FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of September, 2002
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite R, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F
Form 20-F X Form 40-F
--------- ---------
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
--------- ---------
If "yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- _______________
Contents:
1. Quarterly Report for the Quarter Ended June 30, 2002
2. Press Release dated August 12, 2002
This Report on Form 6-K shall be deemed to be incorporated by reference
into the Registrant's Registration Statements on Form S-8 (No. 33-86960, No.
333-7000, No. 333-59737 and 333-61260) and on Form F-3 (No. 333-7526 and No.
333-79005).
QUARTERLY REPORT *
For the quarterly period ended June 30, 2002
Commission File Number 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in charter)
Bermuda N/A
(Country of Incorporation) (I.R.S. Employer Identification No.)
Suite R, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2693 2238
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 2002
--------------------------------------- ----------------------------
Common Stock, par value $0.01 per share 17,734,991
------------------------
* As a foreign private issuer, the registrant is not required to file reports on
Form 10-Q. It intends to make voluntary quarterly reports to its stockholders
which generally follow the Form 10-Q format. Such reports, of which this is one,
are furnished to the Commission pursuant to Form 6-K.
2
RADICA GAMES LIMITED
INDEX TO QUARTERLY REPORT ON FORM 6-K
QUARTER ENDED JUNE 30, 2002
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 5
Condensed Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001 5
Condensed Consolidated Statements of Operations
for the Six Months Ended June 30, 2002 (unaudited) and 2001 (unaudited) 6
Condensed Consolidated Statements of Shareholders' Equity (unaudited) 7
Condensed Consolidated Statement of Cash Flows
for the Six Months Ended June 30, 2002 (unaudited) & 2001 (unaudited) 8
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Qualitative and Quantitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use
of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
3
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 in
our Annual Report on Form 20-F for the fiscal year ended December 31, 2001, as
filed with the Securities and Exchange Commission. See "Item 3. Key Information
- Risk Factors" in such 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.
4
Item 1. Financial Statements
----------------------------
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(US Dollars in thousands, except share data) June 30, December 31,
----------- ------------
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,134 $ 25,810
Accounts receivable, net of allowances for doubtful accounts
of $1,402 ($2,207 in 2001) 11,528 17,290
Inventories, net of provision of $3,860 ($3,997 in 2001) 24,905 17,179
Prepaid expenses and other current assets 3,586 2,283
Income taxes receivable 931 931
Deferred income taxes 168 168
---------- ---------
Total current assets 63,252 63,661
---------- ---------
Property, plant and equipment, net 15,308 16,310
---------- ---------
Intangible assets, net 9,761 9,971
---------- ---------
Deferred income taxes, noncurrent 1,421 1,887
---------- ---------
Total assets $ 89,742 $ 91,829
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 846 $ 846
Accounts payable 12,236 10,101
Current portion of long-term debt 3,649 3,648
Accrued payroll and employee benefits 998 943
Accrued expenses 9,255 10,907
Income taxes payable 510 507
---------- ---------
Total current liabilities 27,494 26,952
---------- ---------
Long-term debt - 1,825
---------- ---------
Total liabilities 27,494 28,777
---------- ---------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
17,729,511 shares outstanding (17,646,740 in 2001) 177 176
Additional paid-in capital 2,168 1,549
Warrants to acquire common stock -- 445
Retained earnings 60,399 61,012
Accumulated other comprehensive income (496) (130)
---------- ---------
Total shareholders' equity 62,248 63,052
---------- ---------
Total liabilities and shareholders' equity $ 89,742 $ 91,829
========== =========
See accompanying notes to the consolidated financial statements.
5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2002 AND 2001
(US Dollars in thousands, Three months ended June 30, Six months ended June 30,
except per share data) ---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net sales $ 20,507 $ 10,295 $ 38,010 $ 22,068
Cost of goods sold (exclusive of items
shown separately below) (14,305) (6,707) (25,880) (15,338)
--------- ---------- --------- ---------
Gross Profit 6,202 3,588 12,130 6,730
Operating expenses:
Selling, general and administrative expenses (4,324) (4,833) (9,770) (8,979)
Research and development (953) (1,446) (1,986) (2,761)
Depreciation and amortization (717) (1,011) (1,436) (2,014)
Foreign exchange gain (loss) 966 (58) 724 (463)
--------- ---------- --------- ---------
Total operating expenses (5,028) (7,348) (12,468) (14,217)
--------- ---------- --------- ---------
Operating income (loss) 1,174 (3,760) (338) (7,487)
Other income 40 15 55 24
Interest income 15 51 16 77
--------- ---------- --------- ---------
Income (loss) before income taxes 1,229 (3,694) (267) (7,386)
Provision for income taxes (267) (41) (346) (73)
--------- ---------- --------- ---------
Net income (loss) 962 (3,735) (613) (7,459)
========= ========== ========= =========
Net income (loss) per share:
Basic $ 0.05 $ (0.21) $ (0.03) $ (0.42)
========= ========== ========= =========
Diluted $ 0.05 $ (0.21) $ (0.03) $ (0.42)
========= ========== ========= =========
Weighted average number of common
and common equivalent shares:
Basic 17,717,795 17,613,303 17,692,695 17,589,722
========== ========== ========== -=========
Diluted 18,366,659 17,613,303 17,692,695 17,589,722
========== ========== ========== ==========
See accompanying notes to the consolidated financial statements.
6
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2002
(US dollars in thousands) Common stock Accumulated Total
------------ Additional Warrants to other share-
Number paid-in acquire Retained comprehensive holders'
of shares Amount capital common stock earnings income (loss) equity
---------- ---------- ---------- ------------ ---------- --------------- --------
Balance at December 31, 2001 17,646,740 $ 176 $ 1,549 $ 445 $ 61,012 $ (130) $ 63,052
Issuance of stock 2,526 - 10 - - - 10
Stock options exercised 80,245 1 164 - - - 165
Expiration of stock warrants - - 445 (445) - - -
Net loss - - - - (613) - (613)
Foreign currency translation - - - - - (366) (366)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2002 17,729,511 $ 177 $ 2,168 $ - $ 60,399 $ (496) $ 62,248
========== ========== ========== =========== ========== ========== ==========
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(US dollars in thousands) 2002 2001
----------- -----------
(unaudited) (unaudited)
Cash flow from operating activities:
Net loss $ (613) $ (7,459)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Deferred income taxes 466 -
Depreciation 1,226 1,323
Amortization 210 691
Loss on disposal and write off of property, plant and equipment 18 40
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable 5,762 17,816
(Increase) in inventories (7,726) (5,521)
(Increase) in prepaid expenses and other current assets (1,303) (1,322)
Increase in accounts payable 2,615 228
Increase in accrued payroll and employee benefits 55 241
(Decrease) in accrued warranty expenses (480) (610)
(Decrease) in other accrued liabilities (1,652) (3,017)
(Increase) decrease income taxes 3 386
---------- ----------
Net cash (used in) provided by operating activities (1,419) 2,796
---------- ----------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 210 47
Purchase of property, plant and equipment (452) (449)
---------- ----------
Net cash used in investing activities (242) (402)
---------- ----------
Cash flow from financing activities:
Funds from issuance of stock $ 10 12
Funds from stock options exercised 165 78
(Decrease) increase in short-term borrowings - (1,966)
Repayment of long-term debt (1,824) (1,824)
---------- ----------
Net cash used in financing activities (1,649) (3,700)
---------- ----------
Effect of currency exchange rate change (366) 46
---------- ----------
Net (decrease) increase in cash and cash equivalents (3,676) (1,260)
Cash and cash equivalents:
Beginning of period 25,810 23,097
---------- ----------
End of period $ 22,134 $ 21,837
========== ==========
See accompanying notes to the consolidated financial statements.
8
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
1. BASIS OF FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in the financials statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the consolidated
financial statements, accounting policies and related notes included in the
Form 20F for the year ended December 31, 2001 as filed with the SEC.
The information provided in this report reflects all adjustments
(consisting solely of normal recurring accruals) that are, in the opinion
of management and subject to year-end audit, necessary to present fairly
the financial position of the Company as of June 30, 2002, and the results
of operations and cash flows for the periods then ended. Because the
Company's business is seasonal, the results for interim periods are not
necessarily indicative of the results to be expected for the full year.
2. SEGMENT INFORMATION
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company has two reportable segments from which
it derives its revenues: the Games business that sells product under the
Company's Radica(R), Radica Gold(R) and Girl Tech(R) brand names, and the
Video Game Accessory ("VGA") business that sells product under the
Company's Gamester(TM) brand name. The Company also sources certain VGA and
other electronic products through third party manufacturers for retailers
to sell under their own brands; this is also included in the VGA segment.
The reportable segments are strategic businesses that offer different
products.
The accounting policies of the reportable segments are the same as those
described in the Notes to the Company's consolidated financial statements
for the year ended December 31, 2001, except for the Company's adoption of
Statements of Financial Accounting Standards Nos. 142 and 144.
The Company measures segment performance based on net income before
interest and other income and income taxes. Inter-segment sales and
transfers have been eliminated and are not included in the following table.
Certain corporate expenses are managed outside of the operating segments.
Corporate expenses consist primarily of costs related to business
integration and other general and administrative expenses. All corporate
and indirect costs have been apportioned on the basis of corresponding
sales and direct costs.
9
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
2. SEGMENT INFORMATION (Continued)
A large proportion of the Company's assets are utilized by both segments
and are therefore not suitable for allocating to specific assets. In 2002,
the Company has further refined the segment assets. The segment assets are
comprised of accounts receivable, inventories and intangible assets. Other
assets included in corporate principally are cash and cash equivalents,
deferred tax assets, property, plant and equipment, and all other
insignificant assets not reportable under other segments. Certain
information presented in the tables below has been restated to conform to
the current management structure as of January 2002. Information by segment
and a reconciliation to reported amounts for the six months ended June 30,
2002 and 2001 are as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues
Games $ 16,608 $ 9,070 $ 29,034 $ 18,582
VGA 3,899 1,225 8,976 3,486
-------- -------- -------- --------
Total revenues $ 20,507 $ 10,295 $ 38,010 $ 22,068
======== ======== ======== ========
Segment income (loss)
Games $ 1,263 $ (3,143) $ 1,090 $ (5,658)
VGA (89) (617) (1,428) (1,829)
-------- -------- -------- --------
Total segment income (loss) $ 1,174 $ (3,760) $ (338) $ (7,487)
Net Interest and other income 55 66 71 101
Provision for income taxes (267) (41) (346) (73)
-------- -------- -------- --------
Total consolidated net income (loss) $ 962 $ (3,735) $ (613) $ (7,459)
======== ======== ======== ========
June 30, December 31,
-------- ------------
2002 2001
-------- ------------
Segment assets
Games $ 25,912 $ 25,592
VGA 20,282 18,848
Corporate 43,548 47,389
-------- --------
Total consolidated assets $ 89,742 $ 91,829
======== ========
10
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
2. SEGMENT INFORMATION (Continued)
Revenues from external customers by product category are summarized as
follows:
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
Electronics Games $ 8,607 $ 6,083 $15,437 $11,537
Girls Electronics 1,802 1,305 3,813 3,599
ODM/OEM 6,199 1,682 9,784 3,446
Sourcing 798 425 2,212 1,148
VGA 3,101 800 6,764 2,338
------------ ----------- ----------- -----------
Total net revenues $20,507 $10,295 $38,010 $22,068
============ =========== =========== ===========
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:
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales:
United States and Canada $ 14,112 $ 6,895 $ 26,622 $ 15,193
Asia Pacific and other countries 3,692 1,557 4,920 2,764
Europe 2,703 1,843 6,468 4,111
-------- -------- -------- --------
$ 20,507 $ 10,295 $ 38,010 $ 22,068
======== ======== ======== ========
June 30, December 31,
-------- ------------
2002 2001
-------- ------------
Long-lived assets
United States and Canada $ 1,167 $ 1,662
Asia Pacific and other countries 14,145 14,851
Europe 9,757 9,768
-------- --------
$ 25,069 $ 26,281
======== ========
11
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share as of June 30:
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
----------- --------------- ---------- --------------
Numerator for basic and diluted
earnings per share:
Net income (loss) $ 962 $ (3,735) $ (613) $ (7,459)
=========== =============== =========== ==============
Denominator for
earnings (loss) per share - Basic 17,717,795 17,613,303 17,692,695 17,589,722
Effect of dilutive options 648,864 -- -- --
----------- --------------- ----------- --------------
Denominator for earnings (loss)
per share - Diluted 18,366,659 17,613,303 17,692,695 17,589,722
=========== =============== =========== ==============
Earnings (loss) per share - Basic $ 0.05 $ (0.21) $ (0.03) $ (0.42)
=========== =============== =========== ==============
Earnings (loss) per share - Diluted $ 0.05 $ (0.21) $ (0.03) $ (0.42)
=========== =============== =========== ==============
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.
12
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
4. 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 total pre-tax restructuring
charge in Q4 2001, of which approximately $199 related to the closure of
the Company's San Francisco R&D office.
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 $1,389 for severance and
contractual termination costs and benefits payments. The consolidation
occurred during the first half of 2002. The components of restructuring
charges are as follows:
Balance Balance
December 31, Amount June 30,
2001 Charges incurred 2002
----------- -------- ---------- ----------
Severance and other compensation $ 1,389 $ -- $ (1,124) $ 265
Lease termination costs and --
related asset writedowns 199 -- (128) 71
-------- -------- -------- --------
$ 1,588 $ -- $ (1,252) $ 336
======== ======== ======== ========
5. INVENTORIES
Inventories by major categories are summarized as follows:
June 30, December 31,
--------- ------------
2002 2001
------- -------
Raw materials $ 4,759 $ 3,165
Work in progress 4,749 3,176
Finished goods 14,473 10,137
Consigned finished goods 924 701
------- -------
$24,905 $17,179
======= =======
13
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30, December 31,
-------- ------------
2002 2001
------- -------
Accrued advertising expenses $ 946 $ 1,105
Accrued license and royalties 1,576 2,346
Accrued sales expenses 3,303 3,422
Commissions payable 65 149
Other accrued liabilities 3,365 3,885
------- -------
Total $ 9,255 $10,907
======= =======
7. PLEDGE OF ASSETS
The Company entered into guaranteed loan agreements and general banking
facilities with one of its banks. The agreement contains covenants that,
among other things, require the Company to maintain a minimum tangible net
worth, gearing ratio and other financial ratios. At June 30, 2002, the loan
agreements and general banking facilities including trade and overdraft
facilities were collateralized as follows:
Leasehold land and buildings $ 11,298
Bank balances 8,955
Inventories 11,253
---------
$ 31,506
=========
8. LITIGATION
The Company is a party to certain claims and legal actions that have arisen
in the ordinary course of business. Some of 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.
14
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
9. RECENT ACCOUNTING PRONOUNCEMENTS
Effective on January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which superceded Accounting Principles Board ("APB") Opinion No.
17, Intangible Assets. This statement addresses the accounting and
reporting of goodwill and other intangible assets subsequent to their
acquisition. In accordance with the adoption of SFAS No. 142, the Company
ceased amortization of goodwill and tested its goodwill and other
intangible assets for impairment based on the requirements included in
Statement 141 and reassessed the useful lives and residual values of those
intangible assets other than goodwill. As of June 30, 2002, there was no
impairment to the underlying value of the assets.
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.
15
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(QUARTER ENDED JUNE 30, 2002)
(US dollars in thousands)
9. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
The effect of the adoption of SFAS No. 142 for the current and prior year
is as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Reported net income (loss) $ 962 $ (3,735) $ (613) $ (7,459)
Add back: Amortization of goodwill -- 199 -- 398
and other intangibles, net of tax effect
-------- -------- -------- --------
Net income (loss) as adjusted $ 962 $ (3,536) $ (613) $ (7,061)
Earnings (loss) per share - Basic $ 0.05 $ (0.21) $ (0.03) $ (0.42)
Add back: Amortization of goodwill -- 0.01 -- 0.02
and other intangibles, net of tax effect
-------- -------- -------- --------
Net earnings (loss) as adjusted $ 0.05 $ (0.20) $ (0.03) $ (0.40)
======== ======== ======== ========
Earnings (loss) per share - Diluted $ 0.05 $ (0.21) $ (0.03) $ (0.42)
Add back: Amortization of goodwill -- 0.01 -- 0.02
and other intangibles, net of tax effect
-------- -------- -------- --------
Net earnings (loss) as adjusted $ 0.05 $ (0.20) $ (0.03) $ (0.40)
======== ======== ======== ========
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The following discussion should be read in conjunction with the
attached financial statements and notes thereto, and with the audited financial
statements, accounting policies and notes included in the Company's Annual
Report on Form 20-F for the year ended December 31, 2001 as filed with the
United States Securities and Exchange Commission.
OVERVIEW
Radica Games Limited (the "Company") manufactures and markets a diverse
line of electronic entertainment products including handheld and tabletop games,
girls' lifestyle products, 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's products currently include 1) handheld electronic and
tabletop games sold under the Company's Radica and Radica Gold brand names, 2)
technology enhanced games and gadgets for girls under the Girl Tech brand name,
3) Radica Play TV(TM) games, featuring XaviX(R) technology and 4) video game
accessories sold under the Gamester brand name.
The Company employs a team of designers and engineers in its US, UK and
Asia offices. Most of Radica's product concepts are generated internally,
however on occasion the Company acquires product concepts from third party
inventors. Inventors are compensated through royalties that are generally paid
as a percentage of worldwide sales of the related product. Radica expects to
continue to develop most of its product in-house going forward, but also plan to
use outside inventors as a source for new product concepts.
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.
17
The Company's offices in Dallas, Texas and Hertfordshire, UK manage its
North American and UK distribution, respectively. Third-party distributors
manage distribution throughout the rest of the world. Substantial portions of
the Company's sales are sold to its distributors and retail customers on letter
of credit basis or open account, and title of goods is taken in Hong Kong.
Radica also sells product from domestic inventories held in various US, Canadian
and UK warehouses. The Company currently has agreements with distributors in
Germany and France that allow them to sell the Company's product on a
consignment basis. The inventory is recorded in the Company's balance sheet and
sales are recorded upon confirmation from the distributor.
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.
The Company's cost of sales is comprised primarily of the cost of goods
of its product manufactured in its Dongguan factory and sourced from third-party
manufacturers. Other costs include inbound and outbound freight costs for goods
that are shipped domestically from its distribution operations in North America
and the UK, obsolescence provisions, warranty provisions for defective product
and license and royalty expenses. The largest factors affecting the Company's
gross margin percentages is the product sales mix; the different product lines
make different gross margins and can have a significant impact on the overall
gross margin of the Company.
The Company's selling, general and administrative ("SG&A") expenses are
comprised of selling expenses such as sales commissions and product advertising,
as well as non manufacturing-related labor expenses, general corporate expenses
and depreciation and amortization. As a result of SFAS 142, beginning January 1,
2002, the Company ceased amortization of goodwill and tested its goodwill and
other intangible assets for impairment based on the requirements included in
SFAS 141. As of June 30, 2002, there was no impairment to the underlying value
of the assets.
18
RESULTS OF OPERATIONS
The following unaudited table sets forth items from the Company's
Consolidated Statements of Operations as a percentage of net sales:
Three month ended June 30,
--------------------------
2002 2001
--------- ---------
Net sales 100.0% 100.0%
Cost of sales (69.8%) (65.1%)
--------- ---------
Gross margin 30.2% 34.9%
Selling, general and administrative expenses (21.1%) (47.5%)
Research and development (4.6%) (14.1%)
Depreciation and amortization (3.5%) (9.8%)
Foreign exchange gain (loss) 4.7% (9.8%)
--------- ---------
Operating income (loss) 5.7% (46.3%)
Other income 0.2% 0.1%
Interest income, net 0.1% 0.5%
--------- ---------
Income (loss) before income taxes 6.0% (45.7%)
Provision for income taxes (1.3%) (0.4%)
--------- ---------
Net income (loss) 4.7% (46.1%)
========= =========
Net profit for the quarter was $1.0 million or $0.05 per share compared
to a net loss of $3.7 million or $0.21 per share in the second quarter of 2001.
Net sales for the quarter increased by 99.0% to $20.5 million from
$10.3 million in the second quarter of 2001. Revenues for the quarter were
comprised of 42.0% Electronic Games (Handheld Games and Play TV(TM)), 8.8%
Girls' Electronics (Girl Tech(R) and Barbie(TM)), 15.1% VGA and 34.1%
Manufacturing Services (ODM, OEM and Sourcing) compared to 59.1%, 12.7%, 7.8%
and 20.4% for the same period in 2001. In US dollar terms this represents sales
growth of 41.5% for Electronic Games, 38.1% for Girls' Electronics, 287.6% for
VGA and 232.1% for Manufacturing Services.
19
Net sales by product category are summarized as follows ($ in
thousands):
Three months ended June 30,
---------------------------
2002 2001
------- -------
Electronic Games $ 8,607 $ 6,083
Girls Electronics 1,802 1,305
ODM/OEM 6,199 1,682
Sourcing 798 425
VGA 3,101 800
------- -------
Total Net Sales $20,507 $10,295
======= =======
The Company's gross profit increased to $6.2 million in 2002 from $3.6
million in 2001. The Company's gross margin for the second quarter of 2002 was
30.2% compared to 34.9% in the second quarter of 2001 as a result of a higher
mix of the lower margin Manufacturing Services business and certain inventory
provisions taken primarily due to the recent sales declines experienced in
European sales of old platform GameBoy Color and PSOne inventory.
Operating expenses for the quarter were $5.0 million compared to $7.3
million in Q2 of 2001. The decrease in expenditure was as a result of the
Company's reorganization plan implemented earlier in the year and reduced
amortization charges compared to 2001. As part of this, both SG&A expenses and
R&D costs each decreased by $0.5 million. In addition the Company made a foreign
exchange gain of approximately $1.0 million in its U.K. operation due to the
increased strength of the Pound Sterling compared to the US Dollar.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 2002 the Company had $22.1 million of cash and total assets
of $89.7 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. There was no long-term debt as at June 30, 2002. During the second
quarter of 2002, the Company made no acquisitions.
At June 30, 2002, cash and cash equivalents, net of borrowings, were
$17.6 million of which $9.0 million of cash deposits have been pledged as
security for undrawn or substantially repaid facilities. Management does not
consider that there are any significant restrictions on its ability to gain
access to these deposits. This compares with cash and cash equivalents, net of
borrowings of $19.5 million at December 31, 2001. 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.
Receivables decreased to $11.5 million from the December 31, 2001 level
of $17.3 million while they increased by $3.4 million compared with receivables
of $8.1 million as of June 30, 2001. Accounts
20
receivable at the quarter-end is primarily composed of second quarter revenues
in 2002. Net sales for the quarter increased by $10.2 million compared to the
second quarter of 2001. Inventories increased to $24.9 million from $17.2
million at December 31, 2001 to support third quarter sales. Current liabilities
were $27.5 million at June 30, 2002 compared to $27.0 million at December 31,
2001.
Net cash used in financing activities was $1.6 million in the second
quarter of 2002. This was primarily due to the repayment of an installment of a
term loan, partially offset by the proceeds from the exercise of stock options.
Loan installments due within twelve months of reported quarter-end are included
in short-term liabilities. The term loan and revolving loan are secured by
certain properties and deposits of the Company (see Notes to 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 the quarter ended June 30, 2002. The Company
believes that its existing cash and cash equivalents and cash generated from
operations are sufficient to satisfy the current anticipated working capital
needs of its core business.
21
Item 3. Qualitative and Quantitative Disclosures 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 June 30, 2002, the result of a hypothetical one percentage
change in the underlying US$ SIBOR rates would have resulted in less than $0.1
million change in the annual amount of interest payable on such debt.
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 Chinese 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's
primary exposure relates to the intercompany debt that exists between Radica
China, its manufacturing company that records its intercompany receivables in US
Dollars, and Radica UK, its UK distribution company that records its
intercompany payable to Radica China in Pound Sterling. Were there to be a
significant fluctuation in exchange rates, this could have a material impact on
the financial results of the Company. The Company does not currently hedge its
foreign exchange risk. 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.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
None.
Item 2. Changes in Securities and Use of Proceeds
--------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
Item 5. Other Information
--------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
23
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RADICA GAMES LIMITED
Date: September 30, 2002 /s/ Craig D. Storey
------------------- --------------------------
Craig D. Storey
Chief Accounting Officer
24