The Quarto Group
Annual Report 2014

Plain-text annual report

2014 ANNUAL REPORT 2 QUARTO KNOWS Quarto is an authority, on a wide range of categories and topics in the publishing world. Quarto educates, entertains and enriches the lives of our readers – enthusiasts and lovers of hands-on living. Quarto Cooks. Quarto Creates. Quarto Thinks. Quarto Drives. Quarto Explores. Quarto Gifts. Quarto Homes. Quarto Kids. Quarto Lives. Quarto Plays. www.QuartoKnows.com 3OVERVIEWSetting the scene for our Group and the businesses we operateHighlights of the year 4 Chairman's statement 6 What we do & How we do it 8STRATEGIC REPORTA review of our strategy and how we are delivering against thisChief Executive Officer's statement 12 Divisional review 14 Strategy 24 Key Performance Indicators 26 Our people 31 Financial review 36GOVERNANCEHow we manage our Group and an introduction to the Board and their focusDirectors' report 39 Audit Committee report 47 Directors' Remuneration report 51 Nominations Committee report 67 Statement of Directors' responsibilities 68 Independent Auditor's report 70FINANCIAL STATEMENTSOur financial statements provide a complete overview of our 2014 performanceConsolidated statement of Comprehensive income 75 Consolidated balance sheet 76 Consolidated statement of changes in equity 77 Consolidated cash flow 78 Notes to the accounts 79 Company balance sheet 112 Five year summary of results 117 Shareholder information 118CONTENTS1166865 QUARTO R+A TEXT 1 Front 2015/04/09 12:48:15 4REVENUE2$42.7m (2013: $40.4m) +6%REVENUE$64.1m (2013: $64.4m) -1%REVENUE$21.5m (2013: $20.8m) +3%REVENUE$31.2m (2013: $29.5m) +6%REVENUE$13.3m (2013: $14.4m) -8%GROUP REVENUE1$172.6m +2%ADJUSTED PROFIT BEFORE TAXATION4$12.1m (2013: $9.6m) +26%HIGHLIGHTS OF THE YEAR1 Underlying Operations – (vs $169.2m FY 2013) Underlying Operations – (less $0.3m FY 2013)2 Reported in FY2013 as Other and now comprising Regent Publishing Services and Quarto Hong Kong3 As defined on page 364 Adjusted profit before taxation is before amortisation of acquired intangibles and exceptional items2PROFIT BEFORE TAXATION$12.2m (2013: $5.8m) +112%2266865 QUARTO R+A TEXT 1 Back 2015/04/09 12:48:15 5IMPRINTS• Apple Press • Design Eye • Fine Wine Editions • Global Book Publishing • Iqon Editions • Ivy Press • Ivy Kids • Leaping Hare Press • Marshall Editions • QED Publishing • Qu:id Publishing • Quantum Publishing • Quarto Children’s Books • Quarto Publishing • Quintessence • Quintet Publishing • RotoVision • small world creations • words & picturesIMPRINTS• Book Sales • Cool Springs Press • Creative Publishing international • Fair Winds Press • Motorbooks • Quarry Books • QDS (Distribution Services) • Race Point Publishing • Rock Point Calendars • Rock Point Gift & Stationery • Rock Port Publishers • Voyageur Press • Walter Foster Publishing • Walter Foster Publishing Junior • Zenith PressIMPRINTS• Aurum Press • Frances Lincoln • Frances Lincoln Children's Books • Frances Lincoln Gift & Stationery • Jacqui Small • Kinkajou • Wide-Eyed EditionsBUSINESSESFormerly: • Lifetime Distributors (Australia) • Premier Books (New Zealand) BUSINESSES• Regent Publishing Services • Quarto Hong KongOPERATING PROFIT3$6.1m (2013: $4.5m) +35%OPERATING PROFIT3$6.6m (2013: $7.2m) -8%OPERATING PROFIT3$3.1m (2013: $2.5m) +24%OPERATING PROFIT3$3.0m (2013: $2.9m) +3%OPERATING PROFIT3$1.1m (2013: $1.2m) -8%13366865 QUARTO R+A TEXT 2 Front 2015/04/09 12:48:15 6Timothy J. M. Chadwick Chairman, The Quarto Group6CHAIRMAN'S STATEMENTWe have made good progress in 2014 continuing the changes made in 2013 and we have delivered further debt reduction and earnings growth. This was achieved against some challenging circumstances in certain markets and channels, particularly in the first half of the year. However, Quarto remains a robust and cash generative enterprise. Our experience and proven business model in creating and selling illustrated books combine to drive the company ahead.BOARDWe welcomed Christopher Mills to the board as non-executive director in October 2014. Christopher is the principal of Harwood Capital, our largest shareholder. He replaced Max Lesser who had served on the board since March 2013.CORPORATE GOVERNANCEWhile the business has made further progress in meeting best practice guidelines for a fully listed company and UK plc, the Board feels the cost of moving the domicile from Delaware to the UK outweighs the benefits. We were pleased to have made the transition during the course of the year to trading shares as depository interests in CREST under the ticker QRT.Financial highlights for the year include: • Group revenues $172.6m • Adjusted Group PBT $12.1m • EPS 27.2p • Final dividend increased from 7.9p to 8.3p per share4466865 QUARTO R+A TEXT 2 Back 2015/04/09 12:48:15 7Financial highlights for the year include: • Group revenues $172.6m • Adjusted Group PBT $12.1m • EPS 27.2p • Final dividend increased from 7.9p to 8.3p per shareEXCEPTIONAL ITEMSFollowing the Board’s decision, as stated in the 2013 Annual Report, exceptional items are now those that the Board consider truly exceptional, being significant non-trading and one-off in nature. Historically, exceptional items included certain types of operational expenses. The prior years have been restated to reflect the revised approach.DIVIDENDNotwithstanding our continued focus on debt reduction, the Board is pleased to recommend a final dividend of 4.95p per share, making the total dividend for the year of 8.3p, a 5% increase over last year, giving dividend cover, based on Adjusted Earnings per Share of 27.2p (2013: 24.2p) of 3.3 times (2013: 3.1 times).PEOPLEOur people at Quarto show restless creativity and resolute innovation everyday. Coupled with our tenacious sales and marketing efforts, the results this year are testament to the success these approaches bring about. On behalf of the Board, I would like to thank all of our people in all of our businesses around the world for their continued hard work and commitment.Timothy J. M. Chadwick Chairman March 20, 20155566865 QUARTO R+A TEXT 3 Front 2015/04/09 12:48:15 8WHAT WE DO & HOW WE DO ITOUR FOURSTRATEGIC PRIORITIESInvesting in creating product that excites the enduring interest of niche enthusiast groups with category focussed publishing teams who are creatively driven and financially astute.Delivering profitability by developing the talented people in our Group network that retains creative independence but encourages marketing and sales interdependence and collaboration.6666865 QUARTO R+A TEXT 3 Back 2015/04/09 12:48:15 9Driving growth through enhanced product distribution with focus on existing channels, adaptation and innovation in new channels as well as expansion into new global markets.Managing an efficient supply chain and distribution of product in order to reach consumers, utilising best practice and the scale of our international marketing and sales operations to drive cost efficiencies, while allowing our creative teams to flourish.To educate, entertain and enrich the lives of our readers, putting books in their hands, wherever, however and whenever they choose.7766865 QUARTO R+A TEXT 4 Front 2015/04/09 12:48:15 Michael Charles Art Director, Quintet PublishingMICHAEL'S TOP TIP:Some dishes shot from an extremely low angle will give an intimate feel, getting in close with the chosen dish.MICHAEL HAS ART DIRECTED MORE THAN 100 TITLES FOR QUINTETQUARTO KNOWS COOKBOOKS8866865 QUARTO R+A TEXT 4 Back 2015/04/09 12:48:16 MICHAEL'S TOP TIP:Do not be scared of imperfection, do not be scared of crumbs, splashes or the odd burnt edge. It will give the shot a sense of realism and ultimately will make the recipe look achievable.Quintet cookbooks are in print in more than thirty languages9966865 QUARTO R+A TEXT 5 Front 2015/04/09 12:48:16 12Marcus E. Leaver CEO, The Quarto Group12Revenue from underlying operations was up by 2%. Adjusted Group Operating Profit was up 10% and with net interest payments falling by 27%, Adjusted Group Profit Before Tax is up 26% against prior year. Our publishing businesses have improved their operating margins to 12.3% from 11.3% in the prior year. This has been achieved through better operational leverage and cost control.This solid performance was delivered despite 2014 being a challenging year in many respects for different reasons either by channel, as in the US where a large wholesaler went out of business early in the year, or by market, such as New Zealand, where the merger of our two businesses in the North Island took longer than we would have wished. Our new operational structure put in place in 2013 has allowed us to deal with these issues quickly and effectively, with newly found agility. During the year, we achieved a rebrand at minimal cost of our publishing businesses to Quarto, which was welcomed by a number of our customers. This has helped to reinforce the Quarto ethos of being a content driven company where the creative independence of each imprint is fundamental while showing that ‘new’ Quarto has operational, marketing and sales interdependency. So while we continue to make investments in the publishing programme that drive future profitability in the portfolio, we have also united, for example, all our sales and marketing efforts in Australia and New Zealand through one distributor, Allen & Unwin Group. This initiative follows on from the launch of Quarto Editora in Brazil, our joint venture with Grupo Nobel. The next step in this global marketing and CHIEF EXECUTIVE OFFICER’S STATEMENTSummaryIn 2014, Quarto started to deliver on its potential following a year of tactical reorganisation. The business has been simplified and focussed and is beginning to deliver on its strategic priorities. The second half of the year was strong and this has given us momentum into 2015.101066865 QUARTO R+A TEXT 5 Back 2015/04/09 12:48:16 13CHIEF EXECUTIVE OFFICER’S STATEMENTSummaryPROFIT BEFORE TAX UP26%DIVIDEND UP5%EARNINGS PER SHARE UP12%increase in Group OP10%sales collaboration will be the launch in Q2 2015 of www.QuartoKnows.com that will group all our websites, blogs and social media under one digital hub and e-commerce platform, by category of books we publish.We have continued to implement the Strategic Review, first started in early 2013, and as such have sold a property in Switzerland, bought out the minority shareholder in Book Sales and bought the North Island New Zealand franchise of Lifetime which allowed us to merge Lifetime and Premier to form Books & Gifts Direct, a customer focussed proposition. Partly owing to the above, and also the new initiatives in the publishing programmes this year, debt has gone down by 7% or $5m that includes the $1.8m from the sale of the Swiss property to $66m. The debt reduction is less than we would have liked but the Board is confident that the investments in intellectual property and other initiatives undertaken during 2014 will benefit the Group’s net debt position during 2015 and beyond. Post-period end, we have successfully re-financed our debt for a four-year term with four of the existing banks in the syndicate at improved terms.Our people have been key to the resilience we have shown, changes we have made and performance of the Company. We have made strong additions to the team, promoted internally where possible and regretfully said ‘goodbye’ to some. I am grateful to each and every one of them for their commitment as well as our entire ecosystem of partners and network of suppliers.Quarto made steady progress in 2014 despite a challenging first half to the year. We shall develop further as a business in 2015 by continuing to expand our reach in channel, territory and format. We are well–positioned to grow organically, capitalising on our strengths, making long-lasting, information-rich books and selling them in as many languages and channels as possible – our investment in intellectual property will continue. We shall also develop the business by acquisition, taking advantage of opportunities that support the long-term growth of our business around the world. 111166865 QUARTO R+A TEXT 6 Front 2015/04/09 12:48:16 1414DIVISIONAL REVIEW2014 has been a good year for QIC with a healthy growth in revenue of 6%, and adjusted operating profit of 34%. Not being a stock holding business, with consequent speed to market being quicker, the significant changes we made in 2013 have quickly gained traction. English language revenues were robust again in 2014 with the UK and ANZ particularly strong. The US showed strength in both new title purchases and reprints. Europe held steady, particularly in Northern and Western Europe, with softness in Eastern Europe, Latin America and the Far East.In this business, we have a very good team of publishers, with imprints, based either in London or Brighton, who make creative, highly illustrated non-fiction books. The medium-term visibility is dependable for this business with some potential upside as we continue to apply our expertise in creative ways to books, expanding our children’s book offering, and increasingly, related products, gifts and stationery.Post period acquisition In February 2015, the Group acquired Lewes Holdings Ltd, the owner of Ivy Press and its imprints, the worldwide co-edition business renowned for its high-quality editorial, design and production values. With the addition of Ivy, the founding business around which the Group was formed is without doubt the market leader.Published 2014Published 2006 BRAIDS, BUNS TWISTS!andStep-by-Step Tutorials for 82 Fabulous HairstylesCHRISTINA BUTCHERPublished 2013Revenue $42.7m (2013: $40.4m) Adjusted Operating Profit $6.1m (2013: $4.5m) Backlist sales % of sales 68%(2013: 74%) Intellectual Property Development Spend $14.6m (2013: $13.5m) Sales by territory: US 31%, Europe 34%, UK 18%, ANZ 9%, RoW 8%(2013: US 36%, Europe 36%, UK 13%, ANZ 7%, RoW 8%)121266865 QUARTO R+A TEXT 6 Back 2015/04/09 12:48:16 152014 has been a challenging year for the US-based imprints with the closure of a wholesaler into two specialty accounts, Lowe's and Tractor Supply. But the management team has shown resilience to manage that disruption and resulting channel flux, finishing the year with a decent result in the circumstances, down less than 1% in revenue and 8% in adjusted operating profit, largely the $0.5m loss resulting from the closure of a wholesaler referred to above. Now that the operational changes from 2013 have settled down and some of the new publishing programme initiatives have begun to take shape, we go into 2015 with a focussed business plan to execute, free from distractions.The medium term view is positive as we continue to focus on the niche markets into which we publish and distribute, with the direct relationships with Lowe’s and Tractor Supply now underpinning that strategy.Published 2013Published 1981Published 2012Revenue $64.1m (2013: $64.4m) Adjusted Operating Profit $6.6m (2013: $7.2m) Backlist sales % of sales 70%(2013: 74%) Inventory % of sales 19%(2013: 16%) As a turn of 1.9x(2013: 2.4x)Intellectual Property Development Spend $14.8m(2013: $13.4m)131366865 QUARTO R+A TEXT 7 Front 2015/04/09 12:48:16 1616vPublished 20142014 has been a sound year for our UK-based imprints as new management, appointed September 2013, has presided over its first full year with revenue growth of 3% and adjusted operating profit growth of 24% after much restructure and change in 2013.The reliable publishing and operational foundation, established in 2013, was added to in 2014 with significant confirmation of the sales and marketing relationship in North America with its sister company, Quarto US, seeing sales up nearly 50% from prior year from all channels.The medium-term view is encouraging as we maintain our focus on domestic sales channels while enhancing our capability on a global scale.Revenue $21.5m (2013: $20.8m) Adjusted Operating Profit $3.1m (2013: $2.5m) Backlist sales % of sales 54%(2013: 59%) Inventory % of sales 19%(2013: 20%) As a turn of 1.4x(2013: 1.3x)Intellectual Property Development Spend $4.2m(2013: $4.8m)Published 2013Published 2012141466865 QUARTO R+A TEXT 7 Back 2015/04/09 12:48:16 17It has been a demanding year for our business in Australia and New Zealand. With the benefit of hindsight with new management, an operational merger (of the two owned but competing businesses in North Island New Zealand) and re-branding to achieve against a soft retail economy, the ‘bounce back’ to historic high-end profit figures will take longer than originally anticipated. However, substantial progress has been made and the recovery has seen growth in adjusted operating profit despite significant restructuring costs. Australia has produced a steady result and New Zealand is recovering soundly. We now have one coherent market-leading business in Australia and New Zealand, an experienced management team, enhanced buying power and the implementation of proprietary technology that has been developed over the last two years. In New Zealand, we retain the ability to sell the Master Franchises for North Island and South Island as opposed to operating them ourselves. We shall determine that strategy during the course of 2015. Revenue $31.2m (2013: $29.5m) Adjusted Operating Profit $3.0m (2013: $2.9m) Network Capacity 85%(2013: 81%)Call Chris0421 795 010FOR A SAMPLE BOX AT YOUR WORKCall Chris 0421 795 010FOR A SAMPLE BOX AT YOUR WORKXYZ-123XYZ-123Call Chris0421 795 010FOR A SAMPLE BOX AT YOUR WORKCall Chris 0421 795 010FOR A SAMPLE BOX AT YOUR WORKXYZ-123XYZ-123Call Chris0421 795 010FOR A SAMPLE BOX AT YOUR WORKCall Chris 0421 795 010FOR A SAMPLE BOX AT YOUR WORKXYZ-123XYZ-123151566865 QUARTO R+A TEXT 8 Front 2015/04/09 12:48:16 1818We reported our Hong Kong print buying business Regent Publishing Services under Other last year with The Image Factory that we sold during the course of 2013. Regent saw sales down 8%, largely attributed to its two largest customers placing fewer orders, resulting in adjusted operating profit falling by 8%. A new sales and marketing strategy focussed on children’s, religious, comic, gaming and stationery publishing is the focus into 2015. A closer relationship with Group companies has been established particularly for stationery initiatives. Post-period print buying office and establishment of Quarto Hong Kong In January 2015, the Group established a new print buying office in Hong Kong, which will work with Regent to drive further savings for Quarto in print buying in China, a critical element of our supply chain. Both will report under the heading Quarto Hong Kong (QHK). Revenue $13.3m (2013: $21.2m)*Adjusted Operating Profit $1.1m (2013: $1.4m)* * FY2013 – Image Factory – $6.8m revenue; $0.2m operating profit161666865 QUARTO R+A TEXT 8 Back 2015/04/09 12:48:16 19During the course of 2014 we took our children’s publishing programmes from five imprints to eight. All have made a contribution to the growth in this category for Quarto in 2014 now amounting to over 13% in terms of Group revenue. This growth in Children’s publishing revenues of over 17% has been achieved both organically by investment in originated product and by acquisition of a complementary business.In QIC, we have three imprints under the strong leadership of one Publisher, who has posted a second successive year of growth. With the addition of the recently purchased small world creations to the division, we have a full offering of children’s product from 0-9 in that division. In QUS, we have launched Walter Foster Jr effectively under a new, accomplished Publisher and the benefits of a full year of publishing will be seen in 2015.In QUK, we have established a new imprint, Wide-Eyed Editions. The imprint’s aim is to be creators of non-fiction for children and families brought about by a belief that books should encourage curiosity about the world we live in, inspiring readers to set out on their own journey of discovery. The imprint made good progress during 2014 and launches in North America in 2015. The addition of Ivy Kids further develops our standing in non-fiction publishing for children and hands-on parenting.Revenue $23.0m (2013: $19.6m) KEY INITIATIVESPublished 2014Published 2014Published 2014vPublished 2014171766865 QUARTO R+A TEXT 9 Front 2015/04/09 12:48:16 2020vPublished 2013vPublished 2013Published 2013The combination in 2013 of our Foreign Rights division – where we sell foreign language editions of our books – under one leader – worked well in 2014 with overall sales up 10% this year over 2013. The main driver has been Children’s publishing with a growth of 24% as the new imprints have come on stream, which added to more modest growth in the existing imprints. Our Brazilian joint venture with Grupo Nobel, Quarto Editora, has got off to a good start and 2015 will see a full year contribution from that business. We continue to source similar relationships in other undersold territories but are proceeding with judicious care to find the right partners. Revenue $26.6m (2013: $24.2m) 181866865 QUARTO R+A TEXT 9 Back 2015/04/09 12:48:16 21OUTLOOKWe expect continued growth in 2015, though this is likely to manifest itself mostly in the second half. The increase in second half weighting experienced in 2014 is a trend which we expect to become more marked in line with global retail trends with the relative strength of the US dollar. Foreign exchange rates will tend to impact negatively on our results. Nevertheless, for the year as a whole, we should show further progress and deliver growth both organically and from the recent acquisitions.Quarto is a cash generative business operationally and we are committed to bringing down our debt by resolutely examining the strengths and weaknesses of our portfolio.Marcus E. Leaver Chief Executive Officer March 20, 2015191966865 QUARTO R+A TEXT 10 Front 2015/04/09 12:48:16 Katie Cotton Editor, Frances Lincoln Children's Books, Quarto UKKatie loves wildlife and is currently writing a  2,500 word text for the children's book Counting Lions for Quarto UKQUARTO KNOWS CHILDREN202066865 QUARTO R+A TEXT 10 Back 2015/04/09 12:48:17 Quarto has sold 20,000 copies of Counting Lions to a US publisher.KATIE'S TOP TIP:In writing for children, we challenge their imagination and curiousity. (The trick is to also make it fun!) 212166865 QUARTO R+A TEXT 11 Front 2015/04/09 12:48:17 24STRATEGIC REPORTREVENUE GROWTHWe focus on revenue growth organically for each of our imprints in our portfolio. We also search for earnings accretive lists, imprints or businesses that can add to our portfolio and enhance the marketing and sales efforts of our existing businesses.IMPROVING OPERATING MARGINSWe improve our operating margins on revenue by using the leverage of our illustrated publishing focus to buy print and freight effectively. We are relentless also in identifying other areas of supply chain efficiencies.INTELLECTUAL PROPERTY INVESTMENTWe are committed to investing in long-lasting intellectual property. In pursuing the very best photography, artwork, design and writing, we aim to safeguard the future revenue streams of the business.DISTRIBUTION DEVELOPMENTWe develop direct physical distribution relationships, global partnerships and the digital marketing and delivery of our content. We are committed to selling our books wherever, however and whenever our customers want them in multiple markets; multiple languages and multiple formats.GROUP VALUE ADDWe continue to develop the value added by the Group function in supporting our people achieve our objectives while acknowledging our core belief of creative independence in each publishing imprint.DEBT REDUCTION/DIVIDEND INCREASESWe shall continue to focus on reducing our debt burden and where possible, increase dividends to enhance shareholder value.OUR STRATEGY IS TO GROW OUR REVENUE AND MARGINS BY LEVERAGING OUR SIZE, SCALE AND REACH AS THE LEADING GLOBAL ILLUSTRATED BOOK PUBLISHER AND DISTRIBUTION GROUP TO BUILD A BUSINESS WITH SUSTAINABLE GROWTH IN EARNINGS PER SHARE WHILE REDUCING ITS DEBT BURDEN.222266865 QUARTO R+A TEXT 11 Back 2015/04/09 12:48:17 25STRATEGY SUMMARYThe last two years has seen us overlay the undoubted creative independence and rigour of our publishing with a tenacious marketing and sales force that works interdependently and collaboratively on a global basis. With the directional control provided from the Group and support in non-publishing or sales/marketing functions, we are beginning to leverage our scalable business model to good effect.StrategyDebt Reduction /Dividend IncreaseDistribution DevelopmentImprove Operating MarginsRevenue GrowthIntellectual Property ManagementGroup Value Add232366865 QUARTO R+A TEXT 12 Front 2015/04/09 12:48:17 26KEY PERFORMANCE INDICATORS (KPIs)Our strategy is to grow our revenue and margins by leveraging our size, scale and reach as the leading global illustrated book publisher and distribution group to build a business with sustainable growth in earnings per share while reducing our debt burden.Our EBITDA has grown 7% in the year.Our net debt has reduced by 7% in the year.The Board uses this ratio to evaluate the long-term financial health of the company. Our Adjusted PBT has grown by 26% in the year.The Board uses this ratio to evaluate the quality of the company's earnings.60.00000067.33333374.66666782.0000008.09.511.012.58.09.511.012.515.00000015.83333316.66666717.50000020142013201220112010$16.5m$15.4m$15.8m$17.4m$15.3mEBITDA (ADJUSTED OPERATING PROFIT PLUS DEPRECIATION)20142013201220112010$66.0m$71.0m$81.0m$81.4m$71.7mNET DEBT2014201320122011201012.2%11.3%10.4%11.5%11.1%RETURN ON NET OPERATING ASSETS20142013201220112010$12.1m$9.6m$9.2m$11.0m$9.0mADJUSTED PBT* adjusted diluted earnings per share2014201320122011201044.8c37.7c33.9c40.0c32.0cEPS*30.00000036.33333342.66666749.000000242466865 QUARTO R+A TEXT 12 Back 2015/04/09 12:48:17 27 05101520253035This is a measure of the cash used up in inventory as a proportion of revenue.Backlist has reduced as a % of sales as we have invested in new Intellectual Property.2014201320122011201012.9%10.3%11.4%13.9%12.6%INVENTORY % OF REVENUE2014201320122011201066.6%71.3%69.8%68.6%68.5%BACKLIST % OF SALES6064687210.00000011.33333312.66666714.000000We shall report this key strategic area of our publishing from now on.The new title sales for any given year are a leading indicator that show how effective and reliable our backlist sales might be.We have increased the IP spend in order to grow the publishing businesses organically.20142013201220112010$23.0m$19.6m$18.5m$14.7m$14.4mCHILDREN'S PUBLISHING REVENUES201420132012201120101.16x1.01x1.02x1.12x1.02xPRODUCT EFFICIENCY20142013201220112010$33.5m$31.7m$30.5m$30.7m$30.1mINTELLECTUAL PROPERTY DEVELOPMENT SPEND14.20000017.16666720.13333323.100000252566865 QUARTO R+A TEXT 13 Front 2015/04/09 12:48:17 Shawn Slavik Art/Craft Category Sales Manager, Quarto USQUARTO KNOWS ARTS AND CRAFTSSHAWN LOVES CREATING HIS OWN ART. HE HAS BEEN EXHIBITING HIS WORK FOR OVER 25 YEARS262666865 QUARTO R+A TEXT 13 Back 2015/04/09 12:48:17 SHAWN'S TOP TIP:Watch out for some of our great upcoming titles like Sharpie Art Workshop and the new Wide Eyed Editions titles.Quarto achieved around $15,000, 000 in revenue in Arts and Crafts books in North America272766865 QUARTO R+A TEXT 14 Front 2015/04/09 12:48:17 3030OUR VALUESBE COLLABORATIVEUse 'we’ and bring the best out of each otherBE CONSISTENTBe clear, concise and clear-headedOur ValuesBE CURIOUSTry things, fail well, do it quicklyBE ACCOUNTABLETake responsibility and do what you sayBE PURPOSEFULDo what you love and make it happenBE EXCELLENTQuality matters in everything we do282866865 QUARTO R+A TEXT 14 Back 2015/04/09 12:48:17 31OUR PEOPLETo support our mission to educate, entertain and enrich the lives of our readers, putting books in their hands, wherever, however and whenever they choose, we need exceptional people!We love making great books and over 400 people across the world help Quarto succeed in doing this. We have over 20 offices in 5 countries and publish our books in many more. The Quarto brand is built upon our people and their creative talents. It is our people who give Quarto its heart and who shape our culture and create our many wonderful books.People are our greatest asset and as such, we believe that treating them with respect, providing consistent and fair policies and allowing them the freedom to be themselves helps to demonstrate the value we hold them in. Quarto is too human to be truly corporate, our businesses are too individual however, we try and create a culture in which all our people flourish.Our culture is a key indicator of how we treat each other and the behaviours we want to be known for. With this in mind in 2014 we set about strengthening our culture by formally launching a set of values that focus on what we want to BE.These values shape the way we do business and we select people to work for and with us who share these same values and passions. Feedback from our customers on which of our books are selling is a vital part of our business, so is feedback from our employees. To continue to build the culture we strive for feedback is an important element of this, and through a mixture of formal and informal channels we continue to seek feedback that highlight things we can work on.Sally Dwyer Group Director of People292966865 QUARTO R+A TEXT 15 Front 2015/04/09 12:48:17 3232DIVERSITYOur books come in all shapes and sizes and are read by customers from all walks of life. We recognise to continue to make books that are valued by our customers we need to attract and retain the best people who are as diverse as our customers. We aim to foster an environment where people are valued for their contribution irrespective of their age, sex, disability, race, religion, marital status, ethnic origin or sexual orientation. We support this by having in place key policies that provide a framework for ensuring everyone is treated fairly and with respect across all of our businesses. EQUALITY & FAIRNESSWhile we operate across several geographies we strive for our people policies to be globally fair and equal. With this in mind we have started a global audit of our people practices which will enable us to see where best practice exists and to support each of our businesses as they strive to reach this.CORPORATE SUSTAINABILITYWe feel Quarto’s responsibility is to create and sustain an economically sound and prosperous business, producing quality books that stand the test of time. In cooperation with our employees and business partners we strive to create a sustainable future. As a company, we continue to make progress with our corporate responsibility and sustainability activities. CORPORATE RESPONSIBILITYQuarto aims to make positive social contributions through sharing our love of books and reading with the world. We donate our books to a wide variety of charities such as Barnardo's and Help for Heroes in the UK and we are significantly involved with the Goddard Riverside Community Center in New York.We hope to build on our efforts and are investigating further support for our people in volunteering with local reading schemes, allowing our employees paid time away from work to volunteer in schools to help improve children’s literacy skills and encouraging our local offices to direct their own community development efforts where they can be most effective.303066865 QUARTO R+A TEXT 15 Back 2015/04/09 12:48:17 33ENVIRONMENT SUSTAINABILITYWe are committed to being a responsible partner with our suppliers and we ensure that our books are produced in a manner that respects international and local laws. We recognise the environment is a precious resource and one that is limited. To support the environment where possible we:• Minimise the consumption of natural resources and energy.• Improve the environmental performance of our operations including the buildings that we own, leased tenant space, corporate travel and procurement.• Reducing waste by adopting improved operating practices and by recycling materials whenever practical.• Ensuring all waste is disposed of in a safe and responsible manner.• Supporting and monitoring the development of new products and processes that improve performance and decrease environmental impact.We choose to work with partners and suppliers where possible that are certificated by:• The Forest Stewardship Council (FSC) which promotes responsible management of the world’s forests.• ISO 14001 covering environmental management systems.• The ICTI CARE process covering ethical standards of manufacturing.PRODUCT SAFETYQuarto is committed to ensuring our books are produced to the highest possible safety standards. Our production teams work with our publishers, our suppliers and partners to ensure our books are safe for our consumers.313166865 QUARTO R+A TEXT 16 Front 2015/04/09 12:48:18 Tina Gitsas Book Buyer, Books & Gifts DirectTINA'S TOP TIP:There are always new categories to be explored, never think you know it all.Tina's passion is dancing. She goes for ballet classes at least three time a week. At each class, she wears her hair in a bun.QUARTO KNOWS BALLET323266865 QUARTO R+A TEXT 16 Back 2015/04/09 12:48:18 We pride ourselves in finding good, practical and inspiring titles for our market. We have also ordered 12,000 of the new title Awesome Hair Days, another Quarto title which we believe will achieve similar results.Braids, Buns and Twistshas sold over 250, 000copies since its release333366865 QUARTO R+A TEXT 17 Front 2015/04/09 12:48:18 36FINANCIAL REVIEWSummary2014$0002013 Restated1$000Sales:Quarto International Co-Editions Group42,67640,430Quarto Publishing Group USA64,05864,392Quarto Publishing Group UK21,47720,819Books & Gifts Direct, ANZ31,17029,455Quarto HK (2013: Other)13,26321,222172,644176,318Operating profit before amortisation of acquired intangibles,exceptional items ("adjusted operating profit")Quarto International Co-Editions Group6,0634,540Quarto Publishing Group USA6,6367,173Quarto Publishing Group UK3,0992,546Books & Gifts Direct, ANZ2,9672,918Quarto HK (2013: Other)1,1121,398Operating profit before amortisation of acquired intangibles,exceptional items19,87718,575Group overheads(4,484)(4,531)Operating profit before amortisation of acquired intangibles andexceptional items, after deducting group overheads15,39314,044Operating profit15,45610,205Interest payable3,2574,443Interest cover, based on operating profit beforeamortisation of acquired intangibles and exceptional items4.73x3.16xAdjusted diluted earnings per share44.8c37.7cNet debt66,04071,0151 As stated in note 1GROUPWe have produced a good trading performance, against the backdrop of a challenging market place.Revenues increased by 2% on a like for like basis, adjusting the comparatives for the two businesses that were sold during 2013. Adjusted operating profit was up 10% at $15.4m (2013: $14.0m). Adjusted profit before tax was up 26% at $12.1m (2013: $9.6m). Adjusted diluted earnings per share increased by 19% to 44.8c (2013: 37.7c). It has been the case for many years that not one of our titles exceeded 1% of Group revenues, and this year is no exception. The following titles were our top ten sellers in 2014, with their respective revenues and original year of publication:Nutella (2013)$992,000Loom Band It (2014)$628,000Art of Zentangle (2013)$602,000The Hair Style Directory (2013)$536,000One Zentangle a Day (2012)$535,000All New Square Foot Gardening (1981)$512,000Biblica Bible Atlas (2006)$480,000Honestly Healthy (2012) $472,000The Beauty of the Cat (2013)$446,0001001 Movies You Must See Before You Die (2003)$437,000343466865 QUARTO R+A TEXT 17 Back 2015/04/09 12:48:18 37QUARTO INTERNATIONAL CO-EDITIONS GROUPRevenue for this segment was up 6% at $42.7m (2013: $40.4m). Adjusted operating profit was up 34%, at $6.1m (2013: $4.5m). We achieved an adjusted operating profit margin of 14.2% (2013: 11.2%). Reprints accounted for 68% of co-edition book publishing revenues, compared to 74% last year. This confirms that we have a very valuable backlist and that our business model, which is to produce titles with strong backlist potential, is working effectively. QUARTO PUBLISHING GROUP USARevenue for this segment was down 1% at $64.1m (2013: $64.4m) and adjusted operating profit was down 5% at $6.6m (2013: $7.2m), largely due to the loss resulting from the closure of a wholesaler that supplied our products into Lowes and Tractor Supply. We achieved an adjusted operating profit margin of 10.4% (2013: 11.1%). Reprints accounted for 70% (2013: 74%) of revenues, again confirming the benefits of our business model.QUARTO PUBLISHING GROUP UKRevenue for this segment was up 3% at $21.5m (2013: $20.8m). Adjusted operating profit was up 22% at $3.1m (2013: $2.5m), representing a margin of 14.4% (2013: 12.2%). Reprints accounted for 54% (2013: 59%) of revenues, reflecting the fact that the lists are more frontlist driven.BOOKS & GIFTS DIRECT, ANZRevenue for this segment was up 6% at $31.2m, largely due to the acquisition, at the beginning of 2014. Adjusted operating profit was up 2% at $3.0m (2013: $2.9m), representing a margin of 9.5% (2013: 9.9%).QUARTO HK (2013: OTHER)Revenue for these businesses was down 38% at $13.3m (2013: $21.2m) due to the disposal of the Image Factory business at the end of September, 2013, with its results consolidated for 9 months. Adjusted operating profit was down 20% at $1.1m (2013: $1.4m), representing a margin of 8.4% (2013: 6.6%).EXCEPTIONAL ITEMSExceptional items comprise the net (profit) loss on sales of businesses and assets of $(644,000) (2013: $3,332,000), and expenses relating to acquisitions (2013: Special meetings) of $78,000 (2013: $73,000).NET INTEREST PAYABLENet interest payable was reduced from $4,443,000 to $3,257,000, largely as a result of the conclusion of an expensive interest rate swap.BALANCE SHEETThe Group's net assets increased from $46.8m to $51.7m, reflecting the good trading performance, noted earlier. The most significant change in the balance sheet related to current and non-current liabilities. Current liabilities increased from $70.4m to $144.9m and non-current liabilities reduced from $84.1m to $6.9m, largely because our borrowing facilities moved from medium term to short term, as we approached the end of the facility term. We have refinanced after the year end and the new facilities will be disclosed under the non-current liabilities in 2015. 353566865 QUARTO R+A TEXT 18 Front 2015/04/09 12:48:18 38CASH FLOW AND INDEBTEDNESSAt the year end, our net debt was $66.0m, a reduction of 7% ($5.0m) compared to 2013, when it was $71.0m.We concluded our refinancing on February 6, 2015, signing a US$95m multi-currency revolving credit facility and term loan, with a tenor through to April 30, 2019. The Group was well within its banking covenants, details of which are included in Note 18 to the Accounts.Trends and factors likely to affect our future development, performance and position of the Group are set out in the Chief Executive Officer’s Statement on pages 12 to 23.SHAREHOLDER RETURNQuarto’s common stock has generated total shareholder return over the five years ended December 31, 2014 of 124%. Over the same period, Quarto’s common stock has outperformed the FTSE Small Cap Index, which has generated a return of 81%.Adjusted fully diluted earnings per share were up 19% at 44.8c (2013: 37.7c). The mid-market price of the shares of common stock on December 31, 2014 was 150.5p, down 8% compared to last year (163.5p).In light of our performance, the Board has proposed a final dividend of 4.95p (7.72c) per share which, combined with the interim dividend of 3.35p (5.53c), results in total dividends of 8.3p (13.25c), an increase of 5% over 2013.PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUPThe Group’s risk management is co-ordinated at its headquarters, in close co-operation with the Board of Directors. Details of the Group’s financial risk management objectives and policies are set out in Note 33.The Group, like all businesses, faces a number of risks and uncertainties as it operates its business. Some of these have been commented upon in the Chief Executive Officer’s Statement and some are commented upon below:• The Group’s profitability depends, in part, on the economic conditions across the world. The Group has a global business and, therefore, is affected by global economic conditions that may affect or impact upon the financial health of its customers, which in turn may lead to their not being able to honour their payment obligations to the Group. The Group has built up strong relationships with its customers and is not over reliant on any one of them.• The Group is well funded through a US$95 million syndicated facility, as noted elsewhere in the financial statements. This facility is subject to quarterly twelve month covenant tests.• The success of the Group’s titles is also an important factor in increasing the Group’s profitability. In particular, we need to continue producing titles that reprint or backlist well. We are not reliant on any one product or group of products and none of our titles accounted for more than 1% of Group revenues in 2014.• The security and robustness of our systems, in particular our IT systems, are important in all aspects of our business. IT processes are continually updated and security improved, with daily off-site back up of electronic files.FINANCIAL REPORTINGWe have very tight reporting deadlines so that we can focus on running the business. This requires considerable commitment and hard work from my team and I would, again, like to thank them all for their hard work, unstinting support and loyalty. M.J.Mousley Chief Financial Officer March 20, 2015363666865 QUARTO R+A TEXT 18 Back 2015/04/09 12:48:18 39DIRECTORS’ REPORTGROUPThe Directors present their report and the audited financial statements of The Quarto Group, Inc., for the year ended December 31, 2014.RESULTS AND DIVIDENDSThe profit for the year amounted to $9,219,000 (2013: $4,068,000). The Directors propose a final ordinary dividend of 4.95p/7.72c (2013: 4.55p/7.37c) per share, amounting to $1,521,000 (2013: $1,488,000), subject to approval at the Annual Meeting.DIRECTORSServing Directors during the year, were as follows:T. J. M. Chadwick (Non-executive) ChairmanR. J. Morley Deputy Chairman M. E. LeaverM. J. MousleyJ. Burley (Non-executive) (Appointed 22nd May 2014)M.G.Hartley (Non-executive) E. Krawitt (Non-executive) (Resigned 22nd May 2014)M. Lesser (Non-executive) (Resigned 15th October 2014)C.H.B. Mills (Non-executive) (Appointed 15th October 2014)None of the Director has a service agreement of more than one year's duration, other than Timothy Chadwick who had an initial three year agreement and Robert Morley, the duration of whose appointment is unspecified, subject to the continuance of certain conditions. All of the directors are subject to annual re-election. The terms and conditions of appointment of non-executive directors are made available for inspection.Save as disclosed in Note 31, no Director had a contract of significance with the company or its subsidiaries during the year. 373766865 QUARTO R+A TEXT 19 Front 2015/04/09 12:48:18 40BOARDTimothy Chadwick started his career in 1974 with Macmillan Publishers and established his first business, Aurum Press, in 1978. In 1988, he sold Aurum Press to The Really Useful Group. In 1991, he started ABC (All Books for Children), which he sold to HIT Entertainment plc in 1995 after developing the best-selling series, Angelina Ballerina.In 1995, he floated American Port Services plc on the London Exchange. After growing his company into a substantial seaport and airport owner and operator in the USA and Belgium, APS was acquired in 1998 by Associated British Ports plc. Tim was elected as Chairman of Simon Ports plc in March 2003. The business grew substantially and was acquired in 2006 by Cobelfret.Tim joined Quarto in 2012 and chairs the Nominations Committee and is a member of the Remuneration Committee.Marcus Leaver has been Chief Executive Officer since December 2012 having joined the board of Quarto as Chief Operating Officer in May 2012. Prior to Quarto, he worked in the USA from 2005, latterly as President of Sterling Publishing, a subsidiary of Barnes & Noble, the leading bricks-and-mortar bookseller in the US. Before living and working in the US, he worked in London for Chrysalis Group plc, a London Stock Exchange-listed media company, latterly as CEO of Chrysalis Books Group, from 2002, and prior to that Corporate Development Director and in a number of different general management roles, from 1998.Marcus graduated from the University of East Anglia with a degree in Art History, and received his MBA from London Business School.Marcus is a member of the Nominations Committee.Mick Mousley worked for 12 years at Deloitte Haskins & Sells (now part of PWC), the last two years of which were as a senior manager in the Mergers and Acquisitions Department. Mick joined Quarto in 1987, and was appointed Finance Director in 1989.Jess Burley has over 20 years' experience in media, working previously as the Group Managing Director of Hearst in the UK, responsible for Hearst Digital and The National Magazine Company portfolio. Jess joined m/SIX (the WPP joint venture between CHI&Partners and GroupM) as CEO in May 2010 bringing a wealth of knowledge across all media. Jess has also held a number of Non Exec roles working currently as a Non Exec for UK Mail Plc and previously with the fashion retailer Jacques Vert Plc and TalkTalk Telecom Plc. Jess is also a Trustee of the young person's charity Get Connected. She became a Non-executive director of Quarto in 2014.Jess is a member of the Nominations, Audit and Remuneration Committees.Mike Hartley was appointed to the Board in August 2013 as Senior Independent Director and Chair of Remuneration and additionally as Chair of Audit from May 2014. Mike brings considerable board and international experience and a broad knowledge of strategic management. He formerly held a series of senior executive positions in both retail and manufacturing serving latterly as Chief Executive Officer of the £800m turnover Viyella division of Coats Viyella plc retiring in 2003. He has held a series of non-executive roles including Chairman of Dawson International plc 2003/09 and Senior Independent Director of ITE Group plc 2003/14. He is currently Chairman of US based Dawson Forte LLP.Christopher Mills is the Managing Partner of Harwood Capital Management LLP, which is the largest shareholder of The Quarto Group, Inc. Christopher is also currently a director of Gleeson PLC, Catalyst Media Group plc and Bioquell plc as well as a number of private companies. He became a Non-executive director of Quarto in 2014.Christopher is a member of the Nominations, Audit and Remuneration Committees.Robert Morley co-founded The Quarto Group in 1976, setting up the original co-edition imprints and later developing the newly acquired US imprints. As a graphic design graduate from art college, he started out his career at Haymarket Publishing Group. He also worked as Art Director on the Sunday Telegraph magazine and with Richard Branson at the start of what is now the Virgin Group. From there he worked for IPC art directing part-work magazines followed by a period developing new ideas for Readers Digest books before setting up Jackson-Morley, a boutique editorial and design company. 383866865 QUARTO R+A TEXT 19 Back 2015/04/09 12:48:18 41Between December 31, 2014 and March 20, 2015 there have been no changes in the interests of the Directors.EMPLOYEESApplications for employment of disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees.The Group places considerable value on the involvement of its employees and has continued its practice of keeping them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal and informal meetings. Employees are consulted regularly on a wide range of matters.The Board recognises the importance of diversity amongst its employees and is committed to ensuring that employees are selected and promoted on the basis of merit and ability, regardless of age, gender, race, religion, sexual orientation or disability. The gender split across the Group for the year ended December 31, 2014 is illustrated in the table below.MalesFemalesBoard61Senior Leadership Team52All employees133269* The Group's Senior Leadership Team was established in 2013 and comprises the Group's CEO and CFO, together with six senior managers.DIRECTORS’ INTERESTSThe share interests of the Directors who held office at December 31, 2014 and of their connected persons in the share capital of the Company are shown below:Number of US$0.10 shares of common stockShareholdingDecember 31, 2014January 1, 2014*T. Chadwick––R. J. Morley1,402,8521,402,852M. E. Leaver14,00010,000M. J. Mousley71,70071,700J. Burley3,300–M.G. Hartley10,0002,000C.H.B. Mills4,100,000**–* or date of appointment ** 4,000,000 shares are held in the names of Oryx International Growth Fund and North Atlantic Smaller Companies Investment Trust plc of which Christopher is a Director, and 100,000 shares are held by him personally. During the year the market price of the shares of common stock ranged between 140.5p and 175p. The mid-market price at December 31, 2014 was 150.5p. M.E. Leaver was granted an award of 666,666 shares under the performance share plan, details of which are set out on page 53.393966865 QUARTO R+A TEXT 20 Front 2015/04/09 12:48:18 42SUBSTANTIAL SHAREHOLDERSAs at March 20, 2015, the latest practicable date prior to the publication of this report, the Directors have been advised of the following shareholders who have an interest of 3% or more in the shares of common stock of the Company: Number of US$0.10 shares of common stockHarwood Capital LLP4,000,00019.6%L. F. Orbach2,909,18514.2%The Wellcome Trust Limited1,987,5689.7%Liontrust1,914,8329.4%Herald Investment Trust1,737,5008.5%R. J. Morley1,402,8526.9%Cavendish Asset Management823,5004.0%The Quarto Group, Inc.747,8213.7%The rights attaching to the Company’s shares of common stock are set out in the Company’s By-Laws, which can be obtained from the Company.The rules for appointment and replacement of the Directors are set out in the Company’s By-Laws.The powers of the Directors are set out in the Company’s By-Laws. The Company may purchase its own shares through the market or by tender at a price which will not exceed the average prices at which business was done for 10 business days before the purchase is made or, in the case of a purchase through the market, at the market price, provided that it is not more than 5% above such average.The Company may amend its By-Laws by special resolution approved by the affirmative vote of the holders of a majority of the voting power of the shares.GOING CONCERN BASISAfter making enquiries, the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive Officer’s Statement on pages 12 to 23. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 36 to 38 and in Note 18 to the financial statements.The Group has considerable financial resources together with a number of customers and suppliers across different geographies. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.The Group has significant banking facilities. In particular, the Group has committed facilities, comprising a US$95m multi-currency revolving credit facility, with a tenor through to April 30, 2019. The Group has prepared detailed profit and cash flow budgets until June 30, 2016 which show that the Group is budgeted to have headroom within that period. The budgets have been subject to various sensitivity analyses. The Group complied with its bank covenants in 2014 and the budgets show sufficient headroom on the covenants throughout the period covered by the budgets. The covenants will be monitored closely by the Board and appropriate action would be taken if any of the covenants became under pressure. 404066865 QUARTO R+A TEXT 20 Back 2015/04/09 12:48:18 43RISK MANAGEMENT STRATEGYThe Group is exposed to a number of principal risks and uncertainties. The Group’s financial risk management strategy is set out on page 38 of the Financial Review and in Note 33. Operational risks are set out on page 38 of the Financial Review.CORPORATE GOVERNANCEThe Company is committed to high standards of corporate governance and supports the principles laid down in the UK Corporate Governance Code issued by the Financial Reporting Council in 2012 (the ‘Code’). The Board considers that the Company has been in compliance with the principles and provisions of the Code, with the exception of those outlined below, throughout the year ended December 31, 2014 and to the date of this report.The principles of the code have been applied as follows:a) The Board of Directors represents the shareholders’ interests in maintaining and growing a successful business including optimising consistent long-term financial returns.b) The Board comprises two Executive Directors and five non-executive Directors. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness. The different roles of the Chairman and Chief Executive Officer are acknowledged. The senior independent non-executive Director is Michael Hartley who is available to shareholders, if they have concerns which are not able to be resolved through normal channels. Two non-executive Directors, Michael Hartley and Jess Burley are considered by the Board to be independent. Timothy Chadwick and Christopher Mills (appointed October 15, 2014) are not deemed to be independent because of their relationship with Harwood Capital LLP, a major shareholder. Bob Morley, who co-founded the Group and was restored to the Board in August 2013, having previously served as a Director until May 2012, is also not deemed independent. There are a number of standing Committees of the Board to which various matters are delegated. They all have formal terms of reference approved by the Board which are available on the Company’s website (www.quarto.com)c) The Board met nine times in 2014. Attendance details are set out below. A formal agenda is prepared for each meeting and all board papers and information are circulated to the Board at least forty-eight hours before the meetings.Attendance by Directors at Board and Committee meetings in 2014BoardAudit CommitteeNominations CommitteeRemuneration CommitteeJess Burley16232Timothy Chadwick9-34Michael Hartley8434Edward Krawitt232-2Marcus Leaver9-3-Max Lesser363-2Michael Mousley9---Christopher Mills42122Robert Morley9---Total number of meetings94341 Jess Burley was appointed to the Board on May 22, 2014. 2 Edward Krawitt stepped down from the Board on May 22, 2014. 3 Max Lesser stepped down from the Board on October 15, 2014. 4 Christopher Mills was appointed to the Board on October 15, 2014.414166865 QUARTO R+A TEXT 21 Front 2015/04/09 12:48:18 44d) All of the Directors are subject to re-election by the shareholders at the Annual Meeting.e) The remuneration of the Executive Directors is recommended by the Remuneration Committee, comprising Michael Hartley who is the Committee Chairman, Timothy Chadwick, Jess Burley and Christopher Mills. A separate report with respect to Directors’ remuneration is included on pages 50 to 66. The Committee meets at least twice a year.f) The Audit Committee is comprised of Michael Hartley who is Committee Chairman, Jess Burley and Christopher Mills. The Board is satisfied that Michael Hartley has appropriate financial experience to fulfil his role. Further details of the Committee’s work can be found on pages 47 to 49.g) Details of the work of the Nominations Committee during the year are set out in its report on page 67.h) A formal review of the performance of the Board, its Committees and the Directors was carried out before the year end, led by the Chairman and assisted by the Company Secretary. A wide ranging appraisal questionnaire was used as part of the process and individual performance was reviewed by the Chairman. The Chairman's own performance was subject to a review led by the Senior Independent Director. The output from the appraisal confirmed that the Board and its Committees were operating effectively.i) The Chief Executive Officer and Chief Financial Officer are responsible for investor relations. They meet with major shareholders during the course of the year to ensure that they develop an understanding of their views, which are communicated to the rest of the Board at Board meetings. The non-executive Chairman and Senior Independent Director meet with major shareholders from time to time. Shareholders are invited to attend the Annual Meeting at least twenty-one days in advance of the meeting. All Directors attend the meeting which is used to communicate with shareholders.j) The Board has approved a procedure for Directors to take independent professional advice at the Company’s expense, if required.k) All Directors have access to the advice and services of the Company Secretary.l) Quarto has arranged appropriate insurance cover in respect of legal action against the Directors.m) The Company has an established whistle-blowing policy. The provisions of the Code not complied with are as follows:a) A.3.1. – As noted above, the Chairman of the Board was not independent at the date of appointment. b) B.2.1. – The Nomination Committee is not composed of a majority of independent non-executive Directors. The Board is however satisfied that its current composition enables the Committee to benefit from a broad range of views and does not inhibit it from following a formal, rigorous and transparent procedure when appointing new directors. c) C.2.1. – The annual review of the effectiveness of risk management is not formally documented, and remains an item of work in progress.The Board will continue to review its corporate governance arrangements, in the light of the Code, as the Group develops and grows, and in particular will review those provisions that are not currently complied with.The directors consider that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.424266865 QUARTO R+A TEXT 21 Back 2015/04/09 12:48:18 45GREENHOUSE GAS EMISSIONS REPORTINGDuring the year, the Group worked with Energy Management LLP, an energy procurement and carbon consultancy, to develop GHG reporting protocol based on DEFRA and World Resource Institute guidelines.The Group has chosen to use Operational Control in their approach to reporting utility data, electricity and natural gas from UK and International operations. This includes sites that have been disposed of during the reporting period. Scope 1 (Natural Gas) and Scope 2 (Electricity) are reported on below, but the Group are not reporting on Scope 3 emissions covering emissions from transport and emissions from fully serviced offices where only a service charge is applied.The Group has identified GHG (Greenhouse Gas) emissions per employee as the most appropriate available KPI (referred to as the intensity ratio) and has chosen 2014 as our Base Year, following the disposal of our silk screen printing business in 2013.GLOBAL GHG EMISSIONS DATA FOR THE YEAR ENDED DECEMBER 31, 2014Tonnes of CO2eScope 113Scope 2319Total GHG emissions (CO e)332Average number of staff*324Emissions per staff member1.02* Excluding staff at fully serviced offices.RISK MANAGEMENT AND INTERNAL CONTROLSThe Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. The Board has in place risk management systems in relation to the Company’s financial reporting process and the Group’s process for the preparation of the consolidated financial statements. However, such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.Established procedures are in place to identify and consolidate reporting entities. Our control activities include policies and practices covering appropriate authorisation and approval of transactions, the application of financial reporting standards and reviews of significant judgements and financial performance.The main elements of the internal control and financial reporting systems are:a) The results of individual operating segments are reported and reviewed by the Board at its board meetings during the year.b) The management reports of each operating segment are tailored to suit the business and management needs of local management. Each operating segment has its own key performance indicators and these are regularly reviewed and assessed.c) In addition to monthly reporting, individual operating units report certain management information more frequently, where it is considered appropriate.d) All operating units report their bank balances twice weekly and a report is produced summarising the Group position.e) The Chief Executive Officer and the finance department make frequent visits to all operating segments. These visits include reviews of the internal control and financial reporting systems.f) All operating units prepare annual budgets and cash flow forecasts which are reviewed by the Board.434366865 QUARTO R+A TEXT 22 Front 2015/04/09 12:48:18 46The UK Corporate Governance Code introduced a requirement that the Directors review the effectiveness of the Group’s system of internal controls, to cover all controls including financial, operational, compliance, and risk management. The Board confirms that there are ongoing processes covering the identification, evaluation and management of the significant risks faced by the Group. The processes are carried out through Group Board meetings, quarterly subsidiary management meetings, discussion and review by the Executive Board and the finance department during the several visits per year to individual operating units, and discussions with professional advisers where appropriate. We will continue to develop our risk management framework during 2015.AUDITOROn December 15, 2014, Grant Thornton UK LLP, resigned as auditor to the Company and Deloitte LLP were appointed in their place. A resolution regarding the appointment of Deloitte LLP as auditor to the Company will accordingly be proposed at the Annual Meeting. John Price Secretary March 20, 2015 Company Registration Number: FC0 13814444466865 QUARTO R+A TEXT 22 Back 2015/04/09 12:48:18 47AUDIT COMMITTEE REPORTThe current members of the Audit Committee are non-executive Directors Michael Hartley (Chairman), Jessica Burley and Christopher Mills. Edward Krawitt was Chairman of the Committee until he left the Board on 22 May 2014 and Max Lesser was a member of the Committee until he left the Board on 15 October 2014. Jessica Burley and Christopher Mills were appointed to the Committee on 22 May 2014 and 15 October 2014 respectively. Michael Hartley was appointed Chairman of the Committee on 22 May 2014. The Board considers Jessica Burley and Michael Hartley to be independent Directors. The Board considers a majority of members of the Committee to have recent and relevant financial experience and together have a wide range of financial and commercial experience to fulfil the Committee’s duties. RESPONSIBILITIESThe Committee acts in accordance with its terms of reference adopted August 14, 2012 amendments to which were adopted on 19 January 2015, as available on the Group’s website, and its specific responsibilities include:• To consider and recommend the appointment of the Group’s auditor, the audit fee, audit engagement letter and questions of auditor performance, partner rotation, resignation, and dismissal.• To meet with the auditor to discuss all aspects of the audit including audit planning, scope, findings, accounting policies, management judgments and estimates.• To review the Board’s representation letter to the auditor.• To review the auditor’s management letter and management’s response.• To set policy and review the use of our non-audit services and assess the independence of the auditor.• To review financial statements released to the public including interim and annual financial statements.• To review the Group’s accounting policies, practices and use of accounting standards especially for decisions requiring major elements of judgement, significant adjustments and going concern basis.• To review the Group’s internal controls and risk management including: - the financial reporting process - identifying, managing and monitoring financial, operational, compliance and other risks - compliance with regulatory and legal requirements - detecting fraud• To review the need for an internal audit function.COMMITTEE MEETINGSThe Committee meets throughout the year to fulfil its responsibilities. The Committee Chairman also meets informally with the CFO throughout the year and with senior management. He also meets with the external Audit Partner from time to time to discuss issues and be appraised of regulatory change.By invitation the Company’s Chairman of the Board, Chief Executive Officer, CFO and representatives of the Company’s auditor also attend Committee meetings although part of some meetings are exclusively for Committee members without executive management present.The Chairman of the Committee attends the Annual Meeting to address any shareholder questions relating to the Committee.The Committee met four times during 2014. The Committee, as part of full Board meetings, was also involved in approving announcements made to the London Stock Exchange.ACTIVITIES OF THE COMMITTEEDuring 2014 the work of the Committee included:• Review of the plan and scope of the external audit. • Review of the external auditor’s report on the year end audit and approval of the preliminary announcement and the annual report. • Recommend to the Board its support for management’s recommendation for the final and interim dividend.• Consider the external auditor’s comments in relation to internal control. • Review compliance of the policy relating to use of the auditors for non-audit work.454566865 QUARTO R+A TEXT 23 Front 2015/04/09 12:48:19 48• Review the actions being taken to ensure compliance with the UK Bribery Act.• Review and approval of the interim report 2014 after discussion with the external auditor.• Review of the need and potential scope of an internal audit function. • Discussion of significant accounting issues facing the Group including goodwill impairment, the amortisation of intangible assets, going concern, revenue recognition and policy with regard to disclosure of exceptional items.• Appointment of Deloitte as external auditor.• Review of the independence of the external auditor.AUDIT RISKS AND FINANCIAL JUDGEMENTS FOR 2014The Committee concentrated on the following judgement areas in relation to the 2014 accounts.Goodwill impairmentGoodwill arising from acquisitions is stated at cost less any accumulated impairment losses. In accordance with IAS 36 the Group tests the goodwill on an annual basis for impairment. The Committee reviewed the methodology and assumptions in the testing process with focus on the discount rate used in the discounted cash flow valuations and the sensitivity to changes in the discount rate and growth rate.Amortisation of intangible assetsAmortisation of intangible assets is charged to profit or loss on a straight line basis over the estimated useful lives of the intangible assets. Pre-publication costs which are capitalised in accordance with IAS 38 form much of these intangible assets and the Committee, with the external auditor, discussed the assumptions behind the amortisation including the amortisation period of the publications. Exceptional itemsThe Committee, in consultation with the Auditor, considered the latest regulatory guidelines issued by the FRC in December 2013 and agreed with the Executive Directors to restrict exceptional items to significant non trading and one-off in nature items. Comparatives for prior periods have been restated to reflect this updated presentation policy. Going concernThe Committee considered the underlying robustness of the Group’s business model, products and proposition, and the financial resources available to it for the future to satisfy itself of the going concern assumption in preparing the financial statements. The Committee noted the recent renewal of its syndicated borrowing facility and its forecast compliance with the facility’s covenants for the foreseeable future.Deferred taxationIn the process of the 2014 year-end audit, the Auditor identified that, on consolidation, there was not a corresponding deferred tax liability booked to correspond to the US tax relief taken on goodwill amortisation. The Committee recognised that the deferred tax liability would only arise in the event of a disposal of the relevant US assets which is not planned. Nevertheless, to fully comply with IAS 12 this deferred tax liability has been booked in 2014 and the relevant adjustments have been made for the prior year (See page 79).Pre-publication costsIn the process of the 2014 year-end audit, the Auditor identified that certain directly attributable costs in relation to capitalized pre-publication costs had been captured and presented on a net basis as opposed to showing the gross investment and subsequent amortisation separately. The effect was to understate both the investment and amortisation. This issue had no impact on the Income Statement or the Balance Sheet, only on the Cash Flow Statement, the Operating Segments and related notes to the accounts. These entries have been amended and the prior year restated. 464666865 QUARTO R+A TEXT 23 Back 2015/04/09 12:48:19 49Revenue recognitionThe Committee considered the risk that revenue may not be captured in the relevant period. Apart from the usual risks relating to the timing of revenue recognition, management are required to provide for returns which may be made subsequent to the period end. This requires a significant degree of judgement. The Committee reviewed management's methodology, and consulted with the Auditor to provide comfort that revenue was booked into the correct period in line with the stated accounting policies and that returns provisions were reasonable based on historic returns rates.Provisions relating to inventory and trade receivablesThe Committee recognises that the Group has significant value in inventory and trade receivables at year end. The valuation of these are subject to a significant management judgement with regard to provisions for slow moving and obsolescent inventory and for the non recoverability of trade debt. The Committee asked the Auditor to test the adequacy of provisions.EXTERNAL AUDITThe Committee assesses the effectiveness of its external auditor through ongoing dialogue and communication with the Auditor. The audit cycle included formal meetings. The audit planning meeting, which happens prior to the audit, was when the Committee discussed reporting developments, significant risks, goodwill impairment, amortisation of intangible assets, exceptional item reporting and controls in the accounting process. At the end of the audit process, the Committee met with the auditors to receive their report on the key findings with focus on identified key audit risks, any misstatements in management’s initial accounts and to consider areas of judgement and estimates. The Auditor showed diligence and openness with the Committee during meetings and through written communication. The Auditor gave the Committee forthright views on judgement areas whilst recognising that the decisions lay with the Committee. The Committee also received feedback from the Executive Directors involved with the audit. The Committee is satisfied with the Auditor’s effectiveness. APPOINTMENT AND INDEPENDENCEGrant Thornton had been the Group’s auditor since 2007. The Committee considers the appointment of the external auditor each year and considers the performance of the lead audit partner and the audit manager during the audit process. In early 2014, the Committee invited four firms, including Grant Thornton, to tender for the Company’s 2014 audit. After receiving written proposals and personal presentations the Committee reappointed Grant Thornton with a specific new lead Audit Partner to audit the Group for its 2014 financial year. The Committee considered Grant Thornton to be independent. However, late in 2014 with the appointment of a new director a conflict of interest arose relating to another company with which both the director and Grant Thornton were involved. This led to the resignation of Grant Thornton and the subsequent appointment of Deloitte. There are no restrictions on the Committee’s choice of external auditor. For the 2014 audit of the Group and the Company’s accounts, Deloitte were paid $224,000.NON-AUDIT SERVICESDeloitte performed no non-audit services.INTERNAL AUDITThe Committee reviews the appropriateness of having an internal audit function. To date there has not been a separate internal audit function, given the size and scale of the Group's operations. However, the Committee plans for 2015 to implement a greater formalisation of the internal review of a set list of required internal control tasks with reports on these items coming to the Committee for review.Mike Hartley Chairman of the Audit Committee March 20, 2015 474766865 QUARTO R+A TEXT 24 Front 2015/04/09 12:48:19 50DEAR SHAREHOLDERI am pleased to present the Directors' Remuneration Report for the year ended 31 December 2014, which has been prepared by the Remuneration Committee (“the Committee”) and approved by the Board. This is the Company’s second year of reporting in line with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The report is divided into two sections: The first is the Policy Report which was approved by shareholders at the AGM on 22 May 2014 and which outlines the Group’s Remuneration Policy applying from 23 May 2014. Whilst the Remuneration Policy is unchanged, for clarity we have updated the charts illustrating the application of the remuneration policy to reflect the latest salaries and changes to directors where appropriate. The second section is the Annual Report on Remuneration, which reviews how the policy was implemented. Mindful of the increasing length of remuneration reports, we have aimed to be concise without compromising on transparency. I hope you find the Remuneration Report clear and easy to understand and we would welcome any feedback or comments. Mike Hartley Chairman of the Remuneration Committee March 20, 2015REMUNERATION COMMITTEE REPORT484866865 QUARTO R+A TEXT 24 Back 2015/04/09 12:48:19 51DIRECTORS’ REMUNERATION REPORTIn line with The Large and Medium-sized Companies and Group’s (Accounts and Reports) (Amendment) Regulations 2013 the following parts of the Annual Report on Remuneration are audited: the single total figure of remuneration for each director, including annual bonus outcomes for the financial year ended December 31, 2014; pension entitlements; payments to past directors and payments for loss of office; and, directors’ shareholdings and share interests. All other parts of the Directors’ Remuneration Report are unaudited. POLICY REPORT This section provides Quarto’s remuneration policy for Directors, which has been applied from May 23, 2014, following approval at the 2014 Annual Meeting. The Group’s principal remuneration policy aim is to ensure that the compensation offered is appropriate to attract, retain and motivate Executive Directors and staff with the ability and experience to deliver the Group’s strategy and grow the value of the business, having regard to the prevailing economic conditions and competition for such people in the markets in which the Group operates. In formulating its policies the Committee had regard to and balanced the following factors:a) the need to align the interests of the executive with those of the shareholders;b) the performance of the individual executive and of the Group as a whole; c) the remuneration practice in the markets in which the executive is principally based; and,d) the remuneration packages offered to executives in companies competing in the same markets and industry as the Group.SUMMARY OF QUARTO’S REMUNERATION POLICY APPLYING FROM MAY 23, 2014The elements of the remuneration policy for Directors are set out below. The changes to the annual and medium-term bonus schemes were implemented for 2014. The Performance Share Plan (“PSP”) was implemented following approval at the 2014 Annual Meeting.FIXED PAY – BASE SALARY / FEESPurpose and link to strategySet at competitive levels in the markets in which Quarto operates, in order to attract and retain executives.OperationReviewed annually with changes normally effective from 1 January of each year. Reviews take account of:• scope of the role and the markets in which Quarto operates;• performance and experience of the individual;• pay levels at organisations of a similar size and complexity; and,• pay and conditions elsewhere in the Group.OpportunityThere is no prescribed maximum to avoid setting unhelpful expectations. Any salary increases are applied in line with the outcome of the review and taking into account wider factors, for example, local market inflation.Performance metricsNot applicable494966865 QUARTO R+A TEXT 25 Front 2015/04/09 12:48:19 52Fixed pay – BenefitsPurpose and link to strategyDesigned to be competitive in the market in which the individual is employed.OperationBenefits include life insurance and private medical insurance. Where appropriate, other benefits may be offered including, but not limited to, participation in all-employee share schemes.Benefits are non-pensionable.OpportunityBenefits vary by role and individual circumstance and eligibility is reviewed periodically. Benefits are not anticipated to exceed 5% of salary p.a. over the period for which this policy applies. The Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside of the Group’s control have materially changed (e.g. increases in medical premiums).Performance metricsNot applicableFixed pay – PensionPurpose and link to strategyTo provide cost effective retirement benefits.OperationParticipation in defined contribution plan or cash allowance in lieu.OpportunityUp to 15% of base salary Performance metricsNot applicableVariable pay – Annual performance bonusPurpose and link to strategyDesigned to reinforce individual performance and contribution to the achievement of profit growth and strategic objectives. OperationMeasures are reviewed prior to the start of the financial year to ensure they remain appropriate and reinforce the business strategy, and performance targets are set annually to ensure they are appropriately stretching and reflect those strategic objectives. At the end of the year the Committee determines the extent to which these were achieved. Awards are payable in cash.Payments made under the annual bonus are subject to claw-back for the later of one year following the date of award or the completion of the next audit of the Group’s accounts, in the event of a fraud or material misstatement of results being identified in relation to the year in which the bonus is earned. OpportunityMaximum potential opportunity of up to 60% of base salary. Typically, 10% of potential is achieved for achieving Threshold performance of the financial goals and 100% for Stretching performance.505066865 QUARTO R+A TEXT 25 Back 2015/04/09 12:48:19 53Performance metricsAt least half of the annual bonus is based on financial objectives with the balance on personal objectives.The Committee will vary the weightings from year-to-year to reflect the changing strategic needs for the business with a default bias towards financial objectives.In exceptional circumstances, the Committee has the ability to exercise discretion to override the formulaic bonus outcome within the limits of the Plan where it believes the outcome is not truly reflective of performance and to ensure fairness to both shareholders and participants. Variable pay – Medium-term performance bonusPurpose and link to strategyDesigned to reinforce the achievement of continuous profit growth over a longer time frame and aid staff retention. OperationMeasures are reviewed prior to the start of each 3 year period to ensure they remain appropriate and to ensure they are appropriately stretching. At the end of the 3 year period the Committee determines the extent to which these were achieved. Awards are payable in cash.Payments made under the medium-term bonus are subject to claw-back for the later of one year following the date of award or the completion of the next audit of the Group’s accounts, in the event of a fraud or material misstatement of results being identified in relation to the year in which the bonus is earned. OpportunityMaximum potential opportunity of up to 120% of base salary for the three year period. Typically, 10% of potential is achieved for achieving Threshold performance and 100% for Stretching performance.Performance metricsThe medium-term bonus is based entirely on cumulative increases in earnings and is only paid at the end of the three year period based on the cumulative result.In exceptional circumstances, the Committee has the ability to exercise discretion to override the formulaic bonus outcome within the limits of the Plan where it believes the outcome is not truly reflective of performance and to ensure fairness to both shareholders and participants. Variable pay – Performance Share Plan (PSP)Purpose and link to strategyEnsures that the Executive’s interests are aligned with those of shareholders through reward for providing shareholders with substantial increases in shareholder value by June 30, 2016 and/or for achievement of a measure of sustained growth in earnings over the medium to long term. OperationAside from a one-off award to the Chief Executive Officer which vests if the target shareholder return is met by June 30, 2016, awards of nominal-cost (or nil-cost) options may be granted annually as a percentage of base salary. Vesting is based on performance measured over four years. The performance period normally starts at the beginning of the financial year in which the date of grant falls.Dividends accrue on PSP awards and are paid on those shares which vest.515166865 QUARTO R+A TEXT 26 Front 2015/04/09 12:48:19 54Operation continuedAward levels and performance conditions are reviewed before each award cycle to ensure they remain appropriate.Payments made under the PSP are subject to claw-back, for the later of one year following date of vesting or completion of the next audit of the Group’s accounts, in the event of a fraud or material misstatement of results being identified in relation to the years in which the PSP is earned. OpportunityWith the exception of a one-off award made to the CEO in 2014, award opportunities for participants are up to 50% of base salary. Awards of up to 100% of base salary may be provided in exceptional circumstances (e.g. recruitment).20% of maximum vests for Threshold, rising on a straight-line basis to full vesting for Stretch performance.Performance metricsApart from the initial one-off award to the Chief Executive Officer, which is based on achieving total shareholder returns of £2.50 by June 30, 2016 from a combination of dividends, capital returns and share price, awards to Executives are subject to four year cumulative EPS performance. In exceptional circumstances, the Committee has the ability to exercise discretion to override the formulaic PSP outcome within the Plan limits to ensure alignment of pay with the underlying performance of the business during the performance period. Fixed pay – Non-executive Directors’ feesPurpose and link to strategyTo reflect the time commitment in preparing for and attending meetings, the duties and responsibilities of the role and the contribution expected from the non-executive Directors.OperationAnnual fee for Chairman.Annual base fee for non-executive Directors. Additional fees are paid to the Senior Independent Director and the Chairmen of the Committees to reflect additional responsibilities. Fees are reviewed annually, taking into account time commitment, responsibilities and fees paid by comparable companies. OpportunityThere is no prescribed maximum. Non-executive Director fee increases are applied in line with the outcome of the review and taking into account wider factors, for example, inflation. Performance metricsNot applicable.In addition to the above elements of remuneration, any commitment made prior to, but due to be fulfilled after, the approval and implementation of the remuneration policy detailed in this report will be honoured.525266865 QUARTO R+A TEXT 26 Back 2015/04/09 12:48:19 55PERFORMANCE MEASURE SELECTION AND APPROACH TO TARGET SETTINGThe measures used under the annual bonus plan are selected annually to reflect the Group’s key strategic priorities for the year and reinforce financial performance and achievement of annual objectives as well as individual performance. Financial measures include, but may not be limited to, profit after tax.The Committee considers that profit after tax adjusted for any exceptional items is the most appropriate measure of long-term performance of the Group. It is well-aligned with shareholder interests, provides clear visibility and the scheme is simple. Performance targets are set at such a level as to be stretching and achievable, with regard to the particular strategic priorities and economic environment. The annual bonus Threshold is based on a 3% growth in profits with Stretch target being 10% growth. The same basis is used for the medium-term bonus where the targets compound annually.The Committee reviews the performance targets applying to awards made to the proposed PSP scheme annually. Awards made to participants will be based on either one or a combination of total shareholder return and cumulative earnings per share over the measured period. These will be reported on each year in the Annual Report on Remuneration. DIFFERENCES IN REMUNERATION POLICY OPERATED FOR OTHER EMPLOYEES Quarto’s approach to annual salary reviews is consistent across the Group. Senior managers with substantial operational responsibilities are eligible to participate in an annual and medium-term bonus scheme with similar metrics to those used for the Chief Executive Officer. Opportunities and specific performance conditions vary by organisational level with business area-specific metrics incorporated where appropriate.Senior managers are eligible to participate in the PSP. Performance conditions are consistent for all these participants, while award opportunities may vary by organisational level but are typically limited to 50% of base salary. SHAREHOLDING GUIDELINESThe Committee recognises the importance of aligning the interests of Executives with shareholders through the building up of a significant shareholding in the Group. Save for the initial award made to Marcus Leaver in May 2014, Executive Directors are required to retain shares of a value equal to 50% of the after-tax gain made on the vesting of awards under the Plans, until they have built up a minimum shareholding of a value equivalent to at least 100% of annual base salary.535366865 QUARTO R+A TEXT 27 Front 2015/04/09 12:48:19 56REMUNERATION POLICY FOR NEW DIRECTORS When hiring or appointing a new executive director, including by way of internal promotion, the Committee may make use of all the existing components of remuneration as follows:ComponentApproachMaximum valueBase salaryDetermined in line with the stated policy, and taking into account their previous salary. Initial salaries may be set below market and consideration given to phasing any increases over two or three years subject to development in the role.Not applicableBenefitsIn line with the stated policy.Not applicablePensionIn line with the stated policy.Not applicableAnnual bonusIn line with stated policy, with the relevant maximum pro-rated to reflect the proportion of the year served. 60% of base salaryMedium-term bonusIn line with stated policy, with the relevant maximum pro-rated to reflect the proportion of the year served. 120% of base salary over 3 yearsPSPIn line with the stated policy.100% of base salary (200% in exceptional circumstances)In determining appropriate remuneration for a new executive, the Committee will take into consideration all relevant factors (including quantum, nature of remuneration and the jurisdiction from which the candidate was recruited) to ensure that arrangements are in the best interests of both The Quarto Group and its shareholders. The Committee may consider it appropriate to grant an award under a structure not included in the policy, for example to ‘buy out’ incentive arrangements forfeited on leaving a previous employer, and will exercise the discretion available under Listing Rule 9.4.2 R where necessary. In doing so, the Committee will consider relevant factors including the expected value of all outstanding equity awards using a Black-Scholes, or equivalent valuation and, where applicable, taking into account toughness of performance conditions attached to these awards and the likelihood of those conditions being met. In cases of appointing a new Executive Director by way of internal promotion, the Group will honour any contractual commitments made prior to their promotion to Executive Director. In cases of appointing a new non-executive Director, the approach will be consistent with the policy.545466865 QUARTO R+A TEXT 27 Back 2015/04/09 12:48:19 57SERVICE CONTRACTS AND EXIT PAYMENTS POLICYNon-executive Directors are engaged on the basis of a letter of appointment. In line with the UK Corporate Governance Code, all Directors are subject to re-election annually at the Annual Meeting. The Chairman has an initial three year contract, subject to re-election each year and the non-executive Directors have a one month notice period. The non-executive Director Letters of Appointment are available to view at the Group’s registered office and the effective dates of their Letters of Appointment are as follows:DirectorDate of AppointmentAppointment LetterNotice periodTim ChadwickNovember 7, 2012February 20, 2013Initial period of 3 years commencing 18 December 2012, subject to annual re-election Jessica BurleyMay 22, 2014January 17, 20141 monthMichael HartleyAugust 6, 2013August 22, 20131 monthChristopher MillsOctober 15, 2014 October 22, 20141 monthExecutive Director service contracts have no fixed term and, save for Bob Morley, have a notice period of not more than 12 months from either the Executive or the Group. Save for Bob Morley, these notice periods meet best practice guidelines and give protection, mutually, to the Group and the Executive. Executive Director service contracts are available to view at the Group’s registered office. The dates of the Executive Director service contracts and the relevant notice period are as follows:DirectorEffective date of contractNotice periodMarcus LeaverApril 30, 201212 monthsMick MousleyApril 4, 198912 monthsBob MorleyAugust 6, 2013None** Bob Morley’s contract provides ongoing employment, without limit, whilst he meets certain conditions, including, but not limited to, him not selling or otherwise disposing of his shares in the Company in a manner that qualifies for Entrepreneur’s Relief. This contract precedes his re-appointment to the Board.The Committee’s policy is to limit severance payments on termination to pre-established contractual arrangements and the rules of the relevant incentive plans. In doing so, the Committee’s objective is to avoid rewarding poor performance. Furthermore, the Committee will take account of the Executive Director’s duty to mitigate their loss.Termination payments are limited to base salary and benefits during the unexpired notice period which cannot be mitigated. 555566865 QUARTO R+A TEXT 28 Front 2015/04/09 12:48:19 58In addition to the contractual provisions regarding payment on termination set out above, the Group’s incentive plans and share schemes contain provisions for termination of employment.ComponentBad leaverGood leaverChange-of-controlAnnual bonusNo annual bonus payableEligible for an award to the extent that performance conditions have been satisfied and pro-rated for the proportion of the financial year served, with Committee discretion to treat otherwiseEligible for an award to the extent that performance conditions have been satisfied up to the change of control and pro-rated for the proportion of the financial year served, with Committee discretion to treat otherwiseMedium-term bonusNo annual bonus payableEligible for an award to the extent that performance conditions have been satisfied and pro-rated for the proportion of the three financial years served, with Committee discretion to treat otherwiseEligible for an award to the extent that performance conditions have been satisfied up to the change of control and pro-rated for the proportion of the three financial years served, with Committee discretion to treat otherwisePSPOutstanding awards are forfeitedOutstanding awards will normally continue and be tested for performance over the full period, and pro-rated for time based on the proportion of the period served, with Committee discretion to treat otherwiseOutstanding awards will normally vest and be tested for performance over the period to change-of-control, and pro-rated for time based on the proportion of the period served, with Committee discretion to treat otherwiseAny commitment made prior to, but due to be fulfilled after the policy comes into force, will be honoured.An individual would normally be considered a good leaver if they leave for reasons of death, injury, ill-health, disability, redundancy, part of the business in which the individual is employed or engaged ceasing to be a member of the Group, circumstances that are considered by the Committee to be retirement, or any other reason as the Committee decides. Bad leaver provisions apply under other circumstances.EXTERNAL APPOINTMENTS The Executive Directors may accept external appointments with the prior approval of the Board and provided only that such appointments do not prejudice the individual’s ability to fulfil their duties at the Group. Whether any related fees are retained by the individual or remitted to the Group will be considered on a case-by-case basis. ILLUSTRATION OF THE APPLICATION OF THE REMUNERATION POLICY The chart on page 59 shows the remuneration that the Executive Directors could be expected to obtain based on varying performance scenarios. Illustrations are intended to provide further information to shareholders regarding the relationship between pay and performance. Potential reward opportunities illustrated are based on the policies applying from May 23, 2014, applied to the latest known fixed pay of base salaries, pension, other benefits and variable pay of annual bonus, medium term bonus and PSP. 565666865 QUARTO R+A TEXT 28 Back 2015/04/09 12:48:20 59* Does not include commissions which may become due (refer to Annual Report on Remuneration) ** Remuneration is contracted in sterlingAssumptions underlying each element of pay are provided in the below table:Component‘Minimum’‘Maximum’FixedBase salaryLatest known salaryPensionContribution rate applied to latest known salaryOther benefitsBenefits as provided in the single figure table on page 61Annual bonusNo bonus payableMaximum bonusMedium-term bonus*No bonus payableMaximum bonusPSP Vesting*None VestingFull vesting* The maximum medium term bonus and the PSP vesting has been prorated over three years Fixed remuneration Annual variable remuneration Medium-term variable remuneration PSPCONSIDERATION OF CONDITIONS ELSEWHERE IN THE GROUPWhen reviewing and setting executive remuneration, the Committee takes into account the pay and employment conditions of all employees of the Group. The Group-wide pay review budget is one of the key factors when reviewing the salaries of the Executive Directors. Although the Group has not carried out a formal employee consultation regarding Board remuneration, it does comply with local regulations and practices regarding employee consultation more broadly.CONSIDERATION OF SHAREHOLDER VIEWSIt is the Committee’s policy to consult with major shareholders or their chosen shareholder representative body prior to any changes to its Executive Director remuneration structure.Mike Hartley Chairman of the Remuneration Committee March 20, 20150100200300400500600700800£408£618£302£225£225£000**MinimumMaximumMarcus LeaverMick MousleyBob Morley*MaximumMinimumMinimumMaximum£366900100011001200130014001500£1314£758575766865 QUARTO R+A TEXT 29 Front 2015/04/09 12:48:20 60ANNUAL REPORT ON REMUNERATIONTHE REMUNERATION COMMITTEE (“THE COMMITTEE”)The current members of the Committee are the Group’s non-executive Directors, Michael Hartley (Chairman), Jessica Burley, Tim Chadwick, and Christopher Mills. Edward Krawitt and Max Lesser were members of the Committee until they left the Board on May 22, 2014 and October 15, 2014 respectively. Jessica Burley and Christopher Mills were appointed on May 22, 2014 and October 15, 2014 respectively. The Committee met four times during the year. Further details of attendance of non-executive Directors at Remuneration Committee meetings can be found in the Corporate Governance Report on page 43. No individual was present when their own remuneration was being discussed. The Remuneration Committee’s Terms of Reference are available on the Group’s website.The Committee is responsible for:• Recommending to the Board the remuneration and terms and conditions of employment of the Chairman (who absents himself from discussions regarding his own remuneration), Executive Directors and key members of senior management; • Measuring subsequent performance as a prelude to determining the Executive Directors’ and key managers’ total remuneration on behalf of the whole Board;• Determining the structure and quantum of short-term and medium-term bonus schemes; and,• Granting awards under the PSP Share Award Scheme. The main issues discussed and/or approved during the financial year under review:• Approval of the prior year Directors’ Remuneration Report;• Approval of all documentation relating to the PSP scheme and the PSP Award Circular to Shareholders;• Annual review of the Executive Directors’ salaries and benefits;• Review of the Executive Directors’ and the senior managers’ performance under the prior year’s annual bonus scheme, including a review of their performance against their personal objectives and approval of the bonus awards;• Review of the design and targets for the forthcoming annual bonus scheme, including personal objectives;• Approval of awards made in the year under the Performance Share Plan.• Approval of terms for new senior management appointments.ADVISERSThe Committee has not paid fees to any advisers during the financial year.STATEMENT OF SHAREHOLDER VOTING AT THE 2014 ANNUAL MEETINGThe following table shows the results of the vote on the Remuneration Policy Report at the Annual Meeting on May 22, 2014. Total number of votes% of votes castFor (including discretionary) 10,214,863 77.9%Against2,896,602 22.1%Total votes cast*13,111,465100%* Representing 64.1% of the total voting shares585866865 QUARTO R+A TEXT 29 Back 2015/04/09 12:48:20 61The following table shows the results of the advisory vote on the 2013 Annual Remuneration Report at the Annual Meeting on May 22, 2014. Total number of votes% of votes castFor (including discretionary) 10,218,180 77.9%Against2,893,285 22.1%Total votes cast*13,111,465100%* Representing 64.1% of the total voting sharesSINGLE TOTAL FIGURE OF REMUNERATION (AUDITED)The table below sets out a single figure for the total remuneration received by each Director for the year ended December 31, 2014 and the prior year. These amounts are shown in the reporting currency, although set in sterling. The exchange rates used in 2014 and 2013 were 1.65 and 1.56, respectively.Base SalaryBenefits1PensionAnnual Bonus2Long-term incentives3Total remunerationExecutive Directors2014 $0002013 $0002014 $0002013 $0002014 $0002013 $0002014 $0002013 $0002014 $0002013 $0002014 $0002013 $000Marcus Leaver577546998782169233--842870Mick Mousley422398131163606083--558552Robert Morley*349134228–-----371142* For period for which he was a Director, in both years.Fees4BenefitsPensionAnnual BonusLong-term incentives3Total remunerationNon-executive Directors2014 $0002013 $0002014 $0002013 $0002014 $0002013 $0002014 $0002013 $0002014 $0002013 $0002014 $0002013 $000Tim Chadwick165156––––––––165156Peter Campbell–31–––––––––31Mike Hartley7122––––––––7122Edward Krawitt2355––––––––2355Max Lesser4138––––––––4138Peter Waine–23–––––––––23Jess Burley35–––– –––––35 –Christopher Mills12–––––––––12–1 Benefits comprise private medical insurance contributions. 2 Annual bonus for performance over the relevant financial year. Further details of performance criteria, achievement, and resulting awards can be found on page 62. 3 Further details of Long-term incentives can be found on page 63. 4 Further details of non-executive Director fees can be found on page 64. There has been no withholding, clawback or deferral of remuneration during the period.595966865 QUARTO R+A TEXT 30 Front 2015/04/09 12:48:20 62EXECUTIVE DIRECTOR BASE SALARIES/FEESDuring the year, Marcus Leaver, the Chief Executive Officer, received £350,000 in salary. His salary has not been increased for 2015. During the year, Mick Mousley, the Chief Financial Officer, received £255,000 in salary. His salary has not been increased for 2015. During the year, Bob Morley, the Deputy Chairman, received £211,692 in salary and in first part payment of notice in lieu of the termination of his former contract. From January 1, 2015 his salary has been set at £86,000 to reflect his reduced executive responsibilities and time commitments. In addition, on June 30, 2015, he shall be paid a lump sum of £82,692, in relation to the second part payment of notice in lieu of the termination of his former contract. He is also entitled to a commission of 37.5% of gross profit generated on projects that he creates for the Children's Design Eye imprint, from 2014. Executive Director salary increases for 2015 were less than the typical increase across the UK employee population. The next salary review date will be January 1, 2016. PENSION AND OTHER BENEFITSThe Group makes a contribution equal to 15% of Marcus Leaver’s and Mick Mousley’s base salary to their personal pension schemes. Benefits are in line with the policy.ANNUAL PERFORMANCE BONUS 2014 bonus frameworkFor the 2014 financial year, the maximum annual bonus opportunity was 60% of salary for Marcus Leaver of which 45% related to a group profit after tax and 15% to personal objective targets. For Mick Mousley. the annual bonus opportunity was 25% of salary, of which group profit after tax targets were 10% and personal objective targets 15%. The group profit after tax target (pre-restatement of deferred tax liability as in note 1, page 79) had a Threshold of $9,704,000 and a Stretch of $10,363,000 but the target was subject to adjustment retrospectively in the event of any exceptional items. Whilst the target in absolute terms was not achieved, the Committee took into account various operational exceptional items, which occurred during the year and adversely affected results, and made an award of a discretionary bonus of £50,000 (which equates to 14.3% of salary) to Marcus Leaver and £8,100 (3.2% of salary) to Mick Mousley.Personal objectives for Marcus Leaver and Mick Mousley were set by the Committee in discussion with the Chairman and CEO respectively. The Committee reviewed and judged the level of achievement against the objectives at the end of the performance period. Marcus Leaver’s personal objectives for 2014 were related to development of a corporate plan to create a step change in shareholder value and related operational KPIs, digital strategy, global distribution, and the development of clear investor communications.. Payout under this element of the bonus was assessed at 15% of the potential award of 15% on personal objectives. Mick Mousley’s personal objectives for 2014 related to negotiation of new debt facilities, implementation of an inclusive budget and forecasting process, production of a tax and treasury strategy, create and adopt a process to optimize the targeting of pre-production spend and debt reduction. Payout under this element of the bonus was assessed at 11% of the potential award of 15% on personal objectives. After taking account of their financial and personal targets, Marcus Leaver and Mick Mousley earned £102,500 and £36,150 respectively, which equated to 48.8% and 56.7% of their respective potential bonus opportunities. 2015 annual bonus frameworkFor the financial year commencing January 1, 2015, the Executive Bonus Plan will operate in line with the approved remuneration policy, save for the measure being adjusted profit before tax (derivation of which is shown in note 32 on page 106) rather than profit after tax, adjusted as appropriate for exceptional items. 606066865 QUARTO R+A TEXT 30 Back 2015/04/09 12:48:20 63There can be a short term mismatch between the accounting tax charge and the cash paid in tax. As the latter is the greatest focus for shareholder value, and there are circumstances where focus on reducing cash tax paid can result in higher tax charges in year, we consider profit before tax to be a more appropriate measure for the annual bonus scheme.Bonuses for Marcus Leaver are based three quarters on the financial measure one quarter on personal objectives with a maximum opportunity of 60% of salary. For Mick Mousley the split is half on the financial measure and half on personal objectives with a maximum opportunity of 20% of salary.The Committee intends to disclose personal objectives retrospectively in next year’s Annual Report on Remuneration, subject to these no longer being considered by the Board to be commercially sensitive. MEDIUM-TERM PERFORMANCE BONUS2014-2016 medium-term bonus frameworkThis is the second year of the medium term bonus scheme which is designed to motivate management to focus on continual profit improvement. The Committee recognises that profit development is not within an annual financial cycle. Rather, the publications (which are a substantial part of the Group’s businesses) are substantially created in the year before the sales are achieved. Thus within any one financial year, there is a limit to the influence of management on profits. These in-year influences are the marketing of the publications and cost control. Emphasis on a single year can motivate cost cutting of creative publishing resources to the detriment of the following year’s results. Thus the Committee has developed a mix of annual and medium term performance goals. To most align these goals with shareholders, the targets are based on improving profits from the prior year/s as the Committee believes that ultimate shareholder value is most driven by a continual improvement in profits from which cash is generated for dividend growth. The profit targets are based on a base year of 2013. The Base is the achieved profits after tax for 2013 adjusted upwards to account for a one-off gain in 2014 on interest charges from an interest rate swap and for the after tax effect of exceptional items, in 2013. The results will be adjusted to account for any exceptional costs (or gains) recorded in the period. The target is based on compound increases over three years over the Base with Threshold for a 9.3% increase and Stretch for a 33.1% increase. Payments are made at the end of the period based on the 2016 results. Marcus Leaver has a maximum opportunity of 120% of salary, with 10% of maximum potential for Threshold and 100% for Stretch . After the accounting adjustments made in the presentation of the 2014 accounts, the targets will be adjusted accordingly.LONG-TERM INCENTIVESPSP AwardsSubsequent to the approval by shareholders of the PSP Plan an initial award was made to CEO, Marcus Leaver with a grant of 666,666 shares (3.3% of share capital) which would vest on June 30, 2016 subject to a stretching performance condition of achieving an average share price of £2.50 over any consecutive 90 day period occurring before vesting date, adjusted for an agreed challenging minimum level of dividends and other cash distributions paid to shareholders from December 31, 2012. There have been no other awards made under the PSP Plan during 2014.OTHER LONG TERM INCENTIVES On appointment to Chairman, Timothy Chadwick was awarded a potential bonus of £750,000 if, during the three year period commencing December 18, 2012, shareholders are able to sell their shares at a price of £2.50 or more, in the context of a general offer to acquire all the shares of the Company by a third party or by way of sale of shares in the market provided that the shares are traded on the market at a bid price of £2.50 or more for a continuous period of at least 6 months and during that period the 616166865 QUARTO R+A TEXT 31 Front 2015/04/09 12:48:20 64shares are trading with sufficient liquidity to enable up to 15% of the shares to be sold in the market on a regular monthly basis at a bid price of at least £2.50 per share without the bid price falling as a consequence. The Committee recognizes that there is a timing mismatch between this incentive and the similar PSP incentive for Marcus Leaver and believes it is in shareholders’ best interest to align the timing by extending the period for Timothy Chadwick’s award to end on 30 June 2016. Granting this extra period at this juncture makes the achievement of the award slightly less challenging and with this in mind the Committee have reduced the potential award to £500,000. As this award is outside the Remuneration Policy and is to be a one-off exception, a special resolution will be put to shareholders and the award will only be made if it is approved on a majority vote. CHAIRMAN AND NON-EXECUTIVE DIRECTOR FEESWith effect from the date of the Annual Meeting in 2014, the non-executive Directors received an annual base fee of £35,000, with an additional annual fee for Audit and Remuneration Committee Chairs of £3,500 and the Senior Independent Director of £3,000. The non-executive Directors’ fees for 2015 will remain unchanged and are therefore as follows: Jessica Burley £35,000, Michael Hartley £45,000 and Christopher Mills £35,000. The Chairman's fee remains at £100,000. RELATIVE IMPORTANCE OF SPEND ON PAY The graph below shows Quarto’s distributions to shareholders and total employee pay expenditure for the financial years ended December 31, 2013 and December 31, 2014, and the percentage change.00510152010203040$m28.630.7201320147.98.3+7.5%Pence perShareTotal Employee Pay(Excluding Image Factory which was sold during the year)Dividend+5.1%00510152010203040$m28.630.7201320147.98.3+7.5%Pence perShareTotal Employee Pay(Excluding Image Factory which was sold during the year)Dividend+5.1%626266865 QUARTO R+A TEXT 31 Back 2015/04/09 12:48:20 65REVIEW OF GROUP PERFORMANCEThe chart below compares the value of £100 invested in Quarto shares, including re-invested dividends, on December 31, 2008 compared to the equivalent investment in the FTSE Small Cap Index, over the last five financial years. The FTSE Small Cap Index has been chosen as it comprises companies of a broadly similar size to Quarto. The table below shows the single figure for the CEO over the same period.FYE December20102011201220132014CEO single figure of remuneration including bonus ($000)9169961,020**870842Annual bonus awarded$ amount ($000s)39*57*121*233169% of maximum opportunity –––56.9%33.5%LTI vesting$ amount ($000s)–––––% of maximum opportunity–––––* Discretionary ** The figure for 2012 is a combination of remuneration of Laurence Orbach, the previous CEO, and Marcus Leaver for the respective periods.PERFORMANCE GRAPH10015020025031 Dec 2009QuartoSmall cap31 Dec201031 Dec201131 Dec201231 Dec201331 Dec201410015020025031 Dec 2009QuartoSmall cap31 Dec201031 Dec201131 Dec201231 Dec201331 Dec2014636366865 QUARTO R+A TEXT 32 Front 2015/04/09 12:48:20 66CHANGE IN CEO REMUNERATION AND FOR EMPLOYEES AS A WHOLE OVER FY 2014The table below shows the change in CEO annual cash, defined as salary, taxable benefits and annual bonus, compared to the average employees for 2013 to 2014. CEOAverage for other employees$ 00020132014% change% changeSalary54657715.7%3.4% 2Taxable benefits991–(9.3)%2Annual variable233169(27.5)%(0.9)% Total788755(4.2)%2.6%1 There was no change to the CEO's starting salary. The increase in the above table is due to exchange rate movements 2 The salary of the other employees has been impacted by exchange rate movementsPAYMENTS TO PAST DIRECTORS AND PAYMENTS FOR LOSS OF OFFICE There have been payments of $680,000, during 2014, to Laurence Orbach in settlement of outstanding remuneration from 2013. DILUTION LIMITSThe Group has at all times complied with the dilution limits set out in the rules of its share plans (principally a limit of 10% in 10 years). The Group will also operate within a dilution limit of 5% in any rolling 10 year period for discretionary schemes. In the 10 year period to December 31, 2014, awards made under the Group’s share schemes represented 3.3% (2013: 0.4%) of the Group’s issued share capital. DIRECTORS’ SHAREHOLDING GUIDELINES AND SHARE SCHEME INTERESTSTo date there has been no requirement for Executive Directors to retain shares as there has been no vesting of share based incentives.Mike Hartley Chairman of the Remuneration Committee March 20, 2015646466865 QUARTO R+A TEXT 32 Back 2015/04/09 12:48:20 67NOMINATIONS COMMITTEE REPORTThe current members of the Nominations Committee are the Group’s non-executive Directors, Tim Chadwick (Committee Chairman), Michael Hartley, Jess Burley and Christopher Mills, and the Chief Executive Officer, Marcus Leaver. The Board approved formal terms of reference for the Committee during 2014, a copy of which can be found on the Company’s website. (www.quarto.com)The search for Board candidates is conducted and appointments made, on merit, against objective criteria and with due regard to the benefits of diversity on the Board, including gender. External search consultants are engaged, as appropriate, and a formal and transparent process is followed. When dealing with the appointment of a successor to the Chairman, the senior independent non-executive Director will chair the Committee instead of the Chairman. All Directors are required to allocate sufficient time to discharge their responsibilities and new Directors receive a tailored induction on joining the Board.This includes presentations on the business, current strategy, shareholder expectations, and familiarisation with the Group's operations worldwide. Guidance is also given on the duties, responsibilities and liabilities of a Director of a listed company and key Board policies and procedures.The Committee met three times during the year and was active in the appointment of Quarto’s new non-executive director, Jess Burley, whose appointment to the Board became effective on 22 May 2014. Jess was introduced by Norman Broadbent, who were engaged to conduct a search for prospective candidates on behalf of the Company, and who have no other connection with the Company. In addition, the Committee dealt with the appointment of Christopher Mills, who replaced Max Lesser, the previous Harwood Capital nominee Director on the Board, on 15 October 2014. Tim Chadwick, Chairman of the Nominations Committee March 20, 2015656566865 QUARTO R+A TEXT 33 Front 2015/04/09 12:48:20 68STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE DIRECTORS’ REPORT AND THE FINANCIAL STATEMENTSThe directors are responsible for preparing the Directors’ Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. The Company is incorporated in the State of Delaware, United States and is subject to the law of that state which places no requirement for annual reporting to shareholders upon the directors. However, since the Company has a listing on the London Stock Exchange and a place of business in the UK, the directors are required to prepare financial statements which comply with certain provisions which are contained within the Listing Rules of the UK Financial Conduct Authority (the Listing Rules) and UK company law for overseas companies.The Company is an ‘overseas’ company within the meaning of the Companies Act 2006. The directors have elected to prepare the group financial statements in accordance with IFRSs as adopted by the EU, and the parent company financial statements in accordance with applicable law and UK GAAP.The directors have accepted responsibility for preparing group financial statements as required by IFRSs as adopted by the EU which present fairly the financial position and the performance of the group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.The directors have accepted responsibility for preparing parent company financial statements which give a true and fair view of the state of affairs and profit or loss of the parent company.In preparing each of the group and parent company financial statements, the directors have accepted responsibility to:• select suitable accounting policies and then apply them consistently;• make judgements and estimates that are reasonable and prudent;• for the group financial statements, state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the group financial statements;• for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration report comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.666666865 QUARTO R+A TEXT 33 Back 2015/04/09 12:48:20 69The directors confirm that:• so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and• the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.The directors are responsible for preparing the annual report in accordance with applicable law and regulations. Having taken advice from the Audit Committee, the directors consider the annual report and the financial statements, taken as a whole, provides the information necessary to assess the Company’s performance, business model and strategy and is fair, balanced and understandable.The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.To the best of our knowledge:• the Group financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and• the annual report, which incorporates a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.• the Chairman’s Statement, Chief Executive Officer’s Statement, Financial Review and Directors’ Report include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.John Price, Secretary March 20, 2015676766865 QUARTO R+A TEXT 34 Front 2015/04/09 12:48:20 70OPINION ON FINANCIAL STATEMENTS OF THE QUARTO GROUP INC. In our opinion:• The financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2014 and of the group profit for the year then ended;• The group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;• The parent company financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • The financial statements have been prepared in accordance with the provisions of the Companies Act 2006 which would have applied were the company incorporated in the United Kingdom.The financial statements comprise the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity and the consolidated cash flow statement, and the related notes 1 to 34, the parent company balance sheet and the related notes to the parent company balance sheet 1 to 10. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). GOING CONCERN As required by the Listing Rules we have reviewed the directors’ statement contained within the Directors’ report on page 42 that the Group is a going concern. We confirm that:• We have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and • We have not identified any material uncertainties that may cast doubt on the Group’s ability to continue as a going concern.However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern.INDEPENDENT AUDITOR’S REPORT686866865 QUARTO R+A TEXT 34 Back 2015/04/09 12:48:21 71OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:RiskHow the scope of our audit responded to the riskThe assessment of the carrying value of goodwill ($41.1m) in the consolidated balance sheetThe assessment of the carrying value of goodwill, as described in Note 10, involves judgement in relation to forecasting future cash flows and is sensitive to growth rates and the discount rate applied to the future cash flows.We tested management’s assumptions used in their impairment model for goodwill, specifically including the cash flow projections, discount rates and growth rates applied.Our procedures included:• Considering the identification of appropriate cash generating units;• Assessing cash flow forecast projections with reference to historical trading performance and cash flow forecasting accuracy;• Comparing the discount rate applied against a broad comparator group as well as involving our internal valuation specialists to review underlying calculations and assess the key components of the discount rate calculation;• Considering the reasonableness of, and recalculating, the sensitivity assessment applied by management; and• Performing further independent sensitivity analysis on the impairment model. The assessment of the carrying value of pre-publication costs ($57.5m) in the consolidated balance sheetThe assessment of the carrying value of pre-publication costs, as described in Note 14, involves judgement in respect of the life of an imprint and its recoverability. The audit procedures we performed in respect of this risk included:• Analysing, on a sample basis, the historic level of sales following the date of publication;• Evaluating a sample of sales in the current year against their respective pre-publication carrying value;• Reviewing, on a sample basis, the level of sales for titles that had been fully written down; and• Comparing the amortisation period applied to industry peers.696966865 QUARTO R+A TEXT 35 Front 2015/04/09 12:48:21 72The description of the above risks should be read in conjunction with the significant issues considered by the Audit Committee discussed on pages 48 and 49.Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements in not modified with respect to any risks described above, and we do not express an opinion on these individual matters.OUR APPLICATION OF MATERIALITYWe define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.We determined materiality for the group to be $585,000, which is 5% of adjusted profit before tax plus amortisation, and below 1% of equity. The adjusted profit before tax measure plus amortization excludes one-off items and is consistent with the measures used by the Group for internal and external reporting requirements. This measure has been used to facilitate a better understanding of the trading performance of the Group. RiskHow the scope of our audit responded to the riskGoing concernAt the year end the group had debt facilities due for renewal of $95.0m in April 2015. It also had net liabilities in the company balance sheet of $7.5m. It was important, therefore, for management to refinance its existing facilities; an exercise that was completed in February 2015.The audit procedures we performed in respect of this risk included:• Obtaining copies of the new banking facility and reviewing revised covenant terms and levels of headroom;• Challenging management’s forecasts of the future profitability and cash generation of the Group and future covenant compliance;• Performing sensitivity on all key assumptions and ensuring renewed facilities are properly disclosed in the financial statements;• Reviewing forecast compliance with loan covenants for the next 15 months through to June 2016;• Reviewing the disclosures to ensure these meet the latest financial reporting requirements. Revenue recognition – sales returnsThe Group primarily generates revenue from publishing new titles and sales of back catalogues. Management judgement is required when assessing the level of sales returns to be provided for. Key assumptions principally surround historic return levels.To test the risk of material misstatement in respect of revenue recognition, our procedures included:• Testing a sample of underlying data used to develop the provision for completeness and accuracy and challenging the appropriateness of the rate by reference to current and post year end sales return levels;• Using analytical techniques to assess monthly movements by reference to historical trends; and• Gaining an understanding of each type of shipping arrangement and then selecting a sample of sales to ensure the terms of shipping and the timing of associated revenue recognition criteria have been met.707066865 QUARTO R+A TEXT 35 Back 2015/04/09 12:48:21 73We agreed with the Audit Committee we would report to the Committee all audit differences in excess of $11,700 (in 2013 the previous auditor reported audit differences in excess of $28,600) as well as differences below that threshold that, on our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.AN OVERVIEW OF THE SCOPE OF OUR AUDITOur Group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the UK and US co-editions and publishing segments, operations in Australia, New Zealand and Hong Kong, and the Group corporate head office function. These locations were subject to full audit procedures and represent the principal business units and account for 92% of the Group’s net assets, 97% of the Group’s revenue and 82% of the Group’ s profit before tax. They were also selected to provide and appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our audit work at locations subject to full audit procedures was executed at levels of materiality applicable to each individual location which was lower that the Group materiality.We carried out analytical procedures for operations in Switzerland and for the US holding company on an entity-only basis, neither of which was subject to audit, to confirm our conclusion that there were no significant risks of material misstatement of the financial information of these entities. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.The Group audit team is following a programme of planned visits designed so that the Senior Statutory Auditor and/or a senior member of the Group audit team visit each of the locations where the group audit scope is focused. For 2014 the Senior Statutory Auditor visited the United States, being the single most significant component outside of the United Kingdom and representing 37% of the Group’s revenue. In years when we do not visit a significant component we have included the component audit team, including the audit partner, in our team briefing, discuss the risk assessment, and review documentation of the findings from their work.OPINION ON OTHER MATTERS WHICH WE HAVE AGREED TO REPORT ONIn our opinion:• The part of Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006, were the requirements of the Act to apply to The Quarto Group Inc.; and• The information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION Adequacy of explanations received and accounting records Under our engagement letter, we are required to report to you if, in our opinion:• We have not received all the information and explanations we require for our audit; or• Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or• The parent company financial statements are not in agreement with the accounting records and returns.We have nothing to report in respect of these matters.Directors’ remuneration Under our engagement letter we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made 717166865 QUARTO R+A TEXT 36 Front 2015/04/09 12:48:21 74or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.Corporate Governance Statement Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating the Company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:• Materially inconsistent with the information in the audited financial statements; or• Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or• Otherwise misleading.In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.This report is made solely to the company’s members, as a body, in accordance with our engagement letter. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s 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 and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTSAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.Deloitte LLP Chartered Accountants and Statutory Auditor London, March 20, 2015727266865 QUARTO R+A TEXT 36 Back 2015/04/09 12:48:21 75CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2014 Notes2014 $0002013 Restated* $000Continuing operations Revenue 2172,644176,318Cost of sales(117,437)(121,507)Gross profit 55,20754,811Other operating income22261 Distribution costs(6,747)(6,306)Administrative expenses(33,089)(34,722)Operating profit before amortisation of acquired intangibles and exceptional items 15,393 14,044Amortisation of acquired intangibles(503)(434)Exceptional items4566(3,405)Operating profit15,45610,205Finance income6151353Finance costs7(3,408)(4,796)Profit before tax12,1995,762Tax8(2,980)(1,694)Profit for the year9,2194,068Other comprehensive income which may be reclassified to profit or lossForeign exchange translation differences(1,949)(2,002)Reclassification of translation reserve on disposal-202Cash flow hedge: losses arising during the year(46)(120)Cash flow hedge: reclassification adjustment for gain included in profit 3631,256(1,632)(664)Total comprehensive income for the year7,5873,404Profit for the year attributable to:Owners of the parent8,9093,656Non-controlling interests3104129,2194,068Total comprehensive income for the year attributable to:Owners of the parent7,2832,969Non-controlling interests3044357,5873,404Earnings per shareBasic945.2c18.6cDiluted945.2c18.6c* Restated to reflect the reclassification of certain exceptional items and to reflect a deferred tax liability on the difference between the carrying amount of the goodwill and the tax base of goodwill in accordance with IAS 12, as set out in note 1.737366865 QUARTO R+A TEXT 37 Front 2015/04/09 12:48:21 76CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2014 Notes2014$0002013Restated* $0002012Restated* $000Non-current assetsGoodwill 1041,06941,36741,501Other intangible assets119569911,422Property, plant and equipment122,7313,75210,041Intangible assets: Pre-publication costs1457,53456,22153,539Deferred tax assets 201263334Total non-current assets102,416102,364106,537Current assetsInventories1523,34719,18122,843Trade and other receivables1654,61656,04357,504Cash and cash equivalents1723,11023,87926,718Total current assets101,07399,103107,065Total assets203,489201,467213,602Current liabilitiesShort term borrowing22(89,150)(16,603)(16,822)Derivative financial instruments19(67)(427)(49)Trade and other payables23(53,272)(52,784)(49,251)Tax payable(2,430)(671)(880)Total current liabilities(144,919)(70,485)(67,002)Non-current liabilitiesMedium and long term borrowings18–(78,291)(90,874)Deferred tax liabilities20(6,338)(5,844)(5,915)Derivative financial instruments19––(1,453)Other payables(537)–(49)Total non-current liabilities(6,875)(84,135)(98,291)Total liabilities(151,794)(154,620)(165,293)Net assets51,69546,84748,309EquityShare capital242,0452,0452,045Paid in surplus33,76433,76433,759Retained profit and other reserves10,9456,2295,558Equity attributable to owners of the parent46,75442,03841,362Non-controlling interests4,9414,8096,947Total equity51,69546,84748,309The financial statements were approved by the Board of Directors and authorised for issue on March 20, 2015. They were signed on its behalf by: M. J. Mousley, Director* Restated as set out in note 1.747466865 QUARTO R+A TEXT 37 Back 2015/04/09 12:48:21 77Share capital (Note 24)$000 Paid in surplus$000 Hedging reserve (Note 25)$000 Translation reserve (Note 25)$000 Treasury shares (Note 25)$000 Retained earnings$000 Equity attributable to owners the parent$000 Non controlling interests$000 Total$000Balance at January 1, 2013 as previously reported2,045 33,759 (1,453) (1,858) (643) 12,33344,1836,94751,130Prior year adjustment– – – – – (2,821)(2,821)–(2,821)Balance at January 1, 2013 2,045 33,759 (1,453) (1,858) (643) 9,51241,3626,94748,309Profit for the year – – – – – 3,6563,656412 4,068Other comprehensive incomeForeign exchange translation differences – – – (2,025)– – (2,025)23 (2,002)Reclassification of translation reserve on disposal–––202––202–202Cash flow hedge: losses arising during the year – – (120) – – – (120)– (120)Cash flow hedge Reclassification adjustment for gain included in profit– – 1,256– – – 1,256– 1,256Total comprehensive income for the year – – 1,136(1,823)– 3,6562,969435 3,404Transactions with ownersShare options exercised by employees–5––9–14–14Dividends to shareholders ( Note 25) – – – – – (2,427)(2,427)– (2,427)Dividends paid to non-controlling interests– – – – – – – (168)(168)Purchase of non-controllinginterests–––––120120(2,405)(2,285)Balance at December 31, 2013 and January 1, 20142,045 33,764 (317)(3,681)(634)10,86142,0384,80946,847Profit for the year –––––8,9098,9093109,219Other comprehensive incomeForeign exchange translation differences –––(1,943)––(1,943)(6)(1,949)Cash flow hedge: losses arising during the year––(46)–––(46)–(46)Cash flow hedge Reclassification adjustment for gain included in profit––363–––363–363Total comprehensive income for the year –– 317(1,943) – 8,9097,283 304 7,587 Transactions with ownersDividends to shareholders ( Note 25) –––––(2,567)(2,567)–(2,567)Dividends paid to non-controlling interests –––––––(172)(172)Balance at December 31, 2014 2,04533,764–(5,624)(634)17,20346,7544,94151,695CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED DECEMBER 31, 2014757566865 QUARTO R+A TEXT 38 Front 2015/04/09 12:48:21 78CONSOLIDATED CASH FLOW STATEMENTYEAR ENDED DECEMBER 31, 20142014$0002013Restated $000Profit for the year9,2194,068Adjustments for:Net finance costs 3,2574,443Depreciation of property, plant and equipment 1,1061,374Tax expense2,9801,694Amortisation of acquired intangible assets 503434Amortisation of and amount written off pre-publication costs 30,93330,099Movement in fair value of derivatives (43)61Loss on disposal of subsidiaries and businesses–1,801(Gain)/loss on disposal of property, plant and equipment(642)1,367Operating cash flows before movements in working capital47,31345,341(Increase)/decrease in inventories(4,529)2,329Decrease/(increase) in receivables5(1,858)Increase in payables2,5512,102Cash generated by operations45,34047,914Income taxes paid(759)(2,087)Net cash from operating activities44,58145,827Investing activitiesInterest received151353Proceeds on disposal of subsidiaries and businesses–1,057Proceeds on disposal of property, plant and equipment1,8484,861Investment in pre-publication costs(33,525)(31,668)Purchases of property, plant and equipment(1,341)(1,998)Acquisition of subsidiaries(2,008)–Net cash used in investing activities(34,875)(27,395)Financing activitiesDividends paid(2,567)(2,427)Interest payments(3,461)(4,886)Proceeds on issue of share capital–14External debt repaid (3,555)(13,184)Dividends paid to non-controlling interest(172)(168)Net cash used in financing activities(9,755)(20,651)Net decrease in cash and cash equivalents(49)(2,219)Cash and cash equivalents at beginning of year23,87926,718Foreign currency exchange differences on cash and cash equivalents(720)(620)Cash and cash equivalents at end of year (Note 17) 23,11023,879767666865 QUARTO R+A TEXT 38 Back 2015/04/09 12:48:21 79The Quarto Group, Inc. is a company incorporated in the State of Delaware, United States. The address of the registered office is given on page 118. The nature of the group’s operations and its principal activities are set out in Note 3 and in the Chief Executive Officer's Statement on page 12.The accounting policies adopted, are consistent with those of the annual financial statements for the year ended December 31, 2013, as described in those financial statements.Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The presentational currency of the Group is US dollars.Certain directly attributable costs in relation to capitalised pre-publication costs had historically been presented on a net basis as opposed to showing the gross investment and subsequent amortisation separately. Additions and amortisation for the year ended December 31, 2013 have been restated to reflect this change in presentation and have increased by $12,200,000 to $31,668,000 and $30,099,000 and for the year ended December 31, 2012 have increased by $12,300,000 to $30,528,000 and $30,749,000 respectively. In addition, a reclassification in the income statement from administration expenses to cost of sales was required to reflect a gross presentation. This resulted in gross profit being reduced by $9,700,000 to $54,811,000 and administrative overheads being reduced by the same amount to $34,722,000. We have reclassified pre-publication costs in the Balance Sheet from current to non-current in the period reflecting our longer term view of the life of the assets.RESTATEMENT OF PRIOR YEARThe following tables show the restated prior year comparative figures for the financial year ended December 31, 2013. This restatement reflects the reclassification of certain exceptional items and a deferred tax liability on the difference between the carrying amount of the goodwill and the tax base of goodwill in accordance with IAS 12. The Group has also reclassified pre-publication costs from current assets to non-current assets to align the Group's expectation that these assets will be recovered over a longer duration.NOTES TO THE ACCOUNTSGENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES1Reported$000Exceptional Items$000Deferred Tax$000Restated $000Operating profit before amortisation of acquired intangibles and exceptional items15,957(1,913)–14,044Amortisation of acquired intangibles (434)––(434)Exceptional Items(5,318)1,913–(3,405)Operating Profit10,205––10,205Interest(4,443)––(4,443)Profit before tax5,762––5,762Tax(1,416)–(278)(1,694)Profit after tax4,346–(278)4,068CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2013777766865 QUARTO R+A TEXT 39 Front 2015/04/09 12:48:21 80STATEMENT OF COMPLIANCEThe Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The parent company financial statements present information about the Company as a separate entity and not about its group.The Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRS’). The Company has elected to prepare its parent company financial statements in accordance with UK GAAP; these are presented on pages 112 to 116.No new accounting standards have had a material impact on these financial statements.BASIS OF ACCOUNTINGThe financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value.The preparation of financial statements in conformity with IFRS requires management to make judgements, 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. Judgements made by Management in the application of IFRS that have a significant effect on the financial statements and accounting estimates are discussed in: Note 10: Key assumptions in making the assessment of carrying value of goodwillNote 14: Presentation of pre-publication costs and the assessment of their useful lifeNote 16: Assessment of the impairment of trade receivables and the estimated allowance for sales returnsNote 20: Calculation of temporary differences in the assessment of deferred tax liabilities There are no judgements, apart from those involving estimations, that management has made in applying the Group’s accounting policies. The accounting policies set out below have been applied to all periods presented.GOING CONCERN BASISAfter making enquiries, the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.2013 Reported$0002013 Deferred Tax$0002013 Restated $0002012 Reported$0002012 Deferred Tax$0002012 Restated $000Deferred tax asset2,226(2,193)332,534(2,500)34Deferred tax liability(4,938)(906)(5,844)(5,594)(321)(5,915)Net deferred tax liability(2,712)(3,099)(5,811)(3,060)(2,821)(5,881)BALANCE SHEET AT DECEMBER 31 2013 AND 2012The impact of the restatement on the line items affected in the balance sheet are set out below:The restated items have impacted equity by $(3,099,000) at December 31, 2013 and the impact on retained earnings as at January 1, 2013 was $(2,821,000)787866865 QUARTO R+A TEXT 39 Back 2015/04/09 12:48:21 81The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive Officer’s Statement on pages 12 to 23. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 36 to 38 and in Note 18 to the financial statements.The Group has considerable financial resources together with a number of customers and suppliers across different geographies. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current economic outlook.The Group has significant banking facilities. In particular, the Group has committed facilities comprising a US$95m multi-currency revolving credit and term loan facility, with a tenor through to April 30, 2019. The Group has prepared detailed profit and cash flow budgets until June 30, 2016 which show that the Group is budgeted to have headroom within that period. The budgets have been subject to various sensitivity analyses. The Group complied with its bank covenants in 2014 and the budgets show sufficient headroom on the covenants throughout the period covered by the budgets. The covenants will be monitored closely by the Board and appropriate action would be taken if any of the covenants became under pressure.BASIS OF CONSOLIDATIONThe 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 intra-group transactions are eliminated in preparing the consolidated financial statements.The interest of non-controlling interests on an acquisition is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILLAll business combinations are accounted for by applying the acquisition method. Goodwill represents the excess of the consideration transferred over the fair value of the net assets and any contingent liabilities acquired. Acquisition costs are expensed as incurred.Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment. Prior to January 1, 1998, goodwill was written off to reserves in the year of acquisition.Other intangible assets, such as backlists, that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.Amortisation of intangible assets is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The amortisation period for non-contractual relationships is 2.5 years and for backlists is between 4 and 10 years.COMMERCIAL INCOMEIn the ordinary course of business, the Group receives volume rebates from its printers. This is accounted for in accordance with contractual terms and is credited to cost of sales.IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS INCLUDING GOODWILLThe 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. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow valuation. 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 profit or loss.797966865 QUARTO R+A TEXT 40 Front 2015/04/09 12:48:21 82REVENUE RECOGNITIONRevenue comprises the fair value of the consideration received or receivable for the sale of goods and services, net of sales taxes, rebates and discounts, and after eliminating sales within the Group. For each of the Group’s operating segments, revenues are recognised on the despatch of goods and when the significant risks and rewards of ownership have been passed to the buyer. The following specific criteria also apply:• The Group’s publishing revenues are stated net of an estimated allowance for sales returns, which is based on a review of the historical return patterns associated with the various sales outlets, as well as current market trends in the business in which the Group operates.• Revenue from e-books is recognised when the content is delivered.LEASINGWhere assets are acquired under finance leases (including hire purchase contracts), which confer risks and rewards similar to those attached to owned assets, the amount representing the outright purchase price of such assets is included in property, plant and equipment. All other leases are classified as operating leases. Depreciation is provided in accordance with the accounting policy below. The capital element of future finance lease payments is included in liabilities 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.FOREIGN CURRENCIESTransactions 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.The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into US Dollars at average annual exchange rates. Foreign exchange differences arising on retranslation are charged or credited to other comprehensive income and are recognised in the currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognised in equity are reclassified to profit or loss and are recognised as part of the gain or loss on disposal.EXCEPTIONAL ITEMSExceptional items are significant non-trading items that, in management’s judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.RETIREMENT BENEFIT COSTSThe Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.TAXATIONTax 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 substantively 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. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or a liability unless the related transaction is a business combination or effects tax or accounting profit. Not all temporary differences give rise to deferred tax assets/liabilities. 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. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income or equity, in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity, respectively.808066865 QUARTO R+A TEXT 40 Back 2015/04/09 12:48:21 83PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment are stated at deemed 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 profit or loss 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, which are reviewed annually. Where parts of an item of plant and equipment have separate lives, they are accounted for and depreciated as separate items. Residual values are reassessed on an annual basis. Land is not depreciated.Estimated useful lives are as follows:Freehold property and long leasehold property improvements – 50 yearsShort leasehold property improvements – over the period of the leasePlant, equipment and motor vehicles – 4 to 10 yearsFixtures and fittings – 5 to 7 yearsAssets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.PRE-PUBLICATION COSTSPre-publication costs represent directly attributable costs incurred in the development of book titles prior to their publication. These costs are carried forward in current intangible assets where the book title will generate future economic benefits and costs can be measured reliably. These costs are amortized upon publication of the book title over estimated economic lives of 3 years or less, being an estimate of the expected useful economic life of a book title. The investment in prepublication has been disclosed as part of the investing activities in the cash flow statement.INVENTORIESInventory is valued at the lower of cost, including an appropriate portion of overheads, and net realisable value, on a first in, first out basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.FINANCIAL INSTRUMENTSFinancial assets and financial liabilities are recognised on the Group’s balance sheet when the group becomes a party to the contractual provisions of the instrument.FINANCIAL ASSETSFinancial assets other than hedging instruments are divided into the following categories:• loans and receivables• financial assets at fair value through profit or lossFinancial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expenses is recognised in profit or loss or directly in equity. See Note 33 for a summary of the Group’s financial assets by category.Generally, the Group recognises all financial assets using trade date accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income and expense relating to financial assets are recognised in the income statement line item ‘finance costs’ or ‘finance income’, respectively, with the exception of trade and other receivables which are recorded in revenue and administrative expenses.Loans and receivables, including trade receivables, are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, at fair value, these are measured at amortized cost using the effective interest method, less provision for impairment. Any change in their value is recognised in profit or loss. The Group’s trade and most other receivables fall into this category of financial instruments. Discounting, however, is omitted where the effect of discounting is immaterial.818166865 QUARTO R+A TEXT 41 Front 2015/04/09 12:48:22 84Significant receivables are considered for impairment on a case-by-case basis when they are past due at the balance sheet date or when objective evidence is received that a specific counterparty will default. All other receivables are reviewed for impairment in groups, which are determined by reference to the industry and region of a counterparty and other available features of shared credit risk characteristics, if any. The percentage of the write down is then based on recent historical counterparty default rates for each identified group.Derivative financial instruments are initially recognised at fair value, and subsequently classified as financial assets at fair value through profit and loss. Any gain or loss arising from derivative financial instruments is based on changes in fair value, which is determined by direct reference to active market transactions or using a valuation technique where no active market exists.FINANCIAL LIABILITIESThe Group’s financial liabilities include borrowings, trade and other payables (including finance lease liabilities). After initial recognition at fair value, all financial liabilities, with the exception of derivative financial instruments, are measured at amortized cost using the effective interest rate method. A summary of the Group’s financial liabilities by category is given in Note 33.All of the Group’s derivative financial instruments that are not designated as hedging instruments in accordance with the strict conditions explained under the heading ‘Derivative financial instruments and hedge accounting’, are accounted for at fair value through profit or loss by definition.FINANCIAL LIABILITIES AND EQUITY INSTRUMENTSFinancial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of Financial Liabilities and equity.FINANCE COSTSFinance costs comprise interest payable on borrowings calculated using the effective interest method.FINANCE INCOMEFinance income comprises interest receivable, which is recognised in profit or loss as it accrues using the effective interest method.CASH AND CASH EQUIVALENTSFor 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.DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTINGThe Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses interest rate swap contracts to hedge these exposures. The Group does not use derivative financial instruments for speculative purposes.The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on the use of financial derivatives.Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in other comprehensive income. If the cash flow of a firm commitment or forecast transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in initial recognition of that asset or liability. Amounts previously recognised in other comprehensive income are recognised in the profits or loss in the same period in which the hedged item affects net profit or loss. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in profit or loss as they arise.828266865 QUARTO R+A TEXT 41 Back 2015/04/09 12:48:22 85The Group’s derivatives are split between level 1 and level 2 financial instruments under IFRS 7. The foreign currency exchange rate derivatives are level 1 and they are valued based on a quoted price in an active market. The interest rate swaps are level 2 financial instruments and they are valued using techniques based significantly on observable market data such as yield curves as at the balance sheet date.Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in other comprehensive income until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred to net profit or loss for the period.TREASURY SHARESTreasury shares represent holdings of the Company’s own equity instruments. No gain or loss is recognised in profit or loss on the purchase, issue or cancellation of these equity instruments. Consideration paid or received is recognised directly in other comprehensive income.SHARE-BASED PAYMENTSThe Group issues equity settled share-based payments to certain employees. Equity settled share-based payments are measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share–based payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest.The fair value of employee share option grants is calculated using a binomial model, taking into account the terms and conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual levels of options vesting. No significant balances arise, therefore the disclosure requirements of IFRS 2 have not been shown, due to the immaterial number of options in issue and amounts involved.BORROWING COSTSAll borrowing costs are recognised in the income statement in the period in which they are incurred.The Group does not incur any borrowing costs which are directly attributable to the acquisition, construction or production of qualifying assets.FINANCIAL RISK MANAGEMENTThe principal risk factors faced by the Group are disclosed in Note 33 and on page 12. NEW STANDARDS AND INTERPRETATIONS NOT APPLIEDThe International Accounting Standards Board and the International Reporting Interpretations Committee (IFRIC) have issued the following standards and interpretations for annual periods beginning on or after the effective dates noted below.838366865 QUARTO R+A TEXT 42 Front 2015/04/09 12:48:22 86IAS/IFRS STANDARDS Effective for accounting periods starting on or afterAmendments to IAS 1 (Dec 15)Disclosure initiative1 January 2016Amendments to IAS 16 and IAS 38 (May 2014)Clarification of Acceptable Methods of Depreciation and Amortisation1 January 2016Amendments to IFRS 11 (May 2014)Accounting for Acquisitions of Interests In Joint Operations1 January 2016IFRS 15Revenue from Contracts with Customers1 January 2017IFRS 9 Financial Instruments1 January 2018The Directors do not consider that the adoption of these standards will have a material impact on the Group’s accounts in the period of initial application.An analysis of the Group’s revenue is as follows:2014$0002013$000Sales of goods172,644176,318Revenue172,644176,318Other operating income22261Finance income151353Total income172,817176,932REVENUE2848466865 QUARTO R+A TEXT 42 Back 2015/04/09 12:48:22 87The analysis by segment is presented below. This is based upon the operating results reviewed by the Chief Executive Officer. Year ended December 31, 2014Quarto Publishing Group USA$000 Quarto Publishing Group UK $000Quarto International Co-Editions Group $000Books & Gifts Direct, ANZ $000Quarto HK$000Total$000External revenue64,05821,47742,67631,17013,263172,644Operating profit before amortisation of acquired intangibles and exceptional items6,6363,0996,0632,9671,11219,877Amortisation of acquired intangibles(346)(93)(3)(61)-(503)Segment result6,290 3,0066,0602,9061,11219,374Unallocated corporate expenses(4,484)**Acquisition costs(78)Gain on sale of property644Investment income151Finance costs(3,408)Profit before tax12,199Tax(2,980)Profit after tax9,219Capital expenditure23343282770131,341Depreciation276205333269231,106Investment in pre-publication costs14,7874,16514,573--33,525Amortisation of pre-publication costs11,9613,82115,151--30,933OPERATING SEGMENTS3858566865 QUARTO R+A TEXT 43 Front 2015/04/09 12:48:22 88OPERATING SEGMENTS (CONTINUED)3Year ended December 31, 2013 (Restated) Quarto Publishing Group USA$000 Quarto Publishing Group UK $000Quarto International Co-Editions Group $000Books & Gifts Direct, ANZ $000Quarto HK$000Total$000External revenue64,39220,81940,43029,45521,222176,318Operating profit before amortisation of acquired intangibles and exceptional items7,1732,5464,5402,9181,39818,575Amortisation of acquired intangibles(346)(88) ---(434)Segment result6,8272,4584,5402,9181,39818,141Unallocated corporate expenses(4,531) **Costs arising from Special Meetings (73)Loss on disposal of assets and businesses(3,332)Investment income353Finance costs(4,796)Profit before tax5,762Tax(1,694)Profit after tax4,068Capital expenditure1652401,446100471,998Depreciation3231973072373101,374Investment in pre-publication costs13,3634,82913,476--31,668Amortisation of and amount written off pre-publication costs 12,868 3,660 13,774 - - 30,302There are no other significant non-cash expenses.* Restated as set out in note 1.** Unallocated corporate expenses principally comprise salary, professional fees and other expenses which cannot be directly allocated to one of the segments.868666865 QUARTO R+A TEXT 43 Back 2015/04/09 12:48:22 89Balance sheet Total assets2014$0002013Restated$000Quarto Publishing Group USA 84,60783,979Quarto Publishing Group UK20,41422,684Quarto International Co-Editions Group46,48646,624Books & Gifts Direct, ANZ21,61417,050Quarto HK7,1327,218Unallocated (Deferred tax and cash) 23,23623,912Total assets203,489201,467Total liabilitiesQuarto Publishing Group USA16,48815,060Quarto Publishing Group UK5,8696,640Quarto International Co-Editions Group19,70120,609Books & Gifts Direct, ANZ 8,3136,617Quarto HK3,4383,858Unallocated (Borrowings, derivatives, deferred tax and tax payable) 97,985101,836Total liabilities151,794154,620Geographical areasThe Group operates in the following main geographic areas:Revenues are allocated based on the country in which the customer is located, irrespective of the origin of the goods. Non-current assets are based on the subsidiaries country of domicile and comprise goodwill, other intangible assets, property, plant and equipment and pre-publication costs.Revenues 2014$000Revenues 2013$000Non-current assets 2014$000RestatedNon-current assets 2013$000United States of America 79,53783,93653,55950,684Australasia and Far East37,62734,6588,5909,075United Kingdom24,66529,46538,00538,671Europe22,70320,3532,1363,901Rest of the World8,1127,906––172,644176,318102,290102,331OPERATING SEGMENTS (CONTINUED)3878766865 QUARTO R+A TEXT 44 Front 2015/04/09 12:48:22 90OPERATING PROFIT4Operating profit has been arrived at after charging/(crediting): 2014$0002013Restated$000Loss/(profit) on sale of property, plant and equipment (642)1,367Depreciation of property, plant and equipment 1,1061,374Net foreign currency exchange differences (243)(208)Amortisation of acquired intangibles503434Amortisation of and amount written off pre-publication costs30,93330,302Staff costs (Note 5) 30,72530,762Auditor’s remuneration (see below) 224384Cost of inventory recognised as an expense37,54135,104Exceptional items(566)3,405 2014Number2013NumberThe average monthly number of employees (including Executive Directors) was: 402 436Their aggregate remuneration comprised:$000$000Wages and salaries 27,43127,724Social security costs2,2262,184Other pension costs 1,06885430,72530,762Auditor’s remuneration Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 59 54Fees payable to the Company’s auditor and its associates for other services: The audit of the Company’s subsidiaries pursuant to legislation 165 328Fees payable to the Company’s auditor for other assurance services–2224 384Exceptional items comprise the net (profit) loss on sales of businesses and assets of $(644,000) (2013: $3,332,000), and expenses relating to acquisitions (2013: Special Meetings) of $78,000 (2013: $73,000).Directors’ remuneration is disclosed in the Remuneration Committee Report on page 23.STAFF COSTS5888866865 QUARTO R+A TEXT 44 Back 2015/04/09 12:48:22 91 2014$0002013 Restated$000Current tax on profit for the year 2,4131,892Total current tax2,4131,892Deferred tax (Note 20)Current year origination and reversal of temporary differences567(198)2,9801,694 2014$0002013$000Interest expense for borrowings at amortized cost 3,4084,794Interest expense for finance lease arrangements –2Total finance costs3,4084,796FINANCE COSTS7TAX8Corporation tax on UK profits is calculated at 21.50%, based on the UK standard rate of corporation tax, (2013: 23.25%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The table below explains the difference between the expected expense at the UK statutory rate of 21.5% and the Group's total tax expense for the year. 2014$0002013$000Interest income on financial assets carried at amortized cost151353 2014$0002014%2013$0002013%Profit before tax 12,1995,762Tax at the UK corporation tax rate of 21.5% (2013: 23.25%)2,6231,340Effect of different tax rates of subsidiaries operating in other jurisdictions 426(131)Adjustment to prior years(480)–Other, including tax effect of expenses that are not deductible in determining taxable profit411485Tax expense and effective tax rate for the year2,98024.4%1,69429.4%FINANCE INCOME6898966865 QUARTO R+A TEXT 45 Front 2015/04/09 12:48:22 92EARNINGS PER SHARE9RestatedEarnings2014$0002013$000Earnings for the purposes of basic earnings per share being net profit attributable to owners of the parent 8,9093,656Number of sharesNumberNumberWeighted average number of ordinary shares for the purposesof basic earnings per share 19,696,72919,694,658Effect of potential dilutive ordinary shares:Share options –942Weighted average number of ordinary shares for the purposes of diluted earnings per share 19,696,729 19,695,600Earnings per share 2014CentsRestated 2013 CentsBasic 45.218.6Diluted45.218.6Adjusted earnings $000$000Earnings for the purposes of basic earnings per share being net profit attributable to owners of the parent:8,9093,656Amortisation of acquired intangibles (net of tax) 350297Exceptional items (net of tax) (427)3,472Earnings for the purposes of adjusted earnings per share8,8327,425Adjusted earnings per share 2014CentsRestated 2013CentsBasic 44.837.7Diluted44.837.7From continuing operations The calculation of the basic and diluted earnings per share is based on the following data:909066865 QUARTO R+A TEXT 45 Back 2015/04/09 12:48:22 932014$0002013$0002012$000CostAt January 1 41,74441,86941,250Exchange differences(971)(125)619Recognised on acquisitions (Note 34)650––At December 3141,42341,74441,869Accumulated impairment lossesAt January 1(377)(368)(352)Exchange differences23(9)(16)At December 31(354)(377)(368)Carrying amountAt December 3141,06941,36741,5012014$0002013$0002012$000Quarto Publishing Group USA (QUS)26,87826,87826,878Quarto Publishing Group UK (QUK)2,2932,4402,381Quarto International Co-Editions Group (QIC)5,1714,9874,931Books & Gifts Direct, ANZ (BGD)6,7277,0627,31141,06941,36741,501Impairment tests for cash generating units containing goodwillThe following units have significant carrying amounts of goodwill:The recoverable amount of each cash generating unit (‘CGU’) is based on the value in use basis. In determining value in use, management prepare a detailed bottom up budget, with reviews conducted at each business unit. Cash flows beyond the budget period of twelve months are extrapolated into perpetuity, by applying the growth and rates applicable to each unit discounted to present value. The key assumptions used in the value in use calculations were:Discount rate: 11.8% pre-tax for QUS, 11.6% for QUK and QIC and 12.3% for BGD which reflects current assessments of the time value of money. The discount rate has been calculated using Weighted Average Cost of Capital analysis adjusted to derive the pre-tax discount rate.Cash flow growth rates: based on a forecast growth rate of 3%, into perpetuity, to reflect the long term expected growth in each of the key markets. Changes in selling prices and direct costs: based on past experience and expectations of future changes in the market. Determining whether goodwill, specific to the US, is impaired requires an estimation of the value of use of each CGU based on the key assumptions above. Neither a 1% decrease in the long term growth rate or a 2% increase in the discount rate would have led to an impairment.GOODWILL10919166865 QUARTO R+A TEXT 46 Front 2015/04/09 12:48:22 94Non-contractual relationships$000 Backlists$000Total$000CostAt January 1, 20131,12118,08219,203Exchange differences63945At December 31, 2013 and January 1, 20141,12718,12119,248Exchange differences(47)(131)(178)Recognised on acquisitions (Note 34)–503503At December 31, 20141,080 18,493 19,573 Amortisation and impairmentAt January 1, 20131,12116,66017,781Exchange differences 63642Charge for the year –434434At December 31, 2013 and January 1, 20141,12717,13018,257Exchange differences(47)(96)(143)Charge for the year –503503At December 31, 20141,08017,53718,617Carrying amountAt December 31, 2014–956 956 At December 31, 2013–991991At December 31, 2012–1,4221,422OTHER INTANGIBLE ASSETS11929266865 QUARTO R+A TEXT 46 Back 2015/04/09 12:48:22 95Freehold Property$000Leasehold Property Improvements$000Planet Equipment & Motor Vehicles$000Fixtures & Fittings$000Total$000Cost At January 1, 20137,7901,3058,2431,74119,079Exchange difference(206)59(255)7(395)Additions 8604022574791,998Disposals (7,073)(513) (1,234)(28)(8,848)Disposal of subsidiaries--(2,550)(710)(3,260)At December 31, 2013 and January 1, 20141,3711,2534,4611,4898,574Subsidiaries acquired––27230302Exchange difference(9)(38)(234)(17)(298)Additions1261,1841391,341Disposals(1,374)(364)(990)(630)(3,358)At December 31, 2014– 857 4,693 1,011 6,561 DepreciationAt January 1, 20131,0498766,0191,0949,038Exchange differences(29)(5)(179)(18)(231)Charge for the year832568232121,374Disposals(934)(471)(1,192)(23)(2,620)Disposal of subsidiaries--(2,109)(630)(2,739)At December 31, 2013 and January 1, 20141696563,3626354,822Subsidiaries acquired––16627193Exchange differences(1)(22)(109)(7)(139)Charge for the year–2284554231,106Disposals(168)(364)(990)(630)(2,152)At December 31, 2014 –498 2,884 448 3,830 Net book valueAt December 31, 2014-3591,8095632,731At December 31, 20131,2025971,0998543,752At December 31, 20126,7414292,22464710,041The net book value of plant, equipment and motor vehicles included $nil (2013: $7,000) in respect of assets held under hire purchase contracts. The depreciation charged on these assets during the year was $3,000 (2013: $3,000).PROPERTY, PLANT AND EQUIPMENT12939366865 QUARTO R+A TEXT 47 Front 2015/04/09 12:48:22 96SUBSIDIARIES13INTANGIBLE ASSETS – PRE-PUBLICATION COSTS14A list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is given in Note 4 to the Company’s balance sheet. All of these subsidiaries are included in the consolidated results.The assessment of the useful life of pre-publication costs and amortisation involves a significant amount of judgement based on historical trends and management estimates of future potential sales, in accordance with the accounting policy stated in Note 1.An overstatement of useful lives could result in excess amounts being carried forward in intangible assets that otherwise would have been written off to the income statement in an earlier period. Reviews are performed regularly to assess the recoverability of the carrying amount. 2014$000Restated 2013$000Restated 2012$000CostAt January 1 102,70188,51076,267Exchange differences(2,774)8581,808Transfer from inventories660691–Acquired on acquisition of subsidiaries 102––Additions33,52531,66830,528Disposals(17,137)(19,026)(20,093)At December 31117,077102,70188,510AmortisationAt January 146,48034,97123,830Exchange differences(733)233485Charge for the year 30,93330,09930,749Amount written off–203–Disposals (17,137)(19,026)(20,093)At December 3159,54346,48034,971Carrying amount57,53456,22153,539949466865 QUARTO R+A TEXT 47 Back 2015/04/09 12:48:22 972014$0002013$0002012$000Finished goods22,23118,11720,676Work in progress 9049461,944Raw materials 21211822323,34719,18122,843All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be impaired and a provision of $1,696,000 (2013: $2,117,000) has been recorded accordingly.2014$0002013$0002012$000Trade receivables43,10146,30547,175Other receivables and prepayments 11,5159,73810,329Amounts falling due within one year 54,61656,04357,504The average credit period on sales of goods is 73 days (2013: 80 days).All of the Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables, including certain trade receivables not yet due, were found to be impaired and a provision of $1,509,000 (2013: $1,185,000) has been recorded accordingly. The impaired trade receivables are customers which are experiencing trading difficulties. In addition, some of the unimpaired trade receivables are past due as at the reporting date. The extent of financial assets past due but not impaired is as follows:2014$0002013$0002012$000Less than one month3,0183,3103,801More than one month but less than two months 7831,3651,281More than two months but less than three months 342385294More than three months but less than six months823300374More than six months4441721735,4105,5325,923The Group has not provided against these receivables as there has not been a significant change in credit quality and the Group believes they are still recoverable. No collateral is held over these balances.INVENTORIES15TRADE AND OTHER RECEIVABLES16959566865 QUARTO R+A TEXT 48 Front 2015/04/09 12:48:22 98TRADE AND OTHER RECEIVABLES (CONTINUED)16CASH AND CASH EQUIVALENTS172014$0002013$0002012$000Bank balances 13,37515,14518,035Short term deposits 9,7358,7348,683Cash and cash equivalents23,11023,87926,718The carrying amount of these assets approximates their fair value.The effective interest rates on bank balances and short term deposits was 0.6% (2013: 0.7%).Movement in allowance for doubtful debts:2014$0002013$0002012$000Balance at beginning of year1,1859571,617Amounts written off in the year (434)(607)(1,068)Amounts recovered during the year 33726810Exchange difference(16)2(6)Increase in allowance recognised in profit or loss437565404Balance at end of the year1,509 1,185957The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. Trade receivables are disclosed after deducting a reserve for sales returns. The reserve is calculated based on a time lag between sales and returns and historical return patterns.969666865 QUARTO R+A TEXT 48 Back 2015/04/09 12:48:22 992014$0002013$0002012$000Bank loans–78,28790,867Obligations under finance leases (see Note 21) –47–78,29190,874The borrowings (excluding obligations under finance leases) are repayable as follows:On demand or within one year 89,15016,60016,819In the second year–78,28716,600In the third to fifth years inclusive––74,26789,15094,887107,686Less: Amount due for settlement within 12 months(shown under current liabilities)(89,150) (16,600) (16,819)Amount due for settlement after 12 months–78,28790,867TotalFixed rate borrowingsVariable rate borrowingsWeighted average interest rate for fixed rate borrowings %Average time over which interest rate is fixed Months$000$000$000$000$000US dollar borrowings 60,000–60,000––Other currency borrowings29,150–29,150––As at December 31, 2014 89,150 – 89,150 – – US dollar borrowings 62,63544,00018,6353.8%11Other currency borrowings32,252–32,252––As at December 31, 201394,88744,00050,8873.8%11US dollar borrowings 71,68649,000 22,6865.6%17Other currency borrowings36,000–36,000––As at December 31, 2012107,68649,00058,6865.6%17The variable rate borrowings bear interest by reference to LIBOR plus a margin.At December 31, 2014, undrawn borrowing facilities totalled $5,480,000 (2013: $16,138,000).The Directors estimate the fair value of the Group’s borrowings to be equal to book value, by reference to market rates.The above borrowings carry interest at commercial rates ranging from 2.8% to 3.3%.At December 31, 2014, the Group had a US$95m (2013: US$95m) syndicated bank facility which is due to expire on April 30, 2015. The Group signed a new syndicated bank facility on February 6, 2015, which matures on April 30, 2019.MEDIUM AND LONG TERM LOANS18979766865 QUARTO R+A TEXT 49 Front 2015/04/09 12:48:22 100MEDIUM AND LONG TERM LOANS (CONTINUED)18OTHER FINANCIAL ASSETS/LIABILITIES19These facilities are subject to three principal covenants, namely:(a) Total consolidated net indebtedness shall not exceed 3 times EBITDA (as defined in the committed facility agreements). At December 31, 2014, net indebtedness was 1.90 times (2013: 2.02 times) EBITDA.(b) The consolidated operating profit before exceptional items and goodwill amortisation shall exceed three times net interest payable. For the year ended December 31, 2014, net interest payable was 4.73 times (2013: 3.59 times) covered under this covenant.(c) Cash flow shall exceed 1.2 times Debt Service. For the year ended December 31, 2014, Debt Service was 2.97 times (2013: 3.50 times) covered under this covenant.The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses exchange rate swaps to hedge exchange rate exposures and interest rate swap contracts to hedge the interest rate exposures. The Group does not use derivative financial instruments for speculative purposes. All interest rate swaps have been designated as hedging instruments in cash flow hedges in accordance with IAS 39. The Group’s interest rate swaps have been designed to match the corresponding loan terms to maximise the effectiveness of the hedging instrument. There was no ineffectiveness during the year and all movements were recorded in other comprehensive income, with amounts reclassified to finance costs within profit or loss. Exchange rate swaps are not treated as hedging instruments for hedge accounting purposes.The fair value of interest rate swaps is determined by using mark to market values at the balance sheet date, based on quoted prices in active markets.The following table details the principal amounts and the remaining terms of interest rate swap contracts outstanding at the reporting date:2014%2013%2012%2014$0002013$0002012$0002014$0002013$0002012$000Within one year–3.8%6.7%–44,00025,000–(317)(848)Within one to two years––5.1%––24,000––(605)Within two to five years––– %––-–– -Derivative 44,00049,000 –(317)(1,453)2014$0002013$0002012$000Current financial liabilities Derivative financial liabilities – exchange rate swap 6711049Derivative financial instruments – interest rate swaps–317-67 42749In the reporting periods under review, other financial assets/liabilities comprise derivative financial instruments as follows:989866865 QUARTO R+A TEXT 49 Back 2015/04/09 12:48:23 1012014$000Restated 2013$000Restated 2012$000Deferred taxation provided in the financial statements is as follows:Excess of capital allowances over depreciation – UK2513–Other temporary differences – UK 4,4934,7565,1784,5184,769 5,178Other temporary differences – US1,545906321Other overseas temporary differences 2751694166,3385,8445,915Deferred taxation assetsOther temporary differences – Other overseas(126)(33)(34)(126)(33)(34)Net deferred taxation liability6,2125,8115,881The movement on the net provision for deferred taxation is as follows:2014$0002013$0002012$000Net provision at January 1 5,8115,8816,838Disposals/acquisitions 14548–Exchange difference through other comprehensive income (311)80(10)Charge/(credit) to profit or loss567(198)(947)Net provision at December 31 6,2125,8115,881At the balance sheet date, the group has unused tax losses of $8,947,000, which are recognised in deferred tax above (2013: $12,610,000) available for offset against future profits. Included in unrecognised tax losses are losses of $nil (2013: $802,000) that will expire in the following years: Year ending December 312014$0002013$0002016–2372018–1242019 –441–802At the balance sheet date, the aggregative amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax has not been recognised was $22,308,000 (2013: $23,572,000).Amount ProvidedAmount ProvidedDEFERRED TAX20999966865 QUARTO R+A TEXT 50 Front 2015/04/09 12:48:23 1022014$0002013$0002012$000Current loan instalments 89,15016,60016,819Borrowings (Note 18) 89,15016,60016,819Finance lease obligations (Note 21) –3389,15016,60316,822The carrying amount of these liabilities approximates to their fair value.OBLIGATIONS UNDER FINANCE LEASES21SHORT TERM BORROWINGS22TRADE AND OTHER PAYABLES232014$0002013$0002012$000Amounts payable under finance leases:Within one year –45In the second to fifth year inclusive–47–812Less: future finance charges –(1)(2)– 710Less: Amount due for settlement within12 months (Note 22) –(3)(3)Amount due for settlement after 12 months–472014$0002013$0002012$000Trade payables 44,04841,02539,763Other payables 9,22411,7599,48853,27252,78449,251The Directors consider that the carrying amount of trade payables approximates to their fair value.10010066865 QUARTO R+A TEXT 50 Back 2015/04/09 12:48:23 103Authorised: 28,000,000 (2013: 28,000,000) shares of common stock of par value US$0.10 each (‘shares of common stock’) with an aggregate nominal value of US$2,800,000 (2013: US$2,800,000).2014$0002013$0002012$000Equity share capital Allotted, called up and fully paid:Shares of common stock of par value US$0.10 each 20,444,550 (2013: 20,444,550) 2,045 2,045 2,045The Company has one class of common stock which carries no right to fixed income.SHARE CAPITAL24RETAINED EARNINGS AND OTHER RESERVES25 2014$0002013$000Amounts recognised as distributions to equity holders in the period:Interim dividend for the year ended December 31, 2014 of 3.35p/5.53c(2013: 3.35p/5.23c) per share 1,089 1,029Final dividend for the year ended December 31, 2013 of 4.55p/7.51c(2012: 4.55p/7.10c) per share 1,478 1,3982,5672,427Proposed final dividend for the year ended December 31, 2014 of 4.95p/7.72c (2013: 4.55p/7.55c) per share 1,521 1,4881,5211,488The proposed final dividend is subject to approval by shareholders at the Annual Meeting and has not been included as a liability in these financial statements.HEDGING RESERVEThe hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions.TRANSLATION RESERVEThe translation reserve comprises all foreign exchange differences arising from the translation of the closing balance sheets of foreign operations of the Group and the results of foreign operations of the Group since January 1, 2004.TREASURY STOCKTreasury stock represents the Group’s purchase of its own shares. The Group owns 747,821 (2013: 747,821) shares, representing 3.7% (2013: 3.7%) of its shares of common stock.DIVIDENDS10110166865 QUARTO R+A TEXT 51 Front 2015/04/09 12:48:23 104RETAINED EARNINGS AND OTHER RESERVES (CONTINUED)25NOTES TO THE CASH FLOW STATEMENT26POST BALANCE SHEET EVENTS 27The Quarto Group, Inc., as a US incorporated company, is required to collect US dividend withholding taxes on dividend distributions made to its non-US shareholders. The US dividend withholding tax is generally 30% of any dividends paid to Quarto’s non-US shareholders, but this amount can potentially be reduced pursuant to an applicable income tax treaty between the US and the country of residence of the non-US shareholder. For example, under the US/UK income tax treaty, the US dividend withholding tax rate can range from nil (applicable to certain UK resident pension trusts and tax exempt entities) to 15% (applicable to UK resident individual shareholders and certain UK corporate shareholders). For US shareholders, no US dividend withholding tax is generally applicable. It should be noted that certain documentation requirements must be met by all shareholders prior to the payment of any dividends to certify their status as a US or non-US shareholder, and, if a non-US shareholder to claim any applicable benefits under the US/UK or other applicable income tax treaty. Each shareholder should consult their own tax adviser to determine whether and to what extent they may be entitled to claim a reduced amount of US dividend withholding taxes under a US income tax treaty.Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value.On February 6, 2015, the Group concluded its refinancing, signing a US $95 million multi currency facility comprising a US$ 45 million revolving credit facility and US$50m term loan with annual amortisation of US$5 million, on the anniversary of signing, with a tenor through to April 30, 2019. On March 4, 2015, the Group completed the acquisition of Lewes Holdings Limited for a consideration of up to £1.3m plus the assumption of £0.2m of net debt. The initial accounting for the business combination has not been finalised, hence an estimate of the financial effect of the transaction cannot yet be made.10210266865 QUARTO R+A TEXT 51 Back 2015/04/09 12:48:23 1052014$0002013$0002012$000Minimum lease payments under operating leases recognised in income for the year 2,253 2,632 2,683At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:2014$0002013$0002012$000Minimum lease payments under operating leases 2,0552,0982,517In the second to fifth years inclusive5,2883,9944,458After more than five years2,0061,4623439,3497,5547,318Operating lease payments represent rentals payable by the Group, primarily for its office properties. There were capital commitments amounting to $24,000 at the year end for which no provision had been made (2013: $184,000).OPERATING LEASE ARRANGEMENTS AND OTHER FINANCIAL COMMITMENTS28SHARE OPTIONS29REMUNERATION OF KEY MANAGEMENT PERSONNEL30The remuneration of the directors and the executive committee, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report on page 61. 2014$0002013$000Short term employee benefits3,5593,197Compensation for loss of office-170Post-employment benefits2612173,820 3,584Details of the award under the Company's Performance Share Plan are set out in the Directors' report on page 41.10310366865 QUARTO R+A TEXT 52 Front 2015/04/09 12:48:23 106RISK MANAGEMENT OBJECTIVES AND POLICIES33DIRECTORS’ TRANSACTIONS31During the year R. J. Morley maintained a current account with the Group. The debit balance on this account was less than $5,000 throughout the year.RECONCILIATION OF FIGURES INCLUDED IN THE OTHER PARTS OF THE FINANCIAL STATEMENTS32 2014$000Restated 2013$000Adjusted profit before tax (before amortisation of acquired intangibles and non-recurring items)12,1369,601Amortisation of acquired intangibles (503)(434)Exceptional items566(3,405) Profit before tax12,1995,762EBITDA (as defined in the committed facility agreement)Adjusted profit before tax (before amortisation of acquired intangibles and exceptional items)12,1369,601Net interest3,2574,443Depreciation1,1061,374Amortisation of pre-publication costs18,33317,899EBITDA, before exceptional items34,83233,317Net debtMedium and long term borrowings–78,291Short term borrowings89,15016,603Cash and cash equivalents(23,110)(23,879)66,04071,015The Group is exposed to market risk through its use of financial instruments and specifically to currency risk, interest rate risk, credit risk, liquidity risk and certain other price risks, which result from both its operating and investing activities. The Group’s risk management is coordinated at its headquarters, in close co-operation with the board of directors, and focuses on actively securing the Group’s short to medium-term cash flows by minimising the exposure to financial markets.The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Group is exposed and a summary of financial assets and liabilities by category are described opposite:10410466865 QUARTO R+A TEXT 52 Back 2015/04/09 12:48:23 107RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED)33Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows:2014$0002013$000SterlingOtherSterlingOtherFinancial assets1863,725671 2,345Financial liabilities–(8,000)(75)(4,571)Short-term exposure 186(4,275)596(2,226)Financial liabilities –––(6,512)Long-term exposure–––(6,512)At December 31186(4,275)596(8,738)The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial assets and financial liabilities and the US Dollar – Sterling exchange rate.It assumes a +/– 5% change of the Sterling/US-Dollar exchange rate. This percentage has been determined based on the average market volatility in exchange rates in the year ended December 31, 2014. The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each balance sheet date.If Sterling had strengthened against the US Dollar by 5% (2013: 5%) then this would have had the following impact: 2014$0002013$000Profit after tax for the year824Equity(297) (466)If Sterling had weakened against the US Dollar by 5% (2013: 5%) then this would have had the following impact: 2014$0002013$000Profit after tax for the year(7)(22)Equity 298468Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group’s exposure to currency risk.FOREIGN CURRENCY SENSITIVITYExposures to currency exchange rates arise from the Group’s overseas sales and costs, which are primarily denominated in Sterling.10510566865 QUARTO R+A TEXT 53 Front 2015/04/09 12:48:23 108RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED)33INTEREST RATE SENSITIVITYThe Group’s policy is to minimise interest rate cash flow risk exposures on long-term financing, through interest rate swaps. A large part of longer-term borrowings are, therefore, usually at fixed rates.At December 31, 2014, the Group is exposed to changes in market interest rates through its bank borrowings, which are subject to variable interest rates – see Note 18 for further information.The following table illustrates the sensitivity of the profit after tax for the year and equity to a reasonably possible change in interest rates of +/–0.25%, with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on the Group’s financial instruments held at each balance sheet date. All other variables are held constant.The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment.The Group continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. The Group’s policy is to deal only with creditworthy counterparties.A 0.25% increase in interest rates would have the following impact: 2014$0002013$000Profit after tax for the year(67)(65)Equity(67)(21)A 0.25% decrease in interest rates would have had the following impact: 2014$0002013$000Profit after tax for the year6765Equity6721Credit risk analysisThe Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised below: 2014$0002013$000Cash and cash equivalents23,11023,879Trade and other receivables : Current54,61656,04377,72679,92210610666865 QUARTO R+A TEXT 53 Back 2015/04/09 12:48:23 109The Group’s management considers that all the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due.None of the Group’s financial assets are secured by collateral or other credit enhancements.In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds and other short-term financial assets is limited, since the counterparties are reputable banks with high quality external credit ratings.LIQUIDITY RISK ANALYSISThe Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis.The Group maintains cash and marketable securities to meet its liquidity requirements. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities.As at December 31, 2014, the Group’s liabilities have contractual maturities which are summarised below:December 31, 2014Current within 6 months 6 to 12 monthsNon-Current 1 to 5 years Over 5 years$000$000$000$000Bank loans 90,251–––Trade payables 44,048–––Other short term financial liabilities9,224– ––At December 31143,523– ––This compares to the maturity of the Group’s financial liabilities in the previous reporting period as follows:December 31, 2013Current within 6 months 6 to 12 monthsNon-Current 1 to 5 years Over 5 years$000$000$000$000Bank loans –17,24982,475–Finance lease obligations224-Trade payables 41,025–––Other short term financial liabilities11,759– ––At December 3152,78617,25182,479–RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED)3310710766865 QUARTO R+A TEXT 54 Front 2015/04/09 12:48:23 110RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED)33SUMMARY OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORYThe carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting periods under review may also be categorised as follows. See Note 1, significant accounting policies, covering financial assets, financial liabilities and derivative financial instruments and hedge accounting for explanations about how the category of instruments affects their subsequent measurement. 2014$0002013$000Current assetsLoans and receivables:– Trade and other receivables48,62751,714– Cash and cash equivalents 23,11023,87971,73775,593Non-current liabilitiesDerivative financial instruments designated as hedging instruments:– Interest rate swap –317Financial liabilities measured at amortized cost:– Borrowings –78,291 – 78,608Current liabilitiesDerivative financial instruments carried at fair value through profit and loss:– Exchange rate swap 67110Financial liabilities measured at amortized cost:– Borrowings89,15016,603– Trade payables and other short term financial liabilities 53,27252,784142,48969,497CAPITAL RISK MANAGEMENTThe Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to shareholders through an optimal balance of debt and equity. The capital structure of the Group consists of debt, which includes the borrowings disclosed in Notes 18, 21 and 22, cash and cash equivalents and equity attributable to equity holders of the parent, comprising share capital and reserves as disclosed in the consolidated statement of changes in equity on page 47.The Board reviews the capital structure, including the level of indebtedness and interest cover, as required. The Board’s objective is to maintain the optimal level of indebtedness and manage interest cover to comply with the covenant requirements set out in Note 18. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. Details of the level of indebtedness, in the form of net debt to EBITDA, and interest cover are given in Note 18, including a comparison with the covenants under the Group’s financing facilities.10810866865 QUARTO R+A TEXT 54 Back 2015/04/09 12:48:23 111The Group acquired the business and certain assets and liabilities of Rose (NZ) Limited (“Rose”) on 17 January 2014 and Small World Creations Limited (“SWC”) on 7 October 2014. These transactions have been accounted for by the acquisition method of accounting. These businesses were acquired because of their strategic fit within the Group.Provisional fair values$000Net assets acquiredIntangibles503Property, plant and equipment109Intangible assets – pre-publication costs102Inventories996Trade and other receivables710Cash and cash equivalents150Trade and other payables(1,406)Tax recoverable18Deferred tax(145)1,037 Goodwill650 Total consideration (including deferred and contingent consideration)1,687 Net cash outflow arising on acquisitionsCash consideration1,015 Less: Cash acquired(150) 865The goodwill arising on the acquisitions is largely attributable to the anticipated incremental sales and cost synergies with being part of The Quarto Group.As of the acquisition dates, the Group’s best estimate of the contracted cash flow not expected to be collected amounted to $710,000. The Group continues to evaluate the harmonisation of its accounting policies and hence fair values remain provisional at the Balance Sheet date.If the acquisitions of Rose (accounted for in the Books & Gifts Direct, ANZ, segment) and SWC (accounted for in the Quarto International Co-Editions Group segment) had been completed on the first day of the financial year, Group revenues for the period would have been $174,411,000 and Group profit attributable to the equity holders of the Parent would have been $9,146,000.Cash flow during the year on other acquisitions amounted to $1,143,000.ACQUISITIONS3410910966865 QUARTO R+A TEXT 55 Front 2015/04/09 12:48:24 112COMPANY BALANCE SHEET AT DECEMBER 31, 2014 Notes2014$0002013$000Fixed assets Investments 312,06012,83312,06012,833Creditors: Amounts falling due within one year5(19,565)(18,236)Net current liabilities(19,565)(18,236)Net liabilities(7,505)(5,403)Capital and reservesCalled up share capital62,0452,045Treasury stock6(634)(634)Reserves – Profit and loss 733,76433,764– Paid in surplus7(42,680)(40,578)Shareholders’ deficit8(7,505)(5,403)The financial statements were approved by the Board of Directors and authorised for issue on March 20, 2015. They were signed on its behalf byM. J. Mousley Director March 20, 201511011066865 QUARTO R+A TEXT 55 Back 2015/04/09 12:48:24 113NOTES TO COMPANY BALANCE SHEET AT DECEMBER 31, 2014The separate financial statements of the company are presented and have been prepared in accordance with UK GAAP format and company law. These financial statements present information for the company, not about its group, which is presented on pages 45 to 79.BASIS OF PREPARATION The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules. The company has taken advantage of the exemption contained in FRS 8 and has therefore not disclosed transactions or balances with wholly owned subsidiaries which form part of the group (or investees of the group qualifying as related parties).ACCOUNTING POLICIESThe following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements, except as noted below.The accounting policies adopted are consistent with those of the annual financial statements for the year ended December 31, 2013, as described in those financial statements.The functional currency of the company is Pounds Sterling, with the parent company accounts presented in US Dollars.INVESTMENTSInvestments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.CREDITORSAmounts owed to subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost using the effective interest method.SHARE-BASED PAYMENTSThe 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, which is immaterial, is adjusted to reflect expected and actual levels of options vesting.FINANCIAL GUARANTEE CONTRACTSWhere the company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the company considers these to be insurance arrangements, and accounts for them as such. In this respect, the company treats the guarantee contract as a contingent liability until such time as it becomes probable that the company will be required to make a payment under the guarantee.SIGNIFICANT ACCOUNTING POLICIES1The profit for the financial year dealt with in the financial statements of the parent company was nil (2013: $212,000). No separate profit and loss account is presented in respect of the parent company.PROFIT ATTRIBUTABLE TO THE COMPANY211111166865 QUARTO R+A TEXT 56 Front 2015/04/09 12:48:24 114SUBSIDIARIES4Name Place and date of incorporation Issued and fully paid  share capital Percentage heldSegmentLifetime Distributors ‘The Book People’ Pty. LimitedAustralia 3 December, 1990100,004 shares of A$1 each 100 Books & Gifts Direct, ANZPremier Books Limited New Zealand 27 September, 1996400,000 shares of NZ$1 each 100* Books & Gifts Direct, ANZQuarto Publishing plc England 1 April, 1976100,000 shares of £1 each 100* Quarto International Co-Editions GroupQuarto, Inc. Delaware, USA 16 October, 198686 shares of no par value 100* Quarto International Co-Editions GroupRotoVision S.A. Switzerland 18 July, 19771,500 shares of SFr500 each 100* Quarto International Co-Editions GroupGlobal Book Publishing Pty. LimitedAustralia 4 November, 19991,000 shares of A$1 each 100* Quarto International Co-Editions GroupApple Press Limited England 5 June, 1984100 shares of £1 each 100 Quarto International Co-Editions GroupSmall World CreationsLimitedEngland 20 September, 19971,536 share of £1 each100 Quarto International Co-Editions GroupAurum Press Limited England 31 May, 1977382,502 shares of £1 each100 Quarto Publishing Group UKJacqui Small LLP England 6 November, 1998100 units 100 Quarto Publishing Group UKFrances Lincoln Limited England 15 December, 1980565,000 shares of 10p each 100 Quarto Publishing Group UKQuarto Publishing Group USA Inc.Delaware, USA 28 June, 2004380 shares of US$0.01 each 100 Quarto Publishing Group USARegent Publishing Services LimitedHong Kong 23 October, 19851,000 shares of HK$10 each 75 Quarto HK* Directly held by The Quarto Group, Inc. $000At 1 January 201412,833Exchange differences (773) At 31 December 2014 12,060INVESTMENTS311211266865 QUARTO R+A TEXT 56 Back 2015/04/09 12:48:24 115 2014$0002013$000Amounts owed to subsidiary undertakings 19,56518,236CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR5Details of called up share capital and treasury stock are set out in Notes 24 to 25 of the consolidated financial statements.CALLED UP SHARE CAPITAL AND TREASURY STOCK6 Paid in surplus $000Profit & loss account $000At beginning of year 33,764(40,578)Result for the year–-Exchange differences–465Dividends–(2,567)At end of year33,764(42,680)RETAINED DEFICIT AND OTHER RESERVES7 2014$0002013$000Profit for the financial year-212Dividends (2,567)(2,427) Deficit for the financial year(2,567)(2,215) Shareholders’ deficit at January 1 (5,403)(2,966)Exercise of share options -14Exchange differences465(236)Shareholders’ deficit at December 31 (7,505)(5,403)RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ DEFICIT811311366865 QUARTO R+A TEXT 57 Front 2015/04/09 12:48:24 116The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $89,150,000 (2013: $94,887,000).CONTINGENT LIABILITIES9The company has taken advantage of the exemption in Financial Reporting Standard No 8 “Related party disclosures” and has not disclosed transactions with group undertakings. RELATED PARTY DISCLOSURE1011411466865 QUARTO R+A TEXT 57 Back 2015/04/09 12:48:24 117FIVE YEAR SUMMARY 2014$0002013*$0002012*$0002011*$0002010*$000ResultsRevenue172,644176,318180,873186,126176,409Operating profit before amortisationof acquired intangibles and exceptional items 15,393 14,044 14,317 15,523 13,886Operating profit 15,45610,20512,29314,05612,640Profit before tax before amortisationof acquired intangibles and exceptional items 12,136 9,601 9,159 10,956 9,014Profit before tax 12,1995,762 7,1359,4277,768Profit after tax9,2194,0685,2497,7936,127Assets employedNon-current assets 102,416102,364106,537105,45299,922Current assets 101,07399,103107,065118,266118,430Current liabilities (144,919)(70,485)(67,002)(137,898)(52,574)Non-current liabilities(6,875)(84,135)(98,291)(41,843)(125,429)Net assets51,69546,84748,30943,97740,349Financed byEquity46,75442,03841,36237,29032,075Minority interests4,9414,8096,9476,6878,27451,69546,84748,30943,97740,349Key statisticsEarnings per share45.2c18.6c24.5c37.5c27.8cDiluted earnings per share45.2c18.6c24.5c37.4c27.8cAdjusted diluted earnings per share44.8c37.7c33.9c40.0c32.0c* Restated as described in note 1.11511566865 QUARTO R+A TEXT 58 Front 2015/04/09 12:48:24 118DIRECTORSTimothy Chadwick (Non-executive Chairman) Robert Morley (Deputy Chairman) Marcus Leaver (CEO) Michael Mousley, ACA (CFO) Jess Burley (Non-executive) Michael Hartley (Non-executive) Christopher Mills (Non-executive)SECRETARYJohn Price, FCISPRINCIPAL OFFICEThe Old Brewery 6 Blundell Street London N7 9BH Tel: +44 (0) 7700 6700STOCKBROKERSPeel Hunt Moor House 120 London Wall London EC2Y 5ETAUDITORDeloitte LLP 2 New Street Square London EC4A 3BZSOLICITORSOlswang LLP 90 High Holborn London WC1V 6XXREGISTRARS AND TRANSFER OFFICECapita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TUPRINCIPAL BANKERSBank of America Corporation 100 Federal Street Boston MA 02110 USAFifth Third Bank 38 Fountain Square Plaza MD 109055 Cincinatti OH 45263 USASantander UK plc 4th Floor Santander House 100 Ludgate Hill London EC4M 7REThe Royal Bank of Scotland plc 280 Bishopsgate London EC2M 4RBCOMPANY REGISTRATION NUMBERFC0 13814OFFICERS & PROFESSIONAL ADVISERS11611666865 QUARTO R+A TEXT 58 Back 2015/04/09 12:48:24 3 To educate, entertain and enrich the lives of our readers, putting books in their hands, wherever, however and whenever they choose. WHERE TO FIND US The Quarto Group, Inc +44 20 7700 9004 Marcus Leaver, CEO / marcus.leaver@quarto.com Michael Mousley, CFO / mick.mousley@quarto.com The Old Brewery, 6 Blundell Street, London, N7 9BH Website: www.quarto.com Twitter: @TheQuartoGroup 

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