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Warthog PLC (WHOG)

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Tuesday 28 September, 2004

Warthog PLC

Final Results

Warthog PLC
28 September 2004


Warthog plc

28th September 2004

 

For immediate release

 

Tuesday, 28th September 2004

 

                                 PRESS RELEASE                                  

 

                                  WARTHOG PLC                                   

                                                                                

                           ('Warthog' or 'the Group')                           

 

 

WARTHOG ANNOUNCES FINAL AUDITED RESULTS FOR THE YEAR ENDED 31 MARCH 2004

 

Chairman's Statement

 

Our results

 

Without doubt the year in which I have been appointed as Chairman of the Group
has been the most challenging year in Warthog's history. It has been a year of
stark contrasts; from a product release perspective it has been our most
successful year to date with releases of Wolverine's Revenge, Mace Griffin
Bounty Hunter, Looney Tunes - Back in Action, Battlestar Galactica and Harry
Potter and the Philosophers Stone all occurring during the financial year and
with four out of five of these producing sales in excess of half a million
units.

 

By comparison our financial results for the year were our worst to date. There
are a number of reasons for this dichotomy including; having to make further
write offs for insolvent publishers, incurring extra costs on 'work for hire'
projects which have not been recoverable from the publishers, incurring costs in
tendering for 'work for hire' projects which we did not win, carrying the costs
of unutilised staff and restructuring costs associated with downsizing our
operations.

 

This necessitated the Group completing a placing and rights issue during the
latter part of the financial year. The purpose of the funds raised was to both
underpin our balance sheet and to support a change in strategy where the Group
would do less 'work for hire' projects and concentrate more on developing games
in conjunction with IP holders and where possible to work on projects in which
Warthog had a substantial IP interest.

 

Our reasons for the change in strategy were that the amount of 'work for hire'
work available in Europe had been steadily reducing for some time and our
margins had also been under significant pressure due in no small part to the
continued weak dollar exchange rate. Additionally, it had become increasingly
clear that the level of risk associated with 'work for hire' projects had also
increased as frequently we found publishers asking us to fund prototypes before
contract.

 

In addition to the fund raising mentioned earlier we also embarked on a
significant cost cutting exercise and over the past twelve months have reduced
our world-wide headcount from a high during the financial year of 280 staff to
currently 120. We also consolidated our two UK studios into a single location
and have recently sold our freehold property in Cheadle, consequently removing
all our bank debt and facilities.

 

Staff

 

At this point I would like to take the opportunity to express the Board's deep
gratitude to all our employees, past and present, for their unstinting
dedication and enormous contribution during the year. The redundancies that we
have regrettably had to make during the year should not be seen as any
reflection on the commitment and loyalty of our staff.

 

Outlook

 

Market conditions in the industry have continued to be very difficult in
particular for European developers with a number of our peers announcing further
losses. In particular we have found, as we predicted, that 'work for hire'
business has been hard to win and in fact we have had two major 'work for hire'
projects cancelled in the last nine months alone. This has left the Group
largely working on its own IP games as well as one currently unannounced IP
Partnering project with a major Hollywood film studio, at its own cost until
publishing contracts are secured.

 

Although the Group continues to face an extremely challenging trading
environment and needs to work hard to secure publishing contracts for its games
going forward the fundraising has allowed the Group to streamline its
operations, reduce fixed operating expenses and overheads, redress the balance
of its development portfolio and provide the Group the best platform it could
hope for to secure the publishing contracts it requires.

 

 

 

Ian Templeton

Chairman

 



Chief Executive's review

 

Summary

 

This financial year and the subsequent six months has been the most difficult in
my seven year history at Warthog. The trading environment is more challenging
than I have ever known and this can be seen in our results that are dominated by
further write offs for insolvent publishers, by significant costs incurred in
tendering for developments that have not been successful, by restructuring costs
for closing one of our UK offices and laying off a significant proportion of
staff worldwide. Additionally, in our general trading, a large proportion of our
receipts have been discounted by a significant weakening of the US dollar.
Moreover in the last nine months we have had two major 'work for hire' projects
cancelled. Accordingly we have concentrated more on our own IP and IP partnering
developments as these are more likely to have an enduring benefit to the Group.
However, despite preliminary successes in this area we are yet to see the full
benefits of this strategy.

 

Strange then that it has also been our best year ever with respect to the games
we have produced. Four of the five major games we released this financial year
have sold in excess of half a million units.

 

Our technology has continued to evolve and indeed without our TUSK technology we
would not have been able to develop many of the games we did in the exacting
timescales we were required to work to, in order to hit the key Thanksgiving and
Christmas market.

 

The contrast is stark. We have developed the games we were working on to the
timescales required and they have sold better than ever before in our history.
Our technology has improved and our development process has continued to be
honed. Yet new business is more difficult to find than ever and the costs of
tendering are higher than ever before. Further it is set to get worse as the
industry prepares for the next generation of consoles, as it will take time to
build up a user base equivalent to the current generation of consoles but the
cost of producing these next generation games will increase significantly.

 

Our resultant strategy has been to streamline our development, to reduce the
number of worldwide teams we operate and address the balance of our development
portfolio, reducing the proportion of 'work for hire' to concentrate more on IP
partnering and self generated IP. This strategy is not without risks; these
risks however are no more than we have been facing through standard 'work for
hire' but the benefits for success are far more attractive. It would only take a
single major hit developed on the back of our IP partnering deals or self
generated IP to propel the Company forward and transform our fortunes.

 

 

 

Games released in the financial year

 

This has been our most successful year to date from a product release
perspective. We completed and shipped five major games (12 versions) with top
tier publishers during the financial year. Four of the five games have sold in
excess of half a million units.

 

Wolverine's Revenge (PS2) was published by Activision simultaneously with the
release of the new X-Men 2 movie during calendar Q2 2003 and got to number 3 in
the PS2 only chart.

 

Mace Griffin Bounty Hunter (Xbox, PS2 and PC) was an original game devised by us
and published by Vivendi Universal Games during calendar Q2/Q3 2003. It received
some excellent reviews from the games press including:

 

PSE2 Magazine - Gold Award - 95%

XboxWORLD - 9/10

PSi2 - 9/10

 

Battlestar Galactica (Xbox and PS2) was published by Vivendi Universal Games
during calendar Q4 2003 simultaneously with the release of a brand new
Battlestar Galactica TV series.

 

Harry Potter and the Philosophers Stone (Xbox, PS2 and GC) was published by
Electronic Arts during Q4 2003.

 

Looney Tunes Back in Action (PS2, GC and GBA) was developed for Warner Bros.
directly and published by Electronic Arts simultaneously with the release of the
new Looney Tunes Back in Action film during calendar Q4 2003 and calendar Q1
2004.

 

Games completed after the financial year end

 

Since the end of the financial year we have completed Richard Burns Rally (PS2,
Xbox and PC) for SCi and this has shipped in Europe. It has received some
outstanding praise from the press including:

 

Custom PC - 90%

Auto Express - 5 out of 5

NUTS - 5 out of 5

Official Playstation 2 magazine - 'The most realistic rally game ever.'

 

We have completed Future Tactics - The Uprising (PS2, Xbox, GC and PC) which is
an original game IP devised and owned by us. Crave have published this in North
America and we licensed JoWooD to publish in the rest of the world with it due
to ship shortly.

 

We are close to completing Animaniacs - The Great Edgar Hunt (PS2, Xbox and GC)
which was originally a 'work for hire' project with Swing! before they went into
receivership during 2003. We have subsequently negotiated the rights back from
the receiver and entered into a publishing agreement with an as yet undisclosed
publisher.

 

Games in development

 

In addition to completing Future Tactics and Animaniacs our Cheadle Studio is
working on a number of projects including an as yet unannounced IP Partnering
project with a major Hollywood movie studio and two original IP's, Sticky Balls
and Milo. The IP Partnering project is based on a movie franchise and is being
developed on the Xbox and PS2 platforms as a first person action adventure game.
It is targeted for release during the second half of our 2006 financial year.
Sticky Balls is a puzzle game which we are currently developing for the new Sony
PSP handheld games console which is due for release in early 2005 and we are
targeting it as a launch title. Milo is a third person 'colour shooter' being
developed on the Xbox, PS2 and GC platforms for release during the second half
of our 2006 financial year. We are currently in discussions with a number of
publishers regarding each of these projects.

 

Our Texas Studio is working on two original IP's, Johnny Whatever and Conquest
II, both of which we own. Johnny Whatever is a highly original '3rd person riff
shooter' which we are aiming at the new Xbox 2 and PS3 platforms. Conquest II is
a space RTS game we are developing for the PC and is targeted for release in
2005. We are currently in discussions with a number of publishers regarding both
of these projects.

 

Our Swedish Studio is working on an as yet unannounced project for SCi.

 

More information is available about our original products at:

http://www.warthogtx.com/unleashedPR/

 

 

Financial Review

 

Turnover of £5.7 million (2003: £11.4 million) was comprised entirely of
development advances. It was substantially less than the previous year due to a
combination of an adverse movement in the dollar exchange rate, which
deteriorated a further 15% in the year, cancelled contracts in the US and the UK
and a lack of success on new tenders or follow on work for our development staff
who until the recent fundraising were predominantly working within the 'work for
hire' business.

 

Cost of Sales

 

The balance of internal resource to contracted resource skewed Cost of Sales
more heavily to employee costs which accounted for 86% (2003: 63%) owing to a
full year's impact of the acquisitions made in 2003. The use of internal
resources generated a reduction in costs, which were down £525,000 (6%) in total
from last year. This saving would have been greater but for the difficulty this
in turn created in tailoring these costs directly to the changing fortunes of
the business. Some of this inflexibility was due in part to European employment
legislation restrictions but also with consideration to the future value of the
Group. Indeed, whilst people are our greatest expense their skill, experience
and expertise remain our greatest asset.

 

Exceptionals

 

A significant factor in our weakened trading position was a series of
exceptional items that impacted upon the business.

 

Exceptional items amounted to £4.424 million, comprised as described below.

 

£1.384 million related to WIP write offs on the Game Cube version of our
previous Rally game in line with poor sales on that platform, and our ET and
Animaniacs games that we viewed to be unlikely to sell into distribution as at
the year end.

 

£2.454 million related to provisions against Amounts Recoverable on Contracts
for contracts ceased due to the financial uncertainty of the customer or the
intellectual property upon which the games were based or due to exceptional
penalties passed on by the publisher.

 

£236k related to the provision for bad debts in relation to these troubled
customers and contracts.

 

£323k related to redundancy and restructuring costs arising from the corrective
action taken as a consequence.

 

Depreciation and Amortisation

 

Depreciation and amortisation rose by £70k to £691k although the majority of
this increase related to amortisation, which increased to £214k from £155k last
year, to reflect the full year's amortisation on the acquisitions made in 2003.
Depreciation was only £10k up on last year reflecting the consolidation taking
place within the Group following its substantial expansion of prior years.

 

Other operating charges

 

Tight control of the Group cost base kept other operating charges in line with
last year at £1.6 million (2003: £1.6 million) despite being the first year to
include a full year's charge for all our studios acquired in 2003. With the
closure of one of our UK offices and the cost reduction exercise undertaken
towards the end of the financial year we anticipate this figure to reduce
substantially next year.

 

Balance Sheet

 

The exceptional items and consequential downturn in trading towards the end of
the financial year required the Group to extend its borrowings to £3.1 million
at its height in the early part of this calendar year. However, this level of
debt was unsustainable for the business, particularly considering the
restructuring required and the change in the balance of its development
portfolio.

 

Following the placing and rights issue undertaken earlier this year and the
recent sale of our freehold property in Cheadle, this debt has been paid back in
full and the balance sheet of the Group has been strengthened.

 

At the year end the Group's cash and short term deposits were at £361k (2003:
Net debt £1.14 million).

 

Net assets of the business were reduced to £3.5 million from £7.8 million last
year reflecting the £4.4 million of exceptional write offs and provisions and
£4.9 million of further losses incurred in the year, offset by the £5 million
placing and rights issue.

 

The fundraising gave the Group a base on which to build for the current
financial year and transition its development portfolio away from its reliance
on standard 'work for hire' business.

 

Going Concern

 

The group incurred losses after tax for the 2003/04 year of £9,397,489 and has
net assets of £3,495,920 at 31 March 2004. A placing and rights issue in January
and February 2004 raised £5,048,405 net of costs to provide additional working
capital. In view, however, of the losses sustained management has prepared
projections for the two years ending 31 March 2006 which indicate that the group
can continue to trade and to meet its liabilities as they fall due for the
foreseeable future. The projections are based on assumptions regarding the
timing and incidence of a relatively small number of projects. Although the
projections incorporate allowance for the cancellation of one project and delay
of others, should further unforeseen delays or cancellations occur these would
adversely affect the group's cash flows. The projections also assume that,
should such cancellations occur, resources can be restructured within a
relatively short timescale in order to enable the group to reduce its cost base.

 

The directors are satisfied that they have drawn up the projections on a prudent
basis, based wherever possible on income generating projects which are close to
or have already been contracted, or projects on which serious discussions have
taken place with publishers. The projections are consistent with the group's
stated aim at the time of its placing and rights issue of developing further its
own intellectual properties.

On this basis the directors have adopted the going concern basis in the
preparation of these financial statements.

 

 

Ashley Hall

Chief Executive Officer

 

27 September 2004

 

 

Enquiries:

 

Steven Law

Chief Operating Officer - Warthog plc 0161 608 1200

 

Simon Elms

Chief Financial Officer - Warthog plc 0161 608 1200

 

 

 


The summary of results on the following pages does not comprise statutory
financial statements.

 

Consolidated Profit and Loss account

 

For the year ended 31 March 2004

 
                                                     2004                 2003  
                                                        £                    £  
Turnover                                        5,674,899           11,417,138  
Cost of sales                                   8,674,367            9,200,899  
Exceptional costs                               4,424,991            1,313,726  
                                            _______________      _______________
                                                        _                    _  
Gross (loss)/ profit                           (7,424,459)             902,513  
Other operating expenses (net)                  1,627,981            1,659,543  
                                            _______________      _______________
                                                        _                    _  
Loss on ordinary activities                                                     
before interest                                (9,052,440)            (757,030) 
Investment income                                   2,161               35,267  
                                            _______________      _______________
                                                        _                    _  
                                               (9,050,279)            (721,763) 
Interest payable                                  192,394               68,942  
                                            _______________      _______________
                                                        _                    _  
Loss on ordinary activities                                                     
before taxation                                (9,242,673)            (790,705) 
Taxation                                         (154,816)             377,914  
                                            _______________      _______________
                                                        _                    _  
Retained loss for the year                     (9,397,489)            (412,791) 
                                            _______________      _______________
                                                 ________                    _  
                                                                                
Earnings per ordinary share-                                                    
basic                                           (12.85)p               (0.87)p  
Earnings per ordinary share-                       N/A                   N/A    
diluted                                                                         

 

Consolidated statement of total recognised gains and losses

For the year ended 31 March 2004
                                                    2004                  2003  
                                                       £                     £  
                                                                                
Loss for the financial year                   (9,397,489)             (412,791) 
Currency translation (loss)/ gain on                                            
foreign currency net investments                 (43,656)               55,740  
                                           _______________       _______________
                                                                             _  
Total recognised gains and losses                                               
relating to the year                          (9,441,145)             (357,051) 
                                     ________________      ________________     

 

Consolidated Balance Sheet

31 March 2004
                                                    2004                  2003  
                                                       £                     £  
Fixed assets                                                                    
                                                                                
Intangible assets                                751,309               906,358  
Tangible assets                                1,959,875             2,270,250  
Investments                                            -                     -  
                                           _______________       _______________
                                                                                
                                               2,711,184             3,176,608  
                                                                                
Current assets                                                                  
                                                                                
Stock                                            435,678             1,634,034  
Debtors                                        1,154,631             5,570,430  
Cash at bank and in hand                         360,845               359,488  
                                           _______________       _______________
                                                                                
                                               1,951,154             7,563,952  
                                                                                
Creditors:                                                                      
Amounts falling due within one year           (1,154,954)           (1,411,267) 
                                           _______________       _______________
                                                                                
Net current assets                               796,200             6,152,685  
                                                                                
                                                                                
                                                                                
Total assets less current                      3,507,384             9,329,293  
liabilities                                                                     
                                                                                
                                                                                
                                                                                
Creditors:                                                                      
                                                                                
Amounts falling due after more than                                             
one                                                    -            (1,500,000) 
year                                                                            
                                                                                
Provision for liabilities and                    (11,464)                    -  
charges                                                                         
                                                                                
                                           _______________       _______________
                                                                                
                                               3,495,920             7,829,293  
                                                                                
                                           _______________       _______________
                                                                                
                                                                                
                                                                                
Capital and reserves                                                            
                                                                                
Called up share capital                        3,197,847               481,820  
                                                                                
Contingent share capital                         143,442               286,885  
                                                                                
Share premium account                          9,190,402             6,655,214  
                                                                                
Merger reserve                                    52,463                52,463  
                                                                                
Profit and loss account                       (9,088,234)              352,911  
                                                                                
                                           _______________       _______________
                                                                                
Share holders' funds                           3,495,920             7,829,293  
                                                                                
                                           _______________       _______________
                                                                                

 

 

Consolidated cash flow statement

 

For the year ended 31 March 2004

 

 
                                                             2004         2003  
                                                                £            £  
                                                                                
Cash flow from operating activities                    (3,356,553)  (2,328,154) 
                                                                                
Returns on investments and servicing of finance          (190,233)     (33,675) 
                                                                                
Taxation                                                  168,873      110,718  
                                                                                
Capital expenditure and servicing of finance             (169,135)    (630,114) 
                                                                                
                                                                ---          ---
Acquisitions                                                    -      242,260  
                                                                                
Cash outflow before financing                          (3,547,048)  (2,638,965) 
                                                                                
                                                                                
Financing                                               3,548,405      169,652  
                                                                                
Increase/ (decrease) in cash in the year                    1,357   (2,469,313) 
                                                                                
                                                                                
                                                                                

 

 

 

Reconciliation of net cash flow to movement in debt

 
                                                            2004         2003  
                                                               £            £  
                                                                               
Increase/ (decrease) in cash in the year                   1,357   (2,469,313) 
                                                                               
Change in net debt resulting from cash flows           1,500,000     (350,008) 
                                                                               
Movement in net debt in year                           1,501,357   (2,819,321) 
                                                                               
                                                                               
Net debt at 1 April 2003                              (1,140,512)   1,678,809  
                                                                               
                                                                               
Net funds at 31 March 2004                               360,845   (1,140,512) 
                                                                               
                                                                               
                                                                               

 

 

 

 

 

Notes to the financial statements

 

For the year ended 31 March 2004

 

The information set out below is unaudited and does not constitute statutory
accounts within the meaning of s240 of the Companies Act 1985.

 

A Turnover and profit on ordinary activities before taxation

 

The group's turnover and profit before taxation were all derived from its
principal activity.

 

Sales originated in the following geographical markets:
                                                          2004            2003  
                                                             £               £  
                                                                                
United Kingdom                                       3,952,624      10,357,174  
USA                                                    980,510         198,544  
EC                                                     741,765         861,420  
                                                                                
                                                     5,674,899      11,417,138  
                                                                                

 

B Exceptional Items

Exceptional costs of £4,424,991 (2003: £1,313,726) have been incurred during the
current year. Provisions totalling £4,043,948 have been made in the current year
against the costs incurred in developing certain games. The directors are of the
opinion that these provisions are necessary in view of the financial status of
certain of the parties that had originally contracted these games. Exceptional
costs of £381,043 (2003: £nil) relate to the cost of restructuring Group
operations. As the Group has trade losses to carry forward for tax purposes,
there is no effect of these charges on the Group's tax charge for the year.

 

C Debtors
                                                         2004             2003  
                                                            £                £  
Due within one year:                                                            
Trade debtors                                          34,797          611,513  
Amount recoverable on long term contracts             965,955        4,072,811  
Other debtors                                          57,476          480,623  
Corporation tax                                        13,090                -  
Deferred tax asset                                          -          323,101  
Prepayments and accrued income                         83,313           82,382  
                                                                        ______  
                                                    1,154,631        5,570,430  
                                                                                

 

D Creditors: Amounts falling due within one year
                                                         2004             2003  
                                                            £                £  
                                                                                
Payments received on account                                -          142,657  
Trade creditors                                       310,670          375,559  
Other taxation and social security                    304,758          227,499  
Other creditors                                        17,924           48,822  
Accruals and deferred income                          521,602          616,730  
                                                                                
                                                                          
                                                    1,154,954        1,411,267  
                                                                                
                                                                          

 

E Cash flows

 
1                                                             2004        2003  
                                                                 £           £  
Reconciliation of operating loss to net cash inflow from                        
operating activities                                                            
Operating (loss)/ profit on ordinary activities          (4,627,449)    556,696  
                                                                                
Exceptional costs                                        (4,424,991) (1,313,726)
                                                                                
                                                                                
                                                                ----        ----
Operating loss                                           (9,052,440)   (757,030) 
                                                                                
Depreciation and amortisation                              691,712      621,232  
Decrease/ (Increase) in stocks                           1,198,356     (163,692) 
Decrease/ (Increase) in debtors                          4,105,788   (1,492,879)
                                                                                
Decrease in creditors                                     (256,313)    (591,525) 
Other non cash movements                                   (43,656)      55,740  
                                                                                
                                                                ----        ----
Net cash outflow from operating activities               (3,356,553) (2,328,154)
                                                                                
                                                                                
                                                                 ===         ===
  
                                                                              
2                                                             2004        2003  
                                                                 £           £  
Analysis of cash flows for headings netted in the cash                          
flow                                                                            
                                                                                
                                                                                
                                                                                
Returns on investments and servicing of finance                                 
                                                                                
Interest received                                            2,161      35,267  
Interest paid                                             (192,394)    (68,942) 
                                                                                
                                                                 ---         ---
Net cash outflow from returns on investments and                                
servicing of finance                                      (190,233)    (33,675) 
                                                                                
                                                                 ===         ===

 
 

 
Capital expenditure and financial investment                                    
                                                                                
Purchase of tangible fixed assets                         (171,561)   (630,114) 
Sales of tangible fixed assets                               2,426           -  
                                                                                
                                                                                
                                                                ===         ===
Net cash outflow from capital expenditure and                                   
financial investment                                      (169,135)   (630,114) 
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
Financing                                                                       
                                                                                
Issue of ordinary share capital                          5,425,661           -  
Issue costs                                               (377,256)   (180,356) 
Repayment of other long term loans                      (1,500,000)   (609,992) 
                                                                                
New Loans                                                        -     960,000  
                                                                                
                                                                 ---         ---
Net cash inflow from financing                            3,548,405     169,652  
                                                                                
                                                                                
                                                               =====       =====

 
3                                   At1 April      Cash flow     At31 March 2004
                                                                                
Analysis of net debt                     2003              £                   £  
                                            £                                   
                                                                                
Cash in hand and at bank              359,488          1,357           360,845  
                                                                                
                                                                                
                                       ------          ------           ------
Debt due within 1 year                      -              -                 -  
Debt due after 1 year              (1,500,000)     1,500,000                 -  
                                                                                
                                       ------          ------           ------   
                                   (1,500,000)     1,500,000                 -  
                                                                                
                                                                                               
                                          ===            ===               ===

Total                               (1,140,512)    1,501,357            360,845

 

 

F Earnings per share

 
                                                           2004          2003  
                                                              £             £  
Basic:                                                                         
Loss after tax                                       (9,397,489)     (412,791) 
Weighted average number of shares                    73,135,755    47,344,052  
EPS (pence)                                              (12.85)        (0.87) 
                                                                               

 

Basic and fully diluted earnings are the same due to the loss for the year.

 



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