Final Results

Quarto Group Inc 15 February 2002 Friday 15 February 2002 THE QUARTO GROUP INC - PRELIMINARY RESULTS Quarto, the London based and listed international book publisher, announces an improved underlying result, in line with expectations, despite difficult economic circumstances. On unchanged turnover of Â£73.6 m, underlying pre-tax profit increased by 9.8% to Â£4.5 m whilst underlying EPS was 16.8% higher at 18.8p. The final dividend per share is increased by 10.0% to 2.53p, giving 4.73p, up 5.1%, for the year. After exceptionals and goodwill amortisation, the reported pre-tax profit decreased to Â£3,190,000 from Â£3,550,000 and EPS to 11.7p from 13.2p. The International Co-edition Publishing Division made an operating profit of Â£5.0 m (2000: Â£5.4 m) on a turnover of Â£41.6 m (2000: Â£43.5 m), with the Quarto and Quantum units doing outstandingly well. The Publishing Division increased operating profit to Â£2.3 m (2000: Â£1.9 m) on a turnover of Â£32.0 m (2000: Â£30.1 m), with the art publishing business moving in the right direction. Since the year end, Quarto has purchased, from the Administrators, the business and publishing assets of Marshall Editions and its associated entities and appointed Danny Gurr, most recently President of Dorling Kindersley USA, as President of Quarto Holdings to assist with operations on both sides of the Atlantic. Laurence Orbach, Chairman and Chief Executive, stated 'Given the unedifying mix of circumstances, I hope that shareholders will share the Board's satisfaction that Quarto weathered the storms well, and achieved a number of objectives set at the beginning of the year. The current year has started well, and I am looking forward to another useful advance in 2002.' Notes for Editors: Quarto's International Co-edition Publishing Division primarily creates content for publication internationally by other publishers. It also includes Regent and ProVision, which are Far East-based print broking and production supervision services businesses, serving both third parties and the Group. Quarto's Publishing Division primarily publishes books, under imprints owned by the group, and art images, mainly for their domestic markets and from US locations. In addition, it includes two UK-based screen printers primarily serving the point of sale display market, Western and AP Screen. Although a Delaware registered corporation, Quarto's Head Office is situated in Islington, London N7 and its shares are fully listed on the London Stock Exchange. Enquiries: The Quarto Group, Inc Laurence Orbach (Chairman & Chief Executive) 020-7700 9001 Mick Mousley (Finance Director) 020-7700 9005 Bankside Consultants Limited Charles Ponsonby 020-7444 4166 CHAIRMAN'S STATEMENT What a difference a year can make! When I wrote to shareholders, at this time last year, there were early intimations of recession in the US, where more than half of Quarto's sales are made, but nothing that hinted at the tumultuous times ahead. The recession has been confirmed, Japan has returned to stagnation, European growth has stalled, most severely in Germany, and the horrifying events of September 11th have, together, created a climate of insecurity that refuses to dissipate. In addition, the new economy, imperiously proclaiming it was wearing new clothes, revealed itself in all its nakedness. It turned out, after all, that it was subject to fundamental economic laws. This was the background to business in 2001 and, given the unedifying mix, I hope that shareholders will share the board's satisfaction that Quarto weathered the storms well, and achieved a number of objectives set at the beginning of the year. Book businesses have done well, historically, in economic recessions. I expected our book business not to be affected seriously by recession and, in the event, that's how it turned out. Financial Overview For the year ended December 31st, 2001, sales were Â£73.62 million (2000: Â£73.56 million). Operating profits increased to Â£6.20 million (2000: Â£6.09 million), and underlying pre-tax profits, before goodwill amortization and exceptional items, advanced by almost 10% to Â£4.46 million (2000: Â£4.07 million). Underlying earnings per share increased by 16.8% to 18.8p (2000: 16.1p), and basic earnings per share were 11.7p (2000: 13.2p). The Board is recommending a 10% increase in the final dividend to 2.53p net (2000: 2.3p net). There's no insulation from disaster. Regrettably, we were caught up in the late December bankruptcy protection filing of Konemann, one of the largest publishers in Germany. Our exposure was at a historic high of approximately Â£1.2 million. It is still too soon to assess the prospects for recovery, so we have provided, as an exceptional item, for the entire debt. That aside, we fulfilled our financial expectations for the year. The US dollar is the group's major trading currency, and the currency in which most of our assets are denominated. As a matter of prudence, most of our borrowings are also in dollars. At the end of 2001, net debt was $34.5 million (Â£23.6 million) compared to $34.3 million a year ago. Konemann aside, our net cash inflow from operating activities was in line with expectations. Net interest payable was covered 3.6 times (2000: 3.0 times) by underlying operating profits, an increase of 20%. Commentary on Results Three principal factors account for the flat sales picture. The first was the continued softness of our sales into the euro-zone, despite encouraging results in some of the countries. The euro continued to be weak, and this put unacceptable pressure on margins. The second factor was our continued focus on eliminating some very marginal business. The overwhelming factor was the third, i.e. the economic and political uncertainty in our major markets. As early as the spring of 2001, it was becoming clear that the implosion of the dot-coms in the United States indicated a more serious imbalance between the real economy, and excessive expectation. All sectors of the economy reacted more cautiously than for some time previously. By the summer, the caution became contagious, and spread outside the United States. Inflation remained benign and, in response to a weaker world economy, central banks generally followed the Fed's lead in reducing interest rates. Much as this may have been the correct recipe, it also emphasized the nervousness of the business world, and contributed to wariness about the immediate future. Customers talked about the possibility of a weak Christmas market. Then came September 11th. When we reported on our third quarter results, I commented on our expectations for the balance of 2001. In the main, our expectations were met, though our sales in December in particular, in common with those of many other companies, were weaker than we expected. This led to sales, for the final quarter, coming in about Â£1 million lower than we expected, reducing operating profits by, perhaps, Â£300,000. September was, despite the events of September 11th, a reasonably strong month, as was October. November was acceptable but, understandably, retailers remained apprehensive about whether there would be a real Christmas season, given the economic circumstances, and the psychological toll that September 11th and the Afghan war had taken. In the light of these uncertainties, we are pleased that we met our expectations for the year. Review of the Year International Co-Edition Book Publishing The weakness of sales into continental Europe did not prevent the division from turning in a very good performance overall. Sales eased to Â£41.6 million (2000: Â£43.5 million), with an operating margin of Â£5.04 million (2000: Â£5.43 million). The Quarto and Quantum units did outstandingly well, with sales and profits that exceeded expectations. Quintet, and our books-plus unit, now renamed Q+, each have new publishers, and much effort during the year went into improving their publishing programs and operations. Gratifyingly, by the end of the year, they were poised to perform better in 2002. Operating profits for the London-based businesses rose by 4.8%, and operating margins reached 13.1%, compared with 11.4% in 2000. Rockport RotoVision invested in a new publishing imprint, Fair Winds, which produces books for the mind, body, and spirit market. Results were impacted adversely by this investment and by disappointing sales of the backlist in the United States, and of co-editions internationally. Additionally, RotoVision decided to discontinue certain marginal, annual publications, at a one-off cost in this year. In Australia, Global was hurt badly by the collapse of Konemann, which was Global's major customer. We held insurance cover on Konemann until it was pulled by the credit insurer just weeks before our receivables were created. We were, in any event, concerned that Global was doing too much of its business with Konemann. We had already planned to expand Global's customer base, and this focus is continuing. Once again, the strengths of our publishing lists were manifested. Revenues from reprints, i.e. from titles first published in prior years, accounted for 64% of co-edition book sales. Publishing The group's publishing businesses are predominantly in the United States. On the book side, Book Sales increased its sales, substantially through increasing its own publishing program in 2001. In the prior year, Walter Foster had launched an innovative new list under the My Chaotic Life imprint. We had very high hopes for its success. In most of the outlets where the range was sold, it did very well but, unfortunately, far fewer retailers than we had expected elected to stock the range in 2001. We are winding down our investment in the line. Despite this experience, Walter Foster improved its profits as its more traditional ranges of instructional books performed well. We continue to update them and extend their concepts. Finally, in the last quarter of the year, our art publishing businesses began to hit their stride. This was not enough to return the business to profitability for the year, but we are moving in the right direction. Vastly improved operations are partly responsible for this turnaround, and our new management in New York and Melbourne are largely responsible for this achievement. It is also gratifying that the fall release of new images performed in accordance with our business model, and far better than the immediately preceding releases. 2002 is a crucial year for the business. The art publishing business has high gross margins. The leveraging effect of extra sales is substantial. If we can increase sales, the impact on the bottom line will be profound, and will open up many options for us. The business is no longer absorbing cash and, I am happy to report, is now modestly cash generative. Publishing Services Once again, publishing services, which provide production services to publishers, and point of sale materials for marketing support, were very successful in 2001. Regent dealt very adroitly with a competitive and fickle international market. Sales, as expected, were down, but profits increased. Regent's results are included in the Co-edition Publishing Division. The challenge for Regent, based in Hong Kong, remains to increase sales and maintain margins. In the UK, Western and AP, whose results are recorded in the Publishing Division, performed extremely well, and continue to focus on their growth opportunities. Prospects Clearly, in operating margin terms, we're on the way to the initial target of 10% that we have set as an objective. We improved the performance of the art publishing business, and we maintained profitable sales across the group, in an adverse trading environment. We have also moved to improve the publishing programs produced by our units. I have already mentioned that Rockport RotoVision's performance was below expectations. We have addressed this, together with weakness in some other areas, generally by appointing dynamic, new publishers. This is, of course, an ongoing effort. I am happy that we are able to recruit such able people, and provide them with exciting challenges. Last week we announced the purchase, from the Administrators, of the business and publishing assets of Marshall Editions, and its associated entities. We have long admired the reference and instructional books produced by Marshall. Our intention is to maintain it as a co-edition publishing unit, with the same degree of autonomy as our other units. This purchase signals not only our confidence in this area of book publishing, but also our conviction that it is now time for us to kick-start the growth of Quarto with some judicious acquisitions. In order to do this most effectively, we need to raise our profile in the publishing trade, and also in the investment community. We have a strong message to convey, our strategy is well defined, and we have a solid business to explain. Over the years, we have acquired a number of businesses. We have made successes of a number of these acquired businesses, perhaps on a par with the organic growth initiatives that we have undertaken. Of course, acquisitions take time to absorb, and require a great deal of management attention. We've learned these lessons from experience, and will apply them in the future. We've made a number of important, senior management and publishing appointments in the last year or two. The effect of these appointments is that we have both enormous depth of management experience now, and also breadth of coverage. Since the end of the year, we have also appointed Danny Gurr, as President of Quarto Holdings, to assist our operations on both sides of the Atlantic. Danny is an industry veteran, with substantial experience in book retailing and publishing, most recently as President of Dorling Kindersley USA. Danny will divide his time between our offices in London and New York. Given the developments I have outlined, I am looking forward to another useful advance in 2002. The year has started well. The caution exhibited by retailer and wholesalers in the aftermath of September 11th, and in the run-up to Christmas was understandable. In the event, though, holiday sales in our major markets were comfortably ahead of expectations. The effect of this has been both to leave retailers both short of inventory, and more optimistic about the short-term. We have seen that in the sales of some of our units in January. Provided that this continues, 2002 will be a better year. It remains for me to thank all of my colleagues for achieving much, in the face of numerous adversities. I cannot single out all those who have excelled, but it would be invidious of me not to pay special thanks to the unstinting work of our Chief Financial Officer, Mick Mousley. He has always been a tireless worker. I'm not sure I know how he managed to take on even more work in 2001. I do know that, without his efforts, things would have been much more difficult for many people. Laurence F Orbach Chairman and Chief Executive London, February 15th, 2002 PROFIT AND LOSS ACCOUNT for the year ended December 31st, 2001 2001 2000 Â£000 Â£000 Turnover 73,620 73,564 Gross Profit 25,996 25,925 Net operating expenses (19,799) (19,837) Amortisation of goodwill (74) (58) Exceptional items (1,200) (457) Group Operating Profit Before exceptional items and goodwill amortisation 6,197 6,088 Amortisation of goodwill (74) (58) Exceptional items (1,200) (457) 4,923 5,573 Net interest payable and similar charges (1,733) (2,023) Profit on ordinary activities before taxation Before exceptional items and goodwill amortisation 4,464 4,065 Amortisation of goodwill (74) (58) Exceptional items (1,200) (457) 3,190 3,550 Taxation (300) (314) Profit on ordinary activities after taxation 2,890 3,236 Minority interests - equity (352) (413) Profit for the year 2,538 2,823 Dividends (including non-equity) (1,295) (1,262) Retained profit for the year 1,243 1,561 Earnings per share 11.7p 13.2p Underlying earnings per share 18.8p 16.1p Diluted earnings per share 11.7p 13.2p Diluted underlying earnings per share 18.1p 15.8p CONSOLIDATED BALANCE SHEET for the year ended December 31st, 2001 2001 2000 Â£000 Â£000 Fixed assets Intangible assets 1,395 1,201 Tangible assets 6,267 6,141 7,662 7,342 Current assets Stocks and work in progress 20,118 18,709 Debtors 23,509 26,504 Cash and deposits 8,679 9,691 52,306 54,904 Creditors: Amounts falling due within one year (54,225) (26,642) Net current (liabilities) assets (1,919) 28,262 Total assets less current liabilities 5,743 35,604 Creditors: Amounts falling due after more than one year (517) (31,337) Provision for liabilities and charges Deferred taxation (1,175) (1,202) Net assets 4,051 3,065 Capital and reserves Called up share capital 1,341 1,341 Reserves - paid in surplus 23,891 23,891 - revaluation 998 1,018 - profit and loss (25,090) (25,852) Treasury stock (638) (461) Shareholders' funds 502 (63) Equity (4,702) (5,267) Non equity 5,204 5,204 502 (63) Minority interests - equity 3,549 3,128 4,051 3,065 CONSOLIDATED CASH FLOW STATEMENT for the year ended December 31st, 2001 2001 2000 Â£000 Â£000 Net cash inflow from operating activities 5,746 6,409 Net cash outflow from return on investment and servicing of finance (2,786) (2,478) Taxation (348) (627) Capital expenditure (648) (450) Acquisitions (544) (1,471) Equity dividends paid (807) (877) Management of liquid resources Movement in short term deposits 477 (115) Net cash flow from financing (983) (1,388) Increase/(decrease) in cash 107 (997) Reconciliation of net cashflow to movement in net debt Movement in cash 107 (997) Movement in debt and lease financing 806 1,388 Management in liquid resources (477) 115 436 506 New finance leases (552) (324) Translation differences (523) (2,286) Movement in debt for year (639) (2,104) Net debt at beginning of year (22,998) (20,894) Net debt at end of year (23,637) (22,998) NOTES 1. Segmental Analysis Geographical analysis of turnover by destination 2001 2000 Â£000 Â£000 United Kingdom 13,970 14,189 United States of America 41,872 39,783 Canada 1,683 1,838 Europe 8,174 9,319 Australasia and the Far East 5,793 6,383 Rest of the World 2,128 2,052 73,620 73,564 Turnover and operating profit before amortisation of goodwill and exceptional items Operating profit before amortisation of goodwill and exceptional items Turnover 2001 2000 2001 2000 Â£000 Â£000 Â£000 Â£000 Class of business Co-edition publishing 41,570 43,472 5,044 5,429 Publishing 32,050 30,092 2,295 1,902 73,620 73,564 7,339 7,331 Group overheads (1,142) (1,243) 6,197 6,088 2. Exceptional items comprise a bad debt write-off (2000: restructuring costs with regard to the co-edition businesses). 3. Dividends comprise: 2001 2000 Â£000 Â£000 Non equity: Preference: 447 455 Equity: Ordinary: Interim 395 395 Final proposed 453 412 1,295 1,262 The Board proposes a final dividend of 2.53p net (2000: 2.3p) per share of common stock of par value US$0.10 each ('ordinary shares') which is expected to be paid on 22 May 2002 to shareholders on the register on 26 April 2002. 4. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to common stock holders by the weighted average number of shares in issue during the period, excluding those held as treasury stock. For diluted earnings per share, the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential shares of common stock. These represent share options granted to employees where the exercise price is less than then weighted average market price of the Company's shares during the period and preference shares which are convertible into shares of common stock. Underlying earnings per share figures are presented. These exclude the effects of exceptional items and goodwill amortisation. 2001 Per 2000 Per Weighted Share Weighted Share Average Amount Average Amount Number of Pence Number of Pence Earnings Shares Earnings Shares Â£000 Â£000 Basic earnings per share 2,091 17,925,306 11.7 2,368 17,925,306 13.2 Effect of dilutive options - 4,138 - - 47,396 - Diluted earnings per share 2,091 17,929,444 11.7 2,368 17,972,702 13.2 Underlying earnings per share figures Basic earnings per share 2,091 17,925,306 11.7 2,368 17,925,306 13.2 Effect of: Exceptional items 1,200 17,925,306 6.7 457 17,925,306 2.6 Goodwill amortisation 74 17,925,306 0.4 58 17,925,306 0.3 Basic earnings per share before goodwill 3,365 17,925,306 18.8 2,883 17,925,306 16.1 amortisation and exceptional items Underlying basic earnings per share 3,365 17,925,306 18.8 2,883 17,925,306 16.1 Effect of: Dilutive options - 4,138 - - 47,396 - Dilutive preference shares 447 3,086,414 14.5 455 3,122,414 14.6 Diluted underlying earnings per share before goodwill amortisation 3,812 21,015,858 18.1 3,338 21,095,116 15.8 and exceptional items 5. The financial information contained in the preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 December 2001 or 2000 but is derived from those accounts. Statutory accounts for 2000 have been delivered to the Registrar of Companies; those for 2001 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts, their reports were unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. 6. The Annual Report will be sent out to shareholders in early March. Additional copies can be obtained from the Finance Director, The Quarto Group, Inc., the Old Brewery, 6 Blundell Street, London, N7 9BH. Tel: 020 7700 9000, (email: mickm@quarto.com). This information is provided by RNS The company news service from the London Stock Exchange

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