QRT.L Regulatory News (QRT)

24 Feb 2006 07:01

Quarto Group Inc24 February 2006 THE QUARTO GROUP, INC - PRELIMINARY ANNOUNCEMENT Quarto, the London-based and listed international book publisher, announcesanother year of solid growth and achievement, with a 12% increase in adjustedprofit before tax (excluding amortization of intangibles and non-recurringitems). FINANCIAL HIGHLIGHTS • Revenue increased by 19% to £95.0m (2004: £79.8m), of which 49% in the US, 19% in Australasia, and 17% in the UK • EBITDA rose by 8% to £16.3m (2004: £15.1m) • Operating profit totalled £6.6m (2004: £7.0m), but adjusted profit from operations was 17% higher at £8.8m (2004: £7.5m) • Profit before tax totalled £4.4m (2004: £5.4m); adjusted, it increased by 12% to £6.6m (2004: £5.9m) • Diluted earnings per share totalled 12.9p (2004: 19.6p) or, adjusted, 20.8p (2004: 21.2p). At constant tax rates, the adjusted diluted earnings per share would have risen to 21.5p, representing a seventh successive annual increase • Dividends per share in respect of 2005 totalled 6.5p (2004: 6.25p), a 4% increase, covered more than three times by adjusted diluted earnings per share COMMERCIAL HIGHLIGHTS •Publishing increased its operating profit (before amortization of intangibles) to £5.3m from £4.1m on external revenue up 34% at £58.0m (2004: £43.4m) •Co-edition Book Publishing increased its operating profit (before amortization of intangibles) to £4.4m from £4.3m on external revenue up 2% at £37.1m (2004: £36.4m) •In May 2005, Quarto purchased 70% of Premier Books, New Zealand's largest business selling books by display marketing, for £2.8m, including debt. Premier contributed £3.2m to revenue in 2005, and operating profit of £0.6m •The integration of Quarto's three acquisitions in 2004 - CPi in the US, Lifetime in Australia, and Aurum in the UK - went smoothly •The healthy advances in revenue and operating profit were achieved despite tough conditions, to a greater or lesser extent, in all of Quarto's English-speaking markets; in particular, a downturn in sales at the end of the year in the US - which was unexpected but now seems to be easing somewhat - and a poor retail environment for most of the year in the UK •Sales of backlist titles contributed almost 70% of revenue in the Co-edition Book Publishing Division and comfortably over 50% in the Publishing Division Laurence F. Orbach, Chairman, stated with regard to acquisitions: "Quarto'sambition is to become one of the world's leading independent book publishers. Wewere less active in making acquisitions, and in starting new ventures, duringthis 2005 year of consolidation, but not for want of trying. The Board continuesto confirm the strategy of growth as outlined some two years ago. We considerthat, rather than overpay for acquisitions, we should continue a policy ofwatchful waiting, and are hopeful that more affordable opportunities willpresent themselves in 2006." With regard to prospects, Mr Orbach added: "The early signs are encouraging. Thepresidents of most of our business units are feeling comfortable about theprospects for 2006. We shall continue to invest strongly in new product, as thisis the lifeblood of our business." Notes for Editors: Quarto is an international book publisher with two principal strands ofactivity: it publishes, under imprints owned by the Group, books and art printsin the US, the UK, and Australia; and it creates books that are licensed toother publishers for publication under their own imprints in many languagesaround the world. Enquiries: The Quarto Group, Inc.Laurence Orbach (Chairman & CEO) 020-7700 9004Mick Mousley (Finance Director) 020-7700 9004 Bankside Consultants LimitedCharles Ponsonby 020-7367 8851 CHAIRMAN'S LETTER Dear Shareholder: 2005 was another year of solid growth and achievement. I am happy to report thatQuarto's audited operating profit, before amortization of intangibles andexceptional costs (aborted acquisition costs of £0.1m and restructuring costs of£0.6m, both announced at the half-year stage), which is Quarto's key performanceindicator, rose by 17% to £8.8 million (2004: £7.5 million)., and pre-tax profitrose by 12% to £6.6 million (2004: £5.9 million). For the year ended December 31, 2005, total revenues rose by 19% to £95.0million (2004: £79.8 million), gross profit by 20% to £34.6 million (2004: £28.9 million), andoperating profit, before amortization of intangibles and exceptional items, by17% to £8.8 million (2004: £7.5 million). Net interest payable was £2.2 million(2004: £1.6 million), reflecting the acquisitions made in 2004, and slightlyhigher interest rates. After amortization of intangibles, and the non-recurringcosts associated with restructuring our UK publishing services units, andabortive acquisition costs, profit before tax was £4.4 million (2004: £5.4million). Tax was £1.3 million (2004: £1.3 million). EBITDA rose by 8% to £16.3million (2004: £15.1 million). Adjusted, diluted earnings per share were 20.8p(2004: 21.2p). As anticipated, the year-on-year decline is due to the taxcharge, which is increasing as our tax losses unwind. At constant tax rates, theadjusted, diluted earnings per share were 21.5p. We actively sought several acquisitions, but only managed to conclude thepurchase of 70% of Premier Books, New Zealand's largest business selling booksby display marketing, for £2.8 million, including debt. The balance of theequity remains with the vendors, including the general manager. Premier is awell-regarded and well-run business, and its purchase further consolidates ourposition in the Australasian book market. Premier's model differs fromLifetime's (our Australian book display marketing business), and there is nocurrent intention to amalgamate the units, both of which are trading verysatisfactorily. Premier contributed £3.2 million to revenue in 2005, and anoperating profit of £0.6 million. Our primary objectives in 2005 were to bed in the three acquisitions we made in2004, continue our growth strategy of starting new ventures and making furtheracquisitions, and improve our infrastructure by readying it for furtherexpansion. We were not able to close as many acquisitions as we had hoped, essentiallybecause we did not share vendors' expectations of the very high valuations thatthey put on their businesses. Happily, there are now a few straws in the windsuggesting that the more demanding trading conditions are tempering vendors'expectations. The integration of our 2004 acquisitions went smoothly. The largest of these,CPi, merged many of its non-creative functions with Rockport at the beginning ofthe year. We believe that this structure can be built on for further expansion.In Australia, we introduced more rigour and systems into Lifetime, and a greaterfocus generally on its operations. The results were felt immediately. To date,we have moved only slowly in building up Aurum (which would have been involvedin the aborted UK acquisition), and we shall focus on this more closely in 2006. Financial Highlights I am pleased to advise that, despite the downturn in sales at the end of theyear in the US, and a poor retailing environment for most of the year in the UK,in generally tough trading conditions, we ended the year with a healthy advancein revenue and operating profits, which rose by 19% and 17% respectively. Thesales hiatus in the United States was a late surprise, and marred an even betteradvance. We felt it across the board, in all of the retail sectors we supply.Since year end, though, the situation seems to be easing somewhat. For the year as a whole, the average sterling/dollar ratio was almost unchanged,something that we haven't experienced for a number of years, although at balancesheet date the 2005 rate of $1.72= £1.00 was much changed from 2004's $1.92=£1.00. This remains important to us in reporting our results, as Quarto'sprincipal operating currency is the US dollar and, for historical reasons, wecontinue to present our financial statements in sterling. We are a little later than usual in reporting our results this year, because ofthe changeover to reporting under IFRS. This change has necessitated asignificant amount of technical adjustment, and it has also required us to putinto separate categories those of our businesses with common characteristics.Prior to this, and speaking broadly, we have explained that we are in theconsumer book publishing business, some of our units publishing our books underimprints owned by the group, and other units licensing our books for publicationby other publishers. IFRS require us to report to you our business segments, according to their riskand reward profiles. We are still using the same two sectors, Co-EditionPublishing, and Publishing but, since we amalgamated CPi and Rockport into theQuayside Publishing Group at the beginning of the year, and the risk profile ismore characteristic of the Publishing division, we are treating Rockport (forpurposes of comparison only) as if it had been part of the Publishing divisionin 2004. Your Board is proposing a final dividend of 3.6p (2004: 3.5p), making atotal for the year of 6.5p (2004: 6.25p), an increase of 4% for the year,payable on June 7, 2006, to shareholders on the register on May 5 , 2006. Thedividend is covered more than three times, with adjusted, diluted earnings pershare of 20.8p (2004: 21.2p), the year-on-year decline being explained by theincreased tax charge for the year. At balance sheet date (and exchange rates), our net borrowings totalled £35.1million; at constant currency rates, they were £32.7 million (2004: £33.1million). Commentary on Trading On the trading front, market conditions were mixed. Quarto's revenue is wellspread internationally: the US is the largest market, with 49% of sales (2004:54%), followed by Australasia at 19% (2004: 10%), reflecting the addition ofLifetime and Premier, and the UK at 17% (2004: 20%). The rest of the world,predominantly continental Europe, accounted for 15% of sales (2004: 16%). To agreater or lesser extent, all of our English-speaking markets experienced toughconditions. Retailers continued to use pricing as a major marketing tool, andthis reached ludicrous proportions in the UK at the end of the year, as if acollective death wish had infected the major chains. Retail bookselling has not been good anywhere in the English-speaking world.From Australia and New Zealand, where conditions were quite difficult early inthe year, compounded by bankruptcies and overstocks, to the US, where sales ofbooksellers are now estimated to have been down overall (by a small amount) forthe year, and the UK, where everything seemed to fall apart for a good part ofthe year, things may appear bleak. Based on our experience, though, much of thebusiness that evaporated from the high street and main street may havere-emerged at online booksellers, particularly Amazon. 2005 was the first yearthat most of our publishing units felt that Amazon was a hugely important outletfor our titles. Of course, it has an unrivalled range, good prices, fantasticease of use, and superb service. Even if online bookselling never holds a muchgreater percentage of the market than the old-time book clubs and mail-orderpublishers maintained, it's a vastly more satisfactory experience for the buyer. The bricks-and-mortar retailers deserve consideration. Their environment iscompetitive, is compounded by the competition from the electronic catalogs ofAmazon and others, and they have little alternative but to meet the competition.This is a particularly acute problem in book publishing because, by thestandards of other consumer goods, books are not expensive, the average bookpurchaser doesn't spend very much money on each shopping trip, and the velocityof sale of most titles is slow. In order to pay the rent for the prime sitesthat booksellers believe they need, and their other overheads, it'sunderstandable that retailers focus on moving large quantities of best-sellingtitles. It's an unsatisfactory state of affairs but, with the outpouring of newtitles each year showing no signs of abating, it's difficult to see thischanging greatly in the near future. Perhaps - and one can but hope - the growthof internet retailing will put downward pressure on rents in prime shoppingareas, and so restore greater profitability to brick-and-mortar retailers. Much ink has been used to demonstrate - and sometimes bemoan - the growing powerof retailers, and the diminishing power of manufacturers and suppliers. Again,it is difficult to see this trend reversing itself rapidly, as powerfulretailers embrace the view that they are not much more than landlords, rentingtheir space to manufacturers, distributors, and suppliers, and providing salespoints. Increasingly, now, for many vendors, the risk, which used to passlargely to the retailers when they delivered the retailers' orders, extends allthe way to the point of sale. Into this mind-set have come slotting fees,in-store placement fees, and all manner of other devices for retailers toincrease their share of the purchaser's dollar. Vendors have now to evolvedifferent models for their businesses in response to this commercial reality. Itmay be that, Canute-like, the Eurozone economies can hold back, by regulation,this wave of discount "creep", now required by retailers of their vendors, butit has swept over most of the English-speaking economies. As more publishersseek to sell books from their own web sites, the bigger question is whether weshall see a return to a more vertically-integrated industry. At Quarto, we focus on publishing well-focused, and niche-oriented, how-totitles, mostly in categories where there are special-interest retailers that canbe as important to our sales as the bookstore. This is true in categories suchas crafts, home improvement, home decor, cooking, and so on. Our how-to booksare known, by many specialist retailers, to help to drive sales of items thatshoppers need in order to undertake projects. Some retailers have studied thebuying patterns of customers who buy how-to books, and have verified thispattern. Overall, we continue to produce and publish books that are of perennialinterest, avoid temporary fads and fashions, and expect to enjoy a long life onsale, with numerous reprints justifying the investment in each title. The spreadof our sales, including so much recurring revenue from evergreen titles, withfew of them ever producing as much as 1% of the group's revenues, emphasizes thequality of our earnings. In our Co-Edition Publishing division, approximately69% of our revenues came from books first published in prior years. This is downfrom the 75% achieved in 2004, and probably reflects the greater concentrationthat retailers have been placing on faster-moving best-selling titles. In thePublishing division, the sales of backlist titles comfortably remained above50%. With the launch of QED, in 2004, Quarto moved into educational publishing, atthe early- learning, supplementary education, level. Our initial target marketwas the school and library market, but we are beginning now to reach out toparents and teachers, and are gratified with the early results, and, inparticular, the response to test placements at Tesco. We hope to build on QED'sexperience to extend our reach into more educational and vocational areas. Iqon Editions' Isms...series had great success with its second title, onarchitecture. This is shaping up to be a promising approach, and is well likedin most markets and languages. Other new initiatives have not done so well.Walter Foster's efforts to create a co-edition children's program wereunsuccessful. Quarto Magazines is struggling with some of its titles,particularly The World of Fine Wine. Despite glowing reviews and praise from allquarters, it remains loss-making, and the pay-back period may be too lengthy forit to be sustained. Other new magazine titles are also still at the loss-makingstage. It is inevitable that not all of our new ventures will succeed, but investmentin them is absolutely essential to the ongoing health of Quarto. We have beenextremely cautious and prudent with our publishing programs, and have enoughexperience to avoid the worst pitfalls but, on occasion, we must expect to fallinto them. The seeding process involves a substantial amount of executive timeand capital, and it may take between three and five years to justify theinvestment. We did not do enough of this in 2005, because of our focus onconsolidating what we have, and must resume the process in 2006, especially inour co-edition activities. Corporate Events As noted above, we remained active in looking at, and negotiating the purchaseof, several acquisitions. We spent months investigating, and negotiating, theacquisition of a UK operation that would have given our presence here somecritical mass. In the end, though, we were unable to come to terms. We wereprepared to pay a premium for the business, but the figures never justified whatwas expected, and we had to withdraw. We also looked at some businesses in the US, although not as deeply, and withthe same conclusion that we could not meet vendors' expectations on price. Wedid succeed, though, with the purchase of 70% of Premier Books for £2.8 million,including the assumption of debt, and costs. The balance is owned by three ofthe vendors, including the general manager, Grant Letica, and two non-executivedirectors, who remain on the board. Premier Books distributes books and related items sourced from publishers anddistributors in New Zealand and from around the world, and is the country'slargest and most successful display marketer of books. Operating from threeregional centres, 55 independently employed agents, working on a fortnightlycycle, deliver and retrieve displays of books in tens of thousand of workplaces,fulfilling the orders when they pick up the displays. The business is efficientand, through testing of many of its offerings before they are ordered for aroll-out, minimizes its risks. Financial Strategy and Reporting Quarto continues to generate good cash flow. For many years, it has generatedmore than its operating profits in cash. In 2005, and chiefly because the mergerof CPi and Rockport into Quayside has required the funding of receivables on amuch bigger scale than previously, and because CPi required greater investmentin revitalizing its core publishing programs, which had been neglected underprevious ownership, cash generation, while still good, was 77% of operatingprofits. Our acquisitions in 2004 and 2005 were funded with debt. During the course of2005, two more banks joined our five-year syndicated revolving credit facility,Allied Irish Banks, and the Australia and New Zealand Bank, expressing theirconfidence in the strategy and management of Quarto. We are well funded, withthe syndicated agreement providing $90 million, and a further $20 millionavailable via a variety of bilateral arrangements. During 2005, some £2.6million of debt (previous classified as convertible preferred stock) wasconverted into equity. We have hedged the interest cost of a significant proportion of our debt untilthe middle of 2007, when our syndicated revolving credit agreement comes due forrenewal. We continue to keep the capital structure of the group, and our averageweighted cost of capital, under review, and there are many options open to us. Strategy Quarto's ambition is to become one of the world's leading independent bookpublishers. The printed word has unsurpassed ability to convey meaning and,despite the regular emergence of new media since printed books first appeared,none has rivalled its authority. Book publishing has adapted extremely well tocompetition, for the consumer dollar, from other media and communication forms.Quarto focuses on the consumer non-fiction market, with an emphasis on books inenduring categories of interest, generally intended for audiences withspecialized interests. This approach allows books to remain in print for manyyears. Our books are intended to inform, instruct, and inspire the reader, andare produced in attractive full colour formats to enhance the experience ofgaining skills and knowledge. We were less active in making acquisitions, and in starting new ventures, duringthis 2005 year of consolidation, but not for want of trying. The board continuesto confirm the strategy of growth as outlined some two years ago. We considerthat, rather than overpay for acquisitions, we should continue a policy ofwatchful waiting, and are hopeful that more affordable opportunities willpresent themselves in 2006. As we grow in size, and ambition, we must keep our portfolio of businesses underregular review, adjusting it when the size or activity or prospects for a unitno longer fit comfortably with our overall direction. Already, it is becomingclear that very small businesses, unless they fit centrally within our coreactivities, are likely to demand more management time than a group of our sizecan afford. Prospects The early signs are encouraging. The presidents of most of our business unitsare feeling comfortable about the prospects for 2006. We shall continue toinvest strongly in new product, as this is the lifeblood of our business. Our management and executive structure is a work in progress and, so long as Iam in charge, I hope that it will remain so! Philosophically, we have alwaysconcluded that our core activity, producing and publishing books, is product-,rather than process-, intensive. This has led us to operate our business unitsas autonomously as possible, and to keep them small scale. We prefer our bookunits to be headed by people whose orientation, background, and sympathies aremore likely to be on the creative than the business side of publishing. Smallunits are easier to manage, and they confer the additional advantage of keepingour management structure very flat. As the group has grown, our management and executive structure must be organizedto take advantage of the additional opportunities that the group offers for themember businesses of the enlarged group. At the beginning of 2005, Piers Spencemoved from his position as Publisher of Quarto Books to a newly created post asDirector of the Co-Edition Book Publishing Division, and this appointment hasworked very well. Almost all of the co-edition units share common problems andopportunities, and Piers' experience and management skills are excellent assets. But our management challenges go further, and we are inching our way to a betterstructure that preserves the best of what we've got in place, but adds value tothe group. We are determined not to move, into positions of responsibility,people whose talents are better used elsewhere and, because we believe we havesome very good people in place as editors, designers, art directors, and so on,we have a limited internal talent pool to recruit for new managementresponsibilities. In any event, the benefit of recruiting some new blood fromoutside is too tempting to ignore. Once again, I want to take this opportunity to thank all the people at Quartowho worked so diligently to make this year a success. Sincerely, Laurence F Orbach Chairman and Chief Executive Officer London, February 24, 2006 REVIEW OF OPERATIONS Quarto is an international book publisher and book producer. In the US, UK, andAustralia, Quarto publishes and distributes books under imprints owned by thegroup. As a book producer, Quarto's co-edition units license other publishers,worldwide, to publish books in their own geographic markets. Quarto's licenseesinclude - and its books appear under the imprints of - publishers such as Simon& Schuster, Reader's Digest, Random House, Orion, Bloomsbury, HodderHeadline,Thames & Hudson, Allen & Unwin, Murdoch Books, HarperCollins, Bonniers,Gyldendaal, Taschen, Hachette, and many, many other distinguished publishinghouses worldwide. The group publishes approximately 500 new titles a year, andmaintains, in print, a backlist of over 6,000 titles. For reporting purposes, our imprints and services are organized into twodivisions: International Co-Edition Book Publishing and Publishing. SinceJanuary 1st, 2005, when Rockport's sales and fulfilment operations were mergedwith those of CPi, we are now reporting Rockport in the Publishing divisionrather than, as previously, in International Co-Edition. The Board places greater emphasis on maintaining the creative vitality of ourindividual operating units than on organizational tidiness. To the extent thatit is possible, each unit operates autonomously, is modest in terms of staffsize, and manageable by someone whose abilities are likely to be more focused onthe product, or creative, side than on the managerial. International Co-EditionBook Publishing is headed by Piers Spence, previously the Publisher of QuartoBooks for five years. Piers is based in the UK, as are the majority of theco-edition businesses. The operating units in the Publishing division, which arebased predominantly in the US and Australia, report directly to the ChiefExecutive. International Co-Edition Book Publishing Division Quarto's International Co-Edition Book Publishing Division includes a number ofunits creating titles that are licensed internationally to hundreds ofpublishers in some 35 countries and 25 languages, and published and distributedunder the imprints of the licensees. Quarto owns the intellectual property inthe books that the units create, but is not engaged in the marketing, selling,and distribution of these books. The business depends on international sales,and the substantial cost of creating titles is, in effect, borne totally by ourlicensees, and shared between them across individual publishing territories.Book ideas are presented to potential licensing publishers, and are only putinto production after firm commitments have been received. The books areproduced on a firm sale basis, and at deep discount to retail prices. Thismodel, and the manner in which it is implemented across the division's units,ensures that the total cost of producing a title is completely covered by theinitial deliveries to licensees. This, then, is an extremely risk-averseapproach to publishing: there is no risk in producing a book, the geographicalspread of customers reduces reliance on a single market, the reprint profile ofthe division, and the modest sales expectations for many of our titles, ensurethat any individual title is rarely responsible for more than 1% of thedivision's revenues. As the division makes its co-edition profits from titles that reprint, ourimprints focus on creating titles of enduring and widespread interestinternationally. Quarto's reputation is particularly strong as creators of booksthat inspire and instruct, allowing the reader to improve his or her level ofskill and knowledge. The common characteristics of the division are that,broadly, the businesses do not hold inventory, and that the creation of booksfor an international, rather than a purely domestic, audience is at the core ofan imprint's activity. Quarto's most important co-edition markets are in theEnglish-speaking world, and continental Europe. The division's intellectual property rights are retained at nil value on thebalance sheet. The backlist sales of these titles generate 69% of the division'srevenues, contributing substantially to overall profit, as the cost of servicingthe reprints is very modest. The balance sheet treatment of the backlist is asprudent as it is possible to be, and it's worth noting that Quarto has acquiredbacklist titles and has paid, on average, £5,000 per title. In 2005, 74% of the division's revenue was invoiced in the US dollar which,because of the substantial amount of printing sourced in South East Asia, indollar-related currencies, is the group's principal operating currency. Revenuesin 2005 were £37.1 million (2004: £36.4 million), giving an operating profit of£4.4 million (2004: £4.3 million). Our target for the division is for anoperating profit of 15%. In a very tight market, the division once againaffirmed the resilience of its business model. Quarto Books, the original imprint and largest of the co-edition units, had avery good year, recording double-digit increases in both revenue and profits.Continued strong demand in its core art and craft categories saw foreignlanguage sales leap 17% ahead of the previous year's performance, and newinitiatives - such as the Outdoor Kama Sutra, shot on location in India - willbe keeping customers warm next winter in Poland, the Czech Republic, and otherchilly climes. Quarto's biggest selling new title (in volume terms) was theStrip Poker Kit, a box containing an illustrated guide to the rules of the gametogether with a saucy deck of cards, but the broad scope of the business couldbe equally well described by the success of Fly-Tying for Beginners, The MovieMaking Course, or 501 Guitar Chords. That all this was achieved under thedirection of new publisher Paul Carslake, who took over the reins at thebeginning of the year with little fuss and no loss of traction, is particularlysatisfying, and augurs well for the future. Operating profit grew by almost £0.4million. Quintet Publishing was less fortunate, and an unsuccessful appointmentnecessitated a change of publisher mid-year, which, in a people-led business, isalways a distraction. Despite this, the unit delivered on its major commitmentsduring the year and met challenging production timetables for the latest twovolumes in its bestselling 1001 series, 1001 Albums and 1001 Books. Albumsdelivered in September, and was already reprinting by November, an almostunheard-of occurrence outside of the fiction bestseller lists, while Books isbeing launched early in 2006. This series is continuing to pay off, with majorforeign language and English-language reprint runs for 1001 Movies (already inits second, updated edition) and 1001 Natural Wonders. Almost 500,000 copies ofthe existing titles are now in print, in 19 territories and 13 languages. Twofurther volumes are planned for each of 2007 and 2008, and these have beensuccessfully placed with existing licensees in the English language. Marshall Editions had its most profitable year since Quarto acquired it fromAdministration. Re-establishing the once-revered reference imprint has been amore intense task than we anticipated, but it seems now to have found its feetunder the steady guidance of publisher Richard Green. The children's list wasfirst out of recovery, with a series of educational biographies licensed toNational Geographic. Backlist sales remained strong, especially in foreignlanguages, thanks to sterling work by rights director Laurence Richard. Thefuture looks even brighter: a review of editorial strategy for the adult list atthe beginning of last year bore fruit with a strong showing of quality referenceprojects at October's Frankfurt Book Fair, promising a further substantialincrease in profit as these titles deliver in 2006 and beyond. Quantum is the operating unit that "recycles" content from the other imprintsfor promotional markets. It had a difficult year, in a market with an excess ofsupply. Its value proposition proved insufficiently attractive in the face offierce price and quality competition. Its disproportionate exposure to thedomestic market meant Quantum was not immune to the woes of the UK High Street,and it suffered from business failures among its UK retail bookshop customers.As a result, we have instituted a review of the unit's publishing strategy,which will concentrate on adding value rather than merely reducing price.Despite this, and a £0.4 million fall in its operating profit, Quantum'sfinancial results remained satisfactory. Longer-term shareholders will know that Q+, our books-plus unit, comprisingQuarto Children's Books and Design Eye, has struggled in recent years tore-establish its former profitability. This year, we made only a modest advancenumerically, but took a significant step philosophically with the appointment ofa new publisher, whose task is to reinvent our publishing for this market. Theaim is to inject greater editorial integrity and educational utility into a lineof product that all agree is innovative and fun, and to do this without losingany of the "wow" factor. In this way, we will continue to attract and delightour primary audience of children, while at the same time making their parentsfeel good about funding the purchase. Initial reactions to this new approach arepromising, with My Dad's Toolbox the subject of multiple bids, and a strongforeign language showing. Global Publishing, our Sydney-based co-edition unit, had another good year.Anatomica, released in 2000 and one of Global's first titles, reprinted againtogether with its spin-offs, The Encyclopedic Atlas of the Human Body, The HumanBody Atlas, and Pocket Anatomica, illustrating once again the tremendouslongevity and repurpose-ability of these investments. As if three spin-offsweren't enough, Anatomica's Flash Cards, an innovative study aid using the samematerial, surprised everyone - not least its publisher - by reprinting threetimes in its first year of release. More than 100,000 card sets were shipped in2005. The Flora brand, built upon the enormous archive created for the eponymousencyclopedia of garden plants, gave birth to Flora's Orchids, the mostcomprehensive and best photographed book on orchids ever produced, which wasreleased to rave reviews in October, and reprinted prior to the firstconsignment reaching its destination port. And following the principle that if athing works once it will work twice or three times, Flora's Gardening Cards, anew Flora series title presented in an innovative card format, shipped inDecember, with a first print run of over 35,000 copies. All three recent start-up units fared well: QED, which produces children'stitles for the educational and library market, hit its stride in its second fullyear of publishing, with sales nearly doubled, and profits up by not much less.It has just begun to exploit its properties in foreign language markets and todate has garnered sales in French, Spanish, Greek, Hungarian, Slovenian, Danish,Portuguese, and Chinese. Two if its series - Let's Start Science and AnimalLives - made Editor's Choice for Bookspan, the largest book club in the US,while, in the UK, agreement was reached with McGraw-Hill's subsidiary,Kingscourt, to have it act as QED's principal reseller and schools sales force,offering the entire range of products direct to schools via its salesrepresentatives in the UK and the Republic of Ireland. QU:ID, known for its sideways, and often quirky, look at life, had its thirdsuccessive year of growth. Its flagship title, Household Management for Men(which now has derivative sales over 400,000 copies), is being developed as afranchise. The follow-up, Man Management for Women, achieved international salesof 60,000 copies within six months of publication; while new title 101 Things toDo in a Shed sold 100,000 copies in its first 12 weeks. The unit's publisher isnow knuckling down to the challenging task of turning small-scale profitabilityinto large-scale profitability. IQON, having seen the first book in its Isms series, Understanding Art,translated swiftly into an extraordinary 21 languages, proved that it wasn'tjust beginner's luck by delivering its second at the very end of the year.Fifteen foreign language partners have already signed up for UnderstandingArchitecture, and sales and pre-orders at the time of writing exceed 65,000copies. RotoVision, our specialist visual arts and graphic design imprint, wascompletely re-engineered during the year to run as a stand-alone business - notwithout some pain - but is now smaller, leaner, and fit for the challenges thatlie ahead. The vacant role of publisher was filled by an internal promotion,which gave the unit renewed focus and impetus. All US distribution wasre-contracted on a co-edition basis, with the attendant benefits in cash flow.Foreign language sales responded well to the introduction of expertise fromelsewhere in the Group, increasing by 20% in the year: most RotoVision titlesnow routinely go into four or five foreign languages, and Designs of the Times,published in September 2005, is already available in seven. Other highlightsinclude 500 Digital Photography Hints, Tips and Techniques, published in early2005, which has 50,000 copies in print in a dozen languages; and the follow-up,500 More Digital Photography Hints, Tips and Techniques, which looks set toexceed this, with over 20,000 foreign orders booked before delivery of theEnglish language edition. One event during the year illustrates perhaps better than most what we call the"backlist-ability" of our books, that is, their propensity to sell on for yearsbeyond the original date of publication. In November 2005, the UK press brokethe story that popular artist Jack Vettriano had created some of his most iconicworks simply by copying characters straight out of a book. The volume inquestion? The Illustrator's Reference Manual, created by Quarto back in 1987. The division includes our Far East-based print broking subsidiaries, Regent andProVision. In extremely competitive markets, both performed strongly, andimproved on the prior year's performances. Publishing Division Quarto also publishes titles under imprints owned by the group. The PublishingDivision publishes, and distributes books, art prints, and magazines eithercreated in-house or licensed from third-party authors or as co-editions. Whilethe broad outlines of the subjects and categories of books by the division doesnot differ substantially from those produced by the group's Co-editionPublishing division, the focus of the publishing imprints is firmly on domesticmarkets. Titles are published with the expectation that the majority of theirsales will be in the home market. In sales terms, the most important market is the US, followed by Australia, andthen the UK. Common to all of our publishing imprints is this focus on domesticsales, and holding inventory of the titles they publish. To a greater, orlesser, extent, all units are involved in distributing their own titles so thatsales, marketing, fulfillment, and collections are as central to the units'activities as the creation of their individual publishing lists.Inventory-holding publishing inherently has a different risk profile fromco-edition publishing: there are greater fixed costs, including a much biggerinfrastructure, risk in holding the inventory and, because the business is moredependent on a domestic market, it is more exposed to volatility in retailsales. In exchange, publishers retain a bigger percentage of the retail dollaragainst which to write off these extra costs and risks. Premier Books, our 2005 acquisition, is in this division. For 2005, including the contribution from Premier books of £3.2 million,revenues totaled £58.0 million (2004: £43.4 million), and generated an operatingprofit of £5.3 million (2004: £4.1 million). The target operating profit is 10%of sales. As noted above, Rockport, which does have substantial co-edition business,merged its business operationally with CPi from the beginning of the year toform the Quayside Publishing Group, under the direction of Ken Fund. TheQuayside Publishing Group, operating from Minneapolis and the Boston area, is aniche publisher, with a mission to become the publisher of choice in thecategories that it publishes into, and is well established as publisher ofchoice in the areas of graphic design, home improvement, and outdoor lifestyle.Quayside is seeking to gain similar status in arts and crafts and, by teaming upwith fellow group subsidiary, Walter Foster, believes that it can gain thisrecognition in 2006. Creative Publishers international (CPi) is the newest member of the Quaysidegroup, and was added to the group in August 2004. CPi's publishing program wasin transition in 2005, with only 22 new titles produced, because of greater thananticipated underinvestment in the publishing list by the prior owners. Salesfor the year fell short of expectations, but operating profits, at over 15% ofsales, exceeded budget. Unlike other publishing units in the Quayside group, CPirelies primarily on accounts outside the traditional book market. The mainmarket is in the home improvement channel, which did exceedingly well this year,experiencing double digit growth, and mirroring the strength of the housingmarket in the US. Continued strong demand for the Black & Decker Complete Guideseries along with the revised editions of its top two selling titles made this astrong year. Sales of the Complete Guide to Home Wiring exceeded 125,000 copies,The Complete Guide to Home Plumbing exceeded 90,000 copies, and each of thefollowing titles shipped in excess of 50,000 copies: The Complete Guide toBathrooms, The Complete Guide to Ceramic and Stone Tile, and The Complete Guideto Building Decks. There was some difficulty with several accounts during the year; sales to bothMenards and Wal-Mart were off significantly, as both dropped several lines ofbooks during the year. Menards has revamped its book program entirely, and weexpect the business to return in 2006. A great deal of effort was undertaken tocreate a more vigorous ongoing publishing program, and the number of new titlesbeing launched in 2006 will double, which should lead us to continued growthwith our major retailers. In addition to its strong showing in home improvement, CPi registered growth inthe Outdoor category. To become the publisher of choice in this category, CPineeds to continue to grow the publishing program. Rockport Publishers, the original division of Quayside, had a successful andprofitable 2005. After a few years of flat sales, the company achieved growththis year and exceeded both its revenue and profit forecasts. The graphic designprogram, which makes up the core of the Rockport list, performed aboveexpectation, both domestically, and in co-edition, where sales exceeded $1.5million. The backbone of the Rockport program, which includes design annuals,such as Best of Brochure Design, Letterhead and Logo Design, and Logo Lounge,continues to sell successfully on an international scale. A more recent focus oncreating a backlist program with a core list of hard-working books paid off thisyear, with much of Rockport's success coming from co-edition and domesticreprints of books like Making and Breaking the Grid, The Universal Principles ofDesign, and our 1000 series. We also achieved notable critical and commercialsuccess with the publication of The Design of Dissent by one of the world's mostrenowned graphic designers, Milton Glaser. This book was reviewed nationally,and sold in co-edition in three languages. In addition, Amazon.com listed thetitle as one of the 50 best books of the year. 2005 marked the first full year of publishing for Rockport's Quarry Books list.There were notable successes with the "art and craft" titles, including Artists'Journals and Sketchbooks, Alphabetica, Altered Images, and the art doll series,Creative Cloth Dollmaking, each achieving sales in excess of 20,000 copies inthe first year. Quarry has found a good niche in this area, and is starting tosee other publishers begin to compete for this audience. We see this as achallenge. The general reference program, although still new, is off to a strong start withco-editions confirmed on the pet care titles, including The Good Food Cookbookfor Dogs and the Home Spa Book for Dogs, and strong domestic sales andco-edition interest for our backyard and artisan series. Quarry will continue toconcentrate on producing titles with consumer-driven, niche, audiences which aresought out by the readers. Its success in this direction is seen in thesignificant sales through Amazon, and other, on-line booksellers. Amazon is oneof Rockport's biggest accounts for both craft and graphic design titles. Fair Winds Press, publisher of practical self-improvement and lifestyle books,marked its fourth year of publishing in 2005. It was a year of transition. Afterthree years of spectacular sales and profit growth, driven primarily by the DanaCarpender low-carbohydrate cookbook franchise, Fair Winds experienced a dramaticincrease in returns as a result of the crash of the low-carbohydrate craze.Without another best-seller to offset the returns, Fair Winds fell short of itsfinancial targets. This, in turn, offset some of the success of Rockport's otherlists, and led to a £0.5 million fall in operating profits. There were some high notes, however: In 2005, Fair Winds published Frumpy toFoxy in 15 Minutes Flat to positive press and strong sales and, at the end ofthe year, launched Makeup Makeovers, which has already sold more than 40,000copies. Fair Winds competes in the highly competitive category ofself-improvement, and is retooling its editorial efforts to create books thatappeal to markets outside the US book trade. Fair Winds made progress in thisdirection in 2005 with record foreign co-edition sales, and is expanding one ofits most successful categories with the planned autumn 2006 launch of Quiver, anew line of illustrated sex books. Southern California-based, and for over 80 years one of the leading USpublishers of how-to books for amateur artists, Walter Foster posted flatrevenues for 2005, as the core business experienced lower sales, and increasedsales of activity kits, and co-editions, made-up the difference. Walter Foster'ssales, over the last four years, have remained within a narrow range, and havenot shown growth. The profits were hit, over the last two years, due to theinvestment in a new custom children's book producing division, started in late2003, that did not generate large enough customer support, and was closed in2005. Walter Foster has been successful in expanding sales of its core productsoutside the art and craft market and into other channels, but adult art productsdo not have as wide a market appeal as children's, and licensed, titles in othermarkets. There is more opportunity to present children's, and licensed,products, than adult titles, to a variety of markets. In order to take advantageof the opportunities, and based on the customer relationships that Walter Fosterhas established with retailers outside the art market, it has established itschildren's publishing team under a separate publisher. Separating out thechildren's list will allow the publishers of both lists better to focus on thegrowth prospects for their respective publishing programs. In 2006,Walter Fosterand Quayside are consolidating their sales forces in the US to take advantage ofrelationships and build upon the presence each business has in the marketchannels it services. Walter Foster's best selling kit last year was the Rock Painting Kit, whichincluded all the tools and paints needed to do the projects, plus a rock, and aCD with 450 patterns. Of the 79,800 copies sold, 42,800 were co-edition sales,in four different languages. The best selling adult book was the Color MixingRecipes title, which was acclaimed by the Craft & Hobby Association as the bestart book of 2005. Of the 41,000 units sold in 2005, 16,000 were co-editionsales, in four different languages. The book provides a reference of more than1,100 common subjects and features an acetate color mixing grid for accuratelymeasuring paints. Quarto's international co-edition sales team, based in London,made the co-edition sales. The Craft & Hobby Association also awarded WalterFoster the best children's product award (Paint Like A Famous Artist), and theaward for best art product overall (Getting Started In Watercolor DVD) in 2005.The best selling licensed title was 5 Splashy Styles of Spongebob Squarepants,selling 521,000 copies. Book Sales, one of the most established and successful promotional publishers inthe US, experienced flat sales, and operating profit dipped, as orders dried upin the last six weeks of the year. Once again, good progress was made with itsown publishing program, a book on baseball, Ballparks, selling 100,000 copiesduring the year. In art print publishing, we continue to make small profits on a slightlydeclining sales base, but there are signs that sales erosion is leveling off.The market was very erratic all year, with no clear pattern emerging, exceptthat, with consumers flush with money, the trend was towards any kind ofreproduction that appeared one-off in nature, such as prints on canvas that wereindividually embellished, however slightly, and individually sized digitalprints, known as giclees. The industry is, clearly, going through a majortransition, and we are not comfortable enough that we can lead the market. Weshall tread water while we try to sense where the market is going. Quarto Magazines had a very difficult year. Almost all magazines depend veryheavily on advertising revenue and this, for our niche, special-interest,titles, was in short supply. Our flagship Artists' and Illustrators' Magazine,and its accompanying Fine Art Materials show, struggled to make a profit,despite good subscriber numbers and good attendance at the show. But the unitwas tipped into heavy losses by the decision, taken in 2004, to launch newtitles. Creative Scrapbooking Magazine and Fine Wine magazine have not yetachieved the circulation and advertising revenues that were projected initially.We are keeping the situation under close review, and intend to act decisively ifthe position does not improve in the first half of 2006. Overall, afterincluding the losses on the start-ups, the unit's performance deteriorated byalmost £0.5 million. As the UK business environment remains tough, it will be aconsiderable achievement to turn around these two magazines in 2006. In the UK, Aurum and Apple both battled hard for sales during the year. For muchof the year, their results trailed 2004's but, in the final few months, salesimproved and, although they underperformed 2004, in what was a very difficultretailing environment, the outcomes were in line with expectations. Both suffered from the extreme polarization in the UK trade between bestseller andalso-rans. Apple did itself no favors with an unappealing offering of new titlesin the first half of the year, and experienced higher than average returns.Although sales were strong in the run-up to Christmas, not enough time remainedto make up the shortfall, and the imprint ended the year feeling it should havedone better. Aurum's big winner was the anniversary volume, The Trafalgar Companion (£45),with 17,000 copies in print. As reported by others, across the board, Aurum'ssales in traditional bookstores were mixed, and sales were down at bothWaterstones and Ottakers, and there was pressure on backlist sales because ofretailers' reluctance to stock slow-moving items but, through supermarkets andAmazon, they were well ahead. The Jacqui Small joint venture turned in aslightly disappointing set of figures, but this was partly the result of thedecision taken in 2004 to increase the output of the list's titles which,because of the gestation period of Jacqui's books, will come to fruition in2006. Lifetime and Premier Books are distinctive businesses in Quarto's PublishingDivision. Operating from Australia and New Zealand respectively, they are boththe largest display marketers of books in their countries. Display marketing isa simple concept, and everything depends on execution and product selection.Display marketers do not create titles; they simply license the displaymarketing rights from publishers. Fundamentally, they visit workplaces and, by arrangement with the management,leave on display a box of books, and related items, which they retrieve sometime later, having allowed adequate time for staff to examine the samples, andfulfill orders on the spot. For the consumer, the two advantages are price andconvenience. In the case of Lifetime, while both businesses operate similartwo-weekly cycles of drops and pick-ups, Lifetime's "agents" are self-employedfranchisees, obtaining their inventory from master franchisees in each state inAustralia, who take the risk in holding the inventory; in New Zealand, theinventory is owned by Premier and the agents are paid commission on their sales. The franchise approach is appealing because inventory risk is reduced, but itinvolves a great deal of work in maintaining the integrity of the franchise, andthis had been sadly neglected under prior ownership. We have been rectifyingthis. We have also addressed a number of other operational deficiencies, so thatmanagement has the best possible handle on what is happening, in a very dynamicbusiness. Lifetime's operating profit increased by £0.7 million. Premier does not operate a franchising system and, given the small size of NewZealand's population, it can manage its operations extremely efficiently fromthe centre. While it does, in theory, have a greater financial exposure thanLifetime in its inventory-holding, in practice both units operate rigoroustesting procedures before committing to many of their major purchases. Fewerthan 10% of tested items are, in fact, ordered, and inventory obsolescence isnot a major issue. Because of the different ways they operate, there is no real comparabilitybetween Lifetime's and Premier's figures. Lifetime sells the inventory it orderfrom its suppliers to its master franchisees at a mark up on cost, and Premieraccounts for the full value of final sales. Finally, as announced earlier in the year, we decided that we could not affordhigher occupancy costs for our publishing and marketing services units, AP, andWestern. Accordingly, we did not renew our lease in Reading, and amalgamated thetwo units in the Image Factory building in Chippenham, leaving only a salesoffice in the Reading area. A certain amount of re-equipping was necessary andthere were, inevitably, a few glitches in both the move and the amalgamation,particularly in software and working methodology compatibilities. Fortunately,these were anticipated, and sorted out swiftly, with no discernible loss ofcustomers. The cost of the restructuring (£0.6 million) has been treated asnon-recurring. CONSOLIDATED INCOME STATEMENT Year ended December 31, 2005 Notes 2005 2004 £000 £000 Continuing operationsRevenue 1 95,038 79,750Cost of sales (60,444) (50,880) Gross profit 34,594 28,870 Other operating income 227 126Distribution costs (4,148) (3,014) -------- --------Administrative expenses before amortization ofintangibles and non-recurring items (21,898) (18,466)Amortization of intangibles (1,381) (509)Non-recurring itemsAborted acquisition costs (102) -Restructuring costs (644) - -------- -------- Total administrative expenses (24,025) (18,975) -------- --------Profit from operations before amortization ofintangibles and non-recurring items 8,775 7,516 -------- -------- Operating profit 1 6,648 7,007 Finance income 128 65Finance costs (2,351) (1,680) Profit before tax 4,425 5,392 Tax (1,263) (1,255) Profit for the year 3,162 4,137 Attributable to:Equity holders of the parent 2,497 3,734Minority interest 665 403 3,162 4,137 Earnings per shareFrom continuing operationsBasic 2 13.2p 20.8p Diluted 2 12.9p 19.6p CONSOLIDATED BALANCE SHEET Year ended December 31, 2005 2005 2004 £000 £000Non-current assetsGoodwill 10,317 7,732Other intangible assets 4,842 5,334Property, plant and equipment 8,533 8,982Deferred tax assets 25 4 Total non-current assets 23,717 22,052 Current assetsInventories 23,521 20,638Tax receivable 152 154Trade and other receivables 28,399 23,646Cash and cash equivalents 14,431 12,578 Total current assets 66,503 57,016 Total assets 90,220 79,068 Current liabilitiesShort term borrowings (3,932) (7,250)Trade and other payables (26,793) (24,995)Tax payable (1,258) (1,304) Total current liabilities (31,983) (33,549) Non-current liabilitiesMedium and long term borrowings (45,599) (38,408)Deferred tax liabilities (668) (630)Other payables (114) (210) Total non-current liabilities (46,381) (39,248) Total liabilities (78,364) (72,797) Net assets 11,856 6,271 2005 2004 £000 £000EquityShare capital 1,162 1,063Paid in surplus 21,716 19,199Retained earnings and other reserves (14,666) (16,678) Equity attributable to equity holders of the parent 8,212 3,584 Minority interest 3,644 2,687 Total equity 11,856 6,271 CONSOLIDATED CASH FLOW STATEMENT Year ended December 31, 2005 2005 2004 £000 £000 Profit for the period 3,162 4,137Adjustments for:Net finance costs 2,223 1,615Depreciation of property, plant and equipment 1,067 1,073Tax expense 1,263 1,255Amortization of intangible assets 1,381 509Equity settled share - based payment expense 9 4Loss/(gain) on disposal of property, plant and equipment 51 (1) Operating cash flows before movements in working capital 9,156 8,592Decrease/(increase) in inventories 28 (722)(Increase)/decrease in receivables (3,057) 301Decrease in payables (120) (1,668) Cash generated by operations 6,007 6,503 Income taxes paid (1,428) (1,062) Net cash from operating activities 4,579 5,441 Investing activities Interest received 119 51Proceeds on disposal of property, plant and equipment 237 38Purchases of property, plant and equipment (678) (1,020)Acquisition of subsidiaries (net of cash acquired) (2,847) (13,700) Net cash used in investing activities (3,169) (14,631) Financing activitiesDividends paid (1,197) (1,077)Interest payments (2,390) (1,753)Proceeds on issue of share capital 18 26New bank loans raised 2,288 10,967Dividends paid to minority interest (121) (103) Net cash (used in)/from financing activities (1,402) 8,060 Net increase/(decrease) in cash and cash equivalents 8 (1,130) Cash and cash equivalents at beginning of year 10,611 12,455 Foreign currency exchange differences on cash and cash equivalents 1,280 (714) Cash and cash equivalents at end of year 11,899 10,611 NOTES 1. Segmented analysis Business segments Co-edition Co-edition Publishing Publishing Total Total Publishing Publishing 2005 2004 2005 2004 2005 2004 £000 £000 £000 £000 £000 £000Revenue --- ---Total sales 38,314 37,391 57,989 43,395 96,303 80,786Inter-segmentrevenue (1,259) (1,024) (6) (12) (1,265) (1,036) External 37,055 36,367 57,983 43,383 95,038 79,750sales --- --- OperatingprofitBeforeamortizationof 4,380 4,263 5,346 4,082 9,726 8,345intangiblesAmortizationof (12) (12) (1,369) (497) (1,381) (509)intangibles 4,368 4,251 3,977 3,585 8,345 7,836 Unallocatedcorporateexpenses (951) (829)Abortedacquisitioncosts (102) -Restructuringcosts (644) - Profit fromoperations 6,648 7,007Investmentincome 128 65Finance costs (2,351) (1,680) Profit beforetax 4,425 5,392Tax (1,263) (1,255) Profit aftertax 3,162 4,137 Geographical Segments Revenue Revenue 2005 2004 £000 £000 United Kingdom 15,848 15,804United States of America 46,305 43,072Australia and the Far East 18,344 8,375Europe 10,415 9,211Rest of the World 4,126 3,288 95,038 79,750 NOTES (continued) 2. Earnings per share 2005 2004 £000 £000Earnings for the purposes of basic earnings pershare, being net profit attributable to equityholders of the parent 2,497 3,734Effect of dilutive potential ordinary shares: 57 23Interest on loan notes (net of tax) 204 446Interest on convertible redeemable preference shares Earnings for the purposes of diluted earnings pershare 2,758 4,203 Number NumberNumber of sharesWeighted average number of ordinary shares for thepurposes of basic earnings per share 18,893,419 17,955,495Effect of dilutive potential ordinary shares:Share options 139,183 111,636Dilutive loan note 1,074,288 437,347Dilutive preference shares 1,218,131 2,923,514 Weighted average number of ordinary shares for thepurposes of diluted earnings per share 21,325,021 21,427,992 2005 2004 pence pence Basic 13.2p 20.8p Diluted 12.9p 19.6p Adjusted EarningsEarnings for the purposes of basic earnings pershare, being net 2,497 3,734profit attributable to equity holders of the parentAmortization of intangibles (net of tax and minorityinterest) 925 345Restructuring costs 644 -Aborted acquisition costs 102 - Earnings for the purposes of adjusted earnings pershare 4,168 4,079Effect of dilutive potential ordinary shares: 57 23Interest on loan notes (net of tax) 204 446Interest on convertible redeemable preference shares Earnings for the purposes of diluted earnings pershare 4,429 4,548 2005 2004 pence pence Basic 22.1p 22.7p Diluted 20.8p 21.2p NOTES (continued) 3. Dividends 2005 2004 £000 £000Amounts recognised as distributions to equity holders in theperiod:Interim dividend for the year ended December 31, 2005 of2.9p (2004: 2.75p) per share. 567 494Final dividend for the year ended December 31, 2004 of 3.5p 630 583(2003: 3.25p) per share. 1,197 1,077 Proposed final dividend for the year ended December 31, 2005of 736 6293.6p (2004: 3.5 p) per share. 736 629 4. Consolidated statement of recognised income and expense Year ended December 31, 2005 2005 2004 £000 £000 Exchange differences on translation of foreign operations 485 (390)Net (loss)/gain on hedge of net investment in foreignsubsidiaries (120) 33Change in the fair value of cash flow hedges 329 130 Net income/(expense) recognised directly in equity 694 (227) Profit for the year 3,162 4,137 Total recognised income and expense for the year 3,856 3,910 Attributable to:Equity holders of the parent 3,191 3,507Minority interest 665 403 3,856 3,910 5. The financial information set out above does not constitute thecompany's statutory accounts for the years ended December 31, 2005 or 2004 butis derived from the 2005 accounts. Statutory accounts for 2004, which wereprepared under UK GAAP, have been delivered to the Registrar of Companies, andthose for 2005, prepared under accounting standards adopted by the EU, will bedelivered in due course. The auditors have reported on those accounts; theirreports were (i) unqualified, (ii) did not include references to any matters towhich the auditors drew attention by way of emphasis without qualifying theirreports and (iii) did not contain statements under section 237(2) or (3) of theCompanies Act 1985. 6. The accounting policies adopted for use in the preparation of the 2005Preliminary Results and of the 2005 Annual Financial Statements were included inthe Interim Results released on 2 September 2005. 7. The Annual Report will be sent out to shareholders in due course.Additional copies can be obtained from the Finance Director, The Quarto Group,Inc., 226 City Road, London EC1V 2TT. Tel: 020 7700 9000 (email:mickm@quarto.com). This information is provided by RNS The company news service from the London Stock Exchange