Annexure A: The proposed Kumba Resources
Long-term Incentive Plan 2005 (LTIP) and Deferred Bonus Plan 2005 (DBP)
   
 
 

Recent developments in taxation legislation, accounting standards and best practice in local and global share schemes have required a review of the company’s existing share option scheme. In particular the costs of the existing scheme are not deductible in the company’s hands, but the benefits are fully taxable in the employees’ hands.

In line with global best practice, and emerging South African practice, the remuneration committee of the company recommends the adoption of the following plans: the LTIP, and a DBP. The recommended schemes are in line with practice in FTSE 100 and FTSE 500 companies in the UK and with several recently adopted schemes for large JSE Securities Exchange South Africa (the JSE) listed or dual-listed companies.

A third scheme, similar to an option scheme, based on equity settled share appreciation rights (SAR) is under consideration to replace the existing share option scheme. The company will seek approval for this scheme at the next annual general meeting. All awards under the existing and proposed plans will be made with due consideration to the potential dilution (to a maximum of 10% of the issued capital), the expected costs to the company and the expected benefits to participants, arising from awards under the current share option plan, the proposed LTIP and DBP, and the potential SAR scheme.

The proposed plans are structured to optimise the company’s taxation position, and the reflection of the new accounting charges that are required under the new standard (IFRS 2/AC139), while providing a benefit that will assist in the attraction, retention and reward of executives and senior management.

The primary intent of the new schemes will be to purchase shares in the market to settle the scheme benefits, so the schemes will not be as dilutive as the current share option scheme. The company will retain the right to issue new shares at its election to mitigate the risk of a spike in the share price which could expose the company to liquidity risk. In any case, the company will be limited to issuing 10% of the company’s ordinary shares in settlement of benefits of all company share schemes over any ten-year period.

Due to the settlement method of the scheme (equity rather than cash-settled) the scheme will enjoy a favourable treatment under the new IFRS 2 accounting standard which permits the charge which is made to reflect the grant of new instruments to be stated using the initial assessment of financial market conditions at the time of grant. This treatment is generally viewed more favourably than the treatment of cash-settled share-based payments which require market conditions to be marked to market, leading to higher volatility, and the possibility of large additional charges if market factors such as the share price and the share volatility lead to significantly higher instrument valuations before they are settled.

The new schemes also support the principle of alignment of management and shareholder interests – performance conditions governing the vesting of the scheme instruments are related to total shareholder return and return on capital employed relative to targets that are intended to be stretching but achievable. Targets are linked where applicable to the company’s medium-term business plan, over rolling three-year performance periods.

Please note the term “Face Value of the Award” when used in the context of setting limits (overall and individual) in the salient features and the rules refers to the face value of the shares associated with the LTIP or DBP award. This should not be confused with the “Expected Value of the Award” which is used when establishing the accounting cost of the award for reflection in the company’s financial statements, and the value of the benefit of awards for scheme members used by the remuneration committee to establish appropriate variable remuneration levels relative to benchmarks.

The LTIP and DBP will be established by the company under which executive directors and employees of the company and its subsidiaries and associates will be awarded rights to receive shares in the company based on the value of these awards (after the deduction of employee tax) when performance conditions have been met and the awards have vested.

A summary of the main terms of the plans and the performance conditions that will be applied to the initial grant is set out below. Note that performance conditions for subsequent awards may utilise different performance measures and targets, but will be no less challenging in the context of the prevailing business environment.

   

SALIENT FEATURES OF THE KUMBA RESOURCES LTIP
The LTIP will be established by the company under which executive directors and employees of the company and its subsidiaries and associates will be awarded rights to a number of shares in the ordinary share capital of the company as will be set forth in grant letters. A summary of the main terms of the LTIP is set out below:
   
1.  Eligibility
  Any executive directors or employees of any participating company may be selected by the remuneration committee to be participants in the plan. Non-executive directors who are members of the committee may not participate in the plan.
   
2.  Performance conditions
2.1 The vesting of LTIP awards will be conditional upon the achievement of group performance levels (established by the remuneration committee) over a performance period of 3 (three) years (LTIP performance period), as set out in the grant letter.
   
2.2 The performance conditions referred to above will be set as of the date of grant of the LTIP award. Two performance conditions will be imposed for the initial grant:
2.2.1 The total shareholder return (TSR) condition.
2.2.2 The return on capital employed (ROCE) condition.
   
2.3 For the initial award, 50% of the LTIP award will be subject to the TSR condition and 50% will be subject to the ROCE condition.
   
2.4 The grant of all LTIP awards will be conditional upon the participant remaining employed within the group for a minimum employment period of 3 (three) years (LTIP minimum employment period) as set out in the grant letter.
   
2.5 If a participant ceases to be employed within the group during the LTIP minimum employment period, all LTIP awards granted to the participant will lapse.
   
2.6 The TSR condition
2.6.1 The Kumba TSR will be compared to the TSR of a peer group over the LTIP performance period, averaged over a 6 (six) month period. The peer group will comprise at least 16 members.
2.6.2 Subject to the participant remaining employed by the group for the LTIP minimum employment period, if the TSR over the LTIP performance period:
2.6.2.1 ranks within the upper quartile of the TSR of the peer group, then the whole LTIP award, which is subject to the TSR condition will become unconditional and will vest;
2.6.2.2 ranks at the median TSR of the peer group, then not more than 30% (thirty percent) of the LTIP award, will become unconditional and will vest. The remainder of the LTIP award subject to the TSR condition will lapse and will be of no further force or effect;
2.6.2.3 ranks less than the upper quartile rank of the peer group and ranks greater than the median of the peer group, then the percentage of the LTIP award, subject to the TSR condition, which becomes unconditional and will vest, will be linearly apportioned as the ranking of the TSR increases. The remainder of the LTIP award, subject to the TSR condition, will lapse and will be of no further force or effect;
2.6.2.4 ranks less than the median TSR of the peer group then the whole of the LTIP award, subject to the TSR condition, will lapse and will be of no force or effect whatsoever.
   
2.7 The ROCE condition
2.7.1 The ROCE measure is a return on capital employed measure with a number of adjustments. Targets are set by the remuneration committee based on existing ROCE performance in the base year of an LTIP and planned ROCE performance in the final year of the LTIP performance period.
2.7.2 Subject to the participant remaining employed by the group for the LTIP minimum employment period, the number of LTIP awards that vest in terms of the ROCE condition is determined as follows:
2.7.3 If the ROCE in the final year of the LTIP performance period of the company is equal to the minimum ROCE target, then the minimum ROCE award (30% of the grant subject to the ROCE condition) vests.
2.7.4 If the ROCE in the final year of the LTIP performance period is equal to, or exceeds the maximum ROCE target, then the maximum award (100% of grant) vests.
2.7.5 The award vests linearly between 30% and 100% for performance between the minimum ROCE target and the maximum ROCE target.
2.7.6 The principles underlying these targets are:
2.7.6.1 The lower target for existing capital is equal to the actual ROCE in the base year.
2.7.6.2 The upper target for existing capital is implied by the current three-year plan. The achievement of the plan in final year will give rise to a 90% payout of the LTIP. This builds some stretch into the target to achieve more than the plan.
2.7.6.3 The upper and lower targets for incremental capital are set to the nominal pre-tax weighted average cost of capital of Kumba.
2.7.7 ROCE definition
ROCE = Adjusted operating profit/average capital employed
Where, in respect of the financial year being measured:
Adjusted operating profit
  Equals            Operating profit
  Plus               Income from associates
  Plus               Price adjustments to base year
  Plus               Realised and unrealised foreign exchange (gains)/losses
  And:
  Adjusted capital employed
  Equals            Capital employed
  Less               Capital projects in progress
2.7.8 The price adjustment for any year within an LTIP is calculated as follows:
  [(Commodity price ave of base year* inflation factor) – (commodity price at ave for the year)]* Volume of commodity sold in the year.
2.7.9 The inflation factor converts commodity prices from the base year to their nominal equivalent in any given year. The inflation factor to be used for the LTIP is the South African CPI-X index
2.7.10 Average capital employed is taken as the average of the opening and closing balances (after adjustments) of capital employed in the year over which profit is measured.
2.7.11 Other adjustments may be applied from time to time by the remuneration committee to reflect change in circumstances (for example, disposals).
   
3.  Limits
3.1 Shares available for the plan
3.1.1 The aggregate number of shares which may be allocated under the plan on any day, when added to the total number of unvested awards which have been allocated previously under this plan and any other employee share scheme operated by the company, shall not exceed 10% of the number of issued ordinary shares of the company from time to time, being 30,2 million at present. For this purpose, one ordinary share shall be allocated for each unvested conditional award.
3.1.2 The committee may, with the approval of the JSE, where required, adjust the number of shares available for the plan (without the prior approval of the company in general meeting) on a proportionate basis to take account of:
3.1.2.1 a capital issue or a rights offer of shares or a subdivision or consolidation of shares of the company or a reduction of capital or repayment of monies to shareholders;
3.1.2.2 any other circumstances where such adjustment may be necessary or appropriate, except a new issue of shares by the company for acquisition purposes.
   
3.2 Individual limit
3.2.1 The maximum number of shares allocated to all unvested awards granted to any participant, in respect of this plan and any other employee share scheme operated by the company, shall not exceed the limit determined from time to time by the directors, which number of shares shall not exceed 1% of the issued ordinary share capital of the company from time to time, being 30,2 million at present.
   
4.  Termination of employment
4.1 Subject to the provisions of this clause, a participant whose employment with all companies in the group terminates for any reason other than as set out in the following paragraphs before the end of a performance period will cease to be entitled to any grant, unless the committee determines otherwise.
   
4.2 Retirement, retrenchment, ill health, disability, or any other circumstances which the company may consider appropriate
If a participant’s employment with any company in the group terminates before the end of a performance period, by reason of retrenchment, ill health, retirement, disability or any other circumstance which the company may consider appropriate, the committee may, in their absolute discretion by written notice to the participant deem a pro-rata portion of the LTIP award to vest within 6 (six) months (or such extended period as the committee regards as appropriate) of the date of cessation of employment. In exercising its discretion, the committee will take into consideration the extent to which the performance conditions have been satisfied and the proportion of the performance period that has endured.
   
4.3

Death
If a participant’s employment with any company in the group terminates by reason of death, a proportion of the grant vests on the date of death. That proportion reflects the number of whole months of the performance period, which have run at the date of death. The number of shares which vest shall be calculated as soon as practicable, and notified to the executor of the deceased participant’s estate and released no longer than 6 (six) months from the date of death and the provisions of 2 shall apply accordingly.

   
5.  Settlement method
  The company may, at its election, settle the conditional awards by issuing new shares, or by instructing any third party (including a share trust constituted for this purpose) to acquire and deliver the shares to employees. The company may not issue more than 10% of its issued share capital over any rolling 10-year period following the adoption of this scheme, in the settlement of employee and director share-based payments. The number of shares in issue at the end of the 10-year period, less shares issued to settle share-based payments, shall be used for this calculation. Application will be made for a listing of the shares at the time of issue.
   
6.  Reconstruction or takeover
6.1 In the event of a reconstruction or takeover of the company before the vesting date, the committee must review the performance condition and the extent to which it has been satisfied up to the date of the reconstruction or takeover, and calculate the number of shares to vest in each participant accordingly. Settlement shall be made for the vested shares so calculated as soon as practicable.
   
6.2 If there is an internal reconstruction or other event which does not involve any substantial change in the ultimate control of the company, and therefore is not a reconstruction or takeover, or if any other event happens which may affect grants, including the shares ceasing to be listed on the JSE, the committee may take such action as it considers appropriate to protect the interests of participants, including converting grants into equivalent grants in respect of shares in one or more other companies.
   
7.  Variation in share capital
7.1 In the event of a rights issue, capitalisation issue or other event affecting the share capital of the company, a demerger (in whatever form) or in the event of the company making distributions including a distribution in specie or a payment in terms of section 90 of the Companies Act, 61 of 1973, as amended, (the Act) (other than a dividend paid in the ordinary course of business out of distributable reserves) before the release date in respect of a conditional award, the committee may make such adjustment to the number of shares comprised in the relevant grants as it thinks appropriate.
   
8.  General
  The salient features as circulated to shareholders and the plan rules will be available for inspection during normal business hours at the company’s registered office from 24 March 2005 to 15 April 2005.
   
9.  Amendments
  The plan rules may be amended by the board subject to prior approval of the JSE, provided that no amendment shall operate in respect of the following matters unless such amendments have received the approval of the company in general meeting:
  — eligibility to participate in the plan;
  — the number of shares subject to the plan;
  — the basis for determining offers;
  — the adjustment of offers in the event of a variation of capital of the
    company;
  — the voting, dividend and other rights attaching to the shares of the plan;
  — the limitations on benefits or maximum entitlements.
   
10. Glossary of terms
 
“Base pay” The total cash package of an employee;
“Business day” a day on which the JSE is open for the transaction of business;
“Committee” the remuneration committee of the board of directors of the company or any duly authorised committee;
“Employee” any person holding full-time salaried employment or office (including any executive director) of the group;
“Letter of grant” a document prepared by the company which details the name of the participant to whom the conditional award is granted, the number of shares in respect of which the conditional award is granted, and any applicable conditions pertaining thereto;
“Market value” the volume weighted average of the market price of a company share as quoted on the JSE;
“Participant” an employee to whom a grant has been made and who has accepted a grant and includes the executor of a deceased estate or a family trust where appropriate, but excludes non-executive directors who are members of the committee;
“Participating company” the company and its subsidiaries and associated organisations, all as defined in the Act;
“Performance condition” the condition specified in the letter of grant, to which a grant is subject;
“Performance period” the period in respect of which a performance condition is to be satisfied;
“Shares” ordinary shares of one cent each in the capital of the company and includes any shares representing them following a reconstruction or takeover;
“Value of grant” the market value of shares related to the grant determined as at the date of grant;
“Vesting date” means the date on which a participant becomes entitled to receive settlement due to the fulfilment of performance conditions and “vest” and “vested” shall be construed accordingly;
“Total shareholder return (TSR)” means the return to shareholders from the change in the share price and the payment of dividends and other distributions.
   
SALIENT FEATURES OF THE KUMBA RESOURCES DBP
The DBP will be established by the company under which executive directors and employees of the company and its subsidiaries and associates will have the opportunity to acquire shares (pledged shares) with the after-tax component of the annual bonus. This will entitle employees to receive a matching award comprising of shares in the ordinary share capital of the company as will be set forth in grant letters. A summary of the main terms of the DBP is set out below:
   
1.  Eligibility
  Any executive directors or employees of any participating company may be selected by the remuneration committee to be participants in the plan. Non-executive directors who are members of the committee may not participate in the plan.
   
2.  Vesting conditions
  The vesting of the matching awards will be conditional upon the employee holding the pledged shares until the release date, and remaining in the employ of the company until the release date as set out in the grant letter.
   
3.  Limits
3.1 Shares available for the plan
3.1.1 The aggregate number of matching shares which may be awarded as a result of the holding of pledged shares under the plan on any day, when added to the total number of unvested awards allocated previously under this plan and any other employee share scheme operated by the company, shall not exceed 10% of the number of issued ordinary shares of the company from time to time being 30,1 million at present. The committee may, subject to the approval of the JSE, where required, issue further shares for the purposes of the plan in place of those shares received by an employee pursuant to the vesting of the matching award. For this purpose, one ordinary share shall be allocated for each unvested matching award related to currently pledged shares in terms of the plan.
3.1.2 The committee may, with the approval of the JSE, where required, adjust the number of shares available for the plan (without the prior approval of the company in general meeting) on a proportionate basis to take account of:
3.1.2.1 a capital issue or a rights offer of shares or a subdivision or consolidation of shares of the company or a reduction of capital or repayment of monies to shareholders;
3.1.2.2 any other circumstances where such adjustment may be necessary or appropriate, except a new issue of shares by the company for acquisition purposes.
   
3.2 Individual limit
3.2.1 The maximum number of shares allocated to all unvested awards granted to any participant, in respect of this plan and any other employee share scheme operated by the company, shall not exceed the limit determined from time to time by the directors, which number of shares shall not exceed 1% of the issued ordinary share capital of the company from time to time, being 30,2 million at present.
   
4. Termination of employment
4.1 Subject to the following provisions of this clause, if the participant ceases to be employed by any participating company before the vesting date, he shall not be entitled to receive a matching award on the vesting date, unless the committee decides otherwise.
   
4.2 Retrenchment, ill health, disability, retirement or any other circumstances which the company may consider appropriate
If a participant’s employment with any company in the group terminates before the release date due to his redundancy,ill health, disability, retirement or any other circumstances which the company may consider appropriate, a proportion of his matching awards vests on the date of termination. That proportion reflects the number of whole months of the pledge period which have run at the date of termination of employment. The number of shares which vest shall be calculated as soon as practicable, and notified to the participant.
   
4.3 Death
  If the participant’s employment is terminated by reason of death, an executor of the deceased estate, as the case maybe, shall be entitled on termination to request the transfer to the estate of the pledged shares. A proportion of the matching awards vests on the date of death. That proportion reflects the number of whole months of the pledge period which have run at the date of death. The number of shares which vest shall be calculated as soon as practicable, and notified to the executor of the deceased participant’s estate.
   
5. Reconstruction or takeover
5.1 In the event of a reconstruction or takeover, the participant shall be entitled to receive the pledged shares and the matching award forthwith.
   
5.2 If there is an internal reconstruction or other event which does not involve any substantial change in the ultimate control of the company, and therefore is not a reconstruction or takeover, or if any other event happens which may affect offers, including the shares ceasing to be listed on the JSE, the committee may take such action as it considers appropriate to protect the interests of participants, including converting offers into equivalent offers in respect of shares in one or more other companies.
   
6. Variation in share capital
6.1 Pledged shares
If there is a rights issue or other variation of share capital of the company, under which shareholders are offered the opportunity to make any choice, the participant shall be entitled to give instructions to the trust as to the choice to be made in respect of pledged shares held by the trust on his behalf. The trust shall transfer to the participant any proceeds on the sale of rights, and any securities issued on the take up of rights, at the participant’s request.
   
6.2 Matching awards
  The committee may vary the amount of shares comprised in the matching award to take account of any variation in the share capital of the company, or a special or extraordinary distribution including a distribution in specie or a payment in terms of section 90 of the Act (other than a dividend paid in the ordinary course of business out of distributable reserves) or other transaction which might adversely affect the value of shares, to ensure that the participant is not disadvantaged.
   
7.  General
  The salient features as circulated to shareholders and the plan rules will be available for inspection during normal business hours at the company’s registered office from 24 March 2005 to 15 April 2005.
   
8.  Amendments
  The plan rules may be amended by the board subject to prior approval of the JSE, provided that no amendment shall operate in respect of the following matters unless such amendments have received the approval of the company in general meeting:
  — eligibility to participate in the plan;
  — the number of shares subject to the plan;
  — the basis for determining offers;
  — the adjustment of offers in the event of a variation of capital of the company;
  — the voting, dividend and other rights attaching to the shares of the plan;
  — the limitations on benefits or maximum entitlements.
   
9. Glossary of terms
 
“Base pay” The total cash package of an employee;
“Business day” a day on which the JSE is open for the transaction of business;
“Committee” the remuneration committee of the board of directors of the company or any duly authorised committee;
“Employee” any person holding full-time salaried employment or office (including any executive director) of the group;
“Date of offer” the date on which the committee resolves to grant a matching awards to an employee as specified in the letter of offer;
“Matching award” an award of shares made to a participant equal in value to the market value of the pledged shares on the vesting date;
“Market value” the volume weighted average of the market price of a company share as quoted on the JSE;
“Offer to participate” a document prepared by the company which details the name of the participant, the number of pledged shares and matching shares relating to each pledged share, the release date and any applicable conditions pertaining thereto;
“Participant” an employee who has been selected to participate in the plan, offered the opportunity to participate and who has accepted the offer to participate, and includes the executor of his deceased estate or a family trust where appropriate, but excludes non-executive directors who are members of the committee;
“Participating company” the company and its subsidiaries and associated organisations, all as defined in the Act;
“Pledged shares” a number of shares acquired by a participant with a portion of the after-tax component of his annual bonus;
   
“Release date” the date on which the settlement for the vested matching award is made and the pledged shares are released from the pledge;
“Shares” ordinary shares of one cent each in the capital of the company and includes any shares representing them following a reconstruction or takeover;
“Vesting date” the date on which a participant becomes entitled to the matching award as is specified in the offer to participate and “vest” and “vested” shall be construed accordingly.
   
 
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