Bellway
Annual Report 2010

Plain-text annual report

Annual Report and Accounts 2010 www.bellway.co.uk Introduction A sound business... Since its formation more than 50 years ago, Bellway has built over 100,000 homes. It is recognised throughout the industry for building quality homes. In this year’s report... 1 24 Business Review Governance 42 Accounts 42 Group Income Statement 42 Statements of Comprehensive Income 43 Statement of Changes in Equity 45 Balance Sheets 46 Cash Flow Statements 47 Accounting Policies 52 Notes to the Accounts 24 Board of Directors 25 Advisers 26 Report of the Directors 32 Report of the Board on Directors’ Remuneration 40 Statement of Directors’ Responsibilities in respect of the Annual Report and Accounts 41 Independent Auditors’ Report to the Members of Bellway p.l.c. 1 Financial Highlights 2 Bellway at a glance 4 Chairman’s Statement 6 Chief Executive’s Operating Review 12 Corporate Responsibility Policy 14 2010 Corporate Social Responsibility Statement 16 Key Performance Indicators 17 Environmental Policy 18 Group Finance Director’s Review 22 Operating Risk Statement Bellway p.l.c. Annual Report and Accounts 2010 73 Other Information 73 Five Year Record 74 Shareholder Information 77 Notice of Annual General Meeting 80 Glossary 82 Notes IBC Principal Offices Business Review Governance Accounts Other Information Financial Highlights A solid performance... Completed sales Average price achieved 4,595 homes (2009 – 4,380) £163,175 (2009 – £154,005) Total Group revenue Profit before taxation £768.3m (2009 – £683.8m) £44.4m (2009 – £29.8m)(1) Exceptional items £nil (2009 – £66.3m write down) Final dividend for the year 6.7p (2009 – 6.0p) (1) before exceptional items (note 5 – page 53). Earnings per ordinary share 29.7p (2009 – 17.7p)(1) Forward order book at 30 September £396.7m (2009 – £349.4m) Front cover: Top – Lounge at The Pines, Linton, Northumberland. Main left – Customers Ryan and Melanie outside their new home at Parchment Place, Havant, Hampshire. Main right – The Pastures, Bruton, Somerset. Bottom centre – Glastian Meadows, Kinglassie, Fife Bottom Right – Les Arrowsmith, Site Manager at Eaton Lodge, Rugeley, Staffordshire. For more information on our business, please go to www.bellway.co.uk Bellway p.l.c. 1 Annual Report and Accounts 2010 Bellway at a glance A focused business model... Through sustainable construction we aim to create new communities and life-supporting environments for people now and in the future. We use some of the following Key Performance Indicators (“KPIs”) to measure our progress: Key Facts Percentage of homes developed on brownfield sites 79% 84% 80% Number of 7m3 skips per homes sold 4.30 3.60 3.70 2008 2009 2010 2008 2009 2010 Number of homes built with renewable energy technology 307 636 1,653 Tonnes of plasterboard recyled 2,868 1,660 1,408 2008 2009 2010 2008 2009 2010 2 Bellway p.l.c. Annual Report and Accounts 2010 Number of NHBC Pride in the Job Awards 18 (2009 – 15) Number of homes built per hectare 63 (2009 – 67) Financial contribution under Section 106 agreements £13m (2009 – £2m) Number of current sites with SUDS (Sustainable Urban Drainage Systems) 86 (2009 – 77) Business Review Governance Accounts Other Information A nationwide presence... With its headquarters in the North East of England, the Group’s operations are located throughout the UK. Bellway provides a wide range of house types covering one, two and three-bedroom apartments; terraced homes; three storey homes; semi-detached homes; and three, four and five- bedroom detached homes. The Group is active in major inner city regeneration schemes across the country and is a leading provider of affordable homes. 1 Wyfold Place, Fulham, London Borough of Hammersmith and Fulham. 1 Uplands, Stowmarket, Suffolk. 1 The Wardale family choosing their new home at Wheatridge Park, Seaton Delaval, Tyne and Wear. 1 Herons Reach, Barnsley, South Yorkshire. 1 Broadheath, Newport, Gwent. Number of homes built to The Code for Sustainable Homes Level 3 1,186 (2009 – 428) Number of homes built to Lifetime Homes Standards 690 (2009 – nil)(1) Customers who would recommend Bellway to a friend 86% (2009 – 89%) Number of sites registered with Considerate Constructors Scheme 89 (2009 – 56) (1) This is the first year of reporting. Bellway p.l.c. 3 Annual Report and Accounts 2010 Introduction I am pleased to report that Bellway has returned to profitability in the year ended 31 July 2010, in the wake of the difficulties that the housing market has endured since 2008. The lessons learnt by the Board in previous downturns have been applied to good effect and as a result, the Group has not only returned to profitability but also has net cash on the Balance Sheet. Having continued to make dividend payments throughout the downturn, the Board is now recommending an increase in the total dividend per share. Results The Group completed the sale of 4,595 homes, an increase of almost 5% over last year, and these homes were sold at an average selling price of £163,175, an increase of almost 6%, mainly due to changes in product mix. These factors, combined with other revenue of £18.5 million, principally arising from ground rents, meant that turnover for the Group grew by 12.4% from £683.8 million to £768.3 million. The operating margin of 6.7% is the same as last year, however this year there are no exceptional items (2009 – £66.3 million write down). The finance charge of £6.8 million has fallen by almost 57% from £15.8 million, resulting in profit before tax of £44.4 million compared to a loss before tax (after exceptionals) of £36.6 million last year. Basic earnings per share have increased to 29.7p from a loss per share (after exceptionals) of 23.9p in 2009. The net asset value per ordinary share at 31 July 2010 has grown from 839p to 856p per share. During the year £208 million was spent on land and at 31 July the Group had net cash of £66 million. Dividend I am delighted that Bellway has continued to pay dividends throughout these testing times and the Board is now proposing to increase the final dividend by 11.7% from 6p to 6.7p per ordinary share, giving a total dividend increase for the year of 11.1% from 9p to 10p per ordinary share. This dividend, which is covered almost three times, will be paid on Wednesday 12 January 2011 to all ordinary shareholders on the Register of Members on Friday 10 December 2010. The ex-dividend date is Wednesday 8 December 2010. People The Board once again would like to express its gratitude to all of its employees, suppliers and sub-contractors for their outstanding efforts in what has been another very challenging year for the industry. I am pleased to report that Bellway has returned to profitability. Chairman’s Statement 4 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Looking Forward Bellway has seen reservations in 2010 return to a more normal selling pattern with a strong spring selling season. However, following the change of government in May and the emergency Budget in June, buyer confidence slowly ebbed away during the summer as increasing media coverage was given to the new policies of the coalition Government to tackle the deficit. Sales in the early part of what is traditionally an active autumn selling period have picked up, albeit only slightly, following the usual summer lull and it seems that potential homebuyers are awaiting the outcome of the Comprehensive Spending Review. Whilst the Board’s desire to increase volumes annually remains, it is ever mindful of past experiences, however, the Group currently has a strong land bank, a forward order book of £397 million and with £59 million of net cash, the capacity to grow the business should market conditions allow. The Board therefore remains confident as to the Group’s ability to respond effectively to whatever market conditions prevail over the coming months. Howard C Dawe Chairman 18 October 2010 1 Duchess Park, Dalkeith, Mid Lothian. For more information on our business, please go to www.bellway.co.uk Bellway p.l.c. 5 Annual Report and Accounts 2010 Chief Executive’s Operating Review Introduction By the beginning of the financial year our strategy of cash generation had reduced the Group’s indebtedness by £181 million and this was supplemented in August 2009 with a share placing which raised £43.7 million putting the Company on a sound financial footing. Regular meetings were taking place at this time with lenders’ valuers and gradually the number of down valuations for mortgage purposes began to fall compared to the previous year. This process was reflected in the number of mortgage approvals which increased throughout 2009 to around 60,000 by December helping customer confidence which began to firm up at that time. Market Place Against this backdrop of a more stable housing market, Bellway increased legal completions of its new homes by 215 to 4,595. Private sales increased by 7% to 3,652 from 3,400, whilst there was a slight decline in the sales of social housing from 980 to 943 homes. Cancellation rates during the year have remained consistent at around 13% compared to a 26% peak in 2008/09. Incentives were regularly employed throughout the year to maintain sales rates and these ranged from simple cash discounts through to the part-exchange of owned homes and shared equity schemes. The last of these incentives was needed for first-time buyers in particular who struggled to raise the necessary deposits. Government’s actions during the year through its continuance of HomeBuy Direct in England are to be applauded and 640 first-time buyers were qualified to buy homes from Bellway in the year where the average deposit required was only 5%. Part-exchange has been used by our customers on 493 occasions and has been helpful in maintaining confidence in local markets. At 31 July the stock of second-hand properties held by the Group stood at £15.0 million (2009 – £8.0 million) comprising 115 homes (2009 – 69 homes). Weekly sales rates from August to December 2009 were broadly consistent but 2010 has seen the market return to its more normal pattern of increased activity in spring followed by a decline as summer arrived. For the 12 months ended 31 July 2010 the Group averaged 89 reservations per week, achieving a high of 169 reservations during one week in March. The confidence that consumers had built up in late 2009 and early 2010 appeared, however, to stall at or around the time of the General Election as customers waited for the emergence of the new Government’s proposed policies. The Board believes that with cash in hand, a strong order book, well located and desirable developments, Bellway is well positioned whichever way the market moves in the coming months. 6 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Completed sales 4,595 homes (2009 – 4,380) 1 Bishops Keep, Farnham, Surrey. 1 Sandpipers, Congleton, Cheshire. 1 Barcham Green, Maidstone, Kent. Divisional Performance The six divisions located in the northern part of the UK sold 1,985 homes, an increase of 152 compared to the previous year. Throughout the year this market has been challenging but prices gradually stabilised as the year progressed and most divisions were able to increase volumes, resulting in an 8% increase when compared with the previous year. The North East division performed well, increasing the number of legal completions in the year by 19% to 500 homes, and the West Midlands division, with the aid of 113 housing association sales, generated through the North Solihull Partnership, increased output by 15% to 328 homes. The average selling price in these northern divisions was £140,690 (2009 – £134,179) and this increase of 4.9% is almost entirely due to a change in the mix of properties legally completed in the period. The seven remaining divisions in the south benefited from a market that had recovered earlier and faster and contributed 57% of total completions. Average sales prices in this region increased by 7% to £180,277 (2009 – £168,273) as the Group’s focus moved towards higher value homes and this region saw a general improvement in consumer confidence. The size of a first-time buyer’s deposit in this part of the country can be particularly daunting. Housing associations, however, remain active in providing housing for this segment of the market and almost two-thirds of our social home sales are in the south of the country. The Thames Gateway division alone accounted for almost 25% of the 943 social sales. We have continued to buy land for apartments in certain areas of the south, particularly within the M25 and with several small schemes coming to fruition, the South East division was able to almost double its output of private sales from 148 to 273 homes. Margin Improvement During the downturn the Board made a conscious decision to, where possible, re-plan sites and move away from apartments and town houses to two storey family housing. As a consequence, output of apartments has declined from 48% to 39% of home sales and is set to reduce further. These changes have also had a marked effect on the price and mix the Group is achieving. In the year, homes sold under £150,000 fell from 59% to 53% of legal completions and homes sold over £250,000 have, for the first time, accounted for more than 10% of output. Whilst operating margins remained flat year on year, they have started to move in an upward direction, helped by stability of revenues with continuing tight controls on costs and overheads supporting the improvement from 6.1% in the first half of the year to 7.2% in the second half. Should stability in pricing remain, this increasing margin trend is expected to continue in the current financial year and beyond as a greater proportion of recently acquired land is traded. For more information on our business, please go to www.bellway.co.uk Bellway p.l.c. 7 Annual Report and Accounts 2010 Chief Executive’s Operating Review continued Enhancing... a wide range of bespoke options gives customers the freedom to personalise their new homes before they even move in – see www.bellway.co.uk/ bespoke-additions for more information. 8 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 1 Springhill Meadows, Kilmarnock, Ayrshire. 1 Paul Edwards, Site Manager at Watermill Rise, Bridgnorth, Shropshire, with his NHBC Pride in the Job Award. Further reductions in build costs are still being achieved especially in relation to plastering, foundation and road and sewer works. Some materials, mainly timber and steel, have increased in price, although they represent a very small percentage of the overall cost. The Group does benefit from national agreements with material suppliers whereby fixed prices quite often straddle more than one financial year, eliminating short-term cost fluctuations. These cost movements do not affect every site but are highlighted when existing schemes have been re-drawn and re-tendered. On these sites, cost savings of around £2,400 per unit have been identified and the divisions will now need to work hard to deliver these savings as labour rates respond quickly to workload increases. The cost implications flowing from new technology, especially in relation to CO2 emissions, are difficult to predict and will remain a focus for future cost control. Planning for Recovery and Land Bank The Group has increased the number of show homes since the year end and has revamped its website to enhance our sales effort, and we are hoping to increase the number of sales outlets to 200 by spring next year. Divisions have released more homes to build and we therefore anticipate that work in progress levels will increase as the year progresses. 7 Lounge at Buckingham Chase, Great Blakenham, Suffolk. At the beginning of the financial year, Bellway decided to engage in opportunistic land buying and indeed, our cash outlay on land has increased to £208 million in the year ended 31 July 2010. Whilst the land bank of plots with planning permission has been slimmed down further from 19,260 to 17,602 plots at 31 July 2010, the Group has increased its land bank awaiting planning permission from 14,000 to 15,000 plots. This pipeline has a high percentage of plots with outline planning permission and now, based on current volumes, our total land bank equates to a seven year supply. Excluded from this are our long-term holdings which amount to over 3,000 acres where presently some 2,800 plots have a positive planning status granted by the various planning departments, who are currently assessing the effect of the new Government’s localism agenda. As a result of acquiring more land in the south of England, the average plot cost of our land bank should increase but, more importantly, has been acquired on higher margins. should any dispute require resolution. Divisions closely monitor their own quality and customer satisfaction levels and the Group employs an independent company to report on its findings. The latest quarterly survey shows 87% of customers said they would recommend a Bellway home to a friend. The Group’s performance has also been recognised independently by the recent achievement of 4* builder status in the Home Builders Federation’s fifth Customer Satisfaction Survey. Every year the National House Building Council (“NHBC”) undertakes an audit of our sites and evaluates the skills of our Site Managers and I am pleased to report that this year Bellway received 18 NHBC Pride in the Job Awards. Following on from our “Major House Builder 2009” Award, our Scottish division’s efforts were recognised this summer when they received the award for the Large House Builder of the Year 2010 at the Scottish Homes Awards. Quality and Service Health and Safety The Group is committed to offering the highest standard of quality and customer service and, by listening to our customers and monitoring our performance, standards can be raised. In April 2010 a new “Consumer Code for House Builders” was introduced and we believe the Code will help to drive quality. The Code will also provide the customer with an Ombudsman The health and safety of the Group’s staff, sub-contractors and those visiting our sites is of the utmost importance to the Board. During the course of the year the NHBC audited our site-based systems to ensure compliance with latest legislation. We are pleased to report that the rate of incidents, despite the increasing levels of activity on site, has fallen to its lowest level since 2006. Bellway p.l.c. 9 Annual Report and Accounts 2010 Chief Executive’s Operating Review continued Respecting... our houses are designed and built by local people, reflecting local environments and demands. 10 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information The Group has its own health and safety teams who ensure best practice and they in turn are supported by external Health and Safety Inspectors who inspect our work practices on a monthly basis. During the last 12 months the teams have focused their site campaigns on manual handling and falls from height in an effort to create more awareness amongst all site operatives. The Environment Over 80% of the year’s legal completions were built on brownfield land. The number of homes built to Code Level 3, or higher, of the Code for Sustainable Homes has substantially increased to 1,186 from the previous year’s 428 homes. As a consequence, many more homes now have access to helpful everyday facilities such as car clubs and cycle stores and some 87% of sites are built within 500 metres of a transport node. Building homes to these new sustainable levels results in an estimated 25% reduction in CO2 emissions compared with homes built under previous building regulations. Virtually all of our developments now segregate waste on site thereby reducing the need for surplus material to be transported to landfill sites. Approximately 80,000 tonnes of demolition material has been re-used under roads and footpaths, therefore avoiding the payment of an ever increasing landfill tax which is presently levied at £48 per tonne. The Group aims to ensure that the developments it builds have minimal negative effect on the local community. We now have some 89 sites registered under the Considerate Constructors Scheme, an audit process undertaken by third parties, assessing good practice and ensuring that the disruption to the local neighbourhood is minimised. In addition, as new planning agreements are implemented, we calculate that the financial contribution made to the local community has been in the region of £13 million resulting in new facilities such as community centres, play facilities and highway improvements. Outlook Throughout the summer consumer confidence appeared to recede as focus moved to the much talked about Comprehensive Spending Review. The first two months of the financial year have shown an increase in the number of reservations taken compared to the summer period and whilst encouraging, this level has been below the same period last year. Bellway is currently well positioned nevertheless having, by early October, already completed, contracted or reserved 2,999 homes for the year to 31 July 2011. The Board believes that with cash in hand, a strong order book, well located and desirable developments, Bellway is well positioned whichever way the market moves in the coming months. John K Watson Chief Executive 18 October 2010 5 The Grange, Westhampnett, West Sussex. 1 Waterside, Leicester, Leicestershire. 1 Kings Wood Park, Epping, Essex. 7 Chapel Walk, Solihull, West Midlands. Bellway p.l.c. 11 Annual Report and Accounts 2010 Corporate Responsibility Policy Through sustainable building we aim to create new communities and lasting environments for people now and in the future. 1 Children from Barlows Lane Junior School, Fazakerley, Liverpool. 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 are significant elements of sustained financial success. At Bellway, the term Corporate Responsibility describes how we manage the environmental, social and economic effects of our business and how these affect 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. Through Bellway’s commitment to corporate responsibility we will: p engage and respond to stakeholders, including shareholders, employees, customers, government and communities that we affect. p comply with all relevant legislation as a minimum standard. p work towards recognised good practice in sustainability and corporate responsibility. p treat all employees fairly and invest in training for the long-term to bring out the best in our people. p provide a healthy and safe environment in which to work through an effective health and safety management system. p demonstrate continual improvement in our approach to sustainable developments (in both design and practice). p recognise and respond to the challenges and opportunities that are presented by climate change. p invest in the communities we develop in a way that contributes to local community needs. p manage our environmental footprint and aim to enhance our performance in areas where we operate, particularly in relation to energy and waste. p consider and respond to the social and environmental effects of the homes we develop and communities that we create. p improve internal and external awareness of our corporate responsibility programmes and initiatives. p 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: p the Chief Executive is responsible for this policy and advises the Board on all corporate responsibility matters. p the Chief Executive is supported by the Sustainability Management Working Group which includes senior employees from within the Group who are responsible for the development and review of this policy. p 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 and 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. For more information on our business, please go to www.bellway.co.uk 3 Two of our apprentices, Nathaniel Welsh and David Reynolds, employed as part of the East and South East Leeds regeneration programme, Leeds, West Yorkshire. 12 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Nurturing... we continue to invest in our people and help them develop their skills and expertise. Bellway p.l.c. 13 Annual Report and Accounts 2010 2010 Corporate Social Responsibility Statement With developments stretching from the central belt of Scotland down to the south coast of England, Bellway is operational on 185 sites across the country. The size, scale and complexity of these development activities require strong partnerships with a range of key stakeholders including planners, local authorities as well as the community at large. In bringing these developments forward we must balance the responsibility owed to these stakeholders and others including our shareholders, customers and supply chain partners, employees and the natural environment. Our CSR strategy aims to develop good relationships, improve our reputation and create safe and rewarding environments in which people can live and work. Despite this year’s harsh economic climate, we have maintained our focus on CSR and have increased the number of homes built, achieving higher environmental credentials. Improving the energy efficiency of the homes we build will form part of the overall solution in moving towards a low carbon economy and helping to achieve the government’s challenging objective to reduce UK CO2 emissions by 80% by 2050. At Barking Riverside in the Thames Gateway, we are working in partnership with the London Borough of Barking and Dagenham Council, the University of East London and the Environment Agency on a research programme to investigate best practice for maximising the benefits of green roof systems: 50% of the homes in the first stage of development will exhibit green roofs, so called “living roofs”. These roof systems reduce heat loss and act as an important refuge for wildlife; their wider use will be one of the solutions in mitigating the effects of climate change in the future. Renewable energy technology and measures to save water are increasingly common features in our developments and benefit customers through lower utility bills. In order to increase energy efficiency and reduce the carbon footprint of a new home we have installed alternative heating technology such as solar and photovoltaic panels in 1,653 homes this year (2009 – 636). Water saving devices such as flow restrictors, mixer taps and dual flush toilets have reduced water consumption to 105 litres per person per day. Other water saving initiatives include the provision of water butts on selected developments and the use, where appropriate, of Sustainable Urban Drainage Systems (“SUDS”) which replicate the natural flow of water back to the aquifer. We appreciate that the construction of new homes and new communities can be an emotive issue and we are sensitive to these points of view. As a consequence, when planning new developments we seek at the earliest stages to gather community support. We do this by explaining our intentions and entering into dialogue with local residents and planners to ensure complete transparency. At North Solihull, in the West Midlands, we are engaged in one of the largest redevelopment schemes in the country where we are working alongside Whitefriars Housing Association and Solihull Council to improve the living conditions of 15 neighbourhoods within the regeneration area. Local consultation has been at the centre of the decision making process where over 2,000 people have attended consultation events. Resident implementation groups were established and development proposals were subjected to area and neighbourhood consultation meetings. Our approach has led to the development of a new urban neighbourhood at Burtons Farm Park, North Solihull, where we were particularly pleased to receive a silver Building for Life Award, recognising well designed homes and neighbourhoods. During this financial year, 80% of the homes we built were on brownfield sites (2009 – 84%). These sites often require extensive remediation, which can have a positive effect on the local environment. Our development at New Cardington in Bedfordshire will create a new community from a former RAF base, where we are developing 970 new homes, a new school, shops, GP’s surgery, a new cadet centre and a nursery. The development will provide a range of homes; the first phase will include 72 affordable homes for Bedford Pilgrims Housing Association. The planning process often leads to substantial community benefits. At Cleadon Park in South Tyneside, we are transforming a former 1920’s council estate into a new residential neighbourhood of 750 new homes. In addition to housing, the scheme has delivered a new Primary Care Centre, library and community centre which opened in July 2010 and which are already being well patronised by local residents. Arising from the grant of planning permissions, Bellway this year has contributed £13.0 million towards community benefits such as improved educational and transport facilities. Our commitment to sustainable development is evidenced by the fact that this is the eighth year that we have reported  on our sustainability performance. This  statement provides a summary of what we have been doing during the year. The Corporate Social Responsibility (“CSR”) section of our website www.bellway.co.uk provides much more detail on our CSR strategy and policies, together with case studies of the progress we are making. 1 Living roof at Barking Riverside, Barking, London Borough of Barking and Dagenham. 14 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Through the development of new homes we are able to provide significant benefits to the economy by creating long-term employment opportunities. Through the construction process jobs are created on-site, drawing from the local labour market where appropriate, and we estimate that for every home built 40 people are employed. At Hucknall in the East Midlands a sub-contractors’ apprenticeship scheme created ten new employment opportunities for young people. During the year we employed 33 apprentices across the Group (2009 – 30), and we hope to be able to increase this number in the future subject, of course, to economic considerations. Our employees make a very real difference to their communities through charity fund raising, dress-down days and sponsored events, which provide valuable income to local charitable initiatives, and we estimate that Bellway employees have donated in the region of £9,500. In Gravesend, Kent, the Helen Allison School for autistic children has received support from Bellway to create a safe play area. At Hovington Park in Leeds, the Company has supported a local community project to create new green space and a children’s play area. At Canterbury Gardens in Merseyside, we hosted a local school group who were keen to understand the differences between building in the 21st and 18th centuries. More recently we have registered our interest in participating in the “Visit our Schools and Colleges” initiative that is being organised by the Education and Employers Taskforce. Bellway has remained committed to its CSR programme despite the downturn in the housing market. Good CSR practice is directly aligned to good business practice and will continue to benefit the Group in the future. In managing our business we work with a variety of different agencies, and this year were pleased to support the World Wildlife Fund’s Earth Hour campaign by carrying the Earth Hour message on our website and in all our press advertising. The campaign highlighted the need to conserve energy and helped direct the public’s attention to the critically important issue of climate change. In reporting the progress we are making, it is important to ensure that our own management reporting systems are robust, which is why we are trialling the ISO 14001 Environmental Management Standard in our Thames Gateway division, and we will assess the benefits of this before deciding whether to extend this to our other divisions. We have also completed an audit of the procurement systems of our sub-contractors, benchmarking them against the ISO 9001 Quality Management Standard. In addition to addressing the environmental credentials of the homes we build we have also looked at other areas of our business where we can improve our carbon footprint. As a consequence, in January 2010, we changed our company car policy so that any new cars purchased for the fleet must have CO2 emissions of less than 160g/km. The welfare of our employees is of paramount importance and we have continued to invest in health and safety training in order to develop the skills of our workforce. Initiatives such as regular tool box talks and campaigns focusing on manual handling and falls from height create added awareness of the dangers faced by site- based personnel. In addition to these initiatives the NHBC undertake health and safety audits every 21 working days across the majority of our developments. We are pleased to report that, despite the increased levels of activity on our sites, the rate of incidents has fallen to its lowest level since 2006. Our focus on health and safety has again been recognised by the Royal Society for the Prevention of Accidents who presented us with a silver award. The health, safety and security of those living in a Bellway home is of the utmost importance. In order to ensure the security and safety of our residents many of our developments exhibit Home Zone methodologies and are designed so that they adopt Secured by Design principles. 1 Bellway compound showing recycling and waste segregation. 1 All 1 All customers receive the h i Go green leaflet giving advice on energy saving. Bellway p.l.c. 15 Annual Report and Accounts 2010 Key Performance Indicators We use these KPIs to help us measure our performance against our objectives. Key Performance Indicators Commercial Total number of homes sold Number of homes sold to Registered Social Landlords Number of plots with planning permission Number of sites registered with the Considerate Constructors Scheme Number of homes built to Lifetime Home Standards(1) Environmental Percentage of homes developed on brownfield sites Number of homes per hectare Number of EcoHomes with at least “Very Good” rating Number of homes built to Code Level 3(2) Number of homes built with renewable energy technology Percentage of homes built using timber frame Tonnes of plasterboard recycled Measure of waste (number of 7m3 skips per home sold) Number of compliance breaches Number of current sites with car clubs Number of current sites with Sustainable Urban Drainage Systems (“SUDS”) designed into the scheme Number of trees planted(1) Employees Employee turnover Number of site workers (including sub-contractors) accredited with Construction Skills Certification Scheme (“CSCS”) cards Number of apprentices employed Number of NHBC Pride in the Job Awards received Health and Safety Financial year ended 31 July 2006 2007 2008 2009 2010 7,117 790 22,600 7,638 900 23,500 6,556 1,337 22,500 4,380 980 19,260 4,595 943 17,602 – – 81% 69 263 – – 32% 4,708 7.10 3 – – – – – 81% 66 326 – 17 34% 3,900 5.70 9 – – – – – 79% 63 1,194 48 307 30% 2,868 4.30 6 – – – 56 – 84% 67 786 428 636 23% 1,408 3.60 – 5 77 – 89 690 80% 63 480 1,186 1,653 15% 1,660 3.70 1 7 86 8,484 31.1% 25.6% 33.7% 65.2% 21.0% 597 206 18 783 203 19 1,042 149 20 1,793 3,489 30 15 33 18 Rate of over 3-day lost time accidents per 100,000 employees 886.95 957.78 980.18 973.24 945.18 Number of health and safety prosecutions Creating community value Total financial contribution under Section 106 agreements Stakeholder Percentage of customers who would recommend Bellway to a friend (annualised) Number of suppliers/contractors who have worked for Bellway for at least three years(1) (1) This is the first year of reporting. 1 – – – – – – – – 1 – £17m £2m £13m 80% – 89% 86% – 2,777 (2) The Code for Sustainable Homes Level 3 applies to newly-constructed Affordable Housing subject to Homes and Communities Agency (“HCA”) grant policy and all homes built on HCA land from 1 April 2008, and therefore 2008 was the first year of reporting. 16 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Environmental Policy Bellway is one of the largest housebuilding groups in the UK. The housebuilding 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 desirable new environment has been created that will be sustainable over time. 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: p minimise any deleterious effects on the environment and where possible to seek environmental enhancements, concentrating on areas where there is most room for improvement. p aim to meet and, where practicable, exceed all relevant environmental legislation and regulations. p improve our environmental performance. p set specific environmental objectives and periodically review progress against these. p ensure that Bellway’s environmental aims and their importance are communicated throughout the Group, including to appropriate sub-contractors and suppliers, and that a copy of this policy statement is displayed in each Bellway site and office. p consider the role that Bellway can play in helping to contribute to the principles of sustainable development within the UK. p 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: p consideration of environmental aspects in the selection and procurement of land for development, including implications for biodiversity and sustainable development. p meeting and, where possible, exceeding government targets for the redevelopment of brownfield land. p influencing the design of sites, housing, and fittings to minimise effects on both the natural and built environment. p providing environmental benefits and minimising nuisance arising from construction activities, and preventing pollution on development sites and surrounding areas. p consideration of environmental issues within our corporate functions and everyday business decision-making processes. The above statement will be balanced against economic considerations. 1 Example of tree-planting at The Retreat, Mildenhall, Suffolk. Bellway p.l.c. 17 Annual Report and Accounts 2010 Group Finance Director’s Review Group Summary During the early part of the financial year stability gradually began returning to the housing market. This was reflected in an increase in mortgage approvals in late 2009 together with a measured reduction in the cancellation rate from its peak of 26% in 2008/09 to an average of 13%. As a result the Group is able to report a 4.9% increase in legal completions to 4,595 units for the year to 31 July 2010. Selling prices have remained firm at, or around, their post write down levels and consequently, have contributed towards Bellway’s return to profitability with pre tax earnings of £44.4 million (2009 – loss of £36.6 million), having reported no further exceptional items in the period (2009 – write down of £66.3 million). The Group has maintained its focus on cash generation with a net cash inflow before debt repayments and excluding new market share issues, of £58.8 million (2009 – £180.9 million). On 6 August 2009 a further £43.7 million, net of expenses, was successfully raised via a share placing at an issue price of 779.0p per share, contributing to a net cash position (excluding preference shares) of £65.7 million at 31 July 2010 (2009 – net debt of £36.8 million). Bellway continues to benefit from a strong balance sheet and, with cash in the bank, is well placed to pursue future land opportunities, whilst retaining the ability to respond to any future changes in market conditions. Group Results Total Group revenue increased by 12.4% from £683.8 million to £768.3 million. Revenue from home sales increased by 11.2% from £674.5 million to £749.8 million, reflecting an increase in unit completions from 4,380 to 4,595 and an increase in the average selling price from £154,005 to £163,175. Other revenue of £18.5 million (2009 – £9.3 million) has almost doubled, principally due to ground rent sales. During the early part of the financial year stability gradually began to return to the housing market. 18 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Net asset value per ordinary share (p) Dividend per ordinary share (p) Earnings per ordinary share* (p) 793 903 871 839 856 34.5 43.1 24.1 9.0 10.0 137.5 146.1 104.2 17.7 29.7 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Operating margin* (%) Profit before taxation* (£m) Revenue (£m) 19.3 18.7 16.1 6.7 6.7 220.7 234.8 165.7 29.8 44.4 1,240.2 1,354.0 1,149.5 683.8 768.3 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 * Pre-exceptional items (note 5). The Group constructs an extensive range of homes within its one UK operating segment; additional information on mix of homes sold, split between north, south, private and social, is provided in the following tables: Homes sold (number) Private Social Total North South Group total 2010 2009 1,650 2,002 3,652 1,500 1,900 3,400 2010 335 608 943 2009 333 647 980 2010 2009 1,985 2,610 4,595 1,833 2,547 4,380 Average selling price (£000) Private Social Total North South Group total 2010 2009 2010 148.1 194.1 173.3 143.8 183.7 166.1 104.4 134.9 124.1 2009 91.6 122.6 112.1 2010 2009 140.7 180.3 163.2 134.2 168.3 154.0 The higher average selling price is principally driven by changes in mix, with a greater focus towards higher value more traditional two storey housing, where the ability to raise at least a 10% deposit, and hence the availability of mortgage finance, is more readily attainable. This trend towards higher value product is reflected in the average home size, having increased by almost 7% from 855 square feet to 912 square feet, with a corresponding reduction in the proportion of apartment sales, falling from 48% to 39% of output. Bellway p.l.c. 19 Annual Report and Accounts 2010 Group Finance Director’s Review continued Incentives continue to be applied to the majority of sales with part-exchange used as a selling tool in 11% of completions (2009 – 7%), again reflecting the move towards higher value homes. The use of shared equity schemes has proved to be an increasingly important incentive, be it through the Government’s HomeBuy Direct initiative or Bellway’s own Opening Doors scheme, increasing from 13% to 18% of completions, a sign of the continued difficulties still faced by buyers in raising an adequate deposit. Gross margin has reduced slightly from 12.7%(1) to 11.7%. At the time of the last exceptional land and work in progress write down at 31 January 2009, a concurrent reassessment of costs and revenues was undertaken on all sites. The outcome was a reduction in margins on those sites that had not been subject to a land write down. As a consequence, the Group has suffered fewer down valuations in the period, and following a full review of inventories at 31 July 2010, the Board can report that there are no further exceptional write downs or write backs. Administrative expenses have reduced by over 7% from £41.6 million to £38.5 million as the Group continues to focus on cost control, having benefited fully from the reduced headcount and divisional rationalisation programme completed by July 2009. Overall the Group has delivered an operating profit of £51.3 million (2009 – £45.6 million(1)) representing a margin of 6.7% which is comparable to the pre-exceptional operating margin of 6.7%(1) delivered in 2009. Finance Costs Net finance costs have reduced by 57% from £15.8 million to £6.8 million as the Group has benefited from being in a net cash position throughout the majority of the year. Net interest payable on bank loans and overdrafts is £0.8 million (2009 – £10.4 million) and largely represents commitment fees payable on undrawn facilities. Taxation The effective income tax rate is 19.4% of profit before tax (2009 – 24.9%) and compares favourably to the Group’s standard tax rate for the year of 28.0% (2009 – 28.0%). This lower effective rate is principally due to enhanced claims for qualifying expenditure on remediated land, relating to current and prior periods, which have reduced the overall tax charge by £5.3 million in the year. In estimating the tax liability for the year the Board expects to fully utilise tax losses brought forward from 2009. Earnings per Share Basic earnings per ordinary share amount to 29.7p compared to 17.7p(1) in 2009, an increase of almost 68%. Balance Sheet The Balance Sheet remains strong with net cash (excluding preference shares) of £65.7 million at 31 July 2010 (2009 – net debt of £36.8 million excluding preference shares) and with inventories showing a measured decrease, down from £1,211.4 million to £1,148.7 million as a result of a disciplined approach to land buying and a reduction in finished goods stock. The continuing use of shared equity incentives has led to an increase in the value of the resultant debt, shown as other financial assets on the Balance Sheet at 31 July 2010, which, at £32.7 million (2009 – £20.8 million), represents a significant discount to vacant possession value (note 14). Land payables have reduced from £110.0 million to £61.9 million as the Group has been able to secure land deals, in many cases, by offering vendors advance cash payments as opposed to deferred terms. The valuation of the Bellway p.l.c. 1972 Pension & Life Assurance Scheme (the “Scheme”) at 31 July 2010 shows a reduction in the deficit, calculated in accordance with IAS 19, of £3.2 million from £11.9 million to £8.7 million. This reduction is after a cash contribution of £1.7 million paid by the Group into the Scheme on 7 October 2009. Earnings per ordinary share 29.7p (2009 – 17.7p)(1) 20 Bellway p.l.c. Annual Report and Accounts 2010 (1) Pre-2009 exceptional write down of £66.3 million (see note 5). Business Review Governance Accounts Other Information Profit before taxation £44.4m (2009 – £29.8m)(1) The increase in Group net assets of £69.8 million from £965.0 million to £1,034.8 million comprises profit after tax for the year of £35.8 million, net cash raised through the share placing of £43.7 million, a net reduction in pension liabilities of £1.3 million after tax, ordinary dividends paid of £11.2 million, and other share issues and share option movements through reserves of £0.2 million. Treasury Other than the proceeds obtained from the issue of ordinary shares and reinvestment of retained profits, the Group’s activities are financed principally through a combination of its £20.0 million preference shares, redeemable in April 2014, bank borrowings and cash in hand. The Group’s bank borrowing facilities comprise medium-term loans, short-term floating rate loans and overdrafts. In addition, the Group often obtains deferred payment terms in its contracts for land purchases. Facilities are due for renewal over the following time periods: Short-term cash surpluses are placed on deposit. Other than disclosed 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. Share Price and Net Asset Value The share price at 31 July 2010 was 579.5p (2009 – 735.0p). This compares with a book net asset value per ordinary share at 31 July 2010 of 856.0p (2009 – 839.0p). Dividend The Board is proposing an increase in the final dividend of 11.7% to 6.7p per ordinary share (2009 – 6.0p) giving a total dividend for the year of 10.0p compared to 9.0p for 2009. The total dividend is covered almost three times (2009 – two times(1)). By July 2011 By July 2012 By July 2013 By July 2014 By July 2015 TOTAL £145 million £35 million £85 million £20 million £20 million £305 million Alistair M Leitch Finance Director 18 October 2010 The Board remains comfortable with the Group’s borrowing facilities. Treasury Policy and Liquidity Risk The Group’s treasury policy has, as its principal objective, the maintenance of flexible bank facilities in order to meet anticipated borrowing requirements. An internal cash forecasting system enables the Group to plan and assess its future treasury needs. (1) Pre-2009 exceptional write down of £66.3 million (see note 5). Bellway p.l.c. 21 Annual Report and Accounts 2010 Operating Risk Statement Risk is a natural part of any business. The management of risk is a key operating component of the Group. The manner in which this is carried out is very important to the long-term success of the business. The Group has identified, evaluated and put in place strategies to mitigate the principal risks faced by the business, shown in the table below: Area of Risk Description of Risk Mitigation of Risk Land The inability to source suitable land at satisfactory margins would have a detrimental effect on the Group’s land bank and, consequently, its future success. Endeavour to ensure that a land bank with planning permission for at least three years’ construction programme is in place on a rolling basis. Thorough pre-purchase due diligence and viability assessments. Authorisation of land purchases in line with robust Group procedures. Delays and the increased complexity of the planning process hampers and slows the Group’s growth prospects. Centralised and Regional Planning Directors provide advice and support to divisions to assist with progressing the planning permission process. Planning 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. In consultation with Head Office, local divisional management determines product range and pricing strategy commensurate with regional market conditions. Use of sales incentives where appropriate to encourage the selling process, such as part-exchange and Express Mover. Use of government-backed schemes to encourage home ownership where appropriate. Ensuring that construction rates are managed to ensure stock availability matches sales rates. Identifying training needs and allocating appropriate resources to training. Ensuring systems are in place for engaging, monitoring and controlling work carried out by sub-contractors. Ensuring competitive reward systems are in place. Group purchasing arrangements in place to secure materials at competitive prices. Construction Ensuring that appropriately skilled personnel are available and that suitable materials are also available at the right price. 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. 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. See our Environmental Policy on page 17, or our website at www.bellway.co.uk, for further information. 22 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Area of Risk Description of Risk Mitigation of Risk Health and 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. 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. The Board considers health and safety issues at each Board meeting. Regular visits to sites by senior management (independent of our divisions) and external consultants to monitor health and safety standards and performance against the Group’s health and safety policies and procedures. The Group offers a competitive salary and benefits package. Divisional training plans in place. Succession planning for key posts. 98% of site workers (including sub-contractors) are fully accredited under CSCS. 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. Group-wide systems in place which are centrally controlled with outsourced support function in place. Asset Protection The way in which the Group carries out its operations can have a material effect on the value of its assets. The Group prepares viability assessments on all of its land purchases and construction projects, and keeps these under regular review to protect, wherever possible, the value of its assets. Treasury Management Ensuring suitable financial resources, at appropriate costs, are in place to meet Group requirements. Central negotiation and control of banking facilities to ensure liquidity and debt levels are appropriate. Facilities distributed across various sources. Careful management and monitoring of cash forecasts. Legal and Regulatory Compliance Disadvantageous contractual obligations, regulatory fines or adverse publicity by failing to comply with current laws and regulations or to have appropriately- worded contracts in place. Central secretariat, human resources and legal functions advise divisions on compliance and ensure policies and procedures are kept up to date to minimise risk of non-compliance. In addition, the Board ensures that adequate insurance cover is maintained to underpin and support the many areas in which the Group is exposed to risk of loss. Bellway p.l.c. 23 Annual Report and Accounts 2010 Board of Directors As at 18 October 2010 24 Bellway p.l.c. Annual Report and Accounts 2010 Howard C Dawe Date of Birth: 7 April 1944 Mr Dawe joined Bellway in 1961, was appointed a director in 1977 and was appointed 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 Chairman of the Nomination Committee. John K Watson Date of Birth: 21 March 1954 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. Peter J Stoker Date of Birth: 23 May 1956 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. Alistair M Leitch Date of Birth: 14 February 1954 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. Peter M Johnson Date of Birth: 17 April 1948 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 became senior independent non-executive director on 16 January 2009 and is Chairman of the Audit Committee and is also a member of both the Board Committee on Executive Directors’ Remuneration and the Nomination Committee. Business Review Governance Accounts Other Information Mike R Toms Date of Birth: 1 July 1953 Mr Toms was appointed a non-executive director on 1 February 2009. He is currently non-executive Chairman of Northern Ireland Electricity plc, and a non-executive director of UK Coal PLC and Birmingham Airport Holdings Limited. He was formerly an executive director of BAA plc and was a non-executive director of Viridian Group PLC. He is a member of the Royal Institution of Chartered Surveyors (MRICS) and a member of the Royal Town Planning Institute (MRTPI). He is Chairman of the Board Committee on Executive Directors’ Remuneration, and a member of the Audit and Nomination Committees of the Board. John A Cuthbert Date of Birth: 9 February 1953 Mr Cuthbert was appointed a non-executive director on 1 November 2009. He is a member of the Audit and the Nomination Committees and the Board Committee on Executive Directors’ Remuneration. Mr Cuthbert worked in the water industry from 1991 to 2010, when he retired as Managing Director of Northumbrian Water Group plc, having formerly been Managing Director of North East Water plc and Managing Director of Essex and Suffolk Water plc. He is Chairman of Castle View Enterprise Academy in Sunderland. Group Company Secretary G Kevin Wrightson Date of Birth: 27 October 1954 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. Advisers Group Company Secretary and Registered Office G K Wrightson FCIS Bellway p.l.c. Seaton Burn House Dudley Lane, Seaton Burn Newcastle upon Tyne NE13 6BE Registered number 1372603 Registrars and Transfer Office Capita Registrars Limited Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0LA Financial Advisers N M Rothschild & Sons Limited Stockbrokers Citigroup Global Markets Limited Bankers Barclays Bank PLC Lloyds Banking Group plc Auditors KPMG Audit Plc Bellway p.l.c. 25 Annual Report and Accounts 2010 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 2010. Principal Activities The Company is a holding company, owning subsidiary undertakings which continue to be engaged principally in housebuilding in the United Kingdom (“UK”). 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 4 and 5, the Chief Executive’s Operating Review on pages 6 to 11, the Corporate Responsibility Policy on page 12, the 2010 Corporate Social Responsibility Statement on pages 14 and 15, the Environmental Policy on page 17 and the Group Finance Director’s Review on pages 18 to 21. In addition, information in respect of the principal operating risks of the business is set out in the Operating Risk Statement on pages 22 and 23. Results and Dividends The profit for the year attributable to equity holders of the parent company amounts to £35.8 million (2009 – £27.4 million loss). Ordinary Dividends The directors have proposed a final ordinary dividend for the year ended 31 July 2010 of 6.7p 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 6.0p per share in respect of the previous year ended 31 July 2009, together with an interim dividend in respect of the year ended 31 July 2010 of 3.3p per share. The directors recommend payment of the final dividend on 12 January 2011 to shareholders on the Register of Members at the close of business on 10 December 2010. Directors All the directors of the Company, who are shown on pages 24 and 25, served throughout the year, apart from Mr Cuthbert who was appointed on 1 November 2009. Mr Perry was a director at the start of the year and retired on 15 January 2010. Two directors retire from the Board and offer themselves for re-election at the forthcoming Annual General Meeting (“AGM”). Mr Leitch and Mr Johnson retire by rotation in accordance with the requirements of the Company’s Articles of Association (the “Articles”) and the Combined Code. The directors’ biographies are shown on pages 24 and 25. 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 the Finance Director, Mr Leitch, and of the senior independent non-executive director, Mr Johnson. The UK Corporate Governance Code, which applies to the Company from its financial year which commenced on 1 August 2010, includes a provision that all directors should be subject to annual re-election. As best practice and shareholder opinion on compliance with this provision of the Code has yet to emerge, the Board will not be requiring all of its directors to submit to annual re-election at the AGM to be held on 7 January 2011 and will review the position before the 2012 AGM. Directors’ Contracts Details of the terms of appointment of the two 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 the Company Service contract of executive director A M Leitch 1 August 2002 Letter of appointment of non-executive director 1 September 2002, amended 7 October 2009 Normal retirement age (60) 12 months 12 months P M Johnson 1 November 2003 1 November 2009 31 October 2012 24 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 33. 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 32 to 39. 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 74 and 75. 26 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Notifiable Shareholders’ Interests As at 18 October 2010, 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 Capital Group International Inc JP Morgan Chase & Co AXA Framlington Investment Management BlackRock Inc Legal & General Group plc Polaris Capital Management LLC HBOS plc Credit Suisse Securities (Europe) Limited Number of shares with voting rights % total voting rights 9,300,000 8,485,786 5,712,902 5,603,638 4,870,809 4,545,633 4,407,939 4,261,453 3,890,282 7.70% 7.02% 4.73% 4.64% 4.03% 3.76% 3.65% 3.53% 3.22% Corporate Governance Introduction 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 32 to 39, 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 throughout the year to 31 July 2010, and with the detailed provisions of the UK Corporate Governance Code from 1 August 2010 up to the date of this report. Copies of both codes 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 and the UK Corporate Governance 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 Group Finance Director’s Review present a balanced and comprehensive assessment of the Group’s position and prospects. The Board At the date of this report the Board consists of seven directors whose names, responsibilities and other details appear on pages 24 and 25. Three of the directors are executive and four of the directors, including the Chairman, are non-executive. 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. 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 acquired, major projects, personnel, 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 Chairman is responsible for leading the Board and ensuring it operates effectively. The directors possess an appropriate balance of skills and experience to meet the requirements of the business. During the year there were ten Board meetings, three Audit Committee meetings, four 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. The full Board aims to visit at least two divisions each year, and last year visited the Essex and Thames Gateway divisions, as well as receiving presentations at Board meetings from divisional senior management. There were no absences from any Board or Committee meetings by any director, with the exception that Mr Dawe, Mr Leitch and Mr Cuthbert were each unable to attend one Board meeting. Bellway p.l.c. 27 Annual Report and Accounts 2010 Report of the Directors continued During the year the non-executive directors met without the executive directors on two occasions, and also met once during the year without the Chairman present. The Articles require one-third of the directors to offer themselves for re-election each year at the AGM and all directors to seek re-election at least every three years in accordance with the Articles. The Articles also require new directors appointed since the last AGM to offer themselves for re-election 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. As part of Mr Cuthbert’s induction programme he visited a number of the Group’s operations and met with senior management and other employees throughout the organisation. 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 Johnson. 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. 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 system of self-assessment. 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. The Board Committees The Board has properly constituted Audit, Remuneration and Nomination Committees. The terms of reference for the Audit and Nomination Committees and the Board Committee on Executive Directors’ Remuneration 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) and Mr Toms, who were members of the Committee throughout the year, and Mr Cuthbert who joined the Committee on 15 January 2010. Mr Perry was a member of the Committee until his retirement on 15 January 2010. The Committee meets at least three times a year and met three times during the year under review. The Committee’s responsibilities include the following: p to consider the appointment/re-appointment of the external auditors and assess their independence each year. p 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 develop and monitor the Company’s policy on the provision of non-audit services by the external auditor and to ensure that the provision of non-audit services does not impair the external auditors’ independence or objectivity. p 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. p to oversee the process for selecting the external auditors and make appropriate recommendations through the Board to the shareholders to consider at the AGM. p to consider annually whether there is a need for an internal audit function and make a recommendation to the Board. p to review the Group’s procedures for handling allegations from “whistleblowers”. p to review management’s reports on the effectiveness of systems for internal financial control, financial reporting and risk management. p to assess the scope and effectiveness of the systems established by management to identify, assess, manage and monitor financial and non-financial risks. p to review and make recommendations in relation to the half year and annual accounts prior to submission to the Board. 28 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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 those 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 tendering 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 Toms (Chairman), Mr Johnson and Mr Cuthbert. Mr Toms and Mr Johnson were members of the Committee throughout the year, and Mr Cuthbert joined the Committee on 15 January 2010. Mr Perry was a member of the Committee until his retirement on 15 January 2010. The Committee meets at least twice a year and during the year it met on four occasions. Its duties are to review and recommend the basic salary, taxable benefits, terms and conditions of employment, including performance-related payments, long-term incentive schemes and other benefits of the executive directors and the Chairman. The Report of the Board on Directors’ Remuneration on pages 32 to 39 contains details of directors’ remuneration and the Group’s policies in relation to directors’ remuneration. The Committee is also responsible, in consultation with the Chief Executive, for determining the total remuneration packages of senior executives below Board level. 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, conditions and 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 Dawe (Chairman), Mr Johnson, Mr Toms and Mr Cuthbert. Mr Dawe, Mr Johnson and Mr Toms were members of the Committee throughout the year. Mr Perry was Chairman of the Committee until his retirement on 15 January 2010, when Mr Dawe became Committee Chairman. Mr Cuthbert joined the Committee on 15 January 2010. The Committee’s main duties are to formulate plans for succession for both executive and non-executive directors and, in particular, for the key roles of Chairman and Chief Executive and 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. Other committees of the Board are formed to perform certain specific functions as required from time to time. 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 32 to 39. Accountability and Audit The statement on going concern and the Statement of Directors’ Responsibilities in respect of the Annual Report and Accounts are shown on pages 30 and 40 respectively. The Audit Committee, whose role is detailed above, has meetings at least twice a year with the Company’s auditors, KPMG Audit Plc. 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 is responsible for the identification and evaluation of significant risks applicable to particular areas of the business together with the design and operation of suitable controls. These significant risks, which are described in the Operating Risk Statement on pages 22 and 23, 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. Bellway p.l.c. 29 Annual Report and Accounts 2010 Report of the Directors continued 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 to satisfy itself that all reasonable steps are being taken to mitigate these risks. The key areas of control are as follows: p 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. p an established monitoring structure is in place, which provides short lines of communication and easy access to members of the Board. p 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. p a comprehensive reporting system entailing annual budgets, regular forecasting and financial reporting. p a central treasury function operates at Head Office. p regular meetings with management attended by members of the Board to review divisional performance. p 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. p regular reviews of site costs and revenues by senior Head Office personnel which are reported to the Board. p regular visits to sites by senior management and external consultants to monitor health and safety standards and performance. p 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. The Company does not have a separate internal audit function and, as recommended by the Combined Code, the Audit Committee considers annually whether there is a need for such an internal audit function and makes a recommendation to the Board. During the year, having considered the robust systems and strong controls already present in the Group and as described above, the Audit Committee recommended that no separate internal audit function was presently required. 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 discuss issues with current and prospective shareholders and institutions, as required. 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 74 to 76 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 as discussed further on pages 47 and 48. 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, belief or sexual orientation. All employees, whether part-time, full-time or temporary, are treated fairly and equally. Selection for employment, promotion, training or other matters affecting their employment is on the basis of aptitude and ability. All employees are assisted 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 using a variety of means appropriate to its own particular needs, with guidance when necessary from Head Office. 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 personal accident insurance arrangements. In accordance with statutory requirements, the Company also has a designated stakeholder pension arrangement. 30 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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, approved by the Board, has been adopted by all trading entities within the Group. Environmental issues are addressed in the Corporate Responsibility Policy on page 12, the 2010 Corporate Social Responsibility Statement on pages 14 and 15, the Environmental Policy on page 17, and in the Corporate Social Responsibility section of the Company’s website www.bellway.co.uk, a copy of which is available 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 6 to 11, in the Corporate Responsibility Policy on page 12, in the 2010 Corporate Social Responsibility Statement on pages 14 and 15, and in the Corporate Social Responsibility section of the Company’s website www.bellway.co.uk. Donations During the year the Group made no political contributions but donated £17,011 (2009 – £11,275) for charitable purposes. Significant Relationships The Company is party to a number of banking agreements with major clearing banks. The withdrawal of such facilities could have a material effect on the financing of the business. Other than the foregoing the Group has contractual and other arrangements in place with suppliers and other third parties which support its business activities. None of these arrangements are considered to be critical to the performance of the business. 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 2010 of £67.973 million (2009 – £52.610 million) gave a creditor payment period of 32 days (2009 – 26 days). Land creditors due within one year were £44.969 million (2009 – £83.588 million). Including land creditors, the creditor payment period was 53 days (2009 – 68 days). The parent company had no land or trade creditors at 31 July 2010 (2009 – £nil). Purchase of the Company’s Own Shares The Company was given authority at the 2010 AGM to purchase its own ordinary and preference shares. As at the date of this report no market purchases have been made by the Company and this authority will expire at the end of the 2011 AGM. Shareholders will be asked to renew this authority for a further year at the 2011 AGM. Market purchases, for which shareholder authority is not required, have been made by the trustees of the employee share plans (see note 20 for further details). Indemnification of Directors The Company has in place directors’ and officers’ insurance and the Articles provide the directors with further protection against liability to third parties, subject to the conditions set out in the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of this report. Disclosure of all Relevant Information to Auditors The directors who held office at the date 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 In accordance with section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming AGM. AGM – Special Business Four resolutions will be proposed as special business at the AGM to be held on Friday 7 January 2011. Explanatory notes on these resolutions are set out in Shareholder Information on page 74. By order of the Board G Kevin Wrightson Group Company Secretary 18 October 2010 Bellway p.l.c. 31 Annual Report and Accounts 2010 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 Toms (Chairman), Mr Johnson and Mr Cuthbert. Mr Perry was a member of the Committee until his retirement at the AGM on 15 January 2010, when his place on the Committee was taken by Mr Cuthbert. 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. The Terms of Reference of the Committee are available on the Company’s website. 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 (“HNBS”). HNBS was appointed by the Committee and does not provide any other services 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 HNBS. 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 broadly achieves 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 performance conditions, including relative Total Shareholder Return (“TSR”) performance against other UK housebuilders, thereby creating an alignment with the strategy of the business and the long-term 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 UK Corporate Governance Code and the Association of British Insurers’ (“ABI”) guidance. When determining the elements of remuneration for the executive directors, the Committee takes into consideration the pay and conditions of employees throughout the Group as a whole, paying particular attention to the levels of pay increase awarded to the workforce generally. All employees, including the executive directors, can join the Savings Related Share Option Scheme. Most employees have access to pension and life assurance benefits and a significant proportion of staff benefit from health insurance, company car or car allowance. Summary of Remuneration Policy The policy in relation to each component of executive remuneration is described below: Component Policy Performance period How achieved Salary To be market competitive. n/a Benefits To provide a range and value which is market competitive. Annual Bonus Long-term incentives (performance shares and matching shares) To reward achievement of annual operational-based performance targets. To encourage long-term value creation, to aid retention, to encourage shareholding, and to promote alignment of interest with shareholders. n/a 1 year 3 years Salary levels set by reference to the mid market level of a peer group of similar UK housebuilding businesses, taking account of individual performance and experience. In practice, notwithstanding the fact that the current management team is highly experienced and well regarded, salaries are generally at or below the median. Benefits to be at the mid market level of a peer group of similar UK housebuilding businesses, and include a salary supplement in lieu of pension contributions, car or car allowance, life assurance, medical cover and permanent health insurance. By providing the opportunity to earn a bonus of up to 100% of salary for outstanding operational performance, both financial and non-financial. By using share-based incentives with performance conditions which are aligned with shareholders’ interests, such as TSR, which are assessed over a three-year period. 32 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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 from the Company and a six-month notice period from the executive. On termination by the Company, an amount equivalent to one year’s salary, benefits and the average amount of the last two years’ annual bonus payments, would be payable. Within six months of a change of control, if the Company or the executive director serves notice to terminate the contract, the liquidated damages payment would be triggered. 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 current executive directors have long service with the Company and the Committee does not consider it appropriate to re-negotiate their contracts in relation to this material provision. However, for future executives’ contracts the Committee will include a provision for bonus to be taken into account in the calculation for compensation payable. This will ensure that, going forward, service contracts are consistent with current best practice. The details of the executive directors’ service contracts are as follows: Executive director J K Watson P J Stoker First appointed as a director Current contract commencement date 1 August 1995 1 August 1995 16 March 2001, amended 7 October 2009 19 January 1996, amended with effect from 1 November 2003 and further amended 7 October 2009 A M Leitch 1 August 2002 1 September 2002, amended 7 October 2009 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 First appointed as a director Current letter of appointment commencement date Current letter of appointment expiry date H C Dawe P M Johnson M R Toms J A Cuthbert 9 August 1977 1 November 2003 1 February 2009 1 November 2007 1 November 2009 1 February 2009 1 November 2009 1 November 2009 31 October 2010 31 October 2012 31 January 2012 31 October 2012 On the expiry of his existing letter of appointment, it is the intention of the Company, following rigorous review, to issue a new letter of appointment to Mr Dawe for a term of three years from 1 November 2010. 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 review, the executive directors received no pay rise while the workforce was awarded an increase generally of 2%. For 2010/11, the executive directors have been awarded a 2.5% increase in basic salary, which will reflect the average percentage increase across the workforce generally. Fee levels for non-executive directors reflect the time commitment and responsibilities of the role, including membership or chairmanship of Board Committees. Fees are reviewed annually, taking into account the level of fees for similar positions in comparable companies. For the year under review, fees were not increased from their 2008/09 level. With effect from 1 August 2010, fees have been increased by around 6% to reflect the increasing responsibilities, complexity and time commitment of their role. 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. Taxable Benefits Taxable benefits provided relate to the provision of motor vehicles, telephones and private medical insurance. Bellway p.l.c. 33 Annual Report and Accounts 2010 Report of the Board on Directors’ Remuneration continued Annual Bonus Scheme For the year under review, bonuses were capped at 100% of basic salary. The performance conditions related to operating profit (pre-exceptional items) (80%) and personal performance (20%), with personal performance being assessed by reference to board structure and succession planning, land bank management, health and safety and customer care. Details of the bonus payments are set out in the notes to the table of directors’ emoluments on page 36. Annual bonuses are not pensionable. 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. The 2010/11 bonus will again be based on similar performance parameters as for the 2009/10 bonus and in the same proportions. The Committee considers that outperformance of targets in relation to year-on-year profitability and non-financial metrics provide a good link to the long-term performance of the business. Long-term Incentive Schemes The Company operates two long-term incentive plans which are designed to focus executive directors on longer term value creation, provide a strong retentive element and also alignment of interest with shareholders. 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 basic salary each year, subject to the achievement of TSR-based performance conditions or, for the award granted in January 2008, a combination of TSR and Return on Capital Employed (“ROCE”) conditions. The policy for long-term incentives to be granted in the 2010/11 financial year, as was the case in prior years, will be for awards to be granted over shares worth 100% of basic salary. Awards will vest to executives after three years, subject to the achievement of performance conditions based around TSR, which compares the stock market performance (share price movement and dividends paid) of different companies. The TSR performance condition will compare Bellway’s TSR against that of an index created by the average TSR of the other UK housebuilders. Awards will start to vest at 25% if Bellway’s TSR matches the performance of the index. Full vesting will occur if Bellway’s TSR outperforms the index by an average of 7.5% per annum over three years. The Committee has carried out significant modelling during the year under review, the results of which continue to support the premise that 7.5% per annum outperformance is equivalent to average “upper quartile” TSR performance of the housebuilders over the long term. The companies comprising the Index for the awards to be granted in the 2010/11 financial year are Barratt Developments PLC, The Berkeley Group plc, Bovis Homes Group PLC, Persimmon plc, Redrow plc and Taylor Wimpey plc. TSR is recognised as enabling alignment with the interests of institutional shareholders by providing a reward mechanism for delivering superior stock market performance. TSR calculations are independently calculated for the Committee by the Company’s brokers. Further, regardless of TSR performance, for the award granted in the 2010/11 financial year, no part of the TSR element of an award will vest unless the Committee is satisfied that there has been an improvement in underlying financial performance over the performance period, taking into account, inter alia, operating profit, operating margin, ROCE and Net Asset Value (“NAV”). The Committee will scale back the level of vesting indicated by the TSR performance condition (potentially to zero) in circumstances where there has not been an improvement. This is a change from the provision applying to previous years’ awards, where the requirement was that TSR performance was simply reflective of underlying financial performance. The Bellway p.l.c. (2008) Share Matching Plan (the “SMP”) operates 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. No awards have been made to date. For any awards which may be made, the performance condition will be the same as will apply to the award under the PSP in the same period. In addition to the two executive plans detailed above, the Bellway p.l.c. (2003) Savings Related Share Option Scheme (“2003 SRSOS”) is available to all employees, including the executive directors. 34 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Shareholding Guidelines There is a minimum shareholding requirement for the executive directors, equivalent to 100% of basic salary. As at 31 July 2010, and at the date of this report, all executive directors hold shares with an equivalent value well 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 the 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 P M Johnson M R Toms J A Cuthbert Fully paid ordinary 12.5 pence shares 31 July 2010 1 August 2009 or date of appointment if later 143,634 400,527 540,000 132,473 4,300 1,500 6,000 143,634 400,527 540,000 132,473 4,300 – – The directors’ interests (including family interests) in the preference share capital of the Company are set out below: Beneficial interests H C Dawe P J Stoker A M Leitch Fully paid cumulative redeemable £1 preference shares 31 July 2010 1 August 2009 679,164 150,000 150,000 629,164 – 50,000 There has been no change in any of the above interests between 31 July 2010 and the date of this report. Pensions In July 2008 the executive directors took enhanced transfer values from the final salary section of the Bellway p.l.c. 1972 Pension & Life Assurance Scheme, and therefore have no accrued pension entitlements. Since 1 June 2008 they have received a cash payment in lieu of pension contributions amounting to 30% of basic salary. Following advice to the Committee, this amount was agreed as being reasonable in the circumstances and was less than the annual accrual foregone by the executive directors under the previous final salary arrangements. Bellway p.l.c. 35 Annual Report and Accounts 2010 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. Non-executive Chairman H C Dawe Executive directors J K Watson P J Stoker A M Leitch Non-executive directors P M Johnson M R Toms(4) J A Cuthbert(5) D G Perry(6) Totals Notes: Salary and fees £ Taxable benefits(1) £ 228,094 2,539 Annual bonus(2) Payment in lieu of pension(3) £ – £ – Total 2010 £ 2009 £ 230,633 230,114 515,000 334,750 334,750 51,500 47,380 35,535 21,746 25,484 24,809 24,716 396,164 257,506 257,506 154,500 1,091,148 100,425 100,425 717,490 717,397 – – – – – – – – – – – – 51,500 47,380 35,535 21,746 799,646 527,962 527,725 49,675 23,690 N/A 47,380 1,568,755 77,548 911,176 355,350 2,912,829 2,206,192 1. Taxable benefits relate to the provision of motor vehicles, telephones and private medical insurance. 2. The annual bonus is payable in November 2010 for performance during the year ended 31 July 2010. The performance conditions for the 2009/10 bonus were operating profit (pre-exceptional items) (80%) and non-financial performance (20%), with non-financial performance being assessed by reference to board structure and succession planning, land bank management, health and safety and customer care. The actual bonus payments against each of these metrics were determined on the following basis: (cid:81) operating profit was £51.255 million. This was above City expectations of underlying profitability and towards the higher end of the target range. A bonus of 64.259% of salary was therefore achieved out of the maximum 80%. (cid:81) in respect of the non-financial elements, the Committee took account of performance against each metric and determined that, overall, a bonus of 12.666% of salary should be payable out of the maximum 20%. 3. Executive directors receive a cash payment in lieu of pension contribution amounting to 30% of basic salary. 4. Appointed 1 February 2009. 5. Appointed 1 November 2009. 6. Retired 15 January 2010. 36 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Directors’ Interests in Deferred Bonus Plan The executive directors had a beneficial interest in certain shares held in the Bellway Employee Share Trust (1992) (“the Trust”) pursuant to the grant of deferred bonus entitlements under the terms of the Bellway p.l.c. 2003 Deferred Bonus Plan (a legacy plan). The number of shares held in the Trust in respect of each director was as follows: J K Watson P J Stoker A M Leitch Notes: Fully paid ordinary 12.5p shares Entitlements held in Trust as at 1 August 2009 Entitlements awarded during the year Entitlements vested during the year(1) Entitlements held in Trust as at 31 July 2010 17,857 12,946 12,054 – – – (17,857) (12,946) (12,054) – – – 1. 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 Watson 1,987 shares, Mr Stoker 1,441 shares and Mr Leitch 1,342 shares. 2. There has been no change in the above holdings between 31 July 2010 and the date of this report. Directors’ Interests in Performance Share Plan (“PSP”) In addition, the executive directors have a potential future beneficial interest in certain shares held in the Trust pursuant to the allocation of shares under the PSP. Further information on the PSP is set out on page 34. 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, is shown below: Potential future beneficial interests J K Watson Totals P J Stoker Totals A M Leitch Totals Notes: Award date Awards held at 1 August 2009 Awarded during the year Awards lapsed during the year Awards vested during the year(5) Awards held at 31 July 2010 Fully paid ordinary 12.5p shares 18.10.2006(1) 16.01.2008(2) 04.11.2008(3) 29.10.2009(4) 18.10.2006(1) 16.01.2008(2) 04.11.2008(3) 29.10.2009(4) 18.10.2006(1) 16.01.2008(2) 04.11.2008(3) 29.10.2009(4) 33,482 67,159 89,487 – 190,128 23,065 43,653 58,167 – 124,885 23,065 43,653 58,167 – 124,885 – – – 72,028 72,028 – – – 46,818 46,818 – – – 46,818 46,818 – – – – – – – – – – – – – – – (33,482) – – – – 67,159 89,487 72,028 (33,482) 228,674 (23,065) – – – – 43,653 58,167 46,818 (23,065) 148,638 (23,065) – – – – 43,653 58,167 46,818 (23,065) 148,638 1. Market value on award 1,344.00p (18.10.2006), performance period 1 August 2006 – 31 July 2009. 2. Market value on award 744.50p (16.01.2008), performance period 1 August 2007 – 31 July 2010. 3. Market value on award 575.50p (04.11.2008), performance period 1 August 2008 – 31 July 2011. 4. Market value on award 715.00p (29.10.2009), performance period 1 August 2009 – 31 July 2012. 5. Market value on 25 March 2010, which was the day the shares vested, was 765.00p. The awards vested at 100% of the full entitlement. Aggregate gross gains made by the above directors on vesting of these awards under the PSP in the year were £610,420.02 (2009 – £507,840.17). Bellway p.l.c. 37 Annual Report and Accounts 2010 Report of the Board on Directors’ Remuneration continued 6. The performance conditions for each award are summarised below: (a) For awards made on 18 October 2006, which vested during the year, a TSR performance condition required Bellway’s TSR to be at least at the median of a comparator group of other housebuilders (at which point 33% of the award vested), and at or above the upper quartile of the comparator group for full vesting. Bellway’s TSR was above the upper quartile and therefore the awards vested in full. The comparator group comprised Barratt Developments PLC, The Berkeley Group plc, Bovis Homes Group PLC, Persimmon plc, Redrow plc and Taylor Wimpey plc (plus Crest Nicholson plc, McCarthy & Stone plc, Taylor Woodrow plc and Wilson Bowden plc, all of whom have now delisted). (b) For awards made on 16 January 2008, two performance conditions applied to separate parts of the award: (i) 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 companies comprising the Index for the awards made on 16 January 2008 are Barratt Developments PLC, The Berkeley Group plc, Bovis Homes Group PLC, Persimmon plc, Redrow plc and Taylor Wimpey plc. This TSR condition has been achieved as at 96.6% of the maximum. (ii) 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. This performance condition has not been achieved. For the awards made on 4 November 2008 and 29 October 2009 the TSR part of the award applied as the sole performance condition (compared to the same companies as for the award made on 16 January 2008). Regardless of TSR performance, no part of the TSR element of an award will vest unless the Committee is satisfied that the Company’s TSR over the performance period reflects underlying financial performance. (c) (d) 7. The market price of the ordinary shares at 31 July 2010 was 579.50p and the range during the year was 560.00p to 927.50p. 8. There has been no change in the above potential future beneficial interests between 31 July 2010 and the date of this report. Directors’ Share Options Details of all directors’ interests under the all-employee savings related share option scheme are shown below: Scheme 1 August 2009 Granted during the year Exercised during the year 31 July 2010 Exercise price (p) Exercisable from Expiry date J K Watson 2003 SRSOS Totals P J Stoker 2003 SRSOS Totals Notes: 2,857 2,857 2,857 2,857 – – – – – – – – 2,857 2,857 2,857 2,857 336.00 1 Feb 2012 31 July 2012 336.00 1 Feb 2012 31 July 2012 1. All of the above options were granted for nil consideration. 2. The market price of the ordinary shares at 31 July 2010 was 579.50p and the range during the year was 560.00p to 927.50p. 3. There has been no change in the above holdings between 31 July 2010 and the date of this report. 38 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Performance Graph The graph below shows the total shareholder return performance of the Company and a “broad equity market index” over the past five financial years. As the Company has been a constituent of the FTSE 250 Index over this period, the Committee considers that index to be the most appropriate for comparison purposes. Total shareholder return over the last five financial years Source: Datastream 200 180 160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 This graph looks at the value at 31 July 2010, of £100 invested in Bellway p.l.c. on 31 July 2005 compared with the value of £100 invested in the FTSE 250 Index over the same period. BELLWAY FTSE 250 This report will be put to an advisory vote of the Company’s shareholders at the AGM on 7 January 2011. On behalf of the Board Mike R Toms Chairman of the Board Committee on Executive Directors’ Remuneration 18 October 2010 Bellway p.l.c. 39 Annual Report and Accounts 2010 Statement of Directors’ Responsibilities in respect of the Annual Report and Accounts The directors are responsible for preparing the Annual Report and Accounts 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 IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the directors are required to: (cid:81) select suitable accounting policies and then apply them consistently; (cid:81) make judgements and estimates that are reasonable and prudent; (cid:81) state whether they have been prepared in accordance with IFRSs as adopted by the EU; and (cid:81) 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 adequate accounting records that are sufficient to show and explain the parent company’s transactions and 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 2006. 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 complies 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. Responsibility statement of the directors in respect of the Annual Report and Accounts We confirm that to the best of our knowledge: (cid:81) 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 or loss of the Company and the undertakings included in the consolidation taken as a whole; and (cid:81) the Directors’ Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Alistair M Leitch Finance Director 18 October 2010 40 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Independent Auditors’ Report to the Members of Bellway p.l.c. We have audited the financial statements of Bellway p.l.c. for the year ended 31 July 2010 set out on pages 42 to 72. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 auditors’ 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 As explained more fully in the Directors’ Responsibilities Statement set out on page 40, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKP. Opinion on financial statements In our opinion: (cid:81) the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 July 2010 and of the Group’s profit for the year then ended; (cid:81) the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; (cid:81) the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and (cid:81) the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: (cid:81) the part of the Report of the Board on Directors’ Remuneration to be audited has been properly prepared in accordance with the Companies Act 2006; and (cid:81) the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: (cid:81) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or (cid:81) the parent company financial statements and the part of the Report of the Board on Directors’ Remuneration to be audited are not in agreement with the accounting records and returns; or (cid:81) certain disclosures of directors’ remuneration specified by law are not made; or (cid:81) we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: (cid:81) the directors’ statement, set out on page 30, in relation to going concern; and (cid:81) the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review. M R Thompson (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants Quayside House 110 Quayside Newcastle upon Tyne NE1 3DX 18 October 2010 Bellway p.l.c. 41 Annual Report and Accounts 2010 Group Income Statement for the year ended 31 July 2010 Revenue Cost of sales Gross profit Administrative expenses Operating profit/(loss) Finance income Finance expenses Profit/(loss) before taxation Income tax (expense)/credit Profit/(loss) for the year * * All attributable to equity holders of the parent. There were no exceptional items in the current period (note 5). Earnings/(loss) per ordinary share – Basic Earnings/(loss) per ordinary share – Diluted 2010 Total £000 2009 Pre-exceptional item £000 2009 Exceptional item note 5 £000 2009 Total £000 Notes 768,341 683,813 – 683,813 (678,547) (596,680) (66,312) (662,992) 89,794 (38,539) 51,255 2,281 87,133 (41,554) 45,579 4,894 (9,103) (20,712) (66,312) – 20,821 (41,554) (66,312) (20,733) – – 4,894 (20,712) (36,551) 9,107 44,433 (8,620) 29,761 (9,460) (66,312) 18,567 35,813 20,301 (47,745) (27,444) 29.7p 29.6p 17.7p 17.6p (41.6)p (41.5)p (23.9)p (23.9)p 1 5 4 2 2 6 8 8 Statements of Comprehensive Income for the year ended 31 July 2010 Profit/(loss) for the period 35,813 (27,444) (1,913) (1,873) Notes 2010 Group £000 2009 Group £000 2010 Company £000 2009 Company £000 Other comprehensive income Actuarial gains on defined benefit pension plans Income tax on other comprehensive income 25 6 1,891 (582) 353 (99) Other comprehensive income for the period, net of income tax 1,309 254 – – – – – – Total comprehensive income/(expense) for the period * 37,122 (27,190) (1,913) (1,873) * All attributable to equity holders of the parent. 42 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Statement of Changes in Equity at 31 July 2010 Group Notes £000 £000 £000 £000 £000 Issued capital Share premium Other reserves Retained earnings Total Non- controlling interest £000 Total equity £000 Balance at 1 August 2008 14,372 116,928 1,492 868,358 1,001,150 (66) 1,001,084 Total comprehensive expense for the period Loss for the period Other comprehensive income * Total comprehensive expense for the period Transactions with shareholders recorded directly in equity: Dividends on equity shares Shares issued Credit in relation to share options and tax thereon Purchase of own shares Total contributions by and distributions to shareholders 7 19 25 20 – – – – 3 – – 3 – – – – 270 – – 270 – – – – – – – – (27,444) (27,444) 254 254 (27,190) (27,190) (10,347) (10,347) – 1,305 (113) 273 1,305 (113) (9,155) (8,882) – – – – – – – – (27,444) 254 (27,190) (10,347) 273 1,305 (113) (8,882) Balance at 31 July 2009 14,375 117,198 1,492 832,013 965,078 (66) 965,012 Total comprehensive income for the period Profit for the period Other comprehensive income * Total comprehensive income for the period Transactions with shareholders recorded directly in equity: Dividends on equity shares Shares issued Credit in relation to share options and tax thereon Purchase of own shares Total contributions by and distributions to shareholders 7 19 25 20 – – – – – – – – 728 43,365 – – – – 728 43,365 – – – – – – – – 35,813 1,309 37,122 35,813 1,309 37,122 (11,221) (11,221) – 1,569 44,093 1,569 (1,777) (1,777) (11,429) 32,664 – – – – – – – – 35,813 1,309 37,122 (11,221) 44,093 1,569 (1,777) 32,664 Balance at 31 July 2010 15,103 160,563 1,492 857,706 1,034,864 (66) 1,034,798 * Additional breakdown is provided in the Statements of Comprehensive Income. Bellway p.l.c. 43 Annual Report and Accounts 2010 Statement of Changes in Equity at 31 July 2010 Company Balance at 1 August 2008 Total comprehensive expense for the period Loss for the period Other comprehensive income * Total comprehensive expense for the period Transactions with shareholders recorded directly in equity: Dividends on equity shares Shares issued Credit in relation to share options Total contributions by and distributions to shareholders Balance at 31 July 2009 Total comprehensive expense for the period Loss for the period Other comprehensive income * Total comprehensive expense for the period Transactions with shareholders recorded directly in equity: Dividends on equity shares Shares issued Credit in relation to share options Purchase of own shares Total contributions by and distributions to shareholders Issued capital Share premium Other reserves Notes £000 £000 £000 Share- based payment reserve £000 Retained earnings Total equity £000 £000 14,372 116,928 2,145 9,267 582,417 725,129 – – – – 3 – 3 – – – – 270 – 270 – – – – – – – – – – – – 1,318 1,318 (1,873) (1,873) – – (1,873) (1,873) (10,347) (10,347) – – 273 1,318 (10,347) (8,756) 14,375 117,198 2,145 10,585 570,197 714,500 – – – – – – – – 728 43,365 – – – – 728 43,365 – – – – – – – – – – – – – 1,372 (1,913) (1,913) – – (1,913) (1,913) (11,221) (11,221) – – 44,093 1,372 – (7,486) (7,486) 1,372 (18,707) 26,758 7 19 25 7 19 25 20 Balance at 31 July 2010 15,103 160,563 2,145 11,957 549,577 739,345 * Additional breakdown is provided in the Statements of Comprehensive Income. 44 Bellway p.l.c. Annual Report and Accounts 2010 Balance Sheets at 31 July 2010 ASSETS Non-current assets Property, plant and equipment Investment property Investments in subsidiaries Other financial assets Deferred tax assets Current assets Inventories Corporation tax receivable Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Non-current liabilities Interest bearing loans and borrowings Retirement benefit obligations Land and other payables Deferred tax liabilities Current liabilities Corporation tax payable Trade and other payables Total liabilities Net assets EQUITY Issued capital Share premium Other reserves Business Review Governance Accounts Other Information Notes 2010 Group £000 2009 Group £000 2010 Company £000 2009 Company £000 9 10 11 14 12 8,216 7,716 – 32,664 3,694 52,290 8,250 7,377 – – – – – 28,160 26,788 20,826 7,328 43,781 – – – – 28,160 26,788 13 1,148,713 1,211,351 – 45,801 145,689 1,340,203 1,392,493 9,847 41,749 43,210 1,306,157 1,349,938 – – 683,173 48,856 732,029 760,189 – – 703,617 4,953 708,570 735,358 15 22 16 25 17 12 17 19 100,000 100,000 20,000 20,000 8,736 20,299 166 11,925 26,854 – – – – – – – 129,201 138,779 20,000 20,000 2,842 225,652 228,494 357,695 – 246,147 246,147 384,926 – 844 844 – 858 858 20,844 20,858 1,034,798 965,012 739,345 714,500 15,103 160,563 1,492 – 857,706 1,034,864 14,375 117,198 1,492 – 832,013 965,078 (66) (66) 15,103 160,563 2,145 11,957 549,577 739,345 – 14,375 117,198 2,145 10,585 570,197 714,500 – 1,034,798 965,012 739,345 714,500 Share-based payment reserve Retained earnings Total equity attributable to equity holders of the parent Non-controlling interest Total equity Approved by the Board of Directors on 18 October 2010 and signed on its behalf by Registered Number 1372603 Howard C Dawe Director Alistair M Leitch Director Bellway p.l.c. 45 Annual Report and Accounts 2010 Cash Flow Statements for the year ended 31 July 2010 Cash flows from operating activities Profit/(loss) for the year Depreciation charge (Profit)/loss on sale of property, plant and equipment (Profit)/loss on sale of investment properties Finance income Finance expenses Share based payment charge Income tax expense/(credit) Decrease in inventories (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other payables Cash from operations Interest paid Income tax received Net cash inflow from operating activities 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 Net cash (outflow)/inflow from investing activities Cash flows from financing activities Decrease in bank borrowings Proceeds from issue of share capital on share placing Proceeds from the issue of share capital on exercise of share options Purchase of own shares by employee share option plans Dividends paid Notes 2010 Group £000 2009 Group £000 2010 Company £000 2009 Company £000 (27,444) (1,913) (1,873) (2,534) (14,590) (1,895) (1,900) 7,484 72,180 23,591 192,964 – – 12,817 10,211 9 4 2 2 25 6 21 19 35,813 1,659 (184) (39) (2,281) 9,103 1,372 8,620 2,190 4 55 (4,894) 20,712 1,318 (9,107) – – – – 1,899 – – – 62,638 293,155 (15,869) (33,602) (22,744) (69,282) 14,740 (14) 67,230 183,963 14,712 (1,763) (657) 322 262 1,049 (787) (139) (3,383) 684 43 1,265 (1,530) – (247,000) – – – – – – – 43,658 435 (1,777) – 273 43,658 435 (113) (1,777) (11,230) (10,697) (11,230) – – – (27) 1,900 – – – 11,961 150 12,111 – – – – 27 27 – – 273 – (10,697) (10,424) (186) 5,139 4,953 Net cash inflow/(outflow) from financing activities 31,086 (257,537) 31,086 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 102,479 43,210 Cash and cash equivalents at end of year 22 145,689 (66,103) 109,313 43,210 43,903 4,953 48,856 46 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Accounting Policies Basis of preparation Bellway p.l.c. (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, which were approved for issue on 18 October 2010, the Company is taking advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. Effect of new standards and interpretations effective for the first time The following new standards, amendments to standards or interpretations have been adopted in the Group’s financial statements for the year ended 31 July 2010. They have had no material effect on the Group’s financial statements. p IAS 1 “Presentation of Financial Statements” (Amendment). These amendments are solely presentational and have been fully reflected in these financial statements. p IAS 23 “Borrowing Costs” (Amendment). 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 Board has concluded that the Group does not hold any qualifying assets. The Board will continue to assess whether this amendment is applicable to future assets under construction. p IAS 27 “Consolidated and Separate Financial Statements” (Amended). The amendments remove the definition of the “cost method” currently set out in IAS 27, and instead, require all dividends from a subsidiary, jointly controlled entity or associate to be recognised in the separate financial statements of the investor when the right to receive the dividend is established. The Board has concluded that there is no effect on the Group’s financial statements. p IAS 32 “Financial Instruments: Presentation” (Amendment). The amendment provides exemptions from the requirement to classify certain financial instruments as a liability where an entity has an unavoidable obligation to deliver cash arising on liquidation. The Board has concluded that the Group does not hold any applicable financial instruments. p IFRS 7 “Financial Instruments: Disclosure” (Amendment). This amendment expands the disclosures required relating to fair value measurements and liquidity risk. These disclosures have been reflected in these financial statements. p IFRS 8 “Operating Segments” replaces IAS 14 “Segmental Reporting” and requires the disclosure of segment information on the same basis as the management information that is regularly reviewed by the Chief Operating Decision Maker. The Board has been identified as the Chief Operating Decision Maker. The adoption of the standard has not resulted in a change in the Group’s reportable segments (note 1). The Group continues to have one reportable segment which is house building in the United Kingdom. p IFRS 2 “Share-based payment” (Amendment). The definition of vesting conditions in IFRS 2 has been amended to clarify that vesting conditions are limited to service conditions and performance conditions. Conditions other than service or performance conditions are considered non-vesting conditions. The amendment also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment, i.e. an acceleration of the charge, rather than being treated as a reversal. The Board has concluded that there is no significant effect on the Group’s financial statements. p IFRIC 14 “IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction”. This interpretation outlines when refunds or reductions in future contributions can be treated as available under IAS 19 “Employee Benefits” and how a minimum funding requirement affects future contributions or may give rise to a liability. The Board has concluded that this does not affect the Group’s financial statements in the current year. p IFRIC 15 “Agreements for the Construction of Real Estate”. This interpretation provides guidance on whether construction of real estate should be accounted for under IAS 11 “Construction Contracts” or IAS 18 “Revenue”. The Group already accounts for the construction of real estate in accordance with IFRIC 15. The Board has therefore concluded that this interpretation does not affect the Group’s financial statements. The other standards and interpretations that are applicable for the first time in the Group’s financial statements for the year ended 31 July 2010, have no effect on these financial statements. 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. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive’s Operating Review on pages 6 to 11. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Finance Director’s Review on pages 18 to 21. Note 18 to the financial statements sets out the Group’s policies and processes for managing its capital, financial risk, and its exposures to credit risk and liquidity risk. Bellway p.l.c. 47 Annual Report and Accounts 2010 Accounting Policies continued Basis of preparation (continued) The Group’s activities are financed principally by a combination of ordinary shares, preference shares, bank borrowings and cash in hand. During the year the Group generated cash of £102.5 million arising from a combination of trading activities and a share placing on 6 August 2009, which raised £43.658 million (net of issue costs). The Group has operated within all of its banking covenants throughout the year. At 31 July 2010 cash, net of borrowings (excluding preference shares), was £65.7 million. In addition, the Group had bank facilities of £305.0 million, expiring in tranches up to April 2015, with £225.0 million available for drawdown under such facilities at 31 July 2010. The directors consider that the Group is well placed to manage business and financial risks in the current economic environment and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Judgements made by the directors, in the application of these accounting policies and Adopted IFRSs, that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year, are discussed below. 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. 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. The Group and Company own 25%–50% of the ordinary share capital of several small entities and the results, assets and liabilities of these jointly controlled entities have been proportionately consolidated. 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 buildings – 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 100 years (2009 – 40 years). The Group has assessed the residual values as highly likely to exceed cost and has therefore determined that no depreciation should be charged (2009 – £nil). The increase in the assessment of the useful life of the investment properties from 40 years to 100 years accordingly has no effect on the financial statements. 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. Regular reviews are carried out to identify any impairment in the value of the land by comparing the total estimated selling prices less estimated selling expenses against the book cost of the land plus estimated costs to complete. Provision is made for any irrecoverable amounts. 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. 48 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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 retained earnings, except for impairment losses and changes in future cash flows, which are recognised directly in the income statement. When these investments are de-recognised, 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. A description of the valuation technique is given in note 14 on page 59. 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 are 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 16) 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. 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 to the extent that they contribute to construction costs and within deferred income to the extent that they contribute to site income. Grants 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 Group of providing the incentive. Sales incentives also include shared equity schemes which are accounted for as Other Financial Assets. Revenue is recognised at the initial fair value of the Other Financial Assets as described above. Rental income Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Bellway p.l.c. 49 Annual Report and Accounts 2010 Accounting Policies continued 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 recognised in cost of sales. 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. Taxation The charge for taxation is based on the result 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 scheme, the liability is calculated at 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 Comprehensive Income (“SOCI”). Further details of the scheme and the valuation methods applied may be found in note 25 on pages 66 to 69. Defined contribution pension costs are charged to the income statement in the period for which contributions are payable. 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. At the balance sheet date, if it is expected that non-market conditions will not be satisfied, the cumulative expense recognised in relation to the relevant options is reversed. 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 SOCI 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 IFRS 1 and have not been accounted for under IFRS 2, 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 Company-sponsored ESOP trust are included in both the Group financial statements and the Company’s own 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. 50 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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 has been credited to cost of sales in the current year. This amount was credited to finance income in the previous year. The amount relating to the year ended 31 July 2009 has not been restated as it is not considered to be significant. 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 both the years ended 31 July 2010 and 31 July 2009, 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 amended based on local management and the Board’s assessment of current market conditions. For the year ended 31 July 2010 no exceptional charge has resulted from the review. In the year ended 31 July 2009 a total exceptional charge of £66.3 million, made up of £58.9 million from site reviews, and £7.4 million from option cost and part-exchange property write downs, was charged to the income statement. Whilst management remain cautious, selling prices and volumes have stabilised, however the market remains fragile. Should there be further significant movements in selling prices, either further reductions or a stepped recovery, exceptional charges or credits may be necessary. 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. 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. Other financial assets The fair value of future anticipated cash receipts takes into account the directors’ view of future house price movements, the expected timing of receipts and the likelihood that a purchaser defaults on a repayment. The directors revisit the future anticipated cash receipts from the assets at the end of each reporting period as detailed in note 14 on page 59. Standards and interpretations in issue but not yet effective At the date of authorisation of these financial statements, the following relevant Standards and Interpretations, which have not been applied in these financial statements, were in issue and endorsed by the EU but not yet effective: p Annual Improvements 2009. This is a collection of amendments to 12 standards as part of the IASB programme of annual improvements. Most of the amendments are effective for the Group for the period beginning 1 August 2010. p IFRS 7 “Financial Instruments: Disclosure” (Amendment). The amendment provides clarification of the standard and requires additional disclosures in relation to financial instruments. This is effective for the period beginning on 1 August 2011. The Board anticipates that these amendments will be adopted in the Group’s financial statements in the year they become effective and that the adoption of these amendments will not have a significant 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. Bellway p.l.c. 51 Annual Report and Accounts 2010 Notes to the Accounts 1 Revenue/Segmental analysis For the purposes of determining its reportable segments, the Chief Operating Decision Maker (“CODM”) has been identified as the Board of Directors. The Board has reviewed the requirements of IFRS 8 “Operating Segments”, including consideration of the internal reporting it receives to assess performance and to make decisions on how resources are allocated. The Board regularly reviews the Group’s performance and balance sheet position for its entire operations, which are based in the UK, and receives financial information for the UK as a whole. As a consequence, having carefully considered the requirements of IFRS 8, the Board has concluded that the Group has one reportable segment, which is UK housebuilding. As there is only one reportable segment whose revenue, profits, expenses, assets, liabilities and cash flows are measured and reported to the CODM, on a basis consistent with the Group financial statements, no additional numerical disclosures are necessary. Additional information on average selling prices and the unit sales split between north, south, private and social has been included in the Group Finance Director’s Review on pages 18 to 21. The Board does not, however, consider these categories to be separate reportable segments as they review the entire operations as a whole, which are based in the UK, when assessing performance and making decisions about the allocation of resources. 2 Finance income and expenses Interest receivable on bank deposits Interest income from financial assets Other interest income Finance 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 25) Share-based payments (note 25) 2010 £000 1,306 – 975 2,281 2,154 4,456 413 181 1,899 9,103 2010 £000 51,463 5,240 1,720 1,372 2009 £000 1,438 1,594 1,862 4,894 11,857 5,663 906 386 1,900 20,712 2009 £000 48,028 5,069 816 1,318 The average number of persons employed by the Group during the year was 1,360 (2009 – 1,240) comprising 464 (2009 – 452) administrative and 896 (2009 – 788) production and others employed in housebuilding and associated trading activities. Pension costs for the current year are net of a settlement gain of £nil (2009 – £1.348 million). The executive directors and the Group Company Secretary are the only employees of the Company and the emoluments of the executive directors are disclosed in the Report of the Board on Directors’ Remuneration on pages 32 to 39. 59,795 55,231 52 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 3 Employee information (continued) Key management personnel remuneration, including directors, comprised: Salaries and fees Taxable benefits Annual bonus – cash Pension costs Share-based payments 2010 £000 2,533 167 1,318 46 901 4,965 2009 £000 2,192 122 335 12 1,040 3,701 Key management personnel, as disclosed under IAS 24 “Related party disclosures”, comprises the directors and other senior operational management. 4 Operating profit/(loss) Operating profit/(loss) is stated after charging/(crediting): Staff costs (note 3) (Profit)/loss 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 audit Other services 2010 £000 2009 £000 59,795 (184) 1,659 6,520 1,300 55,231 4 2,190 4,648 1,271 29 29 183 46 5 – 180 84 5 66 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 was performed at 31 July 2010, and the carrying value of land was compared to the 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 were reviewed on a site by site basis and selling prices were amended based on local management and the Board’s assessment of current market conditions. No further exceptional land write downs or land write backs were required as a result of this review. The exceptional charge of £66.312 million for the year ended 31 July 2009 comprised write downs to net realisable value arising from site reviews (£58.881 million), option costs and related fees (£6.338 million), and part-exchange properties (£1.093 million). Bellway p.l.c. 53 Annual Report and Accounts 2010 Notes to the Accounts continued 6 Income tax expense/(credit) Current tax expense/(credit): UK corporation tax Adjustments in respect of prior years Deferred tax expense/(credit): Origination and reversal of temporary differences Reduction in tax rate Adjustments in respect of prior years Total income tax expense/(credit) in income statement Reconciliation of effective tax rate: Profit/(loss) before tax Tax calculated at UK corporation tax rate Non-deductible expenses Effect of hybrid rate of tax Reduction in tax rate Adjustments in respect of prior years – current tax – deferred tax Effective tax rate and tax expense/(credit) for the year 2010 £000 2009 £000 6,693 (1,488) 5,205 6,768 125 (3,478) 3,415 8,620 (6,927) (2,611) (9,538) (2,317) – 2,748 431 (9,107) 2010 % 2010 £000 2009 % 2009 £000 44,433 12,441 1,020 – 125 (1,488) (3,478) 8,620 28.0 2.3 – 0.3 (3.4) (7.8) 19.4 (36,551) (10,234) 1,305 (315) – (2,611) 2,748 (9,107) 28.0 (3.6) 0.9 – 7.1 (7.5) 24.9 The deferred tax assets and liabilities held by the Group at the start of the year that are expected to be realised after 31 March 2011 have been revalued at a tax rate of 27%, being the corporation tax rate that was substantively enacted at the balance sheet date, with effect from 1 April 2011. The effective income tax charge is 19.4% of profit before tax (2009 – 24.9% tax credit of loss before tax) and compares favourably to the Group’s standard tax rate for the year of 28.0% (2009 – 28.0%). The lower effective tax rate in the current year is principally due to enhanced claims for qualifying expenditure on remediated land, relating to current and prior periods, which have reduced the overall tax charge by £5.3 million in the year. The UK corporation tax rate changed from 30% to 28% with effect from 1 April 2008. The hybrid tax rate continued to affect the tax credit for the year ended 31 July 2009 with respect to losses carried back from that period. The adjustment in respect of the prior years’ current and deferred tax has been applied to the pre-exceptional charge in the income statement for the year ended 31 July 2009. Deferred tax recognised directly in equity: Credit/(charge) relating to equity-settled transactions Charge relating to actuarial movement on the defined benefit pension scheme 2010 £000 197 (582) 2009 £000 (13) (99) 54 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 7 Dividends on equity shares Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 July 2009 of 6.0p per share (2008 – 6.0p) Interim dividend for the year ended 31 July 2010 of 3.3p per share (2009 – 3.0p) Dividends forfeited 2010 £000 7,238 3,987 (4) 2009 £000 6,897 3,450 – 11,221 10,347 Proposed final dividend for the year ended 31 July 2010 of 6.7p per share (2009 – 6.0p) 8,096 7,245 The 2010 proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 7 January 2011 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: Pre-exceptional item (1) Earnings 2010 £000 Weighted average number of ordinary shares 2010 no. Earnings per share 2010 Earnings/(loss) 2009 p £000 Weighted average number of ordinary shares 2009 no. For basic earnings per ordinary share 35,813 120,619,800 Dilutive effect of options and awards 549,620 For diluted earnings per ordinary share 35,813 121,169,420 Post-exceptional item For basic earnings per ordinary share 35,813 120,619,800 Dilutive effect of options and awards (2) 549,620 For diluted earnings per ordinary share 35,813 121,169,420 29.7 (0.1) 29.6 29.7 (0.1) 29.6 Earnings/(loss) per share 2009 p 17.7 (0.1) 17.6 20,301 114,949,883 339,658 20,301 115,289,541 (27,444) 114,949,883 (23.9) – – (27,444) 114,949,883 (23.9) (1) Exceptional charge of £nil (2009 – £66.3 million) in the current year (note 5) less associated tax credit of £nil (2009 – £18.6 million). (2) In accordance with IAS 33 potential ordinary shares are only treated as dilutive when their conversion to ordinary shares would increase the loss per share. Bellway p.l.c. 55 Annual Report and Accounts 2010 Notes to the Accounts continued 9 Property, plant and equipment Group Cost At 1 August 2008 Additions Disposals Reclassification At 1 August 2009 Additions Disposals At 31 July 2010 Depreciation At 1 August 2008 Charge for year On disposals At 1 August 2009 Charge for year On disposals At 31 July 2010 Net book value At 31 July 2010 At 31 July 2009 At 31 July 2008 Land and property £000 Plant fixtures and fittings £000 Total £000 6,801 – (79) (570) 6,152 101 (8) 18,216 139 (3,166) – 15,189 1,662 (2,225) 25,017 139 (3,245) (570) 21,341 1,763 (2,233) 6,245 14,626 20,871 817 140 – 957 140 – 12,641 2,050 (2,557) 12,134 1,519 (2,095) 13,458 2,190 (2,557) 13,091 1,659 (2,095) 1,097 11,558 12,655 5,148 5,195 5,984 3,068 3,055 5,575 8,216 8,250 11,559 Land and property with a book cost of £0.570 million was reclassified from property, plant and equipment to inventories in the previous year. 10 Investment property Group Cost At 1 August 2008 Additions Disposals At 1 August 2009 Additions Disposals At 31 July 2010 56 Bellway p.l.c. Annual Report and Accounts 2010 Total £000 4,092 3,383 (98) 7,377 657 (318) 7,716 Business Review Governance Accounts Other Information 10 Investment property (continued) 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 internal valuation of investment properties was carried out at the end of the financial year. The fair value of investment properties was assessed at £8.238 million (2009 – £7.983 million). As noted above, the Group 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 (2009 – 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. 11 Investments in subsidiaries and proportionately consolidated jointly controlled entities The Group and Company have the following investments in subsidiaries and proportionately consolidated jointly controlled entities: Subsidiaries Company Cost At 1 August 2009 Additions At 31 July 2010 Shares in subsidiary undertakings £000 26,788 1,372 28,160 Principal subsidiary undertakings A summary of the principal subsidiary undertakings is given in note 27 on page 72. Jointly controlled entities Name Barking Riverside Limited Country of incorporation Great Britain Percentage of shares owned directly by Bellway p.l.c. 51% The Group and Company also own 25%–50% of the ordinary share capital of several smaller proportionately consolidated jointly controlled entities. All of these entities are incorporated in Great Britain and registered in England and Wales. Aggregated amounts relating to share of proportionately consolidated jointly controlled entities not adjusted for transactions with Group companies. Non-current assets Current assets Non-current liabilities Current liabilities Net liabilities Income Expenses Guarantees relating to the overdrafts of jointly controlled entities have been given by the Company (note 23). 2010 £000 293 30,682 (5,644) (35,297) (9,966) 1,090 (7,173) 2009 £000 565 27,816 (471) (31,793) (3,883) 1,111 (3,845) Bellway p.l.c. 57 Annual Report and Accounts 2010 Notes to the Accounts continued 12 Deferred taxation The following are the deferred tax assets/(liabilities) recognised by the Group and the movements thereon during the current and prior year: Group At 1 August 2008 Income statement credit/(charge) Charge to statement of comprehensive income Charge to equity At 31 July 2009 Income statement charge Charge to statement of comprehensive income Credit to equity At 31 July 2010 Capital allowances £000 487 192 – – 679 (156) – – Retirement benefit obligations £000 3,558 (120) (99) – 3,339 (399) (582) – 523 2,358 Share-based payments Land payables Losses £000 – £000 3,205 (3,205) 2,104 – – – – – – – – – 2,104 (2,104) – – – £000 429 337 – (13) 753 (137) – 197 813 The following is an analysis of the deferred tax balances for financial reporting purposes: Capital allowances Retirement benefit obligations Share-based payments Losses Other temporary differences Deferred tax assets Other temporary differences Deferred tax liabilities Net deferred tax asset at 31 July There are no deferred tax balances in respect of the Company. 13 Inventories Group Land Work in progress Showhomes Part-exchange properties Inventories of £659.5 million were expensed in the year (2009 – £643.9 million). In the ordinary course of business inventories have been written down by a net £4.4 million (2009 – £5.7 million) in the year. There has been no exceptional write down of inventories in the period (2009 – £66.3 million) as outlined in note 5 on page 53. Land with a carrying value of £26.6 million (2009 – £63.6 million) was used as security for land payables (note 17). The Company has no inventory. 58 Bellway p.l.c. Annual Report and Accounts 2010 Other temporary differences £000 192 261 – – 453 (619) – – Total £000 7,871 (431) (99) (13) 7,328 (3,415) (582) 197 (166) 3,528 2010 £000 523 2,358 813 – – 3,694 (166) (166) 2009 £000 679 3,339 753 2,104 453 7,328 – – 3,528 7,328 2010 £000 2009 £000 724,991 370,911 37,819 14,992 774,677 386,570 42,106 7,998 1,148,713 1,211,351 Business Review Governance Accounts Other Information 14 Other financial assets Group At 1 August Additions Redemptions Imputed interest At 31 July 2010 £000 2009 £000 20,826 10,451 (637) 2,024 5,607 13,842 (217) 1,594 32,664 20,826 Other financial assets carried at fair value are categorised as level 3 within the hierarchical classification of IFRS 7 Revised (as defined within the standard). Other financial assets comprise loans, largely with non fixed repayment dates and variable repayment amounts, provided as part of sales transactions that are secured by way of a second legal charge on the related property. The assets are recorded at fair value, being the estimated amount receivable by the Group, discounted to present day values. The fair value of future anticipated cash receipts takes into account the directors’ view of future house price movements, the expected timing of receipts and the likelihood that a purchaser defaults on a repayment. The directors revisit the future anticipated cash receipts from the assets at the end of each reporting period. The difference between the anticipated future receipt and the initial fair value is credited over the estimated deferred term to cost of sales (finance income in the previous period – see accounting policies), with the financial asset increasing to its full expected cash settlement value on the anticipated receipt date. Credit risk, which the directors currently consider to be largely mitigated through holding a second legal charge over the assets, is accounted for in determining present values. The directors review the financial assets for impairment at the end of each reporting period. There were no indicators of impairment at 31 July 2010 (2009 – nil). None of the other financial assets are past their due dates (2009 – nil). At initial recognition, the fair value of the assets is calculated using a discount rate, appropriate to the class of assets, which reflects market conditions at the date of entering into the transaction. The directors consider at the end of each reporting period whether the initial market discount rate still reflects up to date market conditions. If a revision is required, the fair value of the asset is re-measured at the present value of the revised future cash flows using this revised discount rate; the difference between this value and the carrying value of the asset is recorded against the carrying value of the asset and recognised directly in the Statement of Comprehensive Income. The directors considered that there was no material difference between the carrying value and the fair value of the assets at 31 July 2010 or 31 July 2009 and accordingly have not recognised any movements directly within the Statement of Comprehensive Income to date. The Company has no other financial assets. 15 Trade and other receivables Current receivables Trade receivables Other receivables Amounts owed by Group undertakings Prepayments and accrued income Group 2010 £000 13,000 28,838 – 3,963 45,801 Group 2009 £000 11,032 27,166 Company 2010 £000 Company 2009 £000 – – – – – 683,173 703,617 3,551 41,749 – – 683,173 703,617 The Group assesses the ageing 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 (2009 – nil). Other receivables due within one year include £8.733 million (2009 – £4.096 million) in relation to VAT recoverable. Bellway p.l.c. 59 Annual Report and Accounts 2010 Notes to the Accounts continued 16 Interest-bearing loans and borrowings Non-current liabilities Bank loans Preference shares (see note below) Preference shares Authorised, allotted, called up and fully paid Number Group 2010 £000 80,000 20,000 Group 2009 £000 80,000 20,000 100,000 100,000 Company 2010 £000 – 20,000 20,000 Company 2009 £000 – 20,000 20,000 Group 2010 £000 Group 2009 £000 Company 2010 £000 Company 2009 £000 20,000,000 at 1 August 2009 and 31 July 2010 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. 17 Trade and other payables Non-current liabilities Land payables Other payables Accrued expenses and deferred income Group 2010 £000 16,884 2,834 581 20,299 Group 2009 £000 26,379 – 475 26,854 Company 2010 £000 Company 2009 £000 – – – – – – – – Land payables of £3.972 million (2009 – £6.246 million) are secured on the land to which they relate. The carrying value of the land used for security is £3.378 million (2009 – £6.246 million). Current liabilities Trade payables Land payables Social security and other taxes Other payables Accrued expenses and deferred income Payments on account Group 2010 £000 67,973 44,969 2,246 18,830 42,901 48,733 Group 2009 £000 52,610 83,588 1,712 15,454 49,713 43,070 225,652 246,147 Company 2010 £000 Company 2009 £000 – – – 243 601 – 844 – – – 257 601 – 858 Land payables of £24.321 million (2009 – £50.473 million) are secured on the land to which they relate. The carrying value of the land used for security is £23.257 million (2009 – £57.354 million) 60 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 18 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 cash and 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) (the “Trust”) also purchase shares for the future satisfaction of employee share options. On 6 August 2009 the Group announced the successful placing of 5,747,648 new ordinary shares of 12.5p each representing approximately 5.0% of the Group’s issued ordinary share capital prior to the Placing (note 19). 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 15). In managing risk the Group assesses the credit risk of its counterparties 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 (see note 17). No other security is held against any other financial assets 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 existing 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 the Bank of England base rate. For the year ended 31 July 2010 it is estimated that an increase of 1% in interest rates applying for the full year would increase the Group’s profit before tax by £0.4 million (2009 – decrease the Group’s profit before tax by £1.8 million). Housing market risk The Group is affected by movements in UK house prices. These in turn are affected by factors such as credit availability, employment levels, interest rates, consumer confidence and supply of land with planning. Whilst it is not possible for the Group to fully mitigate housing market risk on a national macroeconomic basis the Group does continually monitor its geographical spread within the UK, seeking to balance investment in areas offering the best immediate returns with a long-term spread of its operations throughout the UK to minimise the effect of local microeconomic fluctuations. Bellway p.l.c. 61 Annual Report and Accounts 2010 Notes to the Accounts continued 18 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 2010 At 31 July 2009 Balance at 31 July £000 Total contracted cash payment £000 Within one year or on demand £000 61,853 109,967 65,818 113,474 45,790 85,341 1–2 years £000 7,874 21,230 2–5 years £000 7,064 6,752 More than 5 years £000 5,090 151 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: Bank loans – floating rates Preference shares Trade and other payables At 31 July 2010 Bank loans – floating rates Preference shares Trade and other payables At 31 July 2009 Balance at 31 July £000 Total contracted cash payment £000 Within one year or on demand £000 80,000 20,000 91,883 83,480 27,600 91,883 191,883 202,963 80,000 20,000 69,776 84,521 29,500 69,776 169,776 183,797 1,030 1,900 89,049 91,979 1,030 1,900 69,776 72,706 1–2 years £000 15,990 1,900 – 2–5 years £000 66,460 23,800 – 17,890 90,260 1,030 1,900 – 2,930 62,262 25,700 – More than 5 years £000 – – 2,834 2,834 20,199 – – 87,962 20,199 The interest rates on the preference shares apply to the whole term of the relevant instruments. The imputed interest rate on land payables reflects market interest rates available to the Group on floating rate bank loans at the time of acquiring the land. At the year end, the Group had £225.0 million (2009 – £290.0 million) of undrawn bank facilities available. The Company’s only financial liabilities 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 ended 31 July 2010 and 31 July 2009 for both the Group and the Company are shown in note 22. At 31 July 2010 the average interest rate earned on the temporary closing cash balance was 1.32% (2009 – 0.22%). The carrying amount of these assets approximates their fair value. 62 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 18 Financial risk management (continued) Fair values Financial assets The carrying values of financial assets is not materially different to their fair values. Financial liabilities A comparison of the book values and fair values of the Group’s fixed rate preference shares and floating rate bank loans at 31 July is as follows: Preference shares – fixed rate Bank loans – floating rate 2010 £000 Book value 20,000 80,000 2010 £000 Fair value 21,800 75,275 2009 £000 Book value 20,000 80,000 2009 £000 Fair value 21,500 70,983 The fair value of the fixed rate preference shares is based on quoted mid-market prices 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. Financial assets and liabilities by category Other financial assets Loans and receivables Cash and cash equivalents Financial liabilities at amortised cost 19 Issued capital Group and Company Authorised Ordinary shares of 12.5p each Allotted, called up and fully paid equity At 1 August 2009 Issued on exercise of options Issued for cash in respect of share placing At 31 July 2010 Company 2010 £000 Company 2009 £000 Group 2010 £000 32,664 41,838 145,689 Group 2009 £000 20,826 48,045 43,210 – – 48,856 (257,159) (280,218) (20,243) (36,968) (168,137) 28,613 – – 4,953 (20,257) (15,304) 2010 Number 000 2010 £000 2009 Number 000 2009 £000 146,000 18,250 146,000 18,250 115,006 14,375 114,951 14,372 78 5,748 10 718 55 – 3 – 120,832 15,103 115,006 14,375 On 6 August 2009 the Group announced the successful placing of 5,747,648 new ordinary shares of 12.5p each (the “Placing Shares”) at a price of 779p per Placing Share, raising gross proceeds of £44.774 million (£43.658 million net of issue costs). The Placing Shares issued represent approximately 5.0% of the Company’s issued ordinary share capital prior to the Placing. The Placing Shares are credited as fully paid and rank equally in all respects with the existing ordinary shares, including the right to receive all dividends and other distributions declared, made or paid in respect of such shares after the date of the issue of the Placing Shares. Bellway p.l.c. 63 Annual Report and Accounts 2010 Notes to the Accounts continued 19 Issued capital (continued) Share options At 31 July 2010 all outstanding options to purchase ordinary shares in Bellway p.l.c., in accordance with the terms of the applicable schemes, were as follows: Grant date Number of shares Exercise price (p) Dates from which exercisable Expiry date (a) Bellway p.l.c. (1995) Employee Share Option Scheme 25 April 2001 18 April 2002 13 May 2003 10 May 2004 3,500 7,600 20,743 2,500 409.30 474.00 524.00 712.50 25 April 2004 18 April 2005 13 May 2006 10 May 2007 17 November 2004 120,650 716.00 17 November 2007 (b) Bellway p.l.c. (1996) Employee Share Option Scheme 154,993 25 April 2001 18 April 2002 13 May 2003 23 October 2003 10 May 2004 17 November 2004 31 October 2005 16 May 2006 500 3,700 6,650 6,500 3,500 409.30 474.00 524.00 621.50 712.50 25 April 2004 18 April 2005 13 May 2006 24 October 2006 10 May 2007 93,550 716.00 17 November 2007 274,150 844.00 31 October 2008 750 1122.00 16 May 2009 389,300 (c) Bellway p.l.c. (2005) Employee Share Option Scheme 31 October 2005 7 February 2007 84,650 844.00 31 October 2008 10,700 1470.00 7 February 2010 95,350 to to to to to to to to to to to to to to to 24 April 2011 17 April 2012 12 May 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 30 October 2015 6 February 2017 (d) Bellway p.l.c. (2007) Employee Share Option Scheme 7 February 2007 26,300 1470.00 7 February 2010 to 6 February 2017 (f) Bellway p.l.c. (2003) Savings Related Share Option Scheme 26,300 19 November 2004 15 November 2005 14 November 2006 14 November 2006 13 November 2007 13 November 2007 13 November 2008 13 November 2008 11 November 2009 11 November 2009 Total 537.60 676.00 1092.00 1092.00 847.20 847.20 336.00 336.00 661.60 661.60 491 15,898 8,201 3,410 11,305 3,722 601,844 265,294 81,228 24,816 1,016,209 1,682,152 1 February 2010 to 1 February 2011 1 February 2010 1 February 2012 1 February 2011 1 February 2013 1 February 2012 1 February 2014 1 February 2013 1 February 2015 to to to to to to to to to 31 July 2010 31 July 2011 31 July 2010 31 July 2012 31 July 2011 31 July 2013 31 July 2012 31 July 2014 31 July 2013 31 July 2015 Details of directors’ share options are contained within the Report of the Board on Directors’ Remuneration on pages 32 to 39. 64 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 20 Reserves Own shares held The Group and Company holds shares within the Bellway Employee Share Trust (1992) (the “Trust”) for participants of certain share-based payment schemes as outlined in note 25. During the period the Trust made a market purchase of 248,955 shares at an average price of 714p and transferred 148,955 shares to employees. The number of shares held within the Trust, and on which dividends have been waived, at 31 July 2010 was 100,000 (2009 – nil). These shares are held within the financial statements at a cost of £0.601 million (2009 – £nil). The market value of these shares at 31 July 2010 was £0.580 million (2009 – £nil). The Board considers that the Company has de-facto control over the Trust. Included within the Company’s purchase of own shares in the period of £7.5 million, an amount of £5.7 million relates to the cumulative cost of transactions within the Trust at 31 July 2009, with the balance of £1.8 million relating to transactions within the period. Income statement As permitted by section 408 of the Companies Act 2006, the Company’s income statement has not been included in these financial statements. The Company’s loss for the financial year was £1.913 million (2009 – £1.873 million). 21 Reconciliation of net cash flow to net cash/(debt) Group Increase/(decrease) in net cash and cash equivalents Decrease in bank loans Decrease in net debt from cash flows Net debt at 1 August Net cash/(debt) at 31 July Company Increase/(decrease) in net cash and cash equivalents Net debt at 1 August Net cash/(debt) at 31 July 22 Analysis of net (debt)/cash Group Cash and cash equivalents Bank loans Preference shares redeemable after more than one year Net (debt)/cash Company Cash and cash equivalents Preference shares redeemable after more than one year Net (debt)/cash 2010 £000 2009 £000 102,479 (66,103) – 102,479 (56,790) 45,689 2010 £000 43,903 (15,047) 28,856 Cash flows £000 102,479 – – 102,479 Cash flows £000 43,903 247,000 180,897 (237,687) (56,790) 2009 £000 (186) (14,861) (15,047) At 31 July 2010 £000 145,689 (80,000) (20,000) 45,689 At 31 July 2010 £000 48,856 – (20,000) 43,903 28,856 At 1 August 2009 £000 43,210 (80,000) (20,000) (56,790) At 1 August 2009 £000 4,953 (20,000) (15,047) Bellway p.l.c. 65 Annual Report and Accounts 2010 Notes to the Accounts continued 23 Contingent liabilities 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 2010 there were bank overdrafts of £nil (2009 – £nil) and loans of £80.0 million (2009 – £80.0 million). The Company has given performance and other trade guarantees on behalf of subsidiary undertakings. The Company has guaranteed the overdrafts of associated undertakings up to a maximum of £7.5 million (2009 – £7.5 million). 24 Commitments Group Capital commitments Contracted not provided Authorised not contracted 2010 £000 187 65 2009 £000 – – Operating leases At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which expire as follows: Expiring within one year Expiring within the second to fifth years Expiring in more than five years 2010 £000 79 3,157 1,590 4,826 2009 £000 88 3,218 2,510 5,816 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 (2009 – £nil). 25 Employee benefits Retirement benefit obligations The Group sponsors the Bellway p.l.c. 1972 Pension and Life Assurance Scheme (the “Scheme”) which has a funded defined benefit arrangement which is closed to new members and to future service accrual. The last full actuarial valuation of the Scheme was carried out by a qualified independent actuary as at 1 August 2008 and updated on an approximate basis to 31 July 2010. The Group also sponsors the Bellway plc 2008 Group Self Invested Personal Pension Plan (“GSIPP”) which is a defined contribution contract-based arrangement. Contributions of £1.763 million (2009 – £1.393 million) were charged to the income statement for the defined contribution section of the Scheme. With regard to the Scheme, the regular contributions made by the employer over the financial year were £nil (2009 – £0.179 million). The employer also paid special contributions amounting to £1.668 million (2009 – £0.581 million). Expenses were paid in addition. It is the policy of the Group to recognise all actuarial gains and losses in the year in which they occur outside the income statement and in the statement of comprehensive income. 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 of defined benefit obligation Fair value of Scheme assets Deficit in Scheme 2010 £000 (41,896) 33,160 (8,736) 2009 £000 (39,870) 27,945 (11,925) As all actuarial gains and assets are recognised, the deficits shown above are those recognised in the balance sheet. 66 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 25 Employee benefits (continued) Best estimate of contributions to be paid to the Scheme for the year ended 31 July 2011 This best estimate of contributions to be paid to the Scheme for the year ending 31 July 2011 is £nil (2010 – £1.668 million). 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 scheme participants Actuarial loss/(gain) Benefit paid, death in service insurance premiums and expenses Settlement Past service cost Defined benefit obligation at end of year 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 gains/(losses) 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 expense recognised in the income statement: Current service (income)/cost Interest on liabilities Expected return on assets Settlement Past service cost Total expense 2010 £000 39,870 (43) 2,277 – 987 (1,195) – – 41,896 2010 £000 27,945 1,864 2,878 1,668 – (1,195) – 33,160 2010 £000 (43) 2,277 (1,864) – – 370 2009 £000 47,472 199 2,822 16 (4,350) (1,711) (5,150) 572 39,870 2009 £000 34,763 1,916 (3,997) 760 16 (1,711) (3,802) 27,945 2009 £000 199 2,822 (1,916) (1,348) 572 329 Of the total expense, income of £0.043 million (2009 – £0.577 million) is recognised within administrative expenses and an expense of £0.413 million (2009 – £0.906 million) is recognised within finance expenses. Bellway p.l.c. 67 Annual Report and Accounts 2010 Notes to the Accounts continued 25 Employee benefits (continued) Gains/(losses) recognised in the statement of comprehensive income: Difference between expected and actual return on Scheme assets Experience gains and losses arising on the Scheme liabilities Effects of changes in the demographic and financial assumptions underlying the present value of the Scheme liabilities Total gain recognised in statement of comprehensive income 2010 £000 2009 £000 2010 % 2009 % 2,878 (3,997) 9 (14) of Scheme assets 813 5,351 (2) (13) of the present value of Scheme liabilities (1,800) (1,001) 4 3 of the present value of Scheme liabilities 1,891 353 (5) (1) of the present value of Scheme liabilities The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since adoption of IAS 19 is a loss of £14.081 million. Assets The fair value of Scheme assets is: Equities Bonds Cash Total 2010 £000 21,578 11,075 507 33,160 2009 £000 15,206 11,715 1,024 27,945 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 Period commencing 1 August 2009 % per annum Period commencing 1 August 2008 % per annum 7.50 5.65 4.50 6.61 6.30 4.80 5.00 5.60 Actual return on Scheme assets The actual return on the Scheme assets over the year ended 31 July 2010 was 16.97% (31 July 2009 – reduction of 4.70%). 68 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 25 Employee benefits (continued) 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 2010 % per annum 2009 % per annum 3.45 4.45 5.35 – 3.45 3.45 – 3.70 4.70 5.80 – 3.70 3.70 – The mortality assumptions adopted at 31 July 2010 are based on the PA00 tables using the long cohort improvements and allow for future improvement in mortality. The tables used imply the following life expectancies at age 65: Male retiring at age 65 in 2010 Female retiring at age 65 in 2010 Male retiring at age 65 in 2030 Female retiring at age 65 in 2030 23.1 years 25.6 years 25.1 years 27.5 years Amounts for the current and previous four 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 plan liabilities 2010 £000 33,160 (41,896) (8,736) 813 2,878 2009 £000 27,945 (39,870) (11,925) 5,351 (3,997) 2008 £000 34,763 (47,472) (12,709) (1,001) (6,248) 2007 £000 49,545 (51,531) (1,986) (967) 1,262 2006 £000 41,622 (53,338) (11,716) (543) 1,435 (1,800) (1,001) (7,102) 4,973 (3,095) Bellway p.l.c. 69 Annual Report and Accounts 2010 Notes to the Accounts continued 25 Employee benefits (continued) Share-based payments The Group operates a long-term incentive plan (“LTIP”), an annual bonus scheme, employee share option 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 have been made to executive directors and the company secretary, with awards under the annual bonus scheme also made to senior employees. The awards take the form of ordinary shares in the Company. 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. 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 pages 34 and 38 within the Report of the Board on Directors’ Remuneration. For awards made prior to 16 January 2008, vesting of awards under the LTIP is dependent upon total shareholder return of the Group measured against relevant comparator companies as detailed on page 38 within the Report of the Board on Directors’ Remuneration. For awards made on 16 January 2008, vesting of awards is dependent upon two conditions, total shareholder return and return on capital employed. For awards made on 4 November 2008 and 29 October 2009, vesting of awards is dependent only on total shareholder return as detailed on page 38 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 was payable in November each year following the announcement of the Group’s annual results. The other half was 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. Share-based payments 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. The number and weighted average exercise price of share-based payments is as follows: LTIP and annual bonus Outstanding at the beginning of the year Granted during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year 2010 Number of options 571,747 197,335 2009 Number of options 531,131 240,799 (148,495) (200,183) 620,587 571,747 3,000 1,000 The options outstanding at 31 July 2010 have a weighted average contractual life of 1.3 years (2009 – 1.5 years). The weighted average share price at the date of exercise for share options exercised during the year was 765.5p (2009 – 515.4p). 70 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 25 Employee benefits (continued) 1995, 1996, 2005 and 2007 ESOS, and SRSOS Outstanding at the beginning of the year Granted during the year Lapsed 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 2010 Number of options 2009 Number of options 1,815,198 1,474,148 111,531 970,830 (83,383) – (83,400) (575,210) (77,794) (54,570) 1,682,152 1,815,198 676,312 756,143 The options outstanding at 31 July 2010 have an exercise price in the range of 336.0p to 1,470.0p (2009 – 336.0p to 1,470.0p) and have a weighted average contractual life of 3.5 years (2009 – 3.4 years). The weighted average share price at the date of exercise for share options exercised during the year was 681.3p (2009 – 677.4p). 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 fair value of services received in return for share options granted are measured by reference to the fair value of the share options granted. The inputs into the models for the various grants in the current and previous year were as follows: Scheme description 3 year SRSOS 5 year SRSOS LTIP 3 year SRSOS 5 year SRSOS November 2009 November 2009 October 2009 November 2008 November 2008 November 2008 LTIP Grant date 11 Nov 2009 11 Nov 2009 29 Oct 2009 13 Nov 2008 13 Nov 2008 4 Nov 2008 Risk free interest rate Exercise price Share price at date of grant Expected dividend yield Expected life Vesting date Expected volatility Fair value of option 2.1% 661.6p 750.5p 3.00% 2.9% 661.6p 750.5p 3.00% 3 years 2 months 5 years 2 months 0% – 715p 3.00% 3 years 2.90% 336.0p 515p 4.50% 3.50% 336.0p 515p 4.50% 3 years 2 months 5 years 2 months 0% – 576p 4.00% 3 years 1 Feb 2013 1 Feb 2015 29 Oct 2012 1 Feb 2012 1 Feb 2014 4 Nov 2011 55% 284p 45% 279p 55% 360p 50% 212p 40% 195p 50% 395.0p 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 £1.372 million (2009 – £1.318 million) in relation to equity-settled share-based payment transactions. Bellway p.l.c. 71 Annual Report and Accounts 2010 Notes to the Accounts continued 26 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 jointly controlled entities: Invoiced to jointly controlled entities in respect of accounting, management fees, interest on loans, land purchases and infrastructure works Invoiced from jointly controlled entities in respect of fees, land purchases and infrastructure works Amounts owed to jointly controlled entities in respect of land purchases and management fees at the year end 2010 £000 850 (929) (440) 2009 £000 1,525 (1,555) – Amounts owed by jointly controlled entities in respect of accounting, management fees, interest, land purchases and infrastructure works 34,703 31,577 Company During the year the Company entered into the following related party transactions with its subsidiaries and jointly controlled entities: Amounts received in the year from subsidiaries in respect of dividends and shares issued Amounts paid in the year by subsidiaries on behalf of the Company in respect of dividends and finance expenses Amounts owed by subsidiaries in respect of dividends and shares issued net of amounts paid on behalf of the Company 2010 £000 435 2009 £000 276 (13,380) (12,236) 683,173 703,617 27 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. 72 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 2006 £m 2007 £m 2008 £m 2009 £m 2010 £m 1,240.2 239.3 – (18.4) (0.2) 220.7 (65.0) 1,354.0 253.0 – (17.9) (0.3) 234.8 (68.1) 31.4 1,462.8 (194.7) (396.0) 28.1 1,608.5 (126.9) (473.9) 1,149.5 185.1* (130.9) (19.1) (0.3) 34.8 (7.8) 27.0 29.3 1,667.7 (359.0) (336.9) 683.8 45.6* (66.3) (15.8) – (36.5) 9.1 768.3 51.3 – (6.9) – 44.4 (8.6) (27.4) 35.8 43.8 1,306.2 52.3 1,340.2 (138.8) (246.2) (129.2) (228.5) 903.5 1,035.8 1,001.1 965.0 1,034.8 Five Year Record Income statement Revenue Operating profit Exceptional items Net finance expenses Share of losses of associates Profit/(loss) before taxation Income tax (expense)/credit Balance sheet ASSETS Non-current assets Current assets LIABILITIES Non-current liabilities Current liabilities EQUITY Total equity Statistics Profit/(loss) for the year (all attributable to equity holders of the parent) 155.7 166.7 Dividend per ordinary share Basic earnings/(loss) per ordinary share Number of homes sold Average price of new homes Operating margin Net assets per ordinary share 34.5p 137.5p 7,117 43.125p 146.1p 7,638 £169.0k £173.3k 19.3% 793p 18.7% 903p Land portfolio – plots with planning permission 22,600 23,500 24.1p 23.6p 6,556 £169.9k 16.1%* 871p 22,500 9.0p (23.9)p 4,380 10.0p 29.7p 4,595 £154.0k £163.2k 6.7%* 839p 6.7% 856p 19,260 17,602 Weighted average no. of ordinary shares 113,248,814 114,108,350 114,615,661 114,949,883 120,619,800 No. of ordinary shares in issue at end of year 113,988,310 114,670,396 114,950,915 115,006,480 120,831,922 * Stated before exceptional items. Bellway p.l.c. 73 Annual Report and Accounts 2010 Shareholder Information Annual General Meeting (“AGM”) 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. Special business Four resolutions will be proposed as special business at the forthcoming AGM. The effect of these resolutions is as follows: Resolution 8 – Authority to directors to issue shares This is an ordinary resolution which authorises the directors to allot ordinary shares up to an aggregate nominal value of £5,034,700, which is equivalent to approximately one-third of the Company’s issued ordinary share capital as at 18 October 2010, and also gives the directors authority to allot, by way of rights issue only, ordinary shares up to an aggregate nominal value of £10,069,400, which is equivalent to approximately two-thirds of the Company’s issued ordinary share capital as at 18 October 2010, such authority, if granted, to expire at the conclusion of the AGM of the Company to be held in 2012. As at 18 October 2010 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. The directors wish to obtain the necessary authority from shareholders so that allotments can be made (if required and if suitable market conditions arise) at short notice and without the need to convene a general meeting of the Company which would be both costly and time consuming. Resolution 9 – Disapplication of pre-emption rights This is a special resolution and is the customary annual request, in substitution for the authority granted to the directors by shareholders on 15 January 2010 which expires at the conclusion of the forthcoming AGM, that shareholders empower the directors to allot ordinary shares for cash without first offering them pro rata to existing shareholders as would otherwise be required by section 561 of the Companies Act 2006 (a) in connection with a rights issue or other pre-emptive offer and (b) (otherwise than in connection with a rights issue or other pre-emptive offer) up to an aggregate nominal value of £755,205, being approximately equal to 5% of the issued ordinary share capital of the Company as at 18 October 2010. Resolution 10 – 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 at 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 2012 AGM. The directors will review opportunities to use this authority in 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. Resolution 11 – Length of notice of meeting Shareholder approval for general meetings of the Company other than AGMs to be held on 14 days’ notice, given at the last AGM, expires at the conclusion of the forthcoming AGM. The directors propose, as a special resolution, that it should be renewed for a further year to expire on the date of the 2012 AGM. Recommendation Your directors consider 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, they 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 total issued ordinary and preference share capital as at 31 July 2010 consisted of 120,831,922 ordinary shares of 12.5p each (representing 43% of the Company’s total issued share capital) and 20,000,000 9.5% Cumulative Redeemable Preference Shares 2014 of £1 each (representing 57% of the Company’s total issued share capital). Further details of the issued capital of the Company and brief details of the rights in relation to the preference shares can be found in note 16 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 (the “Articles”). Copies of the Articles can be obtained from Companies House or by writing to the Group Company Secretary at the Company’s registered office. Restrictions on the transfer of shares The restrictions on the transfer of shares are set out in the Articles. 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 in relation to the shares held in the employee benefit trust The voting rights on shares held in the employee benefit trust in relation to the Company’s employee share schemes are exercisable by the trustees. 74 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Restrictions on voting rights Details of the deadlines for exercising voting rights are set out in the Company’s Articles. The directors are not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights. Appointment and replacement of directors The Company’s rules about the appointment and replacement of directors are set out in the Articles and are summarised in the Directors’ Report on pages 26 and 28. Amendments to the Company’s Articles of Association The Company may amend its Articles 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 required to be exercised by the Company in general meetings. Subject to the provisions of the Articles, 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 77,794 new ordinary shares were issued to satisfy awards made under the Company’s employee share schemes and 5,747,648 new ordinary shares were issued by way of a placing with new and existing institutional shareholders. The directors have authority to allot shares within limits agreed by shareholders. Details of the renewal of this authority are set out on page 74, and Resolutions 8 and 9 in the Notice of Meeting of the AGM to be held on 7 January 2011 on page 77 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 of the renewal of this authority are set out on page 74, and Resolution 10 in the Notice of Meeting of the AGM to be held on 7 January 2011 on page 78 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 for loss of office following a change of control The service agreements between the Company and the executive directors and the Group 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 Preference share dividend payments at the rate of 9.5% per annum paid half yearly Annual report posted to shareholders Final ordinary dividend – ex-dividend date Final ordinary dividend – record date AGM Final ordinary dividend – payment date Shareholders by size of holding at 31 July 2010 March October July January April and October November 8 December 2010 10 December 2010 7 January 2011 12 January 2011 0 – 2,000 2,001 – 10,000 10,001 – 50,000 50,001 and over Total Holdings Shares Number 1,997 441 139 204 % 71.81 15.85 5.00 7.34 Holding 1,299,061 1,855,142 3,263,404 114,414,315 2,781 100.00 120,831,922 % 1.07 1.54 2.70 94.69 100.00 Bellway p.l.c. 75 Annual Report and Accounts 2010 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 0871 664 0300 – calls cost 10p per minute plus network extras. If calling from overseas please call +44 208 639 3399. Lines are open from 8.30 am to 5.30 pm on Monday to Friday (excluding Bank Holidays). Non-sterling bank account Capita Registrars can now convert your dividend into your local currency and send you the funds by currency draft, or they may be able to pay them straight into your overseas bank account. For further information on Capita’s International Payment Service e-mail Capita Registrars Limited at IPS@capitaregistrars.com or telephone +44 208 639 3405. Lines are open from 9.00 am to 5.30 pm London time on Monday to Friday (excluding Bank Holidays). 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 458 4577 for telephone dealing. Please note that the directors of the Company are not seeking to encourage shareholders to either buy or sell their 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 arrangement is currently available to shareholders. Should you intend to purchase a new Bellway home, you will be entitled to a discount of £2,000 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. Underlying beneficial shareholders would be entitled to benefit from the arrangements. 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 Social Responsibility Reporting Further reporting on the Company’s Corporate Social Responsibility activities is available to view in the Corporate Social Responsibility section of the Company’s website www.bellway.co.uk. 76 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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 7 January 2011 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 2010 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 2010 of 6.7p per ordinary 12.5p share, as recommended by the directors, be declared. 3. THAT Mr A M Leitch 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 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. 6. THAT the directors are authorised to agree the remuneration of the auditors of the Company. 7. THAT the Report of the Board on Directors’ Remuneration shown on pages 32 to 39 of the Annual Report and Accounts for the year ended 31 July 2010 be approved. Special business To consider and, if thought fit, pass the following resolution which will be proposed as an ordinary resolution: 8. THAT the directors be generally and unconditionally authorised pursuant to and in accordance with section 551 of the Companies Act 2006 (the “Act”) to exercise all the powers of the Company to: (a) allot shares in the Company and to grant rights to subscribe for, or to convert any security into, shares in the Company (“Rights”) up to a maximum nominal amount of £5,034,700; and (b) allot equity securities (within the meaning of section 560 of the Act) up to a maximum nominal amount of £10,069,400 (such amount to be reduced by the nominal amount of any shares issued or in respect of which Rights are granted under (a) above) in connection with an offer by way of a rights issue to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings and so that the directors may impose any limits or restrictions and make any arrangements which they consider necessary or appropriate to deal with fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter, provided that: (i) this authority shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2012, but may be previously revoked or varied by an ordinary resolution of the Company; and (ii) this authority shall permit and enable the Company to make offers or agreements before the expiry of this authority which would or might require shares to be allotted or Rights to be granted after such expiry and the directors shall be entitled to allot shares and grant Rights pursuant to any such offers or agreements as if this authority had not expired; and (iii) all unexercised authorities previously granted to the directors to allot shares and grant Rights be and are hereby revoked. To consider and, if thought fit, pass the following resolutions which will be proposed as special resolutions: 9. THAT, (a) subject to resolution 8 above being passed as an ordinary resolution, the directors be empowered pursuant to section 570 and section 573 of the Companies Act 2006 (“the Act”) to allot equity securities (within the meaning of section 560 of the Act) for cash pursuant to the authority so conferred or by way of sale of treasury shares in each case as if section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to: (i) the allotment of equity securities in connection with a pre-emptive offer (but in the case of the authority conferred under paragraph (b) of resolution 8 in connection with an offer by way of rights issue only); and (ii) the allotment to any person or persons (otherwise than pursuant to paragraph (i) above) of equity securities up to an aggregate nominal amount of £755,205; (b) the power given by this resolution shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2012 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; and (c) for the purposes of this resolution, “pre-emptive offer” means a rights issue, open offer or other 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). Bellway p.l.c. 77 Annual Report and Accounts 2010 Notice of Annual General Meeting continued 10. THAT the Company be generally and unconditionally authorised for the purposes of section 701 of the Companies Act 2006 (“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 693 of the Act) on the London Stock Exchange upon, and subject to the following conditions: (a) the maximum number of ordinary shares hereby authorised to be purchased is 12,083,281, being approximately 10 per cent of the ordinary shares in issue; (b) 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; (c) 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; (d) 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 the minimum price is £1 per share; and (e) 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. 11. THAT a general meeting of the Company, other than an annual general meeting of the Company, may be called on not less than 14 clear days’ notice. 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, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy need not be a member of the Company. (ii) A form of proxy is enclosed separately. Completion and return of the form of 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 (available via www.euroclear.com/ CREST). 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) 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 enjoy “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. (v) 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 at 5.30 pm on Wednesday 5 January 2011 (or, in the event of any adjournment, at 5.30 pm on the date which is two days prior to the adjourned meeting). Changes to the Register of Members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting or adjourned meeting. (vi) Pursuant to section 527 of the Companies Act 2006, where requested by either a member or members having a right to vote at the general meeting and holding at least 5% of total voting rights of the Company or at least 100 members having a right to vote at the meeting and holding, on average, at least £100 per member of paid up share capital, the Company must publish on its website a statement setting out any matter that such members propose to raise at the meeting relating to either the audit of the Company’s accounts that are to be laid before the meeting or the circumstances connected with an auditor ceasing to hold office since the last meeting at which accounts were laid. Where the Company is required to publish such a statement on its website, it may not require the members making the request to pay any expenses incurred by the Company in complying with the request. It must forward the statement to the Company’s auditors and the statement may be dealt with as part of the business of the meeting. (vii) Any member attending the meeting has the right to ask questions. The Company must cause to be answered any such questions relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation of the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. 78 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information (viii) Members have the right, under section 338 of the Companies Act 2006, to require the Company to give its members notice of a resolution which the shareholders wish to be moved at an annual general meeting of the Company. Additionally, members have the right under section 338A of the Companies Act 2006 to require the Company to include a matter (other than a proposed resolution) in the business to be dealt with at the annual general meeting. The Company is required to give such notice of a resolution or include such matter once it has received requests from members representing at least 5% of the total voting rights of all the members who have a right to vote at the annual general meeting or from at least 100 members with the same right to vote who hold shares in the Company on which there has been paid up an average sum per member of at least £100. This request must be received by the Company not later than six weeks before the annual general meeting or, if later, the time at which notice is given of the annual general meeting. In the case of a request relating to section 338A of the Companies Act 2006, the request must be accompanied by a statement setting out the grounds for the request. (ix) Except as provided above, members who wish to communicate with the Company in relation to the AGM should do so in writing either to the Group Company Secretary at the registered office address or to the Company’s registrar, Capita Registrars Limited, Northern House, Woodsome Park, Fenay Bridge, Huddersfield, West Yorkshire HD8 0LA. No other methods of communication will be accepted. In particular you may not use any electronic address provided either in this notice of meeting or in any related documents to communicate with the Company for any purposes other than those expressly stated. (x) There will be available for inspection during the AGM and for at least 15 minutes before it begins, the directors’ appointment letters and service contracts. (xi) A copy of this notice and the other information required by section 311A of the Companies Act 2006 can be found at www.bellway.co.uk. (xii) As at the date of this notice there are 120,832,805 ordinary shares in issue and the total voting rights of the Company are therefore 120,832,805. 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 18 October 2010 Bellway p.l.c. 79 Annual Report and Accounts 2010 Glossary Affordable Housing Social rented and intermediate housing provided to specified eligible households whose needs are not met by the market, at a cost low enough for them to afford, determined with regard to local incomes and local house prices. Average selling price Calculated by dividing the total price of homes sold by the number of homes sold. Brownfield sites Land which has been previously used for other purposes. Cancellation rate The rate at which customers withdraw from a house purchase after paying the reservation fee, but before contracts are exchanged, usually due to difficulties in obtaining mortgage finance. Reservation fees are refunded in line with the Consumer Code for Home Builders. Code for Sustainable Homes A national standard for sustainable design and construction of new homes. The Code measures the ‘whole home’ as a complete package, assessing its sustainability against nine categories: energy/CO2, water, materials, surface water run-off, waste, pollution, health and well-being, management and ecology. Level 3 applies to newly-constructed Affordable Housing subject to Homes and Community Agency (“HCA”) grant policy and all homes built on HCA land from 1 April 2008. Considerate Constructors Scheme A national initiative by the construction industry, where companies and sites voluntarily register and agree to be monitored against, a Code of Considerate Practice, with a view to promoting best practice beyond statutory requirements. Consumer Code for Home Builders A voluntary code governing customer service and satisfaction, created by the NHBC in conjunction with MD Insurance Service Limited. CSCS cards The CSCS card denotes achievement of a Construction Skills Certificate, demonstrating occupational competence in the construction industry. EcoHomes An environmental rating scheme for UK homes. HBF Home Builders Federation. Home Zones Residential streets in which the road space is shared between drivers of motor vehicles and other road users, with the wider needs of residents (including children) who walk and cycle, in mind. The aim is to change the way that streets are used and to improve the quality of life in residential streets by making them for people, not just for traffic. For more information see www.homezones.org.uk. Land bank A supply of plots for potential development. Lifetime Homes Are ordinary homes incorporating 16 Design Criteria which add to the comfort and convenience of the home and supports the changing needs of individuals and families at different stages of life. NHBC National House-Building Council. Pipeline Land bank awaiting planning permission. Planning consent/permission Usually granted by the local planning authority, this permission allows a plot of land to be built on, change its use or for an existing building to be redeveloped or altered. Consent is either “outline”, when detailed plans are still to be approved, or “detailed” when detailed plans have been approved. Registered Social Landlords (“RSLs”) Government-funded not-for-profit organisations that provide affordable housing, such as housing associations, trusts and cooperatives. Working alongside local authorities, they provide homes for people meeting the affordable homes criteria. As well as developing land and building homes, RSLs perform a landlord function by maintaining properties and collecting rent. 80 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Safemark Certificate NHBC’s Health & Safety Competence Assessment Scheme. Section 106 planning agreements These are legally-binding agreements or planning obligations entered into between a landowner and a local planning authority, under Section 106 of the Town and Country Planning Act 1990. These agreements are a way of delivering or addressing matters that are necessary to make a development acceptable in planning terms. They are increasingly used to support the provision of services and infrastructure, such as highways, recreational facilities, education, health and affordable housing. Secured by Design Focuses on crime prevention at the design, layout and construction stages of homes and commercial premises and promotes the use of security standards for a wide range of applications and products. For more information see www.securedbydesign.com. Social housing Housing that is let at low rents and on a secure basis to people in housing need. It is generally provided by councils and not-for-profit organisations such as housing associations. Sustainability Environmental sustainability has been defined as meeting the needs of the present without compromising the ability of future generations to meet their needs. Sustainable Urban Drainage Systems (“SUDS”) Designed to reduce the environmental effects of surface water run-off, which has been a problem with conventional drainage systems, particularly in new developments. SUDS replicate natural systems with minimal environmental effect, draining away dirty and surface water through collection, storage and cleaning. Transport node A point at which residents are able to access a public transport facility with ease. Waste Management Plan Plans setting out how all resources, products and by-products will be managed and waste controlled at all stages of a construction project. Site Waste Management Plans are a legal requirement for all sites with an estimated construction cost of over £300,000. Bellway p.l.c. 81 Annual Report and Accounts 2010 Notes 82 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information Bellway p.l.c. 83 Annual Report and Accounts 2010 Notes 84 Bellway p.l.c. Annual Report and Accounts 2010 Business Review Governance Accounts Other Information 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; Website: www.bellway.co.uk Bellway Homes Limited East Midlands No. 3 Romulus Court Meridian East Meridian Business Park Braunstone Town Leicester LE19 1YG Tel: (0116) 282 0400 Fax: (0116) 282 0401 Essex Bellway House 1 Rainsford Road Chelmsford Essex CM1 2PZ Tel: (01245) 259 989 Fax: (01245) 259 996 DX: 121935 Chelmsford 6 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 London Bellway House Bury Street, Ruislip Middlesex HA4 7SD Tel: (01895) 671 100 Fax: (01895) 671 111 North West Bellway House 2 Alderman Road Liverpool L24 9LR Tel: (0151) 486 2900 Fax: (0151) 336 9393 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 Scotland Bothwell House Hamilton Business Park Caird Street Hamilton ML3 0QA Tel: (01698) 477 440 Fax: (01698) 477 441 DX: HA13 Hamilton South East 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 Western Avenue Cardiff CF14 3AT Tel: (029) 2054 4700 Fax: (029) 2054 4701 Wessex Bellway House Embankment Way Castleman Business Centre Ringwood Hampshire BH24 1EU Tel: (01425) 477 666 Fax: (01425) 474 382 DX: 45710 Ringwood West Midlands Bellway House Relay Point Relay Drive, Tamworth Staffordshire B77 5PA Tel: (01827) 255 755 Fax: (01827) 255 766 DX: 717023 Tamworth Yorkshire 2 Deighton Close Wetherby West Yorkshire LS22 7GZ Tel: (01937) 583 533 Fax: (01937) 586 147 DX: 16815 Wetherby Other Subsidiary Bellway Housing Trust Limited Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Tel: (0191) 2170717 Fax: (0191) 236 6230 DX: 711760 Seaton Burn Designed and produced by Radley Yeldar www.ry.com Printed on paper sourced from sustainable sources, using vegetable-based inks. www.bellway.co.uk 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 

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