May Annual Report

CAFFÈ NERO GROUP PLC3 NEAL STREETLONDON WC2H 9PU

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ANNUAL REPORT & ACCOUNTS 2005

‘THE BEST ESPRESSO THIS SIDE OF MILAN’

HIGHLIGHTS FY2005

01 FINANCIAL EVOLUTION05 CHAIRMAN’S STATEMENT09 THE BOARD, DIRECTORS & ADVISERS10 DIRECTORS’ REPORT13 CORPORATE GOVERNANCE15 DIRECTORS’ REMUNERATION REPORT18 STATEMENT OF DIRECTORS’ RESPONSIBILITIES19 AUDITORS’ REPORT20 GROUP PROFIT & LOSS ACCOUNT21 GROUP BALANCE SHEET22 COMPANY BALANCE SHEET23 GROUP STATEMENT OF CASH FLOWS

/RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

24 NOTES TO THE FINANCIAL STATEMENTS34 NOTICE OF AGM

• TURNOVER UP 39% TO £70.1M (2004: £50.5M).

• LIKE-FOR-LIKE STORE SALES POSITIVE 7.5%.

• EBITDA INCREASED BY 81% TO £11.8M (2004: £6.5M).

• OPERATING PROFIT IMPROVED BY 155% TO £6.0M (2004: £2.4M).

• PRE TAX PROFIT (BEFORE AMORTISATION) ROSE BY 156% TO £5.6M (2004: £2.2M).

• EPS GREW BY 100% TO 7.49P (2004: 3.75P).

• CASH BALANCE OF £4.0M AND BANKING FACILITIES OF £3.5M AVAILABLE AT YEAR END.

• HAVE REACHED A POSITION OF SELF-FINANCING: INTERNAL CASHFLOW NOW APPROXIMATELY EQUALS CAPITAL EXPENDITURE.

• CURRENTLY 230 STORES OPERATING IN 101 UK TOWNSAND CITIES (MAY 2005: 214).

This report is printed on Retreeve Vellum FSC Natural, manufactured in the UK by Curtis Fine Papers and available exclusively from the Robert Horne Group T/08457 44 33 22.

Designed and produced by College Design.

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CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005FINANCIAL EVOLUTION 01

FINANCIAL EVOLUTION

02 03 04

108

121

STORES

STORE PROFIT (£M)

TURNOVER (£M)

EBITDA (£M)

PROFIT BEFORE TAX (£M)*

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162

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39.4

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50.5

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7.3

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10.6

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6.5

2.4

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RATED THE BEST COFFEE HOUSE BRANDIN BRITAIN FOR THE 5TH YEAR RUNNINGAllegra Strategies, Consumer Survey on Coffee – 2004

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“THE BEST ESPRESSO THIS SIDE OF MILAN” TATLER

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CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005CHAIRMAN’S STATEMENT

CHAIRMAN’SSTATEMENT

INTRODUCTIONThe directors and I are very pleased with Caffè Nero’sperformance for the 12 months to 31 May 2005(FY2005). It was another year of record financial resultsand of outstanding achievement on all three of ourkey fronts: growth, profitability and brand rating. Weopened 52 (net) new stores in the year, grew operatingprofit by 155% and retained our number one brandranking with consumers. A snapshot of the yearreinforces that Caffè Nero is emerging as a highlypromising national brand.

FINANCIAL PERFORMANCEWe are delighted with the financial results. Caffè Neroexceeded every financial target set by the Board for the Group at the beginning of the year and, in the process, achieved record turnover and profit.Sales increased 39% to £70.1m (2004: £50.5m) andlike-for-like sales were up 7.5%, the highest in Caffè Nero’s history. Caffè Nero has now recorded 32 consecutive quarters of positive like-for-like sales.

Profit also increased sharply. Store Profit (profitbefore central overheads) rose by 60% to £17.1m(2004: £10.6m). EBITDA, the critical measurement ofcashflow profit, jumped 81% to £11.8m (2004:£6.5m). This leap forward reflects the samephenomenon as in the previous three years: havingreached a threshold number of stores and a sufficientlevel of infrastructure, a large portion of each newstore’s profit flows down to the Group’s profit line.

Consequently, significant increases occurred in CaffèNero’s adjusted Operating Profit (before amortisationof goodwill and exceptionals), which grew by 112%to £6.5m (2004: £3.1m). Likewise, we made greatstrides in non-adjusted Operating Profit, whichclimbed by 155% to £6.0m (2004: £2.4m).

Increases at the pre-tax profit level were equallyrobust. The Group’s adjusted Pre-tax Profit (beforeamortisation of goodwill) rose by 156% to £5.6m(2004: £2.2m), while Caffè Nero’s non-adjusted Pre-tax Profit improved by 201% to a record £5.1m(2004: £1.7m).

Profit After-Tax was also a record; it climbed to£5.0m, which is a 100% increase. Basic earnings pershare rose from 3.75p to 7.49p, also a 100% uplift.More relevant (due to the recognition of a deferredtax asset last year) is the pre-tax earnings per sharefigure, which jumped from 2.56p to 7.72p, a 202%increase. All in all, this was a very respectablefinancial performance.

BALANCE SHEET AND FUNDINGAt the year end 31 May 2005, Caffè Nero’s cashposition stood at £4.0m. Net debt was £11.6m (c.1.0 x EBITDA of £11.8m). An additional £3.5mfacility was also available from the Bank of Scotland,if required.

Caffè Nero’s cash flow generating capabilitiessuggest that in the next 12 months there will be noneed for further funds outside the Group’s existingarrangements, at least not unless there is a furtheracceleration of growth or an acquisition. The Group’sinternally-generated cash is now able to finance itscapital expenditure programme. This means CaffèNero can self-fund more than 50 new stores perannum without any outside financing.

THE UK RETAIL COFFEE MARKETGrowth and SizeThe UK coffee bar market continues to be an exciting market. Overall, it registers at approximately£2.2 billion. The fastest growing segment within thatis the branded coffee bar area. In 2005, the brandedsegment was worth approximately £700 million(Allegra Strategies). The pace of growth of this brandedsegment continues to be astounding. According toAllegra Strategies, the definitive UK coffee industryresearchers, the branded market will rise by morethan 10% per annum for the next few years. Mostexperts now expect the branded segment toapproach the £1 billion mark in the UK within thenext five years. Without doubt, a great marketopportunity exists for Caffè Nero on the road ahead.

Competitive LandscapeThree main brands continue to dominate the UKbranded coffee segment: Caffè Nero, Starbucks andCosta Coffee. Together these three brands alreadycontrol approximately 57% of the £700 millionmarket. Two of the three, Caffè Nero and Starbucks,are gaining market share faster than their competitors.In fact, Caffè Nero, which has approximately 12% of the branded market, is growing market share thefastest, gaining nearly 1% share per annum over thelast few years.

With the ascendancy of these two brands, it appearsthe branded UK retail coffee market has divided into two sub-segments: a European offering – whereCaffè Nero is the leader – and a North Americanproposition – where Starbucks is the main player.These two market leaders are well positioned tobenefit the most from the continuing growth of thebranded UK coffee sector.

The DynamicsThere has been much debate about the reasonsbehind the spectacular growth in the UK coffeemarket and whether it is here to stay. Any explanationneeds to factor in several converging developmentswith the UK consumer. Firstly, coffee culture hasbeen steadily creeping into UK society and, inparticular, there has been greater appreciation of,and demand for, gourmet espresso-based coffee.Secondly, café society has been spreading from thecontinent at a greater rate than in the past. As morepeople travel to and from Europe, a lifestyle changein the UK has begun to take shape. Thirdly, a newgeneration and mentality has emerged in the UK: one that demands venues which are female friendly,clean and airy, as well as alcohol-free and flexible informat. These three factors are unlikely to recede forthe UK consumer. Coffee houses with quality brandshave filled the needs of these converging consumerdemands and look set to continue to do so.

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005CHAIRMAN’S STATEMENT CONTINUED06

CHAIRMAN’SSTATEMENTCONTINUED

BRANDCaffè Nero is a European-style coffee house brandserving high-quality espresso based coffee, and topquality deli food that changes throughout the day.

We aim to serve as a gathering spot for the localcommunity or neighbourhood. Our intention is forcustomers to feel welcome to grab a coffee and go,have a business meeting, take a break from shopping,have a chat with friends or just sit and read the paper.

We have been fortunate enough to have UKconsumers embrace our brand. Last year they rankedCaffè Nero as the number one rated UK coffee brandfor the fifth consecutive year. In fact, UK consumersrated Caffè Nero as the leader in coffee quality,atmosphere, service and food offering (Allegra Reporton coffee 2004). We hope consumers will continue to appreciate our brand in the years to come.

EXPANSIONLast year was another year of significant expansionfor Caffè Nero. We opened 60 new stores, sold fiveex-Aroma stores, and handed three stores back tolandlords for redevelopment. This gave us a netincrease of 52 stores, our biggest expansion in oneyear since our inception and a 32% jump in ouroverall estate.

The greatest concentration of these new storesoccurred in the regions, particularly the Midlands,North West and South West. Our property strategyhad two prongs: (1) build up clusters in urban areas,and (2) expand into smaller, desirable regional towns.Consequently, we continued to build our presence inManchester, Bristol, Bath, Nottingham and Cambridge.Concurrently, we opened in such places as Formby,Lancaster, Huddersfield, Torquay, Fareham, Warwickand Leamington Spa.

At the year end, we had 214 stores operating in 90 UK towns and cities and employed approximately2,200 people from 66 countries. The directors believethere is considerably more potential in the UKmarket, with room for at least 400 Caffè Nero stores.

PARTNERSHIPSDuring the year, we also strengthened our relationshipwith House of Fraser, opening in their Victoria(London), Croydon, Guildford and Glasgow stores.Our partnership with BAA was likewise bolstered, as we added two new sites at Heathrow in the year. The success of these ventures highlights that thereare a wide variety of formats and locations where the Caffè Nero brand can flourish.

In line with our role as the community gathering spot,we have also initiated partnerships with a number of community arts and culture groups. Last year wesupported the British Museum’s “Egyptian Mummyshow” and the Tate Britain’s “Turner Whistler Monet”exhibition, while also assisting the Old Vic and theRoyal Shakespeare Company.

CURRENT TRADING AND DEVELOPMENTSThe Group has had a promising start to its currentfinancial year. Despite the London bombings and theUK consumer slowdown, Caffè Nero has continuedto trade solidly throughout June, July and August.Revenues are up by 34% in the first quarter.

In the same three months, the Group has opened 16 new stores, which is slightly ahead of schedule.Currently we have 230 stores operating in 101 UKtowns and cities. Our objective is to introduce 41 new cafes in the year, giving us 255 stores by our year end, May 2006.

Since the year end we have also further strengthenedour senior management team with the appointmentof a new UK Managing Director, Jonathan Hart.Jonathan joins us after having previously been GroupManaging Director of Dixons and Head of the RetailNetwork of Abbey National. He will help in the day-to-day management of the UK business, drawingfrom a solid background of more than 20 years ofretail experience.

FUTURE PROSPECTSCaffè Nero is poised to have another strong year.Much like last year, all the main ingredients remain in place for us to excel: a thriving UK retail coffeemarket, a favourable retail property environment withextensive availability of sites at reasonable prices, a coffee brand highly rated by UK consumers, a management team and general infrastructure well-placed to support a roll-out, and self-generatedfunds sufficient to finance the Group’s growth.

The theme then for this current year is more of thesame. We intend to continue our UK roll-out in a disciplined manner. We also plan to bolster ourprocesses and controls to allow us to more effectivelymanage our enlarging business.

One additional aspect to the year will be to spendmore time analysing international opportunities,namely in Northern Europe and the Middle East. We believe that Caffè Nero has great potentialabroad and it is time to examine which new marketswill provide the best opportunities.

Nonetheless, the key to a successful year for Caffè Nero is to stay focussed on the UK and tocontinue to deliver growth, profitability and a strongbrand rating.

GERRY FORDCHAIRMAN & CHIEF EXECUTIVE14 September 2005

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“CAFFE NERO IS THE COMMUNITY GATHERINGSPOT: COME READ THE PAPER, TALK WITHFRIENDS, HAVE A BUSINESS MEETING OR JUSTWATCH THE WORLD GO BY”

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“IT’S THE TRADITIONAL ITALIAN CAFE”EGON RONAY GUIDE

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005THE BOARD, DIRECTORS & ADVISERS 09

THE BOARD

GERRY FORDCHAIRMAN & CHIEF EXECUTIVE (aged 47)Dr Ford oversees the general management, strategy, andbranding of Caffè Nero. Dr Ford first developed his Europeancoffee house concept in 1996. The concept was applied to the five original sites acquired in 1997, and the brand hassubsequently been rolled-out throughout the UK. Dr Ford holdsa BA from Stanford, a MBA from INSEAD and a PhD fromOxford. He has 18 years experience managing, advising and investing in small and medium sized consumer goodscompanies, including co-founding Paladin Associates a venture capital group which both invests in and manages food, consumer brands, and media businesses.

BEN PRICEFINANCE DIRECTOR (aged 38)Mr Price oversees all financial aspects of the Group as well assite acquisitions. Mr Price has a physics degree from Oxfordand qualified as an accountant with Ernst & Young, where heworked for 5 years in the audit practice. Since then he has hadover 11 years of senior finance management experience in theretail sector. For 3 years he was at Dixons PLC, where hebecame one of the senior finance managers reporting directly to the Group Finance Director. He then served as the financecontroller of a furniture retailer before joining Caffè Nero in June 1997 as part of Dr Ford’s original management team.

JOHN BARNESNON-EXECUTIVE DIRECTOR (aged 56)Mr Barnes has 34 years experience in Europe and the USA inconsumer orientated businesses. He is non-executive Chairmanof La Tasca Group PLC, a non-executive Director of Hardy andHanson’s PLC, a non-executive Director of Interior ServicesGroup PLC, non-executive Chairman of Zoo Digital PLC and a non-executive Director of Arena Leisure PLC. He is also co-author of the best selling marketing book “Marketing Judo”.

DAVID KINGNON-EXECUTIVE DIRECTOR (aged 54)Mr King is currently the CEO of Interior Services Group PLC, theoccupancy specialist firm he founded in 1989. Nine years later,Mr King floated Interior Services on AIM. Interior Services nowemploys over 500 fee earning staff and has turnover of over£400m. Mr King has more than 20 years experience in the fit out industry and has strong small business management skills.

DIRECTORS& ADVISERS

DIRECTORSG W FordB J PriceM J BarnesJ D King

SECRETARYB J Price

AUDITORSErnst & Young LLP1 More London PlaceLondon SE1 2AF

BANKERSBank of ScotlandThe MoundEdinburgh EH1 1YZ

SOLICITORSLandwell1 Embankment PlaceLondon WC2N 6DX

STOCKBROKERSCollins Stewart9th Floor88 Wood StreetLondon EC2V 7QR

REGISTRARSCapita Registrars PlcThe Registry34 Beckenham RoadBeckenhamKent BR3 4TU

REGISTERED OFFICE3 Neal StreetLondon WC2H 9PU

COMPANY NUMBER4129005

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CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005DIRECTORS’ REPORT

DIRECTORS’REPORT

The directors present their report and financialstatements for the Caffè Nero Group PLC group (“theGroup”) and the Caffè Nero Group PLC company(“the Company”) for the year ended 31 May 2005.

RESULTS AND DIVIDENDSThe Group operating profit for the period, beforedepreciation and amortisation of goodwill arising from the initial acquisition of Caffè Nero and theacquisition of Aroma Ltd and before exceptionalitems, was £11,817,000 (31 May 2004: £6,520,000).The Group operating profit after depreciation, butbefore amortisation and exceptionals, was £6,511,000 (31 May 2004: £3,076,000). The profit for the yearbefore tax was £5,101,000 (31 May 2004: £1,694,000).The directors do not recommend the payment of anordinary dividend (2004: £nil).

PRINCIPAL ACTIVITIES AND REVIEW OF THE BUSINESSCaffè Nero is the trading name of a group of highquality Italian style coffee bars. In addition to its corerange of high quality espresso-based coffees, CaffèNero offers an array of pastries, baked goods, freshlymade panini, sandwiches, salads and pastas, as wellas its own cakes and biscotti.

A review of the current business and future prospects isgiven in the Chairman’s Statement on page 5.

DIRECTORS AND THEIR INTERESTSDuring the year, the directors and their interests in theshare capital of the company were as follows:

At 31 May 2005 At 1 June 2004ordinary shares of ordinary shares of

0.5p each 0.5p each

G W Ford(1) 11,251,150 11,232,824B J Price 22,381 22,381M J Barnes(2) 142,160 142,160J D King 65,000 65,000

On 21 April 2005 G W Ford bought 18,326 shares.

Notes:(1) G.W Ford’s interest in ordinary shares is registered as follows:

Saratoga Limited 10,000,000 (2004: 9,981,674)Paladin Partners 1 1,251,150 (2004: 1,251,150)

(2) M J Barnes has a beneficial interest in 71,500 ordinary sharesheld through Paladin Partners 1 (2004: 71,500) and 70,660ordinary shares held directly (2004: 70,660)

Details of directors’ share options are shown on page 15.

RE-ELECTION OF DIRECTORSDetails of directors’ service contracts are referred to in the report on remuneration on pages 15 to 17. B J Price and J D King will retire by rotation and offerthemselves for re-election at the forthcoming AnnualGeneral Meeting. (see page 9 for their details)

CREDITOR PAYMENT POLICY AND PRACTICEIt is the Group’s policy that payments to suppliers aremade in accordance with those terms and conditionsagreed between the Group and its suppliers, providedthat all trading terms and conditions have beencomplied with.

At 31 May 2005, the Group had an average of 70 days purchases outstanding in trade creditors.

SUBSTANTIAL SHAREHOLDINGSAs at 13 September 2005, the following shareholdershad notified the company of their interest in holdingsof 3% or more of any one class of voting shares.

No of PercentageOrdinary Shares of issued

of 0.5p each share capital

Paladin Partners 1 21,321,982 31.9%Saratoga Limited 10,000,000 15.0%Fidelity Investment

Services Limited 4,661,894 7.0%Goldman Sachs Group Inc 3,730,173 5.6%Bellepoint Limited 2,066,000 3.1%

EMPLOYEESThe Group provides employees with informationconcerning trading, business development and otherappropriate matters through formal and informalbriefings. Employees are consulted on a regular basis to ensure their views are taken into account in making decisions likely to affect their interests.

The Group gives full and fair consideration to theemployment of disabled people, including thecontinuation in employment of employees who havebecome disabled. All employees are given equalopportunities for training and promotion, havingregard to their particular aptitudes and abilities.

The Group has Enterprise Management Incentive,Unapproved and Approved Option Schemes. Optionsare granted to reward performance and encourageemployee loyalty. Subject to length of service, theschemes extend from senior management to branchmanager level.

DONATIONSNo contributions were made for either charitable or political purposes.

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005DIRECTORS’ REPORT CONTINUED 11

INTERNATIONAL FINANCIAL REPORTINGSTANDARDSThe Board is mindful that, for the year ending 31 May 2006, Caffè Nero Group PLC’s reportedfinancial information will need to comply with IFRS.We are, therefore, currently reviewing what impactadopting IFRS will have both on the Group’s financial statements and the methodologies used for recording both financial and related information.We are ensuring that the likely impact of IFRS on all significant transactions is fully considered.

The key impacts of IFRS so far identified by thereview are:

Recognition of a charge in the profit and loss account,over the relevant vesting period, for share optionsgranted to employees after 7 November 2002 andrelated deferred tax.

Spreading the benefit of rent free periods on storeleases over the term of a lease, rather than theperiod to date of the first rent review and relateddeferred tax.

Goodwill will not be amortised. An impairment reviewon goodwill in the balance sheet will be performedeach year.

The accounting for the recognition in 2004 and 2005of the deferred tax asset arising in Aroma Limitedmay result in an adjustment to acquisition goodwilland a charge in the profit and loss account. Thetreatment of this deferred tax asset under IFRS is the subject of ongoing debate and is not yet clear.

The previously reported results to 31 May 2005 andbalance sheets at 1 June 2004 and 31 May 2005 willbe restated and profit and net assets will be impactedby the adjustments above. In addition there will bedisclosure changes which are not expected to impact profit and net assets.

AUDITORSA resolution to re-appoint Ernst & Young LLP as thecompany’s auditor will be put to the forthcomingAnnual General Meeting.

By order of the Board

B J PRICESECRETARY13 September 2005

“TOP ITALIAN COFFEE SERVED BY PEOPLE WHOSEEM TO KNOW HOW TO DO IT THE ITALIAN WAY”HARDEN’S, LONDON RESTAURANTS 2005

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CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005CORPORATE GOVERNANCE 13

CORPORATEGOVERNANCE

COMBINED CODE STATEMENTThe directors recognise the importance of adoptinggood corporate governance practices in the bestinterests of all shareholders. During the year, theCompany applied the principles of good governanceset out in section 1 of the Combined Code (“theCode”) in the following ways:

DIRECTORSThe BoardThe Board comprises two executive directors and two non-executive directors. Their biographiesappear on page 9. A review of these shows a rangeof experience and expertise sufficient to bringindependent judgement on issues of strategy,performance, resources and standards of conductwhich is vital to the success of the Group. Both non-executive directors hold shares and shareoptions (as disclosed on pages 10 and 16) and M J Barnes is a non-executive director of InteriorServices Group PLC, where J D King is CEO.However, because the number of shares and share options held by the non-executive directors is small and there are no cross directorships between executive and non-executive directors, the non-executive directors are considered by the Board to be independent.

Board meetingsAt Board meetings the agenda normally comprises a review of the management financial statements, a report on the progress of the store roll out and anupdate on the progress of the Group’s other strategicobjectives, with directors reporting on their areas ofresponsibility. The Board meetings in September andJanuary also cover the approval of the preliminaryand interim financial results respectively and the Maymeeting deals with the approval of the annual budget.

The Board is responsible to the shareholders for theproper management of the Group. A statement ofdirectors’ responsibilities in respect of the financialstatements is set out below. To enable the Board todischarge its duties, all directors receive appropriateand timely information. Briefing papers are distributedto all directors in advance of board meetings. Thereis a formal schedule of matters reserved for theBoard, these include the determination of strategy,approval of major corporate acquisitions and budgetand capital expenditure programme approvals.Matters delegated to the executives include storeacquisitions and disposals and most operationalissues. The Board met six times during the year; all directors attended all meetings except J D King,who was unavailable for one meeting.

The non-executive directors meet regularly withoutthe executive directors present.

The company secretary is responsible to the Boardfor ensuring that the Board procedures are followedand that applicable rules and regulations arecomplied with. There is an agreed procedure fordirectors to take independent professional advice.

Chairman and Chief ExecutiveDr Ford is both Chairman and Chief Executive, whichdoes not comply with Code Provision A.2.1. However,the directors consider that this is appropriate at thecompany’s current stage of development. Dr Fordhas no other significant commitments whichconstrain his ability to fulfil his role.

Re-electionAll directors are required to submit themselves for re-election at least every three years. The Company’sArticles of Association require newly appointeddirectors to submit themselves for election byshareholders at the next Annual General Meeting. B J Price and J D King will retire by rotation and offerthemselves for re-election at the forthcoming AnnualGeneral Meeting (see page 9 for their details)

Board evaluationA formal process for board evaluation has beenintroduced following the year ended 31 May 2005.This consists of the appraisal of the Chairman by theindependent non-executive directors, the appraisal ofthe other executive director by the Chairman, and theappraisal of the non executive directors by theexecutive directors. Should action be required as aresult of the process, the Chairman will make thenecessary arrangements.

Board committee structureThe Board has the following committees for whichterms of reference are available on request:

The Remuneration Committee consists of theBoard’s two non-executive directors, John Barnes(who is Chairman) and David King. They are advisedby the Chief Executive, Gerry Ford. Application of theCode principles on directors’ remuneration may beseen in the report on remuneration on pages 15 to 17.The Remuneration Committee met twice during theyear with all members in attendance.

The Nomination Committee was set up during theyear and consists of Gerry Ford (Chairman), JohnBarnes and David King. It did not meet during theyear as there have been no Board vacancies. Shouldthere be an appointment to the Board, the Chairmanwould ensure that a full, formal and tailored inductionprogramme was put in place.

The Audit Committee comprises of the two non-executive directors. The Chairman of the committeeis David King. The committee complies with writtenterms of reference, which deal clearly with itsauthority and duties. The committee met twice duringthe year and all members attended both meetings.

The committee’s duties include reviewing the scopeand results of the audit, its cost effectiveness and the auditor’s remuneration, the independence andobjectivity of the auditors and involvement in theproduction of annual and interim reports. Other non-audit services provided by the auditors consistof routine tax compliance work and are taken intoconsideration as part of the review process. Anyadditional projects are required to be approved by the Audit Committee as they arise to ensurecontinued independence and objectivity. There is in place a “whistle blowing” policy which allows staff to raise any concerns in confidence.

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CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005CORPORATE GOVERNANCE CONTINUED

ACCOUNTABILITY AND AUDITFinancial reportingThe report and financial statements are designed topresent a balanced and understandable assessmentof the Group’s position and prospects.

Going concernIn accordance with Listing Rule 9.8.6 (R3) we reportthat, based on the Group’s budgets and financialprojections, the directors have satisfied themselvesthat the business is a going concern. The Board has a reasonable expectation that the Group hasadequate resources to continue to operate for the foreseeable future and therefore the financialstatements are prepared on the going concern basis.

INTERNAL CONTROLThe Board acknowledges that it is responsible for the Group’s systems of internal control and for thecontinuing process of reviewing their effectiveness.During the year and up to the date of approval, theprocess accorded with the Turnbull guidance withparticular regard to ensuring that appropriate riskmanagement processes were in place. The directorshave satisfied themselves that the Group complies fully.

Internal control systems are designed to managerather than eliminate the risk of failure to achievebusiness objectives and can only provide reasonableand not absolute assurance against materialmisstatement or loss. The directors confirm that theyhave reviewed the effectiveness of the systems ofinternal control that have been in operation duringthe year. This review entailed the directors consideringthe significant risks in the business and the controlsrequired to minimise those risks. The results of thisreview have been documented and will be reviewedand updated on a regular basis. The Group has aninternal branch audit function. During the year, theBoard reviewed whether there was a need to extendthis function and concluded that it was desirable to continue with the current arrangements.

Internal control: financialThe internal control process has now been reviewedand its main features are:

• Financial Reporting: there is a comprehensive budgeting system with an annual budget approvedby the Board. Monthly trading results are reported against the corresponding figures for the budget and previous year.

• Capital Expenditure: there is a comprehensivebudgeting system for capital expenditure with anannual budget approved by the Board. A committeecomprising Gerry Ford, Ben Price and other seniormanagement has been set up to appraise andauthorise individual material items of capitalexpenditure.

• Cashflow: an annual cashflow forecast is drawn up and approved by the Board and actual cashflowis reviewed monthly against this forecast.

• Organisational Structure: a clear organisational structure with defined responsibilities and clear authority levels has been set.

• Branch Audit: a branch audit function exists to ensure that Group procedures regarding cash and stock handling are being adhered to in the cafés.

Internal control: risk managementDuring the year, the Group had in place formalisedprocedures to identify, evaluate and managesignificant risks and to enable management toassess and regularly report to the Board on issuesrelating to business, operational, financial and non-compliance risks.

RELATIONS WITH SHAREHOLDERSThe Board is always willing to meet with its institutionalshareholders and has a programme of such meetingsover the year. The Board believes it is most appropriatefor the Chairman and Finance Director to hold thesemeetings. The Code recommends that the non-executive directors should maintain sufficient contactwith major shareholders to understand their issuesand concerns. Although none of the non-executivedirectors have had direct contact with shareholdersduring the year, which is non-compliance with theCode, feedback from analysts and shareholders isgiven to them through analyst response packs andthey are willing to be contacted by shareholdersshould they have any concerns that cannot beresolved through the normal channels.

ComplianceThe Board believes that during the year the Groupcomplied with the provisions set out in the Code withthe following exceptions:

Code Provision A.1.5There was no directors’ and officers’ liabilityinsurance during the year. During the coming year,the Board has agreed to review the situation todetermine if such insurance is appropriate.

Code Provision A.2.1 Dr Ford is both Chairman and Chief Executive. However,the directors consider that this is appropriate at theCompany’s current stage of development.

Code Provision A.3.3No senior non-executive director has been appointedas both non-executives are deemed to have similarlyappropriate experience for a business of this size.

Code Provision A.6.6The directors are in the process of introducing anevaluation process for the Board, its members andcommittees; however, no such evaluation took placeduring the year.

Code Provision A.7.2The non-executive directors are appointed on rollingcontracts with three month notice periods as opposedto a specific term as required by the Code. Duringthe 2005/2006 year, the Board has agreed to reviewthis situation.

Code Provision C.3.1Neither of the members of the audit committee hasrecent relevant financial experience under the termsof the Code. However, both members have hadconsiderable exposure to financial reporting asCEO’s and non-executives of other businesses. As the Group becomes larger, the Board will review if a financial specialist may also be required.

CORPORATEGOVERNANCECONTINUED

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005DIRECTORS’ REMUNERATION REPORT 15

DIRECTORS’REMUNERATIONREPORT

INFORMATION NOT SUBJECT TO AUDITComposition of the remuneration committeeThe committee members are the Board’s two non-executive directors, John Barnes (Chairman) and David King, who are advised by the Chief Executive Gerry Ford. The remuneration committee appointed RSM Robson Rhodes LLP to advise on the structure of the option arrangements.

Policy on executive directors’ remunerationThe Group’s policy on directors’ remuneration for 2005 and subsequent financial years is that the overallremuneration package should be sufficiently competitive to attract, retain and motivate high quality executivescapable of achieving the Group’s objectives and thereby enhancing shareholder value. The package consistsof basic salary, benefits, share options, performance related bonuses and pensions, with a significantproportion based on performance and dependent upon the achievement of demanding targets.

Basic salary and benefitsSalaries and benefits are reviewed annually. Salaries are set at appropriate levels to match the developmentof the Group and the skills, experience and contribution of individual directors. Benefits comprise carallowances and healthcare benefits.

Share optionsOptions granted up to the point of flotation in March 2001 are listed on page 16. These do not have performancetargets attached to them. It is now the policy of the Group to issue options with performance targets toexecutive Board Members. On 26 June 2003, options subject to performance targets were issued as detailed on page 16.

Performance related bonusesBonuses are earned based on Group performance as detailed on page 16; however, where results areaffected by circumstances beyond an individual’s control, these are subject to the discretion of the remunerationcommittee. The Chairman may put forward an individual case to the remuneration committee for theirapproval of a discretionary bonus in the case of exceptional performance.

PensionsThe Group has no pension schemes for directors. A pension contribution is due to Gerry Ford each year.

Non-executive directorsSalaries for non-executive directors are set by the Board.

Service contractsThe executive directors have rolling service contracts from 1 October 2000. The notice period for Gerry Fordis 16 weeks and for Ben Price 12 weeks.

The non-executive directors have rolling contracts from 14 March 2001 with three month notice periods.There are no predetermined special provisions for executive or non-executive directors with regard to loss of office. The remuneration committee considers the circumstances of individual cases of early terminationand in exceptional circumstances only would recommend compensation payments in excess of the Company’scontractual obligations.

Performance graphThe graph below represents the comparative total shareholder return (TSR) performance of the Company from 22 March 2001 to 31 May 2005. The graph shows the Company’s performance against the performanceof the FTSE All Share index, which is considered an appropriate barometer as it is a broad equity market of which Caffè Nero Group PLC is a constituent.

The TSR level shown at 31 May each year is the average of the closing daily TSR levels for the 30 day periodup to and including that date. This graph has been produced in accordance with the requirements of theDirectors’ Remuneration Report Regulation 2002.

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

22-Mar-01 May-01May-02 May-03

May-04May-05

Total shareholder return FTSE All Share

16

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005DIRECTORS’ REMUNERATION REPORT CONTINUED

DIRECTORS’REMUNERATIONREPORTCONTINUEDINFORMATION SUBJECT TO AUDITShare optionsThe Company previously granted options to directors under Unapproved and EMI schemes. The details areset out below:

Number of ExerciseDate of ordinary Exercise price

grant shares date (p)

G W Ford 29/01/99 750,750 29/01/99-26/01/06 24.4801/04/00 564,850 01/04/00-01/04/07 34.7513/07/00 2,656,225 13/07/00-13/07/10 39.66

B J Price 29/01/99 354,125(1) 01/07/00-01/07/07 24.4801/04/00 536,520 31/12/01-21/11/08 34.7521/02/01 575,575 31/03/03-31/03/10 44.2421/02/01 518,375 31/03/04-31/03/11 44.24

M J Barnes 16/03/01 203,775 31/05/04-31/05/11 50.00J D King 16/03/01 103,775(2) 31/05/04-31/05/11 50.00

(1) At 1 June 2004 B J Price held 554,125 options granted on 29 January 1999. On 11 November 2004 B J Price exercised 200,000options under the Caffè Nero Unapproved Option Scheme and sold the shares. The market price on date of exercise was 99pcreating a gain of £150,039.

(2) At 1 June 2004 J D King held 203,775 options granted on 16 March 2001. On 11 February 2005 J D King exercised 100,000options under the Caffè Nero Unapproved Option Scheme and sold the shares. The market price on date of exercise was £1.46 creating a gain of £96,264.

These options were granted before the flotation of the Company and are not subject to performance criteria.

The market price of the shares varied between 85p and 204p during the year. The market price at 31 May 2005was 204p.

There have been no additional grants or exercises of shares or share options since the year end.

Performance related options and bonusesOn 26 June 2003 additional performance related share options and bonuses were granted to the executivedirectors under the EMI and unapproved schemes:

All the options and bonuses listed below are dependent upon meeting stringent performance criteria and align the directors clearly with the interests of shareholders by requiring them to drive the profitability of theGroup by in excess of 80% per annum over the three year period.

Exercise dates are between the relevant vesting date and 26 June 2013. All options are over ordinary shares.

Options31 May 2004 31 May 2005 31 May 2006

Exercise Exercise ExerciseVesting Dates Number price Number price Number price

G W Ford 750,000 0.5p 1,800,000 24p 1,000,000 24p3,600,000 24p

B J Price 400,000 24p 350,000 24p 350,000 24p

Bonuses31 May 2004 31 May 2005 31 May 2006Performance Performance Performance

bonus bonus bonus

G W Ford £60,000 £65,000 £60,000B J Price £40,000 £20,000 £20,000

EPS Performance Targets31 May 2004 31 May 2005 31 May 2006

Base Level EPS target 1.225p 2.756p 4.593pMiddle Level EPS target 1.432p 3.020p 4.672pMaximum EPS target 1.600p 3.180p 4.825p

If the basic EPS of the Group fails to reach the base level EPS target in any year, then no options or bonusesare earned in that year. Between the base level and the middle level options are earned on a straight line basis,so that if basic EPS equals or exceeds the middle level EPS target 100% of the options are earned. Above themiddle level EPS target, the bonuses start to be earned on a straight line basis up to the maximum EPS targetso that if basic EPS exceeds the maximum EPS target all of the bonuses are earned.

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005DIRECTORS’ REMUNERATION REPORT CONTINUED 17

EPS Performance Targets (Continued)The performance options granted for the years ended 31 May 2004 and 31 May 2005 have vested in full asthe maximum EPS targets have been achieved. Similarly the bonuses for the year ended 31 May 2005 havebeen earned and are included in the remuneration table below.

PensionsA pension contribution of £8,550 (2004: £7,750) accrued to Gerry Ford during the year.

Directors’ emolumentsBasic Total Totalsalary Bonuses Benefits 2005 2004

£ £ £ £ £

G W Ford 192,583 65,000 10,648 268,231 242,137B J Price 118,667 40,000* 8,865 167,532 145,160M J Barnes 22,500 – – 22,500 23,750J D King 22,500 – – 22,500 23,750C H Reeve – – – – 121,924

Total 356,250 105,000 19,513 480,763 556,721

* This includes £20,000 discretionary bonus

Benefits represent car allowance, non-cash healthcare benefits.

CH Reeve resigned on 22 September 2003.

M J BARNESCHAIRMAN OF THE REMUNERATION COMMITTEE13 September 2005

18

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005STATEMENT OF DIRECTORS’ RESPONSIBILITIES

Company law requires the directors to prepare financial statements for each financial year which give a trueand fair view of the state of affairs of the company and of the Group and of the profit or loss of the Group forthat period. In preparing those financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;• make judgements and estimates that are reasonable and prudent; and• state whether applicable accounting standards have been followed, subject to any material departures

disclosed and explained in the financial statements;

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracyat any time the financial position of the Group and which enable them to ensure that the financial statementscomply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group andhence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

STATEMENT OF DIRECTORS’RESPONSIBILITIES IN RESPECTOF THE FINANCIAL STATEMENTS

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005INDEPENDENT AUDITORS’ REPORT 19

We have audited the Group’s financial statements for the year ended 31 May 2005 which comprise the GroupProfit and Loss Account, Group Statement of Total Recognised Gains and Losses, Group Balance Sheet,Company Balance Sheet, Group Statement of Cash Flows, Reconciliation of Net Cashflow to Movement in Net Debt and the related notes 1 to 23. These financial statements have been prepared on the basis of theaccounting policies set out therein. We have also audited the information in the Directors’ RemunerationReport that is described as having been audited.

This report is made solely to the company’s members, as a body, in accordance with Section 235 of theCompanies Act 1985. Our audit work has been undertaken so that we might state to the Company’s membersthose matters we are required to state to them in an auditors’ report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyone other than the Company andthe Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORSThe directors are responsible for preparing the Annual Report, including the financial statements which arerequired to be prepared in accordance with applicable United Kingdom law and accounting standards as setout in the Statement of Directors’ Responsibilities in relation to the financial statements. The directors are alsoresponsible for preparing the Directors Remuneration Report.

Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to beaudited in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standardsand the Listing Rules of the Financial Services Authority.

We report to you our opinion as to whether the financial statements give a true and fair view and whether thefinancial statements and the part of the Directors’ Remuneration Report to be audited have been properlyprepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’Report is not consistent with the financial statements, if the company has not kept proper accounting records, ifwe have not received all the information and explanations we require for our audit, or if information specifiedby law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed.

We review whether the Corporate Governance Statement reflects the company’s compliance with the nineprovisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the FinancialServices Authority, and we report if it does not. We are not required to consider whether the Board’sstatements on internal control cover all risks and controls, or form an opinion on the effectiveness of theGroup’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with theaudited financial statements. This other information comprises the Directors’ Report, unaudited part of theDirectors’ Remuneration Report, Chairman’s Statement, Corporate Governance Statement and notice of AGM.We consider the implications for our report if we become aware of any apparent misstatements or materialinconsistencies with the financial statements. Our responsibilities do not extend to any other information.

BASIS OF AUDIT OPINIONWe conducted our audit in accordance with United Kingdom Auditing Standards issued by the AuditingPractices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in thepreparation of the financial statements, and of whether the accounting policies are appropriate to the Group’scircumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which weconsidered necessary in order to provide us with sufficient evidence to give reasonable assurance that thefinancial statements and the part of the Directors’ Remuneration Report to be audited are free from materialmisstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluatedthe overall adequacy of the presentation of information in the financial statements and the part of theDirectors’ Remuneration Report to be audited.

OPINIONIn our opinion:• the financial statements give a true and fair view of the state of affairs of the Company and of the Group

as at 31 May 2005 and of the profit of the Group for the year then ended; and• the financial statements and the part of the Directors’ Remuneration Report to be audited have been

properly prepared in accordance with the Companies Act 1985.

ERNST & YOUNG LLPRegistered AuditorLondon13 September 2005

INDEPENDENT AUDITORS’REPORT TO THE MEMBERS OF CAFFÈ NERO GROUP PLC

20

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005GROUP PROFIT & LOSS ACCOUNT

GROUP PROFIT & LOSS ACCOUNTFOR THE YEAR ENDED 31 MAY 2005

2005 2004Notes £’000 £’000

Turnover 2 70,117 50,547

Cost of sales (53,059) (39,905)

Gross profit 17,058 10,642Administrative expenses excluding depreciation, amortisation

and operating exceptional items (5,241) (4,122)

EBITDA 11,817 6,520

Administrative expenses – depreciation and impairment of tangible fixed assets (5,306) (3,444)

Operating profit before amortisation andoperating exceptional items 6,511 3,076

Administrative expenses – amortisation (502) (496)Administrative expenses – operating exceptional items 4 – (224)

Total administrative expenses (11,049) (8,286)

Operating profit 3 6,009 2,356

Bank interest receivable 108 101Interest payable and similar charges 6 (1,016) (763)

Profit on ordinary activities before exceptionals and taxation 5,101 1,918

Profit on ordinary activities before taxation 5,101 1,694

Tax on profit on ordinary activities 7 (148) 776

Profit for the financial year 20 4,953 2,470

Earnings per share – basic (pence) 9 7.49p 3.75pEarnings per share – diluted (pence) 9 6.18p 3.37p

Pre-tax earnings per share – basic (pence) 9 7.72p 2.56pPre-tax earnings per share – diluted (pence) 9 6.37p 2.31p

Group statement of total recognised gains and lossesThere are no recognised gains or losses other than as shown above

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005GROUP BALANCE SHEET 21

GROUP BALANCE SHEETAT 31 MAY 2005

2005 2004Notes £’000 £’000

Fixed assetsIntangible assets 10 2,240 2,742Tangible assets 11 36,910 23,456Fixed asset investments 12 – 854

39,150 27,052

Current assetsStocks 542 408Debtors 13 2,087 2,270Cash at bank and in hand 16 3,982 3,171

6,611 5,849Creditors: amounts falling due within one year 14 (14,006) (10,919)

Net current liabilities (7,395) (5,070)

Total assets less current liabilities 31,755 21,982

Creditors: amounts falling due after more than one year 15 15,535 11,166

Provisions for liabilities and charges 18 430 495

15,790 10,321

Capital and reservesCalled up share capital 19 334 328Share premium 20 7,596 7,121Other reserve 20 6,249 6,249Capital redemption reserve 20 15 15Profit and loss account 20 1,596 (3,392)

Shareholders’ funds: Equity 20 15,790 10,321

The financial statements were approved by the board of directors and signed on their behalf by:

G W FORDB J PRICEDIRECTORS13 September 2005

22

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005COMPANY BALANCE SHEET

COMPANY BALANCE SHEETAT 31 MAY 2005

2005 2004Notes £’000 £’000

Fixed assetsInvestments 12 9,724 9,724

Creditors: amounts falling due within one yearAmounts due to subsidiary undertakings (60) (576)

Net current liabilities (60) (576)

9,664 9,148

Capital and reservesCalled up share capital 19 334 328Share premium account 20 7,596 7,121Capital redemption reserve 20 15 15Profit and loss account 1,719 1,684

Shareholders’ funds: Equity 20 9,664 9,148

The financial statements were approved by the board of directors and signed on their behalf by:

G W FORDB J PRICEDIRECTORS13 September 2005

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005STATEMENT OF CASH FLOWS/RECONCILIATION OF NET CASH FLOW 23

GROUP STATEMENT OF CASH FLOWSFOR THE YEAR ENDED 31 MAY 2005

2005 2004Notes £’000 £’000

Net cash inflow from operating activities 3(b) 15,253 7,467

Returns on investments and servicing of financeInterest received 108 101Interest paid (993) (776)Issue costs of new long-term loans (54) (20)

(939) (695)

Capital expenditurePayments to acquire tangible fixed assets (16,911) (10,230)

Net cash outflow before financing (2,597) (3,458)

FinancingIssue of ordinary share capital 408 133Share buy back – (580)Share buy back costs – (91)New long-term loans 3,000 2,000Repayment of long-term loans – (500)

3,408 962

Increase/(decrease) in cash 16 811 (2,496)

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

2005 2004Notes £’000 £’000

Increase/(decrease) in cash 811 (2,496)Cash inflow from increase in long-term loans (3,000) (2,000)Issue costs of long-term loans 54 20Repayment of loans – 500

Change in net debt resulting from cash flows (2,135) (3,976)Other non-cash movements (23) (24)

Movement in net debt (2,158) (4,000)Net debt at 1 June (9,395) (5,395)

Net debt at 31 May 16 (11,553) (9,395)

Other non cash movements relate to amortisation of loan issue costs.

24

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005NOTES TO THE FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTSAT 31 MAY 2005

1. ACCOUNTING POLICIESAccounting conventionThe financial statements are prepared under the historical cost convention and in accordance with applicableaccounting standards. The accounting policies have been applied consistently and remain unchanged from theprevious year.

Basis of consolidationThe Group financial statements consolidate the financial statements of Caffè Nero Group PLC and all its subsidiaryundertakings drawn up to 31 May of each year. No company profit and loss account has been presented for Caffè Nero Group PLC as permitted by section 230 of the Companies Act 1985.

Subsidiary undertakings have been included in the Group financial statements using the acquisition method ofaccounting. Accordingly the Group Profit and Loss Account and Statement of Cash Flows include the results andcash flows of subsidiaries from the date of acquisition. The purchase consideration has been allocated to the assetsand liabilities on the basis of fair value at the date of acquisition and any excess has been capitalised as goodwill.

GoodwillPositive goodwill arising on acquisitions is capitalised, classified as an asset in the balance sheet and amortised ona straight line basis over its useful economic life. It is reviewed for impairment if events or changes in circumstancesindicate that the carrying value may not be recoverable.

DepreciationDepreciation is provided on all tangible fixed assets at rates calculated to write off the cost, less estimated residualvalue based on prices prevailing at the date of acquisition, of each asset evenly over its expected useful life, as follows:

Short leasehold property – over the lease termLeasehold improvements – over the lease termFurniture, fittings and equipment – over 3 to 5 years

The carrying values of tangible fixed assets are reviewed for impairment if events or changes in circumstancesindicate the carrying value may not be recoverable.

InvestmentsFixed asset investments are stated at cost. The carrying value of fixed asset investments is reviewed for impairmentif events or changes in circumstances indicate the carrying value may not be recoverable.

Store opening costsOperating costs incurred by stores prior to opening are written off to the profit and loss account in the period inwhich they are incurred.

StocksStocks are stated at the lower of cost and net realisable value. Stocks comprise food and packaging goods for resale.

Leasing commitmentsRentals payable under operating leases are charged in the profit and loss account on a straight line basis over thelease term.

Deferred taxationDeferred taxation is recognised in respect of all timing differences that have originated but not reversed at thebalance sheet date where transactions or events have occurred at that date that will result in an obligation to paymore, or right to pay less or to receive more tax, with the following exception:

• Deferred tax assets are recognised only to the extent that the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods inwhich timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balancesheet date.

Capital instrumentsShares are included in shareholders’ funds. Other instruments are classified as liabilities if they contain an obligationto transfer economic benefits and if not they are included in shareholders’ funds. The finance costs recognised inthe Profit and Loss Account in respect of capital instruments other than equity shares are allocated to periods overthe term of the instrument at a constant rate on the carrying amount.

Cost of share option schemesIn accordance with UITF Abstract 17 “Employee Share Schemes”, the company recognises a charge to the Profitand Loss Account for the amount by which the fair market value of any share options expected to be exercisedexceeds their exercise price on the date of grant. These costs are recognised on a straight line basis over theperformance period to which they relate.

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005NOTES TO THE FINANCIAL STATEMENTS CONTINUED 25

2. TURNOVERTurnover, which is stated net of value added tax, represents amounts received and receivable from the Group’sprincipal continuing activity: the operation of high quality Italian style coffee bars. All of the turnover is derived in the United Kingdom.

3. OPERATING PROFIT (a) This is stated after charging:

2005 2004£’000 £’000

Auditors’ remuneration – audit services 75* 59*– non-audit services 15 10

Costs relating directly to opening new sites 485 367Exceptional items (see note 4) – 224Depreciation of owned fixed assets 5,161 3,344Impairment of tangible fixed assets 145 100Amortisation of goodwill 502 496Operating lease rentals – land and buildings 12,854 10,153

* £5,000 (2004: £5,000) of this relates to the company.

(b) Reconciliation of operating profit to net cash inflow from operating activities:2005 2004£’000 £’000

Operating profit 6,009 2,356Amortisation 502 496Depreciation 5,161 3,344Impairment provision 145 100Increase in stocks (134) (68)Decrease/(increase) in operating debtors and prepayments 108 (153)Increase in operating creditors and accruals 3,527 1,492Decrease in provisions for liabilities and charges (65) (100)

15,253 7,467

4. EXCEPTIONAL ITEMS2005 2004£’000 £’000

Compensation for CH Reeve loss of office – (82)Disposal of Onerous Contract – (142)

– (224)

During the year ended 31 May 2004 the onerous lease at Oxford Street was assigned. The assignee subsequentlywent into liquidation and the costs related to the assignment were included in the profit and loss account for the yearas an exceptional item.

5. STAFF COSTSDetails of directors’ remuneration, which is included in the amounts below, are given in the remuneration report onpages 15 to 17.

2005 2004£’000 £’000

Wages and salaries 17,085 12,811Social security costs 1,298 999Other pension costs 9 8

18,392 13,818

The average monthly number of employees during the year was as follows:2005 2004

No. No.

Operational 1,306 987Administration 264 214

1,570 1,201

26

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005NOTES TO THE FINANCIAL STATEMENTS CONTINUED

NOTES TO THE FINANCIAL STATEMENTSCONTINUEDAT 31 MAY 2005

6. INTEREST PAYABLE AND SIMILAR CHARGES2005 2004£’000 £’000

Bank loans 1,016 763

7. TAXATIONa) Analysis of tax charge/(credit) in the year

2005 2004£ £

Current tax – –Deferred tax 148 (776)

148 (776)

b) Factors affecting current tax for the yearThe tax assessed for the year differs from the standard rate of corporation tax in the UK of 30% (2004: 30%). The differences are explained below:

2005 2004£’000 £’000

Profit on ordinary activities before tax 5,101 1,694

Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (2004: 30%) 1,530 508

Effect of:Expenses not deductible for tax purposes (including goodwill amortisation) 511 510Share option tax deduction (354) –Capital allowances for the period in excess of depreciation (289) (691)Other timing differences 11 –Tax losses utilised (1,409) (327)

Current tax charge for the period – –

c) Deferred taxDeferred tax recognised in the financial statements and the amounts not recognised are as follows:

2005 2004 Not Not

Recognised recognised Recognised recognised£’000 £’000 £’000 £’000

Decelerated/(accelerated) capital allowances 291 – (689) 1,053Other timing differences 133 85 104 –Tax losses 204 56 1,361 258

Deferred tax asset 628 141 776 1,311

Movements in the recognised deferred tax asset are as follows:£’000

At 1 June 2004 776Profit and loss account movement arising during the year (148)

At 31 May 2005 628

Deferred tax assets are recognised once it is considered more likely than not that they will be recoverable againstfuture taxable trading profits arising in the Group.

d) Factors that may affect future tax chargesThe deferred tax asset on trading losses has been recognised in full which will give rise to an increase in the effective tax rate in the future.


8. PROFIT ATTRIBUTABLE TO MEMBERS OF PARENT COMPANYThe profit relating to transactions in the financial statements of the parent company was £nil. (2004: £nil)

9. EARNINGS PER SHAREThe calculation of the earnings per ordinary share for the year ended 31 May 2005 is based on a profit of £4,953,000(2004: £2,470,000) and 66,095,595 ordinary shares (2004: 65,942,837), being the weighted average number ofordinary shares in issue during the year.

The diluted earnings per share for the year ended 31 May 2005 is based on 80,089,714 ordinary shares (2004: 73,390,098), which is calculated by including the weighted average number of shares being 13,994,119ordinary shares (2004: 7,447,261) relating to potential dilution from share options.

The calculation of the pre-tax earnings per ordinary share for the year ended 31 May 2005 is based on the profit on ordinary activities before taxation of £5,101,000 (2004: £1,694,000) and the same number of shares as above.Pre-tax earnings per share are presented because the recognition of deferred tax assets during the current and prioryears have distorted the comparability of the post-tax earnings per share figures.

10. INTANGIBLE FIXED ASSETSGoodwill

£’000

Cost:At 1 June 2004 and 31 May 2005 5,575

Amortisation:At 1 June 2004 2,833Provided during the year 502

At 31 May 2005 3,335

Net book value:At 31 May 2005 2,240

At 1 June 2004 2,742

Goodwill arising on the acquisition of the Caffè Nero business in 1997 is being written off in equal annual instalmentsover its estimated economic life of 8 years.

Goodwill arising on the acquisition of Aroma Limited in 2002 is being written off in equal instalments over itsestimated economic life of 20 years.

11. TANGIBLE FIXED ASSETSShort Furniture,

leasehold Leasehold fittings andproperty improvements equipment Total

Group £’000 £’000 £’000 £’000

Cost or valuation:At 1 June 2004 2,290 19,939 11,110 33,339Additions 1,933 11,211 5,616 18,760

At 31 May 2005 4,223 31,150 16,726 52,099

Depreciation:At 1 June 2004 666 4,380 4,837 9,883Provided during the year 308 1,998 2,855 5,161Impairment of fixed assets – 145 – 145

At 31 May 2005 974 6,523 7,692 15,189

Net book value:At 31 May 2005 3,249 24,627 9,034 36,910

At 1 June 2004 1,624 15,559 6,273 23,456

The Company balance sheet contains no tangible fixed assets.

28



12. FIXED ASSET INVESTMENTSShares in

Coffee RepublicGroup £’000

Cost:At 1 June 2004 854Disposed (854)

At 31 May 2005 –

The investment represented 24,300,000 shares in Coffee Republic PLC. On 10 June 2004 Caffè Nero acquired 8 stores from Coffee Republic PLC in return for £730,000 of cash and the surrender of the Coffee Republic shares with the proceeds being paid to Coffee Republic PLC.

Shares in subsidiary

undertakingsCompany £’000

Cost:At 1 June 2004 and 31 May 2005 9,724

In the opinion of the directors, the aggregate value of the investment in subsidiary undertakings is not less than the amount at which it is stated in the balance sheet.

The Company holds all the equity share capital of Nero Holdings Limited which operates Italian style coffee bars.Nero Holdings Limited holds all the equity share capital of Aroma Limited which also operates coffee bars. Theresults of these companies have been consolidated in these financial statements. Both companies are registered in England and Wales.

13. DEBTORSGroup Group

2005 2004£’000 £’000

Other debtors 298 360Deferred tax 628 776Prepayments 1,161 1,134

2,087 2,270

Other debtors of £298,000 (2004: £219,000) is due after more than one year (relating to lease deposits paid).

14. CREDITORS: amounts falling due within one year

Group Group Company Company2005 2004 2005 2004£’000 £’000 £’000 £’000

Bank loan (see note 15) – 1,400 – –Trade creditors 7,445 4,837 – –Amount due to subsidiary undertaking – – 60 576Other creditors, including taxation and social security 1,508 1,335 – –Accruals and deferred income 5,053 3,347 – –

14,006 10,919 60 576


15. CREDITORS: amounts falling due after more than one yearGroup Group

2005 2004£’000 £’000

Loans:Wholly repayable within 5 years:Bank of Scotland loan 15,535 12,566Less: included in creditors falling due within one year – 1,400

15,535 11,166

Group Group2005 2004£’000 £’000

Amounts repayable:in one year or less – 1,400between one and two years 4,700 2,550between two and five years 11,000 8,750

15,700 12,700Less: unamortised issue costs 165 134

15,535 12,566

Bank of Scotland loanDuring the year the total available facilities were increased from £16,200,000 to £19,200,000 and the repaymentschedule was re-phased. At the year end additional facilities of £3.5m were available to be drawn down (subject tocertain performance criteria) over the coming year in two tranches to finance the continued expansion of the business.Of these facilities, £1.5m has been drawn down post year end. Until 31 December 2004 the loans incurred interest at between 1.5% and 2.25% above LIBOR. From 1 January 2005 the interest rate was reduced to 1.25% aboveLIBOR. The loan is secured by a floating charge on the assets of the Group. The Company had no debt itself.

16. ANALYSIS OF NET DEBTAt At

1 June Non cash 31 May2004 Cash flow changes 2005

Group £’000 £’000 £’000 £’000

Cash at bank and in hand 3,171 811 – 3,982Debt due within one year (1,400) – 1,400 –Debt due after one year (11,166) (2,946) (1,423) (15,535)

(9,395) (2,135) (23) (11,553)

Non cash changesThe total non cash changes relate to the amortisation of loan issue costs. The changes between debt due within one year and more than one year relate to changes in debt repayment periods.

30



17. FINANCIAL INSTRUMENTSThe Group’s principal financial instruments comprise bank loans and cash. The main purpose of the financialinstruments is to provide finance for the Group’s operations. The Group has various other financial instruments, such as trade creditors, that arise directly from its operations. The disclosures below exclude short term debtors and creditors. It is, and has been throughout the year under review, the Group’s policy that no trading in financialinstruments shall be undertaken.

The main risks arising from Group’s financial instruments are interest rate risk and liquidity risk; there is no currencyrisk as all financial instruments are held in sterling. The Board reviews and agrees policies for managing each ofthese risks and these policies are summarised below.

Interest rate riskThe Group borrows in sterling at floating rates of interest. Excess cash is placed on short term deposit for up to a week with Bank of Scotland at variable money market rates.

Liquidity riskThe Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bankloans and facilities.

Interest rate risk profile of financial assets and liabilitiesThe interest rate profile of the financial assets and liabilities, excluding short term creditors, of the Group at each year end denominated in sterling were as follows:

Group Group2005 2004£’000 £’000

Floating rate cash and deposits 3,982 3,171

Floating rate loans 15,535 12,566

Financial liabilities on which no interest accrues 402 402

The floating rate financial liabilities bear interest at rates based at varying percentages above LIBOR and the UK base rate as set out in note 15.

Floating rate cash and deposits earn interest at rates linked to LIBOR.

Maturity of financial liabilitiesThe maturity profile of the Group’s financial liabilities at each relevant period or year end was as set out in note 15.

Borrowing facilitiesThe Group has various borrowing facilities available to it. The undrawn committed facilities available at each relevantperiod or year end were as follows:

Group Group2005 2004£’000 £’000

Expiring in less than one year 3,500 3,000

Fair values of financial assets and liabilitiesThe book values of financial assets and liabilities of the Group are set out below. The directors consider that therewere no material differences between the book values and fair values of all the Group’s financial assets and liabilities at each year end.

Group Group2005 2004£’000 £’000

Cash at bank and in hand 3,982 3,171Current portion of long term borrowings – (1,400)Long term borrowings (15,535) (11,166)Onerous contract (402) (402)

Of these facilities, £1.5m has been drawn down post year end.

The Group’s fixed asset investment at 31 May 2004 represented 24,300,000 shares in Coffee Republic PLC. On 10 June 2004 Caffè Nero acquired 8 stores from Coffee Republic PLC for £730,000 of cash and the CoffeeRepublic shares were surrendered with the proceeds being paid to Coffee Republic PLC.


18. PROVISIONS FOR LIABILITIES AND CHARGESDisposal Onerous

sites contract TotalGroup £’000 £’000 £’000

At 1 June 2004 93 402 495

Utilised:Costs of disposal (65) – (65)Rent for the year (245) (245)Additional lease incentives 245 245

At 31 May 2005 28 402 430

The provisions for disposal sites represent the anticipated costs of disposal of the sites acquired with Aroma Limitedwhich the Group has decided to sell. The provisions will be utilised as appropriate opportunities to sell the sites arise.

The onerous contract provision represents the period of rent whilst the sublease is being negotiated and theanticipated lease incentives to sublet of the property. The lease on the unit expires in 2020.

19. SHARE CAPITALAuthorised

2005 2004 2005 2004No. No. £’000 £’000

Ordinary shares of 0.5p each 100,000,000 100,000,000 500 500

Allotted called up and fully paid 2005 2004 2005 2004

No. No. £’000 £’000

Ordinary shares of 0.5p each 66,853,739 65,604,025 334 328

On 9 June 2004, 71,450 ordinary shares of 0.5p were allotted, issued and fully paid for total cash consideration of £35,725 in relation to the exercise of options at 50.00p per share.

On 4 November 2004, 36,214 and 343,150 ordinary shares of 0.5p were allotted, issued and fully paid for total cash consideration of £181,171 in relation to the exercise of options at 26.50p and 50.00p per share respectively.

On 11 November 2004, 200,000 ordinary shares of 0.5p were allotted, issued and fully paid for total cashconsideration of £48,960 in relation to the exercise of options at 24.48p per share.

On 10 February 2005, 6,000, 23,500 and 269,400 ordinary shares of 0.5p were allotted, issued and fully paid for total cash consideration of £142,447 in relation to the exercise of options at 24.50p, 26.50p and 50.00p per share respectively.

On 25 May 2005, 300,000 ordinary shares of 0.5p were allotted, issued and fully paid for total cash consideration of £73,440 in relation to the exercise of options at 24.48p per share.

32



19. SHARE CAPITAL (CONTINUED)At 31 May 2005, options had been granted and remained outstanding as detailed below (excluding directors’ options shown in the Directors’ Remuneration Report).

Number of Option exerciseDate of grant ordinary shares price (p) Exercisable

29 January 1999 75,375 24.48 Until 1 July 20071 April 2000 482,625 34.75 Until 31 December 200816 March 2001 513,350 50.00 Until 15 March 201119 February 2002 187,442 26.50 Until 19 February 201211 November 2002 711,500 24.50 Until 11 November 201228 November 2003 920,000 47.50 1 June 2006 to 28 November 201328 March 2004 794,000 84.00 1 June 2007 to 28 March 201414 May 2004 60,000 85.00 1 June 2007 to 14 May 20144 February 2005 604,000 135.50 1 June 2007 to 4 February 2015

300,000 of the options granted on 29 January 1999 at 24.48p per share, 584,000 of the options granted on 16 March 2001 at 50p per share, 59,714 of the options granted on 19 February 2002 at 26.5p per share and 6,000 of the options granted on 11 November 2002 at 24.5p per share were exercised during the year.

15,000 of the options issued on 19 February 2002 at 26.50p, 111,500 of the options issued on 11 November 2002 at 24.50p and 40,000 of the options issued on 28 March 2004 at 84p per share lapsed during the year.

The 920,000 options granted on 28 November 2003 are exercisable subject to the Group reaching certain profittargets over the three years ending 31 May 2006.

745,000 of the 794,000 options granted on 28 March 2004 and the 60,000 options granted on 14 May 2004 areexercisable subject to the Group reaching certain profit targets over the three years ending 31 May 2007.

567,000 of the 604,000 options granted on 4 February 2005 are exercisable subject to the Group reaching certainprofit targets over the three years ending 31 May 2008.

20. RESERVES AND RECONCILIATION OF SHAREHOLDERS’ FUNDS

Share CapitalShare premium Other redemption Profit and

capital account reserve reserve loss account TotalGroup £’000 £’000 £’000 £’000 £’000 £’000

At 1 June 2003 341 9,390 6,249 – (7,732) 8,248

Share premium reduction (2,400) 2,400 –Share buyback (15) (565) (580)Capital maintenance 15 (15) –Share buyback costs (91) (91)Shares issued 2 131 133UITF 17 charge 141 141Profit for the year 2,470 2,470

At 31 May 2004 328 7,121 6,249 15 (3,392) 10,321

Shares issued 6 475 481UITF 17 charge 35 35Profit for the year 4,953 4,953

At 31 May 2005 334 7,596 6,249 15 1,596 15,790


20. RESERVES AND RECONCILIATION OF SHAREHOLDERS’ FUNDS (CONTINUED)

Share CapitalShare premium redemption Profit and

capital account reserve loss account TotalCompany £’000 £’000 £’000 £’000 £’000

At 1 June 2003 341 9,390 – (186) 9,545Share premium reduction (2,400) 2,400 –Share buyback (15) (565) (580)Capital maintenance 15 (15) –Share buyback costs (91) (91)Shares issued 2 131 133UITF 17 charge 141 141

At 31 May 2004 328 7,121 15 1,684 9,148

Shares issued 6 475 481UITF 17 charge 35 35

At 31 May 2005 334 7,596 15 1,719 9,664

21. CONTINGENT LIABILITYThere is an unlimited cross guarantee in favour of the Group’s bankers covering the term loans of Caffè Nero Group PLC and its subsidiaries.

22. CAPITAL COMMITMENTSAt 31 May 2005, capital commitments contracted but not provided for in the financial statements were £1,034,000(2004: £432,000).

23. OTHER FINANCIAL COMMITMENTSAnnual commitments under non-cancellable operating leases are as follows:

Land and buildings2005 2004

Group £’000 £’000

Operating leases which expire:within one year 139 174between two and five years 1,409 1,634over five years 12,388 8,867

13,936 10,675

34

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005NOTICE OF ANNUAL GENERAL MEETING

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of the Company will be held at College Hill, 78 CannonStreet, London EC4N 6HH on the 8th November 2005 at 10am to consider and if thought fit pass the followingresolutions of which numbers 1 to 7 will be proposed as ordinary resolutions and number 8 will be proposed as aspecial resolution:

Ordinary Resolutions 1. To receive and adopt the Report of the Directors and Auditors and the Financial Statements for the period ended

31 May 2005.2. To approve the directors’ Remuneration Report.3. To Re-elect Mr B J Price who having been appointed by the Company in general meeting on 12 November 2003

retires and, being eligible, offers himself for re-election.4. To Re-elect Mr J D King who having been appointed by the Company in general meeting on 12 November 2003

retires and, being eligible, offers himself for re-election.5. To reappoint Messrs Ernst & Young as Auditors to the Company to hold office until the conclusion of the next

Annual General Meeting of the Company and to authorise the directors to fix their remuneration.6. That the directors be and they are hereby generally and unconditionally authorised to exercise all powers of the

Company to allot or grant options or rights of subscription over relevant securities pursuant to section 80 of the Companies Act 1985 up to an aggregate nominal amount of £111,423, such authority to expire fifteen months after passing of this resolution or at the conclusion of the next annual general meeting of the Company whichever occurs first, save that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such an offer or agreement as if the authority hereby conferred had not expired.

7. That the Company be and is hereby generally and unconditionally authorised for the purpose of section 166 of theCompanies Act 1985 (the “Act”) to make one or more market purchases (within the meaning of section 163(3) of the Act) on the London Stock Exchange of ordinary shares of 0.5p each in the capital of the Company (“ordinary shares”) provided that:

(i) the maximum aggregate number of ordinary shares hereby authorised to be purchased is 3,342,687 (representing 5 per cent of the Company’s issued ordinary share capital);

(ii) the minimum price which may be paid for such shares is 0.5p per share (exclusive of relative tax and expenses);

(iii) the maximum price (exclusive of relative tax and expenses) which may be paid for an ordinary share shall be not more than 5 per cent above the average of the market values for an ordinary share as derived from the London Stock Exchange Daily Official List for the 5 business days immediately preceding the date on which the ordinary share is purchased;

(iv) unless previously renewed, varied or revoked, the authority hereby conferred shall expire at the conclusion of the next annual general meeting of the Company to be held in 2006 or within 12 months from the date of passing this resolution whichever shall be the earlier; and

(v) the Company may make a contract or contracts to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority and may make a purchase of ordinary shares in pursuance of any such contract or contracts.

Special Resolution8. That, subject to the passing of the previous resolution 6, the Directors be empowered to allot equity securities

(as defined in section 94(2) of the Companies Act 1985) for cash pursuant to section 95 of the Companies Act 1985and the authority referred to in 6 above as if section 89(1) of the Act did not apply to the allotment provided that such power shall be limited to:

a) the allotment of equity securities (whether by way of rights issue, open offer or other pre-emptive offer) in favour of ordinary shareholders where the equity securities respectively attributable to the interests of all shareholders are proportionate (as nearly as may be) to the respective numbers of shares held by them, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems arising in or under the laws of territories outside the UK or the requirements of any regulatory body or any stock exchange or otherwise howsoever; and

b) the allotment (otherwise than pursuant to sub-paragraph a above) of equity securities up to an aggregate nominal value of £16,713, and shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution, save that the Company may before such expiry make an offer or agreement which would or might require its securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.

By order of the board

B.J.PriceSECRETARY3 Neal StreetLondon WC2H 9PU13 September 2005

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005NOTICE OF ANNUAL GENERAL MEETING CONTINUED 35

Notes1. A Member entitled to attend and vote at the Meeting convened by the above Notice may appoint one or

more proxies to attend and, on a poll, to vote instead of him. A proxy need not be a member of the Company.Completion of a form of proxy does not preclude a Member from attending and voting at the Meeting in person.

2. A form of proxy is enclosed for your use if desired. To be valid, a duly executed form of proxy for use at theMeeting, together with a power of attorney or other authority (if any) under which it is signed or a notariallycertified copy of such power or authority, must be deposited at the Company’s Registrars, Capita Irg, BourneHouse, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, not later than 48 hours before the time for holding of the Meeting or any adjournment thereof.

3. The register of interests of the Directors and their families in the share capital of the Company and copies of the Directors’ service contracts will be available for inspection at the registered office of the Company on anyweekday (Saturdays and Public Holidays excepted) during normal business hours until the meeting and at theplace of the Meeting for 15 minutes prior to, and during the Meeting.

4. In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, only those members enteredon the company’s register of members not later than 10 a.m. on 4th November 2005 or, if the meeting is adjourned,shareholders entered on the company’s register of members not later than 48 hours before the time fixed for theadjourned meeting, shall be entitled to attend and vote at the meeting.

36

CAFFÈ NERO GROUP PLCANNUAL REPORT & ACCOUNTS 2005NOTES

NOTES

HIGHLIGHTS FY2005

01 FINANCIAL EVOLUTION05 CHAIRMAN’S STATEMENT09 THE BOARD, DIRECTORS & ADVISERS10 DIRECTORS’ REPORT13 CORPORATE GOVERNANCE15 DIRECTORS’ REMUNERATION REPORT18 STATEMENT OF DIRECTORS’ RESPONSIBILITIES19 AUDITORS’ REPORT20 GROUP PROFIT & LOSS ACCOUNT21 GROUP BALANCE SHEET22 COMPANY BALANCE SHEET23 GROUP STATEMENT OF CASH FLOWS

/RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

24 NOTES TO THE FINANCIAL STATEMENTS34 NOTICE OF AGM

• TURNOVER UP 39% TO £70.1M (2004: £50.5M).

• LIKE-FOR-LIKE STORE SALES POSITIVE 7.5%.

• EBITDA INCREASED BY 81% TO £11.8M (2004: £6.5M).

• OPERATING PROFIT IMPROVED BY 155% TO £6.0M (2004: £2.4M).

• PRE TAX PROFIT (BEFORE AMORTISATION) ROSE BY 156% TO £5.6M (2004: £2.2M).

• EPS GREW BY 100% TO 7.49P (2004: 3.75P).

• CASH BALANCE OF £4.0M AND BANKING FACILITIES OF £3.5M AVAILABLE AT YEAR END.

• HAVE REACHED A POSITION OF SELF-FINANCING: INTERNAL CASHFLOW NOW APPROXIMATELY EQUALS CAPITAL EXPENDITURE.

• CURRENTLY 230 STORES OPERATING IN 101 UK TOWNSAND CITIES (MAY 2005: 214).

This report is printed on Retreeve Vellum FSC Natural, manufactured in the UK by Curtis Fine Papers and available exclusively from the Robert Horne Group T/08457 44 33 22.

Designed and produced by College Design.

CAFFÈ NERO GROUP PLC3 NEAL STREETLONDON WC2H 9PU

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ANNUAL REPORT & ACCOUNTS 2005

‘THE BEST ESPRESSO THIS SIDE OF MILAN’

Documents

May Annual Report