12th Mar 2008 07:01
Finsbury Food Group PLC12 March 2008 Date: 12 March 2007On behalf of: Finsbury Food Group plc ("Finsbury", the "Company" or the "Group")Embargoed: 0700hrs Finsbury Food Group plcInterim Results 2008 Finsbury Food Group Plc (AIM: FIF), a leading manufacturer of premium andcelebration cakes, low fat slices and speciality, organic and gluten freebreads, today announces its interim results for the six months to 31 December2007. Financial Highlights • Revenue up 91% to £82.76m (2007 : £43.43m)• Strong sales growth in all subsidiaries• Results from operating activities (before reorganisation costs) up 150% to £4.48m (2007 : £1.79m)• Profit before tax and reorganisation costs up 95% to £2.61m (2007 : £1.34m)• Adjusted diluted EPS of 4.3p (2007 : 3.4p) Operating Highlights • Successful recovery of input cost rises from customers• Successful transfer of California Cakes Ltd to Lightbody site• Return to full operation of the United Central Bakeries Ltd site, previously damaged by fire• Acquisition and successful integration of Anthony Alan Foods Ltd Commenting on the results, Dave Brooks, Chief Executive of Finsbury Food Groupplc, said: "This has been an extremely challenging period for the whole food industry and Ifully expect the next twelve months or so to continue in this vein. In suchturbulent times, the fittest and most flexible are those most likely to prosper.With our excellent innovation skills, speed of thought and action, and strongcustomer relationships, I feel we have a robust business model which should giveus every opportunity to capitalise on our strong market position during theseuncertain times." For further information: Finsbury Food Group Plc www.finsburyfoods.co.ukDave Brooks (Chief Executive) 07831 787 382Lisa Morgan (Finance Director) 07771 712 720 Redleaf Communications [email protected] Kane/Sanna Sumner/Anna Dunkin 020 7822 0200 • Publication quality photographs are available via Redleaf Communications Chairman's Statement Against an extremely challenging and volatile market environment, it is withpleasure that I am able to deliver a positive statement on behalf of FinsburyFood Group. During the six month period under review, we have continued toachieve our goals whilst always focusing on being the 'Best at What We Do'. TheGroup's range of products and our customer base is well spread and we arestrongly positioned in the growing sectors of the cake and the speciality breadmarkets. As a consequence, these results demonstrate record sales and stronggrowth in all areas across the Group. Financials Our results, which are in line with market expectations, show: • Revenue up 91% from £43.43m to £82.76m• Results from operating activities (before reorganisation costs) up 150% to £4.48m from £1.79m• Profit before tax and reorganisation costs increasing by 95% from £1.34m to £2.61m• Adjusted diluted EPS increasing by 26% from 3.4p to 4.3p Whilst the full half year effect of the Lightbody Group Ltd acquisition inFebruary 2007 has driven a proportion of this growth, I am pleased to reportstrong organic like-for-like sales growth in all of our businesses. Whencompared year on year, Memory Lane's sales were up by 16%, California Cakes Ltdand Campbells Cakes Ltd up 18% across the combined businesses, and Nicholas &Harris up 14%. The Lightbody Group Ltd experienced like for like growth of 12%for the six month period to 31 December 2007. Input costs We have continued to manage cost pressures, particularly those resulting fromraw material price increases. In common with the rest of the industry, we haveseen major increases in the price of butter and other dairy products, flour,eggs and fats. In total, these factors have increased our material costs byapproximately 10% per annum. However, I am pleased to confirm that the requiredprice increases sought from our customers have now been fully achieved. I amalso pleased to confirm that profitability has been protected via close controlof discretionary costs despite the need for the Group to absorb in excess of£1.0m of increased input costs in the period prior to the implementation of theprice increases. Market conditions continue to be challenging but we remain focused on exploitingour expertise in driving innovation to deliver a wide range of products whichconsumers recognise as tasting great and offering superb value for money. Ourability to act quickly, excellent innovation skills and broad productioncapability, provide the Group with the flexibility to develop products to suitthe changing markets in which we operate. These factors have enabled thebusiness to grow whilst managing its margins and profitability and, importantly,have facilitated three price increases in the last twelve months. We areconfident that this skill set will be able to reinforce the robustness of ourearnings at the same time as managing the cost pressures that are a fact of lifein our industry. Market Overview The cake market has grown by 7% to £1.51bn in the year to January 2008 (Source:TNS). Volumes are on the increase again, up 2.7%, with the remainder due toprice from a combination of consumers trading up into more premium products andthe effect of the initial price increases evident in the market from September2007. In terms of specific sectors, the premium and health sectors continue todrive this performance with the health sector up 15% and the premium sectorgrowing by 41%. As we enter 2008 the economic outlook is less clear. Despite this, the IGDpublished a report in December 2007 which forecast that the total premium foodmarket will grow to be worth £20bn by 2012, with one in every £8 being spent on'premium' products. Should this come to pass, the premium cake market will morethan double in size over the next five years. In addition, the birthday cakemarket is moving back into growth, and our consumer feedback indicates that thetrend towards more health conscious eating shows no signs of slowing. Subsidiaries Memory Lane Cakes Ltd Memory Lane is the hub of Finsbury's focus on premium retailer branded cakes.Over the last eighteen months, the business has successfully extended thepremium ranges of each of the six major multiples who have "tiered branding".Sales growth in the period of 16% indicates strong progression, with the IGDreport suggesting there is still further growth to be achieved. The businesscontinues to refine and improve all of the customer ranges to retain the marketleading position which it currently enjoys. Campbells Cakes Ltd Working in conjunction with Memory Lane on the retailer premium ranges, thisbusiness has now more than trebled in size from the £1.50m per annum turnoverbusiness we purchased in November 2005. Campbells' range of cold set products,such as caramel shortbread and tiffin, has seen significant growth of 53% overthe period. Nicholas & Harris Ltd The strong growth in premium cake is mirrored in our premium and artisan breadbusiness in Salisbury. The sales growth of 14% in the period has been driven bydeveloping a wider range of customer relationships. Whilst Waitrose remains ourlargest customer by far, the business has developed strong positions with threeother major multiple grocers. The ability to produce hand crafted productsusing artisan baking techniques offers a fuller flavour to delight the consumer,and is proving to be our key selling point. The artisan and innovation skillsof the business have also enabled positive development in "clean label" breads,where we now feel we hold a market leading position which will stand us in goodstead for continued growth in 2008. United Central Bakeries Ltd Less than one year on from the disastrous fire which destroyed two thirds of thebakery, the business saw growth of 19% in October 2007 over the correspondingmonth in 2006 (which was the last complete month before the fire). This isexcellent evidence of the superb recovery effected by the management team overthat time. The new state-of-the-art potato scone and yum yum lines purchased with theinsurance proceeds are performing to standards well above those experiencedprior to the fire, with excellent quality. In addition, the gluten free businessgoes from strength to strength and launched two new products within the UKmarket in the period - jam doughnuts and traditional crumpets. Both havestarted promisingly and, with Mintel forecasting the gluten free market todouble over the next five years, the business is well placed to exploit thisopportunity. Lightbody Group Ltd Lightbody, which was acquired in February 2007, has settled into the Group welland experienced strong growth of 12% in the period. As the UK's leadingsupplier of celebration cakes to UK grocery multiples, the initial bakerymanufactures a wide range of party cakes, and is the leading licensing partnerin the cake industry. It has the exclusive rights to Disney party cakes and theThorntons brand. These two brands provide a strong foundation on which otherlicences such as In The Night Garden, Bratz and Dr Who can be added. The second bakery has two cake lines which specialise in small cakes. Theyproduce a wide range of cereal clusters and other indulgent small cakes, and itis this bakery which has driven the majority of the growth. The Lightbodybusiness invested heavily during 2003/04 to create a small cake capability andthe Group are now in a good position to leverage its customer relationships toreally drive this part of the business. We have great equipment which is veryefficient, manufactures delicious products and has capacity to fill. The Lightbody-Stretz sales and marketing joint venture in France continues tomake good progress, though the Czech sales and marketing operation has beenclosed. Sales volumes were satisfactory, though it became clear during thesummer that the Central European economy could not yet support a celebrationbusiness of a suitable size to achieve any critical mass in the foreseeablefuture. Reorganisation costs of £0.2m have been incurred in this closure. Acquisition and Integration Anthony Alan Foods Ltd In October 2007, the Group acquired Anthony Alan Foods Ltd, one of the UK'sleading suppliers of low fat cakes. This purchase included the right todistribute, under license from WeightWatchers, ambient cakes using theWeightWatchers brand in the UK and Ireland. According to TNS, the WeightWatchers brand is the largest in the low fat cake sector with a market share of58%, and with sales up 15% year-on-year. The total maximum consideration forthe acquisition was £3.8m, of which £0.5m is due in June 2008 based upon theoperating results for the year to March 2008, and up to £2.9m is payable inNovember 2009 conditional on the WeightWatchers licence being renewed for afurther three years. The deferred consideration has been accrued in full. The integration of Anthony Alan into the Group has gone smoothly and thetransfer of the administration function to Memory Lane Cakes in Cardiff wascompleted in November 2007, with the integration process generatingreorganisation costs of £0.2m. California Cakes Ltd Following the purchase of the Lightbody business in February 2007, it was agreedto relocate the California operation eight miles from its site in Coatbridge tothe Lightbody business in Hamilton. This process completed to timescale in July2007. The learning curve was a little longer than had been anticipated due tostaff turnover, though this did not prevent the business growing sales by 10% inthe period. The relocation project has proven to be a success and theannualised synergy savings of £2m which were targeted have been achieved. Asexpected, the full effect of these savings will be realised in 2009. Net Debt Net debt at 31 December 2007 was in line with expectations at £43m. In the firsthalf of the year, the Group settled the deferred consideration due on theLightbody Group Ltd acquisition, acquired and integrated Anthony Alan Foods Ltd,and completed the integration of California Cakes Ltd into the Hamilton site.In addition, December also sees the Group's working capital demands peak as webuild material stocks to cover supplier shut downs, and await payment for thefinal month of the Christmas program. Application of International Financial Reporting Standards This is our first set of results reported under IFRS and a full reconciliationof the numbers is provided towards the back of this report. Due to the adoptionof appropriate IFRS accounting policies, pre-tax profits have been reduced bynon-cash charge of £658,000 (2007 : £27,000 credit), reflecting the change infair value of our interest rate swaps (due to reduced base rates) and themovement in the discounted value of the deferred consideration due in relationto the Lightbody Group Ltd and Anthony Alan Foods Ltd acquisitions. The adjusted diluted EPS numbers quoted ignore these IFRS adjustments and the reorganisation costs incurred. ShareSave Scheme Subsequent to the end of the period, the Group launched a ShareSave scheme inJanuary 2008 to encourage wider share ownership amongst the workforce. Suchschemes are rare in manufacturing businesses of our nature and we were expectinga steady growth over a few years. However, demand was strong and the Groupfound itself over-subscribed. As a result of the January invite, we now have256 employees (11% of eligible employees) with options over shares equivalent tonearly 2% of the Group's total number of shares in issue. Strategic Investment The Nicholas & Harris bread business is now approaching capacity, in a marketwhere there is huge potential to continue our recent growth. To enable theGroup to take advantage of this opportunity, the Board has approved a £2mcapital investment program to equip the empty 20,000 sq ft bay in United CentralBakeries. This additional capacity will start to come on line in October 2008and be fully operational from 2009. The Group will also continue to review the bakery market for additional bolt-onacquisition opportunities, with a particular focus on the health end of themarket. Current Trading & Outlook Current trading continues in line with expectations and the growth experiencedin the first six months of the year is expected to continue in all businesses.In the eights weeks since the half year: • Memory Lane Cakes is up 7% (14% for the first 34 weeks);• Lightbody is up 12% (12% year to date);• The combined California and Campbells cake businesses are up 20% (19% year to date); and• Nicholas & Harris is up 29%, accelerating the growth to 18% for the first 34 weeks Whilst there remains a significant level of uncertainty in the UK today aroundfood inflation, we believe our market positioning is excellent. We have a goodteam, great products and a strong range of customer relationships. We willcontinue to work on adding value for consumers and customers via excitinginnovation, world class service levels, consumer insight, consistent quality andcompetitive terms. These factors have enabled the business to grow whilstmanaging its margins and profitability and, importantly, have facilitated threeprice increases in the last twelve months. The Directors remain comfortable that the Group will meet market expectationsfor the full year. Lord SaatchiChairman 12th March 2008 Consolidated Income Statement (unaudited) Six months Year ended 31 ended 30 Six months ended 31 December 2007 December June 2006* 2007* Before Reorganis-ation Total Unaudited Unaudited re-organis-ation costs costs £'000 £'000 £'000 £'000 £'000 Notes (Note 3)Revenue 82,755 - 82,755 43,425 109,784 Cost of sales (53,071) (239) (53,310) (26,522) (67,070) Gross profit 29,684 (239) 29,445 16,903 42,714 Distribution expenses (4,746) (68) (4,814) (2,283) (6,056)Administrative expenses 2 (20,454) - (20,454) (13,397) (31,783)Costs relating to fireclaim - - - - (2,545)Other income 564 2,897Reorganisationadministration costs 3 - (697) (697) - (1,213)Profit on replacement ofplant and equipment - - - - 2,307Profit on sale oftrademark - - - - 28 Results from operatingactivities 4,484 (1,004) 3,480 1,787 6,349 Finance income 4 - - - 29 284Finance expenses 4 (1,873) - (1,873) (478) (1,578)Net pension financeincome - - - - 394 Profit before taxation 2,611 (1,004) 1,607 1,338 5,449 Income tax (expense)/income (796) 301 (495) (397) (1,480) Profit after taxation 1,815 (703) 1,112 941 3,969 Profit attributable to:Equity holders of thecompany 1,738 (703) 1,035 941 3,933Minority interest 77 - 77 - 36 1,815 (703) 1,112 941 3,969 * Income Statements reflect the impact of transition to International FinancialReporting Standards. See appendices on pages 15 onwards. Consolidated Balance Sheet Unaudited Unaudited Unaudited 31 December 31 December 30 June 2007 2006* 2007* Notes £000 £000 £000 AssetsNon-current assetsGoodwill 54,795 13,891 49,608Property, plant & equipment 22,901 14,121 23,160Investments 25 - 25Employee benefits 6 2,522 783 2,522 Total non-current assets 80,243 28,795 75,315 Current assetsInventories 5,569 2,259 3,986Trade and other receivables 29,910 12,578 23,615Financial instruments at fair value - 205 449Cash and cash equivalents 7 - 46 - Total current assets 35,479 15,088 28,050 Total assets 115,722 43,883 103,365 LiabilitiesCurrent liabilitiesTrade and other payables (29,088) (14,319) (24,258)Deferred purchase consideration - - (9,400)Deferred contingent purchase consideration (486) - -Financial instruments at fair value (14) - -Short term borrowings 7 (7,431) (30) (4,130)Current portion of long term borrowings 7 (6,391) (2,614) (2,808)Current tax payable (1,064) (364) (1,033)Total current liabilities (44,474) (17,327) (41,629) Non-current liabilitiesLong term borrowings 7 (29,278) (12,004) (22,046)Provisions and other liabilities - - (324)Deferred contingent purchase consideration (2,545) - -Deferred tax (1,860) (624) (2,045) Total non-current liabilities (33,683) (12,628) (24,415) Total liabilities (78,157) (29,955) (66,044) Net assets 37,565 13,928 37,321 EquityCalled up share capital 514 263 511Share premium account 26,679 7,823 26,579Capital redemption reserve 578 578 578Other reserves 8 9,680 5,264 9,616 Total shareholders' equity 37,451 13,928 37,284Minority interest 114 - 37 Total Equity 9 37,565 13,928 37,321 * Balance sheets reflect the impact of transition to International FinancialReporting Standards. See appendices on pages 15 onwards. Consolidated Cash Flow Statement Unaudited six Unaudited six Unaudited months ended 31 months ended 31 year ended 30 December 2007 December 2006 June 2007 Note £'000 £'000 £'000 £'000 £'000 £'000 Cash Flows from Operating ActivitiesProfit after taxation 1,112 941 3,969Taxation 495 397 1,480Finance expenses 1,873 449 1,294Net pension finance income - - (394)Depreciation 1,308 828 1,894Release of government grant (45) - (28)Profit on disposal of plant, equipmentand trademark - - (2,335) Reorganisation expenses 460 1,213Impact of share based payments 58 - 298Retirement benefits net charge - 24 206IFRS3 fair value adjustment - - 222Operating Profit before Changes inWorking Capital 5,261 2,639 7,819 Changes in Working CapitalChange in inventories (1,583) (545) 17Change in trade and other receivables (4,969) (1,238) (3,532)Change in trade and other payables 2,240 (176) 1,117 (4,312) (1,959) (2,398) 949 680 5,421Interest paid (833) (468) (1,335)Interest received - 2 13Income taxes paid (603) (471) (692) (1,436) (937) (2,014) Net Cash (Used)/Generated in OperatingActivities (487) (257) 3,407 Cash Flows from Investing ActivitiesPurchase of property, plant &equipment (1,324) (1,299) (4,095)Proceeds of insurance claim onproperty, plant and equipment - 933 2,565Purchase of subsidiary companies (10,113) (500) (20,032)Cash received with acquisition 136 - 879 Net Cash Used in Investing Activities (11,301) (866) (20,683) Cash Flows From Financing ActivitiesDrawdown of bank loans 9,800 - 21,700Repayment of current bank loans (681) (814) (393)Repayment of former bank facility - - (12,774)Settlement of acquired debt (1,401) - (6,495)Repayment of loan notes (545) - -Drawdown of asset finance facility 2,184 1072 1,072Repayment of asset finance liabilities (489) (175) (600) Issue of ordinary share capital 103 953 11,457Equity dividend paid 8 (1,029) (394) (394)Net Cash Generated by Financing Activities 7,942 642 13,573 Net Decrease in Cash and Cash Equivalents (3,846) (481) (3,703) Opening cash and cash equivalents (3,176) 527 527 Cash and cash equivalents at end ofperiod (7,022) 46 (3,176) STATEMENT OF RECOGNISED INCOME AND EXPENSE Unaudited Unaudited Unaudited 31 December 2007 31 December 2006 30 June 2007 £000 £000 £000Actuarial movement in defined benefitschemes - - 1,551Deferred taxation on pension schemeasset - - (465)Net income recognised directly inequity - - 1,086Profit for the period 1,112 941 3,969Total recognised income and expensefor the period 1,112 941 5,055 Notes: 1. BASIS OF PREPARATION The AIM Rules require that the next annual consolidated financial statements ofthe company, for the year ending 30 June 2008, be prepared in accordance withInternational Financial Reporting Standards (IFRSs) as adopted by the EU("adopted IFRSs"). This interim financial information has been prepared on the basis of therecognition and measurement requirements of adopted IFRSs as at 31 December 2007that are effective (or available for early adoption) at 30 June 2008, theGroup's first annual reporting date at which it is required to use adoptedIFRSs. Based on these adopted IFRSs, the directors have applied the accountingpolicies which they expect to apply when the first annual IFRS financialstatements are prepared for the year ending 30 June 2008. Please refer to theappendix to this report for further information. Please note, however, that the adopted IFRSs that will be effective (oravailable for early adoption) in the annual financial statements for the yearending 30 June 2008 are still subject to change and to additionalinterpretations and therefore cannot be determined with certainty. Accordingly,the accounting policies for that annual period will be determined finally onlywhen the annual financial statements are prepared for the year ending 30 June2008. A detailed explanation of the impact of the transition from UK GAAP to IFRS iscontained in appendix to this interim report. The interim report, which is unaudited, does not constitute statutory accountswithin the meaning of section 240(5) of the Companies Act 1985 (as amended). The comparative figures for the financial year ended 30 June 20007 are not thecompany's statutory accounts for that financial year. Those accounts, which wereprepared under UK GAAP, have been reported on by the company's auditors anddelivered to the registrar of companies. The report of the auditors was (i)unqualified, (ii) did not include a reference to any matters to which theauditors drew attention by way of emphasis without qualifying their report, and(iii) did not contain a statement under section 237(2) or (3) of the CompaniesAct 1985. 2. SHARE BASED PAYMENTS The Company operates both approved and unapproved share option schemes. The LongTerm Incentive Plan 2006 was adopted by the Company on 29 November 2006.Following the adoption of IFRS2 'Share-based payments' charges have been made tothe Income Statement to reflect the calculated fair value of employee shareoptions. The cost is calculated at the date of grant and is charged equally overthe vesting period. The corresponding adjustment is made to reserves. During the six months to 31 December 2007 options were granted on 5 October and15 November to senior managers and directors throughout the Group. On 5 October1,288,100 options were granted at an exercise price of 106p and on 15 November100,000 options were granted at an exercise price of 1p. The aggregate of theestimated fair values of the options granted on those dates is £388,000, thecomparative estimated fair values for the six months to 31 December 2006 and forthe year ended 30 June 2007 were £126,000 and £364,000. Administration costs include a charge of £58,000 for the six months to 31December 2007. The comparative charges for the six months to 31 December 2006and for the year ended 30 June 2007 were £24,000 and £298,000 respectively. The Company has used the QCA-IRS option valuer(TM) based on the Black-Scholes-Merton based option pricing model, to calculate the fair value of theoutstanding options. This model was developed by The QCA partnered withIndependent Remuneration Solutions (IRS) and City Group plc. The development wasled by Mr Edward Beale, a Director of the Group and Chief Executive of CityGroup plc. 3. REORGANISATION COSTS The re-organisation costs relate to the following: Unaudited Unaudited Unaudited 31 December 31 December 30 June 2007 2006 2007 £000 £000 £000Relocation and integration of the California Cake Company businessfrom their previous site to the Lightbody site in Hamilton 618 - 1,213 Operating loss and closure costs associated with the Lightbody Groupsubsidiary in the Czech Republic 194 - - Reorganisation costs associated with the integration of Anthony AlanFoods Limited 192 - - Total Reorganisation Costs 1,004 - 1,213 4. FINANCE INCOME AND EXPENSES Unaudited six Unaudited six Unaudited months ended 31 months ended year ended December 31 December 30 June 2007 2006 2007 £'000 £'000 £'000 Bank interest receivable - 2 13 Net bank interest payable (1,216) (478) (1,371) Change in fair value of interest rateswaps (463) 27 271 Discount charge on deferred consideration (194) - (207) Finance expenses (1,873) (449) 1,294 The Group has entered into three interest rate swap arrangements to hedge itsrisks associated with interest rate fluctuations - £5m fixed for five years from18 November 2005, £5m amortising for five years from 18 November 2005 and £11mamortising over five years from 23 February 2007. These arrangements do notmeet the conditions necessary for hedge accounting to be applied and, therefore,changes in their fair value are immediately recognised in the income statementresulting in a charge of £463,000 as indicated above. This charge represents amovement of 1.0% in the weighted average market rate payable for similarcontracts from 6.3% at 30 June 2007 to 5.3% at 31 December 2007. In February 2007, the Group acquired the Lightbody Group Limited and thedeferred element of the consideration payable of £9.5m was discountedaccordingly. This deferred consideration was paid in September 2007 and thebalance of the discount of £130,000 has been charged to the income statement(December 2006: nil and June 2007: £207,000). In October 2007, the Group acquired Anthony Alan Foods Limited and the deferredelement of the consideration of £3.4m was discounted accordingly. Thediscounted value of this deferred consideration was re-assessed at 31 December2007 resulting in a charge to the income statement of £64,000 (December 2006:nil and June 2007: nil). 5. EARNINGS PER ORDINARY SHARE Basic earnings per share for the period is calculated on the basis of profit forthe year after tax, divided by the weighted average number of shares in issue51,272,520 (December 2006: 23,981,507 and June 2007: 33,286,620). Basic diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares outstanding to assume conversion of all potentialdilutive ordinary shares. For 30 December 2007 the weighted average number is52,301,650 shares (December 2006: 27,640,071 and June 2007: 36,395,174). An adjusted earnings per share and a diluted adjusted earnings per share havealso been calculated as in the opinion of the Board this will allow shareholdersto gain a clearer understanding of the trading performance of the Group. Theseadjusted earnings per share exclude reorganisation and other exceptional costs,IAS 39 "Financial Instruments: Recognition and Measurement" fair valueadjustment relating to the Group's interest rate swaps and "IFRS 3 BusinessCombinations" discount charge relating to the deferred consideration payable forAnthony Alan Foods Limited. The adjustments have been taken net of the effect oftaxation at the appropriate rate. Six months ending Six months ending Year ending 31 December 2007 31 December 2006 30 June 2007 Weighted Per Weighted Per Weighted Per average share average share average share Earnings number of amonut Earnings number of amount Earnings number of amount shares shares shares £'000 000's Pence £'000 000's Pence £'000 000's PenceBasic earnings pershare Basic earnings 1,035 51,273 2.0 941 23,982 3.9 3,933 33,287 11.8 IFRS2 Share-basedpayment 42 0.1 17 0.1 215 0.7 IAS 39 fair value SWAPS 333 0.6 (18) (0.1) (198) (0.6) IFRS3 fair valueadjustments 140 0.3 - - 149 0.4 Reorganisation costs 703 1.4 - - 849 2.6 Profit on replacementof plant and equipment - - - - (1,615) (4.9) Profit on sale oftrademark - - - - (20) (0.1) Adjusted earnings pershare 2,253 51,273 4.4 940 23,982 3.9 3,313 33,287 9.9 Dilutive effect ofoptions 821 702 803 Dilutive effect ofwarrants 208 2,956 2,305 Basic diluted earningsper share Basic earnings 1,035 52,302 2.0 941 27,640 3.4 3,933 36,395 10.8 IFRS2 Share-basedpayment 42 0.1 17 0.1 215 0.6 IAS 39 fair value SWAPS 333 0.6 (18) (0.1) (198) (0.5) IFRS3 fair valueadjustments 140 0.3 - 149 0.4 Reorganisation costs 703 1.3 - 849 2.3 Profit on replacementof plant and equipment - - - (1,615) (4.4) Profit on sale oftrademark - - - (20) (0.1) Adjusted dilutedearnings per share 2,253 52,302 4.3 940 27,640 3.4 3,313 36,395 9.1 6. EMPLOYEE BENEFITS A number of companies within the Group operate defined contribution pensionschemes with one business, Memory Lane Cakes Limited, operating a definedbenefit scheme. The amounts in the Financial Statements for the period ended 31December 2007 relating to this defined benefit pension scheme are based on afull actuarial valuation dated 31 December 2004, which was updated to 30 June2007. A full actuarial valuation dated 31 December 2007 is being carried outcurrently and will be completed by 31 March 2008. 7. ANALYSIS OF NET DEBT Unaudited six Unaudited six Unaudited year months ended 31 months ended 31 ended December 2007 December 2006 30 June £'000 £'000 £'000Cash at bank - 46 -Bank overdraft (7,022) - (3,176)Cash and cash equivalents (7,022) 46 (3,176)Loan notes (409) (30) (954)Loans within one year (4,214) (1,989) (1,390)Loans after more than one year (25,495) (10,120) (18,910)Asset finance within one year (2,177) (625) (1,418)Asset finance after more than one year (3,783) (1,854) (3,137) (43,100) (14,572) (28,985) The banking facilities of the Group consist of: • £8.0m mortgage over 15 years at 1% above base (drawn) • £12.3m term loan, over 7 years at 1.95% above base (drawn) • £7.7m term loan, over 5 years and 6 months at 2.25% over base (drawn) • £2.1m term loan, over 6 years at 2.25% over base (drawn) • £7.2m asset finance facility, over 5 years, at 1.275% over base (drawn) • £10.0m overdraft facility at 1.375% over base (£7.0m drawn) • £380,000 loan notes over 5 years at 1% below base • £29,000 5% loan notes (repayable at the note holders' demand) The blended interest rate on this facility is 1.55% over the Bank of England base rate. 8. DIVIDENDS The final dividend for the year ended 30 June 2007 of 2.0p (2006: 1.5p)amounting to £1,029,000 (2006: £394,000) was paid on 7th December 2007. 9. STATEMENT OF CHANGES IN EQUITY Issued Share Capital Other Minority Total Share Premium Redemp-tion Reserves Interest Capital Account Reserve £'000 £'000 £'000 £'000 £'000 £'000Balance at 1 July 2006 231 6,902 578 4,693 - 12,404Option exercise in period 2 56 - - - 58Warrant exercise in period 30 865 - - - 895Impact of share based payments - - - 24 - 24Profit for the period - - - 941 - 941Dividend paid - - - (394) - (394)Balance as at 31 December 2006 263 7,823 578 5,264 - 13,928 Balance at 1 July 2006 231 6,902 578 4,693 - 12,404Acquired with Lightbody Group - - - - 1 1Option exercise in period 4 132 - - - 136Warrant exercise in period 51 1,485 - - - 1,536Issue of new ordinary shares 225 18,060 - - - 18,285Impact of share based payments - - - 298 - 298Profit for the period - - - 3,933 36 3,969Actuarial gain relating to pensionscheme asset - - - 1,551 - 1,551Deferred tax movement on actuarial gain - - - (465) - (465)Dividend paid - - - (394) - (394) Balance as at 30 June 2007 511 26,579 578 9,616 37 37,321 Balance at 1 July 2007 511 26,579 578 9,616 37 37,321Option exercise in period 1 28 - - - 29Warrant exercise in period 2 72 - - - 74Impact of share based payments - - - 58 - 58Profit for the period - - - 1,035 77 1,112Dividend paid - - - (1,029) - (1,029)Balance as at 31 December 2007 514 26,679 578 9,680 114 37,565 10. ACQUISITIONS The Group acquired the entire issued share capital of Anthony Alan Foods Limitedon 2 October 2007 for a total maximum consideration of £3.80m. £0.50m iscontingent on achieving certain performance targets for the year to March 2008and a further payment of up to £2.90m will become due in November 2009 providedthat the Weight Watchers licence is renewed for a further three years. Thedeferred consideration has been accrued in full. The fair value of net liabilities acquired was £1,637,000. The following tablesets out the book values of the identifiable assets and liabilities acquired andtheir fair value to the group: Book Fair value Fair value to value adjustment group £'000 £'000 £'000 Non-current assets Property, plant and equipment 12 - 12 Current assets Trade and other receivables 1,370 - 1,370 Cash and cash equivalents 136 - 136 Total current assets 1,506 - 1,506 Total assets 1,518 - 1,518 Current liabilities Trade and other payables (2,252) (105) (2,357) Short term borrowings (798) - (798) Total current liabilities (3,050) (105) (3,155) Net liabilities (1,532) (105) (1,637) Goodwill 5,188 3,551 Satisfied by : Cash 345 Net debt deferred consideration 56 Deferred consideration 2,968 Acquisition costs 182 3,551 The provision for deferred consideration shown above is recorded at its expectednet present value with the unwinding of the discount included as a charge to theincome statement. This treatment is consistent with IFRS3 "BusinessCombinations". 11. SHARESAVE SCHEME Following the launch of the ShareSave scheme as approved at the Annual GeneralMeeting on 28 November 2007, options over 1.02m shares were granted to employeeson 29 January 2008 at an option price of 67.5p. This interim report is being sent to shareholders and warrant holders and copiesare available from the Company Secretaries, City Group Plc. at 30 City Road,London, EC1Y 2AG. APPENDIX TO INTERIM RESULTS Reporting under International Financial Reporting Standards (IFRS) This interim report is the first to be prepared under IFRSs as "adopted by theEU (Adopted IFRSs)". The Group's date of transition is 1st July 2006 and theopening balance sheet for IFRS purposes is that reported at 30 June 2006 asamended for changes due to IFRS. The comparative figures have been prepared onthe same basis and have therefore been restated from those previously preparedunder UK GAAP. Notes below explain the effect of converting from UK GAAP to IFRSin these accounts. To show the impact of adopting IFRS, reconciliation schedules have been includedin this appendix as follows:- 1. Reconciliation of the Group Balance Sheet as at 30 June 2006 UK GAAP to IFRS 2. Reconciliation of the Group Balance Sheet as at 31 December 2006 UK GAAP to IFRS 3. Reconciliation of the Group Balance Sheet as at 30 June 2007 UK GAAP to IFRS 4. Reconciliation of the Group Income Statement for the six months ended 31 December 2006 UK GAAP to IFRS 5. Reconciliation of the Group Income Statement for the year ended 30 June 2007 UK GAAP to IFRS The transition from UK GAAP to IFRS does not affect the cash flows generated bythe Group. There is, therefore, no reconciliation statement required for itsimpact on cash flows, but there has been reclassification of items, between cashflow categories where appropriate. Notes to the reconciliations between previously reported UK GAAP and IFRS INTEREST RATE SWAPS The Group has three interest rate swaps. The Group has applied IAS 39 FinancialInstruments: Recognition and Measurement and determined that hedge accountingdoes not apply to these instruments. They have therefore been valued at theirfair value at each balance sheet date, taking any gains or losses to the financeincome / expenses line in the income statement. Under UK GAAP these were notvalued on the balance sheet. NEGATIVE GOODWILL The carrying value of the negative goodwill as at the transition date of 1 July2006 relating to Memory Lane Cakes Limited has been taken to retained earningsin line with the requirements of IFRS3 Business Combinations. The Group'sprevious policy, as allowed under UK GAAP, was to amortise this negativegoodwill over its estimated useful life of 20 years. GOODWILL Under IFRS3, goodwill is carried at cost subject to impairment review. Theprevious UK GAAP treatment for goodwill relating to Nicholas and Harris was forit to be amortised over its useful economic life of 20 years. For UnitedCentral Bakeries Ltd, California Cake Company Ltd, Campbells Cake Company Ltdand the Lightbody Group, goodwill was deemed to have an indefinite useful lifeand goodwill was not amortised but was subject to annual impairment reviews. Under the transitional arrangements of IFRS1 the Group has exercised the optionof applying IFRS3 prospectively from the date of transition to IFRS. Accordinglygoodwill arising on acquisitions prior to 30 June 2006 is retained at its netbook value at that date and is subject to annual impairment reviews. Thegoodwill arising on acquisitions subsequent to 30 June 2006 has not beenamortised and has been subject to annual impairment reviews under IAS36. Noimpairments have been identified. INTANGIBLE ASSETS IAS38 requires intangible assets acquired in business combinations since thedate of transition to IFRS to be recognised in the balance sheet separately fromgoodwill and amortised over their useful economic lives. The directors havecarried out this review and have ascertained that there were no separatelyidentifiable intangible assets. IFRS3 FAIR VALUE ADJUSTMENTS Stock IFRS 3 Business Combinations requires that finished goods stock acquired onacquisition be recognised at its fair value, that is its selling price less thecosts of disposal, where under UK GAAP it was recognised at the lower ofreplacement cost or realisable value. Goodwill is recalculated accordingly andthe fair value of stock is expensed at the date of its disposal which was in theperiod immediately following acquisition. The decrease in goodwill as a resultof the fair value adjustment is £223,000. Deferred Consideration In the previously reported UK GAAP financial statements provisions for deferredconsideration arising from business combinations were not discounted. Thedirectors have amended this policy so that such provisions are recorded at theirexpected net present value with the unwinding of the discount included as acharge to the income statement. This treatment is consistent with IFRS3 "Business Combinations". The decrease in goodwill as a result of the fair valueadjustment to deferred consideration is £337,000. Reconciliation of Group Balance Sheet as at 30 June 2006 from UK GAAP to IFRS(unaudited) UK GAAP Interest Negative Goodwill IFRS reclassified rate swaps goodwill amort'n £'000 £'000 £'000 £'000 £'000AssetsNon-current assetsGoodwill-positive 14,031 - - - 14,031Goodwill-negative (493) - 493 - -Property, plant and equipment 13,899 - - - 13,899Employee benefits 783 - - - 783Total non-current assets 28,220 - 493 - 28,713 Current assetsInventories 1,714 - - - 1,714Trade and other receivables 11,341 - - - 11,341Financial instruments at fairvalue - 178 - - 178Cash and cash equivalents 527 - - - 527Total current assets 13,582 178 - - 13,760 Total assets 41,802 178 493 - 42,473 LiabilitiesCurrent liabilitiesTrade and other payables (13,772) - - - (13,772)Performance related deferredconsideration (500) - - - (500)Short-term borrowings (245) - - - (245)Current portion of long-termborrowings (1,867) - - - (1,867)Current tax payable (586) - - - (586)Total current liabilities (16,970) - - - (16,970) Non-current liabilitiesLong-term borrowings (12,484) - - - (12,484)Deferred tax (562) (53) - - (615)Total non-current liabilities (13,046) (53) - - (13,099) Total liabilities (30,016) (53) - - (30,069) Total net assets 11,786 125 493 - 12,404 EquityCalled up share capital 231 - - - 231Share premium 6,902 - - - 6,902Capital redemption reserve 578 - - - 578Profit and loss account 4,075 125 493 - 4,693Equity shareholders' funds 11,786 125 493 - 12,404Minority interest - - - - -Total Equity 11,786 125 493 - 12,404 Reconciliation of Group Balance Sheet as at 31 December 2006 from UK GAAP toIFRS (unaudited) UK GAAP Interest Negative Goodwill IFRS reclassified rate swaps goodwill amort'n £'000 £'000 £'000 £'000 £'000AssetsNon-current assetsGoodwill-positive 13,833 - - 58 13,891Goodwill-negative (477) - 477 - -Property, plant and equipment 14,121 - - - 14,121 Employee benefits 783 - - - 783Total non-current assets 28,260 - 477 58 28,795 Current assetsInventories 2,259 - - - 2,259Trade and other receivables 12,578 - - - 12,578Financial instruments at fairvalue - 205 - - 205Cash and cash equivalents 46 - - - 46Total current assets 14,883 205 - - 15,088 Total assets 43,143 205 477 58 43,883 LiabilitiesCurrent liabilitiesTrade and other payables (14,319) - - - (14,319)Short-term borrowings (30) - - - (30)Current portion of long-termborrowings (2,614) - - - (2,614)Current tax payable (364) - - - (364)Total current liabilities (17,327) - - - (17,327) Non-current liabilitiesLong-term borrowings (12,004) - - - (12,004)Deferred tax (562) (62) - - (624)Total non-current liabilities (12,566) (62) - - (12,628) Total liabilities (29,893) (62) - - (29,955) Net assets 13,250 143 477 58 13,928 Shareholders' equityCalled up share capital 263 - - - 263Share premium 7,823 - - - 7,823Capital redemption reserve 578 - - - 578Profit and loss account 4,586 143 477 58 5,264Equity shareholders' funds 13,250 143 477 58 13,928Minority interest - - - - -Total Equity 13,250 143 477 58 13,928 Reconciliation of Group Balance Sheet as at 30 June 2007 from UK GAAP to IFRS(unaudited) UK GAAP Interest Negative Goodwill IFRS Fair IFRS restated rate swaps goodwill amort'n value £'000 £'000 £'000 £'000 £'000 £'000AssetsNon-current assetsGoodwill-positive 50,052 - - 116 (560) 49,608Goodwill-negative (462) - 462 - - -Property, plant and equipment 23,160 - - - - 23,160 Investments 25 - - - - 25Employee benefits 2,522 - - - - 2,522Total non-current assets 75,297 - 462 116 (560) 75,315 Current assetsInventories 3,986 - - - - 3,986Trade and other receivables 23,615 - - - - 23,615Financial instruments at fairvalue - 449 - - - 449Cash and cash equivalents - - - - - -Total current assets 27,601 449 - - - 28,050 Total assets 102,898 449 462 116 (560) 103,365 LiabilitiesCurrent liabilitiesTrade and other payables (24,258) - - - - (24,258)Deferred purchaseconsideration (9,530) - - - 130 (9,400)Short-term borrowings (4,130) - - - - (4,130)Current portion of long-termborrowings (2,808) - - - - (2,808)Current tax payable (1,033) - - - - (1,033)Total current liabilities (41,759) - - - 130 (41,629) Non-current liabilitiesLong-term borrowings (22,370) - - - - (22,370)Deferred tax (2,039) (126) - - 120 (2,045)Total non-current liabilities (24,409) (126) - - 120 (24,415) Total liabilities (66,168) (126) - - 250 (66,044) Net assets 36,730 323 462 116 (310) 37,321 Shareholders' equityCalled up share capital 511 - - - - 511Share premium 26,579 - - - - 26,579Capital redemption reserve 578 - - - - 578Profit and loss account 9,025 323 462 116 (310) 9,616Equity shareholders' funds 36,693 323 462 116 (310) 37,284Minority interest 37 - - - - 37Total Equity 36,730 323 462 116 (310) 37,321 Reconciliation of Group Income Statement for six months ended 31 December 2006from UK GAAP to IFRS (unaudited) UK GAAP Interest Negative Goodwill IFRS rate swaps goodwill amort'n £'000 £'000 £'000 £'000 £'000 Revenue - continuing 43,425 - - - 43,425 Cost of sales (26,522) - - - (26,522) Gross profit 16,903 - - - 16,903 Distribution expenses (2,283) - - - (2,283)Administrative expenses (13,439) - (16) 58 (13,397) Other income 564 - - - 564 Results from operating activities 1,745 - (16) 58 1,787 Finance income 2 27 - - 29Finance expenses (478) - - - (478) Profit before taxation 1,269 27 (16) 58 1,338 Income tax expense (388) (9) - - (397) Profit after taxation 881 18 (16) 58 941 Profit attributable to:Equity holders of the company 881 18 (16) 58 941 881 18 (16) 58 941 Reconciliation of Group Income Statement for year ended 30 June 2007 from UKGAAP to IFRS (unaudited) UK GAAP Interest Negative Goodwill IFRS3 IFRS rate swaps goodwill amort'n Fair value £'000 £'000 £'000 £'000 £'000 £'000 Revenue - continuing 109,784 - - - - 109,784 Cost of sales (66,847) - - - (223) (67,070) Gross profit 42,937 - - - (223) 42,714 Distribution expenses (6,056) - - - - (6,056)Administrative expenses (31,868) - (31) 116 - (31,783)Costs relating to fire claim (2,545) - - - - (2,545)Reorganisation administrationcosts (1,213) - - - - (1,213)Profit on replacement of plantand equipment 2,307 - - - - 2,307Other income 2,925 - - - - 2,925 Results from operatingactivities 6,487 - (31) 116 (223) 6,349 Finance income 13 271 - - - 284Finance expenses (1,371) - - - (207) (1,578)Net pension finance income 394 - - - 394 Profit before taxation 5,523 271 (31) 116 (430) 5,449 Income tax expense (1,527) (73) - - 120 (1,480) Profit after taxation 3996 198 (31) 116 (310) 3,969 Profit attributable to:Equity holders of the company 3,960 198 (31) 116 (310) 3,933Minority interest 36 - - - - 36 3,996 198 (31) 116 (310) 3,969 IFRS 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 unaudited interim financial statements have been prepared using therecognition and measurement principles of International Financial ReportingStandards ("IFRS") and in accordance with IFRS1, "First-time adoption ofInternational Financial Reporting Standards". The Annual Report and Accounts forthe year ending 30 June 2008 will contain the Group's first audited financialstatements prepared in accordance with IFRS. In accordance with IFRS1, theeffective date of the Group's transition to IFRS was 1 July 2006. As required by IFRS1, detailed reconciliations between previously reportedamounts under UK Generally Accepted Accounting Principles ("UK GAAP") andrestated comparative amounts under IFRS are presented on pages 15 to 21. The interim financial information for the six months ended 31 December 2007 andthe six months ended 31 December 2006 have not been audited and does notconstitute statutory accounts within the meaning of Section 240 of the CompaniesAct 1985. The information for the year ended 30 June 2007 does not constitutestatutory accounts within the meaning of Section 240 of the Companies Act 1985,but is based on the statutory accounts for that year restated under IFRS. Thestatutory accounts which were prepared under UK GAAP, have been reported on bythe company's auditors and delivered to the registrar of companies. The reportof the auditors was (i) unqualified, (ii) did not include a reference to anymatters to which the auditors drew attention by way of emphasis withoutqualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985. Basis of Consolidation The Group financial statements consolidate the accounts of the Company and itssubsidiaries. Subsidiaries are entities controlled by the Group. Control existswhen the Group has the power to govern the financial and operating policies ofan entity so as to obtain benefits from its activities. In assessing control,potential voting rights that currently are exercisable are taken into account.The financial statements of subsidiaries are included in the consolidatedfinancial statements from the date that control commences until the date thatcontrol ceases. The accounting policies of subsidiaries have been changed whennecessary to align them with the policies adopted by the Group. Intra-group balances and transactions are eliminated in preparing theconsolidated financial statements. Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill isallocated to cash-generating units and is not amortised but is tested annuallyfor impairment As part of its transition to IFRSs, the Group elected to restate only thosebusiness combinations that occurred on or after 1 July 2006. In respect ofacquisitions prior to 1 July 2006, goodwill represents the amount recognisedunder the Group's previous accounting framework, (UK GAAP). Assets andliabilities are recognised at the date of transition if they would be recognisedunder IFRS, and are measured using their UK GAAP carrying amount as deemed costunder IFRS and subject to annual impairment reviews. Where the excess isnegative (negative goodwill), the amount is taken to retained earnings. For acquisitions on or after 1 July 2006, goodwill represents the excess of thecost of the acquisition over the Group's interest in the net fair value of theidentifiable assets, liabilities and contingent liabilities of the acquiree andis subject to annual impairment reviews. Impairment The carrying amounts of the Group's assets, are reviewed at each balance sheetdate to determine whether there is any indication of impairment; a financialasset is considered to be impaired if objective evidence indicates that one ormore events have had a negative effect on the estimated future cash flows ofthat asset. If any such indication exists, the asset's recoverable amount isestimated. For goodwill, assets that have an indefinite useful life and intangible assetsthat are not yet available for use, the recoverable amount is estimated at eachbalance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocatedfirst to reduce the carrying amount of any goodwill allocated to cash-generatingunits and then to reduce the carrying amount of the other assets in the unit ona pro rata basis. A cash generating unit is the smallest identifiable group ofassets that generates cash inflows that are largely independent of the cashinflows from other assets or groups of assets. Calculation of recoverable amount The recoverable amount is the greater of their fair values less costs to selland value in use. In assessing value in use, the estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific tothe asset. Reversals of impairment An impairment loss in respect of goodwill is not reversed. Deferred Consideration Deferred consideration arising on business combinations is estimated by thedirectors based on the expected outcome of performance related criteria. Theprovision is initially stated at the net present value of the expected futurepayment and the discount is accrued by increasing the amount of the provision upto the expected payment date. The charge relating to the unwinding of thediscount is recorded within finance costs. Revenue Revenue represents the amounts derived from the sale of premium and indulgentproducts in the cake sector and speciality, premium and artisan products withinthe bread and morning goods sector. Revenue is the fair value of considerationreceived or receivable excluding value added tax, trade discounts, transactionswith or between subsidiaries and deduction of off-invoice price promotions.Revenue is recognised when the significant risks and rewards of ownership havebeen transferred to the buyer, recovery of the consideration is probable, theassociated costs and probable return of goods can be estimated reliably, thereis no continuing management involvement with the goods, and the amount ofrevenue can be reliably measured. In practice this is usually upon despatch. Finance Income and Expenses Finance income comprises interest income on funds invested and changes in thefair value of financial instruments. Finance expenses comprise interest expenseon borrowing using the effective interest rate method and changes in the fairvalue of financial instruments. Income Tax The charge for taxation is based on the current results and takes into accounttaxation deferred because of timing differences between the treatment of certainitems for taxation and accounting purposes. Current tax is the expected tax payable on the taxable income for the sixmonths, using tax rates enacted or substantively enacted at the reporting date,and any adjustment to tax payable in respect of previous periods. Deferred tax is recognised using the balance sheet method, provision is made infull at the rates that are expected to be applied to the temporary differenceswhen they reverse, based on the laws that have been enacted or substantivelyenacted at the reporting date and not discounted for all taxation deferred inrespect of timing differences that have originated but have not been reversed bythe balance sheet date, except for gains on disposal of fixed assets which willbe rolled over into replacement assets. No provision is made for taxation onpermanent differences. Deferred tax assets are recognised to the extent that itis more likely than not that they will be recovered. Deferred tax is not recognised for the following temporary differences: theinitial recognition of assets and liabilities in a transaction that is not abusiness combination and that affects neither accounting nor taxable profit, anddifferences relating to investments in subsidiaries and jointly controlledentities to the extent that it is probable that they will not reverse in theforeseeable future. In addition deferred tax is not recognised for the taxabletemporary differences arising on the initial recognition of goodwill. Income tax expense is recognised in the income statement except to the extentthat it relates to items recognised directly in equity, in which case it isrecognised in equity. Property, Plant and Equipment Recognition and measurement Items of property, plant and equipment are measured at cost or fair value at thedate of acquisition, less accumulated depreciation and impairment provisions.The cost of property, plant and equipment at 1 July 2006, the date of transitionto IFRSs, was determined by reference to its fair value at that date. Costincludes expenditure that is directly attributable to the acquisition of theasset. The cost of self-constructed assets includes the cost of materials anddirect labour and any other costs directly attributable to bringing the asset toa working condition for its intended use, and the costs of dismantling andremoving the items and restoring the site on which they are located. Purchasedsoftware that is integral to the functionality of the related equipment iscapitalised as part of that equipment. Disposal of assets Gains and losses on disposal of an item of property, plant and equipment aredetermined by comparing the proceeds from disposal with the carrying amount ofthe property, plant and equipment and are recognised separately within theincome statement. Depreciation Depreciation is provided to write off the cost, less the estimated residualvalue, of fixed assets by equal instalments over their estimated useful economiclives to the income statement, when parts of property, plant and equipment havedifferent useful lives, they are accounted for as separate items (majorcomponents) of property, plant and equipment. The depreciation rates used are 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 lease Motor vehicles 15%-40%Fixtures and fittings 20% - 33% 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 asset's recoverable amount. Leased Assets Assets obtained under hire purchase contracts and finance leases are capitalisedin accordance with the accounting policy applicable to that asset. Assetsacquired by finance lease are depreciated over the shorter of the lease term andtheir useful lives. Assets acquired by hire purchase are depreciated over theiruseful lives. In accordance with IAS 17, the economic ownership of a leasedasset is transferred to the lessee if the lessee bears substantially all therisks and rewards related to the ownership of the leased asset. Finance leasesare those where substantially all of the benefits and risks of ownership areassumed by the company. Obligations under such agreements are included inliabilities net of the finance charge allocated to future periods. The financeelement of the rental payment is charged to the income statement as financeexpense so as to produce a constant periodic rate of charge on the netobligation outstanding in each period. All other leases are regarded as operating leases and the payments made underthem are charged to the income statement on a straight line basis over the leaseterm. Investments Investments are stated at their fair value with any change therein recognised inthe income statement. Employee Benefits Memory Lane Cakes Ltd operates a defined benefit pension scheme and the pensioncosts are charged to the income statement in accordance IAS 19, with current andpast service cost being recognised as an administration expense in the incomestatement and the net of expected returns on plan assets and interest cost shownas net pension finance income in the income statement. The actuarial gains orlosses are recognised in full in the balance sheet. The costs of contributing to defined contribution and personal pension schemesare charged to the income statement as an administration cost in the period towhich they relate. Inventories Inventories are measured at the lower of cost and net realisable value. Cost isdetermined on a first in first out basis, and includes all direct costs incurredand attributable production overheads. Net realisable value is based uponestimated selling price allowing for all further costs of completion anddisposal. Financial Instruments Derivative financial instruments are used by the Group for the management of itsinterest rate exposures. The Group does not hold derivative financialinstruments for trading purposes. The existing derivative financial instrumentsused by the Group do not meet the criteria for hedge accounting set out by IAS39 and have thus been treated as financial assets and liabilities through theincome statement. Foreign Currencies Transactions in foreign currencies are recorded at the rate of exchange at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are reported at the rates of exchangeprevailing at that date. Any exchange differences arising on the settlement of monetary items or ontranslating monetary items at rates different from those at which they wereinitially recorded are recognised in the income statement in the period inwhich they arise. The assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on consolidation, are translated to the Group'spresentational currency, Sterling, at foreign exchange rates ruling at thebalance sheet date. The revenues and expenses of foreign operations aretranslated at an average rate for the year where this rate approximates to theforeign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations aretaken directly to the translation reserve. They are released into the incomestatement upon disposal. 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 assetinvestments which are disposable without curtailing or disrupting the businessand are either readily convertible into known amounts of cash at or close totheir carrying values or are traded in an active market. Liquid resourcescomprise term deposits of less than one year other than cash. Share-based Payments All share based payments that had not vested prior to 1 July 2006 are recognisedin the financial statements. All services received in exchange for the grant ofany share-based payment are measured at their fair values. Where employees arerewarded using share-based payments, the fair values of employees' services aredetermined indirectly by reference to the fair value of the instrument grantedto the employee. The fair value is calculated at the grant date and ultimately expensed in theincome statement over the vesting period based on the best available estimate ofthe number of share options expected to vest with a corresponding credit toreserves. Upon exercise of the share options the proceeds received net of attributabletransaction costs are credited to share capital and where appropriate sharepremium. Bank Borrowings Interest-bearing bank loans and overdrafts are recorded at the proceedsreceived, net of direct issue costs. Finance charges, including premiums payableon settlement or redemption and direct issue costs, are accounted for on anaccrual basis in the income statement using the effective interest method andare added to the carrying amount of the instrument to the extent that they arenot settled in the period in which they arise. Advisers Secretaries AuditorsCity Group Plc KPMG Audit Plc30 City Road Chartered AccountantsLondon Marlborough HouseEC1Y 2AG Fitzalan CourtTel: 020 7448 8950 Fitzalan Road Cardiff Registered Office RegistrarsMaes-y-coed Road Capita Registrars Cardiff Northern House CF14 4XR WoodsomePark Fenay Bridge Huddersfield HD8 0LA RegisteredNumber204368 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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