Financial Statements - Chemring Group PLC

C H E M R I N G G R O U P P L CF I N A N C I A LS T A T E M E N T S2003

C H E M R I N G G R O U P P L CContents■ Financial Highlights■ Summary Financial Information■ Statement by the Chairman■ Review by the Chief Executive■ Review by the Finance Director■ Directors and Professional Advisers■ Directors’ Report■ Directors’ Remuneration Report■ Statement on Corporate Governance■ Independent Auditors’ Report on the Financial Statements■ Consolidated Profit and Loss Account■ Additional Financial Performance Statements■ Consolidated Balance Sheet■ Parent Balance Sheet■ Consolidated Cash Flow Statement■ Notes to the Consolidated Cash Flow Statement■ Notes to the Financial Statements■ Notice and Agenda of Annual General Meeting1236911121419222425262728293153

2 0 0 3 F I N A N C I A L S T A T E M E N T SFinancial HighlightsTurnover(£000)Profit Before Tax(£000)95,245 96,327120,5579,39912,0745,4162001 2002 20032001 2002 2003Earnings PerOrdinary Share(Pence)Shareholders’ Funds(£000)31.0453,52026.7246,014 48,67114.162001 2002 20032001 2002 2003P 1

C H E M R I N G G R O U P P L CSummary Financial Information2003£0002002£000TurnoverCountermeasuresMilitary pyrotechnicsMarine safety and securityContinuing operationsDiscontinued operations66,41119,54026,366112,3178,240120,55745,72517,94221,34585,01211,31596,327Operating profit/(loss)- Continuing- Discontinued14,256(216)14,0407,0066847,690Profit before taxation- Continuing- Discontinued11,69338112,0744,8745425,416Dividend per ordinary share7.40p6.70pBasic earnings per ordinary share31.04p14.16pBasic earnings per ordinary share - continuing30.06p12.75pDiluted earnings per ordinary share30.60p14.11pNet debt38,68147,277Shareholders’ funds53,52048,671P 2

2 0 0 3 F I N A N C I A L S T A T E M E N T SStatement by the ChairmanThis has been a very successful year forthe Group, principally due tosignificant growth in the sales andResults2003£0002002£000profitability of our threecountermeasures businesses -Chemring Countermeasures,Operating profitCredit to operating profitrelating to insurance claim14,040-2,1315,559Alloy Surfaces and Kilgore. Thisexcellent performance was achieveddespite the fact that Kilgore’s newproduction plant only resumed fullproduction in the second half.Total operating profitProfit before taxProfit after taxBasic earnings per ordinary share14,04012,0748,49631.04p7,6905,4163,81114.16pThe substantial increase in earnings ofover 100% returns us to the growthpattern achieved prior to the incidentat Kilgore in April 2001.Two non-core businesses, ChemicalCoatings and Kembrey WiringSystems, were sold in July 2003 andNovember 2003 respectively for atotal consideration of £3.4 millionafter costs.The reduction in the Group’s net debtto £39 million represents satisfactoryprogress. We are still awaiting asubstantial sum from the resolution ofthe Kilgore insurance claim, which isbeing pursued against Royal and SunAlliance (RSA), to further reduce ournet debt.During the year a substantial amountof further work has been carried outto progress our claim against RSA.Our independent forensic accountanthas arrived at his preliminaryconclusions on the total quantum ofthe claim. His valuation is notmaterially different to the original totalof our claim, to which I referred lastyear, and has received the full supportof our insurance brokers,Willis. Inaddition, substantive discussions are atlong last taking place between RSAand Willis to resolve the policycoverage issues which exist betweenthem. It is hoped that this will soonlead to final negotiations in order tosettle this matter. In light of thesepositive developments, we havereassessed our opinion on the sumrecoverable under the policy. In theevent that the matter is not settledwithin the next three months, theBoard will concentrate on thelitigation in Tennessee, which has beenrunning in parallel to other events.The Group has still not achievedsatisfaction from the BBC regardingthe totally unfounded and defamatoryallegations made on the Radio 4 TodayProgramme in May 2002. The severecriticisms by Lord Hutton of theactions of the BBC, the TodayProgramme and its correspondentAndrew Gilligan, bear a strikingresemblance to the Group’s experience.We intend to continue to press forsatisfaction from the BBC.Business ActivitiesAlloy Surfaces maintained its stronggrowth pattern, which is expected tocontinue this year. Its product range isin great demand within the US military,and the business is further expandingexports to certain permitted countries.Alloy Surfaces, in combination withKilgore, is also now entering the USmarket for ship decoys. If all theinterest currently being shown inAlloy Surfaces’ products (even beforetaking account of possible commercialaircraft applications) were to translateinto orders, it would necessitate thebuilding of a further production plant.Kilgore achieved full production inthe second half, demonstrating itsability to achieve the levels of sales andprofitability which we planned whenwe acquired the business. Kilgorehas a very strong order book and anexcellent performance is anticipatedthis year.Chemring Countermeasures had anoutstanding year, with the businessgrowing substantially in both turnoverand profit terms. The UK defenceforces remain the business’ largestcustomer but its excellent results havebeen achieved through the strength ofits export business to all parts of theworld.P 3

C H E M R I N G G R O U P P L CStatement by the Chairman- continuedRecently attention has turned to theprotection of commercial aircraft, andyour Group is heavily involved inresearch and development programmesdesigned to find solutions to thisproblem. This includes being part ofone of the three consortia which havebeen selected in the US by theDepartment of Homeland Security totake the proposed solutions to afurther stage. It is too early to predictwhat additional business could resultfrom these developments.PW Defence produced a solidperformance, with increased sales toboth the UK MoD and overseascountries.Our marine business once againdemonstrated excellent growth of over50% in electronics, where sales reached£11.3 million. The marinepyrotechnics business maintained itsmarket share and profitability in astatic market. Although the overallgrowth in profits of our marinebusiness was creditable, the combinedeffect of our robust policy on thewrite-off of development costs anddifficult, highly-competitive marketconditions meant that our internalexpectations were not met.The Chemical Coatings division ofAlloy Surfaces was successfullydisposed of during the year for£1.5 million after costs, giving riseto an exceptional profit of£0.7 million. Kembrey WiringSystems was disposed of inNovember 2003 for net assetvalue of £1.9 million.Balance Sheet andCash FlowThe Group returned to positive netcash flow in the year as Kilgorereturned to profitability. Our debt isnow at a more manageable level.However, the balance sheet will befurther strengthened by the receipt ofmonies due from RSA.PensionsThe Board has spent a considerableamount of time reviewing the Group’spension schemes - a highly complexissue. It has decided to continue toprovide and maintain its final salaryschemes for UK employees, as itbelieves that this is an attractiveemployee benefit. The Group has,however, increased employeecontributions in order to help meetthe increased costs of providing thefinal salary schemes, which have beenaffected by, amongst other things, anincrease in life expectancy. Afterconsultation with its external advisers,the Group has also agreed to makeadditional contributions to the finalsalary pension schemes, which over theduration should ensure a matching ofassets and liabilities.DividendsThe Board recommends a finaldividend of 4.85p per ordinary share, a14% increase on the final dividend forPains Wessex Australia had an excellentyear, both in defence and marine,supporting the sale and distribution ofother Group products plus its ownindigenously manufactured items.Increased Australian defence spending,together with the appointment ofPains Wessex Australia as thein-country agent for our UScountermeasures businesses, shouldensure continuing solid profitability.P 4

2 0 0 3 F I N A N C I A L S T A T E M E N T Slast year and a 10% increase on thetotal dividend. It is recognised that thedividend is now over four timescovered by retained profits and uponresolution of the insurance claim theGroup’s dividend policy will bereviewed.EmployeesLast year I stated that I believed theGroup would this year return to itsstrong earnings position of previousyears. We would not have deliveredthis achievement without the effort ofeveryone in the Group, to whom thedirectors extend their thanks.ProspectsI hope that next year I will be able toreport to shareholders thestrengthening of the balance sheetthrough the receipt of monies fromRSA.the essential part we play in defeatingground-based missiles. This is havingthe anticipated impact on our orderbook and enquiries for the future,particularly in the US.Our military pyrotechnics business, ourmarine business and our Australianoperation are expected to make furtherprogress this year. This, together withthe continuing expansion of ourcountermeasures business, should leadto another year of excellent growthfor the Group.K C Scobie - Chairman2 February 2004Last year I expressed my confidence inthe growing demand for ourcountermeasures products. Ourperformance this year and currentevents in Iraq and Afghanistan havedemonstrated clearly to the militaryP 5

C H E M R I N G G R O U P P L CReview by the Chief ExecutiveOverviewAn excellent year for the Group withall continuing operations increasingprofitability, and the disposal of theremaining non-core operationscompleted. Defence turnover was up35% to £86 million and the closingorder book was at a similar level toprovide a sound start for this year.Sales in the continuing marine safetyand security business increased by 24%,supported by 50% growth in electronicproducts sales.Kilgore resumed full operations in thesecond half. One and a half milliondecoys were produced at the newfacility during the year. Kilgorecontributed £24 million to totalcountermeasures turnover during theyear, which increased by 45% to£66.4 million.Military pyrotechnics turnoverincreased by 9% to £19.5 million,assisted by increased pyrotechnicproduct sales at Kilgore.Operational ReviewCountermeasures:Countermeasures turnoverincreased by 45% to £66.4 millionThe excellent growth in thecountermeasures business reflects ourposition as the worldwide marketThe Group’s activities are covered underthe following headings:Countermeasures:Chemring Countermeasures,Alloy Surfaces, Kilgore, Pains Wessex AustraliaMilitary Pyrotechnics: PW Defence, Kilgore,Pains Wessex AustraliaMarine Safety and Security: McMurdo Marine, ICS Electronics,McMurdo Pains Wessex,Oroquieta, Pains Wessex AustraliaTurnover by Business Area for theyear ended 31 October 2003£66.4M£19.5M£8.2M£26.4MCountermeasuresMilitary PyrotechnicsOverseas/UKSales SplitUK 24%Overseas 76%Marine Safety and SecurityDiscontinuedleader in providing expendable decoysto protect valuable military platforms.We are the pre-eminent provider ofaircraft IR expendable decoys to theUS Department of Defense. There isparticularly strong US demand for ourproducts to protect military aircraftfrom missile attack, in particular IRMan-Portable Air Defence Systems.These systems have been prevalent inthe Iraq campaign, where therecontinue to be numerous attacks onboth helicopters and fixed wingtransport aircraft.Recently there have been severalinitiatives on commercial aircraftprotection. The most significant ofthese has originated from theDepartment of Homeland Security(DHS) in the US. Alloy Surfaces isincluded in the United Airlines team,which is one of the three consortiaselected by the DHS to develop asystem to protect commercial aircraft.Decoy sales to the US militaryincreased by 33% to £31 millionduring the year. These sales accountedfor 47% of total countermeasuresturnover.Alloy Surfaces is benefiting from newprogrammes to improve helicopterprotection and increased operationaluse of its decoys in pre-emptive mode,which denies missiles the ability tolock-on and hence attack the aircraft.Alloy Surfaces is making significantinroads into the international marketwith non-US sales increasing to 30%of total sales. Major sales wererecorded in the UK, Australia, Canadaand Japan. A joint US andP 6

2 0 0 3 F I N A N C I A L S T A T E M E N T SItalian Air Force test is scheduled toevaluate Alloy Surfaces’ decoys fordeployment on Italy’s new C130Jtransport aircraft.During the year Kilgore was awardedinitial decoy production contracts forboth of the new US fighter aircraft anddevelopment contracts for decoys foremerging multi-role platforms.Alloy Surfaces and Kilgore have alsobeen selected to provide an improveddecoy for the B52 bomber.The Group has invested a total of£17.5 million in manufacturingfacilities over the last three years atKilgore and Alloy Surfaces in supportof the US defence industrial base.Further investment will be made inproduction capacity at Alloy Surfacesin 2004 to meet the increasing demandfor its products. Considerable resourcehas also been put into modelling andsimulation to improve our technologyand marketing capabilities, whichdemonstrates our ability to provide asystems solution to defeat advancedthreats across all services. Theintention is to read across elements ofthis research into the DHS requirementsfor commercial aircraft protection.Our UK based business,Chemring Countermeasures, had anexcellent year with increased exportscontributing to a 32% increase inturnover. The UK business has astrong technical capability which iscontinually bringing new products tothe market including the proprietarymodular expendable blocks forenhanced helicopter protection andchaff and flare decoys for formerSoviet Union platforms such asMiG29 fighters and Mi-24 helicopters.Chemring Countermeasures’ decoys area front runner in protecting the A400M(formerly known as the Future LargeAircraft) on order for the air forces ofBelgium, France, Germany, Italy, Spain,Turkey and the UK. The business has astrong ship decoy order book, includingIR rounds for Australia and RF forJapan. Transfer of its ship decoytechnology to our US subsidiaries isassisting penetration into the US navalmarkets, including US ForeignMilitary Sales.In the US, Kilgore won its first exportorder for IR ship decoys, and is alsosupporting the US Navy on a future IRship decoy requirement. Alloy Surfacesis supporting Northrop Grumman on alow cost modular EW system for theprotection of a wide range of vehicles.Our countermeasures activity has morethan doubled over the last four years,and we continue to invest in researchand development as well as productionfacilities to protect our prominentposition as the market leader and pursuethe many opportunities available to us.Military PyrotechnicsMilitary Pyrotechnics turnoverin the year increased by 9%to £19.5 millionOur military pyrotechnics business is atthe forefront of providing specialistmilitary pyrotechnic products used inillumination, screening, signalling andtraining. Overseas sales were 67% oftotal military pyrotechnics turnover.Despite the financial pressures ongovernments’ defence expenditure, thereis continuing strong internationaldemand for our products against abackground of political tensions whichhave increased awareness of the needfor training.Kilgore is increasing its activity inillumination and screening products fortarget and rescue applications. Kilgoreis the main supplier to the US Navy ofMk58 pyrotechnic marine locationmarkers. In addition to being used foranti-submarine warfare, the Mk58marker is used for search and rescueoperations, man-overboard markings,and for target practice at sea. Kilgorewon an additional order fromGeneral Dynamics for smoke andscreening products, and follow-onorders are expected. Kilgore is also aconduit into the US military marketfor the Group’s UK based militaryvehicle decoy and screening productsand technology, and is involved insupporting General Dynamics LandSystems on future military vehicleprotection in the high profileUS Army Future Combat Systemsprogramme.In June 2003, PW Defence secured apartnering agreement with theUK MoD covering the procurementand through-life management of themajority of the MoD’s militarypyrotechnic requirements. Theagreement is a vehicle for takingforward a number of initiatives,including improvements in the supplychain, smart procurement andmanufacturing, and full-life support.Marine Safety and SecurityMarine Safety and Securityturnover in the year increased by24% to £26.4 millionThe Group is a leading supplier ofP 7

C H E M R I N G G R O U P P L CReview by the Chief Executive- continuedlegislated marine electronic and safetyequipment worldwide for commercialand leisure markets.The marine safetyand security business is made up ofthree product groups and an emergingsystems business. The product groupsare electronics, marine safety lights andpyrotechnics. The growth in thebusiness is primarily driven byelectronics products, where the rangeof products has increased to meetincreased shipping related legislationand growth in recreational marketsboth on land and at sea. Sales ofelectronics products have doubled overthe last three years, and grew by 50%in 2003; these now represent 43% oftotal marine sales. Despite the goodgrowth overall, however, theprofitability of electronics products wasdisappointing. We have now instigatedcost saving initiatives and are focusingon increasing sales volumes to improvethe profitability. Lights andpyrotechnics markets are stable,although there was increased demandfrom military customers in the year.The Group has invested significantly inthe development of new electronicsproducts over the last three years toimprove the product range and reducemanufacturing costs. This investmentis written-off over three years.Demand for our 406MHz EPIRBs andpersonal locating beacons (PLBs) isincreasing due to a combination of thephasing out of 121.5MHz beacons, andincreasing use of 406MHz PLBs formarine, land, government, utilities andaviation use. In the US the FederalCommunications Commissionpermitted the use of PLBs nationwidefrom 1 July 2003, enabling hikers andother outdoor adventurers to use thislife-saving product. With a uniqueintegral GPS capability built into ourPLB, we will be the prime supplier ofproducts into this market area.Sales of the newly developed commercialautomatic identification system (AIS)transponder commenced in the fourthquarter. The AIS is an InternationalMaritime Organisation legislatedrequirement for carriage of automaticidentification systems capable of providinginformation automatically in the VHFmaritime band about the ship to otherships and to coastal authorities.US federal law requires a wide range ofvessels around the US coastline to carrythis equipment by the end of 2004. Theoverall market will exceed £100 millionover the next two years and we aretargeting to achieve an appreciable marketshare. Shore monitoring will also requirethe introduction of AIS base stations andmodification to existing maritime coastradio stations, which provides excellentopportunities for our emerging systemsbusiness, ICS Electronics.StrategyThe Group’s strategy is to focus ongrowing our niche businesses, where weare recognised international marketleaders, by continuing to invest inresearch and development andmanufacturing capability to enhanceand protect our strong market presence.We will support this strategy withcomplementary acquisitions to increaseour product range, services andtechnical competence as opportunitiesarise.D R Evans - Chief Executive2 February 2004P 8

2 0 0 3 F I N A N C I A L S T A T E M E N T SReview by the Finance DirectorOperating ResultsTurnover of the continuingoperations was £112.3 million(2002: £85.0 million), an increase of32%. Turnover of the discontinuedoperations was £8.2 million(2002: £11.3 million). Total Groupturnover was £120.5 million(2002: £96.3 million), an increase of 25%.Overheads are unchanged on last year at£15.8 million. Overheads of thediscontinued operations accounted forapproximately £1.5 million of the totalin both years.Net operating profits of the continuingoperations were £14.3 million(2002: £7.0 million). Net operatingmargins of the continuing operationswere 13% (2002: 8%). The discontinuedoperations produced an operating lossof £0.2 million in the year(2002: operating profit of £0.7 million).Research and DevelopmentResearch and developmentexpenditure totalled £4.7 million(2002: £4.6 million), an analysis ofwhich is set out below.The Group’sprudent policy is to write-offcapitalised development costs over athree year period. Amortisation ofdevelopment costs was £1.2 million(2002: £0.7 million).Profits on DisposalThe Chemical Coatings division ofAlloy Surfaces was sold in the year for£1.5 million after costs, giving rise to aprofit on disposal of £0.7 million. Thisprofit has been accounted for withindiscontinued operations.The Group has reassessed the amountsrecoverable in respect of the Kilgoreinsurance claim against RSA, and hasincreased the amount accrued in theGroup’s accounts by £1.1 million. Ourtotal recoverable balance stands at£7.5 million (2002: £9.6 million). Legalcosts of £0.5 million have been incurredduring the year in connection with the claim,and these have been offset against theadditional £1.1 million accrual. Thebalance of £0.6 million is accounted foras a net profit on disposal of assets whichwere destroyed in the April 2001 incident.This is summarised in the table below.InterestThe interest charge for the year was£3.4 million (2002: £3.5 million).Interest was covered 4.1 times(2002: 2.2 times) by operating profit.It is estimated that the Group incurredapproximately £0.5 million(2002: £0.6 million) of interest duringthe year which would not have beenincurred if the Kilgore insurance claimhad been settled by RSA.TaxationThe tax charge of £3.6 million(2002: £1.6 million) represents aneffective rate of 30% (2002: 30%).Tax losses at Kilgore were used to offsettaxable profits at Alloy Surfaces andthereby reduce tax payments in the US.It is anticipated that tax rates will rise toaround 32% in the current financial year,due to the incidence of higher profits inthe US.PensionsIn accordance with FRS17 Accounting forpension costs, the Group has disclosed theadditional information required inNote 9 of the financial statements.Under FRS17, the calculated deficit onthe Group’s two defined benefit pensionschemes after tax was £9.9 million(2002: £9.4 million).Actuarial valuations as at 6 April 2003 forboth defined benefit schemes are inprogress and will be finalised by the halfyear. Although the Chemring GroupStaff Pension Scheme, which is by far thelarger of the two, was in surplus at thelast valuation, it is anticipated that bothschemes will show deficits on the 2003valuations. The Board has thereforetaken action to increase its pensioncontributions with effect fromResearch and Development2003£m2002£mProfits on Disposal2003£m2002£mCustomer funded research and developmentNon-funded research and developmentCapitalised development costsTotal research and development expenditure1.91.61.24.71.42.21.04.6Material damage proceeds in excessof net book value of assetsLegal expenses incurredNet profit on disposal1.1(0.5)0.61.7(0.6)1.1P 9

C H E M R I N G G R O U P P L CReview by the Finance Director- continued1 January 2004. Employers’ contributionsto the Staff Pension Scheme have beenincreased to 16% from 11.5%, and theGroup has also agreed to pay anadditional £15,000 per month to theStaff Pension Scheme and an additional£6,000 per month to the ExecutivePension Scheme. The impact of theseincreased contributions over the currentand future financial years is in theregion of £0.5 million per annum.Employees’ contributions to the StaffPension Scheme have been increasedfrom 6% to 8%, and 8% employees’contributions have been introduced forthe Executive Pension Scheme.The Board is also reviewing the cashflows associated with the pensionschemes, and taking into account theincreased contributions and theassumptions made in the cash flowmodel, the schemes should remain cashpositive for each year over the nexttwenty years.Shareholder ReturnsEarnings per ordinary share were31.04p (2002: 14.16p). Earnings perordinary share of the continuingoperations were 30.06p (2002: 12.75p).The dividend per ordinary share of7.40p (2002: 6.70p) is covered 4.2 times(2002: 2.1 times).The total shareholder return forthe Group over the five years to31 October 2003 has outperformed theFTSE Small Cap Index for the sameperiod by 209%.Shareholders’ funds at the yearend were £53.5 million(2002: £48.7 million).Cash Flow and GearingOperating cash flow was £18.1 million(2002: £10.1 million), representing aconversion rate from operating profit of129% (2002: 131%). Operating cash flowwas particularly strong in the second halfof the year, with the predicted return toprofitability of Kilgore being convertedinto cash flow. Working capital balanceshave broadly remained the same as lastyear, despite the substantial growth in theGroup turnover.Tangible fixed asset expenditurein the year was £5.4 million(2002: £13.1 million).Net debt fell to £38.7 million(2002: £47.3 million). Gearing was 72%(2002: 97%).Foreign ExchangeThe Group’s principal foreign exchangeexposure is to the US dollar. During theyear sterling appreciated by 8% againstthe dollar, leading to reduced profits fromthe US on translation of the results intosterling. The impact on the Group’s salesand profit before tax was approximately 3%.Contracts have been entered into untilthe end of the current financial year toreduce the Group’s exposure to furtherdepreciation of the dollar against sterling.Post Balance Sheet EventOn 8 November 2003, the entire issuedshare capital of Kembrey Wiring SystemsLimited was sold for net asset value of£1.9 million. Cash consideration of£1.2 million was paid on completionand a further £0.2 million was paid inJanuary 2004. The balance of theconsideration of £0.5 million is payablein two instalments on the anniversary ofcompletion in November 2004 andNovember 2005. The net assets aresubject to a post completion workingcapital adjustment with any surpluses ordeficits to net assets being adjusted viathe deferred consideration.As a consequence of the disposalprocess, the Group agreed to pay£0.5 million to the Chemring GroupStaff Pension Scheme. This cost will beaccounted for in future results.FacilitiesThe Group has agreed total facilities of£49 million with Bank of Scotland toprovide funding and working capital forthe UK businesses and Kilgore. Inaddition, facilities of £7.1 million are inplace with Wilmington Trust andPennsylvania Industrial DevelopmentAuthority to provide funding forAlloy Surfaces, and facilities of£0.6 million in Australia providefunding for Pains Wessex Australia.The Board has reviewed the latestguidance on going concern andconsiders that the above facilitiesprovide the Group with adequateresources.International AccountingStandardsThe Group is monitoring the proposedmove to International AccountingStandards from 2005 and is assessingthe impact on its financial statements.P A Rayner - Finance Director2 February 2004P 10

2 0 0 3 F I N A N C I A L S T A T E M E N T SDirectors and Professional AdvisersNon-Executive ChairmanKenneth C ScobieJoined the Group as Non-ExecutiveChairman in June 1997. FormerChairman of Allied Leisure plc and theExecutive Board of the Scottish RugbyUnion. Chairman and Chief Executiveof a wide range of industrial companiessince 1972.Aged 65.Executive DirectorsDavid R EvansChief ExecutiveJoined the Group in 1987 as ManagingDirector of the Countermeasuresbusiness and appointed to the Board in1988. Became Chief Executive in 1999.Managing Director of the Marconitorpedo business prior to joiningthe Group.Aged 57.Non-Executive DirectorsPeter J MolonyChief Executive of the Group fromJune 1997 to January 1999. Previousappointments include Finance Directorof Scottish & Newcastle plc andRolls-Royce plc.Aged 66.General Sir John Stibbon KCB OBEJoined the Group as a non-executivedirector in December 1993.Non-Executive Chairman ofITT Defence Limited.Former Chief Royal Engineer.Aged 69.SecretarySarah Ellard ACISProfessional AdvisersAuditorsDeloitte & Touche LLPSolicitorsAshurst, LondonSeyfarth Shaw,WashingtonBankersBank of Scotland, SouthamptonStockbrokersInvestec Henderson Crosthwaite, LondonHeadquarters andRegistered Office1650 Parkway,Whiteley, FarehamHampshire PO15 7AH, EnglandTel: +44 1489 881880Fax: +44 1489 881123Website: www.chemring.co.ukTimothy W HayterChief Operating OfficerJoined the Group in November 2001 asChief Operating Officer.Chartered Engineer. Formerlyemployed by Rolls-Royce plc andDynacast International Limited.Aged 44.Paul A Rayner FCAFinance DirectorJoined the Group in June 1994 andacted as Finance Director to severalGroup companies before beingappointed to the Board in August 1999.Formerly a Senior Audit Manager withDeloitte & Touche.Aged 42.Registration Number86662RegistrarsComputershare Investor Services PLC7th Floor, Jupiter HouseTriton Court14 Finsbury SquareLondon EC2A 1BRP 11

C H E M R I N G G R O U P P L CDirectors’ Reportfor the year ended 31 October 2003Your directors present the financialstatements of the Group for the yearended 31 October 2003.Principal ActivitiesThe principal activities of the Group arethe design, manufacture and sale ofcountermeasures, military pyrotechnics,and marine safety and security products.Review of the Yearand ResultsA review of the year can be found inthe Chairman’s Statement, theChief Executive’s Review and theFinance Director’s Review on pages 3 to 10.DividendsThe directors recommend a final dividendof 4.85p per ordinary share, whichtogether with the interim dividend of2.55p per ordinary share paid inSeptember 2003, gives a total for the yearof 7.40p (2002: 6.70p).Directors and their InterestsThe present directors are shown onpage 11.Mr K C Scobie andGeneral Sir John Stibbon will be retiringby rotation at the forthcoming AnnualGeneral Meeting and will be offeringthemselves for re-election. The detailsof their service contracts with theCompany are set out in theDirectors’ Remuneration Reporton pages 14 to 18.None of the directors had a beneficialinterest in any contract of significance towhich the Group was a party during theyear to 31 October 2003.Information required as to directors’shareholdings is set out in theDirectors’ Remuneration Report.Substantial ShareholdersAt 2 February 2004 the followinginterests in the ordinary share capital ofthe Company exceeding 3% had beennotified to the Company under theprovisions of section 198 of theCompanies Act 1985:NameDeutsche Bank AGStandard Life GroupPrudential Corporation PLCLegal & General InvestmentManagementEmployeesThe Group pursues a policy of employeecommunication through meetings(including team briefings and workscouncils) and in-house magazines bywhich employees are made aware of theprogress of the Group and the companiesin which they work.The Group employs disabled personswherever circumstances permit, and fulland fair consideration is given toapplications for employment by disabledpersons having regard to their particularaptitudes and disabilities. Disabledpersons in employment receive equaltreatment to that afforded to otheremployees.Environment%Interest13.811.65.84.3The Group recognises that environmentalissues are of fundamental importance to asuccessful and responsible businessstrategy, and it is committed, through aprocess of continual improvement, tominimising the environmental impact ofits operations. In line with thiscommitment, the Group’s businessesare striving towards:■ designing and developing productswhich have the minimal environmentalimpact during their manufacture, useand subsequent disposal■ minimising energy usage and wastewherever practicable■ reusing or recycling materialswherever practicable■ purchasing goods and services fromenvironmentally responsible suppliers■ monitoring progress on environmentalmatters using external and internalauditing.Charitable and PoliticalDonationsCharitable donations amounting to£3,650 (2002: £2,440) were madeduring the year. No political donationswere made during the year (2002: £nil).Policy on Payment ofSuppliersIt is the policy of the Group that each ofthe Group companies should agreeappropriate terms and conditions for itstransactions with suppliers. These willrange from standard written terms toindividually negotiated contracts.Creditor days as at 31 October 2003amounted to 78 days (2002: 61 days).The Chemring 1998Executive Share OptionSchemeOn 5 February 2003, options weregranted over 100,000 ordinary shares tosenior employees of the Group.Additional information is set out inNote 23.P 12

2 0 0 3 F I N A N C I A L S T A T E M E N T SThe Chemring Group PLCShare Based IncentiveScheme (“The ESOP”)No options were granted in the year to31 October 2003. During the yearoptions on 8,616 shares were exercised.Additional information is set out inNote 23.Share CapitalYour Board has decided to seekshareholders’ approval to an increase inthe Company’s authorised share capital bythe creation of 3,000,000 new ordinaryshares of 5p each. The purpose of thisproposal is to ensure that the Board willhave sufficient authorised share capitalavailable to issue shares on the exercise ofoptions under the share option scheme,and if the need should arise, to issueshares as part of the consideration for anyfuture acquisitions.Under the provisions of section 80 of theCompanies Act 1985 (‘the Act’) theBoard is prevented from exercising itspowers under the Articles of Association(‘the Articles’) to allot shares without anauthority in terms of the Act containedeither in the Articles or in a resolution ofthe shareholders in general meeting.Theauthority, when given, can last for amaximum period of five years, but yourBoard proposes that renewal should besought at each annual general meeting.Such proposal is set out as resolution 8 inthe notice of meeting.made without the necessity of convening ageneral meeting, your Board proposes thatadvantage be taken of the provisions ofsection 95 of the Act to disapply the Act’spre-emptive requirements. Accordingly, aspecial resolution (set out as resolution 9 inthe notice of meeting) will be proposedwhich, if passed, will have the effect ofgranting the directors the power to allotnot more than 5% of the present issuedordinary share capital free of therequirements of section 89 of the Act.No issue of these shares will be madewhich would effectively alter the controlof the Company without prior approval ofthe shareholders in general meeting.Statement of Directors’ResponsibilitiesThe directors are required by theCompanies Act 1985 to prepare financialstatements for each financial year whichgive a true and fair view of the state ofaffairs of the Company and the Group asat the end of the financial year and of theGroup’s profit or loss for that period. It isalso the directors’ responsibility tomaintain adequate accounting recordswhich disclose with reasonable accuracythe financial position of the Company andthe Group, to ensure that the financialstatements comply with theCompanies Act 1985, safeguard theassets of the Company and the Group,and prevent and detect fraud and otherirregularities, and prepare the financialstatements on a going concern basis.Close Company ProvisionsAs far as the directors are aware, the closecompany provisions of the Taxes Acts donot apply to the Group nor has there beenany change in that respect since31 October 2003.AuditorsOn 1 August 2003, Deloitte & Touchetransferred their business toDeloitte & Touche LLP, a limited liabilitypartnership incorporated under the LimitedLiability Partnerships Act 2000. TheGroup’s consent has been given to treat theappointment ofDeloitte & Touche as extendingto Deloitte & Touche LLP with effectfrom 1 August 2003 under the provisionsof section 26(5) of the Companies Act 1989.Accordingly a resolution to re-appointDeloitte & Touche LLP will be proposed atthe forthcoming Annual General Meeting.Approved by the Board of Directors on2 February 2004.Signed on behalf of the BoardS L Ellard - SecretarySection 89 of the Act requires that anallotment of shares for cash may not bemade unless the shares are first offered toexisting shareholders on a pre-emptivebasis in accordance with the terms of theAct. In accordance with general practice,to ensure that small issues of shares can beThe directors confirm that suitableaccounting policies, consistently appliedand supported by reasonable and prudentjudgments and estimates, have been usedin the preparation of the financialstatements, and that applicable accountingstandards have been followed.P 13

C H E M R I N G G R O U P P L CDirectors’ Remuneration Reportfor the year ended 31 October 2003This report sets out the informationrequired by the Directors’ RemunerationReport Regulations 2002(“the Regulations”). As required bythe Regulations, the Directors’Remuneration Report will be submittedto shareholders for approval at theAnnual General Meeting on23 March 2004.Unaudited InformationRemuneration CommitteeThe Remuneration Committeecomprises the three non-executivedirectors and is chaired byMr K C Scobie. The Committeedetermines the remuneration packages ofthe executive directors and also reviewsremuneration packages for seniormanagement. None of the Committeemembers has any personal financialinterest in the matters reserved for theCommittee, nor do they have anyconflicts of interest arising fromcross-directorships, and they are notinvolved in the day to day running ofthe Group’s business.The Committee met five times duringthe year. The Chief Executive attendsmeetings by invitation but is not presentduring any discussions relating to hisown remuneration. During the year theCommittee received advice onremuneration matters fromNew Bridge Street Consultants andAon Consulting. The Committee alsoconsults internally with theChief Executive and the Company Secretary.Remuneration Policy forExecutive DirectorsThe Committee’s policy is to provideexecutive remuneration packages whichare competitive, but not excessive, byreference to market rates, reflect theperformance of the business againstfinancial objectives, and which take intoaccount the individual contribution andperformance of each executive director.Remuneration packages comprise thefollowing elements:(i) basic salary and benefits;(ii) annual bonuses linked to theGroup’s financial performance; and(iii) awards of share options linked tothe long term growth of the Group.The performance-related elements of thebonuses and share options are intendedto align the interests of executivedirectors with those of shareholders.Basic Salaries and BenefitsThe executive directors’ basic salaries arereviewed annually by the Committee,and adjustments made as appropriatetaking into account individualperformance and comparable salary levelsin manufacturing companies of a similarsize and in other companies within theaerospace and defence sector. TheCommittee refers to published salarysurveys and also reviews theremuneration information presented inthe annual reports of companies in thereference group.The main taxable benefits for executivedirectors are company cars, fuel forprivate motoring and private medicalinsurance.Annual BonusesThe Company operates an annualperformance-related bonus plan for theexecutive directors. Under thisarrangement, bonuses are paid basedupon the achievement of predeterminedtargets for earnings per share andreductions in the Group’s netindebtedness. The maximum bonuswhich can be earned is 45% of basicsalary. Bonuses are non-pensionable.The performance measures for the bonusplan are reviewed annually by theCommittee. The bonus plan willcontinue to be based upon earnings pershare and reduction of net debt in 2004.Share Option SchemeThe Company operates an executiveshare option scheme (The Chemring1998 Executive Share Option Scheme),under which both Inland Revenueapproved and unapproved options maybe granted. Participation in this schemeis extended to the executive directorsand senior management of the Group.In determining whether to grant optionsto an individual and the number ofoptions to be granted, the Committeetakes into account their level of senioritywithin the organisation and theanticipated contribution by thatindividual to the long term performanceof the Group.In order to align the interests ofparticipants in the scheme with those ofthe Company’s shareholders, options canonly be exercised under the schemesubject to a performance condition.All options granted to date have beenissued subject to a performancecondition which requires the growth inthe Company’s earnings per share toexceed RPI by 9% over a consecutivethree year period prior to exercise.Options are normally exercisablebetween the third and tenth anniversaryof their grant.P 14

2 0 0 3 F I N A N C I A L S T A T E M E N T SThe Committee continues to believethat a performance condition linked togrowth in earnings per share is anappropriate basis upon which to rewardthe executive directors for a measurableincrease in the performance of theGroup. However, taking into accountcurrent market practice and institutionalshareholders’ views on this subject, it islikely that a more demandingperformance condition requiringincreased growth in earnings per sharewill be applied to future option grantsunder the scheme.Long Term IncentiveSchemeThe Company previously operated along term incentive scheme known asThe Chemring Group PLC Share BasedIncentive Scheme. This scheme is notbeing utilised for executive directors atpresent.Performance GraphThe graph alongside shows acomparison of the Company’s totalshareholder return (TSR) over the lastfive financial years against a “broadequity market index”, as required by theRegulations. The FTSE Small CapIndex has been selected by theCommittee for this comparison becauseit provides the most appropriate measureof performance of listed companies of asimilar size to the Company.pension of up to two-thirds of salary,subject to Inland Revenue limits. TheExecutive Scheme also provides lifeassurance cover, dependants’ pensionsand lump sum payments ondeath-in-service.Mr Evans’ benefits under the ExecutiveScheme accrue based on a pension oftwo-thirds final pensionable salary withno cash commutation, and a 50%spouse’s pension, in respect of hismembership of the scheme from10 August 1987 to 5 April 1993. Forservice thereafter, his benefit accrual isbased on a pension of 50% finalpensionable salary plus 1.5 times finalpensionable salary as cash, and atwo-thirds spouse’s pension. For serviceaccrued from 1 February 2004 thespouse’s pension reduces to 50%. Anyexcess of cash over the Inland Revenuepermitted maximum is converted backto pension at the rate of £12 cash toTotal Shareholder ReturnValue(£)40035030025020015010050Mr Rayner’s pension under theExecutive Scheme accrues at 1/80th offinal pensionable salary for each year ofmembership, and he also accrues a cashlump sum of 3/80ths of final pensionablesalary for each year of membership. Atwo-thirds spouse’s pension is payable inrespect of service accrued to31 January 2004, reducing to 50% forservice accrued thereafter, and ondeath-in-service, Mr Rayner’s dependantswould receive a lump sum payment oftwo times basic salary and, in addition aspouse’s pension would be payable, ascalculated above. Mr Rayner is subject tothe earnings cap in respect of hismembership of the Executive Scheme.All pensions in payment in respect ofpensionable service accrued under theExecutive Scheme after 6 April 1993 areincreased by the lower of RPI or5% per annum.031 Oct 98 31 Oct 99 31 Oct 00 31 Oct 01 31 Oct 02 31 Oct 03Chemring Group PLCFTSE Small Cap IndexThe graph shows the value, by 31 October 2003, of £100 invested in the Company’s shares on31 October 1998 compared with the value of £100 invested in the FTSE Small Cap Index.PensionsMr Evans and Mr Rayner are membersof the Chemring Group ExecutivePension Scheme (“the ExecutiveScheme”). This is an approved finalsalary scheme providing, at retirement, a£1 pension. On death-in-service,Mr Evans’ dependants would receive alump sum payment of four times basicsalary and, in addition a spouse’s pensionwould be payable, as calculated above.Mr Evans has a normal retirement age of 60.Prior to 1 October 2003, the ExecutiveScheme was non-contributory. Witheffect from that date, members havebeen required to make monthlycontributions to the scheme at the rateof 6% of pensionable salary.P 15

C H E M R I N G G R O U P P L CDirectors’ Remuneration Report- continuedThis has been increased to 8% witheffect from 1 February 2004.Mr Hayter became a member of theChemring Group Staff PensionScheme (“the Staff Scheme”) on1 October 2003, although his benefitshave been backdated to1 November 2001, being the date of hisappointment. The Staff Scheme is alsoan approved final salary scheme but iscontracted out of the State SecondPension. Mr Hayter’s benefits underthe Staff Scheme accrue in an identicalmanner to that in which Mr Rayneraccrues benefits under the ExecutiveScheme, as set out above. Mr Hayter isalso subject to the earnings cap.Prior to 1 February 2004, memberswere required to make monthlycontributions to the Staff Scheme atthe rate of 6% of pensionable salary.With effect from that date, this hasbeen increased to 8%.Both Mr Hayter and Mr Rayner havea normal retirement age of 65.Service ContractsMr Evans has a service contractwith the Company dated10 December 1991, which is due toexpire on his 60th birthday on27 October 2006. The contract isterminable on two years’ notice by theCompany and on twelve months’notice by Mr Evans. The Committeebelieves that Mr Evans’ notice period,which was agreed with him in 1994,remains appropriate and in line withthe requirements of the Company,particularly as Mr Evans’ currentservice contract will expire in 2006in any event.Mr Hayter and Mr Rayner haverolling service contracts dated12 December 2001 and27 August 1999 respectively. Theseprovide for termination by eitherparty on twelve months’ notice.The executive directors’ servicecontracts provide that the Companymay make a payment in lieu of theircontractual notice period but there areno other provisions relating tocompensation on early termination.Non-ExecutiveDirectorsFees for the non-executive directorsare determined annually by the Board.The fees payable to Mr Molony andGeneral Sir John Stibbon wereincreased from £20,000 per annum to£25,000 per annum with effect from1 October 2003.The Company provides privatemedical insurance forGeneral Sir John Stibbon andhis spouse.Mr Molony and General Sir John Stibbondo not have service contracts withthe Company.Mr Scobie has a rolling servicecontract with the Company terminableon twelve months’ notice by eitherparty. His remuneration under thecontract, part of which is paid to hiscompany for consultancy services, wasincreased from £55,000 per annum for50 days’ service to £80,000 per annumwith effect from 1 October 2003.Additional services are paid for at therate of £1,000 per day.The non-executive directors do notnormally participate in the Company'sbonus and share option schemes.However, a long term incentivescheme, known as The ChemringGroup Phantom Share OptionScheme, was established in 1997 tosecure the appointment of Mr Scobieas Chairman at a difficult time whenthe Group was undergoing afundamental reorganisation.Mr Scobie, who will be the onlyparticipant in the scheme, acquireda contractual entitlement on hisappointment to the grant of phantomoptions over 141,025 ordinary sharesin the Company at a notional exerciseprice of 78p per share. On exercise ofthe phantom options at least threeyears after the date of grant, Mr Scobiewill be entitled to a cash payment fromthe Company equivalent to thedifference between the then currentmarket value of the ordinary shares lessthe total exercise price. The schemehas a performance condition linked togrowth in earnings per share, whichmust be greater than RPI for a threeyear period prior to exercise. It is notenvisaged that any further awards willbe made under this scheme.P 16

2 0 0 3 F I N A N C I A L S T A T E M E N T SAudited InformationDirectors’ EmolumentsThe emoluments of all the directors who served during the year are shown below:Salariesand feesCashbonusesTaxablebenefitsTotalExecutivesD R Evans2003£0001752002£0001752003£000202002£000-2003£000242002£000182003£0002192002£000193T W Hayter12212018-7013210133P A Rayner11210716-1613144120Non-executivesP J Molony2020----2020K C Scobie5756----5756J Stibbon2020--222222Total remuneration50649854-11246672544Amounts shown above in the salaries and fees column relate to basic salary in the case of executive directors and fees in the case ofnon-executive directors.Mr Scobie’s remuneration includes payments to his company, K C Scobie Limited, in respect of his consultancy services. In addition tothe remuneration shown above, Mr Scobie has a long term incentive scheme, details of which are given on page 16, in respect of whichthe Group had accrued £420,000 (2002: £268,000) as at 31 October 2003. £152,000 (2002: credit of £123,000) was charged to the profitand loss account during the year in respect of Mr Scobie’s long term incentive scheme, reflecting the increase in the Group’s share priceduring the period and the increase in the cash amount to be paid to Mr Scobie on exercise of his phantom options.Mr Hayter received £58,000 in respect of relocation expenses during the year, which has been included within taxable benefits inthe table above.Directors’ Share InterestsThe interests of the directors in the ordinary shares of the Company at 1 November 2002 and 31 October 2003 are shown below.All are beneficial holdings.20032002NumberNumberD R EvansT W HayterP J MolonyP A RaynerK C ScobieJ Stibbon85,9975,000-11,500134,864-89,9975,000-11,500129,864-No movements have taken place between 31 October 2003 and 2 February 2004.In addition to the interests detailed above, by the virtue of section 324 of the Companies Act 1985, all the executive directors aretechnically deemed to be interested in all of the shares held by the Trustee of The Chemring Group PLC Share Based Incentive Scheme.P 17

C H E M R I N G G R O U P P L CDirectors’ Remuneration Report- continuedShare OptionsThe holdings by the executive directors of share options granted under The Chemring 1998 Executive Share Option Schemeat 1 November 2002 and 31 October 2003 are shown below.At1 Nov2002GrantedduringtheyearNumber of share optionsLapsedduring Exercisedthe during theyear yearAt31 Oct2003Exerciseprice (p)Marketprice atdate ofexercise (p)DatefromwhichexercisableExpirydateD R Evans100,000---100,000236-3 Feb 20032 Feb 2010T W Hayter54,000---54,000380.5-23 Jan 200522 Jan 2012P A Rayner50,000---50,000236-3 Feb 20032 Feb 2010The market price of the Company’s ordinary shares at 31 October 2003 was 378.5p. During the year, the ordinary shares tradedwithin the range 218.5p to 433.5p.PensionsThe following table sets out the pension benefits accrued by the executive directors during the year.Totalaccruedbenefit at31 Oct 2002Transfervalue ofaccruedbenefit at31 Oct2002Increase in accruedbenefit during yearbefore inflationTotalaccruedbenefit at31 Oct 2003Transfervalue ofaccruedbenefit at31 Oct2003Increase in accruedbenefit during yearafter inflationTransfervalue ofincreasein accruedbenefit afterinflation(lessmembers’contributions)Increase intransfervalueduringyear (lessmembers’contributions)Pension(£p.a.)Cash(£)(£)Pension(£p.a.)Cash(£)Pension(£p.a.)Cash(£)(£)Pension(£p.a.)Cash(£)(£)(£)D R Evans81,476108,8041,340,9965,6537,17487,129115,9781,495,9903,0394,34553,181154,066T W Hayter---2,4757,4252,4757,42518,9542,4757,42514,03114,031P A Rayner9,51928,556107,3972,1346,40311,65334,959134,9761,8875,6608,69627,084i) Transfer values represent liabilities of the applicable scheme, and do not represent sums paid to the individuals.ii) Transfer values have been calculated on the basis of actuarial advice. During the year, the basis on which transfer values are calculated was updated.For consistency, all transfer values have been calculated on the new basis, based on financial conditions at the respective dates.iii) As referred to previously, Mr Hayter only joined the Staff Pension Scheme on 1 October 2003 but his benefits have been backdated to 1 November 2001.The figures above represent his total accrued benefits.Approval of the Directors’ Remuneration ReportThe Directors’ Remuneration Report was approved by the Board on 2 February 2004.Signed on behalf of the BoardK C Scobie - Chairman of the Remuneration CommitteeP 18

2 0 0 3 F I N A N C I A L S T A T E M E N T SStatement on Corporate GovernanceThis statement sets out how theCompany has applied the fourteenprinciples of good governance set outin Part 1 of the Combined Code, andwhether or not the Company hascomplied throughout its accountingperiod with the provisions set out inPart 2 of the Combined Code.Application of thePrinciples of theCombined CodeThe Board of DirectorsThe Board currently comprises threeexecutive and three non-executivedirectors. The Board, which meetsformally at least ten times a year,approves the Group’s long term goalsand strategies and provides overallfinancial and organisational control.Matters specifically reserved to theBoard include acquisitions anddisposals, financing, major capitalexpenditure and approval of annualbudgets.All directors are entitled to takeindependent advice in furtherance oftheir duties at the Company’s expenseif the need should arise, and eachdirector has full access to the adviceand services of the Company Secretary.The Company meets the cost ofappropriate training for directors andnewly-appointed directors are providedwith detailed information on theirduties and responsibilities.The Company separates the roles ofChairman and Chief Executive inaccordance with the recommendationsof the Combined Code. TheCombined Code requires that themajority of non-executive directorsshould be independent of managementand free from any business or otherrelationship which could materiallyinterfere with the exercise of theirindependent judgment. The Boardbelieves that all three non-executivedirectors currently satisfy theserequirements.The non-executive directors performan essential role in safeguardingshareholders’ interests by monitoringthe Group’s performance and itsexecutive management. In addition toparticipating in Board meetings, theyare the members of the standingcommittees set up to deal with auditand the remuneration of executivedirectors and senior management.The Board is satisfied that the presentbalance of executive andnon-executive influence which existsis appropriate for the Company, takinginto account its size and status.Directors’ RemunerationDetails of the Company’s policy ondirectors’ remuneration are set out inthe Directors’ Remuneration Reporton pages 14 to 18.Relations with ShareholdersThe Company encourages dialoguewith institutional shareholders throughregular briefing meetings and formalpresentations following the release ofinterim and annual results.Communication with private investorsis achieved largely through themedium of the interim report and thefinancial statements. The Company’swebsite (www.chemring.co.uk) alsoprovides financial and businessinformation on the Group.All directors are available to takequestions from shareholders or addressany concerns at the AGM. At othertimes of the year, the directors can becontacted via the Company’s headoffice.Financial ReportingThe statement of directors’responsibilities in respect of thefinancial statements and accountingrecords maintained by the Company isset out on page 13.Internal ControlThe Combined Code has introduced arequirement that the directors reviewthe effectiveness of the Group’s systemsof internal control at least annually.This extends the previous requirementsin respect of internal financial controlsto cover all controls includingoperational controls, compliance andrisk management.The Board acknowledges itsresponsibility for the Group’s systems ofinternal control and attachesconsiderable importance to thesesystems, which are designed to meet theGroup’s particular needs and identifythose risks to which it is exposed.However, the systems can only providereasonable, not absolute, assuranceagainst material misstatement, loss ormismanagement of the Group’s assets.In carrying out its review of theeffectiveness of the Group’s systems ofinternal control, the Board has takeninto consideration the following keyfeatures of the Group’s riskmanagement systems and controlprocedures which operated duringthe year:P 19

C H E M R I N G G R O U P P L CStatement on Corporate Governance- continued■ The Board assesses the key risksassociated with achievement of theGroup’s business objectives as partof the annual strategic planningprocess. Out of this process, eachbusiness establishes a three year planand annual budget, which aresubject to approval by the Board.The performance of each businessagainst budget and prior years isreviewed on a monthly basis at bothoperational level and by the Board.Achievement of strategic businessobjectives and the associated risksare monitored by the Board on anongoing basis.■ All businesses hold monthlyoperating meetings, which areattended by at least one main Boarddirector, either in person or, in thecase of the overseas companies, byvideo conference. In the case of theUS businesses, formal Boardmeetings are held quarterly andthese are attended by both mainBoard directors and externalnon-executive directors appointedin the US. The US non-executivedirectors are available to provideguidance and monitor governancein the US businesses throughoutthe year.■ Each business is required to complywith the Group’s accounting policymanual, which sets out formalprocedures for incurring certaintypes of expenditure and makingcontractual commitments.Compliance with the accountingpolicy manual is reviewed by boththe Audit Committee and thefull Board.■ The Board retains primaryresponsibility for acquisitions anddisposals, and financingarrangements for the Group.Treasury management, IT strategy,insurance and significant legalmatters are dealt with centrally fromthe Group head office, and theBoard receives regular reports oneach of these items. Reviews of theGroup’s pensions, insurance and riskmanagement arrangements arecarried out by external advisers ona regular basis.■ A dedicated Group Health andSafety Manager, supported by aGroup Health and SafetyManagement Committee,co-ordinates and controls theactivities of each business in relationto health and safety, which is a keyfocus for the Board in view of thenature of the Group’s operations.A sub-committee of the main Boardhas also been constituted to focusspecifically on safety. Externalauditors carry out an annual reviewof the health and safety managementsystems at each of the Group’soperations.■ A Risk Management Committeeco-ordinates and reports to theBoard on the risk controlprocedures implemented by eachbusiness at an operational level.The Board confirms that it hasreviewed the effectiveness of theGroup’s systems of internal control andrisk management which were in placeduring the financial year ended31 October 2003, and it confirms thatsystems of internal control and riskmanagement compliant with theCombined Code and the TurnbullGuidance were in place throughoutthe year and have remained in placeup to the date of approval of thesefinancial statements. Notwithstandingthis, the Board will continue to takesteps to embed internal control andrisk management further into theoperations of the Group and to dealwith any areas of improvementwhich come to the attention ofmanagement and the Board.Audit Committee and AuditorsThe Company has an establishedAudit Committee, of which all threenon-executive directors aremembers. The Audit Committeemeets at least twice a year andoperates within formal written termsof reference. Meetings are attendedby the external auditors and theFinance Director by invitation. TheAudit Committee considers mattersrelating to the interim and annualresults, and also reviews internal andexternal audit requirements. TheAudit Committee has considered theneed for a dedicated internal auditfunction and has concluded that thisfunction is adequately covered byexisting procedures and controls atthe present time.Compliance with theProvisions of theCombined CodeThe directors confirm that theCompany has complied throughoutthe year with the provisions of theCombined Code, with the followingexceptions (references to the relevantP 20

2 0 0 3 F I N A N C I A L S T A T E M E N T Ssections of the Combined Code aregiven in brackets):■ The Board has not nominated anon-executive director as the SeniorIndependent Director. Thisrequirement will be kept underreview (A.2.1).■ In view of its size, the Boardconsiders that the appointment ofnew directors should be a matter forconsideration by the Board as awhole and accordingly aNominations Committee has notbeen established (A.5.1).■ Mr Scobie’s appointment asNon-Executive Chairman is not fora specified term; however, he issubject to retirement by rotation (A.6.1).Going ConcernThe directors have acknowledged thelatest guidance on going concern and,after making appropriate enquiries,have formed a judgment at the time ofapproving the financial statements thatthere is a reasonable expectation thatthe Company has adequate resourcesto continue in operational existencefor the foreseeable future. Accordingly,they continue to adopt the goingconcern basis in preparing the financialstatements.Approved by the Board of Directorson 2 February 2004.Signed on behalf of the BoardS L Ellard - Secretary■ Mr Evans has a service contract witha notice period in excess of oneyear, details of which are disclosed inthe Directors’ Remuneration Report(B.1.7).The directors have considered therequirements of the revised CombinedCode, incorporating therecommendations made in the Higgsand Smith reports, and are taking stepsto achieve compliance for the financialyear ending 31 October 2004.P 21

C H E M R I N G G R O U P P L CIndependent Auditors’ Report on theFinancial Statementsfor the year ended 31 October 2003Independent Auditors’Report to the Members ofChemring Group PLCWe have audited the financialstatements of Chemring Group PLCfor the year ended 31 October 2003which comprise the profit and lossaccount, the balance sheets, theconsolidated cash flow statement, thestatement of total recognised gains andlosses and the related notes 1 to 29,together with the reconciliation ofmovements in shareholders’ funds andthe notes to the cash flow statement.These financial statements have beenprepared under the accounting policiesset out therein. We have also auditedthe information in the part of theDirectors’ Remuneration Report thatis described as having been audited.This report is made solely to theCompany’s members, as a body, inaccordance with section 235 of theCompanies Act 1985. Our audit workhas been undertaken so that we mightstate to the Company’s members thosematters we are required to state tothem in an auditors’ report and for noother purpose. To the fullest extentpermitted by law, we do not accept orassume responsibility to anyone otherthan the Company and the Company’smembers as a body, for our audit work,for this report, or for the opinions wehave formed.Respective responsibilities ofdirectors and auditorsAs described in the statement ofdirectors’ responsibilities, theCompany’s directors are responsible forthe preparation of the financialstatements in accordance withapplicable United Kingdom law andaccounting standards. Ourresponsibility is to audit the financialstatements and the part of theDirectors’ Remuneration Reportdescribed as having been audited inaccordance with relevantUnited Kingdom legal and regulatoryrequirements and auditing standards.We report to you our opinion as towhether the financial statements give atrue and fair view and whether thefinancial statements and the part of theDirectors’ Remuneration Reportdescribed as having been audited havebeen properly prepared in accordancewith the Companies Act 1985. Wealso report to you if, in our opinion,the Directors’ Report is not consistentwith the financial statements, if theCompany has not kept properaccounting records, if we have notreceived all the information specifiedby law regarding directors’remuneration and explanations werequire for our audit, or if informationspecified by law or the Listing Rulesregarding directors’ remuneration andtransactions with the Company andother members of the Group is notdisclosed.We review whether the corporategovernance statement reflects theCompany's compliance with the sevenprovisions of the Combined Codespecified for our review by the ListingRules of the Financial ServicesAuthority, and we report if it does not.We are not required to considerwhether the Board’s statements oninternal control cover all risks andcontrols, or form an opinion on theeffectiveness of the Group’s corporategovernance procedures or its risk andcontrol procedures.We read the Directors’ Report and theother information contained in theannual report for the above year asdescribed in the contents sectionincluding the unaudited part of theDirectors’ Remuneration Report andconsider the implications for ourreport if we become aware of anyapparent misstatements or materialinconsistencies with the financialstatements.Basis of audit opinionWe conducted our audit in accordancewith United Kingdom auditingstandards issued by the AuditingPractices Board. An audit includesexamination, on a test basis, ofevidence relevant to the amounts anddisclosures in the financial statementsand the part of the Directors’Remuneration Report described ashaving been audited. It also includesan assessment of the significantestimates and judgments made by thedirectors in the preparation of thefinancial statements and of whether theaccounting policies are appropriate tothe circumstances of the Company andthe Group, consistently applied andadequately disclosed.We planned and performed our auditso as to obtain all the information andexplanations which we considerednecessary in order to provide us withsufficient evidence to give reasonableassurance that the financial statementsand the part of the Directors’Remuneration Report described ashaving been audited are free frommaterial misstatement, whether causedP 22

2 0 0 3 F I N A N C I A L S T A T E M E N T Sby fraud or other irregularity or error.In forming our opinion, we alsoevaluated the overall adequacy of thepresentation of information in thefinancial statements and the part of theDirectors’ Remuneration Reportdescribed as having been audited.Uncertainty relating toinsurance claimIn forming our opinion, we haveconsidered the adequacy of thedisclosure made in Note 6 concerningthe amounts recoverable andcontributions to profit recognisedunder an insurance claim relating to amanufacturing incident atKilgore Flares, a subsidiary undertakingof the Company, in April 2001,resulting in material damage andsuspension of operations. The futuresettlement of this claim could result ina shortfall, or a surplus, whencompared with the recorded debtor at31 October 2003. It is not possible toquantify the effect, if any, of thisuncertainty. Details of thecircumstances relating to thisuncertainty and the amount of therelated debtor recorded at31 October 2003 are disclosed inNote 6. Our opinion is not qualifiedin this respect.OpinionIn our opinion the financial statementsgive a true and fair view of the state ofaffairs of the Company and the Groupas at 31 October 2003 and of theprofit of the Group for the year thenended, and the financial statements andthe part of the Directors’Remuneration Report described ashaving been audited have beenproperly prepared in accordance withthe Companies Act 1985.Deloitte & Touche LLPChartered Accountants andRegistered AuditorsSouthampton2 February 2004P 23

C H E M R I N G G R O U P P L CIndependent Auditors’ Report on theFinancial Statementsfor the year ended 31 October 2003Independent Auditors’Report to the Members ofChemring Group PLCWe have audited the financialstatements of Chemring Group PLCfor the year ended 31 October 2003which comprise the profit and lossaccount, the balance sheets, theconsolidated cash flow statement, thestatement of total recognised gains andlosses and the related notes 1 to 29,together with the reconciliation ofmovements in shareholders’ funds andthe notes to the cash flow statement.These financial statements have beenprepared under the accounting policiesset out therein. We have also auditedthe information in the part of theDirectors’ Remuneration Report thatis described as having been audited.This report is made solely to theCompany’s members, as a body, inaccordance with section 235 of theCompanies Act 1985. Our audit workhas been undertaken so that we mightstate to the Company’s members thosematters we are required to state tothem in an auditors’ report and for noother purpose. To the fullest extentpermitted by law, we do not accept orassume responsibility to anyone otherthan the Company and the Company’smembers as a body, for our audit work,for this report, or for the opinions wehave formed.Respective responsibilities ofdirectors and auditorsAs described in the statement ofdirectors’ responsibilities, theCompany’s directors are responsible forthe preparation of the financialstatements in accordance withapplicable United Kingdom law andaccounting standards. Ourresponsibility is to audit the financialstatements and the part of theDirectors’ Remuneration Reportdescribed as having been audited inaccordance with relevantUnited Kingdom legal and regulatoryrequirements and auditing standards.We report to you our opinion as towhether the financial statements give atrue and fair view and whether thefinancial statements and the part of theDirectors’ Remuneration Reportdescribed as having been audited havebeen properly prepared in accordancewith the Companies Act 1985. Wealso report to you if, in our opinion,the Directors’ Report is not consistentwith the financial statements, if theCompany has not kept properaccounting records, if we have notreceived all the information specifiedby law regarding directors’remuneration and explanations werequire for our audit, or if informationspecified by law or the Listing Rulesregarding directors’ remuneration andtransactions with the Company andother members of the Group is notdisclosed.We review whether the corporategovernance statement reflects theCompany's compliance with the sevenprovisions of the Combined Codespecified for our review by the ListingRules of the Financial ServicesAuthority, and we report if it does not.We are not required to considerwhether the Board’s statements oninternal control cover all risks andcontrols, or form an opinion on theeffectiveness of the Group’s corporategovernance procedures or its risk andcontrol procedures.We read the Directors’ Report and theother information contained in theannual report for the above year asdescribed in the contents sectionincluding the unaudited part of theDirectors’ Remuneration Report andconsider the implications for ourreport if we become aware of anyapparent misstatements or materialinconsistencies with the financialstatements.Basis of audit opinionWe conducted our audit in accordancewith United Kingdom auditingstandards issued by the AuditingPractices Board. An audit includesexamination, on a test basis, ofevidence relevant to the amounts anddisclosures in the financial statementsand the part of the Directors’Remuneration Report described ashaving been audited. It also includesan assessment of the significantestimates and judgments made by thedirectors in the preparation of thefinancial statements and of whether theaccounting policies are appropriate tothe circumstances of the Company andthe Group, consistently applied andadequately disclosed.We planned and performed our auditso as to obtain all the information andexplanations which we considerednecessary in order to provide us withsufficient evidence to give reasonableassurance that the financial statementsand the part of the Directors’Remuneration Report described ashaving been audited are free frommaterial misstatement, whether causedP 22

2 0 0 3 F I N A N C I A L S T A T E M E N T Sby fraud or other irregularity or error.In forming our opinion, we alsoevaluated the overall adequacy of thepresentation of information in thefinancial statements and the part of theDirectors’ Remuneration Reportdescribed as having been audited.Uncertainty relating toinsurance claimIn forming our opinion, we haveconsidered the adequacy of thedisclosure made in Note 6 concerningthe amounts recoverable andcontributions to profit recognisedunder an insurance claim relating to amanufacturing incident atKilgore Flares, a subsidiary undertakingof the Company, in April 2001,resulting in material damage andsuspension of operations. The futuresettlement of this claim could result ina shortfall, or a surplus, whencompared with the recorded debtor at31 October 2003. It is not possible toquantify the effect, if any, of thisuncertainty. Details of thecircumstances relating to thisuncertainty and the amount of therelated debtor recorded at31 October 2003 are disclosed inNote 6. Our opinion is not qualifiedin this respect.OpinionIn our opinion the financial statementsgive a true and fair view of the state ofaffairs of the Company and the Groupas at 31 October 2003 and of theprofit of the Group for the year thenended, and the financial statements andthe part of the Directors’Remuneration Report described ashaving been audited have beenproperly prepared in accordance withthe Companies Act 1985.Deloitte & Touche LLPChartered Accountants andRegistered AuditorsSouthampton2 February 2004P 23

C H E M R I N GG R O U P P L CConsolidated Profit and Loss Accountfor the year ended 31 October 2003NoteContinuingoperations£000Discontinuedoperations£0002003Totaloperations£000Continuingoperations£000Discontinuedoperations£0002002Totaloperations£0002Turnover112,3178,240120,55785,01211,31596,327Analysis of operatingprofit/(loss):6Kilgore- normal operations- insurance claim2,180---2,180-(4,851)5,559--(4,851)5,559Rest of Group2,18012,076-(216)2,18011,8607086,298-6847086,982Operating profit/(loss)14,256(216)14,0407,0066847,6904Operating profit/(loss)14,256(216)14,0407,0066847,6905Associated undertakingProfit on disposal:- insurance claim- sale of division178565---724178565724891,123----891,123-Profit on ordinaryactivities before interest14,99950815,5078,2186848,9021011Interest payableProfit on ordinaryactivities before taxationTax on profit on ordinaryactivitiesProfit on ordinaryactivities after taxation(3,306)11,693(3,465)8,228(127)381(113)268(3,433)12,074(3,578)8,496(3,344)4,874(1,444)3,430(142)542(161)381(3,486)5,416(1,605)3,81112Equity minority interestProfit for thefinancial yearDividends238,519(2,034)293,840(1,843)24131313Retained profitBasic earnings per ordinaryshareBasic earnings per ordinaryshare – continuingDiluted earnings perordinary share30.06p6,48531.04p30.60p12.75p1,99714.16p14.11pP 24

2 0 0 3 F I N A N C I A L S T A T E M E N T SAdditional Financial Performance Statementsfor the year ended 31 October 20032003£0002002£000Statement of total recognised gains and lossesProfit on ordinary activities after taxationCurrency translation differences on foreign currency net investments8,496(1,636)3,811(756)Total recognised gains and losses relating to the year6,8603,055Reconciliation of movements in shareholders' fundsProfit on ordinary activities after taxationEquity minority interestDividends8,49623(2,034)3,81129(1,843)Retained profitOther recognised lossesOrdinary shares issuedShare premium arising6,485(1,636)--1,997(756)251,391Net addition to shareholders’ funds4,8492,657Opening shareholders’ funds48,67146,014Closing shareholders’ funds53,52048,671The historical cost profit and loss for the year is not materially different to that shown on the previous page.P 25

C H E M R I N GG R O U P P L CConsolidated Balance Sheetas at 31 October 2003Fixed assetsIntangible assetsDevelopment costsGoodwillTangible assetsInvestmentsCurrent assetsStockDebtorsCash at bank and in handCreditors due within one yearNote14141516171819£0002,99628,44220,24836,3465,82162,415(57,675)2003£00031,43842,8791,06375,380£0003,00228,34317,80732,6363,77454,217(49,288)2002£00031,34542,74697275,063Net current assets4,7404,929Total assets less current liabilitiesCreditors due after more than one yearProvisions for liabilities and chargesEquity minority interestCapital and reservesCalled-up share capitalReservesShare premium accountSpecial capital reserveRevaluation reserveRevenue reservesShareholders’ funds2022232424242420,72612,9392,44615,97580,120(21,489)(4,832)(279)53,5201,43452,08653,52020,72612,9392,48211,09079,992(29,375)(1,644)(302)48,6711,43447,23748,671Attributable to equity shareholdersAttributable to non-equity shareholders53,4586253,52048,6096248,671These financial statements were approved by the Board of Directors on 2 February 2004.Signed on behalf of the BoardD R EvansP A RaynerP 26

2 0 0 3 F I N A N C I A L S T A T E M E N T SParent Balance Sheetas at 31 October 2003Fixed assetsTangible assetsInvestmentsCurrent assetsDebtorsCash at bank and in handCreditors due within one yearNote15161819£00055,0719655,167(41,075)2003£00093237,01837,950£00054,82423755,061(34,355)2002£00098639,58440,570Net current assets14,09220,706Total assets less current liabilitiesCreditors due after more than one year2052,042(15,559)36,48361,276(22,491)38,785Capital and reservesCalled-up share capitalReservesShare premium accountSpecial capital reserveRevenue reservesShareholders’ funds2324242420,72612,9391,3841,43435,04936,48320,72612,9393,6861,43437,35138,785Attributable to equity shareholdersAttributable to non-equity shareholders36,4216236,48338,7236238,785These financial statements were approved by the Board of Directors on 2 February 2004.Signed on behalf of the BoardD R EvansP A RaynerP 27

C H E M R I N GG R O U P P L CConsolidated Cash Flow Statementfor the year ended 31 October 2003Net cash inflow from operating activitiesReturns on investments and servicingof financeTaxationCapital expenditureAcquisitions and disposalsEquity dividends paidCash inflow/(outflow) before use ofliquid resources and financingFinancing - issue of shares- decrease in debtNoteABBBBB£000-(5,645)2003£00018,084(3,420)(686)(5,497)1,475(1,866)8,090£00054(2,111)2002£00010,056(2,899)671(10,622)(145)(1,818)(4,757)Increase/(decrease) in cashC(5,645)2,445(2,057)(6,814)Reconciliation of net cash flow tomovement in net debtIncrease/(decrease) in cashCash outflow from thedecrease in debt and lease financingChange in net debt resulting from cash flowsNew finance leasesTranslation differenceNew finance costs applied to loansAmortisation of debt finance costs2,4455,6458,090(1,153)1,964-(305)(6,814)2,111(4,703)(3,479)1,212737(102)Movement in net debtOpening net debtClosing net debt8,596(47,277)(38,681)(6,335)(40,942)(47,277)P 28

2 0 0 3 F I N A N C I A L S T A T E M E N T SNotes to the Consolidated Cash Flow Statementfor the year ended 31 October 2003A. RECONCILIATION OF OPERATING PROFIT/(LOSS) TO NET CASH FLOW FROMOPERATING ACTIVITIES2003Continuingoperations£000Discontinuedoperations£000Totaloperations£000Continuingoperations£000Discontinuedoperations£0002002Totaloperations£000Operating profit/(loss)Amortisation chargeDepreciation chargeLoss on disposal of fixed assets(Increase)/decrease in stock(Increase)/decrease in debtorsIncrease/(decrease) in creditors14,2561,2103,229-(3,215)(4,078)6,10717,509(216)-66-3753252557514,0401,2103,295-(2,840)(3,753)6,13218,0847,0067022,87327338(1,301)3149,959684-56-176463(1,282)977,6907022,92927514(838)(968)10,056B. ANALYSIS OF CASH FLOWSReturns on investments and servicing of financeInterest paidPreference dividend paidDividend from associate£0000002003£000(3,516)(4)100£0000002002£000(2,907)(4)12Net cash outflow from returns on investmentsand servicing of finance000(3,420)000(2,899)Capital expenditure and financial investmentPurchase of intangible fixed assetsPurchase of tangible fixed assets0000(1,208)(4,289)0000(990)(9,632)Net cash outflow from capital expenditure andfinancial investment000(5,497)000(10,622)Acquisitions and disposalsAcquisitions of subsidiary undertakingsNet cash acquired with subsidiary undertakingsReceipts from sale of division00000--1,47500000(243)98-Net cash inflow/(outflow) from acquisitionsand disposals0001,475000(145)FinancingIssue of ordinary share capitalCapital elements of finance lease paymentsDebt due within one year:- bank loans00(1,194)0(4,451)0-00000(427)0(1,684)054000Net cash outflow from financing(5,645)(5,645)(2,111)(2,057)P 29

C H E M R I N GG R O U P P L CNotes to the Consolidated Cash Flow Statement- continuedC. ANALYSIS OF NET DEBTOtherAt1 Nov 2002£000Cash flow£000non-cashchanges£000Exchangemovement£000At31 Oct 2003£000Cash at bank and in handOverdraftsDebt due within one yearDebt due after one yearFinance leases3,774(17,345)(13,571)(5,403)(24,851)(3,452)(47,277)2,1822632,4454,451-1,1948,090---(5,427)5,122(1,153)(1,458)(135)3161811191,664-1,9645,821(16,766)(10,945)(6,260)(18,065)(3,411)(38,681)Other non-cash changes represent the movement of debt due after one year to within one year and the amortisation of debtfinance costs.P 30

2 0 0 3 F I N A N C I A L S T A T E M E N T SNotes to the Financial Statementsfor the year ended 31 October 20031. ACCOUNTING POLICIESThe financial statements have been prepared in accordance with applicable United Kingdom accounting standards. Theparticular accounting policies adopted are described below.Accounting conventionThe financial statements are prepared under the historical cost convention as modified by the revaluation of property.Basis of consolidationThe financial statements consolidate those of the Parent with the Group’s share of the results and post acquisition reserves ofall its subsidiary and associated undertakings. All companies within the Group make up their financial statements to the samedate. No profit and loss account is presented for the Parent as provided by section 230 of the Companies Act 1985.Revenue recognitionSales comprise the net value of deliveries made, work completed or services rendered during the year. Sales are recognisedwhen title passes, or when production of goods has been completed in accordance with contract terms, and inspection andquality procedures have been completed but goods await collection. Long term contracts are accounted for in accordancewith SSAP 9 (revised), whereby a prudent level of income is recognised based on the estimated percentage completion ofcontracts where the final outcome can be reasonably assessed.AcquisitionsOn the acquisition of a business, fair values are attributed to the Group’s share of net separable assets. Where the cost ofacquisition exceeds the fair values attributable to such net assets, the difference is treated as purchased goodwill and capitalisedin the balance sheet in the year of acquisition.The results and cash flows relating to an acquired business are included in the consolidated profit and loss account and theconsolidated cash flow statement from the date of acquisition.Intangible fixed assetsThe purchased goodwill of the Group is regarded as having an indefinite useful economic life and in accordance with FRS10,is not amortised but is subject to annual tests for impairment. This represents a departure, for the purpose of giving a true andfair view, from the requirements of schedule 4:21 of the Companies Act 1985, which requires goodwill to be amortised. Inthe opinion of the Board, it is not possible to determine a finite useful economic life for goodwill arising, due to the inherentdurability of the corporate profile in the countermeasures, military and marine industries, and the continued position ofmarket leadership within these chosen business sectors. The complexities of the processes, technologies and regulatory barriersto entry support and corroborate this position. Since it is not possible to identify any finite useful economic life, it is notpossible to quantify any amortisation which would be charged. In reviewing the carrying value of goodwill of the variousbusinesses, the Board has considered the separate plans and cashflows of these businesses consistent with the requirements ofFRS11, and is satisfied that these demonstrate that no impairment has occurred. Accordingly no charge for impairment isrequired.Research, development, patent and licence costs are charged to the profit and loss account as incurred, except where a majorproject is undertaken and it is reasonably anticipated that costs will be recovered through future commercial activity. Suchcosts are written-off over three years.P 31

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued1. ACCOUNTING POLICIES - continuedTangible fixed assetsNo depreciation is provided on freehold land. On other assets depreciation is provided at rates calculated to write down theircost or valuation to their estimated residual values by equal instalments over their estimated useful economic lives, which areconsidered to be:Freehold buildings - up to 50 yearsLeasehold buildings - the period of the leasePlant and equipment - up to 10 yearsFixed asset investmentsExcept as stated below, investments held as fixed assets are stated at cost less provision for impairment.In the consolidated financial statements, shares in the associated undertaking are accounted for using the equity method ofaccounting. The consolidated profit and loss account includes the Group’s share of the profit and attributable taxation of theassociated undertaking. In the consolidated balance sheet, the shares in the associated undertaking are shown as the Group’sshare of net assets.StockStock is stated at the lower of cost and net realisable value. Raw materials are stated at their purchase price, while work inprogress and finished goods comprise the cost of materials, labour and overheads applicable to the stage of production.Deferred taxationDeferred taxation is provided in full at the anticipated tax rates on differences arising from the inclusion of items of incomeand expenditure in taxation computations in periods different from those in which they are included in the financialstatements. Deferred taxation is not provided on timing differences arising from the revaluation of fixed assets where there isno commitment to sell the asset. Deferred tax assets and liabilities are discounted.Special capital reserveThe special capital reserve was created as part of a capital reduction scheme involving the cancellation of the share premiumaccount which was approved by the Court in 1986 and is in accordance with the requirements of the Companies Act 1985.Foreign currencyTransactions of the UK companies denominated in foreign currencies are translated into sterling at the rates ruling at the dateof the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated atthe rates ruling at that date. These translation differences are dealt with in the profit and loss account.Trading results of overseas subsidiary undertakings are translated into sterling at an average rate for the period and net assetsare translated at the rate ruling at the balance sheet date. Exchange differences arising between average rate and closing rateand from the translation of the opening net investment in overseas companies and matched long term foreign currencyborrowings are taken directly to reserves.P 32

2 0 0 3 F I N A N C I A L S T A T E M E N T S1. ACCOUNTING POLICIES - continuedPensionsThe Group operates defined benefit pension schemes which cover the majority of UK employees. The cost of providingpensions is estimated on the basis of independent actuarial advice and is charged to the profit and loss account over theexpected service lives of the participating employees. The accounting policy follows the funding policy except where anactuarial valuation indicates a deficiency or surplus. Such deficiencies or surpluses are for funding purposes dealt with asadvised by the actuary. For accounting purposes they are spread over the expected remaining service lives of the participatingemployees.The Group also operates money purchase pension arrangements for overseas employees, the costs of which are charged to theprofit and loss account as incurred.Leased assetsWhere the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, thelease is treated as a finance lease. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over theshorter of the estimated useful economic life and the lease term. Future instalments under such leases, net of finance charges,are included in creditors. The finance element of the instalments is charged to the profit and loss account at a constant rate ofcharge on the remaining balance of the obligation.All other leases are operating leases and the rental charges are taken to the profit and loss account on a straight line basis overthe life of the lease.2. ANALYSIS OF TURNOVER, PROFIT AND NET ASSETS20032002ContinuingDiscontinuedTotalContinuingDiscontinuedTotaloperationsoperationsoperationsoperationsoperationsoperations£000£000£000£000£000£000TurnoverUK22,2926,33728,62923,2578,24231,499USA44,4221,12045,54232,3592,01034,369Australia12,089-12,0894,642-4,642Europe16,64078317,42314,7231,06315,786Rest of world16,874-16,87410,031-10,031Total112,3178,240120,55785,01211,31596,327An analysis of turnover by business area is given in the summary financial information on page 2 and forms part of thesefinancial statements. An analysis of profit and net assets has not been given since in the opinion of the directors this would beseriously prejudicial to the commercial interests of the Group.The results of Kembrey Wiring Systems Limited (see Note 29) and Alloy Surfaces Chemical Coatings, a division ofAlloy Surfaces Company, Inc. (see Note 27) are included within discontinued operations.P 33

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued3. COST OF SALES, GROSS PROFIT AND OTHER OPERATING EXPENSESContinuingoperations£000Discontinuedoperations£0002003Totaloperations£000Continuingoperations£000Discontinuedoperations£0002002Totaloperations£000Cost of sales - normal- insurance claim(see Note 6)83,807-83,8076,870-6,87090,677-90,67769,205(5,559)63,6469,155-9,15578,360(5,559)72,801Gross profit28,5101,37029,88021,3662,16023,526Distribution costsAdministrative expensesOther operating expenses (net)3,11211,14214,254-1,5861,5863,11212,72815,8403,12611,23414,360511,4251,4763,17712,65915,8364. OPERATING PROFIT/(LOSS)Operating profit/(loss) is stated after charging:Depreciation - owned assets- leased assetsAmortisation - intangible assetsOperating lease rentals - land and buildings- plant and equipment2003£0002,6856101,2104401,1382002£0002,6582717026441,077During the year £4,742,000 (2002: £4,550,000) of research and development costs were incurred by the Group, of which£1,208,000 (2002: £990,000) was capitalised (see Note 14).2003Auditors’ remuneration£0002002£000Statutory audit services:Group auditSubsidiary company auditsFurther assurance services:Accounts preparation and adviceTax services:Tax complianceTax advisoryOther non-audit services:Corporate finance13029111068418378130291110779153509P 34

2 0 0 3 F I N A N C I A L S T A T E M E N T S5. PROFIT ON DISPOSALInsurance claimA profit on disposal of £565,000 arose from the allocation of material damage insurance proceeds in excess of historic netbook value of assets of £1,077,000, less legal and professional fees incurred of £512,000. As no tax arises in respect of thedisposal of the related asset, the tax effect is limited to a credit of £174,000 in respect of the costs incurred. For further detailssee Note 6.Sale of business divisionOn 11 July 2003 the Group sold the business and net assets of Alloy Surfaces Chemical Coatings, a division ofAlloy Surfaces Company, Inc.. A profit on disposal of £724,000 arose on the sale of the business, being the excess of the netconsideration over net assets disposed of. For further details see Note 27.6. INSURANCE CLAIMFollowing the manufacturing incident at Kilgore Flares Company LLC on 18 April 2001, resulting in material damage andsuspension of operations, the Group lodged a claim with its insurers for property damage and business interruption. Legalproceedings in respect of this claim were filed in a Tennessee Court in March 2002 for an additional £11,000,000 over andabove the £3,200,000 which had been received from insurers at that time. Alongside the legal process, negotiations with theGroup’s insurers have continued throughout the year ended 31 October 2003.At 31 October 2003, the Board has made a further estimate of the additional proceeds which it believes that Kilgore is entitledto receive under the insurance policy, after taking advice from its professional advisers, of which £1,077,000 (2002:£7,300,000)has been recognised in these financial statements. Of this, £nil (2002: £5,559,000) has been credited to cost of sales with thebalance, net of legal and professional costs of £512,000 (2002:£618,000), being allocated as material damage proceeds. As thematerial damage related to fixed assets, the surplus of £565,000 (2002:£1,123,000) has been accounted for as a profit ondisposal, in accordance with FRS15, and included separately in the profit and loss account. For further details see Note 5.At 31 October 2003, payments totalling £5,700,000 (2002:£3,200,000) had been received from the Group’s insurers.The balance of the claim that had not been recovered from the insurers at the year end was £7,486,000 (2002:£9,633,000)which has been included within other debtors. Foreign exchange movements of £724,000 have been recognised through thestatement of total recognised gains and losses in these financial statements, due to the claim being denominated in US dollars.7. EMPLOYEESThe average number employed by the Group within each category of persons was:2003Number2002NumberProductionSales and administrationThe costs incurred in respect of these employees were:Wages and salariesSocial Security costsOther pension costs1,4232181,641£00033,7073,9651,81539,4871,3342411,575£00030,0984,6921,44436,234P 35

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued8. DIRECTORS' EMOLUMENTSDisclosures on directors’ remuneration, share options, long term incentive schemes, pension contributions and pensionentitlements required by the Companies Act 1985 and those specified for audit by the UK Listing Authority are set out in theDirectors’ Remuneration Report on pages 14 to 18, and that information which is described as having been audited formspart of these audited financial statements.9. PENSIONSPension arrangementsThe pension cost figures used in these financial statements comply with the current accounting standardSSAP 24 Accounting for pension costs. A new accounting standard, FRS17 Retirement benefits, has been issued and transitionalrequirements continue to apply.Within the UK the Group operates two defined benefit schemes, the Chemring Group Staff Pension Scheme (the “StaffScheme”) and the Chemring Group Executive Pension Scheme (the “Executive Scheme”), as detailed below. The overseasarrangements are all defined contribution schemes. The assets of the schemes are held in separate trustee administered funds.Regular pension costs - SSAP 24The total pension costs for the Group for the year ended 31 October 2003 were £1,815,000 (2002:£1,444,000). Disclosuresgiven relate to the Group as the pension assets and liabilities of the Parent cannot be separately identified.The costs of the defined benefit schemes are assessed in accordance with the advice of a qualified actuary using the attainedage method. Contributions to the schemes are charged to the profit and loss account so as to spread the cost of pensions overemployees’ working lives with the Group.The last actuarial valuation of the Staff Scheme was carried out as at 6 April 2000. The main assumptions used by the actuaryin carrying out this valuation were as follows: return on investments of 7.5% per annum pre-retirement and5.5% to 6% per annum post-retirement; increase in salaries of 5% per annum; and increase in pension accrued after6 April 1993 of 3% per annum.At the date of the last actuarial valuation, the market value of the assets of the Staff Scheme was £22,472,000, which wassufficient to cover 101% of the benefits that had accrued to members. Following the valuation, it was agreed that the Groupwould pay contributions at the rate of 10.5% of pensionable salaries, increasing to 11% with effect from 1 April 2002 and11.5% with effect from 1 April 2003. Members pay contributions at the rate of 6% of pensionable salaries. With effect from1 January 2004, the Group has increased its contributions to 16% plus an additional monthly contribution of £15,000.Members’ contributions have been increased to 8% of pensionable salary with effect from 1 February 2004.A new actuarial valuation of the Staff Scheme as at 6 April 2003 is currently in progress but has not yet been finalised.The last actuarial valuation of the Executive Scheme was carried out as at 6 April 2001. The main assumptions used by theactuary in carrying out this valuation were as follows: return on investments of 7% per annum pre-retirement and5% per annum post-retirement; increase in salaries of 4.75% per annum; and increase in pension accrued after 6 April 1993of 2.5% per annum.P 36

2 0 0 3 F I N A N C I A L S T A T E M E N T S9. PENSIONS - continuedAt the date of the last actuarial valuation, the market value of the assets of the Executive Scheme was £2,797,000, which wassufficient to cover 63% of the benefits that had accrued to members. Following the valuation, it was agreed that the Group wouldpay increased contributions at the rate of 32% of pensionable salaries, together with additional payments of £14,000 per month.With effect from 1 October 2003, members have been required to make contributions at the rate of 6% of pensionable salary. Witheffect from 1 January 2004, the Group increased the additional payments it makes to the Executive Scheme from £14,000 to£20,000 per month. The Executive Scheme is closed to new entrants. The Group’s contribution rate over the average remainingservice lives of the members of the Executive Scheme takes account of the deficit disclosed by the valuation.A new actuarial valuation of the Executive Scheme as at 6 April 2003 is also currently in progress but has not yet been finalised.Included within other debtors (see Note 18) is £263,000 (2002: £237,000) in respect of pension contributions to definedbenefit schemes, being the difference between amounts recognised as costs and amounts paid or funded directly.As required by SSAP 24, the figures included in the financial statements in respect of the Group’s pension schemes are basedon actuarial valuations carried out as at 6 April 2000 and 6 April 2001. These do not take into account any impact of the fallin stock market values since these dates. Any such impact will be reflected in the next valuations as at 6 April 2003, basedupon which subsequent pension costs will be determined until the adoption of FRS17.FRS17 disclosuresUnder the transitional arrangements of FRS17, the Group is required to disclose the following information about the schemesand the figures that would have been shown in the Group balance sheet if FRS17 applied in full today.Provisional numbers in respect of full actuarial valuations for the Staff Scheme and the Executive Scheme as at 6 April 2003have been prepared and updated to 31 October 2003 by a qualified actuary, using the projected unit valuation method.The total assets and liabilities of the Staff Scheme and the Executive Scheme updated to 31 October 2003 in accordance withFRS17, along with the expected rates of return on assets were as follows:20032002Long term rate of Value Long term rate of Valuereturn expected £000 return expected £000Equities7.1%12,3956.7%10,938Bonds5.1%7,1954.7%7,230Other assets5.1%7314.7%113Total market value of assets20,32118,281Present value of scheme liabilities(34,450)(31,748)Deficit in schemes(14,129)(13,467)Related deferred tax4,2394,040Net pension liability(9,890)(9,427)If the FRS17 net deficit in respect of the two schemes of £9,890,000 at 31 October 2003 (2002:£9,427,000) had beenaccounted for as a liability of the Group at that date, the balance on the Group’s profit and loss reserve at that date would havebeen reduced from £15,975,000 to £6,085,000 (2002:£11,090,000 to £1,663,000).P 37

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued9. PENSIONS - continuedThe figures shown above were calculated on the basis of the following assumptions:20032002Discount rateRate of increase in salariesRate of increase in deferred pensionsRate of increase in pensions in payment (where applicable)Inflation assumption6.1%3.9-4.9%2.9-5.0%2.9%2.9%6.1%3.4-4.4%2.4-5.0%2.4%2.4%Analysis of movement in the deficit in the schemes during the year:Opening deficit in the schemesCurrent service costContributionsOther finance costsActuarial lossesClosing deficit in the schemes2003£000(13,467)(802)1,030(851)(39)(14,129)2002£000(9,137)(785)889(468)(3,966)(13,467)Amounts that would have been included within the financial statements for the year ended 31 October 2003 had FRS17 beenapplied are as follows:Amounts included within operating profit:Current service cost2003£0008022002£000785Amounts included as other finance costs:Expected return on scheme assetsDiscount on scheme liabilitiesNet charge2003£0001,093(1,944)(851)2002£0001,341(1,809)(468)P 38Amounts that would have been included within the statement of total recognised gains and losses for the year ended31 October 2003 had FRS17 been applied are shown below, expressed in monetary amounts and as a percentage of:(i) scheme assets at the balance sheet date;(ii) present value of the scheme liabilities at the balance sheet date.Difference between actual and expected returnon scheme assets (i)Experience gains and losses arising on scheme liabilities (ii)Effects of changes in assumptions underlying the present value£0004552,5172003%2.27.3£000(4,333)(217)of the scheme liabilities (ii)Total actuarial losses(3,011)(39)(8.7)(0.1)584(3,966)2002%(23.7)(0.7)1.8(12.5)

2 0 0 3 F I N A N C I A L S T A T E M E N T S10. INTEREST PAYABLEContinuingoperations£000Discontinuedoperations£0002003Totaloperations£000Continuingoperations£000Discontinuedoperations£0002002Totaloperations£000Bank overdraft interestLoan stock interest (see Note 19)Medium term loan interestFinance lease interestAmortisation of debt finance costs91421,8092763053,306127----1271,04121,8092763053,34497222,0522161023,344142----1421,11422,0522161023,48611. TAX ON PROFIT ON ORDINARY ACTIVITIESCorporation tax:Corporation tax charge for the yearOverseas taxationOver provision in prior yearsTotal current taxDeferred tax:Timing differences – current year(Over)/under provision in prior yearsTotal deferred taxAssociate’s taxTax on profit on ordinary activities2003£0001,876569(388)2,0571,759(293)1,466553,5782002£0002982,362(680)1,980(951)547(404)291,605The standard rate of current tax for the year is 30%. The tax charge for the year is 30% for the reasons set out in the followingreconciliation:20032002£000 £000Profit on ordinary activities before taxation12,0745,416Tax on profit on ordinary activities at standard rateFactors affecting charge:Income not deductible for taxPrior year adjustmentsOverseas profits taxed at rates higher than the standard rateDeferred tax movementsTotal current year tax charge3,622199(388)383(1,759)2,0571,625(624)(680)7848751,980P 39

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued12. DIVIDENDSDividends on cumulative preference shares of £1 eachPaid 30 April 2003 3.50p (2002: 3.50p)Paid 31 October 2003 3.50p (2002: 3.50p)Dividends on ordinary shares of 5p eachInterim paid 26 September 2003 2.55p (2002: 2.45p)Final proposed 4.85p (2002: 4.25p)Total dividends2003£0002247001,3302,0302,0342002£0002246731,1661,8391,84313. EARNINGS PER ORDINARY SHAREThe earnings and shares used in the calculations are as follows:Earnings£000OrdinarysharesNumber000s2003EPSPence£000OrdinarysharesNumber000s2002EPSPenceBasicAdditional shares issuable otherthan at fair value in respect ofoptions outstandingDiluted8,515-8,51527,43639127,82731.04(0.44)30.603,836-3,83627,0988827,18614.16(0.05)14.11Earnings comprise profit for the financial year after deducting preference dividends of £4,000 (2002: £4,000). Ordinary sharesare calculated by reference to the average number of shares in issue in the year.Reconciliation from basic earnings per share to basic earnings per share – continuing:Earnings£000OrdinarysharesNumber000s2003EPSPenceEarnings£000OrdinarysharesNumber000s2002EPSPenceBasicProfit on ordinary activities aftertaxation – discontinued operationsBasic - continuing8,515(268)8,24727,436-27,43631.04(0.98)30.063,836(381)3,45527,098-27,09814.16(1.41)12.75P 40

2 0 0 3 F I N A N C I A L S T A T E M E N T S14. INTANGIBLE FIXED ASSETSGROUPCostAt 1 November 2002AdditionsDisposalsForeign exchange movementsAdjustment in respect of prior years (see Note 26)At 31 October 2003Developmentcosts£0005,2161,208(203)(37)-6,184Goodwill£00028,343---9928,442Total£00033,5591,208(203)(37)9934,626AmortisationAt 1 November 2002Charge for the yearDisposalsForeign exchange movementsAt 31 October 20032,2141,210(203)(33)3,188-----2,2141,210(203)(33)3,188Net book valueAt 31 October 2003At 31 October 20022,9963,00228,44228,34331,43831,345The movements to goodwill arose on the adjustment of the fair value of net assets and deferred consideration payable on prioryear acquisitions. For further details of acquisitions see Note 26.15. TANGIBLE FIXED ASSETS(A) GROUPCost or valuationAt 1 November 2002AdditionsDisposalsForeign exchange movementsAt 31 October 2003Land andbuildings£00019,781958-(495)20,244Plant andequipment£00035,5704,484(220)(1,617)38,217Total£00055,3515,442(220)(2,112)58,461DepreciationAt 1 November 2002Charge for the yearDisposalsForeign exchange movementsAt 31 October 20031,342364-(19)1,68711,2632,931(127)(172)13,89512,6053,295(127)(191)15,582Net book valueAt 31 October 2003At 31 October 200218,55718,43924,32224,30742,87942,746Included within additions for the year is own work capitalised of £nil (2002:£2,807,000) relating to the reconstruction of theproduction facility at Kilgore Flares Company LLC.P 41

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued15. TANGIBLE FIXED ASSETS - continued(B)PARENTCostAt 1 November 2002AdditionsAt 31 October 2003Land andbuildings£0001,168-1,168Plant andequipment£0005347541Total£0001,70271,709DepreciationAt 1 November 2002Charge for the yearAt 31 October 2003237342714792750671661777Net book valueAt 31 October 2003At 31 October 20028979313555932986(C) LAND AND BUILDINGSLand and buildings comprise:FreeholdLong leaseholdLand and buildings are stated at cost or value:30 September 1997 - depreciated replacement costAt cost2003£00019,0761,16820,2445,82014,42420,244Group2002£00018,6131,16819,7815,82013,96119,7812003£000-1,1681,168-1,1681,168Parent2002£000-1,1681,168-1,1681,168The 1997 land and buildings valuation was carried out by Chestertons, Chartered Surveyors, on the UK properties, on a depreciatedreplacement cost for the two pyrotechnic sites, and on open market value for the remainder. The effect of the revaluation is to increaseannual depreciation by £36,000. In accordance with the transitional requirements of FRS15 this valuation has not been updated.If stated under historical cost principles the comparable amounts for the total of land and buildings would be:2003£000Group2002£000Parent2003£0002002£000CostAccumulated depreciationHistorical cost value18,147(2,036)16,11117,684(1,727)15,9571,168(274)8941,168(237)931All other tangible fixed assets are stated at historical cost. Included in plant and equipment are assets of net book value£4,170,000 (2002: £3,627,000) held under finance leases.P 42

2 0 0 3 F I N A N C I A L S T A T E M E N T S15. TANGIBLE FIXED ASSETS - continued(D) FUTURE CAPITAL EXPENDITURE2003£000Group2002£0002003£000Parent2002£000Contracted for but not provided for444310--16. FIXED ASSET INVESTMENTS(A) GROUPTradeinvestments£000Associatedundertakingshare of netassets£000Total£000At 1 November 2002Retained profit of associated undertakingDividend receivedForeign exchange movementsAt 31 October 200310---10962123(100)681,053972123(100)681,063(B) PARENTCostAt 1 November 2002AdditionsAt 31 October 2003Shares insubsidiaryundertakings£00034,6473434,681Shares inassociatedundertaking£00013-13Loans tosubsidiaryundertakings£0006,250-6,250Tradeinvestments£00010-10Total£00040,9203440,954Provision for impairmentAt 1 November 2002Provided in the yearAt 31 October 20031,3362,6003,936---------1,3362,6003,936Net book valueAt 31 October 2003At 31 October 200230,74533,31113136,2506,250101037,01839,584P 43

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued16. FIXED ASSET INVESTMENTS - continued(C) SUBSIDIARY AND ASSOCIATED UNDERTAKINGSThe subsidiary and associated undertakings which, in the opinion of the directors, affected the results of the Group are shownbelow.% of issuedordinary sharecapital controlledCountry ofby ChemringSubsidiary undertakings incorporation Group PLC ActivityPains Wessex Ltd England 100 Countermeasures and pyrotechnicsPW Defence Ltd England 100 PyrotechnicsMcMurdo Ltd England 100 Marine safety and electronicsKembrey Wiring Systems Ltd England 100 Wiring harnessesI.C.S. Electronics Ltd England 100 Marine electronicsAlloy Surfaces Company, Inc. Delaware, USA 100 Countermeasures and chemical coatingsKilgore Flares Company LLC Delaware, USA 100 Countermeasures and pyrotechnicsPains Wessex Australia Pty Ltd Australia 100 Countermeasures and pyrotechnicsPirotécnia Oroquieta S.L. Spain 51 Marine pyrotechnicsAssociated undertakingCIRRA S.A. France 49 CountermeasuresThe chemical coatings division of Alloy Surfaces Company, Inc. was sold by the Group on 11 July 2003 (see Note 27).The entire issued share capital of Kembrey Wiring Systems Limited was disposed of by the Group on 8 November 2003 (see Note 29).17. STOCK2003£000Group2002£000Raw materialsWork in progressFinished goods8,3467,0794,82320,2489,0176,0172,77317,807There are no significant differences between the replacement costs and the stock values shown above.P 44

2 0 0 3 F I N A N C I A L S T A T E M E N T S18. DEBTORS2003£000Group2002£0002003£000Parent2002£000Trade debtorsAmounts owed by subsidiary undertakingsGroup relief recoverableAdvance corporation tax recoverableOther debtorsPrepayments and accrued income25,063--17010,0561,05736,34619,692--46711,48998832,6365652,1941,823-9188055,071752,3881,238-1,0979454,824Included within other debtors are amounts recoverable under an insurance claim relating to an incident atKilgore Flares Company LLC (see Note 6) and amounts held in respect of own shares of £174,000 (2002: £264,000).All amounts shown above are due within one year.19. CREDITORS DUE WITHIN ONE YEAR2003£000Group2002£0002003£000Parent2002£000Bank overdrafts (see Note 20)Bank loans (see Note 20)Loan stock – unsecured (see Note 20)Trade creditorsAmounts owed to subsidiary undertakingsOther creditorsObligations under finance leases (see Note 20)Corporation tax payableOverseas tax payableOther taxation and Social SecurityAccruals and deferred incomeProposed dividends16,7666,2204019,256-4,6481,3051,2571,0299794,8451,33057,67517,3455,3634012,293-3,5639289742,6841,5383,3941,16649,28819,2615,2464049812,819630-302-219281,33041,07518,0734,365402799,046-----1,3861,16634,355Loan stock is repayable on three months’ notice from holders and attracts interest at 1% below base rate. The loan stock is heldby certain vendor shareholders of Kembrey Limited (formerly Kembrey Plc), acquired in August 1994, and is guaranteed byNational Westminster Bank Plc.Bank loans and overdrafts held with Bank of Scotland are secured by a full debenture over the assets of the UK businesses andKilgore Flares Company LLC, and are also subject to cross guarantees between all UK subsidiaries. Finance lease obligations aresecured on the related assets.P 45

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued20. CREDITORS DUE AFTER MORE THAN ONE YEAR2003£000Group2002£0002003£000Parent2002£000Medium term loan - UK- overseasObligations under finance leasesOther creditors14,8503,2152,1061,31821,48920,4914,3602,5242,00029,37514,241--1,31815,55920,491--2,00022,491The average interest rate applicable to the UK medium term loan is 4.7% (2002: 6.5%) and the average rate for the overseasmedium term loan is 4.9% (2002: 5.1%) per annum. The overseas medium term loan is secured on the assets of certain of theoverseas businesses. Finance lease obligations attract interest rates of between 2% and 3% above base rate. Obligations underfinance leases falling due within one to two years included above total £1,345,000.An analysis of the Group’s borrowings and the maturity profile of these borrowings is as follows:Group2003£0002002£000Bank overdraftUK medium term loansOverseas medium term loansObligations under finance leasesUnsecured loan stock- sterling denominated- US dollar denominated- US dollar denominated- Australian dollar denominated- sterling denominated- US dollar denominated16,76611,6447,8414,1886121,6931,7184044,50217,34514,00210,8544,8035551,0872,3654051,051Creditors falling due within:One yearOne to two yearsTwo to five yearsAfter five years24,3317,07712,11897644,50223,6766,17619,3621,83751,051P 46

2 0 0 3 F I N A N C I A L S T A T E M E N T S21. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTSThe Group’s financial instruments comprise borrowings, cash and various non-derivative financial instruments such as tradedebtors and trade creditors. As permitted by FRS13 Derivatives and other financial instruments: Disclosures, short term debtors andcreditors have been excluded from all FRS13 disclosures.The Group uses financial instruments to manage financial and commercial risk wherever it is appropriate to do so.The main risks arising from the financial instruments of the Group are interest risk, foreign exchange risk and liquidity risk. TheGroup’s policies in respect of the management of these risks, which remained unchanged throughout the year, were as follows :-Interest risk:The Group finances its operations through a mixture of retained profits, bank borrowings andleasing lines of credit. The UK borrowings are denominated in sterling and US dollars and aresubject to fixed rates of interest through an amortising LIBOR swap and floating rates ofinterest linked to Bank of Scotland base rate to provide flexibility. The overseas borrowings aredenominated in local currency and are predominantly subject to fixed rates of interest.Foreign exchange risk:Foreign exchange risk can be subdivided into two components, transactional risk and profittranslation risk:Transactional risk - The Group policy is for subsidiaries to maximise the use of hedging againsttransactional currency exposures against the currency in which their results are measured. Themeasurement and control of this risk is closely monitored on a Group-wide basis.Profit translation risk -The Group translates overseas profits and net assets in accordance withthe accounting policy in Note 1. The translation risk on net assets is controlled by the transferof currencies between Group companies. Any remaining translation differences are dealt withthrough the Group’s statement of total recognised gains and losses.Liquidity risk: Details of the maturity profiles of the Group’s funding can be found in Note 20.The total undrawn committed borrowing facilities at the financial year end amounted to £8,291,000 (2002: £5,273,000).P 47

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued21. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS - continuedThe interest rate risk profile of the Group’s financial assets and liabilities is as follows:-I) FINANCIAL ASSETS20032002SterlingUS dollarAustralian dollarOther currenciesOffset in the UKFloatingrate£0008,0193,64967659212,936Fixedrate£000-----Total£0008,0193,64967659212,936(7,115)5,821Floatingrate£0004,9572,8372196798,692Fixedrate£000-----Total£0004,9572,8372196798,692(4,918)3,774Disclosed as:Cash at bank and in hand5,8213,774Financial assets held in the UK enjoy a right of interest offset against overdraft balances. Overseas financial assets have a weightedaverage interest rate of 2%.II) FINANCIAL LIABILITIES20032002SterlingUS dollarAustralian dollarOffset in the UKFloatingrate£000(26,268)(2,873)-(29,141)Fixedrate£000(9,834)(12,030)(612)(22,476)Total£000(36,102)(14,903)(612)(51,617)7,115(44,502)Floatingrate£000(28,123)(10,854)-(38,977)Fixedrate£000(11,634)(4,803)(555)(16,992)Total£000(39,757)(15,657)(555)(55,969)4,918(51,051)Disclosed as:Bank loans and overdraftsMedium term loan- UK- overseasObligations under finance leases - UK- overseasLoan stock(22,986)(13,265)(4,800)(1,693)(1,718)(40)(44,502)(22,708)(20,491)(4,360)(1,087)(2,365)(40)(51,051)A right of offset exists for currency amounts held within the UK by Bank of Scotland. These are used to offset the interest chargedon the UK overdraft which bears interest at 1.75% above LIBOR. Cash at bank and in hand consists primarily of overseas fundswhich are used as short term intra-group financing as well as an internal exchange rate hedge.The weighted average interest rate of fixed rate financial liabilities at 31 October 2003 was 6.6% (2002: 7.0%) and the weightedaverage period of funding was four years (2002: five years).P 48The Group has an amortising interest rate swap, from floating to fixed rate, that expires in 2005 at a rate of 7.42%, but otherwise hadno derivative financial instruments outstanding at 31 October 2003. The opinion of the Board is that the fair value of the Group’sfinancial liabilities after taking account of the interest rate swap is £509,000 (2002: £847,000) higher than the book value. TheBoard has no intention of realising this liability. The fair value of the financial assets is their book value.

2 0 0 3 F I N A N C I A L S T A T E M E N T S22. PROVISIONS FOR LIABILITIES AND CHARGES(A) MOVEMENT IN THE YEAR - GROUPDeferredtaxation£000Otherprovision£000Total£000At 1 November 2002Provided in the yearUtilised in the yearTransfer from current taxForeign exchange movementsAt 31 October 20039891,466-2,052(64)4,443655-(266)--3891,6441,466(266)2,052(64)4,832The other provision is held in respect of commitments to warranty claims and other reserves, and is expected to be utilisedwithin one to four years.(B)DEFERRED TAX PROVISION AT YEAR ENDDeferred tax provided in the financial statements is as follows:2003£000Group2002£0002003£000Parent2002£000Capital allowances in excess of depreciationOther timing differencesDiscount4,755287(599)4,4431,950(650)(311)98923234(257)-(1)124(123)-23. CALLED-UP SHARE CAPITALAuthorised62,500 7% cumulative preference shares of £1 each30,000,000 ordinary shares of 5p eachIssued, allotted and fully paid62,500 7% cumulative preference shares of £1 each27,435,972 (2002: 27,435,972) ordinary shares of 5p each2003£000621,5001,562621,3721,4342002£000621,5001,562621,3721,434The 7% cumulative preference shares confer no rights to vote, except on certain specified matters.P 49

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued23. CALLED-UP SHARE CAPITAL - continuedShare optionsThe following options to subscribe for ordinary shares granted under various share option schemes were outstanding at 31 October 2003.(A) THE CHEMRING 1998 EXECUTIVE SHARE OPTION SCHEMEDate Number of ordinary Exercise price Dates between which optionsof grant shares under option per share may be exercised£6 Apr 1998 10,824 1.395 6 Apr 2001 - 5 Apr 20083 Feb 2000 280,000 2.36 3 Feb 2003 - 2 Feb 201023 Jan 2002 54,000 3.805 23 Jan 2005 - 22 Jan 20125 Feb 2003 100,000 2.885 5 Feb 2006 – 4 Feb 2013(B)THE CHEMRING GROUP PLC SHARE BASED INCENTIVE SCHEME (“THE ESOP”)Date Number of ordinary Exercise price Dates between which optionsof grant shares under option per share may be exercised£13 Jan 1997 1,064 -13 Jan 1997 - 13 Jan 200413 Jan 1997 2,128 -13 Jan 2000 1 - 13 Jan 20041 From 13 January 2000 – 12 January 2002, only 50% of the option could be exercised; thereafter 100% of the option could be exercised.The shares under option in this scheme have been purchased in the market and are held by the Trustees of the ESOP.24. RESERVES(A) GROUPAt 1 November 2002Retained profitLoss arising from foreign exchange translationsTransfer between reservesAt 31 October 2003Sharepremiumaccount£00020,726---20,726Specialcapitalreserve£00012,939---12,939Revaluationreserve£0002,482--(36)2,446Revenuereserves£00011,0906,485(1,636)3615,975Total£00047,2376,485(1,636)-52,086The share premium account, special capital reserve and the revaluation reserve are not distributable.Included within revenue reserves is £1,040,000 of retained profits (2002: £949,000) relating to the associated undertaking.(B)PARENTAt 1 November 2002Retained lossForeign exchange differencesAt 31 October 2003Sharepremiumaccount£00020,726--20,726Specialcapitalreserve£00012,939--12,939Revenuereserves£0003,686(2,816)5141,384Total£00037,351(2,816)51435,049P 50The share premium account and special capital reserve are not distributable. A loss after taxation of £5,071,000(2002: £446,000) was recognised in the year by the parent company.

2 0 0 3 F I N A N C I A L S T A T E M E N T S25. OBLIGATIONS UNDER NON-CANCELLABLE OPERATING LEASESLand andbuildings£000Group2003Plant andequipment£000Land andbuildings£000Group2002Plant andequipment£000Within one yearTwo to five yearsMore than five years-58263321651991-1,64233832686546791,406-2,08526. ACQUISITIONS2001/02 AcquisitionsThe financial statements for the year ended 31 October 2002 did not disclose that fair values were provisional but in accordancewith FRS7 Fair values in acquisition accounting, fair values and goodwill in respect of acquisitions made in the previous financial yearhave now been adjusted as follows:I.C.S. Electronics LimitedThe fair value of the net assets acquired has been revised from £244,000 to £45,000. This is due to a reduction in the value ofstock acquired of £52,000 and an increase in liabilities acquired of £147,000. In addition, the fair value of the deferredcontingent consideration has been reduced by £100,000. Goodwill is now calculated to be £3,252,000.27. SALE OF BUSINESS DIVISIONAlloy Surfaces Company, Inc. Chemical Coatings DivisionOn 11 July 2003 the Group sold the business and net assets of Alloy Surfaces Chemical Coatings, a division ofAlloy Surfaces Company, Inc.. Profit after tax for the division for the period from 1 November 2002 to 10 July 2003was £34,000. Profit after tax for the division for the financial year ended 31 October 2002 was £190,000.Net assets disposed of and the related sale proceeds were as follows:£000Fixed assetsStockDebtorsConsideration:Cash933473117511,475Profit on disposal724P 51

C H E M R I N GG R O U P P L CNotes to the Financial Statements- continued28. CONTINGENT LIABILITIESThe Group’s captive insurance company CHG Insurance Limited, based in Guernsey, has provided the following insurance coverfor the Group since 31 October 2001:■■the first £2.5 million of material damage and business interruption cover, subject to a maximum liabilityof £3.5 million in any one year;the first £1 million of public and products liability insurance for the Group’s products which are exportedto the US.Additional cover in respect of these risks is placed with external insurers.29. POST BALANCE SHEET EVENTThe Group disposed of the entire issued share capital of Kembrey Wiring Systems Limited on 8 November 2003. An analysis ofthe assets disposed of is shown below:£000Fixed assetsStockDebtorsCashCreditorsConsideration:CashDeferred consideration1041,0411,9073(1,155)1,9001,2156851,900Cash consideration of £1,200,000 was paid on completion, with a further £200,000 paid in January 2004. The balance of theconsideration of £500,000 is payable in two equal instalments in November 2004 and November 2005.As a consequence of the disposal, the Group agreed to pay £465,000 to the Chemring Group Staff Pension Scheme, with£125,000 paid in November 2003, £170,000 payable on 8 November 2004 and £170,000 payable on 8 November 2005. Inaccordance with FRS3 Reporting Financial Performance these amounts have not been recognised in the year ended31 October 2003 and will be recognised in future results.P 52

2 0 0 3 F I N A N C I A L S T A T E M E N T SNotice and Agenda of Annual General MeetingNotice is hereby given that the ninety-eighth Annual General Meeting of the shareholders will be held at 14.30 hours onTuesday 23 March 2004 at The Solent Hotel, Rookery Avenue,Whiteley, Fareham, Hampshire PO15 7AJ for the purpose of transactingthe ordinary business referred to at “1” to “6” below and also, as special business, for the purpose of considering and (if thought fit)passing the resolutions numbered “7” and “8” below as ordinary resolutions and the resolution numbered “9” below as a specialresolution.1. To receive and adopt the financial statements for the year ended 31 October 2003 together with the reports of the directors andauditors thereon.2. To approve the payment of a final dividend of 4.85p per ordinary share for the year ended 31 October 2003 to be paid on9 June 2004 to shareholders on the register at the close of business on 14 May 2004.3. To approve the Directors’ Remuneration Report for the year ended 31 October 2003.4. To re-elect Mr K C Scobie who retires by rotation under the provisions of Article 92.1 of the Company’s Articles of Association.5. To re-elect General Sir John Stibbon who retires by rotation under the provisions of Article 92.1 of the Company’s Articles ofAssociation.6. To re-appoint the auditors and to authorise the directors to fix their remuneration.Ordinary Resolutions7. THAT the Company’s authorised share capital be and is hereby increased by £150,000 from £1,562,500 to £1,712,500 by thecreation of 3,000,000 new ordinary shares of 5p each, to rank pari passu with the existing ordinary shares of 5p each.8. THAT the Board be and it is hereby generally and unconditionally authorised pursuant to and in accordance with section 80 of theCompanies Act 1985 (‘the Act’) to exercise all the powers of the Company to allot and to make offers or agreements to allotrelevant securities (as defined in section 80(2) of the Act) up to an aggregate nominal amount of £128,201 as at the date hereofprovided that this authority shall expire at the commencement of the next Annual General Meeting of the Company after thepassing of this resolution save that the Company may before the expiry of this authority make an offer or agreement which wouldor might require relevant securities to be allotted after such expiry and the Board may allot relevant securities in pursuance of suchoffer or agreement as if the authority conferred hereby had not expired.Special Resolution9. THAT subject to resolution 8 being passed and pursuant to and in accordance with the authority thereby granted, the Board be andit is hereby empowered pursuant to section 95 of the Act to allot equity securities (as defined in section 94 of the Act) pursuant tosuch authority as if section 89(1) of the Act did not apply to any such allotment provided that this power shall be limited to theallotment of equity securities up to an aggregate nominal value of £68,589 and shall expire at the commencement of the nextAnnual General Meeting of the Company after the passing of this resolution or on 31 May 2005 (whichever is the earlier) save thatthe Company may before such expiry make an offer or agreement which would or might require equity securities to be allottedafter such expiry and the Board may allot equity securities in pursuance of such offer or agreement as if the power conferred herebyhad not expired.By Order of the BoardS L EllardSecretary1650 ParkwayWhiteleyFarehamHampshirePO15 7AH2 February 2004P 53

C H E M R I N GG R O U P P L CNotice and Agenda of Annual General Meeting- continuedNOTES1. A member entitled to attend and vote at the above meeting is entitled to appoint one or more proxies (who need not be membersof the Company) to attend and (on a poll) vote instead of him.2. Preference shareholders are not entitled to attend and vote at the meeting.3. A form of proxy for those entitled to vote is enclosed with this notice and to be valid, must be lodged with the Company'sRegistrars not less than forty-eight hours before the time appointed for holding the meeting.4. Copies of service contracts between the Company and certain of its directors are available for inspection at the registered officeduring normal business hours on each business day, and will be available for inspection at the place of the Annual General Meetingfrom 14.15 hours until the close of the meeting.P 54

Photographs:Offshore Challenges TrimaranPhoto: Andrea FrancoliniDPPI/Offshore Challenges.Ellen MacArthur Vendee Globe finishPhoto: Th MartinezOther Photography© Chemring Group PLC

C HEMRING G ROUP PLC1650 Parkway, Whiteley, Fareham, Hampshire PO15 7AH, EnglandTelephone +44 1489 881880 Facsimile +44 1489 881123