UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2005.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ________________ to __________________
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(Jurisdiction of incorporation or organization)
SUITE V, 6/FL. 2-12 AU PUI WAN ST.
FO TAN, HONG KONG
(Address of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.01
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Title of each class Amount Outstanding
------------------- ------------------
Common Stock, Par Value $.01 19,080,004
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
--------- --------
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes No X
--------- ---------
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated filer Accelerated filer Non-accelerated filer X
----- ----- -----
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 X
------ ------
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- ---------
2
RADICA GAMES LIMITED
INDEX TO ANNUAL REPORT ON FORM 20-F
YEAR ENDED DECEMBER 31, 2005
ITEMS IN FORM 20-F
Page
----
PART I 5
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 5
ITEM 3. KEY INFORMATION 5
ITEM 4. INFORMATION ON THE COMPANY 15
ITEM 4A. UNRESOLVED STAFF COMMENTS 25
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 25
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 36
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 43
ITEM 8. FINANCIAL INFORMATION 44
ITEM 9. THE OFFER AND LISTING 44
ITEM 10. ADDITIONAL INFORMATION 45
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 49
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 50
PART II 50
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 50
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS 50
ITEM 15. CONTROLS AND PROCEDURES 50
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 50
ITEM 16B. CODE OF ETHICS 51
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 51
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 51
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS 51
PART III 51
--------
ITEM 17. FINANCIAL STATEMENTS 51
ITEM 18. FINANCIAL STATEMENTS 51
ITEM 19. EXHIBITS 52
3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. For example, statements included in this report regarding
our financial position, business strategy and other plans and objectives for
future operations, and assumptions and predictions about future product demand,
supply, manufacturing, costs, marketing and pricing factors are all
forward-looking statements. We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information available to us on the date hereof, but we cannot assure you that
these assumptions and expectations will prove to have been correct or that we
will take any action that we may presently be planning. Forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from projected results. These risks include those set forth
elsewhere in this Annual Report on Form 20-F for the fiscal year ended December
31, 2005. See "Item 3. Key Information - Risk Factors" in this report on Form
20-F. We are not undertaking to publicly update or revise any forward-looking
statement if we obtain new information or upon the occurrence of future events
or otherwise.
4
PART I
Except as expressly indicated or unless the context otherwise requires,
as used herein, "Radica", the "Company", "we", or "us", means Radica Games Ltd.
and its subsidiaries.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
Set forth below is the selected income statement and balance sheet data
as of and for each of the years in the five-year period ended December 31, 2005.
This data is derived from the consolidated financial statements included herein
and from those previously reported for earlier periods. This summary should be
read in conjunction with "Operating and Financial Review and Prospects" and the
consolidated financial statements and notes thereto included elsewhere in this
document.
5
YEAR ENDED DECEMBER 31,
(in thousands, except per share data and margins) 2005 2004 2003 2002 2001
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $162,779 $123,399 $105,200 $124,646 $98,554
Cost of goods sold (exclusive of items
shown separately below) 101,927 81,576 65,350 78,138 65,332
-------- -------- -------- -------- -------
Gross profit 60,852 41,823 39,850 46,508 33,222
-------- -------- -------- -------- -------
Operating expenses:
Selling, general and administrative 37,979 30,071 25,000 27,038 25,645
Research and development 4,908 4,164 3,895 4,094 5,775
Depreciation and amortization of goodwill and
intangible assets 1,984 1,693 2,033 2,858 4,013
Impairment of goodwill 6,015 3,536 - - -
Restructuring charge - - 87 - 1,551
-------- -------- -------- -------- -------
Total operating expenses 50,886 39,464 31,015 33,990 36,984
-------- -------- -------- -------- -------
Operating income (loss) 9,966 2,359 8,835 12,518 (3,762)
Other income 216 754 317 306 24
Foreign currency gain (loss), net 135 417 178 1,744 (219)
Net interest income 859 765 295 35 136
-------- -------- -------- -------- -------
Income (loss) before income taxes 11,176 4,295 9,625 14,603 (3,821)
(Provision) credit for income taxes (644) (839) 2,866 (2,669) (553)
-------- -------- -------- -------- -------
Net income (loss) $10,532 $3,456 $12,491 $11,934 $(4,374)
======== ======== ======== ======== =======
Net earnings (loss) per share - basic $0.55 $0.19 $0.69 $0.67 $(0.25)
======== ======== ======== ======== =======
Weighted average number of common shares 18,993 18,653 18,017 17,726 17,612
Net earnings (loss) per share - diluted $0.54 $0.18 $0.66 $0.65 $(0.25)
======== ======== ======== ======== =======
Weighted average number of common shares
and common equivalent shares 19,663 19,526 19,060 18,336 17,612
Cash dividends declared and paid per share $ 0.18 $ 0.16 $ - $ - $ -
STATISTICAL DATA:
Gross margin 37.4% 33.9% 37.9% 37.3% 33.7%
Operating margin 6.1% 1.9% 8.4% 10.0% (3.8%)
BALANCE SHEET DATA (AT PERIOD END):
Working capital $82,448 $71,775 $65,616 $50,155 $36,709
Total assets 117,268 109,941 102,214 95,302 88,407
Long-term debt - - - - 1,825
Total debt - - - 2,671 6,319
Common stock 191 187 182 178 176
Shareholders' equity 98,395 91,077 89,156 74,636 63,052
Note: Working capital represents current assets less current liabilities.
6
RISK FACTORS
Our common stock involves a significant degree of risk. You should
carefully consider the following risk factors and the other information
contained or incorporated by reference in this annual report before investing in
our common stock. Any of the following factors, depending upon the severity and
circumstances of a particular occurrence, could result in a material adverse
effect on our business, prospects, financial condition and results of
operations.
RISK OF MANUFACTURING IN CHINA
Our factory is in Tai Ping, Dongguan, People's Republic of China
("China") and our headquarters are in Hong Kong, which is a Special
Administrative Region of China.
Risk of China Losing Normal Trade Relations Status or of Changes in
Tariff or Trade Policies. We manufacture in China and export from Hong Kong and
China to the United States and worldwide. Our products sold in the United States
are currently not subject to U.S. import duties. On September 19, 2000, the U.S.
Senate voted to permanently normalize trade with China, which provides a
favorable category of U.S. import duties. In addition, on December 11, 2001
China was accepted into the World Trade Organization (WTO), a global
international organization of 144 countries that regulates international trade.
As a result of opposition to certain policies of the Chinese government
and China's growing trade surpluses with the United States, there has been, and
in the future may be, opposition to the extension of Normal Trade Relations, or
NTR, status for China. The loss of NTR status for China, changes in current
tariff structures or adoption in the United States of other trade policies
adverse to China could have an adverse effect on our business.
Chinese Political, Economic and Legal Risks. Our current and future
operations in China and Hong Kong are highly dependent on the Chinese
government's continued support of economic reform programs that encourage
private investment, and particularly foreign private investment. Although the
Chinese government has adopted an "open door" policy with respect to foreign
investment, we cannot assure you that this policy will continue. A change in
policies by the Chinese government could adversely affect our business by, among
other things, imposing confiscatory taxation, restricting currency conversion,
imports and sources of supplies, or expropriating private enterprises. Although
the Chinese government has been pursuing economic reform policies for many
years, we cannot assure you that the Chinese government will continue to pursue
these policies or that these policies may not be significantly altered,
especially in the event of a change in leadership or other social or political
disruption.
Our production and shipping capabilities could be adversely affected by
ongoing tensions between the Chinese and Taiwanese governments. In the event
that Taiwan does not adopt a plan for unifying with China, the Chinese
government has threatened military action against Taiwan. As of yet, Taiwan has
not indicated that it intends to propose and adopt a reunification plan. If an
invasion were to occur, our supply of components from Taiwanese suppliers,
including computer processing units (CPUs), could be cut off, potentially
limiting our production capabilities. Invasion could also lead to sanctions or
military action by the U.S. and/or European countries, which could materially
affect our sales to those countries.
China Does Not Have a Comprehensive System of Laws. Enforcement of
existing laws in China may be sporadic and implementation and interpretation of
laws may be inconsistent. The Chinese judiciary is relatively inexperienced in
enforcing the laws that exist, leading to a higher than usual degree of
uncertainty as to the outcome of any litigation. Even where adequate law exists
in China, it may be impossible to obtain swift and equitable enforcement of such
law, or to obtain enforcement of a judgment by a court of another jurisdiction.
Dependence on Local Government. We operate our factory in China under
agreements with the local government. These agreements and our factory
operations are dependent on our relationship with the local government and
existing trade practices. This relationship could be subject to adverse change
in the future, especially in the event of a change in leadership or other social
or political disruption.
Chinese Taxation. In 2005, we incurred $587,760 in foreign enterprise
tax relating to our Chinese subsidiary that is operated through a joint venture
("JV") contract. This is the seventh year we have paid foreign enterprise tax in
China. We were granted 50% relief from foreign enterprise tax through December
31, 2001 under the Foreign Enterprise Income Tax Law of The People's Republic of
China and were therefore taxed at 12%. In 2002 and 2003, we were taxed at the
full rate of tax of 27%; however, we successfully applied to be designated as an
"Export Oriented Enterprise", which resulted in a tax rebate received in 2005,
2004 and 2003 that reduced our China tax rate applicable to 2004, 2003 and 2002
to 12% excluding the local tax of 3%. The application to be designated as an
"Export Oriented Enterprise" is required to be made on a yearly basis. We
applied for the
7
same designation for 2005 and if our application is successful, it will result
in the receipt of a tax rebate in 2006 that will reduce our China tax applicable
to 2005 to 12%.
The PRC assesses tax on us based on a JV contract. The JV contract is a
JV with the local township that lasts through August 12, 2044 (inclusive of the
contract renewal with respect to extension of the lease period for 20 years
after its first expiration in 2024) and tax is payable quarterly based on tax
rates determined upon entering the agreement.
The Chinese tax system is subject to substantial uncertainties and has
been subject to recently enacted changes, the interpretation and enforcement of
which are also uncertain. We cannot assure you that changes in Chinese tax laws,
their interpretation or their application will not subject us to substantial
Chinese taxes in the future. In addition, the negotiation and settlement of tax
obligations with the local tax authorities are a normal occurrence.
Chinese Customs. Our Chinese subsidiary invoices the Macau entity which
then invoices the Hong Kong, U.S. and U.K. entities for sales rendered. As
required by Chinese customs and the Chinese tax authority in each jurisdiction,
our Chinese subsidiary seeks to apply arms length pricing to this process.
Should the customs or tax authority in any jurisdiction consider the pricing not
to be arms-length, it may deem the prices charged to be different from those we
have applied. If this decision were to be applied unilaterally, it could lead to
an increase in our overall customs duties and taxes. In addition, we may have to
expend resources in defending our position, irrespective of the outcome
determined.
Chinese Value Added Tax (VAT). China's turnover tax system consists of
value-added tax, or VAT, consumption tax and business tax. Export sales are
exempted under VAT rules and an exporter who incurs input VAT on purchase or
manufacture of goods should be able to claim a refund from Chinese tax
authorities. However, due to a reduction in the VAT export refund rate of some
goods, exporters might bear part of the VAT they incurred in conjunction with
the exported goods. In 2003, changes to the Chinese Value Added Tax system were
announced affecting the recoverability of input VAT beginning January 1, 2004.
Our VAT expense will depend on the reaction of both our suppliers and customers.
Continued efforts by the Chinese government to increase tax revenues could
result in revisions to tax laws or their interpretation, which could increase
our VAT and various tax liabilities. In addition from 2006 onwards the China
customs authorities intend to change their method of calculating both import and
export VAT which will increase our liability. It is also possible they could
choose to make this change retroactive. If the change were to be made
retroactive, it would be subject to negotiation with China customs at that time.
We establish provisions for our known and estimated customs duties and
tax obligations. However, we may be exposed to additional taxation whether
through a challenge by one of the many tax authorities in international
jurisdictions of our transfer pricing, our claim regarding lack of permanent
establishment, or other interpretations regarding our tax obligations.
Limited Infrastructure. Electricity, water, sewage, telephone and other
infrastructure are limited in the locality of our factory. In the past, we have
experienced temporary shortages of electricity and water supply. We have
installed nine back-up electrical generators in our factory which can support it
in the event of a power shortage and have constructed a water storage tank that
was put into service in early 2005. We cannot assure you that the infrastructure
on which our factory is dependent will be adequate to operate the factory
successfully.
Availability of Factory Workers. Due to increases in demand for workers
in southern China, we cannot assure you that we can adequately staff the
factory. Labor shortages could have a material impact on production, which could
lead to missed sales, increased air freight costs and vendor fines.
DEPENDENCE ON CURRENT PRODUCT APPEAL AND NEW PRODUCT INTRODUCTIONS
Our operating results depend largely upon the appeal of our products to
consumers. Consumer preferences are highly subjective, and there can be no
assurance that consumers will continue to find existing products appealing or
will find new products appealing. Also, we continue to offer a relatively
limited range of products that are all in the categories of electronic toys and
games or video game accessories. This exposes us to the risks of any narrowly
focused business. Changes in consumer preferences away from the kinds of
products we offer could have an adverse effect on our business.
Some of our products have only recently been introduced and although
they may experience good initial sales growth, we cannot assure you that this
initial success is indicative of significant future sales. As a general matter,
we expect that the sales of these products will eventually decline. We cannot
predict how long the product life cycle will last for any product. Our long-term
operating results will therefore depend largely upon our continued ability to
conceive, develop and introduce new appealing products at competitive prices.
8
Once a new product is conceived, the principal steps to the
introduction of the product include design, sourcing and testing of the
electronic components, tooling, and purchase and design of graphics and
packaging. At any stage in the process, there may be difficulties or delays in
completing the necessary steps to meet the contemplated product introduction
schedule. It is, for example, common in new product introductions or product
revisions to encounter technical and other difficulties affecting manufacturing
efficiency and, at times, the ability to manufacture at all, that will typically
be corrected or improved over a period of time with continued manufacturing
experience and engineering efforts. If one or more aspects necessary for
introduction of products are not met in a timely fashion, or if technical
difficulties take longer than anticipated to overcome, the anticipated product
introductions will be delayed, or in some cases may be terminated. Therefore we
cannot assure you that products will be introduced in a timely fashion.
Future products may utilize different technologies and require
knowledge of markets in which we do not presently participate. Significant
delays in the introduction of, or the failure to introduce, new products or
improved products would have an adverse effect on our operating results.
We cannot assure you that retailers will react positively to new
product introductions which may result in termination of a product. There is
also a risk that the demand for new or existing products could drop suddenly. As
a result, we may build excess quantities of certain products and subsequently
have to make inventory provisions to markdown the value of excess inventory
quantities to their estimated market or net realizable value.
There are often technical challenges in bringing a product into
production. We may announce and sell a product but later find it must be delayed
or abandoned due to difficulties in engineering and manufacturing. We cannot
assure you that an announced product will ship on time or not be abandoned.
NO ASSURANCE OF GROWTH
We cannot assure you that we will achieve future growth in net sales or
that we will be able to maintain our present levels of net sales or
profitability. Our current business strategy emphasizes the sale of a controlled
number of products, while representing a more diverse range of products than in
the past. Our products include casino and heritage electronic games, mechanical
slot banks, youth electronic games, tabletop games, the 20Q(TM) line of
electronic handheld and tabletop games, Play TV(R) games, the Girl Tech(R) girls
electronic line, the Cupcakes(R) doll line, the Street Muttz(TM) plush line, the
Cube World(TM) line of interactive electronic stick people and video game
accessories sold under the Gamester(R) brand. In any period, our financial
results are likely to vary with the success or lack of success of newly
introduced products, which are inherently uncertain. We cannot simply rely on
continuing sales of existing products.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a significant portion of our sales have been concentrated
with a few large retail customers. These customer concentrations are disclosed
in the notes to our consolidated financial statements in this annual report.
Most of our retail customers operate on a purchase order basis and we do not
have long-term contracts with our retail customers. While we believe we have
good relationships with our major retail customers, the loss of one or more of
these retail customers would have an adverse effect on our operating results.
On January 22, 2002, the Kmart Corporation filed for protection from
its creditors under Chapter 11 of the United States Bankruptcy Code. Our
receivable exposure to Kmart was entirely provided for during 2001 and no
additional write-downs or expenses related to this bankruptcy were incurred
during 2002. We continue to sell our products to Kmart and closely monitor our
account with them in order to minimize future exposure.
During 2003, both FAO, the parent company of FAO Schwartz and Zany
Brainy stores, and KB Toys, Inc. filed for Chapter 11 protection. Our exposure
was limited in both of these cases and any outstanding receivables were provided
for during 2003. Currently, we are not selling to FAO Schwartz and are selling
in limited quantities to KB Toys. As with Kmart, the accounts will be closely
monitored in order to minimize future exposure.
During 2005, a significant portion of our Original Equipment
Manufacturing ("OEM") sales were sales to Hasbro, which is also one of our
competitors. We do not have a specific contract with Hasbro regarding these
projects and there is no assurance that we will continue to receive orders from
Hasbro, which could have an adverse effect on our business.
On March 17, 2005, Toys R Us (TRU) announced that they had agreed to be
acquired for $6.6 billion by Kohlberg Kravis Roberts & Co., Bain Capital and
Vornado Realty Trust. In early 2006, the acquiring group announced the closure
of 85 TRU
9
stores in the US. TRU has stated that they do not plan to close any more stores
in 2006 but there are no assurances that they won't continue to downsize further
in the future. This closure could have an adverse effect on our future business
with TRU.
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS
We are dependent on suppliers for the components and parts that we
assemble to produce our products. An interruption of the supply of LCDs,
semiconductor chips or other supplies from a supplier could result in
significant production delays. Additionally, recent increases in oil prices have
resulted in significant price increases from suppliers of plastics. Most of our
products are primarily made from plastic. While our products also contain
significant electronic components and the cost of the plastic may not be the
most significant material costs, if oil prices continue to rise, it could result
in additional increases in the price of plastic, which would increase our
product costs and subsequently reduce our profits. We are also encountering
increases in the costs of other materials such as copper, which is used in a
number of our electronic components, that could also potentially impact product
costs.
We also rely on outside manufacturers for production of some of our
electronic games and video game accessories. While the majority of our
production occurs in our own factory, manufacturer delays or shutdowns could
have a significant impact on future sales of certain products.
CONCENTRATED MANUFACTURING FACILITIES
A disruption of operations at our China factory due to fire, labor
dispute, dispute with the local government or otherwise, would have an adverse
effect on our operating results. In such event, we believe that we could
partially mitigate the effect of a disruption by increasing the use of
subcontractors to assemble our products, but we cannot assure you that we would
be able to do so. In addition, our manufacturing facilities are dependent on our
relationship with the local government.
NO ASSURANCE OF SUCCESS IN NEW PRODUCT LINES
From time to time, we expand into related or new product lines in order
to diversify and grow. Examples included the development of our Original Design
Manufacturing ("ODM") and OEM operations and our expansion into the video game
accessories market. We cannot assure you that such product lines can be retained
or that we will be successful in such ventures.
NO ASSURANCE OF CONTINUED ODM/OEM OPERATIONS
Our contracts with ODM and OEM customers can generally be terminated by
either party on short notice; therefore we cannot assure you that such business
can be retained for an extended period of time. Loss of such operations would
materially affect our revenues.
DEPENDENCE ON KEY PERSONNEL
Our success is substantially dependent upon the expertise and services
of our senior management personnel. The loss of the services of senior
executives would have an adverse effect on our business.
SEASONALITY
We experience a significant seasonal pattern in our operating results
and working capital requirements. We typically generate most of our sales in the
third and fourth quarters of our fiscal year, prior to the traditional gift
season. The high level of seasonality causes us to take large risks in the
purchase of inventory and extending credit to customers for the holiday season.
We cannot assure you that we will sell all our inventories. Excess inventory at
year-end may result in financial losses from obsolescence writedowns, returns,
markdowns and bad debts.
Our operating results may also fluctuate during the year due to other
factors such as the timing of the introduction of new products. The market price
of our common stock may be subject to significant fluctuations in response to
variations in quarterly operating results and other factors. These fluctuations
are reflected in our statement regarding selected quarterly financial data
attached as Exhibit 14.1 to this annual report.
10
INDUSTRY AND PRODUCT LINE VOLATILITY
The toy and game industry is known for a high level of volatility as a
result of changing consumer tastes, competition and over saturation of popular
products. We have experienced significant volatility in our results in our past
history. While we have diversified our business in recent years to reduce
volatility, there can be no guarantee that this history of volatility will not
continue.
COMPETITION
The electronic games and youth electronics and video game accessories
market is highly competitive. We currently face direct competition from a number
of other producers of handheld electronic games and video game accessories. The
barriers for new producers to enter into our markets are relatively low and we
expect that we will face increased competition in the future. Some competitors
offer products at lower prices, are better established in the industry and are
larger than we are. In addition, with respect to ODM and OEM, we compete with a
number of substantially larger and more experienced manufacturers. As we enter
other markets and businesses, we expect to face new competition.
INTELLECTUAL PROPERTY RISKS
From time to time, other companies and individuals may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies or marks that are important to our industry generally or to our
business specifically. We will evaluate each claim relating to our products or
other aspects of our business and, if appropriate, will seek a license to use
the protected technology. There can be no assurance that we will be able to
obtain licenses to intellectual property of third parties on commercially
reasonable terms, if at all. In addition, we could be at a disadvantage if our
competitors obtain licenses for protected technologies on more favorable terms
than we do. If we or our suppliers are unable to license protected technology
used in our products, we could be prohibited from marketing those products or
may have to market products without desirable features. We could also incur
substantial costs to redesign our products or to defend any legal action taken
against us. If our products or manufacturing methods should be found to infringe
protected technology, we could be enjoined from further infringement and
required to pay damages to the infringed party. Any of the foregoing could have
an adverse effect on our operating results and financial position.
In 2005, Radica and our subsidiary Radica (Macao Commercial Offshore)
Limited were involved in litigation initiated by AtGames Holdings Limited which
challenged the exclusivity of Radica's rights to the Play TV Sega Genesis games.
This litigation, which related to Sega Corporation and Sega Toys, was described
in detail in Radica's Form 6-K reports under the Securities Exchange Act of
1934, most recently in the Form 6-K dated December 19, 2005. In late December
2005, the arbitrator issued an interim decision in favor of Sega Corporation in
its arbitration against AtGames. Subsequently, in January 2006, AtGames
voluntarily dismissed (without prejudice) its complaint against Radica and
Radica Macao. At present, there is no pending litigation or arbitration against
the Radica parties arising out of this matter. However, we are considering
whether to take legal action against the other companies involved in this matter
with respect to infringement of Radica's intellectual property rights and, if
such action is taken, counterclaims may be made against the Radica parties. We
could incur substantial legal costs to initiate such actions and there is no
guarantee that we would prevail. The Company's agreement with Sega Toys includes
certain indemnity provisions that allow the Company to seek repayment of certain
legal expenses in its defense of the AtGames lawsuit. The Company plans seek
recovery of certain expenses under this agreement.
On December 9, 2005 University Games Corporation filed a Notice of
Opposition with the US Patent and Trademark Office opposing registration of a
trademark application for "20Q" filed by 20Q.net, Inc., the inventor of the
software licensed by Radica for use in our 20Q line of products. University
Games claims that the trademark filed by 20Q.net could create confusion with the
Twenty Questions trademark registration and game name they use for a board game
that they distribute. Both 20Q.net and Radica believe that the Twenty Questions
name is generic and not a valid trademark owned by University Games, and that
University Games' opposition to the 20Q trademark application is without merit.
In late January of 2006, 20Q.net filed a response to the Notice of Opposition
and filed a counterclaim to cancel the Twenty Questions registration. In the
event that University Games filed a federal district court case alleging
trademark infringement, a court could order Radica to cease using the 20Q name
or pay damages for past or future use of the 20Q name.
PRODUCT LIABILITY
Historically, we have received only minor complaints relating to
injuries or other damages caused by our products. However, in recent years we
have introduced products that involved more active play including our Play TV(R)
baseball, snowboard and golf games. We may be exposed to claims for damages
related to the use of our products, some or all of which may not be covered by
insurance. We cannot guarantee you that current or future products may not
result in claims or that our insurance will be adequate.
11
INCREASED TAXATION
We cannot predict whether our tax rates will remain as low as they have
been in the past as tax regulations and the application or interpretation in the
various jurisdictions where we operate are always subject to change. Our taxes
are subject to audit by the taxing authorities. We cannot guarantee that
additional taxes will not be due as a result of audits or other factors.
PRODUCT "KNOCK-OFFS"
On occasion in the electronic games and video game accessories
industries, successful products are "knocked-off" or copied. While we strive to
protect our intellectual property we cannot guarantee that knock-offs will not
have a significant effect on our business. The costs incurred in protecting our
intellectual property rights could be significant and there is no assurance that
we will be able to successfully protect our rights.
BAD DEBTS AND RETURNS
While we perform full credit checks on all of our customers we cannot
be assured that any customer will not default on a payment of debt. A default
could have a significant effect on our operating results. It is our policy in
North America to only take back defective products and while we believe we will
be able to enforce this policy under normal industry conditions, it may not be
possible to enforce this policy in all cases. The video game accessories market
generally experiences a higher rate of defective and overstock returns than the
electronic and mechanical game market does. Generally, defective video game
accessories that are manufactured by third party manufacturers are returned to
the manufacturer or destroyed on site for credit. In such cases, there is no
guarantee that we will be paid by the manufacturer.
In certain instances, where retailers are unable to sell the quantity
of products which have been ordered from us, we may, in accordance with industry
practice, assist retailers to enable them to sell such excess inventory by
offering discounts or accepting returns. A portion of firm orders, by their
terms, may be canceled if shipment is not made by a certain date. We minimize
the related costs of such discounts and returns by engaging personnel to visit
selected customers and assist in the management of our product returns. We
establish provisions based on historical experience at the time of sale of the
related products. The return of non-defective products occurs infrequently in
the U.S. In the U.K. market, accepting non-defective product returns occurs more
frequently, requiring higher provisions.
CONTROL BY EXISTING SHAREHOLDERS
Our largest shareholders, including a group that consists of Dito
Devcar Corporation and certain related persons, a group that consists of RAD
Partners 1999 LLC and certain related persons, and Royce & Associates, LLC, own
beneficially in the aggregate a majority of our outstanding common stock.
Assuming that they were in agreement, such persons would have the power to elect
our directors and to approve or disapprove all other matters requiring
shareholder approval regardless of the vote of any other shareholders.
DIFFICULTIES IN ENFORCING CIVIL LIABILITIES
We are a Bermuda holding company, and a substantial portion of our
assets are located outside the United States. In addition, many of our directors
and officers and the experts named herein reside outside the United States
(principally in Hong Kong, the United Kingdom and China), and all or a
substantial portion of their assets are or may be located outside the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon them, or to enforce judgments against them
or us obtained in the United States courts predicated upon the civil liability
provisions of the United States securities laws. Among other things, we
understand that there is doubt as to the enforceability in Bermuda and other
foreign jurisdictions, in original actions or in actions for enforcement of
judgments of United States courts, of civil liabilities predicated solely upon
the United States securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
At December 31, 2005, we had 19,080,004 shares of common stock
outstanding. We estimate that most of these shares were previously sold in
registered offerings or in transactions under Rule 144, and therefore are
tradable without restriction, other than any shares purchased by our
"affiliates." The remaining shares owned by existing shareholders are restricted
securities under the Securities Act of 1933, as amended, and may be sold only
pursuant to a registration statement or an applicable exemption from the
registration requirements, including Rule 144. Most of these restricted shares
are currently eligible for sale pursuant to Rule
12
144, subject to the limitations of that rule. Market sales of shares by existing
shareholders or the availability of shares for future sale may depress the
market price of our common stock.
LICENSES AND ROYALTIES
We have entered into various license and royalty agreements in which we
pay fees in exchange for rights to use product inventions or trademarked names,
shapes and likenesses for use in development of our product line. The agreements
generally include minimum fee guarantees based on a reasonable expectation of
the product sales to be generated throughout the life of the agreement. We
cannot assure you that we will be able to meet these expectations and if our
sales do not reach a certain level agreed with our customers, we are required to
at least pay the minimum fee under the agreement. Our license and royalty
agreements are based on a fixed percentage of sales made during the period. We
cannot assure you that we will be able to maintain or extend the rights to our
existing licenses. Several of our licenses apply to products that generate a
large volume of sales. Were we unable to maintain these licenses, the lost sales
could have a significant impact on future earnings.
LABOR
Labor disputes initiated by unions and trade groups could negatively
impact our business or the business of our vendors and customers. Such disputes
could ultimately cause shipping delays, increased costs and lost revenues
resulting from failure to deliver product to customers. We have no way of
anticipating when such actions will occur. None of our employees are in labor
unions or trade groups.
DEPENDENCE ON VIDEO GAME ACCESSORIES ("VGA") PLATFORM PROVIDERS
Our VGA product line (Gamester(R)), is dependent on first party
manufacturers of video game consoles such as Sony, Microsoft and Nintendo to
continue to support and market existing games platforms like PlayStation(R) 2,
PSP(TM), Xbox(TM), Game Boy(R) Advance and Game Boy(R) Advance SP(TM), and to
continue to develop gaming formats and accompanying software in the future. We
cannot guarantee success in this category without the ongoing support of these
platform providers. If a platform is withdrawn from the market or fails to sell,
we may be forced to liquidate our inventories or accept returns resulting in
significant losses.
During 2005, Microsoft introduced its Xbox 360 platform. Prior to
introduction of the platform, our management attempted to negotiate a licensing
agreement to manufacture and distribute accessories for Xbox 360 but were unable
to reach an agreement that made commercial and financial sense for Radica.
Currently we have no plans or intention to seek an agreement with Microsoft.
Sony has not announced the introduction date of the Playstation(R) 3 platform.
Sony typically does not enter into licensing agreements for platform accessories
and we have no assurance that we will be able to successfully engineer and
manufacture accessories for the new platform when it is brought to market.
SEVERE ACUTE RESPIRATORY SYNDROME ("SARS") OR OTHER COMMUNICABLE DISEASES
In 2003, several economies in Asia, including Hong Kong and southern
China, where our operations are located, were affected by the outbreak of SARS.
If there is a recurrence of an outbreak of SARS, or similar infectious or
contagious diseases such as avian flu, it could adversely affect our business
and operating results. For example, a future SARS outbreak could result in
quarantines or closures to our factory, and our operations could be seriously
disrupted as the majority of our work force is housed in a single dormitory. In
addition, ongoing concerns regarding SARS, particularly its effect on travel,
could negatively impact our customers and suppliers, in particular their
willingness to travel to do business.
ADVERSE WORLDWIDE AND LOCAL ECONOMIC AND POLITICAL CONDITIONS
Worldwide and local economic and political conditions can have a
significant negative impact on our Company. Examples of these conditions include
the impact of wars such as the Iraq conflict. Natural disasters such as
devastating typhoons or the recent tsunami in South East Asia. Laws may be
passed that impact the costs of manufacturing products such as the EU's recent
RoHS Directive. Laws may be passed banning certain types of toys such as toy
guns in states or local municipalities. Terrorist attacks may result in major
economic disruptions affecting sales in areas or around the world. Ports or
shipping lines may be impacted by many factors including labor disputes, storms
and security measures. Shortages may occur in critical materials and components
as well as labor. Inflation may accelerate in one or many economic sectors such
as the increase in the price of oil and its impact on plastics, other materials
and shipping costs. Countries may levy unfavorable duties and taxes or increase
the minimum wage or work rules. Many of the factors can lower profits, restrict
sales and damage the Company in many unforeseen
13
ways. These uncertainties make it difficult for us to estimate growth or profits
in the regional economies where we sell our products and therefore may
negatively affect our financial results.
VOLATILE MASS MARKET RETAIL SECTOR
Most of our sales are made to mass-market retailers. The mass-market
retail channel in the U.S. has experienced significant shifts in market share
among competitors in recent years, causing several of our customers to
experience liquidity problems, including several customers that have filed for
bankruptcy during the past three years. While we attempt to minimize our credit
exposure, there is always a risk that our customers will not pay or that they
will delay payment, subjecting us to exposure to bad debt losses. In addition,
if these customers were to cease doing business as a result of bankruptcy, it
could have a material adverse effect on our sales.
HONG KONG REAL ESTATE
We own certain commercial properties in Hong Kong, some of which we
occupy and one of which we lease to a third party. Market values of Hong Kong
real estate dropped significantly during 1997 to 2003 but in the recent two
years, the properties market has staged a strong recovery.
While we expect commercial real estate values to continue their
recovery, we cannot assure you that our commercial properties will follow.
CUSTOMER COMPLIANCE
Periodically, our factory is inspected by auditors either employed by
or contracted by individual customers to ensure that we are in compliance with
various safety and social standards. These standards can vary widely by customer
and failure to meet customer standards can lead to fines and suspension or
termination of shipping from our factory to the customer. The management team
makes every reasonable effort to ensure that we are in compliance with all of
our customers' safety and social standards, but there is no assurance that
customer auditors will find us in compliance. Failure to comply could have a
significant adverse impact on our revenues.
CURRENCY VALUATION
Efforts to increase worldwide distribution have made our business
increasingly global. We expect that international sales may continue to
represent a significant portion of our revenue. Although most of our
international sales are denominated in the US dollars, fluctuations in foreign
currencies may have an impact on our financial results. We are prepared to hedge
against fluctuations in foreign currencies if the exposure is material, and held
Chinese Renminbi (RMB) deposits of RMB55.5 million at the end of 2005
(approximately US$6.9 million) to reduce the foreign currency exposure against
future movements of the RMB against the US dollar.
We have monetary asset and liability balances in foreign currencies
other than the U.S. dollar, including the Pound Sterling, the Canadian dollar,
the Hong Kong dollar and the Chinese Renminbi, or RMB. International
distribution and sales revenues usually are made by our subsidiaries in the
United States, United Kingdom and Canada, and are denominated typically in their
local currency. However, the expenses incurred by these subsidiaries are also
denominated in the local currency. As a result, our operating results are
exposed to changes in exchange rates between the United States Dollar and the
Pound Sterling, the RMB or the Canadian dollar.
Currently China's currency, the RMB, is pegged to a basket of
currencies. On July 21, 2005, China allowed the RMB to appreciate 2.1 percent
against the dollar, but the Chinese Government continues to receive pressure
from other governments to trade its currency on the open market and allow it to
move in a wider band than before. If the Chinese Government were to trade its
currency freely on the open market and the RMB were to increase in value
relative to the U.S. dollar, we would experience increased factory and
production costs, including labor and certain raw materials that could have a
material impact on the cost of our products.
EFFICACY OF ADVERTISING AND PROMOTION
Radica promotes some of its products through advertising and promotion.
This promotion occurs primarily in the second half of the year during the
traditional holiday season and includes television commercials, magazine and
newspaper advertisements, in-store displays and viral marketing campaigns
orchestrated by contracted public relations firms. During 2005, we spent $12.3
14
million on such programs. Our ability to sell products is dependent in part on
our ability to successfully advertise and promote our products. If the cost of
these programs increases or if we were unsuccessful in our efforts to advertise
and promote our products, it could have a material adverse affect on our
financial results.
ROHS COMPLIANCE
Pursuant to Directive 2002/95/EC (on the Restriction of Hazardous
Substances) of the European Parliament, effective July 1, 2006, new electrical
and electronic equipment put on the European market may not contain lead,
mercury, cadmium, hexavalent chromium, polybrominated biphenyls (PBB) or
polybrominated dephenyl ethers (PBDE). As lead is currently the main ingredient
in our soldering process we are changing to 'lead free soldering'. In order to
do this we have purchased certain surface mount technology (SMT) equipment and
are in the process of setting up a lead free workshop within our Dongguan
factory. Our goal is to have this workshop fully operational by March 31, 2006.
In the event that we are not successful either we will have to have product
assembled at another facility that can produce product to this standard or stop
shipping to the European Union.
INTERNAL CONTROL SYSTEMS
Changing laws, regulation and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and
related regulations implemented by the US Securities and Exchange Commission
("SEC"), and the NASDAQ National Market ("NASDAQ"), are making some activities
more time consuming. We will be evaluating our internal controls systems to
allow management to report on, and our independent registered public accounting
firm to attest to, our internal controls. We will be performing the system and
process evaluation and testing (and any necessary remediation) required to
comply with the management certification and the registered public accounting
firm attestation requirements of Section 404 of the Sarbanes-Oxley Act. As a
result, we expect to incur substantial additional expenses and diversion of
management's time. While we anticipate being able to fully implement the
requirements relating to internal controls and all other aspects of Section 404
by our December 31, 2006 deadline (this deadline may be extended to December 31,
2007 depending on whether our stock value is beneath certain market
capitalization thresholds as of June 30, 2006), we cannot be certain as to the
timing of completion of our evaluation, testing and remediation actions or the
impact of the same on our operations since there is presently no definitive
standard available by which to measure compliance adequacy. If we are unable to
implement the requirements of Section 404 in a timely manner or with adequate
compliance, we may be subject to sanctions or investigation by regulatory
authorities such as the SEC or NASDAQ. Any such action could harm our business
or investors' confidence in our Company, and could cause the stock price to
fall.
ITEM 4. INFORMATION ON THE COMPANY
DESCRIPTION OF BUSINESS
Founded in 1983 by Americans living in Hong Kong, Radica Games Limited
(NASDAQ: RADA) was incorporated in Bermuda in 1993. We are headquartered in Hong
Kong and manufacture our products in our factory in southern China. In 1994 we
went public when our shares began trading on the Nasdaq National Market.
We manufacture and market a diverse line of electronic entertainment
products covering multiple product lines - Electronic games carrying the Radica
and Play TV(R) brand names, Gamester(R) branded video game controllers and
accessories, youth electronics carrying the Girl Tech(R) brand names and two new
categories, Cupcakes(R) dolls and Street Muttz(TM) electronic plush dogs,
introduced in 2005. Our factory also manufactures for other companies in the
electronic game industry. We market our products through subsidiaries in the
United States, the United Kingdom, Canada, Macau and Hong Kong. Our largest
market is in the United States where in 2004 we had the second largest market
share in the electronic handheld and tabletop electronic games according to
industry data source, The NPD Group, Inc.
We employ about 4,000 people worldwide in our group of companies. Our
largest retail customers include Wal-Mart, Target, Toys`R'Us, Kmart, Kohl's and
Argos. Our largest manufacturing customer is Hasbro. Internationally we sell
products in approximately 40 countries.
HISTORY OF PRODUCT LINES
ELECTRONIC GAMES
We have operated as a marketer and manufacturer of games since 1983,
starting with a small operation in Hong Kong providing souvenir casino games
such as mechanical slot banks for the Las Vegas and other markets. We expanded
into the
15
electronic game business setting up a factory in China in 1991 and a
distribution operation in the United States in 1992. The business grew
substantially from that point and we became the leading supplier of casino type
electronic handheld games in the U.S. market with games such as Video Poker and
Video Blackjack. Our electronic game products are sold under the Radica and Play
TV brand names.
In 1995 we began to diversify our product line into other electronic
handheld game areas beyond casino themed games. We began to offer classic games
such as Solitaire, Hearts and Gin Rummy, and sports games such as World Class
Golf(TM) and Football. In addition to the casino and classic games that helped
build the company, in recent years we have expanded our electronic game
offerings to a very broad line of electronic games including virtual fishing
games such as Bass Fishin'(R), virtual hunting games such as Deer Huntin'(TM),
TETRIS(R), and other games such as Talking Bingo(TM) and Ultimate Pinball(TM).
In 2004 we introduced 20Q(TM), based on the classic guessing game. 20Q(TM) was
named "The Number One Non-Television Promoted Toy" of 2004 according to The Toy
Book, an industry trade magazine and won the Electronic Entertainment Toy of the
Year at the 2006 TOTY awards in New York. We continued to expand the 20Q line in
2005 with tabletop and big screen versions of the game.
During our history we have become known as a leader in the creative use
of technology. For example, our line of fishing games, one of the top-selling
product lines in the history of electronic games, revolutionized the electronic
handheld games category after its introduction in 1996. The games feature
virtual motion-sensing technology that allows the player to use the physical
game as a rod and reel. The player casts, feels the fish bite, sets the hook
with a jerk, and reels in the fish with a real handle. This product started an
industry trend in creating virtual reality games where the product provides the
feel of the real sport. This is delivered by uniquely realistic game shapes,
featuring motion sensors and tactile feedback. We have expanded our line of
virtual motion sensing games beyond the fishing category. An example of this is
our Deer Huntin' 3(TM) game.
In 2000, we introduced Radica Play TV games featuring XaviX(R)
technology licensed from SSD. The technology provides consumers with easy-to-use
Play TV games, which are freestanding devices that plug directly into the TV and
use the screen as the display. This single-chip, multi-processor integrated
circuit is designed to generate high-quality graphics and sound on a television
set without the use of a video game console. Most importantly the technology
allows motion sensing control devices to interact with the TV images such as
using a physical baseball bat controller to hit video pitches or a physical
snowboard controller to control a race down a video ski slope. Play TV Baseball,
Play TV Snowboarder, and Play TV Buckmasters(R) Huntin' were successfully
introduced in 2000 and 2001. For 2004, we entered into a licensing agreement
with EA Sports(TM) to translate their popular Madden Football(TM) and SSX Tricky
video game titles into the Play TV format. In 2006, we will expand the line with
Golden Tee(R) Golf, based on the popular arcade games created by Incredible
Technologies, and Play TV Skateboarding(TM), an interactive game that gives
players the feeling they are riding in a skate park with the ability to perform
tricks, grinds and jumps using the skateboard interface and a handheld
directional pad.
In 2004, we expanded the "plug and play" category with our Play TV
Legends line. We have a license to manufacture and distribute Play TV
Legends(TM) Sega(R) Genesis(TM) games. The Play TV Legends(TM) Sega(R)
Genesis(TM) games are the first official Sega Genesis multi-game units that
replicate several of the original Sega Genesis games, game codes and graphics
and utilize a replica of the original Genesis control pad. All of the software
and content are stored in the game pad. The Play TV Legends line also includes
other Play TV Legends Sega games, Street Fighter(R) II, Menacer(R) and Outrun
2019(R) and Tetris.
In 2001 we introduced Skannerz(R). Targeting boys 7-12, Skannerz
utilizes UPC scanner technology to create a collectible-driven, interactive
battle game. The game can be played alone or linked to battle with another unit.
Building on this success for 2003 we launched Skannerz Commander and Skannerz
Battle Orbz, two variations on the original version. In 2005, the Skannerz line
was extended to include Skannerz(R) Racerz(TM), a racing game based on the
original Skannerz product. In 2006, we are introducing Scannerz(R)TV(TM), which
combines the collectibility of the original game with the high-quality graphics
of our Play TV line of products.
In 2005 we introduced Cube World(TM), a portable handheld device
consisting of stick characters and simplistic interactive objects that can be
stacked side-by-side or on top of each other to provide interaction between the
characters.
In 2006, we will introduce Thumb Warriors(TM), an updated electronic
version of the traditional thumb wrestling game. Sold in sets of two, the
individual warriors slide onto the thumb, secure around the wrist with a tail
and include sound. We will also expand the 20Q line of product with four new
versions, Music, Movies/TV, Sports and Junior 20Q, as well as additional foreign
language versions.
16
GAMESTER VIDEO GAME CONTROLLERS & ACCESSORIES
In June 1999, we announced the acquisition of Leda Media Products
("LMP"), a UK company that, with its Gamester brand, was a leader in video game
controllers in Europe (now known as Radica UK Ltd.). To date, we have
established video game controller and accessory products to enhance game play
and performance on video game consoles for Nintendo, Sony and Microsoft
including game control pads, steering wheels and memory cards. All Gamester
products are designed to make the game more fun or make the user a better
player, bringing the unfair advantage(TM) to the gamer.
We began shipping and selling the Gamester product line to the United
States and Canada during the second half of 2001 and moved most of the
manufacturing of controllers to our factory in China. Product development is
designed and built in house for the Gamester brand, except for a few less
technically demanding items which are outsourced to officially approved third
parties.
In 2001 we signed a worldwide licensing agreement with Microsoft to
design, manufacture and market peripherals for the Xbox(TM) video game system.
Xbox peripherals include the Phoenix game pad, the Phoenix for Xbox Live pad,
which enables voice communication technology and the Race Pac(R) controller, a
functioning wheel, seat and pedals in a portable unit compatible with both the
Xbox and Sony Playstation 2 platforms.
The video game accessories product line expanded in 2001 with the
introduction of Nintendo's Game Boy(R) Advance (GBA). We introduced products for
the GBA including the Flood Light(TM), which provides an illumination of the GVA
screen using a fluorescent light. The GBA line includes a broad selection of
cases, bags, chargers, adaptors and accessory packs. With the 2003 introduction
to Nintendo's Game Boy Advance SP, we introduced several products for the SP
under the Gamester brand, including Game Changer(TM), which allows gamers to
switch games without removing cartridges.
In 2005 we introduced a line of accessories for the new Sony PSP(TM)
portable Playstation platform. The line includes a case for carrying the unit,
power adaptors and game discs, a car docking station and attachable grips.
However, we did not get a license for the Xbox 360 as we could not agree on
terms with Microsoft, so the platform transition during 2005 from Xbox to Xbox
360 and the expected transition in 2006 of Playstation 2 to Playstation 3 have
left us with a greatly reduced revenue and cash flow streams and reduced line of
products. Based on the results of the annual impairment test of the goodwill
related to the acquisition of LMP, an impairment charge on the goodwill of $6.0
million was recorded during 2005.
YOUTH ELECTRONICS
In 1998 we acquired the assets of the Girl Tech product line from Kid
Active LLC, which targets girls ages 8-12. These products are designed with
girls' play preferences in mind addressing issues that are important to them
such as privacy and communication.
In 1999, Girl Tech introduced a line of products for girls, including
the Password Journal(R), which uses voice recognition technology to unlock the
journal. In the years 2001- 2004, Password Journal was among the top ten
products in the Youth Electronics market according to The NPD Group. In 2005, we
updated the Password Journal with a new Password Journal product. While
maintaining the voice recognition lock and other features of the two previous
versions of this product, the new Password Journal includes a light and a
calendar and has an auto-opening tri-fold layout.
In 2003, Girl Tech introduced Dare Ya!(TM), an electronic version of
the children's game of "Truth or Dare". Girls can create their own dares by
recording them into the game. Dare Ya! has a "truth detector" to determine if
the girls are telling the truth.
In 2004, Friend Chips(TM) was introduced. Friend Chips uses instant
messaging lingo to create password protected, digitally encoded messages on the
four included chips that can be passed on and used in other units. Friend Chips
includes two reader units and four chips to share with a friend.
Another new addition to the Girl Tech line was My Photo Booth(TM). My
Photo Booth gives the photo booth experience at home. Girls set the timer, pose
in the mirror and watch the lights that countdown to the flash. My Photo Booth
uses Polaroid iZone film for refill.
For 2006 we are adding two new products to the Girl Tech line.
B-bop(TM), an affordable compact music player that allows girls to record up to
thirty minutes of music from any audio out-jack and Digi Makeover(TM), a product
developed with Sega Toys that is a makeup case styled touch pad with digital
camera that plugs directly into the TV and lets girls take their picture and
create their own makeover, including makeup, hairstyles and accessories.
17
NEW CATEGORIES
In 2005 we reintroduced Cupcakes(R), a popular doll line that debuted
in 1990 for Tonka. The scented dolls transform from a cupcake to a doll and
include a charm, a brush and a hat. Bedroom, vanity and tea party play sets are
sold separately. In 2005 we also introduced Street Muttz(TM), a collection of
interactive homeless plush dogs. The dogs react to the touch of a hand with
sound and movement.
MANUFACTURING SERVICES
Since 1996 we have designed, engineered and manufactured products for
other companies in the electronic games business. Our factory in Tai Ping,
Dongguan, southern China has 665,000 square feet of factory space and 308,000
square feet of dormitory space. Our dormitory has the capacity to house in
excess of 5,000 people. Depending upon seasonal demands, our factory typically
employs 3,000 to 6,000 people and currently we have approximately 4,000 people
working in the factory. The factory is capable of manufacturing up to 800,000
units per week. We manufacture for other companies on an ODM basis. We currently
design and manufacture games for Hasbro, as well as other companies in the U.S.
and Japan. During 2005, we completed an expansion of the factory that created
141,000 square feet of factory space and cost $2.8 million, including machinery,
to complete.
BUSINESS STRATEGY
As a result of our efforts toward diversification, we now have a
significant presence in our four core product lines of electronic games, youth
electronics, other electronic games and video game accessories. We believe that
these product lines are significantly related to each other in terms of their
entertainment value and the expertise that is involved in delivering products in
each category of electronic entertainment. As a result there are synergistic
skills that can be used to benefit each area of our four core product lines.
Within these product lines we are focused on building four brands including the
Radica brand of electronic games, the Play TV brand of electronic games, the
Girl Tech brand of youth electronics and game products, and the Gamester brand
of video game accessories. It is our strategy to focus on building each of these
product lines and brands through aggressive product development and marketing
programs.
We sell direct to retailers in North America and the United Kingdom and
while we may occasionally sell directly to retailers in other markets, we
usually sell through sub distributors which sell our products to retailers and
foreign distributors in certain other worldwide markets.
We manufacture most of our own products in our factory in China in
order to maintain quality and to minimize inventories of finished goods.
Consistent with previous years, to cope with product demand, we have been
outsourcing certain productions to third party suppliers. We also utilize the
excess capacity of our factory to manufacture products of a similar nature to
our own products for other companies such as the Hasbro Games Group. By
providing such manufacturing services to other companies we seek to spread the
overhead cost of our manufacturing operations in order to improve profitability.
PRODUCT LINE SALES
The following table sets forth a breakdown of our sales by major
product category, including manufacturing services, for the last four fiscal
years.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2005 2004
------------------------------------------------ -----------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
PRODUCT LINES SALES VALUE SALES VALUE SOLD MODELS* SALES VALUE SALES VALUE SOLD MODELS*
------------------------------------ ----------- ----- ------- ----------- ----------- ----- -------
(in thousands, except percentage and no. of models information)
Electronic Games 77.4% $ 125,965 15,199 110 65.4% $ 80,640 7,761 100
Youth Electronics 11.0% 17,868 1,385 22 13.8% 17,038 1,443 28
Other Toys 1.7% 2,839 271 15 2.8% 3,490 189 12
Video Game Accessories 4.5% 7,266 582 47 10.4% 12,840 1,264 97
Manufacturing Services 5.4% 8,841 4,003 28 7.6% 9,391 3,920 28
100.0% 162,779 21,440 222 100.0% 123,399 14,577 265
18
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2003 2002
------------------------------------------------ -----------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
PRODUCT LINES SALES VALUE SALES VALUE SOLD MODELS* SALES VALUE SALES VALUE SOLD MODELS*
------------------------------------ ----------- ----- ------- ----------- ----------- ----- -------
(in thousands, except percentage and no. of models information)
Electronic Games 59.3% $ 62,374 6,422 97 50.3% $ 62,684 6,277 101
Youth Electronics 14.5% 15,227 1,324 27 13.4% 16,744 1,208 22
Video Game Accessories 13.6% 14,294 2,150 152 12.7% 15,844 2,118 150
Manufacturing Services 12.6% 13,305 3,924 23 23.6% 29,374 6,666 30
100.0% 105,200 13,820 299 100.0% 124,646 16,269 303
* Number of models includes new and continuing products as well as a significant
number of discontinued items often sold in small quantities from existing
closeout inventories.
LICENSING
During fiscal 2005, we engaged in several licensing agreements in which
we were given permission to use the name, logo, game concept and/or license of a
person, company or brand in exchange for a royalty fee.
Among the licensors were Electronic Arts(TM), World Poker Tour(TM),
Codemasters(R), owners of the Sensible Soccer license, SSD, developers of
XaviX(R) technology, the Tetris(R) Company, Microsoft, developers of Microsoft
Xbox(R), Sega(R), makers of the original Sega Genesis system, Incredible
Technologies(R), makers of Golden Tee golf and 20Q.Net Inc, developers of the
"artificial intelligence" version of 20Q.
We intend to incorporate some of these licenses into our 2006 product
line and will pursue new licenses in instances where management feels it will
enhance the value and marketability of a particular product.
MANUFACTURING
Our manufacturing is generally limited to integrated chip bonding,
plastic injection, clamshell production, mold manufacture, surface mount
technology, or SMT, and assembly and packaging operations. We order customized
components and parts from suppliers and use subcontractors for more complicated
operations such as masking of our proprietary software onto the semiconductor
chips used in our games, Liquid Crystal Display ("LCD") tooling and a proportion
of tooling of molds for plastic parts.
In 2005 we assembled most of the Radica and Girl Tech lines of products
in order to control our costs, quality, production and delivery schedules. VGA
were assembled both in-house and by third party manufacturers.
We are not required to obtain any quality approvals for our products
sold in the United States. However, we are required to have and have obtained CE
approval, Europe's toy safety standard, for products sold in Europe. We have
been granted a Chinese toy quality license from the Chinese Import and Export
Commodity Inspection Bureau, which is required of toy and game manufacturers in
China to export toys or games. In addition, we voluntarily comply with ASTM 963,
a U.S. toy safety standard.
We received renewal of our ISO 9001 quality certification from
Underwriters Laboratory on February 9, 2004 which runs through February 8, 2007.
The scope of the registration covers the design, sales and distribution of
electronic and electro-mechanical games and related gift products.
MANUFACTURING FACILITIES
We currently manufacture our products at our Tai Ping factory in
Dongguan, southern China approximately 40 miles northwest of Hong Kong. The
factory was constructed with the cooperation of the local government according
to our design specifications on a 3.7 acre site and contains 665,000 sq. ft. of
factory space and 308,000 sq. ft. of dormitory space, capable of housing over
5,000 workers. An extension of the factory commenced in December 1999. As a
result of the drop in demand for our product in the U.S. during 2000, work
towards completion of this addition was postponed until the end of 2004. We
began completion of the expansion of the factory in late 2004 and completed the
expansion in 2005. The completed facility created an additional 141,000 square
feet of factory space and cost $2.8 million, including machinery, to complete.
The unit capacity of the
19
factory depends on the product mix produced. In any event, there can be no
assurance that we will be able to operate at full capacity or have sufficient
sales to warrant doing so.
In June 1994 we entered into a JV agreement with the local government
to operate the factory. The JV agreement was established for the construction
and operation of the factory. We contributed the cost of the construction of the
factory to the JV while the local government contributed the land use rights of
50 years. The JV agreement term is 30 years after which it may be extended by 20
years to match the land use rights of 50 years. The JV partner has agreed to
extend the JV agreement for 20 years when it expires without compensation and we
intend to renew it. We pay two types of costs to the China Government under the
JV agreement. The first was the payment for construction of the factory or
building. This cost is being depreciated over the estimated useful life of the
building of 50 years which corresponds to the term of the land use rights.
The second, which began upon commencement of production, are annual
fees made in the form of a fixed fee to the local government. The annual fee is
subject to increases every three years and had originally been set at a 20%
increase every 3 years but has been successfully renegotiated to be 10% every
three years. The scheduled increases of the annual payment are intended to
reflect the anticipated growth in our overall business. We continue to believe
that we will renegotiate any increases in this fee. As a result, we record the
fee as an expense in the income statement as incurred rather than on a
straight-line basis over the term of the agreement. If we were unable to
renegotiate the terms of the agreement and were forced to pay the scheduled
increases, the amount of the increases would be immaterial over the life of the
contract and therefore accounting for the JV payment on a straight-line basis
would not have a material financial impact. In 2005, the fee was approximately
$125,700.
Aside from the fixed annual fee paid to the JV partner, we are the sole
beneficiary of the results of the JV, and we solely control the JV's operations,
including the operating and capital decisions of the JV in the ordinary course
of business. When the JV expires or in the event that the agreement is
terminated, the local government will be entitled to the fixed assets of the JV.
As we are providing for depreciation of the building over a 50-year period, the
assets will have been fully depreciated at the end of such time.
All the results of our factory operations in China are accounted for as
wholly-owned operations and included in our consolidated financial statements
since we operate all aspects of the factory, including hiring, paying and
terminating workers. Most of the factory workers are hourly employees, live in
the on site dormitories and eat in the on site canteen. In addition, we bear all
other costs of operating the factory, including utilities and certain employee
social welfare charges established by the local government. Many aspects of the
operation of the factory are dependent on our relationship with the local
government and existing trade practices. We believe that our relationship with
the local government is good.
Had we decided to terminate its manufacturing activities in China prior
to December 31, 2004, we would have been required to pay back certain tax
benefits we had received and may have been held liable for certain fees. Such
liabilities could have been substantial. Effective January 1, 2005 we were no
longer subject to these fees should we terminate manufacturing activities in
China.
MATERIALS
Major components used in our products are liquid crystal displays, or
LCD's, semiconductor chips, printed circuit boards, or PCB's, batteries, and
molded plastic parts. We purchase LCD's, PCB's, and semiconductor chips from
several suppliers. We generally provide six to twelve months order indications
to our semiconductor chip suppliers and must place firm orders a minimum of six
weeks in advance of delivery. This lead time in some cases extends to twenty
weeks when the market is in short supply. We pay for most of our materials in
U.S. dollars.
Our major suppliers of electronic and mechanical handheld and tabletop
game materials in fiscal 2005 included C & L Electric Mfg. Co., Ltd. (cables),
DongGuan Qi Long Ind. Co., Ltd (cartons), GPI International Limited (batteries),
Hong Kong Vigour Co., Ltd. (LCD's), Lead Jump Development Limited (PCB's), Shan
Tou Qiheng Trading Co., Ltd (plastic material resins), Silicone Applications
Co., Ltd. (semi-conductor chips), SSD Company Limited (semi-conductor chips), U
Kwong Industrial Co., Ltd. (PVC materials), WB Japan Co., Ltd. (PCB Assembly)
and Yu Lee Printing Co. Ltd. (printing).
Our major suppliers of VGA in fiscal 2005 included Hip Hing Cables &
Plug Mfy Ltd. (cables and plugs) and Mascotte Industrial Associates (HK) Ltd.
(bags and cases).
20
SALES AND DISTRIBUTION
Our products are sold in approximately 40 countries, with the United
States accounting for approximately 68% of net sales in fiscal 2005. We sell our
products directly to over 200 active retailers in the U.S. and U.K. and to
approximately 30 distributors worldwide. We participate in the electronic data
interchange ("EDI") program maintained by 11 customers in the U.S. including
Wal-Mart, Target, Kmart, Kohl's, Toys`R'Us and Best Buy, and 5 customers in the
U.K.: Argos, Comet, Dixon's, Asda Wal-mart and John Lewis. In fiscal 2005, our
largest customer, Wal-Mart, accounted for 30.8% of net sales. In general, all
sales to third party distributors and retail customers are final upon transfer
of title. The top six customers for each of the three years ended December 31,
2005, 2004 and 2003 were as follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
------------- -------------------
2005 2004 2003
---- ---- ----
1. Wal-Mart (USA) 30.8% 24.5% 31.9%
2. Target (USA) 11.9% 9.6% 5.5%
3. Toys`R'Us (USA) 8.9% 10.0% 8.9%
4. Kohl's (USA) 5.5% 2.6% 2.5%
5. Argos (U.K.) 4.6% 6.7% 8.0%
6. Hasbro (USA) 3.3% 4.5% 8.2%
The following table sets forth certain of our major customers in 2005,
including distributors (in alphabetical order):
CATALOG SHOWROOMS DRUG/MASS MERCHANDISERS ELECTRONICS/GROCERY/ CONVENIENCE
----------------- ----------------------- --------------------------------
Argos Army Airforce Exchange Argos
Index Boots Asda/Wal-Mart
Fred Meyer Best Buy
DEPARTMENT STORES Kmart Biggs Hypermarket
-----------------
J.C. Penney's Meijer Blockbuster
John Lewis Pamida Circuit City
Kohl's QVC Comet
May Co. Target Dixon's
Wal-Mart Electronics Boutique
MAIL ORDER/SPECIALTY GIFT SHOP OPERATORS Woolworth's (U.K.) Game
----------------------------------------
Avon Zellers Gamestop
Brookstone Ingram Entertainment
Buckmaster SPORTING GOODS STORES Mill's Fleet Farm
---------------------
Figis Bass Pro Shops Musicland
Fingerhut Dunham's Production Solutions
Hammacher Schlemmer Radioshack
Littlewoods TOY RETAILERS Tesco
-------------
Next Retail Entertainer
Sharper Image Kay Bee DISTRIBUTORS (RADICA)
---------------------
Spillsbury Toymaster Amo oy (Finland)
Starboard Cruise Services Toys`R'Us Alec Cooper (South Africa)
Wish Book Youngsters Valid Trade (South Africa)
Dorcy Irwin Pacific Pty, Ltd. (Australia)
ONLINE RETAILERS DISTRIBUTORS (VGA) Giochi Preziosi (Italy)
---------------- ------------------
Toysrus.com First Game (Korea) Goliath (France/Belgium)
Walmart.com Imbi Mario Trading (Malaysia) Importadora Maduro S.A. (Panama)
Target.com Just for Fun Toys (South Africa) John Hansen Co. (USA)
Etoys.com Master Genius (Thailand) Joker (Germany)
Firebox.com Super Chi-Yuen (Taiwan) Ansaldo (Chile)
Amazon.co.uk Tai Sing/Fowa (Singapore) Zegatron (Greece)
Top Toy (Denmark) Newbay (Middle East)
ODM/OEM Universal Electronics (Lebanon) Planet Fun (New Zealand)
-------
Bensussen Deutch & Associate, Inc. Valid Trade (South Africa) Tai Sing/Fowa (Singapore)
Cranium, Inc. Sablon (Germany/Benelux)
21
Forte Co., Ltd. S. I. D. Cadeaux (France)
Hasbro, Inc. Souvenirworld (USA)
KEMCO Co., Ltd. Top Toy (Denmark)
Konami Corporation Infinity (China)
Lexibook Limited Global Express (Eastern Europe)
Sega Toys Famosa (Spain and Portugal)
WiZ Co. Ltd. Kroeger (Canada)
Universal Electronics (Lebanon)
In the North America, we use mainly regional sales managers working for
us to manage our customers as well as a limited number of manufacturers'
representatives and brokers that sell our products to certain retailers. These
manufacturers' representatives are not our employees and work on a commission
basis. In the United Kingdom, we use brand sales managers and manufacturers'
representatives to sell our products. In the rest of the world, we use
third-party distributors in which we are represented by sales agents with some
of these distributors.
Our customers normally provide indications of interest, which may be
canceled at any time, from three to six months prior to scheduled delivery, but
only confirm orders approximately eight weeks in advance of requested delivery.
Accordingly we generally operate without a significant backlog of regular
orders.
We do not have any sell-through arrangement with our customers, that is
the title of the products is transferred upon delivery to or receipt by
customers. We generally do not allow for the return of non-defective products;
however such a return may occur occasionally due to overstock by our customers,
if we can maintain the same economic benefit by reselling the product at a
similar margin. In certain instances, where our retail customers are unable to
sell the quantity of products which have been ordered, we may, in accordance
with industry practice and at our discretion, assist retailers to enable them to
sell such excess inventory by offering discounts or accepting returns. We
minimize the related costs of such discounts and returns by engaging personnel
to visit selected customers and assist in the management of product returns. A
portion of firm orders, by their terms, may be canceled if shipment is not made
by a certain date. We establish provisions based on historical experience at the
time of sale of the related products.
In the US, Canada and the U.K., we store our products and pick and ship
orders for domestic sale in shared warehouse facilities owned by third party
logistics companies. We are assessed storage, labor, materials and freight
charges, as well as for capital costs such as fork lifts and computer equipment.
Our Radica, Girl Tech, Play TV and Connectv products carry a 90 days
consumer warranty from the date of sale. Our VGA products carry a one year
warranty from the date of sale. In each of the last three years, warranty costs
incurred have been less than 3% of net sales and substantially all warranty
claims are received within 90 days of invoice.
INDUSTRY
NPD Group, the service that has historically tracked our retail sales,
no longer provides this service. It does, however, continue to provide industry
data. According to NPD, the toy industry in the U.S. declined by 4% in 2005.
Management believes that the declines were the result of continuing weaker
overall sales at the mass retailers. NPD's U.K. data showed the toy sales in
2005 were flat against 2004, and up 1% from 2003. Annual industry-wide video
game accessory sales were down significantly in the U.S. in 2005. According to
the NPD Group, VGA sales in gross dollars were down 11.0% in 2005 from 2004.
The U.K. and Europe do not have a reliable retail tracking service for
video game accessories. During 2003, our U.K. operations changed their
distribution strategy in the U.K. and Europe from providing a full line of VGA
product, including low-margin commodity items, to selling a smaller line of
innovative, higher margin products.
PRODUCT DEVELOPMENT
At the end of 2005, our engineering and development department had
approximately 102 staff worldwide. Our product development starts with a design
team in Dallas, Texas and continues through to the engineering teams in Shenzhen
and in the Dongguan factory. We have a formalized product development process
that includes quarterly meetings of its worldwide product development and sales
departments. In fiscal 2003, 2004 and 2005, we spent approximately $3.9 million,
$4.2 million and $4.9 million respectively, on research and development. Our
research and development is heavily oriented toward market demand. Based on our
ongoing contact with consumers, retailers and distributors worldwide, our sales
and marketing departments seek to
22
understand and assist the product development teams in responding to consumer
and retailer preferences. The sales department also targets certain retail price
points for new products which drive our product development, with designs,
features, materials, manufacturing and distribution all developed within the
parameters of the target retail price. We also review product submissions from a
network of third party inventors that have been approved by management. These
submissions are subject to the same product development process and market
demand considerations as internal submissions. Additionally, we use third-party
developers in the creation of software programs that are used in some of our
products.
We expect to continue developing the majority of products internally
during 2006. However, changes in business philosophy or unforeseen circumstances
may arise that could force us to outsource a larger than expected amount of our
development work.
ORIGINAL DESIGN MANUFACTURING AND ORIGINAL EQUIPMENT MANUFACTURING
In 1995, we were successful in establishing a relationship with the
Hasbro Games Group to design and manufacture products for them. We continue to
manufacture for Hasbro, which is also our largest competitor, as well as a
number of other customers including Cranium, Lexibook, B, D&A and Kemco. We
intend to pursue other ODM and OEM business in the future. However it is
uncertain whether we can retain our current business on a long-term basis or
successfully attract additional ODM business or that it will be profitable.
INTELLECTUAL PROPERTY
We own a number of patents, trademarks and copyrights and we are in the
process of registering other intellectual properties. We will continue to apply
for intellectual property registrations on new products as management deems
necessary.
We anticipate that patents, trademarks, copyrights and other
intellectual property rights will become increasingly important in the
electronic entertainment industry in which we operate, particularly since we are
introducing a wider range of products. As the industry focuses on intellectual
property matters, there will be opportunities for us to protect our products
through patents, trademarks and other formalized filings, although the efficacy
of these protections is uncertain. By the same token, we will be exposed to
risks that our products or other aspects of our business will be found to
infringe the intellectual property rights of others. See "Item 3. Key
Information - Risk Factors - Intellectual Property Risks".
WORKING CAPITAL REQUIREMENTS
Our working capital needs are primarily financed through operating cash
and, when necessary, credit lines secured through various banks in Hong Kong and
China. Our revenues are significantly higher in the second half of the year than
in the first half in order to support our retail customers that purchase most of
their goods in the third and fourth quarters to support the fourth quarter
holiday buying season. In order to meet the customer third and fourth quarter
product requirements, we typically purchase the majority of our raw materials
and build inventory in the second and third quarters of the year. Advertising
expenditures are typically highest in the fourth quarter of the year in order to
support retail sales of our products during the holiday season. Because of the
concentrated retail buying season, our receivables are highest in the fourth and
first quarters of the year.
COMPETITION
The games business is highly competitive. We believe that we are one of
the leading sellers of electronic games and youth electronics. Our primary
competitor is the Hasbro Games Group ("Hasbro"), which is also an OEM customer.
Hasbro procures its products from manufacturers in China including Radica. Other
competitors include Jakks Pacific, Wild Planet and MGA. The barriers for new
producers to enter our markets are relatively low and we expect that we will
continue to face strong competition. We compete for consumer purchases on the
basis of price, quality and game features and for retail shelf space also on the
basis of service, including reliability of delivery, and breadth of product
line. Some competitors offer products at lower prices than we do, are better
established in the toy and games industry and are larger than we are. Our
products also compete with other gifts and games for consumer purchases. In
addition, with respect to ODM/OEM activities, we compete with a number of
substantially larger and more experienced manufacturers. As we enter other
markets and businesses, we expect to face strong competition.
The VGA market is also highly competitive. The market share in the U.S.
is spread primarily amongst ten companies that have approximately 87% of the
market. We began significant distribution of VGA in the U.S. market in 2001.
Like the handheld electronic games market, we compete for customer purchases on
the basis of price, quality, and features and for retail shelf space on the
basis of service. Major competitors are MadCatz, Pelican, Logitech and Joytech.
23
TAXATION OF OUR COMPANY AND OUR SUBSIDIARIES
There is currently no Bermuda income, corporation or profits tax
payable by our Company. As an exempted company, we are liable to pay to the
Bermuda government an annual registration fee calculated on a sliding scale
basis by reference to our assessable capital, that is, our authorized share
capital plus any share premium on our issued shares of Common Stock currently at
a rate not exceeding $25,000 per annum.
The Hong Kong profits tax rate for 2005 is 17.5%. Currently, our
subsidiary Radica HK pays Hong Kong profits tax on service and sales income.
On July 1, 1994, our manufacturing operations were transferred to a
Sino-Foreign JV. The JV enjoyed a two year tax holiday which expired in 1999. In
2005, we incurred $587,760 in foreign enterprise tax relating to our Chinese
subsidiary that is operated through a JV contract. This is the seventh year we
have paid foreign enterprise tax in China. We were granted 50% relief from
foreign enterprise tax through December 31, 2001 under the Foreign Enterprise
Income Tax Law of The People's Republic of China, and were therefore taxed at
12%. In 2002 and 2003, we were taxed at the full rate of tax of 27%; however, we
successfully applied to be designated as an "Export Oriented Enterprise", which
resulted in a tax rebate received in 2005, 2004 and 2003 that reduced our China
tax applicable to 2004, 2003 and 2002 to 12% excluding the local tax of 3%. The
application to be designated as an "Export Oriented Enterprise" is required to
be made on a yearly basis. We applied for the same designation for 2005 and if
our application is successful, it will result in the receipt of a tax rebate in
2006.
Our subsidiaries Radica USA, Radica Canada and Disc Inc. are fully
subject to U.S. and Canada federal taxation, as well as any applicable state or
local taxation, on their taxable income. Currently, the highest marginal rate of
U.S. federal corporate income tax is 35%; the highest marginal rate of Canada
federal corporate income tax is 25%. In addition, dividends paid by Radica USA
and Disc Inc. to our Company will be subject to a 30% U.S. federal withholding
tax, resulting in an effective rate of U.S. federal taxation on distributed
profits of up to 54.5%.
Our subsidiary Radica U.K. is fully subject to U.K. corporate taxation.
The U.K. profits tax rate currently applying to corporations is 30%.
During 2003, we formed Radica (Macao Commercial Offshore) Ltd., a
company incorporated in The Special Administrative Region of Macau, for the
purpose of carrying on export trade activities. To the extent that Radica Macau
sells all of its products outside of Macau, it is exempt from tax in Macau.
EMPLOYEES
As of December 31, 2005 our workforce was comprised of the following:
-----------------------------------------------------------------------------------------------------------------
Production Sales and R&D Finance Operations Total by
Marketing & Admin location
-----------------------------------------------------------------------------------------------------------------
Asia 3,737 14 84 24 145 4,004
-----------------------------------------------------------------------------------------------------------------
USA 1 31 18 9 17 76
-----------------------------------------------------------------------------------------------------------------
Europe - 6 - 5 7 18
-----------------------------------------------------------------------------------------------------------------
Total 3,738 51 102 38 169 4,098
-----------------------------------------------------------------------------------------------------------------
At December 31, 2004 and 2003 our workforce comprised 4,480 persons and
3,640 persons, respectively.
None of our employees are subject to a collective bargaining agreement
and we have never experienced a work stoppage. Management believes that our
employee relations are good.
DESCRIPTION OF PROPERTIES
See "Manufacturing Facilities" above. We completed the first phase of
construction of our factory (241,000 sq. ft.) on a 3.7 acre parcel of land in
May 1995 and a second phase (223,000 sq. ft.) in August 1998. An extension of
the factory commenced in December of 1999. As a result of the drop in demand for
our product in the U.S. during 2000, work towards completion of this addition
was postponed until the end of 2004. During 2005, we completed an expansion of
the factory that created 141,000 square feet of factory space and cost $2.8
million, including machinery, to complete. The factory currently contains
665,000 sq. ft. of factory space and 308,000 sq. ft. of dormitory space, capable
of housing over 5,000 workers. We own a long-term leasehold on our executive
offices (8,800 sq. ft. inclusive of one leased unit of 2,500 sq. ft.) and
warehouse space (7,900 sq. ft.) in Fo Tan, Hong
24
Kong. During 2005, we sold one unit (1,900 sq. ft.) that was leased out in Fo
Tan, Hong Kong. We operate our factory under the terms of the JV agreement. We
lease additional office space in Hertfordshire, U.K.; Macau and Shenzhen, China;
Dallas, Texas and Pasadena, California. We lease showrooms in Tsim Sha Tsui,
Hong Kong and New York, New York and provide individual offices for sales
personnel employed in Massachusetts. We are currently paying rent on two
different houses for Mr. Howell and Mr. Scott in Hong Kong. We also leased a
flat in Macau which has been made available to Mr. Chu, an officer of our
Company.
LEGAL PROCEEDINGS
On April 4, 2000 a lawsuit was filed by the Lemelson Foundation
("Lemelson") against us in Arizona for patent infringement. Lemelson claims to
be owner of nearly 800 issued and pending patents, including the patent on
Machine Vision and Automatic Identification (AutoID) operations. The Auto ID
operation is used in machines that are part of our bonding and heat-sealing
manufacturing processes. Lemelson was contesting that the use of machines that
incorporate this patented technology infringes on their intellectual property
("IP") rights and therefore we are obligated to pay a royalty based on the use
of this technology. The suit by Lemelson was stayed pending the outcome of
Lemelson vs. Cognex, a similar suit filed by Lemelson, which had bearing on the
Radica case with Lemelson. On January 23, 2004 a declaratory judgment was given
in the Cognex case that Lemelson's patent claims are invalid. On September 9,
2005, Lemelson's appeal to the Court of Appeals for the Federal Circuit was
denied and the judgment of the District Court was affirmed. Subsequently,
Lemelson filed a Petition for Panel Rehearing and Rehearing En Banc to review
the Court of Appeals' September 9, 2005 Order that affirmed the judgment of the
District Court. On November 16, 2006 the Court of Appeals for the Federal
Circuit affirmed its September 9, 2005 ruling and denied the Petition for
Rehearing En Banc. The prior pending claim or litigation, specifically, Lemelson
Medical Education Foundation v. ESCO Electronics, et al.; CIV-00-0660 PHX HRH in
the U.S. District Court for the District of Arizona was dismissed with prejudice
and final judgment was entered in favor of Radica on February 3, 2006.
In 2005, Radica and our subsidiary Radica (Macao Commercial Offshore)
Limited (the "Radica parties") were involved in litigation initiated by AtGames
Holdings Limited which challenged the exclusivity of our rights to the Play TV
Sega Genesis games. In late December 2005, the arbitrator issued an interim
decision in favor of Sega Corporation in its arbitration against AtGames.
Subsequently, in January 2006, AtGames voluntarily dismissed (without prejudice)
its complaint against Radica and Radica Macao. At present, there is no pending
litigation or arbitration against us arising out of this matter. However, we are
considering whether to take legal action against the other companies involved in
this matter with respect to infringement of our intellectual property rights
and, if such action is taken, counterclaims may be made against the Radica
parties.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
RESULTS OF OPERATIONS
FISCAL 2005 COMPARED TO FISCAL 2004
The following table sets forth items from our Consolidated Statements
of Operations as a percentage of net revenues:
25
Year ended December 31,
-----------------------
2005 2004
------- ------
Net sales 100.0% 100.0%
Cost of goods sold 62.6% 66.1%
------ ------
Gross profit 37.4% 33.9%
Selling, general and administrative expenses 23.4% 24.4%
Research and development 3.0% 3.4%
Depreciation and amortization 1.2% 1.4%
Impairment of goodwill 3.7% 2.9%
------ ------
Operating income 6.1% 1.9%
Other income 0.1% 0.6%
Foreign currency gain, net 0.1% 0.3%
Interest income, net 0.6% 0.6%
------ ------
Income before income taxes 6.9% 3.5%
(Provision) credit for income taxes (.4%) (.7%)
------ ------
Net income 6.5% 2.8%
====== ======
We reported a net profit for the year of $10.5 million or $0.54 per
diluted share compared to $3.5 million or $0.18 per diluted share for 2004.
During the years ended December 31, 2005 and 2004, we incurred goodwill
impairment charges of $6.0 million and $3.5 million, respectively, all of which
are related to the VGA reporting unit. As of December 31, 2005, the goodwill of
this reporting unit has been fully written off.
Sales for the year increased by 31.9% to $162.8 million from $123.4
million in 2004 due to growth in the core Electronic Games and Youth Electronics
branded product lines including our popular 20Q game, but were offset by lower
VGA sales resulting from the current video game platform transition, as well as
a decrease in Manufacturing Services sales, consistent with our strategic
direction to emphasize our own branded products. Compared to sales in 2004,
North American sales for the year grew by 34.1%, with European sales increasing
by 35.2% and other international sales increasing by 16.0%. The following table
shows a comparison of revenue by product lines:
Twelve months ended December 31,
--------------------------------
Product Lines 2005 2004
------------- ---------- ----------
(US Dollars in thousands)
Electronic Games $ 125,965 $ 80,640
Youth Electronics 17,868 17,038
Other Toys 2,839 3,490
Video Game Accessories 7,266 12,840
Manufacturing Services 8,841 9,391
--------- ---------
TOTAL $ 162,779 $ 123,399
========= =========
Gross profit margin for the year increased from 33.9% to 37.4%, an
increase of 350 basis points. The increase in gross margin for the year related
primarily to improved sales mix of higher margin products (in particular a
reduced percentage of lower margin VGA and Arcade Legends product lines as well
as less Manufacturing Services) together with lower air freight and outsourced
manufacturing costs.
Operating expenses for the year increased to $50.9 million from $39.5
million in 2004. The increase was due to the additional goodwill impairment
charges in 2005, together with an increase in variable expenses, including
selling expenses and incentive compensation, resulting from the increase in
sales and profits, and increases in R&D expenses as well as certain
administrative costs including legal and executive redundancy costs. The
following table shows the major operating expenses:
26
Twelve months ended December 31,
---------------------------------
2005 2004
(US$ in thousands) ---------- ----------
Advertising and co-op expenses $ 12,335 $ 10,620
Other selling and promotion expenses 2,640 2,217
Indirect salaries and bonus 12,166 8,827
Research and development expenses 4,908 4,164
Depreciation and amortization 1,984 1,693
Impairment of goodwill 6,015 3,536
Other general and administrative expenses 10,838 8,407
$ 50,886 $ 39,464
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 2005 we had $53.3 million in cash and investment
securities, and net assets of $98.4 million as compared to $40.1 million and
$91.1 million, respectively, at December 31, 2004. There was no debt at December
31, 2005 and December 31, 2004.
Property, plant and equipment increased to $14.5 million at December
31, 2005 from $11.5 million at December 31, 2004 primarily due to the completion
of the factory expansion and our investment in SMT equipment necessary to comply
with the European lead free soldering regulations.
Cash provided by operating activities increased from $16.7 million in
2004 to $17.2 million in 2005. The increase was mainly due to a decrease in
inventories from $26.8 million at December 31, 2004 to $21.4 million at December
31, 2005, resulting from improved inventory planning and sales of closeout
items. Receivables increased to $18.7 million from $18.4 million at December 31,
2004 reflecting increased sales during the year. Accounts payable and accrued
warranty expenses at December 31, 2005 were $8.6 million compared to $11.8
million at December 31, 2004. This decrease was in line with the decrease of the
year end inventory levels as a result of management effort in inventory control
during the year. Accrued payroll increased to $3.8 million from $1.5 million
over the same period due to bonus compensation accruals.
Cash used in investing activities increased from $1.2 million in 2004
to $5.0 million in 2005. This increase was caused by purchase of property, plant
and equipment, primarily due to the aforementioned factory expansion and
equipment purchases.
Cash used in financing activities increased from $1.9 million in 2004
to $2.3 million in 2005. The increase was mainly due to higher dividend
payments.
During the normal course of business, we enter into licensing
agreements and commitments with various third parties for the use of their
inventor concepts and intellectual property. Certain of these agreements and
commitments contain provisions for guaranteed or minimum royalty amounts during
the term of the contracts. Historically, actual royalty payments exceeded
guaranteed royalty amounts in our contracts. Additionally, we lease certain
offices, warehouses and equipment under various operating lease arrangements. In
the normal course of business, leases that expire will be renewed or replaced.
Under the terms of a JV agreement with the local government in Dongguan, we are
also committed to pay fees over the next 19 years, as described above under
"Item 4. Information on the Company - Description of Business - Manufacturing
Facilities".
As of December 31, 2005, we were obligated under various licensing, JV
agreements, non-cancelable operating leases and capital commitments requiring
future minimum payments as follows:
(US$ in thousands)
Total 2006 2007 2008 2009 2010 Thereafter
---------------------------------------------------------------------------------
Operating leases $ 2,481 $ 738 $ 432 $ 319 $ 199 $ 127 $ 666
Licensing commitments 250 30 220 - - - -
Joint venture fees 3,263 132 132 140 145 145 2,569
Capital commitments 207 207 - - - - -
--------------------------------------------------------------------------------
Total minimum payments $ 6,201 $ 1,107 $ 784 $ 459 $ 344 $ 272 $ 3,235
================================================================================
27
We had no derivative instruments or off-balance sheet financing
activities during fiscal years 2004 or 2005. 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.
We believe 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, 2005, we had general banking facilities including
overdraft and trade facilities totaling $5.1 million available for immediate
borrowing. During 2006, 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.
We believe that our existing capital structure, lines of credit and
forecast cashflows are sufficient to fund the long-term cashflow needs of the
Company. However should we decide to enter into any acquisitions in the future
then we would need to re-assess our capital structure at that time.
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 goods sold 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%
(Credit) provision for income taxes (0.7%) 2.7%
------ ------
Net income 2.8% 11.9%
====== ======
We reported a net profit for 2004 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 reporting unit. Despite an
increase in sales of $18.2 million, income before tax decreased by $5.3 million
(55%) and pretax profit before goodwill impairment decreased by $1.8 million
(19%). The decrease was 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%. The income tax expense increased by $3.7 million
compared to 2003 due to a favorable tax adjustment recorded in Q4 of 2003.
28
Sales for the year increased by 17.3% to $123.4 million from $105.2
million in 2003 due to the success of Play TV Legends, 20Q and the Gamester(R)
Race Pac, among other items. The following table shows the detailed revenue
comparisons for the year by product lines:
Year ended December 31,
----------------------------
Product Lines 2004 2003
------------- --------- ---------
(US$ in thousands)
Electronic Games $ 80,640 $ 62,374
Youth Electronics 17,038 15,227
Other Toys 3,490 -
Video Game Accessories 12,840 14,294
Manufacturing Services 9,391 13,305
--------- ---------
$ 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 $3.5 million charge for impairment of goodwill.
The following table shows the major operating expenses:
Year ended December 31,
-------------------------
(US$ in thousands) 2004 2003
-------- --------
(unaudited)
Advertising and co-op expenses $ 10,620 $ 7,614
Other selling and promotion expenses 2,217 1,772
Indirect salaries and bonus 8,827 8,299
Research and development expenses 4,164 3,895
Depreciation and amortization 1,693 2,033
Impairment of goodwill 3,536 -
Restructuring charge - 87
Other general and administrative expenses 8,407 7,315
-------- --------
$ 39,464 $ 31,015
======== ========
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 determined based
on management's assessment of the collectibility of customer trade receivables
having considered the business environment, customers' financial condition,
historical collection trends and customer disputes. Management believes the
accounting estimate related to the
29
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 2005:
Balance at Balance at
beginning Charged to Utilization/ end of
(US$ in thousands) of year income statement write-offs year
---------- ---------------- ----------- ----------
Allowance for Doubtful Accounts
-------------------------------
U.S. and Canada $ 126 $ 22 $ (9) $ 139
Other countries 22 12 (8) 26
----- ----- ----- -----
$ 148 $ 34 $ (17) $ 165
===== ===== ===== =====
Sales to countries other than U.S., Canada and the UK 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
U.S. and Canada's utilization of the provision was for the write off of unpaid
receivables deemed uncollectible for several small customers. The increase to
provision for other countries was made through the third quarter and was based
on historical utilization rates as a percentage of sales.
On a consolidated basis, our five largest customers, Wal-mart (US),
Toys R Us (US), Target (US), Argos (UK) and Hasbro (Asia), account for 61.6% of
2005 sales and 73.7% of total receivables at December 31, 2005. 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) 2005 2004 2003
---------- ---------- ---------
Allowance for bad debts $ 165 $ 148 $ 251
As a percentage of net sales 0.1% 0.1% 0.2%
Management believes that the current doubtful accounts allowance is
adequate to provide for our expected probable bad debt losses.
ALLOWANCE FOR ESTIMATED SALES RETURNS
We record an allowance for estimated returns of non-defective products
from customers. We generally do not accept returns of non-defective products,
however, such a return may occur occasionally due to overstock by our customers,
if we can maintain the same economic benefit by reselling the product at a
similar margin. In circumstances where we accept return as a matter of contract
or as a matter of practice, we recognize revenue only if the following criteria
are met at time of sale: (a) our price to the buyer is substantially fixed or
determinable at the date of sale; (b) the buyer has paid us, or the buyer is
obligated to pay us and the obligation is not contingent on resale of the
product; (c) the buyer's obligation to us would not be changed in the event of
theft or physical destruction or damage of the product; (d) the buyer acquiring
the product for resale has economic substance apart from that provided by us;
(e) we do not have significant obligations for future performance to directly
bring about resale of the product by the buyer and; (f) the amount of future
returns can be reasonably estimated. These returns are different from those
30
covered by our warranty allowance program (described under "Warranty" in this
section) which is set up for defective products returns. The allowance for sales
returns 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 2005:
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
-------------------------------------
U.S. and Canada $ 301 $ 177 $ (231) $ 247
Other countries 623 224 (609) 238
----------- ----------- ----------- ---------
$ 924 $ 401 $ (840) $ 485
=========== =========== =========== =========
The utilization of the allowance was mostly related to the return of
over stock of products from customers which were anticipated at the end of 2004
and during 2005. In the U.K., the return allowance balance is adjusted monthly
as a percentage of the prior six months of sales; in the U.S., 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.
The following table summarizes our sales return provision at December
31:
(US$ in thousands) 2005 2004 2003
----------- ----------- -----------
Allowance for sales returns $ 485 $ 924 $ 1,390
As a percentage of net sales 0.3% 0.7% 1.3%
The 2004 and 2005 declines in the allowance as a percentage of net
sales from prior years occurred because demand for our products was strong and
sales to our third-party distributors, for which we do not accept return of
non-defective products, increased significantly in both 2004 and 2005, reducing
the need for the allowance for returns. The decline in the allowance from 2004
to 2005 was also impacted from a significant overstock return of our Nitro
Battlerz(TM) product from a customer in the US in 2004; no significant
individual overstock returns were received from our US customers in 2005.
Management believes that the current allowance for estimated sales
returns is adequate to provide for 2005 related sales returns expected to be
received during 2006. If non-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 2006, we were to
experience returns resulting from a recall or overstocked product that caused a
25% increase from our estimated sales return provisions for 2005 that were based
on historical return data, the impact would be roughly $125,000. Although our
estimates were primarily based on historical data, there is no way to anticipate
such an increase as actual returns may differ from our estimates.
ALLOWANCE FOR SALES PROGRAMS
We record an allowance for sales programs we offer to certain
customers. Management believes this to be a critical accounting estimate because
changes in the assumptions used to develop this estimate could materially affect
key financial measures, such as revenue, net income and accounts receivable.
This allowance is based on specific dollar-value programs or percentages of
sales, depending on how the program is negotiated with the individual customer.
The movement of this allowance by geographic region in 2005 was as follows:
31
Balance at Balance at
beginning Charged to Utilization/ end of
(US$ in thousands) of year income statement write-offs year
----------- ---------------- ------------ ----------
Allowance for sales programs
----------------------------
U.S. and Canada $ 1,388 $ 2,877 $ (2,265) $ 2,000
Other countries 523 1,114 (1,055) 582
----------- ----------- ----------- ---------
$ 1,911 $ 3,991 $ (3,320) $ 2,582
=========== =========== =========== =========
The additions to allowances were recorded monthly based on the
cumulative total of the amounts granted under individual customer sales
programs, including volume rebates. The utilization of the allowance related to
customer claims made under various sales programs throughout the year. We
request that all customers submit claims for annual 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.
The following table summarizes our sales programs allowance at December
31:
(US$ in thousands) 2005 2004 2003
----------- ----------- -----------
Allowance for sales programs $ 2,582 $ 1,911 $ 2,893
As a percentage of net sales 1.6% 1.5% 2.8%
The decrease in the allowance for sales programs as a percentage of
total sales from 2003 to 2004 was 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. Allowance for
sales programs as a percentage of sales has remained consistent from 2004 to
2005.
Management has reviewed its existing allowances for sales programs and
believes them to be adequate at year-end. Several factors, including poor demand
of our product at retail could result in us providing higher sales incentives to
our customers, which would decrease our earnings. We make every effort to
control the inventories of individual products that are carried at retail in
order to avoid making additional sales incentives due to overstocked products
and subsequent markdowns of those products by our customers. 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 programs, 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 U.S. 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 sales incentive 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 $325,000. In
accruing for the sales programs allowance, we include a charge in anticipation
of such events. However, we typically are not aware that an overstock situation
has occurred until the fourth quarter of the year.
ALLOWANCE FOR CO-OPERATIVE MARKETING AND ADVERTISING EXPENSES
We record an allowance for co-operative marketing and advertising costs
incurred on Radica products by certain customers with which we agreed to share.
Management believes this to be a critical accounting estimate because changes in
the assumptions used to develop this estimate could materially affect key
financial measures, such as selling expenses, net income and current
liabilities. This allowance is based on specific percentages of sales or actual
advertising dollars spent, depending on how the program is negotiated with the
individual customer. The movement of this allowance by geographic region in 2005
was as follows:
32
Balance at Balance at
beginning Charged to Utilization/ end of
(US$ in thousands) of year income statement write-offs year
----------- ---------------- ------------ ----------
Allowance for co-operative marketing and advertising expenses
--------------------------------------------------------------
U.S. and Canada $ 909 $ 2,149 $ (1,502) $ 1,556
Other countries 287 424 (506) 205
----------- ----------- ----------- ---------
$ 1,196 $ 2,573 $ (2,008) $ 1,761
=========== =========== =========== =========
The additions to allowances were recorded monthly based on the
cumulative total of the amounts granted under individual customer co-operative
marketing and advertising programs. The utilization of the allowance related to
customer claims made under various co-operative programs and promotions
throughout the year. We request that all customers submit claims for annual
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 makes adjustments to the provisions as necessary.
The following table summarizes our sales programs allowance at December
31:
(US$ in thousands) 2005 2004 2003
----------- ----------- -----------
Allowance for co-operative marketing
and advertising $ 1,761 $ 1,196 $ 1,091
As a percentage of net sales 1.1% 1.0% 1.0%
The allowance for co-operative marketing and advertising expenses
increased in 2005 as a percentage of total sales from 2004. This was the result
of increased sales volume with certain customers that require higher promotional
participation in their negotiated vendor programs. Similarly, the decrease in
the allowance from 2003 to 2004 was the result of reduced sales as a percentage
of total for these same customers.
Management has reviewed its existing allowances for co-operative
marketing and advertising expenses and believes them to be adequate at year-end.
Several factors, including potential customer demands for increased promotional
support of our product at retail could result in us providing higher marketing
and advertising allowances to our customers, which would decrease our earnings,
assuming that sales remain the same regardless of whether or not the additional
marketing and advertising fees were spent. For example, if we were to agree to
allow a customer to increase its co-operative advertising allowance from 2% of
net sales to 4% of net sales and we subsequently sell $10 million in product to
that customer, the net decrease to earnings assuming sales remain consistent
would be $200,000.
WARRANTY
We record a warranty allowance for costs related to defective product
sold to customers. We have two types of warranty programs. The first type of
warranty program grants sales credit to customers for all products returned to
their stores as defective. The second type of warranty program ("the minimum
warranty program"), which is also the more common program, offers a flat or
minimum allowance negotiated with customers. Under the minimum warranty program,
we issue sales credits based on the agreed minimum warranty even if the actual
returns of defective products are lower than the minimum warranty allowance. If
actual returns exceed the minimum warranty allowance, we would issue credits
based on actual returns. Based on our experience in the past, actual returns are
rarely lower than the minimum warranty allowance.
Management believes warranty allowance to be a critical accounting
estimate because changes in the assumptions used to develop this estimate could
materially affect key financial measures, such as cost of sales and net income.
Additionally, the warranty allowance is based on historical trends and
management's best assessment of what the defective return percentage will be for
a given product. Projecting defective return percentages on new products can
lead to deviations between recorded warranty allowances and actual defective
returns. Significant negative deviations could have a material impact on our
financial results, if large amounts of finished goods were found to be
defective.
The movement of this allowance by geographic region is as follows:
33
Balance at Balance at
beginning Charged to Utilization/ end of
(US$ in thousands) of year income statement write-offs year
----------- ---------------- ------------ ----------
Warranty Allowance
------------------
U.S. and Canada $ 771 $ 2,844 $ (2,147) $ 1,468
Other countries 299 542 (253) 588
----------- ----------- ----------- ---------
$ 1,070 $ 3,386 $ (2,400) $ 2,056
=========== =========== =========== =========
The following table summarizes our warranty allowance at December 31:
(US$ in thousands) 2005 2004 2003
----------- ----------- -----------
Warranty allowance $ 2,056 $ 1,070 $ 1,040
As a percentage of net sales 1.3% 0.9% 1.0%
Warranty allowance as a percentage of total sales has remained
consistent in 2003 and 2004, but increased in 2005 primarily due to the
strategic initiative in the U.S. to move our customers from regular warranty
programs to minimum warranty programs. 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 warranty allowances of 1% of 2005 sales would have
decreased pretax earnings by roughly $1.6 million.
INVENTORIES
We value our inventory at the lower of cost or market. Inventory
write-downs are recorded for slow-moving and obsolete inventory. Management uses
estimates to record these write-downs. Management believes this to be a critical
accounting estimate because changes in the assumptions used to develop this
estimate could materially affect key financial measures, such as cost of sales,
net income and inventory. Slow-moving and obsolete inventories are written-down
to their estimated market value depending on the length of time the product has
been in inventory and the forecast sales for the product over the course of the
following year. Changes in public and consumer preferences and demand for
product or changes in the buying patterns and inventory management of customers
could adversely impact the level of inventory provision.
The following table summarizes our allowance for obsolete inventory at
December 31:
(US$ in thousands) 2005 2004 2003
----------- ----------- -----------
Allowance for obsolescence $ 1,936 $ 1,353 $ 2,228
As a percentage of total inventory 8.3% 4.8% 12.6%
In 2003, we took significant provisions against slow-moving,
commodity-type video game accessory products in the U.S., U.K. and Asia, most of
which have been sold. This resulted in higher allowances as a percentage of
total inventory than we experienced in 2004. In 2005, we took inventory against
several slow moving items, such as the Atlas remote control car and certain VGA
products.
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
34
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
On June 24, 1999, we purchased Radica UK for approximately $15.9
million. During the quarter ended June 30, 2000, upon claiming certain breaches
of warranty at Radica UK, we and the ex-shareholders of Radica UK mutually
agreed to cancel certain loan notes such that the purchase price was reduced by
$1.4 million. As a result, we recorded the excess of net assets purchased
(goodwill) of approximately $12.1 million resulting from the adjusted purchase
price. Goodwill having a net carrying value of $9.6 million at January 1, 2002,
the date of adoption of SFAS No. 142, was allocated to the Video Games
Accessories ("VGA") reporting unit.
The methods used in our testing of goodwill impairment are as follows:
1) We determine the fair market value of the VGA reporting unit by estimating
the expected discounted future cash flows of the VGA reporting unit. In
estimating the discounted future cash flows, we follow FASB Concepts Statement
No. 7, Using Cash Flow Information and Present Value in Accounting Measurements,
by taking into account our 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) We then compare the estimated fair value of the VGA reporting
unit with the carrying value of the VGA reporting unit, including goodwill. 3)
To the extent the fair value of the VGA reporting unit is less than the carrying
value, the second step is performed which compares the implied fair value of the
VGA reporting unit's goodwill to the book value of the goodwill.
In performing the goodwill impairment test for the year ended December
31, 2004, we recognized a goodwill impairment of $3.5 million as the implied
fair value of the VGA reporting unit was determined to be $6.0 million. The
facts and circumstances leading to the goodwill impairment charge in 2004 were
primarily the result of lower forecasted sales and cash flows which were largely
predicated by our new adopted strategy of concentrating on the innovative,
higher margin sector of the VGA market. At December 31, 2004, our carrying value
of goodwill was $6.0 million net of the impairment charge of $3.5 million.
In performing the goodwill impairment test for the year ended December
31, 2005, we recognized a goodwill impairment of $6.0 million as the implied
fair value of the VGA goodwill was determined to be nil. The facts and
circumstances leading to the goodwill impairment charge in 2005 were primarily
as the result of a significant reduction in forecasted sales and cash flows
which were largely predicated by the platform transition of the Xbox to the Xbox
360, the anticipated transition in 2006 of Sony Playstation 2 to Playstation 3,
as well as lower forecasted sales and cash flows for VGA products due to
decrease in market demands. Prior to the introduction of the Xbox 360 platform,
we attempted to negotiate a licensing agreement to manufacture and distribute
Xbox 360 video games accessories but was unable to reach an agreement with
Microsoft. Accordingly, sales of VGA are expected to be significantly lower as
compared to previous year. After this impairment charge, the carrying value of
goodwill as of December 31, 2005 was nil.
DEFERRED TAX ASSETS
We recognized deferred tax assets for all deductible temporary
differences and operating loss carryforwards for regular tax purposes. At each
reporting date, we assess whether a valuation allowance is required to reduce
the amount of the deferred tax amount to a remaining amount that is more likely
than not to be realized. In assessing the need for a valuation allowance, we
consider all available evidence, including projected future taxable income, tax
planning strategies, historical taxable income, and the expiration period of the
operating loss carryforwards. Differences in actual results from projections
used in determining the valuation allowances could result in future adjustments
to the allowances which could adversely affect our operating results.
Based primarily in our U.K. subsidiary's failure to generate profits,
we recorded an allowance against the entire U.K. deferred tax asset of $4.2
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 U.K. and
altered the distribution strategy in that market. We expect these moves to
return our U.K. operations to profitability. If this occurs, depending on the
level of actual and projected profitability, we would then reverse the valuation
allowance, potentially creating an income tax benefit in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payments, which addresses the accounting for transactions in which
an entity exchanges its equity instruments for goods or services, with a primary
focus on
35
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement is a revision to Statement 123 and supersedes APB
Opinions No.25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This Statement will require measurement of the cost of
employee services received in exchange for stock compensation based on the
grant-date fair value of the employee stock options, Incremental compensation
costs arising from subsequent modifications of awards after the grant date must
be recognized. We will adopt this Statement on January 1, 2006 under the
modified prospective method of application. Under that method, we will recognize
compensation costs for new grants of share-based awards, awards modified after
the effective date, and the remaining portion of the fair value of the unvested
awards at the adoption date.
In December 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 No. 151"). SFAS 151
clarifies that abnormal amounts of idle facility expense, freight, handling
costs and spoilage should be expensed as incurred and not included in inventory
cost as a component of overhead. Further, SFAS No. 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 No. 151
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. SFAS No. 151 became effective for the Company on July 1, 2005.
The adoption of SFAS No. 151 had no significant impact on our consolidated
financial statements.
In May 2005, the FASB issued SFAS No.154, Accounting Changes and Error
Corrections. SFAS No. 154 establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to a newly
adopted accounting principle. This statement will be effective for us for all
accounting changes and any error corrections occurring after January 1, 2006.
The impact on the consolidated financial statements will depend on new
pronouncements that are subsequently issued.
In September 2005, the EITF issued EITF Issue No. 04-13 Accounting for
Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13 provides
guidance as to when purchases and sales of inventory with the same counterparty
should be accounted for as a single exchange transaction. EITF 04-13 also
provides guidance as to when a nonmonetary exchange of inventory should be
accounted for at fair value. EITF 04-13 will be applied to new arrangements
entered into, and modifications or renewals of existing arrangements occurring
after January 1, 2007. The application of EITF 04-13 is not expected to have a
significant impact on our consolidated financial statements as it is now
constituted.
In March 2004, the FASB Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments (EITF 03-1). The guidance prescribes
a three-step model for determining whether an investment is
other-than-temporarily impaired and requires disclosures about unrealized losses
on investments. The accounting guidance became effective for reporting periods
beginning after June 15, 2004, while the disclosure requirements became
effective for annual reporting periods ending after June 15, 2004. In September
2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1 The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments (FSP EITF 03-1-1). FSP
EITF 03-1-1 delayed the effective date for the measurement and recognition
guidance contained in paragraphs 10-20 of EITF Issue 03-1. In November 2005, the
FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain other-than-temporary Investments. This
FSP addresses the determination as to when an investment is considered impaired,
whether the impairment is other-than-temporary and the measurement of an
impairment loss. This statement specifically nullifies the requirements of
paragraph 10-18 of EITF 03-1 and references existing other-than-temporary
impairment guidance. The guidance under this FSP is effective for reporting
periods beginning after December 15, 2005. The Company continued to apply
relevant "other-than-temporary" guidance as provided for in FSP EITF 03-1-1
during fiscal 2005. The Company does not expect the implementation of FSP FAS
115-1 and FAS 124-1 will have a material impact on the Company's financial
position or results of operations.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The following table sets forth the directors and executive officers of
the Company at the end of fiscal 2005, as updated to reflect changes in March
2006.
Term
Name Expires Residency Position
---- ------- --------- --------
Jon N. Bengtson (3) 2006 USA Chairman of the Board and Director
Timothy R. Busch (1) 2006 USA Director
36
John A.F.H. Coulter (2) 2006 U.K. Director
Albert J. Crosson (2) 2006 USA Director
Patrick S. Feely (3) 2006 USA Chief Executive Officer and Director
Floyd W. Glisson (1) 2006 USA Director
Frank J. O'Connell (2) 2006 USA Deputy Chairman of the Board and Lead Director
Richard E. Wenz (1) (3) 2006 USA Director
David C.W. Howell N/A Hong Kong Executive Vice President and Chief Financial Officer
Jeanne M. Olson N/A USA President North American Operations
Denis Horton N/A U.K. President International, and Managing Director, Radica U.K.
James M. Romaine N/A USA Senior Vice President Sales
Laurence M. Scott Jr. N/A Hong Kong Senior Vice President of Asian Operations
Craig D. Storey N/A USA Vice President and Chief Accounting Officer
Larry C.N. Cheng N/A Hong Kong Vice President Engineering
Robert E. Esterbrook N/A U.K. Vice President, UK Finance & Operations
Paul Fogarty N/A U.K. Vice President U.K. Sales
Louis S.W. Kwok N/A Hong Kong General Manager, Factory
Eric K.W. Chan N/A Hong Kong Quality Director
Rick C.K. Chu N/A Hong Kong Director of Customer Service
Martin Frain N/A U.K. U.K. Marketing Director
Queenie S.F. Lau N/A Hong Kong Director of International Sales
Sean C.W. Lee N/A Hong Kong Finance Director - Asia
Donny K.W. So N/A Hong Kong Director of Project Management
Benedict K.S. Tsang N/A Hong Kong Engineering Director
Hermen H.L. Yau N/A Hong Kong MIS Director
Kenneth K.C. Yu N/A Hong Kong Engineering Director
(1) Member of the Audit Committee.
(2) Member of the Corporate Governance, Nominations and Compensation Committee.
(3) Member of the Executive Committee.
We annually prepare a proxy statement/management information circular
for distribution to our shareholders in connection with the annual meeting of
shareholders. Additional information is contained in such proxy statement with
respect to the ownership of shares of our common stock by directors and
executive officers, the ages of such persons, and the functions or board
practices of
37
the committees of our board of directors. The information contained in such
proxy statement for the current fiscal year is incorporated herein by reference.
Such proxy statement is furnished as part of our report on Form 6-K for the
period in which the proxy statement is sent to shareholders. The proxy does not
necessarily contain all the information required by the SEC for a domestic
registrant since such information is not required for foreign private issuers.
Messrs. Peter L. Thigpen and James J. O'Toole did not stand for
reelection at the May 2005 shareholder meeting. Theodore J. Eischeid resigned as
a Director in December 2005 and previously had resigned as President and Chief
Operating Officer of Radica Games.
Jon N. Bengtson, formerly the Executive Vice President and Chief
Operating Officer of the Company, became the Chairman of the Board of the
Company in January 1996, and has been a director of the Company since January
1994. He was Chief Financial Officer of the Company from January 1994 to
September 1995, and was appointed President and Chief Executive Officer of
Radica USA in December 1993. Mr. Bengtson joined The Sands Regent in 1984 and
served in various positions, including Vice President of Finance and
Administration, Chief Financial Officer, Treasurer and Director, Senior Vice
President and Director and Executive Vice President and Chief Operating Officer
and Director until December 1993. From 1980 to 1984, Mr. Bengtson was a director
and served in various positions with International Game Technology ("IGT"),
including Treasurer and Vice President of Finance and Administration and Vice
President of Marketing. Mr. Bengtson is currently the Chairman of The Sands
Regent, Chairman of Altair Nanotechnologies, and founder and director of Pinyon
Technologies, a startup company developing smart wireless antenna technology.
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 Catholic 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.
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.
38
Floyd W. Glisson has been Managing Member of GCM Investors, LLC since
December 13, 2005. He was CEO of Avantair, a privately held fractional aircraft
operator, from July 25, 2005 through October 7, 2005, 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 financial management
positions with the Dial Corporation and ConAgra Foods Inc.
Frank J. O'Connell was appointed Lead Director and Deputy Chairman of
the Board in September 2005, and has been a director of the Company since May
2005. He 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 has been Executive Vice President and Chief Financial
Officer of the Company since September 1995. He was President Asian Operations
from December 1998 to October 2005. He was Vice President and Chief Accounting
Officer from January 1994 to September 1995 and a director of the Company from
January 1994 until May 2005 when he did not stand for re-election to the Board.
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.
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. Mr. Horton was promoted to
President, International effective December 2005. 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 33 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
39
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 Asian
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.
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.).
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. Before entering the industry he was
publishing director at licensing agency Americom, and a journalist on a daily
newspaper. He received his MBA from the University of Bath.
Queenie S.F. Lau joined the Company as Sales Manager in January 2004
and was promoted to Director of International Sales in January 2006. She has
over 10 years experience in the toy industry. She received her Bachelor of
Business degree in
40
Administrative Management from University of South Australia, Graduate Diploma
in Marketing from The Chinese University of Hong Kong and is a member of the
Chartered Institute of Marketing (U.K.).
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.
Benedict K.S. Tsang has been Engineering Director since April 2005.
Prior to that, he was an Mechanical Engineering Manager from May 1999 to March
2005. He has 16 years' working experience in product design, manufacturing of
household, networking products and toys industry. He received his BEng degree in
Mechanical Engineering from University of Newcastle upon Tyne and Master degree
in Polymer Engineering from University of Manchester Institute of Science
&Technology.
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.
COMPENSATION OF OFFICERS AND DIRECTORS
COMPENSATION
In fiscal 2005, the aggregate amount of compensation paid to all
executive officers and directors and former officers and directors for services
in all capacities was approximately $4.3 million. In addition, bonus payments of
$2.4 million were accrued in 2005 for 2005 performance and are expected to be
paid in April 2006.
In fiscal 2005, 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 were 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. In addition to the above schedule for outside
director compensation, where appropriate in light of the time commitment
involved, the Company will compensate an outside director for accepting the
responsibility of chairing an ad hoc or other special committee. Any such
compensation will be included in the aggregate amount of compensation in the
year in which it is paid (see, e.g., first paragraph of this section above.)
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.
41
Commencing in May 2005, upon each annual re-election to the Board of
Directors, each outside director and the Chairman of the Board is entitled to
receive 600 shares of restricted common stock per quarter commencing upon such
re-election date (i.e. 2,400 shares per annum) at the then current market price.
The weighted average price of the restricted common stock granted during 2005
was $8.75 per share. These shares become free of any restrictions, in equal
annual installments, over two years from the date of grant.
In addition, upon the initial election or appointment of a new outside
director to the Board of Directors, such director is entitled to receive 5,000
shares of restricted common stock at the then-current market price. These shares
become free of any restrictions, in equal annual installments, over two years
from the date of grant.
EMPLOYMENT AGREEMENTS
Messrs. Feely, Howell, Bengtson, Horton and Ms. Jeanne Olson have each
entered into individual employment agreements with the Company. After giving
effect to the latest renewals, the employment agreements are renewed
automatically on an annual basis unless 90 days notice is given by either party,
for periods of two years each, from July 2003 for Mr. Feely and from December
2002 for Messrs. Howell, Bengtson and Ms. Olson. The employment agreement for
Mr. Horton from April 2003 continues unless 12 months notice is given by the
Company or 6 months notice is given by the employee. Each employment agreement
is terminable by the Company for cause. Under their agreements Messrs. Feely,
Howell, Bengtson, Horton and Ms. Olson shall each receive minimum annual base
salaries of $365,000, $250,000, $43,200, $238,500 and $275,000 (the amount for
Mr. Horton is stated in U.K. currency as (pound)132,500), respectively. The
agreement with Mr. Bengtson, in operation since December 1995, is for part-time
services. Under the terms of their employment agreements Messrs. Feely, Howell,
Bengtson, Horton and Ms. Olson are eligible to participate in the Company's
bonus plan. The employment agreements for Messrs. Feely, Howell, Horton and Ms.
Olson contain certain restrictions on their involvement in businesses other than
the Company during the course of their employment and certain provisions
applicable after termination of employment which prohibit the solicitation of
customers and other employees of the Company, employment or engagement with
competing entities, or the disclosure of proprietary information of the Company.
The Company provides residences for Mr. Howell and Mr. Scott in Hong Kong. Upon
the decision of the Compensation, Nomination & Governance Committee in March
2005, Mr. Bengtson, as a Chairman of the Board, was granted 2,500 stock options
at the then market price of $8.48 per share in April 2005 and is entitled to
receive the same stock compensation as independent directors effective April 1,
2005. In the agreement for Mr. Feely, he was granted 300,000 stock options of
the Company common stock at the then market price of $3.625 per share, another
60,000 stock options at the then market price of $14.125 per share in November
1998 and a further 60,000 stock options at the then market price of $3.00 per
share in May 2000, subject to the terms and conditions of the agreement and the
1994 Stock Option Plan. Additionally, in May 2001, Mr. Feely would have been
granted 60,000 stock options at the then market price provided he achieved
certain conditions as stated in the agreements; however, these were not
achieved. In the agreements for Mr. Howell, he was granted 25,000 stock options
per annum of the Company common stock at the then market price of $3.00 and
$2.90 per share in May 2000 and 2001 respectively. In June 2002, Mr. Howell was
granted 25,000 stock options at the then market price, subject to the terms and
conditions of the agreement and the 1994 Stock Option Plan. In the agreement for
Ms. Olson, she had been granted 60,000 stock options upon initial employment and
was granted an additional 40,000 stock options at the then market price of $3.45
per share in January 2002 subject to the terms and conditions of the agreement
and the 1994 Stock Option Plan. In the agreement for Mr. Horton, he had been
granted 60,000 stock options of the Company common stock at the then market
price of $4.43 in March 2003 upon initial employment subject to the terms and
conditions of the agreement and the 1994 Stock Option Plan. Additionally,
Messrs. Feely, Howell and Ms. Olson were granted 60,000, 25,000 and 25,000 stock
options at the then market price, respectively in February 2001. Mr. Howell was
granted 3,750 stock options in March 2002 for achieving certain requirements
under an incentive plan. Based upon 2002 performance the Company's Compensation
Committee voted in March 2003 to accelerate the vesting of 60,000 options for
Mr. Feely and 25,000 options for Ms. Olson and Mr. Howell. The acceleration of
the stock options was approved in accordance with the original terms of the
contract and these options would become vested 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 for accounting purposes. In
March 2003, Mr. Feely was granted 120,000 options at the then market price of
$4.43. In September 2004, Ms. Olson was granted 30,000 options at the then
market price of $8.24. In December 2005, Mr. Horton was granted 40,000 stock
options at the then market price of $8.81 per share.
In addition to the foregoing, certain executive officers have change in
control bonus agreements and non-competition agreements that may provide
payments to such persons in certain circumstances. In the case of Messrs. Feely,
Howell and Horton and Ms. Olson, these additional agreements are filed as
exhibits to this Annual Report on Form 20-F.
42
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
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 Compensation 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 which replaced the 1994 Stock Option Plan was approved. 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.
In fiscal year 2003, an aggregate of 259,200 options (exclusive of the
outside directors' options and net of stock options that were both issued and
forfeited in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at exercise prices
ranging from $4.21 to $6.54 per share.
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
forfeited in the year) were granted to directors, officers and other employees
under the Omnibus Equity Incentive Plan to purchase the Company's shares at
exercise prices ranging from $7.15 to $9.11 per share.
In fiscal year 2005, an aggregate of 82,500 options (exclusive of the
outside directors' options and net of stock options that were both issued and
forfeited in the year) were granted to directors, officers and other employees
under the Omnibus Equity Incentive Plan to purchase the Company's shares at
exercise prices ranging from $7.90 to $8.81 per share.
As a result of the foregoing, at the end of fiscal year 2005, after
giving effect to all prior exercises and forfeitures of options, an aggregate of
1,238,152 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 812,250 options were held by directors and executive officers of the
Company as a group. Also, an aggregate of 115,000 outside director's options
were outstanding at exercise prices ranging from $2.90 to $9.55 per share.
During 2005, a total of 305,800 shares were issued upon the exercise of options,
at exercise prices ranging from $2.0 to $8.35 per share. Prior to 2005, a total
of 2,146,678 shares had been issued upon the exercise of options at exercise
prices ranging from $0.57 to $11.0 per share.
Additional information with respect to stock options is contained in
Note 11 of the Notes to the Consolidated Financial Statements included in this
filing.
Information with respect to employees is contained in Item 4 above.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
CONTROL OF REGISTRANT
(a) The registrant is not controlled by another corporation or any foreign
government.
(b) The following table is based on information available to the Company and
identifies the owners of more than five percent (5%) of the registrant's
common stock (based on their filings of Forms 13D or 13G) and the amount of
common stock beneficially owned by the officers and directors as a group,
as of February 28, 2006. The Company must rely on information provided by
individual shareholders and therefore cannot verify its accuracy:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
-------------- --------------- ------------ ----------------
Common stock Dito Devcar Corporation, et al. (1) 9,033,938 47.2%
Common stock Royce & Associates, LLC (2) 1,216,150 6.4%
Common stock RAD Partners 1999 LLC, et al. (3) 1,111,813 5.8%
Common stock Officers & Directors as a Group 2,434,915 12.7%
(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. The
ownership percentages of this group as reported in the Company's 2004
and 2003 Forms 20-F were 46.4% and 46.8%, respectively.
43
(2) This shareholder reported ownership in excess of 5% of the outstanding
Common Stock since 2004. The ownership percentages of this group as
reported in the Company's 2004 Form 20-F was 5.2%
(3) 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. The ownership percentages of this group as reported in the
Company's 2004 and 2003 Forms 20-F were 5.8% and 8.9%, respectively.
(c) There are no arrangements known to the registrant which may at a subsequent
date result in a change of control of the registrant.
(d) As of February 28, 2006, the Company had approximately 100 record holders
of its Common Stock, and over 90% of such stock was held by U.S. holders.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
At the time of the Company's IPO in 1994, certain members of management
who were also the principal shareholders of the Company, were parties to a
shareholders agreement (the "Shareholders Agreement") with the Company which
provided for certain matters relating to the management of the Company and
ownership of its Common Stock. In January 1998, the Shareholders Agreement was
amended to eliminate provisions respecting the election and removal of
directors, restrictions on transfer and a right of first refusal. The
registration rights provisions of the Shareholders Agreement remained operative.
Pursuant to the Shareholders Agreement, the Company agreed, at any time
after February 16, 1996 and subject to certain specified conditions, to use its
reasonable efforts to prepare and file one registration statement on behalf of
each shareholder that is a party to the Shareholders Agreement (collectively,
the "Shareholders") under the Securities Act of 1933, and to use its reasonable
efforts to qualify the shares for offer and sale under any applicable U.S. state
securities laws. The Shareholders Agreement also grants each Shareholder certain
"piggyback" registration rights entitling each Shareholder, at any time after
February 16, 1996, to sell Common Stock in certain registered offerings of
equity securities of the Company. These "piggyback" registration rights are
exercisable by each Shareholder only twice. The foregoing registration rights
are subject to other limitations set forth in the Shareholders Agreement.
In the Company's Form 20-F for 2003, we reported that Albert J.
Crosson, one of our directors, had a 1% beneficial interest in Crossfire, LLC,
which in turn had a 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 and restricted stocks acquired as a
director of the Company.
Additional information on management transactions is contained under
Item 6 above.
ITEM 8. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements are included herein.
ITEM 9. THE OFFER AND LISTING
The Company's common stock is traded on the Nasdaq National Market
under the symbol RADA. The Company's common stock is not traded on any foreign
trading market. The following table lists the high and low stock price for each
quarter of fiscal 2005 and fiscal 2004:
44
Year ended Year ended
December 31, 2005 December 31, 2004
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $ 9.51 $ 7.61 $11.64 $ 6.88
Second Quarter 9.30 8.17 9.86 8.00
Third Quarter 9.16 8.48 10.35 8.24
Fourth Quarter 10.21 8.68 10.92 7.52
The annual high and low stock prices in fiscal 2003 were $8.17 and
$4.20; in fiscal 2002 were $4.60 and $3.40; and in fiscal 2001 were $4.90 and
$1.625.
The monthly high and low stock prices over the last six months in
fiscal 2005 were $8.95 and $8.484 in July 2005; $9.16 and $8.58 in August 2005;
$9.10 and $8.70 in September 2005; $9.45 and $8.70 in October 2005; $10.21 and
$8.68 in November 2005; and $9.00 and $8.75 in December 2005.
Radica Games Limited was formed in 1993 as a holding company and,
through fiscal 2003, had not paid any dividends. Except to the extent set forth
below, the Company intends to retain its earnings for operations and expansion
of its business for the foreseeable future.
On January 5, 2004, the Company announced a quarterly dividend program.
In fiscal 2004 and 2005, the Company paid $3.0 million and $3.4 million in
dividends to its shareholders.
On January 6, 2006, our Board of Directors declared a dividend of $.05
per share payable on January 31, 2006, to shareholders of record as of January
16, 2005. The Board has also approved an initial target quarterly dividend of
$.05 per share for subsequent quarters; however, the actual amount of each
quarterly dividend, as well as each declaration date, record date and payment
date, is subject to the discretion of the Board, and the target dividend level
may be adjusted during the year at the discretion of the Board. The factors the
Board is expected to consider in determining the actual amount of each quarterly
dividend will include our financial performance and on-going capital needs, our
ability to declare and pay dividends in light of other financial requirements,
and other factors deemed relevant.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND BY-LAWS
A summary of the Company's memorandum and by-laws and other provisions
pertaining to its common stock is contained in the Company's registration
statement on Form F-3 filed with the Securities and Exchange Commission on May
21, 1999 (file no. 33-79005). Such summary in that registration statement is
incorporated herein by reference.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
The Company has been designated as a non-resident of Bermuda for
exchange control purposes by the Bermuda Monetary Authority.
The transfer of shares of the Company between persons regarded as
non-resident of Bermuda for exchange control purposes and the issuance of shares
of the Company to or by such persons may be effected without specific consent
under the Exchange Control Act 1972 and regulations thereunder subject to such
shares being listed on the National Association of Securities Dealers Automated
Quotation System. Issues and transfers of shares involving any person regarded
as resident in Bermuda for exchange control purposes require specific prior
approval under the Exchange Control Act 1972.
There are no limitations on the rights of non-Bermuda resident holders
of the Common Stock to hold or vote their shares. Because the Company has been
designated as non-resident for Bermuda exchange control purposes, there are no
restrictions on its ability to transfer funds in and out of Bermuda or to pay
dividends to United States residents who are holders of the Common Stock, other
than in respect of local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in
the names of corporations or individuals. In the case of an applicant acting in
a special capacity (for example, as an executor or trustee), certificates may,
at the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
45
The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.
As an exempted company, the Company is exempt from the usual Bermuda
requirement which restricts the percentage of share capital that may be held by
non-Bermudians, but as an exempted company the Company may not, unless
authorized by its memorandum of association and with the consent of the Minister
of Finance, participate in certain business transactions, including: (1) the
acquisition and holding of land in Bermuda (except that required for its
business and held by way of lease or tenancy for terms of not more than 50 years
or with the Minister's consent, land by way of lease or tenancy agreement for a
term not exceeding 21 years in order to provide accommodation or recreational
facilities for its officers and employees); (2) the taking of mortgages on land
in Bermuda to secure an amount in excess of BD$50,000; (3) the acquisition of
any bonds or debentures secured on any land in Bermuda except bonds or
debentures issued by the Bermuda Government or a public authority; or (4) the
carrying on of business of any kind or type whatsoever in Bermuda, either alone
or in partnership, except, among other things, the carrying on of business of
the Company with persons outside Bermuda.
TAXATION
The following discussion is a summary of certain anticipated tax
consequences of the ownership of Common Stock under Bermuda tax laws, Hong Kong
income tax laws, Macau income tax laws, and United States Federal income tax
laws. The discussion does not deal with all possible tax consequences relating
to the Company's operations or to the ownership of Common Stock. In particular,
the discussion does not address the tax consequences under State, local and
other (e.g., non-Bermuda, non-Hong Kong, non-Macau and non-United States
Federal) tax laws. Accordingly, each owner should consult his tax advisor
regarding the tax consequences of the ownership of Common Stock. The discussion
is based upon laws and relevant interpretations thereof in effect as of the date
of this report, all of which are subject to change.
BERMUDA TAXATION
The Company is incorporated in Bermuda. At date of this filing, there
is no Bermuda income, corporation or profits tax, withholding tax, capital gains
tax, capital transfer tax, estate duty or inheritance tax payable by
shareholders of the Company other than shareholders ordinarily resident in
Bermuda. The Company is not subject to stamp or other similar duty on the issue,
transfer or redemption of its shares of Common Stock. Furthermore, the Company
has received from the Minister of Finance of Bermuda under The Exempted
Undertakings Tax Protection Act 1966, an assurance that, in the event that
Bermuda enacts any legislation imposing any tax computed on profits or income,
or computed on any capital assets, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, the imposition of such tax shall not
be applicable to the Company or any of its operations, or to the shares,
debentures or other obligations of the Company, until March 28, 2016. This
assurance does not, however, prevent the imposition of any such tax or duty on
such persons as are ordinarily resident in Bermuda and holding such shares,
debentures or obligations of the Company or on land in Bermuda leased or let to
the Company.
The United States does not have a comprehensive income tax treaty with
Bermuda.
HONG KONG TAXATION
Under the laws of Hong Kong, a holder of shares of a company is not
subject to Hong Kong tax on dividends paid with respect to such shares. Further,
there is no tax on capital gain realized upon the disposal of investments,
including investments in Common Stock, except that Hong Kong profits tax may be
chargeable on assessable profits, to the extent that they arise in or derive
from Hong Kong, arising on the sale or disposal of such investments where the
transactions are or form part of a trade, profession or business carried on in
Hong Kong. Hong Kong does not impose a withholding tax on dividends paid by the
Company or its subsidiaries. In addition, the Company will not be subject to
Hong Kong taxes as a result of its receipt of dividends from any of its
subsidiaries.
Hong Kong stamp duty is levied on the transfer of Common Stock of Hong
Kong companies at the rate of 0.02% on the fair consideration of the transfer.
For companies not incorporated in Hong Kong, no stamp duty is chargeable on the
transfer so long as the shareholders' registers are kept outside of Hong Kong.
As of February 2006, Hong Kong has repealed the estate tax duty on Hong
Kong estates.
46
MACAU TAXATION
Under the Macau Offshore Law, there is no tax to be levied on the
profits of a company generated from its offshore activities, defined as economic
activities dedicated to foreign markets, pursued exclusively with non-residents,
and by means of transactions in currencies other than the Macau pataca.
UNITED STATES FEDERAL INCOME TAXATION
General. The following is a general discussion of the material U.S.
federal income tax consequences to a U.S. Holder (as defined below) of the
ownership of Common Stock and does not address the U.S. tax treatment of certain
types of investors (e.g., individual retirement and other tax-deferred accounts,
life insurance companies, tax-exempt organizations, dealers in securities,
traders in securities that elect to mark to market, persons liable for
alternative minimum tax, persons that hold common stock as part of a straddle or
a hedging or conversion transaction, persons whose functional currency is not
the U.S. dollar and persons owning directly or indirectly (under constructive
ownership rules) 10% or more of the Common Stock), all of whom may be subject to
tax rules that differ significantly from those summarized below.
A "U.S. Holder" is a beneficial owner of Common Stock that is a U.S.
citizen or resident, a domestic corporation, an estate subject to U.S. federal
income taxation on a net income basis, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust.
Dividends. Under the United States federal income tax laws, and subject
to the passive foreign investment company, or PFIC, and controlled foreign
corporation, or CFC rules discussed below, if you are a U.S. holder, the gross
amount of any dividend we pay out of our current or accumulated earnings and
profits (as determined for United States federal income tax purposes) is subject
to United States federal income taxation. If you are a noncorporate U.S. holder,
dividends paid to you in taxable years beginning before January 1, 2009 that
constitute qualified dividend income will be taxable to you at a maximum tax
rate of 15% provided that you hold the shares for more than 60 days during the
121-day period beginning 60 days before the ex-dividend date and meet other
holding period requirements. Dividends we pay with respect to the shares
generally will be qualified dividend income provided that, in the year that you
receive the dividend, the shares are readily tradable on an established
securities market in the United States.
Distributions in excess of the earnings and profits of the Company will
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital to the extent of the U.S. Holder's basis in the Common Stock and then as
gain from the sale or exchange of a capital asset. A corporate shareholder will
not be eligible for the dividends-received deduction.
Sale or Exchange of Common Stock. Subject to the PFIC and CFC rules
discussed below, if you are a U.S. holder and you sell or otherwise dispose of
your shares, you will recognize capital gain or loss for United States federal
income tax purposes equal to the difference between the U.S. dollar value of the
amount that you realize and your tax basis, determined in U.S. dollars, in your
shares. Capital gain of a noncorporate U.S. holder that is recognized before
January 1, 2009 is generally taxed at a maximum rate of 15% where the holder has
a holding period greater than one year.
PFIC Rules. We believe that shares should not be treated as stock of a
PFIC for United States federal income tax purposes, but this conclusion is a
factual determination that is made annually and thus may be subject to change.
In general, if you are a U.S. holder, we will be a PFIC with respect to
you if for any taxable year in which you held our shares:
o at least 75% of our gross income for the taxable year is passive
income or
o at least 50% of the value, determined on the basis of a quarterly
average, of our assets is attributable to assets that produce or
are held for the production of passive income.
Passive income generally includes dividends, interest, royalties, rents
(other than certain rents and royalties derived in the active conduct of a trade
or business), annuities and gains from assets that produce passive income. If a
foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation's income.
If we are treated as a PFIC, and you are a U.S. holder that did not
make a mark-to-market election, as described below, you will be subject to
special rules with respect to:
47
o any gain you realize on the sale or other disposition of your
shares and
o any excess distribution that we make to you (generally, any
distributions to you during a single taxable year that are
greater than 125% of the average annual distributions received by
you in respect of the shares during the three preceding taxable
years or, if shorter, your holding period for the shares).
Under these rules:
o the gain or excess distribution will be allocated ratably over
your holding period for the shares,
o the amount allocated to the taxable year in which you realized
the gain or excess distribution will be taxed as ordinary income,
o the amount allocated to each prior year, with certain exceptions,
will be taxed at the highest tax rate in effect for that year,
and
o the interest charge generally applicable to underpayments of tax
will be imposed in respect of the tax attributable to each such
year.
If you own shares in a PFIC that are treated as marketable stock, you
may also make a mark-to-market election. If you make this election, you will not
be subject to the PFIC rules described above. Instead, in general, you will
include as ordinary income each year the excess, if any, of the fair market
value of your shares at the end of the taxable year over your adjusted basis in
your shares. These amounts of ordinary income will not be eligible for the
favorable tax rates applicable to qualified dividend income or long-term capital
gains. You will also be allowed to take an ordinary loss in respect of the
excess, if any, of the adjusted basis of your shares over their fair market
value at the end of the taxable year (but only to the extent of the net amount
of previously included income as a result of the mark-to-market election). Your
basis in the shares will be adjusted to reflect any such income or loss amounts.
In addition, notwithstanding any election you make with regard to the
shares, dividends that you receive from us will not constitute qualified
dividend income to you if we are a PFIC either in the taxable year of the
distribution or the preceding taxable year. Dividends that you receive that do
not constitute qualified dividend income are not eligible for taxation at the
15% maximum rate applicable to qualified dividend income. Instead, you must
include the gross amount of any such dividend paid by us out of our accumulated
earnings and profits (as determined for United States federal income tax
purposes) in your gross income, and it will be subject to tax at rates
applicable to ordinary income.
If you own shares during any year that we are a PFIC, you must file
Internal Revenue Service Form 8621.
CFC Rules. A foreign corporation generally is treated as a controlled
foreign corporation ("CFC") for U.S. federal income tax purposes if more than
50% of its stock is owned by certain 10% shareholders. The Company believes that
it is not currently a CFC because such shareholder test is not met. The
treatment of the Company as a CFC would not in any event adversely affect any
person who owns (directly or indirectly or by attribution) less than 10% of the
Common Stock.
Backup Withholding and Information Reporting. If you are a noncorporate
U.S. holder, information reporting requirements, on Internal Revenue Service
Form 1099, generally will apply to:
o dividend payments or other taxable distributions made to you
within the United States, and
o the payment of proceeds to you from the sale of shares effected
at a United States office of a broker.
Additionally, backup withholding may apply to such payments if you are
a noncorporate U.S. holder that:
o fails to provide an accurate taxpayer identification number,
o is notified by the Internal Revenue Service that you have failed
to report all interest and dividends required to be shown on your
federal income tax returns, or
o in certain circumstances, fails to comply with applicable
certification requirements.
If you are a non-U.S. holder, you are generally exempt from backup
withholding and information reporting requirements with respect to:
o dividend payments made to you outside the United States by us or
another non-United States payor and
48
o other dividend payments and the payment of the proceeds from the
sale of shares effected at a United States office of a broker, as
long as the income associated with such payments is otherwise
exempt from United States federal income tax, and:
o the payor or broker does not have actual knowledge or
reason to believe that you are a United States person and
you have furnished the payor or broker:
o an Internal Revenue Service Form W-8BEN or an
acceptable substitute form upon which you certify,
under penalties of perjury, that you are a non-United
States person, or
o other documentation upon which it may rely to treat
the payments as made to a non-United States person in
accordance with U.S. Treasury regulations, or
o you otherwise establish an exemption.
Payment of the proceeds from the sale of shares or effected at a
foreign office of a broker generally will not be subject to information
reporting or backup withholding. However, a sale of shares or that is effected
at a foreign office of a broker will be subject to information reporting and
backup withholding if:
o the proceeds are transferred to an account maintained by you in
the United States,
o the payment of proceeds or the confirmation of the sale is mailed
to you at a United States address, or
o the sale has some other specified connection with the United
States as provided in U.S. Treasury regulations,
unless the broker does not have actual knowledge or reason to believe
that you are a United States person and the documentation requirements described
above are met or you otherwise establish an exemption.
In addition, a sale of shares or effected at a foreign office of a
broker will be subject to information reporting if the broker is:
o a United States person,
o a controlled foreign corporation for United States tax purposes,
o a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business
for a specified three-year period, or
o a foreign partnership, if at any time during its tax year:
o one or more of its partners are "U.S. persons", as defined
in U.S. Treasury regulations, who in the aggregate hold
more than 50% of the income or capital interest in the
partnership, or
o such foreign partnership is engaged in the conduct of a
United States trade or business,
unless the broker does not have actual knowledge or reason to believe that you
are a United States person and the documentation requirements described above
are met or you otherwise establish an exemption. Backup withholding will apply
if the sale is subject to information reporting and the broker has actual
knowledge that you are a United States person.
You generally may obtain a refund of any amounts withheld under the
backup withholding rules that exceed your income tax liability by filing a
refund claim with the United States Internal Revenue Service.
DOCUMENTS ON DISPLAY
The documents concerning the Company which are referred to in this
report may be inspected on-line at websites maintained by the Securities and
Exchange Commission and by private companies offering access to the SEC
database. See, e.g., www.sec.gov.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are subject to
risks and uncertainties. Actual results could differ materially from those
discussed in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign currency exchange rates.
The Company does not have derivative financial instruments for hedging,
speculative, or trading purposes.
49
INTEREST RATE SENSITIVITY
The Company currently has no debt and borrowings that are sensitive to
interest rate fluctuation. Our exposure to market rate risk for changes in
interest rates relates primarily to our investment securities. We manage our
interest rate risk by maintaining an investment portfolio primarily consisting
of debt instruments of high credit quality and relatively short average
maturities. We maintain sufficient cash and cash equivalent balances such that
we are typically able to hold our investments to maturity. However, there is no
assurance that we won't decide to retire any of these instruments early or that
they will not be called by the issuer. As there can be no assurance as to how
long these investments will be held, we classify these securities as either
available-for-sale or trading investments.
As of December 31, 2005, our cash equivalents and available-for-sale
and trading investments included $15.9 million of debt securities, consisting
primarily of money market funds and certificates of deposit. Notwithstanding our
efforts to manage interest rate risks, there can be no assurances that we will
be adequately protected against the risks associated with interest rate
fluctuations.
FOREIGN CURRENCY RISK
The Company has net monetary asset and liability balances in foreign
currencies other than the U.S. dollar, including the Pound Sterling, the
Canadian dollar, the Hong Kong dollar and the Chinese RMB. International
distribution and sales revenues usually are made by the Company's subsidiaries
in the United States, United Kingdom and Canada, and are denominated typically
in their local currency and the expenses incurred by these subsidiaries are also
denominated in the local currency. As a result, the operating results of the
Company are exposed to changes in exchange rates between the United States
Dollar and the Pound Sterling or the Canadian dollar. The Company does not
currently hedge its foreign exchange risk, which is not significant at this
time. The Company will continue to monitor its exposure to currency
fluctuations, and, where appropriate, may use financial hedging techniques in
the future to minimize the effect of these fluctuations. If the Chinese
Government were to trade its currency on the open market and the RMB were to
increase in value relative to the U.S. dollar, we would experience increased
factory and production costs, including labor and certain raw materials that
could have a material impact on the cost of our products. See also "Item 3. Key
Information - Risk Factors - Currency Valuation".
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None or Not Applicable
ITEM 15. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) at December 31, 2005. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that these disclosure controls and
procedures were effective. In addition, no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) occurred during the fiscal year ended December 31, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
During 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 Radica
as a Nasdaq National Market company. However, on January 31, 2005, Mr. Eischeid
was named President and Chief Operating Officer of Radica and
50
resigned from the Audit Committee. Timothy R. Busch was then named Chairman of
the Audit Committee in replacement of Mr. Eischeid. The board determined that
Mr. Busch was 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 did determine that Mr. Busch met
the financial sophistication requirement of such listing standards. On May 23,
2005, the board of directors determined that Richard E. Wenz qualified as an
audit committee financial expert and that Mr. Wenz was independent within the
meaning of the applicable listing standards and appointed him as the audit
committee financial expert.
ITEM 16B. CODE OF ETHICS
The Company has adopted a Code of Ethics that is applicable to all its
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. The
Company's Code of Ethics is maintained on the Company's internet website at
www.radicagames.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(US$ in thousands) Audit fees Audit-related fees Tax fees Total
---------- ------------------ -------- -----
2004 $ 283 $ 4 $ 91 $ 378
2005 311 57 137 505
AUDIT-RELATED FEES
Services provided primarily consist of statutory audit of pension
contributions to the Company's defined contribution plan.
TAX FEES
Services provided primarily consist of corporate tax advisory services
and preparation of corporate income tax returns.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Shareholders' Equity and Comprehensive Income F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
51
ITEM 19. EXHIBITS
The exhibit index appears at page I-2 of this report, immediately
following the signature page.
52
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, 2005 and 2004, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with United States generally accepted
accounting principles.
/s/ KPMG
Hong Kong, China
March 6, 2006
F - 1
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(US dollars in thousands, except share data) 2005 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 37,358 $ 27,614
Investment securities 15,928 12,456
Accounts receivable, net of allowance
for doubtful accounts
of $165 ($148 as at December 31, 2004) 18,703 18,359
Inventories 21,420 26,818
Prepaid expenses and other current assets 4,196 3,374
Income taxes receivable 479 168
Deferred income taxes 3,237 1,850
----- -----
Total current assets 101,321 90,639
------- ------
Property, plant and equipment, net 14,542 11,480
Goodwill - 6,015
Other assets 833 854
Deferred income taxes 572 953
--- ---
Total assets $117,268 $109,941
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,580 10,770
Accrued warranty expenses 2,056 1,070
Accrued payroll and employee benefits 3,833 1,486
Other accrued liabilities 5,987 5,251
Income taxes payable 417 287
--- ---
Total current liabilities 18,873 18,864
------ ------
Commitments and contingencies
Total liabilities 18,873 18,864
------ ------
Shareholders' equity:
Common stock
par value $0.01 each,
100,000,000 shares authorized,
19,080,004 shares outstanding
(18,738,112 as at December 31, 2004) 191 187
Additional paid-in capital 6,122 4,610
Retained earnings 93,025 85,909
Deferred compensation (203)
Accumulated other comprehensive (loss) income (740) 371
---- ---
Total shareholders' equity 98,395 91,077
------ ------
Total liabilities and shareholders' equity $117,268 $109,941
======== ========
See accompanying notes to the consolidated financial statements.
F - 2
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2005, 2004 and 2003
(US dollars in thousands, 2005 2004 2003
except per share data) ---- ---- ----
Revenues:
Net sales $162,779 $ 123,399 $ 105,200
Cost of goods sold (101,927) (81,576) (65,350)
(exclusive of items shown separately below) -------- ------- -------
Gross profit 60,852 41,823 39,850
------ ------ ------
Operating expenses:
Selling, general and administrative expenses (37,979) (30,071) (25,000)
Research and development (4,908) (4,164) (3,895)
Depreciation and amortization (1,984) (1,693) (2,033)
Impairment of goodwill (6,015) (3,536) -
Restructuring charge - - (87)
----- ----- ---
Total operating expenses (50,886) (39,464) (31,015)
------- ------- -------
Operating income 9,966 2,359 8,835
Other income 216 754 317
Foreign currency gain, net 135 417 178
Interest income 859 765 344
Interest expense - - (49)
Income before income taxes 11,176 4,295 9,625
------ ----- -----
(Provision) credit for income taxes (644) (839) 2,866
---- ---- -----
Net income $ 10,532 $ 3,456 $ 12,491
======== ======= ========
Net earnings per share:
Basic $ 0.55 $ 0.19 $ 0.69
====== ====== ======
Diluted $ 0.54 $ 0.18 $ 0.66
====== ====== ======
Weighted average number of common and
common equivalent shares:
Basic 18,993,263 18,653,471 18,016,789
========== ========== ==========
Diluted 19,663,237 19,525,757 19,059,974
========== ========== ==========
Cash dividends declared and paid per share $ 0.18 $ 0.16 $ -
====== ====== =========
See accompanying notes to the consolidated financial statements.
F - 3
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 2005, 2004 and 2003
(US dollars in thousands) Common stock Accumulated
------------ Additional other Total
Number paid-in Deferred Retained comprehensive shareholders'
of shares Amount capital compensation earnings income (loss) equity
--------- ------ ------- ------------ -------- ------------- ------
Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ - $ 72,946 $ (808) $ 74,636
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 ---
Comprehensive income 13,319
Issuance of stock 3,073 - 20 - - - 20
Stock options exercised, inclusive 426,000 4 1,177 - - - 1,181
of $44 tax benefit ------- - ----- --- -------- ---- -----
Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ - $ 85,437 $ 20 $ 89,156
Net income - - - - 3,456 - 3,456
Unrealized loss on investment
securities available-for-sale,
net of nil tax - - - - - (90) (90)
Foreign currency translation,
net of nil tax - - - - - 441 441
---
Comprehensive income 3,807
Issuance of stock 2,272 - 21 - - - 21
Stock options exercised, inclusive
of nil tax 510,636 5 1,072 - - - 1,077
Dividends paid - - - - (2,984) - (2,984)
---------- ----- ------- ---- ------ ----- ------
Balance at December 31, 2004 18,738,112 $ 187 $ 4,610 $ - $ 85,909 $ 371 $ 91,077
Net income - - - - 10,532 - 10,532
Unrealized gain on investment
securities available-for-sale,
net of nil tax - - - - - 45 45
Foreign currency translation,
net of nil tax - - - - - (1,156) (1,156)
------
Comprehensive income 9,421
Issuance of stock 892 - 8 - - - 8
Issuance of restricted stock 35,200 1 307 (308) - - -
Amortisation of restricted stock - - - 105 - - 105
Stock options exercised, inclusive 305,800 3 1,197 - - - 1,200
of $93 tax benefit
Dividends paid - - - - (3,416) - (3,416)
---------- ----- ------- ------ ------ ------ ------
Balance at December 31, 2005 19,080,004 $ 191 $ 6,122 $ (203) $ 93,025 $ (740) $ 98,395
========== ===== ======= ====== ======== ====== ========
See accompanying notes to the consolidated financial statements.
F - 4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2005, 2004 and 2003
(US dollars in thousands) 2005 2004 2003
Cash flow from operating activities:
Net income $ 10,532 $ 3,456 $ 12,491
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (1,006) 109 (2,991)
Depreciation and amortization 1,984 1,693 2,033
Impairment of goodwill 6,015 3,536 -
(Gain) loss on disposal and write off of property, plant and equipment (64) (19) 102
Compensatory elements of stock issuances 113 21 20
Tax benefit from stock option exercises 93 - 44
Realized gain on trading securities (24) (108) -
Unrealized gain on trading securities (19) (1) (55)
Proceeds from sale of trading securities 2,616 15,572 -
Purchases of trading securities (6,000) - (18,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (999) (2,518) 187
Decrease (increase) in inventories 4,965 (11,416) 5,145
Increase in prepaid expenses and other current assets (888) (575) (1,058)
(Decrease) increase in accounts payable (4,162) 4,397 (1,659)
Increase (decrease) in accrued payroll and employee benefits 2,385 122 (1,415)
Increase in accrued warranty expenses 1,023 30 -
Increase (decrease) in other accrued liabilities 824 1,219 (1,938)
(Increase) decrease in net income taxes receivable (181) 1,184 (443)
Net cash provided by (used in) operating activities 17,207 16,702 (7,537)
Cash flow from investing activities:
Purchase of available-for-sale securities - - (10,000)
Proceeds from sale of property, plant and equipment 296 1,292 955
Purchase of property, plant and equipment (5,270) (2,504) (932)
Net cash used in investing activities (4,974) (1,212) (9,977)
Cash flow from financing activities:
Proceeds from stock options exercised 1,107 1,077 1,137
Dividends paid (3,416) (2,984) -
Decrease in short-term borrowings - - (846)
Repayment of long-term debt - - (1,825)
Net cash used in financing activities (2,309) (1,907) (1,534)
Effect of currency exchange rate change on cash and cash equivalents (180) 87 300
Net increase (decrease) in cash and cash equivalents 9,744 13,670 (18,748)
Cash and cash equivalents:
Beginning of year 27,614 13,944 32,692
End of year $ 37,358 $ 27,614 $ 13,944
Supplementary disclosures of cash flow information:
Interest paid $ - $ - $ 50
Income taxes paid 2,019 1,084 538
See accompanying notes to the consolidated financial statements.
F - 5
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
Radica Games Limited (the "Company") principally manufactures and markets a
diverse line of principally electronic entertainment products covering
multiple product lines including casino and heritage electronic games,
mechanical slot banks, the 20Q(TM) line of artificial intelligence games,
youth electronic games, tabletop games, Play TV(R) games, the Girl Tech(R)
girls electronic line, the Cupcakes(R) doll line, the Street Muttz(TM)
plush line and video game accessories ("VGA") sold under the Gamester(R)
brand. The Company, incorporated in Bermuda, is headquartered in Hong Kong
and manufactures its products in its factory in Dongguan, People's Republic
of China ("China"). The Company's shares are publicly traded 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, 2005 and 2004 consist of certificates
of deposit 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 investment securities
are determined on a specific-identification basis and included in other
income.
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 forecasted 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.
F - 6
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 exceeding 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 and inventory for which estimated net
realizable value is below its carrying value based on management's analysis
of inventory levels and future expected sales.
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
In June 1994 the Company entered into a joint venture agreement with the
local government to operate a factory. The joint venture agreement was
established for the construction and operation of the factory. The Company
contributed the cost of the construction of the factory to the joint
venture while the local government contributed the land use rights of 50
years. The joint venture agreement term is 30 years after which it may be
extended by 20 years to match the land use rights of 50 years. The joint
venture partner has agreed to extend the joint venture agreement for 20
years when it expires without compensation and the Company intends to renew
it. The payment for construction of the building is being depreciated over
its estimated useful life of 50 years which corresponds to the term of the
land use right. As the Company is depreciating the building over a 50-year
period, the assets will have been fully depreciated at the end of such
time. Costs of leasehold improvements are amortized over the estimated
useful life of the asset (ranging from 2 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 income.
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 the land use right. 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 right. 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 depreciates its property in Hong Kong over 50 years,
which is the shorter of the estimated useful life of the property or the
term of the land use right lease.
The Company expenses all mold costs in the year of purchase or, for
internally produced molds, in the year of construction.
F - 7
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. 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 the implied 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 impaired and is written down to
its implied fair value.
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 undiscounted 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 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.
The Company records reductions to gross revenue for customer incentive
programs, such as discounts and allowances to retailers and volume-based
cash incentives. These customer incentives are determined based on the sale
agreement with each individual customer and are provided for when the
related revenue is recorded. The Company also records provisions against
the gross revenue for estimated product returns in the period when the
related revenue is recorded. In circumstances where the Company accepts
return as a matter of contract or as a matter of practice, the Company
recognizes revenue only if the following criteria are met at time of sale:
(a) the Company's price to the buyer is substantially fixed or determinable
at the date of sale; (b) the buyer has paid the Company, or the buyer is
obligated to pay the Company and the obligation is not contingent on resale
of the product; (c) the buyer's obligation to the Company would not be
changed in the event of theft or physical destruction or damage of the
product; (d) the buyer acquiring the product for resale has economic
substance apart from that provided by the Company; (e) the Company does not
have significant obligations for future performance to directly bring about
resale of the product by the buyer and; (f) the amount of future returns
can be reasonably estimated. 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.
F - 8
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 statements of income.
Warranty
The Company accrues 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
The cost of media related advertising is expensed as incurred. 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 rather than as a reduction of revenue 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
consolidated statements of income and amounted to approximately $12,335,
$10,620 and $7,614 for the years ended December 31, 2005, 2004 and 2003,
respectively.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $4,908, $4,164 and $3,895 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries whose functional currency is
not the US dollar 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.
Post-retirement and Post-employment Benefits
The Company does not have any post-retirement, post-employment or defined
benefit plans. The Company's contributions to defined contribution
retirement plans are expensed as incurred.
F - 9
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred income taxes are accounted for under the asset and liability
method. Under this method, 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 considered 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.
Accounting for 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. 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:
2005 2004 2003
-------- -------- --------
Net income as reported $ 10,532 $ 3,456 $ 12,491
Add stock-based employee compensation expense 105 - -
determined under intrinsic-value-based
method
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all rewards,
net of tax (576) (551) (496)
-------- -------- --------
Pro forma net income $ 10,061 $ 2,905 $ 11,995
======== ======== ========
Reported earnings per share
Basic $ 0.55 $ 0.19 $ 0.69
Diluted $ 0.54 $ 0.18 $ 0.66
Pro forma earnings per share
Basic $ 0.53 $ 0.16 $ 0.67
Diluted $ 0.51 $ 0.15 $ 0.63
F - 10
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123R"), which addresses the accounting for
transactions in which an entity exchanges its equity instruments for goods
or services, with a primary focus on transactions in which an entity
obtains employee services in share-based payment transactions. This
Statement is a revision to Statement 123 and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement will require measurement of the cost of employee
services received in exchange for stock compensation based on the
grant-date fair value of the employee stock options. Incremental
compensation costs arising from subsequent modifications of awards after
the grant date must be recognized. Registrants are required to adopt SFAS
No. 123R at the beginning of the next fiscal year that begins after June
15, 2005. The Company will adopt this Statement on January 1, 2006 under
the modified prospective method of application. Under that method, the
Company will recognize compensation costs for new grants of share-based
awards, awards modified after the effective date, and the remaining portion
of the fair value of the unvested awards at the adoption date.
Earnings Per Share
Basic earnings per share is based on the weighted average number of shares
of common stock, and with respect to diluted earnings per share, also
includes the effect of all dilutive potential common stock outstanding.
Dilutive potential common stock results from dilutive stock options and
warrants. The effect of such dilutive potential common stock on earnings
per share is computed using the treasury stock method. Dilutive potential
common stock has no effect on net loss per share as the effect 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
adjustment and unrealized gains and losses on available-for-sale
securities, net of tax.
Use of Estimates
The preparation of consolidated financial statements in conformity with
United States generally accepted accounting principles requires management
of the Company 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
tax assets and reserves for warranties, product returns and customer sales
incentives. Actual results could 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.
F - 11
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
In December 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 No. 151"). SFAS 151
clarifies that abnormal amounts of idle facility expense, freight, handling
costs and spoilage should be expensed as incurred and not included in
inventory cost as a component of overhead. Further, SFAS No. 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 No. 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. SFAS No. 151 becomes
effective for the Company on January 1, 2006. The Company does not expect
that the adoption of SFAS No. 151 will have a significant effect on its
consolidated financial statements.
In May 2005, the FASB issued SFAS No.154, Accounting Changes and Error
Corrections. SFAS No. 154 establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to a
newly adopted accounting principle. This statement will be effective for
the Company for all accounting changes and any error corrections occurring
after January 1, 2006. The impact on the Company's consolidated financial
statements will depend on new pronouncements that are subsequently issued.
In September 2005, the FASB Emerging Issues Task Force (EITF) issued EITF
Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the
Same Counterparty. EITF 04-13 provides guidance as to when purchases and
sales of inventory with the same counterparty should be accounted for as a
single exchange transaction. EITF 04-13 also provides guidance as to when a
nonmonetary exchange of inventory should be accounted for at fair value.
EITF 04-13 will be applied to new arrangements entered into, and
modifications or renewals of existing arrangements occurring after January
1, 2007. The application of EITF 04-13 is not expected to have a
significant impact on the Company's consolidated financial statements as it
is now constituted.
F - 12
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 2004, the EITF reached a consensus on EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The guidance prescribes a three-step model for determining
whether an investment is other-than-temporarily impaired and requires
disclosures about unrealized losses on investments. The accounting guidance
became effective for reporting periods beginning after June 15, 2004, while
the disclosure requirements became effective for annual reporting periods
ending after June 15, 2004. In September 2004, the FASB issued FASB Staff
Position (FSP) EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (FSP EITF 03-1-1). FSP EITF 03-1-1
delayed the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF Issue 03-1. In November 2005, the
FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
other-than-temporary Investments. This FSP addresses the determination as
to when an investment is considered impaired, whether the impairment is
other-than-temporary and the measurement of an impairment loss. This
statement specifically nullifies the requirements of paragraph 10-18 of
EITF 03-1 and references existing other-than-temporary impairment guidance.
The guidance under this FSP is effective for reporting periods beginning
after December 15, 2005. The Company continued to apply relevant
"other-than-temporary" guidance as provided for in FSP EITF 03-1-1 during
fiscal 2005. The Company does not expect the implementation of FSP FAS
115-1 and FAS 124-1 will have a material impact on the Company's financial
position or results of operations.
Reclassifications
Certain reclassifications have been made to prior year cash flows provided
by (used in) operating activities to conform to the current year's
presentation. The effect of currency exchange rate change on non-cash and
cash equivalents items in 2004 and 2003 were reclassified to relevant line
items in the cash flow statements. The reclassification resulted in an
increase of $341 in the amount of net cash provided by operating activities
in 2004 to $16,702 and a decrease of $563 in the amount of net cash used in
operating activities to $7,537 in 2003. A similar reclassification was also
made to cash flow from investing activities which resulted in an increase
of $13 and $11 in the amounts of net cash used in investing activities in
2004 and 2003 respectively.
3. INVESTMENT SECURITIES
At December 31, 2005 and 2004, investment securities represent municipal
fixed income and money market funds with readily determinable fair market
values and certificates of deposit with 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 the investments can be sold at any time and the
Company intends to liquidate the investments within a year from the balance
sheet date. As at December 31, 2005, the investment in certificates of
deposit has a maturity within one year from the balance sheet date and has
been classified as short-term investments.
Management classifies investments securities at the time of purchase and
reevaluates such classification at each balance sheet date. At December 31,
2005 and 2004, investments in certificates of deposit of $9,909 and $9,864,
respectively were classified as "available-for-sale" and accordingly are
reported at fair value with unrealized losses of approximately $91 and $136
reported as a component of accumulated other comprehensive income (loss) in
shareholders' equity, respectively. The Company also maintains investments
of $6,019 and $2,592 classified as trading securities as of December 31,
2005 and 2004, respectively. These investments represent primarily
municipal fixed income and money market funds subject to price volatility
associated with any interest-bearing instrument.
F - 13
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
3. INVESTMENT SECURITIES (Continued)
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value of available-for-sale securities at December
31, 2005 and 2004 were as follows:
Gross Gross
Amortized unrealized unrealized
cost holding gains holding losses Fair value
--------------- --------------- --------------- ---------------
At December 31, 2005
Available for sale:
Certificates of deposit $ 10,000 $ - $ (91) $ 9,909
At December 31, 2004
Available for sale:
Certificates of deposit $ 10,000 $ - $ (136) $ 9,864
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, 2005:
Less than 12 months 12 months or greater Total
------------------------ ----------------------- ------------------------
Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses
---------- ---------- ---------- ---------- ---------- ----------
Certificates of deposit $9,909 $ (91) $ - $ - $9,909 $ (91)
The unrealized losses on the investments in certificates of deposit 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.
F - 14
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
3. INVESTMENT SECURITIES (Continued)
Net realized investment gains and net changes in unrealized gains (losses)
on investments for the years ended December 31, 2005, 2004 and 2003 are
summarized as follows:
2005 2004 2003
--------------- --------------- ---------------
Net realized gains on investments
Available-for-sale $ - $ - $ -
Trading 24 108 -
--------------- --------------- ---------------
$ 24 $ 108 $ -
Net changes in unrealized gains (losses) on investments
Available-for-sale $ 45 $ (90) $ (46)
Trading 19 1 55
--------------- --------------- ---------------
$ 64 $ (89) $ 9
Net realized gains and changes
in unrealized gains (losses) on investments $ 88 $ 19 $ 9
=============== =============== ===============
Following is a summary of the disposition and purchases of investment
securities for the years ended December 31, 2005, 2004 and 2003:
Gross realized Net realized
---------------------------------- ---------------
Amount Gains Losses Gain
--------------- --------------- --------------- ---------------
Sales:
2005 - Available-for-sale $ - $ - $ - $ -
Trading 2,616 24 - 24
2004 - Available-for-sale $ - $ - $ - $ -
Trading 15,572 108 - 108
2003 - Available-for-sale $ - $ - $ - $ -
Trading - - - -
Purchases:
2005 - Available-for-sale $ - $ - $ - $ -
Trading 6,000 - - -
2004 - Available-for-sale $ - $ - $ - $ -
Trading - - - -
2003 - Available-for-sale $ 10,000 $ - $ - $ -
Trading 18,000 - - -
F - 15
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
4. INVENTORIES
Inventories by major categories, net of provisions are summarized as
follows:
2005 2004
--------------- ---------------
Raw materials $ 2,085 $ 4,017
Work in progress 6,982 6,830
Finished goods 12,353 15,971
--------------- ---------------
$ 21,420 $ 26,818
=============== ===============
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
2005 2004
--------------- ---------------
Land and buildings $ 10,251 $ 9,431
Plant and machinery 10,767 8,142
Furniture and equipment 8,064 8,196
Leasehold improvements 3,307 3,067
Construction-in-progress - 265
--------------- ---------------
$ 32,389 $ 29,101
Less: Accumulated depreciation and amortization (17,847) (17,621)
--------------- ---------------
Total $ 14,542 $ 11,480
=============== ===============
In November 2002, the AICPA International Practices Task Force (the "Task
Force") discussed an issue relating to accounting for land use rights in
China. The Task Force view is that China land use rights are considered
operating leases, as they are long-term leases of lands, which do not
transfer title. As of December 31, 2005 and 2004, other assets of $833 and
$854 respectively, comprise prepaid land use rights. The prepaid land use
rights have a term of 50 years.
F - 16
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
6. GOODWILL
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. As a result, the Company recorded the
excess of net assets purchased (goodwill) of approximately $12,069
resulting from the adjusted purchase price. Goodwill having a net carrying
value of $9,551 at January 1, 2002, the date of adoption of SFAS No. 142,
was allocated to the Video Games Accessories ("VGA") reporting unit.
The methods used in the Company's testing of goodwill impairment are as
follows: 1) The Company determines the fair market value of the VGA
reporting unit by estimating the expected discounted future cash flows of
the VGA reporting unit. In estimating the discounted future cash flows, the
Company follows 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 compares the estimated fair value of the
VGA reporting unit with the carrying value of the VGA reporting unit,
including goodwill. 3) To the extent the fair value of the VGA reporting
unit is less than the carrying value, the second step is performed which
compares the implied fair value of the VGA reporting unit's goodwill to the
book value of the goodwill.
In performing the goodwill impairment test for the year ended December 31,
2004, the Company recognized a goodwill impairment of $3,536 as the implied
fair value of the VGA reporting unit was determined to be $6,015. The facts
and circumstances leading to the goodwill impairment charge in 2004 were
primarily the result of lower forecasted sales and cash flows which were
largely predicated by the Company's new adopted strategy of concentrating
on the innovative, higher margin sector of the VGA market. At December 31,
2004 the Company's carrying value of goodwill was $6,015 net of the
impairment charge of $3,536.
In performing the goodwill impairment test for the year ended December 31,
2005, the Company recognized a goodwill impairment of $6,015 as the implied
fair value of the VGA goodwill was determined to be nil. The facts and
circumstances leading to the goodwill impairment charge in 2005 were the
result of a significant reduction in forecasted sales and cash flows which
were a result of the platform transition of the Xbox to the Xbox 360, the
expected transition in 2006 of Sony Playstation 2 to Playstation 3, as well
as lower forecasted sales and cash flows for VGA products due to decrease
in market demands. Prior to the introduction of the Xbox 360 platform, the
Company attempted to negotiate a licensing agreement to manufacture and
distribute Xbox 360 video games accessories but was unable to reach an
agreement with Microsoft. Accordingly, sales of VGA are expected to be
significantly lower as compared to previous years. After this impairment
charge, the carrying value of goodwill as of December 31, 2005 was nil.
F - 17
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
2005 2004
--------------- ---------------
Accrued advertising expenses $ 1,761 $ 910
Accrued license and royalty fees 1,796 1,963
Commissions payable 68 93
Other accrued liabilities 2,362 2,285
--------------- ---------------
Total $ 5,987 $ 5,251
=============== ===============
8. INCOME TAXES
The Company is incorporated in Bermuda where there is no income or profit
tax. The Company's subsidiaries in Hong Kong, Macau, China, the United
Kingdom and the United States are subject to applicable corporate income
tax rates of 17.5%, 0%, 27%, 30% and 34% respectively.
The components of income before income taxes are as follows:
2005 2004 2003
--------------- --------------- ---------------
United States $ 794 $ 3,472 $ 9,964
Other countries 10,382 823 (339)
--------------- --------------- ---------------
$ 11,176 $ 4,295 $ 9,625
=============== =============== ===============
The provisions (credits) for income taxes consist of the following:
2005 2004 2003
--------------- --------------- ---------------
Current:
US Federal $ 1,174 $ 147 $ 38
US State 171 127 1
Other countries 305 456 42
--------------- --------------- ---------------
Total current income tax provision $ 1,650 $ 730 $ 81
--------------- --------------- ---------------
Deferred:
US Federal and State $ (826) $ 900 $ (2,857)
Other countries (180) (791) (90)
--------------- --------------- ---------------
Total deferred income tax (credit) provision $ (1,006) $ 109 $ (2,947)
--------------- --------------- ---------------
Total income taxes provision (credit) $ 644 $ 839 $ (2,866)
=============== =============== ===============
F - 18
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
8. INCOME TAXES (Continued)
Income tax expense (benefit) for the years ended December 31, 2005, 2004
and 2003 were allocated as follows:
2005 2004 2003
--------------- --------------- ---------------
Income from continuing operations $ 644 $ 839 $ (2,866)
Shareholders' equity - compensation expense for
tax purposes in excess of amounts recognized (93) - (44)
for financial reporting purposes
A reconciliation between income tax expense (benefit) and amounts
calculated using the US statutory rate is as follows:
2005 2004 2003
--------------- --------------- ---------------
The US statutory rate 35% 35% 35%
Computed "expected" tax expense
at the US statutory rate $ 3,911 $ 1,503 $ 3,369
State tax, net of federal tax benefit 171 127 1
Foreign tax rate differential (4,534) (1,028) (807)
Expenses not deductible for taxation purposes 1,070 45 -
Effect of change in effective rate on deferred tax 88 - -
Effect on opening deferred tax balances resulting
from an increase in tax rate during the year - - (478)
Change in valuation allowance 205 380 (4,476)
China tax rebates (340) (212) (472)
Other, net 73 24 (3)
--------------- --------------- ---------------
Income tax provision (credit) $ 644 $ 839 $ (2,866)
=============== =============== ===============
The US statutory rate has been used because the majority of the Company's
taxable income arises in the US. The Company's subsidiary in China is a
Sino-foreign joint venture enterprise and subject to a statutory tax rate
of 27%. The joint venture enterprise successfully applied for the
designation as an "Export Oriented Enterprise", which resulted in the
receipt of tax rebates, which effectively reduced the tax rate to 12% in
2005, 2004 and 2003.
F - 19
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
8. INCOME TAXES (Continued)
The tax effects of the Company's temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are as
follows at December 31:
2005 2004
--------------- ---------------
Deferred tax assets:
Property, plant and equipment $ 697 $ 479
Net operating loss carryforwards 3,941 4,441
Accounts receivable 45 43
Accrued payroll and employee benefits 409 -
Accrued sales allowance and warranty 1,361 580
Advertising allowances 541 322
Alternative minimum tax credit - 519
Inventories 537 416
Other 184 10
--------------- ---------------
Total gross deferred tax assets 7,715 6,810
Valuation allowance (4,224) (4,510)
--------------- ---------------
Net deferred tax assets $ 3,491 $ 2,300
Deferred tax liabilities:
Other $ (128) $ (17)
--------------- ---------------
Net deferred tax assets $ 3,363 $ 2,283
Deferred tax charge on unrealized profits
on intercompany sales 446 520
--------------- ---------------
Total deferred income taxes $ 3,809 $ 2,803
=============== ===============
The valuation allowance was $8,159 at January 1, 2003. The increase
(decrease) in the valuation allowance during the years ended December 31,
2003, 2004 and 2005 were $(4,476), $827 and $(286), respectively. No
valuation allowance has been provided against the deferred tax charges on
unrealized profits on intercompany sales.
F - 20
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
8. INCOME TAXES (Continued)
The following table represents the classification of the Company's deferred
income taxes at December 31:
2005 2004
--------------- ---------------
(unaudited)
Current deferred tax assets $ 2,791 $ 1,330
Non-current deferred tax assets 572 953
Deferred tax charges 446 520
--------------- ---------------
Total net deferred income taxes $ 3,809 $ 2,803
=============== ===============
As of December 31, 2005, the Company's United Kingdom (UK) subsidiary had
approximately $13,000 net operating loss carryforwards which will
carryforward indefinitely.
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. The change in the valuation allowance during the
years ended December 31, 2005, 2004 and 2003 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 volume 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 of the Company's transfer
pricing by one of the many tax authorities in international jurisdictions
where the Company and its subsidiaries operate the Company's claim
regarding lack of permanent establishment in China, or other matters that
may exist such as China's value added taxes, the Company is exposed to
possible additional taxation that has not been accrued as it is not
probable and reasonably estimable. Management believes that the potential
tax contingencies for these items are not expected to 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. During the year ended December 31,
2003, the Company completed the process of closing the UK R&D office and as
of December 31, 2003, no restructuring reserve remained. During the years
ended December 31, 2005 and 2004, no restructuring charges were incurred.
F - 21
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share as of December 31:
2005 2004 2003
--------------- --------------- ---------------
Numerator for basic and diluted earnings per share:
Net income $ 10,532 $ 3,456 $ 12,491
=============== =============== ===============
Denominator:
Basic weighted average shares 18,993,263 18,653,471 18,016,789
Effect of dilutive options 669,974 872,286 1,043,185
--------------- --------------- ---------------
Diluted weighted average shares 19,663,237 19,525,757 19,059,974
=============== =============== ===============
Basic earnings per share: $ 0.55 $ 0.19 $ 0.69
=============== =============== ===============
Diluted earnings per share: $ 0.54 $ 0.18 $ 0.66
=============== =============== ===============
Options on 101,500, 54,000 and 136,500 shares of common stock for the years
ended December 31, 2005, 2004 and 2003, respectively, were not included in
computing diluted earnings per share since their effects were antidilutive.
11. STOCK-BASED COMPENSATION
Stock Options
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 4,200,000
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. 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.
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.
F - 22
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
11. STOCK-BASED COMPENSATION (Continued)
A summary of option activity is as follows:-
2005 2004 2003
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
(Shares in thousands) Shares price Shares price Shares price
------ -------- ------ -------- ------ --------
Outstanding at
beginning of year 1,583 $ 4.39 1,947 $ 3.41 2,313 $ 4.05
Options granted 112 8.27 187 8.36 370 5.10
Options exercised (306) 3.62 (510) 2.11 (426) 2.67
Options forfeited (36) 7.82 (41) 4.19 (310) 11.24
---------- ---------- ----------
Outstanding at end of year 1,353 $ 4.78 1,583 $ 4.39 1,947 $ 3.41
========== ========== ==========
Options exercisable
at year end 1,125 $ 4.39 1,091 $ 3.80 1,232 $ 2.88
========== ========== ==========
The following is additional information relating to options outstanding as
of December 31, 2005:
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 52 $ 1.73 3.63 52 $ 1.73
$ 2.001 to 4.000 642 3.22 4.49 637 3.23
$ 4.001 to 6.000 278 4.37 6.97 196 4.37
$ 6.001 to 8.000 158 7.09 7.82 136 7.11
$ 8.001 to 10.000 206 8.60 8.62 87 8.69
$ 12.001 to 14.000 16 12.63 3.25 16 12.63
$ 18.001 to 20.000 1 20.00 2.00 1 20.00
-------- --------
1,353 $ 4.80 5.97 1,125 $ 4.40
======== ========
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 $2.78, $2.70 and $1.47 per option for the years ended December
31, 2005, 2004 and 2003, respectively. The values were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
F - 23
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
11. STOCK-BASED COMPENSATION (Continued)
2005 2004 2003
--------------- --------------- ---------------
Expected life of options 3.2 years 3.5 years 3.6 years
Risk-free interest rate 4.0% 3.6% 2.8%
Expected volatility of underlying stock 50% 45% 33%
Dividends 2.2% 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.
Had the Company 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
disclosed in Note 2 to the consolidated financial statements.
Common Stock
The Company issued 1,492, 2,272 and 3,073 shares of common stock during the
years ended December 31, 2005, 2004 and 2003, respectively, to directors
who elected to receive some or all of their directors' fees in shares of
the Company in lieu of cash. Shares issued, which were valued at the then
current market price are recorded as an expense in the income statement and
amounted to $8, $21 and $20 for the years ended December 31, 2005, 2004 and
2003, respectively.
F - 24
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
11. STOCK-BASED COMPENSATION (Continued)
Restricted Common Stock
Commencing in May 2005, upon each annual re-election to the Board of
Directors, each outside director and the Chairman of the Board is entitled
to receive 600 shares of restricted common stock per quarter commencing
upon such re-election date (i.e. 2,400 shares per annum) at the then
current market price. The weighted average price of the restricted common
stock granted during 2005 was $8.75 per share. These shares become free of
any restrictions, in equal installments, over two years from the date of
grant.
In addition, upon the initial election or appointment of a new outside
director to the Board of Directors, such director is entitled to receive
5,000 shares of restricted common stock at the then-current market price.
These shares become free of any restrictions, in equal installments, over
two years from the date of grant.
The Company issued 35,200, nil and nil shares of restricted common stock
during the years ended December 31, 2005, 2004 and 2003, respectively, to
members of the Board of Directors as compensation for their services. The
Company records deferred stock compensation related to the restricted
shares of common stock which was measured based on the fair market value on
the date of grant and is being amortized over the vesting period of two
years. As of December 31, 2005, the Company had approximately $203 of
unamortized deferred stock compensation related to restricted shares of
common stock. Amortization of deferred stock compensation expense was $105,
nil, and nil for the years ended December 31, 2005, 2004 and 2003,
respectively. Future amortization of deferred stock compensation relates to
restricted shares of common stock is estimated to be as follows:
Amortization of
deferred stock
compensation
-----------------
2006 134
2007 69
-----------------
$ 203
=================
12. RETIREMENT PLANS
In Hong Kong, the Company contributes to a mandatory provident fund and a
defined contribution retirement plan covering substantially all employees.
Under these plans, eligible employees contribute amounts through payroll
deductions up to a certain percentage of the employee salary, supplemented
by employer contributions ranging from 5% to 10% of individual salary
depending on the years of service. The expense related to the Company's
contributions was $237, $198 and $253 for the years ended December 31,
2005, 2004 and 2003, 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 expense related to the Company's contributions was $121, $118
and $74 for the years ended December 31, 2005, 2004 and 2003, respectively.
F - 25
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
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.
14. PLEDGE OF ASSETS
At December 31, 2005, the Company has general banking facilities including
overdraft and trade facilities totaling $5,050 available for immediate
borrowing. The facilities are collateralized by leasehold land and
buildings with an aggregate net book value of $1,969.
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 $849, $761 and $589 for the years ended December 31,
2005, 2004 and 2003, respectively. In the normal course of business, leases
that expire are renewed or replaced by leases on other properties. As of
December 31, 2005, the Company was obligated under non-cancelable operating
leases requiring future minimum rental payments as follows:
Operating
leases
---------------
2006 738
2007 432
2008 319
2009 199
2010 127
Thereafter 666
---------------
Total minimum lease payments $ 2,481
===============
Joint Venture Agreement
As of December 31, 2005, the Company is committed to pay a total of $3,263
in varying amounts over the remaining initial term of the joint venture
agreement of 30 years until 2024 under the terms of the joint venture
agreement with the local government in Dongguan, China (see note 2). The
joint venture agreement term is 30 years after which it may be extended by
20 years to match the land use rights of 50 years. The joint venture
partner has agreed to extend the joint venture agreement for 20 years when
it expires without compensation and the Company intends to renew it. Upon
expiration, the joint venture agreement may be extended by 20 years to
match the land use right of 50 years. Payments to the joint venture partner
over the renewal period will be subject to negotiation between the Company
and the joint venture partner at that time.
F - 26
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
15. COMMITMENTS AND CONTINGENCIES (Continued)
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 video game
accessories products. Details of the movement in the warranty provision
during the years are presented 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 minimum royalty amounts during the
term of the contracts. Under the terms of agreements which contain
provisions for future minimum payments, the Company is obligated to pay
royalty amounts as follows:
Minimum
Payments
----------------
2006 30
2007 220
Thereafter -
----------------
$ 250
================
For the years ended December 31, 2005, 2004 and 2003, actual royalty
payments made under contracts with minimum royalty provisions exceeded the
minimum royalty amounts.
Capital Commitments
The Company has capital commitments of $207 at December 31, 2005 in respect
of the construction and expansion of its manufacturing facilities in
Dongguan, China.
F - 27
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
15. COMMITMENTS AND CONTINGENCIES (Continued)
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
(AutoID) operations. The Auto ID operation is used in machines that are
part of the Company's bonding and heat-sealing manufacturing processes.
Lemelson was contesting that the use of machines that incorporate this
patented technology infringes on their intellectual property ("IP") rights
and therefore the Company is obligated to pay a royalty based on the use of
this technology. The suit by Lemelson was stayed pending the outcome of
Lemelson vs. Cognex, a similar suit filed by Lemelson, which had bearing on
the Radica case with Lemelson. On January 23, 2004 a declaratory judgment
was given in the Cognex case that Lemelson's patent claims are invalid. On
September 9, 2005, Lemelson's appeal to the Court of Appeals for the
Federal Circuit was denied and the judgment of the District Court was
affirmed. Subsequently, Lemelson filed a Petition for Panel Rehearing and
Rehearing En Banc to review the Court of Appeals' September 9, 2005 Order
that affirmed the judgment of the District Court. On November 16, 2005 the
Court of Appeals for the Federal Circuit affirmed its September 9, 2005
ruling and denied the Petition for Rehearing En Banc. The prior pending
claim or litigation, specifically, Lemelson Medical Education Foundation v.
ESCO Electronics, et al.; CIV-00-0660 PHX HRH in the U.S. District Court
for the District of Arizona was dismissed with prejudice and final judgment
was entered in favor of Radica on February 3, 2006.
In 2005, the Company and its subsidiary Radica (Macao Commercial Offshore)
Limited (the "Radica parties") were involved in litigation initiated by
AtGames Holdings Limited which challenged the exclusivity of Radica's
rights to the Play TV Sega Genesis games. In late December 2005, the
arbitrator issued an interim decision in favor of Sega Corporation in its
arbitration against AtGames. Subsequently, in January 2006, AtGames
voluntarily dismissed (without prejudice) its complaint against Radica and
Radica Macao. At present, there is no pending litigation or arbitration
against Radica arising out of this matter. However, the Company is
considering whether to take legal action against the other companies
involved in this matter with respect to infringement of the Company's
intellectual property rights and, if such action is taken, counterclaims
may be made against the Radica parties.
16. CONCENTRATIONS OF RISK
Dependence on Major Customers
Historically, a significant portion of the Company's sales have been
concentrated with a few large retail customers. Most of the Company's
retail customers operate on a purchase order basis and the Company does not
have long-term contracts with its retail customers. While the Company
believes it has good relationships with its major retail customers, the
loss of one or more of these retail customers would have an adverse effect
on its operating results.
F - 28
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
16. CONCENTRATIONS OF RISK (Continued)
The top six customers for each of the three years ended December 31, 2005,
2004 and 2003 were as follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
2005 2004 2003
---- ---- ----
1. Wal-Mart (USA) 30.8% 24.5% 31.9%
2. Target (USA) 11.9% 9.6% 5.5%
3. Toys`R'Us (USA) 8.9% 10.0% 8.9%
4. Kohl's (USA) 5.5% 2.6% 2.5%
5. Argos (U.K.) 4.6% 6.7% 8.0%
6. Hasbro (USA) 3.3% 4.5% 8.2%
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. The Company
performs ongoing credit evaluations of its customers' financial condition
and generally requires no collateral from its customers.
Dependence on Suppliers and Subcontractors
The Company is dependent on suppliers for the components and parts that it
assembles to produce its products. An interruption of the supply of LCDs,
semiconductor chips or other supplies from a supplier could result in
significant production delays. Additionally, recent increases in oil prices
have resulted in significant price increases from suppliers of plastics.
Most of the Company's products are primarily made from plastic. While the
Company's products also contain significant electronic components and the
cost of the plastic may not be the most significant material costs, if oil
prices continue to rise, it could result in additional increases in the
price of plastic, which would increase its product costs and subsequently
reduce the Company's profits. The Company is also encountering increases in
the costs of other materials such as copper, which is used in a number of
its electronic components, that could also potentially impact product
costs.
The Company also relies on outside manufacturers for production of some of
its electronic games and video game accessories. While the majority of the
Company's production occurs in its own factory, manufacturer delays or
shutdowns could have a significant impact on future sales of certain
products.
Licenses and Royalties
The Company has entered into various license and royalty agreements in
which it pays fees in exchange for rights to use product inventions or
trademarked names, shapes and likenesses for use in development of its
product lines. The agreements generally include minimum fee guarantees
based on a reasonable expectation of the product sales to be generated
throughout the life of the agreement. See note 15 for further information.
The Company's license and royalty agreements are based on a fixed
percentage of sales made during the period in order to maintain or extend
the rights to its existing licenses. Several of the Company's licenses
apply to products that generate a large volume of sales. Were the Company
unable to maintain these licenses or renew them upon expiration, the lost
sales could have a significant impact on future earnings.
F - 29
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
17. SEGMENT INFORMATION
The Company's chief operating decision-maker (or "CODM") is comprised of a
group of executive management. The Company's CODM reviews operating results
and operating plans and makes resource allocation decisions on a
company-wide or aggregate basis. The Company has one reportable segment
which is the Games and Youth Electronic business. This business develops,
manufactures and markets a diverse line of games and electronic
entertainment products. In prior years, the Company had disclosed the Video
Game Accessories ("VGA") business as a reportable segment. However, VGA is
no longer a reportable segment in 2005. The Company's CODM no longer views
the VGA business as a separate segment for either reporting purposes or for
making decisions about resource allocation as the VGA business is
immaterial (VGA business represented 4.5% of the consolidated revenue for
2005). Accordingly, as of and for the year ended December 31, 2005, the
Company has only one reportable segment.
Revenues from external customers by product category including revenue
derived from manufacturing services are summarized as follows:
2005 2004 2003
--------------- --------------- ---------------
Electronic Games $ 125,965 $ 80,640 $ 62,374
Youth Electronics 17,868 17,038 15,227
Other Toys 2,839 3,490 -
Video Games Accessories 7,266 12,840 14,294
Manufacturing Services 8,841 9,391 13,305
--------------- --------------- ---------------
Total net revenues $ 162,779 $ 123,399 $ 105,200
=============== =============== ===============
Manufacturing services is not considered an operating segment because the
CODM has not analyzed or assessed the performance of manufacturing services
as a separate line of business or an operating segment, but rather as a
type of service that generates auxiliary income to the Company and helps
fill excessive production capacity during non-peak production seasons.
F - 30
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
17. SEGMENT INFORMATION (Continued)
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 other long-lived assets:
2005 2004 2003
--------------- --------------- ---------------
Net sales:
United States $ 109,979 $ 81,542 $ 72,520
United Kingdom 18,773 18,156 13,189
New Zealand 1,292 1,094 152
Japan 2,713 1,591 930
Europe 10,851 3,744 3,292
Canada 4,045 3,471 2,191
Australia 5,547 4,387 1,970
Other countries 9,579 9,414 10,956
--------------- --------------- ---------------
$ 162,779 $ 123,399 $ 105,200
=============== =============== ===============
Long-lived assets:
United States $ 450 $ 6,534 $ 9,937
United Kingdom 102 147 114
China and Hong Kong 14,823 11,668 12,283
--------------- --------------- ---------------
$ 15,375 $ 18,349 $ 22,334
=============== =============== ===============
Included in the long-lived assets was goodwill of $nil, $6,015 and $9,551
as of December 31, 2005, 2004 and 2003, respectively.
F - 31
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003)
(US dollars in thousands, except per share data)
18. VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
beginning Charged to Utilization / end of
of year income statement write-offs year
---------------- ---------------- ---------------- ----------------
2005
Allowance for doubtful accounts $ 148 $ 34 $ (17) $ 165
Allowance for estimated sales returns 924 401 (840) 485
Accrued warranty expenses 1,070 3,386 (2,400) 2,056
Allowance for sales programs 1,911 3,991 (3,320) 2,582
Allowance for co-operative
marketing and advertising expenses 1,196 2,573 (2,008) 1,761
---------------- ---------------- ---------------- ----------------
$ 5,249 $ 10,385 $ (8,585) $ 7,049
================ ================ ================ ================
2004
Allowance for doubtful accounts $ 251 $ 6 $ (109) $ 148
Allowance for estimated sales returns 1,390 1,145 (1,611) 924
Accrued warranty expenses 1,040 1,903 (1,873) 1,070
Allowance for sales programs 2,893 2,834 (3,816) 1,911
Allowance for co-operative
marketing and advertising expenses 1,091 1,883 (1,778) 1,196
---------------- ---------------- ---------------- ----------------
$ 6,665 $ 7,771 $ (9,187) $ 5,249
================ ================ ================ ================
2003
Allowance for doubtful accounts $ 315 $ 114 $ (178) $ 251
Allowance for estimated sales returns 1,247 1,079 (936) 1,390
Accrued warranty expenses 1,040 2,495 (2,495) 1,040
Allowance for sales programs 3,591 2,809 (3,507) 2,893
Allowance for co-operative
marketing and advertising expenses 1,242 1,480 (1,631) 1,091
---------------- ---------------- ---------------- ----------------
$ 7,435 $ 7,977 $ (8,747) $ 6,665
================ ================ ================ ================
F - 32
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RADICA GAMES LIMITED
Date: March 30, 2006 /s/ Craig D. Storey
---------------------------- -------------------------------
Craig D. Storey
Chief Accounting Officer
I - 1
EXHIBIT INDEX
1.1 Memorandum of Association (incorporated by reference to exhibit 3.1 to
the filing of the registrant identified in footnote 1 below).
1.2 Bye-Laws (incorporated by reference to exhibit 3.2 to the filing of
the registrant identified in footnote 1 below).
1.3 Certificate of Incorporation on Change of Name (incorporated by
reference to exhibit 3.3 to the filing of the registrant identified in
footnote 1 below)
2.1 Specimen Certificate for the Shares of Common Stock (incorporated by
reference to exhibit 4.1 to the filing of the registrant identified in
footnote 1 below).
4.1 Cooperative Joint Venture Contract of D.G. Radica Games Manufacturing
Co., Ltd., dated June 24, 1994 (incorporated by reference to exhibit
10.16 to the filing of the registrant identified in footnote 2 below).
4.2 Shareholders Agreement, dated January 12, 1994, among the Company and
the shareholders parties thereto (incorporated by reference to exhibit
10.4 to the filing of the registrant identified in footnote 1 below)
4.3 Amendment to Shareholders Agreement, dated as of February 16, 1994,
among the Company and the shareholders party thereto (incorporated by
reference to exhibit 10.5 to the filing of the registrant identified
in footnote 1 below).
4.4 Amendment to Shareholders Agreement, dated as of September 5, 1997,
among the Company and the shareholders party thereto (incorporated by
reference to exhibit 10.5(a) to the filing of the registrant
identified in footnote 5 below).
4.5 Employment Agreement, dated as of December 15, 2001, between Radica
USA and Jeanne Olson (incorporated by reference to exhibit 10.6 to the
filing of the registrant identified in footnote 7 below).
4.6 Amendment No. 1 to Employment Agreement, dated as of March 31, 2003,
between Radica USA and Jeanne Olson (incorporated by reference to
exhibit 4.6 to the filing of the registrant identified in footnote 8
below).
4.6(a) Amendment No. 2 to Employment Agreement, dated as of February 1, 2005,
between Radica USA and Jeanne Olson (incorporated by reference to
exhibit 4.6(a) to the filing of the registrant identified in footnote
9 below).
*4.7 Change in Control Bonus Agreement, dated as of March 1, 2006, between
Radica USA and Jeanne Olson.
4.8 [Reserved]
4.9 Employment Agreement, dated as of November 28, 1993, among Radica HK,
Radica USA and Jon N. Bengtson (incorporated by reference to exhibit
10.8 to the filing of the registrant identified in footnote 1 below).
4.10 Form of Amendment to Employment Agreement among Radica Games Limited,
Radica HK, Radica USA and Jon N. Bengtson (incorporated by reference
to exhibit 10.8(a) to the filing of the registrant identified in
footnote 1 below).
I-2
4.11 December 1995 Amendment to such Employment Agreement (incorporated by
reference to exhibit 10.8(b) to the filing of the registrant
identified in footnote 3 below).
4.12 December 1997 Amendment to such Employment Agreement (incorporated by
reference to exhibit 10.8(c) to the filing of the registrant
identified in footnote 4 below).
4.13 1994 Stock Option Plan, most recent amendment restated in May 2000 to
increase options (incorporated by reference to exhibit 10.9 to the
filing of the registrant identified in footnote 6 below).
4.14 2004 Omnibus Equity Incentive Plan (incorporated by reference to
exhibit 4.14 to the filing of the registrant identified in footnote 8
below).
4.15 Amendment and Restatement to Employment Agreement among Radica USA,
Radica Games Limited and Patrick Feely dated September 27, 2000
(incorporated by reference to exhibit 10.11 to the filing of the
registrant identified in footnote 6 below).
4.16 Amendment No. 1 to Employment Agreement, dated as of March 31, 2003,
among Radica USA, Radica Games Limited and Patrick Feely (incorporated
by reference to exhibit 4.16 to the filing of the registrant
identified in footnote 8 below).
4.16(a) Agreement No. 2 to Employment Agreement dated as of January 31, 2005
among Radica USA, Radica Games Limited and Patrick Feely (incorporated
by reference to exhibit 4.16(a) to the filing of the registrant
identified in footnote 9 below).
*4.17 Change in Control Bonus Agreement, dated as of March 1, 2006, among
Radica USA, Radica Games Limited and Patrick Feely.
*4.18 Agreement (in connection with Executive's sale of shares), dated as of
March 1, 2006, among Radica USA, Radica Games Limited and Patrick
Feely.
4.19 Amendment and Restatement to Employment Agreement between Radica Games
Limited and David C.W. Howell dated September 29, 2000 (incorporated
by reference to exhibit 10.13 to the filing of the registrant
identified in footnote 6 below).
4.20 Amendment No. 1 to Employment Agreement, dated as of March 31, 2003,
between Radica Games Limited and David C.W. Howell (incorporated by
reference to exhibit 4.20 to the filing of the registrant identified
in footnote 8 below).
4.20(a) Amendment No. 2 to Employment Agreement, dated as of February 18,
2005, between Radica Games Limited and David C.W. Howell (incorporated
by reference to exhibit 4.20(a) to the filing of the registrant
identified in footnote 9 below).
*4.21 Change in Control Bonus Agreement, dated as of March 1, 2006, between
Radica Games Limited and David C.W. Howell.
*4.21(a) Agreement (in connection with Executive's sale of shares), dated as of
March 1, 2006, between Radica Games Limited and David C.W. Howell.
4.22 Employment Agreement, dated as of April 7, 2003, among Radica UK
Limited, Radica Games Limited and Denis Horton (incorporated by
reference to exhibit 4.22 to the filing of the registrant identified
in footnote 8 below).
*4.23 Change in Control Bonus Agreement, dated as of March 1, 2006, among
Radica UK Limited, Radica Games Limited and Denis Horton.
I-3
*4.24 Agreement (in connection with Executive's sale of shares), dated as of
March 1, 2006, among Radica UK Limited, Radica Games Limited and Denis
Horton.
*6.1 Statement re Computation of Per Share Earnings.
*8.1 List of subsidiaries
*12.1 Section 302 Certification of Patrick S. Feely
*12.2 Section 302 Certification of David C.W. Howell
*13.1 Section 906/1350 Certification of Patrick S. Feely
*13.2 Section 906/1350 Certification of David C.W. Howell
*15.1 Statement re Selected Quarterly Financial Data
*15.2 Consent of KPMG
-------------------------------
(1) Incorporated by reference to Registration Statement on Form F-1, File No.
33-75794, filed by the Registrant.
(2) Incorporated by reference to Form 20-F for the year ended October 31, 1994.
(3) Incorporated by reference to Form 20-F for the year ended October 31, 1996.
(4) Incorporated by reference to Form 20-F for the year ended October 31, 1997.
(5) Incorporated by reference to Form 20-F for the year ended October 31, 1998.
(6) Incorporated by reference to Form 20-F for the year ended December 31,
2000.
(7) Incorporated by reference to Form 20-F for the year ended December 31,
2001.
(8) Incorporated by reference to Form 20-F for the year ended December 31,
2003.
(9) Incorporated by reference to Form 20-F for the year ended December 31,
2004.
The file number for each of the above reports on Form 20-F is 0-23696.
The exhibits marked with an asterisk are included as part of this filing.
The registrant is not required to file blackout trading restriction notices
under part 10 of Item 19 of Form 20-F, because the registrant does not maintain
any individual account plans that permit participants or beneficiaries to
acquire or hold equity securities of the registrant.
I-4
EXHIBIT 4.7
CHANGE IN CONTROL BONUS AGREEMENT
Effective March 1, 2006
THIS CHANGE IN CONTROL BONUS AGREEMENT is entered into as of March 1,
2006 by and between Radica Games Limited ("Radica"), Radica Enterprises Ltd
("Radica USA") and Jeanne Olson ("Employee").
WHEREAS, Employee has substantial executive management experience;
WHEREAS, Radica and Radica USA would like to secure the continued
services of Employee and to ensure her continued dedication to her duties in the
event of the occurrence of a Change in Control;
WHEREAS, Radica and Radica USA would like to enhance the value of
Radica and Radica USA by motivating superior performance by means of an
incentive that is directly related to value received by Radica in a sale;
SECTION 1 CHANGE IN CONTROL
1.1. In the case of the following events (each a "Change in Control"), and
subject to the other terms of this Agreement, Employee will be eligible to
receive the Bonus described in Section 2:
(a) the consummation of a merger, consolidation, statutory share
exchange, short form merger or similar form of corporate transaction involving
Radica or any member of the Radica Group including by way of acquisition of
shares (a "Business Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of (x) the corporation
resulting from such Business Combination (the "Surviving Corporation"), or (y)
if applicable, the ultimate parent corporation that directly or indirectly has
beneficial ownership of at least 95% of the voting securities eligible to elect
directors of the Surviving Corporation (the "Parent Corporation"), is
represented by Radica Voting Securities that were outstanding immediately prior
to such Business Combination (or, if applicable, is represented by shares into
which such Radica Voting Securities were converted pursuant to such Business
Combination), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Radica Voting
Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation or an existing Radica shareholder, with greater than 50% beneficial
ownership of the Radica Voting Securities prior to the Business Combination,
whose percentage beneficial ownership compared to the other Radica shareholders
in existence immediately prior to the Business Combination does not change on
consummation of the Business Transaction), is or becomes the beneficial owner,
directly or indirectly, of 50% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (C) at least a majority of the members of the board of directors of the
Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination were Incumbent Directors
at the time of the Board's approval of the execution of the initial agreement
providing for such Business Combination (any Business Combination which
satisfies all of the criteria specified in (A), (B) and (C) above shall be
deemed to be a "Non-Qualifying Transaction"); or
(b) the consummation of a sale of all or substantially all of Radica's
assets (a "Sale") in one or a series of related transactions. For purposes of
this Agreement, a sale of assets representing 50% or more of the book value,
revenues or net income of Radica shall be deemed to be a sale of "substantially"
all of the assets of Radica.
SECTION 2 BONUS AND PAYMENT
2.1. Bonus Amount. In case of a Change in Control that occurs on or before
March 1, 2007, or a Change in Control that occurs as a result of a definitive
agreement that is signed on or before March 1, 2007, the amount of the Bonus
will be $100,000.00.
In each case the Bonus amount is subject to the adjustments described in Section
2.3 and the conditions described in Section 3.
2.2. Payment. Provided that the conditions specified in Section 3 are
satisfied and subject to Section 4, within 10 days following a Change in
Control, Radica will pay to Employee an amount in cash equal to the Bonus, as
stated in Section 2.1.
SECTION 3 CONDITIONS TO RECEIVE BONUS
3.1. Employee will not be entitled to receive a Bonus and will forfeit all
rights with respect to the Bonus if for any reason Employee is not an employee
of any member of the Radica Group on the date of the Change in Control.
3.2. Notwithstanding the foregoing, if Employee is terminated prior to the
Transaction Date by Radica or Radica USA without Cause, Employee will be
entitled to receive the Bonus that would have become due and payable had she
remained an employee through such date.
SECTION 4 TERM, EXPIRATION AND AMENDMENT
4.1. This Agreement is effective as of March 1, 2006 and will expire as
follows: If a Change in Control has not occurred prior to March 1, 2007, all
Bonuses will be forfeited and will be of no further force or effect; provided
however that if a definitive agreement has been executed on or prior to March 1,
2007 that would result in a Change in Control upon consummation, then this
Agreement will expire on the earlier of (i) December 31, 2007 or (ii) the
termination of such definitive agreement. If a Change in Control occurs after
the expiration of this Agreement, Employee will not be entitled to any Bonus.
4.2. This Agreement may be amended or terminated only with the written
consent of all parties hereto.
2
SECTION 5 MISCELLANEOUS
5.1. This Agreement is not in any way intended to create any guaranteed
period of continued employment; Employee's employment shall at all times
continue to be governed by the terms of her Employment Agreement. Participation
in this Agreement will not constitute or imply any employment rights.
5.2. No Bonus will be assignable or transferable other than by will or by
the laws of descent and distribution, nor will such Bonus be subject to
alienation, assignment, garnishment, execution or levy of any kind.
5.3. Radica will have the right to withhold from any payment made under
this Agreement any Federal, State or local taxes required by law to be withheld
with respect to the payment of the Bonus.
5.4. Any Bonus under this Agreement will constitute a special incentive
payment to Employee and will not be taken into account in computing the amount
of salary or compensation of Employee for the purpose of determining any
benefits under any pension, retirement, profit sharing, bonus, life insurance,
severance or other compensation or benefit plan of the Radica Group or under any
agreement with the Employee, unless such plan or agreement specifically provides
otherwise.
5.5. All rights and obligations under this Agreement will be construed and
interpreted in accordance with the laws of the State of Nevada, applicable to
agreements made and wholly to be performed in the State of Nevada.
5.6. If any contest or dispute shall arise under this Agreement, Radica or
Radica USA shall reimburse Employee, within 10 days following the resolution of
such contest or dispute, for all reasonable legal fees and expenses, if any,
incurred by Employee in connection with such contest or dispute (regardless of
the result thereof); provided, however, Employee shall be required to repay any
such amounts to Radica or Radica USA to the extent that a court issues a final
and non-appealable order setting forth the determination that the position taken
by Employee was frivolous or advanced by Employee in bad faith.
5.7. It is Radica Group's and the Employee's intention that this Agreement
comply with Section 409A of the U.S. Internal Revenue Code of 1986, as amended.
If either party believes, at any time, that this Agreement as amended does not
so comply, it will promptly advise the other and will negotiate reasonably and
in good faith to amend the terms of this Agreement such that they comply and
that amendment will have the most limited possible economic effect on Radica
Group and the Employee.
5.8 For the avoidance of doubt, it is agreed that the non-competition,
non-solicitation and confidentiality agreement dated March 31, 2003, among
executive, Radica and Radica USA has been terminated.
3
SECTION 6 DEFINITIONS
6.1. Bonus has the meaning set forth in Section 2.1.
6.2. Business Combination has the meaning set forth in Section 1.1(a).
6.3. Cause has the meaning set forth in Section 1(a) of the Employment
Agreement.
6.4. Employee means Jeanne Olson.
6.5. Employment Agreement means the Employment Agreement dated as of
December 15, 2001, Amendment No. 1 dated as of March 31, 2003, and Amendment No.
2 dated as of February 1, 2005 between Radica, Radica USA and Employee
6.6. Incumbent Directors means individuals who, on January 1, 2005,
constitute the Board of Directors of Radica, provided that any person becoming a
director subsequent to January 1, 2005, whose election or nomination for
election was approved by a vote of at least two-thirds of the Incumbent
Directors then on the Board (either by a specific vote or by approval of the
proxy statement of Radica in which such person is named as a nominee for
director, without written objection to such nomination), shall also be an
Incumbent Director.
6.7. Radica means Radica Games Limited.
6.8. Radica Group means Radica, Radica USA and any other corporation or
other entity which at the relevant times is more than fifty percent (50%) owned,
directly or indirectly, by Radica.
6.9. Radica Voting Securities means securities of Radica representing 50%
or more of the combined voting power of Radica's then outstanding securities
eligible to vote for the election of the Board of Directors.
6.10. Radica USA means Radica Enterprises Ltd.
6.11. Sale has the meaning set forth in Section 1.1(b).
6.12. Transaction Date means the date on which a Sale or Business
Combination is consummated.
6.13. Transaction Price means the total amount of consideration received by
the shareholders of Radica or, in the event of a Change in Control described in
1.1(b), the aggregate consideration received by Radica (allocable to
shareholders on an after-tax basis assuming a dividend of such proceeds as
determined by the Compensation Committee). For purposes of this Section, any
notes or deferred payment received in connection with the Sale or Business
Combination (that are not contingent on the future performance of Radica or
other factor) shall be treated as cash consideration and valued at its
face-value or principal amount. The fair market value of any non-cash
consideration will be determined in good faith by the Compensation Committee of
4
the Board; provided that the fair market value of any security for which there
is an established public market will be equal to the average of the closing
market prices for such security over the ten trading days prior to the
Transaction Date and provided further that in their evaluation of any such
non-cash consideration for which there is not an established public market, the
Compensation Committee will seek and rely upon the advice of a an outside
valuation consultant or investment banking firm.
The parties acknowledge that the provisions described above in this Section 6.13
reflect their intention to calculate the Transaction Price. In the event any
definitive agreement for the sale of Radica approaches this issue in a manner
not addressed in this Agreement, the parties will negotiate in good faith to
make any adjustments to the methodology for calculating the Transaction Price as
may be necessary and appropriate to fairly implement the intention of the
parties as reflected in this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
RADICA GAMES LIMITED JEANNE OLSON
By: /s/ Patrick S. Feely By: /s/ Jeanne Olson
--------------------------------- ----------------------
RADICA ENTERPRISES
By: /s/ Patrick S. Feely
--------------------
EXHIBIT 4.17
CHANGE IN CONTROL BONUS AGREEMENT
Effective March 1, 2006
THIS CHANGE IN CONTROL BONUS AGREEMENT is entered into as of March 1,
2006 by and between Radica Games Limited ("Radica"), Radica Enterprises Ltd
("Radica USA") and Patrick Feely ("Employee").
WHEREAS, Employee has substantial executive management experience;
WHEREAS, Radica and Radica USA would like to secure the continued
services of Employee and to ensure his continued dedication to his duties in the
event of the occurrence of a Change in Control;
WHEREAS, Radica and Radica USA would like to enhance the value of
Radica and Radica USA by motivating superior performance by means of an
incentive that is directly related to value received by Radica in a sale;
SECTION 1 CHANGE IN CONTROL
1.1. In the case of the following events (each a "Change in Control"), and
subject to the other terms of this Agreement, Employee will be eligible to
receive the Bonus described in Section 2:
(a) the consummation of a merger, consolidation, statutory share
exchange, short form merger or similar form of corporate transaction involving
Radica or any member of the Radica Group including by way of acquisition of
shares (a "Business Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of (x) the corporation
resulting from such Business Combination (the "Surviving Corporation"), or (y)
if applicable, the ultimate parent corporation that directly or indirectly has
beneficial ownership of at least 95% of the voting securities eligible to elect
directors of the Surviving Corporation (the "Parent Corporation"), is
represented by Radica Voting Securities that were outstanding immediately prior
to such Business Combination (or, if applicable, is represented by shares into
which such Radica Voting Securities were converted pursuant to such Business
Combination), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Radica Voting
Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation or an existing Radica shareholder, with greater than 50% beneficial
ownership of the Radica Voting Securities prior to the Business Combination,
whose percentage beneficial ownership compared to the other Radica shareholders
in existence immediately prior to the Business Combination does not change on
consummation of the Business Transaction), is or becomes the beneficial owner,
directly or indirectly, of 50% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (C) at least a majority of the members of the board of directors of the
Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination were Incumbent Directors
at the time of the Board's approval of the execution of the initial agreement
providing for such Business Combination (any Business Combination which
satisfies all of the criteria specified in (A), (B) and (C) above shall be
deemed to be a "Non-Qualifying Transaction"); or
(b) the consummation of a sale of all or substantially all of Radica's
assets (a "Sale") in one or a series of related transactions. For purposes of
this Agreement, a sale of assets representing 50% or more of the book value,
revenues or net income of Radica shall be deemed to be a sale of "substantially"
all of the assets of Radica.
SECTION 2 BONUS AND PAYMENT
2.1. Bonus Amount. In case of a Change in Control that occurs on or before
March 1, 2007, or a Change in Control that occurs as a result of a definitive
agreement that is signed on or before March 1, 2007, the amount of the Bonus
will be calculated as set forth below; provided that for any Transaction Price
between a Transaction Price listed below (above $197,000,000) and the next
higher price, the amount of the Bonus will be calculated by interpolating
between the relevant Bonus and the next higher Bonus amount:
------------------------------------- -----------------------------------
Transaction Price Bonus
(aggregate consideration received
by Radica)
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Less than $197,000,000 $0
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
$197,000,000 $330,000
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
$216,700,000 $390,000
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
$236,400,000 $450,000
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
$256,100,000 $510,000
------------------------------------- -----------------------------------
In each case the Bonus amount is subject to the adjustments described in Section
2.3 and the conditions described in Section 3.
2.2. Payment. Provided that the conditions specified in Section 3 are
satisfied and subject to Section 4, within 10 days following a Change in
Control, Radica will pay to Employee an amount in cash equal to the Bonus, as
calculated in Section 2.1.
2.3. Special Payment Provisions. In the case of a Business Combination or
Sale, if the terms of the definitive agreement that results in the Change in
Control involve any provisions:
2
(a) pursuant to which a part of the Transaction Price will be paid to
Radica or the Radica shareholders in one or more installments after the
Business Combination or Sale or any other deferral of the payment of the
Sale Price, then payment of the Bonus will be pro-rated so that:
(i) a portion of the Bonus, based on the portion of the Transaction
Price paid to Radica or the Radica shareholders at the Transaction Date,
will be paid to the Employee in accordance with Section 2.2 above and
(ii) an additional portion of the Bonus will be paid to Employee
within 10 days following the date any additional portion of the Transaction
Price is paid to Radica or the Radica shareholders.
(b) that would require the buyer to pay or cause to be paid to Radica
an amount which would result in an increased Transaction Price (after the
Transaction Date), such as pursuant to an earn-out provision or otherwise,
then at the time such additional amount is paid to Radica, the Transaction
Price will be recalculated to include such additional amount and Radica
will pay to Employee the resulting Bonus within 10 days following the date
such additional amount is paid to Radica, less any portion of the Bonus
already paid.
SECTION 3 CONDITIONS TO RECEIVE BONUS
3.1. Employee will not be entitled to receive a Bonus and will forfeit all
rights with respect to the Bonus if for any reason Employee is not an employee
of any member of the Radica Group on the date of the Change in Control.
3.2. Notwithstanding the foregoing, if Employee is terminated prior to the
Transaction Date by Radica or Radica USA without Cause, Employee will be
entitled to receive the Bonus that would have become due and payable had he
remained an employee through such date.
SECTION 4 TERM, EXPIRATION AND AMENDMENT
4.1. This Agreement is effective as of March 1, 2006 and will expire as
follows: If a Change in Control has not occurred prior to March 1, 2007, all
Bonuses will be forfeited and will be of no further force or effect; provided
however that if a definitive agreement has been executed on or prior to March 1,
2007 that would result in a Change in Control upon consummation, then this
Agreement will expire on the earlier of (i) December 31, 2007 or (ii) the
termination of such definitive agreement. If a Change in Control occurs after
the expiration of this Agreement, Employee will not be entitled to any Bonus.
4.2. This Agreement may be amended or terminated only with the written
consent of all parties hereto.
3
SECTION 5 MISCELLANEOUS
5.1. This Agreement is not in any way intended to create any guaranteed
period of continued employment; Employee's employment shall at all times
continue to be governed by the terms of his Employment Agreement. Participation
in this Agreement will not constitute or imply any employment rights.
5.2. No Bonus will be assignable or transferable other than by will or by
the laws of descent and distribution, nor will such Bonus be subject to
alienation, assignment, garnishment, execution or levy of any kind.
5.3. Radica will have the right to withhold from any payment made under
this Agreement any Federal, State or local taxes required by law to be withheld
with respect to the payment of the Bonus.
5.4. Any Bonus under this Agreement will constitute a special incentive
payment to Employee and will not be taken into account in computing the amount
of salary or compensation of Employee for the purpose of determining any
benefits under any pension, retirement, profit sharing, bonus, life insurance,
severance or other compensation or benefit plan of the Radica Group or under any
agreement with the Employee, unless such plan or agreement specifically provides
otherwise.
5.5. All rights and obligations under this Agreement will be construed and
interpreted in accordance with the laws of the State of Nevada, applicable to
agreements made and wholly to be performed in the State of Nevada.
5.6. If any contest or dispute shall arise under this Agreement, Radica or
Radica USA shall reimburse Employee, within 10 days following the resolution of
such contest or dispute, for all reasonable legal fees and expenses, if any,
incurred by Employee in connection with such contest or dispute (regardless of
the result thereof); provided, however, Employee shall be required to repay any
such amounts to Radica or Radica USA to the extent that a court issues a final
and non-appealable order setting forth the determination that the position taken
by Employee was frivolous or advanced by Employee in bad faith.
5.7. It is Radica Group's and the Employee's intention that this Agreement
comply with Section 409A of the U.S. Internal Revenue Code of 1986, as amended.
If either party believes, at any time, that this Agreement as amended does not
so comply, it will promptly advise the other and will negotiate reasonably and
in good faith to amend the terms of this Agreement such that they comply and
that amendment will have the most limited possible economic effect on Radica
Group and the Employee.
SECTION 6 DEFINITIONS
6.1. Bonus has the meaning set forth in Section 2.1.
6.2. Business Combination has the meaning set forth in Section 1.1(a).
4
6.3. Cause has the meaning set forth in Section 1(a) of the Employment
Agreement.
6.4. Employee means Patrick Feely.
6.5. Employment Agreement means the Amendment and Restatement of Employment
Agreement dated as of September 27, 2000, Amendment No. dated as of March 31,
2003, and Amendment No. 2 dated as of January 31, 2005, between Radica, Radica
USA and Employee
6.6. Incumbent Directors means individuals who, on January 1, 2005,
constitute the Board of Directors of Radica, provided that any person becoming a
director subsequent to January 1, 2005, whose election or nomination for
election was approved by a vote of at least two-thirds of the Incumbent
Directors then on the Board (either by a specific vote or by approval of the
proxy statement of Radica in which such person is named as a nominee for
director, without written objection to such nomination), shall also be an
Incumbent Director.
6.7. Radica means Radica Games Limited.
6.8. Radica Group means Radica, Radica USA and any other corporation or
other entity which at the relevant times is more than fifty percent (50%) owned,
directly or indirectly, by Radica.
6.9. Radica Voting Securities means securities of Radica representing 50%
or more of the combined voting power of Radica's then outstanding securities
eligible to vote for the election of the Board of Directors.
6.10. Radica USA means Radica Enterprises Ltd.
6.11. Sale has the meaning set forth in Section 1.1(b).
6.12. Transaction Date means the date on which a Sale or Business
Combination is consummated.
6.13. Transaction Price means the total amount of consideration received by
the shareholders of Radica or, in the event of a Change in Control described in
1.1(b), the aggregate consideration received by Radica (allocable to
shareholders on an after-tax basis assuming a dividend of such proceeds as
determined by the Compensation Committee). For purposes of this Section, any
notes or deferred payment received in connection with the Sale or Business
Combination (that are not contingent on the future performance of Radica or
other factor) shall be treated as cash consideration and valued at its
face-value or principal amount. The fair market value of any non-cash
consideration will be determined in good faith by the Compensation Committee of
the Board; provided that the fair market value of any security for which there
is an established public market will be equal to the average of the closing
market prices for such security over the ten trading days prior to the
Transaction Date and provided further that in their evaluation of any such
non-cash consideration for which there is not an established public market, the
Compensation Committee will seek and rely upon the advice of a an outside
valuation consultant or investment banking firm.
5
The parties acknowledge that the provisions described above in this Section 6.13
reflect their intention to calculate the Transaction Price. In the event any
definitive agreement for the sale of Radica approaches this issue in a manner
not addressed in this Agreement, the parties will negotiate in good faith to
make any adjustments to the methodology for calculating the Transaction Price as
may be necessary and appropriate to fairly implement the intention of the
parties as reflected in this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
RADICA GAMES LIMITED PATRICK S. FEELY
By: /s/ Jon N. Bengtson By: /s/ Patrick S. Feely
-------------------------- --------------------------
RADICA ENTERPRISES
By: /s/ Jon N. Bengtson
-------------------------
6
EXHIBIT 4.18
AGREEMENT
This Agreement dated as of this 1st day of March, 2006 (the "Signing
Date"), between Radica Enterprises, Ltd, a corporation organized under the laws
of Nevada ("Radica USA") and a wholly owned subsidiary of, Radica Games Limited,
a corporation organized under the laws of Bermuda ("Radica"), and Patrick S.
Feely (the "Executive").
WHEREAS, Executive is currently employed as the Chief Executive
Officer of Radica and desires to remain so employed;
WHEREAS, this Agreement is entered into in connection with Executive's
sale of his shares of Radica, in consideration for the payment described in
Section 2 hereof, and in consideration of the confidential information that has
been provided by Radica and Radica USA to Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
commitments contained in this Agreement, the parties hereto agree as follows:
1. Effectiveness.
-------------
(a) This Agreement shall become effective upon a Change in Control of
Radica that occurs on or before March 1, 2007 or such later date as may be
applicable under Section 1(b) (the "Applicable Date") or as a result of a
definitive agreement for a Change in Control that is signed on or before March
1, 2007 or such later date as may be the Applicable Date. For purposes of this
Agreement, a "Change in Control" shall be defined as in the Change in Control
Bonus Agreement, dated March 1, 2006, between Radica, Radica USA and Executive.
(b) The foregoing period within which this Agreement may become
effective shall be automatically renewed annually at each March 1st anniversary
date (commencing March 1, 2007) for an additional one year period so that the
term hereof at each renewal date shall be a one-year period, unless a party to
this Agreement gives notice at least ninety (90) days prior to such renewal date
that this Agreement shall not be renewed.
2. Consideration.
-------------
Upon the occurrence of a Change in Control, Radica will pay to Executive
the amount of $730,000 and provide certain Confidential Information in
consideration for his complying with the covenants in Sections 3, below.
3. Covenant not to Compete; Nonsolicitation; Confidential Information.
-------------------------------------------------------------------
(a) Non-Compete. During the two year period following a Change in
Control (the "Restrictive Period"), the Executive shall not directly or
indirectly (without the prior written consent of Radica):
(i) hold a 5% or greater equity (including stock options whether or
not exercisable), voting or profit participation interest in a Competitive
Enterprise, or
(ii) associate (including as a director, officer, employee, partner,
consultant, agent or advisor) with a Competitive Enterprise and in
connection with the Executive's association engage, or directly or
indirectly manage or supervise personnel engaged, in any activity:
(A) that is substantially related to any activity that the
Executive was engaged in with Radica or Radica USA or their affiliates
during the 12 months prior to the Change in Control,
(B) that is substantially related to any activity for which
the Executive had direct or indirect managerial or supervisory
responsibility with Radica or Radica USA or their affiliates during
the 12 months prior to the Change in Control, or
(C) that calls for the application of specialized knowledge
or skills substantially related to those used by the Executive in his
activities with Radica or Radica USA or their affiliates during the 12
months prior to the Change in Control.
For purposes of this Agreement, "Competitive Enterprise" means any business
enterprise that either (A) engages in, designs, develops, manufactures, markets
or sells products in any of the following lines of business as defined by The
NPD Group, Inc.: (i) electronic handheld and tabletop games, (ii) youth
electronics, or (iii) video game accessories, or (B) holds a 5% or greater
equity, voting or profit participation interest in any enterprise that engages
in such a competitive activity.
(b) Non-Solicit. During the Restrictive Period, the Executive shall
not, in any manner, directly or indirectly (without the prior written consent of
Radica): (i) Solicit any Customer to transact business with a Competitive
Enterprise or to reduce or refrain from doing any business with Radica or Radica
USA, (ii) transact business with any Customer that would cause the Executive to
be a Competitive Enterprise, (iii) interfere with or damage any relationship
between Radica or Radica USA and a Customer or (iv) Solicit anyone who is then
an employee of Radica or Radica USA (or who was an employee of Radica or Radica
USA within the prior 12 months) to resign from Radica or Radica USA or to apply
for or accept employment with any other business or enterprise.
For purposes of this Agreement, a "Customer" means any customer or prospective
customer of Radica, Radica USA or their affiliates to whom the Executive
provided services, or for whom the Executive transacted business, or whose
identity became known to the Executive in connection with his relationship with
or employment by Radica or Radica USA, and "Solicit" means any direct or
indirect communication of any kind, regardless of who initiates it, that in any
way invites, advises, encourages or requests any person to take or refrain from
taking any action.
(c) Confidential Information. The Executive hereby acknowledges that,
as an employee of Radica and Radica USA, Radica and Radica USA has provided him
and is
2
continuing to provide him and he is making use of, acquiring and adding to
confidential information of a special and unique nature and value relating to
Radica and Radica USA and their strategic plan and financial operations. The
Executive further recognizes and acknowledges that all confidential information
is the exclusive property of Radica and Radica USA, is material and
confidential, and is critical to the successful conduct of the business of
Radica and Radica USA and to the Executive's performance of his duties while
employed. Accordingly, the Executive hereby covenants and agrees that he will
use confidential information for the benefit of Radica and Radica USA only and
shall not at any time, directly or indirectly, during the Restrictive Period and
thereafter divulge, reveal or communicate any confidential information to any
person, firm, corporation or entity whatsoever, or use any confidential
information for his own benefit or for the benefit of others.
4. Notice to New Employers.
------------------------
Before the Executive either applies for or accepts employment with any
other person or entity during the Restrictive Period, the Executive will provide
the prospective employer with written notice of the provisions of Section 3 of
this Agreement and will deliver a copy of the notice to Radica.
5. Entire Agreement; Modification.
-------------------------------
This Agreement contains the entire agreement between Executive, Radica and
Radica USA, and it is the complete, final and exclusive embodiment of our
agreement with regard to this subject matter. This Agreement supersedes the
non-competition, non-solicitation and confidentiality agreement, dated March 31,
2003, among Executive, Radica and Radica USA. It is entered into without
reliance on any promise or representation other than those expressly contained
herein, and it cannot be amended except in writing signed by both parties.
The terms and provisions of this Agreement are intended to be separate and
divisible provisions and if, for any reason, any one or more of them is held to
be invalid or unenforceable, neither the validity nor the enforceability of any
other provision of this Agreement shall thereby be affected. The parties hereto
acknowledge and agree that the potential restrictions on the Executive's future
employment imposed by Section 3 of this Agreement are reasonable in both
duration and geographic scope and in all other respects. If for any reason any
court of competent jurisdiction shall find any provisions of Section 3 of this
Agreement unreasonable in duration or geographic scope or otherwise, the
Executive, Radica and Radica USA agree that the restrictions and prohibitions
contained therein shall be automatically reformed to the fullest extent allowed
under applicable law in such jurisdiction.
In the event that the Executive challenges the enforceability of this
Agreement and a court finds that this Agreement is unenforceable, the Executive
shall repay to Radica an amount equal to the Consideration provided for in
Section 2 within 10 business days following such determination.
3
6. Disputes; Governing Law
-----------------------
(a) The Executive, Radica and Radica USA irrevocably submit to the
exclusive jurisdiction of any state or federal court located in the State of
Nevada over any controversy or claim between the Executive and Radica and Radica
USA arising out of or relating to or concerning this Agreement. Executive,
Radica and Radica USA (i) acknowledge that the forum stated in this Section 6(a)
has a reasonable relation to this Agreement and to the relationship between the
Executive, Radica and Radica USA and that the submission to the forum will apply
even if the forum chooses to apply non-forum law, (ii) waive, to the extent
permitted by law, any objection to personal jurisdiction or to the laying of
venue of any action or proceeding in the forum stated in this Section 6(a),
(iii) agree not to commence any such action or proceeding in any forum other
than the one stated in this Section 6(a) and (iv) agree that, to the extent
permitted by law, a final and non-appealable judgment in any such action or
proceeding in any such court will be conclusive and binding on the Executive,
Radica and Radica USA. However, nothing in this Agreement precludes the
Executive or Radica or Radica USA from bringing any action or proceeding in any
court for the purposes of enforcing the provisions of this Section 6(a).
(b) TO THE EXTENT PERMITTED BY LAW, THE EXECUTIVE, RADICA AND RADICA
USA WAIVE ANY AND ALL RIGHTS TO A JURY TRIAL.
(c) Executive acknowledges that Radica and Radica USA would be harmed
by a breach of Section 3 hereof and that, in addition to any other remedy,
Radica shall be entitled to injunctive relief.
(d) THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
NEVADA.
7. Survival.
---------
Any termination of the Executive's employment after the Applicable Date
shall have no effect on the continuing operation of this Agreement.
8. Notices.
--------
For purposes of this Agreement, all notices and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered or five (5) days after deposit in the United
States mail, certified and return receipt requested, postage prepaid, to such
address as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
4
9. Waiver.
-------
If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
10. Assignment.
-----------
This Agreement and any rights or obligations hereunder may be assigned by
Radica and Radica USA to any successor in interest to Radica's and Radica USA's
business. This Agreement may not be assigned by Executive.
11. Headings.
---------
The headings of the sections hereof are inserted for convenience only and
shall not be deemed to constitute a part hereof nor to affect the meaning
thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
RADICA Executive
By: /s/ Jon N. Bengtson By: /s/ Patrick S. Feely
-------------------------------------- --------------------------
RADICA USA
By: /s/ Jon N. Bengtson
--------------------------------------
EXHIBIT 4.21
CHANGE IN CONTROL BONUS AGREEMENT
Effective March 1, 2006
THIS CHANGE IN CONTROL BONUS AGREEMENT is entered into as of March 1,
2006 by and between Radica Games Limited ("Radica") and David C.W. Howell
("Employee").
WHEREAS, Employee has substantial executive management experience;
WHEREAS, Radica would like to secure the continued services of
Employee and to ensure his continued dedication to his duties in the event of
the occurrence of a Change in Control;
WHEREAS, Radica would like to enhance the value of Radica by
motivating superior performance by means of an incentive that is directly
related to value received by Radica in a sale;
SECTION 1 CHANGE IN CONTROL
-----------------
1.1. In the case of the following events (each a "Change in Control"), and
subject to the other terms of this Agreement, Employee will be eligible to
receive the Bonus described in Section 2:
(a) the consummation of a merger, consolidation, statutory share
exchange, short form merger or similar form of corporate transaction involving
Radica or any member of the Radica Group including by way of acquisition of
shares (a "Business Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of (x) the corporation
resulting from such Business Combination (the "Surviving Corporation"), or (y)
if applicable, the ultimate parent corporation that directly or indirectly has
beneficial ownership of at least 95% of the voting securities eligible to elect
directors of the Surviving Corporation (the "Parent Corporation"), is
represented by Radica Voting Securities that were outstanding immediately prior
to such Business Combination (or, if applicable, is represented by shares into
which such Radica Voting Securities were converted pursuant to such Business
Combination), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Radica Voting
Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation or an existing Radica shareholder, with greater than 50% beneficial
ownership of the Radica Voting Securities prior to the Business Combination,
whose percentage beneficial ownership compared to the other Radica shareholders
in existence immediately prior to the Business Combination does not change on
consummation of the Business Transaction), is or becomes the beneficial owner,
directly or indirectly, of 50% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (C) at least a majority of the members
of the board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) following the consummation of the
Business Combination were Incumbent Directors at the time of the Board's
approval of the execution of the initial agreement providing for such Business
Combination (any Business Combination which satisfies all of the criteria
specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying
Transaction"); or
(b) the consummation of a sale of all or substantially all of Radica's
assets (a "Sale") in one or a series of related transactions. For purposes of
this Agreement, a sale of assets representing 50% or more of the book value,
revenues or net income of Radica shall be deemed to be a sale of "substantially"
all of the assets of Radica.
SECTION 2 BONUS AND PAYMENT
-----------------
2.1. Bonus Amount. In case of a Change in Control that occurs on or before
March 1, 2007, or a Change in Control that occurs as a result of a definitive
agreement that is signed on or before March 1, 2007, the amount of the Bonus
will be calculated as set forth below; provided that for any Transaction Price
between a Transaction Price listed below (above $197,000,000) and the next
higher price, the amount of the Bonus will be calculated by interpolating
between the relevant Bonus and the next higher Bonus amount:
------------------------------------- -----------------------------------
Transaction Price Bonus
(aggregate consideration received
by Radica)
------------------------------------- -----------------------------------
Less than $197,000,000 $0
------------------------------------- -----------------------------------
$197,000,000 $127,000
------------------------------------- -----------------------------------
$216,700,000 $187,000
------------------------------------- -----------------------------------
$236,400,000 $248,000
------------------------------------- -----------------------------------
$256,100,000 $319,000
------------------------------------- -----------------------------------
In each case the Bonus amount is subject to the adjustments described in Section
2.3 and the conditions described in Section 3.
2.2. Payment. Provided that the conditions specified in Section 3 are
satisfied and subject to Section 4, within 10 days following a Change in
Control, Radica will pay to Employee an amount in cash equal to the Bonus, as
calculated in Section 2.1.
2.3. Special Payment Provisions. In the case of a Business Combination or
Sale, if the terms of the definitive agreement that results in the Change in
Control involve any provisions:
2
(a) pursuant to which a part of the Transaction Price will be paid to
Radica or the Radica shareholders in one or more installments after the
Business Combination or Sale or any other deferral of the payment of the
Sale Price, then payment of the Bonus will be pro-rated so that:
(i) a portion of the Bonus, based on the portion of the Transaction
Price paid to Radica or the Radica shareholders at the Transaction Date,
will be paid to the Employee in accordance with Section 2.2 above and
(ii) an additional portion of the Bonus will be paid to Employee
within 10 days following the date any additional portion of the Transaction
Price is paid to Radica or the Radica shareholders.
(b) that would require the buyer to pay or cause to be paid to Radica
an amount which would result in an increased Transaction Price (after the
Transaction Date), such as pursuant to an earn-out provision or otherwise,
then at the time such additional amount is paid to Radica, the Transaction
Price will be recalculated to include such additional amount and Radica
will pay to Employee the resulting Bonus within 10 days following the date
such additional amount is paid to Radica, less any portion of the Bonus
already paid.
SECTION 3 CONDITIONS TO RECEIVE BONUS
---------------------------
3.1. Employee will not be entitled to receive a Bonus and will forfeit all
rights with respect to the Bonus if for any reason Employee is not an employee
of any member of the Radica Group on the date of the Change in Control.
3.2. Notwithstanding the foregoing, if Employee is terminated prior to the
Transaction Date by Radica without Cause, Employee will be entitled to receive
the Bonus that would have become due and payable had he remained an employee
through such date.
SECTION 4 TERM, EXPIRATION AND AMENDMENT
4.1. This Agreement is effective as of March 1, 2006 and will expire as
follows: If a Change in Control has not occurred prior to March 1, 2007, all
Bonuses will be forfeited and will be of no further force or effect; provided
however that if a definitive agreement has been executed on or prior to March 1,
2007 that would result in a Change in Control upon consummation, then this
Agreement will expire on the earlier of (i) December 31, 2007 or (ii) the
termination of such definitive agreement. If a Change in Control occurs after
the expiration of this Agreement, Employee will not be entitled to any Bonus.
4.2. This Agreement may be amended or terminated only with the written
consent of all parties hereto.
3
SECTION 5 MISCELLANEOUS
5.1. This Agreement is not in any way intended to create any guaranteed
period of continued employment; Employee's employment shall at all times
continue to be governed by the terms of his Employment Agreement. Participation
in this Agreement will not constitute or imply any employment rights.
5.2. No Bonus will be assignable or transferable other than by will or by
the laws of descent and distribution, nor will such Bonus be subject to
alienation, assignment, garnishment, execution or levy of any kind.
5.3. Radica will have the right to withhold from any payment made under
this Agreement any Federal, State or local taxes required by law to be withheld
with respect to the payment of the Bonus.
5.4. Any Bonus under this Agreement will constitute a special incentive
payment to Employee and will not be taken into account in computing the amount
of salary or compensation of Employee for the purpose of determining any
benefits under any pension, retirement, profit sharing, bonus, life insurance,
severance or other compensation or benefit plan of the Radica Group or under any
agreement with the Employee, unless such plan or agreement specifically provides
otherwise.
5.5. All rights and obligations under this Agreement will be construed and
interpreted in accordance with the laws of the State of Nevada, applicable to
agreements made and wholly to be performed in the State of Nevada.
5.6. If any contest or dispute shall arise under this Agreement, Radica
shall reimburse Employee, within 10 days following the resolution of such
contest or dispute, for all reasonable legal fees and expenses, if any, incurred
by Employee in connection with such contest or dispute (regardless of the result
thereof); provided, however, Employee shall be required to repay any such
amounts to Radica to the extent that a court issues a final and non-appealable
order setting forth the determination that the position taken by Employee was
frivolous or advanced by Employee in bad faith.
SECTION 6 DEFINITIONS
-----------
6.1. Bonus has the meaning set forth in Section 2.1.
6.2. Business Combination has the meaning set forth in Section 1.1(a).
6.3. Cause has the meaning set forth in Section 1(a) of the Employment
Agreement.
6.4. Employee means David C.W. Howell.
4
6.5. Employment Agreement means the Amendment and Restatement of Employment
Agreement dated as of September 29, 2000, Amendment No. 1 dated as of March 31,
2003, and Amendment No. 2 dated as of February 18, 2005, between Radica and
Employee
6.6. Incumbent Directors means individuals who, on January 1, 2005,
constitute the Board of Directors of Radica, provided that any person becoming a
director subsequent to January 1, 2005, whose election or nomination for
election was approved by a vote of at least two-thirds of the Incumbent
Directors then on the Board (either by a specific vote or by approval of the
proxy statement of Radica in which such person is named as a nominee for
director, without written objection to such nomination), shall also be an
Incumbent Director.
6.7. Radica means Radica Games Limited.
6.8. Radica Group means Radica and any other corporation or other entity
which at the relevant times is more than fifty percent (50%) owned, directly or
indirectly, by Radica.
6.9. Radica Voting Securities means securities of Radica representing 50%
or more of the combined voting power of Radica's then outstanding securities
eligible to vote for the election of the Board of Directors.
6.10. Sale has the meaning set forth in Section 1.1(b).
6.11. Transaction Date means the date on which a Sale or Business
Combination is consummated.
6.12. Transaction Price means the total amount of consideration received by
the shareholders of Radica or, in the event of a Change in Control described in
1.1(b), the aggregate consideration received by Radica (allocable to
shareholders on an after-tax basis assuming a dividend of such proceeds as
determined by the Compensation Committee). For purposes of this Section, any
notes or deferred payment received in connection with the Sale or Business
Combination (that are not contingent on the future performance of Radica or
other factor) shall be treated as cash consideration and valued at its
face-value or principal amount. The fair market value of any non-cash
consideration will be determined in good faith by the Compensation Committee of
the Board; provided that the fair market value of any security for which there
is an established public market will be equal to the average of the closing
market prices for such security over the ten trading days prior to the
Transaction Date and provided further that in their evaluation of any such
non-cash consideration for which there is not an established public market, the
Compensation Committee will seek and rely upon the advice of a an outside
valuation consultant or investment banking firm.
The parties acknowledge that the provisions described above in this Section 6.13
reflect their intention to calculate the Transaction Price. In the event any
definitive agreement for the sale of Radica approaches this issue in a manner
not addressed in this Agreement, the parties will negotiate in good faith to
make any adjustments to the methodology for calculating the Transaction Price as
may be necessary and appropriate to fairly implement the intention of the
parties as reflected in this Agreement.
5
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
RADICA GAMES LIMITED DAVID C. W. HOWELL
By: /s/ Patrick S. Feely By: /s/ David C.W. Howell
-------------------------------------- ---------------------------
EXHIBIT 4.21(A)
AGREEMENT
This Agreement dated as of this 1st day of March, 2006 (the "Signing
Date"), between Radica Games Limited, a corporation organized under the laws of
Bermuda ("Radica"), and David C.W. Howell (the "Executive").
WHEREAS, Executive is currently employed as the Chief Financial Officer of
Radica and desires to remain so employed;
WHEREAS, this Agreement is entered into in connection with Executive's sale
of his shares of Radica, in consideration for the payment described in Section 2
hereof, and in consideration of the confidential information that has been
provided by Radica to Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
commitments contained in this Agreement, the parties hereto agree as follows:
1. Effectiveness.
--------------
(a) This Agreement shall become effective upon a Change in Control of
Radica that occurs on or before March 1, 2007 or such later date as may be
applicable under Section 1(b) (the "Applicable Date") or as a result of a
definitive agreement for a Change in Control that is signed on or before March
1, 2007 or such later date as may be the Applicable Date. For purposes of this
Agreement, a "Change in Control" shall be defined as in the Change in Control
Bonus Agreement, dated March 1, 2006, between Radica and Executive.
(b) The foregoing period within which this Agreement may become
effective shall be automatically renewed annually at each March 1st anniversary
date (commencing March 1, 2007) for an additional one year period so that the
term hereof at each renewal date shall be a one-year period, unless a party to
this Agreement gives notice at least ninety (90) days prior to such renewal date
that this Agreement shall not be renewed.
2. Consideration.
--------------
Upon the occurrence of a Change in Control, Radica will pay to Executive
the amount of $250,000 and provide certain Confidential Information in
consideration for his complying with the covenants in Sections 3, below.
3. Covenant not to Compete; Nonsolicitation; Confidential Information.
(a) Non-Compete. During the one year period following a Change in
Control (the "Restrictive Period"), the Executive shall not directly or
indirectly (without the prior written consent of Radica):
(i) hold a 5% or greater equity (including stock options whether or
not exercisable), voting or profit participation interest in a Competitive
Enterprise, or
(ii) associate (including as a director, officer, employee, partner,
consultant, agent or advisor) with a Competitive Enterprise and in
connection with the Executive's association engage, or directly or
indirectly manage or supervise personnel engaged, in any activity:
(A) that is substantially related to any activity that the
Executive was engaged in with Radica or its affiliates during the 12
months prior to the Change in Control,
(B) that is substantially related to any activity for which the
Executive had direct or indirect managerial or supervisory
responsibility with Radica or its affiliates during the 12 months
prior to the Change in Control, or
(C) that calls for the application of specialized knowledge or
skills substantially related to those used by the Executive in his
activities with Radica or its affiliates during the 12 months prior to
the Change in Control.
For purposes of this Agreement, "Competitive Enterprise" means any business
enterprise that either (A) engages in, designs, develops, manufactures, markets
or sells products in any of the following lines of business as defined by The
NPD Group, Inc.: (i) electronic handheld and tabletop games, (ii) youth
electronics, or (iii) video game accessories, or (B) holds a 5% or greater
equity, voting or profit participation interest in any enterprise that engages
in such a competitive activity.
(b) Non-Solicit. During the Restrictive Period, the Executive shall
not, in any manner, directly or indirectly (without the prior written consent of
Radica): (i) Solicit any Customer to transact business with a Competitive
Enterprise or to reduce or refrain from doing any business with Radica, (ii)
transact business with any Customer that would cause the Executive to be a
Competitive Enterprise, (iii) interfere with or damage any relationship between
Radica and a Customer or (iv) Solicit anyone who is then an employee of Radica
(or who was an employee of Radica within the prior 12 months) to resign from
Radica or to apply for or accept employment with any other business or
enterprise.
For purposes of this Agreement, a "Customer" means any customer or prospective
customer of Radica or its affiliates to whom the Executive provided services, or
for whom the Executive transacted business, or whose identity became known to
the Executive in connection with his relationship with or employment by Radica,
and "Solicit" means any direct or indirect communication of any kind, regardless
of who initiates it, that in any way invites, advises, encourages or requests
any person to take or refrain from taking any action.
(c) Confidential Information. The Executive hereby acknowledges that,
as an employee of Radica, Radica has provided him and is continuing to provide
him and he is making use of, acquiring and adding to confidential information of
a special and unique nature and value relating to Radica and its strategic plan
and financial operations. The Executive further recognizes and acknowledges that
all confidential information is the exclusive property of Radica, is material
and confidential, and is critical to the successful conduct of the business of
- 2 -
Radica and to the Executive's performance of his duties while employed.
Accordingly, the Executive hereby covenants and agrees that he will use
confidential information for the benefit of Radica only and shall not at any
time, directly or indirectly, during the Restrictive Period and thereafter
divulge, reveal or communicate any confidential information to any person, firm,
corporation or entity whatsoever, or use any confidential information for his
own benefit or for the benefit of others.
4. Notice to New Employers.
------------------------
Before the Executive either applies for or accepts employment with any
other person or entity during the Restrictive Period, the Executive will provide
the prospective employer with written notice of the provisions of Section 3 of
this Agreement and will deliver a copy of the notice to Radica.
5. Entire Agreement; Modification.
-------------------------------
This Agreement contains the entire agreement between Executive and Radica,
and it is the complete, final and exclusive embodiment of our agreement with
regard to this subject matter. It is entered into without reliance on any
promise or representation other than those expressly contained herein, and it
cannot be amended except in writing signed by both parties.
The terms and provisions of this Agreement are intended to be separate and
divisible provisions and if, for any reason, any one or more of them is held to
be invalid or unenforceable, neither the validity nor the enforceability of any
other provision of this Agreement shall thereby be affected. The parties hereto
acknowledge and agree that the potential restrictions on the Executive's future
employment imposed by Section 3 of this Agreement are reasonable in both
duration and geographic scope and in all other respects. If for any reason any
court of competent jurisdiction shall find any provisions of Section 3 of this
Agreement unreasonable in duration or geographic scope or otherwise, the
Executive and Radica agree that the restrictions and prohibitions contained
therein shall be automatically reformed to the fullest extent allowed under
applicable law in such jurisdiction.
In the event that the Executive challenges the enforceability of this
Agreement and a court finds that this Agreement is unenforceable, the Executive
shall repay to Radica an amount equal to the Consideration provided for in
Section 2 within 10 business days following such determination.
6. Disputes; Governing Law
-----------------------
(a) The Executive and Radica irrevocably submit to the exclusive
jurisdiction of any state or federal court located in the State of Nevada over
any controversy or claim between the Executive and Radica arising out of or
relating to or concerning this Agreement. Executive and Radica (i) acknowledge
that the forum stated in this Section 6(a) has a reasonable relation to this
Agreement and to the relationship between the Executive and Radica and that the
submission to the forum will apply even if the forum chooses to apply non-forum
law, (ii) waive, to the extent permitted by law, any objection to personal
jurisdiction or to the laying of venue of
- 3 -
any action or proceeding in the forum stated in this Section 6(a), (iii) agree
not to commence any such action or proceeding in any forum other than the one
stated in this Section 6(a) and (iv) agree that, to the extent permitted by law,
a final and non-appealable judgment in any such action or proceeding in any such
court will be conclusive and binding on the Executive and Radica. However,
nothing in this Agreement precludes the Executive or Radica from bringing any
action or proceeding in any court for the purposes of enforcing the provisions
of this Section 6(a).
(b) TO THE EXTENT PERMITTED BY LAW, THE EXECUTIVE AND RADICA WAIVE ANY
AND ALL RIGHTS TO A JURY TRIAL.
(c) Executive acknowledges that Radica would be harmed by a breach of
Section 3 hereof and that, in addition to any other remedy, Radica shall be
entitled to injunctive relief.
(d) THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
NEVADA.
7. Survival.
---------
Any termination of the Executive's employment after the Applicable Date
shall have no effect on the continuing operation of this Agreement.
8. Notices.
--------
For purposes of this Agreement, all notices and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered or five (5) days after deposit in the United
States mail, certified and return receipt requested, postage prepaid, to such
address as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
9. Waiver.
-------
If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
10. Assignment.
-----------
This Agreement and any rights or obligations hereunder may be assigned by
Radica to any successor in interest to Radica's business. This Agreement may not
be assigned by Executive.
- 4 -
11. Headings.
---------
The headings of the sections hereof are inserted for convenience only and
shall not be deemed to constitute a part hereof nor to affect the meaning
thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
RADICA GAMES LIMITED Executive
By: /s/ Patrick S. Feely By: /s/ David C.W. Howell
-------------------------------------- ---------------------------
EXHIBIT 4.23
CHANGE IN CONTROL BONUS AGREEMENT
Effective March 1, 2006
THIS CHANGE IN CONTROL BONUS AGREEMENT is entered into as of March 1,
2006 by and between Radica Games Limited ("Radica), Radica UK Limited ("Radica
UK") and Denis Horton ("Employee").
WHEREAS, Employee has substantial executive management experience;
WHEREAS, Radica and Radica UK would like to secure the continued
services of Employee and to ensure his continued dedication to his duties in the
event of the occurrence of a Change in Control;
WHEREAS, Radica and Radica UK would like to enhance the value of
Radica by motivating superior performance by means of an incentive that is
directly related to value received by Radica in a sale;
SECTION 1 CHANGE IN CONTROL
1.1. In the case of the following events (each a "Change in Control"), and
subject to the other terms of this Agreement, Employee will be eligible to
receive the Bonus described in Section 2:
(a) the consummation of a merger, consolidation, statutory share
exchange, short form merger or similar form of corporate transaction involving
Radica or any member of the Radica Group including by way of acquisition of
shares (a "Business Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of (x) the corporation
resulting from such Business Combination (the "Surviving Corporation"), or (y)
if applicable, the ultimate parent corporation that directly or indirectly has
beneficial ownership of at least 95% of the voting securities eligible to elect
directors of the Surviving Corporation (the "Parent Corporation"), is
represented by Radica Voting Securities that were outstanding immediately prior
to such Business Combination (or, if applicable, is represented by shares into
which such Radica Voting Securities were converted pursuant to such Business
Combination), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Radica Voting
Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation or an existing Radica shareholder, with greater than 50% beneficial
ownership of the Radica Voting Securities prior to the Business Combination,
whose percentage beneficial ownership compared to the other Radica shareholders
in existence immediately prior to the Business Combination does not change on
consummation of the Business Transaction), is or becomes the beneficial owner,
directly or indirectly, of 50% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (C) at least a majority of the members
of the board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) following the consummation of the
Business Combination were Incumbent Directors at the time of the Board's
approval of the execution of the initial agreement providing for such Business
Combination (any Business Combination which satisfies all of the criteria
specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying
Transaction"); or
(b) the consummation of a sale of all or substantially all of Radica's
assets (a "Sale") in one or a series of related transactions. For purposes of
this Agreement, a sale of assets representing 50% or more of the book value,
revenues or net income of Radica shall be deemed to be a sale of "substantially"
all of the assets of Radica.
SECTION 2 BONUS AND PAYMENT
2.1. Bonus Amount. In case of a Change in Control that occurs on or before
March 1, 2007, or a Change in Control that occurs as a result of a definitive
agreement that is signed on or before March 1, 2007, the amount of the Bonus
will be calculated as set forth below; provided that for any Transaction Price
between a Transaction Price listed below (above $197,000,000) and the next
higher price, the amount of the Bonus will be calculated by interpolating
between the relevant Bonus and the next higher Bonus amount:
------------------------------------- -----------------------------------
Transaction Price Bonus
(aggregate consideration received
by Radica)
------------------------------------- -----------------------------------
Less than $197,000,000 $0
------------------------------------- -----------------------------------
$197,000,000 $198,000
------------------------------------- -----------------------------------
$216,700,000 $253,000
------------------------------------- -----------------------------------
$236,400,000 $314,000
------------------------------------- -----------------------------------
$256,100,000 $385,000
------------------------------------- -----------------------------------
In each case the Bonus amount is subject to the adjustments described in Section
2.3 and the conditions described in Section 3.
2.2. Payment. Provided that the conditions specified in Section 3 are
satisfied and subject to Section 4, within 10 days following a Change in
Control, Radica will pay to Employee an amount in cash equal to the Bonus, as
calculated in Section 2.1.
2.3. Special Payment Provisions. In the case of a Business Combination or
Sale, if the terms of the definitive agreement that results in the Change in
Control involve any provisions:
2
(a) pursuant to which a part of the Transaction Price will be
paid to Radica or the Radica shareholders in one or more installments
after the Business Combination or Sale or any other deferral of the
payment of the Sale Price, then payment of the Bonus will be pro-rated
so that:
(i) a portion of the Bonus, based on the portion of the
Transaction Price paid to Radica or the Radica shareholders at the
Transaction Date, will be paid to the Employee in accordance with
Section 2.2 above and
(ii) an additional portion of the Bonus will be paid to Employee
within 10 days following the date any additional portion of the
Transaction Price is paid to Radica or the Radica shareholders.
(b) that would require the buyer to pay or cause to be paid to
Radica an amount which would result in an increased Transaction Price
(after the Transaction Date), such as pursuant to an earn-out
provision or otherwise, then at the time such additional amount is
paid to Radica, the Transaction Price will be recalculated to include
such additional amount and Radica will pay to Employee the resulting
Bonus within 10 days following the date such additional amount is paid
to Radica, less any portion of the Bonus already paid.
SECTION 3 CONDITIONS TO RECEIVE BONUS
3.1. Employee will not be entitled to receive a Bonus and will forfeit all
rights with respect to the Bonus if for any reason Employee is not an employee
of any member of the Radica Group on the date of the Change in Control.
3.2. Notwithstanding the foregoing, if Employee is terminated prior to the
Transaction Date by Radica or Radica UK without Cause, Employee will be entitled
to receive the Bonus that would have become due and payable had he remained an
employee through such date.
SECTION 4 TERM, EXPIRATION AND AMENDMENT
4.1. This Agreement is effective as of March 1, 2006 and will expire as
follows: If a Change in Control has not occurred prior to March 1, 2007, all
Bonuses will be forfeited and will be of no further force or effect; provided
however that if a definitive agreement has been executed on or prior to March 1,
2007 that would result in a Change in Control upon consummation, then this
Agreement will expire on the earlier of (i) December 31, 2007 or (ii) the
termination of such definitive agreement. If a Change in Control occurs after
the expiration of this Agreement, Employee will not be entitled to any Bonus.
4.2. This Agreement may be amended or terminated only with the written
consent of all parties hereto.
3
SECTION 5 MISCELLANEOUS
5.1. This Agreement is not in any way intended to create any guaranteed
period of continued employment; Employee's employment shall at all times
continue to be governed by the terms of his Employment Agreement. Participation
in this Agreement will not constitute or imply any employment rights.
5.2. No Bonus will be assignable or transferable other than by will or by
the laws of descent and distribution, nor will such Bonus be subject to
alienation, assignment, garnishment, execution or levy of any kind.
5.3. Radica will have the right to withhold from any payment made under
this Agreement any Federal, State or local taxes required by law to be withheld
with respect to the payment of the Bonus.
5.4. Any Bonus under this Agreement will constitute a special incentive
payment to Employee and will not be taken into account in computing the amount
of salary or compensation of Employee for the purpose of determining any
benefits under any pension, retirement, profit sharing, bonus, life insurance,
severance or other compensation or benefit plan of the Radica Group or under any
agreement with the Employee, unless such plan or agreement specifically provides
otherwise.
5.5. All rights and obligations under this Agreement will be construed and
interpreted in accordance with the laws of England and Wales, applicable to
agreements made and wholly to be performed in England and Wales.
5.6. If any contest or dispute shall arise under this Agreement, Radica or
Radica UK shall reimburse Employee, within 10 days following the resolution of
such contest or dispute, for all reasonable legal fees and expenses, if any,
incurred by Employee in connection with such contest or dispute (regardless of
the result thereof); provided, however, Employee shall be required to repay any
such amounts to Radica or Radica UK to the extent that a court issues a final
and non-appealable order setting forth the determination that the position taken
by Employee was frivolous or advanced by Employee in bad faith.
SECTION 6 DEFINITIONS
6.1. Bonus has the meaning set forth in Section 2.1.
6.2. Business Combination has the meaning set forth in Section 1.1(a).
6.3. Cause has the meaning set forth in Section 1(a) of the Employment
Agreement.
6.4. Employee means Denis Horton.
6.5. Employment Agreement means the Employment Agreement dated as of 03
April 2003 between Radica, Radica UK and Employee
4
6.6. Incumbent Directors means individuals who, on January 1, 2005,
constitute the Board of Directors of Radica, provided that any person becoming a
director subsequent to January 1, 2005, whose election or nomination for
election was approved by a vote of at least two-thirds of the Incumbent
Directors then on the Board (either by a specific vote or by approval of the
proxy statement of Radica in which such person is named as a nominee for
director, without written objection to such nomination), shall also be an
Incumbent Director.
6.7. Radica means Radica Games Limited.
6.8. Radica Group means Radica, Radica UK and any other corporation or
other entity which at the relevant times is more than fifty percent (50%) owned,
directly or indirectly, by Radica.
6.9. Radica Voting Securities means securities of Radica representing 50%
or more of the combined voting power of Radica's then outstanding securities
eligible to vote for the election of the Board of Directors.
6.10. Radica UK means Radica UK Limited.
6.11. Sale has the meaning set forth in Section 1.1(b).
6.12. Transaction Date means the date on which a Sale or Business
Combination is consummated.
6.13. Transaction Price means the total amount of consideration received by
the shareholders of Radica or, in the event of a Change in Control described in
1.1(b), the aggregate consideration received by Radica (allocable to
shareholders on an after-tax basis assuming a dividend of such proceeds as
determined by the Compensation Committee). For purposes of this Section, any
notes or deferred payment received in connection with the Sale or Business
Combination (that are not contingent on the future performance of Radica or
other factor) shall be treated as cash consideration and valued at its
face-value or principal amount. The fair market value of any non-cash
consideration will be determined in good faith by the Compensation Committee of
the Board; provided that the fair market value of any security for which there
is an established public market will be equal to the average of the closing
market prices for such security over the ten trading days prior to the
Transaction Date and provided further that in their evaluation of any such
non-cash consideration for which there is not an established public market, the
Compensation Committee will seek and rely upon the advice of a an outside
valuation consultant or investment banking firm.
The parties acknowledge that the provisions described above in this Section 6.13
reflect their intention to calculate the Transaction Price. In the event any
definitive agreement for the sale of Radica approaches this issue in a manner
not addressed in this Agreement, the parties will negotiate in good faith to
make any adjustments to the methodology for calculating the Transaction Price as
may be necessary and appropriate to fairly implement the intention of the
parties as reflected in this Agreement.
5
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
RADICA GAMES LIMITED DENIS HORTON
By: /s/ Patrick S. Feely By: /s/ Denis Horton
-------------------------------------- ----------------------
RADICA UK LIMITED
By: /s/ Patrick S. Feely
---------------------------------------
6
EXHIBIT 4.24
AGREEMENT
This Agreement dated as of this 1st day of March, 2006 (the "Signing
Date"), between Radica UK Limited, a corporation organized under the laws of
England and Wales ("Radica UK") and a wholly owned subsidiary of, Radica Games
Limited, a corporation organized under the laws of Bermuda ("Radica"), and Denis
Horton (the "Executive").
WHEREAS, Executive is currently employed as the Managing Director of Radica
UK and President, International Sales of Radica and desires to remain so
employed;
WHEREAS, this Agreement is entered into in connection with Executive's sale
of his shares of Radica, in consideration for the payment described in Section 2
hereof, and in consideration of the confidential information that has been
provided by Radica and Radica UK to Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
commitments contained in this Agreement, the parties hereto agree as follows:
1. Effectiveness.
--------------
(a) This Agreement shall become effective upon a Change in Control of
Radica that occurs on or before March 1, 2007 or such later date as may be
applicable under Section 1(b) (the "Applicable Date") or as a result of a
definitive agreement for a Change in Control that is signed on or before March
1, 2007 or such later date as may be the Applicable Date. For purposes of this
Agreement, a "Change in Control" shall be defined as in the Change in Control
Bonus Agreement, dated March 1, 2006, between Radica, Radica UK and Executive.
(b) The foregoing period within which this Agreement may become
effective shall be automatically renewed annually at each March 1st anniversary
date (commencing March 1, 2007) for an additional one year period so that the
term hereof at each renewal date shall be a one-year period, unless a party to
this Agreement gives notice at least ninety (90) days prior to such renewal date
that this Agreement shall not be renewed.
2. Consideration.
--------------
Upon the occurrence of a Change in Control, Radica will pay to Executive
the amount of GBP152,500 and provide certain Confidential Information in
consideration for his complying with the covenants in Sections 3, below.
3. Covenant not to Compete; Nonsolicitation; Confidential Information.
-------------------------------------------------------------------
(a) Non-Compete. During the one year period following a Change in
Control (the "Restrictive Period"), the Executive shall not directly or
indirectly (without the prior written consent of Radica):
(i) hold a 5% or greater equity (including stock options whether or
not exercisable), voting or profit participation interest in a Competitive
Enterprise, or
(ii) associate (including as a director, officer, employee, partner,
consultant, agent or advisor) with a Competitive Enterprise and in
connection with the Executive's association engage, or directly or
indirectly manage or supervise personnel engaged, in any activity:
(A) that is substantially related to any activity that the Executive
was engaged in with Radica or Radica UK or their affiliates during the 12
months prior to the Change in Control,
(B) that is substantially related to any activity for which the
Executive had direct or indirect managerial or supervisory responsibility
with Radica or Radica UK or their affiliates during the 12 months prior to
the Change in Control, or
(C) that calls for the application of specialized knowledge or skills
substantially related to those used by the Executive in his activities with
Radica or Radica UK or their affiliates during the 12 months prior to the
Change in Control.
For purposes of this Agreement, "Competitive Enterprise" means any business
enterprise that either (A) engages in, designs, develops, manufactures, markets
or sells products in any of the following lines of business as defined by The
NPD Group, Inc.: (i) electronic handheld and tabletop games, (ii) youth
electronics, or (iii) video game accessories, or (B) holds a 5% or greater
equity, voting or profit participation interest in any enterprise that engages
in such a competitive activity.
(b) Non-Solicit. During the Restrictive Period, the Executive shall
not, in any manner, directly or indirectly (without the prior written consent of
Radica): (i) Solicit any Customer to transact business with a Competitive
Enterprise or to reduce or refrain from doing any business with Radica or Radica
UK, (ii) transact business with any Customer that would cause the Executive to
be a Competitive Enterprise, (iii) interfere with or damage any relationship
between Radica or Radica UK and a Customer or (iv) Solicit anyone who is then an
employee of Radica or Radica UK (or who was an employee of Radica or Radica UK
within the prior 12 months) to resign from Radica or Radica UK or to apply for
or accept employment with any other business or enterprise.
For purposes of this Agreement, a "Customer" means any customer or prospective
customer of Radica, Radica UK or their affiliates to whom the Executive provided
services, or for whom the Executive transacted business, or whose identity
became known to the Executive in connection with his relationship with or
employment by Radica or Radica UK, and "Solicit" means any direct or indirect
communication of any kind, regardless of who initiates it, that in any way
invites, advises, encourages or requests any person to take or refrain from
taking any action.
(c) Confidential Information. The Executive hereby acknowledges that,
as an employee of Radica and Radica UK, Radica and Radica UK has provided him
and is continuing
- 2 -
to provide him and he is making use of, acquiring and adding to confidential
information of a special and unique nature and value relating to Radica and
Radica UK and their strategic plan and financial operations. The Executive
further recognizes and acknowledges that all confidential information is the
exclusive property of Radica and Radica UK, is material and confidential, and is
critical to the successful conduct of the business of Radica and Radica UK and
to the Executive's performance of his duties while employed. Accordingly, the
Executive hereby covenants and agrees that he will use confidential information
for the benefit of Radica and Radica UK only and shall not at any time, directly
or indirectly, during the Restrictive Period and thereafter divulge, reveal or
communicate any confidential information to any person, firm, corporation or
entity whatsoever, or use any confidential information for his own benefit or
for the benefit of others.
4. Notice to New Employers.
------------------------
Before the Executive either applies for or accepts employment with any
other person or entity during the Restrictive Period, the Executive will provide
the prospective employer with written notice of the provisions of Section 3 of
this Agreement and will deliver a copy of the notice to Radica.
5. Entire Agreement; Modification.
-------------------------------
This Agreement contains the entire agreement between Executive, Radica and
Radica UK, and it is the complete, final and exclusive embodiment of our
agreement with regard to this subject matter. It is entered into without
reliance on any promise or representation other than those expressly contained
herein, and it cannot be amended except in writing signed by both parties.
The terms and provisions of this Agreement are intended to be separate and
divisible provisions and if, for any reason, any one or more of them is held to
be invalid or unenforceable, neither the validity nor the enforceability of any
other provision of this Agreement shall thereby be affected. The parties hereto
acknowledge and agree that the potential restrictions on the Executive's future
employment imposed by Section 3 of this Agreement are reasonable in both
duration and geographic scope and in all other respects. If for any reason any
court of competent jurisdiction shall find any provisions of Section 3 of this
Agreement unreasonable in duration or geographic scope or otherwise, the
Executive, Radica and Radica UK agree that the restrictions and prohibitions
contained therein shall be automatically reformed to the fullest extent allowed
under applicable law in such jurisdiction.
In the event that the Executive challenges the enforceability of this
Agreement and a court finds that this Agreement is unenforceable, the Executive
shall repay to Radica an amount equal to the Consideration provided for in
Section 2 within 10 business days following such determination.
- 3 -
6. Disputes; Governing Law
-----------------------
(a) The Executive, Radica and Radica UK irrevocably submit to the
non-exclusive jurisdiction of any court located in England or Wales over any
controversy or claim between the Executive and Radica and Radica UK arising out
of or relating to or concerning this Agreement. Executive, Radica and Radica UK
(i) acknowledge that the forum stated in this Section 6(a) has a reasonable
relation to this Agreement and to the relationship between the Executive, Radica
and Radica UK and that the submission to the forum will apply even if the forum
chooses to apply non-forum law, (ii) waive, to the extent permitted by law, any
objection to personal jurisdiction or to the laying of venue of any action or
proceeding in the forum stated in this Section 6(a), (iii) agree not to commence
any such action or proceeding in any forum other than the one stated in this
Section 6(a) and (iv) agree that, to the extent permitted by law, a final and
non-appealable judgment in any such action or proceeding in any such court will
be conclusive and binding on the Executive, Radica and Radica UK. However,
nothing in this Agreement precludes the Executive or Radica or Radica UK from
bringing any action or proceeding in any court for the purposes of enforcing the
provisions of this Section 6(a).
(b) TO THE EXTENT PERMITTED BY LAW, THE EXECUTIVE, RADICA AND RADICA
UK WAIVE ANY AND ALL RIGHTS TO A JURY TRIAL.
(c) Executive acknowledges that Radica and Radica UK would be harmed
by a breach of Section 3 hereof and that, in addition to any other remedy,
Radica shall be entitled to injunctive relief.
(d) THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF ENGLAND AND WALES.
7. Survival.
---------
Any termination of the Executive's employment after the Applicable Date
shall have no effect on the continuing operation of this Agreement.
8. Notices.
--------
For purposes of this Agreement, all notices and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered or five (5) days after deposit in the United
States mail, certified and return receipt requested, postage prepaid, to such
address as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
- 4 -
9. Waiver.
-------
If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
10. Assignment.
-----------
This Agreement and any rights or obligations hereunder may be assigned by
Radica and Radica UK to any successor in interest to Radica's and Radica UK's
business. This Agreement may not be assigned by Executive.
11. Headings.
---------
The headings of the sections hereof are inserted for convenience only and
shall not be deemed to constitute a part hereof nor to affect the meaning
thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
RADICA Executive
By: /s/ Patrick S. Feely By: /s/ Denis Horton
-------------------------------------- ----------------------
RADICA UK
By: /s/ Patrick S. Feely
--------------------------------------
-5-
Exhibit 6.1
COMPUTATION OF PER SHARE INCOME
(US dollars in thousands, except per share data)
December 31, December 31, December 31,
2005 2004 2003
---------------- ---------------- ----------------
Basic income per share:
Net income $ 10,532 $ 3,456 $ 12,491
================ ================ ================
Weighted average number of shares 18,993,263 18,653,471 18,016,789
---------------- ---------------- ----------------
Basic earnings per share $ 0.55 $ 0.19 $ 0.69
================ ================ ================
Diluted income per share:
Net income $ 10,532 $ 3,456 $ 12,491
================ ================ ================
Weighted average number of shares 18,993,263 18,653,471 18,016,789
---------------- ---------------- ----------------
Assuming conversion of stock options 669,974 872,286 1,043,185
---------------- ---------------- ----------------
Adjusted weighted average number of shares 19,663,237 19,525,757 19,059,974
---------------- ---------------- ----------------
Diluted earnings per share $ 0.54 $ 0.18 $ 0.66
================ ================ ================
Exhibit 8.1
SUBSIDIARIES OF RADICA GAMES LIMITED
State or Country
Name of Subsidiary in Which Organized
------------------ ------------------
UNITED STATES
Radica Enterprises Ltd Nevada
(Operates as Radica USA Ltd)
- Leda Media Products Ltd (dormant) UK
- Radica Canada Ltd Canada
Disc, Inc. Nevada
(Operates as Radica Innovations)
INTERNATIONAL
Radica Limited Hong Kong
- RadMex S.A. de C.V. (dormant) Mexico
- Radica Technology (Shenzhen) Co. Ltd. People's Republic of China
Radica China Ltd British Virgin Islands
- Dongguan Radica Games Manufactory Co. Ltd People's Republic of China
Radica (Macao Commercial Offshore) Limited Macao
Radica Innovations (UK) Ltd (dormant) UK
Radica Europe Ltd UK
- Radica UK Ltd UK
Exhibit 12.1
CERTIFICATION
I, Patrick S. Feely, certify that:
1. I have reviewed this annual report on Form 20-F of Radica Games Limited;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the company's internal control
over financial reporting that occurred during the period covered by
this report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial
reporting; and
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of company's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal
control over financial reporting.
Date: March 30, 2006
....................................
/s/ Patrick S. Feely
-----------------------
Patrick S. Feely
Chief Executive Officer
Exhibit 12.2
CERTIFICATION
I, David C.W. Howell, certify that:
1. I have reviewed this annual report on Form 20-F of Radica Games Limited;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the company's internal control
over financial reporting that occurred during the period covered by
this report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial
reporting; and
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of company's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal control
over financial reporting.
Date: March 30, 2006
....................................
/s/ David C.W. Howell
-----------------------
David C.W. Howell
Chief Financial Officer
Exhibit 13.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Radica Games
Limited (the "Company"), hereby certifies that the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: March 30, 2006
/s/ Patrick S. Feely
-----------------------------
Name: Patrick S. Feely
Title: Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
Exhibit 13.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Radica Games
Limited (the "Company"), hereby certifies that the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: March 30, 2006
/s/ David C.W. Howell
------------------------------
Name: David C.W. Howell
Title: Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
Exhibit 15.1
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, 2005
----------------------------
Net sales $ 22,474 $ 31,131 $ 63,437 $ 45,737
Gross profit 8,716 9,472 23,687 18,977
Net income (loss) 495 (3,437) 9,987 3,487
Basic income (loss) per share 0.03 (0.18) 0.53 0.18
Diluted income (loss) per share 0.03 (0.18) 0.51 0.18
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)
Common Share Price High Low
2005 Quarter
------------
Fourth.......................................................................$ 10.210 8.680
Third ....................................................................... 9.160 8.484
Second ...................................................................... 9.300 8.170
First ....................................................................... 9.510 7.610
2004 Quarter
------------
Fourth.......................................................................$ 10.920 7.520
Third ....................................................................... 10.350 8.240
Second ...................................................................... 9.860 8.000
First ....................................................................... 11.640 6.880
2003 Quarter
------------
Fourth.......................................................................$ 7.950 $ 6.300
Third ....................................................................... 8.170 6.880
Second ...................................................................... 8.000 5.540
First ....................................................................... 6.540 4.200
Exhibit 15.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Radica Games Limited
We consent to the incorporation by reference in Registration Statement Nos.
33-86960, 333-07000, 333-59737, 333-61260 and 333-122248 on Form S-8, and
Registration Statement Nos. 333-07526 and 333-79005 on Form F-3 of Radica Games
Limited of our report dated March 6, 2006 with respect to the consolidated
balance sheets of Radica Games Limited and its subsidiaries as of December 31,
2005, and 2004 and the related consolidated statements of income, shareholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2005, which report appears in the December
31, 2005 Annual Report on Form 20-F of Radica Games Limited.
/s/ KPMG
Hong Kong, China
March 30, 2006