Certain senior employees are entitled to join the general employee share option plan, based on merit and options are issued at least annually at cost by the Adcock Ingram Board of directors. The offer price is determined in accordance with the rules of the scheme, and options vest as follows:

• a third after three years;
• a third after four years; and
• a third after five years.

Since January 2006 a cash-settled scheme was in place, with the last tranche issued in January 2013. This was replaced by an equity-settled scheme in June 2014.

The following tables illustrates the number and weighted average offer prices (WAOP) of and movements in Adcock Ingram share options during the year:

Share options are fair valued using a Black-Scholes model. The expected dividend yield was estimated using a two-year moving average of the dividend yield at the grant date. An annualised standard deviation of the continuously compounded rates of return of the share was used to determine volatility. The risk-free rate was based on a zero-coupon government bond in South Africa with the same expected lifetime of the options.

Share price volatility is based on the historical volatility of the Adcock Ingram share price matching the remaining life of each option. The valuation is measured at fair value (excluding any non-market vesting conditions) and is the sum of the intrinsic value plus optionality. The fair value of each option is estimated using an actuarial binomial option pricing model. All options are valued with a single exercise date at maturity.

In terms of the Tiger Brands Limited BEE transaction implemented on 17 October 2005, 4 381 831 Tiger Brands shares were acquired by the Tiger Brands Black Managers Share Trust. Allocation of vested rights to these shares was made to black managers. The allocation of vested rights entitles beneficiaries to receive Tiger Brands and Adcock Ingram shares (after making capital contributions to the Black Managers Share Trust) at any time after the defined lock-in period, i.e. from 1 January 2015. These vested rights are non-transferable.

Participation rights were valued using the Monte-Carlo simulation approach to estimate the average, optimal pay-off of the participation rights using 5 000 permutations. The pay-off of each random path was based on:

• the projected Tiger Brands/Adcock Ingram share price;
• outstanding debt projections; and
• optimal early exercise conditions.

A scheme with the intention to form a meaningful participation for BEE participants and to provide Adcock Ingram with increased BEE ownership credentials, as part of its continued efforts to embrace broad-based equity participation, was implemented on 15 July 2015 when Adcock Ingram shareholders sold 25 842 960 or approximately 15% of their shares (scheme shares) in proportion to their shareholding, to Ad-izinyosi (RF) Proprietary Limited (Ad-i) in exchange for 25 842 960 securities in AdBEE (RF) Limited (AdBEE). Thus, for every one share contributed to the scheme, a shareholder received one security in AdBEE, entitling the holder to a pro rata portion of the Ad-i indebtness (the obligation to pay the value of an Adcock Ingram share on the JSE calculated on a rolling 30-day traded VWAP immediately preceding the end of the transaction).

The Mpho ea Bophelo Trust (Bophelo Trust) and Blue Falcon Trading 69 (Pty) Limited (previous BEE participants) invested R5.4 million and R14.7 million respectively in the scheme.

BEE participants

The shareholders of Ad-i, the entity which participates on behalf of strategic partners and holds the shares on behalf of the BEE beneficiaries, are as follows:

• CIH Projects (Pty) Limited (26.67%)
• Dzembe Investments (Pty) Limited (26.67%)
• BDH Group Proprietary Limited (26.67%)
• Bophelo Trust (20.00%)

The following table illustrates the movement in units issued to employees:

KEY TERMS AND CONTRACTUAL OBLIGATIONS

The key terms and contractual obligations of the scheme shares and securities are as follows:

• the scheme shares will not be entitled to participate in any normal dividend distributions during the transaction period, but are only entitled to special dividends;
• AdBEE securities are listed on the main board of the JSE in the “Specialist Securities - Other Securities” sector as an Asset Based Security under the share code “ADE”;
• whatever Ad-i may be entitled to receive from Adcock Ingram (other than dividend distributions), as the holder of the scheme shares, is deemed to be renounced to AdBEE and onward renounced by AdBEE to the securities holders;
• Ad-i issued one A redeemable preference share and one B redeemable preference share with no par value respectively to Adcock Ingram Holdings Limited and AdBEE;
• preference shares are not entitled to vote unless a resolution is proposed for a distribution of any nature to Ad-i shareholders;
• if the Adcock Ingram share price is below R36.00 per share during the empowerment period of 4 years, the directors of AdBEE can convene a meeting of the AdBEE securities holders to decide whether they should waive the AdBEE resolutive condition or not;
• if the Adcock Ingram share price is below R72,00 per share at the 4th anniversary, the Ad-i indebtedness to the holders of the securities will be calculated using the 30-day VWAP of the Adcock Ingram share price before this date, but not less than a minimum price of R52.00 per share and not more than R72.00 per share;
• If the Adcock Ingram share price is above R72.00 per share at the 4th anniversary, the Ad-i indebtedness shall be settled and the remaining Adcock Ingram shares in Ad-i released from the pledge; and
• If the Adcock Ingram share price is below R52.00 per share at the 4th anniversary, the scheme will be cancelled and the shares in Ad-i released from the pledge;
• AdBEE will assume the obligation of Ad-i to the securities holders to settle the scheme consideration.

SHARE CALL OPTIONS

• 8 000 000 share call options in Adcock Ingram Holdings Limited were allocated to shareholders in proportion to the scheme shares tendered, entitling the holders thereof to subscribe for Adcock Ingram shares;
• call options may be exercised at the strike price of R72.00 per Adcock Ingram share, at any time within the 30-day period prior to the transaction end date; and
• On inception of the scheme, R20.8 million was incurred as a once-off cost for the call options. The call options were fair valued using a Black-Scholes-Merton model taking into account the expected volatility, expected dividend yield, spot and strike price of the option, the exercise date and the risk-free interest rate of the call option.