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 April, 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. Press Release dated April 21, 2005
2. Press Release dated April 12, 2005
3. Annual Report to Stockholders
4. Management Information Circular / Proxy Statement dated
April 22, 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, No. 333-61260 and No. 333-122248) and on Form F-3 (No.
333-7526 and No. 333-79005).
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: April 27, 2005 /s/ Craig D. Storey
------------------------------ -------------------------------
Craig D. Storey
Chief Accounting Officer
RADICA GAMES LIMITED
ANNOUNCES BOARD CHANGES
FOR IMMEDIATE RELEASE CONTACT: PATRICK S. FEELY
APRIL 21, 2005 CHIEF EXECUTIVE OFFICER
(LOS ANGELES, CALIFORNIA)
(626) 744 1150
DAVID C.W. HOWELL
PRESIDENT ASIA OPERATIONS
& CFO
(HONG KONG)
(852) 2688 4201
(HONG KONG) Radica Games Limited (NASDAQ: RADA) announced today changes in the
composition of its Board of Directors that will be proposed in the upcoming
proxy for election at its Annual General Meeting scheduled for May 23, 2005. New
directors proposed for election include John Coulter, Floyd (Bud) Glisson, Frank
O'Connell and Richard Wenz. Directors leaving the Board in May at the end of
their terms include external directors James J. O'Toole and Peter L. Thigpen,
and internal director David C.W. Howell, who continues to serve the Company as
Chief Financial Officer and President, Asia Operations.
Jon Bengtson, Radica's Chairman said, "I want to express our deep appreciation
for the outstanding service of retiring directors Jim O'Toole, Pete Thigpen and
David Howell. Their contributions have directly impacted the growth and strength
of Radica. Jim O'Toole has served on the Board since 1994 and has been
instrumental in guiding the Company through its many challenges and successes.
His intellect and vast experience with some of the largest and most successful
public companies have helped Radica to a position of prominence in the toy
industry. Pete Thigpen has served on the Board for the past seven years. His
international and operational experience in a fashion industry that follows
similar trends as those faced by Radica has helped the Company succeed in the
ever changing toy industry. David C. W. Howell is resigning from the Board after
11 years as a director but continues to serve the Company as its Chief Financial
Officer and President of Asia Operations. David's resignation has allowed the
Company to increase the number of outside directors to provide additional
strengths to the Board while continuing to have the benefit of David's knowledge
and experience."
"We are excited about the experience and skills we are adding to the Board with
the addition of John Coulter, Bud Glisson, Frank O'Connell and Dick Wenz. Their
participation on our Board will help us forge the strategic future of Radica.
Each new director brings a variety of experiences in addition to a strong track
record of success. Let me summarize some of their accomplishments and
experiences. John Coulter built European businesses for Mattel and Tonka, and
comes from a strong marketing and entrepreneurial background. Bud Glisson turned
around and sold Acres Gaming, and has extensive financial management experience.
Frank O'Connell led the turn around and sale of Gibson Greetings and took Skybox
public in addition to his years of marketing experience at such companies as
Mattel and Reebok. Dick Wenz has had several successful experiences in consumer
products companies including being president of
Safety First and holding senior financial management positions with Wilson
Sporting Goods and Electrolux. Previously he was a partner at Arthur Young. We
look forward to benefiting from the many talents of these gentlemen as they join
our Board," said Bengtson.
The foregoing discussion contains forward-looking statements that
involve risks and uncertainties that could cause actual results to
differ materially from projected results. Forward-looking statements
include statements about efforts to attract or prospects for
additional or increased business, new product introductions and other
statements of a non-historical nature. Actual results may differ from
projected results due to various Risk Factors, including Risks of
Manufacturing in China, Dependence on Product Appeal and New Product
Introductions, and Dependence on Major Customers, as set forth in the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2004, as filed with the Securities and Exchange
Commission. See "Item 3. Key Information -- Risk Factors" in such
report on Form 20-F.
ABOUT THE PROPOSED DIRECTORS
John A.F.H. Coulter is CEO and founder of Exact Products Ltd., a company which
specializes in new product development. Prior to this Mr. Coulter had over 20
years of experience in the toy industry. He was founder and CEO of TCL Marketing
between 1992 and 2001 acting as the UK distributor for Radica, KID design and
Team Concepts. Prior to this he was a Corporate Vice President and President of
Europe for Tonka between 1986 and 1990. Between 1982 and 1986 he helped build
Mattel in the UK, as Managing Director and Vice President. Prior to entering the
toy industry he worked in the food industry and held senior marketing management
positions at United Biscuits, Brooke Bond Oxo, Cadbury Schweppes and J. Lyons
Grocery Division. Mr. Coulter is an Alumnus of London Business School, Fellow of
The Marketing Society (Chairman 1975-76), Fellow of the Chartered Institute of
Marketing and Fellow of the British Institute of Management.
Floyd W. Glisson was CEO of Acres Gaming Incorporated from July 1998 through
October 2004, and Chairman of the Board from April 2000 until the company was
acquired in October 2003. He has a BS degree in Accounting from the University
of Akron, an MBA from the University of Pittsburgh, and was a CPA in Colorado.
His previous experience included audit and consulting engagements with Arthur
Andersen & Co., and financing management positions with the Dial Corporation and
ConAgra Foods Inc. He is in the process of forming GCM Investors LLC, a private
investment firm for which he will be Managing Member.
Frank J. O'Connell a Senior Partner at The Parthenon Group was appointed head
of the West Coast office in March 2005 having joined the firm in June 2004 to
lead the consumer and specialty retail consulting practice. He joined Indian
Motorcycle Corporation in November 2000 as President and CEO to lead the
revitalization of this 100-year old American-Icon Brand. He became Chairman in
June 2002, eventually overseeing the liquidation of the company under a
California procedure in January 2005. From 1996 to 2000, he was Chairman,
President and CEO of Gibson Greetings, Inc., a public company in the greeting
card and social expression business. He negotiated the sale of Gibson to
American Greetings Corporation in March 2000. From 1991-1995 he was President
and Chief Operating Officer of Skybox International, a sports and entertainment
trading card company, which he took public. Mr. O'Connell has led other branded
companies including President of Reebok Brands, North America, President of HBO
Video, Founder and President of Fox Video Games and Senior VP of the Electronics
Divisions at Mattel. He spent the first 14 years of his career in the food
business, in various marketing and operating roles. Mr. O'Connell is a
co-founder of Tuckerman Capital, a private equity fund in
Hanover, NH. He serves on the Advisory Boards of the Johnson Graduate School of
Management, the Personal Enterprise Program, and the Undergraduate Business
Program at Cornell University, where he earned his undergraduate and MBA
degrees.
Richard E. Wenz is a consultant and private investor and currently serves on
the Board of Directors of Hunter Fan Company and Inplex Corporation. From 2000
to 2002 Mr. Wenz was an operating partner/affiliate of DB Capital Partners, the
private equity arm of Deutsche Bank A.G. and served on the board of directors of
a number of portfolio companies including NewRoads, Inc. and Jenny Craig
International. Mr. Wenz also served as Chief Executive Officer of Jenny Craig
International during 2002. From 1997 to 2000 Mr. Wenz was President and Chief
Operating Officer of Safety 1st, Inc., a publicly traded juvenile products
company. During 1995 and 1996 Mr. Wenz was the Partner in charge of the Chicago
office with The Lucas Group, a business strategy consulting firm. Previous to
1995 Mr. Wenz held senior executive positions with Wilson Sporting Goods Co.,
Electrolux Corporation, The Regina Company and Professional Golf Corporation.
Mr. Wenz began his career in 1971 with Arthur Young & Company (predecessor of
Ernst & Young) and left the firm as a Partner in 1983. Mr. Wenz is a certified
public accountant.
ABOUT RADICA GAMES LIMITED
Radica Games Limited (Radica) is a Bermuda company headquartered in Hong Kong
(NASDAQ: RADA). Radica is a leading developer, manufacturer and distributor of a
diverse line of electronic entertainment products including electronic games,
youth electronics, video game accessories and high-tech toys. Radica has
subsidiaries in the U.S.A., Canada and the U.K., and a factory in Dongguan,
Southern China. More information about Radica can be found on the Internet at
www.radicagames.com.
-- END --
RADICA GAMES LIMITED
ANNOUNCES QUARTERLY CASH DIVIDEND
FOR IMMEDIATE RELEASE CONTACT: PATRICK S. FEELY
APRIL 12, 2005 CHIEF EXECUTIVE OFFICER
(LOS ANGELES, CALIFORNIA)
(626) 744 1150
DAVID C.W. HOWELL
PRESIDENT ASIA OPERATIONS
& CFO
(HONG KONG)
(852) 2688 4201
(HONG KONG) Radica Games Limited (NASDAQ: RADA) announced today that its Board
of Directors has declared a quarterly dividend of $0.045 per share. The dividend
will be payable on April 29, 2005, to shareholders of record as of April 20,
2005.
ABOUT RADICA GAMES LIMITED
Radica Games Limited (Radica) is a Bermuda company headquartered in Hong Kong
(NASDAQ: RADA). Radica is a leading developer, manufacturer and distributor of a
diverse line of electronic entertainment products including electronic games,
youth electronics, video game accessories and high-tech toys. Radica has
subsidiaries in the U.S.A., Canada and the U.K., and a factory in Dongguan,
Southern China. More information about Radica can be found on the Internet at
www.radicagames.com.
-- END --
RADICA GAMES LTD.
2004 ANNUAL REPORT
TABLE OF CONTENTS
LETTER TO SHAREHOLDERS........................................................2
MANAGEMENT'S DISCUSSION OF RESULTS............................................4
FINANCIAL INFORMATION........................................................15
DIRECTORS AND OFFICERS ......................................................43
CORPORATE INFORMATION .......................................................44
ABOUT RADICA:(R)
Radica Games Limited (NASDAQ: RADA) is a Bermuda company headquartered in Hong
Kong. Radica is a leading developer, manufacturer and distributor of a diverse
line of electronic entertainment products including electronic games, youth
electronics, video game accessories and high-tech toys. Radica has subsidiaries
in the USA, Canada and the UK, and a factory in Dongguan, Southern China. More
information about Radica can be found on the Internet at "www.radicagames.com."
FINANCIAL HIGHLIGHTS
OPERATING RESULTS
(US dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Net sales $ 123,399 $ 105,200 $ 124,646 $ 98,554 $ 106,696
Net income (loss) $ 3,456 $ 12,491 $ 11,934 $ (4,374) $ (18,099)
Diluted net income (loss) per share $ 0.18 $ 0.66 $ 0.65 $ (0.25) $ (1.03)
Weighted average number of common shares
and common equivalent shares 19,526 19,060 18,336 17,612 17,608
FINANCIAL POSITION AT DECEMBER 31,
(US dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Working capital $ 71,775 $ 65,616 $ 50,155 $ 36,709 $ 42,619
Total assets $109,941 $102,214 $ 95,302 $ 88,407 $ 99,315
Total liabilities $ 18,864 $ 13,058 $ 20,666 $ 25,355 $ 31,927
Shareholders' equity $ 91,077 $ 89,156 $ 74,636 $ 63,052 $ 67,388
1
TO OUR SHAREHOLDERS,
2004 represented one of the most difficult years in the toy and game industry in
recent history. The US market for toys and games declined by approximately 4%
and the worldwide markets were even weaker. Additionally oil prices skyrocketed
resulting in higher plastic and shipping costs for the industry. This came
during a period of intense price pressure from large retailers due to the soft
market. The result of these pressures weighed heavily on industry sales and
profits.
At Radica, through our continued emphasis on electronic innovation and building
our branded business, we overcame this weak market and grew sales by 17%.
However, our profits were severely impacted by the industry pricing and cost
squeeze exacerbated by our late entry into the retro plug-and-play TV game
sector with our Play TV Legends product line. Our late entry into this new
category created demand in excess of production capacity in our factory in the
third and fourth quarter that resulted in unusually high air freight costs and
outsourcing costs to improve product availability dates for our customers. These
large "one time" costs significantly decreased gross margins for the year. Plus,
since most of our growth occurred in this low margin plug-and-play sector where
gross margins are about half of our normal gross margins, our profit results
were disappointing with operating profit before the goodwill impairment
decreasing by 33% for the year. In addition, we needed to take a non-cash
impairment charge against our Gamester video game accessory (VGA) goodwill that
depressed net income further.
In spite of these factors we feel that many accomplishments were made during
2004 that demonstrate real promise for the future. Let me list some of the key
ones:
o We continued to successfully build our branded sales with
innovative new products like 20Q, Girl Tech Photo Booth and
Gamester Race Pac. In fact our Radica branded sales increased by
24% in 2004, and the compound annual growth rate (CAGR) of branded
products is 15% since 2001.
o 20Q, our artificial intelligence game, was a major success and
holds significant growth potential for the future. It was a total
sell out at Christmas and we are introducing two additional 20Q
products for 2005. Plus we have recently signed an agreement with
the inventor and a licensing agent to pursue cell phone, video
game platform and other licenses. On top of that we are
introducing five new language versions for the international
markets and have received excellent international distribution
support for 2005.
o We licensed the World Poker Tour for handheld and tabletop
electronic games that will be introduced in 2005. We look forward
to benefiting from the strong new trend toward Texas Hold'em Poker
by leveraging the top license in the category.
o Our new Sega Genesis retro plug-and-play TV game sold well at
Christmas and will be expanded with 5 exciting new products
featuring original retro hits like Sonic 2, Capcom's Street
Fighter II, Outrun 2019, Menacer and Codemaster's Sensible Soccer.
o We expanded Radica branded product sales outside the US at a rate
of 68% in 2004 due to strong performance of our subsidiaries in
the UK and Canada plus the solid growth of distributors in
Australia, New Zealand and France. On top of that we hired
Intertoy as our sales representative in Europe to leverage their
impressive network of distributors for 2005 and beyond.
o We diversified our customer base on a worldwide basis. No single
customer accounted for more than 25% of our sales in 2004 compared
to 32% in 2003, thanks not only to our international growth but
also expansion of sales to electronics retailers.
o We made significant progress with our Gamester video game
accessory product line in 2004 and recorded a profit for the first
time ever in this business. However, since profits were below
forecast we needed to take a non-cash goodwill impairment charge
of $3.5 million at the end of 2004. Our new strategy to focus on
premium products with a significant advantage to the consumer and
higher gross margins seems to be starting to take hold and we
believe will lead to profit growth in this sector in the long
term.
o We are launching an exciting new line of dolls in 2005 called
Cupcakes that will bring back a product line that had a proven
track record of success in the early 1990s and are sure to delight
girls once again.
2
o We announced and are now in the completion stages of a significant
increase in plant capacity that will be ready by the middle of
2005. This should allow us to continue our growth without
experiencing the production delays, air freight costs or large
outsourcing costs that plagued us in 2004.
o We have pulled forward the launch of an exciting new product line
called Cube World into the late fall and are limiting 2005
shipments to specialty retailers. In 2006 we will roll it out to
all our customers. Trade reception has been outstanding and gives
us hope that it has the potential to be our next hit handheld
product.
These accomplishments will help propel us forward into 2005 allowing us to
continue to grow while addressing the profit margin issues we suffered in 2004.
Even so, we recognize that the toy and game industry has recently been dealing
with difficult market challenges. We believe that some of these challenges have
the potential to normalize in 2005. We also believe that we learned a lot about
planning better for this type of adversity for future years and have continued
to improve our systems and management in this area.
In that regard, we were pleased to announce the addition of Ted Eischeid to our
staff in January in the position of President and Chief Operating Officer
reporting to Pat Feely, our CEO, who has been filling both positions since Bob
Davids' retirement in 1999. Given our growth opportunities for the future, the
time has come again to split the job so that Pat has more time to devote to
building our business and Ted can expand the time devoted to managing our
growing day to day operations. Ted is a seasoned toy industry executive with
particular skills in operational and financial management and has been an
outside director of Radica since 2003. We look forward to his contribution to
Radica.
So, looking to the future we continue to believe that Radica is in the "sweet
spot" of our industry because of our focus on electronic innovation. We believe
this gives us a strong competitive advantage to allow us to continue the strong
growth of Radica branded products we have achieved in recent years. As we move
forward we will continue this focus and endeavor to improve our financial model
by increased emphasis on product diversity, customer diversity and cost
reduction. With our emphasis on technology we like to think we have the key to
long-term success in the toy and game industry, and most importantly, to
delivering the benefits of this success to our shareholders.
Sincerely,
/s/ Patrick S. Feely /s/ Jon N. Bengtson
Patrick S. Feely Jon N. Bengtson
Chief Executive Officer Chariman of the Board
March 8, 2005 March 8, 2005
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2004 COMPARED TO FISCAL 2003
The following table sets forth items from our Consolidated Statements of
Operations as a percentage of net revenues:
Year ended December 31,
--------------------------
2004 2003
-------- --------
Net sales 100.0% 100.0%
Cost of sales 66.1% 62.1%
----- -----
Gross profit 33.9% 37.9%
Selling, general and administrative expenses 24.4% 23.8%
Research and development 3.4% 3.7%
Depreciation and amortization 1.4% 1.9%
Impairment of goodwill 2.9% --
Restructuring charge -- 0.1%
-------- --------
Operating income 1.9% 8.4%
Other income 0.6% 0.3%
Foreign currency gain, net 0.3% 0.2%
Interest income, net 0.6% 0.3%
-------- --------
Income before income taxes 3.5% 9.1%
(Provision) credit for income taxes (0.7%) 2.7%
-------- --------
Net income 2.8% 11.9%
======== ========
We reported a net profit for the year of $3.5 million or $0.18 per diluted share
compared to $12.5 million or $0.66 per diluted share for 2003. The decline in
net profit was in part the result of a pretax non-cash charge of $3.5 million
for impairment of goodwill for the VGA or Gamester business acquired in 1999.
Despite an increase in sales of $18.2 million that generated additional gross
profits of $6.2 million, pretax profit before goodwill impairment declined by
19% ($1.8 million) due largely to a sales mix shift to lower margin Play TV
Legends sales, which accounted for $0.5 million of the decline, increased air
freight ($1.5 million of the decline), outsourcing costs due to increases in
demand in Q3 and Q4 ($1.5 million of the decline), and increased selling and
advertising expenses ($3.5 million of the decline). Other factors contributing
to the profit decline included a $0.6m charge against an underperforming license
guarantee and inventory writedowns for certain discontinued product lines. The
effective tax rate was 19.5% and due to a favorable tax adjustment recorded in
Q4 of 2003 resulted in a significant increase in tax expense compared to 2003 of
$3.2 million for the 4th quarter and $3.7 million for the full year.
Sales for the year increased by 17.3% to $123.4 million from $105.2 million in
2003 due to the success of Play TV Legends, 20Q and the Gamester(R) Race Pac,
among other items. The following table shows the detailed revenue comparisons
for the year by segment:
4
Year ended December 31,
--------------------------
Product Lines 2004 2003
- ------------- -------- --------
(US$ in thousands)
Games and Youth Electronics Segment
Electronic Games $ 80,640 $ 62,374
Youth Electronics 17,038 15,227
Other Electronic Toys 3,490 --
Manufacturing Services 9,008 10,386
-------- --------
$110,176 $ 87,987
-------- --------
VGA Segment
Video Game Accessories $ 12,840 $ 14,294
Manufacturing Services 383 2,919
-------- --------
$ 13,223 $ 17,213
-------- --------
TOTAL $123,399 $105,200
======== ========
Gross profit margin for the year was 33.9% compared to 37.9% for the year ended
December 31, 2003. This decrease in gross margin was in large measure due to the
impact of higher mix of our lower margin Play TV Legends line plus the impact of
the previously mentioned provision for an under-performing license, inventory
writedowns for certain discontinued product lines and additional air freight and
product outsourcing costs incurred to meet increased demand in Q3 and Q4.
Operating expenses increased to $39.5 million for the year from $31.0 million in
2003. The increase was due to variable expenses resulting from increased sales
together with increased advertising expenditure ($8.8 million in fiscal year
ended 2004 compared to $6.2 million in fiscal year 2003), increased research and
development costs connected with external programming of software for Play TV
games and the $3.5 million charge for impairment of goodwill.
The following table shows the major operating expenses and income taxes:
Year ended December 31,
-----------------------
(US$ in millions) 2004 2003
---------- ---------
Advertising and co-op expenses $ 10.6 $ 7.6
Other selling and promotion expenses 2.2 1.8
Indirect salaries and bonus 8.8 8.3
Research and development expenses 4.2 3.9
Depreciation and amortization 1.7 2.0
Provision (credit) for income taxes 0.8 (2.9)
Impairment of goodwill 3.5 --
Other general and administrative expenses 8.4 7.4
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 2004 we had $40.1 million of cash and investment securities, and
net assets of $91.1 million as compared to $42.0 million and $89.2 million,
respectively, at December 31, 2003. Inventories increased to $26.8 million from
$15.5 million at December 31, 2003, reflecting current sales growth rates and
the reduction in expected shipments to a large customer in the 4th quarter of
2004 of products that are largely expected to be reordered in the first half by
that same customer. Receivables increased to $18.4 million from $15.4 million at
December 31, 2003 also due to higher volume of sales in the fourth quarter of
2004 compared to the same quarter in 2003.
5
In addition to our previously announced factory expansion, we plan to
significantly invest in new equipment for 2005 including major expansion of our
surface mount technology (SMT) capacity in compliance with European lead free
soldering regulations and replacement of certain factory equipment with more
efficient models. As a result, total capital expenditures for 2005 will be in
the range of $6 to $7 million.
Current liabilities were $18.9 million at December 31, 2004, an increase from
$13.1 million at December 31, 2003. This is primarily due to an increase in
payables for raw material for production of inventories needed to meet Q1 2005
demand.
Cash flows from operating activities, adjusted for the impact on proceeds and
purchases of trading securities, decreased from $10 million to $0.8 million due
primarily to increase in inventory levels at December 31, 2004 compared to
December 31, 2003.
Cash used in investing activities was $1.2 million compared to a net utilization
of $10 million in 2003. This decrease was caused by $10 million in investment
securities in 2003 offset by an increase in capital purchases related to the
factory expansion.
Cash used in financing activities was $1.9 million in 2004, up from $1.5 million
of cash used in 2003. This was the result of $3.0 million in dividends paid
during the year offset by funds from stock options exercised by directors and
employees.
During the normal course of business, we enter into licensing agreements and
commitments with various third parties for the use of their inventor concepts
and intellectual property. Certain of these agreements and commitments contain
provisions for guaranteed or minimum royalty amounts during the term of the
contracts. Additionally, we lease certain offices, warehouses and equipment
under various operating lease arrangements. In the normal course of business,
leases that expire will be renewed or replaced. Under the terms of a joint
venture agreement with the local government in Dongguan, we are also committed
to pay fees over the next 20 years.
As of December 31, 2004, we were obligated under various licensing, joint
venture agreements, non-cancelable operating leases and capital commitments
requiring future minimum payments as follows:
(US$ in thousands)
Total 2005 2006 2007 2008 2009 Thereafter
---------------------------------------------------------------------------------------
Operating leases $3,116 $ 720 $ 601 $ 374 $ 318 $ 204 $ 899
Licensing commitments 1,861 1,294 106 231 10 210 10
Joint venture fees 3,317 125 129 129 137 142 2,655
Capital commitments 571 571 -- -- -- -- --
---------------------------------------------------------------------------------------
Total minimum payments $8,865 $2,710 $ 836 $ 734 $ 465 $ 556 $3,564
=======================================================================================
We had no derivative instruments or off-balance sheet financing activities
during fiscal years 2003 and 2004. We believe that our existing cash and cash
equivalents and cash generated from operations are sufficient to satisfy the
current anticipated working capital needs of our core business.
Management believes that our existing 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. At December 31, 2004, we had general banking facilities including
overdraft and trade facilities totaling $3,798,000. 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.
6
FISCAL 2003 COMPARED TO FISCAL 2002
We reported net income for the year of $12.5 million or $0.66 per diluted share
compared to $11.9 million or $0.65 per diluted share for the same period in
2002. Sales for the year decreased by 15.6% to $105.2 million from $124.6
million in 2002 due to the reduction in "one-off" manufacturing business
generated by the production of the "Ekara" karaoke product manufactured for
Takara in 2002, reduced sales in the United Kingdom which was impacted by a
particularly weak fourth quarter retail environment and weaker than expected
sales of Barbie(TM) licensed products.
Our UK subsidiary experienced a large shift in its sales mix and gross sales
during 2003. Sales of video game accessories fell from $6.1 million in 2002 to
$2.2 million in 2003. This was primarily due to our decision to stop selling
less profitable commodity-type video game accessories such as memory cards,
cables and carrying bags and begin selling a more focused, profitable line that
includes products with unique, trademark and patent protected features. In the
fourth quarter of 2003, we wrote down our UK video game accessory inventory by
$1.25 million with plans to sell our remaining commodity product in 2004. Our
sales of electronic games in the UK were $8.0 million in 2003, up from $7.0
million in 2002. This was the result of management's focus on broadening our
electronic game distribution in the UK, which was achieved through increased
promotional spending and pursuing new retail outlets.
Summary of sales achieved from each category of products:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2003 2002
---------------------------- ----------------------------
% of Net Net % of Net Net
Product Lines Sales Value Sales Value Sales Value Sales Value
- --------------------------------------------------------- ------------- ------------- -------------
(US$ in thousands)
Games and Youth Electronics Segment
Electronic Games 59.3% $ 62,374 50.3% $ 62,684
Youth Electronics 14.5% 15,227 13.4% 16,744
Manufacturing Services 9.8% 10,385 19.8% 24,634
-------- -------- -------- --------
83.6% 87,986 83.5% 104,062
-------- -------- -------- --------
VGA Segment
Video Game Accessories 13.6% 14,294 12.7% 15,844
Manufacturing Services 2.8% 2,920 3.8% 4,740
-------- -------- -------- --------
16.4% 17,214 16.5% 20,584
-------- -------- -------- --------
Total 100.0% $105,200 100.0% $124,646
======== ======== ======== ========
Gross profit margin for the year was 38.6% compared to 37.8% for the year ended
December 31, 2002 as a result of a favorable product mix shifting from lower
margin OEM sales offset by a charge taken in the fourth quarter of $1.25 million
to reflect inventory write-downs related to our decision to exit the commodity
side of the video game accessories business and concentrate on the higher
margin, innovative product sector of the video game accessories market.
Operating expenses for the year decreased to $31.8 million from $34.6 million
for the year ended December 31, 2002. The decrease was the result of a decrease
in variable expenses. In addition, depreciation and amortization charges dropped
by $0.8 million for the year due to certain fixed assets that have become fully
amortized during the year.
During the fourth quarter we released the valuation allowance previously
provided against deferred taxes in the US. This, combined with a larger than
expected tax reimbursement in China, resulted in a net tax credit for the year
of $2.9 million.
The following table shows the major operating expenses and income taxes:
7
Year ended December 31,
-----------------------
(US$ in millions) 2003 2002
------- --------
Advertising and co-op expenses $ 7.6 $ 7.4
Other selling and promotion expenses 1.8 2.4
Indirect salaries and bonus 8.3 10.0
Research and development expenses 3.9 4.1
Depreciation and amortization 2.0 2.9
(Credit) provision for income taxes (2.9) 2.7
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with generally
accepted accounting principles in the United States. Management is required to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenue and expenses. Below
is a listing of accounting policies that we consider critical in preparing our
consolidated financial statements. These policies include estimates made by
management using the information available to them at the time the estimates are
made, but these estimates could change considerably if different information or
assumptions were used.
BAD DEBT ALLOWANCE
The bad debt allowance is an adjustment to customer trade receivables for
amounts that are determined to be uncollectible or partially uncollectible. The
bad debt allowance reduces gross trade receivables and is computed based on
management's best assessment of the impact on trade receivables in respect of
the business environment, customers' financial condition, historical trends and
customer disputes. Management believes the accounting estimate related to the
allowance for doubtful accounts is a critical accounting estimate because
changes in the assumptions used to develop the estimate could have a material
effect on selling and administrative expenses, net income and accounts
receivable.
We have put controls in place to minimize bad debt exposure. Revenue is
recognized provided that there are no uncertainties regarding customer
acceptance, vendor agreements are put in place documenting the specific terms of
the customer sales relationship or order, the sales price is fixed or
determinable and credit checks are conducted periodically to ensure that
collectibility is reasonably assured. Credit limits and payment terms are
established based on the underlying criteria that collectibility must be
reasonably assured at the levels of credit being extended. For customers
experiencing financial difficulties, management performs additional analysis and
may reduce credit limits or revoke credit based on the findings of the analysis.
Management may also restrict credit terms of its customers if circumstances
warrant by restricting payment terms to cash in advance, wire transfer or
domestic letter of credit.
The movement of the doubtful accounts allowance by geographic region was as
follows for 2004:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Allowance for Doubtful Accounts
- -------------------------------
North America $ 208 $ 1 $ (83) $ 126
Europe 43 5 (26) 22
----- ----- ----- -----
$ 251 $ 6 $(109) $ 148
===== ===== ===== =====
Asia sales are primarily to third-party distributors and manufacturing services
customers. These sales are generally secured by an irrevocable letter of credit
resulting in no historical bad debts writeoffs and therefore no allowance for
bad debts has been made. The North American utilization of the provision was for
the write off of unpaid receivables deemed uncollectible for several small
customers. The increase to the European provision was made through the third
quarter and was based on historical utilization rates as a percentage of sales.
At the end of Q3, an evaluation of the UK
8
provision was made and $26k of the provision was released, which consists of the
all of the 2004 utilization of the European provision.
On a consolidated basis, our five largest customers, Wal-mart (US), Toys R Us
(US), Target (US), Argos (UK) and Hasbro (Asia), account for 55.3% of 2004 sales
and 67% of total receivables at December 31, 2004. If any of these retailers
were to experience financial difficulties, it could expose us to significant bad
debt charges and related declines in earnings. Additionally, deterioration in
the retail environment or the economy could adversely impact the trade
receivables valuation which would increase our bad debt allowance, thus
decreasing our earnings.
The following table summaries our doubtful accounts provision at December 31:
(US$ in thousands) 2004 2003 2002
------ ------- ------
Allowance for bad debts $ 148 $ 251 $ 315
As a percentage of net sales 0.1% 0.2% 0.3%
Management believes that the current doubtful accounts allowance is adequate to
provide for our expected probable bad debt losses.
ALLOWANCE FOR SALES RETURNS
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. Management believes this to be a
critical accounting estimate because changes in the assumptions used to develop
this estimate could materially affect key financial measures, such as sales, net
income and receivables.
The movement in the allowance for estimated sales returns by geographic region
was as follows for 2004:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Allowance for Estimated Sales Returns
- -------------------------------------
North America $ 284 $ 350 $ (333) $ 301
Europe 1,106 795 (1,278) 623
--------------- --------------- --------------- ---------------
$ 1,390 $ 1,145 $ (1,611) $ 924
=============== =============== =============== ===============
The utilization of the allowance was mostly related to the return of various
defective product (net of warranty cost) and over stock of products from
customers which were anticipated at the end of 2003 and during 2004. The
Company's US sales terms and policies do not allow for the return of
non-defective products; however such a return may occur infrequently if the
Company can maintain the same economic benefit by reselling the product at a
similar margin. In keeping with industry practice, the Company does allow for
the return of non-defective products in the UK. In the UK, the return allowance
balance is adjusted monthly as a percentage of the prior six months of sales; in
the US, the return allowance is adjusted quarterly as a percentage of the prior
six months' sales. The percentage is based on historical data and is reviewed
quarterly. Defective product returns can be reliably estimated based on past
history and do not fluctuate widely from quarter to quarter. Non-defective
returns are much more difficult to estimate due to the unpredictability of
consumer tastes.
The following table summarizes our sales return provision at December 31:
9
(US$ in thousands) 2004 2003 2002
--------- ---------- ----------
Allowance for sales returns $ 924 $ 1,390 $ 1,247
As a percentage of net sales 0.7% 1.3% 1.0%
The 2004 decline in the allowance as a percentage of net sales from 2003 is the
result of quality improvement efforts and a strategic initiative in the US to
move our customers from defective return programs to warranty allowance
programs. Defective return programs typically grant return credit to customers
for all products returned to their stores as defective. A warranty allowance is
a flat, negotiated allowance taken as a percentage of sales and is typically
preferable to defective returns because liberal customer return policies
generate higher return rates than the negotiated warranty allowances.
Additionally, sales to our third-party distributors, which have no right of
return, have increased significantly in 2004, reducing the need for the
allowance for returns.
Management believes that the current allowance for estimated sales returns is
adequate to provide for 2004 related sales returns expected to be received
during 2005. If defective returns were to exceed historical estimates, or if we
were to experience large overstock returns, then we may have to take higher than
anticipated charges in order to adequately increase the allowance which would
decrease our earnings. For example, if in 2005, we were to experience returns
resulting from a recall or overstocked product that caused a 25% increase from
our estimated sales return provisions for 2004 that were based on historical
return data, the impact would be roughly $300,000. Although our estimates were
primarily based on historical data, there is no way to anticipate such an
increase as recalls and poor sell through cannot be reliably predicted.
ALLOWANCE FOR SALES, MARKETING AND ADVERTISING EXPENSES
We record an allowance for sales, marketing and advertising costs agreed with
certain customers. Management believes this to be a critical accounting estimate
because changes in the assumptions used to develop this estimate could
materially affect key financial measures, such as selling and administrative
expenses, net income and short-term liabilities. These allowances are based on
specific dollar-value programs or percentages of sales, depending on how the
program is negotiated with the individual customer. The largest of these
allowances is for accrued sales expenses; the movement of this allowance by
geographic region in 2004 was as follows:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Accrued Sales Expenses Allowance
- --------------------------------
North America $ 2,428 $ 1,826 $ (2,866) $ 1,388
Europe 465 1,008 (950) 523
--------------- --------------- --------------- ---------------
$ 2,893 $ 2,834 $ (3,816) $ 1,911
=============== =============== =============== ===============
The charges or provisions to the North American and European allowances were
recorded monthly based on the cumulative total of the amounts granted under
individual customer sales programs, including volume rebates and co-op
advertising credits. The utilization of the provisions related to sales
discounts subsequently provided and customer claims made under various sales
programs throughout the year. The utilization of the provision can be materially
impacted by sell-through of our product at retail because poor sell through can
result in increased markdown or co-operative advertising expenditures. We
request that all customers submit claims for annual sales and advertising
programs by no later than February 28th of the subsequent year but typically we
receive significant claims through June 30th of the subsequent year. At the end
of the third and fourth quarter, management assesses the remaining provisions
from the prior year and releases any provisions that we believe will not be
utilized. At the end of the third quarter and
10
fourth quarters of 2004, we released $174,000 and $313,000 respectively of prior
year accrued balances into the income statement that we believe will not be
utilized or claimed.
The following table summarizes our sales expense allowance at December 31:
(US$ in thousands) 2004 2003 2002
-------- --------- ---------
Allowance for sales expenses $ 1,911 $ 2,893 $ 3,591
As a percentage of net sales 1.5% 2.8% 2.9%
The decrease in the allowances for sales expenses as a percentage of total sales
is the result of an effort by management to replace allowances that were based
on a certain percentage of sales with allowance that are based on specific
advertising and promotional targets agreed to at the beginning of the year and
applied to Radica products.
Management has reviewed its existing allowances for sales, marketing and
advertising and believes them to be adequate at year-end. Several factors,
including poor sell-through of our product at retail could result in management
having to authorize higher than anticipated increases to the allowance, which
would decrease our earnings. We make every effort to control the inventories of
individual products that we carry at retail in order to avoid overstocked
product and subsequent markdowns of those products. However, we cannot predict
consumer reaction to new products or if similar product introductions by
competitors will have an adverse reaction on sales of our existing products.
This unpredictability exposes us to potentially large charges to the allowance
for sales expense, the total impact of which depends on several variables. The
largest of these variables is the volume of slow-moving inventory at retail and
the per-unit markdown of the product. For example, there are collectively almost
6,500 individual Wal-mart, Kmart, Target and Toys R US stores in the US. If we
were to have a product that was fully distributed in those stores and the stores
ended up with unanticipated excess inventories of 20 pieces per store and we
offered a $5 markdown on each unit, the total impact of that charge would be a
decrease in pretax earnings of $650,000. However, if that product had
distribution in half of the total stores, the markdown would be $325,000. In
accruing for the sales expense allowance, we include a charge in anticipation of
such events. However, we typically are not aware that an overstock situation has
occurred until the fourth quarter of the year.
WARRANTY
We record a warranty allowance for costs related to defective product sold to
customers. Management believes warranty allowance to be a critical accounting
estimate because changes in the assumptions used to develop this estimate could
materially affect key financial measures, such as cost of sales and net income.
Additionally, the warranty allowance is based on historical trends and
management's best assessment of what the defective return percentage will be for
a given product. Projecting defective return percentages on new products can
lead to deviations between recorded warranty allowances and actual defective
returns. Significant negative deviations could have a material impact on our
financial results, if large amounts of finished goods were found to be
defective.
The movement of this allowance by geographic region is as follows:
Balance at Balance at
beginning Charged to Utilization / end of
(US$ in thousands) of year income statement write-offs year
------- ---------------- ---------- ----
Warranty Allowance
- ------------------
North America $ 841 $ 1,399 $ (1,469) $ 771
Europe 199 396 (405) 190
Other countries -- 109 -- 109
--------------- --------------- --------------- ---------------
$ 1,040 $ 1,904 $ (1,874) $ 1,070
=============== =============== =============== ===============
11
The following table summarizes our warranty allowance at December 31:
(US$ in thousands) 2004 2003 2002
--------- --------- --------
Warranty allowance $ 1,070 $ 1,040 $ 1,040
As a percentage of net sales 0.9% 1.0% 0.8%
Warranty allowance as a percentage of total sales has remained consistent over
the past three years. Despite our continued efforts at improving the quality of
our products, there can be no assurance that we will continue to see the same
defective product rates. New product introductions, changes to existing products
or changes in material vendors and manufacturing subcontractors could all have a
negative impact on our defective rates that could cause us to take additional
charges to our allowance. For example, an increase in defective returns and
allowances of 1% of 2004 sales would have decreased pretax earnings by roughly
$1.2 million.
INVENTORIES
We value our inventory at the lower of cost or market. Inventory write-downs are
recorded for slow-moving and obsolete inventory. Management uses estimates to
record these write-downs. Management believes this to be a critical accounting
estimate because changes in the assumptions used to develop this estimate could
materially affect key financial measures, such as cost of sales, net income and
inventory. Slow-moving and obsolete inventories are written-down to their
estimated market value depending on the length of time the product has been in
inventory and the forecast sales for the product over the course of the
following year. Changes in public and consumer preferences and demand for
product or changes in the buying patterns and inventory management of customers
could adversely impact the level of inventory provision.
The following table summarizes our allowance for obsolete inventory at December
31:
(US$ in thousands) 2004 2003 2002
--------- --------- --------
Allowance for obsolescence $ 1,353 $ 2,228 $ 4,193
As a percentage of total inventory 4.8% 12.6% 17.1%
During 2002 and 2003, we took significant provisions against slow-moving,
commodity-type video game accessory products in the US, UK and Asia, most of
which have been sold. This resulted in higher allowances as a percentage of
total inventory than we experienced in 2004.
Orders are subject to cancellation or change at any time prior to shipment since
actual shipments of products ordered and order cancellation rates are affected
by customer acceptance of product lines, strength of competing products,
marketing strategies of retailers, changes in buying patterns of retailers and
consumers and overall economic conditions. Unexpected changes in these factors
could result in excess inventory in a particular product line, which could cause
management to make material adjustments to the allowance.
Management reviews its inventories at the end of each quarter on an item by item
basis and identifies products that it believes are obsolete or slow-moving.
Management records a provision for a specific item based on several factors,
including sell through data, the level of inventory at customers' retail stores,
sales price of the item and length of time the item has been in inventory.
IMPAIRMENT OF GOODWILL
In accordance with SFAS No. 142, goodwill and intangible assets not subject to
amortization are tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the asset might be
impaired. At the end of the fiscal year ended December 31, 2004, we completed
testing of the goodwill related to Radica's Gamester(R) or video game accessory
(VGA) segment. In determining the fair value of the VGA segment, a discounted
cash flow analysis was performed in which the net present value of cash flows
were calculated based on a
12
five-year projected profit and loss and working capital requirements. The
estimated net present value of the cash flows was then added to an estimated
residual value that was calculated by taking a multiple of projected earnings
before interest, taxes, depreciation and amortization at the year end of year
five to arrive at the fair value of the VGA segment. Based on a comparison of
the estimated fair value of the VGA segment to the VGA's carrying value,
including goodwill, a second step was performed which compared the implied fair
value of the reporting unit's goodwill to the book value of goodwill. In
determining fair value of the reporting unit goodwill, the fair values of the
tangible net assets and recognized and unrecognized intangible assets are
deducted from the fair value of the reporting unit. If the implied fair value of
reporting unit goodwill is lower than its carrying amount, goodwill is
determined to be impaired and is written down to its implied fair value. After
performing this annual evaluation, we recognized an impairment charge related to
goodwill of $3.5 million for the year ended December 31, 2004.
Despite the small profit for the VGA segment in 2004 before the goodwill
impairment adjustment, the reason for the decline in the estimated fair value of
the VGA's segment from the previous year was primarily the result of lower sales
forecasts for fiscal years 2005 through 2009. The adjustment to projected annual
sales from prior year was based on our current strategy of concentrating on the
innovative, higher margin sector of the market. This improved the projected
gross margins and operating margins as a percentage of sales in our model, but
decreased the total operating margin and cash flows. We believe that this new
model portrays a more accurate picture of our future cash flows and that our new
strategy limits the large closeout returns and price pressures that made the VGA
segment unprofitable from 1999 through 2003.
DEFERRED TAX ASSETS
We record valuation allowances against our deferred tax assets. In determining
the allowance, management considers all available evidence for certain tax
credit, net operating loss and capital loss carryforwards. The evidence used in
assessing the need for valuation allowances includes the use of business
planning, projections of future taxable income and corporate-wide tax planning.
Based primarily in our UK subsidiary's failure to generate profits, we recorded
our allowance against the entire UK deferred tax asset of $4.5 million.
Differences in actual results from projections used in determining the valuation
allowances could result in future adjustments to the allowance.
During 2003, we put a new management team in place in the UK and altered the
distribution strategy in that market. We expect these moves to return our UK
operations to profitability. If this occurs, depending on the level of actual
and projected profitability, we would then reverse the valuation allowance,
potentially creating a one-time credit to income tax expense in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 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. We do 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 non monetary 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. We do not believe
that the adoption of SFAS 153 will have a significant effect on its financial
statements.
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. 123(R), all forms of share-based payments
to employees, including employee stock options and employee stock purchase
plans, would be
13
treated the same as any other form of compensation by recognizing the related
cost in the statement of operations. This pronouncement eliminates the ability
to account for stock-based compensation transactions using APB No. 25 and
generally would require that such transactions be accounted for using a
fair-value based method. For the Company, SFAS No. 123(R) is effective for
awards and stock options granted, modified or settled in cash in interim or
annual periods beginning after June 15, 2005, which for the Company will be its
third quarter ending September 30, 2005. SFAS No. 123(R) provides transition
alternatives for public companies to restate prior interim periods or prior
years. We are in the process of evaluating the impact of this standard on its
financial statements and will adopt SFAS 123(R) on July 1, 2005.
14
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(US dollars in thousands, except share data) 2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 27,614 $ 13,944
Investment securities 12,456 28,009
Accounts receivable, net of allowances for doubtful accounts
of $148 ($251 in 2003) 18,359 15,360
Inventories 26,818 15,503
Prepaid expenses and other current assets 3,374 2,748
Income taxes receivable 168 1,404
Deferred income taxes and charges 1,850 1,706
-------- --------
Total current assets 90,639 78,674
Property, plant and equipment, net 11,480 11,908
Goodwill 6,015 9,551
Other assets 854 875
Deferred income taxes 953 1,206
-------- --------
Total assets $109,941 $102,214
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,770 $ 6,350
Accrued payroll and employee benefits 1,486 1,353
Accrued warranty expenses 1,070 1,040
Other accrued liabilities 5,251 3,976
Income taxes payable 287 339
-------- --------
Total current liabilities 18,864 13,058
-------- --------
Total liabilities 18,864 13,058
-------- --------
Shareholders' equity:
Common stock par value $0.01 each, 100,000,000 shares authorized,
18,738,112 shares issued and outstanding (18,225,204 in 2003) 187 182
Additional paid-in capital 4,610 3,517
Retained earnings 85,909 85,437
Accumulated other comprehensive income 371 20
-------- --------
Total shareholders' equity 91,077 89,156
-------- --------
Commitments and contingencies
Total liabilities and shareholders' equity $109,941 $102,214
======== ========
/s/ Jon N. Bengtson /s/ David C.W. Howell
- --------------------------- ---------------------------
Director Director
See accompanying notes to the consolidated financial statements.
15
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(US dollars in thousands, 2004 2003* 2002*
except per share data) ------------ ------------ ------------
Revenues:
Net sales $ 123,399 $ 105,200 $ 124,646
Cost of goods sold
(exclusive of items shown separately below) (81,576) (65,350) (78,138)
------------ ------------ ------------
Gross profit 41,823 39,850 46,508
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses (30,071) (25,000) (27,038)
Research and development (4,164) (3,895) (4,094)
Depreciation (1,693) (2,033) (2,438)
Amortization of goodwill and intangible assets -- -- (420)
Impairment of goodwill (3,536) -- --
Restructuring charge -- (87) --
------------ ------------ ------------
Total operating expenses (39,464) (31,015) (33,990)
------------ ------------ ------------
Operating income 2,359 8,835 12,518
Other income 754 317 306
Foreign currency gain, net 417 178 1,744
Interest income 765 344 253
Interest expense -- (49) (218)
------------ ------------ ------------
Income before income taxes 4,295 9,625 14,603
(Provision) credit for income taxes (839) 2,866 (2,669)
------------ ------------ ------------
Net income $ 3,456 $ 12,491 $ 11,934
============ ============ ============
Net income per share:
Basic $ 0.19 $ 0.69 $ 0.67
============ ============ ============
Diluted $ 0.18 $ 0.66 $ 0.65
============ ============ ============
Weighted average number of
common and common equivalent shares:
Basic 18,653,471 18,016,789 17,725,879
============ ============ ============
Diluted 19,525,757 19,059,974 18,335,827
============ ============ ============
Cash dividends paid per share
(4 cents declared and paid for each
quarter ended March 31, June 30,
September 30, and December 31, 2004) $ 0.16 $ -- $ --
============ ============ ============
* Reclassified to conform with 2004 presentation.
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECMEBER 31, 2004, 2003 AND 2002
(US dollars in thousands) Common stock Accumulated
------------ Additional Warrants to other Total
Number paid-in acquire Retained comprehensive shareholders'
of shares Amount capital common stock earnings income (loss) equity
---------- ---------- ---------- ------------ ---------- ------------- -------------
Balance at December 31, 2001 17,646,740 $ 176 $ 1,549 $ 445 $ 61,012 $ (130) $ 63,052
Issuance of stock 4,945 1 20 -- -- -- 21
Stock options exercised, inclusive 144,446 1 306 -- -- -- 307
of nil tax
Expiration of stock warrants -- -- 445 (445) -- -- --
Net income -- -- -- -- 11,934 -- 11,934
Foreign currency translation, -- -- -- -- -- (678) (678)
net of nil tax
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ -- $ 72,946 $ (808) $ 74,636
Issuance of stock 3,073 -- 20 -- -- -- 20
Stock options exercised, inclusive 426,000 4 1,177 -- -- -- 1,181
of $44 tax benefit
Net income -- -- -- -- 12,491 -- 12,491
Unrealized loss on investment -- -- -- -- -- (46) (46)
securities available-for-sale,
net of nil tax
Foreign currency translation, -- -- -- -- -- 874 874
net of nil tax
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ -- $ 85,437 $ 20 $ 89,156
Issuance of stock 2,272 -- 21 -- -- -- 21
Stock options exercised, inclusive 510,636 5 1,072 -- -- -- 1,077
of nil tax
Dividends paid -- -- -- -- (2,984) -- (2,984)
Net income -- -- -- -- 3,456 -- 3,456
Unrealized loss on investment -- -- -- -- -- (90) (90)
securities available-for-sale,
net of nil tax
Foreign currency translation, -- -- -- -- -- 441 441
net of nil tax
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 18,738,112 $ 187 $ 4,610 $ -- $ 85,909 $ 371 $ 91,077
========== ========== ========== ========== ========== ========== ==========
The comprehensive income (loss) of the Company, which represents the aggregate
of the net income, unrealized loss on investment securities available for sale
and the foreign currency translation adjustments, was $3,807, $13,319 and
$11,256 for the years ended December 31, 2004, 2003 and 2002, respectively.
See accompanying notes to the consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(US dollars in thousands) 2004 2003* 2002
-------- -------- --------
Cash flow from operating activities:
Net income $ 3,456 $ 12,491 $ 11,934
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 109 (2,947) 2,134
Depreciation 1,693 2,033 2,438
Amortization -- -- 420
Impairment of goodwill 3,536 -- --
(Gain) loss on disposal and write off of property, plant and equipment (19) 102 57
Compensatory elements of stock issuances 21 20 21
Gain on trading securities (108) -- --
Unrealized gain on trading securities (1) (55) --
Proceeds from sale of trading securities 15,572 -- --
Purchases of trading securities -- (18,000) --
Changes in current assets and liabilities:
Increase in accounts receivable (2,999) (221) (1,271)
(Increase) decrease in inventories (11,315) 4,882 (3,206)
(Increase) decrease in prepaid expenses and other current assets (626) (1,074) 609
Increase (decrease) in accounts payable 4,420 (1,624) (1,227)
Increase (decrease) in accrued payroll and employee benefits 133 (1,400) 1,810
Increase in accrued warranty expenses 30 -- 140
Increase (decrease) in other accrued liabilities 1,275 (1,864) (1,645)
Increase (decrease) in net income taxes receivable 1,184 (443) (198)
-------- -------- --------
Net cash provided by (used in) operating activities 16,361 (8,100) 12,016
-------- -------- --------
Cash flow from investing activities:
Purchases of available-for-sale securities -- (10,000) --
Proceeds from sale of property, plant and equipment 1,292 955 201
Purchase of property, plant and equipment (2,517) (943) (1,316)
-------- -------- --------
Net cash used in investing activities (1,225) (9,988) (1,115)
-------- -------- --------
Cash flow from financing activities:
Funds from stock options exercised 1,077 1,137 307
Dividends paid (2,984) -- --
Decrease in short-term borrowings -- (846) --
Repayment of long-term debt -- (1,825) (3,648)
-------- -------- --------
Net cash used in financing activities (1,907) (1,534) (3,341)
-------- -------- --------
Effect of currency exchange rate change 441 874 (678)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 13,670 (18,748) 6,882
Cash and cash equivalents:
Beginning of year 13,944 32,692 25,810
-------- -------- --------
End of year $ 27,614 $ 13,944 $ 32,692
======== ======== ========
Supplementary disclosures of cash flow information:
Interest paid $ -- $ 50 $ 220
Income taxes paid 1,084 538 1,314
* Reclassified to conform with 2004 presentation.
See accompanying notes to the consolidated financial statements.
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(US dollars in thousands, except per share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
Radica Games Limited (the "Company") manufactures and markets a diverse
line of electronic entertainment products covering multiple product lines -
casino and heritage electronic games, mechanical slot banks, youth
electronic games, tabletop games, Play TV(R) games, Girl Tech(R) and
Barbie(TM) girls electronic lines, the Twinkleberries(TM) and Cupcakes(R)
doll lines, the Nitro Battlerz(TM) and Big Trouble(TM) remote control car
products, the Street Muttz(TM) plush line and video game accessories sold
under the Gamester(R) brand. The Company is headquartered in Hong Kong and
manufactures its products in its factory in Southern China. In 1994 the
Company went public when its shares began trading on the NASDAQ exchange.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation. The accompanying
consolidated financial statements have been prepared in accordance with
United States generally accepted accounting principles and are presented in
US dollars.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in bank accounts,
interest-bearing savings accounts, and time certificates with an initial
term of less than three months. For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.
Investment Securities
Investment securities at December 31, 2004 consist of certificates of
deposits and money-market mutual fund investments. The Company classifies
its investment securities in one of three categories: trading, available
for sale, or held to maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity debt securities are those securities in which the Company
has the ability and intent to hold the security until maturity. All
securities not included in trading or held to maturity are classified as
available for sale.
Trading and available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of other comprehensive income until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis.
A decline in the fair value of an investment security below cost that is
deemed to be other-than-temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. In determining whether impairment is
other-than-temporary, the Company considers whether it has the ability and
intent to hold the investment for a reasonable period of time sufficient
for a forecasted recovery of fair value up to (or beyond) the cost of
investment and considers whether evidence indicating the cost of the
investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. Evidence considered in this assessment includes
the cause of the decline, the severity and duration of the decline, changes
in value subsequent to year-end and forecast performance of the investment.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity or available-for-sale security as an adjustment to
yield using the effective-interest method. Dividend and interest income are
recognized when earned.
19
Trade Receivables
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on
historical write-off experience. The Company reviews its allowance for
doubtful accounts monthly. Past due balances over 90 days and over a
specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance-sheet credit exposure
related to its customers.
Inventories
Inventories are stated at the lower of cost, determined by the weighted
average method, or market. Write-downs are provided for potentially slow
moving and obsolete inventory or inventory of which estimated net
realizable value is below its carrying value based on management's analysis
of inventory levels and future expected sales.
Depreciation and Amortization of Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is provided on the straight-line method over the following
estimated useful lives of the assets:
Plant equipment and machinery 4 to 5 years
Furniture and equipment 3 to 7 years
All of the Company's land and building holdings in the PRC and Hong Kong
are considered to be leasehold property and are amortized on a
straight-line basis over the term of the lease, ranging from 30 to 50
years. The buildings on the land are also depreciated over the same period.
Costs of leasehold improvements are amortized over the economic life of the
asset (ranging from 3 to 5 years) or the term of the lease, whichever is
shorter. Upon sale or retirement of property, plant and equipment, the
costs and related accumulated depreciation or amortization are eliminated
and any resulting gain or loss is included in the statement of operations.
The Company's real property in Hong Kong consists of purchased office space
in an office building that was built on land that is owned by the Hong Kong
government. When the Company purchased the office space, there was no
separate amount paid to the government for land use rights because the land
continues to be owned by the Hong Kong government. Also, there is no
ongoing obligation to the government to pay any land use right fee. In Hong
Kong, substantially all properties or buildings are built on land owned by
the Hong Kong Government for which a developer or owner is required to pay
a land premium fee to the government for the land use rights. This fee is
paid by the developer at the time the developer commences the construction
of the building. The developer is solely responsible for the payment.
Properties, including office space, in Hong Kong are purchased and sold at
their current market value with no additional lease payment required to be
made. The Company amortizes its properties in Hong Kong over a fifty-year
period as all leases are set at fifty years since 1997, when Hong Kong was
handed back to the Chinese government.
The Company expenses all mold costs in the year of purchase or, for
internally produced molds, in the year of construction.
Goodwill
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are
not amortized, but instead tested for impairment at least annually or if
certain circumstances indicate a possible impairment may exist, in
accordance with the provisions of SFAS No. 142. The Company evaluates the
recoverability of goodwill and indefinite lived intangible assets using a
two-step impairment test approach at the reporting unit level at the end of
each year. In the first step, the fair value of the reporting unit is
compared to its carrying value including goodwill. The fair value of the
reporting unit is determined based upon a combination of multiple of
earnings, discounted future cash flows and the projected profitability of
the market in which it operates. In the case that the fair value of the
reporting unit is less than the carrying value, a second step is performed
which compares the implied fair value of the reporting unit's goodwill to
the book value of the goodwill. In determining
20
the implied fair value of the reporting unit goodwill, the fair values of
the tangible net assets and recognized and unrecognized intangible assets
is deducted from the fair value of the reporting unit. If the implied fair
value of reporting unit goodwill is lower than its carrying amount,
goodwill is impaired and is written down to its implied fair value.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation in 2002, the Company performed the required transitional
impairment review of goodwill as of January 1, 2002. For each of the
reporting units, the estimated fair value of the reporting unit exceeded
their carrying value and therefore no writedown of goodwill was required.
Impairment of Long-lived Assets
The Company evaluates the recoverability of long-lived assets in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 requires long-lived assets, such as property, plant,
and equipment, and purchased intangibles subject to amortization, 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 estimated undiscounted future 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 which is the amount at which the asset can be bought and
sold in a current transaction between willing parties.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment and
passage of title, which is in accordance with the terms of the sale, FOB
shipping point. This represents the point at which the customer takes
ownership and assumes risk of loss. Prior to 2003, the Company had
consignment agreements with certain European distributors and recorded
these shipments as revenues upon confirmation of sell-through by the
distributor.
The Company records reductions to gross revenue for customer incentive
programs, such as discounts to retailers and volume-based cash incentives.
Volume-based cash incentives are determined based on the sale agreement
with each individual customer. The Company also records provisions against
the gross revenue for estimated product returns and allowances in the
period when the related revenue is recorded. These estimates are based on
factors that include, but are not limited to, historical sales returns,
analyses of credit memo activities and current known trends. Should these
actual product returns and allowances exceed those estimates, additional
reductions to the Company's revenue would result.
Shipping and Handling Costs
The Company records costs incurred for the shipping and handling of the
products as cost of goods sold in the consolidated statement of operations.
Warranty
The Company provides reserves for the estimated cost of product warranties
at the time revenue is recognized. The estimated cost of warranty
obligations is based on historical experience of known product failure
rates and the terms of product warranties.
Advertising
Advertising costs are expensed as incurred. The cost of media related
advertising is incurred by the Company at the earlier of the first time
that the advertising takes place or the invoice date for the media
purchase. In addition, the Company offers discounts to customers who
advertise Radica products through cooperative advertising programs. The
cooperative advertising costs associated with customer benefit programs are
accrued as the related revenues are recognized. The cooperative advertising
costs are characterized as a cost if the Company receives a benefit that is
sufficiently separable from the retailer's purchase of the Company's
products and the fair value of the cooperative advertising benefit is
determinable and greater than or equal to the cooperative advertising
allowance provided to the retailer. Cooperative advertising costs not
meeting these criteria are recorded as reductions in revenue. Advertising
and cooperative advertising expenses are recorded as selling, general and
administrative expenses in the
21
consolidated statement of operations and amounted to approximately $10,620,
$7,614 and $7,350 for the years ended December 31, 2004, 2003 and 2002,
respectively.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $4,164, $3,895, and $4,094 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Foreign Currency Translation
Asset and liabilities of foreign subsidiaries whose functional currency is
not the US dollars are translated into US dollars using the exchange rate
on the balance sheet date. Revenues and expenses are translated at average
rates prevailing during the year. The gains and losses resulting from
translation of financial statements of foreign subsidiaries are recorded as
a separate component of accumulated other comprehensive income (loss)
within shareholders' equity. Cumulative translation adjustments are
recognized as income or expense upon disposal or liquidation of a foreign
subsidiary.
Post-retirement and Post-employment Benefits
The Company does not have any post-retirement or post-employment benefit
plans. The Company makes contributions to certain defined contribution
arrangements with groups of employees. The Company's contributions and any
related costs and are expensed as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method for
financial accounting. Deferred income tax liabilities and assets are
recorded to reflect the tax consequences in future years of differences
between the taxable bases of assets and liabilities and the respective
financial statement carrying amounts at each period end and operating loss
carryforwards using enacted tax rates expected to apply in the year
temporary differences are expected to be recovered or settled. A valuation
allowance is recognized for any portion of the deferred tax asset for which
realization is not deemed to be more likely than not. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Stock-based Compensation
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, 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 (See Note 11). The following table illustrates the effect on net
income if the fair value based method had been applied to all outstanding
and unvested awards in the period:
2004 2003 2002
-------- -------- --------
Net income as reported $ 3,456 $ 12,491 $ 11,934
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (551) (496) (746)
-------- -------- --------
Pro forma net income $ 2,905 $ 11,995 $ 11,188
======== ======== ========
Earnings Per Share
Basic earnings per share is based on the weighted average number of shares
of common stock, and with respect to diluted earnings per share, also
includes the effect of all dilutive potential common stock outstanding.
Dilutive potential common stock results from dilutive stock options and
warrants. The effect of such dilutive potential
22
common stock on earnings per share is computed using the treasury stock
method. All potentially dilutive securities are excluded from the
computation in loss making periods as their inclusion would be
anti-dilutive.
Comprehensive Income
Other comprehensive income refers to revenues, expenses, gains and losses
that under United States generally accepted accounting principles are
included in comprehensive income but are excluded from net income as these
amounts are recorded as a component of shareholders' equity. The Company's
other comprehensive income represented foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities, net of tax.
Use of Estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of certain assets,
liabilities, revenues and expenses and the disclosure of contingent assets
and liabilities as of and during the reporting periods. Significant items
subject to such estimates and assumptions include the carrying amount of
goodwill, property, plant and equipment and inventories, allowances for
doubtful receivables and deferred income tax assets and reserves for
warranties, product returns and customer sale incentives. Actual results
may differ from such estimates. Differences from those estimates are
recorded in the period they become known.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment can be
reasonably estimated.
Recently Issued Accounting Standards
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 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 non monetary 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.
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. 123(R), 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 eliminates the ability to account for
stock-based compensation transactions using APB No. 25 and generally would
require that such transactions be accounted for using a fair-value based
method. For the Company, SFAS No. 123(R) is effective for awards and stock
options granted, modified or settled in cash in interim or annual periods
beginning after June 15, 2005, which for the Company will be its third
quarter ending September 30, 2005. SFAS No. 123(R) provides transition
alternatives for public companies to restate prior interim periods or prior
years. The Company is in the process of evaluating the impact of this
standard on its financial statements and will adopt SFAS 123(R) on July 1,
2005.
23
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation. The purchase of trading investments in
2003 was reclassified from investing activities to operating activities in
order to conform to the provisions of SFAS No. 115. The reclassification
resulted in a reduction of $18,000 in the amount of net cash flow provided
by operating activities from $9,900 (as originally reported) to net cash
flow used in operating activities of $8,100 and a corresponding change in
the amount of net cash flows used in investing activities from $27,988 (as
originally reported) to net cash flows used in investing activities of
$9,988.
3. INVESTMENT SECURITIES
At December 31, 2004, investment securities represent municipal fixed
income and money market funds with readily determinable fair market values
and original maturities in excess of three months. Investments classified
as available for sale with maturities beyond one year have been classified
as short-term based on their highly liquid nature and because it can be
sold at anytime and the Company intends to liquidate the investments within
the year from the balance sheet date.
Management classifies investments in marketable securities at the time of
purchase and reevaluates such classification at each balance sheet date. At
December 31, 2004, investments in certificates of deposits of $9,864 were
classified as "available-for-sale" and accordingly are reported at fair
value with unrealized losses of approximately $136 reported as a component
of accumulated other comprehensive income (loss) in shareholders' equity.
The fair value of these investments is based on market information
available to management as of the balance sheet date presented. Unrealized
losses are charged against income when a decline in the fair market value
of an individual security is determined to be other than temporary.
Realized gains and losses on investments are included in other income.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value of available-for-sale securities at December
31, 2004 and 2003 were as follows:
Gross Gross
Amortized unrealized unrealized
cost holding gains holding losses Fair value
--------------- --------------- --------------- ---------------
At December 31, 2004
Available for sale:
Certificates of deposits $10,000 $ -- $ (136) $ 9,864
At December 31, 2003
Available for sale:
Certificates of deposits $10,000 $ -- $ (46) $ 9,954
The following table shows the gross unrealized losses and fair value of the
Company's available for sale investments with unrealized losses that are
not deemed to be other-than-temporarily impaired, aggregated by investment
category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2004:
Less than 12 months 12 months or greater Total
----------------------- ------------------------- --------------------------
Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses
---------- ------ ---------- ------ ---------- ------
Certificate of deposits $ -- $ -- $9,864 $ (136) $9,864 $ (136)
24
The unrealized losses on the investments in certificates of deposits were
caused by interest rate changes. The fair value amount above reflects the
market price provided by the issuer of the security, assuming an early sale
was to occur. The contractual terms of these securities do not permit the
issuer to settle the securities at a price less than amortized cost of the
investment. Because the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these securities are
not considered other-than-temporarily impaired.
The Company also maintains an investment portfolio of $2,592 and $18,055
portfolio of investment classified as trading securities as of December 31,
2004 and 2003, respectively. These investments represent primarily
municipal fixed income and money market funds subject to price volatility
associated with any interest-bearing instrument.
Net realized investment gains and net changes in unrealized gains (losses)
on investments for the years ended December 31, 2004, 2003 and 2002 are
summarized as follows:
2004 2003 2002
----- ----- ----
Net realized investment gains
Available-for-sale $ -- $ -- $ --
Trading 108 -- --
----- ----- ----
$ 108 $ -- $ --
----- ----- ----
Net changes in unrealized gains (losses) on investment
Available-for-sale $ (90) $ (46) $ --
Trading 1 55 --
----- ----- ----
$ (89) $ 9 $ --
----- ----- ----
Net realized investment gains and changes
in unrealized gains (losses) on investment $ 19 $ 9 $ --
===== ===== ====
Following is a summary of the disposition and purchases of investment
securities for the years ended December 31, 2004, 2003 and 2002:
25
Gross realized Net realized
----------------------------------
Amount Gains Losses gain
--------------- --------------- --------------- ---------------
Sales:
2004 - Available-for-sale $ -- $ -- $ -- $ --
Trading 15,572 108 -- 108
2003 - Available-for-sale $ -- $ -- $ -- $ --
Trading -- -- -- --
2002 - Available-for-sale $ -- $ -- $ -- $ --
Trading -- -- -- --
Purchases:
2004 - Available-for-sale $ -- $ -- $ -- $ --
Trading -- -- -- --
2003 - Available-for-sale $10,000 $ -- $ -- $ --
Trading 18,000 -- -- --
2002 - Available-for-sale $ -- $ -- $ -- $ --
Trading -- -- -- --
4. INVENTORIES
Inventories by major categories, net of provisions are summarized as
follows:
2004 2003
------- -------
Raw materials $ 4,017 $ 1,554
Work in progress 6,830 2,758
Finished goods 15,971 11,191
------- -------
$26,818 $15,503
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
2004 2003
-------- --------
Land and buildings $ 9,431 $ 10,953
Plant and machinery 8,142 7,754
Furniture and equipment 8,196 7,514
Leasehold improvements 3,067 2,943
Construction-in-progress 265 --
-------- --------
Total $ 29,101 $ 29,164
Less: Accumulated depreciation and amortization (17,621) (17,256)
-------- --------
Total, net $ 11,480 $ 11,908
======== ========
In November 2002, the AICPA International Practices Task Force (the "Task
Force") discussed an issue relating to accounting for land use rights in
the People's Republic of China ("PRC"). The Task Force view is that PRC
land use rights are considered operating leases, as they are long-term
leases of lands, which do not transfer title. As of December 31, 2004 and
2003, other assets of $854 and $875 respectively, comprise of prepaid land
use rights. The prepaid land use rights have a term of 50 years.
26
6. GOODWILL
At December 31, 2004 and 2003, the Company's cost in excess of fair value
of net assets purchased (goodwill) related primarily to the 1999
acquisition of Leda Media Products Limited, now called Radica UK Limited
("Radica UK"). On June 24, 1999, the Company purchased Radica UK for
approximately $15,970. During the quarter ended June 30, 2000, upon
claiming certain breaches of warranty at Radica UK, the Company and the
ex-shareholders of Radica UK mutually agreed to cancel certain loan notes
such that the purchase price was reduced by $1,399. The Company recorded
goodwill of approximately $12,069 resulting from the adjusted purchase
price. The goodwill was allocated to the VGA reporting unit and is not tax
deductible. Accumulated amortization related to goodwill of $2,518 arose
prior to the adoption of SFAS No. 142.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Upon implementation of SFAS 142, and annually
thereafter, the Company tested goodwill for impairment. The goodwill
arising from the purchase of Radica UK was allocated to the Video Games
Accessories ("VGA") reporting unit and the Company has undertaken goodwill
impairment testing as follows to determine whether the goodwill was
impaired and the extent of such impairment.
The methods used in the Company's testing of goodwill impairment were as
follows: 1) 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. 2) The Company then compared the estimated fair value of the
VGA reporting unit with the carrying value of the VGA reporting unit,
including goodwill. 3) Since 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 annual evaluation, the Company
recognized an impairment charge related to goodwill of $3,536 for the year
ended December 31, 2004. The impairment charge recorded at December 31,
2004 adjusted the carrying value of the VGA reporting unit's goodwill to
its implied fair value. The reason for the impairment was primarily the
result of lower sales forecasts for fiscal years 2005 through 2009. The
adjustment to projected annual sales from prior year was based on the
Company's current strategy of concentrating on the innovative, higher
margin sector of the market. This improved the projected gross margins and
operating margins as a percentage of sales, but decreased the total
operating margin and cash flows. Management believes that the revised
forecast portrays a more accurate picture of the Company's future cash
flows and that the new strategy limits the large closeout returns and price
pressures that made the VGA business unprofitable from 1999 through 2003.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
2004 2003
------ ------
Accrued advertising expenses $ 910 $1,091
Accrued license and royalty fees 1,963 1,062
Commissions payable 93 166
Other accrued liabilities 2,285 1,657
------ ------
Total $5,251 $3,976
====== ======
8. INCOME TAXES
The components of income before income taxes are as follows:
27
2004 2003 2002
-------- -------- --------
United States $ 3,472 $ 9,964 $ 10,807
International 823 (339) 3,796
-------- -------- --------
$ 4,295 $ 9,625 $ 14,603
======== ======== ========
The Company's subsidiary in the People's Republic of China ("PRC") is a
Sino-foreign joint venture enterprise. The statutory tax rate of the joint
venture is 27%. The joint venture successfully applied for the designation
as an "Export Oriented Enterprise", which resulted in a 12% tax rate in
2003 and 2004.
The provisions (credits) for income taxes consist of the following:
2004 2003 2002
------- ------- -------
Current:
US federal and state $ 274 $ 39 $ 51
International 456 42 950
------- ------- -------
Total current income tax provision $ 730 $ 81 $ 1,001
------- ------- -------
Deferred:
US federal $ 900 $(2,857) $ --
International (791) (90) 1,668
------- ------- -------
Total deferred income tax provision (credit) $ 109 $(2,947) $ 1,668
------- ------- -------
Total income taxes provision (credit) $ 839 $(2,866) $ 2,669
======= ======= =======
The income taxes for the years ended December 31, 2004, 2003 and 2002 were
allocated as follows:
2004 2003 2002
------- ------- -------
Income from continuing operations $ 839 $(2,866) $ 2,669
Shareholders' equity - compensation expense for
tax purposes in excess of amounts recognized
for financial reporting purposes -- 44 --
------- ------- -------
$ 839 $(2,822) $ 2,669
======= ======= =======
A reconciliation between income tax expense (benefit) and amounts
calculated using the US statutory rate is as follows:
28
2004 2003 2002
------- ------- -------
The US statutory rate 35% 35% 34%
Computed "expected" tax expense
at the US statutory rate $ 1,503 $ 3,369 $ 4,965
State tax, net of federal tax benefit 127 1 4
Tax rate differential (1,028) (807) (763)
Change in valuation allowance 380 (4,476) (1,282)
Effect on opening deferred tax balances resulting -- (478) --
from an increase in tax rate during the year
China tax rebates (212) (472) --
Other, net 69 (3) (255)
------- ------- -------
Income tax provision (credit) $ 839 $(2,866) $ 2,669
======= ======= =======
The US statutory rate has been used since the majority of the Company's
taxable income arises in the US. Other, net in the tax reconciliation above
primarily includes the tax effect of non-deductible and non-taxable items.
The tax effects of the Company's temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are as
follows:
2004 2003
------- -------
Deferred tax assets:
Property, plant and equipment $ 479 $ 386
Net operating loss carryforwards 4,441 4,169
Advertising allowances 322 399
Accounts receivable 43 75
Inventories 416 232
Sales allowance and returns 580 968
Alternative minimum tax credit 519 324
Other 10 42
------- -------
Total gross deferred tax assets 6,810 6,595
Valuation allowance (4,510) (3,683)
------- -------
Net deferred tax assets $ 2,300 $ 2,912
Deferred tax liabilities:
Other (17) --
------- -------
Total gross deferred tax liabilities (17) --
Net deferred tax assets $ 2,283 $ 2,912
======= =======
Deferred tax charge on unrealized profits $ 520 $ --
on intercompany sales
======= =======
The valuation allowance was $9,441 at January 1, 2002. The increase
(decrease) in the valuation allowance during the years ended December 31,
2002, 2003 and 2004 were $(1,282), $(4,476) and $827, respectively.
The following table represents the classification of the Company's net
deferred tax assets:
29
2004 2003
------ ------
Current deferred tax assets $1,330 $1,706
Long-term deferred tax assets 953 1,206
------ ------
Total net deferred tax assets $2,283 $2,912
====== ======
As of December 31, 2004, the Company's US subsidiary had approximately $647
of tax operating loss carryforwards which will begin to expire after 2020.
In addition, as of December 31, 2004, the Company's United Kingdom (UK)
subsidiary had approximately $14,000 tax net operating loss carryforwards
which will carryforward indefinitely. The Company has alternative minimum
tax credit carryforwards in the US of approximately $519, which are
available to reduce future US Federal regular income taxes, if any, over an
indefinite period.
Under the provisions of SFAS No. 109, Accounting for Income Taxes, the
realization of the future tax benefits of a deferred tax asset is dependent
on future taxable income against which such tax benefits can be applied and
the consideration of any available tax strategies. All available evidence
must be considered in the determination of whether sufficient future
taxable income will exist. Such evidence includes, but is not limited to,
the Company's financial performance, the market environment in which the
Company operates, the utilization of past tax credits, and the length of
relevant carryback and carryover periods. Sufficient negative evidence,
such as cumulative net losses during a three-year period that includes the
current year and the prior two years, may require that a valuation
allowance be established with respect to existing and future deferred tax
assets. Differences in actual results from available evidence used in
determining the valuation allowances could result in future adjustments to
the allowance.
Based on management's assessment of the need for a valuation allowance as
at the balance sheet dates, the Company views the recoverability of the
deferred tax assets, net of existing valuation allowances, as more likely
than not to be realizable. Movement in the valuation allowance during the
year ended December 31, 2004 primarily reflected the net effect of the
change in deferred tax assets in respect of tax losses carried forward of
the Company's UK subsidiary.
The Company's operations involve a significant amount of transactions which
cross a number of international borders. In addition, the Company's
manufacturing operations are in China, where the negotiation and settlement
of tax obligations with the local tax authorities are a normal occurrence.
The Company establishes provisions for its known and estimated income tax
obligations. However, whether through a challenge by one of the many tax
authorities in international jurisdictions where the Company and its
subsidiaries operate of the Company's transfer pricing, the Company's claim
regarding lack of permanent establishment, or other matters that may exist,
the Company is exposed to possible additional taxation that has not been
accrued. Management believes that any potential tax obligations for these
items will not have a material adverse effect on the financial statements.
9. RESTRUCTURING CHARGE
In the second quarter of 2003, the Company recorded a restructuring charge
of $87 for personnel costs relating to the closure of the UK R&D office,
Radica Innovations (UK) Limited. The restructuring resulted in a workforce
reduction of approximately 5 positions. The reductions in workforce are
permanent and affected the Company's VGA segment. During the year ended
December 31, 2003, the Company completed the process of closing the UK R&D
office as of December 31, 2003. No restructuring reserve remained as at
December 31, 2003.
In December 2001, the Board of Directors approved a restructuring plan to
transfer its R&D operations in the US and Hong Kong to China for
implementation in February 2002. The estimated costs related to this
restructuring were accrued in December 2001. These accrued restructuring
charges were substantially disbursed during 2002. The total restructuring
charges consisted of $1,514 of cash outlays, the majority of which were
incurred in fiscal 2002, and $40 of non-cash charges, primarily for
leasehold improvements write-offs. The remaining restructuring reserve as
at December 31, 2002 consisted of $34, primarily related to certain
termination benefits which were paid in 2003.
30
The components of restructuring charges are as follows:
Balance Balance
at beginning Charges / Amount at end
of year (release) incurred of year
------------ ------------ ------------ -----------
2003
Severance and other compensation $ 34 $ 87 $ (121) $ --
======= ======= ======= =======
2002
Severance and other compensation $ 1,389 $ (78) $(1,277) $ 34
Lease termination costs and 199 78 (277) --
related asset writedowns
------- ------- ------- -------
$ 1,588 $ -- $(1,554) $ 34
======= ======= ======= =======
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per share as of December 31:
2004 2003 2002
----------- ----------- -----------
Numerator for basic and diluted
earnings per share:
Net income $ 3,456 $ 12,491 $ 11,934
=========== =========== ===========
Denominator:
Basic weighted average shares 18,653,471 18,016,789 17,725,879
Effect of dilutive options and warrants 872,286 1,043,185 609,948
----------- ----------- -----------
Diluted weighted average shares 19,525,757 19,059,974 18,335,827
=========== =========== ===========
Basic net income per share: $ 0.19 $ 0.69 $ 0.67
=========== =========== ===========
Diluted net income per share: $ 0.18 $ 0.66 $ 0.65
=========== =========== ===========
Options and warrants on 54,000, 136,500 and 441,700 shares of common stock
for the years ended December 31, 2004, 2003 and 2002, respectively were not
included in computing diluted earnings per share since their effects were
antidilutive.
11. STOCK-BASED COMPENSATION
The Company's 1994 Stock Option Plan and 2004 Omnibus Equity Incentive Plan
for employees and directors (together, the "Stock Option Plan") provides
for options to be granted for the purchase of an aggregate of 1,600,000
shares of common stock at per share prices not less than 100% of the fair
market value at the date of grant as determined by the Compensation
Committee of the Board of Directors. Following shareholders' approval, the
total number of shares of the Company's common stock that may be purchased
pursuant to options under such plan has been increased to 4,200,000 shares.
Options to employees are generally exercisable over three to five years
from the date of grant and vest, or are exercisable, in equal installments,
the period beginning one year after the date of grant unless otherwise
provided. Options granted to employees under the stock option plan must be
exercised no later than ten years from the date of grant. The Company also
maintains plans under which it offers stock options to directors. Pursuant
to the terms of the plans under which directors are eligible to receive
options, each director is entitled to receive options to purchase common
stock upon initial election to the Board and at each subsequent quarterly
Board meeting. Options are exercisable during the period beginning one year
after the date of grant.
31
In 2001, the Company issued stock options to management based on the terms
of various employment contracts. Based upon 2002 performance, the Company's
Compensation Committee voted in March 2003 to accelerate the vesting of
110,000 options. The acceleration of the stock options was approved in
accordance with the original terms of the contract and these options would
vest in five years regardless of the achievement of the performance goals
and therefore the acceleration did not result in a new measurement of the
stock options.
A summary of option activity is as follows:-
2004 2003 2002
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
(Shares in thousands) Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 1,947 $ 3.41 2,313 $ 4.05 2,191 $ 3.88
Options granted 187 8.36 370 5.10 585 3.75
Options exercised (510) 2.11 (426) 2.67 (145) 2.13
Options forfeited (41) 4.19 (310) 11.24 (318) 3.21
---------- ---------- ----------
Outstanding at end of year 1,583 $ 4.39 1,947 $ 3.41 2,313 $ 4.05
========== ========== ==========
Options exercisable
at year end 1,091 $ 3.80 1,232 $ 2.88 1,352 $ 4.52
========== ========== ==========
The following is additional information relating to options outstanding as
of December 31, 2004:
Options outstanding Options exercisable
----------------------------------------------------------- -------------------------------
Weighted average
Weighted average remaining Weighted average
Exercise Number exercise price contractual Number exercise price
price range of shares per share life (years) of shares per share
----------- --------- --------- ------------ ---------- ---------
(Shares in thousands)
$ 1.090 to 2.000 76 $ 1.83 5.07 76 $ 1.83
$ 2.001 to 4.000 880 3.27 5.08 760 3.26
$ 4.001 to 6.000 304 4.37 7.93 127 4.33
$ 6.001 to 8.000 139 6.81 8.24 104 6.76
$ 8.001 to 10.000 167 8.56 9.25 7 8.57
$ 12.001 to 14.000 16 12.63 4.31 16 12.63
$ 18.001 to 20.000 1 20.00 3.00 1 20.00
----------------- ------------
1,583 $ 4.39 6.34 1,091 $ 3.80
================= ============
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS No. 123. The weighted average fair value of stock options at date of
grant were $2.70, $1.47 and $1.51 per option
32
for the years ended December 31, 2004, 2003 and 2002, respectively. The
values were estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
2004 2003 2002
---------- --------- ---------
Expected life of options 3.5 years 3.6 years 3.4 years
Risk-free interest rate 3.6% 2.8% 4.1%
Expected volatility of underlying stock 45% 33% 51%
Dividends 1.9% -- --
The Black-Scholes option pricing models require the input of highly
subjective assumptions, including the expected volatility of stock price.
Because changes in subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing model does not
necessarily represent the estimated fair value of freely tradable fully
transferable options without vesting restrictions which differ from the
Company's stock option awards.
If the Company had accounted for its stock option plans by recording
compensation expenses based on the fair value at grant date for such awards
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts as
follows:
2004 2003 2002
--------- ---------- ----------
Reported net income $ 3,456 $ 12,491 $ 11,934
Pro forma net income 2,905 11,995 11,188
Reported net income per share
Basic $ 0.19 $ 0.69 $ 0.67
Diluted 0.18 0.66 0.65
Pro forma net income per share
Basic $ 0.16 $ 0.66 $ 0.63
Diluted 0.15 0.62 0.61
12. RETIREMENT PLAN
In Hong Kong, the Company has both mandatory provident fund and defined
contribution retirement plans covering substantially all employees. Under
these plans, eligible employees contribute amounts through payroll
deductions which are 5% or more of individual salary, supplemented by
employer contributions ranging from 5% to 10% of individual salary
depending on the years of service. The expenses related to these plans were
$198, $253 and $142 for the years ended December 31, 2004, 2003 and 2002,
respectively.
Radica's US and UK employees are eligible to participate in savings plans
administered by independent trustees, all of which are defined contribution
plans. The Company makes company contributions and both individual and
company contributions are invested into a balanced variety of investment
funds. The Company contributed approximately $118, $74 and $60 to these
plans for the years ended December 31, 2004, 2003 and 2002, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts reported for cash and cash equivalents, trade accounts
receivable and trade accounts payable are considered to approximate fair
values because of the short duration of these instruments.
Investment securities (both available-for-sale and trading securities) are
carried at fair values which are based on quoted prices at the reporting
date.
33
14. PLEDGE OF ASSETS
At December 31, 2004, the Company has general banking facilities including
overdraft and trade facilities totaling $3,798 available to be drawn upon.
The facilities are collateralized by leasehold land and buildings and bank
balances with an aggregate net book value of $3,232.
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain offices, warehouses and equipment under various
operating lease arrangements. The rental expense under the operating leases
was approximately $761, $589 and $509 for the years ended December 31,
2004, 2003 and 2002, respectively. In the normal course of business, leases
that expire will be renewed or replaced by leases on other properties. As
of December 31, 2004, the Company was obligated under non-cancelable
operating leases requiring future minimum rental payments as follows:
Operating leases
----------------
2005 720
2006 601
2007 374
2008 318
2009 204
Thereafter 899
---------------
Total minimum lease payments $ 3,116
===============
Joint Venture Agreement
Under the terms of a joint venture agreement with the local government in
Dongguan as of December 31, 2004, the Company is committed to pay a total
of $3,317 in varying amounts over the next 20 years.
Warranties
The Company provides product warranties to its customers for a period of 90
days from the date of purchase for games and one year for VGA products.
Details of the movement in the warranty provision during the year are set
out in note 18.
Licensing Commitments
In the normal course of business, the Company enters into certain licensing
agreements and commitments with various third parties for the use of their
inventor concepts and intellectual property. Certain of these agreements
and commitments contain provisions for guaranteed or minimum royalty
amounts during the term of the contracts. Under the terms of agreements
which contain provisions for future minimum payments, the Company is
obligated to pay royalty amounts as follows:
34
Minimum
Payments
------------
2005 $ 1,294
2006 106
2007 231
2008 10
2009 210
Thereafter 10
------------
$ 1,861
============
Capital Commitments
The Company has capital commitments of $571 at December 31, 2004 in respect
of the expansion of its manufacturing facilities in Dongguan, PRC. The
Company expects the expansion to be fully completed in 2005.
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 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 the 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 June 29,
2004, Lemelson filed its notice of appeal to the Court of Appeals for the
Federal Circuit. The briefing is not expected to be completed until the
first half of 2005 and a decision from the Court will likely not be issued
until 2006.
The Company cannot predict the outcome of the Lemelson case or the effect
of such litigation on the financial results of the Company. No accrual has
been recorded at December 31, 2004 and December 31, 2003 in respect of the
Lemelson case or other claims or legal actions, in accordance with SFAS No.
5 Accounting for Contingencies. Management does not believe that the
ultimate disposition of the other matters will have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
16. CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND MAJOR SUPPLIERS
Accounts receivable of the Company are subject to a concentration of credit
risk with customers in the North American and the United Kingdom retail
sector and customers in the Company's manufacturing services. This risk is
somewhat limited due to the large number of customers composing the
Company's customer base and their geographic dispersion, though the
Company's Games business had one customer which accounted for more than
twenty-four percent of consolidated net sales for the year ended December
31, 2004, one customer which accounted for more than thirty-one percent of
consolidated net sales for the year ended December 31, 2003 and one
customer which accounted for more than twenty-four percent of consolidated
net sales for the year ended December 31, 2002. The Company's top five
customers accounted for 55% and 42% of the Company's net sales in 2004 and
2003 respectively. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from
its customers. Several of the Company's licenses apply to products that
generate a large volume of sales. To the extent, the Company is unable to
maintain these licenses, the lost sales could have a significant impact on
future sales. On March 17, 2005, a significant customer that accounted for
approximately 10% of the Company's sales in 2004, announced that it had
agreed to be acquired. The acquiring group has not commenced any plans for
the future of this customer, but a restructuring that includes store
closings or liquidation of the company could have an adverse effect on the
Company's business.
35
17. 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 and Youth Electronics business that
sells product under the Company's different brand names, and the Video Game
Accessory ("VGA") business that sells product under the Company's
Gamester(R) brand name. The reportable segments are strategic businesses
that offer different products, and have different production processes and
different type of customers. The Company also sources certain VGA and other
electronic products through third party manufacturers for retailers
("Manufacturing Services") to sell under their own brands; this is also
included in the Games and Youth Electronics and VGA segments. Manufacturing
Services is not considered a separate business segment because the nature
of the products and services provided under a manufacturing service order
is always either Games and Youth Electronics or VGA. Except for certain
small tools that are expensed in the year of service, the Company did not
acquire additional machines or equipment to manufacture these products. As
such, the chief operating decision maker has not analyzed or assessed the
performance of Manufacturing Services as a separate line of business or a
reportable operating segment, but rather as a type of service that
generates auxiliary income to the Company to the extent if it has excessive
production capacity to fill the order. Revenue and costs related to the
Manufacturing Services are allocated between Games and Youth Electronics
and VGA based on product type.
The accounting policies of the reportable segments are the same as those
described elsewhere in these Notes to the Company's consolidated financial
statements for the year ended December 31, 2004. The Company measures
segment performance based on net income before foreign currency gain,
income taxes, interest, other income and allocable corporate expenses.
Unallocable corporate expenses such as costs related to business
integration and other general and administrative expenses are managed
outside of the operating segments and are included as corporate costs. All
other indirect costs have been apportioned on the basis of corresponding
sales and direct costs. Inter-segment sales and transfers have been
eliminated and are not included in the following table.
A large proportion of the Company's assets are utilized by both segments
and are therefore not suitable for allocating to specific assets. The
segment assets are comprised of accounts receivable, inventories and
goodwill. Other assets included in corporate principally are cash and cash
equivalents, investment securities, deferred tax assets, property, plant
and equipment, and all other insignificant assets not reportable under
other segments. Information by segment and a reconciliation to reported
amounts for the year ended December 31, 2004, 2003 and 2002 are as follows:
A summary of the Company's two reportable segments is set forth below.
36
2004 2003 2002
--------- --------- ---------
Revenues from external customers
Games and Youth Electronics $ 110,176 $ 87,986 $ 104,062
VGA 13,223 17,214 20,584
--------- --------- ---------
Total revenues from external customers $ 123,399 $ 105,200 $ 124,646
========= ========= =========
Depreciation and amortization
Games and Youth Electronics $ 1,505 $ 1,671 $ 2,446
VGA 188 362 412
--------- --------- ---------
Total depreciation and amortization $ 1,693 $ 2,033 $ 2,858
========= ========= =========
Impairment of goodwill
Games and Youth Electronics $ -- $ -- $ --
VGA 3,536 -- --
--------- --------- ---------
Total impairment of goodwill $ 3,536 $ -- $ --
========= ========= =========
Segment income (loss)
Games and Youth Electronics $ 8,833 $ 13,788 $ 18,004
VGA (3,527) (2,547) (3,636)
--------- --------- ---------
Total segment income $ 5,306 $ 11,241 $ 14,368
Corporate
Unallocated corporate expenses $ (2,947) $ (2,406) $ (1,850)
Net interest and other income 1,936 790 2,085
(Provision) credit for income taxes (839) 2,866 (2,669)
--------- --------- ---------
Total consolidated net income $ 3,456 $ 12,491 $ 11,934
========= ========= =========
Segment assets
Games and Youth Electronics $ 38,134 $ 23,061 $ 26,037
VGA 13,058 17,353 19,038
Corporate 58,749 61,800 50,227
--------- --------- ---------
Total consolidated assets $ 109,941 $ 102,214 $ 95,302
========= ========= =========
Revenues from external customers by segment and product category and
manufacturing services within the segment are summarized as follows:
2004 2003 2002
--------- --------- ---------
Games and Youth Electronics Segment
Electronic Games $ 80,640 $ 62,374 $ 62,684
Youth Electronics 17,038 15,227 16,744
Other Electronic Toys 3,490 -- --
Manufacturing Services 9,008 10,386 24,634
--------- --------- ---------
110,176 87,987 104,062
--------- --------- ---------
VGA Segment
Video Games Accessories 12,840 14,294 15,844
Manufacturing Services 383 2,919 4,740
--------- --------- ---------
13,223 17,213 20,584
--------- --------- ---------
Total net revenues $ 123,399 $ 105,200 $ 124,646
========= ========= =========
37
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 and intangible assets:
2004 2003 2002
-------- -------- --------
Net sales:
United States $ 81,542 $ 72,520 $ 76,926
United Kingdom 18,156 13,189 17,888
New Zealand 1,094 152 --
Japan 1,591 930 14,832
Europe 3,744 3,292 1,863
Canada 3,471 2,191 2,279
Australia 4,387 1,970 465
Other countries 9,414 10,956 10,393
-------- -------- --------
$123,399 $105,200 $124,646
======== ======== ========
Long-lived assets:
United States $ 6,534 $ 9,937 $ 771
United Kingdom 147 114 9,733
China and Hong Kong 11,668 12,283 13,977
-------- -------- --------
$ 18,349 $ 22,334 $ 24,481
======== ======== ========
18. VALUATION AND QUALIFYING ACCOUNTS
38
Balance at Balance at
beginning Charged to Utilization / end of
of year income statement write-offs year
------- ---------------- ---------- ----
2004
Allowance for doubtful accounts $ 251 $ 6 $ (109) $ 148
Allowance for estimated product returns 1,390 1,145 (1,611) 924
Accrued warranty expenses 1,040 1,903 (1,873) 1,070
Accrued sales allowance 2,893 2,834 (3,816) 1,911
--------------- --------------- --------------- ---------------
$ 5,574 $ 5,888 $ (7,409) $ 4,053
=============== =============== =============== ===============
2003
Allowance for doubtful accounts $ 315 $ 114 $ (178) $ 251
Allowance for estimated product returns 1,247 1,079 (936) 1,390
Accrued warranty expenses 1,040 2,495 (2,495) 1,040
Accrued sales allowance 3,591 2,809 (3,507) 2,893
--------------- --------------- --------------- ---------------
$ 6,193 $ 6,497 $ (7,116) $ 5,574
=============== =============== =============== ===============
2002
Allowance for doubtful accounts $ 2,207 $ 60 $ (1,952) $ 315
Allowance for estimated product returns 1,555 390 (698) 1,247
Accrued warranty expenses 900 1,771 (1,631) 1,040
Accrued sales allowance 3,912 1,864 (2,186) 3,590
--------------- --------------- --------------- ---------------
$ 8,574 $ 4,085 $ (6,467) $ 6,192
=============== =============== =============== ===============
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Radica Games Limited:
We have audited the accompanying consolidated balance sheets of Radica Games
Limited and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Radica Games Limited
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with United States generally accepted
accounting principles.
/s/ KPMG
HONG KONG
February 25, 2005, except for
footnote 16, which is as of March 17, 2005
40
SELECTED QUARTERLY FINANCIAL DATA - (UNAUDITED) (US dollars in thousands, except
per share data)
Quarter ended
---------------------------------------------------------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31
------------- ------------- ------------- -------------
Year ended December 31, 2004
- ----------------------------
Net sales $ 12,125 $ 18,799 $ 48,972 $ 43,503
Gross profit 5,140 6,152 15,269 15,262
Net income (loss) (1,112) 171 5,990 (1,593)
Basic income (loss) per share (0.06) 0.01 0.32 (0.09)
Diluted income (loss) per share (0.06) 0.01 0.31 (0.09)
Year ended December 31, 2003
- ----------------------------
Net sales $ 16,045 $ 16,944 $ 37,655 $ 34,556
Gross profit 6,254 5,647 14,598 14,130
Net income (loss) (604) (789) 6,625 7,259
Basic income (loss) per share (0.03) (0.04) 0.37 0.40
Diluted income (loss) per share (0.03) (0.04) 0.34 0.38
41
COMMON STOCK DATA
As of January 31, 2005 there were approximately 100 record holders of the
Company's common stock. The Company believes that this represents more than
2,000 individual shareholders.
Price Range of Common Stock
Fiscal Year and Quarter High Low
- --------------------------------------------------------------------------------
2004 Quarter
- ------------
Fourth........................................... $ 10.92 $ 7.52
Third ........................................... 10.35 8.24
Second .......................................... 9.86 8.00
First ........................................... 11.64 6.88
2003 Quarter
- ------------
Fourth........................................... $ 7.95 $ 6.30
Third ........................................... 8.17 6.88
Second .......................................... 8.00 5.54
First ........................................... 6.54 4.20
2002 Quarter
- ------------
Fourth........................................... $ 4.60 $ 3.45
Third ........................................... 4.03 3.56
Second .......................................... 4.60 3.80
First ........................................... 4.40 3.40
The Company's common shares have been traded on the NASDAQ National Market
System since May 13, 1994. Prior to that time, the Company's securities were
privately held. The Company's symbol for its common shares is "RADA". On
December 31, 2004 the share price closed at $7.98.
From becoming public until the end of fiscal 2003, the Company had not paid any
dividends. On January 5, 2004, the Company announced a quarterly dividend
program. In fiscal 2004, the Company paid $3.0 million in dividends to its
shareholders. On January 4, 2005, our Board of Directors declared a quarterly
dividend of 4.5 cents per share payable on January 31, 2005, to shareholders of
record as of January 20, 2005.
42
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Jon N. Bengtson (3) Patrick S. Feely (3)
Chairman of the Board and Director Chief Executive Officer and Director
Timothy R. Busch (1) (3) David C.W. Howell
Director President Asia Operations,
Chief Financial Officer and Director
Albert J. Crosson (1) (2)
Director James J. O'Toole (2)
Director
Theodore J. Eischeid
President, Chief Operating Officer and Director Peter L. Thigpen (1) (2)
Director
CORPORATE OFFICERS
Patrick S. Feely Paul Fogarty
Chief Executive Officer and Director Vice President UK Sales
Theodore J. Eischeid Louis S.W. Kwok
President, Chief Operating Officer and Director General Manager, Factory
David C.W. Howell Eric K.W. Chan
President Asia Operations, Quality Director
Chief Financial Officer and Director
Vincent K.M. Ching
Jeanne M. Olson Manufacturing Director
President North American Operations
Rick C.K. Chu
Denis Horton Director of Customer Service
President Radica Europe and
Managing Director, Radica UK Martin Frain
UK Marketing Director
James M. Romaine
Senior Vice President Sales Sean C.W. Lee
Finance Director - Asia
Laurence M. Scott Jr.
Senior Vice President of Asia Operations Donny K.W. So
Director of Project Management
Craig D. Storey
Vice President and Chief Accounting Officer Hermen H.L. Yau
MIS Director
Larry C.N. Cheng
Vice President Engineering Kenneth K.C. Yu
Engineering Director
Robert E. Esterbrook
Vice President UK Finance & Operations
(1) Member of the Audit Committee
(2) Member of the Corporate Governance, Nominations and Compensation Committee
(3) Member of the Executive Committee
43
30
CORPORATE OFFICE
Radica Games Limited
Suite V, 6th Floor, 2-12 Au Pui Wan Street
Fo Tan, Hong Kong
Tel: Hong Kong 852.2693.2238
Fax: Hong Kong 852.2695.9657
INVESTOR RELATIONS
180 South Lake Avenue, Suite 440
Pasadena, CA 91101
Tel: USA 1.626.744.1150
Fax: USA 1.626.744.1155
WEB SITES
www.radicagames.com
www.gamesterusa.com
www.gamesteruk.com
www.girltech.com
www.skannerz.com
CORPORATE COUNSEL
Sullivan & Cromwell
1888 Century Park East
Los Angeles, CA 90067-1725
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG
8th Floor, Prince's Building
10 Chater Road
Hong Kong
REGISTRAR AND TRANSFER AGENT
U.S. Stock Transfer Corporation
1745 Gardena Avenue
Glendale, CA 91204
COMMON STOCK
NASDAQ National Market System
Common Stock Symbol: RADA
LEGAL INFORMATION
RADICA(R) and Radica logo are registered trademarks of Radica Games Limited;
GIRL TECH(R) and Girl Tech logo are registered trademarks of Radica Games
Limited;
GAMESTER(R) and Gamester logo are trademarks of Radica Games Limited;
PLAY TV(R) and Play TV logo are registered trademarks of Radica Games Limited;
PLAY TV(R) LEGENDS(TM) and its logo are trademarks of Radica Games Limited;
SKANNERZ(R) is a registered trademark of Radica Games Limited;
20Q is a trademark of 20Q.NET, INC. used under license by Radica Games Limited;
BIG TROUBLE(TM), STREET MUTTZ(TM), TWINKLEBERRIES(TM), MY PHOTO BOOTH(TM),
CUPCAKES(TM), CUBE WORLD(TM), RACE PAC(TM) are trademarks of Radica Games
Limited;
NITRO BATTLERZ(TM) is a trademark of Radica Games Limited and is licensed from
Konami;
BARBIE(TM) is a trademark of Mattel, Inc. All rights reserved.
World Poker Tour & Spade Card Design are trademarks of WPT Enterprises, Inc.
(C)2005 WPT Enterprises, Inc. All Rights Reserved. All photographic images
contained herein are property of WPT Enterprises, Inc. and used with permission
herein.
(C)2005 WPT Enterprises, Inc. All Rights Reserved. Bee Royal Face Card Designs
used on packaging background are (C) The United States Playing Card Company. All
Rights Reserved. Travel Channel and logo are registered trademarks of Discovery
Communications, Inc., used under license. All rights reserved.
(C)SEGA CORPORATION,1988-1995. (C)SEGA OF AMERICA,1992. "SEGA and the Sega Logo
are either registered trademarks or trademarks of Sega Corporation."
Manufactured and distributed by Radica under license by Sega Toys.
Street Fighter(R) II' Special Champion Edition & (C) 1991, 2005 CAPCOM U.S.A.,
INC. All Rights Reserved. Ghouls'n Ghosts(TM) & (C) 1988, 2005 CAPCOM CO., LTD.
All Rights Reserved.
Reprogrammed Game (C)SEGA CORPORATION, 1989 All Rights Reserved. SEGA and the
Sega Logo are either registered trademarks or trademarks of Sega Corporation.
Manufactured and distributed by Radica under license by Sega Toys.
(C)1992 SEGA. SEGA, the Sega logo are either registered trademarks or trademarks
of Sega Corporation. Manufactured and distributed by Radica under license by
Sega Toys.
(C)1993 SIMS CO., LTD. SEGA, the Sega Logo and OutRun are either registered
trademarks or trademarks of Sega Corporation. Manufactured and distributed by
Radica under license by Sega Toys.
Sensible Soccer (C)1992 Sensible Limited and The Codemasters Software Company
Limited ("Codemasters"). All rights reserved. "Sensible" is a registered
trademark of Sensible Limited. Used under license by Codemasters.
Cannon Fodder (C)1994 Sensible Limited and The Codemasters Software Company
Limited ("Codemasters"). All rights reserved. "Cannon Fodder" is a registered
trademark of Sensible Limited. Used under license by Codemasters.
Mego-lo-mania (C)1992 Sensible Limited and The Codemasters Software Company
Limited ("Codemasters"). All rights reserved. "Mego-lo-mania" is a trademark of
Sensible Limited.
Used under license by Codemasters.
Codemasters(R) and the Codemasters logo are registered trademarks owned by
Codemasters. GENIUS AT PLAY(TM) is a trademark of Codemasters.
All other trademarks are property of their respective owners.
44
RADICA GAMES LIMITED
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 23, 2005
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of
Radica Games Limited (the "Company") will be held at The Westin Pasadena Hotel,
191 North Los Robles Avenue, Pasadena, California 91101 on Monday, May 23, 2005
commencing at 10:00 a.m., to consider and act upon the following proposals or
matters:
(1) To elect directors;
(2) To appoint KPMG as Independent Registered Public Accounting Firm
and to authorize the directors to fix the Independent Registered Public
Accounting Firm's remuneration; and
(3) To transact such further or other business matters as may properly
come before the meeting or any adjournments thereof.
Only shareholders of record at the close of business on March 31, 2005
will be entitled to notice of the meeting.
The Annual Report containing the Financial Statements of the Company
and the Report of the Independent Registered Public Accounting Firm thereon, the
Management Information Circular/Proxy Statement and a form of proxy are enclosed
with this Notice of Meeting.
By order of the Board of Directors,
DAVID C.W. HOWELL
President Asia Operations and
Chief Financial Officer
April 22, 2005
Fo Tan, Hong Kong
Note: If you are unable to be present at the meeting in person, please fill
in, date and sign the enclosed proxy and return it to the President of
the Company in the enclosed envelope.
RADICA GAMES LIMITED
MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT
This Management Information Circular/Proxy Statement ("this Circular")
is furnished to shareholders of Radica Games Limited (the "Company") in
connection with the solicitation by and on behalf of the management of the
Company of proxies to be used at the Annual Meeting of Shareholders (the
"Meeting") of the Company to be held at The Westin Pasadena Hotel, 191 North Los
Robles Avenue, Pasadena, California 91101 on Monday, May 23, 2005 at 10:00 a.m.,
and at any adjournments, for the purposes set forth in the attached Notice of
Annual Meeting of Shareholders (the "Notice").
This Circular, the attached Notice and the accompanying form of proxy
are first being mailed to shareholders of the Company on or about April 22,
2005. The Company will bear all costs associated with the preparation and
mailing of this Circular, the Notice and form of proxy as well as the cost of
solicitation of proxies. The solicitation will be primarily by mail; however,
officers and regular employees of the Company may also directly solicit proxies
(but not for additional compensation) by telephone or telegram. Banks, brokerage
houses and other custodians and nominees or fiduciaries will be requested to
forward proxy solicitation material to their principals and to obtain
authorizations for the execution of proxies and will be reimbursed for their
reasonable expenses in doing so.
No person is authorized to give any information or to make any
representations other than those contained in this Circular and, if given or
made, such information must not be relied upon as having been authorized.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named as proxies in the enclosed form of proxy are
directors or officers of the Company. A shareholder has the right to appoint a
person (who need not be a shareholder of the Company) as proxy to attend and act
for and on such shareholder's behalf at the Meeting other than the management
proxies named in the accompanying form of proxy. This right may be exercised
either by striking out the names of the management proxies where they appear on
the front of the form of proxy and by inserting in the blank space provided the
name of the other person the shareholder wishes to appoint, or by completing and
submitting another proper form of proxy naming such other person as proxy.
A shareholder who has given a proxy, in addition to revocation in any
other manner permitted by applicable law, may revoke the proxy within the time
periods described in this Circular by an instrument in writing executed by the
shareholder or by his/her attorney authorized in writing or, if the shareholder
is a body corporate, by an officer or attorney thereof duly authorized.
Shareholders desiring to be represented at the Meeting by proxy or to
revoke a proxy previously given, must deposit their form of proxy or revocation
of proxy at the office of Radica Enterprises, Ltd. ("Radica USA") at 13628-A
Beta Road, Dallas, Texas 75244, addressed to the President of the Company, at
any time up to and including the last business day preceding the day of the
Meeting, or any adjournment thereof, at which the proxy is to be used, or on the
day of the Meeting with the chairman of the Meeting prior to the Meeting, or any
adjournment thereof. If a shareholder who has completed a proxy attends the
Meeting in person, any votes cast by the shareholder on a poll will be counted
and the proxy will be disregarded.
-2-
VOTING OF PROXIES
THE SHARES REPRESENTED BY ANY VALID PROXY IN FAVOR OF THE MANAGEMENT
PROXIES NAMED IN THE ACCOMPANYING FORM OF PROXY WILL BE VOTED FOR, AGAINST OR
WITHHELD FROM VOTING (ABSTAIN) ON THE ELECTION OF DIRECTORS AND ON THE
REAPPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND THE
AUTHORIZATION OF THE DIRECTORS TO FIX THE REMUNERATION OF THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM, IN ACCORDANCE WITH ANY SPECIFICATIONS OR
INSTRUCTIONS MADE BY A SHAREHOLDER ON THE FORM OF PROXY. IN THE ABSENCE OF ANY
SUCH SPECIFICATIONS OR INSTRUCTIONS, SUCH SHARES WILL BE VOTED FOR THE ELECTION
AS DIRECTORS OF THE MANAGEMENT NOMINEES NAMED IN THIS CIRCULAR AND FOR THE
APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND THE
AUTHORIZATION OF THE DIRECTORS TO FIX THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM'S REMUNERATION AS STATED IN THIS CIRCULAR.
Each share of Common Stock is entitled to one vote on each matter
submitted to vote at the meeting. Under the Company's Bye-laws, action may be
taken by the shareholders at any duly convened Annual General Meeting of the
Company by a majority of the votes cast on each proposal (other than certain
proposals requiring a special resolution as defined in the Bye-laws). In the
case of elections of directors, the number of vacant positions (in the case of
this meeting, nine director positions) will be filled by the nominees who
receive the greatest number of votes at the meeting, with each shareholder being
entitled to vote for a number of directors equal to the number of vacancies, but
without cumulative voting. Although the Bye-laws permit voting by a show of
hands in certain circumstances, the Company follows the practice of voting by
poll or ballot (i.e. tabulating written votes submitted at the meeting in person
or by proxy).
The accompanying form of proxy confers discretionary authority upon the
persons named therein with respect to amendments or variations to matters
identified in the Notice and with respect to such other business or matters
which may properly come before the Meeting or any adjournments thereof.
RECORD DATE
The Board of Directors of the Company has fixed the close of business
on March 31, 2005, as the record date (the "Record Date") for the Meeting. Only
holders of record of the Common Stock as of the close of business on the Record
Date are entitled to receive notice of and to attend and vote at the Meeting.
-3-
VOTING SECURITIES AND THEIR PRINCIPAL HOLDERS
As of January 31, 2005 there were issued and outstanding 18,827,112
shares of the Common Stock of the Company.
The following table and the text that follows set forth information
with respect to shareholders which the Company believes own beneficially more
than 5% of the issued and outstanding shares of Common Stock of the Company, as
of January 31, 2005:
- ----------------------------------------------------------------------------------------------
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF COMMON
BENEFICIAL OWNER STOCK OUTSTANDING
- ----------------------------------------------------------------------------------------------
Dito Devcar Corporation, et al. (1) 8,728,888 46.4%
c/o Richard H. Pickup
2321 Alcova Ridge Dr.
Las Vegas, Nevada 89134
RAD Partners 1999 LLC, et al. (2) 1,093,700 5.8%
c/o The Busch Firm, 2532 Dupont Drive
Irvine, California 92612
Royce & Associates, LLC 972,250 5.2%
1414 Avenue of the Americas
New York, New York 10019
- -------------------------
<FN>
(1) Includes shares of Common Stock owned by the following related persons:
Dito Devcar Corporation, DRP Charitable Unitrust, TMP Charitable
Unitrust, Dito Devcar, LP, Dito Caree, LP, Pickup Family Trust, Pickup
Charitable Unitrust II, TD Investments, LLC, Plus Four Equity Partners
LP, Dito Devcar Foundation and Richard H. Pickup.
(2) Includes shares of Common Stock owned by the following related persons:
RAD Partners 1999 LLC, Lenawee Trust, 92653 Trust, Busch Family
Foundation and Timothy R. Busch, who is a director of the Company.
</FN>
The information in the above table is provided by individual
shareholders and therefore the Company cannot verify its accuracy.
-4-
ELECTION OF DIRECTORS
The following persons are nominees proposed by management for election
as directors of the Company to serve until the next annual meeting of the
shareholders of the Company or until their successors are duly elected or
appointed. A SHAREHOLDER MAY WITHHOLD HIS VOTE FROM ANY INDIVIDUAL NOMINEE BY
WRITING THE PARTICULAR NOMINEE'S NAME ON THE LINE PROVIDED IN THE FORM OF PROXY.
Management does not contemplate that any of the nominees will be unable to serve
as a director. If, as a result of circumstances not now contemplated any nominee
shall be unavailable to serve as a director, the proxy will be voted for the
election of such other person or persons as Management may select. The
management nominees for election as directors of the Company are Jon N.
Bengtson, Timothy R. Busch, John A.F.H. Coulter, Albert J. Crosson, Theodore J.
Eischeid, Patrick S. Feely, Floyd W. Glisson, Frank J. O'Connell and Richard E.
Wenz. Messrs. Coulter, Glisson, O'Connell and Wenz are being nominated to join
the Company's board of directors for the first time at the 2005 meeting. The
biographical information of all director nominees follows the table below.
The Board of Directors expresses its deep appreciation for the
outstanding service of retiring directors James J. O'Toole, Peter L. Thigpen and
David C.W. Howell. Their contributions have directly impacted the growth and
strength of Radica.
Jim O'Toole has served on the board since 1994 and has been
instrumental in guiding the Company through its many challenges and successes.
His intellect and vast experience with some of the largest and most successful
public companies have helped Radica to a position of prominence in the toy
industry.
Pete Thigpen has served on the board for the past seven years. His
international and operational experience in a fashion industry that follows
similar trends as those faced by Radica has helped the Company succeed in the
ever changing toy industry.
David Howell is retiring from the board after 11 years as a director
but continues to serve the company as its Chief Financial Officer and President
of Asian Operations. David's retirement has allowed the Company to provide
additional strengths to the board while continuing to have the benefit of
David's knowledge and experience.
The following table and the textual discussion which follows sets forth
information as of January 31, 2005 with respect to each of the management
nominees for director and each executive officer, including their names, ages,
the number of shares beneficially owned by each such person individually and as
a group, all positions and offices with the Company held by each such person (in
addition to their directorships) and their term of office as a director:
- --------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
NUMBER OF COMMON
TERM AS SHARES STOCK
AGE AT DIRECTOR OTHER POSITIONS AND OFFICES BENEFICIALLY OUTSTANDING
NAME 1/1/05 EXPIRES PRESENTLY HELD WITH THE COMPANY OWNED (1)
- ----------------------------- --------- ----------- ----------------------------------- -------------- --------------
Director Nominees:
- -----------------
Jon N. Bengtson (2) 61 2005 Chairman of the Board 419,260 2.2%
Timothy R. Busch (2)(3)(5) 50 2005 None 1,128,700 6.0%
John A.F.H. Coulter 61 None --
Albert J. Crosson (3)(4)(6) 74 2005 None 55,000
Theodore J. Eischeid 54 2005 President, Chief Operating Officer 36,697
Patrick S. Feely (2) 58 2005 Chief Executive Officer 338,000 1.8%
Floyd W. Glisson 57 None --
Frank J. O'Connell 61 None --
Richard E. Wenz 55 None --
Executive Officers:
- ------------------
David C.W. Howell 42 President Asia Operations, Chief 174,050
Financial Officer
-5-
- --------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
NUMBER OF COMMON
TERM AS SHARES STOCK
AGE AT DIRECTOR OTHER POSITIONS AND OFFICES BENEFICIALLY OUTSTANDING
NAME 1/1/05 EXPIRES PRESENTLY HELD WITH THE COMPANY OWNED (1)
- ----------------------------- --------- ----------- ----------------------------------- -------------- --------------
Jeanne M. Olson 56 President North American 115,000
Operations
Denis Horton 53 President Radica Europe and 20,000
Managing Director, Radica UK
James M. Romaine 59 Senior Vice President Sales 50,200
Laurence M. Scott, Jr. 59 Senior Vice President of Asia 20,000
Operations
Craig D. Storey 36 Vice President, Chief Accounting 34,000
Officer
Larry C.N. Cheng 41 Vice President Engineering 7,000
Robert E. Esterbrook 59 Vice President UK Finance & 12,000
Operations
Paul Fogerty 43 Vice President UK Sales 5,000
Louis S.W. Kwok 43 General Manager, Factory 8,000
Eric K.W. Chan 48 Quality Director --
Vincent K.M. Ching 44 Manufacturing Director --
Rick C.K. Chu 51 Director of Customer Service 4,000
Martin Frain 36 UK Marketing Director --
Sean C.W. Lee 38 Finance Director - Asia 6,000
Donny K.W. So 41 Director of Project Management 8,000
Hermen H.L. Yau 45 MIS Director 100
Kenneth K.C. Yu 42 Engineering Director --
<FN>
- -------------------------
(1) Except as indicated, in each case these shares represent less than 1%
of the total stock outstanding.
(2) Member of the Executive Committee.
(3) Member of the Audit Committee.
(4) Member of the Corporate Governance, Nominations and Compensation
Committee.
(5) Mr. Busch is one of the persons included in the RAD Partners 1999 LLC
Group. See "Voting Securities and Their Principal Owners" above for
additional information.
(6) In the Company's Proxy Circular for last year, we reported that Albert
J. Crosson, one of our directors, had a 1% beneficial interest in
Crossfire, LLC, which provided beneficial ownership of 450,000 shares
of our common stock and the right for Crossfire to acquire an
additional 400,000 shares over time from a limited liability company
(RAD Partners 2001, LLC) which was controlled by RAD Partners 1999 LLC,
one of our principal stockholders. Mr. Crosson has reported to the
Company that in 2004 the additional 400,000 shares were acquired by
Crossfire and RAD Partners 2001 was liquidated, but Mr. Crosson sold
his interest in Crossfire to his four adult children. As a result, Mr.
Crosson has disclaimed any beneficial ownership in common stock of the
Company, other than through his ownership of stock options acquired as
a director of the Company.
</FN>
The director nominees and executive officers of the Company as shown in
the above table, as a group (27 persons), owned beneficially 2,441,007 shares of
Common Stock (not including option shares not yet vested held by such persons),
or approximately 13.0% of the Common Stock outstanding, as of January 31, 2005.
-6-
The executive officers of the Company do not have any fixed term of
office and serve at the pleasure of the Board of Directors.
Jon N. Bengtson, formerly the Executive Vice President and Chief
Operating Officer of the Company, became the Chairman of the Board of the
Company in January 1996, and have been a director of the Company since January
1994. He was Chief Financial Officer of the Company from January 1994 to
September 1995, and was appointed President and Chief Executive Officer of
Radica USA in December 1993. Mr. Bengtson joined The Sands Regent in 1984 and
served in various positions, including Vice President of Finance and
Administration, Chief Financial Officer, Treasurer and Director, Senior Vice
President and Director and Executive Vice President and Chief Operating Officer
and Director until December 1993. From 1980 to 1984, Mr. Bengtson was a director
and served in various positions with International Game Technology ("IGT"),
including Treasurer and Vice President of Finance and Administration and Vice
President of Marketing. Mr. Bengtson is currently the Chairman of The Sands
Regent.
Timothy R. Busch was appointed a director of the Company in May 2003.
Mr. Busch is CEO and founder of The Busch Firm. Founded in 1979, The Busch Firm
specializes in estate planning, asset protection, tax, corporate law,
partnership and real estate matters. He is also founder of Pacific Hospitality
Group, an Irvine-based hotel firm that constructs and operates hotels; St. Anne
School of Laguna Niguel, California, a private Christian elementary school; and
the new private JSerra High School. Mr. Busch serves on a number of private and
public boards in various industries, including Advanced Materials, Inc. of
Rancho Dominguez, California. Mr. Busch received his Juris Doctor degree from
the Wayne State University of Law, and his B.B.A., summa cum laude, degree from
Western Michigan University. He is an attorney licensed in Michigan, California,
Texas, and Washington, D.C., and a CPA licensed in Michigan, California, and
Nevada. He is a member of the Orange County and Palm Springs Chapters of
Legatus, an organization of Catholic CEOs.
John A.F.H. Coulter is CEO and founder of Exact Products Ltd., a
company which specializes in new product development. Prior to this Mr. Coulter
had over 20 years of experience in the toy industry. He was founder and CEO of
TCL Marketing between 1992 and 2001 acting as the UK distributor for Radica, KID
design and Team Concepts. Prior to this he was a Corporate Vice President and
President of Europe for Tonka between 1986 and 1990. Between 1982 and 1986 he
helped build Mattel in the UK, as Managing Director and Vice President. Prior to
entering the toy industry he worked in the food industry and held senior
marketing management positions at United Biscuits, Brooke Bond Oxo, Cadbury
Schweppes and J. Lyons Grocery Division. Mr. Coulter is an Alumnus of London
Business School, Fellow of The Marketing Society (Chairman 1975-76), Fellow of
the Chartered Institute of Marketing and Fellow of the British Institute of
Management.
Albert J. Crosson was appointed a director of the Company in May 2001.
He became a director of International Game Technology ("IGT") in 1988. He became
Vice Chairman of the Board of IGT in July 1996 and an employee of such company.
He resigned as an employee in December 2000 and as Vice Chairman of the Board of
IGT in August 2001. Mr. Crosson was employed for 34 years by ConAgra, Inc. and
its predecessor companies. He was President of ConAgra Grocery Products
Companies from 1993 until January 1996 when he retired. From 1986 until January
1993, he was President of Hunt-Wesson Foods, Inc., a ConAgra company.
Theodore J. Eischeid was appointed President and Chief Operating
Officer in January 2005. He has been a director of the Company since May 2003
and served as Chairman of the Audit Committee until January 2005. Most recently
Mr. Eischeid was Vice President - Global CDMA Partnership and Product Management
for Motorola, Inc., a global leader in wireless, automotive and broadband
communications. Prior to that, he was Senior Vice President and Chief Financial
Officer of K12 Inc., a developer of online curriculum for grades K-12; formerly
President and CEO of Educational Insights, Inc., a publicly traded developer,
manufacturer and marketer of educational products; and prior to that served as
President of Revell-Monogram, Inc., an international manufacturer and marketer
of plastic hobby kits, where he lead a successful initial public offering in
1991 and continued as President when the company was acquired by Hallmark Inc.
in 1994. Mr. Eischeid also served as Chief Financial Officer of Arvey
Corporation, a manufacturer and retailer of paper and paper products, and began
his career with Arthur Andersen & Co. He is a Certified Public Accountant, a
member of the Illinois Bar and a past Chairman of the Toy Manufacturers of
America. Mr. Eischeid received his Juris Doctor, cum laude, degree from the
Loyola University of Chicago School of Law, his MBA from Northwestern
University's Kellogg Graduate School of Management, and his BS degree from Iowa
State University.
-7-
Patrick S. Feely has been Chief Executive Officer since April 1999. He
was Chief Operating Officer and President of the Company from July 1997 to
January 2005 and has been a director of the Company since July 1996. Prior to
joining Radica, he was President and CEO of Spectrum HoloByte, Inc. from 1993 to
1995; President of Bandai America, Inc. from 1991 to 1992; and founder and
President of Toy Soldiers, Inc. (which merged with Bandai America) from 1988 to
1991. Mr. Feely was an executive at Tonka, Inc. from 1982 to 1988, where he
served as President of the Tonka Products Division and a Director of the parent
company. At Tonka, in addition to his other responsibilities, he managed the
launch of the Sega video game system into the U.S. market. Mr. Feely was an
executive at Mattel Toys from 1977 to 1982 and began his career at RCA
Corporation in 1970. Mr. Feely is also an advisor to the Toy Industry
Association Board of Directors, where he was Chairman from 2000 to 2002. He is
also a director of the Board of Trustees of the Toy Industry Foundation. He has
a BA from Duke University and an MBA from the University of Michigan.
Floyd W. Glisson was CEO of Acres Gaming Incorporated from July 1998
through October 2004, and Chairman of the Board from April 2000 until the
company was acquired in October 2003. He has a BS degree in Accounting from the
University of Akron, an MBA from the University of Pittsburgh, and was a CPA in
Colorado. His previous experience included audit and consulting engagements with
Arthur Andersen & Co., and financing management positions with the Dial
Corporation and ConAgra Foods Inc. He is in the process of forming GCM Investors
LLC, a private investment firm for which he will be Managing Member.
Frank J. O'Connell was appointed head of the West Coast office at the
Parthenon Group in March 2005 having joined the firm in June 2004 as full time
Senior Partner to lead the consumer and specialty retail consulting practice. He
joined Indian Motorcycle Corporation in November 2000 as President and CEO to
lead the revitalization of this 100-year old American-Icon Brand. He became
Chairman in June 2002, eventually overseeing the liquidation of the company
under a California procedure in January 2005. From 1996 to 2000, he was
Chairman, President and CEO of Gibson Greetings, Inc., a public company in the
greeting card and social expression business. He negotiated the sale of Gibson
to American Greetings Corporation in March 2000. From 1991-1995 he was President
and Chief Operating Officer of Skybox International, a sports and entertainment
trading card company, which he took public. Mr. O'Connell has led other branded
companies including President of Reebok Brands, North America, President of HBO
Video, Founder and President of Fox Video Games and Senior VP of the Electronics
Divisions at Mattel. He spent the first 14 years of his career in the food
business, in various marketing and operating roles. Mr. O'Connell is a
co-founder of Tuckerman Capital, a private equity fund in Hanover, NH. He serves
on the Advisory Boards of the Johnson Graduate School of Management, the
Personal Enterprise Program, and the Undergraduate Business Program at Cornell
University, where he earned his undergraduate and MBA degrees.
Richard E. Wenz is a consultant and private investor and currently
serves on the Board of Directors of Hunter Fan Company and Inplex Corporation.
From 2000 to 2002 Mr. Wenz was an operating partner/affiliate of DB Capital
Partners, the private equity arm of Deutsche Bank A.G. and served on the board
of directors of a number of portfolio companies including NewRoads, Inc. and
Jenny Craig International. Mr. Wenz also served as Chief Executive Officer of
Jenny Craig International during 2002. From 1997 to 2000 Mr. Wenz was President
and Chief Operating Officer of Safety 1st, Inc., a publicly traded juvenile
products company. During 1995 and 1996 Mr. Wenz was the Partner in charge of the
Chicago office with The Lucas Group, a business strategy consulting firm.
Previous to 1995 Mr. Wenz held senior executive positions with Wilson Sporting
Goods Co., Electrolux Corporation, The Regina Company and Professional Golf
Corporation. Mr. Wenz began his career in 1971 with Arthur Young & Company
(predecessor of Ernst & Young) and left the firm as a Partner in 1983. Mr. Wenz
is a certified public accountant.
David C.W. Howell was appointed President Asia Operations in December
1998. He has been Executive Vice President and Chief Financial Officer and a
director of the Company since September 1995. Prior to that, he was Vice
President and Chief Accounting Officer and a director of the Company from
January 1994 to September 1995. From 1992 to 1994, Mr. Howell was the Finance
Director and Company Secretary of Radica HK. From 1984 to 1991, Mr. Howell was
employed by Ernst & Young in London, Hong Kong and Vietnam. He has a B.Sc. from
Nottingham University, is a Fellow of the Institute of Chartered Accountants in
England and Wales, and is a Fellow of the Hong Kong Society of Accountants.
-8-
Jeanne M. Olson was promoted to President North American Operations in
January 2004. She previously held the positions of Executive Vice President and
General Manager from 2002 to 2003, and Senior Vice President, Marketing from
2000 to 2002. Prior to joining the Company in 2000, she was Senior Vice
President of Sales & Marketing at Lyrick Studios, a privately-held children's
entertainment company. Ms. Olson has over 15 years of experience in the toy
industry, having held executive marketing and management positions at Mattel
Toys, Hasbro Inc., and Tonka Toys. She started her career in marketing research
with The Pillsbury Company and with Custom Research Inc.
Denis Horton has been Managing Director of Radica U.K. Ltd. since April
2003 and President Radica Europe since January 2005. He has over 18 years of
experience in the toy industry, previously having held Managing Director
positions at Mattel U.K., Fisher Price and Tonka Europe. Prior to entering the
toy industry, Mr. Horton worked in the food industry and held management
positions at United Biscuits and H J Heinz Co., Ltd. He received his BA (Honors)
degree in Business Studies from Nottingham Trent University, and is a Fellow of
the Chartered Institute of Marketing in the U.K.
James M. Romaine joined Radica USA in September 1999 as Senior Vice
President of Sales for Radica USA. He has been an executive in the Toy Industry
for over 32 years. He spent the 1980's and into the early 90's at Parker
Brothers where he was Senior Vice President of Sales. Mr. Romaine was the
President of Play Tech Inc., a VTech company, for seven years before joining
Radica USA. His most recent educational credentials include the completion of
the Executive Program for General Managers at the University of Michigan's
School of Business.
Laurence M. Scott, Jr. was appointed Senior Vice President Asia
Operations in April 2002. Previously he was Managing Director - Asian Operations
for iLogistix Singapore Supply Chain Management Pte. Limited. Prior to that he
was Managing Director for MGA Entertainment (Hong Kong) Limited (1998 - 2000);
Vice President - Operations for Atari Corporation (1992 - 1996) and then Vice
President - Worldwide Materials for JTS Corporation (1996 - 1997) after Atari
merged with JTS; and President and Managing Director for Radofin Electronics
(Far East) Limited. (1975 - 1991). Mr. Scott has over 25 years experience with
Asian Manufacturing Operations. He has a BSc. and MBA from the University of
Southern California.
Craig D. Storey has been Vice President and Chief Accounting Officer of
the Company since July of 1999. Prior to that, he was the Financial Controller
of Radica USA from 1995 to 1999. From 1993 to 1995, Mr. Storey was employed by
Kafoury, Armstrong and Company in Reno, Nevada. He has a BS from Arizona State
University and is a member of the American Institute of Certified Public
Accountants and the Nevada Society of CPA's.
Larry C.N. Cheng has been Vice President Engineering of the Company
since April 2003. Prior to that, he was an Engineering Director from April 1999
to March 2003. Mr. Cheng joined the Company in 1991 and was an Engineering
Manager from April 1993 to March 1999. Mr. Cheng has more than 15 years
experience in ODM and the toy industry. He has a Higher Diploma in Marine
Electronics from the Hong Kong Polytechnic University.
Robert E. Esterbrook joined Radica U.K. as Finance Director and Company
Secretary during July 2001, becoming Vice President U.K. Finance and Operations
in 2004. He has held executive positions in the U.K. toy industry for over 25
years. He has previously worked at Tonka Toys, Playmates Toys and Ideal Toys as
Finance Director and was involved with the establishment of Mattel Toys in the
U.K. in 1980. He re-joined Invicta Plastics, Ltd, originators of the board game
Mastermind, as Managing Director from 1989 to 1991. He is a fellow member of the
Chartered Institute of Management Accountants and completed a program in legal
studies at Demontfort University.
Paul Fogarty commenced working as Sales Director for Radica U.K. in
January 2004 and was promoted to Vice President of U.K. Sales in January 2005.
He has over 10 years experience in the toy industry previously having held
senior management positions for Mattel U.K., Tyco Toys U.K. and JAKKS Pacific.
Prior to this Mr. Fogarty worked in the paper industry for Scott Paper Ltd. Mr.
Fogarty, who is originally from New Zealand, moved to England in 1989. He
received his Bachelor of Commerce degree in Marketing from the University of
Auckland.
Louis S.W. Kwok has been the General Manager, Factory from April 2004.
Prior to that, he was the Materials and Logistics Director of the Company from
March 2002 to March 2003 and the Plant Administration Director from January 2001
to February 2002. He has over 16 years experience in manufacturing plant
operations. Major companies he has worked with are Fymetics (Hong Kong) Limited,
Management, Investment and Technology Company Limited, and Sunciti Manufacturers
Limited. He has a Higher Diploma in Mechanical Engineering, Diploma in
Mechanical Engineering (Manufacturing Technology), and National Diploma in
Mechanical Engineering.
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Eric K.W. Chan has been the Quality Director of the Company since July
2, 2001. Prior to that, he was Senior QA Manager/Quality Director in various
major toy companies such as Tonka Kenner Parker, Hasbro and Galoob. Mr. Chan has
over 20 years of solid experience in QA/QC operations in the toy industry. He
has a Diploma in Production and Industrial Engineering, Diploma in Management
Study and Diploma in Industrial Management (U.K.).
Vincent K.M. Ching joined the Company as the Manufacturing Director in
September 2002. He has over 16 years experience in research, consultancy and
manufacturing sectors, has been working in PRC for 10 years at a managerial
level with Philips, Procter & Gamble (P & G) and previously as Manufacturing
Director in Honeywell Consumer Products (H.K.) Ltd. from June 1999. He has
achieved a number of prizes and awards in both academic and industrial sectors
including the Ford Design Prize from Ford Motor (U.K.) Co. Ltd. in 1985, First
Class Honors degree in Mechanical Engineering in 1986, Overseas Research
Students Award from the Committee of Vice-Chancellors and Principals of
Universities (U.K.) in 1987, Postdoctoral Research Fellowship from the Croucher
Foundation of Hong Kong in 1990 and Hong Kong Productivity Council Productivity
Award for the 2002 Hong Kong Awards for Industry.
Rick C.K. Chu has been the Director of Customer Service of the Company
since January 2004. Prior to that, he was the International Sales Director of
the Company from April 1996 to December 2003 and the International Sales
Administration Manager of the Company from April 1994 to April 1996. He has more
than 17 years experience in international trade and business management. From
1988 to 1994, he was the Senior Manager managing the sales administration
function and marketing of industrial materials for a leading trading company in
Hong Kong.
Martin Frain joined Radica U.K. as Marketing Director in May 2004.
Prior to that he was marketing manager at Hasbro U.K., where he worked from
1999. He entered the toy industry in 1993 when he started a games and toys
distribution business in Southern Africa. Prior to that he worked as a
journalist on a daily newspaper in Johannesburg. He is currently completing his
Masters of Business Administration at the University of Bath.
Sean C.W. Lee has been Finance Director - Asia of the Company since
September 2002. Prior to that, he was the Financial Controller of Dongguan
factory. He has more than 10 years experience in electronic manufacturing field.
He has a Professional Diploma in Accountancy from City University of Hong Kong.
He is also a member of HKICPA and ACCA.
Donny K.W. So joined the Company as Director of Project Management in
September 2002. Before joining the Company, he held management positions in
product development at VTech HK for 4 years. Mr. So has 17 years experience in
project management and product development in major appliances, electronics and
toys industries. He obtained his Six Sigma experience while working for General
Electric Company, and led the development of Total Cycle Time management skill
at VTech. He has a Postgraduate Certificate in Business Administration from the
Open University of Hong Kong, a BA in Industrial Design from the Hong Kong
Polytechnic University and a Diploma in Product Design from LWL Technical
Institute.
Hermen H.L. Yau has been the MIS Director of the Company since March 1,
1994. From 1982 to 1994, he worked in Outboard Marine Corporation Asia Ltd in
various positions in the Systems & Data Processing Department. He has more than
18 years experience in Information Technology and particular experience in IBM
mid-range computer systems and solutions. He has a Higher Diploma in Computer
Studies from the National Computing Center U.K. and a Diploma in Management
Studies from the Hong Kong Polytechnic and Hong Kong Management Association.
Kenneth K.C. Yu has been as Engineering Director - Asia of the Company
since June 2004. Prior to that, he was the engineering manager of a Dongguan
factory. He has seventeen years working experience in product engineering,
production and industrial engineering, product design, project management and
manufacturing of toys and computer accessories. His academic background is
engineering and he received a Master in Engineering Business Management in 2003.
He is a member of IEE and also a Chartered Engineer.
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MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During fiscal 2004, the Board of Directors of the Company met four
times. Each of the directors, during his tenure as a director, attended at least
75% of the meetings of the Board of Directors and of each committee of the board
on which he has served.
The responsibilities of the Executive Committee include exercising the
authority of the Board of Directors as to matters that may arise between
meetings of the Board of Directors. The Executive Committee is comprised of
three members of the Board, being Messrs. Bengtson, Busch and Feely. In fiscal
2004, it did not hold any meetings. After the 2005 annual shareholders meeting,
it is expected that the Executive Committee will be comprised of Messrs.
Bengtson, Feely and Wenz.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent registered public accountants to be selected
to conduct the annual audit of the books and accounts of the Company, reviewing
the proposed scope of such audit and approving the audit fees to be paid, and
reviewing the adequacy and effectiveness of the internal auditing, accounting
and financial controls of the Company with the independent registered public
accountants and the Company's financial and accounting staff. The Audit
Committee consists entirely of independent directors. The Audit Committee is
comprised of three members of the Board, being Messrs. Busch, Crosson and
Thigpen. In fiscal 2004, it held 11 meetings. After the 2005 annual shareholders
meeting, it is expected that the Audit Committee will be comprised of Messrs.
Wenz (Chairman), Busch and Glisson.
The responsibilities of the Corporate Governance, Nominations and
Compensation Committee include reviewing and approving the slate of director
nominees for election to the Company's board of directors, recommending
individuals to serve on the standing committees of the Board, and developing and
recommending to the board a set of corporate governance principles applicable to
the Company. The responsibilities of the Committee also include reviewing and
approving executive appointments and remuneration and supervising the
administration of the Company's employee benefit plans. The Corporate
Governance, Nominations and Compensation Committee consists entirely of
independent directors. The Committee is comprised of three members of the Board,
being Messrs. Crosson, O'Toole and Thigpen. In fiscal 2004, it held four
meetings (including two meeting of the Compensation Committee before it was
combined with the Corporate Governance and Nominations Committee). After the
2005 annual shareholders meeting, it is expected that the Corporate Governance,
Nominations and Compensation Committee will be comprised of Messrs. Crosson,
Coulter and O'Connell.
COMMITTEE CHARTERS
Our Board of Directors has adopted charters applicable to our Audit
Committee and our Corporate Governance, Nominations and Compensation Committee.
Copies of these charters are available at our website. Go to the investor
relations link at www.radicagames.com to inspect copies of our committee
charters.
AUDIT COMMITTEE FINANCIAL EXPERT
In 2004, our board of directors determined that Theodore J. Eischeid
qualified as an audit committee financial expert and that Mr. Eischeid was
independent within the meaning of the listing standards applicable to the
Company as a Nasdaq National Market company. However, on January 31, 2005, Mr.
Eischeid was named President and Chief Operating Officer of the Company and
resigned from the Audit Committee. Timothy R. Busch was named Chairman of the
Audit Committee in replacement of Mr. Eischeid. The board determined that Mr.
Busch is an independent director within the meaning of such listing standards
but made no determination that Mr. Busch would qualify as an audit committee
financial expert. However, the board determined that Mr. Busch meets the
financial sophistication requirement of such listing standards.
Therefore, the board of directors determined that the Company does not
have an audit committee financial expert serving on its Audit Committee at the
present time. This is due to the inability of the Company to replace Mr.
Eischeid as audit committee financial expert in the short time frame associated
with his hiring as an officer.
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The charter of the Audit Committee requires that all members of such
committee be independent and the board expects that ordinarily at least one
member will qualify as an audit committee financial expert. Promptly following
the 2005 annual shareholders meeting, the board of directors expects to make
determinations about the members of the Audit Committee with respect to the
qualifications of such persons as an audit committee financial expert.
CODE OF ETHICS
The Company has adopted a Code of Ethics that is applicable to all
directors, senior management and employees. The Code of Ethics contains written
standards that are reasonably designed to deter wrongdoing and to promote honest
and ethical conduct and the other standards applicable to public companies. A
copy of the Code of Ethics is available at our website. Go to the investor
relations link at www.radicagames.com to inspect a copy of our Code of Ethics.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Information responsive to this item is contained in the Company's
Annual Report on Form 20-F for the year ended December 31, 2004 and is
incorporated herein by reference. See Item 7 in such Report on Form 20-F.
COMPENSATION OF OFFICERS AND DIRECTORS
COMPENSATION
In fiscal 2004, the aggregate amount of compensation paid to all
executive officers and directors for services in all capacities was
approximately $3.2 million. In addition, bonus payments of $0.2 million were
accrued in 2004 for 2004 performance and are expected to be paid in April 2005.
In fiscal 2004, each outside (i.e., non-employee and non-affiliated)
director of the Company received compensation according to the following
schedule:
o Board retainer $10,000 annually
o Quarterly board meeting fee $1,250 per meeting
o Committee retainer $4,000 annually (excluding
Executive Committee)
o Audit chair additional retainer $4,000 annually
o Other committee chairs additional
retainer $2,000 annually
Payments are made quarterly. Any director may elect to receive some or all of
the above fees payable in shares of the Company's Common Stock valued at the
then current market price.
Directors who are employees or affiliates of the Company are not paid
any fees or additional remuneration for service as members of the Board of
Directors or its Committees.
Upon each annual re-election to the Board of Directors, each outside
director receives stock options to purchase 2,500 shares per quarter (i.e.
10,000 shares per annum) of Common Stock of the Company at an exercise price
equal to the then current market price of the Company's Common Stock. The
average exercise price was $9.02 per share in 2004. These options are
exercisable after one year from the date of grant.
The Company also follows the practice that upon the initial election or
appointment of a new outside director to the Board of Directors, such director
receives a stock option to purchase 30,000 shares of the Company's Common Stock
at an exercise price equal to the then-current market price, and, based on past
practice, these options have been exercisable after one year from the date of
grant.
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EMPLOYMENT AGREEMENTS
Messrs. Feely, Eischeid, Howell, Bengtson, Horton and Ms. Olson have
each entered into individual employment agreements with the Company. In
addition, the Company provides residences for Mr. Howell and Mr. Scott in Hong
Kong. Additional information regarding employment agreements is contained in the
Company's Annual Report on Form 20-F for the year ended December 31, 2004 and is
incorporated herein by reference. See Item 6 in such Report on Form 20-F.
OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY
The Company's 1994 Stock Option Plan provided for the granting of stock
options to directors, officers and employees of the Company. The Stock Option
Plan is administered by the Corporate Governance, Nominations and Compensation
Committee (hereinafter, the "Committee") of the Board of Directors. The total
number of shares of the Company's Common Stock that may be purchased pursuant to
stock options under the Stock Option Plan shall not exceed in the aggregate 3.7
million shares. The Stock Option Plan terminated in October 2004 but continues
in effect for outstanding options under such plan.
At the Annual Shareholders Meeting in May 2004, the 2004 Omnibus Equity
Incentive Plan was approved to replace the 1994 Stock Option Plan. The 2004
Omnibus Equity Incentive Plan includes an authorization for a total of 500,000
shares of the Company's common stock to be issued under the plan and the plan
will expire in 2014 unless earlier terminated.
The option price per share with respect to each option shall be
determined by the Committee but shall normally be not less than 100% of the fair
market value of the Company's Common Stock on the date such option is granted.
Ordinarily, either twenty percent or thirty-three and a third percent of the
stock options vest and become exercisable on each of the first five or three
anniversaries of the date of grant, and all of the options expire in ten years.
In fiscal year 2004, an aggregate of 137,000 options (exclusive of the
outside directors' options and net of stock options that were both issued and
canceled in the year) were granted to directors, officers and other employees to
purchase the Company's shares at exercise prices ranging from $7.15 to $9.11 per
share.
At the end of fiscal year 2004, after giving effect to all prior
exercises and forfeitures of options, an aggregate of 1,317,886 options
(exclusive of the outside directors' options) were outstanding at exercise
prices ranging from $1.09 to $19.63 per share, and of such amount a total of
967,750 options were held by directors and executive officers of the Company as
a group. Also, an aggregate of 265,000 outside director's options were
outstanding at exercise prices ranging from $2.00 to $12.63 per share. During
2004, a total of 510,636 shares were issued upon the exercise of options, at
exercise prices ranging from $1.09 to $6.78 per share. Prior to 2004, a total of
1,636,042 shares had been issued upon the exercise of options, at exercise
prices ranging from $0.57 to $11.00 per share.
Information respecting options granted and exercised in the fiscal
periods of the Company prior to and including 2004 is contained in the Company's
Annual Report on Form 20-F for the year ended December 31, 2004, and is
incorporated herein by reference. See Item 6 in such Report on Form 20-F and
Note 11 of the Notes to the Consolidated Financial Statements included therein.
APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Management is recommending, and the person named in the enclosed form
of proxy will, in the case of a ballot and in the absence of specifications or
instructions to vote against or not to vote (abstain) in the form of proxy, vote
for the re-appointment of KPMG as the Independent Registered Public Accounting
Firm of the Company, to hold office until the next annual meeting of
shareholders of the Company or until a successor is duly elected or appointed,
and the authorization of the directors to fix the Independent Registered Public
Accounting Firm's remuneration. KPMG has been the Independent Registered Public
Accounting Firm of the Company since 2001.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information responsive to this item is contained in the Company's
Annual Report on Form 20-F for the year ended December 31, 2004 and is
incorporated herein by reference. See Item 16C in such Report on Form 20-F.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 2006 annual
meeting of shareholders must be received by the Company at the principal
executive offices of Radica USA in the United States (see address below) on or
before December 31, 2005 in order to be considered for inclusion in the
Company's 2006 management information circular/proxy statement.
In addition, under the Company's Bye-Laws, unless a person is a
continuing director or is recommended by the board of directors for election, no
person shall be eligible for election to the office of director at any meeting
of shareholders unless, not less than 60 days nor more than 90 days before the
day appointed for the meeting, there shall have been given to the Secretary of
the Company notice in writing by a shareholder who is qualified to be present
and vote at the meeting of his intention to propose such person for election and
also notice in writing, signed by the person to be proposed, of his willingness
to be elected.
OTHER MATTERS
Management is not aware of any amendments or variations to matters
identified in the Notice or of any other matters that are to be presented for
action to the Meeting other than those described in the Notice.
Information stated in this Circular is dated as of January 31, 2005
except where otherwise indicated. The contents and the mailing of this Circular
have been approved by the Board of Directors of the Company.
PATRICK S. FEELY JON N. BENGTSON THEODORE J. EISCHEID DAVID C.W. HOWELL
Chief Executive Officer Chairman of the Board President and Chief President Asia Operations
Operating Officer and Chief Financial Officer
The Company files an Annual Report on Form 20-F with the Securities and
Exchange Commission. A copy of this Circular and the Annual Report containing
the financial statements of the Company and Management's Discussion and Analysis
of Financial Condition and Results of Operations, will be sent to any person
upon request in writing addressed to Investor Relations at Radica USA's office
at 13628-A Beta Road, Dallas, Texas 75244. Copies are without charge to any
shareholder.
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