Giardino Group, which issued a profits warning back in February, revealed interim figures which showed operating profits for the six months to 31 July plunged by almost half to just £665,000 on turnover up 14% to £12m.

A hit of £3m in impairments means the company, which runs 56 restaurants and cafes u8ner such brand names as Cafe Giardino and Azzurro, declared a pre-tax loss of £2.4m for the six months, against a profit of £1.3m for the same period last year.

The company was releasing both interim and 12-month results, on its way to repositioning its financial year. It said operating profit before impairment provision and interest for the 12 months to 31 July was £2.26m, down 22% from 2001.

Gross profit increased by 15% to £9.03m for the six months and by 25% to £18.7m for the twelve months.

During the 12 months, six new cafes were opened in the Cafe Giardino division bringing the total to 43, including three Pellini coffee shops. The restaurant division now has 13 sites, and a new Azzurro will be open in Glasshouse Street London in time for the Christmas and new year period. Trading in the division for the eight weeks of August and September 2002 is 6% up on the same period in 2001.

The company said the decision announced in February to sell those units which were unlikely to contribute to the group has already started to yield results. It has sold one site, negotiations to sell a second unit are "close to fruition" and discussions are currently under way with the landlords of four other sites "to mitigate the longer term effects on the group's profits", it said.

It added that "a few " of the cafe openings carried out towards the end of the last financial year and the early part of the current period at sites outside London and the South East "have not met budgeted levels of turnover and profit despite changes in the range and price of the offer to accommodate local demand." The group will therefore be disposing of a number of the units that are not trading well.

Giardino said it remained cautious about further expansion against a poor economic background and continuing intense competition.

However, chairman John Moxon said adverse economic conditions can create opportunities for companies such as Giardino which find themselves in a healthy financial position. He said: "Our cash generation remains strong and next year we would expect to see this improve. We believe that this will enable us to take advantage of opportunities which may arise."

The company's shares fell 7.5p to 37.5p in early morning trading, a drop of almost 17%.