QRT.L Regulatory News (QRT)

THE QUARTO GROUP, INC

Interim Results

for the Six Months Ended 30 June 2011

Quarto (Full List: QRT.L), one of the largest international co-edition book publishers based in London, announces its Interim results for the six months ended 30 June 2011.

Financial Highlights

* excludes amortization of non-current intangibles and exceptional items

Operational Highlights

·; Acquisition Activity

o Acquisition of Frances Lincoln Ltd

§  A British book publisher well-known for its award-winning children's list and its horticultural titles

§ Significantly increases presence in the UK market

o Purchase of Cool Springs Press

§ A leading publisher of gardening and garden related titles

§ Now part of Quarto's Quayside Publishing Group in the US

·; Continued strong divisional performance

o Publishing division

§ Revenue up 3% to $51.6m (2010: $50.2m)

o Co-edition division

§ Revenue up 12% to $21.0m (2010: $18.7m)

Financial Highlights

o Improved trading; robust revenue and profit growth

o Reduction in interest cost

o Interim dividend of 3.35p declared

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About Quarto:

Quarto is one of the largest international co-edition book publishers with two principal strands of activity: its Publishing segment publishes books, under imprints owned by the Group; and its Co-Edition Publishing segment creates books that are licensed to third party publishers for publication under their own imprints in many languages around the world. 

Quarto is an international co-edition book publisher with two principal strands of activity: the Publishing segment publishes books, in the US and the UK, under imprints owned by the Group; the Co-Edition Publishing segment creates titles that are licensed to third party publishers around the world for publication under their own imprints in many languages and many geographies. 

Key Points from the Chairman's Statement

"It is simply wrong to portray the book publishing industry as being in decline. New information has recently been published, and confirms Quarto's own experience that it continues to grow."

Chairman's Statement

Today, along with the publication of our solid financial results for the six months ended June 30, 2011, we are happy to announce the acquisition of Frances Lincoln Ltd, a British book publisher well known for its award-winning children's list and its horticultural titles. Founded by the eponymous Frances Lincoln, it has been run, since her tragically early and untimely death, by her husband, John Nicoll, who had been the publisher of Yale University Press in London. This acquisition significantly increases our presence in the UK market, at a time when many booksellers, in the UK and other parts of the English-speaking world, are grappling with the challenges and opportunities created by the impact of online retailing and e-books, and reinforces our confidence in the future of book publishing.

Business Performance

Adjusted results are stated before amortization of non-current intangibles and exceptional items. The reconciliation to the statutory results appears in note 8 of this announcement.

For the six months ended June 30, 2011 adjusted profit before tax jumped 21% to $1.4 million (2010: $1.2 million), with adjusted earnings per share of 4.4 cents (2010: 3.4 cents), an increase of 29%, accounted for by improved trading, the reduction in interest costs, and the lower levels of minority interest. The board has declared an unchanged interim dividend of 3.35p net, payable on October 27, 2011 to shareholders on the record at September 30, 2011.

As expected, following the purchases of the minority interests in Lifetime and Jacqui Small, and the acquisition of Cool Springs Press and the repayment of its borrowings, net debt rose to $90.3 million (2010: $86.6 million).

This is again a good performance in the face of considerable retail weakness in the major English-language markets. For the International Co-Edition segment, which licenses content and supplies printed copies, on a geographical basis, to publishers around the world, the first half of the year is traditionally the quieter half. Revenues increased by 12% to $21 million (2010: $18.7 million) with the operating profit rising by 17% to $0.8 million (2010: $0.7 million). A steady release of new titles, and numerous reprints accounted for the improved result, and the Quarto Adult, Marshall, and Jacqui Small lists were outstanding performers.

The Book Publishing segment, operating entirely in the fragile English-language markets, benefited from a first time contribution from Cool Springs Press, a gardening imprint acquired in February, and posted a 3% revenue gain to $51.6 million (2010: $50.2 million). Operating income rose by 4% to $4.3 million (2010: $4.2 million). Good performances came from Lifetime, in Australia, Rockport, CPi, and Walter Foster in the US, and Aurum in the UK.

During the period, Borders in the US and the RED Group in Australasia went into bankruptcy administration, and business from Waterstone's in the UK slowed to a trickle, so these growth figures impressively demonstrate both the resilience of Quarto's titles, and our ability to adapt to difficulties in any single sales channel; in this instance, the chain store booksellers.

For the trailing 12 months ended June 30, 2011, group revenues were up 3% to $180.0 million (2010 $174.1 million). Operating income remained flat at $16.5 million (2010: $16.4 million). To date, income from all digital streams is growing, and is expected to exceed 1% of group revenues by the end of the year.

We are keen to exploit these new digital platforms for our titles. Most of our titles are heavily illustrated instructional and reference works and, to date, there is no affordable software to translate them into attractive digital versions for e-readers, so the growth of our digital revenues has not yet been explosive.

As the value of our content to aggregators grows, we are licensing some of it, on a restrictive basis, where this makes commercial sense. On both sides of the Atlantic we are testing a variety of initiatives, and shall continue to do so.

Corporate Activity

During the first half of 2011, we acquired the outstanding shares of Lifetime, from its founder, who remains involved with the business, and the shares outstanding in the hands of the founder of Jacqui Small, who remains in charge of her eponymous imprint. We also acquired Cool Springs Press, a publisher of regional US gardening titles, many of which are sold through the home center channel in which we are already very active with our CPi list of how-to home improvement titles. The smooth transition to integration with our CPi business was thrown off track by the untimely, early death of Cool Springs's founder during a fishing vacation, but a new, very-experienced publisher has now been appointed.

We also announce today the significant acquisition of Frances Lincoln Ltd, for a cash consideration of £4.5 million. For the year ended March 31, 2011, Frances Lincoln reported an audited profit before tax of £619,000, net assets of £3.8 million and gross assets of £5.9 million.

This important acquisition more than doubles the size of our UK-based book publishing revenues. Frances Lincoln also has a distribution business, handling sales and fulfillment for a number of third-party publishers. We anticipate that this will be linked with the group's existing sales and distribution activities, and will handle titles from our US imprints in the UK and continental Europe.

Frances Lincoln has a well-deserved reputation as a publisher of authoritative gardening and horticulture books, and award-winning children's titles. It publishes extensively in outdoor activities, UK and overseas travel, art, design, and photography, and general non-fiction. It is particularly well known as the publisher of Alfred Wainwright, Julia Bradbury, Christopher Lloyd, and many other well-respected authors.

John Nicoll, the managing director, will remain at the helm for a transitional period, after which he will be available as a consultant. David Graham, who joined us early this year to run the Aurum group and to create the new Union Press imprint, will head the transition team. Editorially, and creatively, the lists will retain their distinctive approaches but we anticipate that we shall be able to make some useful savings in the administration of the businesses.

Strategy

We are in a period of rapid evolutionary transition that is unsettling. In business terms, it doesn't matter profoundly to Quarto whether our material is delivered in electronic or in printed format. Our content has been developed for a static format. Simple electronic enhancements, such as searchability and a dictionary, are bonuses, as anybody who has ever used an index or sought a definition will recognize immediately.

Many start-up firms are groping towards a new medium that will take advantage of the unique properties of the portable tablet and e-reader devices, including smartphones. We are watching these developments closely, but haven't yet stumbled on an approach that seems likely to succeed. At this moment, the obstacles are both technological and economic. If and when a new medium is born for these delivery platforms, it will require a vast amount of content, and we shall then be able to leverage our position to become a significant player in the burgeoning market.

We don't endorse the somewhat fashionable concept that the printed book is simply a "container" for its content; in this centenary year of Marshall McLuhan's birth, his insight that "we shape our tools, and thereafter the tools shape us" helps explain why we have so many different kinds of media, and why "the book", as a means of editing and organizing ideas and content, will remain alive and well in something resembling its existing form, and distinct from other media. Discussions about the disintermediation of publishers, and the vitality of self-publishing, make for lively debate and fulsome commentary; the strong likelihood is that the outcome will be far less revolutionary.

There has been much over-excited commentary about the digital revolution. This discussion is generally well intentioned, but the more apocalyptic essayists are only treading a well-worn path that others have followed almost since the earliest days of printing, when books held a near monopoly of reading material. This isn't the place to rehash, in detail, the long story of the emergence of "competing" media, such as newspapers, serial publications, i.e. magazines, movies, radio, television, and so on. In the face of this competition, book publishing flourished, adding to the size of its audience, and to the output of new titles. It's enough to remember this to sense that the current new challenges are part and parcel of an evolutionary story.

It is simply wrong to portray the book publishing industry as being in decline. New information about total industry revenues in the US confirms our own experience that it continues to grow. BookStats, a comprehensive survey, and the largest of its kind, undertaken by the US book publishing industry, was published last week. It mirrors Quarto's own experience that, once revenues from new sales channels are included in the tally, book sales in the US in 2010 were 5.6% above 2008's, even during a recessionary period. Growth was across the board, and this, again, is in line with Quarto's own experience. The survey endorses our strategic direction, which has been to enter new markets in a serious way, and we continue with this approach because, self-evidently, it is working.

People, even those in the book publishing industry, often overlook some of the oddities of the business. For the best part of a century now, formats have played a big part in book publishing although, at the end of the day, we have been simply producing reading material. We may publish the same content at different prices and for different audiences and users in a hardcover format with a jacket, or in "trade" paperback format, or in the mass market, racking format; and now, in digital formats for electronic readers. The industry has grown, with the times, to adapt and "repurpose" its content for evolving markets.

We have analyzed a number of strengths that Quarto has and will build on and extend them.

Over 35 years Quarto has created books that, because they are well made and affordable, have delivered outstanding revenues over many years. We are good, therefore, in identifying evergreen human interests and satisfying peoples' desires to learn more, obtain new skills, and pursue their interests.

On the international co-edition book publishing side, we are among the very few firms that have prospered consistently. This is attributable, in large part, to the relevance and quality of our titles, and to the disciplined implementation of our business model. Although each title is different and economies of scale are not significant on the book creation side, our licensing approach gives us a larger international reach than much of the competition. In our book publishing segment, we now have enough scale in the US and the UK to build upon our position in burgeoning new markets, and will devote more resources to discovering and exploiting new channels to reach our target audiences.

Our strategy for growing Quarto remains focused on acquiring other publishing lists. This will enable us to leverage our international market knowledge and reach, and to exploit our distribution infrastructure. We, and other book publishers, are exploiting new opportunities; almost all have found outlets other than bookstores for titles, as bookstore sales have been challenging, and have benefitted from growing online and e-book sales. We are confident that further interesting acquisition opportunities exist.

Our acquisition of Cool Springs Press, earlier this year, is giving us a greater presence in the home improvement channel because most home improvement centers also have large garden centers, and we are providing both printed and digital content to retailers and users.

We are maintaining our output of new co-edition titles and have an enormously deep well of content that can be repurposed easily because, by and large, we own the content outright. This is extremely unusual among book publishers, and is a deeply valuable hidden asset of the business. We are regularly updating and refreshing our content, and it can be repurposed relatively easily. We already license some of it digitally - through public library systems, on commercial websites, and in e-books, and shall license it digitally even more widely, as this becomes profitable. This will put us in a strong position to act decisively when we determine further appropriate ways to monetize our content digitally.

Outlook, opportunities, and challenges

The collapse of Borders in the US, and of Angus & Robertson and the whole of the RED Group in Australasia, and the malaise of Waterstone's in the UK before its recent rescue, have stimulated much discussion about "the end of the book". I have written to shareholders before, explaining why we think this view is misguided and, inevitably, shall have to explain again our confidence in the book's future.

The travails of bricks and mortar book chains are real, but it is too facile to suggest that the book is dead. The big box bookstore chains have some common characteristics that did not serve them well in the age of online retailing and e-books, and there is some hope that these will be reversed. For dedicated book readers, a trip to the bookstore was always as much a voyage of discovery as for the purchase of a specific title. The loss of many bookstores will undoubtedly prove to be a massive challenge for book publishers. But, the numbers are now suggesting that more independent bookstores are opening than are closing.

Book publishing is an extraordinarily fertile industry, producing more new products each year than any other consumer products industry. A good local bookseller, such as Daunt Books in the UK, is a destination store attracting readers who browse and linger, and will continue to do so because the selection and presentation of the titles is so exciting. Online retailing will remain a competitive challenge and canny booksellers will have to pay attention to their local demographics, and carry exciting ranges of books. What will be difficult for publishers is that they will have to discover new ways to market their titles to the intended audiences.

The challenge is not so much to develop or acquire new marketing skills, although these will be necessary. Instead, it is to adjust the business model to allow for a much greater proportion of revenue to be spent on marketing. This may be easy for some businesses: at Quarto, we have long contended that the book trade's unusual sales methodology, i.e. of taking back and crediting returns of unsold merchandise from booksellers - something that developed as a marketing tool to allow aggressive publishers to "rent" prominent space in the book reader's natural habitat, the bookstore - has always been a marketing cost, even if insiders and observers have tended to lambast it wrongly, in my view, as evidence of the inefficiency of the book distribution system. While there's no suggestion that this institutionalized practice will disappear, recognition of what it means in an era of declining bricks-and-mortar shelf space, could well free up money to be spent on other marketing initiatives. The number of new titles continues to grow. This is because people are interested in more and more specialized areas, and books help people to explore their particular interests more fully, and very affordably.

Most book publishers have been working diligently to test new marketing approaches. The results, from observation, and our own limited experience, have been equivocal. For example, advertising our special interest titles in electronic media has been pretty unrewarding, even when focused in highly targeted specialized blogs and portals; by contrast, advertising in specialized print media remains a viable approach to generate awareness and sales of our titles. Social media has not produced the interest and outcomes that we, and others, hoped for from such exposure. Will this always be so? Undoubtedly not but, for the moment, we read the facts as we see them.

As far as e-books are concerned, they have been growing by leaps and bounds, perhaps not least because people have snapped up e-readers and enthusiastically bought titles to put on them. Their sales may represent as much as 25% of the units sold by publishers of fiction and narrative non-fiction, but they have made few inroads into the sales of illustrated books. To date, the economics and the available software impede the growth of illustrated e-books. No doubt, these obstacles will be overcome, but enhancing existing titles will always be costly and, if the medium is to take off for illustrated books, these will have to be created specially for e-readers, rather than being routinely converted from existing titles.

I write this report in the shadow of yet more convulsions in global markets and greater fears about economic recovery. Quarto's prudence will once again be tested and, while these are undeniably choppier seas, we expect to navigate safe passage through them. Senior executives and managers at Quarto are adept at managing change and challenges and I believe we remain up to the task.

Laurence F Orbach

Chairman and CEO

London, August 16, 2011

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED INCOME STATEMENT

for the six months to June 30, 2011

THE QUARTO GROUP, INC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the six months to June 30, 2011

THE QUARTO GROUP, INC

CONSOLIDATED BALANCE SHEET

at June 30, 2011

THE QUARTO GROUP, INC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months to June 30, 2011

THE QUARTO GROUP, INC

CONDENSED CASH FLOW STATEMENT

for the six months to June 30, 2011

THE QUARTO GROUP, INC

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months to June 30, 2011

1. Introduction

These interim consolidated financial statements are for the half year to June 30, 2011. They were approved by the Board on August 16, 2011 and are unaudited, as is the case with the comparative figures to June 30, 2010. These interim financial results do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year to December 31, 2010, prepared in accordance with International Financial Reporting Standards as adopted by the EU, which carried an unqualified Auditors' Report, have been filed with the Registrar of Companies and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2. Basis of preparation

These interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting", as adopted by the European Union.

The Directors have formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. The Group has significant banking facilities. In particular, the Group has committed facilities of $165m through to June 2012. The Group is currently reviewing its financing arrangements, which include the possible extension or renegotiation of existing facilities. The Group has continued to comply with its bank covenants and is budgeted to do so for the foreseeable future.

3. Accounting policies

The accounting policies adopted are consistent with those of the annual financial statements for the year ended December 31, 2010, as described in those financial statements, with the exception of a change in the presentational currency of the Group.Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.Following an exercise to assess the impact of the principal trading currencies of the Group, these results have been presented for the first time in US Dollars. This is a change from prior years and the Group's previously published interim financial statements, which were presented in Pounds Sterling.Assets and liabilities were translated into US dollars using the closing rate at the 2010 balance sheet date. Income, expenses and cashflows recognised in the period were translated at an average US dollar exchange rate for the period. Resulting exchange differences were reflected as currency translation adjustments and included in the translation reserve. Equity and share capital items were translated using historic rates and were not retranslated at each subsequent balance sheet date. The applicable rates used for 2010 were:June 30 2010: Average rate 1.52, Closing rate 1.50December 31 2010: Average rate 1.55, Closing rate 1.56Other than the change in the accounting policy for the Group's choice of presentational currency, no new accounting standards have had a significant impact on the Group's results.

Segmental analysis

4. Exceptional items

Exceptional items primarily relate to acquisition and restructuring costs.

5. Taxation

Taxation for the six months to June 30, 2011 is based on the estimated effective tax rate for the year. The rate that has been used is 25% (June 30, 2010: 25% and December 31, 2010: 18%).

6. Earnings per share

The calculation of earnings per share is based on 19,677,229 shares (the weighted average number of issued shares, excluding those held as treasury stock) (June 30, 2010: 19,677,229 shares; December 31, 2010: 19,677,229) and profits of $124,000 (June 30, 2010: losses of $186,000; December 31, 2010: profits of $5,749,000). The calculation of adjusted earnings per share is based on earnings of $859,000 (June 30, 2010 $664,000; December 31, 2010: $8,320,000), calculated as follows:

There is no dilution in earnings per share or adjusted earnings per share for the six months to June 30, 2011 and June 30, 2010, or for the year to December 31, 2010.

7. Dividend

The interim dividend of 3.35p per share is payable on October 27, 2011, to shareholders on the register on September 30, 2011, with an ex-dividend date of September 28, 2011.

8. Reconciliation of figures included in the Announcement

9. Net debt

Total borrowing facilities, at June 30, 2011, were $169m. Committed facilities total $165m and comprise a $115m syndicated facility which extends to June 12, 2012, and a $50m private placement facility, which extends to December 7, 2014, on which repayment commences on December 7, 2012.

10. Risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group remain those detailed in the Annual Report for 31 December 2010, a copy of which is available on the Group website at www.quarto.com. The Board considers that these remain a current reflection of the risk and uncertainties facing the business for the second half of the financial year.

11. Directors' Responsibility Statement in respect of the Condensed Interim Financial Statements

The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union, and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules of the Financial Services Authority, paragraphs DTR 4.2.7 and DTR 4.2.8.

The directors of The Quarto Group, Inc. are listed in The Quarto Group, Inc. Annual Report for 31 December, 2010. A list of current directors is maintained on the Quarto website: www.quarto.com.

THE QUARTO GROUP, INC

MANAGEMENT'S PRO FORMA ABBREVIATED INCOME STATEMENT

for the twelve months to June 30, 2011

Note:

The above figures do not include amortization of non-current intangible assets or exceptional items.