Interim Results - 6 Months to 29 February 2000

Character Group PLC 30 May 2000 11.00am - Analysts' Briefing 12.00noon - Press Briefings @ Citigate Dewe Rogerson 3 London Wall Buildings London Wall London EC2M 5SY Tel: 0207 638 9571 The Character Group plc Interim Results for the six months ended 29 February 2000 STATEMENT BY THE CHAIRMAN, RICHARD KING In my AGM statement in January, I commented that trading conditions were challenging over the all-important 1999 Christmas period. The major factors contributing to this were the generally difficult retail trading conditions coupled with the under-performance in sales of our range of computer accessories (which resulted in a write-off of £1m in unused license fees), and of our Star Wars related products where, like many other companies, we had taken an aggressive position in a range of merchandise which we believed would be in demand following the release of the Star Wars film. Following the AGM statement, trading conditions have continued to be difficult, with no evidence of an improvement in the retail environment or an upturn in sales. The major factor that impacted on the Group in this period continued to be our exposure to products relating to Star Wars. Like many other distributors and retailers, we anticipated that our position in relation to this range would improve following the release of the video in April. However the general lack of appetite for this merchandise resulted in sales being significantly below expectations. The combination of these exceptional factors impacting our businesses during the same trading period resulted in the movement for the Group from profit to loss. It is very disappointing therefore to report that in the half year to 29 February 2000, on sales of £45.4 million (1999 - £49.0 million), we produced a net loss before tax of £5.955 million against a net profit before tax of £5.023 million at the interim stage for 1999. In these circumstances, no interim dividend will be paid. The acquisition of the business and assets of The Really Useful Games Company was completed on 3 April 2000. The business has been integrated into Character Games Limited, a new company formed specifically for that purpose. The business and assets were acquired with effect from 4 January 2000. Hence, the interim results include two months performance of this business. It should be noted that the games market is very seasonal and that the cost of this year's trade fairs have been expensed in this period, although the benefit of the resulting sales will not materialise until the first half of the new financial year. To return to our previous pattern of growth, we are currently undertaking an in-depth review and substantial rationalisation of our businesses in order to improve efficiencies and maximise returns quickly and effectively. To date, these actions include: * reducing our overall stocks to a more realistic level together with an aggressive write down of obsolete stock. We anticipate that the Group's current stock clearance programme will be completed by the end of this financial year and expect to sell all Star Wars stocks within the next few weeks. Provisions for this have been made in the first half results being reported. This, we believe, will leave the Group in a much healthier position going forward. * the appointment of a chief operating officer in Hong Kong, to head up our Far East operations; by streamlining our operating procedures, we have already been able to reduce our head count there by over 25%, without affecting our ability to grow the business. * Delta Millennium Inc. is to focus predominantly on developing 'FOB' sales for its products rather than incurring substantial costs in warehousing and other services associated with local distribution. In addition, we will be transferring the business of Universal Concepts to Downpace's premises, which will be completed by the end of this financial period and should lead to a further reduction of personnel and other costs. I would like to emphasize that we are basically a marketing and distribution business. In the last five years, we have developed into an international Company with our own designed products, selling in many countries throughout the world. Prior to this set of results, we were exceptionally successful and we see no reason why we should not recover from this temporary set-back, particularly given the number of exciting opportunities that the Group is currently focusing on this calendar year, and which include: * Cool-iCam, a palm size digital camera capable of taking 80 images which can be downloaded in seconds and can generate up to 15 seconds of video which can be transmitted via the internet. It can also be used as a web camera for conferencing. This is particularly significant in that it is the first of a generation of hi-tech products being developed by the Group. This product will be with the major retailers in the UK by late summer. * the successful launch of our range of Pokemon stationery and the high demand for this product has generated keen interest with retailers both in the UK and internationally. * a range of toys based on the movie 'Chicken Run' by Aardman (the creators of Wallace and Gromit) which is due for release in July. * Toy Story 2 products are continuing to sell well and should benefit from the video release in October. * a wide range of Cartoon Network products across the Group. * the 'Loveable' range of collectibles. * the C-watch range (with characters such as Pokemon, Toy Story 2 and Power Puff Girls). * Purple Ronnie products, including gifts, watches and computer accessories. In common with the retail market in general and, in particular, the toy, stationery, and gift markets we are continuing to experience difficult trading conditions, which have led to us achieving a lower than expected rate of sale for our products to date. However, we believe that even if these conditions continue through the year, the action that we have taken to focus on a continual programme of cost reduction, improvement in efficiency and profitability, when combined with our strong product range and listings should enable us to benefit from strong trading this coming Christmas and a return to our normal pattern of profitable growth. The Character Group plc Interim Results CONSOLIDATED PROFIT AND LOSS ACCOUNT 6 months to 6 months to 12 months to 29 February 28 February 31 August 2000 1999 1999 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000 Turnover Continuing 45,017 48,973 99,002 operations Acquisitions 372 - - 45,389 48,973 99,002 Cost of sales (33,549) (28,796) (55,240) Gross profit 11,840 20,177 43,762 Net operating expenses Selling and (7,640) (6,884) (17,229) distribution costs Administrative (9,728) (7,990) (16,281) expenses Other operating 65 246 356 income Operating (loss)/profit Continuing (5,074) 5,549 10,608 operations Acquisitions (389) - - (5,463) 5,549 10,608 Interest 17 22 51 receivable Interest payable (509) (548) (1,295) (Loss)/profit on (5,955) 5,023 9,364 ordinary activities before taxation Taxation 2 1,818 (1,474) (2,925) (Loss)/profit on (4,137) 3,549 6,439 ordinary activities after taxation Equity minority - 89 (115) interest (Loss)/profit for (4,137) 3,638 6,324 financial period Dividends - (367) (1,350) (Loss (4,137) 3,271 4,974 absorbed)/profit retained 3 Earnings per share (19.67p) 17.34p 30.12p - basic 3 Earnings per share (19.03p) 16.71p 29.14p - fully diluted Dividends per - 1.75p 6.5p share EBITDA (4,793) 6,013 11,619 (Earnings before interest, tax, depreciation and amortisation) The Character Group plc Interim Results CONSOLIDATED BALANCE SHEET Group as at Group as at Group as 29 February 28 February at 2000 1999 31 August (unaudited) (unaudited) 1999 Note £'000 £'000 (audited) £'000 Fixed assets Intangible 1,999 - - assets Tangible 2,766 3,272 3,070 assets Investments 903 436 433 Joint 214 - 126 Ventures - Gross Assets - Gross (213) - (125) Liabilities - Net 1 - 1 Investment 5,669 3,708 3,504 Current assets Stocks 11,392 12,296 16,663 Trade debtors 9,473 12,889 18,989 subject to finance arrangements Factor (8,188) (9,568) (17,324) advances 1,285 3,321 1,665 Trade and 5,862 6,485 8,595 other debtors Cash at bank 810 1,517 9,544 and in hand 19,349 23,619 36,467 Creditors: amounts (14,459) (16,530) (27,327) falling due within one year Net current 4,890 7,089 9,140 assets Total assets 10,559 10,797 12,644 less current liabilities Creditors: amounts (44) (134) (55) falling due after more than one year Net assets 10,515 10,663 12,589 Capital and reserves Called up 1,052 1,049 1,052 share capital Shares to be 2,016 2,320 2,320 issued Capital 15 15 15 redemption reserve Share 3,625 3,568 3,617 premium Merger 651 651 651 reserve Profit and 4 3,156 3,263 4,934 loss account Equity 10,515 10,866 12,589 shareholders' funds Minority - (203) - interest 10,515 10,663 12,589 The Character Group plc Interim Results CONSOLIDATED CASH FLOW STATEMENT Note 6 months to 6 months to 12 months 29 February 28 February to 2000 1999 31 August (unaudited) (unaudited) 1999 £'000 £'000 (audited) £'000 Cash flow from 5 (6,350) 958 9,535 operating activities Returns on investment and servicing of finance Interest paid (net) (477) (526) (1,229) Interest element of (15) - (15) finance lease rental payments Net cash outflow for returns on (492) (526) (1,244) investments and servicing of finance Taxation (1,492) (110) (1,667) Capital expenditure and financial investment Payments to acquire (260) (733) (1,161) tangible fixed assets Sale of tangible 94 51 141 fixed assets Purchase of shares (472) (434) (431) for ESOT Investment in joint - - (1) venture Net cash outflow for capital expenditure (638) (1,116) (1,452) and financial Investment Acquisitions and disposals Purchase of - (2,255) (678) subsidiary undertakings Net cash outflow for - (2,255) (678) acquisitions Equity dividends paid (971) (829) (1,195) Cash (outflow)/inflow before use of liquid (9,943) (3,878) 3,299 resources and financing Management of liquid resources: Financing Issue of ordinary 8 - 52 share capital Capital element of (67) (40) (122) finance lease rentals Short term bank loan (102) (348) 532 Net cash (161) (388) 462 (outflow)/inflow from financing (Decrease)/increase 7 (10,104) (4,266) 3,761 of cash in the period (Decrease)/increase 7 (9,935) (3,878) 3,351 in net debt in the period The Character Group plc Interim Results NOTES TO THE ACCOUNTS 1. Basis of Preparation The financial information for the six months ended 29 February 2000 has not been audited, nor has the financial information for the six months ended 28 February 1999. However, the interim report includes a review report signed by the auditors. The comparative figures for the year ended 31 August 1999 do not constitute the company's statutory accounts for that year, but have been extracted from the statutory accounts filed with the Registrar of Companies, and which carried an unqualified audit report. The report has been prepared in accordance with the applicable accounting standards on a consistent basis using the accounting policies set out in the 1999 annual report. 2. Taxation The tax charge for the half year is estimated on the basis of the anticipated tax rates applying for the full year. 3. Earnings per Share Earnings per share have been calculated in accordance with FRS 14 Earnings per share. The calculations are based on the following: 6 months to 6 months to 12 months to 29 February 2000 28 February 1999 31 August 1999 (Loss)/profit for the period after (£4,137,000) £3,638,000 £6,324,000 taxation and minority interest Basic weighted average share 21,035,590 20,983,000 20,994,615 capital (number of shares) Dilutive Shares - 702,202 785,702 708,202 share options Diluted weighted 21,737,792 21,768,702 21,702,817 average share capital 4. Profit and Loss Account £'000 At 1 September 1999 4,934 Loss absorbed for the six months (4,137) Goodwill adjustment for contingent consideration 2,320 Exchange difference 39 At 29 February 2000 3,156 The cumulative amount of positive goodwill written off against reserves is £5,583,000 (28 February 1999: £7,901,000 - 31 August 1999: £7,903,000). The directors have reviewed the contingent consideration relating to a previous acquisition and have reduced the consideration payable by £2,320,000. 5. Reconciliation of operating profit to net cash inflow from operating activities 6 months to 6 months to 12 months to 29 February 28 February 31 August 2000 1999 1999 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Operating (loss)/profit (5,463) 5,549 10,608 Depreciation and 670 464 1,011 amortisation of goodwill Loss/(profit) on 23 (10) (20) disposal of tangible fixed assets Decrease/(increase) in 5,272 (683) (5,051) stocks Decrease/(increase) in 3,113 (2,223) (2,679) debtors (Decrease)/increase in (9,931) (2,246) 5563 creditors Exchange differences (34) 107 103 Net cash (6,350) 958 9,535 (outflow)/inflow from operating activities 6. Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash in the period (10,104) (4,266) 3,761 Cash inflow/(outflow) from movement in debt and 169 388 (410) lease financing Movement in net debt resulting from cash (9,935) (3,878) 3,351 flows Other non-cash movements - (168) (168) Movement in net debt in the period (9,935) (4,046) 3,183 Net debt at 1 September 1999 8,053 4,870 4,870 Net debt at 29 February 2000 (1,882) 824 8,053 7. Analysis of net debt Cash at bank & Short term Lease Total in hand bank loan finance £'000 £'000 £'000 £'000 1 September 1998 5,783 (761) (152) 4,870 Cash flow 3,761 (532) 122 3,351 Non cash flow - - (168) (168) Acquisitions - - - - 31 August 1999 9,544 (1,293) (198) 8,053 Cash flow (10,104) 102 67 (9,935) 29 February 2000 (560) (1,191) (131) (1,882) 8. The interim statement will be posted to shareholders on 1 June 2000. Further copies will be available from the Company's Office: 2nd Floor, 86-88 Coombe Road, New Malden, Surrey, KT3 4QS. Independent Review Report to The Character Group plc Introduction We have been instructed by the company to review the financial information set out on pages 3 to 7 and we have read the other information contained in the interim report for any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the London Stock Exchange require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review of work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data, and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 29 February 2000. HLB Kidsons Chartered Accountants Chelmsford 30 May 2000 Enquiries: Richard King, Chairman Fiona Tooley, Director Kiran Shah, Finance Director Citigate Dewe Rogerson Ltd The Character Group PLC Today: 0207-638 9571 Today: 0207-638 9571 Thereafter:0121-631 2299 Thereafter: 0208-949 5898 Mobile: 07785 703523 Mobile: 0836 250150 (RK) Mobile: 0956 278522 (KS)

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