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Pre-tax profit*EquityAssetsWorking capital from operationsGBP millions40GBP millions140GBP millions1200GBP millions80353012010007060259080050206004015604003010530200201002001 2002 2003 2004 200502001 2002 2003 2004 200502001 2002 2003 2004 200502001 2002 2003 2004 2005

3 Directors’ addressBakkavör at a Glance8 Our Group9 Our sites11 Our products16 Reasons to investUK Market18 Food trends26 Economic trends29 Food retail trends32 Our customers34 Our innovationOur Business39 Annual review 200543 Financial review54 Market and sales review58 Board of Directors58 Our management60 Our strategyCorporate Governance63 Corporate governance70 Risk management72 Compensation report75 Our responsibilitiesOur Shareholders80 Our shareholders84 Investor relationsAccounts and Information88 Endorsement by the Board88 Auditor’s report89 Accounts93 Notes to the accounts113 Glossary116 Corporate information

Lýdur Gudmundsson, Chief Executive OfficerÁgúst Gudmundsson, Executive Chairman

Directors’ addressSTRATEGIC CLARITY: 20 YEARS ONDear Shareholders,The year 2005 was of strategic importance to our business as wereached a significant milestone in the future development of BakkavörGroup. With the acquisition of Geest PLC and Hitchen Foods, thescale of our business was transformed and we became the largestUK supplier of fresh prepared foods and produce – our chosen areasof focus. This was an important and logical step towards our longtermstrategic goal of becoming an international leader in the freshprepared foods sector.B a k k a v ö r ’ s 2 0 t h a n n i v e r s a r yLater this year, we celebrate the 20th anniversary ofBakkavör Group. An important juncture, such as this,allows us to reflect on our achievements to date, as wellas look forward to the opportunities that lie ahead.reached an important milestone in the new millenniumwhen the Group was successfully listed on the IcelandStock Exchange. Over 10,000 shareholders participated inour Initial Public Offering (IPO) and many of you are stillpart of the Group today. We thank you for your continuedsupport.D i r e c t o r s ’ a d d r e s s 2 0 0 5Bakkavör Group was founded on 1 August 1986 – initiallywith the purpose of manufacturing and exporting codroe to Scandinavia. From the beginning, our goal wasto manufacture and export fully-processed consumergoods directly to retailers. To gain a competitive edge,our strategy was based on three main pillars: quality,new product development and value chain control. Tenyears later, in 1996, we had become a medium-sizedIcelandic company, employing 65 people with a turnoverof £4.6 million, manufacturing and selling fully-processedconsumer goods directly to European retailers. AlthoughBakkavör Group was still a very small company byinternational standards we had built a solid platform forfurther growth.The years 1997-2002 represented the second phase inthe Group’s development, during which we focusedon expanding our operations internationally. We alsoIn 2000 we announced an important strategicdevelopment and issued a new mission statement – tofocus primarily on the manufacturing of fresh preparedfoods. This represented a turning point for our businessas, up to then, our operations had only been based onseafood. The fresh prepared foods market was the mostdynamic segment of the food market and thereforerepresented an excellent growth opportunity. In thesame year we acquired Wine & Dine, a small dips anddressings company in Birmingham, and took our firststeps in the UK – the world's most developed marketfor fresh prepared foods. In 2001 we acquired KatsourisFresh Foods, the largest supplier of Greek dips in the UKand a quality supplier of chilled ready meals. True to ourmission, our business focus was now primarily on thefresh prepared foods market, manufacturing and sellingproducts under our customers’ own brands.

By 2002 we were running operations in seven countries,with a turnover of £133.7 million and 2,200 employees.In line with our strategy we sold the seafood part ofour operations, in 2003, to focus entirely on the freshprepared foods market.The new vision we set forth for Bakkavör Group for 2004-2013 entailed ambitious growth targets. Our intentionwas to continue our expansion in the fresh preparedfoods market, benefiting from the strong consumertrends prevalent in this sector. Our goal was to increaseour turnover to £1.5 billion, employ over 12,000 peopleand expand further internationally. At first glance thesetargets might have seemed overly ambitious. However, toput the Group’s growth in perspective, the average annualgrowth rate from 1997-2002 had been 65%. In comparison,our target for 2013 meant a ‘modest’ annual growth rateof 30%, which in light of our history was not unreasonable.Only a year later, and with your support, we acquired GeestPLC, the UK’s leading provider of fresh prepared foods andproduce. By the end of 2005, our turnover totalled £722.1million and we now employ over 14,000 people in sixcountries.Looking back, the setting of a clear vision for each stage ofthe Group's development has been paramount. With a clearvision and a simple, yet focused, strategy Bakkavör Group hasgrown profitably. In 2005 we reached a significant milestoneand we are pleased to see that the market has recognisedthe importance of our strategic development, with shares inthe Group increasing by 110% in value during the year.With your support, we will continue to set ambitious, yetrealistic, targets that will bring us closer to realising ourlong-term vision of becoming an international leader in freshprepared foods and produce.T h e y e a r i n r e v i e wBakkavör Group performed well in 2005 and successfullyintegrated Geest PLC and Hitchen Foods into the Group. Weare pleased to report to you that the underlying growth ofour business also remained strong, despite the continuedchallenging trading conditions.During 2005 our total sales grew 383% and sales in ourunderlying business increased by 6.7%. Total turnover was£722.1 million (2004: £149.6 million). In the UK, our freshprepared foods sales grew by 6.2% in a market which grew4.7% in the same period. We achieved our UK businessgrowth target to grow our fresh prepared food salesabove the market growth. Our fresh produce sales alsooutperformed the market with sales growth of 8.7% in amarket which grew 7.1% in 2005.In Continental Europe, our sales declined by 5%, reflecting aplanned range reduction and reorganisation in one business.Overall, our Continental European business is loss-makingbut actions to improve profit performance are taking effect.Pre-tax profits for the year were £38.4 million, up 125%.Operating profit (EBIT) grew 176% to £66.7 million andEBITDA amounted to £86.1 million, up 208%. Shareholders’earnings totalled £32.0 million. Cash generated fromoperations totalled £103.6 million and free cash generatedby operating activities was £65.6 million. Earnings per shareincreased from 0.8 pence to 2.0 pence. Return on equity was30.0% compared with 16.4% in 2004. The Board of Directorswill recommend that a dividend of 25% of nominal sharevalue be paid for 2005.

Vidya Kalsi (Kalsi)Production Operative (Samosa line)Katsouris Fresh FoodsKalsi has worked on the samosaproduction line at Katsouris FreshFoods for 19 years and is a real‘people person’. Alongside takingpride in her products, Kalsi’s favouriteaspect of her job is enjoying thecompany of fellow colleagues, manyof whom she considers to be herextended family. She has five childrenof her own and holidays are spentvisting relations in the Punjab. Kalsiloves cooking – especially for herfamily – and takes great delight inteaching others how to recreateauthentic curries.

O u r c u s t o m e r sAs a result of the acquisition of Geest, we broadened ourretail customer base, although, given the concentratednature of the UK retail market, we continue to supply few,very large retailers. The trading environment remainedchallenging throughout the year with much promotionalactivity and price competition. Nonetheless, our salesturnover grew 6.7% in our underlying business. Asbefore it remains our priority to continue to build strongrelationships with our customers and the provision ofservice, quality, innovation and value remains paramount.O u r i n n o v a t i o nMore strongly than ever, our consumers are demandingproducts which provide premium quality and/or ahealthy option, alongside convenience. New productdevelopment in 2005 revolved around these trends. Ourability to launch innovative products which correspondto our consumer and customer requirements is acornerstone of our operations and part of the high levelof service to our retail customers.Responsibilities and risk managementWe have grown rapidly over the years and significantly in2005. We intend to grow further and recognise that wemust continue to develop the business in a sustainablemanner. We are committed to the highest standards ofethics and integrity and we keep the management ofidentified risks to the business high on our Board agenda.March 2005 and we would like to take this opportunity tothank him for his invaluable contribution to the Group.Shareholders and share performanceOur primary goal is to increase the value of your sharesin the Group. We believe that the importance of ourstrategic activities this year has been recognised – ourshare price increased by 110% and we were the secondbestperformer on the ICEX.D i v i d e n d sWe continue to pursue an ambitious expansion strategyand made significant investments in 2005. Given theGroup’s strong cash flow and solid profit generation, theBoard of Directors will recommend at the Group’s AnnualGeneral Meeting on 24 March 2006 that a dividendof 25% of nominal share value be paid out, whichcorresponds to ISK 0.25 per share or 11% of net earningsfor the year 2005. The dividend will be payable on 25April 2006 for all shareholders on the share register atclose of business on 24 March 2006.P r o s p e c t sThe events of 2005 for Bakkavör Group marked a key,strategic year for us and we are delighted with theprogress made. We will continue to maximise synergiesacross the enlarged Group, benefiting from the leadingposition which we now command in the fresh preparedO u r p e o p l eWe now employ around 14,000 people across theGroup and the recruitment and retention of high-qualityemployees remains key to the continued success of ourbusiness.Last year was an extremely busy one for Bakkavör Groupand we would like to take this opportunity to thankformer and new Bakkavör Group employees for theircontribution to this year’s achievements. The successfulintegration of the operating business in a short spaceof time is testament to their dedication. We have adevolved structure and our aim during the integrationwas ‘business as usual’. We believe that we achieved thissuccessfully with minimal disruption.During the last ten years, Brynjólfur Bjarnason, ourlongest-serving Board member, has played a pivotal rolein the strategic development and success of BakkavörGroup. Brynjólfur resigned from the Board of Directors infoods and produce markets. These markets continue to befast-growing areas of the UK food market.Further consolidation in the UK fresh prepared foodssector is anticipated and Bakkavör Group confirms itscommitment to playing an active role in this trend.Performance is improving in Continental Europe,following the effects of profit improvement actions, andthese businesses are in a stronger position going into2006. We will also continue to explore opportunities inAsia.In summary, we have the resources in place to developour business profitably and in a sustainable manner andwill continue to pursue our strategy of targeted growth,both organically and through acquisitions.Ágúst Gudmundsson, Executive ChairmanLýdur Gudmundsson, Chief Executive Officer

O u r G r o u pBakkavör Group is the UK’s leading provider of freshprepared foods and produce and focuses on thedevelopment and marketing of products under itscustomers’ own brands. The Group has a diverse portfolioof some 4,500 products, operates 40 factories and employsaround 14,000 people, across six countries.Bakkavör Group’s Head Office is in Reykjavík, Iceland, andthe Group is listed on the Iceland Stock Exchange.Our visionTo be recognised and respected as the world’s leadingfresh prepared foods and produce provider.Our missionTo earn the loyalty of existing and new customersby providing the very best service, quality, value andinnovation in the fresh prepared foods and producemarket.Our unwavering commitment to our focused strategy andcore business values will ensure our delivery is as good asour promise to both customers and shareholders.Our strategy• To focus on the fresh prepared foods and producemarkets, fast-growing sectors of the food industry.• To target growth sectors where a strong market sharecan be achieved by building strong relationships withmajor customers, understanding their needs and theneeds of the consumer.• To create an empowered group of independent managementteams, whilst maximising synergy acrossthe Group in areas which help develop competitiveadvantage.• To ensure a highly valuable, quality service is providedto our customers through the recruitment andretention of excellent people, investment in firstclassfacilities and strong support for innovation.Our valuesFive core values underpin the way we do business:• Customer careWe are committed to supplying outstandingservice, quality and value, never forgetting that ourrelationship with our customers is pivotal to oursuccess.• Can doWe encourage personal initiative and empowerour people to make things happen. Our motivationcomes from a determination to succeed in all we do.• TeamworkWe believe everyone has a valuable part to play inthe success of our business. We aim to communicateeffectively and are committed to the higheststandards of ethics and integrity.• InnovationWe thrive on new challenges, looking for innovativeways to grow and improve our business further.• EfficiencyWe endeavour to achieve efficiencies in all thingswe do, providing value for our customers andshareholders alike.For further information on Bakkavör Group, please visitour website: www.bakkavor.com

Our marketsThe majority of the Group’s sales are generated in the UK – around 92% in 2005– and are mainly to the major UK food retailers. The remaining sales are fromour Continental European sites in France, Spain and Belgium, where we servethe Dutch, French and Spanish retail and foodservice markets. We also have anoperation in South Africa which supplies the UK market. In 2004, we establishedBakkavör Asia with the purpose of exploring further business opportunities.Bakkavör Group Head OfficeIcelandThe BakeryMariner FoodsBakkavör at a glanceCaledonian ProduceYorkshire Fresh SaladsEnglish Village SaladsInternational ProduceMelrow SaladsAnglia CrownHitchen FoodsThe Pasta CoGeest Overseas LtdThe DelicatessenWelland Fresh FoodsUKFranceBelgiumBakkavör BirminghamFreshcook (JV)The PizzeriaLincs CuisineWingland FoodsGeest QV (JV)Saxon Valley FoodsVacoIsleport FoodsBourne Salads/Stir fryGeest Limited Head OfficeAlresford SaladsKatsouris Fresh FoodsKatie’s The Pizza CoAnglia CrownInternational ProduceTilmanstone SaladsSpainCinquième SaisonCrudiSogesol, Geest IberiaO u r S i t e sSouth AfricaSpring Valley Foods

Gary McEvoyOperations ManagerBourne SaladsGary joined the Group in 2000 aspart of the Produce AcceleratedManagement Scheme (open toemployees and graduates). Gary isIrish and spent three years with thebusiness in Spain, during which timehe managed to become fluent inSpanish. He has worked in a varietyof roles (always involving produce)in procurement, sales, technical(food safety) and operations. As aresult, Gary has gained in-depthknowledge across the whole of theproduce supply chain. Gary worksat Bourne Salads – one of BakkavörGroup’s four prepared leafy saladsoperations in the UK.10

Our fresh prepared products can be split roughlyinto two categories: hot-eating and cold-eating.There are always some exceptions but, generallyspeaking, hot-eating products are those whichneed to be cooked or heated. Cold-eating productsare those which are ready to eat or need minimalpreparation. We also market fresh produce such aslettuce, cucumbers, tomatoes, peppers and fruit.O u r p r o d u c t sCold-eatingHot-eatingL e a f y s a l a d sC o n v e n i e n c e s a l a d sD i p sD e s s e r t sP r e p a r e d f r u i tS a l a d d r e s s i n g sW r a p sR e a d y m e a l sR e a d y t o c o o k m e a l sF r e s h p i z z aF r e s h p a s t aS o u p sS a u c e sS t i r f r i e sE t h n i c s n a c k sP r e p a r e d v e g e t a b l e sS p e c i a l i t y b r e a d11

Hot-eating productsR e a d y m e a l sReady meals are pre-cooked complete meals oraccompaniments. The majority of these products are forone or two persons although there are also larger packsfor families.In the UK, the most popular ready meal cuisines areIndian, traditional British and Italian, followed by Oriental.Our extensive range includes recipes from around theworld: prawn Creole with rice, chicken with goat’s cheeseand peppers, beef in plum sauce, Thai yellow chicken andprawn laska, coq au vin, chicken karai balti, BBQ ribs, andLincolnshire sausages with mushrooms and gravy.R e a d y t o c o o k m e a l sReady to cook meals are essentially ‘ready meals’ with thekey difference that many of the ingredients are still raw,i.e. the meal has to be cooked rather than just reheated.P i z z aWhatever the type of base or range (thin or thick, Italianor American) the most popular pizza is cheese andtomato. However, our fresh pizzas are now topped witha huge variety of ingredients: smoked salmon, sundriedtomatoes, chorizo, marinaded olives, bell peppers,artichokes, prosciutto and a whole host of differentcheeses. (Bakkavör Group alone buys over 30 differenttypes of cheese).Ready to cook mealsFresh pasta and saucePizzaStir fries12

P a s t aWe specialise in making unfilled pasta which can be splitinto two main groups: long and short shapes. Long shapesinclude spaghetti, linguine, tagliatelle and fettuccine. Shortshapes include fusilli (bows), spirale (twists), ricciole (curls)and penne (quills).S t i r f r i e sTake a wok or a heavy-based frying pan, heat up some oiland stir in some fresh vegetables and bean sprouts for ahealthy meal or accompaniment. We grow our own beansprouts and then add fresh colourful prepared vegetablesto take away the chore of chopping.S p e c i a l i t y b r e a dOur breads are chilled, pre-cooked breads filled or toppedwith fresh butter, mixed mainly with garlic or cheese.The main style of bread we bake is baguettes but we alsotop Italian-style breads with olives, herbs and sun-driedtomatoes. The breads need to be put into the oven tofinish off the baking and are best served warm.Speciality breadSoupsPrepared vegetablesReady meals andethnic snacksS o u p s a n d s a u c e sTomato and basil, carrot and coriander, broccoli andstilton are popular fresh soup recipes throughout theyear. In winter, we also launch seasonal specials suchas spicy parsnip, pea and ham, Scotch broth, pumpkinand ginger; and in summer, minted pea, asparagus,watercress and gazpacho.Most of our sauces are developed especially to eat withpasta and include traditional Italian recipes. We alsomake fresh sauces for stir fries.P r e p a r e d v e g e t a b l e sMost of our prepared vegetable products are ready toreheat in the oven or microwave – or on the BBQ. Wealso have a range of prepared potatoes.E t h n i c s n a c k sOur ethnic snacks include traditional snacks andaccompaniments such as Chinese spring rolls and dimsum or Indian bhajis, samosas and pakoras.13

Cold-eating productsL e a f y s a l a d sThese salads are predominantly mixes of different saladleaves. The leaves are carefully selected for flavour, colourand texture and are cut, washed, dried and packed so thatthe salad is ready to eat. Bakkavör Group sources over40 different varieties of salad leaves and fresh herbs. Forsalad recipe ideas log on to: www.bringonthesalads.com or:www.watercress.co.uk for recipes that include watercress,one of the ‘superfoods’ that we sell.C o n v e n i e n c e s a l a d sAs a rule of thumb, these salads do not contain saladleaves and are ‘dressed’ e.g. with vinaigrette, mayonnaiseor other sauces. Traditional convenience salads arepotato salad and coleslaw. Some of our newer saladsinclude pasta, rice, couscous, cracked bulgur wheat,beans and lentils. These salads are usually served asaccompaniments but are also popular as lunchtimesnacks.D i p sDips are sauces suitable for dipping! Dips generallycome in two key formats: single pots of the mostpopular flavours and ‘multipacks’– typically four smallerportions for parties. Dips can be vegetable-based suchas guacamole (avocado) and salsa (fresh tomatoes andchilli peppers) or made with mayonnaise or sour creamflavoured with fresh ingredients (e.g. cheese and chive;garlic and onion). Traditional Mediterranean recipesinclude taramasalata (made with cod roe), tzatziki (madewith fresh cucumber) and houmous (made with chickpeas).P r e p a r e d f r u i tFruit salads make great lunchtime snacks or healthydesserts. Most of our salads are fruit mixes and includemango, various types of melon, passion fruit, pineapple,kiwi, apple, citrus, blueberries, pineapple, grapes, etc.Leafy saladsDipsConvenience saladsBakkavör Group key market sectorsKey market sectorsMarket size£ million RSV*Market growthBakkavör Groupsector positionReady meals 1,569 +0.5% 1Pizza 379 +2.1% 1Leafy salads 454 +2.7% 1Convenience salads 204 +5.8% 1* Retail Sales ValueSource: Bakkavör estimates14

W r a p sWraps are Mexican tortillas (flat savoury pancakes) filledwith ingredients such as char-grilled chicken, cheese,salad and sauce, which are then rolled into a formatwhich is easy to eat.D e s s e r t sWe specialise in premium desserts such as carrot cake,cheesecakes, fruit tarts, crumbles and trifles.D r e s s i n g sOur fresh dressings range has been developed tocomplement our leafy salads. Recipes include traditionalFrench vinaigrette, honey and mustard, balsamic vinegarand garlic, and yoghurt and mint.DessertsWrapsPrepared fruitPer shopping trip, people spend moreon the types of fresh prepared foodsthat Bakkavör Group makes than onany other food category.Source: TNS Worldpanel15

Fresh prepared foods:1 People want to spend less time cooking andpreparing food. Fresh prepared foods can help themachieve this. The average total time spent cookingand preparing the main meal of the day in the UK is19 minutes and 55% of main meals are prepared in30 minutes or less (see below).10 reasons to continueinvesting in this market2 Only 27% of people claim to cook at least one mealfrom scratch during the week. Assembly cookingis becoming more popular with people using freshprepared foods such as fresh pasta and pasta sauces(page 20).3 Our retail customers believe that the fresh preparedfoods sector represents the best future salesopportunity in their convenience stores, where thechilled and fresh foods category is already worth£24 billion (page 30).4 For every £1 spent on food, 20 pence is spent inconvenience stores where sales are set to grow 53%by 2010. The percentage of space dedicated to freshprepared foods in convenience stores is higher thanin the average supermarket (page 30).5 Pleasure is a key consumer trend and people areplacing an increasing importance on treatingthemselves to high-quality food and drink. In 2005,premium fresh prepared foods ranges grew 16%(page 31).6 People are less inclined to cook from scratch if theyare cooking for themselves. In the UK 51% of all mealseaten at home are now eaten alone (page 17). Inaddition, people rarely eat three fixed meals a day andinstead base meals around their lifestyles. The varietyof fresh prepared foods offers quick and easy solutions.7 Health is high up on the agenda. Over 20% ofconsumers believe the most important reason forfollowing a healthy diet is to live a long life (page23).But healthy eating needs to be convenient – ‘health onthe go’ meals are set to grow 15% by 2009, accordingto Datamonitor.R e a s o n s t o i n v e s tLess than half an hour 29%Time spent preparingand cooking the main mealMore than an hour 10%8 Per shopping trip, people spend more on the typesof fresh prepared foods that Bakkavör Group makesthan on any other food category (page 17).9 The top seven retailers in the UK hold over 90%share of the fresh prepared foods market. We supplyall of them (page 29).Half an hour 26%Source: IGDAn hour 20%More than half an hour/less than an hour 15%10 In the market sectors in which we operate, 94% ofproducts are sold under retailer brands – our areaof expertise in the UK. The chilled food category isthe fastest-growing own label category – up 18%between 2000 and 2005 – and this trend is set tocontinue (page 31).16

60%50%40%30%20%10%0%Percentage ofmeals eaten alone1994 2005Source: TNS Family Food PanelBakkavör market sectorsMore spent per shopping trip on ourproducts than any other food categorySoft drinksConfectioneryCheeseFruitVegetablesBiscuitsMilkMorning goodsBreadSpend per trip £0.951.121.501.87Source: TNS, 52 weeks ending 22 May 20052.392.362.342.342.563.280.0 0.5 1.0 1.5 2.0 2.5 3.0 3.517

The UK is the largest market in whichBakkavör Group operates and the UKfresh prepared foods market is thelargest in the world. In this section, weshare with you the key trends in the UKmarket which influence the largest partof our business.Emma OwenCategory Purchasing ManagerThe PizzeriaAt Bakkavör Group, we run adevolved business where the GeneralManagers of each site have a highlevel of independence and make theirown day-to-day decisions. We look,however, to achieve Group synergiesand economies of scale which do notaffect our autonomous structure andculture.We allow experts such as Emma,who are based in the businesses, tobuy key ingredients on behalf of theGroup. Emma works in one of ourpizza businesses and specialises inpurchasing Continental cheeses.food trendsIn the UK, the three mega-trends – health, convenienceand pleasure – continue to influence the way people shopfor and eat fresh prepared foods.The health, convenience and pleasure trends aredeep-rooted and long-lasting. However they aregradually evolving, affected by advances in technology,communication and cultural integration, as well aschanges in the UK’s traditional social structure. Thisdevelopment has led to the emergence of two distincttrend groupings – described by Datamonitor as thebenefit and complexity mega-trends.The complexity mega-trends focus on the breakdown ofthe UK’s traditional demographics and demonstrate thatpeople with very different social backgrounds, ages andgender may think and act in similar ways, hold similarattitudes and adopt similar values.The benefit mega-trends focus on the specific productbenefits that people look for at different stages in theirlives.As a fresh prepared foods manufacturer, we need tounderstand these mega-trends to identify the key factorsshaping our markets and to develop products that meetthe changing needs of today’s consumers.HealthPleasureConvenienceSource: Datamonitor18

19UK market

ConvenienceConvenience means different things to different peoplebut can be summarised as looking for ease. Time pressure,stress and the challenge of achieving a work-life balancemean that, today, ease is in high demand. People areseeking easy solutions across all aspects of their lives thatfree up time and, for this, they are generally willing to paya premium price.E a s e o f c o o k i n gIn the UK, it is unusual for people to make meals fromscratch regularly. According to research undertaken bythe Institute of Grocery Distribution (IGD), only 27% ofpeople surveyed claimed to make at least one meal fromscratch between Monday and Friday. Although 45% 1 ofUK consumers enjoy cooking, a decline in culinary skillsand an unwillingness to devote time to cooking hasresulted in people spending less time preparing mealsat home. The total cooking and preparation time for themain meal of the day has reduced from 30 minutes in1994 to 19 minutes in 2005. 2People vary the amount of time spent preparing mealsaccording to their circumstances. Sometimes peoplewant a quick, foolproof solution; sometimes people arekeen to be ‘involved’ in the cooking process. ‘Assemblycooking’, where people use fresh prepared foods, suchas fresh pasta and fresh sauces, is a good example of thelatter. Products such as ready to cook meals and preparedvegetables also cater for these needs successfully. Theseproducts contain raw ingredients and allow people to feelas if they are cooking from scratch – the advantage beingthat they have not spent time shopping for all the specificingredients or chopping and peeling them.E a s e o f e a t i n gPeople are increasingly eating smaller snacks throughoutthe day, often on the move, rather than eating traditionalmeals at set times. Datamonitor estimates that, acrossEurope, people will skip 12.4 more main meals in 2008 thanin 2003, which equates to 1 billion fewer core meals in total.In the UK, 22.9% 2 of all meals are consumed as snacks.1.1 billion 2 snacks are eaten ‘out of home’ and bought insupermarkets – a 9% increase in the last two years.However, the fastest growing type of meal in 2005 wasthe light meal. In 2005, 23.9 billion 2 light meals wereeaten – a 7% increase on 2004. People are opting formore filling snacks to compensate for smaller or skippedmain meals and now define 39% 2 of all their meals as‘light’. Popular light meals include fresh soups, freshpizzas and snack salads.E a s e o f s h o p p i n gIn the UK, people are increasingly making additionalshopping trips throughout the week to supplement theirmain shopping trip. In a survey by the IGD in 2004, nearlya third of people asked claimed they were shopping morefrequently than they used to.One of the main factors influencing this is that people arespending less time planning ahead for food due to all theother activities they are trying to fit into their lives.Spontaneity is becoming the norm, as is a desire forinstant gratification. Decisions are made more often atthe last minute – undoubtedly made easier by the useof mobile phones and the Internet. As well as planningmeals later, people also buy their fresh items closer to thetime when they eat them. Fresh prepared foods are oftenthe ideal last minute meal solution.Today's extensive range of fresh prepared foods providesa variety of options for people who choose to ‘assemblycook’, who want an ‘instant’ meal (e.g. snack salad orwrap) or who are happy to put a fresh pizza into the ovenor reheat a ready meal in the microwave.Single-person households account for 30% of householdsin the UK and many people live in city centres wherespace is at a premium. Top-up shopping is a convenientoption for these people as space to store and cook food isoften limited. There is also a growing trend for people tolive away from home in rented or hotel accommodationduring the working week, returning home at weekends.1Scratch vs Convenience Cooking, Mintel, June 20052State of the Nation 2005, TNS Family Food Panel (N.B. This definition has recentlychanged and is based on meals for an average-sized family of four people).20

Their eating habits are governed by work commitments– they will either eat out or buy products that are easy toprepare, such as fresh prepared foods, from local stores.As reported in ‘Food retail trends’ on page 30 the majorsupermarkets have invested heavily over the last fewyears in developing their convenience food offer and theconvenience store is now the most popular choice forpeople when they need a top-up shop. Fresh preparedfoods command significant space in these stores asdemand for these products is high.The rise in popularity of Internet shopping is anotherstrong indication of people’s desire for convenience.People have the choice to place orders whenever it suitsthem and are no longer confined to shop opening times.Given that over 60% of UK households have a homecomputer and over 50% have access to the Internet, manyorders are placed in the comfort of people’s homes. TheIGD estimates that there will be eight million connectionsto high-speed broadband by the end of 2005, which willfurther boost Internet shopping.In 2005, around £19.2 billion was spent online in the UK– an increase of 32% over 2004. 24 million consumersshopped online in 2005 – each spending an average of£816.Some UK food retailers have invested heavily in Internetshopping services and the choice of fresh prepared foodsavailable online is steadily expanding.CONVENIENCEMain meal preparation:weekdayWhen choosing food, the mainobjective for 41% of shoppersis to buy something that isquick to cook.Cooking from scratchCooking paste plus ingredientsCooking sauceA light meal e.g. beans on toastReady mealsTakeaway27%30%24%24%22%39%Source: MintelEating out19%% of consumersSource: Consumer Watch, IGD, 200421

22HEALTH

HealthAccording to TNS Family Food Panel, 15.2 billion mealseaten in the home (around a fifth of all in-home meals)are classed as healthy by the consumer and this number isgrowing at 5% year-on-year.Going forward this trend will become more significant ashealth needs become more complex due to the ageingpopulation and ever-stressful lives. People’s valuesand attitudes towards health are shifting and we arebecoming more proactive in how we achieve a healthylifestyle.Over the last ten years people have become moreinterested and knowledgeable about the food they buyand eat. High-profile celebrity chefs continue to play arole in educating people about ingredients, sourcing andcooking methods.There has also been increased media attention followingthe Sudan 1 product recall and effective educationalcampaigns by the Food Standards Agency (FSA) ongeneral health issues such as obesity and salt, sugarand fat levels. A survey by the FSA, following one ofits campaigns, showed that between August 2004 andJanuary 2005 there was a 32% increase in people claimingto cut down on salt.For many years, the vast majority of fresh prepared foodshave provided voluntary, detailed on-pack nutritionalinformation such as calories, sugar, sodium, fibre,carbohydrate, protein levels, nut information and portionsize. These have proved useful for people who wish tomonitor the food they eat.Undoubtedly, on-pack information can be improvedand must be made simpler for people to understand,especially as demand for information increases. However,in many areas, fresh prepared foods lead the way inhelping people make informed choices about the foodthey wish to eat.Concerned aboutbeing overweightI look out forhealthy productsChanged tohealthier foodsBuy low saltif availableReduced calorietastes as goodConcerned about amountof salt I consumeChanged diet onmedical adviceIn general, consumers arebecoming more aware of healthand a healthier lifestyle% of individuals agreeing with the statement ...22.4%20%27.9%27.6%Source: TNS Family Food Panel43.3%36.4%33.6%30.8%46.8%41.3%2004200355.8%54%53.3%48.2%0% 10% 20% 30% 40% 50% 60%Health is high up on the agenda. Over 20% ofconsumers believe the most important reason forfollowing a healthy diet is to live a long life.Source: Food Consumption, IGD, 200523

PleasureIn addition to health and convenience, Datamonitorhas identified four other trends: sensory, comfort,individualism and connectivity. We have chosen to groupthese under ‘pleasure’.S e n s o r yThe sensory benefit is explained by people taking risksand experimenting with new tastes. Today, global travelallows people to eat national and regional foods whenabroad which can be replicated when they return thanksto the availability of ethnic ingredients, ready meals andadventurous restaurant menus. In the last two years aloneGreek, Indonesian, Oriental, Mexican, Hungarian, Spanish,Portuguese, Moroccan, Japanese and Russian ready mealrecipes have been launched in the UK.In the UK, the provenance of foods is becoming moreimportant. In the fresh produce arena, for example, it isbecoming more common for the name of the farm and/orfarmer to be seen on packs of produce. In fresh preparedfoods, there are recipes which use and name localingredients, e.g. regional cheeses and sausages.C o m f o r tOn the surface, the comfort benefit appears to contradictthe sensory benefit. The former reflects the desire to staywith the familiar, whereas the latter highlights the willto experiment. Both benefits, however, involve a levelof self-indulgence and demand for quality. The comfortbenefit has evolved from our need to find ways to escapeour pressured life and reduce the number of choices wehave to make on a daily basis. Comfort can be achievedby returning to familiar and simple pleasures in life,particularly those from our childhood in the ‘good olddays’.PLEASUREThis trend helps explain the growth in demand fornostalgic foods. People are increasingly choosing old UKfavourites, e.g. a roast beef lunch, sausages and mash,or a traditional pudding such as a sherry trifle or lemontart. Again, these trends influence the types of freshready meals, soups and desserts now on offer in the UK– in particular through some of our customer sub-brandsreflecting bistro and gastro-pub menus.24

UK demographic trendsAn ageing populationOver the last three decades,the average age of the UKpopulation has risen from 34.1years in 1971 to 38.6 years in2004.Smaller households for longerAlthough the fertility rate inthe UK of 1.77 children perwoman has risen since the alltimelow of 1.63 in 2001, theaverage age of women havingtheir first birth continuesto rise – 27.1 years in 2004versus 23.7 years in 1971.Divorce rates on the rise again?People are taking longer toget married and the numberof divorces has risen for fouryears in a row. In 2004, thehighest divorce rate wasrecorded since 1996.I n d i v i d u a l i s mThe individualism trend focuses on the desire to berecognised as having personal needs rather than beingpart of the mass market. This is largely influenced bythe rise in single-person households with people gettingmarried later, divorcing faster and living longer.Developments which reflect this trend in the freshprepared foods market include single-serve packagingand portions. Again, the extensive range of freshprepared foods available in the UK means that the‘individual’ can easily ‘pick and mix’ meals for one.C o n n e c t i v i t yThe connectivity trend focuses on the importancepeople place on leading a life that involves meaningfulrelationships and experiences. In essence, people aresearching for a greater sense of community and lookingfor others who share similar values and attitudes.One example of the connectivity trend is the rise ininformal home entertaining. Fresh prepared foods areoften used in such get-togethers. ‘Sociable’ products– designed for sharing – such as fresh dips and savourymeal accompaniments are ideal solutions for suchoccasions. Similarly, leafy bagged salads, garlic baguettesand fresh desserts ease the stress of worrying aboutstarters and ‘afters’, giving the host more time to talk toguests.Source: ONSS u m m a r yDespite the blurring of social boundaries and someseemingly contradictory lifestyle demands, the familiarkey food mega-trends of health, convenience andpleasure continue to influence the food market.The strength of these trends bodes well for the future offresh prepared foods in particular, as these products canoften fulfil people’s lifestyle needs and aspirations moreeasily than other types of foods.Manufacturers and retailers alike will continue to developtheir products and services to take advantage of thesestrengthening trends. For examples of how BakkavörGroup translates these trends into new product ideas,please turn to pages 34 to 37 in ‘Our innovation’ section.25

2005 – a cautious yearThe UK economy saw a slowdown in 2005and this affected consumer confidence,despite retailers reporting the bestDecember sales for four years. A number offactors caused this weaker confidence:Interest ratesBy the end of 2004, the UK consumer had experiencedthree consecutive interest rate rises, which resulted inhigher mortgage payments and therefore a reduction indisposable income. As over 70% of homes in the UK areoccupied by their owners, consumer confidence is verymuch affected by housing costs.Uncertain whether they would be hit by further interestrate rises, more people started to save and, in 2005, theamount of money put into savings accounts reached itshighest level for a number of years. Some relief camein August 2005 when the main interest rate was cut by0.25% to 4.5%, which helped boost consumer confidencetowards the end of the year.E C O N O M I C T R E N D SIt remains difficult to predictconsumer confidence for 2006,but people always have to eatand our products are part ofpeople’s lifestyles.26

Housing marketThe UK’s most valuable asset continues to be housing andis equivalent to 59% of the nation’s wealth. House priceshave risen faster than disposable income in recent years.This has discouraged first-time buyers from enteringthe market and also led to relatively high levels of debt.The Nationwide building society reported that houseprices grew by 2.4% in 2005, compared with 12.7% in2004, which has given rise to mixed views about futureprospects. Most people believe that a house price crashhas been averted but a return to significant increases inhouse prices in 2006 is not expected.InflationInflation gradually increased until September 2005 whenit reached a peak of 2.5%. This was due largely to higheroil prices which inevitably led to higher transport and airtravel costs. Fuel prices since dropped and inflation fell toaround 2% at the end of the year.Credit card borrowingOver the past five years, outstanding credit card loansin the UK have increased by 54% to £56 billion. In 2005,credit card borrowing increased overall by 10% but,again, trends changed towards the end of the 2005 andcredit card borrowing rose by its lowest rate for fouryears – possibly fuelled by media coverage of the highlevel of debt in the UK. Uncertain consumers started totighten their belts and save more.Unemployment rateThe low unemployment rate in the UK remained stablefor most of 2005 and measured 4.9% in the third quarterof 2005. However, in the final quarter of the year, thisfigure reached 5% – the highest in two years. Thisincrease came mainly from the manufacturing sector.Employment levels in the service sector remained stable.Overall, the UK economy saw a slowdown in 2005.Growth in the service sector was negated by poorperformances in the construction sector and, even poorerones, in the manufacturing sector – a reflection of lowconsumer confidence during the year.Going forward, people are expected to remain very valueconscious and, according to the British Retail Consortium,‘the first quarter of 2006 looks challenging’.What does this mean for us?With so many mixed economic messages, it remainsdifficult to predict consumer confidence for 2006.However, people have to eat and, increasingly, ourproducts are part of people’s lifestyles. Unless, there isa deep and long-lasting recession, we believe that freshprepared foods should be relatively ‘recession robust’.Annual inflation rate3.53.0Retail Price IndexConsumer Price Index2.52.01.51.02003 Dec 2004 Mar 2004 Jun 2004 Sep 2004 Dec 2005 Mar 2005 Jun 2005 Sep 2005 DecSource: ONS27

Andy GreenWarehouse ManagerSpalding WarehouseAndy has worked in logisticson the Spalding site for10 years. He started as apicker and now runs thewarehouse which co-ordinatesproducts from a cross-sectionof Bakkavör Group sites,providing a cost-effective andefficient service to our retailcustomers.Andy thrives on the challengesthat the fast-moving world oflogistics brings, which is just aswell – in 2005, 33 million casesof product were processedthrough the Spaldingwarehouse, up 10%. On thepeak day in 2005, 150 caseswere picked every minute,90 pallets were loaded everyhour and over 4 vehicles weredespatched every hour.28

The UK food retail market has undergone recent consolidationand has relatively few players. We trade with all the majorsupermarket chains and it is our intention to continue to buildstrong relationships with our customers. In this section of thereport, we give an indication of some of the main UK foodretail trends and an overview of the key players.A concentrated marketFood retailing is big business in the UK. In 2004, foodretailers accounted for 46% 1 of all retail sales in the UKand in 2005 our main customers accounted for almost85% of the £119.8 billion 2 UK grocery market.This is a mature market, characterised by increased pricecompetition, consolidation and the development ofdistinct store formats, retailer sub-brands and alternativesales channels (e.g. grocery orders via the Internet). Themost significant event in recent years was the acquisitionof the fourth largest grocery retailer, Safeway, byMorrisons in early 2004 and the subsequent sale of storeswhich was a condition of the takeover.The combined share of the four largest UK food retailers(Tesco, Asda, J Sainsbury and, now, Morrisons) continuedto increase during 2005 and these retailers now hold a70% share of the UK grocery market (including Marks& Spencer, which is not normally classified as a groceryretailer).1Food Retailing – UK, Retail Intelligence, Mintel, November 20052Grocery Retailing 2005, IGD, August 2005The combined share of the top four retailers in the freshprepared foods market amounts to just over 70% andMarks & Spencer has over double its fair share of themarket compared with its grocery share. The strength ofthe main retail players in the fresh prepared foods marketbecomes evident by looking at the share of the top sevenretailers, who hold just under 85% of the grocery marketand over 90% of the fresh prepared food market.Intense price pressureAs a result of price competition between the largegrocery retailers, prices have been squeezed and, overthe last three years, food inflation has consistently beenrunning below the general rate of inflation and, at times,has even experienced periods of deflation.Despite these tough trading conditions, the UK grocerymarket has seen an increase of 4.2% in sales (by value)over 2004, helped by consumers ‘trading up’ and buyingmore premium brands (see page 31).f o o d r e t a i l t r e n d sGrocery shareby retailer 2005Fresh prepared foods marketshare by retailer 2005Others 15.6%Somerfield 5.4%Marks & Spencer 5.3%Tesco 27.6%Others 8.7%Somerfield 4.0%Marks & Spencer 11.8%Tesco 28.5%Waitrose 5.4%Waitrose 5.1%Morrisons 12.0%Asda 15.8%Morrisons 9.8%Asda 14.1%J Sainsbury 14.9%J Sainsbury 18.0%Source: TNS Till RollSource: TNS RST Summary29

A polarisation of store formatsIncreases in market share by the large supermarket chainshave been gained through the strategic development ofdifferent store formats – achieved mainly through storeacquisitions and refurbishments. There has been anincrease in the number of convenience stores for ‘topup’shopping and also in large one-stop ‘destination’superstores that sell both food and non-food items.For the purposes of this report, we will focus ondevelopments in food.ConvenienceGrowth in the convenience sector continues to be astrong factor behind overall growth in the UK grocerymarket. For every pound spent on food and grocery,people spend 20 pence in convenience stores and thetotal sector is estimated to be worth £23.9 billion 3 , up4.9% on 2004.In this section, we concentrate on the stores that are runby our major supermarket customers – the ‘conveniencemultiples’, as defined by the Institute of GroceryDistribution (IGD) – as these stores represent the biggestopportunity for our products. Total sales from these storeformats amounted to £2.66 billion in 2005, up 17.8%since 2004. Our customers now hold around 11% shareof the total sector, gaining just over 1% market sharefrom other convenience store players over the year.The convenience sector is forecast to remain strong,with the major retailers expected to continue to investin this area. However, at the time of writing, the HighStreet Britain: 2015 report has just been published. Thisis an investigation by the All-Party Parliamentary SmallShops Group into the impact of supermarkets on smallerstores in the UK. The authors have no legislative powersbut have recommended that the government suspendsmerger and takeover activity in the sector and appointsa retail regulator. This report has also been submittedto the Office of Fair Trading (OFT) which has given aprovisional indication that it might refer the UK retailsector to the Competition Commission.It is difficult to predict the influence of this report andthe outcome of an OFT referral at this stage. Prior tothis development, the IGD predicted that the number of‘convenience multiples’ stores is set to grow a further18% by 2010 and their sales turnover 53% in the sameperiod. This development represents an excellentopportunity for our types of products. Chilled foods (asdefined by the IGD) is now the third largest sales categoryfor convenience stores (behind tobacco and alcoholicdrinks) – accounting for 11.6% of all conveniencemultiples sales in 2004.In the same survey, retailers voted the chilled andfresh food category as the best future opportunity forconvenience stores. This undoubtedly reflects the UKshopper’s propensity for top-up shopping (see page 20 inthe ‘Food trends’ report).Again, much of this growth was realised through theincrease in store numbers following acquisition and storeconversions. Sales per store in the convenience multiplessector are much higher than in convenience stores run byother players.Convenience stores tend to be much smaller than otherretail stores and are ideally located in areas of highpopulation density, near affluent shoppers who needquick-fix solutions. It comes as no surprise, therefore, thatretailers are targeting the ‘high street’ (rather than out-oftown locations), busy towns and cities and areas such asrailway stations and garage forecourts. In many cases, UKretailers have their own petrol forecourts on the premisesof their larger stores and have taken the opportunity todevelop these into convenience stores. In other cases,retailers have linked up with major oil companies tohelp expand the grocery offer in the branded petrolforecourts.Online shoppingThe UK online grocery market is estimated to be worthabout £1 billion. This figure is expected to increase giventhe projected uptake of home computers and high speedconnections (see page 21 in the ‘Food trends’ report).No longer confining themselves to non-food or nonperishablefood items, the UK consumer has now gainedmore confidence in ordering fresh and frozen foodsonline. Exclusive research for Bakkavör Group showsthat in the last quarter of 2005, 17% of food was boughtover the Internet, up from 5% in the previous quarter.Far from being a threat, we believe that online shoppingrepresents a viable channel for fresh prepared foods,which now feature frequently on retailer websites.3Convenience Retailing 2005, IGD, April 200530

Retailer brandsUK retailers have a higher percentage share of productssold under their own brands than any other mainEuropean country. Around 36% of all consumer packagedgoods sold in the UK are under retailer brands.For the sectors of the market in which Bakkavör Groupoperates, this figure is nearly three times higher at 95%.This reflects the close way in which manufacturers andretailers work in this relatively young sector of the foodmarket and the trust that UK consumers have in thesebrands. In a recent report by Datamonitor, chilled foodwas identified as the fastest growing own label categorybetween 2000 and 2005 – up 18% – and this trend is setto continue.Fastest-growing own labelproducts in the UKSoft drinksMake-upOver-the-counter healthcareSpiritsSkincareChilled food11%11%12%13%17%18%0% 5% 10% 15% 20%Source: DatamonitorConvenience storeprojections to 2010No. of stores3,0002,5002,0001,5001,000500003 04 05 06 07 08 09 10YearStore numbersTurnover£ billion4.543.532.521.510.50Source: IGDNote: These figures are for‘convenience multiples’ only.Trading upThe top retailers have invested considerably in the developmentof premium retail sub-brands over the past few years to helpmeet consumer demand for pleasure (see page 24 of the ‘Foodtrends’ report). These sub-brands provide strong competitionto the premium manufacturer brands and are now substantialbrands in their own right. Since 2000, the largest premiumretailer sub-brands have increased by over 10 times in value andare now worth over £100 million. 4SummaryThe UK food retail market remains challenging, following anunprecedented period of continued price pressure and retailerconsolidation. However, our customers continue to representthe best channels for sales of fresh prepared food. They continueto look for growth opportunities, through significant investmentin new store formats, successful retail brands and sub-brandsand alternative channels such as their Internet grocery websites.4TNS State of the Nation, November 200531

M o r r i s o n sMorrisons is a large format retailer and, traditionally,its shoppers have been less affluent and younger.It completed its conversion of the Safeway storesin November 2005, which was a huge undertaking.Following the acquisition it has expanded its geographicand demographic reach to become a national player. Asa result, its shopper profile is now similar to the totalmarket. The company aims to offer quality and value andcompetes primarily on price with extensive promotionaloffers.S o m e r f i e l dAlthough its supply chain operations have beenintegrated, the Somerfield Group operates two storenames, Somerfield and Kwik Save. Kwik Save is its valuediscount store and Somerfield focuses on providingfreshness and convenience to local shoppers. Theshopper profiles reflect this difference in store types.Somerfield stores are considerably smaller than those ofits rivals and it aims to be the ‘leading small store formatretailer in the UK’.T e s c oTesco is the largest retailer for grocery and freshprepared foods and its brand has an extremely broadappeal – attracting customers from all socio-economicbackgrounds. This is part of its strategy and has beenachieved through its variety of store formats (from thelarge hypermarket to the small convenience store), theextent of its trading space and its diversification intoareas such as non-food and services.% of housewife aged under 45Retailer demographic profile55504540Total grocers353025201525 30 35 40 45 50 55 60% of class ABC1Source: TNSW a i t r o s eWaitrose attracts the highest proportion of affluentshoppers and has a premium food position. Historicallybased mainly in the South, Waitrose has expanded itsgeographical store coverage through the acquisition ofstores from Morrisons, sold as part of the takeover deal.33

At Bakkavör we believe innovation is a cornerstoneof our operations – fundamental to our businessgrowth as well as our high level of service tocustomers. The following section is based oninterviews with our Development Directors, whodescribe and explain how our innovation processworks.Michelle StockDevelopment ChefWelland Fresh FoodsTo help maintain high food standardsat Bakkavör Group, we employ severalchefs with experience outside the foodmanufacturing industry, who haveworked at highly-regarded restaurantswith well-known chefs. Michelle has beenwith the Group for over five years, duringwhich time she has run internal culinarytraining courses and worked at threedifferent sites. Before joining, Michelleworked on the Queen Elizabeth II cruiseship and with top chefs at a prestigiousgolf club. She also travelled and cookedher way around Australia for a year.O u r i n n o v a t i o nAre the health, convenience and pleasure trends stillrelevant for today’s product development?Absolutely. The health, convenience and pleasure trends(see pages 18 to 25 in the ‘Food trends’ report) havenever been stronger. To be successful, we must continueto base our product development on these trends as thisis what people are demanding currently.However, there has been a change in emphasis. Takethe health mega-trend, for example. Two years ago,people were only really worried about counting caloriesand maybe looking at fat content if they were tryingto control their diet. By definition, this was a reactiveapproach. Today, people still look at the calorific contentof food, but they are taking a more holistic and proactiveapproach to their diet, e.g. eating the right types offood, choosing ‘superfoods’, drinking more water andexercising more. Dieting is no longer just about weightloss but about ‘feeling good’ and eating foods which arenaturally good for you.Why is this happening?There are several triggers, but the main one is thatpeople are living longer. 16% of the population is aged65 or older and this percentage will continue to increase.People are starting to realise that they need to invest intheir health now if they want to be healthy for longer.Eating healthily is also a topic that has featured highlyin the press and in government campaigns. Therefore,people are becoming more aware of the need for balancein their lives.So what do people want from their food?Fresher food which is as convenient as possible toprepare and/or cook. Do not underestimate the timesavingelement. People may want less processed food,with less packaging and more information but, very fewpeople want to spend more time preparing their food ona daily basis.People also want to see good-quality ingredients andhave some reassurance about where their ingredients aresourced and how their food is prepared. For this they aremore likely to pay a premium price.Although people continue to experiment with newingredients and are more confident with names andtastes, there is a hankering after some of the morenostalgic and simple recipes (e.g. sausages and mash).So, in summary, people today are looking for ‘fresher andlighter’ food which is naturally healthy.34

So how do you go about incorporating these ideas intoyour products?We are very well placed to continue to take advantageof these trends as many of our products only use rawingredients and these have a great fresh appeal – forexample, leafy bagged salads and fresh fruit salads. Inother product areas we are using less packaging andphotography to show off fresh ingredients more. Forexample, the best way to sell a fresh pizza is to make surethe toppings are visible through as large a window aspossible. We are also working with our retail customersto improve further the clarity of nutritional informationavailable on our products so that people can choose withconfidence.In areas such as ready meals, we have been working onthe ‘ready to cook’ range which has proved very popular– the ingredients can be easily seen, the product is rawbut still convenient and people can also be ‘involved’ inthe cooking process. Our challenge is to continue ourdevelopment in these areas whilst looking after our coreranges, bearing in mind affordable prices.36

What is the secret of success in new product development?Understanding what people want and using a bit of ‘gutfeel’!If you can cover off at least two of the mega-trends youprobably increase your chances of launching a successfulproduct. In the current climate, a good combinationwould be the health-convenience mix. (But don’t forgetthe pleasure-convenience mix – indulgence productscontinue to perform well – we all need treats every nowPeople, today, arelooking for ‘fresher andlighter’ food which isnaturally healthy.and then!) But the ultimate aim would be to developproducts which hit all three mega-trends: health,convenience and pleasure. An example of this would beprepared fruit salads with exotic fruits – these are bright,colourful and healthy and also a real tasty treat. Thetime-saving element is also very clear – people know howcostly it would be to buy each ingredient and how fiddlyit can be to prepare fruit. It is no coincidence that theprepared fruit market grew by over 25% in 2005.But how do you come up with good ideas all the time?One of the ways we do this is by tracking what ishappening in restaurants. We then present these trendsand product ideas to our supermarket customers. Forexample, there is a definite shift in the type of restaurantsin the UK – a move from the heavy, ‘classic’ types ofcooking to modern lighter eating, e.g. using less creamand butter.There is also an interesting blurring of traditional cookingstyles as chefs from different countries and disciplineswork together. Don’t be surprised to find a Spanish-style‘coq au vin’ on the menu or a traditional British puddingmade with a French-style custard and a higher proportionof fresh fruit.We also carry out research and ask people about theiropinions on new products and packaging to understandtheir preferences. We incorporate this information andthe restaurants trends into our new development ideaswherever possible.Do your retail customers ever hand over a recipe and say,“Make that”?Extremely rarely. Long gone are the days when oursupermarket customers had huge food developmentteams. Today, the day-to-day product development isvery much part of the service we provide. But, of course,we work very closely with them on the initial concepts toensure that the product categories fit into their bigger,strategic picture or specific sub-brands (e.g. a healthy orpremium sub-brand). A buyer can always reject a productif he/she doesn’t like it, but the idea generation andexecution is mainly down to us.So what were the key product areas in 2005 and what doyou predict for 2006?Anything lighter and fresher proved to be popular. Wealso saw good sales in premium ready meals – thesehad good-quality ingredients and hit the indulgence andnostalgia trends. Without giving away too many tradesecrets we will be looking at fresher snack-type productsand we are working on some exciting new packagingconcepts. Whatever we do, however, we must continueto be mindful of people´s different lifestyles and attitudesas these will influence our new product developmentsignificantly.And finally, any top tips for ‘feeling good’?You could try choosing products which contain any of thenatural ‘superfoods’ – foods which in their own right are goodfor you. I recommend avocado and tomatoes in particular, soyou should be OK to eat guacamole and salsa dips!37

The highlight of the year was Bakkavör Group’sacquisition of Geest, one of the UK’s leading providersof fresh prepared foods and produce. During 2004,Bakkavör Group built up a strategic stake in Geest anddisclosed at year end that it had made an indicativeoffer to acquire the company. The review belowoutlines the progress of the acquisition and other keydevelopments in 2005.Annual review 2005Our businessJon PinderGeneral ManagerGeest ProcurementJon is responsible for sourcing saladsfor our prepared leafy salads and snacksalads. In order to obtain optimal qualityand year-round supply, Jon and his teamwork closely with our growers to developnew varieties and plan for expecteddemand. Jon has worked for the Groupfor 11 years and enjoys the diversity ofhis job – contact with different suppliersand customers, the variety of produce hehandles and the mix of operational andstrategic thinking required.Jon and his team source over 40different varieties of fresh salads andherbs including: apollo, batavia, chard,chervil, Chinese leaf, chives, coriander,cos, escarole, flat leaf parsley, frisée,gem, iceberg, lambs’ lettuce, lollo rosso,mizuna, oak leaf, radicchio, spinach,tango, tatsoi, watercress and wildroquette.JanuaryBakkavör Group presented its annualresults to shareholders on 27 Januaryand confirmed that the due diligenceprocess for the potential acquisitionof Geest had started.FebruaryBakkavör Group held its AnnualGeneral Meeting on 25 February inthe National Museum of Iceland.Ágúst and Lýdur Gudmundssonpresented their vision to grow thebusiness organically and throughstrategic investment in the freshprepared foods market, reiteratingtheir intention to acquire Geest.MarchFollowing the completion of duediligence, Bakkavör Group submitteda binding offer for Geest on 8 March.The Geest Board recommendedthat its shareholders accept theoffer of 655 pence per share withan additional 7 pence per share as aspecial dividend. The total price paidfor shares was £497.3 million.Brynjólfur Bjarnason, non-executiveDirector of Bakkavör Group, resignedhis position from the Board on 14March due to a possible conflict ofinterests.39

AprilAt the beginning of the month, a fireat the Geest Barton-on-Humber sitedestroyed two facilities making pastaand speciality bread. Fortunately, noone was injured. The two facilitiesrepresented less than 10% of Geest’sassets and contributed around 6%to the Group’s turnover. Geest wasinsured against the loss.On 20 April, Geest shareholdersapproved the recommendedacquisition by Bakkavör Group.The first quarter trading resultsannounced on 28 April showed agood financial performance in theover 4,500 products across 17categories with a combined turnoverof around £1 billion, operatingover 40 factories and employingapproximately 13,000 people in sixcountries.At the investor briefing in Icelandon 27 May, Ágúst and LýdurGudmundsson presented BakkavörGroup’s new long-term financialgoals. (Please turn to page 60 in ‘Ourstrategy’ section.)In order to maximise synergies andutilise knowledge and in-houseexpertise across the Group, all offirst quarter of 2005. Like-for-likesales growth was 14% with net salesamounting to £38.8 million and netincome amounting to £4.2 million –a 94% increase. Operating profit was£7.1 million, up 68%. Operations werecharacterised by good organic growthand strong cash flow.At the end of the month, BakkavörGroup’s acquisition of Geest wasagreed by the Office of Fair Trading(the UK’s competition authority).MayOn 13 May, Geest became a part ofBakkavör Group and delisted from theLondon Stock Exchange on 16 May.Payments to shareholders were madeon 27 May. The acquisition processwas completed for a consideration of£623 million.As a result of the joining of the twocompanies, Bakkavör Group becamethe leading supplier of fresh preparedfoods and produce in the UK, making40Bakkavör Group’s UK operations werecombined under the Geest operationalstructure, which remains under theleadership of Gareth Voyle.JunePlans for further integration of thecompanies were set in motion.Changes to the reporting of financialresults included new sales analysisby geographical market and productgroups (hot-eating and cold-eating).A new bond loan issued raised capitalfor further development of activities inthe Group’s markets. Barclays, whichunderwrote the acquisition facility,finished the loan syndication at theend of June.JulyBakkavör Group and Kaupthing Bankrenewed a market making agreementfor issued shares in Bakkavör Groupwith the aim of improving liquidity andenhancing transparent price formationon the Iceland Stock Exchange.AugustThe half year results were announcedon 25 August and reflected the fullincorporation of Geest into BakkavörGroup’s consolidated accounts fromMay. Pro-forma sales increased by justunder 5% to £489.5 million over thesix month period and profit for theperiod was £12.1 million, up 128%.Operating profit amounted to £24.9million – up 155%. Owing primarilyto the acquisition of Geest, BakkavörGroup’s balance sheet changedconsiderably – total assets rose nearlyfour-fold to £1,036.6 million andgoodwill amounted to £476.1 million.Cash flow remained strong with cashfrom operations at £25.3 million, up124%.

SeptemberOn 19 September, Bakkavör Groupincreased its share in Fram Foodshf. 1 , which had become one of theleading manufacturers of consumerpacked marine products in the Nordiccountries following its acquisition ofa Finnish herring producer, BoyfoodsOy. By participating in a shareoffering and converting a loan in thecompany to shares, Bakkavör Group’sstake in Fram Foods rose from 19.0%to 30.5%, allowing the Group tocontribute to the continuing growthof Fram Foods hf.1Fram Foods has historical links with Bakkavör Group.In 2003, Fram Foods hf. acquired Bakkavör Group’sseafood operations, allowing Bakkavör Group toconcentrate on its fresh prepared foods strategy. FramFoods hf. has operations in six countries: Sweden,France, Iceland, Germany, Chile and Finland.OctoberOn 17 October, Bakkavör Groupacquired a UK manufacturer offresh cut vegetables, Hitchen Foods,for £44 million. This acquisitionstrengthened Bakkavör Group’sfoothold significantly in the freshprepared vegetable market – arapidly growing category within thefresh prepared foods sector.NovemberThe third quarter results reportedon 17 November demonstrated theGroup’s continuing success followingthe acquisition of Geest in May. Overthe nine month period, operatingprofit was £45.8 million and netsales were £469.9 million. Profit forthe period was £20.7 million, up137%. Growth in underlying businesswas 7.5% and cash generated fromoperations was £43.3 million, up202%.Bakkavör Group confirmed that theintegration of Geest was runningto schedule and stated its intentionto play an active role in furtherconsolidation of the UK freshprepared foods market.Later in the month, BakkavörGroup announced a reorganisation,including 100 redundancies acrossits businesses in the UK. The changesprimarily affected roles at Geest’soffices in Lincolnshire and formedpart of the Group’s continuing driveto improve efficiencies and ensurefurther profitability.For more detailed information aboutBakkavör Group’s development in2005, please refer to the Group’swebsite: www.bakkavor.com, whereregulatory announcements andpress releases have been archived,or visit www.icex.is (the Iceland StockExchange’s website).41

Sidi ChouikhiTechnical ManagerCentral Technical TeamSidi has been with theGroup for one year andhas a specialised rolewhich encompasses amix of technical (foodsafety and quality) anddevelopment skills.Sidi works on a varietyof projects aroundthe Group to improveprocess performanceand technical productinnovation. He is anindustry expert inmicrowave technologyand runs in-housetraining courses. He hasrecently worked on a newpackaging concept whichhas been filed for patentand which he expectsto see shortly on thesupermarket shelves.42

FINANCIAL reviewE x e c u t i v e s u m m a r yNet sales in 2005 were £722.1 million, which is a 383%increase compared with 2004 sales of £149.6 million.Operating profit amounted to £66.7 million, increasingby 176% and earnings before interest, tax, depreciationand amortisation, EBITDA, increased by 208%, amountingto £86.1 million. Profit before tax amounted to £38.4million reflecting the increase in operating profit, offsetby higher interest charges resulting from the cost ofservicing the increased debt used to acquired Geest andHitchen Foods. Cash generated from operations totalled£103.6 million and free cash generated by operatingactivities was £65.6 million. Earnings per share increasedfrom 0.8 pence to 2.0 pence and return on equity was30.0% compared with 16.4% in 2004.43

Five year summaryProfit and loss account 2005 2004 2003 2002 2001Operating revenues 722,065 149,584 137,867 133,684 41,036Operating expenses (636,061) (124,803) (115,444) (110,876) (34,750)Share of profit in associates 75 3,176EBITDA 86,079 27,957 22,423 22,808 6,286Depreciation (19,429) (3,799) (4,108) (3,414) (2,024)EBIT 66,650 24,158 18,315 19,394 4,262Financial expenses (28,269) (7,092) (4,043) (3,957) (684)Net income from operating activities 38,381 17,066 14,272 15,437 3,578Income tax (6,048) (3,962) (3,882) (4,062) (1,017)Net profit from ordinary activities 32,333 13,104 10,390 11,375 2,561Extraordinary items 3,123 (434)Profit for the year 32,333 13,104 13,513 10,941 2,561Shareholders’ earnings 31,986 13,104 13,513 10,941 2,561Minority interest 347Working capital from operations 66,939 18,582 15,825 15,274 4,140Capital expenditure 16,413 3,529 5,691 15,879 1,652Balance sheet 2005 2004 2003 2002 2001Non-current assets 840,400 217,285 129,805 137,081 124,139Current assets 294,207 55,108 84,965 36,324 36,208Total assets 1,134,607 272,393 214,770 173,405 160,347Equity 127,352 88,214 72,056 58,611 46,975Subordinate convertible loan 12,868 12,868 15,923 15,923 15,944Non-current liabilities 691,355 151,950 96,068 63,256 71,753Current liabilities 303,032 19,361 30,723 35,615 25,675Liabilities 1,007,255 184,179 142,714 114,794 113,372Total equity and liabilities 1,134,607 272,393 214,770 173,405 160,347Key ratios 2005 2004 2003 2002 2001Current ratio 0.97 2.85 2.77 1.02 1.41Equity ratio 11.2% 32.4% 33.6% 33.8% 29.3%Equity ratio incl. subordinated loan 12.4% 37.1% 41.0% 43.0% 39.2%EBITDA ratio 11.9% 18.7% 16.3% 17.1% 15.3%EBIT ratio 9.2% 16.1% 13.3% 14.5% 10.4%Return on equity 30.0% 16.4% 20.7% 20.7% 22.0%Earnings per share from ordinaryactivities (GBP pence) 2.0 0.8 0.9 0.7 0.444Amounts in thousands of GBP

Financial highlights 2005• Sales growth in underlying business 6.7%• Record pre-tax profits of £38.4 million• Operating profit (EBIT) £66.7 million – up 176%• EBITDA £86.1 million – up 208%• Free cash generated by operating activities £65.6 million – up 407%• Total assets £1,134.6 million• Earnings per share increased from 0.8p to 2.0p• Return on equity 30.0% compared with 16.4% in 2004EBIT*Pre-tax profit*EBITDA/EBITDA ratio*GBP millions70GBP millions40GBP millions10020%605035308015.3%17.0% 17.4% 18.7%16%40256011.9%12%203015408%2010204%10502001 2002 2003 2004 200502001 2002 2003 2004 200502001 2002 2003 2004 20050%*Continuing business*Continuing businessEBITDA EBITDA ratio*Continuing business45

2 0 0 6 o u t l o o kManagement will continue to maximise synergies acrossthe enlarged Group, benefiting from the strong marketposition which it now commands. Further consolidationin the UK fresh prepared foods sector is anticipatedand Bakkavör Group confirms its commitment to playan active role in this trend. Performance is improvingin Continental Europe, following the effects of profitimprovement actions. Growth in underlying businessin Continental Europe was 12% in the first eight weeksof 2006. Group sales in the first eight weeks are betterthan expected and delivered strong growth of 10% inunderlying business. The fresh prepared foods sector stillremains a fast-growing area of the UK food market.A c c o u n t i n g p o l i c i e sBakkavör Group’s results for the year 2005 are the firstannual consolidated financial statements prepared inaccordance with the International Financial ReportingStandards (IFRS) as adopted by the European Union.The effects of the implementation relate in particularto the way the consolidated financial statements arepresented. Comparative figures have been re-calculatedin accordance with the standards and all comparisons ofoperating figures are therefore based on this format. Netincome and equity for 2004 remain unchanged.Between 1 January and 29 April 2005, Geest was accountedfor as an associated company. Thereafter, Geest becamepart of the consolidated Group. Hitchen Foods wasaccounted for as part of the consolidated financialstatements from October 2005.The preparation of the Consolidated Financial Statementsin conformity with IFRS requires management to makeestimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assetsand liabilities at the date of the Consolidated FinancialStatements and the reported amounts of revenue andexpenses during the reporting period. Management basesits estimates on historical experience and other assumptionsthat it believes are reasonable. Actual results could differfrom those estimates. Judgement made by managementand estimates with a significant risk of material adjustmentin the next year are impairment of goodwill and pensionplan liabilities.N e t s a l e sSales in 2005 amounted to £722.1 million. This was £572.5million, and 383%, higher than in 2004. Pro-forma sales,which are the combined sales of Bakkavör Group, Geestand Hitchen Foods for the whole year, amounted to£1,028.9 million in 2005 compared with £976.4 million in2004, which is a 5.4% increase. Like-for like growth in theunderlying business for the year 2005 was 6.7%.EBITDA*EBIT*Net sales*GBP millions30GBP millions25GBP millions3002520250201515200150101010055500Q1 Q2 Q3 Q42002200320042005*Continuing business0Q1 Q2 Q3 Q42002200320042005*Continuing business0Q1 Q2 Q3 Q42002200320042005*Continuing business46

Net sales*GBP millions80070060050040030020010002001 2002 2003 2004 2005*Continuing businessReview of 2005 profit and loss accountOperating profit and EBITDAOperating profit (EBIT) increased by 176% to £66.7 millioncompared to 2004. Earnings before interest, tax, depreciationand amortisation (EBITDA) amounted to £86.1 million in 2005compared with £28.0 million in 2004, an increase of 208%.The increase in operating profit and EBITDA is affected by theGroup’s acquisitions during the year.EBITDA ratio to net sales (EBITDA ratio) reached 11.9%compared with 18.7% last year. In 2004, Geest’s EBITDA ratiowas 9.3%.Share of operating profit in associatesIn 2005, the share of profit in associates decreased from £3.2million to £0.1 million. This was a result of Geest becomingpart of the consolidated Group from 29 April 2005, prior tothis Geest was accounted for as an associated company.InterestIn 2005, the net finance costs arising in Group companiesincreased by 299% to £28.3 million, principally as a resultof the interest charge on the debt used for the Group’sacquisition of Geest in May 2005 and the full year effect ofthe increased debt related to the bond issue in 2004. Interestcover remains well within our banking covenants.Income taxIncome tax during 2005 amounted to £6.0 million. This isequivalent to an effective tax rate of 15.8%. In 2004 theeffective tax rate was 23.2%. The tax rate on underlying profitbefore tax was 24.0% as compared to 28.7% in 2004. Thetax rate was impacted among other things by tax incentivesrecognised during the year, effects of acquisitions made inthe year and some outstanding settlements with the relevanttax authorities.Trading between the Group’s subsidiaries is monitoredcarefully to ensure that all transactions are based on arm’slength principles. Careful management of income tax willcontinue to be an important contribution to the overall resultof the Group.M i n o r i t y i n t e r e s t sProfit attributable to minority interests in 2005 was £0.3million. In 2004 there were no minority interests. Thischange is the result of Geest incorporation into the Group.47

D i v i d e n d sThe Group is currently pursuing an ambitious expansionstrategy and made significant investments last year.Given the Group’s strong cash flow and solid profitgeneration the Board of Directors will recommend at theGroup’s Annual General Meeting on 24 March 2006 thata dividend of 25% of nominal share value be paid out,which corresponds to ISK 0.25 per share or 11% of netearnings for the year 2005.E a r n i n g s p e r s h a r eBasic earnings per share rose by 141% to 2.0 pence principallyreflecting that the acquisitions made in 2005 were completedwithout issuing new shares in Bakkavör Group.C a p i t a l s t r u c t u r e a n d r e s o u r c e sEquity increased from £88.2 million at year end 2004 to£127.4 million at the end of 2005. The equity ratio is now12.4%, including the subordinated loan. The equity ratio atthe end of 2004 was 37.1%, including the subordinated loan.Return on equity for the year 2005 was 30.0% compared with16.4% in 2004.During 2005 the Group’s market capitalisation increased byapproximately £359 million to £756 million, due to a 110%increase in the share price during the year to a ISK 50.9 at 30December 2005. Net borrowings increased during the yearfrom £150.1 million at the end of 2004 to £695.0 million at theend of 2005, representing 92% of total market capitalisation.Cash and cash equivalents increased by 236% to £82.3 millionat year end 2005 compared with £24.5 million at the endof 2004. The Group’s borrowings, net of cash, amounted to£612.7 million at year end 2005 compared with £125.6 millionat year end 2004. The net debt cover remains comfortablyabove our target level and well within our banking covenants.In relation to the acquisition of Geest and also to refinanceGeest’s long-term debt the Group signed a £450 million creditfacility with a 5-year maturity and a £50 million multi-currencycredit revolving facility (RCF).The Group issued a new bond, BAKK 05 1, with a nominalvalue ISK 9.2 billion (£77 million). The bonds are indexedbullet bonds which bear a 5.4% fixed interest rate. The bondswill mature on 1 December 2010. The bonds are listed on theIceland Stock Exchange.Estimated future interest rate payments on debt are basedon the applicable floating rates of interest at the end of theyear for all floating rate debt or interest rate swap liabilities.Details of borrowings, currency and interest rate profile of theGroup’s borrowings are disclosed in notes 19 and 20 of theConsolidated Financial Statements.The Group has guaranteed borrowings and otherliabilities of certain subsidiary undertakings, the amountsoutstanding at 31 December 2005 being £12.3 million.At 31 December 2005 100% of the subordinatedconvertible loan was eligible for conversion and 19.2% ofthat had been converted.The Group intends to manage its capital structureproactively to maximise shareholder value whilstmaintaining flexibility to take advantage of opportunitieswhich arise to grow its business. One element of theGroup’s strategy is to make targeted acquisitions. It isintended that these will, where possible, be funded fromcash flow and increased borrowing.Working capital from operationsGBP millions35302520B o r r o w i n g sAt the end of 2005, the total of non-current and currentborrowings increased by 363% to £695.0 million comparedwith £150.1 million at year end 2004. At year end 2005approximately 96% of the gross debt was due later than oneyear. Approximately 4% of gross debt due within one yearwas supported by undrawn committed facilities maturingafter more than one year.48151050Q1 Q2 Q3 Q42002 20042003 2005

Committed payments at year end 2005 amounted to £108.0million. These payments have not been provided for in theaccounts and relate to lease payments under non-cancellableoperating leases, contracted capital expenditure andpurchase commitments for the next 12 months.A s s e t sThe Group’s total assets amounted to £1,134.6 million at yearend 2005 compared with £272.4 million at year end 2004.The increase was as a result of the consolidation of Geest andHitchen Foods into the Group’s consolidated accounts.Non-current assets were £840.4 million, increasing by287% year-on-year. Goodwill totalled £560.2 million andprincipally relates to the acquisition of Geest. The assessmentof fair value of the net assets of Geest at 29 April 2005 isprovisional, as permitted by IFRS 3. The assessment of fairvalue of Geest will be completed before 29 April 2006. Theassessment of fair value of the net assets of Hitchen Foodsis also provisional and will be completed at the latest by30 September 2006. Under IFRS, the value of goodwill willbe tested annually for impairment. At year end 2005 animpairment test was performed on the goodwill of BakkavörGroup and the outcome of the test was that goodwillimpairment was not required.Current assets at 31 December 2005 amounted to £294.2million compared with £55.1 million at the end of 2004.Included in current assets are pension assets in excess ofpension liabilities amounting to £7.5 million at year end2005. Current liabilities increased from £19.4 million at yearend 2004 to £303.0 million at year end 2005. The currentratio is 0.97 and the quick ratio is 0.87.Return on equity %Equity ratio %35%70%30%60%25%50%20%40%15%30%10%20%5%10%0%2001 2002 2003 2004 200502001 2002 2003 2004 2005Subordinated loanEquity49

Net cash provided by operating activities (GBP '000)2005 2004Profit for the year 32,333 13,104Items not affecting cash 34,606 5,477Working capital provided byoperating activitiesChanges in current assetsand liabilities66,939 18,58115,120 (2,101)Cash flow from operating activities 82,059 16,480Property, plant and equipment (16,413) (3,529)Free cash generated byoperating activities65,646 12,951C a s h f l o w sStrong cash flow characterised Bakkavör Group’soperations in 2005. Cash generated from operations was£103.6 million compared with £22.6 million in 2004, anincrease of 359%. Cash flow, after deducting paymentsof interest and tax, amounted to £82.1 million comparedwith £16.5 million in 2004.million. This included the acquisition of the freshprepared foods company Geest on 29 April 2005 for atotal consideration of £382.6 million and Hitchen Foodsa manufacturer of fresh cut vegetables and conveniencesalads, on 14 October 2005 for a total considerationof £44.8 million. The acquisition of the assets of G’sMarketing is excluded since it was completed beforethe Group acquired Geest. Acquisitions in 2005 werecompleted with third party borrowings and not withshare offering.There were no disposals during 2005.Further information on the impact of acquisitions anddisposals can be found in the cash flow section of theConsolidated Financial Statements on page 92 and innotes 23 and 24 on pages 106 to 107.Free cash flow is defined as the amount of cash generatedby the business, after meeting all its obligations forinterest, tax and after investments in tangible assets. TheGroup generated free cash flow of £65.6 million in 2005compared with £13.0 million in 2004, an increase of 407%.The increase arose from operating profits, working capitalinflow and lower taxation payments, partially offsetby increases in net cash outflows from the servicing offinance.The Group remains strongly cash-generative, reflectingits healthy margin and the cash-generative nature ofthe Group’s business. At year end the Group held cashand cash equivalents amounting to £82.3 million andhad unused committed credit lines amounting to £31.9million.C a s h o u t f l o w s o n a c q u i s i t i o n sa n d d i s p o s a l sThe cash outflow in 2005 on acquisitions was £427.350Capital expenditure and investmentsCapital expenditure for the year was £16.4 million, anincrease of 365% over the level of expenditure in 2004.Key areas of expenditure were additional productionfacilities at three of our sites and a general improvementand maintenance at other production facilities. All theseprojects were funded from internal resources.At 31 December 2005 the Group had capital commitmentsof £1.9 million which are not provided for in the accounts.It is anticipated that these commitments will be financedout of the Group’s operational free cash flow.Investments in 2005 total £2.3 million and includedfurther investment in the Fresh Cook joint venture,participation in Fram Food’s share offering and aconversion of a loan in the company to shares. BakkavörGroup’s share in Fram Foods increased from 19.0% to30.5%, allowing the Group to contribute to the continuinggrowth of Fram Foods.All cost related to new product development is expensedin the profit and loss account, as in previous years.

Financial riskBakkavör Group is exposed to a variety of risks. Set outbelow is a description of factors that may affect our business,results and share price from time to time. The responsibilityof the Treasury department is to identify and manage theserisks in accordance with guidelines set out by the Board.The Treasury is run as a non-profit centre, reports regularlyto the Board and is subject to internal audits. The Group'sHedging Committee sets the risk policy and approves allmajor derivative transactions after a careful review which issupported by statistical analysis. No speculative transactionsare permitted.Currency crossesGBP/EURGBP/ISK1.521.51251201.481.461.441.421151101051.41.381.3610095Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec6 month GBP LIBORInterest rates %5.2%5.0%4.8%4.6%4.4%4.2%4.0%JanFeb Mar Apr May Jun Jul Aug Sep Oct Nov Dec51

Maturities of debtGBP millions5004504003503002502001501005002006 2007 2008 2009 2010 LaterI n t e r e s t r a t e sThe fair value of the Group’s financing, investments andrelated hedging instruments is affected by movements ininterest rates. This risk is both macro (market fluctuationsand liquidity) and micro (Group’s margin).The level of hedging may vary from time to time within theHegding Committee’s policy. At the end of 2005 around 32% ofinterest bearing debt was hedged against interest risk to somedegree.Among the actions taken to monitor the interest rate risk arestress tests to establish sensitivity to possible movements inrates and how they might effect the Group’s results. These testsare presented to the Board.LiquiditySeasonal working capital fluctuations are minimised dueto the Group’s diverse portfolio of products. Nonethelessit must ensure necessary short-term funding, as well asadequate medium- and long-term funding.Short-term available funding is set up in the most costefficientway to fund forecasted peaks and to givereasonable operating headroom. Surplus funds areeither in cash or marketable securities. To monitor theseobjectives, forecasts are made using maturities of a week,month and up to a year. These forecasts along with currentcash position and variations are sent each week to theGroup’s management. At the end of 2005 the Group had£82.3 million in available funds and £31.9 million undrawnin committed facilities and overdraft.Backed by strong operational cash flow, the Group is a netborrower in order to maintain liquidity and optimises itsweighted average cost of capital (WACC) and fund operations.In accordance with the Hedging Committee’s policy, themajority of the Group’s borrowings are floating rate. Therefore,adverse movements in rates can have a negative impact onthe Group’s results. In order to reduce these fluctuations, theGroup uses derivative instruments such as swaptions, swapsand collars. In addition, the Group also varies the duration of itsinterest periods and spreads the fixing dates.In 2003 and 2005 the Group issued index-linked fixed ratebullet bonds in Icelandic Króna with a 5-year and a 5½-yearmaturity respectively. The interest rate on those bonds wasswapped to floating rate GBP LIBOR at the time of issue, thuseliminating the exposure to the Icelandic consumer price index.External capital market conditions, beyond the Group’s control,can affect the margin offered to the Group for debt eitherfor refinancing or for financing value added investments. Toreduce the level of risk the Group varies the maturity of itsloans.52

In the medium- and long-term, the Group’s objective isto have in any one year the ability to repay or refinancematuring debt. To enforce this objective the Group varies thematurity of its loans. At the end of 2005 more than 95% of theGroup's interest-bearing debt had a maturity of over one year.CurrencyThe Group’s functional currency is pounds sterling. The valueof other currencies in regards to trading activities and thetranslation of its financial statements are therefore subject tocurrency fluctuations.Exposure to trading activities arises from the sale andpurchases in currencies other then the functional currency.These currencies are mainly the euro, Icelandic Króna, U.S.Dollar and South African rand. Derivatives may be used tohedge net currency exposure.The Group has three major operating sites in ContinentalEurope. Translation exposure to these euro investments ishedged in accordance with hedge accounting for hedges ofa net investment.The bonds issued in 2003 and 2005 were denominated inIcelandic Króna. These bonds were swapped into poundssterling at the time of issue, thus eliminating currency risk.CommodityThe Group has some exposure to price changes incommodity markets. In order to reduce the risk, the Groupenters into forward contracts on vegetable oil, utilities andimported raw materials.Retirement benefitsThe Group operates a pension scheme for its employeesboth in the UK and overseas. It is funded with investmentsin equities, bonds and other financial assets. The value ofthese assets is dependent on capital markets, which areinherently volatile. Short-term market risk is balanced by along-term spread over time and the portfolio effect. Theseassets are held seperately from the assets of the Group, in anadministered fund. An actuarial valuation at the end of 2005showed that the scheme was in surplus.CreditThe Group is exposed to potential concentrations of creditrelatedlosses, in the event of non-performance, that consistprincipally of financial instruments and trade receivables.As its main customers are major retailers and financialinstitutions with high credit ratings, the risk at the end ofDecember 2005 is not considered to be material.Additional information on risk and its effects on the Group’sresults can be found in the notes to the financial statementson page 95.EBITDA/EBITDA ratio*EquityGBP millions3025%GBP millions1402520.6% 20.9%20%1202015%901512.0%11.1% 11.3%10%601055%300Q42004Q12005Q22005Q32005Q42005EBITDA EBITDA ratio*Continuing business0%02001 2002 2003 2004 200553

United KingdomO v e r v i e wMost of Bakkavör Group’s sales are generated in the UKand represented 92% of sales in 2005. UK pro-forma salesamounted to £947.6 million for the year. Sales in theUK include fresh prepared foods (e.g. ready meals, leafysalads, convenience salads and pizzas) and also freshproduce (e.g. lettuce, tomatoes, cucumbers).Bakkavör Group’s target in the UK is to grow its freshprepared food sales above market growth. This targetwas achieved in 2005, as Bakkavör Group’s salesoutperformed market growth in the area of freshprepared foods as well as in the fresh produce sector.In 2005, market growth rates demonstrate that the freshprepared foods and fresh produce markets continued togrow more quickly than other areas of the food market.T r a d i n g e n v i r o n m e n tUK retail trading conditions remained challengingthroughout the year with continued deflationarypressure and high levels of promotional activityaffecting food prices. However, sales of premium rangeswere strong, especially towards the end of the year, andthere was evidence of consumers ‘trading up’ to thesehigher quality and higher-priced products.M a r k e t a n d s a l e s r e v i e w54UK key food sector growth 2005Growth %10Fresh produce8.7%86420Total food-2-4-63.6%7.1% Fresh prepared foods6.2%4.7%-4.5%Frozen prepared foodsBakkavor Group salesgrowth 2005Market growth 2005Source: TNS RST, 52 weeks ending 1 January 2006 for the market figures at Retail Sales Value.Bakkavör Group’s sales figures recorded at Manufacturer Sales Value.Mixed messages in the British media have affected people’sfood buying behaviour in general and have had a negativeimpact specifically in two of Bakkavör Group’s largest marketsectors; leafy salads and ready meals. In addition, earlier inthe year, the ready meals market was affected by a largerecall of products containing an illegal dye in a bought-iningredient. Our businesses reacted very quickly to the recalland, within hours, we had identified finished productsaffected by the ingredient and replaced it with an alternativein order to minimise the impact on sales. It was confirmedsubsequently that the risk to food safety was negligible.However the consumer trends that have emerged overthe last few years are stronger than ever; products whichcontinue to provide premium quality and/or a healthyoption, alongside convenience, are faring better thantheir counterparts. Bakkavör Group has a balancedproduct portfolio and is well positioned to gain from thesestrengthening consumer trends.Product groupsFor UK fresh prepared foods, Bakkavör Group recorded yearon-yearsales growth of 6.2% for the year 2005, ahead of themarket growth, which was 4.7%.The Group divides its UK fresh prepared products into twomain product groups; hot-eating and cold-eating. BakkavörGroup’s sales ratio of hot-eating versus cold-eating productsfor the year 2005 was 56:44. Please refer to pages 11 to 15for details of our specific product sectors.

Roberta RichardsonSenior Development ManagerFresh CookRoberta has been with theGroup for 10 years – mainly indevelopment roles (but also asa Commercial Manager) at fourdifferent sites. Roberta is currentlyon long-term secondment toFresh Cook – a joint venturecompany established in 2004 tomeet the growing demand forready to cook meals (see page12). Roberta and the Fresh Cookteam have had a busy year – FreshCook was a start-up project and,within five months, the team hadlaunched 50 products.55

H o t - e a t i n g p r o d u c t o v e r v i e wPro-forma sales of hot-eating products amounted to£481.9 million for the full year 2005.The ready meals sector is by far the largest market sectorin the fresh prepared foods market and is estimated tobe worth £1.6 billion at retail sales value. At the year end,Bakkavör Group held a market share of 18% on a proformabasis and is the largest supplier in this sector.Ready meal market growth by value for the year was lowat 0.5%. Overall, this market continued to be affected byretail price deflation pressure, considerable promotionalactivity across all retailers, and, as previously mentioned,a product recall and adverse media coverage. In contrast,Bakkavör Group’s sales growth in ready meals in 2005was 4%, which was a good performance. The low overallmarket growth rate masks the high growth rate inpremium ready meals of around 25% and Bakkavör Groupbenefited from its strong position in this area.There was a very high level of promotional activity in thepizza sector throughout the year. The market grew justover 2% by value compared with around 7% by volume.Bakkavör Group’s sales growth of 11% in this categoryoutperformed market growth. Pizza is the second largesthot-eating market sector in which the Group operates andBakkavör Group is market leader.Other strong sales performances in the hot-eating sectorincluded prepared vegetables (nearly 25% growth yearon-year),and stir-fry (over 15% growth year-on-year).Conversely, the Group’s sales of speciality bread and freshpasta declined over the year following the fire in April2005.C o l d - e a t i n g p r o d u c t o v e r v i e wPro-forma sales of cold-eating products amounted to£375.3 million for the year 2005.The market for leafy salads grew by 2.7% in value termsyear-on-year. For over a year, the leafy salads market hassuffered from negative media coverage which has had anadverse impact on the market.In comparison, Bakkavör Group’s leafy salad sales grewjust over 5% in 2005. Prior to the acquisition of Geest,Geest acquired the assets of G’s Marketing leafy saladsbusiness. This business has been integrated successfullyand is now manufactured in Geest facilities. The leafysalads sector is the largest cold-eating sector in whichBakkavör Group operates with a market value at year endof over £450 million. Bakkavör Group is the clear leaderin the sector with almost twice the market share of itsnearest competitor.Hot-eating growth performanceGrowth %Cold-eating growth performanceGrowth %1211.4%87.3%10765.8%855.1%644.0%Bakkavör Group salesgrowth 2005Market growth 2005432.7%Bakkavör Group salesgrowth 2005Market growth 200522.1%210.5%0Ready mealsPizza0Leafy saladsConvenience saladsSource: Bakkavör Group market estimates, 52 weeks ending December 2005. Market growthrates at Retail Sales Value and Bakkavör Group sales growth rates at Manufacturer Sales Value.56

The market for convenience salads grew by just under 6%over the year. There was considerable price competitionbetween retailers over the summer and, again, at theend of the year. As a result, volume sales exceeded valuesales. However, new salad recipes (e.g. salads with lighterdressings) fared well and the market saw encouraginggrowth rates in this area. Again, premium rangesperformed strongly. Bakkavör Group’s sales growthof over 7% in convenience salads was higher than themarket growth in 2005.High market growth rates were recorded in the freshprepared fruit sector (over 20%) and wraps sector (over25%), reflecting consumer demand for fresh, quick andhealthy products for lunch or snacks. In both cases,Bakkavör Group’s sales growth was higher than marketgrowth rates over the year. Bakkavör Group’s salesgrowth in the dips sector also outperformed the market.UK fresh produceThe fresh produce market performed strongly throughoutthe year and was influenced by the continued impactof the UK government’s message to eat ‘five a day’ (fivepieces of fruit or vegetables). This message is promotedon track and includes the closure of one factory and atransfer of production to the two remaining sites. Asexpected, overall sales declined in the year, owing to theagreed range rationalisation with its main customer. Salesare progressing well in the chosen core product cuisinesand profit performance is improving.Combined sales in the other Continental Europeanbusinesses grew marginally in the year. These businessessupply mainly leafy salads and other cold-eating productsinto the French and Spanish markets. One of the Group’sFrench operations has also developed a fruit saladsbusiness, which is performing well. Sales also improvedin Spanish retail and French retail. As a result of this salesmomentum, these businesses were in a stronger positiongoing into 2006.Bakkavör AsiaIn 2004, Bakkavör Group established Bakkavör Asiato identify business opportunities in the fast-growingconsumer markets in Asia. Considerable groundwork wasundertaken in 2005 and Bakkavör Group’s aim is to enterthis market as early as possible in order to benefit from itsdynamic economic development.through various means in the UK supermarkets alongsidegovernment campaigns. Bakkavör Group’s sales growth inproduce was 8.7% in 2005, outperforming market growth.Produce sales accounted for around 9% of BakkavörGroup’s UK sales.Continental EuropeBakkavör Group’s Continental European operations arebased in Belgium, France and Spain and the key productcategories covered by these businesses are ready meals,leafy salads and fruit salads. Bakkavör Group’s sales inContinental Europe represented 8% of the Group’s totalturnover in 2005. Pro-forma sales in 2005 were £81.3million and declined by 5% over the year. Although twoof the Group’s Continental European businesses wereloss-making over the year, profit improvement planshelped to move one of these businesses into a profitableposition towards the end of 2005.The planned restructuring of the Group’s ready mealbusiness that serves the Dutch retail market remainsNew product developmentBakkavör Group has over 4,500 products in its portfolio.Many of the year’s new products revolved around the keyconsumer trends of health, convenience and pleasure.Launches included: ready to cook meals, luxury toppeddips, convenience salads with marinaded vegetables,lunchtime salad snacks with lighter dressings, premiumand reduced fat pizzas, new leafy salad mixes with babyleaves and herbs, savoury and fruit salads with addedfashionable ingredients such as fresh berries, dried fruitsand nuts.New product development is a cornerstone of BakkavörGroup’s operations and part of the high level of service itgives to its retail customers. New products are importantas they help maintain people’s interest in fresh preparedfoods and also provide variety and choice. The Group wasparticularly pleased to win two awards (one for a pizzaand another for a ready meal) at the UK’s Quality Foodand Drink 2005 Awards.57

Ágúst GudmundssonExecutive ChairmanLýdur GudmundssonChief Executive OfficerHreinn JakobssonNon-executive DirectorPanikos J. KatsourisNon-executive DirectorÁsgeir ThoroddsenNon-executive DirectorAntonios P. YerolemouNon-executive DirectorÁgúst GudmundssonExecutive ChairmanBorn: 1964Nationality: IcelandicPrincipal occupation: ExecutiveChairman of Bakkavör GroupProfessional background: Founderof Bakkavör Group in 1986, ExecutiveChairman 1986-2005Education: College of ArmuliOther activities and functions: Boardmember of Flaga Group hf., Existaehf., Fram Foods hf. and IcelandicMountain Guides.Lýdur GudmundssonChief Executive OfficerBorn: 1967Nationality: IcelandicPrincipal occupation: Chief ExecutiveOfficer of Bakkavör GroupProfessional background: Founder ofBakkavör Group in 1986, Chief ExecutiveOfficer 1986-2005Education: The Commercial College ofIcelandOther activities and functions:Chairman of Síminn hf. (Iceland Telecom) andExista ehf. Board member of Fram Foodshf., VÍS hf. (Iceland Insurance Company) andIceland Chamber of Commerce.BOARD OF DIRECTORSOUR MANAGEMENTÁgúst GudmundssonExecutive ChairmanLýdur GudmundssonChief Executive OfficerHildur ÁrnadóttirChief Financial Officer58Gareth VoyleChief Executive Officerof Geest LimitedHildur ÁrnadóttirChief Financial OfficerShares in Bakkavör Group: 3,519,500(including shares of financially-relatedparties)Born: 1966Nationality: IcelandicPrincipal occupation: Chief FinancialOfficer of Bakkavör GroupProfessional background: CharteredAccountant at KPMG from 1990 andPartner from 1997. CFO at BakkavörGroup since October 2004.Education: BSc BusinessAdministration from University ofIceland. Became state authorisedaccountant in 1995.Gareth VoyleChief Executive Officer of Geest LimitedShares in Bakkavör Group: 0Born: 1959Nationality: British (Welsh)Principal occupation: Chief ExecutiveOfficer of Geest LimitedProfessional background: GeneralManager and, subsequently, DeputyManaging Director of R.F. Brookes Ltd(Rank Hovis McDougall) 1985-1991.Joined Geest in 1991, becoming ChiefOperating Officer in 1998 and ChiefExecutive Officer in 2002.Education: BSc Hons in BiologicalScience, Bristol University, and InternalExecutive Programme, INSEAD.

Ásgeir ThoroddsenNon-executive DirectorChairman of Audit Committee andmember of Compensation CommitteePanikos J. KatsourisNon-executive DirectorMember of Audit CommitteeBorn: 1950Nationality: BritishPrincipal occupation: Chief ExecutiveOfficer of Katsouris Brothers Ltd.Professional background: FinanceDirector of Katsouris Fresh Foods1982-2002Education: BSc EconomicsOther activities and functions:Board member of Síminn hf. (IcelandTelecom).Born: 1942Nationality: IcelandicPrincipal occupation: Attorney to theSupreme Court of Iceland.Professional background: Lawyerand Partner in a Reykjavík law firmsince 1977Education: Cand. juris from Universityof Iceland and a degree in PublicAdministration from New YorkUniversityOther activities and functions:Chairman of Plastprent hf. and IntrumIceland ehf. Board member ofKaupthing Bank hf.Antonios P. YerolemouNon-executive DirectorVice Chairman of theBoard of DirectorsMember of CompensationCommitteeBorn: 1942Nationality: BritishPrincipal occupation: Non-executiveDirector of a number of companies.Professional background: ChiefExecutive Officer of Katsouris FreshFoods from 1982-2002Education: Primarily educatedin Cyprus. Studied BusinessAdministration in London.Length of service summaryBoard member Age Date of Board appointmen tAntonios P. Yerolemou 63 4 January 2002Ágúst Gudmundsson 41 1 August 1986Ásgeir Thoroddsen 63 2 March 2000Hreinn Jakobsson 45 2 March 2000Lýdur Gudmundsson 38 1 August 1986Panikos J. Katsouris 55 4 January 2002Shareholding summaryBoard memberShareholdingsAntonios P. Yerolemou 74,534,353Ágúst Gudmundsson 470,524,954*Ásgeir Thoroddssen 1,418,164#Hreinn Jakobsson 1,500,000#Lýdur Gudmundsson 470,524,954*Panikos J. Katsouris 52,336,471*Ágúst Gudmundsson and Lýdur Gudmundsson jointly own 470,524,954shares in Bakkavör Group through Exista B.V.# Includes shares of financially-related parties.Hreinn JakobssonNon-executive DirectorChairman of CompensationCommittee and member of AuditCommitteeBorn: 1960Nationality: IcelandicPrincipal occupation: ChiefExecutive Officer of Skýrr hf.Professional background:The Industry Bank 1989-1995,Thróunarfélag Íslands hf. 1989-1997Education: Cand.Oecon. in BusinessAdministration, ManagementDevelopment in Venture CapitalOther activities and functions:Board member of The Federation ofIcelandic Industries, Teymi ehf., andHands AS in Norway.59

The strategy of Bakkavör Group is to focus on the fresh preparedfoods and produce markets, fast-growing sectors of the foodindustry. The Group will target growth sectors where a strongmarket share can be achieved by building strong relationshipswith major customers, understanding their needs and the needsof the consumer.Bakkavör Group will also focus on creating an empoweredgroup of independent management teams, whilst maximisingsynergy across the Group in areas which help developcompetitive advantage.O u r S t r a t e g yS t r a t e g i c d e v e l o p m e n tThe year 2005 was a significant one for Bakkavör Group’sstrategic development. The successful acquisition ofGeest and, subsequently, Hitchen Foods transformed thescale of the business and Bakkavör Group became thelargest fresh prepared foods and produce provider in theUK. This was an important and logical step towards theGroup’s long-term strategic goal to be recognised andrespected as the world’s largest fresh prepared foods andproduce provider.O u r l o n g - t e r m g r o w t h g o a l sBakkavör Group defines its long-term goals for salesgrowth by its geographical markets:• In the UK, the Group aims to achieve growth whichis above the overall growth of the fresh preparedfoods market at any given time. Growth will bemainly organic with bolt-on acquisitions.• In Continental Europe, the Group aims to strenghtenits position and grow mainly through acquisitions.• Bakkavör Group is now in the process of exploringopportunities in the rapidly-growing consumermarket in Asia and aims to start operations there inthe near future. Specific long-term goals have notyet been set in this area, as the Group is still at theexploratory stage.Competitive advantage and furtherconsolidation in the UK marketBakkavör Group now holds 28% market share in the freshprepared foods market – around 2.5 times the marketshare of its nearest competitor – as well as a leadingposition in all of its key product categories.The UK fresh prepared foods market is still veryfragmented with 44% of the market in which BakkavörGroup operates in the hands of many companies with lessthan 4% share. Further consolidation in the UK market isanticipated and Bakkavör intends to play a leading role inthis trend.60

Market sectors in whichBakkavör Group operates byshare of companySmaller players 44%Bakkavör Group 28%Other large players 28%Source: Bakkavör estimates 52 weeks ending December 2005Other large players defined as those with over 4% market sharein the market sectors in which Bakkavör Group operates.Strong positions in key market sectorsMarket sectorBakkavör Groupmarket sector positionReady meals 1Leafy salads 1Convenience salads 1Pizza 1Pasta 1Wraps 1Stir fry 1Dressings 1Speciality bread 2Soups 2Sauces 2Prepared vegetables 3Prepared fruit 3Desserts 6Source: Bakkavör Group market data estimates 200561

Kal RaiQuality Assurance ManagerBakkavör BirminghamKal has been with the Group for 11 years. She leftschool after her exams and worked part-time as aProduction Operative during the summer holidays.For the next few years, Kal juggled work and study,until she completed her degree and became afull-time employee. The business sponsored herto complete a Post-graduate Diploma in FoodSafety, Hygiene and Management and, a year aftergraduating, Kal was promoted to Quality AssuranceManager. Kal enjoys problem-solving and buildingcustomer relationships.Bakkavör Group defines CorporateGovernance as the code of conductby which the Group is directed andcontrolled. This involves its relationswith shareholders, employees,customers, suppliers and other keystakeholders.Policy and contextC o r p o r a t e G o v e r n a n c eThe duties of the various bodies within Bakkavör Groupare determined by Icelandic law and by the Group’scorporate governance policy, which is based on theGuidelines on Corporate Governance (‘the Guidelines’).These were first issued in 2004 by the Iceland Chamberof Commerce, the Iceland Stock Exchange and theConfederation of Icelandic Employers and weresubsequently reviewed in 2005.C o m p l y o r e x p l a i nOn 14 March 2005, Brynjólfur Bjarnason, non-executiveDirector, resigned from the Board of Directors to avoidany possible conflict of interest. 1 Since his resignation,the majority of Board Directors has not been independentas defined by the Guidelines.Currently, there are three independent non-executiveDirectors, one non-independent non-executive Directorand two non-independent executive Directors on theBoard. One member of the Board, Antonios P. Yerolemou,will qualify as an independent non-executive Directorwithin two years. 21Brynjólfur Bjarnason’s principal occupation is Chief Executive Officer ofIceland Telecom. During 2005, Iceland Telecom was privatised as part ofthe Icelandic government’s plan to privatise state-owned companies. Theprivatisation process was completed in July 2005 when Iceland Telecomwas sold to a group of investors. Exista hf., an investment company,owned in the majority by Ágúst Gudmundsson (Executive Chairman ofBakkavör Group) and Lýdur Gudmundsson (Chief Executive Officer ofBakkavör Group), took part in the bidding process and eventually acquiredIceland Telecom in partnership with a group of investors.2Antonios P. Yerolemou is a non-executive Director but is not yetconsidered to be independent as he was the Executive Chairman of theGroup’s subsidiary, Katsouris Fresh Foods. According to the Guidelines,Board members may not be defined as independent if they become BoardDirectors within three years of being an employee of the company.The Board of Directors complied with the Guidelines in allother respects during the year.Structure and bodiesBakkavör Group’s organisational structure is devolved,which enables the business to respond quickly to thedemands of the fast-moving markets in which it operates.Bakkavör Group’s governance structure reflects theorganisational structure of the Group.Following is a description of each of the governancebodies: shareholder meetings, the Board of Directors, theBoard Committees, and the Geest Management Board.Governance structure and bodiesShareholdermeetingsBoard of DirectorsBakkavör Group hf.Chief Executive OfficerBakkavör Group hf.Chief Executive OfficerGeest LimitedManagement BoardGeest LimitedBoard Commitees:Audit CommiteeCompensation CommiteeCorporate governance63

S h a r e h o l d e r m e e t i n g sShareholder meetings are the highest authority inBakkavör Group’s affairs (within the restrictions made bythe Group’s Articles of Association and Icelandic law). Themain shareholder meeting is the Annual General Meeting(AGM) which is scheduled once a year. Other shareholdermeetings are convened when necessary.All shareholders, as well as their representatives, havethe right to attend shareholder meetings. The membersof the Board of Directors and the Chief Executive Officeralso have the right to speak and submit motions atshareholder meetings, even if they are not shareholders.Shareholder meetings are also open to the media andrepresentatives of the Iceland Stock Exchange. Each shareequals one vote, and motions are passed by majorityvote unless otherwise stated in the Group’s Articles ofAssociation or Icelandic law.In 2005 the Group’s AGM was held on 25 February.Details of the AGM are set out on the Group’s website:www.bakkavor.com, and on the Iceland Stock Exchangewebsite: www.icex.is. At the AGM, the annual accountsfor the year 2004 were approved and a motion wassubmitted and approved that no dividend would be paidin 2005. It was also decided that the compensation ofeach member of the Board of Directors (including theChairman) for 2005 would be £20,000 per annum. TheBoard of Directors and the auditor were re-elected for aterm of one year.T h e B o a r d o f D i r e c t o r sThe Board of Directors has supreme authority in theGroup’s affairs in the period between shareholdermeetings.Board compositionThe Board of Directors is elected annually by shareholdersat the Annual General Meeting. The Board currentlycomprises six members: the Executive Chairman, fournon-executive Directors (including the Vice Chairmanof the Board) and one executive Director. Together, theBoard members bring a valuable and balanced range ofexperience as they have all held or hold senior positionsin professional and public life. Profiles of the Boardmembers are set out on pages 58 and 59.The Board elects a Chairman and Vice Chairman of theBoard of Directors and appoints the Chief ExecutiveOfficer (CEO).The responsibilities of the BoardThe Board is responsible for the overall managementand performance of the Group and has adopted writtenworking rules specifying its responsibilties.The Chairman of the Board is responsible for leading theBoard, facilitating its work and ensuring that the Boardis capable of operating in the interests of the Group’sshareholders.The Group’s AGM is held before the end of June each yearand, for 2006, is scheduled to take place on 24 March.64

Board meeting attendanceBoard memberBoard meetingattendanceCompensation Committeemeeting attendanceAntonios P. Yerolemou 8/10 2/2Ágúst Gudmundsson 10/10Audit Committeemeeting attendanceÁsgeir Thoroddssen 8/10 1/1 2/2Brynjólfur Bjarnason* 3/3 1/1Hreinn Jakobsson 8/10 2/2 2/2Lýdur Gudmundsson 10/10Panikos J. Katsouris 8/10 2/2Total 87% 100% 100%*Brynjólfur Bjarnason resigned from the Board of Directors on 14 March 2005 (see page 63).The Board’s responsibilities to shareholders encompass:• setting the Group’s strategy• providing leadership within a framework of controlsfor managing risk• maintaining the policy and decision-makingframework in which the Group’s strategy isimplemented• ensuring that necessary financial and humanresources are in place to meet strategic goals• monitoring performance against key financial andnon-financial indicators• overseeing the system of risk management• setting values and standards in governance mattersThe Group’s CEO is responsible for the overall dailymanagement of the business and the implementation ofthe Group’s strategy as set out by the Board.The Board has a formal agenda of matters reserved to itfor decision-making, which include: strategy formulation,approval of annual and interim statements, approval ofannual budget and business plan, approval of acquisitionsand disposals, approval of major capital investments,monitoring of internal controls and important policymatters.The Board plans to assess its activities and workprocedures regularly with the assistance of outsideparties, as applicable. All Directors are required to dealat arm’s length with the Group and its subsidiaries andto disclose circumstances that might be perceived as aconflict of interest.Board meetingsThe Board of Directors convened ten times in 2005. Theaverage attendance at the Board meetings was 87%.Following the Group’s acquisition of Geest, the membersof the Board toured various factories and the Head Officeof Geest to familiarise themselves with the Group’s newstructure.The Board is provided with a report in advance of eachBoard meeting and, in addition, a comprehensive monthlyreport of the Group’s financial performance, operationsand market conditions. Board members are informedabout all significant matters immediately.The Board reviews and determines the compensation ofthe Executive Chairman and the CEO. The CompensationCommittee discharges the Board’s responsibility inreviewing and determining Executive Chairman’s andthe CEO’s remuneration. The Board also approves theorganisational structure of the Company.65

AuditorAn external auditor is elected by the shareholders at theAnnual General Meeting for a term of one year. Deloittehf. was elected as the Group’s auditor at the AnnualGeneral Meeting on 25 February 2005.B o a r d C o m m i t t e e sThe Board’s work is supported by its Committees – theAudit and Compensation Committees. Each Committee’sChairman and members are appointed by the Boardannually.Auditing feesClear guidelines exist which outline other professionalservices which are appropriate for Deloitte hf. to providein their capacity as Group auditor. These services include:due diligence on mergers, acquisitions and disposals, andtax and business risk assurance. These guidelines ensurethe independence of the Group’s auditors.Details of auditing fees and other fees paid to Deloitte hf.are set out in note 7 on page 101.Audit CommitteeThe powers and duties of the Audit Committee aredetermined in the Audit Committee Charter, whichis approved by the Board. The Audit Committee isresponsible for monitoring the Group’s internal controlsystem and financial reporting process. To this effect,the Audit Committee is in regular contact with theexternal auditor to ensure that observations made by theauditor are adhered to. The Audit Committee receiveswritten confirmation from the external auditor as toany relationships which may reasonably be thought toinfluence its independence. The external auditor alsoconfirms whether it considers itself independent withinthe meaning of the professional requirements. ThisCommittee reviews with the external auditor and theChief Financial Officer (CFO) the effectiveness of theinternal control system and financial reporting process.The Committee keeps under review the scope and resultsof the audit. The Audit Committee, acting with the Boardof Directors, is responsible for the selection, evaluationand nomination, when applicable, of an external auditorfor shareholder approval.Members of the Audit Committee are: Ásgeir Thoroddsen(Chairman), Hreinn Jakobsson and Panikos J. Katsouris.The Audit Committee met twice in 2005.According to the Guidelines, the Executive Chairmanand other employees are not allowed to be membersof the Audit Committee, and the majority should beindependent.66

Compensation CommitteeThe powers and duties of the Compensation Committeeare determined in the Compensation Committee Charter,which is approved by the Board. The CompensationCommittee discharges the Board’s responsibility inmatters relating to executive compensation as wellas compensation to the Chairman of the Board for hisspecial full-time duties to the Board. This work includesadministration of the Group’s incentive compensationand equity-based plans. Executive performance andcompensation is evaluated annually. The Committeeprepares an annual report on executive compensation forinclusion in the Company’s Annual Report, in accordancewith applicable rules and regulations. The principalresponsibility in compensating executives is to coordinatethe incentives of the executives with actions thatwill enhance long-term shareholder value.Members of the Compensation Committee are: HreinnJakobsson (Chairman), Antonios P. Yerolemou and ÁsgeirThoroddsen. The Compensation Committee met twice in2005.According to the Guidelines, the Executive Chairman andother employees are not allowed to be members of theCompensation Committee, and the majority should beindependent.67

G e e s t M a n a g e m e n t B o a r dBelow Board level, the management of the business isdelegated to the Management Board of the Group’sfresh prepared foods and produce operating subsidiary,Geest Limited (Geest). The Management Board is headedby Geest’s Chief Executive Officer, Gareth Voyle. Othermembers of the Geest Management Board are: fourdivisional Managing Directors, Human Resource Director,Business Improvement Director and Group TechnicalDirector. The Geest Management Board meets monthly.At Geest, there are four divisions, each headed by aManaging Director. In each division are a number ofbusiness units; each one is headed by a General Manager.The Geest Management Board sets policies of minimumstandards, with which all the Group’s businesses mustcomply, in important risk areas such as food safety,internal financial reporting, treasury, employee mattersand health and safety as well as the environment. Beyondthese minimum standards, the Geest General Managershave the freedom to run their businesses as they see fitin order to meet the demands of their customers, and thestrategic and financial targets that have been set by theirdivisional Managing Director.68

ComplianceIn accordance with the Rules on Treatment of InsiderInformation and Insider Trading (‘the Rules’) issued bythe Financial Supervisory Authority, a special ComplianceOfficer is employed within the Group. The ComplianceOfficer is directly responsible to the Chief ExecutiveOfficer and is independent in his duties. The mainresponsibility of the Compliance Officer is to ensure thatthe Rules are adhered to within the Group.I n s i d e r r e g i s t e rThe Group’s insider register is maintained by theGroup’s Compliance Officer and is updated as and whenchanges occur. A register of primary insiders and a listof financially-related parties are maintained on a regularbasis. A register of temporary insiders is maintainedwhen the Group is involved in specific projects suchas acquisitions and disposals which require outsideparties (e.g. consultants) to have access to price sensitiveinformation.A list of primary insiders at Bakkavör Group can be viewedon the Group’s website: www.bakkavor.com and on theFinancial Supervisory Authority’s website: www.fme.is.I n f o r m a t i o n p o l i c yThe distribution of confidential information is strictlymonitored. As a rule, information is only distributed tothose people who strictly require it at any given time.C l o s e d p e r i o d sInsiders of Bakkavör Group are permitted to trade inGroup shares up to six weeks after the publication ofannual and quarterly statements, although all trades aredependent on whether insider information exists withinthe Group.Summary of Board governance in 2005Name Independent Audit Committee Compensation CommitteeAntonios P. Yerolemou No* No YesÁgúst Gudmundsson No No NoÁsgeir Thoroddssen Yes Chairman YesBrynjólfur Bjarnason Yes No Chairman (resigned 14 March 2005)Hreinn Jakobsson Yes Yes Chairman (effective 28 April 2005)Lýdur Gudmundsson No No NoPanikos J. Katsouris Yes Yes No*Antonios P. Yerolemou is a non-executive Director but is not yet considered to be independent as he was the Executive Chairman of the Group’ssubsidiary, Katsouris Fresh Foods. According to the Guidelines, Board members may not be defined as independent if they become Board Directorswithin three years of being an employee of the company.69

Board’s approach to risk managementBakkavör Group is faced with a number of risks in its business environment,both operational and financial. The purpose of risk management isto determine which factors are critical and material to the Group’s success.It is the Board’s responsibility to ensure that management sets outprocedures to control the identified risks and deals with changes in thebusiness environment, where possible, to minimise the effect of theserisks on the Group’s operations.Board agendaR i s k m a n a g e m e n tThe Bakkavör Group Board hasidentified five key areas of riskwhich, if managed incorrectly, couldbe detrimental to the long-termsustainability and profitability of theGroup. Consequently, performance inthese areas is kept high on the Boardagenda. The five key areas are asfollows:GrowthBakkavör Group has been characterisedby substantial growth in recent years.The Group has set itself ambitiousgrowth targets and aims to continueto grow both organically and throughstrategic acquisitions. (Please turn topage 60 in ‘Our strategy’.)It is important to ensure that, while wegrow, our business remains sustainableand profitable. In order to achieve this,we must have access to key financialand non-financial resources in order tofulfil our obligations to our customersand maintain our high servicestandards.The management and planning of theGroup’s key resources are reviewedregularly by the Board.Food safetyFood safety is paramount to thecontinued success of our business asmillions of people eat our productsevery day.All our factories operate documentedquality management systems (QMS)based on Hazard Analysis CriticalControl Point (HACCP) principlesand customer Codes of Practice tomanufacture products that are safe,legal and of the quality required by theindividual customer. Each step in themanufacture of our products is assessedfor risk and the necessary controls areput in place to maintain food safetystandards.Traceability is a critical componentin our management of food safety,allowing us to trace ingredients quicklyfrom source through to the finishedproduct and vice versa. We work closelywith our suppliers to source safe, legal,quality ingredients to a consistentstandard. This includes regular visits totheir factories to assure ourselves of theintegrity of their quality systems andfactory operations.Employee training is paramount to themanagement of food safety and we arecommitted to providing this at all levelswithin our operations.CustomersAs with most suppliers in the freshprepared foods sector, our customersare few, but of critical importance tous, and it is our intention to continueto build strong relationships with them.Our products carry our customers’brand names and we develop productsin close partnership with our customers.70

Sibu SivagaranHygiene Manager (Evening and Nights)Katsouris Fresh FoodsSibu joined Katsouris as a part-time machine operativeon the evening shift. One night he was asked to staylate to help clean down a machine as, at that time,this was the responsibility of the production team.Thereafter, Sibu became the founder member of thehygiene department which now has over 170 peopleworking across the three Katsouris sites. Sibu is SriLankan and became a British citizen in 2000. He enjoysmanaging a large and diverse team of people andis proud of the high hygiene standards his team hasachieved.At various levels of our organisation,our employees talk to their customerpeers (often daily). At a senior level, weappoint ‘Customer Champions’ whoare responsible for managing overallcustomer relations with their specificcontacts. This communication facilitatesthe day-to-day business as well aslonger-term strategic planning.Our consumersAt the heart of our success arethe people who buy and eat ourfinished products – our consumers.It is important for us to listen to thedemands of our consumers in orderto provide them with innovativemeal solutions which are of highquality and quick and easy to prepare.Development and innovation skillsremain a high priority in the business.For examples of how we keep abreastof evolving trends, please turn to page34.Shareholder valueThe trust that our shareholdersplace in us is valued greatly, and theprincipal goal of Bakkavör Group is toprovide good, long-term returns toits shareholders. The key to achievingthis goal is the development andcommunication of a clear strategicvision and the recruitment andretention of talented management tofulfil this strategic vision. (Please turnto page 80 to see our performance increating value for our shareholders.)71

C o m p e n s a t i o n r e p o r tBoard compensationBoard fees for the Board of Directors are decided at theAnnual General Meeting. For 2005, the agreed annual feewas £20,000 for each Board member. During 2005 theBoard was compensated as stated in the table opposite.Severance paymentsNo severance payment was made to any person giving uptheir function on the Board or as Director during 2005.Options, warrants or other rightsNo options, warrants or other rights were granted during2005, and no member of the Board or other Directorshold such rights.Loans to members of the BoardShare allotmentNo shares were allotted to members of the Board or otherDirectors in 2005 and there are no programmes for shareallotment in place.Besides the compensation tabled opposite, some Boardmembers have been involved in commercial tradingwith Bakkavör Group: Katsouris Brothers Ltd. (chairedby Panikos J. Katsouris) has supplied Katsouris FreshFoods with raw materials. Panikos J. Katsouris is alsoin control of buildings rented by the Group. The Grouprents office space from Tjarnargata 35 ehf., which is asubsidiary of Exista ehf. Exista ehf. is the parent companyof Exista B.V. which, in turn, owns 29.1% of shares inBakkavör Group hf. All such transactions are based onarm’s length principles and are not considered to be partof the Board’s compensation. Details of related partytransactions can be found in note 27 on page 110 of theaccounts section.There are no outstanding guarantees, loans, advances orcredits to members of the Board or other Directors.72

Compensation overview (GBP '000)Board member Salary Board fee # Benefits BonusPension fundpaymentsTotalShares at yearend (ISK)Antonios P. Yerolemou 202 23 2 25 252 74,534,353Ágúst Gudmundsson 382 23 153 100 1 659 470,524,954*Ásgeir Thoroddsen 23 2 25 1,418,164**Brynjólfur Bjarnason 8 1 9Hreinn Jakobsson 23 2 25 1,500,000**Lýdur Gudmundsson 456 23 79 100 1 659 470,524,954*Panikos J. Katsouris 23 1 24 52,336,471* Ágúst Gudmundsson and Lýdur Gudmundsson jointly own 470,524,954 shares in Bakkavör Group through Exista B.V.**Includes shares of financially-related parties.# Figures affected by monthly currency fluctuations.Management team memberGareth Voyle 295 116 495 8 91473

Yvonne MullerHR ManagerSpring Valley Foods, South AfricaYvonne joined Spring Valley Foods in 1999 and has been instrumental in thedevelopment of the site’s community welfare policy. Spring Valley Foods iscommitted to choosing community projects which benefit its employees andwhere its team can control and influence the impact of its direct investment.Among other activities Yvonne and her team promote AIDS awareness at thesite and in the community. Yvonne is pictured here, dressed in local costume,together with two girls from Daveyton, at the annual AIDS day event whichSpring Valley Foods supports. Around 25% of Spring Valley employees live inDaveyton. There is a huge stigma attached to the HIV virus and yet every localemployee knows somebody who is affected by the HIV infection in some way. Toimprove education, Yvonne has arranged for people who are HIV-positive to visitthe factory every month to provide counselling and promote health.Since Bakkavör Group’s inception –20 years ago this year – we havetried to balance the growth andprofitability objectives of theGroup with our commitment tothe environments in which weoperate.O u r r e s p o n s i b i l i t i e sThe Directors of the Group recognise that sound ethicsmake good business sense. By minimising risk, ensuringlegal compliance and demonstrating to our customersthat we are their active partners in a combined agendaof social, ethical and environmental responsibility, wecan assist in achieving our prime objective of creatingsustainable growth in shareholder value.We have identified seven areas of focus and the followingstatements underpin Bakkavör Group’s corporateresponsibility philosophies:Our shareholdersThe Board of Directors fully appreciates that ourshareholders are the owners of the Group and that itsduty is to act in their best interest. The Board seeksto protect shareholder investments by ensuring thateffective risk management policies are in place across theGroup. These policies are reviewed and approved formallyeach year by our Directors. In addition, proceduresare in place to help ensure that Company informationis disseminated promptly and without prejudice. Formore information on our shareholder structure and ourapproach to investor relations, please turn to pages 83and 84.Our peopleOur employees are our greatest asset. Our businesshas grown significantly and, since 2000, the number ofemployees has risen from 300 to around 14,000.Motivated and committed management is fundamentalto the Group’s future development. Much of our growthto date has been acquisitive and, as such, we believe it isof strategic importance to retain key management of ouracquired businesses.We aim to promote an environment where our peopleare given equal opportunities and treatment. We areproud of our culturally and socially diverse workforceand our ability to attract and retain the best people. Thetraining we give is designed to develop individual talentand capability and give every opportunity to those whowish to develop their career within our business.Welfare and occupational health and safetyEmployee well-being and occupational health and safety(OHS) is one of our top priorities at Bakkavör Group. It isin everybody’s interest to promote a working environmentin which our employees are healthy and capable ofperforming to their full ability and where accident- andwork-related illness is reduced to a minimum.75

We promote an active health and safety culturethroughout the organisation and are committed toproviding and maintaining safe working conditionsfor all employees, visitors and contractors. We provideinformation, instruction and training as necessary toenable our people to perform their tasks safely andefficiently.Our consumersThere has been a marked increase in the level of mediacoverage of public health issues and in the potential rolesof the food industry and others (e.g. consumers, retailers,regulators and government) to resolve these.As a major player in the fresh prepared foods andproduce market, we seek to maintain awareness of theseissues and of the potential influence we may have. Weare committed to monitoring developments, complyingwith any legislative changes and working with ourcustomers and regulators in this area.Food safetyBakkavör Group is committed to producing safe, legal,quality food products which are manufactured understringent conditions of hygiene and control. All ourfactories operate documented quality managementsystems (QMS) based on Hazard Analysis Critical ControlPoint (HACCP) principles and customer Codes of Practice.Each step in the manufacture of our products is assessedfor risk and the necessary controls are put in place tomaintain food safety standards.Employee training is paramount to the management offood safety and we are committed to providing this at alllevels within our operations.Genetically modified ingredientsOur view on genetically modified ingredients (GMOs)reflects that of our retail customers.We do not use genetically modified ingredients inour products and will, wherever possible, eliminateingredients associated with genetic modification fromour recipes. Where these ingredients cannot be removedfrom a product, we will source them from a guaranteednon-genetically modified source that is identity-preserved.76

Our customersStrong customer relations form the cornerstone ofour operations. They are built on close co-operation inareas across the whole business and they support ourcustomers’ strategies.We are committed to supplying our customers withsafe products to agreed specification and quantities,and innovative products that meet consumer needs.We engage with our customers at all levels of ourrespective organisations to understand their needs andrequirements and we treat customer information withintegrity.Our suppliersOur organisation seeks to develop long-term businessrelationships with its suppliers based on mutual respect.Bakkavör Group supports the United Nations’ UniversalDeclaration of Human Rights and the core conventions ofthe International Labour Organisation.As a minimum standard we require our suppliersto comply with all relevant local and national laws,particularly in the areas of working hours and conditions,health and safety, rates of pay, terms of employment andminimum age of employment.As relationships develop, we work with our supplierstowards achieving standards promoted by the EthicalTrading Initiative (ETI). This is a collaborative group ofcompanies, non-governmental organisations (NGOs)and trade unions. Many of our customers are also ETImembers. For more information on ETI policies, pleaseview the website: www.ethicaltrade.org.Our manufacturing subsidiary, Geest, is a foundermember of the Supplier Ethical Data Exchange (SEDEX),a web-based system for companies to maintain dataon labour standards at production sites. This systemhas been adopted by the majority of UK retailers as away of sharing information on labour standards in thesupply chain and reducing duplication of effort. For moreinformation on SEDEX, please view the website:www.sedex.org.uk.77

Our environmentWe recognise that our operations have direct andindirect impacts on the environment. We are committedto reducing our negative impact on the environmentthrough continual improvement, prevention of pollutionand reduction in resource usage.We are committed to identifying and complying withall relevant environmental legislation and will manageenvironmental responsibilities in a manner that minimisesthe effects of our operations on the local community’squality of life.Our communityWe are committed to respecting the communities inwhich we operate and we aim to promote open dialoguewith the local community on all issues.From the entries submitted, the level of communityinitiatives this year is very encouraging. There areexamples of sites working with local councils to reducevehicle movements; considerable involvement with localschools, particularly in the areas of business studies andfood science and technology; free use of offices andparking space to local charities and fund-raising events;the development of community resource centres topromote literacy, numeracy and computer skills; productand employee time donations; and sponsorship of manylocal sports clubs. The winners of the Community Awardwill be announced at the annual Geest European Forum(GEF) (our equivalent of the European Works Council) inJune.In addition to the tremendous efforts made locally, itwas decided at the 2005 GEF to support a Group-widecommunity project in Delmas, South Africa. Delmas is anFrom our Iceland Head Office, we continued to sponsorthe National Museum of Iceland as part of a three-yearsponsorship, which amounts to ISK 5 million (£46,000)per year. In association with the University of Iceland,we have made a commitment to support entrepreneurialstudies for three years (also amounting to ISK 5 millionper year). We are currently sponsoring the Pure Icelandexhibition at the London Science Museum. In addition,we made donations to a variety of charities, educationalprojects and sports clubs, throughout the year. Instead ofsending Christmas cards we used the money saved to buyfood parcels for needy families at Christmas – part of anestablished Icelandic initiative.At our operating sites, we encourage our businesses tosupport local community initiatives and charities of theirchoice. We have established the Geest Community Award(now in its third year) to encourage our sites to thinkabout the way in which they can have a positive impact intheir local communities and to report their achievements.The prize (to be used for future investment in communityactivity) is an annual donation of £10,000, which is sharedacross the winning sites.under-privileged township near Bakkavör Group’s site,Spring Valley Foods, where many Spring Valley employeeslive. Spring Valley Foods has been instrumental insupporting various community projects involving localschools and the local community centre.The target set by the GEF was to raise £10,000 and therehave been tales of South African days across the Groupwith employees raising money by selling South Africanfood and jewellery and organising quiz nights, raffles,sponsored marathons and bike rides. At the time ofwriting, we estimate that we are on track to reach thetarget by June.In 2005, Bakkavör Group's total charity contributionsamounted to £277,000. We made no political donations.For further information on Bakkavör Group’sresponsibilities and policies, please refer to the Groupwebsite: www.bakkavor.com.At the time of writing, the winners of the 2006 GeestCommunity Award are yet to be announced. However,12 sites have entered, representing nearly 6,000 BakkavörGroup employees. Our target is for all sites to enter– including overseas operations and newly-acquiredbusinesses.79

Share performanceIn 2005, shares in Bakkavör Group rose by 110%, from ISK24.2 per share to ISK 50.9 per share, and Bakkavör Groupwas the second-highest climber on the Iceland StockExchange during the year. In comparison, theICEX-15 (the 15 largest companies by marketcapitalisation listed on the ICEX) rose by 64.7% in 2005.Bakkavör Group’s market capitalisation at year end 2005amounted to ISK 82.3 billion (£756 million), makingBakkavör Group the seventh largest company on theIceland Stock Exchange by market capitalisation.O u r s h a r e h o l d e r sShare capitalThe registered share capital is ISK 1,616,592,755 (£10.8million) in nominal value. All issued share capital inBakkavör Group is listed on the Iceland Stock Exchange.Each share represents one vote.Liquidity of sharesBakkavör Group renewed its market making agreementwith Kaupthing Bank during the year. The purpose ofthe agreement is, as before, to improve liquidity andenhance transparent price formation in the Group’sshares on the Iceland Stock Exchange. In 2005, liquidity ofBakkavör Group shares was high and shares in BakkavörGroup were traded 4.665 times for a total market valueof ISK 42.8 billion (£393 million), which corresponds toa turnover of 71.3%. The average spread of BakkavörGroup’s shares during the year was 0.75%.David PotterGeneral ManagerCrudi and Sogesol, France and SpainDavid has worked for the Group for 12 yearsand is currently General Manager at Crudi– one of Bakkavör’s Continental Europeanbusinesses. He works from the French factoryin Torreilles but also has responsibility forthe Sogesol site in Spain. David speaks Frenchand Spanish and lives with his family in asmall village called Alenya, about 10 km fromthe factory. David believes there are manyopportunities to expand the business andenjoys the challenge of managing customersacross three different countries/nationalities.80

81Our shareholders

Iceland Stock ExchangeThe ICEX was established in 1985 and the first equitieswere listed in 1990. The legal framework controllingthe activities of ICEX is based on European Uniondirectives. Licences are issued by the Ministry ofCommerce after receiving an assessment from theFinancial Supervisory Authority.ICEX participates in international activities, mainlywithin the Federation of European SecuritiesExchanges (FESE), the Norex Alliance (NOREX) and inconnection with the SAXESS trading system. NOREX isthe first stock exchange alliance to implement a jointsystem for equity trading and a common regulatoryframework. Trading at ICEX is electronic and all tradesare automatically matched.The equities market has developed quickly in Icelandand, in recent years, the ICEX-15 index has risensubstantially (in contrast to developments in mostother countries). In 2005, the ICEX-15 rose by 64.7%which is its greatest increase in the history of theIceland Stock Exchange.ShareholdersAt year end 2005, 3,828 shareholders in Bakkavör Groupwere recorded on the shareholder register, comparedwith 3,482 shareholders at year end 2004.Exista B.V. is the largest shareholder of Bakkavör Groupwith 29.1% of the total share capital. Together, ÁgústGudmundsson (Executive Chairman of Bakkavör Group)and Lýdur Gudmundsson (CEO of Bakkavör Group) own59.1% in Exista B.V.With 17.6%, the founders and former owners of KatsourisFresh Foods control the second largest portion ofshares. Bakkavör Group employees and other Boardmembers held 48.2% of the shares in total at year end.Approximately 30% of shares were held by institutionalinvestors and 17.9% of shares are held by privateinvestors at the end of 2005.Bakkavör Group shareprice performance in 2005Volume ISK million350300250200150100500JanShare price ISK58Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecTrading volume - 20 days averageICEX-15 performanceBakkavör Group share price54504642383430262218Private investors 17.9%Others 3.9%Institutional investors 30.0%Groups of shareholders31 December 2005Exista 29.1%Katsouris family 17.6%Other Board members and employees 1.5%82

Dividends and dividend policyBakkavör Group will continue to pursue its ambitiousexpansion strategy. Given the Group’s strong cash flowand solid profit generation, the Board will recommendat the Annual General Meeting on 24 March 2006 thata dividend of 25% of the nominal share value be paidout. This corresponds to ISK 0.25 per share or 11% of netearnings for the year 2005.Employee shareholdingsThe Board of Directors and employees owned 48.2% ofshares in Bakkavör Group at year end 2005. No shareoption programmes are currently in place for employeesat Bakkavör Group.Trading of shares in Bakkavör Group by the Board ofDirectors and other employees is strictly monitored bythe Group’s Compliance Officer who is guided by theFinancial Supervisory Authority’s Rules on Treatment ofInsider Information and Insider Trading. Information onshares held by the Board of Directors and key employeescan be found on pages 73 and 100. A list of primaryinsiders can be found on the Group’s website: www.bakkavor.com and the Financial Supervisory Authority’swebsite: www.fme.is.The 20 largest shareholders at 31 December 2005Name No. of shares OwnershipExista B.V. 470,524,954 29.11%Lífeyrissjóður verslunarmanna 103,145,797 6.38%Gildi – lífeyrissjóður 95,770,534 5.92%Antonios P. Yerolemou 74,534,353 4.61%Lífeyrissjóðir Bankastræti 7 62,041,305 3.84%Panikos J. Katsouris 52,336,471 3.24%Eleni Pishiris 52,336,471 3.24%Stella Andreou 52,336,470 3.24%The Demos 2004 Settlement 52,336,470 3.24%Arion safnreikningur 51,755,669 3.20%Vátryggingafélag Íslands hf 32,625,824 2.02%MP Investment Bank 31,914,500 1.97%Samvinnulífeyrissjóðurinn 27,720,512 1.71%Sjóvá-Almennar tryggingar hf. 24,516,910 1.52%Tryggingamiðstöðin hf 20,147,059 1.25%Sameinaði lífeyrissjóðurinn 17,376,902 1.07%Fjárfestingasjóður Búnaðarb. hf 17,072,071 1.06%Einar Magnússon Gustafsson 16,239,652 1.00%Kaupthing bank hf. 14,436,249 0.89%Lífeyrissjóðurinn Lífiðn 13,319,888 0.82%Total 1,282,488,061 79.33%Others 334,104,694 20.67%1,616,592,755 100.00%Distribution of sharesNo. of shares Shareholders Percentage Shares Percentage1 - 9,999 1,581 41.30% 7,036,487 0.44%10,000 - 49,999 1,522 39.76% 35,535,829 2.20%50,000 - 99,999 317 8.28% 21,134,423 1.31%100,000 - 999,999 329 8.59% 73,607,581 4.55%1,000,000 - 9,999,999 57 1.49% 174,346,195 10.78%10,000,000 - 99,999,999 20 0.52% 731,261,489 45.23%100,000,000 + 2 0.05% 573,670,751 35.49%3,828 100.00% 1,616,592,755 100.00%Bakkavör Group’s primary goal is to increase shareholder value.Bakkavör Group is listed on the Iceland Stock Exchange (ICEX) and its tickeris BAKK. Bakkavör Group is one of the 15 companies forming ICEX-15, the 15largest companies on the Iceland Stock Exchange by market value.83

Bakkavör’s approach toinvestor relationsBakkavör Group aims to ensure that current andpotential investors’ perception of the Group’sperformance and future prospects is in line withmanagement’s understanding of the Group’ssituation at any given time. This approach isfundamental in achieving a fair market price for theGroup’s shares.I n f o r m a t i o n p o l i c yThe cornerstone of the Group’s information policyis to provide current and potential investors withequal access to consistent, transparent and asdetailed information as is commercially sensible.Regulatory announcements are announced first onthe Iceland Stock Exchange’s website:www.icex.is and then on the Group’s website:www.bakkavor.com. Financial results are issuedquarterly in accordance with the requirementsof the Iceland Stock Exchange. All price sensitiveinformation is published in a timely manner. Resultsare webcast and available to view in real time onthe Group website.Major announcements such as acquisitions ordisposals are presented at extraordinary investormeetings and also published on the Group website.i n v e s t o r r e l a t i o n sI n v e s t o r m e e t i n g sBakkavör Group places great emphasis ondeveloping its relations with existing and potentialinvestors. This is achieved by several means,most notably through regular investor meetings,roadshows and participation in capital marketsdays.Investors and potential investors are also invited tothe Group’s Head Offices in Reykjavík or in Londonwhere management has the opportunity to presentan overview of the Group’s operations. Thesemeetings focus primarily on recently announcedfinancial results or corporate activity and the longtermgoals of the Group. No new information isdisclosed at these meetings which might affectinvestment decisions.84

G r o u p w e b s i t eIn addition to Bakkavör Group’s regulatoryannouncements issued on the Group’s website:www.bakkavor.com, the website contains additionalinformation relating to the Group’s history,operations and activities. Past and current pressreleases, presentations and annual reports arearchived on the website and available to download.A n n u a l r e p o r tThe Group’s Annual Report is an importantcommunication tool and the Group strives toprovide a balanced picture of all key aspects ofthe business, including financial and non-financialinformation. A hard copy of the Annual Reportis sent to all shareholders and is also availableon request at: investor.relations@bakkavor.com.Downloadable versions of current and past annualreports in pdf format are available from the Group’swebsite. The current report is also accessible on thewebsite of the Iceland Stock Exchange:www.icex.com and on www.huginonline.com.F i n a n c i a l c a l e n d a r 2 0 0 6(All future dates may be subject to change. Pleasecontact us or refer to the website for latestinformation.)Quarter one results 2006 27 April 2006Quarter two results 2006 27 July 2006Quarter three results 2006 26 October 2006Annual results 2006 31 January 2007Annual General Meeting 2006 2 March 2007D i v i d e n d d a t e sAnnouncement date 24 March 2006Ex dividend date 24 March 2006Record date 24 March 2006Payment of dividend 25 April 2006E m a i l a l e r t sIf you wish to receive alerts at your email address ormobile phone, please subscribe to our email alertservice at: www.bakkavor.com/subscribe.F i n a n c i a l s t a t e m e n t sThe latest financial statements can be viewed at theGroup’s Head Office at the address below.A n n u a l G e n e r a l M e e t i n gBakkavör Group will hold its Annual GeneralMeeting on Friday 24 March 2006 at the IcelandicOpera in Reykjavík.C o n t a c t u sWe are happy to answer queries from current andpotential shareholders. Similarly, please let us knowif you wish to be put on electronic or postal mailinglists. Please contact us by phone, email, fax, letter orvia the website.C o n t a c t d e t a i l sÁsdís PétursdóttirInvestor RelationsBakkavör GroupTjarnargata 35, 101 Reykjavík, IcelandTel: +354 550 9715Fax: +354 550 9701Email: investor.relations@bakkavor.com85

Prince MensahBakery Team Leader (Evening shift)Katie’s The Pizza CompanyPrince has worked at Katie’s forover 16 years. He started on thenight shift, moved into mixingand has been Team Leader forthe past three years. He enjoysthe organisational and planningside of his job – in particularthe challenge of working outthe schedule for the shift everyevening. Prince moved to theUK from Ghana and his surnamemeans ‘third child’ – he is thethird child of seven and has fourchildren of his own.A c c o u n t s a n d I n f o r m a t i o nAccounts87

Endorsement by the Board of Directors and CEOThe Consolidated Financial Statementsfor the year ended 31 December 2005,have been prepared in accordancewith International Financial ReportingStandards (IFRS) as adopted by the EU.These are the Company’s first AnnualConsolidated Financial Statements whereIFRS has been applied. The ConsolidatedFinancial Statements include theFinancial Statements of Bakkavör Grouphf. and its subsidiaries together referredto as the Company.In May Bakkavör Group hf. acquired thefresh prepared foods company GeestPlc. The company is included in theConsolidated Financial Statements as ofMay 2005.In October Bakkavör Group hf. acquiredHitchen Foods Plc. Hitchen Foods is amanufacturer of fresh cut vegetablesand convenience salads. The companyis included in the Consolidated FinancialStatements as of October 2005.The Board of Directors and the CEO ofBakkavör Group hf. are of the opinion thatthe Consolidated Financial Statements forthe year 2005 contain all the informationnecessary to form a clear picture of thecompany’s standing at year-end, theyear’s operating results and the year’sfinancial development.Profit for the year, according to theIncome Statement, amounted to GBP32.3 million. Total equity amounted toGBP 127.4 million at the end of the year.The Board of Directors recommendspayment of 25% dividend to shareholdersin the year 2006, but otherwise refers tothe Consolidated Financial Statementsregarding changes in the Company’sequity and disposal of profits.At the year-end the number ofshareholders was 3,828. At the beginningof the year there were 3,482 shareholders.At year end one shareholder held morethan 10% of the shares, Exista B.V. with29.1% of the shares.The Board of Directors and the CEO ofBakkavör Group hf. hereby confirm theConsolidated Financial Statements for theyear 2005 with their signature.Reykjavík, 28 February 2006Board of Directors and CEOÁgúst GudmundssonExecutive ChairmanÁsgeir ThoroddsenAntonios P. YerolemouLýdur GudmundssonCEOHreinn JakobssonPanikos J. KatsourisAuditor’s ReportTo the Board of Directors andshareholders of Bakkavör Group hf.We have audited the accompanyingConsolidated Balance Sheet of BakkavörGroup hf. and subsidiaries as of 31December 2005, and the relatedConsolidated Statement of Income andCash Flows for the year then ended. Thesefinancial statements are the responsibilityof the Company’s management. Ourresponsibility is to express an opinionon these financial statements based onour audit. The Financial Statement of theforeign subsidiaries of Bakkavör Group hf.were audited by Deloitte member firms.We conducted our audit in accordancewith International Standards on Auditing.Those standards require that weplan and perform the audit to obtainreasonable assurance about whether theFinancial Statements are free of materialmisstatement. An audit includes examining,on a test basis, evidence supporting theamounts and disclosures in the FinancialStatements. An audit also includesassessing the accounting principlesused and significant estimates made bymanagement, as well as evaluating theoverall Financial Statement presentation.We believe that our audit provides areasonable basis for our opinion.In our opinion, based on our own auditand the audit reports on the FinancialStatements of the foreign subsidiariesof Bakkavör Group hf., the ConsolidatedFinancial Statements give a true and fairview of the financial position of BakkavörGroup hf. as of 31 December 2005 andof the results of its operations and itscash flows for the year then ended inaccordance with International FinancialReporting Standards as adopted by the EU.Reykjavík, 28 February 2006Deloitte hf.Hilmar A. AlfredssonState Authorized Public AccountantGudlaugur GudmundssonState Authorized Public Accountant88

Consolidated Income Statement for the year 2005Notes 2005 2004 2005 2004Q4Q4Net sales 5 722,065 149,565 252,170 43,013Cost of sales (513,521) (112,853) (180,599) (32,258)Gross profit 208,544 36,712 71,571 10,755Other operating income 164 19 12 5Operating expenses (142,133) (15,749) (50,447) (4,370)Share of profit (loss) in associates 75 3,176 (278) 1,477(141,894) (12,554) (50,713) (2,888)Operating profit 66,650 24,158 20,858 7,867Net finance costs 8 (28,269) (7,092) (9,764) (2,333)Profit before tax 38,381 17,066 11,094 5,534Income tax 9 (6,048) (3,962) 193 (1,155)Profit for the year 32,333 13,104 11,287 4,379Attributable to:Shareholders of Bakkavör Group hf. 31,986 13,104 11,271 4,379Minority interest 347 0 16 032,333 13,104 11,287 4,379Earnings per share (GBP pence) 10 2.0 0.8 0.7 0.3Amounts in thousands of GBP89

Consolidated Balance Sheet at 31 December 2005Notes 31.12 2005 31.12 2004Non-current assetsGoodwill and other intangible assets 11 565,723 99,592Property, plant and equipment 12 267,898 28,993Investments in joint ventures and associates 13 4,699 87,730Financial assets available for sale 0 970Deferred income tax asset 17 2,080 0840,400 217,285Current assetsInventories 14 31,839 4,242Trade and other receivables 15 180,051 26,358Cash and cash equivalents 15 82,317 24,508294,207 55,108Total assets 1,134,607 272,393EquityShare capital 16 10,813 10,813Capital reserve 38,416 38,416Translation reserves (484) 0Retained earnings 78,471 38,985Shareholders’ equity 127,216 88,214Minority interest 136 0Total equity 127,352 88,214Non-current liabilitiesDeferred income tax liability 17 24,957 1,886Subordinated convertible loan 18 12,868 12,868Borrowings 19 666,398 150,064704,223 164,818Current liabilitiesCurrent maturities of non-current liabilities 19 28,589 0Other current liabilities 274,443 19,361303,032 19,361Total equity and liabilities 1,134,607 272,393Off Balance Sheet ItemsMortgages and commitments 2190 Amounts in thousands of GBP

Consolidated Statement of Changes in Equity for the year 2005Shareholders’ equityShare Capital Translation Retained Minority Totalcapital reserve reserves earnings Total interest equityEquity 1 January 2004 10,191 35,984 0 25,881 72,056 0 72,056Issue of share capital 622 2,432 3,054 3,054Profit for the year 13,104 13,104 13,104Equity 1 January 2005 10,813 38,416 0 38,985 88,214 0 88,214Translation reserves (484) (484) (484)Actuarial gain recognisedon pension plan 7,500 7,500 7,500Profit for the year 31,986 31,986 347 32,333Change in minority interest (211) (211)Equity 31 December 2005 10,813 38,416 (484) 78,471 127,216 136 127,352Amounts in thousands of GBP91

Consolidated Cash Flow Statement for the year 2005Notes 2005 2004Cash flow from operating activitiesOperating profit 66,650 24,158Depreciation 12 19,429 3,799Other items not affecting cash (751) (3,180)Changes in current assets and liabilities 18,225 (2,196)Cash generated from operations 103,553 22,581Payments of interest income and interest expense (18,635) (2,745)Payments of tax (2,859) (3,356)Cash flow from operating activities 82,059 16,480Investing activitiesProperty, plant and equipment 12 (16,413) (3,529)Acquisitions, net of cash acquired 23, 24 (427,344) 0Shareholdings (2,343) (84,554)Investing activities (446,100) (88,083)Financing activitiesBank loans 1,696 (1,809)New borrowings 423,352 99,507Payments of non-current liabilities (3,114) (59,500)Financing activities 421,934 38,198Net increase (decrease) in cash 57,893 (33,405)Effects of foreign exchange adjustments (84) 0Cash and cash equivalents at beginning of year 24,508 57,913Cash and cash equivalents at end of year 15 82,317 24,508Other information:Net cash provided by operating activitiesProfit for the year 32,333 13,104Items not affecting cash 34,606 5,477Working capital provided by operating activities 66,939 18,581Changes in current assets and liabilities 15,120 (2,101)Cash flow from operating activities 82,059 16,480Property, plant and equipment (16,413) (3,529)Free cash generated by operating activities 65,646 12,95192 Amounts in thousands of GBP

Notes to the Consolidated Financial Statements1. General informationBakkavör Group hf. is a company incorporated and domiciled in Iceland. The Consolidated Financial Statements for the year 2005comprise Bakkavör Group hf. (the parent) and its subsidiaries (together referred to as the Company).The Company prepares its Consolidated Financial Statements in GBP, which is the Company’s functional currency.2. Significant accounting policiesThe Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS)as adopted by the EU. These are the Company’s first IFRS annual Consolidated Financial Statements and IFRS 1 First-time Adoptionof International Financial Reporting Standards has been applied. The Consolidated Financial Statements have been preparedunder the historical cost basis, except for revaluation of certain properties and financial instruments.An explanation of how the transition to IFRS has affected the reported financial position and financial performance of theCompany is provided in note 28. This note includes reconciliations of equity and profit or loss for comparative periods reportedunder Icelandic GAAP (previous GAAP to those reported under IFRS).The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ConsolidatedFinancial Statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differfrom those estimates.The principal accounting policies adopted are set out below.Basis of consolidationThe Consolidated Financial Statements incorporate the financial statements of Bakkavör Group hf. and entities controlled by theCompany (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policiesof an entity so as to obtain benefits from its activities.The Consolidated Financial Statements have been prepared using the purchase method of consolidation accounting. Whenownership in subsidiaries is less than 100%, the minority interest in the subsidiaries’ income or loss and equity is accounted for inthe calculation of the consolidated income or loss and the consolidated equity.On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair value at the date ofacquisition. Any excess of the cost of the acquisition over the fair value of the identifiable net assets acquired is recognised asgoodwill.The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from theeffective date of acquisition or up to the effective date of disposal, as appropriate.Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into linewith those used by other members of the Company.All intra-company transactions, balances, income and expenses are eliminated on consolidation.Minority interests in the net assets of consolidated subsidiaries are identified separately from the Company’s equity therein.Minority interests consist of the amount of those interests at the date of the original business combination (see below) andthe minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of theminority’s interest in the subsidiary’s equity are allocated against the interests of the Company except to the extent that theminority has a binding obligation and is able to make an additional investment to cover the losses.Amounts in thousands of GBP93

Business combinationsThe Consolidated Financial Statements have been prepared using the purchase method of consolidation accounting. Whenownership in subsidiaries is less than 100%, the minority interest in the subsidiaries’ income or loss and stockholders’ equity isaccounted for in the calculation of the consolidated income or loss and the consolidated stockholders’ equity.The cost of the acquisition is measured at the aggregate of the fair value, at the date of exchange, of assets given, liabilitiesincurred or assumed and equity instruments issued by the Company in exchange for control of the acquiree, plus any costsdirectly attributable to the business combination.Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of thebusiness combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingentliabilities. If this exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of theassets, liabilities and contingent liabilities recognised.The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from theeffective date of acquisition or up to the effective date of disposal, as appropriate.Investments in associatesAn associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in ajoint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but isnot control or joint control over those policies.The results of associates are incorporated in the Consolidated Financial Statements using the equity method of accounting. Thecarrying amount of such investments is reduced to recognise any impairment in the value of individual investments.Investments in joint venturesA joint venture is a contractual arrangement whereby the Company and other parties undertake an economic activity that issubject to joint control, that is when the strategic financial and operating policy decision relating to the activities requires theunanimous consent of the parties sharing control.Where a Group company undertakes its activities under joint venture arrangements directly, the Company’s share of jointlycontrolled assets and any liabilities incurred jointly with other ventures are recognised in the financial statements of the relevantcompany and classified according to their nature. Liabilities and expenses incurred directly in respect of interest in jointlycontrolled assets are accounted for on an accrual basis. Income from the sale or use of the Company’s share of the output ofjointly controlled assets, and its share in joint venture expenses, are recognised when it is probable that the economic benefitsassociated with the transactions will flow to/from the Company and their amount can be measured reliably.Joint venture arrangements which involve the establishment of a separate entity in which each venturer has an interest arereferred to as jointly controlled entities. The Company reports its interest in jointly controlled entities using the alternative equitymethod.Where the Company transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent ofthe Company’s interest in the joint venture, except to the extent that unrealised loss provides evidence of an impairment of theassets transferred.Non-current assets held for saleFinancial assets available-for-sale are primarily unlisted equity instruments held for long-term investment purposes.Financial assets available-for-sale are carried at fair value. Unrealised gains or losses on available-for-sale investments arereported in equity, net of applicable income taxes, until such investments are sold, collected or otherwise disposed of, or untilsuch investment is determined to be impaired. On disposal of an available-for-sale investment, the accumulated unrealised gainor loss included in equity is transferred to net profit or loss for the period and reported in other operating income. Gains andlosses on disposal are determined using the average cost method.Interest and dividend income on available-for-sale financial assets is included in net financial expenses.94 Amounts in thousands of GBP

GoodwillGoodwill arising on consolidation represents the excess of the cost of acquisition over the Company’s interest in the fair value ofthe identifiable assets and liabilities of a subsidiary or jointly controlled entity at the date of acquisition. Goodwill is recognisedas an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is notsubsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generatingunits expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated aretested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverableamount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reducethe carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of thecarrying amount of each asset in the unit.On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination ofthe profit and loss on disposal.Financial risk managementi ) Financial risk factorsFinancial risk management is an integrated part of the way the Company is managed. The Company’s activities expose it to avariety of financial risks: market risks (including foreign exchange risk), credit risk, liquidity risk, cash flow risk and fair valueinterest rate risk. The Company’s overall risk management programme focuses on the unpredictability of financial markets andseeks to minimise potential adverse effects on the Company’s financial performance. The Company uses derivative financialinstruments to manage certain risk exposures. Risk management is carried out within the Company under policies approved bythe Board of Directors.ii ) Market riskThe Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarilywith respect to euros and Icelandic Króna. The Company uses forward contracts to manage its foreign exchange risk arisingfrom future commercial transactions, recognised assets and liabilities. Foreign exchange risk arises when future commercialtransactions, recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency.iii ) Credit riskThe Company has no significant concentrations of credit risk. The Company has policies in place to ensure that sales are made tocustomers with an appropriate credit history and that products are not delivered until payments are secured. The Company haspolicies that limit the amount of credit exposure to any of the subsidiaries.iv) Liquidity riskPrudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequateamount of committed credit facilities. Due to the dynamic nature of the underlying businesses, the Company aims to maintainflexibility in funding by keeping committed credit lines available.v) Cash flow and fair value interest rate riskThe Company’s income and operating cash are substantially independent of changes in market interest rates. The Company’scash flow interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to cashflow interest rate risk. Borrowings issued at fixed rate expose the Company to fair value interest rate risk.Foreign currenciesTransactions in currencies other than GBP are initially recorded at the rates of exchange prevailing on the dates of thetransactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on thebalance sheet date. Profits and losses arising on exchange are included in net profit or loss for the period.On consolidation, the assets and liabilities of the Company’s overseas operations are translated at exchange rates prevailingon the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchangedifferences arising, if any, are classified as equity and transferred to the Company’s translation reserve. Such translationdifferences are recognised as income or as expenses in the period in which the operation is disposed of.Amounts in thousands of GBP95

Derivative financial instrumentsThe Company uses derivative financial instruments (primarily foreign currency forward contracts) to hedge its risks associatedwith foreign currency fluctuations relating to certain firm commitments and forecasted transactions. The significant interest raterisk arises from bank loans. The Company’s policy is to convert a proportion of its floating rate debt to fixed rates. The Companydesignates these as cash flow hedged of interest rate risk.The use of financial derivatives is governed by the Company’s policies approved by the Board of Directors, which provides writtenprinciples on the use of financial derivatives consistent with the Company’s risk management strategy. The Company does notuse derivative financial instruments for speculative purposes.Derivative financial instruments are initially measured at fair value on the contract date, and are remeasured to fair value atsubsequent reporting dates.Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows arerecognised directly in equity and the ineffective portion is recognised immediately in the profit or loss. The Company’s policywith respect to hedging the foreign currency risk of a firm commitment is to designate it as a cash flow hedge. If the cash flowhedge of a firm commitment or forecasted transaction results in the recognition of an asset or a liability, then, at the time theasset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equityare included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset ora liability, amounts deferred in equity are recognised in the profit or loss in the same period in which the hedged item affectsprofit or loss.Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in profit orloss as they arise.Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longerqualifies for hedge accounting. At that time, for forecast transactions, any cumulative gain or loss on the hedging instrumentsrecognised in equity is retained in equity until the forecasted transactions occurs. If a hedged transaction is no longer expectedto occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period.Revenue recognitionRevenue from sales is recognised when earned. Sales of goods are recognised when goods are delivered and title has passed.Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.LeasingLeases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards ofownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised asassets at their fair value. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligationunder finance leases.TaxationIncome tax expense represents the sum of the tax currently payable and deferred tax.The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the incomestatement because it excludes items of income or expense that are taxable or deductible in other years and it further excludesitems that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date.Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising fromdifferences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis usedin the computation of taxable profit. Deferred tax liabilities are recognised for all taxable temporary differences and deferred taxassets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporarydifferences can be utilised.Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates,except where the Company is able to control the reversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future.96 Amounts in thousands of GBP

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability issettled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directlyto equity, in which case the deferred tax is also dealt with in equity.Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against currenttax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle itscurrent tax assets and liabilities on a net basis.Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation. Depreciation is charged so as to write offthe cost of assets, other than land and properties under construction, over their estimated useful lives, using the straight-linemethod, on the following basis:Real estate 2-5%Equipment 5–33%Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets.The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds andthe carrying amount of the asset and is recognised in the income statement.Internally-generated intangible assets – research and development expenditureExpenditure on research activities and product development is recognised as an expense in the period in which it is incurred.An internally-generated intangible asset arising from research and development is recognised only if all of the followingconditions are met:– an asset is created that can be identified;– it is probable that the asset created will generate future economic benefits; and– the development cost of the asset can be measured reliably.Internally-generated intangible assets are amortised on a straight-line basis over their useful lives. Where no internally-generatedintangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.Other intangible assetsOther intangible assets are recognised in an acquisition of subsidiaries only if all of the following conditions are met:– an asset is created that can be identified;– it is probable that the asset created will generate future economic benefits; and– cost of the asset can be measured reliably.Other intangible assets include licensing agreements and customer contracts.Impairment of tangible and intangible assets excluding goodwillAt each balance sheet date the Company reviews the carrying amounts of its tangible and intangible assets to determine whetherthere is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amountof the assets is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate therecoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to whichthe asset belongs.Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flowsare discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value ofmoney and the risks specific to the asset.If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset isreduced to its recoverable amount. Impairment losses are recognised as an expense immediately.Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of itsrecoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have beendetermined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognisedas income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment istreated as a revaluation increase.Amounts in thousands of GBP97

InventoriesInventories are stated at the lower of cost and net realisable value.Cost prices of processed inventories are direct material costs, direct wages costs and a proportion of indirect processing costswhile cost price for purchased inventories is the actual cost of acquisition.Cost is calculated using the “first in – first out” – principle (FIFO).Current receivablesCurrent receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.The allowance is deducted from current receivables in the balance sheet and does not represent a final write-off. Currentreceivables in other currencies than GBP have been entered at the exchange rate prevailing on the balance sheet date.Cash and cash equivalentsCash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that arereadily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.BorrowingsInterest bearing loans and overdrafts are valued at nominal value less payments made and the remaining nominal balance isadjusted by exchange rate and/or index, if applicable. Interest expense is accrued on a periodical basis, based on the principaloutstanding and at the interest rate applicable.Trade payablesTrade payables are stated at their nominal value and trade payables in other currencies than GBP have been booked at theexchange rate prevailing on the balance sheet date.ProvisionProvision is recognised when an enterprise has a present obligation as a result of a past event and it is probable that an outflowof resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of theamount of the obligation.PensionThe Company’s defined benefit plan requires contributions to be made to a separate administrated fund. The amounts chargedto operating profit, as part of staff costs, are the current service cost. The interest on pension plan liabilities and the expectedreturn on assets are shown as a net amount of other finance costs or income. Actuarial gains and losses are recognisedimmediately in equity.Pension plan assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit methodand discounted at a rate equivalent to the current rate of return on a corporate bond of equivalent currency and term to theplan liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date. The resultingdefined benefit asset or liability, net of the related deferred taxation, is included in the balance sheet.Contributions to other Company pension plans are charged to the profit and loss account, in the period vested. Additional detailsare given in note 25.98 Amounts in thousands of GBP

3. SubsidiariesSubsidiaries at 31 December 2005:Place of registrationand operation Interest Principal activityBakkavor London Ltd. United Kingdom 100% Management companyBakkavor Invest Ltd. United Kingdom 100% Holding companyKatsouris Fresh Foods Ltd. United Kingdom 100% Preparation and marketing of fresh prepared foodsBakkavor Birmingham Ltd. United Kingdom 100% Preparation and marketing of fresh prepared foodsGeest Ltd. United Kingdom 100% Holding companyGeest Foods Ltd. United Kingdom 100% Preparation and marketing of fresh prepared foodsAnglia Crown Ltd. United Kingdom 100% Preparation and marketing of fresh prepared foodsEnglish Village Salads Ltd. United Kingdom 95% Packaging and marketing of fresh produceInternational Produce Ltd. United Kingdom 76% Packaging and marketing of fresh produceCinquième Saison SAS Group France 100% Preparation and marketing of fresh prepared foodsCentrale Salades France SAS France 100% Preparation and marketing of fresh prepared foodsCrudi SAS France 100% Preparation and marketing of fresh prepared foodsSociété Bretonne de LégumesPréparés SAS France 100% Preparation and marketing of fresh prepared foodsGeest Overseas Ltd. United Kingdom 100% Import and exporter of machinery and equipmentGeest (Guernsey) Ltd. Guernsey 100% Insurance and re-insuranceGeest Properties Ltd. United Kingdom 100% Property managmentBV Negecos United Kingdom 100% Holding companyGeest European Marketing BV Netherlands 100% Holding companyVaco BV Belgium 100% Preparation and marketing of fresh prepared foodsGeest (SA) (Pty) Ltd. South Africa 100% Preparation and marketing of fresh prepared foodsHitchen Foods Ltd. United Kingdom 100% Packaging and marketing of fresh produceBakkavör Group hf. also operates a finance branch in Switzerland to govern inter-company long-term liabilities and investments.4. Quarterly statementsQ1 2005 Q2 2005 Q3 2005 Q4 2005 TotalNet sales 38,814 187,174 243,907 252,170 722,065Cost of sales (29,536) (132,353) (171,033) (180,599) (513,521)Gross profit 9,278 54,821 72,874 71,571 208,544Other operating income 41 49 62 12 164Operating expenses (3,950) (36,519) (51,217) (50,447) (142,133)Share of profit (loss) in associates 1,762 (625) (784) (278) 75Operating profit (EBIT) 7,131 17,726 20,935 20,858 66,650Net finance costs (2,295) (6,916) (9,294) (9,764) (28,269)Profit before tax 4,836 10,810 11,641 11,094 38,381Income tax (599) (2,918) (2,724) 193 (6,048)Profit for the period 4,237 7,892 8,917 11,287 32,333EBITDA 8,120 22,396 27,136 28,427 86,079EBITDA ratio 20.9% 12.0% 11.1% 11.3% 11.9%Working capital provided by operating activities 4,943 16,708 15,290 29,998 66,939Cash flow from operating activities 4,329 13,239 11,134 53,357 82,059Free cash generated by operating activities 4,015 9,336 4,451 47,844 65,646Amounts in thousands of GBP99

5. Business and geographical segmentsThe Company operates in five countries with over 4,500 products in 17 categories.The following table provides an analysis of the Company’s sale by geographical market, irrespective of the origin of the goods/services:2005 2004United Kingdom 669,374 149,565Continental Europe 52,691 0722,065 149,565The following table provides an analysis of the Company’s sale by categories:2005 2004“Hot-eating” 340,199 113,614“Cold-eating” 267,386 35,951Traded produce and Continental Europe 114,480 0The following table provides an analysis of the Company’s operating profit (loss) by geographical market:722,065 149,5652005 2004United Kingdom 69,236 24,158Continental Europe (2,586) 066,650 24,1586. SalariesSalaries and salary-related expenses paid by the Company are specified as follows:2005 2004Salaries 179,652 38,504Related expenses 20,601 580200,253 39,084Average number of employees 14,365 2,077Salary andBoard fee Benefits Bonus Pension Shares*Ágúst Gudmundsson, Executive Chairman 405 153 100 1 ** 470,524,954Lýdur Gudmundsson, CEO 479 79 100 1 ** 470,524,954Antonios P. Yerolemou, Board member 225 2 25 74,534,353Ásgeir Thoroddsen, Board member 23 2 1,410,264Brynjólfur Bjarnason, former Board member 8 1Hreinn Jakobsson, Board member 23 2 1,355,000Panikos J. Katsouris, Board member 23 1 52,336,471Gareth Voyle, CEO of Bakkavor Invest Ltd. 295 116 495 8No options, warrants or other rights were granted during 2005 and no member of the Board or management holds such rights.* in Icelandic Króna (ISK)** Ágúst Gudmundsson and Lýdur Gudmundsson in total hold control of 470,524,954 shares through Exista B.V.100 Amounts in thousands of GBP

7. Fees to Auditors2005 2004Audit of financial statements 290 56Review of interim financial statement 16 17Other services 1,564 1531,870 2268. Net finance costs2005 2004Interest income 2,792 1,914Dividend 0 284Interest expenses and exchange rate adjustments (31,061) (9,290)(28,269) (7,092)9. Income tax2005 2004Current tax 10,502 3,812Deferred tax (note 17) (4,454) 150Reconciliation of effective tax rate:6,048 3,9622005 2004Profit before tax 38,381 17,066Tax calculated at domestic tax rate 6,909 18.0% 3,072 18.0%Effect of different tax rates of other jurisdictions 2,301 6.0% 1,822 10.7%Tax effect of expenses that are not deductible 308 0.8% 51 0.3%Tax exempt revenues (92) (0.2%) (1,038) (6.1%)Equity transactions affecting taxes (1,290) (3.4%) 0 0.0%Permanent differences for tax purposes 260 0.7% 89 0.5%Utilisation of previously unrecognised tax losses/tax asset not recognised 800 2.1% 0 0.0%Tax incentives not recognised in the income statement (1,300) (3.4%) 0 0.0%Adjustments in respect of prior years (1,731) (4.5%) 6 0.0%Other changes (117) (0.3%) (40) (0.2%)6,048 15.8% 3,962 23.2%10. Earnings per shareThe calculation of earnings per share is based on the following data:2005 2004Net profit for the 12 months ended 31 December attributable to shareholders 31,986 13,104Total average number of shares outstanding during the period (in million) 1,615 1,596Earnings per share (GBP pence) 2.0 0.8Amounts in thousands of GBP101

11. Goodwill and other intangible assetsLicensing CustomerGoodwill agreements contracts TotalCost at 1 January 2005 99,592 99,592Changes during the year 460,633 600 5,700 466,933Amortisation 0 (267) (535) (802)At 31 December 2005 560,225 333 5,165 565,723Carrying amount:At 31 December 2005 560,225 333 5,165 565,723The Company tests goodwill annually for impairment, or more frequently if there are indications that goodwill might beimpaired.The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions forthe value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices anddirect costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessmentsof the time value of money and the risks specific to the cash generating units. The growth rates are based on industry growthforecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.The Company prepares cash flow forecasts based on actual operating results and derived from the most recent financial budgetsapproved by management for the next five years. Cash flows for future periods are extrapolated using a 2 per cent growth rate.This rate does not exceed the average long-term growth rate for the relevant markets. A pre-tax discount rate of 12 per cent hasbeen used in discounting the projected cash flows.Licensing agreements and customer contracts have finite useful lives, over which the assets are amortised. These intangibleassets will be amortised on a straight-line basis over their useful lives.The amortisation charge for each period is recognised as expense on the following basis:Licensing agreementsCustomer contracts18 months4–10 years12. Property, plant and equipmentReal estate Equipment TotalCost at 1 January 2005 12,535 43,881 56,416Accumulated depreciation at 1 January 2005 (3,779) (23,644) (27,423)Book value at 1 January 2005 8,756 20,237 28,993Acquisitions 40,338 196,349 236,687Additions in 2005 4,304 16,983 21,287Disposals in 2005 0 (46) (46)Depreciated 2005 (2,273) (17,156) (19,429)Exchange differences 319 87 406Book value at 31 December 2005 51,444 216,454 267,898Insurance value of property, plant and equipment at year end amounts to GBP 656.5 million.Depreciation in the Income Statement is specified as follows:2005 2004Included in Cost of sales in the Income Statement 16,331 3,570Included in Operating expenses in the Income Statement 3,098 22919,429 3,799102 Amounts in thousands of GBP

13. Interest in joint ventures and associatesJoint ventures and associates at 31 December 2005.Place of registrationand operation Interest Principal activityGeest QV Ltd. United Kingdom 55.0% Marketing of fresh produceThe Flower Team Ltd. United Kingdom 50.0% Packing of chrysanthemum bunchesGeest RFG Fresh Cook Ltd. United Kingdom 50.0% Preparation and marketing of fresh prepared foodsFram Foods hf. Iceland 30.5% Manufactures consumer packaged seafood14. Inventories31.12 2005 31.12 2004Raw material and packaging 22,493 3,667Work in progress 1,101 0Finished goods 8,245 575Insurance value of inventories at year end amounts to GBP 27.0 million.31,839 4,24215. Other financial assetsTrade and other receivables:31.12 2005 31.12 2004Nominal value of trade receivables 129,333 17,592Allowance for doubtful accounts (4,822) (46)Pension asset (note 25) 7,500 0Other receivables 48,040 8,812The Directors consider that the carrying amount of trade and other receivables approximates their fair value.Cash and cash equivalents:180,051 26,358Bank balances and cash comprise cash and short-term deposits. The carrying amount of these assets approximate their fair value.16. Share capitalShare capital is registered in Icelandic Króna (ISK) and is 1,616,592,755 ISK as required by the articles of association. At year end,the Company’s own shares amounted to 1,154,000 ISK.Total share capital at year end according to the financial statements was GBP 10.8 million, as follows:Total share capital 10,821Own shares (8)Changes in share capital are as follows:10,813Share capital at 1 January 2004 10,191Issue of share capital 622Share capital at 1 January 2005 10,813Changes during the year 0Share capital at 31 December 2005 10,813Amounts in thousands of GBP103

17. Deferred income tax asset and liabilityDeferred taxDeferred taxasset liability TotalAt 1 January 2005 0 (1,886) (1,886)Arising on acquisition 0 (25,445) (25,445)Computed income tax for the year 2005 2,462 (8,510) (6,048)Income tax levied in 2006 (382) 10,884 10,502Income tax assets (liability) at 31 December 2005 2,080 (24,957) (22,877)18. Subordinated convertible loanThe subordinated loan can be converted to share capital in tranches of 20% per annum until the loan fully matures in 2006. At31 December 2005 100% of the loan was eligible for conversion. Of this 19.2% has been converted. The conversion rate is 5.56ISK per share throughout the entire life of the loan.19. Non-current liabilities31.12 2005Borrowings 694,987Current maturities of non-current liabilities (28,589)The borrowings are repayable as follows:666,3982006 28,5892007 33,3082008 40,0252009 170,2472010 380,840Later 41,978The entire amount is repayable in GBP.Borrowings amounting to GBP 542.0 million are secured over certain land and buildings of the Company.694,98720. Derivative financial instrumentsThe Company utilises currency derivatives to hedge significant future transactions and cash flows. At the balance sheet date,the total notional amount of outstanding forward exchange contracts to which the Company is committed amounts to GBP72.6 million.The Company uses interest rate swaps to manage its exposures to interest rate movements on its bank borrowings. At the balancesheet date, the total notional amount of outstanding interest rate swaps amounts to GBP 304.5 million.104 Amounts in thousands of GBP

21. Mortgages and commitmentsOperating lease commitmentsThe future minimum lease payments under non cancellable operating leases are as follows:31.12 2005Not later than 1 year 12,268Later than 1 year and not later than 5 years 33,759Later than 5 years 54,006Capital commitmentsCapital expenditure contracted for but not provided for in these accounts amounted to GBP 1.9 million.Purchase commitmentsThe Company has purchased commitments for the next 12 months to guarantee supply and price amounting to GBP 6.1million.100,03322. Contingent liabilitiesOn 3 April 2005 a fire at Barton site destroyed part of the facility. The Company is fully insured and does not expect the fire tohave material adverse effects on the operating results.There are a number of legal claims or potential claims against the Company, the outcome of which cannot at present beforeseen. Provision has been made for all liabilities which are expected to materialise.At 31 December the Company has granted its subsidiaries guarantees amounting to GBP 12.3 million.Amounts in thousands of GBP105

23. Acquisition of Geest Plc.The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the Company:Acquisition of Geest Plc.Fair valueTangible assets 226,855Intangible assets 38,200Investment in joint ventures 1,379Inventories 19,717Debtors 130,433Cash 23,501Total assets 440,085Bank loans (99,252)Taxation (579)Other creditors (183,831)Deferred taxation (19,505)Other (33,247)Total liabilities (336,414)Net assets 103,671Minority interest (350)Movements on reserves 4,067Investment in associates (17,352)Goodwill 309,002Other intangible assets 6,300Satisfied by:405,338Direct costs relating to acquisition 10,170Cash consideration 395,168405,338The assessment of the fair value of the net assets of Geest Plc. at 1 May 2005 is provisional, as permitted by IFRS 3 Businesscombinations. The assessment of fair value will be completed prior to the end of April 2006.If the acquisition of Geest Plc. had been completed on the first day of the financial year, Company operating profit for the periodwould have been GBP 88.8 million before non recurring costs.Net cash outflows in respect of the acquisition comprise:Cash consideration (405,338)Cash at bank and in hand acquired 23,506Bank overdrafts acquired (755)(382,587)106 Amounts in thousands of GBP

24. Acquisition of Hitchen Foods Plc.The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the Company:Acquisition of Hitchen Foods Plc.Fair valueTangible assets 9,832Inventories 586Debtors 5,713Cash 618Total assets 16,749Taxation (260)Other creditors (4,444)Deferred taxation (403)Other (1,930)Total liabilities (7,037)Net assets 9,712Goodwill 35,663Satisfied by:45,375Direct costs relating to acquisition 891Cash consideration 44,48445,375The assessment of the fair value of the net assets of Hitchen Foods Plc. at 1 October 2005 is provisional, as permitted by IFRS 3Business combinations. The assessment of fair value will be completed prior to the end of September 2006.If the acquisition of Hitchen Foods Plc. and Geest Plc. had been completed on the first day of the financial year, Companyoperating profit for the period would have been GBP 93.4 million before non recurring costs.Net cash outflows in respect of the acquisition comprise:Cash consideration (45,375)Cash at bank and in hand acquired 618(44,757)Amounts in thousands of GBP107

25. PensionThe Company operates a number of pension schemes in the UK and overseas. These schemes are either trust or contract basedand have been set up in accordance with appropriate legislation. The assets of each of the pension schemes are held separatelyfrom the assets of the Company.In the UK, the two main schemes, one a defined contribution scheme and the other a funded defined benefit scheme are open toemployees joining the Company (full-time or part-time).Pension costs charged in arriving at profit on ordinary activities before taxation were:2005UK defined benefit plan net credit 1,100UK defined contribution plan net charge 353Overseas net charge 143No amounts were owed at the year end for the defined contribution scheme.1,596Defined benefit schemeThe valuation used for IAS 19 disclosures has been used upon the latest full actuarial valuation at 31 March 2004 and updatedby the actuaries to take account of the requirements of IAS 19 in order to assess the assets and liabilities of the scheme at 31December 2005.The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significantchange before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projectionsover long periods and thus are inherently uncertain, were:31.12 2005Expected rateEstimatedof returnbid valueUK equities 8.0% 69,700Overseas equities 8.0% 36,400Corporate bonds 4.7% 21,600UK government bonds 4.1% 5,400Property 6.2% 11,000144,100Present value of scheme liabilities (136,600)Surplus in scheme 7,500Related deferred taxation liability (2,300)Net pension asset 5,200The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due tothe timescale covered, may not necessarily be borne out in practice.31.12 2005Rate of increase in salaries 4.3%Rate of increase for pensions in payment and deferred pensions 2.8%Expected return of scheme assets 7.2%Discount rate 4.8%Inflation assumption 2.8%The amount charged to the Company operating profit under IAS 19 of GBP 1.1 million is analysed as follows:2005Current service cost (2,700)Interest on pension scheme liabilities (4,000)Expected return on assets in the pension scheme 5,600(1,100)108 Amounts in thousands of GBP

Analysis of the amount recognised in the Income Statement:2005Gain on assets 22,900Experienced gain on liabilities 100Loss on change of assumptions (financial and demographic) (12,300)Actuarial gain 10,700Analysis of the movement in the surplus/(deficit) in the scheme during the period:2005Deficit in the scheme at acquisition (3,800)Contributions paid 1,700Current service cost (2,700)Net financial return 1,600Actuarial gain 10,700Surplus in the scheme carried forward 7,500History of experienced gains and losses:2005Surplus between actual and expected return on scheme assets 22,900% of scheme asset at the end of the year 15.9%Experience loss on scheme liabilities (100)% of scheme liabilities at end of the year 0.1%Actuarial gain recognised in statement of recognised income and expense 10,700% of scheme liabilities at the end of the year 7.8%26. Other mattersIn relation to the acquisition of the fresh prepared foods company Geest Plc and also to refinance Geest’s long-term debt theCompany signed a GBP 450 million credit facility with a 5-year maturity and a GBP 50 million multi-currency credit revolvingfacility (RCF). At 31 December GBP 31.9 million were available against the RCF.The Company issued a new bond, BAKK 05 1, with a nominal value ISK 9.2 billion (GBP 77 million). The bonds are indexed bulletbonds which bear a 5.4% fixed interest rate. The bonds will mature on 1 December 2010. The bonds are listed on the IcelandStock Exchange. The purpose of the bond issue was to raise capital for further development of activities on Bakkavör Group’smarkets and support the profitable growth of the Company.The Company has purchased a business interruption insurance to the amount of GBP 987 million.Amounts in thousands of GBP109

27. Related party transactionsThe following transactions were carried out with related parties:Tjarnargata 35 ehf.Rent: 2005Tjarnargata 35 ehf. (for the period June to December 2005) 18Tjarnargata 35 ehf. is a subsidiary of Exista ehf. Exista ehf. is the parent company of Exista B.V., which in turn owns 29.1% sharesin Bakkavör Group hf.Katsouris Brothers Ltd.; Katsouris family; AP Yerolemou and OthersSales of goods and services: 2005Katsouris Brothers Ltd. 132Purchases of goods and other services:Katsouris Brothers Ltd. 5,760Katsouris family 149Rent:AP Yerolemou and Others 188Katsouris Brothers Ltd. is among others owned by Panikos J. Katsouris and Antonios P. Yerolemou, Board members of BakkavörGroup hf.AP Yerolemou and Others is among others owned by Panikos J. Katsouris and Antonios P. Yerolemou, Board members ofBakkavör Group hf.5,909Joint venturesSales of goods and services: 2005Sales to joint ventures 1,939Purchases of goods and other services:Purchases from joint ventures 1,894Management charge from Geest QV 846The above transactions were carried out on commercial terms.2,740110 Amounts in thousands of GBP

28. Change to accounting policies in accordance with International Financial Reporting Standards (IFRS)As discussed in note 1 on accounting policies, this is the first time the Company has prepared its annual accounts in accordancewith the International Financial Reporting Standards (IFRS).The accounts for the operating year 2005 are prepared in accordance with the accounting policies discussed in the notes onaccounting policies. This also applies to comparative figures for 2004 and the opening Balance Sheet of 1 January 2004, aschanges become effective as of that date, which is referred to as the transition date.Amounts in the opening Balance Sheet of 1 January 2004 have been changed in accordance with IFRS, but were previouslypresented in accordance with legislation on annual accounts and Icelandic GAAP (Generally Accepted Accounting Principles).The following tables and notes show the effects the change from Icelandic GAAP to IFRS has had on the financial position ofthe Company and its financial results. The effects of the implementation are minimal and relate in particular to how the incomestatement, balance sheet and cash flow are presented.PresentationDepreciation was presented previously as a specific item in the Income Statement but is now presented with related cost items,cost of sales and operating expenses. This change means that gross profit will be GBP 36,711,862 but was previously GBP40,281,854.Income from associates is presented with cost items but not with financing items as before. This change affects the operatingprofit (EBIT). The EBIT for 2004 is now GBP 24,157,416 and was GBP 20,981,447 previously. EBIT margin is 16.2% compared with14.0% previously.Bakkavör Group’s Balance Sheet is now presented on one page and is more condensed than before. The changes are as follows:– The items, real estate and equipment, are combined into one item under non-current assets.– Shareholdings in other companies are divided into two items, interest in associates and available-for-sale investments.– The items, raw materials and packaging, and finished goods are now presented as one item, inventories.– Credit institutions and other loans are now presented as one item, borrowings.EquityThe implementation of IFRS has no effect on equity 31 December 2004. Equity is as follows:Balance at 31 December 2003 72,056Effects of IFRS 0Balance at 1 January 2004 72,056Net income for the year 13,104Issued share capital 3,054Balance at 31 December 2004 88,214Below is the Income Statement 2004 and Balance Sheet as at 31 December 2004 before and after the implementation of IFRS:Income Statement 2004, change to IFRS from previous GAAPAfter IFRSimplementation Original EffectsNet sales 149,565 149,565 0Cost of sales (112,853) (109,283) (3,570)Gross profit 36,712 40,282 (3,570)Other operating income 19 19 0Operating expenses (15,749) (15,520) (229)Depreciation 0 (3,799) 3,799Share of profit in associates 3,176 0 3,176(12,554) (19,300) 6,746Operating profit 24,158 20,982 3,176Net finance costs (7,092) (7,092) 0Share of profit in associates 0 3,176 (3,176)(7,092) (3,916) (3,176)Profit before tax 17,066 17,066 0Income tax (3,962) (3,962) 0Profit for the year 13,104 13,104 0Amounts in thousands of GBP111

Balance Sheet 31 December 2004, change to IFRS from previous GAAPAfter IFRSimplementation Original EffectsAssetsNon-current assetsGoodwill 99,592 99,592 0Property, plant and equipment 28,993 0 28,993Real estate 0 8,756 (8,756)Equipment 0 20,237 (20,237)Interest in associates 87,730 0 87,730Available for sale investments 970 88,700 (87,730)217,285 217,285 0Current assetsInventories 4,242 0 4,242Raw materials and packaging 0 3,666 (3,666)Finished goods 0 576 (576)Trade receivables 17,545 17,545 0Other current receivables 8,813 8,813 0Cash and cash equivalents 24,508 24,508 055,108 55,108 0Total assets 272,393 272,393 0Equity and liabilitiesEquityShare capital 10,813 10,813 0Capital reserve 38,416 38,416 0Retained earnings 38,985 38,985 088,214 88,214 0Non-current liabilitiesDeferred income tax liability 1,886 1,886 0Subordinated convertible loan 12,868 12,868 0Borrowings 150,064 0 150,064Credit insititutions 0 41,770 (41,770)Other loans 0 108,294 (108,294)164,818 164,818 0Current liabilitiesAccrued taxes 2,267 2,267 0Other current liabilities 17,094 17,094 019,361 19,361 0Total equity and liabilities 272,393 272,393 029. Events after the balance sheet dateThere have been no material post balance sheet events which would require disclosures or adjustment to the 31 December 2005Consolidated Financial Statements.The Consolidated Financial Statements were approved by the Board of Directors and authorised for issue on 28 February 2006.112 Amounts in thousands of GBP

Glossary ofgeneral termsIn this glossary we have tried to cover somespecific financial and business terms used in thisyear’s report. The list is not exhaustive and manyof the definitions have been interpreted froma Bakkavör Group perspective and so may notbe pertinent to other businesses or countries.Please let us know of any omissions or suggestedimprovements.Actuarial valuationProfessional assessment of the funding positionof a company’s pension scheme, based onassumptions regarding future events (includingaverage lifespan of members, returns on thedifferent investment types etc).AmortisationDepreciation of an intangible asset – the cost ofgoodwill spread over the number of years whichare judged to benefit.Associate / Associated companyEntity over which Bakkavör Group has significantinfluence and that is neither a subsidiary nor ajoint venture. Significant influence means thepower to participate in the financial and operatingpolicy decisions of the investee but not to havecontrol or joint control over those policies.Basis pointOne hundredth of a percentage point (0.01%),used in quoting movements in interest rates oryields on securities.Book valueThe net value of assets or liabilities (cost, less anyamounts written off) held in the books of accountat a point in time. It may not reflect currentmarket value or replacement cost.BondA certificate of debt issued to raise funds. Bondstypically pay a fixed rate of interest and arerepayable at a fixed future date.British Retail Consortium (BRC)Trade association representing retailers in the UK.Broker analystAn analyst employed by a stockbroker whoassesses a company and makes recommendationsto investors as to the relative value of thatcompany’s shares.Capital commitmentThe situation where a company has contractuallyagreed to undertake some capital expenditurebefore the period end, but the money has not yetbeen spent nor the asset received.Capital employedAll capital used in a business. It may refer to netassets (total assets less liabilities) and often isdefined as shareholders’ funds plus long-termliabilities. Operating capital employed relates tothose net assets involved in operational activities.Capital expenditure (Capex)Payment for acquisition of a longer-term asset,e.g. buildings, machinery.Cash flowA measure of the actual cash generated by thebusiness rather than accounting profit. Free cashgenerated by operating activities is defined ascash flow from operating activities after deductinginvestments in tangible assets.Closed periodThe period when insiders of Bakkavör Group areunable to trade in Group shares. Insiders are ableto trade (subject to status of insider information)up to six weeks after the release of BakkavörGroup’s annual and quarterly statements.Competition CommissionAn independent UK public body established bythe Competition Act 1998. It conducts in-depthinquiries into mergers, markets and the regulationof the major regulated industries.www.competition-commission.org.ukConsumer Price Index (CPI)A basket of goods/services whose price iscalculated monthly and which provides a broadmeasure of the level of inflation.ContinuingDescribes the ongoing element of a company’sresults and excludes the results of disposed ordiscontinued activities.Corporate governanceThe code of conduct by which the Group isdirected and controlled.DatamonitorBusiness information company, specialising inindustry analysis.Debt/Equity ratioSee Gearing.Deferred taxSee Corporation tax.DepreciationThe means by which a business spreads the costof an asset over its useful life to the business – aproportion of the value of the asset is chargedagainst profit in each year. For an intangible asset,this is generally referred to as amortisation.DerivativesFinancial instruments (for Bakkavör Group, mainlyforeign currency forward contracts) to hedge risksassociated with foreign currency fluctuations.DividendsThe proportion of a company’s profits paid toshareholders, usually declared as a dividend pershare.Due diligenceFor a potential acquiror, includes theunderstanding of the obligations of the targetedcompany.EarningsProfit available to ordinary shareholders, after alloperating expenses, interest charges, taxes andpreference dividends have been deducted.Earnings per share (EPS)Earnings divided by the number of ordinary sharesin issue.EBITEarnings (as above) Before Interest and Tax.EBITAEarnings (as above) Before Interest, Tax andAmortisation.EBITDAEarnings (as above) Before Interest, Tax,Depreciation and Amortisation.Effective tax rate (%)See Income tax.Enterprise valueA measure of a company’s value calculated by itsmarket capitalisation minus debt.Ethical Trading Organisation (ETI)An alliance of companies, non-governmentalorganisations and trade unions working topromote and improve the implementation ofcorporate codes of practice which cover supplychain working conditions.www.ethicaltrade.orgExceptional itemsGains/losses incurred that should be noted ina company’s results according to accountingstandards. Even though these items areconsidered to be a part of ordinary businessactivities, due to their size or frequency,management consider that they should beaccordingly disclosed.Executive DirectorsBoard Directors who are also full-time employeesof the company and have managementresponsibility.FESE (Federation of European SecuritiesExchanges)The foremost aim of FESE is to represent andpromote the common interests of securitiesexchanges in Europe.www.fese.beFinancial Services Authority (FSA)The independent body that regulates the financialservices industry in the UK.www.fsa.gov.ukFinancial Supervisory Authority (FSA)Icelandic state authority whose role is to ensurethat the activities of parties (e.g. financialinstitutions) subject to supervision are inaccordance with laws and regulations and arein consistent with sound and proper businesspractices.www.fme.isFood Standards Agency (FSA)An independent UK Government department setup by an Act of Parliament in 2000 to protect thepublic’s health and consumer interests in relationto food.www.food.gov.ukFunctional currencyA company’s working currency. For BakkavörGroup, GBP.GBPPound sterling. The UK’s official currency.GearingUsed to describe the relationship between debtand equity. Calculated by dividing the companynet debt by the shareholders’ equity. A highlygeared company carries a lot of debt. Alsomeasured by the debt/equity ratio.GoodwillThe excess of the cost of acquisition over thecompany’s interest in the fair value of theidentifiable assets and liabilities at the date ofacquisition.113

HedgingReducing exposure to risk of loss resulting fromfluctuations in exchange rates, commodity prices,interest rates etc. Typical tools include forwardforeign exchange contracts and interest rateswaps.ICEX (Iceland Stock Exchange)Iceland’s stock exchange where Bakkavör Groupis listed.www.icex.isICEX-15The top 15 companies by market capitalisation onthe ICEX.IGD (Institute of Grocery Distribution)Research organisation for the UK food and groceryindustry.www.igd.comImpairmentReduction in a company’s stated capital.Income taxThe tax on company profits or losses. This isinfluenced by the tax rate applicable to the sizeof the company and the level of profits and anydifferences between accounting treatment andtax treatment. This gives rise to the effective taxrate, which expresses tax payable as a percentageof profit. Deferred tax relates to the tax that maybe payable in future as a result of the differencesbetween accounting treatments and taxtreatments adopted to date.Interest coverThe number of times a company could pay itsmost recent interest charges out of its net profitafter tax.Internal rate of return (IRR)A technique for appraising capital investment.It is that rate of return that needs to be appliedas the discount factor to future cash flows froma project to give an overall net present value ofzero. In simple terms, if the IRR is higher than apredetermined hurdle rate then the project isworthwhile.International Financial Reporting Standards (IFRS)and International Accounting Standards (IAS)The common accounting principles on which themajor industrial nations are harmonising theiraccounting treatments.International Labour Organisation (ILO)The United Nation’s specialised agency whichseeks the promotion of social justice andinternationally-recognised human and labourrights. www.ilo.orgISKIcelandic Króna. Iceland’s official currency.Joint ventureContractual arrangement whereby a companyand other parties undertake an economic activitythat is subject to joint control, i.e. the strategicfinancial and operating policy decision relating toactivities requires the unanimous consent of theparties sharing control.LIBORLondon Inter Bank Offered Rate – the rate ofinterest at which banks will lend in the inter-bankmarket.LiquidityThe proportion of cash or cash equivalents in acompany’s assets. For shares, the ability to tradeon an open market.Management BoardGeest’s executive operational team.114Market capitalisationValue at current market prices of a company’sshare capital. Calculated by multiplying currentshare price by the number of shares in issue.Minority interestsSubsidiary undertakings which are not 100%-owned by the parent company.MintelGlobal supplier of consumer, media and marketresearch.Net debtThe excess of the company’s borrowings over itscash and liquid resources.Non-government organisation (NGO)Any local, national, or international organisationwhose members are not employed by agovernment.NOREX Alliance (NOREX)An alliance between the Nordic and Balticexchanges in Denmark, Finland, Estonia, Iceland,Norway, Latvia and Sweden and gives singleaccess to the Nordic and Baltic equity markets.www.norex.comOFT (Office of Fair Trading)UK’s competition authority which enforcesconsumer protection law and competition law,reviews proposed mergers and conducts marketstudies. www.oft.gov.ukONS (Office for National Statistics)The government department that provides UKstatistical and registration services.www.statistics.gov.ukOrganic growthGrowth achieved by increasing the scale ofbusiness by internal activities as opposed toacquiring other established businesses.Price/Earnings (P/E) ratioRatio or multiple calculated by dividing the marketprice per share by the earnings per share. It isa simple measure for comparing the relativevaluations of different companies.Price sensitive information (PSI)Any information which if in the public domaincould cause the share price to move.Quick ratioA measure of a company’s liquidity and abilityto meet its obligations. Quick ratio (or acid testratio) is obtained by subtracting inventoriesfrom current assets and then dividing by currentliabilities. It can be viewed as a sign of company’sfinancial strength or weakness (higher numbermeans stronger, lower number means weaker).Record dateThe date on which a shareholder should beentered on the company’s share register to qualifyfor a dividend payment.Retail Price Index (RPI)A basket of goods/services whose price iscalculated monthly and which provides a broadmeasure of the level of inflation.Return on Capital Employed (ROCE) /Return onInvested Capital (ROIC)These are measures of the profitability of thefunds/assets used by the business. ROCE measuresoperating profit as a percentage of total capitalemployed excluding goodwill. ROIC measuresoperating profit pre goodwill amortisation butafter tax as a percentage of capital invested, whichincludes goodwill arising on acquisitions.

SAXESSElectronic trading system used on the OMXExchanges (Copenhagen, Stockholm, Helsinki,Tallinn, Riga and Vilnius Stock Exchanges).Shareholder valueThe value a company generates for shareholdersin terms of both dividends and growth in thecompany’s share price.Subsidiary/Subsidiary undertakingBusinesses in which all or the majority of theirshare is owned and where management controlcan be exercised.TNS (Taylor Nelson Sofrès)Global market information group.Weighted average cost of capital (WACC)The average cost (weighted by market value) of acompany’s debt and equity funding. The cost ofdebt is the post tax percentage cost of funding thedebt and the cost of equity is the rate of returnrequired by a company’s shareholders.Working capitalThe cash that the business has tied up in fundingday to day operations – this includes the value ofthe stock it holds, the amount owed to it in tradedebts by customers less any amounts that arefunded by our suppliers/creditors in the form ofour trade debts to them.B i b l i o g r a p h y(for ‘UK market’ section):Agents’ summary of business conditions,Bank of England, December 2005In the preparation of this report, BakkavörGroup hf. (Bakkavör) has not taken intoaccount any single shareholder investmentobjectives, financial resources or other relevantcircumstances. All securities transactions involverisks, which include (among others) the risk ofadverse or unanticipated market, financial orpolitical developments and, in internationaltransactions, currency risk. Due care andattention has been used in the preparation ofany forecast information. Actual results mayvary from their forecasts, and any variation maybe materially positive or negative. Forecasts, bytheir very nature, are subject to uncertainty andcontingencies, many of which are outside thecontrol of Bakkavör.Bakkavör cannot guarantee that the informationcontained herein is without fault or entirelyaccurate. The information in this material isbased on sources that Bakkavör believes tobe reliable. Information and opinions maychange without notice. Bakkavör is under noobligation to make amendments or changes tothis publication if errors are found or opinionsor information change. Bakkavör accepts noresponsibility for the accuracy of its sources.Bakkavör is the owner of all works of authorshipincluding, but not limited to, all design,text, images and trademarks in this materialunless otherwise explicitly stated. The use ofBakkavör’s material, work or trademarks isforbidden without written consent except whereotherwise expressly stated. It is prohibited topublish material made or gathered by Bakkavörwithout written consent.BRC – KPMG Retail Sales Monitor,December 2005Convenience Retailing 2005, IGD, April2005Economic Update, Annual Summary 2005,Office of National Statistics, January 2006Evolution of Consumer Trends,Datamonitor, June 2005.Family Food Panel, Taylor Nelson SofrèsFood Retailing – UK, Retail Intelligence,Mintel, November 2005Grocery Retailing 2005, IGD, August 2005Health on-the-go, Datamonitor, December2004Retail Banking International, 21 January2006Retail Week, IGD (throughout 2005)Shopportunities, Online Shopping Issue 3,IGD, 2005Shopportunities, Premium Issue 4, 2005,IGD 2005The Typical Shopping Basket, Mintel, April2003UK Food Issues 2005 Review, fisacUndercurrents: Consumer segmentation inthe news, Consumer Dynamics BusinessCommunications, November 2005115

Corporate informationBakkavör Group hf.Bakkavör Group Head OfficeTjarnargata 35101 ReykjavíkIcelandTel: +354 550 9700Fax: +354 550 9701London Office (until June 2006)40 Cumberland AvenuePark RoyalLondonNW10 7RQUnited KingdomTel: +44 (0)208 728 5100Fax: +44 (0)208 728 5101London Office (from June 2006)5th Floor3 Sheldon SquarePaddington CentralLondonW2 6PWUnited KingdomBakkavör Group website:www.bakkavor.comPrincipal bankersBarclays, United KingdomThe Royal Bank of Scotland, United KingdomKaupthing Bank, IcelandGlitnir (formerly Islandsbanki), IcelandRabobank (International), London, United KingdomInvestment bankersKaupthing Ltd.89 New Bond Street, 5th floorLondonW15 1DAUnited KingdomAuditorDeloitteStórhöfdi 23110 ReykjavíkIcelandExchange range used throughout thereport (unless otherwise stated): 1 GBP = ISK 108.85Design: Tunglid – advertisingPrinted in Iceland by Svansprent, on environmentallyfriendly paper.People photographer: Ari Magg, Silja MaggAdditional photography courtesy of: Tara Fisher, NigelMcMillan, David Loftus, Watercress Alliance, FreshPrepared Salads Producer Group, Ari Magg116