QRT.L Regulatory News (QRT)

2 Sep 2005 07:00

Quarto Group Inc02 September 2005 THE QUARTO GROUP, Inc. - INTERIM ANNOUNCEMENT Quarto, the London-based and listed international book publisher, announces thatit is on track to achieve a seventh successive year of progress in underlyingEPS. • Underlying operating profit increased by 9.9% to £2.2m on revenue up 23.0% to £38.2m. • The results reflected the growing importance of own-imprint publishing (following four acquisitions in the 12 months to 30 June 2005), timing differences on co-edition revenues, and some sales deterioration at the publishing services business, now consolidated successfully into one manufacturing facility. • On a trailing 12-month basis, revenue increased by 14% to £86.9m and underlying operating profit by 13% to £7.7m. The underlying gross margin improved to 35% from 32%. • The interim dividend per share is increased by 5.5% to 2.9p, reflecting the Board's confidence in the outcome for the year. • Quarto's core strategy, of focusing on areas of perennial interest, which it knows well from its extensive experience of publishing international co-edition books, continues to work well. • Amongst publishing successes in the period were Quarto's Poker Player's Bible (which has reprinted four times and is approaching 100,000 copies in print), Quintet's 1,001 Movies you Must See Before You Die (released last year, which has notched up almost 400,000 copies in print), Aurum's Trafalgar (which combines the most detailed account of the battle ever published and a new biography of Nelson), Rockport's The Design of Dissent (by the eminent US graphics designer, Milton Glaser) and Creative Publishing's bestseller Outdoor Projects for your Power Washer (which sold 77,000 copies during the period). Laurence F. Orbach, Chairman, stated: "I am happy to report that, for the sixmonths ended June 30, 2005, operating profit has exceeded our internal forecast. Although there are unmistakable signs of tightening in some of our core markets,I hope that we shall be able to achieve our seventh successive annual increasein adjusted diluted earnings per share, although, probably, not by as much as wehad estimated internally earlier in the year. Quarto is a resilient business,with a very high percentage of its revenues coming from the sale of bookscreated in earlier years, both from titles licensed to other publishers, andfrom those published under its own imprints. This will continue to stand us ingood stead, and provide a solid platform for further growth." Enquiries: The Quarto Group, Inc. 020-7700 9000Laurence Orbach (Chairman & CEO)Mick Mousley (Finance Director) Bankside Consultants LimitedCharles Ponsonby 020-7367 8851Ian Payne 020-7367 8853 THE QUARTO GROUP, INC CHAIRMAN'S STATEMENT Dear Shareholder: I am happy to report that, for the six months ended June 30, 2005, Quarto'soperating profit has exceeded our internal forecasts. Although there is growinguncertainty about the economy, we expect a strong second half of the year. We are now executing the growth strategy that we outlined to shareholders, byincreasing our publishing presence in areas that we understand well through oursuccesses in illustrated co-edition book publishing. Quarto publishes books in anumber of non-fiction categories. Our international co-edition imprints licensetheir titles to other publishers for marketing, sales, and local distribution,and are not involved in these processes, nor do they hold inventory of thetitles; books appearing under imprints owned by the group are marketed, sold,and distributed by those imprints, which also hold inventory of the titles. Thefirst half of 2005 marks the first time that sales of Quarto's own publishingimprints have exceeded the sales of our international co-edition titles. Since the second half of 2004, an active program of corporate activity,involving several acquisitions of publishing imprints, has had a profound impacton Quarto's business. These acquisitions have performed, over these 12 months,in line with our expectations, and we continue to work to improve theircontributions. The impact of these changes means that to compare the first halfof 2004 to the first half of 2005 is akin to likening apples to oranges. Financial Review For some time, Quarto has published management's trailing 12 month figures toprovide a clearer guide to performance, by reducing the cyclical nature of thebusiness. It may be more helpful, as an indicator, to view the headline tradingperformance over the trailing 12-month periods, ended June 30, 2005 (andincluding the acquisitions for some of the time), and June 30, 2004, prior tothe acquisitions. These figures demonstrate the first fruits from our recentacquisitions, although none is included for the full 12 months. Revenueincreased by 14% to £86.9 million (2004: £75.9 million), and operating profit by13% to £7.7 million (2004: £6.8 million). The overall gross margin rose to 35%(2004: 32%). Overall, our half year results are slightly ahead of management's internalforecasts for the period. With the change from reporting figures under UK GAAPto reporting under IFRS, there are modest adjustments to the historic figures,which are explained in some detail in the Notes. The overall impact on theadjusted diluted earnings per share, for the year ended December 31, 2004, is areduction of 0.8p, from 22.0p to 21.2p. The three substantial differences, i.e.the calculation of goodwill, the amortization of intangible assets, and theclassification of Quarto's convertible preferred stock as debt rather thanequity, relate entirely to items that have had no impact on cash flow.International Financial Reporting Standards (IFRS) are used throughout thisresults announcement, rather than UK General Accepted Accounting Practice(GAAP). For the six months ended June 30, 2005, revenue increased by 23.0% to £38.2million. Acquisitions contributed £9.4 million, and revenue of continuingbusinesses fell by £2.3 million, or 7%. There was, once again, some negativeimpact on sales from the comparative sterling-dollar exchange rates ($1.87compared to $1.82 to £1.00) but, more simply, almost all of the shortfall isexplained by timing differences on co-edition revenues (which were very robustin 2004, helped by some deliveries which had slipped from 2003), anddeteriorating sales at one of our publishing services units, which resulted inits profit moving from £104,000 in 2004, to a loss of £34,000 this year, anadverse swing of £138,000. This deterioration could only be reversed byunwarranted capital investment, and led us to consolidate its business into ourmodern facility at Chippenham, as we announced in April. This is expected toproduce annualized cost savings of £0.3 million, at a one-time charge of £0.6million. Operating profit was up 9.9% at £2.2 million, before amortization of intangiblesof £0.6 million, publishing services restructuring costs of £0.6 million, andthe costs of an abortive acquisition of £0.1 million, a total of £1.3 million.After our four recent acquisitions since last July, net financing costsincreased to £1.0 million (2004: £0.6 million), giving a pre-tax loss of £0.1million (2004: profit of £1.3 million), and a loss per share of 2.2p (2004:earnings per share of 4.5p). Reflecting its confidence in the outcome for the year, your Board has declaredan interim dividend per share of 2.9p (2004: 2.75p), up 5.5%, payable on October21, 2005 to shareholders on the register at September 23, 2005, with anex-dividend date of September 21, 2005. June 2005 was the final opportunity for holders of the Company's high-yieldingconvertible cumulative redeemable shares of preferred stock to convert intocommon stock. Holders of 2,947,292 of these converted into 1,768,344 shares ofcommon stock, increasing the number in issue to 20,444,550. The outstanding2,255,272 convertible preference shares will be redeemed at a price of £1.00each on December 31, 2005. Operational Review Our core strategy, of focusing our publishing in areas of perennial interest,which we know well from our extensive experience of publishing internationalco-edition books, is continuing to work well. Our largest acquisition since June30, 2004, Creative Publishing, based in the US, and publishing books primarilyon home improvement, home crafts, and outdoors activities, has two core outletsfor most of its titles, i.e. the bookstore, and the specialty retailer, andemphasizes our risk-averse approach to stock-holding publishing. Among its corecustomers are The Home Depot and Lowe's, both of which have recently reportedstrong sales and profit figures. There were some very positive achievements in our co-edition units. Quarto'sBible series of how-to arts and crafts titles, reached total sales of almost 1.5million copies. And, riding the wave of the interest in poker and onlinegambling, its Poker Player's Bible has reprinted four times and is approaching100,000 copies in print. Quintet's 1001 Movies You Must See Before You Die, released last year, hasnotched up almost 400,000 copies in print. The newest title in the 1001 series,1001 Albums, looks likely to debut with Quintet's largest ever starting printrun, and next spring's 1001 Books has already been pre-sold in five Europeanlanguages. Q+, our books plus imprint, largely involved in children's publishing, isstarting to work on a complete revision of its Let's Start series which, withnearly six and a half million copies in print, has been a cornerstone of thebusiness. The relaunch will take place next year. QED, our start-up children's educational books unit, delivered its second list,of 59 titles, to customers and distributors in the English-language world.Gratifyingly, a number of titles were chosen as "editor's choices" by the USA'slargest children's educational book club. The UK's largest supermarket group hasindicated its strong support for relaunching QED's first list of titles inpaperback format next year. Quantum had poor sales. Unlike many of the other co-edition units, its UK saleshave been the backbone of its business. These were seriously dented by thetrading difficulties of a number of Quantum's retailing customers and, inaddition, a major German publisher went out of business. In the book publishing area, Aurum, in the UK, has sold 10,000 copies of itsmajor new title, Trafalgar, producing revenue of £120,000, which combines themost detailed account of the battle ever published and a new biography ofNelson. Last year's US acquisition of Creative Publishing has now been merged with thevarious Rockport imprints into the Quayside Publishing Group, which managestheir combined invoicing, sales, marketing, and fulfillment functions. Rockportin June published The Design of Dissent, by the eminent US graphic designer,Milton Glaser, to considerable critical and sales acclaim. It accompanies amajor show illustrating the role of arresting graphics in the politics ofdissent and, in particular, of opposition to war, poverty, and exploitation. Creative Publishing (CPi) specializes in how-to books in the home improvementand associated lifestyle areas, covering more prosaic, and less provocative,subjects than Milton Glaser's title. The best-selling of these, in the firsthalf of the year, was Outdoor Projects for your Power Washer, which sold 77,000copies during the period. The third edition of CPi's The Complete Guide to Deckswas released in May, and has already sold 38,000 copies. There is considerablework to be done to repair the previous neglect of CPi's core publishing. Thisinvolves updating, with current code requirements and standards, many of itscore home improvement titles. Encouragingly, our owned imprint publishing businesses, which, appropriately,focus their main energies on their domestic markets, are starting to takeadvantage of Quarto's considerable experience in international markets, a trendthat is set to continue and, through licensing, to provide extra profit to theiractivities. Lifetime, based in Australia, (acquired in November 2004) and Premier Books,based in New Zealand, (acquired in April 2005), both market leaders, in theirrespective countries, in the display marketing of books, turned in exemplaryresults. With their focus on a value-for-money proposition for the consumer,they bucked the weaker retailer markets. Once again, we had very strong performances from Book Sales, and RegentPublishing Services. Their results, together with the better than expectedperformance from our acquisitions, overcame the weaker performance from theco-edition units, to produce an overall improvement in operating profit greaterthan forecast. Outlook and Risk Factors The timing of our revenues is now beginning to change to reflect the greaterconcentration in stock-holding publishing. This may result in a higherproportion of our profit falling into the second half of the year. Previously, dominated as we were by co-edition revenues, reprints were sold whenlicensees needed more inventory, and this could happen at any time of the year.This remains true for the co-edition units but, for the publishing units,revenue is only booked when reprinted inventory sells through to the retailer(or other third party). Typically, booksellers return to publishers, in thefirst half year, their overstocks of books that didn't sell through during theprior Christmas selling season. There is, inherently, higher risk in stock-holding book publishing than ininternational co-edition publishing, but this has to be seen in context.Quarto's focus remains firmly in publishing subjects and categories of provensustained and enduring interest and, as we have pointed out on previousoccasions, over half of our revenue comes from the sales of books produced inprior years. There is no intention to deviate from this focus. Quarto's business is well spread. No one title, out of the 500 or more titlesper year published by the group, exceeds 1% of total sales; we have a plethoraof autonomously-operated business units with great geographical diversification,helping to cushion us from the effects of a downturn in any one or twocategories or major geographical markets. Trade sources in the US, as well as statistical evidence, indicate that the bookretailing market has been down overall for the calendar year. The US is, by far,our biggest market. Our strong focus in publishing in special interestcategories makes us less heavily dependent than many publishers on book traderetailing, but we cannot be completely insulated from the overall trend. In the UK, which accounts for approximately 10% of our sales of books, most ofthe book chains are under pressure, as publicity about W H Smith and Ottaker'sattests. Borders has also reported a slowdown in UK sales, and we are alsoexperiencing de-stocking by Waterstone's. This overshadows some strong sales ofnewly published titles. For instance, sales of front list titles, published inthe UK by our Aurum imprint in the first half of this year, are actually up byabout 5% over the same period last year, but returns of backlist titles haveeliminated the impact of this good performance from a strong publishing list. The experience of retailers in Australia is not very different. For example,Angus & Robertson (previously a W H Smith subsidiary), is only beginning to pullout of a slump, and the Collins Booksellers chain collapsed during the period.In defiance of these strains in book retailing, our direct-selling displaymarketing businesses, Lifetime in Australia, and Premier Books in New Zealand,both exceeded last year's comparative sales. In corporate activity, we acquired 70% of Premier Books in April, the balanceremaining with existing management and shareholders, subject to a put-and-callagreement. We also spent considerable time and expense exploring anotheracquisition possibility but, unfortunately, were not able to agree terms. Wecontinue to look at other opportunities. With our recent acquisitions, we have made good headway in implementing ourstrategy, but this remains a work-in-progress. There is more to do to grow thebusiness significantly, and to leverage our infrastructure to greater effect. In common with other publishers operating in the consumer market, we are feelingthe effects of a slowdown in consumer spending, which has been commented on bymany in the book industry, and in many other retailing sectors, particularly inthe major English-language markets. In the United States, this now seems to beeasing somewhat. Unhappily, this is not yet so for the UK and some of our othermarkets. There is a risk that our customers will see the downturn as being morethan a cyclical adjustment, and will be cautious about ordering inventory. The English-language markets have been buoyant for a number of years, but arenow much less so, and it may be of some value to shareholders to understand ourreading of the economic outlook in the major English-language markets in termsof the likely impact on Quarto. In spite of obvious overheating in some areas, notably in housing, the economiesare not in bad shape. But, the impact of higher fuel prices, higher interestrates, rising mortgage costs, a visceral feeling that published inflation ratedata does not reflect personal experience of cost increases, and plentiful mediaspeculation about the possibly parlous state of the economic outlook, haveprompted many people to re-evaluate their priorities. As happened some yearsago, they have decided that they have enough "stuff", in many instances, and areholding off on further consumption while they await a clearer picture of the waythe economy is developing. Traditionally, low ticket items, such as books, butperceived by consumers as having high value, have done well in thesecircumstances. From this perspective, then, we see value in sustained investment in ourpublishing lists, and expect that, as a side effect of the squeeze on retailers,some interesting acquisition opportunities may open up. Although there are unmistakable signs of tightening in some of our core markets,I hope that we shall be able to achieve our seventh successive annual increasein adjusted diluted earnings per share, although, probably, not by as much as wehad estimated internally earlier in the year. Quarto is a resilient business,with a very high percentage of its revenues coming from the sale of bookscreated in earlier years, both from titles licensed to other publishers, andfrom those published under its own imprints. This will continue to stand us ingood stead, and provide a solid platform for further growth. Sincerely, Laurence F OrbachChairman and Chief Executive OfficerLondon, September 2, 2005 THE QUARTO GROUP, INC UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT for the six months to June 30, 2005 Six months Six months Year ended ended ended December 31, June 30, June 30, 2004 2005 2004 £'000 £'000 £'000 Revenue 38,198 31,049 79,750 -------- -------- --------Operating profit 2,167 1,971 7,516Less:-Amortization of intangibles (1) (586) (17) (509)Restructuring costs (2) (600) - -Aborted acquisition costs (3) (100) - - _____ _____ _____Operating profit 881 1,954 7,007 Financing costs (4) (1,083) (671) (1,680)Financial income 56 31 65 _____ _____ _____(Loss) profit before taxation (146) 1,314 5,392Taxation (5) 39 (340) (1,255) _____ _____ _____(Loss) profit for period (107) 974 4,137 ------- ----- ------- Profit (loss) for the period attributable to:Minority interests (6) 285 159 403Shareholders of the parent company (392) 815 3,734 ----- ------- (107) 974 4,137 ------- ----- ------- (Loss) earnings per share (2.2)p 4.5p 20.8p -------- ------ -------Diluted (loss) earnings per share (2.2)p 4.5p 19.6p -------- ------ ------- The following information is presented as additional information and does not form part of theincome statement : Adjusted earnings per share 3.0p 4.6p 22.7p ------ ------ -------Adjusted diluted earnings per share (7) 3.0p 4.6p 21.2p ------ ------ ------- --- --- --- £'000 £'000 £'000EBITDA (Earnings before restructuringand aborted acquisition costs,corporate expenses not attributable tooperations, interest, tax, depreciationand amortization) 3,309 3,160 9,412 ------- ------- ------- 1 Under IFRS, goodwill arising on acquisitions is no longer amortized, but willbe subject to an annual impairment review. The group made three acquisitions in2004. These acquisitions included the purchase of intangible assets, with finitelives, not previously recognised under UK GAAP. Under IFRS, these intangibleassets are reclassified from goodwill, and amortized over their useful economiclives. This explains the large increase in the amortization charge in the sixmonth period ended June 30, 2005 compared to June 30, 2004. 2 Restructuring costs relate to our publishing services units, as noted in theChairman's letter. The costs include redundancies, dilapidations, losses onfixed asset disposals, and other losses incurred after closure of our Readingsite was announced. 3 Aborted acquisition costs mainly comprise third party legal and professionalfees. Six months Six months Year ended ended ended December 31, June 30, 2005 June 30, 2004 2004 £'000 £'000 £'000 4 Financing costs comprise: Bank and other interest (981) (448) (1,234)Interest on cumulative redeemablepreference shares (102) (223) (446)treated as debt --------- ------- --------- (1,083) (671) (1,680) --------- ------- --------- Under IFRS, Quarto's cumulative redeemable preference shares have been separatedinto debt and equity components. In these financial statements, they have beenclassified principally as debt and the dividends have been treated as afinancial cost on the debt. Net financing costs amounted to £1,027,000 in thesix months ended June 30, 2005, an increase of 60% compared to the six monthsended June 30, 2004. This increase is because the average rate of interest paidhas risen by 44% from 3.6% to 5.2%, and, because of higher net debt levels as aresult of the acquisitions made in the twelve months ended June 30, 2005. 5 Taxation for the six months ended June 30, 2005 is based on the estimatedeffective tax rate for the year. The rate that has been used is 27% (June 30,2004: 26% and December 31, 2004: 23%). The increase compared to the year endedDecember 31, 2004 was expected. 6 Minority interests relate to the following business units: Book Sales, Regent,Global, Aurum, Lifetime, and Premier. The increase in the profit attributable tominority shareholders in the six months ended June 30, 2005 compared to June 30,2004 is mainly attributable to the acquisitions made during the twelve monthperiod ended June 30, 2005. 7 Under IFRS, there are modest adjustments to the historic figures, which areexplained in some detail in the document headed Adoption of InternationalFinancial Reporting Standards (IFRS). The three substantial differences i.e. thecalculation of goodwill, the amortization of intangibles and the classificationof the cumulative redeemable preference shares as debt, have no impact on cashflow. The cumulative redeemable preference shares have either been converted orwill be redeemed at par at the year end and therefore the most appropriatemeasure of the underlying performance of the business going forward is theadjusted diluted earnings per share. THE QUARTO GROUP, INC UNAUDITED CONSOLIDATED BALANCE SHEET at June 30, 2005 June 30, June 30, December 31, 2005 2004 2004 £'000 £'000 £'000 Non-current assets Goodwill (1) 9,871 3,071 7,244Other intangible assets (2) 5,068 249 5,334Property, plant and equipment 8,604 8,959 8,982Deferred tax 4 - 4 --- --- --- 23,547 12,279 21,564 -------- -------- --------Current assets Inventories (3) 25,650 19,178 20,863Taxation recoverable 154 94 154Trade and other receivables (3) 24,512 17,102 23,876Cash and cash equivalents (4) 5,962 6,287 10,611 ------- ------- -------- 56,278 42,661 55,504 -------- -------- -------- Total assets 79,825 54,940 77,068 -------- -------- -------- Current liabilitiesShort-term borrowings (4) (6,147) (356) (5,283)Trade and other payables (3) (22,173) (15,774) (24,929)Current tax liabilities (532) (462) (1,304) ------- ------- --------- (28,852) (16,592) (31,516) ----------Net current assets 27,426 26,069 23,988 -------- -------- -------- Non current liabilities Medium and long-term borrowings (4) (41,448) (33,698) (38,408)Other payables (218) (243) (210)Deferred tax liabilities (638) (924) (630) ------- ------- ------- (42,304) (34,865) (39,248) ---------- ---------- ----------Total liabilities (71,156) (51,457) (70,764) ---------- ---------- ----------Net assets 8,669 3,483 6,304 ------- ------- ------- EquityIssued capital 1,172 1,063 1,063 ======= =======Share premium account 21,699 19,194 19,199Reserves (17,279) (19,230) (16,678)Total equity attributable to equityholders of the parent 5,592 1,027 3,584Minority interests 3,077 2,456 2,720 ------- ------- ------- 8,669 3,483 6,304 ------- -------Total equity and liabilities (79,825) (54,940) (77,068) ---------- ---------- ---------- 1 The increase in the value of goodwill carried in the balance sheet at June 30,2005 compared to December, 2004 relates principally to the acquisition ofPremier, which is commented upon in the Chairman's letter. The increase comparedto June 30, 2004 is principally due to the four acquisitions made during thetwelve months period ended June 30, 2005. 2 The increase in other intangible assets at June 30, 2005 compared to June 30,2004 is attributed to the four acquisitions made during the twelve months endedJune 30, 2005. 3 Inventories, trade and other receivables and trade and other payables at June30, 2005 are significantly higher than the comparatives at June 30, 2004, dueprincipally to the acquisitions. 4 Net debt (which comprises medium and long term borrowings and short-termborrowings, less cash and cash equivalents) at June 30, 2005 amounted to£41,633,000 compared to £27,767,000 at June 30, 2004 and £33,080,000 at December31, 2004. The increase compared to a year ago (£13,866,000), has arisen becausethe cash consideration, together with debt assumed, of the four acquisitionsmade in the twelve months ended June 30, 2005, amounted to £16,812,000, at theJune 30, 2005 exchange rates. Net debt has increased since the year end,consistent with prior years, and reflects the seasonal cash outflow in the firstsix months of the year. For the six month period ended June 30, 2005 only, thecash consideration, and debt assumed with regard to acquisitions, amounted to£2,844,000. 5 The movement in issued capital and share premium account is due to theconversion of cumulative redeemable shares of preferred stock, which iscommented upon in the Chairman's letter, and the exercise of stock options. THE QUARTO GROUP, INC UNAUDITED CONDENSED CASH FLOW STATEMENT for the six months to June 30, 2004 Six months Six months Year ended ended ended June 30, June 30, December 31, 2005 2004 2004 £'000 £'000 £'000 (Loss) profit for the period (107) 974 4,137 Tax (credit) expense (39) 340 1,255 Net finance costs 1,027 640 1,615 Depreciation 578 537 1,073Amortization 586 17 509Loss (profit) on sale of fixed assets 73 - (1)Equity settled share based payment 4 2 4Changes in working capital (6,286) (5,473) (2,089)Corporation tax (656) (743) (1,062) ------- ------- ---------Net cash from operating activities (4,820) (3,706) 5,441 --------- --------- ------- Purchase of tangible fixed assets (net) (114) (613) (982) Purchase of subsidiaries (2,844) (183) (13,700)Interest received 56 31 51 ---- ---- ----Net cash from investing activities (2,902) (765) (14,631) --------- ------- ---------- Dividends paid (629) (583) (1,077)Interest paid (1,081) (661) (1,753)Issue of shares 2,624 26 26Dividend paid to minority shareholder (117) (103) (103)New loans (loans repaid) 1,650 (197) 10,967 ------- ------- --------Net cash flows from financing 2,447 (1,518) 8,060activities ------- --------- ------- --- --- ---Net decrease in cash and cash (5,275) (5,989) (1,130)equivalents --------- --------- --------- Net debt at June 30, 2005 amounted to £41,633,000 compared to £27,767,000 atJune 30, 2004 and £33,080,000 at December 31, 2004. The increase compared to ayear ago (£13,866,000), has arisen because the cash consideration, together withdebt assumed, of the four acquisitions made in the twelve months ended June 30,2005, amounted to £16,812,000, at the June 30, 2005 exchange rates. Net debt hasincreased since the year end, consistent with prior years, and reflects theseasonal cash outflow in the first six months of the year. For the six monthperiod ended June 30, 2005 only, the cash consideration, and debt assumed withregard to acquisitions, amounted to £2,844,000. Notes: 1. The next annual consolidated financial statements of thecompany, for the year period ending December 31, 2005, will be prepared inaccordance with International Financial Reporting Standards (IFRSs) adopted foruse in EU ("adopted IFRSs"). This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRSs in issue that either areendorsed by the EU and effective at December 31, 2005 or are expected to beendorsed and effective at December 31, 2005, the Group's first annual reportingdate at which it is required to use adopted IFRSs. Based on these IFRSs, thedirectors have made assumptions about the accounting policies expected to beapplied and their impact, when the first annual IFRS financial statements areprepared for the year ending 31 December 2005. The accounting policies adopted under IFRS are set out in pages 20-23 of thedocument headed Adoption of International Financial Reporting Standards, whichis attached to the interim statement and the impact of adopting these accountingpolicies is detailed in pages 24-37 of Adoption of International FinancialReporting Standards. In addition, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending December 31,2005 are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ending December 31, 2005. 2. The comparative figures for the financial year endedDecember 31, 2004 are not the company's statutory accounts for that financialyear. Those accounts, which were prepared under UK Generally Accepted AccountingPractices, have been reported on by the company's auditors and delivered to theregistrar of companies. The report of the auditors was unqualified and did notcontain statements under section 237(2) or (3) of the Companies Act 1985. 3. The calculation of earnings per share is based on18,218,281 shares (the weighted average number of issued shares, excluding thoseheld as treasury stock) (June 30, 2004: 17,944,206 shares; December 31, 2004:17,955,495) and earnings of £(392,000) (June 30, 2004: £815,000; December 31,2004: £3,734,000). The calculation of adjusted earnings per share is based onearnings of £547,000 (June 30, 2004: £828,000; December 31, 2004: £4,079,000),calculated as follows: June 30, 2005 June 30, 2004 December 31, 2004 £'000 £'000 £'000 Earnings after minorityinterests (392) 815 3,734Amortization ofintangibles * 428 13 345Restructuring costs * 438 - -Costs of abortedacquisition * 73 - - ___ ___ _____ 547 828 4,079 ----- ----- ------- Adjusted earnings pershare 3.0p 4.6p 22.7p ------ ------ ------- * net of tax credit There is no dilution in earnings per share, or adjusted earnings per share, forthe six months ended June 30, 2005 and June 30, 2004. Diluted earnings per sharefor the year ended December 31, 2004 is based on earnings of £4,203,000 and21,427,992 shares. Diluted adjusted earnings per share for the year endedDecember 31, 2004 is calculated below, based on earnings of £4,548,000 and21,427,992 shares. December 31, 2004 £'000Adjusted earnings as above 4,079Interest on convertible note net of tax 23Interest on convertible redeemable preference shares 446 ----- 4,548 -------Adjusted diluted earnings per share 21.2p ------- 4. Consolidated statement of recognised income and expense for the six months to June 30, 2005 Six months Six months Year ended ended June 30, ended June 30, December 31, 2005 2004 2004 £'000 £'000 £'000 Foreignexchangetranslationdifferences 268 (352) (357)Cash flowhedge: changein fair value 133 - 130 ----- ---------- -----Income andexpensesrecogniseddirectly inequity 401 (352) (227)(Loss) profitfor the period (107) 974 4,137 ------- ----- -------Totalrecognisedincome andexpense forthe period 294 622 3,910 ----- ----- ------- Attributable to:Equity holdersof parent 9 463 3,507Minorityinterests 285 159 403 ----- ----- ----- 294 622 3,910 ----- ----- ------- 5. Consolidated statement of changes in equity: Share Capital Share Premium Reserves Total £'000 £'000 £'000 £'000 Balance at January 1, 2005 1,063 19,199 (16,678) 3,584Total recognised income andexpense - - 9 9Share options exercised byemployees - 3 15 18Equity settled transactions - - 4 4Shares issued 109 2,497 - 2,606Dividends to shareholders - - (629) (629) ---------- ----------- ------- -------Balance at June 30, 2005 1,172 21,699 (17,279) 5,592 ------- -------- ---------- ------- THE QUARTO GROUP, INC MANAGEMENT'S UNAUDITED PRO FORMA OPERATING FINANCIAL STATEMENTS for the 12 months to June 30, 2005 12 months 12 months ended ended June 30, 2005 June 30, 2004 £'000 £'000 Revenue 86,899 75,919 -------- --------Gross profit 1 30,063 24,625Overheads 2 (22,351) (17,803) ---------- ----------Operating profit 3 7,712 6,822 ------- ------- 1 The gross profit margin is up from 32% to 35%, partly because of improvedmargins generally and partly because of higher sales of own imprint titles,which are at higher than average gross margins. 2 Overheads are up £4,548k. This increase is due to the acquisitions. 3 Operating profit represents 8.9% of sales (2004: 9.0%) Note:The above figures do not include amortization of intangible assets orrestructuring costs or the cost of an aborted acquisition. This information is provided by RNS The company news service from the London Stock Exchange