FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of July, 2006
Commission File Number: 0-23696
RADICA GAMES LIMITED
(Translation of registrant's name into English)
Suite V, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or 40-F
Form 20-F X Form 40-F
------ ------
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): ______
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): ______
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
------ ------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- _______________.
Contents:
1. Quarterly Report for the Quarter Ended March 31, 2006.
This Report on Form 6-K shall be deemed to be incorporated by reference
into the Registrant's Registration Statements on Form S-8 (No. 33-86960, No.
333-7000, No. 333-59737, 333-61260 and 333-122248) and on Form F-3 (No. 333-7526
and No. 333-79005).
QUARTERLY REPORT *
For the quarterly period ended March 31, 2006
Commission File Number 0-23696
RADICA GAMES LIMITED
(Exact name of registrant as specified in charter)
Bermuda N/A
(Country of Incorporation) (I.R.S. Employer Identification No.)
Suite V, 6/F., 2-12 Au Pui Wan Street, Fo Tan, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2693 2238
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 2006
------------------------------- -----------------------------
Common Stock, par value $0.01 per share 19,282,341
------------------------
* As a foreign private issuer, the registrant is not required to file reports on
Form 10-Q. It intends to make voluntary quarterly reports to its stockholders
which generally follow the Form 10-Q format. Such reports, of which this is one,
are furnished to the Commission pursuant to Form 6-K.
2
RADICA GAMES LIMITED
INDEX TO QUARTERLY REPORT ON FORM 6-K
THREE MONTHS ENDED MARCH 31, 2006
ITEMS IN FORM 6-K
Page
----
PART I - FINANCIAL INFORMATION..............................................................4
Item 1. Financial Statements.............................................................4
Condensed Consolidated Balance Sheets
March 31, 2006 (unaudited) and December 31, 2005.................................4
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2006 (unaudited) and 2005 (unaudited).......5
Condensed Consolidated Statements of Shareholders' Equity
for the Three Months Ended March 31, 2006 (unaudited)............................6
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2006 (unaudited) and 2005 (unaudited).......7
Notes to the Condensed Consolidated Financial Statements.........................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................16
Item 4. Controls and Procedures.........................................................16
PART II - OTHER INFORMATION................................................................17
Item 1. Legal Proceedings...............................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....................17
Item 3. Defaults Upon Senior Securities.................................................17
Item 4. Submission of Matters to a Vote of Security Holders.............................17
Item 5. Other Information...............................................................17
Item 6. Exhibits........................................................................17
3
PART I - FINANCIAL INFORMATION
Item. 1. Financial Information
-------------------------------
RADICA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
(US dollars in thousands, except per share data) March 31, December 31,
-------------- ------------
2006 2005
-------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 43,954 $ 37,358
Investment securities 16,046 15,928
Accounts receivable, net of allowances for doubtful accounts of $107
($165 as at December 31, 2005) 7,523 18,703
Inventories 22,307 21,420
Prepaid expenses and other current assets 5,241 4,196
Income taxes receivable 276 479
Deferred income taxes 3,295 3,237
-------------- ------------
Total current assets 98,642 101,321
Property, plant and equipment, net 14,496 14,542
Other assets 828 833
Deferred income taxes, noncurrent 581 572
-------------- ------------
Total assets $ 114,547 $ 117,268
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,365 $ 6,580
Accrued warranty expenses 866 2,056
Accrued payroll and employee benefits 3,070 3,833
Other accrued liabilities 5,177 5,987
Income taxes payable 638 417
-------------- ------------
Total current liabilities 18,116 18,873
-------------- ------------
Total liabilities 18,116 18,873
-------------- ------------
Shareholders' equity:
Common stock
par value $0.01 each, 100,000,000 shares authorized, 19,282,341 shares
outstanding (19,080,004 as of December 31, 2005) 193 191
Additional paid-in capital 6,818 6,122
Retained earnings 90,095 93,025
Deferred compensation - (203)
Accumulated other comprehensive loss (675) (740)
-------------- ------------
Total shareholders' equity 96,431 98,395
-------------- ------------
Total liabilities and shareholders' equity $ 114,547 $ 117,268
============== ============
See accompanying notes to the consolidated financial statements.
4
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2006 and 2005
(US dollars in thousands, Three months ended March 31,
except per share data) -------------------------------------
2006 2005
--------------- --------------
(unaudited) (unaudited)
Revenues:
Net sales $ 18,467 $ 22,474
Cost of goods sold
(exclusive of items shown separately below) (11,526) (13,758)
--------------- -------------
Gross profit 6,941 8,716
--------------- -------------
Operating expenses:
Selling, general and administrative expenses (6,650) (6,659)
Research and development (1,405) (1,197)
Depreciation and amortization (558) (404)
--------------- -------------
Total operating expenses (8,613) (8,260)
--------------- -------------
Operating (loss) income (1,672) 456
Net interest and other income 513 219
Foreign currency gain (loss), net 92 (25)
--------------- -------------
(Loss) income before income taxes (1,067) 650
Credit (provision) for income taxes 55 (155)
--------------- -------------
Net (loss) income $ (1,012) $ 495
=============== =============
Net (loss) earnings per share:
Basic $ (0.05) $ 0.03
=============== =============
Diluted $ (0.05) $ 0.03
=============== =============
Weighted average number of common and common equivalent
shares:
Basic 19,174,785 18,860,682
=============== =============
Diluted 19,174,785 19,571,477
=============== =============
Cash dividends declared per share
(2006: 5.0 cents for each of Q1 2006 and Q2 2006, $ 0.10 $ 0.045
2005: 4.5 cents for Q1 2005) =============== =============
See accompanying notes to the consolidated financial statements.
5
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Three months ended March 31, 2006
(US dollars in thousands) Common stock Accumulated
------------ Additional other Total
Number paid-in Deferred Retained comprehensive shareholders'
of shares Amount capital compensation earnings loss equity
------------ ---------- ----------- ------------ -------- ------------- -------------
Balance at December 31, 2005 19,080,004 $ 191 $ 6,122 $ (203) $ 93,025 $ (740) $ 98,395
Elimination of remaining deferred
compensation balance recorded as a
contra-equity account in additional
paid-in capital as a result of
adoption of SFAS No. 123R - - (203) 203 - - -
Net loss - - - - (1,012) - (1,012)
Unrealized loss on investment
securities available-for-sale,
net of nil tax - - - - - 51 51
Foreign currency translation, - - - - - 14 14
net of nil tax - - - - - 14 14
-----------
Comprehensive income (947)
Issuance of stock 289 - 3 - - - 3
Issuance of restricted stock 34,974 - - - - - -
Amortisation of restricted stock - - 79 - - - 79
Stock options exercised 167,074 2 817 - - - 819
Dividends paid - - - - (1,918) - (1,918)
------------ ---------- ----------- ------------ -------- ------------- -------------
Balance at March 31, 2006 19,282,341 $ 193 $ 6,818 $ - $ 90,095 $ (675) $ 96,431
============ ========== =========== ============ ======== ============= =============
See accompanying notes to the consolidated financial statements.
6
RADICA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2004
(US dollars in thousands) Three months ended March 31,
----------------------------------
2006 2005
---------------- --------------
(unaudited) (unaudited)
Cash flow from operating activities:
Net (loss) income $ (1,012) $ 495
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (67) 135
Depreciation and amortization 558 404
Gain on disposal and write off of property, plant and equipment - (38)
Stock-based compensation expense 82 9
Unrealized gain on trading securities (67) (15)
Changes in current assets and liabilities:
Decrease in accounts receivable 11,122 4,683
Increase in inventories (888) (2,834)
Increase in prepaid expenses and other current assets (1,039) (607)
Increase (decrease) in accounts payable 1,782 (1,702)
Decrease in accrued payroll and employee benefits (767) (181)
Decrease in accrued warranty expenses (1,191) (520)
Decrease in other accrued liabilities (1,771) (398)
Decrease (increase) in net income taxes receivable 424 (189)
---------------- --------------
Net cash provided by (used in) operating activities 7,166 (758)
---------------- --------------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment - 38
Purchase of property, plant and equipment (506) (938)
---------------- --------------
Net cash used in investing activities (506) (900)
---------------- --------------
Cash flow from financing activities:
Proceeds from stock options exercised 819 821
Dividends paid (954) (847)
---------------- --------------
Net cash used in financing activities (135) (26)
---------------- --------------
Effect of currency exchange rate change on cash and cash equivalents 71 (270)
---------------- --------------
Net increase (decrease) in cash and cash equivalents 6,596 (1,954)
Cash and cash equivalents:
Beginning of period 37,358 27,614
---------------- --------------
End of period $ 43,954 $ 25,660
================ ==============
See accompanying notes to the consolidated financial statements.
7
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS ENDED MARCH 31, 2006)
(US dollars in thousands, except per share data)
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements of Radica Games Limited
(the "Company" or "Radica") have been prepared in accordance with generally
accepted accounting principles in the United States for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles in the United States have been
condensed or omitted pursuant to such rules and regulations. The
accompanying unaudited condensed consolidated financial statements contain
all normal and recurring adjustments which, in the opinion of management,
are necessary to present fairly the financial position of the Company as of
March 31, 2006, and its results of operations and cash flows for the
periods presented herein. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report
on Form 20-F for the year ended December 31, 2005.
Because the Company's business is seasonal, revenues, expenses, assets and
liabilities can vary during each quarter of the year. Accordingly, the
operating results and trends in these unaudited condensed consolidated
interim financial statements are not necessarily indicative of future
results that may be expected for any other interim period or the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect reported amounts of certain
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities as of and during the reporting periods. Significant
items subject to such estimates and assumptions include the carrying amount
of property, plant and equipment, valuation allowances for receivables and
deferred income tax assets and provisions for product returns and
warranties, as well as the provision for legal contingencies. Actual
results could differ from the estimated results. Changes from those
estimates are recorded in the period they become known.
ACCOUNTING FOR STOCK BASED COMPENSATION
Prior to January 1, 2006, the Company applied the intrinsic-value-based
method of accounting prescribed by the Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations including Financial Accounting Standards Board (FASB)
interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25 to account for its
fixed-plan stock options. Under this method, compensation expense was
recorded on the date of grant only if the then market price of the
underlying stock exceeded the exercise price. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company continued to apply the
intrinsic-value based method of accounting as described above, and adopted
only the disclosure requirements of SFAS No. 123.
Effective January 01, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payments. The Company has elected the modified prospective
transition method as permitted by SFAS No. 123R, and accordingly, prior
periods have not been restated to reflect the impact of SFAS No. 123R.
Under this transition method, compensation cost recognized for the
three-month period ended March 31, 2006 includes: (i) compensation cost for
all stock-based payments granted prior to, but not vested as of, January 1,
2006 (based on the grant-date fair value estimated in accordance with the
original SFAS No. 123 and previously presented in the pro forma footnote
disclosures), and (ii) compensation cost for all stock-based payments
granted subsequent to January 1, 2006 (based on the grant-date fair value
estimated in accordance with the new provisions of SFAS No. 123R).
The estimated value of the Company's stock-based awards (including stock
options and restricted stocks), less expected forfeitures, is amortized
over the awards' respective vesting period on a straight-line basis.
8
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS ENDED MARCH 31, 2006)
(US dollars in thousands, except per share data)
1. BASIS OF PRESENTATION (CONTINUED)
EFFECT OF ADOPTING SFAS NO. 123R
Under SFAS No. 123R, the Company recognized $79, net of taxes, of
compensation expense related to stock options and restricted stock for the
three-month period ended March 31, 2006. Such stock-based compensation
expense is included in selling, general and administrative expenses. The
implementation of SFAS No. 123R did not have any impact on the Company's
basic and diluted earnings per share or cash flows from financing
activities for the first quarter of 2006.
PRIOR PERIOD PRO FORMA PRESENTATIONS
The Company has applied the modified prospective transition approach for
adoption of SFAS No. 123R. Under the modified prospective approach, results
for prior periods have not been restated to reflect the effects of
implementing SFAS No. 123R. The following pro forma information, is
presented for comparative purposes and illustrates the pro forma effect on
net earnings and earnings per share for each period presented as if the
Company had accounted for its stock options under the fair value method:
Three months ended
March 31, 2005
------------------
Net income as reported $ 495
Add stock-based employee compensation expense
determined under intrinsic-value-based method 9
Deduct total stock-based employee compensation
expense determined under fair-value-based method
for all rewards, net of tax (140)
---------
Pro forma net income $ 364
=========
Reported earnings per share
Basic $ 0.03
Diluted $ 0.03
Pro forma earnings per share
Basic $ 0.02
Diluted $ 0.02
RECLASSIFICATIONS
Certain reclassifications have been made to prior period cash flows used in
operating activities to conform to the current period presentation. The
effect of currency exchange rate change on non-cash and cash equivalents
items for the three-month period ended March 31, 2005 was reclassified to
relevant line items in the cash flow statements. The reclassification
resulted in an increase of $144 in the amount of net cash used in operating
activities for the three-month period ended March 31, 2005 to $758. A
similar reclassification was also made to cash flow from investing
activities which resulted in an increase of $4 in the amount of net cash
used in investing activities for the three-month period ended March 31,
2005.
9
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS ENDED MARCH 31, 2006)
(US dollars in thousands, except per share data)
2. EARNINGS PER SHARE
Basic earnings (loss) per share is based on the weighted average number of
shares of common stock, and with respect to diluted earnings per share,
also includes the effect of all dilutive potential common stock
outstanding. Dilutive potential common stock results from dilutive stock
options and warrants. The effect of such dilutive potential common stock on
earnings per share is computed using the treasury stock method. Dilutive
potential common stock has no effect on net loss per share as the effect
would be anti-dilutive.
The following table sets forth the computations of earnings (loss) per
share:
Three months ended March 31,
----------------------------
2006 2005
------------ ------------
Numerator for basic and diluted (loss) earnings per share:
Net (loss) income $ (1,012) $ 495
============ ============
Denominator:
Basic weighted average shares 19,174,785 18,860,682
Effect of dilutive options - 710,795
------------ ------------
Diluted weighted average shares 19,174,785 19,571,477
============ ============
Basic (loss) earnings per share: $ (0.05) $ 0.03
============ ============
Diluted (loss) earnings per share: $ (0.05) $ 0.03
============ ============
10
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS ENDED MARCH 31, 2006)
(US dollars in thousands, except per share data)
3. INVENTORIES
Inventories by major categories, net of provisions are summarized as
follows:
March 31, December 31,
2005 2005
-------------- --------------
Raw materials $ 2,696 $ 2,085
Work in progress 9,080 6,982
Finished goods 10,531 12,353
--------------- --------------
$ 22,307 $ 21,420
=============== ==============
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, December 31,
2006 2005
-------------- --------------
Land and buildings $ 10,256 $ 10,251
Plant and machinery 10,898 10,767
Furniture and equipment 8,325 8,064
Leasehold improvements 3,320 3,307
------------- -------------
Total $ 32,799 $ 32,389
Less accumulated depreciation and amortization (18,303) (17,847)
------------- -------------
$ 14,496 $ 14,542
============= =============
In November 2002, the AICPA International Practices Task Force (the "Task
Force") discussed an issue relating to accounting for land use rights in
China. The Task Force view is that China land use rights are considered
operating leases, as they are long-term leases of lands, which do not
transfer title. As of March 31, 2006 and December 31, 2005, other assets of
$828 and $833 respectively, comprise prepaid land use rights. The prepaid
land use rights have a term of 50 years.
11
RADICA GAMES LIMITED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS ENDED MARCH 31, 2006)
(US dollars in thousands, except per share data)
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31, December 31,
2006 2005
---------------- ----------------
Accrued advertising expenses $ 1,013 $ 1,761
Accrued license and royalty fees 1,173 1,796
Commissions payable 48 68
Dividends payable 964 -
Other accrued liabilities 1,979 2,362
---------------- ----------------
$ 5,177 $ 5,987
================ ================
6. PLEDGE OF ASSETS
At March 31, 2006, the Company has general banking facilities including
overdraft and trade facilities totaling $5,050 available for immediate
borrowing. The facilities are collateralized by leasehold land and
buildings with an aggregate net book value of $1,769.
7. LITIGATION
On April 4, 2000 a lawsuit was filed by the Lemelson Foundation
("Lemelson") against the Company in Arizona Court for patent infringement.
Lemelson claims to be owner of nearly 800 issued and pending patents,
including the patent on Machine Vision and Automatic Identification
(AutoID) operations. The Auto ID operation is used in machines that are
part of the Company's bonding and heat-sealing manufacturing processes.
Lemelson was contesting that the use of machines that incorporate this
patented technology infringes on their intellectual property ("IP") rights
and therefore the Company is obligated to pay a royalty based on the use of
this technology. The suit by Lemelson was stayed pending the outcome of
Lemelson vs. Cognex, a similar suit filed by Lemelson, which had bearing on
the Radica case with Lemelson. On January 23, 2004 a declaratory judgment
was given in the Cognex case that Lemelson's patent claims are invalid. On
September 9, 2005, Lemelson's appeal to the Court of Appeals for the
Federal Circuit was denied and the judgment of the District Court was
affirmed. Subsequently, Lemelson filed a Petition for Panel Rehearing and
Rehearing En Banc to review the Court of Appeals' September 9, 2005 Order
that affirmed the judgment of the District Court. On November 16, 2005 the
Court of Appeals for the Federal Circuit affirmed its September 9, 2005
ruling and denied the Petition for Rehearing En Banc. The prior pending
claim or litigation, specifically, Lemelson Medical Education Foundation v.
ESCO Electronics, et al.; CIV-00-0660 PHX HRH in the U.S. District Court
for the District of Arizona was dismissed with prejudice and final judgment
was entered in favor of Radica on February 3, 2006.
In 2005, the Company and its subsidiary Radica (Macao Commercial Offshore)
Limited (the "Radica parties") were involved in litigation initiated by
AtGames Holdings Limited which challenged the exclusivity of Radica's
rights to the Play TV Sega Genesis games. In late December 2005, the
arbitrator issued an interim decision in favor of Sega Corporation in its
arbitration against AtGames. Subsequently, in January 2006, AtGames
voluntarily dismissed (without prejudice) its complaint against Radica and
Radica Macao. At present, there is no pending litigation or arbitration
against the Radica parties arising out of this matter.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the attached
unaudited interim financial statements and notes thereto, and with the audited
financial statements, accounting policies and notes included in the Company's
Annual Report on Form 20-F for the year ended December 31, 2005, as filed with
the United States Securities and Exchange Commission.
DESCRIPTION OF BUSINESS
Founded in 1983 by Americans living in Hong Kong, Radica Games Limited (NASDAQ:
RADA) was incorporated in Bermuda in 1993. We are headquartered in Hong Kong and
manufacture most of our products in our factory in southern China. In 1994 we
went public when our shares began trading on the Nasdaq National Market.
We manufacture and market a diverse line of electronic entertainment products
covering multiple product lines - Electronic games carrying the Radica and Play
TV(R) brand names, Gamester(R) branded video game controllers and accessories,
youth electronics carrying the Girl Tech(R) brand names, Cupcakes(R) dolls, Cube
World(TM) portable handheld devices and 20Q(TM), the award winning electronic
line based on the classic guessing game. Our factory also manufactures for other
companies in the electronic game industry. We market our products through
subsidiaries in the United States, the United Kingdom, Canada, Macau and Hong
Kong. Our largest market is in the United States where in 2005 we had the second
largest market share in the electronic handheld and tabletop electronic games
according to industry data source, The NPD Group, Inc.
RESULTS OF OPERATIONS
The following table sets forth items from our Condensed Consolidated Statements
of Operations as a percentage of net sales:
Three months ended March 31,
------------------------------------
2006 2005
---------------- ----------------
Net sales 100.0% 100.0%
Cost of goods sold (62.4%) (61.2%)
Gross margin 37.6% 38.8%
Selling, general and administrative expenses (36.1%) (29.6%)
Research and development (7.6%) (5.4%)
Depreciation and amortization (3.0%) (1.8%)
Operating (loss) income (9.1%) 2.0%
Net interest and other income 2.8% 1.0%
Foreign currency gain (loss), net 0.5% (0.1%)
(Loss) income before income taxes (5.8%) 2.9%
Credit (Provision) for income taxes 0.3% (0.7%)
Net (loss) income (5.5%) 2.2%
We reported a net loss for the first quarter of 2006 of $1.0 million or $0.05
per diluted share compared to a net profit of $0.5 million or $0.03 per diluted
share in the first quarter of 2005.
Sales for the first quarter of 2006 decreased by 18% to $18.5 million from $22.5
million for the same period in 2005. Sales decreases in the quarter were
primarily due to expected reductions in declining areas of low margin business
including declines of $2.4 million in plug and play TV games, $0.7million in
video game accessories and $0.8million of manufacturing services revenues during
the quarter. Excluding these areas of business, sales were about comparable with
last year in spite of a change in shipping patterns from our largest customer,
the later timing of Easter in 2006 and the
13
comparative pipeline fill of 20Q in early 2005. The following table shows
revenue comparison by product lines for the quarter:
Three months ended March 31,
-------------------------------------
Product Lines 2006 2005
----------------- -----------------
(US Dollars in thousands)
Electronic Games and Toys $ 14,704 $ 16,948
Youth Electronics 2,158 2,446
Video Game Accessories 885 1,594
Manufacturing Services 720 1,486
----------------- -----------------
TOTAL $ 18,467 $ 22,474
================= =================
Gross profit margin for Q1 2006 was 37.6% compared to 38.8% in Q1 2005 due to
closeout sales of $1.1 million compared to $0.9 million in Q1 of 2005, together
with a higher proportion of sales to distributors in Europe and Asia at lower
margin than sales to retailers.
Operating expenses for the quarter increased to $8.6 million from $8.3 million
for the same period last year. The increase was due to an increase of
advertising from $0.8 million to $1.0 million, professional fees of $0.1 million
related to Sarbanes Oxley, increased research and development costs for
programming charges for new product and increased depreciation and amortization
due to increased capital expenditure in 2005. The increase was also due to
recognition of stock based compensation of $79,000 with respect to compensation
cost for share-based payment awards in connection with the adoption of Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-based Payment,
on January 1, 2006.
The following table shows the major operating expenses:
Three months ended March 31,
-------------------------------------
(US$ in thousands) 2006 2005
(unaudited) ---------------- ----------------
Advertising and co-op expenses $ 1,353 $ 1,142
Other selling and promotion expenses 738 656
Distribution fees 264 420
Indirect salaries and bonus 2,208 2,241
Research and development expenses 1,405 1,197
Depreciation and amortization 558 404
(Credit) provision for income taxes (55) 155
Other general and administrative expenses 2,087 2,200
CAPITAL RESOURCES AND LIQUIDITY
Our cash and investment securities totaled $60.0 million at December 31, 2006 as
compared to $53.3 million at December 31, 2005. The $6.7 million increase was
mainly due to a seasonal decrease in accounts receivable ($11.1 million), and
increase in accounts payable ($1.7 million), and proceeds received from stock
options exercised ($0.8 million). This was offset by increases in inventories
($0.9 million) and prepaid expenses ($1.0 million) and decreases in accrued
payroll and employee benefits ($0.8 million), accrued warranty expenses ($1.2
million), other accrued liabilities ($1.7 million), dividends payment ($0.9
million) and purchase of property plant and equipment ($0.5 million).
Our accounts receivable were $7.5 million at March 31, 2006 as compared to $18.7
million at December 31, 2005 and $13.5 million at March 31, 2005. Inventories
increased to $22.3 million from $21.4 million at December 31, 2005 and showed a
decrease as compared to $29.7 million at March 31, 2005. Our business is
inherently seasonal. Normally our sales and accounts receivable have been lowest
during the first and second quarters and highest during the third and fourth
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quarters. Receivables have been lowest during the succeeding first and second
quarters. The decrease in accounts receivable related primarily to the decrease
in sales in the first quarter of 2006 compared to the fourth quarter of 2005.
The inventory increase from December 31, 2005 was primarily due to normal
seasonality. Such seasonal changes in assets and liabilities are typical for the
toy industry.
Current liabilities were $18.1 million at March 31, 2006, down $0.8 million from
the $18.9 million reported at December 31, 2005 and showed an increase as
compared to $15.8 million at March 31, 2005. This was largely due to a decrease
in purchases of raw materials for production during the quarter, offset by an
increase in dividends payable. There was no debt outstanding at March 31, 2006
and December 31, 2005.
At March 31, 2005, we had net assets of $96.4 million compared with $98.4
million at December 31, 2005. We had no derivative instruments or off-balance
sheet financing activities during the quarter ended March 31, 2006. We believe
that our existing cash, investment securities and credit lines are sufficient to
meet future short-term cash demands, including seasonal build up of inventory.
We fund our operations and liquidity needs primarily through cash flow from
operations, as well as utilizing borrowings under secured and unsecured credit
facilities when needed. During 2006, we expect to continue to fund our working
capital needs through operations and the revolving credit facility and we
believe that the funds will be sufficient to meet our needs. However, unforeseen
circumstances such as severe softness in, or a collapse of, the retail
environment may result in a significant decline in revenues and operating
results, thereby causing us to exhaust our cash resources. If this were to
occur, we may be required to seek alternative financing of working capital.
On January 6 and March 30, 2006, we declared first and second quarter dividends
each of 5 cents per share that were paid on January 31 and April 28,
respectively.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies, see "Item 5. Operating and
Financial Review and Prospects" in our 2005 Form 20-F.
RECENTLY ISSUED ACCOUNTING STANDARDS
A discussion of certain recently issued accounting standards and the estimated
impact on us is set out in our 2005 Form 20-F.
RISK FACTORS
For a discussion of our risk factors, see "Item 3. Key Information - Risk
Factors" and "Item 5. Operating and Financial Review and Prospects" in our 2005
Form 20-F.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995)
Certain written and oral statements made or incorporated by reference from time
to time by us or our representatives in this Form 6-K, other filings or reports
filed with the Securities and Exchange Commission, press releases, conferences,
or otherwise, contain certain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify these forward-looking statements by the
fact they use words such as "should", "expect", "anticipate", "estimate", "may",
"will", "project", "guidance", "intend", "plan", "believe" and other words and
terms of similar meaning and expression in connection with any discussion of
future operating or financial performance. One can also identify forward-looking
statements by the fact that they do not relate strictly to historical or current
facts. Such forward-looking statements are based on current expectations and
involve inherent risks and uncertainties, including factors that could delay,
divert or change any of them, or depend on the outcome of contingencies such as
legal proceedings. Management cautions you that forward-looking statements
involve risks and uncertainties that may cause actual results to differ
materially from the forward-looking statements. For a more complete discussion
of our risk factors, you are referred to the sections in our Form 20-F and Form
6-K identified above under the caption "Risk Factors". The forward-looking
statements made in this Form 6-K speak only as of the date on which the
statements are made.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The market risk disclosures have not materially changed from those
appearing in our 2005 Form 20-F (see Item 11).
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
Not Applicable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------------------
See Note 7 to the accompanying interim condensed financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
There were no unregistered sales of equity securities in the quarterly
period covered by this report, except that, as disclosed in the Company's
filings under the Securities Exchange Act of 1934, the Company permits any
outside director to elect to receive some or all of the applicable director fees
payable in shares of the Company's Common Stock valued at the then current
market price. Such issuances are exempt from registration pursuant to Section
4(2) under the Securities Act of 1933, as being issuances not involving any
public offering. In the quarter ended March 31, 2006, the Company issued an
aggregate of 289 shares to an outside director in lieu of an aggregate of $2,624
of fees that would otherwise have been paid to such director in cash. No
underwriters were involved in such transactions.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
At the Company's annual meeting of shareholders held on May 22, 2006, the
shareholders of the Company elected the management nominees, who were named in
the Company's Proxy Statement dated April 20, 2006, to serve as directors for
the period until the next annual meeting of shareholders or until his respective
successor is elected or appointed in accordance with applicable law and the
Company's bye-laws. Immediately following the annual meeting of shareholders,
the board of directors consisted of seven members: Jon N. Bengtson, Timothy R.
Busch, John A.F.H. Coulter, Patrick S. Feely, Floyd W. Glisson, Frank J.
O'Connell and Richard E. Wenz. At such meeting, the shareholders also
reappointed KPMG as independent registered public accounting firm and authorized
the directors to fix the independent registered public accounting firm's
remuneration.
The shareholder votes were as follows:
Election of Directors For Withheld
--------------------- --- --------
Jon N. Bengtson 18,373,515 20,708
Timothy R. Busch 18,372,415 21,808
John A.F.H. Coulter 18,373,515 20,708
Patrick S. Feely 18,373,515 20,708
Floyd W. Glisson 18,372,515 21,708
Frank J. O'Connell 18,373,515 20,708
Richard E. Wenz 18,373,515 20,708
For Against Abstain
Reappointment of Independent Registered Public
Accounting Firm
KPMG 18,373,228 19,582 1,413
Item 5. Other Information
--------------------------
None.
Item 6. Exhibits
-----------------
None.
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Supplemental Information:
------------------------
As previously disclosed in our Form 6-K filing on August 16, 2005, Jon Bengtson,
the Chairman of the Board of Radica Games, entered into a Rule 10b5-1 preset
diversification program on July 6, 2005.
Rule 10b5-1 of the Securities Exchange Act of 1934 allows officers and directors
to adopt written plans for trading the Company's securities in a
non-discretionary, pre-scheduled manner in order to avoid concerns about
initiating stock transactions when the insider may be aware of non-public
information.
During the term of the trading plan, acting on behalf of a family trust, Mr.
Bengtson intends to sell up to 100,000 shares, and the trading plan will
terminate when such shares are sold, or in any event by June 30, 2006.
Mr. Albert Crosson resigned from the Radica Board of Directors effective as of
April 10, 2006 and did not stand for reelection at the May 22, 2006 annual
meeting.
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SIGNATURE
---------
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RADICA GAMES LIMITED
Date: July 7, 2006 /s/ Craig D. Storey
---------------- --------------------------------
Craig D. Storey
Chief Accounting Officer
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