Northern Foods plc Northern | Annual 2007/08 report

Making great tasting food

Northern Foods plc 2180 Century Way Thorpe Park Leeds LS15 8ZB Tel: 0113 390 0110 Annual report 2007/08 Fax: 0113 390 0211 www.northernfoods.com Contents 56 Consolidated income statement 101 Company cash flow statement IFC Financial and operating highlights 57 Consolidated balance sheet Company statement of recognised 02 Chairman’s statement 58 Consolidated cash flow statement income and expense 04 Chief executive’s report 59 Reconciliation of net cash flow Company statement of changes 08 Performance review to movements in net debt in equity 26 Corporate social responsibility report Consolidated statement of 102 Notes to the Company financial 32 Board of directors and recognised income and expense statements company secretary Consolidated statement of 112 Five year record 33 Directors’ report changes in equity 113 Shareholder analysis 36 Corporate governance report 60 Notes to the consolidated financial 114 Financial calendar 42 Directors’ remuneration report statements Company information 54 Statement of directors’ responsibilities 99 Independent auditors’ report – Company 115 Investor information 55 Independent auditors’ report – Group 100 Company balance sheet 116 Principal operations

Financial highlights: > Continuing profit before taxation* up 25.3% at £50.1m (2006/07: £40.0m) > Profit for the period £34.5m (2006/07: loss £22.5m) > Adjusted EPS1 20.9% ahead at 7.88p (2006/07: 6.52p) > Strong cash management continues to drive low net debt2 at £200.2m (2006/07: £174.2m) > Robust balance sheet – continuation of share buy-back programme in 2008/09 > Proposed dividend up 5.9% at 4.50p (2006/07: 4.25p)

£m 2007/08 2006/07 Continuing operations Revenue* 931.9 888.5 Operating margin* 5.2% 5.1% Profit from operations* 48.4 45.7 Profit before taxation* 50.1 40.0 Return on invested capital* (ROIC3) 11.0% 10.2% Adjusted earnings per share (EPS) 7.88p 6.52p Group Profit before taxation and restructuring items 50.1 41.3 Free cash flow4 39.0 83.0 Basic EPS 7.08p (4.60p) Dividend per share (proposed) 4.50p 4.25p

Designed and produced by 35 Communications

Food photography: David Loftus * An asterisk denotes results for continuing operations (except where otherwise stated) and profit is stated before restructuring items. ‘Continuing’ People and location photography: Igor Emmerich and Philip Gatward operations exclude businesses which were sold (‘discontinued’) in 2006/07. ‘Restructuring items’ which relate to significant restructuring events and the impact of the Fletchers fire in the 52 weeks ended 31 March 2007 are presented as a separate ‘Restructuring items’ column within their relevant We would like to thank our employees at the following sites for their Consolidated income statement category. Presentation of these items in a separate column helps to provide a better indication of the Group’s underlying assistance in the photography featured within this report: Fox’s Biscuits (Batley), business performance. ‘Restructuring items’ include costs or income associated with the restructuring of businesses, gains or losses on the disposal Gunstones Bakery, Northern Foods Technical Services, Pennine Foods, of businesses and assets and financial instrument gains and impairments arising from the Group’s restructuring activities Solway Foods (Corby), The Pizza Factory and Thorpe Park. 1 Adjusted earnings per share (EPS) is basic EPS for continuing operations before restructuring items and is reconciled to earnings per share in the financial statements Printed at St Ives Westerham Press Ltd, ISO14001 and CarbonNeutral® 2 Net debt is defined as total borrowings (including both short and long term bank loans, bonds, loan notes and finance leases) less cash and cash equivalents and short term investments This report is printed on regency Satin paper. This paper comprises of virgin 3 ROIC is profit from operations before restructuring items for continuing operations divided by a 13 month average invested capital (net equity adjusted wood free pulp from well-managed forests. It is manufactured at a mill that to exclude retirement benefit obligations net of deferred tax, and net debt, together with accumulated goodwill previously written off) has been awarded the ISO14001 certificate for environmental management. 4 Free cash flow is net cash from operating activities, adjusted for special pension contributions, less net capital expenditure, plus interest received. The mill uses pulps that are elemental chlorine free (ECF) and the inks Net capital expenditure is purchase of property, plant and equipment (PPE) less grants received and proceeds from sale of PPE used are all vegetable oil based. This paper is totally recyclable. Good progress Operating in first year of the Group’s three year highlights strategic plan 2007/08

Strong Chilled and Continued focus on Bakery performances; above average market action plan initiated growth and operational to address Frozen simplification, delivering performance revenue and profit improvements

Bolt-on acquisition Significant commodity strategy extending cost increases presence in attractive successfully recovered growth markets

Northern Foods makes great tasting food. From our 21 sites across the UK and Ireland, we produce outstanding branded and retailer own brand ready meals, sandwiches & salads, pizza, biscuits and puddings Chairman’s statement This has been a year of progress for Northern Foods

Anthony Hobson Chairman Overview Our employees The challenging market in which we operate requires the very With a simpler business and a focused best from our colleagues within Northern Foods. I would like to strategy, we have improved profitability, thank all our employees for their commitment and efforts during the year, whether driving product innovation; superior service delivered an increased return on capital delivery to customers; or manufacturing efficiency. This year and maintained a strong balance sheet. we have also welcomed over 240 new colleagues to the Group through acquisition.

Having successfully completed our radical disposal programme In May 2008 we announced proposals to mothball our Fenland in 2006/07, we are now growing selectively, but only where this Foods facility in Grantham, following a decision to resign supply will enhance shareholder returns. We completed three bolt-on of products from the site. This has been necessary due to a acquisitions during the year extending our presence in attractive lack of adequate returns and immediate prospects for the facility. growth markets. We continually drive to lower costs, whilst The Board very much regret the potential impact on the site’s targeting investment in developing our business and its talent. loyal workforce and we are currently working to support them Northern Foods is now leaner and fitter, and well placed for the through the consultation process. challenging environment in which we operate. Your Board Performance and dividend The Board has continued to benefit from the skills and depth In 2007/08, we increased our return on invested capital* (ROIC) of experience available to support the new management from 10.2% to 11.0%. This is a fundamental measure of performance team created last year. I thank colleagues for their continued for us, assessing the profit from our business operations commitment and support. There were no changes to the (excluding interest and pension financing) against the capital Board during the year. we have invested in assets and acquisitions. The Board has targeted a two percentage point increase in ROIC over three years, Summary with executive management incentivised against this target. Northern Foods has made good progress in the first year of the Group’s three year strategic plan. Performance has Faced with unprecedented commodity cost increases and improved, driven by innovation, greater efficiency and through volatile trading conditions, it is pleasing to report a 25.3% the elimination of unprofitable business. With a strong balance increase in the Group’s profit before tax* to £50.1m, together sheet, the Group is well placed for the challenging environment with a 20.9% improvement in adjusted earnings per share to in which we operate. 7.88 pence. Profit for the period was £34.5m (2006/07:loss £22.5m). Supported by an embedded culture of cash generation across Anthony Hobson the Group and a conservatively leveraged balance sheet, 27 May 2008 the Board is pleased to recommend a full year dividend of 4.50 pence per share, an increase of nearly 6%, giving a final dividend of 2.95 pence payable in August 2008.

Our management disciplines are much improved, reflecting a harder edge and the roll out of a genuine performance culture. We remain true to our heritage of leading our markets in innovation, quality and customer service. These critical features are supported by a focus on efficiency by ensuring a competitive cost base and rigorously ensuring that all of our business is profitable.

This approach will ensure that we are successful in the long term. However, I am pleased with the progress already visible across our portfolio. Whilst the Group operating margin* increased only marginally to 5.2%, performance in the Chilled and Bakery divisions improved markedly. A 130 basis point increase in the Chilled operating margin* and a 90 basis point improvement in Bakery demonstrates not only early success, but also the potential for further improvements. The combination of market and currency challenges, which have held back our Frozen performance, are disappointing, but plans are in place to improve this performance over time.

+25.3 % +20.9 % +5.9% Profit before taxation* Adjusted EPS Proposed dividend up 25.3% at £50.1m up 20.9% to 7.88p up 5.9% at 4.50p

Northern Foods plc | Chairman’s statement 3 Chief executive’s report Our progress is built on a simple strategy, which creates a clear point of difference between Northern Foods and other food companies

Stefan Barden Chief Executive Dear Shareholders Our strategy Our progress is built on a simple strategy which creates a I am pleased to report that Northern Foods clear point of difference between Northern Foods and other is delivering steady top and bottom line food companies. This strategy has three priorities. growth. This is driven by our focus on Strategic priority one: targeting attractive, growing making great tasting food that consumers market segments Our target markets grew at a weighted average of 5.2% in want to buy again and again … and again. 2007/08 and, we forecast, similar growth over the next couple of years. In uncertain times, Northern Foods benefits from operating across diverse food markets. These can be Every day, in thousands of stores around the UK and Ireland, characterised in a number of ways; for example, by temperature millions of people are casting their vote for food cooked (chilled, ambient and frozen), by lifestyle (healthy, indulgent), by Northern Foods’ chefs every time one of our products or by season (winter biased, summer biased). This gives us an is purchased. Their vote is the ultimate test of the quality element of natural hedge that reduces (but does not eliminate) and value for money we deliver every day. some of the volatility to which our Group is exposed. Understanding how consumers view the products we deliver During 2007/08, we have consolidated our position in our five day in, day out is crucial to our success. Each of our businesses selected markets, with three bolt-on acquisitions which added focuses on our most important performance measure – the new capacity for us but which did not expand market supply, so ‘number of units sold of each product, per store, per week’. We helping us maintain our pricing power with our retail customers: are constantly seeking to improve our performance against this > in Ready Meals we acquired two facilities: Ethnic Cuisine, and, as a result, in 2007/08 we have delivered greater sales revenue. which supplies Sainsbury’s with Chinese ready meals; and the Baxter’s chilled soup site in Grimsby; However, it is not sufficient for us simply to grow the business. > in Frozen Pastry, we bought the rights to the McDougalls We also have to do so profitably, driving enhanced returns frozen pastry assets and brands, which we have successfully for shareholders. This requires tough choices to be made. transferred to our Irish facility in Portumna. We have culled poor selling products, exited unprofitable retailer own label contracts and eliminated unprofitable promotions. Each of these acquisitions was completed at an attractive cost We have driven efficiencies across the business, taking out to us and two came with experienced workforces. We have also cost where sufficient value is not added or where we are not grown organically. We had a good year in our Chilled division, achieving world class performance. We invest and utilise cash despite the poor summer weather, and our performance in selectively across the Group, targeting additional returns. Biscuits was particularly pleasing.

This disciplined, performance orientated approach has improved Strategic priority two: focusing on customers that value quality profitability. We continue to generate free cash flow. Our strong and service balance sheet provides a solid platform for growth; this year we We are working with customers who are scale players, with single funded a share buy-back and three bolt-on acquisitions which points of negotiation and few distribution points. These customers will strengthen the business. value what we do: making great tasting food, to the highest food safety standards, delivered promptly, at the right price. This was all delivered against a backcloth of unprecedented market volatility, in which significant commodity cost increases We are focused on creating a true point of difference between have been successfully recovered. We have demonstrated that ourselves and our competitors. This point of difference gives the basics of running the business are now in place; we have our retail customers the benefit of improved ‘repeat purchase’ identified and made good progress in eliminating the priority by their shoppers. Improved ‘rate of sale, per store, per week’ performance issues of a year ago; and, most importantly, translates into ‘above average category growth’ for our customers. we continue to build a better business. This approach helps us to build our customers’ businesses by giving them crucial ‘shopper loyalty’.

Our chosen markets are growing at a weighted average of 5.2%

Year on year market growth

Ready meals5 2.2

Sandwiches6 7.0

Salads (wet and prepared)7 7. 5

Pizza (frozen and chilled)7 6.8

Christmas Puddings8 0

Biscuits7 6.3 5 TNS Worldpanel 52 w/e 23/03/08 6TNS Scantrack MAT 15/03/08 Average growth 5.2 7ACN Scantrack MAT 22/03/08 8 Internal estimate

Northern Foods plc | Chief executive’s report 5 The Corporate social responsibility (CSR) agenda is increasingly Taking individual responsibility for actions has allowed us to take important to both ourselves and our customers. Northern Foods out management tiers. This has reduced cost, enabled faster is a leader in this, building on our strong heritage and supporting decision making and created ownership of results. We have also our customers in delivering their specific commitments and worked hard to make remuneration more variable – with greater targets. Our CSR report explains more about our achievements upside for results and clear action on under-performance. and plans, from which all of our stakeholders, including our customers, benefit. In an industry short of available talent, we want to be an employer of choice. We are committed to developing our talent We seek to maintain good, professional relationships with at every level. This was one reason why I accepted, on behalf all of our customers. We see ourselves as custodians of our of Northern Foods, a directorship on the Board of ‘Improve’, shareholders’ investments in assets which supply the retailers. the government’s Sector Skills Council for the food manufacturing We believe that we have an obligation to our customers to provide industry. In addition, we have signed the government’s ‘Skills them with food which improves their business and, in return, Pledge’ which commits Northern Foods to aspiring to give all we have an obligation to our shareholders to generate an of our employees the opportunity to be trained to an accredited acceptable return on any investment we make in each retailer. standard. We are the first food manufacturer to have done this. Across our workforce, we are working with service providers Strategic priority three: a low cost operating model to deliver certification in food safety, as well as training in We have adopted a low cost operating model. We are developing continuous improvement, product development, health and and strengthening our culture of effective cash and capital safety, and lean manufacturing. management. Improved disciplines have seen capital invested much more selectively, focused on good margin business A further demonstration of our commitment to our employees’ which generates real returns for our shareholders. The capital training and development agenda can be seen in our investment we currently require remains well below our historic re-activated graduate training programme. We have committed depreciation (although increased expenditure will be made £450,000 to helping 150 technical graduates through university where future returns are strong). Working capital is also tightly over the next five years, boosting food science resource for the managed. Helping to drive this culture within the Group, industry as well as ourselves. each business is now charged weekly a notional sum for the shareholders’ capital that it utilises. Summary Looking ahead, we are well placed to deliver our targets of Our ‘cost out’ agenda has been a key contributor to our improved returns for our shareholders and of making Northern increased margins. Across the business we are driving efficiency Foods a great place to work. Our goal is for increasing numbers through a combination of rationalisation and investment in of consumers to purchase our great tasting food… every day. automation. As part of this, we have reduced our corporate This will enable Northern Foods to continue to deliver steady centre in Leeds to just one floor, housing only 35 people, top and bottom line growth. completing our £12m central cost reduction programme. Stefan Barden Performance culture and talent agenda Chief Executive As our strategy begins to deliver results, we are working hard 27 May 2008 to embed success throughout the organisation. Key to this is our focus on building a performance culture and differentiating ourselves through our talent agenda.

We employ nearly 11,000 colleagues. To get the best results every day requires a strong performance culture. Empowered, focused business units, operating with disciplined weekly reporting, ensures that everyone is committed to delivering their promises.

Looking ahead, we are well placed to deliver our targets of improved returns for our shareholders and of making Northern Foods a great place to work

6 Chief executive’s report | Northern Foods plc Ready Meals We target Our Ready Meals add value through attractive delivering genuinely growing market leading products markets

Pizza Sandwiches & Salads Constant innovation Strong cost control and ongoing range together with selective refreshes continued product development to drive Goodfella’s maintained a robust performance margin performance

Biscuits Puddings Our new brand We successfully strategy will ensure launched The Pudding, we maximise a new premium the strengths of branded offer for the Fox’s brand Christmas 2007

Northern Foods plc | Chief executive’s report 7 The Northern Foods Operating board from left to right: Kuldip Kular, Julian Slade, Robin Walker, Stefan Barden, Jez Maiden, Graham Hunter and Garry Walsh.

Performance overview The firm foundation created by our 2006/07 Performance review disposal programme has allowed us to focus on attractive market segments; Over the last twelve successfully partner with customers who value high levels of quality, innovation months Northern and service; and implement a low cost, Foods has made high performance business model.

As a result of these actions, performance has steadily good progress improved. As we work to realise the full potential of Northern Foods, our businesses are focused on developing products in delivering its which demonstrate ‘above average rates of sale’, whilst we continue to eliminate low margin and low volume products from our range, as well as progressively re-orientating the strategic plan Group towards markets growing at above average rates.

In measuring our performance, we seek to: > drive shareholder returns; > strengthen Group profitability; > improve the performance of each business, whilst successfully navigating the volatile markets in which they operate; > invest in future expansion to meet exciting market opportunities; > drive cash generation to enable future investment and growth; and > maintain a robust and well managed balance sheet.

Performance review | Northern Foods plc We improved shareholder returns during the year. Return on by putting in place forward cover, where possible, for key areas invested capital* (ROIC), our preferred measure, increased of spend. from 10.2% to 11.0%. Our strategic plan target is to achieve a 2% improvement over three years. This progress represents a We invested in future expansion, making acquisitions and good beginning. We also began a share buy-back programme, investments to enhance the Group’s competitive position. We to maintain an efficient balance sheet. acquired Ethnic Cuisine, a well regarded supplier to Sainsbury’s, together with a well invested chilled soup facility in Grimsby, into We strengthened Group profitability, achieving a 25.3% increase in which we plan to consolidate existing production and deliver new profit before tax* to £50.1m (2006/07: £40m). This was driven by an business. We also acquired the rights to the brands and assets improved trading performance and lower financing costs. We have of the McDougalls frozen pastry business and also expanded also changed our presentation of the net pensions financing salads capacity to meet exciting market growth opportunities. credit to classify it within financing, rather than operations, thus facilitating a better understanding of our trading performance. We continued to drive cash generation, with free cash flow of £39.0m in the year (2006/07: £83.0m), building on the previous We improved the performance in two of our three divisions. year’s success. Net capital expenditure remained carefully Profit from operations* was 5.9% ahead at £48.4m (2006/07: focused at just 40% of depreciation (2006/07: 37%) and working £45.7m), as we drove continuing improvement in margin capital was closely managed. performance in our Chilled division, whilst securing the first benefits of our profit recovery plan in the Bakery division. Finally we maintained a robust and well managed balance Disappointingly, profitability declined in our Frozen division and sheet. Year end net debt was £200.2m (2006/07: £174.2m); despite we are working hard on our plans to stabilise this performance. acquisitions costing £22.0m, special pension contributions of Corporately, we completed our targeted £12 million reduction £22.0m; and £9.4m spent on share purchases. Our strong balance in annual centre costs (which are allocated to the divisions), sheet provides us with capacity for future growth through reflecting a simpler operating structure which devolves decision investment in our existing businesses and selective acquisitions. making to dedicated management teams, whilst ensuring scale At the same time, the Group’s retirement benefit obligations services, such as Information Services (IS) are centralised and moved into surplus during the year on an International Financial appropriate levels of governance maintained. We continued Reporting Standards (IFRS) basis, with a net £61.6m year end to perform in volatile markets, successfully recovering surplus pre-tax (2006/07: deficit £8.6m). The Group’s long history of unprecedented commodity inflation experienced in the year. providing attractive pension benefits has resulted in a significant Material costs in the period were almost 5% higher than the pension asset and accompanying liability relative to the Group’s prior year, representing an annualised impact of approximately size. With good funding in place, we have initiated action to £40m. We have sought to manage the risk of further increases reduce future volatility in the balance sheet.

Northern Foods plc | Performance review 9 To continue to deliver better performance, the Group needs excellent, motivated talent. We want all our employees to profit KPI 2007/08 2006/07 together through our performance, in terms of career and skills Revenue growth (underlying)9 3.3% 3.1% development and also financially. During the year we invested Operating margin* 5.2% 5.1% £1.1m in employee training and development programmes Return on net assets (RONA)* 13.7% 12.2% to support this agenda. We also successfully implemented Free cash flow £39.0m £83.0m a savings-related share option scheme for all employees. Debt ratio 2.0 times 1.8 times Launched in November 2007, the scheme saw strong demand Return on invested capital (ROIC)* 11.0% 10.2% across the workforce with take up exceeding the 10 million shares available, necessitating a scale back of 11%, a sign of strong confidence in the Group from our dedicated, talented workforce. Each KPI is defined and assessed within this review. Non-financial Outlook KPIs are featured in the Corporate social responsibility report. Investment in brand advertising and costs to commission the Grimsby soup facility during the first half year are expected Revenue to result in profit being more second half phased, in addition The Group seeks to deliver selective, profitable increases to the typical seasonal bias. The net pensions financing credit in revenue by focusing on attractive market segments with is expected to decline by approximately £6.5m compared to strong growth potential in areas where margin is enhanced. 2007/08 due to year end market factors. In addition, we continue We continue to exit low margin and low volume products to explore opportunities to mitigate the adverse impact of the through selective range rationalisation. This in turn reduces strong Euro on our Irish based business. complexity and drives efficiency improvements in our facilities.

The current trading environment remains challenging, with The Group has made good progress in selectively driving continuing commodity cost pressures which we are committed profitable sales growth, whilst fully recovering commodity to recovering. Despite some caution, we expect the underlying price increases. Continuing revenue was up 4.9% at £931.9m business to continue to make good progress in 2008/09. (2006/07: £888.5m). Underlying revenue growth, a key measure for the Group, was up 3.3%. Prices increased by 2.8%, reflecting Summary financial performance and dividend the commodity price recovery effect, whilst volumes were up Revenue* grew to £931.9m (2006/07: £888.5m). Profit from 0.5%. Sales to the Group’s top five customers by value (Asda, operations* improved to £48.4m (2006/07: £45.7m), whilst lower Marks & Spencer, Morrisons, Sainsbury’s and Tesco) represent financing charges resulted in improved profit before taxation and 77% (2006/07: 77%) of total revenue. restructuring items of £50.1m (2006/07: £40.0m). With restructuring items for continuing operations after taxation of £3.9m (2006/07: Operating margin £3.9m), profit for the period was £34.5m (2006/07: loss £22.5m). Profit from operations before restructuring items for continuing operations was 5.9% ahead of prior year at £48.4m (2006/07: Earnings per share (EPS) from continuing operations before £45.7m). A strong performance in Chilled and Bakery was restructuring items increased strongly, up 20.9% to 7.88 pence offset by lower profits in our Frozen division. Commodity prices (2006/07: 6.52 pence), despite an increase in the effective tax rate increased markedly in the second half, especially in cereals, to 23.4% (2006/07: 20.3%). dairy, cocoa and fats, reflecting difficult global market conditions and constrained UK supply. As a result, material costs were Given the underlying improvement in the operational and financial nearly 5% higher than the prior year. Operating margin* at performance of the Group, the Board proposes a 5.9% increase 5.2% was slightly ahead of the prior year margin (2006/07: 5.1%), in the total dividend payable in respect of 2007/08 performance despite the dilutive impact of recovering higher commodity costs. to 4.50 pence per share (2006/07: 4.25 pence). This represents adjusted EPS cover of 1.8 times (2006/07: 1.5 times). Board policy RONA is that future dividend growth will be driven by performance Whilst delivering a better operating margin is important, each improvement, with dividends covered between 1.5 times and business is focused on driving stronger returns from the 2 times on an adjusted EPS basis and fully covered by free assets utilised in that business. Better management of capital cash flow in the medium term. investment, together with careful use of working capital10, leads to improved asset utilisation. The combination of margin and Subject to shareholder approval, a final dividend of 2.95 pence asset utilisation is measured through return on net assets per share (2006/07: 2.75 pence) will be payable on 28 August 2008 (RONA) – profit from operations* divided by average operating to shareholders on the register at 8 August 2008. assets* invested in the business.

Key performance indicators During the year RONA improved from 12.2% to 13.7%, reflecting Alongside absolute profit and debt measures, the Group uses improvements in both operating margin and asset utilisation. several financial key performance indicators (KPIs) to measure We target 15% as a minimum medium term RONA for each progress, as follows: business and in 2007/08 the Chilled division made strong progress towards this target, whilst the Bakery division achieved a return well above this minimum target. As indicated, the Frozen division had a difficult year, impacting RONA.

9 Underlying revenue excludes the impact of currency translation, product categories no longer manufactured, acquisitions and discontinued operations 10 Working capital is defined as inventories plus trade and other receivables less trade and other payables

10 Performance review | Northern Foods plc Profit Net finance costs on external debt reduced by £4.2m at £14.0m 2007/08 2006/07 (2006/07: £18.2m), reflecting lower average debt levels during £m £m the year. The Group was protected from short term interest rates Operating cash flow (before working driven higher by the ‘credit crunch’ through its long term partial capital & special pension contributions) 84.0 89.9 interest rate hedges. An increase in the net pensions financing Movement in working capital (11.6) 33.6 credit of £3.2m to £15.7m (2006/07: £12.5m) reflected the additional Net interest paid (13.6) (18.6) cash injected into the pension scheme and improved bond Net taxation paid (3.0) (0.4) rates. The combined effect of these pension and interest Capital expenditure (21.5) (29.5) benefits saw the net finance charge improve by £7.4m, Asset sales 4.4 6.7 with a credit in the current year of £1.7m (2006/07: cost £5.7m). Grants received 0.3 1.3 Free cash flow 39.0 83.0 Profit before taxation and restructuring items for continuing operations increased by 25.3% to £50.1m (2006/07: £40.0m). The charge for restructuring items before taxation was £4.7m Debt (2006/07: £5.6m), relating primarily to rationalisation of the Frozen Using its free cash flow, the Group invested £22.0m in selective division’s Meat grills business and central cost reduction bolt-on acquisitions, comprising Ethnic Cuisine in November initiatives. The charge for restructuring items comprised 2007 and the Baxter’s Foods chilled soup facility in January 2008, £2.2m in cash and £2.5m in non-cash items. both in the Chilled Ready Meals business, and the rights to the brands and assets of the McDougalls pastry business in With an increase in the effective taxation rate to 23.4% (2006/07: November 2007 in the Frozen division. With a robust balance 20.3%), reflecting a lower proportion of profit being generated in sheet, ongoing opportunities will be considered for selective the Frozen division, which benefits from low Irish tax rates, Group acquisition in growth markets, where these can be delivered profit for the period was £34.5m (2006/07: loss £22.5m). Adjusted profitably. During 2007/08, the Group also received £6.7m in EPS increased by 20.9% to 7.88 pence (2006/07: 6.52 pence). deferred consideration from a previous disposal. Net of restructuring items (and discontinued businesses in the prior year), basic EPS was 7.08 pence (2006/07: loss 4.60 pence). In addition, the Group spent £9.3m on restructuring programmes, including settlement of provisions relating to Free cash flow and capital management our strategic disposal programme and ongoing restructuring A continued focus on cash management was supported of both the corporate centre and the Frozen meat grills business. by our drive to achieve more profitable utilisation of existing A special pension contribution of £22.0m was made to the capacity. Using RONA as a KPI to embed this discipline across principal UK pension scheme, following the disposal programme, the Group, each business assesses its capital requirements, which completed the deficit reduction programme agreed with utilising robust project evaluation techniques which evaluate the trustee. We currently expect only ongoing pension service economic and cash criteria. contributions to be payable in the future.

Gross capital expenditure (the purchase of property, plant The Group also spent £9.4m on share purchases. A total and equipment) in the year was just £21.5m (2006/07: £29.5m), of 6,056,846 shares were repurchased under a buy-back compared with depreciation and amortisation of £41.7m programme announced in December 2007 at a cost of £5.3m (2006/07: £57.6m). This represents 52% of depreciation (2006/07: (an average price of 87.4 pence per share), with the balance of 52%). Key projects included the creation of new capacity in purchases used to meet long term incentive plan requirements. our Salads business at the Corby chilled site, together with The share buy-back programme is expected to continue £2.1m on casseroles and cooking capacity in Ready Meals in 2008/09. and packaging efficiency investment in our Biscuits business. We expect capital expenditure to increase in the new financial With dividend cash payments of £21.0m during the year year as we invest in a number of capacity and efficiency (2006/07: £11.5m), the resultant net debt at the balance sheet date improvement projects across the Group, including seasonal was £200.2m (2006/07: £174.2m). This level of debt, the majority of biscuits packing automation in the Bakery division. Asset which is at fixed rates, continues to position the Group favourably disposals generated £4.4m (2006/07: £6.7m), as we continued in current volatile credit markets. A key measure of our financial to identify and release non-productive assets. flexibility is our debt ratio. This is the ratio of net debt to EBITDA11 (calculated under ‘frozen UK GAAP’ (the accounting basis used Despite the unprecedented inflationary increases, which when the Group’s current financing facilities were established)). particularly impacted our Bakery and Frozen businesses This is targeted to be below 3.5 times, the limit imposed by our where a larger proportion of Group inventory and receivables financing agreements. For 2007/08, the debt ratio was 2.0 times are carried, working capital remained tightly managed, increasing (2006/07: 1.8 times). by £11.6m in existing businesses during the year. At the balance sheet date, working capital remained favourably negative, at ROIC £(25.9)m (2006/07: £(29.7)m). Group total equity improved to £165.4m (2006/07: £121.2m), reflecting the strong profit for the period and the movement As a result of these successes, following a step change of the Group’s retirement benefit obligation into surplus. improvement in free cash flow in the previous year, the Group The Group’s return on invested capital (ROIC), measuring has maintained its disciplines over cash management and the pre-tax return on shareholders’ invested capital, improved generated further free cash flow of £39.0m (2006/07: £83.0m). during the year to 11.0% (2006/07: 7.8% for the overall business, Free cash flow measures the cash generated by the Group from 10.2% for the continuing business). its normal trading activities and represents the cash available after paying tax and interest costs, for example, to finance dividends and acquisition activity. It is analysed as follows:

11 EBITDA is earnings before interest, tax, depreciation and amortisation. It is calculated as profit from operations before restructuring items plus depreciation and amortisation

Northern Foods plc | Performance review 11 Chilled

13.2% £481.5m £22.1m RONA* increased to 13.2% Continuing revenue Continuing profit from (2006/07: 8.6%) up 7.8% to £481.5m operations* up 51.4% (2006/07: £446.7m) to £22.1m (2006/07: £14.6m) The Chilled division delivered improved performance growing revenue, operating margin and profit From a 19.5% share, Northern Foods delivered 47.0% of the total ready meal market growth

Sandwiches & Salads continued to go from strength to strength, with underlying sales 5.0% ahead

The focus for the Chilled division 2007/08 has seen a strong performance from the Chilled businesses – Sandwiches & Salads and Ready Meals. is on making fresh, short shelf life Sandwiches & Salads has continued its profitable growth, securing greater volumes in each of its markets. Ready Meals products which meet consumers’ has continued to rationalise its product range, creating centres desires for convenient, high quality of excellence which add value through delivering genuinely market leading products, manufactured efficiently, whilst food that reflects the demands of identifying unprofitable business to be exited. busy, healthier lifestyles. As a result, the Chilled division delivered improved performance, successfully growing revenue, operating margin and profits. With a long standing enviable reputation for delivering superior Total sales growth of 7.8% reflected both acquisition and quality, service and innovation, the division has focused in the underlying revenue growth in the existing businesses of 5.6%. last two years on driving more profitable growth, whilst reducing Underlying revenue was £471.8m (2006/07: £446.7m). Underlying high cost complexity in its operations. volume was 4.6% ahead, whilst average selling prices were 1.0% higher as higher commodity costs were successfully recovered during the year.

14 Performance review | Northern Foods plc Continuing profit from operations* for the Chilled division whilst unlocking efficiencies through our procurement capability. increased by 51.4% to £22.1m (2006/07: £14.6m), whilst operating As a consequence, 2007/08 saw the consolidation of two bolt-on margin* improved to 4.6% (2006/07: 3.3%). This strong performance acquisitions within Ready Meals. Ethnic Cuisine was acquired in was driven by a continued focus on simplification, combined November 2007. A supplier of Oriental ready meals to Sainsbury’s, with growth delivered by making great tasting food which Ethnic Cuisine is a profitable business, with a strong reputation achieved strong repeat purchase rates and demonstrated for quality. This acquisition extended our ready meals base above average category growth. to four major customers. Offering scope for expansion through selective investment, the integration of the Ethnic Cuisine The division’s improved profitability, combined with limited capital business is progressing on plan and the facility enjoyed investment, delivered an improved RONA* of 13.2% (2006/07: 8.6%). a successful Chinese New Year. Whilst this performance is encouraging, we believe that significant further progress can be made to achieve better returns in Chilled. This acquisition was supplemented in January 2008 with the purchase of the Baxter’s Foods chilled soup facility in Grimsby. Ready Meals Acquiring this well invested but empty plant allows us to transfer The Ready Meals business consolidated its market leadership our capacity constrained soup business during Summer 2008, in the sector. Driving efficiency, the Riverside facility was exited, into a highly automated bespoke production site with significant allowing transfer and consolidation of M&S business into centres capacity to add new customers in this fast growing category. of excellence at Sheffield and Carlisle. Reaching new customers, The plant is expected to become profitable in 2009/10. we acquired long time Sainsbury’s supplier Ethnic Cuisine; with our Asda and Morrisons business serviced from Hull, we now Sandwiches & Salads have four customers in this business unit. Delivering superior Sandwiches & Salads continued to go from strength to innovation and quality, Northern Foods delivered 47% of the total strength. Underlying sales were ahead 5.0% in the period, market growth from just a 19.5% market share (TNS Worldpanel despite unseasonably poor summer weather. Strong cost 52w/e 23/3/08). control, together with selected product development, maintained a robust margin performance. Total sales grew by 10.4% to £252.2m (2006/07: £228.4m). Excluding acquisition, underlying revenue was up 6.2%, outperforming In Sandwiches, our sales grew at 4.2% over the year, slightly overall market growth which slowed to 2.2% during the year behind the total market growth of 7.0% (AC Nielsen 52 w/e (and which we forecast to turn negative in 2008/09 before 15/03/08). Sustained innovation is a feature of this market, with returning to growth). Our products continued to attract both new regular range refresh for our customers resulting in over 25% shoppers and drive frequency of purchase. A strong innovation of new products every year. The business demonstrated its process supports the introduction of new products, which this continued ability to stay in tune with consumer demand and year included ‘Melting Middle’ fishcakes for M&S and Slow Cooked create value for both our customers and shareholders. Lamb with Roasted Vegetables for Asda. We also updated Successful new recipe variants launched during the year classic recipes, such as M&S Chicken Curry, responding to included a Ploughman’s Baguette for Tesco and a Houmous changing consumer tastes. sandwich for M&S. Once again, the business had some strong Christmas specials, such as the Turkey Feast for M&S. We are focused on delivering acceptable profitability to create shareholder value from this business. Profitability in Ready Meals Our prepared Salads business also performed well, improved during the year, as we actively managed our existing characterised by premium recipes such as Tuna & Sweetcorn product portfolio to exit products which add operational and Salmon & Dill Pasta salads for Sainsbury’s. Our sales grew complexity and cost, without delivering a commensurate return. by 15.6%, outperforming market growth of 14.0% (AC Nielsen 52 In August 2007, we completed our planned exit from our former w/e 22/03/08). Our £9m investment in additional salad capacity Riverside facility in Nottingham, which had been sold as part at our Corby facility was commissioned on schedule in May 2008 of the disposal programme in January 2007. Production was and will provide us with further capacity for growth in this attractive successfully transferred, principally into our Carlisle and Sheffield market during Summer 2008. In the more mature wet Salads facilities, helping drive greater efficiencies in those plants. market, our sales grew by 4.2%, ahead of the market, where growth slowed to 2.6% due to disappointing summer weather. In addition, in May 2008, we announced the proposed mothballing of our Fenland Foods facility in Grantham, which Our chilled Pizza sales grew by 2.0% in the year, although produces Italian based cuisine for M&S but which is unprofitable. profitability in this predominantly retailer own brand (ROB) We were unable to reach agreement to return Fenland to business was diluted by the impact of increased promotional profitability, consistent with our stated strategy to continue with activity across our customers. New product development business only where terms generate an adequate return for included Stuffed Crust and Finest products for Tesco, with our the Group’s shareholders. The mothballing proposal is not Tomato & Mozzarella Tuscan Pizza becoming the top selling expected to impact materially the Group’s profit before tax and Finest product. We also entered the chilled pizza market with restructuring items. However, subject to employee consultation, the launch of our Goodfella’s brand, the market leader in frozen it is expected to result in a cash restructuring cost and a pizza. The Signatore range was launched into test market in non-cash write down of asset value in the 2008/09 financial October 2007 and will, we believe, attract a significant share results. At 29 March 2008 the facility had a net book value of of chilled sales over the medium term. approximately £24m. Given the facility’s excellent track record and reputation, we are seeking new customers with whom to In our niche sushi market, new product variants were develop the site in the future. supplemented in the second half year with additional investment in authentic production capacity. We have identified opportunities for Northern Foods to consolidate its leading position, by acquiring strong independent players with established customer relationships and under utilised production capabilities. We believe we can leverage our strong commitment to product quality, service and innovation,

Northern Foods plc | Performance review 15 Frozen

10.0% £245.4m £11.4m RONA* declined to 10.0% Continuing revenue Continuing profit from (2006/07: 14.9%) up 0.4% to £245.4m operations* down 38.0% (2006/07: £244.5m) to £11.4m (2006/07: £18.4m) Action plan initiated to address Frozen performance The successful integration of the McDougalls pastry business in March 2008 will benefit the new financial year

In Pizza, Goodfella’s continues to lead the market with brand share remaining number one at over 30%

Our Irish Fish business continued to deliver strong growth of 16.3%

The focus for our Frozen division 2007/08 saw poor summer weather, intense promotional activity and a strong Euro combine to create a difficult year for the is to consolidate our market division. In Pizza, our Goodfella’s brand held its market leadership, although Pizza profitability was lower than last year impacted leadership across key categories by currency and tough trading conditions in ROB. Our Fish & in this branded but highly Vegetables business performed strongly, but both our Pastry and Meat & Meat-free grills businesses underperformed, promoted market. adversely impacting both revenue and profitability. We took steps during the year to address these issues, including acquiring the rights to the McDougalls pastry brand and assets, This brings opportunities to improve profitability over time and restructuring at our Meat grills business and the launch of the to bring further innovation and development to staple consumer ‘George Foreman Lean Mean Grillers’ range. product lines.

18 Performance review | Northern Foods plc Total sales revenue was 0.4% higher at £245.4m (2006/07: Fish & Vegetables £244.5m), with underlying revenue 1.6% lower. Average selling Our Fish & Vegetables business performed strongly. Donegal prices were 2.8% higher as we successfully recovered higher Catch, our market leading (AC Nielsen 52 w/e 22/03/08) Irish commodity costs although volumes were lower by 4.4%. branded Fish business continued to deliver strong value growth The division has been working hard to reverse this trend in of 16.3%, outperforming market growth of 4.6% (AC Nielsen performance. The successful integration of the McDougalls 52 w/e 22/03/08). New seafood and ‘naked’ fillet ranges were pastry business, completed in March 2008, will benefit the successfully launched, reflecting increased consumer preference new financial year. for fish as part of a healthy diet. Donegal Catch recently launched its first product with a leading retailer in the UK Continuing profit from operations* for the Frozen division and the initial rate of sale is encouraging. Likewise, our Irish decreased 38.0% to £11.4m (2006/07: £18.4m). Operating margin Green Isle Frozen Vegetable brand also performed well. has continued to be constrained, with a strengthening Euro adversely impacting profitability of the division’s Irish operations Pastry, Meat & Meat-Free Grills by £1.2 million. Divisional operating margin* declined to 4.6% Recovering from loss making positions in Meat grills and Pastry (2006/07: 7.5%) and RONA* declined to 10.0% (2006/07: 14.9%). is a key priority. Our Meat grills business missed out on its important barbeque season due to the poor summer weather. Pizza A restructuring programme was implemented in October, In Pizza, our Goodfella’s brand continues to lead the market, resulting in the loss of 80 jobs and a significant reduction supported by ongoing product innovation and marketing in the cost base at the Dalepak site. We also launched a new support. In 2007/08, our UK brand share in frozen remained grill range, under the ‘George Foreman’s Lean Mean Grillers’ number one at over 30% (AC Nielsen 52 w/e 22/03/08), with brand in the second half year. This features recipes such as a UK and Irish retail brand value exceeding £130 million. Lemon and Black Pepper Salmon fillets and Chargrilled Chicken fillets, in line with the growth in the premium, healthier cooking As expected, volumes in our Pizza business declined during the market. Trade interest has been good and we continue to build autumn as a result of the rapid and successful action taken to market presence with this range. We have also acquired the recover significant commodity cost increases, including on flour, rights to Gardein Protein, a meat-free raw material which will oils & fats, and dairy. Goodfella’s recovered share in the fourth allow us to expand in this growth market, alongside our quarter as overall market prices increased and we restored our Grassington’s product range. promotional activity to consolidate our leadership. Overall for the year, Pizza revenues increased slightly. We also took determined action to restore profitability in Frozen Pastry. Over the past two years, falling demand and excess Constant innovation and ongoing range refreshes continued industry capacity have destroyed value. In October 2007, we to drive Goodfella’s performance. In October, we extended the acquired the production assets, trade marks and licences for Goodfella’s brand into the chilled cabinet with the launch of the Upper Crust, Tiffany and McDougalls frozen pastry brands. Signatore. The chilled pizza market is growing at 8.4% per annum Our integration of these into our existing production capacity (AC Nielsen 52 w/e 22/03/08) and, in 2006, overtook the frozen in Portumna, Ireland is now complete. The acquisition allows market in total value. Signatore is establishing itself in line with us to tackle oversupply, improve factory efficiency and enhance expectations and supports our long term ambition to be the our product offering to customers. At the same time, our actions number one supermarket pizza brand in the UK. We expect to improve performance of our regional Holland’s pastry brand to continue to grow sales in the coming year. A £2m marketing delivered some early success. campaign for the Goodfella’s brand, and specifically Signatore, began at the start of the new financial year.

In a highly price sensitive market, it is also key to maximise operational efficiency. Frozen pizza supply is Continental Europe- based, with our major competitors based in Germany and Italy. To compete effectively, this requires a Eurozone based production facility, ours being in Ireland. However, with nearly 70% of our Irish production exported to the UK, the increasing strength of the Euro progressively impacted the profitability of the Irish business, by £1.2m in 2007/08. Were the Euro to remain at the closing 2007/08 exchange rate throughout 2008/09, a further adverse impact of over £4m could result. Given this impacts the whole supply base, some price recovery is anticipated. However, we are also partially offsetting this through ongoing productivity gains. During the last financial year, significant improvements were introduced at our Naas facility, reducing further labour utilised in the production process.

Northern Foods plc | Performance review 19 Bakery

21.0% £205.0m £14.9m RONA* increased 37.3% Continuing revenue Continuing profit from to 21.0% (2006/07: 15.3%) up 3.9% to £205.0m operations* up 17.3% to (2006/07: £197.3m) £14.9m (2006/07: £12.7m) The progress made in our Bakery performance has been particularly pleasing The biscuits market Our Puddings offers opportunities business had another for significant profit successful Christmas improvement over trading period the medium term

The focus in the Bakery division The division entered 2007/08 with declining revenue and margin. It is therefore encouraging to note the improvement in both is to sell premium indulgent performance metrics during the year as the early benefits Fox’s biscuits and Matthew of greater focus were delivered. Walker puddings which meet Total sales revenue for the division was ahead by 3.9% to £205.0m (2006/07: £197.3m). Underlying revenue was ahead consumer desires for quality, 3.9% in the full year, with average selling prices up 6.6%, with the taste and enjoyment. successful recovery of significant commodity cost increases, including chocolate and flour. Volume reduced by 2.7%, reflecting the impact of exiting both unprofitable private label contracts Consequently, the year has seen a strong focus on innovative and reducing promotional activity in Biscuits. The Matthew Walker branding, relaunch and repackaging of the product range, and puddings business also grew volume, with the successful adding real value to the consumer proposition. Deliberately, the launch of ‘The Pudding’ for the key Christmas season and division has become ‘less busy’, targeting where its brands and further development of an all year round sponge offer. products really work and reducing wasteful promotional activity.

22 Performance review | Northern Foods plc Continuing profit from operations* for the Bakery division Greater focus is being delivered by improving the effectiveness increased by 17.3% to £14.9m (2006/07: £12.7m). Operating margin* of promotions across all three sectors; 7% fewer sales were improved to 7.3% (2006/07: 6.4%). This reflected the benefits of made on promotion during the year. We also exited a number improvements in factory efficiency and reduced complexity of low margin products to reduce production complexity. in the Biscuits business, together with improved profitability in In the last 12 months, 28% of the entire product range has Puddings. This improvement in profitability, together with strong been removed, whilst we continue to innovate where we can capital management, increased RONA* to 21.0% (2006/07: 15.3%). see profitable opportunities.

Biscuits Greater efficiency was initiated during the year, with investment In Biscuits, a new management structure has successfully in a number of automation projects which we anticipate will created dedicated teams which address the very different deliver cost reductions and improved operational efficiency needs of the All Year Round Branded, Seasonal Speciality across our Biscuit production sites. We are currently investing and ROB sectors in which the Biscuits business operates. £3 million to automate seasonal packing, delivering major Each market has different consumer needs, different customer productivity benefits. selling requirements and different manufacturing needs. New management talent has joined the business, whilst Taken together, these actions are expected to drive further streamlining of the manufacturing and indirect cost base improvement in Biscuits profitability over the medium term. around this structure will further strengthen focus and efficiency. Puddings As outlined to shareholders in our October 2007 strategic The Puddings business had another successful Christmas update, we believe that the Biscuits market offers opportunity trading period. Building on its market leading Christmas pudding for significant profit improvement over the medium term. position, Matthew Walker successfully launched The Pudding, The sweet biscuit market grew by 6.3% in 2007/08 (AC Nielsen 52 a new premium branded offer for Christmas 2007, which w/e 22/03/08 (sweet biscuit market)) and, although the Fox’s performed exceptionally well in taste tests and received a brand share of this market reduced slightly from 9.5% to 8.6%, Gold Award in the UK’s ‘Great Taste Awards’. Commanding this reflected deliberate action to improve profitability by exiting a strong price premium, sales in the first year of launch, test marginal promotions. The brand is well placed to exploit its marketed with one customer, were very encouraging and quirky character, its reputation for superior chocolate indulgence provide a platform for future growth alongside our existing and a strong new product pipeline in its heartland product ROB, foodservice and export ranges of Christmas puddings. range. In addition, there are significant opportunities to drive productivity improvements across the manufacturing base. We continue to focus on providing a full range of puddings to our customers, offering a wide range of high quality ROB Our new brand strategy will ensure that we maximise the puddings, both for lovers of traditional recipes and for those strengths of the Fox’s brand. This review has refocused the seeking alternatives, such as nut free or gluten free puddings. brand on grown up indulgence, seasonal gifting and ‘on the In addition, new investment in capacity will increase production go’ snacking chocolate biscuit bars, where Fox’s premium of our all year round puddings, such as our successful Fairtrade positioning is strongest. Building on these areas of strength, chocolate and sponge puddings for the Co-op. Matthew Walker rather than the more commoditised areas of the market, continues to provide a successful platform for future growth in will further improve business performance. For example, this niche market. our Chunkie Cookies, Viennese Melts and Chocolatey Shortcake Rounds all enjoy rates of sale well above the average, demonstrating the appeal, taste and quality of our products. Similarly, our technology in Creams gives us the number one position (AC Nielsen Scantrack MAT 19/04/08 – Total Coverage) in this segment of the market and we are actively innovating to grow this area of our portfolio.

To support this strategy, a new Fox’s logo and pack design strategy was developed during the year and this has now been rolled out across the entire brand portfolio, creating a compelling on shelf presence. A new £5 million advertising campaign, launched in June 2008, will build further awareness of our refreshed and refocused Fox’s brand.

In our Seasonal speciality business we are the market leader and in 2007/08 we delivered more revenue from the Christmas gifting market. Our ROB business is being progressively refocused around fewer, more premium orientated product lines which complement our branded pedigree.

Northern Foods plc | Performance review 23 Pensions raised as fixed interest debt. At the year end, 71% of the Group’s Following completion of the deficit funding programme for net debt was fixed in this way. Board approval is required for the principal UK pension scheme, the balance of assets use of any interest rate derivative. ‘Interest cover’ at year end over liabilities for total Group post retirement benefit schemes, (the ratio of EBITDA to net interest charge, measured under calculated under International Accounting Standard (IAS) 19, ‘frozen’ UK GAAP) had improved to 7.1 times (2006/07: 6.2 times). has improved during 2007/08. This has resulted in a net deficit of £8.6m before taxation at 1 April 2007 becoming a net surplus Currency risk management occurs at a transactional level (for of £61.6m before taxation at 29 March 2008. This includes example, in purchasing ingredients in foreign currencies) and recognising increased longevity, with a move to the ‘medium at a translational level (for example, in relation to Irish operations cohort’ mortality assumption. Whilst the assets of the schemes or foreign currency debt). Board policy is to hedge transactional have reduced during the year following the falls in global equity exposures using forward foreign exchange contracts wherever markets, corporate bond rates have risen following the credit material and feasible, whilst translational exposures are generally crunch and consequently liabilities have also reduced. unhedged (although may be offset against transactional impacts in the Irish operations). The US private placement debt has been Both the balance of pension assets and liabilities, and the net hedged using currency swaps of similar maturity (subject to a pensions financing credit in the income statement, are likely one off right for the counterparty bank to break the swap after to remain volatile in future on the current investment basis. seven years). In 2008/09 the net pensions financing credit is expected to decline by approximately £6.5m compared to 2007/08 due Risks and uncertainties to year end market factors. The operation of a public company involves a series of risks and uncertainties across a range of strategic, commercial, operational Northern Foods’ long history of providing defined benefit and financial areas. Northern Foods has a robust internal control pensions to its employees has resulted in a sizeable liability and risk management process, as outlined in the Corporate and asset on the Group’s balance sheet. Work is well advanced governance report, which is designed to provide assurance but aimed at reducing, but not eliminating, the potential for future which cannot avoid all risks. Outlined below are potential risks that funding volatility caused by both the scheme’s liability profile could impact the Company’s performance, causing actual results and the current asset allocation. This will be achieved by the to vary from those experienced previously or described in forward progressive introduction of a liability driven approach to the looking statements within this document. These risks are monitored investment programme, whilst, at the same time, recognising on an ongoing basis through the Company’s risk management that the future service accrual needs to remain affordable to processes. Additional risks and uncertainties not identified may both the Company and scheme members. also have an adverse material effect on the Company. > Customer relationships – the Company seeks to manage the The trustee of the principal UK scheme is also conducting risks presented by its consolidated customer base, and the a triennial scheme valuation as at 31 March 2008. The current highly competitive environment that characterises the industry company ordinary cash contribution rate is 9.9% of payroll, (which generally operates without long term contracts), through a cash cost in 2007/08 of £6.8m (2006/07: £13.4m). This is not its high service, high quality, low cost model targeted across expected to change in 2008/09. The future cost of delivering a portfolio of markets where it has strong positions. This is benefits beyond the current year is currently under review in light supported by product development programmes and by of current benefit costs and the scheme investment strategy. maintaining and developing strong robust relationships with customers; Financing and treasury management > Consumer trends – exposure to changing consumer trends The Group has a centralised treasury function, which operates can impact profitability. The Company seeks to manage these within a policy framework approved by the Board. The policy was through portfolio changes, with greater weight towards growth reviewed by the Board during the period and the Board receives trends (which include health, convenience and indulgence), a monthly update on compliance. The principal areas of treasury for example, by managing new product innovation to expand management and respective policies cover the management sales in these areas, while managing the exposure to declining of liquidity risk, interest rate risk and currency risk. market sectors; > Operational disruption – the short lead times involved in Liquidity risk management ensures sufficient debt funding is servicing our customers can lead to an adverse impact from available for the Group’s day to day needs. Board policy is to disruption to our manufacturing and distribution facilities (for maintain reasonable headroom of unused, committed bank example, by fire, health and safety failure, problems of supply, facilities in a range of maturities (at least twelve months beyond information systems failure, workforce action or environmental the year end). Current committed facilities are a 2010 Revolving incident). This is managed through a process including systems credit facility of £460m and 2012–2017 Senior loan notes of of standard operating procedure, regulatory compliance, US$155m and £54.3m private placement bonds. The facilities dedicated steering groups, monitoring, audit, consultation remain committed and available, subject to certain conditions, and multiple sourcing. Insurance cover is maintained where which are in line with typical commercial borrowing arrangements. appropriate but may not cover all risks and losses; The principal conditions require sufficient coverage of the last > New legislation, regulation and litigation – Northern Foods twelve month EBITDA to each of net debt and interest charge manages a range of regulatory requirements regarding the (‘covenants’), which are tested half yearly (see debt ratio under production, sale, safety, labelling, composition/ingredients KPIs on page 10). and disposal of its products. Compliance monitoring and proactive initiatives seek to manage this risk. Litigation claims Interest risk management balances debt financing as a tool and proceedings can have an adverse effect on the to improve returns through leverage in the capital structure, with Company’s results; the potential for higher interest rates to impact profits negatively. > Change management, recruitment and retention – ongoing Board policy is to operate with fixed rate borrowings within a change requires close management attention and the range of 20% to 50% of total net borrowings over the medium Company has experience of managing such risks and has term (although the Group may and has operated outside this action plans to mitigate them, including Board oversight and range in the short term). The US private placement bonds were project management processes. Failure to implement and

24 Performance review | Northern Foods plc complete change can impact financial results, employee > Provisions – using information available at the balance sheet recruitment and retention, with the latter also subject to the date, the directors make judgements based on experience availability of a suitable pool of domestic and overseas staff. on the level of provision required. Further information Proactive initiatives for this are included in the Corporate received after the balance sheet date may impact the responsibility report; level of provision required; > Managing procurement costs – exposure to price and > Share based payments – in accordance with IFRS 2 ‘Share- supply fluctuations for raw materials and services is managed based payments’, share options and other share awards are by a central procurement function, to better negotiate with measured at fair value at the date of grant. The valuation of relationship based suppliers, agreeing forward prices where these share based payments requires several judgements appropriate and available. The Company seeks to pass to be made in respect of the number of options that are on cost increases, where possible, to its customers through expected to be exercised. Details of the assumptions are price rises but constraints in achieving this can affect the disclosed in the notes to the consolidated financial statements. Company’s results; Changes in these assumptions could lead to changes in the > Food safety – appropriate product manufacturing, storage income statement expense in future periods; and avoidance of contamination are critical. Standard > Impairment – the Group has reviewed the carrying value of manufacturing and distribution protocols are in place, together goodwill and fixed assets and, from time to time, has impaired with proven product recall processes for product recovery. certain fixed asset values on a value in use basis. Future changes Widespread food scares can impact directly through the sale in performance or disposals could impact these values. of a contaminated product or indirectly through lack of supply or reduced consumer demand; In addition to its key accounting judgements, the Group has > Environment – the Company maintains environmental policies significant accounting policies for revenue recognition, foreign and relationships with relevant regulators to manage the impact currencies, property, plant and equipment, intangible assets, its activities have on the environment. In addition, the Company inventories, and derivative financial instruments and hedge has an active programme (described in the Corporate social accounting, which are set out in the notes to the consolidated responsibility report) to reduce this impact over time. Nevertheless, financial statements. changes in environmental legislation or unplanned incidents could impact the Company’s operations adversely; Basis of preparation > Business continuity – the Group is at risk to disruption at key This financial information has been prepared in accordance sites from incidents such as a major fire which could result with IFRS. The comparative information for 2006/07 has been in significant operational issues. Our businesses have incident amended to reflect the change to the presentation of the net management processes and continuity plans in place to pensions financing credit (which has been moved from profit manage the impact of such an event as well as insurance from operations into finance items). to mitigate the financial impact. A major update of these plans is currently in progress; Forward looking statements > Financial risks – the Company has committed financing in Forward looking statements are made throughout this Annual place, which can only be withdrawn in the event of a breach report, including in the Performance review, the Directors’ report of financing agreement, such as covenants, when the Company and the Directors’ remuneration report. These forward looking might be restricted in its ability to operate normally and could statements are based on a number of assumptions concerning be required to dispose of assets to pay down debt and incur future events and information currently available. The user of additional costs. Pension schemes could require increases these accounts should not rely unduly on these forward looking in future Company funding and pension regulation could statements, which are not a guarantee of performance and which restrict the freedom of the Company to undertake certain are subject to a number of uncertainties and other facts, many corporate activities (including disposals and return of capital of which are outside of the Company’s control and could cause to shareholders). The Company has certain tax exposures in actual events to differ materially from those in these statements. addition to trading tax balances. These exposures total £28.5m which are provided for but which, in the event of an adverse Although Northern Foods believes that the expectations finding by taxation authorities, could result in a substantial reflected in those forward looking statements are reasonable, payment of cash. it cannot assure users that those expectations will prove to be fulfilled. In addition to those factors described under ‘Risks and Key accounting judgements uncertainties’ other factors could cause actual results to differ Taking into account this analysis of risks and uncertainties, the materially from our expectation, including economic and political key accounting judgements which could impact future financial conditions, changes in laws, regulation and accounting performance include the following: standards, customer relationships and actions, effectiveness > Pensions – movements in asset markets, interest rates and life of spending and marketing programmes and unusual weather expectancy could materially affect the level of surpluses and patterns. No guarantee can be given of future results, levels deficits in the pension schemes. The key assumptions used to of activity, performance or achievements. value pension liabilities are set out in the notes to the financial statements; Comparative statements > Tax – the Group carries out tax management consistent with In this report, Northern Foods makes certain statements with a business of its size, and makes appropriate provision, based respect to its market position or its products’ or its brands’ on best estimates, until tax computations are agreed with the market positions by comparisons with third parties or their tax authorities; products or brands. These statements are based on both > Useful economic life estimates – the Group reviews the useful internal sources and independent sources and are accurate economic lives attributed to assets on an ongoing basis to the best of the knowledge and belief of Northern Foods. to ensure they are appropriate. Changes in economic life could impact the carrying value and charges to the income statement in future periods;

Northern Foods plc | Performance review 25 Corporate social responsibility report Northern Foods is committed to making great tasting food in a responsible and sustainable manner Overview In 2007/08 we continued to make good Community progress in our Corporate social As a major provider of food to UK and Irish consumers, and an employer of responsibility (CSR) agenda, with the 11,000 people across 21 operating sites, ongoing fulfilment of key programmes, Northern Foods can have a positive impact the identification of new opportunities on the community both at a national and and the introduction of more robust local level. We have sought to strengthen management and reporting structures. this engagement through focused projects which enhance our links with the local Every day, the Group has to address a wide range of issues from community and contribute to consumer the well-being and development of our people through to the well-being in the area of food. protection of the environment and ensuring food safety. Central to our approach is the expectation that all CSR activity is aligned with, and supports our overall business strategy. As such, we Phunky Foods expect individual programmes to have a positive impact, not In 2007/08 we continued our support of Phunky Foods, the only on our people or wider society, but also on our operational unique primary school programme which delivers healthy performance and our risk management profile. To facilitate lifestyle education for 5 to 11 year olds. The programme supports overall delivery of the Group’s responsibility agenda, a director the development of informed choice by introducing children, of CSR was appointed in January 2008 who reports directly to their families and their teachers to the science of healthy the chief executive. lifestyles. The year round programme has been developed by qualified British nutritionalists, delivers to the National We also continued to build on our relationship with Business in Curriculum and is underpinned by significant academic the Community (BITC), the UK’s acknowledged thought leaders research. As founder sponsor, Northern Foods has supported in CSR. This year’s review of activities corresponds more closely the programme since its pilot stage and has encouraged with BITC’s key impact framework of community, environment, the participation of other food businesses to help spread the workplace and marketplace. We believe this cross referencing programme more widely. As a result, the 2007/08 academic will support better engagement with our stakeholders who year has seen Phunky Foods delivered into 282 schools across include employees, shareholders, customers, regulators and England. Northern Foods will continue its support for a fourth the communities in which we operate. year in 2008/09, with a focus on 50 schools within close proximity to four operating sites.

Highlights 2007/08 Work placements With an acknowledged skills shortage in the food sector, 1. Supporting primary school teaching on healthy Northern Foods believes it can play a role in introducing eating through our Phunky Foods sponsorship students to the opportunities within the industry. One way 2. Sponsoring 30 food science undergraduates of achieving this is through work placements. The Group in 2007 with a further 120 planned over the next has been active in this area during the year and is working four years to extend the opportunity across the business in 2008/09. 3. Engaging with over 30 policy making and An example of our approach can be found at Pennine Foods, industry bodies to shape future good practice – our ready meals site based near Sheffield, which has strong this included chairing DEFRA’s (Department links with the Education Business Partnership (EBP). In line for Environmental, Food and Rural Affairs) with the EBP’s goal of offering high quality work experience for Food Industry Sustainability Strategy Waste students from age 14 to 20 years, Pennine Foods has delivered Champions Group work experience to approximately 60 students ranging from a 4. Improving energy efficiency and on course to two week Year 10 placement to the tailored delivery of business meet the fourth Climate Change Levy target specific projects to Further Education college students studying for their BTECH (BTECH is a vocational based qualification which 5. Sustaining a strong performance on Health gives access to the student into higher education or work). and Safety 6. Signing the Skills Pledge to reinforce our Sponsorship of undergraduate food scientists commitment to skills training Skills shortages are particularly acute in the area of food science. It is estimated that one in four food science roles are 7. Delivering well-being programmes in 9 of our vacant at any one time. Northern Foods launched a Foundation 21 manufacturing sites for food science and technology in January 2007 to help tackle 8. Launching an all employee sharesave scheme this industry wide problem by providing bursary support for 9. Maintaining our status as the only food food science and technology undergraduates. It is envisaged this move should encourage more sixth formers to consider manufacturer to have achieved UKAS (United a career in food science. Targeted to run for five years and Kingdom Accreditation Services) accreditation for developed in partnership with Leeds, Nottingham and Reading both our food testing and site certification Universities, the Foundation will provide support for up to 150 activities, for the seventh year running undergraduates for the duration of their courses. Working for 10.Meeting our salt reduction targets ahead Northern Foods is not a condition of the scheme but bursary of schedule. students will gain preferential access to potential industrial placements or graduate training opportunities. Northern Foods

Northern Foods plc | Corporate social responsibility report 27 is seeking to build interest in the sector as a whole, believing that it will benefit in the long term from a wider pool of qualified Environment food scientists. The first intake of 30 undergraduates received their grants in 2007/08 and the impact on applications for food As outlined earlier, we have sought to align science degrees will be monitored with interest. our CSR programme management and reporting more closely to BITC’s impact Stakeholder engagement framework. This separate section on the We believe that effective stakeholder management can help us to manage risk and optimise our performance. Throughout environment supports this approach and the year continued active involvement in relevant industry and reflects our recognition of environmental regulatory bodies has allowed us to respond effectively to issues as an area of considerable interest emerging challenges. During 2007/08 our involvement included, for our stakeholders. but was not limited to: > chairing the waste champions group for DEFRA in support of the development of the Food Industry Sustainability Strategy (FISS); In 2007/08, the Group continued to build on its record of good > chief executive membership of the Prince’s Rural Action environmental practice implementing project findings to reduce Programme; the business’ carbon footprint. This Carbon Trust funded project > board membership of Improve, the sector skills council for identified energy usage as the biggest contributor to our food manufacturing; footprint, accounting for over 60% of our carbon emissions. > acting as a member of a pilot project for the Health & Safety Northern Foods is taking positive action to reduce energy use Executive (HSE); through its internal Operational Excellence Group, which drives > furthering the food chain safety and sustainability activities of effective environmental management across the business and the executive committee of the Chilled Food Association (CFA); is supported by the Group’s environmental affairs controller. > chairing the Microbiological Assurance/Quality Control working party for the world renowned Camden Chorleywood Food We have also accelerated our efforts on waste management Research Association (CCFRA); by minimising the quantity of waste produced and reducing the > acting as treasurer for the Irish Institute for Training quantity of waste disposed to landfill. We believe that these two and Development. areas of improved waste management will provide us with both cost and environmental benefits. Overall Northern Foods is involved with more than 30 external bodies, to which it devoted an estimated 14 months of senior Progress on environmental issues is assessed by the Operating executive time. This investment helps the sector to share best board on a regular basis. External energy and waste reduction practice and support the consumer’s needs as efficiently as targets are under review awaiting publication of DEFRA’s Food possible. An example of this was the speech given by Stefan Industry Sustainability Strategy. Barden to the IGD in October 2007 regarding the re-engineering of our Goodfella’s pizza packaging. By modifying the pizza box Energy we are able to deliver better stacking on the pallet and a net Dedicated energy efficiency teams at our sites continued decrease in packaging of 4,000 tonnes per year, as well as a to identify areas for further efficiency gains and a number reduction of one million transport miles. of projects are underway, including increased monitoring and targeting. Performance against target is routinely monitored In addition to the community investment outlined above, and the Group is on course to meet the fourth Climate Change Northern Foods also donated £60,000 (2006/07: £59,600) Levy target in 2008/09. to various charities during 2007/08. The Group is a silver member of the ‘Give as You Earn’ scheme with more than We have also provided an annual update to the Carbon 10% of employees involved. Over the next 12 months we will Disclosure Project, an initiative which benchmarks progress of be encouraging more individuals to sign onto the scheme ‘UK plc’ in mitigating the impact of climate change. Our efforts and further increase our involvement. on energy efficiency were recognised externally when Northern Foods were runners up in the energy efficiency category of the Rural action awards Food Processing awards. The year saw the Group’s inaugural sponsorship of the Rural Action Award, one of BITC’s Awards for Excellence Waste which showcase CSR best practice in the UK. Reductions in the use of resources can bring environmental and financial benefits. In the area of waste, Northern Foods Supporting British agriculture has always been important for was one of the first food manufacturers to sign the Courtauld Northern Foods. By sponsoring the award, Northern Foods is Commitment in November 2006. In doing so the Group supporting the recognition of companies which are addressing committed to delivering targets on reducing packaging growth issues faced by rural communities and helping to create and through design, delivering an absolute packaging reduction by maintain a vibrant, sustainable rural economy. We have continued 2010 and tackling the issue of food waste. We have worked with this sponsorship in 2008/09. the Waste Resources Action Programme (WRAP), the architects of the Courtauld Commitment, to agree targets and report results.

28 Corporate social responsibility report | Northern Foods plc Our expectation is Our aim during the that all CSR activity year was to better is aligned with, and integrate CSR initiatives supports, our overall into our daily activity business strategy and this has been achieved

Our continued support of Encycle LLP, a waste to energy The Group has also contributed during the year to the CFA’s infrastructure initiative, has helped it to obtain planning approval sustainability agenda and to the IGD working party on the for a plant in Immingham which will become operational in 2009. practicalities of product carbon footprint measurement. We are This plant will convert non-recyclable waste from Northern Foods’ committed to understanding both the Group’s and individual UK sites, and other food manufacturers, into biofuel which will be sites’ carbon footprints, but, in line with industry sentiment (as used to generate electricity. Northern Foods’ waste will power articulated by the CFA), we are sceptical of the practicality and approximately 6,000 households, and the technology will enable benefits of individual product carbon labelling to the consumer. Northern Foods’ UK operations to become zero waste to landfill in 2009/10. An audit by the Environment Agency demonstrated that we had robust procedures in place to comply with the UK Producer On a number of manufacturing sites Northern Foods has teamed Responsibility Obligations (Packaging Waste) Regulations. up with the charity FareShare to distribute safe but ‘non-specification’ Internal compliance checks have also ensured that compliance short shelf life products to the needy that would otherwise have procedures at all sites are satisfactory. Our two registered been wasted. The Group is hoping to roll out this partnership to ISO 14001 sites have retained their certification to the standard. all the sites where FareShare operates. The Green Isle Longford facility is now diverting raw dough, previously sent to landfill, to an animal feed provider. This has enabled it to achieve a 90% reduction in material going to landfill over the last 12 months.

Northern Foods plc | Corporate social responsibility report 29 As a direct result of these strategy initiatives individual Workplace businesses have clear ownership and accountability for their The Group remains committed to making own H&S targets. Our approach has delivered a significant saving on the Group’s insurance costs. Training, capability Northern Foods a great place to work. development and behavioural change programmes have With quality and service core to our value been introduced and performance is tracked through a rigorous proposition, we understand that skilled monthly review process from site to CEO level. H&S is discussed and motivated people are fundamental in detail at Operating and plc Board meetings. to Group performance. As such, we invest The development of high standards is promoted through considerable time and resource in ensuring internal best practice awards. The year’s award went to the that the safety, well-being and development Gunstones Bakery facility which recognised that the daily pre-start H&S checks for machinery were not consistent across the site needs of our people are addressed. and were difficult to audit. A pioneering equipment tagging approach, controlled using departmental safety stations, has ensured that management and employees now have the tools and systems in place to ensure that a complex production line, Health & Safety (H&S) with around 136 pre-start check points, is safe before use. An intensive risk improvement programme has helped the Group achieve a 50% reduction in Accident Frequency Rates Training (AFR) over the two years prior to this report. Building on this To develop and retain talent to deliver the quality, service strong H&S performance has been an area of significant focus and efficiency standards demanded by our customers and for Northern Foods in 2007/08. consumers, Northern Foods must ensure our employees have the skills they need, both to be efficient in their current role and Our goal during the year was to maintain this improvement to develop their careers. whilst ensuring we have very robust reporting standards in place. In addition, we embarked on a programme of training and With a goal of getting ‘more people more skilled’, the Company development and the recruitment of new talent to support the signed the Skills Pledge in 2007/08. This government led initiative delivery of our new standards. We also completed an intensive is aimed at increasing the skills of the entire workforce, from the behavioural safety trial at our Pennine site to help us define and basics of reading, writing and counting to advanced technical roll out a Group wide behavioural safety programme in 2008/09. skills in science, engineering and finance. By signing the Skills Our objective is to create a sustainable H&S culture with an Pledge, the Group has access to the Government funded increasing focus on proactive improvement initiatives and ‘Train to Gain’ network, enabling it to build a training programme we are pleased with the progress that has been made. which is being progressively rolled out across the business. As can be seen from the chart below, a long term reduction As the first food manufacturing company to sign this pledge, in Accident Frequency Rates (AFR) has been achieved by May 2007 saw Northern Foods host the Government’s skills envoy, the Group, ahead of the industry average. The AFR figures for Sir Digby Jones, at its Fox’s biscuit site in Batley. The visit, arranged 2007/08 increased from 0.56 to 0.66 per hundred thousand hours in conjunction with Improve, the UK Food and Drink sector skills worked due to an increased focus on reporting all incidents council, highlighted the career opportunities within the sector. (major or minor). Well-being The detailed H&S improvement strategy was further developed Northern Foods believes that the health and well-being of its throughout 2007/08 with an increasing focus on local management employees can contribute to the health of the business. It also ownership of H&S and clear visibility of key proactive deliverables recognises that proactive management of this can help reduce including talent recruitment and development, leadership absence costs and improve productivity. processes improvement, business continuity planning, behavioural safety programmes and management H&S training. Across the Group an increasing number of well-being initiatives are taking place. For example, our Green Isle employees in Ireland benefit from annual medicals, health screening sessions, 12 month rolling accident frequency rates cancer awareness activity and a subsidised sports and social Per hundred thousand hours worked club. Similarly, 700 health checks and the roll out of the ‘Fit for Life’

1.30 programme at Solway Foods, our Sandwiches and Salads business, has increased employee health awareness. Currently 1.20 Food industry average 1.23 9 of our 21 operating sites are running well-being initiatives 1.10 1.12 and our aim over the next 12 months is to consolidate these 1.00 programmes and ensure the best practice is available for all 0.90 employees across the entire Group. 0.80 0.88 0.70 Employee sharesave scheme 0.60 0.66 To help align employees with the Group’s performance 0.50 0.56 ambitions, and to give all employees the opportunity of sharing 0.40 in planned future success, the Group launched the Savings- 0.30 related share option scheme in November 2007. This scheme gives employees the opportunity to buy shares at a discounted 0.20 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 0.00 price and provides a simple way of saving. The Board allocated ten million shares for this launch, which was oversubscribed, indicating the high level of confidence that employees have in Northern Foods’ future.

30 Corporate social responsibility report | Northern Foods plc Supply chain impact Recipe reformulation The Group continues to recognise the potential impact it has In line with national policy to encourage healthy eating, the on those in our wider supply chain. We have contracts with Group continued its systematic reformulation of recipes to approximately 4,000 suppliers and 75% of our raw materials are reduce salt content, initiated in 2004. As a result the Group purchased within the UK. To maintain appropriate transparent is on course to meet the national targets for salt reduction sourcing strategies, we continue to champion best practice ahead of the FSA’s 2010 schedule. through our Farm Assurance and Agents & Suppliers Codes of Practice. We are founding members of Sedex, a secure web The Group completed its removal of hydrogenated vegetable based system on which companies can make data regarding oils (HVOs) from all branded products and continues to work their labour standards at production sites available to trading with its customers to help them achieve their targets in this area. partners. Sedex is now the largest Ethical Trading database in the world, active in 132 countries with over 18,000 companies Providing healthy choices participating. Strong collaboration between our Technical and In line with our objective of providing a balanced range of Procurement teams, including auditing, supports the maintenance products aligned with the three macro trends of convenience, of these high sourcing standards. health and indulgence, the Group continued to provide healthy eating options across the portfolio such as low fat alternatives, An updated labour policy, finalised in June 2007, is now fully special allergen dietary needs, vegetarian recipe dishes, new in place to ensure that agency staff, including migrant labour, salad recipes and simple fish fillets. are sourced from selected licensed operators and that Northern Foods’ commitments on the health and safety of its employees Supporting informed purchasing are extended to our agency staff, including the provision of The Group continued with its two year commitment to move full training. all Guideline Daily Amounts (GDA) labelling to front of pack. Initiatives, such as the creation of a new identity for the Fox’s brand, have supported this move and this work was completed in July 2007. Marketplace Our marketplace activities cover the The 2007 relaunch of the Goodfella’s Deeply Delicious range Group’s responsibilities to create food demonstrated how different streams of the healthy eating agenda are being addressed. Recipe reformulation included that is safe to eat, reflects the healthy a 16% reduction in saturated fat, a 20% reduction in fat, eating agenda and helps consumers a 10% reduction in salt and confirmation that one third of the make informed purchasing decisions. recommended daily amount (RDA) of calcium was included We continued our work in this area in per serving. GDA labelling was moved to front of pack in September 2007 and the recommended portion size is a 2007/08 across both our branded ranges healthier ‘half a pizza’. and in conjunction with our retailer customers. Conclusion Food safety Our aim during the year was to integrate Having appropriate testing and audit procedures in place to better our CSR initiatives into our daily assure food safety and quality is core to the Group’s proposition. Northern Foods’ Nottingham based accredited, central testing activity and this has been achieved. The laboratory conducts over 30,000 tests every week, with further approach is delivering measurable benefits tests taking place on our sites and at external contract in the reduction of energy, packaging laboratories. and waste, as well as a greater focus on Unique in the industry, Northern Foods has dual accreditation employee development and community from the national body UKAS, for both our product testing and commitment. As ever, there is much more site certification activities. These sector leading standards were to do and this will be the focus of our reconfirmed in 2007/08 with not only accreditation maintained but also continuous improvement demonstrated. In national activity in the coming 12 months. trials of laboratory competence in the detection, identification and enumeration of major food pathogens, we have a With a structured approach to the 100% performance, maintained for three years. responsibility agenda now firmly rooted in the management framework of the To support the continuous development of leading standards in the safe production of wholesome food, the Group continued Group, Northern Foods was pleased to to share expert microbiological and technical knowledge with be recognised in May 2008 for the second key organisations such as the Food Standards Agency (FSA), year running, with a bronze rating in the the CFA, DEFRA, the British Retail Consortium and the CCFRA. Specifically, Northern Foods supplied scientific guidance to the BITC ‘100 Companies That Count’ rankings. CFA, and in turn Codex Alimentarius (the Joint Food & Agricultural Organization of the United Nations/World Health Organization Food Standards Programme). The Codex is a series of food standards and related texts that aim to provide a high level of consumer protection and fair practice in the international trade of food and agricultural products.

Northern Foods plc | Corporate social responsibility report 31 Board of directors and company secretary

1 234

5678

1 Anthony Hobson Chairman •‡ 5 David Nish Non-executive director •*†‡ Joined the Board in 2002 and became Chairman in 2005. He is Joined the Board in 2005 as a non-executive director. He is Group Chairman of The Sage Group plc, and a non-executive director Finance Director of Standard Life plc and was formerly Executive of HBOS plc and Glas Cymru. He was formerly Group Finance Director, Infrastructure of Scottish Power plc, and prior to that he Director of Legal & General Group plc from 1987 to 2001. He was Group Finance Director of Scottish Power plc, a position that chairs the nomination committee. he held since 1999. He was formerly a partner of Pricewaterhouse. He chairs the audit committee. 2 Stefan Barden Chief Executive Joined the Board in 2006 and was appointed Chief Executive on 6 Ronnie Bell Non-executive director •*‡ 5 February 2007. He was formerly Managing Director of Heinz UK Joined the Board in 2005 as a non-executive director. He was and Ireland from 2003 to 2005. He has extensive experience of formerly President of Kraft Foods Europe until 2004. He is Chairman the food industry having held roles with Iceland, McKinsey & of Milk Link and is a non-executive director of Ansell Limited and Company and Unilever. He sits on the policy issues committee The Edrington Group Limited. of the IGD and is a director of Improve, the UK’s food and drink sector skills council. 7 Tony Illsley Non-executive director •*†‡ Joined the Board in 2006 as a non-executive director. He was 3 Jez Maiden Chief Finance Officer formerly Chief Executive of Telewest plc until 2000, and has held Joined the Board in 2005. He was formerly Group Finance roles with PepsiCo and Colgate Palmolive. He is Chairman of Director of British Vita plc, a position he held from 2002. Prior CacheLogic Ltd, holds a non-executive position with GCap Media to that, he was Director of Finance of Britannia Building Society plc, and is a trustee of the charity Whizz-Kidz. and Group Finance Director of Hickson International plc. He is a non-executive director of Yule Catto & Co plc and a Fellow of 8 Carol Williams Company Secretary the Chartered Institute of Management Accountants. Joined Northern Foods in 1990. She is Head of Legal and was appointed Company Secretary in March 2005. She is a director 4 Orna Ni-Chionna Senior independent non-executive director •*†‡ of C&I Group Services Limited. Joined the Board in 2002 as a non-executive director. She is the senior independent non-executive director of BUPA and is • Non-executive director a member of Apax Partners’ UK Retail and Consumer Advisory * Remuneration committee member Board and of Eden McCallum’s Advisory Board. She is Chair of † Audit committee member the Soil Association and was formerly a partner of McKinsey & ‡ Nomination committee member Company. She is the senior independent director and chairs the remuneration committee.

32 Board of directors and company secretary | Northern Foods plc Directors’ report

The directors of Northern Foods plc (‘Northern Foods’) present The acquisition of Ethnic Cuisine Limited, which is a supplier their Annual report and the audited financial statements of the of chilled ready meals to J Sainsbury plc and Brake Bros Ltd, Company for the 52 weeks ended 29 March 2008. will allow Northern Foods to consolidate its position in the ready meals market and widen its existing ready meals customer base. Principal activity It also supports Northern Foods’ future growth plans by acquiring The principal activity of Northern Foods remains unchanged as additional ready meals manufacturing capacity from existing one of the UK’s leading food producers, manufacturing a mix of market providers. own label and branded products for retailers. Reporting under three divisions; Chilled, Frozen and Bakery, the business operates On 10 January 2008, Northern Foods acquired the chilled soup in five businesses primarily producing chilled Ready Meals, manufacturing plant and fixed assets in Grimsby of Baxters Food chilled Sandwiches & Salads, Biscuits, Puddings and Pizza. Group Limited. The acquisition will create a bespoke production site for Northern Foods’ growing soup business. Performance review During the year under review, the Group continued to expand Further details are provided in the Performance review. and develop its core activities. A detailed review of the business of the Group and its activities, including a list of the principal Share capital risks and uncertainties facing the Group, is set out in the Details of the issued, ordinary share capital of the Company Performance review on pages 8 to 25. The Performance review during the year are set out in note 30 to the Consolidated and Chief executive’s report include details of expected future financial statements. During both the current and prior period, developments in the business of the Group. the Company did not issue any shares.

Profit and dividends During the year under review the Company announced a share Pre-tax profit before restructuring items for continuing operations buy-back programme under the authority granted at the 2007 was £50.1m (2006/07: £40.0m) and for discontinued operations Annual general meeting. A total of 6,056,846 shares have been was £nil (2006/07: £1.3m). Profit for the period was £34.5m purchased between 19 December 2007 and 29 March 2008 (2006/07: loss £22.5m). for an average price of 87.4 pence per share and representing 1.25% of the Company’s issued share capital. The shares will be An interim dividend of 1.55 pence per share was paid to held in treasury. At the forthcoming Annual general meeting, the shareholders on 31 January 2008 and the directors recommend Company will be seeking authority again to purchase its ordinary a final dividend of 2.95 pence per share, subject to shareholders’ shares. The existing authority is for the purchase of up to 10% approval, which will be paid on 28 August 2008 to shareholders of the Company’s issued ordinary share capital. on the register on 8 August 2008. The total dividend in respect of the year amounts to 4.50 pence per share, an increase of During the year, the ESOT acquired 3,770,000 of the Company’s 5.9% from last year. In accordance with IFRS the final dividend ordinary shares for a total consideration of £4,092,269 in order to meet has not been accrued in the results to 29 March 2008. future obligations under the Company’s Performance share plan and other outstanding awards under the Company’s share plans. The Northern Foods Employee share ownership trust (the ‘ESOT’) holds ordinary shares in the Company (acquired in the market) Information required by section 992 of the Companies Act 2006 in order to meet obligations under the Northern Foods plc The following provides the additional information required for Performance share plan or to provide similar employee benefits. shareholders as a result of the implementation of the EU The trustees have waived their right to receive dividends in respect Takeovers Directive into UK Law. of the ordinary shares held by the trust. The Company’s authorised share capital comprises ordinary Acquisitions shares of 25p each nominal value. All of the Company’s issued On 19 October 2007, Northern Foods acquired the production ordinary shares are fully paid up and rank equally in all respects. assets, trade marks and licences for the Upper Crust, Tiffany and The rights attached to them, in addition to those conferred McDougalls frozen pastry brands. The successful integration of this on their holders by law, are set out in the Company’s Articles business into our Portumna site will benefit the new financial year. of Association (the ‘Articles’) a copy of which can be obtained on request from the company secretary. On 21 November 2007, Northern Foods acquired the entire issued share capital of Ethnic Cuisine Limited. At 31 March 2007, Ethnic Cuisine had gross assets of £13.9m and annual revenue of £24.0m.

Northern Foods plc | Directors’ report 33 Directors’ report continued

There are no restrictions on the transfer of ordinary shares or The executive directors’ service contracts are referred to in on the exercise of voting rights attached to them, except (i) where the Directors’ remuneration report set out on pages 42 to 53. the Company has exercised its right to suspend their voting rights The executive directors’ service contracts are terminable by or to prohibit their transfer following the omission of their holder the Company giving one year’s notice. or any person interested in them to provide the Company with information requested by it in accordance with Part 22 of the Other than service contracts, no director has a material Companies Act 2006 or (ii) where their holder is precluded from beneficial interest in any contract to which the Company, exercising voting rights by the Financial Services Authority’s or any of its subsidiaries, was a party during the year. Listing Rules or the City Code on Takeovers and Mergers. Details of the remuneration of individual directors, and their Rules about the appointment and replacement of directors interests in the share capital of the Company, are shown are set out in the Articles, and on page 37 of the Corporate in the Directors’ remuneration report on pages 42 to 53. governance report. Any director appointed to the Board must be elected by ordinary resolution at the next general meeting Indemnity of directors and officers following their appointment. Changes to the Articles must be The Company’s Articles include provisions for the indemnity approved by shareholders passing a special resolution at a of directors, the company secretary and other officers of general meeting. The directors’ powers are conferred on them the Company to the extent permitted by law. This permits the by UK legislation and by the Articles. Company to provide indemnities to cover defence costs in civil and criminal proceedings. The director, employee or officer would The directors’ authority to effect purchases of the Company’s still be liable to pay damages and to repay defence costs to the shares on its behalf is conferred by resolution of shareholders Company if his/her defence was unsuccessful. The Company and renewed annually at the Company’s Annual general meeting. has executed deeds of indemnity for the benefit of each director of the Company in respect of liabilities which may attach to them The Company is party to significant agreements, including in their capacity as directors of the Company or associated commercial contracts, financial and property agreements, companies. These provisions are qualifying third party indemnity which contain certain termination and other rights for the provisions for the purposes of the Companies Act 2006 and counterparties upon a change of control of the Company. remain in force at the date of approval of this report. Copies Should the counterparties choose to exercise their rights under of the deeds of indemnity are available to shareholders at the the arrangements on a change of control, such arrangements Company’s registered office. would need to be renegotiated. There are no agreements between any Group company and any of its employees or any director of Employees and employee involvement the Company which provide for compensation to be paid to the Northern Foods takes its responsibilities to its employees employee or director for termination of employment or for loss seriously and places great emphasis on optimising the contribution of office as a consequence of a takeover of the Company, other made by employees at all levels. The Company recognises the than provisions that would apply on any termination of employment. value of its employees and seeks to create an energetic, dynamic and responsive environment in which to work. It places considerable The trustees of the ESOT may vote or abstain from voting shares importance on communications with employees, which occur held in the trust in any way they see fit. The ESOT currently holds throughout the organisation on both a formal and informal basis. 1.37% of the issued share capital of the Company in trust for the The Group’s policy is to provide opportunities for active participation benefit of employees of the Group. and personal development, with the goals of motivating individuals and helping them to enhance their skills and maximise their potential. Directors The following were directors of the Company during the year: The Group is committed to: S Barden > providing equality of opportunity for all existing and potential R J S Bell* employees. It aims to treat all of its employees fairly in every A J Hobson* aspect of employment; A K Illsley* > ensuring that employees have access to information J K Maiden that enables them to contribute and participate fully O G Ni-Chionna* in the Group’s achievement of its objectives; D T Nish* > providing employees with clear and fair terms of employment * non-executive directors and competitive remuneration packages.

Directors’ biographical details are set out on page 32.

Under the Company’s Articles, and the provisions of the Combined Code, directors are required to stand for re-election at the third anniversary of their appointment. Under these provisions A J Hobson, O G Ni-Chionna and D T Nish are required to stand for re-election at this year’s Annual general meeting.

34 Directors’ report | Northern Foods plc The Company encourages involvement in the Company’s Supplier payment policy performance in a variety of ways, including senior management It is the Company’s policy that payments to suppliers are made briefings and via the Company’s intranet. The philosophy in accordance with the terms and conditions agreed between of encouraging employees to contribute to the performance the Company and its suppliers, provided that all trading terms of the Group is reinforced by a number of incentive schemes. and conditions have been met. Suppliers were paid on average A new savings-related share option scheme was approved by 49 days from receipt of invoice, in line with the Company’s standard shareholders at the Annual general meeting in 2007. The first payment terms (2006/07: 44 days). invitation, aimed at maximising employees’ involvement and interest in the success of the Company as a whole through Research and development share ownership, was successfully launched in November 2007. Throughout the year the Company invested across the business in product development and research, further details are set out Further information about our employment practices and our in the Performance review. These costs comprise all directly commitment to learning and development can be found in attributable costs necessary to create and produce new products the Corporate social responsibility report on pages 26 to 31. which are both brand new in design and those being modified.

Disabled persons Financial instruments Applications for employment by disabled persons are fully Information on the Group’s financial risk management objectives considered, bearing in mind the aptitudes of the applicant and policies, and on the exposure of the Group to relevant risks concerned. In the event of members of staff becoming disabled, in respect of financial instruments is set out under the heading every effort is made to ensure their employment with the Group ‘Financing and treasury management’, on page 24 of the continues and appropriate training is arranged. It is the policy Performance review. of the Group that training, career development and promotion of disabled persons should, as far as possible, be identical to Auditors that of other employees. In the case of each of the persons who are directors of the Company at the date when this report was approved: Substantial shareholdings > so far as each of the directors is aware, there is no relevant At the date of this report the Company had been notified of audit information (as defined in the Companies Act 1985) the following interests in 3% or more of the total voting rights of which the Company’s auditors are unaware; and in the issued share capital of the Company: > each of the directors has taken all the steps that he/she ought to have taken as a director to make himself/herself % of total voting rights aware of any relevant audit information (as defined in the Standard Life Investments Limited 12.97% Companies Act 1985) and to establish that the Company’s GAM International Investment Management Limited 7.53% auditors are aware of that information. Odey Asset Management 7.45% FIL Limited 5.95% This confirmation is given and should be interpreted in accordance Barclays plc and group companies 5.47% with the provisions of section 234A of the Companies Act 1985. Witmer Asset Management, LLC 5.09% Legal & General Investments Limited 4.41% Deloitte & Touche LLP acted as auditors for the 52 weeks ended Grantham Mayo Van Otterloo & Co LLC 4.01% 29 March 2008 and have expressed their willingness to continue Allianz SE 4.00% in office as auditors of the Company. A resolution proposing their re-appointment will be submitted at the Company’s Annual general meeting. Corporate social responsibility Northern Foods is committed to improving the operational Annual general meeting and environmental performance of the business. Details of The notice convening the Company’s Annual general meeting the commitments it makes in the community, environment, to be held at 12.00 noon on Monday 28 July 2008 at the marketplace and workplace are set out in the Corporate social Thorpe Park Hotel, 1150 Century Way, Leeds LS15 8ZB, is contained responsibility report on pages 26 to 31. in the circular sent to shareholders who requested a hard copy, together with this report and is also available on the Company’s Charitable donations website at www.northernfoods.com. During the year the Group donated £60,000 (2006/07: £59,600) for charitable purposes. It is Group policy not to make political By order of the Board donations and none were made during the financial year. Carol Williams Company Secretary 27 May 2008

Northern Foods plc | Directors’ report 35 Corporate governance report

Compliance Attendance at Board meetings and committees of the Board Northern Foods is committed to the highest standards of There were eight Board meetings held during the year. In addition, corporate governance. The Board has overall responsibility for the chairman held two separate meetings with the non-executive corporate governance and is accountable to the Company’s directors without the executive directors being present. The shareholders for good governance. discussions held at these meetings covered Board related issues including Board structure and succession planning. The directors recognise the importance of this responsibility and The non-executive directors also met once without the chairman can confirm that the Company has complied fully throughout the present to appraise his performance. The Board holds meetings year with the provisions set out in Section 1 of the 2006 Combined in London or Leeds and at least one meeting each year is held Code on Corporate Governance (the ‘Combined Code’) and at one of the operational sites. the associated Turnbull Guidance, as annexed to the Financial Services Authority’s Listing Rules other than in relation to Code The table below shows the number of meetings of the Board, provision C.3.1. For part of the year Anthony Hobson, non-executive audit, remuneration and nomination committees held during chairman, was a member of the audit committee until his resignation the year, and the number of meetings attended by each director. from the committee in November 2007. As chairman he is not The directors attended Board and committee meetings wherever considered to be independent by the Combined Code. Following possible unless personal circumstances prevented their his resignation the Company now considers it is fully compliant. attendance, as shown below.

Number of This report describes the Company’s governance policies and meetings held explains how the Company has applied the main and supporting 31 March 2007 to Board1 Audit2 Remuneration3 Nomination4 principles of the Combined Code. 29 March 2008 8371 Number of meetings attended S Barden 8/8 n/a n/a n/a Directors R J S Bell 8/8 n/a 7/7 1/1 The Board A J Hobson 8/8 2/25 n/a 1/1 The Board determines the strategic direction of the Company A K Illsley 8/8 3/3 7/7 1/1 and reviews its operating and financial position. The Board J K Maiden 8/8 n/a n/a n/a ensures that the necessary resources are in place in order for O G Ni-Chionna 7/8 2/3 7/7 1/1 the Company to meet its objectives. It has a schedule of matters D T Nish 8/8 3/3 5/7 1/1 specifically reserved to it, which can be amended only by the Notes Board itself and which has been reviewed and updated during 1 A J Hobson is chairman of the Board the financial year under review. 2 D T Nish is chair of the audit committee 3 O G Ni-Chionna is chair of the remuneration committee These matters include approval of the overall Group strategy 4 A J Hobson is chair of the nomination committee 5 A J Hobson resigned as a member of the audit committee on and financial policy, membership of the Board and its committees, 7 November 2007 acquisitions and divestments, and major capital expenditure. This schedule is available on the Company’s website. All other matters The chairman is not a member of the remuneration and audit relating to the management of the Company are delegated committees but attends by invitation. Senior executives below to the Operating board within clearly defined limits of authority. Board level are periodically invited to attend Board meetings The Board monitors the performance of management and aims to make presentations on their areas of responsibility. to ensure that the strategy, policies and procedures adopted are not only in the long term interest of shareholders but also meet Chairman and chief executive the needs of Northern Foods’ customers, employees, suppliers There is a clear, written division of responsibility between the and the local communities in which it operates. The Operating chairman and the chief executive. The chairman is responsible board is responsible to the Board for developing the strategy for leadership of the Board, setting the agenda and ensuring its and for the overall performance of the Group and for managing effectiveness. He is also responsible for ensuring that the directors the Group’s businesses as defined by the Board. receive accurate, timely and clear information, and for effective communication with shareholders. The chairman’s other significant The Board, chaired by Anthony Hobson, has seven directors, commitments and any changes during the year are detailed in his comprising two executive directors and five non-executive directors. biography on page 32. The Board is satisfied that the commitments The executive directors are Stefan Barden, Chief Executive and of the chairman outside the Group are not such as to interfere with Jez Maiden, Chief Finance Officer. Orna Ni-Chionna is the senior the performance of his duties. The chief executive is responsible independent director. The non-executive directors possess a for operating the business and implementing the Board’s strategies range of skills and experience and bring independent judgement and is supported in these matters by the Operating board. to bear on issues of strategy, performance and resources that are vital to the success of the Group. The non-executive directors have a particular responsibility to challenge constructively the strategy proposed by the executive directors; to scrutinise, and challenge performance; and to satisfy themselves that the Group maintains a sound system of internal control to safeguard shareholders’ investment and the Company’s assets.

36 Corporate governance report | Northern Foods plc Board balance and independence One week prior to each scheduled Board meeting, the chairman The Company complies with the requirement of the Combined Code and the company secretary ensure that the directors receive all that there should be a balance of executive and non-executives, relevant papers so that they are properly appraised of the Company’s such that no one individual has unrestricted powers of decision. current performance and information on any other matter which There is a succession plan, approved by the Board, to ensure is referred to the Board for consideration. continual review of the balance of skills and experience. There is a comprehensive induction process, tailored to the needs The Board uses criteria to assist in arriving at its decision that of the individual directors, which is arranged by the company the non-executive directors are independent. These include: secretary. This includes meetings with management and external > a deep appreciation of the Group’s business and activities so advisors so that the new director receives an appreciation of the that a thorough evaluation of information received can be made; activities of the Group, the key drivers of business performance > objective decision making after debate; and the significant current issues. Visits to operational sites are > objective challenge of management; encouraged. The training also covers the role of the Board and > a clear and consistent approach demonstrating that he/she its committees, corporate governance practices and procedures, has the good of the Group uppermost in his/her behaviour and the duties, responsibilities and liabilities of a director of a when challenging others and defending his/her viewpoints. public listed company. There have been no new appointments to the Board in this financial year. Following the annual review of independence, the Board is of the opinion that all of the current non-executive directors are Additional training is arranged, by the company secretary, independent by these criteria and are free from any relationship on a group or individual basis as needs arise; for example, or circumstance which could affect, or appear to affect, their when a non-executive director is appointed to a Board committee. independent judgement. David Nish is the Group Finance Director of Standard Life plc which owned 12.97% of the Company’s shares During the year, in order to assist them in their duties, the directors as at 27 May 2008. The Company does not consider that this received presentations on the developments in financial reporting affects his independence as his role at Standard Life does not since March 2007 and the Corporate Manslaughter and Homicide include direct responsibility for investment decisions. Act 2008.

Influence is balanced within the Board by virtue of a non-executive Board performance evaluation senior independent director and a further three non-executive The performance of the Board, the chairman and its principal directors whose skills and business experience are invaluable committees is evaluated annually. As in previous years, this has in constructively challenging and developing the Group’s strategy taken the form of obtaining completed detailed questionnaires and direction. (which have been extensively revised this year) from all Board members, analysing the responses, and providing the opportunity Appointments to the Board for directors to comment on any issues not covered directly by Appointments to the Board are the responsibility of the full Board the questionnaire. The results of the evaluation were considered on the recommendation of the nomination committee. There is by the Board. It was agreed that the results confirmed the a formal, rigorous and transparent procedure for the appointment effectiveness of each director’s contribution, each committee, of new directors which is made on merit and against objective and of the Board as a whole. criteria. The criteria are set by the non-executive directors and include identifying any areas where skills are lacking and making Orna Ni-Chionna, Senior Independent Director, has analysed appointments to enhance the balance of skills and experience responses to a detailed questionnaire designed to evaluate of the Board. the performance of the chairman. The results of the survey were discussed with the executive and non-executive directors when The terms and conditions of appointment of non-executive the chairman was not present. The outcome of these discussions directors are available for inspection at the Company’s registered confirmed that the performance of the chairman was effective office during normal business hours and at the Annual general and that he continues to provide strong leadership to the Board. meeting (for 15 minutes prior to, and during the meeting). The chairman assesses the performance of the non-executive Information and professional development directors, after consultations with the executive directors and All directors have unlimited access to information regarding the senior independent director. the Company, and to the advice and services of the company secretary, whose appointment and removal requires the approval Re-election of directors of the Board, and they may obtain external advice, as required, Under the Company’s Articles of Association, all directors at the expense of the Company. are subject to election by shareholders at the first opportunity after their appointment and then to re-election at intervals of no more than three years. Retiring directors may offer themselves for re-election.

Northern Foods plc | Corporate governance report 37 Corporate governance report continued

The directors standing for re-election by shareholders at this year’s In line with the Turnbull Report, Internal Control: Guidance for Annual general meeting are Anthony Hobson, Orna Ni-Chionna and Directors on the Combined Code (Turnbull), the directors regularly David Nish. The Combined Code requires that any non-executive review the effectiveness of the Group’s system of controls and director serving a term beyond six years should be subject to a risk management. The directors believe that appropriate steps particularly rigorous review. Anthony Hobson and Orna Ni-Chionna are being taken to embed internal control and risk management have both served two three year terms and, as required, were further into the operations of the business and to identify subject to a rigorous review of their performance, contribution opportunities for improvement which come to the attention of and effectiveness in the Board evaluation process. A review of management and the Board. The system is designed to provide the results of the Board evaluation took place in April 2008, where reasonable (not absolute) assurance of effective operations and it was concluded that both directors continued to make a valuable compliance with laws and regulations. and effective contribution to Board decisions and that their performance continued to demonstrate commitment to their roles. As part of its review process, the Board considers new and emerging risks and also considers key external business drivers The biographical details of all the directors put forward for such as market trends and competitive activity. The Board also re-election are contained on page 32 of the Annual report and plays an important role in driving continuous improvement in the in the explanatory notes contained in the Notice of meeting. management of risk by encouraging the sharing of best practice across the business. Remuneration Remuneration is set out in the Directors’ remuneration report on A summary of the principal control structure and processes pages 42 to 53 and the work of the remuneration committee is in place across the Group is set out below. set out on page 40 of this report. Control structure and processes The Board assesses key areas of internal control and risk Accountability and audit management and sets policy accordingly. It tasks each business Financial reporting to identify and document each significant risk and to implement The Board is required to present a balanced and understandable appropriate controls for that risk. The Board also requires the assessment of the Company’s position and prospects. This businesses to manage, monitor and report on the effectiveness responsibility extends to annual and half year reports and other of these controls. price sensitive reports. The Company is also required to present interim management statements covering the first and third quarter The businesses are supported by appropriate corporate trading during each six months trading, following implementation management resources which provide the technical skills and of the Transparency Directive in January 2007. For the financial expertise needed to supplement the businesses’ own resource year 2007/08, the Company made two such interim management and to provide overall assurance for the major areas of risk. statements in compliance with the regulations. There are clearly defined lines of authority and accountability.

The Board is satisfied that it has met its obligations in presenting The internal auditors have reviewed the overall approach adopted a balanced and clear assessment of the Company’s position by the Company towards its risk management activities. and prospects. This assessment is primarily provided in the Chairman’s statement, the Chief executive’s report and the The audit committee oversees both internal and external audit Performance review contained in this report. The Statement of procedures and monitors response to any significant control directors’ responsibilities in respect of the financial statements issues raised. is set out on page 54. Roles and responsibilities for each area of identified risk are Internal control and risk management outlined below: The Board has overall responsibility for the Company’s system > Strategic delivery: through its regular meetings, the Board of internal controls and for reviewing its effectiveness which assesses performance against objectives. In doing so, it covers all aspects of the business. Key risks are identified in considers performance data and also considers external the Performance review on pages 8 to 25 and include strategic, dynamics, such as shifting customer and consumer trends, commercial, operational and financial risks. These risks are that could affect the delivery of these objectives. managed through a comprehensive internal control and risk management system as outlined below. > Health and safety: the Group’s health and safety team sets strategy and risk management standards. A detailed monthly Underlying this process is the Board’s aim to safeguard review process facilitates performance measurement against shareholders’ investments and the Company’s assets. It also targets. Governance is maintained through the coordination aims to ensure that proper accounting records are maintained, and delivery of an operationally focused audit which complies and that the financial information used within the business and with Health & Safety Executive guidance. The group function for publication is accurate, reliable and fairly presents the financial also provides a centre of excellence to support each business position of the Company and results of its business operations. and site in working to defined risk management standards.

38 Corporate governance report | Northern Foods plc Key improvement activities are defined and assistance The central finance function obtains advice and provides provided to aid the implementation of improvement activities. adequate insurance cover for major losses with appropriate These activities include processes such as behavioural levels of deductibles, through a Group programme with safety programmes, safety training initiatives and site based external insurance brokers. This cover is reviewed and improvement project support. Networking is strongly supported negotiated annually. through the operation of an annual best practice award scheme, annual safety conference and the safety function contact Financial and treasury management oversee the principal areas group activities. of treasury risk including liquidity, interest and currency risk.

A dedicated risk management steering group identifies and > Information technology: the Information Services function manages fire risk through site audits and the implementation provides appropriate systems infrastructure and back-up of recommendations and standards, together with sharing of services to the business. best practice. > Legal: provides and obtains advice on a full range of legal > Talent management and human resources: centrally driven issues across the Group, and ensures good title to properties organisational capability reviews ensure that each of the and intangible assets. businesses and functions regularly reviews its existing management capability and succession plans in the context > Corporate social responsibility: the corporate social of the Company’s strategic plans. responsibility director ensures that there are effective systems in place for evaluating and managing social, environmental > Food safety and quality: the technical services team and ethical (SEE) risks. Further information is provided in assesses and approves raw material suppliers, audits the the Corporate social responsibility report on pages 26 to 31. quality management systems in the Group, provides guidance on compliance with food related and environmental legislation, Review process sets technical standards and offers expertise on food science An ongoing review process includes an assessment of internal and technology. This expertise and governance is reflected controls, in particular, internal financial controls. It also includes in the independent accreditation of the team as UKAS reports from the internal audit function as well as the external Certification Body No.199 and UKAS Testing Laboratory No. auditor on matters identified in the course of its statutory audit work. 2087. The dual accreditation has again continued without interruption in 2007/08, a record that is unique to Northern Foods. Businesses and specialist functions report by exception on any matters arising during the year to the monthly performance review > Asset management and engineering: contractors for building, meetings. The results of formal half yearly internal reviews are engineering and professional services are approved by the taken forward to the audit committee. businesses’ engineering resource in conjunction with Group Procurement and Group Health and Safety. The Board is therefore able to confirm that there is an ongoing process for identifying, evaluating and managing the significant > Procurement: Group Procurement supports the businesses risks faced by the Group, that it has been in place for the year in identifying, contracting and managing strategic supply under review and up to the date of approval of these financial relationships. It plays a key role in the Group’s risk management statements, that it is regularly reviewed by the Board and that of external third party expenditure. it accords with Turnbull guidance.

> Finance: each business prepares detailed annual budgets Audit committee and auditors and strategic plans, which are reviewed and updated on A principle of the Combined Code is that the Board should a regular basis. Weekly and monthly accounts are prepared establish formal and transparent arrangements for considering for each business and performance is monitored against how it should apply the financial reporting and internal control the original budget, and updated forecasts. The Group’s chief principles and for maintaining an appropriate relationship with executive and chief finance officer meet on a formal basis the external auditors, Deloitte & Touche LLP. These responsibilities each month to review the performance of each of the are delegated to and are discharged by the audit committee businesses with its managing director and finance director. whose work is described on pages 40 to 41.

During the year, capital expenditure planning, budgeting and approval of expenditure was performed by executive Relations with shareholders management, up to an agreed level delegated by the full Board. Dialogue with shareholders The Board attaches great importance to maintaining good The internal audit function reviews the standard of internal relationships with all shareholders, who are kept informed of financial control and the accuracy of financial reporting significant Company developments. Presentations are made through a rolling cycle of audit visits under a programme of the half year and full year results, briefings are given to analysts, of activity approved by the audit committee. and other meetings to discuss Company direction are held with institutional shareholders on a regular basis.

Northern Foods plc | Corporate governance report 39 Corporate governance report continued

The chief executive and chief finance officer are closely involved Nomination committee in investor relations and report the views of major shareholders A J Hobson Chair back to the Board. Investor meetings are arranged through R J S Bell the Company’s broker, UBS Investment Bank, and others. A K Illsley The chairman, the senior independent director and other O G Ni-Chionna non-executive directors are available to meet major shareholders D T Nish whenever necessary, and the chairman did so during the year. The committee meets as required to review the structure, All material information reported to the regulatory news services size and composition of the Board. During 2007/08 the committee is simultaneously published on the Company’s website affording met once to consider the terms of appointment of directors, all shareholders full access to Company announcements. In succession planning and Board skill and balance. Due to the addition, the Company has introduced an electronic communication changes in the composition of the Board which occurred in facility to allow shareholders to receive information more quickly the previous financial year, no further changes to the structure and in a manner more convenient for them. The Company has of the Board were considered desirable or necessary. also taken advantage of provisions under the Companies Act 2006 which allows the use of the website to communicate When the need for a new director is identified, the criteria with shareholders as an alternative to receiving hard copies. in respect of the background and competencies of potential A resolution to this effect was passed at the Company’s Annual candidates are approved by the Board before the search is general meeting in 2007. It was implemented in November 2007 by started. This specification is drawn up after consideration of shareholders being offered the choice of receiving communications the skills, knowledge and experience of existing Board members. from the Company either via the website or by way of hard copy. The committee also ensures that candidates have enough time available to devote to the position. Search consultants have been Constructive use of the Annual general meeting used extensively in the identification of new Board appointments. The Board regards the Annual general meeting, which will be held on Monday, 28 July 2008, as an opportunity to The committee also reviews annually the need for succession communicate directly with private investors. Wherever possible, planning, particularly for the chairman, chief executive and other all directors attend the Annual general meeting. Anthony Illsley key Board positions, and makes recommendations accordingly. will not be attending this year’s meeting due to a previous engagement. A presentation is made to shareholders at the Remuneration committee meeting to facilitate greater awareness of the Group’s activities. O G Ni-Chionna Chair Shareholders are invited to ask questions and are able to meet R J S Bell the directors informally. Separate resolutions are proposed on A K Illsley each substantially separate issue and the number of proxy votes D T Nish cast for and against each resolution, as well as the number of votes withheld, are announced to the meeting following voting The remuneration committee, which is chaired by the senior on a show of hands. A poll would be called on any resolution independent director, consists of the non-executive directors and where it was appropriate or required. The Company offers an determines the broad policy and framework for the remuneration electronic voting facility to investors. of executive directors and senior managers. No director is permitted to be present when his/her own remuneration is being discussed, Details of proxy voting by shareholders, including votes withheld, nor to vote on his/her own remuneration. The committee also are announced through the London Stock Exchange and are determines the nature and scale of incentive performance also placed on the Company’s website. arrangements that encourage enhanced performance and which reward individuals in a fair and responsible manner for their contribution to the success of the business. In setting the Board committees remuneration policy for executive directors and senior managers, Each Board committee has written terms of reference which the committee also takes into account the reward policies for define the role and responsibilities of the committees and are managers generally. reviewed annually. The terms of reference of each committee are available from the company secretary or can be viewed An integral part of the role of the remuneration committee is to on the Company’s website. carry out an appraisal of the performance of the chief executive.

Appointments to the committees are made on the Audit committee recommendation of the nomination committee but subject to D T Nish Chair Board approval. Membership of the committees is for periods A J Hobson (Resigned 7 November 2007) of up to three years, normally extendable by no more than two A K Illsley additional three year periods. The company secretary acts as O G Ni-Chionna secretary to the Board committees.

40 Corporate governance report | Northern Foods plc The audit committee comprises three non-executive directors; Internal controls and risk management each is considered to be independent as required by the The committee reviews reports from internal audit at three Combined Code. A J Hobson resigned from the committee meetings during the year. These reports consider the operation on 7 November 2007 in order to comply with the provisions of of, and issues arising from, the Group’s internal control procedures, the Combined Code which state that all committee members together with observations from the external auditors. The committee should be independent. The chairman is not considered to monitored the effectiveness of the Group’s risk management process, be independent under the Combined Code. The chairman is, which considers the key risks, both financial and non-financial, however, invited to attend meetings of the committee. facing the Group and the effectiveness of the Group’s controls to manage and reduce the impact of those risks. The main duties of the committee, set out in its terms of reference, are to: Internal audit > make recommendations on the appointment and remuneration It is the role of internal audit to advise management and the Board of external auditors and to monitor their performance; on the extent to which systems of internal control are effective > approve and monitor the policy for non-audit services and to provide independent and objective assurance that the provided by the external auditors to ensure that the processes by which significant risks are identified, assessed and independence of the auditors is not compromised; managed are appropriate and effectively applied. The internal audit > review and advise the Board on the Company’s financial plan, which covers the scope, authority and resources of the statements, its accounting policies and on the control and function, is determined through a structured process of risk mitigation of its financial and business risks; assessment and is approved by the audit committee. The nature > review the nature and scope of the work to be performed and scope of the work of the internal audit team was reviewed by the external and internal auditors, the results of their audit and approved, the reports of results received and the responses work and of the response of management; of management considered. The plan set out at the beginning > review and advise the Board on the effectiveness of the of the year was achieved and the outcome of the work was in Company’s internal control environment, including its line with expectations. To ensure the independence of the internal ‘whistleblowing’ procedures. audit function, the senior internal auditor has the right of direct access to the chair of the committee and to the chairman of D T Nish took over the chair of the committee on his appointment the Board; this right was not invoked in the year under review. to the Board. He is a member of the Institute of Chartered Accountants of Scotland and is Group Finance Director of External audit Standard Life plc. He is considered to have the recent and The committee reviews auditor independence annually. The relevant financial experience required for the provisions of the committee also monitors the cost effectiveness and objectivity Combined Code. The other members of the committee have of the external auditors. To assist in ensuring independence, the a wide range of business experience, which is evidenced by role of the audit partner on the audit is rotated every five years. their biographical summaries on page 32. The provision of non-audit services by the external auditors is considered in line with the committee’s terms of reference. During Meetings the year, the auditors also provided tax advice, amongst other The committee invites executive directors, management, services. Auditor objectivity and independence was safeguarded external and internal auditors to attend meetings as it considers through the use of a separate tax audit partner. In addition, the appropriate for the matters being discussed. auditors report annually on the actions taken to comply with professional and regulatory requirements and on current best Work of the committee practice required to ensure independence. The audit committee During 2007/08, the audit committee met on three occasions reviewed the external auditors proposed plan in November 2007 and reported its conclusions to the Board. It met privately with and their report of May 2008 and has considered the effectiveness the internal and external auditors without executives present. of the external audit. It also met with executive management and executive directors. Operating board The committee discharged its obligations in respect of 2007/08 During the year, in line with the simplification of the business, as follows: the Northern Foods’ Operating board was restructured. It now comprises the chief executive, the chief finance officer and five Financial reporting managing directors with responsibility for the individual businesses. During the year the committee reviewed the draft half year and annual financial statements prior to Board approval. The committee received a report from the external auditors setting out the Going concern accounting or judgemental issues which required its attention. The directors are satisfied that the Company has adequate The auditors’ reports were based on a high level review resources to continue in business for the foreseeable future. (Half year report) and a full audit (Annual report) respectively. Accordingly the financial statements for the 52 weeks ended 29 March 2008 have been prepared on the going concern basis. The committee has also advised the Board on accounting policies, disclosure and controls. By order of the Board Carol Williams Company Secretary 27 May 2008

Northern Foods plc | Corporate governance report 41 Directors’ remuneration report

1 Introduction In undertaking this role, the committee considers remuneration The Board has prepared this report in accordance with the policy and rewards across the Company and not just at Board level. requirements of Schedule 7A to the Companies Act 1985. The report also meets the relevant requirements of the Revised The committee has been formally delegated the authority, by the Combined Code on Corporate Governance issued by the Board, to establish policy in respect of all terms of employment Financial Reporting Council (‘the Combined Code’) and is for executive directors. No individual plays a part in any discussion prepared for the 52 weeks ended 29 March 2008. about his or her remuneration.

This report to shareholders sets out the remuneration policy and It is the role of the committee to ensure that the Group’s explains the policy under which the executive and non-executive remuneration policy and framework provides competitive reward directors and management team were remunerated for the 52 weeks for its executive directors and other senior executives, taking ended 29 March 2008. It also provides details of the salary, into account the Company’s performance, the markets in which incentives, share and pension interests of all the directors for the it operates and pay and conditions elsewhere in the Group. year and, subject to ongoing review by the remuneration committee, outlines remuneration policy for the forthcoming and subsequent The Board believes that a properly constituted remuneration years. A resolution to approve the report will be proposed at the committee is essential in establishing a system of remuneration Annual general meeting of the Company. which clearly aligns the interests of executive directors and senior managers with those of shareholders, and links incentives The auditors are required to report to the Company’s members to improvements in the absolute performance and relative on the audited element of the Directors’ remuneration report and competitiveness of the Company. The committee’s terms to state whether, in their opinion, that part of the report has been of reference are published on the Company’s website. properly prepared in accordance with the Companies Act 1985.

Unaudited information 3 Advisers to the remuneration committee The information in this following section of the remuneration report Strategic Remuneration acted as independent executive has not been audited by the Company’s external auditors. remuneration adviser to the committee up to and including 17 August 2007. During 2007 the committee engaged the services of New Bridge Street Consultants LLP to provide advice in the 2 Remuneration committee formulation of executive remuneration packages and it has been The remuneration committee is a committee of the Board and formally retained as remuneration adviser to the committee. the members, all of whom are independent, during the year were New Bridge Street Consultants has been acquired by Hewitt O G Ni-Chionna (Chair), R J S Bell, D T Nish, and A K Illsley. Details Associates Limited and now trades as Hewitt New Bridge Street of attendance for the committee are provided in the Corporate (‘HNBS’). HNBS provided no other services to the Company. governance report on page 36. At the invitation of the chair of the However, Hewitt Associates Limited is the appointed scheme committee, the chief executive, the chief finance officer and group actuary to the principal Northern Foods UK pension schemes. HR director attend committee meetings to provide background HNBS operates separately from the rest of Hewitt and there and context on matters relating to executive remuneration. are provisions in place to ensure that there is no crossover of A J Hobson is not a member but attends the committee information between the two teams. The committee retained by invitation. The secretary to the committee is C Williams, DLA Piper UK LLP as solicitors to advise on matters relating Company Secretary. to directors’ contracts and specific employment law advice. The committee appointed Pinsent Masons LLP to provide advice The role of the remuneration committee is to approve, implement regarding the principal Northern Foods UK pension schemes. and keep under review the remuneration policy and practice of The committee identified no conflict in the nature of the services the Group, and specifically to: provided by its advisers. The terms of business of HNBS, > agree with the Board the framework and the value of DLA Piper UK LLP and Pinsent Masons LLP are available the remuneration of the chairman, executive directors and from the company secretary. senior managers; > agree the terms of the executive directors’ and company secretary’s service contracts and remuneration; 4 Remuneration policy > determine the nature and scale of short and long term To deliver its objective of creating real increases in shareholder performance incentive arrangements that drive high value relative to its peers, the Company needs to attract and performance whilst rewarding individuals in a fair and retain the most talented and committed people and create the reasonable manner for their contribution to the success right employment conditions and reward opportunities for them. of the Group. The Company’s remuneration policy is designed to support the recruitment, motivation and retention of such high calibre employees. Remuneration is considered within the context of the sector of which the Company is a part, and the wider FTSE 350 community where the Company competes for talent. The sector includes companies operating as fast moving consumer goods (FMCG) companies.

42 Directors’ remuneration report | Northern Foods plc The committee fundamentally reviewed the Company’s remuneration Northern Foods’ policy regarding non-executive directors’ fees policy in 2004/05. This review, detailed in the Annual report for that takes into account the need to attract individuals of the right year, set the objectives such that the remuneration of executive calibre and experience and reflects the responsibilities and time directors and senior executives should be directly linked to the commitments of the role. Fees for the non-executive directors delivery of strategic objectives which are closely aligned with the are reviewed annually on the recommendation of the executive interests of shareholders. The policy includes the introduction of directors and are then subject to approval by the Board. Fees differentiated rewards, according to performance, based on the are set with regard to a range of external information for equivalent introduction of rigorous individual performance measures against companies. There are no other emoluments for non-executive the delivery of these strategic objectives. This practise of linking directors, except where the Company meets authorised expenses pay to performance was implemented for the first time in 2005/06. incurred on the Company’s activities. They are not eligible for pension scheme membership and do not participate in any During 2007, the committee reviewed the balance between fixed of the Company’s annual or long term incentive schemes. and variable compensation for senior executives. Accordingly, Fees were reviewed in October 2006 and a decision was taken a significant proportion of the remuneration package now depends to defer any increase to 1 June 2007. At this date, the basic fees on the attainment of demanding performance objectives, both of the non-executives directors were increased, with the exception short and long term. The annual bonus scheme is designed to of the chairman, who received no increase. Any future revisions incentivise and reward the achievement of demanding financial of fees will come into effect on 1 June each year. and business related objectives. Long term share based incentives are designed to align the interests of executive directors and other senior executives with the longer term interests of shareholders by 6 Remuneration policy for executive directors rewarding them for delivering sustained increased shareholder value. The remuneration committee aims to ensure that the Company’s executive directors are fairly rewarded for their individual In agreeing the level of base salaries and the performance related contributions to the Group’s performance. The committee’s policy elements of the remuneration package, the committee considers is to offer differentiated remuneration packages, clearly linked to the potential maximum remuneration that executives could receive. both individual and business performance, which are capable The committee reviews the packages and varies individual of attracting, retaining and motivating executive directors of high elements when appropriate from year to year. The policy continues calibre, providing both short and long term focus for the business. to be to reward senior managers at the relevant mid-market level The approach is designed to ensure that the Company is managed for on target performance, whilst delivering competitive rewards effectively to the benefit of shareholders and will create real increases for outstanding performance. in shareholder value.

The committee seeks to align the remuneration of executive 5 Remuneration policy for directors with that of the wider Northern Foods senior management non-executive directors team. The committee’s objective is to achieve a structured and Non-executive directors are appointed for an initial term of three balanced remuneration package. years with the expectation that, subject to satisfactory performance, they will be invited to serve a second and third three year term. The committee believes that a significant proportion of the total remuneration of an executive director should be performance The dates of the chairman’s and current non-executive directors’ related. Accordingly, a rigorous approach has been adopted to letters of engagement, the dates on which their appointment the assessment of individual performance, whereby significant took effect and the current expiry dates are as follows: emphasis is placed upon the individual’s contribution to the Group’s overall performance. This is to ensure that the remuneration Date of Effective date Expiry date package for executive directors is aligned closely with shareholder commencement of current term of current term interests and individual performance. R J S Bell 1 Sep 05 1 Sept 05 31 Aug 08 A J Hobson 28 May 02 28 May 05 27 May 08 The four main components of the ongoing remuneration package A K Illsley 2 Oct 06 2 Oct 06 1 Oct 09 for executive directors and senior management in 2008/09 are: O G Ni-Chionna 28 May 02 28 May 05 27 May 08 > basic annual salary, targeted at market median, although D T Nish 1 Jul 05 1 Jul 05 30 Jun 08 it is recognised that it may be necessary to pay above this to attract sufficiently high calibre executives; Both A J Hobson and O G Ni-Chionna have been offered, and have > an annual incentive plan, based upon the delivery of annual accepted, a further three year term of engagement with a date operating plans for the Group and individual strategic of commencement of the 28 May 2008 expiring on 27 May 2011. objectives described in performance contracts; D T Nish, whose letter of engagement expires on 30 June 2008, > participation in long term incentive plans based upon the will be offered a further three year term of engagement. delivery of sustainable high performance; > pension and other benefits. The appointments of the chairman and the non-executive directors may be terminated by the Company on six months’ notice and by the relevant directors on three months’ notice. No compensation is payable by the Company on termination of an appointment with due notice.

Northern Foods plc | Directors’ remuneration report 43 Directors’ remuneration report continued

The balance of the fixed and variable pay at current value for stretching by the committee. Following the introduction of the 2008/09, exclusive of pension and benefits, is illustrated below Performance share plan 2007 (PSP), from 2007/08 all awards for the two executive directors. The table is a theoretical model under the annual incentive plan will be settled in cash. and assumes that on target Group performance is achieved for short term incentives and the director’s individual performance, The level of profit before tax and restructuring achieved in 2007/08 and that long term incentives are valued at an expected value of £50.1m was below that required for a maximum bonus for of 55% of the initial value at the time of grant. the profit element of bonus but above the on-target level. The committee also determined that the individual performance Basic Annual Long term salary as a bonus as a incentives as a measures had been met. proportion of proportion of proportion of Performance remuneration (%) remuneration (%) remuneration (%) The targets set for 2008/09 continue to be made up of financial, S Barden On Target 44.0% 19.7% 36.3% business and individual performance measures. The financial Maximum 28.6% 28.6% 42.9% element is set in terms of profit before tax and restructuring items J K Maiden On Target 44.0% 19.7% 36.3% performance versus operating plan. The business and individual Maximum 28.6% 28.6% 42.9% elements comprise a number of commercially sensitive strategic objectives for each individual and the executive team. The performance targets selected are considered appropriately 6.1 Salary stretching by the committee. Salaries of executive directors are reviewed annually taking into account information from independent sources for comparable 6.3 Long term incentive share plans roles in the industry and in other selected quoted companies. The Company’s long term incentive policy has been developed Reviews also reflect the individual’s responsibilities, performance to reflect market practice and to provide long term management and development, and the Group’s performance. Basic salary is focus and motivation, creating a clear link between sustainable the only pensionable remuneration. business performance and an executive’s reward. The committee believes that a significant element of executive remuneration The executive directors’ current salaries effective as at 1 April 2008 should be linked to the delivery of long term returns for shareholders. (before salary sacrifice in relation to Pension Builder membership and non-pensionable salary supplements in lieu of pension During 2007 the committee introduced, and shareholders approved, contributions) are: Basic salary as at 1 April 2008 the PSP (details set out under 6.3.3 below) to act as the primary vehicle for the delivery of long term incentives across the Group. S Barden £475,000 This approach will continue into 2008/09 and remains the only J K Maiden £326,500 long term incentive plan used on an annual basis. The Executive share option plan 2004 (set out in 6.3.1 below) will be retained for For S Barden this represents an increase of 5.6% over the prior year. use in exceptional circumstances; for example, on recruitment. For J K Maiden, this represents an increase of 3%. 6.3.1 Executive share option plan 2004 6.2 Annual incentive plan Participation in the Company’s Executive share option plan The remuneration committee believes that achieving annual is at the discretion of the committee. The plan comprises an performance targets is a high priority for the executive directors. HM Revenue & Customs approved section and an unapproved Incentive targets for executive directors are set each year by the section. Options are generally exercisable in the seven year committee to take account of current business plans. period following the third anniversary of grant and before the tenth anniversary, provided that the executive remains in employment The annual incentive plan drives differentiation in the level of award and subject to satisfaction of the performance condition. Should based upon the individual’s contribution to Group performance. an employee leave the organisation by virtue of redundancy The target incentive for an executive director is 45% of basic salary or retirement, the requirement under the performance condition for on target performance. In line with the Group’s ethos of pay remains in place. Company performance is measured on a for performance, in the case of exceptional individual performance pro-rated basis to assess the extent to which it has been met. and Group results significantly above operating plan, the executive can expect to receive an incentive payment up to a maximum of The performance condition for existing awards under the plan 100% of basic salary representing a significant increase in reward requires that, for grants with a market value of up to one times in return for over achievement. salary, the real growth in adjusted earnings per share is greater than 3% per annum over the three year performance period Under the annual incentive plan, 80% of annual bonus opportunity before the options can be exercised. In the event that the is linked to Group financial targets in the form of profit before tax committee makes grants with a market value of greater than one and restructuring items. The other 20% is directly related to the times salary, the proportion of the award above this level that will committee’s assessment of the directors’ individual performances vest is assessed by reference to a vesting scale detailed below: against their personal performance contracts. These contracts > 4% real annual growth in earnings per share: allocations are set at the start of the financial year and contain six individual between 100–149% of salary vest; performance targets, achievement of which is integral to the > 5% real annual growth in earnings per share: allocations performance of the business. These are considered appropriately between 150–199% of salary vest; > 6% real annual growth in earnings per share: allocations at 200% of salary vest.

44 Directors’ remuneration report | Northern Foods plc The performance will be assessed by comparing the adjusted The proportion of the award that will vest is assessed by reference earnings per share growth to the growth in the Retail Price Index to a vesting scale. If the Group’s performance is ranked below (RPI) over the three year performance period. If the performance the median, this part of the conditional award will lapse. Where the condition is not met at the end of three years, there is no facility Company is placed at the median or above, the maximum number for retesting. of shares available for vesting will be calculated on a straight line basis, with 20% of the conditional award being available when 6.3.2 Long term incentive plan 1997 (LTIP) the Company is placed at the median and the maximum of This scheme has now expired and has been replaced by the 50% of the award being available where the Company is placed PSP; as such no further awards can be made under the plan. in the upper quartile.

Under the LTIP, the committee has awarded shares in the Company 6.3.2.2 Return on invested capital (ROIC) to senior management conditional upon the achievement of The proportion of the award that will vest is assessed by reference corporate performance targets over a fixed period of three years. to a vesting scale. Potential vesting of this proportion of the LTIP Vesting of the LTIP is triggered by achieving two independent sets is triggered by the achievement of a minimum growth in ROIC of performance conditions, with 50% of the vesting conditional of 100 basis points over three years, measured against a base upon each set as follows: year. If the minimum target is not achieved this part of the > a measure of the Company’s relative market performance conditional award will lapse. as assessed by growth in total shareholder return (TSR) against a selected group of comparable companies from The maximum number of shares available for vesting will be the constituents of the FTSE Food Producers Index; and calculated on a straight line basis with 7.5% of the conditional > a return on capital measure, used as an absolute measure award being available if the Company achieves growth of 100 of Company performance. The committee determined return basis points, and a maximum of 50% of the award being available on capital as a strategic priority for realising growth in where the Company achieves growth of 200 basis points. shareholder value. For the purpose of determining any reward, ROIC is defined Shares awarded under the LTIP are retained in trust on behalf of as profit from operations before restructuring items (adjusted the participants for a further two years following vesting. During this to exclude any non-service charge element of pension costs), retention period the participants will be entitled to dividends on the divided by average invested capital. Average invested capital is shares and to instruct the nominee how to vote. At the end of the calculated as the sum of net equity (adjusted to exclude retirement retention period, the shares will be transferred to employees from benefit obligation, net of deferred tax thereon), net debt and the Northern Foods Employee share ownership trust (the ‘ESOT’). accumulated goodwill previously written off.

6.3.2.1 Total shareholder return In response to any significant events, including material trading Vesting of 50% of the LTIP is triggered by comparing the growth events, the committee may, at its discretion, amend the performance in TSR, in terms of share price growth and dividends, to that of the conditions to reflect these changes. TSR of the companies comprising a selected group of comparable companies from the FTSE Food Producers All Share Index. 6.3.3 Performance share plan 2007 As part of the development of the Group’s senior executive The committee selected relative TSR as a measure that reflects incentive strategy and in order to further align the interests of corporate performance relative to companies with similar executives and shareholders through the use of greater variable characteristics and subject to similar market conditions. reward, the committee introduced the new PSP in 2007/08.

The comparable group companies chosen by the remuneration In terms of quantum, participants may be granted annual awards committee for the award in July 2006 were: over shares in the Company worth no more than 200% of base salary. In practice, the committee intends to operate within a Arla Foods plc* limit of 150% of salary for awards made under the PSP. Cranswick plc Dairy Crest plc The committee believes that the performance conditions for the Premier Foods plc PSP reinforce the alignment of the interests of senior executives RHM plc* with those of shareholders. The benefits available to senior Robert Wiseman Dairies plc management participating in the PSP only accrue to them when Uniq plc the Company has delivered significant benefits to shareholders over a fixed three year period. Awards vest three years after * removed following delisting of the relevant securities grant, subject to the extent to which demanding performance conditions have been achieved by the end of a single three year period. Two performance conditions determine the vesting of awards. These are based on growth in the Company’s ROIC and its absolute TSR performance. Each determines the vesting of one half of each award.

Northern Foods plc | Directors’ remuneration report 45 Directors’ remuneration report continued

6.3.3.1 Return on invested capital Awards made in 2008/09 will be subject to a similar TSR performance The proportion of the award that will vest is assessed by reference condition with TSR performance again measured by reference to a vesting scale, as follows: to growth from the Company’s average share price over the three months prior to the beginning of the 2008/09 financial year. Percentage of the total number Growth in ROIC over the of performance shares under performance period an award that will vest Percentage of the total number TSR at the end of the of performance shares under Less than 100 basis points 0% performance period an award that will vest 100 basis points 7.5% Less than 30% growth (from an effective base of £0.91 Between 100 basis points Straight line vesting between this is equivalent to a share price and 200 basis points 7.5% and 50% plus dividends of £1.19) Nil 200 basis points or more 50% 30% growth 7.5% Between 30% growth and Straight line vesting between ROIC is defined above in section 6.3.2.2. 80% growth 7.5% and 50% Growth of 80% or more In response to any significant events, including material trading (equivalent to a share price events, the committee may at its discretion amend the performance plus dividends of £1.64 or more) 50% conditions to reflect these changes. In addition, the ROIC element will only vest if the committee is satisfied that the investment level over the performance period was appropriate for ensuring the The TSR will be calculated using the closing return indices over business’ long term growth. the final three months of the performance period.

6.3.3.2 Total shareholder return In addition, the TSR element will only vest to the extent that the In order to focus executives on delivering outstanding returns to committee is satisfied that the Company’s TSR over the period is shareholders, the committee has decided to set the TSR targets reflective of the underlying financial performance of the Company. in terms of improvement measured from the Company’s share price averaged over the three months immediately prior to the Awards vest on a change of control or cessation of employment beginning of the financial year. The targets for the first awards under ‘good leaver’ provisions, subject to the performance (during 2007/08) under the PSP were as follows: conditions having been met pro-rata, and are normally reduced to reflect the shortened performance period. Percentage of the total number TSR at the end of the of performance shares under performance period an award that will vest 6.4 Award of matching shares to S Barden As part of the terms of his recruitment as chief executive, and as Less than 30% growth disclosed in last year’s Annual report, the committee approved (from an effective base of £1.24 this is equivalent to a share price a share award agreement between the Company and S Barden, plus dividends of £1.61) Nil providing the opportunity to purchase shares in the Company worth up to 100% of his salary and in return receive an award 30% growth 7.5% of matching shares of up to three shares for every one share Between 30% growth Straight line vesting between purchased. At the time of the matching award on 4 June 2007, and 80% growth 7.5% and 50% S Barden held 351,110 shares in the Company and therefore was Growth of 80% or more awarded 1,040,460 additional shares. Half of the matching award (equivalent to a share price will vest on the third anniversary of grant with the other half plus dividends of £2.23 or more) 50% vesting on the fourth anniversary of grant to the extent that the performance conditions are met and providing S Barden retains the purchased shares and remains employed by the Group. To the extent that the award vests, the relevant shares will be delivered free of charge, but to the extent that it does not vest (in part or in full), it will lapse. The matching award was granted pursuant to the exemption from the need for prior shareholder approval contained in Listing Rule 9.4.2. The delay in granting the matching award was due to regulatory restrictions. The matching award is non-pensionable and non-transferable (other than on death).

46 Directors’ remuneration report | Northern Foods plc The performance conditions attached to the matching award The executives now need to remain in the employment of the are the same as those that apply to the first PSP award detailed Group for the required two year period until 31 May 2009 before above, save that threshold vesting of the TSR element will not any share awards vest. During this time, awards will be subject occur unless the Company achieves growth in TSR of 35% over to normal forfeiture policies. However, awards may be retained the relevant period. The committee felt that, since this award is under ‘good leaver’ provisions, although shares will not transfer a one off, the targets applying to vesting at threshold should be until July 2009. Awards include a dividend equivalent which will be more demanding. If S Barden ceases employment with the Group paid on vesting. No further awards can be made under this plan. before the fourth anniversary of grant, the outstanding part of the matching award will lapse, unless he leaves in certain ‘good 6.6 Savings-related share option scheme leaver’ situations. In this event, it will vest on cessation (or, if the The Company introduced an HM Revenue & Customs approved committee so decides, the normal vesting dates) to the extent the Savings-related share option scheme for all employees during performance condition is met at the relevant time. This would be 2007/08. This sharesave scheme (the ‘Scheme’) is open to all subject to time pro-rating to reflect the period of time between employees (subject to eligibility), including executive directors. the date of grant and the date of cessation (rounded up to the Options are normally exercisable after either three or five years next whole year), relative to the period of three years, unless the from the date of grant. The price at which options were offered committee concludes in its discretion that it is not appropriate was not less than 80% of the middle market price on the dealing to apply the pro-rata reduction. On a change of control or winding day immediately preceding the date of invitation. In accordance up of the Company, the award will vest early to the extent that with HM Revenue & Customs requirements, there were limits on the performance conditions are met at that time and, unless the the number of shares which could be issued under the Scheme. committee decides otherwise, subject to time pro-rating to reflect In addition, the use of new issue shares under the Scheme is the period between the grant date and the relevant event on the limited to 10% of the issued share capital of the Company, taking basis set out above. The award may also vest on this basis in the account of shares issued or to be issued under any other Company event of a demerger, special dividend or other similar event which, employee share schemes over the previous ten year period. in the committee’s opinion, materially affects the price of the Company’s shares. Employees were invited to participate in the Scheme following the announcement of the Half year results in November 2007. The award will not, unless the committee decides otherwise, vest on an internal reorganisation but will instead be exchanged There was strong demand across the workforce for the Scheme, for an equivalent award over shares in the new holding company. with take up exceeding the ten million shares made available by The award will not confer any shareholder rights on S Barden until the Board of directors. This resulted in the Scheme becoming it vests, except that he will be entitled to a payment (in cash and/or oversubscribed and, under the rules of the Scheme, necessitated shares, at the discretion of the committee) shortly after vesting to a scale back of 11%. The committee believe that the success of reflect the dividends that would have been paid on those shares, the Scheme is a clear indication, both of the confidence felt in, assuming such dividends were re-invested in further shares at the and the commitment to, Northern Foods across the workforce. closing price on the relevant ex-dividend dates. In the event of any variation of the Company’s share capital or any other event which 6.7 Executive shareholding materially affects the price of the Company’s shares, the award Executives’ interest in both relative and absolute share price may be adjusted as the committee sees fit. The terms of the performance is important, and this is facilitated by share schemes award may be amended in such manner as he and the committee and the encouragement to build a significant personal shareholding may agree, provided that amendments to his benefit may only in the Company. be made with the prior consent of shareholders. The committee confirms that the matching award was felt to be necessary The Company has introduced a policy requiring the executive to facilitate the recruitment of S Barden as chief executive and directors to build a significant level of shareholding. It is the view to honour commitments made to him on such recruitment. of the committee that the act of building and maintaining a substantial shareholding in the Company creates a strong 6.5 Deferred share bonus plan 2006 (DSBP) alignment of interest between shareholders and executives. The DSBP was introduced in June 2006 (and fully disclosed in last year’s Annual report) so as to incentivise and retain the key 6.7.1 Minimum shareholding requirements talent necessary to drive the specific performance improvements The Company’s minimum shareholding policy requires the required to deliver the business strategy at that time. The DSBP retention of a value of shares as follows: provided approximately 40 senior executives with an award of > 300% of basic salary for the chief executive; shares with a value up to 100% of base salary, at the prevailing > 200% of basic salary for other executive directors. market price of 81.75 pence per share on the 13 July 2006. These shares will be satisfied by the transfer of existing shares held in trust after the vesting date in July 2009.

Northern Foods plc | Directors’ remuneration report 47 Directors’ remuneration report continued

Executives are expected to retain all shares acquired through 6.9 Additional directorships share option plans, long term incentive plans or deferred share Executive directors are encouraged to hold one non-executive plans (other than those sold to meet income tax and national directorship in a listed business in a non-competing sector. insurance contribution (NIC) liabilities) until the required minimum Fees for such directorships are retained by the executive director. shareholding is achieved. J K Maiden, Chief Finance Officer, was appointed a non-executive The number/value of shares required as the target is fixed for director of Yule Catto & Co plc on 20 August 2007. His fee for this each year. No purchases are required to respond to share price appointment during 2007/08 was £12,269.23. falls during the year. 6.10 Directors’ contracts 6.8 Benefits It is the Company’s policy that executive directors should have In addition to basic salary, all the executive directors receive secure agreements, providing for a maximum of one year’s notice. certain benefits, principally a car or car allowance, private medical The contract of J K Maiden is subject to one year’s notice by insurance and a pension. either party. S Barden’s contract is terminable upon six months notice by him, and one year’s notice by the Company. 6.8.1 Pensions Executive directors are members of the Northern Foods Pension In the event of early termination, the contract of J K Maiden Builder scheme (‘Pension Builder’). Their dependants are eligible provides compensation up to a maximum basic salary, company for dependants’ pensions and the payment of a lump sum in car, private medical insurance, outstanding holiday and pension the event of death in service. for the notice period. In the event of early termination, the contract of S Barden provides for compensation up to a maximum of basic For all employees, including the executive directors, appointed salary. Car allowance, private medical insurance, outstanding after 22 March 2005, the pension arrangements provided by holiday and pension benefits are not included in the payment. Pension Builder for pension on retirement at age 65 are based upon a career average accrual of either: The details of the contracts are summarised in the table below: > 1.25% of annual salary per annum revalued, before retirement, by inflation up to 5.0%, with an employee contribution of 6.0%; or Table 1 Date of contract Notice period > 1.0% of annual salary per annum revalued, before retirement, S Barden 30 May 2007 12 months by the Company by inflation up to 5.0%, with an employee contribution of 4.5%. and 6 months by S Barden J K Maiden 5 Sept 2005 12 months This scheme has an optional salary sacrifice arrangement. No payments to directors other than basic salary are pensionable. To protect the interests of the Company and its shareholders, Following the removal of the pension’s earnings cap and the the executive directors’ contracts contain restrictive covenants, introduction of the lifetime allowance under the Finance Act 2004, the principal terms of which prevent the executive directors: with effect from 6 April 2006, the Company provides executives > undertaking work for direct competitors, either during who hold pension benefits in excess of the lifetime allowance their employment with the Company or within six months with the following options: (nine months in the case of S Barden) of their employment > continue to accrue pension under Pension Builder subject terminating, without the express permission of the Board; to the recovery charge; or > enticing away from the Group individuals or customers with > a cash alternative, paid on a monthly basis, reflecting the whom the executive directors had dealt in the 12 months Company’s long term contribution rate to Pension Builder. prior to termination; and The cash alternative for executive directors who are members > enticing away from the Group or employing senior or middle of Pension Builder will be 10% of basic salary. managers from within the business with whom the executive directors had direct contact or knowledge in the 12 months In addition to the benefits he receives through his participation prior to termination. in Pension Builder, J K Maiden also receives a non-pensionable cash supplement of 20% of salary.

48 Directors’ remuneration report | Northern Foods plc P A O’Driscoll resigned from the Board on 1 February 2007. TSR Performance index comparison As disclosed in the 2006/07 Annual report, the Board agreed Northern Foods TSR compared to FTSE Mid 250 – that in the event that she had not secured new employment, 1 April 2003 to 1 April 2008 on or before 1 November 2007, she would be eligible to receive a payment of £158,183 (equivalent to three months salary and pension). TSR P A O’Driscoll did not secure employment prior to the agreed date and, as such, a payment was made and she continued to have 350 use of a company car until 1 February 2008 300

7 Performance graph 250 In accordance with the requirements of Schedule 7A to the 200 Companies Act 1985, the graph opposite shows the Company’s five year performance measured by TSR, compared with the 150 performance of the FTSE 250 Index also measured by TSR. 100 The FTSE 250 Index has been selected as an appropriate comparison because it represents a broad equity market index, 50 of which Northern Foods is a constituent. 0 2003 2004 2005 TSR measures share price growth with any dividends deemed 2006 2007 2008 to be reinvested gross on the ex-dividend date. The TSR shown Financial period end is based on daily spot prices. Northern Foods FTSE 250 Index Audited information The information in this following section of the Remuneration report has been audited by the Company’s external auditors.

8 Directors’ remuneration and pension entitlements

8.1 Emoluments Table 2 shows an analysis of the salary, benefits and bonus elements of remuneration for the individual directors who held office during the 52 weeks ended 29 March 2008. Pension entitlements are shown in Table 3 and interests under the Company’s long term incentive plan and deferred share plan are disclosed in the sections covering share awards on pages 50 to 52.

Accrued Compensation Salary/ annual for loss fees Benefits bonus of office Total Total Table 2 2007/08 2007/081 2007/08 2007/08 2007/08 2006/07 Directors’ remuneration ££££££ Executive directors S Barden2 437,700 747 397,800 – 836,247 526,576 J K Maiden2 361,380 24,614 264,378 – 650,372 559,781 P A O’Driscoll (resigned 1 February 2007) – – – 158,183 158,183 756,521 Non-executive directors R J S Bell3 36,458 – – – 36,458 35,000 A J Hobson 142,000 – – – 142,000 142,000 A K Illsley3 36,458 – – – 36,458 17,500 O G Ni-Chionna3 47,792–––47,79243,000 D T Nish3 43,292–––43,29241,000

Notes to Table 2 Note 1 Benefits include medical insurance and company car. Note 2 The salaries are net of salary sacrifice in relation to Pension Builder membership. The salary paid to J K Maiden includes a non-pensionable salary supplement in lieu of pension contribution of £63,400. Where a cash car allowance is taken in lieu of company car, this is included as salary. Note 3 From 1 June 2007 the fee payable to non-executive directors was increased to £36,750 with an additional annual fee of £7,000 to the chairs of the audit and remuneration committees and of £5,000 to the senior independent director. The chairman’s fee remained unchanged.

Northern Foods plc | Directors’ remuneration report 49 Directors’ remuneration report continued

8.2 Pension benefits Transfer value Accrued Accrued of real Increase in pension Additional pension increase in Transfer Transfer transfer as at Real pension as at year less value value value 31 March increase earned 29 March directors’ 31 March 29 March directors’ Table 3 2007 in year Inflation in year 20082 contributions 20073 20083 contributions Directors’ pension entitlements Notes £ ££££££ ££ S Barden 1 4,375 5,770 171 5,941 10,316 42,489 48,276 75,961 27,685 J K Maiden 1 5,719 3,830 223 4,053 9,772 30,385 66,727 77,526 10,799

Notes to Table 3 Note 1 The Company provides executive directors who are members of Pension Builder with a pension, which is payable at age 65. The accrual rates and member contributions for the scheme are set out in 6.8.1. Death in service cover is a lump sum of three times annual earnings. On the death of a director or a retired director, a spouse’s pension of 50% would be payable.

Early retirement may be granted with the consent of the Company and the trustee of the scheme from age 55 but benefits are reduced by 4% per annum for ages 55 up to 64 years. Once in payment, pensions are increased in line with Retail Price Index inflation up to a ceiling of 2.5% per annum. The trustee, with the consent of the Company, has discretion to apply such greater increase as it considers appropriate.

Note 2 The accrued pension at 29 March 2008 is the pension which the director would have been entitled to receive based on completed pensionable service to 29 March 2008, payable from normal pension date and subject to revaluation increases between leaving and retirement.

Note 3 The transfer values are based on the accrued pensions at 31 March 2007 and at 29 March 2008 and are calculated as at 31 March 2007 and at 29 March 2008 respectively based on actuarial factors. The transfer values are the lump sums which would have been paid to another pension scheme for the benefit of the director if they left service at the respective dates. A transfer value cannot be paid to a director personally.

8.3 Long term incentive plans 8.3.1 Share options Details of grants, exercises and lapses of options for individual executive directors under the Executive share option plan, detailed in section 6.3.1, are as follows: Balance at Granted Balance at Option Date from 31 March Exercised during 29 March Table 4 Date of price which Expiry 2007 during year year 2008 or at 1 Executive share options grant (p) exercisable date (number) (number) (number) (number) S Barden 04 Jul 06 79.67 04 Jul 09 03 Jul 16 37,655 – – 37,655 04 Jul 06 79.67 04 Jul 09 03 Jul 16 376,554 – – 376,554 414,209 – – 414,209

J K Maiden 14 Dec 05 153.33 14 Dec 08 13 Dec 15 19,565 – – 19,565 14 Dec 05 153.33 14 Dec 08 13 Dec 15 151,634 – – 151,634 04 Jul 06 79.67 04 Jul 09 03 Jul 16 414,209 – – 414,209 585,408 – – 585,408

Notes to Table 4 Note 1 These options were granted under the Company’s Share option plan 2004 and are subject to a performance condition measured by reference to earnings per share as set out in section 6.3.1. The performance condition does not allow for retesting.

Note The mid-market price of the Company’s shares at 29 March 2008 was 92.50p (31 March 2007: 123.75p) and the range during the year was 81.00p to 132.00p.

50 Directors’ remuneration report | Northern Foods plc 8.3.2 Long term incentive plan The committee has awarded shares under the LTIP conditional upon the achievement of corporate performance targets in accordance with section 6.3.2, as follows: Shares released Beneficial Conditional by the Awards Beneficial Conditional1 interest at interest at nominee made interest at interest at Table 5 31 March 31 March during during 29 March 29 March Executive long term incentive plan 2007 2007 the year the year 2008 2008 S Barden – 93,750 – – – 93,750 J K Maiden – 128,176 – – –128,176 –221,926 – – – 221,926

Notes to Table 5 Note 1 The interest in shares at 29 March 2008 is comprised of awards made on 12 December 2005 and 4 July 2006. The shares will vest after three years from the date of grant, subject to performance conditions, and will be retained in trust on behalf of the participants for a further two year retention period. The market price of the shares at the date of grant for the above awards was 152.50p and 80.00p respectively.

Note Shares awarded under the LTIP are retained in trust on behalf of the participants for a further two years after vesting. During the retention period the participants are entitled to dividends on the shares and to instruct the nominee how to vote. The performance measurement date is the three year period from the commencement of the financial year in which the award was made.

8.3.3 Performance share plan 2007 The committee has awarded shares under the PSP conditional upon the achievement of corporate performance targets in accordance with section 6.3.3, as follows: Maximum Market Awards potential price transferred Conditional award of the by the Awards Conditional interest at granted shares at nominee lapsed interest at Table 6 31 March 29 August date of during during 29 March Performance share plan 2007 2007 grant (p) the year the year 20081 S Barden – 683,544 99.00 – – 683,544 J K Maiden – 481,581 99.00 – – 481,581 – 1,165,125 –– 1,165,125

Note to Table 6 Note 1 The interest in shares at 29 March 2008 is comprised of an award made on 29 August 2007. The shares will vest after three years from the date of grant, subject to performance conditions being met.

8.3.4 Award of matching shares to S Barden The committee granted a one off award of matching shares on 4 June 2007 pursuant to the exemption from the need for prior shareholder approval contained in Listing Rule 9.4.2. Maximum Market Awards potential price transferred Conditional award of the by the Awards Conditional interest at granted shares at nominee lapsed interest at Table 7 31 March 4 June date of during during 29 March Matching share award 2007 2007 grant (p) the year the year 20081 S Barden – 1,040,460 129.75 – – 1,040,460

Note to Table 7 Note 1 Half of the matching award will vest on the third anniversary of grant with the other half vesting on the fourth anniversary of grant in each case to the extent that the performance conditions are met and providing S Barden retains the purchased shares and remains employed by the Group. To the extent that the award vests the relevant shares will be delivered free of charge.

Northern Foods plc | Directors’ remuneration report 51 Directors’ remuneration report continued

8.4 Deferred share bonus plan 2006 This table relates to the DSBP introduced in June 2006 which was subject to a one year performance period. Full details are set out in section 6.5. Awards transferred Beneficial Awards by the Awards Beneficial interest at granted nominee lapsed interest at Table 8 31 March during during during 29 March Deferred share bonus plan 2007 the year the year the year 2008 S Barden 366,972–––366,972 J K Maiden 376,146 – – – 376,146 743,118–––743,1 18

8.5 Savings-related share option scheme This table relates to the Savings-related share option scheme launched in November 2007. Full details are set out in section 6.6.

Balance at Exercised Granted Balance Date 31 March during during 29 March Table 9 Date of Option from which Expiry 2007 year year 2008 Savings-related share options grant price (p) exercisable date (number) (number) (number) (number) S Barden 20 Dec 07 76.00 1 Mar 11 31 Aug 11 – – 11,166 11,166 J K Maiden 20 Dec 07 76.00 1 Mar 11 31 Aug 11 – – 11,166 11,166

Note to Table 9 Note 1 The share options listed were granted at 80% of the prevailing middle market share price under the Northern Foods plc Savings-related share option scheme which was approved by shareholders at the Company’s Annual general meeting in July 2007. Consistent with the relevant legislation, there are no pre-vest performance conditions.

8.6 Dilution Limits Northern Foods’ share plans comply with recommended guidelines on dilution limits and the Company has always operated within these limits. Assuming none of the extant options lapse and will be exercised and having included all exercised options the Company has utilised 35.5% of the 10% in ten years and 20.2% of the 5% in ten years in accordance with the Association of British Insurers (ABI) guidance on dilution limits.

52 Directors’ remuneration report | Northern Foods plc 8.7 Directors’ aggregate remuneration The total amount of directors’ remuneration and other benefits was as follows:

Table 10 2006/07 2007/08 Directors’ aggregate remuneration £ £ Emoluments 2,143,878 1,950,802 Gains on exercise of options and award of performance share plan shares – – 2,143,878 1,950,802

8.8 Directors’ interests in shares The interests of the directors in the share capital of the Company at 31 March 2007 and 29 March 2008 are detailed below.

Ordinary shares1 Share options Conditional awards SAYE – share options (number) (number) (number)2 (number) Table 11 Description 31 March 29 March 31 March 29 March 31 March 29 March 31 March 29 March Directors’ interests in shares of interest 2007 2008 2007 2008 2007 2008 2007 2008 Executive directors S Barden Beneficial 172,528 910,043 414,209 414,209 460,772 2,184,726 – 11,166 J K Maiden Beneficial 27,470 64,387 585,408 585,408 504,332 985,903 – 11,166 Non-executive directors R J S Bell Beneficial – 100,000 – – – – – – A J Hobson Beneficial 18,000 30,000 – – – – – – A K Illsley –– – – – – – – – O G Ni-Chionna Beneficial 25,000 25,000 – – – – – – D T Nish –– – – – – – – –

Notes to Table 11 Note 1 This includes beneficial interests in ordinary shares, together with beneficial interests under the Share bonus plan.

Note 2 This includes conditional awards made under the LTIP, the PSP and DSBP. In the case of S Barden the total also includes shares under the matching share award.

At 29 March 2008 the executive directors of Northern Foods, as potential beneficiaries of the Northern Foods ESOT, were interested in 6,697,363 (2006/07: 2,951,142) ordinary shares held by the trustee.

By order of the Board Orna Ni-Chionna Chair Remuneration committee 27 May 2008

Northern Foods plc | Directors’ remuneration report 53 Statement of directors’ responsibilities in relation to the financial statements

To the members of Northern Foods plc The directors are responsible for keeping proper accounting The following statement, which should be read in conjunction records that disclose with reasonable accuracy at any time the with the auditors’ responsibilities set out in their report, is made financial position of the Company and enable them to ensure with a view to distinguishing for shareholders the respective that the financial statements comply with the Companies responsibilities of the directors and of the auditors in relation Act 1985. They are also responsible for safeguarding the assets to the financial statements. of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for preparing the Annual report and the financial statements. The directors are required to prepare the The directors are responsible for the maintenance and integrity financial statements for the Group in accordance with applicable of the corporate and financial information included on the law and International Financial Reporting Standards (IFRS) as Company's website. Legislation in the United Kingdom governing adopted by the European Union. Company law requires the the preparation and dissemination of financial statements may directors to prepare such financial statements in accordance with differ from legislation in other jurisdictions. IFRS, the Companies Act 1985 and Article 4 of the IAS Regulation.

International Accounting Standard 1 requires that financial statements present fairly for each financial period, the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and Presentation of Financial Statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. The directors are also required to: > properly select and apply accounting policies; > present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and > provide additional disclosures when compliance with specific requirements in IFRS is sufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

54 Statement of directors’ responsibilities in relation to the financial statements | Northern Foods plc Independent auditors’ report – Group financial statements

To the members of Northern Foods plc We review whether the Corporate governance report reflects We have audited the Group financial statements of Northern Foods the Company’s compliance with the nine provisions of the 2006 plc for the 52 weeks ended 29 March 2008 which comprise the Combined Code specified for our review by the Listing Rules Consolidated income statement, the Consolidated balance of the Financial Services Authority, and we report if it does not. sheet, the Consolidated cash flow statement, the Consolidated We are not required to consider whether the Board’s statements statement of recognised income and expense, the Consolidated on internal control cover all risks and controls, or form an opinion statement of changes in equity and the related notes 1 to 39. on the effectiveness of the Group’s corporate governance These Group financial statements have been prepared under procedures or its risk and control procedures. the accounting policies set out therein. We have also audited the information in the Directors’ remuneration report that is described We read the other information contained in the Annual report as having been audited. as described in the contents section and consider whether it is consistent with the audited Group financial statements. We have reported separately on the parent company financial We consider the implications for our report if we become aware statements of Northern Foods plc for the 52 weeks ended of any apparent misstatements or material inconsistencies 29 March 2008. with the Group financial statements. Our responsibilities do not extend to any further information outside the Annual report. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Basis of audit opinion Act 1985. Our audit work has been undertaken so that we might We conducted our audit in accordance with International state to the Company’s members those matters we are required Standards on Auditing (UK and Ireland) issued by the Auditing to state to them in an auditors’ report and for no other purpose. Practices Board. An audit includes examination, on a test basis, To the fullest extent permitted by law, we do not accept or of evidence relevant to the amounts and disclosures in the Group assume responsibility to anyone other than the Company and financial statements and the part of the Directors’ remuneration the Company’s members as a body, for our audit work, for this report to be audited. It also includes an assessment of the report, or for the opinions we have formed. significant estimates and judgments made by the directors in the preparation of the Group financial statements, and of whether the Respective responsibilities of directors and auditors accounting policies are appropriate to the Group’s circumstances, The directors’ responsibilities for preparing the Annual report, consistently applied and adequately disclosed. the Directors’ remuneration report and the Group financial statements in accordance with applicable law and International We planned and performed our audit so as to obtain all the Financial Reporting Standards (IFRS) as adopted by the European information and explanations which we considered necessary Union are set out in the Statement of directors’ responsibilities. in order to provide us with sufficient evidence to give reasonable . assurance that the Group financial statements and the part of the Our responsibility is to audit the Group financial statements Directors’ remuneration report to be audited are free from material in accordance with relevant legal and regulatory requirements misstatement, whether caused by fraud or other irregularity and International Standards on Auditing (UK and Ireland). or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group We report to you our opinion as to whether the Group financial financial statements and the part of the Directors’ remuneration statements give a true and fair view, whether the Group financial report to be audited. statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation Opinion and whether the part of the Directors’ remuneration report In our opinion: described as having been audited has been properly prepared > the Group financial statements give a true and fair view, in in accordance with the Companies Act 1985. We also report to accordance with IFRS as adopted by the European Union, of you whether in our opinion the information given in the Directors’ the state of the Group’s affairs as at 29 March 2008 and of its report is consistent with the Group financial statements. The profit for the 52 weeks then ended; information given in the Directors’ report includes that specific > the Group financial statements have been properly prepared information presented in the Performance review and the Chief in accordance with the Companies Act 1985 and Article 4 of executive’s report that is cross referred from the Performance the IAS Regulation; review section of the Directors’ report. > the part of the Directors’ remuneration report described as having been audited has been properly prepared in In addition we report to you if, in our opinion, we have not received accordance with the Companies Act 1985; and all the information and explanations we require for our audit, or > the information given in the Directors report is consistent if information specified by law regarding directors’ remuneration with the Group financial statements. and other transactions is not disclosed. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Leeds 27 May 2008

Northern Foods plc | Independent auditors’ report – Group financial statements 55 Consolidated income statement for the 52 weeks ended 29 March 2008

Restated (note 10) Before Before restructuring Restructuring restructuring Restructuring items items Total items items Total 2008 2008 2008 2007 2007 2007 Notes £m £m £m £m £m £m Continuing operations: Revenue 4, 5 931.9 – 931.9 888.5 – 888.5 Profit from operations 5, 6, 7, 8 48.4 (4.7) 43.7 45.7 (5.6) 40.1 Finance income 4, 10 59.2 – 59.2 53.8 – 53.8 Finance expense 10 (57.5) – (57.5) (59.5) – (59.5) Profit/(loss) before taxation 50.1 (4.7) 45.4 40.0 (5.6) 34.4 Taxation 11 (11.7) 0.8 (10.9) (8.1) 1.7 (6.4) Profit for the period from continuing operations 38.4 (3.9) 34.5 31.9 (3.9) 28.0 Discontinued operations: Revenue 4, 5 –––317.4 – 317.4 Profit from operations 5, 6, 7, 8 –––1.3 2.4 3.7 Loss on sale of discontinued operations 7 –––– (58.7) (58.7) Taxation 11 –––(0.3) 4.8 4.5 Profit/(loss) for the period from discontinued operations – – – 1.0 (51.5) (50.5) Profit/(loss) for the period 38.4 (3.9) 34.5 32.9 (55.4) (22.5) The result for the period is all attributable to equity holders of the parent.

Earnings/(loss) per share (pence) From continuing operations: Basic 14 7.08 5.72 Diluted 14 6.95 5.66 From continuing and discontinued operations: Basic 14 7.08 (4.60) Diluted 14 6.95 (4.55)

56 Consolidated income statement | Northern Foods plc Consolidated balance sheet as at 29 March 2008

29 March 31 March 2008 2007 Notes £m £m Non-current assets Goodwill 15 54.8 45.0 Other intangible assets 16 4.6 3.5 Property, plant and equipment 17 320.0 321.0 Retirement benefit assets 37 71.5 – Deferred taxation assets 29 – 9.4 450.9 378.9 Current assets Inventories 18 47.2 45.8 Trading investments 19 0.1 4.9 Trade and other receivables 21 111.3 114.3 Cash and cash equivalents 22 72.9 48.3 231.5 213.3 Total assets 682.4 592.2 Current liabilities Trade and other payables 23 (184.4) (189.8) Provisions 24 (2.3) (7.7) Current taxation liabilities (26.0) (27.8) Bank loans and overdrafts 25 (0.3) (0.4) (213.0) (225.7) Non-current liabilities Revolving credit facility 2010 25, 26 (130.0) (85.0) Senior loan notes 2012–2017 25, 26 (131.6) (132.6) Derivative financial instruments 27 (4.1) (6.5) Retirement benefit obligations 37 (9.9) (8.6) Deferred taxation liabilities 29 (14.7) – Accruals and deferred income (13.7) (12.6) (304.0) (245.3) Total liabilities (517.0) (471.0) Net assets 165.4 121.2

Equity Share capital 30 128.6 128.6 Share premium account 31 65.1 65.1 Capital redemption reserve 31 23.6 23.6 Reserve for own shares 31 (39.5) (34.2) Employee share ownership trust reserve 31 (8.3) (4.2) Hedging and translation reserve 31 21.4 4.9 Other reserves 31 5.2 4.2 Retained earnings 31 (30.7) (66.8) Equity attributable to the equity holders of the parent 165.4 121.2 The financial statements were approved by the Board of directors and authorised for issue on 27 May 2008. They were signed on its behalf by:

S Barden J K Maiden Director Director 27 May 2008 27 May 2008

Northern Foods plc | Consolidated balance sheet 57 Consolidated cash flow statement for the 52 weeks ended 29 March 2008

2008 2007 Notes £m £m

Net cash from operating activities 32 32.5 50.6 Investing activities: Interest received 1.3 0.9 Purchase of property, plant and equipment (21.5) (29.5) Proceeds of sale of property, plant and equipment 4.4 6.7 Proceeds from settlement of insurance claim – 30.0 Purchase of trading investments – (3.4) Disposal of trading investments 4.8 8.1 Acquisitions of subsidiary and businesses (net of cash acquired, acquisition costs, working capital and debt adjusters) 12 (22.0) – Disposal of discontinued operations (net of disposal costs, working capital and debt adjusters) – 171.0 Receipt of deferred consideration 6.7 – Cash balances disposed of with discontinued operations – (30.0) Grants received 0.3 1.3 Net cash (used in)/from investing activities (26.0) 155.1 Financing activities: Dividends paid 13 (21.0) (11.5) Increase/(decrease) in amounts drawn on Revolving credit facility 2010 25 45.0 (185.0) Repayment of borrowings – (0.2) Purchase of treasury shares 31 (5.3) – Purchase of shares for Employee share ownership trust 31 (4.1) – Net cash from/(used in) financing activities 14.6 (196.7) Net increase in cash and cash equivalents 21.1 9.0 Net cash and cash equivalents: Total Group at start of period – all continuing operations 47.9 39.3 Effect of foreign exchange rates 3.6 (0.4) Cash and cash equivalents at end of period 72.6 47.9

Cash and cash equivalents comprise: Cash and cash equivalents 72.9 48.3 Bank loans, overdrafts and loan notes due within one year (0.3) (0.4) 72.6 47.9

58 Consolidated cash flow statement | Northern Foods plc Reconciliation of net cash flow to movements in net debt for the 52 weeks ended 29 March 2008

2008 2007 Notes £m £m Net increase in cash and cash equivalents 21.1 9.0 Decrease in trading investments 19 (4.8) (4.7) (Increase)/decrease in amounts drawn on Revolving credit facility 2010 25 (45.0) 185.0 Decrease in borrowings – 0.2 Increase in finance leases 35 (0.8) – (29.5) 189.5 Effect of foreign exchange rates 3.6 (0.4) Other movements (0.1) (0.2) Movements in net debt in period (26.0) 188.9 Net debt at start of period (174.2) (363.1) Net debt at end of period 28 (200.2) (174.2)

Consolidated statement of recognised income and expense for the 52 weeks ended 29 March 2008 2008 2007 Notes £m £m

Currency translation differences on overseas investment 31 13.0 (3.0) Actuarial gains/(losses) on defined benefit pension schemes 31, 37 35.3 (0.5) Taxation on actuarial gains/(losses) taken directly to equity 29 (12.8) 0.1 Fair value movement on cash flow hedge 31 2.4 (5.0) Transfer to profit or loss on cash flow hedge 31 1.1 10.3 Net income recognised directly in equity 39.0 1.9 Profit for the period from continuing operations 34.5 28.0 Loss for the period from discontinued operations – (50.5) Total recognised income and expense for the period 73.5 (20.6) Total recognised income and expense for the period is all attributable to equity holders of the parent. Consolidated statement of changes in equity for the 52 weeks ended 29 March 2008 2008 2007 Notes £m £m Total recognised income and expense for the period 73.5 (20.6) Equity dividends 13, 31 (21.0) (11.5) Purchase of shares for Employee share ownership trust 31 (4.1) – Purchase of treasury shares 31 (5.3) – Equity settled incentive schemes 31 1.1 1.1 Deferred taxation on equity settled incentive schemes taken directly to equity 29, 31 (0.1) 0.1 Deferred taxation on revaluation reserve 29 0.1 – Movements in total equity in the period 44.2 (30.9) Total equity at start of period 121.2 152.1 Total equity at end of period 165.4 121.2

Northern Foods plc | Reconciliation of net cash flow to movements in net debt, Consolidated statement 59 of recognised income and expense, Consolidated statement of changes in equity Notes to the consolidated financial statements

1 General information Key accounting judgements and sources of estimation uncertainty Northern Foods plc (Northern Foods) is a company incorporated The key accounting judgements and sources of estimation in the United Kingdom under the Companies Act 1985. The address uncertainty with a significant risk of causing a material adjustment of the registered office is included within the Company information to assets and liabilities in the next 12 months include the following: section. The nature of the Group’s operations and its principal activities are set out in the segmental reporting note and in the Pensions – movements in equity markets, interest rates and life Performance review. expectancy could materially affect the level of surpluses and deficits in the pension schemes. The key assumptions used The financial statements are presented in pounds sterling because to value pension assets and liabilities are set out in note 37 that is the currency of the primary economic environment in Retirement benefit obligations; which the Group operates. Overseas operations are included in accordance with the accounting policies. Tax – the Group carries out tax planning consistent with a group of its size, and makes appropriate provision, based on best estimates, until tax computations are agreed with the taxation authorities; 2 Adoption of new and revised standards In the current year, the Group has adopted International Financial Useful economic life estimates – the Group reviews the useful Reporting Standard (IFRS) 7 ‘Financial Instruments: Disclosures’ economic lives attributed to assets on an ongoing basis to which is effective for annual reporting periods beginning on or ensure they are appropriate. Changes in economic life could after 1 January 2007. The impact of the adoption of IFRS 7 has impact the carrying value and charges to the income statement been to expand the disclosures provided in these financial in future periods; statements regarding the Group’s financial instruments and management of capital. Provisions – using information available at the balance sheet date, the directors make judgements based on experience on the The Group has also taken the decision to adopt International level of provision required. Further information received after the Financial Reporting Interpretations Committee (IFRIC) 14 balance sheet date may impact the level of provision required; ‘International Accounting Standard (IAS) 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Share based payments – in accordance with IFRS 2 ‘Share-based their Interaction’ in these financial statements. This is an early payments’, share options and other share awards are measured adoption of the interpretation which is not compulsory until at fair value at the date of grant. The fair value determined is then annual periods beginning on or after 1 January 2008. The impact expensed in the income statement on a straight line basis over of the adoption of this interpretation is discussed in note 37 the vesting period, with a corresponding increase in equity. The Retirement benefit obligations. fair value of the options and other share awards are measured using the Black-Scholes and Monte Carlo option pricing models. The valuation of these share based payments requires several 3 Significant accounting policies judgements to be made in respect of the number of options Basis of accounting that are expected to be exercised. Details of the assumptions The financial statements have been prepared in accordance made in respect of each of the share based payment schemes with IFRS. These financial statements have also been prepared in are disclosed in note 36 Equity settled share based payments. accordance with IFRS adopted by the European Union (EU) and Changes in these assumptions could lead to changes in the therefore the Group financial statements comply with Article 4 of income statement expense in future periods; the EU International Accounting Standards (IAS) Regulation. Impairment – the Group reviews the carrying value of goodwill The financial statements have been prepared on the historical cost and fixed assets and other intangibles, including acquisition basis, except for the revaluation of certain financial instruments. intangibles. It has impaired certain asset values on a value in use basis. Future changes in performance or disposals could Northern Foods’ management considers the following to be the impact this value. most important accounting policies for the Group. In applying these accounting policies, management makes certain judgements Basis of consolidation and estimates that affect the reported amounts of assets and The consolidated financial statements incorporate the financial liabilities at the period end date and the reported revenues and statements of the Company and entities controlled by the expenses during the financial year. The financial statements Company (its subsidiaries) made up to 29 March 2008, together have been prepared in accordance with the Group’s accounting known as the Group. Control is achieved where the Company policies described below. has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Group has changed the presentation of the net pensions financing credit (expected return on scheme assets less interest On acquisition, the assets and liabilities and contingent liabilities on pension scheme liabilities) to be included as a financing item of a subsidiary, or trade and assets of businesses acquired, are within finance income and finance expense, rather than within measured at their fair values at the date of acquisition. Any excess profit from operations. This allows easier understanding of the of the cost of acquisition over the fair values of the identifiable underlying operational performance of the Group. The presentation net assets acquired is recognised as goodwill. Any deficiency in the prior period has been amended to reflect this change. of the cost of acquisition below the fair values of the identifiable This change in presentation has no impact on profit before net assets acquired (i.e. discount on acquisition) is credited to the tax or net assets in either period. This is shown in note 10 Consolidated income statement during the period of any acquisition. Net finance costs.

60 Notes to the consolidated financial statements | Northern Foods plc 3 Significant accounting policies continued (a) Sales of goods Sales of goods are recognised when goods are delivered and The results of subsidiaries and businesses acquired or disposed title has passed. of during the period are included in the Consolidated income statement from the effective date of acquisition or up to the (b) Sales of services effective date of disposal, as appropriate. Sales of services are recognised on completion of the service.

Where necessary, adjustments are made to the financial (c) Finance income statements of subsidiaries and businesses acquired to bring the Interest income is accrued on a time basis, by reference to the accounting policies used into line with those used by the Group. principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash All intra-group transactions, balances, income and expenses are receipts through the expected life of the financial asset to that eliminated on consolidation. asset’s net carrying amount.

Business combinations Finance income includes the expected return on scheme The acquisition of subsidiaries and businesses acquired are assets. This is a change from the prior period where it was accounted for using the acquisition method. The cost of the included in profit from operations. The prior period has been acquisition is measured at the aggregate of the fair values, at the amended to reflect this change. date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for Foreign currencies control of the acquiree, plus any costs directly attributable to the (a) Functional and presentation currency business combination. The acquiree’s identifiable assets, liabilities The individual financial statements of each Group company are and contingent liabilities that meet the conditions for recognition presented in the currency of the primary economic environment under IFRS 3 ‘Business combinations’ are recognised at their fair in which it operates (its functional currency). For the purpose of value at the acquisition date, except for non-current assets (or the consolidated financial statements, the results and financial disposal groups) that are classified as held for sale in accordance position of each Group company are expressed in pounds with IFRS 5 ‘Non Current Assets Held for Sale and Discontinued sterling, which is the functional currency of the Company, and the Operations’, which are recognised and measured at fair value presentation currency for the consolidated financial statements. less costs to sell. (b) Transactions and balances Goodwill arising on acquisition is recognised as an asset and In preparing the financial statements of the individual companies, initially measured at cost, being the excess of the cost of the transactions in currencies other than pounds sterling are recorded business combination over the Group’s interest in the net fair at the rates of exchange prevailing on the dates of the transactions. value of the identifiable assets, liabilities and contingent liabilities At each balance sheet date, monetary assets and liabilities that recognised. If, after reassessment, the Group’s interest in the are denominated in foreign currencies are retranslated at the net fair value of the acquiree’s identifiable assets, liabilities and rate prevailing on the balance sheet date. Non-monetary assets contingent liabilities exceeds the cost of the business combination, and liabilities carried at fair value that are denominated in foreign the excess is recognised immediately in the income statement currencies are translated at the rates prevailing at the date when as a profit or loss. the fair value was determined. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary The interest of minority shareholders in the acquiree is initially items are included in the income statement for the period. measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the Disposal groups foreign entity and are translated at the closing rate. Disposal groups classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. (c) Group companies On consolidation, the assets and liabilities of the Group’s overseas Disposal groups are classified as held for sale if their carrying operations are translated at exchange rates prevailing on the amount will be recovered primarily through a sale transaction balance sheet date. Income and expense items are translated at rather than through continuing use. This condition is regarded the average exchange rates for the period. Exchange differences as met only when the sale is highly probable and the disposal arising, if any, are classified as equity and transferred to the Group’s group is available for immediate sale in its present condition. translation reserve. Such translation differences are recognised Management must be committed to the sale which should be as income or an expense in the period in which the operation expected to qualify for recognition as a completed sale within is disposed of. one year from the date of classification. Leases Revenue recognition Leases are classified as finance leases whenever the terms of Revenue is measured at the fair value of the consideration the lease involve the substantial transfer of the risks and rewards received or receivable and represents amounts receivable of ownership to the lessee. All other leases are classified as for goods and services provided in the normal course of operating leases. business, net of discounts, Value Added Tax (VAT) and other sales related taxes.

Northern Foods plc | Notes to the consolidated financial statements 61 Notes to the consolidated financial statements continued

3 Significant accounting policies continued Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax Assets held under finance leases are recognised as assets of liabilities, and when they relate to income taxes levied by the same the Group at their fair value or, if lower, at the present value of the taxation authority, and the Group intends to settle its current tax minimum lease payments, each determined at the inception of assets and liabilities on a net basis. the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments Property, plant and equipment are apportioned between finance charges and reduction of the Property, plant and equipment held for use in the production lease obligation so as to achieve a constant rate of interest on or supply of goods, or for administrative purposes is stated in the the remaining balance of the liability. Finance charges are charged balance sheet at historical cost or deemed cost, less depreciation. directly against income, unless they are directly attributable to Historical cost includes the expenditure that is directly attributable qualifying assets, in which case they are capitalised in accordance to the acquisition of the items. Deemed cost includes surpluses with the Group’s general policy on borrowing costs. arising on the revaluation of certain properties to their fair values prior to the date of transition to IFRS. Land is not depreciated. Rentals payable under operating leases are charged to income on a straight line basis over the term of the relevant lease. Benefits Subsequent costs are included in the asset’s carrying amount received and receivable as an incentive to enter into an operating or recognised as a separate asset, as appropriate, only when it lease are also spread on a straight line basis over the lease term. is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured Taxation reliably. All other repairs and maintenance are charged to the The tax expense represents the sum of the tax currently payable income statement during the financial period in which they and deferred tax. are incurred.

The tax currently payable is based on the taxable profit or loss Assets in the course of construction are carried at cost less for the period. Taxable profit differs from net profit as reported in any recognised impairment loss. Cost includes professional fees the income statement because it excludes items of income and which are capitalised in accordance with the Group’s accounting expense that are taxable or deductible in other periods and it further policy. Depreciation of these assets commences when the assets excludes items that are never taxable or deductible. The Group’s are ready for their intended use. liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Depreciation is charged so as to write off the cost or valuation of assets over their estimated useful lives, using the straight line Deferred tax is the tax expected to be payable or recoverable on method, on the following basis: differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used Property 20–50 years in the computation of taxable profit, and is accounted for using (or over the remaining life of the lease if shorter) the balance sheet liability method. Plant and equipment 5–15 years Motor vehicles 4–10 years Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised Assets held under finance leases are depreciated over their to the extent that it is probable that taxable profits will be available expected useful lives on the same basis as owned assets or, against which deductible temporary differences can be utilised. where shorter, over the term of the relevant lease. Such assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill or from The gain or loss arising on the disposal or retirement of an asset the initial recognition (other than in a business combination) is determined as the difference between the sale proceeds of other assets and liabilities in a transaction that affects neither and the carrying amount of the asset and is recognised in the the tax profit nor the accounting profit. income statement.

Deferred tax liabilities are recognised for taxable temporary Intangible assets differences arising on investments in subsidiaries, except where (a) Goodwill the Group is able to control the reversal of the temporary difference, Goodwill arising on consolidation represents the excess of the and it is probable that the temporary difference will not reverse cost of the business combination over the Group’s interest in the in the foreseeable future. net fair value of the identifiable assets, liabilities and contingent liabilities at the date of acquisition. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer Goodwill is initially recognised as an asset at cost and is probable that sufficient taxable profits will be available to allow subsequently measured at cost less any accumulated all or part of the assets to be recovered. impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is Deferred tax is calculated at the tax rates that have been enacted recognised immediately in the income statement and is not or substantively enacted by the balance sheet date. Deferred tax subsequently reversed. is charged or credited to the income statement, except where it relates to items charged or credited directly to equity, in which On disposal of a subsidiary, the attributable amount of goodwill case the deferred tax is also dealt with in equity. is included in the determination of the profit or loss on disposal.

62 Notes to the consolidated financial statements | Northern Foods plc 3 Significant accounting policies continued Retirement benefit costs (a) Pension obligations/assets Goodwill arising on acquisitions before the date of transition to The Group operates a number of defined benefit schemes for IFRS has been retained at the previous UK Generally Accepted qualifying employees, principally the Northern Foods Pension Accounting Principles (GAAP) amount subject to being tested for Scheme (‘the Scheme’) and Northern Foods Pension Builder impairment at that date. Goodwill written off to reserves under (‘Pension Builder’) in the United Kingdom and the Green Isle UK GAAP prior to 1998 has not been reinstated and is not Foods Group Retirement and Death Benefit Plan (‘the Plan’) in the included in determining any subsequent profit or loss on disposal. Republic of Ireland. A defined benefit scheme is one where the amount of pension benefit an employee will receive on retirement (b) Computer software is dependent on age, years of service and compensation. Computer software that is not integral to an item of property, plant or equipment is classified as an intangible asset and is held For defined benefit retirement benefit schemes, the cost of on the balance sheet at cost net of amortisation. These costs are providing benefits is determined using the Projected unit credit amortised over their estimated useful lives of ten years. method, with actuarial valuations for the purpose of the financial statements being carried out at each balance sheet date. (c) Customer relationships Actuarial gains and losses are recognised in full in the period Customer relationships are included at fair value at the date of in which they occur. They are recognised outside the income acquisition and are held on the balance sheet at cost net of statement and are presented in the statement of recognised amortisation. These costs are amortised over their estimated income and expense. useful lives of ten years. The retirement benefit obligation/asset recognised in the balance Impairment of tangible and intangible assets excluding goodwill sheet represents the present value of the defined benefit At each balance sheet date, the Group reviews the carrying obligation/asset as adjusted for unrecognised past service costs, amounts of its tangible and intangible assets to determine and net of the fair value of the scheme assets. Any asset resulting whether there is any indication that those assets have suffered from this calculation is limited to the past service cost plus the an impairment loss. If any such indication exists, the recoverable present value of the available refunds and reductions in future amount of the asset is estimated in order to determine the extent contributions. The Group has considered the impact of IFRIC 14 of the impairment loss (if any). Where the asset does not generate at the period end. However, as the rules of the Scheme give cash flows that are independent from other assets, the Group the Company an unconditional right to a refund of the current estimates the recoverable amount of the cash generating unit residual surplus, there is no restriction to the level of surplus (CGU) to which the asset belongs. that is recognised in the balance sheet.

Recoverable amount is the higher of fair value less costs to sell Past service cost is recognised immediately to the extent that and value in use. In assessing value in use, the estimated future the benefits are already vested, and otherwise is amortised on cash flows are discounted to their present value using a pre-tax a straight line basis over the average period until the benefits vest. discount rate that reflects current market assessment of the time value of money, and the risks specific to the asset for which the Current service cost is recognised within profit from operations estimates of future cash flows have not been adjusted. in the income statement.

If the recoverable amount of an asset or CGU is estimated to The expected return on scheme assets and the interest on be less than its carrying amount, the carrying amount of the pension scheme liabilities are recognised in finance income asset or CGU is reduced to its recoverable amount. An impairment and finance expense respectively. loss is recognised as an expense immediately. (b) Post retirement healthcare With the exception of goodwill, where an impairment loss The Group provides post retirement healthcare benefits to eligible subsequently reverses, the carrying amount of the asset or retired employees. An employee is eligible if granted the benefit CGU is increased to the revised estimate of its recoverable and if retirement occurred on or before 31 March 1999. Employees amount, but so that the increased carrying amount does not who were granted the benefit, but retired after 31 March 1999, exceed the carrying amount that would have been determined will not receive this benefit in retirement. Post 31 March 1999, had no impairment loss been recognised for the asset or CGU the benefit was not granted to any employees. in prior years. A reversal of an impairment loss is recognised as income immediately. The expected cost of this benefit has been computed using an accounting methodology similar to that for defined benefit Inventories pension schemes. Actuarial gains and losses arising from Inventories are stated at the lower of cost and net realisable experience adjustments, and changes in actuarial assumptions, value. Cost comprises direct materials and, where applicable, are recognised in full in the period in which they occur. direct labour costs and those overheads that have been incurred bringing the inventories to their present location and condition. They are recognised outside the income statement and Net realisable value represents the estimated selling price less presented in the statement of recognised income and expense. all estimated costs of completion and costs to be incurred in These obligations are valued annually for the purpose of marketing, selling and distribution. the financial statements by independent qualified actuaries.

Northern Foods plc | Notes to the consolidated financial statements 63 Notes to the consolidated financial statements continued

3 Significant accounting policies continued Derecognition of financial assets The Group derecognises a financial asset only when the Financial instruments contractual rights to the cash flows from the asset expire; Financial assets and financial liabilities are recognised in the or it transfers the financial asset and substantially all the risks Group’s balance sheet when the Group becomes a party to the and rewards of ownership of the asset to another entity. contractual provisions of the financial instrument. Financial liabilities Financial assets Financial liabilities held by the Group are classified as financial Trading investments are classed as held for trading. Any gains liabilities measured at amortised cost, financial liabilities held and losses arising from the change in fair value are recognised at amortised cost in a cash flow hedging relationship, and in the income statement for the period. derivatives that are designated and effective as hedging instruments carried at fair value. Financial assets held by the Company are classified as held for trading or loans and receivables at amortised cost. The Financial liabilities measured at amortised cost are initially classification depends on the nature and purpose of the financial measured at fair value, net of transaction costs, and subsequently assets and is determined at the time of initial recognition. measured at amortised cost using the effective interest method. Interest expense is recognised on an effective yield basis. Loans and receivables The effective interest method is used to calculate the amortised Trade receivables, loans, other receivables and cash and cost of a financial liability by allocating interest expense over the cash equivalents that have fixed or determinable payments relevant period. The effective interest rate is the rate that exactly that are not quoted in an active market are classified as loans discounts estimated future cash payments through the expected and receivables at amortised cost. Loans and receivables are life of the financial liability. measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying Bank borrowings the effective interest rate, except for short term receivables when Interest bearing bank loans and overdrafts are classified as other the recognition of interest would be immaterial. financial liabilities at amortised cost. They are recorded at the proceeds received, net of direct issue costs. Finance charges, Impairment of financial assets including premiums payable on settlement or redemption and Financial assets are assessed for indicators of impairment at direct issue costs, are accounted for on an accrual basis in the each balance sheet date. Financial assets are impaired where income statement using the effective interest rate method. They there is evidence that, as a result of one or more events that are added to the carrying amount of the instrument to the extent occurred after the initial recognition of the financial asset, the that they are not settled in the period in which they arise. estimated future cash flows of the investment have been impacted. Derecognition of financial liabilities The carrying amount of the financial asset is reduced by the The Group derecognises financial liabilities when, and only when, impairment loss directly for all financial assets with the exception the Group’s obligations are discharged, cancelled or they expire. of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable Derivative financial instruments and hedge accounting is considered uncollectible, it is written off against the allowance The Group’s activities expose it primarily to the financial risks of account. Subsequent recoveries of amounts previously written changes in foreign currency exchange rates and interest rates. off are credited against the allowance account. Changes The Group uses foreign exchange forward contracts and interest in the carrying amount of the allowance account are recognised rate swap contracts to hedge some of these exposures. The in the income statement. Group does not use derivative financial instruments for speculative purposes. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to The use of financial derivatives is governed by the Group’s policies an event occurring after the impairment was recognised, the approved by the Board of directors, which provide written previously recognised impairment loss is reversed through the principles on the use of financial derivatives. Further information income statement to the extent that the carrying amount of the on currency and interest rate management is provided in note 27 investment at the date the impairment is reversed and does Financial instruments. not exceed what the amortised cost would have been had the impairment not been recognised. Changes in the fair value of derivative financial instruments that are designated and effective as hedging instruments are recognised Cash and cash equivalents directly in equity. The ineffective portion is recognised immediately Cash and cash equivalents comprise cash in hand, deposits held in the income statement. If the cash flow hedge of a firm at call with banks and other short term, highly liquid, investments commitment or forecasted transaction results in the recognition with original maturities of three months or less. of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that Bank overdrafts are shown within borrowing in current liabilities had been previously recognised in equity are included in the initial on the balance sheet. measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss.

64 Notes to the consolidated financial statements | Northern Foods plc 3 Significant accounting policies continued Research and development Research and development costs comprise all directly attributable Changes in the fair value of derivative financial instruments that costs necessary to create and produce new products which do not qualify for hedge accounting are recognised in the income are both brand new in design and those being modified. Costs statement as they arise. classified as research and development include raw materials, labour costs, artwork origination and market research directly At the inception of the hedge relationship, the entity documents attributable to developing the product. the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy Equity instruments for undertaking various hedge transactions. Furthermore, at the Equity instruments issued by the Company are recorded at the inception of the hedge and on an ongoing basis, the Group proceeds received, net of direct issue costs. documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in Accounting standards in issue but not yet effective fair values or cash flows of the hedged item. At the date of approval of these financial statements, the following standards and interpretations, considered relevant to the Group, Hedge accounting is discontinued when the hedging instrument were in issue but not yet effective and have not been applied in expires or is sold, terminated, or exercised, or no longer qualifies these financial statements: for hedge accounting. At that time, any cumulative gain or loss on > IFRIC 12 ‘Service Concession Arrangements’ the hedging instrument recognised in equity is retained in equity > IFRIC 13 ‘Customer Loyalty Programmes’ until the forecasted transaction occurs. If a hedging transaction > IFRS 8 ‘Operating Segments’ is no longer expected to occur, the net cumulative gain or loss > amendments to IAS 1 ‘Presentation of Financial Statements – recognised in equity is transferred to the income statement at a Revised Presentation’ net profit or loss for the period. > amendments to IAS 23 ‘Borrowing Costs’ > IFRS 3 (revised) ‘Business Combinations’ Provisions > amendments to IAS 27 ‘Consolidated and Separate Financial Provisions are recognised when the Group has a present Statements’ obligation as a result of a past event, and it is probable that > amendments to IAS 31 ‘Interests in Joint Ventures’ the Group will be required to settle that obligation. Provisions > amendments to IAS 32 ‘Financial Instruments: Disclosure are measured at the directors’ best estimate of the expenditure and Presentation’ required to settle the obligation at the balance sheet date. The directors anticipate that the adoption of these standards and Share based payments interpretations in future periods will have no material impact on the The Group has applied the requirements of IFRS 2 ‘Share-based financial statements of the Group, except for additional disclosures payments’. In accordance with the transitional provisions, IFRS 2 on operating segments when the relevant standards come into has been applied to all grants of equity instruments after effect for periods commencing on, or after, 1 January 2008. 7 November 2002 that were unvested at 1 January 2005. Non-GAAP measures The Group issues equity settled share based payments to certain Definitions of non-GAAP measures used by Northern Foods are employees in addition to issuing an HM Revenue & Customs shown below: approved Savings-related share option scheme for all employees. Equity settled share based payments are measured at fair value (a) Net debt (excluding the effect of non-market based vesting conditions) at Net debt is not a defined term under IFRS and may not therefore the date of grant. The fair value determined at the grant date of be comparable with other similarly titled non-IFRS debt measures the equity settled share based payments is expensed on a reported by other companies. The Group adopts this measure straight line basis over the vesting period, based on the Group’s because it is used in calculating the banking covenants. It is also estimate of shares that will eventually vest and adjusted for the the measure used for internal debt analysis. In addition, the net effect of non-market based vesting conditions. debt balance provides an indication of the net borrowings on which the Company is required to pay interest. Fair value is measured by use of the Black-Scholes and Monte Carlo models. The expected life used in the model (b) Underlying revenue has been adjusted, based on management’s best estimate, Underlying revenue excludes the impact of currency rate for the effects of non-transferability, exercise restrictions, and changes, product categories no longer manufactured, behavioural considerations. acquisitions and discontinued operations.

Government grants (c) Restructuring items Government grants in respect of capital expenditure are credited Items which relate to significant restructuring events and the to deferred income and are released to the income statement impact of the fire in the 52 weeks ended 31 March 2007 are over the expected useful lives of the relevant assets by equal presented as a separate column within their relevant Consolidated annual instalments. Grants of a revenue nature are credited to income statement category. Presentation of these items in a the income statement so as to match them with the expenditure separate column helps to provide a better indication of the to which they relate. Group’s underlying business performance. Restructuring items include costs or income associated with the restructuring of businesses, gains or losses on the disposal of businesses and asset and financial instruments impairments and gains arising from the Group’s restructuring activities. Northern Foods plc | Notes to the consolidated financial statements 65 Notes to the consolidated financial statements continued

4 Revenue The analysis of the Group’s revenue is as follows: Restated 2008 2007 Continuing operations: £m £m Sale of goods 931.9 888.5 Revenue 931.9 888.5 Finance income 59.2 53.8 Other operating income 0.9 1.9 992.0 944.2 Discontinued operations: Sale of goods and services – 317.4 Revenue – 317.4 Other operating income – 4.8 – 322.2 Total 992.0 1,266.4

5 Segmental reporting Business segments For management purposes the Group is organised into three operating divisions; Chilled, Frozen and Bakery. These divisions are the basis on which the Group reports its primary segment information. The continuing operating divisions are as follows:

Division Major product category Chilled Ready Meals, Sandwiches & Salads Frozen Pizza, Fish & Vegetables, Pastry, Meat & Meat-free products Bakery Biscuits, Puddings

Segment information The segment information is as follows:

Chilled Frozen Bakery Total 2008 2007 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m £m £m Revenue 481.5 622.2 245.4 244.5 205.0 339.2 931.9 1,205.9 Less revenue from discontinued operations – (175.5) – – – (141.9) – (317.4) Revenue from continuing operations 481.5 446.7 245.4 244.5 205.0 197.3 931.9 888.5 Less revenue from acquisitions (9.7) – (2.4) – – – (12.1) – Foreign exchange – – (2.3) – – – (2.3) – Underlying revenue 471.8 446.7 240.7 244.5 205.0 197.3 917.5 888.5

66 Notes to the consolidated financial statements | Northern Foods plc 5 Segmental reporting continued External revenue Profit from operations* Restated 2008 2007 2008 2007 £m £m £m £m Continuing operations: Chilled 481.5 446.7 22.1 14.6 Frozen 245.4 244.5 11.4 18.4 Bakery 205.0 197.3 14.9 12.7 931.9 888.5 48.4 45.7 Net finance income/(costs)* 1.7 (5.7) Profit before taxation* 50.1 40.0 Taxation* (11.7) (8.1) Profit for the period from continuing operations* 38.4 31.9 Discontinued operations: Chilled – 175.5 – 1.1 Bakery – 141.9 – 0.2 Profit before taxation* – 317.4 – 1.3 Taxation* – (0.3) Profit for the period from discontinued operations* – 1.0 Profit for the period* 38.4 32.9 * before restructuring items

Continuing restructuring items from operations of £4.7m (2006/07: £5.6m) comprised Chilled £1.3m (2006/07: £2.7m), Frozen £2.9m (2006/07: £1.7m) and Bakery £0.5m (2006/07: £1.2m). Intersegmental sales were charged at prevailing market prices. Continuing intersegmental sales were: Chilled £nil (2006/07: £nil), Frozen £nil (2006/07: £nil) and Bakery £0.1m (2006/07: £0.1m).

Continuing profit from operations after restructuring items was: Chilled £20.8m (2006/07: £11.9m), Frozen £8.5m (2006/07: £16.7m) and Bakery £14.4m (2006/07: £11.5m).

Discontinued restructuring items from operations in the prior period was a gain of £2.4m. This comprised a Chilled loss of £15.2m and a Bakery gain of £17.6m. Discontinued intersegmental sales in the prior period were Chilled £0.4m and Bakery £6.6m.

The discontinued result from operations after restructuring items in the prior period was a Chilled loss of £14.1m and a Bakery profit of £17.8m. The loss on the sale of the discontinued operations in the prior period was £58.7m.

2008 2007 Assets Liabilities Total Assets Liabilities Total Assets/(liabilities) £m £m £m £m £m £m Chilled 260.8 (76.8) 184.0 239.6 (87.5) 152.1 Frozen 176.1 (59.0) 117.1 163.8 (52.6) 111.2 Bakery 99.8 (35.0) 64.8 111.0 (34.0) 77.0 Operating assets/(liabilities) 536.7 (170.8) 365.9 514.4 (174.1) 340.3 Unallocated corporate assets: Cash at bank and in hand 72.9 – 72.9 48.3 – 48.3 Trading investments 0.1 – 0.1 4.9 – 4.9 Loan note from NFT business disposal –––6.7 – 6.7 Corporate other receivables 1.2 – 1.2 8.5 – 8.5 Retirement benefit assets 71.5 – 71.5 ––– Deferred tax assets –––9.4 – 9.4

Unallocated corporate liabilities: Total borrowings – (261.9) (261.9) – (218.0) (218.0) Derivative financial instrument – (4.1) (4.1) –(6.5)(6.5) Retirement benefit obligations –(9.9)(9.9) –(8.6)(8.6) Deferred tax liabilities – (14.7) (14.7) ––– Current tax liabilities – (26.0) (26.0) – (27.8) (27.8) Corporate other payables – (29.6) (29.6) – (36.0) (36.0) Total assets/(liabilities) 682.4 (517.0) 165.4 592.2 (471.0) 121.2

Northern Foods plc | Notes to the consolidated financial statements 67 Notes to the consolidated financial statements continued

5 Segmental reporting continued

Chilled Frozen Bakery Group Other information – 2008 (all continuing) £m £m £m £m Capital additions 11.2 2.9 5.2 19.3 Depreciation 19.7 12.4 9.0 41.1 Amortisation of other intangible assets 0.3 0.2 0.1 0.6 Impairment of property, plant and equipment 0.9 0.3 0.3 1.5

Chilled Frozen Bakery Group Other information – 2007 £m £m £m £m Capital additions: Continuing 12.1 5.2 3.2 20.5 Discontinued 3.6 – 4.0 7.6 Depreciation: Continuing 17.8 10.9 11.9 40.6 Discontinued 8.2 – 7.9 16.1 Amortisation of other intangible assets: Continuing 0.3 0.1 0.1 0.5 Discontinued 0.2 – 0.2 0.4 Impairment of property, plant and equipment: Discontinued 5.0 – – 5.0

Geographical segments The Group operates in two main geographical areas; the United Kingdom and the Republic of Ireland. The Chilled and Bakery divisions operate in the United Kingdom while the Frozen division operates in both the United Kingdom and the Republic of Ireland. The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services:

Revenue 2008 2007 £m £m United Kingdom 858.1 1,131.5 Other 73.8 74.4 931.9 1,205.9 Revenue in the prior period from the Group’s discontinued operations was derived principally from the United Kingdom (2006/07: £315.8m) and other (2006/07: £1.6m).

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and intangible assets, analysed by geographical area in which the assets are located:

Additions to property, plant and equipment Segment assets and intangible assets 2008 2007 2008 2007 £m £m £m £m United Kingdom 529.8 438.4 17.1 24.3 Republic of Ireland 152.6 153.8 2.2 3.8 682.4 592.2 19.3 28.1

68 Notes to the consolidated financial statements | Northern Foods plc 6 Analysis of consolidated income statement

Restated Before Before restructuring Restructuring restructuring Restructuring items items Total items items Total 2008 2008 2008 2007 2007 2007 £m £m £m £m £m £m Continuing operations: Revenue 931.9 – 931.9 888.5 – 888.5 Cost of sales (736.0) (2.5) (738.5) (708.0) (2.4) (710.4) Gross profit/(loss) 195.9 (2.5) 193.4 180.5 (2.4) 178.1 Distribution costs (65.2) – (65.2) (62.2) (0.3) (62.5) Administrative expenses (83.2) (2.2) (85.4) (74.5) (2.9) (77.4) Other operating income 0.9 – 0.9 1.9 – 1.9 Profit/(loss) from operations 48.4 (4.7) 43.7 45.7 (5.6) 40.1 Discontinued operations: Revenue –––317.4 – 317.4 Cost of sales –––(233.0) 7.0 (226.0) Gross profit –––84.4 7.0 91.4 Distribution costs –––(66.2) (0.1) (66.3) Administrative expenses –––(21.7) (4.5) (26.2) Other operating income –––4.8 – 4.8 Profit from operations – – – 1.3 2.4 3.7

7 Restructuring items

2008 2007 £m £m Continuing operations: Restructuring items from operations (4.7) (5.6) Taxation 0.8 1.7 (3.9) (3.9) Discontinued operations: Restructuring items from operations – 2.4 Loss on sale of discontinued operations – (58.7) Taxation – 4.8 – (51.5) Total (3.9) (55.4) Restructuring items of £4.7m comprised: £2.4m in respect of central cost reduction initiatives including office rationalisation; in the Frozen division, £1.0m relating to headcount reduction and £1.2m relating to reorganisation costs due to the Pastry business combination; and in the Chilled division, £0.1m due to start up costs relating to the chilled soup business combination.

Items which relate to significant restructuring events and the impact of the fire in the 52 weeks ended 31 March 2007 are presented as a separate column within their relevant Consolidated income statement category. Presentation of these items in a separate column helps to provide a better indication of the Group’s underlying business performance. Restructuring items include costs or income associated with the restructuring of businesses, gains or losses on the disposal of businesses and asset and financial instrument impairments and gains arising from the Group’s restructuring activities.

Northern Foods plc | Notes to the consolidated financial statements 69 Notes to the consolidated financial statements continued

8 Profit/(loss) from operations Profit/(loss) from operations has been arrived at after charging/(crediting) the restructuring items in note 7 and the items below:

2008 2007 £m £m Net foreign exchange transaction losses/(gains): Continuing 1.7 (0.3) Research and development costs (principally new product development): Continuing 9.5 10.2 Discontinued – 0.9 Depreciation of property, plant and equipment: Continuing 41.1 40.6 Discontinued – 16.1 Impairment of property, plant and equipment: Continuing 1.5 – Discontinued – 5.0 Amortisation of other intangibles: Continuing 0.6 0.5 Discontinued – 0.4 Staff costs (note 9): Continuing 218.5 230.8 Discontinued – 126.6 Auditors’ remuneration for audit services: Continuing 0.2 0.2 Discontinued – 0.1 Government grants: Continuing (1.1) (1.9) Cost of inventories recognised as expense: Continuing 736.0 708.0 Discontinued – 233.0 Write down of inventories recognised as an expense: Continuing 4.2 2.8 Discontinued – 0.8 Loss/(profit) on disposal of property, plant and equipment: Continuing 0.3 (1.5) Impairment loss recognised on trade receivables: Continuing 1.0 0.9 Reversal of impairment losses recognised on trade receivables: Continuing (0.3) – Operating lease charges – Plant and machinery: Continuing 2.7 1.3 Discontinued – 2.6 Operating lease charges – Land and buildings: Continuing 2.2 1.0 Discontinued – 1.3 Profit on disposal of property, plant and equipment included within restructuring items was £nil (2006/07: £26.6m).

70 Notes to the consolidated financial statements | Northern Foods plc 8 Profit/(loss) from operations continued

A more detailed analysis of auditors’ remuneration is provided below:

2008 2007 Deloitte & Deloitte & Touche LLP Touche LLP £’000 £’000 Audit services Fees payable to the Company’s auditors for the audit of the Group’s Annual report 80 80 Fees payable to the Company’s auditors and their associates for the audit of the Company’s subsidiaries pursuant to legislation 146 185 226 265 Other services Other services supplied pursuant to legislation – Half year review 37 30 Other services supplied pursuant to legislation – Reporting accountants – 265 Other services – Accounting advice 47 – Other 20 2 104 297 Tax services Advisory services 119 153 Compliance 143 130 262 283 Total 592 845 Deloitte & Touche LLP were appointed sole Group auditors for both the current and prior periods.

9 Staff costs The average monthly number of employees (including executive directors) was:

2008 2007 number number Continuing operations: Production 9,281 9,111 Distribution 544 622 Administration 942 1,113 10,767 10,846 Discontinued operations: Production – 4,897 Distribution – 678 Administration – 300 – 5,875 Total 10,767 16,721

Northern Foods plc | Notes to the consolidated financial statements 71 Notes to the consolidated financial statements continued

9 Staff costs continued

Aggregate remuneration comprised:

2008 2007 £m £m Continuing operations: Wages and salaries 207.1 212.9 Social security costs 17.6 17.3 Other pension (income)/cost (6.2) 0.6 218.5 230.8

Discontinued operations: Wages and salaries – 112.7 Social security costs – 8.5 Other pension cost – 5.4 – 126.6 In addition to the staff costs disclosed above, redundancy costs were £1.0m (2006/07: £16.9m) which were charged to restructuring.

10 Net finance income/(expense)

Restated 2008 2007 £m £m Finance income: Loans and receivables at amortised cost: Bank interest receivable 0.8 0.9 Other interest receivable 0.2 0.5 Expected return on pension scheme assets 58.2 52.4 59.2 53.8 Finance expense: Financial liability held at amortised cost in a cash flow hedging relationship: Interest on Senior loan notes 2012–2017 (7.8) (7.8) Other financial liabilities at amortised cost: Interest on bank overdrafts and loans (7.2) (11.8) Interest on pension scheme liabilities (42.5) (39.9) (57.5) (59.5) Net finance income/(expense) 1.7 (5.7) The Group has changed the presentation of the net pensions financing credit to be included as a financing item within finance income and finance expense, rather than within profit from operations. This allows easier understanding of the underlying operational performance of the Group. The presentation in the prior period has been amended to reflect this change. This change in presentation has no impact on profit before tax or net assets in either period.

72 Notes to the consolidated financial statements | Northern Foods plc 11 Taxation

Continuing Discontinued Total 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m Current taxation: UK corporation tax (0.4) 4.9 – 0.2 (0.4) 5.1 Overseas tax 1.2 2.5 – – 1.2 2.5 Tax on restructuring items – UK – (1.9) – (2.5) – (4.4) Tax on restructuring items – overseas (0.2) 0.2 – – (0.2) 0.2 0.6 5.7 – (2.3) 0.6 3.4 Deferred taxation: UK deferred tax 11.2 1.3 – 0.1 11.2 1.4 Overseas tax (0.3) (0.6) – – (0.3) (0.6) Tax on restructuring items – UK (0.6) – – (2.3) (0.6) (2.3) 10.3 0.7 – (2.2) 10.3 (1.5) Tax charge/(credit) for the period 10.9 6.4 – (4.5) 10.9 1.9 UK corporation tax is calculated at 30.0% (2006/07: 30.0%) of the estimated assessable profit or loss for the period. Overseas tax is taxation on profits made in the Republic of Ireland which is calculated at 10.0% (2006/07: 10.0%).

The Finance Act 2007 included provision for a reduction in the rate of UK Corporation tax from 30.0% to 28.0% with effect from 1 April 2008. The rate reduction has been substantively enacted and therefore has been used for the deferred tax calculations on UK businesses.

A deferred tax charge of £0.1m (2006/07: £0.1m credit) was taken to equity relating to equity settled incentive schemes.

A deferred tax charge of £12.8m (2006/07: £0.1m credit) was taken to equity relating to the actuarial gains and losses on the retirement benefit assets and obligations.

The charge for the year can be reconciled to the profit/(loss) per the Consolidated income statement as follows:

2008 2008 2007 2007 £m % £m % Profit/(loss) before taxation: Continuing operations 45.4 100.0 34.4 167.0 Discontinued operations ––3.7 18.0 Loss on sale of discontinued operations ––(58.7) (285.0) Total profit/(loss) before taxation 45.4 100.0 (20.6) (100.0) Taxation at the UK corporation tax rate of 30.0% 13.6 30.0 (6.2) (30.0) Effect of lower overseas tax rates (1.9) (4.2) (4.4) (21.4) Adjustment to tax charge in respect of prior periods: Corporation tax (0.7) (1.5) (4.3) (20.9) Deferred tax 2.1 4.6 (0.5) (2.4) Change in UK taxation rate from 30.0% to 28.0% (2.8) (6.2) –– Expenses not deductible in determining taxable profit and other items 0.6 1.3 5.2 25.2 Creation of losses not recognised as deferred tax assets ––12.1 58.7 Tax charge and effective tax rate for the period 10.9 24.0 1.9 9.2 The adjustments in respect of prior periods relate to resolutions of previous years’ tax computations and a switch from current to deferred tax with respect to capital allowance disclaimers.

Northern Foods plc | Notes to the consolidated financial statements 73 Notes to the consolidated financial statements continued

12 Acquisitions On 19 October 2007, the Group acquired a frozen pie business to integrate into the existing facility in Portumna, Ireland. The production assets, Upper Crust and Tiffany brands and McDougalls licence for the manufacture of frozen pies were all purchased. On 21 November 2007, the Group acquired 100% of the issued share capital of Ethnic Cuisine Limited, a company which manufactures ready meals. On 10 January 2008, the Group acquired the Baxter’s Foods chilled soup manufacturing facility in Grimsby. Soup production from an existing site will be transferred to the newly acquired business during 2008.

All of these business combinations have been accounted for by the acquisition method of accounting under IFRS 3 ‘Business Combinations’.

Book Fair value Fair value Adjustments value £m £m £m Net assets acquired: Property, plant and equipment 14.4 – 14.4 Inventories 0.6 – 0.6 Trade and other receivables 3.2 (0.2) 3.0 Cash and cash equivalents 1.5 – 1.5 Trade and other payables (4.0) 0.2 (3.8) Current tax liabilities (0.3) – (0.3) Deferred tax liabilities (0.8) – (0.8) Grants (0.7) – (0.7) Total net assets acquired 13.9 – 13.9 Customer relationships 1.7 Goodwill 7. 9 Total consideration 23.5 Satisfied by: Cash 22.5 Directly attributable acquisition costs 1.1 Working capital and debt adjusters (0.1) Total consideration 23.5 Cash and cash equivalents acquired (1.5) 22.0 Goodwill arising on business combinations is attributable to the expected future profitability of new products and the anticipated future operating synergies from the combination. Goodwill also includes the workforce acquired as part of the business combination. Both the workforce acquired and strategic acquisition synergies are specifically excluded in the identification of intangible assets on acquisition, in line with IFRS 3 ‘Business Combinations’.

Fair value adjustments are management’s assessment of the differences between the book value of the assets and liabilities acquired and the fair value at the date of acquisition.

Acquisitions contributed £12.1m revenue, £0.3m to the Group’s profit before tax before restructuring items and £1.3m to restructuring items for the period between their date of acquisition and the balance sheet date.

If the acquisitions had been completed on the first day of the financial year, Group revenue for the period would have been £952.8m and profit for the period would have been £35.6m.

74 Notes to the consolidated financial statements | Northern Foods plc 13 Dividends

2008 2007 Equity dividends on ordinary shares £m £m Amounts recognised in the period: Final dividend for the 52 weeks ended 31 March 2007 of 2.75p (2005/06: 0.85p) per share 13.4 4.2 Interim dividend for the 52 weeks ended 29 March 2008 of 1.55p (2006/07: 1.50p) per share 7.6 7. 3 21.0 11.5 Proposed final dividend for the 52 weeks ended 29 March 2008 of 2.95p (2006/07: 2.75p) per share 14.2 13.5 The proposed final dividend is subject to approval by shareholders at the Annual general meeting and accordingly has not been included as a liability in these financial statements.

14 Earnings/(loss) per share

Basic Diluted Basic Diluted earnings/(loss) earnings/(loss) earnings/(loss) earnings/(loss) Earnings/(loss) per share per share Earnings/(loss) per share per share 2008 2008 2008 2007 2007 2007 Earnings/(loss) and earnings/(loss) per share £m pence pence £m pence pence Continuing operations: Earnings used for calculation of earnings per share 34.5 7.08 6.95 28.0 5.72 5.66 Restructuring items 3.9 0.80 0.79 3.9 0.80 0.79 Earnings used for calculation of earnings per share before restructuring items 38.4 7.88 7.74 31.9 6.52 6.45 Discontinued operations: Loss used for calculation of loss per share –––(50.5) (10.32) (10.21) Restructuring items –––51.5 10.52 10.41 Earnings used for calculation of earnings per share before restructuring items –––1.00.200.20 Continuing and discontinued operations: Earnings/(loss) used for calculation of earnings/(loss) per share 34.5 7.08 6.95 (22.5) (4.60) (4.55) Restructuring items 3.9 0.80 0.79 55.4 11.32 11.20 Earnings used for calculation of earnings per share before restructuring items 38.4 7.88 7.74 32.9 6.72 6.65

2008 2007 Number of shares number (m) number (m) Weighted average number of shares 514.2 514.2 Own shares held (22.5) (21.9) Shares held in Employee share ownership trust (ESOT) (4.3) (2.7) Weighted average number of shares used for calculation of basic earnings per share and earnings per share before restructuring items 487.4 489.6 Savings-related share options 0.8 – Executive share options 0.7 0.4 Long term incentive plan 0.7 1.3 Deferred share plan 3.4 3.4 Matching share award 0.9 – Performance share plan 2.4 – Weighted average number of shares used for calculation of diluted earnings per share and diluted earnings per share before restructuring items 496.3 494.7

Northern Foods plc | Notes to the consolidated financial statements 75 Notes to the consolidated financial statements continued

15 Goodwill

£m Cost: At start of prior period 76.5 Restructuring disposals (26.3) Exchange movements (0.4) At end of prior period 49.8 At start of period 49.8 Acquisitions 7. 9 Exchange movements 2.4 At end of period 60.1 Accumulated impairment losses: At start of prior period 11.1 Restructuring disposals (6.2) Exchange movements (0.1) At end of prior period 4.8 At start of period 4.8 Exchange movements 0.5 At end of period 5.3 Carrying amount: At end of period 54.8 At start of period 45.0 Goodwill acquired related to the three business combinations completed during the period. For further information, see note 12.

Goodwill acquired in a business combination is allocated, at acquisition, to the Group’s CGUs that are expected to benefit from that business combination. The CGUs have been defined as the operating business to which the goodwill relates. The carrying amount of goodwill has been allocated as follows: 2008 2007 £m £m Solway Foods 30.1 30.1 Ethnic Cuisine 5.1 – Green Isle 17.8 14.9 Convenience Foods 1.8 – 54.8 45.0

Impairment tests for goodwill The Group tests for impairment of goodwill at least annually.

The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using the Group’s weighted average cost of capital.

The Group prepares cash flow forecasts derived from the most recent financial plans approved by management for the next five years and extrapolates these cash flows in perpetuity using growth assumptions relevant for the business sector. The growth rate used is not more than 3.0% (2006/07: not more than 3.0%), and is not considered to be higher than the average long term industry growth rate.

The rate used to discount the forecast cash flows for all CGUs is the Group’s pre-tax weighted average cost of capital of 11.1% (2006/07: 10.0%).

76 Notes to the consolidated financial statements | Northern Foods plc 16 Other intangible assets

Customer Software relationships licences Total £m £m £m Cost: At start of prior period –10.310.3 Restructuring disposals – (4.4) (4.4) At end of prior period –5.95.9 At start of period –5.95.9 Acquisitions 1.7 – 1.7 At end of period 1.7 5.9 7.6 Accumulated amortisation: At start of prior period –3.53.5 Charge for prior period –0.90.9 Restructuring disposals – (2.0) (2.0) At end of prior period –2.42.4 At start of period –2.42.4 Charge for period –0.60.6 At end of period –3.03.0 Carrying amount: At end of period 1.7 2.9 4.6 At start of period –3.53.5 The Group tests for impairment of customer relationships at least annually. The key assumptions for the value in use calculations are those regarding forecast sales volumes and prices. The growth rate used is not more than 3.0% and is not considered to be higher than the average long term industry growth rate. Management estimates discount rates using the Group’s weighted average cost of capital.

The rate used to discount the forecast cash flows is the Group’s pre-tax weighted average cost of capital of 11.1% (2006/07: 10.0%).

Northern Foods plc | Notes to the consolidated financial statements 77 Notes to the consolidated financial statements continued

17 Property, plant and equipment

Freehold Leasehold Plant, fixtures property property and vehicles Total £m £m £m £m Cost or valuation: At start of prior period 261.1 101.1 931.2 1,293.4 Additions 0.5 – 27.6 28.1 Disposals – (0.5) (2.7) (3.2) Restructuring disposals (94.3) (72.5) (398.3) (565.1) Reclassifications 1.5 (1.0) (0.5) – Exchange movements (0.9) – (3.3) (4.2) At start of period 167.9 27.1 554.0 749.0 Additions 2.7 – 16.6 19.3 Acquisition of subsidiaries and businesses – 5.8 8.6 14.4 Disposals (5.1) – (2.5) (7.6) Reclassifications 0.1 – (0.1) – Exchange movements 5.1 – 20.5 25.6 At end of period 170.7 32.9 597.1 800.7 Accumulated depreciation and impairment losses: At start of prior period 75.0 28.0 629.7 732.7 Charge for prior period 4.8 1.9 50.0 56.7 Restructuring provision for impairment 2.0 – 3.0 5.0 Disposals – (0.3) (2.5) (2.8) Restructuring disposals (27.8) (23.2) (310.7) (361.7) Reclassifications 0.6 (0.2) (0.4) – Exchange movements (0.1) – (1.8) (1.9) At start of period 54.5 6.2 367.3 428.0 Charge for period 3.2 0.5 37.4 41.1 Restructuring provision for impairment – – 1.5 1.5 Disposals (0.8) – (2.1) (2.9) Exchange movements 0.9 – 12.1 13.0 At end of period 57.8 6.7 416.2 480.7 Carrying amount: At end of period 112.9 26.2 180.9 320.0 At start of period 113.4 20.9 186.7 321.0 At the period end, the Group had entered into contractual commitments for the purchase of property, plant and equipment amounting to £2.0m (2006/07: £1.6m).

The carrying amount of the Group’s property, plant and equipment includes an amount of £nil (2006/07: £nil) in respect of assets held under finance leases.

The recoverable amounts of the property, plant and equipment are determined from value in use calculations unless management is committed to closing or selling the business. If the value of the business is to be recovered through sale or closure then the recoverable amount is the fair value less costs to sell. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using the Group’s weighted average cost of capital.

The Group prepares cash flow forecasts derived from the most recent financial plans approved by management for the next five years and extrapolates these cash flows in perpetuity using growth assumptions relevant for the business sector. The growth rate used is not more than 3.0% (2006/07: not more than 3.0%) and is not considered to be higher than the average long term industry growth rate.

The rate used to discount the forecast cash flows for all CGUs is the Group’s pre-tax weighted average cost of capital of 11.1% (2006/07: 10.0%).

78 Notes to the consolidated financial statements | Northern Foods plc 18 Inventories

2008 2007 £m £m Raw materials 15.5 17.6 Work in progress 4.3 3.8 Finished goods 27.4 24.4 47.2 45.8 The directors consider that the replacement cost of inventories is not materially different to the value shown above.

19 Trading investments Trading investments, stated at fair value, represent investments in listed equity securities that present the Group with opportunity for return through dividend income and trading gains. They have no fixed maturity or coupon rate. The fair values of these securities are based on quoted market prices.

2008 2007 £m £m Trading investments at fair value 0.1 4.9

20 Subsidiaries A list of the significant subsidiary investments, including the name, country of incorporation and proportion of ownership interest is given in note 45 to the Company’s separate financial statements.

21 Trade and other receivables

2008 2007 £m £m Trade receivables 97.2 88.7 Other receivables 10.7 14.6 Other prepayments 3.4 4.3 Loan note – 6.7 111.3 114.3 The loan note in the prior period related to deferred consideration on the disposal of the trade and assets of NFT Distribution. Interest accrued at a variable rate. The loan note and accrued interest was repaid in full by the purchaser on 11 August 2007.

Trade receivables of £97.2m (2006/07: £88.7m) are net of amounts that are individually determined to be impaired of £1.9m (2006/07: £1.5m).

The average credit period taken on sales of goods is 31 days (2006/07: 39 days). Trade receivables are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience and sales documentation.

Northern Foods plc | Notes to the consolidated financial statements 79 Notes to the consolidated financial statements continued

21 Trade and other receivables continued

An ageing profile of trade receivables past due but not impaired is shown below:

Past due by Past due by 1–31 days 31–90 days Total £m £m £m 2008 9.0 0.5 9.5 2007 4.9 0.9 5.8 Included within trade receivables are balances which are neither past due nor impaired of £87.7m (2006/07: £82.9m). In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. Management believe that these balances have low credit risk because the Group’s top five customers, all leading UK retailers, represent more than 75% of the Group’s revenue. This results in a high concentration of credit risk, however, these customers have good credit ratings and consequently the credit risk for the Group’s overall trade receivables is considered low.

Included in the trade receivables balance are receivables with a carrying amount of £9.5m (2006/07 £5.8m) which are past due at the period end for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables which are past due but not impaired is 17 days (2006/07: 22 days). The table below shows the movement in the allowance for doubtful debt:

2008 2007 £m £m At start of period 1.5 1.7 Impairment losses recognised 1.0 0.9 Amounts written off as uncollectible (0.3) (0.3) Disposal of discontinued operations – (0.8) Impairment losses reversed (0.3) – At end of period 1.9 1.5

The ageing profile of impaired trade receivables is shown below:

Past due by Past due by Past due by 1–31 days 31–90 days over 90 days Total £m £m £m £m 2008 0.3 1.0 0.6 1.9 2007 0.6 0.3 0.6 1.5 The directors consider that the carrying amount of trade and other receivables approximates to their fair value. The directors consider the maximum credit risk at the balance sheet date is equivalent to the carrying value of trade and other receivables.

22 Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group, short term bank deposits with an original maturity of three months or less and bank overdrafts. The directors consider that the carrying amount of these assets and liabilities approximates to their fair value.

80 Notes to the consolidated financial statements | Northern Foods plc 23 Trade and other payables

2008 2007 £m £m Trade payables 100.7 103.6 Accruals and deferred income 63.5 62.0 Other payables including social security 20.2 24.2 184.4 189.8 Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade payables is 49 days (2006/07: 44 days). The Group has financial risk management policies in place to ensure that all payables are paid within the internal credit timeframe.

The directors consider that the carrying amount of trade payables approximates to their fair value.

24 Provisions

£m At start of period 7.7 Restructuring provisions – charge for period 2.1 Utilised in period (7.5) At end of period 2.3 All of the provisions are included within current liabilities. The provisions are expected to be utilised in full within the next 52 week period.

The restructuring provisions made during the period of £2.1m comprised: £1.1m in respect of central cost reduction initiatives including office rationalisation and £1.0m relating to the headcount reduction within the Frozen division.

25 Financial liabilities – borrowings

2008 2007 Current £m £m Bank loans and overdrafts due within one year or on demand 0.3 0.4 0.3 0.4

2008 2007 Non-current £m £m Revolving credit facility 2010 130.0 85.0 Senior loan notes 2012–2017 131.6 132.6 261.6 217.6

Borrowings are repayable as follows:

2008 2007 £m £m Within one year or on demand 0.3 0.4 In the second year – – In the third to fifth years inclusive 175.9 85.0 After five years 85.7 132.6 261.9 218.0

Northern Foods plc | Notes to the consolidated financial statements 81 Notes to the consolidated financial statements continued

25 Financial liabilities – borrowings continued

Bank loans and overdrafts are analysed by currency as follows:

Sterling US Dollars Total 2008 £m £m £m Bank loans and overdrafts due within one year or on demand 0.3 – 0.3 Revolving credit facility 2010 130.0 – 130.0 Senior loan notes 2012–2017 54.3 77.3 131.6 184.6 77.3 261.9

2007 Bank loans and overdrafts due within one year or on demand 0.4 – 0.4 Revolving credit facility 2010 85.0 – 85.0 Senior loan notes 2012–2017 54.3 78.3 132.6 139.7 78.3 218.0

The average interest rates paid on bank loans and overdrafts were as follows:

2008 2007 % % Bank overdrafts 6.54 5.82 Bank loans 6.17 5.36 Senior loan notes 2012–2017 5.50 5.50 Where market values are not available, fair values of financial assets and financial liabilities have been calculated by discounting expected future cash flows at prevailing interest rates and by applying period end exchange rates. The carrying amounts of short term borrowings and the Revolving credit facility 2010 approximate to their fair value.

The fair value of the Senior loan notes 2012–2017 is disclosed below:

2008 2008 2007 2007 Carrying value Fair value Carrying value Fair value £m £m £m £m Senior loan notes 2012–2017 131.6 139.0 132.6 132.0 At the period end the Group had available £330.0m (2006/07: £375.0m) of undrawn committed facilities on the Revolving credit facility 2010 and £4.7m bank overdrafts (2006/07: £14.6m), in respect of which all conditions precedent had been met.

26 Financing Bank overdrafts All bank loans and overdrafts are unsecured and repayable on demand, and are arranged at floating rates, thus exposing the Group to cash flow interest rate risk. The interest rate on bank overdrafts is 1.0% (2006/07: 1.0%) above the Bank of England base rate.

Revolving credit facility 2010 The Group holds a five year syndicated revolving credit facility of £460.0m. At the period end, the amount due under the facility was £130.0m (2006/07: £85.0m). The amount drawn down is repayable in periods of up to one year but is capable of being immediately refinanced as part of the committed Revolving credit facility 2010. The rate of interest fluctuates in line with market rates, thus exposing the Group to cash flow interest rate risk.

The maturity profile of the Revolving credit facility 2010 is shown below. This assumes that the interest paid during future years is paid at the interest rate (5.85%) and the level of debt drawn down remains consistent with the rates and borrowings at the balance sheet date.

Interest payable over remaining Repayment of life of facility principal Total payable £m £m £m Revolving credit facility 2010 17.4 130.0 147.4

82 Notes to the consolidated financial statements | Northern Foods plc 26 Financing continued

Senior loan notes 2012–2017 The Company has approximately £142.7m of senior guaranteed loan notes in the US Private Placement debt market. Notes are in both US Dollars ($155.0m) and pounds Sterling (£54.3m). The notes are fixed rate and unsecured. Following the business disposals in the prior period, the Group may have been required by the note holders to make a part repayment during 2007/08. As an appropriate proportion of the proceeds was reinvested in acquisitions or capital investment no repayment has been required.

The maturity profile below shows the annual cash flows paid in both the current and prior year. The cash flow hedge is currently effective. In consequence, the interest payments are fixed and are accounted for in the Consolidated income statement on an accruals basis. The charge to the Consolidated income statement corresponds to the annual interest paid. The repayment of the principal amount will not enter into the determination of profit or loss unless the hedge becomes ineffective. The effectiveness of the cash flow hedge is assessed at each balance sheet date.

Annual swap Annual swap cash flow cash flow Annual Annual paid received interest interest Amount Amount Interest to banks from banks paid paid Tranche Maturity (m) £m rate £m $m $m £m Series A Dec 2012 $35.0 20.0 5.63% 1.1 2.0 2.0 1.1 Series B Dec 2015 $82.5 47.1 5.77% 2.5 4.8 4.8 2.5 Series C Dec 2017 $37.5 21.3 5.87% 1.2 2.2 2.2 1.2 Series D Dec 2012 £28.5 28.5 5.47% – – – 1.6 Series E Dec 2015 £25.8 25.8 5.47% – – – 1.4 142.7 7.8 All US Dollar cash flows are hedged using cross currency swaps. Northern Foods will receive each 20 December and 20 June (the bond interest payment dates) fixed USD sufficient to fully cover interest due to holders of the USD denominated bonds, in exchange for payment of fixed pounds Sterling on the same date. The weighted average interest rate payable in pounds Sterling by the Company is approximately 5.5%. Additionally, the swap contracts provide for an exchange of the principal amounts at maturity at the same rate of exchange as the initial principal was translated (£1 = $1.752).

27 Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns whilst maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of net debt, as disclosed in note 28, and equity shareholders’ funds, as disclosed in notes 30 and 31.

Board policy is to operate with fixed rate borrowings within a range of 20% to 50% of total net debt over the medium term, although the Group may operate outside of this range in the short term. At the year end 71% of the Group’s debt was fixed (2006/07: 81%). The proportion of fixed rate borrowings increased in the prior period after the business disposals were made during 2006/07. A net debt review is carried out by management on a weekly basis.

The Group has performed share buy-backs during the period and funded acquisitions. During the period, the company repurchased 6,056,846 shares at a cost of £5.3m (2006/07: nil shares) and made three acquisitions (2006/07: nil) as discussed in note 12.

Northern Foods plc | Notes to the consolidated financial statements 83 Notes to the consolidated financial statements continued

27 Financial instruments continued

Categories of financial instruments Carrying value Fair value 2008 2007 2008 2007 £m £ £m £ Financial assets Held for trading: Trading investments 0.1 4.9 0.1 4.9 Loans and receivables at amortised cost: Trade receivables 97.2 88.7 97.2 88.7 Loan note – 6.7 – 6.7 Cash and cash equivalents 72.9 48.3 72.9 48.3 170.2 148.6 170.2 148.6 Financial liabilities Financial liability held at amortised cost in a cash flow hedging relationship: Senior loan notes 2012–2017 (131.6) (132.6) (139.0) (132.0) Derivatives that are designated and effective as hedging instruments carried at fair value: Derivative financial instruments (cross currency interest rate swaps) (4.1) (6.5) (4.1) (6.5) Other financial liabilities at amortised cost: Trade payables (100.7) (103.6) (100.7) (103.6) Bank loans and overdrafts (0.3) (0.4) (0.3) (0.4) Revolving credit facility 2010 (130.0) (85.0) (130.0) (85.0) Finance leases (0.8) – (0.8) – (367.5) (328.1) (374.9) (327.5) The fair value of the financial assets approximates to their carrying value due to the short term nature of the receivables.

The fair value of the financial liability held at amortised cost in a cash flow hedging relationship has been calculated by discounting expected future cash flows at prevailing interest rates and by applying period end exchange rates. The disclosure of the fair value is also shown in note 25.

The directors use their judgement in selecting an appropriate valuation technique for derivatives that are designated and effective as hedging instruments carried at fair value, but that are not quoted in an active market. Valuation techniques commonly used by market practitioners are applied and assumptions are made based on quoted market rates adjusted for specific features of the instrument.

The fair value of the other financial liabilities at amortised cost approximates to their carrying value. The trade and other payables approximate to their fair value due to the short term nature of the payables. The finance lease fair value approximates to the carrying value based on discounted future cash flows.

Financial risk management objectives The Group collates information from across the business and reports to the Board of directors on key financial risks on a monthly basis. These risks include credit risk, liquidity risk, interest rate risk and currency risk.

The Group seeks to minimise its exposure to these risks by using derivative financial instruments where applicable. The use of derivative financial instruments is governed by Group policies which have been approved by the Board of directors. The Group only enters into trade financial instruments for specific purposes. Speculative purchases are not made.

Credit risk management Credit risk refers to the risk of financial loss to the Group if a counterparty defaults on its contractual obligations of the loans and receivables at amortised cost held in the balance sheet.

The Group’s credit risk is primarily attributable to its trade receivables. The Group’s top five customers, all leading UK retailers, continue to represent more than 75% of the Group’s revenue. These customers have favourable credit ratings and consequently reduce the credit risk for the Group’s overall trade receivables. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with good credit ratings assigned by international credit rating agencies. Processes are in place to manage receivables and overdue debt and to ensure that appropriate action is taken to resolve issues on a timely basis. Credit control operating procedures are in place to review all new customers. Existing customers are reviewed as management become aware of changes of circumstances for specific customers. During the period, the amount written off in respect of credit risk was £0.3m (2006/07: £0.3m).

84 Notes to the consolidated financial statements | Northern Foods plc 27 Financial instruments continued

The amounts presented in the balance sheet are net of appropriate allowance for doubtful trade receivables, specific customer risk and assessment of the current economic environment. The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk.

Liquidity risk management Liquidity risk refers to the risk that the Group may not be able to fund the day to day running of the Group. Liquidity risk is reviewed by the Board on a monthly basis. The Group manages liquidity risk by monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. The Group also monitors the drawdown of debt against the available banking facilities and reviews the level of reserves. Liquidity risk management ensures sufficient debt funding is available for the Group’s day to day needs. Board policy is to maintain reasonable headroom of unused committed bank facilities in a range of maturities at least 12 months beyond the period end.

The Group has two principal debt facilities (notes 25 and 26): > Revolving credit facility 2010 > Senior loan notes 2012–2017

The following table details the Group’s maturity profile of its financial liabilities (excluding derivative financial instruments):

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2008 £m £m £m £m £m £m Senior loan notes 2012–2017 – 3.8 3.7 73.6 98.2 179.3 Trade payables 69.4 31.3 – – – 100.7 Bank loans and overdrafts 0.3 – – – – 0.3 Revolving credit facility 2010 0.6 1.3 5.7 139.8 – 147.4 Finance leases – – 0.2 0.6 – 0.8 70.3 36.4 9.6 214.0 98.2 428.5

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2007 £m £m £m £m £m £m Senior loan notes 2012–2017 – 3.8 3.7 76.7 103.0 187.2 Trade payables 71.4 32.2 – – – 103.6 Bank loans and overdrafts 0.4 – – – – 0.4 Revolving credit facility 2010 0.4 0.8 3.7 96.4 – 101.3 72.2 36.8 7.4 173.1 103.0 392.5 The liquidity profile of the trade payables has been assumed consistent with the Group’s payment terms of 45 days (2006/07: 45 days).

The repayment of the interest and principal on the US Dollar denominated Senior loan notes 2012–2017 has been calculated at the period end rate of £1 = $1.989 (2006/07: £1 = $1.961).

The repayment of interest on the Revolving credit facility 2010 has been calculated on the principal at the period end date and the interest rate at that date.

The maturity profiles of the derivative financial instruments are shown below. The US Dollar exchange rate used is that at the balance sheet date of £1 = $1.989 (2006/07: £1 = $1.961).

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2008 £m £m £m £m £m £m Swap cash flow paid to banks – (2.4) (2.4) (38.1) (78.3) (121.2) Swap cash flow received from banks – 2.3 2.3 34.7 69.6 108.9 – (0.1) (0.1) (3.4) (8.7) (12.3)

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2007 £m £m £m £m £m £m Swap cash flow paid to banks – (2.4) (2.4) (39.2) (82.0) (126.0) Swap cash flow received from banks – 2.3 2.3 36.2 74.1 114.9 – (0.1) (0.1) (3.0) (7.9) (11.1)

Northern Foods plc | Notes to the consolidated financial statements 85 Notes to the consolidated financial statements continued

27 Financial instruments continued

Interest rate risk management The Group is exposed to interest rate risk on borrowings drawn down on the Revolving credit facility 2010. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings. Interest risk management balances debt financing as a tool to improve the returns through leverage in the capital structure with the potential for an increase in interest rates to impact profits negatively. Board policy is to operate with fixed rate borrowings within a range of 20% to 50% of total net borrowings over the medium term (although the Group may operate outside this range in the short term). At the year end 71% of the Group’s net debt is fixed (2006/07: 81%). Board approval is required for the use of any interest rate derivative.

Interest rate sensitivity analysis has been performed on the financial assets and liabilities to illustrate the impact on Group profits and equity if interest rates increased/decreased. This analysis assumes the liabilities outstanding at the period end were outstanding for the whole period. A 50 bps increase or decrease has been used, comprising management’s assessment of reasonably possible changes in interest rates.

If interest rates had been 50 bps higher/lower, then profit before taxation for the 52 weeks ended 29 March 2008 would have decreased/increased by £0.7m (2006/07: £0.4m) and equity at the balance sheet date would have decreased/increased by £0.8m (2006/07: £0.6m). It has been assumed that all other variables remained the same when preparing the interest rate sensitivity analysis.

Foreign currency risk management Foreign currency risk management occurs at a transactional level on revenues and purchases in foreign currencies and at a translational level in relation to the translation of overseas operations. Board policy is for UK businesses to hedge transactional exposures using forward foreign exchange contracts wherever material. Transactional exposure in our Irish business is not hedged, however, there is a partially offsetting translation exposure. The Senior loan notes 2012–2017 have been hedged using cross currency interest rate swaps of similar maturity (subject to a one off right for the counterparty bank to break the swap after seven years at the market value of the swap at that date). The Group monitors foreign exchange rates to assess the potential impact on Group profits if exchange rates move significantly and a summary of hedges in place is reported monthly to the Board.

The Group’s main foreign exchange risk is to the Euro. During the 52 week period to 29 March 2008, the Euro strengthened against GBP by 14%, mainly in the second half of the year, with the closing rate at ¤1.2621 compared to ¤1.4735 at the prior period end. The average rate for the 52 week period to 29 March 2008 was ¤1.42, a reduction of 3.5% versus prior year and the net impact on profit of transaction losses offset by translation gains was a charge of £1.2m.

The overseas subsidiary, whose functional currency is the Euro, has pounds Sterling assets and liabilities at both balance sheet dates. A sensitivity analysis has been performed on these pounds Sterling financial assets and liabilities to sensitivity of a 10% increase/decrease in pounds Sterling to Euro exchange rate. A 10% increase/decrease has been used, comprising management’s assessment of reasonably possible changes in Euro exchange rates. The impact on profit for the period is an increase/decrease of £0.3m (2006/07: increase/decrease of £1.8m) and the impact on equity is an increase/decrease of £0.3m (2006/07 increase/decrease of £1.8m).

A sensitivity analysis has been performed on the financial assets and liabilities to sensitivity of a 10% increase/decrease in the pounds Sterling to US Dollar exchange rate. A 10% increase/decrease has been used, comprising management’s assessment of reasonably possible changes in US Dollar exchange rates. The impact on profit for the period is an increase/decrease of £nil (2006/07: £nil) and on equity is an increase/decrease of £1.1m (2006/07: £0.5m).

86 Notes to the consolidated financial statements | Northern Foods plc 27 Financial instruments continued

Forward foreign exchange contracts Group policy in 2007/08 and prior periods was to hedge individual capital expenditure foreign currency transactions of more than £0.3m. An analysis is shown below:

Average exchange rate Foreign currency Contract value Fair value 2008 2007 2008 2007 2008 2007 2008 2007 Outstanding contracts: m m £m £m £m £m Buy US Dollars: In less than 3 months 1.984 – 0.6 – 0.3 – 0.3 – in 3–6 months 1.980 – 0.1 – 0.1 – 0.1 – Buy Euros: In less than 3 months 1.264 – 1.3 – 1.0 – 1.0 – Changes in the fair value of non-hedging currency derivatives amounting to £nil have been charged to the income statement in the year (2006/07: £nil).

Cross currency interest rate swaps The Company has cross currency interest rate swaps to provide a cash flow hedge against currency and interest rate movements on the US$155.0m Senior loan notes 2012–2017. Swap contracts with a nominal value of US$155.0m (£88.5m) have fixed sterling interest payments at an average rate of 5.5% for periods up to 2017 and have fixed USD interest receipts at an average rate of 5.76%. At the period end, swap contracts had a negative fair value of £4.1m (2006/07: negative £6.5m).

The cash flow hedge forms part of the Group’s risk management strategy which is reviewed and authorised by the Board. The fixed cash flows will be achieved through the use of cross currency interest rate swaps. The actual risk being hedged is the foreign exchange risk.

The Group uses the Dollar offset hypothetical derivative method to test the effectiveness of the hedge. The cumulative change in the fair value of the hypothetical derivative is compared to the cumulative fair value changes of the hedge instrument. The fair values of foreign currency forward contracts are measured using quoted forward foreign exchange rates and yield curves from quoted interest rates matching maturities of the contracts. The maturity profile is shown on page 85.

28 Analysis of net debt References to net debt refer to the total borrowings of the Group, including both short term and long term bank loans, bonds, loan notes and finance leases, after offsetting the cash and cash equivalents of the business and short term investments. Net debt will also include the proportion of the fair value of the currency swaps hedging the balance sheet value of the Group’s Dollar denominated loan notes.

The table below reconciles net debt: 2008 2007 £m £m Cash and cash equivalents 72.9 48.3 Trading investments 0.1 4.9 Bank loans, overdrafts and loan notes due within one year (0.3) (0.4) Finance leases (0.8) – Revolving credit facility 2010 (130.0) (85.0) Senior loan notes 2012-2017 (131.6) (132.6) Currency element of fair value of swaps hedging the Group’s US Dollar denominated loan notes (10.5) (9.4) Net debt (200.2) (174.2)

Net debt Net debt is not a defined term under IFRS and may not therefore be comparable with other similarly titled non-IFRS debt measures reported by other companies. The Group adopts this measure because it is used in calculating the banking covenants. It is also the measure used for internal debt analysis. In addition, the net debt balance provides an indication of the net borrowings on which the Company is required to pay interest.

Northern Foods plc | Notes to the consolidated financial statements 87 Notes to the consolidated financial statements continued

29 Deferred taxation assets/(liabilities)

Retirement Other Accelerated benefit employee tax Revaluation obligation benefits depreciation of buildings Other Total £m £m £m £m £m £m At start of prior period 26.5 1.5 (28.1) (1.1) – (1.2) (Charged)/credited to income statement in prior period (6.3) 0.3 5.2 – – (0.8) Restructuring items (13.8) – 16.1 – – 2.3 Disposal of discontinued operations – – 8.8 – – 8.8 Charged to equity 0.1 0.1 – – – 0.2 Exchange differences – – 0.1 – – 0.1 At start of period 6.5 1.9 2.1 (1.1) – 9.4 (Charged)/credited to income statement (7.8) (0.3) (3.1) – 0.3 (10.9) Restructuring items (1.8) – 2.4 – – 0.6 Acquisition of subsidiaries and businesses – – (0.8) – – (0.8) Charged to equity (12.8) (0.1) – 0.1 – (12.8) Exchange differences 0.1 – (0.3) – – (0.2) At end of period (15.8) 1.5 0.3 (1.0) 0.3 (14.7) The Finance Act 2007 included provision for a reduction in the rate of UK Corporation tax from 30.0% to 28.0% with effect from 1 April 2008. The rate reduction has been substantively enacted and therefore has been used for the deferred tax calculation on UK businesses.

Although amendments to the Industrial Buildings Allowance regime were also proposed in the Finance Act 2007, these amendments were not substantively enacted at 29 March 2008 and accordingly have not been reflected in the Group’s results for the 52 weeks ended 29 March 2008. The directors have estimated that, had these amendments been reflected in the Group’s results for the 52 weeks ended 29 March 2008 in respect of existing industrial buildings held by the Group, the effect would be to increase the deferred tax liability held in the balance sheet by approximately £10.7m.

At the balance sheet date, the aggregate amount of temporary differences associated with unremitted earnings of subsidiaries for which deferred tax liabilities have not been recognised is £17.4m (2006/07: £14.4m). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.

No deferred tax has been provided on capital losses totalling £155.5m at 29 March 2008 (2006/07: £94.0m) as it is uncertain when these losses will be utilised against future taxable gains. The unprovided deferred tax asset on these losses is £43.5m (2006/07: £28.2m).

30 Share capital

2008 2008 2007 2007 number (m) £m number (m) £m Authorised ordinary shares of 25p each 760.0 190.0 760.0 190.0 Allotted, called up and fully paid ordinary shares of 25p each: At start of period 514.2 128.6 514.2 128.6 Issue of equity shares –––– At end of period 514.2 128.6 514.2 128.6 During both the current and prior period, the Company did not issue any shares.

88 Notes to the consolidated financial statements | Northern Foods plc 31 Reserves

Hedging Share Capital Reserve and premium redemption for own ESOT translation Other Retained account reserve shares reserve reserve reserves earnings £m £m £m £m £m £m £m At start of prior period 65.1 23.6 (34.2) (4.4) 2.6 3.3 (32.5) Net loss for period – – – – – – (22.5) Dividends – – – – – – (11.5) Actuarial gains on defined benefit pension schemes net of deferred tax – – – – – – (0.4) Equity settled incentive schemes net of deferred tax – – – 0.2 – 1.0 – Exchange differences – – – – (3.0) – – Decrease in fair value of cash flow hedge – – – – (5.0) – – Transfer to profit or loss on cash flow hedge – – – – 10.3 – – Other movements – – – – – (0.1) 0.1 At start of period 65.1 23.6 (34.2) (4.2) 4.9 4.2 (66.8) Net profit for period – – – – – – 34.5 Dividends – – – – – – (21.0) Actuarial gains on defined benefit pension schemes net of deferred tax – – – – – – 22.5 Purchase of shares for ESOT – – – (4.1) – – – Purchase of treasury shares – – (5.3) – – – – Equity settled incentive schemes net of deferred tax – – – – – 1.0 – Exchange differences – – – – 13.0 – – Increase in fair value of cash flow hedge – – – – 2.4 – – Transfer to profit or loss on cash flow hedge – – – – 1.1 – – Other movements – – – – – – 0.1 At end of period 65.1 23.6 (39.5) (8.3) 21.4 5.2 (30.7)

Share capital The Company has one class of ordinary shares which carry no right to fixed income.

Share premium account The share premium account represents amounts received in excess of the nominal value of shares on issue of new shares.

Capital redemption reserve The capital redemption reserve arose on the repurchase and cancellation of ordinary shares.

Reserve for own shares The reserve for own shares held by the Group represents the shares in the Company held in treasury. The number of shares held in treasury at the balance sheet date was 27,971,846 (2006/07: 21,915,000).

ESOT reserve The ESOT holds shares which are primarily used to satisfy awards made under long term incentive plans. The number of shares held in the ESOT at the balance sheet date was 6,697,363 (2006/07: 2,951,142).

Hedging and translation reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

The translation element of the reserve records exchange differences arising from the translation of the financial statements of foreign subsidiaries.

Other reserves Other reserves primarily represent the equity component of share based payment arrangements and the remaining revaluation reserve from when the Group accounted under UK GAAP.

Retained earnings Retained earnings include net profit or loss for the year.

Northern Foods plc | Notes to the consolidated financial statements 89 Notes to the consolidated financial statements continued

32 Reconciliation of net cash from operating activities

2008 2007 Notes £m £m

Profit from operations – continuing operations 6 43.7 40.1 Profit from operations – discontinued operations 6 – 3.7 43.7 43.8 Adjustments for: Depreciation of property, plant and equipment and amortisation of other intangible assets 16, 17 41.7 57.6 Impairment of property, plant and equipment 17 1.5 5.0 Loss/(profit) on disposal of property, plant and equipment 0.3 (28.1) (Decrease)/increase in provisions 24 (5.4) 7.7 Change in retirement benefit obligation excluding special pension contributions 2.0 4.5 Equity settled incentive scheme 1.1 0.9 Grants and other non-cash movements (0.9) (1.5) Operating cash flow before movement in working capital and special pension contributions 84.0 89.9 Special pension contributions (22.0) (53.0) Operating cash flow before movement in working capital 62.0 36.9 Movement in inventories 1.5 6.8 Movement in trade and other receivables 3.7 8.8 Movement in trade and other payables (16.8) 18.0 Cash from operations 50.4 70.5 Interest paid (14.9) (19.5) Net taxation paid (3.0) (0.4) Net cash from operating activities 32.5 50.6

33 Contingent liabilities A number of subsidiary companies and Northern Foods plc are guarantors in respect of the Senior loan notes 2012–2017, whereby they absolutely and unconditionally guarantee the principal of and interest on the Senior loan notes 2012–2017. Additionally, the same subsidiary companies are cross guarantors in respect of the five year syndicated Revolving credit facility 2010.

A subsidiary undertaking is party to a letter of credit issued by Barclays Bank plc for £4.5m (2006/07: £2.2m) secured against the assets of the subsidiary undertaking.

Northern Foods plc is the guarantor in respect of the obligations of several subsidiary undertakings with Allied Irish Bank. As at 29 March 2008 Northern Foods plc guaranteed £nil (2006/07: £nil).

Various Group undertakings are also parties to litigation, none of which is considered to be material.

34 Operating lease commitments Outstanding commitments for future minimum lease payments under non-cancellable operating leases fall due as follows:

2008 2007 £m £m Within one year 4.8 3.4 In the second to fifth years inclusive 9.4 7.7 After five years 10.5 6.7 24.7 17.8 The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The Group also leases plant and machinery and vehicles under non-cancellable operating lease agreements.

90 Notes to the consolidated financial statements | Northern Foods plc 35 Finance leases The Group’s finance lease obligations are shown below:

2008 2007 £m £m Within one year 0.2 – In the second to fifth years inclusive 0.6 – 0.8 – The fair value of the Group’s finance lease obligations approximates to their carrying value.

36 Equity settled share based payments Equity settled share option plan The Group has applied the requirements of IFRS 2 ‘Share-based payments’. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 January 2005.

The Group operates executive share option schemes for executive directors and senior management within the Group in addition to issuing an HM Revenue & Customs Savings-related share option scheme for all employees. Options are granted with a fixed exercise price. Options lapse when an employee leaves the Group subject to certain ‘good leaver’ provisions.

The fair value per option granted and the assumptions used in the calculations are as follows:

Grant of share Grant of share Grant of share Executive share options options options options Date of grant 19 Nov 2001 2 Dec 2002 19 Dec 2003 Number of instruments granted 3,751,500 3,883,500 3,375,195 Exercise price (pence) 157.2 168.1 137.0 Share price at date of grant (pence) 163.0 172.0 135.0 Contractual life (years) 10 10 10 Performance conditions Note A Note A Note A Settlement Equity Equity Equity Expected volatility 42% 38% 37% Expected option life at grant date (years) 5 5 5 Risk free interest rate 4.66% 4.73% 4.78% Expected dividend (dividend yield) 5.22% 5.15% 6.79% Fair value per granted instrument determined at the grant date (pence) 43.0 42.3 27.5 Valuation model Black-Scholes Black-Scholes Black-Scholes

Grant of share Grant of share Grant of share Grant of share Executive share options options options options options Date of grant 29 March 2004 17 Dec 2004 14 Dec 2005 4 July 2006 Number of instruments granted 442,950 2,313,123 2,059,231 4,218,455 Exercise price (pence) 159.2 169.7 153.3 79.7 Share price at date of grant (pence) 159.0 166.5 153.5 84.0 Contractual life (years) 10 10 10 10 Performance conditions Note B Note C Note C Note C Settlement Equity Equity Equity Equity Expected volatility 35% 33% 30% 30% Expected option life at grant date (years) 5555 Risk free interest rate 4.74% 4.44% 4.30% 4.70% Expected dividend (dividend yield) 5.84% 5.25% 6.00% 5.40% Fair value per granted instrument determined at the grant date (pence) 33.9 36.0 26.4 15.3 Valuation model Black-Scholes Black-Scholes Black-Scholes Black-Scholes

Northern Foods plc | Notes to the consolidated financial statements 91 Notes to the consolidated financial statements continued

36 Equity settled share based payments continued

Long term Long term Share bonus Share bonus Deferred share Other arrangements incentive plan incentive plan plan plan bonus plan Date of grant 12 Dec 2005 4 July 2006 4 July 2006 13 June 2007 13 July 2006 Number of instruments granted 474,442 1,013,523 408,809 357,028 4,928,287 Exercise price (pence) nil nil nil nil nil Share price at date of grant (pence) 153.7 84.0 84.0 123.5 81.8 Contractual life (years) 5 5 3 3 3 Performance conditions Note D Note D Note E Note E Note F Settlement Equity Equity Equity Equity Equity Expected volatility 30.0% 30.0% 30.0% 25.0% 30.0% Expected life at grant date (years) 33333 Risk free interest rate 4.30% 4.70% 4.70% 5.77% 4.70% Expected dividend (dividend yield) 6.00% 5.40% 5.40% 4.78% 5.40% Fair value per granted instrument determined at the grant date (pence) 128.1 61.1 61.0 88.9 40.9 Valuation model Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes

Deferred Matching Performance Performance share bonus Save as you Save as you Other arrangements share award share plan share plan plan earn earn Date of grant 4 June 2007 29 Aug 2007 5 Dec 2007 26 Sept 2007 20 Dec 2007 20 Dec 2007 Number of instruments granted 1,040,460 2,441,010 3,350,000 194,586 4,607,258 5,390,539 Exercise price (pence) nil nil nil nil 76.0 76.0 Share price at date of grant (pence) 129.7 98.75 87.0 101.7 90.0 90.0 Contractual life (years) 3 and 4 3 3 2 3.5 5.5 Performance conditions Note H Note G Note G Note F Note I Note I Settlement Equity Equity Equity Equity Equity Equity Expected volatility 25.2% 27.2% 30.9% 30.0% 27.5% 27.4% Expected life at grant date (years) 3 and 4 3 3 2 3.25 5.25 Risk free interest rate 5.77% 5.26% 4.41% 5.11% 4.45% 4.56% Expected dividend (dividend yield) 0 0 0 0 4.78% 4.78% Fair value per granted instrument determined at the grant date (pence) 89.14 58.90 49.17 101.70 20.11 21.53 Valuation model Monte Carlo Monte Carlo Monte Carlo Black-Scholes Monte Carlo Monte Carlo Expected volatility was determined by calculating the historical volatility of the Group’s share price over a period commensurate with the expected term of the relevant award. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

92 Notes to the consolidated financial statements | Northern Foods plc 36 Equity settled share based payments continued

Performance conditions – notes A Performance condition measured by reference to earnings per share. The target requires that the real growth in earnings per share over the three year performance period is greater than 3% per annum compound. The performance condition allows for retesting after years four and five against the full period from the grant. B No performance condition attached. C Performance condition measured by reference to earnings per share. The target requires that the real growth in earnings per share over the three year performance period is greater than 3% per annum compound. The performance condition does not allow for retesting. D The LTIP has two performance conditions. TSR: The total number of shares that will vest will be up to 50% dependent on how the TSR in relation to an ordinary share of Northern Foods over the relevant performance period compares with TSR in relation to the ordinary shares of the companies in the comparator group in the same period. Where the TSR of Northern Foods over the performance period places it between the median and the upper quartile the number of shares will be calculated on a straight line basis with 20% of the shares being received when Northern Foods is placed above median, and 50% being received where Northern Foods is placed in the upper quartile. Where Northern Foods growth in TSR places it below median, no shares will vest in relation to this element of the award. Return on invested capital (ROIC): 50% of the total award vests on achievement of a minimum growth in ROIC over the performance period. Growth in ROIC over the period has to be 100 or more basis points. The number of shares that each participant receives is calculated on a straight line basis with 7.5% of the shares being received if Northern Foods achieves growth of 100 basis points and maximum of 50% being received if the Company achieves growth of 200 basis points. E Under the Share bonus plan, 80% of annual bonus opportunity is linked to specific financial targets, including targets for profit from operations and profit before tax, both measured before restructuring items. The other 20% is directly related to individual performance against personal performance contracts set at the start of the financial year, which contain six individual and business performance targets which are considered appropriately stretching. F The Deferred share bonus plan (DSBP) was introduced in June 2006 so as to incentivise and retain the key talent necessary to drive the specific performance improvements required. Performance was assessed against key milestones over the 12 month period to 31 March 2007. These four key milestones related to improving free cash flow and reducing net debt as at 1 April 2006 by £125m, reducing the run rate for central costs by £12m per annum compared to 2005/06 and the successful resolution of the pension deficit. This DSBP provided approximately 40 senior executives with an award of shares with a value up to 100% of base salary, at the prevailing market price of 81.75 pence per share on 13 July 2006. These shares will be satisfied by the transfer of existing shares held in trust after the vesting date in July 2009. G The Performance share plan was introduced to incentivise the Group’s senior executives. There are two performance conditions which will align the interests of senior executives with those of shareholders. TSR: The total number of shares that will vest will be up to 50% dependent on TSR growth over the performance period. TSR is required to grow by 30% from the effective base of £1.24 for 7.5% of the shares to vest up to a maximum of 50% being received if the TSR grows by 80% or more. ROIC: 50% of the total award vests on achievement of a minimum growth in ROIC over the performance period. The number of shares that each participant receives is calculated on a straight line basis with 7.5% of the shares being received if the Group achieves growth of 100 basis points and maximum of 50% being received if the Group achieves growth of 200 basis points or more. H The award of matching shares to S Barden was made as part of his recruitment as chief executive. The performance conditions attached to the matching share award are the same as those for the Performance share plan (see G) save that threshold vesting of the TSR element will not occur unless the Group achieves growth in TSR of 35% over the relevant period. Half the matching award will vest on the third anniversary of the grant with the other half vesting on the fourth anniversary of grant to the extent that the performance conditions are met and providing he retains the purchased shares and remains employed by the Group. I The Group introduced an HM Revenue & Customs approved savings-related share option plan for all employees. There are no performance conditions attached to these options.

Northern Foods plc | Notes to the consolidated financial statements 93 Notes to the consolidated financial statements continued

36 Equity settled share based payments continued

Details of movements in share options during the period are as follows: Weighted Weighted average average Options exercise price Options exercise price 2008 2008 2007 2007 number £ number £ Outstanding at start of period 8,533,451 1.23 8,806,337 1.58 Granted during period ––4,218,455 0.80 Forfeited during period (5,410,637) 1.34 (3,453,602) 1.89 Expired during period (1,201,949) 1.46 (1,037,739) 1.57 Outstanding at end of period 1,920,865 0.80 8,533,451 1.23 Exercisable at end of period 1,920,865 0.80 8,533,451 1.23 Forfeiture arises when the employee leaves within the vesting period. Expiration of shares occurs when the last date for exercise has passed and the option has not been exercised.

There were no share options exercised during the period (2006/07: £nil). The options outstanding had a weighted average remaining contractual life of 8.27 years (2006/07: 8.22 years). The weighted average fair value of the share options outstanding is £0.15 (2006/07: £0.25) per share. The exercise price of options outstanding at the period end was £0.80 (2006/07: range of £0.80 to £1.70).

The Group recognised total expenses of £1.1m (2006/07: £0.9m) in the period relating to equity settled share based payment transactions.

37 Retirement benefit obligations Defined benefit schemes The Group operates a number of defined benefit schemes for qualifying employees, principally the Northern Foods Pension Scheme (‘the Scheme’) and Northern Foods Pension Builder (‘Pension Builder’) in the United Kingdom and the Green Isle Foods Group Retirement and Death Benefit Plan (‘the Plan’) in the Republic of Ireland. Under the Scheme, Pension Builder and the Plan, employees are entitled to retirement benefits based on pay and service. The Scheme, Pension Builder and the Plan are funded schemes whilst the Post retirement medical benefit scheme is unfunded. The Scheme and the Plan are final salary schemes. The assets of the Scheme, Pension Builder and the Plan are held in trustee administered funds separate from the finances of the Group.

On 22 March 2005 the Company announced the closure of the Scheme to new entrants and withdrew its agreement to allow early retirement on an enhanced basis. Pension Builder was introduced on 1 May 2005 and is available to all UK based employees. Pension Builder is a defined benefit scheme based on the career average principle.

The most recent valuation of the Scheme for the purpose of the financial statements and the present value of defined benefit obligations was carried out at 29 March 2008 by an independent qualified actuary, PricewaterhouseCoopers LLP. The present value of the defined benefit obligation/asset, the related current service cost and past service cost was measured using the Projected unit credit method. The principal assumptions used for the purpose of the actuarial valuation of the Scheme and Pension Builder are detailed below. Valuation date 2008 2007 Rate of increase in salaries 3.9% 4.0% Rate of increase to pensions in payment 3.1% 2.9% Rate of increase to deferred pensions 3.4% 3.0% Discount rate 6.4% 5.3% Inflation assumption 3.4% 3.0%

94 Notes to the consolidated financial statements | Northern Foods plc 37 Retirement benefit obligations continued

Sensitivities The mortality assumptions used are based on mortality experience of the Scheme and anticipated mortality experience. The assumptions are below the national average reflecting the socio-economic make up of the Scheme membership. For the valuation at 29 March 2008, the Company has adopted the medium cohort principle for the Scheme and Pension Builder (2006/07: short cohort). If life expectancy is increased or decreased by one year, liabilities are estimated to increase or decrease by £15m respectively. The impact of a 0.1% increase or decrease in the discount rate would decrease or increase liabilities by £13m respectively.

The life expectancy in years for a member aged 65 is as follows: Valuation date 2008 2007 years years Current pensioner – male 18.7 17.7 – female 21.0 19.8 Future pensioner – male 20.0 18.4 – female 22.2 20.5

Post retirement medical benefit scheme Until 31 March 1999, the Group operated a post retirement medical benefit scheme. The method of accounting, assumptions and the frequency of valuations are similar to those used for defined benefit pension schemes detailed on page 94. The main actuarial assumptions are the underlying medical cost inflation of 5.4% per annum (2006/07: 5.0%) and the discount rate of 6.4% per annum (2006/07: 5.3%).

If the assumed rate of underlying medical cost inflation increased or decreased by 1.0% per annum then the valuation of the liabilities is estimated to increase or decrease by approximately £0.4m (2006/07: £0.4m) respectively.

Amounts recognised in the income statement in respect of the Group’s defined benefit schemes and post employment medical benefit scheme are as follows:

Defined benefit Post retirement Total retirement schemes medical benefit scheme benefit schemes 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m Current service cost 9.7 18.6 – – 9.7 18.6 Past service cost – 0.1 – – – 0.1 Interest on obligation 42.3 39.7 0.2 0.2 42.5 39.9 Expected return on scheme assets (58.2) (52.4) – – (58.2) (52.4) (6.2) 6.0 0.2 0.2 (6.0) 6.2 Curtailment gain due to business disposals* – (21.1) – – – (21.1) (6.2) (15.1) 0.2 0.2 (6.0) (14.9) * included within restructuring items

The service cost for the period has been included within cost of sales £8.4m (2006/07: £15.6m), distribution costs £0.5m (2006/07: £1.5m) and administrative expenses £0.8m (2006/07: £1.5m). The interest on obligation and expected return on scheme assets is included within financing. Actuarial gains and losses have been reported in the Consolidated statement of recognised income and expense.

In the prior period a curtailment gain of £2.1m arose on the sale of the trade and assets of NFT Distribution and a gain of £19.0m arose on the disposal of the trade and assets of the Speciality Bread, chilled Pastry, Cakes and Flour Milling businesses. The curtailment gains were included in the profit or loss on disposal of the businesses. A curtailment gain reflects reduced liabilities of the Scheme due to removing the salary link when formerly active members of the Scheme become deferred members.

Northern Foods plc | Notes to the consolidated financial statements 95 Notes to the consolidated financial statements continued

37 Retirement benefit obligations continued

Special pension contributions of £22.0m were made to the Scheme during 2007/08 (2006/07: £53.0m). This completes the programme of special pension contributions made by the Company following the disposals in 2006/07.

The amounts recognised in the Consolidated balance sheet in respect of the Group’s defined benefit schemes and post retirement medical benefit scheme are as follows:

Defined benefit Post retirement Total retirement schemes medical benefit scheme benefit schemes 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m Present value of obligations (718.2) (805.4) (4.4) (4.7) (722.6) (810.1) Fair value of scheme assets 784.2 801.5 – – 784.2 801.5 66.0 (3.9) (4.4) (4.7) 61.6 (8.6)

The following table shows the split of the Group’s defined benefit schemes and post retirement medical benefit scheme between retirement benefit assets and retirement benefit obligations:

Defined benefit Post retirement Total retirement schemes medical benefit scheme benefit schemes 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m Retirement benefit assets 71.5 – – – 71.5 – Retirement benefit obligations (5.5) (3.9) (4.4) (4.7) (9.9) (8.6) 66.0 (3.9) (4.4) (4.7) 61.6 (8.6) The table above does not include the related deferred tax assets and liabilities.

Movements in the present value of obligations are as follows:

Defined benefit Post retirement Total retirement schemes medical benefit scheme benefit schemes 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m At start of period 805.4 813.0 4.7 5.0 810.1 818.0 Current service cost 9.7 18.6 – – 9.7 18.6 Past service cost – 0.1 – – – 0.1 Interest on obligation 42.3 39.7 0.2 0.2 42.5 39.9 Curtailment gain due to business disposals – (21.1) – – – (21.1) Actuarial gains (109.2) (14.7) (0.3) (0.3) (109.5) (15.0) Contributions from scheme members 5.1 9.2 – – 5.1 9.2 Benefits paid (37.5) (39.1) (0.2) (0.2) (37.7) (39.3) Exchange differences 2.4 (0.3) – – 2.4 (0.3) At end of period 718.2 805.4 4.4 4.7 722.6 810.1

Movements in the fair value of scheme assets are as follows:

Defined benefit schemes 2008 2007 £m £m At start of period 801.5 727.8 Expected return on scheme assets 58.2 52.4 Actuarial losses (74.2) (15.5) Contributions from sponsoring companies 29.5 67.0 Contributions from scheme members 5.1 9.2 Benefits paid (37.5) (39.1) Exchange differences 1.6 (0.3) At end of period 784.2 801.5

96 Notes to the consolidated financial statements | Northern Foods plc 37 Retirement benefit obligations continued

The fair value of scheme assets at the balance sheet date and the expected rate of return are analysed as follows:

2008 2007 2008 2007 £m £m % % Defined benefit schemes Equity 498.0 585.9 7.9 8.05 Bonds 284.0 186.5 6.4 5.3 Other 2.2 29.1 5.3 5.3 784.2 801.5 The expected return on individual classes of pension scheme assets are determined by reference to external indices and after taking advice from external advisers. The overall expected rate of return is the weighted average of the returns above, allowing for anticipated balances held in each asset class according to the Scheme’s investment strategy. The actual return on scheme assets was a loss of (£16.0m) (2006/07: gain £36.9m).

Work is currently at an advanced stage which is aimed at reducing future funding volatility of the Scheme. As part of this, the Company and trustee have agreed a revised investment strategy for the Scheme to be implemented principally over the course of 2008/09. Paragraph 106 of IAS19 requires the expected return on plan assets to be based on market expectations of returns over the entire life of the related obligation and as such the revised expected returns will be reflected from 30 March 2008 onwards. The weighted average expected return of the revised investment strategy is 7.1% and this will be used to calculate the expected return on assets for 2008/09.

The history of experience adjustments is as follows: 2008 2007 2006 2005 £m £m £m £m Defined benefit schemes Present value of obligations (718.2) (805.4) (813.0) (729.3) Fair value of scheme assets 784.2 801.5 727.8 562.9 Deficit in the scheme 66.0 (3.9) (85.2) (166.4) Experience adjustments on scheme obligations: Amount loss/(gain) – –30.2(0.7) Percentage of scheme obligations – –3.7%0.1% Experience adjustments on scheme assets: Amount (loss)/gain (74.2) (15.5) 99.6 14.2 Percentage of scheme obligations 9.5% 1.9% 13.7% 2.5% The cumulative effect of the experience adjustments on scheme liabilities as shown in the Consolidated statement of recognised income and expense is a gain of £29.5m (2006/07: gain of £29.5m).

The cumulative effect of the experience adjustments on scheme assets as shown in the Consolidated statement of recognised income and expense is a gain of £9.8m.

The Group expects to make ongoing contributions of approximately £8m to its defined benefit schemes in 2008/09.

Northern Foods plc | Notes to the consolidated financial statements 97 Notes to the consolidated financial statements continued

38 Events after the balance sheet date On 13 May 2008 the Group announced that following negotiations with a customer, and by mutual agreement, the Group has resigned supply of most of the product lines produced at the Fenland Foods ready meals facility, amounting to approximately £45m of annual revenue. The site operated at break-even profitability in the 52 weeks ended 29 March 2008. As a result of this the Group is in consultation with employees about proposals to mothball the site which at 29 March 2008 had a net book value of £24m. The directors are currently unable to make a reliable estimate of the financial impact of mothballing the site. This is a non-adjusting post balance sheet event.

The Group has also proposed a final dividend outlined in note 13 which is a non-adjusting post balance sheet event.

There have been no other post balance sheet events.

39 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 ‘Related party disclosures’. Further information about the remuneration of individual directors is provided in the audited section of the Directors’ remuneration report.

2008 2007 £m £m Salaries and other short term employee benefits 1.8 1.7 Post employment benefits – 0.2 Compensation for loss of office 0.2 0.3 Share based payments 0.4 0.3 2.4 2.5

98 Notes to the consolidated financial statements | Northern Foods plc Independent auditors’ report – Company financial statements

To the members of Northern Foods plc We read the other information contained in the Annual report We have audited the parent company financial statements of as described in the contents section and consider whether it is Northern Foods plc for the 52 weeks ended 29 March 2008 consistent with the audited parent company financial statements. which comprise the Company balance sheet, the Company We consider the implications for our report if we become aware cash flow statement, the Company statement of recognised of any apparent misstatements or material inconsistencies with income and expense, the Company statement of changes in the parent company financial statements. Our responsibilities do equity and the related notes 40 to 59. These parent company not extend to any further information outside the Annual report. financial statements have been prepared under the accounting policies set out therein. Basis of audit opinion We conducted our audit in accordance with International We have reported separately on the Group financial statements Standards on Auditing (UK and Ireland) issued by the Auditing of Northern Foods plc for the 52 weeks ended 29 March 2008 Practices Board. An audit includes examination, on a test basis, and on the information in the Directors’ remuneration report that of evidence relevant to the amounts and disclosures in the is described as having been audited. parent company financial statements. It also includes an assessment of the significant estimates and judgments made This report is made solely to the Company’s members, as a by the directors in the preparation of the parent company financial body, in accordance with section 235 of the Companies Act 1985. statements, and of whether the accounting policies are appropriate Our audit work has been undertaken so that we might state to to the Company’s circumstances, consistently applied and the Company’s members those matters we are required to state adequately disclosed. to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume We planned and performed our audit so as to obtain all the responsibility to anyone other than the Company and the information and explanations which we considered necessary Company’s members as a body, for our audit work, for this in order to provide us with sufficient evidence to give reasonable report, or for the opinions we have formed. assurance that the parent company financial statements are free from material misstatement, whether caused by fraud or other Respective responsibilities of directors and auditors irregularity or error. In forming our opinion we also evaluated the The directors’ responsibilities for preparing the Annual report overall adequacy of the presentation of information in the parent and the parent company financial statements in accordance with company financial statements. applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the Opinion Statement of directors’ responsibilities. In our opinion: > the parent company financial statements give a true and fair Our responsibility is to audit the parent company financial view, in accordance with IFRS as adopted by the European statements in accordance with relevant legal and regulatory Union, of the state of the Company’s affairs as at 29 March 2008 requirements and International Standards on Auditing (UK and of its profit for the 52 weeks then ended; and Ireland). > the parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and We report to you our opinion as to whether the parent company > the information given in the Directors’ report is consistent financial statements give a true and fair view and whether the with the parent company financial statements. parent company financial statements have been properly prepared in accordance with the Companies Act 1985. We also Deloitte & Touche LLP report to you whether in our opinion the information given in the Chartered Accountants and Registered Auditors Directors’ report is consistent with the parent company financial Leeds statements. The information given in the Directors’ report includes 27 May 2008 that specific information presented in the Performance review and the Chief executive’s report that is cross referred from the Performance review section of the Directors’ report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

Northern Foods plc | Independent auditors’ report – Company financial statements 99 Company balance sheet as at 29 March 2008

Restated (Note 45) 29 March 31 March 2008 2007 Notes £m £m Non-current assets Property, plant and equipment 44 88.2 98.1 Investments in subsidiaries 45 1,080.3 1,061.3 Retirement benefit assets 58 71.5 – Deferred taxation assets 52 – 5.6 1,240.0 1,165.0 Current assets Trade and other receivables 46 349.2 647.8 Cash and cash equivalents 47 58.3 26.4 407.5 674.2 Total assets 1,647.5 1,839.2 Current liabilities Trade and other payables 48 (109.7) (704.6) Provisions 49 (2.0) (4.0) Current taxation liabilities (18.4) (18.2) Bank loans and overdrafts 50 (0.3) (0.3) (130.4) (727.1) Non-current liabilities Revolving credit facility 2010 50 (130.0) (85.0) Senior loan notes 2012–2017 50 (131.6) (132.6) Derivative financial instruments 51 (4.1) (6.5) Long term loans due to subsidiary undertakings (499.1) (248.3) Retirement benefit obligations 58 (4.4) (4.5) Deferred taxation liabilities 52 (16.2) – (785.4) (476.9) Total liabilities (915.8) (1,204.0) Net assets 731.7 635.2

Equity Share capital 53 128.6 128.6 Share premium account 54 65.1 65.1 Capital redemption reserve 54 23.6 23.6 Reserve for own shares 54 (39.5) (34.2) Employee share ownership trust reserve 54 (8.3) (4.2) Hedging reserve 54 6.4 2.9 Other reserves 54 4.3 3.3 Retained earnings 54 551.5 450.1 Total equity 731.7 635.2 The financial statements were approved by the Board of directors and authorised for issue on 27 May 2008. They were signed on its behalf by:

S Barden J K Maiden Director Director 27 May 2008 27 May 2008

100 Company balance sheet | Northern Foods plc Company cash flow statement for the 52 weeks ended 29 March 2008

2008 2007 Notes £m £m

Net cash from operating activities 55 12.7 116.7 Investing activities: Interest received 0.6 0.6 Purchase of property, plant and equipment (0.1) (4.0) Proceeds of sale of property, plant and equipment 4.1 3.4 Disposal of discontinued operations (net of disposal costs, working capital and debt adjusters) – 125.0 Net cash from investing activities 4.6 125.0 Financing activities: Dividends paid 13 (21.0) (11.5) Increase/(decrease) in amounts drawn on Revolving credit facility 2010 25 45.0 (185.0) Repayment of borrowings – (0.2) Purchase of treasury shares 54 (5.3) – Purchase of shares for Employee share ownership trust 54 (4.1) – Net cash from/(used in) financing activities 14.6 (196.7) Net increase in cash and cash equivalents 31.9 45.0 Cash and cash equivalents at start of period 26.1 (18.9) Cash and cash equivalents at end of period 58.0 26.1

Cash and cash equivalents comprise: Cash and cash equivalents 58.3 26.4 Bank overdrafts (0.3) (0.3) 58.0 26.1

Company statement of recognised income and expense for the 52 weeks ended 29 March 2008 2008 2007 Notes £m £m

Actuarial gains/(losses) on defined benefit pension schemes 54, 58 35.5 (0.4) Taxation on actuarial gains/(losses) taken directly to equity 52, 54 (12.8) 0.1 Fair value movement on cash flow hedge 54 2.4 (5.0) Transfer to profit or loss on cash flow hedge 54 1.1 10.3 Net income recognised directly in equity 26.2 5.0 Profit for the period 99.6 83.3 Total recognised income and expense for the period 125.8 88.3 Total recognised income and expense for the period is all attributable to the equity holders. Company statement of changes in equity for the 52 weeks ended 29 March 2008 2008 2007 Notes £m £m Total recognised income and expense for the period 125.8 88.3 Equity dividends 13, 54 (21.0) (11.5) Purchase of shares for Employee share ownership trust 54 (4.1) – Purchase of treasury shares 54 (5.3) – Equity settled incentive schemes 54 1.1 0.9 Deferred taxation on equity settled incentive schemes taken directly to equity 52, 54 (0.1) 0.1 Deferred taxation on revaluation reserve 52 0.1 – Movements in total equity in the period 96.5 77.8 Total equity at start of the period 635.2 557.4 Total equity at end of the period 731.7 635.2

Northern Foods plc | Company cash flow statement, Company statement of recognised income and expense, 101 Company statement of changes in equity Notes to the Company financial statements

40 Significant accounting policies The separate financial statements of the Company are presented as required by the Companies Act 1985. As permitted by that act, the separate financial statements have been prepared in accordance with IFRS.

The principal accounting policies adopted are the same as those detailed in note 3 of the Consolidated financial statements, except as set out below:

Investments in subsidiaries are stated at cost less any provision for impairment.

41 Profit for the period Of the profit for the period, a profit of £99.6m (2006/07: £83.3m) has been dealt with in the accounts of the parent company. In accordance with the exemptions allowed by section 230(3) of the Companies Act 1985, the parent company has not presented its own income statement.

42 Profit from operations A detailed analysis of auditors’ remuneration is provided below:

2008 2007 Deloitte & Deloitte & Touche LLP Touche LLP £’000 £’000 Audit services Fees payable to the Company’s auditors for the audit of the Group’s Annual report 80 80 80 80 Other services Other services supplied pursuant to such legislation – Half year review 37 30 Other services supplied pursuant to legislation – Reporting accountants – 265 Other services – Accounting advice 47 – Other 20 2 104 297 Tax services Advisory services 119 153 Compliance 143 130 262 283 Total 446 660 Deloitte & Touche LLP were appointed sole Group auditors for both the current and prior period.

43 Staff costs The average monthly number of employees (including executive directors) was:

2008 2007 number number Administration 284 397

Aggregate remuneration comprised:

2008 2007 £m £m Wages and salaries 9.0 13.5 Social security costs 1.1 1.4 Other pension costs 0.8 1.1 10.9 16.0

102 Notes to the company financial statements | Northern Foods plc 44 Property, plant and equipment Plant, Freehold Leasehold fixtures and property property vehicles Total £m £m £m £m Cost or valuation: At start of prior period 204.8 88.6 28.0 321.4 Additions 0.4 – 1.3 1.7 Disposals – (0.5) (0.6) (1.1) Restructuring disposals (87.2) (71.0) (3.4) (161.6) Reclassifications 1.5 (1.0) (0.5) – Group transfers (6.4) – (0.2) (6.6) At start of period 113.1 16.1 24.6 153.8 Additions ––0.10.1 Disposals (5.1) – – (5.1) Reclassifications 0.1 – (0.1) – Group transfers ––0.10.1 At end of period 108.1 16.1 24.7 148.9 Accumulated depreciation and impairment losses: At start of prior period 58.0 25.4 15.7 99.1 Charge for period 3.9 1.8 1.7 7.4 Restructuring provision for impairment 2.0 – – 2.0 Disposals – (0.3) (0.5) (0.8) Restructuring disposals (26.9) (22.7) (1.6) (51.2) Group transfers (0.8) – – (0.8) Reclassifications 0.9 (0.5) (0.4) – At start of period 37.1 3.7 14.9 55.7 Charge for period 2.1 0.3 2.0 4.4 Restructuring provision for impairment – – 1.3 1.3 Disposals (0.7) – – (0.7) At end of period 38.5 4.0 18.2 60.7 Carrying amount: At end of period 69.6 12.1 6.5 88.2 At start of period 76.0 12.4 9.7 98.1 At the period end, the Company had entered into contractual commitments for the purchase of property, plant and equipment amounting to £nil (2006/07: £nil).

The recoverable amounts of the property, plant and equipment are determined from value in use calculations unless management is committed to closing or selling the business. If the value of the business is to be recovered through sale or closure then the recoverable amount is the fair value less costs to sell. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using the Group’s weighted average cost of capital.

The Company prepares cash flow forecasts derived from the most recent financial plans approved by management for the next five years and extrapolates these cash flows in perpetuity using growth assumptions relevant for the business sector. The growth rate does not exceed 3.0% (2006/07: does not exceed 3.0%) and is not considered to be higher than the average long term industry growth rate.

The rate used to discount the forecast cash flows for all CGUs is the Group’s pre-tax weighted average cost of capital of 11.1% (2006/07: 10.0%).

Northern Foods plc | Notes to the company financial statements 103 Notes to the Company financial statements continued

45 Investments in subsidiaries The Company’s principal subsidiaries at the period end are as follows:

Directly owned: Convenience Foods Limited Northern Foods Grocery Group Limited

Indirectly owned: F W Farnsworth Limited Green Isle Foods Limited Cavaghan & Gray Group Limited Cavaghan & Gray Limited Solway Foods Limited Ethnic Cuisine Limited

The above companies are all wholly owned (ordinary shares), and their principal activities are food manufacture. All are incorporated in the UK except for Green Isle Foods Limited, which is incorporated in the Republic of Ireland.

Restated 2008 2007 Subsidiary undertakings: £m £m At start of period 889.5 947.7 Cost of shares acquired – 8.6 Impairment of investments (17.0) (8.7) Disposals – (58.1) At end of period 872.5 889.5 Long term loans due from subsidiary undertakings 207.8 171.8 1,080.3 1,061.3 The investments were impaired during 2007/08 following a corporate simplification exercise to liquidate dormant companies.

The shares acquired in 2006/07 related to the recapitalisation of Fletchers Bakeries Limited. The investments impaired were those in subsidiary undertakings which disposed of trade and assets during 2006/07. The disposal in 2006/07 was the disposal of Fletchers Bakeries Limited.

The investments in subsidiary undertakings have been restated for a change in presentation of the long term loans due to subsidiary undertakings. These were previously included within investments in subsidiary undertakings and are now included within non-current liabilities. This restatement has no impact on profit for the period or net assets in either period. The directors believe this provides a better presentation of the balances.

46 Trade and other receivables 2008 2007 £m £m Receivables from subsidiary undertakings 344.0 636.7 Other receivables 4.2 9.7 Other prepayments 1.0 1.4 349.2 647.8 The directors consider that the carrying amount of trade and other receivables approximates to their fair value. The directors consider that the maximum credit risk at the balance sheet date is equivalent to the carrying value of trade and other receivables.

47 Cash and cash equivalents Cash and cash equivalents comprise cash held by the Company, short term bank deposits with an original maturity of three months or less and bank overdrafts. The directors consider that the carrying amount of these assets and liabilities approximates to their fair value.

104 Notes to the company financial statements | Northern Foods plc 48 Trade and other payables 2008 2007 £m £m Trade payables 3.0 6.3 Payables due to subsidiary undertakings 86.8 676.6 Accruals and deferred income 3.3 7. 3 Other payables including social security 16.6 14.4 109.7 704.6 Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade payables is 33 days (2006/07: 33 days). The Company has financial risk management policies in place to ensure that all payables are paid within the internal credit timeframe. The directors consider that the carrying amount of trade payables approximates to their fair value.

49 Provisions

£m At start of period 4.0 Restructuring provisions – charge for period 1.1 Utilised in period (3.1) At end of period 2.0 All of the £2.0m provisions are included within current liabilities. The provision is expected to be utilised in full within the next 52 week period.

The restructuring provisions made during the period of £1.1m are in respect of central cost reduction initiatives.

50 Financial liabilities – borrowings

Current 2008 2007 £m £m Bank loans and overdrafts due within one year or on demand 0.3 0.3 0.3 0.3

Non-current 2008 2007 £m £m Revolving credit facility 2010 130.0 85.0 Senior loan notes 2012–2017 131.6 132.6 261.6 217.6

Borrowings are repayable as follows: 2008 2007 £m £m Within one year or on demand 0.3 0.3 In the second year – – In the third to fifth years inclusive 175.9 85.0 After five years 85.7 132.6 261.9 217.9

Northern Foods plc | Notes to the company financial statements 105 Notes to the Company financial statements continued

50 Financial liabilities – borrowings continued

Bank loans and overdrafts are analysed by currency as follows:

Sterling US Dollars Total 2008 £m £m £m Bank loans and overdrafts due within one year or on demand 0.3 – 0.3 Revolving credit facility 2010 130.0 – 130.0 Senior loan notes 2012–2017 54.3 77.3 131.6 184.6 77.3 261.9

2007 Bank loans and overdrafts due within one year or on demand 0.3 – 0.3 Revolving credit facility 2010 85.0 – 85.0 Senior loan notes 2012–2017 54.3 78.3 132.6 139.6 78.3 217.9 For further detail regarding the bank loans see notes 25 and 26 within the Group disclosure notes.

51 Financial instruments Categories of financial instruments Carrying value Fair value 2008 2007 2008 2007 £m £m £m £m Financial assets Loans and receivables at amortised cost: Long term loans due from subsidiary undertakings 207.8 171.8 207.8 171.8 Receivables from subsidiary undertakings 344.0 636.7 344.0 636.7 Cash and cash equivalents 58.3 26.4 58.3 26.4 610.1 834.9 610.1 834.9 Financial liabilities Financial liability held at amortised cost in a cash flow hedging relationship: Senior loan notes 2012–2017 (131.6) (132.6) (139.0) (132.0) Derivatives that are designated and effective as hedging instruments carried at fair value: Derivative financial instruments (cross currency interest rate swaps) (4.1) (6.5) (4.1) (6.5) Other financial liabilities at amortised cost: Trade payables (3.0) (6.3) (3.0) (6.3) Long term loans due to subsidiary undertakings (499.1) (248.3) (499.1) (248.3) Payables due to subsidiary undertakings (86.8) (676.6) (86.8) (676.6) Bank loans and overdrafts (0.3) (0.3) (0.3) (0.3) Revolving credit facility 2010 (130.0) (85.0) (130.0) (85.0) (854.9)(1,155.6)(862.3) (1,155.0) The intercompany receivable balance has been reviewed for recoverability at the balance sheet date. The fair value of the financial assets approximates to their carrying value.

The fair value of the financial liability held at amortised cost in a cash flow hedging relationship has been calculated by discounting expected future cash flows at prevailing interest rates and by applying period end exchange rates. The disclosure of the fair value is shown in note 25.

The directors use their judgement in selecting an appropriate valuation technique for derivatives that are designated and effective as hedging instruments carried at fair value, but that are not quoted in an active market. Valuation techniques commonly used by market practitioners are applied and assumptions are made based on quoted market rates adjusted for specific features of the instrument.

The fair value of the other financial liabilities at amortised cost approximates to their carrying value. The trade and other payables approximate to their fair value due to the short term nature of the payables.

Long term loans due to subsidiary undertakings are interest free and have no fixed date of redemption.

Payables due to subsidiary undertakings carry a fixed interest rate linked to market rates.

106 Notes to the company financial statements | Northern Foods plc 51 Financial instruments continued

The following table details the Company’s maturity profile of its financial liabilities (excluding derivative financial instruments):

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2008 £m £m £m £m £m £m Senior loan notes 2012–2017 – 3.8 3.7 73.6 98.2 179.3 Trade payables 2.8 0.2 – – – 3.0 Long term loans due to subsidiary holdings – – – – 499.1 499.1 Payables due to subsidiary holdings 86.8 – – – – 86.8 Bank loans and overdrafts 0.3 – – – – 0.3 Revolving credit facility 2010 0.6 1.3 5.7 139.8 – 147.4 90.5 5.3 9.4 213.4 597.3 915.9

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2007 £m £m £m £m £m £m Senior loan notes 2012–2017 – 3.8 3.7 76.7 103.0 187.2 Trade payables 5.7 0.6 – – – 6.3 Long term loans due to subsidiary holdings – – – – 248.3 248.3 Payables due to subsidiary holdings 676.6 – – – – 676.6 Bank loans and overdrafts 0.3 – – – – 0.3 Revolving credit facility 2010 0.4 0.8 3.7 96.4 – 101.3 683.0 5.2 7.4 173.1 351.3 1,220.0 The liquidity profile of the trade payables has been assumed consistent with the Company’s average credit period taken for trade payables of 33 days (2006/07: 33 days).

Payables due to subsidiary holdings can be repayable on demand, and as such have been classified as less than one month.

The repayment of the interest and principal on the US Dollar denominated Senior loan notes 2012–2017 has been calculated at the period end rate of £1 = $1.989 (2006/07: £1 = $1.961).

The repayment of interest on the Revolving credit facility 2010 has been calculated on the principal at the period end date and the interest rate at that date.

The maturity profiles of the derivative financial instruments are shown below. The US Dollar exchange rate used is that at the balance sheet date of £1 = $1.989 (2006/07: £1 = $1.961).

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2008 £m £m £m £m £m £m Swap cash flow paid to banks – (2.4) (2.4) (38.1) (78.3) (121.2) Swap cash flow received from banks – 2.3 2.3 34.7 69.6 108.9 – (0.1) (0.1) (3.4) (8.7) (12.3)

Less than 3 months to 1 month 1–3 months 1 year 1–5 years 5+ years Total 2007 £m £m £m £m £m £m Swap cash flow paid to banks – (2.4) (2.4) (39.2) (82.0) (126.0) Swap cash flow received from banks – 2.3 2.3 36.2 74.1 114.9 – (0.1) (0.1) (3.0) (7.9) (11.1) For further detail regarding the financial instruments see note 27 within the Group disclosure notes.

Northern Foods plc | Notes to the company financial statements 107 Notes to the Company financial statements continued

52 Deferred taxation assets/(liabilities)

Retirement Other Accelerated benefit employee tax Revaluation obligation benefits depreciation of buildings Other Total £m £m £m £m £m £m At start of prior period 26.2 – (10.1) (1.1) – 15.0 (Charged)/credited to income statement (6.5) 0.3 (0.4) – – (6.6) Restructuring items (13.8) – 10.8 – – (3.0) Charged to equity 0.1 0.1 – – – 0.2 At start of period 6.0 0.4 0.3 (1.1) – 5.6 (Charged)/credited to income statement (7.8) – 0.2 – 0.3 (7.3) Restructuring items (1.8) – 0.1 – – (1.7) Charged to equity (12.8) (0.1) – 0.1 – (12.8) At end of period (16.4) 0.3 0.6 (1.0) 0.3 (16.2) The Finance Act 2007 included provision for a reduction in the rate of UK corporation tax from 30.0% to 28.0% with effect from 1 April 2008. The rate reduction has been substantively enacted and therefore has been used for the deferred tax calculation on UK businesses.

Although amendments to the Industrial Buildings Allowance regime were also proposed in the Finance Act 2007, these amendments were not substantively enacted at 29 March 2008 and accordingly have not been reflected in the Company’s results for the 52 weeks ended 29 March 2008. The directors have estimated that, had these amendments been reflected in the Company’s results for the 52 weeks ended 29 March 2008 in respect of existing industrial buildings held by the Company, the effect would be to increase the deferred tax liability held in the balance sheet by approximately £6.5m.

No deferred tax has been provided on capital losses totalling £56.0m at 29 March 2008 (2006/07: £26.1m) as it is uncertain when these losses will be utilised against future taxable gains. The unprovided deferred tax asset on these losses is £15.7m (2006/07: £7.8m).

53 Share capital For further detail regarding the share capital see note 30 within the Group disclosure notes.

54 Reserves Share Capital Reserve premium redemption for own ESOT Hedging Other Retained account reserve shares reserve reserve reserves earnings £m £m £m £m £m £m £m At start of prior period 65.1 23.6 (34.2) (4.4) (2.4) 2.6 378.5 Net profit for period – – – – – – 83.3 Dividends – – – – – – (11.5) Actuarial gains on defined benefit pension schemes net of deferred tax – – – – – – (0.3) Equity settled incentive schemes net of deferred tax – – – 0.2 – 0.8 – Decrease in fair value of cash flow hedge – – – – (5.0) – – Transfer to profit or loss on cash flow hedge – – – – 10.3 – – Other movements – – – – – (0.1) 0.1 At start of period 65.1 23.6 (34.2) (4.2) 2.9 3.3 450.1 Net profit for period – – – – – – 99.6 Dividends – – – – – – (21.0) Actuarial gains on defined benefit pension schemes net of deferred tax – – – – – – 22.7 Purchase of equity share capital – – (5.3) – – – – Equity settled incentive schemes net of deferred tax – – – – – 1.0 – Increase in fair value of cash flow hedge – – – – 2.4 – – Transfer to profit or loss on cash flow hedge – – – – 1.1 – – Purchase of shares for ESOT – – – (4.1) – – – Other movements – – – – – – 0.1 At end of period 65.1 23.6 (39.5) (8.3) 6.4 4.3 551.5 For further detail regarding reserves see note 31 within the Group disclosure notes. Retained earnings include £192.4m (2006/07: £192.4m) of undistributable reserves.

108 Notes to the company financial statements | Northern Foods plc 55 Reconciliation of net cash from operating activities

2008 2007 Notes £m £m Profit from operations 12.1 59.8 Adjustments for: Depreciation of property, plant and equipment 44 4.4 7.4 Impairment of property, plant and equipment 44 1.3 2.0 Loss/(profit) on disposal of property, plant and equipment 0.2 (1.5) Impairment of investments in subsidiaries 17.0 – (Decrease)/increase in provisions (2.0) 4.0 Change in retirement benefit obligation excluding special contributions 1.8 4.2 Equity settled incentive schemes 1.1 0.7 Operating cash flow before movement in working capital and special pension contributions 35.9 76.6 Special pension contributions (22.0) (53.0) Operating cash flow before movement in working capital 13.9 23.6 Movement in trade and other receivables (including movement on intercompany balances) 260.8 355.8 Movement in trade and other payables (including movement on intercompany balances) (247.2) (245.0) Cash from operations 27.5 134.4 Interest paid (14.9) (19.5) Taxation recovered 0.1 1.8 Net cash from operating activities 12.7 116.7

56 Operating lease commitments Outstanding commitments for future minimum lease payments under non-cancellable operating leases fall due as follows:

2008 2007 £m £m Within one year 1.3 1.1 In the second to fifth years inclusive 4.4 4.3 After five years 5.3 6.0 11.0 11.4 The Company leases various offices and warehouses under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The Company also leases plant and machinery and vehicles under non-cancellable operating lease agreements.

57 Equity settled share based payments For further detail regarding share based payments see note 36 within the Group disclosure notes.

Northern Foods plc | Notes to the company financial statements 109 Notes to the Company financial statements continued

58 Retirement benefit obligations The amounts recognised in the Company balance sheet in respect of the Company’s defined benefit schemes and post employment medical benefit scheme are as follows:

Defined benefit Post retirement Total retirement schemes medical benefit scheme benefit schemes 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m Present value of obligations (701.1) (790.7) (4.4) (4.7) (705.5) (795.4) Fair value of scheme assets 772.6 790.9 – – 772.6 790.9 71.5 0.2 (4.4) (4.7) 67.1 (4.5) The table above does not include the related deferred tax assets and liabilities.

Movements in the present value of obligations are as follows:

Defined benefit Post retirement Total retirement schemes medical benefit scheme benefit schemes 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m At start of period 790.7 800.4 4.7 5.0 795.4 805.4 Current service cost 8.8 17.6 – – 8.8 17.6 Interest on obligation 41.5 39.1 0.2 0.2 41.7 39.3 Curtailment gain due to business disposals – (21.1) – – – (21.1) Actuarial gains (106.5) (15.2) (0.3) (0.3) (106.8) (15.5) Contributions from scheme members 3.8 8.9 – – 3.8 8.9 Benefits paid (37.2) (39.0) (0.2) (0.2) (37.4) (39.2) At end of period 701.1 790.7 4.4 4.7 705.5 795.4

Movements in the fair value of scheme assets are as follows:

Defined benefit schemes 2008 2007 £m £m At start of period 790.9 718.7 Expected return on scheme assets 57.4 51.9 Actuarial losses (71.3) (15.9) Contributions from the sponsoring company 29.0 66.3 Contributions from scheme members 3.8 8.9 Benefits paid (37.2) (39.0) At end of period 772.6 790.9 For further detail on the retirement benefit obligations see note 37 within the Group disclosure notes. The Group disclosure includes information on the Scheme, Pension Builder, the Plan and the Post retirement medical benefit scheme. The Scheme, Pension Builder and the Post retirement medical benefit scheme are included within the Company financial statements.

110 Notes to the company financial statements | Northern Foods plc 59 Related party transactions Transactions with subsidiaries Details of transactions, which comprise Group recharges and net interest receivable on intercompany balances between the Company and its subsidiary undertakings, are set out below:

2008 2007 £m £m Group recharges 57.9 54.8 Net interest receivable 22.5 7. 5 80.4 62.3 The Group recharges include special pension contributions of £22.0m (2006/07: £25.5m).

A summary of the balances outstanding at the period end is shown below:

2008 2007 £m £m Receivables from subsidiary undertakings due in less than one year 344.0 636.7 Long term loans due from subsidiary undertakings 207.8 171.8 551.8 808.5 Payables due to subsidiary undertakings in less than one year (86.8) (676.6) Long term loans due to subsidiary undertakings (499.1) (248.3) (585.9) (924.9) Total (34.1) (116.4)

Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Company, is set out within note 39.

Northern Foods plc | Notes to the company financial statements 111 Five year record

UK GAAP IFRS 2004 2005 2006 2007 2008 Continuing operations: Consolidated income statement Revenue £m 844.1 878.9 862.0 888.5 931.9 Profit from operations*†† £m 86.7 69.6 55.4 45.7 48.4 Operating margin*†† % 10.3 7.9 6.4 5.1 5.2 Share of associated undertakings* £m 0.4 – – – – Net finance (expense)/income*†† £m (21.4) (26.8) (22.4) (5.7) 1.7 Profit before taxation* £m 65.7 42.8 33.0 40.0 50.1 Profit after taxation*† £m 53.9 34.7 27.7 31.9 38.4 Earnings per share Before restructuring items† pence 10.53 7.08 5.68 6.52 7.88 Return on operating assets Average net operating assets £m 407.3 375.6 353.1 Return on net assets % 13.6 12.2 13.7 Return on invested capital††‡ Profit from operations* £m 45.7 48.4 Average invested capital £m 448.2 442.0 Return on continuing average invested capital % 10.2 11.0

Discontinued operations: Consolidated income statement Revenue £m 698.0 569.9 576.2 317.4 – Profit from operations* £m 20.3 19.4 12.1 1.3 –

Continuing and discontinued operations (as reported): Earnings per share Before restructuring items pence 13.77 10.27 7.77 6.72 7.88 After restructuring items pence 12.78 4.66 (1.03) (4.60) 7.08 Dividend per share pence 8.90 9.05 4.25 4.25 4.50 Dividend cover* times 1.5 1.1 1.8 1.6 1.8 EBITDA: Debt* times 1.9 2.0 2.5 1.8 2.0 Capital expenditure £m 71.3 62.2 55.3 28.1 19.3 Invested capital Net equity £m 356.3 155.6 152.1 121.2 165.4 Add back deficit/(less surplus) on retirement benefit schemes £m – 171.2 90.2 8.6 (61.6) (Less deferred tax asset)/add back deferred tax liability on retirement benefit schemes £m – (50.4) (26.4) (6.5) 15.8 Adjusted net equity £m 356.3 276.4 215.9 123.3 119.6 Net debt £m 332.4 326.3 363.1 174.2 200.2 Trading capital employed £m 688.7 602.7 579.0 297.5 319.8 Accumulated goodwill written off £m 239.2 211.0 211.0 116.6 116.6 Total invested capital £m 927.9 813.7 790.0 414.1 436.4 Total invested capital excluding net debt £m 595.5 487.4 426.9 239.9 236.2 Return on invested capital Profit from operations*†† £m 107.0 89.0 67.5 47.0 48.4 Average invested capital £m 929.1 840.1 801.9 602.1 425.3 Return on average invested capital % 11.5 10.6 8.4 7.8 11.4 * Stated before goodwill amortisation and restructuring items for UK GAAP and before restructuring items for IFRS. † The effective taxation rate for continuing operations for each period has been assumed to be the same as that for the Group. ‡ Continuing return on invested capital is calculated using continuing profit from operations divided by continuing average invested capital. Continuing average invested capital has been calculated using a 13 month average (used for Performance share plan). ††Periods reporting under IFRS have been restated for the change in presentation of the pension finance (charge)/credit from within profit from operations to net finance costs.

The period ended 2004 has been restated to comply with Urgent Issue Task Force (UITF) Abstract 38 ‘Accounting for ESOP trusts’. The amounts disclosed for 2004 are stated on the basis of UK GAAP because it is not practicable to restate amounts for periods prior to the date of transition to IFRS. The principal differences between UK GAAP and IFRS are explained in the published financial statements for Northern Foods plc for the 52 weeks ended 1 April 2006. These are available from the Company’s website at www.northernfoods.com.

112 Five year record | Northern Foods plc Shareholder analysis at 20 May 2008

Holders Shares held number number % ’000s % By classification Individuals 32,825 96.03 43,253 8.41 Bank or nominees 1,155 3.38 427,000 83.05 Investment trust 14 0.04 188 0.04 Insurance company 9 0.03 69 0.01 Other company 161 0.47 14,833 2.89 Pension trust 60.021810.04 Other corporate body 12 0.03 28,600 5.56 34,182 100.00 514,124 100.00 By size of holding 1–100 5,940 17.38 271 0.05 101–500 12,031 35.20 3,146 0.61 501–1,000 5,587 16.34 4,202 0.82 1,001–2,000 4,704 13.76 6,945 1.35 2,001–5,000 3,849 11.26 12,379 2.41 5,001–50,000 1,744 5.10 20,547 4.00 50,001–100,000 93 0.27 6,800 1.32 100,001 and over 234 0.69 459,834 89.44 34,182 100.00 514,124 100.00 *This includes 27.97m shares held in treasury

Percentage of shareholders Percentage of shares held

Individuals – 96.03% Individuals – 8.41% Other – 3.97% Other – 91.59%

Northern Foods plc | Shareholder analysis 113 Financial calendar

2008 Full year results announcement 27 May Annual report issued 13 June Half yearly interest payment on Senior loan notes 2012–2017 20 June Latest date for receipt of forms of proxy 26 July Annual general meeting 28 July First Interim management statement 28 July Shares quoted ex-dividend 6 Aug Record date for final dividend 8 Aug Final dividend payment on ordinary shares 28 Aug Half year results announcement 11 Nov Half yearly interest payment on Senior loan notes 2012–2017 20 Dec

2009 Second Interim management statement 13 Jan Interim dividend payment on ordinary shares Jan Financial year end 28 March

Company information

Registered office Merchant bankers 2180 Century Way N M Rothschild & Sons Limited Thorpe Park Leeds LS15 8ZB Stockbrokers Telephone: 0113 390 0110 UBS Investment Bank Facsimile: 0113 390 0211 Website: www.northernfoods.com Registrar to the ordinary shareholders Computershare Investor Services PLC Registered in England and Wales The Pavilions No 471864 Bridgwater Road Bristol BS99 6ZZ Auditors Telephone: 0870 702 0134 Deloitte & Touche LLP Email: [email protected] Website: www-uk.computershare.com/investor

114 Financial calender, Company information | Northern Foods plc Investor information

Shareholder services and helpline Any shareholder wishing to adopt this method of payment should Shareholders who change address, or who want to have complete a dividend mandate form, which can be found attached their dividends paid directly into their bank account, may do to the last dividend warrant. Alternatively, a form can be downloaded so on the following website www-uk.computershare.com/investor, from the Registrar’s website or requested by calling the telephone or shareholders should write to the Registrar, Computershare helpline on 0870 702 0134. Investor Services PLC, at The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ. If they require any other information about their holding The following share dealing services are available through our shareholders can contact the Registrar, Computershare Investor Registrars, Computershare Investor Services PLC. Services PLC on the dedicated Northern Foods shareholder information telephone line: 0870 702 0134 or email their enquiry, Internet share dealing indicating that they are a Northern Foods shareholder, to Please note that, at present, this service is only available to [email protected]. shareholders in certain European jurisdictions. Please refer to the website for an up to date list of these countries. This service Shareholder information on the internet provides shareholders with an easy way to buy or sell Northern The Northern Foods website www.northernfoods.com provides Foods plc ordinary shares on the London Stock Exchange. access to shareholder information, including our annual and half The commission is 0.5%, subject to a minimum charge of £15.00. year reports, share price and recent share price trends, financial In addition stamp duty, currently 0.5%, is payable on purchases. highlights and results presentations to analysts as well as a There is no need to open an account in order to deal. Real time link to our Registrar, Computershare Investor Services PLC, dealing is available during market hours. In addition there is at www-uk.computershare.com/investor. a facility to place your order outside of market hours. Up to 90 day limit orders are available for sales. To access the service The link to our Registrar allows shareholders to access their log on to www.computershare.com/dealing/uk. Shareholders individual shareholder details. Shareholders will be required should have their Shareholder Reference Number (SRN) available. to pass an identity check to access their personal information. The SRN appears on share certificates. A bank debit card will be This link also allows shareholders to download stock transfer, required for purchases. dividend mandate and change of address forms. Telephone share dealing In addition, shareholders can also register on line with the Investor Please note this service is, at present, only available to shareholders Centre at www-uk.computershare.com/investor. On registering, resident in the UK and Ireland. The commission is 1%, subject shareholders will receive a unique user name and password. to a minimum charge of £15.00. In addition stamp duty, currently This site enables shareholders to view and update their portfolio 0.5%, is payable on purchases. The service is available from in all companies maintained by Computershare and to view 8.00am to 4.30pm Monday to Friday, excluding bank holidays, those held by other registrars. on telephone number 0870 703 0084. Shareholders should have their Shareholder Reference Number (SRN) ready when making E-communications the call. The SRN appears on share certificates. A bank debit card Shareholders may also now receive reports electronically by will be required for purchases. Detailed terms and conditions logging onto the Computershare Investor Services website at are available on request by telephoning 0870 702 0134. www-uk.computershare.com/investor and follow the instructions or simply follow the link from the Northern Foods website. If you These services are offered on an execution only basis and have any problems registering or would like further information, subject to the applicable terms and conditions. This is not a please contact the Computershare helpdesk on 0870 702 0134. recommendation to buy, sell or hold shares in Northern Foods plc. Shareholders who are unsure of what action to take should obtain Electronic proxy voting independent financial advice. Share values may go down as well Shareholders wishing to appoint a proxy electronically via the as up which may result in a shareholder receiving less than internet should refer to the instructions contained in the circular he/she originally invested. sent to shareholders with this report. Capital gains tax Dividend mandates The base cost of a Northern Foods ordinary share at 31 March Shareholders may choose to have dividends paid electronically 1982 for capital gains tax purposes is 75.8 pence. This figure is the into their United Kingdom bank or building society account, using adjusted price to reflect the effect of the rights issue in January 1992, the BACS system. This process ensures that the amount of the the one-for-one capitalisation issue in August of the same year, dividend is passed directly into their account, as cleared funds, and the demerger of Express Dairies plc (now Arla Foods UK) on on the date the payment is due. Confirmation of payment is 30 March 1998. contained in a dividend tax voucher which is posted to shareholders’ registered addresses at the time of payment. This voucher should Any gain arising on disposal may also need to be adjusted be kept safely for future reference. to take account of indexation allowances and, since these adjustments will depend on individual circumstances, shareholders are recommended to consult their financial advisers.

Northern Foods plc | Investor information 115 Principal operations

Central functions Frozen division

Northern Foods plc Dalepak Foods 2180 Century Way, Thorpe Park, Leeds LS15 8ZB Dale House, Leeming Bar, Northallerton, North Yorkshire DL7 9UL Telephone: 0113 390 0110 Telephone: 01677 424111

Northern Foods Support Services Green Isle Foods Trinity Park House, Trinity Business Park, Fox Way I.D.A. Industrial Estate, Monread Road, Naas, Co Kildare, Ireland Wakefield, West Yorkshire WF2 8EE Telephone: 00 353 45 848000 Telephone: 01924 831300 Operations at Gurteen, Longford, Naas and Portumna

Northern Foods Technical Services Walter Holland & Sons BioCity Nottingham, Pennyfoot Street, Nottingham NG1 1GF Baxenden, Accrington, Lancashire BB5 2SA Tel: 0115 912 4424 Telephone: 01706 213591

Chilled division Bakery division

Cavaghan & Gray Fox’s Biscuits Brunel House, Brunel Way, Carlisle, Cumbria CA1 3NQ Wellington Street, Batley, West Yorkshire WF17 5JE Telephone: 01228 518200 Telephone: 01924 444333 Operations at Carlisle and Hull Operations at Batley, Kirkham and Uttoxeter

Convenience Foods Grimsby Matthew Walker Unit 1, Pegasus Way, Europarc, Grimsby Heanor Gate Road, Heanor, Derbyshire DE75 7RJ North East Lincolnshire DN37 9TS Telephone: 01773 760121 Tel: 01472 243600

Ethnic Cuisine Viking Way, Winch Wen Industrial Estate, Winch Wen Swansea SA1 7DE Tel: 01792 772064

Fenland Foods Turnpike Close, Swingbridge Road, Earlesfield Industrial Estate Grantham, Lincolnshire NG31 7XU Tel: 01476 567733

Gunstones Bakery Stubley Lane, Dronfield, South Yorkshire S18 1PF Tel: 01246 414651

Pennine Foods Drakehouse Crescent, Waterthorpe, Sheffield South Yorkshire S20 7JG Telephone: 0114 247 6864

Solway Foods 3 Godwin Road, Earlstrees Industrial Estate, Corby Northants NN17 4DS Telephone: 01536 464400 Operations at Corby and Manton Wood, Worksop

The Pizza Factory Gateside Road, Nottingham NG2 1LT Telephone: 0115 986 8204

116 Principal operations | Northern Foods plc Contents 56 Consolidated income statement 101 Company cash flow statement IFC Financial and operating highlights 57 Consolidated balance sheet Company statement of recognised 02 Chairman’s statement 58 Consolidated cash flow statement income and expense 04 Chief executive’s report 59 Reconciliation of net cash flow Company statement of changes 08 Performance review to movements in net debt in equity 26 Corporate social responsibility report Consolidated statement of 102 Notes to the Company financial 32 Board of directors and recognised income and expense statements company secretary Consolidated statement of 112 Five year record 33 Directors’ report changes in equity 113 Shareholder analysis 36 Corporate governance report 60 Notes to the consolidated financial 114 Financial calendar 42 Directors’ remuneration report statements Company information 54 Statement of directors’ responsibilities 99 Independent auditors’ report – Company 115 Investor information 55 Independent auditors’ report – Group 100 Company balance sheet 116 Principal operations

Financial highlights: > Continuing profit before taxation* up 25.3% at £50.1m (2006/07: £40.0m) > Profit for the period £34.5m (2006/07: loss £22.5m) > Adjusted EPS1 20.9% ahead at 7.88p (2006/07: 6.52p) > Strong cash management continues to drive low net debt2 at £200.2m (2006/07: £174.2m) > Robust balance sheet – continuation of share buy-back programme in 2008/09 > Proposed dividend up 5.9% at 4.50p (2006/07: 4.25p)

£m 2007/08 2006/07 Continuing operations Revenue* 931.9 888.5 Operating margin* 5.2% 5.1% Profit from operations* 48.4 45.7 Profit before taxation* 50.1 40.0 Return on invested capital* (ROIC3) 11.0% 10.2% Adjusted earnings per share (EPS) 7.88p 6.52p Group Profit before taxation and restructuring items 50.1 41.3 Free cash flow4 39.0 83.0 Basic EPS 7.08p (4.60p) Dividend per share (proposed) 4.50p 4.25p

Designed and produced by 35 Communications

Food photography: David Loftus * An asterisk denotes results for continuing operations (except where otherwise stated) and profit is stated before restructuring items. ‘Continuing’ People and location photography: Igor Emmerich and Philip Gatward operations exclude businesses which were sold (‘discontinued’) in 2006/07. ‘Restructuring items’ which relate to significant restructuring events and the impact of the Fletchers fire in the 52 weeks ended 31 March 2007 are presented as a separate ‘Restructuring items’ column within their relevant We would like to thank our employees at the following sites for their Consolidated income statement category. Presentation of these items in a separate column helps to provide a better indication of the Group’s underlying assistance in the photography featured within this report: Fox’s Biscuits (Batley), business performance. ‘Restructuring items’ include costs or income associated with the restructuring of businesses, gains or losses on the disposal Gunstones Bakery, Northern Foods Technical Services, Pennine Foods, of businesses and assets and financial instrument gains and impairments arising from the Group’s restructuring activities Solway Foods (Corby), The Pizza Factory and Thorpe Park. 1 Adjusted earnings per share (EPS) is basic EPS for continuing operations before restructuring items and is reconciled to earnings per share in the financial statements Printed at St Ives Westerham Press Ltd, ISO14001 and CarbonNeutral® 2 Net debt is defined as total borrowings (including both short and long term bank loans, bonds, loan notes and finance leases) less cash and cash equivalents and short term investments This report is printed on regency Satin paper. This paper comprises of virgin 3 ROIC is profit from operations before restructuring items for continuing operations divided by a 13 month average invested capital (net equity adjusted wood free pulp from well-managed forests. It is manufactured at a mill that to exclude retirement benefit obligations net of deferred tax, and net debt, together with accumulated goodwill previously written off) has been awarded the ISO14001 certificate for environmental management. 4 Free cash flow is net cash from operating activities, adjusted for special pension contributions, less net capital expenditure, plus interest received. The mill uses pulps that are elemental chlorine free (ECF) and the inks Net capital expenditure is purchase of property, plant and equipment (PPE) less grants received and proceeds from sale of PPE used are all vegetable oil based. This paper is totally recyclable. Northern Foods plc Northern | Annual 2007/08 report

Making great tasting food

Northern Foods plc 2180 Century Way Thorpe Park Leeds LS15 8ZB Tel: 0113 390 0110 Annual report 2007/08 Fax: 0113 390 0211 www.northernfoods.com