acquisition of Radica UK,
the Company historically operated in one principal industry segment: the
design, development, manufacture and distribution of a variety of
electronic and mechanical handheld and tabletop games. On June 24, 1999,
the Company acquired Radica UK. Due to the distinct differences between the
core products of Radica UK and the remainder of the Company, the Company
has decided to operate and report on these product lines as two different
business segments: Video Games Accessories ("VGA"), which includes video
game controllers, steering wheels and other accessories and VGA sourcing
business; and Games, which includes electronic and mechanical handheld and
tabletop games.
The Company evaluates the performance of its operating segments and
allocates resources based on segment operating income before interest and
income taxes, not including gains and losses associated with the Company's
investments. The Company does not include inter-segment transfers for
management reporting purposes. Certain expenses which are managed outside
of the operating segments are excluded. These consist primarily of
corporate expenses, other income and expense items. Corporate expenses
consist primarily of certain costs related to business integration and
other general and administrative expenses. Assets included in corporate
principally are cash and cash equivalents and certain raw materials for
both segments. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
F-26
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
19. SEGMENT INFORMATION (Continued)
A summary of the Company's two business segments is set forth below.
2001 2000 1999
--------- --------- ---------
Revenues from external customers
Games $ 82,929 $ 91,036 $ 123,116
VGA 15,625 15,660 13,600
--------- --------- ---------
Total revenues from external customers $ 98,554 $ 106,696 $ 136,716
========= ========= =========
Depreciation and amortization
Games $ 3,120 $ 4,449 $ 3,981
VGA 893 978 975
--------- --------- ---------
Total depreciation and amortization $ 4,013 $ 5,427 $ 4,956
========= ========= =========
Segment (loss) income
Games $ 795 $ (14,199) $ 18,547
VGA (4,752) (5,465) (1,064)
--------- --------- ---------
Total segment (loss) income $ (3,957) $ (19,664) $ 17,483
Corporate
Interest income 733 1,472 1,800
Interest expense (597) (808) (331)
Equity in net loss of
affiliated company -- -- (1,748)
(Provision) credit for income taxes (553) 901 (149)
--------- --------- ---------
Total consolidated net (loss) income $ (4,374) $ (18,099) $ 17,055
========= ========= =========
Segment assets
Games $ 45,370 $ 54,652 $ 67,426
VGA 20,729 20,973 22,589
Corporate 25,809 23,769 32,159
--------- --------- ---------
Total consolidated assets $ 91,908 $ 99,394 $ 122,174
========= ========= =========
Capital expenditures
Games $ 999 $ 2,920 $ 3,177
VGA 102 218 129
--------- --------- ---------
Total capital expenditures $ 1,101 $ 3,138 $ 3,306
========= ========= =========
F-27
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(US dollars in thousands)
19. SEGMENT INFORMATION (Continued)
Revenues from external customers by product category are summarized as
follows:
2001 2000 1999
-------- -------- --------
Handheld $ 38,001 $ 49,307 $ 87,775
Play TV 14,315 8,561 --
Girl Tech 11,723 13,897 7,444
ODM / OEM 18,890 19,271 27,897
VGA 15,625 15,660 13,600
-------- -------- --------
Total net revenues $ 98,554 $106,696 $136,716
======== ======== ========
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:
2001 2000 1999
-------- -------- --------
Net sales:
United States and Canada $ 67,414 $ 84,504 $118,779
Asia Pacific and other countries 13,470 3,492 1,557
Europe 17,670 18,700 16,380
-------- -------- --------
$ 98,554 $106,696 $136,716
======== ======== ========
Long-lived assets:
United States and Canada $ 1,662 $ 2,689 $ 2,944
Asia Pacific and other countries 14,851 16,002 16,076
Europe 9,768 10,637 12,854
-------- -------- --------
$ 26,281 $ 29,328 $ 31,874
======== ======== ========
F-28
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(YEARS ENDED DECEMBER 31, 2001, 2000 and 1999)
(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
------- ------- ---------- ----
2001
Allowances for doubtful accounts $ 2,073 $ 1,056 $ (922) $ 2,207
Estimated customer returns 1,494 1,528 (1,467) 1,555
Provision for inventories 5,788 1,764 (3,555) 3,997
------- ------- ------- -------
$ 9,355 $ 4,348 $(5,944) $ 7,759
======= ======= ======= =======
2000
Allowances for doubtful accounts $ 389 $ 2,648 $ (964) $ 2,073
Estimated customer returns 624 1,423 (553) 1,494
Provision for inventories 2,339 5,130 (1,681) 5,788
------- ------- ------- -------
$ 3,352 $ 9,201 $(3,198) $ 9,355
======= ======= ======= =======
1999
Allowances for doubtful accounts $ 446 $ 3 $ (60) $ 389
Estimated customer returns 1,077 705 (1,158) 624
Provision for inventories 2,437 407 (505) 2,339
------- ------- ------- -------
$ 3,960 $ 1,115 $(1,723) $ 3,352
======= ======= ======= =======
-------------------------------------------------------------------------------------------------------------
F-29
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: June 11, 2002 /S/ Craig D. Storey
--------------------- --------------------------
Craig D. Storey
Chief Accounting Officer
I-1
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, as most recently amendment restated
in May 2000 to increase options
I-2
> 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
* 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
The other exhibits not footnoted are included as part of this filing.
I-3