Quintain Estates & Development PLC 06 December 2005 6 December 2005 QUINTAIN ESTATES AND DEVELOPMENT PLC ("Quintain" / "Company" / "Group") INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2005 Highlights • Good progress made in positioning the business to deliver the Company's major Special Projects • Interim dividend increased by 18% to 3.25p (2004: 2.75p) reflecting the Board's confidence in the prospects of the Company • Profit before tax reduced to £2.1m (2004: £4.8m) after charge of £2.7m for discontinued operations at Wembley and £1.6m for marking to market of debt • Earnings per share up 74% to 3.3p before discontinued activities (2004: 1.9p); earnings per share after discontinued activities down 52% to 1.4p (2004: 2.9p) • Directors' interim valuation, not incorporated into the 30 September 2005 figures, indicates 10.2% uplift in adjusted diluted NAV to 542p per share (31/03/05: 492p) • Directors' valuation of Wembley and Greenwich Peninsula assets reveal approximate uplifts of £35m (13%) at Wembley and £8m (7%) at Greenwich • Asset disposals totalling £45.6m during the period, generating profits of £6.9m, including the completion of the Company's shopping centre disposal programme • Signing of 15 year contract with world class promoter to manage events at Wembley Arena, thereby removing operational risk • Heads of terms agreed with Hilton for a 400 room hotel at Wembley • Meridian Delta entered into exclusive negotiations with two major housebuilders at Greenwich • Joint ventures agreed with BioRegional and long standing partner, Countryside Properties plc to develop large mixed use developments; Quintain now one of the UK's leading urban regeneration experts with 21m sq ft of consented schemes • Significant progress in Q3P, the Group's Fund Management division; Quercus now approaching £400m of assets under management and new funds planned. Nigel Ellis, Chairman of Quintain, commented: "The outlook remains exciting, with the scale and breadth of opportunities capable of delivering substantial rewards. We believe we have the management skills, disciplines and contacts to continue to deliver a track record of sustained outperformance, with as always our measure being the generation of total return for shareholders." For further information, please contact: Quintain Estates and Development Rebecca Worthington 020 7495 8968 Financial Dynamics Stephanie Highett / Dido Laurimore 020 7831 3113 FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2005 Profit and Loss Account 30 Sept 30 Sept Annual Year to 31 2005 2004 change March % 2005 Group turnover (£000) 23,403 27,855 (16.0) 59,095 Profit before tax (£000) 2,100 4,766 (55.9) 37,173 Earnings per share (pence) After discontinued activities 1.4 2.9 (51.7) 32.1 Before discontinued activities 3.3 1.9 73.7 30.4 Dividend per share (pence) 3.25 2.75 18.2 9.50 Balance Sheet 30 Sept 30 Sept Annual As at 31 2005 2004 change March % 2005 Net asset value per share (pence) 431 363 18.7 443 Diluted net asset value per share (pence) 424 358 18.4 436 Gearing (%) 39 54 29 Chairman's Statement I am pleased to report that Quintain has continued to make good progress in the six months to 30 September 2005, during which time it has positioned itself to deliver the Company's major Special Projects. The Board's confidence in the prospects of the Company is reflected in the decision to increase the interim dividend by 18% to 3.25p (2004: 2.75p). The creation of sustainable shareholder value remains Quintain's primary objective. We have decided not to compete in a fully priced investment market which we believe would in the longer term reduce our total return as well as making us more vulnerable to a downturn in the market. We have, therefore, been net sellers of assets, although we have made selective purchases where we can add value, more details of which are included in the portfolio review. In particular we have been sellers of retail and, with the sale of Anglia Square, Norwich during the period, have now sold all of our secondary and tertiary shopping centres acquired in 1999 as part of the Chesterfield acquisition, realising proceeds of £149m and a profit over acquisition cost of £42m. The Company's strategy has been refined in light of the major Special Projects, where we intend to own the freehold estates, whilst creating joint venture developments and potentially selling long leases on individual plots. This allows us to capture additional revenue streams from telecommunications, media and estate management and, in a market where product is increasingly hard to find, we have ensured access to a pipeline of assets as a result of Special Projects securing consents of 21m sq ft. In order to capture this longer term value, we have increased headcount, the cost of which is charged against revenue, with as yet no associated income, giving rise to a short term decrease in underlying earnings. We are also focusing resources on fund management in order to deliver opportunities in non-traditional sectors, where we believe the market currently offers better value. Over time this will create a significant stream of fees, a share of profits and further opportunities. Results The good progress in the six months, as shown by the 10.2% increase in adjusted diluted net assets after incorporating director's valuations, is not reflected in the income statement with one-off items reducing profit before tax to £2.1m (2004: £4.8m). The excitement and scale of Special Projects and the commitment to the long-term development of communities must be tempered by thorough risk and financial management disciplines - processes which are firmly and rigorously imposed. Mindful of the need to keep music alive at Wembley, so protecting the operational business and enabling us to deliver the deal set out below, the Board took a difficult decision to open and maintain the temporary Pavilion, despite a challenging year when many high profile stars cancelled tours, The cost of the building was fully provided for at the half year giving rise to a £2.7m loss. This compares with a profit of £1.5m for the time the arena was open in the previous period. This business is classified as discontinued, as we are pleased to announce today that we have signed a 15 year management agreement with a world class promoter. The signing of this contract immediately removes the operational risk in relation to the Arena, giving Quintain guaranteed revenues and a performance related profit share, and allows us to concentrate on delivering value from developing the surrounding property. However, we are also pleased to report strong interest in the re-opening of the Arena in April 2006, with 172 provisional or confirmed bookings in place, a record for the Arena. As in previous years, we have not undertaken a formal valuation of the property portfolio for the half year. However the Directors have carried out, in conjunction with our valuers, an informal review of the portfolio, which shows a capital uplift of 8.2%. The largest uplifts were at Wembley, £35m (13%), and at Greenwich, £8m (7%). We are encouraged by these results at perhaps one of the most difficult stages of major development schemes, where infrastructure is being installed and the first phase of deals being negotiated, but before any profits can be realised on land sales or development. In this context, we would anticipate the Company's profits remaining subdued over the next 18 months although, subject to market conditions, we would expect to see continued robust growth in NAV, and therefore strong total returns. Portfolio review Special Projects With Quintain increasingly recognised as one of the UK's leading urban regenerators, we are pleased to report good progress with the Special Projects division. With Heads of Terms now signed for a management agreement with Hilton for a 400 room hotel, the development of the central core of the site is now unlocked, giving the potential for simultaneous delivery of a substantial housing development and retail scheme. Our joint venture with the Genesis and Family Housing Associations for 286 units behind the Arena is progressing well with a view to starting on site in late Spring 2006. The Arena is on target for the first event on 2 April 2006. The heart of the development, incorporating the world class public realm of Arena Square and the Spanish Steps that link it to the Stadium, is taking shape and will be completed in good time for the Arena opening. We are advancing demolition works of the 370,000 sq ft, 13 acre Palace of Industry following on from its delisting. This will enhance the sense of place at Wembley, giving strong sightlines into our development and providing additional income opportunities whilst we work with local and national government to demonstrate the case for delivering a regional casino to support the regeneration of the wider Wembley area. The Conference Centre and Exhibition Halls will close in August 2006 to allow demolition works take place before starting on site with the hotel, retail and residential core mentioned above. At Greenwich we are in exclusive negotiations with a major housebuilder in relation to one plot, and negotiating a joint venture on a further plot with another housebuilder on the South East section. In order to maximise returns on the most valuable land in the North West, facing Canary Wharf, we are proposing a wider development joint venture with our partner Lend Lease of the 2.5m sq ft Meridian Gardens area. At Abbey Mills, Merton, SW19, our joint venture with Countryside Properties Plc, phase 2 progresses well with 79 of the 164 units sold and a further 26 exchanged or reserved. The Speciality Market was sold in the period, taking advantage of current investor demand. Since the half year, we have signed a further joint venture with Countryside to develop City Park Gate in Birmingham. The outline consented scheme comprises 608 residential units, 115,000 sq ft of offices and 100,000 sq ft of retail development. We are refining the masterplan and anticipate being on site within two years. We formed a joint venture with BioRegional in the period, a company that undertakes sustainable development. This will give us a competitive advantage when presenting the environmental impact of our proposals for future regeneration projects. Our first development will be in conjunction with Crest Nicholson to build 168 units and 24,000 sq ft of commercial space in Brighton. We have a further scheme in the Thames Corridor in solicitors' hands and have also secured preferred bidder status on a project in Middlesborough, comprising 500 apartments, 200,000 sq ft of offices and 77,000 sq ft of retail. Considerable work will have to be undertaken pending exchange of development agreements with Tees Valley Regeneration and English Partnerships. Main Portfolio With institutions and property companies lowering their IRR targets in order to remain competitive, it continues to be difficult to buy properties where we see value. However, we have made selective purchases totalling £31.1m, of mainly regional offices, as we believe this sector offers the best opportunities for adding value. Within the Company's Main Portfolio, sales of £45.6m included the completion of our shopping centre disposal programme with the £23.8m sale of Anglia Square, Norwich delivering a surplus over cost of £12.9m. We completed a sale and leaseback of our head office at 16 Grosvenor Street that we bought last year and refurbished. Proceeds of £14.6m gave a profit of £4.3m. Market conditions for sales could not be better and we have decided to take this opportunity to undertake further sales which will impact in early 2006. Q3P We are pleased with the strong progress in our Fund Management Division, Q3P. Quercus, our specialist healthcare fund, has grown to £379m of gross assets invested in 184 properties in the nursing home, learning disability and specialist care markets. During the period, the fund made its first investment into the independent private hospital market with the £32m acquisition and leaseback of three hospitals as part of the financing for the buyout of BUPA's Classic Hospitals Group by Legal and General Ventures. As part of a recent fundraising, we opted to invest a further £10 million to maintain our share at around 27%, taking advantage of the strong performance of the fund, which is now also delivering a material fee income. Other fund management opportunities are being progressed and, in particular, we hope to launch a student accommodation fund in the New Year. We are bidding for a pipeline of properties to be warehoused on our balance sheet and have reached agreement with University Partnership Programme to bid jointly for University backed student accommodation projects. At Oxford we have acquired a site for 290 beds with a planning application to be submitted in early 2006. Financial Review Turnover fell by 16% in the period to £23.4m reflecting, as mentioned above, the net disposal programme and the negative contribution from leisure operations as a result of Wembley Arena being closed for refurbishment. The £3.3m increase in administrative expenses relates to staff costs. Our recruitment programme has continued in order to augment our existing resource to deliver our major projects and this has resulted in an increased average headcount of 62 compared with 57 in the same period last year. In addition to this bonuses agreed and paid in the period, calculated on the prior year total return of 24.6%, were up £2.3m to £4.5m. Net finance expenses have fallen by £3.3m to £6.1m reflecting the disposal programme mentioned above. Within this was a £1.6m charge under IAS 39, Financial Instruments: Recognition and Measurement, which is discussed in more detail below. Gearing rose to 39%, reflecting the capital cost of developments and the impact of International Financial Reporting Standards (IFRS). This is still significantly below our long run target, but reflects current market conditions and the future cash requirements for our significant projects. At the half year, all banking covenants were well covered. The effective tax rate, based on estimates for the full year, of 15% remains below the standard 30% owing to the continuing availability of tax losses from previous acquisitions, balancing allowances on properties sold and capitalised interest. These financial statements are prepared under IFRS and reconciled to UK GAAP. They include the first time application of IAS 39, Financial Instruments and IFRS 2, Share-based payments, the latter of which has a negligible impact. Under IAS 39, the marking to market of financial instruments is included on the balance sheet under current liabilities. We have adopted cashflow hedging, allowing us to take movements in effective hedges through reserves. The longer-term swaps, taken out in view of our long term projects, are under this standard considered ineffective and so movements are taken through the income statement. Outlook The outlook remains exciting, with the scale and breadth of opportunities capable of delivering substantial rewards. We believe we have the management skills, disciplines and contacts to continue to deliver a track record of sustained outperformance, with as always our measure being the generation of total return for shareholders. Nigel Ellis 6 December 2005 Independent Review Report Introduction We have been engaged by the Company to review the attached financial information and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with best practice which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be disclosed. International Financial Reporting Standards As disclosed in note 1, the next annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards as adopted for use in the EU. Accordingly, the interim report has been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the Listing Rules. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/ 4: Review of interim financial information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2005. KPMG Audit Plc Chartered Accountants Salisbury Square London EC4Y 8BB 6 December 2005 Consolidated Income Statement For the six months ended 30 September 2005 Unaudited Unaudited Unaudited Six months ended Six months ended Year ended 30 Sept 2005 30 Sept 2004 31 March 2005 Notes £000 £000 £000 _______ _______ _______ Gross rental income 14,809 18,427 36,394 Property related costs (2,792) (2,533) (6,597) _______ _______ _______ Net rental income 12,017 15,894 29,797 _______ _______ _______ Proceeds from sale of trading properties 2,245 2,391 6,336 Carrying value of trading properties sold (2,048) (1,944) (5,122) _______ _______ _______ Profit from sale of trading properties 197 447 1,214 _______ _______ _______ Income from leisure activities 2,809 2,188 6,178 Outgoings in relation to leisure activities (1,365) (597) (2,500) _______ _______ _______ Profit from leisure activities 1,444 1,591 3,678 _______ _______ _______ Other income receivable 2,368 1,350 4,253 Outgoings in relation to other income (872) (749) (2,050) _______ _______ _______ Profit from other income 1,496 601 2,203 _______ _______ _______ Total revenue from continuing activities 22,231 24,356 53,161 Total cost of sales from continuing (7,077) (5,823) (16,269) activities _______ _______ _______ Gross profit from continuing activities 15,154 18,533 36,892 _______ _______ _______ Total revenue from discontinued activities 1,172 3,499 5,934 Total cost of sales from discontinued (3,916) (1,965) (3,371) activities _______ _______ _______ Gross (loss) profit from discontinued 5 (2,744) 1,534 2,563 activities _______ _______ _______ Gross profit 12,410 20,067 39,455 Administrative expenses 6 (13,880) (10,607) (19,286) _______ _______ _______ Operating (loss) profit before recognition of results from fixed asset property sales (1,470) 9,460 20,169 Profit from sale of properties held as fixed 6,933 2,230 5,577 assets Gains on revaluation of investment - - 23,574 properties Deficits on revaluation of investment (58) (107) (3,315) properties Deficits on revaluation of development - - (1,232) properties _______ _______ _______ Net operating profit before net finance 5,405 11,583 44,773 expenses Finance income 197 1,325 1,454 Finance expenses (4,726) (10,778) (17,379) Change in fair value of cash flow hedges (1,590) - - Net finance expenses 7 (6,119) (9,453) (15,925) Share of profit from joint ventures and 2,814 2,636 8,325 associates _______ _______ _______ Profit before tax 2,100 4,766 37,173 Current tax (169) (988) (2,191) Deferred tax (154) - 6,667 Tax (charge) credit for the period 8 (323) (988) 4,476 _______ _______ _______ Profit for the financial period 3 1,777 3,778 41,649 ====== ====== ====== Attributable to: Equity shareholders of the parent 1,777 3,709 41,559 Minority shareholders - 69 90 _______ _______ _______ Profit for the financial period 3 1,777 3,778 41,649 ====== ====== ====== Earnings per share 9 basic 1.4p 2.9p 32.1p ====== ====== ====== diluted 1.4p 2.9p 31.5p ====== ====== ====== Dividend per share 10 3.25p 2.75p 9.50p ====== ====== ====== Consolidated Statement of Recognised Income and Expense For the six months ended 30 September 2005 Unaudited Unaudited Unaudited Six months ended Six months ended Year ended 30 Sept 2005 30 Sept 2004 31 March 2005 Notes £000 £000 £000 _______ _______ _______ Foreign exchange movements (6) 347 127 Unrealised (deficit) surplus on development (5) 12 93,261 properties Change in fair value of effective cash flow 7 (4,499) - - hedges Tax on items taken directly to equity 1,350 - (22,884) _______ _______ _______ Net income recognised directly in equity (3,160) 359 70,504 Profit for the financial period 3 1,777 3,778 41,649 _______ _______ _______ Total recognised income and expense for the (1,383) 4,137 112,153 period ====== ====== ====== Attributable to: Equity shareholders (1,383) 4,068 112,063 Minority shareholders - 69 90 _______ _______ _______ Total recognised income and expense for the (1,383) 4,137 112,153 period ====== ====== ====== Consolidated Statement of Changes in Equity For the six months ended 30 September 2005 Unaudited Unaudited Unaudited Six months ended Six months ended Year ended 30 Sept 2005 30 Sept 2004 31 March 2005 Notes £000 £000 £000 _______ _______ _______ Opening equity shareholders' funds as previously reported 638,261 523,513 523,513 Effect of adopting IFRS (66,957) (50,427) (50,427) _______ _______ _______ Opening equity shareholders' funds restated 571,304 473,086 473,086 Opening adjustment for change in accounting policy: Fair value of cash flow hedges (net of tax) 2 (i) & (xv) (5,825) - - _______ _______ _______ Adjusted opening equity shareholders' funds 565,479 473,086 473,086 Issue of shares less costs 178 350 534 Purchase of own shares for cancellation (107) - (2,243) Credits relating to directors' and 629 274 721 employees' share plans Investment in own shares (1,063) (443) (1,539) _______ _______ _______ 565,116 473,267 470,559 Total recognised income and expense (1,383) 4,068 112,063 _______ _______ _______ 563,733 477,335 582,622 Dividends 10 (8,683) (7,763) (11,318) _______ _______ _______ Closing equity shareholders' funds 4 555,050 469,572 571,304 ====== ====== ====== Consolidated Balance Sheet As at 30 September 2005 Unaudited Unaudited Unaudited As at As at As at 30 Sept 2005 30 Sept 2004 31 March 2005 Notes £000 £000 £000 ________ ________ ________ Non-current assets Investment properties 11 296,604 411,495 290,202 Development properties 11 489,366 346,051 463,893 Owner occupied properties, plant and 8,658 554 10,416 equipment Investment in joint ventures 82,809 44,858 70,232 Investment in associates 1,800 1,575 1,800 Other investments 188 188 188 ________ ________ ________ Total non-current assets 879,425 804,721 836,731 ________ ________ ________ Current assets Trading properties 8,796 4,119 4,724 Trade and other receivables 36,309 38,086 29,271 Short-term investments 19 19 19 Cash and cash equivalents 17,494 13,305 11,090 ________ ________ ________ Total current assets 62,618 55,529 45,104 ________ ________ ________ Total assets 942,043 860,250 881,835 ======= ======= ======= Current liabilities Bank loans 12 (48) (49) (88) Trade and other payables (49,080) (37,527) (31,049) Tax liabilities (978) (2,830) (6,497) ________ ________ ________ Total current liabilities (50,106) (40,406) (37,634) ________ ________ ________ Non-current liabilities Bank loans 12 (225,986) (255,889) (167,020) Other borrowings 12 (7,715) (7,625) (7,667) Deferred tax liability 8 (77,789) (60,685) (80,546) Obligations under finance leases 11 (20,587) (18,481) (12,750) Other payables (4,810) (6,039) (4,674) ________ ________ ________ Total non-current liabilities (336,887) (348,719) (272,657) ________ ________ ________ Total liabilities (386,993) (389,125) (310,291) ======= ======= ======= Net assets 555,050 471,125 571,544 ======= ======= ======= Equity Issued capital 13 32,316 32,377 32,298 Share premium account 47,065 46,000 46,575 Convertible loan stock (equity element) 786 786 786 Revaluation reserve 168,618 88,477 180,102 Other capital reserves 112,439 112,330 112,436 Translation reserve 121 347 127 Retained earnings 196,307 189,698 200,519 Investment in own shares (2,602) (443) (1,539) ________ ________ ________ Equity shareholders' funds 4 555,050 469,572 571,304 Minority shareholders - 1,553 240 ________ ________ ________ Total equity 555,050 471,125 571,544 ======= ======= ======= Net asset value per share 14 basic 431p 363p 443p ====== ====== ====== diluted 424p 358p 436p ====== ====== ====== Consolidated Cash Flow Statement For the six months ended 30 September 2005 Unaudited Unaudited Unaudited Six months ended Six months ended Year ended 30 Sept 2005 30 Sept 2004 31 March 2005 £000 £000 £000 ________ ________ ________ Operating activities Profit before tax 2,100 4,766 37,173 Adjustments for: Depreciation 363 674 1,027 Costs relating to share plans 629 274 721 Net finance expenses 6,119 9,453 15,925 Unrealised net revaluation losses (gains) on investment properties 58 107 (20,259) Deficits on revaluation of development - - 1,232 properties Share of profit from joint ventures and (2,814) (2,636) (8,325) associates Profit from sale of properties held as (6,933) (2,230) (5,577) fixed assets Loss (profit) from sale of fixtures and 6 (5) - fittings ________ ________ ________ (472) 10,403 21,917 Decrease (increase) in trade and other 5,785 (4,823) 4,050 receivables Increase (decrease) in trade and other 1,106 (4,497) (4,676) payables Decrease (increase) in trading 1,487 (1,992) (2,962) properties ________ ________ ________ 7,906 (909) 18,329 Interest paid (6,778) (11,221) (19,737) Profit on termination of hedging - 630 722 arrangement Interest received 207 1,338 1,106 Tax paid (2,003) (101) (100) ________ ________ ________ Cash flows from operating activities (668) (10,263) 320 ======= ======= ======= Investing activities Purchase and development of property (57,247) (65,243) (110,615) assets Purchase of property, plant and (1,093) (256) (9,007) equipment Proceeds from property sales 35,914 135,628 287,486 Tax paid on property sales (2,750) - (1,460) Acquisition of subsidiary companies (7,232) (13,875) (15,155) Loans to joint ventures and associates (11,325) (7,411) (18,648) Distributions received from joint ventures and associates 1,933 614 2,165 ________ ________ ________ Cash flows from investing activities (41,800) 49,457 134,766 ======= ======= ======= Financing activities Issue of shares 178 352 534 Purchase of own shares for cancellation (107) - (2,243) Investment in own shares (1,063) (443) (1,539) Increase (decrease) in borrowings 58,951 (58,261) (148,992) Payment of loan issue costs (273) (2,751) (2,858) Payment of finance lease liabilities (149) (909) (1,663) Equity dividends paid (8,683) (7,763) (11,318) ________ ________ ________ Cash flows from financing activities 48,854 (69,775) (168,079) ======= ======= ======= Net increase (decrease) in cash and cash equivalents 6,386 (30,581) (32,993) Cash and cash equivalents at start of 11,109 43,905 43,905 period Effect of exchange rate fluctuations on 18 - 197 cash held ________ ________ ________ Cash and cash equivalents at end of 17,513 13,324 11,109 period ======= ======= ======= Cash and cash equivalents here include short-term investments. Notes to the accounts For the six months ended 30 September 2005 1. Basis of preparation The financial information contained in this report is not audited and does not comply with the meaning of statutory accounts as defined by section 240 of the Companies Act 1985. The comparative figures for the financial year ended 31 March 2005 are not the Company's statutory accounts for that financial year. Those accounts, which were prepared under UK Generally Accepted Accounting Practice (UK GAAP), have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidated financial statements of the Company, for the year ending 31 March 2006, be prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the EU ('adopted IFRSs'). This interim financial information has been prepared on the basis of the recognition and measurement requirements of adopted IFRSs as at 30 September 2005 that are effective (or available for early adoption) at 31 March 2006, the Group's first annual reporting date at which it is required to use adopted IFRSs. Based on these adopted IFRSs, the directors have applied the accounting policies, as set out below, which they expect to apply when the first annual IFRS financial statements are prepared for the year ending 31 March 2006. However, the adopted IFRSs that will be effective (or available for early adoption) in the annual financial statements for the year ending 31 March 2006 are still subject to change and to additional interpretations and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements are prepared for the year ending 31 March 2006. As permitted, IAS 34, 'Interim Financial Reporting' has not been adopted. The audited financial statements for the year ended 31 March 2005 were prepared under UK GAAP as were previous annual and interim reports. Reconciliations of equity as at 1 April 2004 and 31 March 2005 and profit for the year ended 31 March 2005 reported under UK GAAP and IFRS have been distributed to recipients of the 2005 Annual Report and Accounts. Reconciliations are presented in the following notes to facilitate a comparison of these interim results with those published in the corresponding period of the previous financial year and those relating to the year ended 31 March 2005. IFRS 1, 'First-time Adoption of International Financial Reporting Standards', requires an explanation of major adjustments to cash flows under IFRS. While the format of the IFRS cash flow statement differs from that under UK GAAP, there are no material changes to cash flows from operations, investment or financing. 2. Accounting policies The principal accounting policies which the Group has applied to its results following the adoption of IFRS are as follows: (i) Basis of accounting The accounts have been prepared under the historical cost convention as modified by the annual revaluation of investment and development properties either held directly or through joint ventures and associates, and by the valuation of derivative financial instruments. The accounting policies have been applied consistently to the results, other gains and losses, assets and liabilities, and cash flows of entities included in the consolidated financial statements except for the first time application of IFRS 2, 'Share-based Payment'; IAS 32, 'Financial Instruments: Disclosure and Presentation' and IAS 39, 'Financial Instruments: Recognition and Measurement'. IFRS 2 applies to accounting periods commencing on or after 1 January 2005 and requires the Group to account through the income statement for the fair value of shares, share options and share rights granted on or after 7 November 2002 to directors and staff which had not vested as at 1 April 2005. The impact on the current and earlier periods has been negligible as the Group already recognised charges in respect of grant of shares under the Executive Directors' Performance Share Plan and share rights under the 2004 Unapproved Share Plan. The Group has taken advantage of the exemption in IFRS 1 which allows the deferral of the accounting and disclosure requirements of IAS 32 and IAS 39. As such, the effective date of transition to IFRS in relation to these standards is 1 April 2005. The effect of the change is to include interest rate swaps in the balance sheet at fair value and to recognise changes in their fair value in respect of the effective portion of cash flow hedges through equity and in relation to all other movements in the income statement. As at 1 April 2005, equity shareholders' funds have been decreased by £5,825,000 relating to the fair value adjustment of £8,321,000 less the related deferred tax provision of £2,496,000. The preparation of financial statements requires management to make judgments, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Though management believes that the estimates and the assumptions upon which these are based and are used in the preparation of the financial statements are reasonable in the light of available information, actual outcomes may be different. A revision to accounting estimates is recognised in the period in which the estimate is revised if the revision affects only that period. If the revision affects both current and future periods, the change is recognised over those periods. (ii) Basis of consolidation The Group's accounts include the results, assets and liabilities of the Company and its subsidiaries. Subsidiaries are those entities controlled by the Group. Control is established when the Group has the power to determine the financial and operating policies of an entity or business 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 it ceases. The acquisition method of accounting is adopted unless there are no significant assets or liabilities other than property within the acquired company, in which case the acquisition is treated as an asset acquisition. A joint venture is an undertaking in which the Group has a long-term interest and over which it exercises joint control. An associate is an undertaking in which the Group has a long-term interest, usually from 20% to 50%, of the equity voting rights and over which it exercises significant influence. The Group equity accounts for its share of net profit after tax of joint ventures and associates, together with its share of any revaluation movement on their investment properties less the related deferred tax, through the income statement. Its interest in their net assets is included in the consolidated balance sheet. (iii) Foreign currency Assets and liabilities of foreign operations are translated into sterling at exchange rates ruling at the balance sheet date. Operating income and expenses of foreign operations are translated into sterling at average exchange rates. Exchange differences arising from the translation of the net investment in foreign operations, including the effective portion of related hedges, are taken to the translation reserve. They are released to the income statement upon disposal of the foreign operation. (iv) Revenue and cost of sales Revenue is stated net of VAT and comprises rental income, proceeds from sales of trading properties, income from leisure operations, commission and fees receivable. Rental income from investment property leased out under an operating lease is recognised in the income statement on a straight-line basis over the term of the lease. Contingent rents such as turnover rents and indexed rents are recognised as income in the periods in which they are earned. Rent reviews are recognised when such reviews have been agreed with tenants. Lease incentives are recognised as an integral part of the net consideration for the use of the property and amortised on a straight-line basis over the term of the lease. Property operating costs are expensed as incurred including any element of service charge expenditure not recovered from tenants. (v) Disposal of properties Sales of properties are recognised in the accounts if an unconditional contract is exchanged by the balance sheet date and the sale is completed before the accounts are approved by the Board. Profits or losses arising from the sale of investment and trading properties are calculated by reference to book value at the end of the previous year, adjusted for subsequent capital expenditure. (vi) Depreciation No depreciation is provided in respect of the Group's freehold investment and development properties and leasehold investment and development properties with over 20 years to run. This represents a departure from the provisions of the Companies Act 1985 which requires all properties to be depreciated. Depreciation is only one of many factors reflected in the annual valuation of properties and accordingly, the amount of depreciation which might otherwise have been charged cannot be separately identified or quantified. Depreciation is provided on leasehold investment and development properties with less than 20 years to run, over the remaining life of the lease. In relation to other tangible fixed assets, depreciation is provided over the life of the lease in respect of group occupied properties and over their estimated useful life, in the case of fixtures, fittings and equipment. (vii) Employee benefits Pensions Contributions to employees' personal pension plans are charged to the income statement as incurred. Share-based payment The Group uses the Black Scholes model to estimate the fair value of equity rights at the date of grant to directors and staff and this amount is then amortised through the income statement on a straight-line basis over the vesting period. (viii) Capitalisation of borrowing costs Borrowing costs associated with direct expenditure on properties under development or undergoing major refurbishment are capitalised. Capitalisation is initiated when the activities to develop a property commence and continues until the property is substantially ready for its intended use. Interest is capitalised at the actual rate payable on borrowings for development purposes or for that part of the development cost financed out of general funds, at an average rate. The capitalisation of finance costs is suspended if there are prolonged periods when development activity is suspended. (ix) Tax Tax is included in the income statement except to the extent that it relates to items recognised directly in equity, in which case the related tax is recognised in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates applicable at the balance sheet date. Tax payable upon the realisation of revaluation gains recognised in prior years is recorded as a current tax charge with a release of the associated deferred taxation. Deferred tax is provided on all temporary differences, except in respect of investments in subsidiaries and joint ventures where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is provided using the balance sheet liability method in respect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates applicable at the balance sheet date. 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. (x) Investment properties Investment properties are properties owned or leased by the Group which are held either for long-term rental growth or for capital appreciation or both. Investment property is initially recognised at cost including related transaction costs and valued annually by professionally qualified external valuers. In accordance with IAS 40, 'Investment Property', property held under lease is shown gross of the recognised finance lease liability. Gains or losses arising from changes in the fair value of investment property are included in the income statement of the period in which they arise. When the Group redevelops an existing investment property for continued future use as an investment property, the property remains an investment property and is not reclassified. (xi) Development properties Properties acquired with the intention of redevelopment are classified as development properties and stated at fair value in accordance with IAS 16, ' Property, Plant and Equipment'. Changes in fair value above cost are recognised in equity and changes in fair value below cost are recognised in the income statement. All costs directly associated with the purchase and construction of a development property are capitalised. When development properties are completed, they are reclassified as investment properties and any accumulated balance on revaluation is transferred to retained earnings. (xii) Owner occupied property, plant and equipment The Group's leasehold office premises together with fixtures, fittings and equipment are carried at cost less accumulated depreciation. (xiii) Other investments Fixed asset investments are stated at cost less any provision for impairment in value. (xiv) Borrowings Borrowings are recognised initially at fair value after taking account of any discount on issue and attributable transaction costs. Subsequently, such discounts and costs are charged to the income statement over the term of the debt at a constant return on the carrying amount of the liability. (xv) Derivative financial instruments The Group uses interest rate swaps for hedging purposes in line with its risk management policies to alter the risk profile of existing underlying exposure in respect of floating rate debt. These derivative financial instruments are recognised initially at cost and subsequently at fair value with changes in fair value being recognised in equity for effective cash flow hedges and through the income statement for ineffective hedges. (xvi) Property derivatives The Group enters into property derivatives to mitigate or enhance its exposure to a particular class or a spectrum of property assets. Such instruments are accounted for initially at cost with subsequent recognition in the balance sheet at fair value and with changes in fair value being reflected through the income statement. 3. Reconciliation of profit reported under UK GAAP to profit under IFRS Unaudited Unaudited Six months ended Six months ended 30 Sept 2005 30 Sept 2004 Notes £000 £000 _____ _____ Profit for the period under UK GAAP 1,682 4,201 IFRS adjustments: Reallocation of rent smoothing adjustment i (15) (15) Capitalised interest ii 184 (104) Additional interest on convertible loan stock iii (48) (43) Treatment of leasehold interests as finance leases iv - 3 Tax effect of differences (26) (264) _____ _____ Profit for the period under IFRS 1,777 3,778 ==== ==== Notes: i Under IFRS, rent free periods are allocated over the whole lease term or to a tenant break if appropriate rather than the period to the first rent review as is the case under UK GAAP. ii Under UK GAAP, the Group accounts for jointly administered arrangements on a proportional basis and capitalises interest on its share of the cost of properties in the course of development. Under IFRS, all such arrangements with third parties are included in the financial statements on an equity accounted basis. As a result, interest previously capitalised under UK GAAP in the transitional period was reversed, giving rise to a higher profit on sale under IFRS in the current period but a lower comparative figure. iii As noted above, the present value of the liability element of the Group's convertible loan stock is deemed to have been estimated at the date of issue using an appropriate rate of discount. Interest is charged at this rate to the income statement during the life of the obligation. iv Under IFRS, leasehold property interests are accounted for as finance leases. The liability under these leases is recognised as the present value of the minimum lease payments at the date of inception or acquisition of the lease. Part of the rent payable under the lease is treated as a finance charge based on the discount rate used in this calculation. 4. Reconciliation of equity reported under UK GAAP to equity under IFRS Unaudited Unaudited Unaudited Unaudited As at As at As at As at 30 Sept 2005 30 Sept 2004 31 March 31 March 2005 2004 Notes £000 £000 £000 £000 ________ ________ ________ ________ Equity shareholders' funds under UK GAAP 626,252 524,606 638,261 523,513 IFRS adjustments: Obligations under finance leases i 20,587 18,481 11,549 18,776 Leasehold property interests i (20,587) (18,481) (11,549) (18,776) Deferred tax on revaluation gains ii (75,318) (58,513) (75,453) (58,249) Equity element of convertible loan iii 786 786 786 786 stock Additional interest on convertible loan iii (631) (541) (583) (498) stock Adjustment to interest capitalised iv (223) (327) (407) (223) Exclusion of dividend v 4,184 3,561 8,700 7,757 _______ _______ _______ ________ Equity shareholders' funds under IFRS 555,050 469,572 571,304 473,086 ====== ====== ====== ======= Notes: i Interests in leasehold properties are accounted for as finance leases under IFRS and the obligation to the freeholder or superior leaseholder is included within non-current liabilities, calculated as the present value of the minimum lease payments at the inception of the lease. Investment and development properties are valued net of this obligation, so an amount equivalent to the obligation is included in the balance sheet as a non-current asset. An element of the rent payable is treated as interest and a part repayment of the obligation to the freeholder or superior leaseholder. ii Under IFRS, deferred tax provisions are made for the tax that would potentially be payable on the sale of investment and development properties and other assets where the carrying value is different from their cost for tax purposes. UK GAAP requires that this potential liability is disclosed as contingent tax but not provided for in the balance sheet. iii Under IFRS, the present value of the Group's convertible loan stock is regarded as having been estimated at the date of issue using an appropriate rate of discount and this amount is reflected in the balance sheet under non-current liabilities with the equity included in the equity section. Interest is charged at this rate to the income statement during the life of the obligation. Under UK GAAP, convertible loan stock is included under non-current liabilities. iv Under IFRS, the Group has elected to account for jointly administered arrangements as joint ventures and accordingly, interest previously capitalised on development expenditure under the proportional basis of accounting adopted under UK GAAP has been reversed. v Under IFRS, unapproved dividends are not provided for. Under UK GAAP, proposed dividends are shown as a liability in the balance sheet. 5. Discontinued activity The discontinued activity relates to the operation of Wembley Arena, which has been subject to a reconstruction programme, and its temporary replacement, the Pavilion. Agreement has now been reached with Clear Channel Entertainment which will undertake the management of the Arena on its re-opening in April 2006. 6. Administrative expenses Unaudited Unaudited Unaudited Six months ended Six months ended Year ended 30 Sept 2005 30 Sept 2004 31 March 2005 £000 £000 £000 _______ _______ _______ Directors' remuneration 2,979 2,138 2,853 Staff costs 8,564 5,415 10,657 Legal and professional fees 977 1,333 2,258 Office costs 941 1,332 2,477 Depreciation 166 171 441 Loss (profit) on disposal of fixed 6 (5) - assets Operating lease payments 102 - 302 General expenses 145 223 298 _______ _______ _______ 13,880 10,607 19,286 ====== ====== ====== 7. Net finance expenses The 2004 interest charge included an amount written off on re-financing of £1,969,000 in respect of borrowing costs previously capitalised and a profit of £630,000 which arose on the termination of certain swap arrangements. In accordance with IAS 39, 'Financial Instruments: Recognition and Measurement', the Group has reviewed its interest rate hedges in existence as at 30 September 2005 along with those in its joint ventures. As assessed by J C Rathbone Associates, movements in fair value since 31 March 2005 of the elements of those viewed as effective have been recognised through equity while all other movements are reflected in the income statement. The impact of the adoption of IAS 39 on these numbers as at 30 September 2005 has been as follows: £000 _______ Restatement of opening equity 8,321 Recognised in income statement in period 1,590 Recognised in equity in period 4,499 _______ 14,410 Tax credit (4,022) _______ 10,388 ====== Interest rate hedges within joint ventures are viewed as effective and so movements in fair value have been recognised through equity. These totalled £440,000 before tax at 30 September 2005 (£308,000 after tax) and are included within the above total. 8. Tax 31 March 2005 Opening Payments Recognised Recognised 30 Sept 2005 adjustment in period in income in equity £000 £000 £000 £000 £000 £000 _______ _______ _______ _______ _______ _______ Current tax 6,497 - (4,753) 169 (935) 978 ====== ====== ====== ====== ====== ====== Deferred tax: Revaluation gains on investment 17,984 - - (308) - 17,676 properties Revaluation gains on development properties 57,410 - - - 935 58,345 Other items 5,152 - - 638 - 5,790 _______ _______ _______ _______ _______ _______ 80,546 - - 330 935 81,811 Fair value adjustments to - (2,496) - (176) (1,350) (4,022) interest rate swaps _______ _______ _______ _______ _______ _______ 80,546 (2,496) - 154 (415) 77,789 ====== ====== ====== ====== ====== ====== The tax charge in the period reflects the benefit of available losses, capitalised interest and balancing allowances arising on disposals. 9. Earnings per share Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Six months Six months Six months Six months Six months Six months Year Year Year ended ended ended ended ended ended ended ended ended 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 31 March 31 March 31 March 2005 2005 2005 2004 2004 2004 2005 2005 2005 Profit Average Earnings Profit Average Earnings Profit Average Earnings for the weighted per for the weighted per for the weighted per financial number share financial number share financial number share period of shares period of shares year of shares £000 000 pence £000 000 pence £000 000 pence ______ _______ _____ ______ _______ _____ ______ _______ _____ (i)After discontinued activities Basic 1,777 128,903 1.4 3,709 129,332 2.9 41,559 129,349 32.1 === === ==== Adjustments: 8% Convertible 84 2,000 84 2,000 168 2,000 loan stock Employee share - 1,121 - - - 1,031 plans ______ _______ _____ _______ ______ _______ Diluted 1,861 132,024 1.4 3,793 131,332 2.9 41,727 132,380 31.5 ===== ====== === ===== ====== === ===== ====== ==== (ii)Before discontinued activities Basic 4,299 128,903 3.3 2,493 129,332 1.9 39,305 129,349 30.4 === === ==== Adjustments: 8% Convertible 84 2,000 84 2,000 168 2,000 loan stock Employee share - 1,121 - - - 1,031 plans ______ _______ _____ _______ ______ _______ Diluted 4,383 132,024 3.3 2,577 131,332 2.0 39,473 132,380 29.8 ===== ====== === ===== ====== === ===== ====== ==== Profit before discontinued activities shown above excludes the gross (loss) profit in respect of the operation of Wembley Arena, and its temporary replacement the Pavilion, net of tax at the Group's effective current tax rate. 10. Dividends The proposed interim dividend of 3.25p (2004: 2.75p) per ordinary share was approved by the Board on 29 November 2005 and is payable on 18 January 2006 to shareholders on the register at the close of business on 16 December 2005. The dividend has not been included as a liability as at 30 September 2005. The final dividend of £8,683,000 for the year ended 31 March 2005, representing 6.75p per share, was paid on 8 September 2005 and is included in the consolidated statement of changes in equity. 11. Investment and development properties Investment and development properties are valued annually at the end of each financial year and are shown in the balance sheet as at 30 September 2005 at the previous year end valuations adjusted for subsequent expenditure and disposals. In the case of leasehold properties, book values have been grossed up for the liabilities to superior landlords and a corresponding adjustment, shown as obligations under finance leases, has been included in the balance sheet within non-current liabilities. 12. Fair value of financial assets and liabilities Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited As at As at As at As at As at As at 30 Sept 2005 30 Sept 2005 30 Sept 2004 30 Sept 2004 31 March 31 March 2005 2005 Book value Fair value Book value Fair value Book value Fair value £000 £000 £000 £000 £000 £000 _______ _______ _______ _______ _______ _______ Current liabilities: Bank loans 48 49 88 Non-current liabilities: Bank loans 228,375 258,434 169,383 Other borrowings 7,715 7,625 7,667 _______ _______ _______ _______ _______ _______ 236,138 236,545 266,108 266,950 177,138 177,513 Unamortised borrowing costs (2,389) (2,389) (2,545) (2,545) (2,363) (2,363) _______ _______ _______ _______ _______ _______ Total borrowings 233,749 234,156 263,563 264,405 174,775 175,150 ====== ====== ====== ====== ====== ====== Current liabilities: Interest rate swaps 13,970 13,970 - - - - ====== ====== ====== ====== ====== ====== The fair value of the Group's borrowings has been estimated by J C Rathbone Associates on the basis of quoted market prices. The fair values of the Group's outstanding interest rate swaps have been estimated by calculating the present values of future cash flows, using appropriate market discount rates. The fair value of the Group's cash balances and those of other debtors and creditors equate to their book values. 13. Issued capital Number Nominal of shares value 000 £000 _______ _______ Shares in issue as at 1 April 2005 129,191 32,298 Issue of shares under Staff Share Option Schemes 93 23 Purchase and cancellation of own shares (20) (5) _______ _______ Shares in issue as at 30 September 2005 129,264 32,316 ====== ====== During the period, 200,000 of Quintain's own shares were purchased and held through The Quintain Group Employee Benefit Trust making a total of 500,000 of the Company's shares held by the Trust. 14. Net asset value per share Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited As at As at As at As at As at As at As at As at As at 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 31 March 31 March 31 March 2005 2005 2005 2004 2004 2004 2005 2005 2005 Net Number Net asset Net Number Net asset Net Number Net asset assets of shares value assets of shares value assets of shares value per share per share per share £000 000 pence £000 000 pence £000 000 pence _______ _______ ____ _______ _______ ____ _______ _______ ____ Basic 555,050 128,764 431 469,572 129,507 363 571,304 128,891 443 === === === Adjustments: 8% Convertible 3,000 2,000 3,000 2,000 3,000 2,000 loan stock Employee share 10,364 3,180 8,777 2,799 9,310 2,919 plans _______ _______ _______ _______ _______ _______ Diluted 568,414 133,944 424 481,349 134,306 358 583,614 133,810 436 ====== ====== === ====== ====== === ====== ====== === The number of shares excludes those held in The Quintain Group Employee Benefit Trust. 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