Final Results

RNS Number : 1050B

Quarto Group Inc

31 March 2017

 



THE QUARTO GROUP INC

("Quarto" or the "Company" or the "Group")

 

Final Results for the Year Ended 31 December 2016

 

Resilient Publishing Performance; Clear Focus for the Future

 

The Quarto Group, Inc. (LSE: QRT), the leading global illustrated book publisher, announces its unaudited results for the year ended 31 December 2016.

Results ($m)	2016	2015 Restated3
Revenue	188.4	182.2	+3%
Publishing Revenue	154.6	145.3	+6%
Adjusted Publishing Operating Profit*	21.7	18.5	+17%
Adjusted1 Operating Profit* (excluding BGD)	18.6	15.6	+19%
Operating Profit*	1.7	15.3
Exceptional impairment charge relating to BGD	(14.2)	-
(Loss)/Profit After Tax*	(5.3)	8.5
Adjusted1 Earnings Per Share (excluding BGD)	54.7c	46.0c	+19%
Basic (Loss)/Earnings Per Share	(28.5)c	41.3c
Net Debt	61.9	59.5	+4%
Total dividend for the year	15.0c	14.5c	+3%

*      Includes the contribution from acquired businesses in 2015 and 2016 and a reduced amortisation charge in 2016 arising from the review of useful lives of our titles, providing consistency across all imprints in the portfolio.

(See notes 1 and 11 to the accompanying condensed financial statements.)

Financial Highlights

 

·	Resilient performance in publishing business; revenue up 6%, operating profit up 17%;
·	Exceptional impairment charge of $14.2m against Books & Gifts Direct (BGD) attributable to previously announced exit from the business;
·	Net debt at $61.9m (2015: $59.5m) resulting from both poor trading within BGD and negative working capital timing movements in the final quarter;
·	Dividend up 3% with an adjusted cover (excluding BGD) of 3.6x (2015: 3.2x)2,3.

 

Operational Highlights

·	Children's publishing revenues up 34% with both organic and acquisitive growth;
·	Foreign Rights revenues up 8% despite foreign currency headwinds in certain markets;
·	Positive contribution from acquired businesses in 2016, Harvard Common Press and becker&mayer;
·	Extended value of backlist confirmed by review of useful economic lives of titles;
·	Group re-focused on core publishing portfolio during the course of 2017 with new organisational and financial reporting structure.
·	Resignation of Group CFO and Executive Director Michael Connole.

1.     Adjusted measures are stated before amortisation of acquired intangible assets and other exceptional items (note 3).

2.     Dividend per share is declared in cents per share and paid in sterling translated at the spot rate on the record date.  Dividend cover is calculated using adjusted earnings per share.

3.     Restated for an error in our Books & Gifts Direct business with respect to the valuation of Stock in Transit at 31 December 2015 and prior periods. Full details are set out in Note 1 to the accompanying condensed financial statements.

Commenting on the results, Chief Executive, Marcus Leaver said: 

"We celebrated our fortieth anniversary with our largest publishing profits ever. We exploited the size, scale and reach we have built in the last five years and enhanced our business with two strategic acquisitions that are already contributing positively to the Group.

Books & Gifts Direct has disappointed for a number of years, including 2016. The disposal of our non-publishing businesses, almost complete, will allow us to focus entirely on our publishing portfolio.

Whilst we expect the market background to remain difficult in 2017, we will be helped by our increased focus and expect to show further progress in the business and in reducing our debt. Quarto has a unique opportunity in a fragmented industry to become the dominant publisher of illustrated books worldwide."

For further information, please contact:

       The Quarto Group

Marcus E. Leaver, CEO                 Dorothée de Montgolfier, Group Director of Communications	020 7700 9002
Bell Pottinger         Elly Williamson        Isobel Giles	020 3772 2491

About The Quarto Group: 

The Quarto Group (LSE: QRT) is the leading global illustrated book publishing group. Its mission is to make and sell great books that entertain, educate and enrich the lives of adults and children around the world. 

Quarto creates and owns proprietary content, publishing books from a diverse portfolio of imprints that are creatively independent and expert in developing long-lasting content across specific niches of interest.

Quarto sells books across 50 countries and in 39 languages through a variety of traditional and non-traditional channels, while constantly looking for new ways to create and deliver content that people need.

Quarto employs over 400 talented people in the US, UK and Hong Kong. The group was founded in London in 1976. It is domiciled in the US and listed on the London Stock Exchange. 

For more information, visit quarto.com or follow us on Twitter at @TheQuartoGroup.

CHAIRMAN'S STATEMENT

2016 was my first year as Chairman of The Quarto Group, following my election at the Annual Meeting in May 2016.

Consistently, I have been impressed by the quality of the people I have met within the organisation, at all levels. They showed restless passion and innovation last year, whether they had been with Quarto for a long time or have joined the Group more recently through acquisitions.

Quarto continues to demonstrate the market value and global demand for illustrated print books. Since 2012, debt has been reduced to a more manageable level, Adjusted Group Operating Profit and dividends have increased and strong foundations for future growth have been put in place.

In 2016, Quarto showed a resilient performance in its publishing business, with revenue growth of 6% and adjusted operating profit growth of 17%. The Group achieved its largest publishing profit ever - a gratifying result considering the uncertain economic environment.

Quarto has a clear vision to become the dominant publisher of illustrated books worldwide, a clear strategy for the future and an experienced Leadership team.

In the course of 2017, the Group will be refocused on its core publishing expertise, following the exit of Books & Gifts Direct (BGD) in Australia/New Zealand and Regent Publishing Services in Hong Kong. BGD has disappointed for a number of years. Whilst Regent Publishing Services has performed well since it was founded in 1985, the Board believed that Quarto should seize the full opportunity to focus on what it does best - make and sell books.

Refocused on its publishing activities, Quarto will be uniquely positioned to create further shareholder value, through its rich portfolio of content, the combination of organic and acquisitive growth, further distribution development and added value from the Group's operational platform.

I joined a Board comprising three Non-Executive Directors and two Executive Directors, including Chief Executive Marcus Leaver. Non-Executive Directors Mike Hartley and Jess Burley both bring very different skillsets to the Board and respectively chair the Audit Committee and Remuneration Committee. Unfortunately, our third Non-Executive Director, Marie-Louise Windeler stepped down at the end of September for health reasons. The Nominations Committee is making good progress in its search for a new Non-Executive Director and we hope to provide an update very soon.

Michael Connole, Chief Financial Officer and Non-Executive Director, resigned on 30 March 2017. The Board has commenced an executive search to identify a suitable replacement for the role and a further announcement will be made as soon as possible. Having known Michael for more than 25 years, I am particularly sorry to see him leave the Group but wish him and his family well.

Alongside Chief Executive Marcus Leaver, Quarto has an experienced and international operational Senior Leadership Team that provides solid strategic direction to the business. I have every confidence in the successful continued development of the Group under their leadership.

Additionally, Quarto's solid institutional ownership structure, following the placing of approximately 35% of the company's shares with blue chip investors over the last 18 months, will be a benefit to the company as it continues to grow and deliver its potential over the coming years.

The Board is pleased to recommend a final dividend of 9.87c per share, making the total dividend for the year 15c per share, a 3% increase over last year, giving dividend cover, based on Adjusted Earnings per Share (excluding BGD) of 54.7c (2015: 46.0c) of 3.6 times (2015: 3.2 times).

On behalf of the Board and all shareholders, I would like to thank all our people across our businesses and geographies, as well as our global ecosystem of partners and suppliers, for their continued hard work and commitment to Quarto.

Peter Read

Chairman

CHIEF EXECUTIVE'S STATEMENT

SUMMARY

We delivered a resilient performance in our publishing business and celebrated our fortieth anniversary with our largest publishing profits ever. We exploited the size, scale and reach we have built in the last five years and enhanced our business with two strategic acquisitions that are already contributing positively to the Group.

Our children's publishing revenues grew by 34% year-on-year and have increased by 135% since 2012. Our Foreign Rights sales team achieved a record performance with 8% revenue growth despite foreign currency fluctuations in certain markets - selling our books to over 550 customers in 47 countries and 39 languages. The significant value of our backlist was confirmed by the review of the useful economic lives of our titles. As we continually seek to further expand our scale and reach across the globe, our new publishing partnership with Kalimat Group to publish books in Arabic in the Middle East and North Africa is also a major highlight.

The dedication, commitment and passion of everyone employed in the business, coupled with the strategic direction provided by our experienced Senior Leadership Team have been key to our ongoing success. In particular, I would like to recognise Ken Fund and David Breuer, recently appointed to the new global roles of Chief Operating Officer and Chief Creative Officer respectively, as well as Karine Marko, Group Director of Foreign Rights who have made significant contributions to the business this year.

I would also like to express our thanks to Michael Connole, Chief Financial Officer, who has decided to resign. Significant changes have been made to the business over the last 18 months or so and the Group is now well placed as a focused publishing business. We wish Michael and his family the best in the future.

Since I took over as Chief Executive in late 2012, my aim has been to make Quarto an even healthier and more talented company. We have become more profitable in our publishing business while continuing to invest more in the quality of our books and in our global sales and marketing teams. We have attracted new, extremely talented people to our already excellent team. We are strategically well placed in our markets as our direct relationships with retailers continue to develop. Our model is simple but solid: the right People, high-quality and long-lasting Product, efficient Processes, a balanced Portfolio of imprints and a global scalable Platform.

The clarity of this model has facilitated the onboarding of acquired businesses in the last two years and we now have a tested and solid integration process in place.

Overall, our 2016 performance is a gratifying result set against a more difficult trading background than we had anticipated and a tough comparative given the success of colouring books in 2015. Undeniably, 2016 has been an uncertain and unpredictable year, economically and politically in both our largest domestic markets. While we have fulfilled many of the business objectives that we set ourselves, there are others that we have not met.

Our net debt at 31 December 2016 was $61.9m (2015: $59.5m) a result of both poor trading within BGD and negative working capital timing movements in the final quarter.

BGD has disappointed for a number of years, including 2016 and the exceptional impairment charge of $14.2m has impacted our overall 2016 results negatively. In the course of 2017, our exit from BGD, alongside our announced disposal of Hong Kong-based Regent Publishing Services will allow Quarto to focus entirely on our publishing portfolio.

We strongly believe that Quarto, once fully positioned on what we do best - making and selling books - has a unique opportunity in a fragmented industry to become the dominant publisher of illustrated books worldwide.

Whilst we expect the market background to remain difficult in 2017, we will be helped by our increased focus and expect to show further progress in the business and in reducing our debt.

The performance of our publishing operations is set out below. Total revenue from publishing of $154.6m showed a 6% increase on 2015 ($145.3m). Adjusted Operating profit for these publishing businesses for 2016 was $21.7m which was up 17% (2015: $18.5m). As mentioned earlier, we reviewed the useful lives of our backlist of illustrated book titles during the year and the pre-publication costs for all our imprints are now written off over three years. This review confirms the fact that taken across all our illustrated titles; our backlist continues to sell for at least three years. This has reduced our amortization charge for 2016 by $2.1m.

DIVISIONAL REVIEW

Publishing Operations

Our most profitable imprints in 2016 were QED/Quarto Children's Books, Ivy Press, Race Point Publishing, Book Sales, Walter Foster, and the recently acquired becker&mayer. Except for becker&mayer, the same imprints were also the most profitable ones in 2015, with Race Point Publishing in top position due to the success of Adult colouring books. Such cycles are natural in a creative business like Quarto, and we manage our portfolio and Intellectual Property investment accordingly.

2016 Portfolio Highlights

Highlights of top-selling titles and series of titles from our portfolio in 2016 epitomize what Quarto does best: each of our imprints produces a wide variety of books, with different visions and a specific market in mind, with the objective of selling well over a long period. The overall portfolio is extremely well diversified with no single title or series accounting for more than 1.9% of our Total Publishing Revenue (TPR).

Quarto Creates - Arts & Crafts

·	Color Me & Portable Color Me Series (5 books) - Race Point Publishing, published 2015: $2,908k revenue (1.9% of TPR)
·	Creative Lettering and Beyond, Walter Foster, published 2014: $1,388k revenue (0.9% of TPR)

Quarto Homes - Home improvement, Gardening & Pets

·	All New Square Foot Gardening - 2nd Ed., Cool Springs Press, published 2013: $307k revenue (0.2% of TPR)
·	101 Dog Tricks, Quarry Books, published 2007: $274k revenue (0.2% of TPR)

Quarto Cooks

·	The KetoDiet Cookbook, Fair Winds Press, published 2016: $242k revenue (0.2% of TPR)
·	The Bread Lover's Bread Machine Cookbook, Harvard Common Press, published 2000: $237k revenue (0.2% of TPR)

Quarto Explores - Biography, Travel, History, Space & more

·	Block Wonders, Quintet, published 2016: $410k revenue (0.3% of TPR)
·	1001 Movies to Watch Before You Die (2016 Edition), Quintessence, first Published 2001: $245k revenue (0.2% of TPR)

Quarto Kids

·	Secrets of… (Shine A Light series - 9 books), Ivy Kids, first Published 2013: $1,843k revenue (1.2% of TPR) Build The Dragon and Build The Human Body, Quarto Children's Books, first published 2013: $690k revenue (0.4% of TPR)
·	Cutest Puppies Ever, QED, published 2016: $439k revenue (0.3% of TPR)
·	Footloose, MoonDance Press, published 2016: $369k revenue (0.2% of TPR)

Quarto International Co-Editions (QIC)

Revenue	$51.9	(2015: $50.1m)
Adjusted Operating Profit	$9.4m	(2015: $6.4m)
Backlist sales % of sales      1	56%	(2015: 59%)
Intellectual Property Development Spend1	$15.5m	(2015: $15.7m)

Sales by Territory

2016 - US - 37%; Eu - 33%; UK - 15%; ANZ - 4%; RoW - 11%

2015 - US - 34%; Eu - 32%; UK - 16%; ANZ - 6%; RoW - 12%

Quarto International Co-Editions Group performed well in 2016 and is continuing to grow year-on-year.  Revenue was $51.9m (2015: $50.1m) up by 4%, and profit grew by an impressive 48% to $9.4m (2015: $6.4m). The division benefited from good trading in our children's imprints - one of our key strategic areas of focus - as well as an outstanding performance by Ivy Press, which we acquired in March 2015.  Like any diverse portfolio, some of our imprints performed better than others due to a variety of factors but we recognise the cyclical nature of our creative businesses and actively manage and revitalize the portfolio accordingly.

ThisIsYourCookbook.com had a steady first full year following its launch in 2015 and proved its concept of producing personalised cookbooks. We saw a nice uplift particularly before the Christmas period. We will invest some marketing funds in this business in 2017.  It is still too early to say whether this new venture will reach commercial success, but investment in new ways of exploiting our IP is essential to the ongoing health of Quarto.

Quarto Publishing Group USA (QUS)

Revenue	$81.2m	(2015: $72.4m)
Adjusted Operating Profit	$9.6m	(2015: $8.9m)
Backlist sales % of sales   1	65%	(2015: 71%)
Inventory % of sales1	23%	(2015: 21%)
At a turn of1	1.6x	(2015: 2.0x)
Intellectual Property Development Spend1	$17.7m	(2015: $14.9m)

Quarto Publishing Group USA had an excellent year. Revenue grew by 12% over 2016 and adjusted operating profit improved by 8% from $8.9m to $9.6m. This was a particularly pleasing performance as the business replaced the spike in sales of adult art instruction/colouring book titles that we saw in 2015 with other titles.  As anticipated, we saw signs of retail oversaturation with this category and sales of these titles have settled to a lower, more consistent level, but one at which our titles still to continue to participate.

becker&mayer, acquired in August, exceeded management expectations by effectively becoming our sixth most profitable imprint this year. As stated at the time of the deal, this acquisition has further enhanced the Group's offering in both adult and children's publishing, particularly in the USA. It is an excellent addition to our portfolio. We continue to focus the product of the Smart Lab business towards Book Plus products and are pleased with the initial direction.

1.     See note 9 to the accompanying condensed financial statements

In addition, we are satisfied with the integration of The Harvard Common Press also acquired in 2016 and that performed to expectations. This acquisition furthers our position as a leading publisher of lifestyle-orientated titles for the consumer markets.

The US election in November did introduce some uncertainty into the market place and trading was a little weaker than anticipated in the final weeks of the year. We are therefore budgeting cautiously for 2017 but we have a strong portfolio of products and increasingly, are strategically well placed in the US market.

Our direct relationships with retailers continue to develop as we focus our publishing and distribution into niche markets.  Our strategy remains to diversify our channels to market in a way that matches the breadth of our publishing programmes which cater for enthusiasts. We opened nearly 1,800 new specialty sales accounts in 2016. 

Quarto Publishing Group UK (QUK)

Revenue	$21.5m	(2015: $22.8m)
Adjusted Operating Profit	$2.8m	(2015: $3.3m)
Backlist sales % of sales1	36%	(2015: 44%)
Inventory % of sales1	12%	(2015: 17%)
At a turn of1	1.0x	(2015: 1.4x)
Intellectual Property Development Spend1	$4.3m	(2015: $4.3m)

Quarto Publishing Group UK showed modest growth in 2016 in absolute terms but was badly impacted by currency volatility, resulting overall in a 6% decline, with revenue of $21.5m.

The UK market has been somewhat softer in 2016, undermined to some extent by the anticipation and result of the EU referendum and subsequent currency volatility and the weakness in sterling has reduced revenue growth. As in the US, there was a slow finish to the year and we are also budgeting cautiously here. That said, this remains a portfolio of good imprints that publish excellent books.

We have seen particularly gratifying performances from the transformed Aurum Press in Adults, as well as Children's imprints Wide Eyed Editions and Frances Lincoln Children's Books.

KEY INITIATIVES

Children's Publishing

Revenue

$43.4m

(2015: $32.4m)

Our children's revenues have grown by 34% year-on-year, both organically and through the acquisition of becker&mayer, which comprises about 50% children's books.

Overall, our children's revenues have grown by 135% since 2012 and it remains an area of strong focus for the Group. Our talented creative teams around the world are suitably teamed up with excellent specialist children's book sales people and marketers. We continue to attract and develop talent, and constantly manage creative cycles by starting new imprints, renewing publishers of long-running imprints and examining potential acquisitions on both sides of the Atlantic.

1.     See note 9 to the accompanying condensed financial statements

Foreign Rights

Revenue

$32.5m

(2015: $30.1m)

Our Foreign Rights sales team achieved a record performance in 2016 with 8% growth in revenue, which is particularly commendable given the uncertainties and currency fluctuations in some of the markets in which we conduct business. This demonstrates their expertise and entrepreneurial approach, as well as the solid, enduring relationships they have built with co-edition partners all over the world.

We continue to work to identify further opportunities for growth in both English and foreign language - in existing markets and in new markets - proceeding cautiously to ensure we find the right partners who share our values.

In 2016, we entered into a new international publishing partnership with Sharjah-based Kalimat Group. Our new Kalimat Quarto imprint launched in November 2016 at the Sharjah Book Fair with a range of cookbooks in Arabic repurposed from our existing 500 series and distributed throughout the Middle East and North Africa. Other categories, including children's books, are envisaged as the co-operation grows. We see great scope for developing the market for illustrated non-fiction in the United Arab Emirates (UAE) as well as the larger Arabic-speaking world. The category is currently dominated by English language imports - excluding a significant potential readership, as English is not that widely spoken in the Arabic speaking world as a whole.

Our Brazilian distribution agreement with Grupo Nobel, Quarto Editora, had a steady performance in line with management expectations. Our 2016 program included 60 titles, with a mix of core Adult categories (Food & Wine, Esoteric, Pets, Drawing) and some new topics such as Healthy Living, Interior, Gardening and Kids.

New Organisational and Financial Reporting Structure

On 1 January 2017, we implemented a new organizational structure which establishes a stronger partnership between creative, commercial and financial management within the Group, while enabling us to respond to changing market conditions and acquisition opportunities with enhanced agility and purpose.

We have moved away from our geographic business divisions. In line with our philosophy of creative independence, imprints no longer report into a country division but are run as independent businesses with creative, commercial and financial oversight from the centre. They are serviced and supported by a strong central platform that includes finance, operations, sales, marketing and foreign rights sales.

This structure provides a financial and operational framework within which a creative ecosystem can flourish without the distraction of non-core activities. Importantly, this model is not only about managing the fixed costs across production to enhance the bottom line, it is also about stimulating and managing the creation of new and valuable intellectual property to enhance the top line.  

Consequently, starting in 2017, we will no longer report revenue by publishing divisions, but by the geography of where transactions take place, including US, UK, Rest of the World and Foreign Rights.

Trading Businesses

Quarto Hong Kong

Revenue	$14.5m	(2015: $14.8m)
Operating Profit	$1.6m	(2014: $1.5m)

Regent Publishing Services (Regent), our long-established print broking business based in Hong Kong, performed to expectations in 2016 with operating profit up 7% from revenues down 2%.

On 24 March 2017, we announced that we had agreed Heads of Terms to dispose of our 75% interest in Regent. The consideration for the disposal is $7.0m which includes a payment of $2.5m (HK$19.5m) for the Group's share of the excess cash in the business, payable in cash on completion, which is expected to take place on 31 March 2017. The business is being sold to 1010 Printing Group Ltd, a Hong Kong based printing business listed on the Hong Kong Stock Exchange. The consideration will be used to reduce the Group's net debt.

Regent has performed well since it was founded and 25% shareholder George Tai has been a loyal partner to the Group for over 30 years. 1010 Printing Group Ltd., one of Quarto's long-term and most valued printing suppliers, will be a good home for Regent and its people.

Books & Gifts Direct

Revenue	$19.4m	(2015: $22.1m)
Adjusted Operating (Loss)/Profit	($9.8m)	(2015: $0.9m as restated)

BGD's revenue for the year ended 31 December 2016, was $19.4m, showing a decline of 12% on the 2015 figure of $22.1m.  The operating loss for the year was of $16.1m (2015: operating profit of $0.9m as restated, and includes exceptional impairment charges of $14.2m discussed below.  Further details of the exceptional impairment charges are set out in note 3.

We announced on 31 January 2017 that we were negotiating with a potential acquiring group for the disposal of the entire business and that heads of terms had been signed. These Heads of Terms indicated that we proposed to sell the entire business for a proposed total consideration of A$5.75m comprising A$1.0m of cash consideration payable on completion, with a further A$4.75m in interest-bearing loan notes repayable out of cash generated by the business, but with a long-stop date of 10 years.  

Subsequently, based on advice received from corporate advisors in Sydney, the Directors decided to sell the businesses in Australia and New Zealand separately to maximise shareholder value.

BGD Australia has been acquired by Zooom Pty Limited (as trustee for the the Zooom Investment Trust), a company incorporated in Australia and formed for the purposes of acquiring the business by a group comprising certain of the master franchisees and former employees of the business in Australia. The consideration for the sale of the company is A$1 and Quarto will also take an assignment of certain debts owed by the master franchisees to BGD Australia of A$1.9m (US$1.4m) which will be repayable in monthly instalments over two years and are interest bearing.  The repayments will be used to reduce the Group's bank debt as they are received. Quarto is entitled to receive 10% of the profit before interest and tax of Zoom Pty Limited for the next 5 years.

We have determined that exceptional impairment charges totalling $14.2m are required to write down the net and other attributable assets of the BGD business at 31 December 2016 to reflect the recoverable value.

In the course of finalising the results of the BGD Australia business for the year ended 31 December 2016, we uncovered an error in the value of stock in transit, which has also resulted in the results for 2015 being restated.  Full details of the error and the restatement are set out in note 1.

Other Financial Information

The tax charge for the year amounted to $4.0m (2015: $3.7m) The effective tax rate for the Group excluding BGD was 27.3% (2015: 25.1%). We have not recognised a tax credit on the BGD loss before tax for the year. Amortisation of acquired intangibles amounted to $0.7m (2015: $0.7m). Net interest cost of $3.0m was $0.1m down on the comparative figure for 2015 of $3.1m.

OUTLOOK

In 2016 we delivered a resilient performance in our publishing business through a combination of organic growth supplemented with two strategic acquisitions. 

We were not helped by the political climate in our two domestic markets, nor by the resultant volatility in currency which resulted in slower trading in our traditionally stronger second half.

In the very short-term, we feel it prudent to assume a continuation of this uncertainty in 2017 and we are budgeting accordingly. Nevertheless, for the year as a whole, we expect to show further progress in the business and redouble our efforts in net debt management and capital allocation for growth. 

Looking forward, the future for Quarto remains very exciting. With the disposals of both Books & Gifts Direct and Regent Publishing Services in 2017, we shall be able to focus resolutely on what we do best - make and sell books.  The Group is full of talented entrepreneurs running a diverse portfolio of imprints who leverage our global platform to grow their businesses and to create valuable intellectual property, which we are selling into more markets, in more foreign languages and through more distribution channels than we have ever done before.

Quarto has a unique opportunity in a fragmented industry to become the dominant publisher of illustrated books worldwide, exploiting the size, scale and reach we have built in the last five years. In 2017, we shall continue to pursue that goal.

Lastly, a large thank you to each one of our employees worldwide. They make Quarto the success that it continues to be and their creativity, tenacity and collaboration especially, have carried the company through a challenging year.

Marcus E. Leaver

Chief Executive

THE QUARTO GROUP, INC.

CONDENSED CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2016

(UNAUDITED)

		Year ended 31 December 2016				Year ended 31 December 2015
	Notes	Group excluding Books & Gifts Direct	Books & Gifts Direct	Group		Group excluding Books & Gifts Direct	Books & Gifts Direct	Group
		$000	$000	$000		$000	$000 Restated (Note 1)	$000 Restated (Note 1)
Continuing operations
Revenue	2	169,076	19,358	188,434		160,105	22,060	182,165
Cost of sales		(114,095)	(17,070)	(131,165)		(105,956)	(17,578)	(123,534)
Gross profit		54,981	2,288	57,269		54,149	4,482	58,631
Distribution costs		(6,870)	(388)	(7,258)		(6,548)	(648)	(7,196)
Administrative expenses		(29,533)	(3,720)	(33,253)		(32,008)	(2,952)	(34,960)
Exceptional impairment of BGD assets	3	-	(7,997)	(7,997)		-	-	-
Operating profit/(loss) before amortisation of acquired intangibles and other exceptional items	2	18,578	(9,817)	8,761		15,593	882	16,475
Amortisation of acquired intangibles	2	(654)	(51)	(705)		(672)	(52)	(724)
Other exceptional items	3	(191)	(6,206)	(6,397)		(445)	-	(445)
Operating profit/(loss)		17,733	(16,074)	1,659		14,476	830	15,306
Finance income		153	11	164		116	26	142
Finance costs	4	(3,109)	-	(3,109)		(3,240)	-	(3,240)
(Loss)/profit before tax		14,777	(16,063)	(1,286)		11,352	856	12,208
Tax	5	(4,031)	40	(3,991)		(2,849)	(836)	(3,685)
(Loss)/profit for the year		10,746	(16,023)	(5,277)		8,503	20	8,523
(Loss)/Profit for the year attributable to:
Owners of the parent		10,326	(16,023)	(5,697)		8,115	20	8,135
Non-controlling interests		420	-	420		388	-	388
		10,746	(16,023)	(5,277)		8,503	20	8,523
(Loss)/earnings per share (cents)
Basic	6	51.7		(28.5)		41.2		41.3
Diluted	6	50.5		(28.5)		41.1		41.2
Adjusted basic	6	54.7		5.7		46.0		46.2
Adjusted diluted	6	53.5		5.6		45.9		46.1

QUARTO GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2016

(UNAUDITED)

	2016	2015
	$000	$000 Restated (Note 1)
(Loss)/profit for the year	(5,277)	8,523
Items that may be reclassified to profit or loss
Foreign exchange translation differences	706	(2,341)
Cash flow hedge: gains/(losses) arising during the year	150	(64)
Cash flow hedge: reclassification adjustment for net income recognised directly in equity	-	68
Tax relating to items that may be reclassified to profit or loss	(1,609)	(14)
	(753)	(2,351)
Total comprehensive (expense)/income for the year	(6,030)	6,172
Total comprehensive (expense)/income for the year attributable to:
Owners of the parent	(6,450)	5,798
Non-controlling interests	420	374
	(6,030)	6,172

QUARTO GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2016

(UNAUDITED)

		2016	2015	2014
	Notes	$000	$000 Restated (Note 1)	$000 Restated (Note 1)
Non-current assets
Goodwill	9	36,144	40,112	41,069
Other intangible assets		4,351	1,510	956
Property, plant and equipment		1,857	3,368	2,731
Intangible assets: Pre-publication costs	10	61,133	59,443	57,534
Deferred tax assets		2,022	-	126
Total non-current assets		105,507	104,433	102,416
Current assets
Inventories		24,006	25,191	23,859
Trade and other receivables		54,162	57,145	51,740
Derivative financial instruments		141	18	-
Cash and cash equivalents		18,824	25,059	23,110
Total current assets		97,133	107,413	98,709
Current liabilities
Short term borrowing		(5,000)	(5,000)	(89,150)
Derivative financial instruments		(94)	(10)	(67)
Trade and other payables		(59,718)	(63,716)	(53,271)
Tax payable		(4,060)	(2,549)	(2,430)
Total current liabilities		(68,872)	(71,275)	(144,918)
Non-current liabilities
Medium and long term borrowings		(75,748)	(79,562)	-
Deferred tax liabilities		(10,502)	(7,466)	(5,927)
Other payables		(3,407)	(99)	(537)
Total non-current liabilities		(89,657)	(87,127)	(6,464)
Net assets		44,111	53,444	49,743
Equity
Share capital		2,045	2,045	2,045
Paid in surplus		33,764	33,764	33,764
Retained profit and other reserves		3,410	12,476	8,993
Equity attributable to owners of the parent		39,219	48,285	44,802
Non-controlling interest		4,892	5,159	4,941
Total equity		44,111	53,444	49,743

QUARTO GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2016

(UNAUDITED)

	Share capital	Paid in surplus	Hedging reserve	Translation reserve	Treasury shares	Retained earnings	Equity attributable to owners of the parent	Non-controlling interests	Total
	$000	$000	$000	$000	$000	$000	$000	$000	$000
Balance at 1 January 2015 (as previously stated)	2,045	33,764	-	(5,611)	(634)	16,230	45,794	4,941	50,735
Prior year adjustment (note 1)	-	-	-	-	-	(992)	(992)	-	(992)
Balance at 1 January 2015 (restated)	2,045	33,764	-	(5,611)	(634)	15,238	44,802	4,941	49,743
Profit for the year	-	-	-	-	-	8,135	8,135	388	8,523
Other comprehensive income
Foreign exchange translation differences	-	-	-	(2,326)	-	-	(2,326)	(14)	(2,340)
Cash flow hedge: losses arising during the year	-	-	(64)	-	-		(64)	-	(64)
Cash flow hedge: reclassification adjustment for gain included in profit	-	-	68	-	-	-	68		68
Tax relating to items that may be reclassified to profit or loss	-	-	(14)	-	-	-	(14)	-	(14)
Total comprehensive income for the year	-	-	(10)	(2,326)	-	8,135	5,799	374	6,173
Transactions with owners
Dividends to shareholders (Note 8)	-	-	-	-	-	(2,502)	(2,502)	-	(2,502)
Dividends paid to non-controlling interests	-	-		-	-	-	-	(156)	(156)
Share based payment charge	-	-	-	-	-	186	186	-	186
Balance at 1 January 2016	2,045	33,764	(10)	(7,937)	(634)	21,057	48,285	5,159	53,444
(Loss)/profit for the year	-	-	-	-	-	(5,697)	(5,697)	420	(5,277)
Other comprehensive income								-
Foreign exchange translation differences	-	-	-	696	-	-	696	10	706
Cash flow hedge: losses arising during the year	-	-	150	-	-	-	150	-	150
Tax relating to items that may be reclassified to profit or loss	-	-	-	(1,609)	-	-	(1,609)	-	(1,609)
Total comprehensive income for the year	-		150	(913)	-	(5,697)	(6,460)	430	(6,030)
Transactions with owners
Dividends to shareholders (Note 8)	-	-	-	-	-	(2,902)	(2,902)	-	(2,902)
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	(697)	(697)
Share based payment charges	-	-	-	-	-	256	256	-	256
Shares released/sold from treasury shares					634	(594)	40	-	40
Balance at 31 December 2016	2,045	33,764	140	(8,850)	-	12,120	39,219	4,892	44,111

QUARTO GROUP, INC.

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2016

(UNAUDITED)

	2016	2015
	$000	$000 Restated (Note 1)
(Loss)/profit for the year	(5,277)	8,523
Adjustments for:
Net finance costs	2,945	3,098
Depreciation/amortisation of property, plant and equipment and software intangible assets	1,080	1,189
Tax charge	3,991	3,685
Exceptional impairment of BGD assets	14,203	-
Share based payments charges	256	186
Amortisation of acquired intangible assets	705	724
Amortisation of and amount written off pre-publication costs	30,540	33,258
Movement in fair value of derivatives	120	(85)
Operating cash flows before movements in working capital	48,563	50,578
Decrease/(increase) in inventories	1,270	(1,198)
Decrease/(increase) in receivables	1,628	(6,156)
(Decrease)/increase in payables	(7,715)	8,724
Cash generated by operations	43,746	51,948
Income taxes paid	(1,436)	(1,981)
Net cash from operating activities	42,310	49,967
Investing activities
Interest received	164	142
Investment in pre-publication costs	(37,165)	(34,872)
Purchases of property, plant and equipment and software intangible assets	(1,562)	(2,010)
Acquisition of subsidiaries and business combinations	(3,718)	(1,614)
Net cash used in investing activities	(42,281)	(38,354)
Financing activities
Dividends paid	(2,902)	(2,502)
Interest payments	(2,725)	(2,891)
Drawdown/(repayment) of revolving credit facility	5,583	(3,283)
Repayment of term loan	(5,000)	-
Dividends paid to non-controlling interest	(697)	(156)
Net cash used in financing activities	(5,741)	(8,832)
Net (decrease)/increase in cash and cash equivalents	(5,712)	2,781
Cash and cash equivalents at beginning of year	25,059	23,110
Foreign currency exchange differences on cash and cash equivalents	(523)	(832)
Cash and cash equivalents at end of year	18,824	25,059

NOTES TO THE CONDENSED ACCOUNTS

(UNAUDITED)

1.   Basis of preparation

The financial information set out in this statement does not constitute the Group's Annual Report for the year ended 31 December 2016 prepared in accordance with the Companies Act 2006 as applicable to overseas companies.  The financial information for the year ended 31 December 2015 has been extracted from the statutory financial statements, except for the prior year restatement.  The statutory financial statements for the year ended 31 December 2015, including an unmodified auditor's report, have been delivered to the Registrar of Companies. The audit for the year ended 31 December 2016 is not yet complete.  The financial information contained within this preliminary announcement was approved by the Board on 27 March 2016.The financial statements will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual meeting.

The Group financial statements are presented in US Dollars and all values are shown in thousands of dollars ($000) rounded to the nearest thousand dollars, except where otherwise stated.  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 accounting policies used have been applied consistently and are described in full in the statutory financial statements for the year ended 31 December 2015.

On the basis of the cash flows generated by the business and the headroom available on the bank facilities the Directors are confident that the Group has adequate resources to continue in operational existence for the foreseeable future and, accordingly, consider that it is appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements.  Note 7 provides additional information on the Group's banking covenants and sensitivity.

Change in estimate

During the year, the Group undertook a review of useful lives of the pre-publications costs incurred in the development of book titles prior to publication.  The review resulted in the change in useful life of certain imprints to a three-year useful life in accordance with IAS 8 - Accounting Polices, Changes in Accounting Estimates and Errors, the revisions were accounted for prospectively as a change in accounting estimate and as a result the amortisation charge of the Group for the current financial year has been reduced by $2.1m.

Restatement of prior year results

In the process of finalising the results of the Books and Gifts Direct business for the year ended 31 December 2016, errors were uncovered in the cut-off procedures and accounting for returns in relation to stock in transit and the related liability accounts at BGD Australia.  The errors related to the value attributed to stock in transit at each of the three years ended 31 December 2016, 31 December 2015 and 31 December 2014 where detailed examination has shown that supplier invoices for stock in transit were not processed in the correct accounting period, nor was the correct accrual or return provision recorded in the financial statements.  The impact of these errors has resulted in the lower operating margins for the year ended 31 December 2015.

The error was caused by a failure in controls relating to cut-off and reconciliation procedures in respect of stock in transit and the related purchase clearing accounts, and accounting for returns on certain products.

The error has now been corrected and impacts the Consolidated Income Statement as follows:

·	Cost of sales for the year ended 31 December 2015 increased by $0.7m from $122.8m to $123.5m which is included in the restated operating results for the year; and
·	Opening retained earnings as at 1 January 2015 have been restated and decreased by $1.0m.

Expected tax losses of $0.5m have not been recognised as there is insufficient evidence that future profits are available against which the losses could be applied.

The impact on the Consolidated Balance Sheet as at 31 December 2015 and as at 31 December 2014 is:

	2015	Adjustment	2015		2014	Adjustment	2014
	$'000	$'000	$'000		$'000	$'000	$'000
	As reported		Restated		As reported		Restated
Inventories	26,147	(956)	25,191		24,851	(992)	23,859
Trade payables	(63,076)	(640)	(63,716)		(53,271)	-	(53,271)
Impact on net assets	55,040	(1,596)	53,444		50,735	(992)	49,743
Impact on total equity	55,040	(1,596)	53,444		50,735	(992)	49,743

2.   Operating segments

The analysis by segment is presented below. This is based upon the operating results reviewed by the Chief Executive Officer.

		Year ended 31 December 2016
	Quarto International Co-Editions Group	Quarto Publishing Group USA	Quarto Publishing Group UK	Total Publishing	Quarto HK	Books & Gifts Direct	Group
	$000	$000	$000	$000	$000	$000	$000
External revenue	51,915	81,189	21,506	154,610	14,466	19,358	188,434
Operating profit/(loss) before amortisation of acquired intangibles and other exceptional items	9,372	9,589	2,777	21,738	1,589	(9,817)*	13,510
Amortisation of acquired intangibles	(253)	(356)	(45)	(654)	-	(51)	(705)
Segment result	9,119	9,233	2,732	21,084	1,589	(9,868)	12,805
Other exceptional items (note 3)	-	(191)	-	(191)	-	(6,206)	(6,397)
	9,119	9,042	2,732	20,893	1,589	(16,074)	6,408
Unallocated corporate expenses							(4,749)
Operating profit/(loss)							1,659
Finance income							164
Finance costs							(3,109)
Loss before tax							(1,286)
Taxation							(3,991)
Loss after tax							(5,277)

* Includes exceptional impairment charge of $8.0m.  Further detail included in note 3.

		Year ended 31 December 2015 Restated (Note 1)
	Quarto International Co-Editions Group	Quarto Publishing Group USA	Quarto Publishing Group UK	Total publishing	Quarto HK	Book & Gifts Direct	Group
	$000	$000	$000	$000	$000	$000	$000
External revenue	50,147	72,441	22,765	145,353	14,752	22,060	182,165
Operating profit before amortisation of acquired intangibles and other exceptional items	6,351	8,884	3,302	18,537	1,487	882	20,906
Amortisation of acquired intangibles	(240)	(346)	(86)	(672)	-	(52)	(724)
Segment result	6,111	8,538	3,216	17,865	1,487	830	20,182
Other exceptional items (note 3)	-	-	-	-	-	-	(445)
Unallocated corporate expenses							(4,431)
Operating profit/(loss)							15,306
Finance income							142
Finance costs							(3,240)
Profit before tax							12,208
Taxation							(3,685)
Profit after tax							8,523

2.   Operating segments (continued)

Segmental balance sheet

				2016	2015
				$000	$000 (Restated)
Quarto Publishing Group USA				110,010	92,154
Quarto Publishing Group UK				17,277	20,562
Quarto International Co-Editions Group				46,055	49,957
Quarto HK				6,591	7,811
Book & Gifts Direct				1,720	16,285
Unallocated (Deferred tax and cash)				20,987	25,077
Total Assets				202,640	211,846
Quarto Publishing Group USA				29,569	22,567
Quarto Publishing Group UK				5,851	7,848
Quarto International Co-Editions Group				18,668	23,246
Quarto HK				3,895	4,325
Book & Gifts Direct				5,141	5,829
Unallocated (Deferred tax and cash)				95,405	94,587
Total Liabilities				158,529	158,402

Geographical areas

	Revenue	Revenue
	2016	2015
	$000	$000 (Restated)
United States of America	104,109	92,758
Australasia and Far East	25,172	28,556
United Kingdom	20,900	24,150
Europe	26,303	24,453
Rest of the World	11,950	12,248
	188,434	182,165

Revenues are allocated based on the country in which the customer is located, irrespective of the origin of the goods.

3.   Exceptional items

		2016	2015
		$000	$000
Impairment of BGD assets		7,997	-
Write-off of BGD goodwill		6,000	-
Write-off of BGD intangible assets		206	-
		14,203	-
Acquisition costs		191	257
Aborted corporate transaction costs		-	188
		14,394	445

The impairment of assets comprises principally inventory of $1.9m, trade receivables of $4.3m and property, plant and equipment of $1.1m.  This impairment and the write-off of goodwill and intangible assets reflect the charges to reduce the carrying value of the assets of the Books & Gift Direct to their recoverable value.

Acquisition costs relate to the purchase of the assets of becker&mayer and Harvard Common Press (2015: purchase of The Ivy Press Limited).

4.   Finance costs

	2016	2015
	$000	$000
Interest expense on borrowings	2,728	2,837
Amortisation of debt issuance costs	381	403
	3,109	3,240

5.   Taxation

	2016	2015
	$000	$000 Restated (Note 1)
Current tax on profit for the year	2,344	2,277
Total current tax	2,344	2,277
Current year origination and reversal of temporary differences	1,647	1,408
Total deferred tax	1,647	1,408
Total tax	3,991	3,685

Corporation tax on UK profits is calculated at 20% (2015: 20.25%), based on the UK standard rate of corporation tax of the estimated assessable profit for the year.  Taxation for other jurisdictions is calculated at the rate prevailing in the respective jurisdictions.  The table below explains the difference between the expected expense at the UK statutory rate of 20% and the total tax expense.

			2016 $000	2015 $000 Restated (Note 1)
	Group excluding Books & Gifts Direct	Books & Gifts Direct	Group	Group
(Loss)/profit before tax	14,777	(16,063)	(1,286)	12,208
Tax (credit)/charge at the UK corporation tax rate of 20% (2015: 20.25%)	2,956	(3,213)	(257)	2,472
Effect of different tax rates of subsidiaries operating in other jurisdictions	1,422	-	1,422	1,163
Other, including tax effect of expenses that are not deductible in determining taxable profit	(347)	3,173	2,826	50
Tax expense	4,031	(40)	3,991	3,685
Effective tax rate for the year	27.3%	-	-	30.2%

6.   Earnings per share

	2016				2015
	Group excluding BGD	BGD	Total		Group excluding BGD	BGD	Total
	$000	$000	$000		$000	$000	$000 Restated (Note 1)
(Loss)/Profit attributable to owners of the parent	10,326	(16,023)	(5,697)		8,115	20	8,135
Amortisation of intangible assets (net of tax)	473	36	509		508	18	526
Exceptional items (net of tax)	126	6,206	6,332		441	-	441
Adjusted profit/(loss) attributable to owners of the parent	10,925	(9,781)	1,144		9,064	38	9,102
	Number		Number		Number		Number
Weighted average number of shares	19,984,824		19,984,824		19,696,729		19,696,729
Diluted effect of outstanding share options	452,031		452,031		38,591		38,591
Diluted weighted average number of shares	20,436,855		20,436,855		19,735,320		19,735,320
Basic (loss)/earnings per share	51.7		(28.5)		41.2		41.3
Diluted (loss)/earnings per share	50.5		(28.5)		41.1		41.2
Adjusted earnings per share	54.7		5.7		46.0		46.2
Adjusted diluted earnings per share	53.5		5.6		45.9		46.1

7.     Committed facilities and banking covenants

At 31 December 2016, the Group had a US$90m (2015: US$95m) syndicated bank facility which is due to expire on 30 April 2019.  These facilities are subject to three principal covenants summarised below.

These facilities are subject to three principal covenants, namely:

Covenant	2016	2015
Consolidated net debt shall not exceed 2.75 times EBITDA	1.76 times	1.63 times
Consolidated adjusted operating profit shall exceed 3 times net interest payable	6.15 times	5.55 times
Cash flow shall exceed 1.2 times Debt Service	0.74 times	3.89 times

The cashflow cover covenant test was not passed at 31 December 2016; this does not constitute a breach of the Group's banking facilities.  The agreement states that if on a quarter end test date the cashflow covenant test is not complied with due to an adverse movement in working capital, then it shall not constitute a breach provided that it is the first time that such non-compliance has occurred, and on the following test date, the covenant is complied with.  The seasonality of the industry means there is always a degree of sensitivity around the Group's working capital movements.  Having identified mitigating actions which would maintain working capital headroom in such situations, the Directors are confident that the Group will comply with all financial covenants for the foreseeable future.

8.   Dividends

	2016	2015
	$000	$000
Interim dividend for the year ended 31 December 2016 of 5.13c/3.35p (2015: 5.13c/3.35p) per share	1,049	1,010
Final dividend for the year ended 31 December 2015 of 8.17c/4.95p (2014: 8.17c/4.95p) per share	1,853	1,492
	2,902	2,502
Proposed final dividend for the year ended 31 December 2016 of 9.87c/7.95p (2015: 9.41c/6.15p) per share	2,018	1,853

The proposed final dividend is subject to approval by shareholders at the Annual Meeting and has not been included as a liability in these condensed financial statements. 

The Quarto Group, Inc., as a US incorporated company, is required to collect US dividend withholding taxes on dividend distributions made to its non-US shareholders. The US dividend withholding tax is generally 30% of any dividends paid to Quarto's non-US shareholders, but this amount can potentially be reduced pursuant to an applicable income tax treaty between the US and the country of residence of the non-US shareholder.  For example, under the US/UK income tax treaty, the US dividend withholding tax rate can range from nil (applicable to certain UK resident pension trusts and tax exempt entities) to 15% (applicable to UK resident individual shareholders and certain UK corporate shareholders). For US shareholders, no US dividend withholding tax is generally applicable. It should be noted that certain documentation requirements must be met by all shareholders prior to the payment of any dividends to certify their status as a US or non-US shareholder, and, if a non-US shareholder to claim any applicable benefits under the US/UK or other applicable income tax treaty. Each shareholder, should consult their own tax adviser to determine whether and to what extent they may be entitled to claim a reduced amount of US dividend withholding taxes under a US income tax treaty.

9.     Goodwill

	2016	2015
	$000	$000
Cost
At 1 January	40,448	41,423
Exchange differences	(1,128)	(1,244)
Recognised on acquisitions (see note 11)	3,105	269
At 31 December	42,425	40,448
Accumulated impairment losses
At 1 January	336	354
Exchange differences	(55)	(18)
Impairment	6,000	-
At 31 December	6,281	336
Net book value	36,144	40,112

The following units have significant carrying amounts of goodwill:

	2016	2015
	$000	$000
Quarto Publishing Group USA (QUS)	29,982	26,878
Quarto Publishing Group UK (QUK)	1,816	2,176
Quarto International Co-Editions Group (QIC)	4,346	5,145
Books & Gifts Direct, ANZ (BGD)	-	5,913
	36,144	40,112

9.     Goodwill (continued)

The recoverable amount of each cash generating unit ('CGU') is based on the value in use basis. In determining value in use, management prepare a detailed bottom up budget, with reviews conducted at each business unit. Cash flows beyond the budget period of twelve months are extrapolated into perpetuity, by applying the growth rates applicable to each unit discounted to present value. The key assumptions used in the value in use calculations were:

The discount rate has been calculated using Weighted Average Cost of Capital analysis adjusted to derive the pre-tax discount rate.  The rates applied to each CGU were 14.57% (2015: 11.58%) pre-tax for QUS, 11.66% (2015: 12.17%) for QUK and QIC and 15.60% (2015: 11.58%) for BGD which reflects current assessments of the time value of money.

Cash flow growth rates are based on a short term forecast growth rate of 2% (2015: 3%) for the next three years, and reverting to 3% (2015: 3%) into perpetuity, to reflect the long term expected growth in each of the key markets. Changes in selling prices and direct costs are based on experience and expectations of future changes in the market.

Determining whether goodwill, specific to the US, is impaired requires an estimation of the value of use of the CGU based on the key assumptions above. The headroom of the QUS CGU as at 31 December 2016 was $5.0m (2015: $12.7m).  Neither a 0.9% decrease in the long term growth rate or a 0.6% increase in the discount rate would have led to an impairment.

As a result of the anticipated disposals of the BGD businesses, the goodwill related to these businesses has been fully impaired in the year.

10.  Intangible assets: Pre-publication costs

	2016	2015
	$000	$000
Cost
At 1 January	151,733	117,077
Exchange differences	(7,671)	(2,217)
Additions	37,165	34,872
Acquisitions	564	2,001
At 31 December	181,791	151,733
Accumulated amortisation
At 1 January	92,290	59,543
Exchange differences	(2,172)	(511)
Charge for the year	30,540	33,258
At 31 December	120,658	92,290
Net book value	61,133	59,443

11.  Acquisitions

becker&mayer

On 8 August 2016, the Group acquired the publishing business and net assets of becker&mayer LLC ("becker&mayer") through its US subsidiary Quarto Publishing Group USA Inc, for a consideration of $9.8m, together with a working capital adjustment payment capped at $1.0m and further deferred contingent consideration of up to $1.0m.  Consideration of $2.3m was paid on completion.  A further $2.5m was paid in January 2017 and the remaining balance is payable in separate tranches over the next three years.

If the acquisition had been completed on the first day of the financial year, Group revenue for the year would have been $197.9m and Group loss for the year would have been $6.1m.  The revenue and operating profit of becker&mayer since the date of acquisition included in the consolidated statement of comprehensive income are $11.4m and $1.9m respectively.

Harvard Common Press

On 1 February 2016, the Group acquired selected assets of the publishing business of The Harvard Common Press through its US subsidiary Quarto Publishing Group USA Inc, for a consideration of $1.0m. Of the consideration $0.1m was paid during the year ended 31 December 2015, a further $0.1m was paid on completion of the acquisition and $0.4m was paid in July 2016.  The final payment of $0.4m was made in January 2017.

The revenue and operating profit of The Harvard Common Press since the date of acquisition included the consolidated statement of comprehensive income is $1.3m and $0.4m respectively.  There would be no difference in these results had the acquisition completed on the first day of the financial year.

11. Acquisitions (continued)

These companies were acquired because of their strategic fit within the Group. The transaction costs of $191,000 were incurred in relation to the acquisition (note 3).  The transaction has been accounted for under the acquisition method.  The goodwill arising on these acquisitions is largely attributable to the anticipated incremental sales and cost synergies achievable as part of The Quarto Group and is expected to be deductible for tax purposes.

The fair value of acquired assets and liabilities is summarised below.

	becker&mayer Fair values $000	Harvard Common Press Fair Values $000
Net assets acquired
Intangible assets - pre-publication costs	564	-
Other intangible assets - backlists	2,415	436
Property, plant and equipment	259	-
Inventories	2,461	297
Trade and other receivables	6,340	79
Trade and other payables	(3,225)	(551)
	8,814	261
Goodwill	2,332	773
Total consideration	11,146	1,034
Satisfied by:
Cash	2,300	230
Loan notes	7,319	804
Contingent consideration arrangements	1,527	-
Total	11,146	1,034
Net cash outflow arising on acquisitions in the year
Cash consideration	2,300	502

The goodwill for becker&mayer is provisional, using an estimate of fair value and will be reviewed and adjusted in the next 12 months if necessary.

12.  Post balance sheet events

On 24 March 2017, the Group announced the disposal of its 75% interest in Regent Publishing Services Ltd, its Hong Kong based publishing services business.

The consideration for the disposal is $7.0m together with a payment of $2.5m (HK$19.5m) for the group's share of the excess cash in the business, payable in cash on completion, which is expected to take place on 31 March 2017. The business was sold to 1010 Printing Group Ltd, a Hong Kong based printing business listed on the Hong Kong Stock Exchange. The consideration will be used to reduce the Group's net debt.

For the 12 months ended 31 December 2016, Regent Publishing Services Ltd recorded a profit before tax of $1.6m and had net assets of $6.6m. The disposal is likely to result in an exceptional profit of $3.3m.

On 27 March 2017, the Group announced the disposal of BGD Australia which has been acquired by Zooom Pty Limited (as trustee for the Zooom Investment Trust), a company incorporated in Australia and formed for the purposes of acquiring the business by a group comprising certain of the master franchisees and former employees of the business in Australia. The consideration for the sale of the company is A$1 and Quarto will also take an assignment of certain debts owed by the master franchisees to BGD Australia of A$1.9m (US$1.4m) which will repayable in monthly instalments over two years and are interest bearing.  The repayments will be used to reduce the Group's bank debt as they are received. Quarto is entitled to receive 10% of the profit before interest and tax of Zoom Pty Limited for the next 5 years.

13. Alternative performance measures

The Group uses alternative performance measures to explain and judge its performance.

Adjusted operating profit excluding amortisation of acquired intangibles and exceptional items.  The Directors consider this to be a useful measure of the Group operating performance as it approximates the underlying operating cash flow.

Exceptional items are those which the Company defines as significant non-recurring 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.

Backlist % refers to book titles that were published in previous calendar years and is a key measure of the performance of our intellectual property assets.

Intellectual property development spend refers to the amounts spent annually on the creation and publication of book titles against which we monitor subsequent sales (see note 10).

Inventory % of sales is the book value of inventory divided by total revenue for the year.  Inventory turn is cost of sales divided by book value of inventory and measures the number of times inventory is sold through the business in a year.

	2016	2015
	$000	$000 (Restated)
Adjusted Operating Profit
Operating profit	1,659	15,306
Add back:
Amortisation of acquired intangibles	705	724
Exceptional items - other	6,397	445
Adjusted Operating profit	8,761	16,475
Add back/(deduct) Books & Gifts Direct Operating (loss)/profit	9,817	(882)
Adjusted Operating profit (Excluding BGD)	18,578	15,593
EBITDA (as defined in the committed facility agreement)
Adjusted profit before tax, before amortisation of acquired intangibles and exceptional items	13,813	13,377
Net interest	2,945	3,098
Depreciation	1,080	1,189
Amortisation of pre-publication costs	17,244	18,184
EBITDA, before exceptional items	35,082	35,848
Net debt
Short term borrowings	5,000	5,000
Medium and long term borrowings	75,748	79,562
Cash and cash equivalents	(18,824)	(25,059)
	61,924	59,503
Adjusted Dividend Cover (excluding BGD)
Adjusted basic earnings per share (cents per share)	54.7	46.0
Total Dividend for the year (cents per share)	15.0	14.5
Dividend cover (times)	3.6	3.2

14.  Principal risks and uncertainties

a.     Customer risk.  The Group operates across many of the major world economies including the USA, United Kingdom, Europe, Australia, New Zealand and Hong Kong and our revenues and profits depend on the general state of the economies in these territories. Another recessionary environment in our key USA and UK markets could have a significant impact on the financial status of some of our key customers and their ability to pay their debts to us. We monitor debts closely and maintain close relationships with all major customers that may provide prior warning of likely failure.

b.     Currency risk. The Group's businesses operate in a number of different currencies giving rise to a risk of exchange loss due to fluctuating exchange rates.  We have hedging and currency swaps in place.  We have a natural hedge that mitigates against currency movements impacting our earnings in that one of our largest costs which is print costs are paid in US Dollars.  Borrowings have been taken out in different currencies to mitigate risk of currency movements impacting our net assets.

c.     Loss of intellectual property.  As we are an owner of intellectual property, a lot of which is digitally stored and accessed, the security and strength of our information technology systems is very important. Because of its importance, we regularly review our storage and back-up routines and disciplines and are in the process of introducing a new title management system for our publishers that will improve the security of and access to our intellectual property.

d.     Economic risk.  A sudden downturn in revenues or profits caused by a global recession or through the impact of currency movements could reduce consumer discretionary spending which might result in a reduction in profitability and operating cashflow.  The group has over $90m in debt facilities available but in addition, in the event of such a reduction in profits and/or cashflow, the Directors have the ability to take a number of mitigating actions including the reduction of discretionary spend on pre-publication costs.

e.     Supply chain risk.  The Group uses a number of print suppliers to print its books, many of whom are based in Southern China.  There is a risk that an interruption in the availability of printing services in Southern China could result in an interruption in the printing and distribution of new books to customers.  The group maintain relationships with printers in other South East Asian countries, Eastern Europe, the UK and the USA and are confident that printing could be carried out by an alternative range of printers if supply from China was interrupted.

f.      Cyber security risk.  Like many organisations, the group is at risk from cyber attack. This presents a potentially serious risk disruption to production process and could have a significant impact on the probability of the business and the security of intellectual property assets.  The Group uses firewalls and IT controls to prevent attack as well as maintaining offsite backup of intellectual property.  Computerised files of the Group's books are also retained by printers.

15.  Directors responsibilities statement

The Directors confirm that to the best of their knowledge: 

a.     The condensed financial statements, prepared in accordance with the applicable set of accounting standards 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

b.     The Business Review, which will be incorporated into the Directors' Report of the financial statements, will 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 they face.

 

END

 

 

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