Final Results

19th Sep 2006 07:01

Finsbury Food Group PLC19 September 2006 Date: 19 September 2006On behalf of: Finsbury Food Group plc ("Finsbury" or "the Company")Embargoed: 0700hrs Finsbury Food Group plcFinal Results 2006 Highlights of the year ended 30 June 2006 • Total revenues of £73.3m (2005: £59.3m) up 24%• Profit before tax and exceptional items of £2.4m (2005: £1.5m) up 60%• Normalised basic earnings per share of 7.4p (2005: 4.5p)• Dividend increased by 25% with a recommended dividend of 1.5p per share• Acquisition of California Cake Company Ltd, Campbells Cake Company Ltd and United Central Bakeries Ltd during the year• Two major capital expenditure programmes were completed within Memory Lane Cakes Ltd• A dedicated, segregated gluten free production facility was completed at United Central Bakeries Ltd Commenting on the results, Dave Brooks, Chief Executive of Finsbury, said: "This has been a good year for the Group. Our existing businesses have made goodprogress this year; we have completed the remodelling of the Memory Lane Cakesand Nicholas & Harris core businesses, and also broadened our range ofproduction capability via our three acquisitions in Scotland and capitalinvestment in Memory Lane Cakes. As we have gone through this process, we havebeen highly focused on operational excellence within our bakeries. "All of this activity has been running in parallel with a huge amount ofinnovation. Much of this has now been launched or will be launched in early2007, with the focus being on premium and health-orientated products. Newinitiatives are now in place to build upon this in 2007 and beyond. "I believe that we have positioned ourselves in the growing sectors of the UKcake, bread and morning goods markets and that we have strong, well-runbusinesses which are well set for coping with the growth which I expect theywill achieve over the next twelve months. I therefore look forward to the comingyear with confidence and a great deal of excitement." For further information: Finsbury Food Group Plc www.finsburyfoods.co.ukDave Brooks (Chief Executive) 07831 787 382John Lomer (Finance Director) 0777 888 9977Lisa Morgan (Finance Director Designate) 07771 712 720 Redleaf CommunicationsEmma Kane/Sanna Lehtinen/Susan Quigley 020 7822 0200 • Publication quality photographs are available via Redleaf Communications on the numbers shown above Chairman's Statement This has been a good year for the Group. November 2005 saw the acquisition ofour three new Scottish subsidiaries, which have been able to contribute to thesolid results that the enlarged Group has delivered for the year. Our existing businesses have made good progress this year with Memory Lane CakesLtd completing its new premium small cake processing line in order to produce acompletely new range of products, and Nicholas & Harris Ltd achievingsignificant listings with two additional multiple retailers. This would not have been possible without the support of our excellentmanagement teams and their committed colleagues across the bakeries. On behalfof the Board I would like to express our thanks to every one of our employeesfor the part they have played. Financial results • Turnover up 24% to £73.3m (2005: £59.3m) • Operating profit up 75% to £2.8m (2005: £1.6m) • Profit before tax and exceptional items up 60% to £2.4m (2005: £1.5m) • Normalised earnings per share up 65% to 7.4p (2005: 4.5p) Dividend The Directors recommend an increase in the dividend distribution to 1.5p pershare for the year (2005: 1.2p per share) in accordance with the Group'sprogressive dividend policy. Staff and directors I am delighted to welcome Lisa Morgan, who joins the Board as Group FinancialDirector on the 1st October 2006 and replaces John Lomer, who has decided toleave the business at the end of September to return to consulting on strategicdevelopment. The Board is extremely grateful to John for his contribution overthe last three years and he leaves with our best wishes. He will remain involvedwith the Group until March 2007 to assist in the handover to his successor. Lisais currently Finance Director of Memory Lane Cakes Ltd and brings six yearsexperience within the Group to her new role. Outlook The UK bread and cake markets are worth over £4.5bn between them. We operate inthe premium, indulgent and speciality sectors of those markets and it is inthese areas that the major opportunities for growth and innovation exist. Bycontinuing to follow our principle of being "The Best at What We Do", both indeveloping our current businesses and in acquiring new ones, the Group is wellplaced to capitalise on the current market trends. We are, therefore, pleased to be able to look forward to the coming year withconfidence. Lord SaatchiChairman Chief Executive's Report Welcome to my review of what has been a very active and successful year to June2006 and my look ahead to what lies in store for the Group over the comingmonths. The results for the year are covered in detail within John Lomer'sFinance Director's report although I am proud to highlight an increase in profitbefore tax and exceptional items of 60%, to £2.4m (June 2005: £1.5m). This is atruly splendid performance in a competitive market place and I take thisopportunity to congratulate the whole team here at Finsbury for producing suchexcellent earnings growth. This improved profitability has been the result ofthirty months' hard work, during which time we have: • focused the business into core product areas• built strong foundations for growth• worked with consumers and our customers to deliver exciting new products• clearly defined our mission and objectives Let us begin our journey through Finsbury Food Group plc. Strategy You will have seen and heard our mission many times by now I am sure, and thatis quite simply to be "The Best at What We Do". Our aim is to develop ourcurrent businesses by focusing on stunning innovation, world class servicelevels and consistent product quality. It is my firmly held belief that if youget all these things right, and combine them with a competitive pricingstructure, then you have every opportunity of not only retaining your currentbusiness but also achieving steady growth as customers gravitate towards thecentre of excellence. However, fail in any one facet and you are likely to losebusiness - and, indeed, probably deserve to. We are also keen to develop our Group by adding complementary businesses thatmeet our strict acquisition criteria. We seek to find companies which: • either lead or have the potential to lead their market sector;• possess strong management teams;• have the UK's multiple grocers as their core customers; and• have bakery capacity available to implement growth plans. Our Markets Our aim is to operate in the growing sectors of large markets. According to thelatest Mintel reports the ambient cake market is worth £1.47bn and is growing by3% per annum, whilst the bread and morning goods market is worth £3.1bn withsimilar growth rates. Volumes consumed are fairly flat, although the movetowards premium products continues to drive market growth. Consumers are moving towards eating in a more health conscious way, though theyalso have the desire to indulge on a regular basis. Our focus on meeting thesedemands will give us every opportunity to grow our business ahead of headlinemarket-growth rates. Healthy Eating This is a big issue and a matter we take very seriously. However, the UKconsumer is quite sophisticated and also very demanding. So it's not just aboutcutting out fats and reducing calorie intake but more about achieving a balance. As noted in the previous section, consumers are becoming more health consciousbut do still want to treat themselves. We work hard to ensure that we have arange of products with as many virtues as possible, most important of which isthat they must taste great! Over the past few months, and continuing through the next year, we will beseeking to remove all hydrogenated fats from our range and to minimise the useof artificial colours and flavours particularly in products likely to beprimarily consumed by children. Additionally we will continue to develop newlow-fat cakes that are just as good as standard cakes, grow our gluten-freerange to offer those consumers, who wish to remove gluten from their diet,quality products, and continue to develop our organic capability. Our Businesses The Group commenced the financial year with two trading subsidiaries and closedit with five, following our three acquisitions in November 2005. Memory Lane Cakes Limited Our largest subsidiary with sales of £50.5m in the year to June 2006 (June 2005:£50.3m). Whilst in headline terms sales appear flat, our underlying growth inthe ongoing core business is 5%. This takes account of the fact that the year toJune 2005 includes an element of low-margin contracts which we chose to exit aspart of our strategic review. The business supplies all but one of the UK's major multiple grocers and isfocused on premium retailer brands (eg, Tesco's Finest and Sainsbury's Taste TheDifference), celebration cakes and better-quality small cakes for children andadults. The last twelve months have seen two major capital installations within theMemory Lane business. The first was to automate the processing of our spongecakes, which has freed up labour to work on more value-added activity; and thesecond was the £1m investment in the new small-cake line, which will producemini versions of our premium whole cakes. I am delighted to report that both ofthese installations have been successfully commissioned and are contributing inline with expectations. In the year ahead, this business will concentrate on promoting operationalexcellence to ensure that we are as efficient as possible and also to continueto drive innovation in our core product areas. June 2006 saw the Group reach the halfway stage in its five-year agreement withNestle (UK) Ltd, to develop a cake offering utilising their confectionerybrands. The growth has slowed within this area, as it is the only part of thebusiness directly affected by the unusually aggressive promotional activity ofour competitors. Sales for the year (which are also included in the salesnumbers above) were £8.4m, which showed a 12% increase on the previoustwelve-month period. Smarties remains the most powerful brand in the portfolio and the recent Nestlecampaign to support its children's brands, which have been relaunched with allartificial colours removed, will generate additional interest in our cake range.This range will also be boosted by a number of new product launches in the nextsix months. Nicholas & Harris Limited Purchased in 2003, this is our original bread subsidiary with sales in the yearto June 2006 of £9.1m (June 2005: £9.0m). As with Memory Lane, this business hasbeen re-engineering its product mix by exiting non-core activities. Theunderlying growth is therefore 9%. The last twelve months have seen major commercial developments within Nicholas &Harris and whilst Waitrose remains its core customer, there has been encouraginggrowth with other multiple grocers. The majority of this growth is being driven by the organic capability of thisbusiness. Our ability to produce excellent products in relatively short batchruns is a key selling point which all of the premium grocers are interested inutilising to develop their consumer offering. We believe this trend willcontinue and it offers significant growth opportunities with all of ourcustomers over the next twelve months. California Cake Company Limited Joining the Group in November 2005 this subsidiary has generated sales of £7.9min the 32 weeks to June 2006. With its prime focus on low-fat cake slices, thissubsidiary forms an important part of our health offering. Over the past twelve months, the low-fat cake market in the UK has stabilised.We are therefore seeking new avenues for our product portfolio and are workingclosely with Nestle to deliver a range of confectionery-branded products. Inaddition we will be seeking organic accreditation for this site to offer a rangeof top-quality organic individual portion products. Campbells Cake Company Limited This is our smallest subsidiary and was also purchased in November 2005. In the32 weeks to June 2006, Campbells contributed £1.4m of sales to the Groupturnover. In relation to the whole of the Group, this is a relatively small business.However, the range of cold set products (such as caramel shortcake) that itproduces perfectly complements the range of whole cakes and individual cakesfrom Memory Lane. This broadened capability has been able to deliver a dominantmarket position in premium retailer brands. As we expect this trend to premium products to continue, the opportunity fordevelopment within this site remains strong. United Central Bakeries Limited Last but not least we come to UCB, the third subsidiary purchased in November2005, which contributed sales of £4.5m in the 32 weeks to June 2006. UCB has become a hybrid bakery within the Group as it produces a range ofcake-based products (such as yum yums and Scottish festive cake), gluten-freespeciality breads and morning goods, potato cakes and a range of morning rolls. The gluten-free market is a particularly interesting opportunity. According tothe latest Mintel report, the gluten-free market is currently worth £49m perannum and is expected to double by 2010. We have invested nearly £0.3m in thephysical segregation of our plant and we believe we have not only got themarket-leading range of speciality breads in the gluten-free sector, but alsothe largest and most modern gluten-free bakery in the UK. Listings of our coregluten-free products have been secured with each of the four largest majormultiples, and we expect further growth in this segment. As with the California Cake business, we will be seeking organic accreditationfor this site to produce a range of organic morning goods to complement theNicholas & Harris capability and organic cake products to support theopportunity in that market. We see UCB leading our health developments over thecoming months, supported by California Cakes and Nicholas & Harris with theirrespective ranges. People All good businesses are based on the strength and depth of the teams thatoperate within them. I am delighted to report that we have first class teams ateach of our operating subsidiaries. The people who have joined the Group in thepast twelve months have already proven their worth. I would like to take this opportunity to formally welcome all of our colleaguesin Scotland who joined us in November 2005 when we acquired three businessesnorth of the border. They are led by Archy Cunningham who is now ManagingDirector of all three, having previously run UCB for seven years. He has anexcellent management team at each site that retains overall responsibility forthe profitability of that business. I am also extremely pleased to have managed to recruit Mike Woods as our newManaging Director for Memory Lane Cakes. Mike was previously with RHM plc andhas worked in the cake sector for five years. He has been warmly welcomed by themanagement team at Memory Lane and has been a valuable asset, excelling inproject management in relation to our capital expenditure programme and peopleskills, as we continue to move the business forward. Mike's appointment has freed up Phil Batchelor, the previous Managing Directorof Memory Lane Cakes, to become Group Commercial Director. In this role he hasfocused on developing our consumer knowledge, building the product offering andestablishing market positioning with each of our customers. This extra depth hassignificantly added to our credibility in the sector. I am sure his influencehas played a key part in our development as the dominant player in the premiumcake market in particular. Finsbury Food Group and its subsidiaries are committed to the internal promotionof its own people whenever this is possible. As a good example of this policy,we are proud to confirm Lisa Morgan's appointment as our Group Finance Directorwith effect from 1st October 2006. Lisa has worked her way up through theaccounting function of Memory Lane Cakes from the role of Commercial Accountantto that of Finance Director. She has six years experience in that business andhas a thorough understanding of all operational, accounting and commercialissues. I am sure that experience will be of great use to all of oursubsidiaries and will give great comfort to all of our external stakeholders. The present Group Finance Director, John Lomer, will be leaving the Group at theend of September, although he will be remaining in a consultancy capacity forthe next six months on a part-time basis to assist in a full and appropriatehandover to Lisa. John has played an instrumental part in the initialdevelopment of the Group by gaining credibility with the investment communityand building a presence with our funding partners. He leaves us to return tostrategic consultancy with our best wishes and deepest thanks. Over the past six months we have integrated our sales and marketing function sothat we now operate with a cake division sales team and a bread division salesteam. We have also rationalised our purchasing function to ensure all of ourbusinesses are buying at the best possible rates. Whilst we continue to believein independent subsidiaries, it is sensible to streamline these activities tomaximise efficiency for ourselves, our multiple grocer customers and oursuppliers. I am firmly of the belief that the team we now have within Finsbury Food Groupgives us the strongest foundation for continuing to drive the Group forward. Market Environment With our customer base of the UK multiple grocers, we are always going to beoperating in a demanding market. However, this is a market which we relish asour team are experienced in managing their requirements and, we believe the coreskills we have developed give us very strong alignment with their strategicaims. It is also the case that when we succeed in our aim to be "The Best at What WeDo", we will grow market segments to such a level that there will be interest inentering those areas from our competitors. Our focus will remain on retainingand strengthening our leading position. Supply-side pressures are closely monitored and, as with many businesses, wehave suffered significant increases in energy bills over the past eighteenmonths. With our constant stream of innovation, we have been able to absorbthese thus far and will continue to work with our customers to ensure that theimpact on future profitability is mitigated. Summary and Outlook The year to June 2006 has seen a significant amount of strategic activity withinthe Group. We have completed the remodelling of the Memory Lane Cakes andNicholas & Harris core businesses, and also broadened our range of productioncapability via our three acquisitions in Scotland and capital investment inMemory Lane Cakes. As we have gone through this process, we have been highly focused on operationalexcellence within our bakeries, streamlining our commercial functions for themost efficient use of our people's time and, gaining a strong control of ourdiscretionary costs to ensure a close alignment between added value andexpenditure. All of this activity has been running in parallel with a huge amount ofinnovation. Much of this has now been launched or will be launched in early2007, with the focus being on premium and health-orientated products. Newinitiatives are now in place to build upon this in 2007 and beyond. I believe that we have positioned ourselves in the growing sectors of the UKcake, bread and morning goods markets and that we have strong, well-runbusinesses which are well set for coping with the growth which I expect theywill achieve over the next twelve months. I therefore look forward to the comingyear with confidence and a great deal of excitement. Dave BrooksChief Executive Finance Report Trading results Group sales were £73.3m (2005: £59.3m). Excluding the sales from the threeacquisitions, sales from continuing operations were £59.6m (2005: £59.3m). Strong operational performance and a continued focus on higher gross marginproducts yielded an overall gross margin of 40% (2005: 38%). Profit before tax and exceptional charges was ahead of last year by 60% at £2.4m(2005: £1.5m). This was achieved after interest costs of £0.6m (2005: £0.2m). Exceptional costs of £0.3m relate to the disruption and reorganisation costsassociated with major projects following the acquisitions (2005: £1.9mexceptional profit related to the profit from the sale of surplus land at theGroup's Cardiff site). Basic earnings per share (EPS), calculated on the weighted average number ofshares in issue during the year, was 6.6p (2005:13.3p). Normalised EPS iscalculated by adjusting for the effect of exceptional items and is 7.4p for theyear (2005: 4.5p). Taking into account the dilution from warrants and options,diluted Basic EPS is 5.6p (2005: 11.7p) and diluted normalised EPS is 6.3p(2005: 4.0p). Acquisitions During November 2005 the Group purchased California Cake Company Ltd, CampbellsCake Company Ltd and United Central Bakeries Ltd for a combined consideration of£10m, of which £4m was deferred, conditional on achieving performance targets.The deferred consideration has now been paid in full, with the final £0.5m beingpaid to the former shareholders of UCB during July 2006. The transactions werefinanced by a package of debt facilities provided by the Company's bankers. Cash-flow and debt The Group achieved a cash-flow from operations of £3.6m (2005: £4.8m) andcompleted the year with a cash balance of £0.5m (2005: £4.2m). These cash-flows were achieved after taking into account the effects of theincreased working capital requirements of California Cake Company Ltd. Thiscompany was previously owned by Enterprise Foods Ltd, which provided aninvoicing and cash collection service for the business. Under the arrangement,Enterprise Foods Ltd paid California Cake Company Ltd more quickly than standardcustomer terms, and then subsequently collected money from customers. Postacquisition, California Cake Company Ltd deals directly with its retailcustomers and so collects its money on normal commercial terms. This hasresulted in £0.8m of extra working capital being required. The Group is able to offer strong asset backing to secure its borrowings. TheGroup owns the eight acre site at Cardiff, which is held at original cost in thebalance sheet. The Group also owns freehold sites at UCB and Campbells inScotland. Additionally, the Group has a blue-chip trade debtor book, which stoodat £9.9m (2005: £7.2m) at the balance sheet date. The Group has a suite of borrowing facilities provided by HSBC Bank plc andthese are at a blended average cost of 1.42% over LIBOR. These facilities total£21.1m and have been used to finance the acquisitions, and to settle the debtacquired of £5.4m. Included in these facilities the Group has an overdraftfacility of £5m, which was unused at the balance sheet date, and an unused assetfinance line of £1.4m. The Group has entered into two hedge transactions of £5meach, at capped rates of 4.755% and 4.7425% to mitigate against the risk ofincreases in interest rates Taxation The Group corporation tax charge for the year is £0.6m (2005: £0.5m). Thisrepresents an effective rate of 30% (2005: 34%). Capital spending The Group continued its program of targeted capital spending. Total expenditureduring the year was £2.0m (2005: £2.7m). Two major projects were completed atMemory Lane Cakes Ltd at a cost of £1.5m: the automated sponge-processing lineand the automated line to produce mini versions of premium boxed round cakes. At UCB in Scotland the new gluten-free facility was completed ahead of scheduleand below budget at a cost of £0.3m. Pension costs Memory Lane Cakes Ltd operates a defined benefit scheme, which is closed to newmembers. We have previously shown the affect of FRS 17 in note form only and theaccounts for the year to 30th June 2006 are the first time that FRS 17 has beenimplemented in full, with an accompanying re-statement of the prior year. Theimpact has been negligible, with profits increased by only £16,000 (2005:£67,000 charge). Prior Year adjustments The implementation of FRS17 for pensions, as mentioned above leads to arestatement of year ended June 2005 to bring into the balance sheet a liabilityfor last year (see note 22 to the accounts). In addition the implementation of FRS 21 for events after the balance sheetdate, requires an adjustment to the balance sheet for year ending June 2005 toaccommodate the changes to the way dividends are treated (see note 29 to theaccounts) Staff: long-term incentive plan The existing range of share option schemes expire during 2007. The RemunerationCommittee has proposed, and the Board has approved, new standard form approvedand unapproved plans to allow the continuation of the current remunerationpolicies. These are explained in greater detail in the remuneration committeereport. A resolution will be proposed at the AGM to adopt the new rules. John LomerGroup Finance Director Directors' Report Business Review Background The Group operates in the cake and bread markets, providing premium andindulgent products in the cake sector and speciality, premium and artisanproducts within the bread and morning goods sector. These products are suppliedpredominantly under the retailers' own brands but also through a number ofprivate brands to which the Group has access. As a Group, we have the stated aim of operating in areas where we can be "TheBest at What We Do". This means that the Group has a high degree of focus oninnovation and new product development and does not operate in commodityproducts. The Group is now also well placed to supply the health segments of its markets: • Nicholas & Harris produces a number of organic products under retailer brands and the Village Bakery brand. • The California Cake Company is the leading manufacturer of low-fat slices both in retailer brands and through a co-manufacturing agreement with a major brand. • In early 2006, United Central Bakeries completed its dedicated gluten-free facility, which produces a range of high-quality gluten-free products that provide real choice for those with a wheat intolerance and are of such a standard that they compare favourably on taste against regular products containing wheat. Operating companies and acquisitions In November 2005, the Group completed the purchase of United Central Bakeriesfor £2.5m, plus California Cake Company Ltd and Campbells Cake Company Ltd for acombined £7.4m, all of which are in Scotland. This brings the number ofoperating companies to five. Memory Lane Cakes Ltd Market leaders in premium retailer brand cakes, with a strong focus oncelebration and better-quality children's products utilising the Nestleconfectionery brand. Based in Cardiff and employing over 900 staff. Nicholas & Harris Ltd Premium, speciality and artisan breads, organic and premium morning goods. Basedin Salisbury, with around 120 staff. United Central Bakeries Ltd Market leader in gluten-free breads and morning goods, potato cakes and yumyums. Based in Bathgate, near Edinburgh, with in excess of 150 employees. California Cake Company Ltd Market leader in low-fat slices. Based in Coatbridge, near Glasgow, with almost200 employees. Campbells Cake Company Ltd Market leader in cold set premium products such as caramel shortbread andtiffin. Based in Twechar, near Glasgow, with approaching 40 staff. In addition, the Group has a five-year contract running from 1st January 2004 tomake exclusive use of the Nestle confectionery brands within the ambient cakemarket. The objective of the project is to build a business with significantretail sales, which will also be earnings-enhancing for the Group, over thecourse of the contract. The Group is on track to achieve its goals and theautumn of 2006 will see the launch of the next phase of new products, a numberof which will be manufactured by the new companies in the Group. Performance of the company and its Key Performance Indicators The Group has achieved strong results during the year and is well positioned todevelop its strategies going forward. During the year ended 30 June 2006, the Group generated pre-tax profits of £2.1mcompared with pre-tax profits of £3.3m during the year ended 30 June 2005.Performance is discussed in more detail in the Chief Executive's report and theFinance report. KPI 2006 2005 2004 2003Turnover £73.3m £59.3m £59.9m £35.2mEBITDA £4.0m £4.5m £1.2m £1.0mNet debt/(Cash) £14.0m (£1.3m) £3.1m £1.2mShareholders' funds £11.8m £9.4m £6.3m £6.3m EBITDA is calculated as earnings before interest, taxation, depreciation andamortisation. Net debt is calculated as the cash balances less bank loans,overdrafts and mortgages. The Group owns its freehold sites at Cardiff, UCB, & Campbells and these assets,along with its blue-chip debtors, provide the Group's bank with significantasset-backed debt security. A key feature of all of the businesses is their ability to deliver extremelyhigh service levels on a consistent basis. The multiple grocers demand in excessof 98.5% of product ordered to be delivered on time, and this target wasexceeded by all of our businesses over the year. This performance isparticularly impressive in a business with such short shelf life, where theability to hold finished stock is severely limited. A second major strength is the ability to renovate and innovate products. MemoryLane Cakes, for example, launched 123 new products during the year to June 2006. Risks and uncertainties Any business faces a number of risks and these are reviewed thoroughly andregularly by the board as part of its ongoing corporate governance procedures.This review considers only the principal risks and uncertainties. All Group companies supply the UK multiple retailers. These customers havesubstantial purchasing power and this creates a risk of margin pressure. TheGroup's stance on this issue is to be "The Best at What We Do". Our customersrequire constant innovation, high levels of service and high quality. Byproviding these services, and developing our processes, we place ourselves in astronger position, where we are part of the drive to more premium products. During year ended 30th June 2005 the Group became debt free, following strongoperational cash-flow and the receipts from the sale of surplus land at Cardiff.In November 2005 the Group made three acquisitions funded by debt. The Grouprecognises the inherent risk from interest rate rises and the requirement toservice the debt. To mitigate these risks, the Group has entered into twointerest-rate-hedging transactions, totalling £10m, to protect against interestrate rises. Our interest cover is 4.5 times, which means that there is a highmargin of comfort in our ability to service the debts. The third major risk area for the Group comes from supply-side pressures. Energycosts, for example, have risen sharply over the past twelve months and the Grouphas taken steps to reduce wastage and improve efficiency. Power representsapproximately 1.6% (2005: 1.0%) of Group turnover, so even though it is asignificant cost, it does not present a major threat to profitability. Rawmaterial costs are constantly monitored by the Group's buying team and forwardcontracts are taken out to reduce uncertainty where this is felt to beappropriate. The other major supply side experiencing upward pressure is labour costs. TheGroup employs significant numbers of staff and we believe that it is importantto maintain a competitive pay structure, even in a market place where it isdifficult to pass on these cost increases to our customers. The Group ismanaging these increasing costs by judicious use of capital projects to reducelabour content and by an ongoing management focus on efficient operations,product innovation and new launches. Position at the year ended 30th June 2006 The Group is operating in demanding markets. However it's positioning places itin the growth segments of these markets and its focus on innovation generatesstrong opportunities for profitable growth. (The Directors' Report continues after the notes to the financial statements) Consolidated Profit and Loss Account Year ended As restated 30 June Year ended 2006 30 June Notes £000 2005 £ 000 £ 000 £000 Turnover 4 - Continuing 59,586 59,338 - Acquisitions 13,761 - 73,347 59,338Cost of Sales 2 (44,159) (37,073) Gross Profit 29,188 22,265 Distribution expenses 2 (3,871) (2,989)Administrative expenses 2 (22,497) (17,692)Other operating income - 20 Operating profit - Continuing 1,988 - Acquisitions 832 3 2,820 1,604 Exceptional items 5 (267) 1,865 Profit on ordinary activities 2,553 3,469 before interest and taxationInterest receivable 6 8 6Interest payable 6 (572) (225)Other finance income 22b iv 143 85 Profit on ordinary activities before taxationPre exceptional 2,399 1,470Exceptional (267) 1,865 3 2,132 3,335Tax on profit on ordinary activities (711) (480)Tax on profit on exceptional activities 76 (15) 9 (635) (495) Profit on ordinary activities after taxationPre exceptional 1,688 975Exceptional (191) 1,865 1,497 2,840 Basic earnings per share 10 6.6p 13.3pDiluted Basic earnings per share 10 5.6p 11.7pNormalised earnings per share 10 7.4p 4.5pDiluted normalised earnings per share 10 6.3p 4.0pDividend per share 1.5p 1.2p Consolidated Balance Sheet Year ended As restated 30 June Year ended Notes 2006 30 June 2005 £000 £000 Fixed assets Intangible assetsGoodwill 11(a) 14,031 2,041Negative goodwill 11(b) (493) (523) Total net goodwill 13,538 1,518Tangible assets 12 13,899 9,422 27,437 10,940 Current assetsStock 14 1,714 1,588Debtors 15 11,341 8,591Cash at bank and in hand 527 4,202 13,582 14,381 Creditors: amounts falling due within one year 16 (16,970) (12,711) Net current (liabilities) / assets (3,388) 1,670 Total assets less current liabilities 24,049 12,610 Creditors: amounts falling due after more than one year 17 (12,484) (2,550) Provision for liabilitiesDeferred Tax 26 (327) (280) Total net assets excluding pension scheme asset / (liability) 11,238 9,780 Defined Benefit pension scheme asset / (liability) 22 548 (416)Total Net assets including pension scheme 11,786 9,364 Capital and reservesCalled up share capital 18 231 222Share Premium Account 19 6,902 6,658Capital Redemption Reserve 19 578 578Profit and Loss Account 19 4,075 1,906 Equity shareholders' funds 20 11,786 9,364 These financial statements were approved by the Board of Directors on 20September 2006 and were signed on its behalf by: D G BrooksGroup Chief Executive J A LomerFinance Director Consolidated Cash Flow Statement Year ended 30 June Year ended 30 June 2006 2006 2005 2005 Notes £000 £000 £000 £000 Net cash inflow from operating activities 23 3,587 4,787 Returns on investments and servicing of financeInterest received 8 6Interest paid on bank loans, overdrafts and (474) (225)loan stock Net cash outflow from returns on investmentsand servicing of finance (466) (219) Taxation (paid) / recovered (420) 138 Capital expenditurePurchase of tangible fixed assets (2,032) (2,671)Proceeds on disposal of tangible fixed assets 40 2,350 Net cash outflow from capital expenditure (1,992) (321) Acquisitions and disposalsPurchase of subsidiary Companies (10,110) -Settlement of acquired debt (5,380) -Cash received with acquisition 40 - Net cash outflow from acquisitions and (15,450) -disposals Equity dividend paid (275) (211) Net cash (outflow) / inflow before use ofliquid resources and Financing (15,016) 4,174 FinancingDrawdown of bank loans 14,600 450Repayment of current bank loans (476) -Repayment of former bank facility (2,850) -Repayment of hire purchase liabilities (128) -Issue of ordinary share capital 252 229 Net cash inflow from financing 11,398 679 (Decrease) / Increase in cash in the period 24 (3,618) 4,853 Consolidated Statement of total recognised gains and losses Year ended Year ended 30 June 30 June 2006 2005 Notes £000 £000 Profit for the financial period 1,497 2,840Actuarial gain / (loss) related to the pension scheme (liability) / 22 1,361 (391)assetDeferred tax movement attributable to the actuarial gain (413) 178 Total recognised gains and losses relating to the period 2,445 2,627 Prior year adjustment 29 169 -Total recognised gains and losses since the last financial statements 2,614 2,627 Notes to the Accounts 1 Accounting Policies The following accounting policies have been applied consistently in dealing withitems which are considered material in relation to the Group's financialstatements. Basis of Preparation The financial statements have been prepared in accordance with applicableaccounting standards and under the historical cost accounting rules. Basis of Consolidation The Group financial statements consolidate the accounts of the Company, and itssubsidiaries. Unless otherwise stated, the acquisition method of accounting hasbeen adopted. Under this method the results of subsidiary undertakings acquiredor disposed of in the period are included in the consolidated profit and lossaccount from the date of acquisition or up to the date of disposal. Under Section 230(4) of the Companies Act 1985 the Company is exempt from therequirement to present its own profit and loss account. The loss for thefinancial period, before dividends payable and receivable, dealt with in thefinancial statements of the Holding Company, which have been approved by theBoard, was £2.2m (2005: Profit of £3.6m). Goodwill Purchased goodwill (both positive and negative, representing the excess ordiscount of the fair value of the consideration given over the fair value of theseparable net assets acquired) arising on consolidation in respect ofacquisitions is capitalised. The goodwill relating to each acquisition isassessed separately based upon each individual acquisition. Goodwill isamortised as follows:- Memory Lane Cakes Ltd and Nicholas & Harris Ltd over their estimated usefullives. The estimated useful life is calculated separately for each acquisitionand for each of these acquisitions has been calculated at 20 years. United Central Bakeries Ltd, California Cakes Ltd & Campbells Cake Company Ltdare not amortised and are all subject to annual impairment reviews, as thedirectors believe the goodwill relating to these individual acquisitions has anindefinite useful economic life. On the subsequent disposal or termination of a business, the profit or loss ondisposal or termination is calculated after charging / (crediting) theunamortised amount of any related goodwill. Turnover Turnover represents the amounts (excluding value added tax and trade discounts)derived from sales of premium and indulgent products in the cake sector andspeciality, premium and artisan products within the bread and morning goodssector. Government Grants Government grants relating to tangible fixed assets are treated as deferredincome and released to the profit and loss account over the expected usefullives of the assets concerned. Other grants are credited to the profit and lossaccount as the related expenditure is incurred. Finance Leasing and Hire Purchase Assets obtained under hire purchase contracts and finance leases are capitalisedas tangible fixed assets. Assets acquired by finance lease are depreciated overthe shorter of the lease term and their useful lives. Assets acquired by hirepurchase are depreciated over their useful lives. Finance leases are those wheresubstantially all of the benefits and risks of ownership are assumed by thecompany. Obligations under such agreements are included in creditors net of thefinance charge allocated to future periods. The finance element of the rentalpayment is charged to the profit and loss account so as to produce a constantperiodic rate of charge on the net obligation outstanding in each period. Taxation The charge for taxation is based on the results for the year and takes intoaccount taxation deferred because of timing differences between the treatment ofcertain items for taxation and accounting purposes. Provision is made in full for all taxation deferred in respect of timingdifferences that have originated but not reversed by the balance sheet date,except for gains on disposal of fixed assets which will be rolled over intoreplacement assets. No provision is made for taxation on permanent differences.Deferred tax assets are recognised to the extent that it is more likely than notthat they will be recovered. Notes to the Accounts continued 1 Accounting Policies continued Pension Costs Memory Lane Cakes Ltd operates a defined benefit pension scheme and the pensioncosts are charged to the profit and loss account in accordance with FRS 17. Inaddition the group contributes towards the personal pension schemes of certainemployees. The costs of contributing to personal pension schemes and defined contributionschemes are charged against profits of the period for which they are payable. Fixed assets, depreciation and impairment Fixed assets are stated at historical cost, or fair value at the date ofacquisition, less accumulated depreciation and impairment provisions. Depreciation is provided to write off the cost, less the estimated residualvalue, of fixed assets by equal instalments over their estimated useful economiclives as follows: Freehold buildings 2%-20% Plant and equipment 6% - 33%Leasehold property Up to the remaining life Assets in the course of construction Nil of leaseFixtures and fittings 20% - 33% Motor vehicles 15%-40%Freehold land Nil Impairment reviews of fixed assets are undertaken if there are indications thatthe carrying values may not be recoverable or that the carrying values may beless than the assets recoverable amount. Operating Leases Rentals applicable to operating leases where substantially all of the benefitsand risk of ownership remain with the lessor are charged to the profit and lossaccount on the straight line basis over the lease term. Investments Investments are stated at cost less provision for any permanent diminution invalue. Stocks Stocks and work in progress are stated at the lower of cost and net realisablevalue. Cost is determined on a first in first out basis, and includes all directcosts incurred and attributable production overheads. Net realisable value isbased upon estimated selling price allowing for all further costs of completionand disposal. Financial instruments The Group has taken advantage of the exemption available for short-term debtorsand creditors from the narrative disclosures contained in FRS13. Foreign currencies Assets and liabilities in foreign currencies are translated into sterling at therates of exchange ruling at the balance sheet date. Transactions in foreigncurrencies are translated into sterling at the rates ruling on the date of thetransaction. Exchange differences are taken into account in arriving atoperating profit. Cash and liquid resources Cash, for the purposes of the cash flow statement, is defined as cash in handand deposits repayable on demand. Liquid resources are defined as current asset investments which are disposablewithout curtailing or disrupting the business and are either readily convertibleinto known amounts of cash at or close to their carrying values or traded in anactive market. Liquid resources comprise term deposits of less than one yearother than cash. Notes to the Accounts continued 2 Cost of Sales, gross profit and other operating expenses Year ended 30th Year ended 30th June 2006 June 2005 £'000 £'000 £'000 £'000 Continuing Operations Continuing Operations Previous Acquisition Total TotalSales 59,586 13,761 73,347 59,338Cost of sales (35,399) (8,760) (44,159) (37,073)Gross Margin 24,187 5,001 29,188 22,265Distribution (3,058) (813) (3,871) (2,989)Administration (19,141) (3,356) (22,497) (17,692)Other operating income - - - 20 Operating Profit 1,988 832 2,820 1,604 3 Operating Profit Operating profit is stated after charging/(crediting) the following: Year ended As 30 June restated 2006 Year ended £000 30 June 2005 £000 Auditors' remuneration for audit 62 36Other fees paid to the auditor by the Group Taxation compliance & other services 27 8Depreciation of owned tangible fixed assets 1,164 904Depreciation on assets under finance leases and hire purchase contracts 92 -Amortisation of goodwill 116 116Amortisation of negative goodwill (30) (30)Hire of Plant and Machinery - operating leases 438 241Hire of other assets - operating leases 142 244Licence fee charges 2,180 1,872 In addition to the above fees paid to the auditors by the group, an amount of£75,000 relating to corporate finance fees has been capitalised during the year. 4 Segmental Analysis The Group's operations activities arise from the sales of premium and indulgentproducts in the cake sector and speciality, premium and artisan products withinthe bread and morning goods sector. Year ended Year ended 30 June 30 June 2006 2005 £000 £000An analysis of turnover by geographical destination is as followsUnited Kingdom 72,547 58,438Europe 800 900 73,347 59,338Profit on ordinary activities before taxationFood production and distribution operations 2,132 3,335 Net assetsFood production and distribution operations 11,786 9,364 A geographical analysis of results and assets is not presented because the Groupoperates from within the United Kingdom. Notes to the Accounts continued 5 Exceptional Items Year ended Year ended 30 June 30 June 2006 2005 £000 £000 Profit on sale of land - 1,815Release of provision for reorganisation - 50Reorganisation and restructuring costs (267) - (267) 1,865 6 Interest (a) Interest receivable and similar income Year ended Year ended 30 June 30 June 2006 2005 £000 £000 Bank interest receivable 8 6 (b) Interest payable and similar charges Year ended Year ended 30 June 30 June 2006 2005 £000 £000 Bank loans, overdrafts 543 221 Interest on finance leases 26 - Loan notes 3 4 572 225 7 Directors' Remuneration Year ended Year ended 30 June 30 June 2006 2005 £000 £000 Fees 126 98Executive salaries and benefits 308 259Executive bonuses 50 48 484 405 The emoluments of the Directors for the year were as follows: Year ended Year ended Fees Salary Benefits Pension Bonuses Other 30 June 30 June £000 £000 £000 £000 £000 £000 2006 2005 £000 £000 Lord Saatchi 43 - - - - - 43 38D G Brooks - 145 10 10 25 - 190 175J A Lomer - 95 10 8 25 30 168 132D C Marshall 15 - - - - - 15 10E J Beale 15 - - - - - 15 10I R Farnsworth 23 - - - - - 23 15P J Monk 30 - - - - - 30 25 126 240 20 18 50 30 484 405 Directors' interests in share options Number of Number of options at options at Earliest Exercise 30 June 30 June Exercise Exercise date Expiry date 2006 2005 Price D G Brooks Nil 100,000 29p 19/12/2005 19/12/2012D G Brooks 500,000 500,000 29p 19/12/2005 19/12/2009D G Brooks 52,848 52,848 34p 06/10/2009 06/10/2014D G Brooks 40,000 Nil 52.5p 14/07/2010 14/07/2015J A Lomer 75,000 75,000 39p 25/03/2007 25/03/2014J A Lomer 125,000 125,000 39p 25/03/2007 25/03/2011J A Lomer 52,848 52,848 34p 06/10/2009 06/10/2014J A Lomer 50,000 Nil 52.5p 14/07/2010 14/07/2015 Options over 90,000 shares (2005: 105,696) were granted to Directors during theyear. Options have been granted to Directors, whose performances and potentialcontribution were judged to be important to the operations of the Group, asincentives to maximise their performance and contribution. The mid-market price of the ordinary shares on 30 June 2006 was 66p and therange during the twelve months period to 30 June 2006 was 52.5p to 84.0p. The aggregate of the amount of the difference between the value of sharesacquired on the exercise of share options by directors and the exercise pricewas £48,500. 8 Staff Numbers and Costs The average number of persons employed by the Group (including Directors) duringthe year, analysed by category, was as follows: Year ended Year ended 30 June 30 June 2006 2005 £000 £000 Production staff 1,075 881Selling and distribution 61 54Directors and administrative staff 99 67 1,235 1,002 Year ended Year ended 30 June 30 JuneThe aggregate payroll costs were as follows: 2006 2005 £000 £000 Wages, salaries and fees 20,825 16,237Social security costs 1,869 1,506Redundancy costs 30 44Other pension costs 323 299 23,047 18,086 Notes to the Accounts continued 9 Taxation Year ended Year ended 30 June 30 June 2006 2005 £000 £000UK taxation Corporation tax at 30% (2005:30%) 522 396 ACT previously written off now recovered (9) - Adjustment in respect of prior years (77) (1)Tax on profit on ordinary activities 436 395 Deferred taxation Origination and reversal of timing differences 257 94 Adjustment in respect of prior periods (58) 6Total deferred tax charge 199 100Tax on profit on ordinary activities 635 495 Factors affecting tax charge for the yearThe tax assessed for the period is lower than the standard rate ofcorporation tax in the UK (30%). The differences are explainedbelow:Profit on ordinary activities before tax 2,132 3,335Profit on ordinary activities multiplied by the standard rate ofcorporation tax in the UK of 30% (2005: 30%) 640 1,000Effects of:Expenses not deductible for tax purposes 13 35ACT written off now recovered (9) -Relief on exercise of employee share options (15) -Capital allowances for period in excess of depreciation (124) (114)Utilisation of tax losses in year (63) (544)Ineligible depreciation and losses on disposal 44 14Other adjustments arising in the period 27 5Adjustments to tax charge in respect of prior periods (77) (1)Current tax charge for year 436 395 The Company has a deferred tax asset of £720,112 (2005: £720,112). This asset has not been recognised in thesefinancial statements as suitable profits are not expected to arise in the very near future. If the entity wasto make a taxable profit in its own right the deferred tax asset would be recoverable, but as the entity doesnot trade this is not expected to occur. 10 Earnings per Share The calculation of the normalised earnings per share is based on the result ofordinary activities before exceptional items after taxation of £1,688,000 (2005:£975,000) and on the weighted average number of ordinary shares in issue duringthe period of 22,765,188 (2005: 21,435,207). The calculation of the basic earnings per share is based on the result ofordinary activities after taxation of £1,497,000 (2005: £2,840,000) and on theweighted average number of ordinary shares in issue during the period of22,765,188 (2005: 21,435,207). Diluted normalised earnings per share are based on the result of ordinaryactivities before exceptional items after taxation of £1,688,000 (2005:£975,000). The dilution effect is calculated on the full exercise of options andwarrants compared with the average mid-market price over the period for whichthey were outstanding. The resulting number of shares on which diluted earningshave been calculated is 26,585,774 (2005: 24,204,177). Diluted basic earnings per share are based on the result of ordinary activitiesafter taxation of £1,497,000 (2005: £2,840,000). The dilution effect iscalculated on the full exercise of options and warrants compared with theaverage mid-market price over the period for which they were outstanding. Theresulting number of shares on which diluted earnings have been calculated is26,585,774 (2005: 24,204,177). Notes to the Accounts continued 11 Intangible Fixed AssetsGroup 30 June 30 June 2006 2005 £000 £00011(a) Goodwill Cost brought forward 2,311 2,311 Acquired during the year 12,106 - Cost carried forward 14,417 2,311 Amortisation brought forward (270) (154) Amortisation for the year (116) (116) Amortisation carried forward (386) (270) Net book value brought forward 2,041 2,157 Net book value carried forward 14,031 2,041 11(b) Negative goodwill Cost brought forward (608) (608) Acquired during the year - - Cost carried forward (608) (608) Amortisation brought forward 85 55 Amortisation for the year 30 30 Amortisation carried forward 115 85 Net book value brought forward (523) (553) Net book value carried forward (493) (523) 12 Tangible Fixed Assets Group Furniture Assets in 30 June Land and Plant and Fittings & course of 2006 Buildings Machinery Equipment Vehicles construction Total £000 £000 £000 £'000 £000 £000 At cost:At 1 July 5,736 9,905 626 - 1,488 17,755 Acquired assets 2,081 7,037 260 52 - 9,430Additions 190 213 124 17 1,488 2,032Transfers 513 2,305 16 - (2,834) -Disposal (9) (31) - - - (40) At 30 June 8,511 19,429 1,026 69 142 29,177 Depreciation:At 1 July (2,162) (5,610) (561) - - (8,333)Acquired assets (39) (5,531) (71) (52) - (5,693)Charge for period (136) (1,054) (64) (2) - (1,256)Disposal - 4 - - - 4 At 30 June (2,337) (12,191) (696) (54) - (15,278) Net book valueAt 30 June 2006 6,174 7,238 330 15 142 13,899 At 30 June 2005 3,574 4,295 65 - 1,488 9,422 The net book value of assets held under finance leases or hire purchasecontracts, included in plant and machinery above at 30 June 2006 is £589,827, at30 June 2005 £nil. Notes to the Accounts continued 13 Investments Company 30 June 30 June 2006 2005 £000 £000Investments in shares of subsidiary undertakingsAt beginning of year 10,450 10,450Additions 12,293 -At end of year 22,743 10,450 The following significant subsidiaries have been included in the consolidatedfinancial statements of the Group: Wholly owned Country of Classes of shares registration Principal activities in issue Memory Lane Cakes Limited England & Wales Food production and distribution Ordinary 1p Nicholas & Harris Limited England & Wales Food production and distribution Ordinary £1 United Central Bakeries Ltd Scotland Food production and distribution Ordinary £1 California Cake Company Ltd Scotland Food production and distribution Ordinary £1 Campbells Cake Company Ltd Scotland Food production and distribution Ordinary £1 14 Stocks 30 June 30 June 2006 2005 £000 £000 Raw materials 1,104 1,025Finished goods and goods for resale 610 563 1,714 1,588 15 Debtors Company 30 June 30 June 30 June 30 June 2006 2005 2006 2005 £000 £000 £000 £000 Trade debtors 9,904 7,199 - -Amounts owed by Group undertakings - - 3,872 -Other taxation 594 731 12 10Corporation tax recoverable - - - 346Deferred taxation - - 20 -Other debtors 32 52 22 -Prepayments and accrued income 811 609 249 33 11,341 8,591 4,175 389 Included within prepayments are prepaid pension costs of £22,000 (2005:£15,000), and an amount of £180,000 (2004: £300,000) which is not due withinone year, Notes to the Accounts continued 16 Creditors - Amounts falling due within one year Group Company 30 June 30 June 30 June 30 June 2006 2005 2006 2005 £000 £000 £000 £000 Unsecured loan notes 30 86 30 86Bank overdraft - - 727 -Bank loan 1,867 300 1,867 300Trade creditors 7,641 5,908 63 64Hire Purchase 215 - - -Deferred Consideration 500 - 500 -Amounts due to Group undertaking - - 1,421 1,721Corporation tax 586 445 - 4Other taxes and social security 481 309 16 12Other creditors 986 1,205 65 -Accruals and deferred income 4,664 4,458 319 187 16,970 12,711 5,008 2,374 The unsecured loan notes, bearing interest at 5%, were issued at par as part ofthe consideration for the acquisition of Framestore in 1996 and are redeemableat the option of the holders. Included within creditors is an amount of £39,000in respect of unpaid pension contributions (2005: £19,000). 17 Creditors - Amounts falling due after more than one year Company and Group 30 June 30 Junea) Bank loans and mortgages 2006 2005 £000 £000 Between one and two years 2,033 300Between two and five years 5,902 900Between five and ten years 2,555 1,350Between ten and fifteen years 1,767 -Total Bank loan and mortgages 12,257 2,550 Company and Groupb) Net obligations under finance leases 30 June 30 Juneand hire purchase contracts 2006 2005 £000 £000 Between one and five years 167 - Company and Group 30 June 30 Junec) Government grants 2006 2005 £000 £000 Between one and five years 60 - HSBC Bank plc, HSBC Asset Finance (UK) Limited and HSBC Equipment Finance (UK)limited have debentures incorporating fixed and floating charges over theundertaking and all property and assets including goodwill , book debts,uncalled capital, buildings, fixtures, fixed plant and machinery. A breakdown ofthe financial liabilities are shown in note 26. Hire purchase obligations are secured on the underlying assets. Notes to the Accounts continued 18 Called up Share Capital Company and Group 30 June 30 June 2006 2005 £000 £000Authorised equity share capital:100,000,000 shares of 1p each 1,000 1,000 Allotted, called up and fully paid equity share capital:Number22,234,151 At beginning of year 222 211 750,042 Warrants exercised 8 1 100,000 Options exercised 1 10 23,084,193 At end of year 231 222 Since the year end 100,000 options have been exercised. 5,707,894 Warrants were issued following shareholder approval on 27 May 2002 onthe basis of 1 warrant for every three shares held and 859,410 were issued onthe acquisition of Memory Lane Cakes. Warrant holders can subscribe forordinary shares, at 30p per share, 28 days after despatch of all interim andannual reports in each of the years up to and including 2007. 750,042 warrantswere exercised during the year (2005: 69,888). 5,549,250 warrants remainedoutstanding at 30 June 2006 and at the date of this report. At 30 June 2006 there were options outstanding over 1,823,544 (2005: 1,258,544)shares. 304,000 options were granted during the year. Options over 100,000shares were exercised during the year. At 30 June 2006 there were 162,000 Approved options and 762,544 EnterpriseManagement Incentive options outstanding, both of which have a ten year life.There were 899,000 Unapproved options outstanding at 30 June 2006, which have aseven year life. Exercise 1 July At 30 JunePrice Expiry date 2005 Granted Exercised Cancelled 2006 74.5p Jan 2016 - 40,000 - - 40,00074.5p Jan 2013 - 160,000 - - 160,00067.5p Nov 2015 - 139,000 - - 139,00063p Nov 2015 - 47,000 - - 47,00063p Nov 2012 - 114,000 - - 114,00052.5p July 2015 - 165,000 - - 165,00039p March 2014 200,000 - - - 200,00034p October 2014 158,544 - - - 158,54429p December 2012 600,000 - (100,000) - 500,00029p March 2013 300,000 - - - 300,000 Total outstanding 1,258,544 665,000 (100,000) - 1,823,544 Notes to the Accounts continued 19 Share Premium and Reserves Movements on reserves Share Capital As restated Premium Redemption Profit &Group Account Reserve Loss £000 £000 Account £000 At 1 July 2005 as previously stated 6,658 578 1,737Prior Year Adjustments Recognition of pension fund deficit on Balance - - (98)Sheet (note 29) Reversal of creditor for proposed year end - - 267dividend (note 29)At 1 July 2005 restated 6,658 578 1,906Premium on warrants exercised 217 - -Premium on options exercised 27 - -Actuarial gain on pension scheme asset - - 1,361Deferred tax movement on pension scheme gain - - (414)Retained profit for the year - - 1,497Dividend paid - - (275) Balance at 30 June 2006 6,902 578 4,075 CompanyAt 1 July 2005 6,658 578 3,969Prior Year Adjustments Reversal of debtor and creditor for proposed - - (4,182)year end dividend (note 29)At 1 July 2005 restated 6,658 578 (213)Premium on warrants exercised 217 - -Premium on options exercised 27 - -Retained (loss) for the year - - (2,020)Dividend received - - 4,450Dividend paid - - (275) Balance at 30 June 2006 6,902 578 1,942 Notes on the Accounts continued 20 Reconciliation of Movement in Shareholders' Funds Group Company As restated 2006 2005 2006 2005 £000 £000 £000 £000 Opening shareholders' funds as previously 9,195 6,326 11,427 7,822statedPrior year adjustment 169 393 (4,181) 211Opening shareholders' funds as restated 9,364 6,719 7,246 8,033 Retained profit / (loss) for the year 1,497 2,840 2,155 (1,017)Dividends (275) (211) - - 1,222 2,629 2,155 (1,017)Subscriptions received for new sharesissued during the year 252 229 252 229 Actuarial gains less deferred tax 948 (213) - -Closing shareholders' funds 11,786 9,364 9,653 7,245 21 Commitments and Contingent Liabilities At the balance sheet date: (a) The Group had capital expenditure commitments of £85,011(2005: £206,000). (b) The Group had an estimated contingent liability of £500,000(2005: £515,600) in respect of excesses under employer's liability claims, notprovided. (c) At 30 June 2006 the Group had annual commitments undernon-cancellable operating leases and licences of: Land and Buildings Other 2006 2005 2006 2005 £000 £000 £000 £000Expiry date Within one year 114 - 198 32 Between two and five years 566 110 2,390 2,282 680 110 2,588 2,314 22 Pensions a) Pension arrangements A number of companies within the Group operate defined contribution pensionschemes and the pension charge represents the amounts payable by the companiesto the funds in respect of the year. Memory Lane Cakes Limited (MLC) has a funded defined benefits scheme called theMemory Lane Cakes Pension Scheme, which is a separately administered plan. Thescheme is closed to new members, and the accrual rate decreased, from 1 July2003. As the age of the active membership increases, the closure to new entrantsmay cause the current service cost to increase under the projected unit method(although this may be offset to some extent by a reducing salary roll as membersleave active service). At 30 June 2006, the scheme had 161 active membersaccruing benefits, 166 deferred pensioner members and 107 pensioner members. The MLC contribution paid for the year to 30 June 2006 was £211,000. The agreedcontribution rate for future years is 6.2% of pensionable pay by MLC and 6% bythe employees. A full actuarial valuation of the Scheme was carried out as at 31 December 2004on an equity/bond basis and projected unit method, which showed that there was asurplus of assets of 5% over liabilities. The valuation was conducted by aqualified independent actuary. The FRS 17 results below are based on this fullactuarial valuation. The trustees of the Memory Lane Cakes Pension Scheme have agreed to transfer themajority of the assets to a Merrill Lynch Target Return Fund, which aims for areturn of 5% per annum above the increase in the retail price index. Thetransfer took place on the 27th April 2006. Notes to the Accounts continued 22 Pensions continued b) FRS17 Retirement Benefits (i) The major assumptions used by the actuary for FRS17 purposes were: 30 June 30 June 2006 2005 £000 £000 Rate of Pensionable Salary Increases 3.5% 3.0%Increases to pensions in payment 3.0% 2.5%Discount Rate 5.4% 5.1%Inflation Assumption 3.0% 2.5% (ii) The assets in the Scheme and the expected rates of return were: 30 June Expected 30 June Expected 30 June Expected 30 June Expected 2006 Return 2005 Return 2004 Return 2003 Return £000 p.a. £000 p.a. £000 p.a. £000 p.a. Equities/Target 13,599 8.0% 9,585 7.0% 8,308 7.0% 6,824 7.0%return fundProperty 814 7.0% 653 7.0% 557 7.0% 524 7.0%Bonds 0 n/a 1,031 5.0% 1,036 5.0% 1,325 5.0%Cash 620 4.0% 1,395 4.0% 657 4.0% 386 3.0%Total Assets 15,033 12,664 10,558 9,059Total Liabilities (14,250) (13,258) (10,694) (10,125) Scheme Asset / 783 (594) (136) (1,066)(Deficit)Deferred Tax (235) 178 41 319Net Pension 548 (416) (95) (747)Surplus /(Deficit) (iii) Analysis of the amounts which are charged to Operating Profit Year ended Year ended 30 June 2006 30 June 2005 £000 £000 Current Service Cost 338 362Total Operating Cost 338 362 (iv) Analysis of amounts which are credited to Other Finance Income Year ended Year ended 30 June 2006 30 June 2005 £000 £000 Expected Return on Assets 825 707Interest on Scheme Liabilities (682) (622)Net Return 143 85 Notes to the Accounts continued 22 Pensions continued (v) Analysis of amounts which are recognised in the ConsolidatedStatement of Total Recognised Gains and Losses (STRGL) Year ended Year ended 30 June 2006 30 June 2005 £000 £000 Actual return less expected return on Scheme assets 1,448 1,144Experience gains and losses arising on the Scheme liabilities (16) -Changes in assumptions underlying the present value of the Schemeliabilities (71) (1,535) Actuarial gain / (loss) recognised in STRGL 1,361 (391) (vi) Movement in deficit during the year Year ended Year ended 30 June 2006 30 June 2005 £000 £000 Deficit in Scheme at 1 July (594) (136)Current Service Cost (338) (362)Company Contributions 211 210Other Finance Income 143 85Actuarial Gain / (Loss) 1,361 (391)Surplus / (Deficit) in Scheme at the 30 June 783 (594) (vii) History of experience gains and losses Year ended Year ended 30 June 2006 30 June 2005 £000 £000 Difference between expected and actual return 1,448 1,144 As a percentage of Scheme assets 10% 9% Experience gains and losses on Scheme liabilities (16) - As a percentage of the value of the liabilities 0% 0% Total Actuarial (loss) / gain 1,361 (391) As a percentage of the value of the liabilities 10% (3%) Notes to the Accounts continued 23 Note to Cash Flow Statement (a) Reconciliation of Operating Profit to net cash flow from operating activities Year ended Year ended 30 June 30 June 2006 2005 £000 £000 Operating profit 2,553 3,469Other finance income 143 85Exceptional expenditure / (Income) 267 (1,865)Amortisation of goodwill 86 85Depreciation 1,256 904FRS 17 (income) / charge (16) 67Movement in working capital: Decrease / (increase) in stocks 595 (37) (Increase) / decrease in debtors and prepayments (164) 846 (Decrease) / Increase in creditors and accruals (1,133) 1,233 Net cash inflow from operating activities 3,587 4,787 (b) Reconciliation of net cash flow to net debt Year ended Year ended 30 June 30 June 2006 2005 £000 £000(Decrease) / Increase in cash during the year and change in netfunds arising from cash flow (3,618) 4,853 Cash inflow from increase in debt and lease finance (11,146) (450) Change in net debt resulting from cash flows (14,764) 4,403 Finance leases acquired with subsidiary (509) -Movement in net debt in the year (15,273) 4,403 Net (debt) / funds brought forward 1,266 (3,137) Net funds / (debt) carried forward (14,007) 1,266 (c) Analysis of net funds 2006 Cash Acquisitions At end of At start of flow and disposals * year year £000 £000 £000 £000 Cash at bank and on call 4,202 (3,675) - 527Loan notes repayable on demand (86) 57 - (29) 4,116 (3,618) - 498 Debt due after 1 year (300) (1,567) - (1,867)Debt due within 1 year (2,550) (9,707) - (12,257)HP < 1 year - 128 (342) (214)HP > 1 year - - (167) (167) Total Net Debt 1,266 (14,764) (509) (14,007) * Excluding cash and overdrafts (d) Material non-cash transaction There were no material non-cash transactions. Notes to the Accounts continued 24 Related Party Transactions and Directors' Material Interests inTransactions Mr D C Marshall and Mr E J Beale are Directors of City Group P.L.C. whichcompany received fees for the year of £44,000 (2005: £50,000) for the provisionof head office and company secretarial services to Finsbury Food Group plc.£15,600 was due to City Group from the Group at 30 June 2006 (2005: £28,000).The services of Mr Marshall are supplied by an overseas company in which none ofthe Directors have an interest in. Directors' fees for Mr Beale are ceded to hisprimary employer. Fees of £35,000 which are payable to a company in which MrLomer has an interest are accrued within the accounts to 30 June 2006. 25 Financial Assets and Liabilities The Group's policies on the management of interest rate, liquidity and currencyexposure risks are set out in the Report of the Directors. The Group has takenadvantage of the exemption available for short-term debtors and creditors fromthe narrative disclosures contained in FRS13. (a) The financial liabilities of the Group consist of : • £5.6m mortgage over 15 years at 1% above LIBOR (drawn)• £5.0m Term Loan, over 6 years at 2% over LIBOR (drawn)• £2.5m Term Loan, over 5 years at 1.5% over LIBOR (drawn)• £1.5m equipment finance facility, over 5 years, at 1.275% over LIBOR (drawn)• £1.5m equipment finance facility, over 2 years, at 1.275% over LIBOR (£0.1m drawn)• £5.0m overdraft facility at 1.375% over LIBOR (undrawn)• £30k 5% loan notes All are denominated in pounds sterling and are repayable by quarterlyinstalments. Total Fixed Floating rate rate Total £000 £000 £000 Financial liabilities 14,124 29 14,153 Repayment terms:Within one year 1,867 - 1,867Between one and two years 2,033 - 2,033Between two and five years 5,902 - 5,902After more than five years 4,322 - 4,322No fixed repayment date - 29 29 14,124 29 14,153 The carrying amounts of the loan and the loan notes are deemed to approximate totheir fair values. The loan notes are repayable at the note holders' demand. The interest rate onloan notes is 5%. The Group has two £5m Interest rate swaps, one fixed for 5 years and the otheramortising over 5 years. (b) The financial assets of the Group are surplus funds, which are offsetagainst borrowings under the facility, and there is no separate interest rateexposure. There is an overdraft facility of £5m. Notes to the Accounts continued 26 Deferred Tax (Group) Year ended As restated 30 June Year ended 2006 30 June £000 2005 £000 Provision at start of period as restated 280 -Deferred tax acquired with subsidiaries 246 -Deferred tax charge for year (199) 280Closing provision 327 280The deferred tax provision is made up as followsAccelerated capital allowances 538 283Short term timing differences (193) (3)Tax losses carried forward (18) - 327 280 27. Post Balance Sheet events The Directors propose a dividend for the year to 30 June 2006 of 1.5p per share(2005: 1.2p) 28. Dividends (a) The company paid dividends during the year of £275,000 (2005: £211,000) (b) The Directors propose a dividend for the year to 30 June 2006 of 1.5pper share (2005: 1.2p) 29. Prior Year Adjustment In accordance with Financial Reporting Standard number 3 'Reporting FinancialPerformance' two prior year adjustments have been made: (a) The full adoption of Financial Reporting Standard number 17 'RetirementBenefits' (FRS 17) has been implemented for the first time this year. This hashad the effect of reducing the net assets of the group at 30 June 2005 by£98,000. (b) The company has adopted the provisions of Financial Reporting Standard21 'Events After the Balance Sheet Date (FRS 21) which applies to accountingperiods commencing on or after 1 January 2005. FRS 21 stipulates that dividendsmay only be recognised in the financial statements when they are formallyapproved. This differs from the previous accounting treatment whereby thecompany accrued for dividends which were proposed before the balance sheet datebut not approved until after that date. The change in accounting policy has necessitated a prior year adjustment. Acreditor of £267,000 in respect of proposed dividends in 2005 has beencancelled leading to an increase in opening reserves at 30 June 2005 of£267,000. Notes to the Accounts continued 30. Acquisition of subsidiary undertaking On 18 November 2005 the company acquired California Cake Company Ltd, CampbellsCake Company Ltd and United Central Bakeries Ltd for a total consideration of£12,293,123. Net assets of £187,993 were acquired giving rise to goodwill of£12,105,130. Details of each acquisition are as follows:- (a) California Cake Company Ltd On 18 November 2005 the company acquired 100% of the issued share capital ofCalifornia Cake Company Ltd for a total consideration of £8,926,590. The fairvalue of net liabilities acquired was (£273,068). The following table sets outthe book values of the identifiable assets and liabilities acquired and theirfair value to the group: Book value Fair value Fair value to adjustment group £'000 £'000 £'000Fixed assetsTangible 835 (221) 614 Current assetsStocks 369 (12) 357Debtors 1,238 212 1,450Cash 48 - 48 Total assets 2,490 (21) 2,469 CreditorsTrade creditors (857) - (857)Other creditors & accruals (3,373) 1,723 (1,650)HP & Finance Leases (235) - (235) Total Liabilities (4,465) 1,723 (2,742) Net liabilities (1,975) 1,702 (273) Goodwill 9,200 8,927Satisfied byCash 4,259Deferred Consideration 2,850Acquisition Costs 402Settlement of debt 1,416 8,927 The deferred consideration was paid in full before the balance sheet date. Net cash outflows in respect of the acquisition comprised: £'000 Cash consideration 7,511Cash at bank and in hand acquired (48) 7,463An amount of £30,000 has been charged to the group profit and loss account inrespect of costs incurred in reorganising, restructuring and integrating theacquisition in the period from November 18 2005 to 1 July 2006. California Cake Company Ltd earned a profit after taxation of £801,087 in theyear ended 1 July 2006, (18 months ended 1st July 2005 £160,274), of which£577,560 arose in the period from 2 July 2005 to 18 November 2005, shown on thebasis of the accounting policies of California Cake Company Ltd prior to theacquisition, are as follows: Notes to the Accounts continued 30. Acquisition of subsidiary undertaking (continued) Profit and loss account £'000 Turnover 5,482Cost of sales (4,056)Gross Profit 1,426Net other operating expenses (1023)Operating Profit 403Net finance charges (17)Profit on ordinary activities before taxation 386Tax on profit on ordinary activities 192Profit on ordinary activities after taxation 578Profit for the financial period 578 Statement of recognised gains and losses £'000Profit for the financial period 578Total recognised gains and losses relating to the period 578 Notes to the Accounts continued 30. Acquisition of subsidiary undertaking (continued) (b) Campbells Cake Company Ltd On 18 November 2005 the company acquired 100% of the issued share capital ofCampbells Cake Company Ltd for a total consideration of £673,814. The fair valueof the net liabilities acquired was (£7,954). The following table sets out thebook values of the identifiable assets and liabilities acquired and their fairvalue to the group: Book value Fair value Fair value to adjustment group £'000 £'000 £'000Fixed assetsTangible 349 (57) 292 Current assetsStocks 72 - 72Debtors 343 2 345Cash 3 - 3 Total assets 767 (55) 712 CreditorsBank overdraft (12) - (12)Trade creditors (171) - (171)Other creditors & accruals (598) 235 (363)HP & Finance Leases (153) (1) (154) ProvisionsDeferred taxation (20) - (20) Total Liabilities (954) 234 (720) Net liabilities (187) 179 (8) Goodwill 682 674Satisfied byCash 220Deferred Consideration 150Acquisition Costs 36Settlement of debt 268 674 The deferred consideration was paid in full before the balance sheet date. Net cash outflows in respect of the acquisition comprised: £'000 Cash consideration 406Bank overdraft acquired 8 414 An amount of £40,000 has been charged to the group profit and loss account inrespect of costs incurred in reorganising, restructuring and integrating theacquisition in the period from November 18 2005 to 1 July 2006. Campbells Cake Company Ltd had a loss after taxation of £25,399 in the yearended 1 July 2006, (18 months ended 1st July 2005 a loss of £13,785), of which£52,010 arose in the period from 2 July 2005 to 18 November 2005, shown on thebasis of the accounting policies of Campbells Cake Company Ltd prior to theacquisition, are as follows: Notes to the Accounts continued 30. Acquisition of subsidiary undertaking (continued) Profit and loss account £'000 Turnover 725Cost of sales (537)Gross Profit 188Other operating expenses (net) (240)Operating Loss (52)Finance charges (net) (1)Loss on ordinary activities before taxation (53)Tax on profit on ordinary activities 1Loss on ordinary activities after taxation (52)Loss for the financial period (52) Statement of recognised gains and losses £'000Loss for the financial period (52)Total recognised loss relating to the period (52) (c) United Central Bakeries Ltd On 18 November 2005 the company acquired 100% of the issued share capital ofUnited Central Bakeries Ltd for cash consideration of £2,692,716. The fair valueof the net assets was £469,015 The following table sets out the book values ofthe identifiable assets and liabilities acquired and their fair value to thegroup: Fair value Fair value to adjustment group Book value £'000 £'000 £'000Fixed assetsTangible 2,783 48 2,831 Current assetsStocks 475 (182) 293Debtors 569 (20) 549Cash 1 - 1 Total assets 3,828 (154) 3,674 CreditorsTrade creditors (896) (145) (1,041)Other creditors & accruals (1,936) - (1,936)HP & Finance Leases (120) - (120) ProvisionsDeferred taxation (110) 2 (108) Total Liabilities (3,062) (143) (3,205) Net assets 766 (297) 469 Goodwill 2,224 2,693Satisfied byCash 2,000Deferred Consideration 500Acquisition Costs 193 2,693 The deferred consideration has been paid in full since the balance sheet date. Notes to the Accounts continued 30. Acquisition of subsidiary undertaking (continued) Net cash outflows /(inflows) in respect of the acquisition comprised: £'000 Cash consideration 2,193Cash at bank and in hand when acquired (1) 2,192 An amount of £80,000 has been charged to the group profit and loss account inrespect of costs incurred in reorganising, restructuring and integrating theacquisition in the period from November 18 2005 to 1 July 2006. United Central Bakeries Ltd earned a profit after taxation of £196,301 for the15 months ended 1 July 2006, (for year ended 1 July 2005 a loss of £85,320), ofwhich £71,164 arose in the period from 2 July 2005 to 18 November 2005, shown onthe basis of the accounting policies of United Central Bakeries Ltd prior to theacquisition, are as follows: Profit and loss account £'000 Turnover 4,935Cost of sales (2,701)Gross Profit 2,234Other operating expenses (net) (2089)Operating Profit 145Finance charges (net) (54)Profit on ordinary activities before taxation 91Tax on profit on ordinary activities (20)Profit on ordinary activities after taxation 71Profit for the financial period 71 Statement of recognised gains and losses £'000Profit for the financial period 71Total recognised gains and losses relating to the period 71 Directors' Report continued Dividend The Directors have adopted a progressive dividend policy. They are recommendingpayment of an increased dividend of 1.5p per share in respect of the year ended30 June 2006. Subject to shareholders' approval at the Annual General Meetingto be held on 29 November 2006 the dividend will be paid on 8 December 2006 tothose shareholders on the Register of Members on 10 November 2005. Directors and their interests in the Company The present Directors and brief biographies are detailed on page 2. In accordance with the Articles of Association Paul Monk and Edward Beale retireby rotation and being eligible offer themselves for re-election. The beneficial interests of the Directors on 1 July 2005 and on 30 June 2006 areset out below: Ordinary Shares 30 June 2006 1 July 2005E J Beale 15,000 15,000D G Brooks 225,460 125,460I R Farnsworth 73,700 73,700J A Lomer Nil NilD C Marshall Nil NilP J Monk 55,000 55,000Lord Saatchi 5,798,774 5,798,774 WarrantsE J Beale 25,000 25,000D G Brooks Nil NilI R Farnsworth 10,166 10,166J A Lomer Nil NilD C Marshall Nil NilP J Monk Nil NilLord Saatchi 1,599,591 1,599,591 Mr D C Marshall is deemed to be interested in 5,000,000 (2005: 4,800,000)ordinary shares and 3,000,000 (2005: 3,000,000) warrants in the Company at 30June 2006 by virtue of his directorship and direct shareholding in LondonFinance & Investment Group P.L.C, and its subsidiary companies. There have beenno other changes in the share interests of the Directors. Details of Directors' share options are set out in Note 7 to the accounts. Details of the emoluments of the Directors are given in Note 7 to the accounts. Directors' Report continued Share Capital Details of the changes in the share capital of the Company during the year areset out in Note 18 to the accounts. Substantial Interests In addition to directors' interests disclosed previously, the followingsubstantial interests (3 per cent or more) in the Company's ordinary sharecapital have been notified to the Company: Number % of Issued of Shares Share Capital London Finance & Investment Group P.L.C. 5,000,000 21.6%Richard Ashness 1,637,333 7.1%Grahger Capital International Investment Pty Ltd 1,500,000 6.5%Atorka Group HF 900,000 3.9%Trevor Wild 798,328 3.4% Report on Corporate Governance The Board embraces the objectives of the Combined Code and has implemented themas far as is practical for a Group of this size. The Board, operates as an effective board in directing the activities of theGroup. The Board maintains a schedule of matters which are reserved for a boarddecision. The Board then sets authority limits for the executives, which areregularly reviewed. The Board consists of two Executive Directors and five Non-Executive Directors,including the Non-Executive Chairman. The Board considers all Non-ExecutiveDirectors to be independent because there are no circumstances that, as definedin the Combined Code, would impair their independence. Board Committees The Board runs separate Remuneration and Audit Committees which meet on a timelybasis. The Audit Committee is chaired by Ian Farnsworth and has two furtherNon-Executive Directors as members including Edward Beale, who is a charteredaccountant and a member of the QCA's Accounting Standards and CorporateGovernance committees. Directors' Report continued The Executive Directors are not members of the Committee but may be invited toattend the meetings. The auditors have direct access to the members of theCommittee without the presence of the Executives. The Board maintains an appropriate relationship with the Group's auditorsthrough the Audit Committee. The auditors do from time to time providenon-audit services and in these situations the Group's policy is based on theprimary assumption that our financial advisors are independent under their ownprofessional guidelines and that the Group's business does not form asufficiently large proportion of their income in any of their business divisionsthat they are dependent upon it. For reasons of efficiency and lack of conflict of interest there is norequirement to segregate tax and audit work. Internal review work may beperformed by the auditors in order to take advantage of their pre-existingknowledge but only in such cases where such review will not consider theadequacy of the audit work or create any other conflict of interest. The AuditCommittee consider this issue before the placing of any assignment. DueDiligence work may be carried out by the audit firm so long as the assignment isnot staffed, or more particularly managed, by audit personnel, and subject toprior agreement by the Audit Committee. The Remuneration Committee is chaired by Ian Farnsworth and there are twofurther Non-Executive Directors as members. The Committee determines theremuneration policy of the Group and determines the pay and incentive schemesfor the Executive Directors and the Managing Directors of the subsidiaries. Research and Development Research and development expenditure is written off in the year in which it isincurred. Internal controls The Board is responsible for ensuring that appropriate controls and systems arein place to safeguard the Group's assets. The Group has a management structure in place such that decisions are escalatedthrough a hierarchy. Operational risk management is strongly embedded inoperational procedures and there is appropriate division of duties. The Board has carried out a review of the risks that the business faces, alongwith a further review of the financial controls within the business. Dialogue with shareholders The Board maintains a general policy of keeping all interested parties informedby regular announcements and update statements. In implementing this policy the Board keeps in mind the distribution ofshareholders between direct, nominee and institutional shareholders.Communication efforts are then distributed between these groups accordingly. Specific methods of communication are: • General and extraordinary shareholders meetings• Broker briefings• Broker and analysts visits to operating sites• Shareholder open days• Letters to shareholders when appropriate• One to one meetings with investors Care is taken that information is available to all shareholders at the sametime. Directors' Report continued Payment of Suppliers The Group does not follow any code or statement on payment practice, but thepolicy of the Group is to abide by such payment terms as are agreed withsuppliers within the terms of supply. At the Balance Sheet date there were 49days' purchases outstanding (2005: 49), calculated on the ratio of tradecreditors to total purchases. Legal Indemnity The company maintains a directors and officers liability insurance policy. Financial Instruments The Group's financial instruments, other than options, comprise a mortgage, twobank term loans, asset finance facilities, loan notes, cash and liquidresources, and various items arising directly from its operations, such as tradedebtors and creditors. The main purpose of these financial instruments is tofinance the Group's acquisitions and operations. It is, and has been throughoutthe year under review, the Group's policy that no trading in financialinstruments shall be undertaken. The main risks arising from the Group's financial instruments are interest raterisk and liquidity risk. The Board reviews and agrees policies, which haveremained substantially unchanged for the year under review, for managing theserisks. The policies are summarised below: Interest Rate Risk The Group finances its operations by retained profits and bank borrowings. Asuite of borrowing facilities totalling £21.1m is available. This includes anundrawn overdraft facility of £5m and unused asset finance of £1.4m. Theinterest rate risk is managed through two interest rate swap transactions,totalling £10m. The counterparty to these transactions is HSBC Bank Plc. Liquidity Risk Short term flexibility is available through existing bank facilities and thenetting off of surplus funds. Full details of the group financial assets andliabilities are given in note 25. Employee Involvement The Group aims to improve the performance of the organisation through thedevelopment of its employees. Their involvement is encouraged by means of teamworking, team briefings, consultative committees and working parties. Disabled Employees The Group is committed to equality of employment and its policies reflect adisregard of factors such as disability in the selection and development ofemployees. Political and Charitable Contributions During the year charitable donations amounting to £10,411 (2005: £3,740) weremade primarily to local charities. Auditors Horwath Clark Whitehill LLP have expressed their willingness to continue inoffice as auditors and a resolution proposing their re-appointment will besubmitted to the forthcoming Annual General Meeting. This information is provided by RNS The company news service from the London Stock Exchange

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