Directors' report
The directors have pleasure in presenting their report which forms part of the summary consolidated financial statements of the group, for the year ended 31 March 2014.
Nature of business
The nature of the business of the company and its subsidiaries is fully described under the Business Overview section of this report.
Review of operations
Detailed commentary on the group's operations is provided under the Business Overview section of this report.
Share capital
As at 31 March 2014, the authorised share capital of the company was 900 000 000 ordinary shares of 4 cents each and the issued share capital was 460 622 957 ordinary shares of 4 cents each. Further details are set out in note 24 to the annual financial statements which may be accessed on the company's website at www.illovosugar.com.
During the year under review, the issued ordinary share capital of the company increased from 460 447 457 shares to 460 622 957 shares as a result of options being exercised in respect of 175 500 shares in terms of the Illovo Sugar 1992 Share Option Scheme.
Shareholders
An analysis of shareholders and their shareholdings appears here in this report.
Pursuant to the provisions of section 56(3) of the Companies Act, an analysis of the relevant disclosures by nominee shareholders as at 31 March 2014 revealed three beneficial shareholdings equal to or exceeding 5% of the issued ordinary share capital, details of which appear here.
Illovo Sugar 1992 Share Option Scheme
During the financial year ended 31 March 2006, the Illovo Sugar Phantom Share Scheme (more fully described here) replaced the further granting of share options in terms of the Illovo Sugar 1992 Share Option Scheme (the option scheme). Although closed, the option scheme continues to operate relative to the share options previously granted with the approval of the Remuneration/Nomination Committee. Vesting periods for the share options are one-third after three years, two-thirds after four years, and the full allocation after five years, with the maximum period for the exercising of options being ten years. In terms of the rules of the option scheme, all share options were granted at the closing market price of the shares on the JSE on the trading day immediately preceding the day on which the relevant options were granted.
As approved at the AGM of shareholders held on 17 July 2002, a total of 33 000 000 ordinary shares were reserved and placed under the control of the directors for the purpose of the option scheme. The tables below reflect the options granted to and exercised by the executive directors and senior managers as at 31 March 2014:
| Number of shares | |
| Options granted as at 1 April 2013 | 27 717 000 |
|---|---|
| Options expired during the year under review | – |
| Options granted as at 31 March 2014 | 27 717 000 |
| Options exercised, allotted and issued as at 1 April 2013 | 27 430 300 |
| Options exercised during the year under review | 175 500 |
| Options unexercised as at 31 March 2014 | 111 200 |
| Options granted as at 31 March 2014 | 27 717 000 |
The options granted and unexercised as at 31 March 2014, are as follows:
| Option price | ||
| Number of shares | Expiry date | (cents) |
| 111 200 | 1 June 2014 | 770 |
|---|
All these options have fully vested.
Illovo Sugar Phantom Share Scheme
The board approved the adoption of the Illovo Sugar Phantom Share Scheme (PSS) in 2005, and in 2007 introduced certain performance hurdles related to the future earnings of the company.
While the rules of the PSS are modelled on those of the option scheme, the important difference is that options under the PSS are "cash settled" rather than "equity settled". As a consequence, the PSS is not classified as a share incentive scheme in terms of the JSE Listings Requirements. The vesting periods are the same as those applicable to the option scheme; one-third becoming vested on each of the third, fourth and fifth anniversaries of the relevant grant date, with the maximum period for the exercising of options being ten years. The grant price of an option is determined as being equal to the average of the closing market prices of Illovo shares on the JSE for the 30 trading days immediately preceding the grant date of the relevant option. The cash settlement amount of an option is equal to the difference between the closing market price of Illovo shares on the trading day immediately preceding that on which an option is exercised and the grant price. The participants receive the equivalent net proceeds as under the option scheme, but without incurring broking fees.
The advantages of the PSS include: there being no necessity to issue new shares when options are exercised, ie no share dilution; ease of administration; and tax effectiveness of the expense in the hands of the company, expensing of conventional options not being tax deductible.
The Remuneration/Nomination Committee approves the granting of all share options in terms of the PSS. Phantom options granted to and exercised by executive directors and senior managers as at 31 March 2014 are as follows:
| Number of shares | |
| Options granted as at 1 April 2013 | 11 811 000 |
|---|---|
| New options granted during the year under review | 1 543 000 |
| Options forfeited during the year under review | (1 360 375) |
| Options granted as at 31 March 2014 | 11 993 625 |
| Options exercised as at 1 April 2013 | 2 473 450 |
| Options exercised during the year under review | 309 100 |
| Options unexercised as at 31 March 2014 | 9 211 075 |
| Options granted as at 31 March 2014 | 11 993 625 |
The options granted and unexercised as at 31 March 2014 are as follows:
| Option price | |||
| Number of shares | Expiry date | (cents) | |
| 241 800 | 12 July 2015 | 829 | |
|---|---|---|---|
| 250 600 | 29 October 2016 | 1 634 | |
| 608 700 | 23 July 2017 | 2 364 | |
| 1 128 375 | 9 July 2018 | 2 867 | |
| 1 673 000 | 13 July 2019 | 2 808 | |
| 1 183 000 | 20 July 2020 | 2 856 | |
| 1 207 500 | 26 May 2021 | 2 702 | |
| 1 554 100 | 22 May 2022 | 2 573 | |
| 1 364 000 | 21 May 2023 | 3 445 | |
| 9 211 075 | |||
Details of options granted to executive directors, any options exercised during the year, and options unexpired and unexercised as at 31 March 2014, are provided in the Remuneration Report.
Forfeitable Share Plan
As indicated in the Remuneration Report, the company intends to implement a forfeitable share plan (FSP), as an additional long-term incentive plan for directors and selected key executive senior employees, to provide an adequate incentive mechanism to enable the company to attract and retain executives and other key management whose skills are necessary for the company to fulfil its long-term goals. Details of the FSP are set out in the Notice of Annual General Meeting and Appendix 1.
The FSP is not a share option scheme contemplated in Schedule 14 of the JSE Listings Requirements and shareholder approval thereof is accordingly not required. Shares allocated under the FSP are to be purchased on the market and paid for by the company. As the FSP does not involve the issue of new shares, it does not have the dilutionary effect of conventional share option schemes.
The FSP provides for the award of shares to executive directors and a limited number of senior key employees. These shares participate in dividends and shareholder rights from grant date, but in order to achieve an alignment of the interests of management and shareholders, performance conditions in the form of continuing employment and financial hurdle achievements must be met, failing which the allocated shares are forfeited.
The total number of shares which may be allocated under the plan will not exceed 1% (one percent) of the issued ordinary shares, which currently equates to 4 600 000 shares. The maximum number of shares that may be issued to any one person in terms of the FSP is 0.1% of the issued ordinary shares, which equates to 460 000 shares.
The conditions of the FSP will continue to be reviewed in line with best practice.
Illovo Sugar Employees' Share Purchase Scheme
The Illovo Sugar Employees' Share Purchase Scheme (ESPS) was established in 1996 to enable employees to share directly in the profitability and growth of the company, by assisting them to acquire shares in the company. Any contribution made by an employee for the purchase of shares is enhanced by a 10% company contribution, and the company pays for any trading costs. Employees may acquire up to 5 000 shares in aggregate and 1 000 shares in a continuous 12-month period, by means of regular monthly contributions (deducted from their salaries) or a lump-sum payment. The ESPS is administered by a trust, the trustees of which are appointed by the board. A similar purchase scheme is operated in Malawi in respect of shares in Illovo Sugar (Malawi) Limited.
During the year under review, the trustees of the ESPS undertook net purchases of 39 684 shares in the company, thereby increasing the total number of shares held to 236 209. Of these shares, which are all registered in the name of the trust, 236 208 are held on behalf of 590 participants. All such shares have been fully paid for by the participants.
Capital distributions
An interim capital distribution (number 44) of 37.0 cents per share was declared on 13 November 2013 and a final capital distribution (number 45) of 60.0 cents per share was declared on 26 May 2014 (both by way of a reduction of contributed tax capital), making the total distribution for the year, 97.0 cents per share.
In respect of the final capital distribution, pursuant to the requirements of section 46 of the Companies Act, after due consideration the board concluded that the company would satisfy the relevant solvency and liquidity test immediately after completing the proposed distribution.
The interim capital distribution was paid on 13 January 2014 and the final capital distribution will be paid on 7 July 2014.
Subsidiary companies
The names and financial information concerning the subsidiaries of the company are set out in the note 14 to the financial statements which may be accessed on our website at www.illovosugar.com.
Directorate and Company Secretary
The names of the directors and the Company Secretary in office at the date of this report are reflected here. The details of the company's business and postal addresses are set out here.
During the year under review, Mr G J Clark resigned as Managing Director and Mr G B Dalgleish (formerly Operations Director) was appointed Managing Director in his stead with effect from 1 September 2013. With effect from the same date, Mr J P Hulley was appointed as Operations Director in place of Mr Dalgleish. Mr R N Pike resigned with effect from 31 August 2013 and was replaced by Mr G M Rhodes with effect from 1 September 2013.
As indicated in the Corporate Governance Report, evaluations were carried out in respect of those independent non-executive directors who had served as such for more than nine years (ie, Dr D Konar and Prof P M Madi), and both were found to be independent, taking into account all relevant factors, including that there were no relationships or circumstances likely to affect, or appearing to affect, the relevant director's judgement. In addition, written confirmation was obtained from each of the independent non-executive directors that he/she continues to meet the requirements for independence contemplated in paragraph 67 of Chapter 2 of King III.
In terms of the company's Memorandum of Incorporation, Dr M I Carr and Messrs A R Mpungwe and T S Munday retire by rotation at the forthcoming annual general meeting. All these directors are eligible and offer themselves for re-election. The Remuneration/Nomination Committee, having conducted an assessment of and being satisfied with the performance of each of the retiring directors, and the board having accepted the recommendation of this committee, recommends the re-election of these directors to shareholders.
The beneficial interests of the directors holding office at the end of the year under review in the issued ordinary share capital of the company as at 31 March 2014 were as follows:
| 2014 | 2013 | |||
| Direct | Indirect | Direct | Indirect | |
| Hankinson M J | 3 925 | 3 925 | 3 925 | 3 925 |
|---|---|---|---|---|
| MacLeod D G | 450 000 | 450 000 | ||
| Total | 453 925 | 3 925 | 453 925 | 3 925 |
| Total | 457 850 | 457 850 | ||
No non-beneficial interests were held by any of the directors.
There have been no changes in the above interests since the end of the year under review.
The register of interests of directors in the shares of the company is available for inspection at the registered office.
Directors' remuneration
At the forthcoming annual general meeting:
- as contemplated by King III, shareholders will be requested to pass a non-binding advisory vote, approving the company's remuneration policy; and
- pursuant to the requirements of section 66(9) of the Companies Act, shareholders will be requested to pass a special resolution to approve the following annual fees payable to the non-executive directors with effect from 1 April 2014, plus an additional fee of R28 000 per day for any additional services undertaken at the request of the company (eg a site visit or a non-routine meeting):
| Rand per annum | ||
| Current | Proposed | |
| Board | ||
| Chairman* | 2 200 000 | 2 200 000 |
| Other members | 236 500 | 270 000 |
| Audit Committee | ||
| Chairman | 236 500 | 255 000 |
| Other members | 118 500 | 127 500 |
| Remuneration/Nomination Committee | ||
| Chairman‡ | 161 500 | 180 000 |
| Other members | 91 500 | 120 000 |
| Risk Management Committee | ||
| Chairman | 118 500 | 129 750 |
| Other members | 80 500 | 86 500 |
| Social and Ethics Committee | ||
| Chairman | 118 500 | 129 750 |
| Other members | 80 500 | 86 500 |
| * | The fee paid to Mr D G MacLeod as Chairman of the board is inclusive of all other committee membership fees and is payable monthly in arrears. All other fees are paid quarterly in arrears. |
| ‡ | This fee is not paid to Mr D G MacLeod as Chairman of the Nomination Committee, due to the inclusive nature of his fee as Chairman of the board. |
Given the generally high level of attendance at meetings, the board does not consider it appropriate for non-executive directors' fees to comprise a meeting attendance fee as well as a base fee.
Having taken appropriate advice, the directors are of the view that section 66(9) of the Companies Act does not apply to the remuneration paid to the executive directors as employees of the company.