THE DIRECTORS PRESENT THEIR ANNUAL REPORT ON THE AFFAIRS OF THE BAKKAVOR FINANCE (2) PLC GROUP (THE "GROUP").

This is accompanied by the financial statements and Auditor's report for the 52 weeks ended 29 December 2012. Comparatives are for the 52 weeks ended 31 December 2011.

PRINCIPAL ACTIVITIES

The Group is a leading provider of fresh prepared food products in the United Kingdom. Our customers include some of the United Kingdom's most reputable and well-known grocery retailers, including Tesco, Marks & Spencer, J Sainsbury, Waitrose, Asda and Morrisons, which sell our products to their customers predominantly under their respective private labels. We have also established a significant presence in development markets for fresh prepared and private label food products, including Europe, the United States and China. The subsidiaries principally affecting the profits or net assets of the Group in the period are listed in Note 8 to the Company only financial statements.

RESULTS FOR THE YEAR

The results of the Group for the year are set out in the Group income statement. The profit for the year after taxation and exceptional items was £2.1 million (2011: loss after tax of £75.0 million). Further details of the Group's financial performance are outlined in the Business Review.

GOING CONCERN

The Directors, in their detailed consideration of going concern, have reviewed the Group's future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience, and believe, based on those forecasts and projections, that it is appropriate to prepare the financial statements of the Company and the Group on a going concern basis.

In arriving at this conclusion the Directors considered the Group's financing arrangements, which comprise £350 million of seven-year listed bonds issued in February 2011 and £350 million of bank facilities committed to June 2014. The Company is in advanced discussions with its lenders regarding the refinancing of these bank facilities. Both the Company and its lenders are committed to the refinancing of both the term loan and revolving credit facility and the Board is confident of announcing new financing arrangements in the near future.

Importantly, the Group's liquidity remains particularly strong with £83.8 million of facilities undrawn as at 29 December 2012.

The existing bank facilities are subject to a series of covenants set by the lenders. Financial covenants are measured quarterly and include an assessment of leverage (the ratio of net debt to EBITDA, being earnings before interest, tax, depreciation and amortisation); cash flow cover (the ratio of finance charges to cash generated from operations); interest cover (the ratio of finance charges to EBITDA); and capital expenditure limits. The key financial covenant is leverage; this was re-set earlier in the year following the successful restructuring of the Company's parent. Under the revised covenant, leverage must be less than 5.75 times at the 2012 financial year-end and less than 5.0 times at the 2013 financial year-end. At 29 December 2012 the leverage ratio of net debt to EBITDA was 4.9 times. At the date of this report the Group has complied in all respects with the terms of its borrowing agreements, including its financial covenants, and forecasts to continue to do so.

The Group believes it is adequately placed to manage covenant compliance successfully despite the challenging macroeconomic environment. In the event that conditions worsen, the Group has the flexibility to react by accessing additional working capital arrangements that we have already agreed with key stakeholders. Further actions available to management may include a reduction to our capital expenditure programme and further supply chain improvements.

Consequently, the Directors have a reasonable expectation that the Company and the Group have adequate resources to comply with these covenants and meet their liabilities as they fall due for a period of at least 12 months from the date of approval of the financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

FUTURE DEVELOPMENTS

As we enter the new financial year, the ongoing macroeconomic pressures on consumers and retailers combined with further inflation on raw material prices remain a challenge for the business. Despite this, the Directors are of the opinion that the strategic actions implemented in the current year, coupled with capacity and productivity investments across the Group, leave the Company in a stronger position to compete with these economic pressures. Further detail on future prospects are outlined in the Chairman's Address and the Business Review.

RESEARCH AND DEVELOPMENT

The main focus of the Group's research and development expenditure is product innovation. Research and development expenditure increased by 14.5% to £6.3 million in 2012 (2011: £5.5 million).

EQUAL OPPORTUNITIES

The Group is an equal opportunities employer. Equal opportunities are offered
to all regardless of race, colour, nationality, ethnic origin, sex (including gender reassignment), marital or civil partnership status, disability, religion, belief, sexual orientation, pregnancy and maternity, age or trade union membership.
All candidates and employees are treated equally in respect of recruitment, promotion, training, pay and other employment policies and conditions.
All decisions are based on relevant merit and abilities.

DISABLED EMPLOYEES

The Group gives full and fair consideration to employment applications made by people with disabilities. We offer equal opportunity to all disabled candidates and employees who have a disability or who become disabled during the course of their employment. A full assessment of the individual's needs is undertaken and reasonable adjustments are made to the work environment and/or practices in order to assist those with disabilities.

DIVIDENDS

The Directors do not propose payment of a dividend for year ended
29 December 2012 (2011: £nil).

FINANCIAL RISK MANAGEMENT POLICIES AND OBJECTIVES

Information on the Group's financial risk management objectives and policies and on the exposure of the Group to relevant risks in respect of financial instruments is set out in the Our Risks section and in Note 29, Financial Instruments.

SUPPLIER PAYMENT POLICY

The Company's policy, which is also applied by the Group, is to settle on appropriate terms of payment with suppliers when agreeing the terms of each transaction, and to ensure that suppliers are made aware of those terms of payment and subsequently comply with those terms. Trade creditors of the Group at 29 December 2012 were equivalent to 66 (2011:60) days' purchases, based on the average daily amount invoiced by suppliers during the year.

POLITICAL DONATIONS

No political donations were made during the period (2011: £nil).

directors and their interests

The Directors, who served throughout the period and to the date of this report are set out in the table below.



Both A Gudmundsson and P Gates were appointed Directors on the date of incorporation, 21 January 2011. On completion of the refinancing agreement, being 7 March 2011, P Gates resigned from the Board of Directors to allow for the Director's of the Company's parent, Bakkavor Group ehf., to be appointed. The Company has made qualifying third party indemnity provisions for the benefit of Directors who remain in force at the date of this report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:

  • properly select and apply accounting policies;
  • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
  • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
  • make an assessment of the Company and the Group's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

By order of the Board


Agust Gudmundsson
Director

20 February 2013