Bellway
Annual Report 2008

Plain-text annual report

Bellway cover AW 08:Annual report cover 18/11/08 11:39 Page 1 Bellway p.l.c. is committed to the efficient use of natural resources. This Annual Report and Accounts is printed using environmentally friendly recycled paper called 9 lives and environmentally friendly inks. Bellway p.l.c. Seaton Burn House . Dudley Lane . Seaton Burn . Newcastle upon Tyne NE13 6BE Tel. 0191 217 0717 Fax. 0191 236 6230 DX 711760 Seaton Burn www.bellway.co.uk ANNUAL REPORT & ACCOUNTS 2008 B E L L W A Y p . l . c . A N N U A L R E P O R T & A C C O U N T S 2 0 0 8 Bellway cover AW 08:Annual report cover 18/11/08 11:39 Page 2 Contents 02 03 05 06 07 13 15 19 21 25 27 34 42 Chairman’s Statement Figures at a glance The Board Advisers Chief Executive’s Operating Review Corporate Responsibility Policy Summary Corporate Responsibility Statement Environmental Policy Statement Financial Review Operating Risk Statement Report of the Directors Report of the Board on Directors’ Remuneration Statement of Directors’ Responsibilities in respect of the Annual Report and the Accounts 43 Independent Auditors’ Report to the Members of Bellway p.l.c. Group Income Statement Statements of Recognised Income and Expense Balance Sheets Cash Flow Statements Accounting Policies Notes to the Accounts Five Year Record Shareholder Information Notice of Annual General Meeting Principal Offices 44 44 45 46 47 52 79 80 83 86 Bellway p.l.c. Seaton Burn House, Dudley Lane, Seaton Burn, Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 . Fax: (0191) 236 6230 . DX 711760 Seaton Burn . Web site - www.bellway.co.uk Bellway Homes Limited Wessex Bellway House Embankment Way Castleman Business Centre Ringwood Hampshire BH24 1EU Tel: (01425) 477 666 Fax: (01425) 476 774 DX 45710 Ringwood OTHER Planning & Development Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 Fax: (0191) 236 6230 DX 711760 Seaton Burn City Solutions Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 Fax: (0191) 236 6230 DX 711760 Seaton Burn OTHER SUBSIDIARY Bellway Housing Trust Limited Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 Fax: (0191) 236 6230 DX 711760 Seaton Burn NORTHERN REGION SOUTHERN REGION East Midlands No 3 Romulus Court Meridian East Meridian Business Park Braunstone Town Leicester LE19 1YG Tel: (0116) 282 0400 Fax: (0116) 282 0401 North East Peel House Main Street, Ponteland Newcastle upon Tyne NE20 9NN Tel: (01661) 820 200 Fax: (01661) 821 010 DX 68924 Ponteland 2 North West Bellway House 2 Alderman Road Liverpool L24 9LR Tel: (0151) 486 2900 Fax: (0151) 336 9393 Scotland Bothwell House Hamilton Business Park Caird Street Hamilton ML3 0QA Tel: (01698) 477 440 Fax: (01698) 477 441 DX HA13 Hamilton West Midlands Bellway House, Relay Point Relay Drive, Tamworth Staffordshire B77 5PA Tel: (01827) 255 755 Fax: (01827) 255 766 DX 717023 Tamworth 8 Yorkshire 2 Deighton Close Wetherby West Yorkshire LS22 7GZ Tel: (01937) 583 533 Fax: (01937) 586 147 DX 16815 Wetherby Essex Bellway House 1 Rainsford Road Chelmsford Essex CM1 2PZ Tel: (01245) 259 989 Fax: (01245) 259 996 DX 121935 Chelmsford 6 North London Bellway House Bury Street Ruislip Middlesex HA4 7SD Tel: (01895) 671 100 Fax: (01895) 671 111 Northern Home Counties Oak House Woodlands Business Park Breckland Linford Wood Milton Keynes MK14 6EY Tel: (01908) 328 800 Fax: (01908) 328 801 DX 729383 Milton Keynes 16 Southern Counties Bellway House London Road North Merstham Surrey RH1 3YU Tel: (01737) 644 911 Fax: (01737) 646 319 Thames Gateway Osprey House Crayfields Business Park New Mill Road Orpington Kent BR5 3QJ Tel: (01689) 886 400 Fax: (01689) 886 410 Wales Alexander House Excelsior Road Cardiff CF14 3AT Tel: (029) 2054 4700 Fax: (029) 2054 4701 Chairman’s Statement Crystal Park, Airdrie, Lanarkshire Results The current state of the housing and mortgage markets has been well documented and the speed of the deterioration is unprecedented. Nevertheless, the Group completed the sale of 6,556 homes, a fall of 14.2% from last year’s record level of 7,638. The average price achieved for these sales was £169,729, down 2.1% from £173,300 in 2007, resulting in housing turnover reducing by 15.9% from £1,323.7 million to £1,112.7 million. Other turnover increased from £30.3 million to £36.8 million, resulting in total turnover for the Group of £1,149.5 million, compared to £1,354.0 million in 2007. Operating margins have come under increasing pressure as the market rapidly contracted and, in response to this, more incentives were used. As a consequence, the operating margin, as mentioned in the Trading Update on 14 August, has fallen from 18.7% in 2007 to 16.1%, before any exceptional charge. This has resulted in operating profit falling from £253.1 million to £185.0 million. The net interest charge for the period is £19.1 million, up from £17.9 million, mainly reflecting changes in interest rates. Gearing, as at 31 July 2008, was 23.7%, with 42.5% of the Group’s £512 million bank facilities having been utilised. In light of ongoing adverse market conditions, the Group considered it prudent to review its stocks by applying current expectations of revenues, dependent upon location and product. The Group has also written down costs incurred on sites, not yet purchased, where the likelihood is that we will not conclude a purchase under current contractual terms. In addition, our stock of unsold part exchange properties has been written down by 10%. The total exceptional charge created by these actions is £130.9 million, equating to 8.0% of stocks at 31 July 2008. The net profit before tax, and after exceptional items, was £34.8 million giving earnings per ordinary share of 23.6p, compared to 146.1p in 2007. Net assets per ordinary share at 31 July 2008 were 871p compared to 903p at 31 July 2007. Dividend The Board recognises the importance of cash dividends to shareholders and, consequently, despite the current instability in the financial markets and the resultant effects on the general economy, has decided to propose a final dividend of 6p per ordinary share. This results in a total dividend for the year of 24.1p, representing 56% of last year’s payment of 43.125p. The Board believes this level of dividend for the year is an appropriate reduction, given current trading conditions. Future dividend payments will be quantified with reference to cash generation. The dividend will be paid on Wednesday 21 January 2009 to all ordinary shareholders on the Register of Members on Friday 12 December 2008. The ex-dividend date is Wednesday 10 December 2008. Bellway p.l.c. Annual Report & Accounts 2008 02 Figures at a glance 2008 2007 TOTAL GROUP REVENUE £1,149.5m £1,354.0m OPERATING PROFIT - PRE EXCEPTIONAL ITEM - POST EXCEPTIONAL ITEM PROFIT BEFORE TAXATION - PRE EXCEPTIONAL ITEM - POST EXCEPTIONAL ITEM EARNINGS PER ORDINARY SHARE - PRE EXCEPTIONAL ITEM - POST EXCEPTIONAL ITEM TOTAL DIVIDEND FOR THE YEAR £185.0m £54.1m £165.7m £34.8m 104.2p 23.6p 24.1p £253.1m £253.1m £234.8m £234.8m 146.1p 146.1p 43.125p INCREASE IN SOCIAL HOUSING COMPLETIONS OF 49% TO 1,337 HOMES GEARING OF 23.7% 03 Bellway p.l.c. Annual Report & Accounts 2008 People In these extremely testing times our employees, sub-contractors, suppliers and partners have contributed more than ever to the production of these results and the Board is extremely grateful to all of them, including those who have now, sadly, left the business. The Board Leo Finn, our senior independent non-executive director, steps down at the forthcoming AGM on 16 January 2009 and will not seek re-election. Leo has given thirteen years of sterling service to the Group and the Board would like to thank him for all his efforts on behalf of Bellway. He is to be replaced on 1 February 2009 by Mike Toms whose current directorships include the role of non-executive director of UK COAL PLC and whose past directorships include the role of executive director of BAA plc. We wish Mike every success in his new role, which will incorporate the chairmanship of the Board Committee on Executive Directors’ Remuneration. Peter Johnson will become senior independent director from 16 January 2009. Outlook In its long experience, the Board has never witnessed such a swift change in the housing market as has been seen in the last twelve months. The Board has a clear strategy, aimed primarily at conserving cash and reducing the cost base, whilst maintaining the essential operational fabric and protecting shareholder value so that growth may commence when the market returns to more normal conditions. Howard C Dawe Chairman 24 October 2008 Dovecote Barns, Purfleet, Essex Castell Maen, Warrington, Caerphilly Bellway p.l.c. Annual Report & Accounts 2008 04 “ The Board has a clear strategy, aimed primarily at conserving cash and reducing the cost base, whilst maintaining the essential operational fabric and protecting shareholder value so that growth may commence when the market returns to more normal conditions.” The Board (cid:1) HOWARD C DAWE Date of Birth: 07.04.44 (cid:1) JOHN K WATSON Date of Birth: 21.03.54 (cid:1) PETER J STOKER Date of Birth: 23.05.56 (cid:1) ALISTAIR M LEITCH Date of Birth: 14.02.54 Mr Dawe joined Bellway in 1961, was appointed a director in 1977 and was appointed Group Chief Executive in 1985. In May 1997 he was appointed Acting Chairman and Chairman on 1 November 1999, when he relinquished the role of Chief Executive. On 1 November 2004, Mr Dawe became non- executive Chairman. He is a member of the Nomination Committee. Mr Watson, a Chartered Surveyor, joined Bellway in 1978. He was later appointed Managing Director of the North East division, a position which he held for 12 years. He joined the Board as Technical Director in 1995 and became Chief Executive on 1 November 1999. He is Chairman of the Board Committee on Non-Executive Directors’ Remuneration. Mr Stoker qualified as a Solicitor in 1979 and joined Bellway in 1981. He was appointed Company Secretary in 1985 and joined the Board as an executive director in 1995. He resigned as Company Secretary to take up his new role as Commercial Director on 1 August 2002. He is a member of the Board Committee on Non-Executive Directors’ Remuneration. Mr Leitch qualified as a Chartered Accountant in 1977 and joined Bellway in 1981. He has held a number of senior positions in the Company including, from 1996, the post of Group Chief Accountant. He was appointed Finance Director on 1 August 2002. He is a member of the Board Committee on Non- Executive Directors’ Remuneration. 05 Bellway p.l.c. Annual Report & Accounts 2008 Advisers Group Company Secretary and Registered Office G K Wrightson ACIS Bellway p.l.c. Seaton Burn House Dudley Lane, Seaton Burn Newcastle upon Tyne NE13 6BE Registered number 1372603 Financial Advisers N M Rothschild & Sons Limited Registrars and Transfer Office Capita Registrars Limited Northern House, Woodsome Park Fenay Bridge, Huddersfield West Yorkshire HD8 0LA Stockbrokers Citigroup Global Markets Limited Bankers Barclays Bank PLC HBOS plc Lloyds TSB Bank plc Auditors KPMG Audit Plc Quayside House, 110 Quayside Newcastle upon Tyne NE1 3DX (cid:1) LEO P FINN Date of Birth: 13.07.38 (cid:1) DAVID G PERRY Date of Birth: 26.12.37 (cid:1) PETER M JOHNSON Date of Birth: 17.04.48 (cid:1) GROUP COMPANY SECRETARY Mr Perry was appointed a non- executive director on 1 November 1999. He was formerly Chairman of Waddington PLC and Anglian Group PLC. He is Chairman of the Nomination Committee and is also a member of both the Audit Committee and the Board Committee on Executive Directors’ Remuneration. Mr Finn was appointed a non- executive director on 1 August 1995 and was, until February 2001, the Chief Executive of Northern Rock plc. He is currently Non-Executive Chairman of Northern Recruitment Group Plc and a member of the North East Regional Housing Board. Since 1 November 2003 he has been senior independent non-executive director and Chairman of the Board Committee on Executive Directors’ Remuneration. He is also a member of both the Audit Committee and the Nomination Committee. Mr Johnson, a Chartered Accountant, was appointed a non-executive director on 1 November 2003. He had been, on his retirement in September 2000, a partner in KPMG for 23 years. He is a Non-Executive director of Sunderland Marine Mutual Insurance Company Limited and Honorary Treasurer of the University of Newcastle upon Tyne. He is Chairman of the Audit Committee and is also a member of both the Board Committee on Executive Directors’ Remuneration and the Nomination Committee. G KEVIN WRIGHTSON Date of Birth: 27.10.54 Mr Wrightson, a Chartered Secretary, joined Bellway in 1990. He has held senior posts within the Group, including that of Deputy Group Secretary, before being appointed as Group Company Secretary on 1 August 2002. Bellway p.l.c. Annual Report & Accounts 2008 06 Chief Executive’s Operating Review Introduction The Group’s policy of forward selling resulted in the Company holding a strong forward sales position of £594 million on 1 August 2007. As the events of the last twelve months unfolded, this order book stood us in good stead to weather the initial changes in the market. From Easter onwards, however, customers cancelled at an increasing rate and our divisional sales teams did well to hold on to sales they had achieved, resulting in a year on year fall in total completions of 14.2% to 6,556. This number was underpinned by an increasing proportion of social housing where completions rose by 49% to 1,337 homes. The Group has sold 144 properties to first time buyers through initiatives promoted by English Partnerships and the Housing Corporation. Private sales fell by 22.5% to 5,219 homes, reflecting the swift change in consumer confidence. Completions are divided almost equally between the northern and southern regions. Regional Performance Northern Region During the year, the then nine northern divisions sold 3,348 homes, a decrease from the previous year’s 4,168 homes. Of this total, 339 homes, some 10%, were sold to housing associations compared to 431 the previous year. Overall the average selling price in the north is marginally reduced at £157,000. The effect of the slowing economy and the erosion of consumer confidence hit our markets in the north much earlier in the financial year with the Manchester and Yorkshire divisions being particularly hard hit. Conversely, the South Midlands division managed to increase output benefiting from new outlets opening as part of the North Solihull regeneration project. The West Scotland division maintained output of 500 homes without any exposure to social housing and the West Lancashire division, with an average selling price of only £126,000, continued to build on several developments in and around the Liverpool Pathfinder area which led to the completion of 528 homes, of which some 19% were sold to housing associations. Earsdon View, Shiremoor, North Tyneside Meridian South, Borough of Lewisham, London 07 Bellway p.l.c. Annual Report & Accounts 2008 foundations and road and sewer works. Approximately 30% of production last year used timber frame systems where the price of timber has fallen by up to 10%. National agreements with major suppliers should reduce ongoing costs by a further £5 million per annum. The overall build cost per home, therefore, should continue to fall, helping, in part, to offset sales incentives currently being offered. Overhead Reduction and Company Structure With little prospect of an immediate recovery, the primary operational focus of the Group has changed during the course of the year to cost control and cash management. At the beginning of May, the Group commenced a redundancy and rationalisation programme which resulted in job losses amounting to 35% of the workforce. The vast majority of these people have, sadly, already left the organisation. This should result in a net overhead saving of £8 million in the financial year ending 31 July 2009. The number of divisions has been slimmed down from eighteen to thirteen. This now leaves the Group much leaner as most of the affected divisions have been amalgamated with adjoining ‘neighbours’. We feel nationwide coverage has not been compromised and the Group’s growth potential remains intact. Bellway continues to focus on cost control and cash management. Every new release to construct is now assessed centrally on a plot by plot basis and only proceeds if production is matched by sales. The result of these actions should lead to a reduction in the number of active sites, which presently stands at around 210. Southern Region The Southern divisions sold 3,208 homes, a decrease of only 7.5% from the previous year’s total of 3,470. This relatively small reduction was achieved by more than doubling sales to housing associations from 469 to 998 homes. Primarily due to this increased exposure to social housing, the overall average selling price for the region fell from £191,000 to £183,000. The Thames Gateway area demonstrated the greatest resilience, with the Thames Gateway North division, established in 2005, virtually doubling volumes to 203 homes. Its much larger neighbour, Thames Gateway South, also benefited from strong demand, especially from developments in the London boroughs of Tower Hamlets and Greenwich, which helped to increase output to 759 homes. Sales Incentives and Cost Control During the year the average cancellation rate gradually increased, finishing at an annualised rate of 26%, a level not previously experienced. Sales incentives have therefore been employed on a regular basis to support the targeted selling rate. Typically these incentives included cash discounts, part exchange and other incentives determined by our divisions. Mortgage and stamp duty subsidies, for example, were widely advertised and utilised. For the second time buyer, part exchange was a popular sales aid and was used in 10% of transactions. The Group sold 560 part exchange homes during the year and ended it with a stock of 331 part exchange properties valued at £40.6 million, after the exceptional write down. Since the year end, the stock has been reduced to £29 million. Tight controls continue to be operated in relation to the part exchange scheme in these markets. These incentives have been a major reason for the operating margin falling from 18.7% to 16.1%. In response to the reduction in workloads, we have seen a curtailment in labour rate increases and in sub-contract tender prices, where recent tenders have fallen by up to 6%, particularly in areas such as Bellway p.l.c. Annual Report & Accounts 2008 08 Land The Group has been cautious over the last twelve months, but particularly in 2008 with regard to land acquisition, with very little new investment in land with planning permission. During the year, 5,556 plots were acquired and land held with planning permission reduced to 22,500 plots, compared with 23,500 in the previous year. Land owned, contracted or under option currently awaiting planning permission has decreased to 14,400 plots, a fall of 1,400 as we allowed contracts that we deemed no longer viable to expire. The Group has 36,900 plots as part of its short and medium-term holdings. These holdings exclude long term land, representing a combination of greenfield and regeneration opportunities, amounting to around 4,850 plots. Due to the weaknesses in the market and, in particular, selling prices, the holding cost of stock has been reviewed. Whilst markets currently vary, dependent upon product and geography, selling prices since 31 July 2008 have fallen. This has resulted in a total write-down of stocks of £130.9 million, including around £15 million of fees and option costs already incurred on land transactions that are unlikely to proceed and £3 million in relation to part exchange stocks. Environment The grant of planning permission is often perceived by local politicians and communities as damaging to the environment, however, with the grant of planning permission, substantial benefits often accrue which are not always apparent to the broader community. During the year, through a variety of legal agreements, the Group’s developments will generate an estimated £17 million of benefits with the majority of its contributions going towards education and sporting facilities. Other benefits include car clubs, especially in and around London, which aim to reduce the number of car journeys made by residents from each development. Running costs of new homes will come down as the industry embraces new technology. During the year 5% of our production incorporated some form of renewable energy technology, utilising features such as solar and photovoltaic panels and biomass heat units. In Halstead, Essex, for example, construction is about to commence using air source heat pumps and a heat recovery system which should reduce the carbon footprint of each home by about 40%. Additionally, almost 20% of homes built were constructed to EcoHomes standards. With the imposition of higher gas and electricity bills, the purchase of a new Bellway home will certainly reap rewards for our purchasers, as well as directly benefiting the environment. An increasing element of the whole construction process incorporates recycled materials such as plasterboard, timber flooring and lightweight blocks. All timber now comes from accredited managed sources. With the cost of landfill waste increasing on an annual basis we have, during the year, recycled almost 2,900 tonnes of plasterboard and, in addition, 106,000 tonnes of demolition material has been crushed and reused on-site. Health and Safety The Group is pleased to report that the number of lost time reportable accidents declined during the year from 48 to 46. The number of reportable accidents resulting from falls from height declined from 11 to 8. The Group is currently enforcing best practice on its sites by targeting and supporting a nationwide ladder safety campaign. Site based employees, including those employed by sub-contractors, attend regular health and safety meetings to raise awareness on this most serious of subjects. Low Mill Fold, Addingham, West Yorkshire 09 Bellway p.l.c. Annual Report & Accounts 2008 Bellway p.l.c. Annual Report & Accounts 2008 10 Demolition treatment Stone crushing and sorting “during the year, we have recycled almost 2,900 tonnes of plasterboard and, in addition, 106,000 tonnes of demolition material has been crushed and reused on-site.” During the year, the Manchester division (now part of the North West division) received a silver award from the Royal Society for the Prevention of Accidents (“RoSPA”) for the second year running in recognition of its high standards in managing and maintaining health and safety awareness. In addition, 93% of employees have now received a Construction Skills Certification Scheme (“CSCS”) card and site managers are being trained to NVQ Level 3. Customer Care At Bellway, we pride ourselves in providing a first class service, guiding our customers through every step of the purchasing process. The latest independent survey, carried out on a quarterly basis, confirmed that 80% of our customers are prepared to recommend Bellway to a friend - a marginal improvement on last year’s 79%. The Group must continue to improve its performance in this area and the recent Office of Fair Trading investigation into the housebuilding industry will result in a new customer code being agreed and implemented in the near future. Looking Forward The Group had secured an order book, at 30 September 2008, of £342 million with almost 50% of these sales to housing associations. There is clearly, at present, great uncertainty regarding future transaction levels, selling prices and profitability. Therefore, the Group’s priorities are to target the sale of stock properties and strictly control work in progress and land expenditure, with a view to reducing borrowings from the year end position of £218 million, thus further lowering gearing. The Group is, and wishes to remain, in a strong position to recommence its organic growth model as and when more normal market conditions return. John K Watson Chief Executive 24 October 2008 11 Bellway p.l.c. Annual Report & Accounts 2008 Brooklands, Harold Hill, Essex Bellway p.l.c. Annual Report & Accounts 2008 12 Corporate Responsibility Policy The Old Tannery, Canterbury, Kent one of the main challenges facing “The effect of climate change is the housebuilding industry today.” Bellway p.l.c. Annual Report & Accounts 2008 13 Through Bellway’s commitment to corporate responsibility we will: (cid:1) engage and respond to stakeholders, including shareholders, employees, customers, government and communities that we affect (cid:1) comply with all relevant legislation as a minimum standard (cid:1) work towards recognised good practice in sustainability and corporate responsibility (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) treat all employees fairly and invest in training for the long-term to bring out the best in our people provide a healthy and safe environment in which to work through an effective health & safety management system demonstrate continual improvement in our approach to sustainable developments (in both design and practice) recognise and respond to the challenges and opportunities that are presented by climate change invest in the communities we develop in a way that contributes to local community needs (cid:1) manage our environmental footprint and aim to enhance our performance in areas where we operate, particularly in relation to energy and waste (cid:1) (cid:1) (cid:1) consider and respond to the social and environmental effects of the homes we develop and communities that we create improve internal and external awareness of our corporate responsibility programmes and initiatives report regularly to the Board and external stakeholders on performance using sustainability indicators. The following structure has been put in place to achieve these commitments. (cid:1) (cid:1) (cid:1) The Chief Executive is responsible for this policy and advising the Board on all corporate responsibility matters. The Chief Executive is supported by the Sustainability Management Working Group which includes senior employees from across the Group who are responsible for the development and review of this policy. The financial directors or managers of each regional division are responsible for implementation and reporting on performance. Bellway is committed to reporting annually on its approach to corporate responsibility and has established key performance indicators to enable others to judge our performance. This policy does not replace existing policies on environment, health & safety and wood procurement, but has been developed to work in conjunction with them. All policies are available on the Bellway website www.bellway.co.uk and are reviewed annually. Bellway p.l.c. Annual Report & Accounts 2008 14 Bellway believes that its reputation is critical to the creation of long- term value for its shareholders. We recognise that financial success is reinforced by our behaviour beyond the balance sheet. Protecting and enhancing our reputation and social licence to operate is a significant element of sustained financial success. Corporate responsibility is action taken by our Group which positively affects our employees, customers, shareholders, suppliers, the communities where we work and the environment that we operate in, and goes beyond our legal or regulatory obligations. This policy sets out how we will operate and drives the Group’s corporate responsibility activity. Summary Corporate Responsibility Statement 15 Bellway p.l.c. Annual Report & Accounts 2008 Increasingly we are focusing upon the sustainability of the homes that we build. We aim to minimise the effects of the building process and create vibrant sustainable communities where people wish to live. To achieve this objective we have established five strategic principles that steward our day-to-day activities. (cid:1) (cid:1) Protection of the environment in which we are working. Prudent use of natural resources. (cid:1) Creating environments that have the potential to add to economic growth and employment opportunities. (cid:1) (cid:1) Social considerations that recognise the needs for a changing and advancing population. The development of communities that will endure and where people will aspire to live. Protection of the environment The construction process affects the environment in many different ways. It is our aim to minimise the effect of our development operations and reclaim former brownfield sites, returning them to community use. This year 79% of our developments have been built on brownfield sites – well above the Government target of 60%. The majority of these sites are located in urban areas, where there is greater potential to affect neighbouring communities. Prior to construction, we test all sites with impact assessment and sustainability studies. The preparation of these documents, in conjunction with public consultation exercises, allows us to understand the unique characteristics of the sites we develop and to identify the appropriate methods of remediation and development. We have deliberately chosen timber frame as a principal building material. This year 30% of our homes have been constructed using timber frame. Timber is a natural and renewable resource that offers significant environmental benefits saving around 4 tonnes of CO² for every home built. All our timber suppliers are either accredited to Forest Stewardship Council (“FSC”) or Programme for the Endorsement of Forest Certification (“PEFC”) standards. Wherever possible we aim to reuse materials and this year 106,000 tonnes of demolition material has been recycled. During the year Site Waste Management Plans have been introduced. They will advance the management of waste materials and increase the volume of material that is able to be re-used. The objective is, ultimately, to achieve 100% recycling on-site. Prudent use of natural resources Earlier this year we undertook a detailed review of our supply chain which enabled us to evaluate the consequences of the materials used in the construction process and their method of manufacture. The selection of building materials is a key component in limiting the effects of climate change. Many of the products we use display high environmental credentials. For example, Thermalite is a brand of aerated concrete block containing up to 80% recycled material (pulverised fuel ash) which achieves an “A” rating in the Green Guide and offers high standards of insulation. Bellway p.l.c. Annual Report & Accounts 2008 16 Synergy at Park 25, Redhill, Surrey 2008 marks the sixth successive year for reporting the progress we are making in managing the effect of our operations on the environment. Since the publication of our first report in 2003 we have made considerable progress in managing our environmental footprint and what this means to the many communities around the country where Bellway is working. Our sustainability strategy helps us to respond to the numerous social, economic and environmental challenges that we face. It also represents an investment in the future of our business enabling us to adapt to the changing expectations and needs of society. Developing communities that will endure and where people will aspire to live In creating new neighbourhoods and better places to live we aim to blend design quality with affordable prices to create community hubs with safer streets, play areas and better community facilities. Schemes involving significant regeneration are underway in various parts of the country. In bringing these schemes forward, as well as creating new homes and new places to live, we are adding wealth to the local economy through the building process and the transformation of these formerly derelict sites. Increasingly the housebuilding environment is becoming more complex. Bellway has made considerable progress in recent years in the way that it manages the effect of its operations upon the environment. We fully expect that the coming years will be as equally challenging, but feel confident that Bellway is well placed to respond to these challenges. “As well as returning derelict land back to economic use, the regeneration is creating valuable training and employment.” Adding economic value to communities Bellway has an established track record for its ability to manage significant regeneration schemes across the country. These are extremely complex projects calling for a broad spectrum of experience. One of the principal outcomes of these schemes is the value that we add to the community in terms of returning derelict land to economic use. For example in Glasgow, it has been acknowledged that our Mondriaan development has created a radical new presence amidst one of the most challenging social environments in Scotland. Similarly, in South Tyneside, our scheme at Cleadon Park has turned a blighted area into a new community, benefiting from 750 new, seamlessly integrated homes for sale and rent, along with a new primary care centre and community facilities. Recognising the needs for a changing and advancing population Bellway has been at the forefront of developing new and extending existing communities for more than 20 years. Recognising the unique characteristics that combine to create sustainable communities lies at the heart of our business. Last year saw the completion of our Ravenswood scheme in Ipswich. After 10 years of development, this 1,200 home community provides a high quality, attractive and stimulating environment for residents. The scheme provides a wide range of accommodation and tenure, meeting both the local and wider needs of the Ipswich and Suffolk area. In North Solihull, we are engaged in a major regeneration scheme that will result in new homes, new schools, more open space and new village centres. The overall aim of the scheme is to bring about physical change to a deprived area and to bridge the economic divide between north and south Solihull. Key to the success of this scheme is the partnership we have with the community and key stakeholders; a fact that was recognised this year when the scheme won the Regeneration and Renewal Partnership of the Year Award, with the judges citing that community involvement was at the forefront of the scheme. Similarly, in the Meden Valley, on the borders of Nottinghamshire and Derbyshire, we are working with the development agency, Meden Valley Making Places, to regenerate the neglected former coal mining areas. As well as returning derelict land back to economic use, the scheme is creating valuable training and employment opportunities for the local community. To date, more than 100 local people have been employed across a range of building trades. Apprenticeship schemes have also been established which work in conjunction with local colleges so that apprentices develop building skills and attain recognised qualifications. 17 Bellway p.l.c. Annual Report & Accounts 2008 The Hawthorns, Leicester, Leicestershire Parade Park, Dennistoun, Glasgow Key Performance Indicators Economic Total homes sold Number of homes sold to Registered Social Landlords Plots with planning permission Environmental % of homes developed on brownfield sites Density of build per hectare (number of homes) Number of EcoHomes with at least 'Very Good' rating Number of homes built to Code Level 3 (1) Average SAP rating for all Bellway homes Number of homes built with renewable energy technology % of homes built using timber frame Tonnes of plasterboard recycled Measure of waste (skips 7m3/home sold) Number of compliance breaches Employees Training days per employee Employee turnover Number of employees accredited with CSCS cards Number of apprentices employed Health and Safety Lost time accidents Number of health and safety prosecutions 2004 6,610 556 20,700 75% 56 168 - 95.60 - - 1,287 6.10 4 0.50 na na 116 57 0 Notes: 1. The Code for Sustainable Homes Level 3 applies to new build social housing from April 2008 and therefore this is the first year of reporting. na = not available Financial year ended 31 July 2006 2005 2007 7,001 828 22,500 78% 69 224 - 89.60 - 25% 2,408 7.55 1 1.18 27.0% 305 139 51 0 7,117 790 22,600 81% 69 263 - 90.20 - 32% 4,708 7.10 3 1.22 31.1% 597 206 47 1 7,638 900 23,500 81% 66 326 - 91.20 17 34% 3,900 5.70 9 1.24 25.6% 783 203 48 0 2008 6,556 1,337 22,500 79% 63 1,194 48 88.00 307 30% 2,868 4.30 6 1.03 33.7% 1,042 149 46 0 Bellway p.l.c. Annual Report & Accounts 2008 18 Environmental Policy Statement “The Bellway Group is one of the largest house builders in the UK. The house building process affects the environment by the use of land and consumption of resources throughout the development process. It is our objective to ensure that at the conclusion of a development an attractive and sustainable new environment has been created that will continue over time.” Cotton Gardens, Romford, Essex 19 Bellway p.l.c. Annual Report & Accounts 2008 Recognising that we have responsibilities to both limit damage to and enhance the environment, this statement sets out our policies for managing the environmental aspects across our business. Key objectives are to: (cid:1) minimise any deleterious effects on the environment and where possible to seek environmental enhancements, concentrating on areas where there is most room for improvement (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) aim to meet and, where practicable, exceed all relevant environmental legislation and regulations improve our environmental performance set specific environmental objectives and targets and periodically review progress against these ensure that Bellway's environmental aims and their importance are communicated throughout the Group, including appropriate sub- contractors and suppliers, and that a copy of this policy statement is displayed at each Bellway office and site consider the role that Bellway can play in helping to contribute to the principles of sustainable development within the UK recognise and respond to the challenges and opportunities that are presented by climate change. In addition to our key commitments, the Group has identified a number of specific priority areas which we will endeavour to achieve: (cid:1) consideration of environmental aspects in the selection and procurement of land for development, including implications for biodiversity and sustainable development (cid:1) meeting and, where possible, exceeding government targets for the redevelopment of brownfield land (cid:1) (cid:1) (cid:1) influencing the design of sites, housing, and fittings to minimise effects on both the natural and built environment providing environmental benefits and minimising nuisance arising from construction activities and preventing pollution on development sites consideration of environmental issues within our corporate functions and everyday business decision-making processes. The above statement will be balanced against economic considerations. Bellway p.l.c. Annual Report & Accounts 2008 20 The Embankment, Gravesend, Kent Financial Review Introduction Bellway is a volume housebuilder selling primarily in the private market and trading nationally in areas of high population. Its principal subsidiary company is Bellway Homes Limited which, during the majority of the financial year to 31 July 2008, traded throughout Great Britain from its eighteen operating divisions. In the latter part of the year, however, a process of divisional rationalisation was undertaken in order to address the downturn in market conditions. The aim of this process was to reduce the number of operating divisions to thirteen, whilst still maintaining geographical coverage. This was achieved shortly after the year end. Each operating division of Bellway Homes Limited has its own local management team covering all aspects of the business and they are given a high degree of autonomy and responsibility. Although the Group is decentralised, there are strict central controls and reporting systems in place. The main Group financial and computing systems are standard throughout and this has been achieved without diluting the local character of the divisions. Bellway Homes Limited has three further divisions; Planning and Development which deals with planning matters and long-term strategic land acquisitions on a national basis; City Solutions which deals with the sourcing of regeneration projects throughout the UK and Group Administration which deals with, among other things, group reporting systems, information technology, treasury, banking, personnel, pensions, land vetting, public relations, administration, insurance, legal and company secretarial functions. 21 Bellway p.l.c. Annual Report & Accounts 2008 The activities of other subsidiary companies accounted for less than 1% of the turnover of the Group. Reporting Requirements The accounting policies of the Group are stated on pages 47 to 51. The report on corporate governance as recommended in the ‘Combined Code’ is stated on pages 28 to 32. The Report of the Board on Directors’ Remuneration is shown on pages 34 to 41. International Financial Reporting Standards The financial information has been prepared in accordance with International Financial Reporting Standards adopted by the EU (IFRSs). Income Statement Revenue and profit from the sale of homes is recorded when sales are legally completed. We build an extensive range of homes and a geographical summary of the homes sold in the year to 31 July is detailed in the table overleaf. Homes sold Number 2008 2007 Northern Region 3,348 4,168 Average selling price £000 2008 157.3 2007 158.5 Turnover £m 2008 2007 526.6 660.7 Southern Region 3,208 3,470 182.7 190.8 586.1 663.0 GROUP TOTAL 6,556 7,638 169.7 173.3 1,112.7 1,323.7 The new homes sold above include 1,337 (2007 – 900) housing association sales. In addition, the Group derived £36.8 million (2007 - £30.3 million) turnover from other sources. This consisted of land sales, financial services, commercial developments, rental income and miscellaneous items. The Group will, in the appropriate economic environment, seek to secure forward sales of homes. This policy involves securing a purchaser in advance of the physical completion of the home. Marketing frequently begins at an early stage of a development and prospective purchasers are able to pay a small deposit of between £250 and £1,000 in order to register their interest in a property. At this stage there is no legal obligation for the prospective purchaser to buy the property and no legal obligation for the Group to sell. The Group is merely giving an undertaking not to secure another purchaser within a particular number of weeks. The deposit is held in the balance sheet as a payment in advance of the purchase. If the prospective purchaser does not proceed to exchange and completion the cash deposit is classified as a forfeited deposit and taken to the income statement. Once contracts are exchanged, a larger deposit is paid and there is a legal obligation to purchase, and to sell, the home. This larger deposit is also held in the balance sheet as a payment in advance. All deposits are taken to the income statement on legal completion, as part of revenue. The Group acquires second hand homes taken in part-exchange against a new home. The subsequent sales of these properties are not included in homes sold or turnover. The net result of the part-exchange transaction is classified as a cost of sale. Pre-exceptional gross profit decreased from £311.9 million to £243.8 million and administrative expenses during the year remained static at £58.8 million, representing 5.1% of turnover (2007 – 4.3%). The operating profit (pre-exceptional item) of £185.0 million compares to £253.1 million last year, giving an operating margin of 16.1% on turnover (2007 – 18.7%). All the Group operating profit arose in Great Britain. Interest is written off as it is incurred and this year amounted to £19.1 million compared to £17.9 million in 2007 and is covered 10 times (2007 – 14 times). The profit before taxation (pre-exceptional item) of £165.7 million is £69.1 million lower than the previous year’s figure of £234.8 million, a decrease of 29.4%. Bellway p.l.c. Annual Report & Accounts 2008 22 Key Financial Performance Indicators Revenue Operating Margin Profit before taxation Earnings per ordinary share Dividend per ordinary share Net asset value per ordinary share £m 1,400 1,200 1,000 800 600 400 200 0 % 20 15 10 5 0 £m 250 200 150 100 50 0 pence 160 140 120 100 80 60 40 20 0 pence 50 pence 1,000 40 30 20 10 0 800 600 400 200 0 08 07 06 05 04 08 07 06 05 04 08 07 06 05 04 08 07 06 05 04 08 07 06 05 04 08 07 06 05 04 The pre-exceptional tax charge for the year (including deferred tax) of £46.2 million (2007 - £65.0 million) is 27.9% (2007 – 29.0%) of profit before taxation (pre-exceptional item). The current tax charge (pre- exceptional item) is 27.1% (2007 – 28.7%) and this compares with the company’s standard tax rate for the year of 29.3% (2007 – 30.0%). The Group does not have the benefit of any unused tax losses. The Board is recommending a dividend for the year of 24.1 pence per ordinary share representing a decrease of 44.1% on the previous year, which is covered 4.3 times by earnings (2007 – 3.4 times). Basic earnings per share (pre-exceptional item), (EPS), amount to 104.2 pence, compared to 146.1 pence in 2007, a decrease of 28.7%. Exceptional Item Exceptional items are those which, in the opinion of the Board, are material by size or nature, non-recurring, and of such significance that they require separate disclosure in the income statement. For the year ended 31 July 2008, a full review of inventories has been performed and write downs have been made where cost exceeds estimated net realisable value. Net realisable value represents the estimated selling price (in the ordinary course of business) less all estimated costs of completion and overheads. Estimated selling prices have been reviewed on a site by site basis and selling prices have been reduced based on local management and the Board’s assessment of current market conditions. In the main, a fall of 12.5% in housing revenue was assumed, although certain sites had revenue falls in excess of this amount applied. These site reviews have resulted in write-downs totalling £112.5 million. In addition land option costs and related fees have been written down by £15.4 million to their net realisable value. The Board has also reassessed the net realisable value of currently unsold part exchange properties and has written down stock by 10% totalling £3.0 million. The above has resulted in an exceptional charge of £130.9 million. Balance Sheet The balance sheet remains strong with inventories, after exceptional charges, showing a moderate decrease from £1,537.9 million to £1,503.9 million. Our land holdings, at 31 July 2008, with residential planning permission total some 22,500 units (2007 - 23,500 units). In addition, we have extensive land interests with development potential. At 31 July 2008 borrowings, net of cash balances, were £237.7 million, which compared with £112.2 million last year. The Group’s gearing at 31 July 2008 was 23.7% compared with 10.8% last year. Net current assets increased by £196.2 million from £1,134.6 million to £1,330.8 million. 23 Bellway p.l.c. Annual Report & Accounts 2008 “Each operating division of Bellway Homes Limited has its own local management team covering all aspects of the business and they are given a high degree of autonomy Ley Hill, Birmingham, West Midlands and responsibility.” Total equity decreased by £34.7 million from £1,035.8 million to £1,001.1 million, reflecting total recognised income of £16.7 million, less ordinary dividends paid of £51.3 million and share issues and share option movements in reserves of £0.1 million. Finance Other than the proceeds obtained from the issue of ordinary shares and reinvestment of retained profits, the Group’s activities are financed principally by a combination of preference shares, bank borrowings and cash in hand. Our bank borrowing facilities comprise a long-term fixed rate loan, medium-term loans, short-term floating rate loans and overdrafts. terms in its contracts for land purchases. In addition, the Group often obtains deferred payment Fair Value The fair values of the Group’s financial instruments at 31 July 2008 are disclosed in note 17 on page 64. This states that the fair values are not materially different to their book value except that, for the 9.5% cumulative redeemable preference shares, and the long-term fixed rate bank loan the fair value exceeds book value by £0.4 million and £0.02 million respectively. This reflects the movement in long-term interest rates since these financial instruments were entered into. Share Price and Net Asset Value The share price at 31 July 2008 was 477.25p (2007 – 1,247p). This compares with a book net asset value at 31 July 2008 of 871p (2007 – 903p). Alistair M Leitch Finance Director 24 October 2008 Treasury Policy and Liquidity Risk The Group’s treasury policy has, as its principal objective, the maintenance of flexible bank facilities in order to cover anticipated borrowing requirements. A sophisticated cash forecasting system enables the Group to plan and assess its future treasury needs. Short-term cash surpluses are placed on deposit. Other than mentioned above, there are no financial instruments, derivatives or commodity contracts used. Interest Rate Risk The Group’s attitude to interest rate risk is influenced by the existing and forecast conditions prevailing at the time that each new interest-bearing instrument is entered into. This will determine, amongst other things, the term and whether a fixed or floating interest rate is obtained. Bellway p.l.c. Annual Report & Accounts 2008 24 Operating Risk Statement is a key operating component “The management of risk of the Bellway Group.” Bellway p.l.c. Annual Report & Accounts 2008 25 The management of risk is a key operating component of the Bellway Group. The manner in which this is carried out is very important to the long term success of the business. The principal operating risks of the Group include, but are not limited to, the following areas: (cid:1) Land Inability to source suitable land at satisfactory margins would have a detrimental effect on the Group’s land bank and consequently, its future success. (cid:1) Planning Delays and the increased complexity of the planning process hampers and slows the Group’s growth prospects. (cid:1) Sales Ensuring that the effects of any diminution in the size of the market place, the ability of prospective customers to access credit facilities or the sales prices achieved are managed in such a way as to limit any adverse financial or operational effects on the Group’s performance. (cid:1) Construction Ensuring, in a competitive labour market, that appropriately skilled personnel are available and that suitable materials are also available at the right price. (cid:1) Environment Housebuilding has a significant effect on the environment. It is important that the effects of the Group’s developments are, as far as possible, positive rather than negative. (cid:1) Health & Safety It is important to ensure that the Group has adequate systems in place to mitigate, as far as possible, the dangers inherent in the construction process. (cid:1) Personnel Attracting and retaining the correct personnel is key to the Group’s long term success. Failure to do so will severely affect the Group’s ability to perform in a highly competitive market. (cid:1) Information Technology It is vital that the Group has suitable systems in place to ensure that, as far as possible, a smooth flow of information operates throughout the Group and that the risk of system loss is mitigated and supported by appropriate contingency plans. (cid:1) Insurance It is vital that suitable insurance arrangements exist to underpin and support the many areas in which the Group is exposed to risk of loss. Bellway p.l.c. Annual Report & Accounts 2008 26 Report of the Directors The directors have pleasure in submitting the Annual Report and Accounts of Bellway p.l.c. to the shareholders for the year ended 31 July 2008. Principal activities The Company is a holding company, owning subsidiary undertakings which continue to be engaged principally in housebuilding in the United Kingdom. Performance and prospects A review of the Group’s performance and prospects that fulfils the requirements of the business review can be found in the Chairman’s Statement on pages 2 to 4, the Chief Executive’s Operating Review on pages 7 to 11, the Corporate Responsibility Policy on pages 13 to 14, the Summary Corporate Responsibility Statement on pages 15 to 18, the Environmental Policy Statement on pages 19 and 20, and the Financial Review on pages 21 to 24. In addition, information in respect of the principal operating risks of the business is set out in the Operating Risk Statement on pages 25 and 26. Results and dividends The profit for the year attributable to equity holders of the parent amounts to £27.0m (2007 - £166.7m). Ordinary dividends The directors have proposed a final ordinary dividend for the year ended 31 July 2008 of 6.0 pence per share. This has not been included within creditors as it was not approved before the year end. Dividends paid during the year comprise a final dividend of 26.675 pence per share in respect of the previous year ended 31 July 2007, together with an interim dividend in respect of the year ended 31 July 2008 of 18.1 pence per share. The directors recommend payment of the final dividend on Wednesday 21 January 2009 to shareholders on the Register of Members at the close of business on Friday 12 December 2008. Directors All the directors of the Company, who are shown on pages 5 and 6, served throughout the year. Three directors retire from the Board and offer themselves for re-election at the forthcoming Annual General Meeting (“AGM”). Mr Stoker and Mr Johnson, retire by rotation in accordance with the Company’s Articles of Association (the “Articles”) and the Combined Code. Mr Perry will have served on the Board for more than nine years and is therefore subject to annual re-election in accordance with the Combined Code provision A.7.2. One non-executive director, Mr Finn, will retire at the forthcoming AGM and is not seeking re-election. The directors’ biographies are on pages 5 and 6. None of the executive directors hold external directorships. Following formal rigorous evaluation, the Chairman, acting on behalf of the Board, is satisfied as to the effectiveness and commitment of Mr Stoker, Mr Johnson and Mr Perry. As reported in the Chairman’s statement on page 4, Mr Mike Toms is to be appointed as a non-executive director with effect from 1 February 2009. Mr Toms will join the Audit and Nomination Committees and the Board Committee on Executive Directors’ Remuneration. Directors’ contracts Details of the terms of appointment of the three directors who are retiring and offering themselves for re-election at the forthcoming AGM are set out below: First appointed as a director Current contract/letter of appointment commencement date Current contract/letter of appointment expiry date Unexpired term at the date of this report Notice period by either side Service contract of Executive Director P J Stoker 1 August 2002 1 September 2002 Normal retirement age (60) 12 months 12 months Letter of appointment of Non-Executive Directors P M Johnson D G Perry 1 November 2003 1 November 2006 31 October 2009 1 November 1999 1 November 2006 16 January 2009 12 months 3 months 3 months 3 months Details of the terms of appointment of all the directors are given in the Report of the Board on Directors’ Remuneration on page 34. 27 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Directors (continued) Directors’ interests The directors’ interests in the share capital of the Company and in share ownership plan arrangements are given in the Report of the Board on Directors’ Remuneration on pages 35 to 40. Takeovers Directive The information for shareholders required pursuant to section 992 of the Companies Act 2006 which implements the Takeovers Directive is disclosed in this report and in the Shareholder Information section on pages 80 and 81. Notifiable shareholders’ interests As at 24 October 2008, the Company had been notified of the following interests amounting to 3% or more of the voting rights in the issued ordinary share capital of the Company: Fidelity International Ltd/FMR Corp Jupiter Asset Management Limited Aviva plc AXA S.A. JP Morgan Chase & Co Polaris Capital Management Legal & General Group plc HBOS plc Prudential plc Corporate governance Introduction Number of shares % Total Voting Rights with voting rights 9,300,000 6,647,489 5,751,086 5,603,638 5,254,822 4,683,001 4,609,806 4,261,453 4,224,092 8.09 5.78 5.00 4.87 4.57 4.07 4.01 3.71 3.67 The Board acknowledges the importance of, and is committed to, the principle of achieving and maintaining a high standard of corporate governance. This Report, together with the Report of the Board on Directors’ Remuneration, as detailed on pages 34 to 41, describes how the Principles of Good Governance, which are set out in Section 1 of the Combined Code, are applied by the Group. Statement of compliance with the Code of Best Practice The Board considers that it has complied with the detailed provisions of the Combined Code issued in June 2006 throughout the year to 31 July 2008 and with the detailed provisions of the Combined Code issued in June 2008 from 1 August 2008 up to the date of this report. Both versions of the Combined Code are publicly available free of charge from FRC publications, tel: 020 8247 1264, e-mail: customer.services@cch.co.uk and online at: www.frcpublications.com. Statement about applying the Principles of Good Governance The Group has applied the Principles of Good Governance, including both the Main Principles and the Supporting Principles, by complying with the Combined Code as reported above. Further explanations of how the Main Principles and Supporting Principles have been applied are set out below and, in connection with the directors’ remuneration, in the Report of the Board on Directors’ Remuneration. The Chairman’s Statement, the Chief Executive’s Operating Review and the Financial Review present a balanced and comprehensive assessment of the Group’s position and prospects. The Board The Board consists of seven directors whose names, responsibilities and other details appear on pages 5 and 6. Three of the directors are executive and four of the directors, including the Chairman, are non-executive. One of the non-executive directors, Mr Finn, will retire at the AGM on 16 January 2009 and will not seek re-election. Mr Mike Toms has accepted an appointment as a non-executive director from 1 February 2009. Once these changes have been put in place, the Board will, from 1 February 2009, continue to consist of three executive and four non-executive directors. The Board discharges its responsibilities by providing entrepreneurial leadership of the Company within a framework of prudent and effective controls, which enables risk to be assessed and managed. It sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives and reviews management performance. It also defines the Company’s values and standards and ensures that its obligations to its shareholders are understood and met. Bellway p.l.c. Annual Report & Accounts 2008 28 Report of the Directors (continued) The Board has adopted a schedule of matters which are specifically reserved for its decision which includes various matters to do with Companies Acts and other legal requirements, listing requirements, Board membership and Board Committees, management, corporate governance, employment, financial and other miscellaneous items. In addition, it has a series of matters that are dealt with at regular Board meetings including an operational review, a financial review, strategy, land purchased, major projects, senior appointments, corporate governance, internal control and health and safety. It has also adopted a framework of delegated commercial and operational authorities which define the scope of powers delegated to management below Board level. All directors have access to the advice and services of the Group Company Secretary and all the directors may take independent professional advice at the Group’s expense where they judge it necessary to discharge their responsibility as directors. Board effectiveness The directors possess an appropriate balance of skills and experience for the requirements of the business. During the year there were nine Board meetings, three Audit Committee meetings, six meetings of the Board Committee on Executive Directors’ Remuneration, one meeting of the Board Committee on Non-Executive Directors’ Remuneration and two Nomination Committee meetings. There were no absences from any Board or Committee meetings by any director, with the exception that Mr Leitch was unable to attend one Board meeting and Mr Johnson was unable to attend one Board meeting and one meeting of the Board Committee on Executive Directors’ Remuneration. The non-executive directors met without the executive directors on one occasion, and also met once during the year without the Chairman present to evaluate his performance. One third of the directors offer themselves for re-election each year at the AGM and all directors seek re-election every three years in accordance with the Articles. Mr Perry is excluded from the foregoing as he is subject to annual re-election for the reasons set out on page 27. New directors appointed since the last AGM are required to offer themselves for re-appointment at the next AGM. Training and development The Board received appropriate training and updates on various matters relevant to its role as and when required during the year. Training needs are reviewed as part of the performance evaluation process and on an ongoing basis. Board balance and independence The roles of Chairman and Chief Executive, which are recorded in writing and approved by the Board, are separate with a clear division of responsibilities, ensuring a balance of responsibility and authority at the head of the Group. The senior independent non-executive director is Mr Finn. It is the Company’s intention that Mr Johnson will assume the role of senior independent non-executive director following the retirement of Mr Finn on 16 January 2009. The senior independent non-executive director is available for shareholders to contact with any queries or concerns they may have. Each of the non-executive directors, excluding the Chairman, has at all times acted independently of management and has no relationship which would materially affect the exercise of his independent judgement and decision-making. The Company considers all of its non-executive directors, excluding the Chairman, to be independent, as defined in the Combined Code. In the case of Mr Finn, the Company considers him to have remained independent throughout the financial year for the reasons which have been detailed in previous annual report and accounts. In addition, the Company has consulted with shareholders in relation thereto. With regard to Mr Perry, as at 1 November 2008, he will have served on the Board and its Committees for nine years. The Company has carefully considered Mr Perry’s character and judgement. He has been subject to a rigorous evaluation process and the Company can confirm that, in its view, he remains independent. Whenever any director considers that he is interested in any contract or arrangement to which the Group is, or may be, a party, due notice is given to the Board. No such instances of any significance have arisen during the year. Board evaluation During the year the directors undertook an evaluation of the performance and effectiveness of the Board, its Committees and individual directors. The evaluation was performed using a self-assessment framework. This involved the Chairman, acting on behalf of the Board, evaluating the performance of the other individual directors, and the non-executive directors, led by the senior independent non-executive director, assessing the performance of the Chairman, taking into account the views of the executive directors. The Board, led by the Chairman, evaluated its own performance, and the Committees, led by the Chairman of each, evaluated their own performance. As part of the process of ensuring Board effectiveness, the non-executive directors, led by the senior independent non-executive director, met without the Chairman present. Additionally, the Chairman held a meeting with the non-executive directors without the executives present. The Chairman also had meetings with each of the executive directors. The Board and its Committees reviewed the results of these evaluations and are satisfied with the evidence they provided about the balance, effectiveness and performance of the Board and its Committees and the effectiveness and commitment of each director. 29 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Directors (continued) The Board Committees The Board has properly constituted Audit, Remuneration and Nomination Committees. The terms of reference for the Committees are available either on request, at the AGM or on the Company’s website: www.bellway.co.uk. Audit Committee The Audit Committee comprises three independent non-executive directors, Mr Johnson (Chairman), Mr Finn and Mr Perry, who were members of the Committee throughout the year. Mr Finn is to retire at the AGM on 16 January 2009. He will be replaced on the Committee from 1 February 2009 by Mr Toms. It meets at least three times a year and met three times during the year under review. The Committee’s responsibilities include the following: (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) To consider the appointment/re-appointment of the external auditors and assess their independence each year. To recommend the audit fee to the Board and pre-approve any fees in respect of non-audit services provided by the external auditors and to ensure that the provision of non-audit services does not impair the external auditors’ independence or objectivity. To agree the nature and scope of the audit and review the quality control procedures and steps taken by the auditors to respond to changes in regulatory and other requirements. To oversee the process for selecting the external auditors and make appropriate recommendations through the Board to the shareholders to consider at the AGM. To consider annually whether there is a need for an internal audit function and make a recommendation to the Board. To review the Group’s procedures for handling allegations from whistleblowers. To review management’s reports on the effectiveness of systems for internal financial control, financial reporting and risk management. To assess the scope and effectiveness of the systems established by management to identify, assess, manage and monitor financial and non-financial risks. To review and make recommendations in relation to the half year and annual accounts prior to submission to the Board. The Board believes that Mr Johnson, the Committee Chairman, has recent relevant financial experience as a Chartered Accountant. The Group has a written Independent Auditor Policy in place which seeks to preserve the independence of its auditors by defining what non-audit services the independent auditors may and may not provide. There are clearly defined levels of approval depending on the value of work to be provided. Where fees exceed £100,000, or where total non-audit fees equate to 100% of audit fees, Board approval would be required. Any material project with fees in excess of £200,000, where the auditors are considered for the provision of services, would be the subject of a competitive process. During the year the Committee met the auditors without management present on two occasions. In addition, the Committee Chairman had regular contact with the Finance Director and the external auditors. Board Committee on Executive Directors’ Remuneration The Board Committee on Executive Directors’ Remuneration comprises Mr Finn (Chairman), Mr Perry and Mr Johnson, who were members of the Committee throughout the year. Mr Finn is to retire at the AGM on 16 January 2009, and he will be replaced on this Committee from 1 February 2009 by Mr Toms, with Mr Toms taking the role of Committee Chairman. The Committee meets at least twice a year and during the year it met on six occasions. Its duties are to review and recommend the basic salary, benefits in kind, terms and conditions of employment, including performance related payments, long term incentive schemes and pension benefits of the executive directors and the Chairman. The Report of the Board on Directors’ Remuneration on pages 34 to 41 contains details of directors’ remuneration and the Group’s policies in relation to directors’ remuneration. Board Committee on Non-Executive Directors’ Remuneration The Board Committee on Non-Executive Directors’ Remuneration comprises the executive directors and is chaired by Mr Watson. It meets at least once a year to review and recommend the terms and conditions and the remuneration of the non-executive directors. Last year it met on one occasion to review the fees and terms of appointment of the non-executive directors. Nomination Committee The Nomination Committee comprises Mr Perry (Chairman), Mr Finn, Mr Johnson and Mr Dawe, who were members of the Committee throughout the year. Mr Finn is to retire at the AGM on 16 January 2009, and he will be replaced on the Committee with effect from 1 February 2009 by Mr Toms. Its main duties are to make recommendations regarding appointments to the Board. The Committee meets at least twice a year and last year met on two occasions. Appointments to the Board are made on merit through a formal, rigorous and transparent process against objective criteria recommended by the Committee. The Committee also guides the whole Board in arranging orderly succession for appointments to the Board. The appointment of a non-executive director is for a specified term and re-appointment is not automatic and is made on the recommendation of the Committee. During the year the Committee appointed external recruitment consultants to assist it in the recruitment of Mr Toms as a new non-executive director to fill the vacancy to be created when Mr Finn retires from the Board at the AGM on 16 January 2009. The Committee is also responsible for formulating plans for succession for both executive and non-executive directors and in particular for the key roles of Chairman and Chief Executive. Other committees of the Board are formed to perform certain specific functions as required from time to time. Bellway p.l.c. Annual Report & Accounts 2008 30 Report of the Directors (continued) Directors’ and officers’ liability insurance The Company carries appropriate insurance cover in respect of possible legal action being taken against its directors and senior employees. Directors’ remuneration The principles and details of directors’ remuneration are detailed in the Report of the Board on Directors’ Remuneration on pages 34 to 41. Accountability and audit The statement on going concern and the Statement of Directors’ Responsibilities in respect of the Annual Report and the Accounts are shown on pages 32 and 42 respectively. The Audit Committee has meetings at least twice a year with the Company’s auditors, KPMG Audit Plc. Its role is detailed above. Internal control The Board is responsible for the Group’s system of internal control and also for reviewing its effectiveness. The Board has reviewed, on an ongoing basis, the effectiveness of the system of internal control throughout the year and up to the date of approval of the Annual Report and Accounts. The system is regularly reviewed by the Board in accordance with the guidance contained in the Turnbull Report “Internal Control Guidance for Directors of Listed Companies Incorporated in the United Kingdom”. The Board acknowledges its responsibility to establish, maintain and monitor a system of internal control relating to operational, financial and compliance controls and risk management to safeguard the shareholders’ interests in the Company’s assets. This system, however, is designed to manage and meet the Group’s particular requirements and reduce the risk to which it is exposed rather than eliminate the risk of failure to achieve business objectives. It can provide only reasonable and not absolute assurance against material misstatement or loss. The Board has reviewed the effectiveness of the system of internal control and, in particular, it has reviewed the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks are managed. Management are responsible for the identification and evaluation of significant risks applicable to their particular areas of the business together with the design and operation of suitable controls. These risks are regularly assessed and cover all aspects of the business, but in particular land acquisition, planning, construction, health and safety, information and reporting systems, sales, environmental issues, personnel, asset protection, treasury management and legal and regulatory compliance. In addition, there is a responsibility to mitigate risk by the provision of adequate insurance cover and by management reporting on material changes in the business or external environment affecting the risk profile. There is a system of regular reporting to the Board which provides for appropriate details and assurances on the assessment and control of risks. The continuing role of the Board is, on a systematic basis, to review the key risks inherent in the business, the operation of the systems and controls necessary to manage such risks and its effectiveness and satisfy itself that all reasonable steps are being taken to mitigate these risks. The key areas of control are as follows: (cid:1) (cid:1) The Board has agreed a list of key risks which affect the Group and has considered the extent to which the measures taken by the Group mitigate those risks. An established monitoring structure is in place, which provides short lines of communication and easy access to members of the Board. (cid:1) Delegation of clearly defined responsibilities to divisional Boards with clear procedures and authority limits in place to provide and maintain effective controls across the Group. A comprehensive reporting system entailing annual budgets, regular forecasting and financial reporting. A central treasury function operates at Head Office. Regular meetings with management attended by members of the Board to review divisional performance. The acquisition of land and land interests is subject to checking by management and approval by the Board to ensure that purchasing criteria are met. Regular reviews of site costs and revenues by senior Head Office personnel which are reported to the Board. Regular visits to sites by senior management and external consultants to monitor health and safety standards and performance. A number of the Group’s key functions are dealt with centrally. These include finance, banking, taxation, financial services, pensions, insurance, information technology, legal, personnel and company secretarial. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 31 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Directors (continued) Internal audit The Company does not have an internal audit function and, as recommended by the Combined Code, the Audit Committee considers annually whether there is a need for an internal audit function and makes a recommendation to the Board. During the year, having considered the position, the Audit Committee recommended that no internal audit function, as such, was presently required, given the robust systems and strong controls already present in the Group. The position will continue to be monitored by the Audit Committee on behalf of the Board. Whistleblowing arrangements The Group has operated throughout the year a ‘whistleblowing’ arrangement whereby all employees of the Group are able, via an independent external third party, to confidentially report any malpractice or matters of concern they have regarding the actions of management and employees. The Audit Committee and the Board regularly review the effectiveness of this arrangement. Relations with shareholders The Company encourages active dialogue with its private and institutional shareholders, both current and prospective. Meetings are held with both existing and prospective institutional shareholders on a regular basis and as requested. Shareholders are also kept up to date with Company affairs through the Annual and Half Year Reports, Trading Updates and Interim Management Statements. The AGM is used to communicate with institutional and private investors and their participation is encouraged by the taking of questions by the whole Board, both during, and also informally, before and after the meeting. The senior independent non-executive director is always available to meet with current and prospective shareholders and institutions as required. No requests have been received to date. In addition, the whole Board is regularly updated on shareholder and investor views and activities at Board meetings by the Chief Executive and the Finance Director. Further information for shareholders is available under Shareholder Information on pages 80 to 82 and also on the Company’s website at www.bellway.co.uk. Going concern After making due enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Employees The Group is an equal opportunities employer. It is the Group’s policy to develop and apply throughout the Group procedures and practices which are designed to ensure that equal opportunities are provided to employees of the Group, or those who seek employment with the Group, irrespective of their age, colour, disability, ethnic origin, gender, marital status, nationality, parental status, race, religion or sexual orientation. All employees, whether part time, full time or temporary, are treated fairly and equally. Selection for employment, promotion, training or other benefit is on the basis of aptitude and ability. All employees are helped and encouraged to develop their full potential and the talents and resources of the workforce are fully utilised to maximise the efficiency of the organisation. It is Group policy to give full and fair consideration to the employment needs of disabled persons (and persons who become disabled whilst employed by the Group) and to comply with any current legislation with regard to disabled persons. Training at each division is planned and monitored through an annual training plan. The importance of good communications with employees is recognised by the directors. Each division maintains employee relations appropriate to its own particular needs and a Group magazine is published at periodic intervals. New employees, when eligible, are invited to join the Company’s pension and life assurance arrangements and the Savings Related Share Option Scheme. The Company also offers a private medical scheme, childcare vouchers and a personal accident insurance scheme. In accordance with statutory requirements, the Company also has a designated stakeholder pension arrangement. Environmental issues The Board recognises the importance of environmental issues and, when carrying out its business, endeavours to make a positive contribution to the quality of life, both for the present and the future. An Environmental Policy Statement, approved by the Board, has been adopted by all trading entities within the Group. Environmental issues are addressed in the Corporate Responsibility Policy on pages 13 and 14, the Summary Corporate Responsibility Statement on pages 15 to 18, the Environmental Policy Statement on pages 19 and 20, and in the Corporate Responsibility Report itself which is available to view on the Company’s website www.bellway.co.uk or from the Group Company Secretary at the Company’s registered office. Health and safety at work The Group promotes all aspects of health and safety throughout its operations in the interests of employees, sub-contractors and visitors to its sites and premises and the general public. Health and safety issues are considered at each Board meeting, and are addressed in the Chief Executive’s Operating Review on pages 7 to 11, in the Corporate Responsibility Policy on pages 13 and 14, in the Summary Corporate Responsibility Statement on pages 15 to 18, and in the Corporate Responsibility Report. Donations During the year the Group made no political contributions but donated £22,010 (2007 - £95,956) for charitable purposes. Bellway p.l.c. Annual Report & Accounts 2008 32 Report of the Directors (continued) Suppliers The Group agrees terms and conditions under which business transactions with suppliers are conducted. The policy is that payments to suppliers are made in accordance with these terms and conditions, provided that the supplier is also complying with the terms and conditions. The Group follows the Better Payment Practice Code and its current policy concerning the payment of the majority of its materials suppliers and sub-contractors is for payment to be made at the month end following the month of the invoice. For other supplies, particularly land, the terms are many and varied. Trade creditors due within one year at 31 July 2008 of £75,075,000 (2007 - £84,387,000) gave a creditor payment period of 27 days (2007 - 27 days). Land creditors due within one year were £81,806,000 (2007 - £112,148,000). Including land creditors, the creditor payment period was 57 days (2007 - 63 days). The parent company had no land or trade creditors at 31 July 2008 (2007 - £nil). Purchase of the Company’s own shares The Company was given authority at the 2008 AGM to purchase its own ordinary or preference shares. As at the date of this report no market purchases have been made and this authority will expire at the end of the 2009 AGM. Shareholders will be asked to renew this authority at the 2009 AGM. Disclosure of all relevant information to auditors The directors who held office at the date of approval of this Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Auditors KPMG Audit Plc has indicated its willingness to continue in office and a resolution proposing its re-appointment as auditors will be put to shareholders at the AGM. AGM - special business Three resolutions will be proposed as special business at the AGM to be held on Friday 16 January 2009. Explanatory notes on these resolutions are set out in Shareholder Information on page 80. By order of the Board G Kevin Wrightson Group Company Secretary 24 October 2008 33 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Board on Directors’ Remuneration Introduction The remuneration of the executive directors is determined by the Board Committee on Executive Directors’ Remuneration (the “Committee”) within a framework set by the Board. As at the date of this Report, the Committee’s members are three non-executive directors, Mr Finn (Chairman), Mr Perry and Mr Johnson. Mr Finn is to retire at the AGM on 16 January 2009, and he will be replaced on this Committee from 1 February 2009 by Mr Mike Toms, with Mr Toms taking the role of Committee Chairman. None of the Committee members has a personal financial interest, other than as shareholders, in the matters to be decided. There are no conflicts of interest arising from cross-directorships and no day-to-day involvement in running the business. During the year, the Group Company Secretary attended a number of Committee meetings at the invitation of the Committee and provided advice on issues other than those relating to his own remuneration. The Committee also received independent external advice from Hewitt New Bridge Street. Hewitt New Bridge Street was appointed by the Committee and does not provide any other service to the Company other than to the Board Committee on Non-Executive Directors’ Remuneration. The remuneration of the non-executive directors (apart from the Chairman) is determined by the Board Committee on Non-Executive Directors’ Remuneration, which comprises the executive directors. The Board Committee on Non-Executive Directors’ Remuneration also receives advice from the Group Company Secretary and Hewitt New Bridge Street. The Chairman’s remuneration is determined by the other non-executive directors. Objectives The aim of the Committee is to ensure that the Company has competitive remuneration packages in place in order to recruit, retain and motivate executive directors in the overall interests of shareholders, the Company, its employees and its customers. The Committee has set, as an objective, a policy of paying remuneration around the median of a peer group of similar UK housebuilding businesses and it is satisfied that the structure of the executives’ packages will broadly achieve this objective. The Committee has used this comparative approach to benchmarking with caution, recognising the risk of upward only reviews of remuneration. The structure of the package has been designed to ensure that the performance related elements of remuneration (annual bonus and long-term incentives) constitute a significant proportion of an executive’s potential total remuneration package, but are only receivable if demanding and stretching performance targets are achieved. The Committee considers that the remuneration level and structure are fully competitive with the market, with a significant element of the package payable in the form of share-based incentives, subject to long-term Total Shareholder Return (“TSR”) and Return on Capital Employed (“ROCE”) performance conditions, thereby creating alignment with the interests of shareholders. In framing the Company’s remuneration policy for executive directors, the Committee has given full consideration to the best practice provisions in the Combined Code and the Association of British Insurers’ (“ABI”) guidance. Service contracts and letters of appointment The executive directors have fixed-term service contracts which specify that retirement is at age 60, with a 12 month notice period on either side. For executive directors, on termination, an amount equivalent to one year’s salary, benefits and the average amount of the last two years’ annual bonus payments, would be payable. The inclusion of average annual bonus in the calculation of compensation payable for early termination will ensure that there is variability in the potential level of compensation. In particular, after a period of poor performance, it could be expected that little or no bonus would be payable, reducing potential payout in these circumstances. The notice period of all executive directors’ service contracts is kept under review by the Committee. It is the Committee’s view that the notice period for the executive directors is appropriate and consistent with current market practice. The details of the executive directors’ service contracts are as follows: Executive Director J K Watson P J Stoker A M Leitch First appointed as a director 1 August 1995 1 August 1995 Current contract commencement date 16 March 2001 19 January 1996 and amended with effect from 1 November 2003 1 August 2002 1 September 2002 All non-executive directors have letters of appointment with the Company of no more than three years with a three month notice period by either side. Non-Executive Director H C Dawe L P Finn D G Perry P M Johnson First appointed as a director 9 August 1977 1 August 1995 1 November 1999 1 November 2003 Current letter of appointment Current letter of appointment commencement date 1 November 2007 12 January 2008 1 November 2006 1 November 2006 expiry date 31 October 2010 16 January 2009 16 January 2009 31 October 2009 On the expiry of his existing letter of appointment, it is the intention of the Company to issue a new letter of appointment to Mr Perry which will expire at the conclusion of the AGM in 2010. Bellway p.l.c. Annual Report & Accounts 2008 34 Report of the Board on Directors’ Remuneration (continued) Salaries and fees Salaries are reviewed on 1 August each year, taking into account the general settlement across the Company. Any changes are implemented from that date. For the year under consideration, the executive directors were awarded rises varying from 4.84% to 11.11%. These increases were considered appropriate by the Committee after an assessment of base salary levels in peer group companies and also taking into consideration the performance of the executive directors and of the Company as a whole. Fee levels for non-executive directors reflect the time commitment and responsibilities of the role and are reviewed annually, taking into account the level of fees for similar positions in comparable companies. They are not entitled to any benefits (with the exception of the Chairman) or pension. They do not participate in any bonus or long-term incentive plan and they are not entitled to compensation on termination of their agreements, other than normal notice provisions of three months’ notice given by either party. Benefits in kind Benefits in kind provided to the executive directors relate to car allowance and private medical insurance. Annual bonus scheme The annual bonus scheme has a potential which is currently capped at 120% of basic salary, other than in exceptional circumstances where outstanding performance may, in the view of the Committee, merit a higher bonus, subject to an overall cap of 150% of basic salary. Recognising the genuinely exceptional operating environment for the UK housing market and the consequent short-term lack of visibility in the outlook for financial performance, the Committee intends to operate a less formulaic bonus structure for the forthcoming year (within the maximum cap set out above). The basis for the payment of any bonus will be disclosed in next year’s Remuneration Report. The bonus will be payable in cash, with executives having the opportunity to invest up to 25% of their net cash bonus in Bellway shares under the terms of the Bellway p.l.c. (2008) Share Matching Plan. Annual bonuses are not pensionable. Long-term incentive schemes (1) The Bellway p.l.c. Savings Related Share Option Scheme, which was established in 2003, is available to all employees, including the executive directors. (2) The Bellway p.l.c. (2004) Performance Share Plan (the “PSP”) was introduced for the Company’s executive directors and the Group Company Secretary. Under the PSP, executives have been granted awards over shares worth 100% of base salary each year. For awards made on 16 January 2008, two performance conditions applied to separate parts of the award: (a) 50% of the award is based on a TSR condition against other housebuilders but, instead of a ranking approach (comparing Bellway’s TSR to that of each other company), an Index is created out of the TSR of the other housebuilders in the group. Bellway’s TSR is compared to that of the Index. If Bellway’s TSR matches that of the Index, 25% of the TSR part of the award vests (reduced from the previous vesting profile whereby 33% of the award vested at median). Full vesting is achieved for 7.5% per annum outperformance of the Index. The Committee has carried out significant modelling, the results of which support the premise that 7.5% per annum outperformance is equivalent to average ‘upper quartile’ TSR performance of the housebuilders. Further, regardless of TSR performance, no part of the TSR element of an award will vest unless the Committee considers that the Company’s TSR over the performance period reflects underlying financial performance. The companies comprising the Index for the awards in the financial year commencing on 1 August 2008 are as follows; Barratt Developments PLC Bovis Homes Group PLC Redrow plc The Berkeley Group plc Persimmon plc Taylor Wimpey plc TSR is recognised as enabling alignment with the interests of institutional shareholders through providing a reward mechanism for delivering superior stock market performance (b) The remaining 50% of the award is based on a range of ROCE based targets requiring average annual ROCE of 15% per annum (at which point, 25% of the ROCE part of the award would vest) to 22% per annum for all of this part of the award to vest. Awards vest on a straight line basis in between these two points. 35 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Board on Directors’ Remuneration (continued) For awards to be made in the financial year commencing 1 August 2008, in view of the difficulty in setting financial performance conditions in the current economic climate, it is proposed that the TSR part of the award will apply as the sole performance condition. It is currently anticipated that the performance conditions will revert to a combination of TSR and ROCE when the housing market returns to more normal conditions and clearer visibility of the Company’s prospects is possible. The directors’ outstanding awards under the PSP are set out in the table on page 38. (3) Shareholder approval was given at the AGM in January 2008 for the introduction of a new long-term incentive plan, the Bellway p.l.c. (2008) Share Matching Plan (the “SMP”) to operate in conjunction with the annual bonus plan. Under the SMP senior executives may invest up to 25% of their net cash bonus, on a voluntary basis, in Bellway shares, which must be held for a minimum of three years. Invested shares will not be subject to a risk of forfeiture and executives will enjoy full beneficial ownership (including voting rights and dividends). In return for investing in shares, under the SMP, an award of matching shares is granted. The level of matching is on a gross basis to the net of tax bonus invested in shares. Matching shares will vest subject to the executive remaining employed, retention of the invested shares and also subject to a performance condition. For the 2008 SMP awards, the performance condition will be the same TSR-based condition as will apply to the 2008 award of performance shares. It is anticipated that the performance condition will revert to ROCE when the housing market returns to more normal conditions and clearer visibility of the Company’s prospects is possible. Shareholding Guidelines There is a minimum shareholding requirement for the executive directors, equivalent to 100% of basic salary. As at 31 July 2008, and at the date of this report, all executive directors hold shares with an equivalent value in excess of 100% of their basic salary. Any executive directors appointed in the future will be given an appropriate period of time to acquire the requisite shareholding. Directors’ interests The directors’ interests (including family interests and holdings in which directors are interested only as trustees) in the ordinary share capital of the Company are set out below: Beneficial interests H C Dawe J K Watson P J Stoker A M Leitch L P Finn D G Perry P M Johnson Fully paid ordinary 12.5 pence shares 31 July 2008 1 August 2007 143,634 400,527 536,531 132,473 34,000 5,000 4,300 123,634 364,733 506,238 100,000 34,000 5,000 4,300 There has been no change in the above interests between 31 July 2008 and the date of this report. Mr Dawe had a beneficial interest in 554,164 Bellway p.l.c. 9.5% cumulative redeemable preference shares 2014 of £1 each which are held in his Self Invested Personal Pension (“SIPP”) at 31 July 2008 and at the date of this report (1 August 2007 - 554,164). During the year Mr Leitch acquired a beneficial interest in 50,000 Bellway p.l.c. 9.5% cumulative redeemable preference shares 2014 of £1 each, which he held at 31 July 2008 and at the date of this report (1 August 2007 - nil). Bellway p.l.c. Annual Report & Accounts 2008 36 Report of the Board on Directors’ Remuneration (continued) Pensions In an effort to control its long-term pension costs the Company, during the year, offered the executive directors an enhanced transfer value from the final salary section of the Bellway plc 1972 Pension & Life Assurance Scheme. The offer was made on equal terms for each individual with the additional amount available to be taken either as an enhancement to the standard pension transfer value, as a separate taxable cash amount, or a combination of both. The three executive directors elected to take a combination of both. The transfer values from the pension scheme to the individual director’s private pension arrangements and the additional cash amounts received by them are set out in the table below. J K Watson P J Stoker A M Leitch Transfer value Enhancement to Cash sum £ 3,965,185 3,073,328 2,534,875 transfer value £ 1,154,815 13,672 675,125 £ 1,421,107 1,470,628 1,081,162 The transfers were all made on 31 July 2008. In addition, the three executive directors ceased to accrue future benefits in the scheme with effect from 31 May 2008. This action is considered to be beneficial as it removes an ongoing open-ended liability of the Company. The Committee received appropriate advice in arriving at the enhancement levels and the quantum is considered to be fair given the benefit promises surrendered. In a further effort to control the cost of ongoing pension provision the Company, in consultation with the rest of the active membership of the final salary section of the scheme, is carrying out a similar exercise in relation to the balance of the membership of the final salary section of the scheme. As part of the consultation exercise it is proposed that final salary accrual would terminate, to be replaced by Defined Contribution arrangements. Further details in relation to executive directors’ pensions can be found under ‘Directors’ pension information’ on page 41. Performance graph In line with legislation introduced by the Government, this Report contains a graph below showing the performance of the Company and a ‘broad equity market index’ over the past 5 financial years. As the Company has been a constituent of the FTSE Mid 250 Index over this period, the Committee considers that index to be the most appropriate for this purpose. Total shareholder return over last 5 financial years Source: Datastream Bellway FTSE Mid 250 Index 300 250 200 150 100 50 ) £ ( l e u a V 0 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 This graph looks at the value, by 31 July 2008, of £100 invested in Bellway p.l.c. on 31 July 2003 compared with the value of £100 invested in the FTSE Mid 250 Index. 37 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Board on Directors’ Remuneration (continued) The auditors are required to report on the information contained in the following part of this report. Directors’ interests in deferred bonus plan The executive directors and the non-executive Chairman have a beneficial interest in certain shares held in the Bellway p.l.c. Employee Share Trust (1992) pursuant to the grant of deferred bonus entitlements. For further information concerning the directors’ bonus arrangements, see page 35. The number of shares held in the Trust in respect of each director is as follows: Held in Trust as at 1 August 2007 33,283 70,180 54,549 46,095 Fully paid ordinary 12.5 pence shares Awarded during the year Vested during the year(2) Held in Trust as at 31 July - - - - 33,283 28,336 23,928 18,891 2008 - 41,844 30,621 27,204 H C Dawe(1) J K Watson P J Stoker A M Leitch Notes: 1. 2. These shares relate to deferred bonus shares awarded to Mr Dawe while he was executive Chairman. Additional shares (not included above) were awarded on vesting in lieu of dividends accrued on the shares held in the Trust from the date of the award to vesting in respect of each director as follows: Mr Dawe 4,270 shares, Mr Watson 3,636 shares, Mr Stoker 2,293 shares and Mr Leitch 2,424 shares. 3. There has been no change in the above holdings between 31 July 2008 and the date of this Report. Directors’ interests in Performance Share Plan In addition, the executive directors have a potential future beneficial interest in certain shares held in the Bellway Employee Share Trust (1992) pursuant to the allocation of shares under the PSP. Further information on the PSP is set out on pages 35 and 36. The number of shares allocated in the Trust in respect of each director, along with the market price of the shares at the date of award, are shown below: Fully paid ordinary 12.5 pence shares Award date 30.11.2004(1) 14.11.2005(2) 18.10.2006(3) 16.01.2008(4) 30.11.2004(1) 14.11.2005(2) 18.10.2006(3) 16.01.2008(4) 30.11.2004(1) 14.11.2005(2) 18.10.2006(3) 16.01.2008(4) Potential future beneficial interests J K Watson Totals P J Stoker Totals A M Leitch Totals Awards held at 1 August 2007 54,016 42,083 33,482 - 129,581 39,801 30,510 23,065 - - - 67,159 67,159 - - - - 43,653 Awarded during the year Awards lapsed during the year Awards vested during the year(5) Awards held at 31 July 2008 25,334 28,682 - - - - - - - 42,083 33,482 67,159 25,334 28,682 142,724 18,667 21,134 - - - - - - - 30,510 23,065 43,653 93,376 43,653 18,667 21,134 97,228 34,115 28,406 23,065 - 85,586 - - - 43,653 43,653 16,000 18,115 - - - - - - - 28,406 23,065 43,653 16,000 18,115 95,124 Bellway p.l.c. Annual Report & Accounts 2008 38 Report of the Board on Directors’ Remuneration (continued) Notes: 1. Market value on award 703.5p, performance period 1 August 2004 - 31 July 2007. 2. Market value on award 950.5p, performance period 1 August 2005 - 31 July 2008. 3. Market value on award 1344.0p, performance period 1 August 2006 - 31 July 2009. 4. Market value on award 744.5p, performance period 1 August 2007 - 31 July 2010. 5. Market value on 7 December 2007, which was the day the shares vested was 914.0p. 6. Aggregate gross gains made by these directors on vesting of awards under the performance share plan in the year were £620,886.34 (2007 - £1,192,896.05 (adjusted to exclude gains made by H C Dawe in 2006/07)). 7. Details of the performance conditions are shown on pages 35 and 36 and below. The award which was granted on 30.11.04 vested at 53.1% of the full entitlement. 8. The market price of the ordinary shares at 31 July 2008 was 477.5p and the range during the year was 377.75p to 1,320.0p. Vesting of all but the last of these awards is conditional on the achievement of a TSR performance condition requiring Bellway’s TSR to be at least at the median of a comparator group of other housebuilders (at which point 33% of the award vests). Full vesting requires Bellway’s TSR to be at the upper quartile. The Comparator group comprises Barratt Developments PLC, The Berkeley Group plc, Bovis Homes Group PLC, Persimmon plc, Redrow plc and Taylor Wimpey plc (plus Countryside Properties PLC, Crest Nicholson plc, McCarthy & Stone plc, Taylor Woodrow plc, Westbury plc and Wilson Bowden plc, all of whom have now delisted). The vesting conditions of the award granted on 16 January 2008 are set out on page 35. There has been no change in the above potential future beneficial interests between 31 July 2008 and the date of this Report. The executive directors had no further potential future beneficial interest in ordinary shares at 31 July 2008 and at the date of this report (1 August 2007 - Nil) which are held by the Bellway Employee Share Trust (1992). For this Trust, a linking agreement is in place between the Group and the Trustees of the Trust, Capita IRG Trustees Limited. This agreement ensures that sufficient shares/cash are available in the Trust to meet obligations as they arise. The directors had a joint non-beneficial interest in 18,000 ordinary shares at 31 July 2008 and as at the date of this report (1 August 2007 - 18,000) which are held by the Bellway p.l.c. 1988 Employee Benefit Trust. Directors’ remuneration Non-Executive Chairman H C Dawe Executive Directors J K Watson P J Stoker A M Leitch Non-Executive Directors L P Finn D G Perry P M Johnson Totals Salary and Fees Taxable Benefits(1) Annual Bonus(2) £ £ 221,450 1,413 £ - Payment in lieu of pension(3) Total 2008 2007 £ £ - 222,863 216,425 500,000 325,000 325,000 50,000 46,000 46,000 24,917 24,276 24,009 275,000 178,750 178,750 25,000 16,250 16,250 824,917 1,014,471 544,276 544,009 705,886 709,075 - - - - - - - - - 50,000 46,000 46,000 45,700 43,000 43,000 1,513,450 74,615 632,500 57,500 2,278,065 2,777,557 39 Bellway p.l.c. Annual Report & Accounts 2008 Report of the Board on Directors’ Remuneration (continued) Notes: 1. 2. 3. Taxable benefits relate to the provision of motor vehicles, car allowance and private medical insurance. The annual bonus is payable in November 2008 for performance during the year ended 31 July 2008. The Board Committee on Executive Directors’ Remuneration (the “Committee”) has considered carefully the basis for bonus payments to executive directors for the 2007/08 year. The rapidly deteriorating housing market necessitated a review of the budget process for the Company and associated bonus targets (set by reference to budget). Due to the genuinely exceptional circumstances, the Committee agreed that the financial performance should be assessed at the end of the year, and the basis for the bonus should be determined at that time. Accordingly, at the Committee meeting in June, it was confirmed that the bonus level should be equivalent to 55% of an executive director’s salary. In coming to this conclusion, the Committee took into account the Company’s financial performance in its own right and also compared to other housebuilders, and considered that management’s own performance had been very good in extremely challenging conditions. The three executive directors ceased to accrue pension benefits under the terms of the Bellway plc 1972 Pension & Life Assurance Scheme with effect from 31 May 2008. As a consequence the Committee agreed that the executive directors may receive a cash payment in lieu of pension contributions amounting to 30% of base salary commencing with effect from 1 June 2008. The value of the cash payment has been calculated on a basis which is considered to be cost beneficial to the Company compared to the cost of continued accrual under the terms of the executive directors’ previous final salary arrangements. Directors’ share options Details of all directors’ interests in the share option schemes outlined on page 35 are shown below: Scheme 1 August Granted Exercised 31 July 2007 during during 2008 Exercise price (p) Exercisable from the year the year Expiry date Market price at date of excercise (p) J K Watson 2003 SRSOS 1,762 - 1,762 Totals 2003 SRSOS - 1,762 P J Stoker 2003 SRSOS 1,762 Totals 2003 SRSOS - 1,762 A M Leitch 2003 SRSOS 1,762 2003 SRSOS - 1,762 Totals Notes: 1,133 1,133 - 1,133 1,133 - 1,133 1,133 - 1,762 1,762 - 1,762 1,762 - 1,762 - 1,133 1,133 - 1,133 1,133 - 1,133 1,133 537.60 847.20 537.60 847.20 537.60 847.20 1 Feb 2008 31 July 2008 789.0p 1 Feb 2011 31 July 2011 - 1 Feb 2008 31 July 2008 789.0p 1 Feb 2011 31 July 2011 - 1 Feb 2008 31 July 2008 789.0p 1 Feb 2011 31 July 2011 - 1. 2. 3. All of the above options were granted for nil consideration. The market price of the ordinary shares at 31 July 2008 was 477.5p and the range during the year was 377.75p to 1,320.0p. Aggregate gains made by directors on exercise of share options in the year were £13,289.01 (2007 - £1,399,802.50 (adjusted to exclude gains made by H C Dawe in 2006/07)). Bellway p.l.c. Annual Report & Accounts 2008 40 Report of the Board on Directors’ Remuneration (continued) Directors’ pension information The following directors had accrued entitlements under the Bellway plc 1972 Pension & Life Assurance Scheme defined benefit section as follows: Accrued pension Increase in Increase in Transfer value accrued accrued of the increase as at pension during pension during in entitlement Accrued pension as at Transfer value Transfer value of pension of pension as at as at 31 July 2007 the year excluding inflation to the year during the year and transferred and transferred 31 July 2007 including inflation to out on out on 31 July 2008 31 July 2008 31 July 2008 31 July 2008 £ 228,635 154,971 156,837 £ 39,508 6,581 12,915 £ 48,425 12,625 19,032 £ £ £ £ 730,098 121,217 235,727 277,060 167,596 175,869 5,120,000 3,515,000 3,087,000 2,881,000 3,210,000 2,423,000 J K Watson P J Stoker A M Leitch Notes: 1. The pension shown as at, and transferred out on, 31 July 2008 is based on service to 31 May 2008, but excludes any statutory increases, which will reflect future inflation after the year end (see ‘Pensions’ section on page 37 for further details). 2. The ‘net of inflation increase’ in accrued pension during the year excludes any increase in respect of inflation. The inflation rate used is that published for September 2007 i.e. 3.9%. 3. There are no contributions from the directors to the Bellway plc 1972 Pension & Life Assurance Scheme; therefore there are no contributions to offset against the transfer values shown. 4. The transfer value as at 31 July 2007 has been calculated employing the transfer value basis adopted for the scheme as at that date. 5. The transfer value as at, and transferred out on, 31 July 2008 has been calculated employing the transfer value basis adopted for the scheme as at that date and includes an additional enhancement (see ‘Pensions’ section on page 37 for further details). 6. The pension entitlements are based on the pensionable salaries as at 31 July 2007 and 31 July 2008 which are derived from the “basic annual salary on the previous 31 October”. This report will be put to an advisory vote of the Company’s shareholders at the Annual General Meeting on 16 January 2009. On behalf of the Board of Bellway p.l.c. Chairman of the Board Committee on Executive Directors’ Remuneration 24 October 2008 Leo P Finn 41 Bellway p.l.c. Annual Report & Accounts 2008 Statement of Directors’ Responsibilities in respect of the Annual Report and the Accounts The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. The group and parent company financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position of the group and the parent company and the performance for that period; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the group and parent company financial statements, the directors are required to: (cid:1) select suitable accounting policies and then apply them consistently (cid:1) make judgments and estimates that are reasonable and prudent (cid:1) (cid:1) state whether they have been prepared in accordance with IFRSs as adopted by the EU and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors confirm that to the best of their knowledge: (cid:1) (cid:1) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole and the Report of the Directors, the Chairman’s Statement, the Chief Executive’s Operating Review, the Corporate Responsibility Policy, the Summary Corporate Responsibility Statement, the Environmental Policy Statement, the Financial Review and the Operating Risk Statement includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Bellway p.l.c. Annual Report & Accounts 2008 42 Independent Auditors’ Report to the Members of Bellway p.l.c. We have audited the group and parent company financial statements (the ‘financial statements’) of Bellway p.l.c. for the year ended 31 July 2008 which comprise the Group Income Statement, the Group and Parent Company Balance Sheets, the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statements of Recognised Income and Expenses, and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and IFRSs as adopted by the EU are set out in the Statement of Directors' Responsibilities on page 42. Our responsibility is to audit the financial statements and the part of the Directors' Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the financial statements. The information given in the Report of the Directors includes that specific information presented in the Chairman’s statement, the Chief Executive’s Operating Review, the Corporate Responsibility Policy, the Summary Corporate Responsibility Statement, the Environmental Policy Statement, the Financial Review and the Operating Risk Statement that is cross referred from the Performance and Prospects section of the Directors' Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group's corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors' Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group's and Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors' Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' Remuneration Report to be audited. Opinion In our opinion: (cid:1) (cid:1) (cid:1) (cid:1) the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the group's affairs as at 31 July 2008 and of its profit for the year then ended the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company's affairs as at 31 July 2008 the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation and the information given in the Report of the Directors is consistent with the financial statements. 43 Bellway p.l.c. Annual Report & Accounts 2008 KPMG Audit Plc Chartered Accountants Registered Auditor Newcastle upon Tyne 24 October 2008 Group Income Statement for the year ended 31 July 2008 Revenue Cost of sales Gross profit Administrative expenses Operating profit Finance income Finance expenses Share of losses of equity accounted entities Profit before taxation Income tax expense Notes 2008 2008 Pre-exceptional Exceptional item £000 item £000 2008 Total £000 2007 Total £000 1 5 4 2 2 6 1,149,541 - 1,149,541 1,354,022 (905,745) (130,905) (1,036,650) (1,042,102) 243,796 (130,905) 112,891 311,920 (58,761) - (58,761) (58,844) 185,035 (130,905) 54,130 253,076 3,631 (22,683) (315) - - - 3,631 5,050 (22,683) (22,961) (315) (315) 165,668 (130,905) 34,763 234,850 (46,159) 38,399 (7,760) (68,136) Profit for the year (all attributable to equity holders of the parent) 119,509 (92,506) 27,003 166,714 Earnings per ordinary share - basic Earnings per ordinary share - diluted 8 8 104.2p 104.1p (80.6)p (80.6)p 23.6p 23.5p 146.1p 144.7p Statements of Recognised Income and Expense for the year ended 31 July 2008 Notes 24 6 Actuarial (losses) / gains on defined benefit pension scheme Tax on items taken directly to equity Net (expense) / income recognised directly in equity Profit / (loss) for the year Total recognised income/(expense) (all attributable to equity 19 holders of the parent) Group 2008 £000 (14,351) 4,018 (10,333) 27,003 16,670 Group Company Company 2007 £000 5,268 (1,475) 3,793 166,714 170,507 2008 £000 - - - 2007 £000 - - - (1,900) 143,150 (1,900) 143,150 Bellway p.l.c. Annual Report & Accounts 2008 44 Balance Sheets at 31 July 2008 ASSETS Non-current assets Property, plant and equipment Investment property Investments in subsidiaries and equity accounted entities Other financial assets Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Non-current liabilities Interest bearing loans and borrowings Retirement benefit obligations Land payables Current liabilities Interest bearing loans and borrowings Trade and other payables Current tax liabilities Total liabilities Net assets EQUITY Issued capital Share premium Other reserves Share-based payment reserve Retained earnings Total equity attributable to equity holders of the parent Minority interest Total equity Notes 9 10 11 14 12 13 14 21 15 24 16 15 16 18 19 19 19 19 19 Group 2008 £000 11,559 4,092 126 5,607 7,871 Group 2007 £000 Company Company 2008 £000 2007 £000 12,671 2,417 - - - - - 25,470 23,785 5,201 7,826 - - - - 29,255 28,115 25,470 23,785 1,503,936 1,537,874 - - 54,496 109,313 45,252 25,381 1,667,745 1,608,507 1,697,000 1,636,622 715,578 767,304 5,139 720,717 746,187 4,991 772,295 796,080 295,000 12,709 51,306 77,000 1,986 47,875 20,000 20,000 - - - - 359,015 126,861 20,000 20,000 52,000 284,901 - 336,901 695,916 60,554 380,895 32,498 473,947 600,808 - 1,058 - 1,058 21,058 - 909 - 909 20,909 1,001,084 1,035,814 725,129 775,171 14,372 116,928 1,492 - 14,337 115,484 1,492 - 14,372 116,928 2,145 9,267 868,358 904,567 582,417 1,001,150 1,035,880 725,129 (66) (66) - 14,337 115,484 2,145 7,582 635,623 775,171 - 1,001,084 1,035,814 725,129 775,171 Approved by the Board of Directors on 24 October 2008 and signed on its behalf by Howard C Dawe Director Alistair M Leitch Director 45 Bellway p.l.c. Annual Report & Accounts 2008 Cash Flow Statements for the year ended 31 July 2008 Notes Group 2008 £000 Group 2007 £000 Company Company 2008 £000 2007 £000 Cash flows from operating activities Profit for the year Depreciation charge Loss / (profit) on sale of property, plant and equipment Profit on sale of investment properties Finance income Finance expenses Dividends received Share based payment charge Income tax expense 2 2 6 27,003 166,714 (1,900) 143,150 2,858 140 (151) 3,102 (188) - (3,631) (5,050) - - - - - - - - 22,683 22,961 1,900 1,900 - 1,685 7,760 - 2,580 68,136 - - - - (145,050) - - - Decrease / (increase) in inventories 33,938 (103,875) Decrease / (increase) in trade and other receivables 13,322 (17,151) 51,784 (105,107) (Decrease) / increase in trade and other payables (101,688) 46,584 149 - Cash from operations 3,919 183,813 51,933 (105,107) Interest paid Income tax paid (17,418) (19,382) (1,900) (1,900) (62,875) (63,867) - - Net cash (outflow) / inflow from operating activities (76,374) 100,564 50,033 (107,007) Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of investment properties Proceeds from sale of property, plant and equipment Proceeds from sale of investment properties Interest received Dividends received Net cash inflow from investing activities Cash flows from financing activities Increase / (decrease) in bank borrowings (2,096) (1,858) 376 334 4,557 - 1,313 (3,090) (704) 1,224 - 3,988 - 1,418 253,000 (67,000) - - - - - - - - Proceeds from the issue of share capital on exercise of share options Purchase of own shares by employee share option plans 1,479 (568) 3,666 (2,431) 1,479 - - - - - - 145,050 145,050 - 3,666 - Dividends paid (51,364) (41,695) (51,364) (41,695) Net cash inflow / (outflow) from financing activities 202,547 (107,460) (49,885) (38,029) Net increase / (decrease) in cash and cash equivalents 127,486 (5,478) Cash and cash equivalents at beginning of year (18,173) (12,695) Cash and cash equivalents at end of year 21 109,313 (18,173) 148 4,991 5,139 14 4,977 4,991 Bellway p.l.c. Annual Report & Accounts 2008 46 Accounting Policies Basis of preparation Bellway plc (the “Company”) is a company incorporated in the UK. Both the Company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”) and have been prepared on the historical cost basis except for other financial assets, which are stated at their fair value. On publishing the Company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. In these financial statements the following Adopted IFRS is effective for the first time and comparatives have been restated accordingly: IFRS 7 - ‘Financial Instruments: Disclosures’ and the related amendment to IAS 1 ‘Presentation of Financial Statements’ in relation to capital disclosures. The Group adopted IFRS 7 - ‘Financial instruments: Disclosures’ on 1 August 2007. IFRS 7 and the related amendment to IAS 1 ‘Presentation of Financial Statements’ in relation to capital disclosures, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group's or Company's financial instruments. The preparation of financial statements in conformity with Adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Judgements made by the directors, in the application of these accounting policies, that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed under accounting estimates and judgements on page 50. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 July. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The consolidated financial statements include the Group’s share of the total recognised income and expenses of equity accounted entities. When the Group's share of losses exceeds its interest in an equity accounted entity, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an investee. Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements include the Group’s proportionate share of the significant entities’ assets, liabilities, income and expenses with items of a similar nature on a line by line basis, from the date that joint control commences until the date that joint control ceases. Property, plant and equipment Items are stated at cost less accumulated depreciation and impairment losses. Depreciation on property, plant and equipment is charged to the income statement on a straight-line basis over their estimated useful lives over the following number of years: Plant, fixtures and fittings - 3 to 10 years. Freehold property - 40 years. Freehold land is not depreciated. Investment property Investment property is initially recognised at cost. Subsequent to recognition, investment property is measured using the cost model and is carried at cost less any accumulated impairment losses. Depreciation is charged, where material, so as to write off the cost less residual value of the investment properties over their estimated useful lives. The residual values and useful lives of investment properties are reviewed at each financial year end. The useful life of investment properties has been assessed as 40 years (2007 - 40 years). 47 Bellway p.l.c. Annual Report & Accounts 2008 Accounting Policies (continued) Inventories Inventories are stated at the lower of cost and net realisable value. Cost, in relation to work in progress and showhomes, comprises direct materials and, where applicable, direct labour costs and those overheads, not including any general administrative overheads, that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and overheads. Land held for development, including land in the course of development until legal completion of the sale of the asset, is initially recorded at cost. Where, through deferred payment terms, the fair value of land purchased differs from the amount that will subsequently be paid in settling the liability, the difference is charged as a finance expense in the income statement over the period to settlement. Options purchased in respect of land are capitalised initially at cost. Regular reviews are carried out for impairment in the value of these options, and provisions made accordingly to reflect loss of value. The impairment reviews consider the period elapsed since the date of purchase of the option given that the option contract has not been exercised at the review date. Further, the impairment reviews consider the remaining life of the option, taking account of any concerns over whether the remaining time available will allow a successful exercise of the option. The carrying cost of the option at the date of exercise is included within the cost of land purchased as a result of the option exercise. Investments in land without the benefit of planning consent, either through the purchase of land or non-refundable deposits paid on land purchase contracts subject to planning consent, are included initially at cost. Regular reviews are carried out for impairment in the values of these investments, and provision made to reflect any irrecoverable element. The impairment reviews consider the existing use value of the land and assess the likelihood of achieving planning consent and the value thereof. Trade and other receivables Trade receivables are stated at their fair value at the date of initial recognition and subsequently at amortised cost less allowances for impairment. Other financial assets Other financial assets are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity within an available-for-sale reserve, except for impairment losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in the income statement. Where these investments are interest bearing, interest calculated using the effective interest method is recognised in the income statement. Cash and cash equivalents Cash and cash equivalents are defined as cash balances in hand and in the bank (including short term cash deposits). The Group utilises bank overdraft facilities, which are repayable on demand, as part of its cash management policy. As a consequence, bank overdrafts are included as a component of net cash and cash equivalents within the cash flow statement. Offset arrangements across Group businesses have been applied to arrive at the cash and overdraft figures in the balance sheet. Interest bearing loans and borrowings Interest bearing loans and borrowings are stated at their fair value at the date of initial recognition and subsequently at amortised cost. Trade and other payables Trade payables on normal terms are not interest bearing and are stated at their nominal value. Trade payables on deferred terms, most notably in relation to land purchases, are recorded initially at their fair value. The discount to nominal value is amortised over the period to settlement and charged to finance expenses. Share capital I. Preference share capital Preference share capital is redeemable on 6 April 2014 or at the option of the Company (subject to relevant conditions set out in note 15) and is classified as a liability. II. Dividends Dividends on redeemable preference shares are recognised as a liability and accrued using the effective interest rate method. They are recognised in the income statement within finance expenses. Other dividends are recognised as a liability in the period in which they are approved by the shareholders. Interim dividends are recognised when paid. Bellway p.l.c. Annual Report & Accounts 2008 48 Accounting Policies (continued) Classification of equity instruments and financial liabilities issued by the Group Equity instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and (b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. Grants Grants are included within work in progress in the balance sheet and are credited to the income statement over the life of the developments to which they relate. Revenue recognition Revenue from private housing sales and land is recognised when transactions have legally completed. Incentives Sales incentives are substantially cash in nature but include part-exchange costs which mainly relate to amounts written down, where the part-exchange allowance given to the purchaser of the new home is greater than the valuation of the part-exchange property. Incentives are accounted for by reducing the housebuild revenue by the cost to the company of providing the incentive. Rental income Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Part-exchange properties The purchase and subsequent sale of part-exchange properties is an activity undertaken in order to achieve the sale of a new property. As such, the activity is regarded as a mechanism for selling. Impairments and gains or losses on the sale of part-exchange properties are classified as a cost of sale. Any subsequent write-down below the part-exchange valuation is posted to cost of sales. Taxation The charge for taxation is based on the profit for the year and takes into account current and deferred taxation. The charge is recognised in the income statement except to the extent that it relates to items recognised in equity in which case it is recognised in equity. Deferred taxation is provided for all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that the related tax benefit will be realised. Employee benefits - retirement benefit costs For the defined benefit pension scheme, the liability is calculated as the present value of the defined benefit obligation at the balance sheet date. The fair values of scheme assets are then deducted. The calculation is performed by a qualified actuary using the projected unit credit method. All actuarial gains and losses are recognised immediately in the Statement of Recognised Income and Expense (SORIE). Further details of the scheme and the valuation methods applied may be found in note 24 on page 71. Defined contribution pension costs are charged to the income statement in the period for which contributions are payable. 49 Bellway p.l.c. Annual Report & Accounts 2008 Accounting Policies (continued) Employee benefits - share-based payment In accordance with IFRS 2, the fair value of equity settled share options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured as at the date the options are granted and the charge is only amended if vesting does not take place due to non-market conditions not being met. Various option pricing models are used according to the terms of the option scheme under which the options were granted. The fair value is spread over the period during which the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of options that vest. IFRS 2 has been applied to options granted after 7 November 2002 which had not vested at 1 January 2005. With respect to share-based payments, a deferred tax asset is recognised on the relevant tax base. The tax base is then compared to the cumulative share- based payment expense recognised in the income statement. Deferred tax arising on the excess of the tax base over the cumulative share-based payment expense recognised in the income statement has been recognised directly in equity outside the SORIE as share-based payments are considered to be transactions with shareholders. A deferred tax asset relating to awards issued before 7 November 2002, which follow the exemption of IFRS1 and have not been accounted for under IFRS2, has been recognised on transition. Subsequent reversal of the deferred tax asset and any excess tax benefits are recognised directly in equity. Where the Company grants options over its own shares to the employees of its subsidiaries it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equivalent to the equity settled share-based payment charge recognised in its consolidated financial statements with the corresponding credit being recognised in equity. Own shares held by ESOP trust Transactions of the Group-sponsored ESOP trust are included in the Group financial statements but are not accounted for within the Company's financial statements. The purchase of shares in the Company by the trust are charged directly to equity. Operating leases Operating lease rentals are charged to the income statement on a straight line basis over the period of the lease. Finance income and expenses Finance income includes interest receivable on bank deposits. Other financial assets relate to the deferred element of revenues receivable from the sale of homes under shared equity schemes. The discounting of these other financial assets produces a notional interest receivable amount and this is also credited to finance income. Finance expenses includes interest on bank borrowings and dividends on redeemable preference shares. The discounting of the deferred payments for land purchases produces a notional interest payable amount and this is also charged to finance expenses. Exceptional items Exceptional items are those which, in the opinion of the Board, are material by size or nature, non-recurring, and of such significance that they require separate disclosure on the face of the income statement. Accounting estimates and judgements Management considers the key estimates and judgements made in the financial statements to be related to: Valuation of work in progress and land held for development Inventories are carried at the lower of cost and net realisable value, less payments on account. Net realisable value represents the estimated selling price (in the ordinary course of business) less all estimated costs of completion and overheads. Valuations of site work in progress are carried out at regular intervals and estimates of the cost to complete a site and estimates of anticipated revenues are required to enable a development profit to be determined. Management are required to employ considerable judgement in estimating the profitability of a site and in assessing any impairment provisions which may be required. Exceptional items For the year ended 31 July 2008, a full review of inventories has been performed and write downs have been made where cost exceeds net realisable value. Estimated selling prices have been reviewed on a site by site basis and selling prices have been reduced based on local management and the Board's assessment of current market conditions. These site reviews have resulted in write-downs totalling £112.5 million. Should there be a further significant reduction in UK house prices then further write-downs of land and work in progress may be required. Pension The Group has utilised a rate of return on assets and a discount rate having been advised by its actuary. To the extent that such assumed rates are different from what actually transpires, the pension liability of the Group would change. Bellway p.l.c. Annual Report & Accounts 2008 50 Accounting Policies (continued) Income taxes A certain degree of estimation and judgement is required in establishing the tax figures prior to formal resolution with HMRC. In accordance with the contingent asset rules, detailed in IAS 37, the Group's policy is to be prudent in assessing the level of benefit which may accrue. Standards and interpretations in issue but not yet effective At the date of approval of these financial statements some standards, amendments and interpretations have been published which are expected to have an effect on the Group's financial statements for the accounting periods beginning on or after 1 August 2008. None of these have been endorsed by the EU with the exception of IFRS 8 'Operating Segments'. The standards, interpretations and amendments which are expected to have an effect on the Group's financial statements are: - IFRS 8 'Operating Segments'. This standard amends the current segmental reporting requirements of IAS 14 with a requirement for segmental information to be presented on the same basis as that used by management for internal reporting purposes. This standard will apply to the Group's financial statements for the period commencing 1 August 2009, with the requirement of additional disclosures. - IAS 23 (Amendment): Borrowing costs. This amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset, removing the option to immediately expense such costs. The Group is assessing whether this amendment is applicable to the Group and, if so, its likely effect on the financial statements. - IFRIC 14 - IAS 19 - 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction'. This IFRIC outlines when refunds or reductions in future contributions can be treated as available under IAS 19 and how a minimum funding requirement affects future contributions or may give rise to a liability. This interpretation applies to the Group's financial statements from the accounting period commenced on 1 August 2008. The Group anticipates that no additional liabilities will be recognised on the adoption of IFRIC 14. - IFRIC 15 'Agreements for the construction of real estate'. This IFRIC provides guidance on whether the construction of real estate should be accounted for under IAS 11 or IAS 18. The interpretation is effective from 1 January 2009, however, the Group already accounts for the construction of real estate in accordance with IFRIC 15 and consequently there will be no effect on the Group's financial statements. Of the other IFRSs that are available for early adoption, none are expected to have a material effect on the financial statements. 51 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts 1 Revenue / segmental analysis The Group uses business as the basis for primary segmentation. Operations are carried out within one business segment which is housebuilding. No additional business segment information is required to be provided. The Group's secondary segment is geography. It operates in one geographical segment, the United Kingdom, therefore no additional geographical segment information is required to be provided. 2 Finance income and expenses Interest income Interest payable on bank loans and overdrafts Interest on deferred term land payables Interest element of movement in pension scheme deficit Other interest expense Preference dividends Finance expenses 3 Employee information Group employment costs, including directors, comprised: Wages and salaries Social security Pension costs (note 24) Share-based payments 2008 £000 3,631 15,049 5,262 63 409 1,900 22,683 2007 £000 5,050 15,828 4,749 85 399 1,900 22,961 2008 £000 2007 £000 80,768 81,238 9,215 784 1,685 9,816 2,986 2,580 92,452 96,620 The average number of persons employed by the Group during the year was 2,203 (2007 - 2,476) comprising 704 (2007 - 704) administrative and 1,499 (2007 - 1,772) production and others employed in housebuilding and associated trading activities. The figure for pension costs for the previous year has been restated due to an erroneous number in the prior year disclosure. The restatement relates to the above disclosure only and has no effect on the income statement for 2007. Pension costs for the current year include a settlement gain of £1,783,000 (2007 - £nil). The Executive Directors are the only employees of the Company and their emoluments are disclosed in the Report of the Board on Directors' Remuneration on pages 34 to 41. Key management personnel remuneration, including directors, comprised: Salaries and fees Taxable benefits Annual bonus - cash Annual bonus - deferred Pension costs Share-based payments 2008 £000 1,733 75 807 - 358 1,161 4,134 2007 £000 1,837 135 1,776 100 324 1,392 5,564 Bellway p.l.c. Annual Report & Accounts 2008 52 Notes to the Accounts (continued) 3 Employee information (continued) Details of director's remuneration are given in the Report of the Board on Directors’ Remuneration on pages 34 to 41. Key management personnel, as disclosed under IAS 24: ‘Related party disclosures’, comprises the Directors and other senior operational management. 4 Operating profit Operating profit is stated after charging / (crediting): Staff costs (note 3) Loss / (profit) on sale of property, plant and equipment Depreciation Hire of plant and machinery Operating lease charges for land and buildings Auditors' remuneration: Audit of these financial statements Amounts receivable by the auditors and their associates in respect of: Audit of financial statements of subsidiaries pursuant to legislation Other services relating to taxation Pension scheme audits Other services 2008 £000 2007 £000 92,452 96,620 140 2,858 10,210 1,569 (338) 3,102 14,649 1,561 31 31 177 127 5 6 167 88 5 182 Amounts paid to the Company's auditors and their associates in respect of services to the Company, other than the audit of the Company's financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. 5 Exceptional items Exceptional items are those which, in the opinion of the Board, are material by size or nature, non-recurring, and of such significance that they require separate disclosure on the face of the income statement. A full review of inventories has been performed and land write downs have been made where cost exceeds net realisable value. Net realisable value represents the estimated selling price (in the ordinary course of business) less all estimated costs of completion and overheads. Estimated selling prices have been reviewed on a site by site basis and selling prices have been reduced based on local management and the Board’s assessment of current market conditions. These site reviews have resulted in land write downs totalling £112.5 million. In addition option costs and related fees have been written down by £15.4 million to their net realisable value. The Board has also reassessed the net realisable value of currently unsold part-exchange properties and has written down stock by 10% totalling £3.0 million. The above has resulted in an exceptional charge totalling £130.9 million (2007 - £nil). 53 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 6 Income tax expense Current tax expense: UK corporation tax Adjustments in respect of prior years Deferred tax expense: Origination and reversal of temporary differences Adjustments in respect of prior years 2008 £000 2007 £000 10,855 70,950 (4,378) (3,595) 6,477 67,355 1,277 6 1,283 775 6 781 Total income tax expense in income statement 7,760 68,136 Reconciliation of effective tax rate: Profit before tax Tax calculated at UK corporation tax rate Non-deductible expenses Effect of hybrid rate of tax Adjustments in respect of prior years - current tax - deferred tax Effective tax rate and tax expense for the year 2008 % 2008 £000 2007 % 2007 £000 34,763 9,734 1,936 462 28.0 5.6 1.3 (12.6) (4,378) - 22.3 6 7,760 234,850 70,455 1,270 - (3,595) 6 68,136 30.0 0.5 - (1.5) - 29.0 The UK corporation tax rate changed from 30% to 28% with effect from 1 April 2008. All deferred tax assets and liabilities are now recognised at 28%. The adjustment in respect of prior year’s current tax has been applied to the pre-exceptional charge in the income statement. Tax recognised directly in equity: Relating to equity-settled transactions Relating to actuarial movement on the defined benefit pension scheme tax 2008 £000 - - Income Deferred tax 2008 £000 Total 2008 £000 Total 2007 £000 (2,690) (2,690) 92 4,018 4,018 (1,475) Bellway p.l.c. Annual Report & Accounts 2008 54 Notes to the Accounts (continued) 7 Dividends on equity shares Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 July 2007 of 26.675p per share (2006 - 20.2p) Interim dividend for the year ended 31 July 2008 of 18.1p per share (2007 - 16.45p) Proposed final dividend for the year ended 31 July 2008 of 6.0p per share (2007 - 26.675p) 2008 £000 2007 £000 30,541 20,765 51,306 6,912 23,103 18,813 41,916 30,810 The 2008 proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 16 January 2009 and, in accordance with IAS 10, has not been included as a liability in these financial statements. 8 Earnings per ordinary share Basic earnings per ordinary share is calculated by dividing earnings by the weighted average number of ordinary shares in issue during the year (excluding the weighted average number of ordinary shares held by the employee share ownership plans which are treated as cancelled). Diluted earnings per ordinary share uses the same earnings figure as the basic calculation except that the weighted average number of shares has been adjusted to reflect the dilutive effect of outstanding share options allocated under employee share schemes where the market value exceeds the option price. It is assumed that all dilutive potential ordinary shares are converted at the beginning of the accounting period. Diluted earnings per ordinary share is calculated by dividing earnings by the diluted weighted average number of ordinary shares. Reconciliations of the earnings and weighted average number of shares used in the calculations are outlined below: Earnings per share 2007 p 146.1 (1.4) 144.7 146.1 (1.4) 144.7 Pre-exceptional item* Earnings 2008 £000 Weighted average number of ordinary shares 2008 no. For basic earnings per ordinary share 119,509 114,615,661 Earnings per share Earnings Weighted average number of ordinary shares 2007 no. 2008 p 104.2 2007 £000 166,714 114,108,350 Dilutive effect of options and awards 245,743 (0.1) 1,140,376 For diluted earnings per ordinary share 119,509 114,861,404 104.1 166,714 115,248,726 Post-exceptional item For basic earnings per ordinary share 27,003 114,615,661 Dilutive effect of options and awards 245,743 For diluted earnings per ordinary share 27,003 114,861,404 23.6 (0.1) 23.5 166,714 114,108,350 1,140,376 166,714 115,248,726 * Exceptional charge of £130.9m (2007 - £nil) in the current year (note 5). 55 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 9 Property, plant and equipment Group Cost At 1 August 2006 Additions Disposals At 1 August 2007 Additions Disposals At 31 July 2008 Depreciation At 1 August 2006 Charge for year On disposals At 1 August 2007 Charge for year On disposals At 31 July 2008 Net book value At 31 July 2008 At 31 July 2007 At 31 July 2006 10 Investment property Group Cost At 1 August 2006 Additions At 1 August 2007 Additions Disposals At 31 July 2008 Land and Plant, Total property fixtures and £000 7,311 - (420) 6,891 2 (92) fittings £000 18,092 3,060 £000 25,403 3,060 (2,927) (3,347) 18,225 2,260 25,116 2,262 (2,269) (2,361) 6,801 18,216 25,017 537 140 - 677 140 - 817 5,984 6,214 6,774 11,117 2,962 11,654 3,102 (2,311) (2,311) 11,768 2,718 12,445 2,858 (1,845) (1,845) 12,641 13,458 5,575 6,457 6,975 11,559 12,671 13,749 Total £000 1,713 704 2,417 1,858 (183) 4,092 Investment properties, which represent properties where Bellway has retained an interest in a sold property, are valued under the cost model and are held at cost less accumulated impairment losses. A formal external valuation of investment properties was carried out at the end of the financial year. The fair value of investment properties was assessed at £9,038,000 (2007 - £6,519,000). As noted above, the Group, in conjunction with external valuers, assessed the residual values as being highly likely to exceed cost and, in the event that costs exceed residual values, any excess would be viewed as not likely to be material in the Group’s financial statements. The Group has determined, therefore, that no depreciation should be charged (2007 - £nil). The investment properties are a proportion of the cost of residential units constructed by the Group, the units being sold under a shared ownership scheme. Bellway p.l.c. Annual Report & Accounts 2008 56 Notes to the Accounts (continued) 11 Investments in subsidiaries, equity accounted entities and proportionately consolidated jointly controlled entities The Group and Company have the following investments in subsidiaries, equity accounted entities and proportionately consolidated jointly controlled entities: Subsidiaries Company Cost At 1 August 2007 Additions At 31 July 2008 Shares in subsidiary undertakings £000 23,785 1,685 25,470 Principal subsidiary undertakings A summary of the principal subsidiary undertakings is given in note 26 on page 78. Equity accounted entities The Group and Company own 25% - 50% of the ordinary share capital of several small entities which they have accounted for using the equity method as they are not considered to be significant. Cost At 1 August 2007 and at 31 July 2008 Share of post acquisition reserves At 1 August 2007 Loss for the year Transferred to current liabilities within other payables Reclassification of opening balance At 31 July 2008 Net book value At 31 July 2008 At 31 July 2007 Investments in equity accounted entities £000 5 (5) (296) 194 228 121 126 - The above equity accounted entities are incorporated in Great Britain and registered in England and Wales. The amount by which the accumulated share of post acquisition losses exceeds the cost of the investment in individual equity accounted entities has, where required by the Group accounting policy, been transferred to current liabilities and included within note 16. One of the equity accounted entities has a net asset position at 31 July 2008 and also at 31 July 2007. The other equity accounted entity has a net liability position for those years. The figure for investments in equity accounted entities at 31 July 2008 represents the amount for the entity which has a net asset position. The corresponding figure at 31 July 2007 of £228,000 (adjusted above) was not separately disclosed in the accounts for the year then ended. Guarantees relating to the overdrafts of equity accounted entities have been given by the Company (note 22). 57 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 11 Investments in subsidiaries, equity accounted entities and proportionately consolidated jointly controlled entities (continued) Summary of financial information on equity accounted entities - 100% Total assets Total liabilities Net liabilities of equity accounted entities Revenue Loss after interest Taxation Loss after interest and taxation Proportionately consolidated jointly controlled entities Name Country of incorporation Percentage of shares owned directly by Bellway p.l.c. Barking Riverside Limited Great Britain 51% Aggregated amounts relating to share of proportionately consolidated jointly controlled entity Non-current assets Current assets Non-current liabilities Current liabilities Net assets Income Expenses 2008 £000 3,922 (5,348) (1,426) 983 (630) 38 (592) 2007 £000 3,791 (4,623) (832) 316 (630) - (630) 2008 £000 2007 £000 288 2 22,742 18,705 - (466) - (814) 22,564 17,893 638 (1,449) 1,198 (1,012) Bellway p.l.c. Annual Report & Accounts 2008 58 Notes to the Accounts (continued) 12 Deferred taxation The following are the deferred tax assets recognised by the Group and the movements thereon during the current and prior year: Capital Retirement Share-based allowances benefit payments Land payables obligations Other Total temporary differences £000 £000 £000 £000 £000 £000 Group At 1 August 2006 Income statement credit / (charge) Charge to statement of recognised income and expense Charge to equity At 31 July 2007 405 25 - - 430 3,515 4,194 1,789 565 - - 271 10,174 (31) (781) - - (1,475) (92) 144 - (92) 4,246 2,354 240 7,826 (1,484) (1,475) - 556 Income statement credit / (charge) 57 (1,016) (1,127) 851 (48) (1,283) Credit to statement of recognised income and expense Charge to equity At 31 July 2008 - - 4,018 - - (2,690) - - - - 4,018 (2,690) 487 3,558 429 3,205 192 7,871 There are no deferred tax balances in respect of the Company. 13 Inventories Group Land Work in progress Showhomes Part-exchange properties 2008 £000 2007 £000 920,778 1,041,790 497,713 429,317 44,786 40,659 36,839 29,928 1,503,936 1,537,874 Inventories of £872.0m were expensed in the year (2007 - £1,004.0m). Inventories have been written down by £1.9m (2007 - £1.6m ) in the year. In addition there have been inventory write-backs of £20.2m (2007 - £4.4m). There has also been an exceptional write-down of inventories in 2008 of £130.9m as outlined in note 5 on page 53. Land with a carrying value of £61.158m (2007 - £80.803m) was used as security for land payables (note 16). 59 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 14 Trade and other receivables Non-current receivables Other financial assets Current receivables Trade receivables Other receivables Corporation tax receivable Amounts owed by Group undertakings Prepayments and accrued income Group Company Group 2007 £000 5,201 2007 £000 15,948 26,104 - - Company 2008 £000 - 2008 £000 - - - 2007 £000 - 2007 £000 - - - 715,578 767,297 3,200 - 7 45,252 715,578 767,304 2008 £000 5,607 2008 £000 13,644 15,130 23,900 - 1,822 54,496 The Group assesses the aging of trade receivables in terms of whether amounts are receivable in less than one year or more than one year. None of the trade receivables are past their due dates (2007 - £nil). The other financial assets due after more than one year are recorded at fair value, being the amount receivable by the Group discounted to present day values.The difference between the nominal value and the initial fair value is credited over the deferred term to finance income, with the financial asset increasing to its full cash settlement value on the anticipated payment date. None of the other financial assets are past their due dates (2007 - £nil). Credit risk is accounted for in determining fair values and appropriate discount factors are applied. The Group holds a second charge over property sold under shared equity schemes. The other financial assets were held at amortised cost at 31 July 2007. This change in accounting policy, which has been accounted for in the current year, does not have a material effect. Other receivables due within one year include £5.509m (2007 - £15.761m) in relation to VAT recoverable. 15 Interest bearing loans and borrowings Non-current liabilities Bank loans Preference shares (see note below) Current liabilities Bank overdrafts Bank loans Group Company 2007 £000 57,000 20,000 77,000 2008 £000 - 20,000 20,000 2007 £000 - 20,000 20,000 Group Company 2007 £000 43,554 17,000 60,554 2008 £000 - - - 2007 £000 - - - 2008 £000 275,000 20,000 295,000 2008 £000 - 52,000 52,000 Bellway p.l.c. Annual Report & Accounts 2008 60 Notes to the Accounts (continued) 15 Interest bearing loans and borrowings (continued) Preference shares Authorised, allotted, called up and fully paid Number Group Company 2008 £000 2007 £000 2008 £000 2007 £000 20,000,000 at 1 August 2007 and 31 July 2008 20,000 20,000 20,000 20,000 With regard to the 9.5% cumulative redeemable preference shares 2014 of £1 each the following rights are attached: (a) The holders are entitled to a preferential fixed cumulative dividend at an annual rate of 9.5% payable half yearly on 6 April and 6 October. (b) The shares are redeemable by the Company at any time at a sum calculated by reference to the yield on 12% Exchequer Stock 2013/2017 provided such sum is neither less than the nominal value nor more than twice the nominal value of the shares. Any shares still in issue shall be redeemed at par on 6 April 2014. (c) In the event of a winding up of the Company, the preference shareholders are entitled to a preferential payment in addition to any arrears of dividend, equivalent to the nominal value of the preference shares, or in the event of a voluntary winding up, an amount per share calculated by reference to the yield on 12% Exchequer Stock 2013/2017 provided such sum is neither less than the nominal value nor more than twice the nominal value of the shares. (d) The preference shareholders have no ordinary voting rights except in circumstances where the fixed dividend on the preference shares is six months in arrears or where the business of a General Meeting includes the consideration of certain resolutions as defined in the Articles of Association relating to winding up, changes in the rights of preference shareholders or failure by the Company to redeem the preference shares by 6 April 2014. 16 Trade and other payables Non-current liabilities Land payables Group Company 2008 £000 2007 £000 51,306 47,875 2008 £000 - 2007 £000 - Land payables of £12.154m (2007 - £8.595m) are secured on the land to which they relate. The carrying value of the land used for security is £24.327m (2007 - £17.1m). Current liabilities Trade payables Land payables Social security and other taxes Other payables Accrued expenses and deferred income Payments on account Group Company 2008 £000 75,075 81,806 4,984 3,137 82,707 37,192 2007 £000 84,387 112,148 3,055 4,613 96,077 80,615 2008 £000 - - - 457 601 - 284,901 380,895 1,058 2007 £000 - - - 308 601 - 909 Land payables of £17.546m (2007 - £36.838m) are secured on the land to which they relate. The carrying value of the land used for security is £36.831m (2007 - £63.703m). 61 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 17 Financial risk management The Group's financial instruments comprise cash, bank loans and overdrafts and various items such as trade receivables and trade payables that arise directly from its operations. The main objective of the Group's policy towards financial instruments is to maximise returns on the Group's cash balances, manage the Group's working capital requirements and finance the Group's ongoing operations. The Company's only financial instruments are Preference Shares. Capital Management The Board's policy is to maintain a strong capital base to underpin the future development of the business in order to deliver value to shareholders. The Group finances its operations through retained earnings, bank borrowings and the management of working capital. From time to time, the trustees of the Bellway Employee Share Trust (1992) also purchase shares for the future satisfaction of employee share options. Management of financial risk The main risks associated with the Group's financial instruments have been identified as credit risk, liquidity risk and interest rate risk. The Board is responsible for managing these risks and the policies adopted, which have remained largely unchanged during the year, are set out below. Credit risk The Group's exposure to credit risk is limited by the fact that the Group generally receives cash at the point of legal completion of its sales. There is no specific concentration of credit risk in respect of home sales as the exposure is spread over a number of customers. In respect of trade receivables and other financial assets, the amounts presented in the balance sheet are stated after adjusting for any doubtful receivables, based on the judgement of the Group's management through using both previous experience and knowledge of the current position (see note 14). In managing risk the Group assesses the credit risk of its counter parties before entering into a transaction. No credit limits were exceeded during the reporting period or subsequently and the Group does not anticipate any losses from non-performance by these counterparties. In relation to land payables, certain payables are secured on the respective land asset held as shown in note 16. No other security is held against any other financial asset of the Group. The Board considers the Group's exposure to credit risk to be acceptable and normal for an entity of its size given the industry in which it operates. Liquidity risk The Group finances its operations through a mixture of equity (comprising share capital, reserves and retained earnings) and debt (comprising bank overdraft facilities and borrowings). The Group manages its liquidity risk by monitoring exisitng facilities and cash flows against forecast requirements based on a two year rolling cash forecast. The Group's banking arrangements outlined below are considered to be adequate in terms of flexibility and liquidity for its medium term cash flow needs therefore mitigating the Group's liquidity risk. Interest rate risk Interest rate risk reflects the Group's exposure to fluctuations to interest rates in the market. The risk arises because the Group's overdraft and floating rate bank loans bear interest based on either LIBOR or to the bank's base rate. For the year ended 31 July 2008 it is estimated that an increase of 1% in interest rates applying for the full year would decrease the Group's profit before tax by £2.2m (2007 - £0.9m). Bellway p.l.c. Annual Report & Accounts 2008 62 Notes to the Accounts (continued) 17 Financial risk management (continued) Land purchased on deferred terms The Group sometimes acquires land on deferred payment terms. In accordance with IAS 39 the deferred creditor is recorded at fair value being the price paid for the land discounted to present day. The difference between the nominal value and the initial fair value is amortised over the deferred term to finance expenses, increasing the land creditor to its full cash settlement value on the payment date. The maturity profile of the total contracted cash payments in respect of amounts due on land creditors at the balance sheet date is as follows: At 31 July 2008 At 31 July 2007 Balance at Total 31 July contracted cash payment £000 £000 Within one year or on demand £000 133,112 139,916 83,279 160,023 167,397 113,121 1-2 years £000 42,306 33,679 2-5 years £000 7,125 17,995 More than 5 years £000 7,206 2,602 The maturity profile of the total contracted payments in respect of financial liabilities (excluding amounts due on land creditors shown separately above) is as follows: Balance at Total 31 July contracted cash payment £000 £000 Bank loans - floating rates 325,000 334,151 Bank loans - fixed rates Preference shares 2,000 20,000 2,134 31,400 Within one year or on demand £000 59,151 2,134 - Trade and other payables 115,404 115,404 115,404 At 31 July 2008 462,404 483,089 176,689 Bank overdrafts Bank loans - floating rates Bank loans - fixed rates Preference shares 43,554 70,000 4,000 20,000 45,621 72,170 4,403 33,300 45,621 17,170 2,269 - Trade and other payables 169,615 169,615 169,615 1-2 years £000 - - - - - - - 2,134 - - 2-5 years £000 235,000 - - - More than 5 years £000 40,000 - 31,400 - 235,000 71,400 - 55,000 - - - - - - 33,300 - At 31 July 2007 307,169 325,109 234,675 2,134 55,000 33,300 The interest rate on the fixed rate borrowing and preference shares apply to the whole term of the relevant instruments. No interest rate has been calculated for the imputed interest on land payables as this is an accounting transaction with no actual interest payment being made by the Group. At the year end, the Group had £294.3m (2007 - £432.1m) of undrawn bank facilities available. The Company's only financial instruments are Preference Shares as disclosed in the maturity profile above. Cash and cash equivalents This comprises cash held by the Group and short-term bank deposits with a maturity date of less than one month. The amounts of cash and cash equivalents for the years ending July 2008 and July 2007 for both the Group and the Company are shown in note 21. At 31 July 2008 the average interest rate earned on the temporary closing cash balance was 3.69% (2007 - 4.58%). The carrying amount of these assets approximates their fair value. 63 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 17 Financial risk management (continued) Fair values Financial assets The carrying values of financial assets equates to their fair values. Financial liabilities A comparison of the book values and fair values of the Group's fixed rate preference shares and fixed rate bank loan at 31 July is as follows: Preference shares - fixed rate Bank loan - fixed rate 2008 £000 2008 £000 2007 £000 2007 £000 Book value Fair value Book value Fair value 20,000 20,400 2,000 2,021 20,000 4,000 23,000 4,049 The fair value of the fixed rate preference shares is based on quoted mid-market prices at 31 July. The fair value of the fixed rate bank loan is based on an indicative rate which could have been obtained on the market at 31 July. In aggregate, the fair values of the Group's other financial assets and liabilities are not materially different from their book value. 18 Issued capital Group and Company Authorised Ordinary shares of 12.5p each Allotted, called up and fully paid Equity At 1 August 2007 Issued on exercise of options At 31 July 2008 2008 Number ‘000 2008 £000 2007 Number ‘000 2007 £000 146,000 18,250 146,000 18,250 114,670 14,337 113,988 14,252 281 35 682 85 114,951 14,372 114,670 14,337 Bellway p.l.c. Annual Report & Accounts 2008 64 Notes to the Accounts (continued) 18 Issued capital (continued) Share options At 31 July 2008 all outstanding options to purchase ordinary shares in Bellway p.l.c., in accordance with the terms of the applicable schemes, were as follows: Number of shares Exercise price (p) Date from which exercisable (a) Bellway p.l.c. (1995) Employee Share Option Scheme 1,000 6,000 7,500 2,000 3,500 12,600 27,743 800 2,500 167,340 230,983 (b) Bellway p.l.c. (1996) Employee Share Option Scheme 500 3,700 6,650 6,500 3,500 158,090 380,850 750 560,540 273.50 354.50 248.00 277.50 409.30 474.00 524.00 621.50 712.50 716.00 409.30 474.00 524.00 621.50 712.50 716.00 844.00 29 October 2001 28 May 2002 13 April 2003 17 October 2003 25 April 2004 18 April 2005 13 May 2006 24 October 2006 10 May 2007 17 November 2007 25 April 2004 18 April 2005 13 May 2006 24 October 2006 10 May 2007 17 November 2007 31 October 2008 1,122.00 16 May 2009 to to to to to to to to to to to to to to to to to to Expiry date 28 October 2008 27 May 2009 12 April 2010 16 October 2010 24 April 2011 17 April 2012 12 May 2013 23 October 2013 9 May 2014 16 November 2014 24 April 2011 17 April 2012 12 May 2013 23 October 2013 9 May 2014 16 November 2014 30 October 2015 15 May 2016 65 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 18 Issued capital (continued) Number of shares Exercise price (p) Date from which exercisable (c) Bellway p.l.c. (2005) Employee Share Option Scheme 126,350 13,300 139,650 844.00 31 October 2008 1,470.00 7 February 2010 (d) Bellway p.l.c. (2007) Employee Share Option Scheme 28,700 1,470.00 7 February 2010 (e) Bellway p.l.c. (2003) Savings Related Share Option Scheme 35,142 44,208 102,732 61,964 51,804 18,587 138,796 61,042 514,275 489.60 537.60 676.00 676.00 1 February 2009 1 February 2010 1 February 2009 1 February 2011 1,092.00 1 February 2010 1,092.00 1 February 2012 847.20 847.20 1 February 2011 1 February 2013 to to to to to to to to to to to Total 1,474,148 Details of directors' share options are contained within the Report of the Board on Directors' Remuneration on pages 34 to 41. Expiry date 30 October 2015 6 February 2017 6 February 2017 31 July 2009 31 July 2010 31 July 2009 31 July 2011 31 July 2010 31 July 2012 31 July 2011 31 July 2013 Bellway p.l.c. Annual Report & Accounts 2008 66 Notes to the Accounts (continued) 19 Reconciliation of movements in capital and reserves Attributable to equity holders of the parent Ordinary Share Other premium reserves Retained earnings Total Minority interest Total equity share capital £000 £000 £000 £000 £000 £000 £000 Group At 1 August 2006 Total recognised income and expense Dividends on equity shares Shares issued Credit in relation to share options and tax thereon Purchase of own shares 14,252 111,903 1,492 775,919 903,566 (66) 903,500 - - 85 - - - - 3,581 - - - - - - - 170,507 170,507 (41,916) (41,916) - 3,666 2,488 2,488 (2,431) (2,431) - - - - - 170,507 (41,916) 3,666 2,488 (2,431) At 31 July 2007 14,337 115,484 1,492 904,567 1,035,880 (66) 1,035,814 Total recognised income and expense Dividends on equity shares Shares issued Charge in relation to share options and tax thereon Purchase of own shares - - 35 - - - - 1,444 - - - - - - - 16,670 16,670 (51,306) (51,306) - 1,479 (1,005) (1,005) (568) (568) - - - - - 16,670 (51,306) 1,479 (1,005) (568) At 31 July 2008 14,372 116,928 1,492 868,358 1,001,150 (66) 1,001,084 Within retained earnings are amounts relating to ordinary shares held by the employee share ownership plans. The number of shares held within these plans at 31 July 2008 was 197,858 (2007 - 337,089) which are held within the financial statements at a value of £1.872m (2007 - £3.239m). 67 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 19 Reconciliation of movements in capital and reserves (continued) Attributable to equity holders of the parent Ordinary Share Other Share-based share capital £000 premium reserves payment £000 £000 reserve £000 Retained earnings Total Minority interest Total equity £000 £000 £000 £000 Company At 1 August 2006 14,252 111,903 2,145 5,002 534,389 667,691 Total recognised income and expense Dividends on equity shares Shares issued Credit in relation to share options - - 85 - - - 3,581 - - - - - At 31 July 2007 14,337 115,484 2,145 Total recognised income and expense Dividends on equity shares Shares issued Credit in relation to share options - - 35 - - - 1,444 - - - - - - - - 2,580 7,582 - - - 1,685 143,150 143,150 (41,916) (41,916) - - 3,666 2,580 635,623 775,171 (1,900) (1,900) (51,306) (51,306) - - 1,479 1,685 At 31 July 2008 14,372 116,928 2,145 9,267 582,417 725,129 - - - - - - - - - - - 667,691 143,150 (41,916) 3,666 2,580 775,171 (1,900) (51,306) 1,479 1,685 725,129 As permitted by section 230 of the Companies Act 1985, the Company's income statement has not been included in these financial statements. The Company's loss for the financial year was £1.9m (2007 - Profit £143.15m). 20 Reconciliation of net cash flow to net debt Group Increase / (decrease) in net cash and cash equivalents (Increase) / decrease in bank loans (Increase) / decrease in net debt from cash flows Net debt at 1 August Net debt at 31 July 2008 £000 2007 £000 127,486 (5,478) (253,000) (125,514) 67,000 61,522 (112,173) (173,695) (237,687) (112,173) Bellway p.l.c. Annual Report & Accounts 2008 68 Notes to the Accounts (continued) 20 Reconciliation of net cash flow to net debt (continued) Company Increase in net cash and cash equivalents Net debt at 1 August Net debt at 31 July 21 Analysis of net debt Group Cash and cash equivalents Bank overdrafts Net cash and cash equivalents Bank loans Preference shares redeemable after more than one year Net debt Company Cash and cash equivalents Preference shares redeemable after more than one year Net debt 2008 £000 2007 £000 148 14 (15,009) (15,023) (14,861) (15,009) At 1 August 2007 £000 25,381 (43,554) Cash flows £000 83,932 43,554 At 31 July 2008 £000 109,313 - (18,173) 127,486 109,313 (74,000) (253,000) (327,000) (20,000) - (20,000) (112,173) (125,514) (237,687) At 1 August 2007 £000 4,991 (20,000) (15,009) Cash flows £000 148 - 148 At 31 July 2008 £000 5,139 (20,000) (14,861) 69 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 22 Contingent liabilities Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. The Company is liable, jointly and severally with other members of the Group, under guarantees given to the Group's bankers in respect of overdrawn balances on certain Group bank accounts and in respect of other overdrafts, loans and guarantees given by the banks to or on behalf of other Group undertakings. At 31 July 2008 there were bank overdrafts of £ nil (2007 - £43.554m) and loans of £327.0m (2007 - £74.0m). The Company has given performance and other trade guarantees on behalf of subsidiary undertakings. The Company has guaranteed the overdrafts of equity accounted entities up to a maximum of £6.5m (2007 - £6.0m). 23 Commitments Group Capital commitments Contracted not provided Authorised not contracted Operating leases 2008 £000 2007 £000 - - 48 33 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Expiring within one year Expiring within the second to fifth years Expiring in more than five years 2008 £000 1,298 4,331 2,778 8,407 2007 £000 1,327 4,895 3,823 10,045 Operating lease payments principally relate to rents payable by the Group for office premises. These leases are subject to periodic rent reviews. Company The commitments of the Company were £ nil (2007 - £ nil). Bellway p.l.c. Annual Report & Accounts 2008 70 Notes to the Accounts (continued) 24 Employee benefits Retirement benefit obligations The Group sponsors the Bellway p.l.c. 1972 Pension and Life Assurance Scheme which has a funded defined benefit arrangement. The last full actuarial valuation of this scheme was carried out by a qualified independent actuary as at 1 August 2005 and was updated on an approximate basis to 31 July 2008. Contributions of £866,000 (2007 - £909,000) were charged to the income statement for the defined contribution section of the Scheme. With regard to the defined benefit section of the Scheme, the regular contributions made by the employer over the financial year have been £1,174,000, equivalent to approximately 32.7% of pensionable pay less members' contributions. This level of contribution is to continue until reviewed following the triennial valuation of the Scheme due as at 1 August 2008. The Company also paid special contributions amounting to £2,435,000. Expenses were paid in addition. It is the policy of the Company to recognise all actuarial gains and losses in the year in which they occur outside the income statement and in the statement of recognised income and expense. Insured pensions and defined contributions have been excluded from the assets and liabilities. Present values of defined benefit obligations, fair value of Scheme assets and deficit: Present value defined benefit obligation Fair value of scheme assets Deficit in plan As all actuarial gains and assets are recognised, the deficits shown above are those recognised in the balance sheet. 2008 £000 2007 £000 (47,472) (51,531) 34,763 49,545 (12,709) (1,986) Best estimate of contributions to be paid to the Scheme for the year ended 31 July 2009 This best estimate of contributions to be paid to the Scheme for the year ending 31 July 2009 is £808,000, all in respect of regular contributions. Reconciliation of opening and closing balances of the present value of the defined benefit obligation: Defined benefit obligation at start of year Current service cost Interest cost Contributions by plan participants Actuarial loss / (gain) Benefit paid, death in service insurance premiums and expenses Settlement Past service cost 2008 £000 2007 £000 51,531 53,338 1,530 2,948 67 8,103 (2,485) (14,393) 171 1,777 2,743 73 (4,006) (2,694) - 300 Defined benefit obligation at end of year 47,472 51,531 71 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 24 Employee benefits (continued) Reconciliation of opening and closing balances of the fair value of Scheme assets: Fair value of assets at start of year Expected return on assets Actuarial (losses) / gains Contributions by employer Contributions by Scheme participants Benefit paid, death in service insurance premiums and expenses Settlement Fair value of assets at end of year Total (income) / expense recognised in the income statement: Current service cost Interest on liabilities Expected return on assets Settlement Past service cost Total (income) / expense 2008 £000 49,545 2,885 (6,248) 3,609 67 2007 £000 41,622 2,658 1,262 6,624 73 (2,485) (2,694) (12,610) - 34,763 49,545 2008 £000 1,530 2,948 (2,885) (1,783) 171 (19) 2007 £000 1,777 2,743 (2,658) - 300 2,162 Of the total expense, £82,000 (2007- £2,077,000) is recognised within administrative expenses and £63,000 (2007 - £85,000) is recognised within finance expenses. (Losses) / gains recognised in statement of recognised income and expense: Difference between expected and actual return on Scheme assets Experience gains and losses arising on the Scheme liabilities 2008 £000 2007 £000 (6,248) 1,262 (1,001) (967) Effects of changes in the demographic and (7,102) 4,973 2008 2007 % 18 2 15 % (3) % of Scheme assets 2 % of the present value of Scheme liabilities (10) % of the present value of Scheme liabilities financial assumptions underlying the present value of the Scheme liabilities Total amount recognised in statement of recognised income and expense (14,351) 5,268 30 (10) % of the present value of Scheme liabilities The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense since adoption of IAS 19 is a loss of £16,236,000. Bellway p.l.c. Annual Report & Accounts 2008 72 Notes to the Accounts (continued) 24 Employee benefits (continued) Assets Equities Bonds Cash Total 2008 £000 18,993 12,459 3,311 34,763 2007 £000 28,765 15,948 4,832 49,545 2006 £000 23,968 12,694 4,960 41,622 2005 £000 21,071 11,846 1,686 34,603 None of the fair values of the assets shown above include any of the Group's own financial instruments or any property occupied by, or other assets used by, the Group. Expected long-term rates of return The expected long-term return on cash is related to bank base rates at the balance sheet date. The expected return on bonds is determined by reference to UK long dated gilt and bond yields at the balance sheet date. The expected rate of return on equities has been determined by setting an appropriate risk premium above gilt / bond yields having regard to market conditions at the balance sheet date. The expected long-term rates of return are as follows: Equities Bonds Cash Overall for Scheme 2008 2007 2006 2005 % per annum % per annum % per annum % per annum 6.30 4.80 5.00 5.60 6.50 5.00 5.00 5.90 6.50 5.00 4.00 5.90 6.50 5.00 4.00 5.90 Actual return of Scheme assets The actual return on the Scheme assets over the year ending 31 July 2008 was (7.35%). Assumptions Inflation Salary increases Rate of discount Allowance for pension in payment increases of RPI or 2.5% p.a. if less Allowance for pension in payment increases of RPI or 5% p.a. if less Allowance for revaluation of deferred pensions of RPI or 5% p.a. if less Allowance for commutation of pension for cash at retirement 2008 2007 2006 2005 % per annum % per annum % per annum % per annum 3.90 4.90 6.00 - 3.90 3.90 - 3.30 4.30 5.70 - 3.30 3.30 - 3.20 4.20 5.10 - 3.20 3.20 - 2.75 3.75 5.00 - 2.75 2.75 - The mortality assumptions adopted at 31 July 2008 are based on the PA92 tables using the medium cohort improvements and allow for future improvement in mortality. The tables used imply the following life expectancies at age 65: Male currently aged 40 Female currently aged 40 Male currently aged 65 Female currently aged 65 23 years 26 years 22 years 25 years 73 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 24 Employee benefits (continued) Amounts for the current and previous three years: Fair value of assets Defined benefit obligation Deficit in Scheme Experience adjustment on Scheme liabilities Experience adjustment on Scheme assets Effects of changes in the demographic and financial assumptions underlying the present value of the Scheme liabilities Share-based payments 2008 £000 34,763 47,472 2007 £000 49,545 51,531 2006 £000 41,622 53,338 2005 £000 34,603 46,687 (12,709) (1,986) (11,716) (12,084) (1,001) (6,248) (7,102) (967) 1,262 4,973 (543) 1,435 (3,095) (3,341) 3,876 (5,575) The Group operates a long-term incentive plan (LTIP), an annual bonus scheme, employee share ownership schemes (ESOS) and Savings Related Share Option Schemes (SRSOS) all of which are detailed below. IFRS 2 has been applied to options granted after 7 November 2002, which had not vested at 1 January 2005. Awards under the LTIP and the annual bonus scheme have been made to executive directors and the company secretary. Share options issued under the Bellway p.l.c. (1995) Employee Share Option Scheme (1995 ESOS) have been granted to employees at all levels as well as to executive directors. The last tranche of shares was awarded to directors in October 2003 and to other employees in November 2004. No further options may be granted under this scheme. Options issued under the Bellway p.l.c. (1996) Employee Share Option Scheme (1996 ESOS) have been granted to employees at all levels as well as to executive directors. The last tranche of shares was awarded to employees in May 2006. No further options may be granted under this scheme. The Bellway p.l.c. (2005) Employee Share Option Scheme (2005 ESOS) replaces the 1995 ESOS. Awards may be granted on a discretionary basis to employees at all levels as well as to executive directors and are subject to performance conditions. The Bellway p.l.c. (2007) Employee Share Option Scheme (2007 ESOS) replaces the 1996 ESOS. It is an unapproved discretionary scheme which provides for the grant of options over ordinary shares to employees and executive directors. It is, however, the current intention that no executive directors of the Company should be granted options under the scheme. Awards will be available to vest after three years, subject to objective performance targets. Options issued under the SRSOS are offered to all employees including the executive directors. An outline of the performance conditions in relation to the above schemes is detailed under the long-term incentive scheme section on page 35 within the Report of the Board on Directors' Remuneration. For awards made prior to 16 January 2008, vesting of options under the LTIP is dependent upon total shareholder return of the Group measured against relevant comparator companies as detailed on page 35 within the Report of the Board on Directors' Remuneration. For awards made on 16 January 2008, vesting of options is dependent upon two conditions, total shareholder return and return on capital employed, as detailed on page 35 within the Report of the Board on Directors' Remuneration. With regard to the annual bonus scheme, for awards up to and including those for the year ended 31 July 2006, one half is payable in November each year following the announcement of the Group's annual results. The other half is used to acquire Bellway shares at the prevailing market value. These shares are held in the Bellway Employee Share Trust (1992) for three years. The shares can then be transferred into the employee's name. In addition, various small share awards were made for years 2003 through to 2007 to employees, mainly at divisional management level. These awards mainly had three year vesting periods. Awards to executive directors and to the company secretary in relation to the year ended 31 July 2007, and subsequent years, are made in cash with no compulsory deferral element. Shares in relation to the annual bonus scheme and the LTIP, which are held in the Bellway Employee Share Trust (1992) carry voting rights which are not exercisable by the employees until the shares vest. Prior to this, the voting rights are exercisable by the trustees of the Trust. Share options have been valued by an external third party using various models detailed below, based on publicly available market data at the time of the grant, which the directors consider to be the most appropriate method of determining their fair value. Bellway p.l.c. Annual Report & Accounts 2008 74 Notes to the Accounts (continued) 24 Employee benefits (continued) Share-based payments (continued) Reconciliations of share options outstanding and weighted average exercise prices for each type of share option are shown below: LTIP Outstanding at the beginning of the year Granted during the year Forfeited during the year Lapsed during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year Number of Number of share options share options 2008 2007 355,851 456,213 176,963 91,517 - - (69,334) (61,593) (78,498) (130,286) 384,982 355,851 - - The weighted average share price at the date of exercise for share options exercised during the year was 914.25p (2007 - 1,488p). The options outstanding at 31 July 2008 had a weighted average remaining life of 1.5 years (2007 - 0.8 years). Annual bonus Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year Annual Bonus Annual Bonus Number of Number of share options share options 2008 2007 248,868 322,549 16,064 55,436 - - (118,783) (129,117) 146,149 248,868 12,000 2,000 The weighted average share price at the date of exercise for share options exercised during the year was 881.9p (2007 - 1,395.2p). The options outstanding at 31 July 2008 had a weighted average remaining contractual life of 0.7 years (2007 - 1.0 years). Number of Weighted average exercise price 2008 share options 2008 Number of Weighted average share options exercise price 2007 2007 1995, 1996, 2005 and 2007 ESOS Outstanding at the beginning of the year 1,301,193 792.0p 1,799,466 Granted during the year Forfeited during the year Exercised during the year Outstanding at the end of the year - (255,200) (86,120) 959,873 - (828.3p) (637.1p) 50,000 (98,300) (449,973) 796.6p 1,301,193 717.6p 1470.0p (767.5p) (575.6p) 792.0p Exercisable at the end of the year 409,923 558.2p 124,743 487.5p The weighted average share price at the date of exercise for share options exercised during the year was 958.4p (2007 - 1,386.5p). The options outstanding at 31 July 2008 had exercise prices ranging from 273.5p to 1,470p (2007 - 248p to 1,470p) and the weighted average remaining contractual life of these options was 6.6 years (2007 - 7.6 years). 75 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 24 Employee benefits (continued) Share-based payments (continued) The figure for forfeited during the year ended 31 July 2007 has been reduced by 8,900 share options, with the figure for options outstanding at the end of the year being increased by the corresponding amount. These options were erroneously treated as forfeited in the year ended 31 July 2007. SRSOS Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Outstanding at the end of the year Number of Weighted average Number of Weighted average share options exercise price share options exercise price 2008 2008 2007 2007 700,983 267,031 (262,340) (191,399) 514,275 680.9p 847.2p (815.9p) (475.3p) 774.8p 828,554 162,336 (64,067) (225,840) 700,983 482.5p 1,092.0p (683.7p) (459.3p) 680.9p Exercisable at the end of the year - - - - The weighted average share price at the date of exercise for share options exercised during the year was 796.2p (2007 - 1,393.9p). The options outstanding at 31 July 2008 had exercise prices ranging from 490p to 1,092p (2007 - 384p to 1,092p) and the weighted average remaining contractual life of these options was 2.6 years (2007 - 2.3 years). The figure for forfeited during the year ended 31 July 2007 has been increased by 371 share options, with the figure for options outstanding at the end of the year being decreased by the corresponding amount. These options were erroneously omitted from the figure for forfeited in the year ended 31 July 2007. Valuation methodology For the LTIP, a Monte Carlo simulation method is used which allows the Group's performance, in terms of total shareholder return, to be measured against its comparator companies. Individual share price volatilities are calculated for each of the comparator companies. A correlation assumption, appropriate to the building sector, is also used. In the case of the deferred element of the annual bonus, a simplified Black Scholes method is applied with an exercise price and dividend yield of zero. This is because no performance conditions attach to the award and no dividends are credited to the individual. The result is that the fair value equates to the face value of the award. The Black Scholes method is used for the SRSOS due to the relatively short exercise window of six months. For the 1995, 1996, 2005 and 2007 ESOSs, a lattice method is used which enables early exercise behaviour to be modelled in a more sophisticated manner than under Black Scholes. The inputs into the Monte Carlo model for the various grants under the LTIP were as follows: Grant date Risk free interest rate Exercise price Share price at date of grant Expected dividend yield Expected life Date vested Expected volatility Fair value of option January 2004 November 2004 November 2005 October 2006 January 2008 January 2008 (ROCE element) (TSR element) 19 Jan 2004 30 Nov 2004 14 Nov 2005 18 Oct 2006 16 Jan 2008 16 Jan 2008 - - 667.5p 3.00% 3 years - - 712p 3.00% 3 years - - 999p 2.90% 3 years - - 1,372p 2.40% 3 years - - 766p 5.60% 3 years - - 766p 5.60% 3 years 19 Jan 2007 30 Nov 2007 14 Nov 2008 18 Oct 2009 16 Jan 2011 16 Jan 2011 25% 343.0p 25% 292.0p 25% 480.0p 25% 676.4p - 650.0p 30% 359.0p Bellway p.l.c. Annual Report & Accounts 2008 76 Notes to the Accounts (continued) 24 Employee benefits (continued) Share-based payments (continued) The inputs into the simplified Black Scholes model used for the shares issued under the annual bonus scheme were as follows: May November October November October February November 2003 2003 2004 2005 2006 2007 2007 January 2008 April 2008 Grant date Exercise price 31 May 2003 18 Nov 2003 26 Oct 2004 14 Nov 2005 18 Oct 2006 7 Feb 2007 23 Nov 2007 21 Jan 2008 17 Apr 2008 - - - - - - - - - Share price at date of grant 575.5p 621.5p 675p 999p 1,372p 1,542p 993.5p 772.5p 783.5p Expected dividend yield - - - - - - - - - Expected life Date vested 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 31 May 2006 18 Nov 2006 26 Oct 2007 18 Nov 2008 18 Oct 2009 7 Feb 2010 23 Nov 2010 21 Jan 2011 17 Apr 2011 Fair value of option 575.5p 621.5p 675p 999p 1,372p 1,542p 993.5p 772.5p 783.5p The inputs into the lattice model for the various grants under the 1995, 1996, 2005 and the 2007 ESOSs were as follows: Grant date Risk free interest rate Exercise price Share price at date of grant Expected dividend yield Expected life Date vested Expected volatility Fair value of option April 2003 May 2003 October 2003 May November October 2004 2004 2005 May 2006 February 2007 22 Apr 2003 13 May 2003 24 Oct 2003 10 May 2004 17 Nov 2004 31 Oct 2005 16 May 2006 7 Feb 2007 4.10% 4.00% 4.90% 5.10% 4.70% 4.40% 4.40% 5.40% 548.5p 548.5p 524p 524p 621.5p 712.5p 621.5p 712.5p 716p 716p 844p 844p 1,122p 1,470p 1,122p 1,542p 3.00% 3.00% 3.00% 3.00% 3.00% 3.40% 3.40% 2.20% 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 22 Apr 2006 13 May 2006 24 Oct 2006 10 May 2007 17 Nov 2007 31 Oct 2008 16 May 2009 7 Feb 2010 25% 129p 25% 123p 25% 155p 25% 180p 25% 183p 25% 197p 25% 197p 25% 466p The inputs into the Black Scholes model for the various grants under the SRSOS were as follows: November November November November November November November November November November 2007 2007 2006 2006 2005 2005 2004 2004 2002 2003 5 Year SRSOS 5 Year SRSOS 3 Year SRSOS 5 Year SRSOS 3 Year SRSOS 5 Year SRSOS 3 Year SRSOS 5 Year SRSOS 3 Year SRSOS 5 Year SRSOS Grant date 26 Nov 2002 25 Nov 2003 19 Nov 2004 19 Nov 2004 15 Nov 2005 15 Nov 2005 14 Nov 2006 14 Nov 2006 13 Nov 2007 13 Nov 2007 Risk free interest rate 4.50% 5.00% 4.70% 4.70% 4.40% 4.40% 5.00% 4.90% 4.80% 4.80% Exercise price 384.0p 489.6p 537.6p 537.6p 676.0p 676.0p 1,092p 1,092p 847.2p 847.2p Share price at date of grant 451p 638p 720p 720p 995p 995p 1,397p 1,397p 1,034p 1,034p Expected dividend yield 3.00% 3.00% 3.00% 3.00% 2.90% 2.90% 2.30% 2.30% 3.50% 3.50% Expected life 5 years 2 mths 5 years 2 mths 3 years 2 mths 5 years 2 mths 3 years 2 mths 5 years 2 mths 3 years 2 mths 5 years 2 mths 3 years 2 mths 5 years 2 mths Date vested 1 Feb 2008 1 Feb 2009 1 Feb 2008 1 Feb 2010 1 Feb 2009 1 Feb 2011 1 Feb 2010 1 Feb 2012 1 Feb 2011 1 Feb 2013 Expected volatility Fair value of option 25% 126p 25% 209p 25% 224p 25% 239p 25% 349p 25% 363p 25% 436p 25% 482p 25% 268p 25% 291p The expected volatility for all models was determined by considering the volatility levels historically for the Group. Volatility levels for more recent years were considered to have more relevance than earlier years for the period reviewed. The Group recognised total expenses of £1,685,000 (2007 - £2,580,000) in relation to equity-settled share-based payment transactions. 77 Bellway p.l.c. Annual Report & Accounts 2008 Notes to the Accounts (continued) 25 Related party transactions Transactions between fellow subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed. Group During the year the Group entered into the following related party transactions with its equity accounted entities and proportionately consolidated jointly controlled entities: Invoiced to equity accounted entities in respect of land purchases and infrastructure works Invoiced from equity accounted entities in respect of management fees Invoiced from equity accounted entities in respect of land purchases and infrastructure works 2008 £000 1 (22) - 2007 £000 1 (14) (97) Invoiced to proportionately consolidated jointly controlled entities in respect of accounting, management fees and interest on loans 1,440 293 Invoiced from proportionately consolidated jointly controlled entities in respect of fees Amounts owed by equity accounted entities respect of land purchases and infrastructure works at the year end Amounts owed to equity accounted entities in respect of management fees at the year end Amounts owed by proportionately consolidated jointly controlled entities in respect of accounting, management fees and interest at the year end (21) - (11) - 1 - 58 223 Company During the year the Company entered into the following related party transactions with its subsidiaries, equity accounted entities and proportionately consolidated jointly controlled entities: Amounts received in the year from subsidiaries in respect of dividends and shares issued 2008 £000 1,479 2007 £000 148,716 Amounts paid in the year by subsidiaries on behalf of the Company in respect of dividends and finance expenses (53,198) (43,763) Amounts owed by subsidiaries in respect of dividends and shares issued net of amounts paid on behalf of the Company 715,578 767,297 26 Principal subsidiary undertakings The Company owns the whole of the ordinary share capital of the following active subsidiary undertakings incorporated in Great Britain, registered in England and Wales and engaged in housebuilding and associated activities. Bellway Homes Limited Bellway Properties Limited Bellway (Services) Limited Litrose Investments Limited Bellway Financial Services Limited Bellway Housing Trust Limited The Victoria Dock Company Limited (60% owned)* *These shares are held indirectly. Bellway p.l.c. Annual Report & Accounts 2008 78 Five Year Record Income statement Revenue Operating profit* Exceptional items Net finance expenses Share of (losses) / profits of equity accounted entities Profit before taxation Income tax expense Profit for the year (all attributable to equity holders of the parent) Balance sheet Assets Non-current assets Current assets Liabilities Non-current liabilities Current liabilities Equity Total equity Statistics 2004 UK GAAP £m 1,092.6 213.3 - (7.7) (0.1) 205.5 (61.7) 2005 IFRS £m 1,178.1 230.1 - (16.4) 0.1 213.8 (64.6) 2006 IFRS £m 1,240.2 239.3 - (18.4) (0.2) 220.7 (65.0) 2007 IFRS £m 1,354.0 253.0 - (17.9) (0.3) 234.8 (68.1) 143.8 149.2 155.7 166.7 2008 IFRS £m 1,149.5 185.1* (130.9) (19.1) (0.3) 34.8 (7.8) 27.0 16.7 1,175.9 36.7 1,381.4 31.4 1,462.8 28.1 1,608.5 29.3 1,667.7 (180.7) (336.8) (287.4) (350.9) (194.7) (396.0) (126.9) (473.9) (359.0) (336.9) 675.1 779.8 903.5 1,035.8 1,001.1 Dividend per ordinary share Basic earnings per ordinary share Number of homes sold Average price of new homes Operating margin Net assets per ordinary share Land portfolio - plots with planning permission 25.0p 127.5p 6,610 31.25p 133.1p 7,001 34.5p 137.5p 7,117 £161.4k £163.8k £169.0k 19.5% 585p 20,700 19.5% 689p 22,500 19.3% 793p 22,600 43.125p 146.1p 7,638 £173.3k 18.7% 903p 23,500 24.1p 23.6p 6,556 £169.9k 16.1%* 871p 22,500 Weighted average no. of ordinary shares 111,303,849 112,054,913 113,248,814 114,108,350 114,615,661 No. of ordinary shares in issue at end of year 112,061,346 113,229,119 113,988,310 114,670,396 114,950,915 * Operating profit and operating margin are stated before exceptional item. The amounts disclosed for 2004 are stated under UK GAAP because it is not practical to restate amounts for periods prior to the date of transition to International Financial Reporting Standards (IFRS). 79 Bellway p.l.c. Annual Report & Accounts 2008 Shareholder Information AGM - special business This section is important. If you are in any doubt as to what action to take you should consult an appropriate independent financial adviser. If you have sold or transferred all of your shares in Bellway p.l.c. you should pass this document and all accompanying documents to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee. Three resolutions will be proposed as special business at the forthcoming AGM. The effect of these resolutions is as follows: Resolution 9 - Authority to directors to issue shares This is an ordinary resolution which authorises the directors to allot unissued shares up to an aggregate nominal value of £1,293,629 which is the difference between the Company’s authorised and issued ordinary share capital as at 24 October 2008. The resolution seeks to renew the authority given to the directors at the AGM in 2008. This authority, if granted, will expire at the conclusion of the AGM of the Company to be held in 2010. As at 24 October 2008 the Company held no shares as treasury shares. At present, the directors only intend to use this authority to satisfy the exercise of awards under the Company’s share schemes. Resolution 10 - Disapplication of pre-emption rights This is a special resolution and is the customary annual request that shareholders empower the directors to allot equity securities for cash without first offering them pro rata to existing shareholders as would otherwise be required by section 89 of the Companies Act 1985. This power allows the directors to allot equity securities for cash only (a) up to an aggregate nominal value of £718,456, being approximately equal to 5% of the issued ordinary share capital of the Company; or (b) in a rights issue or other offer of securities pro rata to shareholders up to the maximum unused amount of the general authority to allot which shareholders are being asked in Resolution 9 to confer on the directors in substitution of the authority granted to the directors by shareholders on 11 January 2008 which expires at the end of this AGM. Resolution 11 - Company’s purchase of its own shares The Company’s authority to purchase its own ordinary and preference shares, given at the last AGM, expires on the conclusion of the forthcoming AGM. This authority was not used during the year. The directors propose, as a special resolution, that it should be renewed for a further year to expire on the date of the 2010 AGM. The directors will review opportunities to use this authority in the light of stock market conditions and trading opportunities during the year. The directors will only make purchases (which will reduce the number of shares in issue) after paying due attention to the effect on the financing of the Group, its assets and earnings per share for the remaining shareholders. Any shares purchased under this authority may be cancelled (in which case the number of shares in issue will be reduced accordingly) or may be held in treasury. Recommendation The Board considers each of the resolutions set out in the Notice of AGM to be in the best interests of the Company and its shareholders as a whole. Accordingly, the directors unanimously recommend that you vote in favour of the resolutions as they intend to do in respect of their own beneficial shareholdings. Takeovers Directive Where not provided in the directors’ report the following sets out the information required to be provided to shareholders in compliance with the Takeovers Directive. Share capital The Company’s authorised share capital is divided into 146,000,000 ordinary shares of 12.5p each (representing 48% of the Company’s total authorised share capital) and 20,000,000 9.5% Cumulative Redeemable Preference Shares 2014 of £1 each (representing 52% of the Company’s total authorised share capital). As at 31 July 2008 there were 114,950,915 ordinary shares and 20,000,000 preference shares in issue. Further details of the issued capital of the Company and brief details of the rights attaching to the preference shares can be found in note 15 to the accounts. The rights and obligations attaching to the ordinary and preference shares in the Company are set out in the Articles of Association. Copies of the Articles of Association can be obtained from Companies House or by writing to the Company Secretary. Restrictions on the transfer of shares The restrictions on the transfer of shares are set out in the Articles of Association. In addition, in compliance with the FSA Listing Rules, Company approval is required for directors, certain employees and their connected persons to deal in the Company’s ordinary shares. No person has special rights of control over the Company’s share capital. Rights on shares held in employee trust The voting rights on shares held in trust in relation to the Company’s employee share schemes are exerciseable by the trustees. Restrictions on voting rights Details of the deadlines for exercising voting rights are set out in the Company’s Articles of Association. The directors are not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights. Bellway p.l.c. Annual Report & Accounts 2008 80 Shareholder Information (continued) Appointment and replacement of directors The Company’s rules about the appointment and replacement of directors are set out in the Articles of Association and are summarised in the directors’ report at page 29. Amendments to the Company’s Articles of Association The Company may amend its Articles of Association by passing a special resolution at a general meeting of its shareholders. Powers of the Board The business and affairs of the Company are managed by the directors, who may exercise all such powers of the Company as are not by law or by the Articles of Association required to be exercised by the Company in general meetings. Subject to the provisions of the Articles of Association all powers of the directors are exercised at meetings of the directors which have been validly convened and at which a quorum is present. Allotment of shares During the year 280,519 shares were issued to satisfy awards made under the Company’s employee share schemes. The directors have authority to allot unissued shares within limits agreed by shareholders. Details of the renewal of this authority are set out on page 80. Resolutions 9 and 10 in the Notice of Meeting for the AGM to be held on 16 January 2009 on page 83 seek to renew this authority. Purchase of own shares The Company has not purchased any of its own shares during the year. The directors have authority to purchase the Company’s own shares within limits agreed by shareholders. Details in relation to the renewal of this authority are set out on page 80. Resolution 11 in the Notice of Meeting for the AGM to be held on 16 January 2009 at page 84 seeks to renew this authority. Significant agreements - change of control provisions The Company is party to a number of banking agreements which may be terminable in the event of a change of control of the Company. Agreements for compensation of loss of office following a change of control The service agreements between the Company and the executive directors and the company secretary contain provisions that entitle the individual to terminate the agreement following a takeover offer and receive an amount equivalent to one year's salary, benefits and the average amount of the last two years' annual bonus payment. Financial calendar Announcement of results and ordinary dividends Half year Full year Ordinary share dividend payments Interim Final March October July January Preference share dividend payments at the rate of 9.5% per annum paid half yearly Annual report posted to shareholders Final dividend - ex-dividend date Final dividend - record date AGM Final dividend - payment date April and October November 10 December 2008 12 December 2008 16 January 2009 21 January 2009 Shareholders by size of holding at 31 July 2008 0 - 2,000 2,001 - 10,000 10,001 - 50,000 50,001 and over Total 81 Bellway p.l.c. Annual Report & Accounts 2008 Holdings Shares Number 2,250 498 174 204 % 72.0 15.9 5.6 6.5 3,126 100.0 Holding 1,505,817 2,179,420 4,313,850 106,951,828 114,950,915 % 1.3 1.9 3.8 93.0 100.0 Shareholder Information (continued) Dividend Re-Investment Plan (“DRIP”) Shareholders may agree to participate in the Company’s DRIP to receive dividends in the form of shares in Bellway p.l.c. instead of in cash. For further information please e-mail Capita Registrars Limited at shares@capitaregistrars.com or telephone on 0871 664 0300 - calls cost 10p per minute plus network extras. If calling from overseas please call +44 208 639 3399. Share dealing service The Company’s registrars, Capita Registrars Limited, provide a share dealing service to existing shareholders to buy or sell the Company’s shares. Online and telephone dealing facilities provide an easy to access and simple to use service. For further information on this service, or to buy or sell shares, please contact: www.capitadeal.com for online dealing, or call 0871 664 0364 for telephone dealing Please note that the directors of the Company are not seeking to encourage shareholders to either buy or sell shares in the Company. Shareholders in any doubt as to what action to take are recommended to seek financial advice from an independent financial adviser, authorised under the terms of the Financial Services and Markets Act 2000. Discount to shareholders The following discount arrangements are currently available to shareholders. Should you intend to purchase a new Bellway home, you will be entitled to a discount of £625 per £25,000, or pro rata on part thereof, of the purchase price provided that: (a) you have been the registered holder of at least 2,000 ordinary shares for a minimum period of 12 months prior to the reservation of your new home and (b) you inform our sales representative on-site when reserving your property that you are claiming shareholder discount. The above discount arrangement is only available to shareholders on the Company’s Register of Members. Employees of investing companies or members of investing institutions would not therefore be eligible. For further details please contact the Group Company Secretary, Bellway p.l.c., Seaton Burn House, Dudley Lane, Seaton Burn, Newcastle upon Tyne, NE13 6BE, telephone 0191 217 0717 or e-mail kevin.wrightson@bellway.co.uk. Beneficial owners of shares with “information rights” Beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the Company’s registrar, Capita Registrars Limited, or to the Company directly. Corporate Responsibility Report 2008 The Company’s Corporate Responsibility Report 2008 is available to view on the Company’s website www.bellway.co.uk. Bellway p.l.c. Annual Report & Accounts 2008 82 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the Annual General Meeting of the Company will be held at The Copthorne Hotel, The Close, Quayside, Newcastle upon Tyne, NE1 3RT on Friday 16 January 2009 at 12.00 noon for the following purposes: Ordinary business To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions: 1. THAT the Accounts for the financial year ended 31 July 2008 and the Directors’ Report and the Auditors’ Report on those Accounts and the auditable part of the Report of the Board on Directors’ Remuneration be received and adopted. 2. THAT a final dividend for the year ended 31 July 2008 of 6.0 pence per ordinary 12.5 pence share, as recommended by the directors, be declared. 3. THAT Mr P J Stoker be re-elected as a director of the Company. 4. THAT Mr P M Johnson be re-elected as a director of the Company. 5. THAT Mr D G Perry be re-elected as a director of the Company. 6. THAT KPMG Audit Plc be re-appointed as the auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting at which Accounts are laid before the Company. 7. THAT the directors are authorised to agree the remuneration of the auditors of the Company. 8. THAT the Report of the Board on Directors’ Remuneration shown on pages 34 to 41 of the Annual Report and Accounts for the year ended 31 July 2008 be approved. Special business To consider and, if thought fit, pass the following resolution which will be proposed as an ordinary resolution: 9. THAT in substitution for the existing authority for the purposes of Section 80 of the Companies Act 1985 (“the Act”) conferred upon the directors by a resolution passed at the Annual General Meeting of the Company held on 11 January 2008, the directors be and they are hereby generally and unconditionally authorised in accordance with Section 80 of the Act to allot relevant securities (which for the purposes of this resolution shall have the same meaning as in Section 80(2) of the Act) of the Company provided that: (i) the maximum amount of relevant securities that may be allotted pursuant to the authority given by this resolution shall be up to an aggregate nominal amount of £1,293,629; (ii) subject as provided in sub-paragraph (iii) below, such authority shall expire at the conclusion of the annual general meeting of the Company to be held in 2010, but may be previously revoked or varied by an ordinary resolution of the Company; and (iii) such authority shall permit and enable the directors to make an offer or agreement before the expiry of such authority, which would or might require relevant securities to be allotted after such expiry and to allot such securities pursuant to any such offer or agreement as if such authority had not expired; and (iv) in relation to the grant of any rights to subscribe for, or to convert any security into, shares in the Company, the reference in this resolution to the maximum amount of relevant securities that may be allotted is the maximum amount of shares which may be allotted pursuant to such rights. To consider and, if thought fit, pass the following resolutions which will be proposed as special resolutions: 10. THAT, subject to resolution 9 above being passed as an ordinary resolution, and insofar as it relates to securities that are not treasury shares within the meaning of Section 162A(3) of the Companies Act 1985 (“the Act”), the directors be empowered pursuant to Section 95 of the Act to allot equity securities (within the meaning of Section 94 of the Act) for cash pursuant to the authority so conferred or where the equity securities are held by the Company as qualifying shares (to which Sections 162A to 162G of the Act apply) in each case as if Section 89(1) of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment of equity securities. (i) in connection with an offer of equity securities, open for acceptance for a fixed period, by the directors to ordinary shareholders of the Company on the Register on a fixed record date in proportion (as nearly as may be) to their then holdings of such equity securities (but subject to such exclusions or other arrangements as the directors may deem necessary or expedient to deal with legal or practical problems under the laws of, or the requirements of any regulatory body or any stock exchange in, any overseas territory or fractional entitlements or any other matter whatsoever); and/or (ii) otherwise than pursuant to sub-paragraph (i) above or pursuant to the Bellway p.l.c. (1995) Employee Share Option Scheme, the Bellway p.l.c. (1996) Employee Share Option Scheme, the Bellway p.l.c. (2003) Savings Related Share Option Scheme, the Bellway p.l.c. (2004) Performance Share Plan, the Bellway p.l.c. (2005) Employee Share Option Scheme, the Bellway p.l.c. (2007) Employee Share Option Scheme, and the Bellway p.l.c. (2008) Share Matching Plan, up to an aggregate nominal amount of £718,456 and shall expire on the conclusion of the next Annual General Meeting of the Company or, if earlier, 15 months after the passing of this resolution except that the Company may, before such expiry, make an offer or agreement which would, or might, require equity securities to be allotted after such expiry and the directors may allot equity securities pursuant to such an offer or agreement as if the power conferred by this resolution had not expired. 83 Bellway p.l.c. Annual Report & Accounts 2008 Notice of Annual General Meeting (continued) 11. THAT the Company be generally and unconditionally authorised for the purposes of Section 166 of the Companies Act 1985 (“the Act”) to purchase ordinary shares and preference shares in the capital of the Company by way of one or more market purchases (within the meaning of Section 163(3) of the Act) on the London Stock Exchange upon, and subject to the following conditions: (i) the maximum number of ordinary shares hereby authorised to be purchased is 11,495,292 ordinary shares of 12.5p each, being approximately 10 per cent of the ordinary shares in issue; (ii) the maximum number of preference shares hereby authorised to be purchased is 20,000,000 9.5% Cumulative Redeemable Preference Shares 2014 of £1 each, being the total amount of preference shares in issue; (iii) the maximum price at which ordinary shares may be purchased is an amount equal to 105 per cent of the average of the middle market quotations derived from the London Stock Exchange Limited Official List for the five business days immediately preceding the date on which the ordinary shares are contracted to be purchased and the minimum price is 12.5p per share, in both cases exclusive of expenses; (iv) the maximum price at which preference shares may be purchased shall be an amount calculated in accordance with the provisions contained in the Articles of Association of the Company; and (v) unless previously renewed, varied or revoked, the authority to purchase conferred by this resolution shall expire at the conclusion of the next Annual General Meeting of the Company, or if earlier, 15 months after the passing of this resolution provided that any contract for the purchase of any shares as aforesaid which was concluded before the expiry of the said authority may be executed wholly or partly after the said authority expires and the relevant shares purchased pursuant thereto. Notes: (i) A Member entitled to attend and vote at the meeting convened by the above notice may appoint one or more proxies to attend and speak and vote instead of him/her. A proxy need not be a member of the Company. (ii) A form of proxy is enclosed separately. Completion and return of the proxy will not preclude shareholders from attending in person and voting at the meeting. (iii) CREST members will be able to cast their vote using CREST electronic proxy voting using the procedures described in the CREST Manual. In order to be valid, the Company’s registrars must receive CREST Proxy Instructions not less than 48 hours before the time of the meeting or any adjourned meeting. (iv) There will be available for inspection during the AGM and for at least fifteen minutes before it begins, the Register of Members, Register of Directors’ interests, details of all proxies received, a copy of the current Memorandum and Articles of Association, and the directors’ appointment letters and service contracts. (v) The above statement as to proxy rights contained in note (i) above does not apply to a person who receives this notice of general meeting as a person nominated to benefit from “information rights” under section 146 of the Companies Act 2006. If you have been sent this notice of meeting because you are such a nominated person, the following statements apply:- (a) you may have a right under an agreement between you and the member of the Company by whom you were nominated to be appointed or to have someone else appointed as a proxy for this general meeting; and (b) if you have no such right or do not wish to exercise it, you may have a right under such an agreement to give instructions to that member as to the exercise of voting rights. Nominated persons should contact the registered member by whom they were nominated in respect of these arrangements. (vi) To be entitled to attend and vote at the meeting (and for the purposes of determination by the Company of the number of votes cast), shareholders must be entered on the Company’s Register of Members not less than 48 hours prior to the time set for the meeting. Bellway p.l.c. Annual Report & Accounts 2008 84 Notice of Annual General Meeting (vii) In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that (i) if a corporate shareholder has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corporate representatives for that shareholder at the meeting, then on a poll those corporate representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (ii) if more than one corporate representative for the same corporate shareholder attends the meeting but the corporate shareholder has not appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. Corporate shareholders are referred to the guidance issued by the Institute of Chartered Secretaries and Administrators on proxies and corporate representatives - www.icsa.org.uk - for further details of this procedure. The guidance includes a sample form of representation letter if the Chairman is being appointed as described in (i) above. (viii) As at the date of this notice there are 114,952,916 shares in issue and the total voting rights of the Company are therefore 114,952,916. By order of the Board G Kevin Wrightson Group Company Secretary Registered Office Bellway p.l.c. Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Registered in England and Wales No. 1372603 24 October 2008 85 Bellway p.l.c. Annual Report & Accounts 2008 Bellway cover AW 08:Annual report cover 18/11/08 11:39 Page 2 Contents 02 03 05 06 07 13 15 19 21 25 27 34 42 Chairman’s Statement Figures at a glance The Board Advisers Chief Executive’s Operating Review Corporate Responsibility Policy Summary Corporate Responsibility Statement Environmental Policy Statement Financial Review Operating Risk Statement Report of the Directors Report of the Board on Directors’ Remuneration Statement of Directors’ Responsibilities in respect of the Annual Report and the Accounts 43 Independent Auditors’ Report to the Members of Bellway p.l.c. Group Income Statement Statements of Recognised Income and Expense Balance Sheets Cash Flow Statements Accounting Policies Notes to the Accounts Five Year Record Shareholder Information Notice of Annual General Meeting Principal Offices 44 44 45 46 47 52 79 80 83 86 Bellway p.l.c. Seaton Burn House, Dudley Lane, Seaton Burn, Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 . Fax: (0191) 236 6230 . DX 711760 Seaton Burn . Web site - www.bellway.co.uk Bellway Homes Limited Wessex Bellway House Embankment Way Castleman Business Centre Ringwood Hampshire BH24 1EU Tel: (01425) 477 666 Fax: (01425) 476 774 DX 45710 Ringwood OTHER Planning & Development Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 Fax: (0191) 236 6230 DX 711760 Seaton Burn City Solutions Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 Fax: (0191) 236 6230 DX 711760 Seaton Burn OTHER SUBSIDIARY Bellway Housing Trust Limited Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 217 0717 Fax: (0191) 236 6230 DX 711760 Seaton Burn NORTHERN REGION SOUTHERN REGION East Midlands No 3 Romulus Court Meridian East Meridian Business Park Braunstone Town Leicester LE19 1YG Tel: (0116) 282 0400 Fax: (0116) 282 0401 North East Peel House Main Street, Ponteland Newcastle upon Tyne NE20 9NN Tel: (01661) 820 200 Fax: (01661) 821 010 DX 68924 Ponteland 2 North West Bellway House 2 Alderman Road Liverpool L24 9LR Tel: (0151) 486 2900 Fax: (0151) 336 9393 Scotland Bothwell House Hamilton Business Park Caird Street Hamilton ML3 0QA Tel: (01698) 477 440 Fax: (01698) 477 441 DX HA13 Hamilton West Midlands Bellway House, Relay Point Relay Drive, Tamworth Staffordshire B77 5PA Tel: (01827) 255 755 Fax: (01827) 255 766 DX 717023 Tamworth 8 Yorkshire 2 Deighton Close Wetherby West Yorkshire LS22 7GZ Tel: (01937) 583 533 Fax: (01937) 586 147 DX 16815 Wetherby Essex Bellway House 1 Rainsford Road Chelmsford Essex CM1 2PZ Tel: (01245) 259 989 Fax: (01245) 259 996 DX 121935 Chelmsford 6 North London Bellway House Bury Street Ruislip Middlesex HA4 7SD Tel: (01895) 671 100 Fax: (01895) 671 111 Northern Home Counties Oak House Woodlands Business Park Breckland Linford Wood Milton Keynes MK14 6EY Tel: (01908) 328 800 Fax: (01908) 328 801 DX 729383 Milton Keynes 16 Southern Counties Bellway House London Road North Merstham Surrey RH1 3YU Tel: (01737) 644 911 Fax: (01737) 646 319 Thames Gateway Osprey House Crayfields Business Park New Mill Road Orpington Kent BR5 3QJ Tel: (01689) 886 400 Fax: (01689) 886 410 Wales Alexander House Excelsior Road Cardiff CF14 3AT Tel: (029) 2054 4700 Fax: (029) 2054 4701 Bellway cover AW 08:Annual report cover 18/11/08 11:39 Page 1 Bellway p.l.c. is committed to the efficient use of natural resources. This Annual Report and Accounts is printed using environmentally friendly recycled paper called 9 lives and environmentally friendly inks. Bellway p.l.c. Seaton Burn House . Dudley Lane . Seaton Burn . Newcastle upon Tyne NE13 6BE Tel. 0191 217 0717 Fax. 0191 236 6230 DX 711760 Seaton Burn www.bellway.co.uk ANNUAL REPORT & ACCOUNTS 2008 B E L L W A Y p . l . c . A N N U A L R E P O R T & A C C O U N T S 2 0 0 8 

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