6-K 1 sc0154.txt 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 June, 2005 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. Quarter Report for the Quarter ended March 31, 2005 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, No. 333-61260 and No. 333-122248) and on Form F-3 (No. 333-7526 and No. 333-79005). QUARTERLY REPORT * For the quarterly period ended March 31, 2005 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, 2005 --------------------------------------- ----------------------------- Common Stock, par value $0.01 per share 18,991,146 ------------------------ * 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 QUARTER ENDED MARCH 31, 2005 ITEMS IN FORM 6-K Page PART I - FINANCIAL INFORMATION.................................................4 Item 1. Financial Statements..............................................4 Condensed Consolidated Balance Sheets March 31, 2005 (unaudited) and December 31, 2004..................4 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)..............................................5 Condensed Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)..............................................6 Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)..............................................7 Notes To The Condensed Consolidated Financial Statements..........8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................14 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......18 Item 4. Controls and Procedures..........................................18 PART II - OTHER INFORMATION...................................................19 Item 1. Legal Proceedings................................................19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......19 Item 3. Defaults Upon Senior Securities..................................19 Item 4. Submission of Matters to a Vote of Security Holders..............19 Item 5. Other Information................................................19 Item 6. Exhibits.........................................................19 3 PART I - FINANCIAL INFORMATION Item 1. Financial Information --------------------------------

~~OPERATING~~RADICA ~~RESULTS~~GAMES LIMITED CONSOLIDATED BALANCE SHEETS MARCH 31, 2005 AND DECEMBER 31, 2004 (US dollars in thousands, except ~~per~~ share data) ~~2004~~March ~~2003~~31, ~~2002~~December ~~2001~~31, ~~2000~~---------------- ---------------- 2005 2004 ---------------- ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 25,660 $ 27,614 Investment securities 12,419 12,456 Accounts receivable, net of allowances for doubtful accounts of $141 ($148 as at December 31, 2004) 13,455 18,359 Inventories 29,710 26,818 Prepaid expenses and other current assets 3,969 3,374 Income taxes receivable 168 168 Deferred income taxes 1,953 1,850 ---------------- ---------------- Total current assets 87,334 90,639 Property, plant and equipment, net 12,015 11,480 Goodwill 6,015 6,015 Other assets 849 854 Deferred income taxes, noncurrent 715 953 ---------------- ---------------- ~~Net~~Total ~~sales~~assets $ ~~123~~106,~~399~~928 $ ~~105~~109,~~200~~941 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ ~~124~~9,~~646~~065 $ 9810,~~554~~770 $Accrued ~~106~~warranty expenses 550 1,~~696~~070 ~~Net~~Accrued ~~income~~payroll ~~(loss)~~and $employee 3benefits 1,~~456~~299 $1,486 12Other accrued liabilities 4,~~491~~831 $5,251 11Income taxes payable 98 287 ---------------- ---------------- Total current liabilities 15,~~934~~843 $18,864 (4---------------- ---------------- Total liabilities 15,~~374)~~843 18,864 ---------------- ---------------- Shareholders' equity: Common stock par value $0.01 each, 100,000,000 shares authorized, 18,991,146 shares outstanding (18,~~099)~~738,112 ~~Diluted~~as ~~net~~at ~~income~~December ~~(loss~~31, 2004) ~~per~~190 ~~share~~187 $Additional ~~0.18~~paid-in $capital ~~0.66~~5,632 $4,610 ~~0.65~~Retained $earnings 85,557 85,909 Deferred compensation (~~0.25~~195) $- Accumulated other comprehensive (~~1.03~~loss) ~~Weighted~~income ~~average~~(99) ~~number~~371 of---------------- ~~common~~---------------- ~~shares~~Total shareholders' equity 91,085 91,077 ---------------- ---------------- Total liabilities and ~~common~~shareholders' ~~equivalent~~equity ~~shares~~$ 19106,~~526~~928 ~~19,060~~$ 18109,~~336~~941 ~~17,612~~================ ~~17,608~~================

See accompanying notes to the consolidated financial statements. 4

~~FINANCIAL~~RADICA ~~POSITION~~GAMES ATLIMITED ~~DECEMBER~~CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31, 2005 and 2004 (US dollars in thousands, Three months ended March 31, --------------------------------- except per share data) 2005 2004 ~~2003~~--------------- ~~2002~~--------------- ~~2001~~(unaudited) ~~2000~~(unaudited) Revenues: Net sales $ 22,474 $ 12,125 Cost of goods sold (exclusive of items shown separately below) (13,758) (6,985) --------------- --------------- Gross profit 8,716 5,140 --------------- --------------- Operating expenses: Selling, general and administrative expenses (6,659) (4,989) Research and development (1,197) (929) Depreciation and amortization (404) (421) --------------- --------------- Total operating expenses (8,260) (6,339) --------------- --------------- ~~Working~~Operating ~~capital~~income $(loss) 71456 (1,~~775~~199) $Net ~~65,616~~interest $and 50other income 219 231 Foreign currency loss, net (25) (28) --------------- --------------- Profit (loss) before income taxes 650 (996) Provision for income taxes (155) (116) --------------- --------------- Net profit (loss) $ ~~36,709~~495 $ 42(1,~~619~~112) ~~Total~~=============== ~~assets~~=============== ~~$109,941~~Net profit (loss) per share: Basic $~~102,214~~ 0.03 $ ~~95,302~~(0.06) =============== =============== Diluted $ ~~88,407~~0.03 $ ~~99,315~~(0.06) ~~Total~~=============== ~~liabilities~~=============== $Weighted average number of common and common equivalent shares: Basic 18,~~864~~860,682 ~~$ 13~~18,~~058~~570,938 $=============== ~~20,666~~=============== $Diluted 2519,~~355~~571,477 ~~$ 31~~18,~~927~~570,938 ~~Shareholders'~~=============== ~~equity~~=============== $Cash ~~91,077~~dividends $declared 89per share (4.5 cents and 4 cents declared and paid for quarter ended March 31,~~156~~ $2005 74and 2004,~~636~~ respectively) $ ~~63,052~~0.045 $ ~~67,388~~0.040 =============== ===============

See accompanying notes to the consolidated financial statements. 5

~~(US$~~RADICA inGAMES ~~thousands~~LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) ~~Total~~Three months ended March 31, 2005 ~~2006~~and ~~2007~~2004 ~~2008~~(US ~~2009~~dollars ~~Thereafter~~in thousands) Common stock ------------ Accumulated Additional other Total Number paid-in Deferred Retained comprehensive shareholders' of shares Amount capital compensation earnings income (loss) equity ------------- ------- ---------- ------------- ----------- ------------- ------------- ~~Operating~~Balance ~~leases~~at $3December 31,~~116~~ 2004 18,738,112 $ ~~720~~187 $ ~~601~~4,610 $ ~~374~~- $ ~~318~~85,909 $ ~~204~~371 $ ~~899~~91,077 ~~Licensing~~Issuance ~~commitments~~of 1stock 25,~~861~~000 1~~,294~~ ~~106~~203 ~~231~~(204) 10- ~~210~~- 10- ~~Joint~~Stock ~~venture~~options ~~fees~~exercised 3228,~~317~~034 ~~125~~2 ~~129~~819 ~~129~~- ~~137~~- ~~142~~- ~~2,655~~821 ~~Capital~~Amortization ~~commitments~~of ~~571~~unearned ~~571~~restricted shares - - - 9 - - 9 Dividends declared - - - - (847) - (847) Net income - - - - 495 - 495 Unrealized loss on investment securities available-for-sale, net of nil tax - - - - - (51) (51) Foreign currency translation, net of nil tax - - - - - (419) (419) ------------- ------- --------- ------------ ---------- ------------ ---------- ~~Total~~Balance ~~minimum~~at ~~payments~~March $831,~~865~~ $22005 18,~~710~~991,146 $ ~~836~~190 $ ~~734~~5,632 $ ~~465~~(195) $ ~~556~~85,557 $3 (99) $ 91,~~564~~085 ============= ======= ========= ============ ========== ============ ========== Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ - $ 85,437 $ 20 $ 89,156 Issuance of stock 616 - 6 - - - 6 Stock options exercised 386,068 4 739 - - - 743 Dividends declared - - - - (1,487) - (1,487) Net loss - - - - (1,112) - (1,112) Unrealized income on investment securities available-for-sale, net of nil tax - - - - - 49 49 Foreign currency translation, net of nil tax - - - - - 187 187 ------------- ------- --------- ------------ ---------- ------------ ---------- Balance at March 31, 2004 18,611,888 $ 186 $ 4,262 $ - $ 82,838 $ 256 $ 87,542 ============= ======= ========= ============ ========== ============ ==========

The comprehensive income (loss) of the Company, which represents the aggregate of the net income (loss), unrealized income (loss) on investment securities available-for-sale and the foreign currency translation adjustments, was $25 and $(876) for the three months ended March 31, 2005 and 2004. See accompanying notes to the consolidated financial statements. 6

~~YEAR~~RADICA ~~ENDED~~GAMES ~~DECEMBER~~LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2005 and 2004 (US dollars in thousands) 2005 2004 --------------- --------------- (unaudited) (unaudited) Cash flow from operating activities: Net income (loss) $ 495 $ (1,112) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes 135 274 Depreciation 404 421 Gain on disposal and write off of property, plant and equipment (38) - Compensatory elements of stock issuances 9 6 Unrealized gain on trading securities (15) (39) Changes in current assets and liabilities: Decrease in accounts receivable 4,904 10,743 Increase in inventories (2,892) (2,449) Increase in prepaid expenses and other current assets (595) (1,088) Decrease in accounts payable (1,705) (90) Decrease in accrued payroll and employee benefits (187) (358) Decrease in accrued warranty expenses (520) (710) Decrease in other accrued liabilities (420) (1,699) (Increase) decrease in income taxes payable (189) 134 --------------- ---------------- ~~2003~~Net ~~2002~~cash (used in) provided by operating activities (614) 4,033 ---------------~~-------------~~ ---------------~~-------------~~ %Cash offlow ~~Net~~from ~~Net~~investing %activities: Proceeds from sale of ~~Net~~property, ~~Net~~plant ~~Product~~and ~~Lines~~equipment ~~Sales~~38 ~~Value~~161 ~~Sales~~Purchase ~~Value~~of ~~Sales~~property, ~~Value~~plant ~~Sales~~and ~~Value~~equipment (934) (444) --------------- --------------- Net cash used in investing activities (896) (283) --------------- ------------ --- Cash flow from financing activities: Proceeds from stock options exercised 821 743 Dividends paid (847) (742) ---------- ----- -------- -------~~------~~ Net cash (~~US$~~used in ~~thousands~~) ~~Games~~provided ~~and~~by ~~Youth~~financing ~~Electronics~~activities ~~Segment~~(26) ~~Electronic~~1 ~~Games 59.3% $ 62,374 50.3% $ 62,684 Youth Electronics 14.5% 15,227 13.4% 16,744 Manufacturing Services 9.8% 10,385 19.8% 24,634~~ -------- -------- -------- -------- ~~83.6%~~Effect ~~87,986~~of ~~83.5%~~currency ~~104,062~~exchange rate change (418) 187 -------- -------- -------- -------- ~~VGA~~Net ~~Segment~~(decrease) ~~Video~~increase ~~Game~~in ~~Accessories~~cash ~~13.6%~~and ~~14,294~~cash ~~12.7%~~equivalents 15(1,~~844~~954) ~~Manufacturing Services 2.8% 2~~3,~~920~~938 ~~3.8%~~Cash ~~4,740~~and ~~--------~~cash ~~--------~~equivalents: ~~--------~~Beginning ~~--------~~of ~~16.4%~~period 1727,~~214~~614 ~~16.5% 20~~13,~~584~~944 -------- -------- -------- -------- ~~Total~~End ~~100.0%~~of period $~~105~~ 25,~~200~~660 ~~100.0%~~ $~~124~~ 17,~~646~~882 ======== ======== ======== ========

See accompanying notes to the consolidated financial statements. 7 RADICA GAMES LIMITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (QUARTER ENDED MARCH 31, 2005) (US dollars in thousands) 1. BASIS OF PRESENTATION FINANCIAL STATEMENT PRESENTATION The condensed consolidated financial statements of Radica Games Limited (the "Company") 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 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, 2005, 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, 2004. 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 goodwill, property, plant and equipment, valuation allowances for receivables and deferred income tax assets and provisions for product returns and warranties, as well as in estimates used in accounting for legal contingencies. Actual results could differ from the estimated results. Differences from those estimates are recorded in the period they become known. ACCOUNTING FOR STOCK BASED COMPENSATION Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the then market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair value based method had been applied to all outstanding and unvested awards in the period: 8 RADICA GAMES LIMITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (QUARTER ENDED MARCH 31, 2005) (US dollars in thousands except per share data) 1. BASIS OF PRESENTATION (CONTINUED) Three months ended March 31, -------------------------- 2005 2004 ----------- ----------- Net income (loss) as reported $ 495 $ (1,112) Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax (131) (127) ----------- ----------- Pro forma net income (loss) $ 364 $ (1,239) =========== =========== Reported net income (loss) per share $ 0.03 $ (0.06) =========== =========== Pro forma net income (loss) per share $ 0.03 $ (0.07) =========== =========== RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs -- An Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed and production facilities overhead to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a significant effect on its consolidated financial statements. In November 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets -- An Amendment of APB Opinion No. 29 ("SFAS 153"). The provisions of this statement are effective for non monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This statement eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance -- that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The Company does not believe that the adoption of SFAS 153 will have a significant effect on its financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. The new pronouncement replaces the existing requirements under SFAS No. 123 and APB 25. According to SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options and employee stock purchase plans, would be treated the same as any other form of compensation by recognizing the related cost in the statement of operations. This pronouncement eliminates the ability to account for stock-based compensation transactions using APB No. 25 and generally would require that such transactions be accounted for using a fair-value based method. SFAS 123R is effective for all interim and annual periods beginning after June 15, 2005. In April 2005, the U.S. Securities and Exchange Commission issued a new rule that a company may elect to adopt the provisions of SFAS 123R at the beginning of their first annual period beginning after June 15, 2005. Consequently, the Company has elected to defer the adoption of SFAS 123R until January 1, 2006. The Company is in the process of evaluating the impact of this standard on its financial statements. The pro forma results disclosed above are not necessarily indicative of what the impact of SFAS 123R will be upon adoption. 9 RADICA GAMES LIMITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (QUARTER ENDED MARCH 31, 2005) (US dollars in thousands except per share data) 1. BASIS OF PRESENTATION (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform to the current year's presentation. These reclassifications had no effect on net profit or shareholders' equity. 2. NET PROFIT (LOSS) PER SHARE Basic net profit (loss) per share is based on the weighted average number of shares of common stock, and with respect to diluted net profit 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 net profit 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 net profit (loss) per share for the three-month ended March 31:

~~Balance~~Three atmonths ~~Balance~~ended atMarch ~~beginning~~31, ~~Charged to Utilization / end of (US$ in thousands) of year income statement write~~-~~offs year~~ ------- ---------------- ----~~------~~ ~~----~~2005 ~~Allowance~~2004 ~~for Doubtful Accounts~~ ----------- -------------~~-------~~ ~~North~~Numerator ~~America~~for $basic ~~208~~and $diluted 1net $profit per share: Net profit (83loss) $per ~~126~~share ~~Europe~~$ 43495 5$ (261,112) 22=========== ============= Denominator: Basic weighted average shares 18,860,682 18,570,938 Effect of dilutive options 710,795 - ---- ------- ----- -------- $Diluted ~~251~~weighted $average 6shares $19,571,477 18,570,938 =========== ============= Basic net profit (~~109~~loss) per share: $ ~~148~~0.03 $ (0.06) =========== ============= Diluted net profit (loss) per share: $ 0.03 $ (0.06) =========== =============

3. SEGMENT INFORMATION The Company is a worldwide designer, producer and marketer of electronic entertainment devices. The Company historically had two reportable segments from which it derives its revenues: the Games and Youth Electronics business that sells product under the Company's Radica(R), Play TV(R) and Girl Tech(R) brand names, and the Video Game Accessory ("VGA") business that sells product under the Company's Gamester(R) brand name. During the period ended 31 March 2005, the Games and Youth Electronics business represented over 90% of the consolidated revenue, profits and assets. While senior management still view Gamester(R) as a successful ongoing brand and the Company will continue to develop, manufacture and sell video game accessories under the Gamester(R) brand name going forward, they no longer view the video game accessory business as a separate segment for either internal reporting purposes or for making decisions about resource allocation. Accordingly, for the quarter ended March 31, 2005, the Company has only one reportable segment which is the Games and Youth Electronics segment. 10 RADICA GAMES LIMITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (QUARTER ENDED MARCH 31, 2005) (US dollars in thousands) 4. GOODWILL At March 31, 2005 and December 31, 2004, the Company's cost in excess of fair value of net assets purchased (goodwill) related primarily to the 1999 acquisition of Leda Media Products Limited, now called Radica UK Limited ("Radica UK"). On June 24, 1999, the Company purchased Radica UK for approximately $15,970. During the quarter ended June 30, 2000, upon claiming certain breaches of warranty at Radica UK, the Company and the ex-shareholders of Radica UK mutually agreed to cancel certain loan notes such that the purchase price was reduced by $1,399. The Company recorded goodwill of approximately $12,069 resulting from the adjusted purchase price. The goodwill was allocated to the VGA reporting unit and is not tax deductible. Accumulated amortization related to goodwill of $2,518 arose prior to the adoption of SFAS No. 142. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS 142, and annually thereafter, the Company tested goodwill for impairment. The goodwill arising from the purchase of Radica UK was allocated to the Video Games Accessories ("VGA") reporting unit and the Company has undertaken goodwill impairment testing as follows to determine whether the goodwill was impaired and the extent of such impairment. The methods used in the Company's testing of goodwill impairment were as follows: 1) the Company determined the fair market value of the VGA segment by estimating the expected discounted future cash flows of the VGA reporting unit. In estimating the discounted future cash flows, the Company followed FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, by taking into account the Company's expectations about possible variations in the amount or timing of those cash flows, the risk-free rate of interest and the discounted interest rate. 2) The Company then compared the estimated fair value of the VGA reporting unit with the carrying value of the VGA reporting unit, including goodwill. 3) Since the fair value of the VGA reporting unit was less than the carrying value, the second step was performed which compared the implied fair value of the VGA reporting unit's goodwill to the book value of the goodwill. After performing this quarter evaluation, the Company recognized an impairment charge related to goodwill of $3,536 for the year ended December 31, 2004. The impairment charge recorded at December 31, 2004 adjusted the carrying value of the VGA reporting unit's goodwill to its implied fair value. The reason for the impairment was primarily the result of lower sales forecasts for fiscal years 2005 through 2009. The adjustment to projected annual sales from prior year was based on the Company's current strategy of concentrating on the innovative, higher margin sector of the market. This improved the projected gross margins and operating margins as a percentage of sales, but decreased the total operating margin and cash flows. Management believes that the revised forecast portrays a more accurate picture of the Company's future cash flows and that the new strategy limits the large closeout returns and price pressures that made the VGA business unprofitable from 1999 through 2003. 5. INVENTORIES Inventories by major categories are summarized as follows: March 31, December 31, 2005 2004 ---------------- ---------------- Raw materials $ 4,058 $ 4,017 Work in progress 9,831 6,830 Finished goods 15,821 15,971 ---------------- ---------------- $ 29,710 $ 26,818 ================ ================ 11 RADICA GAMES LIMITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (QUARTER ENDED MARCH 31, 2005) (US dollars in thousands) 6. PROPERTY, PLANT AND EQUIPMENT Property and Plant and Equipment consists of the following: March 31, December 31, 2005 2004 ------------- ------------- Land and buildings $ 9,428 $ 9,431 Plant and machinery 7,972 8,142 Furniture and equipment 8,126 8,196 Leasehold improvements 3,117 3,067 Construction-in-progress 839 265 ------------- ------------- Total $ 29,482 $ 29,101 Less: Accumulated depreciation and amortization (17,467) (17,621) ------------- ------------- Total, net $ 12,015 $ 11,480 ============= ============= 7. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: March 31, December 31, 2005 2004 ------------- ------------- Accrued advertising expenses $ 1,328 $ 910 Accrued license and royalty fees 1,292 1,963 Commissions payable 50 93 Other accrued liabilities 2,161 2,285 ------------- ------------- Total $ 4,831 $ 5,251 ============= ============= 8. PLEDGE OF ASSETS At March 31, 2005, the Company has general banking facilities including overdraft and trade facilities totaling $3,796 available to be drawn upon. The facilities are collateralized by leasehold land and buildings with an aggregate net book value of $2,231. 12 RADICA GAMES LIMITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (QUARTER ENDED MARCH 31, 2005) (US dollars in thousands) 9. 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 (Auto ID) operations. The Auto ID operation is used in machines that are part of the Company's bonding and heat-sealing manufacturing processes. Lemelson is contesting that the use of machines that incorporate this patented technology infringes on their IP rights and therefore the Company is obligated to pay a royalty based on the use of this technology. The suit by Lemelson has been stayed pending the outcome of Lemelson vs. Cognex, a similar suit filed by Lemelson, which will have some bearing on the Radica case with Lemelson. On January 23, 2004 a declaratory judgment was given in the Cognex case that the Lemelson's patent claims are invalid. If this judgment is upheld following appeal, the Company believes that this result is favorable to the Company's defense of the Lemelson lawsuit. On June 29, 2004, Lemelson filed its notice of appeal to the Court of Appeals for the Federal Circuit. The briefing is not expected to be completed until the first half of 2005 and a decision from the Court will likely not be issued until 2006. The Company cannot predict the outcome of the Lemelson case or the effect of such litigation on the financial results of the Company. No accrual has been recorded at March 31, 2005 and December 31, 2004 in respect of the Lemelson case or other claims or legal actions, in accordance with SFAS No. 5 Accounting for Contingencies. Management does not believe that the ultimate disposition of the other matters will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 13 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 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, 2004, 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 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 - our products include casino and heritage electronic games, mechanical slot banks, youth electronic games, tabletop games, Play TV(R) games, Girl Tech(R) and Barbie(TM) girls electronic lines, the Cupcakes(R) doll lines, the Nitro Battlerz(TM) remote control car product, the Street Muttz(TM) plush line and video game accessories sold under the Gamester(R) brand. Our factory also manufactures for other companies in the electronic game industry. We market our products through subsidiaries in the United States, the United Kingdom, Canada, Macau and Hong Kong. Our largest market is in the United States where in 2004 we had the third 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 Consolidated Statements of Operations as a percentage of net sales: Three months ended March 31, ----------------------------- 2005 2004 ------------- ------------- Net sales 100.0% 100.0% Cost of goods sold (61.2%) (57.6%) Gross margin 38.8% 42.4% Selling, general and administrative expenses (29.6%) (41.1%) Research and development (5.4%) (7.6%) Depreciation and amortization (1.8%) (3.5%) Operating income (loss) 2.0% (9.8%) Net interest and other income 1.0% 1.9% Foreign currency gain, net (0.1%) (0.3%) Profit (loss) before income taxes 2.9% (8.2%) Provision for income taxes (0.7%) (1.0%) Net profit (loss) 2.2% (9.2%) We reported a net profit for the first quarter of 2005 of $0.5 million or $0.03 per diluted share compared to a net loss of ($1.1) million or ($0.06) per diluted share in the first quarter of 2004. 14 Summary of sales achieved from each category of products and services: Three months ended March 31, ----------------------------- Product and Services 2005 2004 -------------------- ------------- ------------- (US$ in thousands) Electronic Games and Toys $ 16,948 $ 6,512 Youth Electronics 2,446 1,978 Video Game Accessories 1,594 1,992 Manufacturing Services 1,486 1,643 ------------- ------------- Total $ 22,474 $ 12,125 ============= ============= Sales for the quarter increased by 85% to $22.5 million from $12.1 million due to sales of 20Q ($7.9 million for the quarter) plus growth of other product lines of 21%. Branded sales grew by 100% with U.S. branded sales increasing by 114% compared to the sales for the same period in 2004. Gross profit margin for Q1 2005 was 38.8% compared to 42.4% in Q1 2004 due to the impact of the sales of lower margin Play TV Legends products in Q1 2005. Operating expenses increased to $8.3 million for the quarter from $6.3 million in Q1 2004. The increase was due to sales-related variable expenses plus the impact of $0.3 million of increased advertising incurred in Q1 this year due to an earlier Easter. During the quarter, the Company also finalized discussions with Immersion Corporation (NASDAQ: IMMR) for use of its force feedback technology in video game accessories. This negotiation resulted in an agreement for the past and future royalties for a technology license. The expense related to the settlement of past royalties and related legal costs in the quarter was $250,000. Research and development costs were up from $0.9 million to $1.2 million due to costs related to the development of Play TV software. The following table shows the major operating expenses: Three months ended March 31, ----------------------------- (US dollars in millions) 2005 2004 ------------- ------------- Advertising expenses $ 0.8 $ 0.5 Other selling and promotion expenses 1.0 0.5 Indirect salaries and bonus 2.3 2.0 Other general & administrative expenses 2.6 2.0 Research and development expenses 1.2 0.9 Depreciation and amortization 0.4 0.4 15 LIQUIDITY AND CAPITAL RESOURCES Our cash and investment securities totaled $38.0 million at March 31, 2005 as compared to $40.1 million at December 31, 2004. The $2.1 million decrease was due to a variety of factors, including a dividend payment ($0.8 million), the purchase of property plant and equipment ($0.9 million) and the net affect of currency rate changes ($0.4 million) and cash used for operating activities ($0.6 million), caused primarily by seasonal increases in inventories and decreases in accounts payable and accrued expenses, offset by a decrease in accounts receivable. These decreases were partially offset by proceeds from stock options exercised during the quarter ($0.8 million). Our accounts receivable were $13.5 million at March 31, 2005 as compared to $18.4 million at December 31, 2004. Inventories increased to $29.7 million from $26.8 million at December 31, 2004. Our business is inherently seasonal. Normally our sales have been lowest during the first and second quarters and highest during the third and fourth 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 2005 compared to the fourth quarter of 2004. The inventory increase from December 31, 2004 was primarily due to a company initiative to accelerate annual production of certain staple electronic games and toys, primarily from our casino/heritage and 20Q lines, in order to free factory capacity during the peak production period of Summer and early Fall. Such seasonal changes in assets and liabilities are typical for the toy industry and should partially reverse by year-end. Current liabilities were $15.8 million at March 31, 2005, down $3.1 million from the $18.9 million reported at December 31, 2004. This was due to a decrease in payables related to purchases and a decrease in accruals for license fees and warranty expenses. There was no debt at March 31, 2005 and December 31, 2004. At March 31, 2005, net assets were $91.1 million, unchanged from December 31, 2004. Our business generates a significant majority of its cash from its normal operations but seasonal cash requirements have been met in the past with the use of short-term borrowings, which included borrowings under secured lines of credit. We had no derivative instruments or off-balance sheet financing activities during the quarter ended March 31, 2005. We believe that our existing cash and cash equivalents and cash generated from operations are sufficient to satisfy the current anticipated working capital needs of our core business. We believe that our existing credit lines are sufficient to meet future short-term cash demands, including seasonal build up of inventory. We fund our operations and liquidity needs primarily through cash flow from operations, as well as utilizing borrowings under secured and unsecured credit facilities when needed. During 2005, we expect to continue to fund our working capital needs through operations and the revolving credit facility and we believe that the funds are available to meet our needs. However, unforeseen circumstances such as severe softness in, or a collapse of, the retail environment may result in a significant decline in revenues and operating results, thereby causing us to exhaust our cash resources. If this were to occur, we may be required to seek alternative financing of working capital. On January 4 and April 12, 2005, we declared first and second dividends each of 4.5 cents per share which were paid on January 31, 2005 and April 29, 2005, respectively. In April 2005, we purchased $9.0 million of Chinese Remninbi ("RMB"), which is on deposit at HSBC in China. This will be used to offset the effect of a revalued RMB on goods and services paid for in China in RMB. CRITICAL ACCOUNTING POLICIES For a discussion of our critical accounting policies, see "Item 5, operating and financial review and prospects" in our 2004 Form 20-F. 16 RECENTLY ISSUED ACCOUNTING STANDARDS A discussion of certain recently issued accounting standards and the estimated impact on us is set out in note 1 to the condensed consolidated financial statements. COMPENSATION OF OFFICERS AND DIRECTORS Since fiscal 2004, each outside (i.e., non-employee and non-affiliated) director of the Company receives compensation according to the following schedule: o Board retainer $10,000 annually o Quarterly board meeting fee $1,250 per meeting o Committee retainer $4,000 annually (excluding Executive Committee) o Audit chair additional retainer $4,000 annually o Other committee chairs additional retainer $2,000 annually Payments are made quarterly. Any director may elect to receive some or all of the above fees payable in shares of the Company's Common Stock valued at the then current market price. Directors who are employees or affiliates of the Company are not paid any fees or additional remuneration for service as members of the Board of Directors or its Committees. Commencing in May 2005, upon each annual re-election to the Board of Directors, each outside director receives restricted shares of the Company's Common Stock at the rate of 600 shares per quarter (i.e. 2,400 shares per annum). In general, the restricted shares will vest two years from the date of grant. Previously, each outside director received stock options to purchase 2,500 shares per quarter (i.e., 10,000 shares per annum) at an exercise price equal to the then current market price of the Company's Common Stock. In May 2005, the Company also changed the equity component of compensation that applies to the initial election or appointment of a new outside director to the Board of Directors. Under the revised arrangement, a new outside director receives a one-time grant of 5,000 restricted shares (previously, the new outside director was granted an option to purchase 30,000 shares of the Company's Common Stock). In general, these restricted shares will also vest two years from the date of grant. The executive officers' compensation disclosures have not materially changed from those appearing in our 2004 Form 20-F (see Item 6. Directors, Senior Management and Employees - Compensation of Officers and Directors - Employment Agreements). 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 2004 Form 20-F. As reported in our 2004 annual report on Form 20-F, in March 2005 we received a letter from a third party (AtGames Holdings Ltd., or AtGames) challenging the exclusivity of our manufacturing, vendor and distributor agreement with Sega Toys, which was represented to give us exclusive rights to the Play TV Sega Genesis games in the United States and certain other countries. Subsequently, we have worked closely with Sega Toys and Sega Corporation in an attempt to clarify our rights. We continue to believe that we have a strong position on the merits of the dispute as well as certain rights to indemnification from Sega Toys. Sega Corporation has advised us in writing that its position is that Sega has not granted AtGames any right to license Sega's Genesis/Mega Drive game titles for incorporation in TV game pads intended for worldwide markets. AtGames contends otherwise. Sega and AtGames have submitted their dispute to arbitration, and the arbitration hearing is currently scheduled to begin on September 26, 2005. Sega further stated its understanding that under the agreement between Radica and Sega Toys, Sega Toys has granted Radica the exclusive right to sell Play TV products incorporating selected Sega Genesis game titles in the United States and certain other territories under a license granted by Sega to Sega Toys. 17 We are presently unable to predict the outcome of the foregoing dispute. We intend to vigorously defend our rights, and continue to believe in the strength of our position with respect to exclusive rights in the United States and certain other territories concerning Play TV Sega Genesis games. Nevertheless, as we stated in our 2004 Form 20-F, this situation illustrates that in certain cases we may face additional unanticipated competition from another party who also has rights, or who asserts that it has rights, in the intellectual property that we are using or intending to use, this may have a material adverse effect on the sales and profitability of the products concerned. We may also incur substantial costs and management time in defending, or attempting to defend, our rights. 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 speaks only as of the date on which the statements are made. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk disclosures have not materially changed from those appearing in our 2004 Form 20-F (see Item 11). ITEM 4. CONTROLS AND PROCEDURES Not Applicable. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings See Note 9 to the accompanying Financial Statements. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. 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 23, 2005, the shareholders of the Company elected the management nominees, who were named in the Company's Proxy Statement dated April 22, 2005, 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 nine members: Jon N. Bengtson, Timothy R. Busch, John A.F.H. Coulter, Albert J. Crosson, Theodore J. Eischeid, 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: For Withheld --- -------- Election of Directors Jon N. Bengtson 15,890,898 9,937 Timothy R. Busch 15,885,201 15,634 John A.F.H. Coulter 15,891,102 9,733 Albert J. Crosson 15,891,001 9,834 Theodore J. Eischeid 15,880,737 20,098 Patrick S. Feely 15,889,398 11,437 Floyd W. Glisson 15,891,102 9,733 Frank J. O'Connell 15,891,102 9,733 Richard E. Wenz 15,890,542 10,293 For Against Abstain --- ------- ------- Reappointment of independent registered public accounting firm KPMG 15,895,905 3,511 1,419 Item 5. Other Information None. Item 6. Exhibits None. 19 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: June 7, 2005 /s/ Craig D. Storey ------------------------------ ------------------------------- Craig D. Storey Chief Accounting Officer 20

Balance at Balance at beginning Charged to Utilization / end of (US$ in thousands) of year income statement write-offs year ------- ---------------- ---------- ---- Allowance for Estimated Sales Returns ------------------------------------- North America $ 284 $ 350 $ (333) $ 301 Europe 1,106 795 (1,278) 623 --------------- --------------- --------------- --------------- $ 1,390 $ 1,145 $ (1,611) $ 924 =============== =============== =============== ===============

Balance at Balance at beginning Charged to Utilization / end of (US$ in thousands) of year income statement write-offs year ------- ---------------- ---------- ---- Accrued Sales Expenses Allowance -------------------------------- North America $ 2,428 $ 1,826 $ (2,866) $ 1,388 Europe 465 1,008 (950) 523 --------------- --------------- --------------- --------------- $ 2,893 $ 2,834 $ (3,816) $ 1,911 =============== =============== =============== ===============

Balance at Balance at beginning Charged to Utilization / end of (US$ in thousands) of year income statement write-offs year ------- ---------------- ---------- ---- Warranty Allowance ------------------ North America $ 841 $ 1,399 $ (1,469) $ 771 Europe 199 396 (405) 190 Other countries -- 109 -- 109 --------------- --------------- --------------- --------------- $ 1,040 $ 1,904 $ (1,874) $ 1,070 =============== =============== =============== ===============

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003 (US dollars in thousands, except share data) 2004 2003 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 27,614 $ 13,944 Investment securities 12,456 28,009 Accounts receivable, net of allowances for doubtful accounts of $148 ($251 in 2003) 18,359 15,360 Inventories 26,818 15,503 Prepaid expenses and other current assets 3,374 2,748 Income taxes receivable 168 1,404 Deferred income taxes and charges 1,850 1,706 -------- -------- Total current assets 90,639 78,674 Property, plant and equipment, net 11,480 11,908 Goodwill 6,015 9,551 Other assets 854 875 Deferred income taxes 953 1,206 -------- -------- Total assets $109,941 $102,214 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,770 $ 6,350 Accrued payroll and employee benefits 1,486 1,353 Accrued warranty expenses 1,070 1,040 Other accrued liabilities 5,251 3,976 Income taxes payable 287 339 -------- -------- Total current liabilities 18,864 13,058 -------- -------- Total liabilities 18,864 13,058 -------- -------- Shareholders' equity: Common stock par value $0.01 each, 100,000,000 shares authorized, 18,738,112 shares issued and outstanding (18,225,204 in 2003) 187 182 Additional paid-in capital 4,610 3,517 Retained earnings 85,909 85,437 Accumulated other comprehensive income 371 20 -------- -------- Total shareholders' equity 91,077 89,156 -------- -------- Commitments and contingencies Total liabilities and shareholders' equity $109,941 $102,214 ======== ========

CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (US dollars in thousands, 2004 2003* 2002* except per share data) ------------ ------------ ------------ Revenues: Net sales $ 123,399 $ 105,200 $ 124,646 Cost of goods sold (exclusive of items shown separately below) (81,576) (65,350) (78,138) ------------ ------------ ------------ Gross profit 41,823 39,850 46,508 ------------ ------------ ------------ Operating expenses: Selling, general and administrative expenses (30,071) (25,000) (27,038) Research and development (4,164) (3,895) (4,094) Depreciation (1,693) (2,033) (2,438) Amortization of goodwill and intangible assets -- -- (420) Impairment of goodwill (3,536) -- -- Restructuring charge -- (87) -- ------------ ------------ ------------ Total operating expenses (39,464) (31,015) (33,990) ------------ ------------ ------------ Operating income 2,359 8,835 12,518 Other income 754 317 306 Foreign currency gain, net 417 178 1,744 Interest income 765 344 253 Interest expense -- (49) (218) ------------ ------------ ------------ Income before income taxes 4,295 9,625 14,603 (Provision) credit for income taxes (839) 2,866 (2,669) ------------ ------------ ------------ Net income $ 3,456 $ 12,491 $ 11,934 ============ ============ ============ Net income per share: Basic $ 0.19 $ 0.69 $ 0.67 ============ ============ ============ Diluted $ 0.18 $ 0.66 $ 0.65 ============ ============ ============ Weighted average number of common and common equivalent shares: Basic 18,653,471 18,016,789 17,725,879 ============ ============ ============ Diluted 19,525,757 19,059,974 18,335,827 ============ ============ ============ Cash dividends paid per share (4 cents declared and paid for each quarter ended March 31, June 30, September 30, and December 31, 2004) $ 0.16 $ -- $ -- ============ ============ ============ * Reclassified to conform with 2004 presentation. See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECMEBER 31, 2004, 2003 AND 2002 (US dollars in thousands) Common stock Accumulated ------------ Additional Warrants to other Total Number paid-in acquire Retained comprehensive shareholders' of shares Amount capital common stock earnings income (loss) equity ---------- ---------- ---------- ------------ ---------- ------------- ------------- Balance at December 31, 2001 17,646,740 $ 176 $ 1,549 $ 445 $ 61,012 $ (130) $ 63,052 Issuance of stock 4,945 1 20 -- -- -- 21 Stock options exercised, inclusive 144,446 1 306 -- -- -- 307 of nil tax Expiration of stock warrants -- -- 445 (445) -- -- -- Net income -- -- -- -- 11,934 -- 11,934 Foreign currency translation, -- -- -- -- -- (678) (678) net of nil tax ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2002 17,796,131 $ 178 $ 2,320 $ -- $ 72,946 $ (808) $ 74,636 Issuance of stock 3,073 -- 20 -- -- -- 20 Stock options exercised, inclusive 426,000 4 1,177 -- -- -- 1,181 of $44 tax benefit Net income -- -- -- -- 12,491 -- 12,491 Unrealized loss on investment -- -- -- -- -- (46) (46) securities available-for-sale, net of nil tax Foreign currency translation, -- -- -- -- -- 874 874 net of nil tax ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2003 18,225,204 $ 182 $ 3,517 $ -- $ 85,437 $ 20 $ 89,156 Issuance of stock 2,272 -- 21 -- -- -- 21 Stock options exercised, inclusive 510,636 5 1,072 -- -- -- 1,077 of nil tax Dividends paid -- -- -- -- (2,984) -- (2,984) Net income -- -- -- -- 3,456 -- 3,456 Unrealized loss on investment -- -- -- -- -- (90) (90) securities available-for-sale, net of nil tax Foreign currency translation, -- -- -- -- -- 441 441 net of nil tax ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2004 18,738,112 $ 187 $ 4,610 $ -- $ 85,909 $ 371 $ 91,077 ========== ========== ========== ========== ========== ========== ==========

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (US dollars in thousands) 2004 2003* 2002 -------- -------- -------- Cash flow from operating activities: Net income $ 3,456 $ 12,491 $ 11,934 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 109 (2,947) 2,134 Depreciation 1,693 2,033 2,438 Amortization -- -- 420 Impairment of goodwill 3,536 -- -- (Gain) loss on disposal and write off of property, plant and equipment (19) 102 57 Compensatory elements of stock issuances 21 20 21 Gain on trading securities (108) -- -- Unrealized gain on trading securities (1) (55) -- Proceeds from sale of trading securities 15,572 -- -- Purchases of trading securities -- (18,000) -- Changes in current assets and liabilities: Increase in accounts receivable (2,999) (221) (1,271) (Increase) decrease in inventories (11,315) 4,882 (3,206) (Increase) decrease in prepaid expenses and other current assets (626) (1,074) 609 Increase (decrease) in accounts payable 4,420 (1,624) (1,227) Increase (decrease) in accrued payroll and employee benefits 133 (1,400) 1,810 Increase in accrued warranty expenses 30 -- 140 Increase (decrease) in other accrued liabilities 1,275 (1,864) (1,645) Increase (decrease) in net income taxes receivable 1,184 (443) (198) -------- -------- -------- Net cash provided by (used in) operating activities 16,361 (8,100) 12,016 -------- -------- -------- Cash flow from investing activities: Purchases of available-for-sale securities -- (10,000) -- Proceeds from sale of property, plant and equipment 1,292 955 201 Purchase of property, plant and equipment (2,517) (943) (1,316) -------- -------- -------- Net cash used in investing activities (1,225) (9,988) (1,115) -------- -------- -------- Cash flow from financing activities: Funds from stock options exercised 1,077 1,137 307 Dividends paid (2,984) -- -- Decrease in short-term borrowings -- (846) -- Repayment of long-term debt -- (1,825) (3,648) -------- -------- -------- Net cash used in financing activities (1,907) (1,534) (3,341) -------- -------- -------- Effect of currency exchange rate change 441 874 (678) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 13,670 (18,748) 6,882 Cash and cash equivalents: Beginning of year 13,944 32,692 25,810 -------- -------- -------- End of year $ 27,614 $ 13,944 $ 32,692 ======== ======== ======== Supplementary disclosures of cash flow information: Interest paid $ -- $ 50 $ 220 Income taxes paid 1,084 538 1,314

2004 2003 2002 -------- -------- -------- Net income as reported $ 3,456 $ 12,491 $ 11,934 Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax (551) (496) (746) -------- -------- -------- Pro forma net income $ 2,905 $ 11,995 $ 11,188 ======== ======== ========

Gross Gross Amortized unrealized unrealized cost holding gains holding losses Fair value --------------- --------------- --------------- --------------- At December 31, 2004 Available for sale: Certificates of deposits $10,000 $ -- $ (136) $ 9,864 At December 31, 2003 Available for sale: Certificates of deposits $10,000 $ -- $ (46) $ 9,954

Less than 12 months 12 months or greater Total ----------------------- ------------------------- -------------------------- Unrealized Unrealized Unrealized Fair value losses Fair value losses Fair value losses ---------- ------ ---------- ------ ---------- ------ Certificate of deposits $ -- $ -- $9,864 $ (136) $9,864 $ (136)

2004 2003 2002 ----- ----- ---- Net realized investment gains Available-for-sale $ -- $ -- $ -- Trading 108 -- -- ----- ----- ---- $ 108 $ -- $ -- ----- ----- ---- Net changes in unrealized gains (losses) on investment Available-for-sale $ (90) $ (46) $ -- Trading 1 55 -- ----- ----- ---- $ (89) $ 9 $ -- ----- ----- ---- Net realized investment gains and changes in unrealized gains (losses) on investment $ 19 $ 9 $ -- ===== ===== ====

Gross realized Net realized ---------------------------------- Amount Gains Losses gain --------------- --------------- --------------- --------------- Sales: 2004 - Available-for-sale $ -- $ -- $ -- $ -- Trading 15,572 108 -- 108 2003 - Available-for-sale $ -- $ -- $ -- $ -- Trading -- -- -- -- 2002 - Available-for-sale $ -- $ -- $ -- $ -- Trading -- -- -- -- Purchases: 2004 - Available-for-sale $ -- $ -- $ -- $ -- Trading -- -- -- -- 2003 - Available-for-sale $10,000 $ -- $ -- $ -- Trading 18,000 -- -- -- 2002 - Available-for-sale $ -- $ -- $ -- $ -- Trading -- -- -- --

2004 2003 -------- -------- Land and buildings $ 9,431 $ 10,953 Plant and machinery 8,142 7,754 Furniture and equipment 8,196 7,514 Leasehold improvements 3,067 2,943 Construction-in-progress 265 -- -------- -------- Total $ 29,101 $ 29,164 Less: Accumulated depreciation and amortization (17,621) (17,256) -------- -------- Total, net $ 11,480 $ 11,908 ======== ========

2004 2003 2002 ------- ------- ------- Current: US federal and state $ 274 $ 39 $ 51 International 456 42 950 ------- ------- ------- Total current income tax provision $ 730 $ 81 $ 1,001 ------- ------- ------- Deferred: US federal $ 900 $(2,857) $ -- International (791) (90) 1,668 ------- ------- ------- Total deferred income tax provision (credit) $ 109 $(2,947) $ 1,668 ------- ------- ------- Total income taxes provision (credit) $ 839 $(2,866) $ 2,669 ======= ======= =======

2004 2003 2002 ------- ------- ------- Income from continuing operations $ 839 $(2,866) $ 2,669 Shareholders' equity - compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes -- 44 -- ------- ------- ------- $ 839 $(2,822) $ 2,669 ======= ======= =======

2004 2003 2002 ------- ------- ------- The US statutory rate 35% 35% 34% Computed "expected" tax expense at the US statutory rate $ 1,503 $ 3,369 $ 4,965 State tax, net of federal tax benefit 127 1 4 Tax rate differential (1,028) (807) (763) Change in valuation allowance 380 (4,476) (1,282) Effect on opening deferred tax balances resulting -- (478) -- from an increase in tax rate during the year China tax rebates (212) (472) -- Other, net 69 (3) (255) ------- ------- ------- Income tax provision (credit) $ 839 $(2,866) $ 2,669 ======= ======= =======

Balance Balance at beginning Charges / Amount at end of year (release) incurred of year ------------ ------------ ------------ ----------- 2003 Severance and other compensation $ 34 $ 87 $ (121) $ -- ======= ======= ======= ======= 2002 Severance and other compensation $ 1,389 $ (78) $(1,277) $ 34 Lease termination costs and 199 78 (277) -- related asset writedowns ------- ------- ------- ------- $ 1,588 $ -- $(1,554) $ 34 ======= ======= ======= =======

2004 2003 2002 ----------- ----------- ----------- Numerator for basic and diluted earnings per share: Net income $ 3,456 $ 12,491 $ 11,934 =========== =========== =========== Denominator: Basic weighted average shares 18,653,471 18,016,789 17,725,879 Effect of dilutive options and warrants 872,286 1,043,185 609,948 ----------- ----------- ----------- Diluted weighted average shares 19,525,757 19,059,974 18,335,827 =========== =========== =========== Basic net income per share: $ 0.19 $ 0.69 $ 0.67 =========== =========== =========== Diluted net income per share: $ 0.18 $ 0.66 $ 0.65 =========== =========== ===========

2004 2003 2002 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted average average average exercise exercise exercise (Shares in thousands) Shares price Shares price Shares price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 1,947 $ 3.41 2,313 $ 4.05 2,191 $ 3.88 Options granted 187 8.36 370 5.10 585 3.75 Options exercised (510) 2.11 (426) 2.67 (145) 2.13 Options forfeited (41) 4.19 (310) 11.24 (318) 3.21 ---------- ---------- ---------- Outstanding at end of year 1,583 $ 4.39 1,947 $ 3.41 2,313 $ 4.05 ========== ========== ========== Options exercisable at year end 1,091 $ 3.80 1,232 $ 2.88 1,352 $ 4.52 ========== ========== ==========

Options outstanding Options exercisable ----------------------------------------------------------- ------------------------------- Weighted average Weighted average remaining Weighted average Exercise Number exercise price contractual Number exercise price price range of shares per share life (years) of shares per share ----------- --------- --------- ------------ ---------- --------- (Shares in thousands) $ 1.090 to 2.000 76 $ 1.83 5.07 76 $ 1.83 $ 2.001 to 4.000 880 3.27 5.08 760 3.26 $ 4.001 to 6.000 304 4.37 7.93 127 4.33 $ 6.001 to 8.000 139 6.81 8.24 104 6.76 $ 8.001 to 10.000 167 8.56 9.25 7 8.57 $ 12.001 to 14.000 16 12.63 4.31 16 12.63 $ 18.001 to 20.000 1 20.00 3.00 1 20.00 ----------------- ------------ 1,583 $ 4.39 6.34 1,091 $ 3.80 ================= ============

2004 2003 2002 ---------- --------- --------- Expected life of options 3.5 years 3.6 years 3.4 years Risk-free interest rate 3.6% 2.8% 4.1% Expected volatility of underlying stock 45% 33% 51% Dividends 1.9% -- --

2004 2003 2002 --------- ---------- ---------- Reported net income $ 3,456 $ 12,491 $ 11,934 Pro forma net income 2,905 11,995 11,188 Reported net income per share Basic $ 0.19 $ 0.69 $ 0.67 Diluted 0.18 0.66 0.65 Pro forma net income per share Basic $ 0.16 $ 0.66 $ 0.63 Diluted 0.15 0.62 0.61

2004 2003 2002 --------- --------- --------- Revenues from external customers Games and Youth Electronics $ 110,176 $ 87,986 $ 104,062 VGA 13,223 17,214 20,584 --------- --------- --------- Total revenues from external customers $ 123,399 $ 105,200 $ 124,646 ========= ========= ========= Depreciation and amortization Games and Youth Electronics $ 1,505 $ 1,671 $ 2,446 VGA 188 362 412 --------- --------- --------- Total depreciation and amortization $ 1,693 $ 2,033 $ 2,858 ========= ========= ========= Impairment of goodwill Games and Youth Electronics $ -- $ -- $ -- VGA 3,536 -- -- --------- --------- --------- Total impairment of goodwill $ 3,536 $ -- $ -- ========= ========= ========= Segment income (loss) Games and Youth Electronics $ 8,833 $ 13,788 $ 18,004 VGA (3,527) (2,547) (3,636) --------- --------- --------- Total segment income $ 5,306 $ 11,241 $ 14,368 Corporate Unallocated corporate expenses $ (2,947) $ (2,406) $ (1,850) Net interest and other income 1,936 790 2,085 (Provision) credit for income taxes (839) 2,866 (2,669) --------- --------- --------- Total consolidated net income $ 3,456 $ 12,491 $ 11,934 ========= ========= ========= Segment assets Games and Youth Electronics $ 38,134 $ 23,061 $ 26,037 VGA 13,058 17,353 19,038 Corporate 58,749 61,800 50,227 --------- --------- --------- Total consolidated assets $ 109,941 $ 102,214 $ 95,302 ========= ========= =========

2004 2003 2002 --------- --------- --------- Games and Youth Electronics Segment Electronic Games $ 80,640 $ 62,374 $ 62,684 Youth Electronics 17,038 15,227 16,744 Other Electronic Toys 3,490 -- -- Manufacturing Services 9,008 10,386 24,634 --------- --------- --------- 110,176 87,987 104,062 --------- --------- --------- VGA Segment Video Games Accessories 12,840 14,294 15,844 Manufacturing Services 383 2,919 4,740 --------- --------- --------- 13,223 17,213 20,584 --------- --------- --------- Total net revenues $ 123,399 $ 105,200 $ 124,646 ========= ========= =========

Balance at Balance at beginning Charged to Utilization / end of of year income statement write-offs year ------- ---------------- ---------- ---- 2004 Allowance for doubtful accounts $ 251 $ 6 $ (109) $ 148 Allowance for estimated product returns 1,390 1,145 (1,611) 924 Accrued warranty expenses 1,040 1,903 (1,873) 1,070 Accrued sales allowance 2,893 2,834 (3,816) 1,911 --------------- --------------- --------------- --------------- $ 5,574 $ 5,888 $ (7,409) $ 4,053 =============== =============== =============== =============== 2003 Allowance for doubtful accounts $ 315 $ 114 $ (178) $ 251 Allowance for estimated product returns 1,247 1,079 (936) 1,390 Accrued warranty expenses 1,040 2,495 (2,495) 1,040 Accrued sales allowance 3,591 2,809 (3,507) 2,893 --------------- --------------- --------------- --------------- $ 6,193 $ 6,497 $ (7,116) $ 5,574 =============== =============== =============== =============== 2002 Allowance for doubtful accounts $ 2,207 $ 60 $ (1,952) $ 315 Allowance for estimated product returns 1,555 390 (698) 1,247 Accrued warranty expenses 900 1,771 (1,631) 1,040 Accrued sales allowance 3,912 1,864 (2,186) 3,590 --------------- --------------- --------------- --------------- $ 8,574 $ 4,085 $ (6,467) $ 6,192 =============== =============== =============== ===============

Quarter ended --------------------------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 ------------- ------------- ------------- ------------- Year ended December 31, 2004 ---------------------------- Net sales $ 12,125 $ 18,799 $ 48,972 $ 43,503 Gross profit 5,140 6,152 15,269 15,262 Net income (loss) (1,112) 171 5,990 (1,593) Basic income (loss) per share (0.06) 0.01 0.32 (0.09) Diluted income (loss) per share (0.06) 0.01 0.31 (0.09) Year ended December 31, 2003 ---------------------------- Net sales $ 16,045 $ 16,944 $ 37,655 $ 34,556 Gross profit 6,254 5,647 14,598 14,130 Net income (loss) (604) (789) 6,625 7,259 Basic income (loss) per share (0.03) (0.04) 0.37 0.40 Diluted income (loss) per share (0.03) (0.04) 0.34 0.38

---------------------------------------------------------------------------------------------- NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF COMMON BENEFICIAL OWNER STOCK OUTSTANDING ---------------------------------------------------------------------------------------------- Dito Devcar Corporation, et al. (1) 8,728,888 46.4% c/o Richard H. Pickup 2321 Alcova Ridge Dr. Las Vegas, Nevada 89134 RAD Partners 1999 LLC, et al. (2) 1,093,700 5.8% c/o The Busch Firm, 2532 Dupont Drive Irvine, California 92612 Royce & Associates, LLC 972,250 5.2% 1414 Avenue of the Americas New York, New York 10019 ------------------------- (1) Includes shares of Common Stock owned by the following related persons: Dito Devcar Corporation, DRP Charitable Unitrust, TMP Charitable Unitrust, Dito Devcar, LP, Dito Caree, LP, Pickup Family Trust, Pickup Charitable Unitrust II, TD Investments, LLC, Plus Four Equity Partners LP, Dito Devcar Foundation and Richard H. Pickup. (2) Includes shares of Common Stock owned by the following related persons: RAD Partners 1999 LLC, Lenawee Trust, 92653 Trust, Busch Family Foundation and Timothy R. Busch, who is a director of the Company.

-------------------------------------------------------------------------------------------------------------------------- PERCENTAGE OF NUMBER OF COMMON TERM AS SHARES STOCK AGE AT DIRECTOR OTHER POSITIONS AND OFFICES BENEFICIALLY OUTSTANDING NAME 1/1/05 EXPIRES PRESENTLY HELD WITH THE COMPANY OWNED (1) ----------------------------- --------- ----------- ----------------------------------- -------------- -------------- Jeanne M. Olson 56 President North American 115,000 Operations Denis Horton 53 President Radica Europe and 20,000 Managing Director, Radica UK James M. Romaine 59 Senior Vice President Sales 50,200 Laurence M. Scott, Jr. 59 Senior Vice President of Asia 20,000 Operations Craig D. Storey 36 Vice President, Chief Accounting 34,000 Officer Larry C.N. Cheng 41 Vice President Engineering 7,000 Robert E. Esterbrook 59 Vice President UK Finance & 12,000 Operations Paul Fogerty 43 Vice President UK Sales 5,000 Louis S.W. Kwok 43 General Manager, Factory 8,000 Eric K.W. Chan 48 Quality Director -- Vincent K.M. Ching 44 Manufacturing Director -- Rick C.K. Chu 51 Director of Customer Service 4,000 Martin Frain 36 UK Marketing Director -- Sean C.W. Lee 38 Finance Director - Asia 6,000 Donny K.W. So 41 Director of Project Management 8,000 Hermen H.L. Yau 45 MIS Director 100 Kenneth K.C. Yu 42 Engineering Director -- ------------------------- (1) Except as indicated, in each case these shares represent less than 1% of the total stock outstanding. (2) Member of the Executive Committee. (3) Member of the Audit Committee. (4) Member of the Corporate Governance, Nominations and Compensation Committee. (5) Mr. Busch is one of the persons included in the RAD Partners 1999 LLC Group. See "Voting Securities and Their Principal Owners" above for additional information. (6) In the Company's Proxy Circular for last year, we reported that Albert J. Crosson, one of our directors, had a 1% beneficial interest in Crossfire, LLC, which provided beneficial ownership of 450,000 shares of our common stock and the right for Crossfire to acquire an additional 400,000 shares over time from a limited liability company (RAD Partners 2001, LLC) which was controlled by RAD Partners 1999 LLC, one of our principal stockholders. Mr. Crosson has reported to the Company that in 2004 the additional 400,000 shares were acquired by Crossfire and RAD Partners 2001 was liquidated, but Mr. Crosson sold his interest in Crossfire to his four adult children. As a result, Mr. Crosson has disclaimed any beneficial ownership in common stock of the Company, other than through his ownership of stock options acquired as a director of the Company.

PATRICK S. FEELY JON N. BENGTSON THEODORE J. EISCHEID DAVID C.W. HOWELL Chief Executive Officer Chairman of the Board President and Chief President Asia Operations Operating Officer and Chief Financial Officer

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