FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of December, 2005
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite V, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F
Form 20-F X Form 40-F
------ ------
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): ______
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): ______
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
------ ------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- _________________
Contents:
1. Quarterly Report for the Quarter Ended September 30, 2005
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, 333-61260 and 333-122248) and on Form F-3 (No. 333-7526
and No. 333-79005).
QUARTERLY REPORT *
For the quarterly period ended September 30, 2005
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 V, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2693 2238
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2005
--------------------------------------- ---------------------------------
Common Stock, par value $0.01 per share 19,060,857
------------------------
* 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
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION.....................................................................................4
Item 1. Financial Statements................................................................................4
Condensed Consolidated Balance Sheets
September 30, 2005 (unaudited) and December 31, 2004................................................4
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended September 30, 2005 (unaudited) and 2004 (unaudited)......5
Condensed Consolidated Statements of Shareholders' Equity
for the Nine Months Ended September 30, 2005 (unaudited) and 2004 (unaudited).......................6
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 2005 (unaudited) and 2004 (unaudited).......................7
Notes to the Condensed Consolidated Financial Statements............................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................17
Item 4. Controls and Procedures............................................................................17
PART II - OTHER INFORMATION.......................................................................................18
Item 1. Legal Proceedings..................................................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................18
Item 3. Defaults Upon Senior Securities....................................................................18
Item 4. Submission of Matters to a Vote of Security Holders................................................18
Item 5. Other Information..................................................................................18
Item 6. Exhibits...........................................................................................18
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(US dollars in thousands, except share data) September 30, December 31,
------------------- -------------------
2005 2004
------------------- -------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,858 $ 27,614
Investment securities 9,874 12,456
Accounts receivable, net of allowances for doubtful accounts of $162
($148 as at December 31, 2004) 35,602 18,359
Inventories 31,385 26,818
Prepaid expenses and other current assets 3,634 3,374
Income taxes receivable 23 168
Deferred income taxes 1,837 1,850
------------------- -------------------
Total current assets 108,213 90,639
Property, plant and equipment, net 14,831 11,480
Goodwill - 6,015
Other assets 838 854
Deferred income taxes, noncurrent 1,058 953
------------------- -------------------
Total assets $ 124,940 $ 109,941
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,326 $ 10,770
Accrued warranty expenses 1,416 1,070
Accrued payroll and employee benefits 3,102 1,486
Other accrued liabilities 7,283 5,251
Income taxes payable 1,740 287
------------------- -------------------
Total current liabilities 28,867 18,864
------------------- -------------------
Total liabilities 28,867 18,864
------------------- -------------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized, 19,060,857 shares
outstanding (18,738,112 as at December 31, 2004) 191 187
Additional paid-in capital 6,027 4,610
Retained earnings 90,396 85,909
Deferred compensation (357) -
Accumulated other comprehensive (loss) income (184) 371
------------------- -------------------
Total shareholders' equity 96,073 91,077
------------------- -------------------
Total liabilities and shareholders' equity $ 124,940 $ 109,941
=================== ===================
See accompanying notes to the consolidated financial statements.
4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(US dollars in thousands, Three months ended September 30, Nine months ended September 30,
except per share data) ------------------------------------- -------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net sales $ 63,437 $ 48,972 $ 117,042 $ 79,896
Cost of goods sold
(exclusive of items shown separately below) (39,750) (33,703) (75,167) (53,335)
----------------- ----------------- ----------------- ----------------
Gross profit 23,687 15,269 41,875 26,561
----------------- ----------------- ----------------- ----------------
Operating expenses:
Selling, general and administrative expenses (10,192) (7,271) (22,883) (17,466)
Research and development (1,274) (926) (3,363) (2,724)
Depreciation and amortization (559) (450) (1,421) (1,300)
Impairment of goodwill - - (6,015) -
----------------- ----------------- ----------------- ----------------
Total operating expenses (12,025) (8,647) (33,682) (21,490)
----------------- ----------------- ----------------- ----------------
Operating income 11,662 6,622 8,193 5,071
Net interest and other income 288 718 733 1,136
Foreign currency (loss) gain, net (216) 2 (227) 46
----------------- ----------------- ----------------- ----------------
Income before income taxes 11,734 7,342 8,699 6,253
Provision for income tax (1,747) (1,352) (1,654) (1,204)
----------------- ----------------- ----------------- ----------------
Net income $ 9,987 $ 5,990 $ 7,045 $ 5,049
================= ================= ================= ================
Earnings per share:
Basic $ 0.52 $ 0.32 $ 0.37 $ 0.27
================= ================= ================= ================
Diluted $ 0.51 $ 0.31 $ 0.36 $ 0.26
================= ================= ================= ================
Weighted average number of common and
common equivalent shares:
Basic 19,036,387 18,687,802 18,967,933 18,626,530
================= ================= ================= ================
Diluted 19,699,815 19,519,694 19,647,073 19,506,360
================= ================= ================= ================
Cash dividends declared per share
(4.5 cents declared and paid for each quarter
ended March 31, June 30, and September 30,
2005; 4 cents per quarter in 2004) $ 0.045 $ 00.040 $ 0.135 $ 0.120
================= ================= ================= ================
See accompanying notes to the consolidated financial statements.
5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(US dollars in thousands)
Accumulated
Common stock Additional other Total
Number paid-in Deferred Retained comprehensive shareholders'
of shares Amount capital compensation earnings income (loss) equity
------------- ---------- ------------ ------------- ------------ -------------- --------------
Balance at December 31, 2004 18,738,112 $ 187 $ 4,610 $ - $ 85,909 $ 371 $ 91,077
Issuance of stock 51,595 1 9 - - - 10
Issuance of restricted stock - - 429 (429) - - -
Stock options exercised 271,150 3 979 - - - 982
Amortization of deferred - - - 72 - - 72
compensation cost
Dividends declared - - - - (2,558) - (2,558)
Net income - - - - 7,045 - 7,045
Unrealized gain on investment - - - - - 10 10
securities available-for-sale,
net of nil tax
Foreign currency translation, - - - - - (565) (565)
net of nil tax
------------- ---------- ------------ ------------- ------------ -------------- --------------
Balance at September 30, 2005 19,060,857 $ 191 $ 6,027 $ (357) $ 90,396 $ (184) $ 96,073
============= ========== ============ ============= ============ ============== ==============
Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ - $ 85,437 $ 20 $ 89,156
Issuance of stock 1,726 - 16 - - - 16
Stock options exercised 495,934 5 1,018 - - - 1,023
Dividends declared - - - - (2,984) - (2,984)
Net income - - - - 5,049 - 5,049
Unrealized loss on investment - - - - - (41) (41)
securities available-for-sale,
net of nil tax
Foreign currency translation, - - - - - (21) (21)
net of nil tax
------------- ---------- ------------ ------------- ------------ -------------- --------------
Balance at September 30, 2004 18,722,864 $ 187 $ 4,551 $ - $ 87,502 $ (42) $ 92,198
============= ========== ============ ============= ============ ============== ==============
The comprehensive income of the Company, which represents the aggregate of the net income, unrealized gain (loss) on investment
securities available-for-sale and the foreign currency translation adjustments, was $6,490 and $4,987 for the nine months ended
September 30, 2005 and 2004, respectively.
See accompanying notes to the consolidated financial statements.
6
RADICA GAMES LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(US dollars in thousands) Nine months ended September 30,
----------------------------------------
2005 2004
------------------- -------------------
(unaudited) (unaudited)
Cash flow from operating activities:
Net income $ 7,045 $ 5,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (92) 1,150
Depreciation 1,421 1,300
Impairment of goodwill 6,015 -
Gain on disposal of property, plant and equipment (50) (19)
Compensatory elements of stock issuances 82 16
Tax benefit from stock option exercises 8 -
Proceeds from sale of trading securities 2,616 -
Realized gain on trading securities (24) -
Changes in current assets and liabilities:
Increase in accounts receivable (17,243) (10,676)
Increase in inventories (4,567) (13,366)
Increase in prepaid expenses and other current assets (260) (1,388)
Increase in accounts payable 4,556 10,778
Increase (decrease) in accrued payroll and employee benefits 1,616 (104)
Increase in accrued warranty expenses 346 350
Increase in other accrued liabilities 2,032 1,733
Decrease in net income taxes payable 1,598 1,261
------------------- -------------------
Net cash provided by (used in) operating activities 5,099 (3,916)
------------------- -------------------
Cash flow from investing activities:
Proceeds from sale of investment securities - 12,207
Proceeds from sale of property, plant and equipment 52 1,278
Purchase of property, plant and equipment (4,758) (2,071)
------------------- -------------------
Net cash (used in) provided by investing activities (4,706) 11,414
------------------- -------------------
Cash flow from financing activities:
Proceeds from stock options exercised 974 1,023
Dividends paid (2,558) (2,235)
------------------- -------------------
Net cash used in financing activities (1,584) (1,212)
------------------- -------------------
Effect of currency exchange rate change (565) (21)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (1,756) 6,265
Cash and cash equivalents:
Beginning of period 27,614 13,944
------------------- -------------------
End of period $ 25,858 $ 20,209
=================== ===================
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005)
(US dollars in thousands)
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements of Radica Games Limited
(the "Company" or "Radica") have been prepared in accordance with generally
accepted accounting principles in the United States for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles in the United States have been
condensed or omitted pursuant to such rules and regulations. The
accompanying condensed consolidated financial statements contain all normal
and recurring adjustments which, in the opinion of management, are
necessary to present fairly the financial position of the Company as of
September 30, 2005, and its results of operations and cash flows for the
periods presented herein. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report
on Form 20-F for the year ended December 31, 2004.
Because the Company's business is seasonal, revenues, expenses, assets and
liabilities can vary during each quarter of the year. Accordingly, the
operating results and trends in these unaudited condensed consolidated
interim financial statements are not necessarily indicative of future
results that may be expected for any other interim period or the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect reported amounts of certain
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities as of and during the reporting periods. Significant
items subject to such estimates and assumptions include the carrying amount
of property, plant and equipment, valuation allowances for receivables and
deferred income tax assets and provisions for product returns and
warranties, as well as in estimates used in accounting for legal
contingencies. Actual results could differ from the estimated results.
Changes from those estimates are recorded in the period they become known.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company elected to follow Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations including Financial Accounting
Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion
No. 25, issued in March 2000, to account for its fixed-plan stock options.
Under this method, compensation expense is recorded on the date of grant
only if the then market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-based Compensation, established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation plans. As allowed by SFAS
No. 123, the Company has elected to continue to apply the intrinsic-value
based method of accounting described above, and has adopted only the
disclosure requirements of SFAS No. 123. The following table illustrates
the incremental effect on net income if the fair value based method had
been applied to all outstanding and unvested awards in the period:
8
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
Three months ended September 30, Nine months ended September 30,
--------------------------------------------------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- -----------------
Net income as reported $ 9,987 $ 5,990 $ 7,045 $ 5,049
Deduct total stock-based employee (136) (130) (438) (380)
compensation expense determined
under fair-value based method
for all rewards, net of tax
----------------- ----------------- ----------------- -----------------
Pro forma net income $ 9,851 $ 5,860 $ 6,607 $ 4,669
================= ================= ================= =================
Reported net income per share $ 0.51 $ 0.31 $ 0.36 $ 0.26
================= ================= ================= =================
Pro forma net income per share $ 0.50 $ 0.30 $ 0.34 $ 0.24
================= ================= ================= =================
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. The new pronouncement replaces the existing requirements under
SFAS No. 123 and APB 25. According to SFAS No. 123R, all forms of
share-based payments to employees, including employee stock options and
employee stock purchase plans, would be treated the same as any other form
of compensation by recognizing the related cost in the statement of
operations. This pronouncement prohibits accounting for stock-based
compensation transactions using APB No. 25 and generally will require that
such transactions be accounted for using a fair-value based method. SFAS
123R is effective for all interim and annual periods beginning after June
15, 2005. In April 2005, the United States Securities and Exchange
Commission issued a new rule that a public company may elect to adopt the
provisions of SFAS 123R at the beginning of their first annual period
beginning after June 15, 2005. Consequently, the Company elected to adopt
SFAS 123R January 1, 2006.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs
-- An Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
spoilage should be expensed as incurred and not included in inventory cost
as a component of overhead. Further, SFAS 151 requires that allocation of
fixed and production facilities overhead to conversion costs should be
based on normal capacity of the production facilities. The provisions in
SFAS 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe that the
adoption of SFAS 151 will have a significant effect on its consolidated
financial statements.
In November 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets -- An Amendment of APB Opinion No. 29 ("SFAS 153"). The provisions
of this statement are effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. This statement eliminates
the exception to fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions that do not
have commercial substance -- that is, transactions that are not expected to
result in significant changes in the cash flows of the reporting entity.
The Company does not believe that the adoption of SFAS 153 will have a
significant effect on its financial statements.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005)
(US dollars in thousands except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation. These reclassifications had no effect
on net income or shareholders' equity.
2. EARNINGS PER SHARE
Basic earnings per share is calculated based on the weighted average number
of shares of common stock, and with respect to diluted earnings per share,
also includes the effect of all potential common stock outstanding.
Dilutive potential common stock results from dilutive stock options and
warrants. The effect of such dilutive potential common stock on earnings
per share is computed using the treasury stock method.
The following table sets forth the computations of earnings per share:
Three months ended September 30, Nine months ended September 30,
--------------------------------------------------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- -----------------
Numerator for basic and
diluted earnings per share:
Net income $ 9,987 $ 5,990 $ 7,045 $ 5,049 045
================= ================= ================= =================
Denominator:
Basic weighted average shares 19,036,387 18,687,802 18,967,933 18,626,530
Effect of dilutive options 663,428 831,892 679,140 879,830
----------------- ----------------- ----------------- -----------------
Diluted weighted average shares 19,699,815 19,519,694 19,647,073 19,506,360
================= ================= ================= =================
Basic earnings per share: $ 0.52 $ 0.32 $ 0.37 $ 0.27
================= ================= ================= =================
Diluted earnings per share: $ 0.51 $ 0.31 $ 0.36 $ 0.26
================= ================= ================= =================
3. SEGMENT INFORMATION
The Company is a worldwide designer, producer and marketer of electronic
entertainment devices. The Company historically had two reportable segments
from which it derived its revenues: the Game and Youth Electronics business
that sells product under the Company's Radica(R), Play TV(R) and Girl
Tech(R) brand names, and the Video Game Accessory ("VGA") business that
sells product under the Company's Gamester(R) brand name. During the period
ended September 30, 2005 the Games and Youth Electronics business
represented over 90% of the consolidated revenue, profits, and assets. The
Company no longer views the VGA business as a separate segment for either
internal reporting purposes or for making decisions about resource
allocation. Accordingly, as of and for the quarter and nine-month period
ended September 30, 2005, the Company has only one reportable segment.
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005)
(US dollars in thousands)
4. GOODWILL
On June 24, 1999, the Company purchased Leda Media Products Limited, now
called Radica UK Limited ("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. As a result, the Company recorded the excess of net
assets purchased (goodwill) of approximately $12,069 resulting from the
adjusted purchase price. The goodwill was allocated to the Video Games
Accessories ("VGA") reporting unit and is not tax deductible.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Upon implementation of SFAS 142, on an annual
basis or quarterly if certain events occur, the Company is required to
perform an impairment test to determine whether the goodwill was impaired
and the extent of such impairment.
For the year ended December 31, 2004, the methods used in the Company's
testing of goodwill impairment were as follows: The Company determined the
fair market value of the VGA segment by estimating the expected discounted
future cash flows of the VGA reporting unit. In estimating the discounted
future cash flows, the Company followed FASB Concepts Statement No. 7,
Using Cash Flow Information and Present Value in Accounting Measurements,
by taking into account the Company's expectations about possible variations
in the amount or timing of those cash flows, the risk-free rate of interest
and the discounted interest rate. The Company then compared the estimated
fair value of the VGA reporting unit with the carrying value of the VGA
reporting unit, including goodwill. Because the fair value of the VGA
reporting unit was less than the carrying value, the second step was
performed which compared the implied fair value of the VGA reporting unit's
goodwill to the book value of the goodwill. After performing this
evaluation for the year ended December 31, 2004, the Company recognized a
goodwill impairment of $3,536 as the goodwill impairment analysis as of
December 31, 2004 showed an implied goodwill value of $6,015 related to the
VGA reporting unit. The adjustment was the result of lower sales forecast
for fiscal years 2005 through 2009 which was largely predicated by the
Company's newly adopted strategy of concentrating on the innovative, higher
margin sector of the market. At December 31, 2004 the Company's carrying
value of the goodwill related to the VGA reporting unit was $6,015 net of
the impairment charge of $3,536 recorded during the 4th quarter of 2004 and
accumulated amortization of $2,518 charged to operating expenses prior to
the adoption of SFAS No. 142.
In 2005, Microsoft announced the introduction of its new platform,
Xbox360(TM), for distribution in Fall 2005. Shortly thereafter, Sony
announced the introduction of its new Playstation(R) platform for
distribution sometime in 2006. These announcements created uncertainty in
the marketplace concerning existing video game platforms and have resulted
in reduced orders of the Company's VGA products. In addition, initial
placement of the Company's Black Diamond(TM) line of products for the
existing Sony PSP(TM) has been lower than originally forecasted. As noted
in the proceeding paragraph, the goodwill impairment analysis as of
December 31, 2004 (before the announced introduction dates of the Xbox and
Playstation platforms and introduction of the Black Diamond line of Sony
PSP compatible products to retail customers.) implied a goodwill value of
$6,015 related to the VGA reporting unit. However, the subsequent
occurrence in 2005 of these events and change in market circumstances
indicated that it is more likely than not that the fair value of the VGA
reporting unit was less than its carrying amount. Accordingly, as required
by SFAS No. 142, the Company performed a goodwill impairment analysis
during the quarter ended June 30, 2005. The analysis indicated that the
carrying value of the VGA reporting unit's goodwill exceeded the implied
fair value of the goodwill resulting in an impairment charge of $6,015
recognized during the quarter. After this impairment charge, the goodwill
related to the VGA reporting unit was reduced to zero.
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005)
(US dollars in thousands)
5. INVENTORIES
Inventories by major category consist of the following:
September 30, December 31,
2005 2004
---------------- ----------------
Raw materials $ 4,380 $ 4,017
Work in progress 6,420 6,830
Finished goods 20,585 15,971
---------------- ----------------
$ 31,385 $ 26,818
================ ================
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, December 31,
2005 2004
---------------- ----------------
Land and buildings $ 10,256 $ 9,431
Plant and machinery 10,250 8,142
Furniture and equipment 8,814 8,196
Leasehold improvements 3,333 3,067
Construction-in-progress 483 265
---------------- ----------------
Total $ 33,136 $ 29,101
Less accumulated depreciation (18,305) (17,621)
and amortization
---------------- ----------------
Total, net $ 14,831 $ 11,480
================ ================
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
September 30, December 31,
2005 2004
---------------- ----------------
Accrued advertising expenses $ 1,351 $ 910
Accrued license and royalty fees 2,598 1,963
Commissions payable 226 93
Other accrued liabilities 3,108 2,285
---------------- ----------------
Total $ 7,283 $ 5,251
================ ================
12
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005)
(US dollars in thousands)
8. PLEDGE OF ASSETS
At September 30, 2005, the Company had general banking facilities including
overdraft and trade facilities totaling $4,049 available to be drawn upon.
The facilities are collateralized by leasehold land and buildings and bank
balances with an aggregate net book value of $2,548.
9. LITIGATION
On April 4, 2000 a lawsuit was filed by the Lemelson Foundation
("Lemelson") against the Company in Arizona Court for patent infringement.
Lemelson claims to be owner of nearly 800 issued and pending patents,
including the patent on Machine Vision and Automatic Identification (Auto
ID) operations. The Auto ID operation is used in machines that are part of
the Company's bonding and heat-sealing manufacturing processes. Lemelson is
contesting that the use of machines that incorporate this patented
technology infringes on their intellectual property ("IP") rights and
therefore the Company is obligated to pay a royalty based on the use of
this technology. The suit by Lemelson has been stayed pending the outcome
of Lemelson vs. Cognex, a similar suit filed by Lemelson, which will have
some bearing on the Radica case with Lemelson. On January 23, 2004 a
declaratory judgment was given in the Cognex case that Lemelson's patent
claims are invalid. If this judgment is upheld following appeal, the
Company believes that this result is favorable to the Company's defense of
the Lemelson lawsuit. On September 9, 2005, Lemelson's appeal to the Court
of Appeals for the Federal Circuit was denied and the judgment of the
District Court was affirmed. Subsequently, Lemelson filed a Petition for
Panel Rehearing and Rehearing En Banc to review the Court of Appeals'
September 9, 2005 Order that affirmed the judgment of the District Court.
On November 16, 2006 the Court of Appeals for the Federal Circuit affirmed
its September 9, 2005 ruling and denied the Petition for Rehearing En Banc.
In March 2005 the Company received a letter from a third party (AtGames
Holdings Ltd., or AtGames) challenging the exclusivity of the Company's
manufacturing, vendor and distributor agreement with Sega Toys, which was
represented to give the Company exclusive rights to the Play TV Sega
Genesis games in the United States and certain other countries.
Subsequently, the Company has worked closely with Sega Toys and Sega
Corporation in an attempt to clarify its rights. The Company continues to
believe that it has a strong position on the merits of the dispute as well
as certain rights to indemnification from Sega Toys. Sega Corporation has
advised the Company in writing that Sega has not granted AtGames any right
to license Sega's Genesis/Mega Drive game titles for incorporation in TV
game pads intended for worldwide markets. AtGames contends otherwise. Sega
and AtGames have submitted their dispute to arbitration, and the
arbitration hearing was held in November 2005, but the arbitrator has not
yet issued a decision. Sega further stated its understanding that under the
agreement between Radica and Sega Toys, Sega Toys has granted Radica the
exclusive right to sell Play TV products incorporating selected Sega
Genesis game titles in the United States and certain other territories
under a license granted by Sega to Sega Toys.
On June 13, 2005, AtGames also filed a complaint against the Company and
its subsidiary Radica (Macao Commercial Offshore) Limited, or Radica Macao,
in the California Superior Court, County of Los Angeles, alleging
intentional interference with contract and unfair competition. The
complaint seeks substantial compensatory damages, punitive damages,
declaratory relief and injunctive relief. Thereafter, the Radica parties
removed the case to the Federal District Court, Central District of
California. In October 2005, the Federal District Court remanded the case
back to the California Superior Court. The Radica parties consider this
suit to be without merit and intend to defend against it vigorously.
In addition, and supplemental to two prior indemnification demands, the
Company has made formal demand on Sega Toys for indemnification respecting
the action filed by AtGames.
The Company cannot predict the outcome of the Lemelson and AtGames cases or
the effect of such litigation on the financial results of the Company. No
accrual has been recorded at September 30, 2005 and December 31, 2004 in
respect of the Lemelson and AtGames cases or other claims or legal actions,
in accordance with SFAS No. 5 Accounting for Contingencies. Management does
not believe that the ultimate disposition of these matters will have a
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material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
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, 2004, as filed with the
United States Securities and Exchange Commission.
DESCRIPTION OF BUSINESS
Founded in 1983 by Americans living in Hong Kong, Radica Games Limited (NASDAQ:
RADA) was incorporated in Bermuda in 1993. We are headquartered in Hong Kong and
manufacture most of our products in our factory in southern China. In 1994 we
went public when our shares began trading on the Nasdaq National Market.
We manufacture and market a diverse line of electronic entertainment products
covering multiple product lines - our products include casino and heritage
electronic games, mechanical slot banks, youth electronic games, tabletop games,
Play TV games, Girl Tech and Barbie(TM) girls electronic lines, the 20Q(TM) line
of electronic and tabletop games, the Cupcakes(R) doll line, the Nitro
Battlerz(TM) remote control car product, the Street Muttz(TM) plush line and
video game accessories sold under the Gamester brand. Our factory also
manufactures for other companies in the electronic game industry. We market our
products through subsidiaries in the United States, the United Kingdom, Canada,
Macau and Hong Kong. Our largest market is in the United States where in 2004 we
had the third largest market share in the electronic handheld and tabletop
electronic games according to industry data source, The NPD Group, Inc.
RESULTS OF OPERATIONS
The following table sets forth items from our Consolidated Statements of
Operations as a percentage of net sales:
Three months ended September 30,
--------------------------------
2005 2004
------------ ------------
Net sales 100.0% 100.0%
Cost of goods sold (62.7%) (68.8%)
Gross margin 37.3% 31.2%
Selling, general and
administrative expenses (16.0%) (14.9%)
Research and development (2.0%) (1.9%)
Depreciation and amortization (0.9%) (0.9%)
Operating income 18.4% 13.5%
Net interest and other income 0.4% 1.5%
Foreign currency (loss) gain, net (0.3%) 0.0%
Income before income taxes 18.5% 15.0%
Provision for income tax (2.8%) (2.8%)
Net income 15.7% 12.2%
We reported a net income for the third quarter of 2005 of $10.0 million or $0.51
per diluted share compared to $6.0 million or $0.31 per diluted share in the
third quarter of 2004.
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Summary of sales achieved from each category of products and services:
Three months ended September 30,
---------------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------------
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
-------------------------------- --------------- --------------- ---------------- ---------------
(US dollars in thousands)
Electronic Games 78.6% $ 49,831 69.9% $ 34,220
Youth Electronics 10.8% 6,859 13.2% 6,447
Other Electronic Toys 2.5% 1,632 3.3% 1,657
Video Game Accessories 2.1% 1,321 6.5% 3,179
Manufacturing Services 6.0% 3,794 7.1% 3,469
--------------- ---------------- ---------------- ----------------
Total 100.0% $ 63,437 100.0% $ 48,972
=============== ================ ================ ================
Sales for the third quarter increased by 30% to $63.4 million from $49.0 million
in the quarter ended September 30, 2004 due mainly to the continued strength in
the Electronic Games category led by growth from both the 20Q product line and
traditional handheld electronic games. The Girl Tech product line also showed
double digit growth during the quarter. Compared to sales for the same period in
2004, branded sales grew by 31% with North American branded sales increasing by
29%, European sales increasing by 35% and other international sales increasing
by 47%. Sales for the nine months ended September 30, 2005 increased 46% to
$117.0 million as compared to $79.9 million for the same period in 2004. Branded
sales were up by 51% for the nine-month period.
Gross profit for the third quarter of 2005 increased by 55% to $23.7 million,
and gross margins increased by 510 basis points to 37.3%. The increases in the
gross margin percentage during the quarter related primarily to a sales mix
shift to higher margin products. Correspondingly, lower margin product lines
such as Manufacturing Services and Play TV Legends games accounted for a smaller
portion of sales. The increase in our gross margin percentage was also affected
by lower air freight charges and outsourcing costs than for the comparable
period last year when the Company experienced a late surge in demand which
caused it to incur higher costs.
Operating expenses increased to $12.0 million for the quarter from $8.6 million
in the third quarter of 2004. The increase was due to advertising expenditure
and other variable costs, including management bonuses together with increases
in research and development costs related to external programming of software,
depreciation and donations during the quarter.
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The following table shows the major operating expenses:
Three months ended September 30,
----------------------------------
(US dollars in thousands) 2005 2004
-------------- -------------
Advertising expenses $ 1,761 $ 1,594
Other selling and promotion expenses 1,547 1,547
Indirect salaries and bonus 4,179 2,228
Other general & administrative expenses 2,705 1,902
Research and development expenses 1,274 926
Depreciation and amortization 559 450
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investment securities totaled $35.7 million at September 30, 2005
as compared to $40.1 million at December 31, 2004. The $4.4 million decrease was
due to a variety of factors, including a dividend payment ($2.6 million), the
purchase of property plant and equipment ($4.8 million) mainly in connection
with the previously announced factory expansion, offset by stock options
exercised ($1.0 million), and effects of currency exchange rate fluctuations
($0.5 million) and cash provided by operating activities ($5.1 million).
Our accounts receivable were $35.6 million at September 30, 2005 as compared to
$18.4 million at December 31, 2004 and $26.0 million at September 30, 2004.
Inventories increased to $31.4 million from $26.8 million at December 31, 2004
and $28.9 million at September 30, 2004. Our business is inherently seasonal.
Normally our sales and accounts receivable have been lowest during the first and
second quarters and highest during the third and fourth quarters. Receivables
have been lowest during the succeeding first and second quarters. The increase
in accounts receivable related primarily to the increased sales in the third
quarter of 2005 compared to the third quarter of 2004. Similarly, the increase
in inventories was due to seasonal build up to meet fourth quarter sales demand.
Such seasonal changes in inventories and receivables are typical for the toy
industry and balances should decline by year-end.
Current liabilities were $28.9 million at September 30, 2005, up $4.5 million
from the $18.9 million reported at December 31, 2004 and $26.4 million at
September 30, 2004. This was largely due to an increase in purchases of raw
materials for production during the quarter. There was no debt at September 30,
2005 and December 31, 2004.
At September 30, 2005, we had net assets of $96.1 million compared with $91.1
million at December 31, 2004. We had no derivative instruments or off-balance
sheet financing activities during the quarter ended September 30, 2005. We
believe that our existing cash, investment securities and credit lines are
sufficient to meet future short-term cash demands, including seasonal build up
of inventory. We fund our operations and liquidity needs primarily through cash
flow from operations, as well as utilizing borrowings under secured and
unsecured credit facilities when needed. During 2005, we expect to continue to
fund our working capital needs through operations and the revolving credit
facility and we believe that the funds are available to meet our needs. However,
unforeseen circumstances such as severe softness in, or a collapse of, the
retail environment may result in a significant decline in revenues and operating
results, thereby causing us to exhaust our cash resources. If this were to
occur, we may be required to seek alternative financing of working capital.
On January 4, April 12, July 7 and October 6, 2005, we declared first, second,
third and fourth quarter dividends each of 4.5 cents per share which were paid
on January 31, April 29, July 29 and October 28, 2005, respectively.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies, see "Item 5, operating and
financial review and prospects" in our 2004 Form 20-F.
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RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and the estimated
impact on us is set out in note 1 to the condensed consolidated financial
statements.
RISK FACTORS
For a discussion of our risk factors, see "Item 3. Key Information - Risk
Factors" and "Item 5. Operating and Financial Review and Prospects" in our 2004
Form 20-F, and the Form 6-K filings on June 15, 2005, August 16, 2005 and
November 8, 2005.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995)
Certain written and oral statements made or incorporated by reference from time
to time by us or our representatives in this Form 6-K, other filings or reports
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise, contain certain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify these forward-looking statements by the
fact they use words such as "should", "expect", "anticipate", "estimate", "may",
"will", "project", "guidance", "intend", "plan", "believe" and other words and
terms of similar meaning and expression in connection with any discussion of
future operating or financial performance. One can also identify forward-looking
statements by the fact that they do not relate strictly to historical or current
facts. Such forward-looking statements are based on current expectations and
involve inherent risks and uncertainties, including factors that could delay,
divert or change any of them, or depend on the outcome of contingencies such as
legal proceedings. Management cautions you that forward-looking statements
involve risks and uncertainties that may cause actual results to differ
materially from the forward-looking statements. For a more complete discussion
of our risk factors, you are referred to the sections in our Form 20-F and Form
6-K identified above under the caption "Risk Factors". The forward-looking
statements made in this Form 6-K speak only as of the date on which the
statements are made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk disclosures have not materially changed from those
appearing in our 2004 Form 20-F (see Item 11).
ITEM 4. CONTROLS AND PROCEDURES
Not Applicable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to the accompanying Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities in the quarterly
period covered by this report, except that, as disclosed in the Company's
filings under the Securities Exchange Act of 1934, the Company permits any
outside director to elect to receive some or all of the applicable director fees
payable in shares of the Company's Common Stock valued at the then current
market price. Such issuances are exempt from registration pursuant to Section
4(2) under the Securities Act of 1933, as being issuances not involving any
public offering. In the quarter ended September 30, 2005, the Company issued an
aggregate of 296 shares to outside directors in lieu of an aggregate of $2,620
of fees that would otherwise have been paid to such directors in cash. No
underwriters were involved in such transactions.
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
None.
Supplemental Information:
As previously disclosed in our Form 6-K filing on August 16, 2005, Jon Bengtson,
the Chairman of the Board of Radica Games, entered into a Rule 10b5-1 preset
diversification program on July 6, 2005.
Rule 10b5-1 of the Securities Exchange Act of 1934 allows officers and directors
to adopt written plans for trading the Company's securities in a
non-discretionary, pre-scheduled manner in order to avoid concerns about
initiating stock transactions when the insider may be aware of non-public
information.
During the term of the trading plan, acting on behalf of a family trust, Mr.
Bengtson intends to sell up to 100,000 shares, and the trading plan will
terminate when such shares are sold, or in any event by June 30, 2006.
As previously announced, Mr. Theodore J. Eischeid ceased to be an officer of
Radica in October 2005 when the position of Chief Operating Officer was
eliminated. Subsequently, Mr. Eischeid elected to resign from the Radica Board
of Directors effective as of December 7, 2005.
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SIGNATURE
---------
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RADICA GAMES LIMITED
Date: December 19, 2005 /s/ Craig D. Storey
----------------------- ------------------------------
Craig D. Storey
Chief Accounting Officer
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