Trading Update

Quarto Group Inc
08 January 2007



Monday January 8, 2007

 
 

                             THE QUARTO GROUP, INC                              

                  Trading Update and Bankruptcy of a Customer                   

                                                                                
Quarto, the fully listed independent book producer and publisher based in
London, announces that one of its Quarto's significant US customers, Advanced
Marketing Services, Inc, (AMS) has filed for protection under Chapter XI of the
Bankruptcy Code.

 
AMS, which has been in business since 1982, and is publicly traded, is the
principal supplier of books to the warehouse club market (Costco, Sams, and
BJ's), publishes proprietary books under its own imprints and, through its PGW
unit, provides a full range of book marketing and distribution services to
smaller publishers.

 
For the year ended March 31, 2003, AMS's audited results showed revenue of $912
million, pre-tax income of $18.4 million, and a net worth of $141.9 million. In
July 2003, certain practices of its advertising department came under the
scrutiny of the US Attorney and led, ultimately, to the successful prosecution
of three individuals. Since the 2003 financials, no audited financials have been
published and the company's shares have been traded on the 'Pink Sheets'.
Another consequence of this investigation was that the warehouse clubs
diversified their sourcing, giving market share to other suppliers. Guidance
given by the company in the interim period indicates that sales for FY 2005 were
$823 million, and that they are currently running at an annualized rate of
between $700 and $750 million.

 
Quarto has traded with AMS for almost 20 years but, in light of the paucity of
financial information, reduced its level of sales in the last several years. For
the year ended December 31, 2006. Quarto's sales to AMS were £2.3 million,
heavily weighted to the last four months of the year. Until the filing, AMS had
been current with their payments, and the filing was entirely unexpected, as
there were no signs of cash flow difficulties.

 
AMS's filing indicates that the top 40 creditors are owed approximately $224
million. The five largest creditors listed are owed a total of $135 million.
Quarto's receivable is £1.6 million, including goods-in-transit to the value of
approximately £300,000, for which payment will be made on delivery, leaving a
net pre-petition receivable of approximately £1.3 million.

 
In the preliminary announcement of its results for the year ended December 31,
2006, Quarto will provide, as a separately identified exceptional item, for the
estimated uncollectible part of its debt from AMS.

 
'While this news is a setback , it should not be allowed to overshadow the
considerable progress and achievements that the group has made in 2006', said
Michael J Mousley, Quarto's Chief Financial Officer. 'Although it's too early
after the end of our financial year for us to update shareholders on 2006
results, we were anticipating that our results, before the exceptional item,
would be substantially in line with our previous expectations.
Encouragingly, it's worth noting that, in spite of not receiving expected
end-of-year payments of some $1.5 million from AMS, Quarto's cash generation was
close to target.

 
'The impact on Quarto's business, going forward, is not easy to assess at this
early stage. The warehouse clubs have rallied to the support of AMS, and view
AMS's expertise in supplying books as essential to their own book selling
operations. There is every possibility that the business may be split up and
sold, as several parties have indicated strong interest in all or parts of the
business now that it's in bankruptcy proceedings; or that it could emerge from
bankruptcy reorganization. AMS has received court approval for $75 million of
debtor-in-possession financing, which it believes is adequate for its short-term
needs, and is in line with the credit facility with which AMS had been operating
for the past several years. It has also resolved its issues with the federal
authorities. But, we shall have to await further financial information from AMS
before determining how Quarto might continue to trade with the company in the
future, other than on a COD basis.'

 
Notes for Editors:
 
Quarto is an international book producer and publisher with two principal
strands of activity: it publishes, under imprints owned by the Group, books and
art prints in the US, the UK, and Australia; and it creates books that are
licensed to other publishers for publication under their own imprints in many
languages around the world.
 
In 2005, Quarto increased adjusted pre-tax profit by 12% to £6.6m and reported
adjusted diluted earnings per share of 20.8p (21.5p at constant tax rates, which
would have represented a seventh successive annual increase).

 

Enquiries:

Bankside Consultants Ltd           
Charles Ponsonby                                          020-7367 8851 

 

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