Report and Financial Statements 31 December 2010

1 Chairman's Statement
2 The Business at a Glance
3 Our Business
6 Business Review
12 Corporate Responsibility
14 Directors and Advisers
15 Report of the Directors
17 Report on Directors' Remuneration
21 Corporate Governance
24 Directors' Responsibilities Statement
25 Independent Auditors' Report
26 Consolidated Income Statement
27 Consolidated Statement of Comprehensive Income
27 Consolidated Statement of Changes in Equity
28 Consolidated Balance Sheet
29 Consolidated Cash Flow Statement
30 Accounting Policies
33 Summary of Critical Accounting Judgements and Key Sources of Estimation Uncertainty
34 Notes to the Financial Statements
54 Company Balance Sheet
55 Notes to the Company Financial Statements
64 Five Year Record

64 Financial Diary

65 Principal Operating Subsidiaries

Chairman's Statement

2010 was a year in which Macfarlane Group responded to testing trading conditions and challenging cost price pressures. The Group attained growth in both turnover and profits while reducing its pension deficit and total debt.

plans developed to take advantage of the strong foundations the Group had created. In the event, progress has been achieved in a number of

Trading

Group turnover increased to £135.5 million (2009 – £123.6 million) pre-tax profit of £3.4 million (2009 – £3.2 million). The absence of by property provisions of £0.3 million, resulted in the Group's post-exceptionals pre-tax profit increasing to £4.2 million (2009 – £2.5 million).

In addition to the difficult conditions presented by the UK economy, accumulating through the year, in excess of 30% for corrugate and 31.0% (2009 – 32.5%) is a result of the significant focus on successfully recovering these price increases. Of the Group turnover increase of 10%, an estimated 7% was through price recovery with 3% growth

In Packaging Distribution, sales increased by 10% to £109.1 million (2009 – £99.0 million) and the gross margin for this division was despite the focus on price recovery, progress has also been achieved against the strategic actions particularly in the development of the Presentational Packaging business, market penetration in the Third Party logistics sector and enhancements to our online offering macfarlanepackaging.com.

£26.4 million (2009 – £24.6 million) and gross margins were broadly volumes for packaging manufacturing – particularly from the automotive and aerospace sectors – but increasing price pressures

Pension Deficit

A year ago I outlined our plans to deal with the group pension deficit. of deficit funding contributions, the move from RPI to CPI for deferred in the pension deficit of £4.6 million to £15.7 million at the end of 2010. Further actions to reduce the deficit are planned for 2011 but have a significant impact on the deficit.

Net Debt

As envisaged in my statement at the half-year, the normal trading year and these stood at £6.3 million at the end of 2010, compared with £6.4 million a year previously and £8.9 million at the half year. In 2010, the Group made payments totalling £2.2 million to reduce the pension deficit.

Dividend

The Board is committed to a policy of a fair return to shareholders, alongside the establishment of sound dividend cover. I am pleased to approval at the Group's Annual General Meeting in May 2011.

Future Prospects

Having tackled the issues of 2010, the challenge facing the Group as of our businesses, 2010 ended strongly and the momentum has carried into 2011 although, we continue to experience pricing pressures on raw we remain cautiously optimistic about trading prospects for 2011.

challenges ahead.

Archie S. Hunter Chairman

The Business at a Glance

Customer service

Presentational packaging

Specialist packaging

Range of packaging products

Specialist labels

Packaging Distribution: The business operates through 17 Regional Distribution Centres (RDCs) supplying customers on a local, regional and national basis.

We benefit customers by enabling them to ensure their products are cost-effectively protected in transit and storage.

The Business

Packaging Distribution is the leading UK distributor of a comprehensive range of packaging consumable products. In a highly fragmented market, Macfarlane is the market leader with a market share of ca. 20%. The business operates through 17 RDCs supplying customers on a local, regional and national basis. We benefit customers by enabling them to ensure their products are cost-effectively protected in transit and storage by providing them with a comprehensive product range, single source supply, just in time delivery and tailored stock management programmes.

Market Conditions

Packaging Distribution was most impacted by the increase in raw material prices in 2010 and, despite an effectively managed price recovery programme, experienced a 1.5% gross margin reduction. However customer attrition was minimal, and the business achieved a number of significant new customer wins resulting in the business growing operating profits in 2010 by 4%.

Future Opportunities

We expect demand in 2011 is likely to remain weak and that cost price inflation will continue. Our plan for 2011 is to focus management actions on enhancing existing customer relationships as well as increasing new business growth through the RDC sales teams and the dedicated National Account sales teams in specific industry sectors which benefit from Macfarlane's national coverage. We also have a range of strategic initiatives, which focus on developing new products and services in the business.

Presentational Packaging

During 2010, a well-known retailer of luxury fashion, approached us through the macfarlanepackaging.com website enquiring about our ability to supply high quality, printed gift boxes. Through working with the recently launched Presentational and Retail Packaging division we were able to design innovative magnetic pop-up boxes, which realised significant cost savings in logistics while preserving the luxury image our customer required to maintain.

In addition, to providing a competitively priced innovative solution, through our Enfield RDC, we were able to supply just in time, significantly reducing the customer's investment in inventory and requirement for storage space. The product range has also now evolved to supplying self-adhesive labels to our customer through our Labels business. The relationship has developed from a simple enquiry through our website to a true partnership combining our strategic capability with our core service and product offering.

Labels: The business produces self-adhesive and resealable labels for major fast moving consumer goods ('FMCG') customers in Europe and US.

The business operates from two production sites in Kilmarnock and Dublin and a sales and design office in Sweden.

The Business

The Labels business produces self-adhesive and resealable labels for major FMCG customers in Europe and US. The business operates from two production sites in Kilmarnock and Dublin and a sales and design office in Sweden which focuses on the development and growth of our resealable labels business – Reseal-it™.

Market Conditions

During 2010 Macfarlane Labels experienced significant price pressures from the customer base, reflecting the strong influence of the major retailers on our key customers. As a result gross margins reduced while an unfavourable customer mix exacerbated this situation. In response Macfarlane Labels has been working to recover supplier price increases from its customers, focusing on improving operational performance, targeting the new business sales effort in the FMCG branded sector and investing in the higher added value Reseal-it™ product range.

Future Opportunities

Macfarlane Labels will work to recover supplier price increases from its customers, focusing on improving operational performance, targeting the new business sales effort in the FMCG branded sector and investing in the higher added value Reseal-it™ product range.

Following our recent expansion of Reseal-it™ into the biscuit market in Europe from our traditional markets in sliced meats and cheese, we were given the opportunity to launch the Reseal-it™ product in the UK with Walkers Shortbread. The Reseal-it™ product benefits customers with its recloseable capability to maintain the freshness of the product whilst at the same time allowing Walkers to maintain strong brand recognition. The product is currently used in a number of Walkers high quality biscuit ranges and will be extended to further ranges in 2011.

Printpack Inc.

The US has a readily developed consumer appreciation of the benefits of resealable packs for a range of different food products. Our US distributor Printpack Inc. has successfully introduced Reseal-it™ applications to a number of its larger customers, who sell established leading brands of cooked meats throughout North America, Printpack Inc. doubled their turnover with Macfarlane Labels in 2010 and are looking forward to further growth of the Reseal-it™ applications in 2011.

Packaging Manufacturing: The business designs, manufactures and assembles custom-designed packaging solutions for customers looking for cost-effective methods of protecting higher-value products in storage and transit.

2010 sales were 13% above those achieved in 2009 as demand in a number of the key sectors of UK industry we serve recovered.

The Business

The principal activity of Packaging Manufacturing is the design, manufacture and assembly of custom-designed packaging solutions for customers looking for cost-effective methods of protecting higher-value products in storage and transit. The primary raw materials are corrugate, timber and foam. The business operates from two manufacturing sites, in Grantham and Westbury, supplying both directly to customers and also via the Group's Distribution business. Key customer sectors serviced are aerospace, medical equipment, electronics and automotive.

Market Conditions

2010 sales were 13% above those achieved in 2009 as demand in a number of the key sectors of UK industry we serve recovered and we achieved some significant new customer wins. The partnership with the Packaging Distribution business contributed effectively to the strong sales growth and good progress was made with our directly serviced customers particularly in the aerospace and electronics sectors.

Future Opportunities

The priorities for 2011 are to identify additional sales growth opportunities both directly and through the relationship with Macfarlane Packaging Distribution and to maintain gross margins through effective recovery of any further cost changes. At the same time we shall continually review the cost base of the business to ensure it is at a level consistent with the demand outlook.

Alternative design for Aircraft Braking System Parts

Meggitt Aircraft Braking Systems asked Macfarlane to develop a new packaging solution for Heat Pack Disks that make up part of an aircraft braking system. We were asked to produce a pack to eliminate damage in transit, reduce weight, maximise the number that can be stacked on a standard size pallet, use recyclable materials that can be easily recycled after use as well as reduce overall costs. The new design shown opposite provides a cost-effective solution for the safe shipment of these parts across the world that has been verified by transit testing to the standards required by the International Safe Transportation Association. The customer has made significant savings in shipping costs, packaging material costs and reduction in damage.

SolidWorks

During 2010 Packaging Manufacturing invested in SolidWorks, a 3D computer-aided design tool, which reduces product development time and provides customers with 3D packaging designs. The system can show customers' products placed within the proposed packaging and manufacturing drawings can be generated automatically once agreed, without sampling. As SolidWorks is the market leader in this type of technology an ever-increasing number of high quality manufacturers use it as part of their design and manufacturing programmes. The investment has already generated sales wins as we are the only UK packaging manufacturer with this tool who can design and convert a number of raw materials and give the customer the best solution to their requirements.

Macfarlane Group has demonstrated it can progress positively whilst managing its way through difficult market conditions.

Trading Performance
	Revenue 2010 £000	Revenue 2009 £000	Profit Before Exceptional Items 2010 £000	Profit Before Exceptional Items 2009 £000	Exceptional Items 2010 £000	Exceptional Items 2009 £000	Profit Before Tax 2010 £000	Profit Before Tax 2009 £000
Group Segment Packaging Distribution	109,093	98,989	4,424	4,256	180	(325)	4,604	3,931
Manufacturing Operations	26,357	24,607	94	150	666	(374)	760	(224)
Revenue from continuing operations	135,450	123,596
Operating profit			4,518	4,406	846	(699)	5,364	3,707
Net finance costs			(1,167)	(1,223)	–	–	(1,167)	(1,223)
Profit before tax – continuing operations			3,351	3,183	846	(699)	4,197	2,484

Following the UK economic slowdown in 2009 the key issue faced by the Macfarlane businesses in 2010 was a dramatic increase in the cost of raw materials. During the year there were five increases in the price of corrugate totalling 33% and two increases in polymer-based products totalling 21%. The effect of these cost price rises required each of the Macfarlane businesses to focus their efforts on recovering the increases while at the same time minimising the risk of customer attrition. In overall terms our actions were successful and, although there was some gross margin erosion during the year, the Group increased its profit before tax from continuing operations by 5% to £3.4 million.

The Packaging Distribution business was most impacted by the increase in raw material prices and, despite an effectively managed price recovery programme, experienced a 1.5% gross margin reduction. However customer attrition was minimal, and the business achieved a number of significant new customer wins resulting in the Packaging Distribution business growing its operating profit before exceptional items in 2010 by 4%.

The Manufacturing businesses had mixed results in 2010. The Packaging Manufacturing business realised the benefits of the restructuring carried out in response to the demand slowdown in 2009 and achieved a positive recovery in profitability. The profitability of the Labels business reduced as a result of the difficulty in recovering raw material price increases and an unfavourable customer mix. In overall terms the Manufacturing businesses continued to be profitable before the impact of exceptional items in 2010.

The resilience displayed by the Group in 2009 in difficult demand conditions has been maintained in 2010 in the face of dramatic cost price inflation. The outlook for 2011 is difficult to judge: there remains a strong likelihood of further cost price increases and the fragile nature of the UK economy means that overall levels of demand are likely to remain weak. However Macfarlane Group has demonstrated it can continue to progress positively whilst managing its way through a variety of difficult market conditions. The Group has robust plans in place to increase sales and improve operational efficiency and the effective implementation of these plans remains the priority.

Packaging Distribution

The Macfarlane Packaging Distribution business is the leading UK distributor of a comprehensive range of packaging consumable products. In a highly fragmented market, Macfarlane is the market leader with a market share of approximately 20%. The business operates through 17 Regional Distribution Centres (RDCs) supplying customers on a local, regional and national basis. We benefit our customers by enabling them to ensure their products are cost-effectively protected in transit and storage by providing a comprehensive product range, single source supply, Just In Time delivery and tailored stock management programmes.

In a highly fragmented market, Macfarlane Packaging Distribution is the market leader with a market share of approximately 20%.

2010 Performance

In 2010 Packaging Distribution grew operating profit by 17% to £4.6 million, compared with £3.9 million in 2009. The comparable amounts before exceptional items showed an increase in operating profit from £4.3 million to £4.4 million in 2010. A number of factors contributed to these results:

Sales revenue increased by 10% reflecting price inflation as well as a modest increase in volumes across a number of the key customer sectors we supply;
There was another good year on new business with a number of high profile new customer wins resulting in new business sales at almost £8.0 million;
We relaunched our web-based packaging service in 2010, and revenue through this increasingly important channel increased by 19% versus 2009;
Our 2010 customer satisfaction survey showed 84% of customers rating our service above average (2009 – 87%) and of these, 38% rated our service as excellent (2009 – 41%). The slight reduction versus 2009 is a direct reflection of the difficult pricing environment;
In 2010 our On-Time-In-Full ('OTIF') deliveries averaged 85% (2009 – 90%) against our benchmark of 90%. This result reflects some of the difficulty experienced due to the weather conditions. The method we use to measure OTIF is applied as an internal logistics efficiency monitor rather than a customer satisfaction measure;
Supplier price inflation has been significant in 2010 and, due to the normal time lag in passing through these price increases, our gross margin reduced to 29.6% compared with 31.3% in 2009. As is traditionally the case, we would expect gross margin to recover gradually in the first half of 2011;
Our Telford RDC was closed at the end of 2009 and has been integrated into our network, primarily benefiting the Coventry and Manchester RDCs;
The 3 RDCs that were loss-making in 2009 were returned to profitability in 2010;
We have maintained a strong focus on cost control and sales per employee increased as we improved productivity levels within the business;
Net overheads as a percentage of sales reduced from 27.0% in 2009 to 25.6% in 2010, evidence of our cost control focus; and
There has been good progress on a number of the key strategic initiatives with momentum building particularly in our development into the third party logistics sector, the increasing importance of our web-based presence through macfarlanepackaging.com and some encouraging early successes in the launch of our presentational packaging business.

Performance Potential

Each of the sites within our current network of 17 RDCs is a profit centre and based on our 2010 results we had eight RDCs performing at or above an acceptable return on sales level. The remaining RDCs, which with one exception are all profitable, continue to demonstrate improvements that indicate their ability to achieve an acceptable return on sales level.

Acquisitions

One component of the Packaging Distribution strategy is the acquisition of quality businesses offering the opportunity to increase geographic penetration and to more effectively utilise our current RDC infrastructure. Allpoint Packaging Limited, acquired in October 2008, has now been successfully integrated into the Macfarlane Distribution network.

Business Risks

The key risks associated with the Packaging Distribution business are detailed below:

As a distributor in a market where products are vulnerable to commodity-based raw material prices and manufacturer energy costs, profitability is sensitive to supplier price changes. Macfarlane works closely with its supplier base to effectively manage the scale and timing of price increases to end-users and we have extensive IT support to monitor and measure our effectiveness in recovering supplier price changes;
Competition in the distribution market is primarily from local companies with good local connections and capability. Macfarlane competes effectively on a local basis through its strong focus and regular monitoring of customer service, its breadth and depth of product offer and the recruitment and retention of staff with good local market knowledge; and
The Macfarlane Packaging Distribution business is decentralised with a high dependency on effective local decision-making. In order to ensure management control of local decision-making, there is a comprehensive management information system with all key sales, margin and working capital measures monitored consistently and regularly.

Future Plans

We expect demand in 2011 is likely to remain weak and that cost price inflation will continue. In this context, our plan for 2011 is to focus our management actions in the following areas:

Enhance existing customer relationships to ensure we maintain high customer retention levels and increase product penetration;
Ensure the effective management and recovery of supplier price changes;
Increase new business activity to accelerate new business growth and win market share both through the RDC sales teams and the dedicated National Account sales teams;
Expand our focus in specific industry sectors which benefit from Macfarlane's national coverage;
Accelerate the development of the Presentational and Retail Packaging business to existing and new customers;
Strengthen our web-based presence through macfarlanepackaging. com to improve online visibility and access to our products and services;
Continue the implementation of our productivity improvement initiatives to ensure all RDCs are operating to their full profit potential within the Macfarlane network; and
Maintain the focus on working capital management to reduce borrowing levels.

There has been good progress on the key strategic initiatives with momentum building.

Business Review

Manufacturing Operations

Macfarlane operates two manufacturing businesses, Labels and Packaging Manufacturing.

In 2010 Macfarlane's Manufacturing Operations recorded an operating profit of £0.8 million, compared to an operating loss of £0.2 million in 2009. Before exceptional items the profit performance was broadly flat and the key features of the Manufacturing Operations performance in 2010 were:

Sales increased by 7% versus 2009 driven by increased demand from major customers in key sectors particularly aerospace and general industrial;
Gross margins reduced from 37.0% to 36.5% reflecting significant customer pressure on sales prices in the Labels business and a change in customer mix towards own label fast moving consumer goods ('FMCG') suppliers; and
Net overheads as a percentage of sales reduced from 36.4% in 2009 to 36.2% in 2010, evidence of our cost control focus.

Labels

The principal activity of the Labels business is the production of self-adhesive and resealable labels for major FMCG customers in Europe and the US. The business operates from two production sites in Kilmarnock and Dublin and a sales and design office in Sweden which focuses on the development and growth of our resealable labels business – Reseal-it™.

Business Performance

2010 sales at Labels showed a 4% increase versus 2009 despite lower pricing levels, with volumes showing a 7% increase. However despite the sales price reduction the Labels business remained profitable and succeeded in delivering a reduced but acceptable return on sales.

Reseal-it™ continued to progress well in 2010. Although we have experienced some slowdown for this product range in Europe, as consumers look to reduce costs, we are experiencing the first signs of penetration in the UK market and we continue to show good progress in the North American market, which is being managed in partnership with our US distributor Printpack Inc.

Business Risks

The specific risks facing the business are detailed below:

There is a high level of dependency on a small number of major customers. Management work closely with these key customers to ensure high levels of service and introduce product and service development initiatives to create competitive differentiation;
In order to offset the margin pressure, driven by the intensity of competition in the retail FMCG sector, our sales team is focused on working closely with customers to manage price increases and also achieve a broader mix of customers for whom the added value of Macfarlane Labels' offering is clear;
Raw material price increases impact margins and further increases are a risk. Where possible increases are mitigated through price negotiations and production efficiencies but some margin erosion is likely if material prices increase. There is a level of dependence on a small number of suppliers, therefore alternative sources of material are being investigated in conjunction with major customers, consistent with maintaining quality and service; and
There is some currency risk as a number of Labels' customers reside in the Euro-zone and the US. This is considered within the context of Macfarlane Group's overall currency management framework.

Future Plans

The priorities for the Labels business in 2011 are to:

Introduce new sales leadership;
Accelerate organic growth plans particularly in those customer sectors where the added value of Macfarlane Labels' offering is apparent;
Identify opportunities to rebuild margins;
Improve operational efficiencies to counterbalance retail price pressure; and
Further develop the Reseal-it™ product in the US market, identify additional geographic opportunities and explore new applications for the Reseal-it™ concept.

Reseal-it™ continued to progress well in 2010 with the first signs of penetration in the UK.

Packaging Manufacturing

The principal activity of the business is the design, manufacture and assembly of custom-designed packaging solutions for customers looking for cost-effective methods of protecting higher-value products in storage and transit. The primary raw materials are corrugate, timber and foam. The business operates from two manufacturing sites, in Grantham and Westbury, supplying both directly to customers and also via the Group's Packaging Distribution business. Key market sectors serviced are aerospace, medical equipment, electronics and automotive.

Over 25% of Packaging Manufacturing sales are channelled through the Macfarlane Packaging Distribution business and the combination of in-house manufacturing and distribution allows us to differentiate our offering in the market.

Business Performance

2010 sales were 13% above those achieved in 2009 as demand, in a number of the key sectors of UK industry we serve, recovered and we achieved some significant new customer wins. The partnership with the Packaging Distribution business contributed effectively to the strong sales growth and good progress was made with our directly serviced customers particularly in the aerospace and electronics sectors. The impact of all these factors resulted in Packaging Manufacturing returning to an acceptable overall level of profitability in 2010. This represented a good performance after a loss-making year in 2009.

Business Risks

The specific risks facing the business are:

Raw material prices the primary material components are corrugate, timber and foam. Both timber and foam raw materials have seen price increases in the last 12 months. The business works extensively with suppliers to minimise increases and re-engineers products for customers in order to mitigate the increase whilst maintaining margins; and
Market risk the main customer sectors are UK-based manufacturers and industrial companies who need to protect their high-value products in storage and transit. Certain industries such as aerospace are large users of this type of packaging solution. To the extent that there is any significant decline in the UK industrial and manufacturing sector then this would be expected to have an impact on the Packaging Manufacturing business. This can be mitigated to some extent by accessing new customers using the extensive customer base in our Packaging Distribution business.

Future Plans

The priorities for 2011 are to:

Continually review the cost base of the business to ensure it is at a level consistent with the demand outlook;
Maintain gross margins through effective recovery of any further cost changes;
Identify additional sales growth opportunities both directly and through the relationship with Macfarlane Packaging Distribution;
At Grantham the primary focus will be to grow sales both directly and through the partnership with Packaging Distribution; and
Our Westbury location is focused on profit recovery through accelerating sales momentum and introducing a programme of productivity and service improvement initiatives.

2011 Outlook

The outlook for the UK economy in 2011 reflects a continuing period of uncertain demand levels and continuing cost price inflation. It is clear that trading conditions will remain challenging. However, the actions taken over recent years mean that Macfarlane Group has significantly greater capability and confidence to address the future market challenges.

Macfarlane Group has a clear business plan incorporating a number of key strategic initiatives, which it is committed to implementing. The early experience to date is that these initiatives will enable the business to continue to drive profitable growth and the effective implementation of these initiatives remains the highest of priorities.

The correct blend of tactical actions and strategic initiatives will ensure that 2011 will be another year of positive progress for Macfarlane Group.

Peter D. Atkinson Chief Executive 2 March 2011

Macfarlane Group has significantly greater capability and confidence to address the future market challenges.

Business Review

Financial Summary
	Profit Before Exceptional Items 2010 £000	Exceptional Items 2010 £000	Total 2010 £000	Profit Before Exceptional Items 2009 £000	Exceptional Items 2009 £000	Total 2009 £000
Revenue	135,450	–	135,450	123,596	–	123,596
Cost of sales	(93,510)	–	(93,510)	(83,473)	–	(83,473)
Gross profit	41,940	–	41,940	40,123	–	40,123
Net operating expenses	(37,422)	846	(36,576)	(35,717)	(699 )	(36,416)
Operating profit	4,518	846	5,364	4,406	(699)	3,707
Net finance costs	(1,167)	–	(1,167)	(1,223)	–	(1,223)
Profit before tax	3,351	846	4,197	3,183	(699)	2,484
Tax	(972)	(239)	(1,211)	(691)	177	(514)
Profits on discontinued activities	–	–	–	351	–	351
Profit after tax	2,379	607	2,986	2,843	(522)	2,321
Earnings per share	2.10p	0.53p	2.63p	2.52p	(0.46p)	2.06p

Financial Review 2010 Trading

Group turnover in 2010 increased to £135.5 million from £123.6 million, an £11.9 million increase. Sales increased by 10.2% in Packaging Distribution, mainly due to recovery of purchase price increases and our Manufacturing Operations saw an increase in sales of 7.1%. Gross margins reduced by 1.5% from 32.5% to 31.0% reflecting an inevitable delay in recovering successive raw material and purchase price increases across all the Group's activities throughout 2010, however the contribution from gross margin increased by £1.8 million, reflecting increased sales levels and partial price recovery.

Net operating expenses before exceptional items increased by £1.7 million primarily due to increased variable costs flexing with the higher sales levels. Interest charges reduced by £0.1 million due to lower funding costs for the pension scheme deficit. Therefore Group profit before exceptional items and tax increased by £0.2 million from £3.2 million in 2009 to £3.4 million in 2010.

During 2010, the Group amended future pension benefits for active members of the final salary pension scheme by freezing pensionable salaries at 30 April 2009 levels. Following a consultation process with the active members affected, the change took effect on 30 April 2010. As a result no further salary inflation applies for active members who remain in the scheme and an exceptional gain of £1.1 million after costs was recorded as a result of this change. This was offset by provisions made against vacant properties totalling £0.3 million in 2010.

In 2009 the Group incurred exceptional restructuring costs of £0.7 million in all our businesses to reduce the cost base in line with the anticipated demand outlook.

As a result the profit before tax from continuing operations has increased to £4.2 million from £2.5 million in 2009.

Taxation

The tax charge for the year from continuing operations was £1.2 million on the profit before tax of £4.2 million. This compared with a tax charge of £0.5 million on the profit before tax of £2.5 million in the previous year, which reflected the utilisation of previously unrecognised tax losses.

Discontinued Operations

During 2009, the Group finalised agreements for previous years' disposals resulting in a profit of £0.4 million.

Earnings per Share and Dividends

Basic earnings per share from all activities totalled 2.63p per share in 2010 compared to 2.06p in 2009. A dividend of 0.50p was paid on 14 October 2010. A further dividend of 1.05p per share is subject to approval by shareholders at the Annual General Meeting in May 2011 and has not been included as a liability in these financial statements.

Cash Flow and Net Debt

Cash inflow from operating activities was £2.4 million (2009 – £1.7 million). The Group's financing requirements have been met by bank borrowings with access to adequate funds ensured by maintaining committed levels of borrowing facilities. Bank facilities are in place for the period to 28 February 2012 to meet the Group's anticipated financing requirements.

The Group spent £0.4 million on property, plant and equipment in 2010 (2009 – £0.5 million) and will continue to invest where there are needs or opportunities to meet future growth plans. Capital expenditure in 2011 is expected to continue to be below the annual depreciation charge, reflecting the well-invested nature of our businesses.

During 2010 the Group paid dividends to shareholders totalling £1.7 million and continued a programme of additional payments to fund the pension scheme deficit and enhance transfer values of £2.6 million, which will continue in 2011. Despite these significant net outflows totalling £4.3 million in 2010, the Group had net debt of £7.0 million at 31 December 2010, a reduction of £0.3 million from the previous year. The Group will strive to ensure that in 2011, profit generation is, at the very minimum, matched by cash generation.

The Group will remain prudent in its assessment of the likely returns from capital expenditure and potential acquisitions. The aim is to seek immediate returns in excess of our weighted-average cost of capital.

Financial Instruments

The Group's principal financial instruments comprise borrowings, cash and short-term deposits, and other items, such as trade receivables and trade payables that arise directly from its operations as well as shareholders' equity. The main purpose of any financial instruments is to raise finance for the Group's operations. It is, and has been throughout the period under review, the Group's policy that no speculative trading in financial instruments is undertaken. The main risks arising are interest rate risk, liquidity risk, credit risk and currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of 2010.

Interest rate risk

The Group finances its business through a mixture of reserves and bank borrowings. The Group borrows in the desired currencies at floating rates of interest. Interest rate exposures are reviewed regularly and financial instruments considered. At present it is not deemed necessary to cover interest rate exposures by the use of financial instruments.

Liquidity risk

The Group's policy with regard to liquidity remains ensuring adequate access to funds by maintaining appropriate levels of committed short-term overdraft facilities, which are then reviewed on a regular basis. The principal Group borrowing facility of £12.0 million is in place for the period to 29 February 2012. The maturity profile of debt outstanding at 31 December 2010 is set out in notes 16 and 17 to the financial statements.

Credit risk

The Group's exposure to credit risk is managed by dealing only with banks and financial institutions with good credit ratings and by applying considerable rigour in managing trade receivables. The Group's principal credit risk is attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior impairment experience and their assessment of the current economic environment.

Currency risk

The Group has two overseas subsidiaries, one operating in Ireland and the other operating in Sweden. Revenues and expenses are denominated exclusively in Euros and Swedish Krone respectively. As a result, movements in the Euro and Swedish Krone to Sterling exchange rates could affect the Group's Sterling balance sheet. The Group's policy during 2010 has been to review the need to hedge exposures on a monthly basis and it was not deemed necessary to cover any currency exposures during 2010 by the use of financial instruments. For 2011 onwards this remains the Group's policy.

Details of Market risk and Price risk are set out in the relevant Business Risks sections in the Business Review.

Shareholders' Funds and Share Price Movements

At the year-end the Company's market capitalisation was £35.1 million, compared with £23.6 million last year. The share price at 31 December 2010 was 30.5p, compared with 20.5p at 31 December 2009. The range of transaction prices for Macfarlane Group shares during 2010 was 16.9p to 32.8p for each ordinary share of 25p.

Pension Scheme Deficit and Associated Risks

The Company's pension scheme deficit is sensitive to movements in interest rates, inflation and longevity assumptions. This creates significant volatility in the charges and equity in each financial year.

Pension scheme deficit movements were as follows:
	2010 £000	2009 £000
At 1 January Normal service costs and financial	(20,366)	(17,477)
charges	(804)	(1,022)
Curtailment gain	1,200	–
Contributions	2,705	2,415
Actuarial gain/(loss) on pension scheme during the year	1,540	(4,282)
At 31 December	(15,725)	(20,366)
Related deferred tax asset	4,246	5,702
Net pension deficit at 31 December	(11,479)	(14,664)

Our UK defined benefit pension scheme had investments with a market value of £45.3 million (2009 – £40.6 million) and liabilities discounted using specified bond yields of £61.0 million (2009 – £61.0 million) at 31 December 2010. This gave a deficit at 31 December 2010 of £15.7 million (2009 – £20.4 million) partially offset by a deferred tax asset of £4.2 million (2009 – £5.7 million) giving a net pension deficit of £11.5 million (2009 – £14.7 million).

During 2010, Macfarlane Group PLC made the decision to amend benefits for active members in the scheme by freezing pensionable salaries at the levels current at 30 April 2009. Following a consultation process with the active members affected, the change took effect on 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme and a curtailment gain of £1.2 million was recorded in the income statement as a result of this change.

During 2010, the pension scheme's investments in equities increased by nearly 14% reflecting the positive growth in equity markets. Returns on scheme assets in 2010 were £2.1 million above expected returns for the year. However this was partly offset by a decrease from 5.75% to 5.50% in the bond yields used to discount pension scheme liabilities and other actuarial assumptions, which had a negative impact of £2.9 million on the liabilities recorded in our balance sheet. The Government announced its intention that statutory minimum increases should be based on the increase in the Consumer Price Index measure of inflation rather than the Retail Price Index measure of inflation. As the Macfarlane Group final salary pension scheme rules define revaluation in deferment to be statutory, this change has been effected in 2010 with a resultant reduction in liabilities of £2.3 million. Accordingly, the overall result was an actuarial gain of £1.5 million in 2010.

Assumptions in relation to mortality are broadly consistent with 2009.

International Financial Reporting Standards

The new International Financial Reporting Standards adopted during 2010 had no major impact on the disclosures and accounting policies in these financial statements.

Accounting Policies

The Group continues to comply with all International Financial Reporting Standards adopted by the European Union.

Going Concern

The Directors, in their consideration of going concern, have reviewed the Group's future cash flow forecasts and revenue projections, which they believe are based on prudent market data and past experience. The Group's business activities, together with the factors likely to affect its future development, performance and financial position are set out in the Business Review on pages 6 to 11.

The Group's principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations. Credit risk is managed by applying considerable rigour in managing the Group's trade receivables. The Directors believe that the Group is adequately placed to manage its financial risks effectively despite the current uncertain economic outlook. The Group's principal banking facilities of £12.0 million have been renewed until 29 February 2012 and the Directors are of the opinion that the Group's cash forecasts and revenue projections, taking account of reasonably possible changes in trading performance given current market and economic conditions, show that the Group should be able to operate within its current facilities and comply with its banking covenants.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

John Love Finance Director 2 March 2011

Corporate Responsibility ('CR')

Macfarlane recognises it has a responsibility to ensure that through its business operations it impacts positively on society.

In order to achieve this we have a series of programmes focused on environmental care, improving the customer experience and increasing employee engagement.

CR leadership comes from an internal committee consisting of members from a cross section of the Group led by the Chief Executive.

The Committee's goals include:

Increasing the awareness of CR throughout the Group;
Developing and implementing the CR strategy in order that CR becomes an integral part of daily operational activities; and
Measuring, monitoring and reporting on CR performance using agreed key performance indicators (KPI's).

The Group has identified a range of measurements relating to the environment, the customer experience and the employee experience which it monitors and measures on a regular basis.

The Environment

CO2 emissions The Group aims to reduce its carbon footprint through a proactive approach to all aspects of the business. Energy and fuel consumption is centrally managed, which enables the Group to target reductions in carbon emissions. During 2010 for every £1,000 of product sold, the Group reduced its CO2 emissions by 4% compared to 2009.

CO2 Kg/£000 Sales
	2010 £000	2009 £000	2008 £000
Distribution	39.4	41.8	45.3
Manufacturing	102.3	105.2	107.6
Group	53.3	55.8	60.3

Energy usage

The Group total energy consumption per £1,000 of sales reduced in 2010 compared to 2009.

Energy MWh/£000 Sales
	2010	2009	2008
	£000	£000	£000
Distribution	0.03	0.03	0.03
Manufacturing	0.21	0.23	0.22
Group	0.07	0.07	0.08

Fuel usage

The Distribution business uses Paragon Fleet Controller to collate customers' delivery requirements and calculates the most efficient means of delivering products. Throughout 2010 the Group fuel consumption was reduced by 4% per £1,000 of sales, the breakdown of which is included in the table below.

Litres/£000 Sales
	2010	2009	2008
	£000	£000	£000
Distribution	11.77	12.44	12.80
Manufacturing	11.60	11.67	11.42
Group	11.73	12.27	12.47

Waste management

Following the appointment of Cory Environmental during 2007, initiatives implemented have resulted in more of our waste being recycled and therefore less being sent to landfill.

We use a range of bespoke waste disposal solutions from paper collection points within the offices to fully integrated baler systems producing mill sized bales for recycling.

As landfill costs continue to rise, revenue from some waste products, such as corrugated products are already being realised and other initiatives are being introduced to further reduce the amount of waste going to landfill. We backload corrugate waste from one of our RDCs to our Manufacturing site in Grantham, this allows it to be baled and sent for recycling and creates extra revenue for the Group.

Environmental care

We support our customers in their efforts to reduce their environmental impact through their choice of packaging products. We provide an Environmental Product Matrix, produced in conjunction with our suppliers, which is consistent with the underlying need to ensure products are effectively protected in storage and transit and enables customers to choose fit for purpose packaging solutions that embrace the Reduce, Reuse and Recycle ethos.

Registration to ISO 14001

15 of our sites are fully registered to BSI ISO 14001 Environmental Management Standard. ISO 14001 is an internationally recognised standard on environmental management. Registration, which involves a process of continual assessment and improvements provide instant market place recognition of our commitment to reducing the impact of the business on the environment. Our Gloucester RDC obtained accreditation in February 2011.

The Customer Experience

Customer feedback

Each year, we survey all Distribution business customers to measure key service performance indicators. In addition, the survey is used to explore customers' thoughts and validate requirements for new and planned product and service initiatives. The 2010 survey results showed an increasing need from customers for enhanced internet-based services, such as improved access to product and pricing information.

Sales order management

Customer Connect provides our customers with online access to current and historical purchase orders, invoices, statements, packaging spend reports and analyses, waste packaging reports and more. The use of Customer Connect encourages paperless communication regarding orders, where customers can log onto their accounts for instant updates. In 2010, £11.2 million (2009 – £9.4 million) worth of sales were transacted electronically using Customer Connect.

Electronic documents

To further reduce paper usage, the Group is encouraging customers to receive documentation electronically. Over 1 in 10 Invoices/Statements were delivered electronically during 2010, following the transfer of a number of our customers to the macfarlanepackaging.com trading platform.

Macfarlanepackaging.com

Macfarlanepackaging.com is our online service that enables customers to research and evaluate our product, pricing and service offer and buy packaging over the Internet.

During 2010 for every £1,000 of product sold, the Group reduced its CO2 emissions by 4% compared to 2009.

Corporate Responsibility

The Distribution business uses Paragon Fleet Controller to collate customers' delivery requirements and calculates the most efficient means of delivering products.

The Employee Experience

Macfarlane Group recognises the importance of recruiting, developing and retaining the best people and is committed to ensuring a safe, diverse working environment that promotes good employee relations at all levels within the organisation.

Training

The Group continues to invest in training in order to equip individuals with the skills and knowledge required to best serve the customer. During 2010 the importance of internally supported development and coaching was vital in dealing with the challenges posed by customer requirements, fluctuating supplier prices and unpredictable product demands.

Employee engagement

Employee engagement has always been seen as important and in 2010 there was additional focus on staff communication, participation and alignment with the Group's strategic objectives. The Group continues to ensure that all employees understand their company's trading position, strategic focus and how each individual contributes to business performance.

Health and safety

The health, safety and welfare of colleagues, customers and contractors are key business objectives within the Group. The Group's approach to Health and Safety is based upon the best practice guidelines as defined by the Health and Safety Executive. There is a dedicated Health and Safety manager in the business who works with local Health and Safety teams to ensure Health and Safety knowledge and standards are effectively applied on a consistent basis.

The importance of Health and Safety is reflected in regular committee meetings whereby meaningful two-way communication and consultation with representatives is seen as vital in ensuring both group and local Health and Safety objectives are achieved.

In addition to the divisional reporting structure, the Board reviews a monthly report on Health and Safety at each Board meeting and monitors any actions flowing from them. The report covers reportable incidents, non-reportable incidents and near misses. The Accident Frequency Rate in respect of reportable incidents is shown below:

Accident Frequency Rate*
	2010	2009	2008
Distribution	0.78	0.38	0.56
Manufacturing	0.85	1.13	0.78
Group	0.81	0.65	0.63

* Number of reportable incidents/100,000 man-hours worked.

The Group continues to make progress in improving its performance against the identified CR objectives. We plan for 2011 to maintain this progress.

15 of our sites are fully registered to BSI ISO 14001 Environmental Management Standard.

Directors and Advisers

Archie Hunter

Appointed as a non-executive director on 1 October 1998, becoming Chairman on 1 November 2003. He is Chairman of the Nominations Committee and a member of the Remuneration Committee. Aged 67, Archie was formerly the senior partner of KPMG in Scotland and a member of KPMG's UK Governing Body. He is a past President of The Institute of Chartered Accountants of Scotland. Archie is currently a director of a number of listed and

Peter Atkinson Chief Executive

Aged 54, Peter joined Macfarlane Group as Chief Executive on 6 October 2003. He has a strong sales and marketing background through his career at Procter & Gamble and S.C. Johnson. Peter also has significant general management experience gained during his time at GKN PLC and its joint venture partners where he worked from 1988 to 2001 in a number international business, having worked in the UK, Continental Europe and the US. From 2000 to 2003, he was responsible for the US automotive and materials handling businesses of Brambles Industries PLC. Peter is a non-executive director of Speedy Hire plc.

John Love

A member of The Institute of Chartered Accountants of Scotland, John has been with the Group for fifteen years and was appointed Finance Director on 12 July 1999. Aged 50, he was with Deloitte and its predecessor firms for sixteen years before joining Macfarlane Group in 1996.

Kevin Mellor Non-Executive Director (Senior Independent Director)

Aged 64, Kevin Mellor joined the Board on 11 May 2004 as a non-executive director and is the Group's nominated Senior Independent Director. He retired in 2007 as President of Bax Global for Europe, Middle East and Africa. Kevin adds significant operations experience to the Board, having previously held senior executive positions at Exxon, B.E.T. PLC, Tibbett & Britten Group plc and Transport Development Group. He chairs the Remuneration Committee and is a member of the Nominations Committee and the Audit Committee.

Graeme Bissett joined the Board on 11 May 2004 as a non-executive director. Aged 53, Graeme has considerable financial experience, having previously been the finance director Graeme assumed the chair of the Audit Committee during 2004 and is also a member of the

Andrew Cotton Company Secretary Company Secretary on 3 August 2001.

Registration Number No. SC004221 Registered in Scotland

Company Secretary Andrew Cotton

Registered Office 21 Newton Place Glasgow G3 7PY Telephone: 0141 333 9666 Fax: 0141 333 1988

Solicitors Dundas & Wilson CS LLP Saltire Court 20 Castle Terrace Edinburgh EH1 2EG

Glasgow G2 5RZ

Wright Johnston & Mackenzie LLP 302 St Vincent Street

Principal Bankers Lloyds Banking Group PLC 110 St. Vincent Street Glasgow G2 5ER

Stockbrokers Oriel Securities Limited 125 Wood Street London EC2V 7AN

Speirs & Jeffrey Limited 36 Renfield Street Glasgow G2 1NA

Independent Auditors Deloitte LLP Edinburgh

United Kingdom Registrars

Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA

Report of the Directors

The Directors present their annual report and the audited financial statements of the Group for the year ended 31 December 2010.

Principal Activities

There were no significant changes in the continuing activities of the Company and its subsidiaries during 2010, which continue to be the distribution of packaging materials and supply of storage services in the UK, the manufacture and supply of self-adhesive and resealable labels to a variety of FMCG customers in the UK and Europe and the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK. Details of the principal subsidiary companies and their activities are set out on page 65.

Review of the Business

A review of the business during and following the end of the financial year and comments on future developments in the Group are contained in the Chairman's Statement and the Business Review on page 1 and pages 6 to 11 and in the Corporate Responsibility Report on pages 12 to 13, which form part of the Report of the Directors. The Directors in preparing this Business Review have complied with Section 417 of the Companies Act 2006.

Corporate Governance

The information that fulfils the requirement of the Corporate Governance Statement can be found in the Corporate Governance Section on pages 21 to 23 (and is incorporated into this report by reference) with the exception of the information referred to in the Financial Services Authority Disclosure and Transparency Rules 7.2.6, which is located within this report.

Cautionary Statement

The Chairman's Statement and the Business Review on page 1 and pages 6 to 11 have been prepared to provide additional information to members of the Company to assess the Group's strategy and the potential for the strategy to succeed. It should not be relied on by any other party or for any other purpose.

This report and the financial statements contain certain forward-looking statements relating to operations, performance and financial status. By their nature, such statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors, including both economic and business risk factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report.

Results and Dividends

The Group's profit before tax from continuing activities was £4,197,000, (2009 – profit before tax was £2,484,000 before recording a profit on discontinued operations after tax of £351,000). This results in a profit for the year of £2,986,000 (2009 – £2,321,000).

The Directors declared an interim dividend of 0.50p, which was paid on 14 October 2010 (2009 – 0.50p per share). The proposed final dividend of 1.05p per share (2009 – 1.00p per share) is subject to approval by shareholders at the Annual General Meeting in May 2011 and has not been included as a liability in these financial statements.

Capital Structure

The Group funds its operations from a number of sources of cash, namely operating cash flow bank borrowings, finance lease borrowings and shareholders' equity, comprising share capital, reserves and retained earnings, where appropriate. The Group's objective is to achieve a capital structure that results in an appropriate cost of capital whilst providing flexibility in immediate and medium-term funding so as to accommodate any material investment requirements.

Details of the authorised and issued share capital are shown in note 20 and there were no movements during 2009 or 2010. The Company has one class of ordinary share, which carries no right to fixed income. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company's shares that may result in restrictions on the transfer of securities or on voting rights.

Details of the Company's Employee Share Ownership Trust ('ESOT') are given in note 21. The ESOT has waived its right to receive dividends but exercises its right to vote. Details of the Company's All Employee Share Ownership Plan ('AESOP') are given in note 27. The AESOP receives dividends and exercises its right to vote.

No person has any special rights of control over the Company's share capital and all issued shares are all fully paid.

With regard to the appointment and replacement of directors, the Company is governed by its Articles of Association, the UK Corporate Governance Code, and the Companies Act 2006. The Articles may be amended by special resolution of the shareholders. The powers of the Directors are detailed in the Corporate Governance report on pages 21 to 23.

At the last Annual General Meeting on 11 May 2010, the Directors were given authority to allot further ordinary shares for cash beyond those committed to the share option schemes up to an aggregate amount of £1,437,738. That authority expires at the conclusion of the forthcoming Annual General Meeting. A special resolution will be put to shareholders to renew for a further year the authority over the existing unissued and uncommitted ordinary share capital. This authority is limited to a maximum nominal amount of £1,437,738. As in previous years, the Directors have no current intention of exercising that authority.

No authority will be sought at the 2011 Annual General Meeting to enable the Company to purchase its own shares.

Significant Agreements

No agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid are considered to be significant in terms of their likely impact on the business of the Group as a whole.

Substantial Holdings of Shares in the Company

The Company has received notification to 2 March 2011 in accordance with Chapter 5 of the Disclosure and Transparency Rules of the following voting rights as a shareholder of the Company.

	Number of Shares Held	Percentage
Funds managed or advised by
Discretionary Unit Fund Managers Limited	18,659,184	16.22%
KPG Investment Holdings Limited	13,399,131	11.65%
Funds managed or advised by
Unicorn Asset Management	5,883,695	5.12%
Funds managed or advised by
Gartmore Investment Management	4,750,000	4.13%
Funds managed or advised by
Prudential/M&G Investment Management	4,311,352	3.75%
Funds managed or advised by
Chelverton Asset Management Limited	4,200,000	3.65%
Lord Macfarlane of Bearsden KT
and Lady Macfarlane	3,533,170	3.07%

Directors

The names of the Directors in office at 31 December 2010, who served throughout the year together with short biographical details, are set out on page 14.

K.D. Mellor retires by rotation at the Annual General Meeting in May 2011 and offers himself for re-election. K.D. Mellor holds a letter of appointment with the Company dated 5 May 2010 with a standard notice period of three months.

No director, either during or at the end of the financial year, had an interest in any contract relating to the business of the Company or any of its subsidiaries. The statement of directors' interests in the ordinary share capital of Macfarlane Group PLC is contained in the Board Report on Directors' Remuneration on page 17.

There are no agreements between the Company and its directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid.

Directors' and Officers' Liability Insurance

The Company has maintained directors' and officers' liability insurance cover throughout the financial year. The Company made qualifying third party indemnity provisions for the benefit of directors in 2009, which remain in force.

Employee Share Schemes

During the year no ordinary shares were issued on the exercise of options under the Group's share option schemes or long-term incentive plans. Options previously granted over 618,303 ordinary shares in the Company's share option schemes and long-term incentive plan awards over 950,040 ordinary shares both lapsed during 2010.

Details relating to options and long-term incentive plan awards granted to parent company directors are set out in the Report on Directors' Remuneration on page 18. All remaining options and awards outstanding under the Company's share option schemes and long-term incentive plans are set out in note 26 to the financial statements.

The Remuneration Committee supervises the grant of share incentives, which are only capable of being exercised if the performance condition to which they are subject has been satisfied. The Remuneration Committee will specify the performance condition at the time of the grant of the share incentive, having regard to the objectives of the Company and to market practice at the relevant time. To provide an incentive to drive both returns to shareholders and earnings growth the Remuneration Committee uses a performance condition based both on total shareholder return ('TSR') and on earnings per share ('EPS'). Further detail is given in the Report on Directors' Remuneration on page 19.

Fixed Assets

In the opinion of the Directors the current open market value of the Group's interests in land and buildings does not differ materially from the book value. The movements in property, plant and equipment are set out in note 11 to the financial statements.

Financing Policy and Financial Instruments

The Group's policies are set out in the Financial Review section of the Business Review on pages 10 to 11.

Trade Payables

The Group negotiates terms with suppliers and settles liabilities in accordance with these terms and normal business practice. All companies in the Group follow this policy and the staff who deal with payments to suppliers are made aware of it. Further details of the policy are made known to suppliers on request. At 31 December 2010 the Group had an average of 74 days purchases outstanding in trade payables (2009 – 73 days).

Employees

The Group policy is to encourage the employment of disabled persons where the disabilities do not hinder these persons in the performance of their duties. Where an employee becomes disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. Registered disabled persons, once employed, receive equal opportunities for training, career development and promotion.

The Group recognises the importance of meaningful communication and consultation in maintaining good employee relations. This is achieved through formal and informal meetings across all business units. There are specific events or briefings to communicate the performance of the previous year and to outline plans for the year ahead.

Political and Charitable Contributions

Charitable donations of £5,000 were made during 2010 (2009 – £3,000) principally to charities in the communities in which the Group operates. No political donations were made in either year.

Special Business

A special resolution will be put to shareholders to renew for a further year the authority over the existing unissued and uncommitted ordinary share capital. This authority is limited to a maximum nominal amount of £1,437,738.

Disclosure of Information to Auditors

Each of the persons who is a director at the date of approval of this report confirms that:

as far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and
the director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.

Independent Auditors

A resolution to re-appoint Deloitte LLP as the Company's auditors will be proposed at the forthcoming Annual General Meeting.

By Order of the Board

Andrew Cotton

Company Secretary 2 March 2011

Introduction

This report is prepared in accordance with Schedule 8 to the Accounting Regulations under the Companies Act 2006 ('the Act'). The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority. It describes how the Board has applied the principles relating to directors' remuneration in the Combined Code issued in 2008. As required by the Act, a resolution to approve this report will be proposed at the Annual General Meeting on 10 May 2011 at which the financial statements will be adopted.

The Act requires the auditors to report to the Company's members on certain parts of the Report on Directors' Remuneration and to state whether, in their opinion, those parts of the Report have been properly prepared in accordance with the Accounting Regulations. This report has therefore been divided into separate sections in respect of audited and unaudited information.

Audited Information

The emoluments of the parent company directors are shown below:

(i) Emoluments

	Fees/ Salaries £000	Annual Bonus £000	Benefits in kind £000	Total 2010 £000	Total 2009 £000
Chairman
A.S. Hunter	61	–	–	61	61
Executive Directors
P.D. Atkinson	303	15	15	333	336
J. Love	141	7	8	156	153
G.H. Casey (Left 6 April 2009)	–	–	–	–	207
Non-Executive Directors
K.D. Mellor	28	–	–	28	28
G. Bissett	28	–	–	28	28
	561	22	23	606	813
Pension contributions				89	100
				695	913

The emoluments of executive directors and the structure of bonus schemes are determined by the Remuneration Committee. Bonuses are based on performance targets described on page 19 for the year to 31 December 2010. Bonuses of £15,000 (2009 – £24,000) and £7,000 (2009 – £7,000) are due to P.D. Atkinson and J. Love respectively for 2010 based on the achievement of non-financial objectives.

(ii) Directors' Pension Entitlements

J. Love, one of the executive directors, is a member of Macfarlane Group PLC Pension & Life Assurance Scheme (1974), a defined benefit pension scheme. Details of benefits accruing under the scheme are shown below:

	Years of Service	Accrued Pension 31 December 2010 £000 p.a.	Increase in Accrued Pension in 2010 £000 p.a.	Accrued Pension 31 December 2009 £000 p.a.
J. Love	15	29	2	27
	Transfer Value 31 December 2010 £000	Contributions Made by the Director in 2010 £000	Increase in 2010 Transfer Value Net of Contributions £000	Transfer Value 31 December 2009 £000
J. Love	340	8	44	288

The increase in accrued pension, net of inflation, is £1,000 per annum for J. Love. The related increase in transfer values net of inflation and director's contributions is £22,000.

The Company provided pension contributions for P.D. Atkinson during 2010 totalling £75,000 (2009 – £74,000).

(iii) Shareholdings

The Directors at 31 December 2010 and their interests in ordinary shares of Macfarlane Group PLC were as follows:

	Beneficial	2010 Option	Performance Share Plan Awards	Beneficial	2009 Option	Performance Share Plan Awards
A.S. Hunter	285,500	–	–	285,500	–	–
P.D. Atkinson	692,000	551,372	581,706	636,000	551,372	1,035,289
G. Bissett	293,500	–	–	293,500	–	–
J. Love	633,199	252,000	270,275	577,199	396,915	481,023
K.D. Mellor	120,000	–	–	120,000	–	–

P.D. Atkinson's beneficial holding includes 90,500 shares held by his children, who are classified as connected parties (2009 – 62,500). Messrs A.S. Hunter, G. Bissett and K.D. Mellor are non-executive directors and do not hold share options or performance share plan awards in the Company.

None of the Directors has any non-beneficial holdings in the Company.

No changes occurred in the Directors' holdings between 1 January 2011 and 2 March 2011.

Report on Directors' Remuneration

(iv) Directors' Share Options

The Directors at 31 December 2010 and their interests in ordinary shares of Macfarlane Group PLC were as follows:

	Lapsed	2010	Exercise Price	Note Below	Excercise Period
551,372	–	551,372	26p	4	29 October 2007 – 28 October 2014
551,372	–	551,372
144,915	(144,915)	–	59p	1	22 March 2003 – 21 March 2010
96,205	–	96,205	681 /2p	2	15 March 2004 – 14 March 2011
43,795	–	43,795	681 /2p	2	15 March 2004 – 14 March 2011
112,000	–	112,000	88p	3	5 April 2005 – 4 April 2012
396,915	(144,915)	252,000

1. Macfarlane Group (Clansman) P.L.C. 1995 Executive Share Option Scheme. The performance condition relating to these options required earnings per share growth of between 5% and 10% over a three-year period. This performance condition was not satisfied and the options lapsed on 21 March 2010.
1. Macfarlane Group PLC Company Share Option Plan 2000 and The Macfarlane Group PLC Executive Share Option Scheme 2000 respectively. The performance condition relating to these options required earnings per share growth of between 3% and 8% above RPI over a three-year period. This performance condition was not satisfied and therefore none of the options vested.
1. The Macfarlane Group PLC Executive Share Option Scheme 2000. The performance condition relating to these options required earnings per share growth of 3% above RPI over a three-year period. This performance condition was not satisfied and therefore none of the options vested.
1. The Macfarlane Group PLC Executive Share Option Scheme 2000. The performance condition relating to this option required Total Shareholder Return ('TSR') of between 10% and 15% per annum over three years from the date of grant for vesting between 40% and 100% of the value of the option respectively. No re-testing of the option was allowed. 551,372 of the maximum award of 961,538 shares vested on 29 October 2007. None of these options have been exercised at 2 March 2011.

(v) Performance Share Plan Awards

	Number of Shares 31 December 2009	Lapsed	Number of Shares 31 December 2010
P.D. Atkinson	1,035,289	(453,583)	581,706
J. Love	481,023	(210,748)	270,275

A conditional award to executive directors under the Performance Share Plan ('PSP') was made in June 2008 based on 50% of salary. The performance condition was based on an EPS target for 1/3 of the award. This requires EPS in 2010 to be 4.1p-4.6p for 25%-100% of this part of the award to vest working on a straight-line basis. The remaining 2/3 of the award is based on TSR, requiring annual growth in TSR to be 15%-20% for 25%-100% of the award to vest, again working on a straight-line basis from a base share price of 25.50p. No re-testing of the award is allowed.

A conditional award to executive directors under the Performance Share Plan ('PSP') was made in April 2007 based on 50% of salary. The performance condition was based on an EPS target for 1/3 of the award. This required EPS in 2009 to be 3.1p-3.6p for 25%-100% of this part of the award to vest working on a straight-line basis. The remaining 2/3 of the award was based on TSR, required annual growth in TSR to be 15%-20% for 25%-100% of the award to vest, again working on a straight-line basis from a base share price of 31.75p. No re-testing was allowed and the awards lapsed on 26 April 2010.

(vi) Share Price

The share price at 31 December 2010 was 30.5p, compared with 20.5p at 31 December 2009. The range of transaction prices for Macfarlane Group shares during 2010 was 16.9p to 32.8p for each ordinary share of 25p.

Unaudited Information

Remuneration Committee

The Company has established a Remuneration Committee, constituted in accordance with the recommendations of the Combined Code. The Remuneration Committee comprised two independent non-executive directors, Kevin Mellor (Chairman), Graeme Bissett and the Company Chairman, Archie Hunter, throughout 2010. None of the members of the Remuneration Committee during 2010 has any personal financial interests, other than as a shareholder, in the matters to be decided, conflicts of interests arising from cross-directorships or any day-to-day involvement in running the business.

The Remuneration Committee determines the individual remuneration packages of executive directors. The Committee makes recommendations to the Board on its proposals and has access to external professional advice. During 2010 the Committee used the services of Aon Hewitt to advise on certain aspects of directors' remuneration. Aon Hewitt also provides other actuarial and administration services to the Company and the Trustees of the final salary scheme.

The Remuneration Committee meets routinely three times each year with other meetings convened as considered necessary. Individual attendance details can be found within the Corporate Governance Report. The Committee's terms of reference are available on the Group web site (www.macfarlanegroup.net) and its responsibilities include:

(i) Setting, reviewing and recommending to the Board the Group's overall remuneration policy and strategy;
(ii) Setting, reviewing and approving individual remuneration packages for the executive directors and the Chairman;
(iii) Considering the provisions of the service agreements of the executive directors, in particular the terms of any notice periods;
(iv) Reviewing the salary structure and terms, conditions and benefits of employment for the Chief Executive and his direct reports;
(v) Approving long-term incentive plan awards and the performance conditions under which awards are granted;
(vi) Reviewing the design of all long-term incentive plans for approval by shareholders; and
(vii) Ensuring that all provisions regarding disclosure of remuneration and pensions, as set out in the Act and the Combined Code are fulfilled.

The Remuneration Committee Chairman will be available to answer questions on any aspect of remuneration policy at the Annual General Meeting in May 2011.

Remuneration Policy

It is a Group objective that it should attract and retain executives of high calibre and that the executives should be rewarded in a manner, which encourages value creation for shareholders. The Committee is consulted on board appointments and measures the performance of the executive directors and key members of senior management in consultation with the Chairman and Chief Executive as a basis for determining their annual remuneration packages. The Remuneration Committee determines executive remuneration and bonus scheme targets together with performance conditions under which long-term incentive plans operate.

The Company's policy is that the main elements in both executive directors' remuneration packages are a basic annual salary (with benefits comprising a company car or company car allowance and private medical insurance), an annual performance-related bonus and long-term incentives under the Performance Share Plan ('PSP') and pension arrangements. A significant proportion of the packages are performance linked. The Committee takes a balanced view of remuneration policy considering each element relative to the market. The position against the market was originally established by research and analysis against a comparator group of public companies of similar size and complexity to the Company. The intention is to ensure that the remuneration package is set at a competitive rate for comparable posts and that the achievement of clearly defined objectives will provide the opportunity to achieve attractive remuneration levels. The Remuneration Committee has concluded that the current policy remains appropriate.

Pay and employment conditions of the overall Group are taken into account when determining directors' remuneration. Any salary increase is expected to be consistent with that for the overall Group, which was the case in 2010.

The Board of Directors, having regard to the time commitment required and the level of fees in similar companies, determines remuneration for non-executive directors.

No director plays a part in any discussion about his own remuneration.

Main Components of Executive Directors' Remuneration Packages (i) Basic salary and benefits

The Remuneration Committee reviews salaries annually, or where an individual has a change of responsibility. When determining salary levels, individual performance, Group performance and pay practices elsewhere within the Group are taken into account. Pay increases for executive directors amounted to an increase of 2.0% for 2011.

(ii) Performance related bonus

Executive directors can earn incentive payments based on Group performance targets and individual performance targets. In setting the Group performance targets, the Committee takes account of the Board's expectation for the year and how these relate to external expectations. The maximum payment for 2010 was 50% of basic salary with 40% based on financial objectives and 10% based on non-financial objectives. Bonuses of £15,000 (2009 – £24,000) and £7,000 (2009 – £7,000) are due to P.D. Atkinson and J. Love respectively based on achievement of non-financial objectives. For 2011 the maximum payment will again be 50% of salary, 40% based on financial objectives and 10% based on non-financial objectives, with any bonus for achieving non-financial objectives only payable subject to achieving a minimum Group performance target.

(iii) Long-term incentives

The Remuneration Committee has responsibility for the share option schemes and long-term incentive plans in force.

A Performance Share Plan ('PSP') based on the following principles has operated from 1 January 2007 onwards:

A normal maximum award equivalent to 100% of salary each year;
A fixed 3 year performance period (with no re-testing); and
An incentive to drive both returns to shareholders and earnings growth with a performance condition based on both total shareholder return ('TSR') and on earnings per share ('EPS').

The Remuneration Committee will seek third party confirmation of the extent to which PSP targets are satisfied. It is the Committee's intention that an annual award will be considered and those eligible for an award will be kept under review. In each year the extent of awards is determined by availability of headroom available to make such awards. No award was made in 2009 or 2010.

(iv) Pension arrangements

The Group operates four types of pension scheme, one based on final pensionable salary, two based on defined contributions and a stakeholder pension plan. The final salary scheme was closed to new entrants during 2002. New employees of the Group are eligible to join one of the defined contribution schemes after a suitable qualifying period.

J. Love is an active member of the final salary scheme with retirement benefits based on pensionable earnings in the years prior to retirement, which is consistent with other members of the pension scheme. During 2010, the Company consulted with all active members of the final salary scheme and pensionable salaries were frozen from 30 April 2010. Bonuses for directors do not form part of pensionable earnings. Where the Group's pension schemes are restricted in respect of any executive director by reason of the scheme's specific cap, the Company may contribute to an alternative pension arrangement for the executive director and the Remuneration Committee keeps this under review.

During 2010 contributions to self-standing pension arrangements were provided for P.D. Atkinson in accordance with the terms of his service contract.

There have been no changes to either of the executive directors' pension entitlements during 2010, except as stated above. There are no unfunded pension commitments or similar arrangements for current or previous executive directors.

Report on Directors' Remuneration

Performance Graph

The following graph shows the Company's performance, measured by Total Shareholder Return, compared with the performance of the FTSE All-Share Index for Support Services, also measured by Total Shareholder Return. The Index for Support Services has been selected because it includes a range of companies, which the Remuneration Committee consider to be the best available comparison for the Company for this purpose.

Directors' Service Contracts

P.D. Atkinson and J. Love have service contracts dated 6 October 2003 and 11 October 1999 respectively, each with a standard notice period of one year. Both service contracts terminate on the individual attaining the age of 65.

The Committee considers the length of the notice periods to be in the best interests of the Company in maintaining the services of its key directors. Nevertheless, the Remuneration Committee also supports the principle of mitigation and phased payments relative to any settlement on the departure of an executive director and the Committee is authorised to take legal advice in respect of any settlements to be proposed.

Executive directors are entitled to accept appointments outside the Company provided the Board's permission is obtained, thus ensuring that the commitment does not conflict with their duties to the Company. The Board may require the fees from such appointments to be accounted for to the Company. Throughout 2010, P.D. Atkinson was a director of Speedy Hire plc. He is allowed to retain the emoluments from this position, which is based on a time commitment of 19 days per annum.

Neither the Chairman nor the two non-executive directors have a service contract; instead they hold letters of appointment for periods not exceeding three years, subject to review and re-election at the Annual General Meeting. Letters of appointment for Messrs A.S. Hunter, G. Bissett and K.D. Mellor are dated 1 May 2010, 5 May 2010 and 5 May 2010 respectively and they are due to be proposed for re-election, at the Annual General Meetings in 2013, 2013 and 2011 respectively. These letters contain a notice period of three months for either party except in the case of the Chairman where six months notice is required.

Details of Kevin Mellor, the director retiring by rotation at the forthcoming Annual General Meeting are set out in the Report of the Directors on page 16 and his letter of appointment will be available for inspection prior to the AGM on 10 May 2011.

Approval

This report was approved by the Board of Directors on 2 March 2011 and signed on its behalf by

K.D. Mellor

Chairman of the Remuneration Committee 2 March 2011

Corporate Governance

Introduction

The Company is committed to the principles of corporate governance contained in the Combined Code on Corporate Governance issued in 2008 ('the Combined Code') issued by the Financial Reporting Council ('FRC'). The Company's compliance is set out in the narrative statement on pages 21 to 23 and for directors' remuneration in the Report on Directors' Remuneration on pages 17 to 20.

Compliance

Throughout the year ended 31 December 2010, the Company has been in compliance with the Code provisions set out in Section 1 of the 2008 FRC Combined Code.

The Company's auditors, Deloitte LLP, are required to review whether the above statement reflects the Company's compliance with the nine provisions of the Combined Code specified for its review by the Listing Rules and to report if it does not reflect such compliance.

The Financial Reporting Council published the United Kingdom Corporate Governance Code in May 2010. This applies to all companies for financial years beginning on or after 29 June 2010. The year ended 31 December 2011 will be the first year that Macfarlane Group PLC will be required to comply with this code.

The Board

The Board currently comprises the Chairman, two independent non-executive directors and two executive directors. The names of the Directors, together with their biographical details, which illustrate their range of experience, are set out on page 14. Details of executive directors' service contracts are given in the Board Report on Directors' Remuneration and all notice periods are for one year.

The Board structure is in compliance with the Combined Code, which requires companies outside the FTSE 350 to have at least two independent non-executive directors. The Directors believe that the Board has an appropriate independent non-executive director complement with recent and relevant experience, which brings strong, independent judgement to the Board's deliberations.

Non-executive directors scrutinise performance in meeting agreed objectives and monitor the reporting of performance. They satisfy themselves as to the integrity of the financial information and that the financial controls and systems of risk management are robust and defensible. Non-executive directors are given access to independent professional advice at the Group's expense, subject to certain limits and procedures, when it is deemed necessary in order for them to carry out their responsibilities. No such advice was sought during the year.

Details of the Chairman's other commitments are included in his biography on page 14. The Board is satisfied that these do not interfere with the performance of his duties for the Group, which is based on a commitment of approximately 50 days per annum.

The Board considers both its non-executive directors, Graeme Bissett and Kevin Mellor, to be independent both in character and judgement. Neither non-executive director:

Has been an employee of the Group within the last five years;
Has, or has had within the last three years, a material business relationship with the Group;
Receives remuneration other than a director's fee;
Has close family ties with any of the Group's advisers, directors or senior employees;
Holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
Represents a significant shareholder; or
Has served on the Board for more than nine years.

The balance of the Board's skills and experience will be kept under review.

The Roles of the Chairman and Chief Executive

The division of responsibilities between the Chairman of the Board, Archie Hunter, and the Chief Executive, Peter Atkinson, is clearly defined and has been approved by the Board. The Chairman is responsible for the running of the Board, ensuring that all directors receive sufficient and relevant information on financial, business and corporate issues prior to meetings to allow all directors to bring independent judgement to bear on all issues. The Chairman facilitates the effective contribution of non-executive directors and ensures effective communication with shareholders. As Chief Executive, Peter Atkinson's responsibilities focus on managing the business and the implementation of the Group's strategy.

Senior Independent Director

The Board appointed Kevin Mellor as Senior Independent Director on 11 May 2004. Kevin is the director whom shareholders may contact if they feel their concerns are not being addressed and resolved through the existing mechanisms for investor communication.

Re-election of Directors

All directors will submit themselves for re-election by shareholders at least once in every three-year period. At the 2011 Annual General Meeting, Kevin D. Mellor falls due to retire by rotation and, being eligible, offers himself for re-election. The director's letter of appointment and all other directors' letters of appointment and service contracts will be available for shareholder review prior to the AGM on 10 May 2011.

Subject to the Company's Articles of Association, the Companies Acts and satisfactory performance evaluation, non-executive directors are appointed for an initial period of three years. Before the third and sixth anniversary of the non-executive directors' first appointment, the Chairman will discuss with the director whether it is appropriate for a further three-year term to be served.

Company Secretary

Andrew Cotton, the Company Secretary, is responsible for advising the Board through the Chairman on all matters relating to corporate governance. Under the direction of the Chairman, the Company Secretary's responsibilities include ensuring good information flows within the Board, its committees and between executive management and non-executive directors. The Company Secretary also facilitates induction and assists with professional development for the Board. All directors have access to the advice and services of the Company Secretary. The Articles of Association and the schedule of matters reserved for the Board provide that the appointment and removal of the Company Secretary is a matter for the Board as a whole.

Board Procedures

The Group is controlled through its Board of Directors. The Board's main roles are to set the Group's strategic objectives, guide and support management in achieving these objectives, create value and safeguard the interests of shareholders within the appropriate legal and regulatory framework. The Board meets at least nine times a year and individual attendance at those and the Board Committee meetings is set out in the table on the following page. In 2010, four Board meetings were held at operational locations to allow the Board to meet management teams and further develop their understanding of the Group. The Directors' Responsibilities Statement is set out on page 24.

The Board has a formal schedule of matters reserved for its approval. The specific matters reserved to the Board include setting the overall Group's strategy and approving an annual budget, reviewing management performance, approving acquisitions, divestments and major capital expenditure, monitoring returns on investment, reviewing the Group's systems of internal control and risk management and consideration of significant financing matters. The Board has delegated to the management responsibility for the development and recommendation of strategic plans for consideration by the Board, the implementation of the strategy and policies of the Group as determined by the Board, the delivery of the operating and financial plan, the approval of capital expenditure below Board authority levels and the development and implementation of risk management systems.

Regular reports and papers are circulated to the Directors in a timely manner in preparation for Board and Committee meetings. These papers are supplemented by information specifically requested by the Directors from time to time.

Corporate Governance

The Directors receive monthly management accounts and a monthly report from the Chief Executive, which together with other papers, enables them to scrutinise the Group and management performance against agreed objectives. At each meeting, the Board considers reports from the Chief Executive and the Finance Director.

Board and Committee Meetings

The number of regular Board meetings and Committee meetings attended by each director during 2010 was:

	Board	Audit Committee	Remuneration Committee	Nominations Committee
Archie Hunter
(Chairman)	9 (9)	3 (3)*	5 (5)	1 (1)
Peter Atkinson
(Chief Executive)	9 (9)	n/a	n/a	1 (1)*
John Love
(Finance Director)	9 (9)	n/a	n/a	n/a
Kevin Mellor
(Senior Independent
Director)	9 (9)	3 (3)	5 (5)	1 (1)
Graeme Bissett
(Non-Executive Director)	9 (9)	3 (3)	5 (5)	1 (1)

Figures in brackets indicate the maximum number of meetings in the period in which the individual was a Board or Committee member. * indicates that a director is attending but is not a member of the relevant Committee.

Where a director cannot attend a Board or Committee meeting, his comments on the papers to be considered at that meeting are relayed in advance to the relevant Chairman.

Professional Development

On appointment, Directors complete an induction programme designed to give them a thorough understanding of the Group and its activities. They receive information about the Group, the matters reserved for the Board, the terms of reference and membership of the Board Committees, and the latest financial information. This is supplemented with visits to key locations and meetings with and presentations from senior management.

Board Performance Evaluation

The Board has established a formal process, led by the Chairman, for the annual performance evaluation of the Board, its Committees and individual directors. All directors are made aware on appointment that their performance will be subject to regular evaluation.

The Board has completed a self-assessment questionnaire based on the 'Higgs' guidance contained within the Combined Code. This includes specific reference to the strategic objectives and performance of the Board and the performance and processes for all Board Committees. The results have been collated by the Company Secretary and reviewed by the Board to identify any areas for improvement and to confirm objectives for the year ahead. The Chairman then holds individual meetings with directors to review performance and set individual objectives.

The Chairman meets periodically with the non-executive directors without the executive directors present. Led by the Senior Independent Director, the non-executive directors meet annually without the presence of the Chairman to conduct a performance evaluation of the Chairman.

Relations with Shareholders

The Group maintains a corporate website (www.macfarlanegroup.net) containing a wide range of information of interest to institutional and private investors. Detailed reviews of the performance and financial position are included in the Business Review on pages 6 to 11 of this report. The Board uses this together with the Chairman's Statement on page 1, the Corporate Responsibility Report on pages 12 to 13 and the remainder of the Report of the Directors on pages 15 to 16 to present its assessment of the Company's position and prospects.

The Chairman maintains a regular dialogue with shareholders and gives feedback to the Board on issues raised. The Group has frequent discussions with institutional shareholders, including meetings led by the Chief Executive and the Finance Director, following the announcement of the annual financial results in March and the announcement of interim results in August. In addition, the Group responds to individual requests for discussions from shareholders.

The Board receives feedback on meetings with shareholders including broker feedback on meetings scheduled at the time of the preliminary announcement and the interim results. The Senior Independent Director is available to meet with shareholders if they have concerns with contact through the normal channels of Chairman, Chief Executive or Finance Director.

All directors attend the Annual General Meeting and shareholders are invited to ask questions during the meeting and to meet directors after the formal proceedings have ended. All shareholders have an opportunity to raise questions with members of the Board on matters relating to the Group's operations and performance at the meeting. Details of the resolutions to be proposed at the Annual General Meeting can be found in the proxy card accompanying the Annual Report and Accounts. In line with the requirements of the Combined Code, the results of proxy votes are disclosed at the Annual General Meeting and made available on the Group website and the Notice of Meeting is sent out more than 20 days in advance of the meeting.

Nominations Committee

The Nominations Committee currently comprises Archie Hunter (Chairman), Kevin Mellor, and Graeme Bissett. The Chief Executive, Peter Atkinson, attends meetings by invitation. The Nominations Committee's terms of reference can be found on the Group website (www.macfarlanegroup.net).

The Committee's responsibilities include reviewing the structure, size and composition of the Board and giving full consideration to succession planning for Directors and other senior executives. The Nominations Committee will continue to consider the mix of skills and experience that the Board requires and seek the appointment of directors to meet its assessment of what is required to ensure that the Board is effective in discharging its responsibilities.

The Committee met once during 2010 to consider proposing Archie Hunter and Graeme Bissett for re-election at the 2010 Annual General Meeting. Both were recommended for re-election and this was approved by shareholders at the 2010 AGM.

Following a Nominations Committee Meeting held on 25 February 2011, Kevin Mellor will present himself for re-election at the AGM on 10 May 2011. As Senior Independent Director Kevin continues to be effective and to demonstrate commitment to his role. The Board as it is currently constituted, is focused on the delivery of the strategy and in that Kevin Mellor plays a significant role.

Remuneration Committee

The Remuneration Committee comprises Kevin Mellor (Chairman) and Graeme Bissett, both independent non-executive directors and Archie Hunter, the Company Chairman. The Remuneration Committee met five times during 2010 and its terms of reference are available on the Group website (www.macfarlanegroup.net). The work carried out by the Remuneration Committee is described within the Report on Directors' Remuneration and is set out on pages 17 to 20.

Audit Committee

The Audit Committee comprises Graeme Bissett (Chairman) and Kevin Mellor, both of whom are independent non-executive directors. The Audit Committee Chairman, Graeme Bissett, has recent and relevant financial experience being a chartered accountant, with substantial experience in the accountancy profession and senior financial roles in industry. Kevin Mellor has a wide range of commercial experience, as evidenced in the biographical details on page 14. The Company Chairman is not a member of the Committee but is asked by the Committee Chairman to join meetings to give the Committee the benefit of his relevant experience. The Audit Committee met three times during 2010 and its agenda is linked to events in the Group's financial calendar.

The Committee meets privately with the external and internal auditors and executive directors are invited to attend meetings as required. The Committee's terms of reference are displayed on the Group website (www.macfarlanegroup.net) and its principal oversight responsibilities cover:

Internal control and risk management;
Internal audit;
External audit (including auditor independence); and
Financial reporting.

Under its terms of reference, the Audit Committee monitors the integrity of the Group's financial statements and any formal announcements relating to the Group's performance. The Committee is responsible for monitoring the effectiveness of the external audit process and making recommendations to the Board in relation to the appointment, re-appointment and remuneration of the external auditors. It is responsible for ensuring that an appropriate relationship between the Group and the external auditors is maintained, including reviewing non-audit services and fees.

The Committee reviews annually the Group's system of internal control and processes for evaluating and monitoring the risks facing the Group. The Committee reviews the effectiveness of the internal audit function and its terms of reference on an annual basis and recommends to the Board any changes required as a result of the review.

In 2010 the Audit Committee discharged its responsibilities by:

Reviewing the Group's draft financial statements and interim results statement prior to board approval and reviewing the external auditors' reports thereon;
Ensuring compliance with International Financial Reporting Standards;
Reviewing the output from the group-wide process used to identify, evaluate and mitigate risks;
Reviewing the effectiveness of the Group's internal controls and disclosures made in the annual report and financial statements on this matter;
Agreeing a programme of work for the Company's Internal Audit function;
Receiving reports from the Head of Internal Audit on the work undertaken by Internal Audit and management responses to proposals made in the audit reports issued by the function during the year;
Reviewing the external auditors' plan for the audit of the Group accounts which included confirmations of auditor independence and approval of the engagement letter;
Reviewing and approving the audit fee and keeping the level of non-audit fees paid to the Group's auditors under review; and
Recommending the re-appointment of the external auditors.

The Audit Committee is responsible for the development, implementation and monitoring of the Group's position on external audit. The Committee's terms of reference assign oversight responsibility for monitoring the independence, objectivity and compliance with ethical and regulatory requirements to the Audit Committee, and day to day responsibility to the Group Finance Director. The Audit Committee has ensured that the Board and external auditors have safeguards in place to prevent the compromise of the auditor's independence and objectivity. The external auditors have also reported to the Committee on the actions that they have taken to comply with professional and regulatory requirements and current best practice in order to maintain independence.

Audit Committee

The Committee has considered the likelihood of a withdrawal of the auditor from the market and noted that there are no contractual obligations to restrict the choice of external auditors. In accordance with best practice guidelines the audit partner is required to rotate off the audit engagement every five years. The audit partner rotated at the commencement of the 2007 interim review. The Committee has recommended to the Board that Deloitte LLP be proposed for reappointment by shareholders at the AGM on 10 May 2011.

The Audit Committee monitors regularly the non-audit services provided to the Group by its external auditors. It decided not to implement a formal policy but keeps all services provided by the external auditors under review so as to ensure the independence and objectivity of the external auditors, taking account of relevant professional and regulatory requirements. Details of the amounts paid to the external auditors during the year for audit and other services are set out in note 2 to the financial statements.

The Audit Committee also monitors the Group's arrangements by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting and other areas. In 2011 the existing policies will be strengthened with the introduction of a whistleblowing service to take calls from employees rather than only providing advice. Brief details are included on the Group website (www.macfarlanegroup. net). All concerns will continue to be investigated at the earliest opportunity and the employee's anonymity is preserved.

The Audit Committee Chairman will be available to answer questions on any aspect of the work of the Committee at the Annual General Meeting.

Risk Management and Internal Control

The Board is responsible for the Group's system of internal control and for reviewing its effectiveness. It is the role of management to implement the Board's policies on risk and control through the design and operation of appropriate internal control systems. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against material mis-statement or loss.

The Board confirms that an ongoing process for identifying, evaluating and managing the significant risks faced by the Group was in place in compliance with the guidance of the Turnbull Review Group. The process has been in place throughout the year under review and has continued up to the date of approval of the annual report and financial statements.

The Board regularly reviews the Group' system of internal control. The Board's monitoring covers all controls including financial, operational and compliance controls and risk management.

The key elements of the internal control process are:

Formal Board reporting on a monthly basis by the Chief Executive and Finance Director;
Formal Board approval of the annual budget;
In 2009, the internal audit function was brought in-house and a Head of Internal Audit appointed. Certain parts of the internal audit plan may be outsourced when it is considered that specific expertise is required. The Audit Committee reviews the annual plan proposed by Group management, receives copies of all reports and an update from the internal auditors on a six-monthly basis;
Monthly and annual financial control checklists submitted by each business unit;
Review by the Audit Committee of the conclusions of the Group's external auditors in their annual audit and interim review; and
A formal risk assessment process as set out below.

During the course of its review of the system of internal control, the Board has not identified nor been advised of any failings or weaknesses which it has determined to be significant. Therefore a confirmation in respect of the necessary actions has not been considered appropriate.

Each business has a risk register which is kept under review during regular review meetings within these businesses. The Board reviews the risk register quarterly so that it can maintain an overview of risks facing the business and ensure management have identified and implemented appropriate controls to address these risks, which are acceptable to the Board. The risk register is taken into account in setting the internal audit programme each year.

The Directors have continued to review the effectiveness of the Group's system of financial and non-financial controls.

Directors' Responsibilities Statement

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

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period.

In preparing the parent company financial statements, the directors are required to:

select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

In preparing the group financial statements, International Accounting Standard 1 requires that directors:

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

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

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility Statement

We confirm that to the best of our knowledge:

the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
the Business Review, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Peter D. Atkinson John Love Chief Executive Finance Director 2 March 2011 2 March 2011

Independent Auditors' Report to the Members of Macfarlane Group Plc

We have audited the financial statements of Macfarlane Group PLC for the year ended 31 December 2010 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated and parent company balance sheets, the consolidated cash flow statement, the summary of accounting policies, the summary of critical accounting judgements and key sources of estimation uncertainty and the related notes 1 to 42 together with the details of the principal operating subsidiaries on page 65. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the 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 Auditors

As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the Audit of the Financial Statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on Financial Statements

In our opinion:

the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2010 and of the group's profit for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the group financial statements, Article 4 of the IAS Regulation.

Separate Opinion in Relation to IFRSs as Issued by the IASB

As explained in the summary of accounting policies, the group, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB).

In our opinion the group financial statements comply with IFRSs as issued by the IASB.

Opinion on Other Matters Prescribed by the Companies Act 2006

In our opinion:

the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the information given in the Corporate Governance Statement set out on pages 21 to 23 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
certain disclosures of directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

the directors' statement, contained within the business review, in relation to going concern;
the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review; and
certain elements of the report to shareholders by the Board on directors' remuneration.

James Boyle CA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors Edinburgh, United Kingdom 2 March 2011

Consolidated Income Statement

For the year ended 31 December 2010

	Note	2010 Before Exceptional Items £000	2010 Exceptional Items £000 See note 1 (b)	2010 £000	2009 Before Exceptional Items £000	2009 Exceptional Items £000 See note 1 (b)	2009 £000
Continuing operations
Revenue Cost of sales	1	135,450 (93,510)	– –	135,450 (93,510)	123,596 (83,473)	– –	123,596 (83,473)
Gross profit Distribution costs Administrative expenses		41,940 (6,458) (30,964)	– – 846	41,940 (6,458) (30,118)	40,123 (5,890) (29,827)	– – (699)	40,123 (5,890) (30,526)
Operating profit Finance income Finance expense	1, 2 4 4	4,518 2,741 (3,908)	846 – –	5,364 2,741 (3,908)	4,406 2,331 (3,554)	(699) – –	3,707 2,331 (3,554)
Profit before tax Tax	5	3,351 (972)	846 (239)	4,197 (1,211)	3,183 (691)	(699) 177	2,484 (514)
Profit for the year from continuing operations		2,379	607	2,986	2,492	(522)	1,970
Discontinued operations Profit for the year from discontinued operations after tax	6	–	–	–	351	–	351
Profit for the year	7,21	2,379	607	2,986	2,843	(522)	2,321
Earnings per share	9
From continuing operations
Basic and diluted *		2.10p	0.53p	2.63p	2.21p	(0.46p)	1.75p
From continuing and discontinued operations
Basic and diluted *		2.10p	0.53p	2.63p	2.52p	(0.46p)	2.06p

* There is no dilution of earnings per share in either 2009 or 2010.

The accompanying notes are an integral part of this consolidated income statement.

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2010

	Note	2010 £000	2009 £000
Exchange differences on translation of foreign operations	21	(20)	(170)
Actuarial gains/(losses) on defined benefit pension schemes Tax on items taken directly to equity	28	1,540	(4,282)
Actuarial (gain)/loss for the year Long-term corporation tax rate change on pension deficit	18 18	(420) (174)	1,199 –
Other comprehensive income/(expense) for the year Profit for the year		926 2,986	(3,253) 2,321
Total comprehensive income/(expense) for the year		3,912	(932)

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

Consolidated Statement of Changes in Equity

For the year ended 31 December 2010

At 1 January 2009 28,755 70 (1,406) 506 (527) Profit for the year – – – – 2,321 Dividends 8 – – – – (1,688) Exchange differences on translation of foreign operations 21 – – – (170)	27,398 2,321 (1,688)




	– (170)
Actuarial loss on defined benefit
pension schemes 28 – – – – (4,282)	(4,282)
Tax on actuarial loss for the year 18 – – – – 1,199	1,199
Transfer of own shares to
pension scheme 21 – – 463 – (314)	149
Credit in respect of share-based
payments 26 – – – –	34 34
At 31 December 2009 28,755 70 (943) 336 (3,257)	24,961
Profit for the year – – – – 2,986	2,986
Dividends 8 – – – – (1,700)	(1,700)
Exchange differences on
translation of foreign operations 21 – – – (20)	– (20)
Actuarial gain on defined
benefit pension schemes 28 – – – – 1,540	1,540
Tax on actuarial loss for the year 18 – – – – (594)	(594)
Transfer of own shares to
pension scheme 21 – – 88 –	(52) 36
Credit in respect of share-based
payments 26 – – – –	26 26
At 31 December 2010 28,755 70 (855) 316 (1,051)	27,235

The accompanying notes are an integral part of this consolidated statement of changes in equity.

Consolidated Balance Sheet

At 31 December 2010

	Note	2010 £000	2009 £000
Non-current assets Goodwill Other intangible assets Property, plant and equipment Other receivables Deferred tax assets	10 (a) 10 (b) 11 14 18	24,149 2,257 8,280 856 4,672	24,199 2,561 8,904 856 6,555
Total non-current assets		40,214	43,075
Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets	13 14 17	9,080 34,514 138 43,732	8,882 30,107 536 39,525

Total assets		83,946	82,600
Current liabilities Trade and other payables	15	32,568	28,558
Current tax liabilities Provisions Obligations under finance leases Bank borrowings	19 16 17	– 291 296 6,408	1 – 272 6,908
Total current liabilities		39,563	35,739
Net current assets		4,169	3,786
Non-current liabilities Retirement benefit obligations Deferred tax liabilities Provisions Other creditors Obligations under finance leases	28 18 19 16	15,725 628 291 120 384	20,366 712 – 136 686
Total non-current liabilities		17,148	21,900
Total liabilities		56,711	57,639
Net assets		27,235	24,961
Equity Share capital Revaluation reserve Own shares Translation reserve Retained earnings Total equity	20 21 21 21 21	28,755 70 (855) 316 (1,051) 27,235	28,755 70 (943) 336 (3,257) 24,961

The accompanying notes are an integral part of this consolidated balance sheet.

The financial statements of Macfarlane Group PLC, Company registration number SC004221, were approved by the Board of Directors on 2 March 2011 and signed on its behalf by

Peter D. Atkinson John Love Chief Executive Finance Director

Consolidated Cash Flow Statement

For the year ended 31 December 2010

	Note	2010 £000	2009 £000
Net cash inflow from operating activities	24	2,407	1,744
Investing activities Interest received Disposal of subsidiary undertaking Acquisition of subsidiary undertakings Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment	22 23	47 32 – – (406)	6 1,916 (1,190) 119 (466)
Net cash (outflow)/inflow from investing activities		(327)	385
Financing activities Dividends paid Repayments of obligations under finance leases Decrease in bank overdrafts	8 24	(1,700) (278) (500)	(1,688) (336) (346)
Net cash used in financing activities		(2,478)	(2,370)
Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year	24	(398) 536	(241) 777
Cash and cash equivalents at end of year	17	138	536

The accompanying notes are an integral part of this consolidated cash flow statement.

Summary of accounting policies

The following accounting policies have been applied consistently for items which are considered to be material in relation to the financial statements.

(a) Basis of accounting

The financial statements for the year ended 31 December 2010 have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial statements have also been prepared in accordance with IFRSs as adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation.

The new International Financial Reporting Standards adopted during 2010 were IFRIC 17 'Distributions of Non-cash Assets to Owners' and IFRS 2 (amended) 'Group Cash-settled Share-based Payment Transactions', with no major impact on the disclosures and accounting treatment in these financial statements.

At the date of authorisation of these financial statements, the following Standards and Interpretations, which have not been applied in these financial statements were in issue but not yet effective.

IFRS 9 Financial Instruments
IAS 24 (amended) Related Party Disclosures
IAS 32 (amended) Classification of Rights Issues
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRIC 14 (amended) Prepayments of a Minimum Funding Requirement
Improvements to IFRSs (issued May 2010)

The Directors anticipate that the adoption of these Standards and Interpretations in future periods will not have a material impact on the financial statements of the Group.

The financial statements have been prepared on the historical cost basis.

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Directors, in their consideration of going concern, have reviewed the Group's future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience, with further details set out on page 11. For this reason they continue to adopt the going concern basis in preparing the financial statements.

(b) Basis of consolidation

The consolidated income statement and the consolidated balance sheet include the financial statements of the parent company and all its subsidiaries (all of which are wholly-owned) made up to the end of the financial year. Transactions between group companies are eliminated on consolidation.

On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the effective date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets is recognised as goodwill.

The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

The consolidated profit or loss on disposal of a subsidiary is the difference between the net proceeds of sale and the Group's share of the subsidiary's net assets together with the carrying value of any goodwill at the effective date of disposal.

(c) Non-current assets held for sale

Non-current assets classified as 'held for sale' are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as 'held for sale' if their carrying value will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. In these circumstances, the income statement is restated for comparative periods with the results of 'held for sale' businesses reclassified as discontinued operations.

(d) Goodwill and other intangible assets

Goodwill arising in a business combination is recognised as an asset and represents the excess of the cost of acquisition over the net fair values of the identifiable assets and liabilities of the acquired subsidiary at the date that control is acquired (the date of acquisition).

Goodwill is allocated to cash generating units ('CGUs') expected to benefit from the synergies of the combination, for the purpose of impairment testing. The carrying value of goodwill for each CGU is considered annually and also reviewed where management have reason to believe that a change in circumstances may have given rise to any impairment.

Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of subsidiary companies. These are primarily brand values, which are calculated on the Relief From Royalty method, and customer relationship values, which are calculated on the excess earnings method based on the net anticipated earnings stream. Brand values are amortised on a straight-line basis over five years and customer relationships are amortised on a straight-line basis over ten years.

(e) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided to third parties in the normal course of business, net of discounts, VAT and other sales related taxes. Revenue from the sale of goods and services is recognised when the Group has transferred the significant risks and rewards of ownership of the goods and services to the customer, the amount of revenue and the costs related thereto can be measured reliably and it is probable that the economic benefits of the transaction will flow to the Group.

Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably.

Investment income is recognised where it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Investment income is accrued on a time basis, by reference to the principal outstanding and at the effective rate of interest applicable.

Summary of accounting policies (continued)

(f) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognised as tangible assets of the Group at their fair value as determined at the inception of the lease. Depreciation is provided in accordance with the Group's accounting policy for the class of tangible asset concerned. Interest costs are charged over the lease term and future obligations, comprising the corresponding liability to the lessor, are included in the balance sheet as finance lease obligations.

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are initially recorded as a liability and then treated as a reduction in the rental expense on a straight-line basis over the lease term.

(g) Foreign currencies

The financial statements of each subsidiary are presented in the currency of the primary economic environment in which the business operates (its functional currency). For the purpose of the Group financial statements, the results and the financial position of each business are expressed in Sterling, being the Company's functional currency. Exchange differences arising on the settlement and retranslation of monetary items on an ongoing basis are included in the profit or loss for the period.

For the purposes of preparing the Group's financial statements, the assets and liabilities denominated in foreign currencies and financial statements of foreign subsidiaries are translated into Sterling at the rates of exchange prevailing on the balance sheet date. Exchange differences arising in the consolidated accounts on the retranslation at closing rates of the Group's net investments in foreign subsidiary companies and on foreign currency borrowings to the extent that they hedge the Group's investment in such operations are recorded as movements on the Group's translation reserve and reported in the statement of recognised income and expense. Such translation differences are recognised in the profit or loss in the period in which the foreign business is disposed.

(h) Retirement benefit costs

For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out triennially and updated at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur in the statement of comprehensive income and expense. Past service cost is recognised immediately to the extent that benefits are already vested and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.

Settlement gains represent the excess of the current value of the retirement obligation extinguished over the transfer value paid to extinguish the liability. Curtailment gains, which are recognised in the consolidated income statement, represent the reduction in value of the retirement obligations achieved following a change in benefits put forward by the Company but only after trustee approval to any necessary rule changes has been effected.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost and as reduced by the fair value of the scheme assets. The obligations are measured on an actuarial basis and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme's liabilities.

Payments made to defined contribution retirement benefit schemes are charged as an expense as they fall due.

(i) Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

The carrying value of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

Deferred tax assets and liabilities are not discounted.

(j) Property, plant and equipment

Property, plant and equipment are stated at cost.

No depreciation is provided on land. Depreciation is recognised so as to write off the cost or valuation of the assets, less their estimated residual values, by equal annual instalments over their estimated useful lives. The rates of depreciation use the straight-line method and vary between 2%-5% per annum on buildings and 7%-33% per annum on plant, vehicles and fittings.

Rates of depreciation are reviewed annually to ensure they remain relevant and residual values are reviewed once in each calendar year.

The gain or loss arising on the disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.

Summary of accounting policies (continued)

(k) Inventories

Inventories are consistently stated at the lower of cost and net realisable value. Such cost is determined by average cost and is stated less any provisions required for obsolescence. In the case of work in progress and finished goods, cost comprises direct materials, direct labour costs and attributable overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is based on the estimated selling price, less further costs expected to be incurred to completion and disposal.

(l) Financial instruments

Financial assets and financial liabilities are recognised in the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Financial assets

Financial assets, categorised as investments, are recognised and derecognised on a trade date where the purchase or sale of an investment is under a contract whose terms require the delivery of the investment within the timeframe established and are initially measured at fair value, net of transactions costs except for those financial assets classified at fair value through profit and loss which are initially measured at fair value.

Other financial assets comprise trade and other receivables that have fixed or determinable payments and are classified as trade and other receivables. The classification takes into account the nature and purpose of the financial assets and is determined at the time of initial recognition. Trade and other receivables are measured at amortised cost less impairment.

Impairment of financial assets

Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired when there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been impacted. For trade receivables the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying value of the allowance account are recognised in the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and on demand deposits, readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.

Financial liabilities and equity

Financial liabilities and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Financial liabilities

Financial liabilities comprise solely other financial liabilities under the terms of IFRS 7. Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost, with interest expense measured on an effective yield basis.

Derivative financial instruments

During both the current and prior year, the Group did not enter into any derivative financial instruments.

(m) Share-based payments

The Group issues equity-settled share-based payments to certain employees. Equity settled share-based payments are measured at fair value of the equity instruments at the date of the grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed as an employee benefits expense on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest.

The fair value is determined by the use of a binomial model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 26.

In preparing the Group financial statements in conformity with IFRSs, the Directors are required to make judgements, estimates and assumptions that impact the carrying amounts of revenues, expenses, assets and liabilities, that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

Certain of the Group's accounting policies have been identified as requiring critical accounting judgements or involving particularly complex or subjective estimates or assumptions, which in turn have the most significant effect on the amounts recognised in the financial statements. These are discussed below and should be read in conjunction with the summary of accounting policies.

Pension liabilities

A liability is recorded at each reporting date equivalent to the deficit on the Group's defined benefit pension scheme. This liability is determined in conjunction with advice from the Pension Scheme and the Group's actuarial advisers and can fluctuate significantly based on a number of assumptions, some of which are linked to market-related factors outwith the control of management. The main actuarial assumptions that can impact the valuation are:

(i) the discount rate used to discount liabilities, which is determined based on the yields on high-quality, fixed income investments of a similar duration to the scheme's liabilities. The discount rate used in 2010 is 5.50% (2009 – 5.75%). Pension liabilities reduce as the discount rate is increased and a movement of 0.1% in this rate impacts liabilities by £1.25 million;
(ii) long term assumptions for inflation;
(iii) actual returns on investments experienced compared to expected rates used in the previous valuation; and
(iv) the mortality rates used to value liabilities.

Details of the assumptions used to determine the pension scheme liability at 31 December 2010 are set out in note 28.

Impairment of goodwill

In certain circumstances and as a minimum at each balance sheet date, accounting standards require goodwill balances to be reviewed for impairment. When a review for impairment is conducted, the recoverable amount of each CGU is determined using value in use calculations with key assumptions relating to discount rates, growth rates and expected changes to selling prices and costs during the period. A discount rate of 7.9% is used which reflects current market assessments of the time value of money and the risks specific to both businesses in question. Growth rates and changes in selling prices and costs are based on expectations of future performance in the markets in which we operate. These are consistent with the Group's plans and forecasts for 2011 and extrapolate these projected cash flows for the following nine years based on an estimated growth rate of 2.5% per annum, and then a perpetuity. In 2010 this review resulted in no impairment charge to the goodwill balance of £24.1 million being recognised in the Group financial statements.

Valuation of trade receivables

Trade receivables recorded in the Group's balance sheet comprise a large number of individual balances. The Group reviews all trade receivables and provides against potentially irrecoverable older items on an ongoing basis throughout the year. The Group's senior executive management then reviews local judgements. Whilst every attempt is made to ensure that bad debt provisions for potential impairment are as accurate as possible, there remains a risk that the provisions may not match the level of debts, which ultimately prove uncollectible. At 31 December 2010, the Group retained a bad debt provision of £259,000, compared to £348,000 in 2009. Further details are set out in note 14.

Valuation of inventories

Inventories recorded in the Group's balance sheet comprise large numbers of comparatively small balances. The Group reviews stock levels and older stock balances and provides against older items on an ongoing basis throughout the year. The Group's senior executive management then reviews local judgements. Whilst every attempt is made to ensure that provisions made against inventories are as accurate as possible, there remains a risk that the provisions may not match the level of stock, which is ultimately unsaleable at full value. During 2010, the Group wrote off £582,000 of inventories through cost of sales compared to £359,000 in 2009. At 31 December 2010, the Group retained provisions against slow-moving and obsolete stocks of £521,000, compared to £584,000 in 2009.

Treatment of surplus properties and rental voids

The Group has a number of surplus properties, held under operating leases, where it seeks to obtain rental income from a sub-lease to cover its ongoing liabilities under the head lease. In the event that a property held under one of these leases becomes vacant due to the expiry of a sub-lease or the default of a tenant, every effort is made to attract a new tenant. The Company reassesses the provision made for residual lease commitments together with other outgoings for dilapidations, after taking into account existing sub-tenant arrangements and assumptions relating to later periods of vacancy and if there is likely to be a rental void for a period of time, then a provision is made at each balance sheet date to cover management's best estimate of the future cost of the likely void period.

1. Business and Geographical Segments

The Group adopted IFRS 8 'Operating Segments' with effect from 1 January 2009.

(a) Business Segments

The Group's principal business segment is Packaging Distribution, comprising the distribution of packaging materials and supply of storage and warehousing services in the UK. This constitutes over 80% of the turnover and profit of Group operations. As permitted by IFRS 8, the Group has elected to combine the remaining operations for the manufacture and supply of self-adhesive and resealable labels to a variety of FMCG customers in the UK & Europe and the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK into one segment headed Manufacturing Operations.

2009

External revenues from major products and services ²⁰¹⁰

	£000	£000
Packaging Distribution	109,093	98,989
Manufacture and supply of self-adhesive and resealable labels	16,920	16,271
Design, manufacture and assembly of timber, corrugated and foam-based packaging materials	9,437	8,336
External revenues from continuing operations	135,450	123,596

(b) Exceptional items 2010 Packaging Distribution £000 Manufacturing Operations £000 2010 Total £000 Freezing pensionable salaries of active members of pension scheme 498 702 1,200 Professional cost of the above exercise (27) (36) (63) 471 666 1,137 Provisions against rental voids and vacant properties (291) – (291) Net exceptional credit 2010 180 666 846

During 2010, the principal employer in the Group final salary pension scheme, Macfarlane Group PLC, made the decision to amend benefits for active members in the scheme by freezing pensionable salaries at the levels current at 30 April 2009. Following a consultation process with the active members affected, the change took effect on 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme and a curtailment gain of £1,200,000 was recorded as a result of this change.

The Group has a number of vacant and partly sub-let leasehold properties, with the majority of the head leases expiring before 2020. Following the previous year's restructuring, the Company has reclassified amounts previously held as short-term accruals into provisions. The Company has also reassessed the provision made for residual lease commitments together with other outgoings for dilapidations, after taking into account existing sub-tenant arrangements and assumptions relating to later periods of vacancy and as a result an additional provision of £291,000 was made during the year.

Exceptional items 2009

	Packaging	Manufacturing	2009
	Distribution	Operations	Total
	£000	£000	£000
Redundancy costs and costs to exit premises	(325)	(374)	(699)

1. Business and Geographical Segments (continued)

Total	Inter-segment	External	Segment
			Result
			£000

			4,604
			760
140,273	(4,823)	135,450

			5,364
			(1,167)
			4,197
			(1,211)
			2,986
	Revenue £000 109,253 31,020	Revenue £000 (160) (4,663)	Revenue £000 109,093 26,357

Inter-segment revenues are charged at prevailing market prices.

	Capital	Depreciation/	Segment	Segment	Net
	Additions	Amortisation	Assets	Liabilities	Assets
	£000	£000	£000	£000	£000
Group segment
Packaging Distribution	280	707	67,361	47,687	19,674
Manufacturing Operations	126	601	16,585	9,024	7,561
Continuing activities	406	1,308	83,946	56,711	27,235

(d) Segmental information 2009	Total Revenue	Inter-segment Revenue	External Revenue	Segment Result
Group segment Packaging Distribution Manufacturing Operations	£000 99,637 28,544	£000 (648) (3,937)	£000 98,989 24,607	£000 3,931 (224)
Continuing activities	128,181	(4,585)	123,596
Operating profit Net finance costs				3,707 (1,223)
Profit before tax Tax				2,484 (514)
Profit from continuing operations after tax Profit from discontinued operations after tax				1,970 351
Profit for the year				2,321

Inter-segment revenues are charged at prevailing market prices.

	Capital	Depreciation/	Segment	Segment	Net
	Additions	Amortisation	Assets	Liabilities	Assets
	£000	£000	£000	£000	£000
Group segment
Packaging Distribution	376	869	64,473	46,669	17,804
Manufacturing Operations	90	596	18,127	10,970	7,157

Continuing activities	466	1,465	82,600	57,639	24,961

Notes to the Financial Statements

For the year ended 31 December 2010

1. Business and Geographical Segments (continued)

(e) Geographical segments

The Group's operations are primarily located in the UK and Europe. Packaging Distribution's activities are primarily in the UK. Within the Manufacturing Operations, the Labels business operates in the UK and Europe and the Packaging Manufacturing business operates primarily in the UK.

	Continuing Operations 2010		Continuing Operations		2009
	UK £000	Europe £000	Total £000	UK £000	Europe £000	Total £000
Revenue
Total revenue	132,513	2,937	135,450	120,672	2,924	123,596
Result
Segment operating result	5,439	(75)	5,364	3,694	13	3,707
Non-current assets	37,665	2,549	40,214	40,463	2,612	43,075
Capital additions in year	396	10	406	457	9	466

(f) Information about major customers

No single customer accounts for more than 5% of the Group's external revenues.

2. Operating Profit
Operating profit has been arrived at after charging/(crediting):	2010 £000	2009 £000
Depreciation of property, plant and equipment Amortisation of intangible assets Gain on disposal of property, plant and equipment	1,004 304 –	1,155 310 (51)
Staff costs (see note 3) Impairment loss recognised on trade receivables Cost of inventories recognised as an expense	21,681 188 89,942	20,474 236 80,451
Write-down of inventories recognised as an expense Net foreign exchange losses Auditors' remuneration	582 3	359 32
Audit services Non-audit services	134 39	143 44
Auditors' remuneration: A detailed analysis of auditors' remuneration is provided below:	2010 £000	2009 £000
Fees payable to the Company's auditor for the audit of the Company's annual accounts Fees payable to the Company's auditor and its associates for other services:	50	50
The audit of the Company's subsidiaries, pursuant to legislation	84	93
Total audit fees	134	143
Review of half-year statements Tax services Fees payable in respect of the Macfarlane Group PLC pension schemes	17 18 4	17 23 4
Total non-audit fees	39	44
Total auditors' remuneration	173	187

3. Staff Costs

The average monthly number of employees was:	2010 No.	2009 No.
Production	184	157
Sales and distribution Administration	367 153	390 162
	704	709
The costs incurred in respect of these employees were:	2010 £000	2009 £000
Wages and salaries	19,244	18,226
Social security costs Other pension costs	1,824 613	1,701 547
	21,681	20,474
4. Net Finance Expense	2010 £000	2009 £000
Interest on bank overdrafts Interest on obligations under finance leases Interest cost of pension scheme liabilities	(415) (64) (3,429)	(260) (53) (3,241)
Total finance expense	(3,908)	(3,554)
Expected return on pension scheme assets Investment income	2,694 47	2,325 6
Total finance income	2,741	2,331
Net finance expense	(1,167)	(1,223)
5. Tax	2010	2009
Current tax	£000	£000
United Kingdom corporation tax at 28% (2009 – 28%)	(2)	–

Foreign tax	6	32
Adjustment in respect of prior periods	–	(81)
Current tax charge/(credit)	4	(49)
Deferred taxation charge (see note 18)	1,207	563
Total tax charge	1,211	514

The standard rate of tax for the year, based on the UK average rate of corporation tax, is 28% (2009 – 28%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The actual tax charge for the current and previous year varies from 28% (2009 – 28%) of the results as set out in the income statement for the reasons set out in the following reconciliation:

	2010 £000	2009 £000
Profit before tax	4,197	2,484
Tax on profit at 28% (2009 – 28%)	1,175	696
Factors affecting tax charge for the year: Depreciation in excess of capital allowances Other timing differences Utilisation of tax losses not previously recognised Difference on overseas tax rates Adjustment in respect of prior periods	53 (9) – (8) –	(34) 78 (151) 6 (81)
Tax charge for the year	1,211	514

Notes to the Financial Statements

For the year ended 31 December 2010

6. Discontinued Operations	2010 £000	2009 £000
Profit on disposal of discontinued operations (see note 22)	–	351
Profit after tax from discontinued operations	–	351
Basic earnings per share	–	0.31p
Diluted earnings per share	–	0.31p

During 2009, the Group reached final settlements in respect of certain remaining sums due and obligations relating to previous years' disposals, resulting in a credit of £351,000 in respect of discontinued operations.

7. Profit for the Year

The Company has taken advantage of Section 408 of the Companies Act 2006 and consequently a separate profit and loss account for the parent company is not presented as part of these financial statements. The Company's profit for the year is disclosed in note 37 to these financial statements.

8. Dividends	2010 £000	2009 £000
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2009 of 1.00p per share (2009 – 1.00p per share) Interim dividend for the year ended 31 December 2010 of 0.50p per share (2009 – 0.50p per share)	1,133 567	1,126 562
	1,700	1,688

Dividends are not payable on own shares held in the Employee Share Ownership Trust detailed in note 21.

In addition to the amounts shown above, a proposed dividend of 1.05p per share will be paid on 9 June 2011 to those shareholders on the register at 13 May 2011 and is subject to approval by shareholders at the Annual General Meeting in May 2011. This has not been included as a liability in these financial statements.

9. Earnings Per Share

From continuing and discontinued operations

The calculation of the basic and diluted earnings per share is based on the following data:
Earnings	2010 £000	2009 £000
Profit for the year from continuing and discontinued operations Less: Profit for the year from discontinued operations	2,986 –	2,321 (351)
Profit for the year from continuing operations	2,986	1,970
Number of shares in issue for the purposes of calculating basic and diluted earnings per share	2010 Number of Shares '000	2009 Number of Shares '000
Weighted average number of ordinary shares in issue Weighted average number of Own Shares in Employee Share Ownership Trust	115,019 (1,646)	115,019 (2,354)
Weighted average number of shares in issue for the purposes of calculating basic earnings per share Effect of dilutive potential ordinary shares due to share options	113,373 –	112,665 –
Weighted average number of shares in issue for the purposes of calculating diluted earnings per share	113,373	112,665

10. Goodwill and Other Intangible Assets

(a) Goodwill

	Packaging Distribution £000	Manufacturing Operations £000	Total £000
Cost
At 1 January 2009 Adjustments to prior year acquisition of subsidiaries (see note 23)	23,040 (200)	1,359 –	24,399 (200)
At 1 January 2010 Adjustments to prior year acquisition of subsidiaries (see note 23)	22,840 (50)	1,359 –	24,199 (50)
At 31 December 20101	22,790	1,359	24,149
Carrying amount
At 31 December 2010	22,790	1,359	24,149
At 31 December 2009	22,840	1,359	24,199

Goodwill on acquisition is allocated to the CGUs expected to benefit from the business combination. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. Packaging Distribution is treated as one CGU for the purposes of impairment testing. There are two separate CGUs within Manufacturing Operations.

The recoverable amount of each CGU is determined using 'value in use' calculations with key assumptions relating to discount rates, growth rates and expected changes to selling prices and costs during the period. The discount rate of 7.9% is used which reflects current market assessments of the time value of money and the risks specific to the businesses in question. Growth rates and changes in selling prices and costs are based on our expectations of future performance in the markets in which we operate. These are consistent with the Group's plans and forecasts for 2011 and extrapolate cash flows for the following nine years, reflecting the long-term nature of the businesses, based on an estimated growth rate of 2.5% per annum and a perpetuity. The Group has conducted sensitivity analyses on the impairment calculations and the long-term growth rate would have to reduce by 2.0% and the discount rate would also have to increase by 2.0% before there was any impairment of the goodwill values shown.

(b) Other Intangible Assets	Brand Values £000	Customer Relationships £000	Total £000
Cost at fair value
At 1 January 2009, 1 January 2010 and 31 December 2010	130	2,843	2,973
Amortisation
At 1 January 2009	15	87	102
Charge for year	26	284	310
At 1 January 2010	41	371	412
Charge for year	26	278	304
At 31 December 2010	67	649	716
Carrying amount
At 31 December 2010	63	2,194	2,257
At 31 December 2009	89	2,472	2,561

Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of subsidiary companies in the Packaging Distribution segment in previous years. These are brand values, which are calculated on the 'Relief From Royalty' method and a valuation of customer relationships, which are calculated on the excess earnings method, based on the net anticipated earnings stream. The brand values are calculated on royalty rates of 0.25%, consistent with an assessment of what would be charged in a typical franchise agreement. The valuation of customer relationships is calculated using our best estimates of customer attrition rate, and returns, based on assessments of performance levels in the markets in which we operate. Brand values and customer relationships are amortised on a straight-line basis over five years and ten years respectively.

Notes to the Financial Statements

For the year ended 31 December 2010

11. Property, Plant & Equipment

Land & Buildings £000	Vehicles & Fittings £000	Total £000
7,180 16 (108) –	28,359 450 (171) (1,208)	35,539 466 (279) (1,208)
7,088 8 (34) –	27,430 398 29 (38)	34,518 406 (5) (38)
7,062	27,819	34,881
2,418 196 (12) –	23,350 959 (157) (1,140)	25,768 1,155 (169) (1,140)
2,602 184 (5) –	23,012 820 26 (38)	25,614 1,004 21 (38)
2,781	23,820	26,601

4,281	3,999	8,280
4,486	4,418	8,904
		Plant,

The carrying value of £8,280,000 (2009 – £8,904,000) includes £1,062,000 (2009 – £1,169,000) of assets held under finance leases. The depreciation charge in respect of these assets is £101,000 (2009 – £129,000).

Land & buildings at net book value comprise:	2010 £000	2009 £000
Freeholds Long leaseholds Short leaseholds	1,751 2,519 11	1,792 2,676 18
	4,281	4,486

12. Subsidiary Companies

A list of principal operating subsidiaries, including names and countries of incorporation is given on page 65.

13. Inventories	2010 £000	2009 £000
Raw materials and consumables Work in progress Finished goods and goods for resale	593 157 8,330	919 229 7,734
	9,080	8,882

Allowances for obsolescence are estimated by the Group's management based on prior experience and their assessment of the current economic environment as set out in Critical Accounting Judgements on page 33.

14. Trade and Other Receivables	2010 £000	2009 £000
Due within one year Trade receivables for the sale of goods and services Allowance for doubtful receivables	30,305 (259)	25,637 (348)
Other receivables Prepayments and accrued income	30,046 1,912 2,556	25,289 1,670 3,148
	34,514	30,107
Due after more than one year Prepayments and accrued income	856	856

Trade receivables

Trade receivables are measured at amortised cost.

The Group's credit risk is primarily attributable to its trade receivables. The average credit period taken on sales of goods is 61 days (2009 – 61 days). No interest is charged on overdue receivables. The Group has provided for trade and other receivables based on estimated irrecoverable amounts, based on prior default experience and an assessment of the current economic environment.

Before accepting any new customer, the Group uses external credit scoring systems to assess the potential customer's credit quality and uses this to help define credit limits by customer. Limits and scoring are attributed to major customers, with receivables over £50,000 reviewed twice per year. Of the trade receivables balance at 31 December 2010, there are no customers with a balance in excess of 5% of the total balance (2009 – one customer had a balance representing 6.2% of the total balance of trade receivables).

Included in the Group's trade receivable balance are debtors with a carrying amount of £11,165,000 (2009 – £9,223,000) which are past due at the reporting date. The Group has not provided for these amounts as there has not been a significant change in the customers' credit quality and the Group believes that the amounts are still recoverable. The Group does not hold any collateral over these balances. The weighted average overdue age of these trade receivables is 23 days (2009 – 23 days).

	2010	2009
	£000	£000
Ageing of past due but not impaired receivables
30-60 days	6,388	5,189
60-90 days	3,498	3,338
Over 90 days	1,279	696
	11,165	9,223

The amounts presented in the balance sheet are net of allowances for doubtful receivables of £259,000 (2009 – £348,000), estimated by the Group's management based on prior experience and their assessment of the current economic environment.

	2010	2009
	£000	£000
Movement in the allowance for doubtful receivables
At 1 January	348	492
Impairment losses recognised	188	236
Amounts written off as uncollectible	(277)	(380)
At 31 December	259	348

All impaired receivables at 31 December 2009 and 2010 are in respect of receivables past due by over 90 days.

The Directors consider that the carrying amount of the trade and other receivables approximate to their fair value.

15. Trade and Other Payables	2010 £000	2009 £000
Due within one year
Trade payables	26,296	23,139
Other taxation and social security	1,822	1,375
Other creditors	128	180
Accruals and deferred income	4,322	3,864
	32,568	28,558

Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. No interest is charged on trade payables. The Directors consider that the carrying amounts for trade and other payables approximate to their fair value.

16. Obligations Under Finance Leases	2010 £000	2009 £000
Amounts payable under finance leases Due within one year Due in the second to fifth years inclusive	296 384	272 686
Present value of finance lease obligations Due for settlement within 12 months (shown under current liabilities)	680 (296)	958 (272)
Due for settlement after more than 12 months (shown as non-current liabilities)	384	686

The average lease term is five years and the average effective borrowing rate was 6.54% (2009 – 7.70%). Interest rates are fixed at the contract date. All lease obligations are on a fixed repayment basis. Lease obligations are denominated in Sterling.

The Directors consider that the carrying amounts for the finance lease obligations are approximate to their fair value. The finance leases are secured over the assets to which the leases relate.

17. Financial Instruments

There has been no significant change to the Group's exposure to market risks during 2010. The main risks arising are interest rate risk, liquidity risk, credit risk and currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of 2010.

Interest rate risk

The Group is exposed to interest rate risk as entities in the Group borrow funds at floating interest rates. The sensitivity analysis below has been determined based on the exposure to interest rates at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. At the reporting date if the interest rates had been 50 basis points higher and all other variables held constant the Group's profit before tax would have decreased by £49,000 (2009 – £42,000).

Liquidity risk

The Group's policy with regard to liquidity remains ensuring adequate access to funds by maintaining appropriate levels of committed short-term overdraft facilities, which are then reviewed on a regular basis. The principal Group borrowing facility of £12,000,000 is in place for the period to 29 February 2012. The maturity profile of debt outstanding at 31 December 2010 is set out in note 16 and this note to the financial statements.

Credit risk

The Group's exposure to credit risk is managed by dealing only with banks and financial institutions with good credit ratings and by applying considerable rigour in managing trade receivables. The Group's principal credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of the current economic environment.

Currency risk

The Group has two overseas subsidiaries, one operating in Ireland and the other operating in Sweden. Revenues and expenses are denominated exclusively in Euros and Swedish Krone respectively. As a result, movements in the Euro and Swedish Krone to Sterling exchange rates could affect the Group's Sterling balance sheet. The Group's policy during 2010 has been to review the need to hedge exposures on a monthly basis and it was not deemed necessary to cover any currency exposures by the use of financial instruments. For 2011 onwards the Group's policy will continue to be to review the need to hedge exposures on a monthly basis.

The carrying amount of the Group's foreign currency denominated monetary assets and monetary liabilities at the reporting date is as follows:

	Assets	Assets	Liabilities	Liabilities
	2010	2009	2010	2009
	£000	£000	£000	£000
Euros	2,078	2,163	262	342
Swedish Krone	383	438	135	120
	2,461	2,601	397	462

The Sterling value of the Group's foreign currency denominated profits/(losses) before tax are as follow:

	2010 £000	2009 £000
Euros Swedish Krone	52 (111)	(4) 32
	(59)	28

17. Financial Instruments (continued)

Accordingly the following table details the Group's sensitivity to a 5% change in Sterling against the respective foreign currencies. The sensitivity of the Group's exposure to foreign currency risk is determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. Result

	2010 £000	Result 2009 £000	Other Equity 2010 £000	Other Equity 2009 £000
Euros	3	–	91	91
Swedish Krone	(6)	2	12	16
	(3)	2	103	107

The numerical disclosures in this note deal with financial assets and financial liabilities.

Cash and cash equivalents	2010	2009
Currency	£000	£000
Sterling	19	365
Euros	106	164
Swedish Krone	13	7
Cash and cash equivalents	138	536
Bank overdrafts
Sterling	6,408	6,908
Bank overdrafts	6,408	6,908
Net bank indebtedness	6,270	6,372

Cash and cash equivalents as set out above comprise cash at bank and other short-term highly liquid investments with maturity of three months or less. All bank overdrafts shown above are repayable on demand. The Group had no bank loans in either 2010 or 2009. The Company and certain UK subsidiaries have given inter-company guarantees to secure their respective overdrafts. The overall credit lines for all borrowing facilities total £12,000,000 (2009 – £12,500,000).

Interest rates

All Group deposits and borrowings are held at floating rates of interest. The average effective interest rate on bank overdrafts approximates to 4.21% (2009 – 3.10%) per annum.

Fair value of financial instruments

Current assets and liabilities are all held at floating rates. The fair values of cash and cash equivalents and bank overdrafts at 31 December 2010 all materially equate to book values.

Borrowing facilities

The Group has various committed undrawn overdraft facilities. The facilities available at 31 December 2010 in respect of which all conditions precedent had been met and which expire within one year were as follows: ²⁰¹⁰

	£000	2009 £000
Drawn down Undrawn	6,408 6,092	6,908 5,592
	12,500	12,500
The Group's borrowing profile is as follows:	2010 £000	2009 £000
Unsecured – at amortised cost Current bank overdrafts Secured – at amortised cost	6,408	6,908
Current finance lease liabilities Current borrowings	296 6,704	272 7,180
Secured – at amortised cost Non-current finance lease liabilities	384	686
Total borrowings	7,088	7,866

The principal Group borrowing facility of £12,000,000 is in place for the period to 29 February 2012. The Group is currently in compliance with all conditions in relation to these borrowing facilities.

Notes to the Financial Statements

For the year ended 31 December 2010

17. Financial Instruments (continued)

Gearing ratio

Net debt to equity ratio	26%	32%
Equity	27,235	24,961
Total borrowings (as defined above)	7,088	7,866
The gearing ratio at the year end is as follows:	2010 £000	2009 £000

18. Deferred Tax Asset

	Corporation Tax Losses £000	Accelerated Tax Depreciation £000	Other Intangible Assets £000	Retirement Benefit Obligations £000	Total £000
At 1 January 2009	1,225	(84)	(832)	4,894	5,203
(Charged)/credited in income statement	(325)	33	120	(391)	(563)
Credited in other comprehensive income Deferred tax on actuarial loss	–	–	–	1,199	1,199
Rolled over and held over gains	1,322	(1,322)	–	–	–
Exchange differences	–	4	–	–	4
At 1 January 2010	2,222	(1,369)	(712)	5,702	5,843
(Charged)/credited in income statement (Charged) in other comprehensive income	(469)	40	84	(862)	(1,207)
Deferred tax on actuarial gain	–	–	–	(420)	(420)
Long-term corporation tax rate change	–	–	–	(174)	(174)
Exchange differences	–	2	–	–	2
At 31 December 2010	1,753	(1,327)	(628)	4,246	4,044
2010
Deferred tax asset
Due outwith one year	1,753	(1,327)	–	4,246	4,672
Deferred tax liabilities Due outwith one year	–	–	(628)	–	(628)
	1,753	(1,327)	(628)	4,246	4,044
2009
Deferred tax asset
Due outwith one year	900	(47)	–	5,702	6,555
Deferred tax liabilities Due outwith one year	–	–	(712)	–	(712)
	900	(47)	(712)	5,702	5,843

The Finance Act 2010, which provides for a reduction in the main rate of corporation tax from 28% to 27% effective from 1 April 2011, was substantively enacted on 21 July. As it was substantively enacted at the balance sheet date, the rate reduction is reflected within the financial statements. The impact of the rate reduction, which can be seen in the table above is a reduction in the UK deferred tax asset at 31 December 2010 of £174,000. The Government has also indicated that it intends to enact future reductions in the main tax rate of 1% each year down to 24% by 1 April 2014. The future 1% main tax rate reductions are expected to have a similar impact on our financial statements as outlined above, however the actual impact will be dependent on our deferred tax position at that time.

Deferred tax of £1.3 million (2009 – £1.3 million) in respect of gains realised in previous years that have been rolled over into the acquisition cost of replacement assets or held over and the corresponding capital and trading losses to offset these gains are now reflected in the above note.

Deferred tax has not been provided on revaluations of fixed assets. This tax will only become payable if the assets are sold and rollover relief is not obtained. The estimated tax that would become payable in these circumstances is £19,000 (2009 – £21,000).

Deferred tax has not been provided in respect of earnings retained overseas as there is no intention to repatriate these profits in the foreseeable future. The estimated tax that would become payable if the profits were repatriated is £62,000 (2009 – £85,000).

19. Provisions	2010 £000	2009 £000
At 1 January	–	–
Reclassified from accrued charges	291	–
Provided in the year	291	–
At 31 December	582	–
Due within one year – current liabilities	291	–
Due between two and five years – non-current liabilities	291	–
	582	–

20. Share Capital	Number of 25p Shares	2010 £000	2009 £000
Authorised	200,000,000	50,000	50,000
Allotted, issued and fully paid: At 1 January and 31 December	115,019,000	28,755	28,755

There have been no movements in share capital during the year.

The Company has one class of ordinary shares, which carry no right to fixed income. Each ordinary share carries one vote in any General Meeting of the Company.

21. Reserves

	Revaluation Reserve £000	Own Shares £000	Translation Reserve £000	Retained Earnings £000	Total £000
Balance at 1 January 2009	70	(1,406)	506	(527)	(1,357)
Disposal of own shares	–	463	–	(314)	149
Exchange difference on retranslation of overseas operations at year end	–	–	(170)	–	(170)
Profit for the year	–	–	–	2,321	2,321
Dividends paid (see note 8)	–	–	–	(1,688)	(1,688)
Actuarial loss in pension scheme taken direct to equity	–	–	–	(4,282)	(4,282)
Deferred tax on actuarial loss	–	–	–	1,199	1,199
Credit for share-based payments (see note 26)	–	–	–	34	34
Balance at 1 January 2010	70	(943)	336	(3,257)	(3,794)
Disposal of own shares	–	88	–	(52)	36
Exchange difference on retranslation of overseas operations at year end	–	–	(20)	–	(20)
Profit for the year	–	–	–	2,986	2,986
Dividends paid (see note 8)	–	–	–	(1,700)	(1,700)
Actuarial gain in pension scheme taken direct to equity	–	–	–	1,540	1,540
Deferred tax on actuarial gain	–	–	–	(594)	(594)
Credit for share-based payments (see note 26)	–	–	–	26	26
Balance at 31 December 2010	70	(855)	316	(1,051)	(1,520)

At 31 December 2010, the Company's Employee Share Ownership Trust ('ESOT') held 1,516,372 (2009 – 1,671,372) ordinary shares in Macfarlane Group PLC with a market value of £462,000 (2009 – £343,000) against the future exercise of share options. The ESOT has waived its right to receive dividends on these shares.

During the year the Company transferred 155,000 (2009 – 819,506) ordinary shares, held as own shares, to the Macfarlane Group PLC Pension & Life Assurance Scheme (1974). Details of the shares held by the pension scheme are set out in note 28.

Exchange differences arising in the consolidated accounts on the retranslation at closing rates of the Group's net investments in foreign subsidiary companies are recorded as movements on the Group's translation reserve. The translation reserve at 31 December 2010 relates to continuing operations.

Notes to the Financial Statements

For the year ended 31 December 2010

22. Disposal of Subsidiary Undertakings	2010 £000	2009 £000
Release of provisions on conclusion of previous years' disposals	–	351
Total profit on disposal	–	351
Total consideration	–	351
Satisfied by: Cash Deferred consideration	32 (32)	1,916 (1,565)
Total consideration	–	351

The expected retention monies of £32,000 relating to previous years' disposals were received in 2010.

23. Acquisition of Subsidiary Undertakings	2010 £000	2009 £000
Fair value of net assets acquired Goodwill arising on acquisition (see note 10 (a))	(50)	(200)
Total consideration	(50)	(200)
Satisfied by: Cash Deferred consideration	– 50	(1,190) 1,390
Total consideration	50	200
Net cash outflow arising on acquisition Cash consideration	–	(1,190)
Net cash outflow	–	(1,190)

On 3 October 2008, the Group acquired 100% of the issued share capital of Allpoint Packaging Limited, for a consideration assessed at £4.3 million at 31 December 2008. £4.0 million of the consideration was paid in 2008 and 2009. The deferred consideration originally assessed on acquisition was reduced by £0.2 million in 2009 with a corresponding reduction in goodwill.

The maximum additional consideration payable at 31 December 2009 was £0.1 million, however, this did not become payable. As a result the deferred consideration assessed on acquisition was reduced by the sum shown above in 2010, with a corresponding reduction in goodwill. The business is accounted for in the Packaging Distribution segment.

24. Notes to the Cash Flow Statement	2010 £000	2009 £000
Operating profit	5,364	3,707
Adjustments for: Amortisation of intangible assets Depreciation of property, plant and equipment Gain on disposal of property, plant and equipment Exceptional credit relating to pension scheme	304 1,004 – (1,200)	310 1,155 (51) –
Operating cash flows before movements in working capital	5,472	5,121
Increase in inventories Increase in receivables Increase in payables Pension scheme payments	(198) (4,449) 4,711 (2,636)	(418) (481) 584 (2,309)
Cash generated by operations Income taxes received/(paid) Interest paid	2,900 5 (498)	2,497 (423) (330)
Net cash inflow from operating activities	2,407	1,744

Cash inflows in respect of the discontinued operations for operating activities amounted to £Nil for 2010 (2009 – £Nil) cash inflows in respect of investing activities totalled £32,000 (2009 – cash inflows £1,916,000) and cash outflows from financing activities amounted to £Nil (2009 – £Nil).

24. Notes to the Cash Flow Statement (continued) ²⁰¹⁰

	£000	2009 £000
Decrease in cash and cash equivalents in the year Decrease in bank overdrafts New finance leases in the year Repayment of obligations under finance leases	(398) 500 – 278	(241) 346 (564) 336
Movement in net debt in the year Opening net debt	380 (7,330)	(123) (7,207)
Closing net debt	(6,950)	(7,330)
Net debt comprises: Cash and cash equivalents Bank overdrafts and loans	138 (6,408)	536 (6,908)
Net bank debt Obligations under finance leases Due within one year Due outwith one year	(6,270) (296) (384)	(6,372) (272) (686)
	(6,950)	(7,330)

Cash and cash equivalents, which are presented as a single class of assets on the face of the balance sheet, comprise cash at bank and other short-term highly liquid investments with maturity of three months or less.

25. Financial Commitments

During the year the Group made minimum lease payments under non-cancellable operating leases as follows:

	Land & Buildings 2010 £000	Other 2010 £000	Land & Buildings 2009 £000	Other 2009 £000
Charge for the year Recoveries against property leases	4,602 (881)	2,131 –	4,394 (893)	2,219 –
Net charge for the year	3,721	2,131	3,501	2,219

At the balance sheet date the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due for payment by the Group as follows:

	Land &		Land &
	Buildings	Other	Buildings	Other
	2010	2010	2009	2009
	£000	£000	£000	£000
Within one year	5,085	1,333	4,959	1,771
Within two to five years	18,411	1,189	17,429	1,704
After five years	19,730	–	22,579	–
	43,226	2,522	44,967	3,475

The majority of the 32 leases of land and buildings summarised above are subject to rent reviews. 10 of these leases are subject to sub-let arrangements or assignations with third parties to reduce the property cost to Macfarlane Group. At the balance sheet date there were outstanding commitments for future annual minimum lease payments under non-cancellable operating leases which fall due for payment to the Group as follows:

	Land & Buildings 2010 £000	Land & Buildings 2009 £000
Within one year Within two to five years After five years	875 2,627 2,153	875 2,945 2,627
	5,655	6,447

Contractual commitments for capital expenditure for which no provision has been made in the accounts amounted to £Nil (2009 – £Nil).

26. Share-based Payments

Equity-settled share option schemes

The Group share option plans provide for a grant price, which equates to the closing quoted market price of the Group shares on the day before the date of grant. The vesting period is generally three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Furthermore, options are forfeited if the employee leaves the Group before the options vest.

Share options A summary of the movements on share options during the year is as follows:	Number of Shares 2010	Number of Shares 2009
Outstanding at 1 January Forfeited during the year	3,022,883 (618,303)	3,355,291 (332,408)
Outstanding at 31 December	2,404,580	3,022,883
Exercisable at 31 December	1,516,372	1,671,372

Inputs to the binomial model for giving rise to a charge are as follows:

2010 2009
42p 42p
42p 42p
40% 40%
6.5 years 6.5 years
4.4% 4.4%
0.0% 0.0%

The options in existence being valued have an average exercise price of 30.7p (2009 – 30.7p).

Equity-settled long-term incentive plans

The Group provides long-term incentive plans which provide for a base level share price for Total Shareholder Return ('TSR'), which equates to the closing quoted market price of the Group shares on the day before the date of award. The vesting period is three years. Furthermore, incentive plans are forfeited if the employee leaves the Group before they vest.

Exercisable at 31 December	Nil	Nil
Outstanding at 31 December	1,218,391	2,168,431
Outstanding at 1 January Forfeited during the year	2,168,431 (950,040)	2,628,966 (460,535)
The movements on long-term incentive plans during the year are as follows:	Number of Shares 2010	Number of Shares 2009

A conditional award to executive directors under the Performance Share Plan ('PSP') was made in June 2008 based on 50% of salary. The performance condition was based on an EPS target for 1/3 of the award. This requires EPS in 2010 to be 4.1p-4.6p for 25%-100% of this part of the award to vest working on a straight-line basis. The remaining 2/3 of the award is based on TSR, requiring annual growth in TSR to be 15%-20% for 25%-100% of the award to vest, again working on a straight line basis from a base share price of 25.50p. No re-testing of the award is allowed.

A conditional award to executive directors under the Performance Share Plan ('PSP') was made in April 2007 based on 50% of salary. The performance condition was based on an EPS target for 1/3 of the award. This required EPS in 2009 to be 3.1p-3.6p for 25%-100% of this part of the award to vest working on a straight-line basis. The remaining 2/3 of the award is based on TSR, required annual growth in TSR to be 15%-20% for 25%-100% of the award to vest, again working on a straight-line basis from a base share price of 31.75p. No re-testing of the award was allowed and the awards lapsed on 26 April 2010.

	In Respect	In Respect
	of 2008	of 2007
	Awards	Awards
Inputs to the binomial model for giving rise to a charge are as follows:
Weighted average share price	25.50p	31.75p
Weighted average exercise price	0.00p	0.00p
Expected volatility	30%	35%
Expected life	3 years	3 years
Risk free rate	4.44%	5.48%
Expected annual dividend yield	0.00%	0.00%

The long-term incentive plan shares in existence being valued have an effective average exercise price of £Nil.

26. Share-based Payments (continued)

The share options granted to employees, including executive directors, and outstanding at 31 December under existing share option schemes together with exercise prices and dates of exercise are as set out below:

	Exercise Price per Share	Exercise Date	Number of Shares 2010	Number of Shares 2009
The Macfarlane Group (Clansman) P.L.C. 1995
Executive Share Option Scheme	59p	March 2003-March 2010	–	389,745
The Macfarlane Group Company Share Option Plan 2000	68½p	March 2004-March 2011	205,803	238,361
The Macfarlane Group PLC Executive Share Option Scheme 2000	68½p	March 2004-March 2011	136,405	136,405
The Macfarlane Group Company Share Option Plan 2000	78½p	September 2004-September 2011	121,432	121,432
The Macfarlane Group PLC Executive Share Option Scheme 2000	78½p	September 2004-September 2011	13,568	13,568
The Macfarlane Group Company Share Option Plan 2000	88p	April 2005-April 2012	78,024	85,722
The Macfarlane Group PLC Executive Share Option Scheme 2000	88p	April 2005-April 2012	332,976	366,278
The Macfarlane Group Company Share Option Plan 2000	28½p	April 2006-April 2013	393,490	468,490
The Macfarlane Group PLC Executive Share Option Scheme 2000	28½p	April 2006-April 2013	571,510	651,510
The Macfarlane Group PLC Executive Share Option Scheme 2000	26p	October 2007-October 2014	551,372	551,372
Total share options outstanding at 31 December			2,404,580	3,022,883

The long-term incentive plan conditional awards to employees, including executive directors, and outstanding at 31 December under existing long-term incentive plans together with dates of exercise are as set out below:

	Exercise Date	Number of Shares 2010	Number of Shares 2009
Macfarlane Group PLC Long Term Incentive Plan 2007 awards 2008 awards	26 April 2010 30 June 2011	– 1,218,391	950,040 1,218,391
Total awards outstanding at 31 December		1,218,391	2,168,431

The Group recognised a charge of £26,000 (2009 – £34,000) relating to equity-settled share-based payment transactions and long-term incentive plans. The accumulated fair value at 31 December 2010 of share-based payment awards and long-term incentive plan awards was £334,000 (2009 – £308,000).

No long-term incentive plan awards were made in either 2009 or 2010.

27. Macfarlane Group All Employee Share Ownership Plan

No monies were paid in 2009 or 2010 to the Trustees of the Macfarlane Group All Employee Share Ownership Plan, which was established in 2002. The shares held by the trustees of the All Employee Share Ownership Plan vest unconditionally in the employees on the normal maturity date and the dividends on the shares are paid to the employees. At 31 December 2010 the Scheme held 35,186 ordinary shares of 25p each (2009 – 315,317), which had a market value of £11,000 (2009 – £65,000) on behalf of the employees. Transfers of ordinary shares to eligible employees out of the Plan take place each year on request following the completion of the five-year tax efficient period. During the year the Company transferred 91,412 (2009 – Nil) ordinary shares, forfeited in the periods up to 2009, to the Macfarlane Group PLC Pension & Life Assurance Scheme (1974). Details of the shares held by the pension scheme are set out in note 28.

Notes to the Financial Statements

For the year ended 31 December 2010

28. Pensions

The Group operates a pension scheme based on final pensionable salary for its UK operations. Under the scheme, the employees accrue benefits of 1/60 of pensionable salary for each completed year's service on attainment of a normal retirement age of 65. The assets of the scheme are held separately from those of the Group in managed funds under the overall supervision of the scheme trustees.

The contributions are determined by the scheme's qualified actuary on the basis of triennial valuations using the Projected Unit method. The most recent triennial valuation was at 1 May 2008. The principal assumptions adopted were that investment returns would average 7.00% per annum and that salary increases would average 4.75% per annum for pre-2007 service and 2.5% for post-2007 service. The results of the valuation showed that the market value of the relevant assets of the scheme was £43,645,000 and the actuarial value of these assets represented 71% of the value of benefits that had accrued to members.

The final salary scheme was closed to new entrants during 2002.

Following the 2008 actuarial valuation, the Board has agreed to make additional payments to the scheme to reduce the net pension deficit. These additional payments will increase the pension scheme assets. The minimum employer contribution to the pension scheme in 2011, including these additional deficit payments, is £2.2 million.

The employer contribution rate is now 11.3% of pensionable salary, and the employee contribution rate is 7% of pensionable salary from 1 July 2009 following actuarial advice.

The Government announced its intention that statutory minimum increases should be based on the increase in the CPI measure of inflation rather than the RPI measure of inflation. As the Macfarlane Group final salary pension scheme rules define revaluation in deferment to be statutory, this change has been effected in 2010 with a resultant reduction in liabilities of £2.3 million.

Balance sheet disclosures

The scheme's liabilities at 31 December 2010 were calculated on the following bases as required under IAS19:

2010	2009	2008
		6.25%
		2.75%
		3% or 5%
		for fixed increases
or 2.75% for LPI.	or 2.75% for LPI.	or 2.75% for LPI.
2.50% post 5 April 2006	2.50% post 5 April 2006	2.50% post 5 April 2006
3.50%	3.50%	2.75%

21.5	21.3	21.3
24.0	24.0	24.0
	5.50% 0.00% 3% or 5% for fixed increases	5.75% 3.50% 3% or 5% for fixed increases

28. Pensions (continued)

Balance sheet disclosures

Asset class	Fair Value 2010 £000	Long-term Expected Rate of Return	Fair Value 2009 £000	Long-term Expected Rate of return	Fair Value 2008 £000	Long-term Expected Rate of return
Equities Bonds Other (cash)	26,577 18,436 280	7.75% 4.90% 1.00%	23,315 17,277 30	7.75% 5.15% 5.15%	18,332 17,506 105	7.75% 5.30% 5.30%
Fair value of assets Present value of scheme liabilities	45,293 (61,018)	6.54%	40,622 (60,988)	6.64%	35,943 (53,420)	6.55%
Deficit in the scheme Related deferred tax asset (note 18)	(15,725) 4,246		(20,366) 5,702		(17,477) 4,894
Net pension liability	(11,479)		(14,664)		(12,583)

The investment in equities of £45,293,000 (2009 – £23,315,000) includes a holding of 1,065,918 ordinary shares in Macfarlane Group PLC (2009 – 819,506) held at a value of £320,000 (2009 – £160,000).

The long-term expected rate of return is based on equity returns, bond yields and cash balance returns. The overall expected rate of return on the scheme assets is a blended rate of the individual investment categories.

Movement in the present value of defined benefit obligations ²⁰¹⁰

	£000	2009 £000
At 1 January	60,988	53,420
Service costs	119	240
Settlement gains	(50)	(134)
Curtailment gain	(1,200)	–
Interest costs	3,429	3,241
Contribution from scheme members	134	169
Changes in assumptions underlying the defined benefit obligations	554	7,587
Benefits paid	(2,956)	(3,535)
At 31 December	61,018	60,988
Movement in the fair value of scheme assets
At 1 January	40,622	35,943
Expected return on scheme assets	2,694	2,325
Actual return less expected return on scheme assets	2,094	3,305
Contributions from sponsoring companies	2,705	2,415
Contribution from scheme members	134	169
Benefits paid	(2,956)	(3,535)
At 31 December	45,293	40,622
Analysis of amounts credited/(charged) to profit before tax
Normal service costs	(119)	(240)
Settlement gains	50	134
Curtailment gain	1,200	–
Expected return on pension scheme assets	2,694	2,325
Interest cost of pension scheme liabilities	(3,429)	(3,241)
Amounts credited/(charged) to profit before tax	396	(1,022)

Notes to the Financial Statements

For the year ended 31 December 2010

28. Pensions (continued)

Analysis of the actuarial gain/(loss) as included in the statement of recognised income and expense ²⁰¹⁰ £000 2009 £000 Actual return less expected return on scheme assets 2,094 3,305 Changes in assumptions underlying the present value of scheme liabilities (554) (7,587) Actuarial gain/(loss) 1,540 (4,282) Movement in scheme deficit in the year At 1 January (20,366) (17,477) Normal service costs (119) (240) Settlement gains 50 134 Curtailment gain 1,200 – Contributions 2,705 2,415 Other financial charges (735) (916) Actuarial gain/(loss) in the year 1,540 (4,282) At 31 December (15,725) (20,366)

The cumulative amount of actuarial losses recognised in other comprehensive income since the date of transition to IAS 19 on 1 January 2004 is £6,010,000 (2009 – £7,550,000).

The history of experience adjustments is as follows:

	2010 £000	2009 £000	2008 £000	2007 £000	2006 £000
Present value of defined benefit obligations Fair value of scheme assets	(61,018) 45,293	(60,988) 40,622	(53,420) 35,943	(59,304) 45,032	(59,503) 43,630
Deficit in the scheme Actual return on scheme assets	(15,725)	(20,366)	(17,477)	(14,272)	(15,873)
Amount	4,788	5,630	(8,281)	1,958	2,834
Percentage of scheme assets	10.6%	13.9%	(23.0%)	4.4%	6.5%
Experience adjustment on scheme liabilities Amount	(554)	(7,587)	7,189	1,335	5,632
Percentage of scheme liabilities	(0.9%)	(12.4%)	13.5%	2.3%	9.5%
Experience adjustment on scheme assets
Amount	2,094	3,305	(11,356)	(942)	203
Percentage of scheme assets	4.6%	8.1%	(31.6%)	(2.1%)	0.5%

The next triennial actuarial valuation of the scheme by the scheme actuary will be undertaken at 1 May 2011.

Defined contribution schemes

The Group also operates a number of defined contribution pension schemes. The assets of these schemes are held separately from those of the Group in independently administered funds. The pension cost charge represents contributions paid by the Group to the funds and amounted to £544,000 (2009 – £441,000). Macfarlane Group has a stakeholder pension arrangement for those employees not eligible for membership of any of the Group's contributory pension schemes.

29. Related Party Transactions

The Group has a related party relationship with its subsidiaries (see note 12), with its directors who comprise the Group Board and with the Macfarlane Group PLC sponsored pension schemes.

Transactions between the Company and its subsidiaries are eliminated on consolidation and are not disclosed.

Key management personnel comprise the Group Board. Their remuneration is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'.

	2010 £000	2009 £000
Directors' Remuneration	695	913
Employer's national insurance contributions	75	100
Cost charged in respect of share-based payments	18	24
	788	1,037

Further details of Directors' individual and collective remuneration are set out in the Board Report on Directors' Remuneration on page 17. Details of directors' shareholdings in the Company are also shown on page 17. Total dividends of £30,000 were paid in respect of these shareholdings in 2010 (2009 £29,000).

Disclosures in relation to the pension schemes are set out in note 28.

The Directors have considered the implications of IAS24 'Related Party Disclosures' and are satisfied that there are no other related party transactions occurring during the year, which require disclosure other than those already disclosed in these financial statements.

Company Balance Sheet

At 31 December 2010

	Note	2010 £000	2009 £000
Fixed assets
Tangible assets	31	43	45
Investments	32	25,810	29,923
		25,853	29,968
Current assets
Debtors – due within one year	33	5,956	5,905
– due after more than one year	33	15,883	12,969
Total current assets		21,839	18,874
Creditors – amounts falling due within one year	34	(9,426)	(9,354)
Net current assets		12,413	9,520
Total assets less current liabilities		38,266	39,488
Creditors – amounts falling due after more than one year	35	(2,199)	(2,199)
Net assets excluding net pension liability		36,067	37,289
Net pension liability	41	(5,593)	(6,667)
Net assets including net pension liability		30,474	30,622
Capital and reserves
Share capital	36	28,755	28,755
Own shares	37	(855)	(943)
Profit and loss account	37	2,574	2,810
Total shareholders' funds	39	30,474	30,622

The accompanying notes are an integral part of this company balance sheet.

The financial statements of Macfarlane Group PLC, Company registration number SC004221, were approved by the Board of Directors on 2 March 2011 and signed on its behalf by

Peter D. Atkinson John Love Chief Executive Finance Director

30. Significant Accounting Policies

The company financial statements have been prepared on the historical cost basis and in accordance with United Kingdom Accounting Standards.

The Directors, in their consideration of going concern, have reviewed the Company and Group's future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience. Additional details are set out on page 11. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

The principal accounting policies adopted are as noted below:

Investments

Investments held as fixed assets are stated in note 32 at cost less provision for any impairment.

Tangible fixed assets

Tangible fixed assets are stated at cost. No depreciation is provided on land. Depreciation is calculated at fixed rates on a straight-line basis to write off the cost of the assets over the period of their expected useful lives. The rates of depreciation vary between 2%-5% per annum on buildings and 7%-33% per annum on plant, vehicles and fittings.

Pension schemes

Past service cost is recognised immediately to the extent that benefits are already vested and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.

Settlement gains represent the excess of the current value of the retirement obligation extinguished over the transfer value paid to extinguish the liability. Curtailment gains, which are recognised in the profit and loss account, represent the reduction in value of the retirement obligations achieved following a change in benefits put forward by the Company but only after trustee approval to any necessary rule changes has been effected.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of the scheme assets. The obligations are measured on an actuarial basis and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme's liabilities.

Payments made to defined contribution retirement benefit schemes are charged as an expense as they fall due.

Financial instruments

(i) Other receivables do not carry interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
(ii) Interest-bearing bank overdrafts are recorded at the proceeds received, net of direct issue costs.

(iii) Trade creditors are not interest bearing and are stated at their nominal value.

Taxation

Provision is made for corporation tax on all profits and realised gains up to the balance sheet date, at the latest known corporation tax rates.

Deferred taxation

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the company's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.

A net deferred tax asset is regarded as recoverable and therefore recognised only to the extent that, on the basis of all available evidence, it can be regarded as more than 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 at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is measured on a non-discounted basis.

30. Significant Accounting Policies (continued)

Cash flow statement

The Company has not presented a cash flow statement. It has taken advantage of the exemption contained in FRS1 (revised 1996) 'Cash Flow Statements' as Macfarlane Group PLC has included a consolidated cash flow statement within its group accounts.

Share-based payments

The Company has adopted FRS 20 'Share-based payments.' The Company issues equity-settled share-based payments to certain employees, which are measured at fair value at the date of grant. The fair value, determined at the grant date, of the share-based payments issued to employees of this Company are expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. The expense relating to employees of subsidiary companies are fully recharged to those companies with the cost increasing the investment in subsidiaries and a corresponding credit to reserves.

31. Tangible Assets

	£000	& Fittings £000	Total £000
Cost
At 1 January 2010 and 31 December 2010	15	305	320
Depreciation
At 1 January 2010 Charge for year	11 –	264 2	275 2
At 31 December 2010	11	266	277
Net book value
At 31 December 2010	4	39	43
At 31 December 2009	4	41	45

The parent company had no assets held under finance leases in 2010 or in 2009.

32. Investments	2010 £000	2009 £000
Investment in subsidiaries at cost At 1 January Additions during the year Amendment to earn-out (see note 23) Group transfers	29,923 4 (50) (4,067)	30,111 12 (200) –
At 31 December	25,810	29,923

Details of the principal operating subsidiaries are set out on page 65.

Of the investment value shown above £114,000 (2009 – £110,000) relates to charges to investments in subsidiary companies in respect of equity-settled share-based payments, which will be settled by the parent company.

The group transfer in the year represents the transfer of the investment in Allpoint Packaging Limited to a fellow subsidiary, Macfarlane Group UK Limited.

33. Debtors	2010 £000	2009 £000
Due within one year Amounts owed by subsidiaries	5,000	5,000
Other receivables Prepayments and accrued income	559 397	569 336
	5,956	5,905
Due after more than one year Amounts owed by subsidiaries	15,883	12,969
34. Creditors – Amounts Falling Due Within One Year	2010 £000	2009 £000
Bank overdrafts	7,726	8,022
Trade creditors	316	260
Amounts owed to group companies	633	318
Other taxation and social security	32	29
Other creditors	–	50
Accruals and deferred income	719	675

All bank overdrafts are repayable on demand. The Company had no bank loans in either 2010 or 2009.

The Company and certain subsidiaries have given inter-company guarantees to secure their respective overdrafts. The overall credit lines for these borrowing facilities total £12,000,000 (2009 – £12,500,000) and are in place for the period to 29 February 2012.

35. Creditors – Amounts Falling Due After More Than One Year		2010 £000	2009 £000
Amounts owed to group companies		2,199	2,199
36. Share Capital	Number of 25p Shares	2010 £000	2009 £000
Authorised	200,000,000	50,000	50,000
Allotted, issued and fully paid: At 1 January and 31 December	115,019,000	28,755	28,755

There have been no movements in share capital during the year.

The Company has one class of ordinary shares, which carry no right to fixed income. Each ordinary share carries one vote in any General Meeting of the Company.

9,426 9,354

37. Reserves

	Own Shares £000	Retained Earnings £000	Total £000
Balance at 1 January 2009	(1,406)	2,560	1,154
Disposal of own shares	463	(314)	149
Profit for the year	–	2,919	2,919
Dividends paid (see note 8)	–	(1,688)	(1,688)
Post tax actuarial loss in pension scheme taken direct to equity	–	(701)	(701)
Credit for share-based payments (see note 26)	–	34	34
Balance at 1 January 2010	(943)	2,810	1,867
Disposal of own shares	88	(52)	36
Profit for the year	–	446	446
Dividends paid (see note 8)	–	(1,700)	(1,700)
Post tax actuarial gain in pension scheme taken direct to equity	–	1,044	1,044
Credit for share-based payments (see note 26)	–	26	26
Balance at 31 December 2010	(855)	2,574	1,719

During 2010 the Company transferred 155,000 ordinary shares, previously held as own shares, (2009 – 819,560) to Macfarlane Group PLC Pension & Life Assurance Scheme (1974). Details of the shares held by the pension scheme are shown in note 41.

38. Operating Profit	2010	2009
Operating profit for the parent company has been arrived at after charging: Auditors' remuneration	£000	£000
Audit services	17	30
Non-audit services	35	34
Staff costs	1,004	995
	2010 No.	2009 No.
Staff costs
The average monthly number of employees was:
Administration	11	12
	2010	2009
The costs incurred in respect of these employees were:	£000	£000
Wages and salaries	834	824
Social security costs	95	93
Other pension costs	75	78
	1,004	995

39. Reconciliation Of Movements In Shareholders' Funds ²⁰¹⁰

	£000	2009 £000
Profit for the year	446	2,919
Dividends to equity holders in the year	(1,700)	(1,688)
Post tax actuarial gain/(loss) in pension scheme taken direct to equity	1,044	(701)
Transfer of own shares to pension scheme	36	149
Credit for share-based payments (See note 26)	26	34
Movements in shareholders' funds in the year	(148)	713
Opening shareholders' funds	30,622	29,909
Closing shareholders' funds	30,474	30,622

40. Share-based Payments

Equity-settled share option plans

Share option plans of the ultimate parent company, Macfarlane Group PLC ('the Group') provide for a grant price, which approximates to the average quoted market price of the Group shares on the date of grant. The vesting period is generally three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Furthermore options are forfeited if the employee leaves the Group before the options vest. The fair value at 31 December 2010 was £112,000 (2009 – £112,000).

A summary of the movements on share options during the year is as follows:		Number of Shares 2010	Number of Shares 2009
Outstanding at 1 January Lapsed during the year		1,355,251 (379,321)	1,687,659 (332,408)
Outstanding at 31 December		975,930	1,355,251
Exercisable at 31 December		631,372	711,372
Options outstanding as follows: Grant date	Exercise price	Number of Shares 2010	Number of Shares 2009
22 March 2000 15 March 2001 5 April 2002 16 April 2003 29 October 2004	59.0p 68.5p 88.0p 28.5p 26.0p	– 172,558 172,000 80,000 551,372	225,763 205,116 213,000 160,000 551,372
		975,930	1,355,251
Equity-settled share option plans Inputs to the binomial model for these options giving rise to a charge are as follows:		2010	2009
Weighted average share price Weighted average exercise price Expected volatility Expected life Risk free rate Expected annual dividend yield		42p 42p 40% 6.5 years 4.4% 0.0%	42p 42p 40% 6.5 years 4.4% 0.0%

The options in existence, being valued, have an average exercise price of 30p (2009 – 30p).

Notes to the Company Financial Statements

For the year ended 31 December 2010

40. Share-based Payments (continued)

Equity-settled long-term incentive plans

The Group provides long-term incentive plans which provide for a base level share price for Total Shareholder Return ('TSR'), which approximates to the average quoted market price of the Group shares on the date of award. The vesting period is generally three years. If the incentive plans remain unexercised after a period of ten years from the date of award, then they expire. Furthermore, incentive plans are forfeited if the employee leaves the Group before they vest. The fair value at 31 December 2010 was £108,000 (2009 – £86,000).

Exercisable at 31 December	Nil	Nil
Outstanding at 31 December	1,027,940	1,829,476
Outstanding at 1 January Forfeited during the year	1,829,476 (801,536)	2,290,011 (460,535)
The movements on the Macfarlane Group Long Term Incentive Plan during 2010 are as follows:	Number of Shares 2010	Number of Shares 2009

A conditional award to executive directors under the Performance Share Plan ('PSP') was made in June 2008 based on 50% of salary. The performance condition was based on an EPS target for 1/3 of the award. This requires EPS in 2010 to be 4.1p-4.6p for 25%-100% of this part of the award to vest working on a straight-line basis. The remaining 2/3 of the award is based on TSR, requiring annual growth in TSR to be 15%-20% for 25%-100% of the award to vest, again working on a straight line basis from a base share price of 25.50p. The first available exercise date is 30 June 2011. No re-testing of the award is allowed.

A conditional award to executive directors under the Performance Share Plan ('PSP') was made in April 2007 based on 50% of salary. The performance condition was based on an EPS target for 1/3 of the award. This required EPS in 2009 to be 3.1p-3.6p for 25%-100% of this part of the award to vest working on a straight-line basis. The remaining 2/3 of the award is based on TSR, required annual growth in TSR to be 15%-20% for 25%-100% of the award to vest, again working on a straight-line basis from a base share price of 31.75p. No re-testing of the award was allowed and the awards lapsed on 26 April 2010.

	In Respect	In Respect
	of 2008	of 2007
	Awards	Awards
Inputs to the binomial model for these awards giving rise to a charge are as follows:
Weighted average share price	25.50p	31.75p
Weighted average exercise price	0.00p	0.00p
Expected volatility	30%	35%
Expected life	3 years	3 years
Risk free rate	4.44%	5.48%
Expected annual dividend yield	0.00%	0.00%

The long-term incentive plan shares in existence being valued have an average exercise price of £Nil.

No long-term incentive plan awards were made in 2009 or 2010.

41. Pensions

The final salary scheme was closed to new entrants during 2002.

The employer contribution rate is now 11.3% of pensionable salary, and the employee contribution rate is 7% of pensionable salary from 1 July 2009 following actuarial advice.

During 2010, Macfarlane Group PLC made the decision to amend benefits for active members in the scheme by freezing pensionable salaries at the levels current at 30 April 2009. Following a consultation process with the active members affected, the change took effect on 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme and a curtailment gain of £0.2 million was recorded as a result of this change after charging expenses.

Balance sheet disclosures

The assets in the scheme, the net liability position for the scheme and the expected rates of return have been based on the results of the actuarial valuation as at 1 May 2008, updated to the year-end. The scheme's liabilities at 31 December 2010 were calculated on the following bases as required under FRS17:

Assumptions	2010	2009	2008
Discount rate	5.50%	5.75%	6.25%
Rate of increase in salaries	0.00%	3.50%	2.75%
Rate of increase in pensions in payment	3% or 5%	3% or 5%	3% or 5%
	for fixed increases	for fixed increases	for fixed increases
	or 2.75% for LPI.	or 2.75% for LPI.	or 2.75% for LPI.
	2.50% post 5 April 2006	2.50% post 5 April 2006	2.50% post 5 April 2006
Inflation assumption	3.50%	3.50%	2.75%
Life expectancy beyond normal retirement age of 65
Male	21.5	21.3	21.3
Female	24.0	24.0	24.0

41. Pensions (continued) Balance sheet disclosures

	Fair Value	Long-term	Fair Value	Long-term	Fair Value	Long-term
Asset class	2010 £000	Expected Rate of Return	2009 £000	Expected Rate of Return	2008 £000	Expected Rate of Return
Equities Bonds Other (cash)	12,950 8,983 136	7.75% 4.90% 1.00%	10,599 7,854 13	7.75% 5.15% 5.15%	8,487 8,105 48	7.75% 5.30% 5.30%
Fair value of assets Present value of scheme liabilities	22,069 (29,731)		18,466 (27,726)		16,640 (24,732)
Deficit in the scheme Related deferred tax asset	(7,662) 2,069		(9,260) 2,593		(8,092) 2,266
Net pension liability	(5,593)		(6,667)		(5,826)

The investment in equities of £22,069,000 (2009 – £18,466,000) includes a holding of 1,065,918 ordinary shares in Macfarlane Group PLC (2009 – 819,506) held at a value of £320,000 (2009 – £160,000).

Related deferred tax asset	2010 £000	2009 £000	2008 £000
At 1 January (Charge)/credit to equity (Charge)/credit to profit and loss account	2,593 (11) (513)	2,266 273 54	2,348 (113) 31
	2,069	2,593	2,266
Analysis of amounts credited/(charged) to operating profit Normal service cost Settlement gains Curtailment gain	2010 £000 (8) 11 196	2009 £000 (17) 16 –
Amounts credited/(charged) to operating profit	199	(1)
Analysis of amounts charged to net finance costs Expected return on pension scheme assets Interest cost of pension scheme liabilities	1,313 (1,671)	1,057 (1,474)
Net finance costs	(358)	(417)
Analysis of the actuarial gain/(loss) included in the statement of total recognised gains and losses Actual return less expected return on scheme assets Changes in assumptions underlying present value of scheme liabilities	3,519 (1,962)	2,140 (3,114)
Actuarial gain/(loss)	1,557	(974)
Movement in scheme deficit in the year At I January Current service credit/(cost) Contributions Other financial charges Actuarial gain/(loss) in the year	(9,260) 199 200 (358) 1,557	(8,092) (1) 224 (417) (974)
At 31 December	(7,662)	(9,260)

41. Pensions (continued) ²⁰¹⁰

At 31 December	(29,731)	(27,726)
Benefits paid	1,440	1,607
Actuarial loss	(1,962)	(3,114)
Contribution from scheme members	(11)	(12)
Interest costs	(1,671)	(1,474)
Current service credits/(costs)	199	(1)
At 1 January	(27,726)	(24,732)
Movement in the present value of defined benefit obligations
At 31 December	22,069	18,466

Benefits paid	(1,440)	(1,607)
Contribution from scheme members	11	12
Contributions from sponsoring companies	200	224
Expected return on scheme assets Actual return less expected return on scheme assets	1,313 3,519	1,057 2,140
At 1 January	18,466	16,640
Movement in the fair value of scheme assets
	£000	£000
		2009

The cumulative actuarial gains on the pension scheme applied against reserves since the transition to FRS 17 on 1 January 2004 is £3,105,000 (2009 – £1,548,000).

	2010 £000	2009 £000	2008 £000	2007 £000	2006 £000
Present value of defined benefit obligations Fair value of scheme assets	(29,731) 22,069	(27,726) 18,466	(24,732) 16,640	(34,846) 26,459	(34,876) 25,573
Deficit in the scheme	(7,662)	(9,260)	(8,092)	(8,387)	(9,303)
Return on assets	4,832	3,197	(8,746)	1,981	2,894
Percentage of scheme assets	21.9%	17.3%	(52.6%)	7.5%	11.3%
Experience adjustment on scheme assets	3,519	2,140	(10,170)	308	1,391
Percentage of scheme assets	15.9%	11.6%	(61.1%)	1.2%	5.4%
Experience gains and losses on scheme liabilities	(1,962)	(3,114)	10,575	421	(649)
Percentage of the present value of the scheme's liabilities	(6.6%)	(11.2%)	42.8%	1.2%	(1.9%)

The next triennial actuarial valuation of the scheme by the scheme actuary will be undertaken at 1 May 2011.

Defined contribution schemes

The Company also participated in a defined contribution scheme, the Macfarlane Group Personal Pension Scheme. Contributions to the scheme for the year were £78,000 (2009 – £77,000).

42. Related Party Transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed. The directors have considered the implications of FRS 8 'Related Party Transactions' and are satisfied that there are no other related party transactions occurring during the year, which require disclosure other than those already disclosed in these financial statements.

Five Year Record

	2010 £000	2009 £000	2008 £000	2007 £000	2006 £000
Turnover – all operations	135,450	123,596	138,549	138,049	130,067
Profit before interest, discontinued operations, exceptional items and tax Net interest payable Exceptional items Contribution from discontinued activities Profit/(loss) on disposal of operations	4,518 (1,167) 846 – –	4,406 (1,223) (699) – 351	4,708 (1,006) – 271 (1,378)	3,051 (598) 14 182 (1,800)	2,007 (534) – 42 849
Profit before tax Taxation	4,197 (1,211)	2,835 (514)	2,595 (800)	849 981	2,364 (313)
Profit for the financial year	2,986	2,321	1,795	1,830	2,051
Earnings per ordinary share	2.63p	2.06p	1.60p	1.63p	1.82p
Dividends	(1,700)	(1,688)	(2,252)	(2,252)	(1,125)
Dividends per ordinary share	1.50p	1.50p	2.00p	2.00p	1.00p
Dividend cover	1.8	1.4	0.8	0.8	1.8

This table reflects the five-year record for continuing and discontinued operations as classified at 31 December 2010.

Financial Diary

Financial Results

Interim Announced – August Final Announced – March

Accounts and Annual General Meeting

Report and financial statements Posted to shareholders on 1 April 2011. Annual General Meeting Held in Glasgow on 10 May 2011.

Shareholder Enquiries

Macfarlane Group PLC's ordinary shares are classified under the 'Industrial – General' section of the Industrial Sector on the London Stock Exchange.

Enquiries regarding shareholdings, dividend payments, dividend mandate instructions, lost share certificates, tax vouchers, changes of address, transfers of shares to another person and other administrative matters should be addressed to the Company's registrars:

Equiniti Aspect House Telephone: 0871 384 2439 Spencer Road Fax: 0871 384 2100 Lancing Website: www.shareview.co.uk West Sussex, BN99 6DA

The Company's website www.macfarlanegroup.net provides details of all major Stock Exchange announcements, details of the current share price and information about Macfarlane Group's business.

Principal Operating Subsidiaries

Company Name	Principal Activities	Country of Registration
Macfarlane Group UK Limited Coventry Telephone 02476 511511	Supply and distribution of all forms of packaging materials and equipment. Design and manufacture of specialist packaging.	England
Grantham Telephone 01476 574747 Westbury Telephone 01373 858555
Allpoint Packaging Limited Hayes Telephone 020 8813 5322	Supply and distribution of all forms of packaging materials and equipment.	England
Macfarlane Labels Limited Kilmarnock Telephone 01563 525151	Manufacture of high quality printed self-adhesive labels and resealable labelling solutions.	Scotland
Macfarlane Labels (Ireland) Limited Dublin Telephone 00 353 1832 0220	Manufacture of high quality printed self-adhesive labels and resealable labelling solutions.	Ireland
Macfarlane Group Sweden AB Helsingborg Telephone 00 46 42 13 75 55	Manufacture of high quality printed self-adhesive labels and resealable labelling solutions.	Sweden

and non-trading subsidiaries is available from the registered office, 21 Newton Place, Glasgow G3 7PY.

Our trading website www.macfarlanepackaging.com enables customers to place orders

at their convenience 24 hours each day.

Macfarlane group plc

Head Office

21 Newton Place Glasgow G3 7PY Telephone: 0141 333 9666 Facsimile: 0141 333 1988 E-mail: [email protected] Website: http://www.macfarlanegroup.net

Packaging Distribution
Labels
Packaging Manufacturing

Bristol

T 0844 770 1401 E [email protected]

Basingstoke T 01256 851 081 E [email protected]

Coventry T 0844 770 1407 E [email protected]

Enfield T 0844 770 1409 E [email protected]

Exeter T 0844 770 1411 E [email protected]

Fareham T 0844 770 1413 E [email protected]

Glasgow T 0844 770 1421 E [email protected]

Gloucester T 0145 255 5550 E [email protected]

Grantham T 0844 770 1415 E [email protected]
Hayes T 0208 813 5322 E [email protected]
Horsham T 0844 770 1419 E [email protected]
Manchester T 0844 770 1423 E [email protected]
Milton Keynes T 0844 770 1425 E [email protected]
Newcastle T 0844 770 1427 E [email protected]
Sudbury T 0844 770 1429 E [email protected]

Wakefield T 0844 770 1433 E [email protected]

Wigan T 0844 770 1437 E [email protected]
Grantham T 0844 770 1417 E [email protected]
Westbury T 0844 770 1435 E [email protected]
Dublin T 00 353 (1) 832 0220 E [email protected]
Kilmarnock T 01563 525151 E [email protected]
Sweden T 0046 4213 7555 E [email protected]

AI assistant

MACFARLANE GROUP PLC — Annual Report 2010

4664_10-k_2010-12-31_156c2a23-c429-4cd9-8cda-b02c390ae4b7.pdf

Contents

Chairman's Statement

Trading

Pension Deficit

Net Debt

Dividend

Future Prospects

The Business at a Glance

The Business

Market Conditions

Future Opportunities

Presentational Packaging

The Business

Market Conditions

Future Opportunities

Printpack Inc.

The Business

Market Conditions

Future Opportunities

Alternative design for Aircraft Braking System Parts

SolidWorks

Macfarlane Group has demonstrated it can progress positively whilst managing its way through difficult market conditions.

Packaging Distribution

2010 Performance

Performance Potential

Acquisitions

Business Risks

Future Plans

Business Review

Manufacturing Operations

Labels

Business Performance

Business Risks

Future Plans

Packaging Manufacturing

Business Performance

Business Risks

Future Plans

2011 Outlook

Business Review

Financial Review 2010 Trading

Taxation

Discontinued Operations

Earnings per Share and Dividends

Cash Flow and Net Debt

Financial Instruments

Interest rate risk

Liquidity risk

Credit risk

Currency risk

Shareholders' Funds and Share Price Movements

Pension Scheme Deficit and Associated Risks

International Financial Reporting Standards

Accounting Policies

Going Concern

Corporate Responsibility ('CR')

The Environment

Energy usage

Fuel usage

Waste management

Environmental care

Registration to ISO 14001

The Customer Experience

Customer feedback

Sales order management

Electronic documents

Macfarlanepackaging.com

Corporate Responsibility

The Employee Experience

Training

Employee engagement

Health and safety

Directors and Advisers

Independent Auditors Deloitte LLP Edinburgh

Report of the Directors

Principal Activities

Review of the Business

MACFARLANE GROUP PLC Annual Report 2010