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 October 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from ___________________ to ___________________
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(Jurisdiction of incorporation or organization)
SUITE R, 6/FL. 2-12 AU PUI WAN ST.
FO TAN, HONG KONG
(Address of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.01
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Title of each class Amount Outstanding
------------------- ------------------
Common Stock, Par Value $.01 20,860,200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -------
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 X
--------- --------
<PAGE>
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
Radica Games Limited ("the Company") designs, develops, manufactures
and distributes a variety of electronic handheld and mechanical games.
The Company is a leading seller of handheld electronic games in the
United States and several other worldwide markets. The Company began its
business with Casino themed handheld and table top game products and then
diversified its business to other handheld electronic game categories including
sports, heritage and action games. In 1997 the Company's largest category in
sales was sports themed games. The Company still maintains a significant Casino
themed game business and believes it is the dominant seller of handheld and
table top games in this category in the United States.
The Company's principal products include a range of Sports themed games
(including Bass Fishin'(TM), World Class Golf(TM), King Pin Bowling, and Deep
Sea Fishin'(TM)), Casino themed games (including Poker, Blackjack and Slot), and
a new line of Action themed games (including Night Vision Sub Assault(TM) and
Night Vision Tank Assault(TM)) for children. The Company expects to produce new
electronic handheld games in 1998 (see New Product Introduction). The Company's
products are based on familiar games or sports that have been played for
generations and are designed to be played with little or no instruction. The
Company currently offers over 50 models with retail prices ranging from $5 to
$50.
In June 1995 the Company announced a joint venture with the Hasbro
Games Group. Under this agreement, the Company produced a handheld electronic
Yahtzee(TM) game in fiscal 1995, 3 additional handheld electronic games in 1996
and 5 additional games for the Hasbro Games Group in 1997 (a total of 9 in
1997). It expects to produce additional games for the Hasbro Games Group in
1998.
THE INFORMATION IN THIS ANNUAL REPORT ON FORM 20-F CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM PROJECTED RESULTS AS A RESULT OF
VARIOUS FACTORS. FORWARD-LOOKING STATEMENTS INCLUDE ESTIMATES OF NEW PRODUCTS TO
BE INTRODUCED BY THE COMPANY IN THE FUTURE, STATEMENTS ABOUT THE COMPANY'S
BUSINESS STRATEGY AND PLANS, STATEMENTS ABOUT THE ADEQUACY OF THE COMPANY'S
WORKING CAPITAL AND OTHER CAPITAL RESOURCES, AND IN GENERAL STATEMENTS HEREIN
THAT ARE NOT OF A HISTORICAL NATURE. THE FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM PROJECTED RESULTS INCLUDE THE RISKS OF MANUFACTURING
IN CHINA (INCLUDING THE STATUS OF HONG KONG WHICH BECAME A SPECIAL
ADMINISTRATIVE REGION OF CHINA IN 1997), DEPENDENCE ON PRODUCT APPEAL AND NEW
PRODUCT INTRODUCTIONS, DEPENDENCE ON MAJOR CUSTOMERS, COMPETITION AND THE OTHER
RISK FACTORS WHICH ARE DESCRIBED HEREIN UNDER "ITEM 1. DESCRIPTION OF BUSINESS
- -- RISK FACTORS".
2
<PAGE>
BACKGROUND
The Company completed an Initial Public Offering (IPO) in May, 1994.
Prior to the IPO, the principal shareholders of the Company conducted the
Company's business through two separate, jointly owned companies (Radica
Limited, which manufactured the Company's products, and Radica USA, which
distributed and currently distributes products in the United States) and through
a third company, Disc, that was solely owned by Robert E. Davids, Chief
Executive Officer of the Company, which provided certain design and engineering
services to Radica Limited ("Radica HK"), and now provides similar services to
Radica China Ltd ("Radica China").
Radica HK was established in Hong Kong in December 1985 by James J.
Sutter and John N. Hansen and originally sold two models of souvenir slot
machine banks. In 1988, Robert E. Davids joined the Company as General Manager
and led the Company's development of one of the first souvenir electronic
tabletop poker games. In 1989, Mr. Davids became an equal shareholder in the
Company with Mr. Sutter and Mr. Hansen. In 1991, the Company introduced one of
the first handheld electronic poker games.
Radica initially had its products assembled in Hong Kong by
subcontractors and sold through distributors in the United States. Between 1988
and 1990, the Company brought certain of its production activities in house. At
the beginning of 1992, the Company opened a factory in Tai Ping, China, moving
its production activities from Hong Kong to southern China. In April 1992, Mr.
Sutter, Mr. Hansen and Mr. Davids established Radica USA to take greater control
of the distribution of the Company's products in the United States. The Company
made over 80% of its sales through Radica USA in fiscal 1997 (excluding Original
Equipment Manufacturing ("OEM") sales).
In December 1993, Radica Games Limited was established as a holding
company of Radica HK. Prior to the closing of the IPO, Radica Games Limited
acquired all of the outstanding common stock of Radica USA from Mr. Davids, Mr.
Sutter and Mr. Hansen in exchange for additional shares of the Company's Common
Stock and acquired all of the outstanding common stock of Disc from Mr. Davids.
In May 1995 the Company opened its purpose built factory in Tai Ping, China on a
3.7 acre site under the terms of a cooperative joint venture agreement with the
local government.
In October 1997 the Company announced its intention to expand the Tai
Ping factory (see Manufacturing Facilities).
BUSINESS STRATEGY
The Company intends to provide a broad line of handheld and table top
electronic and mechanical games covering a variety of game categories. In order
to provide innovative, high quality games at low prices, Radica employs a
strategy of product design in the United States, where a substantial majority of
the Company's products are sold, combined with engineering and low cost
materials procurement in Asia and low cost manufacturing in China, where the
Company operates its Factory. The Company's current products and planned
products are intended to reach retail price points covering the range of large
volume gift products. The Company historically focused primarily on products
that combine knowledge of the casino gaming industry with experience in new
product introduction, electronic game design and low cost manufacturing. More
recently, the Company has placed more emphasis on non-casino themed games.
To provide differentiation between high-end and low-end markets,
products are packaged under the name 'RADICA:(R)' for the low-end mass markets
and under the name 'Monte Carlo' for the more exclusive high-end markets.
Radica believes its ability to develop and introduce innovative
products is enhanced by its established innovative product design and
engineering in the United States, its multiple channel distribution
capabilities, which allow for close customer contact, and the experience of
several of its employees in the casino gaming industry. Large manufacturing
volumes and low cost production activities in China have allowed the Company to
keep its prices competitive. In addition, electronic parts and subassemblies can
be purchased efficiently and at low cost in Asia.
3
<PAGE>
The Company has expanded and continues to expand distribution of its
existing products, both inside and outside the United States. As part of this
goal, Radica Canada and Radica UK were established in 1995 to distribute
products in these markets. The Company intends to pursue related business
opportunities that leverage off the Company's product development expertise to
access new markets. Related business opportunities include OEM for other
companies, of which the manufacturing for the Hasbro Games Group is an example.
PRODUCTS
At the end of fiscal year 1997, Radica's principal products included 10
models of Sports themed games (including Bass Fishin'(TM), Lunker Bass(TM), Deep
Sea Fishin'(TM), King Pin Bowling and World Class Golf); 14 models of Heritage
themed games (including Solitaire, Tic Tac Toe, Checkers and Bingo); 2 models of
Action games (Night Vision Tank Assault(TM) and Night Vision Sub Assault(TM));
27 models of handheld and tabletop Casino themed games (including electronic
poker, blackjack, slot games and tabletop mechanical slot machine banks), all of
which have been designed to simulate the play of the commercial gaming machines
found in casinos; and 9 models of OEM games (Connect Four(TM), Battleship(TM),
Yahtzee(TM), Hangman(TM), Sorry(TM), Perfection(TM), Jumanji(TM), and 2 games
based on Jurassic Park movie "The Lost World(TM)", the first three of which are
also sold under the Company's Monte Carlo trade name). However, the foregoing
models include 28 models representing discontinued lines, which, unless the
market warrants reintroduction, the Company only intends to continue selling so
long as inventories exist. The Company intends to introduce over 15 new models
in 1998. The Company is focusing its efforts to a greater extent on non-casino
themed games. In fiscal 1997, Sports themed games accounted for approximately
51% of net sales, Heritage themed games accounted for approximately 12% of net
sales, Vision games accounted for approximately 3%, Casino themed games
accounted for approximately 15% of the Company's net sales and OEM products,
including those sold under the Company's Monte Carlo trade name, accounted for
approximately 19% of net sales. In fiscal 1997, the Company's products had
retail prices ranging from $5 to $50.
4
<PAGE>
The following table sets forth a breakdown of the Company's sales by
major product category for the last four fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------------------
1994 1995
------------------------------------------------ ------------------------------------------------
% OF % OF
NET UNITS NO. OF NET NO. OF
UNITS NET SALES SALES SOLD MODELS NET SALES SALES UNITS SOLD MODELS
- ----- ------------- ---------- ------------ -------- -------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Casino games
- -- Handheld $ 58,195,409 80.7% 7,674,960 32 $ 41,929,528 79.6% 7,457,696 73
- -- Tabletop 13,889,243 19.3% 1,563,401 24 7,863,600 14.9% 704,354 26
Heritage games - - - - 1,521,825 2.9% 116,995 3
OEM products - - - - 1,335,355 2.6% 282,681 2
(including those sold
under Monte Carlo trade
name)
Others 7,486 0.0% 7,901 12 - - - -
------------- ---------- ------------ -------- -------------- --------- ----------- --------
Total 72,092,138 100% 9,246,262 68 52,650,308 100% 8,561,726 104
============= ========== ============ ======== ============== ========= =========== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------ --------------------------------------------------
% OF % OF
NET NO. OF NET NO. OF
UNITS NET SALES SALES UNITS SOLD MODELS NET SALES SALES UNITS SOLD MODELS
- ----- ------------- ---------- ------------ -------- -------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Casino games
- -- Handheld $ 15,901,992 33.5% 5,037,180 85 $ 11,711,230 13.3% 3,416,426 84
- -- Tabletop 3,335,684 7.0% 357,425 32 2,085,745 2.4% 238,310 32
Heritage games 8,218,728 17.3% 659,755 8 10,876,318 12.4% 985,163 16
Sports games 8,608,150 18.1% 734,378 7 44,370,837 50.6% 3,987,564 10
Action games - - - - 2,379,605 2.7% 208,649 2
OEM products 11,471,024 24.1% 2,192,099 7 16,336,555 18.6% 3,519,666 12
(including those sold
under Monte Carlo trade
name)
------------- ---------- ------------ -------- -------------- --------- ------------- ---------
Total 47,535,578 100% 8,980,837 139 87,760,290 100.0% 12,355,778 156
============= ========== ============ ======== ============== ========= ============= =========
</TABLE>
The Company's Sports themed games are electronic handheld versions of
popular sports activities such as Bowling, Bass Fishin'(TM) and Golf. Company
designers have incorporated the interesting aspects of sports activities into
these electronic handheld games. More Sports themed games are planned for
introduction in 1998.
5
<PAGE>
The Company's Heritage themed games such as Gin Rummy, Hearts, Bingo
and Solitaire are electronic handheld versions of classic card, dice and other
games. The Company believes that its versions of classic games are designed to
provide the highest play value to customers as a result of their accuracy. More
Heritage themed games are planned for introduction in 1998.
The Company's Action games such as Night Vision Tank Assault(TM) and
Night Vision Sub Assault(TM) are electronic games which are held up to the eyes
in a similar way to binoculars and create a 'virtual' experience for the user
similar to looking through a gun site in a tank or a periscope in a submarine.
The Company's current Casino themed games are designed to simulate the
commercial gaming machines such as Video Poker, Video Blackjack and Slot found
in casinos but without any monetary risk or reward. The electronic games allow
players to bet points with automatic scorekeeping. The Company's games also
offer a variety of different features intended to further simulate casino
playing, such as variable betting, music melody on winners, a jackpot bell (slot
games), a flashing win light and reel spin sound (slot games). The sound of
games can be turned off to permit silent play. A new line of Casino themed games
is being introduced in 1998 (see New Product Introduction).
The Company's tabletop models are designed to be attractive souvenirs
and gifts. The tabletop models have a coin slot and jackpot bell like commercial
casino machines and can be used as savings banks. The electronic tabletop models
have features similar to those of the Company's handheld games. Certain of the
tabletop mechanical models have a simulated pewter finish to give them an
antique appearance.
The Company's electronic games incorporate a semiconductor
microcontroller chip into which the Company's proprietary game software has been
masked. The electronic games use LCDs for their display and are battery powered.
The Company sells its low-end, mass merchandise products under the
RADICA:(R) trade name and its high-end products under the Monte Carlo trade
name.
NEW PRODUCT INTRODUCTION
In fiscal 1998, Radica intends to expand its line of games by
introducing more than 15 new games and re-categorizing its games into Radica
Fishing (4 games); Radica Sports (4 games); Radica Heritage (6 games); Radica
Extreme (2 games); Radica Combat (4 games) and Radica Casino (7 games). The
Company believes that its strategy of offering various game models with
differing features enables it to market its games to a wide age range of
consumers with different tastes and financial means. The Company will also
continue to provide its Monte Carlo brand products to higher end retailers.
In fiscal 1997, the Company introduced two new Sports games (Deep Sea
Fishin'(TM) and Lunker Bass(TM)), five new Heritage themed games (Checkers,
Triple Tic Tac Toe, Dominoes, Pinochle and Liar's Dice), a new line of Action
games (Night Vision Tank Assault(TM) and Night Vision Sub Assault(TM)), and a
backlit line of "Lite" Casino games.
The Company anticipates that new product introductions in fiscal 1998
will be concentrated in the second and third quarters of that year. By the end
of fiscal 1998, the Company expects its product line to include approximately 42
models. However, it is possible that the Company will determine not to proceed
with any given product or that one or more aspects necessary for introduction of
the products in fiscal 1998 will be delayed, which could delay or prevent
certain anticipated product introductions.
MANUFACTURING
Radica's manufacturing is generally limited to IC chip bonding, plastic
injection, clamshell production, mold manufacture and assembly operations. The
Company orders customized components and parts from suppliers and uses
subcontractors for more complicated operations such as masking of the Company's
proprietary software onto the semiconductor chips used in its games, LCD tooling
and tooling of a small percentage of the molds for its plastic parts.
6
<PAGE>
In 1997 the Company assembled all of its own products in order to
control its costs, quality, production and delivery schedules.
The Company 's products are not required to obtain any quality
approvals prior to sales in the United States. The Company, however, is required
to have and has obtained CE approval, Europe's toy safety standard, for its
products sold in Europe. The Company has been granted a Chinese toy quality
license from the Chinese Import and Export Commodity Inspection Bureau, which is
required of toy and game manufacturers in China to export toys or games. In
addition, the Company voluntarily complies with ASTM 963, a U.S. toy safety
standard.
The Company received the ISO 9001 quality certification from
Underwriters Laboratory on January 17, 1997. The scope of the registration
covers the design, sales and distribution of electronic and electro-mechanical
games and related gift products.
MANUFACTURING FACILITIES
Radica currently manufactures its products at its Tai Ping factory (the
"Factory") in Dongguan, Southern China approximately 40 miles northwest of Hong
Kong. The Factory was constructed with the cooperation of the local government
according to the Company's design specifications on a 3.7 acre site. It was
scheduled to be constructed in two phases. The first phase was completed and
opened in May 1995 and commenced operations in June 1995. The first phase of the
Factory has approximately 240,000 sq. ft. of factory space and dormitory
facilities for up to 3,000 workers as well as apartments for managers and
visitors. The second phase of the Factory is planned to have approximately
210,000 sq. ft. of additional factory space and have dormitory facilities for up
to an additional 2,500 workers. The cost of the rights to use the site and
construction of the first phase was approximately $6.0 million, exclusive of
manufacturing equipment. The unit capacity of the Factory depends on the product
mix produced but is limited by its bonding capabilities. The Company believes
that at peak it can produce in excess of 25,000 units of handheld games per day
(the maximum number of chips that can currently be bonded per day). However,
there can be no assurance that the Company will be able to operate at full
capacity or have sufficient sales to warrant doing so.
Due to the growth of business, the Company plans to expand the Factory
in two stages. The first stage, due to be completed and usable by the end of May
1998, will add 107,000 square feet of factory space and dormitory capacity to
accommodate 1,100 additional workers. The second stage to be completed by the
end of August 1998 will add a further 108,000 square feet of factory space and
accommodation for a further 1,100 workers. It is expected that the total cost
will be approximately $3 million.
In June, 1994 the Company entered into a joint venture agreement
("Joint Venture Agreement") with the local government to operate the Factory.
The Company funded the construction costs. Such amounts will be applied as a 30
year prepaid leasehold on the Factory. Upon commencement of production, the
local government received a fixed annual fee as the joint venture partner. The
annual fee is subject to increases every three years.
The Company also manufactures under a processing agreement ("Processing
Agreement") with the local government. The Processing Agreement provides by its
terms that the local government will provide manufacturing facilities and supply
workers to the Company and that the Company will pay a management fee and
processing fee and certain other charges. The management fee is paid to the
local government and is based on a negotiated sum per worker at the Factory. The
processing fee is based on the value of raw materials shipped into the Factory
and the value of products shipped from the Factory and is established in
semi-annual production agreements agreed upon with local government officials.
The Company pays the processing fees through the Bank of China in Hong Kong and
the funds are then placed in an operating account including other Company funds
in China, all of which are used to pay the costs of the Factory. In practice,
the Company operates all aspects of the Factory, including hiring, paying and
terminating workers. Most of the Company's factory workers are hourly employees
and are provided room and board in addition to their wages. In addition, the
Company bears all other costs of operating the Factory, including utilities and
certain employee social welfare charges established by the local government.
Many aspects of the Processing Agreement and operation of the Factory are
dependent on the Company's relationship with the local government and existing
trade practices in addition to the terms of the Processing Agreement. The
Company believes that its relationship with the local government is good.
7
<PAGE>
MATERIALS
Major components used in the Company's products are liquid crystal
displays ("LCDs"), semiconductor chips, printed circuit boards ("PCBs") and
molded plastic parts. The Company purchases LCDs, PCBs, and semiconductor chips
from several suppliers, although specific LCDs, PCBs or semiconductor chips for
any particular model are generally purchased from a single supplier. The Company
generally provides six to nine months order indications to its semiconductor
chip suppliers and must place firm orders a minimum of three months in advance
of delivery. The Company tries to maintain only two months supply of
semiconductor chips, which may constrain increased production of its products on
short notice. The Company pays for most of its materials in U.S. dollars.
The Company's major suppliers in fiscal 1997 included Duracell Asia Ltd
(batteries), Epson Hong Kong Ltd (semiconductor chips), GPI International Ltd
(batteries), Lead Jump Development Ltd (PCBs), Lik Sun Printing Co. Ltd
(printing), Meise Label Printing Fty (printing), Onpress Printed Circuit Boards
Ltd (PCBs), Picvue Electronics Ltd (LCDs), Senmax Limited (keypads), Sunplus
Technology Co., Ltd (semiconductor chips) and United Radiant Technology (HK) Ltd
(LCDs).
8
<PAGE>
SALES AND DISTRIBUTION
Radica's products are sold in over 30 countries, with the United States
accounting for over 80% of net sales in fiscal 1997. The Company sells its
products directly to over 1,000 active retailers in the United States and to
over 20 distributors worldwide. The Company participates in the electronic data
interchange ("EDI") program maintained by 25 customers including J.C. Penney's,
Sears, Target, Wal-Mart, Walgreens, K-Mart and Venture. In fiscal 1997, the
largest customer of the Company, Wal-Mart, accounted for 20.9% of net sales; in
addition OEM work for the Hasbro Games Group accounted for 18.5% of net sales.
Our top five customers (excluding OEM business) were as follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
-------------------
1997 1996
---- ----
1. Wal-Mart (USA) 20.9% 16.6%
2. Target (USA) 10.9% 8.6%
3. Estona Incorporated (Japan) 9.4% 1.0%
4. Kohl's (USA) 4.3% 4.8%
5. Toys 'R' Us (worldwide) 3.4% 1.2%
The following table sets forth certain of the Company's major customers
in 1997, including distributors (alphabetical order).
<TABLE>
<CAPTION>
DEPARTMENT STORES DRUG STORES INTERNATIONAL DISTRIBUTORS MASS MERCHANDISERS
- ----------------- ----------- -------------------------- ------------------
<S> <C> <C> <C>
Dayton Hudson Arbor Drugs Inc. Alec Cooper (South Africa) Army Airforce Exch.
Dillards Boots Cartal Diffusion (Italy) Bradlees
Foley's Eckerd Corporation Darmon (France) Hills
Gottschalk Genovese Drugs Estona Incorporated (Japan) K-Mart
Harrods London Drugs Hasbro Australia (Australia & New Zealand) Kay Bee
J.C. Penney's Long's Drugs Income Express (Hong Kong) Meijer
Kohl's Osco Drug Johnny Fassi (Italy) Mervyns
Macy's Thrifty Payless Drug Mastarting A.B. (Sweden) QVC
Marshall Fields Walgreens Plizer Geetanjali (India) Target
Robinson's-May Popular de Juguetes (Spain) Venture
Sheng Tai Toys (Singapore) Wal-Mart
The Oriental Trading Co. (Hong Kong)
</TABLE>
<TABLE>
<CAPTION>
CONSUMER
CATALOG SHOWROOMS MAIL ORDER RETAILERS SPECIALTY GIFT SHOP OPERATORS ELECTRONICS STORES
- ----------------- -------------------- ----------------------------- ------------------
<S> <C> <C> <C>
Argos Fingerhut Caesar's World Best Buy
Index Grattan Circus Circus Radio Shack
Service Merchandise G.U.S. Host Marriott
Sharper Image Home Shopping Network Spencer Gifts
H. Schneider (Germany) Dufferen Game Room Stores
Innovations
Wish Book
</TABLE>
9
<PAGE>
GROCERY &
CONVENIENCE STORES TOY RETAILERS
- ------------------ -------------
Albertsons Hamleys
Emro Marketing Toys'R'Us
Kroger
L&L Jiroch
M.W. Kasch
W.H. Smith
Westfair Super Stores
Over the last seven years, the Company has expanded its distribution
channels from Las Vegas souvenir and other specialty shops to general retailers,
and from Christmas and other gift season display to year round display.
Previously, the Company moved United States distribution of its products
in-house through Radica USA. In fiscal 1995, the Company took control of its
marketing in Canada and the United Kingdom by establishing distribution
operations in those countries. Radica's distribution operations use regional
sales managers working for the Company to manage manufacturers representatives
and brokers that sell its products. These manufacturers representatives are not
employees of the Company and work on a commission basis.
The Company's customers normally provide indications of interest, which
may be canceled at any time, from three to six months prior to scheduled
delivery, but only confirm orders eight weeks in advance of delivery.
Accordingly the Company generally operates without a significant backlog of
regular orders, however, OEM orders tend to be placed 3 months or more in
advance. The Company's backlog orders as of the end of fiscal 1997 were
approximately $16.5 Million, of which approximately $5 million relates to OEM
business.
The Company does not sell any of its products on consignment (except to
a limited extent in Hong Kong and China). In certain instances, where retailers
are unable to sell the quantity of products which have been ordered from the
Company, the Company may, in accordance with industry practice, assist retailers
to enable them to sell such excess inventory by offering discounts, accepting
returns and other concessions. A portion of firm orders, by their terms, may be
canceled if shipment is not made by a certain date.
The Company's products generally carry a 90 days consumer warranty from
the date of sale, and the Company generally honors warranty claims even after
that period. In each of the last two years, warranty costs incurred have been
less than 2% of net sales.
PRODUCT DEVELOPMENT
Radica's engineering and development department has approximately 72
staff worldwide. The Company's product development starts with teams in Reno,
Nevada and Dallas, Texas and continues through to the engineering teams in Hong
Kong and in the Tai Ping Factory. The Company has a formalized product
development process that includes semiannual meetings of its worldwide product
development and sales departments. In fiscal 1995, 1996 and 1997, the Company
spent approximately $2,084,000, $1,699,000 and $2,099,000, respectively, on
research and development. The Company's research and development is heavily
oriented toward market demand. Based on its ongoing contact with consumers,
retailers and distributors worldwide, the Company's sales department seeks to
understand and assist the product development teams in responding to consumer
and retailer preferences. The sales department also targets certain retail price
points for new products which drive the Company's product development, with
designs, features, materials, manufacturing and distribution all developed
within the parameters of the target retail price.
The Company is also engaged in designing and producing products for the
Hasbro Games Group and expects to increase the number of products manufactured
for them in 1998.
10
<PAGE>
ORIGINAL PRODUCT MANUFACTURING
In 1995, the Company was successful in establishing a joint venture
with the Hasbro Games Group to manufacture products for them. The Company
intends to pursue other OEM business in the future. However, it is uncertain
whether the Company can successfully attract additional original product
manufacturing business or that it will be profitable.
INTELLECTUAL PROPERTY
The Company currently owns 3 patents, 7 trademarks and has certain
copyrights over its artwork. It also has 22 design patents and 33 trademark
applications in process and will continue to obtain copyrights, trademarks and
design patents for new products. In November 1997 the Company was successful in
having a factory in China raided by the Administration of Industry and Commerce
in Shenzhen, China ("AIC") who seized product and packaging from a company that
was making direct copies of its Bass Fishin'(TM) game.
The Company anticipates that patents, trademarks, copyrights and other
intellectual property rights will become increasingly important in the
electronic handheld and mechanical games industry in which the Company operates,
particularly since the Company is introducing a wider range of products with
themes and features that do not duplicate casino or heritage games. As the
industry focuses on intellectual property matters, there will be opportunities
for the Company to protect its products through patents, trademarks and other
formalized filings, although the efficacy of these protections is variable at
best. By the same token, the Company will be exposed to risks that its products
will be found to infringe the intellectual property rights of others. See "Risk
Factors -- Intellectual Property Risks".
COMPETITION
The games business is highly competitive. Radica believes that it has a
dominant market share of the U.S. market for non-gambling Casino themed games
and is one of the dominant sellers of other handheld electronic games. The
Company's primary competitor is Tiger Electronics, Inc. ("Tiger"). Tiger
procures its products from manufacturers in China. The barriers for new
producers to enter the Company's markets are relatively low and the Company
expects that it will face increased competition. The Company competes for
consumer purchases on the basis of price, quality and game features and for
retail shelf space also on the basis of service, including reliability of
delivery, and breadth of product line. Some competitors offer products at lower
prices than the Company, are better established in the toy and games industry
and are larger than the Company. The Company's products also compete with other
gifts and games for consumer purchases. In addition, with respect to OEM
activities, the Company will compete with a number of substantially larger and
more experienced manufacturers. As the Company enters other markets and
businesses, it expects to face new competition.
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
There is currently no Bermuda income, corporation or profits tax
payable by the Company. As an exempted company, the Company is liable to pay to
the Bermuda government an annual registration fee calculated on a sliding scale
basis by reference to its assessable capital, that is, its authorized share
capital plus any share premium on its issued shares of Common Stock currently at
a rate not exceeding $25,000 per annum.
The Hong Kong profits tax rate currently applying to corporations is
16.5%. Currently, Radica HK and one other Hong Kong-based subsidiary pay Hong
Kong profits tax on service and sales income.
On July 1, 1994 the Company's manufacturing operations were transferred
to Radica China. Because the Company operates in China only pursuant to the
Processing Agreement and the Joint Venture Agreement, it is not subject to China
tax. With effect from the first profitable year of the joint venture, the
Company will operate under a two year tax holiday in China, followed by a three
year period of reduced tax at half the regular rate of 24%.
Radica USA and Disc are fully subject to U.S. federal taxation, as well
as any applicable state or local taxation, on their taxable income (including
income, if any, imputed under applicable transfer pricing rules). Currently, the
highest marginal rate of U.S. federal corporate income tax is 35%. In addition,
dividends paid by Radica USA and Disc to the 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%.
EMPLOYEES
As of October 31, 1997 the Company had 2,602 full-time employees (46 in
North America, 2 in Europe and 2,554 in Asia), of whom 2,350 worked in
production processes including manufacturing, purchasing, materials, shipping
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and stores (including those employed under the Joint Venture and Processing
Agreements in China); 24 worked in sales and marketing; 72 worked in engineering
and development; 30 worked in finance and 126 worked in administration,
including employees in security, kitchens, management information systems and
document control. The Company believes that its future success will depend, in
part, on its ability to continue to attract and retain highly skilled technical,
marketing, support and management personnel.
None of the Company's employees are subject to a collective bargaining
agreement and the Company has never experienced a work stoppage. Management
believes that its employee relations are good.
RISK FACTORS
The shares of Common Stock of the Company involve a significant degree
of risk. Prospective investors should carefully consider the following factors
together with the other information contained or incorporated by reference
herein prior to making any investment decision regarding the Company or its
securities.
RISKS OF MANUFACTURING IN CHINA
Risk of China Losing Most Favored Nation Status or of Changes in
Tariff or Trade Policies. The Company manufactures in China and exports from
Hong Kong to the United States and worldwide. Its products sold in the United
States are currently not subject to U.S. import duties. China currently enjoys
most favored nation ("MFN") trade status under U.S. tariff laws, which provides
a favorable category of U.S. import duties. 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 MFN status for China. The loss of MFN status for China, changes in
current tariff structures or adoption in the United States of other trade
policies adverse to China could have an adverse effect on the Company's
business.
Chinese Political, Economic and Legal Risks. The success of the
Company's current and future operations in China and Hong Kong (which became a
Special Administrative Region of China on July 1, 1997) is highly dependent on
the Chinese government's continued support of economic reform programs that
encourage private investment, and particularly foreign private investment.
Although the Chinese government has adopted an "open door" policy with respect
to foreign investment, there can be no assurance that such policy will continue.
A change in policies by the Chinese government could adversely affect the
Company by, among other things, imposing confiscatory taxation, restricting
currency conversion, imports and sources of supplies, or expropriating private
enterprises. Although the Chinese government has been pursuing economic reform
policies for the past 15 years, no assurance can be given that the Chinese
government will continue to pursue such policies or that such policies may not
be significantly altered, especially in the event of a change in leadership or
other social or political disruption.
China does not have a comprehensive system of laws. Enforcement of
existing laws may be sporadic and implementation and interpretation thereof
inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the
laws that exist, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation. Even where adequate law exists in China, it may be
impossible to obtain swift and equitable enforcement of such law, or to obtain
enforcement of a judgment by a court of another jurisdiction.
Dependence on Local Government. The Company operates its factory in
China under agreements with the local government. Many aspects of such
agreements and operation of the Factory are dependent on the Company's
relationship with the local government and existing trade practices. The
relationship of the Company with the local government could be subject to
adverse change in the future, especially in the event of a change in leadership
or other social or political disruption.
Chinese Taxation. The Company has not paid any Chinese taxes and
believes that, under current Chinese tax rules and practice, its activities in
China have not subjected it to Chinese taxes to date as it is eligible for an
exemption from income tax for two years starting from the first profitable year
of operations and thereafter a 50 percent relief from income tax for the
following three years under the Income Tax Law of the PRC. The Company's
subsidiary in China has incurred a tax loss since its commencement of
operations. In addition, under the existing processing arrangement
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and in accordance with the current tax regulations in the PRC, manufacturing
income generated in the PRC is not subject to PRC income taxes. The Chinese tax
system is subject to substantial uncertainties and has been subject to recently
enacted changes, the interpretation and enforcement of which are also uncertain.
There can be no assurance that changes in Chinese tax laws or their
interpretation or their application will not subject the Company to substantial
Chinese taxes in the future.
Limited Infrastructure. Electricity, water, sewage, telephone and other
infrastructure are limited in the locality of the Factory. In the past, the
Company has experienced temporary shortages of electricity and water supply. The
Company has installed three back-up electrical generators in the Factory which
can support it in the event of a power shortage. There can be no assurance that
the infrastructure on which the Factory is dependent will be adequate to operate
the Factory successfully.
Hong Kong Political, Economic and Legal Risks. The Company also
operates in Hong Kong, which until recently was a colony of the United Kingdom.
Sovereignty over Hong Kong was transferred from the United Kingdom Government to
the Chinese Government on July 1, 1997, at which time Hong Kong became a Special
Administrative Region ("SAR") of China. Under the agreements providing for such
transfer (known as the "Joint Declaration"), and the Chinese law implementing
its commitments thereunder (the "Basic Law"), the current social and economic
systems in Hong Kong are to remain unchanged for 50 years, and Hong Kong is to
enjoy a high degree of autonomy but the courts of the Hong Kong SAR will have no
jurisdiction over acts of state such as foreign and defense affairs. Laws
currently in force, as they may be amended by the Hong Kong SAR legislature, are
to remain in force except to the extent that they contravene the Basic Law . It
is not clear how future developments in Hong Kong and China may affect the
implementation of the Basic Law after the transfer of sovereignty in 1997. There
can be no assurance that the general political and economic position of Hong
Kong, and therefore the Company's results of operations and financial condition,
will not be adversely affected as a consequence of the exercise of Chinese
sovereignty over Hong Kong. In addition, political and social developments in
China have from time to time adversely affected the economy of Hong Kong.
DEPENDENCE ON PRODUCT APPEAL AND NEW PRODUCT INTRODUCTIONS; LIMITED
RANGE OF PRODUCTS
The Company's operating results depend largely upon the appeal of its
products to consumers. Consumer preferences are highly subjective, and there can
be no assurance that consumers will continue to find existing products appealing
or will find new products appealing. Also, notwithstanding the Company's recent
emphasis on non-casino themed games, the Company continues to offer a relatively
limited range of products. This exposes the Company to the risks of any narrowly
focused business. Changes in consumer preferences away from the kinds of
products offered by the Company could have an adverse effect on the Company.
Some of the Company's products have been only recently introduced and
although they may experience good initial sales growth, there is no assurance
that such initial success is indicative of significant future sales. As a
general matter, the Company expects that the sales of these products will
eventually decline. The Company cannot predict how long the product cycle will
last for any product. In order to control costs, and take advantage of the
finite shelf space available to the Company, it will also need to delete
products from its line periodically. The Company's long-term operating results
will therefore depend largely upon its continued ability to conceive, develop
and introduce new appealing products at competitive prices.
Once a new product is conceived, the principal steps to the
introduction of the product include design, sourcing and testing of the
electronic components, tooling, and purchase and design of graphics and
packaging. At any stage in the process, there may be difficulties or delays in
completing the necessary steps to meet the contemplated product introduction
schedule. It is, for example, common in new product introductions or product
revisions to encounter technical and other difficulties affecting manufacturing
efficiency and, at times, the ability to manufacture at all, that will typically
be corrected or improved over a period of time with continued manufacturing
experience and engineering efforts. If one or more aspects necessary for
introduction of products are not met in a timely fashion, or if technical
difficulties take longer than anticipated to overcome, the anticipated product
introductions will be delayed, or in some cases may be terminated. Therefore no
assurances can be given that products will be introduced in a timely fashion.
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Future products may utilize different technologies and require
knowledge of markets in which the Company does not presently participate.
Significant delays in the introduction of, or the failure to introduce, new
products or improved products would have an adverse effect on the Company's
operating results.
NO ASSURANCE OF CONTINUED GROWTH
There can be no assurance that the Company will achieve future growth
in net sales and net income or that it will be able to maintain its present
levels of net sales and net income. The Company's current business strategy
emphasizes the sale of a fewer number of products, while representing a more
diverse range of products, e.g., Sports themed games, Heritage card games, and
OEM games in addition to Casino themed games.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a significant portion of the Company's sales has been
concentrated in a few large retail customers. See Note 13 of Notes to
Consolidated Financial Statements included herein. Most of the Company's retail
customers operate on a purchase-order basis and the Company does not have
long-term contracts with its retail customers. While management considers the
Company's relationships with its major retail customers to be good, the loss of
one or more of its major retail customers would have an adverse effect on the
Company's results of operations.
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS
The Company is dependent on suppliers for the components and parts that
it assembles to produce its products. The Company generally purchases the
specific LCDs or semiconductor chips for any particular product model from a
single supplier. While the Company believes that there are alternative sources
for all of its supplies, an interruption of the supply of LCDs, semiconductor
chips or other supplies from a supplier could result in significant production
delays. The Company makes use of subcontractors as part of its manufacturing
process. This exposes the Company to risks of delay or quality control problems
at the subcontractors.
In recent periods the Company has experienced delays from a number of
suppliers in the delivery of chips used in producing the Company's games. To
date, the delays have not been material. However, they may indicate that chips
supplies generally are tightening, and the Company may experience further delays
in receipt of chips or other necessary components from these or other suppliers.
Delays in receipt of essential components for the Company's products may be
significant to the Company's financial results in that sales of products by the
Company may be delayed, or in certain cases may be canceled, if the Company is
unable to meet delivery schedules to its customers in a timely fashion in order
for its customers to meet targeted selling seasons. The Company is unable to
predict the extent or impact of delays from its suppliers beyond the actual
delays, as mentioned above, that have recently been experienced.
CONCENTRATED MANUFACTURING FACILITIES
A disruption of operations at the Factory due to fire, labor dispute,
dispute with the local government or otherwise, would have an adverse effect on
the Company's results of operations. In such event, the Company believes that it
could partially mitigate the effect of a disruption by increasing the use of
subcontractors to assemble its products, but there can be no assurance that it
would be able to do so. In addition, the Company's manufacturing facilities are
dependent on the Company's relationship with the local government.
NO ASSURANCE OF SUCCESS IN NEW BUSINESS
In order to sustain growth, Radica intends to expand into related
businesses, including original product manufacturing of products for third
parties. To date these efforts have only been successful in the case of the
manufacturing for the Hasbro Games Group. While several of the Company's
executive officers have extensive experience in manufacturing other products in
the United States, including Mr. Davids, there can be no assurance that the
Company will be able to also perform OEM manufacturing in China successfully.
The Company's Pub Poker business was not successful and has been discontinued.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is substantially dependent upon the
expertise and services of Mr. Robert E. Davids, Vice Chairman and Chief
Executive Officer of the Company and certain other senior management personnel.
The loss of the services of Mr. Davids would have an adverse effect on the
Company's business. The Company maintains a "key man" life insurance policy on
Mr. Davids, in the amount of $1 million.
SEASONALITY
The Company experiences a significant seasonal pattern in its operating
results and working capital requirements. The Company typically generates most
of its sales in the third and fourth quarters of its fiscal year, prior
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to the traditional gift season. The Company expects this seasonal pattern to
continue for the foreseeable future but to become less pronounced as retailers
increasingly sell its products year round and OEM orders increase. The Company's
operating results may also fluctuate during the year due to other factors such
as the timing of the introduction of new products. The market price of the
Common Stock may be subject to significant fluctuations in response to
variations in quarterly operating results and other factors. See Note 20 of
Notes to Consolidated Financial Statements included herein.
COMPETITION
The gifts and games business is highly competitive. The Company
currently faces direct competition from a number of other producers of handheld
electronic games, the barriers for new producers to enter into the Company's
markets are relatively low and the Company expects that it will face increased
competition in the future. Some competitors offer products at lower prices, are
better established in the toy and games industry and are larger than the
Company. In addition, with respect to OEM manufacturing, the Company will
compete with a number of substantially larger and more experienced
manufacturers. As the Company enters other markets and businesses, it expects to
face new competition.
INTELLECTUAL PROPERTY RISKS
From time to time, other companies and individuals may asset exclusive
patent, copyright, trademark and other intellectual property rights to
technologies or marks that are important to the electronic handheld and
mechanical games industry generally or to the Company's business specifically.
The Company has recently been contacted by a Japanese company which has asserted
that certain of the Company's electronic games may infringe patents of such
other company. The Company has only begun to evaluate this matter. The Company
will evaluate each claim relating to its products and, if appropriate, will seek
a license to use the protected technology. There can be no assurance that the
Company will be able to obtain licenses to intellectual property of third
parties on commercially reasonable terms, if at all. In addition, the Company
could be at a disadvantage if its competitors obtain licenses for protected
technologies on more favorable terms than does the Company. If the Company or
its suppliers are unable to license protected technology used in the Company's
products, the Company could be prohibited from marketing those products or may
have to market products without desirable features. The Company could also incur
substantial costs to redesign its products or to defend any legal action taken
against the Company. If the Company's products should be found to infringe
protected technology, the Company could be enjoined from further infringement
and required to pay damages to the infringed party. Any of the foregoing could
have an adverse effect on the results of operations and financial position of
the Company.
CHANGING CONSUMER PREFERENCES
The toy market is characterized by changing consumer preferences and
frequent new product introductions which reduce the length of product life
cycles. There can be no assurance that any of the Company's current products or
product lines will be popular with consumers for any period of time.
Furthermore, sales of the Company's existing products are expected to decline
over time and may decline at rates faster than expected. The Company's success
is dependent upon the Company's ability to enhance existing product lines and
develop new products and product lines. Historically, a significant portion of
the gross sales each year were derived from new products. Failure of the
Company's existing and new products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have an adverse effect
on the Company's financial condition and results of operations.
TAXATION
The Company cannot predict whether its tax rates will remain as low as
they have been in the past as tax regulations and the application or
interpretation thereof in the various jurisdictions within which the Company
operates are always subject to change.
COPY PRODUCT
Occasionally in the toy industry successful products are "knocked-off"
or copied. While the Company strives to protect its intellectual property there
can be no guarantee that knock-offs will not have a significant effect on
business.
BAD DEBTS AND RETURNS
While the Company does full credit checks on all of its customers it
cannot guarantee that any customer will not default on a payment of debt. Such a
default could have a significant effect on the Company's results. It is industry
practice for retailers to hold back payments on slow moving stock or to request
markdowns or returns on such stock. It is the Company's policy to only take back
defective products and while the Company believes it will be able to enforce
this policy under normal industry conditions, it may not be possible to enforce
this policy in all cases, as was experienced with the downturn of the casino
games market.
CONTROL BY EXISTING SHAREHOLDERS
The Company's largest shareholders (see "Item 4. Control of
Registrant") including Mr. Davids, other directors and officers of the Company,
a group that consists of Dito Devcar Corporation and certain related persons, a
group that consists of RAD Partners, LLC and certain related persons, and the
Hansen Trust, own beneficially in the aggregate a majority of the outstanding
Common Stock. Assuming that they were in agreement, such persons would have the
power
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to elect the Company's directors and to approve or disapprove all other matters
requiring shareholders' approval regardless of the vote of any other
shareholders.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a Bermuda holding company, and a substantial portion of
its assets are located outside the United States. In addition, certain of the
Company's directors and officers and certain of the experts named herein are
resident outside the United States (principally in Hong Kong), and all or a
substantial portion of the assets of such persons are or may be located outside
the United States. As a result, it may not be possible for investors to effect
service of process within the United States upon such persons, or to enforce
against them or the Company judgments obtained in the United States courts
predicated upon the civil liability provisions of the United States securities
laws. Among other things, the Company understands that there is doubt as to the
enforceability in Bermuda and Hong Kong, respectively, in original actions or in
actions for enforcement of judgments of United States courts, of civil
liabilities predicated solely upon the United States securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 20,860,200 shares of Common Stock
outstanding. Of such amount, the 7,141,000 shares sold in the initial public
offering, up to 1,855,000 shares that have been or may be sold under a 1997
secondary shelf registration and an undetermined number of shares previously
sold under Rule 144 (other than any shares purchased by "affiliates" of the
Company) are tradable without restriction. Substantially all of the remaining
shares owned by existing shareholders are restricted securities under the
Securities Act of 1933, as amended (the "Securities Act") and may be sold only
pursuant to a registration statement under the Securities Act or an applicable
exemption from the registration requirements of the Securities Act, including
Rule 144 thereunder. Most of these restricted shares are currently eligible for
sale pursuant to Rule 144, subject to the limitations of such rule. In addition,
the Company has granted to Mr. Davids and the Hansen Trust certain registration
rights with respect to their shares. (See "Interest of Management in Certain
Transactions") No predictions can be made as to the effect, if any, that market
sales of shares by existing shareholders or the availability of such shares for
future sale will have on the market price of Common Stock prevailing from time
to time. The prevailing market price of Common Stock could be adversely effected
by future sales of Common Stock by existing shareholders.
YEAR 2000 COMPUTER PROBLEM
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Although the Company believes that its systems are Year
2000 compliant, or will be by the Year 2000, third parties with whom the Company
does business, including suppliers of necessary components to the Company, may
be affected by Year 2000 requirement issues which could result in an adverse
effect on the Company's business, operating results and financial condition.
While the Company is using its best efforts to ensure that it has no
business interruptions as a result of the Year 2000 computer problem, there can
be no assurances that the Company will not suffer some disruption either as a
result of its own systems or those of its suppliers or customers.
ITEM 2. DESCRIPTION OF PROPERTIES
See Item 1 "Manufacturing Facilities." The Company completed
construction of its Factory (450,000 sq. ft.) on a 3.7 acre parcel of land in
May 1995. The Company owns a 51 year leasehold on its executive offices (11,000
sq. ft.) and warehouse space (7,900 sq. ft.) in Fo Tan, Hong Kong as well as two
houses for employees in Hong Kong (2,100 sq. ft. each), which are made available
to Mr. Davids and to Mr. Howell, officers of the Company. Radica operates its
Factory under the terms of the Joint Venture Agreement and Processing Agreement.
In November 1997 the Company signed agreements to expand its factory in
Dongguan, Southern China in two phases. The first phase, due to be completed and
usable by the end of May 1998, will add 107,000 square feet of factory space and
dormitory capacity to accommodate 1,100 additional workers. The second stage to
be completed by the end of August 1998 will
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add a further 108,000 square feet of factory space and accommodation for a
further 1,100 workers. It is expected that the total cost will be approximately
$3 million. The Company leases additional storage and office space in Cambridge,
UK, Toronto, Canada and office space in Dallas, Texas, Reno, Nevada and Las
Vegas, Nevada.
ITEM 3. LEGAL PROCEEDINGS
Ten purported class actions filed in various United States District
Courts against the Company, various of its officers and directors, and the
managing underwriters of the Company's initial public offering were consolidated
in the United States District Court for the District of Nevada under the caption
In re Radica Games Limited Securities Litigation, Master File No.
CV-S-94-00653-DAE (LRL). Plaintiffs filed a consolidated complaint on November
4, 1994 that superseded all the complaints in the individual actions.
The named plaintiffs originally sought to represent a class consisting
of purchasers of the Company's common stock in the initial public offering or in
the open market from May 13 through July 22, 1994 and sought unquantified
monetary damages and other relief against the defendants for alleged violations
of Sections 11, 12(2), and 15 of the Securities Act of 1933, Sections 10b (and
Rule 10b-5 thereunder), 20(a), and 20A(a) of the Securities Exchange Act of
1934, Sections 90.570, 90.660 and 90.660.4 of the Nevada Revised Statutes, and
the common law of Nevada relating to the Company's registration statement and
other public disclosures. As a consequence of an Order of the Court granting in
part defendants' motion to dismiss the complaint and a stipulation of the
parties, all of plaintiff's claims other than those arising under the Securities
Act of 1993, and limited to certain specified statements in the Company's
registration statement, were dismissed without prejudice. Pursuant to a
stipulation of the parties, the Court provisionally agreed to treat the
remaining claims as class claims.
After the close of discovery, plaintiffs moved for leave to amend their
complaint to add allegations with respect to an additional claimed omission in
the registration statement. Shortly thereafter, the Company moved for summary
judgment seeking dismissal of the complaint. Following a hearing on July 31,
1996, the District Court entered an Order (i) denying plaintiffs' motion to
amend the complaint and (ii) granting the Company's (and the other defendants')
motion for summary judgment, and on August 9, 1996 the District Court entered
final judgment dismissing the action. Plaintiffs subsequently moved for
reconsideration of the grant of summary judgment against them, and the court
denied their motion. Plaintiffs filed a timely appeal to the United States Court
of Appeals for the Ninth Circuit, and oral argument of such appeal was held on
November 5, 1997. On November 14, 1997, the Court of Appeals entered an Order
affirming the judgment of the District Court.
ITEM 4. 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 ten percent (10%) of the
registrant's common stock and the amount of common stock owned by the
officers and directors as a group, as of December 1, 1997:
<TABLE>
<CAPTION>
Identity of
Title of Class Person or Group Amount Owned Percent of Class
-------------- --------------- ------------ ----------------
<S> <C> <C> <C>
Common stock Robert E. Davids 3,463,800 16.6%
Common stock Dito Devcar Corporation et al 4,736,500 22.7%
Common stock Officers & Directors as a Group 4,007,000 19.2%
</TABLE>
In addition to the foregoing, the Company is aware of two other
significant shareholders who are believed to own approximately 8% and 6%,
respectively, of the Company's common stock. These are The John and Mary Hansen
1989 Trust (the "Hansen Trust") (including shares owned by other Hansen family
trusts or individuals) and RAD Partners, LLC et al. The Company expects to
update this information in its Proxy Statement for its 1998 Annual Shareholders'
Meeting.
(c) There are no arrangements known to the registrant which may at a
subsequent date result in a change of control of the registrant.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
under the symbol RADAF. The Company's common stock is not traded on any foreign
trading market. The following table lists the high and low closing stock price
for each quarter of fiscal 1997, fiscal 1996 and fiscal 1995.
FISCAL YEAR 1997 FISCAL YEAR 1996 FISCAL YEAR 1995
---------------- ---------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
$ $ $ $ $ $
First Quarter........ 3 1/4 1 1/16 2 1/2 1 1/8 7 4 3/4
Second Quarter....... 4 1/8 2 3/8 2 1 1/4 5 3
Third Quarter........ 7 7/8 2 7/8 1 15/16 15/16 3 3/4 2 1/2
Fourth Quarter....... 15 3/8 7 1/2 1 3/4 3/4 3 1 3/8
Radica Games Limited was formed in 1994 as a holding company and has
not paid any dividends. Except to the extent set forth below, the Company
intends to retain its earnings for operations and expansion of its business for
the foreseeable future. The payment of any future dividends will be at the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, financial condition, capital requirements and general
business outlook at the time the payment is considered. The Company intends to
make cash distributions at the end of its taxable year at least equal to 50% of
its foreign personal holding company income for any year in which it is a
personal foreign holding company. (See Item 7. Taxation.)
As of October 31, 1997, the Company had approximately 117 record
holders of its Common Stock, and approximately 82% of such stock was held by
U.S. holders.
ITEM 6. 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
resident outside Bermuda for exchange control purposes and the issue of shares
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 or other appointed stock exchange (as defined in the Companies
Act 1981 of Bermuda). 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
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request of the applicant, record the capacity in which the applicant is acting.
Notwithstanding the recording of any such special capacity, the Company is not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.
As an exempted company, the Company is exempt from the usual Bermuda
requirement which restricts the percentage of share capital that may be held by
non-Bermudans, but as an exempted company the Company may not participate in
certain business transactions, including: (1) the acquisition or 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 21 years); (2) the taking of mortgages on
land in Bermuda to secure an amount in excess of $50,000 without the consent of
the Minister of Finance of Bermuda; (3) the acquisition of securities created or
issued by, or any interest in, any local company or business, other than certain
types of Bermuda government securities or securities of another exempted
company, partnership or other corporation resident in Bermuda but incorporated
abroad; or (4) the carrying on of business of any kind in Bermuda, except in
furtherance of the business of the Company carried on outside Bermuda or under a
license granted by the Minister of Finance of Bermuda.
ITEM 7. TAXATION
The following discussion is a summary of certain anticipated tax
consequences of the ownership of Common Stock under Bermuda tax laws, Hong Kong
income tax laws and United States Federal income tax laws. The discussion does
not deal with all possible tax consequences relating to the Company's operations
or to the ownership of Common Stock. In particular, the discussion does not
address the tax consequences under State, local and other (e.g., non-Bermuda,
non-Hong Kong and non-United States Federal) tax laws. Accordingly, each owner
should consult his tax advisor regarding the tax consequences of the ownership
of Common Stock. The discussion is based upon laws and relevant interpretations
thereof in effect as of the date of this report, all of which are subject to
change.
BERMUDA TAXATION
The Company is incorporated in Bermuda. At date of this filing, there
is no Bermuda income, corporation or profits tax, withholding tax, capital gains
tax, capital transfer tax, estate duty or inheritance tax payable by
shareholders of the Company other than shareholders ordinarily resident in
Bermuda. The Company is not subject to stamp or other similar duty on the issue,
transfer or redemption of its shares of Common Stock. Furthermore, the Company
has received from the Minister of Finance of Bermuda under The Exempted
Undertakings Tax Protection Act 1966, an assurance that, in the event that
Bermuda enacts any legislation imposing any tax computed on profits or income,
or computed on any capital assets, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, the imposition of such tax shall not
be applicable to the Company or any of its operations, or to the shares,
debentures or other obligations of the Company, until March 28, 2016. This
assurance does not, however, prevent the imposition of any such tax or duty on
such persons as are ordinarily resident in Bermuda and holding such shares,
debentures or obligations of the Company or on land in Bermuda leased or let to
the Company.
The United States does not have a comprehensive income tax treaty with
Bermuda.
HONG KONG TAXATION
Under the laws of Hong Kong, as currently in effect, a holder of Common
Stock is not subject to Hong Kong tax on dividends paid with respect to such
shares and no holder of Common Stock is liable for Hong Kong tax on gains
realized on sale or other disposition of such Common Stock except that Hong Kong
profits tax may be chargeable on revenue profits, to the extent that they arise
in or derive from Hong Kong, arising on the sale or disposal of the Common Stock
where such transactions are or form part of a trade, profession or business
carried on in Hong Kong. Hong Kong does not impose a withholding tax on
dividends paid by the Company or its subsidiaries. In addition, the Company will
not be subject to Hong Kong taxes as a result of its receipt of dividends from
any of its subsidiaries.
19
<PAGE>
No Hong Kong stamp duty will be chargeable upon the transfer of Common
Stock so long as the shareholders' register is kept outside Hong Kong at the
time of transfer. No Hong Kong estate duty will be chargeable in respect of
Common Stock so long as the shareholders' register is kept outside Hong Kong at
the time of death of the relevant holder of Common Stock.
UNITED STATES FEDERAL INCOME TAXATION
General. The following is a general discussion of the principal 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 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 in respect of the Common Stock, 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. Subject to the FPHC discussion below, a U.S. Holder
receiving a distribution on Common Stock will be required to include such
distribution in gross income as a dividend to the extent such distribution is
paid from current or accumulated earnings and profits of the Company as
determined under U.S. federal income tax law. Distributions in excess of the
earnings and profits of the Company will first be treated, for U.S. federal
income tax purposes, as a nontaxable return on 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. Dividend income with respect to the Common Stock generally will
constitute foreign source "passive" income or in the case of certain U.S.
Holders "financial services" income for purposes of the foreign tax credit
limitation. A corporate shareholder will not be eligible for the dividends
received deduction.
Sale or Exchange of Common Stock. Gain or loss on the sale or exchange
of the Common Stock by a U.S. Holder generally will be treated as capital gain
or loss and will be long-term capital gain or loss if the U.S. Holder has held
the Common Stock for more than one year at the time of the sale or exchange.
Gain, if any, realized by a U.S. Holder will generally be U.S. source gain.
Long-term capital gain of a non-corporate U.S. Holder is generally subject to a
maximum tax rate of 28% in respect of property held for more than one year and
to a maximum tax rate of 20% in respect of property held in excess of 18 months.
FPHC Rules. A foreign corporation will be classified as a foreign
personal holding company ("FPHC") if (i) five or fewer individuals who are U.S.
citizens or residents directly or indirectly own more than 50% of the
corporation's stock (measured either by voting power or value) (the "shareholder
test") and (ii) more than 50% (or 60%, in certain years) of its gross income, as
specially adjusted, consists of foreign personal holding company income (defined
generally to include dividends, interest, royalties, rents, gains from the sale
of stock or securities and certain other types of passive income) (the "income
test"). U.S. citizens or residents, domestic corporations, domestic partnerships
and estates or trusts other than foreign estates or trusts who are shareholders
of FPHCs ("U.S. shareholders") are required to include in income the
undistributed income of a FPHC.
The Company is not a FPHC because the income test was not met in 1997.
The Company intends to manage its business such that it will not meet the income
test until such time that it begins to receive significant dividends from its
subsidiaries, which is not expected to occur in the foreseeable future. The
Company would then be a FPHC only if, in the same taxable year, it also met the
shareholder test.
If the Company is a FPHC for any year, each U.S. shareholder who holds
Common Stock on the last day of the Company's taxable year (currently, October
31) or, if earlier, on the last day on which the ownership test is met, would be
required to include in income as a dividend its pro rata share of the Company's
undistributed foreign personal holding company income. The shareholder's tax
basis in the Common Stock would be increased by the amount included
20
<PAGE>
in income. Such income would be taxable to any such U.S. shareholder as a
dividend whether or not distributed in cash. For any year in which the Company
is a FPHC, any 5% or greater U.S. shareholder would be required to report on its
tax return in complete detail the gross income, deductions and credits, taxable
income, FPHC income and undistributed FPHC income of a FPHC. The Company will
furnish any shareholder required so to report the information required to be
reported. In addition, any holder who acquires Common Stock from a decedent
would be denied the date of death value as the tax basis for such Common Stock
(which would have a basis equal to the lower of fair market value or the
decedent's basis) if the Company was a FPHC with respect to its taxable year
next preceding the date of the decedent's death.
For any year in which it is a FPHC, the Company intends to make cash
distributions to shareholders of record on the last day of its taxable year in
an amount at least equal to 50% of its foreign personal holding company income
(which amount should be sufficient for shareholders to pay U.S. federal and
state income taxes on such distributions and any undistributed foreign personal
holding company income taxable as a dividend).
PHC Rules. A corporation (including a foreign corporation that is not a
FPHC) will be classified as a personal holding company ("PHC") if (i) five or
fewer individuals (without regard to their citizenship or residence) directly or
indirectly own more than 50% in value of the corporation's stock (the
"shareholder test") and (ii) at least 60% of its ordinary gross income, as
specially adjusted, consists of personal holding company income (defined
generally to include dividends, interest, royalties, rents and certain other
types of passive income) (the "income test"). A PHC is subject to a U.S. federal
income tax of 39.6% on its undistributed personal holding company income
(generally limited, in the case of a foreign corporation, to U.S. source
income).
The Company is not a PHC as the income test was not met in 1997. The
Company intends to cause any subsidiary that is a PHC to make distributions on a
basis such that it will not have undistributed personal holding company income.
CFC Rules. A foreign corporation generally is treated as a controlled
foreign corporation ("CFC") for 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.
PFIC Rules. The Company believes that the Common Stock should not be
treated as stock of a passive foreign investment company (a "PFIC") for United
States federal income tax purposes, but this conclusion is a factual
determination made annually and thus may be subject to change. If the Company
were to be treated as a PFIC, a gain realized on the sale or other disposition
of Common Stock would in general not be treated as a capital gain, and a U.S.
Holder would be treated as if such holder had realized such a gain and certain
"excess distributions" ratably over the holder's holding period for the Common
Stock and would be taxed at the highest tax rate in effect for each such year to
which the gain was allocated, together with an interest charge in respect of the
tax attributable to each such year.
In general, the Company will be a PFIC with respect to a U.S. Holder
if, for any taxable year in which the U.S. Holder held the Company's Common
Stock, either (i) at least 75% of the gross income of the Company for the
taxable year is passive income or (ii) at least 50% of the value (determined on
the basis of a quarterly average) of the Company's assets is attributable to
assets that produce or are held for the production of passive income. For this
purpose, passive income generally includes dividends, 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.
ITEM 8. SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
the combined financial statements and notes thereto included elsewhere in this
document. The selected income statement and balance sheet data for each of the
five years in the period ended October 31, 1997 are derived from financial
statements of the Company which have been audited by Deloitte Touche Tohmatsu,
Hong Kong, independent auditors.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1993 1994 1995 1996 1997
-------- -------- -------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MARGINS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $32,505 $72,092 $52,650 $47,535 87,760
Cost of sales 16,085 37,823 34,640 30,696 40,888
------- ------- ------- ------- -------
Gross profit 16,420 34,269 18,010 16,839 46,872
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative 4,766 13,657 21,105 11,752 14,403
Research and development 652 1,577 2,084 1,699 2,099
Write down of assets - - 15,318 - -
Depreciation and amortization - - 1,591 1,594 2,278
------- ------- ------- ------- -------
Total operating expenses $ 5,418 $15,234 $40,098 $15,045 $18,780
------- ------- ------- ------- -------
Operating income (loss) from continuing operations 11,002 19,035 (22,088) 1,794 28,092
Other income - - 329 748 915
Share of result of affiliated company - - - - (141)
Net interest income (expenses) (65) 95 (628) (165) 913
------- ------- ------- ------- -------
Income (Loss) from continuing operations before
income taxes and unusual item 10,937 19,130 (22,387) 2,377 29,779
Unusual item - - - 709 -
------- ------- ------- ------- -------
Income (Loss) from continuing operations before 10,937 19,130 (22,387) 3,086 29,779
income taxes
(Provision) Credit for income taxes ( 860) (1,950) 897 120 (193)
------- ------- ------- ------- -------
Income (Loss) from continuing operations after $10,077 $17,180 $(21,490) $ 3,206 $29,586
income taxes
Discontinued Operations:
Loss from operation of pub poker business - (20) (233) (1,712) -
------- ------- ------- ------- -------
Net income (loss) $10,077 $17,160 $(21,723) $ 1,494 $29,586
======= ======= ======= ======= =======
Net income (loss) per share from continuing $ 0.51 $ 0.81 $ (0.94) $ 0.15 $ 1.36
operations
Effect of discontinued operations - - (0.01) (0.08) -
------- ------- ------- ------- -------
Net income (loss) per share $ 0.51 $ 0.81 $ (0.95) $ 0.07 $ 1.36
======= ======= ======= ======= =======
Weighted average shares and share equivalents 19,696 21,308 22,780 21,439 21,798
outstanding
STATISTICAL DATA:
Gross margin 50.5% 47.5% 34.2% 35.4% 53.4%
Operating margin 33.8% 26.4% N/A 3.8% 32.0%
Dividends per share (1) $ 0.16 $ 0.17 - - -
BALANCE SHEET DATA:
Working capital $ 7,687 $39,733 $15,878 $18,847 $48,860
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets 21,826 87,326 54,054 42,725 79,449
Long-term debt 30 73 99 - -
Total debt 2,849 18,673 14,440 99 -
Shareholders' equity 10,365 51,821 30,297 31,813 61,593
</TABLE>
(1) During the periods presented the only dividends paid were cash dividends of
$3,064 paid in respect of fiscal 1993 to the then shareholders of Radica HK
and $3,704 paid in respect of fiscal 1994 to the then shareholders of
Radica USA following termination of the S Corporation status (amounts in
thousands).
23
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
The following table sets forth items from the Company's Consolidated
Statements of Income as a percentage of net revenues:
Year ended October 31,
----------------------
1995 1996 1997
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Cost of sales 65.8% 64.6% 46.6%
Gross margin 34.2% 35.4% 53.4%
Selling, general and administrative 40.1% 24.7% 16.4%
Research and development 4.0% 3.6% 2.4%
Nonrecurring charges 29.1% -- --
Depreciation and amortization 3.0% 3.3% 2.6%
Operating income (loss) (42.0%) 3.8% 32.0%
Other income 0.6% 1.6% 1.0%
Interest income (expenses), net (1.2%) (0.4%) 1.0%
Unusual item -- 1.5% --
Income before income taxes (42.5%) 6.5% 34.0%
(Provision) credit for income taxes 1.7% 0.3% (0.3%)
Discontinued operation (0.5%) (3.7%) --
Net income (loss) (41.3%) 3.1% 33.7%
Net sales for the year ended October 31, 1997 were $87.8 million,
increasing 84.8% from $47.5 million for the prior year. Approximately 50.6% of
sales related to Sports themed games, 12.4% to Heritage themed games, 2.7% to
Action games, 15.7% to Casino themed games and 18.6% to Original Equipment
Manufacturing "OEM" sales in fiscal 1997 in comparison to 18.1 %, 17.3%, 0%,
40.5% and 24.1% in fiscal 1996. During 1997, the Company sold 156 different
models of games, totaling 12.4 million units, compared to 139 models totaling
9.0 million units in 1996, an increase of 37.8%. Of the 147 models of Radica and
Monte Carlo games sold during the period 122 models are discontinued lines,
which unless the market warrants reintroduction, the Company only intends to
continue selling so long as inventories exist. 10 new models were sold during
1997 (See "New Products Introduction"). The Company intends to introduce over 15
new models in 1998.
The gross profit for fiscal year 1997 was $46.9 million compared to
$16.8 million for fiscal 1996, an increase of 179.2%. The gross margin for the
year was 53.4% compared to 35.4% for fiscal year 1996. The increase in gross
margin was due to higher sales volume of current and new product at historic
margin levels relative to sales of low margin promotional product and OEM
production. In addition, approximately 3.6% of the year end margin or $3.2
million was as a result of sales of product which had previously been written
off.
Operating profit for fiscal year 1997 was $28.1 million, an increase
from $1.8 million from fiscal 1996. Operating expenses increased 25.3% to $18.8
million from $15 million in 1996. Commissions increased 113% to $2.45 million
from $1.15 million in fiscal 1996; indirect salaries and wages increased 36.8%
to $4.72 million from $3.45 million in fiscal 1996; advertising and promotion
expenses increased 11.1% to $0.8 million from $0.72 million in fiscal 1996; and
research and development expenses increased 23.5% to $2.10 million from $1.70
million in fiscal 1996.
The effective blended tax rate for the year ended October 1997 was 0.6%
on continuing operations compared to a credit of 3.9% for fiscal 1996. This is
due to the effective USA tax rate of 34% combined with the 16.5% effective tax
rate of the operations in Hong Kong and 0% effective tax rate of the
manufacturing operation in China conducted by a British Virgin Islands
subsidiary. It should be noted that the U.S. subsidiary had significant releases
of inventory provisions which are not taxable during the year, so that although
it was profitable there was no tax charge.
Net profit for fiscal year 1997 of $29.6 million or $1.36 per share
compared to $1.5 million or $.07 per share in fiscal 1996.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents totaled $33.5 million at October 31, 1997, up
$25 million from the year ended October 31, 1996. Working capital at October 31,
1997 was $48.9 million, a $30.1 million increase from working capital of $18.8
million at October 31, 1996. The increase in working capital is due primarily to
an increase in net income. The ratio of current assets to current liabilities
increased to 3.7 at October 31, 1997 from 2.7 at October 31, 1996. This increase
in the current ratio is also due to the increases in net income over the same
period.
There were no short-term borrowings at October 31, 1997 and 1996.
The Company believes that its existing cash and cash equivalents and
cash generated from operations are sufficient to satisfy the current anticipated
working capital needs of its core business.
24
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the year ended October 31, 1996 were $47.5 million,
decreasing 9.9% from $52.7 million for the prior year. Approximately 40.5% of
sales related to Casino themed games, 17.3% to Heritage themed games, 18.1% to
Sports themed games and 24.1% to Original Equipment Manufacturing "OEM" sales in
fiscal 1996 in comparison to 94.5%, 2.9%, 0% and 2.6% in fiscal 1995. During
1996, the Company sold 139 different models of games, totaling 9.0 million
units, compared to 104 models totaling 8.6 million units in 1995, an increase of
4.7%. Of the 139 models of Radica and Monte Carlo games sold during the period
87 models are discontinued lines, which unless the market warrants
reintroduction, the Company only intends to continue selling so long as
inventories exist. Twelve new models were sold during 1996 including a Sports
line of Casino games, Tournament Golf, Golf Range, World Class Golf, Bass
Fishin'(TM), King Pin Bowling, 9 Ball Pool, Pinball Rider, Talking Bingo, Hearts
and Gin Rummy.
The gross profit for fiscal year 1996 was $16.8 million compared to $18
million for fiscal 1995, a decrease of 6.7%. The gross margin for the year was
35.4% compared to 34.2% for fiscal year 1995. The increase in gross margin was
due to the sale of new Sports themed and Heritage themed product at higher
margins offset by continued sales of promotional Casino themed product at low
margins and lower margin OEM production for the Hasbro Games Group.
Operating profit for fiscal year 1996 before accounting for cessation
of Pub Poker business was $1.8 million, an increase from operating loss of $22.1
million for fiscal 1995. Operating expenses decreased 62.6% to $15.0 million
from $40.1 million in 1995. These decreases were primarily due to the effects of
the Company's cost cutting program together with lower commissions due to lower
sales and a new commission structure and the write down of assets of $15.3
million in fiscal 1995. Commissions decreased 62.2% to $1.15 million from $3.04
million in fiscal 1995; indirect salaries and wages decreased 45.4% to $3.45
million from $6.32 million in fiscal 1995; advertising and promotion expenses
decreased 76.8% to $0.72 million from $3.10 million in fiscal 1995; and research
and development expenses decreased 19.0% to $1.70 million from $2.10 million in
fiscal 1995.
The effective blended tax rate for the year ended October 1996 was a
credit of 3.9% on continuing operations compared to a credit of 4.0% for fiscal
1995. This is due to the effective USA tax rate of 34% combined with the 16.5%
effective tax rate of the operations in Hong Kong and 0% effective tax rate of
the manufacturing operation in China conducted by a British Virgin Islands
subsidiary.
After tax profit from continuing operations of $3.2 million or $.15 per
share for fiscal year 1996 compared to a net loss of $21.5 million or $.94 per
share in the prior year.
Net profit after discontinued operations for fiscal year 1996 of $1.5
million or $.07 per share compared to a net loss for fiscal 1995 of $21.7
million or $.95 per share.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for the year ended October 1995 of $52.7 million decreased
26.9% from the $72.1 million for the prior year. Fourteen new ranges of products
consisting of 48 new models were introduced during the year, including a new
line of products under the high-end brandname of Monte Carlo. The Monte Carlo
line included a smaller 'Maverick' slot machine, the 700 series of electronic
tabletops, the 1700 series of electronic handheld games, the 1900 series of
fliplid electronic handheld games, a Blackjack trainer game, Yahtzee(TM) (which
was also produced for the Hasbro Games Group on an OEM basis during the year),
the 2200 series of one player fliplid handheld games, a tabletop unit with a
telephone attached and the 3200 series of handheld games. Other new product
ranges included the Bingo Box (an electronic 'talking' Bingo game), Solitaire,
Poker Trainer, the 2100 series of fliplid electronic one player handheld games
and the 2800 and 900 series of handheld games. Approximately 85% of sales
related to handheld models and 15% to tabletop models in comparison to 80% and
20% respectively in fiscal 1994. During 1995, the Company sold 78 different
models of handheld games, totalling 7.8 million units, compared to 32 models
totalling 7.7 million units in 1994 and 26 different models of tabletop games
totalling 0.7 million units, compared to 24 different models and 1.6 million
units in 1994. The total number of units sold decreased 7.5% from the 9.2
million sold in 1994 to 8.6 million in 1995.
25
<PAGE>
Gross profit for the year ended October 1995 was $18 million as
compared to $34.2 million for fiscal 1994, a decrease of 47.4%. The gross margin
for the year of 34.2% was down from 47.5% for fiscal 1994. This decline is due
primarily to sales of promotional items at low margins coupled with provisions
for customer returns of $2.8 million and provisions for retail mark-downs of
$0.46 million to enable customers to lower the price of slow moving inventory,
together with sales of promotional product at low margins as part of the
Company's inventory reduction program.
Operating expenses increased 163.8% to $40.1 million from $15.2 million
in 1994. These increases were primarily due to provisions of $11.9 million
against obsolete and slow moving inventory, bad debt provisions of $1.7 million
caused by a number of customers filing for Chapter 11, legal fees and provisions
for legal fees in relation to the on-going law suit against the Company of $0.75
million (the total deductible against the directors and officers insurance
policy), the cost of closure of the Mexican plant of $0.3 million, write off of
unamortized mold costs of $1.6 million, increases in salaries and wages,
increases in advertising and promotional costs and other miscellaneous
provisions offset by a decrease in commissions due to lower sales. Sales
commissions were $3.0 million compared to $3.7 million in fiscal 1994,
advertising and promotion costs were $3.1 million compared to $2.3 million in
fiscal 1994, salaries and wages were $6.3 million compared to $3.7 million in
fiscal 1994 and research and development expenses were $2.1 million compared to
$1.6 million in fiscal 1994.
Operating loss for the year ended October 1995 was $22.1 million versus
operating income of $19.0 million for the same period in the prior year due
primarily to lower than expected sales, inventory provisions, sales of
promotional inventory, provisions for returns, provisions against bad debts and
higher operating costs.
The effective blended tax rate for the year ended October 1995 was a
credit of 4.0% compared to a rate of 10.2% for fiscal 1994. This is due to the
effective USA tax rate of 34% combined with the 8.25% effective tax rate of the
operations in Hong Kong and 0% effective tax rate of the manufacturing operation
in China conducted by a British Virgin Islands subsidiary.
Net loss for the year ended October 1995 was $21.7 million, down from
net income of $17.2 million in fiscal 1994. The loss per common share in the
year ended October 1995 was $0.95 as compared to net income per common share of
$.81 for fiscal 1994.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable until the Company's 1998 Form 20-F.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth the directors and executive officers of
the Company.
TERM
NAME EXPIRES RESIDENCY POSITION
- ---- ------- --------- --------
Robert E. Davids (1) 1998 Hong Kong Vice-Chairman, Chief
Executive Officer and
Director
Jon N. Bengtson 1998 USA Chairman of the Board and
Director
Patrick S. Feely (2) 1998 USA President, Chief Operating
Officer and Director
David C.W. Howell 1998 Hong Kong Executive Vice President,
Chief Financial Officer,
Chief Accounting Officer
and Director
Lam Siu Wing 1998 USA Vice President, Engineering
and Director
Robert Townsend (3)(4) 1998 USA Director
26
<PAGE>
James O'Toole (3)(4) 1998 USA Director
Millens W. Taft (3)(4)(5) 1998 USA Director
Mary Hansen (6) Resigned USA Director
Chan Sai Chung N/A Hong Kong Vice President of Asia
Operations
Wong Kam Cheong N/A Hong Kong Manufacturing Director
Hermen H.L. Yau N/A Hong Kong MIS Director
Y.L. Wang N/A China Quality Director
Rick C.K. Chu N/A Hong Kong International Sales
Administration Manager
Christopher Dingley N/A UK General Manager, Radica
UK Ltd
Michael L. Pikett N/A Canada President, Radica
Canada Ltd
(1) Mr. Davids was appointed Vice-Chairman of the Board of Directors on July 1,
1997 and resigned as President on that date.
(2) Mr. Feely was appointed President and Chief Operating Officer on July 1,
1997.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
(5) Mr. Taft was appointed as an outside director on April 9, 1997.
(6) Mrs. Hansen resigned as a director of the Board on April 9, 1997.
Pursuant to the Shareholders Agreement between the controlling
shareholders and the Company, the full Board of Directors of the Company
consists of 11 members, elected as provided in such Shareholders Agreement. As
of the date of this filing, eight such directors have been elected and are
serving.
Robert E. Davids has been the Chief Executive Officer of the Company
since January 1994 and a director since December 1993. He was President of the
Company from December 1993 to July 1997. Prior to 1993, Mr. Davids had been the
Co-Chief Executive Officer with Mr. James Sutter and director of Radica HK since
he joined the Company in 1988. Mr. Davids has over 30 years experience in the
development, design and engineering of non-gambling casino gifts, commercial
gaming machines, automobiles and other products. From 1984 until he joined the
Company, he was the General Manager of Prospector Gaming Enterprises Inc., a
casino in Reno, Nevada. From 1978 through 1984, Mr. Davids served in various
positions at International Game Technology ("IGT"), including Director of
Special Projects and Director of Engineering.
Jon N. Bengtson, formerly the Executive Vice President and Chief
Financial Officer of the Company, became the Chairman of the Board of the
Company since January 1996, and has been a director of the Company since January
1994. He is currently the Executive Vice President and Chief Operating Officer
of the Sands Regency Hotel and was formerly an Executive Vice President and
Chief Operating Officer of the Company from September 1995 to January 1996. 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 Regency 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 Director until
27
<PAGE>
December 1993. From 1980 to 1984, Mr. Bengtson was a director and served in
various positions with IGT, including Treasurer and Vice President of Finance
and Administration and Vice President of Marketing. Mr. Bengtson is currently a
director of The Sands Regency and its subsidiary, Patrician, Inc.
Patrick S. Feely has been Chief Operating Officer and President of the
Company since July 1997 and a director of the Company since July 1996.
Previously, he was President of Fun Source, a Strottman International, Inc.
company; President and CEO of Spectrum HoloByte, Inc. from 1993 to 1995;
President of Bandai America, Inc. from 1991 to 1992; founder and President of
Toy Soldiers, Inc. (which merged with Bandai America) from 1988 to 1991; and
President of the Tonka Products Division of Tonka, Inc. from 1986 to 1988. Mr.
Feely was also Director of the Toy Manufacturers Association from 1992 to 1995.
He has a BA from Duke University and an MBA from the University of Michigan.
David C.W. Howell has been Executive Vice President and Chief Financial
Officer and a director of the Company since September 1995. Prior to that, he
was Vice President and Chief Accounting Officer and a director of the Company
from January 1994 to September 1995. From 1992 to 1994, Mr. Howell was a Finance
Director and Company Secretary of Radica HK. From 1984 to 1991, Mr. Howell was
employed by Ernst and Young in London, Hong Kong and Vietnam. He has a BSc from
Nottingham University, is a member of the Institute of Chartered Accountants of
England and Wales, and is a fellow of the Hong Kong Society of Accountants.
Lam Siu Wing has been Vice President, Engineering and a director of the
Company since January 1994. Prior to that, he had been the head of the Radica HK
engineering department for eight years since he joined the Company in 1985. Mr.
Lam has over 13 years of experience in plastic design and production
engineering. Prior to joining the Company, he served as a project designer in
the electrical appliance industry. Mr. Lam has a post graduate diploma in
Engineering Management from City Polytechnic of Hong Kong.
Robert Townsend has been a director of the Company since June 1994. He
is best known as the author of "Up the Organization" and "Further Up the
Organization". Mr. Townsend formerly held positions with Avis as its President
and Chief Executive Officer and American Express as Senior Vice President of
International Banking, Investment and Planning.
James O'Toole has been a director of the Company since June 1994. He is
currently Managing Director of Booz Allen Hamilton Leadership Center. Mr.
O'Toole retired in 1994 from the faculty of the Graduate School of Business at
the University of Southern California after a career of more than twenty years,
where he held the University Associates' Chair of Management.
Millens W. Taft has been a director of the Company since April 1997. He
brings with him five decades of toy and games experience and currently advises
companies in the toy industry on marketing, product development and licensing in
both the domestic and international markets. He retired from the Milton Bradley
Company in 1984, where is was Corporate Senior Vice President of Research and
Development and was also a Director of the firm. Mr. Taft had been with Milton
Bradley since graduating from Harvard Business School in June of 1949 with the
degree of Master of Business Administration. From 1942 to 1945 he was in the
military service with the 8th Air Force as First Lieutenant and Pilot. Upon his
early retirement from Milton Bradley, he started his own company, Mel Taft &
Associates in 1984, which helps companies in the USA and around the world with
marketing, product development and licensing projects primarily in the Toy,
Games, Craft, Specialty and International Markets.
Chan Sai Chung has been Vice President of Asia Operations of the
Company since October 1995. Prior to that, he was Technology Director of the
Company from June 1994 to October 1995. From 1980 to 1994, Mr. Chan served in
various positions with Digital Equipment International Limited, including
Manufacturing Engineering Manager and Technology Manager. He graduated from the
Hong Kong Polytechnic and has an MSc from the University of Warwick.
Wong Kam Cheong has been the Director of Manufacturing for the Company
since June 1994. Mr. Wong has over 18 years of experience in product design,
R&D, production and sales in toys, consumer electronics and the electrical
appliance industry. Mr. Wong has a BSc in Mechanical Engineering from Taiwan
University, a post graduate
28
<PAGE>
diploma in Manufacturing Technology from City University, London and is a member
of the Institute of Management, UK.
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
16 years experience in Information Technology and particular experience in IBM
mid-range computer systems and solutions. He has a Higher Diploma in Computer
Studies from the National Computing Center UK and a Diploma in Management
Studies from the Hong Kong Polytechnic and Hong Kong Management Association.
Y.L. Wang has been the Quality Director of the Company since December
1993. Prior to that, he was Head of the Quality Assurance Section of Foxboro Co.
Ltd in Shanghai from 1986 to 1993 and a Quality Control Engineer from 1982 to
1986.
Rick C.K. Chu has been the International Sales Administration Manager
of the Company since April 1994. He has more than 16 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.
Christopher Dingley has been the General Manager and Company Secretary
of Radica UK since January 1995. From January 1991 to December 1994 he acted for
Radica as Manager of European Operations. From 1987 to 1991 he was the Sales
Manager for Export Military Sales in the UK. Prior to that he worked for
Chrysler Military Sales in Germany, Italy and the UK from 1982 to 1986.
Michael L. Pikett has been President of Radica Canada Ltd since October
1994. From 1993 to 1994 Mr. Pikett was employed as a Commercial Attache for the
Government of Quebec in Toronto. From 1986 to 1993 Mr. Pikett was employed as
Vice President-General Manager Melitta Canada Inc. He was the Director of Sales
for J.M. Schneider Inc. from 1980 to 1985. Mr. Pikett has over 28 years senior
management experience in the Canadian market. He was born and educated in the
UK, moving to Canada in 1968.
ITEM 11. COMPENSATION OF OFFICERS AND DIRECTORS
COMPENSATION
In fiscal 1997, the aggregate amount of compensation paid to all
executive officers and directors as a group for services in all capacities was
approximately $1.28 million.
Commencing in April 1997, each outside (i.e., non-employee and
non-affiliated) director of the Company receives a fee of $600 for attendance at
each meeting of the Board of Directors and a fee of $600 for attendance at each
Committee meeting. Directors who are employees or affiliates of the Company will
not be paid any fees or additional remuneration for service as members of the
Board of Directors or its Committees.
Prior to April 1997, each outside director of the Company also
received, in addition to the above, a $10,000 annual fee paid in quarterly
installments.
Prior to fiscal year 1996, each outside director received non-qualified
stock options to purchase 30,000 shares of Common Stock of the Company upon
initial election to the Board of Directors at an exercise price equal to the
public offering price ($11.00 per share) of the Company's Common Stock and
exercisable after one year from the date of grant. In January 1997, the board of
directors resolved to reprice 30,000 stock options ($11.00 per share) each of
two outside directors to market price as of the date of such meeting ($1.75 per
share) and the change was ratified in the board meeting on April 9, 1997. In the
same board meeting, one outside director was appointed and received
non-qualified stock options to purchase 30,000 shares of Common Stock of the
Company at an exercise price equal to the average of bid and asked closing price
($3.125) on such date. Upon each re-election to the Board of Directors in 1995,
1996 and 1997, each outside director received non-qualified stock options to
purchase 5,000 shares (15,000 shares in 1997, to reflect elimination of the
$10,000 annual fee) of Common Stock of the Company at $3.66 per share, $1.50 and
$3.125
29
<PAGE>
per share, respectively. Upon re-election to the Board of Directors in 1998 and
thereafter, each outside director will receive non-qualified stock options to
purchase 15,000 shares of Common Stock of the Company at an exercise price equal
to the then current market price of the Company's Common Stock. These subsequent
options are also exercisable after one year from the date of grant.
EMPLOYMENT AGREEMENTS
Messrs. Davids, Feely and Bengtson have each entered into individual
employment agreements with the Company. The employment agreements are for
periods of two years each, from December 1997 for Mr. Bengtson and Mr. Davids.
In the case of Mr. Feely, his employment agreement is also for a period of two
years but it will be renewed in December 1998 due to a change of renewal date of
his agreement in December 1997. Each employment agreement is terminable by the
Company for cause. Messrs. Davids, Feely and Bengtson shall each receive minimum
annual base salaries of $182,000, $185,000 and $43,200, respectively. The
agreement with Mr. Bengtson, as amended in December 1995, is for part-time
services. The employment agreements for Mr. Davids and Mr. Feely 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 agreement for Mr.
Davids also requires that the Company provide him with a residence in Hong Kong.
In the agreement for Mr. Feely, he was granted 300,000 stock options of the
Company common stock at $3.625 per share subject to the terms and conditions of
the agreement and the 1994 Stock Option Plan. Additionally, after the end of
each of the Company's 1998, 1999 and 2000 fiscal years, Mr. Feely will be
granted 60,000 stock options (up to 180,000 shares in the aggregate) provided he
achieves certain conditions as stated in the agreement.
CONSULTING AGREEMENT
The Company, acting through its subsidiary Radica China Limited,
entered into a one-year Consulting Agreement, dated November 1, 1997, with Mr.
Millens W. Taft, one of the Company's outside directors. Under such agreement,
Mr. Taft is to act as an independent contractor and is to assist in identifying,
contacting and developing relationships with inventors and other product concept
sources in the toy and game industry in order to develop new products for the
Radica line of games. Mr. Taft will be paid a consulting fee of $10,000 per
month for the first three months under the agreement, and $3,334 for each of the
remaining nine months. Mr. Taft will bear his own costs and expenses in
providing the consulting services other than certain travel, lodging,
entertainment and similar expenses which will be reimbursed by the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company's 1994 Stock Option Plan provides for the granting of stock
options to directors, officers and employees of the Company. The Stock Option
Plan is administered by the Compensation Committee of the Board of Directors.
Subject to the provisions of the Stock Option Plan, the Compensation Committee
shall have sole authority to determine which of the eligible directors and
employees of the Company shall receive stock options, the terms, including
applicable vesting periods, of such options, and the number of shares for which
such options shall be granted.
The total number of shares of the Company's Common Stock that may be
purchased pursuant to stock options under the Stock Option Plan shall not exceed
in the aggregate 2.0 million shares. The option price per share with respect to
each such option shall be determined by the Compensation Committee but shall be
not less than 100% of the fair market value of the Company's Common Stock on the
date such option is granted as determined by the Compensation Committee.
Ordinarily, twenty percent of the stock options vest and become exercisable on
each of the first five anniversaries of the date of grant, and all of the
options expire in ten years. The Stock Option Plan terminates in 2004 unless
terminated earlier.
In fiscal years 1994 and 1995, an aggregate of 1,181,000 options
(exclusive of the outside directors' options referred to above, and net of stock
options that were both issued and canceled in such years) were granted to
directors, officers and other employees under the Stock Option Plan to purchase
the Company's shares at exercise prices ranging from $8.50 to $8.53 per share.
In addition, Mr. Bengtson was granted options under his employment agreement, as
30
<PAGE>
amended, to purchase 75,200 shares of the Company's Common Stock at an exercise
price of $0.57 per share, which options are now fully vested.
On January 4, 1996, the Company's Board of Directors authorized the
officers of the Company to make offers to holders of options under the Company's
Stock Option Plan (excluding the option plan for the Company's outside
directors), in which each holder was offered the right to surrender existing
options for cancellation, and receive new stock options for the same number of
shares at a new exercise price (equal to $1.38 per share, the market price on
January 4, 1996), and subject to the commencement of a new vesting period. The
term of the new options will not extend beyond the ten-year period of the
original options surrendered. The effect of this authorization was that holders
of options who elected to surrender their previous options received new options
at a lower exercise price subject to starting a new vesting period. The holders
of 916,000 options previously granted accepted such offers. As referred to
above, in January 1997 the Board of Directors approved a similar repricing of
certain outside directors' options.
In fiscal year 1996, an aggregate of 30,000 options (exclusive of the
outside directors' options and the options issued in exchange for prior options,
as referred to above, and net of stock options that were both issued and
canceled in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at an exercise
price of $1.38 per share.
In fiscal year 1997, an aggregate of 779,000 options (exclusive of the
outside directors' options and the options issued in exchange for prior options,
as referred to above, and net of stock options that were both issued and
canceled in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at an exercise
price ranged from $1.09 to $12.25 per share.
As a result of the foregoing, at the end of fiscal year 1997, after
giving effect to all prior exercises and cancellations of options, an aggregate
of 1,571,000 options (exclusive of the outside directors' options) were
outstanding at exercise prices ranging from $0.57 to $12.25 per share, and of
such amount a total of 1,130,000 options were held by directors and executive
officers of the Company as a group. Also, an aggregate of 185,000 outside
director's options were outstanding at exercise prices ranging from $1.5 to $11
per share.
Additional information with respect to stock options is contained in
Note 11 of the Notes to Consolidated Financial Statements included in this
filing.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In February 1994, prior to the Company's initial public offering,
Messrs. Davids, Sutter and the Hansen Trust sold an aggregate of 2,100,000
shares of the Company's Common Stock to International Game Technology ("IGT").
In fiscal year 1996, the 2,100,000 shares of the Company owned by IGT were
transferred back to the Company as part of a settlement of disputes between the
Company and IGT relating to original equipment manufacturing by the Company for
IGT which never come to fruition, and such shares are no longer outstanding.
Messrs. Davids and Sutter, the Hansen Trust, IGT and the Company were
parties to a shareholders agreement (the "Shareholders Agreement") which
provides for certain matters relating to the management of the Company and
ownership of its Common Stock. The Shareholders Agreement provides that the full
Board of Directors should consist of 11 directors and that so long as each party
other than the Company (each, a "Shareholder", and collectively the
"Shareholders") owns at least 5% of the Company's outstanding Common Stock, each
such Shareholder will be entitled to elect one Director at any meeting at which
Directors are to be elected. IGT and Mr. Sutter no longer have rights pursuant
to the Shareholders Agreement since they have disposed of their shares in the
Company.
The Shareholders Agreement also provides that the Board of Directors
should include four independent directors, each of whom must be acceptable to
the Shareholders, and three directors (each a "Company Director") nominated by
the majority of the directors (other than the existing Company Directors) then
in office. One of the Company Directors initially was Mr. Bengtson. The
Shareholders Agreement sets forth certain other matters relating to the election
and removal of directors. To date, the Company has never had a full complement
of directors since the Company and the Shareholders have never fully exercised
their rights under the Shareholders Agreement.
31
<PAGE>
The Shareholders Agreement also contained certain restrictions on
transfers of shares of the Company's Common Stock by the Shareholders and a
right of first refusal provision applicable to the Shareholders (other than the
Hansen Trust). These provisions are now effectively inoperative since shares may
be sold under Rule 144 or pursuant to the registration rights hereinafter
mentioned. Additionally, Mr. Davids may freely dispose of his shares under the
right of first refusal provision since there is now no other Shareholder who is
entitled to exercise such right of first refusal. In 1997, the Company proposed
an amendment to the Shareholders Agreement to formally eliminate the provisions
with respect to the election and removal of directors, since such provisions
have never been utilized, and the restrictions on transfer and right of first
refusal, but such proposal has not yet been acted upon by Mr. Davids and the
Hansen Trust.
Pursuant to the Shareholders Agreement, the Company has 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 (the "Demand Registration Rights") 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 1997, the Company effected a demand registration
at the request of Mr. Davids and also included certain shares at the request of
the Hansen Trust. Such registration covered an aggregate of 1,855,000 million
shares, most of which were sold in the fall of 1997.
The Shareholders Agreement provides that the foregoing restrictions on
transfer, rights of first refusal and provisions relating to the election of
directors will terminate on March 31, 2004.
Additional information on management transactions is contained under
Items 11 and 12 above.
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
None or Not Applicable
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
32
<PAGE>
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
(b) Exhibits
*3.1 Memorandum of Association
*3.2 Bye-Laws
*3.3 Certificate of Incorporation on Change of Name
*4.1 Specimen Certificate for the Shares of Common Stock
*10.1 Processing Agreement, dated December 4, 1991, between Radica
HK and foreign Economic Development Co. of Humen Town,
Dongguan, relating to the Tai Ping Factory
*10.2 Processing Agreement, dated December 27, 1993, between Radica
HK and Foreign Economic Development Co. of Humen Town,
Dongguan
10.3 [Reserved]
*10.4 Shareholders Agreement, dated January 12, 1994, among the
Company and the shareholders parties thereto
*10.5 Amendment to Shareholders Agreement, dated as of February 16,
1994, among the Company and the shareholders party thereto.
*10.6 Form of Employment Agreement, between Radica Games Limited
and Robert E. Davids
#10.6(a) April 1996 Amendment to such Employment Agreement.
10.6(b) December 1997 Amendment to such Employment Agreement.
10.7 [Reserved]
*10.8 Employment Agreement, dated as of November 28, 1993, among
Radica HK, Radica USA and Jon N. Bengtson
33
<PAGE>
*10.8(a) Form of Amendment to Employment Agreement among Radica Games
Limited, Radica HK, Radica USA and Jon N. Bengtson.
#10.8(b) December 1995 Amendment to such Employment Agreement.
10.8(c) December 1997 Amendment to such Employment Agreement.
*10.9 1994 Stock Option Plan
10.10 1994 Stock Option Plan, as amended in April 1997 to increase
options
10.11 Employment Agreement, dated as of May 16, 1997, among Radica
USA, Radica Games Limited and Patrick Feely
10.11(a) December 1997 Amendment to such Employment Agreement.
10.12 Consulting Agreement, dated November 1, 1997 between Radica
China Limited and Millens W. Taft
10.13 [Reserved]
*10.14 Form of Common Stock Purchase Agreement, for Radica USA,
between Radica Games Limited and the Sellers named therein
*10.15 Form of Common Stock Purchase Agreement, for Disc, Inc.,
between Radica Games Limited and the Sellers named therein
@10.16 Cooperative Joint Venture Contract of D.G. Radica Games
Manufacturing Co., Ltd., dated June 24, 1994
11.1 Statement re Computation of Per Share Earnings
21.1 List of subsidiaries
23.1 Consent of Deloitte Touche Tohmatsu
+23.2 Consent of Deloitte Touche Tohmatsu of change in accounting
policy
* Incorporated by reference to Registration Statement on Form F-1, File
No. 33-75794 filed by the Registrant.
@ Incorporated by reference to Form 20-F for the year ended October 31,
1994.
+ Incorporated by reference to Form 20-F for the year ended October 31,
1995.
# Incorporated by reference to Form 20-F for the year ended October 31,
1996.
34
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report.............................................F-1
Consolidated Balance Sheets..............................................F-2
Consolidated Statements of Operations....................................F-3
Consolidated Statements of Shareholders' Equity ........................F-4
Consolidated Statements of Cash Flows....................................F-5
Notes to the Consolidated Financial Statements ..........................F-7
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Radica Games Limited
We have audited the accompanying consolidated balance sheets of Radica
Games Limited and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended October 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Radica Games Limited and
subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997, in conformity with accounting principles generally accepted in
the United States of America.
/S/ Deloitte Touche Tohmatsu
HONG KONG
December 17, 1997
F-1
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
(US dollars in thousands, except share data)
<TABLE>
<CAPTION>
At October 31,
------------------------------
1997 1996
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 33,504 $ 8,527
Short-term investments (Note 3) 2,050 77
Accounts receivable, net of allowances for doubtful
accounts of $908 in 1997 and $234 in 1996 and estimated
customer returns of $2,327 in 1997 and $817 in 1996 18,740 9,624
Inventories, net of provision of $3,479 in 1997 and
$8,419 in 1996 (Note 5) 11,741 10,984
Prepaid expenses and other current assets 681 547
-------------- --------------
Total current assets 66,716 29,759
-------------- --------------
INVESTMENT IN AFFILIATED COMPANY (Note 6) 194 -
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET (Note 7) 12,539 12,937
-------------- --------------
DEFERRED INCOME TAXES (Note 8) - 29
-------------- --------------
Total assets $ 79,449 $ 42,725
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 99
Accounts payable 10,370 5,535
Accrued payroll and employee benefits 1,249 686
Commissions payable 915 476
Accrued sales expenses 1,254 1,827
Accrued warranty expenses 2,161 1,554
Accrued other expenses 1,615 690
Income taxes payable 213 45
Deferred income taxes (Note 8) 79 -
-------------- --------------
Total current liabilities 17,856 10,912
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock
par value $0.01 each, 100,000,000 shares authorized,
20,860,200 shares outstanding (20,680,000 at
Oct. 31, 1996) (Note 10) 209 207
Additional paid-in capital 28,589 28,371
Retained earnings 32,800 3,214
Cumulative translation adjustment (5) 21
-------------- --------------
Total shareholders' equity 61,593 31,813
-------------- --------------
Total liabilities and shareholders' equity $ 79,449 $ 42,725
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(US dollars in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------
1997 1996* 1995*
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net sales $ 87,760 $ 47,535 $ 52,650
Cost of sales (40,888) (30,696) (34,640)
------------ ------------ ------------
Gross profit 46,872 16,839 18,010
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses (14,403) (11,752) (21,105)
Research and development (2,099) (1,699) (2,084)
Write down of assets (Note 12) - - (15,318)
Depreciation and amortization (2,278) (1,594) (1,591)
------------ ------------ ------------
Total operating expenses (18,780) (15,045) (40,098)
------------ ------------ ------------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS 28,092 1,794 (22,088)
OTHER INCOME 915 748 329
SHARE OF LOSS OF AFFILIATED COMPANY (141) - -
NET INTEREST INCOME (EXPENSE) 913 (165) (628)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND UNUSUAL ITEM 29,779 2,377 (22,387)
UNUSUAL ITEM (Note 4) - 709 -
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 29,779 3,086 (22,387)
(PROVISION) CREDIT FOR INCOME TAXES (193) 120 897
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS AFTER INCOME TAXES 29,586 3,206 (21,490)
DISCONTINUED OPERATION: (Note 9)
Loss from operation of Pub Poker business (less applicable
income tax benefit of $110 in 1995) - (1,712) (233)
------------ ------------ ------------
NET INCOME (LOSS) $ 29,586 $ 1,494 $ (21,723)
============ ============ ============
EARNINGS PER SHARE - PRIMARY:
Income (loss) from continuing operations $ 1.36 $ 0.15 $ (0.94)
Effect of discontinued operation - (0.08) (0.01)
Net earnings (loss) per share and common stock equivalents $ 1.36 $ 0.07 $ (0.95)
============ ============ ============
Average number of shares
and common stock equivalents outstanding 21,798,013 21,439,452 22,780,000
============ ============ ============
EARNINGS PER SHARE - ASSUMING FULL DILUTION:
Income (loss) from continuing operations $ 1.34 $ 0.15 $ (0.94)
Effect of discontinued operation - (0.08) (0.01)
Net earnings (loss) per share and common stock equivalents $ 1.34 $ 0.07 $ (0.95)
============ ============ ============
Average number of shares
and common stock equivalents outstanding 22,112,317 21,439,452 22,780,000
============ ============ ============
</TABLE>
* Restated to conform with 1997 presentation.
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US dollars in thousands)
<TABLE>
<CAPTION>
Common stock Additional Cumulative Total
Number paid-in Retained translation shareholders'
of shares Amount capital earnings adjustment equity
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994 22,780,000 228 28,129 23,443 21 51,821
Grant of stock option - - 199 - - 199
Net loss - - - (21,723) - (21,723)
------------- ------------- ------------- ------------- ------------- -------------
Balance at October 31, 1995 22,780,000 228 28,328 1,720 21 30,297
Cancellation of common stock (Note 10) (2,100,000) (21) 21 - - -
Grant of stock option - - 22 - - 22
Net income - - - 1,494 - 1,494
------------- ------------- ------------- ------------- ------------- -------------
Balance at October 31, 1996 20,680,000 $ 207 $ 28,371 $ 3,214 $ 21 $ 31,813
Stock option exercised 180,200 2 218 - - 220
Net income - - - 29,586 - 29,586
Foreign currency translation - - - - (26) (26)
------------- ------------- ------------- ------------- ------------- -------------
Balance at October 31, 1997 20,860,200 $ 209 $ 28,589 $ 32,800 $ (5) $ 61,593
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 29,586 $ 1,494 $ (21,723)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes 108 - 159
Depreciation 1,613 1,594 1,591
Amortization 665 - -
Share of loss of affiliated company 141 - -
(Gain) Loss on disposal and write off of
property, plant and equipment (21) (97) 642
Write off of molds - - 1,478
Write off of other assets - - 172
Provision for compensation expense related to
stock options - 22 199
Effect on mark to market of money market funds - - 2
Changes in assets and liabilities:
Accounts receivable (9,142) 618 15,735
Inventories (757) 5,488 16,750
Prepaid expenses and other current assets (134) (16) 1,167
Accounts payable 4,835 2,529 (7,395)
Accrued payroll and employee benefits 563 445 (114)
Commissions payable 439 (527) (688)
Accrued sales expenses (573) (277) 2,104
Accrued warranty expenses 607 1,101 (6)
Accrued other expenses 925 (1,820) 734
Income taxes payable 168 1,351 (3,456)
---------------- ---------------- ---------------
Net cash provided by operating activities 29,023 11,905 7,351
---------------- ---------------- ---------------
Cash flow from investing activities:
Increase in short-term investments (1,973) - -
Proceeds from sale of property, plant and equipment 61 929 -
Purchase of property, plant and equipment (1,255) (874) (6,371)
Proceeds from the sales of money market funds - 3,151 -
Investment in an affiliate company (1,000) - -
---------------- ---------------- ---------------
Net cash (used in) provided by investing activities (4,167) 3,206 (6,371)
---------------- ---------------- ---------------
</TABLE>
F-5
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flow from financing activities:
Funds from sale and lease back arrangements - - 488
Repayment of note payable - - (3,000)
Funds from stock options exercised 220 - -
Decrease in short-term borrowings - (13,970) (1,503)
Repayment of long-term debt (99) (371) (246)
---------------- ---------------- ---------------
Net cash provided by (used in) financing activities 121 (14,341) (4,261)
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents $ 24,977 $ 770 $ (3,281)
Cash and cash equivalents:
Beginning of year 8,527 7,757 11,038
---------------- ---------------- ---------------
End of year $ 33,504 $ 8,527 $ 7,757
================ ================ ===============
Supplementary disclosures of cash flow information:
Cash paid during the year:
Interest $ 12 $ 413 $ 1,374
Income taxes - - 2,399
Non cash transactions:
Property, plant and equipment acquired under
capital leases - - 28
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(US dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company
and all subsidiaries. Investments in affiliates, owned more than 20 percent
but not in excess of 50 percent, are recorded using the equity method. All
significant intra-group transactions and balances have been eliminated on
consolidation.
The Company designs, develops, manufactures and distributes a variety of
electronic handheld and mechanical games.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
and are presented in US dollars as the Company's sales are predominantly
denominated in US dollars.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents - Cash and cash equivalents include cash on hand,
cash accounts, interest-bearing savings accounts, and time certificates of
deposit with a maturity at purchase date of three months or less.
Inventories - Inventories are stated at the lower of cost, determined by
the weighted average method, or market. Provision for potentially obsolete
or slow-moving inventory is made based on management's analysis of
inventory levels and future expected sales.
Depreciation and amortization of property, plant and equipment Depreciation
is provided on the straight line method at rates based upon the estimated
useful lives of the property, generally not more than seven years except
for leasehold land and buildings which are 30 years, the term of the lease.
Costs of leasehold improvements and leased assets are amortized over the
life of the related asset or the term of the lease, whichever is shorter.
Upon sale or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the respective accounts and any resulting
gain or loss is included in income.
Mold costs - The Company expenses all mold costs in the year of purchase or
for internally produced molds, in the year of construction.
Revenue recognition - Revenues are recognized as sales when merchandise is
shipped. The Company permits the return of damaged or defective products
and accepts limited amounts of product returns in certain other instances.
Accordingly, the Company provides allowances for the estimated amounts of
these returns at the time of revenue recognition, based on historical
experience adjusted for known trends.
F-7
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments -- Debt and equity securities which the Company has both the
positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Debt and equity securities
which might be sold prior to maturity are classified as available-for-sale
and carried at approximate fair value. Any material unrealized gains and
losses related to available-for-sale investments, net of applicable taxes,
are reported in other comprehensive income. The Company determines the
appropriate classification of securities at the time of purchase and
evaluates such classification as of each balance sheet date.
Income taxes - Income taxes are provided based on an asset and liability
approach for financial accounting and reporting of income taxes. Deferred
income tax liabilities or benefits are recorded to reflect the tax
consequences in future years of differences between the tax basis of assets
and liabilities and the financial reporting amounts at each year end. A
valuation allowance is recognized if it is more likely than not that some
portion of, or all of, a deferred tax asset will not be realized.
Foreign currency translation - Assets and liabilities of foreign operations
are translated using year-end exchange rates. Revenues and expenses of
foreign operations are translated using average monthly exchange rates. The
impact of exchange rate changes is shown as "Cumulative Translation
Adjustment" in shareholders' equity. Net losses from foreign exchange
transactions of $122, $102 and $202 in 1997, 1996 and 1995 respectively,
are included in selling, general and administrative expenses.
Post-retirement and post-employment benefits - The Company does not provide
post-retirement benefits other than pensions to employees and
post-employment benefits are immaterial.
Warranty - Future warranty costs are provided for at the time of revenue
recognition based on management's estimate by reference to historical
experience adjusted for known trends.
Stock options - The Company continues to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting
for its stock options. As a result, no compensation expense has been
recognized as the exercise price of the Company's employee stock options
equals the market price of the underlying stock at the date of grant. Pro
forma disclosures of the effect on net income (loss) and earnings (loss)
per share as if the Company had accounted for its employee stock options
under the fair value method prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", are
shown in note 11.
F-8
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (loss) per share - Earnings (loss) per share is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents result from dilutive
stock options. The effect of such common stock equivalents on net income
(loss) per share is computed using the treasury stock method. On March 3,
1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share". This pronouncement provides for the calculation
of Basic and Diluted earnings per share which is different from the current
calculation of Primary and Fully Diluted earnings per share. The Company
will adopt this SFAS in the coming financial year.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of
estimates. Actual results could differ from those estimates.
New accounting standards adopted early - The Company has chosen to adopt
early the SFAS No. 130, "Reporting Comprehensive Income", and No. 131,
"Disclosure about Segments of an Enterprise and Related Information", in
this year. Regarding the reporting of comprehensive income, since the
Company did not have any material items of other comprehensive income in
each of the three years in the period ended October 31, 1997, the net
income reported in the consolidated statements of operation is equivalent
to the total comprehensive income. Further, as the Company has only one
operating segment, the adoption of SFAS No. 131 did not result in any
restatement of comparative information.
Reclassifications - Certain reclassifications have been made to prior years
amounts to conform with the 1997 presentation.
3. SHORT-TERM INVESTMENTS
The Company's short-term investments, all of which are classified as
available-for-sale as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", consist primarily of United
States government and Federal agency securities and are stated at market
value. No unrealized gain or loss on these investments was recognized
during the year.
4. UNUSUAL ITEM
During the second quarter of 1996, a gain of $709 was made from the sale of
a property in Hong Kong.
F-9
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
5. INVENTORIES
Inventories by major categories are summarized as follows:
October 31,
----------------------
1997 1996
------- -------
Raw materials $ 2,786 $ 1,002
Work in progress 2,889 2,012
Finished goods 6,066 7,970
------- -------
$11,741 $10,984
======= =======
6. INVESTMENT IN AFFILIATED COMPANY
In May 1997, the Company acquired 123,000 of the capital stock of U-Tel,
Inc., a private company incorporated in Nevada, United States of America,
and engaged in research and development of telecommunication equipment, for
$1 million in cash. This investment represents a 34.6% interest. U-Tel,
Inc., is in the early stages of its product development cycle and
accordingly the excess purchase price over fair value of the net assets
acquired of $665, has been charged to operations for the year ended October
31, 1997.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 31,
---------------------
1997 1996
------- -------
Land and buildings $ 9,882 $ 9,882
Plant and machinery 3,633 3,031
Furniture and equipment 3,184 2,812
Leasehold improvements 1,318 1,180
------- -------
Total $18,017 $16,905
Less: Accumulated depreciation and
amortization (5,478) (3,968)
------- -------
Total $12,539 $12,937
======= =======
F-10
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
7. PROPERTY, PLANT AND EQUIPMENT (Continued)
Included in property, plant and equipment are assets acquired under capital
leases with the following net book values:
October 31,
--------------
1997 1996
----- -----
Plant and machinery - cost $ - $ 685
Less: accumulated depreciation - (217)
----- -----
$ - $ 468
===== =====
No amortization of capital lease assets was included in depreciation and
amortization expenses in the accompanying statements of operations, for the
year ended October 31, 1997. For the years ended October 31, 1996 and 1995,
such amortization of capital lease assets amounted to $137 and $136,
respectively.
8. INCOME TAXES
The components of income (loss) from continuing operations before income
taxes are as follows:
Year ended October 31,
---------------------------------
1997 1996 1995
-------- -------- --------
United States $ 2,167 $ 910 $(17,561)
Foreign subsidiaries operating in :
People's Republic of China 27,544 1,348 (5,210)
Hong Kong 68 828 384
-------- -------- --------
$29,779 $ 3,086 $(22,387)
======== ======== ========
As the Company's subsidiary in the People's Republic of China ("PRC") is a
sino-foreign joint venture enterprise, it is eligible for an exemption from
income tax for two years starting from the first profitable year of
operations and thereafter a 50 percent relief from income tax for the
following three years under the Income Tax Law of the PRC. That subsidiary
has incurred a tax loss since its commencement of operations. In addition,
under the existing processing arrangement and in accordance with the
current tax regulations in the PRC, manufacturing income generated in the
PRC is not subject to PRC income taxes.
F-11
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
8. INCOME TAXES (Continued)
The (provision) credit for income taxes consists of the following:
Year ended October 31,
----------------------------------
1997 1996 1995
-------- ------- --------
Hong Kong
Current income tax $ (123) $ 45 $ (68)
Deferred - - (8)
-------- ------- ---------
$ (123) $ 45 $ (76)
United States
State tax benefit, net of
federal tax benefit $ 38 $ 75 $1,125
Deferred (108) - (152)
-------- ------- ---------
$ (70) $ 75 $ 973
-------- ------- ---------
$ (193) $ 120 $ 897
======== ======= =========
F-12
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
8. INCOME TAXES (Continued)
A reconciliation between the (provision) credit for income taxes computed
by applying the statutory tax rates in the United States for 1997, 1996 and
1995 to income (loss) from before income taxes and the actual (provision)
credit for income taxes is as follows:
Year ended October 31,
-----------------------------
1997 1996 1995
---------- -------- -------
US statutory rate 34% 34% 34%
---------- -------- -------
(Provision) credit for income taxes at
statutory rate on income (loss) for the year $(10,125) $(1,049) $7,612
State income taxes (7) 95 154
International rate differences 9,807 365 (67)
Accounting (losses) gains for which deferred
income tax cannot be recognized (430) 302 (1,772)
Decrease (increase) in valuation allowance 854 293 (5,553)
Prior year tax adjustments - - 361
Other (292) 114 52
---------- -------- -------
Income tax (provision) credit $ (193) $ 120 $ 787
========== ======== =======
F-13
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
8. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for income tax purposes
compared with the respective amounts for financial statement purposes. At
October 31, 1997 and 1996 deferred income taxes comprised:
October 31,
----------------------
1997 1996
-------- --------
Deferred tax (liabilities) assets:
Excess of tax over financial
reporting depreciation $ (79) $ (79)
Tax losses 1,173 2,150
Bad debt allowance 309 25
Advertising allowances 244 88
Inventory obsolescence reserve 643 1,857
Accrued sales adjustments and returns 1,321 691
Other 716 557
-------- --------
4,327 5,289
Valuation allowance (4,406) (5,260)
-------- --------
$ (79) $ 29
======== ========
At October 31, 1997, the Company had a net operating loss carried forward
available for US income tax reporting purposes of approximately $3,450
which expires beginning in 2011.
9. DISCONTINUED OPERATION
On July 31, 1996 the Company adopted a plan to discontinue its Pub Poker
operations. All products and raw materials relating to Pub Poker were
disposed of by October 31, 1996 either by means of sale at discounted
prices or by scrapping, and in addition, an after tax operating loss of
$256 was realized. The loss from Pub Poker operations has been accounted
for as a discontinued operation.
10. COMMON STOCK
During fiscal 1996, 2,100,000 shares previously owned by International Game
Technology (IGT) were cancelled as consideration for the Company's
agreement to dissolve a contract with IGT. A corresponding amount was
transferred to additional paid-in capital.
F-14
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
11. STOCK OPTIONS
The Company's 1994 Stock Option Plan (the "Stock Option Plan") provided for
options to be granted for the purchase of an aggregate of 1,600,000 shares
of common stock at per share prices not less than 100% of the fair market
value at the date of grant as determined by the Compensation Committee of
the Board of Directors. Following approval at the annual shareholders
meeting in April 1997, the Stock Option Plan's aggregate number of common
stock increased by 400,000 to 2,000,000 shares available for options.
Options under this plan are generally exercisable ratably over five years
from the date of grant unless otherwise provided.
In January 1996, due to the reduced market price of Radica Games common
stock, the Company offered active employees holding outstanding options the
opportunity to exchange them for stock options at an exercise price equal
to the fair market value at that time. As a result of the offer, holders of
916,000 options at an exercise price of $8.50 returned their options for
cancellation and 916,000 options at an exercise price of $1.375 were
granted in exchange.
In January 1997, 60,000 stock options held by outside directors at an
exercise price of $11.00 per share were repriced to $1.72 per share, the
market price on January 3, 1997. Upon each re-election to the Board of
Directors in 1995 and 1996, each outside director received non-qualified
stock options to purchase 5,000 shares of Common Stock of the Company at
$3.66 per share and $1.50 per share, respectively. Upon re-election to the
Board of Directors in 1997 and thereafter, each outside director received
or will receive non-qualified stock options to purchase 15,000 shares of
Common Stock of the Company at an exercise price equal to the current
market price on such date.
F-15
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
11. STOCK OPTIONS (Continued)
Option activity for each of the three fiscal years ended October 31, 1995,
1996 and 1997:-
Weighted average
Number exercise price
of shares per share
(in thousands)
Outstanding at October 31, 1994 1,324 $ 7.54
Options granted 195 8.13
Options cancelled (250) 8.50
Options exercised - -
------
Outstanding at October 31, 1995 1,269 7.44
Options granted 1,091 1.37
Options cancelled 1,194) 7.12
Options exercised - -
------
Outstanding at October 31, 1996 1,166 2.09
Options granted 856 2.98
Options cancelled (86) 8.22
Options exercised (180) 1.22
-------
Outstanding at October 31, 1997 1,756 2.31
=======
Exercisable at October 31, 1997 137 2.67
F-16
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
11. STOCK OPTIONS (Continued)
The following is additional information relating to options outstanding as
of October 31, 1997:
<TABLE>
<CAPTION>
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
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
0.567 to 2.000 1,167 1.30 8.32 104 1.09
2.001 to 4.000 480 3.45 9.44 15 3.66
4.001 to 6.000 10 5.00 9.62 - -
6.001 to 8.000 59 6.77 9.74 - -
8.001 to 10.000 5 8.63 9.80 - -
10.001 to 12.250 35 11.18 7.11 18 11.00
-------- ------
1,756 2.31 8.66 137 2.67
======== ======
</TABLE>
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. The weighted average fair value of stock options at
date of grant of $1.59, $0.71 and $1.89 per option for 1997, 1996 and 1995,
respectively, were estimated using the Black-Scholes option pricing model
with the following weighted average assumptions:
Year ended October 31,
-------------------------------
1997 1996 1995
--------- -------- --------
Expected life of options 5 years 5 years 5 years
Risk-free interest rate 6.50% 6.25% 6.5%
Expected volatility of underlying stock 50% 50% 50%
Dividends 0% 0% 0%
The Black-Scholes option pricing models require the input of highly
subjective assumptions, including the expected volatility of stock price.
Because changes in subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of the
stock options.
F-17
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
11. STOCK OPTIONS (Continued)
If the Company had accounted for its stock option plans by recording
compensation expenses based on the fair value at grant date for such awards
consistent with the method of SFAS No. 123, the Company's net income (loss)
earnings (loss) per share would have been reduced to the pro forma amounts
as follows:
Year ended October 31,
----------------------------------------
1997 1996 1995
--------- ---------- ----------
Pro forma net income (loss) $ 29,154 $ 1,202 $ (21,919)
Pro forma earnings (loss) per share $ 1.34 $ 0.06 (0.96)
12. WRITE DOWN OF ASSETS
During the year ended October 31, 1995, the Company wrote down the
following assets:
Inventory -- obsolescense and slow moving reserve $ 11,116
Inventory -- market value reserve 757
Accounts receivable -- write off 1,670
Closure of Mexican factory 297
Write off of unamortized mold costs 1,478
----------
$ 15,318
==========
13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Accounts receivable of the Company are subject to a concentration of credit
risk with customers in the retail sector. This risk is limited due to the
large number of customers composing the Company's customer base and their
geographic dispersion, though the Company has two customers which accounted
for more than twenty percent and eighteen percent of net sales in fiscal
1997, two customers which accounted for more than twenty and sixteen
percent of net sales in fiscal year 1996 and had two customers which
accounted for more than thirteen percent each and one customers which
accounted for more than ten percent of net sales in fiscal year 1995. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
F-18
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. The estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
The carrying amounts of cash and short-term investments, accounts
receivable and accounts payable are reasonable estimates of their fair
value.
15. COMMITMENTS AND CONTINGENCIES
The Company leases several warehouses and equipment under operating leases.
Total expense for the operating leases was $358, $411 and $466 in 1997,
1996 and 1995, respectively.
At October 31, 1997, the Company was obligated under operating leases
requiring future minimum lease payments as follows:
Operating
leases
1998 $ 285
1999 201
2000 188
2001 56
2002 30
-------
Total minimum lease payments $ 760
=======
At October 31, 1997, certain leasehold land and buildings with a net book
value of $4,994 and bank balances of $3,871 were pledged to secure general
banking facilities including overdraft and trade facilities granted to the
Company.
F-19
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
16. RETIREMENT PLAN
The Company has defined contribution retirement plans covering
substantially all employees in Hong Kong. Under these plans, eligible
employees may contribute amounts through payroll deductions which are 5% or
more of individual salary, supplemented by employer contributions ranging
from 5% to 10% of individual salary depending on the years of service. The
expenses related to these plans were $191, $141 and $144 for the years
ended October 31, 1997, 1996 and 1995, respectively.
17. LITIGATION
Ten purported class actions filed in various United States District Courts
against the Company, various of its officers and directors, and the
managing underwriters of the Company's initial public offering were
consolidated in the United States District Court for the District of Nevada
under the caption In re Radica Games Limited Securities Litigation, Master
File No. CV-S-94-00653-DAE (LRL). Plaintiffs filed a consolidated complaint
on November 4, 1994 that superseded all the complaints in the individual
actions.
The named plaintiffs originally sought to represent a class consisting of
purchasers of the Company's common stock in the initial public offering or
in the open market from May 13 through July 22, 1994 and sought
unquantified monetary damages and other relief against the defendants for
alleged violations of Sections 11, 12(2), and 15 of the Securities Act of
1933, Sections 10b (and Rule 10b-5 thereunder), 20(a), and 20A(a) of the
Securities Exchange Act of 1934, Sections 90.570, 90.660 and 90.660.4 of
the Nevada Revised Statutes, and the common law of Nevada relating to the
Company's registration statement and other public disclosures. As a
consequence of an Order of the Court granting in part defendants' motion to
dismiss the complaint and a stipulation of the parties, all of plaintiffs'
claims other than those arising under the Securities Act of 1993, and
limited to certain specified statements in the Company's registration
statement, were dismissed without prejudice. Pursuant to a stipulation of
the parties, the Court provisionally agreed to treat the remaining claims
as class claims.
After the close of discovery, plaintiffs moved for leave to amend their
complaint to add allegations with respect to an additional claimed omission
in the registration statement. Shortly thereafter, the Company moved for
summary judgment seeking dismissal of the complaint. Following a hearing on
July 31, 1996, the District Court entered an Order (i) denying plaintiffs'
motion to amend the complaint and (ii) granting the Company's (and the
other defendants') motion for summary judgment, and on August 9, 1996 the
District Court entered final judgment dismissing the action. Plaintiffs
subsequently moved for reconsideration of the grant of summary judgment
against them, and the court denied their motion. Plaintiffs filed a timely
appeal to the United States Court of Appeals for the Ninth Circuit, and
oral argument of such appeal was held on November 5, 1997. On November 14,
1997, the Court of Appeals entered an Order affirming the judgment of the
District Court.
F-20
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
18. SEGMENT INFORMATION
The Company operates in one principal industry segment: the design,
development, manufacture and distribution of a variety of electronic and
mechanical handheld and tabletop games. Geographic financial information is
as follows:
Year ended October 31,
-------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales:
United States $ 57,478 $ 33,036 $ 48,329
PRC and Hong Kong 28,537 13,456 3,887
Other 1,745 1,043 434
------------ ------------ ------------
$ 87,760 $ 47,535 $ 52,650
============ ============ ============
Operating income (loss):
United States $ 2,269 $ 973 $ (16,741)
PRC and Hong Kong 25,990 906 (5,157)
Other (167) (85) (190)
------------ ------------ ------------
$ 28,092 $ 1,794 $ (22,088)
============ ============ ============
Identifiable assets:
United States $ 24,745 $ 16,011 $ 19,797
PRC and Hong Kong 53,639 25,313 33,528
Other 1,065 1,401 729
------------ ------------ ------------
$ 79,449 $ 42,725 $ 54,054
============ ============ ============
A significant portion of PRC and Hong Kong net sales were export sales to
the United States.
F-21
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
19. VALUATION AND QUALIFYING ACCOUNTS
Year ended October 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
Beginning of year:
Allowances for doubtful accounts $ 234 $ 1,572 $ 96
Estimated customer returns 817 1,790 138
Provision for inventories 8,419 11,873 -
----------- ---------- ----------
$ 9,470 $ 15,235 $ 234
=========== ========== ==========
Charged to cost and expenses:
Allowances for doubtful accounts $ 818 $ 70 $ 1,476
Estimated customer returns 1,995 1,250 1,652
Provision for inventories - - 11,873
----------- ---------- ----------
$ 2,813 $ 1,320 $ 15,001
=========== ========== ==========
Release of provision:
Allowances for doubtful accounts $ (144) $ (1,408) $ -
Estimated customer returns (485) (2,223) -
Provision for inventories (4,940) (3,454) -
----------- ---------- ----------
$ (5,569) $ (7,085) $ -
=========== ========== ==========
End of year:
Allowances for doubtful accounts $ 908 $ 234 $ 1,572
Estimated customer returns 2,327 817 1,790
Provision for inventories 3,479 8,419 11,873
----------- ---------- ----------
$ 6,714 $ 9,470 $ 15,235
=========== ========== ==========
F-22
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter ended
-------------------------------------------
Jan. 31 Apr. 30 Jul. 31 Oct. 31
--------- --------- --------- ---------
Fiscal 1997
Net sales $ 12,668 $ 12,175 $ 22,532 $ 40,385
Gross profit 5,476 5,422 11,671 24,303
Net income (loss) 2,522 2,317 7,147 17,600
Net income (loss) per share
and common stock equivalents 0.12 0.11 0.34 0.79
Fiscal 1996
Net sales $ 9,052 $ 3,918 $ 11,989 $ 22,576
Gross profit 2,982 290 3,260 10,307
Net income(loss) (727) (978) (1,045) 4,244
Net income (loss) per share
and common stock equivalents (0.03) (0.05) (0.05) 0.21
Common Share Price
High Low
1997 Quarter
Fourth....................................... 15 3/8 7 1/2
Third........................................ 7 7/8 2 7/8
Second....................................... 4 1/8 2 3/8
First........................................ 3 1/4 1 1/16
1996 Quarter
Fourth....................................... 1 3/4 3/4
Third........................................ 1 15/16 15/16
Second....................................... 2 1 1/4
First........................................ 2 1/2 1 1/8
1995 Quarter
Fourth....................................... 3 1 3/8
Third........................................ 3 3/4 2 1/2
Second....................................... 5 3
First........................................ 7 4 3/4
F-23
<PAGE>
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: December 19, 1997 /S/ David C.W. Howell
-------------------------------------- ---------------------
David C.W. Howell
Executive Vice President
Chief Financial Officer
I-1
<PAGE>
EXHIBIT INDEX
*3.1 Memorandum of Association
*3.2 Bye-Laws
*3.3 Certificate of Incorporation on Change of Name
*4.1 Specimen Certificate for the Shares of Common Stock
*10.1 Processing Agreement, dated December 4, 1991, between Radica HK
and foreign Economic Development Co. of Humen Town, Dongguan,
relating to the Tai Ping Factory
*10.2 Processing Agreement, dated December 27, 1993, between Radica HK
and Foreign Economic Development Co. of Humen Town, Dongguan
10.3 [Reserved]
*10.4 Shareholders Agreement, dated January 12, 1994, among the Company
and the shareholders parties thereto
*10.5 Amendment to Shareholders Agreement, dated as of February 16,
1994, among the Company and the shareholders party thereto.
*10.6 Form of Employment Agreement, between Radica Games Limited and
Robert E. Davids
#10.6(a) April 1996 Amendment to such Employment Agreement.
10.6(b) December 1997 Amendment to such Employment Agreement.
10.7 [Reserved]
*10.8 Employment Agreement, dated as of November 28, 1993, among Radica
HK, Radica USA and Jon N. Bengtson
*10.8(a) Form of Amendment to Employment Agreement among Radica Games
Limited, Radica HK, Radica USA and Jon N. Bengtson.
#10.8(b) December 1995 Amendment to such Employment Agreement.
10.8(c) December 1997 Amendment to such Employment Agreement.
*10.9 1994 Stock Option Plan
I-2
<PAGE>
10.10 1994 Stock Option Plan, as amended in April 1997 to increase
options
10.11 Employment Agreement, dated as of May 16, 1997, among Radica USA,
Radica Games Limited and Patrick Feely
10.11(a) December 1997 Amendment to such Employment Agreement.
10.12 Consulting Agreement, dated November 1, 1997 between Radica China
Limited and Millens W. Taft
10.13 [Reserved]
*10.14 Form of Common Stock Purchase Agreement, for Radica USA, between
Radica Games Limited and the Sellers named therein
*10.15 Form of Common Stock Purchase Agreement, for Disc, Inc., between
Radica Games Limited and the Sellers named therein
@10.16 Cooperative Joint Venture Contract of D.G. Radica Games
Manufacturing Co., Ltd., dated June 24, 1994
11.1 Statement re Computation of Per Share Earnings
21.1 List of subsidiaries
23.1 Consent of Deloitte Touche Tohmatsu
+23.2 Consent of Deloitte Touche Tohmatsu of change in accounting policy
* Incorporated by reference to Registration Statement on Form F-1, File No.
33-75794 filed by the Registrant.
@ Incorporated by reference to Form 20-F for the year ended October 31, 1994.
+ Incorporated by reference to Form 20-F for the year ended October 31, 1995.
# Incorporated by reference to Form 20-F for the year ended October 31, 1996.
I-3
Exhibit 10.6(b)
AMENDMENT NO. 2 TO SERVICE CONTRACT
(BETWEEN RADICA GAMES LTD & ROBERT E. DAVIDS)
THIS AMENDMENT NO. 2 TO THE SERVICE CONTRACT ("Amendment No. 2") is
made as of December 12, 1997, between Radica Games Limited, a company
incorporated under the laws of Bermuda ("Radica Games") and Robert E. Davids
(referred to hereinafter as "Appointee").
W I T N E S S E T H
WHEREAS, Radica Games and Appointee entered into an Service Contract as
President and Director dated April 8, 1994 ("Service Contract");
WHEREAS, by written resolution of the Board of Radica Games in May
1996, the Service Contract was extended on the same terms for a further period
of two years expiring on May 1, 1998;
WHEREAS, the signatories hereto desire to amend certain provisions of
the Service Contract;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements contained herein, the parties hereto agree that the Service
Contract is hereby amended as follows:
(1) It is agreed that the renewal date of the Service
Contract has been amended to December 13 effective
from this Amendment No. 2.
(2) With respect to Section 1.01 of the Service Contract,
it is agreed that Appointee will act as Chief
Executive Officer, Vice Chairman and Director of
Radica Games.
(3) With respect to Section 1.02 of the Service Contract
and item (1) of this Amendment No. 2, it is agreed
that the Service Contract has been renewed for an
additional two-year period with effect from December
13, 1997 and shall be renewed for an additional year
as of each December 13 anniversary date unless a
party to the Service Contract gives notice at least 6
months prior to such anniversary that the Service
Contract shall not be renewed.
<PAGE>
(4) With respect to Section 5.01(a) of the Service
Contract which provides for remuneration, the parties
have agreed that Appointee's minimum salary shall be
at the rate of US$14,000 per month, reflecting the
lower level of services and lesser time commitment
involved.
THIS AMENDMENT NO. 2 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH BERMUDA LAW.
This Amendment No. 2 may be executed in any number of counterparts and
by the different parties on separate counterparts and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same instrument.
Except as expressly provided in this Amendment No. 2, all of the terms,
covenants, conditions, restrictions and other provisions contained in the
Service Contract, as previously amended, shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment No. 2 to the Service Contract has
been duly executed and delivered by the individual party hereto and the duly
authorized officers of the corporate parties hereto as of the date first
hereinabove written.
RADICA GAMES LIMITED
By: /s/ David C.W. Howell
---------------------------
Name: David C.W. Howell
/s/ Robert E. Davids
-------------------------------
Robert E. Davids
Exhibit 10.8(c)
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 3 TO THE EMPLOYMENT AGREEMENT ("Amendment No. 3") is
made as of December 12, 1997, by and among Radica Enterprises Ltd., dba Radica
USA Ltd., a Nevada corporation ("Radica USA"), Radica Limited, a company
incorporated under the laws of Hong Kong ("Radica Limited"), Radica Games
Limited, a company incorporated under the laws of Bermuda ("Radica Games"), and
Jon N. Bengtson (referred to hereinafter as "Employee").
W I T N E S S E T H
WHEREAS, Radica USA, Radica Limited and Employee entered into an
Employment Agreement dated November 28, 1993 (as amended, the "Employment
Agreement");
WHEREAS, the Employment Agreement was amended as of May 9, 1994 to
provide, inter alia, for the inclusion of Radica Games as a party thereto;
WHEREAS, the signatories hereto desire to amend certain provisions of
the Employment Agreement;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements contained herein, the parties hereto agree that the Employment
Agreement is hereby amended as follows:
(1) With respect to Section 3(a) of the Employment
Agreement, it is agreed that the Employment Agreement
has been renewed for an additional two-year period
with effect from December 13, 1997, and shall be
renewed for an additional year as of each December 13
anniversary date unless a party to the Employment
Agreement gives notice at least 90 days prior to such
anniversary that the Employment Agreement shall not
be renewed.
(2) With respect to Section 5 of the Employment Agreement
which provides for compensation, the parties have
agreed that Employee's minimum salary shall be at the
rate of $3,600 per month, reflecting the lower level
of services and lesser time commitment involved.
THIS AMENDMENT NO. 3 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEVADA.
<PAGE>
This Amendment No. 3 may be executed in any number of counterparts and
by the different parties on separate counterparts and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same instrument.
Except as expressly provided in this Amendment No. 3, all of the terms,
covenants, conditions, restrictions and other provisions contained in the
Employment Agreement, as previously amended, shall remain in full force and
effect.
IN WITNESS WHEREOF, this Amendment No. 3 to the Employment Agreement
has been duly executed and delivered by the individual party hereto and the duly
authorized officers of the corporate parties hereto as of the date first
hereinabove written.
RADICA GAMES LIMITED
By: /s/ Robert E. Davids
--------------------------
Name: Robert E. Davids
RADICA LIMITED
By: /s/ David C.W. Howell
--------------------------
Name: David C.W. Howell
RADICA USA
By: /s/ Patrick Feely
--------------------------
Name: Patrick Feely
/s/ Jon N. Bengtson
------------------------------
Jon N. Bengtson
Exhibit 10.10
[Version reflecting 1997
Amendments to this Plan
as of April 9, 1997.]
RADICA GAMES LIMITED
AMENDED AND RESTATED
1994 STOCK OPTION PLAN
This amended and restated 1994 Stock Option Plan, dated as of May 19,
1994, is intended to amend and restate in its entirety the 1994 Stock Option
Plan adopted by the Board of Directors on April 17, 1994, and further reflects
the 1997 Amendments to such Plan as of April 9, 1997.
1. PURPOSE OF THE 1994 STOCK OPTION PLAN (THE "1994 PLAN").
The 1994 Plan is intended to promote the growth and general prosperity
of Radica Games Limited (the "Company") and its Subsidiaries and Affiliates (as
defined below) by attracting and retaining the best available personnel for
positions of substantial responsibility and by providing directors and certain
key employees with an additional incentive to contribute to the success of the
Company and its Subsidiaries and Affiliates. For purposes of the 1994 Plan,
"Subsidiary" shall mean any corporation of which the Company owns, directly or
indirectly, stock possessing not less than a majority of the total combined
voting power of all classes of stock in such corporation and "Affiliate" means
any corporation controlled by any combination of the Company and its
shareholders.
2. ADMINISTRATION.
The 1994 Plan shall be administered by a committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board") consisting of
at least two members of the Board. Members of the Committee shall be
disinterested persons within the meaning of Rule 16b-3(c)(2)(i) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Subject to the provisions
of the 1994 Plan, the Committee shall have sole authority, in its absolute
discretion, to determine which of the eligible directors and employees of the
Company, its Subsidiaries and Affiliates shall receive stock options, the time
when stock options shall be granted, the terms of such options, and the number
of shares for which options shall be granted. The Committee shall have the
authority to do everything necessary or appropriate to
<PAGE>
administer the 1994 Plan including, without limitation, interpreting the 1994
Plan. All decisions, determinations and interpretations of the Committee shall
be final and binding on all optionees.
Notwithstanding any other provision of the 1994 Plan, the members, from
time to time, of the Committee shall be ineligible to receive stock options,
except to the following extent and on the following terms:
Each member of the Committee shall receive non-qualified stock options
to purchase 30,000 shares of Common Stock of the Company upon initial
election to the Board of Directors at an exercise price equal to $11.00 per
share and exercisable after one year from the date of the grant. Upon
re-election to the Board of Directors, each such member will receive
non-qualified stock options to purchase 5,000 shares, provided that, at and
after the Company's 1997 Annual Meeting of Shareholders, such number shall
be increased to 15,000 shares, of Common Stock of the Company at an exercise
price equal to the then current market price of the Company's Common Stock
and exercisable after one year from the date of the grant. The term "market
price" shall mean the closing price per share of the Company's Common Stock
on the date immediately prior to the date of the grant. The term "closing
price" shall mean the last reported sales price or, in case no such reported
sale takes place on such date, the average of the reported closing bid and
asked prices on the National Association of Securities Dealers Automated
Quotations National Market System ("NASDAQ"), provided, that if such shares
are not quoted on NASDAQ, the net book value per share as determined in
accordance with United States generally accepted accounting principles. Each
option granted pursuant to this provision shall expire ten years from the
date the option is granted. With respect to the options granted to the
members of the Committee, the full Board of Directors, excluding such
Committee members, shall have the authority to do everything necessary or
appropriate to administer or interpret the 1994 Plan.
The provisions contained in the preceding two paragraphs shall not be
amended more than once every six months, other than to comport with changes in
the Internal Revenue Code, the Employee Retirement Income Security Act, or the
rules thereunder.
-2-
<PAGE>
3. ELIGIBILITY.
The Committee may grant stock options to any director, key employee or
officer of the Company or any Subsidiary or any Affiliate unless such person is
a member of the Committee.
4. STOCK SUBJECT TO THE 1994 PLAN.
The stock subject to the options and other provisions of the 1994 Plan
shall be shares of the Company's authorized and unissued or reacquired Common
Stock. Subject to Section 8 hereof, the total number of shares of the Company's
Common Stock that may be purchased pursuant to stock options under the 1994 Plan
shall not exceed in the aggregate 2,000,000 shares.
5. TERMS AND CONDITIONS OF OPTIONS.
All stock options granted pursuant to the 1994 Plan shall be in such
form as the Committee shall from time to time determine and shall be subject to
the following terms and conditions:
(a) Price:
The option price per share with respect to each option shall be
determined by the Committee but shall be not less than 100% of the fair
market value of the Company's Common Stock on the date the option is
granted as determined by the Committee.
(b) Term:
Each stock option shall expire no later than ten years from the
date the option is granted.
(c) Exercise and Payment for Shares:
Subject to Section 7 hereof, stock options shall be exercisable on
such dates as the Committee may specify at the time of grant. The
Committee may, in its discretion, accelerate in whole or in part the
exercisability of any outstanding stock options. In no event (including
those specified in Section 7) shall any stock option be exercisable
after the expiration of ten years from the date on which the stock
option is granted.
-3-
<PAGE>
To exercise a stock option, the optionee shall give written notice to
the Company specifying the number of shares to be purchased and accompanied by
payment either (i) in cash or by a certified or official bank check, (ii)
through the delivery of shares of Common Stock of the Company with a value equal
to the total option price, or (iii) by a combination of the methods described in
(i) and (ii) for the full purchase price therefor. The value of a share of
Common Stock of the Company delivered in accordance with the above shall be the
average of the closing price on each of the five business days immediately prior
to the date of delivery. The closing price for each day shall be the last
reported sales price or, in case no such reported sale takes place on such day,
the average of the reported closing bid and asked prices on NASDAQ, provided,
that if such shares are not quoted on NASDAQ during such five-day period only
the method described in (i) above may be used to make payment for the purchase
price of any such stock option. Any person exercising a stock option shall make
such representations and agreements and furnish such information as the
Committee may in its discretion deem necessary or desirable to assure compliance
by the Company, on terms acceptable to the Company, with the provisions of the
Securities Act of 1933 and any other applicable legal requirements. Each stock
option granted under the 1994 Plan shall be subject to the requirement that the
listing, registration or qualification of the shares subject thereto upon any
securities exchange or under state or federal law, or the consent or approval of
any governmental regulatory body, are necessary or desirable in connection with
the issue or purchase of the shares subject thereto, no such option may be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Committee. If an optionee so requests, shares purchased
may be issued in the name of the optionee and another jointly with the right of
survivorship.
6. NON-TRANSFERABILITY.
Stock options under the 1994 Plan may not be sold, pledged, assigned or
transferred in any manner otherwise than by will or the laws of descent or
distribution, and may be exercised during the lifetime of a holder of a stock
option only by such holder.
-4-
<PAGE>
7. EXERCISE UPON TERMINATION OR DEATH.
(a) No stock option granted under the 1994 Plan may be exercised at any time
after the termination of employment or director status, as the case may be,
of a holder with the Company or any Subsidiary or any Affiliate, except that:
(i) if such termination of employment or director status, as the
case may be, is on or after the holder's 62nd birthday or due
to disability, any portion of an option, whether or not
exercisable at the time of such termination, may be exercised
by the holder within ninety days after such termination (or
such longer period as may be designated by the Committee);
and
(ii) if such termination of employment or director status, as the
case may be, is prior to the holder's 62nd birthday and not
due to disability or death, any portion of an option may be
exercised by the holder within ninety days of such
termination (or such longer period as may be designated by
the Committee), but only to the extent such option was
exercisable at the time of such termination.
(b) In the event of the death of the holder, whether during or after the
termination of his employment or director status, as the case may be, any
portion of an option exercisable at the time of death may be exercised by
the holder's beneficiary or estate within twelve months from the date of the
holder's death or such longer period as the Committee may determine.
(c) Notwithstanding this Section 7, in no event shall any stock option be
exercisable more than ten years from the date the option is granted.
8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
The aggregate number of shares of Common Stock which may be purchased
pursuant to the options granted under the 1994 Plan as provided in Section 4
hereof, the number of shares covered by each outstanding option and the price
per share in each such option shall be proportionately adjusted for any increase
or decrease in the number of issued shares
-5-
<PAGE>
of the Company's Common Stock resulting from a division or consolidation of
shares or other capital adjustment, or the payment of a stock dividend or other
increase or decrease in such shares, effected without receipt of consideration
by the Company; provided, however, that any fractional shares resulting from any
such adjustment shall be eliminated.
Subject to any required action by the stockholders, if the Company
shall be the surviving or resulting corporation in any merger, any option
granted hereunder shall pertain to and apply to the securities or rights to
which a holder of the number of shares of Common Stock subject to the option
would have been entitled.
9. MERGER INTO ANOTHER CORPORATION OR SALE OF SUBSTANTIALLY ALL OF COMPANY'S
ASSETS.
If the Company shall be merged with another corporation and shall not
be the surviving or resulting corporation in such merger or if the Company shall
sell substantially all of its assets, any option granted hereunder shall become
exercisable sufficiently prior to the effective date of such merger or such sale
of assets to permit the exercise thereof by the holders thereof, unless under
the terms of such merger or sale of its assets, any option granted hereunder
shall pertain to and apply to the securities or rights to which a holder of the
number of shares of Common Stock subject to the option would have been entitled.
10. RIGHTS AS A STOCKHOLDER.
A holder of a stock option shall have no rights as a stockholder with
respect to any shares covered by such option until the date of issuance of a
stock certificate for such shares.
11. WITHHOLDING TAXES.
Whenever shares of the Company's Common Stock are to be issued in
satisfaction of stock options granted under the 1994 Plan, the Company shall
have the right to require the recipient to remit to the Company an amount
sufficient to satisfy all applicable withholding tax requirements prior to the
delivery of any certificate or certificates for such shares.
-6-
<PAGE>
12. TERM OF 1994 PLAN.
The 1994 Plan shall become effective upon its adoption by the Board,
subject to approval by majority vote of the stockholders of the Company. It
shall continue in effect until October 31, 2004 unless sooner terminated.
13. AMENDMENT OR TERMINATION OF THE 1994 PLAN.
(a) The Board may amend the 1994 Plan from time to time in such respects as
the Board may deem advisable, provided that no change may be made in any
option theretofore granted which would impair the rights of a holder without
consent of the holder, and provided further, that without the approval of
stockholders, no alteration or amendment may be made if such approval would
be required by Rule 16b-3 under the Exchange Act for transactions pursuant to
the 1994 Plan to continue to be exempt thereunder.
(b) The Board may at any time terminate the 1994 Plan. Any such termination
of the 1994 Plan shall not affect options already granted and such options
shall remain in full force and effect as if the 1994 Plan had not been
terminated.
-7-
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of the 16th day of May, 1997,
provided the employment hereunder shall commence July 1, 1997, by and among
Radica Enterprises Ltd., a Nevada corporation, having an office at 5301 Longley
Lane, Suite 157, Reno, Nevada 89511, Radica Games Limited, a Bermuda company,
having an office at Suite R, 6/F, 2-12 Au Pui Wan Street, Fo Tan, Hong Kong, and
Patrick Feely, who resides at 751 Linda Vista Avenue, Pasadena, California
91103.
WHEREAS, Radica is engaged through its subsidiaries in designing and
manufacturing electronic and mechanical gifts and games for worldwide sale, and
OEM manufacturing for others;
WHEREAS, Radica USA is engaged in marketing and distributing products
manufactured by Radica;
WHEREAS, Employee has substantial executive management experience
including marketing experience in the United States;
WHEREAS, Radica USA and Radica desire to secure the services of
Employee, and Employee is willing to provide such services, each upon the terms
and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. DEFINITIONS. For the purposes of this Agreement, the parties hereby
adopt the following definitions:
(a) "Cause" means:
(i) breach by Employee of a fiduciary obligation to any member
of Radica Group;
(ii) commission by Employee of any act or omission to perform
any act (excluding the omission to perform any act attributable to Employee's
Total Disability) which results in serious adverse consequences to any member of
Radica Group;
(iii) breach of any of Employee's agreements set forth in this
Agreement including, but not limited to, continual failure to perform
substantially his duties with Radica Group, excessive absenteeism and
dishonesty;
<PAGE>
(iv) any attempt by Employee to assign or delegate this Agreement
or any of the rights, duties, responsibilities, privileges or obligations
hereunder without the prior written consent of Radica or Radica USA (except in
respect of any delegation by Employee of his employment duties hereunder to
other employees of Radica Group in accordance with its usual business practice);
(v) Employee's arrest or indictment for, or written confession of,
a felony or any crime involving moral turpitude under the laws of the United
States or any state or of Hong Kong;
(vi) death of Employee;
(vii) declaration by a court that Employee is insane or incompetent
to manage his business affairs; or
(viii) the filing of any petition or other proceeding seeking to
find Employee bankrupt or insolvent.
(b) A "Change in Control" shall be deemed to have occurred if, at or
before July 1, 1998: (i) any person or group of persons (as defined in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act")) together with its affiliates, excluding employee benefit plans of Radica,
is or becomes, directly or indirectly, the "beneficial owner" (as defined in
rule 13d-3 promulgated under the 1934 Act) of securities of Radica representing
50% or more of the combined voting power of Radica's then outstanding
securities; or (ii) as a result of a proxy contest, merger, consolidation, sale
of assets, tender offer or exchange offer or as a result of any combination of
the foregoing, Directors who were members of the Board of Directors of Radica
two years prior to such time and new Directors whose election or nomination for
election by Radica's shareholders was approved by a vote of at least two-thirds
of the Directors still in office who were Directors two years prior to such
time, cease to constitute at least two-thirds of the members of the Board of
Directors of Radica; or (iii) the shareholders of Radica approve a merger or
consolidation of Radica with any other corporation or entity regardless of which
entity is the survivor, other than a merger or consolidation which would result
in the voting securities of Radica outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or being converted into
voting securities of the surviving entity) at least 50% of the combined voting
power of the voting securities of Radica or such surviving entity outstanding
immediately after such merger or consolidation; or (iv) the shareholders of
Radica approve a plan of complete liquidation or winding-up of Radica or an
agreement for the sale or disposition by Radica of all or substantially all of
Radica's assets.
-2-
<PAGE>
(c) "Dollars" and "US$" means United States dollars.
(d) "Employee" means Patrick Feely.
(e) "Good Reason" shall mean the occurrence within twelve (12) months
after a Change in Control of any of the following events without the Employee's
express written consent: (i) the assignment to the Employee of duties
inconsistent with his position and status as an executive of the Radica Group,
or a substantial alteration in the nature, status or prestige of the Employee's
responsibilities with the Radica Group from those in effect immediately prior to
such Change in Control; or (ii) a reduction in the Employee's base salary or
bonus opportunity as in effect immediately prior to the occurrence of such
Change in Control; or (iii) any other material adverse change in the terms or
conditions, including location and travel, of the Employee's employment
hereunder following the occurrence of such Change in Control.
(f) "1994 Plan" means the 1994 stock option plan adopted by Radica, as
amended from time to time.
(g) "Radica" means Radica Games Limited, a Bermuda company.
(h) "Radica Group" means Radica, Radica USA and any other corporation
or other entity which at the relevant time is more than fifty percent (50%)
owned, directly or indirectly, by Radica.
(i) "Radica USA" means Radica Enterprises Ltd., a Nevada corporation.
(j) "Termination" means, according to the context, the termination of
this Agreement or the cessation of rendering employment services by Employee.
(k) "Total Disability" means Employee shall become disabled to an
extent which renders him unable to perform the essential functions of his job,
with or without reasonable accommodation, for a cumulative period of twelve (12)
weeks in any twelve (12) month period.
2. EMPLOYMENT.
(a) Commencing July 1, 1997, Radica hereby employs Employee and
Employee hereby accepts employment by Radica to serve as the President and Chief
Operating Officer of Radica. Employee shall also be employed as the President,
or in another senior executive position, of Radica USA. During his period of
employment, employee also agrees to serve as a member of the board of directors
of Radica, Radica USA and of such other members of Radica Group as may be
determined by the Board of
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<PAGE>
Directors of Radica ("Board"). Employee shall perform services of an executive
nature consistent with his offices with Radica and Radica USA and as a director
of Radica as may from time to time be assigned or delegated to him by the Board.
It is envisioned that these duties will include inter alia management of the
business of Radica USA.
(b) Employee will devote his full business time and attention to his
duties under this Agreement.
(c) Employee shall perform his duties under this Agreement principally
in or around Los Angeles. It is contemplated Employee will frequently travel to
carry out his duties under this Agreement, including travel to the offices of
Radica USA in Nevada and Texas. Air travel and other travel arrangements will
comply with current Radica Group policies respecting class of travel, etc.
(d) Radica Group will provide to Employee, his spouse and children
medical benefits which are provided to other officers of Radica Group.
(e) Employee shall have four (4) weeks paid vacation during each year
of this Agreement taken at such times as mutually convenient to Employee and
Radica Group.
3. TERM OF EMPLOYMENT.
(a) This Agreement and Employee's employment hereunder shall
commence as of July 1, 1997 and continue until the second anniversary of such
date, and shall be renewed annually at each July 1 anniversary date (commencing
July 1, 1998) for an additional one year period so that the term hereof at each
renewal date shall be a two 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, in which case this Agreement shall terminate at the end of
the ensuing year.
(b) Notwithstanding Paragraph (a) above, this Agreement may be
sooner terminated by Radica or Radica USA for Cause, by Employee without consent
of Radica or Radica USA, by Radica or Radica USA without Cause, or by Radica or
Radica USA in the event of the Total Disability of Employee. This Agreement may
also be sooner terminated by Employee following any Change in Control which
occurs prior to July 1, 1998 and if within twelve (12) months following such
Change in Control Employee has Good Reason for such Termination; such
Termination by Employee is herein called a "Termination/Change in Control".
(c) On termination of this Agreement pursuant to Paragraph (a)
above, or by Radica or Radica USA for Cause, or by Employee without consent of
Radica or Radica USA, all benefits and compensation shall cease as of the date
of such
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<PAGE>
Termination. On termination of this Agreement by Radica or Radica USA without
Cause or in event of Total Disability of Employee, all benefits and compensation
shall continue for twelve (12) months after such a Termination. On termination
of this Agreement in the event of a Termination/Change in Control, all benefits
and compensation shall continue for twenty-four (24) months after such a
Termination.
4. BUSINESS EXPENSE REIMBURSEMENT. Employee will be entitled to
reimbursement by Radica Group for the reasonable business expenses paid by him
on behalf of Radica Group in the course of his employment hereunder on
presentation to Radica Group of appropriate vouchers (accompanied by receipts or
paid bills) setting forth information sufficient to establish:
(i) the amount, date, and place of each such expense;
(ii) the business reason for each such expense and the nature
of the business benefit derived or expected to be derived as a result thereof;
and
(iii) the names, occupations, addresses, and other information
sufficient to establish the business relationship to Radica Group of any person
who was entertained by Employee.
5. COMPENSATION. Radica USA agrees to pay Employee, and Employee agrees
to accept from Radica USA, during the first year after July 1, 1997, for the
services to be rendered by him hereunder a minimum salary at the rate of
US$185,000 per annum payable in arrears in monthly installments. Employee shall
receive annual salary reviews by the Board provided that such salary shall not
be reduced below US$185,000 per year. Employee shall also be entitled to a
signing bonus of U.S.$15,000.
If Radica Group institutes a retirement, bonus or other benefit plan
which applies generally to U.S. executive officers of Radica Group, Employee
shall be entitled to participate therein, but not to the extent such benefits
would be duplicative of the benefits herein.
6. STOCK OPTIONS.
(a) (i) As of the date of this Agreement, Radica hereby grants to
Employee an option to purchase three hundred thousand (300,000) shares of the
common stock of Radica at $3.625 per share (representing the current market
price as of a recent date), subject to the terms and conditions of this Section
6 and the 1994 Plan (the "Initial Stock Option").
(ii) Additionally, with reasonable promptness after the end of
each of Radica's 1998, 1999 and 2000 fiscal years (i.e., fiscal years ending
October 31 in such
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years), Radica shall grant to Employee an option (up to three such options in
total) to purchase sixty thousand (60,000) shares (up to 180,000 shares in the
aggregate) of the common stock of Radica at the then applicable market price,
subject to the terms and conditions of this Section 6 and the 1994 Plan;
provided, however, that each such grant shall be subject to the condition that
Radica achieves consolidated income from continuing operations before income
taxes of at least U.S.$9.0 million in fiscal year 1998, U.S.$11.0 million in
fiscal year 1999, and U.S.$14.0 million in fiscal year 2000, respectively. The
determination of the amount of consolidated income from continuing operations
before income taxes shall be based on Radica's consolidated statement of
operations included in its annual report on Form 20-F for such year as filed
with the Securities and Exchange Commission. For comparability purposes, it is
noted that the amount of consolidated income from continuing operations before
income taxes for the fiscal year ended October 31, 1996 was $3.086 million. If
such requirement is not met in such fiscal year (or if Employee's employment
hereunder has previously Terminated), the stock option associated with such
fiscal year will not be granted. Such stock options are herein called the
"Subsequent Stock Options". The Initial Stock Option and the Subsequent Stock
Options are herein collectively called the "Stock Options". It is expected that
the Subsequent Stock Options will be granted approximately in December of each
applicable year after the end of the related fiscal year.
(iii) The Stock Options shall vest and become exercisable 20%
per year following the date of grant, commencing at the first anniversary of the
date of grant.
(b) The number of shares subject to the Stock Options will be adjusted
for stock splits and reverse splits; provided that such number of shares shall
not be adjusted if Radica should otherwise change or modify its capitalization,
including but not limited to the issuance by Radica of new securities (including
options or convertible securities), ESOP's or other employee stock plans. It is
the intent of the parties that the stock subject to the Stock Options shall be
subject to dilution, except for stock splits and reverse splits.
(c) Any other provision hereof to the contrary notwithstanding, (i) as
of the date of Termination in the event of Termination pursuant to Section 3(a)
or Termination by Radica or Radica USA for Cause or by Employee without consent
of Radica or Radica USA, or (ii) twelve (12) months after the date of
Termination in the event of Termination by Radica or Radica USA without Cause or
the Total Disability of Employee, or (iii) twenty-four (24) months after the
date of Termination in the event of a Termination/Change in Control
("Determination Date"), Employee shall forfeit the Stock Options (measured by
percentages of the stock subject to the Stock Options) and they shall expire as
follows:
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(A) if the Determination Date is within the first year after
the date the Stock Option is granted (the "Grant Date") then Employee shall
forfeit 100% of the stock subject to the Stock Option;
(B) if the Determination Date is after the end of said first
year and within the second year after the Grant Date, then Employee shall
forfeit 80% of the stock subject to the Stock Option;
(C) if the Determination Date is after the end of said second
year and within the third year after the Grant Date, then Employee shall forfeit
60% of the stock subject to the Stock Option;
(D) if the Determination Date is after the end of said third
year and within the fourth year after the Grant Date, then Employee shall
forfeit 40% of the stock subject to the Stock Option; or
(E) if the Determination Date is after the end of said fourth
year and within the fifth year after the Grant Date, then Employee shall forfeit
20% of the stock subject to the Stock Option.
(d) In any event each Stock Option shall expire to the extent not
previously exercised on the tenth anniversary of the Grant Date. Otherwise,
Employee may at any time within ninety (90) days following the Determination
Date, exercise his right to purchase stock subject to the Stock Options, but
subject to the foregoing provisions respecting vesting and forfeitures.
(e) Employee shall have no right to sell, alienate, mortgage, pledge,
gift or otherwise transfer the Stock Options or any rights thereto, except by
will or by the laws of descent and distribution, and except pursuant to
applicable state and federal securities laws and except as specifically
contemplated herein.
7. NON-COMPETE; CONFIDENTIALITY.
(a) During the term of employment of Employee, and for a period of
one year ("Prohibition Period") after any Termination (other than in the event
of a Termination/Change in Control) of such relationship or employment for any
other reason (either by Employee or Radica or Radica USA), with or without
cause, voluntarily or involuntarily, Employee agrees that he will not engage in,
be employed by or become affiliated with, in the United States of America or
anywhere else in the world, directly or indirectly, any person or entity which
offers, develops, performs or is engaged in services, products or systems which
are competitive with the business of Radica Group or any other products,
services or systems hereafter developed, produced or offered by Radica Group
("Companies' Business"). During the Prohibition Period, Employee shall not,
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<PAGE>
directly or indirectly, become an owner or member, to the extent of an ownership
interest of five percent (5%) or more, of a joint venture, partnership,
corporation or other entity, or a consultant, employee, agent, officer or
director of a corporation, joint venture, partnership or other entity, which is
competitive with, directly or indirectly, the Companies' Business.
(b) [RESERVED.]
(c) Employee understands and agrees that he has been exposed to (or
had access to), and may be further exposed to (or have access to), confidential
information, knowhow, knowledge, data, techniques, computer software and
hardware, and trade secrets of Radica Group or related to the Companies'
Business, including, without limitation, customer or supplier requirements,
notes, drawings, writings, designs, plans, specifications, records, charts,
methods, procedures, systems, price lists, financial data, records, and customer
or supplier lists (collectively "Confidential Information"). Accordingly, except
as permitted or required in the performance of his duties for Radica Group,
Employee agrees not to disclose, divulge, make public, utilize, communicate or
use, whether for his own benefit or for the benefit of others, either directly
or indirectly, any Confidential Information relating to the Companies's Business
unless specifically authorized in writing by Radica or Radica USA to do so.
(d) Employee shall promptly communicate and disclose to Radica Group
all information, inventions, improvements, discoveries, knowhow, methods,
techniques, processes, observations and data ("Proprietary Information")
obtained, developed, invented or otherwise discovered by him in the course of
this employment. All written materials, records, computer programs or data and
documents made by Employee or coming into his possession during the employment
period concerning any Proprietary Information used or developed by Radica Group,
or by Employee, shall be the sole exclusive property of Radica Group. Employee
shall have no right, title or interest therein notwithstanding that he may have
purchased the medium on which such Proprietary Information is recorded.
(e) Upon Termination, Employee shall not take with him any of the
Confidential Information or Proprietary Information. Upon Termination, or at any
time upon the request of Radica or Radica USA, Employee shall promptly deliver
all Confidential Information and Proprietary information, and all copies
thereof, to Radica Group with no cost or charge to Radica Group. Upon request by
Radica or Radica USA, Employee shall promptly execute and deliver any documents
necessary or convenient to evidence ownership of the Confidential Information
and Proprietary Information by Radica Group, or the transfer and assignment of
the Confidential Information and Proprietary Information to Radica Group without
cost or charge. The provisions of this Section 7 shall survive any Termination
of this Agreement.
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8. BENEFIT AND BINDING EFFECT. This Agreement shall inure to the
benefit of and be binding upon Radica and Radica USA, their successors and
assigns, including but not limited to any corporation, person or other entity
which may acquire all or substantially all of the assets and business of Radica
or Radica USA or any corporation with or into which they may be consolidated or
merged. Radica and Radica USA may assign their rights and obligations to another
present or future member of Radica Group. The rights and obligations of Employee
hereunder may not be delegated or assigned.
9. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same instrument.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEVADA WITHOUT REFERENCE TO THE CHOICE
OF LAW PRINCIPLES THEREOF.
11. ENTIRE AGREEMENT. This Agreement sets forth and is an integration
of all of the promises, agreements, conditions and understandings among the
parties hereto with respect to all matters contained or referred to herein, and
all prior promises, agreements, conditions, understandings, warranties or
representations, oral, written, express or implied, are hereby superseded and
merged herein.
12. VALIDITY OF PROVISIONS. Should any provision(s) of this Agreement
be void or unenforceable in whole or in part, the remainder of this Agreement
shall not in any way be affected thereby, and such provision(s) shall be
modified or amended so as to provide for the accomplishment of the provision(s)
and intentions of this Agreement to the maximum extent possible.
13. MODIFICATIONS OR DISCHARGE. This Agreement shall not be deemed
waived, changed, modified, discharged or terminated in whole or in part, except
as expressly provided for herein or by written instrument signed by all parties
hereto.
14. NOTICES. Any notice which either party may wish to give to the
other parties hereunder shall be deemed to have been given when actually
received by the party to whom it is addressed. Notices by Employee to either
Radica or Radica USA shall be sent to both of them. Notices hereunder may be
sent by courier, mail, telefax, telegram or telex, to the following addresses,
or to such other addresses as the parties may from time to time furnish to each
other by like notice:
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To: Radica Enterprises Ltd.
5301 Longley Lane, Suite 157
Reno, Nevada 89511
U.S.A.
Attention: Jon N. Bengtson
Telephone: (702) 829-8643
Telefax: (702) 829-8688
To: Radica Games Limited
Suite R, 6/F
2-12 Au Pui Wan Street
Fo Tan
Hong Kong
Attention: David C.W. Howell
Telephone: (852) 2693 2238
Telefax: (852) 2695 9657
To: Employee:
Mr. Patrick Feely
751 Linda Vista Avenue
Pasadena, California 91103
Telephone: (818) 792-7849
15. NUMBER; GENDER. In this Agreement, the masculine shall include the
feminine and neuter and vice versa, and the singular shall include the plural
and vice versa, as the context may reasonably require or permit.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
RADICA ENTERPRISES LTD.
By: /s/ Jon N. Bengtson
--------------------------------------
RADICA GAMES LIMITED
By: /s/ Jon N. Bengtson
--------------------------------------
PATRICK FEELY
/s/ Patrick Feely
--------------------------------------
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Exhibit 10.11(a)
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
(AMONG RADICA USA, RADICA GAMES LTD & PATRICK FEELY)
THIS AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT ("Amendment No. 1")
is made as of December 12, 1997, by and among Radica Enterprises Ltd., dba
Radica USA Ltd., a Nevada corporation ("Radica USA"), Radica Games Limited, a
company incorporated under the laws of Bermuda ("Radica Games"), and Patrick
Feely (referred to hereinafter as "Employee").
W I T N E S S E T H
WHEREAS, Radica USA, Radica Games and Employee entered into an
Employment Agreement dated May 16, 1997 (the "Employment Agreement");
WHEREAS, the signatories hereto desire to amend a provision of the
Employment Agreement;
NOW, THEREFORE, the parties hereto agree that the Employment Agreement
is hereby amended as follows:
(1) It is agreed that the renewal date of the Employment
Agreement has been amended to December 13 effective
from this Amendment No. 1. The next renewal date of
the Employment Agreement will be
December 13, 1998.
THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEVADA.
This Amendment No. 1 may be executed in any number of counterparts and
by the different parties on separate counterparts and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same instrument.
Except as expressly provided in this Amendment No. 1, all of the terms,
covenants, conditions, restrictions and other provisions contained in the
Employment Agreement, as previously amended, shall remain in full force and
effect.
IN WITNESS WHEREOF, this Amendment No. 1 to the Employment Agreement
has been duly executed and delivered by the individual party hereto and the duly
authorized officers of the
<PAGE>
corporate parties hereto as of the date first hereinabove written.
RADICA GAMES LIMITED
By: /s/ David C.W. Howell
------------------------------
Name: David C.W. Howell
RADICA USA
By: /s/ Graham Cotton
------------------------------
Name: Graham Cotton
/s/ Patrick Feely
---------------------------------
Patrick Feely
Exhibit 10.12
CONSULTING AGREEMENT
I. PARTIES
The parties to this Consulting Agreement (this "Agreement") are Radica
China Limited (Radica), a British Virgin Islands corporation, and Millens W.
Taft, an employee of Mel Taft & Associates, Inc., with offices at 10 Crane
Avenue, East Longmeadow, Massachusetts 01028, USA ("The Consultant").
II. RECITALS
This Agreement is made with reference to the fact that Radica wishes to
engage Consultant to perform certain services for Radica and/or for its
affiliates around the world ("Affiliates"), and the Consultant wishes to perform
such services pursuant to each and all of the terms of this Agreement.
III. AGREEMENT
Subject to the terms and conditions set forth in this Agreement, Radica
hereby retains the Consultant as an independent contractor in a consulting
capacity, and the Consultant agrees to perform consulting services for Radica as
described in this Agreement. The relationship between Radica and the Consultant
created by this Agreement is hereinafter referred to as "the Consultancy."
IV. THE CONSULTANCY
Term
Unless terminated sooner pursuant to Paragraph VI of this Agreement or extended
by mutual agreement in writing, the term of the Consultancy shall be exactly one
(1) year commencing on November 1, 1997.
Duties
During the Consultancy, the Consultant shall advise, consult with and assist
Radica and/or any Affiliates designated by Radica at such times, places and
during such periods of time as Radica shall reasonably request. The Consultant's
duties for Radica and/or its Affiliates shall be limited to the specific project
and related matters as follows:
1. Providing assistance in identifying, contacting, meeting and
developing with inventors and other product concept sources in the toy and game
industry for the specific purpose of developing handheld, boxed, single or multi
player, electronic games for the Radica line. Administering normal inventor
relations records and controls required to protect Radica's legal interests;
2. Providing advice and assistance in obtaining and arranging for
licenses to manufacture and/or distribute Radica developed games or games
developed as noted under item 1 above;
3. Providing advice as to selection of product concepts for development
from both internal and external services;
4. Providing advice regarding methods and procedures relating to the
selection, development, engineering, testing and marketing of the company's
products;
5. Providing such other advice, counsel and assistance as Radica may
from time to time reasonably request.
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6. However, it is expressly understood that Consultant is also a
Director of Radica and has certain duties and responsibilities related to that
office which are not changed by this Agreement.
In performing his duties as described above, the Consultant shall
consistently and at all times diligently and conscientiously use his best
efforts to further the interests of Radica and its Affiliates.
V. CONSIDERATION
In consideration of the complete and faithful performance of his duties
pursuant to this Agreement, Radica agrees to provide to the Consultant
consideration solely as follows:
A. A monthly payment for the first three months of this Agreement in an amount
of $10,000.00 per month and for the remaining nine months of the Agreement in
the amount of three thousand, three hundred thirty-four US dollars (US$3,334.00)
to be paid on the first (1st) business day of each month. The Effective Date is
the first (1st) business day of the first month. Immediately upon any
termination of the Consultancy, Radica shall have no further duty, obligation or
responsibility to make any further payment or to provide any other consideration
to the Consultant.
B. The monthly payments to the Consultant described in Paragraph V(A) above are
the entirety of the consideration, pay, fees, benefits or other things of value
of any kind to be provided by Radica to the Consultant for his services pursuant
to this Agreement, and the Consultant is solely responsible for supplying, at
his own cost and expense, any and all equipment, tools, supplies,
instrumentalities, places of work, employees, facilities and other things and/or
services which may need or require to perform each and all of his duties
pursuant to this Agreement.
VI. TERMINATION
The Consultancy, this Agreement (with the exception of the Consultant's
obligations pursuant to Paragraphs VIII, X, XII, XIII, IV, XV and each of them,
each of which obligations survive any termination of the Consultancy) and
Radica's obligation to provide the consideration described in Paragraph V(A) of
this Agreement shall each automatically, immediately and forever terminate upon
the occurrence of any one (1) or more of the following:
The passage of a period of one (1) year from the Effective Date;
Radica's and the Consultant's entry into and execution of a written agreement to
such termination;
The death of the Consultant;
The Consultant ceases to be a Director of Radica;
Any breach by the Consultant of any provision of this Agreement;
Any failure by the Consultant to observe and to fully and faithfully perform
each and all of his duties, responsibilities and obligations pursuant to this
Agreement; or
The inability, for any reason whatsoever, of the Consultant to perform fully his
duties, responsibilities and obligations pursuant to this Agreement for any
period of sixty (60) consecutive calendar days.
VII. THE CONSULTANT'S EXPENSE
In performing his duties pursuant to this Agreement, the Consultant, except as
otherwise provided in this Agreement, is fully liable and responsible for paying
any and all costs and expenses
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incurred by him and/or his employees, agents and/or servants in the performance
of the Consultant's duties pursuant to this Agreement.
Notwithstanding the foregoing, Radica recognizes that the Consultant,
in performing his duties pursuant to this Agreement, may be obligated to expend
monies for travel, lodging, entertainment, telephone conferencing, and similar
business reasons. Radica agrees that upon (1) the express, written approval of
Radica's President or Chief Financial Officer, of business-related expenses and
the maximum amounts of any and all such expenses; and (2) the Consultant's
presentation to Radica of an expense voucher with receipts showing the amounts
of such expenses, Radica will reimburse the Consultant for such business-related
expenses as long as they are in conformance with Radica's Travel and Expense
Reporting Policy as attached hereto.
VIII. EMPLOYEES OF THE CONSULTANT
Each and all of the Consultant's duties to Radica pursuant to this
Agreement are personal, can be performed only through his unique knowledge and
experience, and, therefore, shall be performed solely by him. However, to the
extent, if any, that the Consultant may require support or staff to provide
assistance to him in fulfilling his duties, the Consultant shall hire and
employ, at his own cost and expense, any and all such persons. Any and all
persons so employed by the Consultant shall be under the sole direction and
control of the Consultant, and the Consultant shall be and at all times remain
solely responsible for the selection; hiring; firing; disciplining; supervising;
compensating; assigning; directing; setting of wages, hours and working
conditions; and adjusting the grievances of each and all of his employees,
agents and/or servants. The Consultant shall determine the methods, means and
manners of the performance of the work of each of his employees, agents and/or
servants, if any. Radica shall not have any authority with respect to the
employment relationship between the Consultant and his employees, agents and/or
servants.
Radica shall not have any duty, responsibility or obligation of any
kind to the Consultant or to the Consultant's employees, agents and/or servants
for any fines, costs, or expenses incurred by the Consultant or any employee,
agent and/or servant of the Consultant for any violation of any statute, rule,
ordinance, regulation or other law. Radica shall not have any duty,
responsibility or obligation for or in respect to any wages; benefits; taxes;
expenses; workers' compensation insurance; other insurance for the benefit or
protection of the Consultant and/or any of his employees, agents and/or
servants; or any other aspect of the employment relationship between the
Consultant and his employees, agents and/or servants if hired or used for this
specific project. The Consultant expressly agrees that he alone has and assumes
the full and entire responsibility for the deduction and payment of any and all
state, federal and other income taxes; disability insurance premiums;
unemployment insurance taxes; old age, pension or other social security
benefits; and any and all other payments, deductions and/or contributions for
each and all of his employees, agents and/or servants if hired or used for this
specific project, and the Consultant further agrees to the best of his knowledge
to comply fully with each and every statute, rule, ordinance, regulation and
other law now or hereafter prescribed by any legally constituted authority with
respect to the Consultant's employment of any of his employees, agents and/or
servants for this specific project.
In the event of any conflict between any of the terms or provisions of
this Paragraph VIII and any of the terms or provisions of Paragraph VII of this
Agreement, the terms and provisions of this Paragraph VIII shall control for any
and all purposes.
COMPLIANCE WITH LAWS
The Consultant to the best of his knowledge shall in all ways and at all times
during the Consultancy be and remain in full and complete compliance with and
refrain from violating or causing Radica and/or its Affiliates to violate any
statute, rule, ordinance, regulation or other law now or hereafter prescribed by
any legally constituted authority, and he will at all times follow any and all
guidelines or instructions regarding compliance with such laws that are provided
to him by Radica and/or its Affiliates. However,
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neither Radica nor any of its Affiliates shall ever be responsible for issuing
any such guidelines or instructions. The Consultant shall, at his own expense,
comply with any of all statutes, rules, ordinances, regulations and other laws
now or hereafter prescribed by any legally constituted authority applicable to
the Consultant with respect to the performance of his duties, responsibilities
and obligations pursuant to this Agreement, including, without limitation, the
obtaining of any and licenses required of the Consultant in order for the
Consultant to provide the services required of him pursuant to this Agreement.
In the event of any conflict between any of the terms or provisions of this
Paragraph IX and any of the terms or provisions of Paragraph VII of this
Agreement, the terms and provisions of this Paragraph IX shall control for any
and all purposes.
X. INDEMNIFICATION
A. By Consultant
The Consultant expressly agrees to indemnify and otherwise hold
harmless Radica and each of its Affiliates and each and all of their respective
parent, subsidiary or sibling corporations; and each and all of their respective
officers, directors, shareholders, employees, representatives, agents,
successors, assigns, licensors, licensees and other affiliated persons, firms,
corporations, associations, partnerships, joint ventures and/or entities from
and against any and all lawsuits, legal actions, claims, demands, obligations,
costs, and/or liabilities whatsoever, including all attorneys' fees, arising
from, without limitation, any of the following: (1) any violation by the
Consultant, Radica and/or any of Radica's Affiliates of any statute, rule,
ordinance, regulation or other law now or hereafter prescribed by any legally
constituted authority if the violation was attributable, in whole or in part, to
the Consultant's acts or omissions; (2) any act, omission or other conduct of
the Consultant, whether or not in the performance of his duties,
responsibilities and obligations pursuant to this Agreement; (3) any and all
taxes and/or other payments for which the Consultant may be liable or which may
be due to any and all governmental taxing authorities and/or entities with
respect to or on account of any and all of the consideration afforded to the
Consultant pursuant to Paragraph V of this Agreement; (4) any personal injury or
property damage arising from any act, omission or other conduct of the
Consultant, whether or not in the performance of his duties, responsibilities
and obligations pursuant to this Agreement; (5) any verbal and/or written
statements or representations not previously approved in writing by Radica's
President made by the Consultant to any person, firm, corporation, partnership,
joint venture or other entity; and/or (6) any violation by the Consultant of any
provision of this Agreement.
For any and all purposes of this Agreement, any act, omission or other
conduct and/or any violation of any statute, rule, ordinance, regulation or
other law now or hereafter prescribed by and legally constituted authority by
any employee, agent and/or servant of the Consultant is and shall be
conclusively presumed for any and all purposes to be the act, omission,
violation and/or other conduct of the Consultant.
B. By Radica
Radica expressly agrees to indemnify Consultant for any actions or
disclosures by Radica, its employees, directors, etc., to any third parties of
any ideas or inventions created by outside inventing sources and presented to
Radica by Consultant for or in connection with this project unless expressly
agreed to in writing by the Consultant and the outside inventing source.
Further, Radica agrees that any such unauthorized disclosure could cause
Consultant and inventing source irreparable harm, loss of future income, harmful
legal action, possible cancellation or delay of work on this project, and cause
Consultant not to be able to comply with its indemnification of Radica as agreed
to above under X(A).
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THE CONSULTANT IS AN INDEPENDENT CONTRACTOR
Radica and the Consultant each specifically understands, agrees, and
acknowledges that the Consultant is for any and all purposes whatsoever an
independent contractor who is not subject to the direct control of Radica or any
of its Affiliates. The Consultant is solely responsible for successfully
performing each and all of his duties pursuant to this Agreement, and neither
Radica nor any of its Affiliates shall have any right to, and shall not, control
the manner or prescribe the method of accomplishing the services to be performed
by the Consultant. The Consultant is not authorized for any purpose or in any
manner to bind Radica or any of its Affiliates and/or to make any
representations or agreements on behalf of Radica or any of its Affiliates.
Radica and the Consultant expressly agree that (1) neither the Consultant nor
any employee, agent, servant, contractor or representative of the Consultant is
an employee, agent, servant, contractor or representative of Radica or any of
its Affiliates, and (2) the Consultant is not a joint venturer or partner for
any purpose whatsoever of or with Radica or any of its Affiliates. No provision
of this Agreement shall ever be construed by any person whomsoever for any
purpose whatsoever to (1) make the Consultant and/or employee, agent, servant,
contractor representative of the Consultant an employee, agent, servant,
contractor or representative of Radica or any of its Affiliates and/or (2) make
the Consultant a joint venturer or partner for any purpose whatsoever of or with
Radica or any of its Affiliates.
DISCLOSURE OF CONFIDENTIAL INFORMATION
The Consultant recognizes, acknowledges and agrees that, due to and during the
Consultancy, he will have access to and obtain knowledge of certain inventions,
proprietary information and/or trade secrets ("Confidential Information")
relating to the businesses of Radica or any of its Affiliates and not generally
known to the public or to the competitors of Radica or any of its Affiliates.
The Consultant recognizes, acknowledges and agrees that such Confidential
Information constitutes a valuable, special and unique asset of Radica and/or
its Affiliates, access to and knowledge of which is essential to the performance
of the Consultant's duties. The Consultant specifically agrees that, except as
directed by Radica's President, he will not any time during the Consultancy or
after any termination of the Consultancy use or disclose any Confidential
Information to any person whomsoever for or allow any Confidential Information
to be disclosed to any person whomsoever for any purpose other than for the
benefit of Radica and/or its Affiliates.
In turn, Radica recognizes that they will have access to inventors' confidential
knowledge, inventions, etc.
The Consultant agrees that the remedy at law for any breach or threatened breach
of any term, provision or convenant of this Paragraph XII would be entirely
insufficient and inadequate to protect the legitimate interests of Radica and/or
its Affiliates, and therefore any and all provisions under Paragraph XIII of
this Agreement to the contrary notwithstanding, Radica or any of its Affiliates
shall each be entitled to immediate injunctive relief for any such breach or
threatened breach in addition to any and all other relief, damages and/or other
remedies available at law or in equity to Radica or any of its Affiliates.
ARBITRATION
The Consultant and Radica each desires to resolve any and all disputes which may
ever arise between them, or between the Consultant and any of Radica's
Affiliates, solely through binding arbitration in order to avoid any possibility
of their having to incur the expense, loss of time, vagaries and uncertainties
of litigation.
Except as otherwise expressly provided in this Agreement, any controversy,
dispute and/or claim ("Claim") which Radica may have against the Consultant or
which the Consultant may have against Radica or any of its Affiliates and/or any
of their respective officers, directors, shareholders, employees,
representatives, agents, successors, assigns, licensors, licensees and other
affiliated persons, firms,
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<PAGE>
corporations, associations, partnerships, joint ventures and/or entities in
their capacity as such or otherwise, including, without limitation, any Claim
arising out of, concerning or relating to this Agreement; the Consultancy; the
meaning, application and/or interpretation of this Agreement; the formation of
this Agreement; any breach or claimed breach of this Agreement and/or any
termination of this Agreement, shall be settled solely by arbitration in
accordance with the Arbitration Rules (the "Rules") of the International Chamber
of Commerce. In the event of any conflict between the Rules and the provisions
of this Agreement, this Agreement shall control for any and all purposes.
Each party to any arbitration will pay the cost, including the attorneys fees of
presenting his or its case, and the Consultant and Radica shall each pay
one-half (1/2) of the fees of the arbitrator(s), the costs of any record or
transcript of the arbitration proceedings, any and all administrative fees, and
all other fees and costs of the arbitration. Radica shall pay the Consultant's
airfare and related expenses incident to his attendance at the arbitration
hearing.
Judgement upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
Any arbitration proceeding shall be held in United States unless Radica and the
Consultant specifically agree in writing to another location for such
proceeding.
NOTICES
All notices, requests, demands and/or other communications pursuant to or
pertaining to this Agreement shall be given in writing and shall be deemed given
upon hand delivery or within forty-eight (48) hours of being deposited in the
mail; first class, registered or certified mail; postage prepaid; and addressed
as follows:
If to Radica China Limited:
Radica China Limited
Suite R, 6/F
2-12 Au Pui Wan Street
Fo Tan, Hong Kong
If to the Consultant:
Millens W. Taft
77 Ridge Road
East Longmeadow, Massachusetts 01028
U.S.A.
Radica and/or the Consultant may change the address at which such notices,
requests, demands and other communications shall be given to it or him by
written notice to the other in the same manner as specified above in this
Paragraph XIV.
GENERAL
Waiver
No waiver of any breach of any warranty, representation, agreement, promise,
covenant, paragraph, term and/or provision of this Agreement shall be deemed to
be a waiver of any proceeding or succeeding breach of the same or any other
warranty, representation, agreement, promise, covenant, paragraph, term and/or
provision of this Agreement. No extension of the time for the performance of any
duty, responsibility, obligation or other act required or permitted by this
Agreement shall be deemed to be an extension of the
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<PAGE>
time for the performance of any other duty, responsibility, obligation or other
act required or permitted by this Agreement.
Sole and Entire Agreement
This Agreement is the sole, complete and entire contract, agreement and
understanding between the Consultant and Radica concerning the Consultancy; the
terms and conditions of the Consultancy; the duration of the Consultancy; the
termination of the Consultancy; the consideration to be paid by Radica to the
Consultant pursuant to this Agreement; and the entire relationship between the
Consultant and Radica for any and all purposes whatsoever; and this Agreement
supersedes any and all prior contracts, agreements, relationships,
understandings, and/or negotiations, whether oral or written, concerning any of
the foregoing.
Amendments
This Agreement becomes effective on the Effective Date subject to the execution
and delivery of this Agreement by both Radica and the Consultant on or before
the Effective Date, and no amendment, modification, waiver or consent relating
in any manner to this Agreement will be effective unless and until it is
embodied in a written document signed by the party to be charged with such
amendment, modification, waiver or consent.
Severability
To the extent that any provision of this Agreement shall be found to be illegal
or unenforceable for any reason, each such provision shall be deemed modified or
deleted in such a manner as to make this Agreement, as so modified, legal and
enforceable under applicable laws. The remainder of this Agreement shall
continue in full force and effect.
Applicable Law
This Agreement shall be construed, interpreted and applied solely pursuant to
the internal laws of British Virgin Islands without regard or consideration for
any conflicts of laws principles.
Construction
The language of this Agreement shall, in any and all cases, for any and all
purposes, and in any and all circumstances be construed as a whole, according to
its fair meaning, not strictly for or against the Consultant or Radica, and with
no regard whatsoever to the identity or status of any person or persons who
drafted all or any part of this Agreement.
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Execution in Counterparts
This Agreement may be executed in counterparts, each of which shall be an
original, and such counterparts together shall constitute one and the same
instrument.
RADICA CHINA LIMITED
DATED: November 1, 1997 By: /s/ Robert E. Davids
------------------------
Title: President
MILLENS W. TAFT
DATED: November 1, 1997 By:/s/ Millens W. Taft
------------------------
("The Consultant")
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Exhibit 11.1
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except for share data)
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Primary Earnings
Net income (loss) $ 29,586 $ 1,494 $ (21,723)
=========== =========== ===========
Weighted average number of
shares and common stock
equivalents outstanding 21,798,013 21,439,452 22,780,000
---------- ---------- ----------
Primary earnings (loss) per share
and common stock equivalents $ 1.36 $ 0.07 $ (0.95)
=========== =========== ===========
Fully diluted
Net income (loss) $ 29,586 $ 1,494 $ (21,723)
=========== =========== ===========
Weighted average number of
shares outstanding 20,761,020 21,439,452 22,780,000
---------- ---------- ----------
Assuming conversion of stock options
under the employment agreement
and Stock Option Plan 1,351,297 N/A N/A
---------- ---------- ----------
Weighted average number of
shares and common stock
equivalents outstanding after
considering effects of stock option 22,112,317 21,439,452 22,780,000
---------- ---------- ----------
Earnings per share and common stock
equivalents outstanding (1) $ 1.34 $ 0.07 N/A
=========== =========== ==========
</TABLE>
(1) Fully diluted earnings per share is not applicable in 1995 as the Company
made a loss.
Exhibit 21.1
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)
- Radica UK Ltd UK
- Radica Canada Ltd Canada
Disc., Inc. Nevada
INTERNATIONAL
Radica Limited Hong Kong
- Radica China Ltd British Virgin Islands
- Dongguan Radica Games People's Republic of China
Manufactory Co. Ltd
- RadMex S.A. de C.V. (dormant) Mexico
Radica Sales (HK) Ltd Hong Kong
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Radica Games Limited
We consent to the incorporation by reference in Registration Statement Nos.
33-86960 and 333-07000 on Form S-8, and Registration Statement No. 333-07526 on
Form F-3 of Radica Games Limited of our report dated December 17, 1997,
appearing in this Annual Report on Form 20-F of Radica Games Limited for the
year ended October 31, 1997.
/S/ Deloitte Touche Tohmatsu
HONG KONG
December 17, 1997
