SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

o                                   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x                                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

o                                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o                                   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14868

BUNZL PLC

(Exact Name of Registrant as Specified in Its Charter)

ENGLAND

(Jurisdiction of incorporation or organization)

110 Park Street, London WIK 6NX

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

*Traded in the form of American Depositary Receipts evidencing American Depositary
Shares representing such ordinary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 346,584,130

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x       No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o       No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x               Accelerated filer o               Non-accelerated filer o

Indicate by check mark which financial statement items the registrant has elected to follow:

Item 17 x       Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No x

TABLE OF CONTENTS

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TABLE OF CONTENTS (Continued)

 

 

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PRESENTATION OF INFORMATION

In this Annual Report on Form 20-F (the “Annual Report”), the term the “Company” or “Bunzl” refers to Bunzl public limited company, alone or together with its subsidiary undertakings, as the context so permits. The term “Group” refers to Bunzl together with its subsidiary undertakings. The Company’s fiscal year ends on December 31. References in this Annual Report to a particular year are to the fiscal year unless otherwise indicated.

In this Annual Report, the term “ordinary shares” or “shares” refers to ordinary shares of 321¤7 pence each of the Company, and the term “ADSs” refers to American depositary shares each representing five ordinary shares and evidenced by American depositary receipts (“ADRs”).

The Company’s consolidated financial statements (the “Consolidated Financial Statements”) for 2005 and 2004 that form part of this Annual Report are presented in pounds sterling and are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted for use in the EU, which differ in certain respects from accounting principles generally accepted in the United States (“US GAAP”). The principal differences between IFRS and US GAAP affecting the Group are explained in Note 31 of the Notes to the Consolidated Financial Statements beginning on page F-45 of this Annual Report.

IFRS as adopted by the EU differ in certain respects from IFRS as issued by the International Accounting Standard Board (“IASB”). However, the Consolidated Financial Statements for the periods presented would be no different had the Company applied IFRS as issued by the IASB. References to IFRS hereafter should be construed as references to IFRS as adopted by the EU.

Where relevant the comparative information for 2004 and prior years has been restated for the Bunzl share consolidation following the demerger of the Filtrona business on June 6, 2005 (using a ratio of seven new Bunzl shares of 321/7p each for nine old Bunzl shares of 25p each).

In this Annual Report, references to “US dollar(s)”, “US$” or “$” are to currency of the United States (“US”) and references to “pound(s) sterling”, “sterling”, “£”, “pence” or “p” are to currency of the United Kingdom (“UK”). Solely for convenience, this Annual Report contains translations of certain pound sterling amounts into US dollars at specified rates. These translations should not be construed as representations that the pound sterling amounts represent such US dollar amounts or could be converted into US dollars at the rates indicated. The following tables show for the periods and dates indicated certain information concerning the US dollar exchange rate for pounds sterling based on the noon buying rate in New York City for cable transfers in pounds sterling as announced for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). On April 11, 2006, the Noon Buying Rate was $1.75 to £1.00.

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(1)          The average of the Noon Buying Rates on the last day of each full month during the relevant period.

(2)          January 1 through April 11, 2006.

For the preparation and consolidation of financial information in this Annual Report, the year end exchange rates used by Bunzl for translating US dollars into pounds sterling for the years 2001, 2002, 2003, 2004 and 2005 were, respectively, $1.46, $1.61, $1.79, $1.92 and $1.72 to £1.00 and the average exchange rates used for the years 2001, 2002, 2003, 2004 and 2005 were, respectively, $1.44, $1.51, $1.64, $1.82 and $1.81 to £1.00.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. A number of factors could cause actual results, performance or achievements of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the following: (i) changes in demand for the Group’s products worldwide; (ii) changes in the costs of raw materials; (iii) changes in the pound sterling/dollar exchange rate and the exchange rates between pounds sterling and other currencies in which the Group’s businesses operate; (iv) changes in the political or fiscal regime of Bunzl’s areas of activity; (v) principal changes in UK and US tax legislation or similar laws or regulations; (vi) cost inflation within the industrial sectors and economies in which Bunzl operates; (vii) changes in environmental legislation; (viii) changes in UK and US LIBOR rates and (ix) the risk factors identified in Item 3. “Key Information—Risk Factors”. The foregoing list of factors should not be construed as exhaustive. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “pro forma”, “anticipates” or “intends” or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Forward-looking statements in this Annual Report include, but are not limited to, certain statements under (i) Item 3. “Key Information—Risk Factors”, (ii) Item 4. “Information on the Company—Business Overview” and “—Properties”, (iii) Item 5. “Operating and Financial Review and Prospects”, (iv) Item 8. “Financial Information—Consolidated Statements and Other Financial Information - Legal Proceedings”, and (v) Item 11. “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk”. Such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

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PART I

ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.   KEY INFORMATION

SELECTED FINANCIAL DATA

The data presented below under the caption “Selected Financial Data” is derived from the published consolidated financial statements of the Group which have been audited by KPMG Audit Plc, independent registered public accounting firm. The results are for continuing operations and, as a result of the demerger of the Filtrona business area in June 2005, Filtrona’s contribution to profits is included as a single line net of interest, tax and the costs of effecting the demerger and presented as discontinued operations.

The Consolidated Financial Statements are prepared in accordance with IFRS which differ in certain respects from US GAAP. The principal differences between IFRS and US GAAP affecting the Group are explained in Note 31 of the Notes to the Consolidated Financial Statements beginning on page F-45 of this Annual Report.

IFRS as adopted by the EU differ in certain respects from IFRS as issued by the IASB. However, the Consolidated Financial Statements for the periods presented would be no different had the Company applied IFRS as issued by the IASB. References to IFRS hereafter should be construed as references to IFRS as adopted by the EU.

Under the IFRS transition provisions within the US Securities and Exchange Commission’s (“SEC”) Form 20-F requirements, the Group is permitted to provide two years of comparable financial information under IFRS and reconciliations to US GAAP for the periods presented. In addition, the Group is providing selected financial US GAAP information for five years.

The Consolidated Financial Statements as of December 31, 2005 and 2004, and for each of the years in the two year period ended December 31, 2005, and the reports thereon, are included in this Annual Report.

Where relevant the comparative information has been restated for the Bunzl share consolidation following the demerger of the Filtrona business on June 6, 2005 (using a ratio of seven new Bunzl shares of 321¤7p each for nine old Bunzl shares of 25p each).

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Consolidated Income Statement

*                    The comparative information and 2005 prior to June 6, 2005 has been restated for the Bunzl share consolidation following the demerger of the Filtrona business on June 6, 2005 (using a ratio of seven new Bunzl shares of 321¤7p each for nine old Bunzl shares of 25p each).

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Consolidated Income Statement

*                    The comparative information and 2005 prior to June 6, 2005 has been restated for the Bunzl share consolidation following the demerger of the Filtrona business on June 6, 2005 (using a ratio of seven new Bunzl shares of 321¤7 p each for nine old Bunzl shares of 25p each).

Consolidated Balance Sheet

 

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*                    The comparative information and 2005 prior to June 6, 2005 has been restated for the Bunzl plc share consolidation following the demerger of the Filtrona business on June 6, 2005 (using a ratio of seven new Bunzl shares of 321¤7 p each for nine old Bunzl shares of 25p each).

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RISK FACTORS

Investors, holders and prospective purchasers of ADSs should carefully consider the risk factors discussed below as well as the other information included in this Annual Report (including, without limitation, the “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the United States Private Securities Litigation Reform Act of 1995” and Item 5. “Operating and Financial Review and Prospects”). Bunzl’s business, financial condition or results of operations could be materially affected by any or all of these risks or by other risks that Bunzl cannot presently identify.

Bunzl may be adversely affected by fluctuations in exchange and interest rates

Bunzl may be adversely affected by fluctuations in exchange rates. The results of Bunzl’s operations are accounted for in pounds sterling but the majority of the Group’s sales are made and income earned in US dollars and other foreign currencies. Movements in exchange rates used to translate foreign currencies into pounds sterling may have a significant impact on Bunzl’s reported results of operations from year to year.

Bunzl may also be adversely impacted by fluctuations in interest rates, mainly through an increased interest expense. See Item 11. “Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk”.

Bunzl faces competition that may reduce its market share and growth potential

Bunzl faces competition from international companies as well as local and regional companies in the countries in which it operates. In addition, many of Bunzl’s customers have chosen to source products from Bunzl as they have looked to outsourced solutions to service their own requirements. If this trend was reversed and customers decided to satisfy their requirements themselves or source products directly from manufacturers or other suppliers, this could result in a loss of business and a resulting adverse effect on Bunzl’s operating results. Increased competition and unanticipated actions by competitors or customers could lead to downward pressure on prices and/or a decline in Bunzl’s market share in any of Bunzl’s businesses which would adversely affect Bunzl’s results and hinder its growth potential.

Bunzl’s growth is partly dependent on the ability to complete acquisitions and successfully integrate operations of acquired businesses

A significant portion of Bunzl’s historical growth has been achieved through acquisitions of businesses and the Group’s growth strategy includes additional acquisitions. There can be no assurance that Bunzl will be able to make acquisitions in the future or that any acquisitions Bunzl does make will be successful.

Bunzl makes acquisitions with the expectation that these acquisitions will result in benefits to the Group. Achieving these benefits depends on the timely, efficient and successful execution of a number of post acquisition events, often including integrating the business of the acquired company into Bunzl’s purchasing programs, distribution network, marketing programs and reporting and management information systems. In general Bunzl cannot offer assurances that it will be able to successfully integrate the acquired company’s operations or personnel or realize the anticipated benefits of the acquisition. The ability to integrate acquisitions may be adversely affected by many factors, including the relative size of a business and the allocation of the Group’s limited management resources among various integration efforts.

The results of operations may be adversely affected by expenses Bunzl incurs in making acquisitions, by amortization of acquisition related intangible assets with definite lives and by additional depreciation expenses attributable to acquired assets. Any of the businesses Bunzl acquires may also have liabilities or adverse operating issues, including some that Bunzl fails to discover before the acquisition. Additionally,

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Bunzl’s ability to make future acquisitions may depend upon obtaining additional financing. There can be no assurance that the Group will be able to obtain additional financing on acceptable terms.

Managing Bunzl’s growth may be difficult and the Group’s growth rate may decline

Bunzl has expanded its operations over recent years. This growth has placed significant demands on the Group’s managerial, administrative and operational resources. Bunzl cannot be sure that this growth will continue. To the extent that the Group’s customer base and services continue to grow, this growth is expected to place a significant demand on Bunzl’s managerial, administrative and operational resources. The future performance and results of operations will depend in part on Bunzl’s ability to successfully implement enhancements to the Group’s business management systems and to adapt those systems as necessary to respond to changes in the business. Similarly, the Group’s growth has created a need for expansion of its facilities from time to time. As Bunzl nears maximum utilization of a given facility, operations may be constrained and inefficiencies may be created, which could adversely affect operating results unless the facility is expanded or volume is shifted to another facility. Conversely, as additional facilities are added or existing facilities expanded, excess capacity may be created. Any excess capacity may also create inefficiencies and adversely affect the operating results.

Bunzl’s operating results may be adversely affected by increased costs, shortages of purchased products or labor, or disruption to distribution facilities

Many of the products the Group supplies have a significant plastic and/or paper content. As a consequence movements in natural gas, oil and pulp prices as well as other raw material prices may affect the cost of the products purchased by the Group. If commodity price changes result in unexpected increases in the cost of Bunzl’s purchased products, Bunzl may not be able to increase its prices to offset these costs without suffering reduced volume, revenue and operating income. Bunzl may also be adversely affected by shortages of such purchased products.

Similarly, Bunzl’s operating results could be adversely affected by labor or skill shortages or increased labor costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.

Bunzl would be affected if there was a catastrophic failure of its major distribution facilities or supply chain. In addition, the maintenance and development of information systems may result in systems failures which may adversely affect business operations.

Product liability claims could have an adverse effect on the Group’s business

Like any other distributor of products, Bunzl faces an inherent risk of exposure to product liability claims if the products Bunzl sells, or the products sold by companies acquired by Bunzl, cause injury or illness. The Group may be subject to liability, which could be substantial, because of actual or alleged contamination in products sold by Bunzl or by companies Bunzl has acquired, including products sold by those companies before Bunzl acquired them. Bunzl has, and management believes that the companies Bunzl has acquired have had, liability insurance with respect to certain product liability claims. However, there can be no guarantee that this insurance will continue to be available at reasonable cost or at all, or will be adequate to cover product liability claims against Bunzl, or companies Bunzl has acquired. If Bunzl or any of the Bunzl acquired companies do not have adequate insurance, product liability claims and costs associated with product recalls, including a loss of business, could have a material adverse effect on the Group’s business, operating results and financial condition.

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Bunzl’s business may be adversely impacted by unfavorable economic conditions or other developments and risks in the countries in which it operates

Bunzl’s business is somewhat dependent on general economic conditions in the US, the UK, France and other important markets. A significant deterioration in these conditions, including a reduction in consumer spending levels, could have an adverse effect on Bunzl’s business and results of operations. Bunzl’s businesses are involved in the distribution of products which is a business characterized by a high volume of sales with relatively low profit margins. A significant portion of Bunzl’s sales is at prices that are based on product cost plus a percentage markup. Accordingly the results of operations may be negatively impacted when the price of products goes down, even when the percentage markup remains constant. In addition, Bunzl may be adversely affected by political and economic developments in any of the countries where Bunzl has distribution networks. Bunzl’s operations are also subject to a variety of other risks and uncertainties relating to trading in numerous foreign countries, including political or economic upheaval, the imposition of any import or investment restrictions, including tariffs and import quotas or any restrictions on the repatriation of earnings and capital, and changes in tax regulation and international tax treaties.

In addition, Bunzl’s operating results are sensitive to, and may be materially adversely impacted by, difficulties with the collectibility of accounts receivable, inventory control, price pressures, severe weather conditions and increases in wages or other labor costs, energy costs and fuel or other transportation related costs. There can be no assurance that one or more of these factors will not adversely affect the future operating results.

Bunzl may be adversely affected by government regulations

Bunzl’s operations are affected by various statutes, regulations and laws in the countries and markets in which it operates. The Group is subject to various laws applicable to businesses generally, including laws affecting land usage, zoning, environment, health and safety, labor and employment practices, competition and other matters. Bunzl cannot predict whether future developments in laws and regulations concerning its businesses will affect its earnings in a materially adverse manner or whether its operating units will be successful in meeting future demands of regulatory agencies in a manner which will not materially adversely affect Bunzl’s business, financial condition or results of operations.

ITEM 4.                INFORMATION ON THE COMPANY

HISTORY OF THE GROUP

Bunzl had its origins in Bratislava, Slovakia, in the middle of the nineteenth century. The headquarters moved to London and the Company was incorporated in England in 1940, gaining a listing on the London Stock Exchange as a public company in 1957.

In the early 1980s there were significant changes to the Group. Its Austrian paper mills were sold and it embarked on a strategy of expanding into outsourcing services in the US and into paper distribution in the UK. In the mid to late 1980s the Group diversified into many other businesses including parcel and goods transportation in the UK and building products distribution in the US. During the 1990s the Group disposed of a number of businesses, focusing on those businesses which reflected the Group’s evolution towards outsourcing and its increasing service orientation.

In 2002 the final break with the paper industry occurred when the Paper Distribution business area was sold. Following this disposal the Group was reorganized in August 2002 into two business areas: Outsourcing Services and an enlarged Filtrona (comprising the businesses of the former Filtrona and Plastics business areas).

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In June 2005 the Group demerged Filtrona, its speciality plastic and fiber products business, into a separate listed company. As a result, Bunzl has become a focused, international distribution and outsourcing Group organized into four business areas: North America, UK & Ireland, Continental Europe and Australasia.

Strategy and development

The Company has grown by following a strategy of expanding in those areas where it can build its international competitive position through both organic growth and acquisitions combined with the disposal of lower margin, lower growth businesses. This evolution gave the Group an increasing focus on higher return, higher growth businesses which became increasingly international and service oriented. The pursuit of this strategy resulted in Bunzl having two business streams, Outsourcing Services and Filtrona, both of which had superior returns, good international competitive positions and potential to grow but which had little or no commercial overlap between them. Bunzl therefore decided to separate these two fundamentally different component parts by demerging Filtrona from the Group in June 2005. Effective as of the date of the demerger, Filtrona became an independent public company while Bunzl became a simpler organization concentrating on the Outsourcing Services business stream as a focused, international distribution and outsourcing Group.

Bunzl’s organic growth has been the result of a consistent emphasis on market focus, service orientation and efficiency. To supplement this organic growth, the Group has made a number of strategic acquisitions. Through this strategy Bunzl aims to strengthen its position in targeted regions and market segments, increase Bunzl’s presence in established markets and develop Bunzl’s offering in new and developing markets and geographies. Details of significant acquisitions in continuing operations within the last five years are outlined below. Over the last five years revenue from continuing operations (including acquisitions) has increased from £2,129 million in 2001 to £2,924 million in 2005.

Acquisitions

In February 2001 ICCS MacGregor, a distributor of supplies to hotels, nursing homes and contract cleaners in Scotland, was added to the Group’s business in the UK. In June 2001 the business in North America was extended with the acquisition of Godin which supplies supermarkets, food processors and industrial companies in Quebec. In July 2001 the Group’s European retail supply business was expanded by acquiring the UK carrier bag supply business from BPI thus building on the Group’s international sourcing operations. The Group completed a number of transactions in October 2001. It acquired Eastern Paper which supplies supermarkets, redistributors and food processors in the Maritimes thus completing the Group’s geographic coverage of Canada. In Europe the Group acquired the DKI Group which supplies packaging consumables and equipment to the Danish supermarket and food processing industries, strengthening the Group’s position in the Scandinavian market. In a move to strengthen the Group’s position supplying the US food processor industry it purchased Packers, a long established supplier to the beef and pork processing industries based in Omaha, Nebraska. In November 2001 the Group further expanded in Europe with the acquisition of W A Blyth, a distributor of personal protection equipment and cleaning and hygiene supplies in Wales and South West England.

The Group bought Lockhart in May 2002. Lockhart is one of the UK’s leading suppliers of catering equipment to the foodservice industry including hotels, caterers, restaurants, retailers and the licensed trade. In late June 2002 the Group acquired Kenco in Seattle. Kenco is a redistribution business which strengthened the position of the Group’s business in the Pacific Northwest of the US. In the last two months of 2002 the Group announced four acquisitions which added to its business in different parts of the world. In early November 2002 Lesnie’s, a distributor of supplies to food processors and retailers based in Sydney, Australia, was acquired. This expanded the Group’s position in Australasia. In November 2002, the Group agreed to purchase Darenas, a UK national distributor of cleaning and hygiene supplies, and

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completed shortly thereafter. In December 2002, the Group acquired Saxton, a US redistribution business based in Phoenix with locations also in Kansas City and Denver, which strengthened the Group’s position both in cleaning and hygiene and in the relevant regions. In late December 2002 the Group purchased Thomas McLaughlin, a leading distributor of catering equipment in both Northern Ireland and the Republic of Ireland. McLaughlin was a logical extension of the Group’s existing business in Ireland and complemented the acquisition of Lockhart earlier in the year.

In February 2003 the Group purchased Enterprise, a distributor of plant supplies to food processors in Dallas, Texas; Greeley, Colorado; Atlanta, Georgia and St Joseph, Missouri. Also in October 2003 the Group bought MultiLine, a distributor of a wide range of consumables to the Danish hotel and catering industries. In December 2003 the Group purchased Prolix Packaging, a retail stores supply distributor based in Chicago, Illinois, and O’Mahony Packaging, a distributor of supplies to retailers and food processors based in Cork, Ireland.

In May 2004 Bunzl acquired Groupe Pierre Le Goff. This significant acquisition took Bunzl into France. A strong position in France complemented the Group’s existing European positions in the UK, Benelux, Germany, Denmark and Ireland and provided a platform to develop further in France and Southern Europe. During the fourth quarter of 2004 the Group acquired three companies in North America. In October 2004 the Group reinforced its position in the growing convenience store segment through the acquisition of TSN. Headquartered in Denver, Colorado, TSN is a distributor of goods not for resale to convenience stores across the US. In November 2004 the Group purchased Joseph Weil & Sons. Based in Chicago, Weil supplies janitorial/sanitation (“jan/san”) businesses, disposable foodservice and non-food retail products in the Midwest, complements the Group’s position there and provides an opportunity to develop further into these markets. In December 2004 the Group further expanded with the acquisition of TEMO. Located in Maspeth, New York City, TEMO is a well-established redistribution business in the Northeast distributing foodservice and jan/san products. In October 2004 the Group acquired the disposable consumables and packaging distribution business of Cospak in Australia. Based in Newcastle, New South Wales and Perth, the Cospak business complemented Bunzl’s existing Australian business. In November 2004 the Group made its first acquisition in Eastern Europe with the purchase of Beltex, which is a national distributor in Hungary with additional branches in neighboring Romania and Slovakia. Beltex’s product range encompasses cleaning and hygiene supplies and has recently expanded into safety supplies and personal protection equipment.

In January 2005, Bunzl completed the acquisition of Gelpa. Based in Arnhem, Gelpa is a distributor principally supplying the retail and food processor sectors with packaging and consumables in the Netherlands. Following the acquisition of Beltex, Bunzl continued its expansion into Central Europe with the acquisition of Tecep in July 2005. Tecep has operations in Hungary, Czech Republic, Slovakia, Romania and Poland, primarily serving the retail, foodservice, catering and food processor markets with packaging supplies and catering and food processing equipment. In July Bunzl also purchased Sanicare, strengthening its position in the healthcare sector in Australia and New Zealand. Based in New South Wales, Sanicare supplies disposable products principally into the healthcare sector. In September the acquisition of SOFCO based in New York State was completed. SOFCO distributes disposable supplies to a number of sectors including grocery, foodservice and healthcare. At the end of September A W Mendenhall based in Chicago was acquired. Mendenhall serves the redistribution sector principally supplying foodservice, janitorial, industrial packaging and disposable products in the Midwest. In October the Group’s position in the non-food retail sector was strengthened with the purchase of Retail Resources, a business based in New York providing distribution services to retail stores across the US including store supplies such as checkout and merchandise bags, jan/san items, labels, boxes and other paper products as well as specialized expense control systems. The grocery and food processor distribution business of Weiss Brothers, based in West Point, Pennsylvania, was also acquired in October.

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In January 2006 Bunzl acquired Midshires, a UK vending machine and supplies business, and Master Craft, a US business servicing the redistribution and foodservice sectors. In April 2006 Bunzl announced the acquisitions of Allcare, a distributor of personal protection equipment and disposable products to food processors in Australia, and Picardie Hygiene, a distributor of cleaning and hygiene products in Northeast France.

BUSINESS OVERVIEW

The Company is a holding company conducting its operations through its subsidiary undertakings. The Group is an international group of companies involved in the provision of value-added distribution and outsourcing services. As of December 31, 2005, the Group had approximately 10,500 employees in approximately 350 locations in 17 countries.

The Company’s shares are quoted on the London Stock Exchange and the ADSs are quoted on the New York Stock Exchange. Its principal executive offices are located at 110 Park Street, London, W1K 6NX (telephone number 011-44-20-7495-4950; fax number 011-44-20-7495-4953; website www.bunzl.com).

The Group’s operations are organized primarily by international line of business into four business areas. A segment analysis of the results of these business areas is set out in Note 3 of the Notes to the Consolidated Financial Statements on page F-14 of this Annual Report and is discussed in the following pages.

The table below sets out selected financial and other information for the Group for the years ended December 31, 2004 and 2005.

 

Explanation of trends

The Group produced good results in 2005 with continuing operations’ revenue and operating profit ahead of 2004 due to a combination of organic growth and acquisition activity. Currency translation had a marginally favourable impact in 2005, increasing continuing operations’ revenue by £22.9 million, or 0.8%, and continuing operations’ operating profit by £1.5 million, or 0.7%.

In 2005, following the demerger of Filtrona, the Group reorganized itself into four geographical segments; North America, UK & Ireland, Continental Europe and Australasia. These geographical locations are consistent with the geographical markets served by the Group.

North America

The table below sets out selected financial and other information for North America as of and for each of the two years ended December 31, 2005 and 2004.

 

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UK & Ireland

The table below sets out selected financial and other information for UK & Ireland as of and for each of the two years ended December 31, 2005 and 2004.

 

Continental Europe

The table below sets out selected financial and other information for Continental Europe as of and for each of the two years ended December 31, 2005 and 2004.

 

Australasia

The table below sets out selected financial and other information for Australasia as of and for each of the two years ended December 31, 2005 and 2004.

 

Activities

Bunzl provides a broad range of products including grocery store supplies, foodservice packaging, catering equipment, cleaning and hygiene products, personal protection equipment and disposable healthcare products. Product catalogs and order lists are provided for customers to place their orders, which can be received by telephone, fax or electronically via computer link. Internet ordering is also being used in parts of the business.

In its supermarket and retail operations, Bunzl operates three main programs: (i) direct-store-delivery, where deliveries are made to individual user locations, (ii) warehouse replenishment, where Bunzl restocks a customer’s warehouse on a planned basis, and (iii) cross-docking where orders are picked for individual stores of a customer’s supermarket chain, for example, and pallets are prepared, labeled by store and delivered to the customer’s warehouse. In cross-docking programs these products are not stored in the customer’s warehouse, they simply cross from the customer’s inward dock to the outward dock and are loaded onto the customer’s delivery truck with the grocery supplies for each store. Some cross-docking customers collect their products from Bunzl’s warehouse, as do some redistributors, which are smaller independent distributors that do not source the relevant products directly from manufacturers. In other parts of the business, deliveries are generally made directly to the customer.

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Market characteristics

Customers are keen to reduce storage space taken up by a wide variety of products which are often bulky, low cost plastic and paper disposable products, so demand is strong for Bunzl’s outsourcing programs which deliver direct to their outlets on an as needed basis or via the cross-docking program described above.

Demand continues for ready to eat, reheat or cook at home meals, known as takeout food. These products are available in retail food courts, displayed as a range of ready to go starters, main courses and desserts which are often prepared on the premises. Customers can choose from set meals or à la carte from menu boards. Bunzl supplies an extensive range of specialized packaging and foodservice equipment for this purpose. With case-ready meats, produce, bakery and other food types gaining acceptance in the market, Bunzl is also obtaining an increasing share of business from food processors.

Many of Bunzl’s larger customers use Electronic Data Interchange, which involves utilizing linked computer systems, for placing orders and handling billing and account management information. This method of communication is quick and efficient both for customers and for Bunzl. Many smaller customers take advantage of Bunzl’s e-catalog for ordering.

In Europe, the role of larger distributors has been steadily increasing, replacing a distribution process characterized by regional, fragmented, typically family owned enterprises or manufacturers supplying customers direct. There is an increasing trend towards a full outsourcing service.

Products

Bunzl distributes thousands of items. Typically a branch might carry around 3,000 lines and have access to many more within the Group. Some examples of products are listed below by user type.

Grocery store supplies:   meat trays, labels, plastic and paper bags, clear plastic containers, aluminum foil, merchandizing tags, platters, cake domes, plastic microwavable and oven proof takeout food packaging.

Hotel, restaurant and catering supplies:   napkins, disposable table coverings, cutlery, cups, straws and stirrers, custom printed food boxes, pizza boxes, burger wraps, tumblers, paper plates, vending machine ingredients, catering equipment, custom printed soaps and shampoos.

Cleaning and hygiene supplies:   paper towels, toilet tissue, liquid soap, disinfectant, cloths, floor polish, refuse sacks, mops, buckets and disposable gloves.

Personal protection equipment:   protective workwear, high visibility workwear, protective headwear, footwear, gloves, respiratory protective equipment and hearing and eye protection.

Healthcare supplies:   examination gloves, surgical masks, dressing pads and incontinence products.

Suppliers and customers

Bunzl purchases its supplies from a variety of manufacturers of plastic and paper packaging, plastic bags, clingfilm, aluminum foil, napkins, tissue, janitorial and other products ranging from large multinational organizations to smaller specialist manufacturers. Products are sourced both locally from domestic suppliers and imported from overseas. There has been supplier consolidation over recent years and suppliers are increasingly deciding to move away from direct sell of smaller shipments and instead utilize third parties like Bunzl for distribution of their products.

Customers range greatly in size. Larger customers include major national, and sometimes international, chains of supermarkets, fast food outlets, hotels, contract caterers, contract cleaning groups

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and food processors. Smaller customers include local independent operators in these sectors as well as restaurants, cafes and sandwich shops and redistributors.

Raw materials

Many of the products the Group supplies have a significant plastic and/or paper content with plastic polymers predominating. As a consequence movements in natural gas, oil and pulp prices as well as other raw material prices may affect the cost of the products purchased by the Group.

Competition

The market is highly competitive in all sectors and geographic areas of operation. Competitors range from large distribution companies to small, local distributors in specific geographic areas. Many manufacturers also distribute their own products, selling directly to their larger customers, and many of the Group’s customers also have distribution operations.

Bunzl has extensive distribution networks which can offer service to customers on both a local and national basis. It is a specialist in its field and is able to anticipate as well as meet customer needs and trends. Considerable investment in technology makes Bunzl a fast and efficient operator and management believes that this, combined with experienced and well organized teams of staff, ensures customers get the right product at the right price at the right time.

Organic growth

The business has grown organically by seeking to consistently develop long term relationships with customers and attract new ones. A particular growth area has been in expanding outsourcing services programs for customers which can be tailored to their precise needs. The programs can yield cost, space and working capital savings for these customers.

There has been supplier consolidation over recent years and suppliers are increasingly deciding to move away from direct sell of smaller shipments and instead utilize third parties like Bunzl for distribution of their products, thereby leading to further organic growth.

Another growth driver has been in identifying market trends and exploiting their potential, such as takeout food and food processors described above.

Business with supermarkets, non-food retailers, convenience stores, food processors, contract caterers and cleaners and the redistribution side of the business, where Bunzl supplies products to other small distributors, has seen growth over the years.

Acquisitions

The business in North America has been strengthened over the last five years. In June 2001 the acquisition of Godin in Quebec enabled Bunzl to serve national customers across Canada. In October 2001 the Group’s geographic coverage of Canada was completed with the acquisition of Eastern Paper in the Maritimes. In October 2001 Bunzl also acquired Packers, a long established supplier to the US beef and pork processor industries based in Nebraska. In June 2002 Kenco, a redistribution business based in Seattle, Washington was acquired. In December 2002 the Group acquired Saxton, a redistribution business based in Phoenix with locations also in Kansas City and Denver, which has strengthened the Group’s position both in cleaning and hygiene and the relevant regions. In February 2003 the Group purchased Enterprise, a distributor of plant supplies to food processors in Dallas, Texas; Greeley, Colorado; Atlanta, Georgia and St Joseph, Missouri. In December 2003 the Group purchased Prolix Packaging, a retail stores supply distributor based in Chicago, Illinois. In October 2004 the Group purchased TSN, a distributor of goods not for resale to the convenience store sector based in Denver, Colorado. In November 2004

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Joseph Weil & Sons, a redistribution business based in Chicago, Illinois, was acquired. In December 2004 the Group acquired TEMO, a redistribution business based in Maspeth, New York City. Four acquisitions were completed in 2005. In September the acquisition of SOFCO, which is based in New York State and distributes disposable supplies to a number of sectors including grocery, foodservice and healthcare, was completed. At the end of September A W Mendenhall based in Chicago was acquired. Mendenhall serves the redistribution sector principally supplying foodservice, janitorial, industrial packaging and disposable products in the Midwest. In October the Group’s position in the non-food retail sector was strengthened with the purchase of Retail Resources, a business based in New York providing distribution services to retail stores across the US including store supplies such as checkout and merchandise bags, jan/san items, labels, boxes and other paper products as well as specialized expense control systems. The grocery and food processor distribution business of Weiss Brothers, based in West Point, Pennsylvania, was also acquired in October. In January 2006 Bunzl acquired Master Craft, a US business servicing the redistribution and foodservice sectors.

A number of acquisitions have also helped develop the UK & Ireland business during the last five years. In February 2001 ICCS MacGregor, a distributor of supplies to hotels, nursing homes and contract cleaners in Scotland, was added to the Group. In July 2001 the Group’s retail supply business was expanded by acquiring the UK carrier bag supply business from BPI thus building on the Group’s international sourcing operations. In November 2001 Bunzl acquired W A Blyth, a distributor of personal protection equipment and cleaning and hygiene supplies in Wales and South West England. In May 2002 Lockhart, a distributor of catering equipment to the UK foodservice industry, was acquired. In November the Group agreed to purchase Darenas, a UK national distributor of cleaning and hygiene supplies, and completed shortly thereafter. In late December 2002 the Group purchased Thomas McLaughlin, a leading distributor of catering equipment in both Northern Ireland and the Republic of Ireland. McLaughlin was a logical extension of the Group’s existing business in Ireland and complemented the acquisition of Lockhart earlier in the year. In December 2003 the Group purchased O’Mahony Packaging, a distributor of supplies to retailers and food processors based in Cork, Ireland. In January 2006 Bunzl acquired Midshires, a business principally engaged in the operation and sale of vending machines and associated services throughout Central England.

The business in Continental Europe has grown significantly over the last five years through acquisitions. In October 2001 the Group acquired the DKI Group which supplies packaging consumables and equipment to the Danish supermarket and food processing industries, strengthening the Group’s position in the Scandinavian market. In October 2003 Bunzl acquired MultiLine, a distributor of a wide range of consumables to the Danish hotel and catering industries. In May 2004 Bunzl acquired Groupe Pierre Le Goff, a national distributor of cleaning and safety products in France, which extended Bunzl’s business into France for the first time. In November 2004 the Group acquired Beltex, a distributor of cleaning and safety products in Hungary, Bunzl’s first acquisition in Eastern Europe. In January 2005, Bunzl completed the acquisition of Gelpa in the Netherlands, a distributor principally supplying the retail and food processor sectors with packaging and consumables. Bunzl continued its expansion into Central Europe with the acquisition of Tecep in July 2005. Tecep has operations in Hungary, Czech Republic, Slovakia, Romania and Poland, primarily serving the retail, foodservice, catering and food processor markets with packaging supplies and catering and food processing equipment. In April 2006 Bunzl announced the acquisition of Picardie Hygiene, a distributor of cleaning and hygiene products in Northeast France.

The business in Australasia has also been developed through recent acquisitions. In November 2002 the Group bought Lesnie’s, a distributor of supplies to food processors and retailers based in Sydney, Australia. In October 2004 the Group acquired the disposable consumables and packaging distribution business of Cospak, based in Newcastle, Australia. In July 2005 Bunzl purchased Sanicare, strengthening its position in the healthcare sector in Australia and New Zealand. Based in New South Wales, Sanicare

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supplies disposable products principally into the healthcare sector. In April 2006 Bunzl acquired Allcare, a distributor of personal protection equipment and disposable products to food processors in Australia.

Technology

Effective information technology systems are critical to operations and process management and for financial and general management control across the Group. Substantial investment is continually made in computer systems throughout the operations to improve the Group’s ability to service customers, enhance its market position, trade on the internet and contribute to productivity gains. Management considers that the quality of its systems is an important source of competitive advantage.

There is continuing use of Electronic Data Interchange for business transactions and communication between Bunzl and its suppliers as well as customers. Bunzl devotes substantial resources to this area. Internet ordering is also being used in parts of the business.

Intellectual Property

The industries in which the Group is active are not generally characterized by proprietary products and although the Group’s companies hold certain trademarks and other intellectual property rights, the successful continuation of the Group’s business is not dependent on such intellectual property rights and no one such intellectual property right is, by itself, material to the Group’s business.

Environmental Regulation

The Group is subject to a broad range of environmental laws and regulations in each of the jurisdictions in which it operates, including the US. These laws and regulations impose increasingly stringent environmental protection standards on the Group regarding, among other things, waste disposal practices and the remediation of environmental contamination. These standards expose the Group to the risk of substantial environmental costs and liabilities, including liabilities associated with divested assets and past activities.

The Group has an established environmental policy pursuant to which all its operating companies are committed to a program of continued improvement in environmental performance and committed to ensuring that each business area identifies and controls significant environmental risks associated with its activities, products and services. Bunzl is also committed to compliance with environmental legislation and regulations in the jurisdictions where Group companies operate. The Group periodically reviews its environmental practices in order to ensure that appropriate standards are being maintained. The Group regularly incurs expenditure in connection with environmental compliance requirements. The Group is involved in the remediation of certain of its properties. Management is not aware of any instances of non-compliance that would have a materially adverse effect on the Group’s financial condition or results of operations.

The Group believes that the amounts that it has budgeted and reserved will enable it to satisfy its known and anticipated environmental obligations. However, environmental matters cannot be predicted with certainty and there can be no assurance that these amounts will be adequate. In addition, future developments, such as changes in law or environmental conditions, could result in increased environmental costs and liabilities that could have a material adverse effect on the Group’s financial condition or results of operations.

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ORGANIZATIONAL STRUCTURE

Bunzl is a holding company conducting its operations through its subsidiary undertakings (some of which are themselves intermediate holding companies of other subsidiary undertakings). The following are the significant subsidiaries of the Company as of December 31, 2005. Each subsidiary listed is wholly owned by the Group.

 

PROPERTIES

As of December 31, 2005 the Group operated its various businesses from a total of approximately 350 locations, the majority of which were in North America and Europe with the remainder located in Australasia. Most of these facilities were leased by the Group, with the balance owned by the Group. The Group believes that all such facilities are suitable and adequate for their use, and generally have sufficient capacity for existing needs and expected near term organic growth.

ITEM 5.                OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OPERATING RESULTS

The following discussion and analysis is based on the Company’s Consolidated Financial Statements, which appear on pages F-1 to F-51 of this Annual Report. The Consolidated Financial Statements have been prepared in accordance with IFRS as adopted by the EU, which differ in certain significant respects from US GAAP.

The Group has adopted IFRS from January 1, 2005 with a transition date of January 1, 2004. On transition, IFRS 1 “First-time Adoption of International Financial Reporting Standards” was applied. This standard provided the Group with a number of optional exemptions from applying certain IFRS accounting policies retrospectively. Set out below is a description of the significant first time adoption optional choices made by the Group.

Business combinations, goodwill and intangibles

The Group has elected not to apply IFRS 3 “Business Combinations” retrospectively to business combinations prior to January 1, 2004. As a result, in the opening balance sheet as at January 1, 2004, goodwill arising from previous business combinations remains as stated under UK GAAP. If this exemption had not been taken the net book value of other intangible assets may have been greater, subject to separate identification of intangible assets, and the value of goodwill may have been lower, whilst the IFRS amortization charge would have been higher than currently reported as amortization would be charged on intangible assets arising on acquisitions prior to January 1, 2004.

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Share based payments

Although no expense had been included in the UK GAAP consolidated profit and loss account for the year ended December 31, 2004, the Group had previously disclosed the fair value expense for equity instruments by way of a note to the consolidated financial statements for the year ended December 31, 2003. As such, the Group has not adopted the exemption to apply IFRS 2 “Share Based Payments” to awards made after November 7, 2002; instead a full retrospective approach has been followed on all awards granted from January 1, 1999 but not fully vested as at the date of transition.

Foreign currency translation reserve

The Group has elected to separately measure the foreign currency translation reserve from January 1, 2004 excluding translation differences arising before that date. IFRS requires amounts taken to reserves on the retranslation of foreign subsidiaries to be recorded in a separate foreign currency translation reserve and be included in the future calculation of profit or loss on sale or liquidation of the subsidiary. The profit or loss arising on any such future sale or liquidation may therefore be different than if the election had not been made. There was no impact on the IFRS profit for 2004 or 2005.

Financial instruments

On transition, the Group deferred the implementation of International Accounting Standard (“IAS”) 32 “Financial Instruments: Disclosure and Presentation” and IAS 39 “Financial Instruments: Recognition and Measurement” to the year ending December 31, 2005. Consequently, financial instruments continued to be accounted for and presented in accordance with UK GAAP for the year ended December 31, 2004. With effect from January 1, 2005 the Group adopted IAS 39 “Financial Instruments: Recognition and Measurement”. The effect of adopting IAS 39 at January 1, 2005 is presented as a movement in the Group’s consolidated statement of recognized income and expense for 2005.

The Company’s Consolidated Financial Statements have been prepared in accordance with IFRS as adopted for use in the EU. IFRS as adopted by the EU differ in certain respects from IFRS as issued by the IASB. However, the Consolidated Financial Statements for the periods presented would be no different had the Company applied IFRS as issued by the IASB. References to IFRS herein should be construed as references to IFRS as adopted by the EU.

Under the IFRS transition provisions within the Form 20-F requirements of the Securities and Exchange Commission (“SEC”), the Group is permitted to provide two years of comparable financial information under IFRS and reconciliations to US GAAP for the periods presented.

For an explanation of the principal differences between IFRS and US GAAP affecting the Group, see Note 31 of the Notes to the Consolidated Financial Statements beginning on page F-45 of this Annual Report. This also includes a reconciliation of profit, a statement of comprehensive income, details of earnings per share, a reconciliation of equity shareholders’ funds and a consolidated cash flow statement.

Critical IFRS Accounting Policies

The results of the Group’s operations and its financial condition are dependent upon the utilization of accounting methods, assumptions and estimates that are used as a basis for the preparation of the Consolidated Financial Statements. The Consolidated Financial Statements of Bunzl are prepared in accordance with IFRS and the accounting policies employed are set out under the heading “Accounting Policies” on pages F-7 to F-13 of this Annual Report. The Company has identified the following critical accounting policies and related methods, assumptions and estimates which management believes are essential to understanding the underlying financial reporting risks and the impact that these accounting

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methods, assumptions and estimates have on the Group’s reported financial results. This information should be read in conjunction with the Consolidated Financial Statements and this “Operating and Financial Review and Prospects”.

Pensions

The Group accounts for its defined benefit pension schemes in accordance with IAS 19 “Employee Benefits”. All principal defined benefit schemes are now closed to new entrants who are offered a defined contribution arrangement. The application of IAS 19 requires the exercise of judgement in relation to the assumptions used and for each assumption there is a range of possible outcomes. In consultation with the Group’s actuaries management decides the point within those ranges that most appropriately reflects the Group’s circumstances. Small changes to these assumptions can have a significant impact on valuations and the amounts reflected in the Consolidated Financial Statements. Assumptions vary for the different countries in which the Group operates and there is also an inter-dependency between some of the assumptions. Holding all other factors constant, an increase in the mortality assumption by one year would increase the pension liability by approximately £11 million. A reduction in the discount rate by 0.25% would increase the pension liability by approximately £14 million.

Intangible assets

IFRS 3 “Business Combinations” requires the identification of acquired intangible assets as part of a business combination. The methods used to value such intangible assets require the use of estimates. Future results are impacted by the amortization periods adopted and changes to the estimated useful lives would result in different effects on the income statement. It is estimated that a change of one year in the useful economic life of intangible amortization would have had an impact of approximately £1 million on annual operating profit.

Goodwill is not amortized but is tested annually for impairment. Tests for impairment are based on discounted cash flows and assumptions (including discount rates, timing and growth prospects) which are inherently subjective.

Revenue recognition

Revenue represents sales to third parties for goods sold and are valued at invoiced amount, excluding sales taxes, less estimated provisions for returns and volume and early settlement discounts where relevant. Returns provisions are based on experience over an appropriate period whereas volume and early settlement discounts are based on agreements with customers.

Acquisitions

Acquisitions are accounted for using the purchase method based upon the fair value of the consideration paid. Assets and liabilities acquired are measured at fair value and the purchase price is allocated to assets and liabilities based upon these fair values.

Determining the fair values of assets and liabilities acquired involves the use of significant estimates and assumptions (such as discount rates, asset lives and recoverability). Assets and liabilities are measured at fair value and freehold properties are typically determined by valuation on an open market existing use basis by qualified valuers.

Bunzl believes that estimates made in previous years have been accurate as any changes made in the 12 month period following acquisition to finalize provisional fair value adjustments made in the year of acquisition have not been material.

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Background

The following discussion and analysis of the Group’s results of operations and the Group’s medium term prospects should be considered in light of certain significant developments which have occurred in recent years in the Group.

Bunzl has followed a strategy of focusing its resources on areas where it has, or can develop, competitive advantage and which have sound organic growth potential. This has resulted in a major change in the Group’s structure over the last ten years. Following the demerger of the Filtrona business on June 6, 2005, the Group comprises four geographical segments: North America, UK & Ireland, Continental Europe and Australasia. All segments continue to develop through a combination of organic growth and acquisitions.

Acquisitions

During 2005 the Group spent £124.4 million on acquisitions. The principal acquisitions made during the year were Gelpa, which the Group acquired in January, Tecep and Sanicare, acquired in July, SOFCO and A W Mendenhall, acquired in September, and Retail Resources and Weiss Brothers, acquired in October.

As explained in Risk Factors on pages 7 to 9 of this Annual Report the results of the Group are affected by the acquisitions it makes and the successful integration of the acquired company’s operations in order to realize the anticipated benefits of the acquisition. Over the last two years the company has made a number of acquisitions.

The principal acquisitions were:

 

 

These acquisitions contributed the following to Group results in the year of acquisition:

 

The future results of the Group will be impacted by any decisions to make further acquisitions.

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In January 2006 Bunzl purchased Master Craft Packaging, a company serving the redistribution and food service sectors in the US, and The Midshires Group, a business principally engaged in the operation and sale of vending machines and associated services throughout Central England. In April 2006 Bunzl announced the acquisitions of Allcare, a distributor of personal protection equipment and disposable products to food processors in Australia, and Picardie Hygiene, a distributor of cleaning and hygiene products in Northeast France.

The strategy and development of the Group is explained in more detail in ‘History of the Group’ on pages 9 to 12 of this Annual Report.

Demerger of Filtrona

The pursuit of Bunzl’s strategy over recent years resulted in the Company having two business streams, Outsourcing Services and Filtrona, both of which had superior returns, good international competitive positions and potential to grow but which had little or no commercial overlap between them. Bunzl therefore decided to separate these two fundamentally different component parts by demerging Filtrona, its speciality plastic and fiber products business, from the Group in June 2005. This was achieved by paying existing shareholders of Bunzl a dividend in specie satisfied by the issuance of shares in Filtrona plc, a newly established independent public company. Effective as of the date of the demerger, Bunzl became a simpler organization concentrating on the Outsourcing Services business stream as a focused, international distribution and outsourcing Group.

The Group made no other divestments in 2005 or 2004.

Share buy back

In October 2004 Bunzl reinstated a share buy back program following the purchase and cancellation of 21.3 million shares in 2003. A total of 13.0 million shares were purchased into treasury in 2004 at a cost of £58.2 million (excluding expenses) and an average price of £4.48 per share. These purchases were consistent with the Board’s continuing overall capital management strategy. This strategy seeks to maintain an appropriate balance sheet structure taking into account completed and prospective acquisitions and disposals. The treasury shares were subsequently cancelled in May 2005. No shares were purchased by the Company in 2005.

Share Consolidation

Following the approval of Bunzl’s shareholders at an Extraordinary General Meeting on June 2, 2005 and as part of the demerger of Filtrona, existing Bunzl ordinary shares of 25p each were consolidated on June 6, 2005 on a seven for nine basis into ordinary shares of 321/7p each.

Foreign currency exchange rate trends

As explained in Risk Factors on pages 7 to 9 of this Annual Report the results of Bunzl are impacted by the movements in the US dollar and other foreign currency exchange rates.

The US dollar average exchange rate trend over the past two years is shown below:

 

In 2006 there have been no significant movements in the US dollar exchange rate compared with the end of 2005. The average rate for the period to March 31, 2006 was $1.75.

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In 2005 the overall translation effect of currency movements increased continuing operations’ revenue by £22.9 million, or 0.8%, and continuing operations’ operating profit by £1.5 million, or 0.7%.

Bunzl operates on a worldwide basis. Accordingly the results of the Group will continue to be impacted by fluctuations in the US dollar, the euro and other foreign currency exchange rates.

Financial reporting standards and accounting policies

The following IFRS and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations have been issued by the IASB and may affect future Annual Reports.

IFRS 7 “Financial instruments: disclosures” was issued in August 2005 and is required to be implemented by Bunzl from January 1, 2007. This new standard incorporates the disclosure requirements of IAS 32, which it supersedes, and adds further quantitative and qualitative disclosures in relation to financial instruments.

IFRIC 4 “Determining whether an arrangement contains a lease” was issued in December 2004 and has been implemented by Bunzl from January 1, 2006. The interpretation requires arrangements which may have the nature, but not the legal form, of a lease to be accounted for in accordance with IAS 17 “Leases”. This interpretation is not expected to have a material impact on the Group.

See pages F-50 and F-51 of this Annual Report for further discussion of certain recent pronouncements which may affect the Group’s consolidated financial position, results of operations and cash flows reported under US GAAP.

2005 compared with 2004

Results

These are the Group’s first full year results presented under IFRS. The income statement shows the results of the continuing operations of the Group. The discontinued operations are those of Filtrona, which was part of the Group until June 6, 2005, and its contribution to profit is included as a single line net of interest, tax and the costs of effecting the demerger.

Group performance

Revenue from continuing operations increased by 20% to £2,924.4 million with businesses acquired during the year contributing 5% of this increase.

Operating profit increased by 16%, or £26.4 million, from £161.1 million to £187.5 million. This reflected a good operating performance, underlying organic growth and the full year impact of acquisitions made in 2004.

Operating profit margin from continuing operations declined to 6.4% from 6.6% in 2004. This is after an intangible amortization charge of £15.9 million (2004: £7.8 million). Margin improvements in UK & Ireland and Continental Europe were more than offset by a decline in North America, caused by the effect of lower margin acquisitions, and a decline in Australasia.

Interest and tax

The net finance cost from continuing operations increased to £10.8 million from £2.9 million in 2004 as a result of higher interest rates and increased average borrowings due to acquisition spend more than offsetting strong operating cash flow. Interest cover was 17 times based on operating profit of £187.5 million and the net finance cost of £10.8 million.

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The tax charge for continuing operations of £56.7 million represents an overall tax rate of 32.1% on the profit before income tax compared to 33.2% in 2004.

Foreign currency exchange rates

Currency translation had a marginally (less than 1%) favourable impact in the year primarily due to the strengthening of the US dollar, euro and Australian dollar against sterling. This translation effect is the major way that currency impacts the Group although there is also a small negative transaction effect on certain parts of the business. In 2005 the overall translation effect of currency movements increased continuing operations’ revenue by £22.9 million, or 0.8%, and continuing operations’ operating profit by £1.5 million, or 0.7%.

Earnings and dividends

Profit after tax from continuing operations increased 14% to £120.0 million. Discontinued operations, net of demerger costs of £17.3 million, contributed profit of £4.2 million.

Adjusting for the seven for nine share consolidation in June 2005, the weighted average number of shares in issue reduced to 338.8 million from 344.6 million in 2004 as a result of the full year effect of the share buyback in the last quarter of 2004 offset by shares issued on the exercise of share options by employees of the Group. Earnings per share from continuing operations increased by 15% to 35.4p.

An interim 2005 dividend of 4.9p per share and a final dividend of 10.8p per share will deliver an increase of 18% for the year. A final 2004 dividend of 9.15p per share and the interim 2005 dividend of 4.9p per share at a total cost of £55.8 million has been charged to shareholders’ equity in 2005.

Balance sheet

Shareholders’ equity has decreased by £24.5 million to £460.4 million principally due to a £117.6 million reduction as a consequence of the demerger and dividends of £55.8 million charged to equity, partly offset by retained earnings of £123.6 million. Net debt decreased by £49.7 million to £355.5 million due to £115.4 million of debt assumed by Filtrona and strong operating cash flow partly offset by acquisition spend of £124.4 million.

Commitments

Obligations under non-cancellable operating leases decreased from £154.3 million at December 31, 2004 to £144.4 million at December 31, 2005. 30% of these operating leases expire in more than five years, similar to 2004. At the year end the Group was committed to, but had not provided for, capital expenditure of £0.8 million (2004: £0.3 million).

Intangible assets

Intangible assets increased by £59.4 million to £695.5 million reflecting goodwill and other intangibles acquired in the year net of a £57.4 million reduction due to the demerger and an amortization charge of £16.3 million.

Capital expenditure

In 2005 Bunzl continued to invest in the capital base of the Group spending £11.4 million in relation to continuing operations. Warehouses have been expanded and upgraded during the year and new ones opened. Computer systems continue to be improved and installed into acquired facilities. These systems remain critical to the Group’s ability to serve its customers in the most efficient and appropriate way.

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Management believes that up to date assets are an important source of its competitive advantage and investing in them remains a priority.

Pensions

At December 31, 2005 the Group’s IAS 19 “Employee Benefits” pension liabilities were £60.0 million, a £10.5 million decrease compared to 2004 due to a £32.4 million reduction arising from the demerger and an increase in the asset base being partly offset by increased liabilities due to a fall in bond yields and an increase in the longevity assumptions.

US Sarbanes-Oxley Act

As a foreign registrant with the SEC, the Company will be required to assess and report on the effectiveness of internal financial controls for the first time as at December 31, 2006. In order to achieve this the Company has established a steering committee and a detailed project plan which requires the Group to document and test internal financial controls and to adopt a recognized internal control framework. The project is proceeding satisfactorily towards completion.

Discussion by Business Area

North America

A combination of organic growth and acquisitions grew revenue by 18% to £1,665.2 million while operating profit rose by 9% to £113.6 million. The Group successfully integrated the acquisitions made during the fourth quarter of 2004 and announced four further acquisitions in 2005; SOFCO, A W Mendenhall, Retail Resources and Weiss Brothers. Though these new businesses came into the Group with on average lower margins, management have confidence in the integration and cost rationalization plans which are currently being executed. These additions reflect the strategy to reorientate the business mix towards the higher growth and higher potential sectors of redistribution, jan/san, food processor, non-food retail and convenience stores.

The grocery business, which is the largest of the customer categories, continued to perform well. Revenue, while ahead of 2004 both organically and through incremental acquisitions, decreased as a proportion of the total due principally to a strategy of concentrating growth and acquisition activities in the other sectors.

Rising fuel costs, increased regulation on drivers’ hours of work and greater traffic congestion has provided additional stimulus to the growth of the redistribution sector. The recent acquisitions, particularly A W Mendenhall in Chicago, have broadened the geographic coverage and improved the Company’s ability to service customers in this sector. The Company’s low cost and highly efficient operating platform offers an economic solution to both customers and suppliers. Bunzl believes that the potential in this sector will continue to grow as suppliers see the value of redistribution.

Although the processor business felt the effects of the various bans on US beef throughout the world, it had another year of sound growth in most categories. As Bunzl continues to demonstrate to customers the value in the “one stop shop” concept, it is able to increase the breadth of items it sells while helping them control their operating costs and working capital.

The successful integration of TSN, which was acquired in October 2004, provides the Company with opportunities to sell disposable packaging and jan/san products in addition to selected retail items into the growing convenience store sector. Bunzl believes this will grow in direct correlation with the expansion in size of the convenience stores as they begin to compete with grocery stores and fast food restaurants.

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The acquisition of Retail Resources in October will allow the Company to grow faster in the non-food retail sector. Bunzl’s logistics platform can provide customers an opportunity to increase the number of packaging items without increasing their investment in inventory. Bunzl believes that the expense management system offered by Retail Resources is unique and provides customers with a management tool enabling them to manage and control their expenses in every store. Bunzl’s import program can also provide packaging solutions to these customers that will reduce operating expenses without a reduction in quality.

2005 provided plenty of operating challenges and one of those was the significant increase in fuel costs. As a result, management carried out a complete analysis of the transport operations to mitigate the cost impact. The Company re-examined routes, improved drivers’ education programs and implemented new vehicle tracking technology to monitor trucks en route. Furthermore the utilisation of enterprise systems and metrics helped customers and suppliers to clearly identify operating costs while increasing internal effectiveness.

On a more sombre note, it would be hard to overestimate the havoc wreaked by the hurricanes Katrina, Rita and Wilma and the positive response by the Company’s employees to these events. These hurricanes not only created operational challenges for Bunzl, its customers and suppliers, but also directly impacted the lives of many of its employees. Due to their determination, commitment and hard work the Company continued to service its customers and through teamwork, flexibility and a common IT platform all their needs were met, often by shifting the work among the branch network. These difficult times tested Bunzl’s operational capabilities but it believes that the performance has strengthened relationships with both customers and suppliers.

Bunzl continues to invest in technology and the new e-commerce supply chain initiative is increasing sales by providing added value to customers. Self-service features include internet based 24/7 access to electronic ordering with other features including inventory and pricing information, order and delivery status and customer history. Training and technical support from experienced personnel is also provided to customers.

In order to meet the demands of an evolving marketplace Bunzl implemented a new VIP (value, integrity and performance) sales training and development initiative. The program is customised to the Company’s needs and enables the sales professionals to learn and apply state-of-the-art sales techniques and tools. The program content includes sales maximization, sales strategies, communicating effectively, successful sales calls, negotiation skills, responding to customers needs, understanding buyer motivations and handling queries. This comprehensive course will be attended by all sales personnel and a select group of other managers.

Bunzl’s private label program, Prime Source, continues to grow as the Company adds more items and offers customers a less costly alternative without sacrificing quality. This program has expanded significantly again in 2005 as Bunzl broadened the product offering and increased international sourcing. A Shanghai warehouse consolidates many of the Chinese sourced products and allows for efficient delivery even to the smaller warehouse locations.

Despite rising costs of both fuel and employee benefits, the Company believes that it has managed the cost platform effectively and is confident that the improvements to IT capabilities, facilities, logistics platform, supply chain and delivery routes will contribute to long term efficiency gains and lead to an even more competitive cost base in the future. Bunzl is also confident that, as it deepens the ties with both customers and suppliers, it will continue to provide a product and consolidation service offering that is of the highest level in the market.

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UK & Ireland

Since the first acquisition in the UK in 1993, Bunzl’s UK & Ireland business has expanded to provide a wide range of consumables into a broad range of customer sectors. During 2005 the business continued to develop with revenue increasing by 4% to £664.2 million and operating profit by 9% to £55.8 million.

This increase has been predominantly organic with sales growth coming from new contract wins and range extensions, particularly from businesses adding products available from other Bunzl operations. In addition to revenue growth, profit has been enhanced through increased efficiencies from rationalization and improvement in operations which more than offset increases in fuel and raw material prices. The Horeca (hotel, restaurant and catering) markets remain challenging with ongoing consolidation and customers deferring non-essential spend. Sales growth was underpinned by the full year impact of significant contract wins in the hotel, restaurant and bar sectors in the second half of 2004. Bunzl also won and fulfilled contracts to supply light and heavy equipment for the fit out of two new sports stadiums in England and Wales. Operationally the Company introduced a standard IT system into the catering equipment business which now allows the increasing number of customers it serves with both disposables and equipment to receive consistent management information.

In a difficult high street environment, the Company’s retail supplies business, which provides goods not for resale, grew through a combination of new contract wins, notably a three year contract with a leading high street retailer, and by adding new ranges to existing customers. Bunzl’s approach with new ranges and services is to prove the concept with one customer and then proceed to offer it to others. Within the healthcare market, increased imports and budgetary pressures within the National Health Service resulted in price deflation in examination gloves. Shermond maintained its sales momentum through sales of new products in other categories and gained operating efficiencies from the reorganization of the supply chain in 2004.

Overall sales were flat within the cleaning and safety business following rationalization of the cleaning and hygiene branch network. The subsequent reduction in operating costs more than offset the reduction in local sales around the closed branches and the Company still has a national network capable of servicing contracts anywhere in the UK. Greenham continued to develop business with local authorities and construction companies. Increased importing via the National Distribution Centre and sales of own label products offset pricing pressures, while operating costs and working capital remained tightly controlled.

Within Ireland the Company continues to develop. Bunzl’s largest area, the catering supplies business, benefited from new hotel construction activity driven by available capital allowances. The Company was also successful in winning new public sector accounts in the cleaning supplies business. Bunzl continues to grow the two smaller sectors, safety and retail, by leveraging resources in the UK, an approach that the new regional structure will facilitate.

Within the vending business, the market trend away from customers purchasing machines to having operating companies such as Bunzl charge for them as part of a fee, left overall revenue level with the previous year. However account wins in the hotel and retail sectors means a higher proportion of the sales is repeatable ongoing contracted business. This, together with good cost control, improved profitability.

Across the UK and Ireland the Company will maintain its segmental focus. The market oriented businesses will provide that focus while Bunzl will leverage the overall scale where appropriate to gain competitive advantage and increased efficiencies while sharing best practices.

Continental Europe

Bunzl successfully achieved substantial growth in both revenue and operating profit in 2005. Revenue increased 59% to £490.0 million and operating profit rose 95% to £25.3 million. This was driven by the impact of a full year of trading from Groupe Pierre Le Goff, acquired in May 2004, as well as from further

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acquisitions in 2005 and some strong performances from the existing businesses. With increasing oil prices and higher costs of raw materials, all of the businesses have had to place a greater amount of effort into gross margin management and tight control of operating costs.

In a period of challenging economic conditions in France, the cleaning and hygiene business has delivered a robust performance whilst the personal protection equipment/safety products business has outperformed the market. Throughout the year Bunzl have reorganized the operational infrastructure of the businesses at Groupe Pierre Le Goff, with the merging of a number of the smaller operating units to create operating efficiencies and improve service. This reorganization programme will continue throughout 2006. An IT system implementation commenced at the end of 2005 in the cleaning and hygiene business and this will harness further synergies throughout the business.

In January 2005 the Company completed the acquisition of Gelpa in the Netherlands which has provided it with a route into the retail and food processor sectors. In difficult market conditions the business has integrated well with the existing operations. The two businesses have achieved synergies enabling them to exceed expectations in 2005.

In similarly difficult market conditions, the German business has developed its national accounts program as more customers realize the benefits which derive from the strong operating platform. This, combined with ongoing cost control, has been a key driver in delivering profitable organic growth.

Following its relocation to a purpose built warehouse in 2005, the business supplying retailers in Denmark has taken advantage of a stronger operating platform to offer an improved service to its customers. This has enabled the business to perform ahead of expectations and also sets a good base for further positive development in 2006. The operations at MultiLine, the business supplying Horeca customers in Denmark, continue to prosper, partly aided by a significant contract win in the second half of the year.

2005 was the first full year of Bunzl’s activities in Central Europe. The Beltex business, a distributor of cleaning and safety products, has taken advantage of growth in industrial activity in the region. With operations in Hungary and Romania the business has performed well ahead of expectations. Bunzl’s position in Central Europe was strengthened by the acquisition of Tecep in July. Tecep is a leading distributor of packaging supplies and catering and food processor equipment to the retail, foodservice, catering and food processor markets, largely in Hungary and the Czech Republic but also throughout Central Europe. The Company is gaining synergies in a number of areas and at the same time investing in the IT systems to create further operating efficiencies.

Bunzl continued to expand its geographic footprint in 2005 and remains optimistic about further expansion through acquisitions. Reorganizing Continental Europe into a separate business area will enable the Company to put the focus and resources behind the pursuit of these additional opportunities.

Australasia

The combination of acquisitions in late 2004 and mid 2005, as well as organic growth in the underlying business, contributed to an increase of 34% in revenue to £105.0 million and 24% in operating profit to £7.8 million.

The business strategy is for continued development of the consolidation platform, providing a greater offering to new and existing customers. This will gain momentum through the development of acquisition opportunities within the core markets.

In July Bunzl completed the acquisition of Sanicare which expands its position and product offering into the healthcare sector and complements its growing position within aged care in the region. In addition

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the clinical expertise within this business creates opportunity to expand into other healthcare markets with a wider range of disposable consumables and leverage the Company’s position in the UK healthcare sector.

Bunzl’s principal business completed the successful integration of acquisitions made in 2004 as well as winning new contracts within the targeted growth sectors, including healthcare, industrial, safety and catering. Lesnie’s continued to focus on developing core business within the food processor markets. During 2005 the Company introduced a range of specialized production consumables to complement its already strong position with specialist equipment into this sector. The business has added resource to drive growth within these markets and this will continue throughout 2006.

The Company’s strong growth and leadership in the marketplace creates opportunities for purchasing synergies and the ability to leverage its global sourcing to improve its competitive position. Bunzl will continue to invest in its business through the establishment of new warehouses and the upgrading of existing facilities and further enhancement to IT systems. All of these many initiatives will enable the Company to continually improve its customer service offering which is the principal driver of the strong growth in this market.

LIQUIDITY AND CAPITAL RESOURCES

Bunzl continues to be a highly cash generative business. The primary source of the Group’s liquidity has been cash generated from operations. A portion of these funds have been used to fund acquisitions and share purchases, to pay interest, dividends and taxes, and to fund capital expenditure.

Cash flow

Of the net cash inflow from operating activities of £140.4 million, a £141.0 million inflow relates to continuing operations and a £0.6 million outflow relates to discontinued operations. The continuing operations cash flow is £35.4 million higher than 2004 due to an increase in profit and continued strong management of working capital.

Interest

The net interest paid increased to £8.4 million from £2.6 million in 2004 as a result of higher average borrowings and higher interest rates.

Dividends

In the year ended December 31, 2005, £57.8 million in ordinary dividends were paid, representing the interim dividend for the year ended December 31, 2004 and the final dividend for the year ended December 31, 2004.

Capital expenditure

Capital expenditure on continuing operations of £11.4 million was used to refurbish and expand facilities, upgrade and replace computer systems and enhance the quality and capacity of the asset base. Sales of fixed assets generated a cash inflow of £0.8 million.

Acquisitions

Spend on acquisitions totalled £124.4 million for 2005. This predominately related to the acquisitions of Gelpa, Tecep, Sanicare, SOFCO, A W Mendenhall, Retail Resources and Weiss Brothers.

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Shareholders’ equity

Shareholders’ equity has decreased by £24.5 million to £460.4 million principally due to a £117.6 million reduction as a consequence of the demerger and dividends of £55.8 million charged to equity, partly offset by retained earnings of £123.6 million.

Net debt

Net debt decreased by £49.7 million to £355.5 million due to £115.4 million of debt assumed by Filtrona and strong operating cash flow partly offset by acquisition spend of £124.4 million.

Management believes that the Group’s balance sheet remains strong and has adequate working capital for its current needs.

Management currently expects that future operating cash flow will be sufficient to fund its operating costs and costs of debt, to satisfy appropriate levels of capital expenditure and to meet tax and dividend commitments, subject to the Risk Factors discussed on pages 7 to 9 of this Annual Report.

Borrowings

At December 31, 2005, the Group had gross borrowings of £409.2 million, of which £136.0 million comprised a US dollar bond of $225 million. After deducting cash and deposits of £53.7 million, the Group’s net debt at December 31, 2005 was £355.5 million, a decrease of £49.7 million from £405.2 million at the end of 2004.

The Group is currently funded by a mixture of one to five year multi-currency bilateral committed credit facilities and a syndicated facility totaling £687.2 million together with a US dollar bond totalling $225 million. The bank facilities mature between 2006 and 2010, and the loans under these facilities are drawn for various periods, at interest rates based on LIBOR. As at the end of 2005, sterling loans of £246.0 million were drawn under these facilities at average rates of approximately 4.9% and were repayable in early 2006. As these drawings were refinanced on maturity under the same facilities, dependent upon the term of the relevant facility under which they have been drawn, all £246.0 million of the loans were classified for accounting purposes as repayable after four years but within five years. No loans as of December 31, 2005 were secured by either fixed or floating charges on the Group’s assets. In addition the Group maintains uncommitted and overdraft facilities to maintain short term flexibility.

The credit agreements under which the banks provide these facilities contain customary terms and conditions, including various financial and operating covenants (such as leverage and interest cover levels and customary negative pledge and reporting covenants). The US dollar bond also contains similar financial and operating covenants. Management believes that it is in compliance with all such covenants and that they do not presently impose undue restrictions on its activities.

Pensions

At December 31, 2005 the Group’s IAS 19 “Employee Benefits” pension liabilities were £60.0 million, a £10.5 million decrease compared to 2004 due to a £32.4 million reduction arising from the demerger and an increase in the asset base being partly offset by increased liabilities due to a fall in bond yields and an increase in the longevity assumptions.

Treasury policies and controls

Bunzl has a centralized treasury department to control external borrowings and manage exchange rate risk and interest rate risk. Treasury policies are approved by the Board and cover the nature of the exposure to be hedged, the types of financial instruments that may be employed and the criteria for

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investing and borrowing cash. The Group uses derivatives only to manage its foreign currency and interest rate risks arising from underlying business activities. No transactions of a speculative nature are undertaken. The treasury department is subject to periodic independent reviews by the internal audit department. Underlying policy assumptions and activities are reviewed by the executive directors. Controls over exposure changes and transaction authenticity are in place and dealings are restricted to those banks with the relevant combination of geographic presence and suitable credit rating. The Group continually monitors the credit ratings of its counterparties and credit exposure to each counterparty.

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility. The Group is currently funded by a US dollar bond and multi-currency credit facilities from the Group’s bankers. The US dollar bond, originally issued during 2001, is in three tranches, five years, seven years and 10 years with maturities between 2006 and 2011, for a total of $225 million at fixed rates of interest. The bank facilities have tenures ranging from six months to five years and mature between 2006 and 2010. At December 31, 2005, the available bank facilities totaled £687.2 million of which £246.0 million was drawn down. In addition the Group maintains overdraft and uncommitted facilities to provide short-term flexibility.

Foreign currency risk

The majority of the Group’s net assets are in currencies other than sterling. The Group’s policy is to limit the translation exposure and resulting impact on shareholders’ equity by borrowing and/or using forward foreign exchange contracts to hedge the translation exposure in those currencies in which the Group has significant net assets. At December 31, 2005 there were no material currency exposures after accounting for the effect of the hedging transactions. Throughout the year, the Group’s borrowings were primarily held in sterling and US dollars. The Group does not hedge the translation effect of exchange rate movements on the income statement.

The majority of the Group’s transactions are carried out in the respective functional currency of each of the Group’s operations and so transaction exposures are limited. However where they do occur the Group’s policy is to hedge significant exposures as soon as they are committed using forward foreign exchange contracts.

Interest rate risk

The Group’s strategy is to ensure with a reasonable amount of certainty that the overall Group interest charge is protected against material adverse movements in interest rates. The majority of the US dollar bond was swapped to floating rates during 2001. Interest rate caps are in place to reduce the Group’s floating rate exposure to movements in LIBOR.

Credit risk

The Group’s principal financial assets are cash and receivables which represent the Group’s maximum exposure to credit risk in relation to financial assets.

The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment.

The credit risk on cash and derivative financial instruments is limited because the Group restricts its dealings to counterparties with high credit ratings. The credit risk policy specifies the maximum permitted exposure to each counterparty.

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At the balance sheet date there were no significant concentrations of credit risk.

TREND INFORMATION

Management believes that, as a more focused outsourcing Group that has recently been reorganized into four business areas, Bunzl will be able to advance both organically and through acquisitions and thereby grow the business successfully.

OFF-BALANCE SHEET ARRANGEMENTS

The Group has provided bank, trade and other guarantees of £0.9 million to third parties as of December 31, 2005. For further information on guarantees see Note 20 of the Notes to the Consolidated Financial Statements on page F-31 of this Annual Report.

The Group uses financial instruments to mitigate its interest rate and foreign exchange risks. For further information on financial instruments see Note 14 of the Notes to Consolidated Financial Statements on pages F-22 to F-26 of this Annual Report.

There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Group’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources.

CONTRACTUAL OBLIGATIONS

The following table summarizes Bunzl’s principal contractual obligations at December 31, 2005:

*                    It is not possible to look beyond 2006 due to the variable nature of pension contributions.

Further information relating to the Group’s long term debt is set out in Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Borrowings” on page 30 of this Annual Report. Operating leases principally relate to land and buildings. The Group’s future operating cash flow is expected to be sufficient to meet these contractual obligations.

ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

Board changes since January 2005

As announced in February 2005, the demerger of Filtrona resulted in M. J. Harper and P. Heiden resigning from the Board on June 6, 2005 to take up the positions of Chief Executive and non-executive director of Filtrona plc respectively. Having originally agreed to do so, C. P. Sander decided for personal reasons not to assume the position of Chief Executive of Bunzl following the demerger of Filtrona and

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resigned from the Board on July 13, 2005. Following a comprehensive search using an external search consultancy, M. J. Roney, who had been a non-executive director since June 2003, was appointed as Chief Executive on November 1, 2005. A. J. Habgood remains as Chairman. At the end of the year A. P. Dyer retired from the Board after having been Chairman from 1993 to 1996 and then Deputy Chairman until the demerger of Filtrona. On January 1, 2006 B. M. May, who had been Finance Director designate since June 2005, joined the Board as Finance Director. His previous role was as Finance Director of Bunzl’s European and Australasian business. Also on January 1, 2006 P. W. Johnson, Chairman of Inchcape plc, joined the Board as an independent non-executive director. Finally on January 31, 2006 D. M. Williams, Finance Director until the end of 2005, retired from the Board after reaching his normal retirement age and having served as a director for over 14 years.

Summary of Directors

The business of the Company is managed by the Board of directors, comprising executive and non-executive directors. The directors and executive officers of the Company as of April 11, 2006 are as follows:

 

A.J. Habgood was appointed as Chairman in 1996, having joined as Chief Executive in 1991. He is Chairman of the Nomination Committee. Formerly a director of The Boston Consulting Group from 1977 to 1986, he was then appointed a director of Tootal Group PLC subsequently becoming Chief Executive. He is Chairman of Whitbread PLC and the senior independent director of SVG Capital plc.

M.J. Roney was appointed Chief Executive in November 2005 having been a non-executive director since 2003. After holding a number of senior general management positions within Goodyear throughout Latin America and then Asia, he became President of Goodyear’s Eastern European, African and Middle Eastern businesses and subsequently Chief Executive Officer of Goodyear Dunlop Tires Europe BV, the joint venture between Goodyear and Sumitomo Rubber.

J.F. Harris was appointed a non-executive director in 2000 and is the senior independent director and Chairman of the Audit Committee. Appointed Finance Director of Unichem Plc in 1986 and Chief Executive in 1992, he became Chief Executive of the enlarged Alliance Unichem Plc in 1997 and served as Chairman from 2001 until 2005. He is Chairman of Filtrona plc and a non-executive director of Anzag AG and Associated British Foods plc.

C.A. Banks was appointed a non-executive director in 2002 and is Chairman of the Remuneration Committee. Previously Chief Executive of Ferguson Enterprises, the largest North American subsidiary of Wolseley plc, he joined the board of Wolseley in 1992 and was appointed Group Chief Executive in 2001.

U. Wolters has been a non-executive director since 2004. Formerly Managing Director of Aldi Süd in Germany, he built the business into one of the world’s leading retailers operating principally in Germany and Austria, the US, the UK and Australia. He is now Chairman of the Aldi Family Trust which holds the majority of the Aldi Süd shares.

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P.L. Larmon is President and Chief Executive Officer of Bunzl North America. Having joined Bunzl in 1990 when Packaging Products Corporation, of which he was an owner, was acquired, he has held various senior management positions over 15 years. He became President in late 2003, Chief Executive Officer in 2004 and was appointed to the Board later that year.

B. M. May has been Finance Director since January 2006. A chartered accountant, he qualified with KPMG and joined Bunzl in 1993, initially as Internal Audit Manager, subsequently becoming Group Treasurer before taking up the role of Finance Director, Outsourcing Services Europe & Australasia in 1996 and Finance Director designate in June 2005.

P. W. Johnson was appointed a non-executive director in January 2006. Having spent most of his earlier career in the motor industry, he joined Inchcape plc in 1995 and became Chief Executive in 1999 and Chairman in 2006. He is a non-executive director of Wates Group Ltd.

COMPENSATION

Reference is made to pages A-1 to A-13 of this Annual Report, which contain Annex A thereto, the Directors’ Remuneration Report.

BOARD PRACTICES

The Board

The Board has established the following committees:

Remuneration Committee

The membership of the Remuneration Committee comprises all of the non-executive directors. The Chairman of the Committee is C.A. Banks. The terms of reference of the Committee, as approved by the Board, embody the purpose of the Committee as ensuring that the Company’s executive directors and senior executives are fairly rewarded for their individual contributions to the Group’s overall performance having due regard to the interests of the shareholders and to the financial and commercial health of the Group. Members of the Committee do not have any personal financial interest (other than as shareholders) in matters decided by the Committee, nor do they have any potential conflict of interest arising from cross-directorships or day to day involvement in running the Group’s business. The Committee meets at least three times a year and at other times as may be required. While neither the Chairman of the Company, A.J. Habgood, nor the Chief Executive, M.J. Roney, are members of the Committee, they normally attend meetings except when the Committee is considering matters concerning themselves. The primary purpose of the remuneration policy is to help ensure the recruitment, retention and motivation of the executive directors by providing fair reward for the responsibilities they undertake and the performance they achieve on behalf of shareholders. The Committee also oversees the administration of the Company’s share incentive schemes for employees. The Board itself determines the remuneration of the non-executive directors. The terms of reference of the Committee are available on the Company’s website.

Audit Committee

The membership of the Audit Committee comprises all of the non-executive directors and is chaired by J.F. Harris. The Committee considers reports from the Group’s internal and external auditors. The reports from the internal audit function cover specific matters arising during the year in addition to matters which are the subject of regular review. The Committee also regularly reviews the resourcing of the internal audit function and its program of investigations. The Committee reviews the half year and annual financial statements before formal submission to the Board for approval. The Committee is also

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responsible for reviewing the appointment of the external auditors and the broad scope of the annual audit. The Committee reviews and approves the level and type of non-audit work which the external auditors perform, including the fees paid for such work, thus ensuring that their objectivity and independence is not compromised. The Committee meets at least twice a year and at such other times as may be required. While the Finance Director, B.M. May, is not a member of the Committee, he normally attends meetings although the Committee has the authority to discuss matters with the external auditors without executive Board members present. The terms of reference of the Committee are available on the Company’s website.

Nomination Committee

The Nomination Committee meets as and when required and recommends candidates for both executive and non-executive positions on the Board for the consideration of the Board as a whole. A.J. Habgood, J.F. Harris and C.A. Banks are members of the Committee which is chaired by A.J. Habgood. J.F. Harris chaired the Committee when considering the new Chief Executive appointment. The terms of reference of the Committee are available on the Company’s website.

Directors’ Service Contracts

P.L. Larmon and B.M. May each have service contracts which provide for one year’s notice from the Company and six months’ notice from themselves. However on appointment, M. J. Roney, due to his relocation and move from his previous company after 24 years’ service, was provided with 24 months’ notice which during the first 12 months of employment reduces on a quarterly basis by one month for each quarter. During the period of months 13 to 24 of employment, the notice period continues to reduce quarterly but by two months each quarter so that after 24 months’ service the Company will provide M. J. Roney with 12 months’ notice. P.L. Larmon’s contract provides that on termination by the Company without cause he is entitled to receive payment of 12 months’ base salary plus health insurance coverage, reduced by any interim earnings. There are no provisions for predetermined compensation in excess of one year’s remuneration and benefits in kind. M. J. Roney, for the first three years of service in limited circumstances only, is also entitled to receive a repatriation payment to cover relocation and school fees that have been incurred. A. J. Habgood’s service contract ended on December 31, 2005 and was replaced with a letter of appointment relating to his ongoing role as Chairman. The non-executive directors are paid an annual fee for their services. In addition, where relevant, they are paid a fee for chairing the Remuneration and Audit Committees. The non-executive directors do not have service contracts, are not eligible for pension scheme benefits and do not participate in any of the Group’s bonus or share incentive plans. For details of directors’ compensation, see Annex A to this Annual Report, the Directors’ Remuneration Report, on pages A-1 to A-13 of this Annual Report.

New York Stock Exchange Corporate Governance

Under the NYSE rules, listed foreign private issuers, like Bunzl, must disclose any significant ways in which their corporate governance practices differ from those followed by US domestic companies under NYSE listing standards. There are no significant differences in the corporate governance practices followed by Bunzl as compared to those followed by US domestic companies under the NYSE listing standards, except that Bunzl follows the recommendations in the revised Combined Code issued by the Financial Reporting Council in July 2003 (“Combined Code”) with respect to membership of its Nomination Committee and the balance of independent directors on the Board.

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The Combined Code permits membership of the Nomination Committee to be composed of a majority of independent non-executive directors. The NYSE listing standards require that the Nomination Committee be composed entirely of independent directors. The Combined Code recommends that at least half the board, excluding the Chairman, be independent whilst the NYSE listing standards requires a majority of independent directors.

EMPLOYEES

As of December 31, 2005, the Group’s continuing operations had 10,526 employees (2004: 9,455). An insignificant number of the Group’s employees are represented by trade unions. The Group has not experienced any significant strikes or work stoppages in recent years and considers its employee relations to be good.

The employment policies of the Group have been developed to meet the needs of its different business areas and the locations in which they operate worldwide, embodying the principles of equal opportunity. The Group has standards of business conduct (including a code of ethics) with which it expects its employees to comply. Bunzl encourages involvement of employees in the performance of the business in which they are employed and aims to achieve a sense of shared commitment.

SHARE OWNERSHIP

The following table sets forth, as of April 11, 2006, the total amount of ordinary shares owned by the current directors, and the percentage of the ordinary shares of the Company represented by such ordinary shares outstanding as of such date.

 

Share Option Schemes and Plans

The Company operates the following share plans for the benefit of its employees relating to the acquisition of shares from the Company.

Sharesave Scheme (1991) (“Sharesave Scheme”)

The Sharesave Scheme, approved by shareholders at the 1991 Annual General Meeting, is approved by the UK Inland Revenue and was open to all UK employees, including the UK based executive directors, who had completed at least one year of continuous service. No further options have been granted under the Sharesave Scheme since it expired in May 2001. It was linked to a contract for monthly savings of up to £250 per month over a period of either three or five years. Under the Sharesave Scheme options were granted to participating employees at a discount of up to 20% to the market price prevailing on the day immediately preceding the date of invitation to apply for the option. Options were normally exercisable either three or five years after they have been granted.

As of April 11, 2006 under the Sharesave Scheme there were options outstanding to purchase 66,106 ordinary shares, at exercise prices ranging from 308 pence to 365 pence, exercisable until October 31, 2006.

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Sharesave Scheme (2001) (“2001 Sharesave Scheme”)

The 2001 Sharesave Scheme was approved by shareholders at the 2001 Annual General Meeting and has replaced the Sharesave Scheme. The 2001 Sharesave Scheme is also approved by the UK Inland Revenue. It operates on a similar basis to the Sharesave Scheme as summarized above. As of April 11, 2006 under the 2001 Sharesave Scheme there were options outstanding to purchase 1,721,251 ordinary shares, at exercise prices ranging from 296 pence to 512 pence, exercisable at various dates until October 31, 2011.

International Sharesave Plan (“International Sharesave Plan”)

The International Sharesave Plan was introduced following the approval of the 2001 Sharesave Scheme by shareholders. It operates on a similar basis to the 2001 Sharesave Scheme save that it is linked to a contract for monthly savings of up to €400 per month (or equivalent in other currencies) over a period of three years and options are granted to participating employees at a discount of up to 20% to the market price prevailing five days before the date of invitation to apply for the option. As of April 11, 2006, under the International Sharesave Plan there were 143,703 options outstanding to employees in the Netherlands, Germany, Canada and Australia at exercise prices ranging from 296 pence to 512 pence, which are normally exercisable at various dates until October 31, 2009.

Irish Sharesave Scheme (“Irish Sharesave Scheme”)

The Irish Sharesave Scheme was introduced in March 2006 and operates on a similar basis to the International Sharesave Plan save that it is linked to a contract for monthly savings of up to €320 per month. It is approved by the Irish Revenue Commissioners. As of April 11, 2006 there were 32,828 options outstanding under the Irish Sharesave Scheme at an exercise price of 512 pence exercisable until October 31, 2009.

1994 Executive Share Option Scheme (“1994 Scheme”)

The 1994 Scheme was approved by shareholders at the 1994 Annual General Meeting. No further options have been granted under the 1994 Scheme since it expired in May 2004. A performance condition based on the Company’s adjusted earnings per share growth relative to UK inflation over three years, has to be satisfied before options may normally be exercised.

On August 31, 1999 Bunzl filed a Registration Statement with the SEC on Form S-8 to register ordinary shares for issuance pursuant to the 1994 Scheme.

As of April 11, 2006 under the 1994 Scheme there were options outstanding to purchase 5,953,780 ordinary shares, including market purchased shares as well as new shares to be allotted, at exercise prices ranging from 229 pence to 482 pence, exercisable until March 2, 2014.

Long Term Incentive Plan (“LTIP”)

The LTIP was approved by shareholders at the 2004 Annual General Meeting and replaces the 1994 Scheme. The LTIP is divided into two parts.

Part A allows the Board to grant share options. In normal circumstances options granted are only exercisable if the relevant performance condition has been satisfied. Share options granted to date have a performance condition attached based on the Company’s adjusted earnings per share growth relative to UK inflation over three years.

Part B of the LTIP allows the Board to award performance shares which is a conditional right to receive shares in the Company for no or nominal consideration. A performance share award will normally

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vest (i.e. become exercisable) on the third anniversary of its grant to the extent that the applicable performance condition has been satisfied. The extent to which performance share awards vest will be subject to the Company’s total shareholder return (“TSR”) performance over a three year period relative to the TSR performance of a specified peer group of companies. For further information on the current peer group see Annex A to this Annual Report, the Directors’ Remuneration Report, on page A-7.

On May 27, 2005 Bunzl filed a Registration Statement with the SEC on Form S-8 to register ordinary shares for issuance pursuant to the 2004 LTIP.

As of April 11, 2006 under the 2004 LTIP Part A there were options outstanding to purchase 5,406,903 ordinary shares, including market purchased shares as well as new shares to be allotted, at exercise prices ranging from 429 pence to 6821/2  pence, exercisable until April 3, 2016. Under the 2004 LTIP Part B there were 1,647,933 awards outstanding exercisable until April 3, 2012.

For details of options held by the executive directors of the Company, see Annex A to this Annual Report, the Directors’ Remuneration Report, on pages A-1 to A-13.

US Employee Stock Purchase Plan (2000) (“US Stock Purchase Plan”)

Effective January 1, 2000 the Company adopted the US Stock Purchase Plan for eligible employees of its US subsidiaries under which participating employees make contributions through payroll deductions to their respective employee option accounts (“Option Accounts”). At the end of every calendar month, a custodian appointed by the Remuneration Committee withdraws funds contributed to the participant’s Option Account to purchase ADRs in the open market on the participant’s behalf. Under the US Stock Purchase Plan, participants receive a 15% discount on the fair market value of the ADRs on the purchase date. The discount participants receive may be increased at the discretion of the Remuneration Committee, but in no event shall exceed the greater of 15% of the fair market value of the ADRs on the purchase date and 15% of the fair market value of the ADRs on the first business day of the relevant calendar month. Under the US Stock Purchase Plan, participants are limited to stock purchases which (taken together with all other stock options held by the participant under any other stock purchase plan of the Company) in the aggregate do not exceed $25,000 worth of ADRs for each calendar year. The US Stock Purchase Plan is intended to satisfy the requirements of Section 423 of the Internal Revenue Code of 1986, as amended. As of April 11, 2006, 194,156 ADRs had been purchased under the US Stock Purchase Plan.

On December 27, 1999 Bunzl plc filed a Registration Statement on Form S-8 to register ADRs in connection with the US Stock Purchase Plan and a non-qualified US stock purchase plan for eligible employees of Bunzl Northeast, L.P., which the Company adopted effective January 1, 2000 and ended effective December 31, 2001. Prior to its termination, 3,114 ADRs were purchased at a discount of 20% to fair market value on the applicable purchase dates under the non-qualified US stock purchase plan.

ITEM 7.                MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

As far as the Company is aware, it is neither directly or indirectly owned nor controlled by any corporation or by any foreign government.

The Company has been informed that as of December 31, 2005, FMR Corp and Fidelity International Ltd had a beneficial interest of 22,503,195 ordinary shares, representing 6.52% of the outstanding ordinary shares. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.

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Under the Companies Act 1985, holders of voting securities of a listed UK company must notify the Company of the level of their holding whenever it reaches, exceeds or falls below specified thresholds. These thresholds are 3% (for material interests) and 10% (for non-material interests) and every one percent movement in the number of shares held which have voting rights. The following table sets forth, as of April 11, 2006, the number of ordinary shares held by holders of more than 3% and their percentage ownership which have been notified to the Company in accordance with the provisions noted above.

 

None of the Company’s major shareholders have different voting rights.

As of April 11, 2006 342,969 ordinary shares were held by 22 shareholders with registered addresses in the US. These figures do not include either the number of ordinary shares held by shareholders with registered addresses outside the US in which US residents have an interest or the number of any such US residents. As of the same date, 2,994,030 ordinary shares were being traded in the form of ADSs by 3 holders of record of ADSs.

The Company does not know of any arrangements which might result in a change of its control.

RELATED PARTY TRANSACTIONS

There are no material transactions between the Company and any related party. There are no loans outstanding from the Company to any related party.

ITEM 8.                FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

The Consolidated Financial Statements are set forth under Item 17. “Financial Statements”.

Legal Proceedings

The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their operations. While any litigation has an element of uncertainty, the Company does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material adverse effect upon the Group’s financial condition or results of operations.

SIGNIFICANT CHANGES

No significant changes have occurred since the date of the Consolidated Financial Statements included herein.

ITEM 9.                LISTING DETAILS

MARKET PRICE INFORMATION

The Company’s share capital consists of one class of ordinary shares. The trading market for the ordinary shares is the London Stock Exchange Limited (the “London Stock Exchange”) in London, England. The ADSs, each representing five ordinary shares of the Company, have been listed on the New York Stock Exchange, Inc. (the “NYSE”) since October 29, 1998. The Bank of New York is the Company’s depositary (the “Depositary”) issuing ADRs evidencing the ADSs.

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The following table sets forth, for the periods indicated, the highest and lowest middle market quotations for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange, and high and low closing prices of the ADSs on the NYSE.

 

Fluctuations between the pound sterling and the US dollar will affect the dollar equivalent of the price of the ordinary shares on the London Stock Exchange and the price of the ADSs on the NYSE. On April 11, 2006 the Noon Buying Rate was $1.75 to £1.00.

ADRs evidencing ADSs are issuable by The Bank of New York, as depositary, pursuant to the Deposit Agreement dated as of October 29, 1998 among the Company, the Depositary and the registered holders and holders from time to time of the ADRs. The Deposit Agreement and the form of ADR are exhibits to this Annual Report, respectively, having been incorporated by reference to Exhibit A of the Company’s Registration Statement on Form F-6 (File No. 333-9536) filed with the SEC on October 20, 1998 and filed herewith. Additional copies of the Deposit Agreement are available for inspection at the Corporate Trust Office of the Depositary currently located at 101 Barclay Street, New York, NY 10286, and the principal office in London of the agent of the Depositary at 1 Canada Square, London E14 5AL. The Depositary’s principal executive office is located at One Wall Street, New York, NY 10286.

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ITEM 10.         ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

The Company’s Memorandum and Articles of Association are incorporated by reference to Item 10 “Additional Information—Memorandum of Articles of Association”, as Exhibit 1.1 hereto.

MATERIAL CONTRACTS

Management does not believe the Company, or any member of the Group, has been a party to any material contract in the last two years, other than contracts entered into in the ordinary course of business and the agreement referred to below relating to the demerger of the Filtrona business (“the Demerger Agreement”).

The Demerger Agreement was entered into on May 16, 2005 between Bunzl and Filtrona plc to effect the demerger and govern the relationship between the Group and the Filtrona Group following the demerger.

Bunzl and Filtrona plc agreed pursuant to the Demerger Agreement that Bunzl would transfer the Filtrona business to Filtrona plc and that Filtrona plc would issue shares in Filtrona plc to the Bunzl shareholders as of June 6, 2005.

The Demerger Agreement contains mutual indemnities under which Filtrona plc indemnifies the Group against liabilities arising in respect of the Filtrona business and Bunzl indemnifies the Filtrona Group against liabilities arising in respect of the business carried on by the Group other than the Filtrona Group. These mutual indemnities are unlimited in terms of amount or duration and are customary for an agreement of this type.

The Demerger Agreement sets out how guarantees, indemnities or other assurances given by Group companies for the benefit of Filtrona Group companies (or vice versa) will be dealt with following the demerger. Where relevant the beneficiary of such a guarantee must try to obtain the guarantor’s release form the guarantor’s obligations thereunder and, pending release, indemnify the guarantor against all amounts paid by it under the guarantee and ensure that the guarantor’s exposure under the guarantee is not increased.

Both the Group and the Filtrona Group will be permitted access to each other’s records for a period of six years following the Demerger. Reasonable endeavours are to be used to ensure that contracts in the name of one group member whereby a member of the other group is deriving the benefit of that contract are novated to the relevant member of the other group, pending which the contracting party shall hold the benefit of that contract on trust for the relevant member of the other group. The parties have covenanted for a period of 12 months not to employ, solicit or entice away certain employees engaged in skilled or managerial worked employed by the other party’s group. Both groups have agreed to keep certain information on the other group confidential, subject to certain exemptions (for instance if disclosure is required by law).

The Demerger Agreement contains detailed provisions relating to the discharge of indebtedness due from Filtrona Group companies to the Group, the establishment by Filtrona plc of its pension schemes and the transfer of assets to them and the allocation of tax liabilities.

The Demerger Agreement also contains indemnities relating to taxation. Subject to certain exceptions, Bunzl indemnifies the Filtrona Group against tax liabilities arising as a result of the demerger or certain pre-demerger reorganisation steps. Bunzl also indemnifies the Filtrona Group against certain tax liabilities which are properly liabilities of the Group being imposed on a member of the Filtrona Group and Filtrona plc indemnifies the Group against certain tax liabilities which are properly liabilities of the Filtrona Group being imposed on a member of the Group. All of these indemnities are unlimited in terms

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of amount but do not cover liabilities which arise more than seven years after the demerger or which have not been notified by the indemnified party to the indemnifying party within seven years and 30 days after the demerger.

EXCHANGE CONTROLS

There are currently no UK foreign exchange control restrictions on remittances of dividends on the ordinary shares or the ADSs or on the conduct of the Group’s operations. There are no limitations under English law or the Memorandum and Articles prohibiting persons who are neither residents nor nationals of the UK from freely holding, voting and transferring shares in the same manner as UK residents or nationals.

TAXATION

The following discussion is a summary of material UK tax and US federal income tax consequences of the acquisition, ownership and disposition of ordinary shares or ADSs by a US Holder (as defined below). This summary is not a complete analysis or description of all the possible tax consequences of such purchase, ownership or disposal. It deals only with ordinary shares or ADSs held as capital assets by US Holders and does not address the tax consequences applicable to all categories of US Holders, some of which may be subject to special rules, such as:

·       certain financial institutions;

·       insurance companies;

·       dealers or certain traders in securities or foreign currencies;

·       US Holders holding ordinary shares or ADSs as part of a hedge, straddle, conversion or other integrated transaction;

·       US Holders whose functional currency is not the US dollar;

·       US Holders liable for the alternative minimum tax;

·       US Holders who acquired ordinary shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation;

·       partnerships or other entities classified as partnerships for US federal income tax purposes;

·       tax-exempt organizations; or

·       US Holders that own or are deemed to own 10% or more of the Company’s voting stock.

This summary is based in part on representations of the Depositary and assumes that each obligation in the Deposit Agreement, and any related document, will be performed in accordance with its terms. The US Treasury has expressed concern that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by US Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate US Holders. Accordingly, the analysis of the availability of the reduced tax rate for dividends received by certain non-corporate US Holders, described below, could be affected by actions that may be taken by parties to whom ADSs are pre-released.

This summary is intended as a general guide only and is based on UK legislation and HM Revenue and Customs practice, and laws and practices of the US currently in force (including the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”), judicial decisions and final, temporary and proposed Treasury Regulations), as well as the US-UK double taxation convention relating to income and gains which entered into force on March 31, 2003 (the “Income Tax Convention”) and the US-UK double

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taxation convention relating to estate and gift taxes (the “Estate and Gift Tax Convention”), changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. US Holders of ordinary shares or ADSs are advised to consult their own tax advisors with respect to the tax consequences of the purchase, ownership or disposal of their ordinary shares or ADSs, including specifically the consequences under US state and local tax laws and the tax laws of any non-US taxing jurisdiction.

As used herein, the term “US Holder” means a beneficial owner of ordinary shares or ADSs that is, for US federal income tax purposes:

·       a citizen or resident of the US;

·       a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the US or of any political subdivision thereof; or

·       an estate or trust the income of which is subject to US federal income taxation regardless of its source.

For US federal income tax purposes and for the purposes of the Income Tax Convention and the Estate and Gift Tax Convention, US Holders of ADSs will generally be treated as the owners of the underlying ordinary shares. Accordingly, no gain or loss will be recognized if a US Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs.

UK Taxation of Distributions

Under current UK law dividends received by a US Holder from the Company will not be subject to UK withholding tax.

US Taxation of Distributions

For US federal income tax purposes, distributions paid with respect to ordinary shares or ADSs (other than certain pro rata distributions of ordinary shares or rights to subscribe for ordinary shares) will be treated as a foreign-source dividend to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under US federal income tax principles). Such dividends will not be eligible for the dividends-received deduction generally allowed to corporate US Holders under the Code. The amount of the distribution will equal the US dollar value of the pounds sterling received, calculated by reference to the exchange rate in effect on the date such distribution is received (which for US Holders of ADSs will be the date such distribution is received by the Depositary), whether or not the Depositary or the US Holder in fact converts the pounds sterling received into US dollars on the date of receipt. Any gains or losses resulting from the conversion of pounds sterling into US dollars will be treated as US-source ordinary income or loss.

Subject to applicable limitations that vary depending upon a US Holder’s individual circumstances and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders in taxable years beginning before January 1, 2009 will be taxable at a maximum tax rate of 15%. Non-corporate US Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.

UK Taxation of Capital Gains

Holders of ADSs or ordinary shares who are US resident individuals or US corporations, and who are not resident or ordinarily resident in the UK for UK tax purposes, will not normally be subject to UK taxation on capital gains realized on the disposal of their ordinary shares or ADSs, unless the ordinary shares or ADSs are, or have been, used, held or acquired for the purposes of a trade, profession or

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vocation carried on in the UK through a branch or agency or a UK permanent establishment, at the time of the disposal.

US Taxation of Capital Gains

For US federal income tax purposes, a US Holder will realize capital gain or loss on the sale or other disposition of ordinary shares or ADSs in an amount equal to the difference between the amount realized and the US Holder’s tax basis in such ordinary shares or ADSs. The gain or loss, if any, will generally be US-source and will be long term capital gain or loss if the ordinary shares or ADSs were held for more than one year. US Holders should consult their own tax advisors regarding the US federal income tax treatment of capital gains, which may be taxed at lower rates than ordinary income for individuals, and capital losses, the deductibility of which is subject to limitations.

UK Inheritance Tax

Provided that any gift or estate tax due in the US is paid, the Estate and Gift Tax Convention generally relieves from UK inheritance tax (being a tax charge, broadly, on the value of an individual’s estate at his/her death and upon certain transfers of value (e.g., gifts) made by an individual during his/her lifetime (generally within seven years of death)) the transfer of ordinary shares or of ADSs where the holder of the ordinary shares or ADSs making the transfer is domiciled, for the purposes of the Estate and Gift Tax Convention, in the US and is not a national of the UK, for the purposes of the Estate and Gift Tax Convention. This will not apply if the ordinary shares or ADSs are part of the business property of an individual’s permanent establishment of an enterprise in the UK or pertain to the fixed base in the UK of a person providing independent personal services. In the unusual case where ordinary shares or ADSs are subject to both UK inheritance tax and US estate or gift tax, the Estate and Gift Tax Convention generally provides for tax paid in the UK to be credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the UK based on priority rules set forth in the Estate and Gift Tax Convention.

UK Stamp Duty and Stamp Duty Reserve Tax (“SDRT”)

No stamp duty will be payable on an instrument transferring an ADS or on a written agreement to transfer an ADS, provided that the instrument or written agreement of transfer remains at all times outside the UK and that the instrument or written agreement of transfer is not executed in the UK. No SDRT will be payable in respect of an agreement to transfer an ADS (whether made in or outside the UK). Stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the market value of the ordinary shares, where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee for such a person.

A transfer of, or an agreement to transfer, for value the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration. A transfer of ordinary shares from a nominee to its beneficial owner (including the transfer of underlying ordinary shares from the Depositary or its nominee to an ADS holder) under which no beneficial interest passes is subject to stamp duty at the fixed rate of £5 per instrument of transfer.

US Backup Withholding and Information Reporting

Payments of dividends and sales proceeds may be subject to information reporting requirements of the Code. Under US federal income tax law, such dividends and sales proceeds may also be subject to backup withholding unless the US Holder is a corporation or comes within certain exempt categories and, when required, demonstrates this fact, or provides a correct taxpayer identification number and certifies

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that no loss of exemption from backup withholding has occurred. Any amount withheld under these rules will be creditable against a US Holder’s US federal income tax liability and may entitle the US Holder to a refund, provided that the required information is furnished to the Internal Revenue Service. A US Holder who does not provide a correct taxpayer identification number may be subject to certain penalties.

DOCUMENTS ON DISPLAY

The documents concerning Bunzl which are referred to herein may be inspected at the SEC. You may read and copy any document filed or furnished by Bunzl at the SEC’s public reference rooms in Washington D.C., New York and Chicago. Please call the SEC at +1-800-SEC-0330 (+1-800-732-0330) for further information on the reference rooms. Documents filed or furnished made by Bunzl via EDGAR are available at the SEC’s website, http://www.sec.gov.

ITEM 11.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Bunzl has a centralized treasury department to control external borrowings and manage the exchange rate risk and interest rate risk. Treasury policies are approved by the Board of Directors and cover the nature of the exposure to be hedged, the types of financial instruments that may be employed and the criteria for investing and borrowing cash. The Group uses derivatives only to manage its foreign currency and interest rate risks arising from underlying business activities. No transactions of a speculative nature are undertaken. The treasury department is subject to periodic reviews by the internal audit department. Underlying policy assumptions and activities are reviewed by the executive directors. Controls over exposure changes and transaction authenticity are in place and dealings are restricted to those banks with the relevant combination of geographic presence and suitable credit rating. The Group continually monitors the credit ratings of its counterparties and credit exposure to each counter party.

Interest Rate Risk

The Group’s principal exposure to interest rate risk relates to changes in US dollar, euro and sterling interest rates. The Group’s gross borrowings as at December 31, 2005 after taking into account the impact of foreign exchange swaps were denominated as follows:

 

At December 31, 2005, after interest rate swaps, £29.1m of US dollar gross borrowings maturing within one year have a fixed interest rate of 6.4%. All other borrowings are at floating rates. The Group manages its interest rate risk by reference to its forecast net borrowings. A portfolio of interest rate caps fixing at three month intervals over a rolling 18 month period is used to reduce the impact of adverse movements. Financial liabilities with a notional principal of £211.1m were capped at December 31, 2005 (£178.2m at December 31, 2004).

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