Final Results

Character Group PLC 07 December 2004 Issued by Citigate Dewe Rogerson Ltd, Birmingham Date: Tuesday, 7 December 2004 Embargoed: 7.30am The Character Group plc Designers and distributors of licensed toys, games, gifts and digital camera products Preliminary Results for the year ended 31 August 2004 2004 Other Exceptional Total 2003 Turnover £74.65m £1.40m £76.05m £85.31m Operating Profit £3.19m £492k £3.68m £6.12m Pre-tax Profit £2.73m £492k £3.22m £5.56m EPS - fully diluted 7.31p 10.11p Dividend 1.80p 3.00p EBITDA £4.44m £7.13m 'Although our 2004 financial results were disappointing...for the 2005 financial year, I am pleased to report that, despite the on-going challenging markets, our confidence in our new product introductions (such as the well documented Robosapien) has proven to be justified in the current run up to Christmas. 'This, together with the exciting reaction to next year's products at previews from our major customers, underpins our belief that, although the retail environment will remain competitive and challenging across the sector, the Group's current momentum will continue through both the next financial and calendar year.' Richard King, Chairman FULL STATEMENT ATTACHED Enquiries: Richard King, Chairman Kiran Shah, Group Finance Director Fiona Tooley, Director The Character Group plc Citigate Dewe Rogerson Today: 020 7282 8000 (8.00am - 1.30pm) Today: 0207 282 8000 Thereafter: 020 8949 5898 Thereafter: 0121 455 8370 Mobile: 07836 250150 (RK) Mobile: 07785 703523 (FMT) Mobile: 07956 278522 (KS) www.charactergroup.plc.uk --------------------------- -2- The Character Group PLC Preliminary Results for the year ended 31 August 2004 STATEMENT BY THE CHAIRMAN, RICHARD KING The year under review has been, to say the least, very challenging, with many factors taking their toll on our sales and profits. As reported, in April 2004, we started the year under review with poor 2003 Christmas trading in the UK, closely followed by the unexpected termination by our distributor of our distribution agreement for Polaroid digital cameras in the USA. With no distributor in the USA and a generally lack-lustre toy, game and gift line up of product for the early part of 2004 as well as a difficult trading environment in all our markets, we were facing an uphill battle to get back to a growth pattern. However, for the 2005 financial year, I am pleased to report that, despite the on-going challenging markets, our confidence in our new product introductions (such as the well documented Robosapien) has proven to be justified in the current run up to Christmas. Results Although our 2004 financial results were disappointing when compared with the previous year, the Directors believe that they were satisfactory when the factors I have already touched on are taken into account. Without the benefit of the settlement from Uniden America Corporation, which we announced to the market on 29 November 2004, the Directors expected the profit before tax for the year ended 31 August 2004 to be in line with market expectations. As a result of the Uniden settlement, the total profit before tax has risen to £3.2 million of which approximately £0.5 million is exceptional. It should also be noted that the Group has incurred substantial additional expenses associated with the settlement agreement. On our normal business excluding exceptional items, our gross margin was maintained at last year's level at 30.8% (2003: 31.3%). Stocks increased from £ 8.1 million to £12.2 million, mainly as a result of slower than anticipated sales of digital products in the USA. At the interim stage, the Group had unused bank and trade finance facilities of £2.9 million and the Company was ungeared following the conversion of the Convertible Unsecured Loan Note by Valtidone SpA. By the year-end, the Group had cash at bank of £4.18 million (2003: £3.93 million) and unused bank and trade finance facilities of £1.52m (2003: £1.86 million) and remained ungeared. Net assets at the end of the period were £11.8 million against £5.3 million in 2003. Dividend The Board is proposing a final dividend of 0.7 pence per share. This, together with the interim dividend of 1.10 pence per share makes the total dividend for the year 1.8 pence per share, a decrease of 40% on the previous year, which is broadly in line with the fall in pre-tax profits. The dividend is covered 3.41 times by earnings and the shares go ex-dividend on the 5 January 2005. Subject to approval by shareholders at the Company's Annual General Meeting on 19 January 2005, the final dividend will be paid on 28 January 2005 to shareholders on the Register as at 7 January 2005. Review and Prospects We announced in April that we intended to integrate Downpace to form a single Toys, Games and Gifts division within the Group in order to rationalise the use of the Group's resources. However, to ensure that our long term strategy of developing a significantly larger proportion of our product line-up was working to our satisfaction, we decided to implement the restructuring plans later than originally anticipated. continued... -3- We are currently in the process of consultation regarding our integration plans with the Directors of Downpace. We would expect the process of integration to be completed by the end of March 2005. Digital Products Division World Wide Licensing Limited ('WWL') is operating in a market where, although there is growth in revenue by our major competitors, there is little evidence of growth in profits and where the market has become very competitive with non-branded cameras finding it ever more difficult to get retail placement. Against this background and the loss of our US distributor at a critical point in the year, WWL did not meet its targets for the year ended 31 August 2004. The set back we experienced in the US has had adverse repercussions throughout our digital business with greater costs being absorbed into lower than anticipated sales. Since the year-end, I am pleased to report that we have begun to see some positive signs from the US market and we believe that we shall start to see our product placed in a growing number of major US retailers from early next year. On a positive note, our Research and Development Centre in the HiTech Park in Shenzhen, China is growing and becoming very effective in allowing us to create a creditable position in the digital camera category. We are committed to introducing engineers from the United States and Japan into the staffing mix in China to further enhance our R&D and technical abilities. We have also taken a strategic initiative with the Polaroid Corporation to engage with their technical team to be part of our development process. Although as we have previously reported we have experienced some problems in bringing new products to the market on time, our development team has continued to build on its experience and has enhanced its skills base with every new camera that comes to the market. Today we have many products that are designed and developed by WWL and, with the imminent introduction of our Foveon x530 digital camera, we shall have reached a higher level in camera design and technical expertise which is a credit to the team in the Far East. Our Polaroid agreement is entering its third year and we have engaged in an extensive review process with them to establish a new long term agreement. It has become apparent that the close relationship between WWL and Polaroid should set the tone for a very competitive and dynamic range of products for the world market-place. Our distribution of digital products has now stabilised and we are active in over 30 markets. With the introduction of a new distributor in the United States and strong growth in Canada and various European Markets we believe that we are well placed to grow the business in 2005. Our current digital business is trading in line with our expectations and we anticipate that we will increase its contribution to Group revenue both in the 2005 financial and calendar years. Toys, Games and Gifts Division In our interim report, we stated that the difficult trading experienced at Christmas had continued into the second half and that we were expecting that new product introductions would begin to impact on our sales only in the last quarter of the 2004 financial year. In the period under review, whilst trading was disappointing, we have nevertheless made progress as an organisation. We have expanded our development programme, and of our current sales both in the UK and internationally, the percentage of our own developed products continues to increase. continued... -4- The success of Robosapien has been well documented and we believe that, by the time Christmas has finished, we will have placed approximately 180,000 pieces into the market and we are expecting a total sell through at retail. We are also very happy with our GR8 Gear range where our in-house developed fashion centre has sold out in the UK and where we have supplied seven overseas territories, with good sales reports from each. We are experiencing another good year for Scooby Doo, which has all but sold out for the year, and Magic Sand range is having another successful year. In games, Spin the Bottle is selling well in its 8th year and Slapz, Pin the Tail on the Donkey and Hungry Huey are all worthy of mention as they turn into perennial favourites. In general, we have strengthened and expanded our distribution base. For example our trading with Gadget Shop, our joint launch partner with Hamley's for Robosapien, has increased substantially and we have developed our business with more E-business, stationery and non toy outlets. New product introductions for 2005 include: a new line up of Robosapien related products and a broad range of Batman products to be launched with the release of the new film in 2005. The Batman range has been developed with our trading partner and investor Giochi Preziosi SpA and, from initial reactions, should provide substantial sales, both domestically and internationally, next calendar year. We are also launching a new chess set and other products under a Star Wars license as well as working with Disney in launching the Disney Princess dolls which will be co-ordinated with the release of the Cinderella DVD in October 2005. After a gap of ten years, we shall also be relaunching Sky Dancers, which sold over a million units on its last outing in the UK, while in the Spring, we will launch Go Yo's, where we have high hopes of a significant early sell through. It is refreshing to be turning the year with so many toy and games products and ranges with such potential going through to next year. On the gift side, we are not as advanced in the cycle; however, we have high hopes for the Talking Mug range which has just gone to market and where early sales have been very encouraging. In addition to finalising some exciting new gift licenses we shall be introducing some of our own-developed products which is a result of utilising the wider Group's internal resources and capabilities Overall, in this 2005 financial year we have introduced some very exciting new products which have already had good sell through to Christmas and we will end 2004 with clean stocks. This, together with the exciting reaction to next year's products at previews from our major customers, underpins our belief that, although the retail environment will remain competitive and challenging across the sector, the Group's current momentum will continue through both the next financial and calendar year. People No business can survive and prosper without the individual effort and input from its employees and, during the difficult year we have just endured, that effort has had to be even more focused. It is therefore very gratifying that over this period, we have received many calls and compliments for the high standard of service that we have achieved in satisfying the ever increasing demands of our valued customers. The Board is truly grateful for the effort and support of our employees throughout the world. Summary We have made substantial progress in our product line-up and we expect that as we focus on our product offering throughout the Group, we shall achieve improved sales from a smaller number of individual products. This strength in our product line-up gives us confidence that, despite the market conditions, we are looking forward to a year of significant growth. -5- The Character Group PLC Consolidated Profit and Loss Account for the year ended 31 August 2004 Other Exceptional Total 2003 2004 2004 2004 £'000 £'000 £'000 £'000 (as restated) Turnover 74,653 1,393 76,046 85,308 Cost of sales (51,675) (2,657) (54,332) (58,610) -------------------------------------------------------------------------------- Gross profit 22,978 (1,264) 21,714 26,698 Net operating expenses Selling and distribution costs (9,131) (278) (9,409) (9,138) Administration expenses (10,919) (470) (11,389) (11,967) Other operating income 257 2,504 2,761 526 -------------------------------------------------------------------------------- Operating profit 3,185 492 3,677 6,119 Interest (453) - (453) (563) -------------------------------------------------------------------------------- Profit on ordinary activities before taxation 2,732 492 3,224 5,556 Taxation 589 (86) 503 (287) -------------------------------------------------------------------------------- Profit on ordinary activities after taxation 3,321 406 3,727 5,269 Dividend (1,093) (1,310) -------------------------------------------------------------------------------- Retained profit for the year 2,634 3,959 -------------------------------------------------------------------------------- Earnings per share - basic 7.48p 12.85p - fully diluted 7.31p 10.11p - dividend per share 1.80p 3.00p -------------------------------------------------------------------------------- EBITDA 4,444 7,128 (earnings before interest, tax, depreciation and amortisation) -------------------------------------------------------------------------------- All activity has arisen from continuing operations. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 (as restated) Profit for the financial period 2,634 3,959 Foreign exchange differences (541) (185) -------------------------------------------------------------------------------- Total recognised gains and losses relating to the financial period 2,093 3,774 ---------- Prior period adjustment 569 ---------------------------------------------------------------- Total recognised gains and losses since last annual report 2,662 ---------------------------------------------------------------- -6- The Character Group PLC Consolidated Balance Sheet as at 31 August 2004 2004 2003 £'000 £'000 (as restated) Fixed assets Intangible assets 692 737 Tangible assets 1,599 1,876 Investments 2 2 -------------------------------------------------------------------------------- 2,293 2,615 -------------------------------------------------------------------------------- Current assets Stocks 12,227 8,143 ------------------------ Trade debtors subject to finance arrangements 8,319 7,302 Factor advances (6,785) (5,401) ------------------------ 1,534 1,901 Debtors - including non-factored trade debtors 16,024 16,776 Cash at bank and in hand 4,183 3,932 -------------------------------------------------------------------------------- 33,968 30,752 Creditors: amounts falling due within one year: Convertible loan note - (4,600) Other creditors (24,484) (23,504) -------------------------------------------------------------------------------- Net current assets 9,484 2,648 -------------------------------------------------------------------------------- Total assets less current liabilities 11,777 5,263 -------------------------------------------------------------------------------- Creditors: amounts falling due after more than one year: Other creditors - (4) -------------------------------------------------------------------------------- Net assets 11,777 5,259 -------------------------------------------------------------------------------- Capital and reserves Called up share capital 2,634 2,064 Investment in own shares (908) (908) Capital redemption reserve 40 15 Share premium 11,794 7,843 Merger reserve 651 651 Profit and loss account (2,434) (4,406) -------------------------------------------------------------------------------- Equity shareholders' funds 11,777 5,259 -------------------------------------------------------------------------------- -7- The Character Group PLC Consolidated Cash Flow Statement for the year ended 31 August 2004 2004 2003 £'000 £'000 Cash inflow from operating activities 3,326 3,817 -------------------------------------------------------------------------------- Returns on investment and servicing of finance Interest received 7 12 Interest paid (460) (574) Interest element of finance lease rental payments - (1) -------------------------------------------------------------------------------- Net cash outflow for returns on investments and servicing of finance (453) (563) -------------------------------------------------------------------------------- Taxation (315) (285) -------------------------------------------------------------------------------- Capital expenditure and financial investment Payments to acquire tangible fixed assets (510) (1,038) Sale of tangible fixed assets 9 24 Purchase of business and assets - (902) -------------------------------------------------------------------------------- Net cash outflow for capital expenditure and financial investment (501) (1,916) -------------------------------------------------------------------------------- Equity dividends paid (1,626) (410) -------------------------------------------------------------------------------- Cash inflow before financing 431 643 -------------------------------------------------------------------------------- Issue of new shares 6 - Expenses in relation to the conversion loan note (60) Purchase of own shares (121) Capital element of finance lease rentals (5) 5 -------------------------------------------------------------------------------- Net cash (outflow)/inflow from financing (180) 5 -------------------------------------------------------------------------------- Increase in cash in the year 251 648 -------------------------------------------------------------------------------- Decrease in net debt in the year 256 643 -------------------------------------------------------------------------------- -8- The Character Group PLC Notes to the Accounts for the year ended 31 August 2004 1. Turnover Turnover represents the amount derived from the provision of goods and services which arise from the Group's ordinary activities, stated net of value added tax. Analysis of turnover by geographical market by 12 months 12 months destination to to 31 August 31 August 2004 2003 £'000 £'000 United Kingdom 52,347 51,781 Rest of the world 23,699 33,527 -------------------------------------------------------------------------------- Total 76,046 85,308 -------------------------------------------------------------------------------- Analysis of turnover by division 12 months 12 months to to 31 August 31 August 2004 2003 £'000 £'000 Toys, Games and Gifts 44,989 51,375 Digital 31,057 33,933 -------------------------------------------------------------------------------- Total 76,046 85,308 -------------------------------------------------------------------------------- All the Group's activities during the 12 months ended 31 August 2004 are classed as continuing. The Directors consider that the disclosure of further disaggregated information would be seriously prejudicial to the commercial interests of the Group. 2. Operating Profit 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 Operating profit is stated after charging: Staff costs 6,185 6,686 -------------------------------------------------------------------------------- Auditors' remuneration - Statutory audit services 97 97 - Financial reporting advisory services 60 14 - Tax compliance services 8 12 - Tax advisory services 8 17 - Further assurance services 9 - -------------------------------------------------------------------------------- - Total fees payable to auditors 182 140 -------------------------------------------------------------------------------- Operating leases - land and buildings 343 291 -------------------------------------------------------------------------------- Research and development costs 1,971 1,023 -------------------------------------------------------------------------------- Depreciation of tangible fixed assets - owned assets 718 975 - assets held under finance leases and HP contracts 4 4 -------------------------------------------------------------------------------- 722 979 -------------------------------------------------------------------------------- Goodwill amortisation 45 30 -------------------------------------------------------------------------------- -9- The Character Group PLC Notes to the Accounts for the year ended 31 August 2004 continued Exceptional Item As announced on 29 November 2004, World Wide Licences Limited ('WWL') settled its dispute with Uniden America Corporation ('Uniden') which commenced when Uniden terminated its distribution agreement with WWL. Under the settlement, Uniden has agreed to pay to WWL the sum of US$4.5 million by two equal instalments. WWL has incurred substantial costs since Uniden terminated its distribution agreement. The settlement as well as the associated costs incurred have been classified as an exceptional item. The exceptional income and costs as set out on the face of the consolidated profit and loss account are explained below. Turnover is the sale of products which had to be sold elsewhere at lower prices. Cost of sales are the costs of those products, as well as a write off of royalties paid which are unlikely to be recoverable. Selling and distribution costs represent an additional amount of commission payable under the terms of WWL's contract with a USA company as a consequence of the settlement. Administration expenses comprise the legal costs incurred. Other operating income is the settlement from Uniden. 3. Interest 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 Total interest receivable 7 12 Total interest payable: On bank overdraft and similar charges (296) (222) Convertible loan note interest (56) (230) Finance leases and hire purchase contracts (1) (1) Factor advances (107) (122) -------------------------------------------------------------------------------- (453) (563) -------------------------------------------------------------------------------- -10- The Character Group PLC Notes to the Accounts for the year ended 31 August 2004 continued 4. Taxation 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 UK Corporation Tax Tax on profit for the period - - Adjustments to tax charge in respect of previous periods (241) - -------------------------------------------------------------------------------- Total UK corporation tax (241) - -------------------------------------------------------------------------------- Foreign Tax Tax on profit for the period 444 552 Adjustments to tax charge in respect of previous periods 17 - -------------------------------------------------------------------------------- Total foreign tax 461 552 -------------------------------------------------------------------------------- Total current tax 220 552 -------------------------------------------------------------------------------- Deferred Tax Tax losses (764) (473) Origination and reversal of timing differences 41 208 -------------------------------------------------------------------------------- Total deferred tax (723) (265) -------------------------------------------------------------------------------- Tax on profit on ordinary activities (503) 287 -------------------------------------------------------------------------------- Factors affecting tax charge for the period Profit on ordinary activities before taxation 3,224 5,556 -------------------------------------------------------------------------------- Profit on ordinary activities multiplied by standard rate of 967 1,667 corporation tax in the UK of 30% (2003: 30%) Effects of: Expenses not deductible for tax purposes 301 244 Capital allowances less than /(in excess of) depreciation 16 (212) Other temporary differences between taxable and accounting profit 162 (481) Lower tax rate on overseas earnings (252) (413) Utilisation of tax losses (1,003) (445) Tax losses not utilised 253 192 Adjustments to tax charge in respect of previous periods (224) - -------------------------------------------------------------------------------- Current tax charge for the year 220 552 -------------------------------------------------------------------------------- The deferred tax credit for the year includes a value for tax losses previously unrecognised. These losses were previously unrecognised as the Directors did not consider that there was sufficient evidence to support the recognition of a deferred tax asset. Having considered the results of the subsidiary companies for the year ended 31 August 2004, and prepared forecasts for the period ahead, the Directors are of the opinion that some of the tax losses within the Group will be recovered against future taxable profits within a time horizon which they consider to be reasonable. 5. Dividend 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 On equity shares: Interim dividend paid - 1.1p (2003: 1.0p) per share 726 410 Final dividend proposed - 0.7p (2003: 2.0p) per share 367 900 -------------------------------------------------------------------------------- Total 1,093 1,310 -------------------------------------------------------------------------------- -11- The Character Group PLC Notes to the Accounts for the year ended 31 August 2004 continued 6. Earnings per Share 12 months to 31 August 2004 12 months to 31 August 2003 Profit Weighted Pence Profit Weighted Pence after average per after average per taxation number of share taxation number of share ordinary ordinary shares shares Basic earnings per share 3,727,000 49,811,576 7.48 5,269,000 41,002,909 12.85 Impact of share option schemes - 1,190,106 (0.17) - 1,224,118 (0.37) Impact of convertible loan note - - - 161,000 11,500,000 (2.37) -------------------------------------------------------------------------------- Diluted earnings per share 3,727,000 51,001,682 7.31 5,430,000 53,727,027 10.11 -------------------------------------------------------------------------------- 7. Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 Operating profit 3,677 6,119 Depreciation, impairment and amortisation 767 1,009 (Profit)/loss on disposal of fixed assets (7) (3) (Increase) in stocks (4,084) (3,161) Decrease/(Increase) in debtors 1,843 (6,659) Increase in creditors 1,671 6,697 Exchange movement (541) (185) -------------------------------------------------------------------------------- Net cash inflow from operating activities 3,326 3,817 -------------------------------------------------------------------------------- Reconciliation of Exceptional Profit to Net Cash Outflow from Exceptional Activities Exceptional profit 492 Increase in debtor (2,504) Increase in creditors 926 -------------------------------------------------------------------------------- Net cash outflow from exceptional activities (1,086) -------------------------------------------------------------------------------- There was no cash flow relating to taxation in respect of the exceptional item. 8. Reconciliation of Net Cash Flow to Movement in Net Debt 12 months to 12 months to 31 August 2004 31 August 2003 £'000 £'000 Increase in cash in the period 251 648 Cash inflow/(outflow) from movement in debt and lease financing 5 (5) -------------------------------------------------------------------------------- Movement in net debt resulting from cash flows 256 643 Net debt at 1 September 2003 3,923 3,280 -------------------------------------------------------------------------------- Net debt at 31 August 2004 4,179 3,923 -------------------------------------------------------------------------------- -12- The Character Group PLC Notes to the Accounts for the year ended 31 August 2004 continued 9. Analysis of Net Debt Cash at bank Lease Total and in hand finance £'000 £'000 £'000 1 September 2002 3,284 (4) 3,280 Cash flow 648 (5) 643 -------------------------------------------------------------------------------- 31 August 2003 3,932 (9) 3,923 Cash flow 251 5 256 -------------------------------------------------------------------------------- 31 August 2004 4,183 (4) 4,179 -------------------------------------------------------------------------------- 10. The Annual General Meeting will be held at the offices of Citigate Dewe Rogerson, 26 Finsbury Square, London, EC2A 1DS on Wednesday, 19 January 2005 at 10.00am. 11. The Report & Accounts will be posted to shareholders. Further copies will be available from the Company's Office: 2nd Floor, 86-88 Coombe Road, New Malden, Surrey, KT3 4QS or info@charactergroup.plc.uk or character@citigatedr.co.uk and will be posted on the Company's website at www.charactergroup.plc.uk. 12. The preliminary announcement does not constitute statutory accounts. The annual report and accounts for the year ended 31 August 2004 have yet to be reported on by the auditors and have not yet been filed with the registrar of companies. This information is provided by RNS The company news service from the London Stock Exchange

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