World leader in edible casings by nyut545e2

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Annual Report & Accounts 2005

World leader in edible casings
Contents
Key financials                            1   Statements of recognised income
Global reach                              2     and expense                       30
Our product applications                  4   Balance sheets                      31
Chairman’s statement                      6   Cash flow statements                32
Eating Wieners around the world           8   Notes to the financial statements   33
Operating and financial review           10   Independent auditors’ report to
Directors and executive committee        14     the members of Devro plc          73
Corporate social responsibility report   16   Notice of meeting                   74
Directors’ report                        20   Financial summary                   75
Corporate governance                     22   Directors and advisers              75
Remuneration report                      26   Shareholder information             76
Consolidated income statement            30




Devro is one of the world’s leading pro-
ducers of manufactured casings
for the food industry, supplying a wide
range of products and technical sup-
port to manufacturers of sausages,
salami, hams and other cooked meats.
The group’s main focus is edible colla-
gen-based products. These are
a key component of our customers’
product offerings and have been steadily
replacing gut casings in markets around
the world.
Key financials
The group continued to increase its revenue, unit volumes
and profits and we again saw growth in each of our major
trading regions.




                                                                  2005                   2004*



        Earnings per share (before exceptional item)              8.7p                   8.0p

        Dividends per share                                       4.4p                   4.0p



        Group revenue                                             £152.5m                £148.9m

        Gross profit                                              £47.6m                 £49.2m

        – margin                                                  31.2%                  33.0 %

        Operating profit (before exceptional item)                £21.3m                 £20.7m**

        – margin                                                  13.9%                  13.9%

        Exceptional item – profit on sale of land                 £6.3m                  –

        Profit before tax                                         £25.8m                 £18.0 m

        Cash generated from operations                            £28.5m                 £28.3m

        Capital expenditure                                       £16.7m                 £11.5m

        Net debt                                                  £17.7m                 £25.5m

        Gearing                                                   28.9%                  47.8%




        * Prior year information has been restated to incorporate adjustments required under
             International Financial Reporting Standards (“IFRS”).
        **Including the share of the operating loss of the joint venture.




                                                                                               Devro plc Annual Report & Accounts 2005 1
Global reach
Devro is the world’s leading provider of collagen products for the
food industry. It manufactures a broad range of collagen casings at
production plants in Scotland, Australia, the Czech Republic and the
US, supported by technical development facilities in each country.




Collagen is one of the most common forms of animal protein.
It is transformed into edible casings by highly sophisticated
biochemical processing technologies which are constantly
being developed and improved. The Devro group is one of the
most advanced exponents of these technologies.

Devro supplies world markets from strategically located
commercial operations and through an extensive network
of distributors and agents. Our management structure
has established Regional Business Directors, who have
responsibility for day-to-day sales and operations at
their businesses and local profit accountability. Strategy,
financial policy and business development continue to be
directed centrally.


2 Devro plc Annual Report & Accounts 2005
Europe                            Americas                        Asia/Pacific

£88.8m £31.4m £32.3m
Revenue                           Revenue                         Revenue
1,547 Employees                   386 Employees                   267 Employees
Moodiesburn, Bellshill and        Sandy Run, South Carolina, US   Tokyo, Japan
Hamilton, Scotland, UK
                                  >   Manufacturing               > Sales
>   Head office                   >   Technical development       > 6 Employees
>   Manufacturing                 >   Sales
>   Technical development         >   386 Employees
>   Sales                                                         Hong Kong
>   532 Employees                                                 > Sales
                                                                  > 5 Employees
Hamburg, Germany
> Sales                                                           Bathurst, New South Wales,
> 32 Employees                                                    Australia
                                                                  >   Manufacturing
                                                                  >   Technical development
             ˇ
Jilemnice, Korenov and Slavkov,
                                                                  >   Sales
Czech Republic
                                                                  >   250 Employees
>   Manufacturing
>   Technical development
>   Sales                                                         Auckland, New Zealand
>   983 Employees                                                 > Sales
                                                                  > 6 Employees




                                                                           Devro plc Annual Report & Accounts 2005 3
Our product applications
We can supply edible collagen casings for any sausage application.
With its Devro, Coria and Cutisin ranges, and comprehensive
technical know-how, the business is well placed to meet the
demands of the markets and customers around the world.




                                                                                                       Small calibre
                                                                      Fresh sausage
                                                                                                       smoked sausage




                                                                     >60%                             >10%
                                            Devro share of
                                            market

                                            Product                  Typically breakfast or dinner    Wiener, frankfurter
                                                                     sausage



                                            Key markets              Australia, Canada, New           Continental Europe, Japan
                                                                     Zealand, US and UK

                                            Typical market factors   Customer productivity, sausage   Tradition, colour and
                                                                     manufacturing sophistication,    appearance, kiosk outlets
                                                                     retail outlet concentration

                                            Key product features     Production speed capability,     Processing consistency, finished
                                                                     size control, cooking            sausage appearance, bite
                                                                     performance, tender bite




                                            From factory to fork

                                                                                              >                               >
                                                                     Raw material conversion          Extrusion
                                                                     Natural material must be         In a sophisticated process, the
                                                                     broken down and reconstituted    gel is extruded to form a
                                                                     as a gel with consistent and     tubular casing, which must be
                                                                     predictable traits. Devro is a   strong enough for the sausage
                                                                     leader in this complex           manufacturer – but tender
                                                                     biotechnology.                   enough for the final consumer.


4 Devro plc Annual Report & Accounts 2005
                                                                                                              Larger diameter
 Bratwurst                           Beefstick                           Dried sausage
                                                                                                              smoked sausage




>25%                                >30%                                <25%                                 <20%
Processed sausage eaten in          Initially a US snack product, now   A wide category, including           A wide category of principally
summer                              expanding into many markets         Mini-Salami, Landjaeger,             pork sausage
                                                                        Chorizo and Lap Cheong

Central Europe, particularly        US, Japan, Australia                Europe, Asia, US                     Central and Eastern Europe,
Germany                                                                                                      US

White colour, customer              Snack product growth, price,        Tradition, taste, texture,           Price, productivity, tradition
productivity, barbecue season       geographic expansion                appearance


High processing temperatures,       High strength, consistent           Colour development, wide             Appearance, bite, colour, cost
range of sizes and lengths,         narrow calibre, pre-colouring,      range of sizes and lengths,
grilling capability                 ‘snap’ bite                         controlled drying rate




                           >                                 >                                       >
Finishing                           Sausage manufacturing               Cooking                              Consumption
The casings are finished in a       Devro customers range from          Sausages can be cooked in            We all demand that our food
variety of ways for different       large food processors requiring     many ways, from steaming to          looks as good as it tastes. Even
products. Each must be              casings for ultra high-speed        deep-fat frying – and the casing     at this stage in the cycle, the
delivered in a form that fits the   machines to local specialists       must be able to handle stress        casing remains critical to the
customer’s production               making handcrafted products.        and temperature changes              sausage’s appearance, taste
machinery and methods.              Versatility is key.                 without bursting.                    and ‘bite’.

                                                                                                           Devro plc Annual Report & Accounts 2005 5
Chairman’s statement
We believe there is further significant revenue growth potential
in the developing markets of South East Asia, Eastern Europe
and Latin America and we have a number of new products under
development to support these aims.




I am pleased to report that 2005 was          markedly during the third quarter. While     In response to this additional cost
a further year of achievement and             there was some recovery in the fourth        burden, and as part of our ongoing
progress. The group continued to increase     quarter, volumes in this category were       efforts to ensure that our cost base
its revenue, unit volumes and profits and     still below their recent historical trend.   remains as tightly controlled as possible,
we again saw growth in each of our major      In the UK, following two years of above      we have carried out a major review of
trading regions. Profit before tax and        average growth, 2005 experienced             the overhead structure in our UK
exceptional item increased to £19.4 million   quieter trading conditions. Conversely,      operation. Action was taken early in
(2004: £18.0 million) while basic earnings    in the Asia/Pacific region the pattern       2006 to reduce our overhead costs.
per share before exceptional item rose        of growth seen in 2003 and 2004 was          This is costing approximately £1.0 million
9% to 8.7 pence (2004: 8.0 pence).            maintained throughout 2005, with both        to implement but, with the associated
                                              South East Asian and Japanese markets        benefits arising from this programme,
Total sales in 2005 were £152.5               experiencing solid increases in sales        it will be broadly neutral to profits for
million, an increase of 2.4% compared         volumes. A similar situation existed in      the year as a whole.
to £148.9 million reported for 2004.          Eastern European and Russian markets,
Sales volumes were ahead of prior year        where the strong growth of recent years      Pre-tax profit before the exceptional gain
by 1.7%. This was offset by an adverse        continued throughout 2005. These             on the sale of the land at Moodiesburn
price/mix of 1.6%, resulting from a           volume gains in the developing markets       was £19.4 million compared with
combination of a significant adverse          were delivered through a mix of              £18.0 million in 2004. Basic earnings
movement in the strength of the Czech         increased conversion from gut casings        per share before exceptional item was
Koruna against its principal trading          to collagen and growth in the underlying     8.7 pence against 8.0 pence in 2004,
currencies, unfavourable movements in         sausage market.                              an increase of almost 9%.
market and product mixes and increased
volume discounts at specific key accounts.    We are constantly striving to improve        Net debt at the end of the year was
A positive exchange impact on translating     further the performance of both our          reduced to £17.7 million, £7.8 million
overseas sales into sterling then provided    products and our manufacturing               less than at December 2004, and
a favourable 2.3% movement.                   processes to ensure our cost base            compares with £20.6 million reported
                                              remains as effective as possible. In         at June 2005. This reduction was
This sales performance was achieved           2005 our programme of improvements           achieved despite a marked increase
during a year in which market conditions      yielded further increases in productivity    in the level of capital investment.
were variable and sometimes difficult,        which greatly helped to offset the
particularly during the second half.          considerable adverse financial impact of     During the year, we made good progress
Volumes in certain of our more                significantly increased energy costs. This   on the expansion of our Czech facilities.
established markets were slower in the        rise in energy costs, the impact of which    As a result of this investment programme,
second half, while substantial growth         was greatest on our UK operation and         capital expenditure for 2005 increased to
was generally maintained throughout the       which mainly occurred during the second      £16.7 million (2004: £11.5 million) and
year in the developing regions. In the US     half, is expected to remain with us for      we expect it to continue around this level,
market the snack sector slowed                some time to come.                           at least for 2006.




6 Devro plc Annual Report & Accounts 2005
                                                 With many opportunities to invest in the
                                                 improvement, development and expansion
                                                 of our core casing business around the
                                                 world, the Board is confident about the
                                                 outlook for the group.




Dividend                                       I am delighted that, on 9 March 2006, Mr    efficiency and manufacturing
The Board is proposing a final dividend of     Stuart Paterson joined the Board            effectiveness, however, will mitigate
3.025 pence (2004: 2.75 pence),                as a non-executive Director. He will        much of the adverse effect.
bringing the total for the year to 4.4 pence   succeed John Napier as Chairman of the
(2004: 4.0 pence). This will be paid on        Audit Committee. Stuart has been Chief      While we continue to face strong
17 May 2006 to shareholders on the             Financial Officer of Johnston Press plc     competition in a number of markets
register as of 18 April 2006. Our dividend     since 2001.                                 there is, nevertheless, considerable
policy continues to be one of progressive                                                  scope for organic growth within the
growth that is both sustainable over the       Employees                                   casing sector and we are continuing to
longer term and consistent with the            Our greatest asset is the quality and       expand our business globally. We believe
investment requirements for the further        dedication of our workforce worldwide.      there is further significant revenue
development of the business.                   I need hardly tell shareholders that all    growth potential in the developing
                                               who work in the group habitually do work    markets of South East Asia, Eastern
Board changes                                  very hard for them. On behalf of the        Europe and Latin America and we
As previously announced, Mr Patrick            Board and shareholders, I would like to     have a number of new products under
Mocatta retired from the Board at the          offer our employees sincere thanks for      development to support these aims.
Annual General Meeting on 5 May                their efforts during 2005.                  With many opportunities to invest in
2005, after nine years as a non-                                                           the improvement, development and
executive Director. On behalf of the           Prospects                                   expansion of our core casing business
Board I would like to thank Patrick for        Revenue for the early part of 2006          around the world, the Board is confident
his significant contribution to our            has been encouraging and our                about the outlook for the group.
company during his time on the Board.          operations are performing well. The
                                               expansion of our manufacturing facilities
Also as previously announced, Mr Paul          in the Czech Republic is progressing
Neep joined the Board as a non-executive       according to plan and initial production
Director on 1 February 2005. Paul              will commence during the second half of
has been Chief Executive Officer of            this year. With strong growth continuing
Glenmorangie since 2000 and brings             in the Cutisin range, we have now           Pat Barrett OBE Chairman
to Devro a wide range of international         decided to accelerate our development
marketing experience.                          plans for the Czech operations by
                                               increasing the level of investment in the
In September we were saddened by the           new manufacturing plant being installed
death of Mr John Napier. In his time with      in our Jilemnice facility.
the company as a non-executive Director
he made a significant contribution to          We will continue to experience pressures
Board discussions. His presence is missed      from higher energy costs. Our ongoing
and our thoughts are with his family.          commitment to improving operational




                                                                                                    Devro plc Annual Report & Accounts 2005 7
Eating Wieners
around the world




In Europe alone,
36 countries now buy
Wiener casing from
the Devro group in
a variety of different
calibres and colours.

8 Devro plc Annual Report & Accounts 2005
                                                The Wiener is considered by many
                                                to have originated in the German city
                                                of Frankfurt and to have been
                                                subsequently developed in nineteenth-
                                                century Vienna by a master butcher.




Wiener Sausages                               sausage styles in China. The collagen         productivity in Wiener manufacture and
The Wiener is a very popular small            casing required for Wiener sausage has        its gut-like characteristics on the finished
diameter smoked and cooked sausage            particular characteristics – the product      sausage. Sales of Cutisin Fine have
which is made using pork, beef or poultry     must be strong enough to withstand high       developed strongly over the past few
meat. Traditionally, the Wiener has been      speed filling and be capable of hanging       years, as illustrated by the graph, and its
produced using sheep gut whereas              on smoke-sticks during smoking and            success is expected to continue. This
its close relative, the Frankfurter, has      cooking and taking up smoke colour            product’s growth potential was a
used hog gut. Nowadays, the use of            and flavour to ensure that the familiar       significant factor in the group’s decision in
edible collagen casing is well established    taste and appearance of the sausage           2004 to expand the Jilemnice factory in
in the manufacture of both Wieners            is achieved. At the end of the process,       the Czech Republic and also in the recent
and Frankfurters, which are essentially       the Wiener is ready for heating by the        decision to bring forward the investment
very similar in nature, although generally    consumer and must be tender enough            of a further £3.0 million on the installation
the Frankfurter can be slightly larger        to eat and, in some markets, have the         of additional manufacturing capacity there.
in diameter.                                  all-important “knack” sound when the
                                              consumer bites into the sausage.              In Europe alone, 36 countries now buy
The Wiener derives its name from the                                                        Wiener casing from the Devro group
Austrian capital, Wien, which is of course    Profile of Cutisin                            in a variety of different calibres and
known in English as Vienna. This type         Fine volume growth                            colours. The humble Wiener has come
of sausage, using smoking and cooking                                                       a long way, but there’s every reason
to preserve the meat, has been around                                                       to believe it still has some way to go.
for many hundreds of years. It is
considered by many to have originated
in the German city of Frankfurt and to
have been subsequently developed in
nineteenth-century Vienna by a master
butcher who had been trained in
Frankfurt. Somewhat bizarrely, these
sausages are known today in Frankfurt
as “Wieners”, while the Viennese call           2002    2003     2004    2005
them “Frankfurters”.

This type of sausage is consumed in           Such key characteristics of a collagen
many countries throughout the world,          Wiener casing are not easily achieved.
particularly within Continental Europe. Its   Cutisin has committed significant technical
popularity extends also to the Far East,      resource to this task and developed
with established key markets in Japan         the Cutisin Fine product. It has won
                                                                                                     Find out more – visit our website
and Korea and rapid development in the
production and marketing of similar
                                              widespread acclaim for its success in this
                                              area, particularly with respect to its high
                                                                                            @        www.devro.plc.uk



                                                                                                      Devro plc Annual Report & Accounts 2005 9
Operating and
financial review
We remain committed to developing the market through
solid investment in our marketing programmes, our product
development programmes and our manufacturing operations.




                                              Operating review                               previous years in what is, essentially,


 £152.5m                                      Devro had another satisfactory trading
                                              year overall, with the majority of our
                                              major market areas showing increases
                                                                                             a mature market. In such circumstances,
                                                                                             some easing up is perhaps not surprising
                                                                                             and, indeed, trading in the early part
 Group revenue                                in sterling revenue compared with 2004.        of 2006 has returned to a pattern
                                                                                             of reasonably solid growth. While
                                              This was achieved against the backdrop         price/mix for the year was slightly under
                                              of a softer trading environment during the     2% adverse, the trend was positive
                                              second half of the year, particularly during   towards year-end with the fourth quarter
                                              the third quarter. Trading at the very end     recording an improvement of around 1%.
                Americas
                                              of the year recorded a significant downturn    Competition continues to be quite active
                                              on prior year in almost all markets. Most      in the UK market, but over the course
                                              of this downturn, however, was due to the      of the year we held a solid position and
              Asia/         Europe
              Pacific                         phasing of the Devro trading calendar          the improved price/mix figure for the
                                              which had fewer effective days for selling     fourth quarter reflects actions on price,
                                              in December 2005 compared to 2004,             taken earlier in the year, beginning to work
                                              reducing group volume growth from 4%,          through into the market.
                                              recorded to the end of November, to 2%
 The chart above shows the regional           for the year as a whole. Excluding this        In Continental European markets the
 spread of our sales in 2005. We              effect, trading during the fourth quarter      excellent growth seen in recent years
 believe there is significant potential       generally was comfortably above prior year.    continued throughout 2005. Each of
 for growth in the developing markets                                                        the major market areas – Western
 of South East Asia, Eastern Europe           Total group revenue for the year, at           Europe, Central Europe and Eastern
 and Latin America.                           £152.5 million, was 2.4% ahead of              Europe – showed an increase in casing
                                              the prior year figure of £148.9 million.       sales volumes over prior year, resulting
                                              While translational exchange had a             in an overall increase of over 10% in
                                              positive influence on the revenue in each      these markets.
 Group capital expenditure (£’m)
                                              of our operating regions, the largest
                                              single impact was the adverse                  While the Devro range achieved a solid
 20                                           transactional effect of over £1.5 million,     increase of 4%, Cutisin increased its
                                              arising from Cutisin’s export sales in         volumes by almost 20%. Sales in all
 15                                           euros and US dollars, which appears            Cutisin’s European markets were
                                              as an adverse price movement.                  comfortably ahead of prior year, with
                                                                                             Eastern Europe being particularly strong.
 10
                                              In the UK, the market was slightly             The good potential demonstrated by
                                              subdued, particularly during the third         Eastern European markets during 2004
   5                                          quarter. While sales picked up early in the    continued throughout 2005, driven by
                                              fourth quarter, UK volumes nevertheless        a combination of the underlying
   0                                          finished 5% behind for the year. However,      conversion from gut to collagen and the
         2002       2003     2004      2005   this should be viewed against a picture        continued improvements in the quality,
                                              of unusually strong growth over the two        design and range of the product offering.

10 Devro plc Annual Report & Accounts 2005
                                               Net debt (£’m)

                                               40



                                               30



                                               20



                                               10



                                                0
                                                      2002    2003     2004     2005


John Neilson, Finance Director                                                               Dr Graeme Alexander OBE, Chief Executive




These markets continue to hold                been growing strongly for several years        market, a strong marketing drive from
considerable potential for the future.        and this growth continued into the first       our Japan-based team and the availability
                                              half of 2005. As the year progressed,          of porcine casing. Elsewhere in the
However, the strength of the Czech            the growth slowed and some customers’          region, sales into our other Asian
Koruna compared to its major export           inventories were re-aligned accordingly.       markets have also grown strongly with
trading currencies of the euro and US         The combination of lower sales and             volumes ahead of prior year by almost
dollar had a significant adverse impact       reducing production then resulted in           20%. This continues the pattern of the
on the value of Cutisin’s export sales.       a more significant reduction in the off-take   past few years and reflects a significant
While underlying prices for Cutisin’s         of casing for these products during the        increase in the developing Chinese
products in European markets were             second half. This situation, however, is not   market as growth in low-temperature or
either stable or slightly higher than prior   expected to be of extended duration and        western-style Frankfurter sausage begins
year, the impact of the transactional         we anticipate that a more normal trading       to move forward.
currency movement was a reduction in          pattern will return during 2006.
effective selling prices. This was                                                           In our developing thin-film and biomedical
equivalent to over £1.5 million within the    In Latin America, while sales were             segments we continue to make progress,
local Czech operation, although the           behind those of 2004, the underlying           and both the range of products and the
impact on group profits is reduced to         market was actually steady. Availability of    technologies required to manufacture
around £1.0 million when Cutisin’s            Coria product for sale in Latin American       them are now well established. Sales
results are translated into sterling.         markets was restricted during the first        of thin-film products continue to be
                                              half due to the large demand being             slower than anticipated, however, and
In the Americas there was an increase in      created in the growing US market. As           developing this market opportunity into
sterling revenue of almost 3%. This           2005 progressed and the snack sector           a viable commercial proposition is an
resulted from an increase in volumes of       in the US slowed down, more volume             important challenge for 2006.
slightly under 1% and a positive price/mix    was released into Latin America and
of 0.5%, with a positive translational        sales grew closer to prior year levels.        The year saw real productivity gains in
exchange effect contributing the balance.     This continues to be a market with good        manufacturing. Coupled with tight cost
                                              potential for the future, albeit at a lower    controls, these helped to offset some of
In local currency terms, total sales in the   average price.                                 the significant rise we experienced in the
Americas finished the year ahead of prior                                                    cost of energy. This rise had an impact
year. Within this, however, second half       In the Asia/Pacific region, revenue in         right across the group and amounted to
trading was poorer than the equivalent        local currency increased by 3.5%. The          around £2.0 million of additional costs
period of 2004, with volumes slowing          sales performance in Australia and New         compared with 2004. The greatest
markedly after a very good first half.        Zealand was reasonable, with steady            impact was experienced in the UK
While the phasing of the Devro trading        market conditions prevailing. In the           operation, particularly in the second half,
calendar, referred to earlier, played         Japanese market, the solid growth of           and was in the region of £1.3 million.
a significant part in this, it was also,      2003 and 2004 continued into 2005.             We will continue to experience pressure
in large measure, a reflection of a small     Volumes were almost 12% ahead of               on our energy costs at least in the
reduction in the snack sausage sector         2004 levels, which were themselves well        immediate future.
in the US market during the third quarter.    ahead of the previous year. This
This sector, characterised by products        continued growth has been assisted by a        We remain committed to a rigorous and
such as beefsticks and mini-salamis, had      combination of underlying growth in the        ongoing programme of cost control and, in

                                                                                                     Devro plc Annual Report & Accounts 2005 11
The growth in operating profits was
underpinned by increased volumes and
significant improvements in productivity
and manufacturing efficiency.




order to ensure that any escalation in          enabled us to extend our range and           impact of 1.6%, due in part to
overall manufacturing costs is kept to an       introduce several enhancements for both      competitive pricing but arising mainly
absolute minimum, action has been taken         products and processes. This continuing      from adverse transactional exchange
to tighten further the overhead structure       programme of improvement is of vital         movements. A favourable translational
in the UK operation. This has resulted in       importance in helping to retain our          exchange impact of 2.3% then resulted
some reduction in employee numbers              position in those markets where we           in the overall sterling revenue for the
across each of the overhead cost centres.       maintain high market shares. We also         group finishing 2.4% ahead of prior year.
This action was implemented in January          continue to believe that our technologies
2006 and will yield annualised cost savings     form the basis on which the future           The group’s operating profit of
in the order of £1.0 million. While it will     growth of our business will depend.          £21.3 million, excluding an exceptional
have some impact on the results for the                                                      credit of £6.3 million relating to the
first half of this year, neither profits nor    There is considerable scope for the          sale of surplus land at Moodiesburn,
cash should be significantly affected for the   development of markets in Eastern            compares with £20.7 million, including
year as a whole.                                Europe, South East Asia and Latin            the share of the operating loss of the
                                                America, as well as further opportunities    joint venture, in 2004.
In the Czech Republic, the major project        in the more established markets. We
to expand the manufacturing facilities is       remain committed to developing the           The growth in operating profits was
progressing well. The plant installation is     market through solid investment in our       underpinned by increased sales volumes
well underway and the project is running        marketing programmes, our product            and significant improvements in
to time, with overall costs expected to         development programmes and our               productivity and manufacturing efficiency.
finish very close to budget. The bulk of        manufacturing operations. We will            The group also benefited from a cost
the new manufacturing process will come         continue to face competitive pressure, but   reduction programme which has been
on-stream during the second half of this        the group is in a strong position to take    vigorously pursued. In total, these
year and the older Korenov plant will be
                        ˇ                       advantage of the emerging opportunities      factors generated additional profit of
converted to manufacturing only non-            as the world food market becomes steadily    approximately £2.5 million. Offsetting
edible collagen casing at the end of            more automated, generating increasing        these positive items, the adverse
2006. Sales of Cutisin products remain          applications for edible collagen casings.    price/mix impact on average selling
buoyant and the outlook is for continued                                                     prices had a negative effect on
strong growth. It has, therefore, been          Financial review                             profitability of a similar amount. This
decided to bring forward plans, originally      Total sales for 2005 were £152.5             adverse price/mix impact relates mainly
scheduled for 2007, to invest an                million against a prior year figure of       to a reduction in the effective selling
additional £3.0 million this year to extend     £148.9 million.                              prices of Cutisin’s exports, due to the
the new capacity being installed in our                                                      strength of the Czech Koruna compared
Jilemnice facility in the Czech Republic.       Sales volumes were ahead of prior year       with the euro and the US dollar.
                                                by 1.7%. Sales of Cutisin casings were
In our technical and manufacturing              significantly higher than prior year         Energy prices have been rising steeply
operations we continue to place great           throughout 2005, particularly in Eastern     and this led to an increase of £2.0 million
emphasis on improving the quality and           Europe, while both Devro and Coria           in utility costs. Prices continue to rise
range of our product offering, together         experienced a slower second half in the      and, while we have an active energy
with the consistency and effectiveness of       UK and US markets respectively. The          conservation programme in place, we
our manufacturing processes. This has           volume gain was offset by a price/mix        expect broadly similar increases in 2006.

12 Devro plc Annual Report & Accounts 2005
                                                R&D expenditure              % of sales       Head count by region
                                                (£m)                                          (Average number of employees)
                                                 5                                     5

                                                                                                           Asia/
                                                4
                                                                                                           Pacific


                                                3
                                                                                                   Americas
                                                2

                                                                                                                       Europe
                                                1


                                                0                                      0
                                                     2002     2003    2004    2005




We continue to make solid progress in          debt of £28.9 million and cash of             while tax payments of £6.4 million
developing thin-film products at our           £11.2 million. Gearing was reduced to         included £0.9 million in respect of the
Hamilton facility. Although sales show         29% (2004: 48%).                              land sale.
a significant uplift over 2004, group
results have been adversely affected by        The group’s borrowing facility totals £47.8   Capital expenditure of £16.7 million
£0.8 million (2004: £0.3 million) with         million. An interest rate swap of £10         (2004: £11.5 million) contained
depreciation on the newly-acquired             million is in place to provide protection     £7.4 million in respect of the expansion
assets accounting for a significant            against potential increases in interest       programme in the Czech Republic.
portion of this charge.                        rates. This swap expires on 17 July 2006.
                                                                                             Earnings attributable to shareholders
Pension charges of £2.1 million (2004:         The financial impact of exchange rate         have increased to £18.7 million from
£3.2 million) were significantly lower         fluctuations is minimised by a policy of      £12.9 million in 2004. Unadjusted
than prior year. This was primarily due        hedging foreign exchange risk. All            earnings per share was 11.5 pence,
to a one-off credit of £0.9 million relating   hedging is undertaken centrally by the        an increase of 44% compared with
to a reduction in the future obligations       Corporate Treasury function, based in         8.0 pence in 2004. Excluding the
of the US pension fund.                        Moodiesburn, in accordance with Board-        exceptional credit of £6.3 million,
                                               approved policies and authorities.            earnings attributable to shareholders
Foreign exchange had a net negative            Specifically, policies permit forward         were £14.0 million, giving earnings
impact of £0.6 million on group profits.       transaction hedging to a maximum level        per share before exceptional item of
The total impact of adverse transactional      of 75% of anticipated currency flows for      8.7 pence, an increase of almost 9%.
exchange mentioned earlier totalled £1.6       up to one year ahead. They also permit
million, while group profits benefited by      the hedging of up to 100% of interest         A final dividend of 3.025 pence per share
£1.0 million when translating the profits      rate exposures for a period not               is proposed. This, together with the
of the overseas entities into sterling.        exceeding five years. As a matter of          interim dividend of 1.375 pence paid in
                                               policy, the group does not undertake any      October, gives 4.4 pence and represents
Considerable resources continue to be          speculative transactions which would          an increase of 10% over 2004.
invested in product and process                increase its foreign exchange or interest
development, resulting in research and         rate risks.                                   Prior year financial information as
development expenditure in 2005                                                              presented in the comparative figures
totalling £4.1 million, being 2.7% of sales    The group’s effective tax rate for 2005 of    has been restated to incorporate
(2004: £4.0 million, 2.7% of sales).           27.5% (2004: 28.6%) has fallen due to         adjustments required under International
                                               an adjustment in respect of the prior year    Financial Reporting Standards as
Net interest expense totalled £1.8             provision for taxation in our US operation.   endorsed by the EU.
million in 2005 (2004: £2.7 million).
The average level of debt was                  Cash generated from operations of £28.5
significantly lower than 2004, following       million (2004: £28.3 million) was ahead
the land sale early in 2005. Net interest      of prior year, reflecting higher operating    Graeme Alexander OBE, Chief Executive
cover was over 11 times.                       profits and lower interest payments.

Net debt at the year-end amounted              The sale of surplus land led to the
to £17.7 million, comprising gross             receipt of £7.3 million, net of expenses,     John Neilson, Finance Director

                                                                                                     Devro plc Annual Report & Accounts 2005 13
Who we are


1                           2                3                      4                     5                     6




Board:                                       1 Pat Barrett OBE (69)                       3 John Neilson (52)
Pat Barrett OBE                              Chairman                                     Finance Director
Graeme Alexander OBE                         Pat joined Devro in June 2001 as             A chartered accountant, John joined
Trevor Morgan                                a Non-Executive Director and was elected     Devro in 1976 and was appointed as
Paul Neep                                    Chairman in July 2001. He is Chairman        a director of the company controlling
John Neilson                                 of Jaycare Limited, a company involved       Devro’s European operations in 1989,
Stuart Paterson                              in plastics packaging focusing on the        becoming Finance Director in 1991.
                                             pharmaceutical industry, Chairman of         With a small corporate finance team
Executive committee:                         M & H Plastics, which is a packaging         and finance directors in each of our
Graeme Alexander OBE                         business specialising in the personal        operating entities located in seven
Will Blair                                   care sector and also a Board Director of     countries, each trading in several
Mike Cooke                                   Lecta – a company based in France, Italy     currencies, John maintains a tight
Gordon Frame                                 and Spain – specialising in the production   control over cash, treasury and capital
Graham McGilchrist                           of coated wood-free paper. It is his         expenditure. He is responsible for the
Trevor Morgan                                responsibility to lead the Board and         development of financial policies and
John Neilson                                 oversee management in its development        procedures and ensuring these are
Petr Raschik                                 of strategies to grow Devro’s business.      adhered to around the world.
Douglas Stewart
                                             2 Dr Graeme Alexander OBE (56) 4 Trevor Morgan (49)
                                             Chief Executive                Executive Director
                                             Graeme joined Devro in 1977 and was          Trevor joined Devro in 1982 and has
                                             appointed as a director of the company       held a number of key positions at a senior
                                             controlling Devro’s European operations      executive level within the group. He was
                                             in 1989, becoming Chief Executive            appointed a director in March 1998.
                                             following the company’s flotation in         Trevor is responsible for the development
                                             1993. He is responsible for the overall      and the growth of the group’s non-
                                             direction of Devro’s business and leads      casings business. With a broad technical
                                             the Executive Management team. He            background and considerable experience
                                             is actively involved in all the important    of new product introductions, he plays
                                             aspects of the company’s development         a critical role in the development and
                                             – people, markets, products and              commercialisation of new products.
                                             technology. Graeme has extensive
                                             knowledge of the global casing market
                                             and is a key driver in the development
                                             of company strategy and vision. He
                                             is Chairman of the Non-Executive
                                             Directors’ Remuneration Committee.




14 Devro plc Annual Report & Accounts 2005
7                      8                     9                     10                     11                       12




5 Paul Neep (52)                             8 Mike Cooke (54)                            area of responsibility expanded to include
Non-Executive Director                       Director, Technical                          Japan and South East Asia as well as the
Paul joined Devro in February 2005 as        Mike joined Devro in September 2001          Australian and New Zealand markets.
a Non-Executive Director. He was Chief       after 25 years in ICI. He brought with
Executive of Glenmorangie plc and holds      him a wide experience of senior technical,   11 Petr Raschik (61)
the same position now that the company       project and manufacturing roles in           Business Director
is part of LVMH. He has previously held      different businesses both in the UK and      Eastern Europe
senior positions within the Granada          overseas. After three years as Regional      Petr joined the Cutisin organisation in
Group and United Distillers. He is the       Director Europe, Mike was appointed as       1967 and held a number of senior
Senior Independent Director and is           Director, Technical during 2005 and is       positions in the technical function until
Chairman of the Executive Directors’         responsible for leading the development      his appointment as General Manager
Remuneration Committee.                      of our products and processes.               in 1990. In this role, he has been
                                                                                          responsible for the Cutisin business
6 Stuart Paterson (48)                       9 Gordon Frame (46)                          and, under his leadership, Cutisin has
Non-Executive Director                       Business Director                            become a major contributor to the
Stuart, a chartered accountant, joined       Western Europe                               Devro group. Petr was appointed to
Devro in March 2006 as a Non-Executive       Gordon joined Devro in 1986 and has          the Executive Committee of Devro in
Director. He is Chief Financial Officer of   held a number of key technical and           2002 and became Business Director
Johnston Press plc and a Non-Executive       business development positions at a          Eastern Europe in 2005.
Director of Mirago plc. He was formerly      senior level within the group, including
Finance Director of Aggreko plc. He is       Business Director Americas before            12 Douglas Stewart (43)
Chairman of the Audit Committee.             returning to Scotland in 2005. He was        Business Director Americas
                                             appointed Business Director Western          Since joining Devro in 1994, Douglas
7 Will Blair (52)                            Europe in September 2005 and has             has worked both domestically and
Director, Group Marketing                    responsibility for leading the group’s       internationally in a number of senior
Will joined Devro in 1981 and became         business activities in this area.            positions covering a wide range of
Head of UK Sales and Marketing in the                                                     disciplines, including Director of Sales
late eighties before leaving to work for     10 Graham McGilchrist (55)                   Asia/Pacific based in Australia. In
3i. Since rejoining Devro in 1993 he         Business Director Asia/Pacific               December 2005 he relocated to South
has held a number of commercial roles,       Graham joined Devro in 1981 as head          Carolina, US to become Business Director
including responsibility for sales of        of finance for the Australian operation.     Americas, and has responsibility for
collagen in North and Latin America          Since that time, he has held a number        leading the group’s business activities in
and marketing our range of non-casings       of senior positions within the Devro         that region.
products. He was appointed to the            Worldwide organisation, including
Executive Committee in November 2005.        President of our North American
                                             operations until returning to Australia
                                             in 1995. During 2002, Graham had his




                                                                                                  Devro plc Annual Report & Accounts 2005 15
Corporate social
responsibility report
The group has always recognised that environmental protection
is of fundamental importance to a successful and responsible
business strategy.




Each year the Board carries out a broad       a consequence, environmental issues              with respect to the environment and
review of business risks which includes       are dealt with through a network of              some of the key projects undertaken this
social, environmental and ethical (“SEE”)     specialists operating within the business        year are outlined below:
matters. This review is aimed at              units. To ensure consistency of
identifying and assessing significant risks   approach, all group companies operate            • Scotland
to the group’s value, as well as providing    within an agreed corporate framework             The programme of energy saving
the Board with an opportunity to manage       which promotes exchange of information           projects continued and, as a result, both
such risks by way of an appropriate           and best practice.                               our plants are on target to meet the next
response.                                                                                      climate change levy milestone in 2006.
                                              It is a group objective that none of its
To ensure the Board receives adequate         products, processes or operations shall          55 tonnes of cardboard, office paper,
information to make this assessment,          pose any threat to the environment.              plastics and polythene have been
the review is co-ordinated globally by the    Commitment to this objective is highlighted      recycled in 2005. Following successful
Head of Risk Assurance, and requires          in the Safety, Health & Environmental            pilot tests, large scale composting trials
regional management committee input           Policy, (reviewed and updated during             with gel and casing waste are being
and Executive Committee participation         2005), which complements the company             carried out at the Scottish Water
before the process reaches the Board.         Philosophy. Both policies are available          composting site at Deerdykes.
                                              on our website (www.devro.plc.uk).
The Board believes that this system is        Recognising that teamwork and                    • United States
sufficiently comprehensive to effectively     co-operation are key to success, training        Through joint efforts with a major
manage significant SEE risks, and to date     arrangements are in place to raise               fertilizer manufacturer, the South
has not felt it necessary to incorporate      employee awareness of safety and                 Carolina facility recycled approximately
remuneration incentives into the system.      environmental issues and develop support         three thousand tonnes of liquid
                                              for future initiatives.                          ammonium sulphate, to be used as
Environmental policy                                                                           fertiliser feedstock. In total, waste
The group has always recognised               Environmental update                             minimisation efforts have allowed the
that environmental protection is of           Environmental issues continue to be              plant to hold the increase in total
fundamental importance to a successful        a high priority within the group, which          land-filled waste to 1%, while increasing
and responsible business strategy.            is committed to achieving compliance             overall collagen gel production by 6%.
We take pride in our business activities      with regulations, permits and consent
and are committed to minimising our           limits in its various activities. In addition,   Investments in upgraded controls,
environmental impact in the countries         with a philosophy of continuous                  an improved fuel delivery system and
in which we operate and the                   improvement in all areas of the business,        an improved ash removal system for
communities we serve.                         improvements in environmental                    the wood boiler have resulted in a
                                              performance are expected.                        50% reduction in the opacity of the
The diverse range of group operations                                                          emissions compared to 2004, thus
around the world is subject to a variety      The group’s operating plants continue to         meeting the goal set by the air
of regulatory regimes and cultures. As        make improvements to their operations            regulatory agency.



16 Devro plc Annual Report & Accounts 2005
                                               Our Czech facilities                         For the third
                                               recorded a 15%                               consecutive year, the
                                               reduction in accidents                       Scottish operation has
                                               compared to                                  been awarded the Gold
                                               2004.                                        Award by the Royal
                                                                                            Society for Prevention
                                                                                            of Accidents.




• Australia                                  each plant so that we can monitor the        International Safety Award by the British
During 2005 our Australian facility has      safety performance of each company.          Safety Council. Benchmarking of the
focused on improving the performance                                                      reportable injury rate shows the plant to
and reliability of its effluent treatment    Although group safety performance            have achieved a performance four times
through primary screening and upgraded       as measured by the number of injuries        better than the average for UK
computer and control systems.                resulting in lost work remained              manufacturing industry as a whole.
                                             constant when measuring 2005
• Czech Republic                             performance against 2004, there was          Regulatory compliance
The group’s Czech plants are certified to    a 24% reduction in the number of lost        With its worldwide trading, the group
the Environmental and Quality Management     working days.                                is conscious of the need to ensure
System Standard ISO 14001.                                                                compliance with a multiplicity of national
                                             The Australian plant has focused on          and international legislation. In particular,
The Czech facilities have continued to       early return to work and rehabilitation      in 2005 we have ensured compliance
focus on waste recycling to reduce the       following accidents; this has resulted in    with the European Union Collagen
impact of waste disposal. At the             a significant decrease in costs related to   Decision 2003.721/EC which is
Jilemnice plant, process improvements        claims and a reduction of 30% in the         superseded in 2006 by the new
in the shirring area have yielded a 15%      number of days lost.                         European Union Hygiene Regulations
reduction in waste.                                                                       and specifically the new Regulation
                                             During 2005 there was only one lost          2004/853/EC Section XV covering
Health and safety                            work day due to an accident at our US        collagen for human consumption. In
Health and safety has a very high priority   plant which was the recipient of the         addition, we remain in full compliance
within Devro. The group’s policy on          Palmetto Safety Award from the South         with the new European Union Regulation
health and safety requires that all our      Carolina Safety Council. A new record        2005/2073/EC on microbiological
companies are committed to achieving         of 1.35 million hours worked without         criteria for foodstuffs.
high standards within their operations.      a lost time injury was created.
                                                                                          The harmonisation of Czech law with EU
All group companies are required to          The Czech facilities recorded a 15%          requirements has resulted in the need for
conduct regular formal safety reviews at     reduction in accidents compared to           some changes in our facilities and these
plant level. Nominated managers and          2004. There continues to be a rapid          continue to be carried out in agreement
employees review policies, processes         rate of change as local management           with the local authorities. In addition, the
and procedures in order that risks may       strives to comply with changes to the        Czech factories are accredited to the ISO
be properly assessed and appropriate         law aimed at bringing the Czech Republic     14000 environmental standard.
action taken to protect the safety of        in line with EU standards.
employees. All accidents and incidents                                                    We aspire to achieve high levels of
are fully investigated so that remedial or   For the third consecutive year, the          food safety, and in addition to general
avoidance action may be initiated and        Scottish operation has been awarded the      registration to ISO 9001:2000 by all
subsequently monitored. Formal               Gold Award by the Royal Society for          our manufacturing facilities, and routine
reporting procedures are in place at         Prevention of Accidents and the              inspection by local authorities, our



                                                                                                  Devro plc Annual Report & Accounts 2005 17
As a truly global business, we are fully
aware of our global responsibilities. These
responsibilities are extensive, from protecting
the environment throughout the continents
in which we work, to safeguarding the health
and safety of our employees.




Scottish facilities are accredited to the     this, share ownership is encouraged and      was equivalent to 33 days of purchases
2005 BRC/EFSIS Global Standard for            channels for employee involvement have       from suppliers.
food safety.                                  been established, including a European
                                              Works Council.                               Communities
Collagen Casings Trade                                                                     All our factories are situated in relatively
Association                                   Given the geographical spread of our         small communities, and we work with
Following an initiative by Devro, a Global    operations, it would be inappropriate and    them where possible. This includes
Trade Association has been created with       impractical to apply uniform procedures      small but regular donations to support
membership which includes other major         group-wide. Each company is, therefore,      local institutions such as schools
manufacturers. The initial focus will be in   responsible for achieving and maintaining    and hospitals.
the regulatory area and a launch meeting      appropriate consultation and
was held in January 2006 in Brussels.         communication with its employees.            Corporate ethics
                                              Examples of the employee involvement         All Devro employees are expected to
Employees                                     programme during 2005 included:              behave ethically in their work and our
The group aims to attract and retain                                                       expectations of them are set out in a
employees of high calibre in order to         • Financial information as disclosed by      detailed Business Conduct Policy. Annually,
achieve improvements in its performance.        means of employee briefings and the        senior management are required to sign
The development and motivation of our           distribution of the Interim and Annual     a certificate confirming compliance of both
employees is a high priority.                   Report and Accounts;                       themselves and their staff with this policy.
                                              • Joint management and employee
The group provides equal opportunity            committee meetings on Health and           Verification
for employment, training, career                Safety; and                                This report has been reviewed by the
development and promotion regardless          • Meetings undertaken with employees         Head of Risk Assurance, whose role
of age, sex, colour, race, religion, ethnic     and union representatives to discuss       involves risk management co-ordination
origin or other minority criteria.              the issues affecting them.                 on a global basis, and regular contact
                                                                                           with all group locations worldwide.
The group encourages the employment           Suppliers
of disabled people whenever suitable          We recognise that our corporate              Summary
vacancies are available. Arrangements         social responsibility also reflects in the   As a truly global business, we are
are made, wherever possible, for              way we behave towards our suppliers.         fully aware of our global responsibilities.
retraining employees who become               We strive to be open, honest and             These responsibilities are extensive,
disabled, to enable them to perform           consistent in all our dealings with          from protecting the environment
work identified as appropriate to their       suppliers. The group agrees terms            throughout the continents in which we
aptitudes and abilities.                      and conditions with suppliers before         work, to safeguarding the health and
                                              business takes place. The group’s            safety of our employees and to ensuring
Enabling employees to derive the              policy is to pay agreed invoices in          integrity and honesty in our business
maximum possible benefit from their           accordance with the terms of payment.        dealings. In these and many other ways,
employment with Devro is a key principle      At 31 December 2005, the amount              it is Devro’s objective to operate worldwide
which the Board has adopted. In line with     owed to trade creditors by the group         in a safe and responsible manner.


18 Devro plc Annual Report & Accounts 2005
Financial statements




                       Contents
                       Directors’ report                           20
                       Corporate governance                        22
                       Remuneration report                         26
                       Consolidated income statement               30
                       Statements of recognised income
                         and expense                               30
                       Balance sheets                              31
                       Cash flow statements                        32
                       Notes to the financial statements           33
                       Independent auditors’ report to
                         the members of Devro plc                  73
                       Notice of meeting                           74
                       Financial summary                           75
                       Directors and advisers                      75
                       Shareholder information                     76




                               Devro plc Annual Report & Accounts 2005 19
Directors’ report
for the year ended 31 December 2005




The directors present their report and the audited financial          Directors
statements for the year ended 31 December 2005.
                                                                      The names and brief biographical details of the directors of the
                                                                      company at the date of this report are set out on pages 14 and 15.
Principal activity                                                    Mr S R Paterson was appointed as a Non-Executive Director on
The principal activity of the group is the production and marketing   9 March 2006.
of manufactured casings for the food industry.
                                                                      In accordance with the Articles of Association, Mr J A Neilson and
The company’s principal subsidiary undertakings and branches          Mr T F Morgan retire by rotation and being eligible offer themselves
are listed in note 16 to the financial statements.                    for re-election at the Annual General Meeting. Mr J A Neilson and
                                                                      Mr T F Morgan are subject to service agreements which are
Review of business                                                    terminable by either party on one year’s notice. Mr S R Paterson
The report of the directors should be read in conjunction with        will stand for election at the forthcoming Annual General Meeting
the Chairman’s Statement and the Operating and Financial Review       as he was appointed since the last Annual General Meeting.
which contain details of the group’s trading during the year and
an indication of future developments.                                 The company maintains insurance for its directors in respect of
                                                                      their duties as directors.
The consolidated income statement for the year is set out on
page 30.                                                              None of the directors had or has an interest in any material
                                                                      contract relating to the business of the company or of any of its
Post balance sheet event                                              subsidiary undertakings.

In January 2006, the group incurred a charge of £1,015,000
                                                                      The interests of the directors in the share capital of the company
in respect of redundancy costs in Scotland.
                                                                      are shown on page 29.

Dividends                                                             Substantial shareholdings
An interim dividend of 1.375 pence per share was paid on
                                                                      At 20 March 2006, the company had been notified of the
19 October 2005. This compares with the interim dividend
                                                                      following material interests in the issued ordinary share capital of
of 1.25 pence in 2004.
                                                                      the company:

The directors recommend a final dividend of 3.025 pence per                                                                  Percentage of
ordinary share. If the final dividend is approved by shareholders,                                                           issued capital
                                                                                                               Number of         at date of
dividends for the year will total 4.4 pence.                                                              ordinary shares       notification

During the year the employee share ownership plan trust waived        Acomita Investments Limited          22,434,052              13.9%
dividends totalling £23,000 due in respect of the shares              Schroder Investment
purchased by it under the Devro 2001 Deferred Bonus Scheme              Management Limited                 17,403,217              10.8%
(2004: £27,000).                                                      Legal & General Group plc             4,840,164               3.0%

Share capital
During the year 427,000 ordinary shares of 10 pence each              Charitable and political contributions
were issued under the rules of the company’s executive share          The contributions made by the group during the year for
option schemes, bringing the total number of ordinary shares in       charitable purposes amounted to £35,000 (2004: £66,000).
issue at 31 December 2005 to 161,755,760.                             The contributions were mainly made to charities where the
                                                                      group’s operations are based and can be analysed as follows:
Share options
                                                                                                                                          £
Details of all options granted but not exercised or lapsed
at 31 December 2005 are shown in note 28 to the                       Local community groups                                      18,000
financial statements.                                                 Schools and colleges                                         7,000
                                                                      Health care and medical research                            10,000
Research and development
The group is committed to research and development activities                                                                   £35,000
in order to secure its position as a world leader in the casings
industry. The research and development expenditure incurred           There were no contributions for political purposes (2004: £nil).
in the year is set out in note 3 to the financial statements.




20 Devro plc Annual Report & Accounts 2005
Employees                                                               the company’s ordinary shares were exercised in full, these options
                                                                        would then represent 0.6% of the company’s issued ordinary share
Details of the group’s employment policies are given in the
                                                                        capital. As at 23 March 2006, the company did not hold any
Corporate Social Responsibility Report on page 18.
                                                                        treasury shares in the company and no warrants over ordinary
                                                                        shares in the capital of the company existed.
Policy on payment of suppliers
The group agrees terms and conditions with suppliers before             Auditors
business takes place. The group’s policy is to pay agreed invoices
                                                                        A resolution to reappoint PricewaterhouseCoopers LLP as auditors
in accordance with the terms of payment. At 31 December
                                                                        to the company will be proposed at the Annual General Meeting.
2005, the company had no trade creditors; the amount owed
to trade creditors by the group was equivalent to 33 days of
purchases from suppliers (2004: 25 days).
                                                                        Statement of directors’ responsibilities
                                                                        Company law requires the directors to prepare financial
Financial instruments                                                   statements for each financial year that give a true and fair view of
                                                                        the state of affairs of the company and the group and of the profit
Details of the group’s financial risk management objectives and
                                                                        or loss of the group for that period.
policies are included in note 23 to the financial statements.

                                                                        In preparing those financial statements the directors are required to:
Annual General Meeting
The Annual General Meeting (“AGM”) of the company will be held          • select suitable accounting policies and then apply them
on Wednesday 10 May 2006 at 12.00 noon at The Westerwood                  consistently.
Hotel, 1 St Andrews Drive, Cumbernauld.
                                                                        • make judgements and estimates that are reasonable
Shareholders will be invited to approve the Remuneration Report           and prudent.
set out on pages 26 to 29.
                                                                        • state that the financial statements comply with IFRS.
The authority for the company to purchase its own ordinary shares
of 10 pence each granted at last year’s AGM will expire on the          • prepare the financial statements on the going concern basis,
date of the forthcoming AGM. The directors wish to renew this             unless it is inappropriate to presume that the group will
authority and a special resolution, which is set out in full in the       continue in business.
Notice of Annual General Meeting on page 74, will be proposed as
special business at the forthcoming AGM to give the company             The directors confirm that they have complied with the above
the authority to purchase its own ordinary shares in the market         requirements in preparing the financial statements.
as permitted by the Companies Act 1985. The authority limits
the number of shares that could be purchased to a maximum of            The directors are responsible for keeping proper accounting
16,000,000 (representing less than 10% of the issued ordinary           records that disclose with reasonable accuracy at any time the
share capital of the company as at 23 March 2006) and sets              financial position of the company and the group and enable
minimum and maximum prices. This authority will expire no later         them to ensure that the financial statements comply with the
than 15 months after the date of the forthcoming AGM.                   Companies Act 1985. They are also responsible for safeguarding
                                                                        the assets of the company and the group and for taking
Although the directors have no present intention of exercising          reasonable steps for the prevention and detection of fraud and
the authority to purchase the company’s ordinary shares, they           other irregularities.
consider that it is in the best interests of the company to have
available this authorisation, in case of circumstances when it          The directors are responsible for the maintenance and integrity of
would be appropriate to use it. They would only use it when             the website. Legislation in the UK concerning the preparation and
satisfied that this will result in an increase in earnings per share    dissemination of financial statements may differ from legislation in
and is in the best interests of shareholders generally.                 other jurisdictions.

Any ordinary shares purchased pursuant to this authority may            By order of the Board
either be held as treasury shares or cancelled by the company,
depending on which course of action is considered by the                J Meredith Secretary
directors to be in the best interests of shareholders at the time.      Chryston
                                                                        23 March 2006
As at 23 March 2006, there were options over 845,000 ordinary
shares in the capital of the company, which represents 0.5% of the
company’s issued ordinary share capital. If the authority to purchase




                                                                                                        Devro plc Annual Report & Accounts 2005 21
Corporate governance



1. Statement                                                              The company’s Articles of Association require all directors to
                                                                          stand for election by the shareholders at the first AGM following
Devro plc is committed to high standards of corporate
                                                                          their appointment and for re-election subsequently at least every
governance consistent with the needs of the business and the
                                                                          three years. As in previous years, brief biographies of all Board
interests of shareholders. This statement, together with the
                                                                          members, giving details of their experience and other main
Remuneration Report set out on pages 26 to 29, describes how,
                                                                          commitments are included in the Annual Report, allowing
in respect of the financial year ended 31 December 2005, the
                                                                          shareholders to take an informed decision on those standing for
company has applied the provisions and principles of corporate
                                                                          election or re-election.
governance as set out in the revised Combined Code (“the Code”).

                                                                          There is a clear division of authority and responsibility through the
2. Board composition                                                      separation of the roles of Chairman and Chief Executive. This
Mr P A Barrett, Non-Executive Chairman; Dr G Y Alexander,                 demarcation is set out in writing and has been agreed by the Board.
Chief Executive; Mr J A Neilson, Finance Director; and
Mr T F Morgan, Business Development Director, served                      Directors of the company and its subsidiaries have the benefit of
as Directors throughout 2005. Mr P A J Neep joined the                    a directors’ and officers’ liability insurance policy. All directors can
Board as a Non-Executive Director on 1 February 2005.                     take independent professional advice at the company’s expense in
Mr S R Paterson joined the Board as a Non-Executive Director              furtherance of their duties.
on 9 March 2006. Mr P J E Mocatta retired as a Non-Executive
Director at the Annual General Meeting (“AGM”) on 5 May 2005.             3. Board and Committee proceedings
                                                                          The Board acknowledges that it is collectively responsible for the
The Board was saddened by Mr J A Napier’s untimely death on
                                                                          success of the company by providing entrepreneurial leadership,
14 September 2005.
                                                                          setting the company’s strategic aims, ensuring that the necessary
                                                                          financial and human resources are in place and reviewing
The Chairman believes that an efficient Board requires a range
                                                                          management performance.
of skills and experience in order to ensure balanced and informed
decision-making at Board meetings. While the composition of
                                                                          In order to discharge these responsibilities, the Board and its
the Board is kept under review, the Chairman is satisfied that the
                                                                          Committees meet on a regular basis throughout the year. In
Board as presently constituted is of sufficient size and diversity
                                                                          2005, the Board held nine full meetings with all directors
that the balance of skills and experience is appropriate for the
                                                                          attending. Full details of Board and Committee attendance are
requirements of the business.
                                                                          shown in the table opposite.

It is the considered view of the Board that all of the Non-Executive
                                                                          Following a review of practice in 2005, Board papers are now
Directors, including the Chairman, are “independent” directors.
                                                                          generally circulated one week before the meetings. Monthly
This opinion is based primarily on a careful consideration of their
                                                                          management accounts are also sent to directors in a timely manner.
character and judgement and their contribution to the work of the
Board and its committees. Furthermore, none holds any external
                                                                          The Audit, Remuneration and Nomination Committees, all
position which would impinge upon his independence or objectivity,
                                                                          appropriately resourced, met a total of twelve times during the
nor are there such relationships or circumstances as envisaged
                                                                          year. The attendance of Committee members is set out in the
by Provision A.3.1 of the Code.
                                                                          table opposite.

The question of the Chairman’s independence is relevant in connection
                                                                          A number of specific matters are reserved to the Board for
with his continuing membership of the Audit Committee and the
                                                                          decision. These include the setting of corporate strategy, approval
Executive Directors’ Remuneration Committee, as this may not comply
                                                                          of the annual budget, and major decisions on capital expenditure.
with the Code. However, as stated above, the Board is satisfied on this
                                                                          The Board conducts an annual review of the effectiveness of the
point and both committee chairmen welcome his continued
                                                                          company’s system of internal control, following a group-wide
involvement on their committees in view of his input to meetings.
                                                                          exercise led by the Head of Risk Assurance.

Mr P A J Neep was appointed to the position of “Senior Independent
                                                                          Each year, the Board visits at least one of the group’s operating
Director” in October 2005 following Mr J A Napier’s death. The
                                                                          divisions in order to meet local management and develop a
Board views this essentially as a passive role, but acknowledges that
                                                                          deeper understanding of the business issues. In 2005 the US
there can be occasions where there may be a need for shareholders
                                                                          business was chosen.
to convey concerns to the Board other than through the Chairman
or the Chief Executive. The company’s major shareholders have been
                                                                          The Chairman and the other Non-Executive Directors met
advised that the Senior Independent Director is willing to meet with
                                                                          informally on several occasions during the year, providing an
them if they wish, but none has requested such a meeting and, to
                                                                          opportunity to review the business conducted without the
the extent that no meetings have taken place, the company has not
                                                                          Executive Directors being present.
fully complied with Provision D.1.1 of the Code.


22 Devro plc Annual Report & Accounts 2005
Board and Committee attendance of members during the year ended 31 December 2005

                                    P A Barrett   G Y Alexander P J E Mocatta*    T F Morgan    J A Napier**      J A Neilson              *
                                                                                                                                P A J Neep* *

Board – 9 meetings                           9              9               3             9               4               9                  6
Audit Committee – 5 meetings                 4            n/a               2           n/a               4             n/a                  4
Executive Directors’ Remuneration
   Committee – 2 meetings                    2            n/a               1           n/a               1             n/a                  1
Non-Executive Directors’
   Remuneration Committee –
   2 meetings                             n/a               2            n/a            n/a            n/a                 2              n/a
Nomination Committee –
   3 meetings                                3            n/a               1           n/a               1             n/a                  2

  * retired 5 May 2005
 ** died 14 September 2005
*** appointed 1 February 2005

All directors have access to the services of the Company                twice in 2005, is chaired by Dr G Y Alexander with Mr J A Neilson
Secretary who is also responsible for ensuring that Board               as the other member, so no director is involved in deciding his
procedures are observed and for advising the Board on Corporate         own remuneration.
Governance matters.
                                                                        The Remuneration Report contains a detailed statement of the
4. Directors’ remuneration                                              remuneration of each director for 2005, including details of the
Details of the level of remuneration received by the directors in       company’s pension policy.
2005 are set out in the Remuneration Report on pages 26 to 29.
The Board believes that the current levels of remuneration are          The written remit of the Executive Directors’ Remuneration
sufficient to attract and retain the directors needed to run the        Committee is available on the company’s website.
company successfully, without being excessive. Base salaries for
Executive Directors are reviewed annually against those paid for        5. Report from the Audit Committee
similar positions in comparable companies. Professional advice          The Audit Committee has written terms of reference, which
from independent advisers is sought each year in this regard            are available on the company’s website, and include the
by the Executive Directors’ Remuneration Committee.                     responsibilities set out in provision C.3.2 of the Code.

An explanation of the company’s incentive schemes is set out in         Mr J A Napier was the Chairman of the Committee until his
the Remuneration Report.                                                death in September 2005. Mr P A J Neep then took over
                                                                        as Interim Chairman until Mr S R Paterson’s appointment as
The Executive Directors’ service contracts provide for notice           Non-Executive Director and Chairman of the Committee on
periods of one year. Due to the technical nature of the business,       9 March 2006. The other members of the Committee in 2005
these contracts contain restrictive covenants which will be             were Mr P A Barrett, and Mr P J E Mocatta until his retirement
rigorously applied and, taking this into account, the Board and         on 5 May 2005. The Company Secretary acts as Secretary
the Executive Directors’ Remuneration Committee believe that            to the Committee.
the notice periods are reasonable and in the best interests of
the company, having regard to prevailing market conditions and          Until Mr S R Paterson’s appointment, the Board viewed
current practice among public companies.                                Mr J A Napier as the only Committee member with both recent
                                                                        and relevant financial expertise as stipulated in Provision C.3.1
Non-Executive Directors’ remuneration is reviewed from time to          of the Code. Accordingly, from 14 September 2005 until the end
time by the Non-Executive Directors’ Remuneration Committee,            of the year, the Company did not comply with that paragraph.
taking independent external advice as appropriate.
                                                                        Meetings of the Committee are normally attended by the Finance
Mr P J E Mocatta chaired the Executive Directors’ Remuneration          Director, the Chief Executive and the Head of Risk Assurance, as
Committee until his retirement on 5 May 2005, at which time             invitees. Representatives of the auditors also attend as required.
Mr P A J Neep took over this role. The other members of the
Committee were Mr P A Barrett, and Mr J A Napier until his              At the beginning of 2005, the Board set objectives for the
death in September 2005. This Committee met twice. The                  Committee, including the fulfilling of each aspect of its terms
Non-Executive Directors’ Remuneration Committee, which also met         of reference and keeping abreast of developments in accounting


                                                                                                       Devro plc Annual Report & Accounts 2005 23
best practice. During the year, five Committee meetings were         8. Directors’ training and development
held. In addition to reviewing the company’s full year and interim
                                                                     The Board believes that an ongoing programme of training and
results, the Committee (i) reviewed internal controls across
                                                                     development is necessary to ensure that directors keep abreast
the group; (ii) considered the question of reappointment of the
                                                                     of developments within the group and broader regulatory issues.
external auditors before making a recommendation to the Board;
                                                                     To achieve this, the Board meets with local management of at
and (iii) considered the effectiveness of the internal audit
                                                                     least one of the group’s operations annually. In addition, specific
activities. The company’s “whistleblowing” procedures were also
                                                                     briefing sessions are held and in 2005 these included
reviewed during the year, with the Committee concluding that the
                                                                     presentations from external advisers on pensions and insurance.
arrangements in place would result in proportionate and
independent investigation of such matters.
                                                                     9. Board performance evaluation
6. Auditor independence                                              The Board believes that while there are a number of ways of
                                                                     addressing performance, the most relevant measures are the
The Audit Committee and PricewaterhouseCoopers LLP the     ,
                                                                     financial results of the company and shareholder value, over
external auditors, operate procedures to ensure that the auditors
                                                                     both the short and long term. The company’s approach to the
remain objective and independent. These procedures include
                                                                     evaluation process applies this principle while at the same time
the pre-approval of the scope of the audit by the Committee. The
                                                                     taking account of broader business issues.
Committee conducts a formal annual review of the independence
of the auditors, looking carefully at the level of non-audit work
                                                                     In 2005, the Board set business-focused objectives for itself and
conducted by the auditors, and the detailed safeguards which
                                                                     every director, while each of the committees was given objectives
they have in place.
                                                                     centred around its remit. The primary objective of the Chief
                                                                     Executive and the Executive Directors concerned the delivery of
The fees paid to the external auditors in 2005 are set out in
                                                                     the financial plan for the year. Performance reviews were carried
note 8 to the financial statements on page 41. A large proportion
                                                                     out at the end of the year against those objectives.
of the non-audit fees relate to tax services. The Committee
believes that there are sound commercial and practical reasons
                                                                     The Chairman’s performance was assessed against his personal
for this work being conducted by the auditors.
                                                                     objectives in a process led by the Senior Non-Executive Director
                                                                     and taking account of views expressed by the Executive Directors,
7. Relationship with shareholders                                    as envisaged by the Code.
The company communicates with institutional investors primarily
through analysts’ briefings and meetings with major shareholders,    10. Report from the Nomination Committee
as well as timely Stock Exchange announcements. The Board, and
                                                                     Mr P A Barrett, the Chairman of the company, is the Chairman
in particular the Non-Executive Directors, are kept informed of
                                                                     of this Committee. The other members of the Committee during
investors’ views in the main through distribution of analysts’ and
                                                                     the year were Mr P J E Mocatta until he retired on 5 May 2005,
brokers’ briefings. The Chairman has held a number of meetings
                                                                     Mr J A Napier until his death on 14 September 2005 and
with shareholders, large and small, to discuss matters such as
                                                                     Mr P A J Neep from his appointment on 1 February 2005.
strategy and governance and, in addition, the Senior Independent
                                                                     The Company Secretary acts as Secretary to the Committee.
Director is available in the event of shareholder concerns which
cannot be addressed through the usual channels.
                                                                     The Committee has written terms of reference which can be
                                                                     found on the company’s website. These include the regular review
Broader shareholder communication takes place through the
                                                                     of the structure, size and composition of the Board.
company’s website which contains company announcements and
other relevant information, and also through the Annual Report
                                                                     During 2005 the Committee met on three occasions. In view
and AGM. All directors attend the AGM, and shareholders have
                                                                     of the requirement to recruit a new Non-Executive Director to
the opportunity to hear presentations on the company’s financial
                                                                     replace Mr J A Napier as Audit Committee Chairman, the
and business performance as well as to question any member of
                                                                     Committee evaluated the balance of skills, knowledge and
the Board on any relevant topic.
                                                                     experience of the remaining Board members and prepared a
                                                                     description of the role and capabilities required.
Votes at the AGM are conducted by way of a poll to ensure that
the votes of shareholders who are unable to attend may be taken
                                                                     External independent selection consultants, free of any other
into account. The results are announced to the Stock Exchange.
                                                                     ties to the company, were then retained in order to finalise the
                                                                     job specification and conduct searches.
Each substantial issue is proposed as an individual resolution of
the AGM. The notice is sent to shareholders at least 20 working
days before the meeting.




24 Devro plc Annual Report & Accounts 2005
Following the review of profiles of a number of candidates and        • Operating controls
subsequent interviews, the Committee then recommended                 Financial and operational policies and procedures are set out
Mr S R Paterson to the Board for approval. Mr S R Paterson was        in formal procedures manuals which are held by all Business
duly appointed Non-Executive Director on 9 March 2006, and will       Directors and finance staff. The latter are responsible for
stand for election at the company’s forthcoming AGM.                  ensuring that all relevant staff are familiar with their content and
                                                                      application. All Board members, Business Directors and senior
The company’s major shareholders were offered the opportunity         finance staff have been issued with Internal Control Guidelines.
to meet with Mr S R Paterson as envisaged by provision A.5.1 of
the Code. Mr S R Paterson received a full formal induction on         • Treasury
joining the Board, including plant visits and detailed briefing       Formal written treasury procedures are in operation, covering
sessions with the Chief Executive and the Finance Director.           banking arrangements, hedging instruments, investment of cash
                                                                      balances and borrowing procedures. Individual staff responsibilities
The question of succession planning for senior management             and levels of delegated authority in relation to treasury matters
below Board level is the responsibility of the Chief Executive.       are defined.

11. Financial reporting                                               • Internal audit
The Board acknowledges its responsibility to present a balanced       The company has an internal audit function, which has a
and understandable assessment of the company’s position and           reporting line to the Chairman of the Audit Committee and also
prospects. Each Annual Report contains a Chairman’s Statement         direct access to the Chairman of the Board. The Head of Risk
and an Operating and Financial Review by the Chief Executive and      Assurance, who is responsible for internal audit, normally attends
the Finance Director. The Interim Report also contains a Statement    Audit Committee meetings and makes a formal report to the
by the Chairman. The Board believes that this additional narrative    Committee annually.
sets the accounts in context and promotes a better understanding
of the current status of the business and its outlook.                • Capital investment appraisal
                                                                      The company has clearly defined guidelines for the approval
                                                                      and review of capital expenditure projects, which include annual
12. Internal control
                                                                      budgets and designated levels of authority.
An ongoing process has been established for identifying,
evaluating and managing the significant risks the group faces.        • Integrity of personnel
The process, which accords with the Turnbull guidance, has            The company has a Policy on Business Conduct which sets
been in place for the period under review and up to the date          out specific requirements for all staff to meet the company’s
of approval of the 2005 Annual Report and Accounts. This              standards of conduct and integrity in their business dealings.
includes the appointment of a Head of Risk Assurance whose
responsibilities include the application of risk assessment           The Board has reviewed the effectiveness of the system of
procedures throughout the group and working alongside                 internal control and considers that the group has an established
subsidiary undertakings in establishing the process. Furthermore,     system of internal control which the directors believe to be
the programme of work performed by internal audit includes            appropriate to the business.
non-financial risks. The system is designed to manage, rather
than eliminate, the risk of failure to achieve business objectives.
                                                                      13. Going concern
The Board of Directors, being ultimately responsible for the          After making enquiries, the directors have a reasonable
group’s system of internal control, has established an internal       expectation that the company and the group have adequate
financial control structure, which is designed to provide the Board   resources to continue in operational existence for the foreseeable
with reasonable, but not absolute, assurance that it can rely         future. For this reason, they continue to adopt the going concern
on the accuracy and reliability of the financial records.             basis in preparing the financial statements.


This structure, which is based on an assessment of material           14. Compliance with the Code
financial risks, can be described under the following headings:       The company complied with all the Code’s provisions throughout
                                                                      the accounting period other than those specifically referred to
• Financial reporting                                                 in the above report.
There is a budgeting system in place which includes an annual
budget approved by the Board. Monthly actual results are reported
against budget. Revised forecasts for the year are prepared
regularly. The company reports to shareholders twice a year.




                                                                                                      Devro plc Annual Report & Accounts 2005 25
Remuneration report


The Board has established two committees to deal with directors’      The main components
remuneration. The Executive Directors’ Remuneration Committee,        The main components of the policy are set out below:
consisting entirely of Non-Executive Directors, including the
Non-Executive Chairman, settles all aspects of the remuneration       i) Base salary
of the Executive Directors, and monitors and recommends the           The base salary for each Executive Director is reviewed annually
level and structure of remuneration for senior management.            by the Committee taking into account the performance of the
The Non-Executive Directors’ Remuneration Committee, whose            individual and information from independent sources on salary
members are both Executive Directors, decides the level of fees       rates for similar jobs in comparable companies. The policy is
paid to the Non-Executive Directors, including the Non-Executive      to set base salaries around median level.
Chairman. This arrangement ensures that no committee member
has a personal interest in the matters delegated to his committee     ii) Annual bonus
other than as a shareholder. There are no potential conflicts of      The Committee believes that a significant portion of Executive
interest arising from cross-directorships.                            Directors’ remuneration should be performance-related. It is
                                                                      therefore the practice of the Committee to incentivise the Executive
During the course of 2005, both committees took advice from New       Directors by setting challenging annual bonus targets which are
                             ,
Bridge Street Consultants LLP a firm of independent remuneration      relevant to the needs of the business in the year in question. The
consultants appointed by the committees. New Bridge Street            setting of relevant and stretching targets in line with the strategic
Consultants has not provided any other services to the company.       objectives of the company is key to the effectiveness of any
                                                                      performance-related scheme. Cash bonuses up to a maximum
Composition of the Non-Executive Directors’                           of 60% of annual base salary may be achieved.
Remuneration Committee
                                                                      The annual bonus plan for 2005 was focused on fixed targets
Throughout the year, the members of the Non-Executive Directors’
                                                                      for profit growth, margin improvement, cash generation and
Remuneration Committee were Dr G Y Alexander (Committee
                                                                      sales of new products. In setting the parameters, the Committee
Chairman) and Mr J A Neilson.
                                                                      took account of the group’s sound balance sheet and operating
                                                                      flexibility, and decided that profit growth plus margin improvement
Policy on Non-Executive Directors’ remuneration                       should have a slightly greater weighting than cash generation,
The company’s policy on Non-Executive Directors’ remuneration         while adding for the first time an element linked to sales of new
is to pay a fixed fee, which is reviewed from time to time, taking    products. The Committee reviewed the performance of the group
account of the nature of the role of the individual director, and     against these targets in February 2006 and agreed that a bonus
considering data from independent sources on the level of fees        of 20% of base salary was payable to the Executive Directors.
for similar positions in comparable companies. Non-Executive          Details are set out on page 28.
Directors are not entitled to share options or any other benefits,
nor is any element of their remuneration pensionable. Details of      The annual bonus plan for 2006 is again focused on fixed financial
their contracts of service are set out on page 27.                    targets. The Committee believes that the actual targets, which
                                                                      are the same for all Executive Directors, are commercially
Composition of the Executive Directors’                               sensitive and does not propose to publish precise details. The
Remuneration Committee (“the Committee”)                              Committee will meet in early 2007 to assess whether, and to
The members of the Committee at the start of 2005 were Mr P J E       what extent, the targets have been met by reviewing the audited
Mocatta (Committee Chairman), Mr P A Barrett and Mr J A Napier.       performance of the group against these targets.
Mr P A J Neep was appointed to the Committee on 25 February
2005 and assumed Chairmanship on 5 May 2005 when Mr P J E             iii) Performance Share Plan
Mocatta retired. Mr J A Napier died on 14 September 2005.             At the Annual General Meeting in May 2003 the shareholders
                                                                      approved the introduction of the Devro 2003 Performance Share
Compliance                                                            Plan. No new awards were made under this scheme in 2005.
                                                                      Conditional awards under this plan will be considered regularly.
Other than as stated in this report, the constitution and operation
of the Committee are in compliance with the provisions of the
revised Combined Code on Corporate Governance 2003 (“the
                                                                      Company Policy on Contracts of Service
Code”). When setting its remuneration policy, the Committee gives     The company’s Chairman, Mr P A Barrett, is engaged for an
due consideration to the provisions and principles of the Code.       unspecified term, with a 12-month notice period.


Policy on Executive Directors’ remuneration                           Non-Executive Directors, other than the Chairman, are engaged
                                                                      for fixed terms, with no notice period. These appointments are
Total level of remuneration
                                                                      subject to the Articles of Association and the wishes of the
The Committee aims to ensure that remuneration packages
                                                                      shareholders expressed in General Meeting.
offered are competitive and designed to attract, retain and
incentivise Executive Directors of high quality.


26 Devro plc Annual Report & Accounts 2005
The service contracts of the three Executive Directors include                   compensation which would be payable under the Executive
a provision that employment may be terminated by the company                     Directors’ Service Agreements in the event of termination.
on one year’s notice or on payment of one year’s salary. Due to
the technical nature of the business, the directors’ service                     The details of the service contracts of the current directors are:
contracts contain restrictive covenants.                                                                        Date of        Date term
                                                                                 Director                      contract      due to expire      Notice period
None of the contracts provides for specific contractual
termination payments and the company will seek to enforce                        P A Barrett          19 June 2001               n/a            12 months
rigorously the principle of mitigation of loss in the event of                   G Y Alexander        16 June 1993               n/a            12 months
termination of any service contract.                                             T F Morgan          21 March 1995               n/a            12 months
                                                                                 P A J Neep         1 February 2005         AGM 2008                 n/a
The company’s policy on the termination of contracts of service                  J A Neilson          16 June 1993               n/a            12 months
of senior executives is dictated by events, bearing in mind the                  S R Paterson         6 March 2006          AGM 2009                 n/a
circumstances of termination and the interests of the company.
In the past, compensation payments have, in appropriate
circumstances, been phased and linked to non-compete                             External directorships
agreements. In 2004 the Committee reviewed the level of                          None of the Executive Directors has any external paid directorships.


Performance Graph

Total shareholder return
Value (£)

  400

  350

  300

  250

  200

  150

  100

   50

     0
 31 Dec 2000                   31 Dec 2001                31 Dec 2002                 31 Dec 2003                31 Dec 2004                  31 Dec 2005
         The above graph shows that £100 invested in Devro plc on 31 December 2000 would be worth £339.90 by the end of 2005, while £100 similarly
         invested in the FTSE All-Share Index would be worth £111.58. The other points plotted are the values at intervening financial year-ends.

                   Devro plc                                                                                                     Source: Datastream
                   FTSE All-Share Index


Under legislative requirements, the graph shows the total shareholder return over the last five years.

In the opinion of the directors the FTSE All-Share Index is the most appropriate index against which the total shareholder return of the
company should be measured. There are no other food casings companies listed on the London Stock Exchange.

Auditable information
                                                                                                ,
The following information has been audited by the company’s auditors, PricewaterhouseCoopers LLP as required by Schedule 7A to the
Companies Act 1985.

Company pensions policy regarding Executive Directors
The Executive Directors are members of the Devro Limited (UK) Pension Plan which is a funded, contributory, defined benefit pension plan,
incorporating a “money purchase” benefit guarantee. This plan provides a pension for members of 2% of final pensionable salary (as defined
for the purposes of the plan) for each year of pensionable service (as so defined) completed up to the normal retirement age of 65.




                                                                                                                     Devro plc Annual Report & Accounts 2005 27
Pension entitlements and corresponding transfer values increased as follows during the year:

                                              Gross increase          Increase in                                                                      Increase in
                                                  in accrued     accrued benefits                                                                         transfer
                                                     benefits       earned in the            Accrued                                                     value less
                                                      earned            year (net         entitlement     Transfer value      Transfer value             directors’
                                   Age at         in the year          of inflation)   at 31 Dec 05        at 31 Dec 05       at 31 Dec 04           contributions
Director                       31 Dec 05        £ per annum         £ per annum         £ per annum                    £                   £                      £

G Y Alexander                          56             9,795               6,054          148,334              2,181,967        1,786,366               379,005
T F Morgan                             49             6,991               5,236           71,973                816,245          629,401               177,010
J A Neilson                            52             8,996               6,712           93,570              1,191,482          929,925               251,070


– Accrued pension entitlements shown are the amounts which would be paid annually on retirement based on service to the end of the year.

– Transfer values have been calculated in accordance with version 8.1 of guidance note GN11 issued by the actuarial profession.

– Changes in the transfer values include the effect of fluctuations due to factors beyond the control of the company and directors,
  such as stock market movements. They are calculated after deducting the directors’ contributions.

– Voluntary contributions paid by directors, transferred-in money purchase funds and resulting benefits are not shown.

The following additional information is applicable:
• Normal retirement age is 65.

• A spouse’s pension of one-half of the member’s pension is payable on death after retirement.

• Pension payments in excess of the Guaranteed Minimum Pension escalate at 5% per annum for service up to 31 December 2001.
  From 1 January 2002, pension payments in excess of the Guaranteed Minimum Pension will escalate in line with the Retail Prices
  Index (“RPI”) plus 1%, subject to a minimum of zero and a maximum of 7%.

• Death-in-service benefit insurance provides for a payment equal to three times salary.

Directors’ detailed emoluments
Details of directors’ emoluments for those directors who served during the year ended 31 December 2005 were as follows:

                                     Basic salary                Bonuses                       Fees                Benefits in kind*                 Total


                                 2005         2004        2005            2004         2005           2004        2005         2004        2005              2004
Director                         £’000        £’000       £’000           £’000        £’000          £’000       £’000        £’000       £’000             £’000

P A Barrett                         –            –               –            –          95              90          –             –            95            90
G Y Alexander                     259          252              52           48           –               –         25            23           336           323
P J E Mocatta                       –            –               –            –          12              30          –             –            12            30
T F Morgan                        156          151              31           29           –               –         18            17           205           197
J A Napier                          –            –               –            –          26              30          –             –            26            30
P A J Neep                          –            –               –            –          31               –          –             –            31             –
J A Neilson                       166          161              33           30           –               –         19            18           218           209

Total                             581          564          116            107          164             150         62            58           923           879


*Benefits in kind include the provision of a company car, fuel and medical insurance for each Executive Director.

Deferred Bonus Scheme
The company operated the Devro 2001 Deferred Bonus Scheme in 2002 and 2003. Under the scheme, awards of shares by way of
nil-priced options were made to Executive Directors to the level of their annual bonus in the previous year. These awards vest three
years from the date of grant. No further awards have been made under this scheme since 2003.

Awards granted in 2002 under this Scheme vested in 2005. Awards granted in 2003 and outstanding at 31 December 2005 vested
on 13 March 2006. Details are shown in the table on page 29.



28 Devro plc Annual Report & Accounts 2005
Performance Share Plan
The Executive Directors’ awards under the Devro 2003 Performance Share Plan are as follows:

                                                                                          Shares
                                                                    Number held        awarded in             Number of                            Number held
Director                                                             at 1 Jan 05           2005            shares vested         Value vested     at 31 Dec 05

G Y Alexander                                                         263,359                      –                     –                  –          263,359
T F Morgan                                                            150,795                      –                     –                  –          150,795
J A Neilson                                                           158,766                      –                     –                  –          158,766



Directors’ interests
The interests, all of which are beneficial, of the directors (and their immediate families) in the share capital of the company (ordinary
shares of 10 pence each), details of outstanding options to acquire ordinary shares and details of awards made under the 2001
Deferred Bonus Scheme and the 2003 Performance Share Plan, at the beginning and end of the financial year, are as follows:

                                                                                                                   Deferred    Deferred      Perfor–      Perfor-
                                                                                                                      Bonus       Bonus      mance        mance
                        Ordinary     Ordinary        Share         Share    Exercise    Earliest         Latest     Scheme      Scheme        Share        Share
                         shares       shares     options at    options at      price   date for        date for      shares      shares         Plan        Plan
Director              31 Dec 05    31 Dec 04    31 Dec 05     31 Dec 04      (pence)   exercise        exercise   31 Dec 05   31 Dec 04   31 Dec 05    31 Dec 04

P A Barrett           220,000      220,000               –          –            –        –        –                    –           –           –            –
G Y Alexander         502,992      461,642               –     60,000          251 11.12.98 10.12.05              157,571     227,659     263,359      263,359
P J E Mocatta             n/a       60,000               –          –            –        –        –                    –           –           –            –
T F Morgan            163,051      195,051               –     40,000          251 11.12.98 10.12.05               87,117     126,012     150,795      150,795
J A Napier                n/a       47,500               –          –            –        –        –                    –           –           –            –
P A J Neep             18,200          n/a               –          –            –        –        –                    –           –           –            –
J A Neilson           338,933      438,485               –     45,000          251 11.12.98 10.12.05               90,906     141,354     158,766      158,766

On 22 March 2006 Mr P A J Neep purchased a further 13,000 ordinary shares.

The company operates an employee share ownership plan (“ESOP”). All employees of the group, including the Executive Directors, are
beneficiaries of the ESOP and are deemed to be interested in the shares held by the ESOP which, at 31 December 2005, amounted to
529,803 ordinary shares.

All share options have been granted for nil consideration.

The Executive Directors exercised nil-priced options under the Devro 2001 Deferred Bonus Scheme on 23 March 2005 and 13 March 2006.
The market prices of the company’s shares on 23 March 2005 and 13 March 2006 were 127 pence and 125 pence respectively. Details
of the number of options exercised and gains made by each director are as follows:

                                                                                             Options exercised on                       Options exercised on
                                                                                              23 March 2005                              13 March 2006

Director                                                                                  Number                   Gain (£)          Number               Gain (£)

G Y Alexander                                                                            70,088                   89,012          157,571              196,964
T F Morgan                                                                               38,895                   49,397           87,117              108,896
J A Neilson                                                                              50,448                   64,069           90,906              113,633


No other options were exercised by directors during the year or up to the date of this report.

The market price of the company’s shares at 31 December 2005 was 128.25 pence and the range of market prices during the year
was 120.50 pence to 139 pence.

Except as disclosed above, the Directors’ interests have not changed between 31 December 2005 and the date of this report.

On behalf of the Board

P A J Neep Chairman
Executive Directors’ Remuneration Committee
23 March 2006
                                                                                                                         Devro plc Annual Report & Accounts 2005 29
Consolidated income statement
for the year ended 31 December 2005




                                                                                                                  2005                2004
                                                                                                   Notes          £’000               £’000

Revenue – continuing operations                                                                       2       152,518           148,938

Operating profit – continuing operations                                                                        27,600              20,948


Analysed as:
Operating profit before exceptional item                                                              3          21,256             20,948
Exceptional item                                                                                      4           6,344                   –

Operating profit                                                                                                 27,600             20,948

Finance income                                                                                        7             351                862
Finance expense                                                                                       7          (2,165)            (3,587)
Share of post-tax loss of joint venture*                                                                              –               (184)

Profit before tax                                                                                     8         25,786              18,039
Taxation                                                                                              9          (7,091)             (5,157)

Profit for the year                                                                               10, 31        18,695              12,882


Attributable to:
Equity holders                                                                                                  18,651              12,882
Minority interest                                                                                                   44                   –

                                                                                                                18,695              12,882

Earnings per share
– Basic                                                                                              12           11.5p               8.0p
– Diluted                                                                                            12           11.4p               7.9p


*Included within the share of post-tax loss of joint venture for the twelve months ended 31 December 2004 are tax credits of £96,000.




Statements of recognised income
and expense for the year ended 31 December 2005
                                                                                         Group                            Company

                                                                                 2005             2004            2005                2004
                                                                      Notes      £’000            £’000           £’000               £’000

Profit/(loss) for the year                                                    18,695             12,882          (2,600)            (3,053)
Net exchange adjustments                                                30     2,747              1,655               –                  –
Cash flow hedges:
– net fair value gains, net of tax                                      30        207                 –              25                   –
– reclassified and reported in operating profit                         30       (318)                –             (99)                  –
Actuarial loss recognised in group pension schemes                      25    (11,264)             (118)              –                   –
Actuarial gain recognised in US post-retirement benefit obligations               245               321               –                   –
Movement of deferred tax on retirement benefit obligations              24      3,432              (103)              –                   –
Adoption of IAS 32 and 39                                                1        200                 –            144                    –

Total recognised income/(expense) for the year                                13,944             14,637          (2,530)            (3,053)



30 Devro plc Annual Report & Accounts 2005
Balance sheets
at 31 December 2005




                                                                                          Group                                Company

                                                                                 2005                2004              2005               2004
                                                                 Notes           £’000               £’000             £’000              £’000

ASSETS
Non-current assets
Goodwill                                                           13            177                  177               –                   –
Other intangible assets                                            14            901                  809              15                  23
Property, plant and equipment                                      15        101,357               92,380              97                  74
Investments                                                        16              –                    –         129,380             116,084
Deferred tax assets                                                24         16,500               13,700              51                  40
Other receivables                                                  18            171                    –          10,500              32,600

                                                                             119,106              107,066         140,043             148,821

Current assets
Inventories                                                        17          21,056              19,766                 –                   –
Current tax assets                                                                870                 160               393                 500
Trade and other receivables                                        18          20,218              19,735               295                 585
Financial assets                                                   23             541                   –               362                   –
Cash and cash equivalents                                          19          11,243              11,010                65                  11

                                                                               53,928              50,671            1,115                1,096

LIABILITIES
Current liabilities
Financial liabilities
    – Borrowings                                                   22             895               1,661           10,367                8,382
    – Derivative financial instruments                             23             132                   –                –                    –
Trade and other payables                                           20          21,450              18,697            1,886                1,974
Current tax liabilities                                                         3,571               2,916                –                    –

                                                                               26,048              23,274           12,253               10,356

Net current assets/(liabilities)                                               27,880              27,397          (11,138)              (9,260)

Non–current liabilities
Financial liabilities
    – Borrowings                                                   22          28,068              34,815           19,000               29,250
Deferred tax liabilities                                           24          15,406              14,555               30                    –
Retirement benefit obligations                                     25          41,985              31,580                –                    –
Other non–current liabilities                                      21             165                 217                –                    –

                                                                               85,624              81,167           19,030               29,250

Net assets                                                                     61,362              53,296         109,875             110,311

EQUITY
Capital and reserves attributable to equity holders
Ordinary shares                                                    26          16,176              16,133           16,176               16,133
Share premium                                                      29            5,471              5,194            5,471                5,194
Other reserves                                                     30          49,681              46,448           45,090               44,711
Retained (losses)/earnings                                         31           (9,966)           (14,435)          43,138               44,273

Total shareholders’ equity                                                     61,362              53,340         109,875             110,311
Minority interest – equity                                         33               –                  (44)             –                   –

Total equity                                                                   61,362              53,296         109,875             110,311

The financial statements on pages 30 to 72 were approved by the Board of Directors and signed on its behalf by:

J A Neilson Finance Director
23 March 2006


                                                                                                         Devro plc Annual Report & Accounts 2005 31
Cash flow statements
for the year ended 31 December 2005




                                                                                    Group                          Company

                                                                           2005                2004        2005                2004
                                                                Notes      £’000               £’000       £’000               £’000

Cash flows from operating activities
Cash generated from operations                                    34    28,521              28,281      19,114           (48,012)
Interest received                                                           357                 861       1,534               729
Interest paid                                                            (2,218)             (4,029)     (1,739)           (2,150)
Tax (paid)/received                                                      (6,434)             (4,998)        964             1,336

Net cash from operating activities                                      20,226              20,115      19,873           (48,097)

Cash flows from investing activities
Purchase of property, plant and equipment                               (14,962)            (11,325)         (64)                (50)
Proceeds from sale of land                                                7,305                    –           –                   –
Proceeds from sale of other property, plant and equipment                     94                  97          21                   –
Purchase of intangible assets                                              (338)                (151)          –                   –
Payments to former minority shareholders of Cutisin a.s.                     (13)             (1,744)          –                   –
Cash balances of joint venture acquired                                        –                 126           –                   –
(Increase)/reduction in investment in subsidiary undertakings     16           –                   –    (13,296)             11,990
Dividends received from subsidiary undertakings                                –                   –      8,104              41,557

Net cash (used in)/generated from investing activities                   (7,914)            (12,997)     (5,235)             53,497

Cash flows from financing activities
Issue of ordinary share capital                                             320                 429          320                429
Net repayments under the loan facility                                   (7,697)             (2,822)    (10,250)                  –
Payments under finance leases                                                (41)                (70)          –                  –
Dividends paid to shareholders                                    11     (6,639)             (5,831)      (6,639)            (5,831)

Net cash used in financing activities                                   (14,057)             (8,294)    (16,569)             (5,402)

Net decrease in cash and cash equivalents                                (1,745)             (1,176)     (1,931)                  (2)
Cash and cash equivalents at beginning of year                          11,010              12,828       (8,371)             (8,369)
Exchange gains/(losses) on cash and cash equivalents                      1,978                (642)          –                    –

Cash and cash equivalents                                               11,243              11,010           65                  11
Bank overdraft                                                               –                   –      (10,367)             (8,382)

Net cash and cash equivalents at end of year                      19    11,243              11,010      (10,302)             (8,371)




32 Devro plc Annual Report & Accounts 2005
Notes to the financial statements
for the year ended 31 December 2005




1 Accounting policies                                                   a straight-line basis over the estimated useful life of the related
                                                                        asset (15 years). External and internal costs are capitalised to the
The principal accounting policies adopted in the preparation of these
                                                                        extent that they enhance the future economic benefit of the asset.
financial statements are set out below. These policies have been
consistently applied to the years presented, unless otherwise stated.
                                                                        Research and development
                                                                        In general, research and development expenditure is charged to
Basis of preparation
                                                                        the income statement in the period in which it occurred. However,
These financial statements have been prepared in accordance
                                                                        as set out above, under certain conditions development
with accounting policies based on International Financial Reporting
                                                                        expenditure is capitalised as an intangible asset.
Standards (“IFRS”), International Accounting Standards (“IAS”) and
IFRIC interpretations endorsed by the European Union (“EU”) and
                                                                        Property, plant and equipment
with those parts of the Companies Act 1985 applicable to
                                                                        The cost of property, plant and equipment is its purchase cost,
companies reporting under IFRS. The financial statements have
                                                                        together with any incidental costs of acquisition. Provision for
been prepared under the historical cost convention as modified
                                                                        depreciation is made so as to write off the costs of the assets
by the revaluation of derivative financial instruments. The 2004
                                                                        on a straight-line basis over their expected useful economic lives.
comparative information has, as permitted by the exemption in
IFRS 1, not been prepared in accordance with IAS 32, Financial
                                                                        The principal lives are:
Instruments: Disclosure and Presentation, and IAS 39, Financial
                                                                            Freehold properties         50 years
Instruments: Recognition and Measurement. Instead, IAS 32 and
                                                                            Plant and machinery         8-15 years
IAS 39 have been implemented with effect from 1 January 2005
                                                                            Computer equipment          5 years
and the impact is shown on page 35 of the financial statements.
                                                                            Motor vehicles              4 years
                                                                            Fixtures and fittings       10 years
A summary of the more important group accounting policies is
set out below, together with an explanation of where changes
                                                                        No depreciation is provided on freehold land or on assets under
have been made to previous policies on the adoption of new
                                                                        construction.
accounting standards in the year.
                                                                        Asset residual values and useful lives are reviewed and adjusted,
The preparation of financial statements in conformity with
                                                                        if appropriate, at each balance sheet date.
generally accepted accounting principles requires the use of
estimates and assumptions that affect the reported amounts
                                                                        Impairment
of assets and liabilities at the date of the financial statements
                                                                        Assets that have an indefinite useful life are not subject to
and the reported amounts of revenues and expenses during
                                                                        amortisation but are tested annually for impairment or whenever
the reporting period. Although these estimates are based on
                                                                        events or changes in circumstances indicate that the carrying
management’s best knowledge of the amount, event or actions,
                                                                        amount may not be recoverable. Assets that are subject to
actual results ultimately may differ from those estimates.
                                                                        amortisation are tested for impairment whenever events or
                                                                        changes in circumstances indicate that the carrying amount may
Basis of consolidation
                                                                        not be recoverable. An impairment loss is recognised in the income
The consolidated financial statements include the financial
                                                                        statement for the amount by which the asset’s carrying amount
statements of the company and all its subsidiary undertakings
                                                                        exceeds its recoverable amount. The recoverable amount is the
made up to 31 December 2005. Intra-group sales and profits
                                                                        higher of an asset’s fair value less costs to sell and its value in use.
are eliminated fully on consolidation. The purchase method of
accounting is used to account for the acquisition of subsidiary
                                                                        Grants
undertakings by the group. The results of subsidiary undertakings
                                                                        Grants in respect of capital expenditure are credited to deferred
acquired or disposed of are consolidated for the period from or
                                                                        revenue and released to the income statement over the expected
to the date on which control passed.
                                                                        useful lives of the related assets.
Goodwill
                                                                        Fixed asset investments
Goodwill arising on acquisitions represents the excess of the fair
                                                                        The company’s investments in subsidiary undertakings are shown
value of the consideration payable over the aggregate of the fair
                                                                        at cost less impairment losses.
values of the identifiable net assets acquired. Goodwill is stated
at cost less impairment losses.
                                                                        Leases
                                                                        Operating lease rentals are charged to the income statement on
Other intangible assets
                                                                        a straight-line basis over the term of the lease.
Other intangible assets within the group comprise computer
software and certain types of development expenditure. Computer
                                                                        Finance leases are capitalised at the inception of the lease at the
software costs are capitalised and amortised on a straight-line
                                                                        lower of the fair value of the leased asset and the present value of
basis over the estimated useful life of the software (5 years). Costs
                                                                        the minimum lease payments, and depreciated over the shorter
incurred on development projects are recognised as intangible
                                                                        of the asset’s useful life and its lease term. The capital element
assets when it is probable that the project will be a success,
                                                                        of future rentals is treated as a liability. The interest element is
considering its commercial and technological feasibility, and costs
                                                                        charged to the income statement over the period of the lease.
can be measured reliably. Development costs are amortised on

                                                                                                          Devro plc Annual Report & Accounts 2005 33
Inventories                                                             Deferred tax is provided on temporary differences arising on
Inventories are stated at the lower of cost and net realisable          investments in subsidiaries, except where the timing of the
value. Cost is determined on a first in, first out basis and includes   reversal of the temporary difference is controlled by the group
transport and handling costs. In the case of manufactured               and it is probable that the temporary difference will not reverse
products, cost includes all direct expenditure and production           in the foreseeable future.
overheads based on the normal level of activity. Net realisable
value is the price at which inventories can be sold in the normal       Pension and other post-retirement benefits
course of business after allowing for the costs of realisation and,     The group operates a number of defined contribution and defined
where appropriate, the cost of conversion from their existing           benefit retirement plans, in addition to a post-retirement medical plan.
state to a finished condition. Provision is made, where                 All defined benefit retirement plans are now closed to new members.
appropriate, for obsolete, slow moving and defective inventories.
                                                                        Payments to defined contribution retirement plans are charged
Trade receivables                                                       as an expense as they fall due.
Trade receivables are stated at their nominal value as reduced
by appropriate allowances for estimated irrecoverable amounts.          The group’s obligations in respect of defined benefit retirement
                                                                        plans are valued by independent actuaries using the “Projected
Cash and cash equivalents                                               Unit Credit Method”. All group plans are funded externally, with
Cash and cash equivalents comprise cash balances and short-             the exception of Germany, where, in line with local practice,
term deposits with maturity dates of less than three months.            obligations are supported by insurance policies. Plan assets are
                                                                        valued at fair market value and are held completely separate from
Foreign currencies                                                      the group’s assets. Full formal actuarial valuations of obligations
Assets and liabilities denominated in foreign currencies are            are carried out at frequencies of not more than 3 years and are
translated into sterling at rates of exchange ruling at the end         updated regularly for reporting purposes.
of the financial year and the results of foreign subsidiary
undertakings are translated at average rates of exchange for the        Amounts recorded in the balance sheet represent the fair value
year. Differences on exchange arising from the translation of the       of external plan assets less the present value of the defined
opening net assets of overseas subsidiary undertakings and the          benefit obligations.
results of those undertakings at closing rates are taken to the
cumulative translation adjustment reserve.                              Amounts recorded in the income statement represent the
                                                                        current service cost over the reporting period and net financing
Other gains and losses arising from foreign currency transactions       costs, i.e. expected returns on assets less interest cost on
are included in the income statement.                                   liabilities. Other income statement credits or charges can arise
                                                                        for special events, such as a past service benefit improvement
Revenue recognition                                                     or settlement and curtailment of plan liabilities.
Sales revenue, which excludes value added tax, sales between
group companies and trade discounts, represents the net invoiced        Actuarial gains and losses are immediately recognised in the
value of goods and services supplied and is recognised when the         statement of recognised income and expense. Actuarial gains and
goods are shipped or the services are supplied to customers.            losses on liabilities occur due to changes in actuarial assumptions
                                                                        at the balance sheet date and also due to any differences
Taxation                                                                between assumptions and what actually occurs. Gains and losses
The charge for current tax is based on the results for the period as    on plan assets represent the difference between the expected
adjusted for items which are non-assessable or disallowable. It is      return over the period, set in line with long-term expectations,
calculated using taxation rates that have been enacted or               and the actual achieved return.
substantially enacted by the balance sheet date.
                                                                        Subject to certain conditions, the group provides health care
Deferred tax is provided in full, using the liability method, on        benefits for retired employees in the United States. These benefits
temporary differences arising between the tax base of assets and        are earned over the active service lives of the employees. Provision
liabilities and their carrying amounts in the financial statements.     is made for post-retirement medical costs based on an assessment
Deferred tax is determined using tax rates that have been               of actuarial liabilities and this is amortised over the expected
enacted or substantially enacted by the balance sheet date and          average remaining service lives of the relevant employees.
are expected to apply when the related asset is realised or the
liability is settled. Deferred tax is charged or credited in the        Share schemes
income statement, except when it relates to items charged or            Shares are allocated under the group’s share-based incentive
credited directly to equity, in which case the deferred tax is also     plans. The fair market value of these shares at the date of the
dealt with within equity.                                               grant, less any consideration to be received from the employee, is
                                                                        charged to the group’s income statement over the period to which
Deferred tax assets are recognised to the extent that it is             the employee’s performance relates. Where awards are
probable that future taxable profit will be available against which     contingent upon future events (other than continued employment),
the temporary differences can be utilised.                              an assessment of the likelihood of these conditions being achieved
                                                                        is made at the end of each period and appropriate provision made.

34 Devro plc Annual Report & Accounts 2005
Dividends payable                                                        Gains or losses arising from movements to fair value are
The liability for final dividends is recorded when the dividends are     taken to the income statement except where the financial
approved by the company’s shareholders. For interim dividends,           instruments are designated as cash flow hedges.
the liability is recorded when the dividends are paid.
                                                                         In order to qualify for hedge accounting, the group is required
Derivative financial instruments                                         to document in advance the relationship between the item being
Prior to implementing IAS 39 “Financial Instruments: Recognition         hedged and the hedging instrument, and demonstrate that the
and Measurement” from 1 January 2005, derivative financial               hedge will be highly effective on an ongoing basis. This
instruments used as hedges were held off balance sheet with              effectiveness testing is reperformed at each reporting date to
unrecognised gains or losses and fair values reported in the notes       ensure that the hedge remains highly effective.
to the financial statements.
                                                                         Cash flow hedges
For interest rate swaps, amounts payable or receivable in respect        The group has designated both interest rate swaps and forward
of these agreements were recognised as adjustments to interest           foreign exchange contracts as cash flow hedges.
expense over the period of the debt they were hedging. For
forward contracts, the cash flows were classified in a manner            For cash flow hedges, the effective part of changes in the fair value
consistent with the underlying nature of the hedged transaction.         of the derivative is recognised in equity. The amounts accumulated
Currency swaps were revalued at month-end rates with gains or            in equity are transferred to the income statement in the same
losses taken to the income statement. The interest element               period as the hedged transaction occurs, for example, when
relating to the swaps was also taken to the income statement.            interest arising on floating rate debt is paid or the forecast sale
                                                                         or purchase transaction takes place. Any movements in fair value
With effect from 1 January 2005, derivative financial instruments        occurring after the time when hedging contracts cease to be cash
used to hedge risks associated with interest rate and foreign currency   flow hedges are taken directly to the income statement. Gains or
fluctuations are initially and subsequently measured at fair value.      losses relating to any ineffective part of changes in fair value are
                                                                         taken immediately to the income statement.
The fair values of forward exchange contracts are calculated
by reference to market forward rates at the balance sheet date.
The fair value of the interest rate swap contract is calculated on
a discounted cash flow basis using market forward rates.


Adoption of IAS 32 and IAS 39
IAS 32 and IAS 39 have been implemented with effect from 1 January 2005. A reconciliation of the impact is set out below:
                                                                                            Group                              Company

                                                                                   £’000             £’000             £’000              £’000

Net assets at 31 December 2004 under IFRS                                                           53,296                            110,311

Adjustments at 1 January 2005:
Financial assets
    Recognition of interest rate swaps at fair value                                247                                 247
    Recognition of foreign exchange derivatives at fair value                       252               499                 –                 247

    Amounts already recognised included in the above
    Relating to interest rate swaps                                                  (40)                                (40)
    Relating to foreign exchange derivatives                                         (54)              (94)                –                 (40)

Financial liabilities – derivative financial instruments
    Recognition of foreign exchange derivatives at fair value                                         (257)                                   (5)

    Amounts already recognised included in the above
    Relating to foreign exchange derivatives                                                          267                                    23

                                                                                                       415                                  225
Deferred tax                                                                                          (125)                                  (68)

Net assets at 1 January 2005 after adoption of IAS 32 and 39                                        53,586                            110,468


Net assets for the group at 1 January 2005 increased by £290,000, with other reserves and retained losses credited by £200,000 and
£90,000 respectively. Net assets for the company at 1 January 2005 increased by £157,000, with other reserves and retained earnings
credited by £144,000 and £13,000 respectively.

                                                                                                         Devro plc Annual Report & Accounts 2005 35
2 Segmental information
(a) Primary reporting format – Business segments

                                  Collagen casings     Distributed products      Other products        Unallocated                Group

                                 2005         2004     2005         2004       2005        2004     2005       2004       2005            2004
Group                            £’000        £’000    £’000        £’000      £’000       £’000    £’000      £’000      £’000           £’000

Segment results
Revenue
Sales to external
    customers               123,251 120,552           19,427     19,788        9,840      8,598         –            – 152,518 148,938

Results
Segment results before
   exceptional item           21,683         20,766      206         136       2,661      2,958    (3,294)   (2,912)    21,256       20,948
Exceptional item               6,344              –        –           –           –          –         –         –      6,344            –

Segment results               28,027         20,766      206         136       2,661      2,958    (3,294)   (2,912)    27,600       20,948

Finance income                                                                                                             351          862
Finance expense                                                                                                         (2,165)      (3,587)
Share of post-tax loss
    of joint venture                                                                                                          –           (184)

Profit before tax                                                                                                       25,786       18,039
Taxation                                                                                                                 (7,091)      (5,157)

Profit for the year                                                                                                     18,695       12,882

Segment assets and liabilities
Segment assets         148,581 135,010                 3,723       3,964      12,916    12,904       811        381 166,031 152,259
Company overdraft
    (note 22)                                                                                                          (10,367)       (8,382)
Taxation                                                                                                                17,370       13,860

Total assets                                                                                                           173,034 157,737

Segment liabilities           57,070         44,952    2,670       2,189       2,915      2,275    11,444     9,460     74,099       58,876
Borrowings                                                                                                              28,963       36,476
Company overdraft
    (note 22)                                                                                                          (10,367)       (8,382)
Taxation                                                                                                                18,977       17,471

Total liabilities                                                                                                      111,672 104,441




36 Devro plc Annual Report & Accounts 2005
2 Segmental information continued
(a) Primary reporting format – Business segments continued

                               Collagen casings       Distributed products      Other products            Unallocated                    Group

                              2005        2004        2005         2004       2005        2004        2005         2004         2005             2004
Group                         £’000       £’000       £’000        £’000      £’000       £’000       £’000        £’000        £’000            £’000

Other segment items
Additions to property,
   plant and equipment      15,857       9,924             6          10       450       1,397           64             50   16,377         11,381

Additions to goodwill              –              –        –            –          –        177            –             –           –           177

Additions to other
   intangible assets           331         143             4           1          3              7         –             –       338             151

Depreciation of property,
   plant and equipment       7,714       7,356             9          10     1,115          921          38             37     8,876         8,324

Amortisation of
  intangible assets            212         256             1           1         37          47            8            25       258             329


There are no sales between business segments.


The business segments shown above are as follows:


Collagen casings includes the three edible collagen brands, Devro, Coria and Cutisin, and Cutisin non-edible collagen casings. Distributed
products comprise Teepak cellulose, Krehalon plastics and other ancillary products. Other products includes collagen film, collagen gel, Cutisin
plastic casings, collagen for medical and cosmetic use and thin-film products. The unallocated segment represents the activities of the group’s
head office based at Moodiesburn, Scotland and three subsidiary undertakings which are either solely holding companies or non-trading.




                                                                                                            Devro plc Annual Report & Accounts 2005 37
2 Segmental information continued
(b) Secondary reporting format – Geographical segments

                                       Europe             Americas             Asia/Pacific            Unallocated                  Group

                                 2005         2004     2005      2004       2005        2004        2005        2004        2005            2004
                                 £’000        £’000    £’000     £’000      £’000       £’000       £’000       £’000       £’000           £’000

Segment revenue
Sales to external customers
    (by destination)      88,868             88,211   31,372   30,527     32,278      30,200            –             – 152,518 148,938
Inter-segment sales         6,065             6,579    5,953    5,531        533         678            –             –  12,551  12,788

                              94,933         94,790   37,325   36,058     32,811      30,878            –             – 165,069 161,726

Segment assets
Segment assets              107,012 101,401           25,789   22,982     39,443      36,640       11,565    33,533 183,809 194,556
Company overdraft
    (note 22)                                                                                                             (10,367)   (8,382)
Taxation                                                                                                                   17,370   13,860
Inter-segment assets                                                                                                      (17,778) (42,297)

Total assets                                                                                                              173,034 157,737

Other segment items
Additions to property,
   plant and equipment        12,020          8,443    2,095    1,715      2,198       1,173          64             50    16,377      11,381

Additions to goodwill                 –         177        –         –           –             –        –             –         –           177

Additions to other
   intangible assets              283           130        –         –         55             21        –             –      338            151


Sales between geographical segments are made on arms-length terms and conditions which are available to unrelated parties.


Company
The company’s business is to invest in its subsidiary undertakings and, therefore, it operates in single business and geographical segments.




38 Devro plc Annual Report & Accounts 2005
3 Cost of sales and other operating income and expenses
                                                                                                                                Group

                                                                                                                        2005               2004
                                                                                                                        £’000              £’000

Group revenue                                                                                                      152,518              148,938
Cost of sales                                                                                                      104,943               99,730

Gross profit                                                                                                         47,575              49,208

Selling and distribution costs                                                                                       11,523              11,309
Administrative expenses                                                                                              10,373              10,184
Research and development expenditure                                                                                  4,147               4,038
Other expenses                                                                                                          934               2,781

                                                                                                                     26,977              28,312
Less: other operating income                                                                                            658                  52

Net operating expenses                                                                                               26,319              28,260

Operating profit before exceptional item                                                                             21,256              20,948



4 Exceptional item
The exceptional credit of £6,344,000 (£4,618,000 after tax) for the year ended 31 December 2005 relates to the sale of 34.5 acres of
surplus land at Moodiesburn.



5 Directors’ emoluments
A detailed analysis of directors’ remuneration, shareholdings, share options, long-term incentive schemes and pension benefits is provided in
the Remuneration Report on pages 26 to 29. Details of the emoluments of the highest-paid director are as follows:

                                                                                                                        2005               2004
                                                                                                                        £’000              £’000

Aggregate emoluments                                                                                                     336                 323
Defined benefit pension scheme:
    Accrued pension at end of year                                                                                       148                 139




                                                                                                          Devro plc Annual Report & Accounts 2005 39
6 Employee information
The average monthly number of persons (including Executive Directors) employed by the group during the year was:

                                                                                                                     2005               2004
                                                                                                                   Number             Number

By employee category
Operations and engineering                                                                                          1,853              1,800
Sales and marketing                                                                                                    96                 98
Distribution                                                                                                           29                 30
Administration                                                                                                        119                118
Research and development                                                                                              103                106

                                                                                                                    2,200              2,152


                                                                                                                    2005               2004
                                                                                                                    £’000              £’000

Staff costs (for the above persons):
Wages and salaries                                                                                                 39,575             38,194
Social security costs                                                                                               5,452              5,024
Retirement benefit obligation costs (note 25)                                                                       2,272              3,413
Performance share plan charge                                                                                         397                247

                                                                                                                   47,696             46,878



7 Finance income/(expense)
                                                                                                                              Group

                                                                                                                    2005               2004
                                                                                                                    £’000              £’000

Finance income
Interest receivable and similar income:
    On bank balances                                                                                                 351                862

Finance expense
Interest payable and similar charges:
    On bank loans and overdrafts repayable within 5 years                                                          (2,163)            (3,586)
    On finance leases                                                                                                   (2)                (1)

Total interest payable and similar charges                                                                         (2,165)            (3,587)


Interest payable and similar charges on bank loans and overdrafts repayable within 5 years above includes a credit of £142,000
(2004: £127,000) in respect of interest rate swap contracts.




40 Devro plc Annual Report & Accounts 2005
8 Profit before tax
                                                                                                                    2005               2004
                                                                                                                    £’000              £’000

Profit before tax is stated after charging/(crediting):
Inventory recognised as an expense                                                                             103,200              98,694
Inventory written down or written off                                                                            1,743               1,036
Depreciation of tangible fixed assets
– Owned assets                                                                                                    8,830              8,285
– Leased assets                                                                                                       46                 39
Amortisation of intangible fixed assets                                                                             258                329
Repairs and maintenance expenditure                                                                              12,182             11,714
Research and development expenditure                                                                              4,147              4,038
Auditors’ remuneration (Company £55,000; 2004: £60,000)                                                             218                217
Hire of plant and machinery – operating leases                                                                      347                388
Hire of other assets – operating leases                                                                             518                508
Loss on disposal of tangible fixed assets                                                                           161                108
Amortisation of grant income                                                                                         (83)               (46)
Net foreign exchange losses (see below)                                                                              613              1,233


Exchange differences charged/(credited) to the income statement were as follows:

                                                                                                                    2005               2004
                                                                                                                    £’000              £’000

Revenue                                                                                                          (1,720)              5,056
Cost of sales                                                                                                     1,922              (3,526)
Net operating expenses                                                                                              411                (297)

                                                                                                                     613              1,233


Remuneration of the auditors for the year ended 31 December 2005, including remuneration for non-audit services, is analysed below:

                                                                                                                    2005               2004
                                                                                                                    £’000              £’000

Audit services
– Statutory audit                                                                                                    218                 217
– Audit-related regulatory reporting                                                                                  73                  20
Tax services
– Compliance                                                                                                         146                 110
– Advisory                                                                                                            80                 104
Other services                                                                                                         21                122

                                                                                                                     538                 573


Fees paid to the auditors for non-audit services in 2005 include £153,000 (2004: £213,000) payable in the UK.


In addition to the above services, the group’s auditor acted as auditor to the group’s pension schemes. The appointment of auditors to the
group’s pension schemes and the fees paid in respect of those audits are agreed by the trustees of each scheme, who act independently from
the management of the group. The aggregate fees paid to the group’s auditor for audit services to the pension schemes during the year were
£7,000 (2004: £8,000).




                                                                                                      Devro plc Annual Report & Accounts 2005 41
9 Taxation
                                                                                                                               Group

                                                                                                                      2005               2004
                                                                                                                      £’000              £’000

Current tax
   United Kingdom corporation tax at 30% (2004: 30%)                                                                 1,744                 30
   Foreign tax                                                                                                       4,730              4,317

                                                                                                                     6,474              4,347
    Adjustments in respect of prior years                                                                             (116)              (506)

Total current tax                                                                                                    6,358              3,841

Deferred tax
   Origination and reversal of timing differences representing:
   United Kingdom corporation tax                                                                                       66                 (52)
   Foreign tax                                                                                                         654                640

                                                                                                                       720                588
    Adjustments in respect of prior years                                                                               13                728

Total deferred tax (note 24)                                                                                           733              1,316

Taxation                                                                                                             7,091              5,157


                                                                                                                      2005               2004
                                                                                                                      £’000              £’000

Tax on items charged to equity
Deferred tax (credit)/charge on retirement benefit obligations                                                      (3,432)               103
Deferred tax charge on net fair value gains on cash flow hedges                                                         38                  –

                                                                                                                    (3,394)               103

Total current tax charge                                                                                             6,358              3,841

Total deferred tax charge                                                                                           (2,661)             1,419


The effective rates for both years are lower than the standard rate of corporate tax in the UK (30%). The differences are explained below:
                                                                                            Group                             Company

                                                                                   2005              2004             2005               2004
                                                                                   £’000             £’000            £’000              £’000


Profit/(loss) before tax                                                         25,786             18,039          (3,468)             (4,224)
Add: share of post-tax loss of joint venture                                          –                184               –                   –

                                                                                 25,786             18,223          (3,468)             (4,224)
Profit/(loss) before tax multiplied by standard rate
    of corporation tax in the UK of 30%                                           7,736              5,467          (1,040)             (1,267)
Effects of:
Adjustments to tax in respect of prior years                                        (103)              222              69                    (3)
Adjustments in respect of foreign tax rates                                         (283)             (312)              –                     –
Permanent differences                                                               (259)             (220)            103                   99

Taxation                                                                          7,091              5,157            (868)             (1,171)



42 Devro plc Annual Report & Accounts 2005
10 Profit for the year
As permitted by Section 230 of the Companies Act 1985, the holding company’s income statement has not been presented in these financial
statements. The profit for the financial year is made up as follows:

                                                                                                                          2005               2004
                                                                                                                          £’000              £’000

Dealt with in the financial statements of the holding company                                                           (2,600)            (3,053)
Profit retained by subsidiary undertakings                                                                             21,295             16,119
Share of loss of joint venture                                                                                               –               (184)

                                                                                                                       18,695             12,882



11 Dividends
                                                                                                                          2005               2004
Group and company                                                                                                         £’000              £’000

Final paid 2.75 pence per share (2004: 2.4 pence)                                                                       4,423               3,834
Interim paid of 1.375 pence per share (2004: 1.25 pence)                                                                2,216               1,997

                                                                                                                        6,639               5,831


The directors propose a final dividend in respect of the financial year ended 31 December 2005 of 3.025 pence per share, which will
absorb an estimated £4,893,000 of shareholders’ funds. It will be paid on 17 May 2006 to shareholders who are on the register at close
of business on 18 April 2006.



12 Earnings per share
                                                                                                                          2005                2004

Earnings per share (pence)
– Basic                                                                                                                   11.5                 8.0
– Diluted                                                                                                                 11.4                 7.9
– Basic before exceptional item                                                                                            8.7                 8.0


Basic earnings per share for 2005 is calculated by dividing the profit for the year attributable to ordinary shareholders of £18,651,000
(2004: £12,882,000) by 161,545,593 (2004: 160,630,593) shares, being the weighted average number of shares in issue throughout
the year.


Share options are only treated as dilutive in the calculation of diluted earnings per share if their exercise would result in the issue of shares
at less than the average market price of the shares during the year. Shares arising from share options, the deferred bonus scheme or the
performance share plan are only treated as dilutive where the effect is to reduce earnings per share. Diluted earnings per share is calculated
by dividing the profit for the year attributable to ordinary shareholders of £18,651,000 (2004: £12,882,000) by the average number of
shares, including the effect of all dilutive potential shares, of 163,527,774 (2004: 163,187,365).


The earnings per share before exceptional item of 8.7 pence in 2005 is calculated in order to eliminate the effect of the exceptional credit
after tax of £4,618,000 on the results. Basic earnings per share before exceptional item is based on the profit attributable to ordinary
shareholders before exceptional item, after attributable tax, of £14,033,000 and 161,545,593 shares, being the weighted average
number of shares in issue throughout the year.




                                                                                                            Devro plc Annual Report & Accounts 2005 43
13 Intangible assets – goodwill
The company had no goodwill at 31 December 2005. The cost and net book value of goodwill in respect of the acquisition of Balpod Limited
(formerly BioFilm Limited) relating to the group at 31 December 2005 and 31 December 2004 was £177,000.



14 Other intangible assets
The company had other intangibles assets relating to computer software with a net book value of £15,000 at 31 December 2005 (2004:
£23,000). The cost at 31 December 2005 and 31 December 2004 was £174,000. There were no additions or disposals during 2005 or
2004 and the amortisation charge was £8,000 in 2005 (2004: £25,000).


Details of other intangible assets relating to the group are set out below:

                                                                              Computer      Development
                                                                               Software            Costs          Other             Total
Group                                                                            £’000            £’000           £’000            £’000

Cost
At 1 January 2005                                                               2,652              324                 –          2,976
Exchange differences                                                               44                1                 –             45
Additions                                                                         284               47                 7            338

At 31 December 2005                                                             2,980              372                 7          3,359

Amortisation
At 1 January 2005                                                               2,126               41                 –          2,167
Exchange differences                                                               33                –                 –             33
Charge for year                                                                   234               24                 –            258

At 31 December 2005                                                             2,393               65                 –          2,458

Net book value at 31 December 2005                                                587              307                 7            901

Cost
At 1 January 2004                                                               2,567              303                 –          2,870
Exchange differences                                                                37               –                 –              37
Additions                                                                         130               21                 –            151
Disposals                                                                          (82)              –                 –             (82)

At 31 December 2004                                                             2,652              324                 –          2,976

Amortisation
At 1 January 2004                                                               1,859               21                 –          1,880
Exchange differences                                                                40               –                 –              40
Charge for year                                                                   309               20                 –            329
Disposals                                                                          (82)              –                 –             (82)

At 31 December 2004                                                             2,126               41                 –          2,167

Net book value at 31 December 2004                                                526              283                 –            809




44 Devro plc Annual Report & Accounts 2005
15 Property, plant and equipment
                                                                            Plant and
                                                             Freehold      machinery,         Fixtures
                                                             land and      and motor                and     Construction
                                                             buildings        vehicles         fittings      in progress               Total
Group                                                          £’000           £’000            £’000             £’000               £’000

Cost
At 1 January 2005                                            51,614         108,376            2,359              6,323           168,672
Exchange differences                                             952          4,322                21               186              5,481
Additions                                                      1,233          6,449                72             8,623            16,377
Disposals                                                     (1,109)          (595)              (10)                (3)           (1,717)
Reclassification                                                 863          5,087                 –            (5,950)                 –

At 31 December 2005                                         53,553         123,639             2,442             9,179           188,813

Depreciation
At 1 January 2005                                            11,332          63,097            1,863                    –          76,292
Exchange differences                                            207           2,566               16                    –           2,789
Charge for year                                               1,155           7,574              147                    –           8,876
Disposals                                                        (30)          (462)               (9)                  –            (501)

At 31 December 2005                                         12,664           72,775            2,017                    –          87,456

Net book value at 31 December 2005                          40,889           50,864              425             9,179           101,357


Cost
At 1 January 2004                                            49,198         105,977            2,331              3,981           161,487
Exchange differences                                          1,199             (806)               5               155                553
Additions                                                       791            4,767               64             5,759            11,381
Disposals                                                      (256)          (4,446)             (41)                (6)           (4,749)
Reclassification                                                682            2,884                –            (3,566)                 –

At 31 December 2004                                          51,614         108,376            2,359             6,323            168,672

Depreciation
At 1 January 2004                                            10,032          61,113            1,728                    –          72,873
Exchange differences                                            236            (601)               4                    –            (361)
Charge for year                                               1,246           6,909              169                    –           8,324
Disposals                                                       (182)         (4,324)             (38)                  –           (4,544)

At 31 December 2004                                          11,332          63,097            1,863                    –          76,292

Net book value at 31 December 2004                           40,282          45,279              496             6,323             92,380


Depreciation has not been charged on freehold land which is stated at historical cost of £2,908,000 (2004: £3,828,000).


Assets held under finance leases included above comprise computer equipment with a net book value of £43,000 at 31 December 2005
(2004: £86,000).




                                                                                                     Devro plc Annual Report & Accounts 2005 45
15 Property, plant and equipment continued
                                              Plant and
                                             machinery,    Fixtures
                                             and motor           and
                                                vehicles    fittings    Total
Company                                          £’000       £’000     £’000

Cost
At 1 January 2005                                  323          28      351
Additions                                            50         14        64
Disposals                                           (81)         –       (81)

At 31 December 2005                               292           42      334

Depreciation
At 1 January 2005                                  253          24      277
Charge for year                                     36           2       38
Disposals                                          (78)           –      (78)

At 31 December 2005                               211           26      237

Net book value at 31 December 2005                  81          16       97


Cost
At 1 January 2004                                  273          28      301
Additions                                           50           –       50

At 31 December 2004                                323          28      351

Depreciation
At 1 January 2004                                  219          21      240
Charge for year                                     34           3       37

At 31 December 2004                                253          24      277

Net book value at 31 December 2004                  70            4      74




46 Devro plc Annual Report & Accounts 2005
16 Investments
                                                                                                                       2005                2004
Company                                                                                                                £’000               £’000

Interest in group undertakings
Net book value at 1 January                                                                                       116,084             128,074
Add: increase in investment (see below)                                                                            15,000                    –
Less: reduction in investment (see below)                                                                           (1,704)            (11,990)

Net book value at 31 December                                                                                     129,380             116,084


During the year, the company made an additional investment in one of its subsidiary undertakings. Another of its subsidiary undertakings
repurchased a proportion of the shares in that undertaking held by the company.


The company’s principal subsidiary undertakings at 31 December 2005 are shown below. The accounting dates of the subsidiary
undertakings are 31 December except where stated.

                                                                                                                       Proportion of nominal
                                                                                Country of                         value of issued shares held by:
                                                                             incorporation       Nature of
Name of undertaking                                                         or registration      business              Group            Company

Devro (Scotland) Limited                                                        Scotland          Casings                                 100%
Devro New Holdings Limited                                                      Scotland          Holding                                 100%
Devro Acquisition Corp                                                              USA           Holding                                 100%
Devro BV (accounting date – 31 October;
    reporting date – 31 December)                                           Netherlands           Holding             100%
Devro Asia Limited                                                           Hong Kong           Casings              100%
Devro Pty Limited                                                              Australia         Casings              100%
Devro GmbH                                                                     Germany        Non-trading             100%
Devro KK                                                                          Japan          Casings              100%
Devro Inc                                                                           USA          Casings              100%
Devro Investments Inc                                                               USA           Holding             100%
Cutisin s.r.o.                                                            Czech Republic         Casings              100%
BioFilm Limited (formerly BioFilm Manufacturing Limited)                        Scotland         Thin-film             90%
Balpod Limited (formerly BioFilm Limited)                                       Scotland      Non-trading             100%


Devro (Scotland) Limited has a branch located in Germany. Devro Pty Limited has a branch located in New Zealand.




                                                                                                         Devro plc Annual Report & Accounts 2005 47
17 Inventories
The company had no inventories at 31 December 2005. Details of inventories relating to the group are as follows:

                                                                                                                    2005                2004
Group                                                                                                               £’000               £’000

Raw materials and consumables                                                                                       2,539               2,289
Work in progress                                                                                                    2,351               2,369
Finished goods and goods for resale                                                                                16,166              15,108

                                                                                                                   21,056              19,766



18 Trade and other receivables
                                                                                          Group                              Company

                                                                                  2005              2004            2005                2004
                                                                                  £’000             £’000           £’000               £’000

Amounts falling due after more than one year
Amounts owed by subsidiary undertakings                                              –                  –          10,500              32,600
Prepayments and accrued income                                                     171                  –               –                   –

                                                                                   171                  –          10,500              32,600

Amounts falling due within one year
Trade debtors                                                                  17,868             17,637                 –                  –
Less: provision for doubtful debts                                                 (98)             (200)                –                  –

Trade debtors – net                                                            17,770             17,437               –                   –
Amounts owed by subsidiary undertakings                                             –                  –             254                 552
Other debtors                                                                   1,223              1,315               6                   5
Prepayments and accrued income                                                  1,225                983              35                  28

                                                                               20,218             19,735             295                 585


19 Cash and cash equivalents
                                                                                          Group                              Company

                                                                                  2005              2004            2005                2004
                                                                                  £’000             £’000           £’000               £’000

Cash and cash equivalents
Cash at bank and in hand                                                         6,598             7,719               65                 11
Short-term bank deposits                                                         4,645             3,291                –                  –

                                                                               11,243             11,010               65                 11


An overdraft balance in the company (note 22) is pooled with cash balances held at the same bank by a subsidiary undertaking. The resulting
net cash position is included in the group’s cash at bank and in hand balance.




48 Devro plc Annual Report & Accounts 2005
20 Trade and other payables – current
                                                                                            Group                               Company

                                                                                   2005              2004              2005                2004
                                                                                   £’000             £’000             £’000               £’000

Trade creditors                                                                   9,622              6,866                –                   –
Amounts owed to subsidiary undertakings                                               –                  –              836                 952
Other taxation and social security payable                                        1,200              1,290              111                  44
Accruals and deferred income                                                     10,326             10,230              939                 978
Amounts owed to former Cutisin shareholders                                         302                311                –                   –

                                                                                 21,450             18,697           1,886                 1,974



21 Other non-current liabilities
                                                                                            Group                               Company

                                                                                   2005              2004              2005                2004
                                                                                   £’000             £’000             £’000               £’000

Accruals and deferred income                                                        165               217                   –                  –



22 Financial liabilities – borrowings
                                                                                            Group                               Company

                                                                                   2005              2004              2005                2004
Current                                                                            £’000             £’000             £’000               £’000

Unsecured bank loans and overdrafts due within one year or on demand                876              1,621          10,367                 8,382
Finance lease obligations
– due within one year                                                                 19               40                   –                  –

                                                                                    895              1,661          10,367                 8,382


                                                                                            Group                               Company

                                                                                   2005              2004              2005                2004
Non-current                                                                        £’000             £’000             £’000               £’000

Unsecured bank loans                                                             28,068             34,797          19,000                29,250
Finance lease obligations
– due between one and two years                                                         –              18                   –                  –

                                                                                 28,068             34,815          19,000                29,250


Bank loans are denominated in a number of currencies and bear interest based on LIBOR or foreign equivalents appropriate to the country in
which the borrowing is incurred. As part of the group’s interest rate management strategy, the company entered into interest rate swaps in
2003. At December 2005 there remained one interest rate swap (2004: two) for a principal amount of £10 million (2004: £15 million)
maturing in 2006. Under the terms of this swap, the company receives interest on a variable basis and pays interest fixed at a rate of 3.71%
(2004: 3.65%).




                                                                                                         Devro plc Annual Report & Accounts 2005 49
22 Financial liabilities – borrowings continued
                                                                                                      Within          Between
The exposure of the group’s borrowings to interest rate changes                                       1 year         1-5 years               Total
                                                                                                      £’000             £’000               £’000

At 31 December 2005
Total borrowings (see below)                                                                        28,963                  –              28,963

At 31 December 2004
Total borrowings                                                                                     36,476               –                36,476
Effect of interest rate swaps                                                                       (10,000)         10,000                     –

                                                                                                    26,476           10,000                36,476


An interest rate swap of £10,000,000 is in place at 31 December 2005. Borrowings at that date total £28,963,000. The interest rate
swap expires on 17 July 2006.


The effective interest rates at the balance sheet dates were as follows:

                                                                Currency    Rate                                        2005                 2004

Bank overdraft                                                      euro    ECB min. bid rate plus 75 basis points    3.00%                2.75%
Bank borrowings
   Fixed rate                                                    Sterling   3.71% plus 81 basis points                4.52%                4.46%
   Floating rate                                                 Sterling   LIBOR plus 81 basis points                5.34%                5.64%
   Floating rate                                        Australian dollar   BBSW plus 80 basis points                 6.06%                5.85%

Average bank borrowings rate                                                                                          5.29%                5.17%

Finance lease obligations                                                                                             5.24%                2.44%


The borrowings are denominated in the following currencies:

                                                                                            Group                                Company

                                                                                    2005              2004             2005                 2004
                                                                                    £’000             £’000            £’000                £’000

Sterling                                                                           19,007           29,284           19,000                29,250
Australian dollar                                                                   9,068            5,547                –                     –
euro                                                                                  876            1,621                –                     –
US dollar                                                                              12               24           10,367                 8,382

                                                                                   28,963           36,476           29,367                37,632




50 Devro plc Annual Report & Accounts 2005
23 Financial Instruments
The Board reviews and agrees policies for managing each of the risks associated with interest rate, liquidity, foreign currency and credit. It is
the group’s policy that no trading in financial instruments shall be undertaken. These policies have remained unchanged throughout the year,
are consistent with the previous year and are summarised below:

Interest rate risk
The group borrows in the desired currencies at floating rates of interest and can use forward rate agreements or interest rate swaps to
generate the desired interest profile and to manage the group’s exposure to interest rate fluctuations. At 31 December 2005, 34% (2004:
41%) of the group’s borrowings were at fixed rates after taking account of interest rate swaps.

Liquidity risk
The group has a medium-term loan facility which is regularly reviewed to ensure that it provides adequate liquidity for the group. The facility is
managed on a centralised basis with appropriate local availability.

Foreign currency risk
The group has several significant overseas subsidiary undertakings whose revenues and expenses are denominated in a variety of currencies. It is
the group’s policy to hedge up to a maximum of 75% of the net external currency transaction exposures for periods of up to a maximum of one year
forward. It is the group’s policy not to routinely hedge translation exposures. Specific Board approval is required for any translation exposure hedging.

Credit risk
The group has no significant concentrations of credit risk. The group has implemented policies that require appropriate credit checks on
potential customers before sales commence.

• Fair values of derivative financial instruments
Disclosures regarding financial instruments are set out below:

                                                                                                  Group                                  Company

                                                                                         Assets           Liabilities           Assets             Liabilities
                                                                                         £’000               £’000              £’000                 £’000

At 31 December 2005
Interest rate swap (cash flow hedge)                                                        65                     –                65                      –
Forward foreign currency contracts
– cash flow hedge                                                                          100                   77                 –                       –
– other                                                                                     79                   20                 –                       –
Currency swaps                                                                             297                   35               297                       –

                                                                                           541                 132                362                       –


In accordance with IAS 39, “Financial instruments: Recognition and Measurement”, Devro plc has reviewed all contracts for embedded
derivatives. At 31 December 2005, there were no embedded derivatives (2004: Nil).


At 31 December 2005 the net fair value gains on open forward foreign exchange contracts that hedge the foreign currency risk of
anticipated future sales and purchases amount to £23,000. These will be transferred to the income statement when the forecast sales and
purchases occur during 2006.


At 31 December 2005 the net fair value gains on the interest rate swap contract amount to £47,000, which will be transferred to the
income statement when the interest on the floating rate loan is recognised.


At 31 December 2005, the principal amounts of the outstanding financial instruments are £10 million interest rate swap contract,
£22 million currency swaps and £10 million forward foreign exchange currency contracts.




                                                                                                                   Devro plc Annual Report & Accounts 2005 51
23 Financial Instruments continued
• Fair values of non-derivative financial assets and financial liabilities.

                                                                                                                   Group

                                                                                               2005                                     2004

                                                                                  Book value          Fair value           Book value          Fair value
                                                                                     £’000               £’000                £’000               £’000

Long-term borrowings (note 22)                                                    (28,068)            (28,068)             (34,815)            (34,815)


Fair value of other financial assets and financial liabilities


Primary financial instruments held or issued to finance the group’s activities:
Other non-current receivables (note 18)                                               171                 171                     –                   –
Trade and other receivables (note 18)                                              20,218              20,218               19,735              19,735
Short-term deposits (note 19)                                                       4,645               4,645                 3,291               3,291
Cash at bank and in hand (note 19)                                                  6,598               6,598                 7,719               7,719
Trade and other payables (note 20)                                                (21,450)            (21,450)             (18,697)            (18,697)
Other non-current liabilities (note 21)                                              (165)               (140)                 (217)               (197)
Short-term borrowings (note 22)                                                      (895)               (894)               (1,661)             (1,659)


The fair values of the group’s borrowings are equivalent to the carrying values reported in the balance sheet, except for finance lease
obligations whose fair value is calculated by discounting expected cash flows at prevailing interest and exchange rates.


The fair values of trade and other receivables, short-term deposits and trade and other payables are equivalent to the carrying values because
of the short-term nature of these instruments.


The fair values of other non-current receivables and liabilities have been calculated by discounting expected cash flows at prevailing interest
and exchange rates.

• Maturity of financial liabilities
The maturity profile of non-current liabilities at 31 December 2005 was as follows:

                                                                       2005                                                  2004

                                                       Debt      Finance leases        Total              Debt       Finance leases                Total
Group                                                 £’000              £’000        £’000              £’000               £’000                £’000

In more than one year but not more
    than two years                                         –                  –            –                  –                  18                  18
In more than two years but not more
    than five years                                28,068                     –    28,068             34,797                        –          34,797

                                                   28,068                     –    28,068             34,797                     18            34,815




52 Devro plc Annual Report & Accounts 2005
23 Financial Instruments continued
                                                                                                                           2005               2004
Company                                                                                                                    £’000              £’000

In more than two years but not more than five years                                                                     19,000             29,250

• Borrowing facilities
The group has the following undrawn committed borrowing facilities available at 31 December 2005:

                                                                                                                           2005               2004
                                                                                                                           £’000              £’000

Expiring within one year                                                                                                 5,100               5,100
Expiring between one and two years                                                                                       5,100               5,100
Expiring in more than two years                                                                                          2,532                  903

                                                                                                                        12,732             11,103


The group has in place unsecured floating rate loan facilities comprising committed elements with a total of £40.8 million (2004: £45.9 million)
and uncommitted working capital elements with a total of £7.0 million (2004: £7.0 million). These facilities are co-ordinated, bilateral facilities
with three banks and the committed elements expire on 15 July 2008.


In addition, there is a further uncommitted working capital facility of $2.0 million arranged in the United States. The uncommitted facilities are
renewable within one year.

• Finance leases
The minimum lease payments under finance leases fall due as follows:

                                                                                                                                              2005
                                                                                                                                              £’000

Within one year                                                                                                                                  19

Future finance charges on finance leases                                                                                                          (1)

Present value of finance lease obligations                                                                                                       18




                                                                                                             Devro plc Annual Report & Accounts 2005 53
24 Deferred tax
                                                                                         Group                            Company

                                                                               2005                 2004       2005                   2004
                                                                               £’000                £’000      £’000                  £’000

Net (liability)/asset at 1 January                                            (855)                  941          40                    26
Exchange differences                                                          (712)                 (377)          –                     –
(Charge)/credit for the year                                                  (733)               (1,316)         11                    14
Credit/(charge) to equity                                                    3,394                  (103)        (30)                    –

Net asset/(liability) at 31 December                                         1,094                  (855)         21                    40


Group
Deferred tax assets can be analysed as follows:
                                                          Retirement     Accelerated
                                                               benefit         capital
                                                          obligations     allowances               Losses      Other                  Total
                                                               £’000           £’000                £’000      £’000                 £’000

At 1 January 2005                                           10,257                27                 360      3,056                 13,700
Exchange differences                                          (395)                –                   39      (306)                  (662)
Credit/(charge) for the year                                    55                60                  (29)       (56)                   30
Credit to equity                                             3,432                 –                    –          –                 3,432

At 31 December 2005                                         13,349                87                 370      2,694                 16,500


Deferred tax liabilities can be analysed as follows:

                                                                                             Accelerated
                                                                                                   capital
                                                                                              allowances       Other                  Total
                                                                                                   £’000       £’000                 £’000

At 1 January 2005                                                                                (13,186)     (1,369)           (14,555)
Exchange differences                                                                                  (49)          (1)              (50)
Credit/(charge) for the year                                                                         324      (1,087)              (763)
Charge to equity                                                                                        –         (38)               (38)

At 31 December 2005                                                                              (12,911)     (2,495)           (15,406)


The net deferred tax asset at 31 December 2005 can be analysed as follows:

                                                                                                   Asset      Liability               Total
                                                                                                   £’000       £’000                 £’000

Due within one year                                                                                 552         (264)                 288
Due after more than one year                                                                     15,948      (15,142)                 806

                                                                                                 16,500      (15,406)                1,094




54 Devro plc Annual Report & Accounts 2005
24 Deferred tax continued
Company
Deferred tax assets can be analysed as follows:

                                                                                                    Accelerated
                                                                                                          capital
                                                                                                     allowances               Other               Total
                                                                                                          £’000               £’000              £’000

At 1 January 2005                                                                                            27                  13                 40
Credit for year                                                                                              10                   1                 11

At 31 December 2005                                                                                          37                  14                 51


Deferred tax liabilities can be analysed as follows:

                                                                                                                              Other               Total
                                                                                                                              £’000              £’000

At 1 January 2005                                                                                                                 –                   –
Charge to equity                                                                                                                (30)                (30)

At 31 December 2005                                                                                                             (30)               (30)


The net deferred tax asset at 31 December 2005 can be analysed as follows:

                                                                                                          Asset             Liability             Total
                                                                                                          £’000              £’000               £’000

Due within one year                                                                                           4                 (30)                (26)
Due after more than one year                                                                                 47                   –                  47

                                                                                                             51                 (30)                21


Deferred tax assets and liabilities are only offset to the extent that there is a legally enforceable right to do so, as permitted by IAS 12.


No deferred tax has been recognised in respect of the withholding tax and other taxes that would be payable on the unremitted earnings
of certain subsidiaries. Unremitted earnings of subsidiary undertakings with a lower tax rate than the UK rate and on which UK tax could
become payable if repatriated totalled £29.4 million at 31 December 2005 (31 December 2004: £23.2 million).




                                                                                                                Devro plc Annual Report & Accounts 2005 55
25 Retirement benefit obligations
The amounts recognised as charges in the income statement are as follows:

                                                                                                                      2005             2004
                                                                                                                      £’000            £’000

Pension obligations
Defined benefit schemes                                                                                             1,512             2,721
Defined contribution schemes                                                                                          608               517

                                                                                                                    2,120             3,238
Post-retirement benefit obligations
Post-retirement benefit scheme                                                                                         152              175

                                                                                                                    2,272             3,413


The amounts recognised as non-current liabilities in the balance sheet are as follows:

                                                                                                                      2005             2004
                                                                                                                      £’000            £’000

Pension obligations
Fair value of plan assets                                                                                         172,957          148,951
Present value of funded obligations                                                                              (213,109)        (178,693)

                                                                                                                  (40,152)          (29,742)
Post-retirement benefit obligations
Present value of benefit obligations                                                                                (1,833)          (1,838)

                                                                                                                  (41,985)          (31,580)


(a) Pension obligations
The group operates a number of pension schemes throughout the world. The major schemes are of the defined benefit type and, with the exception
of Germany where book reserves are supported by insurance policies, the assets of the schemes are held in separate trustee-administered funds.
The defined benefit schemes are now closed to new members and have been replaced with defined contribution schemes. The total pension cost for
the group was £2,120,000 (2004: £3,238,000), of which £256,000 (2004: £1,606,000) related to the overseas schemes. On the advice of
the actuaries, cash contributions to the group’s defined benefit schemes are expected to be £4.5 million for the year ending 31 December 2006.


The most significant defined benefit scheme within the group is the Devro Limited (UK) Pension Plan, which operates in the UK. The latest
formal actuarial valuation of the scheme was at 31 March 2005. The other major defined benefit schemes operate in Australia and the US.


Actuarial assumptions appropriate for each country have been used.




56 Devro plc Annual Report & Accounts 2005
25 Retirement benefit obligations continued
The last formal actuarial valuations of the group’s material defined benefit schemes have been updated to 31 December 2005 by qualified
independent actuaries. The major assumptions used by the actuaries in the following principal countries were:

                                                             Australia                       United Kingdom                           United States

                                                      2005                 2004            2005               2004                  2005               2004
                                                        %                    %                %                  %                    %                     %

Discount rate                                         4.40                 5.25            4.75               5.40                  5.60               5.75
Rate of increase in salaries                          4.00                 4.00            3.75               3.75                  3.50               3.50
General inflation                                     2.50                 2.50            2.75               2.75                  2.50               2.50


In addition to the above schemes, the group operates a defined benefit retirement plan in Germany which, in common with typical practice in
that country, is supported by insurance policies. At 31 December 2005, the value of the insurance asset was £3.0 million (2004: £3.0 million)
and the value of the liability was £2.8 million (2004: £2.6 million).


In addition, the group has benefit arrangements in respect of two former executives in the US for which the group has made adequate
provisions on the advice of its actuary. There is also an individual pension arrangement in Japan in respect of which appropriate
contributions are made annually. The plan in Germany and these additional arrangements in the US and Japan are included under the
“other” heading in this note.


The aggregate fair values of assets in the group’s defined benefit schemes at 31 December 2005 were estimated to be:

                                   Australia             United Kingdom              United States                  Other                      Group

                                2005           2004     2005             2004       2005           2004    2005              2004          2005        2004
                               £’000      £’000         £’000            £’000     £’000      £’000       £’000             £’000      £’000           £’000

Equities                       5,086      3,989       84,816         76,107       17,935    16,180            –                 – 107,837          96,276
Bonds                          1,130      1,126       42,280         29,988       13,727    11,604            –                 –  57,137          42,718
Other                          1,220      1,247          255          2,555        3,526     3,152        2,982             3,003   7,983           9,957

                               7,436      6,362 127,351 108,650                   35,188    30,936        2,982             3,003 172,957 148,951


The long-term rates of return expected at 31 December 2005 in the following principal countries were as follows:

                                                                                       Australia              United Kingdom                United States

                                                                                    2005           2004    2005              2004          2005        2004
                                                                                      %              %          %              %             %              %

Equities                                                                            7.10           7.30    6.90              7.30          8.50        8.50
Bonds                                                                               4.10           4.80    4.25              4.70          4.50        4.50
Other                                                                               4.67           6.00    4.30              4.55          7.50        7.50




                                                                                                                  Devro plc Annual Report & Accounts 2005 57
25 Retirement benefit obligations continued
The net pension assets and liabilities at 31 December 2005 were as follows:

                                      Australia              United Kingdom         United States             Other                      Group

                                 2005             2004      2005        2004      2005        2004     2005           2004            2005       2004
                                £’000        £’000         £’000       £’000     £’000       £’000    £’000           £’000       £’000          £’000

Total fair value of plan
    assets (as above)           7,436        6,362 127,351           108,650    35,188     30,936     2,982           3,003 172,957          148,951
Present value of
    plan liabilities           (6,487)       (5,624) (156,800) (128,490)        (46,553)   (41,519)   (3,269)     (3,060) (213,109) (178,693)

Surplus/(deficit) in plans        949             738     (29,449)   (19,840)   (11,365)   (10,583)    (287)            (57)    (40,152)     (29,742)
Related deferred
    tax (liabilities)/assets      (284)           (221)    8,835       5,952     4,178       3,916       (58)           (70)    12,671         9,577

Net pension
   assets/(liabilities)           665             517     (20,614)   (13,888)    (7,187)    (6,667)    (345)           (127)    (27,481)     (20,165)


The deficits shown in the table above have arisen mainly due to falling interest rates across the world over recent years. We continue to pay
contributions to retirement plans in accordance with local regulatory requirements and on the advice of qualified independent actuaries. The
actuaries continually review the funding position of the plans. The group remains committed to funding all of its benefit arrangements.


Changes in the fair value of plan assets are as follows:

                                                                                                                              2005               2004
                                                                                                                              £’000              £’000

Fair value of plan assets at 1 January                                                                                  148,951              138,857
Expected return on plan assets                                                                                             9,694                8,770
Employer contributions                                                                                                     3,479                4,442
Member contributions                                                                                                         818                  883
Benefits paid                                                                                                             (6,963)              (7,107)
Actuarial gains                                                                                                          13,373                 5,774
Exchange gains/(losses)                                                                                                    3,605               (2,668)

Fair value of plan assets at 31 December                                                                                172,957              148,951


Changes in present value of defined benefit obligations are as follows:

                                                                                                                              2005               2004
                                                                                                                              £’000              £’000

Present value of obligations at 1 January                                                                               178,693              171,193
Service cost                                                                                                               1,325                1,939
Interest cost                                                                                                              9,881                9,552
Member contributions                                                                                                         818                  883
Benefits paid                                                                                                             (6,963)              (7,107)
Actuarial losses                                                                                                         24,637                 5,892
Exchange losses/(gains)                                                                                                    4,718               (3,659)

Present value of obligations at 31 December                                                                             213,109              178,693




58 Devro plc Annual Report & Accounts 2005
25 Retirement benefit obligations continued
Amounts charged to the income statement and recognised in the statement of recognised income and expense are as follows:

                                   Australia               United Kingdom        United States               Other                   Group

                               2005            2004       2005       2004      2005        2004      2005             2004      2005         2004
                               £’000      £’000          £’000      £’000     £’000       £’000      £’000           £’000     £’000         £’000

Analysis of amounts
    charged to the
    income statement
Current service cost            307            185       1,815      1,674         –              –     82               80     2,204      1,939
Plan amendment                    –              –           –          –      (879)             –      –                –      (879)         –

Total operating
    charge/(credit)             307            185       1,815      1,674      (879)             –     82               80     1,325      1,939

Other finance income:
Expected return on
    pension scheme
    assets                     (409)           (359)     (7,036)   (6,626)    (2,249)    (1,785)         –               –    (9,694)    (8,770)
Interest on pension
    scheme liabilities          314            358       6,972      6,502     2,463       2,494       132             198      9,881      9,552

Net financing
   (credit)/charge               (95)             (1)       (64)      (124)     214         709       132             198        187          782

Analysis of amounts
   recognised in
   statement of
   recognised income
   and expense
Actual return less expected
   return on assets             538            816      13,133      3,341      (380)      1,550        82               67   13,373       5,774
Experience gains and
   (losses) on liabilities     (126)            (67)    (931)          89      (705)        428         (4)          1,115    (1,766)     1,565
Changes in assumptions         (172)            (89) (21,693)      (4,510)     (788)     (2,495)     (218)            (363) (22,871)     (7,457)

Actuarial gain/(loss)
   on assets and liabilities    240            660       (9,491)   (1,080)    (1,873)      (517)     (140)            819    (11,264)        (118)
Exchange gain/(loss)             36              (5)          –         –     (1,142)       944         (7)            52      (1,113)        991

Actuarial gain/(loss)
   recognised in sterling       276            655       (9,491)   (1,080)    (3,015)       427      (147)            871    (12,377)         873

Movement in surplus/
   (deficit) during
   the year
Surplus/(deficit) in scheme
   at beginning of year         738            242      (19,840) (18,868) (10,583) (12,932)            (57)           (778) (29,742) (32,336)
Movement in year:
Pension (expense)/credit       (212)           (184)     (1,751)   (1,550)       665       (709)     (214)            (278)  (1,512)     (2,721)
Employer contributions          147              25       1,633     1,658      1,568      2,631       131              128    3,479       4,442
Actuarial gain/(loss)           240             660      (9,491)   (1,080)    (1,873)      (517)     (140)             819 (11,264)        (118)
Exchange gain/(loss)             36               (5)         –         –     (1,142)       944         (7)             52   (1,113)        991

Surplus/(deficit) in
   scheme at end
   of year                      949            738      (29,449) (19,840) (11,365) (10,583)          (287)             (57) (40,152) (29,742)




                                                                                                          Devro plc Annual Report & Accounts 2005 59
25 Retirement benefit obligations continued
Cumulative actuarial gains and losses recognised in equity are as follows:

                                                                                                                     2005             2004
                                                                                                                     £’000            £’000

At 1 January                                                                                                          873                –
Net actuarial (losses)/gains recognised in the year                                                               (12,377)             873

At 31 December                                                                                                    (11,504)             873


The actual return on plan assets was £23.1 million in 2005 (2004: £14.5 million).


History of experience gains and losses in the principal countries is as follows:

                                             Australia                         United Kingdom                       United States

                          2005        2004          2003      2002    2005     2004      2003    2002    2005     2004        2003     2002

Difference between
    expected and
    actual return on
    scheme assets:
Amount (£’000)             538         816          (890)     (763) 13,133    3,341 10,073 (26,532)      (380)   1,550       2,502   (3,784)
Percentage of
    scheme assets           7%        13%          (15)%      (14)%   10%       3%       10%    (31)%    (1)%       5%         8%     (12)%
Experience gains
    and (losses) on
    scheme liabilities:
Amount (£’000)            (126)         (67)         479          –   (931)        89    359     471     (705)     428        (777) (3,917)
Percentage of
     scheme liabilities    (2)%        (1)%              8%       –   (1)%      0%        0%      0%     (2)%       1%        (2)%     (9)%
Total amount
    recognised in
    statement of
    recognised income
    and expense:
Amount (£’000)             276         655          (206) (1,100) (9,491) (1,080)       7,340 (37,159) (3,015)     427        474    (8,908)
Percentage of
     scheme liabilities     4%        12%           (4)%      (22)%   (6)%     (1)%       6%    (33)%    (6)%       1%         1%     (20)%


(b) Post-requirement benefit obligations
The group also provides post-retirement health care benefits to certain groups of its retired employees in the United States. The amount
of expense recognised in the current year is £152,000 (2004: £175,000) and the liability at 31 December 2005 is £1,833,000
(2004: £1,838,000). It has been assumed that the annual per capita cost of benefits will increase by between 8% and 9%. This rate
is assumed to decrease to an ultimate rate of 5% in 2011. The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation at 31 December 2005 was 5.75% (2004: 6.25%).




60 Devro plc Annual Report & Accounts 2005
26 Called up share capital
                                                                                                                          2005               2004
Group and company                                                                                                         £’000              £’000

Authorised
225,000,000 ordinary shares of 10 pence each                                                                           22,500             22,500


Allotted, called up and fully paid
161,755,760 (2004: 161,328,760) ordinary shares of 10 pence each                                                       16,176             16,133


The number of ordinary shares of 10 pence each issued during the year in connection with options exercised were:


The Devro 1993 (No. 1) Executive Share Option Scheme                                                                   66,000            164,000
The Devro 1993 (No. 2) Executive Share Option Scheme                                                                 361,000             669,000

                                                                                                                     427,000             833,000



27 Share-based payments
The Performance Share Plan (“the plan”) was introduced in 2003.


Under the plan, the Executive Directors’ Remuneration Committee can make provisional allocations of ordinary shares in the company
to employees of the group, including executive directors. No payment for an allocation is made by a participant. Allocations vest over
a three-year period, are conditional on the continued employment of the participant and are subject to certain performance conditions.
These performance conditions relate to growth in operating profit of the subsidiary undertaking in which the participant is employed, growth
in earnings per share of the group, or a combination of both. For a minimum vesting of 30% of the provisional allocation to be made,
operating profit and/or earnings per share must grow by inflation plus 9% over the three-year performance period. For a maximum vesting
of 100% of the provisional allocation to be made, operating profit and/or earnings per share must grow by inflation plus 30% in the case
of members of the executive committee or by inflation plus 18% in the case of other employees. A proportional allocation, calculated on a
straight-line basis, is made where growth in operating profit and/or earnings per share is between the minimum and maximum targets.


The fair value of an allocation represents the market value of the ordinary shares in the company on the date of the provisional allocation,
less the discounted value of estimated dividends expected to be paid during the vesting period. A participant is not entitled to receive dividends
during this period.


Amounts provided in the accounts are based on an estimate of the probability of the targets in respect of allocations being achieved.


At 31 December 2005, the maximum number of shares which may vest under the plan is as follows:

                                                                                               Fair value                                  Number
Allocation date                                                                                per share         Vesting date             of shares

18/06/2003                                                                                      £0.584       18/06/2006                  610,596
10/10/2003                                                                                      £0.691       10/10/2006                  618,290
12/10/2004                                                                                      £1.006       12/10/2007                  894,627




                                                                                                            Devro plc Annual Report & Accounts 2005 61
28 Options in shares of Devro plc
Options had been granted but not yet exercised or lapsed for ordinary shares at 31 December 2005 as follows:

                                                                                                                                   Remaining
                                                           Price per      Earliest date          Latest date       Number of      life (years):
Scheme                                                        share        for exercise          for exercise    share options   Contractual

The Devro 1993 (No 1) Executive Share Option Scheme         £2.44      19/09/1999         18/09/2006                 42,000               0.8
                                                           £1.665      22/12/2001         21/12/2008                 10,000               3.0


The Devro 1993 (No 2) Executive Share Option Scheme         £3.95      10/10/2000         09/10/2007               270,000                1.8
                                                           £3.925      21/10/2000         20/10/2007                10,000                1.9
                                                           £1.665      22/12/2001         21/12/2008               335,000                3.0
                                                            £0.97      19/10/2002         18/10/2009               100,000                3.9
                                                           £0.515      24/10/2004         23/10/2011                78,000                5.9


The Devro 2001 Deferred Bonus Scheme                             Nil   13/03/2006         12/09/2006               529,801                0.8


A reconciliation of the movement in share options during the year ended 31 December 2005 is shown below:

                                                                                          2005                               2004

                                                                                                  Weighted                          Weighted
                                                                                                   average                           average
                                                                                                   exercise                          exercise
                                                                               Number              price (£)       Number                  (£)

Outstanding at 1 January                                                  2,530,442                   1.28      3,651,942               1.12
Exercised                                                                  (804,641)                  0.57       (975,000)              0.52
Lapsed                                                                     (351,000)                  2.48       (146,500)              2.31

Outstanding at 31 December                                                1,374,801                   1.40      2,530,442               1.28

Exerciseable at 31 December                                                 845,000                   2.27      1,796,000               1.81


The weighted average remaining life (contractual) of outstanding options at 31 December 2005 is 2.1 years (31 December 2004: 3.3 years).
There is no difference between the calculation on a contractual basis and on an expected basis.


Details of options held by directors at 31 December 2005 are shown on page 29.


The company has established an employee share ownership plan trust (“ESOP”) with an independent professional trustee. The ESOP may
acquire shares for the purpose of the company’s employee share schemes, including the Devro 2001 Deferred Bonus Scheme. The ESOP
will not hold more than 5% of the ordinary share capital of the company without obtaining prior approval of the shareholders.




62 Devro plc Annual Report & Accounts 2005
29 Share premium
Group and company                                                                                                               £’000

At 1 January 2005                                                                                                              5,194
Premium on shares issued during the year under the share option schemes                                                          277

At 31 December 2005                                                                                                            5,471


At 1 January 2004                                                                                                              4,848
Premium on shares issued during the year under the share option schemes                                                          346

At 31 December 2004                                                                                                            5,194



30 Other reserves
                                             Capital                                                   Cumulative
                                         redemption          Special      Performance    Hedging       translation
                                            reserve         reserve         share plan   reserve       adjustment                Total
Group                                        £’000            £’000             £’000     £’000             £’000               £’000

At 1 January 2005                          35,587            8,888               318          –            1,655             46,448
Adoption of IAS 32 and 39                       –                –                 –        200                –                200
Exchange adjustments                            –                –                 –          –            2,747              2,747
Cash flow hedges                                –                –                 –       (111)               –               (111)
Performance share plan charge                   –                –               397          –                –                397

At 31 December 2005                        35,587           8,888                715         89            4,402             49,681


At 1 January 2004                          35,587            8,888                71          –                –             44,546
Exchange adjustments                            –                –                 –          –            1,655              1,655
Performance share plan charge                   –                –               247          –                –                247

At 31 December 2004                        35,587            8,888               318          –            1,655             46,448




                                                                                               Devro plc Annual Report & Accounts 2005 63
30 Other reserves continued
                                                          Capital
                                                      redemption          Special      Performance      Hedging
                                                         reserve         reserve         share plan     reserve                Total
Company                                                   £’000            £’000             £’000       £’000                £’000

At 1 January 2005                                       35,587           8,888                  236           –             44,711
Adoption of IAS 32 and 39                                    –               –                    –        144                 144
Cash flow hedges                                             –               –                    –         (74)                (74)
Performance share plan charge                                –               –                  309           –                309

At 31 December 2005                                     35,587           8,888                  545         70              45,090


At 1 January 2004                                       35,587           8,888                   40           –             44,515
Performance share plan charge                                –               –                  196           –                196

At 31 December 2004                                     35,587           8,888                  236           –             44,711


The balance on the special reserve account represents the remaining undistributable proportion of the amount which arose on
the acquisition of Teepak International Inc in 1996 under the merger relief provisions of the Companies Act 1985. At 1 January
2004 (the date of transition to IFRS), goodwill previously set off against the special reserve was reclassified to retained
earnings in accordance with IFRS.


31 Retained (losses)/earnings
                                                                                    Group                         Company

                                                                          2005                 2004       2005                2004
                                                                          £’000                £’000      £’000               £’000

At 1 January                                                           (14,435)             (21,586)    44,273              11,600
Profit/(loss) for the year                                              18,695               12,882      (2,600)             (3,053)
Dividends received                                                            –                    –      8,104             41,557
Dividends paid                                                           (6,639)              (5,831)    (6,639)             (5,831)
Retirement benefit obligations, net of tax                               (7,587)                 100          –                   –

At 31 December                                                          (9,966)             (14,435)    43,138              44,273




64 Devro plc Annual Report & Accounts 2005
32 Statement of changes in shareholders’ equity
                                               Share       Share      Other          Retained
                                              capital   premium    reserves            losses               Total
Group                                         £’000       £’000      £’000             £’000               £’000

At 1 January 2005                            16,133      5,194     46,448           (14,435)            53,340
Exchange adjustments                              –          –      2,747                 –              2,747
Cash flow hedges
– net fair value gains, net of tax                –          –         89                  –                 89
Retirement benefit obligations, net of tax        –          –          –             (7,587)            (7,587)
Issue of share capital                           43        277          –                  –                320
Dividends paid                                    –          –          –             (6,639)            (6,639)
Performance share plan charge                     –          –        397                  –                397
Profit for the year                                –          –          –           18,695             18,695

At 31 December 2005                          16,176      5,471     49,681            (9,966)            61,362


At 1 January 2004                            16,050      4,848     44,546           (21,586)            43,858
Exchange adjustments                              –          –      1,655                  –              1,655
Retirement benefit obligations, net of tax        –          –          –                100                100
Issue of share capital                           83        346          –                  –                429
Dividends paid                                    –          –          –             (5,831)            (5,831)
Performance share plan charge                     –          –        247                  –                247
Profit for the year                               –          –          –            12,882             12,882

At 31 December 2004                          16,133      5,194     46,448           (14,435)            53,340




                                                                          Devro plc Annual Report & Accounts 2005 65
32 Statement of changes in shareholders’ equity continued
                                               Share       Share      Other   Retained
                                              capital   premium    reserves   earnings       Total
Company                                       £’000       £’000      £’000      £’000       £’000

At 1 January 2005                            16,133      5,194     44,711     44,273     110,311
Cash flow hedges
– net fair value gains, net of tax                –          –         70          –          70
Issue of share capital                           43        277          –          –         320
Dividends received                                –          –          –      8,104       8,104
Dividends paid                                    –          –          –     (6,639)     (6,639)
Performance share plan charge                     –          –        309          –         309
Loss for the year                                 –          –          –     (2,600)     (2,600)

At 31 December 2005                          16,176      5,471     45,090     43,138     109,875


At 1 January 2004                            16,050      4,848     44,515     11,600      77,013
Issue of share capital                           83        346          –           –         429
Dividends received                                –          –          –     41,557      41,557
Dividends paid                                    –          –          –      (5,831)     (5,831)
Performance share plan charge                     –          –        196           –         196
Loss for the year                                 –          –          –      (3,053)     (3,053)

At 31 December 2004                          16,133      5,194     44,711     44,273     110,311



33 Minority interest
                                                                                2005        2004
                                                                                £’000       £’000

At 1 January                                                                      (44)           -
Acquisition of joint venture                                                        –         (44)
Income statement                                                                   44           –

At 31 December                                                                      –         (44)




66 Devro plc Annual Report & Accounts 2005
34 Reconciliation of net profit/(loss) to cash generated from operations
                                                                             Group                                Company

                                                                    2005                2004              2005               2004
                                                                    £’000               £’000             £’000              £’000

Continuing operations
Net profit/(loss)                                                18,695              12,882            (2,600)              (3,053)


Adjustments for:
Taxation                                                           7,091               5,157             (868)              (1,171)
Finance income                                                      (351)               (862)          (1,529)                (734)
Finance expense                                                    2,165               3,587            1,663                2,088
Share of loss of joint venture                                         –                 184                 –                   –
Gain on disposal of land                                          (6,344)                   –                –                   –
Loss/(gain) on disposal of other property, plant and equipment       161                 108               (18)                  –
Depreciation of property, plant and equipment                      8,876               8,324                38                  37
Amortisation of intangible assets                                    258                 329                 8                  25
Retirement benefit obligations                                    (2,103)             (1,149)                –                   –
Performance share plan charge                                        397                 247              309                  196
Other                                                                  –                  (89)               –                   –
Changes in working capital:
Increase in inventories                                             (693)             (1,106)                –                  –
(Increase)/decrease in trade and other receivables                  (741)                828           22,123             (32,552)
Increase/(decrease) in trade and other payables                    1,110                (159)              (12)           (12,848)

Cash generated from operations                                   28,521              28,281            19,114             (48,012)



35 Analysis of net debt
                                                                             Group                                Company

                                                                    2005                2004              2005               2004
                                                                    £’000               £’000             £’000              £’000

Cash and cash equivalents                                        11,243              11,010                65                   11
Bank overdraft                                                        –                   –           (10,367)              (8,382)

                                                                  11,243              11,010          (10,302)              (8,371)
Borrowings less bank overdraft and finance leases                (28,944)            (36,418)         (19,000)            (29,250)

                                                                 (17,701)            (25,408)         (29,302)            (37,621)
Finance leases                                                        (19)                (58)              –                   –

                                                                 (17,720)            (25,466)         (29,302)            (37,621)




                                                                                            Devro plc Annual Report & Accounts 2005 67
36 Capital commitments
                                                                                                 Group                        Company

                                                                                       2005              2004      2005                 2004
                                                                                       £’000             £’000     £’000                £’000

Capital expenditure contracted for but not provided
   in the financial statements                                                        4,257              4,704           –                  –



37 United States litigation
In December 2004, Devro Inc received service of a summons on behalf of an individual alleging that he had contracted asbestosis while
working for a contractor at, amongst other places, a plant formerly owned by Devro Inc. This case was dismissed in June 2005.



38 Contingent liabilities
In the opinion of the directors, the group has no material contingent liabilities.



39 Financial commitments
Operating leases


At 31 December 2005, there were annual commitments under non-cancellable operating leases as follows:

                                                                                        2005              2005      2004                2004
                                                                                     Land and                    Land and
                                                                                     buildings           Other    buildings              Other
Group                                                                                  £’000             £’000      £’000               £’000

Expiring within one year                                                                  25               78         31                 180
Expiring after more than one year and less than five years                               230              622        271                 531
Expiring after more than five years                                                        –                –          –                   2

                                                                                         255              700        302                 713



                                                                                        2005              2005      2004                2004
                                                                                     Land and                    Land and
                                                                                     buildings           Other    buildings              Other
Company                                                                                £’000             £’000      £’000               £’000

Expiring within one year                                                                    –               2            –                 –
Expiring after more than one year and less than five years                                  –              15            –                22

                                                                                            –              17            –                22




68 Devro plc Annual Report & Accounts 2005
40 Related party transactions
The group had no related party transactions. Related party transactions carried out by the company during the year ended 31 December 2005
were as follows:

                                                                                                                   2005               2004
                                                                                                                   £’000              £’000

Sale of services to subsidiary undertakings                                                                      1,448               1,785

Purchase of services from subsidiary undertakings                                                                   288                 506

Interest received from subsidiary undertakings                                                                   1,518                  724

Interest paid to subsidiary undertakings                                                                              31                 10

Payment received from subsidiary undertakings for surrender of tax losses                                           964              1,353

Additional investment in subsidiary undertakings                                                                15,000                     –

Reduction in investment in subsidiary undertakings                                                              (1,704)            (11,990)


Balances at 31 December arising from transactions with subsidiary undertakings:
Receivables:
– current                                                                                                          254                552
– non-current                                                                                                   10,500             32,600

                                                                                                                10,754             33,152

Payables:
– current                                                                                                           836                 952



41 Post balance sheet event
In January 2006, the group incurred a charge of £1,015,000 in respect of redundancy costs in Scotland.




                                                                                                     Devro plc Annual Report & Accounts 2005 69
42 Explanation of transition to International Financial Reporting Standards (“IFRS”)
The company’s financial statements for the year ended 31 December 2005 are the first annual financial statements that comply with IFRS. The
last financial statements under UK GAAP were for the year ended 31 December 2004 and the date of transition to IFRS was 1 January 2004.


Companies are required to establish their IFRS accounting policies and apply these retrospectively to determine their opening balance sheets
under IFRS. However, IFRS 1, First-Time Adoption of International Financial Reporting Standards, allows a number of exemptions to this
general principle. Devro plc has taken advantage of the following transitional arrangements:

• Business combinations
  The group has adopted the exemption under IFRS 3, Business Combinations, and therefore, does not need to reassess the accounting
  treatment of businesses acquired before 1 January 2004.

• Cumulative translation differences
  The translation of overseas entities’ reserves into sterling gives rise to foreign exchange differences which are required to be recorded as a
  separate component of equity under IFRS. An exemption is available to deem these cumulative translation differences to be zero at the date
  of transition to IFRS. Devro plc has adopted this exemption.

• Share-based payments
  The group has applied the exemption for share-based payments granted on or before 7 November 2002.

• Employee benefits
  All cumulative actuarial gains and losses on the group’s defined benefit pension schemes have been recognised in equity at the date
  of transition.

• Financial instruments
  The group has elected to apply IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition
  and Measurement, from 1 January 2005.


Presented below are the reconciliations of both profit and operating profit for the year ended 31 December 2004 and the reconciliations
of equity at 1 January 2004 (date of transition to IFRS) and at 31 December 2004 (date of last UK GAAP financial statements) as required
by IFRS 1.


Explanations of material adjustments to profits for the year ended 31 December 2004 and to equity at 1 January 2004 and 31 December
2004 are given below.




70 Devro plc Annual Report & Accounts 2005
42 Explanation of transition to International Financial Reporting Standards continued
(a) Reconciliation of UK GAAP profit and loss account to income statement prepared under IFRS

                                                                                                                                      Year ended
                                                                                                                                    31 December
                                                                                                                                           2004
Group                                                                                                                   Notes              £’000

Profit for the year as reported under UK GAAP                                                                                           13,360
Adjustments for:
Retirement benefit obligation costs                                                                                          (i)            (715)
Bad debt provisions                                                                                                          (ii)             (18)
Other operating profit items                                                                                                (iii)              47
Finance expense                                                                                                                                 (1)
Taxation                                                                                                                                     209

Profit for the year as restated under IFRS                                                                                              12,882


Operating profit for the year as reported under UK GAAP                                                                                 21,365
Adjustments for:
Retirement benefit obligation costs                                                                                          (i)            (715)
Bad debt provisions                                                                                                          (ii)             (18)
Other operating profit items                                                                                                (iii)              47
Reclassification of share of loss of joint venture                                                                          (iv)             269

Operating profit for the year as restated under IFRS                                                                                    20,948

                                                                                                                                      Year ended
                                                                                                                                    31 December
                                                                                                                                           2004
Company                                                                                                                 Notes              £’000

Loss for the year as reported under UK GAAP                                                                                              (2,857)
Adjustments for:
Share-based payments                                                                                                        (v)             (196)

Loss for the year as restated under IFRS                                                                                                 (3,053)


The transition to IFRS has resulted in the following changes:

(i) Retirement benefit obligation costs
    These costs were calculated under UK GAAP using Statement of Standard Accounting Practice (“SSAP”) 24, Accounting for Pension
    Costs. The adoption of IAS 19 (amended), Employee Benefits, has resulted in an additional charge of £715,000 for the year ended
    31 December 2004.

(ii) Bad debt provisions
                     ,
     Under UK GAAP these provisions were based on the ageing of debtor balances with reference to an established formula. The bad debt
     provisions are now based on experience and the history of bad debt write-offs.

(iii) Other operating profit items
      This category represents the net effect on operating profit of a number of minor adjustments, each of which is less than £50,000.

(iv) Reclassification of share of loss of joint venture
                                                                                                        .
     The share of the operating loss of the joint venture was included in operating profit under UK GAAP Under IAS 1 it is now reported, net
     of tax, after finance expense, but before profit before tax.

(v) Share-based payments
    The parent company proportion of share-based payments charge has been recognised.


                                                                                                          Devro plc Annual Report & Accounts 2005 71
42 Explanation of transition to International Financial Reporting Standards continued
(b) Reconciliation of shareholders’ equity from UK GAAP to IFRS

                                                                                                                      1 January     31 December
                                                                                                                          2004             2004
Group                                                                                                   Notes            £’000            £’000


Shareholders’ equity as reported under UK GAAP                                                                         64,829            72,813
Adjustments for:
Retirement benefit obligations                                                                               (i)      (32,735)          (31,825)
Post-retirement benefit obligations                                                                          (i)           705               863
Reversal of SSAP 24 prepayment                                                                               (i)        (3,634)           (3,678)
Deferred tax asset                                                                                           (i)       10,362            10,257
Dividend reversal                                                                                           (ii)         3,852             4,437
Capitalisation of development costs                                                                         (iii)          282               283
Bad debt provisions                                                                                         (iv)            29                 7
Deferred tax                                                                                                (v)            327               345
Other                                                                                                       (vi)          (159)             (162)

Shareholders’ equity as restated under IFRS                                                                            43,858            53,340

                                                                                                                      1 January     31 December
                                                                                                                          2004             2004
Company                                                                                                 Notes            £’000            £’000

Shareholders’ equity as reported under UK GAAP                                                                         73,161          105,874
Adjustments for:
Dividend reversal                                                                                           (ii)        3,852             4,437

Shareholders’ equity as restated under IFRS                                                                            77,013          110,311


The transition to IFRS has resulted in the following changes:

(i) International Accounting Standard 19 (amended), Employee Benefits
    The impact on equity of replacing SSAP 24 with IAS 19 (amended) is as follows:
    a) the defined benefit pension obligation and the post-retirement benefit obligation are brought onto the balance sheet;
    b) the SSAP 24 prepayment is reversed; and
    c) a deferred tax asset is brought onto the balance sheet in respect of a) above.

(ii) Dividends payable
                         ,
     Under UK GAAP dividends declared after the period end are recorded in the profit and loss account in the period to which they relate. Under
     IFRS, liabilities for final dividends are recognised when the dividends are approved by shareholders and liabilities for interim dividends are
     recognised when paid. Furthermore, dividends are not shown in the income statement but are recorded directly in retained earnings.

(iii) Capitalisation of development costs
      Under IAS 38, Intangible Assets, development costs are capitalised as intangible assets if the conditions as explained in the accounting
      policies note are met.

(iv) Bad debt provisions
     Refer to note (a) (ii) above.

(v) Deferred tax
    This represents the effect on taxation of the adjustments made as a result of changes to the basis of accounting other than the inclusion
    of the retirement benefit obligations adjustment under IAS 19 (amended).

(vi) Other
     This category represents the net effect of a number of minor adjustments, each of which is less than £100,000.




72 Devro plc Annual Report & Accounts 2005
Independent auditors’ report
to the members of Devro plc




We have audited the group and company financial statements             Social Responsibility Report. We consider the implications for
(the “financial statements”) of Devro plc for the year ended           our report if we become aware of any apparent misstatements
31 December 2005 which comprise the Consolidated Income                or material inconsistencies with the financial statements. Our
Statement, the Group and Company Balance Sheets, the Group             responsibilities do not extend to any other information.
and Company Cash Flow Statements, the Group and Company
Statements of Recognised Income and Expense and the related            Basis of audit opinion
notes. These financial statements have been prepared under             We conducted our audit in accordance with International
the accounting policies set out therein. We have also audited          Standards on Auditing (UK and Ireland) issued by the Auditing
the information in the Directors’ Remuneration Report that is          Practices Board. An audit includes examination, on a test basis,
described as having been audited.                                      of evidence relevant to the amounts and disclosures in the
                                                                       financial statements and the part of the Directors’ Remuneration
Respective responsibilities of directors and auditors                  Report to be audited. It also includes an assessment of the
The directors’ responsibilities for preparing the Annual Report,       significant estimates and judgements made by the directors in
the Directors’ Remuneration Report and the financial statements        the preparation of the financial statements, and of whether the
in accordance with applicable law and International Financial          accounting policies are appropriate to the group’s and company’s
Reporting Standards (“IFRS”) as adopted by the European Union          circumstances, consistently applied and adequately disclosed.
are set out in the Statement of Directors’ Responsibilities.
                                                                       We planned and performed our audit so as to obtain all the
Our responsibility is to audit the financial statements and the part   information and explanations which we considered necessary
of the Directors’ Remuneration Report to be audited in accordance      in order to provide us with sufficient evidence to give reasonable
with relevant legal and regulatory requirements and International      assurance that the financial statements and the part of the
Standards on Auditing (UK and Ireland). This report, including         Directors’ Remuneration Report to be audited are free from
the opinion, has been prepared for and only for the company’s          material misstatement, whether caused by fraud or other
members as a body in accordance with Section 235 of the                irregularity or error. In forming our opinion, we also evaluated
Companies Act 1985 and for no other purpose. We do not,                the overall adequacy of the presentation of information in the
in giving this opinion, accept or assume responsibility for any        financial statements and the part of the Directors’ Remuneration
other purpose or to any other person to whom this report is            Report to be audited.
shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.                                Opinion
                                                                       In our opinion:
We report to you our opinion as to whether the financial
statements give a true and fair view and whether the financial         • the group financial statements give a true and fair view, in
statements and the part of the Directors’ Remuneration Report            accordance with IFRS as adopted by the European Union, of
to be audited have been properly prepared in accordance with             the state of affairs as at 31 December 2005 and of the profit
the Companies Act 1985 and Article 4 of the IAS Regulation.              and cash flows of the year then ended;
We also report to you if, in our opinion, the Directors’ Report
is not consistent with the financial statements, if the company        • the company financial statements give a true and fair view,
has not kept proper accounting records, if we have not received          in accordance with IFRS as adopted by the European Union
all the information and explanations we require for our audit,           as applied in accordance with the provisions of the Companies
or if information specified by law regarding directors’                  Act 1985, of the state of the company’s affairs as at
remuneration and transactions is not disclosed.                          31 December 2005 and cash flows for the year then ended;
                                                                         and
We review whether the Corporate Governance Statement reflects
the company’s compliance with the nine provisions of the 2003          • the financial statements and the part of the Directors’
FRC Combined Code specified for our review by the Listing Rules          Remuneration Report to be audited have been properly
of the Financial Services Authority, and we report if it does not.       prepared in accordance with the Companies Act 1985 and
We are not required to consider whether the Board’s statements           Article 4 of the IAS Regulation.
on internal control cover all risks and controls, or to form an
opinion on the effectiveness of the company’s or group’s corporate     PricewaterhouseCoopers LLP
governance procedures or its risks and control procedures.             Chartered Accountants and Registered Auditors
                                                                       Glasgow
We read the other information contained in the Annual                  23 March 2006
Report and consider whether it is consistent with the financial
statements. The other information comprises only the Directors’
Report, the unaudited part of the Directors’ Remuneration
Report, the Chairman’s Statement, the Operating and Financial
Review, the Corporate Governance Statement and the Corporate


                                                                                                      Devro plc Annual Report & Accounts 2005 73
Notice of meeting


Notice is hereby given that the fifteenth Annual General Meeting     c) the maximum price (exclusive of any expenses) which may be
(“AGM”) of Devro plc (“the Company”) will be held on 10 May             paid for an Ordinary Share shall be not more than 5% above
2006 at the Westerwood Hotel, 1 St Andrews Drive,                       the average of the middle market quotations for an Ordinary
Cumbernauld at 12 noon for the following purposes:                      Share as derived from the London Stock Exchange Daily
                                                                        Official List for the five business days immediately preceding
Ordinary Business                                                       the date on which that Ordinary Share is purchased;
1. To receive the Company’s accounts for the year ended
   31 December 2005, together with the Directors’ Report             d) unless previously renewed, varied or revoked, the authority
   and the Auditors’ Report on those accounts.                          hereby conferred shall expire at the conclusion of the next
                                                                        annual general meeting of the Company to be held in 2007 or
2. To declare a final dividend for the year ended                       15 months from the date of passing this resolution whichever
   31 December 2005.                                                    shall be the earlier; and

3. To re-elect as a director Mr Trevor Morgan who retires by         e) the Company may make a contract or contracts to purchase
   rotation under the provisions of the Articles of Association.        Ordinary Shares under the authority hereby conferred prior
                                                                        to the expiry of such authority which will or may be executed
4. To re-elect as a director Mr John Neilson who retires by             wholly or partly after the expiry of such authority and may
   rotation under the provisions of the Articles of Association.        make a purchase of Ordinary Shares in pursuance of any such
                                                                        contract or contracts.
5. To elect as a director Mr Stuart Paterson, who, having been
   appointed by the Board since the last annual general meeting      By order of the Board
   of the company, retires in accordance with the provisions of
   the Articles of Association.                                      J Meredith Secretary                                  Registered Office:
                                                                     Moodiesburn                             Moodiesburn, Chryston, G69 0JE
6. To re-appoint PricewaterhouseCoopers LLP as the Company’s         23 March 2006
   auditors to hold office until the conclusion of the next annual
   general meeting of the company and to authorise the               Notes
   Directors to fix their remuneration.                              A shareholder entitled to attend and vote at the AGM is also entitled to
                                                                     appoint one or more proxies to attend and, on a poll, vote instead of him.
                                                                     A proxy need not be a shareholder of the Company.
7. To consider and, if thought fit, pass the following resolution
   as an ordinary resolution:
                                                                     To be valid, the instrument appointing a proxy, together with the power of
                                                                     attorney or other authority, if any, under which it is signed (or a notarially
THAT the Remuneration Report contained within the Company’s          certified copy of such power or authority) must be deposited at the
Report and Accounts for the year ended 31 December 2005              Company’s Registrars, Computershare Investor Services PLC, The
be and is hereby approved.                                           Pavilions, Bridgwater Road, Bristol BS13 8FB, not later than 48 hours
                                                                     before the time fixed for the AGM. A form of proxy is enclosed with this
Special Business                                                     Notice. Completion and return of the form of proxy will not preclude
8. To consider and, if thought fit, pass the following resolution    shareholders from attending or voting in person at the AGM, if they wish.
   as a special resolution:
                                                                     The following documents are available for inspection at the Company’s
                                                                     Registered Office during usual business hours, and will also be available
THAT the Company be and is hereby generally and unconditionally
                                                                     at the place of the AGM from 11.45 am until the close of the meeting:
authorised for the purpose of section 166 of the Companies
Act 1985 (“the Act”) to make one or more market purchases            a)   copies of all service contracts of Executive Directors;
(within the meaning of section 163(3) of the Act) on the London      b)   copies of all appointment letters of Non-Executive Directors;
Stock Exchange of ordinary shares of 10 pence each in the            c)   the Register of Directors’ Share Interests; and
capital of the Company (“Ordinary Shares”) provided that:            d)   a copy of the Articles of Association, as the Directors have the benefit
                                                                          of the indemnity provision in article 135 which constitutes a “qualifying
a) the maximum aggregate number of Ordinary Shares hereby                 third party indemnity provision” for the purposes of sections 309A to
   authorised to be purchased is 16,000,000 (representing less            309C of the Act.
   than 10% of the Company’s issued ordinary share capital);
                                                                     Pursuant to Regulation 41 of the Uncertificated Securities Regulations
                                                                     2001, eligibility to attend and vote at the AGM will be determined by
b) the minimum price (exclusive of any expenses) which may be
                                                                     reference to entries on the relevant register of members at 6.00 pm
   paid for an Ordinary Share is 10 pence being the par value;       on 8 May 2006. Changes to entries on the relevant register of members
                                                                     after 6.00 pm on 8 May 2006 shall be disregarded in determining the
                                                                     rights of any person to attend or vote at the AGM.




74 Devro plc Annual Report & Accounts 2005
Financial summary


                                                           2005            2004         2003               2002                2001
                                                            IFRS            IFRS     UK GAAP            UK GAAP             UK GAAP
                                                                                                                         (as restated)
For the year ended 31 December                           £’million       £’million    £’million          £’million           £’million

Group revenue                                             152.5          148.9         146.1             138.0               208.3
Operating profit before exceptional items                  21.3           20.9          21.1              18.4                 18.6
Exceptional items                                           6.3              –             –               (1.8)              (52.1)
Operating profit/(loss)                                    27.6           20.9          21.1              16.6                (33.5)
Profit/(loss) before tax                                   25.8           18.0          18.0              13.7                (37.0)
Profit/(loss) after tax                                    18.7           12.9          12.9              12.7                (44.1)
Net assets                                                 61.4           53.3          64.8              58.7                 77.7
Earnings per share:
– Basic                                                    11.5           8.0p          7.9p                7.2p            (29.1)p
– Diluted                                                  11.4           7.9p          7.9p                7.2p            (29.1)p
– Before exceptional items                                 8.7p           8.0p          7.9p                6.0p              4.8p
Dividends per share                                        4.4p           4.0p          3.5p                  3p                2p
Net assets per share                                      37.9p          33.0p         40.4p               36.6p             48.4p




Directors and advisers

Executive directors                         Registered Auditors                      Merchant Bankers
Dr G Y Alexander OBE                        PricewaterhouseCoopers LLP               Hawkpoint Partners Limited
T F Morgan                                  Kintyre House                            4 Great St Helens
J A Neilson                                 209 West George Street                   LONDON
                                            GLASGOW                                  EC3A 6HA
Non-executive directors                     G2 2LW
P A Barrett OBE                                                                      Stockbrokers
P A J Neep                                  Solicitors                               Investec Securities
S R Paterson (appointed 9 March 2006)       Clifford Chance LLP                      2 Gresham Street
                                            10 Upper Bank Street                     LONDON
Secretary and registered office             Canary Wharf                             EC2V 7QP
J Meredith                                  LONDON
Moodiesburn                                 E14 5JJ                                  Registrars
CHRYSTON                                                                             Computershare Investor Services PLC
G69 0JE                                     Bankers                                  PO Box 82
Registered number: 129785                   Clydesdale Bank PLC                      The Pavilions
                                            20 Hanover Street                        Bridgwater Road
                                            EDINBURGH                                Bristol
                                            EH2 2QW                                  BS99 7NH




                                                                                             Devro plc Annual Report & Accounts 2005 75
Shareholder information


If you have sold or transferred all of your holding of ordinary shares, you should pass this document and the accompanying form of
proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee.

Financial calendar
10 May 2006                                                 – Annual General Meeting

17 May 2006                                                 – Final Dividend Paid

September 2006                                              – Half Year Results and Interim Dividend Announced

October 2006                                                – Interim Dividend Paid

31 December 2006                                            – Financial Year End

March 2007                                                  – 2006 Results and Proposed Final Dividend Announced

Dividends
The final dividend will be paid on 17 May 2006 to shareholders on the register at close of business on 18 April 2006.

Dividend mandates
Shareholders wishing dividends to be paid directly into a bank or building society account should contact the Registrar for a dividend
mandate form at the address below. Dividends paid in this way will be paid through the Bankers Automated Clearing System (BACS).

Shareholder enquiries
For all share registration and dividend
mandate enquiries contact:                                  For other shareholder enquiries contact:

The Registrar                                               Company Secretary
Computershare Investor Services PLC                         Devro plc
PO Box 82                                                   Moodiesburn
The Pavilions                                               Chryston
Bridgwater Road                                             G69 0JE
Bristol
BS99 7NH
Telephone: 0870 702 0010                                    Telephone: 01236 879191

Website
The company has a website (http://www.devro.plc.uk) which provides up-to-date information on the company and its products.




76 Devro plc Annual Report & Accounts 2005
Designed and produced by Merchant
     in collaboration with Philosophy
                   Printed by Granite
Devro plc, Moodiesburn, Chryston G69 0JE Telephone: 01236 879191 www. devro.plc.uk

								
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