THE QUARTO GROUP
T
h
e
Q
u
a
r
t
o
G
r
o
u
p
,
I
n
c
.
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
9
ANNUAL REPORT 2019
The Old Brewery | 6 Blundell Street | London N7 9BH | United Kingdom
Tel: +44 (0)20 7700 6700 | Email: info@quarto.com
QuartoAR2019_Final Cover.indd 1
QuartoAR2019_Final Cover.indd 1
4/27/20 4:21 PM
4/27/20 4:21 PM
Contents
STRATEGIC REPORT
Highlights
Quarto at a Glance
Chairman’s Statement
Group Chief Executive Officer’s Statement
Divisional Review
Our Business Model
Our People
Corporate Responsibility and Sustainability
2019 Portfolio Highlights
Market Overview
Financial Review
Risk Management, Principal Risks and Uncertainties
Our Key Performance Indicators
GOVERNANCE
Board of Directors
Nominations Committee Report
Audit and Risk 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
2
3
4
5
8
8
9
9
10
12
13
15
18
20
22
23
26
34
39
43
44
53
54
55
56
57
58
90
91
91
92
96
97
11
1
01QuartoAR2019_STRATEGIC_RMG.indd 1
01QuartoAR2019_STRATEGIC_RMG.indd 1
5/5/20 2:36 PM
5/5/20 2:36 PM
Highlights
FINANCIAL
REVENUE ($M)
2019
2018
135.8
149.3
OPERATING
PROFIT ($M)2
2019
2018
4.3
EBITDA ($M)2
8.8
2019
2018
12.5
11.1
PROFIT (LOSS) FOR
THE YEAR ($M)2
ADJUSTED1 BASIC
EARNINGS PER SHARE (CENTS)2
BASIC EARNINGS
PER SHARE (CENTS)2
2019
2018
(0.6)
2.9
2019
2018
19.0
2019
14.1
23.2
2018
(2.7)
1 Adjusted measures are stated before amortisation of acquired intangible assets and exceptional items.
2
IFRS16 (‘Leases’) have been adopted on a modified retrospective basis and accordingly the prior year has not been restated. The impact of this is disclosed
in note 1 of Notes to the Financial Statements.
OPERATIONAL
• Revenue of $135.8m down 9% on prior year of $149.3m
• Operating profit of $8.8m compared to $4.3m for prior year
• Children’s publishing revenues now represent over 36% of Group
revenues, up from one-third.
• 65% of revenue generated from backlist titles (2018: 63%).
• Banking facilities extended in January 2020 to 31 July 2021.
• Open Offer successfully completed in January 2020 raising $16.5m
net of expenses and reducing net bank debt to $33m.3
3 Net debt excludes lease liabilities relating to right-of-use assets (IFRS16)
01QuartoAR2019_STRATEGIC_RMG.indd 2
01QuartoAR2019_STRATEGIC_RMG.indd 2
5/5/20 2:36 PM
5/5/20 2:36 PM
2
3
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report 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.$24M
ANNUAL INTELLECTUAL
PROPERTY INVESTMENT
c.65%
OF ANNUAL SALES
FROM BACKLIST
44
YEARS
FOUNDED IN 1976
WE SELL OUR PRODUCTS GLOBALLY THROUGH A VARIETY OF SALES CHANNELS,
PARTNERSHIPS AND ROUTES TO MARKET.
50
COUNTRY
MARKETS
7
OFFICES
WORLDWIDE
2
INTERNATIONAL PUBLISHING
PARTNERSHIPS
QUARTO OFFICES
USA
SEATTLE
CALIFORNIA
BOSTON
NEW YORK
UK
LONDON (X2)
BRIGHTON
2
Key
International partnership
English language markets
Foreign language markets
3
01QuartoAR2019_STRATEGIC_RMG.indd 3
01QuartoAR2019_STRATEGIC_RMG.indd 3
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chairman’s Statement
“A welcome return to profitability and significant progress
towards a stronger financial base.”
Andy Cumming
Chairman
2019 has been a year of consolidation in
many respects for Quarto following the
Board changes and refocus of the
business in 2018.
The trading background in 2019 has
been challenging but the Board has
maintained a clear emphasis on the
following areas:
• Right sizing the Group.
•
Identifying and pursuing a path of
sustainable debt reduction.
• Focusing on the Group’s key
strengths.
• Maintaining a disciplined business
model.
The successful open offer to shareholders
which was concluded on 31 January
2020 had been under active
consideration by the Board for much of
2019. The proceeds of this transaction,
coupled with additional sums from
positive cash generation, resulted in a
significant reduction in bank debt and the
creation of a stronger financial base.
In addition to the reduction in debt, the
banking syndicate has extended the term
of the ongoing finance provided to the
Group out to July 2021, which provides
more certainty and time to continue
improving business performance.
The Board’s vision is for the Group to
become the dominant publisher of
illustrated books worldwide and to
expand on the use of the Group’s
intellectual property in as many ways as
possible. The Board is focused on a
product offering which brings the
highest value to consumers and on
operating an efficient publishing
company which excels at the delivery of
quality content in a cost-effective way.
As I have emphasized previously, Quarto
is a great business, with great people and
great products. I am proud to be
chairing a Board which is fully
committed to the business and 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 was one Board change in 2019
following the Annual Meeting. We have
welcomed Michael Mousley as a Non-
Executive Director. Michael was previously
the Company’s Chief Financial Officer
between 1987 and 2015, and came out of
retirement in 2018 to assist the refinancing
and restructuring plans that helped to
stabilize the Group. Further changes to
the Board occurred in February 2020 as
the Group’s turnaround continued, with
experienced publisher Polly Powell joining
the Board as CEO for the Group’s UK
operations, and Andrea Giunti Lombardo
of publisher Giunti Editore S.p.A. joining
the Board as a Non-Executive Director. At
the same time, to keep the company
within the authorised level of directors,
Michael Mousley kindly stepped down
from the Board. Michael will however, be
retained as an advisor to the Board.
The long-term impact on the global
economy of the Covid-19 pandemic is
expected to be significant. I am however,
confident that the strong team spirit
displayed by our talented staff, coupled
with the more sustainable balance sheet,
will allow us to react positively and quickly
to the challenges ahead.
Andy Cumming
Chairman
22 April 2020
01QuartoAR2019_STRATEGIC_RMG.indd 4
01QuartoAR2019_STRATEGIC_RMG.indd 4
5/5/20 2:36 PM
5/5/20 2:36 PM
4
5
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report Group Chief Executive Officer’s Statement
“We live in a fast-changing world, and Quarto’s mission is to be a
nimble publisher that delivers quality illustrated content on trending
subjects that people want to read.”
C.K. Lau
Group Chief Executive Officer
Business Review
In 2019, our revenue declined by 9% to
$135.8m (2018: $149.3m), operating
profit increased by 104% to $8.8m (2018:
$4.3m) as a result of reduced exceptional
costs, and the group has returned to
profitability with a profit after tax of
$2.9m (2018: $0.6m loss).
In the past two years, both the board and
senior management have been focused
on cash generation in order to return the
Group to a stronger financial position.
Our comprehensive cost-out program is
now bearing fruit as it has saved us
significant amount of operating expense.
We have right-sized our publishing
program in order to reduce investment
and to focus on creating strong
purposeful book titles. We have
continued to suspend payment of
dividends to reduce our cash outlays. All
these initiatives have helped the Group
return to our first profit since 2016.
The Group ended the year with net debt
at $50.5m, down 16.4% vs prior year
(2018: $60.4m). We are encouraged that
our financial stability is now further
secured with the completion of a
one-for-one open offer after the year
end in January 2020. The net proceeds
of the open offer were used to pay down
debt, and immediately following the
open offer, we were able to reduce our
net bank debt to a more sustainable level
of $33m.
The guidance of our Senior Leadership
Team is critical to our continued efforts
in our turnaround plan. Polly Powell,
owner of Pavilion Books, has been an
advisor to me since October 2019 and
from 10 February 2020 she has been
appointed as CEO of Quarto’s UK
operations. Polly, along with Ken Fund,
our CEO of Quarto’s US operations, will
spearhead the development of the
quality publishing program at Quarto.
The Little People, Big Dreams children’s
series started with life stories of female
role models such as Coco Chanel, Frida
Kahlo and Marie Curie, and in 2019, we
added male role models such as David
Bowie, Stephen Hawking and
Muhammad Ali. The series continues to
produce bestselling titles, and we are
very excited to have secured the
worldwide rights (excluding Spain) for
this series which celebrates the diversity
of society. Sixteen titles in this series
were published during 2019 and we are
introducing twenty more titles in 2020
with David Attenborough and Martin
Luther King, Jr. already amongst our
bestsellers.
Our new titles in the food and drink, and
art craft categories continued to perform
strongly. Beautiful Boards, a book about
preparing easy-to-find foods and
arranging them in beautiful, artful, and
whimsical ways, has sold 40,000 copies
within the first 3 months of its publishing.
Cross Stitch The Golden Girls, a fun
stitching kit introduced in June 2019 that
comes with hilarious patterns and quotes
from The Golden Girls, has already
warmed the hearts of 40,000 fans of this
critically acclaimed TV series.
Squishy Human Body, Smart Circuits:
Electronics Lab and Ultimate Secret
Formula Lab from our SmartLab Toys
have been bestselling products for years.
Our traditional strength in backlist items
like these continue to support us during
our business turnaround and contributed
65% to our revenue in 2019 (2018: 63%).
4
5
01QuartoAR2019_STRATEGIC_RMG.indd 5
01QuartoAR2019_STRATEGIC_RMG.indd 5
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S STATEMENT (continued)
Quarto takes the issue of sustainability
very seriously. I am happy to report that
the vast majority of the paper we use is
FSC certified, which means that it is
sourced from self-sustaining forestry. We
will continue to actively pursue the latest
planet-friendly initiatives in the book
industry.
Key Strategies
BE RELEVANT
As a major publisher of English non-
fiction books, we will continue to
leverage our powerful transatlantic
market position to quickly identify
consumer trends and capitalize from that
in both the US, UK and the rest of the
world. To deliver that content strategy,
we are structuring our imprints into ‘best
in class’ hubs, concentrating on the
subjects we do best, reducing internal
overlapping in our publishing programs,
and creating ‘more from less’.
NIMBLE AND RESPONSIVE
We are removing layers and streamlining
the decision-making processes within
Quarto. Our strategic objective is to
create a nimble publishing organization
that is quick to react to what consumers
want in the fast-moving marketplace. A
good example is Greta and the Giants, a
book inspired by Greta Thunberg who is
on a mission to raise awareness about
the climate crisis. Six months from first
concept in June 2019, this title became
an international bestseller for us selling
30,000 copies in the UK, 18,000 copies
in the US, and licensed in over 25
languages around the world.
STATE-OF-THE-ART
INFRASTRUCTURE
It is important to equip our staff with
modern IT tools to keep pace with the
ever-changing developments in the
publishing industry and consumer
trends. Traditionally, the book publishing
business has been seen as more of an art
rather than science, with a lot of
publishing decisions made based on “gut
feeling”. But with the emergence of new
technologies such as AI and machine
learning, we are moving towards the
hybrid model of art + science for
decision making. We are working with
outside consultants to modernize our
tools, so that our publishers can identify
popular and trending topics quickly; our
operations teams can demand-plan
more accurately; and Quarto’s
management can make quicker
informed decisions.
GROWING OUR GLOBAL REACH
We will continue to leverage Quarto’s
traditional strength in global trade
publishing and co-edition publishing.
Our foreign rights sales capability is
second to none among publishing
houses of our size and we will further
develop our sales coverage in custom
publishing and international English
language trade book channels. On 3
February 2020, the Giunti family of Italy
became a 20% shareholder of Quarto.
The partnership with the Giunti family,
owner of Giunti Editore and Giunti al
Punto bookstore chain, will enable us to
increase our global penetration of the
English language non-fiction trade book
markets in both conventional and
emerging countries.
Covid-19
In its initial phase, the Covid-19 outbreak
caused delays of two to four weeks on
shipments from our Chinese print
suppliers. This caused a small increase in
production costs as we relocated some
of our print productions to other
countries such as Singapore and
Malaysia. However, in the last two
months, the lockdown measures
imposed across the globe have led to
falling orders and revenues, across our
businesses. It is not possible to forecast
how long this pandemic will continue to
adversely impact the Group but we have
already taken measures to mitigate our
operational risk, reduce our cost base
and, most Importantly in the short-term,
manage our cashflow. We are engaged
in discussions with our lenders on
relaxing the financial covenants for the
current financial year.
Outlook
Since the introduction of US tariffs on
Chinese imports, we have been working
hard to mitigate the impact on our
customers. With the support of our print
suppliers, we are able to minimise the
brunt of the 7.5% tariff, and latterly we
have been able to offer competitive
printing outside of China.
Our pricing will continue to be under
pressure as retailers both online and in
physical brick and mortar locations put
pressure on margin. We are looking for
ways to counter this industry-wide trend
of increasing discount and we have had
some initial success in pricing our books
at the proper price points for the
marketplace, thus in some cases seeing
higher retail pricing that matches our
quality offering.
With a more sustainable balance sheet,
we are a more resilient business that
could quickly respond to the evolution of
the book retailing environment, the
consumer trends and the challenge of
the Covid-19 outbreak.
The success of Quarto is all about our
people. I would like to thank every
employee for their strong performance
and dedication in 2019.
C. K. Lau
22 April 2020
01QuartoAR2019_STRATEGIC_RMG.indd 6
01QuartoAR2019_STRATEGIC_RMG.indd 6
5/5/20 2:36 PM
5/5/20 2:36 PM
6
7
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report Section 172 statement
The Directors promote the success of
the Company by giving due care and
attention to the following elements:
(A) LIKELY CONSEQUENCES OF
DECISIONS IN THE LONG TERM
The Board’s vision for the Group is to
become the dominant publisher of
illustrated print books worldwide and to
expand on the use of the Group’s
intellectual property in as many ways as
possible.
The Board recognises that a coherent
and viable strategy is required which
must be (i) nimble and responsive, (ii)
have a modern infrastructure, and (iii)
grow its global reach. These are
considerations which have long-term
consequences, and so in executing its
strategy for the Group it prioritises the
greatest stability for its publishing
imprints and employees with appropriate
consideration for what is a challenging
international marketplace.
In 2019 this approach was evident from
the renegotiation of banking facilities
and the open offer to shareholders
which concluded successfully in January
2020. This allowed the Group to reduce
its indebtedness and provides funding
through to July 2021.
The ongoing rationalisation of the
Group’s indirect and overhead cost base
that started in 2018 is a necessary
element of returning the Group to
profitability, however, the Board also
recognised that the Company’s
publishing activities needed to innovate,
and from 2019 title acquisition and sales
activities were refocused.
(B) INTERESTS OF THE COMPANY’S
EMPLOYEES
Quarto is a publishing company and
having creative and motivated
employees is essential. The Board has a
rolling programme of employee
meetings through the year. These
meetings offer employees the
opportunity to discuss the Group’s
strategic direction and management.
The Board has asked Andy Cumming, an
independent non-executive director, to
be the designated employees’ liaison as
recommended by the Code.
The Company offers competitive market
rates of remuneration; encourages
community interaction through the
Quarto Foundation, established in 2017;
and offers workplace welfare
opportunities, such as providing weekly
yoga sessions.
The Company invests in our people by
providing them with tools, technology
and training to meet the challenges of
our market and the evolving needs of
our customers. Quarto also involves
employees in areas of strategy where
possible. During 2019, the Company
conducted a series of strategy sessions
involving employees from across the
Group inviting them to identify and
undertake projects aimed at enhancing
Group performance. This resulted in the
formation of ten projects ranging from
‘metadata’ capture, through identifying
gaps in our publishing, to leveraging
Quarto’s extensive publication archive
and its global reach.
(C) FOSTERING THE COMPANY’S
BUSINESS RELATIONSHIPS WITH
SUPPLIERS, CUSTOMERS AND
OTHERS
The Company benefits from its
association with Lion Rock which
operates amongst Quarto’s key suppliers
enabling it to maintain a positive
relationship with an essential supplier
base; this connection also allows Quarto
to print outside China and so provide a
better service to US customers
particularly sensitive to US tariffs.
The Board recognises the need to offer a
flexible service to its customers, be that
offering them outside-China printing, or
customised publishing, as well as the
need to cultivate suppliers of print-on-
demand in order to manage the business
efficiently and still fulfil customers’
orders. By exploring all the technologies
available, Quarto maximises its offer to
customers.
(D) IMPACT OF THE COMPANY’S
OPERATIONS ON THE COMMUNITY
AND THE ENVIRONMENT
The Company seeks to minimise its
impact on the environment. It takes
advantage of schemes that promote
green energy, such as in the UK where
several of its offices now use 100% green
energy supplies; and when refitting its
7
offices, it accommodates energy-saving
elements (e.g. LED lighting). Energy used
by its IT operations has reduced as the
Company has adopted cloud-based
services, and new equipment is
increasingly energy-efficient.
Through the Quarto Foundation, which
is very much staff led, Quarto
contributes to local causes.
By choosing accredited production
schemes like ICTI and SEDEX, which
include worker welfare assessments,
Quarto ensures a minimum welfare
standard in its principal supplier base.
Additionally, the Group prints predominantly
on paper from sustainable sources.
(E) DESIRABILITY OF THE COMPANY
MAINTAINING A REPUTATION FOR
HIGH STANDARDS OF BUSINESS
CONDUCT
The Board complies with the
requirements of the UK’s 2018 Code of
Governance. In early 2020 the Company
strengthened the Board and is confident
that it has the right composition to
deliver its strategy to the benefit of its
employees, customers, and
shareholders.
The Board appraises its own
performance in accordance with the
Code, and recognises the value of fair
treatment of its suppliers, honouring its
commitments, so that it can achieve a
reliable and responsive supply chain that
serves the needs of its customers; in
2019 Quarto renegotiated its terms with
its printers. To this end, the Board
routinely assesses the performance of its
supply chain.
(F) NEED TO ACT FAIRLY AS BETWEEN
MEMBERS OF THE COMPANY
The Company has a single class of
common shares. In 2019, C.K. Lau and
1010 Printing Limited, a company
controlled by C.K. Lau, became
controlling shareholders. The Company
and controlling shareholder parties
entered into a relationship agreement to
ensure that controlling shareholders do
not exert improper influence over the
Company, and in accordance with the
Listing Rules.
01QuartoAR2019_STRATEGIC_RMG.indd 7
01QuartoAR2019_STRATEGIC_RMG.indd 7
5/5/20 2:36 PM
5/5/20 2:36 PM
6
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Group Overhead
Group overhead, or corporate costs,
were reduced by $1.4m due to the
cost-out program initiated in the second
half of 2018.
Divisional Review
US Publishing
US Publishing adjusted operating profit
was down 10% to $4.5m (2018: $5.0m)
due to a combination of factors:
UK Publishing
UK Publishing adjusted operating profit
was down 15% to $6.5m (2018: $7.7m)
due to the following factors:
• A challenging co-edition market in
both English language and foreign
language markets. Revenues from
co-edition declined by $7.8m (17%).
• Gross margins remained stable with a
modest improvement in print margins
offset by the impact of relatively flat
pre-publication costs.
• Overhead savings of 5% were achieved.
• A reduction in the number of new
titles published following the cost-out
programme put in place in 2018, with
total revenue falling by 8% from
$78.1m to $71.9m. Backlist revenues
also dropped slightly reflecting a
cautious domestic market.
• Custom publishing continues to grow
with revenues up 19% and with slightly
Improved margins.
• Print margins were stable but
amortization on pre-publication costs
were relatively flat, creating a decline
in overall gross margins.
• Overhead savings amounted to $3.3m
(15%) but not enough to reverse the
decline in gross profit.
Adjusted Operating Profit ($m)
2019
2018
US Publishing
UK Publishing
Group overhead
Total adjusted operating profit
Amortisation of acquired intangible assets
Exceptional items
Operating profit
4.5
6.5
(1.0)
10.0
(0.8)
(0.4)
8.8
5.0
7.7
(2.4)
10.3
(0.9)
(5.1)
4.3
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 33 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.
01QuartoAR2019_STRATEGIC_RMG.indd 8
01QuartoAR2019_STRATEGIC_RMG.indd 8
5/5/20 2:36 PM
5/5/20 2:36 PM
8
9
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic 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 marketplace 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 2019, the breakdown of
directors, senior managers and
employees was:
Directors
Senior managers
All employees
Male
Female
4
10
86
2
10
234
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 2019, holding events
across Quarto’s offices to raise money
that the company then matches.
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 and SEDEX Care protocols.
8
9
01QuartoAR2019_STRATEGIC_RMG.indd 9
01QuartoAR2019_STRATEGIC_RMG.indd 9
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 2019 Portfolio Highlights
Adults
Ultimate Guide to Tarot
Published 2015
$324k
0.3% of revenue
Beginner’s Keto Diet
Published 2018
$312k
0.3% of revenue
Quick Keto Meals in 30
Minutes or Less
Published 2017
$268k
0.2% of revenue
Calligraphy Kit
Published 2014
$262k
0.2% of revenue
All New Square Foot
Gardening
Published 2018
$258k
0.2% of revenue
Drawing Really Cute
Kawaii Animals
Published 2018
$216k
0.2% of revenue
ANGELA NGUYEN is an artist known
for her cute illustration style. She was
the illustrator for Brent Campbell's
Are Mommy and Daddy Like Me? and
founder of the comic series Somewhere
in the World. Her first book, How to
Draw Cute Stuff, was recently published.
On the Internet she is known under
the screen name Pikarar, where she
publishes her artwork and has over
40,000 subscribers. Besides being an
illustrator, she's also a graphic designer
trained in print, motion graphics,
packaging, and digital.
For more information, visit her site:
angelanm.com.
C o m e a n d
C o m e a n d
j o i n u s !
j o i n u s !
COMPLETE
the kawaii drawings.
Enter Planet Cute
Enter Planet Cute
ADD
cute-appeal to your animal art.
HOW TO DRAW
HOW TO DRAW
CUTE ANIMALS
CUTE ANIMALS
CUTE ANIMALS
CUTE ANIMALS
CUTE ANIMALS
I’m soooo
I’m soooo
I’m soooo
I’m soooo
cute!
cute!
cute!
cute!
GRAB
a marker or pen and get started.
ISBN 978-1-4549-3101-0
5 1 2 9 5 >
9 7 8 1 4 5 4 9 3 1 01 0
Manufactured in China
H
O
W
T
O
D
R
A
W
C
U
T
E
A
N
M
A
L
S
I
N
g
u
y
e
n
A
n
g
e
l
a
Harry Potter Crochet
Published 2019
$603k
0.4% of revenue
Bucket List Journal
Published 2016
$601k
0.4% of revenue
How To Draw Cute Stuff
First Published 2017
$400k
0.3% of revenue
Beautiful Boards
Published 2019
$391k
0.3% of revenue
Witchcraft
Published 2016
$328k
0.3% of revenue
1001 Movies
Published 2003
$327k
0.3% of revenue
I’m
just hanging
around
$12.95 U.S.
$17.50 CAN.
Find out how to draw
cute animals, including:
✽ Hamsters ✽
✽ Elephants ✽
✽ Llamas ✽
✽ Sea creatures ✽
...and much more!
T W E E T
I’ m so
c u te!
How to Draw
CUTE ANIM A L
S
.
.
.
.
.
.
.
.
b a a .
b a a .
C H I R P
h ello!
h ello!
Bo w w o w !
Z
Z
Z
Z
Angela Nguyen
DCKA_COV_KawaiiNotebook_US_v4.indd All Pages
24/04/2018 16:39
10
11
01QuartoAR2019_STRATEGIC_RMG.indd 10
01QuartoAR2019_STRATEGIC_RMG.indd 10
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report
Squishy Human Body
Published 2006
$1,718k
1.3% of revenue
The Art of Making
Pokemon Detective
Pikachu
Published 2019
$1,023k
0.8% of revenue
Smart Circuits:
Electronics Lab
Published 2016
$953k
0.7% of revenue
All-natural Lip Balm
Boutique
Published 2016
$505k
0.4% of revenue
Story Orchestra: The
Nutcracker
Published 2017
$478k
0.4% of revenue
Story Orchestra: Swan
Lake
Published 2019
$415k
0.3% of revenue
Children
ABC For Me: ABC What
Can She Be?
Published 2018
$401k
0.3% of revenue
Greta and The Giants
Published 2019
$383k
0.3% of revenue
Extreme Secret
Formula Lab
Published 2011
$347k
0.3% of revenue
National Parks
of The USA
Published 2019
$346k
0.3% of revenue
Ultimate Secret
Formula Lab
Published 2016
$342k
0.3% of revenue
The Cave
Published 2017
$333k
0.2% of revenue
10
11
01QuartoAR2019_STRATEGIC_RMG.indd 11
01QuartoAR2019_STRATEGIC_RMG.indd 11
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS As an international publisher publishing
into 50 markets worldwide, Quarto
experiences many market trends, and
with an extensive and diverse customer
and supplier network around the world
Quarto monitors trends and
technologies looking for opportunities
for growth and innovation.
Market size and potential
The global publishing market
(comprising print books and digital
publications) is anticipated to reach
approximately $49 billion by 2024 and
projected to grow at a rate of more than
1 per cent. per annum during the
six-year period from 2018 to 2024.1 The
current publishing market is stable and
mature with consumers continuing
being loyal to print books. On average,
adult non-fiction consumers purchase
eight books per year, and children’s
book consumers purchase nine per
year.2
According to a report produced by
Pragma Consulting commissioned by
the Group (Pragma Report, produced
for Quarto in November 2017), the
Group’s addressable market in both the
United States and the United Kingdom,
being the consumer book market, grew
between 2013 and 2016. The consumer
book market was forecasted to be worth
approximately $12.4 billion and $2.24
billion in the United States and the
United Kingdom, respectively, by 20202.
Furthermore, the publishing industry
had also experienced significant
economic and demographic changes in
the demand for print books with
growing interest and sales in countries
with large populations such as Brazil and
Argentina.
Market Overview
General trends
PHYSICAL AND DIGITAL BOOKS
Whilst digital formats like e-books have
grown significantly, a broader and
diverse retail landscape of print books,
including production of vibrant and
innovative books, means that the print
book is evolving to find new readers.
E-books have experienced limited
success outside the adult fiction
segment and there is a suggestion that
e-book sales are flat-lining having
declined by 4.5 per cent. during the first
quarter of 2019.3 Nonetheless, as each
of the print books and digital format
provides the reader with a different
experience, they can easily co-exist in
the publishing market. E-books cannot
match the experience of highly
illustrated colour print books, and with
book readers being loyal to print books,
there remains a strong market for print
books.
According to the Association of
American Publishers’ Annual Report
2019, publishers of books in all formats
made approximately $26 billion in
revenue last year in the United States
with print books making up
approximately $22.6 billion and e-books
$2.04 billion.4 These figures include
trade and educational books, as well as
fiction. In general, Quarto believes that
these figures show the enduring appeal
and strength of print books and that the
publishing market will continue to show
support for print books as e-books do
not offer the same experience for
readers.
PUBLISHING INDUSTRY
SEGMENT DRIVERS
A trend that has emerged during 2019 in
the publishing industry is the growth in
the young adult non-fiction segment.5
Quarto believes young adult non-fiction
books is one of the fastest growing
industry segments in the United
Kingdom and United States both of
which are mature geographical markets
for the publishing industry. In the United
States young adult non-fiction sales
have grown at an average annual rate of
over 6.7 per cent. during the period
between 2014 and 2018.6 In addition,
revenues generated by the children’s
non-fiction segment rose by 3 per cent.
12
in the United Kingdom and 11.9 per cent.
in the United States, respectively, in
2018.7 Quarto believes that each of
these segments are an industry “sweet
spot” in which the Group is focusing its
operations, and which offer good
prospects for growth.
CHINA TREND ANALYSIS
The book publishing industry in China
continued to experience steady growth
in the first half of 2019, following an
increase of 10.8 per cent. in sales
compared to in the first half of 2018.
This sales growth occurred despite a
decline in physical bookstores in China.8
In particular, China’s online bookstore
market has grown by 24.1 per cent. in
the first half of 2019 whilst its physical
bookstores have decreased by 11.7 per
cent. during the same period.9 Quarto
believes that the development of online
sales channels in China will be an
important short-term ambition for
publishing companies looking to
capitalise on a growing foreign market
with an existing and dominant
e-commerce infrastructure.
1 Arizton Advisory and Intelligence Book Printing
Market – Global Outlook and Forecast
2019-2024 (Arizton Report)
2 Pages 9 and 14 of the Pragma Report
3 Article by GoodEReader titled ‘ebook sales
decrease by 4.5% in the first quarter of 2019’
dated 17 June 2019
4 CNBC article ‘Physical books still outsell
e-books — and here’s why’ dated 19
September 2019
5 NPD/BookScan
6 Article by Publishing Perspectives titled ‘AAP
Issues Its Annual 2018 Stat Shot Look at the US
Publishing Industry’ dated 23 June 2019
7 Article by The Bookseller titled ‘Total UK
publishing revenues down 2% in 2018;
consumer book market stable’ dated 26 June
2019
8 Article by Publishing Perspectives titled
‘China’s Book Market in the First Half of 2019:
Up 10.82 Percent’ dated 9 August 2019
9 Article by Porter Anderson of Publishing
Perspective titled ‘Asian Bookstore Forum 2019
in Xi’an: Online Retail Rising Fast in China’
dated 23 August 2019 (https://
publishingperspectives.com/2019/08/
asian-bookstore-forum-2019-the-retail-
context-in- china-today/).
01QuartoAR2019_STRATEGIC_RMG.indd 12
01QuartoAR2019_STRATEGIC_RMG.indd 12
5/5/20 2:36 PM
5/5/20 2:36 PM
13
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report Financial Review
“Operating profit for the Group increased by 104% ($4.5m) to $8.8m
(2018: $4.3m) as a result of reduced exceptional costs.”
C.K. Lau
Group Chief Executive Officer
Group Results
Revenue was $135.8m, a decrease of 9%,
compared to 2018 ($149.3m). However
operating profit was up 104% at $8.8m
(2018: $4.3m) and represented 6.5% (2018:
2.9%) of revenue. Diluted earnings per share
increased to 14.0c (2018: loss per share 2.7c).
Only one of our titles exceeded 1% of Group
revenue, being the top revenue earner for
the second year in a row. The following titles
were our top ten sellers in 2019, with their
respective revenue and year of publication:
Squishy Human Body (2006)
$1,718,000
Art and Making of Pokémon Detective Pikachu (2019)
Smart Circuits: Electronics Lab (2016)
Harry Potter Crochet (2019)
The Bucket List (2016)
All-Natural Lip Balm Boutique (2016)
Story Orchestra: The Nutcracker (2017)
Story Orchestra: Swan Lake (2019)
ABC For Me: ABC What Can She Be? (2018)
How To Draw Cute Stuff (2017)
$1,023,000
$953,000
$603,000
$601,000
$505,000
$478,000
$415,000
$401,000
$400,000
US Publishing
Revenue for this segment was down 8%
at $71.5m (2018: $78.1m). Operating
profit before amortisation of acquired
intangibles and exceptional items
(“adjusted operating profit”) was down
10% at $4.5m (2018: $5.0m). We
achieved an adjusted operating profit
margin of 6.3% (2018: 6.4%). Reprints
accounted for 68% of revenue,
compared to 65% in 2018.
UK Publishing
Revenue for this segment was down 10%
at $64.3m (2018: $71.2m). Adjusted
operating profit was down 15% at $6.5m
(2018: $7.7m). We achieved an adjusted
operating profit margin of 10.2% (2018:
10.8%). Reprints accounted for 63% of
revenue, compared to 61% in 2018.
Corporate costs
Corporate costs were reduced by 57%
from $2.4m to $1.0m, due to the
cost-out program which was initiated in
the second half of last year.
Exceptional Items
Exceptional items, in 2019, comprised
refinancing costs of $387,000, and
$32,000 with respect to aborted
corporate transaction costs. Exceptional
items, in 2018, comprised reorganisation
costs of $2.9m, arising from the cost-out
program, $0.8m with respect to the
board changes that occurred in May
2018 and $1.5m of refinancing costs.
Further details are disclosed in note 5.
Finance Costs
Finance costs were $4.9m (2018: $4.3m).
The increase was attributable to higher
interest rates arising from the refinancing
in October 2018 and the Impact of
adopting IRFS 16 ’Leases’ for the first
time.
Tax
The tax charge for the year was $1.0m
(2018: $0.5m).
Prior Year Adjustment
As a part of the year end audit there was
a reinterpretation of the directly
attributable costs and overheads that
should be capitalized under IAS 38, as
pre-publication costs; in the past, an
element of overheads relating to indirect
costs were capitalized which represents
an error. The Directors accept
responsibility for the error in their
interpretation of IAS38 and the treatment
of indirect overhead costs. This
interpretation first introduced in 2005
has not been challenged or commented
on, by any of the Company’s auditors in
the intervening years. Past Company’s
auditors include Grant Thornton (2017
- 2019), Deloitte (2014 - 2016), Grant
Thornton (2007 - 2013) and RSM (2006).
There was no overall impact on the
results of the Group for the year ended
31 December 2018 however there was a
reclassification in the financial
statements (see note 1).
Balance Sheet
The Group’s net assets increased to
$21.1m from $18.0m, driven by the
trading performance during the year. The
most significant change in the balance
sheet related to current and non-current
liabilities. Current liabilities increased
from $74.1m to $128.2m and non-
current liabilities decreased from $79.7m
to $15.5m, largely because our
borrowing facilities moved from medium
term to short term, as we approached
the end of the facility term. We have
refinanced after the year-end.
Additionally, the initial impact of adopting
IFRS 16, whilst this has no significant
effect on net assets, it increases
property, plant and equipment by $9.7m
and liabilities by $9.9m.
12
13
01QuartoAR2019_STRATEGIC_RMG.indd 13
01QuartoAR2019_STRATEGIC_RMG.indd 13
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW (continued)
Cash Flow and Indebtedness
At the year end, our net debt was
$50.5m, a reduction of 16%, compared
to 2018, when it was $60.4m. 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 $17.4m, up
107% compared to 2018, when it was
$8.4m. In 2019, a primary of objective of
the Board was to reduce the bank debt
to a more acceptable level and this was
achieved with strong cash generation as
outlined above.
Shareholder Return
The Directors have decided to continue
the Group’s policy of not paying a
dividend for the foreseeable future,
whilst the Group continues to focus on
delivering a stable financial platform.
Principal Risks and Uncertainties
Details of the Group’s principal risks and
uncertainties are set out on pages 15 to
17.
Going Concern
In accordance with Provision 31 of the
2018 revision of the UK Corporate
Governance Code, the Directors initially,
prior to the outbreak of Covid-19,
assessed the prospects of the Group
over both a one-year and a three-year
period. The one-year period at that time
had a greater level of certainty and
therefore, used to set budgets for all our
businesses which culminated in the
approval of a Group budget for the
Board. The three-year period is aligned
with long-term incentives offered to
Executive Directors and certain senior
management.
The Directors 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 2022, which comprise a
detailed cash forecast for the year
ending 31 December 2020 based on the
budget for that year and standard growth
assumptions for revenue and costs for
the years ending 31 December 2021 and
2022, to satisfy themselves of the going
concern assumption used in preparing
the financial statements and the Group’s
viability over a three-year period ending
on 31 December 2022. The Directors
used the three-year review period
because the Group’s publishing program
planning cycle normally works over a
two- to three-year period.
In January 2020 the Group raised
$16.5m net of expenses to pay down
bank debts and the bank facilities were
extended and now have 15 months to
run before they will need to be
refinanced in July 2021. 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.
The Directors 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.
The uncertainty as to the future impact
on the Group of the recent Covid-19
outbreak has subsequently been
considered as part of the Group’s
adoption of the going concern basis. In
the downside scenario analysis
performed, the Directors have
considered the impact of the Covid-19
outbreak on the Group’s trading and
cash flow forecasts. In preparing this
analysis, the directors assumed that the
lockdown effects of the Covid-19 virus
will peak around the end of June and
trading will normalise over the
subsequent few months, albeit attaining
substantially lower levels of revenue than
budgeted, for at least the rest of the
current financial year. This scenario will
lead to a material reduction in the
Group’s revenues and results for 2020.
A range of mitigating actions within the
control of management were assumed,
including reductions in the investment in
pre-publication costs, print volumes,
staffing levels and other variable costs.
The Directors have also considered the
financial support commitment made by
the UK Government and they believe the
Group is eligible for some elements of
this financial support. This has been
factored in to the forecasts. The
Directors have also assumed, having had
productive discussions with its lenders,
that certain bank fees due to be paid in
August 2020, can be deferred to the end
of the current facility.
In this scenario, whilst the Group would
remain within its banking facilities, some
of the financial covenants would, within
the current financial year, be breached,
unless a waiver agreement is reached
with the majority of lenders. Further
adverse changes arising from Covid-19
would increase the challenge of
complying with financial covenants and
remaining within the banking facilities.
The Directors, as stated above, are in
discussions with its lenders which, albeit
at early stages, are considered as being
productive. The financial covenants,
which are tested every calendar quarter,
and generally vary by each quarter, are
referred to in note 18.
Based on the above indications, after
taking into account the impact of
Covid-19 on the Group’s future trading,
the Directors believe that it remains
appropriate to continue to adopt the
going concern in preparing the financial
statements. However, the downside
scenario detailed above, Including taking
mitigating actions, would indicate the
existence of a material uncertainty which
may cast doubt on the Group’s ability to
continue as a going concern.
C.K. Lau
Group Chief Executive Officer
22 April 2020
01QuartoAR2019_STRATEGIC_RMG.indd 14
01QuartoAR2019_STRATEGIC_RMG.indd 14
5/5/20 2:36 PM
5/5/20 2:36 PM
14
15
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report Risk Management, Principal
Risks and Uncertainties
The 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 maintains a Risk Register which is reviewed, updated and approved at each meeting of the Audit and Risk Committee,
and presented at each quarterly Board meeting for review; this means that the Register is reviewed, typically, as many as seven
times a year. These reviews are broad ranging addressing each part of the Group’s business and activities. For each risk
identified its impact is rated, and mitigations are identified. In addition, risks to the business are monitored regularly by the
Company’s Group and divisional CEOs, so that emergent risks can be identified and escalated quickly, and mitigations enacted.
The introduction of tariffs by the US Government on Chinese manufactured goods and more recently the spread of the
Coronavirus has been the most urgent emerging risks.
Details of the Group’s financial risk management objectives and policies are set out in note 22 to the Financial Statements. The
business risk review has identified the following risks that face our businesses.
MARKET AND FINANCIAL RISKS
Risk
Description
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 spread of
the Coronavirus is such an example. The UK’s
planned exit from the European Union and US-Sino
relations (culminating in the introduction of tariffs
during 2019) contribute to uncertainty in the
eco-nomic 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.
.
Mitigating factor
The Group has adequate facilities with up to $48m 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 spend on pre-publica-
tion costs, inventory printings and other discretionary
Items. The Group offers now non-Chinese printing for
customers in order to avoid US tariffs on books.
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 impact-
ing our net assets.
During 2019 Quarto negotiated an Amended Facilities
Agreement with its banking syndicate subject to successful
completion of an open offer to shareholders in January
2020; the open offer proceeded successfully and raised
$16.7m that will be used to pay down bank debt in 2020.
The Group now has a bank debt facility secured until 31
July 2021. Quarto continues to benefit from a strong
cost-reduction programme introduced in the second half
of 2018, and introduced a competitive auction platform
during 2019 to procure printing services providing addition-
al cost savings. Meanwhile the Group is pursuing its
strategy of organic growth through innovation (as set out
on page 6).
14
15
01QuartoAR2019_STRATEGIC_RMG.indd 15
01QuartoAR2019_STRATEGIC_RMG.indd 15
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS RISK MANAGEMENT, PRINCIPAL RISKS AND UNCERTAINTIES (continued)
OPERATIONAL RISKS
Risk
Description
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.
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-envi-
ronmentally friendly paper.
‘Brexit’, the planned departure of the UK from the
EU in 2020, could disrupt product movement into
the EU.
Coronavirus
The global spread of the coronavirus (Covid-19) is
causing significant business interruption by
infecting the Group’s workforce; closing retail
outlets and therefore impacting orders and
revenues; and impairing the Group’s supply chain
adding cost and delaying fulfilment of orders.
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.
Mitigating factor
The Group has a long-established strategy of diversifying its
international customer base, including specialty retailers,
resulting in the fact that with one exception no 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.
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 Steward-
ship 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.
Quarto monitors and follows government advice making
the necessary adjustments in order to maintain the
well-being of its employees. Quarto promotes hygienic
practices in its offices and avoids unnecessary travel. The
Group operates modern enterprise IT systems that permit
remote working with the minimum of interruption. The
Group has the ability to immediately reduce its investment
in pre-publication costs and inventory and manage
discretionary spending. Working with its suppliers and
customers, Quarto works hard to reduce the impact of any
interruption in its supply chain.
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 work-
flow for storage, back-up and recovery services for product
files in development. Two archive data arrays that replicate
each other were 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.
01QuartoAR2019_STRATEGIC_RMG.indd 16
01QuartoAR2019_STRATEGIC_RMG.indd 16
5/5/20 2:36 PM
5/5/20 2:36 PM
16
17
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report OPERATIONAL RISKS (continued)
Risk
Description
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.
Mitigating factor
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, and Quarto’s IP rights are
properly protected.
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. The Group undertakes industry
standard system penetration testing.
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 2019.
Quarto’s Publishers are experienced and talented profes-
sionals 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.
16
17
01QuartoAR2019_STRATEGIC_RMG.indd 17
01QuartoAR2019_STRATEGIC_RMG.indd 17
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC 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.
EBITDA ($M)2
ADJUSTED1 OPERATING
PROFIT ($M)2
2019
2018
2017
2016
2015
2014
2013
2012
12.5
11.1
8.5
18.3
17.9
17.0
15.9
16.5
2019
2018
2017 7.2
2016
2015
2014
2013
2012
10.0
10.3
XX
17.0
18.5
15.8
14.3
12.8
EBITDA is used to measure the
operational performance of the Group.
Adjusted operating profit fractionally
lower despite significant reduction in
intellectual property investment.
RETURN ON NET
OPERATING ASSETS (%)4
NET DEBT ($M)2
2019
2018
2017
2016
2015
2014
2013
2012
10.3
9.7
7.7
14.3
13.4
12.0
11.8
11.0
2019
2018
2017
2016
2015
2014
2013
2012
50.5
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 16% in
2019.
1 Adjusted measure are stated before amortisation of acquired intangible assets and exceptional items
2 See note 31
3 See note 10
4 Operating profit before amortisation of acquired intangibles & exceptional costs over Group net
assets plus unallocated net liabilities from operating segment
01QuartoAR2019_STRATEGIC_RMG.indd 18
01QuartoAR2019_STRATEGIC_RMG.indd 18
5/5/20 2:36 PM
5/5/20 2:36 PM
18
19
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic Report ADJUSTED1 DILUTED
EARNINGS PER SHARE (CENTS)3
BACKLIST % OF SALES (%)
18.8
23.0
17.8
2019
2018
2017
2016
2015
2014
2013
2012
48.7
46.1
39.1
36.1
41.6
2019
2018
2017
2016
2015
2014
2013
2012
65.4
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 ($M)
2019
2018
2017
2016
2015
2014
2013
2012
14.3
15.0
14.8
15.5
13.8
13.9
11.2
12.6
2019
2018
2017
2016
2015
2014
2013
2012
23.8
27.6
33.4
37.2
34.9
33.5
31.7
30.5
This is a measure of the cash used up
in inventory as a proportion of revenue.
We reduced the IP spend in 2019, as a
result of our cost-out programme in
2018. See note 15 of the financial
statements.
CHILDREN’S PUBLISHING
REVENUES ($M)
49.8
50.2
49.1
41.1
32.4
2019
2018
2017
2016
2015
2014
2013
2012
23.0
19.6
18.5
Children’s publishing revenues have
increased by 17% in the last 4 years.
The Strategic Report was approved by the Board and was signed on behalf of the
Board by:
C.K. Lau
Director
22 April 2020
18
19
01QuartoAR2019_STRATEGIC_RMG.indd 19
01QuartoAR2019_STRATEGIC_RMG.indd 19
5/5/20 2:36 PM
5/5/20 2:36 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Board of Directors
Andy Cumming
Non-Executive Chairman
Andy joined the Board on 1 March 2018 as an independent Non-Executive Director
and was appointed Non-Executive Chairman on 11 July 2018; he is a member of
the Audit and Risk, and Remuneration Committees, and he Chairs the Nomination
Committee.
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 a Non-Executive Director of (i) Lloyds Development Capital, the
private equity arm of Lloyds Banking Group, (ii) Bluestone Holdings Limited, a
multinational financial services business, (iii) Seadrill Partners LLC, which focuses on
the acquisition, ownership and operation of offshore drilling rigs, and (iv) Integrity
Capital plc, a company investing in asset backed secured lending.
Chuk Kin Lau
Group Chief Executive Officer
C.K. Lau, “CK”, is also an Executive Director of Lion Rock Group and an Executive
Director of OPUS Group Limited, a subsidiary of Lion Rock. CK was elected to the
Board on 17 May 2018 as an Executive Director. He is President of the Company.
CK is a member of the Remuneration and Nominations Committees.
Ken Fund
Chief Operating Officer
Chief Executive Officer Quarto US
Ken became Chief Operating Officer of the Company in July 2016 and joined the
Board as an Executive Director on 11 July 2018; he is CEO of Quarto US. Ken joined
the Company in 1999 as President and CEO of Rockport Publishers, a former
subsidiary of the Company.
Ken’s career started with Dino DeLaurentiis Productions in New Business
Development before moving to Simon & Schuster Publishers as Business Manager in
1984. He joined Harper Collins San Francisco in 1990 becoming senior Vice
President for Adult publishing.
Ken is a graduate of SUNY Oswego and holds an MBA in Finance from Pace
University.
02QuartoAR2019_GOVERNANCE_RMG.indd 20
02QuartoAR2019_GOVERNANCE_RMG.indd 20
5/5/20 2:38 PM
5/5/20 2:38 PM
20
21
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Polly Powell
Chief Executive Officer Quarto UK
Polly was elected to the Board on 10 February 2020 as Executive Director. She is
CEO of Quarto UK.
Polly has worked in non-fiction publishing for more than thirty years. She was a
member of the management team that acquired the book publishing business from
Chrysalis Music Limited in 2004. Polly became the sole owner of the business in
2012 renaming it Pavilion Books.
Polly is a Director of Pavilion Books Holdings Limited. In addition, she is a Non-
Executive Director of National Gallery Company Limited.
Jane Moriarty
Non-Executive Director
Jane joined the Board of the Company on 12 November 2018. Additionally, Jane is
Chair of the Audit and Risk, and Remuneration Committees; she is the Senior
Independent Director. Jane is Vice-Chair.
Jane is a Fellow Chartered Accountant 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.
Jane is currently a non-executive director of (i) Mitchells & Butlers plc, one of the
largest operators of pubs, bars and restaurants in the UK, (ii) NG Bailey, an
independent engineering, construction and services company in the UK, (iii) Martin’s
Properties, a leading commercial, retail and residential property company, and (iv)
Nyrstar NV, a listed Belgian holding company with an investment in a global mining
and smelting business.
Mei Lan Lam
Non-Executive Director
Mei Lan is an Executive Director and Chief Financial Officer of Lion Rock Group and
responsible for the financial management of Lion Rock. Mei Lan has 30 years’
experience in finance and has held senior financial positions in various listed
companies and a non-profit charitable organisation in Hong Kong. She joined the
Company after being elected to the Board as a Non-Executive Director on 17 May
2018.
Andrea Giunti Lombardo
Non-Executive Director
Andrea was elected to the Board on 10 February 2020.
Andrea is a member of the board of Giunti Editore S.p.A., the second largest
publishing house in Italy and owner of the Giunti al Punto bookstore chain. He has
been involved in different aspects of the publishing industry, and has extensive
experience in finance, M&A and digital development. Andrea was also involved in the
establishment of the Giunti Academy, a business management school in Italy.
20
21
02QuartoAR2019_GOVERNANCE_RMG.indd 21
02QuartoAR2019_GOVERNANCE_RMG.indd 21
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Nominations Committee Report
The Committee met once during the
year and was active in appointing
Michael Mousley as a Non-Executive
Director. Following the successful open
offer to shareholders in January 2020,
the Committee was also active in the
appointment of Polly Powell as an
Executive Director and Andrea Giunti
Lombardo as a Non-Executive Director.
The Chairman of the Committee attends
the Annual Meeting to address any
shareholder questions relating to the
Committee.
Andy Cumming
Chair of the Nominations Committee
22 April 2020
The Nominations Committee 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 formal and transparent
processes 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.
02QuartoAR2019_GOVERNANCE_RMG.indd 22
02QuartoAR2019_GOVERNANCE_RMG.indd 22
5/5/20 2:38 PM
5/5/20 2:38 PM
22
23
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Audit and Risk Committee Report
In line with FRC guidance the Committee
has had 2 members throughout the year,
Jane Moriarty as Chairman and Andy
Cumming, and Michael Mousley was a
member of the Committee from 12
August 2019 until 10 February 2020.
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 is
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 2019
and once so far in 2020.
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 2019 and 2020, 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 2019 year-end audit and
approval of the preliminary
announcement and the annual report.
• Review of the Directors’ viability
statement and consideration of the
downside scenario modelled, to
reflect the impact in 2020 of the
Covid-19 outbreak, which indicated
the existence of a material uncertainty
on going concern, referred to in the
2019 year-end audit report.
• 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 2019 after discussion with
management and the external auditor.
• Review and consider the goodwill
impairment review.
• Review and approve the financial
documents prepared to support the
open offer in January 2020.
Significant Audit Risks, Key
Findings and Financial
Judgements Relating to Year End
Accounts 2019
The Committee concentrated on the
following in relation to the 2019
accounts.
PRIOR YEAR ADJUSTMENT
As a part of the year end audit a
reinterpretation of the directly
attributable costs and overheads that
should be capitalized under IAS 38, as
pre-publication costs; in the past, an
element of overheads relating to indirect
costs were capitalized which represents
an error. The Directors accept
responsibility for the error in their
interpretation of IAS38 and the treatment
of indirect overhead costs. This
interpretation first introduced in 2005
has not been challenged or commented
on, by any of the Company’s auditors in
the intervening years. Past Company’s
auditors include Grant Thornton (2017
- 2019), Deloitte (2014 - 2016), Grant
Thornton (2007 - 2013) and RSM (2006).
There was no overall impact on the
results of the Group for the year ended
31 December 2018 however there was a
reclassification of related expenses in the
financial statements (note 1).
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.
22
23
02QuartoAR2019_GOVERNANCE_RMG.indd 23
02QuartoAR2019_GOVERNANCE_RMG.indd 23
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT COMMITTEE REPORT (continued)
The Group’s financial performance in
2019, and its forecast future
performance, reflects the positive impact
of the Group’s renewed focus on core
products and titles, the cost-out program
which began in 2018, and the fund
raising and resulting debt position of the
open offer to shareholders that occurred
in January 2020.
The Committee discussed the Impact of
Covid-19 on the Group and, in particular,
considered the downside scenario that
was prepared as part of the going
concern review. It also considered and
satisfied itself of the existence of a
material uncertainty which may cast
doubt on the Group’s ability to continue
as a going concern.
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 2019,
the value in use calculation exceeded
the carrying value of goodwill.
Further detail is set out in note 11 to the
Financial Statements.
RECOVERABILITY OF PRE-
PUBLICATION COSTS
Amortization 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 capitalized in
accordance with IAS 38 and the
Committee, with the external auditor,
discussed the assumptions behind the
amortization profile including the
amortization period of the publications.
Further detail is set out in note 15 to the
Financial Statements.
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 2019, 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.
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 2019 accounts, there were only
minor exceptional costs, mainly relating
to the renewal of the banking facilities In
January 2020, and these are referred to
in note 5 to the Financial Statements.
For the 2018 accounts, there were
significant exceptional items. These
comprised $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.
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 and Risk Committee. The Auditor
gave the Committee forthright views on
judgement areas whilst recognising that
the decisions lay with the Committee.
The Committee is satisfied with the
Auditor’s effectiveness in 2019.
02QuartoAR2019_GOVERNANCE_RMG.indd 24
02QuartoAR2019_GOVERNANCE_RMG.indd 24
5/5/20 2:38 PM
5/5/20 2:38 PM
24
25
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance 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 and Risk Committee
reviewed and monitored the work of the
Executive Board during the year.
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,
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.
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.
Audit Quality Review
As part of its annual inspection of audit
firms the Audit Quality Review team of
the UK Financial Reporting Council
reviewed the audit conducted by Grant
Thornton of the Company accounts for
financial year 2018. The Committee
discussed the findings of this external
report and the actions undertaken by
Grant Thornton to address the matters
raised. After discussions with Grant
Thornton the Committee noted that any
identified areas for further improvement
by Grant Thornton have been addressed
or had appropriate action plans in place
during this year’s audit.
Jane Moriarty
Chair of the Audit and Risk Committee
22 April 2020
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 2019 audit of the Group and the
Company’s accounts, Grant Thornton
charged $255,000 (2018: $244,000).
Non-Audit Services
Grant Thornton was engaged to provide
non-audit services in relation to the
preparation of the open offer made to
shareholders in January 2020. The cost
of these services to 31 December 2019
was $172,000 (2018: $nil). The Company
has a policy in regard to the provision of
non-audit services by the auditor which
is reviewed annually.
Internal Audit
To date there has not been a separate
internal audit function, given the size and
scale of the Group’s operations.
The Audit and Risk Committee decided
not to establish a dedicated internal audit
function this year, for the reasons stated
above. 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.
Quarto has continued to develop a
strong and effective control environment
for the business. This has built the
Board’s and Audit and Risk Committee’s
confidence in the financial management
of the Group.
24
25
02QuartoAR2019_GOVERNANCE_RMG.indd 25
02QuartoAR2019_GOVERNANCE_RMG.indd 25
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Remuneration Committee Report
Annual Statement
DEAR SHAREHOLDER
I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2019, which has been prepared by
the Committee and approved by the Board.
For the year ended 31 December 2019, there were no substantial changes in Directors’ remuneration arrangements. During the
year Ken Fund was granted a retention award as outlined on page 36.
This is the Company’s sixth 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 22 May 2020 subject to approval at
the 2020 Annual Meeting. The proposed policy mirrors the existing policy implemented on 16 May 2019.
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 2019; 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
Chair of the Remuneration Committee
22 April 2020
02QuartoAR2019_GOVERNANCE_RMG.indd 26
02QuartoAR2019_GOVERNANCE_RMG.indd 26
5/5/20 2:38 PM
5/5/20 2:38 PM
26
27
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Remuneration Committee meeting attendance 2019
Committee membership
Number of meetings held during the year: 3
Andy Cumming (Appointed 1 March 2018, Chair from 17 May 2018 to 7 March 2019)
Jane Moriarty (Appointed 12 November 2018, Chair from 7 March 2019)
C. K. Lau (Appointed 17 May 2018)
3 of 3
3 of 3
3 of 3
Michael Mousley (Appointed 16 April 2019 until 10 February 2020)
2 of 3 (all meetings after appointment)
Policy
This section sets out Quarto’s Remuneration Policy for Directors which is recommended by the Board for approval at the 2020
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:
•
•
•
•
the need to align the interests of the executive with those of the shareholders;
the performance of the individual executive and of the Group as a whole;
the remuneration practice in the markets in which the executive is principally based; and,
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
02QuartoAR2019_GOVERNANCE_RMG.indd 27
02QuartoAR2019_GOVERNANCE_RMG.indd 27
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC 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 em-
ployed.
Performance metrics
Not applicable.
Not applicable.
Operation
Opportunity
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 experi-
ence 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 insur-
ance and private medical
insurance. Where appropri-
ate, other benefits may be
offered including, but not
limited to, participation in
all-employee share schemes.
Benefits are non-
pensionable.
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.
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.
02QuartoAR2019_GOVERNANCE_RMG.indd 28
02QuartoAR2019_GOVERNANCE_RMG.indd 28
5/5/20 2:38 PM
5/5/20 2:38 PM
28
29
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance VARIABLE PAY
Element of
remuneration
Annual
performance
bonus
Purpose and
link to strategy
Designed to rein-
force individual
performance and
contribution to the
achievement of profit
growth and strategic
objectives.
Operation
Opportunity
Maximum potential opportuni-
ty of up to 100% of base salary
for the CEO and 50% for the
COO.
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 exceed-
ing the base EBITDA target by
10%.
Measures are reviewed at the
beginning 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.
Performance metrics
60% on financial
objectives and 40% on
personal objectives.
The Committee will
vary the weightings
from year-to-year to
reflect the changing
strategic needs for
the business with a
default bias towards
financial objectives.
In exceptional
circumstances, the
Committee has the
ability to exercise
discretion to override
the formulaic bonus
outcome within the
limits of the Plan
where it believes
the outcome is not
truly reflective of
performance and to
ensure fairness to
both shareholders and
participants.
28
29
02QuartoAR2019_GOVERNANCE_RMG.indd 29
02QuartoAR2019_GOVERNANCE_RMG.indd 29
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (continued)
VARIABLE PAY (continued)
Element of
remuneration
Performance
Share Plan
(PSP)
Purpose and
link to strategy
Ensures that the
Executive’s interests
are aligned with those
of shareholders
through reward for
providing sharehold-
ers with substantial
increases in share-
holder value and/or
for achievement of
a measure of sus-
tained growth in
earnings
over the medium
to long term.
Operation
Opportunity
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 perfor-
mance 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.
FIXED PAY
Element of
remuneration
Purpose and
link to strategy
Operation
Opportunity
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-Execu-
tive Directors.
Annual fee for Chair.
Annual base fee for Non-Ex-
ecutive 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.
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.
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.
Performance metrics
Not applicable.
02QuartoAR2019_GOVERNANCE_RMG.indd 30
02QuartoAR2019_GOVERNANCE_RMG.indd 30
5/5/20 2:38 PM
5/5/20 2:38 PM
30
31
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance 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 the
stated policy.
In line with stated
policy, with the
relevant maximum
pro-rated to reflect the
proportion of the year
served.
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
31
02QuartoAR2019_GOVERNANCE_RMG.indd 31
02QuartoAR2019_GOVERNANCE_RMG.indd 31
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC 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
Ken Fund
Effective date of contract
17 May 2018
11 July 2018
Notice period
3 months
6 months
Michael Mousley ceased to be an Executive Director on 30 April 2019 and became a Non-Executive Director from 1 May 2019
until 10 February 2020.
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
Andy Cumming
Mei Lan Lam
Jane Moriarty
Date of Appointment
1 March 2018
17 May 2018
12 November 2018
Michael Mousley1
1 May 2019
1 Resigned on 10 February 2020
Notice period
1 month
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 2019, $28,194 was paid into Marcus Leaver’s pension fund in respect of pension
underpayments during the period May 2016 to September 2018; no payments were made to other 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
Bad leaver
Good leaver
Change-of-control
Annual bonus
PSP
No annual bonus payable
Outstanding awards are forfeited
Eligible for an award to the extent that perfor-
mance conditions have been satisfied and pro-rat-
ed 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 perfor-
mance 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-con-
trol, 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.
02QuartoAR2019_GOVERNANCE_RMG.indd 32
02QuartoAR2019_GOVERNANCE_RMG.indd 32
5/5/20 2:38 PM
5/5/20 2:38 PM
32
33
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance 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 is 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 16 May 2019, 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.
EXECUTIVE DIRECTORS APPLICATION OF REMUNERATION POLICY
US$000
600
500
400
300
200
100
0
Ken Fund
1.6%
459
16.3%
82.1%
2.6%
541
27.7%
69.6%
377
100%
Fixed
Annual variable
PSP
Min
In line
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 pay out 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 pay out 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
22 April 2020
32
33
02QuartoAR2019_GOVERNANCE_RMG.indd 33
02QuartoAR2019_GOVERNANCE_RMG.indd 33
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC 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; and
• 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 2019 Annual Meeting
The following table shows the results of the advisory vote on the 2018 Annual Remuneration Report at the Annual Meeting on
16 May 2019.
For (including discretionary)
Against
Total votes cast
Withheld
Total number
of votes
% of
votes cast
10,102,204
99.98%
2,500
10,104,704
342,700
0.02%
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
2019 and the prior year. These amounts are shown in the reporting currency, although Michael Mousley’s payments were settled
in Sterling. The exchange rates used in 2019 and 2018 were 1.2758 and 1.3375, respectively.
Base Salary
Benefits1
Annual Bonus2
Long-term
incentives
Pension
Total
remuneration
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
—
145
346
—
265
164
—
—
13
—
—
10
—
38
20
—
—
—
—
—
—
—
—
—
—
—
18
—
—
17
—
183
397
—
265
191
Executive Directors
C. K. Lau*
Michael Mousley*
Ken Fund*
02QuartoAR2019_GOVERNANCE_RMG.indd 34
02QuartoAR2019_GOVERNANCE_RMG.indd 34
5/5/20 2:38 PM
5/5/20 2:38 PM
34
35
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Fees3
Benefits
Annual Bonus
Long-term
incentives
Pension
Total
remuneration
Non–Executive
Directors
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
Andy Cumming*
Mei Lan Lam*
Jane Moriarty*
Michael Mousley* 4
92
—
64
65
77
—
9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
92
—
64
65
77
—
9
—
* 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 in note 6.
3 Details of Non–Executive Directors’ fees can be found on page 30.
4 The fees for Michael Mousley include $23,000 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 2019 and of their connected persons in
the share capital of the Company are shown below:
Executive Directors
C. K. Lau
Michael Mousley
Ken Fund
Number of share
options of common stock
Number of US$0.10
shares of common stock
31 December
20191
31 December
20182
—
—
75,188
—
—
75,188
31 December
20191
6,874,6723
45,700
24,000
31 December
20182
5,754,672
45,700
24,000
During the year the market price of the shares of common stock ranged between 48p and 76p. The mid-market price on 31 December 2019 was 69p.
Non–Executive Directors
Andy Cumming
Mei Lan Lam
Jane Moriarty
Number of US$0.10
shares of common stock
31 December
31 December
20191
20182
—
—
—
—
—
—
1 Or date of resignation
2 Or date of appointment
3 Shares held by C.K. Lau (1,679,743) plus shares held by 1010 Printing Limited (5,194,929) a company over which C.K. Lau exercises control.
No director receives, or has an entitlement to receive, shares in the Company as part of his or her remuneration. A 50%
appreciation in the Company’s share price would have no impact on a director’s remuneration. As noted below Ken Fund has
been granted share options under the Company’s PSP Scheme (see note 29).
34
35
02QuartoAR2019_GOVERNANCE_RMG.indd 35
02QuartoAR2019_GOVERNANCE_RMG.indd 35
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ANNUAL REPORT ON REMUNERATION (continued)
Directors’ share options
Shares: Common Stock of $0.10 each
Ken Fund
Date of grant
19/04/2016
28/04/2017
* Or date of appointment
As at
1 January
2019*
49,692
25,496
75,188
Granted
Forfeited
As at
31 December
2019
Face value at
date of grant
(£’000)
—
—
—
—
—
—
49,692
25,496
75,188
122
67
Fair value
at date of
grant
(£’000)
126
68
Price at
exercise date
n/a
n/a
All awards under the PSP schemes have a four-year vesting period.
Executive directors’ base salaries/fees
During the year 2019, C. K. Lau, appointed on 17 May 2018, received $nil, in accordance with his service contract.
During the year 2019, Michael Mousley, resigned on 30 April 2019, received £114,000, in accordance with his service contract.
During the year 2019, Ken Fund, received $346,500, 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 $18,000.
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 31 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.
Retention Award
Ken Fund has been granted a retention award that offers a total payment of $500,000 composed of two elements: (i) a payment
of $350,000 so long as he remains employed by the Company until at least 30 September 2021, and (ii) a performance-related
payment of up to $150,000 assessed on profit-achievement by the Group for financial years 2020 and 2021.
Chair and Non-Executive director fees
The Non–Executive Directors’ annual fees for 2019 were as follows: Andy Cumming £72,000, Jane Moriarty £50,000, and
Michael Mousley £50,000 (date of appointment, 1 May 2019).
02QuartoAR2019_GOVERNANCE_RMG.indd 36
02QuartoAR2019_GOVERNANCE_RMG.indd 36
5/5/20 2:38 PM
5/5/20 2:38 PM
36
37
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Relative importance of spend on pay
The graph below shows how total employee pay compares with expenditure on intellectual property for years ended
31 December 2018 and 31 December 2019.
29.8
29.7
25.0
24.4
16
40
30
20
10
0
Total employee pay
Intellectual property spend
2019
2018
Review of group performance
The chart on page 38 compares the value of £100 invested in Quarto shares, including re–invested dividends, on 31 December
2010 compared to the equivalent investment in the FTSE Small Cap Index, over the last ten financial years. The FTSE Small Cap
Index has been chosen as it comprises companies of a broadly similar size to Quarto. The table below shows the single figure
for the CEO over the same period.
2010
750
2011
2012
996
1,0201
2013
870
2014
842
2015
2016
929
3,252
2017
701
2018
230
2019
—
CEO single figure of
remuneration
including bonus
($’000)
Annual bonus
awarded
$ amount
($’000s)
393
573
1213
233
169
305
34
150
PSP vesting
% of maximum
opportunity
$ amount
($’000s)
% of maximum
opportunity
—
—
—
—
—
—
— 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
02QuartoAR2019_GOVERNANCE_RMG.indd 37
02QuartoAR2019_GOVERNANCE_RMG.indd 37
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC 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
2019
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
2019
—
—
—
—
Average
for other employees
% change
% change
(100)%
(100)%
—%
(100)%
4%
5%
38%
4%
2018
224
6
—
230
Salary, benefits and bonuses for other employees 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 2019, awards made under the Group’s share schemes represented 4.4% (2018:
4.5%) 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
22 April 2020
02QuartoAR2019_GOVERNANCE_RMG.indd 38
02QuartoAR2019_GOVERNANCE_RMG.indd 38
5/5/20 2:38 PM
5/5/20 2:38 PM
38
39
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Directors’ Report
Group
The Directors present their report and the audited financial statements of The Quarto Group, Inc., for the year ended 31
December 2019.
Results
The profit for the year is $2.9m (2018: loss of $0.6m). 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 6.
Directors
Serving Directors during the year were as follows:
A. J. Cumming
(Non-Executive Chairman) Appointed 1 March 2018
C. K. Lau
(Chief Executive Officer) Appointed 17 May 2018; Non-Executive Director from 1 May 2019
M. J. Mousley1
(Interim Chief Financial Officer) Appointed 17 May 2018; Non-Executive Director from 1 May 2019
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
1 Resigned 10 February 2020
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.
On 10 February 2020, Polly Powell was appointed as Executive Director (Chief Executive Officer, Quarto UK) and Andrea Giunti
Lombardo was appointed as a Non-Executive Director. Andrea Giunti Lombardo is not considered to be independent.
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 requirement:
Directors’ remuneration
Location:
Annual Report on Remuneration, pages 34 to 38
Details of Long-term Incentive Plans
Annual Report on Remuneration, pages 34 to 38
Related Party Transactions
The Company purchases printing services from 1010 Printing Limited, a
company over which C.K. Lau exercises control. These purchases are made on
a job-by-job basis at arm’s length. Financial Statement note 30, page 88,
summarizes purchases of printing services from 1010 Printing Limited.
With reference to LR 9.8.4 R (14)(a), the Company entered into a written and legally binding relationship agreement with 1010
Printing Limited, Lion Rock Group Limited and C.K. Lau. The Company confirms in relation to the requirements of LR 9.8.4 (14)
(c) that: (i) it has complied with the undertakings of the relationship agreement; (ii) as far as the Company is aware, the
controlling shareholder parties have complied with the relationship agreement; and (iii) so far as the Company is aware, the
procurement obligations of LR 9.2.2B R (2)(a) have been complied with within the period under review.
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.
38
39
02QuartoAR2019_GOVERNANCE_RMG.indd 39
02QuartoAR2019_GOVERNANCE_RMG.indd 39
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REPORT (continued)
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 2019 is illustrated in the table below.
Board
Senior managers
All employees
Males
Females
4
10
86
2
10
234
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 2019 and 18 April 2020. 18 April 2020 is the latest practicable date prior to the publication
of this report.
1010 Printing2
L.F. Orbach
Herald Investment Management Ltd
C.K. Lau
Giunti3
Lazard Freres Gestion SAS
Haitong International Securities
As at 31 December 2019
As at 18 April 2020
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 stock1
% holding of the
issued capital
of the Company
5,194,929
4,103,615
1,812,045
1,679,743
995,000
993,674
625,000
25.4
20.1
8.9
8.2
4.9
4.9
3.1
12,915,083
4,103,615
2,212,045
3,359,486
8,177,820
993,674
1,875,000
31.6
10.0
5.4
8.2
20.0
2.4
4.6
1 Following an open offer which concluded on 31 January 2020 the allotted share capital of the Company increased from 20,444,550 shares of common
stock to 40,889,100. These figures represent the resulting enlarged shareholding.
2 1010 Printing is ultimately controlled by C.K. Lau.
3 Sergio Giunti and Andrea Giunti Lombardo (shareholders of the Company) along with Montecristo 2019 S.r.I., a private limited company incorporated under
the laws of Italy (an entity, ultimately controlled by Sergio Giunti and Andrea Giunti Lombardo).
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.
Post balance sheet events
On 16 January 2020, the Group announced an Open Offer of 20,444,550 new Common Shares at 68 pence per share. On the
same day, the Group concluded its refinancing, signing an extension to its existing bank facilities to 31 July 2021. The multi-currency
facility comprises a $25m term loan, a $8m revolving credit facility and a $2m overdraft facility. The effective date of the new facility
was dependent on the raising of the funds from the Open Offer which was successfully completed on 4 February 2020.
The outbreak of Covid-19 Is considered to be a non-adjusting post balance sheet event. At this stage of the outbreak, It Is not
possible to make an estimate of the financial effect that Covid-19 will have on the Group.
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 15 of the Risk Management Review. Operational risks are set out on pages 16 and 17 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 2018 (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 2019 and to the date of this report.
02QuartoAR2019_GOVERNANCE_RMG.indd 40
02QuartoAR2019_GOVERNANCE_RMG.indd 40
5/5/20 2:38 PM
5/5/20 2:38 PM
40
41
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance 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 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.
Section 172 statement
The Company’s section 172 statement can be found in the Strategic Report on page 7.
Attendance by Directors at Board and Committee meetings in 2019
Andy Cumming
C. K. Lau
Michael Mousley1,3
Mei Lan Lam2
Ken Fund2
Jane Moriarty
Total number of meetings
Board
Audit and Risk
Committee
Nominations
Committee
Remuneration
Committee
9
10
10
9
10
9
10
3
—
1
—
—
3
3
1
1
—
—
—
1
1
3
3
2
—
—
3
3
1 Member of the Audit and Risk Committee from 12 August 2019; prior to this date attended Audit and Risk Committee by invitation only.
2 Not members of the Remuneration Committee.
3 Member of the Remuneration Committee from 16 April 2019 to 10 February 2020.
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
optimizing consistent long-term financial returns.
b) As at 31 December 2019, the Board comprised two Executive Directors and four 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 2019.
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 10 times in 2019. 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, Michael Mousley (from 16 April 2019 and 10 February 2020), and C. K. Lau.
A separate report with respect to Directors’ remuneration is included on pages 34 to 35. The Committee meets at least twice
a year. In the year ended 31 December 2019 the Committee had met 3 times.
g) The Audit and Risk Committee comprises Jane Moriarty, who is Committee Chairman, Andy Cumming, and, from 12 August
2019, Michael Mousley. 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.
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 will 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.
40
41
02QuartoAR2019_GOVERNANCE_RMG.indd 41
02QuartoAR2019_GOVERNANCE_RMG.indd 41
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REPORT (continued)
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
Tonnes of CO2e
2019
12
132
144
334
0.43
2018
13
129
142
372
0.38
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 authorization 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 summarizing 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 2020.
Michael Clarke
Company Secretary
22 April 2020
Company Registration Number: FC0 13814
02QuartoAR2019_GOVERNANCE_RMG.indd 42
02QuartoAR2019_GOVERNANCE_RMG.indd 42
5/5/20 2:38 PM
5/5/20 2:38 PM
42
43
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance 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
Group Chief Executive Officer
22 April 2020
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 and Risk 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.
42
43
02QuartoAR2019_GOVERNANCE_RMG.indd 43
02QuartoAR2019_GOVERNANCE_RMG.indd 43
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 2019, 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 2019 and of the group’s profit and the parent company’s loss 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 parent 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.
THE IMPACT OF UNCERTAINTIES ARISING FROM THE UK EXITING THE EUROPEAN UNION ON OUR AUDIT
Our audit of the financial statements requires us to obtain an understanding of all relevant uncertainties, including those arising
as a consequence of the effects of Brexit. All audits assess and challenge the reasonableness of estimates made by the directors
and the related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of
these depend on assessments of the future economic environment and the group’s and parent company’s future prospects and
performance.
Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to
unprecedented levels of uncertainty, with the full range of possible outcomes and their impacts unknown. We applied a
standardised firm-wide approach in response to these uncertainties when assessing the group’s and parent company’s future
prospects and performance. However, no audit should be expected to predict the unknowable factors or all possible future
implications for a group and parent company associated with a course of action such as Brexit.
02QuartoAR2019_GOVERNANCE_RMG.indd 44
02QuartoAR2019_GOVERNANCE_RMG.indd 44
5/5/20 2:38 PM
5/5/20 2:38 PM
44
45
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance MATERIAL UNCERTAINTY RELATED TO GOING CONCERN
We draw attention to note 1 of the financial statements, which indicates that the directors have prepared a downside scenario
analysis which models the potential impact of the recent Covid-19 outbreak on the group’s trading and cash flow forecasts and
financial covenants. As stated in note 1, the downside scenario analysis indicates that a material uncertainty exists that may cast
significant doubt on the group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Audit work performed
In evaluating whether a material uncertainty exists, our procedures evaluated management’s assessment of the impact of
Covid-19 on the group’s working capital and covenant conditions by undertaking, inter alia, the following work:
• We have reviewed the forecasts and the assumptions used by management and have considered whether these are
consistent with our understanding of the business derived from other detailed work undertaken;
• We assessed the quality of management’s forecasting by comparing projections to actual post year-end results;
• We agreed the underlying cash flow projections to management-approved forecasts, assessed how these forecasts are
compiled, and considered the adequacy of management’s scenario planning by applying appropriate sensitivities to the
underlying assumptions;
• Considered the effect of the assumptions regarding the lost revenue, availability of workforce and the resulting effect on
working capital during the estimated period of Covid-19 impact;
• Reviewed the terms of the covenant agreement and assessed under what circumstances that there was a risk that a covenant
may be breached as a result of the Covid-19 adjustments to the projections; and
• Assessed the impact of the mitigating factors available to management in respect of the ability to restrict cash impact,
including the level of available credit facilities.
OVERVIEW OF OUR AUDIT APPROACH
• Overall materiality: $700,000, which represents approximately 0.5% of the group’s 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 valuation of pre-publication intangible assets; and
• We have performed a full scope audit of the financial statements of the parent company and of the financial information of
Quarto Publishing plc (‘Quarto UK’) and Quarto Publishing Group USA Inc. (‘Quarto US’). We have performed analytical
procedures on the financial information of other companies within the group.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, 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, which Include the matter described
in the ‘Material uncertainty related to going concern’ section, 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. In
addition to the matter described In the Material Uncertainty Related to Going Concern section, we have determined the matters
described below to be the key audit matters to be communicated In our report.
44
45
02QuartoAR2019_GOVERNANCE_RMG.indd 45
02QuartoAR2019_GOVERNANCE_RMG.indd 45
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
Key Audit Matter – Group
How the matter was addressed in the audit – Group
COMPLETENESS OF THE SALES RETURNS
PROVISION
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
2019, this provision totals $6,349,000. 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 therefore the provision which is
required to be made.
We therefore identified the completeness of the sales
returns provision as a significant risk, which was one of
the most significant assessed risks of material misstate-
ment.
Our audit work included, but was not restricted to:
• Considering the appropriateness of the accounting policy for the
provision for sales returns by checking whether it is in accordance with
the financial reporting framework, including IAS 37 ‘Provisions, Contin-
gent Liabilities and Contingent Assets’ and IFRS 15 ‘Revenue from
Contracts with Customers’.
• 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; and
• Inquiring of sales and operations staff as to their knowledge of any
exceptional returns in the period or the potential for these in the returns
period.
The group’s accounting policy on the sales returns provision is shown in
note 1 to the group financial statements and related disclosures are
included in notes 1 and 21. The Audit Committee identified revenue
recognition and sales returns 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
Based on our audit work, we concur with management’s view that the
provision made for sales returns is in accordance with the financial
reporting framework, including IAS 37 and IFRS 15.
Our audit work did not identify any material errors in the completeness of
the sales returns provision recognised at 31 December 2019.
02QuartoAR2019_GOVERNANCE_RMG.indd 46
02QuartoAR2019_GOVERNANCE_RMG.indd 46
5/5/20 2:38 PM
5/5/20 2:38 PM
46
47
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance 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 $19,192,000 of goodwill on its
balance sheet, including a balance of $12,882,000
relating to Quarto US as disclosed in Note 11 to the
group financial statements.
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 cash generating unit (CGU) is a key risk due to the
sensitivity of the impairment calculations to a reasona-
bly 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 signifi-
cant risk, which was one of the most significant
assessed risks of material misstatement.
Our audit work included, but was not restricted to:
• Considering the appropriateness of the accounting policy by checking
whether it is in accordance with the financial reporting framework,
including IAS 36 ‘Impairment of Assets’.
• Obtaining management’s impairment review model and testing its
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; and
• Considering the post year end performance of the group against budget
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
group financial statements and related disclosures are included in note 11.
The Audit Committee identified assessment of the carrying value of good-
will 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 audit work did not identify any material errors in the carrying value of
goodwill in relation to Quarto US and we concur with management’s view
that no impairment charge is necessary. The impairment calculation
remains sensitive to changes in key assumptions and these continue to be
disclosed in the accounts.
46
47
02QuartoAR2019_GOVERNANCE_RMG.indd 47
02QuartoAR2019_GOVERNANCE_RMG.indd 47
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
Key Audit Matter – Group
How the matter was addressed in the audit – Group
ASSESSMENT OF THE VALUATION OF PRE-
PUBLICATION INTANGIBLE ASSETS
The Group’s holds capitalised pre-publication costs
with a net book value of $52,213,000 as intangible
assets on its consolidated balance sheet. This repre-
sents costs which are capitalised by the Group in
relation to the development of book titles, including
directly attributable overhead costs. There is manage-
ment judgement involved in determining which costs
are directly attributable to the development of books
and should therefore be capitalised.
These costs are amortised over a three-year period on
a straight-line basis to reflect the expected useful
economic life of these intangible assets. There is
management judgement in relation to the length of life
of these intangible assets and whether the balance is
recoverable.
We therefore identified the assessment of the valuation
of pre-publication intangible assets 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:
• Considering the appropriateness of the accounting policy by checking
whether it is in accordance with the financial reporting framework,
including IAS 38 ‘Intangible Assets’.
• Testing a sample of costs capitalised in the year to supporting docu-
mentation in order to confirm they are directly attributable to the
development of book titles;
• Challenging judgements made by management in determining which
costs are directly attributable to the development of book titles;
• 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; and
• Analysing historic sales patterns to ensure that they support the estimate
made by management of a three-year useful economic life.
The group’s accounting policy on pre-publication costs is shown in note 1
to the group financial statements and related disclosures are included in
note 15. The Audit Committee identified recoverability 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 audit work for the current year identified that certain overhead costs
have been capitalised in pre-publication intangible assets in the current
and prior year which do not meet the recognition criteria set out in IAS
38. Accordingly, as set out in note 1, management have made a prior
period adjustment to restate the prior period financial statements and
have made an adjustment in the current year to correct this misstatement.
Following the adjustments noted above, based on our audit work, we
concur with management’s view that pre-publication assets are carried at
an appropriate valuation and are amortised over an appropriate useful
economic life.
We did not identify any key audit matters relating to the audit of the financial statements of the parent company.
02QuartoAR2019_GOVERNANCE_RMG.indd 48
02QuartoAR2019_GOVERNANCE_RMG.indd 48
5/5/20 2:38 PM
5/5/20 2:38 PM
48
49
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance
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
Financial statements as a whole
$700,000, which is approximately 0.5% of the
group’s revenue. This benchmark is considered
the most appropriate because revenue is a key
driver of the business and is monitored by
management and the directors. We do not
consider it appropriate to use earnings before
tax as the benchmark as there have been
significant fluctuations in the group’s earnings
before tax in recent years.
Materiality for the current year is lower than the
level that we determined for the year ended 31
December 2018 to reflect the decrease in the
group’s revenue in the current year.
Parent company
$8,000, which is 0.6% of the parent
company’s total assets. This benchmark is
considered the most appropriate because
the parent company is a holding company
and has no revenue.
Materiality for the current year is at the
same level that we determined for the year
ended 31 December 2018 to reflect that
there has been no significant change in the
parent company’s total assets.
Performance materiality used to
drive the extent of our testing
Specific materiality
65% of financial statement materiality.
65% of financial statement materiality.
We determined a lower level of specific
materiality for certain areas including directors’
remuneration and related party transactions.
We determined a lower level of specific
materiality for certain areas including
directors’ remuneration and related party
transactions.
Communication of misstatements
to the audit committee
$35,000 and misstatements below that thresh-
old that, in our view, warrant reporting on
qualitative grounds.
$400 and misstatements below that
threshold that, in our view, warrant
reporting on qualitative grounds.
48
49
02QuartoAR2019_GOVERNANCE_RMG.indd 49
02QuartoAR2019_GOVERNANCE_RMG.indd 49
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
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 we considered that the only significant components are Quarto UK and Quarto US due to their financial
significance to the group;
• We performed a full scope audit of the financial statements of the parent company;
• For Quarto US, we performed a full scope audit of its financial information using component materiality, being 65% of group
materiality.
• For Quarto UK, we performed a full scope audit of its financial information using materiality that we determined for the statutory
audit, which was lower than we would have applied had we performed audit procedures only for group purposes.
• The full scope audits performed represent 100% of the group’s continuing revenue for the year, 100% of the group’s total assets,
and 99.8% of the group’s total liabilities.
• The financial information of the other components in the group has been subjected to analytical procedures.
EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES,
INCLUDING FRAUD
The objectives of our audit are to identify and assess the risks of material misstatement of the financial statements due to fraud
or error; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud or
error; and to respond appropriately to those risks. Owing to the inherent limitations of an audit, there is an unavoidable risk that
material misstatements in the financial statements may not be detected, even though the audit is properly planned and
performed in accordance with ISAs (UK).
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with
laws and regulations, our procedures included the following:
• We obtained an understanding of the legal and regulatory frameworks applicable to the parent company and the group and
the industry in which they operate. We determined that the following laws and regulations were most significant: IFRSs as
adopted by the European Union, Listing Rules, and the UK Corporate Governance Code.
• We obtained an understanding of how the parent company and the group is complying with those legal and regulatory
frameworks by making inquiries of management, those responsible for legal and compliance procedures and the company
secretary. We corroborated our inquiries through our review of board minutes and papers provided to the Audit Committee.
• We assessed the susceptibility of the parent company’s and group’s financial statements to material misstatement, including
how fraud might occur. Audit procedures performed included:
– identifying and assessing the design effectiveness of controls management has in place to prevent and detect fraud;
– understanding how those charged with governance considered and addressed the potential for override of controls or
other inappropriate influence over the financial reporting process;
– challenging assumptions and judgments made by management in its significant accounting estimates; and
– identifying and testing journal entries posted in the year which were deemed to be unusual.
• We did not identify any key audit matters relating to irregularities, including fraud.
02QuartoAR2019_GOVERNANCE_RMG.indd 50
02QuartoAR2019_GOVERNANCE_RMG.indd 50
5/5/20 2:38 PM
5/5/20 2:38 PM
50
51
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance OTHER INFORMATION
The directors are responsible for the other information. The other information comprises the information included in the annual
report, 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 the 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 43 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 describing the work of the audit committee 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 pages 40 and 41 – 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 PARENT
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.
MATTER ON WHICH WE ARE REQUIRED TO REPORT UNDER THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE
PARENT 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 PARENT 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.
50
51
02QuartoAR2019_GOVERNANCE_RMG.indd 51
02QuartoAR2019_GOVERNANCE_RMG.indd 51
5/5/20 2:38 PM
5/5/20 2:38 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL STATEMENTS
As explained more fully in the statement of directors’ responsibilities set out on page 43, 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.
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 ended 31 December 2017 and subsequent financial periods.
The period of total uninterrupted engagement is 3 years, covering the years ended 31 December 2017 to 31 December 2019.
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 OUR 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 9 January 2019. 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.
David White
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
22 April 2020
02QuartoAR2019_GOVERNANCE_RMG.indd 52
02QuartoAR2019_GOVERNANCE_RMG.indd 52
5/5/20 2:38 PM
5/5/20 2:38 PM
52
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Governance Consolidated Income Statement
FOR THE YEAR ENDED 31 DECEMBER 2019
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Impairment of financial assets
Distribution costs
Operating profit before amortisation of acquired intangibles
and exceptional items
Amortisation of acquired intangibles
Exceptional items
Operating profit
Finance income
Finance costs
Profit/(loss) before tax
Tax
Profit/(loss) for the year
Attributable to:
Owners of the parent
Earnings/(loss) per share (cents)
From continuing operations
Basic
Diluted
Adjusted basic
Adjusted diluted
Notes
2019
$’000
Restated
(Note 1)
2018
$’000
2
135,807
149,292
(97,782)
(105,113)
38,025
(19,641)
(853)
(7,527)
10,004
(811)
(419)
8,774
9
(4,939)
3,844
(962)
2,882
2,882
2,882
14.1
14.0
19.0
18.8
44,179
(25,710)
(245)
(7,919)
10,305
(850)
(5,152)
4,303
21
(4,381)
(57)
(495)
(552)
(552)
(552)
(2.7)
(2.7)
23.2
23.0
17
4
5
7
8
9
10
10
10
10
53
53
03QuartoAR2019_FINANCIALS_RMG.indd 53
03QuartoAR2019_FINANCIALS_RMG.indd 53
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Consolidated Statement
of Comprehensive Income
FOR THE YEAR ENDED 31 DECEMBER 2019
Profit/(loss) for the year
Items that may be reclassified to profit or loss
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 other comprehensive income/(expense)
Total comprehensive income/(expense) for the year
Total comprehensive income/(expense) for the year attributable to:
Owners of the parent
Restated
(Note 1)
2018
$’000
(552)
(1,950)
(60)
(246)
(2,256)
(2,808)
2019
$’000
2,882
403
(105)
(162)
136
3,018
3,018
3,018
(2,808)
(2,808)
03QuartoAR2019_FINANCIALS_RMG.indd 54
03QuartoAR2019_FINANCIALS_RMG.indd 54
5/5/20 2:40 PM
5/5/20 2:40 PM
54
55
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements Consolidated Balance Sheet
AS AT 31 DECEMBER 2019
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
Lease liabilities
Tax payable
Total current liabilities
Non-current liabilities
Medium and long-term borrowings
Deferred tax liabilities
Tax payable
Lease liabilities
Other payables
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Paid in surplus
Retained earnings and other reserves
Total equity
Notes
11
12
13
15
19
16
17
18
18
21
20
18
19
20
21
25
Restated
(Note 1)
2018
$000
Restated
(Note 1)
2017
$000
18,954
2,368
1,552
52,706
3,901
79,481
22,324
54,476
105
15,384
92,289
19,286
3,516
2,129
56,243
3,901
85,075
22,637
53,460
205
17,946
94,248
2019
$000
19,192
1,282
10,883
48,697
3,331
83,385
19,378
46,397
—
15,621
81,396
164,781
171,770
179,323
(66,077)
(57,381)
(1,937)
(2,831)
(128,226)
(5,000)
(64,917)
—
(4,167)
(74,084)
(5,000)
(60,796)
—
(5,243)
(71,039)
—
(70,752)
(76,907)
(7,139)
(433)
(7,929)
—
(7,848)
(544)
—
(554)
(15,501)
(79,698)
(7,615)
(1,116)
—
(1,673)
(87,311)
(143,727)
(153,782)
(158,350)
21,054
17,988
20,973
2,045
33,764
(14,755)
21,054
2,045
33,764
(17,821)
17,988
2,045
33,764
(14,836)
20,973
The financial statements were approved by the Board of Directors and authorised for issue on 22 April 2020. They were signed
on its behalf by:
C K Lau, Director
54
55
03QuartoAR2019_FINANCIALS_RMG.indd 55
03QuartoAR2019_FINANCIALS_RMG.indd 55
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Consolidated Statement
of Changes in Equity
FOR THE YEAR ENDED 31 DECEMBER 2019
Paid in surplus
$000
Hedging
reserve
$000
Translation
Reserve
$000
Retained
earnings
$000
Equity
attributable to
owners
of the
parent
$000
Balance at 1 January 2018 as
previously stated
Prior year adjustment (Note 1)
Balance at 1 January 2018
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 income
for the year
Share based payments credit
Share
capital
$000
2,045
—
2,045
—
—
—
—
—
—
33,764
—
33,764
—
—
—
—
—
—
Balance at 31 December 2018
2,045
33,764
Profit 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 income
for the year
Share based payments charge
—
—
—
—
—
—
—
—
—
—
—
—
Balance at 31 December 2019
2,045
33,764
165
—
165
—
—
(60)
—
(4,793)
(7,078)
24,103
—
(4,793)
—
(1,950)
—
(246)
(3,130)
(10,208)
(552)
—
—
—
(3,130)
20,973
(552)
(1,950)
(60)
(246)
(60)
(2,196)
(552)
(2,808)
—
105
—
—
(105)
—
(177)
(6,989)
(10,937)
—
2,882
403
—
—
(162)
—
—
—
(177)
17,988
2,882
403
(105)
(162)
(105)
—
—
241
—
2,882
3,018
48
48
(6,748)
(8,007)
21,054
03QuartoAR2019_FINANCIALS_RMG.indd 56
03QuartoAR2019_FINANCIALS_RMG.indd 56
5/5/20 2:40 PM
5/5/20 2:40 PM
56
57
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements Consolidated Cash Flow Statement
FOR THE YEAR ENDED 31 DECEMBER 2019
Profit/(loss) for the year
Adjustments for:
Net finance costs
Depreciation of property, plant and equipment
Software amortisation
Tax expense
Impairment of pre-publication costs
Share based payments
Amortisation and amounts written off acquired intangibles
Amortisation of pre-publication costs
Operating cash flows before movements in working capital
Decrease in inventories
Decrease/(increase) in receivables
(Decrease)/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
Net cash used in investing activities
Financing activities
Interest payments
Lease payments
Drawdown of revolving credit facility
Repayment of term loan and revolving credit facility
Net cash used in financing activities
Net increase/ (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
Restated
(Note 1)
2018
$000
(552)
4,360
693
298
495
501
(177)
910
29,267
35,795
21
(2,280)
4,639
38,175
(1,962)
36,213
2019
$000
2,882
4,930
2,127
276
962
—
48
811
28,694
40,730
3,157
8,961
(8,896)
43,952
(2,650)
41,302
9
21
(23,786)
(27,585)
(138)
—
(1,250)
(25,165)
(3,709)
(1,882)
1,963
(12,417)
(16,045)
92
15,384
145
15,621
(169)
(77)
(1,887)
(29,697)
(2,980)
—
18,457
(24,238)
(8,761)
(2,245)
17,946
(317)
15,384
56
57
03QuartoAR2019_FINANCIALS_RMG.indd 57
03QuartoAR2019_FINANCIALS_RMG.indd 57
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL 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
2018, as described in those financial statements. Two new accounting standards, IFRS 16 - Leases and IFRIC 23 - Uncertainty
over Income Tax Treatments, have been adopted during the period. There was no impact of IFRIC 23 on the financial
statements whilst the impact of IFRS 16 has been disclosed below.
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.
RESTATEMENT OF PRIOR YEAR RESULTS
The following tables show the restated prior year comparative figures for the financial year ended 31 December 2018. This
restatement reflects a reinterpretation of the directly attributable costs and overheads that should be capitalised under IAS 38, as
pre-publication costs; in the past, an element of overheads relating to indirect costs were capitalised which represents an error. The
Directors accept responsibility for the error in their interpretation of IAS38 and the treatment of indirect overhead costs. This
interpretation first introduced in 2005 has not been challenged or commented on, by any of the Company’s auditors in the
intervening years. Past Company’s auditors include Grant Thornton (2017 - 2019), Deloitte (2014 - 2016), Grant Thornton (2007
- 2013) and RSM (2006). There was no overall impact on the results of the Group for the year ended 31 December 2018. The
impact on the financial statements is set out below:
Income statement
Cost of sales
Administration expenses
Cash flow statement
Amortisation and amounts written off pre-publication costs
Investment in pre-publication costs
As reported
2018
$000
Adjustment
2018
$000
Restated
2018
$000
(107,195)
2,082
(105,113)
(23,628)
(2,082)
(25,710)
31,426
(29,744)
(2,159)
2,159
29,267
(27,585)
Balance sheet
Intangible assets: pre-publication costs
Deferred tax liabilities
Net assets
Total equity
STATEMENT OF COMPLIANCE
As reported
2018
$000
Adjustment
2018
$000
Restated
2018
$000
As reported
2017
$000
Adjustment
2017
$000
Restated
2017
$000
56,741
(8,753)
21,118
21,118
(4,035)
905
(3,130)
(3,130)
52,706
(7,848)
17,988
17,988
60,278
(8,520)
24,103
24,103
(4,035)
905
(3,130)
(3,130)
56,243
(7,615)
20,973
20,973
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 90 to 96.
BASIS OF ACCOUNTING
The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value.
03QuartoAR2019_FINANCIALS_RMG.indd 58
03QuartoAR2019_FINANCIALS_RMG.indd 58
5/5/20 2:40 PM
5/5/20 2:40 PM
58
59
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 1 General information and significant accounting policies (continued)
NEW ACCOUNTING STANDARDS
The Group has adopted the new accounting standard IFRS 16 ‘Leases’ during the year. The adoption of this new Standard has
resulted in the Group recognising a right-of-use asset and related lease liability in connection with all former operating leases
except for those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application.
The new Standard has been applied using the modified retrospective approach, with the cumulative effect of adopting IRFS 16
being recognised in equity as an adjustment to the opening balance of retained earnings for the current period. Prior periods
have not been restated.
For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from IAS 17 and
IFRIC 4 and has not applied IFRS 16 to arrangements that were previously not identified as lease under IAS 17 or IFRIC 4.
The Group has elected not to include initial direct costs in the measurement of the right-to-use asset for operating leases in existence
at the date of initial application of IFRS 16, being 1 January 2019. At this date, the Group has also elected to measure the right-of-use
assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.
Instead of performing an impairment review on the right-to-use assets at the date of initial application, the Group has relied on
its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16.
On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for
leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for
the lease expense on a straight-line basis over the remaining lease term.
On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16
was 4.29%.
The following is a reconciliation of total operating lease commitments at 31 December 2018, as disclosed in the financial
statements to 31 December 2018, to the lease liabilities recognised at 1 January 2019:
Total operating lease commitments disclosed at 31 December 2018
Recognized exemptions at 1 January 2019:
Leases with remaining lease term of less than 12 months
Other liabilities now recognised within lease liabilities
Discounted using incremental borrowing rate
Total lease liabilities recognised under IFRS 16 at 1 January 2019
Of which are:
Current lease liabilities
Non-current lease liabilities
The adoption of IFRS 16 has impacted the following items:
Impact on Balance Sheet
Right-of-use assets
Property, plant and equipment
Lease liabilities
Trade and other payables: within one year
Trade and other payables: over one year
$’000
12,008
(266)
837
12,579
(1,970)
10,609
1,885
8,724
1 January
2019
$’000
31 December
2019
$’000
10,609
9,683
(1,885)
(8,724)
(10,609)
(1,937)
(7,929)
(9,866)
58
59
The adoption of IFRS 16 on 1 January 2019 had a nil impact on the net assets of the Group due to applying the modified
retrospective approach where assets equal liabilities. At 31 December 2019, lease liabilities of $9,866,000 are $183,000 higher
than right-of-use assets due to the depreciation charge in the period being in excess of lease repayments, net of interest charges.
03QuartoAR2019_FINANCIALS_RMG.indd 59
03QuartoAR2019_FINANCIALS_RMG.indd 59
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
1 General information and significant accounting policies (continued)
A reconciliation of the value of right-to-use assets and lease liabilities from 1 January 2019 to 31 December 2019 is presented
below:
Right-of-use assets and lease liabilities at 1 January 2019
Depreciation
Lease payments
Lease interest
Remeasurement
Exchange differences
Right-of-use
assets
$’000
10,609
(1,609)
—
—
526
157
Lease
liabilities
$’000
(10,609)
—
1,882
(454)
(526)
(159)
Right-of-use assets and lease liabilities at 31 December 2019
9,683
(9,866)
Impact on Income Statement
Reduction in occupancy expenses
(Increase) in depreciation of property, plant and equipment
(Increase) in exchange differences
(Increase) in interest expense
Net (decrease) in profit before tax
2019
$’000
1,882
(1,609)
(2)
(454)
(183)
STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND
HAVE NOT BEEN ADOPTED EARLY BY THE GROUP
Standards and amendments that are not yet effective and have not been adopted early by the Group include:
IFRS 17 Insurance Contracts
•
• Definition of a business (Amendments to IFRS 3)
• Definition of Material (Amendments to IAS 1 and IAS 8)
• Conceptual Framework for Financial Reporting
At the date of authorisation of these financial statements, several new, but not yet effective, Standards and amendments to
existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing
Standards have been adopted early by the Group.
Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective
date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been
disclosed as they are not expected to have a material impact on the Group’s financial statements.
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, 21 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
Note 15: Recoverability of pre-publication costs and the assessment of their useful life
03QuartoAR2019_FINANCIALS_RMG.indd 60
03QuartoAR2019_FINANCIALS_RMG.indd 60
5/5/20 2:40 PM
5/5/20 2:40 PM
60
61
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 1 General information and significant accounting policies (continued)
Key judgements at the balance sheet date are:
The appropriateness of the going concern basis: when preparing the financial statements, management Is required to make an
assessment of the entity’s ability to continue as a going concern and prepare the financial statements on this basis unless It
either Intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. As set out In going concern,
there are a number of events or conditions that Indicate a material uncertainty exists In relation to going concern. After
reviewing the most recent projections and the sensitivity analysis and having carefully considered the material uncertainty, and
the mitigating actions available, the directors have formed the judgement that It Is appropriate to prepare the financial
statements on the going concern basis.
At 31 December 2019 there was no explicit evidence of human to human transmission of Covid-19. The subsequent spread of
Covid-19 does not provide further evidence of conditions that existed at the year-end and is, therefore, considered to be a
non-adjusting post balance sheet event in accordance with IAS 10. Accordingly, the development of Covid-19 has not been
reflected in the directors’ assessment of the measurement of assets and liabilities such as impairment of tangible and intangible
assets, expected credit losses, the net realisable value of inventory and the recoverability of deferred tax assets.
GOING CONCERN BASIS
The Board initially assessed the Group’s ability to operate as a going concern for the next 12 months from the date of signing the
financial statements, based on a financial model which was prepared as part of the process of considering and approving the
2020 budget.
The Directors 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 2022, together with certain assumptions for revenue and costs, to satisfy themselves of the
appropriateness of the going concern basis used in preparing the financial statements.
Regarding financing, the Group has raised equity of $18.5m (£13.9m), approximately $16.5m net of expenses, since the end of the
year, and renewed its facilities on the remaining debt which now expire on 31 July 2021, which is outside of the going concern
period. Notwithstanding, given this recent renewal, the directors believe that the debt providers will continue to support the
Group thereafter.
The Directors 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.
The uncertainty as to the future impact on the Group of the recent Covid-19 outbreak has subsequently been considered as part
of the Group’s adoption of the going concern basis. In the downside scenario analysis performed, the Directors have considered
the impact of the Covid-19 outbreak on the Group’s trading and cash flow forecasts. In preparing this analysis, the directors
assumed that the lockdown effects of the Covid-19 virus will peak around the end of June and trading will normalise over the
subsequent few months, albeit attaining substantially lower levels of revenue than budgeted, for at least the rest of the current
financial year. This scenario will lead to a material reduction in the Group’s revenues and results for 2020.
A range of mitigating actions within the control of management were assumed, including reductions in the investment in
pre-publication costs, print volumes, staffing levels and other variable costs. The Directors have also considered the financial
support commitment made by the UK Government and they believe the Group is eligible for some elements of this financial
support. This has been factored in to the forecasts. The Directors have also assumed, having had productive discussions with its
lenders, that certain bank fees due to be paid in August 2020, can be deferred to the end of the current facility.
In this scenario, whilst the Group would remain within its banking facilities, some of the financial covenants would, within the current
financial year, be breached, unless a waiver agreement is reached with the majority of lenders. Further adverse changes arising from
Covid-19 would increase the challenge of complying with financial covenants and remaining within the banking facilities. The
Directors, as stated above, are in discussions with its lenders which, albeit at early stages, are considered as being productive. The
financial covenants, which are tested every calendar quarter, and generally vary by each quarter, are referred to in Note 18.
Based on the above indications, after taking into account the impact of Covid-19 on the Group’s future trading, the Directors
believe that it remains appropriate to continue to adopt the going concern in preparing the financial statements. However, the
downside scenario detailed above, Including successfully taking mitigating actions, would indicate the existence of a material
uncertainty which may cast doubt on the Group’s ability to continue as a going concern.
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.
60
61
03QuartoAR2019_FINANCIALS_RMG.indd 61
03QuartoAR2019_FINANCIALS_RMG.indd 61
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
1 General information and significant accounting policies (continued)
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.
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.
REVENUE RECOGNITION
Revenue arises largely from the sale of physical products. Each contract is for an agreed prices 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 return patterns associated with the customer, as well as current market trends. The estimated returns period is a
key input of the returns allowance and is calculated by reference to historic returns data. The estimated returns period for the
current and prior year is 6 months. 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.
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.
03QuartoAR2019_FINANCIALS_RMG.indd 62
03QuartoAR2019_FINANCIALS_RMG.indd 62
5/5/20 2:40 PM
5/5/20 2:40 PM
62
63
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 1 General information and significant accounting policies (continued)
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.
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. Where parts of an item of plant and equipment have
separate lives, they are accounted for and depreciated as separate items. Residual values are reassessed on an annual basis. Land
is not depreciated.
Estimated useful lives are as follows:
Right-of-use assets
Short leasehold property improvements
Plant, equipment and motor vehicles
Fixtures and fittings
Over the period of the lease
Over the period of the lease
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.
In the case of right-to-use assets, expected useful lives are determined by reference to comparable owned assets or the lease
term, if shorter. Material residual value estimates and estimates of useful life are updates as required, but at least annually.
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.
LEASED ASSETS
As described on page 60, the Group has applied IFRS 16 using the modified retrospective approach and therefore comparative
information has not been restated. This means comparative information is still reported under IAS 17 and IFRIC 4.
For any new contracts entered into on or after 1 January 2019, the Group considers whether a contract is, or contains, a lease. A
lease is defined as a ‘contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for
consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:
•
•
•
the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being
identified at the time the asset is made available to the Group
the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the
period of use, considering its rights within the defined scope of the contract
the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has
the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.
At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-
use asset is measured at cost, which is made up of the initial measurement of the lease liability, any direct costs incurred by the
Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in
advance of the lease commencement date (net of any incentives received).
62
63
03QuartoAR2019_FINANCIALS_RMG.indd 63
03QuartoAR2019_FINANCIALS_RMG.indd 63
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
1 General information and significant accounting policies (continued)
The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the
end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for
impairment when such indicators exist.
At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that
date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing
rate. Lease payments included in the measurement of the lease liability are made up of fixed payments, variable payments based
on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options
reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and
increased for interest. It is remeasured to reflect any reassessment or modification, or if there are any changes in in-substance
fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or
profit and loss if the right-of-use asset is already reduced to zero.
The Group has elected to account for short-term lease and leases of low-value assets using the practical expedients. Instead of
recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss
on a straight-line basis over the lease term.
On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease
liabilities have been included in trade and other payables.
INTANGIBLE ASSETS - 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 recognised as non-current
intangible assets in accordance with IAS38, 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
life of three years or less, being an estimate of the expected useful economic life of a book title. The estimated economic life is
based on the annual sales profile of the Group. 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.
FINANCIAL ASSETS
Financial assets other than those designated and effective as hedging instruments are divided into the following categories:
• amortised costs
•
•
fair value through profit or loss
fair value through other comprehensive income
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 22 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 amortised 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 expected
collectability of future cash flows of the instrument.
03QuartoAR2019_FINANCIALS_RMG.indd 64
03QuartoAR2019_FINANCIALS_RMG.indd 64
5/5/20 2:40 PM
5/5/20 2:40 PM
64
65
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 1 General information and significant accounting policies (continued)
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 22.
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.
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.
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 use 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.
64
65
03QuartoAR2019_FINANCIALS_RMG.indd 65
03QuartoAR2019_FINANCIALS_RMG.indd 65
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
1 General information and significant accounting policies (continued)
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.
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.
No borrowing costs have been capitalized in the current or prior years in relation to qualifying assets. Qualifying assets are
considered to be those assets that take in excess of one year to be ready for use.
FINANCIAL RISK MANAGEMENT
The principal risk factors faced by the Group are disclosed in Note 21.
2 Revenue
Sales of products
Sales of publishing rights
Total revenue
2019
$’000
2018
$’000
131,857
144,880
3,950
4,412
135,807
149,292
See accounting policies for detail of the revenue recognition concerning the above revenue streams.
During the year, sales to one customer exceeded 10% of Group revenue (2018: one customer). The value of these sales was
$29,404,000 (2018: $26,664,000).
3 Operating segments
The core publishing businesses comprises two divisions: US Publishing and UK Publishing. This is the basis on which operating
results are reviewed and resources allocated by the Chief Executive Officer. The Group reorganised the number of its divisions
from three to two at the start of the current year. The previous year’s figures have been restated accordingly.
03QuartoAR2019_FINANCIALS_RMG.indd 66
03QuartoAR2019_FINANCIALS_RMG.indd 66
5/5/20 2:40 PM
5/5/20 2:40 PM
66
67
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 3 Operating segments (continued)
2019
Continuing operations
Revenue
Operating profit before amortisation of acquired intangibles and exceptional items
Amortisation of acquired intangibles
Segment result
Unallocated corporate expenses
Corporate exceptional items
Operating profit
Finance income
Finance costs
Profit before tax
Tax
Profit after tax
Capital expenditure
Depreciation and software amortization
Investment in pre-publication costs
Amortisation of pre-publication costs
2018 (restated)
Continuing Operations:
Revenue
Operating profit 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
Capital expenditure
Depreciation and software amortisation
Investment in pre-publication costs
Amortisation of pre-publication costs
US Publishing
$000
UK Publishing
$000
Total Group
$000
71,488
4,511
(570)
3,941
64,319
6,540
(241)
6,299
17
1,294
10,930
14,289
121
1,109
12,856
14,405
US Publishing
$000
UK Publishing
$000
78,108
5,027
(596)
4,431
(1,164)
(811)
2,456
71,184
7,708
(254)
7,454
—
(402)
7,052
135
575
12,974
13,968
111
416
14,611
15,299
135,807
11,051
(811)
10,240
(1,047)
(419)
8,774
9
(4,939)
3,844
(962)
2,882
138
2,403
23,786
28,694
Total
Group
$000
149,292
12,735
(850)
11,885
(1,164)
(1,213)
9,508
(2,430)
(2,775)
4,303
21
(4,381)
(57)
(495)
(552)
246
991
27,585
29,267
66
67
03QuartoAR2019_FINANCIALS_RMG.indd 67
03QuartoAR2019_FINANCIALS_RMG.indd 67
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
3 Operating segments (continued)
BALANCE SHEET
Continuing operations:
Quarto Publishing Group USA
Quarto Publishing Group UK
Unallocated (Deferred tax and cash)
Total assets
Continuing operations:
Quarto Publishing Group USA
Quarto Publishing Group UK
Unallocated (Deferred tax, corporation tax and debt)
Total liabilities
GEOGRAPHICAL AREAS
The Group operates in the following main geographic areas:
United States of America
United Kingdom
Europe
Rest of the World
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)
Doubtful debt allowance
Cost of inventory recognised as an expense
Exceptional items (Note 5)
Restated
(Note 1)
2018
$’000
81,960
70,525
19,285
2019
$’000
81,154
64,675
18,952
164,781
171,770
29,613
37,634
76,480
30,518
34,953
88,311
143,727
153,782
Revenue
Non-current assets
2019
$’000
80,131
19,193
21,392
15,091
2018
$’000
86,092
20,384
25,314
17,502
2019
$’000
47,887
35,498
—
—
Restated
(Note 1)
2018
$’000
47,453
32,028
—
—
135,807
149,292
83,385
79,481
Restated
(Note 1)
2018
$’000
693
298
(129)
850
29,267
29,789
245
36,080
5,152
2019
$’000
2,127
276
(181)
811
28,694
24,985
853
32,647
419
03QuartoAR2019_FINANCIALS_RMG.indd 68
03QuartoAR2019_FINANCIALS_RMG.indd 68
5/5/20 2:40 PM
5/5/20 2:40 PM
68
69
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 4 Operating profit (continued)
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 relating to Open Offer
5 Exceptional items
Reorganisation costs
• Impairment of pre-publication intangible assets (note 15)
• Impairment of backlists (note 12)
• Write-off of pre-publication costs
• Staff severance costs
• Other reorganisation costs
• Board changes
Refinancing costs
Aborted corporate transaction costs
Total
90
165
172
427
2019
$000
—
—
—
—
—
—
387
32
419
93
151
—
244
2018
$000
501
60
603
1,039
672
831
1,446
—
5,152
In 2019, the Group incurred $387,000 of refinancing costs in connection with the renewal of the facility agreement, signed on
16 January 2020 and $32,000 of costs incurred on aborted corporate transaction costs. This year’s charges, net of taxation,
amount to $339,000.
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.
6 Staff costs
Average monthly number of employees (excluding Executive Directors)
Wages and salaries
Share-based payments
Social security costs
Other pension costs
Directors’ remuneration is disclosed in the Remuneration Committee Report on page 34.
2019
Number
334
$’000
21,854
48
2,229
854
2018
Number
374
$’000
26,343
(177)
2,617
1,006
24,985
29,789
68
69
03QuartoAR2019_FINANCIALS_RMG.indd 69
03QuartoAR2019_FINANCIALS_RMG.indd 69
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
6 Staff costs (continued)
The remuneration of the Executive Directors (2018: Executive Directors), 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
* Includes $58,000 discretionary bonus payments paid in 2019 but relating to performance in 2018.
7 Finance income
Interest income
8 Finance costs
Interest expense on borrowings
Amortisation of debt issuance costs and bank fees
Interest expense on lease liabilities arising from the adoption of IFRS 16
Other interest
9 Taxation
Corporation tax
Current tax
Prior periods
Total current tax
Deferred tax (Note 19)
Origination and reversal of temporary differences
Total tax expense
2019
788*
18
806
2019
$’000
9
2019
$’000
3,360
936
454
189
2018
1,442
18
1,460
2018
$’000
21
2018
$’000
3,710
301
—
370
4,939
4,381
2019
$’000
1,557
(123)
1,434
(472)
962
2018
$’000
73
176
249
246
495
Corporation tax on UK profits is calculated at 19%, based on the UK standard rate of corporation tax, (2018: 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.
Profit/(loss) before tax
Tax at the UK corporation tax rate of 19% (2018: 19%)
Effect of different tax rates of subsidiaries operating in other jurisdictions
Adjustment to prior years
Tax effect of items that are not deductible in determining taxable profit
Other
Tax expense
Effective tax rate
2019
$’000
3,844
730
(79)
97
174
40
962
2018
$’000
(57)
(11)
(101)
(85)
606
86
495
25.0%
(868.4)%
03QuartoAR2019_FINANCIALS_RMG.indd 70
03QuartoAR2019_FINANCIALS_RMG.indd 70
5/5/20 2:40 PM
5/5/20 2:40 PM
70
71
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 10 Earnings per share
From continuing operations
Profit/(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
Number of shares
Weighted average number of ordinary shares
Average number of potentially dilutive share options
Diluted weighted average number of ordinary shares
Earnings/(loss) per share (cents) – continuing operations
Basic
Diluted
Adjusted earnings per share (cents)
Basic
Diluted
11 Goodwill
Cost
At 1 January
Exchange differences
At 31 December
Accumulated impairment losses
At 1 January
Exchange differences
Impairment
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)
2019
$’000
Group
2,882
654
339
3,875
2018
$’000
Group
(552)
701
4,603
4,752
Number
Number
20,444,550
20,444,550
171,597
256,655
20,616,147
20,701,205
14.1
14.0
19.0
18.8
(2.7)
(2.7)
23.2
23.0
2018
$000
2017
$000
2019
$000
42,675
238
42,913
43,007
(332)
42,675
(23,721)
(23,721)
—
—
—
—
(23,721)
(23,721)
42,425
582
43,007
(6,281)
(26)
(17,414)
(23,721)
19,192
18,954
19,286
2019
$000
12,882
6,310
19,192
2018
$000
12,882
6,072
18,954
2017
$000
12,882
6,404
19,286
70
71
03QuartoAR2019_FINANCIALS_RMG.indd 71
03QuartoAR2019_FINANCIALS_RMG.indd 71
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
11 Goodwill (continued)
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 from the addressable market. The cashflows are
then discounted using a country-specific discount rate. 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 pre-tax Weighted Average Cost of Capital
analysis. These are as follows:
United States of America
United Kingdom
Terminal Growth Rates
Discount Rates
2019
2%
2%
2018
2%
2%
2017
2%
2%
2019
10.81%
10.54%
2018
10.90%
10.38%
2017
11.72%
11.16%
If a reasonably possible change occurred in either forecast revenues, terminal growth rate or discount rate there would be no
impairment. The sensitivities applied were 2.5% reduction in revenues and a 1% increase in discount rate.
12 Other intangible assets
Cost
At 1 January 2018
Exchange differences
Additions
Disposals
At 1 January 2019
Exchange differences
At 31 December 2019
Amortisation and impairment
At 1 January 2018
Exchange differences
Charge for the year
Amount written off for the year
Disposals
At 1 January 2019
Exchange differences
Charge for the year
At 31 December 2019
Carrying amount
At 31 December 2019
At 31 December 2018
At 31 December 2017
Backlists
$000
Software
$000
Total
$000
1,579
22,921
21,342
(138)
—
—
21,204
(30)
21,174
18,705
(121)
850
60
—
19,494
(31)
811
—
77
(26)
1,630
—
1,630
700
—
298
—
(26)
972
—
276
20,274
1,248
900
1,710
2,637
382
658
879
(138)
77
(26)
22,834
(30)
22,804
19,405
(121)
1,148
60
(26)
20,466
(31)
1,087
21,522
1,282
2,368
3,516
03QuartoAR2019_FINANCIALS_RMG.indd 72
03QuartoAR2019_FINANCIALS_RMG.indd 72
5/5/20 2:40 PM
5/5/20 2:40 PM
72
73
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements
13 Property, plant and equipment
Cost
At 1 January 2018
Exchange difference
Additions
Disposals
At 1 January 2019
Adjustment on transition to IFRS 16
Exchange difference
Additions
Remeasurement
Disposals
At 31 December 2019
Depreciation
At 1 January 2018
Exchange differences
Charge for the year
Disposals
At 1 January 2019
Exchange differences
Charge for the year: right of use asset
Charge for the year: other property, plant and equipment
Disposals
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
At 31 December 2017
Short-term
Leasehold
Improvements
$000
Right-of-use
Leasehold
Property
$000
Plant,
Equipment &
Motor
Vehicles
$000
Fixture &
Fittings
$000
1,308
(57)
—
(9)
1,242
—
26
—
—
(258)
1,010
434
(30)
113
(9)
508
8
—
104
(258)
362
648
734
874
—
—
—
—
—
10,538
156
—
508
—
1,116
1,117
(58)
167
(282)
943
71
27
138
18
—
(23)
2
(11)
1,085
—
1
—
—
—
11,202
1,197
1,086
—
—
—
—
—
—
1,545
—
—
1,545
9,657
—
—
295
(35)
413
(282)
391
17
64
310
—
782
415
552
821
683
(20)
167
(11)
819
—
—
104
—
923
163
266
434
Total
$000
3,541
(138)
169
(302)
3,270
10,609
210
138
526
(258)
14,495
1,412
(85)
693
(302)
1,718
25
1,609
518
(258)
3,612
10,883
1,552
2,129
All property, plant and equipment has been pledged as security for the Group’s bank borrowings (note 18).
Included in the net carrying amount of property, plant and equipment are right-of-use assets of $9,683,000 of which $9,657,000
is attributable to leasehold property improvements and $26,000 to plant, equipment and motor vehicles. Depreciation charge
on these assets are disclosed separately in the above table.
14 Subsidiaries
A list of the 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
73
03QuartoAR2019_FINANCIALS_RMG.indd 73
03QuartoAR2019_FINANCIALS_RMG.indd 73
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
15 Intangible assets – pre-publication costs
Cost
At 1 January
Exchange differences
Additions
Reclassification to other balance sheet line
Disposals
At 31 December
Amortisation
At 1 January
Exchange differences
Charge for the year
Impairment charge
Disposals
At 31 December
Net Book Value
At 31 December
Restated
(Note 1)
2018
$000
Restated
(Note 1)
2017
$000
2019
$000
137,640
188,531
179,021
2,040
23,786
—
(3,354)
27,585
—
(28,931)
(75,122)
4,609
33,360
(2,113)
(26,346)
134,535
137,640
188,531
84,934
1,141
28,694
—
(28,931)
85,838
132,288
120,658
(2,000)
29,267
501
(75,122)
84,934
1,822
31,286
4,868
(26,346)
132,288
48,697
52,706
56,243
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 impairment charge and the amount written-off for the year, for 2018 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
2019
$000
19,270
108
19,378
2018
$000
22,098
226
22,324
2017
$000
22,309
328
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 $2,318,000 (2018: $2,079,000) has been recorded accordingly.
All inventories have been pledged as security for the Group’s bank borrowings (note 18).
03QuartoAR2019_FINANCIALS_RMG.indd 74
03QuartoAR2019_FINANCIALS_RMG.indd 74
5/5/20 2:40 PM
5/5/20 2:40 PM
74
75
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 17 Trade and other receivables
Trade receivables
Other receivables and prepayments
2019
$000
38,753
7,644
46,397
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 73 days (2018: 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 $1,168,000 (2018: $826,000) 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
2019
$000
1,750
930
81
242
167
2018
$000
1,022
687
182
171
49
2017
$000
2,475
860
699
245
341
3,170
2,111
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
2019
$000
826
(677)
148
18
853
1,168
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.
Note 22 includes disclosures relating to credit risk exposures and analysis relating to the allowance for expected credit losses.
74
75
03QuartoAR2019_FINANCIALS_RMG.indd 75
03QuartoAR2019_FINANCIALS_RMG.indd 75
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
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% (2018: 0.4%).
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
2019
$000
15,621
—
15,621
2018
$000
11,134
4,250
15,384
2017
$000
17,946
—
17,946
2019
$000
66,077
66,077
—
66,077
(66,077)
—
2018
$000
75,752
5,000
70,752
75,752
(5,000)
70,572
2017
$000
81,907
5,000
76,907
81,907
(5,000)
76,907
US dollar borrowings
Other currency borrowings
As at 31 December 2019
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
45,000
21,077
66,077
55,450
20,302
75,752
55,500
26,407
81,907
13,000
—
13,000
23,000
—
23,000
20,000
—
20,000
32,000
21,077
53,077
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
4.0
—
4.0
3.8
—
3.8
19.0
—
19.0
14.6
—
14.6
13.5
—
13.5
03QuartoAR2019_FINANCIALS_RMG.indd 76
03QuartoAR2019_FINANCIALS_RMG.indd 76
5/5/20 2:40 PM
5/5/20 2:40 PM
76
77
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 18 Cash, borrowings and net debt (continued)
OTHER LOANS
Other loans
On demand or within one year
In the second year
Less: Amount due for settlement within 12 months (shown under current liabilities)
2019
$000
13,000
13,000
—
13,000
(13,000)
2018
$000
13,000
—
13,000
13,000
—
Amount due for settlement after 12 months
—
13,000
2017
$000
—
—
—
—
—
—
Other loans, of which $11,500,000 (2018: $13,000,000) are with related parties, as disclosed in note 30, are unsecured, are
repayable, together with the accrued interest on 31 August 2020 and carry an interest rate of 3.5%. A loan for $1,500,000 (2018:
$1,500,000) is from Recruit & Company Limited which was a related party at 31 December 2018 but is no longer classified as
such C K Lau no longer exercises control.
Post the year end date the facilities detailed above were extended to 31 July 2021.
Fixed rate
borrowings
$’000
Variable
rate
borrowings
$’000
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which interest
rate is fixed
Months
Total
$’000
13,000
13,000
13,000
—
US dollar borrowings
As at 31 December 2019
As at 31 December 2018
As at 31 December 2017
BANK LOANS
Bank loans
On demand or within one year
In the second year
13,000
13,000
13,000
—
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
—
—
—
—
2019
$000
53,077
53,077
—
53,077
(53,077)
—
3.5
3.5
3.5
—
2018
$000
62,752
5,000
57,752
62,752
(5,000)
57,752
19.0
19.0
20.0
—
2017
$000
81,907
5,000
76,907
81,907
(5,000)
76,907
76
77
03QuartoAR2019_FINANCIALS_RMG.indd 77
03QuartoAR2019_FINANCIALS_RMG.indd 77
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
18 Cash, borrowings and net debt (continued)
US dollar borrowings
Other currency borrowings
As at 31 December 2019
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
32,000
21,077
53,077
42,450
20,302
62,752
55,500
26,407
81,907
—
—
—
10,000
—
10.000
20,000
—
20,000
32,000
21,077
53,077
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
—
—
—
5.8
—
5.8
3.8
—
3.8
—
—
—
7.5
—
7.5
13.5
—
At 31 December 2019, undrawn borrowing facilities totalled $11.0m (2018: $9.4m). 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 2019 the Group had a US$64.0m (2018: US$72.5m) multi-currency syndicated bank facility which was due to
expire on 31 August 2020. A new facility agreement was signed on 16 January 2020 with borrowing facilities of US$35m,
subsequent to the net proceeds of the Open Offer being received by the banks prior to 20 February 2020. Banking EBITDA used
for bank covenant purposes was $10,376,000 in 2019 (2018: $11,707,000).
These facilities are subject to three principal covenants which vary over the course of the financial year. At December 31, 2019,
the covenants were:
(a) Total consolidated net banking indebtedness shall not exceed 4.07 times EBITDA (as defined in the committed facility
agreement). At December 31, 2019 net indebtedness was 3.54 times EBITDA.
(b) EBITDA shall exceed 2.79 times net finance charges (as defined in the committed facility agreement). For the year
ended December 31, 2019, net finance charges were 3.47 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, 2019, Debt Service was 3.10 times covered under this covenant.
NET DEBT
Borrowings
Cash and cash equivalents
Net debt
Borrowings
Cash and cash equivalents
Net debt
Cashflows
$’000
10,454
92
10,546
Cashflows
$’000
5,781
(2,245)
3,536
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2019
$’000
(188)
—
(188)
(591)
145
(446)
(66,077)
15,621
(50,456)
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2018
$’000
(301)
—
(301)
675
(317)
358
(75,752)
15,384
(60,368)
1 January
2019
$’000
(75,752)
15,384
(60,368)
1 January
2018
$’000
(81,907)
17,946
(63,961)
78
03QuartoAR2019_FINANCIALS_RMG.indd 78
03QuartoAR2019_FINANCIALS_RMG.indd 78
5/5/20 2:40 PM
5/5/20 2:40 PM
79
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 18 Cash, borrowings and net debt (continued)
Borrowings
Cash and cash equivalents
Net debt
19 Deferred tax
1 January
2017
$’000
(80,748)
18,824
(61,924)
Cashflows
$’000
1,761
(1,310)
451
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2017
$’000
(384)
—
(384)
(2,536)
432
(2,104)
(81,907)
17,946
(63,961)
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 as previously stated
Prior year adjustment (note 1)
Credit direct to equity
Exchange difference through other comprehensive income
(Credit)/charge to profit and loss
Net provision at 31 December
2019
$000
1
4,519
4,520
2,619
—
7,139
—
3,331
3,331
3,808
Restated
(Note 1)
2018
$000
Restated
(Note 1)
2017
$000
8
4,688
4,696
3,152
—
7,848
99
3,802
3,901
3,947
2019
$000
3,947
—
3,947
162
171
(472)
3,808
32
5,060
5,092
2,523
—
7,615
509
3,392
3,901
3,714
Restated
(Note 1)
2018
$000
4,619
(905)
3,714
246
(259)
246
3,947
78
79
03QuartoAR2019_FINANCIALS_RMG.indd 79
03QuartoAR2019_FINANCIALS_RMG.indd 79
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
20 Lease liabilities
Current
Non-current
Total
2019
$000
1,937
7,929
9,866
2018
$000
—
—
—
2017
$000
—
—
—
The Group has leases for its offices and some IT equipment. With the exception of short-term leases and leases of low-value
underlying assets, each lease is reflected on the balance sheet as right-of-use asset and a lease liability. Variable lease payments
which do not depend on an index or a rate (such as lease payments based on a percentage of Group revenues) are excluded
from the initial measurement of the lease liability and asset. The Group classifies its right-of-use assets in a consistent manner to
its property, plant and equipment (note 13).
Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another
party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by
incurring a substantive termination fee. For leases over office buildings the Group must keep those properties in a good state of
repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of
property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts.
The table below describes the nature of the Group’s leasing activities by type of right-to-use asset recognised on the balance
sheet:
No of right-of-
use assets
leased
Range of
remaining term
Average
remaining lease
term
No of lease
with extension
options
No of lease
with options to
purchase
No of lease with
variable
payments
linked to an
index
No of lease with
termination
options
7
2
2-9 years
6 years
1 year
1 year
5
—
—
—
4
—
1
—
Right-of-use
asset
Office
building
IT
equipment
The lease liabilities are secured by the related underlying assets. Future minimum lease payments at 31 December 2019 were as
follows:
Within 1 year
1-2 years
2-3 years
3-4 years
4-5 years
After 5 years
Total
Minimum lease payments due US$000
31 December 2019
Lease payments
Finance charges
Net present values
31 December 2018
Lease payments
Finance charges
Net present values
2,253
(390)
1,863
2,263
(454)
1,809
2,085
(329)
1,756
2,102
(395)
1,707
1,886
(267)
1,619
1,938
(334)
1,604
1,504
(204)
1,300
1,746
(271)
1,475
1,343
(149)
1,194
1,683
(208)
1,475
2,291
(157)
2,134
2,847
(308)
2,539
11,362
(1,496)
9,866
12,579
(1,970)
10,609
The Group has elected not to recognise a lease liability for short term lease or for leases of low value assets. Payments made
under such leases are expenses on a straight-line basis and amounted to $26,000 in the year.
03QuartoAR2019_FINANCIALS_RMG.indd 80
03QuartoAR2019_FINANCIALS_RMG.indd 80
5/5/20 2:40 PM
5/5/20 2:40 PM
80
81
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 21 Trade and other payables
CURRENT LIABILITIES
Trade payables
Other payables
Total
2019
$000
36,218
21,163
57,381
2018
$000
45,850
19,067
64,917
2017
$000
46,514
14,282
60,796
Under IFRS 15, the reserve for sales returns in included in other payables, amounting to $6,749,000 (2018: $5,391,000). 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.
Other payables include the discounted deferred and contingent consideration liabilities of $nil in respect of prior year
acquisitions (2018: $1.2m). $1.2m was paid in the year (2018: $1.9m).
NON-CURRENT LIABILITIES
At 31 December 2019, Other Payables comprise $nil in respect of the discounted deferred and contingent liabilities of prior year
acquisitions (2018: $0.6m).
The Directors consider that the carrying amount of trade payables approximates to their fair value.
22 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
2019
2018
$000
Sterling
10,321
(19,030)
(8,709)
$000
Other
2,121
(4,344)
(2,223)
$000
Sterling
8,232
(1,603)
6,629
—
—
(8,709)
(2,223)
(16,841)
(10,212)
$000
Other
1,948
(1,045)
903
(3,459)
(2,556)
The following table illustrates the sensitivity of the net result for the year and equity in regard to the Group’s financial assets and
financial liabilities and the US Dollar – Sterling exchange rate.
It assumes a +/– 7.5% 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 7.5% (2018: 7.5%) then this would have had the following impact:
80
81
03QuartoAR2019_FINANCIALS_RMG.indd 81
03QuartoAR2019_FINANCIALS_RMG.indd 81
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
22 Financial instruments (continued)
Profit/(loss) after tax for the year
Equity
2019
$000
244
4,228
If Sterling had weakened against the US Dollar by 7.5% (2018: 7.5%) then this would have had the following impact:
Profit/(loss) after tax for the year
Equity
2018
$000
92
3,914
2018
$000
(92)
2019
$000
(244)
(4,228)
(3,914)
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 2019, 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:
Profit/(loss) for the year
Equity
A 0.25% decrease in interest rates would have the following impact:
Profit/(loss) for the year
Equity
2019
$000
(100)
(100)
2019
$’000
100
100
2018
$000
(118)
(118)
2018
$’000
118
118
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
2019
$’000
15,621
38,753
—
54,374
2018
$’000
15,384
45,430
105
60,919
03QuartoAR2019_FINANCIALS_RMG.indd 82
03QuartoAR2019_FINANCIALS_RMG.indd 82
5/5/20 2:40 PM
5/5/20 2:40 PM
82
83
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 22 Financial instruments (continued)
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 2019
Bank and other loans
Trade payables
Other short-term financial liabilities
31 December 2018
Bank and other loans
Trade payables
Other short-term financial liabilities
Other long-term payables
Within 6
months
$’000
1,365
31,218
21,163
53,746
Within 6
months
$’000
7,130
45,850
17,836
—
70,816
Current
6 to 12
months
$’000
66,671
5,000
—
71,671
Current
6 to 12
months
$’000
2,165
—
1,250
—
3,415
Non-Current
1 to 5
years
$’000
Over 5
years
$’000
—
—
—
—
1 to 5
years
$’000
74,686
—
—
569
75,255
—
—
—
—
Non-Current
Over 5
years
$’000
—
—
—
—
—
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.
82
83
03QuartoAR2019_FINANCIALS_RMG.indd 83
03QuartoAR2019_FINANCIALS_RMG.indd 83
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
22 Financial instruments (continued)
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
2019
$000
2018
$000
—
105
38,753
15,621
54,374
—
—
—
66,077
36,218
21,163
123,458
45,430
15,384
60,919
70,752
554
71,306
5,000
45,850
19,067
69,917
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.
23 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
2019
$000
—
—
2018
$000
105
105
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 IAS 39.
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.
03QuartoAR2019_FINANCIALS_RMG.indd 84
03QuartoAR2019_FINANCIALS_RMG.indd 84
5/5/20 2:40 PM
5/5/20 2:40 PM
84
85
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 23 Other financial assets/liabilities (continued)
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
2019
%
—
—
2018
%
5.8
—
2019
$000
—
—
—
2018
$000
10,000
—
10,000
2019
$000
—
—
—
2018
$000
(370)
—
(370)
24 Post balance sheet events
On 16 January 2020, the Group announced an Open Offer of 20,444,550 new Common Shares at 68 pence per share. On the
same day, the Group concluded its refinancing, signing an extension to its existing bank facilities to 31 July 2021. The multi-
currency facility comprises a $25m term loan, a $8m revolving credit facility and a $2m overdraft facility. The effective date of
the new facility was dependent on the raising of the funds from the Open Offer which was successfully completed on 4
February 2020.
The outbreak of Covid-19 is considered to be a non-adjusting post balance sheet event. At this stage of the outbreak, It Is not
possible to make an estimate of the financial effect that Covid-19 will have on the Group.
25 Share capital
Authorised
2019
$000
2018
$000
2017
$000
28 million shares of common stock of par value of US$0.10 each
2,800
2,800
2,800
Allotted, called up and fully paid:
20,444,550 (2018: 20,444,550) shares of common stock of par value of US$0.10 each
2,045
2,045
2,045
The Company has one class of common stock which carries no right to fixed income.
26 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.
27 Dividends
No dividends have been declared in the current or prior year.
28 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.
84
85
03QuartoAR2019_FINANCIALS_RMG.indd 85
03QuartoAR2019_FINANCIALS_RMG.indd 85
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
29 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 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 (%)
Model used
2019
Number
—
—
—
2018
Number
167,464
(167,464)
—
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 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.
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
2019
Number
152,192
2018
Number
287,136
(8,408)
(134,944)
143,784
152,192
03QuartoAR2019_FINANCIALS_RMG.indd 86
03QuartoAR2019_FINANCIALS_RMG.indd 86
5/5/20 2:40 PM
5/5/20 2:40 PM
86
87
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 29 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 (%)
EPS Portion
TSR Portion
£2.45
4
£2.10
2.3
3.88
n/a
£2.45
4
£0.44
3.3
3.88
19.1
Dividend
discount
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.
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 (%)
Model used
2019
Number
104,463
(19,468)
84,995
2018
Number
178,131
(73,668)
104,463
EPS Portion
TSR Portion
£2.64
4
£2.20
3.3
4.55
n/a
£2.64
4
£0.48
3.3
4.55
18.6%
Dividend
discount
Monte-
Carlo
86
87
03QuartoAR2019_FINANCIALS_RMG.indd 87
03QuartoAR2019_FINANCIALS_RMG.indd 87
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
30 Related party transactions
The Group had the following related party transactions over the periods under review:
PRINTING PURCHASES:
Lion Rock Group Limited
Accounts payable at start of year (2018: 17 May 2018)
Purchases
Payments
Accounts payable at end of year
LOANS AND ACCRUED INTEREST:
Loans (advanced on 1st and 2nd November 2018)
Accrued interest on loans at end of year
2019
$’000
6,083
11,562
(3,953)
13,692
2018
$’000
4,806
1,872
(595)
6,083
At 31
December
2019
$000
At 31
December
2018
$000
11,500
13,000
470
76
The loans are from 1010 Printing Limited ($7.0m) and C K Lau ($4.5m). The loans are unsecured, are repayable, together with the
accrued interest, on 31 July 2021, and carry interest at 3.5%. In the prior year, a further loan of $1.5m from Recruit & Company
was designated as a related party loan but this ceased to be a related party during 2019.
Lion Rock Group Limited and 1010 Printing Limited are companies over which C K Lau exercises control.
03QuartoAR2019_FINANCIALS_RMG.indd 88
03QuartoAR2019_FINANCIALS_RMG.indd 88
5/5/20 2:40 PM
5/5/20 2:40 PM
88
89
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 31 Reconciliation of figures included in other parts of the financial statements
Adjusted operating profit
Operating profit (continuing operations)
Add back:
Amortisation of acquired intangibles
Other exceptional items (Note 5)
Adjusted operating profit
EBITDA
Operating profit before amortisation of acquired intangibles and exceptional items
Less: Net finance costs
Impact of IFRS 16
Adjusted profit before tax (before amortisation of acquired intangibles and exceptional items)
Net finance costs
Depreciation of property, plant and equipment and software (excluding right-of-use assets)
Share based payments
EBITDA on consistent measure
Impact of IFRS 16
Depreciation of right-of-use assets
EBITDA
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items
Adjusted operating profit before amortisation of acquired intangibles and exceptional items
Less: net finance costs
Adjusted profit tax before amortisation of acquired intangibles and exceptional items
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
Restated
(Note 1)
2018
$000
4,303
850
5,152
2019
$000
8,774
811
419
10,004
10,305
10,004
(4,930)
(271)
4,803
4,930
794
48
10,575
271
1,609
12,455
10,004
(4,930)
5,074
41,302
(23,786)
(138)
—
17,378
66,077
—
(15,621)
50,456
10,305
(4,360)
—
5,945
4,360
991
(177)
11,119
—
—
11,119
10,305
(4,360)
5,945
36,213
(27,585)
(169)
(77)
8,382
5,000
70,752
(15,384)
60,368
88
89
03QuartoAR2019_FINANCIALS_RMG.indd 89
03QuartoAR2019_FINANCIALS_RMG.indd 89
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Company Balance Sheet
AS AT 31 DECEMBER 2019
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
Paid in surplus
Retained earnings
Total equity
Notes
4
6
7
2019
$000
1,266
1,266
2018
$000
1,209
1,209
(15,866)
(15,866)
(15,167)
(15,167)
(441)
(544)
(15,041)
(14,502)
2,045
33,764
(50,850)
(15,041)
2,045
33,764
(50,311)
(14,502)
The financial statements were approved by the Board of Directors and authorised for issue on 22 April 2020.
They were signed on its behalf by
C K Lau
Director
22 April 2020
03QuartoAR2019_FINANCIALS_RMG.indd 90
03QuartoAR2019_FINANCIALS_RMG.indd 90
5/5/20 2:40 PM
5/5/20 2:40 PM
90
91
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements
Company Statement of
Comprehensive Income
FOR THE YEAR ENDED 31 DECEMBER 2019
Administrative expenses
Foreign exchange (loss)/gain
(Loss)/profit before tax
Tax
(Loss)/profit for the year
Balance at 1 January 2018
Profit for the year
Transactions with owners
Share based payments charges
Balance at 1 January 2019
Loss for the year
Transactions with owners
Share based payments/charges
Balance at 31 December 2019
Notes
3
2019
$’000
—
(587)
(587)
—
(587)
2018
$’000
—
822
822
472
1,294
Company Statement of
Changes in Equity
FOR THE YEAR ENDED 31 DECEMBER 2019
Share
capital
$’000
2,045
—
—
Paid in
surplus $’000
Retained
earnings
$’000
Equity
attributable to
owners
$’000
33,764
(51,428)
(15,619)
—
—
1,294
1,294
(177)
(177)
2,045
33,764
(50,311)
(14,502)
—
—
—
—
(587)
(587)
48
48
2,045
33,764
(50,850)
(15,041)
90
91
03QuartoAR2019_FINANCIALS_RMG.indd 91
03QuartoAR2019_FINANCIALS_RMG.indd 91
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Company Accounts
AT 31 DECEMBER 2019
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.
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 Pounds Sterling, with the parent company accounts
presented in 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
recognized 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.
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.
03QuartoAR2019_FINANCIALS_RMG.indd 92
03QuartoAR2019_FINANCIALS_RMG.indd 92
5/5/20 2:40 PM
5/5/20 2:40 PM
92
93
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 3 Tax
Current tax (Credit)/charge
2019
$000
—
2018
$000
(472)
Corporation tax is calculated at 21%, based on the US standard rate of corporate tax (2018: 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.
Profit/(loss) before tax
Tax at the US corporation tax rate of 21% (2018: 21%)
Adjustment to prior years
Tax effect of items that are not deductible in determining taxable profit
Tax (Credit)/charge
4 Investments
At 1 January
Capital contribution (note 2)
At 31 December
5 Subsidiaries
A) TRADING COMPANIES
2019
$’000
(587)
(123)
—
123
—
2019
$000
1,209
57
1,266
2018
$’000
822
173
(472)
(173)
(472)
2018
$000
1,436
(227)
1,209
Place
Australia
Incorporation
Date
Registered
address key
Issued and fully paid up
share capital
% held
Segment
14 September 1981 D
110 shares of $A1 each
100
UK Publishing
Name
Quarto Australia
Pty Limited
Books & Gifts
Direct Limited
New Zealand
27 September 1996 C
400,000 shares of
NZ$1 each
100*
UK Publishing
100 shares of HKD1
each
100
UK/US
Publishing
380 shares of
US$0.01 each
100,000 shares of £1
each
86 shares of no
par value
1,500 shares
of SFr500 each
100
US Publishing
100*
UK Publishing
100*
US Publishing
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
*Directly held by The Quarto Group, Inc.
E
B
A
B
F
93
92
03QuartoAR2019_FINANCIALS_RMG.indd 93
03QuartoAR2019_FINANCIALS_RMG.indd 93
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE COMPANY ACCOUNTS (continued)
5 Subsidiaries (continued)
B) DORMANT COMPANIES
Name
Incorporation
Place
Date
Registered
address key
Issued share capital
AP Screen Printers Limited
United Kingdom 30 September 1980 A
1000 shares of £1 each
Apple Press Limited
Aurum Press Limited
United Kingdom 5 June 1984
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
Global Book Publishing Pty Limited
Australia
4 November 1999
Great American Trading Company
Limited (THE)
United Kingdom 24 February 1982
IQON Editions Limited
iqu-digital.com Limited
Ivy Press (The)
Jacqui Small LLP
JR Books Limited
United Kingdom 5 December 1972
United Kingdom 30 November 1978
United Kingdom 9 July 1996
United Kingdom 6 November 1998
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
D
A
A
A
A
A
A
A
A
A
B
A
Quantum Books Limited
United Kingdom 7 February 1983
Quarto Children’s Books Limited
United Kingdom 6 January 1976
Quarto Magazines Limited
United Kingdom 20 May 1986
Quarto Marketing Inc
Delaware, USA
26 April 1995
Quarto Media Inc
Delaware, USA
10 December 2010
A
A
A
B
B
%
held
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
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
1,000 shares of A$1 each
100 shares of £1 each
300 shares of £1 each
100 shares of £1 each
1042 shares of 10p each
100 units
43 004 shares of £1 each
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 shares of £1 each
2 shares of £1 each
1000 shares of £1 each
3000 shares
of no par value
1000 shares of $1 each
100
QU:ID Publishing Limited
United Kingdom 30 September 1980 A
100 shares of £1 each
03QuartoAR2019_FINANCIALS_RMG.indd 94
03QuartoAR2019_FINANCIALS_RMG.indd 94
5/5/20 2:40 PM
5/5/20 2:40 PM
94
95
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements 5 Subsidiaries (continued)
Name
Incorporation
Place
Date
Registered
address key
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
Small World Creations Limited
United Kingdom 20 September 1997
A
A
A
A
A
Issued share capital
1000 shares of £1 each
1000 shares of £1 each
1 shares of £1 each
100 shares of £1 each
1,536 share of £1 each
%
held
100
100
100
100
100
D) LIST OF REGISTERED OFFICES
A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom
B 100 Cummings Center, Suite 265D, Beverly, MA 01915, USA
C 135b Morrin Road, Saint Johns, Auckland, 1072, New Zealand
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
6 Creditors: Amounts falling due within one year
Amounts owed to subsidiary undertakings
Tax payable
2019
$000
15,814
52
2018
$000
15,167
—
15,866
15,167
7 Called up share capital
Details of called up share capital are set out in note 25 of the consolidated Financial Statements.
8 Contingent liabilities
The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $53,077,000 (2018: $62,752,000). Refer
to note 18 of the group consolidated Financial Statements.
9 Related parties
The Company borrowed an amount of $647,000 from its wholly owned subsidiary, Quarto Publishing plc, during the year
(2018: $0.1m borrowed in the year). The balance on the loan at 31 December 2019 was $15.8m (2018: $15.2m). These balances
are non-interest bearing and repayable on demand.
94
95
03QuartoAR2019_FINANCIALS_RMG.indd 95
03QuartoAR2019_FINANCIALS_RMG.indd 95
5/5/20 2:40 PM
5/5/20 2:40 PM
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Five Year Summary
Results
Revenue
Operating profit before amortisation
of acquired intangibles and exceptional items
Operating profit/(loss)
Profit before tax, amortisation of acquired
intangible assets and exceptional items
Profit/(loss) before tax
Profit/(loss) 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
Restated
(Note 1)
2018
$’000
Restated
(Note 1)
2017
$’000
20193
$’000
20161
$’000
20151,2
$’000
135,807
149,292
152,512
154,610
182,165
10,004
10,305
7,193
16,989
16,475
(17,882)
3,893
16,144
13,880
(21,182)
(18,539)
13,035
(5,277)
15,306
13,377
12,208
8,523
8,774
5,074
3,844
2,882
83,385
81,396
(128,226)
(15,501)
21,054
4,303
5,945
(57)
(552)
79,481
92,289
(74,084)
(79,698)
17,988
85,075
94,248
(71,039)
(87,311)
20,973
21,054
17,988
20,973
—
—
—
21,054
17,988
20,973
14.1
13.9
19.0
18.7
(2.7)
(2.7)
23.2
23.0
(96.4)
(96.4)
18.3
17.8
105,507
104,433
97,133
107,413
(68,872)
(89,657)
44,111
39,219
4,892
44,111
46.4
45.4
49.8
48.7
(71,275)
(87,127)
53,444
48,285
5,159
53,444
41.3
41.2
46.2
46.1
1 The results of 2016 and 2015 have not been restated to reflect the change in accounting for the absorption of overheads to pre-publication costs as set out
in note 1
2 The results of 2015 have not been adjusted to reflect the effect of discontinued operations.
3
IFRS16 (‘Leases’) have been adopted on a modified retrospective basis and accordingly the prior year has not been restated. The impact of this is disclosed
in note 1 of Notes to the Financial Statements.
03QuartoAR2019_FINANCIALS_RMG.indd 96
03QuartoAR2019_FINANCIALS_RMG.indd 96
5/5/20 2:40 PM
5/5/20 2:40 PM
96
THE QUARTO GROUP, INC. ANNUAL REPORT 2019Financial Statements Officers & Professional Advisers
Registrars and Transfer Office
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Principal Banks
Bank of America Corporation
100 Federal Street
Boston MA 02110 USA
Fifth Third Bank
38 Fountain Square Plaza
MD 109055
Cincinatti OH 45263 USA
Abbey National Treasury Services PLC
4th Floor Santander House
100 Ludgate Hill
London EC4M 7RE
The Royal Bank of Scotland plc
280 Bishopsgate
London EC2M 4RB
Company Registration Number
FC0 13814
Directors
C K Lau, Group Chief Executive Officer, President
Kenneth Fund, Chief Operating Officer,
Chief Executive Officer US
Polly Powell, Chief Executive Officer UK
Andy Cumming*, Chairman
Jane Moriarty*, Vice Chair
Mei Lam*
Andrea Giunti Lombardo*
* Non-executive
Secretary
Michael Clarke
Registered Office
The Old Brewery
6 Blundell Street
London N7 9BH
Tel: +44 (0) 20 7700 6700
Stockbrokers
finnCap Ltd
60 New Broad Street
London
EC2M 1JJ
Auditor
Grant Thornton UK LLP
30 Finsbury Square
London
EC2A 1AG
Solicitors
Cleary Gottlieb Steen & Hamilton LLP
2 London Wall Place
London
EC2Y 5AU
QuartoAR2019_InsideBack Cover_rev.indd 1
QuartoAR2019_InsideBack Cover_rev.indd 1
4/29/20 8:32 AM
4/29/20 8:32 AM
97
THE QUARTO GROUP
T
h
e
Q
u
a
r
t
o
G
r
o
u
p
,
I
n
c
.
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
9
ANNUAL REPORT 2019
The Old Brewery | 6 Blundell Street | London N7 9BH | United Kingdom
Tel: +44 (0)20 7700 6700 | Email: info@quarto.com