Adoption of IFRS - Part 1

Quarto Group Inc
02 September 2005


                             THE QUARTO GROUP, INC.
                                        
          ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The Quarto Group, Inc's (Quarto's) transition date for IFRS reporting is 1
January 2004, and the first full year reporting under IFRS will be for the year
ending 31 December 2005.

The primary changes to Quarto's reported 2004 financial information following
the adoption of IFRS are as a result of:

   • Changes in presentation and disclosure;
   • Ceasing to amortize goodwill. Capitalised goodwill will, in future, be
     subject to an annual impairment review;
   • Ceasing to accrue for dividends declared after the period end;
   • Recognising certain intangible assets, which will be amortized;
   • Carrying goodwill and intangibles in the currency of the company
     acquired;
   • Recognising liabilities in respect of unutilised holiday pay;
   • Accounting for cumulative redeemable preference shares, convertible loan
     notes and interest rate swaps in accordance with IAS 32 and IAS 39; and
   • Recognising deferred tax assets and liabilities on a different basis.

The effect of the adoption of IFRS in respect of the group's 2004 financial
statements is set out in detail in the attached report. In summary:

                                             UK GAAP         IFRS       Change
                                                £000         £000         £000
Revenue                                       79,835       79,750          (85)

Operating profit                               7,194        7,007         (187)
Adjusted operating profit*                     7,604        7,516          (88)

Profit before tax                              6,025        5,392         (633)
Adjusted profit before tax*                    6,435        5,901         (534)

Earnings per share                              21.5p        20.8p        (0.7)p
Adjusted earnings per share*                    23.8p        22.7p        (1.1)p
Diluted earnings per share                      20.1p        19.6p        (0.5)p
Adjusted diluted earnings per share             22.0p        21.2p        (0.8)p

                                                £000         £000         £000
Net assets at 31 December 2004                11,167        6,304       (4,863)

*Adjusted operating profits and earnings per share are after adding back
intangible asset amortization.

   • Adjusted operating profits for the year to 31 December 2004 are reduced
     by £88k from £7,604k to £7,516k due primarily to holiday pay expense of 
     £50k and share-based payment expenses of £4k; unadjusted operating profits 
     are reduced by £187k from £7,194k to £7,007k, which, in addition to the 
     holiday pay and share-based payment expenses, is primarily caused by 
     changes to the accounting for goodwill and intangible assets;
   • Adjusted and unadjusted profits before tax for the year to 31 December
     2004 are reduced for the same reasons by £88k and £187k respectively and
     additionally by £446k in respect of preference share dividends now treated
     as finance costs, a total reduction of £534k (from £6,435k to £5,901k) and
     £633k (from £6,025k to £5,392k), respectively.
   • Adjusted and unadjusted share are consequently reduced by 1.1 pence per
     share and 0.7 pence per share respectively. Adjusted and unadjusted 
     dilutive earnings per share are consequently reduced by 0.8 pence and 
     0.5 pence per share respectively;
   • Net assets as at 31 December 2004 are decreased by £4,863k from £11,167k
     to £6,304k, primarily due to the treatment of preference shares under 
     IAS 32 as debt (£4,855k) and £374k with respect to carrying goodwill and
     intangibles in the currency of the company acquired, offset by changes to
     the timing of recognition of dividend payments totalling £629k;

To date, Quarto has prepared its accounts in compliance with UK Generally
Accepted Accounting Principles (UK GAAP). EU regulations require Quarto to adopt
IFRS in its financial statements from 2005. The group has reviewed those changes
necessary to move from UK GAAP to IFRS. Restatements of our 2004 financial
statements are unaudited.

Disclaimer
Standards currently in issue and adopted by the EU are subject to interpretation
issued from time to time by the International Financial Reporting
Interpretations Committee (IFRIC). Further standards may be issued by the IASB
that will be adopted for financial years beginning on or after 1 January 2005.
Additionally, IFRS is currently being applied in the United Kingdom and in a
large number of countries simultaneously for the first time. Furthermore, due to
a number of new and revised Standards included within the body of Standards that
comprise IFRS, there is not yet significant established practice on which to
draw in forming decisions regarding the interpretation and application.
Accordingly, practice is continuing to evolve. At this preliminary stage,
therefore, the full financial effect of reporting under IFRS as it will be
applied and reported on in the Company's first IFRS financial statements for the
year ended 31 December 2005 may be subject to change.

ADOPTION OF IFRS

Contents 

1.              Introduction 
2.              Basis of Preparation 
3.              Overview of Impact 
4.              Key Impact Analysis 
5.              Performance Measurement 
6.              Restated Consolidated Primary Statements 

APPENDICES

1.              Summarised Restatement of Accounting Policies 
2.              Reconciliations of reported UK GAAP financial statements to IFRS
    2.1-2.6: Year to 31 December 2004 - IAS 1 format changes and 
             Other IFRS adjustments
    2.7-2.12: Six months to 30 June 2004 - IAS 1 format changes and 
              Other IFRS adjustments
    2.13-2.14: Transition Balance Sheet as at 1 January 2004 - IAS 1 format changes
               and Other IFRS adjustments

1.             INTRODUCTION

In accordance with European Union regulations, Quarto is required to adopt
International Financial Reporting Standards (IFRS)(1) in its consolidated
accounts for accounting periods commencing on or after 1 January 2005.
Consequently, the first full year reporting under IFRS will be for the year to
31 December 2005. These financial statements will include comparative
information for 2004.

This press release explains how the group's previously reported UK GAAP
financial performance and position are reported under IFRS. It includes on an
IFRS basis:

   • the consolidated income statement for the period ended 30 June 2004 and
     for the year ended 31 December 2004;
   • the consolidated balance sheet at 30 June 2004 and 31 December 2004; and
   • the consolidated cash flow statement for the period ended 30 June 2004
     and year ended 31 December 2004.

A summary of the impact on the group's operating profit, profit before tax,
earnings per share, and net assets from the adoption of IFRS is provided in
section 3, 'Overview of Impact'.

Reconciliations to assist the reader in understanding the nature and quantum of
differences between UK GAAP and IFRS for the financial information above are
included in the appendices.

The financial information set out in this press release is unaudited.

2.             BASIS OF PREPARATION

Standards currently in issue and adopted by the EU are subject to interpretation
issued from time to time by the International Financial Reporting
Interpretations Committee (IFRIC). Further standards may be issued by the IASB
that will be adopted for financial years beginning on or after 1 January 2005.
Additionally, IFRS is currently being applied in the United Kingdom and in a
large number of countries simultaneously for the first time. Furthermore, due to
a number of new and revised Standards included within the body of Standards that
comprise IFRS, there is not yet significant established practice on which to
draw in forming decisions regarding the interpretation and application.
Accordingly, practice is continuing to evolve. At this preliminary stage,
therefore, the full financial effect of reporting under IFRS as it will be
applied and reported on in the Company's first IFRS financial statements for the
year ended 31 December 2005 may be subject to change.

(1) References to IFRS throughout this document refer to the application of
International Financial
Reporting Standards ('IFRS'), including International Accounting Standards
('IAS') and interpretations issued by the International Accounting Standards 
Board ('IASB') and its committees that have been adopted for use in the EU 
('adopted IFRS').

2.1.       IFRS 1 exemptions

IFRS 1, 'First-time Adoption of International Financial Reporting Standards'
sets out the procedures that the Group must follow when it adopts IFRS for the
first time as the basis for preparing its consolidated financial statements. The
group is required to establish its IFRS accounting policies as at 31 December
2005 and, in general, apply these retrospectively to determine the IFRS opening
balance sheet at its date of transition, 1 January 2004.

This standard provides a number of exceptions, some of which are optional, to
this general principle. The most significant of these so far as they have been
adopted by the group are set out in Appendix 1.18 'IFRS Transitional
Arrangements'.

2.2.       Presentation of financial information

The primary statements within the financial information contained in this
document have been presented in accordance with IAS 1, 'Presentation of
Financial Statements'. However, this format and presentation may require
modification in the event that further guidance is issued and as practice
develops.

3.             OVERVIEW OF IMPACT

The following summary tables show the impact of IFRS adjustments on the group's
operating profit and profit before tax, earnings per share, and net assets.

3.1.       Operating profit and profit before tax


                  Six months ended 30 June 2004    Year ended 31 December 2004
                       Unadjusted       Adjusted      Unadjusted      Adjusted
                             £000           £000            £000          £000
Operating profit
per UK GAAP                 1,996          2,101           7,194         7,604

Share based
payments
(section 4.2)                  (2)            (2)             (4)           (4)
Short term
employee benefit
(section 4.4)                (133)          (133)            (50)          (50)
Reversal of
goodwill
amortization
(section 4.3)                  88              -             376             -
Amortization of
intangibles
(section 4.3)                   -              -            (475)            -
Other (section
4.8)                            5              5             (34)          (34)
Operating profit
per IFRS                    1,954          1,971           7,007         7,516

Net financing
costs per UK
GAAP                         (417)          (417)         (1,169)       (1,169)
Preference
shares (section
4.7)                         (223)          (223)           (446)         (446)
Net financing
costs per IFRS               (640)          (640)         (1,615)       (1,615)
*Profit before
tax per IFRS                1,314          1,331           5,392         5,901

*There are no reconciling items between profit before tax under UK GAAP and
under IFRS, save for those identified above.

3.2 Profit after tax

                   Six months ended 30 June 2004   Year ended 31 December 2004
                    Unadjusted          Adjusted      Unadjusted      Adjusted
                          £000              £000            £000          £000
Profit after tax
per UK GAAP              1,225             1,330           4,688         5,098

Adjustments to
operating profit           (42)             (130)           (187)          (88)
Adjustments to
financing costs           (223)             (223)           (446)         (446)
Tax on non-tax
IFRS adjustments            33                33             119            10
Deferred tax on
revalued assets
(section 4.6)                1                 1               3             3
Tax adjustment
relating to US
goodwill
(section 4.6)              (20)              (20)            (40)          (40)
Profit after tax
per IFRS                   974               991           4,137         4,537

Earnings per
share
Earnings per
share per UK
GAAP                       4.7p              5.3p           21.5p         23.8p
Earnings per
share per IFRS             4.5p              4.6p           20.8p         22.7p

3.3 Net assets

                                                   30 June 2004      31 December
                                                                          2004
                                                           £000           £000
Net assets per UK GAAP                                    8,137         11,167
Reversal of 2004 goodwill amortization
(section 4.3)                                                88            376
Amortization of intangibles (section 4.3)                     -           (371)
Goodwill / Intangibles translation (section
4.3)                                                          -           (374)
Short term employee benefits (section 4.4)                 (215)          (174)
Deferred tax on US goodwill (section 4.6)                   156            128
Deferred tax on revalued assets (section
4.6)                                                       (292)          (290)
Dividends (section 4.5)                                     494            629
Interest rate swap (section 4.7)                              -            130
Preference shares and convertible loan note
(section 4.7)                                            (4,845)        (4,850)
Other (section 4.8)                                         (40)           (67)

Net assets under IFRS                                     3,483          6,304

4.             KEY IMPACT ANALYSIS

The analysis below sets out the most significant adjustments arising from the
transition to IFRS.

Adjustments effective from 1 January 2004

4.1 Presentation of Financial Statements

The format of the group's primary financial statements has been presented in
accordance with IAS 1, 'Presentation of Financial Statements'. The changes are
set out in appendices 2.1, 2.3, 2.5, 2.7, 2.9, 2.11 and 2.13.

4.2 Share Based Payments

IFRS 2, 'Share-based Payment' requires that an expense for share options granted
be recognised in the financial statements based on their fair value at the date
of grant. This expense is recognised over the vesting period of the options.

The group has measured this expense for options granted after 7 November 2002,
that had not vested at 1 January 2005, in accordance with the exemption
permitted under IFRS 1. Quarto has used a binomial model for the purposes of
computing fair value.

The charge to the income statement for the year to 31 December 2004 was £4k (six
months ended 30 June 2004 - £2k), see appendices 2.2 and 2.8.

As this transaction is settled in equity, rather than cash, the charge to the
income statement is matched by a corresponding increase in equity and there is
therefore a net nil effect on the balance sheet.

4.3 Goodwill and acquired intangible assets

IAS 38, 'Intangible Assets' requires that goodwill is not amortized. Instead it
is subject to an annual impairment review. As permitted, the group has elected
not to apply IFRS 3 retrospectively to business combinations prior to the
opening balance sheet date under IFRS. Consequently, the UK GAAP goodwill has
been included in the opening IFRS consolidated balance sheet at the carrying
value as at 31 December 2003 (£3,071k) and is no longer amortized. £266k of
separately acquired backlists, previously included within goodwill, have been
presented as separate intangible assets and will continue to be amortized over
their useful economic life.

The goodwill amortization in the year to 31 December 2004 of £376k (30 June 2004
- £88k) under UK GAAP has been reversed; see appendices 2.2 and 2.8. The
amortization of intangibles under UK GAAP in the year to 31 December 2004 of
£34k (30 June 2004 - £17k) remains in the financial statements under IFRS.

The group made three acquisitions of businesses during 2004. These acquisitions
included the purchase of finite-lived intangible assets not previously
recognised under UK GAAP. Under IFRS, these intangible assets are reclassified
from goodwill, and amortized over their useful economic lives.

The reclassified intangible assets are being amortized over various periods not
exceeding five years, depending on their nature; the corresponding amortization
charge for the reclassified intangible assets for the year to 31 December 2004
was £475k (30 June 2004 - £nil); see appendices 2.2 and 2.8.

The balance sheet reclassification of goodwill to intangibles arising from 2004
acquisitions as at 31 December 2004 was £5,810k (30 June 2004 - £nil), see
appendices 2.4 and 2.10.

Under IAS 21, goodwill and intangibles are carried in the currency of the
acquired company. The balance sheet value of goodwill at 31 December 2004 has
been reduced by £141k and the balance sheet value of intangibles at 31 December
2004 has been reduced by £233k (30 June 2004 for both categories £nil).

4.4 Employee Benefits

IAS 19 requires short term accumulating benefits such as holiday pay entitlement
and sick pay to be accrued over the period in which the entitlement is earned.

The additional liability in the balance sheet at 31 December 2004 is £205k (30
June 2004 - £280k), see appendices 2.4 and 2.10.

The impact on profit before tax for the year to 31 December 2004 is a charge of
£50k (30 June 2004 - charge of £133k), see appendices 2.2 and 2.8.

4.5 Dividends

IAS 10, 'Events after the Balance Sheet Date' requires that dividends declared
after the balance sheet date should not be recognised as a liability at that
balance sheet date as they do not represent a present obligation as defined by
IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'.

Under IFRS, dividends are shown as a deduction from reserves; therefore the
income statement no longer shows the deduction of dividends.

The final dividend in the 2004 UK GAAP financial statements in relation to the
financial year ended 31 December 2004 of £629k has been reversed in the balance
sheet at 31 December 2004 (30 June 2004 - reversal of interim dividend of
£494k), see appendices 2.4 and 2.10.

4.6 Deferred and Current Taxes

IAS 12, 'Income Taxes' requires that deferred tax assets and liabilities are
calculated by reference to temporary differences, the difference between the
carrying amount of an asset and its tax base.

Deferred tax on US Goodwill

Goodwill from the acquisition of US businesses previously written off to
reserves under UK GAAP is deductible for US tax purposes; the tax balance
carried forward under IAS 12 gives rise to a deferred tax asset.
At 31 December 2004 a deferred tax asset of £128k has been recognised under IFRS
(30 June 2004 - deferred tax asset of £156k) which partially offsets US deferred
tax liabilities, see appendices 2.4 and 2.10.

The impact on the income statement for the year to 31 December 2004 is to
increase the tax expense by £40k (30 June 2004 - £20k), see appendices 2.2 and
2.8.

Deferred tax on revalued asset

A deferred tax liability has been established with regard to the property
revaluation. At 31 December 2004, this amounted to £290k (30 June 2004 - £292k).

The impact on the income statement for the year to 31 December 2004 is to reduce
the tax expense by £3k (30 June 2004 - £1k), see appendices 2.2 and 2.8

Other tax adjustments

The non-tax IFRS adjustments outlined elsewhere within this document have been
tax effected as at 30 June 2004 and 31 December 2004.

4.7 Financial Instruments

IAS 32, 'Financial Instruments: Disclosure and Presentation' and IAS 39
'Financial Instruments: Recognition and Measurement' address the accounting for,
and reporting of, financial instruments. IAS 39 sets out detailed accounting
requirements in relation to financial assets and liabilities.

All derivative financial instruments are accounted for at fair value whilst
other financial instruments are accounted for either at amortized cost or at
fair value depending on their classification. Subject to stringent criteria,
financial assets and financial liabilities may be designated as forming hedge
relationships as a result of which fair value changes are offset in the income
statement or charged/credited to equity depending on the nature of the hedge
relationship.

Quarto has three types of financial instrument that are impacted by IAS 32 and
IAS 39, as follows:

Interest rate swap

In order to provide a hedge against changes in interest rates, the group has
taken out an interest rate swap to swap variable to fixed rates on US$ 30
million of borrowings.

Under IAS 39, the group has designated the interest rate swap as a cash flow
hedge of its interest cost on the borrowings concerned, and the directors have
determined that the hedge was effective in the year ended 31 December 2004.

The impact of recognising this instrument at fair value on the balance sheet as
at 31 December 2004 is an increase in net assets of £130k, with a corresponding
adjustment in the hedging reserves.

Financial Instruments

Preference shares / Convertible loan note

These two financial instruments have been recognised / presented in the
financial statements under IAS 32. The impact of IAS 32 is to recognise a
significant portion of the preference share investment as a liability and to
recognise an element of the convertible loan note as equity, in accordance with
the rights attaching to those instruments.

The impact of recognising these instruments, in accordance with IAS 32, on the
balance sheet is to increase short term borrowings by £4,850k (30 June 2004 -
increase medium and long term borrowing by £4,845k), to reduce share capital by
£278k (30 June 2004 - £278k), to reduce the share premium account by £4,704k (30
June 2004 - £4,709k) and to increase retained earnings by £132k (30 June 2004 -
£142k), see appendices 2.4 and 2.10.

The impact on the income statement for the year to 31 December 2004 is to
increase the interest charge by £446k (30 June 2004 - £223k), see appendices 2.2
and 2.8.

4.8 Other

The impact of other IFRS requirements, primarily the calculation of deferred tax
on eliminated inter company profit, has been minimal.

In the income statement at 31 December 2004, other IFRS requirements led to a
reduction in profit before tax of £34k (30 June 2004 increase of £5k) and £24k
in profit after tax (30 June 2004 increase of £4k), see appendices 2.2 and 2.8.

In the balance sheet at 31 December 2004, net assets were reduced by £67k (30
June 2004 - £40k), see appendices 2.4 and 2.10.

5. PERFORMANCE MEASUREMENT

Under UK GAAP, the group has presented adjusted profit and earnings per share
measures of its underlying performance that excluded goodwill amortization and
exceptional items.

In implementing IFRS, it is necessary to revise the definition of underlying
profits and earnings per share, whilst seeking to continue to present a measure
of underlying performance.

It is therefore intended that Quarto reports an adjusted measure of profits and
earnings per share that eliminates the following items:

   • Intangible asset amortization charges;
   • Asset impairment charges;
   • Gains or losses on the disposal of businesses;
   • Significant restructuring costs
   • Significant non-recurring items
   • The tax effect of the items referred to above.


6.             RESTATED CONSOLIDATED PRIMARY STATEMENTS

Condensed Consolidated Income Statement

6.1 For the period ended 30 June 2004

                                         UK GAAP IFRS          IFRS       IFRS
                                               format   adjustments
                                                 £000          £000       £000
Revenue                                        31,039            10     31,049
Operating profit                                1,996           (42)     1,954
Financing costs                                  (448)         (223)      (671)
Financial income                                   31             -         31
Profit before taxation                          1,579          (265)     1,314
Taxation                                         (354)           14       (340)
Profit for the period                           1,225          (251)       974
Profit for the period attributable to:
Minority interests                                160            (1)       159
Shareholders of the parent
company                                         1,065          (250)       815
                                                1,225          (251)       974
Earnings per share                                4.7p         (0.2)p      4.5p

The above results are wholly from continuing operations.

Condensed Consolidated Income Statement

6.2 For the year ended 31 December 2004

                                        UK GAAP IFRS           IFRS       IFRS
                                              format    adjustments
                                                £000           £000       £000
Revenue                                       79,835            (85)    79,750
Cost of sales                                (50,931)            51    (50,880)
Gross profit                                  28,904            (34)    28,870
Operating costs                              (21,710)          (153)   (21,863)
Operating profit                               7,194           (187)     7,007
Financing costs                               (1,234)          (446)    (1,680)
Financial income                                  65              -         65
Profit before taxation                         6,025           (633)     5,392
Taxation                                      (1,337)            82     (1,255)
Profit for the period                          4,688           (551)     4,137
Profit for the period attributable to:
Minority interests                               403              -        403
Shareholders of the parent
company                                        4,285           (551)     3,734
                                               4,688           (551)     4,137
Earnings per share                              21.5p          (0.7)p     20.8p

The above results are wholly from continuing operations.


Consolidated Balance Sheet

6.3 As at 30 June 2004

                                 UK GAAP IFRS               IFRS          IFRS
                                       format        adjustments
                                         £000               £000          £000
Non current assets
Property, plant & equipment             8,959                  -         8,959
Goodwill                                3,232               (161)        3,071
Other intangible assets                     -                249           249

                                       12,191                 88        12,279
Current assets
Inventories                            19,148                 30        19,178
Taxation recoverable                       94                  -            94
Trade and other receivables            17,195                (93)       17,102
Cash and cash equivalents               6,287                  -         6,287
                                       42,724                (63)       42,661
Total assets                           54,915                 25        54,960
Current liabilities
Short term borrowings                    (356)                 -          (356)
Trade and other payables              (15,995)               221       (15,774)
Corporation tax liabilities              (462)                 -          (462)
                                      (16,813)               221       (16,592)
Net current assets                     25,911                158        26,069

Non-current liabilities
Medium and long term
borrowings                            (28,853)            (4,845)      (33,698)
Other payables                           (243)                 -          (243)
Deferred tax liabilities                 (869)               (55)         (924)
                                      (29,965)            (4,900)      (34,865)
Total liabilities                     (46,778)            (4,679)      (51,457)
Net assets                              8,137             (4,654)        3,483

Equity
Issued capital                          1,341               (278)        1,063
Share premium account                  23,903             (4,709)       19,194
Retained earnings and other
reserves                              (19,564)               334       (19,230)
Equity attributable to
shareholders of the parent
company                                 5,680             (4,653)        1,027
Minority Interests                      2,457                 (1)        2,456
                                        8,137             (4,654)        3,483
Total equity and liabilities          (54,915)               (25)      (54,940)

Consolidated Balance Sheet

6.4 As at 31 December 2004

                                 UK GAAP IFRS               IFRS          IFRS
                                       format        adjustments
                                         £000               £000          £000
Non current assets
Property, plant & equipment             8,982                  -         8,982
Goodwill                               12,773             (5,529)        7,244
Other intangible assets                   232              5,102         5,334
Deferred tax                                4                  -             4
                                       21,991               (427)       21,564
Current assets
Inventories                            20,727                136        20,863
Taxation recoverable                      154                  -           154
Trade and other receivables            24,066               (190)       23,876
Cash and cash equivalents              10,611                  -        10,611
                                       55,558                (54)       55,504
Total assets                           77,549               (481)       77,068
Current liabilities
Short term borrowings                    (433)            (4,850)       (5,283)
Trade and other payables              (25,377)               448       (24,929)
Corporation tax liabilities            (1,304)                 -        (1,304)
                                      (27,114)            (4,402)      (31,516)
Net current assets                     28,444             (4,456)       23,988

Non-current liabilities
Medium and long term
borrowings                            (38,408)                 -       (38,408)
Other payables                           (210)                 -          (210)
Deferred tax liabilities                 (650)                20          (630)
                                      (39,268)                20       (39,248)
Total liabilities                     (66,382)            (4,382)      (70,764)
Net assets                             11,167             (4,863)        6,304

Equity
Issued capital                          1,341               (278)        1,063
Share premium account                  23,903             (4,704)       19,199
Retained earnings and other
reserves                              (16,797)               119       (16,678)
Equity attributable to
shareholders of the parent
company                                 8,447             (4,863)        3,584
Minority Interests                      2,720                  -         2,720
                                       11,167             (4,863)        6,304
Total equity and liabilities          (77,549)               481       (77,068)

Condensed Consolidated cash flow statement

6.5 For the period to 30 June 2004

                                     UK GAAP IFRS              IFRS       IFRS
                                           format       adjustments
                                             £000              £000       £000
Cash flows from operating activities
Profit for the period                       1,225              (251)       974
Tax expense                                   354               (14)       340
Net finance costs                             417               223        640
Depreciation                                  537                 -        537
Amortization                                  105               (88)        17
Equity settled share-based
payment expense                                 -                 2          2
Operating profit before
changes in working capital and
provisions                                  2,638              (128)     2,510
Movement in current operating
assets and liabilities                     (5,601)              128     (5,473)
Corporation tax paid                         (743)                -       (743)
Net cash flow from operating
activities                                 (3,706)                -     (3,706)

Cash flows from investing activities
Purchase of tangible fixed
assets                                       (613)                -       (613)
Purchase of subsidiary
undertakings                                 (183)                -       (183)
Interest received                              31                 -         31
Net cash flow from investing
activities                                   (765)                -       (765)

Cash flows from financing activities
Interest paid                                (448)             (213)      (661)
Proceeds from the issue of
share capital                                  26                 -         26
Preference dividends paid                    (213)              213          -
Dividend paid to minority
shareholder                                  (103)                -       (103)
Loans repaid                                 (197)                -       (197)
Ordinary dividends paid                      (583)                -       (583)
Net cash flows from financing
activities                                 (1,518)                -     (1,518)
Net decrease in cash and cash
equivalents                                (5,989)                -     (5,989)

Consolidated cash flow statement

6.6 For the year to 31 December 2004

                                     UK GAAP IFRS             IFRS        IFRS
                                           format      adjustments
                                             £000             £000        £000
Cash flows from operating activities
Profit for the period                       4,688             (551)      4,137
Tax expense                                 1,337              (82)      1,255
Net finance costs                           1,169              446       1,615
Depreciation                                1,073                -       1,073
Amortization                                  410               99         509
Profit on sale of tangible
fixed assets                                   (1)               -          (1)
Equity settled share-based
payment expense                                 -                4           4
Operating profit before
changes in working capital and
provisions                                  8,676              (84)      8,592
Decrease in trade and other
receivables                                   215               86         301
Increase in inventories                      (675)             (47)       (722)
Decrease in trade and other
payables                                   (1,713)              45      (1,668)
Corporation tax paid                       (1,062)               -      (1,062)
Net cash flow from operating
activities                                  5,441                -       5,441

Cash flows from investing activities
Purchase of tangible fixed
assets                                     (1,020)               -      (1,020)
Proceeds from sale of tangible
fixed assets                                   38                -          38
Purchase of subsidiary
undertakings                              (13,700)               -     (13,700)
Interest received                              51                -          51
Net cash flow from investing
activities                                (14,631)               -     (14,631)

Cash flows from financing activities
Interest paid                              (1,327)            (426)     (1,753)
Proceeds from the issue of
share capital                                  26                -          26
Preference dividends paid                    (426)             426           -
Dividend paid to minority
shareholder                                  (103)               -        (103)
New loans                                  10,967                -      10,967
Ordinary dividends paid                    (1,077)               -      (1,077)
Net cash flows from financing
activities                                  8,060                -       8,060
Net decrease in cash and cash
equivalents                                (1,130)               -      (1,130)



Appendix 1 - Summarised restatement of accounting policies

This appendix provides a summary of Quarto's key group accounting policies under
IFRS.

1.1 Basis of accounting under IFRS

The restated financial information for the transition to IFRS at 1 January 2004,
the interim period ended 30 June 2004, and the year ended 31 December 2004 has
been prepared in accordance with International Financial Reporting Standards
issued by the International Accounting Standards Board and expected to be
endorsed by the EU and effective at 31 December 2005.

Certain optional exemptions are allowed by IFRS1 on first-time adoption of IFRS.
The exemptions adopted
by the group are summarised in section 1.18, 'IFRS transitional arrangements',
below.

1.2 Basis of preparation

The financial statements are prepared on the historical cost basis, except that
the derivative financial instruments are stated at fair value and non-current
assets, as modified by the revaluation of freehold property, are stated at the
lower of carrying amount and fair value less costs to sell.

The preparation of financial statements in conformity with IFRS's requires
management to make judgments, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income
and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period of
the revision and future periods if the revision affects both current and future
periods.

The accounting policies set out below have been applied to all periods
presented.

1.3 Basis of consolidation

The group financial statements include the results of the company and all of its
subsidiary undertakings. A subsidiary is an entity controlled, directly or
indirectly, by the group. Control is the power to govern the financial and
operating policies of the entity so as to obtain benefits from its activities.
The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that
control ceases.

Intragroup balances and any unrealised gains and losses or income and expenses
arising from intragroup transactions are eliminated in preparing the
consolidated financial statements.

The assets and liabilities of foreign operations, including goodwill and fair
value adjustments arising on consolidation, are translated into sterling at
exchange rates ruling at the balance sheet date. The revenues and expenses of
foreign operations are translated into sterling at average annual exchange
rates. Foreign exchange differences arising on retranslation are recognised
directly in a separate translation reserve within equity.

1.4 Foreign currency transactions

Transactions in foreign currencies are translated at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at
the exchange rate ruling at that date with any exchange differences arising on
retranslation being recognised in the income statement.

1.5 Derivative financial instruments and hedge accounting

The group uses derivative financial instruments to hedge its exposure to
interest rate risks arising from financing activities. The group has an interest
rate swap on US$30 million of its borrowings. The instrument meets IAS 39's
hedge accounting criteria and the instrument is carried at fair value at each
reporting date, with any gain or loss being recognised in equity.

Preference share capital is classified as a liability if it is redeemable as a
specific date or at the option of shareholders or if dividend payments are not
discretionary. Dividends thereon are included in the income statement within
financial costs.

Convertible notes that can be converted to share capital at the option of the
holder, where the number of shares issued does not vary with changes in their
fair value, are accounted for as compound financial instruments. Transaction
costs that relate to the issue of a compound financial instrument are allocated
to the liability and equity components in proportion to the allocation of
proceeds. The equity component of the convertible notes is calculated as the
excess of the issue proceeds over the present value of the future interest and
principal payments, discounted at the market rate of interest applicable to
similar liabilities that do not have a conversion option. The interest expense
recognised in the income statement is calculated using the effective interest
rate method.

1.6 Financing income and costs

1.6.1 Financing costs

Financing costs comprise interest payable on borrowings calculated using the
effective interest methods.

1.6.2 Financing income

Financing income comprises interest receivable, which is recognised in the
income statement as it accrues using the effective interest method, and dividend
income, which is recognised in the income statement when the right to receive
payment is established.

1.7 Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents
comprises cash balances, call deposits and bank overdrafts that form an integral
part of the group's cash management processes.

1.8 Business combinations and goodwill

All business combinations are accounted for by applying the purchase method.
Goodwill represents the excess of the cost of the acquisition over the fair
value to the group of the net assets and any contingent liabilities acquired. In
respect of acquisitions prior to 1 January 2004, goodwill is included on the
basis of its deemed cost which represents the amount recorded previously under
UK GAAP.

Goodwill arising on acquisitions is stated at cost less any accumulated
impairment losses. From 1 January 2004, goodwill is allocated to cash-generating
units and is no longer amortized but is tested annually for impairment. Prior to
1 January 1998, goodwill was written off to reserves in the year of acquisition.

1.9 Intangible assets

Other intangible assets, such as backlists, that are acquired by the group are
stated at cost less accumulated amortization and impairment losses. Subsequent
expenditure on capitalised intangible assets is expensed as incurred.

Amortization of intangible assets is charged to the income statement on a
straight-line basis over the estimated useful lives of intangible assets. The
estimated useful lives are 5 to 10 years.

1.10 Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation
and any provision for impairments in value. The group recognises in the carrying
amount of property, plant and equipment the subsequent costs of replacing part
of such items when there are future economic benefits. All other costs are
recognised in the income statement as an expense as they are incurred.

Depreciation is provided on a straight-line basis to write off the cost, less
the estimated residual value, of property, plant and equipment over their
estimated useful lives. Where parts of an item of plant and equipment have
separate lives, they are accounted for and depreciated as separate items. Land
is not depreciated. Estimated useful lives are as follows:
Freehold and long leasehold property - 50 years
Short leasehold property - over the period of the lease
Plant, equipment and motor vehicles - 4 to 10 years
Fixtures and fittings - 5 to 7 years

Certain items of property, plant and equipment, that had been revalued to fair
value on or before 1 January 2004, the date of transition to IFRS's, are
measured on the basis of deemed cost, being the revalued amount at the date of
that revaluation.

1.11 Impairment

The carrying amount of the group's assets is reviewed at each balance sheet date
to determine whether there is any indication of impairment. If any such
indication exists, the asset's recoverable amount is estimated. For goodwill,
the recoverable amount is estimated at each balance sheet date. An impairment
loss is recognised whenever the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment losses are
recognised in the income statement.

1.12 Revenues

Revenue represents invoiced value of sales less anticipated returns, excluding
customer sales taxes and inter group sales. Revenues are recognised on despatch
of goods.

1.13 Inventory

Inventory is valued at the lower of cost, including an appropriate portion of
overheads, and net realisable value. Net realisable value is the estimated
selling price in the ordinary course of business, less estimated costs of
completion and selling expenses. Production costs (excluding unit print costs),
including an appropriate proportion of overheads, in respect of a book are
charged to income statement on the first printing of a book.

1.14 Leases and hire purchase contracts

Where assets are acquired under finance leases (including hire purchase
contracts), which confer rights and obligations similar to those attached to
owned assets, the amount representing the outright purchase price of such assets
is included in tangible fixed assets. Depreciation is provided in accordance
with the accounting policy above. The capital element of future finance lease
payments is included in creditors and the interest element is charged to the
income statement over the period of the lease in proportion to the capital
element outstanding. Expenditure on operating leases is charged to the income
statement on a straight line basis.

1.15 Post-retirement benefits

Substantially all of the group's pension costs relate to individual pension
plans and are charged to the income statement as they fall due. The Quarto
Publishing plc pension scheme is a personal defined contribution pension scheme.

1.16 Share-based payments

The fair value of employee share option grants is calculated using a binomial
model. The resulting cost is charged to the income statement over the vesting
period of the plans. The value of the charge is adjusted to reflect expected and
actual levels of options vesting.

1.17 Taxation

Tax on the profit or loss for the year comprises both current and deferred tax.

Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the balance sheet date, and
any adjustments to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for
temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used
for taxation purposes. A deferred tax asset is recognised only to the extent
that it is probable that future
taxable profits will be available against which the asset can be utilised.

1.18 IFRS transitional arrangements

When preparing the group's IFRS balance sheet at 1 January 2004, the date of
transition, the following optional exemptions, provided by IFRS 1 First-time
Adoption of International Financial Reporting Standards from full retrospective
application of IFRS accounting policies, have been adopted:

   • Business combinations - the provisions of IFRS 3 have been applied from
    1 January 2004. The net carrying value of goodwill at 31 December 2003 under
    the previous accounting policies has been deemed to be the cost at 1 January
    2004;
   • Cumulative translation differences arising on consolidation of
    subsidiaries - IAS 21 requires such differences to be held in a separate
    reserve, rather than included in the profit and loss reserve under UK GAAP.
    This reserve has been deemed to be nil on January 1 2004;

Share-based payments - IFRS2 has not been applied to share options granted prior
to 7 November 2002.

CONTINUED IN ADOPTION OF IFRS ANNOUNCEMENT - PART 2 


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