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, 1998.
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 18,864,294
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 handheld and table top game products and then diversified
its business to other handheld electronic game categories including sports,
heritage and action games. In 1998 the Company's largest category in sales was
fishing games in which, according to the NPD group, the Company was the dominant
seller in 1998 as was also the case with Casino games.
The Company's principal products include a range of Fishing games,
Combat games, Sports games, Casino games, Heritage games and Extreme games. The
Company expects to produce new electronic handheld games in 1999 (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 April 1998, the Company acquired the business and assets of
KidActive, LLC, dba Girl Tech(TM), of San Rafael, California. Girl Tech(TM) has
created a line of personal electronic products for girls that were introduced at
the New York Toy Fair in February 1998. The acquisition is intended to allow the
Company to expand into the girls electronics market, a rapidly growing segment
of the toy industry.
The Company also undertakes Original Design Manufacturing ("ODM") for
the Hasbro Games Group, producing well-known electronic versions of games such
as Yahtzee(TM), Trivial Pursuit(TM) and Monopoly(TM).
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".
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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 Inc., 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 Limited ("Radica China") and Radica Games Limited ("Radica Games").
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 90% of its sales through Radica USA in fiscal 1998 (excluding ODM
sales).
In December 1993, Radica Games was established as a holding company of
Radica HK. Prior to the closing of the IPO, Radica Games 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 April 1998 the Company acquired the assets and business of Girl
Tech(TM) from KidActive, LLC. A Girl Tech(TM) line of electronic toys and
gadgets for girls is planned for release in 1999.
In August 1998 the Company completed its expansion of 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 and
markets. 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
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combine knowledge of the casino gaming industry with experience in new product
introduction, electronic game design and low cost manufacturing. Since 1996 the
Company has placed more emphasis on non-casino 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. Girl
Tech products are packaged under the name of "Girl Tech(TM)".
Radica believes its ability to develop and introduce innovative
products is enhanced by its established innovative product design and
engineering in the United States and its multiple channel distribution
capabilities, which allow for close customer contact. 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.
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 ODM for other
companies, of which the manufacturing for the Hasbro Games Group is an example.
PRODUCTS
At the end of fiscal year 1998, Radica's principal products included 4
models of Fishing games (Deep Sea Fishin'(TM), Bass Fishin'(TM), Lunker Bass
Fishin'(TM)) and Jr. Bass Fishin'(TM); 4 models of Combat games (Sub
Assault(TM), Tank Assault(TM), Tracer Ace(TM) and Stealth Assault(TM); 8 models
of Sports games (World Class Golf, King Pin Bowling, NASCAR(TM) Racer, Monte
Carlo NASCAR(TM) Racer, FIFA World Cup 98, Soccer Striker(TM), Pro World Class
Golf(TM) and Grand Prix 2000(TM); 8 models of Heritage games (Solitaire,
Checkers, Touch Screen Checkers, Dominoes, Bingo Box, Solitaire Lite(TM), Touch
Screen Solitaire and Tic Tac Toe); 3 models of Extreme games (Trail Burner(TM),
Enduro Racer(TM) and Inline Alley(TM)); 18 models of handheld and tabletop
Casino games (including electronic poker, blackjack, slot games and tabletop
mechanical slot machine banks); and 18 models of ODM games (including Connect
Four(TM), Battleship(TM), Yahtzee(TM), Hangman(TM), Sorry(TM), Perfection(TM),
Trivial Pursuit(TM) and Monopoly(TM), the first three of which are also sold
under the Company's Monte Carlo trade name). In addition the Company has a
number of 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 approximately 25 new models in 1999. In fiscal
1998, Fishing games accounted for approximately 44% of net sales, Combat games
accounted for approximately 4.6% of net sales, Sports games accounted for
approximately 10% of net sales, Heritage games accounted for approximately 7.4%
of net sales, Extreme games accounted for approximately 4.5% of net sales,
Casino games accounted for approximately 8.5% of net sales and ODM products,
including those sold under the Company's Monte Carlo trade name, accounted for
approximately 21% of net sales. In fiscal 1998, the Company's products had
retail prices ranging from $5 to $50.
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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,
---------------------------------------------------------------------------------------
1995 1996
----------------------------------------- ------------------------------------------
% OF UNITS NO.OF % OF UNITS NO.OF
UNITS NET SALES NET SALES SOLD MODELS NET SALES NET SALES SOLD MODELS
- ----- --------- --------- ----- ------ --------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fishing games $ - 0.0% - - $ 5,363,082 11.3% 465,271 1
Sports games - 0.0% - - 3,245,068 6.8% 269,107 6
Casino games
- --Handheld 41,929,528 79.6% 7,457,696 73 15,901,992 33.5% 5,037,180 85
- --Tabletop 7,863,600 14.9% 704,354 26 3,335,684 7.0% 357,425 32
Heritage games 1,521,825 2.9% 116,995 3 8,218,728 17.3% 659,755 8
ODM products 1,335,355 2.6% 282,681 2 11,471,024 24.1% 2,192,099 7
(including those sold under
Monte Carlo trade name) ----------- ------ --------- --- ------------ ------ --------- ---
Total $52,650,308 100.0% 8,561,726 104 $ 47,535,578 100.0% 8,980,837 139
=========== ====== ========= === ============ ====== ========= ===
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------------
1997 1998
----------------------------------------- ------------------------------------------
% OF UNITS NO.OF % OF UNITS NO.OF
UNITS NET SALES NET SALES SOLD MODELS NET SALES NET SALES SOLD MODELS
- ----- --------- --------- ----- ------ --------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fishing games $35,692,328 40.7% 3,261,086 3 $ 68,484,062 44.0% 5,598,897 5
Combat games 2,350,350 2.7% 208,649 2 7,184,035 4.6% 548,632 4
Sports games 8,198,529 9.3% 726,478 7 15,583,238 10.0% 1,145,824 12
Casino games
- --Handheld 11,611,350 13.2% 3,416,426 84 11,722,194 7.6% 3,035,888 54
- --Tabletop 2,068,168 2.4% 238,310 32 1,430,686 0.9% 172,956 11
Heritage games 10,765,909 12.3% 985,163 16 11,567,117 7.4% 1,037,105 16
Extreme games - 0.0% - - 7,037,236 4.5% 466,921 3
ODM products 17,073,657 19.4% 3,519,665 12 32,609,761 21.0% 5,663,867 20
(including those sold under
Monte Carlo trade name) ----------- ------ ---------- --- ------------ ------ ---------- ---
Total $87,760,291 100.0% 12,355,777 156 $155,618,329 100.0% 17,670,090 125
=========== ====== ========== === ============ ====== ========== ===
</TABLE>
The Company's Fishing games are electronic handheld versions of popular
fishing activities such as Bass Fishin' (TM) and Deep Sea Fishin'(TM). These
games provide significant additional stimulus when
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compared to traditional handheld electronics games as they must be physically
cast and then vibrate when a fish is on the line. More fishing games are planned
for introduction in 1999.
The Company's Combat games such as Stealth Assault(TM), Tracer Ace(TM),
Night Vision Tank Assault(TM) and Night Vision Sub Assault(TM) are electronic
games which are held up to the eyes like 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. Stealth Assault has proprietary Virtual Motion
Sensor(TM) ("VMS") technology allowing the user to virtually fly the game by
tilting it left or right or up or down.
The Company's Sports games are electronic handheld versions of popular
sports activities such as Bowling and Golf. Company designers have incorporated
the interesting aspects of sports activities into these electronic handheld
games. More Sports games are planned for introduction in 1999.
The Company's current Casino 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. Two additional Casino games are
being introduced in 1999 (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 Heritage games such as Checkers, Tic Tac Toe, Dominoes
and Solitaire are electronic handheld versions of classic card 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
games are planned for introduction in 1999.
The Company's Extreme games such as Trail Burner(TM) and Inline
Alley(TM) also incorporate VMS(TM) technology to allow the user a virtual
reality experience in mountain biking or inline skating.
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 1999, Radica intends to expand its line of games by
introducing approximately 25 new games in the following categories: Radica
Fishing (3 games); Radica Sports (5 games); Radica Heritage (4 games); Radica
Extreme (1 game); Radica Combat (1 game); Radica Hunting (2 games); Radica
Casino (2 games); and Girl Tech(TM) (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
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different tastes and financial means. The Company will also continue to provide
its Monte Carlo brand products to higher end retailers.
In addition, following the acquisition of the assets of KidActive, LLC
(dba Girl Tech(TM)) in April 1998, the Company is bringing out a new line of
electronic games and gadgets under the Girl Tech(TM) brand name for girls. This
category is expected to introduce 7 games during fiscal 1999.
In fiscal 1998, the Company introduced 2 new Fishing games (Junior Bass
Fishin'(TM) and Lunker Bass Fishin'(TM)); 6 new Sports games (NASCAR(R) Racer,
Monte Carlo NASCAR(R) Racer, FIFA World Cup 98, Soccer Striker(TM), Pro World
Class Golf(TM) and Grand Prix 2000(TM)); 2 new Heritage games (Solitaire
Lite(TM) and Touch Screen Solitaire); 2 new Combat games (Tracer Ace(TM) and
Stealth Assault(TM)); 3 new Extreme games (Trail Burner(TM), Inline Alley(TM)
and Enduro Racer(TM)) and 5 new Casino handheld games (Pocket Draw Deuces Poker,
Pocket Blackjack 21, Pocket Slot, Player's Choice Poker and Player's Choice
Blackjack).
The Company anticipates that new product introductions in fiscal 1999
will be concentrated in the second and third quarters of that year. By the end
of fiscal 1999, the Company expects its product line to include approximately 58
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 1999 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.
In 1998 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
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and commenced operations in June 1995. The first phase of the Factory has
approximately 241,000 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 was completed in August 1998 and has approximately 223,000
sq. ft. of additional factory space and dormitory facilities for up to an
additional 2,200 workers. The cost of the rights to use the site and
construction of the first phase was approximately $6.0 million, and the second
phase approximately $3.0 million, exclusive of manufacturing equipment. The unit
capacity of the Factory depends on the product mix produced. The Company
believes that at peak it can produce in excess of 800,000 units of handheld
games per week. 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.
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.
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 four weeks 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 1998 included Epson Hong Kong
Limited (semiconductor chips), Gillette Hong Kong Limited (batteries), GPI
International Limited (batteries), Just Technology Co. Limited (keypads), Leader
Printed Circuit Boards Limited (PCBs), Lik Sun Printing Co. Limited
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(printing), Meise Label Printing Fty (printing), Onpress Printed Circuit Boards
Limited (PCBs), Picvue Electronics Limited (LCDs), Sunplus Technology Co.,
Limited (semiconductor chips) and United Radiant Technology (HK) Limited (LCDs).
SALES AND DISTRIBUTION
Radica's products are sold in over 30 countries, with the United States
accounting for over 90% of net sales in fiscal 1998. The Company sells its
products directly to over 1,300 active retailers in the United States and to
approximately 13 distributors worldwide. The Company participates in the
electronic data interchange ("EDI") program maintained by 30 customers including
J.C. Penney's, Sears, Target, Wal-Mart, Walgreens and K-Mart. In fiscal 1998,
the largest customer of the Company, Wal-Mart, accounted for 25.4% of net sales;
in addition ODM work for the Hasbro Games Group accounted for 20.7% of net
sales. Our top five customers (excluding ODM business) were as follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
- ------------- -------------------
1998 1997
---- ----
1. Wal-Mart (USA) 25.4% 20.9%
2. Target (USA) 10.7% 10.9%
3. Toys 'R' Us (worldwide) 6.9% 3.4%
4. K-Mart (USA) 3.9% 3.0%
5. Kohl's (USA) 3.4% 4.3%
The following table sets forth certain of the Company's major customers
in 1998, including distributors (alphabetical order).
<TABLE>
<CAPTION>
DEPARTMENT STORES DRUG STORES INTERNATIONAL DISTRIBUTORS MASS MERCHANDISERS
- ----------------- ----------- -------------------------- -----------------
<S> <C> <C> <C>
Dayton Hudson Arbor Drugs Inc. Agerex (Finland) Ames
Dillards Eckerd Corporation Alec Cooper (South Africa) Army Airforce Exch.
Foley's Genovese Drugs Ban Kee Trading (Philippines) Bradlees
Gottschalk London Drugs Darmon (France) Hills
J.C. Penney's Long's Drugs Estona Incorporated (Japan) K-Mart
Kohl's Osco Drug Hasbro Australia (Australia & New Zealand) Meijer
Macy's Thrifty Payless Drug Income Express (Hong Kong) Mervyns
Marshall Fields Walgreens L.E. Int'l Corp. (Taiwan) QVC
Robinson's-May Mastarting A.B. (Sweden) Target
Popular de Juguetes (Spain) Bust
Sheng Tai Toys (Singapore) Wal-Mart
The Oriental Trading Co. (Hong Kong) Woolworths
Universal Electronics (Lebanon)
</TABLE>
<TABLE>
<CAPTION>
CONSUMER
CATALOG SHOWROOMS MAIL ORDER RETAILERS SPECIALTY GIFT SHOP OPERATORS ELECTRONICS STORES
- ----------------- -------------------- ----------------------------- ------------------
<S> <C> <C> <C>
Service Merchandise Fingerhut Caesar's World Best Buy
Sharper Image Home Shopping Network Circus Circus Radio Shack
Argos H. Schneider (Germany) Host Marriott
Index Wish Book Spencer Gifts
Innovations Dufferen Game Room Stores
</TABLE>
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GROCERY &
CONVENIENCE STORES TOY RETAILERS SPORTING GOODS STORES
- ------------------ ------------- ---------------------
Albertsons Kay Bee Sports Authority
Emro Marketing Toys'R'Us Bass Pro Shops
Kroger
L&L Jiroch
M.W. Kasch
W.H. Smith
Westfair Super Stores
Since 1990, 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 is attempting to improve the quality of its distribution
network and expects to add new distributors in fiscal 1999, in Australia, New
Zealand, Japan, France, U.K. and Scandinavia.
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, ODM orders tend to be placed 3 months or more in
advance. The Company's backlog orders as of the end of fiscal 1998 were
approximately $19 million, of which approximately $13 million related to ODM
business. This compares to approximately $16.5 million at the end of fiscal
1997.
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 100
staff worldwide. The Company's product development starts with teams in Reno,
Nevada; Dallas, Texas and San Rafael and Torrance, California 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
1996, 1997 and 1998, the
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Company spent approximately $1,699,000, $2,099,000 and $3,710,000, 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 and marketing
departments seek 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.
ORIGINAL DESIGN MANUFACTURING
In 1995, the Company was successful in establishing a relationship with
the Hasbro Games Group to design and manufacture product for them. The Company
intends to pursue other ODM business in the future. However it is uncertain
whether the Company can retain its current business on a long term basis or
successfully attract additional original design manufacturing business or that
it will be profitable.
INTELLECTUAL PROPERTY
The Company currently owns 18 design patents, 2 utility patents, 7
trademarks and has certain copyrights over its artwork. It also has 54 design
patents, 4 utility patents and 145 trademark applications in process and will
continue to obtain copyrights, trademarks, design and utility patents for new
products. In April 1998 at the Port of Los Angeles, U.S. Marshals seized
quantities of Bass Fishin'(TM) knockoffs imported by Exactly for Smart People,
Inc. of Culver City, CA from Techno Power Technology Limited, of Hong Kong. In
August 1998, the Company successfully obtained a final settlement from a large
Australian toy and games retailer in the form of cash, receipt of all stocks of
infringing product and written undertakings from the retailer confirming
Radica's exclusive rights in Bass Fishin'(TM) and agreeing not to sell any
further copies of counterfeit Bass Fishin'(TM) games. The Company has a number
of ongoing negotiations with companies in the U.K., Australia, China and the
U.S.A. with regards infringement of its intellectual property rights.
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 games and is
one of the dominant sellers of other handheld electronic games. The Company's
primary competitor is Tiger Electronics, Inc. ("Tiger") which was purchased by
the Hasbro Games Group during 1998. 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
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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 ODM 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%. 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 (1997), the
Company has operated under a two year tax holiday in China. This commenced on
January 1, 1997 and ends on December 31, 1998 and will be followed by a three
year period of reduced tax, 12%, 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. 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, 1998 the Company had 4,378 full-time employees (71 in
North America, 2 in Europe and 4,305 in Asia), of whom 4,012 worked in
production processes including manufacturing, purchasing, materials, shipping
and stores (including those employed under the Joint Venture and Processing
Agreements in China); 31 worked in sales and marketing; 108 worked in
engineering and development; 30 worked in finance and 197 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.
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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
and China 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 had its first profitable year in 1997 and will become
taxable on January 1, 1999 at 12% (half of the current rate) until December 31,
2001. After
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this it will be taxed at the full rate of income tax. 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. 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 five 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. 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 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.
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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.
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 controlled number of products, while representing a
more diverse range of products, e.g., Sports games, Heritage card games, the
Girl Tech(TM) line and ODM games, in addition to Casino 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 14 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.
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
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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 design 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 perform additional ODM manufacturing in China
successfully.
NO ASSURANCE OF CONTINUED ODM BUSINESS
The Company's contract with the Hasbro Games Group can be ended on 180
days notice. There can be no guarantee then such business can be retained
indefinitely. Loss of such business would materially affect the Company's
revenues.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is substantially dependent upon the
expertise and services of its senior management personnel. The loss of the
services of senior executives would have an adverse effect on the Company's
business.
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 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 ODM 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 21 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 ODM 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.
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INTELLECTUAL PROPERTY RISKS
From time to time, other companies and individuals may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies or marks that are important to the electronic handheld and
mechanical games industry generally or to the Company's business specifically.
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 was 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. The Company anticipates that taxes paid
in China will increase after December 31, 1998. See "Taxation of the Company and
its Subsidiaries".
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 product and while the Company believes it will be able to enforce this
policy under normal industry
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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. Robert E. Davids, Vice Chairman and Chief Executive
Officer of the Company, and a group that consists of Dito Devcar Corporation 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 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
At October 31, 1998, the Company had 18,864,294 shares of Common Stock
outstanding. The Company estimates that approximately half of such shares were
sold in a registered offering or in a transaction under Rule 144, and therefore
such shares (other than any shares purchased by "affiliates" of the Company) are
tradable without restriction. 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 affected by future
sales of Common Stock by existing shareholders.
YEAR 2000 COMPLIANCE RISKS
The Year 2000 compliance issue arises from the fact that a significant
percentage of the software utilized by businesses relies on two-digit date codes
to perform computations and decision-making functions. Commencing on January 1,
2000, these computer programs may fail from an inability to interpret date codes
properly, misinterpreting "00" as the year 1900 rather than 2000. The Company
has
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completed an evaluation of both its information technology systems and its
non-technology systems, such as equipment containing microprocessors. The
Company believes that all information technology and non-technology systems in
its corporate head office in Hong Kong and in its subsidiary offices have been,
or by March 31, 1999 will have been, modified to address the Year 2000 issue.
Such major systems include the BPCS manufacturing software in Hong Kong and
China, and the Solomon software used to run the U.S. distribution operation in
Radica USA. To assist with this process the Company has contracted with
Commercial Software Services Ltd in Hong Kong to assist in upgrading and testing
of systems and Spectrum Solutions in the U.S. to test all software and hardware,
including simulation of Year 2000. The Company does not believe that the costs
associated with implementing its Year 2000 compliance plan for its corporate
offices are material to the Company's financial condition or operations.
It is estimated that such costs will be as follows:
Actual Expenditure
through October 31, 1998
a) New software/upgrades $46,000 $36,129
b) Consultants for testing/review 76,400 26,467
c) Interest lost on funds used to
purchase raw materials early 20,000
d) Contingency 50,000
------- -------
TOTAL $192,400 $62,596
The Company is in the process of compiling information concerning the
Year 2000 compliance of its key suppliers and customers through the process of
issuing questionnaires and monitoring responses. In the event that any of the
Company's key suppliers or customers do not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected. The Company's Year 2000 compliance plan includes encouraging and/or
requiring Year 2000 compliance by all key suppliers.
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 the first
phase of construction of its Factory (241,000 sq. ft.) on a 3.7 acre parcel of
land in May 1995 and the second phase (223,000 sq. ft.) in August 1998. The
Company owns a long-term leasehold on its executive offices (13,500 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. 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.
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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 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 a
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. Plaintiffs sought no further review and such
judgment is now final.
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, 1998:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
- -------------- --------------- ------------ ----------------
Common stock Robert E. Davids 3,265,800 17.3%
Common stock Dito Devcar Corporation et al 6,062,218 32.1%
Common stock Officers & Directors as a Group 3,716,350 19.7%
In addition to the foregoing, the Company is aware of one other
significant shareholder who is believed to own approximately 5% of the
Company's common stock. This is The John and Mary Hansen 1989 Trust
(the "Hansen Trust") (including shares owned by other Hansen family
trusts or
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individuals). The Company expects to update this information in its
Proxy Statement for its 1999 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.
PART II
ITEM 5. NATURE OF TRADING MARKET
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 1998, fiscal 1997 and fiscal 1996.
<TABLE>
<CAPTION>
Fiscal year 1998 Fiscal year 1997 Fiscal year 1996
-------------------------- -------------------------- ------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $
First Quarter ........ 19 12 7/8 3 1/4 1 1/16 2 1/2 1 1/8
Second Quarter ....... 20 5/8 14 3/4 4 1/8 2 3/8 2 1 1/4
Third Quarter ........ 22 1/4 16 1/8 7 7/8 2 7/8 1 15/16 15/16
Fourth Quarter ....... 16 5/8 9 3/4 15 3/8 7 1/2 1 3/4 3/4
</TABLE>
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, 1998, the Company had approximately 130 record
holders of its Common Stock, and approximately 80% 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
non-resident of 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
21
<PAGE>
involving any person regarded as resident in Bermuda for exchange control
purposes require specific prior approval under the Exchange Control Act 1972.
There are no limitations on the rights of non-Bermuda resident holders
of the Common Stock to hold or vote their shares. Because the Company has been
designated as non-resident for Bermuda exchange control purposes, there are no
restrictions on its ability to transfer funds in and out of Bermuda or to pay
dividends to United States residents who are holders of the Common Stock, other
than in respect of local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in
the names of corporations or individuals. In the case of an applicant acting in
a special capacity (for example, as an executor or trustee), certificates may,
at the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
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, unless authorised
by its memorandum of association and with the consent of the Minister of
Finance, participate in certain business transactions, including: (1) the
acquisition and holding of land in Bermuda (except that required for its
business and held by way of lease or tenancy for terms of not more than 50 years
or with the Minister's consent, land by way of lease or tenancy agreement for a
term not exceeding 21 years in order to provide accommodation or recreational
facilities for its officers and employees); (2) the taking of mortgages on land
in Bermuda to secure an amount in excess of $50,000; (3) the acquisition of any
bonds or debentures secured on any land in Bermuda except bonds or debentures
issued by the Bermuda Government or a public authority; or (4) the carrying on
of business of any kind 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
22
<PAGE>
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.
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"
23
<PAGE>
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 20% in respect of property held for more than one year.
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 1998.
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 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
24
<PAGE>
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 1998. 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, interests, 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.
25
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA
Set forth below is the selected income statement and balance sheet data
for each of the five years in the period ended October 31, 1998. This summary
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and the combined financial
statements and note thereto included elsewhere in this document.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MARGINS)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $72,092 $52,650 $47,535 $87,760 $155,618
Cost of sales 37,823 34,640 30,696 40,888 70,576
Gross profit 34,269 18,010 16,839 46,872 85,042
Operating expenses:
Selling, general and administrative 13,657 21,105 11,752 14,403 27,788
Research and development 1,577 2,084 1,699 2,099 3,710
Write down of assets - 15,318 - - -
Acquired research and development - - - - 1,500
Depreciation and amortization - 1,591 1,594 2,278 3,423
Total operating expenses $15,234 $ 40,098 $15,045 $18,780 $36,421
Operating income (loss) from continuing operations 19,035 (22,088) 1,794 28,092 48,621
Other income - 329 748 915 807
Share of loss of affiliated company - - - (141) (334)
Net interest income (expenses) 95 (628) (165) 913 1,896
Income (Loss) from continuing operations before income taxes
and unusual item 19,130 (22,387) 2,377 29,779 50,990
Unusual item - - 709 - -
Income (Loss) from continuing operations before income taxes 19,130 (22,387) 3,086 29,779 50,990
Credit (Provision) for income taxes (1,950) 897 120 (193) 226
Income (Loss) from continuing operations after income taxes $17,180 $(21,490) $3,206 $29,586 $51,256
Discontinued Operations:
Loss from operation of pub poker business (20) (233) (1,712) - -
Net income (loss) $17,160 $(21,723) $ 1,494 $29,586 $51,256
Net earnings (loss) per share from continuing operations $ 0.81 $ (0.94) $ 0.15 $ 1.43 $ 2.53
Effect of discontinued operations - (0.01) (0.08) - -
Net earnings (loss) per share $ 0.81 $ (0.95) $ 0.07 $ 1.43 $ 2.53
Average number of shares outstanding 21,308 22,780 21,439 20,761 20,240
</TABLE>
(continued)
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MARGINS)
<S> <C> <C> <C> <C> <C>
Statistical data:
Gross margin 47.5% 34.2% 35.4% 53.4% 54.6%
Operating margin 26.4% N/A 3.8% 32.0% 31.2%
Dividends per share (1) $ 0.17 - - - -
Balance Sheet Data:
Working capital $39,733 $15,878 $18,847 $48,860 $59,913
Total assets 87,326 54,054 42,725 79,449 113,521
Long-term debt 73 99 - - -
Total debt 18,673 14,440 99 - -
Shareholders' equity 51,821 30,297 31,813 61,593 79,839
<FN>
(1) During the periods presented the only dividends paid were cash dividends of
$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).
</FN>
</TABLE>
27
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
The following table sets forth items from the Company's Consolidated
Statements of Income as a percentage of net revenues:
Year ended October 31,
------------------------------
1996 1997 1998
------ ------ ------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 64.6% 46.6% 45.4%
Gross margin 35.4% 53.4% 54.6%
Selling, general and administrative 24.7% 16.4% 17.8%
Research and development 3.6% 2.4% 2.4%
Acquired research and development - - 1.0%
Depreciation and amortization 3.3% 2.6% 2.2%
Operating income (loss) 3.8% 32.0% 31.2%
Other income 1.6% 1.0% 0.5%
Share of loss of affiliated company - (0.1%) (0.2%)
Interest income (expense), net (0.4%) 1.0% 1.2%
Unusual item 1.5% - -
Income before income taxes 6.5% 33.9% 32.7%
Credit (provision) for income taxes 0.3% (0.2%) 0.2%
Discontinued operation (3.7%) - -
Net income (loss) 3.1% 33.7% 32.9%
Net sales for the year ended October 31, 1998 were $155.6 million,
increasing 77.2% from $87.8 million for the prior year.
28
<PAGE>
The following table sets out the percentages of sales achieved from
each category of products:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1997 1998
---------------------------- -----------------------------
% OF UNITS NO.OF % OF UNITS NO.OF
PRODUCT LINES NET SALES SOLD MODELS NET SALES SOLD MODELS
----------------- --------- ----- ------ --------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Fishing games 40.7% 3,261,086 3 44.0% 5,598,897 5
Combat games 2.7% 208,649 2 4.6% 548,632 4
Sports games 9.3% 726,478 7 10.0% 1,145,824 12
Casino games
--Handheld 13.2% 3,416,426 84 7.6% 3,035,888 54
--Tabletop 2.4% 238,310 32 0.9% 172,956 11
Heritage games 12.3% 985,163 16 7.4% 1,037,105 16
Extreme games 0.0% - - 4.5% 466,921 3
ODM products 19.4% 3,519,665 12 21.0% 5,663,867 20
------ ---------- --- ------ ---------- ---
Total 100.0% 12,355,777 156 100.0% 17,670,090 125
====== ========== === ====== ========== ===
</TABLE>
During 1998, the Company sold 125 different models of games, totaling
17.7 million units, compared to 156 models totaling 12.4 million units in 1997,
an increase of 42.7%. Of the 125 models of Radica and Monte Carlo games sold
during the period a number of models are discontinued lines, which unless the
market warrants reintroduction, the Company only intends to continue selling so
long as inventories exist. Twenty new models were sold during 1998 (See "New
Products Introduction"). The Company intends to introduce approximately 25 new
models in 1999.
The gross profit for fiscal year 1998 was $85.0 million compared to
$46.9 million for fiscal 1997, an increase of 81.2%. The gross margin for the
year was 54.6% compared to 53.4% for fiscal year 1997.
Operating profit for fiscal year 1998 was $48.6 million, an increase of
$20.5 million from $28.1 million in fiscal 1997. Operating expenses increased to
$36.4 million from $18.8 million in 1997.
The following table lays out the changes in operating expenses for the
major expense categories.
October 31,
-----------
1997 1998
---- ----
(dollars in millions)
Commissions $ 2.45 $ 4.73
Indirect salaries and wages 4.72 6.36
Advertising and promotion expenses 0.80 9.20
Research and development expenses 2.10 3.71
29
<PAGE>
The effective blended tax rate for the year ended October 31, 1998 was
a credit of 0.5% on continuing operations compared to a provision of 0.6% for
fiscal 1997. The tax credit for the year was comprised of an expense of $4.0
million representing 7.8% of pre-tax income, offset by a one time deferred tax
credit of $4.6 million. This compared to a charge of $0.2 million in 1997, or
0.6% of pre-tax income. The increase in tax expense for the year was as a result
of the brought forward losses in the U.S. subsidiary being used up resulting in
the U.S. profits of the distribution operation becoming fully taxable.
Net profit for fiscal year 1998 of $51.3 million or $2.53 per share
compared to $29.6 million or $1.43 per share in fiscal 1997.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents totaled $33.1 million at October 31, 1998, a
drop of $0.4 million from October 31, 1997. Working capital at October 31, 1998
was $59.9 million, an $11.0 million increase from working capital of $48.9
million at October 31, 1997. The increase in working capital is due primarily to
an increase in net income offset by the purchase of 2,610,400 Company shares at
average price of $14.36 during the fiscal year. The ratio of current assets to
current liabilities decreased to 2.8 at October 31, 1998 from 3.7 at October 31,
1997. This decrease in the current ratio is due mainly to the purchase of the
Company's shares. There were no short-term borrowings at October 31, 1998 and
1997.
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.
FISCAL 1997 COMPARED TO FISCAL 1996
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 games, 12.4% to Heritage games, 2.7% to Action games,
15.7% to Casino games and 18.6% to Original Design Manufacturing "ODM" 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 were discontinued lines, which unless the market warranted
reintroduction, the Company only intended to continue selling so long as
inventories exist. 10 new models were sold during 1997.
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 ODM
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
30
<PAGE>
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 was
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 were 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 $1.43 per share
compared to $1.5 million or $.07 per share in fiscal 1996.
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 games, 17.3% to Heritage games, 18.1% to Sports games
and 24.1% to ODM 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 were discontinued lines, which unless the
market warrants reintroduction, the Company only intended 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 and Heritage product at higher margins offset by
continued sales of promotional Casino product at low margins and lower margin
ODM 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 was 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.
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<PAGE>
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.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in transactions in the ordinary course of
its business to hedge itself against exposure to currency risks.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth the directors and executive officers of
the Company in fiscal 1998.
<TABLE>
<CAPTION>
Term
Name Expires Residency Position
- ---- ------- --------- --------
<S> <C> <C> <C>
Robert E. Davids 1999 Hong Kong Vice-Chairman, Chief Executive Officer
and Director
Jon N. Bengtson 1999 USA Chairman of the Board and Director
Patrick S. Feely 1999 USA President, Chief Operating Officer and Director
David C.W. Howell 1999 Hong Kong Executive Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
Lam Siu Wing 1999 USA Vice President, Engineering and Director
Robert Townsend (1) Deceased USA Director
James O'Toole (2)(3) 1999 USA Director
Millens W. Taft (2)(3) 1999 USA Director
Peter Thigpen (2)(3)(4) 1999 USA Director
Henry Hai-Lin Hu (2)(3)(5) 1999 Australia Director
Gene Murtha N/A USA President, Radica USA
Wong Kam Cheong N/A Hong Kong Vice President of China Operations
Hermen H.L. Yau N/A Hong Kong MIS Director
Samuel Kwok N/A Hong Kong Plant Administration Director
Ben Hui N/A Hong Kong Materials Director
Y.L. Wang N/A China Quality Director
Rick C.K. Chu N/A Hong Kong International Sales Director
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Christopher Dingley N/A UK General Manager, Radica UK Ltd
Michael L. Pikett N/A Canada President, Radica Canada Ltd
<FN>
(1) Mr. Townsend served as a director of the Company from June 1994 until his
death in January 1998.
(2) Member of the Audit Committee.
(3) Member of the Compensation, Organization and Nominating Committee.
(4) Mr. Thigpen was appointed as an outside director on June 16, 1998.
(5) Mr. Hu was appointed as an outside director on December 14, 1998
</FN>
</TABLE>
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 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 in January 1996, and has been a director of the Company since January
1994. He is currently the President and Chief Operating Officer of U-Tel, Inc.,
a telecommunications company. Mr. Bengtson 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 Chief Operating Officer
and Director until 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.
33
<PAGE>
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 was the head of the Radica HK
Engineering department for eight years since joining the company in 1985. Mr.
Lam has over 18 years of experience in manufacturing, product design and
engineering management. He has an Associateship in Production and Industrial
Engineering from Hong Kong Polytechnic, a post graduate diploma in Engineering
Management from City Polytechnic of Hong Kong, and is an associate member of the
Institute of Electrical Engineers of UK.
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 he 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.
Peter Thigpen has been a director of the Company since June 1998. He
owns Executive Reserves, a consulting company that specializes in quality
processes, ethics and marketing strategy. Prior to starting Executive Reserves,
Mr. Thigpen was Senior Vice President - U.S. Operations and a member of the
Executive Management Committee at Levi Strauss & Company, retiring after 23
years with the San Francisco-based apparel company. During his tenure at Levi
Strauss, Mr. Thigpen held positions of President of European Operations,
President - Levi Strauss USA, President - The Jeans Company and was a member of
the Board of Directors. Mr. Thigpen is a Senior Fellow and a Moderator at the
Aspen Institute, member of the Board of the San Francisco School Volunteers,
member of the Board of Governors of the Josephson Institute of Ethics, a
lecturer on ethics at the Haas Graduate School of Business at the University of
California, Berkeley, Member of the Board of Directors of Designs, Inc. and the
Gymboree Corporation.
Henry Hai-Lin Hu has been a director of the Company since December
1998. He is currently the Principal of Business Plus Consultants Limited
providing services to Hong Kong toy companies on business development. From 1993
through 1996, he was Chairman and Chief Executive Officer of Zindart Industrial
Co. Ltd., a NASDAQ listed manufacturer of die cast car replicas and premium
giftwares. He co-founded Wah Shing Toy Group since 1982, a Singapore listed toy
company, and retired
34
<PAGE>
from Wah Shing in 1991. Mr. Hu has served in director and senior officer roles
in several toy companies in Hong Kong since 1967. He has a B.Sc in Mechanical
Engineering from Hong Kong University, is a Registered Professional Engineer,
and a member of the Institution of Electrical Engineers, Hong Kong.
Gene Murtha has been the President of Radica USA since December 1998. A
20-year veteran of the Toy and Game Industry, Mr. Murtha recently served as
Mattel's Vice President of Marketing with worldwide responsibilities for the
Matchbox line of products. He has previously held senior marketing and R&D jobs
with game companies such as Milton Bradley and Coleco, where he had
responsibility for such classic brands as Scrabble, Trivial Pursuit and
Parcheesi.
Wong Kam Cheong has been the Vice President of China Operations for the
Company since May 1998. Prior to that, he was the Director of Manufacturing for
the Company from June 1994 to May 1998. Mr. Wong has over 19 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 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
17 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.
Samuel Kwok has been the Plant Administration Director since February
1998. Mr. Kwok has over 10 years working experience in Finance and
Administration in multinational companies and is responsible for the general
administration in the China factory. He has an MBA and is a certified
accountant.
Ben Hui has been the Materials Director since May 1998. Prior to that,
he has previously held materials and purchasing management jobs with companies
such as Sunciti Manufacturers Limited, HK Air Cargo Terminals Limited, Computer
Products and Saitek Ltd. Mr. Hui has 20 years extensive experience in
manufacturing management with responsibility for purchasing, shipping, inventory
and warehousing. He has been a full member of the Institute of Purchasing and
Supply of Hong Kong since 1990.
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 Director of the Company
since April 1996. Prior to that, Mr. Chu was International Sales Administrative
Manager of the Company from April 1994 to April 1996. 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 European Marketing Manager of Radica
UK since January 1998. Prior to that, Mr. Dingley was General Manager and
Company Secretary of Radica UK from January 1995 to December 1997. From January
1991 to December 1994 he acted for Radica as Manager of European
35
<PAGE>
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 30 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 1998, the aggregate amount of compensation paid to all
executive officers and directors as a group for services in all capacities was
approximately $1.39 million.
Commencing in April 1997, each outside (i.e., non-employee and
non-affiliated) director of the Company received 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, 1997 and 1998, each outside director received non-qualified stock options
to purchase 5,000 shares (15,000 shares in 1997 and 1998, to reflect elimination
of the $10,000 annual fee) of Common Stock of the Company at $3.66, $1.50,
$3.125 and $18.75 per share, respectively. Upon re-election to the Board of
Directors in 1999 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. In fiscal year 1998, an outside director received
non-qualified stock options to purchase 30,000 shares of Common Stock of the
Company upon initial election at an exercise price of $17.25 per share. These
subsequent options are also exercisable after one year from the date of grant.
36
<PAGE>
EMPLOYMENT AGREEMENTS
Messrs. Davids, Feely, Murtha 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, and from November 30, 1998 for Mr. Murtha. 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, Murtha and Bengtson shall each receive minimum annual base
salaries of $182,000, $185,000, $200,000 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, Mr. Feely and Mr. Murtha
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) at market price provided he achieves certain conditions as stated
in the agreement. In the agreement for Mr. Murtha, he was granted 300,000 stock
options of the Company common stock at $11.00 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 2000, 2001 and 2002 fiscal years, Mr. Murtha
will be granted 25,000 stock options (up to 75,000 shares in the aggregate) at
market price 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 acted as an independent contractor and assisted 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. After giving effect to certain changes to this agreement,
Mr. Taft was paid an aggregate consulting fee of $80,000 in fiscal 1998 and
certain travel, lodging, entertainment and similar expenses were reimbursed by
the Company. The agreement has not been renewed.
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, Organization and Nominating Committee
of the Board of Directors. Subject to the provisions of the Stock Option Plan,
the Compensation, Organization and Nominating 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 2.8 million shares. The option
37
<PAGE>
price per share with respect to each such option shall be determined by the
Compensation, Organization and Nominating 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, Organization and Nominating
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
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 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 exercise prices
ranging from $1.09 to $12.25 per share.
In fiscal year 1998, an aggregate of 549,000 options (exclusive of the
outside directors' options and net of stock options that were both issued and
canceled in the year) were granted to directors, officers and other employees
under the Stock Option Plan to purchase the Company's shares at exercise prices
ranging from $10.875 to $19.75 per share.
As a result of the foregoing, at the end of fiscal year 1998, after
giving effect to all prior exercises and cancellations of options, an aggregate
of 1,822,600 options (exclusive of the outside directors' options) were
outstanding at exercise prices ranging from $0.57 to $19.75 per share, and of
such amount a total of 1,235,600 options were held by directors and executive
officers of the Company as a group. Also, an aggregate of 115,000 outside
director's options were outstanding at exercise prices ranging from $1.50 to
$18.75 per share. By the end of fiscal year 1998, a total of 604,600 shares have
been issued upon the exercise of options, at exercise prices ranging from $0.57
to $11 per share.
38
<PAGE>
Additional information with respect to stock options is contained in
Note 13 of the Notes to Consolidated Financial Statements included in this
filing.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Messrs. Davids and Sutter, the Hansen Trust, International Game
Technology ("IGT") and the Company were parties to a shareholders agreement (the
"Shareholders Agreement") which provided for certain matters relating to the
management of the Company and ownership of its Common Stock. In January 1998,
the Shareholders Agreement was amended to eliminate provisions respecting the
election and removal of directors, restrictions on transfer and a right of first
refusal. The registration rights provisions of the Shareholders Agreement remain
operative.
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 that is a party to sales agreement (collectively, the
"Shareholders") under the Securities Act of 1933, and to use its reasonable
efforts to qualify the shares for offer and sale under any applicable U.S. state
securities laws. The Shareholders Agreement also grants each Shareholder certain
"piggyback" registration rights entitling each Shareholder, at any time after
February 16, 1996, to sell Common Stock in certain registered offerings of
equity securities of the Company. These "piggyback" registration rights are
exercisable by each Shareholder only twice. The foregoing registration rights
are subject to other limitations set forth in the Shareholders Agreement. In
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.
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
39
<PAGE>
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
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
40
<PAGE>
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.
10.5(a) Amendment to Shareholders Agreement, dated as of
September 5, 1997, 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 Employment Agreement, dated as of October 23, 1998, among
Radica USA, Radica Games and Eugene A. Murtha
*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
~10.10 1994 Stock Option Plan, as amended in April 1997 to
increase options
10.10(a) 1994 Stock Option Plan, as amended in April 1998 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]
41
<PAGE>
*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.
~ Incorporated by reference to Form 20-F for the year ended October 31, 1997.
42
<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
43
<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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended October 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1998, in conformity with accounting principles generally accepted in
the United States of America.
/S/ Deloitte Touche Tohmatsu
HONG KONG
December 15, 1998
F-1
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
OCTOBER 31,
----------------------------
(US Dollars in thousands, except share data) 1998 1997*
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,141 $ 33,504
Short-term investments (Note 3) - 2,050
Accounts receivable, net of allowances for doubtful
accounts of $466 in 1998 and $908 in 1997 and estimated
customer returns of $1,375 in 1998 and $2,327 in 1997 33,249 18,740
Inventories, net of provision of $2,414 in 1998 and
$3,479 in 1997 (Note 4) 21,534 11,741
Prepaid expenses and other current assets 1,126 681
Deferred income taxes (Note 9) 4,545 -
------------- -------------
Total current assets 93,595 66,716
------------- -------------
Investment in affiliated company (Note 5) 823 194
------------- -------------
Property, plant and equipment, net (Note 6) 16,093 12,539
------------- -------------
Intangible assets, net (Note 7) 3,000 -
------------- -------------
Deferred income taxes, noncurrent (Note 9) 10 -
------------- -------------
Total assets $ 113,521 $ 79,449
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,694 $ 8,209
Accrued warranty expenses 2,470 2,161
Accrued payroll and employee benefits 3,510 1,249
Accrued advertising expenses 6,178 718
Accrued sales expenses 3,316 1,254
Commissions payable 1,444 915
Accrued other expenses 3,005 3,058
Income taxes payable 2,065 213
Deferred income taxes (Note 9) - 79
------------- -------------
Total current liabilities 33,682 17,856
------------- -------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized,
18,864,294 shares outstanding (20,860,200 at Oct. 31, 1997)
(Note 11) 189 209
Additional paid-in capital 9,298 28,589
Retained earnings 70,396 32,800
Cumulative translation adjustment (44) (5)
------------- -------------
Total shareholders' equity 79,839 61,593
------------- -------------
Total liabilities and shareholders' equity 113,521 79,449
============= =============
* Restated to conform with 1998 presentation.
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(US Dollars in thousands, except per share data) Year ended October 31,
---------------------------------------------
1998 1997* 1996*
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Net sales $ 155,618 $ 87,760 $ 47,535
Cost of sales (70,576) (40,888) (30,696)
-------------- -------------- --------------
Gross profit 85,042 46,872 16,839
-------------- -------------- --------------
OPERATING EXPENSES:
Selling, general and administrative expenses (27,788) (14,403) (11,752)
Research and development (3,710) (2,099) (1,699)
Acquired research & development (1,500) - -
Depreciation and amortization (3,423) (2,278) (1,594)
-------------- -------------- --------------
Total operating expenses (36,421) (18,780) (15,045)
-------------- -------------- --------------
OPERATING INCOME FROM CONTINUING OPERATIONS 48,621 28,092 1,794
OTHER INCOME 807 915 748
SHARE OF LOSS OF AFFILIATED COMPANY (334) (141) -
NET INTEREST 1,896 913 (165)
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND UNUSUAL ITEM 50,990 29,779 2,377
UNUSUAL ITEM (Note 8) - - 709
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 50,990 29,779 3,086
CREDIT (PROVISION) FOR INCOME TAXES (Note 9) 266 (193) 120
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES 51,256 29,586 3,206
DISCONTINUED OPERATION: (Note 10)
Loss from operation of Pub Poker business - - (1,712)
-------------- -------------- --------------
NET INCOME $ 51,256 $ 29,586 $ 1,494
============== ============== ==============
EARNINGS PER SHARE - BASIC: (Note 12)
Income from continuing operations $ 2.53 $ 1.43 $ 0.15
Effect of discontinued operation - - (0.08)
-------------- -------------- --------------
Net earnings per share $ 2.53 $ 1.43 $ 0.07
============== ============== ==============
Average number of shares outstanding 20,239,790 20,761,020 21,439,452
============== ============== ==============
EARNINGS PER SHARE - ASSUMING DILUTION: (Note 12)
Income from continuing operations $ 2.39 $ 1.37 $ 0.15
Effect of discontinued operation - - (0.08)
-------------- -------------- --------------
Net earnings per share and dilutive potential common stock $ 2.39 $ 1.37 $ 0.07
============== ============== ==============
Average number of shares and
dilutive potential common stock outstanding 21,488,364 21,635,926 21,439,452
============== ============== ==============
<FN>
* Restated to conform with 1998 presentation.
</FN>
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<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, 1995 22,780,000 $ 228 $ 28,328 $ 1,720 $ 21 $ 30,297
Cancellation of stock (2,100,000) (21) 21 - - -
Grant of stock options - - 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 options 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
Issuance of stock 190,094 2 3,598 - - 3,600
Cancellation of repurchased
stock (Note 11) (2,610,400) (26) (23,901) (13,660) - (37,587)
Stock options exercised 424,400 4 1,012 - - 1,016
Net income - - - 51,256 - 51,256
Foreign currency translation - - - - (39) (39)
------------- ------------- ------------- ------------- ------------- -------------
Balance at October 31, 1998 18,864,294 $ 189 $ 9,298 $ 70,396 $ (44) $ 79,839
============= ============= ============= ============= ============= =============
</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,
------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 51,256 $ 29,586 $ 1,494
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (4,634) 108 -
Depreciation 1,923 1,613 1,594
Amortization 1,500 665 -
Share of loss of affiliated company 334 141 -
Acquired research and development 1,500 - -
Loss (gain) on disposal and write off of
property, plant and equipment 22 (21) (97)
Provision for compensation expense related to
stock options - - 22
Changes in assets and liabilities:
Accounts receivable (14,548) (9,142) 618
Inventories (9,793) (757) 5,488
Prepaid expenses and other current assets (445) (134) (16)
Accounts payable 3,485 2,674 2,529
Accrued payroll and employee benefits 2,261 563 445
Commissions payable 529 439 (527)
Accrued promotion expenses 5,460 461 (79)
Accrued sales expenses 2,062 (573) (277)
Accrued warranty expenses 309 607 1,101
Accrued other expenses (53) 2,625 (1,741)
Income taxes payable 1,852 168 1,351
----------------- ---------------- ----------------
Net cash provided by operating activities 43,020 29,023 11,905
----------------- ---------------- ----------------
Cash flow from investing activities:
Decrease (Increase) in short-term investments 2,050 (1,973) -
Proceeds from sale of property, plant and equipment 33 61 929
Purchase of property, plant and equipment (5,532) (1,255) (874)
Purchase of Girl Tech assets (2,400) - -
Investment in an affiliate company (963) (1,000) -
Proceeds from the sales of money market funds - - 3,151
----------------- ---------------- ----------------
Net cash (used in) provided by investing activities (6,812) (4,167) 3,206
----------------- ---------------- ----------------
</TABLE>
F-5
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars in thousands)
<TABLE>
<CAPTION>
Year ended October 31,
------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flow from financing activities:
Repurchase of common stock (37,587) - -
Funds from stock options exercised 1,016 220 -
Decrease in short-term borrowings - - (13,970)
Repayment of long-term debt - (99) (371)
----------------- ---------------- ----------------
Net cash (used in) provided by financing activities (36,571) 121 (14,341)
----------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents $ (363) $ 24,977 $ 770
Cash and cash equivalents:
Beginning of year 33,504 8,527 7,757
----------------- ---------------- ----------------
End of year $ 33,141 $ 33,504 $ 8,527
================= ================ ================
Supplementary disclosures of cash flow information:
Cash paid during the year:
Interest $ 61 $ 12 $ 413
Income taxes 2,381 - -
<FN>
* Restated to conform with 1998 presentation.
</FN>
</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 50 years or, where
shorter, the remaining 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.
Intangible assets - Intangible assets primarily represent the excess of the
purchase price of acquisition of a business over the fair value of the net
assets acquired. Intangible assets also represent cost allocated to brand
names. Such assets are amortized on a straight-line basis over the period
estimated to be benefited, but not to exceed 40 years. The carrying value
of intangible assets is periodically reviewed by the Company and
impairments are recognized when there is a permanent diminution in value.
The Company policy is to charge a full year of amortization in the year of
acquisition.
Mold costs - The Company expenses all mold costs in the year of purchase or
for internally produced molds, in the year of construction.
F-7
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Advertising - The production costs of advertising are expensed by the
Company the first time the advertising takes place. Advertising costs
associated with customer benefit programs are accrued as the related
revenues are recognized. Advertising expense was $9,121, $735 and $569 in
1998, 1997 and 1996, respectively.
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 $281, $122 and $102 in 1998, 1997 and 1996 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.
F-8
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 13.
Earnings per share - Earnings per share is based on the weighted average
number of shares of common stock and dilutive potential common stock
outstanding. Dilutive potential common stock results from dilutive stock
options. The effect of such dilutive potential common stock on net income
per share is computed using the treasury stock method.
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.
Comprehensive income and segment information - Comprehensive income
includes both net income and other comprehensive income. Other
comprehensive loss for the year ended October 31, 1998 and October 31, 1997
of $39 and $26, respectively, represented foreign currency translation
adjustments. Accumulated other comprehensive loss/(income) included in the
accompanying condensed consolidated balance sheet as of October 31, 1998,
October 31, 1997 and October 31, 1996 was $44, $5 and $(21), respectively,
consisting of the accumulated foreign currency translation adjustment.
Further, as the Company has only one operating segment, the adoption of
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", did not result in any restatement of comparative information.
New accounting standards adopted - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments
and hedging activities. Generally, it requires that an entity recognizes
all derivatives as either an asset or liability and measures those
instruments at fair value, as well as identifying the conditions for which
a derivative may be specially designed as a hedge. The Company does not
have any derivative instruments.
Reclassifications - Certain reclassifications have been made to prior
periods amounts to conform with the 1998 presentation and to comply with
new SFAS's.
F-9
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
3. SHORT-TERM INVESTMENTS
The Company's short-term investments, all of which were classified as
available-for-sale as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", consisted primarily of United
States government and Federal agency securities and were stated at market
value.
4. INVENTORIES
Inventories by major categories are summarized as follows:
October 31,
-----------------------
1998 1997
---------- ---------
Raw materials $ 4,650 $ 2,786
Work in progress 5,733 2,889
Finished goods 11,151 6,066
--------- ---------
$ 21,534 $ 11,741
========= =========
5. INVESTMENT IN AFFILIATED COMPANY
In May 1997, the Company acquired approximately 35% of the capital stock of
U-Tel, Inc., a private company incorporated in Nevada, United States of
America, which is engaged in research and development of telecommunication
equipment, for $1,000 in cash. 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, was charged to operations
for the year ended October 31, 1997.
In July 1998, following a refinancing of U-Tel, Inc., the Company purchased
additional shares for $963 in cash. This allowed the Company to maintain
its percentage interest in U-Tel, Inc.
F-10
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
October 31,
------------------------------------
1998 1997
-------------- -------------
Land and buildings $ 11,950 $ 9,882
Plant and machinery 5,549 3,633
Furniture and equipment 4,003 3,184
Leasehold improvements 1,866 1,318
-------------- -------------
Total $ 23,368 $ 18,017
Less: Accumulated depreciation and
amortization (7,275) (5,478)
-------------- -------------
Total $ 16,093 $ 12,539
============== =============
7. INTANGIBLE ASSETS
The intangible asset of $3,000 on the balance sheet at October 31, 1998
represents a portion of the acquisition price allocated to brand name and
goodwill with regards the assets and business of KidActive, LLC, dba Girl
Tech(TM) acquired during the quarter ended April 30, 1998. KidActive, LLC,
dba Girl Tech(TM) was a development stage enterprise and had not traded
prior to the Company's acquisition of its asset. The Company purchased the
assets and business of KidActive, LLC, dba Girl Tech(TM) for $2,400 in cash
plus 190,094 shares, a total of $6,000. Of this $4,500 was capitalised as
goodwill and brand name and $1,500 was written off immediately as purchased
research and development. It is management's opinion that the amounts
capitalized of $4,500 represent the fair value assigned to the intangible
assets acquired. This cost is being amortized over a three year fiscal
period on a straight line basis. Accumulated amortization was $1,500 at
October 31, 1998.
Intangible assets are as follows:
October 31,
1998
------------
At cost:
Brand name $ 1,000
Goodwill 3,500
------------
Total 4,500
Less: Accumulated amortization (1,500)
------------
Total $ 3,000
============
F-11
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
8. UNUSUAL ITEM
During the second quarter of 1996, a gain of $709 was made from the sale of
a property in Hong Kong.
9. INCOME TAXES
The components of income from continuing operations before income taxes are
as follows:
Year ended October 31,
-------------------------------------
1998 1997 1996
---------- ----------- -----------
United States $ 11,579 $ 2,167 $ 910
Foreign subsidiaries operating in:
People's Republic of China 39,274 27,544 1,348
Hong Kong 137 68 828
---------- ----------- -----------
$ 50,990 $ 29,779 $ 3,086
========== =========== ===========
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
had its first profitable year of operations in the year ended December 31,
1997 and is expected to be taxed at a 12% rate from January 1, 1999. 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-12
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
9. INCOME TAXES (Continued)
The credit (provision) for income taxes consists of the following:
Year ended October 31,
-------------------------------
1998 1997 1996
----------- -------- -------
Hong Kong
Current income tax $ (61) $ (123) $ 45
United States
State tax (expense) benefit, net of
federal tax (expense) benefit $ (4,307) $ 38 $ 75
Change in deferred tax 4,634 (108) -
----------- -------- -------
$ 327 $ (70) $ 75
----------- -------- -------
$ 266 $ (193) $ 120
=========== ======== =======
A reconciliation between the credit (provision) for income taxes computed
by applying the statutory tax rates in the United States for 1998, 1997 and
1996 to income before income taxes and the actual credit (provision) for
income taxes is as follows:
<TABLE>
<CAPTION>
Year ended October 31,
-----------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
US statutory rate 34% 34% 34%
---------- ---------- ---------
Provision for income taxes at
statutory rate on income for the year $ (17,337) $ (10,125) $ (1,049)
State income taxes (133) (7) 95
International rate differences 15,369 9,807 365
Accounting (losses) gains for which deferred
income tax cannot be recognized (1,991) (430) 302
Decrease in valuation allowance 4,406 854 293
Other (48) (292) 114
---------- ---------- ---------
Income tax credit (provision) $ 266 $ (193) $ 120
========== ========== =========
</TABLE>
F-13
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except share and per share data)
9. 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, 1998 and 1997 deferred income taxes comprised:
October 31,
-----------------------
1998 1997
--------- ---------
Deferred tax assets (liabilities):
Excess of tax over financial
reporting depreciation $ (79) $ (79)
Tax losses - 1,173
Bad debt allowance 158 309
Advertising allowances 2,100 244
Inventory obsolescence reserve 749 643
Accrued sales adjustments and returns 1,583 1,321
Other 44 716
--------- ---------
4,555 4,327
Valuation allowance - (4,406)
--------- ---------
$ 4,555 $ (79)
========= =========
10. 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. The loss from Pub Poker operations has been
accounted for as a discontinued operation.
11. COMMON STOCK
On December 22, 1997, the Board adopted a plan authorizing the Company to
repurchase up to one million shares of its common stock. On June 16, 1998,
the Board adopted another plan authorizing the Company to repurchase up to
one million additional shares of its common stock. On September 18, 1998,
the Board adopted a further plan authorizing the Company to repurchase up
to another one million additional shares of its common stock.
During the year ended October 31, 1998, the Company repurchased 2,610,400
shares at an average price of $14.36 per share under these programs. All
repurchased shares are cancelled.
During the quarter ended April 30, 1998, the Company issued 190,094 shares
of newly issued Common Stock at $18.938 per share as a portion of the
acquisition price for the assets and business of KidActive, LLC, dba Girl
Tech(TM).
F-14
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except share and per share data)
12. EARNINGS PER SHARE
The following information shows the numbers used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock:
Year ended October 31, 1998
----------------------------------------
Earnings
Numerator Denominator per share
----------- ------------- ------------
Basic earnings per share:
Net income $ 51,256 20,239,790 $ 2.53
============
Effective of dilutive options 1,248,574
----------- -------------
Diluted earnings per share:
Net income, assuming $ 51,256 21,488,364 $ 2.39
all dilutive options exercised =========== ============= ============
Options on 197,000 shares of common stock were not included in computing
diluted earnings per share since their effects were antidilutive.
13. 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
meetings in April 1997 and 1998, the Stock Option Plan's aggregated common
stock increased by 400,000 and 800,000, respectively. As a whole, the Stock
Option Plan's aggregate common stock increased to 2,800,000 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.
F-15
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
13. STOCK OPTIONS (Continued)
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 (the closing market price
on those dates). 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 closing market price on such date.
Option activity for each of the three fiscal years ended October 31, 1996,
1997 and 1998:-
Weighted average
Number exercise price
of shares per share
--------- ---------
(in thousands)
Outstanding at October 31, 1995 1,269 $ 7.44
Options granted 1,091 1.37
Options cancelled (1,194) 7.12
--------------
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
Options granted 649 13.97
Options cancelled (43) 14.63
Options exercised (424) 2.39
--------------
Outstanding at October 31, 1998 1,938 $ 5.92
==============
Exercisable at October 31, 1998 215 $ 2.59
F-16
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
13. STOCK OPTIONS (Continued)
The following is additional information relating to options outstanding as
of October 31, 1998:
<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 2.000 862 $ 1.33 7.40 115 $ 1.46
$ 2.001 to 4.000 394 3.51 8.49 90 3.49
$ 4.001 to 6.000 8 5.00 8.63 - -
$ 6.001 to 8.000 55 6.76 8.75 8 6.63
$ 8.001 to 10.000 5 8.60 8.80 1 9.00
$ 10.001 to 12.000 321 10.99 9.98 - -
$ 12.001 to 14.000 45 12.87 9.18 1 12.00
$ 14.001 to 16.000 26 15.54 9.12 - -
$ 16.001 to 18.000 121 17.02 9.46 - -
$ 18.001 to 20.000 101 19.10 9.47 - -
================= ============
1,938 $ 5.92 8.40 215 $ 2.59
================= ============
</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 $7.23, $1.59 and $0.71 per option for the year ended
October 31, 1998, 1997 and 1996, respectively, were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Year ended October 31,
---------------------------------
1998 1997 1996
-------- --------- ---------
Expected life of options 5 years 5 years 5 years
Risk-free interest rate 6.50% 6.50% 6.50%
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)
13. 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
earnings per share would have been reduced to the pro forma amounts as
follows:
Year ended October 31,
---------------------------------------
1998 1997 1996
--------- ----------- -----------
Pro forma net income $ 50,548 $ 29,154 $ 1,202
Pro forma earnings per share $ 2.50 $ 1.40 $ 0.06
14. 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 three customers which
accounted for more than twenty-five percent, twenty-one percent and ten
percent of net sales in fiscal 1998, three customers which accounted for
more than twenty percent, eighteen percent and ten percent of net sales in
fiscal year 1997 and had two customers which accounted for more than twenty
and sixteen percent of net sales in fiscal year 1996. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers.
15. 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.
F-18
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
16. COMMITMENTS AND CONTINGENCIES
The Company leases certain warehouses and equipment under operating leases.
Total expense for the operating leases was $401, $358 and $411 in 1998,
1997 and 1996, respectively.
At October 31, 1998, the Company was obligated under operating leases
requiring future minimum lease payments as follows:
Operating leases
----------------
1999 $ 260
2000 267
2001 134
2002 108
2003 106
Thereafter 586
----------------
Total minimum lease payments $ 1,461
================
At October 31, 1998, certain leasehold land and buildings with a net book
value of $4,887 and bank balances of $3,871 were pledged to secure general
banking facilities including overdraft and trade facilities granted to the
Company.
17. 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 $125, $94 and $55 for the year ended
October 31, 1998, 1997 and 1996, respectively.
F-19
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
18. 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 a 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. Plaintiffs sought no further review and
such judgment is now final.
F-20
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
19. 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,
-------------------------------------------
1998 1997 1996
----------- ---------- ----------
Net sales:
United States $ 114,688 $ 57,478 $ 33,036
PRC and Hong Kong 38,029 28,537 13,456
Other 2,901 1,745 1,043
----------- ---------- ----------
$ 155,618 $ 87,760 $ 47,535
=========== ========== ==========
Operating income (loss):
United States $ 9,347 $ 2,269 $ 973
PRC and Hong Kong 39,053 25,990 906
Other 221 (167) (85)
----------- ---------- ----------
$ 48,621 $ 28,092 $ 1,794
=========== ========== ==========
Identifiable assets:
United States $ 45,296 $ 24,745 $ 16,011
PRC and Hong Kong 66,660 53,639 25,313
Other 1,565 1,065 1,401
----------- ---------- ----------
$ 113,521 $ 79,449 $ 42,725
=========== ========== ==========
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)
20. VALUATION AND QUALIFYING ACCOUNTS
Year ended October 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
Beginning 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
========= ========= =========
Charged for the year:
Allowances for doubtful accounts $ 213 $ 818 $ 70
Estimated customer returns 456 1,995 1,250
Provision for inventories 1,105 - -
--------- --------- ---------
$ 1,774 $ 2,813 $ 1,320
========= ========= =========
Release of provision:
Allowances for doubtful accounts $ (655) $ (144) $ (1,408)
Estimated customer returns (1,408) (485) (2,223)
Provision for inventories (2,170) (4,940) (3,454)
--------- --------- ---------
$ (4,233) $(5,569) $ (7,085)
========= ========= =========
End of year:
Allowances for doubtful accounts $ 466 $ 908 $ 234
Estimated customer returns 1,375 2,327 817
Provision for inventories 2,414 3,479 8,419
--------- --------- ---------
$ 4,255 $ 6,714 $ 9,470
========= ========= =========
F-22
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter ended
----------------------------------------------
Jan. 31 Apr. 30 Jul. 31 Oct. 31
----------- --------- --------- --------
Fiscal 1998
- -----------
Net sales $ 26,473 $ 31,750 $ 34,829 $ 62,566
Gross profit 14,674 17,984 19,481 32,903
Net income 9,009 9,046 11,184 22,017
Basic earnings per share 0.43 0.45 0.55 1.13
Fiscal 1997
- -----------
Net sales $ 12,668 $ 12,175 $ 22,532 $ 40,385
Gross profit 5,476 5,422 11,671 24,303
Net income 2,522 2,317 7,147 17,600
Basic earnings per share 0.12 0.11 0.34 0.84
Common Share Price
High Low
1998 Quarter
- ------------
Fourth......................................... $ 16 5/8 $ 9 3/4
Third.......................................... 22 1/4 16 1/8
Second......................................... 20 5/8 14 3/4
First.......................................... 19 12 7/8
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
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 17, 1998 /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.
10.5(a) Amendment to Shareholders Agreement, dated as of September 5,
1997, 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 Employment Agreement, dated as of October 23, 1998, among Radica
USA, Radica Games and Eugene A. Murtha
*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.
I-2
<PAGE>
~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
10.10(a) 1994 Stock Option Plan, as amended in April 1998 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.
~ Incorporated by reference to Form 20-F for the year ended October 31, 1997.
I-3
RADICA GAMES LIMITED
Suite R, 6/Fl, 2-12 Au Pui Wan Street
Fo Tan, Hong Kong
Dated as of September 5, 1997
Robert Eugene Davids
c/o Radica Games Limited
Suite R, 6/Fl, 2-12 Au Pui Wan Street
Fo Tan, Hong Kong
John and Mary Hansen 1989 Trust
249 Clearwater Isle
Foster City, California 92404
Re: Amendment No. 2 to Shareholders Agreement dated as of January
12, 1994, as previously amended by Amendment No. 1 thereto
dated as of February 16, 1994
Dear Sir/Madam:
We refer to the above Shareholders Agreement, as amended (the
"Shareholders Agreement"), among Radica Games Limited (formerly named Radica
Holdings Limited) (the "Company") and each of you. That is, with the disposition
of shares by Mr. James Sutter and by International Game Technology ("IGT"), you
are the only remaining Shareholders pursuant to the Shareholders Agreement.
By way of background, the Company notes that the Shareholders Agreement
was originally entered into at the insistence of IGT, which is no longer a
party. The voting provisions in Article II of the Shareholders Agreement have
never been utilized, to any meaningful extent, by the parties. For example, the
Company has never since its initial public offering had 11 directors as such
Agreement calls for, and the selection of nominees for directors has always been
conducted on an informal basis rather than by reference to the Shareholders
Agreement.
The restrictions on transfer in Article III of the Shareholders
Agreement are now effectively inoperative since the Hansen Trust will be
permitted freely to dispose of its shares either pursuant to Rule 144 or
pursuant to the registration rights provisions of the Shareholders Agreement.
Further, Mr. Davids will be permitted freely to dispose of his shares either
under Rule 144, or pursuant to such registration rights provisions, or pursuant
to the right of first refusal procedures contained in Section 3.04 of the
<PAGE>
Shareholders Agreement, particularly since there is now no other shareholder who
is entitled to exercise such right of first refusal.
The registration rights provisions in Article IV of the Shareholders
Agreement are still operative and it is not proposed pursuant to this Amendment
to alter those provisions.
It is therefore proposed, and upon your signature below it is agreed,
that the entirety of Articles II and III of the Shareholders Agreement shall be
eliminated from such Agreement. The remaining provisions of the Shareholders
Agreement are not intended to be, and shall not be, affected by this Amendment.
Pursuant to Section 6.02 of the Shareholders Agreement, this Amendment may be
duly adopted by the signatures of the Company, the Hansen Trust and Mr. Davids,
as set forth below.
If the foregoing is agreeable to you, would you please sign as
indicated whereupon this Amendment shall become effective as between the
remaining parties to the Shareholders Agreement.
Very truly yours,
Radica Games Limited
By: /s/ David C.W. Howell
--------------------------------
Title: Chief Financial Officer
Accepted and agreed to
as of the date of your letter:
/s/ Robert E. Davids
- ------------------------------
Robert Eugene Davids
John and Mary Hansen 1989 Trust
By: /s/ Mary Hansen
---------------------------
Trustee
-2-
[Version reflecting 1998
Amendment to this Plan
as of April 6, 1998.]
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 and 1998 Amendments to such Plan as of April 9, 1997 and April 6, 1998.
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
<PAGE>
the authority to do everything necessary or appropriate to 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 2,800,000 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-
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of October 23, 1998,
provided the employment hereunder shall commence November 30, 1998, by and among
Radica Enterprises Ltd., a Nevada corporation, having an office at 6100 Neil
Road, Suite 200, 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
Eugene A. Murtha, who resides at 119 Country Club Drive, Moorestown, New Jersey
08057.
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;
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(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 November 30, 1999: (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.
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(c) "Dollars" and "US$" means United States dollars.
(d) "Employee" means Eugene A. Murtha.
(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 November 30, 1998, Radica USA hereby employs Employee
and Employee hereby accepts employment by Radica USA to serve as the President
of Radica USA. Employee shall also be employed as the President, Americas, of
Radica. During his period of employment, employee also agrees to serve in other
executive capacities for Radica Group as may be determined by the Board of
Directors of Radica ("Board"). Employee shall perform services of an executive
nature consistent
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with his offices with Radica and Radica USA 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, and Employee will
report to the President of Radica.
(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 Dallas, Texas. 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 California. Air travel and other travel arrangements
will comply with current Radica Group policies respecting class of travel, etc.
(d) Radica Group will provide Employee, including his spouse and
children, with medical and dental benefits, and life insurance program, as
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 November 30, 1998 and continue until the second anniversary of such date,
and shall be renewed annually at each November 30 anniversary date (commencing
November 30, 1999) 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 November 30, 1999 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
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<PAGE>
Radica USA, all benefits and compensation shall cease as of the date of such
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 (but at a minimum
through the end of Radica's 1999 fiscal year). 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 November 30, 1998, for the
services to be rendered by him hereunder a minimum salary at the rate of
US$200,000 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$200,000 per year. Employee shall also be entitled to a
signing bonus of U.S.$100,000 payable by Radica USA 90 days after Employee's
start-date with Radica Group. However, if Employee voluntarily leaves employment
with Radica Group within two years of such start-date, Employee will repay to
Radica USA such signing bonus.
Employee shall be considered for annual bonuses pursuant to the Radica
Games Bonus Policy as attached to the letter dated October 23, 1998 to Employee
from Mr. Patrick S. Feely, President of Radica. Such Radica Games Bonus Policy
describes potential amounts of bonus which may be earned in respect of each
fiscal year, but with no mandatory amount for any particular employee. However,
in the case of Employee in fiscal year 1999, Employee shall be entitled to a
minimum bonus under such plan of US$100,000.
This Agreement contemplates that Employee will move from his current
New Jersey residence to a residence in or around Dallas, Texas to take up his
duties in
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that location. Radica USA will pay Employee a temporary living allowance of
US$3,000 per month commencing in December 1998 and for up to nine additional
months thereafter, i.e. through September 1999. Radica USA will also reimburse
Employee for weekly airline expense for Employee's travel to and from Dallas and
his current home in New Jersey. Radica USA will reimburse Employee for
reasonable relocation expenses according to its policies for executives,
including moving and real estate agent fees and closing costs, plus gross-up for
tax expenses.
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.
All payments by Radica Group shall be subject to required withholdings
including taxes.
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 $11.00 per share (representing the current market
price as of October 23, 1998), subject to the terms and conditions of this
Section 6 and the 1994 Plan (the "Initial Stock Option").
(ii) Additionally, at or promptly after the end of each of Radica's
2000, 2001 and 2002 fiscal years (i.e., fiscal years ending October 31 (or other
applicable year end date if, as is being considered, Radica changes its fiscal
year)), Radica shall grant to Employee an option (up to three such options in
total) to purchase twenty-five thousand (25,000) shares (up to 75,000 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 conditions that
(x) Employee continues to be employed in good standing by Radica Group through
the relevant date of grant and (y) sufficient shares are available under the
1994 Plan to cover Employee and other similarly situated executives (i.e.
adequate shares must be available for this special program in the option pool
under the 1994 Plan). If such quantity of shares is not available, the grant
dates will roll forward by one year per year until such shares are available.
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".
(iii) The Stock Options shall vest and become exercisable 20% per
year for each year Employee is employed by Radica Group following the date of
grant, commencing at the first anniversary of the date of grant.
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(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 (each of
such applicable dates being called a "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:
(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.
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(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 as specifically
contemplated in the 1994 Plan. In any event, any transfer must comply with
applicable state and federal securities laws.
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, to
be determined at the relevant time but not later than the commencement of such
one-year period ("Companies' Business"). During the Prohibition Period, Employee
shall not, 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"). Notwithstanding the
above, the following shall not be considered "Confidential Information" within
the meaning of this section: (a) information known to Employee or to the public
at the date of this Agreement; and (b) information which hereafter becomes known
to the public through no fault of Employee. 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
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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.
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, except that Employee may, without
the prior consent of any member of Radica Group, assign to his spouse, or to a
family member, proceeds of payments resulting from his death or a disability
which, in either case, occurs after a termination of this Agreement.
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
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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:
To: Radica Enterprises Ltd.
6100 Neil Road, Suite 200
Reno, Nevada 89511
U.S.A.
Attention: Jon N. Bengtson
Telephone: (702) 826-2002
Telefax: (702) 829-8093
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
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To: Employee:
Mr. Eugene A. Murtha
119 Country Club Drive
Moorestown, NJ 08057
Telephone: (609) 234-6389
Telefax: (609) 234-5761
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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
RADICA ENTERPRISES LTD.
By: /s/ P.S. Feely
--------------------------------
RADICA GAMES LIMITED
By: /s/ P.S. Feely
--------------------------------
EUGENE A. MURTHA
/s/ Eugene A. Murtha
-----------------------------------
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Exhibit 11.1
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS
(US dollars in thousands, except share and per share data)
Year Ended October 31,
------------------------------------------------
1998 1997 1996
--------------- ------------ -------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 51,256 $ 29,586 $ 1,494
============== ============ =============
Weighted average number of
shares outstanding 20,239,790 20,761,020 21,439,452
--------------- ------------ -------------
Net earnings per share $ 2.53 $ 1.43 $ 0.07
============== ============ =============
Diluted earnings per share:
Net income $ 51,256 $ 29,586 $ 1,494
============== ============ =============
Weighted average number of
shares outstanding 20,239,790 20,761,020 21,439,452
Assuming conversion of stock options
under the employment agreement
and Stock Option Plan 1,248,574 874,906 N/A
--------------- ------------ -------------
Weighted average number of
shares and dilutive potential common stock
outstanding after considering
effects of stock option 21,488,364 21,635,926 21,439,452
--------------- ------------ -------------
Net earnings per share and dilutive potential
common stock $ 2.39 $ 1.37 $ 0.07
============== ============ =============
</TABLE>
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
(Operates as Radica Innovations)
INTERNATIONAL
Radica Limited Hong Kong
- Radica China Ltd British Virgin Islands
- Dongguan Radica Games Manufactory Co. Ltd People's Republic of China
- 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, 333-07000 and 333-59737 on Form S-8, and Registration Statement No.
333-07526 on Form F-3 of Radica Games Limited of our report dated December 15,
1998, appearing in this Annual Report on Form 20-F of Radica Games Limited for
the year ended October 31, 1998.
/S/ Deloitte Touche Tohmatsu
HONG KONG
December 15, 1998