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Eidos PLC – ‘20-F’ for 6/30/04

On:  Thursday, 12/23/04, at 6:47am ET   ·   For:  6/30/04   ·   Accession #:  1021231-4-856   ·   File #:  0-28994

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/23/04  Eidos PLC                         20-F        6/30/04    6:1.9M                                   St Ives Burrups/FA

Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   1.13M 
 2: EX-4        Instrument Defining the Rights of Security Holders  HTML    157K 
 3: EX-4        Instrument Defining the Rights of Security Holders  HTML    238K 
 4: EX-12       Statement re: Computation of Ratios                 HTML     11K 
 5: EX-12       Statement re: Computation of Ratios                 HTML     11K 
 6: EX-13       Annual or Quarterly Report to Security Holders      HTML      8K 


20-F   —   Annual Report of a Foreign Private Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Back to Contents
"Back to Content
3Part I
"Item 3
"Key Information
11Item 4
"Information on the Group
18Item 5
"Operating and Financial Review and Prospects
30Item 6
"Directors, Senior Management and Employees
39Item 7
"Major Shareholders and Related Party Transactions
41Item 8
"Financial Information
87Item 9
"The Offer and Listing
89Item 10
"Additional Information
94Item 11
"Quantitative and Qualitative Disclosures about Market Risk
95Part II
"Item 15
"Controls and Procedures
"100
96Item 16A
"Audit Committee Financial Expert
"101
"Item 16B
"Code of Ethics
"Item 16C
"Principal Accountant Fees and Services
"Item 16D
"Exemptions from Listing Standards for Audit Committees
"Item 16E
"Purchases of Equity Securities by the Issuer and Affiliated Purchasers
97Part III
"Item 18
"Financial Statements
"102
"Item 19
"Exhibits

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  Prepared and filed by St Ives Burrups  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
 
OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________

Commission file number 000-28994

(Incorporated with limited liability in England and Wales with registered number 2501949)
(Exact name of Registrant as specified in its charter)

England and Wales
(Jurisdiction of incorporation or organization)

Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London, SW19 3RU
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class
  Name of each exchange on which registered

 
American Depositary Shares, each representing
 
NASDAQ National Market
one Ordinary Share of the Company,
   
and the underlying Ordinary Shares
   

Securities registered or to be registered pursuant to Section 12(g) of the Act.
N/a

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
N/a

As at June 30, 2004, there were outstanding 3,493,276 American Depositary Shares and 142,002,471 Ordinary Shares of the Company (including Ordinary Shares underlying the outstanding American Depositary Receipts)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes                                No

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17                               Item 18

Cautionary Statement with Respect to Forward Looking Statements

Certain statements made in this Annual Report on Form 20-F with respect to the plans, strategies and beliefs of Eidos plc (the Company) and its consolidated subsidiaries (collectively with the Company, “the Group”) and other statements that are not historical facts are forward-looking statements (as that term is defined in the United States Private Securities Legislation Reform Act of 1995) that involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements including, without limitation, general economic conditions in the Group’s markets, particularly levels of consumer spending; exchange rates, particularly between the pound sterling and the U.S. dollar, in which the Group makes significant sales; and the Group’s ability to continue to win acceptance of its products, which are offered in highly competitive markets characterized by continuous new product introductions, rapid developments in technology and subjective and changing consumer preferences (particularly in the entertainment business); and other factors identified under “Item 3 Key Information – Risk Factors” in this report.

The Company undertakes no obligation to update any forward-looking statements contained in this Annual Report on Form 20-F, 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 or ADR’s of Eidos plc. The price of securities and income derived therefrom can go down as well as up.

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TABLE OF CONTENTS

      Page  
Part I Item 3 Key Information 4  
         
  Item 4 Information on the Group 12  
         
  Item 5 Operating and Financial Review and Prospects 19  
         
  Item 6 Directors, Senior Management and Employees 31  
         
  Item 7 Major Shareholders and Related Party Transactions 40  
         
  Item 8 Financial Information 42  
         
  Item 9 The Offer and Listing 92  
         
  Item 10 Additional Information 94  
         
  Item 11 Quantitative and Qualitative Disclosures about Market Risk 99  
         
Part II Item 15 Controls and Procedures 100  
         
  Item 16A Audit Committee Financial Expert 101  
         
  Item 16B Code of Ethics 101  
         
  Item 16C Principal Accountant Fees and Services 101  
         
  Item 16D Exemptions from Listing Standards for Audit Committees 101  
         
  Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers 101  
         
Part III Item 18 Financial Statements 102  
         
  Item 19 Exhibits 102  

Note: Omitted items are inapplicable

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PART I

ITEM 3 – KEY INFORMATION

Introduction

The Company is one of Europe’s largest developers and publishers of entertainment software. The Group’s primary focus is on the development of its own content through its internal development resources, augmented by relationships with external development studios. The Group has a broad based publishing portfolio built around key franchises such as Tomb Raider, Championship Manager and Hitman, and original titles that it believes have franchise potential. Tomb Raider is one of the most successful video game franchises in the world owned by an independent publisher with total sales currently exceeding 31 million units.

Change of Year End

In 2002, the Group changed its year end from March 31 to June 30. Eidos filed an annual report on Form 20-F for the year ended March 31, 2002 and a transitional report on Form 20-F for the three months ended June 30, 2002.

Selected Financial Data

The following selected consolidated financial data should be read in conjunction with ‘‘Item 5. Operating and Financial Review and Prospects’’ and the consolidated financial statements and other financial information included in Item 8. The Group prepares its financial statements in accordance with accounting principles generally accepted in the United Kingdom (“U.K. GAAP”), which differs in certain material respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). These differences have a material effect on net income and shareholders’ equity and are described in Note 32 of the notes to the consolidated financial statements of the Company included in Item 8 of this report.

The selected consolidated financial data presented below for the Company in accordance with U.K. GAAP for the years ended March 31, 2002, the three months ended June 30, 2002 and the years ended June 30, 2003 and 2004, and at June 30, 2003 and 2004 are derived from the audited consolidated financial statements included elsewhere in this report.

The selected consolidated financial data presented below for the Company in accordance with U.K. GAAP for the years ended March 31, 2000 and 2001 and at March 31, 2000, 2001 and 2002 are derived from audited financial statements of the Company not included in this report.

The selected consolidated financial data presented below for the Company in accordance with U.S. GAAP are derived from the Company’s audited financial statements.

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U.K. GAAP

Consolidated Statement of Operations Data:

In thousands, except per share data    Year ended      Year ended      Year ended      Three months      Year ended      Year ended  
March 31, March 31, March 31, ended June 30, June 30, June 30,
2000 2001 2002 2002 2003 2004
 











    £’000     £’000     £’000     £’000     £’000     £’000  
Turnover   194,801     147,254     120,280     8,657     151,534     133,917  
Cost of sales   87,908     81,722     48,680     5,144     62,099     (49,877 )
 

 

 

 

 

 

 
Gross profit   106,893     65,532     71,600     3,513     89,435     84,040  
Operating expenses:                                    
   Selling and marketing   45,307     41,530     20,554     5,308     25,747     26,703  
   Research and development   46,270     42,541     39,386     9,179     32,579     39,190  
   Administrative   39,204     34,434     27,198     4,651     20,437     23,775  
 

 

 

 

 

 

 
Income/(loss) from operations   (23,888 )   (52,973 )   (15,538 )   (15,625 )   10,672     (5,628 )
Income from joint ventures   532     876     1,446     394     2,950     2,068  
Joint venture goodwill   (3,475 )   (5,192 )   (5,192 )   (1,415 )   (471 )    
Income/(loss) from sale of investments   80,236     (36,308 )   4,377         1,400      
Income from investments       136     152              
Interest income/(expense), net   (4,130 )   (2,897 )   584     160     2,803     1,609  
 

 

 

 

 

 

 
Profit/(Loss) before income taxes   49,275     (96,358 )   (14,171 )   (16,486 )   17,354     (1,951 )
(Provision)/tax credit for income taxes   (24,072 )   (971 )       (56 )   1,851     (962 )
 

 

 

 

 

 

 
Net profit/(loss)   25,203     (97,329 )   (14,171 )   (16,542 )   19,205     (2.913 )
 

 

 

 

 

 

 
Basic earnings/(loss) per share   23.3 p   (84.5 p)   (10.7 p)   (11.8 p)   13.8 p   (2.1 p)
Diluted earnings/(loss) per share   21.4 p   (84.5 p)   (10.7 p)   (11.8 p)   13.7 p   (2.1 p)
 

 

 

 

 

 

 
Weighted average number of shares used to compute basic net earnings/(loss) per share (’000)
  108,084     115,224     132,514     139,744     139,637     140,313  
 

 

 

 

 

 

 

Consolidated Balance Sheet Data:

 In thousands March 31,
2000
     March 31,
2001
      March 31,
2002
      June 30,
2002
      June 30,
2003
Restated(2)
      June 30,
2004
  
 
 

 

 

 

 

 
  £’000     £’000     £’000     £’000     £’000     £000  
Working capital(1) 54,424     9,540     65,639     49,738     67,932     40,248  
Goodwill 28,305     13,837     2,552     1,021     252     25,258  
Total assets 268,648     86,254     98,880     82,476     107,815     92,653  
Long-term liabilities 2,253     2,318     2,999     2,701     33     3,942  
Shareholders’ equity 126,419     30,617     73,384     56,589     75,578     71,936  

1)     Working Capital includes stock, debtors and cash at bank less creditors falling due in less than one year.
2)     Shareholders’ funds as at June 30, 2003 have been restated for the effects of UITF 38 (see note 2, Item 8).

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U.S. GAAP

Consolidated Statement of Operations Data:

  Year ended   Year ended   Year ended   Three months   Year ended   Year ended  
  March 31,   March 31,   March 31,   ended June 30,   June 30,   June 30,  
In thousands, except per share data 2000   2001   2002   2002   2003   2004  
 
 
 
 
 
 
 
  £'000   £’000   £’000   £’000   £’000   £’000  
                         
Turnover 201,677   156,871   134,273   12,433   171,552   156,654  
Cost of sales 93,310   88,185   57,591   7,744   76,826   65,530  
 
 
 
 
 
 
 
Gross profit 108,367   68,686   76,682   4,689   94,726   91,124  
Operating expenses:                        
Selling and marketing 46,291   42,750   22,161   5,822   28,306   29,159  
Research and development 46,270   42,541   39,386   9,179   32,579   39,190  
General and administrative 44,285   40,617   33,331   6,286   21,086   23,223  
 
 
 
 
 
 
 
Income/(loss) from operations (28,479 ) (57,222 ) (18,196 ) (16,598 ) 12,755   (448 )
Income/(loss) from sale of investments or termination of operations 82,242   (36,308 ) 4,173     1,400   488  
Income from investments   136   148   63   308   224  
Interest income/(expense), net (4,142 ) (1,658 ) (479 ) 170   2,830   1,646  
 
 
 
 
 
 
 
Income/(loss) before income taxes and minority interests 49,621   (95,052 ) (14,354 ) (16,365 ) 17,293   1,910  
Provision for income taxes (26,142 ) (1,033 ) (149 ) (106 ) 1,513   (1,180 )
Minority interests (87 ) (219 ) (319 ) (71 ) (569 ) (434 )
 
 
 
 
 
 
 
Net income/(loss) 23,392   (96,304 ) (14,822 ) (16,542 ) 18,237   296  
Goodwill amortization 13,448   16,107   12,098   1,486      
 
 
 
 
 
 
 
Net income/(loss) before goodwill amortization* 36,840   (80,197 ) (2,724 ) (15,056 )
 18,237
 
 296
 
Earnings/(loss) per share 21.7 p (83.6 )p (11.2 )p (11.8 )p 13.1 p 0.2 p 
Earnings/(loss) per share before goodwill amortization* 34.1 p (69.6 )p (2.1 )p (10.8 )p 13.1 p 0.2 p
Diluted earnings/(loss) per share 19.9 p (83.6 )p (11.2 )p (11.8 )p 13.0 p 0.2 p
Diluted earnings/(loss) per share before goodwill amortization* 31.0 p (69.6 )p (2.1 )p (10.8 )p 13.0 p 0.2 p
 
 
 
 
 
 
 
Weighted average number of shares used to compute net earnings/(loss) per share (’000)
108,084   115,224   132,514   139,744   139,637   140,313  
 
 
 
 
 
 
 

*   This information has been provided to comply with the transitional disclosure requirements of FASB Statement No. 142, Goodwill and Other Intangible Assets.

Consolidated Balance Sheet Data:

  March 31,   March 31,   March 31,   June 30,   June 30,   June 30,  
  2000   2001   2002   2002   2003   2004  
 
 
 
 
 
 
 
  £’000   £’000   £’000   £’000   £’000   £’000  
Working capital(1) 39,122   9,249   69,529   52,694   69,869   42,871  
Goodwill 28,773   13,972   2,552   1,025   1,021   26,076  
Total assets 312,655   103,914   102,967   86,358   112,860   96,905  
Long-term liabilities 2,253   3,014   3,490   3,212   622   871  
Shareholders’ equity 154,489   41,198   73,384   56,589   74,644   73,738  
             

1)     Working Capital includes stock, debtors and cash at bank less creditors falling due less than one year.

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Exchange Rates

The following table sets forth certain information with respect to the Noon Buying Rate for Pounds Sterling expressed in U.S. Dollars per pound sterling. These translations should not be construed as a representation that the Pound Sterling amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at such rate. Such rates are not used by the Company in the preparation of its Consolidated Financial Statements included elsewhere herein.

Fiscal Year Ended Average (1)  
 
 
     
Fiscal year ended March 31, 2000 $1.61  
Fiscal year ended March 31, 2001 $1.47  
Fiscal year ended March 31, 2002 $1.43  
Three months to June 30, 2002 $1.48  
Fiscal year ended June 30, 2003 $1.59  
Fiscal year ended June 30, 2004 $1.74  

1)      Represents the average of the Noon Buying Rates on the last day of each month during the relevant period.
         
Monthly average exchange rates for the previous six months High   Low  
 
 
 
April 2004 $1.86   $1.77  
May 2004 $1.84   $1.76  
June 2004 $1.84   $1.81  
July 2004 $1.87   $1.82  
August 2004 $1.84   $1.79  
September 2004 $1.81   $1.77  

On September 15, 2004 the Noon Buying Rate was $1.77 for each £1.00.

Risk Factors

In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating the Group and its business.

Your particular attention is also drawn to the ‘‘Cautionary Statement with Respect to Forward-Looking Statements’’ on the cover page of this report.

Changing product platforms and formats may lead to consumer uncertainty and reduced demand.

The entertainment software market has evolved rapidly in recent years, primarily as a result of significant ongoing technological development. This is particularly true of the market for proprietary video game hardware and software, which has historically operated on a four to six year cycle, and which has undergone a major transition with the introduction of next generation consoles such as the Sony PlayStation 3 and Microsoft Xbox 2. The introduction of new technologies and new hardware platforms can create instability in the market for entertainment software as a result of consumer uncertainty and fluctuations in demand for software for both old and new hardware systems. This in turn may lead to a deterioration in competitiveness and consequential losses.

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As more technological advances are made, the Group will have to plan its development activities to ensure that it has what it believes to be an appropriate mix of software available to publish as further new hardware platforms or technologies come to market. In order to do this the Group must predict certain key factors over which it exercises little or no control, such as the timing of the launch of new consoles and technologies, the pricing models which the new hardware and software markets will sustain and the levels of market share and penetration which may be achieved. If these projections prove to be inaccurate, the Group might not realize the full potential of its product development program and may fail to recoup its investment in new product development.

The predicted levels of market growth associated with the successful introduction of new hardware platforms may not be achieved.

All of the current range of consoles have now been launched in all of the major commercial markets in which the Group operates. Many commentators continue to forecast a period of significant growth for the industry as these new hardware platforms achieve mass market penetration. There remains however some uncertainty as to what degree these platforms will achieve the forecast levels of sales penetration either collectively or individually. In addition to the above, the next generation of consoles is expected to be launched over the next two years. The Group has invested considerable sums in developing games for these new platforms and the financial performance of the Group may be adversely affected if these platforms do not achieve the degrees of market acceptance that the Group has forecast.

New product releases may fail to achieve market acceptance.

A key aspect of the Group’s strategy is to focus on a relatively small number of high quality entertainment software products based around a number of existing franchise properties and the development of new properties with franchise potential. Due to this dependence on a limited number of products, the Group may be adversely affected if one or more principal entertainment software products fail to achieve anticipated results. Furthermore, whilst the focus on franchise properties, if successful, results in extending product life cycles, there can be no assurance that the Group’s existing franchise titles can continue to be exploited as successfully as in the past. In addition, new products that the Group believes will have potential value as franchise properties may not achieve market acceptance and therefore may not be a basis for future releases.

The Group’s success depends on the timely introduction of new products and new iterations of franchise titles of sufficiently high quality to replace declining revenues from older products. Notwithstanding the Group’s strategy of focusing on franchise and high quality original titles with future franchise potential, few entertainment software products achieve sustained market acceptance and there can be no assurance that new products will be introduced on schedule or that they will achieve widespread market acceptance or generate significant revenues. Due to the highly seasonal nature of the entertainment software market and the substantial revenues that can be generated in the initial months after a new title launch, it is important to choose and achieve an appropriate launch date. A poorly timed launch could affect the potential success of a title and thus the results of the Group. If the Group is unable to develop and publish titles that are capable of achieving market acceptance then it may continue to report operating losses and its prospects for future growth may be limited.

Product release dates are frequently difficult to predict.

The Group’s success depends on the timely introduction of new products to replace declining revenues from older products. The bulk of revenues generated from entertainment software products are generally realized in the first few months following release. Consequently because of the boost to revenues typically associated with the initial shipments of a new product, delaying a product introduction beyond the end of a financial reporting period may have a materially adverse effect on the operating results for that period.

The process of developing entertainment software products such as those offered by the Group is complex and is becoming more so as new hardware platforms and technologies are introduced. In the past, the Group has experienced significant delays in the introduction of certain new products. Whilst every effort has been made by the Group to minimize delays in intended release dates through significant improvements made to the development process, there remains a risk that such delays will occur again in the future and that this might have an adverse impact on the Group’s financial results.

Financial forecasting is difficult.

There is a degree of inherent uncertainty in certain key factors in the forecasting process. These include but are not limited to, the degree to which consumers will continue their interest in both new hardware platforms and the Group’s own new software releases, the timing of new software releases and the general economic conditions in the major markets in which the Group operates. As a consequence, financial forecasting is difficult and there is a risk that the Group may fail to meet its financial forecasts for any given reporting period. There is also a risk that the Group may fail to accurately estimate its working capital requirements.

The Group’s business is highly seasonal.

The market for entertainment software is highly seasonal. As a consequence, any slippage in new product release dates may mean that titles fail to reach their revenue and profitability forecasts and that the Group’s reported results as a whole, may be adversely affected. The Group reports its results at the half year and year-end. Failure to meet new product release dates may also mean that the Group falls short of analysts’ expectations for these reporting periods.

The seasonal nature of the entertainment software industry and the Group’s release schedule, together with the terms on which the Group carries on its business, gives rise at certain times to a pronounced working capital requirement. If the Group does not have access to sufficient working capital during such periods, it may not be able to take full advantage of the commercial opportunities available to it.

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The Group operates in a highly competitive market.

The entertainment software market is highly competitive and is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Accordingly, the Group is always at risk from competitors achieving product selection, price, shelf access, marketing support, distribution or other selling advantages. There is a possibility that market forces, over which the Group has little or no control, may result in an unanticipated fall in the retail price of entertainment software. This could have a materially adverse effect on the Group’s projected profit margins.

Unexpected levels of returns may be experienced.

The Group accepts returns and provides markdowns or other credits in the event that a retailer holds excess inventory of the Group’s entertainment software products. When entertainment software is dispatched into the retail channel, the Group establishes reserves, which estimate future potential returns, based on historical return rates, seasonality of sales, retailer and distributor inventories and other factors. The Group believes that it maintains adequate reserves. However there can be no assurance that actual returns or price reductions will not exceed such reserves.

The unauthorized copying and piracy of software is becoming more commonplace.

The entertainment software industry suffers increasingly from the effects of unauthorized copying and piracy. Whilst the Group takes such measures as it believes are appropriate to protect its entertainment software products, it cannot be certain that these measures will be sufficient, and this may result in a loss of revenue.

Complex entertainment software products may contain undetected errors.

Entertainment software products as complex as those offered by the Group may contain undetected errors when first introduced or when new versions are released. The Group has in the past discovered errors in certain of its product offerings after their introduction and has experienced delays or lost revenues during the period required to correct those errors. In particular, the PC hardware environment is characterized by a wide variety of non-standard peripherals (such as sound cards and graphics cards) and configurations that make pre-release testing for programming or compatibility errors very difficult. There can be no assurance that, despite testing by the Group, programming or compatibility errors will not be found in new products or releases after commencement of commercial shipments. Any such errors could result in the loss of, or delay in, achieving market acceptance, which could have a material adverse effect on the Group’s business, results of operations and financial condition.

The effect of on-line gaming on the entertainment software business is difficult to predict.

The Group has adopted a cautious approach to on-line gaming. It does not currently derive any material revenue streams from on-line gaming and it has taken a selective approach to investing in the development of the software and infrastructure required to support on-line gaming. Although the Group believes that the market for online gaming is not sufficiently mature or predictable to warrant significant levels of investment, a number of the Financial Year 2005’s releases will include an online component. It is not clear what effect any increase in the demand for on-line gaming will have on the demand for the conventionally packaged software that the Group currently sells through its existing retail channels.

The Group is dependent upon the protection of its intellectual property and proprietary rights, and could become subject to costly and time-consuming intellectual property litigation.

The Group relies primarily on a combination of patent, copyright, trademark and trade secret laws, employee and third party non-disclosure and non-competition agreements and other methods to protect its proprietary rights. Although the Group is not currently the subject of any intellectual property litigation, which would have a material effect on the Group, there has been substantial litigation regarding copyright, trademark and other intellectual property rights involving computer software companies.

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There can be no assurance that third parties will not assert infringement claims in the future with respect to current or future products of the Group. Any claims or litigation, with or without merit, could be costly and could require a significant amount of management’s attention and result in adverse determinations, each of which could have a material adverse effect on the Group’s business, results of operations and financial condition. Policing unauthorized use of the Group’s products and trademarks is difficult and, while the Group is unable to determine the extent to which infringement of its proprietary products and marks occurs, software piracy and trademark infringement can be expected to be persistent problems.

The Group relies on hardware manufacturers that are also the Group’s competitors.

The Group publishes products subject to master license agreements with console manufacturers including Sony, Nintendo and Microsoft. Pursuant to these agreements the Group is permitted to use the proprietary information of the manufacturers in connection with the development of products for their platforms.

Although the Group has successfully negotiated agreements for the publication of its products in the past, there can be no assurance that it will be able to obtain publishing rights for all of its products in the future.

Prior to release for manufacturing, the hardware manufacturer has the right to review, evaluate and approve, under standards established by it, each title for its proprietary platform and the right to inspect and evaluate all promotional materials in connection with such title. The inability of the Group to obtain timely approvals or the rejection by the hardware manufacturer of titles or related promotional materials could materially adversely affect its future results of operations or result in variations in operating results if a product scheduled for release in any quarter is delayed.

Changes in international regulatory regimes may restrict the Group’s operations.

Recent developments in the U.S. and elsewhere have led the authorities to consider introducing tighter legislation against so-called ‘‘violent videos’’. Any such regulations could have an impact on the Group, in common with other publishers of video games, which is difficult to measure accurately.

The Group is heavily reliant on key personnel.

The continued success of the Group depends, to a significant extent, upon the performance and contribution of its senior management, together with its ability to continue to attract, motivate and retain highly qualified and creative employees. The loss of key management and employees, or the failure by the Group to attract additional qualified employees or to retain the services of key personnel, could materially adversely affect the Group’s business, results of operations or financial condition.

The results of the Group’s international operations are subject to currency fluctuations.

Currently, the Group’s products and services are marketed in over 35 countries, covering primarily Europe and the U.S. Sales of the Group’s products in such markets are subject to risks inherent in international business activities, including general economic conditions in each country, overlap of differing tax structures, management of an organization spread over various jurisdictions, unexpected changes in regulatory requirements, compliance with a variety of foreign laws and regulations and varying accounts receivable cycles.

The Company publishes its consolidated financial statements in Pounds Sterling. A significant portion of the Group’s assets and net revenues are generated in foreign currencies, primarily Euros and U.S. Dollars. In translating the results of its overseas operations the Group is subject to fluctuations in the exchange rates between pound sterling and the overseas currency.

Accordingly, depreciation in the weighted average value of the overseas currency against pound sterling could decrease reported revenues and appreciation in the weighted average value of the overseas currency against pound sterling could increase reported revenues. As a result of the foregoing, results of operations can be expected to fluctuate significantly from period to period.

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World events.

Events such as the terrorist attacks of September 11, 2001 may trigger un-foreseen economic conditions and cause the demand for computer entertainment software to fluctuate in an un-predictable manner.

Our stock price has been volatile and may continue to fluctuate.

As a result of the factors discussed in this report and other factors that may arise in the future, the market price of our Ordinary Shares historically has been, and may well continue to be, subject to fluctuations. These fluctuations may be due to factors specific to us, to changes in market estimates, or to factors affecting the computer, software, Internet, entertainment, media or electronics business.

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ITEM 4 – INFORMATION ON THE GROUP

History and development of the Group

The legal and commercial name of the Company, which was incorporated on May 14, 1990 under the laws of England and Wales, is Eidos plc. The Company’s Ordinary Shares are traded on the London Stock Exchange and in the form of American Depositary Shares (each representing one Ordinary Share) are traded on the NASDAQ National Market.

The Company’s registered office is located at Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London SW19 3RU, United Kingdom and its main telephone number + (0) 44 20 8636 3000.

The Group develops and publishes advanced entertainment software products.

The Group was formed in May 1990 to develop video editing systems and subsequently expanded its activities to include developing proprietary, software-based video compression technology to be used in CD-ROM and video telephony applications. Sales of video compression products were not significant, and the Company broadened its strategic focus to include developing and publishing entertainment software. To implement this strategy, the Group effected a number of acquisitions, which resulted in a substantial expansion of the Group’s operations. In October 1995, the Group acquired three entertainment software companies (Domark Group Limited, Simis Limited and The Big Red Software Company Limited) for aggregate consideration, including costs, of £13.8 million. In April 1996, the Group acquired CentreGold plc, an entertainment software company, for consideration, including costs, of £17.6 million. The consideration for each of these acquisitions consisted primarily of newly issued Eidos shares. As contemplated at the time of the CentreGold acquisition, in June 1996 the Company disposed of CentreSoft Limited and PDQ Limited, the distribution arms of CentreGold, for £7.5 million in cash, the net book value of such companies at the date of acquisition by the Group. Subsequently CentreSoft Limited was acquired by Activision, Inc. resulting in an additional £0.5 million deferred consideration recognized in fiscal 1999.

In November 1998 the Group acquired Crystal Dynamics, Inc. for $49.1 million including costs. During the year ended March 31, 2000, the Group acquired 75% and 25% holdings in Proein SL and Pyro Studios SL, respectively. During the same year the Group licensed certain of its video compression technologies to Forbidden Technologies plc, a company formed by one of the Group’s original founders. The Group divested itself of its remaining non core activities during the year ended March 31, 2001 to concentrate on developing and publishing high quality entertainment software.

In June 2001 the Group took its holding in Ion Storm LP to 89.6% of the issued partnership units for a nominal sum. The 89.6% holding has been built up over a series of piece-meal acquisitions for which the fair value of the total consideration paid was $536.

In July 2001 the Group successfully completed a 1 for 3 Rights Issue raising £51.6 million, net of costs, to finance the development of its next generation of video games consoles.

In March 2004, the Group entered into an agreement to acquire the entire share capital of IO Interactive for an initial consideration of £23.0 million, which was satisfied by £21.0 million in cash and £2 million in Eidos shares. Contingent consideration of 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.

The Group’s future success is dependent upon its ability to develop and publish new entertainment software titles that are capable of achieving widespread market acceptance and driving sustainable growth in revenues and operating profits. The Group currently derives a significant proportion of its revenues from the market for videogames. This market went through a period of transition as consumers waited for the next generation of videogame consoles to be released into the market. In common with many other publishers of entertainment software the Group has experienced fluctuating and un-predictable levels of demand for its titles during this period, which contributed significantly to its poor operating results during the years ended March 31, 2000 and 2001, and the 15 months ended June 30, 2002.

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Acquisitions, investments and disposals in the last three fiscal years

Vision Park Entertainment AB

The Group had a 39.54% investment in Innerloop Technologies AS, an entertainment software developer. On September 1, 2000, the whole of the share capital of Innerloop Technologies AS was acquired by Vision Park Entertainment AG (publ.), conditional upon the subsequent listing of Vision Park Entertainment AB (publ.) in Sweden. As part of the acquisition, the Group’s 39.54% holding was converted at the ratio of 1 to 12 into 585,198 Vision Park shares. Vision Park Entertainment AB (publ.) subsequently listed its share on OM Stockholmborsens O-lista in November 2000.

Within the Group accounts, this investment was carried at nil. In November 2000, the Group sold 206,000 shares in Vision Park Entertainment AB (publ.) for £519,000. The Group sold its remaining shares in October 2001 for £122,900.

Opticom

In 1998, the Group made a series of investments in Opticom for a total of £11.2 million. Opticom is a Norwegian based company listed on the Norwegian stock exchange and is a leader in the research and development of polymer based storage and processing devices and has significant interests in internet technologies. In March 2000, the Group sold the majority of its holding in Opticom for £91.5 million, excluding costs. The Group sold its remaining stake in the company in a series of open-market transactions during November and December 2001, for net proceeds of £11.0 million.

Ion Storm Inc

In June 2001, the Group took its holding in Ion Storm LP to 89.6% of the issued partnership units for a nominal sum. The 89.6% holding has been built up over a series of step acquisitions for which the fair value of the total consideration was $536.

Pyro Studios SL

During the year ended June 30, 2003, the Group increased its joint venture interest in Pyro Studios SL from 25.1% to 26.7% at a cost of £19,000. No additional goodwill was generated.

Sports Interactive Limited

On September 4, 2003, Eidos and Sports Interactive Limited announced an agreement to end their existing relationship for the development of the Company’s highly successful Championship Manager football management series. Eidos agreed to sell its 25% interest in Sports Interactive for a cash consideration of £488,000, generating no profit/loss following the transfer of attributable goodwill from reserves.

IO Interactive A/S

On March 3, 2004, the Company entered into an agreement to acquire the entire issued and outstanding share capital of IO Interactive A/S, a Danish studio responsible, together with the Company, for the development of the highly successful Hitman franchise. The acquisition of a 90% controlling interest was declared unconditional on April 1, 2004 and following the compulsory acquisition of the remaining interest, the Company completed the acquisition on May 4, 2004. The total consideration of £23.0 million was satisfied as to £21.0 million in cash and the issue of 1,511,509 new Eidos Ordinary Shares. A further deferred cash payment (not to exceed £5.0 million) is payable over the four year period ending March 31, 2008, dependent upon the number of new game units released by the studio in excess of £2.1 million units per annum.

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Business Overview

The Group is one of Europe’s largest independent developers and publishers of entertainment software. The Group’s publishing activities date from 1995 when it acquired the Domark Group Ltd with the Championship Manager franchise. The following year it acquired CentreGold Group plc, which included Core Design Limited, the original developer of the Tomb Raider franchise.

Tomb Raider is one of the most successful entertainment software franchises in the world owned by an independent publisher. With six iterations to date, total unit sales currently exceed 31 million. In addition to Tomb Raider, the Group has developed a broadly based publishing portfolio, which includes a number of other key franchise titles such as Championship Manager, Deus Ex and Hitman.

The Group’s market share amongst all independent publishers in the calendar year 2003, based on independent data supplied by ChartTrack in the U.K., GfK in France, Media Control in Germany and TRST in the U.S., was 4% in the U.K., 3% in Germany, 3% in France and 2% in the U.S.

The Group’s core activity of publishing entertainment software has become increasingly orientated towards the creation and development of its own content. Historically, the particular publishing strengths of the Group have been in the action adventure, strategy and sports management genres and the Directors expect this will continue to be the case in the short to medium-term based on the titles currently in development.

The Directors have promoted a ‘‘developer friendly’’ culture within the business and currently the Group has over 400 development staff working within 13 teams in 5 studios, which are wholly-owned or partly-owned. This resource is augmented by an external development programme. Of total sales of £133.9 million in the year ended June 30, 2004, 67% was derived from internally-generated product.

The Group has focused on becoming a pure development and publishing house. Unlike a number of other independent entertainment software publishers, the Group does not seek to own its channel to market since the Directors consider this to be a low margin activity. The Group maintains close contact with the retail channel. In Europe the Group has direct relationships with over 500 retailers operating approximately 17,000 outlets in three countries and in the U.S. with 50 retailers and distributors with approximately 10,600 outlets. Distribution to the retail channel is primarily undertaken through fulfilment houses.

The Group sells its products mainly in the United States and Europe. See Item 8, Note 3 for a full breakdown of revenues and profits by activity and geographic market.

The Group markets its products by targeting the retail and end-user customers through a marketing strategy, which includes retail promotions, public relations campaigns, consumer advertising, web-based marketing and direct marketing.

Retail promotions include sending product information to major industry buyers and selected retail store managers. The mailings include game descriptions, preliminary pricing information, ordering information, product merchandise and available press coverage. The Group also carries out ‘‘co-operative’’ marketing campaigns with major retailers to improve store presence and participate in the retailer’s own advertising. Public relations campaigns include personal visits to magazine publishers, trade show appearances, and weekly and monthly mailings to the video game press, on-line publications, lifestyle and sports press, national dailies and broadcast media.

Consumer advertising generally begins two to three months prior to launch of a product. The advertising may include: print, television, radio, outdoor, on-line advertising, cinema advertising, direct mail, co-marketing ventures and creative packaging. In-store promotions may include videos, window displays, product signage and/or product demonstrations. Current Web exposure is focused on bringing the Group closer to its customers by the provision of technical support on its web-site and by providing samples to stimulate interest in products. In relation to direct marketing, the Group holds a considerable database of customers built from the return of warranty cards. The database is used for profiling exercises and segmented direct marketing campaigns. Campaigns are extended via physical mailings and, wherever possible, electronic mailing. The Group also participates in direct marketing activities using databases built by retailers’ loyalty schemes.

The Group publishes products subject to master license agreements with console manufacturers, including Sony, Nintendo and Microsoft. Pursuant to these agreements the Group is permitted to use the proprietary information of the manufacturers in connection with the development of products for their platforms. The Company considers that the platform license agreements entered into with Sony U.S., Sony Europe and Microsoft are material to the results of the business as revenue from games released on these platforms represented 69% of total revenue in the year ended June 30, 2004.

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Organizational structure

The Company is the holding company of the Group. The Company has the following principal subsidiaries and joint ventures:

        % Share        
Name   Date of incorporation   capital held   Nature of Business   Registered Office

 
 
 
 
Principal Subsidiaries of the Company                
                 
Incorporated and operate in England and Wales                
Eidos Interactive Limited   03/24/84   100   Developer and   Wimbledon Bridge House,
          publisher of   1 Hartfield Road,
          entertainment   Wimbledon,
          software   London SW19 3RU,
              United Kingdom
                 
Core Design Limited   05/13/88   100 (1) Developer of   2 Roundhouse Road,
          entertainment   Pride Park,
          software   Derby DE24 8JE,
              United Kingdom
                 
Incorporated and operate in the United States                
Eidos, Inc.   08/15/92   100 (1) Publisher of   651 Brannan Street,
          entertainment   4th Floor,
          software   San Francisco,
              California 94107,
              United States of America
                 
Crystal Dynamics, Inc.   07/08/92   100 (1) Developer of   2468 Embarcadero Way,
          entertainment   Palo Alto,
          software   California 94025-3691,
              United States of America
                 
Ion Storm LLP   12/03/96   89 (1)(2) Developer of   CT Corporation System,
          entertainment   350 North St Paul Street,
          software   Dallas,
              Texas, TX 75021
              United States of America.
                 
Incorporated and operates in France                
Eidos France SARL   12/10/85   100 (1) Publisher of   8th Floor,
            entertainment   6 Boulevard du General
            software   Leclerc,
                92115 Clichy,
                France

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Incorporated and operates in Germany                
Eidos (Deutschland) GmbH   02/08/96   100 (1) Publisher of   Grosse Elbstrasse 145d,
            entertainment   22767, Hamburg,
            software   Germany
                 
Incorporated and operates in Japan                
Eidos KK   07/30/98   100   Publisher of   Etsuzan LK Building 4F,
            entertainment   1-10-4, Hiroo, Shibuya-Ku,
            software   Tokyo 150-0012,
                Japan
                 
Incorporated and operates in Australia                
Eidos Interactive Pty Limited   06/13/03   100   Publisher of   Level 11, 90 Alexander
            entertainment   Street Crows Nest 2065
            software   Australia
                 
Incorporated and operates in Denmark                
IO Interactive A/S   11/01/90   100 (1) Developer of   Kalvebod Brygge 35-37
            entertainment   1560 Copenhagen V
            software   Denmark
                 
Joint Ventures                
                 
Incorporated and operate in Spain                
Proein SL   08/12/76   75 (1) Publisher of   Euromor Building,
            entertainment   Avenida de Burgos 16-D,
            software   Madrid,
                Spain
                 
Pyro Studios SL   03/11/97   27 (1) Developer of   Euromor Building,
            entertainment   Avenida de Burgos 16-D,
            software   Madrid,
                Spain
 

With the exception of the companies marked(1), the share capital of the above companies is held directly by the Company. In the case of Ion Storm(2), the holding is in the form of partnership units rather than Ordinary Shares. The share capital of the companies marked(1) is held by one of the wholly-owned subsidiaries of the Company.

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Property, plant and equipment

The Group maintains an aggregate of approximately 230,976 square feet of office and commercial studio space in London and Derby, England, in Hamburg, Germany, in Paris, France, in Copenhagen, Denmark, in San Francisco and Palo Alto, California, and Austin, Texas, U.S., in Tokyo, Japan, in Madrid, Spain and in Sydney, Australia.

Details of the principal establishments of the Group are as follows:

  Property       Tenure       Description     Approximate
Area Occupied
(square feet)

 
 
 
Eidos plc
2nd floor
Wimbledon Bridge House
Hartfield Road
London SW19 3RU
  Leasehold 10 years from
November 22, 1996
  Office   19,000
Eidos Interactive Limited
2nd floor
Wimbledon Bridge House
Hartfield Road

London SW19 3RU
  Leasehold from December 25, 2002 to
September 26, 2014
  Office   4,000
Eidos Interactive Limited
(Beautiful Game Studio)
United House
North Road
London N7 9DP
  Licence (licence period of one year from
May 1, 2003 with two
months’ notice
required from
either party thereafter)
  Office   1,436
Core Design Limited
2 Roundhouse Road

Pride Park
Derby DE24 8JE
  Leasehold 15 years from October 15, 1999   Office   12,320
Eidos Inc.
651 Brannan Street
4th Floor,
San Francisco, California
94107
United States of America
  Leasehold 5 years from May 12, 2002   Office   15,000
Crystal Dynamics, Inc.
64 Willow Place
Menlo Park, California
94025-3691
United States of America
  Leasehold from January 1, 1999 to March 31, 2007   Office   26,788
Eidos France SARL
8th Floor
6 Boulevard du General
Leclerc
Clichy
France
  Leasehold from July 1, 1999 to June 30, 2008   Office   8,547

Eidos (Deutschland) GmbH
145d Grosse Elbstrasse
22767 Hamburg
Germany

  Leasehold from October 15, 2002 to September 30, 2005   Office   11,970
             

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Eidos KK
Etsuzan LK Building 4F
1-10-4, Hiroo
  Leasehold 2 years from June 25, 2004   Office   2,337
Shibuya-Ku
Tokyo 150-0012
Japan
           
Eidos Interactive Pty
Limited
Level 11, 90 Alexander
Street Crows Nest 2065
Australia
  Leasehold 2 years from December 15, 2003   Office   1,614
IO Interactive A/S
Farvergade 6-8
4th and 5th floors
1463 Copenhagen K
Denmark
  Leasehold 5.5 years from November 1, 2003   Office   10,807
Farvergade 2-4
3rd to 5th floors
1463 Copenhagen K
Denmark
  Leasehold 5 years from April 1, 2000.   Office   13,982
Kalvebod Brygge 35-37
1560 Copenhagen V
Denmark
  Leasehold 5.5 years from November 1, 2003   Office   59,547
Ion Storm L.P.
8303 Mopac,
Austin, Texas
United States of America
  Leasehold October 30, 2000 to December 31, 2004.   Office   19,915
Pyro Studios SL
1st Floor
Hermanos Garcia Noblejas
37-C
28037 Madrid
Spain
  Leasehold 5 years from July 9, 2003   Office   9,020
Proein SL
2nd Floor
Hermanos Garcia Noblejas
37-C
28037 Madrid
Spain
  Leasehold 5 years from July 9, 2003   Office   9,020
Proein SL
Poligono Casablanca-2,
Doctor Severo Ochoa,
37-Alcobendas, Madrid
Spain
  Owned   Warehouse   5,673
             

The principal place of business of each of the above companies is the first relevant address shown above.

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ITEM 5 – OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of the financial condition and results of operations of the Group (under U.K. GAAP) should be read in conjunction with the Group’s Consolidated Financial Statements and Notes included elsewhere in this report. The following discussion contains forward-looking statements that involve risks and uncertainties. See ‘‘Cautionary Statement with Respect to Forward-Looking Statements’’ at the beginning of this report.

Overview

The Group’s future success is dependent upon it developing and publishing additional entertainment software titles and such titles achieving significant market acceptance. The Group maintains its accounting records and reports its results in Pounds Sterling in accordance with U.K. GAAP. There are material differences between U.K. GAAP and U.S. GAAP (these are discussed in Note 32 of the Consolidated Financial Statements in Item 8).

The Group has experienced, and expects to continue to experience, significant fluctuations in operating results due to a variety of factors including, among others: (i) the timing and success of product introductions; (ii) market acceptance of the Group’s products; (iii) delays in product completion; (iv) higher than expected product returns; (v) projected and actual changes in platforms; (vi) changes in pricing policies by the Group and its competitors; (vii) costs associated with development projects; (viii) development and promotional expenses relating to the introduction of new products or new versions of existing products; and (ix) the size and rate of growth of the consumer software market. In response to competitive pressures, the Group may take certain pricing or marketing actions that could materially adversely affect the Group’s business, results of operations and financial condition. Products are generally shipped as orders are received; accordingly, the Group operates with little backlog. The Group’s expense levels are based, in part, on its expectations regarding future sales, and, as a result, operating results would be disproportionately and adversely affected by a decrease in sales or a failure to meet the Group’s sales expectations. Furthermore, the entertainment software business is highly seasonal. Net revenues vary significantly as a result of new product introductions and other factors. Consequently results of operations can be expected to fluctuate significantly from period to period. See ‘‘Item 3 – Risk Factors – The Group’s business is highly seasonal’’.

The Group has historically recorded a significant proportion of its costs in Pounds Sterling. The Group’s sterling/non-sterling trading profile has not changed significantly from 2003. In the year ended June 30, 2004, 41% of the Group’s total costs (including goodwill amortization) were in sterling (year ended June 30, 2003: 46%) and 59% in currencies other than sterling. As in previous years, a high proportion of turnover, 67% in the year ended June 30, 2004 (year ended June 30, 2003: 66%), was denominated in non-sterling currencies, primarily U.S. Dollars and Euros. The Group reports its results in sterling. As a result, changes in the value of the pound sterling in relation to other currencies will affect the Group’s turnover and operating margins. The impact of future exchange rate fluctuations between the pound sterling and other currencies on the Group’s turnover and operating margins cannot be accurately predicted. Over the past several years, the Group has taken steps to reduce its exposure to currency fluctuation through foreign exchange management. This is aimed at protecting margins and fixing future pound sterling cash flows. In particular, the Group has adopted a policy of hedging against the devaluation of a portion of its short-term foreign currency cash flows using forward contracts and currency swaps issued by the Company’s bankers.

At June 30, 2004, unhedged currency net liabilities totalled £24.7 million (June 30, 2003: £21.3 million) (predominantly U.S. Dollars and Euros), and there were £1.2 million open derivative positions as at this date (June 30, 2003: £nil).

Exceptional Items

Under U.K. GAAP, exceptional items are those material items which derive from events or transactions within the ordinary activities of the entity. There is no concept of “exceptional items” under U.S. GAAP. Under U.S. GAAP, events and transactions that are distinguished by both their unusual nature and their infrequency of occurrence are classified as “extraordinary items”. The exceptional items discussed below do not meet the definition of ‘‘Extraordinary items’’ under U.S. GAAP and therefore would not be separately identified in the U.S. GAAP consolidated financial statements as extraordinary or unusual.

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Year ended June 30, 2004

There were no exceptional items in the year ended June 30, 2004.

Year ended June 30, 2003

Litigation settlement

The Group received a £1.4 million litigation settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to 31 March 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

Year ended March 31, 2002

Exceptional income on sale of investments

The Group disposed of its remaining shareholding in Opticom during the year ended March 31, 2002 realising net proceeds of £11.0 million and a net profit of £8.5 million. This profit was partially off-set by write downs and losses on other disposals of £4.1 million, which occurred following a review of the Group’s other investments in the period.

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Results of Operations (U.K. GAAP)

The following table sets forth the actual selected statements of operations data of the Group as a percentage of turnover for the periods presented:

Consolidated Statements of Operations Data:

  Year ended   Three months   Year ended   Year ended   Year  
March 31, ended June 30, June 30, ended
  June 30, (unaudited)   June 30,





As a percentage of turnover 2002   2002   2002   2003   2004  
 
 
 
 
 
 
Turnover 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 40.5   59.4   41.7   41.0   37.2  
 
 
 
 
 
 
Gross profit 59.5   40.6   58.3   59.0   62.8  
Operating expenses:                    
Selling and marketing 17.1   61.3   18.9   17.0   19.9  
Research and development 32.7   106.1   33.4   21.5   29.3  
Goodwill amortization 5.7   0.8   3.6   0.1   1.2  
Other administrative 16.9   52.9   17.1   13.3   16.6  
 
 
 
 
 
 
Income/(loss) from operations (12.9 ) (180.5 ) (14.7 ) 7.1   (4.2 )
Income from joint ventures 1.2   4.6   1.5   1.9   1.5  
Joint Venture goodwill amortization (4.3 ) (16.3 ) (4.6 ) (0.3 )  
Income/(loss) from sale of investments or termination of operations    and write down of investments 3.6          
Income from investments 0.1     0.2   0.9    
Interest income (expense), net 0.5   1.8   0.7   1.9   1.2  
(Provision)/credit for income taxes 0.0   (0.6 ) 0.0   1.2   (0.7 )
 
 
 
 
 
 
Net income/(loss) (11.8 %) (191.0 %) (13.1 %) 12.7 % (2.2 %)
 
 
 
 
 
 

Operating Review and Prospects (U.K. GAAP)

Overview

While the results reported for the full year are disappointing, the Company continues to make good progress with its new development methodology and its increased focus of leveraging owned intellectual property. Recognising that a number of game releases did not live up to management’s sales targets (specifically Hitman: Contracts, Commandos 3, Legacy of Kain: Defiance and Whiplash), the Company’s financial performance this year was materially impacted by two key events, both of which occurred in the second half. Firstly, the unexpected softness in the games market, particularly in the US, which started back in May (as illustrated by the 17% year-on-year fall in US games software sales for that month(1). Consequently, the previously anticipated c 700,000 units of re-orders for our biggest title release of the year, Hitman: Contracts, did not materialise. This was despite the game both heading the charts and then maintaining a strong chart position in both Europe and the US from its launch in April. Secondly, in view of the prevailing weakness in the games market, the Board decided in June to defer the launch of the ready-to-release ShellShock: Nam ’67 game until September 2004 to give this new franchise a better opportunity to deliver on its true potential. As a consequence, its operating profit contribution moved out of the 2004 financial year and into the 2005 financial year.

1  Source: US NPD Data, May 2004

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Review of Operations

In the year to June 30, 2004, the Group achieved a turnover of £133.9 million (2003: £151.5 million) and recorded a loss after tax of £2.9 million compared to a profit of £19.2 million in the year to June 30, 2003. While the total number of units shipped in both 2003 and 2004 were the same at 12.5 million units, gross margins improved in the year to 62.8% (2003: 59.0%). During the year, and for the first time, the Company had all of its 14 titles (22 sku’s) available for release on schedule. Of these titles, Backyard Wrestling: Don’t Try This At Home; Deus Ex: Invisible War; Championship Manager: Season 03/04 and Legacy of Kain: Defiance, each sold between 500,000 and one million units. In addition, Hitman: Contracts, while performing below management’s expectations, has sold 1.7 million units to date. The period also included a further one million unit sales of Tomb Raider: The Angel of Darkness together with back catalogue sales which represented 15.7% of turnover (2003: 11.0%). The Company continued to make operational improvements throughout the year: the European Development and Publishing divisions were restructured and the Company’s global marketing initiative was refocused on brand management and direction. Investment in R&D increased by 20% to £39.2 million in the year and is expected to continue to increase, reflecting the Company’s commitment to invest in developing top quality titles in future.

Intellectual Property (IP) Management

The Company has again made good progress in its objective of securing owned IP supported by stringent cost and development controls. This is reflected by the improved gross margin which rose to 62.8% (2003: 59.0%). In March 2004, the Company acquired IO Interactive A/S (‘IO’), the Danish studio which, together with Eidos, had been responsible for the development of the highly successful Hitman franchise. The Hitman franchise has now sold over 5.5 million units to date and significantly strengthens our European creative base and development expertise. IO is expected to contribute to the Group’s on-going development of unique IP with plans to release a new franchise title next year. IO’s technology is also playing a key role in the Group’s transition programme to next generation Xbox 2 and PS3 platforms, which is on track. We have brought the development of the Company’s best selling Championship Manager football management game in-house and the improved Championship Manager 5 will release on PC during the 2005 financial year. In Spring 2005, the game will also release on PlayStation 2 for the first time, as well as on Xbox. In addition, Championship Manager will go online through subscription during the second half of the 2005 financial year. We are confident that these advances and new applications will give the successful Championship Manager franchise a new fan base and enable the game to appeal to a wider audience. Our Crystal Dynamics Studio in the US is continuing the development of the next Tomb Raider game which will be unveiled this Autumn and is scheduled for release in the fourth quarter of the 2005 financial year. Following the internal transfer of the Tomb Raider franchise from Core Design to Crystal Dynamics, Core Design has been refocused and restructured. A number of the new concept ideas and pre-production works, for both platform and PlayStation Portable (PSP) application, are being developed in this studio. During the year, the Company continued to derive revenue and leverage value from its own intellectual property. This included a movie deal entered into for Fear Effect (similar to those previously entered into for Tomb Raider and Deus Ex) and a dialogue with various film studios in relation to other products is on-going.

New Media

On October 28, 2003, we announced the creation of a New Media Division, formed to help facilitate the extension of our intellectual property into new markets using a coordinated and strategic approach. The division has since undertaken a number of successful projects bringing our existing products to market through new distribution channels, particularly online, and introducing some of our key brands to new platforms such as mobile phone handsets, new handheld game devices and interactive digital TV. During the year, income from these new platforms has been generated following agreements with AT&T, Bell Canada, China Telecom, Metaboli, Nokia, Sky and Vodafone, among many others. The Company has advanced its owned IP into new applications through new franchise titles scheduled to release in the 2005 financial year, namely 25 To Life, Project: Snowblind and Just Cause, each of which are either wholly or partly online game products. Although the New Media Division is at an early stage of development, it continues to gain momentum and is already making a positive contribution to the Company's financial position.

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The Board

On July 15, 2003, the Company announced that Jeremy Heath-Smith, Development Director of Eidos plc and Managing Director of Core Design Limited, was stepping down from the Boards of both companies with immediate effect. On October 28, 2003, the Company announced that Simon Protheroe would step down from the Eidos plc Board following his appointment as head of the New Media Division and that Jonathan Kemp, European Managing Director, was being promoted to the Eidos plc Board on December 1, 2003.

Our People

In what turned out to be a challenging year, our employees have again exerted great efforts in striving to deliver upon the Company’s objectives. We would like to take this opportunity to recognise their achievements and thank them for their continued dedication and support.

Strategic Review

As we have previously indicated, the entertainment software market continues to evolve and mature with franchise scale and diversity, aligned to financial strength, becoming ever more important. In addition, there is the continuing need to invest more heavily in R&D ahead of the next hardware cycle. These market trends and the changing competitive landscape have led Eidos to become increasingly reliant on the performance of key titles. With this in mind, the Board initiated a review of the strategic alternatives available to Eidos in order to exploit fully the potential of the Company’s extensive portfolio of intellectual property and development capabilities. This review commenced in June and remains in progress under the direction of the Chairman. On August 3, the Board of Eidos confirmed that it had received expressions of interest from a number of parties. On October 18, the Board announced that discussions, which relate to a possible sale of the Company, are progressing well, although there can be no certainty at this stage as to whether or not they will lead to an offer being made for the Company.

Continued Development

Notwithstanding the ongoing strategic review, management remains focused on driving the business forward and is committed to providing the design, innovation and technological advancement that can further improve the gameplay experience. To that end, we have a significant release schedule planned for the 2005 financial year which includes a strong mix of sequel and new franchise titles. Five titles are planned for release in the first half and nine titles in the second half, including the next editions in the highly successful Hitman and Tomb Raider franchises.

 

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Financial Review (U.K. GAAP)

Year ended June 30, 2004 compared to year ended June 30, 2003

Turnover

Turnover decreased by 11.6% to £133.9 million compared to £151.5 million in the year to June 30, 2003. Overall, the Group recorded a loss after tax of £2.9 million compared to a profit of £19.2 million in the year to June 30, 2003.

The Company released 22 new game sku’s in the year (2003: 27), including five for PlayStation 2 and six for Xbox with the balance being principally PC game releases. In total, 12.5 million units were shipped in 2004, the same as for 2003. There was a decrease in the gross average selling price from £13.73 to £12.72 over the year reflecting increased sales of our back catalogue titles. Approximately 73% of the Group’s total revenue was derived from console based games, compared to 74% in the same period last year.

Operating Results

The gross margin was 62.8% compared to 59.0% in 2003. This increase reflects the move towards internally generated intellectual property.

Operating expenses increased to £89.7 million from £78.8 million. This increase arises largely from certain non-recurring savings made in 2003 together with the increase in goodwill amortisation arising from the acquisition of IO Interactive A/S in March 2004.

Advertising costs were £20.2 million (15.1% of turnover) compared to £18.3 million (12.1% of turnover) last year. This reflects the trend for increasing advertising support being required to promote game releases. The fixed element of selling and marketing costs was £6.5 million compared to £7.4 million in the previous year. The reduction in expenditure is due to the full year impact of savings made in the prior year.

Research and development, representing the Group’s total investment in product development, totalled £39.2 million (2003: £32.6 million). The 20% increase in this cost reflects the Company’s commitment to invest in developing quality titles in future, and certain non-recurring savings which occurred during the previous year. The Group expects the level of expenditure to increase again in the 2005 financial year.

Total administrative expenses for the year were £23.8 million including goodwill amortisation of £1.6 million, compared to £20.4 million including goodwill amortisation of £0.2 million in 2003. The increase in the amortisation charge resulted from the goodwill arising on the acquisition of IO Interactive A/S on March 31, 2004. Also included in administrative expenses for 2004 are foreign exchange losses of £0.8 million against £0.9 million of foreign exchange gains in 2003. While the Group continues to invest in management and infrastructure, it will also continue to manage its administrative expenses.

After deducting total operating expenses of £89.7 million, the Group made an operating loss of £3.6 million. After deducting operating expenses before goodwill of £88.1 million, the Group made an operating loss before goodwill of £2.0 million. This included the Group’s share of joint venture operating profits of £2.1 million. This compares to an operating profit of £13.2 million and an operating profit before goodwill and exceptional items for the prior year of £13.9 million, which included joint venture operating profits of £3.0 million.

Exceptional Items

There were no exceptional items during the year. During 2003, the Group received a £1.4 million settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to 31 March 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

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Taxation

The Group recorded a tax charge in the year of £1.0 million which largely comprises the Group’s share of taxes payable in its profitable joint venture companies. Significant brought forward losses remain available within the Group to offset future trading profits. The Company has reviewed the provisions of FRS19 –Deferred Tax and believes that no further amounts should be recognized in respect of these losses.

Earnings Per Share

The Group reported a loss of £2.9 million for the year compared to a profit of £19.2 million for the previous year. The basic (loss)/earnings per share was (2.1) p compared to 13.8p for 2003, based on the weighted average number of shares in issue during the year.

Liquidity and Capital Resources

Net assets at June 30, 2004 included goodwill of £25.3 million (2003: £0.3 million), tangible fixed assets and investments of £10.4 million (2003: £7.4 million as restated, see note 2 in Item 8), net current assets of £40.2 million (2003: £67.9 million) and other long term creditors and provisions of £3.9 million (2003: £0.03 million).

At the year end, the Group had cash and cash equivalents of £37.4 million (2003: £58.2 million) and no debt (2003: £nil). The decrease in cash primarily resulted from the acquisition of IO Interactive A/S as referred to below. There was a cash outflow before the management of liquid resources and financing of £18.4 million during the year (2003: £0.8 million). Operating activities generated a cash inflow of £8.2 million (2003: £4.7 million outflow), reflecting the operating loss offset by a decrease in working capital during the year.

Interest received decreased to £1.9 million in the year to June 30, 2004 from £3.1 million in the previous year. The decrease was primarily due to lower average cash balances held during the year and the lower average interest rates that existed throughout the year.

Year ended June 30, 2003 compared to year ended June 30, 2002

NB: Please note that the Company changed its year end during 2002 from March 31, to June 30. This discussion below compares the year ended June 30, 2003, to the year ended June 30, 2002.

The Group’s results for the year ended June 30, 2003 showed continued significant improvements in its operating and financial performance. Turnover increased by 29.8% to £151.5 million compared to £116.7 million in the year to June 30, 2002. Gross margins increased to 59.0% compared to 58.3% and there were further reductions in the Group’s fixed cost base. Overall the Group recorded a net profit after tax of £19.2 million for the year to June 30, 2003 compared to a loss of £15.3 million for the year to June 30, 2002.

Turnover

We released 27 new game versions in the year to June 30, 2003 (2002: 18), including seven for PlayStation 2 and five for Xbox with the balance being principally PC game releases. A number of key franchise titles such as Tomb Raider: The Angel of Darkness, Hitman 2: Silent Assassin, TimeSplitters 2 and Championship Manager 4, each sold circa one million units during the year to June 30, 2003. The balance of our portfolio in favour of pillar titles represented a significant improvement over the prior year.Catalogue sales of earlier versions of franchise titles such as Tomb Raider, Deus Ex and TimeSplitters remained strong in the year. In total, 12.5 million units were shipped in the year to June 30, 2003, compared to 11.4 million units during the year to June 30, 2002. There was an increase in the gross average selling price from £12.22 to £13.73 over the year to June 30, 2003 resulting from the strong performance of our franchise titles. Overall, approximately 75% of Eidos’ revenue for the year to June 30, 2003 was derived from console based games, compared to 65% in the prior year.

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Operating results

The gross margin for the year to June 30, 2003 was 59.0% compared to 58.3% for the year to June 30, 2002.

Total operating expenses for the year ended June 30, 2003 fell to £76.3 million from £82.3 million for the year to June 30, 2002. The decrease in operating expenses arose largely from the full year impact of savings made in prior years together with certain non-recurring savings made in research and development.

Advertising costs in the year to June 30, 2003 were £18.3 million (12.1% of turnover) compared to £13.7 million (11.8% of turnover) for the year to June 30, 2002. This reflected the strong promotional support for our pillar titles released during the year to June 30, 2003. The fixed element of selling and marketing costs was £7.4 million compared to £8.1 million in the prior year. The reduction in expenditure was due to the full year impact of savings that arose from salary and licence amortization costs in our publishing businesses.

Research and development, representing the Group’s total investment in product development, totalled £32.6 million in 2003 (2002: £39.0 million). This decrease reflected the move toward internally developed franchise titles and certain non-recurring savings.

Total administrative expenses for the year to June 30, 2003 were £20.4 million including goodwill amortization of £0.2 million, compared to £24.2 million including goodwill amortization of £4.2 million in 2002. The reduction in the amortization charge resulted from the goodwill relating to the acquisition of Crystal Dynamics becoming fully amortized during the year to June 30, 2002. Administrative expenses before goodwill amortization were £20.2 million compared to £20.0 million for the year to June 30, 2002.

After deducting total operating expenses of £76.3 million, Eidos reported an operating profit of £13.2 million for the year to June 30, 2003. This included the Group’s share of joint venture operating profits of £2.5 million (including goodwill amortization of £0.5 million). This compares to an operating loss for the year to June 30, 2002 of £20.8 million, which included joint venture operating profits of £1.8 million.

Exceptional items

During the year to June 30, 2003 the Group received a £1.4 million litigation settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to March 31, 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

Taxation

Included within the tax credit for the financial year 2003 was an amount of £5.6 million relating to the release of provisions in respect of prior year contingent tax liabilities. This release reflected the results of discussions with the Inland Revenue during the 2003 financial year.

Earnings per share

Eidos reported a profit after tax of £19.2 million for the year to June 30, 2003 compared to a loss of £15.3 million for the year to June 30, 2002. The basic earnings per share was 13.8p compared to a loss of 11.1p for the year to June 30, 2002, based on the weighted average number of shares in issue during the year to June 30, 2003.

Critical Accounting Policies

The Group prepares its consolidated financial statements in accordance with U.K. GAAP as described under the heading ‘‘Item 3 – Key Information – Selected Financial Data’’ and reconciles such to U.S. GAAP to the extent required by the rules of the US Securities and Exchange Commission. In preparing the consolidated financial statements in accordance with both U.K. GAAP and U.S. GAAP senior management have to make certain key assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In doing so, they have to exercise considerable judgement in respect of matters which are inherently uncertain. The U.K GAAP accounting policies described below are considered critical by senior management because they provide the framework within which the Group attempts to quantify and assess the assumptions and estimates which have the greatest bearing on the consolidated financial statements. Any change in the estimates used could materially affect the reported results and actual conditions may differ from those assumed.

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Sales Returns and Allowances and Price Protection Reserves

The majority of the Group’s reported revenue is derived from the sale of pre-packaged entertainment software. Revenue is recorded at the point of sale, net of taxes and provisions for future returns and price protection. In common with other publishers of entertainment software the Group operates a number of territory-specific programmes under which retailers may qualify to return unsold product, subject to certain qualifying conditions. Alternatively the Group may offer price protection programmes in certain markets, though again these are subject to the satisfaction of certain qualifying conditions. Typically the Group maintains a policy of issuing credits under such programmes.

By analysing historical rates of return and price protection in conjunction with a number of key variables including the prevailing market and economic conditions at that time, the Group is able to estimate future expected rates of returns and price protection. The adequacy of the reserves generated by these estimated rates is reviewed regularly in the light of current market and economic conditions, considering in particular up to date patterns of sell-through, anticipated trends in the hardware and software markets, seasonal factors, perceived consumer preferences and general economic conditions.

In the past the Group has not always been able to accurately estimate the adequacy of its reserves. In 2001 the Group reported that this was caused by the sell through of products released in the previous year being less than anticipated as a result of continuing consumer uncertainty surrounding the release of new video game hardware platforms. Since then all of the new hardware platforms have now been successfully launched and senior management have taken significant steps to impose new procedures and controls on the estimation of the Group’s exposure to future returns and price protection. In addition measures have been put in place to control the flow of new product into the market place as over stocking in retail and distribution channels may also generate significant future exposures for the Group. The senior management of the Group believes that the controls that they have put in place enable it to make a more realistic estimation of the group’s exposure to future returns and price protection. Nevertheless if the Group were to change certain of the key estimates or assumptions that underpin its calculations, then the level of reserves carried at the balance sheet date would be altered as would the reported net gain for the period. Similarly if actual credits issued for returns and price protection are in excess of the level of reserves carried, then future reported revenues might be reduced in the future. Conversely if the level of actual credits is less than the reserve, then this could increase future reported revenues.

Taxes

The estimation of the Group’s consolidated tax charge is a complex matter encompassing many different international tax jurisdictions. In calculating the Group charge management has to make certain estimates regarding individual exposures in different countries and assess the recoverability of deferred tax assets. It can often take many years to finalise individual tax charges and to reach agreement on areas of contention with the relevant tax authorities. The Company recognises tax benefits from exposures only when it is probable that those benefits will be retained. There is no guarantee that the level of provision carried in respect of open tax items at any one time, will be sufficient to meet final liabilities as they are agreed and fall due.

In reviewing the recoverability of deferred tax assets in the jurisdictions with a cumulative history of losses the Group has limited the recognition of deferred tax assets to reversing deferred tax liabilities. Estimates of future income are considered only for those jurisdictions with a history of predictable profits. Changes in the estimates used to assess the recoverability of deferred tax assets could affect the level of assets carried in the balance sheet at the period-end and also the level of tax charge in the profit and loss account for the period.

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Goodwill Impairment

The Group capitalizes and amortizes goodwill in respect of the acquisition of certain subsidiaries and associated undertakings in accordance with FRS10: Goodwill and Intangibles. The Group makes certain estimates regarding the useful life of goodwill that take account of a number of factors including the future prospects for the entity concerned and the projections for both net income and net cash-flow. To the extent that these projections no longer justify the carrying value of any remaining goodwill, the amortization charge will be accelerated to the degree required to reflect the revised estimate of the fair value of the goodwill. The carrying value of investments carried at cost are also reviewed in a similar fashion and to the extent that an investment’s carrying value can be shown to be permanently impaired, then full provision will be made through the profit and loss account.

The estimates used in assessing the carrying value of both goodwill and investments carried at cost rely on assumptions made about the performance and prospects of the entities themselves and also about the markets in which they operate. Where the entities do not have an established track record or where they are operating in new or emerging markets then the inherent uncertainty in forecasting future performance may be compounded. To the extent that projections no longer substantiate the recorded values of either goodwill or investments carried at cost, then net income may be adversely affected.

The value of unamortized goodwill held within intangible assets at June 30, 2004 was £25,258,000 (June 30, 2003: £252,000). The carrying value of investments carried at cost within fixed asset investments at June 30, 2004 was £4,205,000. (June 30, 2003: £2,746,000 as restated (see note 2 in Item 8)).

Valuation of inventory

The Group carries its inventory of finished goods at the lower of cost and net realisable value. In order to determine what this carrying value should be, management has to estimate the price that they expect to achieve on the future sale of the stock. This process involves reviewing current patterns of demand in the market and projecting these forward. It may also require an assessment of how future demand could be affected by changes in the wholesale price charged by the Group and by other factors that may be beyond the control of the group. In this way management will seek to determine the most realistic price that they believe can be achieved and hence the likelihood that inventories on hand can be sold at or above cost. Should management’s estimates of current or future demand prove to be unrealistic, then the Group may fail to achieve a wholesale price that is sufficient to cover the carrying value of the inventory and hence the charge to the profit and loss account may be greater than expected.

The total amount of inventory on hand at June 30, 2004 was £3,457,000 (June 30, 2003: £2,772,000).

New Accounting Standards

New UK Accounting Standards and Pronouncements Applicable to the Group

FRS 20

On April 7, 2004 the Accounting Standards Board issued FRS 20 - Share-based payment. FRS 20 is effective for periods commencing on or after January 1, 2005. The Company will first adopt the standard in its financial statements for the year ended June 30, 2006. Upon adoption it will supersede the accounting requirements of UITF Abstract 17 Employee share schemes. FRS 20 applies to all share options and share purchase schemes, including Save As You Earn schemes, and to both equity-settled and cash-settled share based payment arrangements, whether with employees or third party providers of goods and services. The key change introduced by the standard is the requirement to recognise an expense for all share-based payments based on the fair value of the instrument. Market based performance conditions are taken account of in the measurement of the fair value of the instrument granted, and no subsequent adjustments made. Service conditions and non-market based performance conditions cause subsequent adjustments to the number of shares/options in respect of which the fair value is charged to the profit and loss account. The Company is in the process of evaluating the impact on the financial statements of the Group.

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FRS 21

On May 20, 2004 the Accounting Standards Board issued FRS 21 – Events after the balance sheet date. FRS 21 replaces SSAP 17 – Post balance sheet events, and is effective for periods beginning on or after January 1, 2005. Early adoption is not permitted. The Company will first adopt the standard in its financial statements for the year ended June 30, 2006. The key change introduced by FRS 21 is that an entity will no longer be permitted to recognise dividends declared after the balance sheet date as a liability at the balance sheet date. Equally, dividends receivable cannot be recognized until the entity is entitled to receive payment. The standard is not expected to have a significant impact on the financial statements of the Group.

New US Accounting Standards and Pronouncements Applicable to the Group

FAS 150

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. Statement 150 requires that certain financial instruments with characteristics of both liabilities and equity be classified as a liability. In November 2003, the FASB deferred application of certain provisions of Statement 150 through FASB Staff Position (FSP) 150-3 which eliminates the disclosure requirements for certain mandatorily redeemable instruments and prohibits early adoption for instruments within the scope of the deferrals established by FSP 150-3. The Company does not expect the adoption of this statement will have a material impact on the Company’s financial position, results of operations or cash flows.

Liquidity and capital resources

The Group’s policy is to use a combination of committed bank facilities and equity in order to ensure that it has sufficient financial resources to meet its short and long term funding requirements. Subsequent to the end of fiscal 2001, a 1 for 3 rights issue was announced. In this rights issue, each holder of three Ordinary Shares (excluding holders of American Depositary Shares, and ordinary shareholders located in the U.S. and Canada, Australia, Ireland or Japan) was offered the right to purchase one ordinary share for £1.55. Following receipt of £51.6 million, net of expenses, raised from the rights issue, the Group’s borrowings were repaid and the terms of the credit facility with the Royal Bank of Scotland amended to a committed £15 million multi currency facility. This facility is secured by a fixed and floating charge over the assets of the Group.. A separate borrowing facility of £0.8 million was secured by the Group’s Japanese subsidiary with Mizuho Bank Limited, also in 2002. This facility was reduced to £0.5 million during fiscal 2003.

The £15 million facility was renewed in fiscal 2005 (maturing in September 2005). Overall at June 30, 2004, the Group had undrawn committed facilities of £16.8 million (June 30, 2003: £15.5 million), denominated £15 million in Sterling, £0.5 million in Japanese Yen and £1.3 million in Danish Krone. Although the Group did not need to draw down against the Sterling facility, under the terms a draw down would only have been permissible if certain covenants were met. During the relevant period the Group was in full compliance with these covenants. The Group believes that the requirements of its existing business and future investment can be met for at least the next 12 months from its current cash reserve and committed facilities.

The Group also held short-term deposits at June 30, 2004 of £12.6 million (June 30, 2003: £30.3 million). Credit risk on transactions is minimized by operating within the parameters of the Group treasury policy. Most of the Group’s surplus funds are held in the United Kingdom and there are no material funds as to which repatriation is restricted as a result of foreign exchange regulations.

Capital Resources

Net assets at June 30, 2004 include goodwill of £25.3 million (June 30, 2003: £0.3 million), tangible fixed assets and investments of £10.4 million (June 30, 2003: £7.4 as restated, see note 2 in Item 8), net current assets of £40.2 million (June 30, 2003: £67.9 million) and other long term creditors and provisions of £3.9 million (June 30, 2003: £nil).

At the year end Eidos had cash balances of £37.4 million (June 30, 2003: £58.2 million) and no gross debt (June 30, 2003: nil). There was a cash outflow before the management of liquid resources and financing of £18.4 million during the year (30 June 2003: 0.8 million). Operating activities generated a cash inflow of £8.2 million (June 30, 2003: cash outflow of £4.7 million), reflecting the operating loss offset by a decrease in working capital during the year.

As discussed above the Group has committed facilities of £16.8 million, £15 million maturing September 2005 and £0.5 million on 31 December 2004. The £1.3 million Danish Krone facility has no maturity date. The facilities bear interest at rates based on inter-bank interest rates. The purpose of the facilities is to meet short and long term requirements. Historically the Group’s borrowing requirements have arisen from a seasonal working capital cycle. The intensity of the cycle can be affected by a number of factors, however it is primarily the Groups release schedule and resulting performance of the titles in the market place (see also ‘Risk Factors’).

The Group also provides working capital to its overseas subsidiaries in their functional currencies and hedges its exposure in accordance with the Group’s Treasury policy. The Group’s objective in managing the currency exposures is to minimise gains and losses arising. To this end the Group may use financial instruments (forward contracts, swaps, options) to manage currency exposures that arise on both funding and trading balances denominated in foreign currencies. Changes in the fair values of instruments used to hedge foreign currency monetary assets and liabilities are recognized in the hedged periods.

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Research and Development, Patents and Licenses

During the 15 month period ended June 30, 2002, and the years ended June 30, 2003 and June 30, 2004, the Group has invested an aggregate of just over £120 million (including employment costs) on research and development (£48 million, £33 million and £39 million in each period respectively). The investment relates to video compression, processing and storage technology and developing entertainment software. Such investments were made mainly in the U.K. and the U.S.A. and consisted mainly of salaries and related employment costs incurred in the development of its technology and games. See “Item 5 – Operating and Financial Review and Prospects”.

Trend information

The following trends could have a material impact on the Group’s net revenues, profitability, and liquidity and capital resources.

a) The market for video games follows a cycle that is defined by the introduction of new hardware platform that replace older and less sophisticated technology. The market for video games is widely believed to be in the mature upswing of its current cycle as all of the next generation consoles have now been established. It may be the case that this cycle will enter its down swing in the next two to three years as the major manufacturers of videogame platforms announce and introduce their next generation of hardware.

b) The Group may invest in its core business of developing and publishing computer and video games through either or both of organic growth and acquisition.

Safe Harbor Statement

The statements contained herein, which are not historical facts, are considered forward-looking statements under federal securities laws. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to them. The Company has no obligation to update such forward-looking statements. Actual results may vary significantly from these forward-looking statements based on a variety of factors. Your particular attention is drawn to the “Cautionary Statement with Respect to Forward Looking Statements” on the cover page.

Off-Balance Sheet Arrangements

The Group had no material off-balance sheet arrangements at June 30, 2004.

Tabular disclosure of contractual obligations

Contractual obligation as at June 30, 2004                 Payment Due by period              

   
 
      Total     <1 year     1-3 years     3-5 years     >5 years  
     
   
   
   
   
 
      £’000     £’000     £’000     £’000     £’000  
Capital (Finance) Lease obligations     756     345     411          
Operating Lease obligations     12,026     3,652     5,131     1,963     1,280  
Payments to developers     5,334     5,334              
     
   
   
   
   
 
Total     18,116     9,331     5,542     1,963     1,280  
     
   
   
   
   
 

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ITEM 6 – DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and senior management

The business address of the directors and executive officers of the Group is c/o Eidos plc, Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London SW19 3RU.

Name   Position/Role  

 
 
Directors – Executive      
Stuart Cruickshank   Chief Financial Officer  
Jeremy Heath-Smith   Development Director (resigned July 14, 2003)  
Jonathan Kemp   European Managing Director (appointed December 1, 2003)  
Ian Livingstone   Creative Director  
Michael McGarvey(3)   Chief Executive Officer  
Simon Protheroe   Technical Director (resigned October 28, 2003)  
       
Directors – Non-Executive      
David Adams(1) (2) (3)   Non-Executive Director  
John van Kuffeler(2) (3)   Non Executive Chairman  
Victor Steel(1) (2) (3)   Non-Executive Director  
Allen Thomas(1) (2) (3)   Non-Executive Director  
       
Other Executive Officers /Key Employees      
Michael Arnaouti   Company Secretary and Corporate Services Director  
Robert Dyer   President of Eidos, Inc. (resigned September 10, 2004)  
David Rose   European Development Director  
John Spinale   Senior VP North American Development  

(1)  Member of the Audit Committee 
(2)  Member of the Remuneration Committee 
(3)  Member of the Nomination Committee 

Stuart Cruickshank

Mr. Cruickshank was appointed to the Board as Chief Financial Officer in September 2001 from Kingfisher plc where he had been the Finance Director of Woolworths. Prior to joining Kingfisher he was Corporate Finance Director at United Biscuits and Finance Director at McVities UK and KP Foods. Mr. Cruickshank has also worked at Grand Metropolitan (Diageo) and Whitbread, where he undertook a wide variety of financial roles.

Jeremy Heath-Smith

Mr. Heath-Smith served as Worldwide Head of Development from January 2000 and as a director of the Company from April 1996 to July 2003. From November 1994 to April 1996, Mr. Heath-Smith served as a main Board Director of CentreGold plc in addition to his role as Managing Director of U.S. Gold Limited. In July 1988, he founded Core Design Limited, an interactive software developer and publisher that was acquired by CentreGold plc in 1994. Mr. Heath-Smith resigned as a director on July 14, 2003.

Jonathan Kemp

Promoted to the Board on December 1, 2003, Mr. Kemp has served as European Managing Director since November 2000. Prior to that he served as Managing Director of Eidos Interactive Limited from November 1998 and as its Sales Director from October 1997 to November 1998. Before joining Eidos Mr. Kemp was Sales Director of Microprose Software Limited.

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Ian Livingstone

A member of the Board since October 1995, Mr. Livingstone was appointed Creative Director in April 2002 when he stepped down as Executive Chairman, a position he had held since 1995. From May 1994 to October 1995 Mr. Livingstone was Managing Director of Domark Group Limited. Since 1982, Mr. Livingstone has authored and co-authored the ‘Fighting Fantasy’ series of interactive game books which have sold in excess of 14 million copies worldwide. In 1975, he co-founded Games Workshop Limited, a role-playing games company, where he served as Joint Managing Director and subsequently as Chairman until 1991.

Michael McGarvey

Promoted to the Board in October 1997 and appointed Chief Executive Officer in November 2000, Mr. McGarvey previously served as Chief Operating Officer from 1997. Prior to that Mr. McGarvey had been Chief Executive Officer of Eidos Interactive Inc, Vice President, Sales and Marketing of Domark Software Inc and Director of Sales for Diceon Electronics Inc.

Simon Protheroe

Mr. Protheroe served as Technical Director of the Company and as a director from June 1994 to October 2003. From July 1993 to December 1993, Mr. Protheroe served as a consultant to the Group. He has conducted post-graduate studies and subsequent research in the field of image processing and he has published works in the fields of image sequence analysis, machine vision and neural networks. He has developed software for the Joint European Torus and the Defence Research Agency. He resigned from the Board on October 28, 2003.

David Adams

Mr. Adams joined the Board in May 2001 as a non-executive Director and was appointed Senior Independent Director in March 2003. He is currently Deputy Chief Executive and Finance Director of House of Fraser Plc. Mr. Adams was previously Finance Director of Asprey Plc, Texas Homecare, Dorothy Perkins and Topshop.

John van Kuffeler

Mr. van Kuffeler joined the Board as non-executive Chairman in April 2002 and is also Chairman of Provident Financial plc and Huveaux PLC and a director of The Medical Defence Union. Prior to taking up these appointments he was Chief Executive of Provident Financial plc and Brown Shipley Holdings plc.

Victor Steel

Mr. Steel has served as a non-executive Director since September 1998. He is also Chairman of Forbidden Technologies plc, Mygard plc and Ideas Hub plc, and non-executive Deputy Chairman of Navy Army and Air Force Institutes. Mr. Steel’s previous appointments were as Chairman of Mansfield Brewery plc and European Leisure plc and as Executive Director of Kingfisher plc, Guinness plc and Beecham Group plc.

Allen Thomas

Mr. Thomas joined the Board in September 1998 as a non-executive Director and is a lawyer qualified in England and the US. He currently also serves as a non-executive Director of Highway Insurance Holdings Plc and Penna Consulting Plc. From 1973 to 1992 Mr. Thomas served as a partner of the international law firm Paul, Weiss, Rifkind, Wharton & Garrison, and was the founding partner of the firm’s Hong Kong office.

Robert Dyer

Mr. Dyer has served as President of Eidos Interactive, Inc., a wholly owned subsidiary of the Company, since November 1998. From February 1994 to October 1998, Mr. Dyer worked at Crystal Dynamics, Inc. and in his most recent position, was President. Prior to joining Crystal Dynamics, Mr. Dyer worked for Disney Home Video International as Director of Sales and Business Development from December 1991 through January 1994. Mr. Dyer resigned with effect from September 10, 2004.

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Michael Arnaouti
Mr. Arnaouti was appointed Company Secretary of Eidos plc in June 2002 and Corporate Services Director on July 1, 2004. He joined the Company from from Spirent plc, where he had been Company Secretary for ten years. Prior to that Mr. Arnaouti was Assistant Company Secretary to the Rio Tinto Zinc (Metal Group) Limited. Mr. Arnaouti graduated in Business Studies from the University of Bristol and is a qualified Chartered Secretary.

David Rose
Mr. Rose has held the position of European Development Director since July 2003, prior to this performing the role of External Development Director. He joined Eidos in April 1999 from Sony/Psygnosis, where Mr. Rose held various positions including Studio Manager, Programming Manager and Head Programmer.

John Spinale
Mr. Spinale is the Senior Vice President of North American Development. He was promoted to that position in February 2004, having previously been General Manager of Crystal Dynamics Inc, Eidos’ North American console development house. Prior to joining Eidos in 2002, Mr. Spinale was VP Product Development for MobileSys Inc, a wireless enterprise software and network services company which he joined via their acquisition of Bitmo Inc, which he founded in 1998; he served as Chief Executive Officer. Mr. Spinale began his career in games at Activision Inc in 1993 where he served in a variety of production and management roles, building several major products and participating in the creation of a worldwide development infrastructure. He holds a degree in Engineering from Yale University.

Compensation

The amounts paid to Directors during fiscal 2004 were as follows:

    Salary and    Severance    Taxable    Pension    Total  
Fees Payment Benefits(1)  contributions  
   
 
 
 
 
 
    £’000   £’000   £’000   £’000   £’000  
Executives                      
Mr. Cruickshank   203.3     26.9   24.4   254.6  
Mr. Heath-Smith(2)   62.4   236.0   8.0   7.5   313.9  
Mr. Kemp(3)   113.8     13.4   11.9   139.1  
Mr. Livingstone   240.0     27.6   28.8   296.4  
Mr. McGarvey   366.3     113.5   21.2   501.0  
Mr. Protheroe(4)   28.9     4.8   3.5   37.2  
Non-Executive                      
Mr. Adams   42.0            
Mr. Van Kuffeler   105.0         105.0  
Mr. Steel   42.0         42.0  
Mr. Thomas   42.0         42.0  
   
 
 
 
 
 
Total   1,245.7   236.0   194.2   97.3   1,773.2  
   
 
 
 
 
 

                     
Notes:                      
(1) Taxable benefits include expensed company cars, life, disability and healthcare insurance coverage. Michael McGarvey (the highest paid director), also received the benefit of £62,080 in relation to Company provided housing accommodation during the year. With effect from 23 May 2004, a cash allowance has been paid to him in lieu of this benefit at a current annual rate of £69,484.
   
(2) Jeremy Heath-Smith resigned as a director of Eidos plc and Core Design Limited on July 14, 2003. He remained on paid leave until September 30, 2003 while the Company undertook a development and technology capability review of the Core Design studio. Effective from September 30, 2003, Mr. Heath-Smith left the Company’s employment and received a severance payment of £236,000 (gross) representing the residual value of his 12 month contractual notice entitlement. The payment was made under a Compromise and Settlement Agreement, which, inter alia, reaffirmed the continuing nature of various post-termination restrictive covenants owed by him to the Company. No further payments are due or payable to Mr. Heath-Smith arising from either his former offices or the cessation of his employment with the Company.
   
(3)
Jonathan Kemp was appointed to the Board on December 1, 2003.
   
(4) Simon Protheroe resigned from the Board on October 28, 2003.

 

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Annual Incentive Bonus Plan

A revised bonus scheme was introduced for the fiscal year ended June 30, 2004, which was designed to reward executive directors and other senior executives for the achievement of annual objectives. The new plan is targeted at rewarding the achievement of challenging financial goals (below which no bonus is earned) as determined by the Remuneration Committee at the beginning of each financial year with reference to the Company’s business plans and market expectations. A small proportion of the bonus opportunity (typically 15%) may be earned for achieving stretching personal performance objectives providing corporate objectives are met. The maximum bonus opportunity for executive directors is 100% of salary for full achievement of all performance targets. No bonus entitlements were earned in respect of the year under review (2003: £118,000).

Employment Contracts of Currently Serving Directors and Executive Officers

Mr. Cruickshank and the Company are parties to a Service Agreement pursuant to which Mr. Cruickshank serves as Chief Financial Officer. Mr Cruickshank’s salary is reviewable annually. As of July 1, 2004 Mr. Cruickshank’s salary is £213,000 per year. Either party may terminate the agreement with twelve months’ notice. Mr. Cruickshank is also entitled to bonuses as determined by the Board of Directors of the Company. In the year ended June 30, 2004, no bonus was paid.

Mr. Kemp and the Company are parties to a Service Agreement pursuant to which Mr. Kemp serves as European Managing Director. Mr. Kemp’s salary is reviewable annually. As of July 1, 2004 his salary is £204,800 per year. In order to terminate the agreement, twelve months’ notice is required from the Company and six months from Mr. Kemp. Mr. Kemp is also entitled to bonuses as determined by the Board of Directors of the Company. In the year ended June 30, 2004, no bonus was paid.

Mr. Livingstone and the Company are parties to a Service Agreement pursuant to which Mr. Livingstone serves as Creative Director. As of July 1, 2004 Mr. Livingstone’s salary is £240,000 per year. His salary is reviewable annually. Either party may terminate the agreement with six months’ notice. Mr. Livingstone does not participate in a bonus programme.

Mr. McGarvey and the Company are parties to a Service Agreement pursuant to which Mr. McGarvey serves as Chief Executive Officer. Mr. McGarvey’s salary is reviewable annually. As of July 1, 2004 his salary is £366,300 per year. Either party may terminate the agreement with twelve months’ notice. Mr. McGarvey is also entitled to bonuses as determined by the Board of Directors of the Company. In the year ended June 30, 2004, no bonus was paid.

Mr. Arnaouti and the Company are parties to a Service Agreement pursuant to which Mr. Arnaouti serves as Company Secretary and Corporate Services Director. Mr. Arnaouti’s salary is reviewable annually. As of July 1, 2004 his salary is £165,000 per year. Either party may terminate the agreement with six months’ notice. Mr. Arnaouti is also entitled to bonuses as determined by the Board of Directors of the Company. In the year ended June 30, 2004, no bonus was paid.

Mr. Rose and the Company are parties to a Service Agreement pursuant to which Mr. Rose serves as European Development Director. Mr. Rose’s salary is reviewable annually. As of July 1, 2004 his salary is £140,000 per year. Either party may terminate the agreement with six months’ notice. Mr. Rose is also entitled to bonuses as determined by the Board of Directors of the Company. In the year ended June 30, 2004, no bonus was paid.

Mr. Spinale and Crystal Dynamics Inc are parties to a Service Agreement pursuant to which Mr. Spinale serves as General Manager. Mr. Spinale’s salary is reviewable annually. As of July 1, 2004 his salary is $240,000 (£133,000) per year. Either party may terminate the agreement with six months’ notice. Mr. Spinale is also entitled to bonuses as determined by the Board of Directors of the Company. In the year ended June 30, 2004, no bonus was paid.

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Board Practices

The Audit Committee

This committee comprises three non-executive directors: Mr. Steel (Chairman); Mr. Thomas; and Mr. Adams. The Company believes that all members of the Audit Committee are ‘‘independent’’ within the meaning of the Sarbanes-Oxley Act of 2002 and the listing rules of the NASDAQ National Market. The Committee meets no less than four times a year with the external auditors together with various representatives of the executive, finance and internal audit functions in attendance. It also meets privately with the external auditors on a regular basis.

Among other responsibilities the Committee: is responsible for the appointment, review and remuneration of the external auditors and has authority to pre-approve their engagement for both audit and permitted non-audit services within an agreed framework; annually assesses the independence and objectivity of the auditors; reviews the annual and interim financial statements, the Group’s accounting policies and procedures and its financial control environment; and reviews the Group’s system of internal controls, including risk management.

The Remuneration Committee

The Remuneration Committee comprises the four non-executive directors: Mr. Thomas (Chairman); Mr. Steel; Mr. van Kuffeler; and Mr. Adams. It meets at least twice a year and otherwise as necessary. It advises the Board on the Company’s remuneration strategy and determines, on behalf of the Board and within its remuneration policy, the individual remuneration package of each of the executive directors and all members of the senior management team. In setting the policy, the Committee considers a number of factors including:

(a) the basic salaries and benefits available to Executive Directors and Officers at comparable international businesses of similar size, particularly those with which the Company competes in the entertainment software industry;

(b) the need to attract, retain and motivate high calibre executives without paying excessively;

(c) the need to maintain an appropriate balance and linkage between fixed and performance related variable remuneration so as to effectively align the interests of the executive with those of shareholders;

(d)  the need to provide remuneration packages based on local country practice; and

(e)  the need to incentivize and reward superior performance both in the short and long-term.

The Committee meets on an ad hoc basis and has also received independent advice from external remuneration consultants.

No director is involved in deciding his own remuneration, whether determined by the Committee, or in the case of non-executives, by the Board. David Adams and Allen Thomas, both Remuneration Committee members, will stand for re-election as directors at the Company’s forthcoming Annual General Meeting.

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Nomination Committee

The Nomination Committee comprises the four non-executive Directors (Mr. van Kuffeler (Chairman), Mr. Thomas, Mr. Steel and Mr. Adams) together with the Chief Executive and meets at least once a year. It is responsible for reviewing the composition and structure of the Board and for making recommendations to the Board for its consideration and approval.

Employees

The average weekly number of persons (including Executive Directors) employed by the Group during the year was:

          Year ended       Three months ended       Year ended June 30,       Year ended June 30,    
March 31, 2002 June 30, 2002 2003 2004
   

 

 

 

 
Corporate     30     30     34     35  
Computer entertainment software     513     509     502     661  
   

 

 

 

 
Total     543     539     536     696  
   

 

 

 

 

Computer entertainment software staff can be further analyzed as follows:

      U.K.     U.S.     Europe     Asia     Total  
Sales and Marketing     49     25     42     9     125  
Research and development     127     187         9     323  
Administration     12     31     15     7     65  
   

 

 

 

 

 
Total     188     243     57     25     513  
   

 

 

 

 

 
                                 
      U.K.     U.S.     Europe     Asia     Total  
Sales and Marketing     48     24     42     9     123  
Research and development     126     178     1     9     314  
Administration     12     37     15     8     72  
   

 

 

 

 

 
Total     186     239     58     26     509  
   

 

 

 

 

 

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Year ended June 30, 2003
   

 
        U.K.     U.S.     Europe     Rest of     Total  
      World  
Sales and Marketing     44     21     41     10     116  
Research and development     137     169     1     8     315  
Administration     12     37     15     7     71  
   

 

 

 

 

 
Total     193     227     57     25     502  
   

 

 

 

 

 
                                 
      Year ended June 30, 2004  
   

 
      U.K.     U.S.     Europe     Rest of World     Total  
Sales and Marketing     39     29     41     7     116  
Research and development     134     206     124     5     469  
Administration     10     35     26     5     76  
   

 

 

 

 

 
Total     183     270     191     17     661  
   

 

 

 

 

 

Relationship between management and unions

There are no relationships between labor unions and any company within the Group.

Temporary employees

Within the Group, during fiscal 2004 there were on average 26 non-permanent employees every quarter.

Share ownership

Interest in Shares

The interests of the current Directors and Executive Officers in the shares of the company as at September 15, 2004 were as follows.

      Number of
shares as at
September 15, 2004
    % Ownership  
   

 

 
I Livingstone     2,942,612     2.07 %
M McGarvey     64,913     0.05 %
J Kemp     20,087     0.01 %
S Cruickshank     9,074     0.01 %
J van Kuffeler     10,000     0.01 %
Remaining Directors and Executive Officers     9,434     0.00 %
   

 

 
Total of Directors and Executive Officers     3,056,120     2.15 %
   

 

 

In total, this shareholding represents 2.15% of the issued share capital of the Company.

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Interests in Share Options

As of September 15, 2004, options for Ordinary Shares had been granted to the following Directors and Executive Officers of the Company pursuant to the Group’s share option schemes:

Name     Options
Outstanding
    Option Exercise Period/Vesting Date     Exercise Price per
Ordinary Share
 

 

 

 

 
Approved Schemes                    
M Arnaouti     25,210     09/19/05 to 09/19/12     119.00 p
S Cruickshank     11,764     09/05/04 to 09/05/11     255.00 p
J Kemp     9,110     05/29/02 to 05/28/09     329.21 p
I Livingstone     21,050     04/03/99 to 04/01/06     142.48 p
D Rose     10,045     04/11/03 to 04/10/10     298.63 p
                     
Unapproved Schemes                    
M Arnaouti     49,790     09/19/05 to 09/19/09     119.00 p
      75,000     10/17/06 to 10/17/10     149.00 p
      56,165     12/12/06 to 12/12/13     133.00 p
                     
S Cruickshank     88,236     09/05/04 to 09/05/08     255.00 p
      100,000     09/11/06 to 09/11/10     145.00 p
      93,000     12/12/06 to 12/12/13     133.00 p
J Kemp     129,855     05/29/02 to 05/28/06     329.21 p
      44,469     04/11/03 to 04/10/07     298.63 p
      75,000     07/25/04 to 07/25/08     254.00 p
      65,000     10/17/06 to 10/17/10     149.00 p
      117,430     12/12/06 to 12/12/13     133.00 p
I Livingstone     166,666     04/28/06 to 04/28/10     144.00 p
M McGarvey     1,111,725     10/14/01 to 10/13/05     105.24 p
      139,543     10/16/00 to 10/14/04     154.26 p
      366,300     12/12/06 to 12/12/13     133.00 p
D Rose     17,747     04/11/03 to 04/10/07     298.63 p
      40,000     07/25/04 to 07/25/08     254.00 p
      40,000     09/19/05 to 09/19/09     119.00 p
      75,000     10/17/06 to 10/17/10     149.00 p
      31,900     12/12/06 to 12/12/13     133.00 p
                     
U.S. Stock Option Schemes                    
J Spinale     20,000     11/18/05 to 11/18/09     204.00 c
      20,000     04/15/06 to 05/15/10     223.00 c
      75,000     10/17/06 to 10/17/10     149.00 p
      30,850     12/12/06 to 12/12/13     133.00 p

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Restricted Stock Awards                    
J Kemp     37,500     09/20/05      
      10,000     10/17/06      
M McGarvey     145,000     09/20/05      
Performance Share Plan                    
S Cruickshank     81,300     12/12/06      
J Kemp     67,800     12/12/06      
M McGarvey     244,200     12/12/06      
   

             
Total     3,691,655              
   

             

 

      Number     Maturity Date       Exercise Price
   

 

 

 
Sharesave Scheme                    
M Arnaouti     9,742     05/01/06     97.00 p
S Cruickshank     9,742     05/01/06     97.00 p
J Kemp     9,742     05/01/06     97.00 p
M McGarvey     8,750     11/01/06     108.00 p
D Rose     7,306     12/01/07     129.00 p
   

             
Total     45,282              
   

             
All directors and executive officers as a group     3,736,937              
   

             

All Employee Option Plans

The Company operates an Inland Revenue approved SAYE Share Scheme (“Sharesave Scheme”) for all U.K. employees under which options may be granted with an exercise price discounted by up to 20% of the market price of an Eidos share at the date of grant. Similar schemes are operated in France, Germany and Japan. In the US, the Company operates an equivalent Employee Stock Purchase Plan under which employees may apply to purchase shares at a 15% discount to market price. These schemes are detailed in Item 8, Note 21.

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ITEM 7 – MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

As at December 10, 2004, the Company had been notified of the following interests in 3 per cent or more of its issued share capital.

Shareholder No. of shares held   % of shares in issue  
Schroder Investment Management Limited 31,204,165   21.97  
Goldman Sachs Inc 15,556,280   10.95  
Taube Hodson Stonex Partners Limited 11,679,524   8.22  
Legal & General Investment Management Limited 5,149,347   3.63  
T. Rowe Price Associates Inc 4,500,000   3.17  
USB Global Asset Management (UK) Limited 4,466,607   3.15  

None of foregoing major shareholders have voting rights different from those of the other shareholders of the Company. As far as the Group is aware it is not directly or indirectly owned or controlled by another corporation(s) or by any foreign government nor are there any arrangements, which may at a subsequent date result in a change of control of the Group.

At December 10, 2004 there were 5,931 holders of record of Ordinary shares and 5 of such holders were resident in the United States representing 0.001% of the issued Ordinary shares. In addition, at December 10, 2004 there were 119 holders of record of the Company’s American Depositary Shares (including 2 for DTC).

Related party transactions

In relation to material transactions, the Group has not identified any parties who are able to negotiate more favorable terms than would have been available to any other independent party on an arm’s length basis.

Year ended June 30, 2004

(a) During the year the Group paid £2.5 million (year ended June 30, 2003: £3.3 million) to its associated undertakings as royalties and advances on games being developed for the Group.

(b) In July 1999, Eidos acquired a 75% stake in Proein SL, which is accounted for as a joint venture. In the year to June 30, 2004 Eidos sold games to Proein SL totalling £2.6 million (year ended June 30, 2003: £1.6 million). In addition, in the same period Eidos paid £3.3 million (year ended June 30, 2003: £3.1 million) to Pyro Studios SL (in which Eidos owns a 26.7% stake) as royalties and advances for the development of games for Eidos. At June 30, 2004, Eidos was owed £47,000 (2003: £238,000) by Proein SL, and was owed £76,000 by Pyro Studios SL (2003: £283,000).

(c) The Group has taken advantage of the exemption in Financial Reporting Standard No. 8 in respect of subsidiaries, which are consolidated in these accounts.

Year ended June 30, 2003

(a) During the year the Group paid £3.3 million to its associated companies as royalties and for development of games for the Group.

(b) In July 1999 the Group acquired a 75% stake in Proein SL. In the year ended June 30, 2003 the Group sold games to Proein SL for a total of £1.6 million after provisions. These games were all sold on an arm’s length basis. In addition in the same period the Group paid £3.1 million to Pyro Studios SL (in which the Group acquired a 25% stake) as royalties and for the development of games for the Group.

At June 30, 2003 the Group was owed £238,000 by Proein SL (via a third party distributor) and owed Pyro Studios SL £283,000.

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(c) In June 2001 Eidos took its stake in Ion Storm to 89%. In the year ended June 30, 2003 the Group paid £5.4 million to Ion Storm for the development of games for the Group. At June 30, 2003 Ion Storm owed Eidos £3,831,000

(d) During the year, Eidos wrote off a £4,589 royalty owed to one of its Directors, Ian Livingstone, for royalties owed in connection with a game to which he owned the rights, Deathtrap Dungeon. In addition, rights have been granted to a Korean company to develop a game based on his other works, for which the Korean company will pay Ian Livingstone a royalty. Eidos is helping to produce this game and will have European and US publishing rights to it, however, there is no royalty agreement in connection with this game between Eidos and Ian Livingstone.

Three months ended June 30, 2002

(a) During the quarter the Group paid £1.3 million to its associated companies as royalties and for development of games for the Group.

(b) In July 1999 the Group acquired a 75% stake in Proein SL. In the Three months ended June 30, 2002 the Group sold games to Proein SL for a total of £179,000. These games were all sold on an arm’s length basis. In addition in the same period the Group paid £0.5 million to Pyro Studios SL (in which the Group acquired a 25% stake) as royalties and for the development of games for the Group.

At June 30, 2002 the Group was owed £24,000 by Proein SL (via a third party distributor) and was owed by Pyro Studios SL £112,000.

(c) In June 2001 Eidos took its stake in Ion Storm to 89%. In the Three months ended June 30, 2002 the Group paid £1.4 million to Ion Storm for the development of games for the Group. At June 30, 2002 Ion Storm owed Eidos £4.6 million.

Year ended March 31, 2002

(a) During the year the Group paid £6.1 million to its associated companies as royalties and for development of games for the Group.

(b) In July 1999 the Group acquired a 75% stake in Proein SL. In the year ended March 31, 2002 the Group sold games to Proein SL for a total of £1.1 million after provisions. These games were all sold on an arm’s length basis. In addition in the same period the Group paid £3.7 million to Pyro Studios SL (in which the Group acquired a 25% stake) as royalties and for the development of games for the Group.

At March 31, 2002 the Group was owed £105,000 by Proein SL (via a third party distributor) and owed Pyro Studios SL £51,000.

(c) In June 2001 Eidos took its stake in Ion Storm to 89%. In the year ended March 31, 2002 the Group paid £6.1 million to Ion Storm for the development of games for the Group. At March 31, 2002 Ion Storm owed Eidos £4.0 million.

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ITEM 8 – FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information.

EIDOS PLC AND SUBSIDIARIES

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The following statement, which should be read in conjunction with the report of the Independent Auditors set out on the next page, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditors in relation to the consolidated financial statements.

Company law in the U.K. requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to

select suitable accounting policies and then apply them consistently; 
   
make judgements and estimates that are reasonable and prudent; 
   
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and 
   
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and Group will continue in business. 

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Eidos plc

We have audited the accompanying consolidated balance sheets of Eidos plc and subsidiaries as of June 30, 2004 and 2003 and the related consolidated statements of operations, statements of total recognized gains and losses, and changes in shareholders’ equity and cash flows for the years ended June 30, 2004 and 2003, the three month period ended June 30, 2002, and the year ended March 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United Kingdom and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eidos plc and subsidiaries as of June 30, 2004 and 2003 and the results of their operations and their cash flows for the years ended June 30, 2004 and 2003, the three month period ended June 30, 2002, and the year ended March 31, 2002, in conformity with generally accepted accounting principles in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 32 to the consolidated financial statements.

KPMG Audit Plc

London, England
September 15, 2004

 

Chartered Accountants and Registered Auditor

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EIDOS PLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

          Notes   June 30,   June 30,  
  2003 2004
  Restated, note 2  
 
 
 
 
     
£’000
 
£’000
 
Fixed assets            
Goodwill 11   252   25,258  
Tangible assets 12   4,681   6,167  
Joint ventures            
     Share of gross assets     5,302   5,851  
     Share of gross liabilities     (2,557 ) (1,646 )
     
 
 
      2,745   4,205  
Interest in associated undertaking 13   1    
     
 
 
Total investments     2,746   4,205  
     
 
 
Total fixed assets     7,679   35,630  
     
 
 
Current assets            
Stocks 14   2,772   3,457  
Debtors, net of provision for doubtful accounts 15   39,122   16,162  
Cash at bank and in hand     58,242   37,404  
     
 
 
      100,136   57,023  
Creditors: amounts falling due within one year 16   (32,204 ) (16,775 )
Net current assets     67,932   40,248  
     
 
 
Total assets less current liabilities     75,611   75,878  
Creditors: amounts falling due after more than one year 17   (33 ) (411 )
Provisions for liabilities and charges 18     (3,531 )
     
 
 
Net assets     75,578   71,936  
     
 
 
             
Capital and reserves            
Called up share capital 20   2,799   2,840  
Share premium account 22   138,315   78,594  
Other reserves 22   707   690  
Profit and loss account 22   (65,967 ) (9,604 )
Reserve for own shares     (276 ) (2,564 )
     
 
 
Equity shareholders’ funds 22   75,578   71,936  
     
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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EIDOS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

      Year ended
March 31,
  Three months
ended June 30,
  Year ended
June 30,
  Year ended
June 30,
 
   
Notes
  2002   2002   2003   2004  
 
 
 
 
 
 
      £’000   £’000   £’000   £’000  
Turnover: Group (including share of joint ventures)     130,939   11,264   169,048   150,057  
Less: share of turnover of joint ventures     (10,659 ) (2,967 ) (17,514 ) (16,140 )
     
 
 
 
 
Turnover 3   120,280   8,657   151,534   133,917  
Cost of sales     (48,680 ) (5,144 ) (62,099 ) (49,877 )
     
 
 
 
 
Gross profit     71,600   3,513   89,435   84,040  
Selling and marketing     (20,554 ) (5,308 ) (25,747 ) (26,703 )
Research and development     (39,386 ) (9,179 ) (32,579 ) (39,190 )
Goodwill amortization     (6,906 ) (71 ) (264 ) (1,567 )
Other administrative expenses     (20,292 ) (4,580 ) (20,173 ) (22,208 )
     
 
 
 
 
Total administrative expenses     (27,198 ) (4,651 ) (20,437 ) (23,775 )
     
 
 
 
 
Group operating income/(loss)     (15,538 ) (15,625 ) 10,672   (5,628 )
Share of operating profit of joint ventures     1,446   394   2,950   2,068  
Joint venture goodwill amortization     (5,192 ) (1,415 ) (471 )  
     
 
 
 
 
Profit / (loss) from operations     (19,284 ) (16,646 ) 13,151   (3,560 )
Exceptional income on sale of investments or termination of operations 8   4,377     1,400    
Income from investments     152        
Net interest income 6   584   160   2,803   1,609  
     
 
 
 
 
Income/(loss) before tax 7   (14,171 ) (16,486 ) 17,354   (1,951 )
Income tax (expense) /benefit 9     (56 ) 1,851   (962)  
     
 
 
 
 
Net income/(loss)     (14,171 ) (16,542 ) 19,205   (2,913 )
     
 
 
 
 
Basic earnings/(loss) per share 10   (10.7 )p (11.8 )p 13.8 p (2.1 )p
Diluted earnings/(loss) per share 10   (10.7 )p (11.8 )p 13.7 p (2.1 )p

The accompanying notes are an integral part of these consolidated financial statements.

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EIDOS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES

  Year ended   Three months   Year ended   Year ended  
    March, 31   ended June 30,   June 30,   June 30,  
    2002   2002   2003   2004  
   
 
 
 
 
    £’000   £’000   £’000   £’000  
Net income/(loss) for the period                  
   Group   (15,220 ) (16,749 ) 17,186   (4,437 )
   Joint Ventures   1,049   207   2,019   1,524  
   
 
 
 
 
    (14,171 ) (16,542 ) 19,205   (2,913 )
   
 
 
 
 
Currency translation differences on foreign currency net investments                  
   Group   (234 ) (583 ) (635 ) (1,349 )
   Joint Ventures   (12 ) 209   406   (126 )
   
 
 
 
 
    (246 ) (374 ) (229 ) (1,475 )
   
 
 
 
 
Total recognized gains/(losses) relating to the period   (14,417 ) (16,916 ) 18,976   (4,388 )
   
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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EIDOS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY:

                      Own Shares          
          Additional paid   Other   Merger   Restated   Profit      
  Shares (#)   Amount   up capital   Reserves   Reserve   (note 2)   and loss account   Total  
 
 
 
 
 
 
 
 
 
                                 
      £’000   £’000   £’000   £’000   £’000   £’000   £’000  
Balances as of March 31, 2001 103,931,470   2,079   85,822   707       (57,991 ) 30,617  
Loss for the year             (14,171 ) (14,171 )
Exchange differences             (246 ) (246 )
Goodwill relating to the disposal of associated and
    other investments
            1,005   1,005  
Provision for impairment in carrying value of goodwill in
    associated companies
            3,299   3,299  
Premium on issue of new shares 35,721,045   714   52,166           52,880  
 
 
 
 
 
 
 
 
 
Balances as of March 31, 2002 139,652,515   2,793   137,988   707       (68,104 ) 73,384  
Loss for the year             (16,542 ) (16,542 )
Exchange differences             (374 ) (374 )
Premium on issue of new shares 100,840   2   119           121  
 
 
 
 
 
 
 
 
 
Balances as of June 30, 2002 139,753,355   2,795   138,107   707       (85,020 ) 56,589  
Profit for the year             19,205   19,205  
Exchange differences             (229 ) (229 )
Premium on issue of new shares 208,168   4   208           212  
 
 
 
 
 
 
 
 
 
Balances as of June 30, 2003 139,961,523   2,799   138,315   707       (66,044 ) 75,777  
Adjustment (note 2)           (276 ) 77   (199 )
 
 
 
 
 
 
 
 
 
Balance as of June 30 2003 (restated, note 2) 139,961,523   2,799   138,315   707     (276 ) (65,967 ) 75,578  
Loss for the year             (2,913 ) (2,913 )
Exchange difference arising on consolidation             (1,475 ) (1,475 )
Reserve movement     (60,000 )       60,000    
Issuance of new shares in connection with the
    acquisition of IO Interactive
1,511,509   30       1,980       2,010  
Exercise of warrants, options and rights under
    US stock purchase plan
529,439   11   279   (17 )       273  
Goodwill previously written off to reserves, transferred
    to the profit and loss account
            488   488  
Purchase of own shares           (2,485 )   (2,485 )
Awards of own shares under US stock purchase plan           197     197  
Cost of employee share options             263   263  
 
 
 
 
 
 
 
 
 
Balances as of June 30, 2004 142,002,471   2,840   78,594   690   1,980   (2,564 ) (9,604 ) 71,936  
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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     EIDOS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOW

 
Notes
 
Year ended
 
Three months
 
Year ended
 
Year ended
 
March 31,
ended June
June 30,
June 30,
2002
30, 2002
2003
2004


 
 
 
£’000
 
£’000
 
£’000
 
£’000
Net cash inflow/(outflow) from operating activities 24   (15,448 ) (3,116 ) (4,674 ) 8,187  
     
 
 
 
 
Dividends from Joint Ventures and Associates     799     2,195   989  
Returns on investment and servicing of finance                    
Interest received     1,367   1,382   2,151   1,665  
Bank interest paid     (986 ) (83 ) (325 ) (199 )
Interest paid on finance leases     (52 ) (82 ) (28 ) (9 )
Other interest paid           40  
     
 
 
 
 
      329   1,217   1,798   1,497  
     
 
 
 
 
Taxation                    
U.K. taxation (paid) / repaid     (9,147 ) 10,824   283   (4,153 )
Overseas taxation (paid) / repaid     2,829   (60 ) (28 ) (1,090 )
     
 
 
 
 
      (6,318 ) 10,764   255   (5,243 )
     
 
 
 
 
Capital expenditure and financial investment                    
Purchase of tangible fixed assets     (2,294 ) (750 ) (1,756 ) (2,765 )
Sale of tangible fixed assets     10     18   13  
(Purchase) / sale of other investments     11,161        
Proceeds from sale of other investments         1,400    
     
 
 
 
 
      8,877   (750 ) (338 ) (2,752 )
     
 
 
 
 
Acquisitions and disposals                    
Purchase of subsidiary undertaking           (21,622 )
Net cash acquired with subsidiaries     371       75  
Sale of associate           488  
     
 
 
 
 
      371       (21,059 )
     
 
 
 
 
Net cash (outflow)/inflow before financing and management of
     liquid resources
    (11,390 ) 8,115   (764 ) (18,381 )
     
 
 
 
 
Management of liquid resources                    
Increase/(decrease) in term deposits 25   (34,030 ) (4,051 ) 7,785   17,569  
     
 
 
 
 
Financing                    
Issue of new ordinary shares     52,880   121   212   273  
Repayment of principal under finance leases     (223 ) 38   (223 ) (97 )
Purchase of own shares (net proceeds from share    issuances)         (276 ) (2,288 )
     
 
 
 
 
      52,657   159   (287 ) (2,112 )
     
 
 
 
 
Increase/(decrease) in cash in the period 25   7,237   4,223   6,734   (2,924 )
     
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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EIDOS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1  Nature of Business and Organization

The activities of Eidos plc (“Eidos” or the “Company”) and subsidiaries (including Eidos, the “Group”) during the periods presented herein were the developing and publishing of interactive software titles for PC and certain games consoles (under license with the console manufacturer), the design, manufacture and sale of video compression and video editing software, post-production video editing and new media design and consultancy.

Currently the principal markets for the Group’s products, all of which are similar in size based on turnover, are the United States, United Kingdom and Continental Europe. Asia and the Rest of the World make up a small but growing part of the Group revenue. Computer software titles are sold primarily to wholesale and retail distributors.

The computer games industry is characterized by the dominance of “hit titles”; consequently a relatively small number of titles (or franchises) will often make up a significant proportion of turnover and net income. Eidos’ stated policy is to concentrate on quality titles and consequently titles which management believes to be marginal are often terminated or sub-licensed.

2  Summary of Significant Accounting Policies

The financial statements have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in the United Kingdom. A summary of the more important Group accounting policies, which have been applied consistently, is set out below.

These principles differ in certain significant respects from generally accepted accounting principles in the United States (U.S. GAAP). Application of U.S. GAAP would have affected shareholders’ funds and results of operations at June 30, 2003, and at June 30, 2004, and for the year ended March 31, 2002, the three month period ended June 30, 2002 and the years ended June 30, 2003 and June 30, 2004 to the extent summarized in Note 32.

Basis of preparation

The information set out in these accounts does not constitute the company’s statutory accounts for the years ended June 30, 2004 or 2003. Those accounts have been reported on by the company’s auditors; their reports were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The accounts for 2003 and 2004 have been delivered to the registrar of companies.

Changes in presentation of financial statements

During the year the group changed the following accounting policy:

Own shares

Own shares held by the Company’s Employee Benefit Trust were previously classified as fixed asset investments under UITF 13. For the shares that relate to the restricted stock scheme or the performance share plan, as prescribed by UITF 17, the difference between their market value at the date of grant and their exercise price is being charged to the profit and loss account over three years, the performance period of each scheme.

UITF 38 – Accounting for ESOP Trusts, which has been adopted, has superseded UITF 13. The effect of adoption is to show the consideration paid by the Company for investments in its own shares as a deduction in arriving at shareholders’ funds, instead of fixed assets. This has resulted in fixed asset investments of £199,000 being transferred to an own shares reserve. As there is a requirement in UITF 38 to disclose the historic cost of own shares held, a further adjustment of £77,000, being the cumulative UITF 17 charge to date, has been reclassified from the profit and loss reserve to the own shares reserve.

The adjustments made for the adoption of UITF 38 are shown in the consolidated statements of changes in shareholders’ equity.

Basis of consolidation

The consolidated profit and loss account and balance sheet include the financial statements of the Company and its subsidiary undertakings (the “Group”). The results of subsidiaries sold or acquired are included in the consolidated profit and loss account up to, or from, the date control passes. Intra-Group sales and profits are eliminated fully on consolidation. On acquisition of a subsidiary, all of the subsidiary’s assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting their condition at that date. The group recognizes all changes to those assets and liabilities, and the resulting gains and losses that arise after the Group has gained control of the subsidiary.

Associated and joint venture undertakings

Associated undertakings are undertakings in which the Group holds a long-term interest and over which it actually exercises significant influence. Joint ventures are undertakings which are jointly controlled with other entities or individuals. The Group’s share of profits less losses from associated and joint undertakings is included in the consolidated profit and loss account on the equity accounting basis. The holding value of associated undertakings is based upon the Group’s equity in the net assets of such undertakings.

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Goodwill

Goodwill in respect of the acquisition of subsidiaries and associated undertakings represents the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired. Goodwill arising prior to April 1998 has been written off immediately against reserves.

Goodwill arising after April 1998 is capitalized and amortized to nil in the profit and loss account over the estimated useful economic life in accordance with FRS10.

A charge is recognized in the Group’s profit and loss account in respect of any impairment in the value of goodwill. Goodwill written off directly to reserves and not previously charged to the Group’s profit and loss account is included in determining the profit and loss of a subsidiary on disposal. Goodwill previously written off to reserves was not reinstated in the balance sheet when FRS10 was adopted. It has been offset against the merger reserve with the excess being offset against the profit and loss reserve.

Turnover

Turnover, which excludes sales between group companies, represents the invoiced amounts of goods sold, net of provisions for returns, value added tax and trade discounts (excluding co-operative advertising expenses). Revenue from licence agreements is recognized when the right to consideration is obtained in exchange for performance.

Tangible fixed assets

The cost of fixed assets is their purchase cost, together with any incidental costs of acquisition. Provision is made for depreciation on all tangible fixed assets at rates calculated to write off the cost less residual value of each asset over its expected useful life as follows:

Leasehold improvements: over the life of the lease;
Fixtures and fittings: 20% per annum straight line;
Computer equipment: 33% per annum straight line; and
Motor vehicles: 25% per annum straight line.

Research and development

All research and development expenditure is charged to the profit and loss account as incurred. This includes all software development expenditure on individual titles, advance royalties paid under publishing agreements to external developers and advance royalties paid under licensing arrangements.

Investments

Investments held as fixed assets are stated at cost less provision for any impairment in value.

Licence fees

Licence fees payable to celebrities and professional sports organisations for use of their name over a number of years or for a range of products (a franchise), including sub-licence arrangements and fees payable through intermediaries, are charged to the profit and loss account as sales and marketing expenditure on the basis of actual product sales. Management relies on forecasts of sales to determine the relevant amortization rate of the licence fee.

Licence fees are classified as current and non-current assets based on the remaining life of the licence. Management regularly reviews the carrying value of such licences, including comparing actual sales to forecast, and will accelerate the amortization should circumstances require it.

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Taxation

Deferred tax is recognized, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19. Tax charges or credits arising on the retranslation of foreign currency borrowings used to finance or provide a hedge against equity investments in foreign enterprises are taken to the Statement of Total Recognized Gains and Losses together with the exchange differences on the borrowings themselves. A net deferred tax asset is regarded as recoverable and therefore recognized only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Foreign currencies

Assets and liabilities of subsidiaries in foreign currencies are translated into sterling at rates of exchange ruling at the end of the financial period. The results and cash flows of foreign subsidiaries are translated at the average rate of exchange for the period. Gains or losses on exchange arising from the retranslation of the opening net investment in subsidiary companies and from the translation of the results of those companies are taken to reserves and are reported in the statement of total recognized gains and losses. Exchange differences arising from the retranslation of long-term foreign currency borrowings used to finance foreign currency investments are also taken to reserves. Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction or if hedged forward, at the date of exchange under the related foreign currency contract. Monetary assets and liabilities denominated in foreign currencies are translated using the contracted rate or the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account.

Stocks

Stocks are valued at the lower of cost and net realisable value. In general, cost is determined on a weighted average basis and includes transport and handling costs.

Finance and operating leases

Costs in respect of operating leases are charged on a straight line basis over the lease term. Leasing agreements, which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as if the asset has been purchased outright. The assets are included in fixed assets and the capital element of Group leasing commitments is shown as obligations under finance leases. The capital element is applied to reduce the outstanding obligations and the interest element is charged against profit so as to give a constant periodic rate of charge on the remaining balance outstanding at each accounting period. Assets held under finance leases are depreciated over the shorter of the lease terms and the useful lives of equivalent owned assets.

Pensions

The Group operates various defined contribution pension schemes. Contributions are recognized as they are incurred in accordance with the rules of the schemes.

Derivative financial instruments

The Group uses derivative financial instruments to reduce exposure to foreign exchange risk. The Group does not hold or issue derivative financial instruments for speculative purposes. For a forward foreign exchange contract to be treated as a hedge, the instrument must be related to actual foreign currency assets or liabilities or to a probable commitment. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the Group’s operations. Gains and losses arising on these contracts are deferred and recognized in the profit and loss account, or as adjustments to the carrying amount of fixed assets, only when the hedged transaction has itself been reflected in the Group’s accounts. If an instrument ceases to be accounted for as a hedge, for example, because the underlying hedged position is eliminated, the instrument is marked to market and any resulting profit or loss recognized at that time.

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Exceptional items

These are material items arising from events in the past or present ordinary activities of the Group and which due to their size or incidence are disclosed separately in order that the consolidated financial statements give a true and fair view.

Use of estimates

The preparation of the financial statements in conformity with U.K. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Management have reviewed the different estimates and assumptions that they have to make and have identified a number of critical accounting policies. These are the U.K. GAAP policies that are applied to those areas that require the greatest level of judgement and which could have the most material affect on the consolidated financial statements of the Group.

Sales Returns and Allowances and Price Protection Reserves

The majority of the Group’s reported revenue is derived from the sale of pre-packaged entertainment software. Revenue is recorded at the point of sale, net of taxes and provisions for future returns and price protection. In common with other publishers of entertainment software the Group operates a number of territory-specific programmes under which retailers may qualify to return unsold product, subject to certain qualifying conditions. Alternatively the Group may offer price protection programmes in certain markets, though again these are subject to the satisfaction of certain qualifying conditions. Typically the Group maintains a policy of issuing credits under such programmes.

By analysing historical rates of return and price protection in conjunction with a number of key variables including the prevailing market and economic conditions at that time, the Group is able to estimate future expected rates of returns and price protection. The adequacy of the reserves generated by these estimated rates is reviewed regularly in the light of current market and economic conditions, considering in particular up to date patterns of sell-through, anticipated trends in the hardware and software markets, seasonal factors, perceived consumer preferences and general economic conditions.

In the past the Group has not always been able to accurately estimate the adequacy of its reserves and in the year ended March 31, 2001 reported an exceptional charge of £16.9 million in respect of additional returns reserves required. At the time the Group reported that this was caused by the sell through of products released in the previous year being less than anticipated as a result of continuing consumer uncertainty surrounding the release of new video game hardware platforms. Since then all of the new hardware platforms have now been successfully launched and senior management have taken significant steps to impose new procedures and controls on the estimation of the Group’s exposure to future returns and price protection. In addition measures have been put in place to control the flow of new product into the market place as over stocking in retail and distribution channels may also generate significant future exposures for the Group. The senior management of the Group believes that the controls that they have put in place enable it to make a more realistic estimation of the group’s exposure to future returns and price protection. Nevertheless if the Group were to change certain of the key estimates or assumptions that underpin its calculations, then the level of reserves carried at the balance sheet date would be altered as would the reported net loss for the period. Similarly if actual credits issued for returns and price protection are in excess of the level of reserves carried, then future reported revenues might be reduced in the future. Conversely if the level of actual credits is less than the reserve, then this could increase future reported revenues

Taxes

The estimation of the Group’s consolidated tax charge is a complex matter encompassing many different international tax jurisdictions. In calculating the Group charge management has to make certain estimates regarding individual exposures in different countries and assess the recoverability of deferred tax assets. It can often take many years to finalise individual tax charges and to reach agreement on areas of contention with the relevant tax authorities. The Company recognises tax benefits from exposures only when it is probable that those benefits will be retained. There is no guarantee that the level of provision carried in respect of open tax items at any one time, will be sufficient to meet final liabilities as they are agreed and fall due.

In reviewing the recoverability of deferred tax assets in the jurisdictions with a cumulative history of losses the Group has limited the recognition of deferred tax assets to reversing deferred tax liabilities. Estimates of future income are considered only for those jurisdictions with a history of predictable profits. Changes in the estimates used to assess the recoverability of deferred tax assets could affect the level of assets carried in the balance sheet at the period-end and also the level of tax charge in the profit and loss account for the period.

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Goodwill Impairment

The Group capitalizes and amortizes goodwill in respect of the acquisition of certain subsidiaries and associated undertakings in accordance with FRS10: Goodwill and Intangibles. The Group makes certain estimates regarding the useful life of goodwill that take account of a number of factors including the future prospects for the entity concerned and the consequent projections for both net income and net cash-flow. To the extent that these projections no longer justify the carrying value of any remaining goodwill, then the amortization charge will be accelerated to the degree required to reflect the revised estimate of the fair value of the goodwill. The carrying value of investments carried at cost are also reviewed in a similar fashion and to the extent that an investment’s carrying value can be shown to be permanently impaired, then full provision will be made through the profit and loss account.

The estimates used in assessing the carrying value of both goodwill and investments carried at cost rely on assumptions made about the performance and prospects of the entities themselves and also about the markets in which they operate. Where the entities do not have an established track record or where they are operating in new or emerging markets then the inherent uncertainty in forecasting future performance may be compounded.

To the extent that projections no longer substantiate the recorded values of either goodwill or investments carried at cost, then net income may be adversely affected.

Valuation of inventory

The Group carries its inventory of finished goods at the lower of cost and net realisable value. In order to determine what this carrying value should be, management has to estimate the price that they expect to achieve on the future sale of the stock. This process involves reviewing current patterns of demand in the market and projecting these forward. It may also require an assessment of how future demand could be affected by changes in the wholesale price charged by the Group and by other factors that may be beyond the control of the group. In this way management will seek to determine the most realistic price that they believe can be achieved and hence the likelihood that inventories on hand can be sold at or above cost. Should management’s estimates of current or future demand prove to be unrealistic, then the Group may fail to achieve a wholesale price that is sufficient to cover the carrying value of the inventory and hence the charge to the profit and loss account may be greater than expected.

3     Segmental Analysis

The analysis by class of business of the Group’s turnover, income before taxation and assets is set out below.

Turnover by class of business

   
Year ended
 
Three months ended
 
Year ended
 
Year ended
 
March 31, 2002
June 30, 2002
June 30, 2003
June 30, 2004




£’000
£’000
£’000
£’000
Class of business                  
Computer software   120,280   8,657   151,534   133,917  
   
 
 
 
 

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Income/(loss) on ordinary activities before tax

        
Year ended
 
Three months ended
 
Year ended
 
Year ended
 
March 31, 2002
June 30, 2002
June 30, 2003
June 30, 2004




£’000
£’000
£’000
£’000
   
 
 
 
 
Class of business                  
Computer software
 
(14,156 ) (16,486 ) 17,354   (1,951 )
Video editing   (15 )      
   
 
 
 
 
    (14,171 ) (16,486 ) 17,354   (1,951 )
   
 
 
 
 

Net Assets/Net liabilities

                
Year ended
     
Year ended
Three months ended
June 30, 2003
Year ended
March 31, 2002
June 30, 2002
Restated (note 2)
June 30, 2004




£’000
£’000
£’000
£’000
Class of business                  
Computer software   76,179   59,384   75,578   71,936  
Video editing   (2,795 ) (2,795 )    
   
 
 
 
 
    73,384   56,589   75,578   71,936  
   
 
 
 
 

Video editing was provided by Eidos Post Productions Ltd (formerly Glassworks Productions Ltd), an 85% subsidiary, the business and assets of which were sold on December 15, 2000. The remaining net liabilities represent an intercompany balance with the Eidos group.

Turnover by destination

The Group organizes its computer software business by geographical area.

Eidos has offices in the United Kingdom, United States, France, Germany, Spain, Denmark, Australia and Japan. The latter two do not generate significant income in relation to the remainder of the Group and are included within the ‘Rest of World’ segment. The French and German offices sell to other French and German speaking European countries (namely Belgium, Austria and Switzerland).

The turnover is attributable to the Group’s principal activities and arose in the following geographical areas:

        
Year ended
 
Three months ended
 
Year ended
 
Year ended
 
March 31, 2002
June 30, 2002
June 30, 2003
June 30, 2004




£’000
£’000
£’000
£’000
United Kingdom   25,517   3,598   36,323   29,265  
France   12,652   1,204   12,746   17,431  
Germany   16,282   1,109   14,123   13,552  
Rest of Europe   16,951   974   16,788   19,993  
U.S.   40,576   2,602   62,274   42,518  
Rest of World   8,302   (830 ) 9,280   11,158  
   
 
 
 
 
    120,280   8,657   151,534   133,917  
   
 
 
 
 

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Turnover by origination

        
Year ended
 
Three months ended
 
Year ended
 
Year ended
 
March 31, 2002
June 30, 2002
June 30, 2003
June 30, 2004




£’000
£’000
£’000
£’000
United Kingdom   38,525   4,149   51,059   43,641  
France   15,413   1,388   15,733   21,299  
Germany   18,813   1,280   16,017   15,019  
U.S.   43,046   1,126   65,088   48,820  
Rest of World   4,483   714   3,637   5,138  
   
 
 
 
 
    120,280   8,657   151,534   133,917  
   
 
 
 
 

Inter-segment sales (predominantly royalties)

    By origination  
   






 
   
Year ended
 
Three months ended
 
Year ended
 
Year ended
 
March 31, 2002
June 30, 2002
June 30, 2003
June 30, 2004




£’000
£’000
£’000
£’000
United Kingdom   30,596   1,425   42,601   26,343  
France         11,708  
Germany   9     66   11,490  
U.S.   13,380   (1,556 ) 30,522   29,185  
Rest of World   1,070   233   1,027   10,694  
   
 
 
 
 
    45,055   102   74,216   89,420  
   
 
 
 
 

Turnover from the joint ventures originates from Spain and relates to computer software. In addition, turnover in the U.K. includes £2,648,000 (year to June 30, 2003: £1,632,000, three months to June 30, 2002 £180,000, year to March 31, 2002: £1,157,000) to the joint venture in Spain.

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Income/(loss) on ordinary activities before tax

    Year ended March 31,
2002
  Three months ended
June 30, 2002
  Year ended June 30,
2003
  Year ended June 30,
2004
 




£’000 £’000 £’000 £’000
Geographical segment                  
United Kingdom   5,728   (17,321 ) 7,108   (6,223 )
France   1,165   (120 ) 1,540   1,720  
Germany   349   (523 ) (999 ) (1,784 )
Spain (joint ventures)   (3,581 ) (991 ) 2,562   1,975  
Denmark         4,112  
U.S.   (22,335 ) 2,703   6,177   (1,589 )
Rest of World   126   (234 ) (434 ) (162 )
   
 
 
 
 
    (18,548 ) (16,486 ) 15,954   (1,951 )
                   
Profit/(loss) on investments – United Kingdom   4,377     1,400    
   
 
 
 
 
    (14,171 ) (16,486 ) 17,354   (1,951 )
   
 
 
 
 

Net Assets/Liabilities

    June 30,
2002
  June 30, 2003
Restated (note 2)
  June 30,
2004
 



£’000 £’000 £’000
Geographical segment              
United Kingdom   89,965   99,678   80,785  
France   1,724   3,369   4,347  
Germany   (324 ) (1,279 ) 1,601  
Spain (joint ventures)   3,789   2,745   3,919  
Denmark       7,201  
U.S.   (38,980 ) (28,927 ) (25,788 )
Rest of World   415   (8 ) (129 )
   
 
 
 
  56,589   75,578   71,936  
   
 
 
 

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4     Directors’ emoluments

Detailed disclosures of the Directors’ individual remuneration and share options are also given in Item 6.

    Year ended March 31,
2002
  Three months ended
June 30, 2002
  Year ended June 30,
2003
  Year ended June 30,
2004
 
   
 
 
 
 
    £’000   £’000   £’000   £’000  
Directors’ emoluments                  
Salary payments and royalties   1,090   278   1,899   1,015  
Fees   114   44   211   231  
Company pension contributions   98   33   112   97  
Other benefits   262   71   209   194  
Compensation payment         236 (1)
   
 
 
 
 
    1,564   426   2,431   1,773  
   
 
 
 
 

1 Effective from September 30, 2003, Mr Heath-Smith left the Company’s employment and received a severance payment of £236,000 (gross) representing the residual value of his 12 month contractual notice entitlement. The payment was made under a Compromise and Settlement Agreement, which, inter alia, reaffirmed the continuing nature of various post-termination restrictive covenants owed by him to the Company. No further payments are due to Mr Heath-Smith arising from either his former offices or the cessation of his employment with the Company.

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Interests in share options

Details of options held by directors are set out below:

  As at
July 1, 2003 or at
date of
appointment if
later
  Granted
in year
  Lapsed
in year
  As at June 30,
2004
  Option price
(pence)
  Date from which
exercisable
  Expiry date   Note








Mr. Heath-Smith 21,267     (21,267 )    141.04   n/a   n/a    
  8,119     (8,119 )   117.00   n/a   n/a    
  173,611     (173,611 )   144.00   n/a   n/a    
                               
Mr. Kemp 9,110       9,110   329.21   05/29/02   05/28/09   1 
  129,855       129,855   329.21   05/29/02   05/28/09   1 
  44,469       44,469   298.63   04/11/03   04/10/07   1 
  75,000       75,000   254.00   07/25/04   07/25/08   1 
  9,742       9,742   97.00   11/01/05   05/01/06   4 
  65,000       65,000   149.00   10/17/06   10/17/10   2 
    117,430     117,430   133.00   12/12/06   12/12/13   3 
                               
Mr. Livingstone 21,050       21,050   142.48   04/03/99   04/01/06   1 
  166,666       166,666   144.00   04/28/06   04/28/10   1 
                               
Mr. McGarvey 139,543       139,543   154.26   10/16/00   10/14/04   1 
  1,111,725       1,111,725   105.24   10/14/01   10/13/05   1 
  8,750       8,750   108.00   05/01/06   11/01/06   4 
    366,300     366,300   133.00   12/12/06   12/12/13   3 
                               
Mr. Protheroe 55,586       55,586   61.76   07/21/97   07/19/04   1 
  111,172       111,172   62.96   03/11/98   03/09/05   1 
  50,000       50,000   121.00   09/20/05   09/20/09   1 
   37,500        37,500   144.00   04/28/06   04/28/10   1 
                               
Mr. Cruickshank 88,236       88,236   255.00   09/05/04   09/05/08   1 
  11,764       11,764   255.00   09/05/04   09/05/11   1 
  9,742       9,742   97.00   11/01/05   05/01/06   4 
    100,000     100,000   145.00   09/11/06   09/11/10   1 
    93,000     93,000   133.00   12/12/06   12/12/13   3 
 
 
 
 
               
Total 2,310,407   676,730   (202,997 ) 2,784,140                
 
 
 
 
               

None of the non-executive Directors has any options in the Company.

Notes:

Note 1 – Granted under the Eidos plc Share Option Scheme. No pre-vesting performance conditions apply. No further options will be granted under this closed Scheme.

Note 2 – Granted under the Eidos plc Share Option Scheme. Vesting conditional upon an increase of at least 15% over a period of three consecutive financial years in the Company’s Earnings Per Share. No further options will be granted under this closed Scheme.

Note 3 – Granted under the Eidos 2003 Share Option Plan. Pre-vesting performance conditions detailed on page 75.

Note 4 – Granted under the All-Employee UK Savings-Related Share Option Scheme. No pre-vesting performance conditions applicable.

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Details of awards made to executive directors during the year under the Performance Share Plan are as follows:

  July 1, 2003 or at date of appointment   Granted
in the year
  Market value of
shares when
award granted (£)
  Awards
lapsed/vested
during the year
  Interests at
June 30,
2004
  Vesting dates
of outstanding
awards
 


 



 

   Stuart Cruickshank -   81,300   1.33   -   81,300   12/12/06  
   Jonathan Kemp -   67,800   1.33   -   67,800   12/12/06  
   Michael McGarvey -   244,200   1.33   -   244,200   12/12/06  

As previously reported, pending the introduction of the Performance Share Plan and in order to retain and incentivize certain key executives, the Committee made a small number of awards of Restricted Stock as permitted under the UKLA Listing Rules.

Details of outstanding awards made under the Restricted Stock Plan are as follows:

  July 1, 2003 or at date
of appointment
if later
  Granted
in the year
  Market value of
shares when
award granted
(£)
  Awards
lapsed/vested
during the year
  Interests at
June 30,
2004
  Vesting dates of
outstanding
awards
 






   Jonathan Kemp (1) 37,500   -   1.21   -   37,500   09/20/05  
   Jonathan Kemp (2) -   10,000   1.49   -   10,000   10/17/06  
   Michael McGarvey (1) 145,000   -   1.21   -   145,000   09/20/05  
 
Notes:
(1)    No pre-vesting performance conditions apply.
(2)    Vesting conditional upon an increase of at least 15% over a period of three consecutive financial years in the Company’s Earnings Per Share.

As employees, the executive directors are also entitled to participate in the Company’s all-employee UK Savings Related Share Option Scheme under which options may be granted with an exercise price discounted by up to 20% of the market price of an Eidos share at the time of grant. Further details on the Company’s existing share plans are provided in note 21 to the Accounts.

The mid-market price of an Eidos share was 137p on July 1, 2003 and 107p on June 30, 2004 and during that period ranged between a high of 183p and a low of 105p.

All options give the holders the rights to acquire shares on a one for one basis.

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5    Employee Information

The average weekly number of persons (including executive directors) employed by the Group and total costs during the periods indicated below were:

  Year ended
March 31, 2002
  Three months ended June 30, 2002   Year ended
June 30, 2003
  Year ended
June 30, 2004
 
 
 
 
 
 
By activity                
Corporate 30   30   34   35  
Computer entertainment software 513   509   502   661  
 
 
 
 
 
  543   539   536   696  
 
 
 
 
 

Computer entertainment software staff numbers have been further broken down in Item 6.

  Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
 
 
 
 
 
  £’000   £’000   £’000   £’000  
Staff costs                
Wages and salaries 25,840   5,571   25,071   24,734  
Social security costs 2,350   941   2,550   2,617  
Pension costs (see note 29) 788   213   857   831  
 
 
 
 
 
  28,978   6,725   28,478   28,182  
 
 
 
 
 

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6     Net Interest and Similar Charges

  Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
 
 
 
 
 
  £’000   £’000   £’000   £’000  
Interest payable                
Group                
Bank loans and overdrafts (825 ) (236 ) (15 ) (104 )
Finance leases (20 ) (74 ) (28 ) (29 )
Other interest (161 ) (92 ) (186 ) (75 )
 
 
 
 
 
  (1,006 ) (402 ) (229 ) (208 )
Share of joint ventures (36 ) (12 ) (63 ) (47 )
 
 
 
 
 
  (1,042 ) (414 ) (292 ) (255 )
 
 
 
 
 
Interest receivable                
Bank interest and other income 1,485   532   2,949   1,704  
Share of joint ventures 141   42   146   160  
 
 
 
 
 
  1,626   574   3,095   1,864  
 
 
 
 
 
Net interest receivable 584   160   2,803   1,609  
 
 
 
 
 

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7     (Loss)/Profit on Ordinary Activities before Taxation

    Year ended
March 31, 2002
 
Three months ended June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
   
 
 
 
 
    £’000   £’000   £’000   £’000  
This is stated after charging:                
Depreciation charge for the period                
  Owned tangible fixed assets 2,092   523   1,950   2,136  
  Tangible fixed assets held under finance leases 156   36   131   80  
(Profit)/loss on disposal of fixed assets (82 ) (4 ) 34   93  
Amortization of goodwill and other investments                
  Joint ventures goodwill amortization 5,192   1,415   471    
  Other goodwill amortization 6,906   71   264   1,567  
  Other investment amortization     77   263  
Auditors’ remuneration for audit 423   17   400   413  
Other fees paid to the auditors and their associates* 855   333   707   500  
Operating lease charges – plant and machinery 572   132   606   552  
Operating lease charges – other 2,926   667   2,502   2,439  
(Gain)/loss on exchange differences 109   (580 ) (902 ) 835  
 
 
 
 
 

*Other fees paid to the auditors and their associates include tax compliance fees of £148,000, other tax advisor fees of £232,000, other assurance work of £71,000 and other work of £49,000. The fees paid to the auditors of £195,000 in respect of the acquisition of IO Interactive A/S during the year have been included in the consideration paid (see note 23).

The audit fee of the Company was £20,000.

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8     Profit on Investments and Exceptional Items

  Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
 
 
 
 
 
  £’000   £’000   £’000   £’000  
Profit/(loss) on investments                
Profit on disposal of other investments 8,495       488  
Loss on disposal of associates and other investments (750 )      
Transfer of goodwill from reserves             (488 )
Settlement received in relation to Express.com     1,400    
 
 
 
 
 
Profit on disposal of fixed asset investments 7,745     1,400    
Write down of investments                
Provision for impairment in carrying value of                
goodwill (previously written off to reserves) (3,299 )      
Provision against other investments (69 )      
 
 
 
 
 
Write down of investments (3,368 )      
 
 
 
 
 
  4,377     1,400    
 
 
 
 
 

On September 4, 2003, Eidos and Sports Interactive Limited announced an agreement to end their existing relationship for the development of the Company’s highly successful Championship Manager football management series. Eidos agreed to surrender its 25% interest in Sports Interactive for a cash consideration of £488,000, generating no profit/loss following the transfer of attributable goodwill from reserves of £488,000.

During 2003 the Group received a £1.4 million litigation settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to March 31, 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

The effect on the taxation charge for the year of the exceptional items is disclosed in note 9.

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9     Tax Charge/(Credit) on Income/(Loss) on Ordinary Activities

  Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
 
 
 
 
 
  £’000   £’000   £’000   £’000  
Current Tax                
UK Taxation                
U.K. Corporation tax     2,860   413  
Less double tax relief     (1,002 ) (67 )
 
 
 
 
 
      1,858   346  
Adjustment in respect of prior years:                
Exceptional items     (5,595 )  
Operational (773 ) (78 ) (480 ) (2,028 )
 
 
 
 
 
Total Current UK Tax (773 ) (78 ) (4,217 ) (1,682 )
                 
Foreign Taxation                
Current tax on income for the year 344   159   1,283   1,193  
Adjustments in respect of prior years 429   (25 ) (100 ) 251  
 
 
 
 
 
Total Current Tax   56   (3,034 ) (238 )
                 
Of which:                
Remaining Group taxation (502 ) (101 ) (4,063 ) (940 )
Joint ventures’ taxation 502   157   1,029   702  
 
 
 
 
 
    56   (3,034 ) (238 )
Deferred taxation – foreign                
Group     1,218   1,245  
Joint Venture     (35 ) (45 )
 
 
 
 
 
    56   (1,851 ) 962  
 



 
Of which:                
Operational   56   3,744   962  
Exceptional     (5,595 )  
 
 
 
 
 
    56   (1,851 ) 962  
 



 

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Total income tax expense differs from the amounts computed by applying the U.K. statutory income tax rate of 30% (2003: 30%, 2002: 30%) to income/(loss) before taxes, as a result of the following:

    Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
   
 
 
 
 
    £’000   £’000   £’000   £’000  
Profit/(loss) for the period   (14,171 ) (16,486 ) 17,354   (1,951 )
   
 
 
 
 
U.K. statutory rate   (4,251 ) (4,956 ) 5,206   (585 )
Expenses disallowed for tax purposes   4,927   6,472   1,228   613  
Tax effect of bad debt provision against U.S. intercompany balance   (2,443 )      
Timing difference where benefit not recognized for deferred tax purposes   6,069   (924 ) 1,981   2,661  
Difference between overseas and U.K. tax rate   (1,809 ) 633   921   (74 )
Utilization of tax losses   (2,278 ) (379 ) (4,999 ) (1,523 )
Prior year adjustments – operational     (442 ) (580 ) (1,777 )
Exceptional prior year items       (5,595 )  
Double tax relief for overseas income       (1,002 ) (67 )
Unrelieved withholding tax       28   250  
Other   (215 ) (348 ) (222 ) 264  
   
 
 
 
 
Total current tax     56   (3,034 ) (238 )
                   
Release of deferred tax asset       1,260    
Deferred tax in respect of timing differences       (77 ) 1,200  
   
 
 
 
 
Deferred taxation       1,183   1,200  
   
 
 
 
 
Tax (Credit) / Charge on Profit / (Loss) on Ordinary Activities for the Period     56   (1,851 ) 962  
   
 
 
 
 

Timing differences arise in the UK, US and Germany where they mainly relate to current year losses unable to be utilised.

Prior year items relate to the partial release of provisions established in prior years as a result of settlements with tax authorities in respect of transfer pricing matters. The Company continues to maintain tax provisions for potential tax charges in other jurisdictions related to transfer pricing which may arise in future periods. During the current year the Group has made an additional provision for tax charges related to transfer pricing, which may arise in respect of the tax position for the current year. In finalizing the tax provisions the directors have taken account of the ongoing discussions with tax authorities in relation to these items and the likely outcome of those discussions. The provision of £2.7 million at June 30, 2004 (2003: £5.5 million) is the directors’ best estimate of amounts that will ultimately be payable to the respective tax authorities.

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10     Earnings / (Loss) Per Share

The calculations of earnings per share are based on the following information. All numbers (including the comparatives) reflect the five for one share split, which took place on January 25, 2000 and the 1 for 3 Rights Issue, which took place in July 2001.

Weighted average number of shares:

    Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
   
 
 
 
 
    Number of shares   Number of shares   Number of shares   Number of shares  
For basic earnings per share   132,514,410   139,744,013   139,637,852   140,313,421  
Exercise of share options   1,722,349   1,299,565   705,258   945,597  
   
 
 
 
 
For diluted earnings per share   134,236,759   141,043,578   140,343,110   141,259,018  
   
 
 
 
 

No dividends were paid during any of the last three fiscal years.

In accordance with FRS14 – Earnings per share, the diluted loss per share for the year ended June 30, 2004 is equivalent to the basic loss per share as any exercise of share options would have the effect of decreasing the loss per share.

BASIC and DILUTED EPS                  
    Year ended
March 31, 2002
  Three months ended
June 30, 2002
  Year ended
June 30, 2003
  Year ended
June 30, 2004
 
   
 
 
 
 
    £’000   £’000   £’000   £’000  
Net income/(loss) for the year   (14,171 ) (16,542 ) 19,205   (2,913 )




 
Earnings/(loss) (basic and diluted)   (14,171 ) (16,542 ) 19,205   (2,913 )

 
 
 
 
             
    Pence per share   Pence per share   Pence per share   Pence per share  
Earnings/(loss) per share – basic   (10.7 )p (11.8 )p 13.8 p (2.1 )p

 
 
 
 
Earnings/(loss) per share – diluted   (10.7 )p (11.8 )p 13.7 p (2.1 )p
   
 
 
 
 

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11     Intangible Fixed Assets

    £’000  
Goodwill      
Cost      
At July 1, 2003   34,709  
Additions   26,587  
   
 
At June 30, 2004   61,296  
Amortization      
At July 1, 2003   34,457  
Exchange adjustment   14  
Amortization for the period   1,567  
   
 
At June 30, 2004   36,038  
   
 
Net book value      
At June 30, 2004   25,258  
   
 
At June 30, 2003   252  
   
 

The unamortized goodwill at June 30, 2004 relates to IO Interactive A/S (acquired in 2004) and is being amortized over its five year estimated useful economic life.

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12     Tangible Fixed Assets

        Leasehold
improvements
    Fixtures and
fittings
    Computer
equipment
    Total     




£’000 £’000 £’000 £’000
Cost                  
At June 30, 2003   2,999   2,688   8,850   14,537  
Exchange adjustment   (15 ) (118 ) (338 ) (471 )
In respect of new subsidiary   81     1,090   1,171  
Additions   76   160   2,529   2,765  
Disposals   (1 ) (229 ) (869 ) (1,099 )
   
 
 
 
 
At June 30, 2004   3,140   2,501   11,262   16,903  
   
 
 
 
 
Depreciation                  
At June 30, 2003   1,238   2,142   6,476   9,856  
Exchange adjustments   (46 ) (68 ) (229 ) (343 )
Charge for the period   297   192   1,727   2,216  
Disposals   (1 ) (220 ) (772 ) (993 )
   
 
 
 
 
At June 30, 2004   1,488   2,046   7,202   10,736  
   
 
 
 
 
Net book value                  
At June 30, 2004   1,652   455   4,060   6,167  
   
 
 
 
 
At June 30, 2003   1,761   546   2,374   4,681  
   
 
 
 
 

The net book value of tangible fixed assets includes an amount of £732,000 (2003: £37,000) in respect of computer equipment held under finance leases.

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13     Fixed Asset Investments

    Joint
ventures
  Associated
undertakings
  Own shares   Total  




£’000 £’000 £’000 £’000
At June 30, 2003 (as originally reported)   2,745   1   199   2,945  
Prior year adjustment       (199 ) (199 )
   
 
 
 
 
At July 1, 2003 (restated, note 2)   2,745   1     2,746  
Share of retained profits less dividends paid   1,268       1,268  
Addition   269       269  
Disposal     (1 )      
                   
Translation adjustment   (77 )     (77 )
   
 
 
 
 
At June 30, 2004   4,205       4,205  
   
 
 
 
 

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Interests in Group undertakings

The directors consider that to give full particulars of all interests in Group undertakings would lead to a statement of excessive length. The following information relates to those subsidiary undertakings, joint ventures and associated undertakings whose results or financial position, in the opinion of the directors, principally affected the financial statements of the Group:

                Held by other      
Country of   Description of Group Held by the
Subsidiary undertakings incorporation Nature of business shares held companies Company

 
 
 
 
 
 
Eidos Interactive Limited   England and   Developer and   Ordinary £1 shares     100 %
    Wales   Publisher of   each and          
        computer   ‘A’ ordinary          
        software   £0.05 shares each          
Eidos Inc   U.S.A   Developer and   Common stock   100 %  
        Publisher of   $0.001 par value          
        computer              
        software              
Crystal Dynamics Inc.   U.S.A   Developer of   Common stock   100 %    
        computer   no par value          
        software              
Core Design Limited   England and   Developer of   Ordinary £1 shares   100 %  
    Wales   computer              
        software              
Eidos France SARL   France   Publisher of   Ordinary Shares   100 %  
        computer   of 7,623 Euros          
        software              
Eidos (Deutschland) GmbH   Germany   Publisher of   Euros 25,565   100 %  
        computer              
        software              
Eidos KK   Japan   Publisher of   Shares of 50,000 Yen     100 %
        computer              
        software              
Eidos Interactive Pty Limited   Australia   Publisher of   Ordinary share of     100 %
        computer   AUS$1          
        software              
IO Interactive A/S   Denmark   Developer of   ’A’ Ordinary   100 %  
        computer   shares of DKK          
        software   616,580 and ‘B’          
            Ordinary shares          
            of DKK 40,000.          
Ion Storm LLP   U.S.A.   Developer of   Partnership units   89 %  
        computer              
        software              
Joint ventures                      

                     
Proein SL   Spain   Publisher of   5000 Common   75 %  
        computer   shares of          
        software   6 Euros each          
Pyro Studios SL   Spain   Developer of   500 Common   26.7 %  
        computer   shares of          
        software   6 Euros each          

All the above companies operated principally in their country of incorporation

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14      Stocks

  June 30, 2003   June 30, 2004  


£’000 £’000
Raw materials and consumables 552   486  
Finished goods 2,220   2,971  
 
 
 
Stocks 2,722   3,457  
 
 
 

15      Debtors

  June 30, 2003   June 30, 2004  
 
 
 
  £’000   £’000  
Trade debtors, net 32,420   10,183  
Deferred tax asset (note 19) 46    
Other debtors* 4,048   3,143  
Prepayments and accrued income 2,608   2,836  
 
 
 
  39,122   16,162  
 
 
 

* Included within other debtors is £35,000 (June 30, 2003: £50,000), which is recoverable after more than one year.

Provision for bad and doubtful debts

      Provision utilised in   Provision created in      
Opening balance the year the year Closing balance




  £’000   £’000   £’000   £’000  
Year ended June 30, 2003 769   (712 ) 651   708  
Year ended June 30, 2004 708   (1,840 ) 2,912   1,780  

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16      Creditors: Amounts Falling Due Within One Year

  June 30, 2003   June 30, 2004  


£’000 £’000
Obligations under finance leases 16   345  
Trade creditors 9,262   5,832  
Other taxes and social security costs 2,643   3,597  
Other creditors 3,420   548  
Accruals 9,558   4,746  
Corporation tax 7,305   1,707  
 
 
 
  32,204   16,775  
 
 
 

Included within other creditors are royalty creditors of £548,000 (2003: £3,387,000).

17      Creditors: Amounts Falling Due After More Than One Year

   June 30, 2003    June 30, 2004  


£’000 £’000
Accruals and deferred income 26    
Obligations under finance leases:        
     Due between one and two years 2   300  
     Due between two and five years 5   111  
 
 
 
33   411  
 
 
 

18      Provisions for liabilities and charges

  £’000  
As at June 30, 2003  
Provision for deferred consideration 2,068  
Provision for deferred tax (see note 19) 1,463  

 
At June 30, 2004 3,531  
 
 

The provision for deferred consideration relates to the acquisition of IO Interactive A/S (see note 23).

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19 Deferred Taxation
           
    June 30, 2003   June 30, 2004  
   
 
 
    £’000   £’000  
Unrecognized Tax Assets          
Excess of tax allowances over book depreciation of fixed assets   502   852  
Other timing differences   9,141   7,211  
Tax effect of losses carried forward   25,589   29,361  
   
 
 
Unrecognized deferred tax asset   35,232   37,424  
   
 
 
           
    June 30, 2003   June 30, 2004  
   
 
 
    £’000   £’000  
Recognized Tax Assets / Liabilities          
Tax effect of losses carried forward     513  
Other timing differences – foreign   46   (1,976 )
   
 
 
Recognized deferred tax asset / liability   46   (1,463  )
   
 
 
           
Movement in deferred tax asset / (liability)          
At July 1, 2003       46  
Profit and loss charge       (1,245 )
Foreign exchange movements       3  
Acquisition of IO Interactive A/S       (267 )
       
 
 At June 30, 2004       (1,463 )
       
 

The movement in the deferred tax provided has arisen in respect of timing differences acquired in IO Interactive A/S.

Significant brought forward losses remain available within the Group to offset future trading profits. The Group has, however, reviewed the provisions of FRS 19 – Deferred Tax, and believes that no further amounts should currently be recognised in respect of these losses as, in the opinion of the directors, there is insufficient evidence that they will be recoverable.

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20 Called up Share Capital
           
    June 30, 2003   June 30, 2004  
   
 
 
    £’000   £’000  
Authorized          
June 30, 2003: 192,500,000 Ordinary Shares of 2p each

 

3,850

 

 

June 30, 2004: 192,500,000 Ordinary Shares of 2p each

 

 

3,850

 

   
 
 
Issued and fully paid          
June 30, 2003: 139,961,523 Ordinary Shares of 2p each

 

2,799

 

 

June 30, 2004: 142,002,471 Ordinary Shares of 2p each

 

 

2,840

 

   
 
 

During the year, 95,586 new Ordinary shares were allotted following the exercise of share options under the Company’s various share option schemes, 119,368 new Ordinary shares were allotted in respect of the US Stock Purchase Plan, 314,485 new Ordinary shares were allotted in respect of the exercise of warrants and 1,511,509 Ordinary shares were allotted in connection with the acquisition of IO Interactive A/S. The total consideration received on all share allotments was £2,283,000. This comprised cash consideration of £273,000 and non cash consideration of £2,010,000. The non cash consideration related to the acquisition of IO Interactive A/S as detailed in note 23. The total nominal value of shares issued was £41,000.

At the Annual General Meeting held on November 24, 2003, shareholders gave authority for the Company to purchase up to 6,998,076 of its own Ordinary shares in the market subject to certain specified conditions. As at September 15, 2004, no purchases have been made or are contracted to be made pursuant to such authority.

There has been no material increase in the issued share capital, whether by exercise of options, rights, warrants or otherwise, between the financial year end and September 15, 2004, the date on which these Accounts have been signed.

Own Shares

During 2002 the Company established the Eidos plc Employee Benefit Trust (the “Trust”) in order to hold shares purchased in the market for the future satisfaction of awards under the Company’s various long term equity incentive plans. It is anticipated that awards of Restricted Shares and grants under the Performance Share Plan will be satisfied by the transfer of shares from the Trust. Awards made under the Company’s share option schemes will primarily be satisfied by the issue of new shares, but in certain circumstances may be satisfied by the transfer of shares from the Trust. No more than 10% of the Company’s equity may be made available for issue under all employee share plans over a 10 year period.

During the year 1,779,223 Eidos plc shares were purchased by the Trust on the open market for a total consideration of £2,484,000. The number and market value of the Ordinary Shares held by the Trust at June 30, 2004 was 1,833,000 and £1,966,000 respectively (June 30, 2003: 236,500 and £323,000 respectively). The movement in the own shares reserve during the year is shown in the Consolidated Statements of Changes in Shareholders’ Equity.

Movements of shares during the year are as follows:

  Numbers of Ordinary Shares  
 
 
     
Balance at July 1, 2003 236,500  
Purchased during the year 1,779,223  
Allocated in respect of the US Employee Stock Purchase Plan (182,723 )
 
 
Balance at June 30, 2004 1,833,000  
 
 

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21 Stock Options

Long-Term Equity Incentive Arrangements

At an Extraordinary General Meeting held on December 12, 2003, shareholders approved the introduction of new long-term equity incentive arrangements (which replaced the existing expiring schemes). The following arrangements were introduced:

two new share option schemes: a UK Inland Revenue approved scheme (the ‘2003 Eidos Approved Share Option Plan ’) and a scheme which is not subject to Inland Revenue limits (the ‘2003 Eidos Unapproved Share Option Plan ’) (together, the ‘New Option Plans’); and
   
a new share-based incentive plan, to be known as the Eidos 2003 Performance Share Plan (the ‘Performance Share Plan’).
   

In addition, and in line with existing arrangements, shareholders also authorised the directors to extend the Unapproved Share Option Plan and the Performance Share Plan to take account of local tax, legal and regulatory issues in those countries in which the Group has a material operating presence.

New Option Plans

The New Option Plans provide for the granting of options to purchase shares to employees of the Company and its subsidiaries up to a maximum of 10% of the issued share capital of the Company immediately prior to the day any options are granted. The option price may not be less than the higher of the nominal value of one Eidos share or the fair market value of an Eidos share on the date the option is granted. The Remuneration Committee (the “Committee”) may make annual option grants to participants over shares worth up to 200% of basic salary. Options are generally exercisable between three and ten years after grant, provided that certain performance conditions, as determined by the Committee, have been satisfied.

Options granted prior to December 12, 2003 are generally not subject to performance conditions.

Performance Share Plan

The Performance Share Plan provides for the award of conditional rights to acquire shares of the Company at nil cost to participants subject to the achievement of certain performance conditions, as determined by the Committee. Awards vest on the third anniversary of grant. The Committee may make annual grants of conditional awards over Ordinary shares in the Company worth up to 100% of basic salary to participants.

Restricted Stock Plan

Pending the introduction of the Performance Share Plan in order to retain and incentivise certain key executives, the Committee also made a small number of share awards under a Restricted Stock Plan in 2002 and 2003.

All Employee Option Plans

The Company operates an Inland Revenue approved SAYE Share Scheme (“Sharesave Scheme”) for all UK employees under which options may be granted with an exercise price discounted by up to 20% of the market price of an Eidos share at the date of grant. Similar schemes are operated in France, Germany and Japan. In the US, the Company operates an equivalent Employee Stock Purchase Plan under which employees may apply to purchase shares at a 15% discount to market price.

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The following options for 2p ordinary shares were open at June 30, 2004:

                             
  July 1, 2003   Granted   Exercised   Lapsed   June 30, 2004   Exercise Price*   Option Exercise Period /
Maturity Date
 
 
 
 
 
 
 
 
 
Approved Scheme 55,586       (55,586 )   61.76 p 07/21/97 to 07/19/04  
(Discretionary) 111,172         111,172   62.96 p 03/11/98 to 03/09/05  
  220,840       (30,000 ) 190,840   119.00 p 09/19/05 to 09/19/12  
  21,267       (21,267 )   141.04 p 04/25/99 to 04/24/06  
  21,050         21,050   142.48 p 04/03/99 to 04/01/06  
  143,368       (92,800 ) 50,568   154.26 p 01/21/00 to 01/19/07  
  148,758         148,758   254.00 p 07/25/04 to 07/25/11  
  11,764         11,764   255.00 p 05/09/04 to 09/05/11  
  186,948       (78,015 ) 108,933   298.63 p 04/11/03 to 04/10/10  
  9,110         9,110   329.21 p 05/29/02 to 05/28/09  
    82,860       82,860   133.00 p 12/12/05 to 12/12/13  
    188,120       188,120   133.00 p 12/12/05 to 12/12/13  
    20,134       20,134   149.00 p 10/17/06 to 10/17/13  
 
 
 
 
 
         
Total 929,863   291,114     (277,668 ) 943,309          
 
 
 
 
 
         
Unapproved Scheme                            
(Discretionary) 1,111,725         1,111,725   105.24 p 10/14/01 to 10/13/05  
  1,001,660       (55,000 ) 946,660   119.00 p 09/19/05 to 09/19/09  
  50,000         50,000   121.00 p 09/20/05 to 09/20/09  
  257,930     (40,000 )   217,930   140.92 p 09/11/01 to 09/10/05  
  377,777       (173,611 ) 204,166   144.00 p 04/28/06 to 04/28/10  
  177,645       (177,645 )   154.26 p 01/21/00 to 01/19/04  
  139,543         139,543   154.26 p 10/16/00 to 10/14/04  
  846,742       (42,000 ) 804,742   254.00 p 07/25/04 to 07/25/08  
  88,236         88,236   255.00 p 09/05/04 to 09/05/08  
  630,137       (166,554 ) 463,583   298.63 p 04/11/03 to 04/10/07  
  129,855         129,855   329.21 p 05/29/02 to 05/28/06  
    55,990       55,990   133.00 p 12/12/05 to 12/12/13  
    893,225       893,225   133.00 p 12/12/05 to 12/12/13  
    100,000       100,000   149.00 p 09/10/06 to 09/10/13  
    754,866     (50,000 ) 704,866   149.00 p 10/17/06 to 10/17/13  
    120,000       120,000   159.00 p 04/06/07 to 04/06/14  
 
 
 
 
 
         
Total 4,811,250   1,924,081   (40,000 ) (664,810 ) 6,030,521          
 
 
 
 
 
         
US Stock option Plan 20,000         20,000   204.00 c 11/18/05 to 11/18/09  
(Discretionary) 138,454         138,454   254.70 c 01/21/00 to 01/19/04  
  452,500         (47,500 ) 405,000   361.00 c 07/24/04 to 07/24/08  
  239,013       (27,792 ) 211,221   472.76 c 04/11/03 to 04/10/07  
  111,172         111,172   525.80 c 05/29/02 to 05/28/06  
  387,000       (105,000 ) 282,000   185.00 c 09/19/05 to 09/19/09  
    93,950       93,950   232.00 c 12/12/05 to 12/12/13  
    478,010       478,010   232.00 c 12/12/06 to 12/12/13  
    40,000       40,000   302.00 c 04/06/07 to 04/06/14  
  50,000         50,000   223.00 c 04/15/06 to 04/15/10  
    255,000       255,000   249.00 c 10/17/06 to 10/17/10  
 
 
 
 
 
         
Total 1,398,139   866,960     (180,292 ) 2,084,807          
 
 
 
 
 
         
Restricted Stock Option 236,500         236,500       09/20/05 to 09/20/05  
    85,000       85,000       10/17/2006  
 
 
 
 
 
         
Total 236,500   85,000       321,500          
 
 
 
 
 
         
Performance Share Plan   565,300       565,300       12/12/06  
 
 
 
 
 
         

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      July 1, 2003     Started     Exercised     Lapsed     June 30, 2004     Exercise price*     Maturity Date  
   

 

 

 

 

 

 

 
Sharesave Schemes     4,707             (4,707 )       403.00 Ec   06/01/03  
(All-employee)     38,082             (38,082 )       205.98 p   08/01/03  
      54,042             (29,514 )   24,528     160.11 p   02/01/04  
      12,412                 12,412     160.11 p   02/01/04  
      6,403             (1,186 )   5,217     403.00 Ec   06/01/04  
      11,249             (4,891 )   6,358     198.00 p   08/01/04  
      4,837             (4,837 )       149.31 p   02/01/05  
      2,902                 2,902     149.31 p   02/01/05  
      116,050             (73,610 )   42,440     117.00 p   04/01/05  
      7,692                 7,692     117.00 p   04/01/05  
      4,315                 4,315     192.00 Ec   04/01/05  
      837                 837     198.00 p   08/01/05  
      8,654                 8,654     213.50 Ec   04/01/06  
      103,060             (49,137 )   53,923     108.00 p   05/01/06  
      7,129                 7,129     108.00 p   05/01/06  
      237,654             (106,029 )   131,625     97.00 p   11/01/05  
      12,370                 12,370     97.00 p   11/01/05  
      27,834                 27,834     97.00 p   11/01/05  
      20,222                 20,222     96.00 Ec   11/01/06  
      1,511                 1,511     108.00 Ec   04/01/07  
          124,925             124,925     129.00 p   06/01/07  
          917             917     129.00 p   06/01/07  
          27,880             27.880     129.00 p   06/01/09  
   

 

 

 

 

             
Total     681,962     153,722         (311,993 )   523,691              
   

 

 

 

 

             
ESPP**                                 161.00 c   09/30/02  
      389,040         (389,040 )           183.00 c   03/31/04  
          175,302             175,302     190.00 c   03/31/05  
   

 

 

 

 

             
      389,040     175,302     (389,040 )       175,302              
   

 

 

 

 

             
Grand Total     8,446,754     4,061,479     (429,040 )   (1,434,763 )   10,644,430              
   

 

 

 

 

             

*Option prices are denominated in pence (UK options), cents (US options), Euro cents (European options) and Yen (Japanese options), or the sterling equivalent.

** Represents rights granted under the US Employee Stock Purchase Plan. The actual exercise price and number of purchase rights cannot be determined until maturity (i.e. 6 or 12 months following the date of grant). 389,040 is a provisional number of shares subject to purchase rights based on the market price of an Eidos Ordinary Share (less an applicable 15% discount) as at the date of grant.

As permitted under UITF Abstract 17 (revised 2003) Employee Share Schemes, The Group has taken exemptions with regard to its Inland Revenue approved SAYE scheme and equivalent overseas schemes. These options include those granted to directors of the Company, which are also detailed in Item 6.

22     Share Premium Account, Reserves and Reconciliation of Movements in Shareholders’ Funds

The balances as at each balance sheet date and the movements in the periods are set out in the Consolidated Statements of Changes in Shareholders’ Equity.

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23     Acquisitions

On March 3, 2004, the Group entered into an agreement to acquire the entire share capital of IO Interactive for an initial consideration of £23.0 million, which was satisfied by £21.0 million in cash and £2.0 million in Eidos shares. Contingent consideration of 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. Based on the directors’ best estimate a provision of £2.1 million has been recorded at June 30, 2004. The Group entered into the agreement in order to gain access to technologies developed by IO Interactive with a view to sharing best practice across the group, and to bring into the group a team of talented developers. Goodwill of £26.6 million arose upon the acquisition as detailed below.

The acquisition has been accounted for using the acquisition method of accounting in accordance with FRS 6 – Acquisitions and Mergers. The results of IO Interactive have been consolidated from March 31, 2004 as the Directors believe that this was the point at which control of the entity effectively passed to the Group.

The net profit recognized for IO Interactive’s financial year ended December 31, 2003 was £280,502 and the net loss from January 1, 2004 through to the date of acquisition was £3,438,000. The net loss recognized in the period relating to IO Interactive was £2,362,000, representing operating expenses from the date of acquisition to June 30, 2004. Prior to the acquisition, IO Interactive developed games which were distributed by Eidos. Accordingly, all of IO Interactive’s post acquisition sales are intra-group sales and have been eliminated on consolidation.

The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the group.

      Book value        Accounting policy
alignments
      Other fair value
adjustments
      Fair value   
   

 

 

 

 
     
£’000
   
£’000
   
£’000
   
£’000
 
Fixed Assets                          
Tangible assets     1,194         (23 )   1,171  
Investments     269             269  
Current assets     2,656     (2,656 )        
   Capitalized software                          
   Debtors     694             694  
   Cash     75             75  
   

 

 

 

 
Total assets     4,888     (2,656 )   (23 )   2,209  
Creditors     (4,342 )   1,312     (66 )   (3,096 )
   

 

 

 

 
Net Assets/(Liabilities)     546     (1,344 )   (89 )   (887 )
Goodwill                       26,587  
Total Consideration                       25,700  
   

 

 

 

 

The accounting policy alignment related primarily to the elimination of capitalized software costs and to the elimination of provisions for holiday pay. Adjustments were also made to the deferred tax balances. The fair value adjustments related primarily to the provision for obligations on vacant property and the write-down of leasehold improvements.

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The consideration comprises:

      £’000  
   

 
   Cash consideration     20,990  
   1.5 million Eidos shares     2,010  
   Deferred cash consideration     2,068  
   Acquisition costs     632  
   

 
      25,700  
   

 

24     Reconciliation of operating profit/(loss) to net cash outflow/(inflow) from operating activities

      Year ended
March 31,
2002
    Three months
ended
June 30,
2002
    Year ended
June 30,
2003
    Year ended
June 30,
2004
 
   

 

 

 

 
      £’000    
£’000
    £’000     £’000  
Operating income/(loss)     (15,538 )   (15,625 )   10,672     (5,628 )
Loss on disposal of fixed assets             34     93  
Depreciation of tangible fixed assets     2,248     559     2,081     2,216  
Amortization and write off of goodwill     6,906     71     264     1,567  
Other amortization             77     263  
(Increase)/decrease in stock     (523 )   520     510     (803 )
(Increase)/decrease in debtors     (5,922 )   20,970     (31,210 )   21,747  
Increase/(decrease) in creditors     (2,619 )   (9,611 )   12,898     (11,268 )
   

 

 

 

 
Net cash inflow/(outflow) from operating activities     (15,448 )   (3,116 )   (4,674 )   8,187  
   

 

 

 

 

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25     Analysis of Net Funds

     March 31,      Change in      March 31,      Change in      June 30,      Change in      June 30,      Change in      June 30,     
2001 period 2002 period 2002 period 2003 period 2004









£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Net cash:                                    
Cash at bank and in hand 28,355   (11,752 ) 16,603   4,368   20,971   6,975   27,946   (3,107 ) 24,839  
Bank overdrafts (368 ) 368                
 
 
 
 
 
 
 
 
 
 
Total cash and demand
    debt
27,987   (11,384 ) 16,603   4,368   20,971   6,975   27,946   (3,107 ) 24,839  
Loans repayable within
    one year
(18,500 ) 18,434   (66 ) 66            
 
 
 
 
 
 
 
 
 
 
  9,487   7,050   16,537   4,434   20,971   6,975   27,946   (3,107 ) 24,839  
 
 
 
 
 
 
 
 
 
 

Short-term deposits and
    liquid resources

  34,030   34,030   4,051   38,081   (7,785 ) 30,296   (17,731 ) 12,565  
 
 
 
 
 
 
 
 
 
 
  9,487   41,080   50,567   8,485   59,052   (810 ) 58,242   (20,838 ) 37,404  
Finance leases (385 ) 129   (256 ) (18 ) (274 ) 251   (23 ) (733 ) (756 )
 
 
 
 
 
 
 
 
 
 
Net funds 9,102   41,209   50,311   8,467   58,778   (559 ) 58,219   (21,571 ) 36,648  
 
 
 
 
 
 
 
 
 
 

Short term deposits and liquid resources comprise deposits repayable on demand which can be withdrawn at any time without notice and without penalty.

Reconciliation of Net Cash Flow to Movement in Net Funds

  Year ended   Three months ended   Year ended   Year ended  
March 31, June 30, June 30, June 30,
2002 2002 2003 2004




£’000 £’000 £’000 £’000
Increase/(decrease) in cash in period 7,237   4,223   6,734   (2,924 )
Cash outflow from decrease in lease financing 223   (38 ) 223   97  
Increase/(decrease) in term deposits 34,030   4,051   (7,785 ) (17,569 )
 
 
 
 
 
Change in net funds resulting from cash flows 41,490   8,236   (828 ) (20,396 )
New finance leases (131 ) (124 ) (31 ) (134 )
In respect of IO Interactive       (693 )
Exchange rate movements (150 ) 355   300   (348 )
 
 
 
 
 
Movement in net funds in period 41,209   8,467   (559 ) (21,571 )
Net funds at beginning of period 9,102   50,311   58,778   58,219  
 
 
 
 
 
Net funds at end of period 50,311   58,778   58,219   36,648  
 
 
 
 
 

26     Contingent Liabilities

The Company and its subsidiaries are defendants in a number of legal proceedings incidental to its operations. 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, accordingly no provision has been made.

The Company has given a letter of guarantee to secure a committed borrowing facility for a subsidiary undertaking (see note 31).

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27     Commitments under Operating Leases

The Group had the following annual commitments under non-cancellable operating leases, analysed into leases that expire as follows:

  Land and buildings   Plant, machinery, motor vehicles and computer equipment  






June 30, 2003   June 30, 2004 June 30, 2003   June 30, 2004




£’000 £’000 £’000 £’000
Within one year 310   282   79   155  
In two to five years 2,135   2,592   375   332  
After five years 521   268     23  
 
 
 
 
 
  2,966   3,142   454   510  
 
 
 
 
 

28     Capital Commitments

As at June 30, 2004 the Group had contracted to make payments, conditional upon the completion of development milestones, totalling £5.3 million to various licensors and developers involved in providing games software for the Group’s use. The total amount is payable within one year. All development contracts can be terminated by Eidos at any time, without penalties, if the development milestones are not achieved.

29     Pension Commitments

Effective from January 1, 1997 the Group has operated a defined contribution private pension plan for UK employees. The assets of the plan are held separately from those of the Group in an independently administered fund. Contributions are paid to the plan and charged to the profit and loss account as incurred. Contributions paid by the Group during the year were £446,000 (year ended June 30, 2003: £379,000). At the year end no contributions were outstanding.

Jeremy Heath-Smith was the sole member of the Core Design Pension Scheme, a defined contribution scheme. Contributions paid by the Group during the year were £12,000 (year ended June 30, 2003: £30,000). At the year end no contributions were outstanding. Jeremy Heath-Smith ceased employment with the Group on September 30, 2003.

An employee was the sole member of the Eidos plc Money Purchase Plan, a defined contribution scheme. Contributions paid by the Group during the year were £nil (year ended June 30, 2003: £350). At the year end no contributions were outstanding.

Contributions were paid into private pension schemes of one employee (2003: two) by the Group during the year of £8,000 (2003: £24,000). At the year end no contributions were outstanding.

All significant overseas pension arrangements are also of a defined contribution nature. Contributions paid by the Group during the year were £365,000 (year ended June 30, 2003: £424,000). At the year end no contributions were outstanding.

In total £831,000 was paid to pension schemes during the year (year ended June 30, 2003: £857,000).

Stakeholder Pensions

In October 2001, the UK Government made it compulsory for most companies in the UK employing over 5 members of staff to give their employees access to a Stakeholder pension. Eidos plc has reviewed its Group Personal Pension Plan and implemented a number of minor changes to ensure that the Plan is Stakeholder Exempt and no further action is required.

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30     Related Party disclosures

In relation to material transactions, the Group has not identified any parties who are able to negotiate more favourable terms than would have been available to any other independent party on an arms length basis.

Year ended June 30, 2004
(a)
During the year the Group paid £2.5 million to its associated undertakings as royalties and advances on games being developed for the Group.
(b) In July 1999, Eidos acquired a 75% stake in Proein SL, which is accounted for as a joint venture. In the year to June 30, 2004 Eidos sold games to Proein SL totalling £2.6 million. In addition, in the same period Eidos paid £3.3 million to Pyro Studios SL (in which Eidos owns a 26.7% stake) as royalties and advances for the development of games for Eidos. At June 30, 2004, Eidos was owed £47,000 by Proein SL, and was owed £76,000 by Pyro Studios SL.
(c) The Group has taken advantage of the exemption in Financial Reporting Standard No. 8 in respect of subsidiaries, which are consolidated in these accounts.

All inter-company transactions are on an arm’s length basis.

Year ended June 30, 2003
(a) During the year the Group paid £3.3 million to its associated companies as royalties and for development of games for the Group.
(b) In July 1999 the Group acquired a 75% stake in Proein SL. In the year ended June 30, 2003 the Group sold games to Proein SL for a total of £1.6 million after provisions. These games were all sold on an arm’s length basis. In addition in the same period the Group paid £3.1million to Pyro Studios SL (in which the Group acquired a 25% stake) as royalties and for the development of games for the Group.
At June 30, 2003 the Group was owed £238,000 by Proein SL (via a third party distributor) and was owed by Pyro Studios SL £283,000.
(c) In June 2001 Eidos took its stake in Ion Storm to 89%. In the year ended June 30, 2003 the Group paid £5.4 million to Ion Storm for the development of games for the Group. At June 30, 2003 Ion Storm owed Eidos £3,831,000.
(d) During the year, Eidos wrote off a £4,589 Royalty owed to one of its Directors, Ian Livingstone, for royalties owed in connection with a game to which he owned the rights, Deathtrap Dungeon. In addition, rights have been granted to a Korean company to develop a game based on his other works, for which the Korean company will pay Ian Livingstone a royalty. Eidos is helping to produce this game and will have European and US publishing rights to it, however, there is no royalty agreement in connection with this game between Eidos and Ian Livingstone.

Three months ended June 30, 2002
(a) During the Three months the Group paid £1.3 million to its associated companies as royalties and for development of games for the Group.
(b) In July 1999 the Group acquired a 75% stake in Proein SL. In the Three months ended June 30, 2002 the Group sold games to Proein SL for a total of £179,000. These games were all sold on an arm’s length basis. In addition in the same period the Group paid £0.5 million to Pyro Studios SL (in which the Group acquired a 25% stake) as royalties and for the development of games for the Group. At June 30, 2002 the Group was owed £24,000 by Proein SL (via a third party distributor) and was owed by Pyro Studios SL £112,000.
(c) In June 2001 Eidos took its stake in Ion Storm to 89%. In the Three months ended June 30, 2002 the Group paid £1.4 million to Ion Storm for the development of games for the Group. At June 30, 2002 Ion Storm owed Eidos £4.6 million.

Year ended March 31, 2002

(a) During the year the Group paid £6.1 million to its associated companies as royalties and for development of games for the Group.
(b) In July 1999 the Group acquired a 75% stake in Proein SL. In the year ended March 31, 2002 the Group sold games to Proein SL for a total of £1.1 million after provisions. These games were all sold on an arm’s length basis. In addition in the same period the Group paid £3.7 million to Pyro Studios SL (in which the Group acquired a 25% stake) as royalties and for the development of games for the Group. At March 31, 2002 the Group was owed £105,000 by Proein SL (via a third party distributor) and owed Pyro Studios SL £51,000.
(c) In June 2001 Eidos took its stake in Ion Storm to 89%. In the year ended March 31, 2002 the Group paid £9.6 million to Ion Storm for the development of games for the Group. At March 31, 2002 Ion Storm owed Eidos £4.0 million.

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31      Derivatives and other Financial Instruments

The Group is exposed to certain market risks arising from transactions in the normal course of business and financial instruments used to finance the Group’s operations. The main risks arising are foreign currency risk and interest rate risk. The Group’s treasury policy is to manage financial risks that arise in relation to underlying business needs.

The numerical disclosures in this note deal with financial assets and liabilities as defined in Financial Reporting Standard No. 13: Derivatives and Other Financial Instruments. Certain financial assets such as investments in subsidiary, joint and associated undertakings are excluded from the scope of these disclosures.

As permitted by FRS13, short-term debtors and creditors have been excluded from the disclosure, other than the currency disclosures.

Interest rate risk profile of financial assets and liabilities

The corresponding interest rate and currency profile of the Group’s financial assets and liabilities at June 30, 2004 was as follows:

    Sterling   US Dollar   Euro   Australian
Dollar
  Danish
Krone
  Singapore
Dollar
  Japanese
Yen
  Total  
   
 
 
 
 
 
 
 
 
    £’000   £’000   £’000   £’000   £’000   £’000   £’000   £’000  
Cash and liquid resources –
    floating rate
  25,000   1,343   9,383   1,583   (88 ) 31   152   37,404  
Floating rate debt   7     19     (756 )   9   (721 )
   
 
 
 
 
 
 
 
 
    25,007   1,343   9,402   1,583   (844 ) 31   161   36,683  
   
 
 
 
 
 
 
 
 

The interest rate and currency profile of the Group’s financial assets and liabilities at June 30, 2003 was as follows:

  Sterling   US Dollar   Euro   Australian
Dollar
  Danish
Krone
  Singapore
Dollar
  Japanese
Yen
  Total  
 
 
 
 
 
 
 
 
 
  £’000   £’000   £’000   £’000   £’000   £’000   £’000   £’000  
Cash and liquid resources –
                               
   floating rate 49,088   1,515   7,208       173   258   58,242  
Net financial assets and                                
   liabilities (excluding                                
   short term debtors and                                
   creditors) 9   (7 ) 19       7   (11 ) 17  
 
 
 
 
 
 
 
 
 
  49,097   1,508   7,227