SCi Entertainment Group Plc

Transcription

Annual report and accounts 2006
Highlights
REVENUE
£179.1m
RECORD PROFITS
SUCCESSFUL
INTEGRATION OF
EIDOS
EBITDA before exceptional
items and share based
compensation of
£28.8 million, 25% ahead of
original target.
Revenue of £179.1 million,
7% ahead of original target.
11.9 million units sold in the
financial year including
2.9 million of Tomb Raider:
Legend; 1.4 million of
Hitman: Blood Money;
2.5 million units of Lego Star
Wars distributed.
Positive results confirm
turnaround of Eidos following
acquisition in May 2005.
Turnaround due to:
successful relaunch of key
brands; annual cost
reductions of £14 million;
and improved performance of
internal development studios.
Eidos brands and technology
independently valued as
intangible assets at
£116.9 million.
Profit before tax of £8.1 million
after amortisation of intangible
assets.
Cash at 30 June 2006 of
£37.2 million. No gearing.
19 product releases planned
for 2007 financial year,
compared to 9 in 2006.
Growing contribution from
profitable New Media business
exploiting our digital content
on mobile phones, digital
television and the internet.
Opportunities to grow
revenues and margins
through direct downloadable
content, broadening age and
geographic profile of gamers.
Contents
Chairman’s statement 8
Chief Executive’s review 9
Financial review 14
Directors, officers and advisers 20
Directors’ report 22
06:07:05
Acquisition of Eidos shares
SCi announces Offer acceptances
from over 90% of Eidos
shareholders, enabling acquisition
of remaining shares.
Corporate governance 24
Corporate responsibility statement 27
Directors’ remuneration report 28
Report of the independent auditors 33
Consolidated income statement 34
Consolidated statement of recognised
income and expense 35
Consolidated balance sheet 36
Consolidated cash flow statement 37
Notes to the consolidated accounts 38
Company balance sheet under UK GAAP 68
Notes to the parent Company
financial statements 69
Shareholder information 72
Five year record ibc
SCi Entertainment Group Plc Annual Report & Accounts 2006
SCi ENTERTAINMENT IS ONE OF THE WORLD’S
LEADING PUBLISHERS AND DEVELOPERS OF
DIGITAL ENTERTAINMENT. WE CREATE AND
OWN VALUABLE GAME FRANCHISES AND
EXPLOIT THEM ACROSS A WIDE RANGE OF
DIGITAL MEDIA. THE GROUP HAS GLOBAL
OPERATIONS WHICH TRADE UNDER THE EIDOS
BRAND NAME. WE OWN HIGH QUALITY
DEVELOPMENT STUDIOS INCLUDING CRYSTAL
DYNAMICS, IO INTERACTIVE, BEAUTIFUL GAME
STUDIOS AND PIVOTAL GAMES.
SCi Entertainment Group is a public limited company registered in England
(number 3121578). Its ordinary shares are listed on the London Stock
Exchange (ticker SEG.L). SCi Entertainment Group Plc is the parent company
of the SCi and Eidos groups of companies. Unless otherwise stated, the text
in this Annual Report does not distinguish between the activities and
operations of the parent Company and those of its subsidiary undertakings.
This is the Company’s Annual Report for the 12 month period ended 30 June
2006 and complies with UK regulations. It is also available on the Company’s
website at www.sci.co.uk. SCi and Eidos and the SCi and Eidos logos are
registered trademarks of the SCi Entertainment Group of companies. All other
trademarks are the property of their respective owners. All rights reserved.
Forward-looking Statement
This Annual Report contains information about our past performance or
practices. No such information should be used as an indicator of future
performance or practices. It may also contain forward-looking statements that
are based on current expectations or beliefs, as well as assumptions about
future events. You can identify these statements by their use of words such as
‘will’, ‘anticipate’, ‘estimate’, ‘expect’, ‘project’, ‘intend’, ‘plan’, ‘should’, ‘may’,
‘assume’ and other similar words. You should not place undue reliance on our
forward-looking statements, which are not a guarantee of future performance
and are subject to factors that could cause our actual results to differ
materially from those expressed or implied by these statements. Such factors
include: general economic conditions in the Group’s markets, particularly levels
of consumer spending; exchange rates, particularly between the pound sterling,
the euro and the US dollar, in which the Group makes significant sales; the
Group's ability to continue to win acceptance of its products, which are offered
in highly competitive markets characterised by continual new product
introductions, rapid developments in technology and subjective and changing
consumer preferences (particularly in the entertainment business); the Group’s
ability to attract and retain qualified personnel; risks of doing business
internationally; and other risks described from time to time in SCi
Entertainment Group Plc’s periodic reports and filings. We undertake no
obligation to update our forward-looking statements, whether as a result of new
information, future events or otherwise. No information contained in this Annual
Report constitutes or shall be deemed to constitute an invitation or otherwise
to deal in ordinary shares of SCi Entertainment Group. The price of securities
and income derived from the securities can go down as well as up.
1
Growing product pipeline
Through significant investment we have more than doubled the size of our product
pipeline. The breadth of our portfolio reflects the strength of the Group and the
broadening demographics of games buyers. New versions of Tomb Raider: Legend for
Nintendo platforms, an Anniversary edition of Tomb Raider and a new Championship
Manager release provide continuing revenue from established brands. New brands
such as Just Cause, Battlestations: Midway and Kane & Lynch have the potential to add
to our portfolio of million selling franchises. The growing market for games that appeal
to a wider audience will be met by products such as Pony Friends, Diner Dash and
Who Wants to be a Millionaire?
22:09:2006
Just Cause was launched in
September 2006 and immediately
reached No. 1 in the Microsoft Xbox
360 charts and No. 2 in the all
format charts. It is a massive, free
roaming action game set in a rogue
South American state suspected of
stockpiling Weapons of Mass
Destruction.
2
Our recent releases and
product pipeline for 2007 include:
Reservoir Dogs
Just Cause
Championship Manager 2007
Tomb Raider: Legend on Nintendo platforms
Tom & Jerry Tales
Justice League Heroes
Bionicle Heroes
Who Wants to be a Millionaire?
Race
Battlestations: Midway
Stacked
Age of Conan
300 March to Glory
Pony Friends
Tomb Raider Anniversary
Chili Con Carnage
Zendoku
Diner Dash
Kane & Lynch: Dead Men
Crossfire: Search and Destroy
NEW
GAMES
NEW
HARDWARE
A growing market
The launch of new hardware platforms has driven growth in software sales. Over the
last 12 months the launches of Microsoft Xbox 360, Sony PSP and Nintendo DS have
boosted the market. The forthcoming launches of Sony PlayStation 3 and the Nintendo
Wii are expected to drive further growth. As the installed base of these new platforms
grows we expect to experience strong market conditions.
Entertainment software sales
According to independent research,
entertainment software sales in
Europe and North America are
expected to grow from $6.4 billion
in 1997 to $16.9 billion in 2008. In
addition, new revenue opportunities
from mobile gaming and
subscriptions from games on
demand are expected to increase
to $1.9 billion by 2008.
Source: Screen Digest and IDG
26:05:06
Hitman: Blood Money was launched in
May 2006 on Sony PlayStation 2, PC,
Microsoft Xbox and Microsoft Xbox 360.
The title reached the No. 1 chart position
in all key territories. In the five weeks
from release to 30 June 2006 the Group
sold over 1.4 million units of Hitman:
Blood Money on all formats.
5
Valuable digital content
In addition to continued growth in the console market, there are increasing
opportunities in new markets. Our New Media division publishes games on mobile
phones. We plan to grow this profitable area by increasing the number of titles in
2007. As in other areas of the entertainment industry our customers are increasingly
downloading content directly rather than purchasing through traditional retailers. We
will shortly release Prism: Light the Way, our first download-only title for PC, and are
also supporting Microsoft’s Xbox Live.
Just Cause downloads
Over 20 different Just Cause content
items were released on Xbox Live
Marketplace, from trailers to themes
to a playable game demonstration. To
date the items have attracted a total
of over 920,000 unique users.
11:04:06
Tomb Raider: Legend sold 2.9
million copies between April and
June 2006 and was No. 1 in all
formats all around the world. Lara
Croft has become an icon whose
fame spreads far beyond the gaming
community. Total Tomb Raider sales
now exceed 31 million units.
6
NEW
OPPORTUNITIES
Chairman’s statement
I am pleased to report on an
outstanding year for SCi. The year to
30 June 2006 was the first full 12
month period following the Group’s
acquisition of Eidos in May 2005. In a
relatively short space of time the SCi
and Eidos groups have been fully
integrated, major brands such as Tomb
Raider and Hitman have been
re-invigorated and the Group has
achieved record results that are ahead
of original targets.
The Group is now one of the world’s
leading games publishers and the only
UK based publisher with a global
presence.
I am pleased to report that the
success of the Group has been
reflected by significant growth in
shareholder value, both over the period
since the acquisition of Eidos and over
the longer period since flotation in
1996.
Group’s original target of £23 million.
Unadjusted EBITDA for the year was
£22.6 million.
Profit before tax for the year was
£8.1 million.
Financial results
Both turnover and profitability were
ahead of the Group’s original plans.
Total revenues for the year were
£179.1 million. Earnings before
interest, tax, depreciation and
amortisation (“EBITDA”) before
exceptional items and share based
compensation for the year was
£28.8 million. This compares to the
Dividend
We will not be paying a dividend this
year due to the opportunities for
growth and investment that we expect
to see in the future. However, we will
continue to keep this policy under
review.
Board changes
Following the expansion of the Group
over the last 18 months, and in
accordance with best practice, we have
conducted a review of the Group’s
corporate governance arrangements.
Further details of this review are
contained on pages 24 to 26 of the
Annual Report. Following this review I
have taken on the role of Chairman. In
addition, I am delighted to welcome
Roger Ames to the Board as a
non-executive director. Roger has many
years’ experience of the entertainment
industry, having been chairman and
CEO of Polygram UK and Warner Music
Group.
People
The last 12 months have been an
eventful period for the combined Group
and, on behalf of the Board, I would
like to express sincere thanks to all
the staff and management for their
hard work and dedication.
Outlook
The Group is in a strong financial
position and well placed to take
advantage of opportunities in what
continues to be an exciting and
dynamic global market.
Tim Ryan
Chairman
16 November 2006
09:12:05
Championship Manager 2006 was
the Group’s first launch on Sony’s
new PlayStation Portable platform.
Lego Star Wars
The Group continued to derive
significant revenue and profit from
the distribution of Lego Star Wars,
selling 2.5 million units during the
year.
8
Chief Executive’s review
generate low risk revenues. Over the
next three years we will sell these
products into a market that is
predicted to grow rapidly as a result of
the growth of Next Generation console
platforms and the spread of interactive
entertainment on mobile phones and
internet platforms.
The results to 30 June 2006 are
the Group’s first full set of results to
be reported under International
Financial Reporting Standards
(“IFRS”).
The achievements over the last 12
months demonstrate our commitment
to growing shareholder value. In May
2005 we acquired Eidos setting out a
strategy to transform the Eidos
business and restore the value of its
intellectual property. We have
successfully implemented that
strategy.
As a result SCi is the only UK
company in the small group of
international publishers with a global
presence in this fast growing segment
of the entertainment industry. Our
global presence enables us to sell
directly to retailers in the world’s major
territories, thereby maximising
revenues. We also own some of the
most highly regarded development
studios in the world and have the
scale to build and share advanced
technologies.
SCi has built a sustainable product
pipeline which is not dependent on any
single title or platform. These products
cover the 2007, 2008 and 2009
financial years. The pipeline
recognises the broadening age range
and interests of games consumers.
We are also balancing the exploitation
of established brands and the creation
of new franchises. We have a strong
back catalogue and additionally
distribute third-party products that
Results to 30 June 2006
£179.1 million. This was approximately
£12 million (7%) higher than upgraded
market expectations. EBITDA before
exceptional items and share based
compensation for the 12 months to
30 June 2006 was £28.8 million. This
is 25% higher than our original target
of £23 million. Unadjusted EBITDA for
the year was £22.6 million. Both
revenues and earnings were higher
than in the previous financial period
because of our acquisition and
integration of Eidos. Our strong level of
revenues has given us nearly 5% share
of the UK market in 2006, which
compares favourably to companies
such as Sony and Nintendo with a 6%
share of the games publisher market
(source Charttrack August 2006).
The largest contributions to
revenues and profitability were from
Tomb Raider: Legend, Hitman: Blood
Money and the distribution of Lego Star
Wars. The strong performances of
these products was the principal
reason why the Group exceeded its
profit targets for the year.
The largest contributor to revenue
and profitability was Tomb Raider:
Legend. This product was launched on
Xbox 360, Xbox, Sony PlayStation 2
(“PS2”) and PC in April 2006 and on
PlayStation Portable (“PSP”) in June
2006. During the financial year we
sold over 2.9 million units of Tomb
Raider: Legend to retailers and
distributors. This performance was
higher than the Group’s original
forecast and, at the time of release,
made Tomb Raider: Legend the highest
selling game in the UK in 2006
(source Charttrack August 2006). We
expect Tomb Raider: Legend to
contribute further sales during the
2007 financial year.
The second major contributor to
revenue and profitability was Hitman:
Blood Money. This product was
launched on Xbox 360, Xbox, PS2 and
PC in May 2006. By the end of the
financial year we had sold to retailers
and distributors over 1.4 million units
Revenue £m
02
17.7
03
28.5
04
31.0
*05
18.0
06
179.1
0
30
60
90
120
150
180
* 9 months
0
20
02
60
80
100
120
11.4
03
17.2
04
*05
40
20.2
5.0
06
103.8
Gross profit £m
* 9 months
9
Chief Executive’s review continued
of Hitman: Blood Money. This level of
sales was in line with the Group’s
plans. We expect Hitman: Blood Money
to contribute further sales during the
Sales of Tomb Raider: Legend and
Hitman: Blood Money have already
exceeded the previous versions of
these games (Tomb Raider: Angel of
Darkness and Hitman: Contracts). This
commercial success was combined
with extremely strong reviews from the
specialist games press and a high
degree of media coverage. All of these
factors support the Board’s view that
Tomb Raider and Hitman are high
profile brands with long-term value.
The status of Tomb Raider was
illustrated in 2005 when Lara Croft
was voted by BBC viewers as one of
the Top Ten Design Icons of the last
100 years. We will continue to build
the quality and breadth of the Tomb
Raider and Hitman franchises.
The third major contributor to
revenue and profit in the year was the
distribution of Lego Star Wars. The
Group exclusively distributes the Lego
Star Wars game, first released by Eidos
in April 2005. During the year the
Group sold 2.5 million units of Lego
Star Wars and has now sold
approximately 4.2 million units of this
product since its first release. During
the year the Group entered into a copublishing agreement for Bionicle
Heroes which will be released in the
One of the Group’s other major
brands, Championship Manager, also
performed well during the year.
Championship Manager 2006 was
released on PS2, Xbox, PSP and PC
during the year. In addition we
released a very successful mobile
phone version. Total sales across all
platforms (excluding mobile phones)
was 0.5 million units, an increase from
the previous version. This level of
sales makes Championship Manager a
profitable franchise, particularly as the
annual development costs are lower
than for many other products.
During the year the Group released
six other new products, Total Overdose,
Conflict: Global Storm, 25 to Life (North
America only), Commandos: Strike
Force, Rogue Trooper and Urban Chaos:
Riot Response. In addition we received
back catalogue revenues from
products first released in previous
financial years. Together these
products sold 4.6 million units in the
financial year.
Profit before tax for the year was
£8.1 million. This figure represents
profit after amortisation charges of
£10.6 million arising from the
valuation of the Eidos brands and
technology under IFRS.
The quality of the Group’s products
has been illustrated by a number of
industry awards. Six of our 2006
releases were nominated for a total of
12 BAFTAs and the Group also
received an MCV Industry Excellence
Award.
Outlook for 2007 financial year
The Group invested significantly in its
product portfolio in 2006. Accordingly,
the Group plans to release 19 new
products in the 2007 financial year
compared to 9 new releases in 2006.
The breadth of our product portfolio
reflects the strength of the Group and
the broadening demographics of
games consumers.
We will continue to exploit
established brands. During the 2007
financial year we will release Tomb
Raider: Legend on the Nintendo
Gamecube, DS and Nintendo Game
Boy Advance (“GBA”) platforms. In the
second half of the financial year we
plan to launch an Anniversary edition
of Tomb Raider, celebrating over ten
years of the legendary Lara Croft. We
will launch a new version of
Championship Manager, fully updated
for the 2006/7 football season,
achieving our objective of moving this
16:01:06
Julien Merceron joins Eidos as
Chief Technology Officer. Julien’s
responsibilities include integrating
technology across our worldwide
studios.
01:01:06
Ian Livingstone awarded OBE
Product Acquisitions Director Ian
Livingstone is awarded OBE for
services to the computer games
industry in New Year Honours.
10
franchise to an annual release early in
the football season.
We will continue to introduce new
brands including Just Cause,
Battlestations: Midway and Kane &
Lynch, a new franchise from Io
Interactive, the developers of Hitman.
We believe that at least one of these
titles has the potential to add to our
portfolio of million unit selling
franchises. Just Cause was released on
22 September 2006 and immediately
entered the UK charts at No. 1 in the
Xbox 360 charts and No. 2 in the All
Formats chart. This is a very
successful result for a new franchise.
Some of our new products are
based on licences with high consumer
recognition. These include Reservoir
Dogs, Who Wants to be a Millionaire?
and Bionicle Heroes. Reservoir Dogs,
based on the classic Quentin Tarantino
movie, was released in Europe in
August 2006. It reached the No. 2
position in the UK PlayStation 2 charts
and was released in North America in
October.
There is a growing market for
games that appeal to a wider
audience. Our 2007 portfolio therefore
includes Pony Friends, on the Nintendo
DS platform, aimed at children who
want to look after a pet pony. It also
includes games such as Zendoku and
Diner Dash designed to appeal to the
growing audience for casual games.
The distribution of third-party titles
will continue to provide us with low risk
revenues. Our global distribution titles
will include the Warner Bros. products
Justice League Heroes (featuring
Batman, Superman and Wonder
Woman), Tom and Jerry Tales and 300
March to Glory. In North America we
are distributing the Empire Interactive
titles Ford Bold Moves and Carol
Vorderman’s Sudoku.
Finally, we expect a continuing level
of strong back catalogue income. This
includes continued sales of Tomb
Raider: Legend and Hitman: Blood
Money which were released in the
latter part of the 2006 financial year.
Both products have already achieved
Sony Platinum status and will be
released as Platinum products at an
appropriate point during 2007.
Platform strategy
Our 2007 line up illustrates the
breadth of our products and our
spread across hardware platforms. We
have 19 new releases planned
including versions on PC, Sony PS2,
Sony PSP, Microsoft Xbox 360,
Microsoft Xbox, Nintendo DS, Nintendo
GBA, Nintendo Gamecube and
Nintendo Wii.
We have not planned any releases
on the Sony PlayStation 3 (“PS3”)
platform in the 2007 financial year.
This is consistent with our policy to
launch titles on a new platform when
the platform reaches a commercially
viable installed base. Therefore we are
not adversely affected by Sony’s recent
announcement that the European
release of the PS3 has been
rescheduled to 2007. Our PS3
products in development are planned
for release from the 2008 financial
year onwards.
2008 and future product pipeline
We have invested significantly in the
2008 and future pipeline. We expect
the market to grow strongly during this
period particularly as a result of the
impact of the PS3 and Nintendo Wii
launches together with the continued
growth of the Xbox 360 platform.
Our 2008 products will include new
versions of Tomb Raider (including a
PS3 version) and many of our other
key franchises. We also plan new
franchises, including completely new
products from both Crystal Dynamics
(developers of Tomb Raider) and Io
Interactive (developers of Hitman and
Kane & Lynch).
27:03:06
Championship Manager on mobiles
Mobile version of Championship
Manager 2006 released in UK –
shows strong performance in
ELSPA mobile game charts.
17:03:06
First online distribution
Commandos: Strike Force becomes
the first Eidos title to ship
simultaneously via retail and online
distribution in major territories
worldwide.
11
Development strategy
SCi has a good record of delivering
high quality products on time. We have
taken a number of steps to ensure
that these disciplines are maintained
in the enlarged Group, as well as
developing for Next Generation
platforms. These steps included:
1. Focusing internal studios around a
key owned franchise (for example Tomb
Raider at Crystal Dynamics and Hitman
at Io Interactive). These franchises
provide a base to studio profitability
which will be supplemented with new
franchises as the studios develop.
2. Each internal studio is focused on
profitability and has a three year plan
in which the profitability of each
individual product is separately
analysed. Incentive plans for studios
are built around the on-time delivery of
profitable products.
3. Those studios that did not fit into
the Group’s long-term plans have been
sold. In June 2006 we sold certain
trade and physical assets (although
not the name) of Core Design and in
July 2006 we sold our minority
shareholding in Pyro Studios. The
financial impact of these transactions
was not material.
4. In January 2006 we appointed
Julien Merceron as our Chief
Technology Officer. Julien, who has
considerable industry experience, was
recruited from Ubisoft. He is working
with our development team, headed by
Development Director Darren Barnett,
to enable our studios to share their
technology more effectively. This
focuses our worldwide development
resources on the shared use of a
limited number of very high quality
technologies, maximising the
effectiveness of our development
resources and increasing our speed to
market. We expect to see significant
benefits from this initiative from 2008
onwards.
5. We continue to open development
studios in cost-effective locations.
During 2006 we opened a
development studio in Budapest and
expect this trend to continue.
Our fully owned development
studios are Crystal Dynamics (San
Francisco), Io Interactive (Copenhagen),
Beautiful Game Studios (London),
Pivotal Games (Bath), Eidos Sweden
(Helsingborg) and Eidos Hungary
(Budapest). We also own 25.1% of
Rocksteady Studios (London). In
addition we continue to work with a
number of high quality third-party
developers.
We continue to seek areas to
manage delivery and commercial risks.
In 2005 we entered into completion
bonds with Film Finance Inc who
guarantee that a game will be
delivered on time, on budget and to
specification. Two games were
delivered under these arrangements in
2006 and a further title is in
development. We expect to continue to
use this style of arrangement to
ensure the successful delivery of
certain products.
In 2006 we entered into two
agreements with the Ingenious Games
Fund to provide direct financial
investment in two of our products.
Under this agreement, the Fund shares
in the commercial risks and reward of
the game. As the Group continues to
grow its product portfolio we expect
further arrangements of this nature.
Publishing and distribution strategy
The Group has publishing and
distribution offices in London,
San Francisco, Paris, Hamburg and
Madrid. Through this structure we sell
directly to the retail sector in all key
Western territories. This increases
our sales revenue per unit, particularly
in North America where we had
previously licensed our products to
third parties.
During the year we closed the
former Eidos distribution offices in
Japan and Australia as the volume of
03:05:06
Justice League Heroes distribution
Distribution agreement signed with
Warner Bros. Interactive
Entertainment.
31:03:06
Half year results to 31 December
Integration on track and targeted
cost savings achieved in the first
six month period of the combined
Group.
12
products sold in those countries was
not sufficient to justify the cost of an
office. Given the different nature of the
Japanese market we believe it is
currently more cost-effective to license
our products to local publishers.
During 2006 we licensed three of our
products, including Tomb Raider:
Legend, to Spike Co., a Japanese
publisher and developer, to produce for
the Japanese market.
As part of the acquisition of Eidos,
SCi acquired a 75% shareholding in
Eidos’ Spanish distributor, Proein.
Proein is a profitable business with a
strong presence in the Spanish
market. I am pleased to say that in
July 2006 we completed the
acquisition of the remaining 25% of
Proein, such that this operation is now
wholly owned.
We believe that our customers will
increasingly download games digitally
rather than purchase physical copies
from a retailer. As a content owner this
is a very positive trend leading to
closer customer relationships and
higher margins. In 2006 we started to
offer North American consumers the
opportunity to download PC games and
expect to offer this globally during
2007. In addition we are selling
content and offering product demos
through Microsoft Xbox Live. Over
750,000 gamers downloaded either
the demo or trailer of Just Cause in the
period just before its release.
New media
Our New Media division, which
principally publishes titles on mobile
phones, successfully grew its revenues
in 2006 and generated a positive
contribution to the Group’s results. The
New Media division published five
titles during the year, including
Championship Manager Solo and Crash
’N’ Burn.
In 2007 we plan to publish ten
titles including new versions of Tomb
Raider: Legend and Hitman: Blood
Money.
the growth in Next Generation
consoles and the growing demand for
mobile, on-line and downloadable
content.
Jane Cavanagh
Chief Executive
16 November 2006
Other matters
Our staff are fundamental to the
success of the business and I would
like to take this opportunity to thank
all our employees for their
contributions and commitment during
the period, particularly through the
integration of the two groups. The
Board would also like to congratulate
our Product Acquisitions Director, Ian
Livingstone, on the OBE awarded to
him in 2006 for services to the games
industry.
The Group is financially robust and
ideally positioned to take advantage of
19:05:06
Trading update
With Tomb Raider the UK’s fastest
selling computer game of the year
so far, Hitman: Blood Money
imminent, plus further planned
launches in 2006, SCi is on track to
exceed target profitability.
11:05:06
Tom & Jerry Tales
Agreement signed with Warner
Bros. Interactive Entertainment to
distribute the game for Nintendo DS
and Game Boy Advance based on
hijinks of the classic cartoon
characters.
13
Financial review
The Group’s results for the 9 months
to 30 June 2005, previously reported
under UK Generally Accepted
Accounting Practice (“GAAP”), have
been restated under IFRS. A
reconciliation of the results for the
9 months to 30 June 2005 was
announced on 31 March 2006 and is
set out on pages 62 to 67 of the
Annual Report.
New product releases
Total Overdose
Conflict: Global Storm
Championship Manager
25 to Life
Commandos: Strike Force
Tomb Raider: Legend
Rogue Trooper
Hitman: Blood Money
Results from operations
The Group regards EBITDA as a key
measure of profitability. EBITDA
provides a key measure of the Group’s
operating performance and excludes
non cash charges such as depreciation
and amortisation. It is the measure
most commonly used by the financial
community to assess the Company’s
performance.
Adjusted EBITDA before exceptional
items and share based payment
compensation (a non cash charge
arising under IFRS) for the 12 months
to 30 June 2006 was £28.8 million
(2005: loss of £5.4 million). This
compares to our original target of
£23 million. Profit before tax was
£8.1 million (2005: loss of
£13.4 million). This review includes
details of the difference between
adjusted EBITDA and profit before tax.
Urban Chaos
PS2
44
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4
4
44
4
4
44
4
4
44
Product releases
We launched nine new titles in the
financial year. In addition we earned
significant revenue from the continued
distribution of Lego Star Wars.
Revenue
£179.1 million (2005: £18.0 million).
Revenues were substantially higher
than in the previous financial period
because of our acquisition of Eidos in
May 2005 and an increase in the
number of titles released.
Total revenues includes sales of
games to retailers and distributors at
invoiced amounts plus royalty
payments invoiced under licence of the
right to distribute games in certain
territories or to exploit certain
intellectual properties. Provisions for
PSP
Xbox 360
44
44
44
44
Xbox
44
44
44
PC
44
44
44
44
44
44
44
44
44
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44
future returns or price adjustments are
deducted from total revenues.
69% of revenues for 2006 were
sales of new published titles. The
most significant contributors to these
revenues were sales of Tomb Raider:
Legend and Hitman: Blood Money.
Back catalogue titles (continuing
sales from titles first released in a
previous financial year) accounted for
12% of total revenues.
16% of revenues for 2006 were
sales of products distributed jointly
under the Eidos and third-party labels.
This relates to Lego Star Wars.
The remaining 3% of revenues were
derived from the exploitation of the
Group’s game franchises in areas other
than the sale of console and PC games.
This includes New Media income from
sale of the Group’s products on mobile
07:06:06
SCi on FTSE4Good
SCi met all CSR inclusion criteria
for the FTSE4Good index,
demonstrating the Group’s
commitment to responsible
business practice.
30:06:06
Corporate governance update
Changes to Board structure
announced including appointment
of Tim Ryan as non-executive
Chairman.
14
Financial review continued
phones as well as merchandising, film
and other licensing income.
61% of total Group revenues arose
in Europe, with the largest markets
being in the United Kingdom, France,
Germany and Spain. 36% of revenues
arose in North America and the
remaining 3% arose in the Rest of
the World.
Gross profit
The Group made a gross profit of
£103.8 million (2005: £5.0 million).
The increase reflects the greater scale
of the Group following the acquisition
of Eidos and the strength of the
Group’s products.
Gross profit represents turnover
less the direct costs of selling a game.
Direct selling costs principally
comprise the cost of manufacturing
and delivering physical copies of the
finished product including the disc, box
and packaging. They also include
royalties to third parties in respect of
products distributed by the Group.
Gross profit was 58% of revenue in
2006 (2005: 28%). This increase
reflects the strength of the products
released in the period.
The gross profit on new published
products was approximately 70% of
revenue. There was little overall
change during the year in percentage
margins earned from new products. We
have experienced some absolute price
decline in the retail prices of products
sold on the PS2 and Xbox platforms.
This has been compensated by
stronger prices on newly launched
platforms such as the Xbox 360 and
the Sony PSP.
The gross profit on back catalogue
products was 30% of revenue. The
gross profit in distribution of third party
products was approximately 19% of
revenue. The gross profit on licence
and New Media income was 94% of
revenues.
Development costs
Development costs charged to the
income statement for the year were
£27.0 million (2005: £5.7 million). In
common with the majority of global
video game publishers, and consistent
with the requirements of IFRS,
development costs are capitalised
during the course of development from
the point at which a product is
considered to be technically and
commercially feasible. The capitalised
amounts are shown as capitalised
development costs (non current,
intangible assets) in the balance
sheet. Capitalised development costs
are charged to the income statement
from the game’s release over the
period in which the Group expects to
earn revenues from the product.
In addition the Group incurred
exceptional development charges of
£1.1 million. These charges comprised
further costs incurred in 2006 on a
loss making development contract
entered into by Eidos prior to
acquisition. This contract has now
been terminated.
During 2006 the Group spent
£57.4 million on development in the
financial year, building the investment
in products and technology that will
benefit future financial years. This level
of investment has enabled the Group
to double the product releases
planned for 2007 and also invest
significantly in the 2008 pipeline.
At 30 June 2006 the Group had
capitalised development costs of
£46.1 million (2005: £16.8 million).
The major titles in development at 30
June 2006 include Reservoir Dogs, Just
Cause, Bionicle Heroes, Championship
Manager, Battlestations: Midway, Tomb
Raider Anniversary, Chili Con Carnage,
Kane & Lynch and Nintendo versions
of Tomb Raider: Legend. All of these
products are planned for release in
2007. The Group has also invested in
a number of products for 2008
onwards including Tomb Raider 8,
Highlander, sequels to Just Cause and
17:07:06
Trading update
Following the success of Tomb
Raider, Hitman and Championship
Manager, new distribution
agreements signed, and 19 new
product launches planned for the
financial year (including Bionicle
Heroes and Just Cause), the
Group’s prospects look bright.
25:08:06
The first release of the new
financial year is the game version
of Quentin Tarantino’s legendary
movie Reservoir Dogs.
15
Urban Chaos and new products from
our key development studios.
Advertising costs
The Group spent £19.4 million (2005:
£1.0 million) on advertising in the
financial year. This reflects the major
campaigns, including global TV
advertising, organised to market our
products and re-establish key
franchises such as Tomb Raider,
Hitman and Championship Manager.
Advertising costs include all
external costs incurred to promote the
sale of the Group’s products. The
largest proportion of advertising costs
is TV, radio, outdoor, print and internet
advertising. Advertising costs also
include promotional and PR
campaigns. All advertising costs are
expensed as incurred.
Administrative costs
Administrative costs comprise all the
costs of running the Group’s corporate,
publishing and distribution functions.
These include staff (and associated
costs) employed in sales, distribution,
marketing, PR, IT, localisation, quality
assurance, customer service, new
product acquisition, new media,
finance, HR, legal and licensing.
Excluding exceptional charges, total
administrative costs were £47.8 million
(2005: £5.7 million). The charge for
administrative expenses of £47.8
million includes £10.6 million of
amortisation relating to intangible
assets acquired on the acquisition of
Eidos, £2.4 million of goodwill
impairment, £1.8 million of
depreciation charges on plant, property
and equipment and software
amortisation and £4.4 million of share
based compensation. The underlying
level of cash based overheads was
£28.6 million. For the 12 months to
30 June 2005 the combined
administrative costs for the two groups
was £41.8 million. This illustrates that
the majority of the £14.0 million cost
savings have been achieved within this
area.
The Group incurred a £4.4 million
accounting charge arising under IFRS
to expense the Group’s Share Option
Scheme. This is an accounting charge
only and does not result in any cash
leaving the Group. The charge
principally relates to the effect of
issuing new share options to Eidos
staff to bring them into the SCi Share
Option Scheme.
The Group has implemented plans
to reduce combined administrative
costs; particularly through the
elimination of duplicate corporate
costs, the rationalisation of UK
publishing and the closure of Eidos’
former distribution offices in Japan and
Australia.
The Group incurred exceptional
charges of £0.7 million relating to
continued integration costs.
Depreciation
The charge for depreciation of plant,
property and equipment and intangible
software amortisation increased to
£1.8 million in the financial year from
£0.6 million in 2005.
Intangible assets and amortisation
Intangible assets comprise brands,
software and technology. The charge
for amortisation of brands and
technology intangible assets increased
to £10.6 million from £1.2 million in
2005. This was the first full year in
which the brands acquired with Eidos
have been subject to a charge for
amortisation.
Under IFRS the Group is required to
value intangible assets purchased
through an acquisition. Our acquired
brands and technology have been
independently valued at £116.9 million.
After accumulated amortisation of
£11.8 million, we show the net value of
£105.1 million as an intangible asset
in the Group’s balance sheet.
The brands valued in the balance
12:09:06
12 BAFTA nominations
The quality of the Group’s products
is recognised by the nomination of
six of our products across 12
BAFTA categories.
25:09:06
Roger Ames appointed
non-executive director
The appointment of Roger Ames,
with many years’ experience in the
music and entertainment
industries, strengthens the Board.
16
sheet include seven titles with lifetime
sales of one million units or more.
These are Tomb Raider, Hitman,
Championship Manager, Thief, Deus Ex,
Legacy of Kain and Shellshock. In
addition the Conflict series and
Carmageddon have also each sold over
one million units. However their values
are excluded from intangible assets as
they have been internally developed.
The value of the intangible assets
is amortised over 15 years for brands
and eight years for technology,
representing the estimated useful
economic life of the intangible assets.
Profit before tax
Profit before tax was £8.1 million. This
is stated after depreciation,
amortisation and impairment charges
of £14.8 million. These charges
principally arise because of the
amortisation of intangible assets
described above.
Taxation
There is a net tax credit of £5.4 million
for the year (2005: £0.5 million). The
net tax credit comprises an overseas
tax charge of £2.6 million, a UK tax
charge of £0.2 million and a deferred
tax credit of £8.2 million.
At 30 June 2006 the Group had UK
tax losses of approximately £50 million
available to carry forward to set
against future taxable profits, subject
to agreement with appropriate tax
authorities. These losses principally
arose on the acquisition of Eidos.
In addition the Group has
substantial overseas tax losses,
principally in the United States,
potentially available to carry forward
against future taxable profits. These
losses arose on the acquisition of
Eidos and their future use is subject to
agreement with overseas tax
authorities. It is not currently possible
to quantify the value of overseas
losses that may be available to the
Group or the period in which the Group
will benefit from these losses. The
Group has not recognised a deferred
tax asset in respect of overseas
losses.
After assessing the prospects for
the 2007 financial year, the Group has
recognised a deferred tax asset of
£2.1 million and a deferred tax liability
of £15.4 million. Included in these
numbers is a prudent estimate of the
losses that may be utilised in the
2007 year end and an estimate of the
tax charge that would arise if the
Group sold its brands and technology
at their balance sheet values.
Earnings per share
Trading profit per share, which is
calculated on a basis consistent with
market expectations, is 37.6p (2005:
loss 16.9p). The calculation of trading
profit per share is set out in note 8.
Basic earnings per share were
18.5p (2005: loss 37.5p).
Goodwill
Goodwill relates to the acquisitions of
Eidos and Pivotal. The net book value
of goodwill at 30 June 2006 was
£4.7 million (2005: £5.1 million).
During the year the Group fully wrote
off all remaining goodwill relating to
the acquisition of the Actualize Group.
Working capital
At 30 June 2006 the Group had
£37.2 million of cash and no borrowing.
The Group started the year with
£46.1 million of cash and, before
allowing for working capital movements
and investment in future products,
generated £27.0 million from profitable
operations. The closing cash figure of
£37.2 million reflects substantial
investment in future products and a
higher than normal level of working
capital because of product releases
close to the end of the financial year.
During the year the Group raised
£17.4 million (net of costs) of cash
Autumn 06
The growing strength of our New
Media product portfolio will be
illustrated by the release of
Pandemonium, our first title for 3D
BREW and Symbian handsets.
Early 2007
Prism: Light the Way
Our first mobile title based on
original IP, Prism: Light the Way
also marks Eidos’ first PC title to be
launched exclusively online to
address the growing market for
downloadable casual games.
17
from the issue of new equity in order
to capitalise on potential
opportunities, including new licences
and opportunities in the casual games
area.
As we continue to build the Group
we have reviewed our banking
requirements. Based on the increased
size of the Group we are finalising new
banking facilities of up to £30 million
with Lloyds TSB Bank. This will provide
flexibility to the Group, cover shortterm working capital needs and give
the Group the opportunity to respond
quickly to product and licence
acquisition opportunities.
Completion bonding and investment in
project finance
We continue to seek new ways of
managing and reducing development
and commercial risk.
We entered into an agreement with
Film Finances Inc in the 2005 financial
year to provide completion bonds on
two titles currently in development.
The purpose of a completion bond
is to provide assurance that a product
will be developed on time, on budget
and in accordance with agreed
specifications. In the event of delay or
failure, the cost of the project will be
guaranteed by the bond rather than
borne by the Group. This arrangement
has been common in the film industry
for many years. Film Finances Inc,
based in Los Angeles, is the leading
provider of completion bonds to the
film industry and, increasingly, to the
games industry.
Both of the initial products covered
by completion bonds, Rogue Trooper
and Urban Chaos, were completed on
time and released in the 2006
financial year. We anticipate further
use of the completion bonding model
in the future and currently have one
product in development covered by
these arrangements.
During the financial year we entered
into agreements in respect of two
further products with the Ingenious
Games Fund. Under these agreements
the Ingenious Games Fund agrees to
invest directly into the total cost of
developing and marketing a product.
The Fund will share proportionally in
the profits of each game and will also
bear their share of any losses that
arise. As the Group grows its portfolio
of products we consider that such
arrangements are an effective method
of sharing the commercial risks in
relation to certain products,
particularly new franchises. We expect
to enter into further arrangements of
this type in the future.
Pensions
The Group offers all employees the
opportunity to participate in an
appropriate Company pension scheme.
As these are defined contribution
schemes there are no circumstances
in which the Group will face a future
pension liability.
Financial instruments
During the period, the Group’s financial
instruments, other than derivatives,
comprised cash, overdrafts and various
items such as trade debtors and
creditors that arise directly from
operations. The main purpose of these
financial instruments is to finance the
Group’s operations. The Group also
enters into derivative transactions in
the form of foreign currency contracts
in order to manage the currency risk
arising from the Group’s operations.
The Group’s policy is, and was
throughout the period under review, not
to trade in financial instruments. The
main risks arising from the Group’s
financial instruments are liquidity risk,
credit risk and foreign currency risk.
The Board reviews and agrees policies
for managing each of these risks on a
regular basis.
2007
A new puzzle game for PSP and
Nintendo DS, Zendoku blends
exciting puzzle battle action with
addictive Sudoku gameplay, adding
a variety of colourful characters
and a comprehensive range of
single-player and wireless multiplayer game modes.
2007
Pony Friends, is the new virtual pet
game designed exclusively for the
Nintendo DS system, where players
can groom and personalise their
own pony, undertake challenges,
enter competitions or simply go for
a gentle canter in picturesque
woodlands.
18
Liquidity risk
The Group has substantial cash
reserves. Additionally the Group is
finalising bank facilities of up to
£30 million with Lloyds TSB Bank
which will cover short-term working
capital needs in periods where there
are a number of product launches.
Credit risk
The Group’s revenues are principally
derived from sales to retailers and
distributors. The amounts due from
any particular retailer or distributor
may be material, particularly following
major product releases. The Group’s
policy is to only extend credit to
companies with a strong credit rating
and to obtain credit insurance to
protect against the risk of default.
Foreign currency risk
The Group receives significant portions
of its revenues in either euros or US
dollars. The Group also has significant
costs in each of these currencies
relating to overseas offices, the
manufacture of finished products and
the development of new games. The
Group seeks to balance the flows of
currency across countries to minimise
any imbalance of foreign currency
receipts and payments.
Key performance indicators
The directors monitor a number of
financial metrics and key performance
indicators (KPIs) for the Group, including:
4 Sales units of each product
4 Average selling prices
4 Use of returns provision
4 Chart positions
4 Review scores
4 Development costs
4 Contribution by title
In addition, the directors receive
information on non financial metrics
such as reports from the Group’s
quality assurance function and the
results of focus groups.
Employee and environmental matters
The Group’s employment policies and
environmental policies are set out in
the corporate responsibility statement
on page 27.
Rob Murphy
Chief Financial Officer
16 November 2006
Risks and uncertainties
Risks to the business include the
performance of products, the risk of
development delays or cost overruns,
competitive products, the need to
maintain sufficient working capital, the
loss of key personnel, delays in the
introduction of new hardware platforms
and increased regulation of products.
The directors regularly monitor all
these risks and uncertainties and
appropriate actions are taken to
mitigate the risks or their potential
outcomes.
Age of Conan: Hyborian
Adventures, winner of multiple E3
awards as the best game in its
genre and one of the most
anticipated PC games currently in
development, is a Massively Multiplayer Online Game (MMO) set in
the fantastic Conan universe as
created by Robert E. Howard.
Kane & Lynch: Dead Men is a dark
and gritty tale of two men bound by
circumstance as they wait on death
row for their final sentence. One is a
flawed mercenary, the other a
medicated psychopath. The two are
forced to embark on a violent and
chaotic journey, hating each other
every step of the way.
19
Directors, officers and advisers
Tim Ryan
Non-executive Chairman
Tim Ryan joined the Board as a nonexecutive director on 19 October 2001
and was appointed as Chairman on
30 June 2006. Tim has considerable
experience of corporate communications.
His former positions include head of
corporate and investor relations at
SkyePharma Plc, one of the world’s
leading drug delivery companies, and
director of corporate communications
at NTL. He is currently chairman of
Bell Pottinger International.
Jane Cavanagh
Chief Executive
After having worked in marketing for
BT, Jane Cavanagh identified a growth
market in the games industry and in
1988 founded SCi Entertainment. She
is today, one of the most experienced
executives in the games industry. In
2005 SCi Entertainment became the
largest UK games publisher following
the successful acquisition of Eidos plc.
Jane is the Chief Executive of the
combined Group.
20
Bill Ennis
Commercial Director
Bill Ennis was appointed to the Board
on 3 May 1996, having previously
worked for DEC. He has substantial
experience of the games industry and
is a former director of the
Entertainment Leisure Software
Publishers Association (ELSPA).
Rob Murphy
Chief Financial Officer
Rob Murphy was appointed to the
Board on 21 April 1997. Before joining
the Company he was a partner in the
audit and business advisory division of
Arthur Andersen in London. He is a
qualified chartered accountant.
Roger Ames
Non-executive director
Appointed to the Board on
25 September 2006, Roger Ames
has extensive experience of the
entertainment industry having
previously held positions as executive
vice-president of Polygram and
president of Polygram Music Group in
1996. Subsequently he was chairman
and CEO of Warner Music Group from
1999 to 2004.
Nigel Wayne
Non-executive director
Nigel Wayne joined the Board on
20 July 2001 and was appointed
senior independent director in 2004.
He is a chartered accountant with
considerable experience of advising
and funding growing companies in the
technology and media sectors. A
former finance director of SCi Games
Limited until 1994, he has significant
experience of the games industry.
Directors, officers and advisers continued
Company Secretary
Anthony Price
Registered office
Wimbledon Bridge House
1 Hartfield Road
Wimbledon
London
SW19 3RU
Registered in England
No. 3121578
Joint brokers
Citigroup Corporate
and Investment Banking
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
KBC Peel Hunt Limited
4th Floor
111 Old Broad Street
London EC2N 1PH
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0LA
Tel: 0870 162 3100
Bankers
Lloyds TSB Bank plc
10 Gresham Street
London EC2V 7AE
Solicitors
Harbottle & Lewis LLP
Hanover House
14 Hanover Square
London W1S 1HP
Auditors
BDO Stoy Hayward LLP
8 Baker Street
London W1U 3LL
21
Directors’ report
The directors present their annual report on the affairs of the
Group, together with the accounts and independent auditors’
report, for the 12 months ended 30 June 2006.
Principal activities and business review
The principal activities of the Group and the Company are the
development and publishing of entertainment software. A
review of the Group’s performance during the 12 months to
30 June 2006, including financial performance, likely future
developments and prospects and information that fulfils the
requirements of the Business Review, is set out in the Chief
Executive’s report on pages 9 to 13 and the financial review
on pages 14 to 19. Principal subsidiaries and joint ventures
are listed in note 14 to the accounts on page 50.
Results and dividend
The results for the 12 month period to 30 June 2006 are
shown in the consolidated income statement on page 34.
No dividend has been paid or declared for the period
(2005: £nil).
Post balance sheet events
Details of events occurring after the year end are set out in
note 31.
Share capital
Details of changes in the share capital of the Company are
set out in note vi of the Notes to the parent Company
financial statements.
Financial instruments
The Group’s policy on the use of financial instruments is set
out in note 28.
Directors
The names and brief biographical details of the current
directors are set out on page 20. All the directors served
throughout the period under review other than Roger Ames,
who was appointed to the Board on 25 September 2006.
Bill Ennis and Tim Ryan retire by rotation at the
forthcoming Annual General Meeting (“AGM”) and, being
eligible, offer themselves for re-election. Roger Ames will
retire at this year’s AGM having been appointed since the
last AGM and, being eligible, offers himself for election.
Details of directors’ holdings of options over ordinary shares
are set out in the directors’ remuneration report on pages
28 to 32.
Directors’ responsibilities
The directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time
the financial position of the Group, for safeguarding the
assets of the Company, for taking reasonable steps for the
prevention and detection of fraud and other irregularities and
for the preparation of a directors’ report and directors’
remuneration report which comply with the requirements of
the Companies Act 1985.
The directors are responsible for preparing the Annual
Report and the financial statements in accordance with the
22
Companies Act 1985. The directors are also required to
prepare financial statements for the Group in accordance
with IFRS as adopted by the European Union and Article 4
of the IAS Regulation. The directors have chosen to prepare
financial statements for the Company in accordance with
UK GAAP.
Group financial statements
International Accounting Standard 1 requires that financial
statements present fairly for each financial year the Group’s
financial position, financial performance and cash flows. This
requires the faithful representation of the effects of
transactions, other events and conditions in accordance with
the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting
Standards Board’s ‘Framework for the preparation and
presentation of financial statements’. In virtually all
circumstances, a fair presentation will be achieved by
compliance with all applicable IFRS. A fair presentation also
requires the directors to:
4 consistently select and apply appropriate accounting
policies;
4 present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information; and
4 provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable
users to understand the impact of particular transactions,
other events and conditions on the entity’s financial
position and financial performance.
Parent Company financial statements
Company law requires the directors to prepare financial
statements for each financial year which give a true and fair
view of the state of affairs of the Company and of the profit
or loss of the Company for that period. In preparing these
financial statements, the directors are required to:
4 select suitable accounting policies and then apply them
consistently;
4 prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
Company will continue in business;
4 make judgements and estimates that are reasonable and
prudent; and
4 state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements.
Financial statements are published on the Group’s
website in accordance with legislation in the United Kingdom
governing the preparation and dissemination of financial
statements, which may vary from legislation in other
jurisdictions. The maintenance and integrity of the Group’s
website is the responsibility of the directors. The directors’
responsibility also extends to the ongoing integrity of the
financial statements contained therein.
Directors’ report continued
Directors’ and officers’ indemnity insurance
The Group has taken out an insurance policy to indemnify
the directors and officers of the Company and its
subsidiaries in respect of certain liabilities which may attach
to them in their capacity as directors or officers of the
Group, so far as permitted by law. This indemnity policy
subsisted throughout the year and remains in place at the
date of this report.
30 June
2005
Number
Executive
Jane Cavanagh
4,819,630 4,819,630
462,450
462,450
71,500
71,500
Tim Ryan
43,141
43,141
Nigel Wayne
11,176
11,176
Rob Murphy
Non-executive
Charitable and political donations
During the 12 month period to 30 June 2006 SCi made
charitable donations of £10,400 (2005: £nil). No political
donations were made in the year (2005: £nil).
There have been no changes in the above shareholdings
between 30 June 2006 and the date of these financial
statements.
Supplier payment policy
The Group’s policy is to settle terms of payment with
suppliers when agreeing the terms of each transaction,
ensure that suppliers are made aware of the terms of
payment and abide by the terms of payment. Trade creditors
of the Group at the period end represented 41 days
purchases (2005: 63 days). The Company had trade
creditors of £0.2 million at the period end (2005: £0.3 million)
which represented 15 days purchases (2005: 8 days).
Substantial shareholdings
On 16 November 2006 the Company had been notified, in
accordance with Sections 198 to 208 of the Companies Act
1985, of the following interests in the ordinary share capital
of the Company:
Number
%
13,413,073
17.38
Artemis Investment Management Ltd
6,237,856
8.08
Cantor Fitzgerald Europe
4,722,580
6.12
Credit Agricole Cheuvreux
International Ltd
3,316,925
4.30
30 June
2006
Number
Bill Ennis
Employees
The Group’s employment policies and those regarding
disabled persons are set out in the corporate responsibility
statement on page 27.
Thorson Investments Ltd
Directors’ shareholdings
The directors who held office at 30 June 2006 had the
following interests in the shares of the Company:
Directors’ statement as to disclosure of information
to auditors
The directors who were members of the Board at the time of
approving the directors’ report are listed on page 20. Having
made enquiries of fellow directors and of the Company’s
auditors, each of these directors confirms that:
4 to the best of each director’s knowledge and belief, there
is no information relevant to the preparation of their
report of which the Company’s auditors are unaware; and
4 each director has taken all the steps a director might
reasonably be expected to have taken to be aware of
relevant audit information and to establish that the
Company’s auditors are aware of that information.
Auditors
BDO Stoy Hayward LLP have expressed their willingness to
continue in office and a resolution to re-appoint them will be
proposed at the AGM.
By order of the Board,
Anthony Price
Company Secretary
16 November 2006
23
Corporate governance
The Board is committed to establishing and maintaining high
standards of corporate governance; the process by which the
Group is directed and managed, risks are identified and
controlled and effective accountability assured. Following the
expansion of the Group over the last 18 months the Board
conducted a review of the Group’s corporate governance
practices, including the structure and composition of the
Board itself, resulting in a number of changes as referred to
below and further in the directors’ remuneration report.
The following statement is intended to describe how the
Group has applied the principles of the Combined Code on
Corporate Governance published in July 2003 (the “Code”),
which applied to the Group for the period under review.
The Board
The Board currently comprises a non-executive chairman, two
further non-executive directors and three executive directors.
Roger Ames was appointed as a non-executive director on
25 September 2006 and the Company is currently in the
final stages of selecting a further independent non-executive
director. In line with best practice, the roles of Chairman and
Chief Executive were separated during the year with the
appointment of Tim Ryan as non-executive Chairman and
Jane Cavanagh continuing as Chief Executive.
The non-executive directors, whose terms of engagement
were updated during the year to fully comply with best
practice and all requirements of the Code, are considered to
be independent of management. Nigel Wayne’s period of
office as a financial director of SCi Games Limited ended
more than five years prior to joining the Board as a nonexecutive director and therefore does not impact his
independence in accordance with the Code. The Company no
longer has a commercial relationship with Bell Pottinger
Corporate and Financial, for whom Tim Ryan was chief
executive. Consequently there are no further related party
issues concerning the non-executive directors.
All the members of the Board are equally responsible for
the management and proper stewardship of the Group. The
non-executive directors are able to bring independent
judgement to issues brought before the Board and are free
from any business or other relationship with the Company or
the Group other than as described in the directors’
remuneration report. All directors are required to stand for
re-election at least every three years.
The Board meets regularly throughout the year and more
frequently where business needs require. The Board has a
schedule of matters reserved to it for decision and the
requirement for Board approval on these matters is
communicated throughout the senior management of the
Group. Matters reserved for the Board include approval of the
Group’s strategy, setting and monitoring performance against
the annual budget, business acquisitions and disposals,
material capital commitments, appointments to subsidiary
company boards and commencing or settling litigation.
Prior to each meeting directors are sent an agenda
together with additional information, including financial
reports, as appropriate for the meeting. Directors have
access to the advice and services of the Company Secretary
and may take, at the Company’s expense, independent
24
professional advice. The Board has adopted a training and
induction policy which includes annual updates from the
Group’s corporate advisors and an induction process for new
directors.
The Board has delegated responsibility in a number of
areas to three sub-committees with clearly defined terms of
reference. The audit and remuneration committees each
currently comprise the three non-executive directors. Both
committees are chaired by Nigel Wayne who has also been
nominated by the Board as the Group’s senior independent
director. The nomination committee, which is chaired by Tim
Ryan, comprises the three non-executive directors and the
Chief Executive. The composition of the committees will be
kept under review following the appointment of an additional
independent non-executive director. The Company is
committed, where possible, to comply with the
recommendations of the Code.
During the 12 month period ending 30 June 2006 there
were seven Board meetings, two meetings of the audit
committee, three meetings of the remuneration committee
and one meeting of the nomination committee. All meetings
were fully attended with the exception of one Board meeting
which Bill Ennis was unable to attend, being in the US on
Company business at the time.
The audit committee
The audit committee meets at least twice a year to review
the financial results, the Group’s internal control systems
and the findings of the external independent auditors. It also
considers the Group’s financial accounting procedures and
policies as well as the cost-effectiveness, independence and
objectivity of the external auditors by monitoring the level
and appropriateness of any non-audit work provided by them.
The current members of the audit committee are Nigel
Wayne (Committee Chairman), Tim Ryan and Roger Ames.
Nigel Wayne is a chartered accountant and has recent and
relevant financial experience.
The remuneration committee
The committee is responsible for the remuneration of the
executive directors. It advises the Board on the broad
framework of executive remuneration and determines, on
behalf of the Board, the individual remuneration packages,
terms and conditions of employment and equity incentive
awards of the executive directors. The policies adopted by
the committee together with details of the directors’
remuneration and service contract terms are set out in the
directors’ remuneration report on pages 28 to 32. The
committee meets on an ad hoc basis as necessary and is
advised by New Bridge Street Consultants, an independent
external firm, who were appointed during the year to provide
advice on executive remuneration matters.
No director is involved in deciding his or her own
remuneration, whether determined by the committee or, in
the case of the non-executives, by the Board. The current
members of the remuneration committee are Nigel Wayne
(Committee Chairman), Roger Ames and Tim Ryan.
Corporate governance continued
The nomination committee
The nomination committee is responsible for reviewing the
composition and structure of the Board and for
recommending Board appointments and interviewing
potential candidates. The committee meets on an ad hoc
basis as required. The current members of the nomination
committee are Tim Ryan (Committee Chairman), Roger Ames,
Nigel Wayne and Jane Cavanagh. The committee consults
with the executive directors when considering appointments
and external search consultants are used to ensure that a
wide range of candidates can be considered.
Operational management
The executive directors are supported by a team of senior
managers who are responsible for assisting in the
development and achievement of the Group’s corporate
strategy, business plans and budgets and for reviewing
operational and financial performance. The management
team, together with the executive directors are responsible
for agreeing and monitoring policies and other matters not
reserved for the Board.
Relations with shareholders
The executive directors meet regularly with institutional
shareholders, fund managers and analysts and are available
to answer questions from private shareholders.
Communication with all shareholders is facilitated by the
issue of full year and interim reports which, together with
other corporate information and press releases, are available
on the Company’s website: www.sci.co.uk.
The AGM provides a forum for all shareholders to raise
issues with the directors. The notice convening the meeting
is normally issued at least 20 working days in advance and
separate resolutions are proposed on each substantially
separate issue.
Risk management and internal controls
The directors are responsible for the Group’s system of
internal control and for reviewing its effectiveness. However,
such a system can only provide reasonable, but not
absolute, assurance against material misstatement or loss.
There is an ongoing process for identifying, evaluating and
managing the significant risks faced by the Group, in
compliance with the guidance on Internal Control: Guidance
for Directors on the Combined Code (the Turnbull Report)
published in September 1999. This process, which is tied
closely to operations, is regularly reviewed by the Board. The
key procedures that the directors have established to ensure
risk management and internal controls are effective are as
follows:
Risk identification
The Group has identified its major risks and has policies in
place to avoid and/or mitigate those risks. All senior
members of staff participate in this process and the results
are reported to the Board.
Operational risks
Operational management are responsible for the
identification and evaluation of significant risks applicable to
their area of business and, in conjunction with the Board, for
designing and operating suitable internal controls. The senior
management team, which includes the executive directors
who report directly to the Board, are responsible for
monitoring and controlling all operational risks.
The Board regularly reviews risk summaries so that
prompt action can be taken in an appropriate manner. In
addition, the internal control process is supported by:
(a) a comprehensive financial control and rolling forecast
system;
(b) a flat management structure which facilitates open and
timely communication;
(c) sophisticated project management systems to
coordinate and control key development and publishing
activities;
(d) an experienced legal function that supports the Group’s
business needs; and
(e) a programme of commercial insurance covering key risks
including intellectual property matters, product liability
and business interruption.
The Board has considered the need for an internal audit
facility and has determined that the scale and nature of the
Group does not justify a dedicated function at the present
time.
Compliance status
During the period under review the Board reviewed the
Group’s compliance with all aspects of the Code resulting in
a number of changes detailed above and in the remuneration
report. The provisions in the Code with which the Company
did not comply throughout the period ending 30 June 2006
were as follows:
(a) Jane Cavanagh fulfilled the roles of both Chief Executive
and Chairman prior to the appointment of Tim Ryan as
non-executive Chairman which was announced on
30 June 2006. The roles are now clearly segregated.
(b) The Chief Executive was a member of the audit and
remuneration committees prior to 30 June 2006. Both
committees now consist solely of the three nonexecutive directors.
(c) Tim Ryan and Nigel Wayne were not previously appointed
for specified terms but, as with executive directors,
retire by rotation every three years. The terms of
engagement of the non-executive directors were updated
during the year to fully comply with best practice and all
requirements of the Code, including specified terms of
appointment.
(d) Tim Ryan and Nigel Wayne have previously been awarded
share options. The Board has determined that no further
share options will be granted to any non-executive
directors. Existing options held by Tim Ryan and Nigel
Wayne granted in 2001 will be exercised or will lapse in
due course as appropriate.
(e) The Chief Executive’s service contract contained a threeyear notice period. With effect from 1 April 2006 the
notice period has been reduced to one-year following a
25
Corporate governance continued
review of remuneration practices relating to executive
directors as set out in the remuneration report.
(f) The Board has yet to implement a self-evaluation
process.
For the period under review, the Company was defined as
a smaller company under the Code, being one that was
below the FTSE 350 throughout the year immediately prior to
the reporting year. Details of directors’ remuneration and
related matters are set out in the directors’ remuneration
report on pages 28 to 32.
Going concern
The directors confirm that, after making enquiries, they have
a reasonable expectation that the Group has adequate
resources to continue in operational existence for the
foreseeable future. For this reason, they continue to adopt
the going concern basis in preparing the accounts.
External audit matters
Independence
The audit committee has sole responsibility for assessing
the independence of the external auditors, BDO Stoy
Hayward LLP. Each year the committee undertakes to:
4 Seek reassurance that the external auditors and their
staff have no family, financial, employment, investment or
business relationship with the Company. To this end the
committee requires the external auditor and their
associates to confirm this in writing, and detail the
procedures which the auditor has carried out in order to
make this confirmation.
4 Check that all partners engaged in the audit process are
rotated at least every five years.
4 Assess the likely impact on the auditors’ independence
and objectivity before awarding them any contract for
additional services.
4 Have as a standing agenda item auditor independence
issues at each audit committee meeting.
26
Corporate responsibility statement
SCi has a strong commitment to its customers,
shareholders, employees and, in a wider context, society at
large. The Group seeks to enhance its relationships with
stakeholders and manage risks in key areas such as health
and safety. SCi is included in the FTSE4Good, an index of
companies that meet specified corporate responsibility
standards. The following policies represent the basis of the
Group’s approach to corporate responsibility.
Environmental policy
SCi seeks to ensure that its operations and products cause
the minimum detrimental impact to the environment. The
Group’s objective is to comply with environmental legislation
in all countries in which it operates and to promote effective
resource management, energy efficiency, waste minimisation
and recycling initiatives. Due to the nature of its business,
the Group does not have a high environmental impact.
Employment policy and employee involvement
The Group’s employees are integral to the success of the
business and, as a result, the Group pursues employment
practices which are designed to attract, retain and develop
this talent to ensure the Group retains its strong market
position with motivated and satisfied employees.
The Board and senior managers take responsibility for
employment matters and have established suitable policies
and guidelines. Wherever possible, the Group seeks to
benchmark itself against industry best practice.
It is the Group’s policy to give all staff an opportunity to
share in the future success of the business. Historically this
has been achieved through the SCi Share Option Plan, which
expired in July 2006. The Board, in conjunction with the
remuneration committee, is currently in the process of
evaluating long-term incentive policy for the Group with a
view to adopting an appropriate structure for future years.
Proposals will be put to shareholders in due course.
Employees receive regular updates on corporate
performance and developments through various formal and
informal channels of communication, including the Group’s
website and internal intranet. The Group assists its
employees in achieving an appropriate work/life balance, by
measures including policies on parental, maternity and
paternity leave and flexible working where appropriate.
Workplace discrimination or harassment is not tolerated and
the Group is committed to providing equal opportunities to
all employees.
Community
The Group aims to partner with local communities in which it
operates by supporting local initiatives and charitable events.
SCi encourages its employees to participate as volunteers in
such activities and supports these initiatives through
donations, employee time and/or other contributions. During
the year the Group participated in a variety of community
related initiatives including:
4 sponsorship of youth football events in London, in
conjunction with the Metropolitan Police to encourage
sporting involvement and provide structured training;
4 provision of work experience programmes for secondary
school students to educate young people in business,
economics and free enterprise within the games industry;
4 studio visits, student internships and career day activities
in the US to provide participants with insight into the
game development process; and
4 donations of computer equipment and games to local
charities.
For the last two years the Group has also been working
closely with the staff of the Causeway Institute in Northern
Ireland, which offers a BTEC National Diploma course in
games development, to help ensure that the course material
accurately reflects the industry of today. The Group fully
supports the introduction of more structured education in
game design and development, which will help increase the
pool of talented developers available to work within the
industry, as well as providing a secure and exciting future for
young people involved with the course.
During the 12 months to 30 June 2006, SCi made
charitable donations of £10,400 (2005: £nil).
Disabled employees
Applications for employment by disabled persons are always
fully considered, bearing in mind the aptitudes of the
applicant concerned. In the event of members of staff
becoming disabled every effort is made to ensure that their
employment with the Group continues and that appropriate
training is arranged. It is the policy of the Group that the
training, career development and promotion of disabled
persons should, as far as possible, be identical with that of
other employees.
27
Directors’ remuneration report
to the shareholders of SCi Entertainment Group Plc
1. Introduction and compliance
This report has been prepared in accordance with the
Companies Act 1985, as amended by the Directors’
Remuneration Report Regulations 2002, and has been
approved by the Board. It also satisfies the relevant
requirements of the UK Listing Authority and explains how the
Board has applied the Principles of the Combined Code on
Corporate Governance (the “Code”) in relation to directors’
remuneration. A resolution to approve this report will be
proposed at the forthcoming Annual General Meeting (“AGM”).
2. The constitution and remit of the remuneration committee
The remuneration committee (the “committee”) currently
comprises the three non-executive directors and is chaired by
Nigel Wayne. Following the Board’s corporate governance
review, Jane Cavanagh stepped down from the committee at
the end of the year in accordance with best practice. The
committee’s terms of reference are available on request from
the Company Secretary.
New Bridge Street Consultants LLP, an independent
external firm who have no other connection with the
Company, were appointed by the committee during the year
to provide advice on executive remuneration matters. The
committee was also provided with legal services from
Addleshaw Goddard (one of the Company’s legal advisers),
and referred to remuneration benchmarking reports from
Monks Partnership. The Chief Executive attends meetings of
the committee by invitation other than when matters
concerning her own remuneration are under consideration.
The committee’s principal functions are to advise the Board
on the broad framework for executive remuneration, to
determine the remuneration packages of the executive
directors and Company Chairman, and to recommend and
monitor the level and structure of remuneration for senior
management. It reviews the performance of the executive
directors and sets the scale and structure of their remuneration
and the basis of their service agreements with due regard to
market practice and the interests of shareholders. No director
participates in decisions regarding his or her own remuneration.
The committee is also responsible for overseeing the operation
of the Company’s equity incentive schemes.
3. Remuneration policy for executive directors
In determining remuneration packages the committee
has regard to the importance of retaining and motivating
executive directors as well as linking reward to the Group’s
performance. Within this context, the committee’s policy on
executive director remuneration is to:
4 pay a competitive base salary designed to attract and
retain executive directors relevant to each director’s role,
experience and the external market;
4 provide incentive arrangements which are subject to
challenging performance targets (based on profitable
growth and share price performance), reflect the Group’s
objectives and recognise the importance of providing
sustained motivation of management to focus on longerterm, as well as annual, performance; and,
4 align the interest of the executive directors with those of
shareholders.
28
In order to achieve these objectives the committee’s
approach is that a significant proportion of the overall
remuneration package should be linked to the performance
of the Group, through participation in an annual performance
related bonus scheme and long-term incentive arrangements.
The committee sets performance criteria based on the
financial targets set during the Group’s budgeting process,
taking into account the strategic aims of the Group as well
as the interests of shareholders. The targets for each
performance criteria are designed to be challenging. The
committee determines whether these criteria have been met,
based on relevant financial information and measured on a
consistent basis.
The above policy is expected to continue to be applied in
respect of the forthcoming and subsequent years.
A review of executive directors’ current remuneration
against the committee’s current policy was undertaken during
the year. The review was conducted for a number of reasons,
including: (i) responding to corporate governance best
practice to reduce the Chief Executive’s notice period from
36 to 12 months; and (ii) the need to ensure that a market
competitive remuneration offering was being provided to the
Chief Executive vis-à-vis comparable companies in the media,
computer and software sectors. The key conclusions of this
review as they affect Jane Cavanagh have been introduced
with effect from 1 April 2006 and are summarised below:
4 Service contract – notice period reduced from 36 months
to 12 months;
4 Base salary – increased to £400,000 per annum with
effect from 1 April 2006; and
4 Annual performance related bonus – maximum bonus
potential increased to 100% of salary with effect from
1 July 2006.
The committee is also in the process of conducting a
further evaluation of future long-term incentive provision
within the Group as a result of the expiration of the SCi
Share Option Scheme during 2006 and developments in
best practice.
4. Remuneration policy and terms of engagement for
non-executive directors
The Company’s policy on non-executive director remuneration
is to pay fees which are in line with market practice, based
upon the experience and expertise of the director concerned
as well as the time commitment and responsibilities of the
role. The fees of the non-executive directors are determined
by the Board as a whole.
During the period under review, the annual fees of the
non-executive directors were reviewed and increased from
£12,000 to £25,000, reflecting increased responsibilities
due to the expansion of the Group over the last 18 months.
The non-executive directors receive no other benefits, with
the exception of a small number of legacy share options
granted in 2001 to Tim Ryan and Nigel Wayne as detailed on
page 32. The Board has determined that no further share
options will be granted to any non-executive director. Existing
options held by Tim Ryan and Nigel Wayne will be exercised
or will lapse in due course as appropriate.
The non-executive directors’ terms of engagement were
Directors’ remuneration report continued
also updated during the period under review to fully comply
with best practice and all requirements of the Code. Each
non-executive director is appointed for a specified term
subject to re-election and a rolling one month notice period.
5. Remuneration packages
(a) Basic salary and benefits in kind
As referred to in last year’s remuneration report, the basic
salary and benefits of the executive directors were reviewed
with effect from 1 June 2005 following the acquisition of
Eidos to the following levels: Jane Cavanagh – £275,000;
Bill Ennis – £195,000; Rob Murphy – £195,000.
One result of the remuneration review undertaken during
the year has been to further increase Jane Cavanagh’s base
salary to £400,000 with effect from 1 April 2006. This
increase, in the opinion of the committee, reflects her very
considerable and industry specific expertise and the
competitive market place for executive talent.
It is not intended that material increases to base salary
levels will take place prior to July 2008. Salaries will,
however, be adjusted to reflect changes in the cost of living.
Accordingly, the base salaries of both Bill Ennis and Rob
Murphy were increased by 3.5% to £201,825 with effect
from 1 July 2006.
The next formal salary review is scheduled to take place
during 2008. If, exceptionally, there is a substantial change
to the Group or its scope of operations before 2008 the
committee retains the flexibility to conduct an interim review.
At each formal review the committee considers the
individual’s performance and responsibilities as well as
market trends. Particular regard is paid to salary levels in
companies of a comparable size, sector and performance.
Benefits for the executive directors consist of a car
allowance, private medical and dental insurance, life
assurance and permanent health insurance. The value of
benefits is not pensionable.
(b) Pensions
Pension contributions are made on behalf of executive
directors based on 15% of basic salary.
(c) Annual performance related bonus
The executive directors participate in an annual bonus
scheme which is administered by the committee. Payments
under the scheme are based on exceeding the Group’s target
profit level, with the actual targets set early in the financial
year for which the bonus is payable.
From 1 July 2005 to 30 June 2006 the maximum
potential annual bonus award under the scheme was 67% of
basic salary per director. All performance targets have been
met or exceeded for the year under review and the maximum
award has therefore been recommended by the committee.
As a result of the remuneration review, the annual bonus
opportunity of Jane Cavanagh is being increased from 67% to
100% of basic salary. This increased bonus opportunity
reflects wider market practice and the committee’s wish to
ensure that a significant proportion of her remuneration
package remains linked to performance.
The annual bonus is not pensionable.
(d) Long-term incentive plans
The 2008 LTIP
At the Company’s AGM on 7 February 2006 shareholders
approved the terms of a long-term incentive plan (“LTIP”)
which applies to all executive directors and is based on
corporate performance in the three year period to 30 June
2008 (the “2008 LTIP”). Under the 2008 LTIP, corporate
performance is measured in three ways (as detailed below),
each selected by the committee as challenging and
appropriate criteria which link awards to the creation of longterm shareholder value.
The maximum payment to each executive director is 100%
of aggregate basic salary over the three year period of the
2008 LTIP, except that in the event that total EBITDA for the
three years ending 30 June 2008 exceeds £80 million, the
maximum payment is 125% of aggregate basic salary,
provided that all three performance criteria have been met.
The three performance measures used to determine the
amount payable to each director are:
(i) 40% of the maximum payment will be determined by
reference to cumulative EBITDA. This element will be
calculated in accordance with the following scale on a
pro-rata basis:
Cumulative EBITDA
Less than £60 million
£60 million – £65 million
Proportion of this element payable
0%
25%
50%
75%
100%
In determining whether this condition has been met, the
committee will primarily have regard to profits generated
from the Group structure as at present. Profits
‘acquired’ as a result of merger or acquisition activity
may be disregarded and/or result in an appropriate
amendment to this target parameter.
(ii) 40% of the maximum payment will be determined by
reference to growth in profits. The Group must report
growth in profit before tax in each of the three years
ending 30 June 2008. The committee selected this
measure as an industry specific target for the period of
transition from one generation of gaming platform to the
next, which, for the games industry, has historically been
a volatile and challenging period in which to achieve
consistent year on year growth. In the view of the
committee, positive year on year growth is sufficiently
challenging and that, therefore, a particular target figure
for growth is not appropriate. As with performance
measure (i), profit growth will primarily be measured in
respect of the Group structure as at present, and growth
achieved by acquisition may be disregarded.
(iii) 20% of the maximum payment will be determined by
reference to share price performance. Over the period
between 1 July 2005 and 30 June 2008 as a whole,
SCi’s share price must outperform the FTSE Media Index
(formerly the FTSE Media & Entertainment Index). The
committee considers that a comparison relative to the
FTSE Media Index which contains similar businesses is
29
more appropriate than a comparison with a general FTSE
Index. As with performance measure (ii), share price
growth which outperforms the FTSE Media Index over the
transition period between gaming platforms will be
difficult to achieve. Given that not all other companies
within the Media Index will be facing that same
challenge over the 2008 LTIP period, the committee
considered that a specific target outperformance
percentage was not appropriate.
Awards under the LTIP are not pensionable.
The 2007 LTIP
As referred to in last year’s report the committee
recommended payments of £75,000 to Jane Cavanagh and
£50,000 each to Bill Ennis and Rob Murphy as
compensation for early termination of the 2007 LTIP, to be
made upon approval of the 2008 LTIP.
These amounts, which were paid in February 2006, were
calculated based on a discounted cash flow value of the
future potential awards taking into account performance to
date, pro-rated for actual time elapsed of the 2007 LTIP
performance period, and discounted by a further 50% in view
of early payment.
(e) Share options
The Group has historically operated the SCi 1996 Share
Option Plan under which options may be granted to eligible
participants at the market price at the date of grant. Options
may be exercised at any time between the third and seventh
anniversaries of date of grant, provided that specific
performance conditions have been fulfilled.
The performance conditions require the Company’s share
price to have outperformed the FTSE Media Index over the
period from the date of grant to exercise.
The committee chose share price growth as the
performance condition for share options as it believed it to
be an appropriate measure of long-term shareholder return.
The requirement to exceed the performance of the FTSE
Media Index was considered to be challenging.
During the period under review Rob Murphy was awarded
75,000 share options, subject to the performance condition
detailed above, in accordance with a long-term service
agreement. Under the agreement he is eligible for further
annual awards for the next two years totalling 250,000 share
options in aggregate. As with all the options previously
granted, these options may not be exercised for three years
and may then only be exercised subject to meeting the
performance criteria mentioned above. These options are
considered by the committee to be an incentive to ensure
key executives are retained within the company and to
further align their interests with those of shareholders.
The SCi 1996 Share Option Plan expired in July 2006 and
the Board is currently in the process of evaluating long-term
incentive provision within the Group with a view to adopting
an appropriate structure for future years. The committee will
put forward proposals to shareholders in due course.
6. Service contracts
Details of the directors’ terms of appointment and notice periods are as follows:
Date of appointment
Expiry date of current term/Notice period
Jane Cavanagh
3 May 1996
Notice has been reduced from 36 months to 12 months’ rolling notice
Bill Ennis
3 May 1996
Terminable on 12 months’ rolling notice
Rob Murphy
21 April 1997
Terminable on 6 months’ rolling notice
Tim Ryan
19 October 2001
26 September 2010/Terminable on 1 month’s rolling notice
Nigel Wayne
20 July 2001
12 July 2010/Terminable on 1 month’s rolling notice
Roger Ames
25 September 2006
25 September 2009/Terminable on 1 month’s rolling notice
With regard to Jane Cavanagh’s revised service contract, she would be eligible to receive payment in lieu of notice on
termination which would include base salary, benefits and annual bonus calculated by reference to bonus opportunity accrued
during the relevant year and any unexpired notice period based on average bonuses paid over the previous three years. Jane
Cavanagh would also be entitled to retain her existing share options pursuant to the rules of the SCi 1996 Share Option Plan,
unless she is terminated for misconduct. There is no enhancement to these terms if termination occurs following a change of
control of the Company.
There are no provisions for compensation to be payable in the event of early termination in the service contracts of Rob
Murphy and Bill Ennis other than for payment in lieu of notice.
30
7. Performance graph
The following graphs show the Company’s total shareholder return (“TSR”) since 30 June 2001 relative to the FTSE Media
Index and the FTSE Software & Computer Services Index. TSR represents share price growth plus reinvested dividends. The two
indices have been selected as they each provide a broad equity market index against which the Company’s performance can be
compared, recognising the uniqueness of the niche market in which the Company operates and the absence of any material UK
comparator companies.
Total shareholder return
Relative to FTSE All-Share Media Index
Total shareholder return
Relative to FTSE All-Share Software & Computer Services Index
Pence
1,400
Pence
1,400
1,300
SCi Entertainment Group
1,300
SCi Entertainment Group
1,200
FTSE All-Share Media Index
1,200
FTSE All-Share Software & Computer Services Index
1,100
1,100
1,000
1,000
900
900
800
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
0
30 June
2001
30 June
2002
30 June
2003
30 June
2004
30 June
2005
30 June
2006
0
30 June
2001
30 June
2002
30 June
2003
30 June
2004
30 June
2005
30 June
2006
Source: Perfect Information
Source: Perfect Information
8. Individual directors’ remuneration
The remuneration of each director for the 12 months ended 30 June 2006 was as follows:
Basic
salary/fees1
£000s
Annual
Bonus2
£000s
2007
LTIP3
£000s
Taxable
benefits
£000s
Total
2006
£000s
Total
2005
£000s
Pension
20064
£000s
Pension
20055
£000s
306.3
184.3
75.0
13.0
578.6
225.0
45.9
24.0
Executive
Jane Cavanagh
Bill Ennis
195.0
130.7
50.0
10.0
385.7
146.0
29.3
15.0
Rob Murphy
195.0
130.7
50.0
10.0
385.7
146.0
29.3
15.0
25.0
9.0
–
–
–
54.0
Non-executive
Tim Ryan
25.0
–
–
–
Nigel Wayne
27.5
–
–
–
27.5
9.0
–
748.8
445.7
175.0
33.0
1,402.5
535.0
104.5
1
2
3
4
5
Nigel Wayne’s fees include a non-recurring payment of £2,500 for additional work on the remuneration review.
Represents bonuses recommended by the remuneration committee in respect of the 12 month period ending
30 June 2006 based on salaries as at 1 July 2005.
Represents compensation for early termination of the 2007 LTIP (see note on page 30).
Pension represents contributions to money purchase schemes.
Information relating to directors’ remuneration in sections 8 and 9 in tabular form has been audited and an opinion in that
regard forms part of the auditors’ report on page 33.
31
9. Share options
The interests of the directors in share options of the Company at 30 June 2006 were:
30 June 2005
Number
Granted
Number
Exercised
Number
30 June 2006
Number
Exercise
price
Pence
75,000
–
–
75,000
39.0
11 December 2001 to
11 December 20052
80,000
–
–
80,000
81.0
20 August 2004 to 20 August 2008
80,000
–
–
80,000
72.0
16 June 2006 to 16 June 2010
43,865
–
–
43,865
125.5
31 March 2007 to 31 March 2011
333.5
30 June 2008 to 30 June 2012
Jane Cavanagh
Bill Ennis
Rob Murphy
Exercisable
270,000
–
–
270,000
548,865
–
–
548,865
50,000
–
–
50,000
39.0
11 December 2001 to
11 December 20052
80,000
–
–
80,000
81.0
170,000
–
–
170,000
72.0
16 June 2006 to 16 June 2010
410,000
–
–
410,000
100.5
270,000
-
–
270,000
333.5
30 June 2008 to 30 June 2012
980,000
–
–
980,000
50,000
–
–
50,000
39.0
11 December 2001 to
11 December 20052
41,000
–
–
41,000
56.5
80,000
–
–
80,000
81.0
84,809
–
–
84,809
125.5
85,000
–
–
85,000
100.5
270,000
–
–
270,000
333.5
30 June 2008 to 30 June 2012
–
75,000
–
75,000
484.0
17 October 2008 to 17 October 2012
610,809
75,000
–
685,809
Tim Ryan
20,000
–
–
20,000
85.0
1 October 2004 to 1 October 2008
Nigel Wayne1
17,500
–
–
17,500
47.5
18 July 2004 to 18 July 2008
2,177,174
75,000
–
2,252,174
1
1
2
Share options are no longer granted to non-executive directors. Existing options granted in 2001 to Tim Ryan and Nigel
Wayne will be exercised or will lapse in due course as appropriate.
During the period under review the committee amended the rules of the SCi Share Option Scheme to extend the exercise
period of options granted on 11 December 1998 and 8 March 1999 where, immediately prior to the expiry of the exercise
period, the Company was in a close period or otherwise subject to a prohibition on share dealing by directors. In such
circumstances the exercise period was extended until one month following the end of such period.
10. Share price
The market price of the ordinary shares at 30 June 2006 was 517p and the range during the period was 333.5p to 615p.
11. AGM and documents available for inspection
In accordance with statutory requirements, an ordinary resolution to approve this remuneration report will be proposed at the
Company’s AGM.
The directors’ service contracts and letters of appointment, together with the statutory register of directors’ interests
(containing full details of directors’ shareholdings and other interests), are available for inspection by shareholders at the
Company’s registered office during normal business hours and at the AGM.
On behalf of the Board,
Nigel Wayne
Chairman – Remuneration committee
16 November 2006
32
Report of the independent auditors
to the shareholders of SCi Entertainment Group Plc
We have audited the consolidated and parent Company
financial statements (the “financial statements”) of SCi
Entertainment Group Plc for the 12 months ended 30 June
2006 which comprise the consolidated income statement,
the consolidated and parent Company balance sheets, the
consolidated cash flow statement, the consolidated
statement of recognised income and expense and the
related notes. These financial statements have been
prepared under the accounting policies set out therein.
We have also audited the information in the directors’
remuneration report that is described as having been audited.
inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
Our report has been prepared pursuant to the
requirements of the Companies Act 1985 and for no other
purpose. No person is entitled to rely on this report unless
such a person is a person entitled to rely upon this report by
virtue of and for the purpose of the Companies Act 1985 or
has been expressly authorised to do so by our prior written
consent. Save as above, we do not accept responsibility for
this report to any other person or for any other purpose and
we hereby expressly disclaim any and all such liability.
Respective responsibilities of directors and auditors
The directors' responsibilities for preparing the Annual
Report and the Group financial statements in accordance
with applicable law and IFRS as adopted by the European
Union, and for preparing the parent Company financial
statements and the directors’ remuneration report in
accordance with applicable law and United Kingdom
Accounting Standards (UK GAAP) are set out in the
statement of directors’ responsibilities.
Our responsibility is to audit the financial statements and
the part of the directors’ remuneration report to be audited
in accordance with relevant legal and regulatory requirements
and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view and whether the
financial statements and the part of the directors’
remuneration report to be audited have been properly
prepared in accordance with the Companies Act 1985 and
whether, in addition, the Group financial statements have
been properly prepared in accordance with Article 4 of the
IAS Regulation. Additionally, we report to you whether, the
information given in the directors’ report is consistent with
those financial statements. We also report to you if, in our
opinion, the Company has not kept proper accounting
records, if we have not received all the information and
explanations we require for our audit, or if information
specified by law regarding directors’ remuneration and other
transactions is not disclosed.
We review whether the corporate governance statement
reflects the Company’s compliance with the nine provisions
of the 2003 FRC Combined Code specified for our review by
the Listing Rules of the Financial Services Authority, and we
report if it does not. We are not required to consider whether
the Board’s statements on internal control cover all risks and
controls, or form an opinion on the effectiveness of the
Group's corporate governance procedures or its risk and
control procedures.
We read other information contained in the annual report
and consider whether it is consistent with the audited
financial statements. The other information comprises only
the directors’ report, the unaudited part of the directors’
remuneration report, the chairman’s statement, Chief
Executive’s statement, corporate responsibility statement,
the financial review and the corporate governance statement.
We consider the implications for our report if we become
aware of any apparent misstatements or material
Basis of audit opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board. An audit includes examination, on
a test basis, of evidence relevant to the amounts and
disclosures in the financial statements and the part of the
directors’ remuneration report to be audited. It also includes
an assessment of the significant estimates and judgments
made by the directors in the preparation of the financial
statements, and of whether the accounting policies are
appropriate to the Group’s and Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence to
give reasonable assurance that the financial statements and
the part of the directors’ remuneration report to be audited
are free from material misstatement, whether caused by
fraud or other irregularity or error. In forming our opinion we
also evaluated the overall adequacy of the presentation of
information in the financial statements and the part of the
directors’ remuneration report to be audited.
Opinion
In our opinion:
4 the Group financial statements give a true and fair view,
in accordance with IFRS as adopted by the European
Union, of the state of the Group’s affairs as at 30 June
2006 and of its profit for the year then ended;
4 the Group financial statements have been properly
prepared in accordance with the Companies Act 1985 and
Article 4 of the IAS Regulation;
4 the parent Company financial statements give a true and
fair view, in accordance with UK GAAP, of the state of the
parent Company’s affairs as at 30 June 2006;
4 the parent Company financial statements and the part of
the directors’ remuneration report to be audited have
been properly prepared in accordance with the Companies
Act 1985; and
4 the information given in the directors’ report is consistent
with the financial statements.
BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London
16 November 2006
33
Consolidated income statement
for the 12 months to 30 June 2006
Notes
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
2
179.1
18.0
Cost of sales
(75.3)
(13.0)
Gross profit
103.8
Revenue
Development costs – exceptional
6
– other
Advertising
Administrative costs – exceptional
6
– other
5.0
(1.1)
(1.9)
(27.0)
(5.7)
(19.4)
(1.0)
(0.7)
(4.7)
(47.8)
(5.7)
(96.0)
(19.0)
2, 4
7.8
(14.0)
Finance income
3
0.7
0.3
Finance costs
3
(0.3)
(0.1)
(0.1)
0.4
8.1
(13.4)
5.4
0.5
13.5
(12.9)
13.4
(13.4)
Administrative expenses
Profit (loss) from operations
Share of (loss) profit in associate
Profit (loss) before taxation
Tax credit
7
Profit (loss) for the period
Attributable to:
Equity holders of the parent
Minority interest
0.1
0.5
13.5
(12.9)
2006
Pence
2005
Pence
Earnings (loss) per share
Basic
8
18.5
(37.5)
Diluted
8
17.7
(37.5)
The notes on pages 38 to 67 form part of the statutory financial statements.
34
Consolidated statement of recognised income and expense
12 months to
30 June 2006
£m
Profit (loss) for the period
Foreign exchange gain on translation of overseas operations
Total recognised income and expense for the period
13.5
0.5
9 months to
30 June 2005
£m
(12.9)
–
14.0
(12.9)
13.9
(13.4)
0.1
0.5
14.0
(12.9)
Attributable to:
Minority interest
35
Consolidated balance sheet
at 30 June 2006
Notes
30 June 2006
£m
30 June 2005
£m
10
3.2
3.4
Non current assets
Property, plant and equipment
Goodwill
11
4.7
5.1
Intangible assets
12
105.7
116.6
Capitalised development costs
13
46.1
16.8
Investment in associates
14
0.4
0.7
Deferred tax assets
19
2.1
0.3
162.2
142.9
Current assets
Inventory
15
5.2
3.8
Trade and other receivables
16
57.5
30.9
37.2
46.1
99.9
80.8
17
0.2
–
2
262.3
223.7
Cash and cash equivalents
Assets classified as held for sale
Total assets
Non current liabilities
Finance leases
18
–
0.2
Deferred tax liabilities
19
15.4
19.0
15.4
19.2
Current liabilities
Trade and other payables
20
29.8
18.2
Tax liabilities
21
7.3
4.9
8.0
14.5
22
15.0
14.6
60.1
52.2
75.5
71.4
Accruals and deferred income
Provisions
Total liabilities
2
Equity
Share capital
23
3.8
3.5
Share premium
25
74.6
57.4
Merger reserve
25
81.3
69.9
Capital reserve
25
6.3
6.3
Foreign currency translation reserve
25
0.5
–
Share based compensation
25
4.7
0.3
Employee benefit trust share reserve
25
(0.9)
(0.9)
Retained profits
25
14.9
1.5
185.2
138.0
1.6
14.3
Total equity
186.8
152.3
Total liabilities and equities
262.3
223.7
Equity attributable to equity holders of the parent Company
Minority interests
The notes on page 38 to 67 form part of these financial statements.
These financial statements were approved by the Board of directors and authorised for issue on 16 November 2006 and signed
on its behalf by
Jane Cavanagh
Director
36
Rob Murphy
Director
Consolidated cash flow statement
Notes
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
Operating activities
Net profit (loss) before taxation
8.1
(13.4)
4.4
0.2
Depreciation on property, plant and equipment and software amortisation
charged to the income statement
4
1.8
0.6
10.6
1.2
Goodwill impairment
2.4
–
Net financing income
(0.4)
(0.2)
0.1
(0.4)
Amortisation of brands and technology
Net loss (profit) made by associates
(Increase) decrease in trade and other receivables
(Increase) decrease in inventories
Increase in trade and other payables and accruals and deferred income
27.0
(12.0)
(26.6)
1.2
(1.4)
0.5
6.3
10.4
Release of capitalised development costs
28.1
5.4
Cash generated from operations
33.4
5.5
Income taxes paid
(0.5)
Cash flows from operating activities
32.9
5.5
–
–
(4.8)
Investing activities
Acquisition of subsidiary, net cash acquired
(2.2)
(0.3)
0.7
0.3
Expenditure on capitalised development costs
(57.4)
(15.8)
Net cash used in investing activities
(58.9)
(20.6)
Proceeds from issue of share capital
17.6
58.4
Share issue expenses
(0.2)
(0.6)
Interest paid
(0.3)
(0.1)
Net cash generated by financing activities
17.1
57.7
Net (decrease) increase in net cash and cash equivalents
(8.9)
42.6
Cash and cash equivalents at beginning of period
46.1
3.5
Cash and cash equivalents at end of period
37.2
46.1
Purchase of property, plant and equipment and intangible software
Interest received
Financing activities
37
Notes to the consolidated accounts
for the 12 months ended 30 June 2006
1. Accounting policies
The principal accounting policies of the Group are
summarised below.
These financial statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS and IFRIC interpretations) issued by the International
Accounting Standards Board (“IASB”), as adopted by the EU,
and, with those parts of the Companies Act 1988 applicable
to preparing accounts under IFRS.
This is the first time the Group has prepared its financial
statements in accordance with IFRS, having previously
prepared its financial statements in accordance with UK
accounting standards. Details of how the transition from UK
standards to IFRS has affected the Group’s reported financial
position, financial performance and cashflow are given in
note 32.
Basis of consolidation
The Group accounts consolidate the accounts of SCi
Entertainment Group Plc and its subsidiary undertakings
drawn up to 30 June 2006.
The results of subsidiaries acquired are consolidated for
the period from the date on which control passed.
Acquisitions are accounted for under the acquisition method
with goodwill, representing any excess of the fair value of the
consideration given over the fair value of the identifiable
assets and liabilities acquired.
Accounting periods
The accounting reference date of the Group is 30 June.
Property, plant and equipment
Property, plant and equipment are stated at cost, net of
depreciation and provision for impairment. Depreciation is
provided on all property plant and equipment, at rates
calculated to write off the cost less estimated residual value,
of each asset on a straight-line basis over its expected
useful life, as follows:
4 Leasehold improvements: over the life of the lease
4 Equipment and vehicles: 3 to 5 years
Goodwill
All Company business combinations are recorded using the
acquisition method. Goodwill results from the acquisition of
subsidiaries, associates and joint entities and corresponds
to the difference between the acquisition cost and the fair
value of the assets, liabilities and contingent liabilities
identified at the date of acquisition.
Positive goodwill is not amortised but is subject to annual
impairment tests at the end of each accounting period. The
recoverable value of goodwill is then estimated on the basis
of the higher of market value or value in use. Value in use is
defined as the present value relating to the cash flow
generating units with which the goodwill is associated. When
the market value or value in use is less than the accounting
value, impairment is recorded and is irreversible.
38
Intangible assets
Intangible assets acquired by the Group are recorded at their
valuation (brands and technology) or cost (software) less the
total of amortisation and impairment. In accordance with
IAS 38 “Intangible assets”, only elements whose cost can be
determined reliably and for which it is probable that future
benefits exist are recorded as non current assets.
Intangible assets are amortised over the expected period
of use:
4 Brands
15 years
4 Technology
8 years
3 years
4 Software
Brands and technology relate to trademarks, characters,
images, engines and designs acquired by the Group that
were identifiable and measurable. These assets are
amortised over a period of 15 and 8 years respectively
based on the useful economic lives, applicable to the
individual characteristics of the respective asset. At the
close of each fiscal year these assets are also subject to
impairment tests whereby the recoverable value of brands
and technology is then estimated on the basis of either
market value or value in use. Value in use is defined as the
present value relating to the cash flow with which the assets
are associated.
Software relates to applications not required to run
hardware and are amortised over three years.
Capitalised development costs correspond to the
development of new products once the Group has
determined that:
4 the product is technically and commercially feasible;
4 the project is clearly defined and related expenditure is
separately identifiable;
4 current and future costs are expected to be exceeded by
future sales;
4 the Group has the intention and ability to complete the
intangible asset and use or sell it; and
4 adequate resources exist for the product to be completed.
Capitalised development costs are amortised over the
period that prudently simulates the flow of revenues from a
typical product. At the close of each fiscal year products are
reviewed for any loss of value. Where contribution made by a
product does not exceed the expected total cost of
development then an impairment provision is made.
Associated undertakings
Associated undertakings are undertakings in which the Group
holds a long-term interest and over which it has the power to
exercise significant influence but not control. The Group’s
share of profits less losses from associated undertakings is
included in the consolidated income statement on the equity
accounting basis and its interest in their net assets included
in investments in the balance sheet.
Notes to the consolidated accounts continued
1. Accounting policies continued
Inventory
Inventory comprise finished goods for resale, and are stated
at the lower of cost and net realisable value. Cost is
calculated as cost of materials. Net realisable value is based
on estimated selling price, less further disposal costs.
Non-current assets held for sale and disposal groups
Non-current assets and disposal groups are classified as
held for sale when:
4 they are available for immediate sale;
4 management is committed to a plan to sell;
4 it is unlikely that significant changes to the plan will be
made or that the plan will be withdrawn;
4 an active programme to locate a buyer has been initiated;
4 the asset or disposal group is being marketed at a
reasonable price in relation to its fair value; and
4 a sale is expected to complete within 12 months from the
date of classification.
Non-current assets and disposal groups classified as held
for sale are measured at the lower of:
4 their carrying amount immediately prior to being classified
as held for sale in accordance with the Group’s
accounting policy; and
4 fair value less costs to sell.
Following their classification as held for sale, non-current
assets (including those in a disposal group) are not
depreciated. The results of operations disposed during the
year are included in the consolidated income statement up
to the date of disposal.
Provisions
Provisions are recognised for liabilities of uncertain timing or
amount that have arisen as a result of past transactions and
are discounted at a pre-tax rate reflecting current market
assessments of the time value of money and the risks
specific to the liability.
Taxation
Corporation tax payable is provided on taxable profits at
prevailing rates.
Deferred taxation
Deferred income tax is calculated using the asset-liability
method of tax allocation for all temporary differences arising
between the book value of assets and liabilities and their tax
bases, except for differences arising on the initial recognition
of goodwill.
A deferred income tax asset is recognised only to the
extent that it is probable that there will be future taxable
profits on which this asset can be charged. Deferred income
tax assets are reduced to the extent that it is no longer likely
that a sufficient taxable benefit will arise.
Deferred taxation is shown on the balance sheet
separately from current tax assets and liabilities and
categorised among non-current items.
Deferred tax assets and liabilities are offset when the
Group has a legally enforceable right to offset current tax
assets and liabilities and the deferred tax assets and
liabilities relate to taxes levied by the same tax authority on
either:
The same taxable Group company or;
Different Group entities which intend to either settle
current tax assets and liabilities on a net basis, or to
realise the assets and settle the liabilities simultaneously,
in each future period in which significant amounts of
deferred tax assets or liabilities are expected to be
settled or recovered.
Deferred tax balances are not discounted.
Foreign currency
Transactions entered into by Group entities in a currency
other than the currency of the primary economic environment
in which it operates (the “functional currency”) are recorded
at the rates ruling when the transactions occur. Foreign
currency monetary assets and liabilities are translated at the
rates ruling at the balance sheet date. Exchange differences
arising on the retranslation of unsettled monetary assets
and liabilities are similarly recognised immediately in the
income statement.
On consolidation, the results of overseas operations are
translated into sterling at rates approximating to those ruling
when the transactions took place. All assets and liabilities of
overseas operations, including goodwill arising on the
acquisition of those operations, are translated at the rate
ruling at the balance sheet date. Exchange differences
arising on translating the opening net assets at opening rate
and the results of overseas operations at actual rate are
recognised directly in equity (the “foreign currency translation
reserve”). Exchange differences recognised in the income
statement of Group entities’ separate financial
statements on the translation of long-term monetary items
forming part of the Group’s net investment in the overseas
operation concerned are reclassified to the foreign exchange
reserve if the item is denominated in the functional currency
of the Group or the overseas operation concerned. On
disposal of a foreign operation, the cumulative exchange
differences recognised in the foreign exchange reserve
relating to that operation up to the date of disposal are
transferred to the income statement as part of the profit or
loss on disposal.
39
Financial assets
The Group classifies its financial assets into one of the
following categories, depending on the purpose for which the
asset was acquired. The Group’s accounting policy for each
category is as follows:
Fair value through profit or loss: This category comprises
only in-the-money derivatives. They are carried in the balance
sheet at fair value with changes in fair value recognised in
the income statement. The Group does not have any assets
held for trading nor does it voluntarily classify any financial
assets as being at fair value through profit or loss.
Loans and receivables: These assets are non-derivative financial
assets with fixed or determinable payments that are not quoted
in an active market. They arise principally through the provision
of goods and services to customers (trade debtors), but also
incorporate other types of contractual monetary asset. They are
carried at cost less any provision for impairment.
Held-to-maturity investments: These assets are nonderivative financial assets with fixed or determinable
payments and fixed maturities that the Group’s management
has the positive intention and ability to hold to maturity.
These assets are measured at amortised cost, with changes
through the income statement.
Available-for-sale: Non-derivative financial assets not
included in the above categories are classified as availablefor-sale and comprise the Group’s strategic investments in
entities not qualifying as subsidiaries, associates or jointly
controlled entities. They are carried at fair value with
changes in fair value recognised directly in equity. Where a
decline in the fair value of an available-for-sale financial
asset constitutes objective evidence of impairment, the
amount of the loss is removed from equity and recognised in
the income statement.
Financial liabilities
The Group classifies its financial liabilities into one of two
categories, depending on the purpose for which the asset
was acquired. The Group’s accounting policy for each
category is as follows:
Fair value through profit or loss: This category comprises
only out-of-the-money derivatives. They are carried in the
balance sheet at fair value with changes in fair value
recognised in the income statement.
Other financial liabilities: Other financial liabilities include
the following items:
4 Trade payables and other short-term monetary liabilities,
which are recognised at amortised cost.
4 Bank borrowings are initially recognised at the amount
advanced net of any transaction costs directly attributable
to the issue of the instrument. Such interest bearing
liabilities are subsequently measured at amortised cost
using the effective interest rate method, which ensures
that any interest expense over the period to repayment is
at a constant rate on the balance of the liability carried in
the balance sheet. “Interest expense” in this context
includes initial transaction costs and premia payable on
redemption, as well as any interest payable while the
liability is outstanding.
40
Completion bonding
Completion bonding provides financial assurance that a
product will be developed on time, on budget and in
accordance with agreed specifications. In the event of delay
or failure, the cost of the project will be guaranteed by the
bond rather than borne by the Group.
Development costs covered by a completion bond are
treated in the same manner as all other development costs
and are capitalised in the balance sheet until time of
release. If a completion bond is utilised then these costs will
be removed from the balance sheet as the project is passed
over to the completion bond company. The cost of the games
development is accounted for as development cost and,
where a completion bond is exercised, the associated
reimbursement is recognised as other operating income,
resulting in no net income effect.
The cost of the completion bond is expensed over the
period insured.
Leases
Where substantially all of the risks and rewards incidental to
ownership of a leased asset have been transferred to the
Group (a “finance lease”), the asset is treated as if it had
been purchased outright. The amount initially recognised as
an asset is the present value of the minimum lease
payments payable over the term of the lease. The
corresponding lease commitment is shown as a liability.
Lease payments are analysed between capital and interest.
The interest element is charged to the income statement
over the period of the lease and is calculated so that it
represents a constant proportion of the lease liability. The
capital element reduces the balances owed to the lessor.
Where substantially all of risks and rewards incidental to
ownership are retained by the lessor (an “operating lease”),
the total rentals payable under the lease are charged to the
income statement on a straight-line basis over the lease term.
The land and buildings elements of property leases are
considered separately for the purpose of lease classification.
Employee benefit trust (“EBT”) share reserve
The cost of the Company’s shares held by the EBT is
deducted from shareholders’ funds in the Group balance
sheet. Any gain or loss by the EBT on disposal of the shares
it holds is also recognised directly in shareholders’ funds to
the extent that it exceeds amounts due from the EBT in
relation to the set up of the share trust. Other assets and
liabilities of the EBT (including borrowings) are recognised as
assets and liabilities of the Group.
Any shares held by the EBT are treated as cancelled for
the purpose of calculating earnings per share.
Revenue recognition
Revenue comprises: (a) sales of games to retailers and
external distributors at invoiced and accrued amounts less
value added tax and provision against any subsequent returns.
The Group makes provision against any subsequent returns or
price protection; (b) royalty payments received or accrued from
external distributors under licence of the right to distribute
games in certain territories. Where advance payments against
royalties are received under licence, in so far as the Group’s
obligations have been fulfilled, such advances are recognised
at the point at which they become non-returnable; and
(c) royalty payments received or accrued from third parties
under licence of the right to exploit the Group’s intellectual
property on other media. Turnover from sales of games is
recognised at the point at which the game is delivered.
Long-term incentive plan for executive directors
Future payments under the Group’s long-term incentive plan
are estimated and charged to the consolidated income
statement account over the remaining period to which they
relate. A charge is initially recognised when it is probable
that an outflow of resources embodying economic benefits
will be required to settle the obligation and when the future
payments can be reliably estimated.
Pensions
For defined contribution schemes, the amount charged to the
consolidated income statement in respect of pension costs
is the contributions payable in the year. Differences between
contributions payable in the year and contributions actually
paid are shown as either accruals or prepayments in the
balance sheet.
Where share options are awarded to employees, the fair
value of the options at the date of grant is charged to the
income statement over the vesting period. Non-market
vesting conditions are taken into account by adjusting the
number of equity instruments expected to vest at each
balance sheet date so that, ultimately, the cumulative
amount recognised over the vesting period is based on the
number of options that eventually vest. Market vesting
conditions are factored into the fair value of the options
granted. As long as all other vesting conditions are satisfied,
a charge is made irrespective of whether the market vesting
conditions are satisfied. The cumulative expense is not
adjusted for failure to achieve a market vesting condition.
Where the terms and conditions of options are modified
before they vest, the increase in the fair value of the options,
measured immediately before and after the modification, is
also charged to the income statement over the remaining
vesting period.
Where equity instruments are granted to persons other
than employees, the income statement is charged with the
fair value of goods and services received.
The Group also operates a phantom share option
scheme. An option pricing model is used to measure the
Group's liability at each balance sheet date, taking into
account the terms and conditions on which the bonus is
awarded and the extent to which employees have rendered
service. Movements in the liability (other than cash
payments) are recognised in the income statement.
Exceptional Items
Exceptional items are those which are separately identified
by virtue of their size or incidence to allow a full
understanding of the underlying performance of the Group.
41
2. Segmental analysis
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
United Kingdom
41.9
3.3
Europe
67.4
5.5
United States of America
64.8
7.2
Rest of World
5.0
2.0
Total revenue
179.1
18.0
Primary segment: Geographic
Revenue by destination
Profit (loss) from operations by destination
United Kingdom*
(3.5)
(12.3)
Europe
5.3
(0.3)
6.0
(1.1)
Rest of World
–
(0.3)
7.8
(14.0)
* Central costs have been included within the United Kingdom results.
Net assets (liabilities)
As at 30 June 2006
United Kingdom
Assets
£m
Liabilities
£m
Net assets
£m
Depreciation and
amortisation
of software
£m
Capital
additions*
£m
186.1
(41.9)
144.2
1.4
1.3
Europe
43.5
(17.2)
26.3
0.8
0.8
32.4
(16.3)
16.1
0.4
0.1
Rest of World
Total
0.3
(0.1)
0.2
–
–
262.3
(75.5)
186.8
2.6
2.2
0.3
As at 30 June 2005
United Kingdom
171.8
(63.5)
108.3
2.6
Europe
13.4
(5.7)
7.7
–
–
36.9
(1.8)
35.1
–
–
1.6
(0.4)
1.2
–
–
223.7
(71.4)
152.3
2.6
0.3
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
Publishing
145.3
3.0
Distribution
28.6
–
5.2
15.0
179.1
18.0
Rest of World
Total
* Capital additions include additions to both plant, property and equipment and to intangible software.
Secondary segment: Business segments
Revenue by business segment
Licensing
Total revenue
Profit (loss) from operations by business segment
Publishing
3.4
(14.2)
Distribution
3.3
–
Licensing
1.1
0.2
7.8
(14.0)
Net assets (liabilities)
In the opinion of the directors, all assets and liabilities relate to the publishing business.
42
3. Net finance charges
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
0.7
0.3
(0.3)
(0.1)
0.4
0.2
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
Finance income
Other interest receivable
Finance expense
Bank loans and overdrafts
Net finance charges
4. Profit from operations
This has been arrived at after charging (crediting):
Depreciation of property, plant equipment and amortisation of software1
Amortisation of brands and technology
1.8
0.6
10.6
1.2
Goodwill impairment
2.4
–
4.4
0.2
Audit fees2
0.4
0.3
Fees paid to auditors for non-audit services provided to the Company and subsidiaries3
0.1
0.1
Foreign exchange loss (profit)
0.5
(0.9)
Operating lease expense
– plant and machinery
0.3
–
– property
2.3
0.7
1
2
3
The charge for depreciation of plant, property and equipment and amortisation of software in the income statement differs
from that in notes 10 and 12 by £0.8 million since depreciation and amortisation incurred by internal development studios
is treated as capitalised development cost.
Of the Group audit fee the amount attributable to the audit of the parent Company was £30,000 (9 months to 30 June
2005: £25,000).
Fees for non-audit services supplied by the Group’s auditors comprised advisory work in connection with the adoption of
IFRS of £51,000, taxation services of £28,500, advisory services of £20,000 and interim reporting of £20,000. A
description of the work of the audit committee is set out in the corporate governance statement which includes an
explanation on how auditor objectivity and independence is safeguarded when non-audit work is provided by the auditors.
43
5. Staff costs and numbers
The average monthly number of employees (including executive directors) was:
12 months to
30 June 2006
Number
9 months to
30 June 2005
Number
Sales, marketing and administration
272
95
Development
628
145
900
240
At 30 June 2006 the Group had 240 employees in sales, marketing and administration and 577 in development.
Aggregate remuneration (including directors) comprised:
£m
£m
Wages and salaries
22.0
8.8
Social security costs
2.0
0.8
Share based compensation (see note 24)
4.4
0.2
Other pension costs
0.6
0.2
29.0
10.0
Directors’ remuneration
£m
£m
Directors’ emoluments
1.4
0.5
Defined contribution pension costs
0.1
0.1
0.5
–
2.0
0.6
Further details of emoluments paid to directors are contained in table 8 within the directors’ remuneration report on pages 28
to 32.
Key management remuneration (including directors):
£m
£m
Wages and salaries
2.6
0.9
Social security costs
0.3
0.1
0.6
–
Gains on share options
0.4
0.1
Other pension costs
0.2
0.1
4.1
1.2
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
There are 16 employees (excluding directors) defined as being key management for 2006 (2005: 9).
6. Exceptional charges
Exceptional administrative costs
Restructuring costs of integrating Eidos and SCi
Provisions in relation to US publishing
(0.7)
–
(2.6)
(2.1)
(0.7)
(4.7)
(1.1)
(1.9)
(1.8)
(6.6)
Exceptional development costs
Write down of capitalised development costs
The Group incurred exceptional administrative costs of £0.7 million (2005: £2.6 million). These costs principally related to
redundancy costs arising from the integration of the Group’s publishing activities.
In 2005 the Group made a provision of £2.1 million for the costs of withdrawing from existing US publishing arrangements.
Exceptional development costs of £1.1 million relate to an unprofitable development contract entered into by Eidos prior to
acquisition. In 2005 following a Group-wide review of its product profile, the Group has decided to make an additional
exceptional provision of £1.9 million against similar products in development.
44
7. Tax on profit (loss) on ordinary activities
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
Current tax
UK corporation tax at 30%
(0.2)
Overseas taxation
(2.6)
Adjustment to the tax charge in respect of previous year
–
–
(0.1)
(0.1)
(2.8)
(0.2)
Origination and reversal of temporary differences
8.2
0.7
Taxation credit
5.4
0.5
Deferred tax
The difference between the deferred tax credit for the year of £8.2 million and the movement in the deferred tax assets and
liabilities in note 18 of £5.4 million relates to a £2.8 million movement on deferred tax liabilities which was set against
goodwill rather than through the income statement. This amount pertains to intangible assets acquired on the acquisition of
Eidos plc.
The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the UK
applied to profits for the year are as follows:
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
8.1
(13.4)
(2.4)
4.0
– non taxable items
(3.8)
(0.4)
– adjustment to the tax charge in respect of previous year
(0.2)
(0.1)
(Loss) profit on ordinary activities at standard rate of UK corporation tax rate (30%)
Effects of:
– share of tax in associate undertakings
–
(0.1)
– losses not recognised for deferred tax purposes
–
(3.9)
– recognition of losses and other deferred tax assets not previously recognised
12.5
– overseas tax rates
(0.7)
Total tax credit for the year
5.4
1.0
–
0.5
45
8. Earnings (loss) per share
12 months to
30 June 2006
9 months to
30 June 2005
Earnings
£m
Weighted
average number
of shares
m
Basic
13.5
72.9
(12.9)
Diluted
13.5
76.4
(12.9)
34.4
Trading profit – basic (see note 9)
27.4
72.9
(5.8)
34.4
Weighted average number of shares
2006
m
2005
m
Weighted average number of shares used in the calculation of basic and adjusted earnings per share
72.9
34.4
3.5
–
76.4
34.4
Earnings per share has been calculated as follows:
Loss
£m
Weighted
average number
of shares
m
34.4
Dilutive potential ordinary shares:
– Employee share options
Weighted average number of shares used in the calculation of diluted basic and
adjusted earnings per share
The calculation of diluted weighted average number of shares does not include 0.5 million share options granted to KBC Peel
Hunt on 18 March 2005 as referred to in note 24.
There is no potential dilution of the loss per ordinary share for 30 June 2005.
9. Non-GAAP measures of performance
12 months to
30 June 2006
£m
EBITDA before exceptional items and share based compensation
Operating profit (loss)
9 months to
30 June 2005
£m
7.8
(14.0)
14.8
1.8
Exceptional items (see note 6)
1.8
6.6
4.4
0.2
28.8
(5.4)
Depreciation*, amortisation and impairment charged to income statement
Trading profit
Trading profit represents EBITDA before exceptional items and share based compensation plus net financing income less
depreciation.
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
28.8
(5.4)
0.4
0.2
Depreciation of plant, property and equipment and amortisation of intangible software
charged to income statement*
(1.8)
(0.6)
Trading profit (loss)
27.4
(5.8)
Net financing income
* The charge for depreciation of plant, property and equipment and amortisation of software in the income statement differs
from that in notes 10 and 12 by £0.8 million since depreciation and amortisation incurred by internal development studios
is treated as capitalised development cost.
46
Leasehold
improvements
£m
Equipment,
vehicles and
fixtures and
fittings
£m
Total
£m
1 July 2005
0.8
4.8
5.6
Additions
0.1
1.5
1.6
Disposals
(0.1)
(0.9)
(1.0)
30 June 2006
0.8
5.4
6.2
0.2
2.0
2.2
10. Property, plant and equipment
Cost
Depreciation
1 July 2005
Charge for the period
0.3
1.4
1.7
Disposals
(0.1)
(0.8)
(0.9)
30 June 2006
0.4
2.6
3.0
30 June 2006
0.4
2.8
3.2
30 June 2005
0.6
2.8
3.4
Leasehold
improvements
£m
Equipment,
vehicles and
fixtures and
fittings
£m
Total
£m
Net book value
Cost
1 October 2004
Additions
0.5
1.9
2.4
–
0.3
0.3
Acquisition of subsidiary
0.3
2.6
2.9
30 June 2005
0.8
4.8
5.6
Depreciation
1 October 2004
0.2
1.4
1.6
–
0.6
0.6
0.2
2.0
2.2
30 June 2005
0.6
2.8
3.4
30 September 2004
0.3
0.5
0.8
30 June 2005
Net book value
The net book value of tangible fixed assets at 30 June 2006 includes the amount of £0.2 million (at 30 June 2005: £0.5
million) in respect of assets held under finance leases. The depreciation charge for the period in respect of such assets was
£0.3 million (9 months ended 30 June 2005: £0.4 million).
47
11. Goodwill
£m
Cost
1 October 2004 and 30 June 2005
7.7
Additions
– Arising on acquisition of Eidos plc
2.0
30 June 2006
9.7
Amortisation
1 October 2004 and 30 June 2005
2.6
Impairment
2.4
30 June 2006
5.0
Net book value
30 June 2006
4.7
30 June 2005
5.1
30 June 2004
5.1
The impairment figure relates to the full write down of £2.4 million of goodwill associated with the Actualize Group. This group
of companies is now dormant and is no longer expected to deliver any future economic benefits to the Group.
Goodwill calculations
Goodwill arising in the 2006 financial year has arisen through the acquisition of the remaining 9.98% of Eidos from its previous
shareholders. In calculating the goodwill, the fair value of the net assets of Eidos plc have been assessed and provisional
adjustments from book value have been made where necessary. These adjustments are summarised in the table below:
Net assets acquired at book and fair value
Plant, property and equipment
Intangible assets
0.4
14.4
0.2
Investments in associates
0.2
Inventory
0.2
3.9
Finance leases
(0.1)
(7.6)
(3.1)
Provisions
(0.2)
Net assets acquired (non cash)
8.3
Bank loans and overdrafts acquired
(0.7)
Net assets
Fair value of the consideration
Goodwill created on acquisition of minority interest
48
£m
7.6
11.7
4.1
Release of contingent consideration (see note 30)
(2.1)
Goodwill created during the year
2.0
Brands
£m
Technology
£m
Software
£m
Total intangible
assets
£m
–
–
–
–
– Arising on acquisition of Eidos plc
69.2
47.7
0.9
117.8
30 June 2005
69.2
47.7
0.9
117.8
–
–
0.6
0.6
69.2
47.7
1.5
118.4
12. Intangible assets
Cost
1 October 2004
Additions
Additions
30 June 2006
Amortisation
1 October 2004
–
–
–
–
0.5
0.7
–
1.2
30 June 2005
0.5
0.7
–
1.2
4.6
6.0
0.9
11.5
30 June 2006
5.1
6.7
0.9
12.7
30 June 2006
64.1
41.0
0.6
105.7
30 June 2005
68.7
47.0
0.9
116.6
30 June 2004
–
–
–
–
30 June 2006
£m
30 June 2005
£m
Net book value
13. Capitalised development costs
At start of the period
16.8
4.2
Capitalised in the period
57.4
15.8
On acquisition
Released in the period
At end of the period
–
(28.1)
46.1
2.2
(5.4)
16.8
49
14. Investments in associates and subsidiary undertakings
The Group had the following investments in associated undertakings:
£m
Cost
1 October 2004
–
Acquisition of Eidos plc
0.3
30 June 2005
0.3
30 June 2006
0.3
Share of retained profits
1 October 2004
–
Profit for the period
0.4
30 June 2005
0.4
(Loss) for the period
(0.1)
Moved to assets held for resale (note 17)
(0.2)
30 June 2006
0.1
Net book value
30 June 2006
0.4
30 June 2005
0.7
The parent Company had investments in the following principal undertakings, each of which has an accounting reference date
of 30 June apart from Rocksteady Studios Ltd which has an accounting reference date of 30 September.
Principal activity
Holding %
Class
Country of
registration
and operation
Subsidiary undertakings
SCi Games Ltd
Developer and publisher of interactive entertainment software
1001
Ordinary
England
Pivotal Games Ltd
Developer of interactive entertainment software
1001
Ordinary
England
Eidos plc
Developer and publisher of interactive entertainment software
1001
Ordinary
England
Core Design Ltd
100
Ordinary
England
Eidos Interactive Inc
Distributor of interactive entertainment software
100
Ordinary
USA
Eidos Sarl
100
Ordinary
France
Eidos GmbH
100
Ordinary
Germany
Proein SL
75
Common shares
Spain
Crystal Dynamics Inc
100
Ordinary
USA
2
Io Interactive
100
Ordinary
Denmark
Eidos Hungary Kft
100
Ordinary
Hungary
Eidos Studios,
Sweden AB
100
Ordinary
Sweden
Rocksteady Studios Ltd Developer of interactive entertainment software
25.1
Ordinary
England
51
Ordinary
Hungary
Associate undertakings
Io Interactive
Hungary Kft
1
2
50
Dormant company
Held directly by the parent Company.
In July 2006 the Group sold its interest in Pyro Studios SL (see note 17). As part of this transaction the Group acquired the
remaining 25% of shares in Proein SL.
30 June 2006
£m
30 June 2005
£m
5.2
3.8
30 June 2006
£m
30 June 2005
£m
52.5
26.0
Prepayments and accrued income
1.8
2.1
Other debtors
2.9
2.6
Amount due from associated undertaking
0.3
0.2
57.5
30.9
15. Inventory
Finished goods
16. Trade and other receivables
Trade debtors
The amount due from associated undertaking represents a loan to Rocksteady Studios Ltd.
17. Assets classified as held for resale
The asset held for sale at 30 June 2006 is the 26.7% investment in the common shares of Pyro Studios SL, Spain. This
investment was sold to the majority shareholder of Pyro Studios SL in July 2006. Pyro Studios SL was, and continues to be, a
developer of interactive entertainment software.
18. Non-current financial liabilities
Obligations under finance leases (see note 26)
30 June 2006
£m
30 June 2005
£m
–
0.2
–
0.2
51
19. Deferred tax assets and liabilities
At 30 June 2006, the Group had UK tax losses of £50.0 million carried forward subject to the agreement of the tax authorities.
In addition the Group is determining the value of overseas tax losses with the tax authorities in various jurisdictions.
Movement in deferred tax balance
Tax losses
Brands and technology
Short-term temporary differences
Recognised deferred tax assets (liabilities)
30 September 2004
£m
Movement in
period
£m
30 June 2005
£m
Movement in
the period
£m
30 June 2006
£m
1.4
11.7
13.1
1.2
14.3
(31.8)
(31.8)
0.5
(31.3)
–
3.7
3.7
5.4
(13.3)
–
–
1.4
–
(20.1)
(18.7)
Presented as:
Deferred tax asset
Deferred tax liability
Total
Movement in unrecognised deferred tax balance
Tax losses
Other short-term temporary differences
Unrecognised deferred tax assets (liabilities)
(1.1)
0.3
1.8
2.1
–
(19.0)
(19.0)
3.6
(15.4)
1.4
(20.1)
(18.7)
5.4
(13.3)
30 September 2004
£m
Movement in
period
£m
30 June 2005
£m
Movement in
the period
£m
1.9
6.8
8.7
(2.3)
6.4
–
0.9
0.9
(0.9)
–
1.9
7.7
9.6
(3.2)
6.4
30 June 2006
£m
30 June 2006
£m
30 June 2005
£m
19.6
6.4
Royalty creditors
6.9
10.1
Other creditors
3.1
1.4
20. Trade and other payables
Trade creditors
Obligations under finance leases (see note 26)
0.2
0.3
29.8
18.2
30 June 2006
£m
30 June 2005
£m
Taxation and social security
2.6
2.7
Overseas corporation tax
4.7
2.2
7.3
4.9
21. Tax liabilities
52
1.4
22. Provisions
Onerous
contract
£m
Restructuring
provision
£m
Returns
provision
£m
Legal
provision
£m
Total
£m
0.8
0.3
13.3
0.2
14.6
–
–
19.2
–
19.2
(0.8)
(0.3)
(17.5)
(0.2)
(18.8)
1 July 2005
Charged to the income statement in the year
Utilised during the year
30 June 2006
–
–
15.0
–
15.0
As at 30 June 2006
Returns provision
As at 30 June 2006 a provision against the return of goods sold and future price protection of £15.0 million related to sales
made during the year and hence has been charged to the income statement during the period. This provision also includes
rebates due to retailers which are paid quarterly. This provision will be released as the games are returned or price protected,
or the quarterly rebate amount paid. These provisions are expected to be fully used or released in the 2007 financial year.
As at 30 June 2005
Provision for onerous contract:
At 30 June 2005 a provision of £0.8 million was made for an onerous development contract between Eidos and Pyro Studios.
The provision was used in 2006.
Restructuring provision:
At 30 June 2005 a restructuring provision of £0.3 million was made for expected additional costs the Group would incur in the
sale or closure of Core Design Ltd. £0.1 million of the provision related to an onerous property lease.
Provision for legal proceedings:
At 30 June 2005 the Group held a provision for legal proceedings of £0.2 million. The provision related to insurance policy
excesses for two claims that the Group settled in the period.
30 June 2006
£m
30 June 2005
£m
4.9
4.9
3.8
3.5
2005
2006 Number of shares
£m
m
2005
£m
23. Called-up share capital
Authorised
97,000,000 (2005: 97,000,000) ordinary shares of 5p each
Allotted, called-up and fully-paid
76,162,376 ordinary shares of 5p each (2005: 69,438,360 ordinary shares of 5p each)
The movement in share capital was as follows:
2006
Number of shares
m
At beginning of the year
69.4
3.5
28.5
1.4
Placing and open offer
3.5
0.2
20.0
1.0
Issue of shares to acquire Eidos
3.0
0.1
20.8
1.1
Issue of new shares under SCi Share Option Scheme
0.3
–
0.1
–
76.2
3.8
69.4
3.5
At end of the year
During the year, 3,471,920 shares were issued under a placing to raise funds to pursue, amongst other things, potential
opportunities in the casual games market, 2,954,096 shares were issued to remaining Eidos shareholders and 298,000
shares were issued under the SCi Share Option Scheme.
53
24. Share based payment
SCi Share Option Scheme
The Company operates an unapproved Share Option Scheme. At 30 June 2006, options were outstanding over 6,667,924
shares, including options held by directors. The options are exercisable if certain performance criteria are met, as set by the
remuneration committee, which currently relate to share price performance compared with a published media sector average.
Number
of shares
over which
options
granted
30 June 2005
Granted in
the period
Exercised in
the period
1
175,000
–
–
–
175,000
175,000
39.0
11 December 2001 to
11 December 2005*
2
43,000
–
–
(2,000)
41,000
41,000
56.5
8 March 2002 to 8 March 2006*
3
28,000
–
(20,000)
(8,000)
–
–
43.5
2 July 2004 to 2 July 2008
4
17,500
–
–
–
17,500
17,500
47.5
18 July 2004 to 18 July 2008
5
240,000
–
–
–
240,000
240,000
81.0
20 August 2004 to
20 August 2008
6
20,000
–
–
–
20,000
20,000
85.0
1 October 2004 to
1 October 2008
7
287,000
– (258,000)
(10,000)
19,000
19,000
57.0
13 September 2005 to
13 September 2009
8
332,000
–
(20,000)
–
312,000
312,000
72.0
9
500,000
–
–
(26,500)
473,500
–
103.5
23 October 2006 to
23 October 2010
10
3,800
–
–
3,800
–
117.0
25 March 2007 to
25 March 2011
11
190,174
–
–
(5,000)
185,174
–
125.5
31 March 2007 to
31 March 2011
12
723,000
–
–
(2,400)
720,600
–
100.5
27 August 2007 to
27 August 2011
13
97,000
–
–
(11,000)
86,000
–
230.0
17 December 2007 to
17 December 2011
14
8,000
–
–
–
8,000
–
273.5
2 February 2008 to
2 February 2012
15
8,000
–
–
–
8,000
–
361.5
28 April 2008 to 28 April 2012
16
4,448,850
–
– (285,500) 4,163,350
–
333.5
30 June 2008 to 30 June 2012
17
–
10,000
–
–
10,000
–
404.0
1 August 2008 to
1 August 2012
18
–
65,000
–
–
65,000
–
515.0
11 October 2008 to
11 October 2012
19
–
75,000
–
–
75,000
–
484.0
17 October 2008 to
17 October 2012
20
–
40,000
–
(20,000)
20,000
–
540.0
1 November 2008 to
1 November 2012
21
–
25,000
–
–
25,000
–
560.0
11 January 2009 to
11 January 2013
215,000 (298,000) (370,400) 6,667,924
824,500
Scheme
number
7,121,324
Number
of shares
over which
options
Lapsed in
granted
the period 30 June 2006
Of which Exercise price
exercisable
(pence)
Exercise period
16 June 2006 to 16 June 2010
* During the period under review the committee amended the rules of the SCi Share Option Scheme to extend the exercise
period of options granted on 11 December 1998 and 8 March 1999 where, immediately prior to the expiry of the exercise
period, the Company was in a close period or otherwise subject to a prohibition on share dealing by directors. In such
circumstances the exercise period was extended until one month following the end of such period.
KBC Peel Hunt Share Options
Pursuant to an agreement dated 18 March 2005 in respect of its services provided as financial adviser, sponsor and broker,
SCi granted to KBC Peel Hunt, an option to subscribe for 500,000 new SCi shares at £3.00 per share (scheme number 22).
The option was exercisable, in whole or in part, at any time up to 16 November 2006 and was exercised on 2 November 2006.
54
24. Share based payment continued
Equity Incentive Plan
In addition to the SCi Share Option Scheme the Group operates a cash settled Equity Incentive Plan for certain employees,
principally in the US. Cash awards under this scheme are based on movements in the Group’s share price. No directors
participate in this scheme.
Number
of shares
over which
options
granted
30 June 2005
Granted in
the period
Exercised in
the period
23
781,000
–
(85,790)
(72,167)
623,043
333.5
30 June 2008 to 30 June 2011
24
–
10,000
–
–
10,000
333.5
11 October 2008 to
11 October 2011
25
–
117,500
(4,166)
(7,500)
105,834
466.0
11 October 2008 to
11 October 2011
26
–
75,000
–
–
75,000
511.0
16 January 2009 to
16 January 2012
781,000
202,500
(89,956)
(79,667)
813,877
Scheme
number
Number
of shares
over which
options
Lapsed in
granted Exercise price
the period 30 June 2006
(pence)
Exercise period
The market price of the ordinary shares at 30 June 2006 was 517p and the range during the period was 333.5p to 615p. All
share options granted during the year were issued at market value.
The weighted average price of shares exercised in the period was 518p.
The weighted average remaining contractual life of share options outstanding as at 30 June 2006 is 5.3 years.
55
24. Share based payment continued
Details of the fair value of share options granted in the year under the schemes operated by the Group are as follows.
Scheme
number
Share price
at grant date
(pence)
Exercise price
(pence)
Estimated
period
to exercise
of options
(years)
Expected
volatility
Risk-free
interest
rate
Scheme name
Option pricing
model used
8
1996 Share Option Plan
16/6/03 & directors
Binomial
71.7
72.0
3.0
50%
3.59%
9
23/10/03 & directors
Binomial
102.8
103.5
3.0
50%
4.84%
9
23/10/03 (illiquid discount)
Binomial
102.8
103.5
3.0
50%
4.84%
11
31/3/04 & directors
Binomial
127.3
125.5
3.0
50%
4.62%
12
27/8/04 & directors
Binomial
103.3
100.5
3.0
50%
4.90%
13
17/12/04
Binomial
229.3
230.0
3.0
50%
4.42%
14
2/2/05
Binomial
292.8
273.5
3.0
50%
4.47%
15
28/4/05
Binomial
360.8
361.5
3.0
50%
4.45%
16
30/6/05 & directors
Binomial
336.8
333.5
3.0
50%
4.04%
16
30/6/05
Binomial
338.0
333.5
3.0
45%
4.04%
17
01/8/05
Binomial
402.8
404.0
3.0
50%
4.27%
18
11/10/05
Binomial
515.0
515.0
3.0
45%
4.18%
(Directors) 17/10/05
Binomial
506.3
484.0
3.0
50%
4.33%
1/11/05
Binomial
547.3
540.0
3.0
50%
4.30%
11/1/06
Binomial
552.0
560.0
3.0
45%
4.13%
22
KBC Peel Hunt options
Binomial
308.8
300.0
0.5
50%
4.73%
23/24
30/6/05
Binomial
336.8
333.5
1.0
50%
4.04%
25
11/10/05
Binomial
514.3
466.0
1.0
50%
4.18%
26
16/1/06
Binomial
517.0
511.0
2.3
45%
4.74%
2006
£m
2005
£m
4.4
0.2
19
20
21
Volatility based on share price data over three years.
Charge recorded in the financial statements of the Group is:
56
25. Reserves and changes in equity
The movements on each reserve are shown below:
1 October 2004
Foreign
currency
Share
translation
based
reserve compensation
£m
£m
Employee
benefit
trust share
reserve
£m
Retained
profit
£m
Total
£m
Share
capital
£m
Share
premium
£m
Merger
reserve
£m
Capital
reserve
£m
1.4
–
0.5
6.3
–
0.1
–
14.4
22.7
–
–
–
–
–
–
–
(12.9)
(12.9)
–
–
–
–
–
–
(0.9)
–
(0.9)
2.1
128.5
–
–
–
–
–
–
Loss for the period
Charged to equity
Arising on acquisition
New shares issued
Less associated issue costs
–
–
Transfer to merger reserve
–
(1.7)
–
130.6
–
–
–
–
–
–
(1.7)
–
–
–
0.2
–
–
0.2
(69.4)
69.4
–
–
–
–
–
–
Total charged to equity
2.1
57.4
69.4
–
–
0.2
(0.9)
–
128.2
Total income and expense
for the period
2.1
57.4
69.4
–
–
0.2
(0.9)
(12.9)
115.3
30 June 2005
3.5
57.4
69.9
6.3
–
0.3
(0.9)
1.5
138.0
–
–
–
–
–
–
–
13.4
13.4
0.2
17.4
–
–
–
–
–
–
17.6
–
(0.2)
–
–
–
–
–
–
(0.2)
Profit for the period
Charged to equity
New shares issued
Share issue costs
Issue of share for remaining
10% of Eidos
0.1
–
11.4
–
–
–
–
–
11.5
–
–
–
–
–
4.4
–
–
4.4
Foreign exchange
–
–
–
–
0.5
–
–
–
0.5
Total charged to equity
0.3
17.2
11.4
–
0.5
4.4
–
–
33.8
Total income and expense
for the period
0.3
17.2
11.4
–
0.5
4.4
–
13.4
47.2
30 June 2006
3.8
74.6
81.3
6.3
0.5
4.7
14.9
185.2
(0.9)
SCi Entertainment Group Plc has the following reserves:
Share premium
Amount subscribed for share capital in excess of nominal value.
Merger reserve
In the 9 months to 30 June 2005 the Company took advantage of the exemption given
in Section 131 of the Companies Act 1985 not to recognise the premium on the issue
of shares that were issued in order to acquire at least 90% of Eidos plc. As a result,
the associated £69.4 million of fair value of shares issued in excess of the nominal
value has been transferred to the merger reserve.
In 2006, the remaining 9.96% was purchased and the £11.4 million of fair value of the
shares in excess of the nominal value was also charged to the merger reserve.
Capital reserve
During the year ended 30 September 2004, the Company completed a capital
reduction to restructure the Group’s reserves. Accordingly the balance of the share
premium account of £28.3 million at 30 September 2003 has been eliminated with
£6.3 million being transferred to a capital reserve and the balance credited against
accumulated losses in the retained earnings reserve.
Foreign currency translation reserve
Reserve includes the movement on overseas foreign currency retained profits reserves
and revaluation of intercompany provisions and investments.
Share based compensation reserve
Reserve contains the value of share based compensation awards, which are charged to
the income statement over the life of the awards, but which have no cash impact.
Reserve containing shares held by an Employee benefit trust for the purpose of
satisfying the exercise of awards under the Company’s share option scheme.
Retained profits
Cumulative net gains and losses recognised in the consolidated income statement.
57
26. Leases
Finance leases
Minimum lease
payments
2006
£m
Future lease payments are due as follows:
Interest
2006
£m
Present value
2006
£m
Not later than one year
0.2
–
0.2
Total
0.2
–
0.2
Minimum lease
payments
2005
£m
Interest
2005
£m
Present value
2005
£m
Not later than one year
0.3
–
0.3
Later than one year and not later than five years
0.2
–
0.2
Total
0.5
–
0.5
2006
2005
0.2
0.3
–
0.2
0.2
0.5
The present value of future lease payments are analysed as:
Current liabilities
Non-current liabilities
Total
Operating leases
The total future minimum rentals payable under operating leases in respect of the total lives of the leases are:
2006
Land and buildings
£m
2006
2005
Other Land and buildings
£m
£m
2005
Other
£m
Within one year
2.7
0.2
2.0
0.2
Within two to five years
6.0
0.2
2.3
0.1
7.8
–
0.9
–
16.5
0.4
5.2
0.3
After five years
Total
Leases of land and buildings are typically subject to rent reviews at specified intervals and provide for the lessee to pay all
insurance, maintenance and repair costs. Other operating leases relate to cars and office equipment.
27. Financial commitments
There were no capital commitments contracted at the balance sheet date.
58
28. Financial instruments – Risk management and numerical information
The Group is exposed through its operations to one or more of the following financial risks:
4 Fair value or cash flow interest rate risk
4 Liquidity risk
4 Credit risk
4 Foreign currency risk
The policy to mitigate each of the above risks is described in more detail below.
Fair value or cash flow interest rate risk
Currently the Group has surplus cash balances so does not have a borrowing requirement. Surplus cash throughout the Group
is put on short-term deposit, where appropriate, at floating rates. The Board constantly monitors the financial markets and the
Group’s future borrowing requirements to ensure that this policy is exercised in the Group’s best interests.
Liquidity risk
Liquidity risk is managed centrally on a Group basis. Bank facilities are agreed at appropriate levels having regard to the
Group’s forecast operating cash flows and future capital expenditures.
Credit risk
The Group faces credit risk due to the credit it extends to retailers. Credit limits are agreed and closely monitored on a local
level and credit insurance is held against bad debts.
Foreign currency risk
The Group earns income and incurs expenditure throughout the world in a variety of currencies. Foreign currency risk is
managed by a variety of methods including forward contracts and swap arrangements.
59
28. Financial instruments – Risk management and numerical information continued
Numerical information
Financial assets
30 June 2006
£m
30 June 2005
£m
– Sterling
11.2
36.9
The financial assets of the Group comprised:
Cash and cash equivalents
– US dollar
13.6
3.7
– Euro
11.8
5.1
– Other
0.6
0.4
37.2
46.1
57.5
30.9
Current financial assets
94.7
77.0
Total financial assets
94.7
77.0
Cash and cash equivalents include balances held on which interest is received at floating rates in the overnight money market.
Rates of interest earned on cash balances varied between 0 and 5.10% (2005: 0 to 4.83%).
Financial liabilities
The financial liabilities of the Group comprised:
Income tax liabilities
30 June 2006
£m
30 June 2005
£m
29.8
18.2
7.3
4.9
8.0
14.5
Provisions
15.0
14.6
Current financial liabilities
60.1
52.2
Finance lease debt
–
0.2
Long-term financial liabilities
–
0.2
60.1
52.4
Total financial liabilities
All financial liabilities are interest free.
In the opinion of the directors, there is no difference between the book value and the fair value of any of the above assets or
liabilities.
Borrowing facilities and maturity of financial liabilities
At 30 June 2006, the Group had an agreed and unused overdraft facility of up to £5 million which expires in February 2007.
The Group is finalising new banking facilities of up to £30 million. £20 million will relate to an overdraft facility and £10 million
will be utilised for project financing. The facility bears interest at 1% over UK base rate, which is subject to an annual review.
Foreign currency risk disclosures
The Group receives significant portions of its revenues in either euros or US dollars. The Group’s policy is to eliminate
significant currency exposures through natural hedges by transacting for sales and purchases in the same currency and by
forward contracts. At 30 June 2006 the Group had no hedging transactions (at 30 June 2005: sold forward $9.5 million. These
contracts matured between 31 October and 22 December 2005, and at 30 June 2005 were showing a loss of £0.3 million.)
60
29. Related party transaction
a) Transactions with associated undertakings
During the period the Group paid £6.9 million to its associated undertakings as royalties and advances on games being
developed for the Group (2005: 1.6 million).
In the period to 30 June 2006 the Group paid £3.0 million to Rocksteady Studios Ltd, an associated undertaking in which
the Group has an interest of 25.1%, as advances for the development of games for the Group (2005: £1.1 million). At 30 June
2006, the Group was owed £0.3 million by Rocksteady Studios Ltd (see note 16) (2005: was owed £0.2 million).
In the same period, the Group paid £3.9 million to the joint venture Pyro Studios SL as royalties and advances for the
development of games for the Group (2005: £0.5 million). At 30 June 2006, the Group was owed £0.1 million by Pyro Studios
SL (2005: was owed £0.1 million).
b) Other related party transactions
Tim Ryan was the chief executive officer of Bell Pottinger Corporate and Financial. During the earlier part of the period Bell
Pottinger acted as the Group’s financial PR company. Tim Ryan was not involved in the process of selecting Bell Pottinger in this
role and played no part in the arrangement of fees with Bell Pottinger. During the period the Group incurred fees of £43,983
from Bell Pottinger, such fees being determined on an arms-length basis. As at 30 June 2006, the Group no longer had a
commercial relationship with, and no amounts were owed to, Bell Pottinger.
30. Contingent assets and liabilities
4 On 3 March 2004, Eidos plc entered into a conditional agreement to acquire the entire share capital of Io Interactive A/S for
an initial consideration of £23.0 million, which was satisfied by £21.0 million in cash and 1.5 million ordinary shares.
Contingent consideration up to £5.0 million in cash is payable dependent upon the number of new game units released in
excess of 2.1 million units per annum over the four year period following completion. However based on the directors best
estimate no provision has been recorded at 30 June 2006 as it is not considered probable that the Group will be required
to settle the obligation.
4 During the year the Group commissioned a royalty audit with regard to games distributed by a third party during the period
from August 2003 to January 2006. Findings from the audit have shown that monies are owed to the Group in respect of
the titles distributed throughout this period. There is a contingent asset of up to £0.6 million and this should be settled
within the next year.
4 The Company and its subsidiaries are defendants in a number of legal proceedings incidental to its operations. Other than
already provided for in the financial statements, the Company does not expect the outcome of such proceedings, either
individually or in aggregate, to have a material effect upon the results of the Company’s operations or its financial position.
31. Post balance sheet event
In July 2006 the Group acquired the remaining 25% of Proein SL not previously held. At the same time it sold its 26.7% stake
in Pyro Studios SL. The financial impact of these transactions was not material.
61
32. First time adoption of IFRS
Basis of preparation
The results for the year ended 30 June 2006 are the first full
year end financial statements to be prepared under IFRS. All
companies whose securities are admitted to trading on a
regulated market in any European Union member state are
required to adopt this basis of accounting in respect of
accounting periods beginning on or after 1 January 2005.
The date of transition to IFRS was 1 October 2004.
First time adoption
IFRS 1 establishes the transitional requirements for the first
time preparation of financial statements in accordance with
IFRS. In general, a company is required to determine its IFRS
accounting policies effective at the reporting date and apply
these retrospectively to the balance sheet at the date of
transition, and to all financial statements for the comparative
period and the reporting period.
To assist in the transition process, there are a number of
exemptions to this retrospective application. The following
significant exemptions have been adopted by the Group:
4 Business combinations: The Group has elected not to
account for business combinations retrospectively in
accordance with IFRS 3 “Business Combinations”. Those
combinations recognised prior to the date of transition
have not been restated.
4 Cumulative translation differences: In accordance with
IAS 21 “The Effects of Changes in Foreign Exchange
Rates”, on translation of a foreign operation certain
exchange differences are recognised as a separate
component of equity, which must be disclosed, and on
subsequent disposal accumulated differences form part
of the calculation of profit or loss on disposal. The Group
has elected not to calculate these translation differences
retrospectively. Cumulative translation differences
recognised separately in equity under IFRS are taken to
be £nil at the date of transition.
4 Share-based payment: In accordance with IFRS 2 “Sharebased Payment”, the Group is recognising a charge to
income representing the fair value of outstanding
employee share options over the relevant option vesting
periods, adjusted to reflect the actual and expected levels
of vesting. However, the Group has elected not to apply
IFRS 2 retrospectively to equity instruments either
granted on or before 7 November 2002 or vesting prior to
1 January 2005.
62
4 Financial instruments: The Group has elected to apply the
requirements of IAS 32 “Financial Instruments:
Disclosures and Presentation” and IAS 39 “Financial
Instruments: Recognition and Measurement” from
1 July 2005 and consequently this restatement to June
2005 does not reflect the impact of these standards.
Overview of impact
The adoption of IFRS requires the following significant changes:
Measurement
4 The cessation of goodwill amortisation, and an annual
test for impairment.
4 The recognition of a wider range of intangible fixed assets
on acquisitions.
4 The amortisation of the recognised intangible fixed assets.
4 The inclusion in the income statement of a fair value
charge in respect of outstanding employee share options.
4 The recognition of deferred tax in respect of all taxable
temporary timing differences arising between the tax base
and the accounting base of balance sheet items.
4 The accrual of outstanding holiday pay.
4 The capitalisation of development expenditure where
certain technical and commercial criteria are met and
subsequent amortisation once development is complete.
Presentation
4 The consolidation of companies that meet the definition of
a subsidiary in terms of control under IAS 27.
4 The reclassification of capitalised software from tangible
fixed assets to intangible assets.
4 The presentation of assets and liabilities held for sale are
shown separately in the balance sheet.
32. First time adoption of IFRS continued
Explanation of adjustments to conform to IFRS
The analysis below sets out the most significant adjustments
to the financial results for the Group for the period ended
30 June 2005 arising from the transition to IFRS.
(a) Non-amortisation of goodwill
Under UK GAAP, goodwill arising on acquisition was
capitalised and amortised over its useful economic life. In
accordance with IFRS 3 “Business Combinations”, goodwill is
not amortised, but is tested for impairment at least annually,
in accordance with IAS 36 “Impairment of Assets”.
In the restatement to IFRS, the amortisation charge has
been reversed from the date of transition and added back to
profit for the year. The revised goodwill figure has been
tested for impairment as at 30 June 2005 and no
impairment charge has been considered necessary.
(b) Business combinations
IFRS 3 introduces significant changes to accounting for
business combinations compared to UK GAAP, the most
significant of which being the recognition of separable or
contractual intangible assets on an acquisition. The Group
has elected not to apply IFRS 3 retrospectively to business
combinations prior to 1 October 2004.
The application of IFRS 3 and IAS 38 “Intangible Assets”
has resulted in the recognition of separable intangibles
comprising of brands and technology on the acquisition of
Eidos plc. A deferred tax liability is provided in respect of
these intangible assets in accordance with IAS 12 “Income
Taxes”.
These intangibles are amortised over their useful
economic lives, applicable to the individual characteristics of
the respective asset. Amortisation has been charged to the
consolidated income statement from the date of acquisition,
together with a related deferred tax credit.
(c) Share based payment
Under UK GAAP, the Group recognised a charge to the profit
and loss account for share based compensation based on
the intrinsic value of the share benefits at the date of the
award expensed over the period of performance. The Group’s
schemes comprise of a discretionary share option plan and a
phantom scheme. Under UK GAAP, there is no charge for
these share based compensation schemes because they
have an intrinsic value of £nil, resulting from the option price
being set at the market value at the date of grant, and
therefore excluded from the requirement to record a charge.
The requirements for accounting for employee share
options under IFRS are set out in IFRS 2 “Share-based
Payment”. This requires an entity to recognise a charge to
income in respect of share options based on the fair value of
the awarded options at the date of grant. This expense is
recognised over the relevant vesting periods, adjusted to
reflect the actual and expected levels of vesting. The Group
has adopted a binomial model for the purpose of computing
fair values under IFRS 2.
IFRS 2 has not been applied to options either granted on
or before 7 November 2002 or vesting prior to 1 January
2005, in accordance with the exemption permitted in IFRS 1.
(d) Joint ventures
Under UK GAAP, joint ventures are accounted for in
accordance with FRS 9 “Associates and joint ventures”,
whereby the results of joint venture operations are
recognised under the gross equity method. Under this
method of accounting, the Group’s share of joint venture
turnover was recognised as part of total turnover, and
operating profit, interest and taxation from joint ventures was
shown separately from the rest of the Group’s results.
Following a review of the classification of investments it
has been noted that under IAS 27 the existence of potential
voting rights must be considered in the assessment of
control of an entity. The Group has therefore concluded that
its interest in Proein SL, in Spain, classified as a joint
venture under UK GAAP, should be accounted for as a
subsidiary under IFRS. The 26.67% owned Pyro Studios SL,
also classified as a joint venture under UK GAAP, is now
accounted for as an associated undertaking under IFRS.
63
(e) Financial instruments
For the 9 months ended 30 June 2005, in the UK, there was
no accounting standard which comprehensively addressed
accounting for financial instruments, although the disclosure
was dealt with in FRS 13 “Derivatives and other financial
instruments: disclosures”. IFRS provides detailed guidance
on financial instrument recognition, measurement,
presentation and disclosure within IAS 32 “Financial
Instruments: Disclosures and Presentation” and IAS 39
“Financial Instruments: Recognition and Measurement”.
IFRS requires that all derivative financial instruments
must be recognised in the balance sheet as financial assets
or financial liabilities and marked to market, therefore
recorded at their fair value. The change in the fair value of a
derivative instrument is taken immediately to the income
statement, resulting in profit and loss volatility, unless it can
be demonstrated on inception that it fulfils a specified hedge
function, and can be demonstrated to be effective in this
function.
If fair value hedge accounting is applied, the fair value of
the derivative will be offset by a change in the fair value of
the hedged item, which will also be recognised in the income
statement. When cash flow hedging is applied, the change in
the fair value of the derivative is taken to equity,
subsequently being recycled to the income statement when
the hedged cash flow impacts the income statement. The
change in the fair value of any ineffective portion of a
derivative is taken to the income statement.
In accordance with the exemption in IFRS 1, the Group
has applied IAS 32 and IAS 39 prospectively from 1 July
2005. The impact of the adoption of these standards was
not material as at 1 July 2005.
(f) Deferred taxation
Under UK GAAP, deferred tax is accounted for under FRS 19
“Deferred Taxation” and was provided in full (subject to
restrictions on the level of recognition of deferred tax assets
based on anticipation of future profits) on timing differences
between the recognition of gains and losses in the financial
statements and their recognition in tax computations.
Provision was made for deferred tax that would arise upon
the remittance of overseas subsidiaries only to the extent
that the dividends had been accrued as received.
In accordance with IAS 12 “Income Taxes”, deferred tax must
be recognised on all taxable temporary timing differences
between the accounting base and tax base of assets and
liabilities. As a result, under IFRS deferred tax is recognised
on certain temporary differences that would not generate
deferred tax in the UK.
64
(g) Capitalisation of software
Under UK GAAP, capitalised computer software is included
within tangible fixed assets on the balance sheet. Under
IFRS, all separately identifiable capitalised computer
software should be shown as an intangible asset, except
where it is integral to a related item of hardware. In this
instance it remains classified within property, plant and
equipment. Any charge to profit in respect of separately
identified computer software is classified as amortisation
of intangible assets under IFRS as opposed to
depreciation under UK GAAP.
Accordingly, software has been reclassified in the
balance sheet from property, plant and equipment to
intangible assets. This reclassification has no impact on
the income statement.
(h) Other adjustments
Assets held for sale
As at June 2005 Core held assets of £722,000 that were
in the process of being sold. The Company also held a
provision for the sale of these assets. IFRS 5 stipulates
that assets held for sale must be separately identified on
the face of the balance sheet therefore moving the Core
assets out of “Property, plant and equipment” into “Assets
held for sale” and with the value being shown as £nil due
to the provision matched off against it.
Advertising costs
IAS 38 (paragraph 69) deals with the issue of deferred
advertising or promotional expenses. It notes that these
activities must be expensed as they occur. In the past
Eidos policy was to expense on release of a title. The
adjustment made reflects the change in policy as at the
balance sheet date.
Presentational changes
Certain items that were classified under UK GAAP as
debtors due more than one year have now been classified
as current assets and included within trade and other
receivables.
Reconciliation of comparative information to previously reported information
Consolidated income statement for the 9 months ended 30 June 2005
As reported
under
UK GAAP
£m
Goodwill
amortisation
a
£m
Share based
payment
charge
c
£m
Revenue
15.4
–
Cost of sales
(11.0)
–
4.4
– exceptional
Consolidation
of Proein SL
d
£m
Deferred
taxation
f
£m
Intangible
amortisation
b
£m
Other
h
£m
–
2.6
–
–
–
18.0
–
(2.0)
–
–
–
(13.0)
–
–
0.6
–
–
–
5.0
(1.9)
–
–
–
–
–
–
(1.9)
– other
(5.7)
–
–
–
–
(5.7)
Advertising
(0.8)
–
–
Administrative costs
(6.0)
2.1
Exceptional administrative
expenses
(4.7)
–
(14.7)
2.1
Notes
Gross profit
IFRS
£m
Development costs
Operating (loss) profit
(0.2)
–
–
–
–
(0.4)
–
–
–
(1.2)
–
(1.0)
–
(5.7)
–
(4.7)
0.1
–
0.3
–
–
–
–
–
–
0.3
Interest payable
(0.1)
–
–
–
–
–
–
(0.1)
Share of profit in associate
and joint ventures
0.5
–
–
(0.1)
–
–
–
0.4
(Loss) profit before taxation
(Loss) profit for the period
(14.0)
5.2
2.1
–
(0.2)
–
–
–
0.1
(4.8)
(1.2)
(0.1)
Interest receivable
Tax charge
(0.2)
–
(0.1)
(1.2)
–
(0.1)
(0.1)
–
(14.0)
(13.4)
0.5
(8.8)
2.1
(0.2)
0.1
(4.8)
(1.2)
(0.1)
(12.9)
(9.4)
2.0
(0.2)
0.1
(4.8)
(1.0)
(0.1)
(13.4)
Attributable to:
Minority interest
0.6
0.1
(8.8)
2.1
–
(0.2)
–
0.1
–
(4.8)
(0.2)
(1.2)
–
(0.1)
0.5
(12.9)
65
Consolidated balance sheet and equity at 30 June 2005
As reported
under
UK GAAP
Notes
£m
IFRS 3
adjustment
b
£m
Share based
payment
charge
c
£m
Consolidation
of Proein SL
d
£m
Deferred
taxation
f
£m
Other
g/h
£m
IFRS
(1.7)
3.4
£m
Non current assets
Property plant and equipment
Goodwill
Intangible assets
4.7
–
–
0.4
–
88.7
(100.4)
–
(1.7)
17.1
1.4
5.1
–
115.6
–
–
–
1.0
116.6
–
–
16.8
–
–
0.7
(5.6)
–
0.3
16.8
–
–
Investment in associates
2.9
–
–
Deferred tax asset
5.9
–
–
–
119.0
15.2
–
(3.5)
11.5
0.7
142.9
2.1
–
–
1.7
–
–
3.8
27.8
–
–
3.3
0.1
30.9
Cash at bank and in hand
44.1
–
–
2.0
–
46.1
74.0
–
–
7.0
(0.3)
0.1
80.8
0.2
–
–
–
–
193.2
15.2
–
3.5
11.2
0.6
223.7
0.2
–
–
–
–
–
0.2
–
–
–
–
19.0
–
19.0
0.2
–
–
–
19.0
–
19.2
18.2
(2.2)
Current assets
Inventory
(0.3)
–
Debtors
Due after one year
Total assets
(0.2)
–
Finance leases
Current liabilities
Tax liabilities
Provisions
16.6
–
–
1.6
–
–
4.8
–
–
0.1
–
–
4.9
12.8
–
–
0.1
–
1.6
14.5
15.3
–
–
–
–
(0.7)
14.6
49.5
–
–
1.8
–
0.9
52.2
49.7
–
–
1.8
19.0
0.9
71.4
3.5
–
–
–
–
–
3.5
Share premium
57.4
–
–
–
–
–
57.4
Merger reserve
69.9
–
–
–
–
–
69.9
Capital reserves
6.3
–
–
–
–
–
6.3
–
–
0.3
–
–
–
0.3
(0.9)
Total liabilities
Equity
Share capital
(0.9)
–
–
–
–
–
Retained profits
5.6
1.0
(0.3)
0.1
(4.8)
(0.1)
1.5
141.8
1.0
–
0.1
(4.8)
(0.1)
138.0
Equity attributable to equity holders of
the parent Company
Minority interests
66
1.7
14.2
1.6
(3.0)
(0.2)
14.3
Total equity
143.5
15.2
–
1.7
(7.8)
(0.3)
152.3
193.2
15.2
–
3.5
11.2
0.6
223.7
Consolidated balance sheet and equity at 1 October 2004
As reported
under
UK GAAP
IFRS
£m
Other
g/h
£m
Property plant and equipment
0.5
–
0.5
Goodwill
5.1
–
5.1
4.2
Notes
£m
Non current assets
4.2
–
Deferred tax asset
1.4
–
1.4
11.2
–
11.2
0.3
–
0.3
13.4
–
13.4
Current assets
Inventory
3.5
–
3.5
17.2
–
17.2
28.4
–
28.4
2.4
–
2.4
Tax liabilities
0.5
–
0.5
2.3
0.5
2.8
5.2
0.5
5.7
Total liabilities
5.2
0.5
5.7
Total assets
Current liabilities
Equity
Share capital
1.4
–
1.4
Share premium
–
–
–
Merger reserve
0.5
–
0.5
Capital reserves
6.3
–
6.3
–
0.1
0.1
–
–
–
Retained profits
15.0
(0.6)
14.4
Equity attributable to equity holders of the parent Company
23.2
(0.5)
22.7
Minority interests
–
Total equity
23.2
28.4
–
(0.5)
–
–
22.7
28.4
67
Company balance sheet under UK GAAP
at 30 June 2006
Notes
30 June 2006
£m
30 June 2005
(restated)
£m
iii
9.6
9.6
9.6
9.6
65.8
19.3
6.1
35.1
71.9
54.4
Fixed assets
Investments
Current assets
Debtors
iv
Creditors: amounts falling due within one year
v
(0.7)
(0.9)
Net current assets
71.2
53.5
Total assets less current liabilities
80.8
63.1
Net assets
80.8
63.1
Capital and reserves
Called-up equity share capital
vi
3.8
3.5
Share premium account
vi
74.6
57.4
Capital reserve
vi
6.3
6.3
vi
4.7
0.3
Profit and loss account
vi
(8.6)
Shareholders’ funds
vi
80.8
(4.4)
63.1
The notes on pages 69 to 71 form part of these financial statements.
These financial statements were approved by the Board of directors and authorised for issue on 16 November 2006 and
signed on its behalf by
Rob Murphy
Director
68
Notes to the parent Company financial statements
i. Accounting policies
The principal accounting policies of the Company are
summarised below.
Basis of accounting
The financial statements have been prepared under the
historical cost convention and in accordance with applicable
accounting standards.
As provided by Section 230 of the Companies Act 1985,
no profit and loss account is presented in respect of SCi
Entertainment Group Plc.
In preparing these financial statements, the Company has
adopted, for the first time:
FRS 20 “Share-based payments”; FRS 21 “Events after the
balance sheet date”; FRS 22 “Earnings per share”; the
presentational requirements of FRS 25 “Financial
instruments: disclosure and presentation”; FRS 26
“Financial instruments: measurement”; and FRS 28
“Corresponding amounts”. Further details are given in note ii.
Accounting periods
The accounting reference date of the Company is 30 June.
Fixed asset investments
Fixed asset investments are shown at cost less provisions
for any impairment.
Investments are stated at cost plus direct acquisition
costs. Where consideration is represented by new share
issues, under Section 131 of the Companies Act 1985, the
Company has elected to show the associated cost of
investment as being the nominal value of the shares issued.
Taxation
Corporation tax payable is provided on taxable profits at
prevailing rates.
Long-term incentive plan for executive directors
Future payments under the Company’s long-term incentive
plan are estimated and charged to the profit and loss
account over the period to which they relate.
Pensions
For defined contribution schemes, the amount charged to the
profit and loss account in respect of pension costs is the
contributions payable in the year. Differences between
contributions payable in the year and contributions actually
paid are shown as either accruals or prepayments in the
balance sheet.
Share based employee remuneration
Stock option plans enable the employees of the Group to
participate in the success of the Company by acquiring
shares. The Group recognises a charge to the income
statement in respect of share options based on the fair
value of the awarded options at the date of grant. This
expense is recognised over the relevant vesting periods,
adjusted to reflect the actual and expected levels of vesting.
The fair value of the options is assessed using a binomial
model that takes account of the terms and conditions of the
options as defined when they are awarded.
ii. Change in accounting policy
The prior year adjustment relates to the implementation of
FRS 20 “Share-based payments”. The adoption of FRS 21,
22, 25, 26 and 28 have had no impact on the net assets or
the profit of the Company.
FRS 20 has been adopted in respect of share based
compensation and this has resulted in the retained profit
reserve carried forward for the year ended 30 September
2004 being decreased by £0.1 million.
iii. Investments
The Company has the following investments:
30 June 2006
£m
30 June 2005
£m
– shares
6.1
6.1
– loans
3.5
3.5
9.6
9.6
All amounts are shown at cost
Subsidiary undertakings:
At 30 June 2006, the principal undertakings of SCi Entertainment Group Plc are detailed in note 14 of the IFRS financial
statements.
iv. Debtors
Amounts due from subsidiary undertakings
30 June 2006
£m
30 June 2005
£m
65.8
19.3
65.8
19.3
69
Notes to the parent Company financial statements continued
v. Creditors: amounts falling due within one year
30 June 2006
£m
30 June 2005
£m
Trade creditors
0.2
0.3
0.5
0.6
0.7
0.9
30 June 2006
£m
30 June 2005
£m
4.9
4.9
3.8
3.5
2005
2006 Number of shares
£m
m
2005
£m
vi. Share capital and reserves
Authorised
97,000,000 (2005: 97,000,000) ordinary shares of 5p each
Allotted, called-up and fully-paid
76,162,376 ordinary shares of 5p each (2005: 69,438,360 ordinary shares of 5p each)
The movement in share capital was as follows:
At beginning of the period
2006
Number of shares
m
69.4
3.5
28.5
1.4
Placing and open offer
3.5
0.2
20.0
1.0
Issue of shares to acquire Eidos
3.0
0.1
20.8
1.1
Issue of new shares under SCi Share Option Scheme
0.3
–
0.1
–
76.2
3.8
69.4
3.5
Share premium
account
£m
Capital reserve
£m
Share based
compensation
(restated)
£m
Profit and
loss account
(restated)
£m
57.4
6.3
-
(4.1)
–
–
0.3
(0.3)
57.4
6.3
0.3
(4.4)
–
–
–
(4.2)
At end of the period
1 July 2005 (as previously stated)
Prior year adjustment (note ii)
1 July 2005 (as restated)
(Loss) for the period
–
–
4.4
–
New shares issued
17.4
–
–
–
Share issue costs
(0.2)
–
–
–
30 June 2006
74.6
6.3
4.7
(8.6)
Details of shares issued in the year are given in note 24 of the IFRS financial statements.
30 June 2006
£m
30 June 2005
£m
Opening shareholders’ funds
63.1
12.8
(Loss) for the financial period
(4.2)
(9.4)
4.4
0.2
New shares issued
17.5
59.5
Closing shareholders’ funds
80.8
63.1
Reconciliation of movement in shareholders’ funds
vii. Loss attributable to SCi Entertainment Group Plc
The loss for the 12 months to 30 June 2006 of the parent Company, SCi Entertainment Group Plc, was £4.2 million (9 months
to 30 June 2005: loss of £9.4 million (restated)).
Remuneration for the auditors is borne by subsidiary undertakings, and totalled £30,000 (2005: £25,000 in respect of the
Company accounts).
70
Notes to the parent Company financial statements continued
viii. Employee costs and numbers
The average number of people employed by the Company (including directors) during the period was as follows:
2006
Number
2005
Number
Management and administration
23
–
Staff costs (including directors) comprise:
£m
£m
Wages and salaries
1.3
–
Defined pension costs
0.2
–
Employer’s national insurance and similar taxes
0.1
–
Total
1.6
–
Please refer to note 5 of the notes to the IFRS financial statements on page 44 for further details of the directors’
remuneration.
In 2005, all staff costs, including Board directors, were incurred in the accounts of a subsidiary Company.
Details of share option schemes operated by the Company are disclosed in note 24 of the IFRS financial statements.
ix. Related party transactions
The Company has taken advantage of the exemption in FRS 8 in respect of subsidiaries which have been consolidated in the
Group accounts.
Dealings with directors are set out in note 29 of the IFRS financial statements.
71
Shareholder information
Shareholder analysis
As at 16 November 2006, the number of registered shareholders was 4,770 and the number of ordinary shares in issue was
77,163,726
Number of
shareholders
Percentage of
total shareholders
4,229
88.7
Number of
shares (million)
Percentage of
total shares
Range of holdings:
1 to 1,500
0.9
1.2
1,501 to 5,000
259
5.4
0.7
0.9
5,001 to 10,000
63
1.3
0.5
0.6
10,001 to 50,000
97
2.0
2.2
2.9
50,001 to 100,000
33
0.7
2.4
3.1
100,001 to 250,000
42
0.9
7.2
9.3
250,001 to 500,000
11
0.2
3.8
5.0
500,001 to 1,000,000
21
0.4
13.5
17.5
1,000,000 to highest
15
0.3
45.9
59.5
4,770
100.0
77.2
100.0
Total
Held by:
Individuals
Institutions and companies
Total
Company registrars
Enquiries concerning shareholdings, change of address or
other particulars, should be directed in the first instance to
the Company’s registrars, Capita Registrars (see page 21 for
contact details). Capita also provide a range of on-line
shareholder information services at www.capitaregistrars.com
where shareholders can check their holdings and find
practical help on transferring shares and updating personal
details.
Share dealing service
An internet and telephone share dealing service has been
established by Capita Registrars, enabling shareholders to
buy or sell SCi ordinary shares on the London Stock
Exchange. Shareholders who are interested in using these
services should visit www.capitadeal.com or telephone +44
(0)870 458 4577.
Share price information
The latest SCi share price can be obtained via the
Company’s website at www.sci.co.uk. It can also be
obtained in the UK on Ceefax and Teletext. SCi’s stock
exchange code is SEG.
Unsolicited mail
The Company is obliged by law to make its share register
available upon request to the public and to other
organisations which may use it as a mailing list resulting in
shareholders receiving unsolicited mail. Shareholders
wishing to limit the receipt of such mail should write to the
Mailing Preference Service, Freepost 29, LON 20 771,
London W1E 0ZT or telephone +44 (0)845 703 4599 for an
application form.
72
4,007
84.0
7.3
9.5
763
16.0
69.9
90.5
4,770
100.0
77.2
100.0
ShareGIFT
Shareholders who hold only a small number of shares, where
dealing costs make it uneconomic to sell them, may wish to
consider donating them to charity through ShareGIFT, a
registered charity administered by The Orr Mackintosh
Foundation. Further information is available at
www.sharegift.org or telephone +44 (0)20 7828 1151.
Annual General Meeting
The Company’s Annual General Meeting will be held at the
offices of KBC Peel Hunt, 111 Old Broad Street, London
EC2N 1PH on 24 January 2007 at 12.30pm. A circular to
shareholders, which includes the notice convening the
meeting, accompanies this document.
Financial calendar 2007
March 2007
September 2007
Announcement of half year
results to 31 December 2006
Announcement of full year
results to 30 June 2007
Investor relations
Should you have any queries, please contact Anthony Price
on +44 (0)20 8636 3000. Alternatively, you can e-mail your
enquiry to [email protected].
Five year record
UK GAAP
12 months to
30 September
2004
£m
UK GAAP
12 months to
30 September
2003
£m
UK GAAP
12 months to
30 September
2002
£m
IFRS
IFRS
12 months to
30 June 2006
£m
9 months to
30 June 2005
£m
Revenue
179.1
18.0
31.0
28.5
17.7
Gross profit
103.8
5.0
20.2
17.2
11.4
Summary of results
7.8
(14.0)
4.5
3.6
2.3
28.8
(5.4)
6.0
4.3
2.9
8.1
(13.4)
4.5
3.6
2.2
Non current assets
162.2
142.9
5.6
6.4
4.1
Net current assets
40.0
28.6
17.6
10.3
5.4
Total assets less current liabilities
202.2
171.5
23.2
16.7
9.5
(15.4)
Net assets
186.8
152.3
23.2
16.1
9.5
Pence
Pence
Pence
Pence
Pence
18.5
(37.5)
17.9
15.4
10.1
EBITDA before exceptional items and
share based compensation
Net assets employed
Earnings (loss) per share
(19.2)
–
(0.6)
–
The amounts stated for 2004 and earlier periods are stated on the basis of UK GAAP as it is not practical to restate these
periods for the transition to IFRS. The principal differences between UK GAAP and IFRS are set out in note 32 to the financial
statements.
Printed on Revive 75 which contains at least 75% recycled fibre. Produced at a mill holding the ISO14001 certificate for environmental management.
The pulp is bleached using a combination of Elemental Chlorine Free (ECF) and Totally Chlorine Free (TCF) methods.
The British Academy Award image on p16 is based on a design by Mitzi Cunliffe.
Designed and produced by Benjamin Rowntree Design Tel: 020 7357 0700 www.benrown.co.uk Printed by Burlington
Wimbledon Bridge House
1 Hartfield Road
Wimbledon
London
SW19 3RU
Tel:
Fax:
Web:
Email:
+44 (0)20 8636 3000
+44 (0)20 8636 3001
www.sci.co.uk
[email protected]
2007
Battlestations: Midway
For the first time, re-live the
intensity of massive air, sea and
underwater WWII battles in
Battlestations: Midway, a unique
mix of intense action and tactical
gameplay.

SCi Entertainment Group Plc

Transcription

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