UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999.
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 17,639,594
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") manufactures and markets a diverse
line of electronic entertainment devices including handheld and tabletop games,
high-tech toys, video game controllers and peripherals and internet enabled
appliances.
The Company is a leading seller of these electronic entertainment
devices worldwide. The Company began its business with Casino handheld and
tabletop game products and then diversified its business to other handheld
electronic game categories including sports, heritage and action games. In 1999
it has the second largest market share in handheld and tabletop electronic games
according to the NPD Group, Inc., the primary source for such industry data. In
the United Kingdom, the Company's subsidiary, Leda Media Products, Ltd ("LMP")
has the largest market share of the video game controller market among
third-party manufacturers according to industry data source, Chart Track.
The Company's principal products include a range of Fishing, Hunting,
Action, Sports, Casino and Heritage games as well as a line of voice-controlled
electronic games. The Company expects to produce new electronic handheld
entertainment devices in 2000 (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 80 models with retail prices ranging from $5 to
$50.
In June 1999, the Company acquired all of the business and operating
assets of LMP, the leading supplier of video game controllers in the United
Kingdom with a strong position in France and Germany. LMP brought Radica into a
new market that is closely aligned with handheld games. The Company intends to
bring the product line to the United States and Canada in 2000 and to move most
of the manufacturing of controllers into its factory in China over the next two
years.
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) as well as a line of Star
Wars electronics games introduced in 1999. During 2000 the Company is under
contract to undertake ODM for Konami Japan, producing the "Beat Mania"
controller, Mattel, producing Othello handheld games in the US market and
Tsukuda, producing Othello handheld games for the Japanese market.
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, 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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<PAGE>
BACKGROUND
The Company completed an Initial Public Offering (IPO) in May 1994.
Prior to the IPO, the principal shareholders of the Company conducted the
Company's business through two separate, jointly owned companies (Radica
Limited, which manufactured the Company's products, and Radica USA, which
distributed and currently distributes products in the United States) and through
a third company, Disc Inc., that was solely owned by Robert E. Davids, Vice
Chairman 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 approximately 70% of its sales through Radica USA in fiscal 1999 (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(R) from KidActive, LLC.
In June 1999, the Company acquired LMP, the leading supplier of video
game controllers in the United Kingdom.
During the fourth quarter of 1999, the Company commenced construction
of a $3 million extension to its factory which will add 202,000 square feet of
factory space and 178,000 square feet of dormitory space allowing for up to an
additional 3,000 employees to be housed. This will give a total employee maximum
of 8,000 and will allow for a peak production of over one million games per
week.
BUSINESS STRATEGY
The Company intends to provide a broad line of electronic and
mechanical games, video game controllers and peripherals and internet
appliances. In order to provide innovative, high quality games at low prices,
Radica employs a strategy of product design in the United States and United
Kingdom, where a substantial majority of the Company's products are sold,
combined with engineering and low cost
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<PAGE>
materials procurement in Asia and low cost manufacturing in China, where the
Company operates its Factory. The Company also consults a select group of
outside inventors for product concepts. The Company's current products and
planned products are intended to reach retail price points covering the range of
large volume gift products. The Company historically focused primarily on
products that combine knowledge of the casino gaming industry with experience in
new product introduction, electronic game design and low cost manufacturing.
Since 1996 the Company has placed more emphasis on non-casino games and with the
acquisition of LMP in 1999, has expanded beyond electronic games, to include a
line of video game joypads, steering wheels, memory cards and other assorted
accessories. The Company also designs and manufactures electronic games and
peripherals on behalf of third parties under ODM agreements. The games and
peripherals are generally based on third party 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 'Radica Gold' for the more exclusive high-end markets. Girl
Tech(R) products are packaged under the name of "Girl Tech(R)". Video game
peripherals are packaged under the Gamester(R) and Destiny(R) names outside the
United States and are expected to be packaged under the Radica brand name in the
United States in 2000.
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 the United Kingdom, 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. Upon the acquisition of LMP in June of 1999, UK
distribution responsibility was assumed by LMP. 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 1999, Radica's principal products by product
line were as follows:
<TABLE>
<CAPTION>
FISHING HUNTING ACTION
- ------- ------- ------
<S> <C> <C>
Ultimate Bass Fishin'(TM) Buckmaster(R)Deer Huntin'(TM) Night Vision(TM)Sub Assault(TM)
Sport Bass Fishin'(TM) Buckmaster(R)Elk Huntin'(TM) Night Vision(TM)Tank Assault(R)
Fish or Man(R) Alien Intruder(TM)
Deep Sea Fishin'(TM) Stealth Assault(TM)
Lunker Bass Fishin'(TM) Trail Burner(TM)
Monte Carlo Lunker Bass Fishin'(TM) Radica Rider(TM)
Fly Fishin'(TM) Enduro Racer(TM)
Jr. Bass Fishin'(TM) Tracer Ace(TM)
Bass Fishin'(TM) Virtual Snowboard VSB(TM)
4
<PAGE>
SPORTS HERITAGE CASINO
- ------ -------- ------
Nascar(R)Racer(TM) Travel Solitaire(TM) Pocket Poker(R)
Nascar(R)Speedzone(TM) Solitaire Lite(TM) Pocket Blackjack 21(R)
Tiger Woods Ultimate Golf(TM) Crossword Challenger(TM) Pocket Slot(TM)
Tiger Woods Tournament Golf(TM) Travel Checkers(TM) Player's Choice Poker(TM)
Virtual Lanes(TM)Bowling Solitaire Player's Choice Blackjack(TM)
EA Madden Football(TM) 2-in-1 Solitaire(TM) Poker/Blackjack Lite(TM)
EA No Hitter(TM)Baseball Travel Tic-Tac-Toe(TM) Draw Poker and Blackjack(TM)
Pro World Class Golf(TM) Touch Screen Solitaire(TM) Draw Poker(TM)
Yahtzee(TM)
GIRL TECH(R) ODM PERIPHERALS (PLAYSTATION)
- ------------ --- -------------------------
Password Journal(R), Connect Four(TM) Playstation Controller
Bug 'Em(TM) Battleship(TM) Dual Force Controller
Keep Safe Box(TM) Yahtzee(TM) Dual Force Steering Wheel
Password Door Pass(TM) Hangman(TM) Evolution Joypad
Beam It(TM) Sorry(TM) Evolution Control System
Friend Frame(R) Perfection(TM) Assorted Color Memory Cards
Laser Chat(TM) Trivial Pursuit(TM)
Monopoly(TM)
Star Wars line of electronic products
PERIPHERALS (NINTENDO 64) PERIPHERALS (PC) PERIPHERALS (HANDHELD)
- ------------------------- ---------------- ----------------------
N64 Steering Wheel with Rumble Evolution Joypad Gameboy Powerpack
Evolution Control System Evolution Control System Gameboy Light Magnifier
N64 Tremor Pak + 1MB Memory Dual Force Steering Wheel Gameboy Link Lead
Dual Force Controller Gameboy Memory Card
4-Button Joypad Gameboy Tremor Pak
6-Button Joypad Gameboy Essentials
8-Button Joypad
</TABLE>
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 114 new models in 2000 (including 78 peripherals products). In
fiscal 1999, the Company's products had retail prices ranging from $5 to $50.
The following table sets forth a breakdown of the Company's sales by
major product category for the last four fiscal years.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------------ -----------------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
PRODUCT LINES SALES VALUE SALES VALUE SOLD MODELS SALES VALUE SALES VALUE SOLD MODELS
- ------------------ ----------- ------------------------- ------ ----------- ------------------------- ------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fishing games 12.8% 6,497 591 1 45.3% 43,622 3,963 5
Action games - - - - 3.7% 3,603 306 2
Sports games 8.6% 4,328 382 6 8.2% 7,880 702 7
Casino games 36.5% 18,466 5,324 103 13.0% 12,521 3,209 102
Heritage games 16.4% 8,311 723 8 11.6% 11,170 1,016 16
ODM products 25.6% 12,968 2,476 7 18.2% 17,487 3,643 12
------------ ----------- ---------- -------- ------------ ---------- ------------ -------
Total 100.0% 50,570 9,496 125 100.0% 96,283 12,840 144
============ =========== ========== ======== ============ ========== ============ =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
1996 1997
------------------------------------------------------ -----------------------------------------------------
% OF NET NET UNITS NO. OF % OF NET NET UNITS NO. OF
PRODUCT LINES SALES VALUE SALES VALUE SOLD MODELS SALES VALUE SALES VALUE SOLD MODELS
- ------------------ ----------- ------------------------- ------ ----------- ------------------------- ------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fishing games 40.4% 64,454 5,233 6 19.0% 25,370 2,239 9
Hunting games - - - - 8.1% 10,822 651 4
Action games 9.8% 15,540 1,089 7 8.7% 11,678 803 12
Sports games 11.5% 18,355 1,316 12 12.1% 16,159 1,027 17
Casino games 8.2% 13,040 3,181 66 7.6% 10,170 2,395 38
Heritage games 7.2% 11,513 1,084 19 10.2% 13,576 1,552 20
Girl Tech games 0.1% 145 11 2 5.6% 7,444 594 6
ODM products 22.8% 36,322 6,144 20 20.9% 27,897 6,109 22
Peripherals - - - - 7.8% 10,406 1,871 139
---------- ----------- ----------- ------- ----------- ----------- --------- ------
Total 100.0% 159,369 18,058 132 100.0% 133,522 17,241 267
========== =========== ========== ======= =========== =========== ========= ======
</TABLE>
Radica sells a broad range of electronic and mechanical handheld and
tabletop games under the Radica and Radica Gold brand names. These games
simulate sports and recreational activities, such as
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<PAGE>
fishing, hunting, golf and snowboarding; casino games, such as blackjack, poker
and slots; and popular heritage games such as solitaire, checkers and crossword
puzzles. Radica's Deer Huntin' game was the second highest selling handheld
electronic game in the United States in 1999, according to the NPD Group.
During 1999, Radica introduced its Girl Tech line of electronic
products. The Girl Tech line provides unique and innovative gadgets for girls
that utilize technologies such as the electronic voice recognition used in
Password Journal(R) and Password Door Pass(TM).
In June of 1999, the Company acquired LMP, which expanded its product
portfolio to include game peripherals such as steering wheels, joypads, memory
cards and video game accessories for Playstation, Nintendo 64, Nintendo Gameboy
and PC Platforms. In 1999, the Company introduced the Gamester(R) Evolution
line, which eliminates the need for direction keys on a controller through
motion sensors located either in a keypad controller or inside a glove that fits
over the user's hand.
NEW PRODUCT INTRODUCTION
In fiscal 2000, Radica intends to expand its line of games by
introducing approximately 114 new games/accessories in the following categories:
Radica Fishing (2 games); Radica Sports (10 games); Radica Heritage (12 games);
Radica Action (2 game); Radica Hunting (2 games); Radica Casino (2 games); Girl
Tech(R) (6 games) and Peripherals (78 products). The Company believes that its
strategy of offering various game models with differing features enables it to
market its games to a wide age range of consumers with different tastes and
financial means. The Company will also continue to provide its Radica Gold brand
products to higher end retailers.
In addition, Radica intends to introduce three internet related items
in 2000 (Sports Nut(TM), Girl Tech(R) Pocket Com(TM) and Surfer Girl(TM) Web
Explorer Kit) and its new Radica Play TV(TM) games, which utilize the Xavix(TM)
technology, for which Radica is the exclusive US licensee.
1999 vs. 2000 Line List (by category)
-------------------------------------
1999 2000
---- ----
Casino 8 11
Heritage 9 17
Action 9 5
Sports 8 16
Fishing 9 9
Hunting 2 4
Girl Tech 6 10
Xavix 0 4
Peripherals 22 78
-- --
TOTAL 73 154
The Company anticipates that new product introductions in fiscal 2000
will be concentrated in the second and third quarters of that year. By the end
of fiscal 2000, the Company expects its product line to include approximately
154 models, of which 78 will be in peripherals. 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 2000 will be
delayed, which could delay or prevent certain anticipated product introductions.
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LICENSING
During fiscal 1999, Radica engaged in several licensing agreements in
which Radica was given permission to use the name, logo, game concept and/or
license of a person, company or brand in exchange for a royalty fee.
Among the licensors were Nascar (Nascar(R) Racer(TM) and Nascar(R)
Speedzone(TM)), Tiger Woods (Tiger Woods Ultimate Golf(TM) and Tiger Woods
Tournament Golf(TM)), Electronic Arts (EA No Hitter(TM) and EA Madden
Football(TM)), Sloane Vision Unlimited, developers of Chicken Soup for the Soul
(Chicken Soup for the Soul(R), Chicken Soup for the Teenage Soul(TM)), Anjar Co,
developers of Othello, Buckmaster (Buckmaster(R) Deer Huntin'(TM), Buckmaster(R)
Elk Huntin'(TM), Buckmaster(R) Bow Huntin'(TM)), and Hank Parker (Ultimate Bass
Fishin'(TM) and Fish or Man(R)).
The Company intends to incorporate these licenses into its 2000 product
line and will pursue new licenses in instances where management feels it will
enhance the value and marketability of a particular product.
MANUFACTURING
Radica's manufacturing is generally limited to IC chip bonding, plastic
injection, clamshell production, mold manufacture, surface mount technology
("SMT") 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 a proportion of tooling of molds for
its plastic parts, with majority of tools built in house.
In 1999 the Company assembled all of the Radica and Girl Tech lines of
products in order to control its costs, quality, production and delivery
schedules. Peripherals for LMP's markets were assembled by third party
manufacturers during 1999, but the Company intends to bring the majority of this
assembly in-house over the course of the next two years.
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 US toy safety standard.
The Company received renewal of their ISO 9001 quality certification
from Underwriters Laboratory on March 15, 1999. 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.
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An extension of the Factory commenced in December 1999 to add 202,000 square
feet of factory space and 178,000 square feet of dormitory space allowing for up
to an additional 3,000 employees to be housed. The cost of construction of the
extension is approximately $3.0 million, exclusive of manufacturing equipment.
The unit capacity of the Factory depends on the product mix produced. The
Company believes that the extension will give a total employee maximum of 8,000
and will allow for a peak production of over one million games per week,
depending on the product mix. 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
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 eight weeks in advance of
delivery. This lead time in some cases extends to twenty weeks when the market
is in short supply. The Company generally tries to maintain only two months
supply of semiconductor chips, which may constrain increased production of its
products on short notice. In preparation for Y2K, Radica stockpiled some
materials to ensure meeting customer demand in the first quarter of 2000. The
Company pays for most of its materials in US dollars.
The Company's major suppliers of electronic and mechanical handheld and
tabletop game materials in fiscal 1999 included Epson Hong Kong Limited
(semiconductor chips), Gillette Hong Kong Limited (batteries), GPI International
Limited (batteries), Leader Printed Circuit Boards Limited (PCBs), Lik Sun
Printing Co. Limited (printing), Meise Label Printing Fty (printing), Onpress
Printed Circuit
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Boards Limited (PCBs), Wintek Corporation (LCDs), Senmax Limited (keypads),
Sunplus Technology Co., Limited (semiconductor chips) and United Radiant
Technology (HK) Limited (LCDs).
The Company's major suppliers of peripherals in fiscal 1999 included
Berway (steering wheels and controllers), PRT (memory cards) and San Tai
Industrial Enterprises (game accessories).
SALES AND DISTRIBUTION
Radica's products are sold in over 30 countries, with the United States
accounting for over 70% of net sales in fiscal 1999 (excluding ODM business).
The Company sells its products directly to over 433 active retailers in the
United States and to approximately 23 distributors worldwide. The Company
participates in the electronic data interchange ("EDI") program maintained by 15
customers including J.C. Penney's, Sears, Target, Wal-Mart, Kohl's and K-Mart.
In fiscal 1999, the largest customer of the Company, Wal-Mart, accounted for
18.2% of net sales; in addition ODM work for the Hasbro Games Group accounted
for 20.9% of net sales. The top five customers (excluding ODM business) were as
follows:
% OF SALES
CUSTOMER NAME FOR THE FISCAL YEAR
------------- -------------------
1998 1999
---- ----
1. Wal-Mart (USA) 25.4% 18.2%
2. Target (USA) 10.7% 7.7%
3. K-Mart (USA) 3.9% 5.4%
4. Toys 'R' Us (worldwide) 6.9% 4.5%
5. Kohl's (USA) 3.4% 4.2%
The following table sets forth certain of the Company's major customers
in 1999, including distributors (alphabetical order).
<TABLE>
<CAPTION>
DEPARTMENT STORES DRUG STORES MASS MERCHANDISERS CATALOG SHOWROOMS
- ----------------- ----------- ------------------ -----------------
<S> <C> <C> <C>
Dayton Hudson Arbor Drugs Inc. Ames Argos
Dillards Eckerd Corporation Army Airforce Exch Brookstone
Foley's Genovese Drugs Bradlees Index
J.C. Penney's London Drugs Fred Meyer Intermediates
John Lewis Long's Drugs K-Mart Littlewoods / Index
Kohl's Osco Drug Mervyns Sharper Image
Macy's Thrifty Payless Drug QVC
Marshall Fields Walgreens Shopko
Neimann Marcus Target
Robinson's-May Bust
Woolworth's Wal-Mart
Woolworths
Zellers
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CONSUMER GROCERY &
MAIL ORDER RETAILERS SPECIALTY GIFT SHOP OPERATORS ELECTRONICS STORES CONVENIENCE STORES
- -------------------- ----------------------------- ------------------ ------------------
<S> <C> <C> <C>
Fingerhut Bass Pro Best Buy Albertsons
Home Shopping Network Caesar's World Comat Emro Marketing
H. Schneider Circus Circus Dixon's Kroger
Wish Book Dufferen Game Room Stores Electronics Boutique L&L Jiroch
Innovations Spencer Gifts Frey's M.W. Kasch
Zany Braining KF Group (Tempo) Tesco
Radio Shack W.H. Smith
Westfair Super Stores
</TABLE>
<TABLE>
<CAPTION>
TOY RETAILERS SPORTING GOODS STORES INTERNET RETAILERS DISTRIBUTORS (RADICA)
- ------------- --------------------- ------------------ ---------------------
<S> <C> <C> <C>
Hamleys Sports Authority e-Toys.com Agerex (Finland)
Kay Bee Bass Pro Shops Amazon.com Al Kawther (Egypt)
Toys'R'Us Bandai (Japan)
Ban Kee Trading (Philippines)
Chryssos Soft Toy (Greece)
Concentra (Portugal)
Creative Computers (Israel)
Europlay Toys (Germany)
Income Express (Hong Kong)
Lansay (France)
Playcorp (Australia and New Zealand)
Popular de Juguetes (Spain)
Sheng Tai Toys (Singapore)
TCL Marketing (UK)
The Oriental Trading Co.(Hong Kong)
Universal Electronics (Lebanon)
Waldmeier (Switzerland)
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTORS (PERIPHERALS)
- --------------------------
<S> <C> <C>
Beckman (Norway) Infogrames (France) Quality Goods (Ireland)
Bonnier (Bulgaria) Livewire (Australia) Toptronics (Finland)
De Vos (Belgium) Manta (Poland) Vidis Electronics (Germany)
Halifax (Italy) Microbyte (Argentina) Yes (Denmark)
</TABLE>
The Company has improved the quality of its distribution network by
adding new distributors in fiscal 1999, in Japan and France. The acquisition of
LMP gave the Company the resources to move UK sales of Radica product in-house.
Subsequently, Radica terminated its distribution agreement with its UK
distributor in 1999.
Radica's distribution operations use regional sales managers working
for the Company to manage manufacturers representatives and brokers that sell
its products. These manufacturers representatives are not employees of the
Company and work on a commission basis.
The Company's customers normally provide indications of interest, which
may be canceled at any time, from three to six months prior to scheduled
delivery, but only confirm orders eight weeks in advance
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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 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 Radica, Radica Gold and Girl Tech(R) products carry a 90
days consumer warranty from the date of sale, and the Company generally honors
warranty claims even after that period. The Company's peripheral products carry
a one year warranty from the date of sale. 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 170
staff worldwide. The Company's product development starts with teams in Dallas,
Texas; San Rafael, California; and Hertfordshire, England 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 1997, 1998
and 1999, the Company spent approximately $2,120,000, $4,120,000 and $6,036,000,
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. In April
1999, the Company signed two new agreements with Hasbro. The first, a new ODM
agreement and the second, a license agreement allowing Radica to continue to
sell high end versions of Yahtzee(TM), Connect Four(TM) and Battleship(TM) under
its Monte Carlo (now called Radica Gold) brand name. The new ODM agreement is a
three-year agreement, which automatically extends to a fourth year unless notice
is given prior to the expiration of the third year. The agreement establishes
purchasing terms for all product built and designed for Hasbro and guarantees
Radica exclusive manufacturing rights for the first two years of production of
any new product. 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 67 design patents, 3 utility patents, 65
trademarks and has 7 copyrights over its artwork. It also has 41 design patents,
12 utility patents, 189 trademarks and 10
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copyright 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, US 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 United Kingdom, China and the United States 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 is
one of the dominant sellers of 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
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.
In the peripherals market, LMP was the fourth largest distributor of
peripherals in the UK in 1999 according to Chart Track. The peripherals market
share is spread primarily amongst ten companies owning 60% of the overall market
share. The Company does not expect to begin distributing peripherals in the US
market until Fall of 2000. Like the handheld electronic games market, the
Company competes for customer purchases on the basis of price, quality, and
peripheral features and for retail shelf space on the basis of service.
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.
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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 a Sino-Foreign Joint Venture. As Radica Games itself does not
carry on any business in China, it is not subject to tax. The Joint Venture
enjoyed a two year tax holiday which expired in 1999. From January 1, 1999 to
December 31, 2001 its profits will be taxed at a reduced rate of 12%, half the
regular tax rate of 24%. After this the Company will be taxed at the regular tax
rate, but expects to apply for a continued tax holiday amounting to 50% of the
regular tax rate.
Radica USA and Disc are fully subject to US federal taxation, as well
as any applicable state or local taxation, on their taxable income. Currently,
the highest marginal rate of US federal corporate income tax is 35%. In
addition, dividends paid by Radica USA and Disc to the Company will be subject
to a 30% US federal withholding tax, resulting in an effective rate of US
federal taxation on distributed profits of up to 54.5%.
LMP is fully subject to UK corporate taxation. The UK profits tax rate
currently applying to corporations is 30%.
EMPLOYEES
As of December 31, 1999 the Company's workforce was comprised of the
following:
- -------------------------------------------------------------------------------
Production Sales and R&D Finance Operations Total by
Marketing & Admin location
- -------------------------------------------------------------------------------
Asia 3852 7 128 25 197 4209
- -------------------------------------------------------------------------------
USA 7 22 35 10 12 86
- -------------------------------------------------------------------------------
Europe 12 9 5 3 6 35
- -------------------------------------------------------------------------------
Total 3871 38 168 38 215 4330
- -------------------------------------------------------------------------------
None of the Company's employees are subject to a collective bargaining
agreement and the Company has never experienced a work stoppage. Management
believes that its employee relations are good.
RISK FACTORS
The shares of Common Stock of the Company involve a significant degree
of risk. Prospective investors should carefully consider the following factors
together with the other information contained or incorporated by reference
herein prior to making any investment decision regarding the Company or its
securities.
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RISKS OF MANUFACTURING IN CHINA
The Company's factory location is in Southern China and its
headquarters are in Hong Kong, which is a Special Adminstrative Region of China.
Risk of China Losing Normal Trade Relations ("NTR") 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 US import
duties. China currently enjoys NTR status under US tariff laws, which provides a
favorable category of US 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 NTR status for China. The loss of NTR status for China, changes in
current tariff structures or adoption in the United States of other trade
policies adverse to China could have an adverse effect on 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 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.
The Company's production and shipping capabilities could be adversely
effected by ongoing tensions between the Chinese and Taiwanese governments. In
the event that Taiwan does not adopt a plan for unifying with China, the Chinese
government has threatened military action against Taiwan. As of yet, Taiwan has
not indicated that they intend to propose and adopt a reunification plan. If an
invasion were to occur, Radica's supply of components from Taiwanese suppliers,
including computer processing units (CPUs), could be cut off, potentially
limiting the Company's production capabilities. Invasion could also lead to
sanctions or military action by the US and/or European countries, which could
materially effect sales to those countries.
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.
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Chinese Taxation.
The Company paid $240,000 in profits tax on the Joint Venture in China
in 1999, the first year it has paid tax in China. The Company has been granted
50% relief from income tax through December 31, 2001 under the Income Tax Law of
the PRC, and will therefore be taxed at 12% during this period. After this it
will be taxed at the full rate of income tax, however, the Company can apply for
extension of the reduced rate and intends to do so. 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 PRC assess tax on the Company based on two separate contracts: a
Processing Agreement (PA) and a Joint Venture (JV) contract. The JV contract is
a joint venture with the local township that lasts through August 12, 2024 and
tax is payable quarterly based on tax rates determined upon entering the
agreement. The tax on a PA is assessed on labor and raw material costs submitted
periodically to the PRC customs offices throughout the year.
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 seven 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.
DEPENDENCE ON PRODUCT APPEAL AND NEW PRODUCT INTRODUCTIONS
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, the Company continues to offer a
relatively limited range of products that are all in the categories of games or
peripherals. This exposes the Company to the risks of any narrowly focused
business. Changes in consumer preferences away from the kinds of products
offered by the Company could have an adverse effect on the Company.
Some of the Company's products have been only recently introduced and
although they may experience good initial sales growth, there is no assurance
that such initial success is indicative of significant future sales. As a
general matter, the Company expects that the sales of these products will
eventually decline. The Company cannot predict how long the product cycle will
last for any product. In order to control costs, and take advantage of the
finite shelf space available to the Company, it will also need to delete
products from its line periodically. The Company's long-term operating results
will therefore depend largely upon its continued ability to conceive, develop
and introduce new appealing products at competitive prices.
Once a new product is conceived, the principal steps to the
introduction of the product include design, sourcing and testing of the
electronic components, tooling, and purchase and design of graphics and
packaging. At any stage in the process, there may be difficulties or delays in
completing the necessary
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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.
During 1997 and 1998, Fishing-related games made up a significant
portion of the Company's overall sales (45.3% and 40.4%, respectively). In
response to the heavy concentration of sales within one line and in anticipation
of the normal decline in the sales level of any successful product after a
period of time, Radica has worked to diversify its product lines.
Fishing-related games accounted for 19% of sales in 1999.
Much of the Company's expected 2000 peripherals revenues are based on
steering wheels and controllers developed for the PlayStation 2 ("PS2")
platform, expected to be released in Japan in Spring of 2000 and in the US and
Europe in Fall of 2000. Delays in Sony's introduction of the PS2 system could
have a significant impact on the Company's peripherals revenue in 2000. There is
also no guarantee that the Company will be able to create peripheral products
that work with the new platform in time to meet the market.
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(R) line, game peripherals, internet accessories and ODM games. In
addition, the Company plans to introduce its new Play TV(TM) line of products in
the Fall of 2000. The Play TV(TM) games utilize the Xavix(TM) technology which
allows users to plug games directly into their television set for display of the
game content on the screen without requiring connection through a video game
system.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a significant portion of the Company's sales has been
concentrated in a few large retail customers. See Note 15 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
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The Company is dependent on suppliers for the components and parts that
it assembles to produce its products. The Company generally purchases the
specific LCDs or semiconductor chips for any particular product model from a
single supplier. While the Company believes that there are alternative sources
for all of its supplies, an interruption of the supply of LCDs, semiconductor
chips or other supplies from a supplier could result in significant production
delays.
The Company also relies on outside manufacturers for production of
peripherals. While the Company intends to move the majority of this production
into its own Factory, manufacturer delays or shut downs could have a significant
impact on sales of peripherals in 2000.
CONCENTRATED MANUFACTURING FACILITIES
A disruption of operations at the Factory due to fire, labor dispute,
dispute with the local government or otherwise, would have an adverse effect on
the Company's results of operations. In such event, the Company believes that it
could partially mitigate the effect of a disruption by increasing the use of
subcontractors to assemble its products, but there can be no assurance that it
would be able to do so. In addition, the Company's manufacturing facilities are
dependent on the Company's relationship with the local government.
NO ASSURANCE OF SUCCESS IN NEW BUSINESS
In order to sustain growth, Radica intends to expand into related
businesses, including original design manufacturing of products for third
parties. Until 1999, Radica had only been successful in developing an ODM
relationship with Hasbro. During the past year, Radica has been able to
successfully enter into an ODM agreement with Konami and is also currently
manufacturing Othello product for both Mattel and Tsukuda of Japan. The Company
intends to maintain relationships with its existing ODM partners while
continuing to pursue new partners.
NO ASSURANCE OF CONTINUED ODM BUSINESS
The Company's contract with the Hasbro Games Group can be ended on 180
days notice; the Company's contracts with Konami has similar termination
clauses. There can be no guarantee then such business can be retained
indefinitely. Loss of such business would materially effect 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
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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
Both the games and peripherals businesses are highly competitive. The
Company currently faces direct competition from a number of other producers of
handheld electronic games and peripherals, 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.
INTERNET RISK
In 2000, the Company plans on introducing several internet-related
products. The market for internet products is highly competitive. There are no
substantial barriers to entry in this market and the Company expects that
competition will continue to intensify.
The market for internet products is characterized by rapid
technological developments, evolving industry standards and customer demands,
ongoing product enhancements and new product introductions. As a result, the
Company may need to make significant changes to the design and content of its
internet product in order to compete effectively. Failure to do so could
adversely effect its business, operating results and financial conditions. In
addition, internet products tend to be higher cost, so failure of a product to
sell will create higher inventory exposure than with other products.
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 electronic games and peripherals markets are characterized by
changing consumer preferences and frequent new product introductions which
reduce the length of product life cycles. There can be no
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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 taxes paid by the Company in China
increased during 1999. See "Taxation of the Company and its Subsidiaries".
COPY PRODUCT
On occasion in the electronic games and peripherals industries,
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 conditions, it may not be possible to enforce this
policy in all cases. The peripherals markets generally experiences a higher rate
of defective and overstock returns than the electronic and mechanical game
market does. Currently all defective peripherals are returned to the
manufacturer for credit.
CONTROL BY EXISTING SHAREHOLDERS
The Company's largest shareholders (see "Item 4. Control of
Registrant") including Mr. Robert E. Davids, Vice Chairman of the Company, and a
group that consists of Dito Devcar Corporation and certain related persons, a
group that consists of RAD Partners 1999 LLC and certain related persons, and
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, the United Kingdom
and the People's Republic of China), and all or a substantial portion of the
assets of such persons
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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 December 31, 1999, the Company had 17,639,594 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")
Mr. Davids has exercised his registration rights for all his outstanding shares.
No predictions can be made as to the effect, if any, that market sales of shares
by existing shareholders or the availability of such shares for future sale will
have on the market price of Common Stock prevailing from time to time. The
prevailing market price of Common Stock could be adversely effected by future
sales of Common Stock by existing shareholders.
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. An
extension of the factory commenced in December of 1999 to add 202,000 square
feet of factory space and 178,000 square feet of dormitory space. The extension
is expected to be completed in August of 2000. The Company owns a long-term
leasehold on its executive offices (15,400 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. Howell and Mr. Storey,
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 Hertfordshire, UK; Toronto, Canada and office space
in Dallas, Texas; Pasadena, California and San Rafael, California.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any pending material legal proceedings.
ITEM 4. CONTROL OF REGISTRANT
(a) The registrant is not controlled by another corporation or any foreign
government.
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(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 January 1, 2000:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
- -------------- --------------- ------------ ----------------
Common stock Robert E. Davids 2,785,800 15.8%
Common stock Dito Devcar Corporation et al 5,878,218 33.3%
Common stock Officers & Directors as a Group 3,258,721 18.5%
In addition to the foregoing, the Company is aware of two other
significant shareholders who are believed to own approximately 9.9% and
5% of the Company's common stock. These are RAD Partners 1999 LLC
(including shares owned by other related persons) and The John and Mary
Hansen 1989 Trust (the "Hansen Trust") (including shares owned by other
Hansen family trusts or individuals), respectively.
(c) There are no arrangements known to the registrant which may at a
subsequent date result in a change of control of the registrant.
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PART II
ITEM 5. NATURE OF TRADING MARKET
The Company's common stock is traded on the NASDAQ National Market
under the symbol RADA. The Company's common stock is not traded on any foreign
trading market. The following table lists the high and low closing stock price
for each quarter of fiscal 1999, fiscal 1998 and fiscal 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED STUB PERIOD ENDED FISCAL YEAR ENDED
----------------- ----------------- ----------------- -----------------
OCTOBER 31, 1997 OCTOBER 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
---------------- ---------------- ----------------- -----------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
$ $ $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stud Period .......... - - - - 17 1/2 13 5/8 - -
First Quarter ........ 3 1/4 1 1/16 19 12 7/8 - - 16 5/16 12 3/8
Second Quarter ....... 4 1/8 2 3/8 20 5/8 14 3/4 - - 13 5/8 9
Third Quarter......... 7 7/8 2 7/8 22 1/4 16 1/8 - - 11 1/8 8 1/4
Fourth Quarter ....... 15 3/8 7 1/2 16 5/8 9 3/4 - - 11 11/16 7
</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 December 31, 1999, the Company had approximately 110 record
holders of its Common Stock, and approximately 80% of such stock was held by US
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
23
<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-Bermudians, 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, United Kingdom income tax laws and United States Federal income
tax laws. The discussion does not deal with all possible tax consequences
relating to the Company's operations or to the ownership of Common Stock. In
particular, the discussion does not address the tax consequences under State,
local and other (e.g., non-Bermuda, non-Hong Kong, non-United Kingdom 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
24
<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.
Hong Kong stamp duty is levied on the transfer of Common Stock of Hong
Kong companies at the rate of 0.03% on the fair consideration of the transfer.
For companies not incorporated in Hong Kong, no stamp duty is chargeable on the
transfer so long as the shareholders' registers are kept outside of Hong Kong.
Hong Kong also levies an estate duty on the estate of a person who
holds Common Stock in a Hong Kong company at the time of his death. No such duty
is levied where the company is not incorporated in Hong Kong and where its share
register is kept outside of Hong Kong.
UNITED STATES FEDERAL INCOME TAXATION
General. The following is a general discussion of the principal US
federal income tax consequences to a US Holder (as defined below) of the
ownership of Common Stock and does not address the US 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 "US Holder" is a beneficial owner of Common Stock that is a US
citizen or resident, a domestic corporation, an estate subject to US 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.
25
<PAGE>
Dividends. Subject to the FPHC discussion below, a US 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 US
federal income tax law. Distributions in excess of the earnings and profits of
the Company will be treated, for US federal income tax purposes, as a nontaxable
return on capital to the extent of the US Holder's basis in the Common Stock and
then as gain from the sale or exchange of a capital asset. Dividend income with
respect to the Common Stock generally will constitute foreign source "passive"
income, or in the case of certain US 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 US Holder generally will be treated as capital gain or
loss and will be long-term capital gain or loss if the US 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 US Holder will generally be US source gain. Long-term
capital gain of a non-corporate US Holder is generally subject to a maximum tax
rate of 20%.
FPHC Rules. A foreign corporation will be classified as a foreign
personal holding company ("FPHC") if (i) five or fewer individuals who are US
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"). US citizens or residents, domestic corporations, domestic partnerships
and estates or trusts other than foreign estates or trusts who are shareholders
of FPHCs ("US 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 1999.
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 US shareholder who holds
Common Stock on the last day of the Company's taxable year 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 US shareholder as a dividend whether or not distributed in
cash. For any year in which the Company is a FPHC, any 5% or greater US
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 US federal and state
income taxes on such distributions and any undistributed foreign personal
holding company income taxable as a dividend).
26
<PAGE>
PHC Rules. A corporation (including a foreign corporation that is not a
FPHC) will be classified as a personal holding company ("PHC") if (i) five or
fewer individuals (without regard to their citizenship or residence) directly or
indirectly own more than 50% in value of the corporation's stock (the
"shareholder test") and (ii) at least 60% of its ordinary gross income, as
specially adjusted, consists of personal holding company income (defined
generally to include dividends, interest, royalties, rents and certain other
types of passive income) (the "income test"). A PHC is subject to a US federal
income tax of 39.6% on its undistributed personal holding company income
(generally limited, in the case of a foreign corporation, to US source income).
The Company is not a PHC as the income test was not met in 1999. 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 US 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 US
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 US Holder if,
for any taxable year in which the US 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.
ITEM 8. SELECTED FINANCIAL DATA
Set forth below is the selected income statement and balance sheet data
for each of the four years in the period ended October 31, 1998, of two months
in the period ended December 31, 1998 and of the year in the period ended
December 31, 1999. 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 notes thereto included elsewhere in this
document.
27
<PAGE>
<TABLE>
<CAPTION>
TWO MONTHS TWO MONTHS
ENDED ENDED
YEAR ENDED OCTOBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 1999
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MARGINS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 52,650 $ 47,535 $ 87,760 $ 155,618 $ 21,071 $ 133,522
Cost of sales 34,640 30,696 40,888 70,576 10,717 78,229
-------- -------- -------- -------- --------- ---------
Gross profit 18,010 16,839 46,872 85,042 10,354 55,293
-------- -------- -------- -------- --------- ---------
Operating expenses:
Selling, general and administrative 21,105 11,752 14,403 27,788 3,657 28,049
Research and development 2,084 1,699 2,099 3,710 730 6,036
Write down of assets 15,318 - - - - -
Acquired research and development - - - 1,500 - -
Depreciation and amortization 1,591 1,594 2,278 3,423 612 4,956
-------- -------- -------- -------- --------- ---------
Total operating expenses $ 40,098 $ 15,045 $ 18,780 $ 36,421 $ 4,999 $ 39,041
-------- -------- -------- -------- --------- ---------
Operating (loss) income from continuing operations (22,088) 1,794 28,092 48,621 5,355 16,252
Other income 329 748 915 807 471 1,231
Share of loss of affiliated company - - (141) (334) (120) (1,748)
Net interest (expenses) income (628) (165) 913 1,896 289 1,469
-------- -------- -------- -------- --------- ---------
(Loss) Income from continuing operations before
income taxes and unusual item (22,387) 2,377 29,779 50,990 5,995 17,204
Unusual item - 709 - - - -
-------- -------- -------- -------- --------- ---------
(Loss) Income from continuing operations
before income taxes (22,387) 3,086 29,779 50,990 5,995 17,204
Credit (Provision) for income taxes 897 120 (193) 226 (176) (149)
-------- -------- -------- -------- --------- ---------
(Loss) Income from continuing operations
after income taxes $(21,490) $ 3,206 $ 29,586 $ 51,256 $ 5,819 $ 17,055
Discontinued Operations:
Loss from operation of pub poker business (233) (1,712) - - - -
-------- -------- -------- -------- --------- ---------
Net (loss) income $(21,723) $ 1,494 $ 29,586 $ 51,256 $ 5,819 $ 17,055
======== ======== ======== ========= ========= =========
Net (loss) earnings per share from continuing $ (0.94) $ 0.15 $ 1.43 $ 2.53 $ 0.31 $ 0.94
operations
Effect of discontinued operations (0.01) (0.08) - -
-------- -------- -------- -------- --------- ---------
Net (loss) earnings per share - basic $ (0.95) $ 0.07 $ 1.43 $ 2.53 $ 0.31 $ 0.94
======== ======== ======== ========= ========= =========
Average number of shares outstanding 22,780 21,439 20,761 20,240 18,883 18,144
Net (loss) earnings per share - assuming dilution $ (0.95) $ 0.07 $ 1.37 $ 2.39 $ 0.29 $ 0.90
======== ======== ======== ========= ========= =========
Average number of shares outstanding 22,780 21,439 21,636 21,488 20,094 18,979
</TABLE>
(continued)
28
<PAGE>
<TABLE>
<CAPTION>
TWO MONTHS TWO MONTHS
ENDED ENDED
YEAR ENDED OCTOBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 1999
-----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MARGINS)
<S> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Gross margin 34.2% 35.4% 53.4% 54.6% 49.1% 41.4%
Operating margin N/A 3.8% 32.0% 31.2% 25.4% 12.2%
Dividends per share - - - - - -
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 15,878 $ 18,847 $ 48,860 $ 59,913 $ 65,776 $ 65,123
Total assets 54,054 42,725 79,449 113,521 108,190 122,095
Long-term debt 99 - - - - 10,946
Total debt 14,440 99 - - - 10,946
Shareholders' equity 30,297 31,813 61,593 79,839 85,735 86,062
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In December of 1998, Radica Games' Board of Directors approved a change
in the Company's fiscal year end from October 31 to December 31. This resulted
in a transition period from November 1, 1998 to December 31, 1998, which has
been audited. However, for clarity of presentation and comparability, the
discussion of results of operations compares the year ended December 31, 1999 to
the unaudited twelve months ended December 31, 1998, followed by a comparison of
the unaudited two months ended December 31, 1998 to two months ended December
31, 1997, a comparison of the fiscal year ended October 31, 1998 to the fiscal
year ended October 31, 1997 and a comparison of the fiscal year ended October
31, 1997 to the fiscal year ended October 31, 1996. For purposes of the
comparison of the year ended December 31, 1999 to the twelve months ended
December 31, 1998, the unaudited twelve months ended December 31, 1998 are
referred to as the prior year.
On June 24, 1999 the Company acquired all of the business and operating
assets of LMP for total transaction costs of $16 million including
acquisition-related costs. The transaction has been accounted for using the
purchase method. The Company's consolidated results of operations include the
results of LMP from the date of Acquisition (see Note 7 of the Notes to
Consolidated Financial Statements).
29
<PAGE>
FISCAL 1999 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1998
The following table sets forth items from the Company's Consolidated
Statements of Income as a percentage of net revenues:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of sales 46.1% 58.6%
Gross margin 53.9% 41.4%
Selling, general and administrative expenses 17.8% 21.0%
Research and development 2.6% 4.5%
Acquired research and development 0.9% -
Depreciation and amortization 2.4% 3.7%
Operating income 30.2% 12.2%
Other income 0.7% 0.9%
Share of loss of affiliated company 0.3% 1.3%
Interest income, net 1.2% 1.1%
Income before income taxes 31.9% 12.9%
(Provision) credit for income taxes 0.1% (0.1%)
Net income 32.0% 12.8%
</TABLE>
Net sales for the year ended December 31, 1999 were $133.5 million,
decreasing 16.2% from $159.4 million for the prior year.
30
<PAGE>
The following table sets out the percentages of sales achieved from
each category of products:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
1998 1999
-------------------------------------------------------- ------------------------------------------------------
% of Net Net Units No. of % of Net Net Units No. of
Product Lines Sales Value Sales Value Sold Models Sales Value Sales Value Sold Models
- ------------------- --------------- ------------------------------ --------- --------------- ------------------------------ -------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fishing games 40.4% $ 64,454 5,233 6 19.0% $ 25,370 2,239 9
Hunting games - - - - 8.1% 10,822 651 4
Action games 9.8% 15,540 1,089 7 8.7% 11,678 803 12
Sports games 11.5% 18,355 1,316 12 12.1% 16,159 1,027 17
Casino games 8.2% 13,040 3,181 66 7.6% 10,170 2,395 38
Heritage games 7.2% 11,513 1,084 19 10.2% 13,576 1,552 20
Girl Tech games 0.1% 145 11 2 5.6% 7,444 594 6
ODM products 22.8% 36,322 6,144 20 20.9% 27,897 6,109 22
Peripherals - - - - 7.8% 10,406 1,871 139
----------- ------------------------------ -------- ----------- ------------------------------ -----------
Total 100.0% $ 159,369 18,058 132 100.0% $ 133,522 17,241 267
=========== ============================== ======== =========== ============================== ===========
</TABLE>
During 1999, the Company sold 267 different models of games, totaling
17.2 million units, compared to 132 models totaling 18.1 million units in 1998,
a decrease of 5.0%. Of the 267 models of Radica, Radica Gold and LMP games and
peripherals 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-seven new models were sold
during 1999 (See "New Products Introduction"). The Company intends to introduce
approximately 114 new models in 2000.
The gross profit for fiscal year 1999 was $55.3 million compared to
$85.9 million for fiscal 1998, a decrease of 35.6%. The gross margin for the
year was 41.4% compared to 53.9% for fiscal year 1998. The decrease in gross
margin was due to the effect of the sales of lower margin controller product
through LMP, the effect of increased licenses, reduced ODM margins, together
with the effect of certain amounts of air freight due to shortages of raw
materials due to the Taiwan earthquake earlier this year.
Operating profit for fiscal year 1999 was $16.3 million, a decrease of
66.1% from $48.1 million in fiscal 1998. Operating expenses increased to $39.0
million from $37.8 million in 1998. The increase was the result of increased
research and development costs, together with increased depreciation and
amortization due to the acquisition of LMP.
31
<PAGE>
The following table lays out the changes in operating expenses for the
major expense categories.
December 31,
----------------------------------------
1998 1999
----------------- -----------------
(US dollars in millions)
Commissions $ 5.0 $ 2.9
Indirect salaries and wages 6.9 8.2
Advertising and promotion expenses 8.8 8.9
Research and development expenses 5.6 6.0
The decrease in commissions in 1999 was the result of the decrease in
sales from 1998 combined with Radica USA's decision to move the sales function
to several of its retail customers in-house. Indirect wages and salaries
increased in 1999 as a result of the acquisition of LMP and management's
decision to increase research and development and add several key management
positions in the United States.
The effective blended tax rate for the year ended December 31, 1999 was
a provision of 0.9% on continuing operations compared to a credit of 0.3% for
fiscal 1998. The tax provision for the year was comprised of an expense of $0.2
million representing 0.9% of pre-tax income. This compared to a credit of $0.6
million in 1998, or 1.2% of pre-tax income. The increase in the tax provision
for the year was as a result of taxable income in the US and the one-time
deferred tax credit of $4.6 million in 1998.
During 1999, the Company wrote down a $1 million loan to its affiliate
ShareGate due to actual losses in 1999 and anticipated ongoing losses in 2000.
As the investment in ShareGate was at zero on the balance sheet at the end of
1999, there will be no further charges as a result of ShareGate in 2000.
Net profit for fiscal year 1999 was $17.1 million or $0.90 per share
compared to $51.0 million or $2.41 per share in fiscal 1998.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents totaled $32.2 million at December 31, 1999, a
drop of $15.4 million from December 31, 1998. Working capital at December 31,
1999 was $65.1 million, a $0.7 million decrease from working capital of $65.8
million at December 31, 1998. The decrease in working capital is due primarily
to a decrease in net income offset by an increase in receivables and inventory
resulting from the acquisition of LMP, Y2K related issues and Radica shares
repurchased throughout the year. The ratio of current assets to current
liabilities decreased to 3.6 at December 31, 1999 from 3.9 at December 31, 1998.
This decrease in the current ratio is due mainly to the decrease in cash.
Short-term borrowings totaled $2.9 million at December 31, 1999, an
increase of $1.4 million from December 31, 1998. $1.4 million at the short-term
borrowings were notes held in escrow as a result of the LMP purchase and will
mature in December of 2000. The remaining $1.5 million is the outstanding amount
of an LMP credit facility.
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.
TWO MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWO MONTHS ENDED DECEMBER 31,
1997
32
<PAGE>
Net sales for the two months ended December 31, 1998 were $21.1
million, increasing 22% from $17.3 million for the prior year. Approximately 25%
of sales related to Fishing games, 12.2% to Action games, 18.2% to Sports games,
7.0% to Heritage games, 0.7% to Girl Tech games, 9.5% to Casino games and 27.4%
to ODM sales during the two months ended December 31, 1998 in comparison to
53.9%, 7.2%, 6.1%, 8.7%, 0%, 12.2% and 11.9% in the same period in 1997.
During the two months ended December 31, 1998, the Company sold 97
different models of games, totaling 2.4 million units, compared to 100 models
totaling two million units in the same period in 1997, an increase of 20%. Of
the 81 models of Radica, Girl Tech and Monte Carlo (now called Radica Gold)
games sold during the period a number of models were discontinued lines, which
unless the market warranted reintroduction, the Company intended to continue
selling so long as inventories exist. Seven new models were sold during the
period.
The gross profit for the two months ended December 31, 1998 was $10.4
million compared to $9.5 million for the two months ended December 31, 1997, an
increase of 9.5%. The gross margin for the two months ended December 31, 1998
was 49.1% compared to 54.6% for the same period in 1997.
Operating profit for the two months ended December 31, 1998 was $5.4
million, a decrease of $0.4 million from $5.8 million for the same period in
1997. Operating expenses increased to $5.0 million from $3.6 million for the two
months ended December 31, 1997.
The following table lays out the changes in operating expenses for the
major expense categories.
Two months ended December 31,
--------------------------------------------
1997 1998
------------------- -------------------
(US dollars in thousands)
Commissions $ 553 $ 791
Indirect salaries and wages 730 1,236
Advertising and promotion expenses 732 421
Research and development expenses 320 730
The effective blended tax rate for the two months ended December 31,
1998 was a provision of 2.9% compared to 1.2% for the two months ended December
31, 1997. The increase in tax expense for the period was as a result of the
brought forward losses in the US subsidiary being used up resulting in the US
profits of the distribution operation becoming fully taxable.
Net profit for the two months ended December 31, 1998 of $5.8 million
or $0.31 per share compared to $6.1 million or $0.29 per share for the same
period in 1997.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for the year ended October 31, 1998 were $155.6 million,
increasing 77.2% from $87.8 million for the prior year. Approximately 44% of
sales related to Fishing games, 9.1% to Action games, 10% to Sports games, 7.4%
to Heritage games, 8.5% to Casino games and 21% to ODM sales in fiscal 1998 in
comparison to 40.7%, 2.7%, 9.3%, 12.3%, 15.6% and 19.4% in fiscal 1997. 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 (now called Radica Gold)
games sold during the period a number of models were discontinued lines,
33
<PAGE>
which unless the market warranted reintroduction, the Company intended to
continue selling so long as inventories exist. Twenty new models were sold
during 1998.
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
----------------- -----------------
(US 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
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 US subsidiary being used up resulting in
the US 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.
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 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 (now called Radica Gold) 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. Ten 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.
34
<PAGE>
Operating profit for fiscal year 1997 was $28.1 million, an increase
from $1.8 million from fiscal 1996. Operating expenses increased 25.3% to $18.8
million from $15 million in 1996. Commissions increased 113% to $2.45 million
from $1.15 million in fiscal 1996; indirect salaries and wages increased 36.8%
to $4.72 million from $3.45 million in fiscal 1996; advertising and promotion
expenses increased 11.1% to $0.8 million from $0.72 million in fiscal 1996; and
research and development expenses increased 23.5% to $2.10 million from $1.70
million in fiscal 1996.
The effective blended tax rate for the year ended October 1997 was 0.6%
on continuing operations compared to a credit of 3.9% for fiscal 1996. This 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 US 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 $0.07 per share in fiscal 1996.
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 1999.
<TABLE>
<CAPTION>
Term
Name Expires Residency Position
- ---- ------- --------- --------
<S> <C> <C> <C>
Patrick S. Feely 2000 USA President, Chief Executive Officer,
Chief Operating Officer and Director
Jon N. Bengtson 2000 USA Chairman of the Board and Director
Robert E. Davids (3) 2000 Hong Kong Vice-Chairman of the Board and Director
David C.W. Howell 2000 Hong Kong President Asia Operations,
Chief Financial Officer and Director
Siu Wing Lam 2000 USA Executive Vice President, Engineering and Director
James O'Toole (1)(2)(3) 2000 USA Director
Millens W. Taft (1)(2)(3) 2000 USA Director
Peter L. Thigpen (1)(2)(3) 2000 USA Director
Henry Hai-Lin Hu (1)(2)(3) 2000 Australia Director
Craig D. Storey N/A Hong Kong Vice President and Chief Accounting Officer
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Eugene A. Murtha N/A USA President, Radica USA
Neil Doughty N/A UK Managing Director, Leda Media Products Ltd
John Doughty N/A UK Head of Sales, Leda Media Products Ltd
Alan R. Champion N/A UK Head of Marketing, Leda Media Products Ltd
Kam Cheong Wong N/A Hong Kong Vice President of China Operations
Hermen H.L. Yau N/A Hong Kong MIS Director
Samuel C.W. Kwok N/A Hong Kong Plant Administration Director
Ben Hui N/A Hong Kong Materials Director
You Liang Wang N/A China Quality Director
Rick C.K. Chu N/A Hong Kong International Sales Director
<FN>
(1) Member of the Audit Committee.
(2) Member of the Compensation, Organization and Nominating Committee.
(3) Member of the Executive Committee.
</FN>
</TABLE>
Patrick S. Feely has been Chief Executive Officer since April 1999. He
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 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, after previously serving as
Senior Vice President Commercial Operations from 1982 to 1986. As president of
Tonka, Mr. Feely was responsible for the successful launch of the Sega video
game system into the US market. Mr. Feely was an executive at Mattel Toys from
1977 to 1982 and began his career at RCA Corporation in 1970. Mr. Feely is also
a Director of the Toy Manufacturers Association. He has a BA from Duke
University and an MBA from the University of Michigan.
Jon N. Bengtson, formerly the Executive Vice President and Chief
Operating Officer of the Company, became the Chairman of the Board of the
Company in January 1996, and has been a director of the Company since January
1994. He is currently the Chairman of ShareGate, Inc. a telecommunications
company. 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 International Game Technology ("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.
36
<PAGE>
Robert E. Davids became Chairman of the Executive Committee of the
Board of Directors, Vice Chairman of the Board and Chief Executive
Officer-Emeritus in April 1999 and has been a director since December 1989. He
was Chief Executive Officer of the Company from January 1994 to April 1999, and
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 IGT, including Director of Special Projects and Director of
Engineering.
David C.W. Howell was appointed President Asia Operations in December
1998. He has been Executive Vice President and Chief Financial Officer and a
director of the Company since September 1995. Prior to that, he was Vice
President and Chief Accounting Officer and a director of the Company from
January 1994 to September 1995. From 1992 to 1994, Mr. Howell was a Finance
Director and Company Secretary of Radica HK. From 1984 to 1991, Mr. Howell was
employed by Ernst & Young in London, Hong Kong and Vietnam. He has a B.Sc. from
Nottingham University, is a Fellow of the Institute of Chartered Accountants in
England and Wales and is a fellow of the Hong Kong Society of Accountants.
Siu Wing Lam has been Executive Vice President, Engineering of the
Company since December 1998 and was previously 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 19 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
Research Professor in the Center for Effective Organization at the University of
Southern California's Marshall School of Business. He is Chairman of the Board
of Academic Advisors of the Booz Allen Hamilton Strategic Leadership Center.
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 L. 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 - US 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
37
<PAGE>
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, a lecturer on ethics at
the Haas Graduate School of Business at the University of California, Berkeley.
Henry Hai-Lin Hu was appointed a director of the Company in 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
giftware. He co-founded Wah Shing Toy Group in 1982, a Singapore listed toy
company, and retired 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.
Craig D. Storey has been Vice President and Chief Accounting Officer of
the Company since July of 1999. Prior to that, he was the Financial Controller
of Radica USA from 1995 to 1999. From 1993 to 1995, Mr. Storey was employed by
Kafoury, Armstrong and Company in Reno, Nevada. He has a BS from Arizona State
University and is a member of the American Institute of Certified Public
Accountants and the Nevada Society of CPA's.
Eugene A. Murtha has been the President of Radica USA since December
1998. A 23-year veteran of the Toy and Game Industry, Mr. Murtha recently served
as Mattel's Senior 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.
Neil Doughty has been Managing Director of Leda Media Products Ltd
("LMP") since their acquisition by Radica on 24th June 1999. He was previously
in the position of Sales Director/ Shareholder and was heavily involved in the
running of the business (heightened by the ill health of the previous managing
director). Mr. Doughty was responsible for LMP's introduction to the video game
peripherals market place in 1991, which is now LMP's primary source of revenue.
He is one of the main pioneers of the European peripherals market and was
responsible for the establishment of LMP's network of European distributors. Mr.
Doughty has 16 years experience in Sales & Marketing management, of which 14
have been spent within the consumer electronics industry.
John Doughty has been Head of Sales with LMP since May 1999, having
previously held the position of UK Sales Manager since March 1998. He personally
manages LMP's major European Accounts, and also oversees all other European and
UK Accounts through the LMP Sales Team. Mr. Doughty has had 13 years experience
in the 'gaming' industry having previously worked at Entertainment UK, part of
the Kingfisher Group, as Senior Buyer, and prior to that having worked at HMV
UK, as a Buyer.
Alan R. Champion has been Head of Marketing at LMP since January 2000
having previously held the position of General Manager since May 1997. Prior to
joining LMP, Mr. Champion worked for 5 years in Sales and Marketing positions
with TDK UK Ltd and earlier lived and worked in Germany for Kraft Suchard
confectionery. Mr. Champion has a BA (Hons) degree in International Business
Management and (Diplom Betriebswirt) German International Business degree from
the University of Stuttgart, Germany.
38
<PAGE>
Kam Cheong Wong 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 20 years of experience
in product design, R&D, production and sales in toys, consumer electronics and
the electrical appliance industry. Mr. Wong has a B.Sc. 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 C.W. 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.
You Liang 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 Administration
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.
ITEM 11. COMPENSATION OF OFFICERS AND DIRECTORS
COMPENSATION
In fiscal 1999, the aggregate amount of compensation paid to all
executive officers and directors as a group for services in all capacities was
approximately $2.31 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.
39
<PAGE>
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. The Company proposes to resume payment of this fee effective from
the May 2000 annual shareholders meeting. Directors may elect to receive half of
this fee payable in shares of the Company's Common Stock valued at the then
current market price.
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. In 1998, each of two outside directors received
non-qualified stock options to purchase 30,000 shares of Common Stock of the
Company upon initial election at exercise prices of $17.25 and $16.375 per
share, respectively.
Upon each re-election to the Board of Directors, starting in 1995, each
outside director received non-qualified stock options to purchase 5,000 shares
in 1995 and 1996, and 15,000 shares in 1997, 1998 and 1999, of Common Stock of
the Company at the then current market price of the Company's Common Stock,
which at the past five re-election dates were $3.66, $1.50, $3.125, $18.75 and
$12.625 per share, respectively. Upon re-election to the Board of Directors in
2000 and thereafter, each outside director will receive non-qualified stock
options to purchase 2,500 shares per quarter (i.e. 10,000 shares per annum) of
Common Stock of the Company at an exercise price equal to the then current
market price of the Company's Common Stock. These subsequent options are also
exercisable after one year from the date of grant.
EMPLOYMENT AGREEMENTS
Messrs. Feely, Howell, Lam, Murtha, Bengtson and Neil Doughty have each
entered into individual employment agreements with the Company. After giving
effect to the latest renewals, the employment agreements are for periods of two
years each, from December 1998 for Messrs. Feely, Howell, Lam, and Bengtson,
from November 30, 1998 for Mr. Murtha, and from June 24, 1999 for Mr. Doughty.
Each employment agreement is terminable by the Company for cause. Messrs. Feely,
Howell, Lam, Murtha, Bengtson and Doughty shall each receive minimum annual base
salaries of $282,600, $182,000, $160,000, $200,000, $43,200 and $171,720,
respectively. The agreement with Mr. Bengtson, in operation since December 1995,
is for part-time services. The employment agreements for Messrs. Feely, Howell,
Lam, Murtha and Doughty contain certain restrictions on their involvement in
businesses other than the Company during the course of their employment and
certain provisions applicable after termination of employment which prohibit the
solicitation of customers and other employees of the Company, employment or
engagement with competing entities, or the disclosure of proprietary information
of the Company. The Company provides residences for Mr. Howell and Mr. Storey 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, and another 60,000 stock
options at $14.125 per share in November 1998, subject to the terms and
conditions of the agreement and the 1994 Stock Option Plan. Additionally, in May
of 2000 and 2001, Mr. Feely will be granted 60,000 stock options (up to 120,000
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
40
<PAGE>
per share subject to the terms and conditions of the agreement and the 1994
Stock Option Plan. Additionally, in May of 2000, 2001 and 2002, Mr. Murtha will
be granted 25,000 stock options (up to 75,000 shares in the aggregate) at market
price provided certain conditions are achieved as stated in the agreement. In
the agreements for Mr. Howell and Mr. Lam, in May of 2000, 2001 and 2002, Mr.
Howell and Mr. Lam will be granted 25,000 stock options (up to 75,000 shares in
the aggregate for each) at market price, subject to the terms and conditions of
the agreement and the 1994 Stock Option Plan, and provided certain conditions
are achieved as stated in the agreement. In the agreement for Mr. Doughty, he
was granted 50,000 stock options of the Company common stock at $10.625 per
share subject to the terms and conditions of the agreement and the 1994 Stock
Option Plan. Additionally, in May of 2000, 2001 and 2002, Mr. Doughty will be
granted 25,000 stock options (up to 75,000 shares in the aggregate) at market
price provided certain conditions are achieved as stated in the agreement.
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 2.86 million shares. The option 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.
41
<PAGE>
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 previous) 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.
In the two months ended December 31, 1998, an aggregate of 135,000
options (exclusive of the outside directors' options and net of stock options
that were both issued and canceled in the period) were granted to directors,
officers and other employees under the Stock Option Plan to purchase the
Company's shares at exercise prices ranging from $14.13 to $16.38 per share.
In fiscal year 1999, an aggregate of 307,000 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 $8.38 to $15 per share.
As a result of the foregoing, at the end of fiscal year 1999, after
giving effect to all prior exercises and cancellations of options, an aggregate
of 1,824,800 options (exclusive of the outside directors' options) were
outstanding at exercise prices ranging from $1.38 to $19.63 per share, and of
such amount a total of 1,146,600 options were held by directors and executive
officers of the Company as a group. Also, an aggregate of 175,000 outside
director's options were outstanding at exercise prices ranging from $1.50 to
$18.75 per share. During 1999, a total of 281,400 shares were issued upon the
exercise of options, at exercise prices ranging from $1.09 to $6.78 per share.
Prior to 1999, a total of 604,600 shares had been issued upon the exercise of
options at exercise prices ranging from $0.57 to $11.00 per share.
Additional information with respect to stock options is contained in
Note 14 of the Notes to Consolidated Financial Statements included in this
filing.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Robert E. Davids, the Hansen Trust, certain other former stockholders
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
42
<PAGE>
registration statement on behalf of each shareholder that is a party to the
Shareholders Agreement (collectively, the "Shareholders") under the Securities
Act of 1933, and to use its reasonable efforts to qualify the shares for offer
and sale under any applicable US 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. In 1999, the Company effected in further negotiation for Mr. Davids that
covered 2,815,800 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
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
43
<PAGE>
Notes to Consolidated Financial Statements F-7
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
(b) Exhibits
* 3.1 Memorandum of Association
* 3.2 Bye-Laws
* 3.3 Certificate of Incorporation on Change of Name
* 4.1 Specimen Certificate for the Shares of Common Stock
* 10.1 Processing Agreement, dated December 4, 1991,
between Radica HK and foreign Economic Development Co.
of Humen Town, Dongguan, relating to the Tai Ping
Factory
* 10.2 Processing Agreement, dated December 27, 1993, between
Radica HK and Foreign Economic Development Co. of Humen
Town, Dongguan
@ 10.3 Cooperative Joint Venture Contract of D.G. Radica Games
Manufacturing Co., Ltd., dated June 24, 1994 (see
exhibit 10.16 to 20-F for year ended October 31, 1994)
* 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
44
<PAGE>
# 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 Employment Agreement dated as of December 15, 1998
between Radica Games Limited and David C.W. Howell
(incorporated by reference to Form 6-K dated March 29,
1999)
10.14 Employment Agreement dated as of December 15, 1998
between Radica Games Limited and Siu Wing Lam
(incorporated by reference to Form 6-K dated March 29,
1999)
10.15 Employment Agreement dated as of June 24, 1999 between
Radica Games Limited and Neil Doughty
10.16 Share Purchase Agreement dated as of June 24, 1999,
relating to the acquisition of the entire issued share
capital of Leda Media Products Limited.
11.1 Statement re Computation of Per Share Earnings
21.1 List of subsidiaries
45
<PAGE>
23.1 Consent of Deloitte Touche Tohmatsu
* 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, 1996.
~ Incorporated by reference to Form 20-F for the year ended October 31, 1997.
** Incorporated by reference to Form 20-F for the year ended October 31, 1998.
<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
<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 December 31, 1999 and 1998, and as of
October 31, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1999, the
two months ended December 31, 1998 and each of the years in the two-year 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 December 31, 1999 and 1998, and as of October 31, 1998, and
the results of their operations and their cash flows for the year ended December
31, 1999, the two months ended December 31, 1998 and each of the years in the
two-year period ended October 31, 1998, in conformity with accounting principles
generally accepted in the United States of America.
/S/ Deloitte Touche Tohmatsu
HONG KONG
February 10, 2000
F-1
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets
December 31, December 31, October 31,
(US Dollars in thousands, except share data) 1999 1998 1998
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 32,159 $ 47,527 $ 33,141
Accounts receivable, net of allowances for doubtful accounts
of $389 ($446 at Dec. 31, 1998 and $466 at Oct. 31, 1998) and
estimated customer returns of $624 ($1,077 at Dec. 31, 1998
and $1,375 at Oct. 31, 1998) 23,750 14,860 33,249
Inventories, net of provision of $2,339 ($2,437 at Dec. 31,
1998 and 2,414 at Oct. 31, 1998) 24,625 20,294 21,534
Prepaid expenses and other current assets 4,752 1,041 1,126
Income taxes receivable 1,257 755 -
Deferred income taxes 3,667 3,754 4,545
------- ------- -------
Total current assets 90,210 88,231 93,595
------- ------- -------
Investment in affiliated company - 703 823
------- ------- -------
Property, plant and equipment, net 17,523 16,500 16,093
------- ------- -------
Intangible assets, net 14,351 2,750 3,000
------- ------- -------
Deferred income taxes, noncurrent 11 6 10
------- ------- -------
Total assets $ 122,095 $ 108,190 $ 113,521
======= ======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 1,464 $ - $ -
Accounts payable 10,929 6,911 11,694
Accrued warranty expenses 1,100 2,500 2,470
Notes payable due within one year 1,399 - -
Accrued payroll and employee benefits 2,511 2,688 3,510
Accrued advertising expenses 1,203 1,308 6,178
Accrued sales expenses 856 3,598 3,316
Commissions payable 464 764 1,444
Accrued other expenses 5,091 2,534 3,005
Income taxes payable 70 2,152 2,065
Total current liabilities 25,087 22,455 33,682
------- ------- -------
Notes payable due after one year 10,946 - -
------- ------- -------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized, 17,639,594
shares outstanding (18,896,694 at Dec. 31, 1998 and 18,864,294
at Oct. 31, 1998) 176 189 189
Additional paid-in capital 1,757 9,382 9,298
Retained earnings 84,100 76,215 70,396
Accumulated other comprehensive income (loss) 29 (51) (44)
------- ------- -------
Total shareholders' equity 86,062 85,735 79,839
------- ------- -------
Total liabilities and shareholders' equity $ 122,095 $ 108,190 $ 113,521
======= ======= =======
</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, Year ended Two months ended Year ended Year ended
except per share data) December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 133,522 $ 21,071 $ 155,618 $ 87,760
Cost of sales (78,229) (10,717) (70,576) (40,888)
------------ ------------- ------------- ------------
Gross profit 55,293 10,354 85,042 46,872
------------ ------------- ------------- ------------
Operating expenses:
Selling, general and administrative expenses (28,049) (3,657) (27,788) (14,403)
Research and development (6,036) (730) (3,710) (2,099)
Depreciation and amortization (4,956) (612) (3,423) (2,278)
Acquired research and development - - (1,500) -
------------ ------------- ------------- ------------
Total operating expenses (39,041) (4,999) (36,421) (18,780)
------------ ------------- ------------- ------------
Operating income 16,252 5,355 48,621 28,092
Other income 1,231 471 807 915
Share of loss of affiliated company (1,748) (120) (334) (141)
Net interest income 1,469 289 1,896 913
------------ ------------- ------------- ------------
Income before income taxes 17,204 5,995 50,990 29,779
Provision for income taxes (149) (176) 266 (193)
------------ ------------- ------------- ------------
Net income $ 17,055 $ 5,819 $ 51,256 $ 29,586
============ ============= ============= ============
Earnings per share - basic:
Net earnings per share $ 0.94 $ 0.31 $ 2.53 $ 1.43
============ ============= ============= =============
Average number of shares outstanding 18,144,179 18,883,455 20,239,790 20,761,020
============ ============= ============= =============
Earnings per share - diluted:
Net earnings per share and
dilutive potential common stock $ 0.90 $ 0.29 $ 2.39 $ 1.37
============ ============= ============= =============
Average number of shares and dilutive
potential common stock outstanding 18,979,349 20,094,489 21,488,364 21,635,926
============ ============= ============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US dollars in thousands)
<TABLE>
<CAPTION>
Common stock Accumulated
------------ Additional other Total
Number paid-in Retained comprehensive shareholders'
of shares Amount capital earnings income (loss) equity
------------- ------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 (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
Stock options exercised 32,400 - 84 - - 84
Net income - - - 5,819 - 5,819
Foreign currency translation - - - - (7) (7)
------------- ------------- ------------- ------------- --------------- -------------
Balance at December 31, 1998 18,896,694 $ 189 $ 9,382 $ 76,215 $ (51) $ 85,735
Cancellation of repurchased stock (1,538,500) (16) (8,821) (9,170) - (18,007)
Stock options exercised 281,400 3 529 - - 532
Grant of warrants - - 667 - - 667
Net income - - - 17,055 - 17,055
Foreign currency translation - - - - 80 80
------------- ------------- ------------- ------------- --------------- -------------
Balance at December 31, 1999 17,639,594 $ 176 $ 1,757 $ 84,100 $ 29 $ 86,062
============= ============= ============= ============= =============== =============
</TABLE>
Accumulated other comprehensive income (loss) represents foreign currency
translation adjustments. The comprehensive income of the Company was $17,135,
$5,812, $51,217 and $29,560 for the year ended December 31, 1999, the two
months ended December 31, 1998 and the fiscal years ended Octobe 31, 1998 and
1997, respectively.
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars in thousands)
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income $ 17,055 $ 5,819 $ 51,256 $ 29,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 82 795 (4,634) 108
Depreciation 2,389 362 1,923 1,613
Amortization 2,567 250 1,500 665
Share of loss of affiliated company 1,748 120 334 141
Acquired research and development - - 1,500 -
Loss (gain) on disposal and write off of
property, plant and equipment 62 1 22 (21)
Changes in assets and liabilities, net of effect from
purchase of Leda Media Products Limited ("LMP"):
Accounts receivable (7,521) 18,382 (14,548) (9,142)
Inventories (2,986) 1,240 (9,793) (757)
Prepaid expenses and other current assets (3,572) 85 (445) (134)
Accounts payable 3,365 (4,783) 3,485 2,674
Accrued payroll and employee benefits (177) (822) 2,261 563
Commissions payable (300) (680) 529 439
Accrued advertising expenses (105) (4,870) 5,460 461
Accrued sales expenses (2,742) 282 2,062 (573)
Accrued warranty expenses (1,400) 30 309 607
Accrued other expenses 2,394 (471) (53) 2,625
Income taxes (2,286) (668) 1,852 168
--------------- ---------------- ------------- -------------
Net cash provided by operating activities 8,573 15,072 43,020 29,023
--------------- ---------------- ------------- -------------
Cash flow from investing activities:
Decrease (increase) in short-term investments - - 2,050 (1,973)
Proceeds from sale of property, plant and equipment 47 35 33 61
Purchase of property, plant and equipment (3,306) (805) (5,532) (1,255)
Purchase of LMP, net of cash acquired (2,511) - - -
Purchase of Girl Tech assets - - (2,400) -
Investment in affiliated company (1,045) - (963) (1,000)
--------------- ---------------- ------------- -------------
Net cash used in investing activities (6,815) (770) (6,812) (4,167)
--------------- ---------------- ------------- -------------
</TABLE>
F-5
<PAGE>
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars in thousands)
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flow from financing activities:
Repurchase of common stock $ (18,007) $ - $ (37,587) $ -
Funds from stock options exercised 532 84 1,016 220
Increase in short-term borrowings 349 - - -
Repayment of long-term debt - - - (99)
--------------- ---------------- ------------- -------------
Net cash (used in) provided by financing activities (17,126) 84 (36,571) 121
--------------- ---------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (15,368) 14,386 (363) 24,977
Cash and cash equivalents:
Beginning of period 47,527 33,141 33,504 8,527
--------------- ---------------- ------------- -------------
End of period $ 32,159 $ 47,527 $ 33,141 $ 33,504
=============== ================ ============= =============
Supplementary disclosures of cash flow information:
Cash paid during the period:
Interest $ 331 $ - $ 61 $ 12
Income taxes 1,983 - 2,381 -
Non-cash investing and financing activities:
Loan notes for purchase of LMP $ 12,345 $ - $ - $ -
Grant of warrants 667 - - -
</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 Company designs, develops, manufactures and market a diverse line of
electronic products including handheld and tabletop games, high-tech toys,
video game controllers and peripherals, and Internet enabled appliances.
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 accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America and are presented in US dollars.
2. CHANGE OF FISCAL YEAR
The Company had a change in its fiscal year end from October 31 to December
31 in accordance with industry practices. Accordingly, the current year
ended on December 31, 1999. The accompanying financial statements and notes
included results for the two-month transition period ended December 31,
1998, as required by the Securities and Exchange Commission.
3. 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 value. 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, by equal annual instalments.
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.
F-7
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (Continued)
(US dollars in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 ("goodwill"). 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 20
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.
Mold costs - The Company expenses all mold costs in the year of purchase or
for internally produced molds, in the year of construction.
Revenue recognition - Revenues are recognized as sales when merchandise is
shipped. The Company permits the return of damaged or defective products
and accepts limited amounts of product returns in certain other instances.
Accordingly, the Company provides allowances for the estimated amounts of
these returns at the time of revenue recognition, based on historical
experience adjusted for known trends.
Investments - Debt 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 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 assets are recorded to reflect the tax
consequences in future years of differences between the taxable basis of
assets and liabilities and the financial reporting amounts at each period
end using rates currently in effect. A valuation allowance is recognized
for any portion of the deferred tax asset for which realization is not
likely.
Advertising - The production costs of advertising are expensed by the
Company the sooner of the first time the advertising takes place or the
invoice date for the media purchase. Advertising costs associated with
customer benefit programs are accrued as the related revenues are
recognized. Advertising expense was $8,929, $415, $9,121 and $735 for the
year ended December 31, 1999, the two months ended December 31, 1998, and
the fiscal years ended October 31, 1998 and 1997, respectively.
F-8
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (Continued)
(US dollars in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency translation - Assets and liabilities of foreign currency
are translated into US dollars using the exchange rates in effect at the
balance sheet date. Revenues and expenses in foreign currencies are
translated into US dollars using average monthly exchange rates during each
reporting period. The impact of exchange rate changes is dealt with as a
separate component of equity. Net gains (losses) from foreign exchange
transactions of $308, $(18), $(281) and $(122) for the year ended December
31, 1999, the two months ended December 31, 1998, and the fiscal years
ended October 31, 1998 and 1997, respectively, are included in selling,
general and administrative expenses.
Post-retirement and post-employment benefits - The Company does not provide
post-retirement benefits other than pensions to employees and
post-employment benefits are immaterial.
Warranty - Future warranty costs are provided for at the time of revenue
recognition based on management's estimate by reference to historical
experience adjusted for known trends.
Stock options - The Company continues to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting
for its stock options. As a result, no compensation expense has been
recognized as the exercise price of the Company's employee stock options
equals the market price of the underlying stock at the date of grant. Pro
forma disclosures of the effect on net income and earnings 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 14.
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 management to make
estimates and assumptions that affect reported amounts of certain assets,
liabilities, revenues and expenses as of and for the reporting periods.
Actual results could differ from those estimates. Differences from those
estimates are reported in the period they become known.
F-9
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (Continued)
(US dollars in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncement - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Implementation of SFAS No. 133 is required
commencing with the first quarter of 2001. The Company does not expect the
adoption to have a material impact on the Company's consolidated financial
statements.
Reclassifications - Certain reclassifications have been made to prior
period amounts to conform with the 1999 presentation and to comply with new
SFAS's.
4. INVENTORIES
Inventories by major categories are summarized as follows:
December 31, December 31, October 31,
1999 1998 1998
------------ ----------- -----------
Raw materials $ 5,397 $ 4,580 $ 4,650
Work in progress 5,166 6,731 5,733
Finished goods 14,062 8,983 11,151
------------ ----------- -----------
$ 24,625 $ 20,294 $ 21,534
============ =========== ===========
5. INVESTMENT IN AFFILIATED COMPANY
In May 1997, the Company acquired approximately 35% of the capital stock of
ShareGate, Inc. (formerly known as 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. ShareGate, 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 ShareGate, Inc.,
the Company purchased additional shares for $963 in cash. This allowed the
Company to maintain its percentage interest in ShareGate, Inc. During the
year of 1999, ShareGate, Inc. raised a round of venture financing of which
Radica granted a one million dollars bridge loan to ShareGate, Inc.
F-10
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
5. INVESTMENT IN AFFILIATED COMPANY (Continued)
As a result of losses incurred and projected ongoing losses at ShareGate,
Inc. in 2000, the Company recognized charges for share of losses in
ShareGate, Inc. associated with impairment of the bridge loan.
The following is a summary of investment activities in ShareGate, Inc.:
<TABLE>
<CAPTION>
Amount due
Shares from affiliated
investment company Total
------------ --------------- --------------
<S> <C> <C> <C>
Investment $ 1,000 $ - $ 1,000
Amortization of goodwill (665) - (665)
Equity in net loss (141) - (141)
------------- --------------- --------------
Balance as October 31, 1997 $ 194 $ - $ 194
Additional investment 963 - 963
Equity in net loss (334) - (334)
------------- --------------- --------------
Balance as October 31, 1998 $ 823 $ - $ 823
Equity in net loss (120) - (120)
------------- --------------- --------------
Balance as December 31, 1998 $ 703 $ - $ 703
Bridge loan and accrued interests - 1,045 1,045
Equity in net loss (703) (633) (1,336)
Provision of impairment - (412) (412)
--------------- --------------- --------------
Balance as December 31, 1999 $ - $ - $ -
=============== =============== ==============
</TABLE>
F-11
<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:
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1999 1998 1998
------------ ----------- -----------
<S> <C> <C> <C>
Land and buildings $ 12,261 $ 11,958 $ 11,950
Plant and machinery 7,385 5,777 5,549
Furniture and equipment 6,124 4,191 4,003
Leasehold improvements 2,562 2,192 1,866
------------ ----------- -----------
Total $ 28,332 $ 24,118 $ 23,368
Less: Accumulated depreciation
and amortization (10,809) (7,618) (7,275)
------------ ----------- -----------
Total $ 17,523 $ 16,500 $ 16,093
============ =========== ===========
</TABLE>
7. ACQUISITION
On June 24, 1999, the Company acquired Leda Media Products Limited ("LMP"),
the leading supplier of third party video game controllers in the U.K. The
Company purchased LMP for approximately $16 million. The acquisition price
consisted of cash payment of approximately $2.6 million, assumption of LMP
net indebtedness of approximately $1.1 million and issuance of notes
payable for $12.3 million. The transaction has been accounted for using the
purchase method. The purchase price has been allocated to the assets
acquired and liabilities assumed based on estimates of fair values as of
the acquisition date. The Company recorded goodwill of $13.5 million which
is being amortized on a straight-line basis over a fifteen year fiscal
period. The pro forma results of operation have not been presented because
the effect of the acquisition was not material to the Company's
consolidated financial statements.
F-12
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
8. INTANGIBLE ASSETS
Intangible assets consist of the excess of purchase price over the
estimated fair value of net assets acquired in acquisition of LMP and Girl
Tech(R), and acquired use in certain cases of the Electronic Arts(TM)
("EA") brand name.
During the year of 1999, the Company and EA announced a strategic alliance
for the extension of EA brands and game properties in the dedicated
electronic handheld game category. As part of this alliance, the Company
entered into a worldwide licensing agreement with EA. In an additional
agreement, the Company granted EA warrants to purchase 375,000 shares of
the Company common stock during the term of the agreement. The agreement
with EA runs through the end of 2002. The fair value of the warrants of
$667 has been recorded as an intangible asset for the acquired license. The
asset is being amortized on a straight-line basis over the term of
agreement.
The Company purchased the assets and business of KidActive, LLC, dba Girl
Tech(R) during the quarter ended April 30, 1998. KidActive, LLC, dba Girl
Tech(R) was a development stage enterprise and had not traded prior to the
Company's acquisition of its assets. The Company purchased the assets and
business of KidActive, LLC, dba Girl Tech(R) for $2.4 million in cash plus
190,094 shares, a total of $6 million. Of this $4.5 million was capitalized
as goodwill and brand name, and $1.5 million was written off immediately as
purchased research and development. Goodwill and brand name are being
amortized over a three year fiscal period on a straight-line basis.
Accumulated amortization was $4,317, $1,750 and $1,500 at December 31, 1999
and 1998, and October 31, 1998, respectively.
9. SHORT-TERM BORROWINGS
Under line of credit arrangements for short-term debt with various banks,
the Company has available approximating $9 million on such terms as the
Company and the banks mutually agree upon. Substantially all of the
short-term borrowings outstanding at the end of 1999 represent borrowings
made under, or supported by, these lines of credit and the weighted average
interest rate of the outstanding borrowings was approximately 6%.
F-13
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
10. INCOME TAXES
The components of income (loss) from continuing operations before income
taxes are as follows:
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
United States $ (1,349) $ 827 $ 11,579 $ 2,167
International 18,553 5,168 39,411 27,612
------------ ---------------- ------------- -------------
$ 17,204 $ 5,995 $ 50,990 $ 29,779
============ ================ ============= =============
</TABLE>
The Company incorporated its share of loss of US affiliated company,
ShareGate, Inc., into the results of United States. The share of loss was
$1,748, $120, $334 and $141 for the year ended December 31, 1999, the two
months ended December 31, 1998, and the fiscal years ended October 31, 1998
and 1997, respectively.
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 the 1999 effective tax rate was 12%. 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-14
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
10. INCOME TAXES (Continued)
The provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
United States
State tax expense (benefit), net of
federal tax expense (benefit) $ 145 $ (623) $ 4,307 $ (38)
Change in deferred tax 39 795 (4,634) 108
$ 184 $ 172 $ (327) $ 70
------------- ---------------- ------------- -------------
International
Current income tax $ (78) $ 4 $ 61 $ 123
Change in deferred tax 43 - - -
------------- ---------------- ------------- -------------
$ (35) $ 4 $ 61 $ 123
------------- ---------------- -------------- -------------
Total provision (credit)
for income tax $ 149 $ 176 $ (266) $ 193
============= ================ ============== =============
</TABLE>
F-15
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
10. INCOME TAXES (Continued)
A reconciliation between the provision (credit) for income taxes computed
by applying the statutory tax rates in the United States to income before
income taxes and the actual provision (credit) for income taxes is as
follows:
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
US statutory rate 34% 34% 34% 34%
------------- ---------------- ------------- -------------
Provision for income taxes at
statutory rate on income $ 5,849 $ 2,038 $ 17,337 $ 10,125
State income taxes 8 38 133 7
International rate differences (6,016) (683) (15,369) (9,807)
Accounting losses (gains) for
which deferred income tax
cannot be recognized 212 (1,029) 1,991 430
Increase (decrease) in
valuation allowance 226 - (4,406) (854)
Other (130) (188) 48 292
------------- ---------------- -------------- -------------
Income tax provision (credit) $ 149 $ 176 $ (266) $ 193
============= ================ ============== =============
</TABLE>
F-16
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
10. 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 recorded amounts for financial statement
purposes. Significant components of the Company's deferred taxes assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1999 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Excess of tax over financial
reporting depreciation $ 67 $ (79) $ (79)
Tax losses 1,841 1,714 -
Bad debt allowance 132 151 158
Advertising allowances 409 445 2,100
Inventory obsolescence reserve 355 44 749
Accrued sales adjustments and returns 519 1,665 1,583
Other 581 (180) 44
------------ ------------ -----------
3,904 3,760 4,555
Valuation allowance (226) - -
------------ ------------ -----------
$ 3,678 $ 3,760 $ 4,555
============ ============ ===========
</TABLE>
11. NOTES PAYABLE
On June 24, 1999, the Company entered into a $12.3 million guaranteed loan
agreement with the sellers as part of the financing of the LMP acquisition.
Interest on the loan notes is based on US$ LIBOR offered rate minus 130
basis points and is payable quarterly. The terms of the loan are subject to
certain financial covenants used for financing of this type. The aggregate
principal maturities of the loan notes for the next five years are as
follows:-
December 31,
1999
------------
2000 $ 1,399
2001 to 2003 -
2004 10,946
------------
$ 12,345
============
F-17
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except share and per share data)
12. COMMON STOCK
During the year ended December 31, 1999, the Company repurchased 1,538,500
shares at an average price of $11.66 per share under the Company's
authorized repurchase programs. All repurchased shares were cancelled. As
of December 31, 1999, approximately 0.9 million shares remain available for
repurchase under the repurchase programs.
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 were 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(R).
13. 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:
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 17,055 $ 5,819 $ 51,256 $ 29,586
============= ================ ============= =============
Denominator:
Denominator for basic
earnings per share 18,144,179 18,883,455 20,239,790 20,761,020
Effect of dilutive options 835,170 1,211,034 1,248,574 874,906
------------- ---------------- ------------- -------------
Denominator for diluted
earnings per share 18,979,349 20,094,489 21,488,364 21,635,926
============= ================ ============= =============
Basic earnings per share: $ 0.94 $ 0.31 $ 2.53 $ 1.43
============= ================ ============= =============
Diluted earnings per share: $ 0.90 $ 0.29 $ 2.39 $ 1.37
============= ================= ============= =============
</TABLE>
Options and warrants on 1,286,000 shares of common stock were not included
in computing diluted earnings per share since their effects were
antidilutive.
F-18
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except share and per share data)
14. STOCK OPTIONS
The Company's 1994 Stock Option Plan of employees and directors (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, and the meeting of
the Board of Directors in June 1999, the Stock Option Plan's aggregated
common stock increased by 400,000, 800,000 and 60,000, respectively. In
total, the Stock Option Plan's aggregate common stock increased to
2,860,000 shares available for options. Options under this plan are
generally exercisable ratably over five years from the date of grant unless
otherwise provided.
Option activity for each of the periods ended December 31, 1999 and 1998
and October 31, 1998 and 1997:-
<TABLE>
<CAPTION>
Weighted average
Number exercise price
of shares per share
-------------- ----------------
(in thousands)
<S> <C> <C>
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
Options granted 135 15.05
Options cancelled - -
Options exercised (32) 2.59
-------------
Outstanding at December 31, 1998 2,041 $ 6.58
Options granted 307 11.48
Options cancelled (66) 8.27
Options exercised (282) 1.89
-------------
Outstanding at December 31, 1999 2,000 $ 7.93
=============
Exercisable at December 31, 1999 492 $ 8.26
</TABLE>
F-19
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
14. STOCK OPTIONS (Continued)
The following is additional information relating to options outstanding as
of December 31, 1999:
<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>
$ 1.090 to 2.000 602 $ 1.31 6.24 157 $ 1.29
$ 2.001 to 4.000 316 3.49 7.32 94 3.45
$ 4.001 to 6.000 7 5.00 7.43 1 5.00
$ 6.001 to 8.000 42 6.83 7.64 12 7.00
$ 8.001 to 10.000 62 9.45 9.32 2 8.50
$ 10.001 to 12.000 421 10.91 8.96 64 11.03
$ 12.001 to 14.000 179 12.70 8.95 10 13.10
$ 14.001 to 16.000 135 14.84 8.72 31 14.97
$ 16.001 to 18.000 141 16.94 8.42 78 16.92
$ 18.001 to 20.000 95 19.05 8.31 43 18.88
--------- ----------
2,000 $ 7.93 7.77 492 $ 8.26
========= ==========
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS No. 123. The weighted average fair value of stock options at date of
grant of $4.54, $7.79, $7.23 and $1.59 per option for the year ended
December 31, 1999, the two months ended December 31, 1998, and the fiscal
years ended October 31, 1998 and 1997, respectively, were estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Expected life of options 5 years 5 years 5 years 5 years
Risk-free interest rate 5.1% 6.5% 6.5% 6.5%
Expected volatility of underlying stock 35% 50% 50% 50%
Dividends 0% 0% 0% 0%
</TABLE>
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-20
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands, except per share data)
14. 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 and
earnings per share would have been reduced to the pro forma amounts as
follows:
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro forma net income $ 15,719 $ 5,633 $ 50,548 $ 29,154
Pro forma earnings per share
Basic 0.87 0.30 2.50 1.40
Diluted 0.83 0.28 2.35 1.35
</TABLE>
15. 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's games business has two
customers which accounted for more than twenty percent and eighteen percent
of net sales for the year ended December 31, 1999, two customers which
accounted for more than thirty percent and twenty-seven percent of net
sales in the two months ended December 31, 1998 and three customers which
accounted for more than twenty-five percent, twenty-one percent and ten
percent of net sales in fiscal year 1998 and three customers which
accounted for more than twenty percent, eighteen percent and ten percent of
net sales in fiscal year 1997. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires
no collateral from its customers.
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
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 cash equivalents, accounts receivable,
accounts payable, notes payable and warrants are reasonable estimates of
their fair value.
F-21
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
17. COMMITMENTS, CONTINGENCIES AND PLEDGE OF ASSETS
The Company leases certain warehouses and equipment under operating leases.
Total expense for the operating leases was $534, $82, $401 and $358 for the
year ended December 31, 1999, the two months ended December 31, 1998 and
the fiscal year ended October 31, 1998 and 1997, respectively.
At December 31, 1999, the Company was obligated under operating leases
requiring future minimum lease payments as follows:
Operating leases
----------------------
2000 $ 541
2001 276
2002 108
2003 107
2004 106
Thereafter 461
----------------------
Total minimum lease payments $ 1,599
======================
At December 31, 1999, the Company's guaranteed loan agreements and general
banking facilities including overdraft and trade facilities were
collateralized by certain leasehold land and buildings, bank balances, and
inventories with a net book value of $4,762, $12,044 and $10,894,
respectively.
18. RETIREMENT PLAN
In Hong Kong, the Company has defined contribution retirement plans
covering substantially all employees. 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 $192, $27, $125 and $94 for the year ended
December 31, 1999, the two months ended December 31, 1998, and the fiscal
years ended October 31, 1998 and 1997, respectively.
F-22
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
19. SEGMENT INFORMATION
Effective the year of 1999, the Company adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. As a result
of this change, prior periods' presentations are restated to conform to
current year presentations.
Prior to the acquisition of LMP, the Company historically operated in one
principal industry segment: the design, development, manufacture and
distribution of a variety of electronic and mechanical handheld and
tabletop games. On June 24, 1999, the Company acquired LMP. Due to the
distinct differences between the core products of LMP and the remainder of
the Company, the Company has decided to operate and report on these product
lines as two different business segments: Peripherals, which includes video
game controllers and steering wheels and other video games accessories; and
Games, which includes electronic and mechanical handheld and tabletop
games.
The Company evaluates performance and allocates resources based on income
or loss from operations before interest and income taxes, not including
profits and losses on the Company's investment portfolio. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies.
F-23
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
19. SEGMENT INFORMATION (Continued)
A summary of the Company's two business segments is set forth below. The
information of peripherals included the period from June 24, 1999 (date of
acquisition) through December 31, 1999.
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales
Games $ 123,116 $ 21,071 $ 155,618 $ 87,760
Peripherals 10,406 - - -
------------- ---------------- ------------- -------------
Total net sales $ 133,522 $ 21,071 $ 155,618 $ 87,760
============= ================ ============= =============
Depreciation and amortization
Games $ 3,981 $ 612 $ 3,423 $ 2,278
Peripherals 975 - - -
------------- ---------------- ------------- -------------
Total depreciation and amortization $ 4,956 $ 612 $ 3,423 $ 2,278
============= ================ ============= =============
Segment income (loss)
Games $ 18,547 $ 5,826 $ 49,428 $ 29,007
Peripherals (1,064) - - -
------------- ---------------- ------------- -------------
Total segment income $ 17,483 $ 5,826 $ 49,428 $ 29,007
Corporate and unallocated
Interest income 1,800 289 1,957 924
Interest expense (331) - (61) (11)
Equity in net loss of
affiliated company (1,748) (120) (334) (141)
------------- ---------------- ------------- -------------
Total consolidated income
before income taxes $ 17,204 $ 5,995 $ 50,990 $ 29,779
============= ================ ============= =============
Segment assets
Games $ 67,347 $ 59,960 $ 79,557 $ 45,751
Peripherals 22,589 - - -
Corporate and unallocated 32,159 48,230 33,964 33,698
------------- ---------------- ------------- -------------
Total consolidated assets $ 122,095 $ 108,190 $ 113,521 $ 79,449
============= ================ ============= =============
Capital expenditures
Games $ 3,177 $ 805 $ 5,532 $ 1,255
Peripherals 129 - - -
------------- ---------------- ------------- -------------
Total capital expenditures $ 3,306 $ 805 $ 5,532 $ 1,255
============= ================ ============= =============
</TABLE>
Assets included in corporate and unallocated principally are cash and cash
equivalents, investment in affiliated company and certain unallocated
property, plant and equipment.
F-24
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(US dollars in thousands)
19. SEGMENT INFORMATION (Continued)
Information about the Company's operations in different geographic areas is
set forth in the table below. Net sales are attributed to countries based
on the location of customers, while identifiable assets are reported based
on their location.
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
United States and Canada $ 118,779 $ 20,556 $ 148,571 $ 74,957
Asia Pacific and other countries 1,557 131 5,934 12,295
Europe 13,186 384 1,113 508
------------- ---------------- ------------- -------------
$ 133,522 $ 21,071 $ 155,618 $ 87,760
=============== ================ ============= =============
Identifiable assets:
United States and Canada $ 39,702 $ 35,212 $ 47,028 $ 25,568
Asia Pacific and other countries 55,908 72,449 65,836 53,445
Europe 26,485 529 657 436
------------- ---------------- ------------- -------------
$ 122,095 $ 108,190 $ 113,521 $ 79,449
============= ================ ============= =============
</TABLE>
F-25
<PAGE>
RADICA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(US dollars in thousands)
20. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning cost and Deductions/ end of
of period expenses write-offs period
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended October 31, 1997
Allowances for doubtful accounts $ 234 $ 818 $ (144) $ 908
Estimated customer returns 817 1,995 (485) 2,327
Provision for inventories 8,419 - (4,940) 3,479
--------- ---------- ----------- ----------
$ 9,470 $ 2,813 $ (5,569) $ 6,714
========= ========== =========== ==========
Year ended October 31, 1998
Allowances for doubtful accounts $ 908 $ 213 $ (655) $ 466
Estimated customer returns 2,327 456 (1,408) 1,375
Provision for inventories 3,479 1,105 (2,170) 2,414
--------- ---------- ----------- ----------
$ 6,714 $ 1,774 $ (4,233) $ 4,255
========= ========== =========== ==========
Two months ended December 31, 1998
Allowances for doubtful accounts $ 466 $ - $ (20) $ 446
Estimated customer returns 1,375 - (298) 1,077
Provision for inventories 2,414 23 - 2,437
--------- ---------- ----------- ----------
$ 4,255 $ 23 $ (318) $ 3,960
========= ========== =========== ==========
Year ended December 31, 1999
Allowances for doubtful accounts $ 446 $ 3 $ (60) $ 389
Estimated customer returns 1,077 705 (1,158) 624
Provision for inventories 2,437 407 (505) 2,339
--------- ---------- ----------- ----------
$ 3,960 $ 1,115 $ (1,723) $ 3,352
========= ========== =========== ===========
</TABLE>
F-26
<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)
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------------------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
----------------------------
Net sales $17,906 $23,756 $47,388 $44,472
Gross profit 8,780 10,073 18,731 17,709
Net income 3,154 2,205 8,817 2,879
Basic earnings per share 0.17 0.12 0.50 0.16
Diluted earnings per share 0.16 0.12 0.48 0.16
Year ended December 31, 1998
----------------------------
Net sales $27,973 $34,265 $49,758 $47,373
Gross profit 15,821 19,474 26,746 23,890
Net income 8,828 10,161 14,919 17,046
Basic earnings per share 0.43 0.50 0.75 0.90
Diluted earnings per share 0.41 0.47 0.71 0.85
</TABLE>
Stock options exercised in conjunction with cancellation of repurchased
common stock caused a significant change in the shares outstanding used
in computing earnings per share between quarters. Due to this change in
shares outstanding, the sum of quarterly earnings per share doe not equal
year-to-date earnings per share.
Common Share Price
High Low
1999 Quarter
Fourth............................................. $ 9 11/16 $ 7
Third.............................................. 11 1/8 8 1/4
Second............................................. 13 5/8 9
First.............................................. 16 5/16 2 3/8
1998 Quarter
Two months stub period ending December 31, 1998.... $ 17 1/2 $13 5/8
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
F-27
<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: April 26, 2000 /S/ David C.W. Howell
------------------ ---------------------
David C.W. Howell
President Asia Operations
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 Cooperative Joint Venture Contract of D.G. Radica Games
Manufacturing Co., Ltd., dated June 24, 1994 (see
exhibit 10.16 to 20-F for year ended October 31, 1994)
* 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.
I-2
<PAGE>
* 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 Employment Agreement dated as of December 15, 1998
between Radica Games Limited and David C.W. Howell
(incorporated by reference to Form 6-K dated March 29,
1999)
10.14 Employment Agreement dated as of December 15,
1998 between Radica Games Limited and Siu Wing
Lam (incorporated by reference to Form 6-K dated
March 29, 1999)
10.15 Employment Agreement dated as of June 24, 1999 between
Radica Games Limited and Neil Doughty
10.16 Share Purchase Agreement dated as of June 24, 1999,
relating to the acquisition of the entire issued share
capital of Leda Media Products Limited.
11.1 Statement re Computation of Per Share Earnings
21.1 List of subsidiaries
23.1 Consent of Deloitte Touche Tohmatsu
* 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, 1996.
~ Incorporated by reference to Form 20-F for the year ended October 31, 1997.
** Incorporated by reference to Form 20-F for the year ended October 31, 1998.
I-3
DATE 24 JUNE 1999
--------------------------------------
RADICA GAMES LIMITED
NEIL DOUGHTY
CONFORMED COPY
EMPLOYMENT AGREEMENT
<PAGE>
CONTENTS
CLAUSE PAGE
1 Definitions 1
2 Employment 3
3 Term of Employment 4
4 Business Expense Reimbursement 5
5 Compensation 5
6 Stock Options 6
7 Confidentiality and Restrictions following Termination 8
8 Termination 11
9 Benefit and Binding Effect 12
10 Counterparts 13
11 Governing law 13
12 Entire Agreement 13
13 Validity of Provisions 13
14 Modifications or Discharge 14
15 Notices 14
16 Number and Gender 14
<PAGE>
EMPLOYMENT AGREEMENT
DATE 24 June 1999
PARTIES
1 RADICA GAMES LIMITED, a Bermuda company, having a registered address at
Clarendon House, Church Street, Hamilton HM11, Bermuda
2 NEIL DOUGHTY who resides at 41 Park Lane, Knebworth, Hertfordshire SG3
6PH
RECITALS
A Radica is engaged through its subsidiaries in designing and
manufacturing electronic and mechanical gifts and games for worldwide
sale, and ODM manufacturing for others.
B Employee is currently Sales Director of Leda Media Products ("LMP") and
has substantial executive management experience.
C Radica desires 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.
AGREEMENT
1 DEFINITIONS
For the purposes of this Agreement, the parties hereby adopt the
following definitions:
CAUSE:
(i) breach by Employee of a fiduciary obligation to any member of
Radica Group;
<PAGE>
(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;
(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 (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 being charged or indictment for, or written
confession of, a felony or any crime involving moral turpitude
under the laws of the United Kingdom or Bermuda or the United
States or any state of Hong Kong other than an offence under
the Road Traffic Acts for which non-custodial penalty is
imposed;
(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;
EMPLOYEE: Neil Doughty;
1994 PLAN: the 1994 stock option plan adopted by Radica, as amended
from time to time;
2
<PAGE>
RADICA: Radica Games Limited, a Bermuda company;
RADICA GROUP: Radica and any other corporation or other entity which at
the relevant time is more than fifty percent (50%) owned, directly or
indirectly, by Radica;
RESTRICTED TERRITORIES: the United Kingdom, the Channel Islands, the
Isle of Man, the Republic of Ireland. France, Germany, China, Austria,
Belgium, Czech Republic, Greece, Holland, Italy, Portugal, Scandinavia,
Spain, Switzerland and any other country in which Radica or Radica
Group is resident or otherwise carries on business at the Termination
Date;
TERMINATION: according to the context, the termination of this
Agreement or the cessation of rendering employment services by
Employee;
TOTAL DISABILITY: 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
2.1 Commencing 1 July 1999, Radica hereby employs Employee and Employee
hereby accepts employment by Radica to serve as Managing Director LMP.
In such capacity, Employee has responsibility for sales and
distribution of Radica's products in Europe. Employee shall perform
services of an executive nature consistent with his offices with Radica
Group as may from time to time be assigned or delegated to him by the
Board of Directors of Radica ("Board").
2.2 Employee will, unless prevented by sickness, injury or other incapacity
or otherwise agreed by the Board, devote his full business time and
attention to his duties under this Agreement.
2.3 Employee shall perform his duties under this Agreement principally in
the United Kingdom and Europe. It is contemplated that Employee will
frequently travel to
3
<PAGE>
carry out his duties under this Agreement, including travel to the
offices of Radica subsidiaries in Dallas, Texas, Hong Kong and
California. Air travel and other travel arrangements will comply with
current Radica Group policies respecting class of travel, etc.
2.4 Radica Group will provide Employee, including his spouse and children
with medical and dental benefits, as provided to other officers of
similar seniority of Radica Group.
2.5 Radica Group will provide Employee with an automobile consistent with
the current practices of LMP. Radica Group will replace the automobile
with another motor vehicle suitable for the Employee's role and status
of such value and at such intervals as the Board of Radica Group may in
its reasonable discretion decide in accordance with the current custom
and practice within LMP.
2.6 Employee shall have five (5) weeks paid vacation during each year of
this Agreement taken at such times as mutually convenient to Employee
and Radica Group. This vacation is in addition to paid holidays that
are allowed under Radica policy.
3 TERM OF EMPLOYMENT
3.1 This Agreement and Employee's employment hereunder shall commence as of
1 July 1999 and continue for a minimum of two (2) years from this date.
Thereafter the Agreement may be terminated by either party upon six (6)
months' notice to the other party.
3.2 Notwithstanding Clause 3.1 above, this Agreement may be sooner
terminated by Radica for Cause.
3.3 On termination of this Agreement pursuant to Clause 3.1 above, or by
Radica for Cause, all benefits and compensation shall cease as of the
date of such Termination.
4
<PAGE>
4 BUSINESS EXPENSE REIMBURSEMENT
Employee will be entitled to reimbursement by Radica Group for the
proper 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:
4.1 the amount, date, and place of each such expense;
4.2 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
4.3 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
5.1 Radica agrees to pay Employee, and Employee agrees to accept from
Radica, during the first year after 1 July 1999, for the services to be
rendered by him hereunder a minimum salary at the rate of
(pound)106,000 per year payable monthly in arrears. Employee shall
receive annual salary reviews by the Board to take effect from 1 July
in each year commencing 2000, provided that such salary shall not be
reduced below (pound)106,000 per year.
5.2 Employee shall be considered for annual bonuses pursuant to the Radica
Games Bonus Policy for officers of Radica Group. 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 both fiscal
years 1999 and 2000, Employee shall be entitled to a guaranteed minimum
bonus of(pound)50,000 in each year under such plan under the conditions
that Employee has not terminated his employment before the plan payment
dates, been terminated for cause by Radica prior to such
5
<PAGE>
date, and that LMP shall have been profitable in its normal trading
activities in such Radica fiscal year as the bonus payment pertains.
5.3 If Radica Group institutes a retirement, bonus or other benefit plan
which applies generally to executive officers of Radica Group of
similar status as Employee, Employee shall be entitled to participate
therein, but not to the extent such benefits would be duplicative of
the benefits herein.
5.4 All payments by Radica Group shall be subject to required withholdings
including taxes.
6 STOCK OPTIONS
6.1 As of the date of this agreement, Radica hereby grants to Employee an
option to purchase 50,000 shares of the common stock of Radica at the
current market price as of the date of this Agreement subject to the
terms and conditions of this Clause 6 and the 1999 Plan (the "Initial
Stock Option").
6.2 Additionally, at or promptly after the end of each of Radica's 2000,
2001 and 2002 fiscal years (i.e., fiscal years ending December 31),
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
Clause 6 and the 1999 Plan, provided, however, that each such grant
shall be subject to the conditions that (i) Employee continues to be
employed in good standing by Radica Group through the relevant date of
grant and (ii) sufficient shares are available under the 1999 Plan to
cover Employee and other similarly situated executives (i.e., adequate
shares must be available for this special programme in the option pool
under the 1999 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 under this Clause 6.2 and the Initial
Stock Option are herein called the "Stock Options".
6.3 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.
6
<PAGE>
6.4 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
capitalisation, including but not limited to the issuance by Radica of
new securities (including options or convertible securities), ESOPs 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.
6.5 Any other provision hereof to the contrary notwithstanding (i) as of
the date of Termination in the event of Termination pursuant to Clause
3.1 or Termination by Radica for Cause or by Employee without consent
of Radica, or (ii) twelve (12) months after the date of Termination in
the event of Termination by Radica without Cause or the Total
Disability of Employee (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:
6.5.1 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;
6.5.2 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;
6.5.3 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;
6.5.4 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
7
<PAGE>
6.5.5 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.
6.6 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.
6.7 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.
6.8 Upon Termination, Employee shall have no claim against Radica for loss
arising out of ineligibility to exercise any Stock Options granted to
him or otherwise in relation to the 1999 Plan or any other stock option
plan adopted by Radica and the rights of Employee shall be determined
solely by the rules of such plan(s) (as the case may be) in force at
Termination.
7 CONFIDENTIALITY AND RESTRICTIONS FOLLOWING TERMINATION
7.1 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,
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
sub-Clause: (i) information known to Employee or to the public at the
date of this Agreement; and (ii) 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
8
<PAGE>
Radica Group, Employee agrees not to disclose, divulge, make public,
utilise, communicate or use, whether for his own benefit or for the
benefit of others, either directly or indirectly, any Confidential
Information relating to Radica Group's business unless specifically
authorised in writing by Radica to do so.
7.2 Employee acknowledges that during the course of his employment he will
be privy to Confidential Information and that he will make, maintain
and develop personal knowledge of, influence over and valuable contacts
with customers, suppliers, staff and third parties. Employee therefore
covenants with Radica that:
7.2.1 he will not in the Restricted Territories for the period of one year
following Termination directly or indirectly in competition with Radica
or Radica Group engage in business with or be in any way interested in
or connected with any concern, undertaking, firm or body corporate
which engages in or carries on within any part of the Restricted
Territories any business which competes with any business carried on by
Radica or Radica Group as at Termination in which Employee was involved
on behalf of Radica or Radica Group at any time within the twelve
months immediately preceding Termination and in particular (but without
limitation) the business of the manufacture and distribution of
peripherals and accessories to the video games and PC games market;
7.2.2 he will not in the Restricted Territories for the period of one year
following Termination directly or indirectly:-
7.2.2.1 interfere with or, in competition with Radica or Radica Group
in relation to any business which competes with any business
carried on by Radica or Radica Group at Termination in which
Employee was involved on behalf of Radica or Radica Group at
any time within the twelve months immediately preceding
Termination, offer or agree to provide goods or services of
any description to, or solicit or endeavour to entice away
from Radica or Radica Group the custom of any person, firm or
body corporate which, at any time during the period of twelve
months immediately preceding Termination, has been a customer
or client of, or in the habit of dealing with, Radica or
Radica Group or which, at any time during that period, was to
his knowledge
9
<PAGE>
negotiating with Radica or Radica Group in relation to the
provision of goods or services by Radica or Radica Group;
7.2.2.2 interfere or seek to interfere with contractual or other trade
relations between Radica or Radica Group and any of its or
their respective suppliers in existence or under negotiation
at any time during the period of twelve months immediately
preceding Termination;
7.2.2.3 solicit the services of or endeavour to entice away from
Radica or Radica Group any director, senior or managerial
employee or consultant of Radica or Radica Group known
personally to the Executive (whether or not such person would
commit any breach of his contract of employment or engagement
by reason of leaving the service of such company) or knowingly
employ, assist in or procure the employment by any other
person, firm or body corporate of any such person.
7.3 The Executive agrees that the restrictions contained in Clause 7.2
shall apply in relation to all customers and suppliers with whom he
personally has had dealings on behalf of Radica notwithstanding that
such customers and suppliers may have been introduced to Radica or
Radica Group by Employee before or during his employment with Radica.
He further agrees that if any of the restrictions in Clause 7.2 is held
to be void or ineffective for any reason, but would be held to be valid
and effective if part of its wording were deleted, that restriction
shall apply with such deletions as may be necessary to make it valid
and effective.
7.4 The restrictions contained in each sub-clause of Clause 7.2 shall be
construed as separate and individual restrictions and shall each be
capable of being severed without prejudice to the other restrictions or
to the remaining provisions.
7.5 Employee waives irrevocably all Moral Rights (as defined in Chapter IV
of Part I of the Copyright, Designs and Patents Act 1988) in any works
produced during his employment in which copyright is vested in Radica
or Radica Group whether by virtue of this Clause 7.5 or otherwise.
Employee shall promptly communicate and disclose to Radica Group all
information, inventions, improvements,
10
<PAGE>
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.
7.6 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, 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, 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 Clause 7 shall survive any Termination of this
Agreement.
8 TERMINATION
8.1 Upon Termination Employee shall immediately resign without claim for
compensation for loss of office (but without prejudice to any claim he
may have against Radica arising out of any breach of this Agreement by
Radica) from such offices held by him in Radica and any company in the
Radica Group and from any other offices he may hold as nominee or
representative of Radica and any company in the Radica Group and Radica
is irrevocably authorised by Employee to appoint some person in his
name and on his behalf to sign any documents and do any things
necessary or requisite to give effect to such resignations.
8.2 If either party gives notice to terminate this Agreement, Employee
agrees:
8.2.1 that for a period not exceeding three months the Board may in its
absolute discretion require Employee not to perform any of his duties
and may require
11
<PAGE>
him not to have any contact with clients or customers of Radica or
Radica Group nor any contact (other than purely social contact) with
such employees of Radica or Radica Group as the Board shall determine
and/or may exclude him from any premises Radica or Radica Group
(without providing any reason for doing so); and
8.2.2 that such action on the part of Radica shall not constitute a breach of
this Agreement nor shall Employee have any claim against Radica in
respect of any such action;
Provided always that throughout such period Employee's salary and other
benefits shall not cease to be paid or provided (unless and until his
employment is terminated).
9 BENEFIT AND BINDING EFFECT
This Agreement shall inure to the benefit of and be binding upon Radica
and its 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 any
corporation with or into which it may be consolidated or merged. Radica
may assign its 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.
10 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.
11 GOVERNING LAW
This agreement shall be governed by and construed in accordance with
the law of
12
<PAGE>
England and Wales. The parties submit to the non-exclusive jurisdiction
of the English Courts as regards to any claim, dispute or matter out of
or relating to this Agreement.
12 ENTIRE AGREEMENT
12.1 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.
12.2 This Agreement replaces all previous contracts of service or other
employment arrangements between Employee and Leda Media Products
Limited, which shall have no further effect as from the date of this
Agreement.
13 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.
14 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.
15 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
13
<PAGE>
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 Games Limited
180 South Lake Avenue
Suite 440
Pasadena
California 91101
USA
Attention: Patrick S Feely
Telephone: (626) 744 1150
Telefax: (626) 744 1155
To: Employee:
Mr. Neil Doughty
c/o Leda Media Products
Stonemasons House
75 Railway Street
Hertford
Herts SG14 1RP
Telephone: (44) 01992 503133
Telefax: (44) 10992 503061
16 NUMBER AND 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.
SIGNED by ) Signed on behalf of Radica Games Limited
for and on behalf of RADICA GAMES ) by Patrick S Feely
LIMITED )
SIGNED by NEIL DOUGHTY ) Signed by Neil Doughty
[1208587.01]
14
DATE 24 JUNE 1999
---------------------------------------
RICHARD MYERS AND OTHERS
RADICA GOLD LIMITED
SHARE PURCHASE AGREEMENT
RELATING TO THE ACQUISITION OF THE ENTIRE
ISSUED SHARE CAPITAL OF LEDA MEDIA PRODUCTS LIMITED
<PAGE>
CONTENTS
CLAUSE PAGE
1 Definitions and interpretation 1
2 Sale and purchase 6
3 Consideration 6
4 Completion 7
5 Warranties 8
6 Taxation 10
7 Restrictions on the Vendors 10
8 Release by the Vendors 12
9 Confidentiality 12
10 Release from Guarantees 13
11 General 15
12 Notices 17
13 Governing law and jurisdiction 18
SCHEDULES
1 The Vendors
2 The Company
3 The Subsidiaries
4 Completion Obligations of the Vendors
5 Warranties
6 Properties
7 Tax Covenant
8 Limitations on Liability
LIST OF AGREED FORM DOCUMENTS
A1 and A2 Service Agreements
B1 to B6 Letters of Resignation
C1 to C3 Vendors' Powers of Attorney
D1 and D2 Board Minutes
E Loan Notes
F Set-Off Loan Notes
G Consultancy Agreement
H Announcement
<PAGE>
SHARE PURCHASE AGREEMENT
DATE 24 June 1999
PARTIES
1 THE PERSONS whose names and addresses are set out in Schedule 1 ("the
Vendors")
2 RADICA GOLD LIMITED (Registered No. 3777636) whose registered office is
at 30 Camp Road, Farnborough, Hampshire GU14 6EW ("the Purchaser")
RECITALS
A The Company is a private company limited by shares. Details of the
Company are set out in Schedule 2.
B The Vendors have agreed to sell and the Purchaser has agreed to buy the
Shares on the terms and subject to the conditions of this Agreement.
AGREEMENT
1 DEFINITIONS AND INTERPRETATION
1.1 The Recitals and Schedules form part of this Agreement and have the
same force and effect as if set out in the body of this Agreement. Any
reference to this Agreement includes the Recitals and Schedules.
1.2 In this Agreement, the following words and expressions have the
following meanings:-
THE ACCOUNTS: the audited accounts of the Company and of the
Subsidiaries and the audited consolidated accounts of the Company and
Leda HK for the accounting reference period which ended on the Accounts
Date (comprising in each case a balance sheet and profit and loss
account or, as the case may be, a consolidated
<PAGE>
balance sheet and consolidated profit and loss account, notes and
directors' and auditors' reports);
THE ACCOUNTING STANDARDS BOARD: the Accounting Standards Board in
England and Wales;
THE ACCOUNTS DATE: 31 August 1998;
THE AGREED FORM: the form agreed between and signed by or on behalf of
the Vendors and the Purchaser;
BUSINESS DAY: any day other than a Saturday, Sunday or any other day
which is a public holiday in England;
CAA 1990: Capital Allowances Act 1990;
THE COMPANY: Leda Media Products Limited;
THE COMPANIES ACTS: the Companies Act 1985, the Companies Consolidation
(Consequential Provisions) Act 1985, the Companies Act 1989 and Part V
of the Criminal Justice Act 1993;
COMPLETION: completion of the sale and purchase of the Shares in
accordance with this Agreement;
THE COMPLETION DATE: the date hereof;
THE CONSIDERATION: the sum referred to in Clause 3.1;
THE CONSULTANCY AGREEMENT: the consultancy agreement proposed to be
entered into between the Company and Trevor Sharman being in the Agreed
Form marked "G";
THE DISCLOSURE LETTER: the letter dated the date of this Agreement from
the Vendors to the Purchaser making certain disclosures against the
Warranties;
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GROUP COMPANY: in relation to any company, any body corporate which is
from time to time a holding company of that company, a subsidiary of
that company or a subsidiary of a holding company of that company;
ICTA 1988: Income and Corporation Taxes Act 1988;
INTELLECTUAL PROPERTY: patents, petty patents, utility models,
registered designs, design right, topography rights, copyright,
database right, trade marks, service marks, trade or business names,
domain names, get-up or trade dress, inventions or secret processes,
know-how and all rights or forms of protection of a similar nature or
effect subsisting anywhere in the world, including applications for any
such right;
LEDA HK: Leda Media Products (HK) Limited, being one of the
Subsidiaries;
LOAN NOTES: the US$10,945,376 floating rate guaranteed loan notes
constituted by the instrument in the Agreed Form marked "E" to be
issued by the Purchaser to Richard Myers and Trevor Sharman in part
satisfaction of the Consideration;
THE MANAGEMENT ACCOUNTS: the unaudited accounts of the Company and of
the Subsidiaries for the eight month period from the Accounts Date to
30 April 1999 comprising a balance sheet and profit and loss account),
a copy of each of which is annexed to the Disclosure Letter;
THE PARTIES: the parties to this Agreement;
THE PROPERTIES: the leasehold properties of the Company and Leda HK,
details of which are given in Schedule 6;
THE PURCHASER'S SOLICITORS: Macfarlanes of 10 Norwich Street, London
EC4A 1BD;
THE RESTRICTED TERRITORIES:
(a) the United Kingdom, the Channel Islands, the Isle of Man, the
Republic of Ireland, France, Germany, China, Austria, Belgium,
Czech Republic,
3
<PAGE>
Greece, Holland, Italy, Portugal, Scandinavia, Spain and
Switzerland;
(b) any other country in which the Company or the Subsidiaries is
resident or otherwise carries on business at Completion;
THE SHARES: the shares referred to in paragraph 9 of Schedule 2
comprising the entire issued share capital of the Company;
THE SERVICE AGREEMENTS: the service agreements proposed to be entered
into between the Company and each of Neil Doughty and Elliott Myers
being in the Agreed Forms marked "A1" and "A2";
SET-OFF LOAN NOTES: the US$1,399,200 floating rate guaranteed set-off
loan notes constituted by the instrument in the Agreed Form marked "F"
to be issued by the Purchaser to Richard Myers, Trevor Sharman and Neil
Doughty in part satisfaction of the consideration;
THE SUBSIDIARIES: the subsidiaries of the Company details of which are
set out in Schedule 3;
THE TAX COVENANT: the covenant contained in Schedule 7;
TCGA 1992: Taxation of Chargeable Gains Act 1992;
VATA 1994: Value Added Tax Act 1994;
THE VENDORS' SOLICITORS: Beachcroft Wansboroughs of 100 Fetter Lane,
London EC4A 1BN; and
THE WARRANTIES: the representations and warranties set out in Schedule
5.
1.3 In this Agreement (unless the context requires otherwise):-
1.3.1 words and expressions which are defined in the Companies Acts have the
same meanings as are given to them in the Companies Acts;
4
<PAGE>
1.3.2 any question as to whether a person is connected with any other person
shall be determined in accordance with the provisions of Section 839
ICTA 1988;
1.3.3 any reference to any statute or statutory provision includes a
reference to any subordinate legislation made under that statute or
statutory provision before the date of this Agreement, to any
modification, re-enactment or extension of that statute or statutory
provision made before that date and to any former statute or statutory
provision which it consolidated or re-enacted before that date;
1.3.4 any reference to an SSAP is to a Statement of Standard Accounting
Practice adopted by the Accounting Standards Board and shall be
construed as including a reference to:
1.3.4.1 any Financial Reporting Standard issued by the Accounting
Standards Board to amend, withdraw or supersede such SSAP and
any reference to an FRS is to a Financial Reporting Standard
issued by the Accounting Standards Board; and
1.3.4.2 any Urgent Issues Task Force abstracts issued by the
Accounting Standards Board to advise on and clarify the
interpretation of SSAPs and FRSs and any reference to an UITF
abstract is to an Urgent Issues Task Force abstract issued by
the Accounting Standards Board;
1.3.5 any gender includes a reference to the other genders;
1.3.6 the singular includes a reference to the plural and vice versa;
1.3.7 any reference to a Recital, Clause or Schedule is to a Recital, Clause
or Schedule (as the case may be) of or to this Agreement;
1.3.8 "directly or indirectly" means (without limitation) either alone or
jointly with any other person, firm or body corporate and whether on
his own account or in partnership with another or others or as the
holder of any interest in or as officer, employee or agent of or
consultant to any other person, firm or body corporate; and
5
<PAGE>
1.3.9 any reference to any English legal term for any action, remedy, method
of judicial proceeding, legal document, legal status, court, official
or any legal concept or thing shall, in respect of any jurisdiction
other than England, be deemed to include what most nearly approximates
in that jurisdiction to the English legal term.
1.4 The headings in this Agreement do not form part of this Agreement or
any part thereof and do not affect its interpretation.
2 SALE AND PURCHASE
2.1 The Vendors (each as to those of the Shares specified against
his name in Schedule 1) shall sell with full title guarantee
free from all liens, charges, encumbrances and any other third
party rights and the Purchaser shall purchase the Shares with
effect from and including the Completion Date to the intent
that as from that date all rights and advantages accruing to
the Shares, including any dividends or distributions declared
or paid on the Shares after that date, shall belong to the
Purchaser.
2.2 The Purchaser shall not be obliged to complete the purchase of any of
the Shares unless the sale of all of the Shares is completed
simultaneously.
3 CONSIDERATION
3.1 The consideration for the Shares shall be the sum of US$13,992,000
(thirteen million nine hundred and ninety two thousand United States
dollars).
3.2 The Consideration shall be divided between the Vendors in proportion to
their respective holdings of the Shares (as set out in Schedule 1) but
the Purchaser shall not be concerned with such division.
3.3 The Consideration shall be satisfied as follows:-
6
<PAGE>
3.3.1 US$1,647,424 shall be paid on Completion to the Vendors in accordance
with Clause 4.1.3;
3.3.2 US$10,945,376 shall be satisfied on Completion in accordance with
Clause 4.1.4; and
3.3.3 US$1,399,200 shall be satisfied on Completion in accordance with Clause
4.1.5.
3.4 Any amount paid in respect of a breach of any of the Warranties or
under the Tax Covenant shall be deemed to give rise to a corresponding
reduction in the Consideration.
4 COMPLETION
4.1 Completion shall take place on the Completion Date at the offices of
the Purchaser's Solicitors when:-
4.1.1 the Vendors shall deliver to the Purchaser, or procure the delivery to
the Purchaser of, the documents and other items referred to in Schedule
4;
4.1.2 the Vendors and the Purchaser shall jointly procure that there shall be
held a Meeting of the Board of Directors of the Company and of Leda HK
at which there shall be duly passed Resolutions set out and contained
in Board Minutes of the Company and of Leda HK in the Agreed Forms
marked "D1" and "D2" respectively;
4.1.3 the Purchaser shall pay that part of the Consideration referred to in
Clause 3.3.1 to the Vendors' Solicitors (who are hereby authorised to
receive the same on behalf of the Vendors), by way of transfer of
funds;
4.1.4 the Purchaser shall satisfy that part of the Consideration referred to
in Clause 3.3.2 by the issue to the Vendors of the Loan Notes;
4.1.5 the Purchaser shall satisfy that part of the Consideration referred to
in Clause 3.3.3 by the issue to the Vendors of the Set-Off Loan Notes.
7
<PAGE>
4.2 The performance by the Vendors of their respective obligations under
Clause 4.1 shall be a condition precedent to the performance by the
Purchaser of its obligations under Clause 4.1 to the intent that, if
the Vendors or any of them shall fail or shall be unable to perform any
of their obligations under Clause 4.1, the Purchaser shall at its
option (and without prejudice to any other remedies or rights which it
may have against the Vendors or any of them in respect of such
non-performance) cease to be liable to perform its obligations under
Clause 4.1.
5 WARRANTIES
5.1 The Vendors represent and warrant to the Purchaser that each of the
Warranties is true and accurate in all respects and is not misleading
at the date of this Agreement.
5.2 The Warranties shall not in any respect be extinguished or affected by
Completion.
5.3 The Vendors acknowledge that the Purchaser has entered into this
Agreement in reliance on representations in the terms of the Warranties
made by the Vendors with the intention of inducing the Purchaser to
enter into this Agreement and that accordingly the Purchaser has been
induced by those representations to enter into this Agreement.
5.4 The Vendors undertake to the Purchaser that, in the event of any claim
being made against them for breach of the Warranties, they will not
make any claim against the Company or the Subsidiaries or against any
director, officer or employee of the Company or of the Subsidiaries on
which or on whom they may have relied before agreeing to any terms of
this Agreement or authorising any statement in the Disclosure Letter.
5.5 The Warranties:-
5.5.1 are qualified by reference to those matters fully, fairly and clearly
disclosed in the Disclosure Letter and not otherwise. In particular,
but without limitation, the rights and remedies of the Purchaser in
respect of the Warranties shall not be
8
<PAGE>
affected by any investigation made by or on behalf of the Purchaser
into the affairs of the Company and the Subsidiaries;
5.5.2 are separate and independent and, unless expressly provided to the
contrary, are not limited or restricted by reference to or inference
from the terms of any other provision of this Agreement or any other
Warranty;
5.5.3 where qualified by the knowledge, information, belief or awareness of
the Vendors, are deemed to include a statement that such knowledge,
information, belief or awareness has been acquired after due and
careful enquiries by the Vendors in respect of the relevant subject
matter of such Warranties; and
5.6 apply to each of the Subsidiaries as well as to the Company as if the
word "Company" was defined to mean each of the Subsidiaries and the
Company.
5.7 The liability of the Vendors in respect of any claim for breach of the
Warranties or the Tax Covenant shall be subject to the provisions of
Schedule 8 provided that the provisions of Schedule 8 shall not apply
in respect of:-
5.7.1 any claim under paragraph 2.1 (capacity), 3.1 (share ownership) or 3.2
(share and loan capital) of Schedule 5; nor
5.7.2 any claim arising out of any fraudulent or wilful non-disclosure on the
part of the Vendors.
6 TAXATION
The provisions of Schedule 7 shall have effect.
7 RESTRICTIONS ON THE VENDORS
7.1 Each of the Vendors covenants with the Purchaser with the intention of
assuring to the Purchaser the full benefit and value of the goodwill
and connections of the Company and the Subsidiaries and as a
constituent part of the agreement for the sale of the Shares that save
with the previous written consent of the Purchaser:-
9
<PAGE>
7.1.1 he will not in the Restricted Territories for the period of three years
following the Completion Date directly or indirectly in competition
with the Company or the Subsidiaries engage in business with or be in
any way interested in or connected with any concern, undertaking, firm
or body corporate which engages in or carries on within any part of the
Restricted Territories any business which competes with any business
carried on by the Company or the Subsidiaries at the Completion Date
and in particular (but without limitation) the business of the
manufacture and distribution of peripherals and accessories to the
video games and PC games market;
7.1.2 he will not in the Restricted Territories for the period of three years
following the Completion Date directly or indirectly:-
7.1.2.1 interfere with or, in competition with the Company or the
Subsidiaries in relation to any business which competes with
any business carried on by the Company or the Subsidiaries as
at the Completion Date, offer or agree to provide goods or
services of any description to, or solicit or endeavour to
entice away from the Company or the Subsidiaries the custom of
any person, firm or body corporate which, at any time during
the period of one year ending on the Completion Date, has been
a customer or client of, or in the habit of dealing with, the
Company or the Subsidiaries or which, at any time during that
period, was to his knowledge negotiating with the Company or
the Subsidiaries in relation to the provision of goods or
services by the Company or the Subsidiaries;
7.1.2.2 interfere or seek to interfere with contractual or other trade
relations between the Company or the Subsidiaries and any of
its or their respective suppliers in existence or under
negotiation at any time during the period of one year ending
on the Completion Date;
7.1.2.3 solicit the services of or endeavour to entice away from the
Company or the Subsidiaries any director, employee or
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<PAGE>
consultant of the Company or the Subsidiaries (whether or not
such person would commit any breach of his contract of
employment or engagement by reason of leaving the service of
such company) or knowingly employ, assist in or procure the
employment by any other person, firm or body corporate of any
such person;
7.1.3 he will not at any time following the Completion Date disclose to any
person, firm or body corporate or otherwise make use or permit the use
of any trade secrets or confidential knowledge or information
concerning the business, finances or affairs of the Company or of the
Subsidiaries or of any of their respective customers, clients or
suppliers at the date of this Agreement and will use his best
endeavours to prevent the publication or disclosure of any such
secrets, knowledge or information by any third party;
7.1.4 he will not for the period of three years following the Completion Date
use or apply to register on any public register any trade or business
name used by the Company or the Subsidiaries during the period of two
years preceding the Completion Date (including in particular (but
without limitation) the names Leda, LMP and Gamester (whether alone or
in conjunction with other names)) or any name similar to those names or
likely to be confused with them.
7.2 Each of the Vendors agrees that, having regard to the facts and matters
above, the restrictions contained in Clause 7.1 are reasonable and
necessary for the protection of the legitimate interests of the
Purchaser and that, having regard to those facts and matters, those
restrictions do not work harshly on him. It is nevertheless agreed
that, if any of those restrictions shall, taken together or separately,
be held to be void or ineffective for any reason but would be held to
be valid and effective if part of its wording were deleted, that
restriction shall apply with such deletions as may be necessary to make
it valid and effective.
7.3 The restrictions contained in the sub-clauses of Clause 7.1 shall be
construed as separate and individual restrictions and shall each be
capable of being severed without prejudice to the other restrictions or
to the remaining provisions of this Agreement.
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<PAGE>
8 RELEASE BY THE VENDORS
8.1 Each of Richard Myers and Trevor Sharman confirms that he has no claim
(whether in respect of any breach of contract, compensation for loss of
office or monies due to him or on any account whatsoever) outstanding
against the Company or the Subsidiaries or against any of the directors
or employees of the Company or the Subsidiaries and that no agreement
or arrangement (including (without limitation) any contract of
employment) is outstanding under which the Company or the Subsidiaries
or any of such persons has or could have any obligation of any kind to
him. Neil Doughty confirms that he has no such claims save in relation
to his contract of employment which has been disclosed to the Purchaser
and is included as an annexure to the Disclosure Letter.
8.2 To the extent that any such claim or obligation exists or may exist,
each of the Vendors irrevocably and unconditionally waives such claim
or obligation and releases the Company and the Subsidiaries and any
such other persons from any liability whatsoever in respect of such
claim or obligation.
9 CONFIDENTIALITY
9.1 Subject to the provisions of Clause 9.2, no Party shall issue any press
release or publish any circular to shareholders or any other public
document or make any statement or disclosure to any person who is not a
Party (including (without limitation) any document, statement or
disclosure published, issued or made by the Vendors or any of them to
any supplier to or customer of the Company or the Subsidiaries) in each
case relating to or connected with or arising out of this Agreement or
the matters contained in it, without obtaining the previous approval of
the Purchaser (in the case of the Vendors) and Richard Myers (in the
case of the Purchaser) to its contents and the manner of its
presentation and publication or disclosure (such approval not to be
unreasonably withheld or delayed).
9.2 The provisions of Clause 9.1 do not apply to:-
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<PAGE>
9.2.1 any announcement relating to or connected with or arising out of this
Agreement required to be made by the Purchaser by virtue of any
applicable law or regulation; and
9.2.2 the announcement in the Agreed Form marked "H".
10 RELEASE FROM GUARANTEES
The Purchaser agrees to use reasonable endeavours to procure the
release of the personal guarantee given by Richard Myers and Trevor
Sharman to De Lage Landen Leasing and Factors (now FNN Financial
Limited) in the form attached to the Disclosure Letter, and the
Purchaser agrees to indemnify each of Richard Myers and Trevor Sharman
in respect of any liability which he may incur pursuant to such
guarantee from Completion until the release of such guarantee is
obtained.
11 PENSION SCHEME
It is hereby acknowledged and declared that the Company is the
principal employer and trustee of a money purchase pension scheme with
Scottish Amicable (Policy Number 161HP302) ("the Pension Scheme"), the
beneficiaries of which are Richard Myers and Andrea Myers. The Parties
will procure that the Company is removed as a trustee as soon as
practicable and renounces any interest that it may have therein. Andrea
Myers has acknowledged in writing to the Company in a letter dated 24
June 1999 and Richard Myers hereby acknowledges and confirms the
release by each of them of the Company from all and any liability in
relation to the Pension Scheme.
12 ESCROW
12.1 In the event that the Purchaser has given notice to any Noteholder (as
defined in the Set-Off Loan Note) pursuant to the provisions of
Condition 7.1 of the Set-Off Loan Note that it wishes to exercise its
right of set-off thereunder and to the extent that any claim or claims
subject to such right of set-off ("Relevant Claim") have not been
settled or withdrawn by 31 December 2000 (being the "Maturity
13
<PAGE>
Date" thereunder), the Purchaser shall be entitled, at its sole
discretion, to pay any amount which it is entitled to deduct from the
Principal and/or the Interest (each as defined therein) ("the Escrow
Sum") into an interest bearing deposit account held in the joint names
of the Purchaser's Solicitors and Vendors' Solicitors ("the Escrow
Account").
12.2 As soon as possible following the agreement or determination or final
adjudication of the Relevant Claim there shall be released from the
Escrow Account:-
12.2.1 to the Purchaser (or as it shall direct), a sum equal to the amount for
which the Relevant Claim shall have been agreed or determined or for
which judgment in respect of the Relevant Claim shall have been
obtained, together with a proportion of the total interest earned on
the monies standing to the credit of the Escrow Account from Completion
to the date of payment out (being that proportion which the sum
released to the Purchaser from the Escrow Account pursuant to this
sub-clause bears to the Escrow Sum); and
12.2.2 to the Vendors' Solicitors the balance of the monies standing to the
credit of the Escrow Account.
12.3 In the event that the Purchaser has not exercised its rights under 12.1
above and any Relevant Claim has not been settled or withdrawn by 30
November 2001, the Purchaser shall be obliged to place the relevant
Escrow Sum into the Escrow Account, such Escrow Sum to be dealt with in
accordance with the provisions of Clause 12.2 above and in the event
that the Purchaser shall fail to do so, then, for the purposes of
Condition 7 only, the Relevant Claim shall be deemed to have been
withdrawn.
12.4 The Parties shall give such instructions to their respective solicitors
as is necessary to give effect to the provisions of this Clause 12.
13 VENDORS' COVENANT
The Vendors hereby covenant to pay to the Purchaser an amount equal to
five times (5x) the amount (if any) by which the net asset value of the
Company
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<PAGE>
(calculated as at 24 June 1999 by the Purchaser after Completion in
accordance with the principles referred to in paragraph 4.1.2 of
Schedule 5) is less than (pound)1,320,000 or to the extent that the
calculation of the net asset value is adjusted from that used in the
preparation of the Management Accounts to comply with the said
principles where they have not previously done so the sum of
(pound)1,230,000.
14 GENERAL
14.1.1 The Vendors shall do or procure to be done all such further acts and
things and execute or procure the execution of all such other documents
as the Purchaser may from time to time reasonably require for the
purpose of giving the Purchaser the full benefit of the provisions of
this Agreement.
14.1.2 The Purchaser shall do or procure to be done all such further acts and
things and execute or procure the execution of all such other documents
as the Vendors may from time to time reasonably require for the purpose
of giving the Vendors the full benefit of the provisions of this
Agreement.
14.2 This Agreement, and the documents referred to in it, constitutes the
entire agreement and understanding of the Parties. Each of the Parties
acknowledges and agrees that in entering into this Agreement, and the
documents referred to in it, it does not rely on, and shall have no
remedy in respect of, any statement, representation, warranty or
understanding (whether negligently or innocently made) of any person
(whether party to this Agreement or not) other than as expressly set
out in this Agreement as a Warranty. The only remedy available to it
for breach of the Warranties shall be for breach of contract under the
terms of this Agreement. Nothing in this sub-clause shall, however,
operate to limit or exclude any liability for fraud.
14.3 Each of the Vendors waives any rights of pre-emption over the Shares
conferred on him or held by him either by virtue of the Company's
Articles of Association or by express agreement or otherwise.
14.4 Each Party shall pay his or its own costs and expenses of and
incidental to this Agreement and the sale and purchase of the Shares.
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14.5 This Agreement shall, as to any of its provisions remaining to be
performed or capable of having or taking effect following Completion,
remain in full force and effect notwithstanding Completion.
14.6 Unless expressly provided otherwise, all representations, warranties,
undertakings, covenants, agreements and obligations made, given or
entered into in this Agreement by more than one person are made, given
or entered into jointly and severally.
14.7.1 Subject to Clause 14.7.2, this Agreement shall be binding upon and
enure for the benefit of the successors and assigns of the Parties
including, in the case of individuals, their respective estates after
their deaths.
14.7.2 The Parties shall not be entitled to assign their respective rights or
obligations under this Agreement without the prior written consent of
each of the other Parties PROVIDED THAT the Purchaser shall be entitled
to assign its rights and obligations to any Group Company of the
Purchaser without requiring the consent of the Vendors.
14.8.1 The failure of the Purchaser at any time or times to require
performance of any provision of this Agreement shall not affect its
right to enforce such provision at a later time.
14.8.2 No waiver by the Purchaser of any condition or of the breach of any
term, covenant, representation, warranty or undertaking contained in
this Agreement, whether by conduct or otherwise, in any one or more
instances shall be deemed to be or construed as a further or continuing
waiver of any such condition or breach or a waiver of any other
condition or of the breach of any other term, covenant, representation,
warranty or undertaking in this Agreement.
14.8.3 Any liability to the Purchaser under this Agreement may in whole or in
part be released, compounded or compromised and time or indulgence may
be given by the Purchaser in its absolute discretion as regards any
Party under such liability without in any way prejudicing or affecting
its rights against any other Party under the same or a like liability,
whether joint and several or otherwise.
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14.9 This Agreement may be amended, modified, superseded or cancelled and
any of its terms, covenants, representations, warranties, undertakings
or conditions may be waived only by an instrument in writing signed by
(or by some person duly authorised by) each of the Parties or, in the
case of a waiver, by the Party waiving compliance.
14.10 The Purchaser shall have no right to rescind this Agreement in the
event of a breach of the Warranties.
15 NOTICES
15.1 Any notice to be served in connection with this Agreement shall be in
writing and shall be delivered by hand, sent by registered mail,
recorded delivery or first-class post or transmitted by fax:-
15.1.1 in the case of the Purchaser, to its registered office for the time
being marked "For the Urgent Attention of the Secretary"; or
15.1.2 in the case of an individual, to the address set opposite his name in
Schedule 1 or to such other address as he may notify in writing for the
purposes of this Agreement to the Party serving the document.
15.2 Each of Richard Myers and Trevor Sharman irrevocably appoints
Beachcroft Wansboroughs of 100 Fetter Lane, London EC4A 1BN to be his
agent for service of process and notices in England.
15.3 Any such notice shall be deemed to have been served as follows:-
15.3.1 in the case of delivery by hand, on delivery;
15.3.2 in the case of service by post, on the third Business Day after the day
on which it was posted;
15.3.3 in the case of transmission by fax, on the day it is transmitted;
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15.4 Subject as provided in Clause 15.3, in proving such service it shall be
sufficient to prove that the notice was properly addressed and left at,
posted to or transmitted by fax to that address.
15.5 For the purpose of this Clause, "Business Day" shall mean any day other
than Saturday, Sunday or any other day which is a public holiday in the
place at or to which the notice is left or despatched.
16 GOVERNING LAW AND JURISDICTION
16.1 This Agreement shall be governed by and construed in accordance with
the laws of England and Wales.
16.2 The Parties submit to the non-exclusive jurisdiction of the English
Courts as regards any claim, dispute or matter arising out of or
relating to this Agreement or any of the documents to be executed
pursuant to this Agreement.
EXECUTED as a deed and delivered on the date set out at the head of this
Agreement.
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<TABLE>
<CAPTION>
SCHEDULE 1
THE VENDORS
1 2 3 4 5 6
SET-OFF LOAN NOTE
HOLDING OF CASH CONSIDERATION LOAN NOTE CONSIDERATION
NAME ADDRESS SHARES CONSIDERATION
<S> <C> <C> <C> <C> <C>
Richard Myers Flat 7, 3rd floor 35,000 US$320,000 US$8,494,960 US$979,440
28 Rue Souveraine
Brussels 1050, Belgium
Trevor Sharman Condominium unit 11,000 US$320,000 US$2,450,416 US$307,824
592/107,
8th Floor Room 812
Park Beach Condominium
592 Soi Naklua 16
Pattaya-Naklua
Banglamung
Cholbury,
Thailand
Neil Doughty 41 Park Lane 4,000 US$1,007,424 US$111,936
Knebworth
Hertfordshire
SG3 6PH
</TABLE>
19
<PAGE>
SCHEDULE 2
THE COMPANY
1 Registered number: 2535134
2 Date of incorporation: 28 August 1990
3 Legislation under which incorporated: England & Wales
4 Registered office address: Stonemasons House
75 Railway Street
Hertford
Hertfordshire SG14 1RP
5 Directors: Neil Doughty
Richard Myers
Trevor Sharman
6 Secretary: Trevor Sharman
7 Authorised share capital:
(a) Amount: (pound)50,000
(b) Number and class of shares: 50,000 ordinary shares of
(pound)1 each
8 Issued share capital:
(a) Amount: (pound)50,000
(b) Number and class of shares: 50,000 ordinary shares of
(pound)1 each
9 Issued loan capital: None
10 Charges:
<TABLE>
<CAPTION>
Date of Date of Property
charge: registration: charged: Sums secured: Chargee:
<S> <C> <C> <C> <C>
05.03.96 07.03.96 Fixed and floating All monies FMN Financial Limited
on all assets (formerly known as De
Lage Landen Factors
Limited)
</TABLE>
11 Accounting Reference Date: 31 August
12 Auditors: Ernst & Young
13 Bankers: Lloyds Bank plc/
Midland Bank plc
20
<PAGE>
SCHEDULE 3
THE SUBSIDIARIES
PART 1 LEDA MEDIA PRODUCTS (HK) LIMITED
1 Certificate number: 595096
2 Date of incorporation: 12 February 1997
3 Legislation under which incorporated: Hong Kong
4 Registered office address: 37/F Wu Chung House,
213 Queen's Road East
Wanchai, Hong Kong
5 Directors: Lavinia Kit Wa Wong
Richard Myers
Chaparral Limited
Trevor Sharman
6 Secretary: BCS Limited
7 Authorised share capital:
(a) Amount: HK$1,000
(b) Number and class of shares: 1,000 ordinary shares of
HK$1.00 each
8 Issued share capital:
(a) Amount: HK$1,000
(b) Number and class of shares 1,000 ordinary shares of
and by whom held HK$1.00 each (999 held by Leda
Media Products Limited and 1
held by Cobyrne Limited as
nominee for Leda Media Products
Limited)
9 Issued loan capital: None
10 Charges:
Date of Date of Property
charge: registration: charged: Sums secured: Chargee:
11 Accounting Reference Date: 31 August
12 Auditors: Grant Thornton
13 Bankers: HSBC
21
<PAGE>
SCHEDULE 3
THE SUBSIDIARIES
PART 2 LMP (USA) INC.
1 Registered number: 4310064
2 Date of incorporation: 16 February 1999
3 Legislation under which incorporated: Illinois, USA
4 Registered office address: 1260 Karl Court,
Wancouda,
Illinois 60084,
USA
5 Directors: Trevor Sharman
6 Secretary: John Doughty
7 Authorised share capital:
(a) Amount: US $100,000
(b) Number and class of shares: 100,000 shares of US $ 1 each
8 Issued share capital:
(a) Amount: US $ 1,000
(b) Number and class of shares 1,000 shares of US $ 1 each
and by whom held:
9 Issued loan capital: None
10 Charges: None
Date of Date of Property
charge: registration: charged: Sums secured: Chargee:
11 Accounting Reference Date: N/A
12 Auditors: N/A
13 Bankers: American National/First National of Chicago
22
<PAGE>
SCHEDULE 4
COMPLETION OBLIGATIONS OF THE VENDORS
At Completion, the Vendors shall deliver or procure to be delivered to the
Purchaser:-
1 duly executed transfers in favour of the Purchaser or its nominee(s) in
respect of the Shares together with the certificates for the Shares;
2 any other document which may reasonably be required to give good title to
the Shares or which may be necessary to enable the Purchaser to procure
the registration of the Shares in the name of the Purchaser or its
nominee(s);
3 a copy of any power of attorney under which this Agreement, or any of the
transfers or other documents referred to in the preceding paragraphs 1
and 2 of this Schedule, is executed and evidence to the Purchaser's
satisfaction of the authority of any person signing on behalf of any
corporate entity;
4 the common seal (if any) and statutory books (including registers and
minutes books) of the Company and the Subsidiaries made up to the
Completion Date and all certificates of incorporation and certificates of
incorporation on change of name of the Company and the Subsidiaries;
5 certificates for all the issued shares of each of the Subsidiaries
registered in the name of the Company;
6 letters of resignation in the Agreed Forms marked "B1" to "B3" from
Richard Myers (as a director) and Trevor Sharman (as a director and
Secretary) (in each case in relation to the Company) and a letter of
resignation in the Agreed Form marked "B4" from Richard Myers (in
relation to Leda HK) acknowledging under seal that he has no claim
against the Company or the Subsidiaries for compensation for loss of
office or otherwise;
7 a copy of a letter from Ernst & Young in the Agreed Form marked "B5"
resigning their office as Auditors of the Company and a letter from Grant
Thornton in the Agreed Form marked "B6" resigning their office as
Auditors of Leda HK with effect from Completion and accompanied by the
statement
23
<PAGE>
required by Section 394 Companies Act 1985, originals of such letter to
be deposited at the registered office of the Company;
8 engrossments in duplicate of each of the Service Agreements and the
Consultancy Agreement duly executed by the relevant party;
9 powers of attorney in the Agreed Form marked "C1" to "C3" duly executed
by the Vendors for the purpose of securing the interest of the Purchaser
in the Shares pending their registration into the names of the Purchaser
and/or its nominee(s);
10 all credit cards in the name, or for the account, of the Company or of
the Subsidiaries in the possession of any officer or employee of the
relevant company resigning at Completion;
11 the documents of title to the Properties;
12 evidence to the Purchaser's satisfaction of the non-crystallisation of
any floating charges created in favour of De Lage Landen Leasing and
Factoring by the Company and the Subsidiaries;
13 evidence to the Purchase's satisfaction of the repayment to the Company
of all sums due to it from any Vendor or any person connected with him;
14 evidence to the Purchaser's satisfaction that Richard Myers has bought a
7-series BMW (Registration No. 69 RNM) from the Company for(pound)26,500
and that Andrea Myers has bought a Land Rover Discovery (Registration No.
M518 KAC) from the Company for(pound)7,000;
15 evidence to the Purchaser's satisfaction that all and any arrangements,
agreements and obligations (whether contractual or otherwise) between the
Company and/or the Subsidiaries and a company known as Eastern Mainsource
(which is registered in the British Virgin Islands) have been properly
terminated;
16 a letter of consent from Sony agreeing not to enforce its rights to
terminate the contract between it and the Company as a result of the
change of control of the
24
<PAGE>
Company; and
17 duly executed changes of bank mandates for the Company and the
Subsidiaries.
25
<PAGE>
SCHEDULE 5
WARRANTIES
1 DISCLOSED INFORMATION
1.1 RECITALS AND OTHER SCHEDULES
The facts set out in the Recitals and in Schedules 2 and 3 are true and
accurate in all respects.
1.2 THE DISCLOSURE LETTER
All information contained or referred to in the Disclosure Letter is
true and accurate in all material respects.
1.3 MEMORANDUM AND ARTICLES OF ASSOCIATION
The copy of the Memorandum and Articles of Association of the Company
annexed to the Disclosure Letter is true and complete, has embodied in
it or annexed to it a copy of every such resolution or agreement as is
referred to in Section 380(4) Companies Act 1985 and sets out in full
the rights and restrictions attaching to each class of the Company's
share capital.
1.4 STATUTORY BOOKS
The statutory books (including all registers and minute books) of the
Company have been properly kept and contain a complete and accurate
record of the matters which should be dealt with in them and no notice
or allegation that any of them is incorrect or should be rectified has
been received.
1.5 RETURNS
All returns, particulars, resolutions and other documents required
under the Companies Act 1985 and all other relevant legislation to be
delivered on behalf of the Company to the Registrar of Companies or to
any other relevant authority whatsoever have been duly and properly
made and delivered.
26
<PAGE>
1.6 MATERIAL DISCLOSURE
There are no facts or circumstances relating to the Shares or to the
assets, business or affairs of the Company which have been deliberately
withheld by the Vendors and which would have a material adverse effect
on the Company or the Purchaser as a result of the Purchaser acquiring
the Shares.
2 THE VENDORS
2.1 CAPACITY
2.1.1 Each Vendor has full power to enter into and perform this Agreement and
this Agreement constitutes binding obligations of each Vendor in
accordance with its terms.
2.1.2 The execution and delivery of this Agreement by the Vendors and the
performance of and compliance with its terms and provisions will not:-
2.1.2.1 conflict with or result in a breach of, or constitute a
default under, any agreement or instrument to which any of
them or the Company is a party or by which any of them or the
Company is bound or of the Memorandum or Articles of
Association of the Company;
2.1.2.2 conflict with or result in a breach of any law, regulation,
order, writ, injunction or decree of any court or agency; or
2.1.2.3 cause the Company to lose the benefit of any right or
privilege it presently enjoys or cause any person who normally
does business with the Company not to continue to do so on the
same basis or cause any officer or senior employee to leave
and, so far as the Vendors are aware, the attitude or actions
of customers, suppliers, employees and other persons with
regard to the Company will not be prejudicially affected
thereby.
27
<PAGE>
2.2 VENDORS' OTHER INTERESTS
No Vendor nor, so far as the Vendors are aware, any person connected
with any Vendor has any interest, direct or indirect, in any business
other than that now carried on by the Company which is or is likely to
be or become competitive with the business or any proposed business of
the Company.
3 THE SHARES AND THE COMPANY
3.1 THE SHARES
3.1.1 The Shares comprise the whole of the allotted and issued share capital
of the Company and all of the Shares are fully paid or credited as
fully paid.
3.1.2 The Shares are legally and beneficially owned by the Vendors free from
all liens, charges, equities, encumbrances or interests of any nature
whatsoever, or any agreement, arrangement or obligation to create any
of the same, in favour of any other person.
3.2 SHARE AND LOAN CAPITAL
Save only as provided in this Agreement, there are no agreements or
arrangements in force which call for the present or future creation,
allotment, issue, transfer, redemption or repayment of, or grant to any
person the right (whether exercisable now or in the future and whether
conditional or not) to call for the creation, allotment, issue,
transfer, redemption or repayment of, any share or loan capital of the
Company (including by way of option or under any right of conversion or
pre-emption).
3.3 SUBSIDIARIES AND SUBSIDIARY UNDERTAKINGS
3.3.1 The Company does not have, and never has had, any subsidiaries or
subsidiary undertakings apart from the Subsidiaries.
3.3.2 The Company is the beneficial owner of the entire issued share capital
of the Subsidiaries, free from all liens, charges, equities,
encumbrances or interests of
28
<PAGE>
any nature whatsoever, or any agreement, arrangement or obligation to
create any of the same, in favour of any other person.
3.4 ASSOCIATED COMPANIES
The Company has no associated companies as defined in SSAP1, as amended
by FRS9.
3.5 FOREIGN BRANCHES
The Company has no branch, agency, place of business or permanent
establishment outside the United Kingdom.
3.6 COMPANIES CONTROLLED BY VENDORS
There exists no company owned or controlled (directly or indirectly) by
the Vendors or any of them or any of their connected persons which in
any way competes with the business of the Company as at the date hereof
and there exists no understanding, liability, commitment or otherwise
between any such company and the Company which remains to be satisfied
and no money is either owed to or by the Company in respect of any such
companies.
4 THE ACCOUNTS AND ACCOUNTING RECORDS
4.1 THE ACCOUNTS
The Accounts:-
4.1.1 comply with the requirements of the Companies Act 1985 (or, in the case
of the Subsidiaries, in accordance with any relevant law);
4.1.2 have been prepared in accordance with all applicable SSAPs, FRSs or
UITF abstracts or, where there are none, in accordance with accounting
principles generally accepted in the United Kingdom and on a basis
consistent with preceding accounting periods;
29
<PAGE>
4.1.3 show a true and fair view of the state of affairs of the Company as at
the Accounts Date and of its profit or loss for the financial year
ended on that date;
4.1.4 save as expressly disclosed in the Accounts, are not affected by any
extraordinary, exceptional or non-recurring items;
4.1.5 properly and adequately disclose all the assets and liabilities
(whether ascertained, contingent or otherwise and whether or not
quantified or disputed) of the Company as at the Accounts Date and make
proper provision and/or reserve for all such liabilities; and
4.1.6 properly and adequately disclose all financial commitments in existence
as at the Accounts Date.
4.2 STOCK VALUATION
4.2.1 The method of valuing stock-in-trade and work-in-progress for the
Accounts was in accordance with SSAP 9 and, subject to that Standard,
was consistent in all respects with that adopted in the corresponding
audited accounts for the preceding three financial periods and has been
accepted by the Inland Revenue for taxation purposes.
4.2.2 Proper provision has been made in the Accounts in respect of dead, slow
moving, obsolete, redundant or excess stock-in-trade and/or
work-in-progress and the value attributed to the remaining
stock-in-trade and/or work-in-progress did not exceed the lower of
direct cost or net realisable value at the Accounts Date.
4.3 ACCOUNTING RECORDS
The accounting records of the Company:-
4.3.1 have at all times been properly and accurately kept and completed and
contain due and accurate records of all matters required by law to be
entered in them;
4.3.2 contain or reflect no material inaccuracies or discrepancies of any
kind; and
30
<PAGE>
4.3.3 disclose the matters which ought to appear in them with reasonable
accuracy.
4.4 MANAGEMENT ACCOUNTS
4.4.1 The Management Accounts have been properly prepared in a manner
consistent with that adopted in the preparation of the Accounts.
4.4.2 Having regard to the purpose for which the Management Accounts have
been prepared, they are not misleading and do not overstate the profits
of the Company in respect of the period to which they relate.
5 TAXATION
5.1 DEFINITIONS
Words and expressions defined for the purposes of Schedule 9 (Tax
Covenant) shall have the same meaning for the purposes of this Part of
Schedule 5.
5.2 THE ACCOUNTS
5.2.1 All liabilities, whether actual or deferred, contingent or disputed, of
the Company for tax measured by reference to income, profits or gains
earned, accrued or received on or before the Accounts Date or arising
in respect of an event occurring or deemed to occur on or before the
Accounts Date are fully provided for or (as appropriate) disclosed in
the Accounts. All other Warranties relating to specific tax matters set
out in this Schedule are made without prejudice to the generality of
this paragraph.
5.2.2 Full provision has been made in the Accounts for deferred taxation
(calculated according to the liability method).
5.3 POSITION SINCE ACCOUNTS DATE
Since the Accounts Date:-
5.3.1 the Company has not been involved in any transaction which has given or
may give rise to a liability on the Company (or would have given rise
or might give rise to
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<PAGE>
such a liability but for the availability of any relief) other than
taxation in respect of normal trading income or receipts of the Company
arising from transactions entered into by it in the ordinary course of
business;
5.3.2 payments made by the Company which will not be deductible for the
purposes of corporation tax, either in computing the profits of the
Company or in computing the corporation tax chargeable on it, are not
materially greater than such payments made in the previous three
accounting periods;
5.3.3 the Company has not been involved in any transaction otherwise than on
arm's length terms;
5.3.4 no disposal has taken place or other event occurred which has given or
may give rise to a liability to taxation which, if such disposal or
event had been planned or predicted at the Accounts Date, should have
been reflected in the provision for deferred taxation contained in the
Accounts; and
5.3.5 no accounting period (as defined in Section 12 ICTA 1988) of the
Company has ended as referred to in Section 12(3) of that Act.
5.4 CONTINUING OBLIGATIONS
All sums of a revenue nature (including without limitation rents,
interest, management charges and annual payments) payable by the
Company pursuant to an obligation incurred by the Company before
Completion and which will continue to bind the company after Completion
have been and will continue to be fully deductible for the purposes of
corporation tax (or any corresponding tax on profits in any relevant
foreign jurisdiction), either in computing the profits of the Company
or in computing the corporation tax or corresponding tax chargeable on
it.
5.5 ADMINISTRATIVE MATTERS
5.5.1 The Company has not within the last six years been, nor has it been
notified that it will be, involved in any dispute with, or the subject
of any enquiry by any taxation authority (whether of the UK or
elsewhere) other than routine enquiries.
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<PAGE>
5.5.2 The Company has duly, and within any appropriate time limits, made all
returns, given all notices, supplied all information and maintained all
such records as are required to be made, given, supplied or maintained
by it; all such returns, notices and information were complete and
accurate in all material respects and were made or provided on the
proper basis.
5.5.3 The Company has duly paid all taxation which it has become liable to
pay and has not been notified of any liability to pay any penalty,
interest, supplement, fine, default surcharge or other payment in
connection with any claim for taxation.
5.5.4 All claims, disclaimers, elections, appeals or applications by the
Company the making of which has been taking into account in the
Accounts have been made and were and remain valid and the Company has
retained all such records and information as may be requisite to enable
any such claim to be made as a correct and complete claim.
5.5.5 No transaction in respect of which any consent or clearance from any
taxation authority was required or sought has been entered into or
carried out by the Company without such consent or clearance having
been properly obtained. Any transaction for which such consent or
clearance was obtained has been carried out in accordance with the
terms of such consent or clearance and the application in respect of
which such consent or clearance was based and at a time when such
consent or clearance was valid and effective.
5.5.6 No taxation authority has operated or agreed to operate any special
arrangement or practice (being one not based on relevant legislation or
published practice) in relation to the affairs of the Company.
5.5.7 In relation to the Company, the Disclosure Letter gives full details
of:-
assessments to tax made by any tax authority, and any such
determinations and directions under sections 41A or 41B Taxes
Management Act 1970, which are subject to appeal or have otherwise not
become final at the date of this Agreement.
5.6 COMPANY RESIDENCE
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<PAGE>
The Company is, and has at all times been, resident for taxation
purposes in the country of its incorporation and is not, and has not at
any time been, treated as resident in any other jurisdiction for any
taxation purposes (including pursuant to any double taxation
arrangement). The Company has no branch, agency, place of business or
permanent establishment outside the country of its incorporation.
5.7 DISTRIBUTIONS AND PAYMENTS
5.7.1 The Company has not since 5 April 1965:-
5.7.1.1 made any distribution or deemed distributions within the
meaning of Sections 209 or 210 ICTA 1988 (distributions and
deemed distributions) except as provided for in its audited
accounts;
5.7.1.2 issued any share capital as paid up otherwise than by the
receipt of new consideration (within the meaning of Section
254 ICTA 1988); or
5.7.1.3 redeemed, repaid or purchased, or agreed to redeem, repay or
purchase, any of its own shares.
5.7.2 No securities (within the meaning of Section 254(1) ICTA 1988) issued
by the Company and remaining in issue at the date of this Agreement
were issued in circumstances such that the interest or any other amount
payable on those securities falls to be treated as a distribution.
5.7.3 The Company has not within the period of six years preceding Completion
made or received any distribution which is an exempt distribution
within Sections 213 to 218(1) (inclusive) ICTA 1988 (demergers).
5.7.4 The Company has not elected under Sections 246A and 246B ICTA 1988 for
any dividend paid by it to be treated as a foreign income dividend for
the purposes of Chapter VA ICTA 1988, and no payment or other
distribution by the Company has been so treated pursuant to Schedule 7
Finance Act 1997.
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<PAGE>
5.8 GROUPS, TAX CONSOLIDATION ETC.
The Company is not and has not at any time been treated as a member of
a group of companies for any taxation purposes and has not been subject
to taxation on the basis that its profits or losses are consolidated
with any other company.
5.9 ACT CARRY FORWARD
5.9.1 As at 6 April 1999, the Company had no unrelieved surplus advance
corporation tax as defined in The Corporation Tax (Treatment of
Unrelieved Surplus Advance Corporation Tax) Regulations 1999 (SI
1999/358) (the "Shadow ACT Regulations").
5.10 CAPITAL GAINS
5.10.1 If each of the assets other than trading stock of the Company were
disposed of for a consideration equal to the book value of that asset
in, or adopted for the purpose of, the Accounts, no liability to
taxation in relation to any such asset would arise (disregarding for
this purpose any relief and allowances available to the Company other
than amounts falling to be deducted from consideration receivable under
Section 38 TCGA 1992).
5.10.2 No liability to taxation would arise on the disposal by the Company of
any asset other than trading stock acquired since the Accounts Date for
a consideration equal to the consideration actually given for the
acquisition.
5.11 CAPITAL LOSSES
No loss which might accrue on the disposal by the Company of any asset
is liable to be reduced or eliminated and no chargeable gain is liable
to be created or increased by virtue of any depreciatory transaction or
any reduction in value of that or any related asset for the purposes of
corporation tax on chargeable gains or any corresponding tax of any
relevant foreign jurisdiction.
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5.12 CAPITAL EXPENDITURE
5.12.1 The Company has not since the Accounts Date done or omitted to do, or
agreed to do, or permitted to be done, any act as a result of which
there may be made a balancing charge or any disposal value may be
brought into account or any deemed trading receipt may arise under or
by virtue of any provision of CAA 1990 (or any corresponding
legislation in the UK or elsewhere), or there may be a withdrawal or
refusal of allowances or a recovery of excess relief under any such
provision.
5.12.2 If the Company disposed of each of its assets, or of any pool of assets
(that is to say all those assets expenditure relating to which would be
taken into account in computing whether a balancing charge would arise
on a disposal of any of those assets) for a consideration equal to
their book value as shown in or adopted for the purpose of the
Accounts, no balancing charge (or corresponding tax of any relevant
foreign jurisdiction) would arise in respect of any such asset or pool
of assets under any legislation relating to capital allowances (or
corresponding legislation of the relevant foreign jurisdiction).
5.12.3 The Company has not made any election under Section 37 CAA 1990 nor is
taken to have made such an election under sub-section (8)(c) CAA 1990
(election for assets to be treated as short life assets). The Company
has not incurred any expenditure on machinery or plant which is a long
life asset to which Chapter IVA, Part II CAA 1990 applies.
5.13 LOAN RELATIONSHIPS
5.13.1 The Company is not party to any loan relationship as defined in Chapter
II, Part IV Finance Act 1996 which may give rise to any debits or
credits for the purposes of that Chapter other than in relation to
interest, charges or expenses.
5.13.2 The Company is not a party to any loan relationship:-
5.13.2.1 where there is a connection between the parties as defined by
Section 87 Finance Act 1996;
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<PAGE>
5.13.2.2 where there has been or will be a release of the amounts
payable under the relationship;
5.13.2.3 to which the transitional provisions of Schedule 15 Finance
Act 1996 apply or will apply;
5.13.2.4 to which paragraph 11, Schedule 9 Finance Act 1996 applies or
may apply (transactions not at arm's length);
5.13.2.5 to which Sections 92 (convertible securities etc), 93
(relationships linked to the value of chargeable assets) or 94
(indexed gilt-edged securities) Finance Act 1996 apply.
5.13.3 The Company accounts for all its loan relationships (as defined in
Section 81 Finance Act 1996) on an authorised accruals basis and no
circumstances exist by virtue of which a balancing debit or credit may
be brought into account in an accounting period of the Company ending
after Completion pursuant to Section 89 Finance Act 1996 (inconsistent
application of accounting methods) or Section 90 Finance Act 1996
(changes of accounting method).
5.13.4 The Company is not the debtor pursuant to any loan relationship:-
5.13.4.1 to which the provisions of paragraph 2, Schedule 9 Finance Act
1996 (late interest) have applied; or
5.13.4.2 which has an unallowable purpose within the meaning of
paragraph 13 Schedule 9 Finance Act 1996 (loan relationships
for unallowable purposes).
5.13.5 The Company has not issued any relevant discounted securities (as
defined in Schedule 13 Finance Act 1996 (or any securities which would
be relevant discounted securities if the amendments to that provision
contained in clause 59 of the Finance Bill 1999 was enacted in the form
originally published).
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5.14 FOREIGN EXCHANGE AND FINANCIAL INSTRUMENTS
The Company has no:-
5.14.1 qualifying assets, qualifying liabilities or currency contracts to
which the provisions of Chapter II, Part II Finance Act 1993 apply or
will or may apply;
5.14.2 interest rate or currency contracts or options to which the provisions
of Chapter II, Part IV Finance Act 1994 apply or will or may apply.
5.15 WITHHOLDINGS
The Company has made all deductions and retentions of or on account of
taxation as it was or is obliged or entitled to make and has made all
such payments of or on account of taxation as should have been made to
any taxation authority in respect of such deductions or retentions.
5.16 EMPLOYEES ETC.
5.16.1 The Company has not made any payment to, or provided any benefit for or
on behalf of, any officer or employee or ex-officer or ex-employee of
the Company which is not allowable as a deduction in calculating the
profits of the Company for taxation purposes.
5.16.2 The Company has made all payments, deductions, withholdings or
reductions as it should have made in respect of any remuneration or
benefits of any kind paid or provided to employees, sub-contractors or
workers supplied by agencies in respect of taxation, national insurance
or social security contributions, and all sums payable by the Company
to any taxation authority in respect of such amounts have been, or will
before Completion be, paid to the relevant authority within the
prescribed time limits.
5.16.3 The Company has kept proper books and records relating to the same.
5.16.4 The Disclosure Letter contains full details of all share schemes which
the Company operates or in which employees are entitled to participate,
together with copies of
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<PAGE>
any approvals issued by the taxation authorities in respect of such
schemes and nothing has been done to prejudice the approved status of
any such schemes.
5.17 CONTROLLED FOREIGN COMPANIES
The Subsidiaries of the Company are not and never have been controlled
foreign companies as defined in section 747(1) ICTA 1988.
5.18 VALUE ADDED TAX
5.18.1 The Company is registered for the purposes of value added tax . The
Company is not a member of a group of companies for UK or foreign value
added tax purposes and has not applied for such treatment.
5.18.2 The Company has not been required by the Commissioners of Customs and
Excise or equivalent foreign authorities to give security and no steps
have been taken for distress to be levied on any asset of the Company.
5.18.3 The Company is not in arrears with any payment or returns in respect of
value added tax. The Company has not been subject to any penalty, fine
or surcharge in respect of value added tax and has not received any
notice of any such penalty, fine or surcharge.
5.18.4 The Company has complied with and observed in all material respects the
terms of all enactments relating to value added tax or any equivalent
tax in any jurisdiction and all regulations, orders, notices,
provisions and conditions made under those enactments ("VAT
legislation").
5.18.5 The Company has maintained and obtained complete, correct and
up-to-date records, invoices and other documents (as the case may be)
appropriate or requisite for the purposes of VAT legislation and has
preserved such records, invoices and other documents in such form and
for such periods as are required by VAT legislation.
5.18.6 The Company has not since its incorporation incurred any expenditure on
capital items such that the provisions of Part XV The Value Added Tax
Regulations 1995 (capital goods scheme) may apply to the Company.
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<PAGE>
5.18.7 The Company obtains credit for all input tax paid or suffered by it,
apart from input tax on supplies in the case of which there is a
general prohibition on credit (such as cars and entertainment).
5.19 CLOSE COMPANIES
5.19.1 The Company is not and has at no time been a close investment holding
company as defined in Section 13A ICTA 1988.
5.19.2 The Company has not made any transfers of value within Section 94
Inheritance Tax Act 1984.
5.19.3 The Company has not in the last six years done anything so as to give
rise to an assessment or any charge to tax under Section 419 (as
extended by Section 422) ICTA 1988.
5.19.4 The Company has not in the last six years made a distribution within
Section 418 ICTA 1988.
5.20 INHERITANCE TAX
5.20.1 No shares in or assets of the Company were acquired by it or (as the
case may be) the Vendor in circumstances such that they continued to be
subject to any Inland Revenue charge to which they were subject
immediately before such acquisition or such that, if they had been
subject to an Inland Revenue charge immediately before such
acquisition, they would have continued to be subject to it.
5.20.2 No shares in or assets of the Company are subject to any such power of
sale, charge or mortgage as is mentioned in Section 212 Inheritance Tax
Act 1984 and there are no circumstances which might lead to such a
power arising.
5.21 SECONDARY LIABILITY
The Company is not, nor will it become, liable to pay, or make
reimbursement or indemnity in respect of, any taxation (or any amount
corresponding to taxation) in consequence of the failure by any other
person to discharge that taxation or amount within any specified period
or otherwise, where the taxation or amount relates to a
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profit, income or gain, transaction, event, omission or circumstances
arising, occurring or deemed to arise or occur (whether wholly or
partly) before Completion.
5.22 PAYMENTS EQUIVALENT TO TAXATION
5.22.1 The Company has not entered into any indemnity, guarantee or covenant
under which the Company has agreed or can be procured to meet or pay a
sum equivalent to or by reference to another person's liability to
taxation.
5.22.2 The Company is not liable, nor has any event or omission occurred in
consequence of which the Company could at any time become liable, to
make a payment to any person as a result of the discharge by that
person of any liability of the Company to taxation incurred on or
before Completion.
5.23 CAPITAL DUTY, STAMP DUTY ETC.
5.23.1 All documents to which the Company is a party and under which the
Company has any rights or which form part of the Company's title to any
asset owned by it have been duly stamped with the correct amount of
stamp duty and any applicable stamp or other duty in respect of such
documents has been accounted for and paid and no such documents which
are outside the United Kingdom would attract stamp duty if they were
brought into the United Kingdom.
5.23.2 The Company has complied in all respects with the provisions of Part IV
Finance Act 1986 (stamp duty reserve tax) and with any regulations made
under it and neither it nor any nominee for it is a party to any
agreement which falls within the terms of Section 87(1) of that Act
(principal charge) and in relation to which the conditions referred to
in Section 92(1) of that Act (repayment or cancellation of tax) have
not been fulfilled.
6 ASSETS
6.1 TITLE TO ASSETS AND ENCUMBRANCES
6.1.1 Except for trading stock sold by the Company in the ordinary course of
its day to day business or for trading stock acquired subject to
retention or reservation of
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title by the supplier or manufacturer of such trading stock as
disclosed in the Disclosure Letter, all the assets included in the
Accounts or acquired after the Accounts Date as well as all the assets
used in the Company's business:-
6.1.1.1 are legally and beneficially owned by the Company free from
any mortgage, charge, lien or other encumbrance;
6.1.1.2 are not held subject to any agreement for lease, hire, hire
purchase or sale on conditional or deferred terms; and
6.1.1.3 are in the possession or under the control of the Company.
6.1.2 In respect of any of the items referred to in the preceding paragraph
6.1.1 which are held under any agreement for lease, hire, hire purchase
or sale on conditional or deferred terms, there has been no default by
the Company in the performance or observance of any of the provisions
of such agreements.
6.2 PLANT
6.2.1 The plant and machinery, including fixed plant and machinery, and all
vehicles and office and other equipment used in connection with the
business of the Company are in good repair and condition and in
satisfactory working order having regard to their age and use, have
been regularly and properly maintained and are not surplus to the
Company's requirements.
6.2.2 So far as the Vendors are aware (having obtained such advice from
competent professional IT advisers as is reasonable in the
circumstances), in relation to hardware, software and equipment reliant
on electronic controls used in the Company's business and supplied by
the Company in the course of its business activities, none contain
embedded logic or code which will fail to recognise the year 2000 as
such, or which might fail or cause other hardware, software or
equipment to fail to perform according to specification or to the needs
of the Company's business by reason of the date change after 31
December 1999, or cannot accurately and correctly process data by
reason of a failure accurately to recognise any date or dates of any
kind.
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6.2.3 The Company owns all tooling and intellectual property rights therein
used by or under the control of the Company.
6.3 STOCK
6.3.1 The Company's stock in trade is in good condition and is capable of
being sold by the Company in the ordinary course of its business in
accordance with its current price list without rebate or allowance to a
purchaser.
6.3.2 The Company has not sold any products to customers on the basis that
such products can be returned by any such customers to the Company in
return for complete or partial repayment.
6.4 DEBTS
6.4.1 The amount of all debts recorded in the Accounts or the books of the
Company as being due to the Company (less the amount of any specific
provision or reserve for such debts made in the Accounts or the
Management Accounts) will be received in full in the ordinary course of
business and none of those debts is subject to any counter-claim or
set-off.
6.4.2 No part of the amounts included in the Accounts or (in the case of an
amount arising after the Accounts Date) in the books of the Company as
due from debtors has been released on terms that any debtor pays less
than the full book value of his debt or has been written off or has
proved to any extent irrecoverable or is now regarded as irrecoverable.
6.5 INTELLECTUAL PROPERTY
6.5.1 In respect of the Intellectual Property listed in document 24 of the
Disclosure Bundle attached to the Disclosure Letter ("the Listed IP"):-
6.5.1.1 the Listed IP is owned absolutely by the Company free of all
liens, charges, encumbrances and licences, nor is the Company
obliged to grant any liens, charges, encumbrances or licences
in respect of it;
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6.5.1.2 the list contains true and complete details of all patents,
trade marks, registered designs and applications for the same
owned by the Company;
6.5.1.3 to the best of the Vendors' knowledge, information and belief,
all documents necessary to establish the Company's title to
the Listed IP are in its possession and have been duly
stamped; and
6.5.1.4 to the extent that the rights in the Listed IP are
registrable, the same are registered in the name of the
Company as sole absolute owner and all payments due and all
registration and renewal formalities relating to them are
up-to-date and complete and correct.
6.5.2 To the best of the Vendors' knowledge, information and belief, the
conduct of the Company's business as now and as currently planned to be
conducted does not infringe, has not infringed and will not infringe
the rights of any third party in relation to any Intellectual Property.
6.5.3 No third party has outstanding any claim against the Company based on
such third party's Intellectual Property and there are no grounds to
anticipate that there will be such claim.
6.5.4 The Vendors have provided the Purchaser with true copies of all written
licences and other arrangements relating to Intellectual Property to
which the Company is a party or to which it is subject, and such copies
contain all the terms applicable to each such licence or arrangement.
No party to any such licence or arrangement is or has been in breach of
it. There are no licences relating to Intellectual Property to which
the Company is a party or to which it is subject which are not in
writing.
6.5.5 The Vendors have provided the Purchaser with a listing of all rights in
Intellectual Property subject to payment of renewal fees by the Company
and such listing is accurate.
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6.5.6 The rights in Intellectual Property used or currently planned to be
used by the Company ("the Utilised IP Rights"):-
6.5.6.1 so far as the Vendors are aware, are such that no third party
may lawfully manufacture or sell those elements of the design
and function of the products made by the Company which
distinguish its products from those made or sold by its
competitors or will be able to do so;
6.5.6.2 so far as the Vendors are aware, may be fully exploited
without payment to or permission of third parties;
6.5.6.3 are not and have not been the subject of any civil, criminal,
administrative or arbitration proceedings brought by or
against the Company, nor are any such proceedings pending or,
so far as the Vendors are aware, threatened, nor, so far as
the Vendors are aware, could any such proceedings successfully
be brought against the Company and no fact or circumstance
exists which might give rise to such proceedings against the
Company, nor have any claims or threats been made against the
Company which might lead to any termination or alteration of
the Company's rights therein or to the terms on which the same
are exploited;
6.5.6.4 are not limited in time save by statute or any agreement which
has been disclosed to the Purchaser and which is included in
the annexures to the Disclosure Letter;
6.5.6.5 are not subject to conditions as to use;
6.5.6.6 are not the subject of any rights held by any third party
including employees (whether by licence or otherwise);
6.5.6.7 so far as the Vendors are aware, are not being and have not
been infringed by any third party, and there are no grounds to
anticipate that any of them will be so infringed;
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6.5.6.8 to the extent that they comprise trade marks, are not
potentially subject to revocation for non-use;
6.5.6.9 to the extent that they comprise rights in respect of
patents:-
(i) have been protected insofar as all goods which are
protected by any such patent are (or their packaging
is) marked to show the patent numbers concerned; and
(ii) have not been exploited in such a way that an order
may be made under Section 49 Patents Act 1977;
6.5.6.10 to the extent that they relate to inventions capable of
protection by the grant of a patent, have not been disclosed
in such a way as to prejudice the grant of a patent;
6.5.6.11 so far as the Vendors are aware, to the extent that they or
any licence over them are subject to registration, have been
protected to the extent that any dealing with them has been
submitted for registration within six months of the date of
the dealing; and
6.5.6.12 so far as the Vendors are aware, are not potentially or
currently subject to payment to any employee of the Company or
any third party by reason of their use or by reference to
profits made or income received for goods or services
incorporating them, nor does any employee potentially or
currently have the right to payment by reason of his
contribution to their creation.
6.5.7 The Utilised IP Rights which were developed specifically for use by the
Company:-
6.5.7.1 have been developed exclusively by employees of the Company
within the course of their employment; or
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6.5.7.2 to the extent not so developed, have been transferred
absolutely to the Company or licensed to it exclusively and
irrevocably without limit of time and not subject to
conditions as to use or transferability or as to payment, and
any moral rights capable of being exercised in relation to
them have been waived.
6.5.8 The Company has fully disclosed to the Purchaser:-
6.5.8.1 all obligations as to confidentiality imposed on the Company
in relation to its business or any equipment or information
held or used in relation to it;
6.5.8.2 all terms to which the Company is subject as to the use of
equipment or information; and
6.5.8.3 all terms to which third parties are subject by reason of
rights granted to them by the Company in connection with its
business.
6.5.9 The Company owns all the Intellectual Property rights in all chips used
in connection with the business of the Company.
6.6 PROPERTIES
6.6.1 The Properties comprise the only freehold or leasehold or other
immovable property in any part of the world in which the Company has
any interest or which are otherwise occupied or used by the Company.
6.6.2 The particulars of each of the Properties set out in Schedule 6 are
true and accurate in all respects.
6.6.3 The Company is in physical possession and actual occupation of the
whole of each of the Properties on an exclusive basis.
6.6.4 The Company is solely entitled at law and in equity to the Properties
and has a good and marketable title to them.
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6.6.5 The Company has in its physical possession free from any lien all of
the deeds and documents necessary to prove the title of the Company to
the Properties and the title deeds and documents are all duly stamped
originals.
6.6.6 The Properties are not subject to or affected by any mortgage or charge
(whether legal or equitable, fixed or floating), debenture, lien,
pledge, security interest or other encumbrance including without
limitation any which secure the payment of monies or other obligation
or liability of any third party.
6.6.7 The Properties enjoy all rights and privileges necessary for their
continued use and enjoyment for their current use without any
restrictions or limitations.
6.6.8 The Properties are not subject to any covenants, restrictions,
stipulations, reservations, agreements or other matters of a public or
private nature which are onerous or unusual or which adversely affect
their current use or which affect their value.
6.6.9 The current use of the Properties is their permitted use under planning
legislation.
6.6.10 All necessary planning permissions and consents and approvals from all
statutory and other competent authorities in relation to the Properties
and their development have been obtained and are valid and subsisting.
6.6.11 So far as the Vendors are aware, the Properties are not affected by any
dispute of any kind.
6.6.12 So far as the Vendors are aware, all statutes, orders or regulations
affecting the Properties and their use and development have been
observed and there are no outstanding requirements or recommendations
of any competent authority.
6.6.13 No difficulty has been experienced in obtaining insurance for any of
the Properties and the current requirements of the insurers of each of
the Properties have been complied with.
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6.6.14 In relation to the Properties which are leasehold, the Company has paid
all sums due and has observed and performed the covenants on the part
of the tenant and the conditions contained in the leases and the
obligations contained in any licence or other document supplemental to
any of the leases and has obtained all consents required in connection
with the grant of the leases.
6.6.15 The Company has no liability (whether actual, contingent or
prospective) or obligation in respect of any property whether freehold,
leasehold, licensed or occupied under an informal or undocumented
arrangement in any part of the world (other than the Properties)
including without limitation any liability or obligation to:-
6.6.15.1 perform covenants (restrictive or positive) or agreements
affecting or relating to land;
6.6.15.2 pay rent or rents, service charges, insurance premiums or
other monies or observe or perform covenants, obligations or
conditions contained in any lease, agreement for lease,
licence, deed, agreement or other document ancillary or
supplemental to a lease whether or not expressed to be so;
6.6.15.3 pay principal, interest or other monies or observe or perform
covenants or agreements contained in any mortgage, charge or
other document creating a security interest affecting any
property to which this Warranty applies;
6.6.15.4 make payments under or otherwise observe or perform any
guarantee or surety, whether as primary or secondary obligor,
or indemnity or otherwise assume any liabilities of any third
party by accepting a leasehold or in any other manner;
6.6.15.5 make payments under or otherwise observe or perform any
agreement for sale, option or right of pre-emption;
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6.6.15.6 make payments under or otherwise observe or perform any
building contract, collateral warranty, duty of care agreement
or professional appointment.
6.7 THE ENVIRONMENT
6.7.1 No Pollution of the Environment in violation of any law relating to
protection of the Environment or at levels in excess of that permitted
under any such law has occurred at, under or from the Properties.
6.7.2 The Company has complied and continues to comply with all laws relating
to protection of the Environment and has filed all notifications
required to enable it lawfully and properly to operate its business at
and from the Properties.
6.7.3 In this paragraph 6.7, "Pollution of the Environment" and "Environment"
have the meanings given to them by the Environmental Protection Act
1990.
7 EMPLOYEES AND CONSULTANTS
7.1 DIRECTORS
The particulars of Directors shown in paragraph 6 of Schedule 2 and in
paragraph 6 of Schedule 3 are true and complete and no person not named
as such in that paragraph is or is held out as a director of the
Company.
7.2 PARTICULARS OF EMPLOYEES
7.2.1 The particulars shown in the Schedule of Employees annexed to the
Disclosure Letter show all remuneration payable and other benefits
provided or which the Company is bound to provide (whether now or in
the future) to each officer and employee of the Company and/or any
person connected with any such person and include true and complete
particulars of all profit sharing, incentive and bonus arrangements to
which the Company is a party, whether legally binding on the Company or
not, and no person not named in that Schedule is an employee of the
Company.
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7.2.2 Since the Accounts Date, no change has been made in the rate of
remuneration or the emoluments or pension benefits of any officer,
ex-officer or employee of the Company and no change has been made in
the terms of engagement of any such officer or employee and no
additional officer or employee has been appointed.
7.2.3 No present officer or employee of the Company has given or received
notice terminating his employment, except as expressly contemplated
under this Agreement.
7.3 SERVICE CONTRACTS
7.3.1 There is not now outstanding any service contract between the Company
and any of its directors, officers or employees which is not terminable
by the Company without compensation (other than statutory compensation)
on one month's notice or less given at any time.
7.3.2 The attention of all employees of the Company has been drawn to such of
the terms of their employment as is required by the Employment Rights
Act 1996.
7.4 TRADES UNIONS
The Company is not a party to any agreement or arrangement with or
commitment to any trades union or staff association nor, to the best of
the Vendors' knowledge, information and belief, are any of its
employees members of any trades union or staff association.
7.5 DISPUTES WITH EMPLOYEES
There is no outstanding claim against the Company by any person who is
now or has been an officer or employee of the Company or any dispute
between the Company and a material number or class of its employees and
no payments are due by the Company under the provisions of the
Employment Rights Act 1996.
7.6 REDUNDANCIES AND TRANSFER OF BUSINESS
In the 12 months preceding the date of this Agreement, the Company has
not:-
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7.6.1 given notice of redundancies to the relevant Secretary of State or
started consultations with a trades union under Chapter II of Part IV
of the Trade Union and Labour Relations (Consolidation) Act 1992 or
failed to comply with its obligations under Chapter II of Part IV of
that Act; or
7.6.2 been a party to a relevant transfer (as defined in the Transfer of
Undertakings (Protection of Employment) Regulations 1981) or failed to
comply with a duty to inform and consult a trade union under those
Regulations.
7.7 CONSULTANTS
There is not now outstanding any contract or arrangement to which the
Company is a party for the payment to any person or body of any
consultancy or like fees.
7.8 EX-GRATIA PAYMENTS
Since the Accounts Date, no ex-gratia payments have been made by the
Company to any officer or employee or former officer or employee of the
Company or to their dependants or relatives nor is the Company
considering making any such payments.
7.9 COMPLIANCE
So far as the Vendors are aware, the Company has, in relation to each
of its officers and employees (and, so far as relevant, to each of its
former officers and employees):-
7.9.1 complied with all obligations imposed on it by, and all orders and
awards made under, all statutes, ordinances, regulations, codes of
conduct and practice, collective agreements and customs and practices
relevant to the relations between it and its employees or any trades
union, or to the conditions of service of its Employees (including the
Working Time Regulations 1998);
7.9.2 complied with all recommendations made by the Advisory Conciliation and
Arbitration Service and with all awards and declarations made by the
Central
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Arbitration Committee; and
7.9.3 maintained current, adequate and suitable records regarding the service
of each of such officers and employees.
7.10 PENSIONS
The Company:-
7.10.1 has no obligation (whether legally binding or not) to:-
7.10.1.1 pay any pension; or
7.10.1.2 make any other payment on or after retirement or death or
during periods of sickness or disability (whether of a
temporary or permanent nature); or
7.10.1.3 otherwise to provide "relevant benefits" (within the meaning
of Section 612 ICTA 1988)
to, or in respect of any person who is now or has been an officer or
employee of the Company or spouse or dependant of such officer or
employee; and
7.10.2 is not a party to or obliged to contribute to any scheme or arrangement
(including, but not limited to, a personal pension scheme as defined in
Section 630 ICTA 1988) having as its purpose or one of its purposes the
making of any such payments, or the provision of any such benefits, as
are mentioned in paragraph 7.10.1 above.
7.11 FORMER OFFICERS AND EMPLOYEES
No former officer or employee (and in particular David Bazeley) has any
claim, whether actual or contingent, against the Company in respect of
the period during which he was an officer or an employee of the Company
(as the case may be) or in respect of his termination as an officer or
employee.
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8 LIABILITIES AND COMMITMENTS
8.1 MATERIAL CONTRACTS
The Company is not a party to or subject to any agreement, transaction,
obligation, commitment, understanding, arrangement or liability which:-
8.1.1 is incapable of complete performance in accordance with its terms
within six months after the date on which it was entered into or
undertaken;
8.1.2 is likely to result in a material loss to the Company on completion of
performance;
8.1.3 cannot readily be fulfilled or performed by the Company on time without
unusual expenditure of money and effort;
8.1.4 involves or is likely to involve obligations, restrictions, expenditure
or receipts of an unusual, onerous or exceptional nature;
8.1.5 is a forward contract relating to foreign currency (including, without
limitation, the Euro);
8.1.6 involves or is likely to involve the supply of goods by or to the
Company the aggregate sales value of which will represent more than
five per cent. of the turnover of the Company for its last financial
year;
8.1.7 is a contract for services (other than a contract for the supply of
electricity, gas or water or normal office services);
8.1.8 requires the Company to pay any commission, finders' fee, royalty or
the like;
8.1.9 in any way restricts the Company's freedom to carry on the whole or any
part of its business in any part of the world in such manner as it
thinks fit;
8.1.10 is an agreement or arrangement otherwise than by way of bargain at
arm's length; or
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8.1.11 is in any way otherwise than in the ordinary and proper course of the
Company's business.
8.2 DEFAULTS
Neither the Company nor any other party to any agreement with the
Company is in material default under any such agreement nor (so far as
the Vendors are aware) are there any circumstances likely to give rise
to such a default.
8.3 SURETIES
No person apart from the Company has given any guarantee of or security
for any overdraft, loan or loan facility granted to the Company.
8.4 POWERS OF ATTORNEY
8.4.1 There is in force no power of attorney or other authority (express,
implied or ostensible) given by the Company to any person to enter into
any contract or commitment on its behalf other than to its employees to
enter into routine trading contracts in the usual course of their
duties.
8.4.2 The Company has not appointed any agent or distributor in respect of
any of its products or services in any part of the world.
8.5 INSIDER CONTRACTS
8.5.1 There is not outstanding, and there has not at any time during the six
years ending on the date of this Agreement been outstanding, any
agreement or arrangement to which the Company is a party and in which
any Vendor, any person beneficially interested in the Company's share
capital, any director of the Company or any person connected with any
of them is or has been interested, whether directly or indirectly.
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8.5.2 The Company is not a party to, nor have its profits or financial
position during such period been affected by, any agreement or
arrangement which is not entirely of an arm's length nature.
8.6 DEBTS
There are no debts owing by the Company, other than debts which have
arisen in the ordinary course of business.
8.7 BORROWINGS AND MORTGAGES
8.7.1 The Company has no borrowings, and has not agreed to create any
borrowings, from its bankers or any other source and, in respect of
borrowings disclosed in the Disclosure Letter, the Company has not
exceeded any limitation on its borrowing contained in its Articles of
Association or in any debenture or loan stock deed or other instrument.
8.7.2 No option, right to acquire, mortgage, charge, pledge, lien (other than
a lien arising by operation of law in the ordinary course of business)
or other form of security or encumbrance or equity on, over or
affecting the whole or any part of the undertaking or assets of the
Company is outstanding and there is no agreement or commitment to give
or create any.
8.7.3 No part of the borrowings or loan capital of the Company is dependent
on the guarantee or indemnity of or security provided by any other
person.
8.8 THIRD PARTY INDEBTEDNESS
The Company is not subject to any option or pre-emption right or party
to any guarantee or suretyship or any other obligation (whatever
called) to pay, purchase or provide funds (whether by the advance of
money, the purchase of or subscription for shares or other securities,
the purchase of assets or services, or otherwise) for the payment of,
indemnity against the consequences of default in the payment of, or
otherwise to be responsible for, any indebtedness of any other person.
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8.9 TENDERS ETC
No offer, tender or the like is outstanding which is capable of being
converted into an obligation of the Company by an acceptance or other
act of some other person.
8.10 TRADE WARRANTIES
8.10.1 The Company has not given any guarantee or warranty or made any
representation in respect of articles or trading stock sold or
contracted to be sold by it, save for any guarantee or warranty implied
by law and (save as aforesaid) has not accepted any liability or
obligation to service, repair, maintain, take back or otherwise do or
not do anything in respect of any articles or stock which would apply
after any such articles or stock have been delivered by it.
8.10.2 The Company has not manufactured, sold or supplied any products or
services which are or were or will become in any material respect
faulty or defective or which do not comply with any warranties or
representations expressly or impliedly made by the Company or with any
applicable regulations, standards and requirements.
8.11 LITIGATION
Neither the Company, nor any person for whose acts or defaults the
Company may be vicariously liable, is involved in any civil, criminal
or arbitration proceedings and no such proceedings are pending or
threatened by or against the Company or any such person and, so far as
the Vendors are aware, there are no facts or circumstances which are
likely to lead to any such proceedings.
8.12 EXPENSES
The Company has not paid or agreed to pay any costs of any of the
Vendors in connection with the negotiation, preparation or
implementation of the transaction contemplated by this Agreement, nor
has it agreed to indemnify any party or incurred any liability in
connection therewith on behalf of any of the Vendors.
8.13 H. ORMOND
There are no outstanding liabilities or commitments (whether
contractual or otherwise) owing by the Company to H. Ormond following
termination of a distribution agreement made between the Company and H.
Ormond, and H. Ormond has no claims (whether actual or contingent)
outstanding against the Company.
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8.14 DATRIC ORIENTAL
Leda HK has assumed the benefit of all contracts entered into by Datric
Oriental, including contracts with Argos, John Lewis and Li and Fung.
9 THE COMPANY'S BUSINESS
9.1 BUSINESS SINCE THE ACCOUNTS DATE
Since the Accounts Date:-
9.1.1 the Company has carried on its business in the ordinary and usual
course and without entering into any transaction, assuming any
liability or making any payment not provided for in the Accounts which
is not in the ordinary course of its business and without any
interruption or alteration in the nature, scope or manner of its
business;
9.1.2 the Company has not borrowed or raised any money or taken any financial
facility;
9.1.3 the Company has paid its creditors in accordance with its normal
practice for payments, its normal practice being as disclosed in the
Disclosure Letter;
9.1.4 the Company has not entered into, or agreed to enter into, any capital
commitment nor has it disposed of or realised any capital assets;
9.1.5 no share or loan capital has been allotted or issued or agreed to be
allotted or issued by the Company;
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9.1.6 no distribution of capital or income has been declared, made or paid in
respect of any share capital of the Company and (excluding fluctuations
in overdrawn current accounts with bankers) no loan or loan capital or
preference capital of the Company has been repaid in whole or part or
has become liable to be repaid;
9.1.7 there has been no depletion in the net assets of the Company; and
9.1.8 there has been no material deterioration in the financial position,
turnover or prospects of the Company.
9.2 WORKING CAPITAL
The Company has sufficient working capital for the purpose of
continuing to carry on its business in its present form and at its
present level of turnover and for the purposes of executing, carrying
out and fulfilling in accordance with their terms all existing orders,
projects and contractual obligations which have been placed with, or
undertaken by, the Company.
9.3 GRANTS
During the period of six years ending on the date of this Agreement,
the Company has not applied for or received any grant or allowance from
any authority or agency.
9.4 COMPLIANCE WITH LAWS
The Company is entitled to carry on the business now carried on by it
without conflict with any valid right of any person, firm or company
and the Company has conducted its business in all material respects in
accordance with all applicable laws and regulations of the United
Kingdom or any foreign country and there is no violation of, or default
with respect to, any statute, regulation, order, decree or judgment of
any Court or any governmental agency of the United Kingdom or any
foreign country which may have a material adverse effect upon the
assets or business of the Company.
9.5 LICENCES
All necessary licences, consents, permits and authorisations (public or
private) have been obtained by the Company to enable the Company to
carry on its business effectively in the places and in the manner in
which such business is now carried on and all such licences, consents,
permits and authorisations are valid and subsisting and the Vendors
know of no reason why any of them should be suspended, cancelled or
revoked.
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9.6 INSOLVENCY
9.6.1 No order has been made and no resolution has been passed for the
winding up of the Company or for a provisional liquidator to be
appointed in respect of the Company and no petition has been presented
and no meeting has been convened for the purpose of winding up the
Company.
9.6.2 No administration order has been made and no petition for such an order
has been presented in respect of the Company.
9.6.3 No receiver (which expression shall include an administrative receiver)
has been appointed in respect of the Company or all or any of its
assets nor has any encumbrance over all or any of its assets become
enforceable.
9.6.4 The Company is not and has not admitted itself to be insolvent or
unable to pay its debts (or deemed to be unable to do so within the
meaning of Section 123 Insolvency Act 1986 or, in relation to the
Subsidiaries, applicable law) nor is it nor has it admitted itself to
be unable to pay its debts as they fall due nor has it stopped or
threatened to stop doing so.
9.6.5 No voluntary arrangement under Section 1 Insolvency Act 1986 (or, in
relation to the Subsidiaries, under applicable law) in respect of the
Company or other compromise or arrangement for the benefit of the
Company's creditors generally has been proposed or agreed.
9.6.6 The Company has not been a party to any transaction at an undervalue as
defined in Section 238 Insolvency Act 1986 (nor, in relation to the
Subsidiaries, as
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defined in applicable legislation) nor has it given or received any
preference as defined in Section 239 Insolvency Act 1986 (nor, in
relation to the Subsidiaries, as defined in applicable legislation), in
either case within the period of two years ending on the date of this
Agreement.
9.6.7 No event analogous to the foregoing has occurred in or outside England.
9.6.8 No unsatisfied judgement is outstanding against the Company.
9.6.9 No guarantee, loan capital, borrowed money or interest is overdue for
payment and no other obligation or indebtedness is outstanding which is
substantially overdue for performance or payment.
9.6.10 The Company has not suspended or ceased or threatened to suspend or
cease to carry on all or a material part of its business.
9.6.11 No creditor of the Company has attached or taken possession of and no
distress, execution, sequestration or other process has been levied or
enforced or sued out against any asset of the Company which has not
been discharged.
9.7 FAIR TRADING
9.7.1 So far as the Vendors are aware, no agreement, practice or arrangement
carried on by the Company or to which the Company is a party or with
which the Company is concerned:-
9.7.1.1 is or requires to be registered in accordance with the
provisions of the Restrictive Trade Practices Acts 1976 and
1977 or contravenes the provisions of the Resale Prices Act
1976 or is or has been the subject or any enquiry,
investigation or proceeding in respect thereof;
9.7.1.2 is proscribed by or has been the subject of an enquiry,
investigation, reference or report under the Fair Trading Act
1973 (or any previous legislation relating to monopolies or
mergers) or the Competition Act 1980;
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9.7.1.3 infringes Article 81 of the Treaty of Rome or constitutes an
abuse of dominant position contrary to Article 82 of that
Treaty or infringes any regulation or other enactment made
under Article 83 of that Treaty or is or has been the subject
of any enquiry, investigation or proceeding in respect
thereof;
9.7.1.4 is, by virtue of its terms or by virtue of any practice for
the time being carried on in connection with it, a "consumer
trade practice" within the meaning of Section 13 Fair Trading
Act 1973 and susceptible to or under reference to the Consumer
Protection Advisory Committee or the subject of a report to
the Secretary of State for Trade and Industry or of an Order
by the Secretary of State for Trade and Industry under the
provisions of Part II of that Act; or
9.7.1.5 infringes any other competition, restrictive trade practice,
anti-trust or consumer protection law or legislation
applicable in the United Kingdom or elsewhere and not
specifically mentioned in this paragraph 9.7.
9.7.2 The Company has not given any undertaking or assurance to the
Restrictive Practices Court or the Director General of Fair Trading or
the Secretary of State for Trade and Industry or the Commission or
Court of Justice of the European Community or to any other court,
person or body and is not subject to any Act, decision, regulation,
order or other instrument made by any of them relating to any matter
referred to in this paragraph 9.7.
9.7.3 The Company is not in material default or in material contravention of
any Article, Act, decision, regulation, order or other instrument or of
any undertaking relating to any matter referred to in this paragraph
9.7.
9.8 INSURANCES
9.8.1 The Company is adequately covered against accident, damage, injury,
third party loss (including product liability) and other risks normally
insured against by
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persons carrying on the same type of business as that carried on by the
Company and the Company has not done or omitted to do anything the
doing or omission of which would make any such policy of insurance void
or voidable or would or might result in an increase in the rate of
premiums payable under any such policy.
9.8.2 Where any of the Properties which are leasehold are insured by the
landlord under the relevant lease, the interest of the Company is noted
on the insurance policy.
9.8.3 The Schedule of Insurances annexed to the Disclosure Letter contains
full details of the insurance policies of the Company or in which it
has an interest.
9.8.4 No claim is outstanding under any of the policies referred to in
paragraph 9.8.3 and no fact or circumstance exists which might give
rise to a claim under any of those policies.
9.9 CUSTOMERS AND SUPPLIERS
9.9.1 During the period of three years ending on the date of this Agreement:-
9.9.1.1 the Company has not lost any major or substantial customer for
or supplier of all or any of its products or requirements;
9.9.1.2 no major or substantial customer has significantly reduced its
orders for all or any of the products of the Company;
9.9.1.3 there has been no substantial change (apart from normal price
changes) in the basis or terms on which any person is prepared
to enter into contracts or do business with the Company;
and no such loss, reduction or change is anticipated whether as a
result of Completion or otherwise.
9.9.2 Neither in the financial period ending on the Accounts Date nor in the
period since then has any person (together with other persons connected
with him)
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purchased from, or sold to, the Company more than ten per cent. of the
aggregate amount of all sales or purchases made by the Company during
such period and there is no person (together with other persons
connected with him) on whom the Company is substantially dependent or
the cessation of business with whom would substantially affect the
business of the Company.
9.9.3 The Company has satisfied itself after making all reasonable enquiries
that there will be no interruption to, or other adverse consequence
for, its business by reason of the failure of any person with whom it
deals in business to ensure that hardware, software or equipment
reliant on electronic controls used by that person (i) recognises the
year 2000 as such, (ii) will not fail or cause other hardware, software
or equipment to fail to perform according to specification or to the
needs of that person's business by reason of the date change after 31
December 1999 and (iii) will accurately and correctly process data
irrespective of any change in date or dates of any kind.
9.10 THE COMPANY'S ACTIVITIES, ETC.
None of the activities, contracts or rights of the Company is ultra
vires, unauthorised, invalid or unenforceable or in breach of any
contract or covenant and all documents in the enforcement of which the
Company may be interested are valid and have been duly stamped.
9.11 TRANSACTIONS WITH EUROPEAN CUSTOMERS
All the Company's transactions with customers in Europe are denominated
in US dollars.
10 CONSEQUENCES OF SALE OF THE SHARES
10.1 OTHER AGREEMENTS AND OBLIGATIONS
Neither the Vendors nor the Company is a party to any agreement or
bound by any obligation the terms of which will prevent the Purchaser
from enjoying the full benefit of this Agreement.
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10.2 CHANGE OF CONTROL
There are no agreements concerning the Company which will or may be
terminated or the terms of which will or may in any way be varied as a
result of a change in the control of the Company or in the composition
of the Board of Directors of the Company.
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SCHEDULE 6
PROPERTIES
UNREGISTERED LAND
LEASEHOLD
<TABLE>
<CAPTION>
BRIEF DESCRIPTION ESTATE OWNER DATE OF PARTIES PRESENT USE
CONVEYANCE
<S> <C> <C> <C> <C>
Unit 11, Ermine Point, LMP Ltd 08.05.98 Brian Oakley Ltd (1) Warehouse
Westmill Road, Ware, Herts LMP Ltd (2)
Unit 12, Ermine Point, LMP Ltd 31.01.97 Brian Oakley Ltd (1) Warehouse
Westmill Road, Ware, Herts LMP Ltd (2)
75 Railway Street, LMP Ltd 22.03.99 Michael Herbert Charles Head Office
Hertford, Herts Smith (1)
LMP Ltd (2)
Office No. 2 on 2nd Floor LMP (HK) Ltd 23.03.99 LMP (HK) Ltd (1) Office
Wing on Plaza, No. 62 Mody Flagtop Light Industrial
Road, Kowloon Co Ltd (2)
</TABLE>
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SCHEDULE 7
TAX COVENANT
1 DEFINITIONS
In this Schedule, unless the context requires otherwise, the following
words and expressions have the following meanings and in the event of
conflict the definitions in this Schedule shall prevail over the
definitions in Clause 1 of this Agreement:-
1.1 ACCOUNTS: the audited accounts of the Company and of the Subsidiaries
for the accounting reference period which ended on the Accounts Date
(comprising in each case a balance sheet and profit and loss account
and the notes to them);
1.2 ACCOUNTS RELIEF: any relief which appears as an asset in the Accounts
or has been taken into account in reducing or eliminating any provision
for deferred tax which appears in the Accounts (or which, but for the
presumed availability of such relief, would have appeared in the
Accounts);
1.3 EVENT: any event, act, omission or transaction (whether or not the
Company or the Subsidiaries is a party to such act, omission or
transaction) and for the avoidance of doubt includes (without
limitation) any change in the residence of any person and the death,
winding up or dissolution of any person and any reference to an event
occurring on or before a particular date shall include a reference to
any event which for tax purposes is deemed to have, or is treated or
regarded as having, occurred on or before that date;
1.4 POST-ACCOUNTS DATE RELIEF: any relief which arises as a consequence of,
or by reference to, an event occurring or deemed to occur after the
Accounts Date;
1.5 PURCHASER'S GROUP: the Purchaser, the Company and the Subsidiaries;
1.6 RELIEF: includes any relief, loss, allowance, exemption, set off,
deduction or credit in respect of any taxation or relevant to the
computation of any income, profits or gains for the purposes of any
taxation, and any right to a repayment of taxation;
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1.7 TAXATION OR TAX: all forms of taxation, imposts, duties, levies, social
security contributions and rates whether of the United Kingdom or
elsewhere including (without limitation) corporation tax, advance
corporation tax, income tax (including income tax or amounts on account
of income tax required to be deducted or withheld from or accounted for
in respect of any payment), capital gains tax, development land tax,
inheritance tax, value added tax, national insurance contributions,
capital duty, stamp duty, stamp duty reserve tax, duties of custom and
excise, petroleum revenue tax, local authority rates and charges, all
taxes, duties or charges replaced by or replacing any of them, and all
other taxes on gross or net income, profits or gains, distributions,
receipts, sales, use, occupation, franchise, value added, and personal
property, and all levies, imposts, duties, charges or withholdings of
any nature whatsoever chargeable by any tax authority, and any payment
whatsoever which the Company or the Subsidiaries may be or become bound
to make to any person as a result of the discharge by that person of
any tax which the Company or the Subsidiaries has failed to discharge;
together with all penalties, charges and interest relating to any of
the foregoing or to any late or incorrect return in respect of any of
them, and regardless of whether any such taxes, levies, duties,
imposts, charges, withholdings, penalties and interest are chargeable
directly or primarily against or attributable directly or primarily to
the Company, the Subsidiaries or any other person and of whether any
amount in respect of any of them is recoverable from any other person;
1.8 TAXATION AUTHORITY: any taxing or other authority (whether within or
outside the United Kingdom) competent to impose any taxation liability;
1.9 TAXATION CLAIM: the issue of any notice, demand, assessment, letter or
other document by or on behalf of any taxation authority or the
imposition (or any document referring to the possible imposition) of
any withholding of or on account of taxation, from which it appears
that a taxation liability will be imposed on the Company or the
Subsidiaries;
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1.10 TAXATION LIABILITY: includes:-
1.10.1 any liability of the Company or the Subsidiaries to make or suffer an
actual payment of taxation (or amount in respect of taxation), in which
case the amount of the taxation liability shall be the amount of the
liability;
1.10.2 the loss of any Accounts relief, in which case the amount of the
taxation liability shall be equal to the amount of the taxation which
(on the basis of the rates prevailing on the date of this Agreement)
would have been saved but for such loss or, where the relevant relief
is a right to a repayment of taxation, the amount of the repayment;
1.10.3 the setting off against taxation, income, profits or gains of any
Accounts relief or any post-Accounts Date relief where, but for such
setting off, the Company or the Subsidiaries would have been subject to
a taxation liability in respect of which the Purchaser would have been
entitled to make a claim against the Vendors under this Schedule (or
would have been so entitled in the absence of any financial
restrictions on such obligation) in which case the amount of the
taxation liability shall be the amount of such claim or, where the
relevant relief is a right to a repayment of taxation, the amount of
the repayment;
1.10.4 any liability of the Company or any of the Subsidiaries to make a
payment pursuant to an indemnity, guarantee or covenant entered into
before Completion under which the Company or any Subsidiary has agreed
to meet or pay a sum equivalent to or by reference to another person's
liability to taxation, in which case the taxation liability shall be
equal to the amount of the liability.
1.11 References to income, profits or gains earned, accrued or received
include income, profits or gains deemed to have been or treated or
regarded as earned, accrued or received for tax purposes.
1.12 References to an event occurring on or before Completion include a
series or combination of two or more events, where at least one of
those events occurs before Completion and at least one of those events
occurs after Completion.
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1.13 References to the loss of a relief or a right to any payment or other
consideration include the loss, nullification, cancellation,
non-availability, non-existence or reduction in amount of a relief or
right to any payment or other consideration.
1.14 For the avoidance of doubt, references to any taxation liability of the
Company or the Subsidiaries which results from any gains earned or
received on or before Completion or any event on or before Completion
include a reference to any taxation liability of the Company or the
Subsidiaries resulting from the sale of the Shares pursuant to this
Agreement.
1.15 For the purposes of paragraph 7 (Payment), reliefs arising from events
occurring earlier shall be taken to be used in priority to any reliefs
arising from events occurring later.
1.16 For the avoidance of doubt, references to any taxation liability in
respect of any event occurring on or before Completion do not include
any taxation liability arising pursuant to any adjustments under
section 770 or Schedule 28AA ICTA 1988 in respect of any profits or
losses of the Company or any Subsidiary accruing after Completion
notwithstanding the fact that those profits or losses may accrue under
a transaction which takes place after Completion but pursuant to a
contract entered into before Completion.
2 COVENANT
2.1 The Vendors jointly and severally covenant to pay to the Purchaser so
far as possible by way of an adjustment to the Consideration a sum
equal to:-
2.1.1 any taxation liability of the Company or the Subsidiaries arising
within paragraph 1.10.1:-
2.1.1.1 in respect of, by reference to or in consequence of any income
or profits earned, accrued or received on or before Completion
or any gains earned or received on or before Completion; or
2.1.1.2 in respect of any event occurring on or before Completion; and
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2.1.2 any taxation liability falling within any of paragraphs 1.10.2 to
1.10.3 (inclusive); and
2.1.3 any taxation liability being a liability for capital transfer tax or
inheritance tax (not falling within paragraph 2.1.1) which:-
2.1.3.1 at Completion is a charge on, or gives rise to a power to
sell, mortgage or charge, any of the shares in or assets of
the Company or the Subsidiaries;
2.1.3.2 after Completion becomes a charge on, or gives rise to a power
to sell, mortgage or charge, any of the shares in or assets of
the Company or the Subsidiaries being a liability in respect
of capital transfer tax or inheritance tax payable as a result
of the death of any person within seven years after a transfer
of value if a charge on, or power to sell, mortgage or charge
any such shares or assets would, if the death had occurred
immediately before Completion and capital transfer tax or
inheritance tax payable as a result had not been paid, have
existed at Completion; and
2.1.3.3 arises as a result of a transfer of value occurring or being
deemed to occur on or before Completion (whether or not in
conjunction with the death of any person whenever occurring)
which increased or decreased the value of assets of the
Company or the Subsidiaries or the Vendor or any predecessor
in title to such assets or to the Shares;
2.1.4 any taxation liability of the Company or any of the Subsidiaries (not
falling within paragraph 2.1.1) which is also a taxation liability of a
person other than the Company or any Subsidiary and which is payable by
the Company or any of the Subsidiaries because that other person was at
any time before Completion a member of the same group as such other
person or otherwise connected with or related to such other person for
taxation purposes;
2.1.5 without prejudice to paragraphs 2.1.1, 2.1.2, 2.1.3 and 2.1.4, any
taxation liability which arises as a result of, or in connection with,
any of the following:
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2.1.5.1 payments by the Company or any Subsidiaries of rent to Mr
Myers; or
2.1.5.2 any amounts payable under Section 419 ICTA 1988 (as extended
by Section 422 ICTA 1988 and any related penalties or
interest) in respect of loans made by the Company or any
Subsidiaries prior to Completion Mr Myers or any person
connected with Mr Myers (within the meaning of section 286 of
the Taxation of Chargeable Gains Act 1992); or
2.1.5.3 any liability of the Company to account for income tax or
national insurance contributions in relation to any fees paid
to Mr Sharman, or to any company of which he is a director or
of which he has control (within the meaning of section 416
ICTA 1988), in each case prior to Completion; and
2.1.6 all reasonable costs and expenses incurred by or charged against the
Purchaser or the Company or the Subsidiaries in connection with any
taxation liability referred to in paragraphs 2.1.1 to 2.1.5. Any such
costs and expenses shall include, where appropriate, a reasonable
amount in respect of management time.
2.2 In determining for the purposes of paragraph 2.1.3 whether a charge on
or power to sell, mortgage or charge any of the shares in or assets of
the Company or the Subsidiaries exists at any time, the fact that any
taxation is not yet payable or may be paid in instalments shall be
disregarded and such taxation shall be treated for the purposes of this
Schedule as becoming due or to have become due and a charge on or power
to sell, mortgage or charge as arising or having arisen on the date of
the transfer of value or other date or event on or in respect of which
it becomes payable or arises.
2.3 The provisions of Section 213 of the Inheritance Tax Act 1984 (refund
by instalments) shall not apply to any payments falling to be made
pursuant to paragraph 2.1.3.
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3 LIMITATIONS
3.1 Subject to paragraph 3.2, the covenant in paragraph 2 shall not apply
to any taxation liability to the extent that:-
3.1.1 provision or reserve in respect of such liability is made in the
Accounts;
3.1.2 the taxation liability is in respect of or by reference to income,
profits or gains earned in respect of the period, or any event
occurring, between the Accounts Date and Completion in the ordinary
course of the business of the Company or the Subsidiaries;
3.1.3 the Purchaser has made or makes recovery in respect of such taxation
liability under any other provision of this Agreement;
3.1.4 it arises as a result only of such a provision or reserve as is
mentioned in paragraph 3.1.1 being insufficient by reason of an
increase in the rates of taxation or a change in taxation law or
published practice made or announced after Completion with
retrospective effect;
3.1.5 it would not have arisen but for a change in accounting methods or
policies adopted by the Company or any of the Subsidiaries after
Completion, provided that the previous methods used by the Company or
the Subsidiary were in compliance with generally accepted accounting
principles applicable to the Company or any of its Subsidiaries;
3.1.6 it would not have arisen but for a voluntary act or omission of the
Company or any of the Subsidiaries (which could reasonably have been
avoided) carried out or occurring after the date of this Agreement,
otherwise than in the ordinary course of business or in performing any
obligation under a contractual agreement entered into on or before
Completion or in accordance with any statutory duty, which the Company
or Subsidiary or the Purchaser was, or ought to have been, aware could
give rise to a taxation liability.
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3.2 The provisions of paragraph 3.1.2 to 3.1.6 inclusive shall not apply to
any claim under paragraph 2 in respect of a taxation liability which
falls within paragraph 2.1.5.
4 OVERPROVISIONS
4.1 If the auditors for the time being of the Company or any of the
Subsidiaries (at the request and expense of the Covenantor) certify
that a Relevant Amount (as defined in paragraph 4.2) exists for the
purposes of this paragraph, paragraph 4.3 shall apply except to the
extent to which credit has been given for the Relevant Amount in
relation to any claim under the Warranties.
4.2 For the purposes of this paragraph, if a provision for taxation in the
Accounts (excluding any provision for deferred tax) is an
over-provision (except to the extent that such over-provision results
from the utilisation of an Accounts relief or a post-Accounts Date
relief), the amount of such over-provision shall be a Relevant Amount.
4.3 Where, pursuant to paragraph 4.1, this paragraph 4.3 applies to a
Relevant Amount:-
4.3.1 the Relevant Amount shall first be set-off against any payment then due
from the Covenantor under this Schedule;
4.3.2 to the extent that there is an excess, a refund shall be made to the
Covenantor of any previous payment or payments made by it under this
Schedule and not previously refunded under this sub-paragraph up to the
amount of such excess; and
4.3.3 to the extent that the excess referred to in paragraph 4.3.2 is not
exhausted under that sub-paragraph, the remainder of that excess shall
be carried forward and set-off against any future payments which become
due from the Covenantor under this Schedule.
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5 GROSSING UP
5.1 All sums payable by the Vendors to the Purchaser under this Schedule
shall be paid free and clear of all deductions or withholdings
whatsoever, save only as may be required by law. If any deductions or
withholdings are required by law to be made from any of the sums
payable under this Schedule, then (except in the case of interest
payable under paragraph 7.3) the Vendors shall be obliged to pay to the
Purchaser such sum as will, after the deduction or withholding has been
made, leave the Purchaser with the same amount as it would have been
entitled to receive in the absence of any such requirement to make a
deduction or withholding.
5.2 If the Purchaser incurs a taxation liability which results from, or is
calculated by reference to, any sum paid under this Schedule other than
interest payable under paragraph 7.3, the amount so payable shall be
increased by such amount as will ensure that, after payment of the
taxation liability, the Purchaser is left with a net sum equal to the
sum it would have received had no such taxation liability arisen.
5.3 If the Purchaser would, but for the availability of a relief, incur a
taxation liability falling within paragraph 5.2, it shall be deemed for
the purposes of that paragraph to have incurred and paid that
liability.
6 CONDUCT OF CLAIMS FOR TAXATION
6.1 If the Purchaser, the Company or any of the Subsidiaries becomes aware
of a taxation claim relevant for the purposes of this Schedule, the
Purchaser shall as soon as reasonably practicable give the Vendors
written notice containing reasonable details of that taxation claim and
shall, subject to paragraphs 6.3 and 6.4, take, or cause the Company or
the Subsidiaries to take, such action as the Vendors may reasonably
request to avoid, resist, appeal or compromise the taxation claim.
6.2 Without prejudice to the generality of paragraph 6.1, the Vendors shall
be entitled, subject to the approval of the Purchaser (such approval
not to be unreasonably withheld or delayed) and, subject to paragraph
6.3 and 6.4, to
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instruct such solicitors and other professional advisers on behalf of
the Company or the Subsidiary as the Vendors may nominate to act for
the Company or any Subsidiary in the matter, and if so the Vendors;
6.2.1 shall ensure that no correspondence, pleading or other document is sent
or issued in connection with the taxation claim without having first
consulted the Purchaser in relation thereto, and shall promptly send
the Purchaser copies of all relevant correspondence and other written
communications and notes of relevant telephone conversations; and
6.2.2 shall obtain the Purchaser's prior written approval (not to be
unreasonably withheld) to any admission of liability in respect of, or
any settlement or compromise of, the taxation claim.
6.3 The Purchaser shall not be required to take, and shall not be required
to cause the Company or any Subsidiaries to take, any action pursuant
to paragraph 6.1 and the Vendors (or any advisers appointed by them)
shall not be entitled to take any action on behalf of the Company or
any Subsidiaries or to require the Company or the Subsidiaries to take
any action pursuant to paragraph 6.2 (including, without limitation,
the adoption of any accounting practice, procedure or methodology):-
6.3.1 if the Purchaser, the Company, or any Subsidiary reasonably considers
such action would be:-
6.3.1.1 unlawful or materially prejudicial to its dealings with any
taxation authority; or
6.3.1.2 likely to have a material adverse effect on its future
liability to taxation (including, without limitation, any
action which would cause the Company or the Subsidiaries to
incur a taxation liability after Completion which it would
otherwise have incurred before Completion); or
6.3.1.3 likely adversely to affect its business or financial
reputation, interests, goodwill, or connection;
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6.3.2 unless the Vendors indemnify and secure the Purchaser and the Company
or the Subsidiaries concerned to the Purchaser's reasonable
satisfaction against any costs, damages or expenses which may be
incurred (together with a reasonable amount in respect of management
time);
6.3.3 where such action involves an appeal against a determination by the
General or Special Commissioners or the VAT and Duties Tribunal, unless
the Vendors have obtained the opinion of leading tax counsel that there
is a reasonable prospect that the appeal will succeed;
6.3.4 if the Vendors or any of them (or the Company or Subsidiaries before
Completion) is or has been involved in a case involving fraud or wilful
default in respect of the taxation liability which is the subject
matter of the taxation claim.
6.4 If:
6.4.1 the Vendors do not request the Purchaser to take any appropriate action
within 30 days of notice to the Vendors or if no action is required to
be taken by virtue of any of the provisions of paragraph 6.3; or
6.4.2 the Vendors do not take any action on behalf of the Company or any
Subsidiaries pursuant to paragraph 6.2 within 30 days of notice to the
Vendors
the Company or Subsidiaries shall be at liberty without reference to
the Vendors to admit, compromise, settle, discharge or otherwise deal
with such taxation claim.
6.5 The Vendors' rights under this paragraph 6 (other than the right to
receive the notice referred to in paragraph 6.1) shall cease if either
Mr Sharman or Mr Myers is declared bankrupt, is unable to pay his debts
as they fall due, commences negotiations with any of his creditors with
a view to the general readjustment or rescheduling of his indebtedness
or makes a general assignment for the benefit of or a composition with
his creditors.
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7 PAYMENT
7.1 Where a claim under this Schedule relates to a liability of the Company
or the Subsidiaries to make or suffer an actual payment of taxation (or
amount in respect of taxation) the Vendors shall pay the Purchaser any
amount which is required to be paid by them (including any amount
payable pursuant to paragraph 2.1.3.3) within five business days
following the date on which the Purchaser notifies the Vendors of their
liability to make such payment or, if later, five business days before
the last date on which the taxation in question would have to be paid
to the appropriate taxation authority in order to avoid incurring a
liability to interest or a charge or penalty in respect of that
taxation liability.
7.2 In any case not falling within paragraph 7.1, the Vendors shall pay the
amount which they are required to pay under this Schedule (including
any amount payable pursuant to paragraph 2.1.3.5) within five business
days of the date on which they receive notice from the Purchaser of the
amount due to be paid or, if later:
7.2.1 in any case which falls within paragraph 1.10.2 (loss of Accounts
relief), not later than the fifth business day before the day on which
the Company or the Subsidiaries concerned is due to pay any taxation
which, but for such loss, it would not have been liable to pay;
7.2.2 in a case which falls within paragraph 1.10.3 (set-off of Accounts
relief or post-Accounts Date relief), not later than the day on which
the Company or the Subsidiaries would, but for such setting off, have
been liable to pay the actual taxation liability;
7.2.3 in a case which falls within paragraph 1.10.4 (liability for indemnity,
guarantee or covenant payments), not later than the fifth business day
before the day on which the Company or Subsidiaries is due to make the
payment or repayment.
7.3 Sums not paid by the Vendors by the dates specified in paragraphs 7.1
and 7.2 shall bear interest (which shall accrue from day to day after,
as well as before, judgment) at 2 per cent. above the base rate of
Lloyds Bank plc or, in the absence of such base rate, at such similar
rate as the Purchaser may select, from the date
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following the specified date up to and including (in either case) the
date of actual payment of such sums (or the next business day if such
date of actual payment is not a business day).
8 RECOVERY
8.1 Where the Vendors have paid any amount in full discharge of a liability
under paragraph 2 in respect of any taxation liability and the Company
or any of the Subsidiaries is legally entitled to recover or by virtue
of a legal entitlement recovers from any person (other than the
Purchaser or any other member of the Purchaser's Group or any person
connected with any of them) any sum in respect of such taxation
liability, the Purchaser shall notify the Vendors of such entitlement
or recovery and, where recovery has not been effected at the date of
notification, shall (if requested by and at the expense of the Vendors
and upon the Vendors indemnifying and securing the Company, the
Subsidiaries or the Purchaser to the Purchaser's reasonable
satisfaction against all costs or expenses which may thereby be
incurred) take, or cause the Company or Subsidiaries to take, such
action as the Vendors shall reasonably request to enforce such recovery
against the person in question (keeping the Vendors fully informed of
the progress of any action taken) provided that the Purchaser shall not
be required to take any action pursuant to this paragraph which, in the
Purchaser's reasonable opinion, is likely to harm its or the Company's
or the Subsidiaries' commercial relationship (potential or actual) with
that or any other person.
8.2 The Purchaser, the Company or the Subsidiaries shall (to the extent
that the recovery is not thereby prejudiced) account to the Vendors for
any sum so recovered (including any interest paid by such person) up to
an amount not exceeding the amount paid by the Vendors under paragraph
2 in respect of the taxation liability in question (but less any tax
payable by the Company or Subsidiaries in respect of the sum recovered
or in respect of such interest or which would be payable but for the
use or set off of any relief and less the amount of all reasonable
costs and expenses in obtaining such payment including a reasonable
amount in respect of management time).
8.3 Where a payment is made, or is to be made, by the Vendors to the
Purchaser under paragraph 2 above in respect of only part of a taxation
liability and that
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taxation liability gives rise to a recovery under paragraph 8.1, the
amount recovered shall be attributed for the purposes of paragraph 8.1
to the part of the taxation liability giving rise to the Purchaser's
claim and to the part not so giving rise on a pro rata basis and,
accordingly, paragraph 8.2 shall only apply to such part of the amount
recovered as is attributed to the part of the taxation liability giving
rise to the Purchaser's claim.
9 PURCHASER'S COVENANT
9.1 The Purchaser hereby indemnifies an amount equal to any liability to
taxation (and all reasonable costs and expenses) of the Vendors
pursuant to section 767A-767C ICTA 1988 which is primarily a liability
of the Company or any Subsidiary and which the Vendors are required to
discharge by reason of the failure of the Company or any Subsidiary to
discharge that liability.
9.2 The covenants contained in paragraph 9.1 shall not apply to taxation to
the extent that the Purchaser could claim payment in respect of it
under this Schedule.
10 TAX RETURNS FOR PERIODS BEFORE AND INCLUDING COMPLETION
10.1 The Purchaser shall procure that any taxation returns that have to be
submitted by the Company or the Subsidiaries for periods commencing
before Completion shall be prepared by the relevant company in draft
and submitted by it to the Vendors, and that the Company shall consider
any comments or suggestions which the Vendors may make. The Purchaser
shall procure that the Company shall send the Vendors a copy of the
return finally submitted.
10.2 The Vendors shall afford or procure that there is afforded to the
Company or the Subsidiaries or their duly authorised agents such
information and assistance as the Purchaser or the Company or
Subsidiaries or their duly authorised agents may reasonably request for
the purpose of preparing, submitting and agreeing the taxation returns
of the Company and the Subsidiaries for all accounting periods ending
before Completion and for the accounting period beginning before and
ending after Completion.
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11 PROVISION OF INFORMATION TO VENDORS
The Purchaser shall afford or procure that there is afforded to the
Vendors or their duly authorised agents such information and assistance
as the Vendors may reasonably request to enable them to exercise their
rights and fulfil their duties under this Schedule.
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SCHEDULE 8
LIMITATIONS ON LIABILITY
1 The provisions of this Schedule shall operate to limit the liability of
the Vendors under and in respect of the provisions of Clause 5 (the
Warranties) and Tax Covenant and references in this Schedule to
"hereof", "hereunder" and to "liability hereunder" shall be construed
to refer to such liabilities as appropriate. Clause 5 (the Warranties)
and Tax Covenant respectively shall accordingly have effect subject to
and as qualified by the terms of this Schedule.
2 The Vendor shall have no liability whatsoever in respect of any claim
for breach of the Warranties unless and until the loss thereby
sustained (together with the aggregate amount of losses sustained
arising under previous claims if any) shall exceed a total sum of
US$139,920, in which event this limitation shall cease to apply and the
whole of such amounts shall be recoverable and not merely the excess
over US$139,920.
3 The aggregate liability of the Vendors in respect of all claims for
breach of the Warranties or under the Tax Covenant made on the Vendors
hereunder shall not exceed $13,992,000. The liability of each Vendor in
respect of claims for breach of the Warranties or under the Tax
Covenant made on the Vendors hereunder shall not exceed the aggregate
of the amounts set out opposite his name in columns 4,5 and 6 of
Schedule 1.
4 No claim shall be brought by the Purchaser against the Vendors in
respect of any breach of the Warranties or under the Tax Covenant
unless notice in writing of any such claim (specifying in reasonable
detail the nature of the claim (to the extent available) and, so far as
practicable, the amount claimed) has been given to the Vendors on or
before:-
4.1 in relation to matters in respect of the Warranties (other than
Warranties relating to taxation), on or prior to 31 December 2000; and
4.2 in relation to matters under the Warranties relating to taxation and
under the Tax Covenant, on or prior to the seventh anniversary of the
date of this Agreement.
<PAGE>
5 No liability shall attach to the Vendors in respect of any claim under
the Warranties or the Tax Covenant to the extent that:-
5.1 it would not have arisen but for an act, omission or transaction of the
Purchaser, or persons deriving title under the Purchaser, or the
Company or any Subsidiary effected after Completion otherwise than in
the ordinary and proper course of the business of the Company or any
Subsidiary as at present carried on or which would not have arisen but
for any claim, election, surrender or disclaimer made or omitted to be
made or notice or consent given or omitted to be done by the Company or
any Subsidiary or the Purchaser under the provisions of any taxation
after Completion, but only to the extent that the Purchaser was aware,
or ought reasonably to have been aware, that any such act, omission or
transaction would have led to such liability arising;
5.2 specific provision or reserve in respect thereof shall have been made
in the Accounts or Management Accounts but only (for the avoidance of
any doubt) to the extent of any provision or reserve;
5.3 the breach or claim occurs wholly out of or as a result of or in
connection with any legislation not in force at Completion or as a
result of any change in legislation hereafter or any decision of the
courts altering the accepted interpretation of any law as at
Completion;
5.4 the Purchaser or the Company or any Subsidiary is entitled to claim an
indemnity under any insurance policy against any loss or damage
suffered as a result of any breach or claim or, as the case may be, in
respect of the subject matter thereof but only to the extent that the
Purchaser or the Company or any Subsidiary (as the case may be) makes
recovery under any such insurance policy; or
5.5 the breach or claim is based upon a liability which is contingent only,
unless and until such contingent liability becomes an actual liability
and is due and payable provided that this sub-clause 5.5 shall not
operate to avoid a claim made in reasonably sufficient detail in
respect of the contingent liability within the applicable time limits
specified in Clause 4 of this Schedule.
6 Any claim shall if it has not been previously satisfied, settled or
withdrawn be
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deemed to have been withdrawn and shall become fully barred and
unenforceable on the expiry of the period of six months commencing on
the date that the claim is made unless proceedings in respect thereof
shall have been commenced against the Vendors and for this purpose
proceedings shall not be deemed to have been commenced unless they
shall have been issued and served upon the Vendors.
7 The Purchaser shall not be entitled to recover damages in respect of
any claim or otherwise to obtain reimbursement or restitution more than
once in respect of any one set of circumstances giving rise to a claim
for misrepresentation or breach of the Warranties or in respect of any
claim under the Tax Covenant.
8 If the Vendors shall have paid to the Purchaser or the Company an
amount in respect of a claim for breach of the Warranties or under the
Tax Covenant and after such payment the Purchaser and/or the Company or
any Subsidiary shall recover from a third party a sum which is
referable to that payment then the Purchaser shall forthwith repay or
procure repayment by the Company or any Subsidiary to the Vendors of
such sum having deducted any costs properly incurred relating to such
recovery from such third party together with any liability to taxation
which arises in connection therewith.
9 The Purchaser shall and shall procure that the Company and each
Subsidiary shall:-
9.1 as soon as practicable after circumstances have come to its or their
notice which will or is likely to give rise to a claim give to the
Vendors by written notice details of such circumstances and claim and
thereafter keep the Vendors informed of all material developments
relating to such circumstances and claim;
9.2 not make any admission of liability, agreement or compromise with any
person, body or authority in relation thereto without prior
consultation with and agreement of the Vendors (not to be unreasonably
withheld or delayed) unless not doing so would prejudice the goodwill
of the business of the Purchaser, the Company or the Subsidiaries to a
material extent in which case the Purchaser shall be entitled to take
any action which it considers in its sole discretion to be necessary;
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9.3 if so requested by the Vendors, take all reasonable steps to avoid,
resist, appeal, compromise or defend any such claim and any
adjudication in respect thereof and for this purpose take all
appropriate proceedings in the name of the Company or any Subsidiary,
as the case may be (but subject to the Company being indemnified and
secured by the Vendors against all losses, charges, costs, damages and
expenses that may be incurred in connection therewith) unless doing so
would prejudice the goodwill of the business of the Purchaser, the
Company or the Subsidiaries to a material extent in which case the
Purchaser shall be entitled to take any action which it considers in
its sole discretion to be necessary; and
9.4 allow the Vendors and their agents reasonable access during business
hours to inspect and take copies of all necessary books and records of
the Company and the Group Companies subject always to their keeping the
same confidential other than necessary disclosures in connection with
any such action or claim PROVIDED THAT such books an records are not
subject to legal professional privilege as between the Purchaser and
any of its professional advisers.
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SIGNED as a deed by RICHARD ) /s/ Richard Myers
MYERS in the presence of:- )
Witness: Signature: /s/ Laurence Markham
Name: Laurence Markham
Address:
Occupation: Solicitor
SIGNED as a deed by NEIL ) /s/ Neil Doughty
DOUGHTY in the presence of:- )
Witness: Signature: /s/ Laurence Markham
Name: Laurence Markham
Address:
Occupation: Solicitor
SIGNED as a deed by TREVOR ) /s/ Trevor Sharman
SHARMAN in the presence of:- )
Witness: Signature: /s/ Laurence Markham
Name: Laurence Markham
Address:
Occupation: Solicitor
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EXECUTED as a deed of ) /s/ Patrick S. Feely
RADICA GOLD LIMITED )
by its attorney P.S. Feely )
Exhibit 11.1
COMPUTATION OF PER SHARE EARNINGS
(US dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended Two months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1999 1998 1998 1997
------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 17,055 $ 5,819 $ 51,256 $ 29,586
========== ========== ========== ==========
Weighted average number of
shares outstanding 18,144,179 18,883,455 20,239,790 20,761,020
---------- ---------- ---------- ----------
Net earnings per share $ 0.94 $ 0.31 $ 2.53 $ 1.43
========== ========== ========== ==========
Diluted earnings per share:
Net income $ 17,055 $ 5,819 $ 51,256 $ 29,586
========== ========== ========== ==========
Weighted average number of
shares outstanding 18,144,179 18,883,455 20,239,790 20,761,020
---------- ---------- ---------- ----------
Assuming conversion of
stock options under
the employment agreement
and Stock Option Plan 835,170 1,211,034 1,248,574 874,906
---------- ---------- ---------- ----------
Weighted average number of
shares and dilutive
potential common stock
outstanding after considering
effects of stock option 18,979,349 20,094,489 21,488,364 21,635,926
---------- ---------- ---------- ----------
Net earnings per share and
dilutive potential
common stock $ 0.90 $ 0.29 $ 2.39 $ 1.37
========== ========== ========== ==========
</TABLE>
Exhibit 21.1
SUBSIDIARIES OF RADICA GAMES LIMITED
<TABLE>
<CAPTION>
State or Country
Name of Subsidiary in Which Organized
-----------------------------------------------------------------------------
UNITED STATES
<S> <C>
Radica Enterprises Ltd Nevada
(Operates as Radica USA Ltd)
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
Radica Innovations (UK) Ltd UK
Radica Europe Ltd UK
- Leda Media Products Ltd UK
- LMP (HK) Ltd Hong Kong
</TABLE>
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 and 333-79005 on Form F-3 of Radica Games Limited of our report dated
February 10, 2000, appearing in this Annual Report on Form 20-F of Radica Games
Limited for the year ended December 31, 1999.
/S/ Deloitte Touche Tohmatsu
HONG KONG
April 10, 2000
