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Annual Report 2018
CONTENTS
STRATEGIC REPORT
Highlights
Quarto at a Glance
Chairman’s Statement
Chief Executive Officer’s Statement
Divisional Review
Our People
Corporate Responsibility and Sustainability
2018 Portfolio Highlights
Our Business Model
Market Overview
Growth Strategy
Financial Review
Our Key Performance Indicators
Risk Management, Principal Risks and Uncertainties
GOVERNANCE
Board of Directors
Nominations Committee Report
Audit Committee Report
Remuneration Committee Report
Annual Report on Remuneration
Directors’ Report
Statement of Directors’ Responsibilities
Independent Auditor’s Report
FINANCIAL STATEMENTS
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Notes to the Financial Statements
Company Balance Sheet
Company Statement of Comprehensive Income
Company Statement of Changes in Equity
Notes to the Company Accounts
Five-Year Summary
Officers and Professional Advisors
1
2
4
5
8
9
9
10
12
12
13
14
16
18
20
22
23
26
34
39
44
45
51
52
53
54
55
56
89
90
90
91
96
97
HIGHLIGHTS
FINANCIAL
REVENUE ($M)
ADJUSTED1 OPERATING
PROFIT ($M)
ADJUSTED1 PROFIT BEFORE
TAXATION ($M)
2018
2017
149.3
XX
152.5
2018
2017
10.3
7.2
2018
2017
5.9
3.9
LOSS FOR
THE YEAR ($M)
2018
(0.6)
2017
(18.5)
ADJUSTED1 DILUTED
EARNINGS PER SHARE (CENTS)
BASIC (LOSS)
PER SHARE (CENTS)
2018
2017
23.0
2018
(2.7)
17.8
2017
(96.4)
1 Adjusted measures are stated before amortisation of acquired intangible assets and exceptional items.
OPERATIONAL
• Adjusted1 operating profit and adjusted profit before taxation
ahead of the prior year.
• Children’s publishing revenues up 2% and now representing
over one-third of Group revenues.
• 63.2% of revenue generated from backlist titles (2017: 60.3%).
• Net debt reduced by 6% to $60.4m (2017: $64.0m).
• Cost-out programme successfully implemented.
• Banking facilities extended to 31 August 2020.
1
1
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS QUARTO AT A GLANCE
We create a wide variety of books and
intellectual property products with a mission to inspire
life’s experiences for the whole family.
c. 330
EMPLOYEES
33
IMPRINTS
c.10,000
BOOKS IN OUR CATALOGUE
c.$30M
ANNUAL INTELLECTUAL
PROPERTY INVESTMENT
c. 63%
OF ANNUAL SALES
FROM BACKLIST
43
YEARS
FOUNDED IN 1976
EIGHT MAIN CONTENT CATEGORIES
BOOKS ON
FOOD AND DRINK
BOOKS ON DESIGN,
ART AND CRAFT
BOOKS ON BODY, MIND,
SPIRIT, PARENTING AND
RELATIONSHIPS
BOOKS ON INTERIORS,
ARCHITECTURE, DIY,
PETS AND GARDENING
BOOKS ON CARS, TRAINS,
BOATS, MOTORCYCLES
AND PLANES
BOOKS ON BIOGRAPHY,
TRAVEL, HISTORY,
SPACE AND MORE
FUN & IMAGINATIVE
BOOKS AND KITS FOR
CHILDREN OF ALL AGES
STATIONERY, KITS,
CALENDARS AND MORE
2
The Quarto Group, Inc. Annual Report 2018Strategic Report
We sell our products globally through a variety of sales
channels, partnerships and routes to market.
50
COUNTRY
MARKETS
7
OFFICES
WORLDWIDE
3
INTERNATIONAL
PUBLISHING
PARTNERSHIPS
Key
International partnership
English language markets
Foreign language markets
QUARTO OFFICES
USA
SEATTLE
CALIFORNIA
BOSTON
NEW YORK
UK
LONDON (X2)
BRIGHTON
2
3
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHAIRMAN’S STATEMENT
“The Board has been working hard to achieve a more stable
platform and the building blocks are now firmly in place.”
Andy Cumming
Chairman
2018 has been a challenging year in
many respects for Quarto but also for
myself personally. I joined the Board as a
Non-Executive Director on 1 March 2018
and following the Board changes at the
2018 Annual Meeting, I was appointed
Chairman on 11 July 2018.
At the time of my appointment to the
Board, there were a number of major
issues facing the company, namely:
• The level of external debt, which was
considerably higher than the
expected norm for a company of
this size.
• The level of cost within the business,
which was difficult to justify given the
financial performance and debt
position.
• A lack of effective communication;
many employees were not fully aware
of the company’s financial position
and unsure of the future strategic
direction.
I am pleased to confirm that since the
creation of the new Board in the middle
of this year, there has been positive
progress on all the issues highlighted
above. In particular:
• Following negotiations with our
banking syndicate, a restructuring
and extension of facilities were
agreed which provide a solid base for
the future. As a result of the
restructuring, external debt has been
reduced and there are further
planned reductions over the term of
the new banking arrangements.
• The cost base of the business has
been extensively reviewed, and as a
result of this exercise, costs have
been reduced and are now at an
acceptable level to support the
ongoing business.
• The Board has significantly increased
the level of communication to ensure
that all employees understand the
financial issues faced by the
Company and also have more clarity
regarding the short-term imperatives.
The Board has been working hard to
achieve a more stable platform and there
is a genuine belief that the building
blocks are now firmly in place. Quarto is
a great business with great people and
great products and the Board is fully
committed to maintaining the positive
momentum which has been achieved.
Dividend
As in the previous year, the Board has
not recommended a payment of a final
dividend, given the need for further debt
reduction and investment in the
business. The dividend policy will remain
under review in consultation with
shareholders and other stakeholders.
Corporate Governance
There were a number of Board changes
in 2018 following the Annual Meeting.
We have welcomed Ken Fund as an
Executive Director and Jane Moriarty as
a Non-Executive Director. Ken, as the
Chief Operating Officer for Quarto,
brings 34 years’ publishing experience
to the Board and Jane’s background as a
former senior partner at KPMG provides
wide commercial expertise.
I am thoroughly enjoying my time as
Chairman of Quarto. This is a people
business and I have been really
impressed by the dedication, enthusiasm
and commitment of all the people I have
met. I look forward to being part of this
talented team as we build for the future.
Andy Cumming
Chairman
8 March 2019
4
The Quarto Group, Inc. Annual Report 2018Strategic Report CHIEF EXECUTIVE
OFFICER’S STATEMENT
“We are focused on delivering stability to the business
and returning the Group to full health.”
Strategic Overview
Overall, revenue was down 2% at
$149.3m (2017: $152.5m) and adjusted
operating profit up 43% at $10.3m (2017:
$7.2m), enabled by a strong trading
performance in the first half of the year
and in the fourth quarter, as well as
significant cost reductions.
This is a satisfactory set of results
considering that the market has
continued to show softness in the book
trade both in the US and the UK, and
that the Group has had to adjust to
various transitions in the management of
the Company.
A new Board was formed following the
Annual Meeting in May, with clear
objectives to deliver a right-sizing of the
Group; a path to sustainable debt
reduction; a focus on the Group’s core
strengths; and a disciplined business
model.
After a short tenure from Laurence
Orbach, Andy Cumming was appointed
Non-Executive Chairman in July and has
provided a clear direction to the Group
since. His experience has proven
invaluable, especially through the
renegotiations of our banking facilities.
C. K. Lau
Chief Executive Officer
I would like to thank our Chief Operating
Officer, Ken Fund, who has been with
Quarto for 20 years and who we
welcomed to the Board last year. His
commitment, leadership and experience
helped the business and all of our
people through a particularly
challenging year. I would also like to
thank Mick Mousley, who agreed to
come out of retirement while we look for
a permanent Chief Financial Officer.
In the last six months, both the new
Board and senior management have
been focused on delivering stability to
the business, supporting our core
operations and starting to address our
balance sheet.
In November, the extension of our
banking facilities to 31 August 2020 was
a major milestone in returning the Group
to full health. This gives us a stable
position from which we can continue to
improve business performance and
reduce debt to a more acceptable level,
as agreed with our banking syndicate.
We completed a comprehensive
cost-out programme, following a
thorough review of key areas of
expenditure. Our portfolio has been
reviewed and reduced from 40 to 33
imprints; we downsized some of our
office facilities; and we effected a
significant reduction in corporate
overhead.
Although the benefits will not flow
through immediately – as we have had to
incur exceptional costs to implement the
cost-out programme – we have gone
into 2019 satisfied that the Group is now
operating at the right size.
US Publishing revenues were down 1% at
$81.2m (2017: $81.8m), and UK
publishing revenues were flat at $20.4m
(2017: $20.3m). Children’s publishing
revenues grew 2.3%, led by the success
of our Lincoln Children’s Books list.
Adult publishing revenues were down
4.3% due to a lower performance of
co-edition publishing.
The Group is now over one-third
Children’s products, with continued
increased contribution from the
Children’s side. The Adult market
remains more challenging, as the
4
5
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S STATEMENT (CONTINUED)
consolidation of publishers in the English
language co-edition market continues to
impact sales negatively. We are looking
at new opportunities in custom
publishing to grow our customer base.
Our Foreign Rights sales team delivered
a solid year, with revenues of $31.3m,
despite strong headwinds against them.
The Group ended the year with net debt
at $60.4m, down 5.6% vs prior year
(2017: $64.0m). Net debt is still sizeable
and remains an immediate focus for the
Board.
I am very passionate about returning the
Group to full health and defining further
growth strategies for 2020 and beyond.
Quarto’s model remains effective:
talented people making high-quality and
long-lasting products across a balanced
portfolio, supported by an efficient
operating platform that adapts to
market conditions.
Our strategy for the Group in the short
term is to deliver stability to the
business, to continue to grow lists where
the opportunity exists while supporting
and improving poor performing business
units and to address our balance sheet
by reducing our net debt.
Revenue ($m)
United States
United Kingdom
Rest of the World
Foreign Rights
Q Partners
Total Revenue
Operating Review
Quarto sells its products globally, in 50
countries in 40 languages, through a
variety of sales channels, partnerships
and routes to market – US, UK,
International English language, Foreign
language and other Partnerships.
In both the US and the UK, co-edition
revenues were soft especially in English
Language, as this market continues to
decline. Specifically, some of our Star
Wars licensed titles did not perform up
to expectations, which affects new title
sales as well as reprints.
Revenue is reported by the geography in
which the product is sold. Adjusted
Operating Profit is reported by IP
portfolio, where the product is
generated – US Publishing, UK
Publishing and Q Partners.
Routes to Market
In the US, revenue was $81.2m, down
marginally over the prior year (2017:
$81.8m), with a strong performance from
our Quarry and Fair Winds Press
Imprints. A strength of the US program
has been our ability to grow the
specialty retailer accounts base, whilst
the uncertainty of the book trade
continues to show lower sales in our
publishing categories. E-book and digital
revenue, although small, showed
improvement. Returns on sales were
lower than prior year and back to an
expected rate, following unusually high
levels in 2017 due to colouring books.
2018
81.2
20.4
10.8
31.3
5.6
2017
81.8
20.3
10.3
34.4
5.7
149.3
152.5
UK revenue was $20.4m, level with the
prior year (2017: $20.3m), led by a
strong performance from our Lincoln
Children’s Books, Ivy Press/Ivy Kids and
Wide Eyed Editions imprints. The Little
People, Big Dreams series continues to
be a major success and in 2019 we are
expanding the list to include inspirational
male role models. The launch of our
Build and Become series (White Lion
Publishing) has been well received.
Our international English language sales
have performed better than prior year
with revenues of $10.8m (2017: $10.3m)
with a strong contribution from our
Australian, Middle Eastern and Asian
markets, and due to new distributors in
India and South Africa.
Foreign Language sales achieved a
strong year with revenues of $31.3m,
although lower than prior year (2017:
$34.4m), as a result of market place
uncertainty, particularly in South
America.
Our publishing partnerships and
distribution business, Q Partners, was
down 1% year-on-year with revenue of
$5.6m (2017: $5.7m). Sales have been
slow in Brazil and the launch of Quarto
Iberoamericana, our Spanish language
partnership, has still to reach critical
mass. Overall the business hasn’t yet
reached a satisfactory level and we are
looking at refining the business model.
6
The Quarto Group, Inc. Annual Report 2018Strategic Report The revenue split between frontlist titles
(published in 2018) and backlist titles
(published before 2018) was comparable
year-on-year, with 63.2% of publishing
revenues generated from backlist titles
vs 60.3% in 2017. This is consistent with
Quarto’s strategy to generate c. 60%
annual recurring revenues from the
Group’s rich IP catalogue and reflects
our expertise in creating long-lasting
content.
Adults’ titles represented 65% of backlist
revenues (2017: 67%) and 66% of
frontlist revenues (2017: 67%), while
Children’s titles represented 35% of
backlist revenues (2017: 33%) and 34%
of frontlist revenues (2017: 33%). The
increased proportion of Children’s titles
in the backlist can be explained as some
of the Group’s imprints, only started a
couple of years ago, are now becoming
established businesses.
Outlook
The newly constituted Board is fully
focused on achieving stability in the
business after a period of considerable
change, returning the Group to full
health and defining further growth
strategies for 2020 and beyond.
Quarto expects the ongoing soft market
conditions to continue in 2019, impacting
foreign language markets and the Adults
portfolio, in particular. The Group
expects some organic growth in
Children’s and further benefits from the
cost-out programme.
In the medium to long term, our strategy
remains to grow organically through
innovation and, where applicable, by
acquisition and to continue to drive circa
60% annual recurring revenue through
the Group’s enduring backlist and
innovative use of its rich IP catalogue.
Intellectual Property Portfolio
Each one of our imprints and businesses
within our portfolio is creatively
independent and caters to different
audiences and markets.
Our most profitable imprints were
Lincoln Children’s Books (UK, acquired
in 2011, relaunched in 2014), Ivy Press
(UK, acquired in 2015) and Wide Eyed
Editions (UK, launched in 2013).
Adult publishing revenues declined
4.3%, suffering from a lower
performance of English language
co-editions against prior year. In this
market, the consolidation of publishers
continues to impact sales negatively. We
are looking at new opportunities in
custom publishing to grow our customer
base. Internally, we have significantly
consolidated parts of our Adults
portfolio and are confident that it is
better equipped to suit customer and
market trends.
Children’s publishing revenues grew
2.3% led by the success of our UK-based
Lincoln Children’s Books imprint. The
Group is now over one-third Children’s
products, with continued increased
contribution from the Children’s side.
6
7
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIVISIONAL REVIEW
US Publishing
US Publishing adjusted operating profit
was up 15% to $5.3m (2017: $4.6m) due
to a combination of positive factors:
UK Publishing
UK Publishing adjusted operating profit
was up 11% to $7.9m (2017: $7.1m) due to
the following factors:
• Lower returns on sales, which came
• A strong performance from our
back to an expected rate after
reaching an unusually high point in
2017 due to colouring books.
Lincoln Children’s Books, Ivy Press/
Ivy Kids and Wide Eyed Editions
imprints.
• A significant reduction in expenses
• Lower royalty costs following a
through the cost-out programme put
in place during the year.
Overall, we saw a 1% reduction in margin.
Some elements of this decline have been
ongoing challenges which we are
addressing. Cost of Goods sold were
slightly higher in 2018, impacted
negatively by an increase in paper costs.
Paper costs have now stabilised, which
should have a positive impact on margin
in 2019.
Product development costs were in line
with expectations and the prior year.
Investment in new titles has started to
be reduced as part of our cost-out
programme, and as we use our IP in new
and innovative ways.
negotiation of more favourable terms.
The increasing mix of sales to the
trade is a trend that we expect to
continue.
• Benefits from our cost-out
programme, with a reduction in
investment in new titles being
acquired, as well as an overall
reduction in administrative, selling
and staffing costs.
Improved margin in our newly formed
White Lion Street Adults imprint, due
to efficiencies across print, staffing
costs and investment in new product.
•
Q Partners
Q Partners’ adjusted operating profit
remained flat year-on-year, with a small
loss of $0.4m in 2018 (2017: loss $0.4m).
The business hasn’t yet reached a
satisfactory level as volumes remain
small. We are looking at refining the
business model.
Adjusted Operating Profit ($m)
2018
2017
US Publishing
UK Publishing
Q Partners
Group overhead
Total adjusted operating profit
5.3
7.9
(0.4)
(2.5)
10.3
4.6
7.1
(0.4)
(4.1)
7.2
8
The Quarto Group, Inc. Annual Report 2018Strategic Report OUR PEOPLE
Quarto employs c. 330 people across 7
locations in the UK and the US, as well as
a network of creative contributors and
freelancers. We operate in a competitive
international market place and need to
attract, develop and retain creative,
talented and resourceful employees.
Our values
Quarto’s values shape our business.
They make Quarto an attractive place to
develop a career, and a responsible
organisation.
Our Values
• BE ACCOUNTABLE
• BE PURPOSEFUL
• BE CONSISTENT
• BE EXCELLENT
• BE CURIOUS
• BE COLLABORATIVE
We will not discriminate against age,
gender, ethnicity, cultural background,
sexual orientation or religious beliefs.
We operate a robust recruitment policy,
including right to work checks and
commitment to a policy of equal
opportunity and treatment, to foster an
inclusive, fair and diverse environment.
Quarto has an employee code of
conduct, operates anti-bribery and
corruption, equal opportunities, anti-
harassment and whistle-blowing policies
and observes health and safety
requirements, demonstrating our
commitment to acting ethically and with
integrity in all employee and business
relationships. These policies are also
readily available to staff via the Quarto
intranet site and in the staff handbooks.
Quarto honours the dignity of all people
and respects the laws, customs and
values of the communities in which we
operate. We are committed to ensuring
that there is no modern slavery or
human trafficking in our supply chains or
in any part of our business.
At the end of 2018, the breakdown of
directors, senior managers and
employees was:
Directors
Senior managers
All employees
Male
Female
4
8
90
2
10
240
CORPORATE RESPONSIBILITY
AND SUSTAINABILITY
Corporate responsibility and
sustainability
Quarto wants to be a good corporate
citizen and considers the impact our
activities have on the environment; as
well as make a positive contribution to
society by making inspirational books
and actively supporting our
communities.
Supporting communities
Quarto launched the Quarto Foundation
in 2017 as a means for our people to
support local charities. The Quarto
Foundation continued to support local
charities during 2018, holding events
across all Quarto’s offices to raise
money that the company then matches,
from “Blind Date with a Book” to a
sponsored abseil.
Environmental impact and
sustainability
Most of our impact arises through the
materials and services we procure such
as printing, production, distribution,
recycling and disposal of books. To
reduce our impact, we adopt the
following practices:
• Use of sustainable paper: most books
are printed on Forest Stewardship
•
Council (FSC) paper supplies, or, for
domestic US printing, we use
Sustainable Forestry Initiative (SFI)
paper. We estimate 80% of books are
printed on sustainable paper.
Increasing sustainable operations: we
continue to consolidate shipments
wherever possible so that the number
of journeys made is minimised.
• Ethical production: we continue to
work with our suppliers to adopt
ethical standards of manufacture
using ICTI Care processes.
8
9
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
2018 PORTFOLIO HIGHLIGHTS
Bucket LIst Journal
Published 2016
$479k
0.3% of revenue
How to Draw Cute Stuff
Published 2017
$252k
0.2% of revenue
Super Squishies:
Slime and Putty
First Published 2018
$213k
0.1% of revenue
Beginner’s Keto
Published 2018
$914k
0.6% of revenue
Quick Keto Meals In
30 Minutes or Less
Published 2017
$559k
0.4% of revenue
Keto Diet
Cookbook
Published 2017
$334k
0.2% of revenue
Adults
RHS Desk Diary
Published 2018
$264k
0.2% of revenue
History of Space
Exploration
Published 2018
$213k
0.1% of revenue
The Complete
Pattern Directory
Published 2018
$199k
0.1% of revenue
Keto Slow Cooker
& One-Pot Meals
Published 2017
$613k
0.4% of revenue
Instant Pot® Electric Pressure
Cooker Cookbook
Published 2017
$415k
0.3% of revenue
Electric Pressure
Cooker Cookbook
Published 2017
$312k
0.2% of revenue
10
The Quarto Group, Inc. Annual Report 2018Strategic Report Children
Little People, Big Dreams:
Coco Chanel
Published 2016
$455k
0.3% of revenue
Little People, Big Dreams:
Frida Kahlo
Published 2016
$415k
0.3% of revenue
The Book of
Comparisons
Published 2018
$383k
0.3% of revenue
Build: The
Human Body
Published 2017
$346k
0.2% of revenue
Ultimate Secret
Formula Lab
Published 2016
$486k
0.3% of revenue
Mini Movers
Published 2014
$284k
0.2% of revenue
The Nutcracker
Published 2017
$374k
0.3% of revenue
Storytime BU: The Big
Book of Bedtime Stories
Published 2017
$268k
0.2% of revenue
World of Birds
Published 2018
$187k
0.1% of revenue
Squishy Human Body
Published 2006
$1,216k
0.8% of revenue
All-natural Lip Balm Boutique
Published 2016
$725k
0.5% of revenue
Smart Circuits:
Electronics Lab
Published 2016
$686k
0.5% of revenue
10
11
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR BUSINESS MODEL
We make visually appealing, information-rich books and related products in a multitude
of formats, for adults, children and the whole family. Our creative portfolio of imprints
develops long-lasting content across many areas of interest.
People
Our people and talent make Quarto who we are. Our 36
imprints are creatively independent, producing what we
believe is right for our customer base and the market.
Product
Each imprint has a different vision. We are proud of the
wide variety of books we publish and our unique, high
quality content.
Platform
Our imprints sit on the Quarto platform of people, sales,
marketing and operations that we have built and adhere
to the financial model through which we manage our
portfolio.
Portfolio
Our imprints make up a diversified portfolio that
strengthens with each addition, whether organic start-up
or acquisition.
Process
Our books and products are created by many different
people but underpinned by one financial model.
MARKET OVERVIEW
Quarto has been firmly anchored in
international illustrated publishing since
its founding in 1976.
Quarto privately commissioned a piece
of research1 on the trends of the global
illustrated book market.
Market size and potential
As of 2017, Quarto’s addressable market
in the US and the UK combined is worth
$14.1bn1. The US market has grown 4.6%
since 2013 and is forecast to grow by a
further 8.8% by 2020; while the UK
market has grown 6.6% since 2013 and is
forecast to grow by 6.7% by 2020.
General trends
The market is overall quite mature and
stable with consumers very loyal to the
book product. On average, adult
non-fiction buyers purchase eight books
a year, and children’s book buyers, nine.
There is a healthy co-existence between
print books and the digital world.
Physical books are vibrant and
preserving a diverse retail landscape.
E-Book sales have been flatlining with
limited success outside of adult fiction.
Children’s and new/young adult
publishing are leading the way in all
markets and all channels. Children’s
books have grown ahead of other
categories in recent years. Consumers
overwhelmingly recognise the role
books play in children’s development
and do not believe digital content can
provide the same type of learning.
In the retail space, the market share of
physical book specialists vs online
retailers and physical non-book
specialists has reduced in the past few
years, and is expected to decrease
further by 2020.
International book markets are
flourishing, with significant economic
and demographic changes in large
countries, for instance Brazil and
Argentina. This can present
opportunities and challenges for
publishers with global reach, such as
Quarto.
1 This report was commissioned by and
produced for The Quarto Group in
November 2017 by Pragma Consulting
Limited as part of a market and channel
review.
12
The Quarto Group, Inc. Annual Report 2018Strategic Report
GROWTH STRATEGY
“We are delivering stability for the business in the short term,
while defining growth strategies for 2020 and beyond.”
C. K. Lau
Chief Executive Officer
• Business Innovation, which is about
finding new ways to expand and
enhance parts of our business,
including:
– Finding the right title for the
market at the right price;
– Developing formats and products
driven by the channel they sell in,
effectively making it easier for
consumers to find our products at
the retailer they usually shop at, for
the price they want and in a format
that works for them. We sell our
products in physical stores and
online; in bookstores, gift stores,
toys stores and wherever we
believe consumers might come
across them. That includes, for
instance, Tractor Supply, Costco,
Urban Outfitters or Holland &
Barrett among many others.
Acquisition Growth
In the medium to long term, acquisitive
growth is likely to remain a key strategic
area for the Group. As a market leader
with a global and scalable platform in
what remains a fragmented industry, the
potential opportunity is significant.
Quarto has a long history of acquisitions
and has established specific parameters
to evaluate acquisition opportunities.
Our Six Key Acquisition
Parameters:
1. Category enhancing
Adds new titles to our portfolio and
expands one of our categories, e.g.
Harvard Common Press.
2. Additional expertise
Brings an area or market we do not
previously have expertise in, e.g. small
world creations, specialised in
children’s 0–3 formats.
3. Competitor Ingestion
Synergistic consolidation, e.g. Ivy
Press,
4. Step Changers
Significant additions to the business,
e.g. becker&mayer
5. Adjacencies
Complementary to existing portfolio
and sales channels, such as Book Plus
and educational products, e.g.
SmartLab
6. Distribution Enhancing
A business that owns a specific
channel to market.
The vision for Quarto remains to become
the dominant publisher of illustrated
books worldwide and to expand on the
use of our IP in as many ways as
possible.
We understand that, as a publicly traded
business, we need to deliver stability to
the market in the short term. We are
focused on becoming best in class in
operating an efficient publishing
company, in which we excel in delivering
quality content in a cost-effective way,
and product offerings that bring the
highest value to our readers.
Organic Growth
We constantly review our portfolio to
ensure it remains dynamic and aligned
to the broader market trends, and we
strive to diversify and expand the
distribution of our products.
In the mature market that is illustrated
publishing, we believe organic growth
can be achieved by:
•
Innovation in products and product
development, which means working
to understand what our end
consumers want and thinking harder
about using our IP in as many ways
and formats as possible. Examples for
our 2018 programme include sound
books, glow in the dark books, as well
as our Scratch and Learn series.
• Communication Innovation, i.e. how
can we better market our products
directly to consumers? For instance,
we have focused on marketing by
channel as well as by title, to ensure
we reach potential consumers in the
outlets where they come to learn and
shop.
12
13
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW
“Operating profit for the Group before amortization of
acquired intangibles and exceptional items increased by
43% ($3.1m) to $10.3m (2017: $7.2m).”
Michael Mousley
Interim Chief Financial Officer
Group Results
Revenue was $149.3m, a decrease of 2%,
compared to 2017 ($152.5m). Operating
profit, before amortisation of intangibles
and exceptional items, (“adjusted operating
profit”) was up 43% at $10.3m (2017: $7.2m)
and represented 6.9% (2017: 4.7%) of
revenue. Adjusted diluted earnings per share
increased by 29% to 23.0c (2017: 17.8c). It
has been the case for many years, that not
one of our titles exceeded 1% of Group
revenue, and this year is no exception. The
following titles were our top ten sellers in
2018, with their respective revenue and year
of publication:
Squishy Human Body (2006)
$1,216,000
Beginner’s Keto Diet Cookbook (2018)
$914,000
All-Natural Lip Balm Boutique (2016)
Smart Circuits: Electronics Lab (2016)
Keto Slow Cooker & One-Pot Meals (2017)
Quick Keto Meals in 30 Minutes or Less (2017)
Ultimate Secret Formula Lab (2016)
The Bucket List (2016)
Little People, Big Dreams: Coco Chanel (2016) 1
Little People, Big Dreams: Frida Kahlo (2016) 1
$725,000
$686,000
$613,000
$559,000
$486,000
$479,000
$455,000
$415,000
1 The Little People, Big Dreams titles are part of a series that generated $4.3m of
revenue in 2018 (2017: $1.8m)
US Publishing
Revenue for this segment was down 2%
at $73.0m (2017: $74.1m). Adjusted
operating profit was up 13% at $5.3m
(2017: $4.6m). We achieved an operating
profit margin of 7.2% (2017: 6.3%).
Reprints accounted for 65% of revenue,
compared to 64% in 2017.
UK Publishing
Revenue for this segment was down 3%
at $70.7m (2017: $72.7m). Adjusted
operating profit was up 11% at $7.9m
(2017: $7.1m). We achieved an operating
profit margin of 11.2% (2017: 9.8%).
Reprints accounted for 61% of revenue,
compared to 54% in 2017.
Q Partners
Revenue for this segment was down 1%
at $5.6m (2017: $5.7m). We incurred an
adjusted operating loss of $0.4m (2017:
loss $0.4m).
Corporate costs
Corporate costs were reduced by 41%
from $4.1m to $2.5m, due to the cost-out
programme, which was initiated in the
second half of the year.
Exceptional Items
Exceptional items, in 2018, comprised
reorganization costs of $2.9m, arising
from the cost-out programme, $0.8m
with respect to the board changes that
occurred in May 2018 and $1.5m of
refinancing costs. Exceptional items, in
2017, comprised goodwill impairment of
$17.4m, impairment of pre-publication
costs of $4.9m and other items of $1.9m.
Further details are disclosed in note 5.
Finance Costs
Finance costs were $4.4m (2017: $3.3m).
The increase was attributable to an
increase in interest rates, an increase in
the interest margin and a charge with
respect to the deferred consideration for
a prior period acquisition.
Tax
The tax charge for the year was $0.5m
(2017: Credit $1.5m). The Group incurred
taxable losses in the US which, following
tax legislation changes from 1 January
2018, cannot be fully recovered.
Balance Sheet
The Group’s net assets decreased to
$21.1m from $24.1m, largely because the
Group has net Sterling assets. The
weakness of Sterling against the US
dollar, which is the Group’s principal
functional currency, has resulted in a
translation loss on exchange. During 2018,
the Group transacted in Sterling, Euros,
Australian Dollars, New Zealand Dollars
and Hong Kong Dollars. Our borrowings
are drawn in US Dollars, Sterling and
Euros to provide a partial hedge against
the movement in our net assets excluding
borrowings in those currencies. The key
exchange rates for the year are shown in
the table on page 15.
We signed an agreement with our
banking syndicate to extend the
maturity of our facilities to 31 August
2020. The revised facilities incorporate
an immediate reduction in bank debt
and a subsequent amortization
programme. As part of the agreement
with the banking syndicate, certain of
the Company’s larger shareholders and
a related company agreed to provide
unsecured and subordinated loans to the
Group, totaling $13m. These loans are
14
The Quarto Group, Inc. Annual Report 2018Strategic Report repayable by 31 August 2020 and have
been used to reduce bank facilities and
to provide additional working capital.
This gives us a stable position to
continue our focus on improving the
performance of our business and
reducing debt to a more acceptable
level.
Cash Flow and Indebtedness
At the year end, our net debt was
$60.4m, a reduction of 6%, compared to
2017, when it was $64.0m. The Group
was well within its banking covenants,
details of which are included in note 18
to the Financial Statements. Free cash
flow, during the year, was $8.4m, up 8%
compared to 2017, when it was $7.7m.
Shareholder Return
The Directors have decided to continues
the Group’s policy of not paying a
divident for the time being, until debt
can be brought down to a more
acceptable level.
Cost-Out Programme
We initiated a cost-out programme in
the second half of the year. This was
designed to achieve the following: a
right-sizing of the Group, a path to
sustainable debt reduction and a focus
on our core strengths. The process
involved a thorough review of key areas
of expenditure, including but not limited
to, prepublication expenditure,
occupancy costs, payroll and
discretionary expenditure. The benefit of
the cost-out programme has not flowed
through immediately, as we have
incurred one-time exceptional costs to
implement the plan. We expect this plan
to lead to improved cash flows in 2019
and 2020.
Principal Risks and
Uncertainties
Details of the Group’s principal risks and
uncertainties are set out on pages 18 and
19.
Going Concern
In accordance with provision c. 2.2 of the
2014 revision of the UK Corporate
Governance Code, the Directors have
assessed the prospects of the Group
over both a one-year and a three-year
period. The one-year period has a
greater level of certainty and is,
therefore, used to set budgets for all our
businesses which culminates in the
approval of a Group budget for the
Board. The three-year period offers less
certainty, but it is aligned with long-term
incentives offered to Executive Directors
and certain senior management.
The Directors have considered the
underlying robustness of the Group’s
business model, products and
proposition and its recent trading
performance, cash flows and key
performance indicators. They have also
reviewed the cash forecasts prepared
for the three years ending 31 December
2021, which comprise a detailed cash
forecast for the year ending 31
December 2019 based on the budget
for that year and standard growth
assumptions for revenue and costs for
the years ending 31 December 2020
and 2021, to satisfy themselves of the
going concern assumption used in
preparing the financial statements.
Exchange Rates
Year-end rate
Average rate
Versus US Dollar
Sterling
Euro
Australian Dollar
New Zealand Dollar
Hong Kong Dollar
2018
0.78
0.87
1.41
1.48
7.80
%
2017
change
0.74
0.84
1.28
1.41
5.4%
3.6%
10.2%
5.0%
7.83
(0.4)%
2018
0.75
0.84
1.34
1.44
7.82
%
2017
change
0.78
0.88
1.30
1.41
7.79
(3.8)%
(4.5)%
3.1%
2.1%
0.4%
The Directors have assessed the Group’s
viability over a three-year period ending
on 31 December 2021 based on a
financial model which was prepared as
part of the process of considering and
approving the 2019 budget. The
Directors used the three-year review
period for the following reason:
The Group’s publishing program
planning cycle normally works over a
two- to three-year period.
The Group’s current banking facilities
have 18 months to run before they will
need to be refinanced in August 2020.
Consistent with previous facilities, the
Directors have assumed that these
facilities will be renewed or extended at
that time on similar terms.
In carrying out their analysis of viability,
the Directors took account of the
Group’s projected profits and cash flows,
and its banking covenants.
They also took account of the principal
risks and uncertainties facing the
business referred to above, a sensitivity
analysis on the key revenue growth
assumption and the effectiveness of
available mitigating actions. Based on
their assessment, the Directors have a
reasonable expectation that the Group
will be able to continue in operation and
meet its liabilities as they fall due up to
31 December 2021.
For this reason, they continue to adopt
the going concern basis in preparing the
financial statements. In doing so, it is
recognised that such future assessments
are subject to a level of uncertainty that
increases with time and, therefore, future
outcomes cannot be guaranteed or
predicted with certainty. Note 1 to the
Financial Statements provides additional
information on the Group’s banking
covenants and sensitivity.
Michael Mousley
Interim Chief Financial Officer
14
15
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR KEY PERFORMANCE INDICATORS
Our strategy is to grow our revenue and margins
by leveraging our size, scale and reach as the
leading global illustrated book publisher, to build
a business with sustainable growth in earnings
per share while also managing our net debt.
ADJUSTED1 OPERATING PROFIT
BEFORE DEPRECIATION
(EBITDA) ($M)
ADJUSTED1 OPERATING
PROFIT ($M)
11.1
8.5
2018
2017
2016
2015
2014
2013
2012
18.3
17.9
17.0
15.9
16.5
2018
2017 7.2
2016
2015
2014
2013
2012
10.3
XX
17.0
18.5
15.8
14.3
12.8
EBITDA is used to measure the
operational performance of the Group.
Adjusted operating profit improvement,
largely as a result of our cost-out
programme.
RETURN ON NET
OPERATING ASSETS (%)
NET DEBT ($M)
2018
2017
2016
2015
2014
2013
2012
11.3
7.7
14.3
13.4
12.0
11.8
11.0
2018
2017
2016
2015
2014
2013
2012
60.4
64.0
61.9
59.5
66.0
71.0
81.0
The Board uses this ratio to evaluate the
long-term financial health of the Group.
Our net debt has reduced by 6% in 2018.
1
Adjusted measures are stated before amortisation of acquired intangible assets and
exceptional items.
16
The Quarto Group, Inc. Annual Report 2018Strategic Report ADJUSTED1 DILUTED
EARNINGS PER SHARE (CENTS)
BACKLIST % OF SALES (%)
23.0
17.8
2018
2017
2016
2015
2014
2013
2012
48.7
46.1
39.1
36.1
41.6
2018
2017
2016
2015
2014
2013
2012
63.2
60.3
58.3
61.4
66.6
71.3
69.8
The Board uses this ratio to evaluate the
quality of the Company’s earnings.
Backlist has increased as a percentage
of sales.
INVENTORY % OF REVENUE (%)
INTELLECTUAL PROPERTY
DEVELOPMENT SPEND ($M)
2018
2017
2016
2015
2014
2013
2012
15.0
14.8
15.5
13.8
13.9
11.2
12.6
2018
2017
2016
2015
2014
2013
2012
29.7
35.6
37.2
34.9
33.5
31.7
30.5
This is a measure of the cash used up
in inventory as a proportion of revenue.
We reduced the IP spend
in 2018, as a result of our cost-out
programme.
CHILDREN’S PUBLISHING
REVENUES ($M)
50.2
49.1
41.1
32.4
2018
2017
2016
2015
2014
2013
2012
23.0
19.6
18.5
Children’s publishing revenues have
increased by 171% since 2012.
16
17
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS RISK MANAGEMENT, PRINCIPAL
RISKS AND UNCERTAINTIES
The Quarto Group’s risk management framework is designed to identify and assess the likelihood of risks arising, the
consequences of them doing so and the actions necessary in order to mitigate their impact.
The Board has carried out its periodic assessment of the principal business risks facing our various businesses and has updated
these risks in its risk register, which is regularly reviewed. The Board continues to monitor these principal risks and associated
material controls. Details of the Group’s financial risk management objectives and policies are set out in note 21 to the Financial
Statements. The business risk review identified the following key risks that face our businesses.
MARKET AND FINANCIAL RISKS
Risk
Description
Mitigating factor
Economic
conditions
Currency
The Group operates across many of the major
world economies and its revenues and profits
depend on the general state of the economy in
those territories. A downturn caused by a global
recession could reduce consumer discretionary
spending, which might result in a reduction in
profitability and operating cash flow. The UK’s
planned exit from the European Union and
US-Sino relations contribute to uncertainty in
the economic environment.
The Group’s businesses operate in a number of
currencies giving rise to a risk of exchange loss
from fluctuating exchange rates.
Financial
The Group’s relatively high level of debt makes
the Group sensitive to interest rates and potential
covenant breaches.
.
The Group has adequate facilities with up to $74.5m in
available debt facilities. In addition, in such an event, the
Directors have the ability to take a number of mitigating
actions, including the reduction of discretionary spend
on pre-publication costs.
The Group has a natural hedge that mitigates against
currency movements impacting our earnings in that one
of our largest costs, which is print costs, are paid in US
Dollars. Borrowings have been taken out in different
currencies to mitigate risk of currency movements
impacting our net assets.
Quarto shares financial information with its banks
routinely and during 2018 negotiated a re-financing to
extend the maturity of its bank facilities to 31 August
2020 which incorporated an immediate reduction in bank
debt and a subsequent amortisation programme. This
agreement was supported with unsecured and
subordinated loans of US$13m from several large
shareholders allowing bank facilities to be reduced and
to provide additional working capital. Further mitigations
to manage risk arise from a programme introduced in the
second half of 2018 to reduce operating costs across the
Group whilst we continue to build the balance sheet with
a strong publishing programme.
OPERATIONAL RISKS
Risk
Description
Mitigating factor
Customer
A significant dependency on a small number of
customers, for instance co-edition partners or
retailers, could be problematic if one of them
tried renegotiating preferential terms or stopped
doing business with the Group. The failure of a
major customer could impact revenue and profits.
The Group has a long-established strategy of diversifying
its customer base, resulting in the fact that no one
customer has over 20% of the business. Customer
relations are managed to ensure a fair-trading
relationship. Management monitors debts closely and
maintains close relationships with its customers, which
may provide prior warning of likely failure.
18
The Quarto Group, Inc. Annual Report 2018Strategic Report OPERATIONAL RISKS (continued)
Supply chain
and raw
materials
The Group relies on a group of print suppliers,
many of which are based in southern China. There
is a risk that an interruption in the availability of
printing services in that area or the financial
failure of one printer could disrupt the supply of
new books to customers. Any increase in costs
such as oil, port charges etc. would also impact
shipping costs. Any disruption in supply of paper
could lead to an increase in costs and production
disruption. There is also a reputational risk of
using non-environmentally friendly paper.
‘Brexit’, the planned departure of the UK from the
EU, could disrupt product movement into the EU.
Product safety Our business is faced with increasing safety
and testing requirements on various product
components. The risk of a product recall due to
children’s safety would have a severe reputational
impact on the business.
Loss of
intellectual
property
A loss of stored IP through failure of storage
medium or loss of back-ups would impact our
ability to process reprints and revisions and
could cause a loss of revenue.
Laws and
regulations
As a creative and IP business, any changes to
copyright laws could have an impact on the
Group’s activities and any infringement could lead
to increased costs. Inconsistent internal practices
for negotiating contracts or clearing rights could
lead to IP claims.
Cyber security Like many organisations, the Group is at risk from
cyber attack. This presents a potentially serious
risk of disruption to the production process and
could have a significant impact on the profitability
of the business and the security of its IP assets.
People
As in any creative business, the Group is heavily
reliant on its people and operates with the
inherent risk of not making the ‘right’ books or
creativity being uneven year-on-year. Failure to
retain talent and attract new talent could
ultimately lead to a failure to generate successful
new titles, leading to a drop in revenue.
The manner in which the UK leaves the EU
(‘Brexit’) in 2019 could affect permission of
EU-citizens to work in the UK potentially
disrupting the resourcing of our UK-based rights
selling team.
The Group maintains relationships with printers in other
parts of the world and is confident that printing could be
carried out by an alternative range of printers if supply
from China was interrupted or to mitigate shipping costs.
We maintain close relations with our printers, reducing the
risk of a lack of knowledge of any printer being in financial
trouble. The Group has worked with its major printers on a
plan to adopt sustainable paper and recently instituted a
Forest Stewardship Council (FSC) paper or Sustainable
Forestry Initiative (SFI) paper policy across all our imprints.
Quarto monitors the Brexit-situation closely, taking note
of the advice of the UK Government and key suppliers so
that it is ready to make appropriate preparations to
ensure minimal disruption. Most of Quarto’s product is
shipped directly to EU countries from its printers based
principally in China. These shipments are not expected to
be affected by Brexit.
All components receive safety testing from specialist and
accredited independent third parties. Management
carefully selects suppliers for components.
A cloud storage solution is integrated into production
workflow for storage, back-up and recovery services for
product files in development. Two archive data arrays
that will be a replication of each other was introduced in
the first half of 2018 – one in the UK and one in the US
with each hosting a complete set of backlist archives.
During 2018 an information system was introduced
Group-wide to harmonise the management of contracts.
Quarto reviews its licensing, permission-acquisitions and
other contracts routinely receiving advice from relevant
professional firms (including the possible impact of
Brexit) so that legal instruments remain current and
represent best practices so that we ensure that our
practices are aligned and consistent across imprints.
The Group uses enterprise level firewalls and IT controls
to prevent attack as well as maintaining cloud-based
copies and offsite back-up of IP. Computerised files of
the Group’s books are also maintained by printers. We do
not store any personal or credit card data on our
transactional website www.quartoknows.com.
Our portfolio of imprints and large number of products
spread this risk. The overall portfolio is well diversified
with no single title or series accounting for more than 5%
of our total revenue in 2018.
Quarto’s Publishers are experienced and talented
professionals who work alongside sales and marketing
teams and strive to stay close to publishing trends and
markets. The Group also offers competitive market rate
remuneration packages and works hard to make Quarto
an attractive place to work.
Quarto monitors the Brexit-situation closely, taking note
of the advice of the UK Government so that it is ready to
support any staff affected by Brexit and can maintain its
business activities.
18
19
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BOARD OF DIRECTORS
Andy Cumming
Non-Executive Chairman
Chuk Kin Lau
Chief Executive Officer
Ken Fund
Chief Operating Officer
C.K. Lau is an executive director of Lion
Rock Group Limited and an executive
director of OPUS Group Limited, a
subsidiary of Lion Rock Group. CK joined
Quarto in May 2018 after being elected
to the Board as an Executive Director.
A graduate of SUNY Oswego and with
an MBA in Finance at Pace University,
Ken first started with Dino DeLaurentiis
Productions in New Business
Development moving on to Simon &
Schuster Publishers as Business
Manager in 1984. He joined Harper
Collins San Francisco in 1990 where he
was Senior Vice President of Finance
and Operations, Trade Group,
responsible for all of the publishing
imprints. In 1999 Ken joined Quarto as
President and CEO of Rockport
Publishers. He has been COO of Quarto
since July 2016 and joined the Board on
12 July 2018.
Andy joined the Board on 1 March 2018.
Andy has over 40 years' experience in
banking and risk management. The last
17 years of his full-time career were
spent with Lloyds Banking Group in a
variety of senior positions, including
seven years as the Chief Credit Officer
of the Commercial Banking Division and
four years as Managing Director of the
Global Non-Core Division. He was also a
member of the Group Risk and
Commercial Banking Executive
Committees.
Andy is currently Non-Executive
Director of Lloyds Development Capital,
the private equity arm of Lloyds Banking
Group, Bluestone Holdings Limited, a
multinational financial services business,
and Seadrill Partners LLC, which focuses
on the acquisition, ownership and
operation of offshore drilling rigs.
Andy is a member of the Audit,
Nominations and Remuneration
Committees.
20
The Quarto Group, Inc. Annual Report 2018Governance Michael Mousley
Interim Chief Financial Officer
Mei Lan Lam
Non-Executive Director
Jane Moriarty
Non-Executive Director
Michael worked for 12 years at Deloitte
Haskins & Sells (now part of PWC),
spending the last two years of his tenure
there as a senior manager in the Mergers
and Acquisitions Department. He joined
Quarto in 1987, and was appointed
Finance Director in 1989. Michael
remained with Quarto for 28 years
before retiring from his post as Chief
Financial Officer in 2015. Michael
rejoined Quarto as a Non-Executive
Director in May 2018 and became Interim
Chief Financial Officer in June 2018.
M. L. Lam is an executive director of Lion
Rock Group Limited. She is the chief
financial officer of Lion Rock Group and
was responsible for the financial
management of Lion Rock Group. Mei
Lan has 30 years’ experience in finance
and has held senior financial positions in
various listed companies and a non-
profit charitable organization in Hong
Kong. She joined Quarto after being
elected to the Board as a Non-Executive
Director, in May 2018.
Jane is an FCA who worked with KPMG
LLP for over 29 years. During her time
with KPMG she worked with a broad
range of businesses helping them to
develop strategies to realise
opportunities and manage threats in fast
moving environments.
She has built and managed market
leading teams and believes in the
importance of effective teamwork.
Jane is currently Non-Executive Director
of Mitchells & Butlers plc, one of the
largest operators of pubs, bars &
restaurants in the UK, NG Bailey, an
independent engineering, construction
and services company in the UK and
Martin’s Properties, a leading
commercial, retail and residential
property company.
She joined the Board of Quarto on 12
November 2018.
20
21
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOMINATIONS
COMMITTEE REPORT
The Committee met twice during the
year and was active in appointing Andy
Cumming as an independent Non-
Executive Director on 1 March 2018 and
Jane Moriarty as Senior Independent
Director on 12 November 2018.
The Chairman of the Committee
attends the Annual Meeting to address
any shareholder questions relating to
the Committee.
Andy Cumming
Chairman of the Nominations
Committee
8 March 2019
Following the Board changes that took
place in 2018, the Nominations
Committee now comprises the Group’s
Non-Executive Directors, Andy
Cumming (Committee Chairman) and
Jane Moriarty (Senior Independent
Director). A copy of the Committee’s
formal terms of reference 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 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.
22
The Quarto Group, Inc. Annual Report 2018Governance AUDIT COMMITTEE REPORT
On 17 May 2018 a number of members of
the Audit Committee resigned. Andy
Cumming was the sole remaining
member. On 12 November 2018, Jane
Moriarty joined the Committee and
became its Chairman. In line with FRC
guidance the committee now has 2
members.
Responsibilities
The Committee acts in accordance with
its terms of reference, 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 judgements
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
any 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,
long-term viability and going
concern.
• 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 at least annually.
Committee Meetings
The 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.
She also meets with the external Audit
Partner from time to time to discuss
issues and be appraised of regulatory
changes.
By invitation the Company’s CEO and
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 3 times during 2018
and once so far in 2019.
The Committee, as part of full Board
meetings, was also involved in approving
announcements made to the London
Stock Exchange.
Activities of the Committee
During 2018 and 2019, to date, 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 2018 year-end audit and
approval of the preliminary
announcement and the annual report.
• Review of the Directors’
viability statement.
• Consider the external auditor’s
comments in relation to internal
controls and review the need and
potential scope of internal audit
functions.
• Consider the Group’s extended and
amended banking agreements,
particularly with respect to ensuring
the Group’s compliance with its
banking covenants.
• Review and approval of the interim
report 2018 after discussion with
management and the external auditor.
• Review and consider the goodwill
impairment review.
Significant Audit Risks,
Key Findings and Financial
Judgements Relating to
Year End Accounts 2018
The Committee concentrated on the
following in relation to the 2018
accounts.
Going Concern and Covenant
Compliance
The 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.
Following the extension and amendment
of the Group’s banking facilities, the
Committee reviewed the Group’s
forecasts to confirm the Group was able
to meet its current and future banking
covenants.
The Group’s financial performance in
2018, and its forecast future
performance, reflects the positive
impact of the Group’s renewed focus on
core products and titles as well as the
cost-out programme (both of which are
discussed in more detail earlier in this
report).
Assessment of the carrying
value of Goodwill
Goodwill 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. In the
tests carried out at 31 December 2018,
the value in use calculation exceeded
the carrying value of goodwill.
Further detail is set out in note 11 to the
Financial Statements.
22
23
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT COMMITTEE REPORT (CONTINUED)
Recoverability of pre-
publication costs
Amortisation of pre-publication costs is
charged to the income statement on a
straight-line basis over the estimated
useful lives of the intangible assets.
Pre-publication costs are capitalised in
accordance with IAS 38 and the
Committee, with the external auditor,
discussed the assumptions behind
the amortisation profile including the
amortisation period of the publications.
Further detail is set out in note 15 to the
Financial Statements.
Exceptional items
The 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 items
outside the scope of normal business
that need to be disclosed by virtue of
their size or incidence. This has been
applied consistently from 2014.
For the 2018 accounts, there have been
significant exceptional items. These
include $2.9m in respect of restructuring
costs ($1.7m for people and other
reorganization costs and $1.2m of
impairments and provision against
imprint assets), $1.5m of refinancing
costs and $0.8m in respect of Board
changes. All of these items were
included within Exceptional Items due
either to their scale and one-off nature
or to being non-trading items.
For the 2017 accounts, there were
significant exceptional items. These
included goodwill impairment ($17.4m),
$5.9m in respect of restructuring costs
($0.5m for people costs and $5.4m of
impairments and provision against
imprint assets),and $0.9m of corporate
costs including costs in respect of the
security package put in place in relation
to the overall financing facilities ($0.6m),
costs incurred in relation to the
unsuccessful bid for the Group in the
year ($0.2m) and abortive acquisition
costs ($0.1m).
Revenue recognition and sales
returns
The 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 is required to
provide for returns, which may be made
subsequent to the period end.
Management assesses sales returns
through quantifying the previous returns
experience and post year end returns.
During 2018, the Committee reviewed
management’s methodology, and
discussed the procedures followed to
ensure that revenue was booked into the
correct period in line with the stated
accounting policies and that returns
provisions were reasonable. As a result
the returns provision for 2018 is
considered to be fully provided.
Inventory provisioning
The economics of manufacturing and
wholesaling of books in the publishing
businesses inherently leads to
substantial inventories. Most of these are
printed without guaranteed sales so
there is a degree of judgement as to the
provisions required to hold this inventory
at the lower of cost or net realisable
value.
The Committee reviewed management’s
methodology and discussed the
testing performed by the Auditor to
provide comfort that these estimates
were reasonable.
Receivables provisioning
Trade receivables is inherently a critical
accounting estimate in relation to the
risk of non recoverability of trade
receivables. The Committee has
discussed and challenged the overall
receivables position and considered the
reasonableness of the level of
provisioning.
External Audit
The Committee assesses the
effectiveness of its external auditor
through on-going dialogue and
communication with the Auditor.
The audit cycle includes formal
meetings. The audit planning meeting,
which happens prior to the audit,
was when the Committee discussed
reporting developments, significant
accounting risks, improvement in
relation to risk management and internal
control 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 and during intermediate
briefing sessions with the Chair of the
Audit Committee. 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 interim CFO involved with the
audit. The Committee is satisfied with
the Auditor’s effectiveness in 2018.
Appointment of Auditor and
Independence
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.
For the 2018 audit of the Group and the
Company’s accounts, Grant Thornton
charged $244,000 (2017: $256,000).
24
The Quarto Group, Inc. Annual Report 2018Governance We consider the following items to be
significant to the effectiveness of the
internal control and risk-management
framework in the accounting and
consolidation processes:
•
Identification of significant risk and
control areas of relevance to the
Group-wide accounting process,
• Controls to monitor the consolidation
process and its results at the level of
the Executive Board and at the level
of the companies included in the
Consolidated Financial Statements,
• Preventative control measures in the
accounting system of the Group and
in the processes that generate
significant information used to
prepare the Consolidated Financial
Statements – areas include the Group
management report, segmental
analysis and commitment disclosures.
Jane Moriarty
Chairman of the Audit Committee
8 March 2019
Non-Audit Services
Grant Thornton has not been engaged
to provide any non-audit services. The
Company has a policy in regard to the
provision of non-audit services by the
auditor.
Internal Audit
To date there has not been a separate
internal audit function, given the size
and scale of the Group’s operations.
In June 2018 a new interim CFO, Michael
Mousley, was appointed. He has
continued to develop a strong and
effective control environment for the
business. This has built the Board’s and
Audit Committee’s confidence in the
financial management of the Group.
The Audit Committee decided not to
establish a dedicated internal audit
function this year. It will review this
decision on an annual basis.
Internal control and risk
management systems
The Executive Board is responsible for
ensuring appropriate risk management
control procedures are in place, and
regularly conducts reviews of the
effectiveness of the Company’s risk
management and internal control
systems. These reviews cover all material
controls designed to respond to
financial, operational and compliance
risks.
The Executive Board is satisfied that
the Company had appropriate risk
management and risk control
procedures in place throughout the year
and up to the date of approval of this
Annual Report to prevent or detect any
material exposures. The Audit Committee
reviewed and monitored the work of the
Executive Board during the year.
The internal control framework
comprises principles, procedures and
measures that are geared towards
the implementation of controlled
management decisions. It is designed
to ensure the effectiveness and
efficiency of business activities, the
quality and reliability of internal and
external accounting, compliance with
the legal frameworks that the Company
must adhere to, and to ensure that
measures are in place that safeguard
proper IT-based processing and data.
The following structures and processes
have been implemented by Quarto
to mitigate potential risks in the
accounting function:
• The Executive Board is responsible
for the internal control and risk
management framework with regard
to the accounting and consolidation
processes.
• The reporting structure relating
to all companies included in the
Consolidated Financial Statements
requires that significant risks are to be
reported immediately to the
Executive Board by the individual
businesses on identification.
• Certain accounting-related processes
(in particular payroll) are outsourced.
24
25
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT
Annual Statement
Dear shareholder
I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2018, which has been prepared by
the Committee and approved by the Board.
For the year ended 31 December 2018, there were no substantial changes in Directors’ remuneration arrangements.
This is the Company’s fifth 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 Quarto’s Remuneration Policy recommended by the Board, which will apply from 16 May 2019 subject to approval at
the 2019 Annual Meeting. The proposed policy mirrors the existing policy implemented on 17 May 2018.
The second section is the Annual Report on Remuneration, which reviews how the existing policy has been implemented.
In 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 31 December 2018; pension entitlements; and, Directors’
shareholdings and share interests. All other parts of the Directors’ Remuneration Report are unaudited.
I would be happy to receive any comments you may have on this report. I hope you find the report clear and comprehensive
and that it helps demonstrate how remuneration is linked to the performance of the Company, and that you are able to support
the resolutions on remuneration being presented at this year’s Annual Meeting.
Jane Moriarty
Chairman of the Remuneration Committee
8 March 2019
26
The Quarto Group, Inc. Annual Report 2018Governance Remuneration Committee meeting attendance 2018
Committee membership
Jess Burley (Chair until 17 May 2018)
Peter Read (Until 17 May 2018)
Claire Capeci (Until 17 May 2018)
Leslie-Anne Reed (Until 17 May 2018)
Number of meetings held during the year: 2
1 of 1 (held before 17 May 2018)
1 of 1 (held before 17 May 2018)
1 of 1 (held before 17 May 2018)
0 of 1 (held before 17 May 2018)
Andy Cumming (Appointed 1 March 2018, Chair from 17 May 2018 to 7 March 2019)
2 of 2
Jane Moriarty (Appointed 12 November 2018, Chair from 7 March 2019)
C. K. Lau (Appointed 17 May 2018)
1 of 1 (held after appointment)
1 of 1 (held after appointment)
Other Board members may be invited to attend parts of some committee meetings. No individual is permitted to participate in
any matters concerning details of their own remuneration.
Policy
This section sets out Quarto’s Remuneration Policy for Directors which is recommended by the Board for approval at the 2019
Annual Meeting. The Group’s principal remuneration policy aim is to ensure that the Executive Directors’ remuneration is
designed to promote long-term value creation through transparent alignment with the agreed corporate strategy.
Performance related elements are designed to be transparent, stretching and are rigorously applied.
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, but exercising caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding
improvement in corporate and individual performance.
26
27
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (CONTINUED)
Quarto’s Remuneration Policy Summary
FIXED PAY
Element of
remuneration
Purpose and
link to strategy
Base Salary/
Fees
Set at competitive
levels in the markets
in which Quarto
operates, in order
to attract and
retain executives.
Benefits
Designed to be
competitive in the
market in which the
individual is
employed.
Operation
Opportunity
Performance metrics
Reviewed 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 and conditions at
organisations of a similar
size and complexity; and,
• pay and conditions
elsewhere in the Group.
Benefits 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.
Not applicable.
There 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.
Not applicable.
Benefits vary by role,
individual circumstance and
eligibility and are
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 % 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).
Pension
To provide cost
effective retirement
benefits.
Participation in defined
contribution plan or cash
allowance in lieu.
Up to 15% of base salary.
Not applicable.
28
The Quarto Group, Inc. Annual Report 2018Governance VARIABLE PAY
Element of
remuneration
Purpose and
link to strategy
Annual
performance
bonus
Designed to
reinforce individual
performance and
contribution to the
achievement of profit
growth and strategic
objectives.
Operation
Opportunity
Performance metrics
Measures are reviewed prior
to the start of the financial
year to ensure they remain
appropriate and reinforce
the business strategy.
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.
Maximum potential
opportunity of up to 100% of
base salary for the CEO and
50% for the COO.
60% on financial
objectives and 40%
on personal
objectives.
For the financial target, the
threshold bonus starts at 10%
of the total potential for
exceeding the base EBITDA
target by 2% and up to 100%
of the total potential for
exceeding the base EBITDA
target by 10%.
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.
28
29
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (CONTINUED)
VARIABLE PAY
Element of
remuneration
Purpose and
link to strategy
Operation
Opportunity
Performance
Share Plan
(PSP)
Ensures that the
Executive’s interests
are aligned with those
of shareholders
through reward for
providing shareholders
with substantial
increases in
shareholder value and/
or for achievement of
a measure of sustained
growth in earnings
over the medium
to long term.
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.
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. Award
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.
Performance metrics
Awards to Executives
are subject to four-
year cumulative
earnings per share
(EPS) and/or total
shareholder return
(TSR) 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
Element of
remuneration
Purpose and
link to strategy
Operation
Opportunity
Performance metrics
Non-Executive
Directors’ fees
To 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.
Annual fee for Chair.
Annual base fee for Non-
Executive Directors.
Additional fees are paid
to the Senior Independent
Director and the Chair of
the Committees to reflect
additional responsibilities.
Fees are reviewed annually,
taking into account time
commitment, responsibilities
and fees paid by
comparable companies.
Not applicable.
There 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.
30
The Quarto Group, Inc. Annual Report 2018Governance Performance measure selection and approach to target setting
The 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 are based on the amount of EBITDA generated compared to budget. The Committee considers this measure is the
most appropriate measure of long-term performance of the Group.
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 2% growth in profits with Stretch target being 10%
growth.
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. Key management personnel and senior managers
with substantial operational responsibilities are eligible to participate in an annual 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.
Key management personnel and 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 guidelines
The Committee recognises the importance of aligning the interests of Executives with shareholders through the building up of
a significant shareholding in the Group. 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.
Remuneration 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:
Component:
Base Salary
Benefits
Pension
Annual Bonus
PSP
Approach
Determined 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.
In line with the
stated policy.
In line with the
stated policy.
In line with stated
policy, with the relevant
maximum pro-rated to
reflect the proportion
of the year served.
In line with the
stated policy.
Maximum
Value
Not applicable.
Not applicable. Not applicable.
50% to 100%
of base salary
50% of base
salary (100% in
exceptional
circumstances)
In determining appropriate remuneration for a new Executive Director, 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 Company 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 Monte Carlo,
Black-Scholes, or other relevant equivalent valuation and, where applicable, taking into account toughness of performance
conditions attached to these awards and the likelihood of those conditions being met.
30
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The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (CONTINUED)
In the case of appointing a new Executive Director by way of internal promotion, the Group will honour any contractual
commitments made prior to his or her promotion to Executive Director.
In the case of appointing a new Non-Executive Director, the approach will be consistent with the remuneration policy.
Executive Service contracts, Non-Executive letters of appointment and exit payments policy
Executive Director service contracts have no fixed term and have a notice period of not more than 12 months from either the
Executive or the Group. 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:
Director
C. K. Lau
Michael Mousley
Ken Fund
Effective date of contract
Notice period
17 May 2018
4 June 2018
11 July 2018
3 months
3 months
6 months
Non-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 Chair, together with the other Non-Executive Directors, have a one month notice period, and are subject to re-election
each year.
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:
Director
Date of Appointment
Notice period
Andy Cumming
Mei Lan Lam
Jane Moriarty
1 March 2018
17 May 2018
12 November 2018
1 month
1 month
1 month
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.
During the year ended 31 December 2018, Marcus Leaver was paid compensation for loss of office amounting to $622,000
(comprising $616,000 in lieu of his salary for his notice period and $6,000 in respect of benefit entitlements) and no payments
were made to past Directors.
In 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.
Component
Annual bonus
PSP
Bad leaver
No annual bonus payable
Outstanding awards are forfeited
Good leaver
Change-of-control
Eligible 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
otherwise
Outstanding 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
otherwise
Eligible 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 otherwise
Outstanding 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 otherwise
Any 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, part
of the business in which the individual is employed or engaged ceasing to be a member of the Group or any other reason as the
Committee decides. Bad leaver provisions apply under other circumstances.
32
The Quarto Group, Inc. Annual Report 2018Governance 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 below shows the remuneration that the Executive Directors could be expected to obtain based on varying
performance scenarios. C. K. Lau and Michael Mousley are not included in the illustrations because neither of them are on
bonus plans. Illustrations are intended to provide further information to shareholders regarding the relationship between pay
and performance.
Potential reward opportunities illustrated are based on the remuneration policy presented for shareholder approval at the
Annual Meeting on 17 May 2018, applied to the latest known fixed pay of base salaries, pension, other benefits and variable pay
of annual bonus and PSP. To better illustrate the annual potential reward opportunities, the remuneration and PSP Awards are
pro-rated to an annual equivalent. All remuneration is contracted in Sterling.
EXECUTIVE DIRECTORS APPLICATION OF REMUNERATION POLICY
US$000
600
500
400
300
200
100
0
Ken Fund
1.6%
440
19.8%
78.6%
2.6%
533
32.5%
64.9%
346
100%
Fixed
Annual variable
PSP
Min
On target
Max
In illustrating the application of the remuneration policy the following assumptions have been made:
Minimum
On target
Maximum
Basic salary, pension or cash in lieu of pension and benefits. No bonus and no vesting of the PSP.
Basic salary, pension or cash in lieu of pension and benefits. Bonus payout at 50% of the maximum
bonus. PSP vesting at 50% of maximum vesting.
Basic salary, pension or cash in lieu of pension and benefits. Bonus payout at 100%. Full vesting of
the PSP.
Consideration of conditions elsewhere in the Group
When reviewing and setting executive remuneration, the Committee takes into account the pay and employment conditions
of all employees of the Group.
The Group has not carried out a formal employee consultation regarding Board remuneration, though it does comply with local
regulations and practices regarding employee consultation more broadly.
Consideration of shareholder views
It 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.
Jane Moriarty
Chair of the Remuneration Committee
8 March 2019
32
33
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ANNUAL REPORT ON REMUNERATION
THE REMUNERATION COMMITTEE
The 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 Chair, 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 scheme; and,
• Granting awards under the Performance Share Plan.
The main issues discussed and/or approved during the financial year under review:
• Approval of the prior year Directors’ Remuneration Report;
• 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;
Statement of shareholder voting at the 2018 Annual Meeting
The following table shows the results of the advisory vote on the 2017 Annual Remuneration Report at the Annual Meeting on
17 May 2018.
For (including discretionary)
Against
Total votes cast
Withheld
Total
number of
votes
9,597,781
4,741,090
14,338,871
1,000
% of
votes cast
66.94%
33.06%
100%
Single 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 31 December
2018 and the prior year. These amounts are shown in the reporting currency, although settled in Sterling. The exchange rates
used in 2018 and 2017 were 1.3375 and 1.29, respectively.
Executive Directors
Marcus Leaver*
Michael Connole*
Carolyn Bresh*
C. K. Lau*
Laurence Orbach*
Michael Mousley*
Ken Fund*
Base Salary
Benefits1
Annual Bonus2
Compensation
for loss of office
Total
remuneration
2018
$’000
2017
$’000
2018
$’000
2017
$’000
2018
$’000
2017
$’000
2018
$’000
2017
$’000
2018
$’000
2017
$’000
224
—
109
—
42
265
164
545
269
—
—
—
—
—
6
—
—
—
—
—
10
6
6
—
—
—
—
—
—
—
—
—
—
—
—
150
622
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
852
—
109
—
42
265
174
701
275
—
—
—
—
—
34
The Quarto Group, Inc. Annual Report 2018Governance Non–Executive Directors
2018
$’000
2017
$’000
2018
$’000
2017
$’000
2018
$’000
2017
$’000
2018
$’000
2017
$’000
2018
$’000
2017
$’000
Fees3
Benefits
Annual Bonus
Compensation
for loss of office
Total
remuneration
Peter Read*
Mike Hartley*
Jess Burley*
Claire Capeci*
Leslie-Ann Read*
Andy Cumming* 4
Mei Lan Lam*
Jane Moriarty*
40
—
23
17
21
77
—
9
93
40
51
28
20
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
40
—
23
17
21
77
—
9
93
40
51
28
20
—
—
—
* For period for which he/she was a Director/Non-Executive Director.
1 Benefits comprise private medical insurance contributions.
2 Annual bonus for performance over the relevant financial year. Further details can be found on page 36.
3 Details of Non–Executive Directors’ fees can be found on page 37.
4 The fees for Andy Cumming include $14,000 of consulting fees, on an arm’s length basis.
Directors’ shareholdings
The share interests of the Directors who held office during the year ended 31 December 2018 and of their connected persons in
the share capital of the Company are shown below:
Number of share
options of common stock
Number of US$0.10
shares of common stock
Executive Directors
Marcus Leaver
Laurence Orbach
C. K. Lau
Michael Mousley
Ken Fund
31 December
2018*
312,149
—
—
—
31 December
2017**
31 December
2018*
31 December
2017**
312,149
—
—
—
395,000
4,103,615
5,754,672
45,700
24,000
395,000
4,103,615
5,554,672
45,700
4,000
75,188
75,188
During the year the market price of the shares of common stock ranged between 65.5p and 186p. The mid-market price on 31
December 2018 was 74p.
Non–Executive Directors
Peter Read
Jess Burley
Claire Capeci
Leslie-Ann Read
Andy Cumming
Mei Lan Lam
Jane Moriarty
*Or date of resignation
** Or date of appointment
Number of US$0.10
shares of common stock
31 December
31 December
2018*
25,625
7,355
10,000
—
—
—
—
2017**
25,625
7,355
10,000
—
—
—
—
34
35
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ANNUAL REPORT ON REMUNERATION (CONTINUED)
Directors’ share options
Shares: Common Stock of $0.10 each
Date of grant
As at
1 January
2018*
Granted
Forfeited
As at
31 December
2018
Face value
at date of
grant
(£’000)
Fair value
at date of
grant
(£’000)
Price at
exercise
date
Marcus Leaver
24/09/2015
19/04/2016
4/08/2016
28/04/17
19/04/2016
28/04/2017
Ken Fund*
83,732
73,750
83,732
70,935
312,149
49,692
25,496
75,188
—
—
—
—
—
—
—
—
(83,732)
(73,750)
(83,732)
(70,935)
(312,149)
—
—
—
—
—
—
—
—
49,692
25,496
75,188
*Or date of appointment
All awards under the PSP schemes have a four-year vesting period.
175
181
175
187
122
67
239
187
239
190
126
68
n/a
n/a
n/a
n/a
n/a
n/a
Executive directors’ base salaries/fees
During the year 2018, Marcus Leaver, the Chief Executive Officer, resigned on 24 May 2018 and was paid salary in line with his
service contract (£419,486 p.a.).
During the year 2018, Carolyn Bresh, who was appointed on 9 April 2018 and resigned on 5 June 2018, was paid salary in line
with her service contract (£287,500 p.a.)
During the year 2018, C. K. Lau, appointed on 17 May 2018, received $nil, in accordance with his service contract.
During the year 2018, Michael Mousley, appointed on 17 May 2018, received £198,000, in accordance with his service contract.
During the year 2018, Ken Fund, appointed as COO on 11 July 2018, received $164,000, in accordance with his service contract.
Pension and other benefits
The Group makes an annual contribution to the personal pension plan of Ken Fund of $17,000. Annual pension contributions
for Marcus Leaver were £10,000. Benefits are in line with the policy.
Long-Term Incentives – PSP Awards
Under the Remuneration Policy, awards of nominal-cost (or nil-cost) options may be granted annually up to 50% (in
exceptional circumstances up to 100%) of base salary to the Executive Directors. Adhering to the same principles, other
applicable employees may receive an award (up a maximum of 40% of base salary, but typically much less). In considering the
size of awards, the Remuneration Committee has regard to the principles set out on page 30 of this report.
Half of the awards have a performance condition relating to cumulative Adjusted Diluted EPS performance for the four financial
years 2017 to 2020 inclusive. The other half of these awards have a performance condition relating to total shareholder returns
(‘TSR’) from a combination of dividends and share price growth (measured as an average over a 20 business day period
leading up to grant and vesting as appropriate). The TSR period runs from 28 April 2016 to 28 April 2020.
Targets for EPS are annual compounded growth of 5% for Threshold to 10% for Stretch. Targets for total shareholder returns
over the period are annual compounded growth of 7% for Threshold and 15% for Stretch.
The Committee believes the TSR directly measures shareholder returns and thereby aligns the goals of management and
shareholders. However, TSR can be affected by a variety of investment factors, which are far removed from those which
management can directly affect. The Committee believes that cumulative diluted EPS to be a good measure of managements’
long–term impact on the business and which over time translates into shareholder value. Thus a combination of TSR and EPS is
believed to be suitable goals for the PSP Awards. Major shareholders have been consulted about adding the TSR condition.
36
The Quarto Group, Inc. Annual Report 2018Governance Chair and Non-Executive director fees
The Non–Executive Directors’ annual fees for 2018 were as follows: Peter Read £72,000, Jess Burley £41,500, Claire Capeci
£35,000, Leslie–Ann Reed £38,500, Andy Cumming £35,000 (increased to £72,000 on becoming Chair) and Jane Moriarty
£50,000.
Relative importance of spend on pay
The graph below shows how total employee pay compares with expenditure on intellectual property for years ended
31 December 2017 and 31 December 2018.
32.5
28.4
35.6
29.7
16
40
30
20
10
0
Total employee pay
Intellectual property spend
2018
2017
Review of group performance
The chart on page 38 compares the value of £100 invested in Quarto shares, including re–invested dividends, on 31 December
2010 compared to the equivalent investment in the FTSE Small Cap Index, over the last nine 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.
CEO single figure of
remuneration
including bonus
($’000)
Annual bonus
awarded
PSP vesting
$ amount
($’000s)
% of
maximum
opportunity
$ amount
($’000s)
% of
maximum
opportunity
2010
750
2011
996
2012
1,0201
2013
870
2014
842
2015
2016
929
3,252
2017
701
2018
230
393
573
1213
233
169
305
34
150
—
—
—
—
—
—
— 56.90% 33.50% 95.00%
12.0%
31%
—
—
—
—
—
—
—
—
2,651
100%
_
_
_
_
_
_
1 The figure for 2012 is a combination of remuneration of Laurence Orbach, the previous CEO, and Marcus Leaver for the respective periods.
2 The figure for 2018 is a combination of remuneration of Marcus Leaver, the previous CEO, and C. K. Lau for the respective periods.
3 Discretionary.
36
37
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
ANNUAL REPORT ON REMUNERATION (CONTINUED)
Performance graph
350
300
250
200
150
100
50
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
Quarto
FTSE Small Cap
Change in CEO remuneration and for employees as a whole
The table below shows the change in CEO annual cash remuneration, defined as salary, taxable benefits and annual bonus,
compared to the average employees for 2017 to 2018.
$’000
Salary
Taxable benefits
Annual variable bonus
Total
CEO
2017
545
6
150
701
2018
224
6
—
230
Average
for other
employees
% change
% change
(59)%
nil
(100)%
(67)%
8%
15%
(70)%
8%
Salary, benefits and bonuses have been impacted by exchange rate movements.
Dilution limits
The 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). In the 10-year period to 31 December 2018, awards made under the Group’s share schemes represented 4.5% (2017:
6.4%) of the Group’s issued share capital.
Directors’ shareholding guidelines and share scheme interests
There has been no requirement for Executive Directors to retain shares as no other shares have vested and they are compliant
with the shareholding guidelines.
Jane Moriarty
Chair of the Remuneration Committee
8 March 2019
38
The Quarto Group, Inc. Annual Report 2018Governance DIRECTORS’ REPORT
Group
The Directors present their report and the audited financial statements of The Quarto Group, Inc., for the year ended
December 31, 2018.
Results
The loss for the year is $0.6m (2017: loss of $18.5m). The Directors do not propose a dividend.
An indication of likely future developments in the business of the Group is included in the Strategic Report on page 7.
Directors
Serving Directors during the year were as follows:
P. Read
(Non-Executive) Not re-appointed 17 May 2018
M. E. Leaver
(Chief Executive Officer) Resigned 24 May 2018
J. Burley
C. Capeci
L-A. Reed
(Non-Executive) Not re-appointed 17 May 2018
(Non-Executive) Not re-appointed 17 May 2018
(Non-Executive) Not re-appointed 17 May 2018
A. J. Cumming
(Non-Executive Chairman) Appointed 1 March 2018
C. M. Bresh
L. F. Orbach
C. K. Lau
(Chief Financial Officer) Appointed 9 April 2018, Resigned 5 June 2018
(Executive) Appointed 17 May 2018, Resigned 25 July 2018
(Chief Executive Officer) Appointed 17 May 2018
M. J. Mousley
(Interim Chief Financial Officer) Appointed 17 May 2018
M. L Lam
K. I. Fund
J. Moriarty
(Non-Executive) Appointed 17 May 2018
(Chief Operating Officer) Appointed 11 July 2018
(Non-Executive) Appointed 12 November 2018
None of the Directors have a service agreement of more than one year’s duration. All of the directors are subject to annual
re-election. The letters of appointment of the Non-Executive Directors are made available for inspection at the Company’s
registered office.
No Director had a contract of significance with the Company or its subsidiaries during the year.
Disclosure of information under Listing Rule 9.8.4
For the purpose of compliance with LR 9.8.4 R, the following information is included by reference within the Directors’ Report:
LR 9.8.4 R
Location
Directors’ remuneration
Annual Report on Remuneration, pages 34 to 38
Details of Long-term Incentive Plans
Annual Report on Remuneration, pages 34 to 38
Employees
Applications 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 as at 31 December 2018 is illustrated in the table below.
Board
Senior managers
All employees
Males
Females
4
8
90
2
10
240
38
39
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REPORT (CONTINUED)
Substantial shareholders
The Directors have been advised of the following shareholders who have an interest of 3% or more in the shares of the common
stock of the Company at 31 December 2018 and 8 March 2019. 8 March 2019 is the latest practicable date prior to the
publication of this report.
As at 31 December 2018
As at 8 March 2019
Number of
US$0.10 shares of
common stock
% holding of the
issued capital
of the Company
Number of
US$0.10 shares of
common stock
% holding of the
issued capital
of the Company
C. K. Lau
Dr. L. F. Orbach
Herald Investment Management
Intrepid Capital Management
Lazard Freres Gestion
Gresham House Asset Management Limited
5,754,672
4,103,615
1,812,045
1,159,466
993,674
898,837
28.15
20.07
8.86
5.67
4.86
4.40
5,754,672
4,103,615
1,812,045
1,159,466
993,674
898,837
28.15
20.07
8.86
5.67
4.86
4.40
The rights attaching to the Company’s shares of common stock are set out in the Company’s By-Laws, which can be found on
the Company’s website, www.quarto.com. 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 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. The Directors’ interests in the shares of the Company are set out on pages 35 and 36. There are no
restrictions on the number of shares that Directors can hold.
Risk management strategy
The Group is exposed to a number of principal risks and uncertainties. The Group’s financial risk management strategy is set
out in on page 18 of the Risk Management Review. Operational risks are set out on pages 18 and 19 of the Risk Management
Review.
Corporate governance
The 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 2016 (the ‘Code’), available from the FRC website at
www.frc.org.uk. The Board considers that the Company has been in compliance with the principles and provisions of the Code
throughout the year ended 31 December 2018 and to the date of this report, except as outlined below:
B.6.1. – It was decided that, because of the substantial additional workload for the Board, Committees and Directors arising
from the numerous and material matters affecting the Company during the year, there was insufficient time to review the
performance of the Board, its Committees and the Directors. It was also the case that a number of the Directors joined the
Company part way through the year and therefore it would have been premature to review their performance.
C.3.1. – Following the board changes on 17 May 2018, there was only one member of the Audit Committee, until the
appointment of Jane Moriarty on 12 November 2018.
The Board will continue to monitor its corporate governance arrangements, in the light of the Code (and future changes), as
the Group develops and grows. The Company intends to review the performance of the Board, its Committees and Directors in
2019.
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.
40
The Quarto Group, Inc. Annual Report 2018Governance Attendance by Directors at Board and Committee meetings in 2018
Board
Audit
Committee
Nominations
Committee
Remuneration
Committee
Jess Burley1 5
Claire Capeci2
Marcus Leaver5 6
Leslie-Ann Reed4
Peter Read3
Andy Cumming7
Carolyn Bresh5 8
Laurence Orbach9
C. K. Lau10
Michael Mousley5 11 15
Mei Lan Lam12 15
Ken Fund13 15
Jane Moriarty14
Total number of meetings
8
8
9
8
8
16
4
5
11
11
11
3
2
19
—
2
1
2
1
2
1
—
—
1
—
—
1
3
1
1
1
1
1
1
—
—
1
—
—
—
—
1
1
1
—
—
1
2
—
—
1
1
1
1
1
2
1 Jess Burley not re-appointed on 17 May 2018.
2 Claire Capeci not re-appointed on 17 May 2018.
3 Peter Read not re-appointed on 17 May 2018.
4 Leslie-Ann Reed not re-appointed on 17 May 2018.
5 These Directors were not members of the Audit Committee (as referred to below) and attend by invitation only.
6 Marcus Leaver resigned on 24 May 2018.
7 Andy Cumming appointed on 1 March 2018.
8 Carolyn Bresh appointed on 9 April 2018, resigned on 5 June 2018.
9 Laurence Orbach appointed on 17 May 2018, resigned on 25 July 2018.
10 C. K. Lau appointed on 17 May 2018.
11 Michael Mousley appointed on 17 May 2018.
12 Mei Lan Lam appointed on 17 May 2018.
13 Ken Fund appointed on 11 July 2018.
14 Jane Moriarty appointed on 12 November 2018.
15 Not members of the Remuneration Committee.
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) As at 31 December 2018, the Board comprised three Executive Directors and three 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. Jane Moriarty, the Senior Independent Director, is available to shareholders, if they
have concerns that are not able to be resolved through normal channels. Two Non-Executive Directors, Andy Cumming and
Jane Moriarty were considered by the Board to be independent throughout 2018.
c) 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).
d) The Board met 19 times in 2018. Attendance details are set out above. A formal agenda is prepared for each meeting and all
board papers and information are circulated to the Board at least 2 days before the meetings except in the case of meetings
that are convened on short notice.
e) All of the Directors are subject to re-election by the shareholders at the Annual Meeting. The Board is satisfied to support
the re-election of Andy Cumming, Jane Moriarty and Mei Lan Lam as Non-Executive Directors as they have individually
produced excellent performance in their duties and have shown a high level of commitment to their roles.
f) The remuneration of the Executive Directors is recommended by the Remuneration Committee, comprising Jane Moriarty,
who is the Committee Chairman, Andy Cumming and C. K. Lau. A separate report with respect to Directors’ remuneration is
included on pages 34 to 38. The Committee meets at least twice a year. In the year ended 31 December 2018 the Committee
had met 2 times.
g) The Audit Committee comprises Jane Moriarty, who is Committee Chairman, and Andy Cumming. The Board is satisfied that
the members of the Committee have appropriate financial experience to fulfil their role. Further details of the Committee’s
work can be found on pages 23 to 25.
40
41
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REPORT (CONTINUED)
h) The Nominations Committee comprises Andy Cumming, who is Committee Chairman, Jane Moriarty and C. K. Lau. Details
of the work of the Nominations Committee during the year are set out in its report on page 22.
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 in order to understand their views, that are then 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 20 days in advance of the meeting. All
Directors attend the meeting which is used to communicate with shareholders.
j) The Board has 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.
Greenhouse gas emissions reporting
During 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 is 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
Scope 1
Scope 2
Total GHG emissions (CO2e)
Average number of staff
Emissions per staff member
* Excluding staff at fully serviced offices.
2018
2017
Tonnes of CO2e
13
13
129
142
372
0.38
174
187
425
0.44
42
The Quarto Group, Inc. Annual Report 2018Governance Risk management and internal controls
The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. As stated previously,
the Directors have carried out a robust assessment of the principal businesses and considered the controls in place to eliminate
or mitigate the impact of key risks. 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 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 weekly and a report is produced summarising the Group position.
e) All operating units prepare annual budgets and cash flow forecasts which are reviewed by the Board.
The UK Corporate Governance Code introduced a requirement that the Directors perform on-going monitoring and review
of 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 which cover all material controls. 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 2019.
Michael Clarke
Company Secretary
8 March 2019
Company Registration Number: FC0 13814
42
43
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE DIRECTORS’ REPORT AND
THE FINANCIAL STATEMENTS
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 Company and the
undertakings included in the
consolidation taken as a whole; and
• the Strategic Report 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.
C. K. Lau
Chief Executive Officer
8 March 2019
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 Directors’
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.
The 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 Company’s 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
preparing the Strategic Report, Annual
Report and the Directors’ Remuneration
Report and the financial statements in
accordance with applicable law and
regulations.
The Company is an ‘overseas’ company
within the meaning of the Companies
Act 2006.
Company law requires the directors to
prepare financial statements for each
financial year. Under that law the
directors have prepared the Group
financial statements in accordance with
International Financial Reporting
Standards (IFRSs) as adopted by the
European Union and the parent
Company financial statements in
accordance with United Kingdom
Generally Accepted Accounting Practice
(United Kingdom Accounting Standards)
and applicable law including FRS 102
‘The Financial Reporting Standard
applicable in the UK and Republic of
Ireland’. Under company law the
directors must not approve the financial
statements unless they are satisfied that
they give a true and fair view of the state
of affairs and profit or loss of the
company and group for that period. In
preparing these financial statements, the
directors are required to:
• select suitable accounting policies
and then apply them consistently;
• make judgements and accounting
estimates that are reasonable
and prudent;
• state whether applicable UK
Accounting Standards for the parent
company and IFRSs as adopted by
the European Union for the Group
have been followed, subject to any
material departures disclosed and
explained in the financial statements;
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
company will continue in business.
44
The Quarto Group, Inc. Annual Report 2018Governance INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF THE QUARTO GROUP, INC.
Opinion
Our opinion on the financial statements is unmodified
We have audited the financial statements of The Quarto Group, Inc. (the ‘parent company’) and its subsidiaries (the ‘group’) for
the year ended 31 December 2018 which comprise the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated
cash flow statement, the company balance sheet, the company statement of comprehensive income, the company statement
of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial
reporting framework that has been applied in the preparation of the group financial statements is applicable law and
International Financial Reporting Standards (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, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and
Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice).
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 2018 and of the group’s loss and the parent company’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 which would
have applied were the company incorporated in the United Kingdom; and, as regards the group financial statements, Article
4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial
statements section of our report. We are independent of the group and the parent company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as
applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK)
require us to report to you whether we have anything material to add or draw attention to:
• the disclosures in the annual report set out on page 18 and 19 that describe the principal risks and explain how they are
being managed or mitigated;
• the directors’ confirmation, set out on page 15 of the annual report that they have carried out a robust assessment of the
principal risks facing the group, including those that would threaten its business model, future performance, solvency or
liquidity;
• the directors’ statement, set out on page 15 of the financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’
identification of any material uncertainties to the group and the parent company’s ability to continue to do so over a period
of at least twelve months from the date of approval of the financial statements;
• whether the directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
• the directors’ explanation, set out on page 15 of the annual report as to how they have assessed the prospects of the group,
over what period they have done so and why they consider that period to be appropriate, and their statement as to whether
they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall
due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications
or assumptions.
44
45
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Overview of our audit approach
• Overall materiality: $780k, which represents 0.52% of group revenue;
• Key audit matters were identified as assessing the completeness of the sales return provision, assessment of the carrying
value of goodwill in relation to Quarto US and assessment of the carrying value of pre-publication costs.
• We have performed a full scope audit of Quarto Publishing plc (‘Quarto UK’) and Quarto Publishing Group USA Inc. (‘Quarto
US’), representing 100% of continuing revenue for the Group, 96% of group assets and 100% of group liabilities. We have
performed analytical procedures on the other companies within the group.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due
to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. These matters are the same as those identified during the planning stage of our audit.
Key Audit Matter – Group
Completeness of sales
returns provision
Under ISA 240 (UK) there is a presumed risk that
revenue may be misstated due to the improper
recognition of revenue.
The Group generates material revenues from published
books. Certain customers have a right of return for these
books and therefore the revenue is recognised net of a
provision for these returns. At 31 December 2018, this
provision totals $5,391k. Management judgement is
required when assessing the level of returns which are
expected to occur subsequent to the year end for sales
made during the year.
The key assumption applied is in relation to historical
return experience, which is used in order to predict
future returns and the provision required.
We therefore identified the completeness of sales return
provision as a significant risk, which was one of the most
significant assessed risks of material misstatement.
How the matter was addressed in the audit – Group
Our audit work included, but was not restricted to:
• Testing a sample of returns made during the year to supporting
documentation in order to confirm the accuracy of the data
used to calculate the rates of returns used in management’s
calculation of the provision;
• Recalculating the provision to confirm that it is appropriate and
in accordance with management’s policy;
• Comparing actual returns in the period to the provision made in
the prior period in order to evaluate the accuracy of
management’s forecasting.
• Comparing actual returns in January and February to the
provision made in order to evaluate whether the current year
provision is accurate.
The group’s accounting policy on the sales returns provision is
shown in note 1 to the financial statements and related disclosures
are included in notes 1 and 17. The Audit Committee identified the
sales returns provision as a significant issue in its report on page
24, where the Audit Committee also described the action that it
has taken to address this issue.
Key observations
We concur with management’s view that the provision made for
sales returns against revenue is reasonable and has been
calculated on an appropriate basis.
Our audit work did not identify any material errors in the
completeness of the sales return provision recognised in the year.
46
The Quarto Group, Inc. Annual Report 2018Governance Key Audit Matter – Group
How the matter was addressed in the audit – Group
Assessment of the carrying value of goodwill in
relation to Quarto US
The Group holds $18,954k of goodwill on its balance
sheet, with the largest balance ($12,882k) relating to
Quarto US as shown in note 11 to the accounts.
In accordance with International Accounting Standard
36: Impairment of Assets (‘IAS 36’) Goodwill is subject
to an annual impairment test.
We consider that the carrying value of the goodwill for
this CGU is a key risk due to the current economic
environment and performance of the US CGU leading to
sensitivity of the impairment calculations to a reasonably
possible change in the key assumptions, including the
discount rate, cash flow forecasts and growth rates.
We therefore identified the assessment of the carrying
value of goodwill in relation to Quarto US as a significant
risk, which was one of the most significant assessed risks
of material misstatement.
Assessment of the carrying value of
pre-publication costs
The Group’s net book value of capitalised pre-
publication costs at 31 December 2018 was $56,741k as
detailed in note 15. This represents costs which are
capitalised by the Group in relation to the development
of book titles.
These costs are amortised over a three-year period on a
straight-line basis to reflect the expected useful
economic life of this asset. There is management
judgement in relation to the length of life of this asset
and whether it is recoverable.
We therefore identified the assessment of the carrying
value of pre-publication costs as a significant risk which
was one of the most significant assessed risks of
material misstatement.
Our audit work included, but was not restricted to:
• Obtaining managements impairment review model and testing
the mathematical accuracy;
• Assessing the appropriateness of the asset and liability amounts
included in the carrying value of each of the cash generating
units which were assessed by management as part of the
impairment review;
• Assessing the discount rate applied, including an assessment by
our valuation specialists and benchmarking the rate against that
used by competitors;
• Performing sensitivity analysis around the value in use
calculation performed by management;
• Considering the post year end performance of the Group
against budgeted profit and cashflow and comparing historical
budgets to actual performance in order to assess the accuracy
of budgets prepared by management.
The group’s accounting policy on goodwill is shown in note 1 to the
Financial Statements and related disclosures are included in note 11.
The Audit Committee identified the carrying value of goodwill as a
significant issue in its report on page 23, where the Audit Committee
also described the action that it has taken to address this issue.
Key observations
No impairment charge has been recognised during the year in
relation to the goodwill held. Quarto US goodwill remains sensitive
to changes in key assumptions and these continue to be disclosed
in the accounts.
Our audit work included, but was not restricted to:
• Assessing the recoverability of pre-publication costs allocated
to each CGU as part of the impairment test performed under
IAS 36 to ensure that pre-publication costs are recoverable
based on management’s value in use calculation for each CGU
in order to assess overall recoverability;
• For imprints which were closed during the year it was ensured
that the related pre-publication cost was appropriately impaired;
• Analysing historic sales patterns to ensure that they support the
estimate made by management of a three-year useful economic life;
• Benchmarking of the useful economic life applied by peers.
The group’s accounting policy on pre-publication costs is shown
in note 1 to the financial statements and related disclosures are
included in note 15. The Audit Committee identified the carrying
value of pre-publication costs as a significant issue in its report on
page 24, where the Audit Committee also described the action
that it has taken to address this issue.
Key observations
Our testing did not identify any material misstatements in the
carrying value of pre-publication costs. We found no reason for
impairment of pre-publication costs or any additional factors to be
considered that would affect the carrying value recognised within
the financial statements.
46
47
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Key Audit Matter – Parent
How the matter was addressed in the audit – Parent
There are no key audit matters in relation to the
parent company.
Our application of materiality
We 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 in determining the nature,
timing and extent of our audit work and in evaluating the results of that work.
Materiality was determined as follows:
Materiality measure
Group
Parent
Financial statements as a whole
Performance materiality used to drive
the extent of our testing
Specific materiality
Materiality was set at $8,000 which is
1% of our initial assessment of total
assets. This benchmark is considered
the most appropriate because the
company is a holding company and
does not trade.
Materiality for the current year is at the
same level that we determined for the
year ended 31 December 2017 to
reflect that there has been no change
in the investment held.
Materiality was set at $780,000, which
is based on our initial assessment of a
number of benchmarks for the Group
and represents 0.52% of group
revenue. This is considered to be the
most appropriate benchmark for the
Group as it drives performance during
the year, and we do not consider it
appropriate to use earnings before tax
given the loss made during the year.
Materiality for the current year is higher
than the level that we determined for
the year ended 31 December 2017 to
reflect this being the second year we
have acted as auditors and the
improvement in the performance of the
Group during the year.
65% of financial statement materiality.
65% of financial statement materiality.
We determine a lower level of specific
materiality for certain areas which
includes directors’ remuneration and
related party transactions where they
are balances which are material by
their nature. We have set this at
$5,000.
We have determined a lower level of
specific materiality of $5,000 for
certain areas being directors’
remuneration and related party
transactions.
Communication of misstatements to the
audit committee
$39,000 and misstatements below
that threshold that, in our view, warrant
reporting on qualitative grounds.
$1,000 and misstatements below that
threshold that, in our view, warrant
reporting on qualitative grounds.
An overview of the scope of our audit
Our audit approach was a risk-based approach founded on a thorough understanding of the group’s business, its environment
and risk profile and in particular included:
• Evaluation by the group audit team of identified components to assess the significance of that component and to determine
the planned audit response based on a measure of materiality. Significance was determined as a percentage of the group’s
total assets, revenues and profit before taxation;
• Based on this evaluation it is considered that the only significant components are Quarto Publishing plc (‘Quarto UK’) and
Quarto Publishing Group USA Inc. (‘Quarto US’) due to financial significance;
• We have also performed a full scope audit of the parent company;
• For Quarto US we performed a full scope audit to component materiality, capped at 65% of group materiality.
• For Quarto UK we performed a full scope statutory audit to a materiality level which was lower than would have applied had
we performed procedures only for group purposes.
• The full scope audits performed represent 100% of continuing revenue for the year, 96% of total assets, and 100% of total
liabilities.
• The other entities in the group have been subject to analytical review.
48
The Quarto Group, Inc. Annual Report 2018Governance Other information
The directors are responsible for the other information. The other information comprises the information included in the annual
report set out on pages 1 to 44, other than the financial statements and our auditor’s report thereon. Our opinion on the
financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we
do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in
the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the
other information and to report as uncorrected material misstatements of the other information where we conclude that those
items meet the following conditions:
• Fair, balanced and understandable – the statement given on page 40 by the directors that they consider the annual report
and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for
shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or
• Audit committee reporting - the section set out on pages 23 to 25 does not appropriately address matters communicated
by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 40 – the parts of the directors’
statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose
a departure from a relevant provision of the UK Corporate Governance Code.
Our opinions on other matters prescribed by the Companies Act 2006 were it to apply to the
company, are unmodified
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• 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; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report under the Companies Act 2006, were it to apply to the
company
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the
course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.
Matters on which we are required to report by exception, were the Companies Act 2006 to apply
to the company
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to
report to you if, in our opinion:
• 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 and the part of the directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
48
49
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (CONTINUED)
Responsibilities of directors for the financial statements
As explained more fully in the directors’ responsibilities statement set out on page 44, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control
as the directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have
no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
We are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that
material misstatements of the financial statements may not be detected, even though the audit is properly planned and
performed in accordance with the ISAs (UK). Our audit approach is a risk-based approach and is explained more fully in the
‘An overview of the scope of our audit’ section of our audit report.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters which we are required to address
Following the recommendation of the audit committee, we were appointed by the audit committee on 20 November 2017 to
audit the financial statements for the year ending 31 December 2017 and subsequent financial periods.
The period of total uninterrupted engagement is two years, covering the years ending 31 December 2017 to 31 December 2018.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and
we remain independent of the group and the parent company in conducting our audit.
Our audit opinion is consistent with the additional report to the audit committee.
Use of report
This report is made solely to the company’s members, as a body, in accordance with the terms that have been agreed in our
engagement letter dated 17 December 2018. 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.
Mark Henshaw
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
8 March 2019
50
The Quarto Group, Inc. Annual Report 2018Governance CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2018
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Operating profit before amortisation of acquired intangibles
and exceptional items
Amortisation of acquired intangibles
Exceptional items
Operating profit/(loss)
Finance income
Finance costs
Loss before tax
Tax
Loss for the year
Discontinued operations
Profit for the year from discontinued operations
Loss for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings/(Loss) per share (cents)
From continuing operations
Basic
Diluted
Adjusted basic
Adjusted diluted
From discontinued operations
Basic
Diluted
Notes
2018
$’000
2017
$’000
2
149,292
152,512
(107,195)
(109,848)
42,097
42,664
(23,873)
(27,922)
(7,919)
(7,549)
10,305
7,193
(850)
(5,152)
4,303
21
(4,381)
(57)
(495)
(552)
(840)
(24,235)
(17,882)
25
(3,325)
(21,182)
1,480
(19,702)
5
7
8
9
31
—
1,163
(552)
(18,539)
(552)
(18,513)
—
(26)
(552)
(18,539)
(2.7)
(2.7)
23.2
23.0
—
—
(96.4)
(96.4)
18.3
17.8
5.8
5.7
10
10
10
10
10
10
The results of the discontinued businesses of BGD and Regent have been classified separately in the consolidated income
statement for the previous year.
51
51
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2018
Loss for the year
Items that may be reclassified to profit or loss
Foreign exchange translation differences
Reclassification to income statement on disposal of business
Cash flow hedge: (losses)/gains arising during the year
Tax relating to items that may be reclassified to profit or loss
Total other comprehensive (expense)/income
Total comprehensive expense for the year net of tax
Total comprehensive expense for the year attributable to:
Owners of the parent
Non-controlling interests
2018
$’000
2017
$’000
(552)
(18,539)
(1,950)
—
(60)
(246)
(2,256)
(2,808)
35
3,540
25
471
4,071
(14,468)
(2,808)
(14,442)
—
(26)
(2,808)
(14,468)
52
The Quarto Group, Inc. Annual Report 2018Financial Statements CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2018
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Intangible assets: Pre-publication costs
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Short-term borrowings
Trade and other payables
Tax payable
Total current liabilities
Non-current liabilities
Medium and long-term borrowings
Deferred tax liabilities
Tax payable
Other payables
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Paid in surplus
Retained earnings and other reserves
Equity attributable to owners of the parent
Non-controlling interests
Total equity
Notes
11
12
13
15
19
16
17
18
18
20
18
19
20
24
2018
$’000
18,954
2,368
1,552
56,741
3,901
83,516
22,324
54,476
105
15,384
92,289
2017
$’000
19,286
3,516
2,129
60,278
3,901
89,110
22,637
53,460
205
17,946
94,248
175,805
183,358
(5,000)
(5,000)
(64,917)
(60,796)
(4,167)
(5,243)
(74,084)
(71,039)
(70,752)
(76,907)
(8,753)
(8,520)
(544)
(554)
(1,116)
(1,673)
(80,603)
(88,216)
(154,687)
(159,255)
21,118
24,103
2,045
33,764
2,045
33,764
(14,691)
(11,706)
21,118
—
21,118
24,103
—
24,103
The financial statements were approved by the Board of Directors and authorised for issue on 8 March 2019.
They were signed on its behalf by:
C. K. Lau, Director
52
53
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2018
Share
capital
$’000
Paid in
surplus
$’000
Hedging
reserve
$’000
Translation
Reserve
$’000
Retained
earnings
$’000
Equity
attributable
to owners
of the
parent
$’000
Non-
controlling
interests
$’000
Total
$’000
140
—
(8,850)
12,120
—
(18,513)
39,219
(18,513)
4,892
44,111
(26)
(18,539)
—
—
25
—
25
—
—
—
—
165
—
Balance at 1 January 2017
2,045
33,764
Loss for the year
Other comprehensive income
Foreign exchange
translation differences
Reclassification to income
statement on disposal of
business
Cash flow hedge: gains arising
during the year
Tax relating to items that may
be reclassified to profit or loss
Total comprehensive income/
(expense) for the year
Dividends paid to shareholders
Dividends in-specie paid to
non-controlling interests
Adjustment arising
from change in non-controlling
interests
Share based payments charge
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at 31 December 2017
2,045
33,764
Loss for the year
Other comprehensive income
Foreign exchange translation
differences
Cash flow hedge: losses arising
during the year
Tax relating to items that may
be reclassified to profit or loss
Total comprehensive expense
for the year
Share based payments credit
—
—
—
—
—
—
—
—
—
—
—
—
Balance at 31 December 2018
2,045
33,764
46
3,540
—
471
—
—
—
—
46
(11)
35
3,540
—
3,540
25
471
—
—
25
471
4,057
(18,513)
(14,431)
(37)
(14,468)
(2,018)
(2,018)
—
(2,018)
—
(3,744)
(3,744)
1,111
(1,111)
—
—
—
—
—
—
—
—
—
—
222
24,103
(552)
(1,950)
(60)
(246)
(2,808)
(177)
21,118
—
—
—
—
—
1,111
222
(4,793)
(7,078)
—
(552)
222
24,103
(552)
(1,950)
(60)
(246)
—
(1,950)
(60)
—
—
(246)
—
—
—
(60)
(2,196)
(552)
(2,808)
—
105
—
(177)
(6,989)
(7,807)
(177)
21,118
54
The Quarto Group, Inc. Annual Report 2018Financial Statements CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2018
Loss for the year
Adjustments for:
Net finance costs
Depreciation of property, plant and equipment
Software amortisation
Tax expense/(credit)
Impairment of goodwill
Impairment of pre-publication costs
Share based payments
Amortisation and amounts written off acquired intangibles
Amortisation and amounts written off pre-publication costs
Movement in fair value of derivatives
Gain on divestment of business
Notes
2018
$’000
2017
$’000
(552)
(18,539)
4,360
3,300
693
298
495
—
501
(177)
910
31,426
—
—
817
315
(1,480)
17,418
4,868
222
841
32,212
(130)
(2,541)
Operating cash flows before movements in working capital
37,954
37,303
Decrease in inventories
(Increase) in receivables
Increase in payables
Cash generated by operations
Income taxes paid
Net cash from operating activities
Investing activities
Interest received
Investment in pre-publication costs
Purchases of property, plant and equipment
Purchase of software
Acquisition of businesses
Disposal of subsidiaries
Net cash used in investing activities
Financing activities
Dividends paid
Interest payments
Drawdown of revolving credit facility
Repayment of term loan and revolving credit facility
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Foreign currency exchange differences on cash and cash equivalents
Cash and cash equivalents at end of year
21
(2,280)
4,639
40,334
(1,962)
38,372
1,281
(784)
6,822
44,622
—
44,622
21
25
(29,744)
(35,551)
(169)
(77)
(1,887)
—
(1,063)
(266)
(7,041)
4,588
(31,856)
(39,308)
—
(2,980)
18,457
(24,238)
(8,761)
(2,245)
17,946
(317)
15,384
(2,018)
(2,935)
6,600
(8,271)
(6,624)
(1,310)
18,824
432
17,946
54
55
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS The Quarto Group, Inc. Annual Report 2018
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
1 General information and significant accounting policies
The Quarto Group, Inc. is a company incorporated in the State of Delaware, United States. The address of the registered office
is given on page 97. 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 5.
The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December
2017, as described in those financial statements. Two new accounting standards, IFRS 9 and IFRS 15, have been adopted during
the period. The accounting policies on revenue and financial instruments have been updated, as a consequence of these
accounting standards. IFRS 15 has been applied using a modified retrospective (‘cumulative catch-up’) approach under which
changes having a material effect on the consolidated statement of financial position as at 1 January 2018 are presented
together as a single adjustment to the opening balance of retained earnings. Accordingly, the Group is not required to present
a third statement of financial position as at that date. IFRS 15 requires that the Group’s reserve for sales returns is reclassified.
The reserve was previously netted off in trade receivables and from 1 January 2018 this is now shown as a liability within trade
and other payables. The effect on transition was to increase trade and other receivables as at 1 January 2018 by $6,401,000,
with a corresponding increase in trade and other payables. As of 31 December 2018 trade receivables and other payables
would have been $5,391,000 lower under previous accounting standards. There was no adjustment to the opening balance of
retained earnings.
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.
Statement of compliance
The 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, including The Financial Reporting Standard applicable in the UK and Republic of
Ireland (‘FRS 102’). These are presented on pages 89 to 95.
Basis of accounting
The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at
fair value.
Significant accounting estimates and judgements
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 year in which the estimate is revised
if the revision affects only that year or in the year of the revision and future years if the revision affects both current and
future years.
Key estimates at the balance sheet date are:
Note 1, 17
The revenue recognition policy details our judgement in respect of sales returns and the method of estimating the
related sales returns allowance
Note 11:
Key assumptions in making the assessment of carrying value of goodwill and acquired intangible assets
Note 15: Recoverability of pre-publication costs and the assessment of their useful life
Note 17: Assessment of the impairment of trade receivables
Going concern basis
The Board has assessed the Group’s ability to operate as a going concern based on a financial model which was prepared as
part of the process of considering and approving the 2019 budget.
The Directors have considered the underlying robustness of the Group’s business model, products and proposition and its
recent trading performance, cash flows and key performance indicators. They have also reviewed the cash forecasts prepared
for the three years ending 31 December 2021, which comprise a detailed cash forecast for the year ending 31 December 2019,
based on the budget for that year, and the growth assumptions for revenue and costs, together with cash forecasts, for the
years ending 31 December 2020 and 2021, to satisfy themselves of the appropriateness of the going concern basis used in
preparing the financial statements.
56
1 General information and significant accounting policies (continued)
In carrying out their analysis of viability, the Directors took account of the Group’s projected profits and cash flows and its
banking covenants and these have been subjected to sensitivity analysis over the three-year period.
Based on our assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and
meet all of its liabilities as they fall due up to 31 December 2021.
For these reasons, the Directors continue to adopt the going concern basis in preparing the financial statements. In doing so, it
is recognised that such future assessments are subject to a level of uncertainty that increases with time and, therefore, future
outcomes cannot be guaranteed or predicted with certainty.
Basis of consolidation
The Group financial statements include the results of the Company and all of its subsidiary undertakings. A subsidiary is an
entity controlled, directly or indirectly, by the Group. Control is the power to govern the financial and operating policies of the
entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that control ceases.
Intragroup balances and any unrealised gains and losses or income and expenses arising from 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 goodwill
All 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.
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, for backlists is 5 years and software is 4 years.
Profit or loss from discontinued operations
A discontinued operation is a component of the Group that has been disposed of. Profit or loss from discontinued operations
comprises the post-tax profit or loss of discontinued operations.
Volume rebates
In 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 in full to cost of sales.
Impairment of property, plant and equipment and intangible assets including goodwill
The carrying amount of the Group’s assets is reviewed at each balance sheet date to determine whether there is any indication
of impairment. If any such indication exists, the asset’s recoverable amount is estimated. 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.
56
57
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1 General information and significant accounting policies (continued)
Revenue recognition
Revenue arises largely from the sale of physical products. Each contract is for an agreed price and revenue is recognised at a
point in time when the Group satisfies performance obligations by transferring the products to its customers; this is
determined with reference to delivery terms. Invoices for products transferred are due on the terms specified in the contract.
Revenue from the sale of publishing rights is recognised when the Group has discharged its performance obligations under the
contractual arrangements.
On certain contracts, the customer has a right to return the products. The Group makes an allowance for this, based on a
review of the historical returns patterns associated with the customer, as well as current market trends. This allowance is
included within other payables. The Group also recognise an asset in relation to stock which is expected to be returned within
inventory.
Leasing
Where 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 currencies
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at
that date with any exchange differences arising on retranslation being recognised in the income statement.
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 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 items
Exceptional items are those which the Group defines as significant items outside the scope of normal business that 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 costs
The Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.
Taxation
Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the
taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to
tax payable in respect of previous years. Tax provisions are based on Management’s interpretation of country specific tax law
and recognised when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are
made annually based on the specific information available at that time and therefore there is limited risk of change in
the estimates in the short term. 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.
58
The Quarto Group, Inc. Annual Report 2018Financial Statements 1 General information and significant accounting policies (continued)
Property, plant and equipment
Property, 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. 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 years
Short leasehold property improvements
Over the period of the lease
Plant, equipment and motor vehicles
Fixtures and fittings
4 to 10 years
5 to 7 years
Assets 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 costs
Pre-publication costs represent directly attributable costs and attributable overheads incurred in the development of book
titles prior to their publication. Attributable overheads are allocated on a title by title basis. 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 amortised on a straight-line basis upon publication of the book title over estimated economic lives of three
years or less, being an estimate of the expected useful economic life of a book title. The investment in pre-publication costs
has been disclosed as part of the investing activities in the cash flow statement.
Inventories
Inventory is valued at the lower of cost 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 instruments
Financial 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.
58
59
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1 General information and significant accounting policies (continued)
Financial assets
Financial assets other than hedging instruments are divided into the following categories:
• financial assets at amortised cost; and
• financial assets at fair value through profit or loss
Financial 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 21 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.
After initial recognition, Financial Assets are measured at amortized cost using the effective interest method. Discounting is
ignored, where the effect is immaterial. The Group’s cash and cash equivalents, trade and most other receivables, fall into this
category of financial instrument. Assets in this category are measured, initially, at fair value with gains or losses recognized in
profit or loss.
In considering impairment of financial assets, the Group uses a wide range of information when assessing credit risk and
measuring credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the
expanded collectability of future cash flows of the instrument.
The Group adopts a simplified approach in accounting for trade and other receivables and records the loss allowance as
lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default
at any point during the life of the financial instrument. The Group uses its historical experience, external indicators and forward-
looking information to calculate the expected credit losses using a provision matrix.
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 liabilities
The 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 amortised cost using the effective interest rate method. A summary of the Group’s financial liabilities by category is given
in note 21.
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 instruments
Financial 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.
Finance costs
Finance costs comprise interest payable on borrowings calculated using the effective interest method together with
the amortisation of debt issuance costs.
Finance income
Finance income comprises interest receivable, which is recognised in profit or loss as it accrues using the effective interest
method.
Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash balances, call deposits and bank
overdrafts that form an integral part of the Group’s cash management processes.
60
The Quarto Group, Inc. Annual Report 2018Financial Statements 1 General information and significant accounting policies (continued)
Derivative financial instruments and hedge accounting
The 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 interest rate 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.
The Group applies the new hedge accounting requirements IFRS 9 prospectively. All hedging relationships that were hedging
relationships under IAS 39 at 31 December 2017 reporting date meet the IFRS 9’s criteria for hedge accounting at 1 January
2018 and are therefore regarded as continuing hedging relationships.
Derivative financial instruments are accounted for at fair value through profit and loss, except for derivatives designated as
hedging instruments in cash flow hedge relationships, which require a specific accounting treatment. To qualify for hedge
accounting, the hedging relationship must meet all of the following requirements:
• there is an economic relationship between the hedged item and the hedging instrument
• the effect of credit risk does not dominate the value changes that result from that economic relationship
• the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity
actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged
item.
All derivative financial instruments used for hedge accounting are recognized initially at fair value and reported subsequently
at fair value in the statement of financial position.
To the extent that the hedge is effective, changes in the fair value of derivatives designated as hedging instruments in cash
flow hedges are recognized in other comprehensive income and included within cash flow hedge reserve in equity. Any
ineffectiveness in the hedge relationship is recognized immediately in profit or loss.
At the time the hedged item affects profit or loss, any gain or loss previously recognized in other comprehensive income is
reclassified from equity to profit or loss and presented as a reclassification adjustment within other comprehensive income.
However, if a non-financial asset or liability is recognized as a result of the hedged transaction, the gains and losses previously
recognized in other comprehensive income are included in the initial measurement of the hedged item.
If a forecast transaction is no longer expected to occur, any related gain or loss recognized in other comprehensive income is
transferred immediately to profit or loss. If the hedging relationship ceases to meet the effectiveness conditions, hedge
accounting is discontinued and the related gain or loss is held in the equity reserve until the forecast transaction occurs.
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.
Share-based payments
The 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 Monte Carlo 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.
60
61
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1 General information and significant accounting policies (continued)
Borrowing costs
All borrowing costs are recognised in the income statement in the period in which they are incurred. Debt issuance costs
comprising arrangement fees and legal costs are capitalised and amortised on a straight-line basis over the period of the
borrowing facility or included within the amortised cost calculation as appropriate. The annual amortisation charge is included
within finance costs in the Consolidated Statement of Comprehensive Income.
The Group does not incur any borrowing costs which are directly attributable to the acquisition, construction or production
of qualifying assets.
Financial risk management
The principal risk factors faced by the Group are disclosed in note 21.
New standards and interpretations not applied
The 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.
IAS/IFRS Standard
Effective for years starting on or after
IFRS 16
Leases
1 January 2019
IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a right-of-use asset for lease
contracts, subject to exceptions for short-term leases and leases of low-value assets. Management is in the process of
assessing the full impact of the Standard. So far, the Group:
• has decided to make use of the practical expedient not to perform a full review of existing leases and apply IFRS 16 only to
new or modified contracts.
• believes that the most significant impact will be that the Group will need to recognise a right of use asset and a lease liability
for the office and production buildings currently treated as operating leases. At 31 December 2018, the future minimum
lease payments, to be recognised on the balance sheet, amounted to $11,217,000. This will mean that the nature of the
expense of the above cost will change from being an operating lease expense to depreciation and interest expense.
The Group is planning to adopt IFRS 16 on 1 January 2019 using the Standard’s modified retrospective approach. Under this
approach, the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to equity at the date of initial
application. Comparative information is not restated.
Choosing this transition approach results in further policy decisions the Group need to make as there are several other
transitional reliefs that can be applied. These relate to those leases previously held as operating leases and can be applied on a
lease-by-lease basis. The Group are currently assessing the impact of applying these other transitional reliefs.
62
The Quarto Group, Inc. Annual Report 2018Financial Statements 2 Revenue
Sales of products
2018
$’000
2017
$’000
149,292
152,512
All revenue recognition is from products transferred at a point in time.
During the year, sales to one customer exceeded 10% of Group revenue (2017: one customer). The value of these sales was
$26,664,000 (2017: $24,257,000).
3 Operating segments
The core publishing businesses comprises three divisions: US Publishing, UK Publishing and Q Partners. This is the basis on
which operating results are reviewed and resources allocated by the Chief Executive Officer.
2018
Continuing operations
Revenue
Operating profit/(loss) before amortisation of acquired intangibles
and exceptional items
Amortisation of acquired intangibles
Segment result
Exceptional pre-publication asset impairment and write-off (note 5)
Exceptional items other (note 5)
Unallocated corporate expenses
Corporate exceptional items
Operating profit
Finance income
Finance costs
Loss before tax
Tax
Loss after tax from continuing operations
Profit after tax from discontinued operations
Loss after tax
Capital expenditure
Depreciation and software amortisation
Investment in pre-publication costs
Amortisation of and amounts written off pre-publication costs
62
63
US Publishing
$’000
UK
Publishing
$’000
Q Partners
$’000
Total Group
$’000
72,971
5,240
(596)
4,644
(1,164)
(811)
2,669
70,734
5,587
149,292
7,913
(418)
12,735
(254)
7,659
—
(402)
7,257
—
(418)
—
—
(418)
135
575
15,133
16,628
111
416
14,611
15,299
—
—
—
—
(850)
11,885
(1,164)
(1,213)
9,508
(2,430)
(2,775)
4,303
21
(4,381)
(57)
(495)
(552)
—
(552)
246
991
29,744
31,927
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3 Operating segments (continued)
2017
Continuing Operations:
Revenue
Operating profit/(loss) before amortisation of acquired intangibles
and exceptional items
Amortisation of acquired intangibles
Segment result
Exceptional pre-publication asset impairment (note 5)
Exceptional impairment of goodwill (note 5)
Exceptional items other (note 5)
Unallocated corporate expenses
Corporate exceptional items
Operating loss
Finance income
Finance costs
Loss before tax
Tax
Loss after tax from continuing operations
Profit after tax from discontinued operations
Loss after tax
Capital expenditure
Depreciation and software amortisation
Investment in pre-publication costs
Amortisation of and amounts written off pre-publication costs
US
Publishing
$’000
UK
Publishing
$’000
Q Partners
$’000
Total Group
$’000
74,134
4,641
(596)
4,045
(1,041)
(17,100)
(82)
(14,178)
72,737
7,099
(244)
6,855
(3,827)
(314)
(842)
1,872
5,641
(431)
—
(431)
—
—
(46)
(477)
539
267
18,958
16,308
790
865
16,593
20,772
—
—
—
—
152,512
11,309
(840)
10,469
(4,868)
(17,414)
(970)
(12,783)
(4,116)
(983)
(17,882)
25
(3,325)
(21,182)
1,480
(19,702)
1,163
(18,539)
1,329
1,132
35,551
37,080
64
The Quarto Group, Inc. Annual Report 2018Financial Statements 3 Operating segments (continued)
Balance sheet
Continuing operations:
Quarto Publishing Group USA
Quarto Publishing Group UK
Unallocated (Deferred tax and cash)
Discontinued operations
Books & Gifts Direct, ANZ
Total assets
Continuing operations:
Quarto Publishing Group USA
Quarto Publishing Group UK
Unallocated (Deferred tax and debt)
Discontinued operations:
Books & Gifts Direct, ANZ
Total liabilities
2018
$’000
2017
$’000
85,995
70,525
19,285
93,085
67,984
21,848
—
441
175,805
183,358
30,518
34,953
89,216
31,518
36,390
91,331
—
16
154,687
159,255
Geographical areas
The Group operates in the following main geographic areas:
United States of America
United Kingdom
Europe
Rest of the World
Revenue
Non-current assets
2018
$’000
2017
$’000
2018
$’000
2017
$’000
86,092
20,384
25,314
17,502
149,292
86,444
20,256
29,098
16,714
152,512
51,488
32,028
—
—
53,649
35,443
—
18
83,516
89,110
Note: the assets for Q Partners are included within those of United States of America and United Kingdom.
64
65
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4 Operating profit
Operating profit has been arrived at after charging/(crediting):
Depreciation of property, plant and equipment
Depreciation of software
Net foreign currency exchange differences
Amortisation of acquired intangibles
Amortisation of pre-publication costs
Staff costs (note 6)
Auditor’s remuneration (see below)
Cost of inventory recognised as an expense
Share based payments
Exceptional items (note 5)
Auditor’s remuneration
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for the audit of subsidiary companies
Fees payable to the Company’s auditor for other assurance services
5 Exceptional items
Goodwill impairment (note 11)
Reorganisation costs
– Impairment of pre-publication intangible assets (note 15)
– Impairment of backlists (note 12)
– Write-off of pre-publication costs
– Staff severance costs
– Royalty advance provisions
– Inventory provisions
– Other reorganisation costs
– Board changes
Refinancing costs
Aborted corporate transaction costs
Aborted business acquisition costs
Total
2018
$’000
2017
$’000
693
298
(129)
850
30,762
28,368
244
36,080
(177)
5,152
93
151
—
244
2018
$’000
—
501
60
603
1,039
—
—
672
831
1,446
—
—
817
315
72
841
32,212
32,504
256
35,174
222
24,235
90
166
—
256
2017
$’000
17,414
4,868
—
—
544
409
75
—
—
597
241
87
5,152
24,235
During 2018, the Group incurred the following exceptional costs: (a) staff severance and reorganisation costs relating to a cost-out
programme that was implemented in order to right-size the Group and to provide a path to sustainable debt reduction (of the
costs incurred, $634,000 would ordinarily have been included within cost of sales and $1,077,000 would ordinarily have been
included within administrative costs), (b) costs relating to Board changes, following the Annual Meeting, which would ordinarily
have been included within administrative costs, (c) refinancing costs, which would ordinarily have been included within
administrative costs and (d) impairment and write-off of pre-publication costs as a consequence of the cost-out programme,
which would ordinarily have been included within cost of sales.
66
The Quarto Group, Inc. Annual Report 2018Financial Statements 5 Exceptional items (continued)
During 2017, the Group undertook a review of all imprints and certain reorganisations plans to either close or restructure the
imprints. In relation to the imprints affected, this resulted in the related pre-publication intangible assets, royalty advances and
inventory being impaired. The charges in respect of pre-publication costs, staff costs, royalty advance provisions and inventory
provisions would ordinarily be included within cost of sales. The charges in respect of implementing the facility security
package and transaction costs would ordinarily be included within administrative costs.
6 Staff costs
Average monthly number of employees (excluding Executive Directors)
Wages and salaries
Social Security costs
Other pension costs
2018
Number
2017
Number
374
$’000
24,745
2,617
1,006
461
$’000
28,421
2,906
1,177
28,368
32,504
Directors’ remuneration is disclosed in the Remuneration Committee Report on pages 34 and 35.
The remuneration of the Executive Directors (2017: Executive 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.
Short-term employee benefits
Post-employment benefits
7 Finance income
Interest income
8 Finance costs
Interest expense on borrowings
Amortisation of debt issuance costs
Other interest
2018
1,442
18
1,460
2017
2,426
70
2,496
2018
$’000
21
2017
$’000
25
2018
$’000
3,710
301
370
4,381
2017
$’000
2,941
384
—
3,325
66
67
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9 Taxation
Corporation tax
Current tax
Prior periods
Total current tax
Deferred tax (note 19)
Origination and reversal of temporary differences
Total tax expense/(credit)
2018
$’000
2017
$’000
73
176
249
246
495
1,552
804
2,356
(3,836)
(1,480)
Corporation tax on UK profits is calculated at 19%, based on the UK standard rate of corporation tax, (2017: 19%) 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 19% and the
Group’s total tax expense for the year.
Loss before tax
Tax at the UK corporation tax rate of 19% (2017: 19%)
Effect of different tax rates of subsidiaries operating in other jurisdictions
Adjustment to prior years
Tax effect of changes in legislation
Tax effect of items that are not deductible in determining taxable profit
Other
Tax expense/(credit)
Effective tax rate
2018
$’000
(57)
(11)
(101)
(85)
—
606
86
495
(868.4)%
2017
$’000
(21,182)
(4,025)
—
804
1,116
625
—
(1,480)
7.0%
On 22 December 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act
resulting in significant modifications to existing law. These changes included a reduction in the corporate tax rate from 35%
to 21% and a one-time deemed repatriation transition tax on unrepatriated foreign earnings. The Group, in consultation with its
US tax advisors, has completed its evaluation of these changes in determining the additional tax liability and has recorded a
liability of $0.6m, which will be settled over a period of 7 years.
68
The Quarto Group, Inc. Annual Report 2018Financial Statements 10 Earnings per share
From continuing operations
Loss for the year
Amortisation of acquired intangibles (net of tax)
Exceptional items (net of tax)
Earnings for the purposes of adjusted earnings per share
From continuing and discontinued operations
Loss attributable to owners of the parent
Amortisation of acquired intangibles (net of tax)
Exceptional items (net of tax)
Profit from discontinued operations
Earnings for the purpose of adjusted earnings per share
Number of shares
Weighted average number of ordinary shares
Effect of potentially dilutive share options
Diluted weighted average number of ordinary shares
Loss per share (cents) – continuing operations
Basic
Diluted
Adjusted earnings per share (cents)
Basic
Diluted
Earnings/(loss) per share (cents) – discontinued operations
Basic
Diluted
Loss per share (cents): from continuing and discontinued operations
Basic
Diluted
2018
$’000
Group
2017
$’000
Group
(552)
(19,702)
701
4,603
4,752
(552)
701
4,603
—
4,752
591
22,852
3,741
(18,513)
591
22,852
(1,189)
3,741
Number
Number
20,444,450 20,444,450
256,655
575,631
20,701,105
21,020,081
(2.7)
(2.7)
23.2
23.0
—
—
(2.7)
(2.7)
(96.4)
(96.4)
18.3
17.8
5.8
5.7
(90.6)
(90.6)
68
69
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
11 Goodwill
Cost
At 1 January
Exchange differences
At 31 December
Accumulated impairment losses
At 1 January
Impairment
Exchange differences
At 31 December
Carrying value
At 31 December
Impairment tests for cash generating units containing goodwill
The following units have significant carrying amounts of goodwill:
Quarto Publishing Group USA (QUS)
Quarto Publishing Group UK (QUK)
2018
$’000
2017
$’000
43,007
42,425
(332)
582
42,675
43,007
(23,721)
—
—
(6,281)
(17,414)
(26)
(23,721)
(23,721)
18,954
19,286
2018
$’000
12,882
6,072
18,954
2017
$’000
12,882
6,404
19,286
The recoverable amount of each cash generating unit (‘CGU’) is determined using the value in use basis. In determining value in
use, management prepares a detailed bottom-up budget for the initial twelve-month period, with reviews conducted at each
business unit. A further two years are forecast using relevant growth rates and other assumptions. Cash flows beyond the three
year period are extrapolated into perpetuity, by applying a 2% growth rate. The cashflows are then discounted using a country-
specific pre-tax WACC. The growth rates used are consistent with the growth expectations for the sector in which the
company operates and the discount rate has been calculated using Weighted Average Cost of Capital analysis. These are as
follows:
United States of America
United Kingdom
Terminal Growth Rates
Discount Rates
2018
2%
2%
2017
2%
2%
2018
10.90%
10.38%
2017
11.72%
11.16%
Neither a 1% decrease in the terminal growth rate or a 1% increase in the discount rate would have led to an impairment.
Goodwill, specific to the US Publishing Group, was impaired by $17.1m at 31 December 2017 reducing its carrying value to
$12.9m. The impairment principally arose due to the decrease in profitability experienced in 2017. One imprint in the UK was
closed in 2017 and the previous carrying value of its goodwill of $0.3m was impaired to nil.
70
The Quarto Group, Inc. Annual Report 2018Financial Statements 12 Other intangible assets
Cost
At 1 January 2017
Exchange differences
Additions
Disposals
At 1 January 2018
Exchange differences
Additions
Disposals
At 31 December 2018
Amortisation and impairment
At 1 January 2017
Exchange differences
Charge for the year
Disposals
At 1 January 2018
Exchange differences
Charge for the year
Amount written off for the year
Disposals
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Backlists
$’000
Software
$’000
Total
$’000
21,124
2,312
23,436
218
—
—
21,342
(138)
—
—
21,204
—
313
(1,046)
1,579
—
77
(26)
1,630
218
313
(1,046)
22,921
(138)
77
(26)
22,834
17,701
1,384
19,085
163
841
—
18,705
(121)
850
60
—
19,494
1,710
2,637
—
315
(999)
700
—
298
—
(26)
972
658
879
163
1,156
(999)
19,405
(121)
1,148
60
(26)
20,466
2,368
3,516
70
71
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
13 Property, Plant and Equipment
Cost
At 1 January 2017
Exchange difference
Additions
Disposals
Disposal of businesses
At 1 January 2018
Exchange difference
Additions
Disposals
At 31 December 2018
Depreciation
At 1 January 2017
Exchange differences
Charge for the year
Disposals
Disposal of businesses
At 1 January 2018
Exchange differences
Charge for the year
Disposals
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Leasehold
Property
Improvements
$’000
Plant,
Equipment
& Motor
Vehicles
$’000
Fixture &
Fittings
$’000
1,250
101
433
(327)
(149)
1,308
(57)
—
(9)
1,242
653
53
152
(307)
(117)
434
(30)
113
(9)
508
734
874
1,050
98
406
(248)
(190)
1,116
(58)
167
(282)
943
210
50
444
(223)
(186)
295
(35)
413
(282)
391
552
821
Total
$’000
3,296
237
1,156
(627)
(521)
3,541
(138)
169
(302)
996
38
317
(52)
(182)
1,117
(23)
2
(11)
1,085
3,270
576
29
221
(4)
(139)
683
(20)
167
(11)
819
266
434
1,439
132
817
(534)
(442)
1,412
(85)
693
(302)
1,718
1,552
2,129
All property, plant and equipment has been pledged as security for the Group’s bank borrowings (note 18)
14 Subsidiaries
A list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of ownership
interest is given in note 5 to the Company’s balance sheet. All of these subsidiaries are included in the consolidated results.
72
The Quarto Group, Inc. Annual Report 2018Financial Statements 15 Intangible Assets – Pre-publication costs
Cost
At 1 January
Exchange differences
Additions
Reclassification to other balance sheet lines
Disposals
At 31 December
Amortisation
At 1 January
Exchange differences
Charge for the year
Amount written-off for the year
Impairment charge
Disposals
At 31 December
Net Book Value
At 31 December
2018
$’000
193,492
(3,353)
29,744
2017
$’000
181,791
4,609
35,551
—
(2,113)
(75,122)
(26,346)
144,761
193,492
133,214
120,658
(1,999)
30,823
603
501
1,822
32,212
—
4,868
(75,122)
(26,346)
88,020
133,214
56,741
60,278
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. The reclassification in 2017 relates to final review of the becker&mayer acquired balances and apart from this
reclassification, no further adjustments were required. The impairment charge and the amount written-off for the year, for 2018
and for 2017, is included in exceptional items and further information is included in note 5. Pre-publication costs form part of
the carrying value of the CGU for each segment and are considered for impairment of goodwill in note 11.
16 Inventories
Finished goods
Raw materials
2018
$’000
22,098
226
2017
$’000
22,309
328
22,324
22,637
All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be impaired
and a provision of $2,079,000 (2017: $2,045,000) has been recorded accordingly.
All inventories have been pledged as security for the Group’s bank borrowings (note 18)
72
73
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
17 Trade and other receivables
Trade receivables
Other receivables and prepayments
2018
$’000
45,430
9,046
54,476
2017
$’000
43,127
10,333
53,460
The average credit period on sales of goods is 71 days (2017: 71 days).
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 not considered to be recoverable and a provision of $826,000 (2017: $801,000) has
been recorded accordingly. The trade receivables considered irrecoverable relate to customers which are experiencing trading
difficulties. In addition, some of the recoverable trade receivables are past due as at the reporting date. The extent of financial
assets past due but not impaired is as follows:
Less than one month
More than one month but less than two months
More than two months but less than three months
More than three months but less than six months
More than six months
2018
$’000
1,022
687
182
171
49
2,111
2017
$’000
2,475
860
699
245
341
4,620
The 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.
Movement in allowance for doubtful debts:
Balance at beginning of year
Amounts written off in the year
Amounts recovered during the year
Exchange differences
Increase in allowance recognised in profit or loss
Balance at end of the year
2018
$’000
801
(215)
12
(17)
245
826
2017
$’000
670
(476)
17
25
565
801
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. Before 2018,
trade receivables were disclosed after deducting a reserve for sales returns. Under IFRS 15, the reserve for sales returns in 2018
($5.4m) is included in other payables. The reserve in 2017 was $6.4m. The reserve is calculated based on a time lag between
sales and returns and historical return patterns. Management monitor actual returns against the reserve on a regular basis.
Note 21 includes disclosures relating to the credit risk exposures and analysis relating to the allowance for expected credit
losses. The 2017 impairment provision was determined on an incurred model basis, under IAS 39, whereas the current year
provision was determined on an expected loss model, under IFRS 9.
74
The Quarto Group, Inc. Annual Report 2018Financial Statements 18 Cash, borrowings and net debt
Cash
Bank balances
Short-term deposits
Cash and cash equivalents
The carrying amount of these assets approximates to their fair value.
The effective interest rate on bank balances and short-term deposits was 0.4% (2017: 0.2%).
Total borrowings
Bank and other loans
On demand or within one year
In the second year
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
Total
$’000
Fixed rate
borrowings
$’000
Variable rate
borrowings
$’000
55,450
20,302
75,752
55,500
26,407
81,907
23,000
—
23,000
20,000
—
20,000
32,450
20,302
52,752
35,500
26,407
61,907
US dollar borrowings
Other currency borrowings
As at 31 December 2018
US dollar borrowings
Other currency borrowings
As at 31 December 2017
Other loans
Bank and other loans
On demand or within one year
In the second year
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
2018
$’000
11,134
4,250
15,384
2018
$’000
75,752
5,000
70,752
75,752
2017
$’000
17,946
-
17,946
2017
$’000
81,907
5,000
76,907
81,907
(5,000)
(5,000)
70,572
76,907
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which
interest rate
is fixed
Months
4.0
—
4.0
3.8
—
3.8
2018
$’000
13,000
—
13,000
13,000
—
13,000
14.6
—
14.6
13.5
—
13.5
2017
$’000
—
—
—
—
—
—
Other loans are with related parties, as disclosed in note 32, are unsecured, are repayable, together with the accrued interest,
on 31 August 2020 and carry an interest rate of 3.5%.
74
75
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
18 Cash, borrowings and net debt (continued)
US dollar borrowings
As at 31 December 2018
As at 31 December 2017
Bank loans
Bank loans
On demand or within one year
In the second year
Total
$’000
13,000
13,000
—
Fixed rate
borrowings
$’000
Variable rate
borrowings
$’000
13,000
13,000
—
—
—
—
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
US dollar borrowings
Other currency borrowings
As at 31 December 2018
US dollar borrowings
Other currency borrowings
As at 31 December 2017
Total
$’000
Fixed rate
borrowings
$’000
Variable rate
borrowings
$’000
42,450
20,302
62,752
55,500
26,407
81,907
10,000
—
10,000
20,000
—
20,000
32,450
20,302
52,752
35,500
26,407
61,907
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which
interest rate
is fixed
Months
3.5
3.5
—
2018
$’000
62,752
5,000
57,752
62,752
20.0
20.0
—
2017
$’000
81,907
5,000
76,907
81,907
(5,000)
(5,000)
57,752
76,907
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which
interest rate
is fixed
Months
5.8
—
5.8
3.8
—
3.8
7.5
—
7.5
13.5
—
13.5
At 31 December 2018, undrawn borrowing facilities totalled $9.4m (2017: $3.1m). The variable rate borrowings carry interest
based on LIBOR plus a margin, depending on the leverage ratio. The Directors estimate the fair value of the Group’s
borrowings to be equal to book value, by reference to market rates.
At 31 December 2018 the Group had a US$72.5m (2017: US$85m) multi-currency syndicated bank facility (signed on 31
October 2018) which is due to expire on 31 August 2020. The previous loan was de-recognized during the year and a new loan
has been recognized. Banking EBITDA used for bank covenant purposes was $11,707,000 in 2018.
These facilities are subject to three principal covenants which vary over the course of the financial year. At December 31, 2018,
the covenants were:
(a) Total consolidated net banking indebtedness shall not exceed 4.88 times EBITDA (as defined in the committed facility
agreement). At December 31, 2018 net indebtedness was 4.05 times EBITDA.
(b) EBITDA shall exceed 2.43 times net finance charges (as defined in the committed facility agreement). For the year
ended December 31, 2018, net finance charges were 3.05 times covered under this covenant.
(c) Cash flow (as defined in the committed facility agreement) shall exceed 1.1 times Debt Service. For the year ended
December 31, 2018, Debt Service was 1.42 times covered under this covenant.
76
The Quarto Group, Inc. Annual Report 2018Financial Statements 18 Cash, borrowings and net debt (continued)
Net debt
Borrowings
Cash and cash equivalents
Net debt
Borrowings
Cash and cash equivalents
Net debt
1 January
2018
$’000
(81,907)
17,946
(63,961)
1 January
2017
$’000
(80,748)
18,824
(61,924)
Cashflows
$’000
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2018
$’000
5,781
(2,245)
3,536
(301)
—
(301)
675
(317)
358
(75,752)
15,384
(60,368)
Cashflows
$’000
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2017
$’000
1,761
(1,310)
451
(384)
(2,536)
(81,907)
—
432
17,946
(384)
(2,104)
(63,961)
All of the assets of the Group have been pledged as security for the Group’s bank borrowings.
19 Deferred tax
Deferred tax liabilities
Excess of capital allowances over depreciation – UK
Pre-publication costs and other temporary differences – UK
Pre-publication costs and other temporary differences – US
Other overseas temporary differences
Deferred tax assets
Tax losses and other timing differences – UK
Goodwill, intangible assets and other temporary differences – US
Net deferred taxation liability
The movement on the net provision for deferred taxation is as follows:
Net provision at 1 January
Credit/(debit) direct to equity
Exchange difference through other comprehensive income
Charge (credit) to profit and loss
Net provision at 31 December
2018
$’000
2017
$’000
8
4,688
4,696
4,057
—
8,753
99
3,802
3,901
4,852
2018
$’000
4,619
246
(259)
246
4,852
32
5,060
5,092
3,428
—
8,520
509
3,392
3,901
4,619
2017
$’000
8,480
(471)
446
(3,836)
4,619
76
77
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
20 Trade and other payables
Current Liabilities
Trade payables
Other payables
Total
2018
$’000
45,850
19,067
64,917
2017
$’000
46,514
14,282
60,796
Other payables include the discounted deferred and contingent consideration liabilities of $1.2m in respect of prior year
acquisitions (2017: $1.9m). $1.9m was paid in the year.
Non-current Liabilities
Other payables comprise the discounted deferred and contingent liability of $0.6m in respect of prior year acquisitions (2017:
$1.7m). The contingent liability is based on the future profitability of the aquired business for the year ending 31 December
2019.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
21 Financial instruments
The 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 below.
Foreign currency sensitivity
Exposures to currency exchange rates arise from the Group’s overseas sales and costs, which are primarily denominated
in Sterling.
Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows:
Financial assets:
Financial liabilities
Short-term exposure
Financial liabilities:
Long-term exposure
At 31 December
$’000
Sterling
8,232
(1,603)
6,629
2018
$’000
Other
1,948
(1,045)
903
$’000
Sterling
6,512
(1,868)
4,644
2017
$’000
Other
3,167
(394)
2,773
(16,841)
(10,212)
(3,459)
(2,556)
(22,823)
(3,584)
(18,179)
(811)
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.
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% (2017: 5%) then this would have had the following impact:
78
The Quarto Group, Inc. Annual Report 2018Financial Statements
21 Financial instruments (continued)
(Loss)/profit for the year
Equity
2018
$’000
61
2,609
If Sterling had weakened against the US Dollar by 5% (2017: 5%) then this would have had the following impact:
(Loss)/profit for the year
Equity
2018
$’000
(61)
(2,609)
2017
$’000
840
2,474
2017
$’000
(840)
(2,474)
Exposures 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.
Interest rate sensitivity
The Group’s policy is to minimise interest rate cash flow risk exposures, where possible and commercially appropriate, on
long-term financing, through interest rate swaps. A part of longer-term borrowings are, therefore, at fixed rates.
At 31 December 2018, 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.
A 0.25% increase in interest rates would have the following impact:
(Loss)/profit for the year
Equity
A 0.25% decrease in interest rates would have the following impact:
(Loss)/profit for the year
Equity
2018
$’000
(118)
(118)
2017
$’000
(155)
(155)
2018
$’000
2017
$’000
118
118
155
155
78
79
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
21 Financial instruments (continued)
Credit risk analysis
The 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:
Cash and cash equivalents
Trade receivables
Derivative financial instruments
2018
$’000
15,384
45,430
105
60,919
2017
$’000
17,946
43,127
205
61,278
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 ongoing credit risk is managed through regular review of ageing analysis together
with credit limits per customer.
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.
The 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. Credit losses written off during the year which are
subject to enforcement activity are minimal.
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 analysis
The 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.
The Group’s liabilities have contractual maturities which are summarised below:
31 December 2018
Current
Non-Current
Bank and other loans
Trade payables
Other short-term financial liabilities
Other long-term payables
Within 6
months
$’000
6 to 12
months
$’000
7,130
45,850
17,836
—
70,816
2,165
—
1,250
—
3,415
1 to 5
years
$’000
74,686
—
—
569
75,255
Over 5
years
$’000
—
—
—
—
—
80
The Quarto Group, Inc. Annual Report 2018Financial Statements 21 Financial instruments (continued)
31 December 2017
Bank loans
Trade payables
Other short-term financial liabilities
Other long-term payables
Current
Non-Current
Within 6
months
$’000
6 to 12
months
$’000
1 to 5
years
$’000
Over 5
years
$’000
6,454
46,514
14,282
—
1,478
78,289
—
—
—
—
—
1,673
79,962
67,250
1,478
—
—
—
—
—
Summary of financial assets and liabilities by category
The 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.
Current assets
Derivative financial instruments designated as hedging instruments:
– Interest rate swap
Financial assets at amortised cost
– Trade receivables
– Cash and cash equivalents
Non-current liabilities
Financial liabilities measured at amortised cost:
– Borrowings
Other payables
Current liabilities
Financial liabilities measured at amortised cost:
– Borrowings
– Trade payables
– Other payables
2018
$’000
2017
$’000
105
205
45,430
15,384
60,919
43,127
17,946
61,278
70,752
76,907
554
1,673
71,306
78,580
5,000
45,850
19,067
69,917
5,000
46,514
14,282
65,796
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern 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 note 18, 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.
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. The Group has complied with its covenant obligations during the year.
80
81
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
22 Other Financial Assets/Liabilities
In the reporting periods under review, other financial assets/liabilities comprise derivative financial instruments as follows:
Current financial assets
Derivative financial instruments – interest rate swaps
Total
2018
$’000
2017
$’000
105
105
205
205
The 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 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 IFRS 9.
The Group’s interest rate swaps have been designated 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 following table details the principal amounts and the remaining terms of interest rate swap contracts outstanding at the
reporting date:
Within one year
Within one to two years
Derivative
Interest rate
Principal amounts
Committed interest
payments
2018
%
5.8
—
2017
%
4.0
3.7
2018
$’000
2017
$’000
2018
$’000
2017
$’000
10,000
10,000
(370)
—
10,000
—
10,000
20,000
(370)
(257)
(605)
(862)
23 Contingent Liabilities
Under the terms of the syndicated bank facility, a fee of $745,000 would be payable on 31 August 2020 to the Royal Bank of
Scotland plc, if certain conditions are not met.
24 Share Capital
Authorised
2018
$’000
2017
$’000
28 million shares of common stock of par value of US$0.10 each
2,800
2,800
Allotted, called up and fully paid:
20,444,550 (2016: 20,444,550) shares of common stock of par value of US$0.10 each
2,045
2,045
The Company has one class of common stock which carries no right to fixed income.
25 Retained earnings and other reserves
Hedging reserve
The 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 reserve
The 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 1 January 2004.
82
The Quarto Group, Inc. Annual Report 2018Financial Statements
26 Dividends
Final dividend for the year ended 31 December 2017 of nil (2016: 9.87c/7.95p) per share
Proposed final dividend for the year ended 31 December 2018 of nil (2017: nil) per share
2018
$’000
2017
$’000
—
—
—
2,018
2,018
—
The 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.
27 Notes to the cash flow statement
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.
28 Share based payments
Performance Share Plan (‘PSP’)
The Company operates a PSP scheme that awards free shares.
2015 award
The awards under this scheme were granted on 24 September 2015. The vesting period is 4 years from the date of grant.
The award vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance
period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return (‘TSR’) being between 7% and 15%, resulting in vesting on a sliding scale
of 20% to 100%.
Participants are not entitled to receive dividends until awards have vested.
Details of the share options outstanding during the year are as follows:
Outstanding at beginning of the year
Forfeited during the year
Outstanding at the end of the year
2018
Number
2017
Number
167,464
227,464
(167,464)
(60,000)
—
167,464
82
83
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
28 Share based payments (continued)
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
Model used
EPS Portion TSR Portion
£2.09
4
£1.78
2.7
3.97
n/a
£2.09
4
£1.07
3.7
3.97
19
Dividend
discount
Monte
Carlo
2016 award
The awards under this scheme were granted on 19 April 2016. The vesting period is 4 years from the date of grant. The award
vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance
period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on TSR being between 7% and 15%, resulting in vesting on a sliding scale of 20%
to 100%.
Participants are not entitled to receive dividends until awards have vested.
Details of the share options outstanding during the year are as follows:
Outstanding at beginning of the year
Forfeited during the year
Outstanding at the end of the year
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
2018
Number
2017
Number
287,136
366,728
(134,944)
(79,592)
152,192
287,136
EPS Portion TSR Portion
£2.45
4
£2.10
2.3
3.88
n/a
Dividend
discount
£2.45
4
£0.44
3.3
3.88
19.1
Monte
Carlo
2017 award
The awards under this scheme were granted on 28 April 2017. The vesting period is 4 years from the date of grant. The award
vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance
period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of
20% to 100%.
Participants are not entitled to receive dividends until awards have vested.
84
The Quarto Group, Inc. Annual Report 2018Financial Statements 28 Share based payments (continued)
Details of the share options outstanding during the year are as follows.
Outstanding at beginning of the year
Granted during the year
Forfeited during the year
Outstanding at the end of the year
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
Model used
29 Operating lease commitments
Lease payments under operating leases recognised in income for the year
2018
Number
178,131
2017
Number
—
—
189,063
(73,668)
(10,932)
104,463
178,131
EPS Portion TSR Portion
£2.64
4
£2.64
4
£2.20
£0.48
3.3
4.55
n/a
Dividend
discount
3.3
4.55
18.6%
Monte
Carlo
2018
$’000
1,911
2017
$’000
1,489
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Minimum lease payments under operating leases within one year
In the second to fifth years inclusive
After more than five years
2018
$’000
1,876
6,329
3,803
12,008
2017
$’000
1,885
6,264
4,038
12,187
Operating lease payments represent rentals payable by the Group, primarily for its office properties. There were no capital
commitments outstanding at the year end (2017: $nil).
84
85
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
30 Acquisitions
There were no acquisitions in the year. On 8 August 2016, the Group acquired the publishing business of becker&mayer LLC
for a consideration of $9.8m, together with a working capital adjustment payment capped at $1.0m and further contingent
consideration of up to $1.0m, based on performance of the business over the next year. The remaining consideration is payable
in stages over the next two years (note 20).
31 Discontinued operations
On 30 March 2017, the Group completed the disposal of its 75% interest in Regent Publishing Services Limited (“Regent”), its
Hong Kong based publishing services business.
On 3 April 2017, the Group completed the disposal of its 100% share of Books & Gifts Direct Pty Limited (“BGD Australia”), its
direct sales business in Australia.
On 7 July 2017, the Group completed the disposal of the trade and selected net assets of Books & Gifts Direct Limited (“BGD
New Zealand”), its direct sales business in New Zealand.
These disposals were completed in line with the Group’s strategy of disposing of non-core businesses. Proceeds from the
disposals were used to manage the Group’s net debt position as received. The results of the discontinued operations which
have been included in the consolidated income statement were:
Regent
Revenue
Expenses
(Loss)/profit before tax
Tax
(Loss)/profit after tax
Profit on disposal
Net profit attributable to discontinued operations
Net cash inflow arising on disposal
Cash consideration
Less: Cash disposed
Net cash inflow
BGD Australia
Revenue
Expenses
Loss before tax
Tax
Loss after tax
Loss on disposal
Net loss attributable to discontinued operations
Net cash outflow arising on disposal
Cash consideration
Less: Cash disposed
Net cash outflow
86
2017
$’000
2,632
(2,803)
(171)
3
(168)
3,236
3,068
7,000
(3,350)
3,650
2017
$’000
1,199
(1,970)
(771)
—
(771)
(325)
(1,096)
—
—
(767)
The Quarto Group, Inc. Annual Report 2018Financial Statements 31 Discontinued operations (continued)
BGD New Zealand
Revenue
Expenses
Loss before tax
Tax
Loss after tax
Loss on disposal
Net loss attributable to discontinued operations
Net cash inflow arising on disposal
Cash consideration
Net cash inflow
32 Related Party Transactions
The Group had the following related party transactions between 17 May 2018 and 31 December 2018.
Printing purchases:
1010 Printing Limited
Accounts payable at 17 May 2018
Purchases
Payments
Accounts payable at 31 December 2018
Loans and accrued interest:
Loans (advanced on 1 and 2 November 2018)
Accrued interest on loans at 31 December 2018
2017
$’000
3,070
(3,667)
(597)
–
(597)
(212)
(809)
540
540
2018
$’000
4,806
1,872
(595)
6,083
At 31
December
2018
$’000
13,000
76
The loans are from 1010 Printing Limited ($7.0m), Recruit & Company Limited ($1.5m) and C. K. Lau ($4.5m). The loans are
unsecured, are repayable, together with the accrued interest, on 31 August 2020, and carry interest at 3.5%.
1010 Printing Limited and Recruit & Company Limited are companies over which C. K. Lau exercises control.
86
87
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
33 Reconciliation of figures included in other parts of the financial statements
Adjusted Operating Profit
Operating profit/(loss) (continuing operations)
Add back:
– Amortisation of acquired intangibles
– Exceptional items (note 5)
Adjusted operating profit
EBITDA
Operating profit before amortisation of acquired intangibles and exceptional items
Net finance costs
Adjusted profit before tax (before amortisation of acquired intangibles and exceptional items)
Net finance costs
Depreciation of property, plant and equipment and software
Share based payments
EBITDA
2018
$’000
2017
$’000
4,303
850
5,152
10,305
(17,882)
840
24,235
7,193
10,305
7,193
(4,360)
(3,300)
5,945
4,360
991
(177)
11,119
3,893
3,300
1,132
222
8,547
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items
Adjusted operating profit before amortisation of acquired intangibles and exceptional items
10,305
7,193
Less: net finance costs
(4,360)
(3,300)
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items
5,945
3,893
Free cashflow
Net cash from operating activities
Investment in pre-publication costs
Purchases of property, plant and equipment
Purchases of software
Free cashflow
Net debt
Short-term borrowings
Medium and long-term borrowings
Cash and cash equivalents
Net debt
38,372
44,622
(29,744)
(35,551)
(169)
(77)
8,382
(1,063)
(266)
7,742
5,000
70,752
5,000
76,907
(15,384)
(17,946)
60,368
63,961
88
The Quarto Group, Inc. Annual Report 2018Financial Statements COMPANY BALANCE SHEET
AS AT 31 DECEMBER 2018
Fixed Assets
Investments
Current liabilities
Creditors: Amounts falling due within one year
Creditors: Amounts falling due after more than one year
Net liabilities
Equity
Called up share capital
Reserves
– Paid in surplus
– Profit and loss
Total equity
Notes
4
6
7
Restated
(note 1)
2017
$’000
1,436
1,436
2018
$’000
1,209
1,209
(15,167)
(15,939)
(15,167)
(15,939)
(544)
(1,116)
(14,502)
(15,619)
2,045
33,764
2,045
33,764
(50,311)
(51,428)
(14,502)
(15,619)
The financial statements were approved by the Board of Directors and authorised for issue on 8 March 2019.
They were signed on its behalf by
C. K. Lau
Director
8 March 2019
88
89
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS COMPANY STATEMENT OF
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2018
Administrative expenses
Impairment of investments
Foreign exchange gain/(loss)
Profit/(loss) before tax
Tax
Profit/(loss) for the year
Notes
3
Restated
(note 1)
2017
$’000
(98)
(3,308)
(1,239)
(4,645)
(1,116)
(5,761)
2018
$’000
—
—
822
822
472
1,294
COMPANY STATEMENT OF
CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2018
Balance at 1 January 2017 (as previously stated)
Prior year adjustment (note 1)
Balance at 1 January 2017
Loss for the year
Transactions with owners
Dividends to shareholders
Share based payments
Balance at 1 January 2018
Profit for the year
Transactions with owners
Dividends to shareholders
Share based payments
Balance at 31 December 2018
Share
capital
$’000
2,045
—
Paid in
surplus
$’000
33,764
Retained
earnings
$’000
Equity
attributable
to owners
$’000
(44,313)
(8,504)
—
442
2,045
33,764
(43,871)
442
(8,062)
(5,761)
(5,761)
—
—
—
—
—
—
(2,018)
(2,018)
222
222
2,045
33,764
(51,428)
(15,619)
—
—
—
—
—
—
1,294
1,294
—
(177)
—
(177)
2,045
33,764
(50,311)
(14,502)
90
The Quarto Group, Inc. Annual Report 2018Financial Statements 1 Basis of preparation
The separate financial statements of the Company are presented and have been prepared in accordance with Financial
Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council. These financial statements present information
for the Company, not about the Group.
The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost
accounting rules modified to include certain items as fair value and in accordance with FRS 102. The financial statements have
been prepared using the going concern basis, as discussed in the Group going concern disclosure.
The Company has adopted the following disclosure exemptions:
• the requirement to present a statement of cash flow and related notes; and
• financial instrument disclosures, including,
• categories of financial instruments;
– items of income, expenses, gains or losses relating to financial instruments; and
– exposure to, and management of, financial risks.
There were no significant judgements or estimates in preparing the financial statements of the Company.
Restatement of Prior Year Results
During the current year it was identified that equity-settled share-based payments issued to employees of subsidiaries were
being incorrectly accounted for in the parent company financial statements. Previously the charge or credit in relation to these
share-based payments has been included in the Company Statement of Comprehensive Income when they should be
accounted for as a capital contribution to the subsidiaries of the Company. The Company’s accounting policy has been
updated to reflect the correct accounting treatment.
The amount for share-based payment charges which should have been recognised as capital contributions in prior periods is
$664,000. An adjustment has been made to opening reserves for the prior year of $442,000 to reflect the correct treatment
of share-based payment charges in 2015 and 2016, with a corresponding adjustment to the value of investments in subsidiaries
brought forward at 1 January 2017. An adjustment of $222,000 to investment in subsidiaries has been made to reflect the
correct treatment in the year ended 31 December 2017. As a result, the prior year figures have been restated as follows.
Investments brought forward
Investments at 31 December 2017
Retained earnings brought forward
Retained earnings at 31 December 2017
Administrative expenses
Loss before tax
Loss for the year
Per prior
year
financial
statements
$’000
4,080
772
(44,313)
(52,092)
(320)
(4,867)
(5,983)
Per current
year
financial
statements
$’000
4,522
1,436
(43,871)
(51,428)
(98)
(4,645)
(5,761)
Restatement
$’000
442
664
442
664
222
222
222
90
91
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
NOTES TO THE COMPANY ACCOUNTS
AT 31 DECEMBER 2018
2 Accounting policies
The following accounting policies have been applied consistently in dealing with items which are considered material in relation
to the financial statements. The functional currency of the Company is US Dollars.
Investments
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.
Creditors
Amounts owed to subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost
using the effective interest method.
Share-based payments
The Company operates a number of equity-settled, share based compensation plans that are awarded to employees of the
Company’s subsidiary undertakings. The fair value of the employee services received under such schemes is recognised as an
expense in the subsidiary undertakings financial statements, which benefit from the employee services. The Company has
recognised the fair value of the share-based payments as an increase to equity with a corresponding adjustment to
investments. 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
Monte Carlo 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. Further detail is set out in note 28 to the group
consolidated Financial Statements.
Cash and cash equivalents
There were no cash transactions during the year and accordingly no cash flow statement has been presented.
Foreign currencies
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling
at that date with any exchange differences arising on retranslation being recognised in the income statement. 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.
Financial guarantee contracts
Where 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.
3 Tax
Current tax (Credit)/Charge
2018
$’000
(472)
2017
$’000
1,116
Corporation tax is calculated at 21%, based on the US standard rate of corporate tax (2017: 21%) of the estimated assessable
profit for the year. The table below explains the difference between the expected expense at the US statutory rate of 21% and
the Company’s total tax expense for the year.
92
The Quarto Group, Inc. Annual Report 2018Financial Statements 3 Tax (continued)
Profit/(loss) before tax
Tax at the US corporation tax rate of 21% (2017: 21%)
Adjustment to prior year
Tax effect of changes in legislation
Tax effect of items that are not deductible in determining taxable profit
Tax (Credit)/charge
4 Investments
At 1 January
Capital contribution (note 2)
Amounts written off during year
At 31 December
5 Subsidiaries
a) Trading companies
2018
$’000
822
173
(472)
—
(173)
(472)
2018
$’000
1,436
(227)
—
1,209
2017
$’000
(4,645)
(975)
—
1,116
975
1,116
Restated
(note 1)
2017
$’000
4,522
222
(3,308)
1,436
Name
Place
Date
Registered
address
key
Issued and fully paid up
share capital
% held Segment
Incorporation
Global Book
Publishing Pty. Limited
Quarto Australia
Pty Limited
Australia
4 November 1999
D
1,000 shares of A$1 each
100*
UK Publishing
Australia
14 September 1981 D
110 shares of $A1 each
100
UK Publishing
Quarto Group HK Ltd
Hong Kong
26 January 2015
Quarto Publishing
Group USA Inc.
Delaware, USA
28 June 2004
Quarto Publishing plc
United Kingdom 1 April 1976
Quarto, Inc.
Delaware, USA
16 October 1986
RotoVision S.A.
Switzerland
18 July 1977
E
B
A
B
F
b) Non-trading company
Incorporation
100 shares of HKD1 each
100
UK/US
Publishing
380 shares of
US$0.01 each
100
US Publishing
100,000 shares of £1 each 100*
UK Publishing
86 shares of no par value
100*
US Publishing
1,500 shares
of SFr500 each
100*
UK Publishing
Name
Place
Date
Registered
address key
Issued and fully paid up
share capital
% held
Books & Gifts Direct Limited New Zealand
27 September 1996
C
400,000 shares of NZ$1 each
100*
* Directly held by The Quarto Group, Inc.
92
93
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE COMPANY ACCOUNTS AT 31 DECEMBER 2017 (CONTINUED)
5 Subsidiaries (continued)
c) Dormant companies
Name
Place
Date
Incorporation
Registered
address key Issued share capital
AP Screen Printers Limited
United Kingdom 30 September 1980 A
1000 shares of £1 each
Apple Press Limited
United Kingdom 5 June 1984
Aurum Press Limited
United Kingdom 31 May 1977
Cartographica Press Limited
United Kingdom 27 July 1981
Design Eye Holdings Limited
United Kingdom 22 June 1992
Design Eye Limited
United Kingdom 18 March 1988
Design Eye Publishing Limited
United Kingdom 17 June 1992
EYE Quarto Inc
Delaware, USA
19 December 2002
Fine Wine Editions Limited
United Kingdom 23 June 1949
Frances Lincoln Limited
United Kingdom 15 December 1980
Frances Lincoln Publishers Limited United Kingdom 11 March 1987
Global Book Publishing Pty Limited United Kingdom 7 July 1986
Great American Trading Company
Limited (THE)
United Kingdom 24 February 1982
IQON Editions Limited
United Kingdom 5 December 1972
iqu-digital.com Limited
United Kingdom 30 November 1978
Ivy Press (The)
JR Books Limited
United Kingdom 9 July 1996
United Kingdom 9 September 1986
Lewes Holdings Limited
United Kingdom 21 July 2005
Marshall Editions Limited
United Kingdom 7 February 2002
Marshall Publishing Limited
United Kingdom 7 February 2002
QEB Publishing Inc
Delaware, USA
27 April 2004
QED Publishing Limited
United Kingdom 12 November 1974
A
A
A
A
A
A
B
A
A
A
A
A
A
A
A
A
A
A
A
B
A
QU:ID Publishing Limited
United Kingdom 30 September 1980 A
100 shares of £1 each
Quantum Books Limited
United Kingdom 7 February 1983
Quarto Children’s Books Limited
United Kingdom 6 January 1976
Quarto (JS) LLP
United Kingdom 6 November 1998
Quarto Magazines Limited
United Kingdom 20 May 1986
Quarto Marketing Inc
Delaware, USA
26 April 1995
Quarto Media Inc
Delaware, USA
10 December 2010
Quarto Multi-Media Limited
United Kingdom 14 December 1984
Quill Publishing Limited
United Kingdom 14 May 1979
Quintessence Editions Limited
United Kingdom 7 February 2002
Quintet Publishing Limited
United Kingdom 14 May 1979
A
A
A
A
B
B
A
A
A
A
100 shares of £1 each
2 shares of £1 each
100 units
1000 shares of £1 each
3000 shares
of no par value
1000 shares of $1 each
1000 shares of £1 each
1000 shares of £1 each
1 shares of £1 each
100 shares of £1 each
Small World Creations Limited
United Kingdom 20 September 1997 A
1,536 share of £1 each
94
% held
100
100
100 shares of £1 each
382,502 shares of £1 each 100
1000 shares of £1 each
200 shares of £1 each
100 shares of £1 each
2 shares of £1 each
1000 shares
of no par value
9020 shares of £1 each
565,000 shares
of 10p each
100 shares of £1 each
1000 shares of £1 each
100 shares of £1 each
300 shares of £1 each
100 shares of £1 each
1042 shares of 10p each
100
100
100
100
100
100
100
100
100
100
100
100
100
43,004 shares of £1 each 100
20,840 shares
of £0.01 each
1 shares of £1 each
1 shares of £1 each
1500 shares
of no par value
400 shares of £1 each
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
The Quarto Group, Inc. Annual Report 2018Financial Statements 5 Subsidiaries (continued)
d) List of registered offices
A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom
B 400 First Avenue North, Minneapolis, MN 55401, USA
C
D c/o ZM Partners, Suite 10 Ground Floor, 123 Clarence Street, Sydney, NSW 2000, Australia
E Room 2306, Technology Plaza, 651 King’s Road, North Point, Hong Kong
F Passage Perdonet 1, 1005 Lausanne, Switzerland
135b Morrin Road, Saint Johns, Auckland, 1072, New Zealand
6 Creditors: Amounts falling due within one year
Amounts owed to subsidiary undertakings
2018
$’000
15,167
2017
$’000
15,939
7 Called up share capital
Details of called up share capital are set out in note 24 of the consolidated Financial Statements.
8 Contingent liabilities
The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $62,752,000 (2017: $81,907,000).
Refer to note 18 of the group consolidated Financial Statements.
9 Related parties
The company borrowed an amount of $0.1m from its wholly owned subsidiary, Quarto Publishing plc, during the year (2017:
$2.0m borrowed in the year). The balance on the loan at 31 December 2018 was $15.2m (2017: $15.9m). These balances are
non-interest bearing and repayable on demand.
94
95
The Quarto Group, Inc. Annual Report 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FIVE-YEAR SUMMARY
Results
Revenue
Operating profit before amortisation
of acquired intangibles and exceptional items
Operating (loss)/profit
Profit before tax, amortisation of acquired
intangible assets and exceptional items
(Loss)/Profit before tax
(Loss)/Profit after tax
Assets employed
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Financed by
Equity
Non-controlling interests
Earnings per share (cents)
Basic
Diluted
Adjusted basic
Adjusted diluted
2018
$’000
2017
$’000
2016
$’000
2015#
$’000
2014#
$’000
149,292
152,512
154,610
182,165
171,339
10,305
7,193
16,989
16,475
14,927
4,303
5,945
(57)
(552)
83,516
92,289
(17,882)
16,144
3,893
13,880
(21,182)
13,035
(18,539)
(5,277)
15,306
13,377
12,208
8,523
14,990
10,950
11,013
8,091
89,110
105,507
104,433
102,416
94,248
97,133
107,413
98,709
(74,084)
(71,039)
(68,872)
(71,275)
(144,918)
(80,603)
(88,216)
(89,657)
(87,127)
(6,464)
21,118
24,103
44,111
53,444
49,743
21,118
24,103
39,219
48,285
44,802
–
-
21,118
24,103
4,892
44,111
5,159
4,941
53,444
49,743
(2.7)
(2.7)
23.2
23.0
(96.4)
(96.4)
18.3
17.8
46.4
45.4
49.8
48.7
41.3
41.2
46.2
46.1
39.5
39.5
39.1
39.1
# The results of 2014 to 2015 have not been adjusted to reflect the effect of discontinued operations.
96
The Quarto Group, Inc. Annual Report 2018Financial Statements OFFICERS & PROFESSIONAL ADVISERS
Directors
C. K. Lau, Chief Executive Officer
Michael Mousley, Chief Financial Officer
Ken Fund, Chief Operating Officer
Andy Cumming*, Chairman
Jane Moriarty*
Mei Lam*
* Non-executive
Secretary
Michael Clarke
Registered Office
The Old Brewery
6 Blundell Street
London N7 9BH
Tel: +44 (0) 7700 6700
Stockbrokers
Stockdale Securities Limited
100 Wood Street
London EC2V 7AN
Auditor
Grant Thornton UK LLP
30 Finsbury Square
London
EC2A 1AG
Solicitors
Taylor Wessing LLP
5 New Street Square
London EC4A 3TW
Registrars and Transfer Office
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Principal Banks
Abbey National Treasury Services PLC
4th Floor Santander House
100 Ludgate Hill
London EC4M 7RE
Bank of America Corporation
100 Federal Street
Boston MA 02110 USA
Fifth Third Bank
38 Fountain Square Plaza
MD 109055
Cincinatti OH 45263 USA
The Royal Bank of Scotland plc
280 Bishopsgate
London EC2M 4RB
Company Registration Number
FC0 13814
97
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8
The Old Brewery
6 Blundell Street
London N7 9BH
United Kingdom
Tel: +44 (0)20 7700 6700
Fax: +44 (0)20 7700 8066
Email: info@quarto.com