Final Results - Year Ended 31 December 1999

Quarto Group Inc 22 February 2000 THE QUARTO GROUP - 1999 PRELIMS ' Our major markets remain buoyant....I am confident that, in 2000, we shall see an improving trend' * Quarto, the London based and listed global co-edition publisher, announces that, for the year ended 31st December 1999, underlying pre-tax profits increased 48.9% and, at £4.11 million, are ahead of expectations. 1999 1998 Increase as restated Sales (£m) 76.5 74.6 +2.5% Operating profit (£m) 5.83 4.72 +23.5% Pre-tax profit (£m) 4.11 2.76 +48.9% Headline earnings per share (p) 15.8 4.9 +222.4% Dividends per share (p) 4.5 4.5 - Excluding Broughton Hall, whose operations were discontinued in November 1998 * The International Co-Edition Publishing Division's sales increased 3.8% to £47.1 million. Operating profit rose 18.0% to £5.81 million. The operating margin increased to 12.3% from 10.8% -well ahead of consumer book publishing industry norms. * A combination of sharper publishing criteria, new creative appointments, and robust cost controls improved overall performance. A new co-edition list, Global Publishing, was launched. It has a strong programme and substantial advance orders for the current year. * The Publishing Division's sales were up 0.5% at £29.4 million. Operating profit increased 22.3% to £1.21 million. * Strong cash generation during the year resulted in a reduction in external debt, on a constant currency basis, of £3.3 million. * Quarto published more than 250 new book titles in 1999, extending still further its extensive content base, which already runs to over 3,000 titles. We have launched iQu- digital.com as a vehicle to co-ordinate the internet exploitation and licensing of this valuable resource. Books were sold to publishers in 35 different countries in 25 languages, underlining the global nature of the business and Quarto's leading role as a producer of quality illustrated non-fiction books and book-related material. * Laurence Orbach, Chairman and Chief Executive, stated; ' Our major markets remain buoyant, the calibre of our publishing programmes has risen, and we have a stronger overall management team. Our new initiatives have made encouraging starts. I am confident that, in 2000, we shall continue the improving trend'. There will be an analyst meeting at 11.00 a.m. today at Bankside Consultants, 123 Cannon Street, EC4. This announcement and other investor-related information is available at www.quarto.com. Enquiries: The Quarto Group, Inc. 0171-700 9000 Terry Hancock (Chief Operating Officer) 0171-700 9015 Email: terryh@quarto.com Mick Mousley (Chief Financial Officer) 0171-700 9005 Email: mickm@quarto.com Bankside Consultants Limited 0171-220 7477 Charles Ponsonby Email: charles@bankside.co.uk CHAIRMAN'S STATEMENT FINANCIAL OVERVIEW At the time we released our interim statement, in September, I wrote that there were tangible signs of improvement in our business. I am pleased now to report that, for the year ended 31st December 1999, sales were up by 2.5% to £76.5 million (1998: £74.6 million), pre-tax profit was 48.9% higher and, at £4.11 million (1998: £2.76 million), was ahead of market expectations. Overall operating margins improved to 7.6%, compared with 6.3% in 1998. This translated into a 23.5% increase in operating profit to £5.83 million (1998: £4.72 million). The accounting policy changes that were announced at the interim stage have reduced our tax bill. The improved trading results and the reduced tax charge led to a more than threefold surge in headline earnings per share to 15.8p (1998: 4.9p). All these figures exclude the US directory publisher, Broughton Hall, whose operations were discontinued in November 1998. In the 1999 interim results we recorded an exceptional charge of £5.23 million for Broughton Hall, which included a goodwill write-back of £4.94 million that affected neither net assets nor cash. For comparative purposes, the 1998 figures have been re-stated to reflect the accounting policy changes introduced during the current year. During the year, we worked assiduously to reduce our external debt and improve our working capital management. By the end of the year, debt had declined by a net £2.9 million, working capital as a percentage of sales fell by 4%, and overheads were down by 1%. The new accounting policy changes helped us to sharpen the focus of our publishing programmes. This has resulted in a much better return on new titles. They also helped our list publishers to focus on producing improved ranges of books: a virtuous combination that augurs well for the future. DIVIDENDS The Board is recommending an unchanged final dividend per ordinary share of 2.3p, making a total for the year of 4.5p (1998: 4.5p). If approved at the Annual General Meeting on 27th April 2000, the dividend will be paid on 5th May 2000 to shareholders on the register at the close of business on 7th April 2000. TRADING REVIEW During 1999, Quarto reorganised from four divisions into two: International Co-edition Publishing, and Publishing, in order to reflect more appropriately our core activities. International Co-edition Publishing Division Co-edition publishing remains at the heart of the Group. In 1999 the division produced 62% of Group revenue (1998: 61%) and over 200 new book titles were published. The seven, separate lists that comprise the division produce titles in the how-to and self-improvement areas, specialising in art, crafts, gardening, self-help, health, photography, and design, all produced for adults, and inter-active books aimed at both children and adults. The largest single market in 1999 was North America (38%), followed by Europe (34%), the UK (15%) and the rest of the world (13%). In addition to these book imprints, our Far Eastern-based pre-press and print broking businesses were merged into this division in 1999 and produced many titles for Group and third party clients. The strategic and operational reviews that we undertook in 1999 yielded immediate benefits. Operating profits for the division rose 18% to £5.81 million (1998: £4.92 million) on sales 4% higher at £47.1 million (1998: £45.4 million). Equally gratifying, the operating margin rose to 12.3% (1998: 10.8%), indicating that we are making good progress towards our divisional target of 15%, and is already ahead of the norms in the consumer book publishing industry. There were a number of key initiatives in 1999: * New publishing appointments were made at Quarto, Quarto Children's Books, Quantum, and Rockport. In addition, we recruited Gordon Cheers, from Random House in Australia, to establish our new Global Publishing list. This resulted in a substantial improvement in the overall creative skills in the division, and the relevance of our publishing programmes. * We refined our publishing criteria to ensure that our investments in new books yield acceptable returns and that titles subsequently have an enduring shelf life. As a result, we saw an average 40% improvement in the investment return on new titles. Reprints continue to comprise over two-thirds of total revenue. * We re-doubled our efforts at controlling our costs, and we improved our operating performance generally. In 1999, divisional gross margins rose by 2%, as pre-press costs declined. Printing costs rose only marginally, and overheads were tightly controlled. At Quarto Adult, we had much success with our self-help titles, as well as more traditional titles, emphasising the range of the list. Quintet consolidated its reputation for stylish cookery, craft, and lifestyle books. At Quarto Children's, our established educational pre-school and juvenile ranges continued to grow their already substantial sales. We added several innovative, colourful, new titles and series to these. Design Eye publishes highly innovative kit books for both adults and children. Sales in 1999 reached almost £11 million, and operating profits rose to a new high. These excellent achievements owed much to the vision and energy of one of the founders of Design Eye, Michael Tout, who died unexpectedly and tragically at the early age of 42 on 16th August 1999. We feel his loss very deeply and hope that we can continue to do justice to his legacy. In July, we established a new list, Global Publishing. Its mission is to publish definitive reference books, with as many as 1,000 pages per title, over a broad range of subject areas. In 2000, we will be publishing Anatomica, the most definitive, illustrated, family reference book on the human body yet published. This will be followed by the Global Wine Encyclopaedia. These titles have attracted very substantial pre-publication orders from leading publishers around the world. As each of these productions contains around 1 million words and a vast resource of photographs and illustrations in digital form, we are negotiating with a number of companies to make our extensive material available on the Internet. We have widened the publishing programmes at both Rockport and RotoVision, our graphics and commercial art publishing units. Rockport's operating profits rose considerably on level sales. At RotoVision, sales advanced substantially, and cash generation improved. Hong Kong-based Regent and Singapore-based ProVision provide important services to the Group and third parties, using their local presences to leverage competitive print buying and exercising close quality control. Publishing Division The Publishing Division now includes our book, magazine, and art publishing imprints, in addition to the UK-based screen printing businesses. We have operations based in the United States, the UK, and Australia that work largely within their respective domestic markets. Divisional performance is stated on a like-for-like basis. Sales increased by 0.5% to £29.4 million. Operating profits advanced by 22.3% to £1.21 million, helped by better inventory management and reduced overhead. The operating margin for the division increased to 4.1% (1998: 3.4%). New product lines at our book publisher, Walter Foster, and the art publishing businesses, were well received. The UK- based screen printing businesses, AP and Western, which produce point of sale and display material for the retail trade, produced record results, with substantial gains in turnover and profit. Our Artist's and Illustrator's Magazine maintained its market-leading position in the UK. In Australia, our art publishing business made considerable strides. Successful new print ranges, and a rigorous focus on overheads, virtually eliminated the 1998 operating loss. In the USA, our art publishing business also improved, but remained loss making. We anticipate a significant improvement in 2000 although there is much more work to be done to produce the kind of profit returns we have traditionally earned in this line of business. In 1999, overheads were reduced further. We combined back office operations and unified the management of the lists by appointing, from within the business, a new CEO for the whole operation. We also took steps to reposition our lists away from less profitable mass market areas and extend our new higher value ranges. Book Sales, our promotional publisher in the USA, did less well than in 1998. The focus on improving margins and cash generation was probably a little too intense. The consequence was that sales declined slightly, and this produced lower operating profits. We have already responded to this by increasing the level of third party business, and encouraging a wider publishing range. INTEREST AND INDEBTEDNESS The interest charge for the year was £1.72 million (1998: £1.93 million). Interest cover increased to 3.4 times (1998: 2.4 times). Year-end debt was down by £2.9 million, to £20.9 million (1998: £23.8 million). We were comfortably within our banking covenants and facilities. We expect further debt reductions in the current year. THE INTERNET The Internet is having a transforming and revolutionary impact on business. Most of Quarto's commercial activities are business to business. We have no measurable public 'face' and sell our products to other publishers and distributors. For some years we have recognized that there is a market for our material in a number of digitized and electronic outlets. Quarto, unlike most book publishers, has always had a policy of owning, rather than licensing, most of the content in our books. This, coupled with the fact that our archive is, in this respect, much vaster than most other publishers, puts us in a very strong position to benefit from the growth of e-commerce. Many investors have not appreciated that very few book publishers 'own' what they publish: they are merely licensed by authors to exploit the content in book form. In this respect, Quarto is very different and our content archive is potentially very valuable. Quarto is already exploiting this archive, and is deriving useful additional revenue at very low cost. At this stage, we have taken the view that to digitize older portions of our archive would not be cost-effective but we are happy to license it to other merchants, for a fee, for them to digitize it at their expense. We have established iQu-digital.com as a vehicle to co-ordinate the exploitation and licensing of this valuable asset. PROSPECTS After two years of relative disappointment in 1997 and 1998, we see a bright future ahead. We have largely concluded the extensive strategic and operational reviews we commenced at the beginning of 1999. Some of the early benefits of this programme are reflected in these results. We expect that further progress from these initiatives will materialize in the current year. Our major markets remain buoyant, the calibre of our publishing programmes has risen, and we have a stronger overall management team. We have further remedial work to complete in our art publishing business, but have a clear strategy for improvement here. Elsewhere, our new initiatives, in particular, Global Publishing, have made encouraging starts. I am confident that we shall continue the improving trend in 2000 and thank our staff, suppliers, and customers for their good work in 1999. Laurence F Orbach Chairman THE QUARTO GROUP, INC. PROFIT AND LOSS ACCOUNT for the year ended 31 December 1999 1998 1999 (as restated) £000 £000 Turnover: Continuing operations 76,456 74,581 Discontinued operations - 4,575 ------ ------ 76,456 79,156 ====== ====== Gross Profit 25,932 27,275 Net operating expenses (20,107) (22,261) Amortisation of goodwill (12) - ------ ------ Operating Profit: Continuing 5,813 4,715 operations Discontinued operations - 299 ------ ------ 5,813 5,014 Share of loss of associate - (20) Exceptional item: Closure of (5,230) (580) Broughton Hall ------ ------ 583 4,414 Net interest payable (1,716) (1,931) ------ ------ (Loss)/profit on ordinary activities before taxation: Continuing operations 4,109 2,764 Amortisation of goodwill (12) - Exceptional items (5,230) (580) Discontinued operations - 299 ------ ------ (1,133) 2,483 Taxation (390) (849) ------ ------ (Loss)/profit on ordinary activities after taxation (1,523) 1,634 Minority interests - equity (440) (555) ------ ------ (Loss)/profit for the financial (1,963) 1,079 year Dividend (including non-equity) (1,262) (1,278) ------ ------ Deficit for the financial year (3,225) (199) ====== ====== Earnings per share (13.5)p 3.3p ====== ====== Underlying earnings per share 15.8p 4.9p ====== ====== Diluted earnings per share (9.3)p 3.3p ====== ====== Diluted underlying earnings per 15.6p 4.9p share ====== ====== THE QUARTO GROUP, INC. CONSOLIDATED BALANCE SHEET as at 31 December 1999 1998 1999 (as restated) £000 £000 Fixed assets Goodwill 792 - Tangible assets 6,341 6,408 ------ ------ 7,133 6,408 ------ ------ Current assets Stocks and work in progress 16,849 17,889 Debtors 26,243 29,021 Investments 1 1 Cash and deposits 9,567 5,355 ------ ------ 52,660 52,266 Creditors: Amounts falling due (26,362) (27,884) within one year ------ ------ Net current assets 26,298 24,382 ------ ------ Total assets less current 33,431 30,790 liabilities Creditors: amounts falling due (29,833) (28,496) after more than one year Provision for liabilities and charges Deferred taxation (1,151) (1,188) ------ ------ Net assets 2,447 1,106 ====== ====== Capital and reserves Called up share capital 1,341 1,341 Reserves - paid in surplus 23,891 23,891 - revaluation 1,018 1,018 - profit and loss (26,097) (27,278) Treasury stock (461) (461) ------ ------ Shareholders' funds (308) (1,489) ------ ------ Equity (5,512) (6,693) Non equity 5,204 5,204 ------ ------ (308) (1,489) Minority interests - equity 2,755 2,595 ------ ------ 2,447 1,106 ====== ====== THE QUARTO GROUP, INC. CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 1999 1999 1998 £'000 £'000 Net cash inflow from operating 8,259 5,907 activities ------ ------ Net cash outflow from return on (2,191) (2,417) investment and servicing of finance ------ ------ Taxation (594) (678) ------ ------ Capital expenditure (465) (878) ------ ------ Acquisition and disposals (67) 30 ------ ------ Equity dividends paid (928) (955) ------ ------ Management of liquid resources Movement of short term deposits (1,418) 105 ------ ------ Financing Purchase of shares - (461) Movement in debt 478 855 ------ ------ Net cash flow from financing 478 394 ------ ------ Increase in cash 3,074 1,508 ------ ------ Reconciliation of net cashflow to movement in (debt)/funds Movement in cash 3,074 1,508 Movement in debt (478) (855) Management of liquid resources 1,418 (105) ------ ------ 4,014 548 New finance leases (726) (139) Translation differences (364) 221 ------ ------ Net cash inflow 2,924 630 ------ ------ Movement in debt for year Net debt at beginning of year (23,818) (24,448) ------ ------ Net debt at end of year (20,894) (23,818) ------ ------ NOTES 1. The financial information contained in the preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 December 1999 or 1998 but is derived from those accounts. Statutory accounts for 1998 have been delivered to the Registrar of Companies; those for 1999 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. The accounts for the year ended 31 December 1999 have been prepared using accounting policies consistent with the previous year with the exception of the change in accounting policy with regard to the development cost of books as set out in note 2 below. 2. The accounting policy of capitalising the development costs of books and amortising them over the estimated economic life of the books (not more than three years) was changed during the year. The Directors consider the new policy of charging all development costs against the first printing of a book to be a more appropriate and fair presentation of the results and financial position of the Group. The comparative figures have been restated to reflect the new policy, the effect of which is as follows: a) The consolidated operating profit and profit on ordinary activities before taxation for the year ended 31 December 1998 were reduced by £1,196,000 and the consolidated net assets at 31 December 1998 were reduced by £13,315,000. b) Had the Group continued to adopt the old policy, the consolidated operating profit and profit on ordinary activities before taxation for the year ended 31 December 1999 would have been lower by £269,000 and the consolidated net assets at 31 December 1999 would have been higher by £12,906,000. 3. The exceptional item comprises the closure costs on Broughton Hall. It includes £4,937,000 relating to the goodwill previously written off to reserves on acquisition. 4. Dividends comprise: 1999 1998 £'000 £'000 Non Preference 455 455 equity: Equity: Ordinary: Interim 395 411 Final 412 412 proposed ------ ------ 1,262 1,278 ====== ====== The Board proposes a final dividend of 2.3p net (1998: 2.3p) per share of common stock of par value US$0.10 each ('ordinary shares') which is expected to be paid on 5 May 2000 to shareholders on the register on 7 April 2000. 5. The calculation of earnings per share is based on 17,925,306 shares (1998: 18,644,484) and a loss, after minority interests and preference dividends, of £2,418,000 (1998: profit of £624,000). The calculation of underlying earnings per share is based on earnings of £2,824,000 (1998: £905,000) calculated as follows: 1999 1998 £'000 £'000 Earnings after minority interest and (2,418) 624 preference dividends Exceptional items 5,230 580 Amortisation of goodwill 12 - Earnings of discontinued operations - (299) ------ ----- 2,824 905 ====== ===== Diluted earnings per share is based on 21,063,732 shares (1998: 18,653,004) and a loss, after minority interests, of £1,963,000 (1998: profit of £624,000). Diluted underlying earnings per share is based on 21,063,732 shares and earnings of £3,279,000 (1998: 18,653,004 shares and earnings of £905,000). 6. The Annual Report will be sent out to shareholders in due course. Additional copies can be obtained from the Company Secretary, The Quarto Group, Inc., The Old Brewery, 6 Blundell Street, London, N7 9BH.

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