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sappiLIFE WITH PRINT
ANNUAL REPORT 2004
sapp
i 2004 annual repo
rt
www.sappi.com
Listings: JSE Securities Exchange South Africa (JSE) – SAP . . . New York Stock Exchange – SPP . . . London Stock Exchange – SAZ . . . Frankfurt Stock Exchange – SPI
© S
app
i Co
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rate Affairs, 2
00
4.
4 Financial highlights
6 Global operations
8 Sappi at a glance
10 Board of directors
14 Chairman’s statement
18 Chief executive officer’s report
24 Sappi Fine Paper review
28 Sappi Forest Products review
31 Sustainable development review
37 Value added statement
38 Management’s discussion and analysis of results
(incorporating financial director’s report)
52 Financial performance
54 Five-year review
58 Share statistics
60 Corporate governance
65 Detailed index to annual financial statements
152 Notice to members
161 Divisional and corporate management
162 Glossary
164 Shareholders’ diary
164 Administration
165 Proxy form
167 Notes to the proxy
IBC Sappi Printer of the Year competition (Inside
Back Cover)
www.sappi.com
How can something that does not move be so moving? How can something that
makes no sound say so much? That’s the power of print. In its finished form, print
has the ability to touch each and every emotion we have. It can make us laugh.
Make us cry. Make us think in ways we’ve never thought before. And because of
that, our relationship with print is one of the most meaningful and influential we will
have in our lives.
annual report 04
Sappi paper used in the annual report:Cover: Printed on Magno Satin 300g/m2 produced at Sappi Maastricht Mill in the NetherlandsText pages 1 – 32 Printed on McCoy Silk Text 100lb/148g/m2 produced at Sappi Cloquet Mill in North AmericaText pages 33 – 64 Printed on Magno Satin 150g/m2 produced at Sappi Gratkorn Mill in AustriaText pages 64 – 168 Printed on Enigma Polar White 120g/m2 produced at Sappi Adamas Mill in South Africa
Paper remembers from the very beginning,
“During every Olympics, our idea of excellence is reshaped,” said Jonathan Leslie, Sappi Chief Executive Officer, at
the gala event in Cape Town in October. “There is always an athlete who performs faster, higher, stronger. Similarly,
every year, at the Sappi International Printer of the Year awards, printers from around the world reshape our ideas
of excellence, raising the bar and performing beyond expectation.”
G R A P H I C O R 3 1 3 0 5
OverviewFor twenty-six years Sappi has promoted excellence in printing by
honouring and celebrating printers through the Sappi Printer of
the Year competition. As Sappi expanded globally, so did the
competition. Today the Sappi International Printer of the Year
awards is the world’s most prestigious print competition.
The competition has run for twenty six-years in South Africa (more
recently the whole of Africa); eleven years in Europe; seven years
in North America and four years in the Sappi Trading region (Asia,
Australasia, Central and South America). It has been held seven
times at the international level.
Worldwide, nearly 6,000 entries from more than 50 countries were
entered in this year’s four qualifying regional Printer of the Year
competitions. An independent panel of judges at each regional
competition selects bronze, silver and gold award winners in each
of the print categories, such as Annual Reports, Calendars and
Posters, Books, Magazines etc. Until 2004, a single regional
winner was selected from these gold award winning entries. The
overall Sappi International Printer of the Year winner was selected
from the four regional winners.
To further build on the success of the competition, from 2005
multiple Sappi Printers of the Year will be announced at each
regional and at the international event, reflecting the print
excellence in each of the qualifying categories.
2004 Sappi International Printer of the Year and Sappi North American Printer of the Year
Category BrochuresPrinter Anderson Lithograph, USAEntry title Cadillac XLR 2004
Sappi African Printer of the Year
Category Calendars and postersPrinter Ultra Litho, South AfricaEntry title The Big 5
Sappi Trading Printer of the Year
Category BooksPrinter Pragati Offset, IndiaEntry title ‘88 Husains in Oils
Sappi European Printer of the Year
Category BrochuresPrinter Fontegrafica, ItalyEntry title The world is a stage
Sappi Printer of the Year
sappi limited page 1
In 2004, Sappi successfully launched its Life with Print initiative
in North America, Europe and South Africa (Power of Print). This
powerful business-to-business campaign, to communication
professionals, advertisers, publishers and printers, promotes
the importance and efficiency of print as a communications
medium – in the marketing mix in advertising, direct mail,
brochures and catalogues – for effective brand promotion.
This annual report allows Sappi to share with you, our
shareholders, some of the imagery, information and research
that has been well received by our customers.
Consumers react differently depending on the medium. Thepercentages indicate people buying something after mediaconsumption
Reading a magazine 36%Reading a newspaper 26%Reading a supplement 21% Media Involvement Study, PPA 2002
“Where the goal is tocapture undividedattention and conveyintangibles such asculture and values,there’s still no substitutefor print.”
The world’s leading producer of coated finepaper and chemical cellulose (dissolving pulp)
you put your best foot forward LIFE WITH PRINT
sappi limited page 2
• Headline EPS 45 US cents for the year
• Demand strengthened
• US coated paper prices improving
• Raw material cost pressure
• Dividend 30 US cents
Global operations 6Financial highlights 4
The executive and non-executive directors’curriculum vitae.
Board of directors 10
Sappi at a glance 8
A ‘snapshot’ of Sappi’s operations.
Chairman’s statement 14
The past year proved to be a particularlychallenging one for the global pulp and paper industry.
2004 annual report at a glance
Forward-looking statements
Certain statements in this report that are neither reported financial results nor other historical information, are forward-looking statements, includingbut not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. Unduereliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and canbe affected by other factors, that could cause actual results and company plans and objectives to differ materially from those expressed or implied inthe forward-looking statements (or from past results). Such risks, uncertainties and factors include, but are not limited to the highly cyclical nature ofthe pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production andpricing), adverse changes in the markets for the group’s products, consequences of substantial leverage, changing regulatory requirements,unanticipated production disruptions, economic and political conditions in international markets, the impact of investments, acquisitions anddispositions (including related financing), any delays, unexpected costs or other problems experienced with integrating acquisitions and achievingexpected savings and synergies and currency fluctuations. The company undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.
sappi limited page 3
A graphic presentation of five yearsperformance against objectives.
Financial performance 52
Directors’ report 67
Annual financial statements 65
Detailed index and annual financialstatements.
The report and annual financial statementsof the group and the company.
The following exchange rates were used as a basis for calculations in this document.
2004 2003
Year Average Closing rate Year Average Closing rate
Rand (ZAR)/US Dollar (US$) 6.6824 6.4290 8.3300 7.1288US Dollar (US$)/Euro (EUR)(€) 1.2152 1.2309 1.0804 1.1475US Dollar (US$)/Pound (GBP)(£) 1.7863 1.8017 1.6018 1.6570
Chief Executive Officer’s report 18
Although economic conditions began to easeearly in 2004 and improved steadily, thisupturn was only felt in our markets in thesecond half of the fiscal year, as coated finepaper growth tends to lag changes ineconomic activity.
Management’s discussion and analysis 38
A detailed analysis of the operating andfinancial performance compared to the prioryear, the capital structure and financing.
Sappi Forest Products 28
Sappi Fine Paper 24
Sappi Fine Paper is the world’s leadingproducer of coated fine paper withmanufacturing assets in North America,Europe and South Africa.
Corporate governance 60
The group endorses the Code of Corporate
Practices and Conduct as contained in the
South African King II Report which was issued
in 2002, and complies substantially with the
principles incorporated in that report. The
group maintains listings on the JSE Securities
Exchange (South Africa), New York Stock
Exchange (NYSE), London Stock Exchange
and Frankfurt Stock Exchange and complies
substantially with the regulations and notes of
those exchanges to the extent required.
Sappi Forest Products, owns and manages540,000 hectares of plantations and produceschemical cellulose (dissolving pulp), bleachedand unbleached kraft pulp, containerboard,packaging paper, newsprint and sawn timber.
Sustainable development 31
At Sappi, our approach to sustainabledevelopment is to concentrate on theresponsible execution of our core businessactivities. In keeping with “Prosperity, People,Planet”, the three key elements inherent inthe concept of sustainable development,we aim to create wealth while buildinghuman capability and striving for continuousimprovement in the environmental field.
Notice to shareholders 152
Notice of the sixty-eighth annual generalmeeting of Sappi Limited.
Proxy form 165
Proxy form for the annual general meeting.
Five-year review 54
Five years of income statement, balancesheet and the statistics including return andgearing ratios.
Share statistics 58
Who are Sappi’s owners and how do ourshares trade on the JSE Securities Exchangeand the New York Stock Exchange.
Sappi Printer of the Year IBC
For twenty-six years Sappi has promotedexcellence in printing by honouring andcelebrating printers through the Sappi Printerof the Year competition.
Throughout this document US$ refers to US Dollar, unless otherwise stated. For other abbreviations and glossary terms refer to page 162.
sappi limited page 4
• Headline EPS 45 US cents for the year
• Demand strengthened
• US coated paper prices improving
• Raw material cost pressure
• Dividend 30 US cents
financial highlights
September September September
2004 2003 2004
US$ million US$ million R million
Sales 4,728 4,299 31,594
EBITDA(1)
653 667 4,364
Operating profit (2) 188 272 1,256
Net profit for the year (3) 98 143 655
Headline earnings (3) 101 157 675
Earnings per share (US cents) (3) 43 62 287
Headline earnings per share (US cents) (3) 45 69 301
Dividend per share (US cents) – declared after year-end (4) 30 29 186
Ordinary shareholders’ interest per share (US cents) (3) 936 857 6,015
The number of times theaverage magazine ispicked up before it isdone with is 5.4 times. The Quality of Reading
Survey 2000
The top 25 magazinesreach more adults thanthe top 25 televisionprograms. Nielson, MRI, Fall 2002
sappi limited page 5
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Sales(US$m)
00 01 02 03 04
4,71
8
4,18
4
3,72
9 4,29
9 4,72
8
400
350
300
250
200
150
100
50
0
Net profit(US$m) *
00 01 02 03 04
363
138
221
143
98
* Net profit has been restated as a result of the adoptionof AC137
Comparative amounts for 2001 and 2000 were notrestated for AC137 due to insufficient availableinformation
700
600
500
400
300
200
100
0
Operating profit(US$m) *
00 01 02 03 04
670
239
402
272
188
* Operating profit has been restated as a result of theadoption of AC137 and to take into account therequirements of Circular 3/2004
Comparative amounts for 2001 and 2000 were notrestated for AC137 due to insufficient availableinformation
Achieved Achieved
September September
2004 2003
Operating profit to sales (%) (2) 4.0 6.3
Return on net assets (RONA) (%) (2) 4.2 6.7
Return on equity (ROE) (%) (3) 4.8 8.1
Net debt to total capitalisation ratio (3) 0.32 0.31
Cash interest cover (times) (3) 5.5 5.8
(1) Refer to the Five-year review for a reconciliation of EBITDA to net profit. The comparative
information was restated to take into account the effects of implementation of the new accounting
standard for plantations AC137 (IAS 41).
(2) The comparative information was restated to take into account the effects of implementation of the
new accounting standard for plantations AC137 and circular 3/2004 issued by the South African
Institute of Chartered Accountants – non-trading profit now included in operating profit.
(3) The comparative information was restated to take into account the effects of implementation of the
new accounting standard for plantations AC137.
(4) The dividends for both financial years were declared subsequent to year-end.
Note:
Definitions for various terms and ratios used above are included in the Glossary on page 162.
160
140
120
100
80
60
40
20
0
Headline EPS(US cents) *
00 01 02 03 04
152
114
102
69
45
* Headline earnings per share has been restated asa result of the adoption of AC137
Comparative amounts for 2001 and 2000 were notrestated for AC137 due to insufficient availableinformation
sappi limited page 6
global operations
Sappi Trading office (1)Sappi Trading office (1)
North America
Central America South America
Fine Paper mills (4)
Sales offices (7)
Sappi Trading office (1)
Paper remembers the day
sappi limited page 7
Corporate head office
Fine Paper mills (3)
Forest Products mills (5)
Fine Paper sales offices (4)
Sappi Trading offices (3)
Forest Product sales offices (9)
Sappi Trading office (1)
Southern Africa
Central Africa
Australia
Asia
Europe
Sappi Trading office (1)
Paper mill – joint venture (1)
Sappi Trading offices (4)
Fine Paper mills (8)
Sales offices (19)
Sappi Trading office (1)
you discovered a whole new world LIFE WITH PRINT
sappi limited page 8
sappi at a glance
sappi limited
sappi fine paperSappi Fine Paper’s operations
are managed through three
regional business units, Sappi
Fine Paper North America,
Sappi Fine Paper Europe and
Sappi Fine Paper South Africa.
Sappi Fine Paper is the leading producer of coated
fine paper in North America, Europe and Africa. The
company also produces a range of uncoated graphic
and business paper, coated and uncoated speciality
paper and casting release paper used in the manufacture
of artificial leather and textured polyurethane applications.
It is approximately 70% self-sufficient in pulp.
operating divisions description
sappi forestproductsSappi Forest Products,
headquartered in Johannesburg,
is Africa’s largest forest products
business. It operates three
business units, Sappi Kraft,
Sappi Saiccor and Sappi Forests.
Sappi Forest Products is a pulp and commodity paper
products business. It is a fully integrated business which
owns and manages about 540,000 hectares of plantations
and produces bleached and unbleached paper pulp for
own consumption and market pulp. It is the world’s largest
producer of chemical cellulose (dissolving pulp). It also
produces newsprint and kraft packaging paper and
beneficiates wood into timber products.
Sappi Trading with its head office in Hong Kong, sells the group’s products internationallyoutside the home markets of the company’s operating divisions.
^ Rounded to the nearest 10.
Pulp integration: Sappi producesunbleached and bleached paperpulp (largely for its ownconsumption) and dissolving pulp.The group’s total pulp demandexceeds its capacity and thereare imbalances between types ofpulp required, grades produced,and within regions. The grouptherefore sells and buys pulp.Sappi sells slightly more pulpthan it purchases.
# Excluding Kraft production.
• Sappi Usutu mill manages theUsutu forests and the numberof employees is included in theSappi Usutu mill section.
† Including corporate, Regionaloffices, Sappi Trading and salesoffices.
sappi limited page 9
Bleached chemical pulp for own consumptionCoated woodfree graphic paper, coated and uncoated speciality paperCoated woodfree graphic paperBleached chemical pulp for own consumption and market pulpCoated woodfree graphic paper, uncoated woodfree paperBleached chemical pulp for own consumption Coated woodfree graphic paperBleached chemi-thermo mechanical pulp for own consumptionCoated mechanical graphic paper, coated speciality paperCoated woodfree graphic paperUncoated business paperCoated woodfree graphic paper
Sappi Fine PaperEurope
Bleached chemical pulp for own consumption and market pulpCoated woodfree graphic paper
Bleached chemical pulp for own consumption and market pulpCoated woodfree graphic paper
Bleached chemical pulp for own consumption and market pulpCoated woodfree graphic paper
Coated speciality paper
divisionsmills/factories/plantations
products producedcapacity (’000 tons) ^
paper pulp ��employees ^
Sappi Fine PaperNorth America
Alfeld Mill
Blackburn MillEhingen Mill
Gratkorn Mill
Lanaken Mill
Maastricht MillNash MillNijmegen Mill
Adamas MillEnstra Mill
Stanger Mill
410260
110260
490760
30
3,050
5,510
10,520
1,960
120360120
130230
250860
16048032030
240
40100
20060
110
4,300 # 1,830
Sappi Fine PaperSouth Africa
Uncoated woodfree graphic paperBleached chemical pulp for own consumptionUncoated graphic and business paperBleached bagasse pulp for own consumptionCoated woodfree graphic paper and tissue paper
Subtotal Sappi Fine Paper
Cloquet Mill
Muskegon Mill
Somerset Mill
Westbrook Mill
In October 2004, we announced a joint venture agreement to acquire 34% of JiangxiChenming Paper Company which is building a light-weight coated paper machine witha capacity of 350,000 tons per annum.
Sappi Saiccor
Sappi Forests
Sappi Kraft
360
16,010 †
4,950
630
990
710
2,260
Cape Kraft MillNgodwana Mill
Tugela Mill
Usutu Mill •
Saiccor Mill
KwaZulu NatalMpumalangaUsutu (Swaziland) •
Sawmills
60
410100
240140
35030090
230
600
830 1,690
5,130 3,520
Waste-based linerboard and corrugating mediumUnbleached kraft pulp for own consumption, bleached chemical pulpfor own consumption and market pulpMechanical pulp for own consumptionKraft and white top linerboardNewsprintUnbleached kraft and semi-chemical pulp for own consumption Kraft linerboard and corrugating mediumOther kraft packaging papers
Unbleached kraft market pulp
Chemical cellulose (dissolving pulp)
capacity/hectares(’000) ^
Plantations (pulpwood and sawlogs) 230 haPlantations (pulpwood and sawlogs) 235 haForests (pulpwood) 75 ha
Sawn timber 80 m3
Subtotal Sappi Forest Products
Grand total
sappi limited page 10
Jonathan Charles AlexanderLeslie (54)
Chief Executive Officer, joined Sappiin April 2003. Mr Leslie waseducated at Trinity College, Oxford,receiving a Master of Arts degree inJurisprudence. He was called to theBar in 1974. Prior to joining Sappi hespent 26 years with Rio Tinto andwas appointed director of Rio Tintoplc in 1994 and Rio Tinto Limited in1995. He had wide experience ofthe company’s interests in Africa,Australia, Latin America and theUnited States, including asManaging Director of RössingUranium in Namibia. Mr Leslie wasChief Executive of the Copper Groupfrom 1997 to 1999 and ChiefExecutive of the Diamonds and GoldGroup from 1999 until joining Sappi.
Donald Gert Wilson (47)Wolfgang Pfarl (60)John Leonard Job (60)
board of directors
BCom CTA, Chartered Accountant(South Africa), Executive Director –Finance of Sappi Limited. He joinedSappi in April 1999 and wasappointed to the board in May 1999.Mr Wilson has held various executivefinancial positions in the BarloworldGroup, a South African-basedinternational industrial corporation,mainly within their Caterpillarearthmoving division.
Dipl Kfm, Chief Executive Officer ofSappi Fine Paper Europe. Mr Pfarlwas appointed to his presentposition in December 1997 followingSappi’s acquisition of KNP Leykam.In 1989, he was appointedChairman of the Executive board ofLeykam-Mürztaler and becameExecutive Chairman of KNP Leykamafter the merger in 1993 of the finepaper production activities of NVKoninklijke KNP BT (now BuhrmannNV) and the Austrian paper producerLeykam-Mürztaler. Mr Pfarl wasappointed to the board of SappiLimited in December 1997.
BSc Hons (Rand), PhD (McGill).Executive Director of Technology.Dr Job joined Sappi in July 1999and was appointed to the board inAugust 1999. He served asChairman of Sappi’s South Africanbusinesses and as ExecutiveDirector, Technology until the endof December 2004 when herelinquished his responsibility forthe South African businesses. Hecontinued with his responsibility asExecutive Director, Technology andfrom April to October 2004 alsoassumed the responsibility asPresident and Chief Executive Officerof Sappi Fine Paper North America.He has 25 years experience in thechemical industry and was formerlythe Chief Executive Officer ofSentrachem. Dr Job is a Director ofthe National Research Foundation ofSouth Africa.
The executive directors are the executive officers of Sappi.
Executive directors
sappi limited page 11
Meyer Feldberg (63)(independent)
Klaas de Kluis (68)(independent)
David Charles Brink (65)(independent)
Eugene van As (65)
BA (Wits), MBA (Columbia), PhD(Cape Town). Professor Feldberg’scareer has included a number ofteaching and leadership positionsin the business schools of theuniversities of Cape Town,Northwestern and Tulane. In 1986,he was appointed president andChief Executive Officer of the IllinoisInstitute of Technology. From 1989to 2004, he served as Professor ofManagement and Dean of ColumbiaBusiness School. He is currentlyDean Emeritus and the Sanford CBernstein Professor of Leadershipand Ethics at Columbia BusinessSchool. Professor Feldberg serveson the Advisory board of the BritishAmerican Business Council andhas served on the Council ofCompetitiveness in Washington DC.In 2001, the International Centrein New York honoured ProfessorFeldberg as a distinguished foreign-born American who has made asignificant contribution to Americanlife. He is a director of many majorpublic companies includingFederated Department Stores Inc,Revlon Inc, PRIMEDIA Inc, UBSFunds and Select MedicalCorporation. Professor Feldberg wasappointed to the board of directorsof Sappi Limited in March 2002 andis currently a member of the HumanResources Committee and of theNomination Committee of the boardof directors of Sappi Limited.
Master of Law. From January 1998until July 1998, Mr de Kluis acted asChairman of the Executive board ofNV Koninklijke KNP BT (nowBuhrmann NV). He held the positionof Vice Chairman of the Executiveboard of NV Koninklijke KNP BTfrom March 1993 to April 1996.Presently he is a member of thesupervisory boards of a numberof private companies in theNetherlands and is Chairman ofthe Audit Committee of the boardof directors of Sappi Limited andChairman of the Audit Committeeof Sappi Fine Paper Europe.Mr de Kluis was appointed to theboard of directors of Sappi Limitedin January 1998.
MSc Eng (mining), DCom (hc),Graduate Diploma in CompanyDirection. He was appointed a Non-executive Director of Sappi Limitedin March 1994 and is currently amember of the Audit Committee, ofthe Human Resources Committeeand the Nomination Committee ofthe board of directors of SappiLimited. Mr Brink is Chairman ofUnitrans Limited and DeputyChairman of Absa Bank Limited andAbsa Group Limited. He is a directorof Sanlam Limited, and BHP BillitonLimited and Plc, where he isChairman of the Health, Safety andEnvironment Committee and also amember of the Risk Managementand Audit Committee. Mr Brink iscurrently a board member of theNational Business Initiative, he is co-chairman of the Business Trust andis also a founder member of theIndependent directors’ Initiative. Heserves on the board of Trustees ofthe SA Nature Foundation. Mr Brinkretired as Chairman of Murray &Roberts at the end of 2003.
Chairman. Mr van As joined Sappi inDecember 1976 as the ManagingDirector of Sappi Kraft (Pty) Limitedand was appointed to the board inJanuary 1997. In 1978, Mr van Aswas appointed Group ManagingDirector and Chief Executive Officer,Sappi Limited, becoming ExecutiveChairman in 1991 and Non-executive Chairman on hisretirement as an Executive Directorin 2003. He is also a Director ofSanlam Limited and a trustee of anumber of education and researchbodies.
Non-executive directors
sappi limited page 12
Non-executive directors continued
Deenadayalen (Len) Konar(50) (independent)
James Edward Healey (63)(independent)
Monte Roy Haymon (67)
BCom, MAS (Illinois), DCom,Chartered Accountant (South Africa).Previously Professor and Head ofthe Department of Accountancy atthe University of Durban-Westville.He is a member of the KingCommittee on CorporateGovernance, the CorporateGovernance Forum and the Instituteof directors. Companies of which heis a Non-executive Director includeOld Mutual South Africa, the SouthAfrican Reserve Bank, KumbaResources Limited, Illovo Sugar,JD Group and Steinhoff InternationalHoldings. Dr Konar is currently anindependent consultant in corporategovernance, risk management,compliance and internal audit andjoined the board of directors ofSappi Limited in March 2002 wherehe is a member of the AuditCommittee and also the Chairmanof the Audit Committee of Sappisouthern African region.
BSc (Public Accounting) PaceUniversity (1964, Honorary Doctorof Commercial Science, PaceUniversity (2000). Joined the SappiLimited board with effect from July2004. Mr Healey has held varioussenior financial positions in a careerspanning 37 years. He began hiscareer as an auditor with Ernst &Young and from 1973 until hisretirement at the end of 2000, heheld various financial positions in theconsumer goods industry. Hebecame Vice President andTreasurer of Bestfoods, formerlyCPC International Inc in 1995.In 1997 he moved to NabiscoHoldings Inc, one of the world’slargest snack food manufacturers,as Executive Vice President andChief Financial Officer, a positionfrom which he retired at the end of2000. He is a member of the boardof directors of Interchange FinancialServices Corporation. He is currentlya member of the Audit Committee ofthe board of directors of SappiLimited.
Bachelor of Science in ChemicalEngineering, served as Presidentand Chief Executive Officer of SappiFine Paper North America from 1995to 2002. Prior to joining Sappi hehad been President and ChiefOperating Officer of Ply-GemIndustries and for thirteen years,President and Chief Executive Officerof Packaging Corporation ofAmerica, a division of Tenneco Inc.Mr Haymon was appointed to theboard of directors of Sappi Limitedin October 1995, becoming a Non-executive Director from January2003. He serves on the board ofother public companies in the UnitedStates and Europe.
board of directors continued
sappi limited page 13
Franklin Abraham Sonn (65)(independent)
Bridgette Radebe (44)(independent)
Helmut Claus-JurgenMamsch (59) (independent)
BA, HdipEd (Hons) FIAC. He wasappointed to the board of directorsof Sappi Limited in July 1999 andis currently a member of theNomination Committee of theboard of directors of Sappi Limited.He was the former Rector ofPeninsula Technikon for 17 yearsand appointed democratic SouthAfrica’s first ambassador to theUnited States from 1995 to 1998.He returned to South Africa in 1999.He is the recipient of elevenhonorary doctorates in law,education, humanities andphilosophy from various institutionsin South Africa, Europe and NorthAmerica. His current board positionsinclude amongst others, African StarVentures (Pty) Ltd as ExecutiveChairman, Steinhoff Group HoldingsLtd, Macsteel Holdings (Pty) Ltd,Capespan Group Holdings Ltd,ABSA Group Ltd, ABSA Bank Ltdand ABSA Personal Bank, NewAfrica Capital Ltd and Pioneer FoodGroup Ltd. He was appointedChancellor of the University of theFree State in 2002 and serves asDeputy President of the Chamber ofCommerce and Industry in SouthAfrica (CHAMSA) and as Chairman,Trustee and Patron to numerousorganisations of civil society.
BA (Political Science) BotswanaUniversity. In the last 16 years,Ms Radebe has worked in a broadrange of sectors across industry andcommerce with a particular focus inmining. She is currently theExecutive Chairperson of MmakauMining making her the only womanto head a deep-level hard rockmining company in South Africa.She founded that business in 1995and has turned it into a leadingplayer in the mining managementindustry. Ms Radebe chairs theSouth African Mining DevelopmentAssociation, which represents anddevelops South Africa’s small andjunior miners. She was closelyinvolved in developing the Mineral &Petroleum Resources DevelopmentAct and the Mining Charter, and untillast year chaired the InternationalWomen’s Forum in South Africa,which focuses on leadershipfoundation programmes forprofessional women. She is also aDirector of the LeadershipFoundation IWF, Washington, andserves on the boards of the NationalResearch Foundation and the NewAfrica Mining Fund. Ms Radebejoined the Sappi Limited board inMay 2004.
Studied economics at DeutscheAussenhandels-und Verkehrs-Akademie, Bremen and alsoreceived training in businessadministration and shipping inGermany, the UK and Belgium. Heworked for 20 years for CoutinhoCaro & Co. He joined themanagement board in 1986 withresponsibility for international tradeand shipping. At the same time,he joined the management ofMcDermott International based inNew Orleans after the latter acquiredCoutinho Caro. In 1989 he moved toVEBA AG, one of Germany’s largestutility-based conglomerates. Until1996 he was Chairman of RaabKarcher AG, a VEBA subsidiary.Concurrently, from 1991 to 1993 hewas a board member of VEBA OelAG. From 1996 to 1998 he wasChairman of the management boardof Stinnes AG, the trading andtransportation subsidiary of VEBA.Concurrently, from 1993 to 2000 hewas a VEBA AG management boardmember and as from 1998responsible for their US electronicbusinesses, Corporate Strategy andDevelopment. In 1997 he joinedLogica as Non-executive Director andin 2002 was appointed DeputyChairman. He is also a Non-executiveDirector of RMC Group Plc and GKNPlc and a former supervisory boardmember of Commerzbank AG,Degussa AG, Steag AG and theformer Chairman of MEMC Inc.Mr Mamsch was appointed as Non-executive Director in January 2004and is currently a member of theAudit Committee of the board ofdirectors of Sappi Limited.
sappi limited page 14
The past year proved to be a particularly challenging one for the
global pulp and paper industry. Despite a general improvement in
global economic conditions which would have been expected to
flow through to the paper industry, paper companies have
continued to underperform the market in return to shareholders,
margins have been under pressure and results have been weak.
In this environment Sappi displayed resilience stemming from our
well-balanced spread of products, markets and currencies.
However, our US business has significantly underperformed our
standards and our investors’ expectations, and has continued to
do so through the end of the year. This is a major concern for our
board. We are also conscious that there have recently been many
changes in management in this business, but we are confident
that we can earn acceptable returns in the future and that the
new Chief Executive of Sappi Fine Paper North America, Ronee
Hagen, who took up the reins on the 01 November, will deliver the
results we all expect.
The global economy has shown a strong recovery from its cyclical
downturn in 2000 with particularly strong growth in China and
recently in the United States, whilst Europe lagged but is now
growing reasonably. The strong investment-based growth in China
has led to price increases for most commodities, particularly steel
and other metals as well as energy, but prices for paper, which is
generally a later cycle consumption-based product, have taken
longer to recover than normal.
Surplus capacity, particularly in Europe, and industry’s attempts to
sell additional volume into weak markets have been significant
factors impacting coated paper prices, which eroded to historic
lows. All data that I have seen would indicate that our customers
and their customers look for stable, fair, competitive prices. A
sharp decline in price does not stimulate demand although it
might generate product switching. The converse is not true –
sharp price rises tend to make consumers rethink their formats
and can have a long-term negative impact on paper consumption.
chairman’s statement
We get more ideasabout what to buy frommagazines than any othermedium. 66% of ideasare sourced frommagazines. IPC Media Values
Direct mail is more and more part of the media mix andtotal expenditures have increased to more than €31 billion.A total of almost 25 billion items of addressed direct mailwere sent to inform and seduce consumers across Europe.Fedma, Survey on Direct and Interactive Marketing Activities in Europe,
2003
sappi limited page 15
Demand for coated paper was also severely affected by the worst
advertising recession in at least 20 years in the period after 2000.
However, in 2004 global advertising spend started recovering,
which has contributed to strong growth in worldwide paper
consumption and capacity utilisation. Advertising spend is
forecast to remain buoyant through to at least 2006, which will
lead to a positive outlook for coated paper.
Sappi’s performance during the year was disappointing. Weak
coated paper prices and the impact of input price increases,
particularly oil and other materials including wood, restricted
margins. We have long stated that it is our aim to earn in excess
of our cost of capital through the cycle, although we recognised
that this can probably not be done in every quarter or even every
year. The decline of our return on equity from an already low 8.1%
the previous year to 4.8% this past year is disappointing, but our
aim to beat our cost of capital remains intact.
Last year’s performance was exacerbated by currency volatility,
particularly the extraordinary strength of the South African Rand,
which has appreciated by more than 60% in two years compared
to the US Dollar. Whilst the strong Rand positively affects the
translation value of our South African businesses’ earnings into
our reporting currency of US Dollars, the net effect is negative.
Sappi does not speculate in currencies but the consequence of a
rapid increase in the value of one of the currencies compared to
the US Dollar, which is the benchmark currency for most of our
sales, can be very painful. Typically a weak US Dollar will result in
rising US Dollar denominated prices for pulp and ultimately paper
products. However, that takes time and currency moves have
been rapid. Our South African business therefore has suffered
severe short-term pressure on margins.
The price of coated paper started to rise towards the end of our
financial year but the benefits were not reflected within the
reporting period. We expect strong price recovery in the United
States during the first half of our financial year. Pulp prices are
currently increasing and we expect paper prices in Europe to
improve in our second fiscal quarter.
In these difficult conditions, Sappi continued to generate positive
cash flows. We have delayed some of our expansion projects and
exercised disciplined cash management. Our net debt to total
capitalisation is 32%, which is comfortably within our target range
and allows us a lot of flexibility to tackle new projects. We
continued our progressive dividend policy, which has an average
dividend cover ratio of three times over the cycle, and declared a
dividend of 30 US cents per share in November 2004.
Over the year, a great deal of work has gone into evolving the
group’s strategy to differentiate its product and service offering to
its customers with the aim of further distancing our offering from
our competitors and thereby improving our financial returns. Part
of the strategy has been to find new ways to invigorate the
demand for print media as a whole.
The slump in advertising spend after 9/11 exacted a heavy toll on
the paper industry over the last few years but it has turned and is
recovering. There is a wealth of evidence which speaks to the
unrivalled effectiveness of print advertising in generating product
awareness and product sales when compared to electronic
media. Sappi management has been the catalyst in developing
a response to the decline in print advertising, part of which is
evidenced by Sappi’s acclaimed advertising promotion of the
power of print which has been recognised by “American Printer”
magazine as the most important print promotion campaign ever.
It is starting to galvanise other industry players to take up the
advocacy work on their own, and I think our management team
should be commended for this effort.
Our pursuit of improved and sustainable returns for shareholders
is grounded in our philosophy of corporate social responsibility,
which we have used as an integral part of good business
practice. It is a business imperative to have a responsible and
harmonious relationship with the communities where we work and
this should be evident in our attitude to safety, the environment,
quality management and social responsibility. These practices are
adapted to the needs of the societies in which we operate. We
measure our performance in these areas stringently and we
reward excellence on a regional and local level.
This programme is particularly important in our home market.
Sappi recognises the need for socio-economic transformation in
South Africa. We do not fear the development of Black Economic
Empowerment initiatives. We see it as an opportunity. Our efforts
at developing underprivileged communities goes back over
20 years. We have seen significant evidence of the benefit of
creating opportunities from broad-based wealth creation for local
communities, particularly in rural areas.
Demand for coated paper was also severely affected by the worst advertisingrecession in at least 20 years in the period after 2000.
sappi limited page 16
We continue to pursue a broad-based black economic
empowerment agenda in South Africa and to focus particularly
on rural areas and on forestry development. Our approach to
empowerment is that any transaction should add value to our
business and add value to the community or society where we
operate. We see no reason for it to result in a reduction in the net
present value of our group.
Our long-term approach is entirely consistent with the current
emphasis on corporate governance in the new requirements
represented by the Sarbanes-Oxley Act of the United States or
the King II Report on Corporate Governance in South Africa. Our
response to these developments is that good businesses have
good governance and that we should focus on improving our
internal controls to benefit shareholder value. We seek to maintain
an entrepreneurial spirit in the group which is so much part of
Sappi’s heritage and success whilst continuing to refine our
internal controls and to meet regulatory requirements. We are
making good progress in complying with Sarbanes-Oxley S404 as
required of foreign issuers by the end of our 2005 financial year.
Two years ago we embarked on a programme to restructure our
board of directors to reflect more clearly the demographics of the
world we operate in. We have made good progress during the
year. Helmut Mamsch (Germany), Jim Healey (United States) and
Bridgette Radebe (South Africa) have joined the board of
directors. They bring with them a wide spread of skills and
backgrounds and should add to the entrepreneurial, financial and
international business skills in the group. Furthermore, they add a
balance of personalities that will assist us in building a formidable
team.
At the end of this year we will have some further retirements from
the board as we all comply with our own internal rules. Monte
Haymon, the former CEO of Sappi Fine Paper North America,
who has played an important role on the board and assisted us
enthusiastically in Investor Relations in North America, will retire
from the board at the next AGM in March 2005.
chairman’s statement continued
Paper remembers
sappi limited page 17
your first hint of love LIFE WITH PRINT
We have a focused strategy and a talented and committed
executive team, with the energy and drive to realise our strategic
ambitions. Jonathan Leslie and his team have strongly
emphasised innovation in every area of our business and this will
benefit the group greatly. We look at new opportunities with open
minds and the right mix of prudence, opportunism and resolve.
Our first step into manufacturing in China is an exciting new
venture and we expect it to be an avenue for profitable growth. In
Europe our market share is rising and having lost some market
share in the US, we are beginning to rebuild our position. We
understand the role of industry leadership and are confident that
we can play our rightful role in giving direction to the benefit of all,
our customers, their customers and ultimately also to all the
communities we operate in.
It has been a difficult year, and I want to pay tribute to Jonathan
Leslie and his management team and Sappi people the world
over, for their resilience, dedication, hard work and the effort they
have made in the interests of all the stakeholders in Sappi. The
results have not been as we had hoped, but the groundwork is
laid for the future. I would like to thank my colleagues on the
board for their insight and guidance through this difficult year and
we are confident that the year ahead will be much more
successful.
760
740
720
700
680
660
640
620
600
EBITDA(US$m) *
04
653
03
667
02
740
* EBITDA has been restated as a result of the adoptionof AC137
400
350
300
250
200
150
100
50
0
Free cash flows(US$m) *
04
126
03
256
02
340
* Cash retained from operating activities (post networking capital movements, finance costs, taxationand dividends paid) less non discretionary capitalexpenditure
Comparative amounts have been restated as resultof the adoption of AC137
112
110
108
106
104
102
100
98
96
Net finance costs(US$m) *
04
110
03
111
02
102
* Net finance costs before capitalised interest
Comparative amounts have been restated as resultof the adoption of AC137
sappi limited page 18
Strategic developmentDuring the course of the year we reviewed our strategy first with
senior management and subsequently with the board. Our review
found the group’s long-term strategy to be fundamentally sound,
requiring certain evolutionary adjustments rather than major re-
engineering.
Sappi’s objective is to be the outstanding company in the global
pulp and paper sector. First and foremost, this requires that we
return superior value to shareholders. To centralise this focus on
returns, we have undertaken to measure performance using
appropriate metrics: total shareholder return versus our peers;
and internally, growth in net present value per share. Sustaining
these returns requires being recognised by all our stakeholders –
customers, employees, local communities and regulators – as a
company that adds outstanding value in all areas of its business,
and one that does so responsibly.
We have agreed that there needs to be a shift in orientation away
from the conventional viewpoint of the paper manufacturer, which
is to be production-focused and asset-led, to a more market-
oriented position. To realise this intention, we will ensure that the
functions of marketing and product and process technology are
sufficiently resourced.
This re-orientation is being spearheaded by cross-regional marketing
clusters, which interact intimately with our technology and innovation
teams. We have also appointed a new marketing director for the fine
paper business with extensive relevant experience, having come
from the “fast moving consumer goods” sector.
An exacting understanding of customer requirements will also
support improved cost containment along the supply chain and
allow a greater degree of predictability. With production processes
informed by real as opposed to apparent demand, it will be
possible to better match production to demand levels.
Another feature of our marketing strategy has been an innovative
drive to grow the industry by creating demand. The central
element of this strategy is our widely acclaimed “Life with Print”
chief executive officer’s report
Percentage of sales from catalogs vs websites;
Websites: 20%Catalogs: 80% The DMA State of the Catalog/Interactive Industry Report, 2002
It’s an irrefutable fact,dollar for dollar,magazines are moreeffective than televisionand the internet atgenerating ad awarenessand product sales. Milward Brown
sappi limited page 19
campaign, which was launched in the US in the second quarter,
and subsequently rolled out in Europe and South Africa. The
campaign provides empirical evidence for the unmatched impact,
penetration and cost-effectiveness of print and its importance in
effective brand promotion, across the spectrum of printed media
including magazines, direct mail, brochures and catalogues, as
well as its effectiveness as a corporate communications medium.
Although the campaign is aimed mainly at giving players in the
print industry a credible basis to argue the case for print, it also
targets key decision-makers in major corporations. The campaign
has been extremely well received in the US, Europe and South
Africa. In the US, Sappi’s campaign helped motivate the Magazine
Publishers of America to commit US$40 million to a similar
initiative with a three-year rollout aimed at consumers, advertisers
and advertising agencies.
As indicated at the outset of my report, we are maintaining
many elements of Sappi’s long-term strategy which have served
us so well.
Our core focus remains coated paper. Coated fine paper
represents 18% of global graphic paper demand and has
consistently shown the fastest demand growth of any paper
segment. From 1988 – 2003, the global compound annual growth
rate in the coated fine paper segment was 5.7%, followed by
coated groundwood at 3.2%. Strong growth is expected to
continue with estimates for the next five years seeing compound
annual growth of 4.4% and 3.9% respectively.
Sappi has built up an excellent asset base and significant technical
expertise in coated paper. We have a broad suite of coated paper
machines, capable of producing a full product range to cover the
different segments of the coated paper market. Our geographic
spread means that our production and service facilities are situated
close to our customers, and our portfolio of best-known brands is
uniquely suited to service their diverse needs.
We also have a strong southern Africa forest products business.
Our chemical cellulose (dissolving pulp) business has a leading
world market share in the viscose market and growing shares in a
range of other cellulose-based markets. We are currently investing
to debottleneck production to expand this business further. We
also have important regional market shares in packaging paper,
newsprint, uncoated paper and continue to explore value adding
investments in these businesses.
Sappi is fully pulp integrated on an economic basis, which allows
the benefits of low cost pulp in one region to offset the cost of
pulp purchases in another. Our South African based Forest
Products division produces over half our global pulp requirements
and we are a net seller of pulp by a small margin. We will continue
to invest in maintaining this significant low-cost pulp advantage,
and we will look to apply our extensive expertise in plantation
forestry in new geographic areas.
We also intend to examine opportunities to expand our global
manufacturing base through sensible acquisitions that deliver the
required synergies. As such, we will consider partnerships with
Sales by region
Where the product is sold *Where the product is manufactured *
Europe 45%
Southern Africa 26%
North America 29%
* For the year ended September 2004
Southern Africa 15%
Far East and other 13%
North America 31%
Europe 41%
Geographic diversity adds strength . . .
Sappi’s objective is to be the outstanding company in the global pulp andpaper sector. First and foremost, this requires that we return superior valueto shareholders.
sappi limited page 20
chief executive officer’s report continued
local players that can provide assets or market positions that are
strategically attractive. In line with our long-stated intention to
expand into Asia, we made our first manufacturing investment in
this region post year-end.
In October 2004, we announced a joint venture agreement to
acquire 34% of Jiangxi Chenming Paper Company in south-east
China for an equity contribution of approximately US$60 million.
The balance will be owned by Shandong Chenming Paper
Holdings, a leading Chinese paper producer, together with Jiangxi
Paper Industry Company; the leading Korean fine paper
manufacturer Shinmoorim Paper Manufacturing Company and
the International Finance Corporation. Jiangxi Chenming is
constructing a light-weight coated paper machine, a mechanical
pulp mill, ancillary plants and transportation infrastructure. The
total cost of the project is US$487 million and construction is at
chief executive officer’s report continued
Data shows that a marketing program combining print andtelevision almost always out performs one that relies ontelevision alone.International Federation of the Periodical Press
Paper remembers you dreaming of
In October 2004, we announced a joint venture agreement to acquire 34% ofJiangxi Chenming Paper Company in south-east China for an equitycontribution of approximately US$60 million.
sappi limited page 21
an advanced stage. The mill is scheduled to start delivering paper
in the first half of 2005. In the short term, it is expected to export
around half its product, and over the long term will supply only the
expanding Chinese market.
China is currently the fastest growing market for printing and
writing paper, with demand growth of 9.1% forecast for 2004,
against 5.8% for Europe and 3.8% in North America. Global
demand growth is expected to be 5%. The project’s debt is
without recourse to the group, making it an excellent low-risk
entry into the Chinese market and an opportunity to build
experience, as well as a platform from which to investigate and
pursue other ventures.
Going forward, we intend to exploit our coating expertise to
realise profitable opportunities in the adjacent coated paper
markets we already operate in, as well as across the coated
paper spectrum. This will include value adding growth
opportunities in coated groundwood and coated specialities
markets. These are likely to be niche, customer focused
opportunities and our objective will be to grow in step with
customers’ needs from an efficient base. Our coated specialities
business is particularly dependent on close relationships with
customers and insight into their specific requirements. It is
therefore well suited to act as a nursery for innovation – being
able to test new technology and marketing ideas for export to
other parts of the business.
Underlying all these efforts is a steadfast commitment to financial
discipline, the efficient use of capital, and focus on cash flow. We
continue to maintain a strong balance sheet by keeping net debt
to within 25 – 50% of total capitalisation. To ensure that our
We have strong market focus . . .Sales by product group *
* For the year ended September 2004
Pulp 13%
Packaging andnewsprint 9%
Other 1%
Coated fine paper 63%
Uncoated fine paper 5%
Coated specialities 9%
Our current geographic ownership **
South African investors 51%
European investors 12%
North American investors 36%
Rest of world 1%
** As at September 2004
one day being on those posters LIFE WITH PRINT
sappi limited page 22
capital investments add maximum value, we will continue to invest
in the improved efficiency and cost-competitiveness of our
existing assets, and in new machines and pulp mills only where
these conform to strict criteria. All major projects will be evaluated
against the alternative of repurchasing our shares.
Ultimately, the success of our strategy is dependent on the people
responsible for its implementation. As such, leadership has been a
key theme for Sappi over the year. We made a number of new
executive appointments across the business to ensure we have
the right quotient of skills and experience in place to implement
our strategy effectively and to deliver on our objectives. Most
recently we have appointed Veronica Hagen to run Sappi Fine
Paper North America.
Performance overviewFor Sappi, the year in review was a year in two distinct halves.
Although economic conditions began to ease early in 2004 and
improved steadily, this upturn was only felt in our markets in the
second half of the fiscal year, as coated fine paper growth tends
to lag changes in economic activity. The recovery in economic
conditions stimulated demand levels in all our markets, although
low paper price inflation and rising input costs were also common
but dampening factors over the year.
Sales for the year increased by 10% to US$4,728 million primarily
as a result of the improved demand in the second half and
enhanced by currency translation effects. Despite top line growth,
operating profit fell by 31% to US$188 million compared to the
prior year, following another year of weak prices accompanied
by input cost pressures. However, it is pleasing to note that
operating profit in the second half of the year was up from the
corresponding prior period, underlining the improvement in market
conditions. Continued Rand strength relative to the US Dollar
adversely affected our South African operations, which
experienced a margin squeeze as revenue realisation from exports
were affected by the translation from a weaker US Dollar and
competition from imports intensified.
Selling, general and administration costs increased by US$87 million
compared to the prior year largely as a result of currency translation
effects, restructuring charges mainly related to the closure of the
Westbrook Mill paper machine, a US$10 million credit for employee
benefits in 2003 and increasing employee costs.
Rising energy costs and high wood costs in North America had a
further impact on our costs.
chief executive officer’s report continued
We constantly work to reduce fixed and variable costs in all our
businesses. The rising tide of raw material costs this year
overshadowed much of the work we have done on variable costs.
However, we have successfully reduced fixed cash costs by
US$31 million compared to fiscal 2003 at constant exchange
rates, part of which stems from a 5.5% reduction in our workforce
(more than 900 employees) during the year.
During the year cash generated by operations fell 6.7% to
US$601 million reflecting difficult operating conditions. Our capital
expenditure was US$334 million, about 82% of depreciation.
In Europe, an overhang of capacity made it difficult to raise prices,
despite the resurgence in demand that started the previous year.
Rising input costs, due to the spiralling oil price and its direct effect
on energy costs and indirect effect on transport and certain raw
materials, continued to affect profitability. European sales grew by
11.8% to US$2,127 million following volume increases over the
year, which reflected the strong apparent consumption growth in
this region and the currency translation effect. Price increases
announced in Europe for April were unrealised and continued low
prices had an adverse impact on operating margins. Operating
profit declined by 29.7% to US$83 million for the year.
Given the recovery in the US market and rebounding demand,
operational results in this region were disappointing and returns
remain unacceptable. This reflected our inability to realise price
increases in step with improving market conditions, given the
price protection unusually afforded to many customers. This
appears to have been an industry-wide challenge that has
stemmed from giving away pricing power over a prolonged period
of weak market conditions. We are redressing this trend and a
major priority is improved price management and price realisation.
Although we realised significant increases in prices during the
fourth quarter, the full impact of our corrective actions will only
be seen in subsequent quarters. Sales in our North American
business declined marginally to US$1,373 million while it reported
an operating loss of US$92 million after costs associated with the
closure of the Westbrook Mill paper machine No 14 and
restructuring costs amounting to a total of US$20 million.
Although margins were impacted by higher input costs in this
region, some mitigation came from strong shipments and price
increases in the last two quarters.
The South African Fine Paper business performed strongly over
the year, posting an increase in sales of 15.2% to US$311 million.
Demand for our products is strong, advertising spend is rising in our majormarkets and prices for coated paper are showing upward momentum.
sappi limited page 23
Despite strong local demand and significant savings in fixed and
variable costs being achieved, Rand strength took its toll and
resulted in a sharp reduction of margins and returns. This
impacted on operating profit, which decreased by 57.1% to
US$15 million.
Sappi Forest Products was also affected by the increase in
competition from imports. However, helped by the increase in
demand for chemical cellulose (dissolving pulp), improved
US Dollar pulp prices and the currency translation effect, the
division posted a 23.6% increase in sales to US$917 million for
the year. The results in this region were enhanced by the
plantation fair value adjustment in terms of the relevant
accounting standard. Including the net fair value adjustment on
plantations of US$70 million, operating profit for the year
increased by 69.0% to US$191 million.
We continue to drive behavioural-based safety
improvement throughout the group. A 27.5% improvement
in lost time frequency rate was achieved. These good results
were, however, overshadowed by three fatal accidents in the
group. We are committed to the goal of zero accidents in our
operations.
Looking aheadWe are positive about the market prospects for the year ahead.
Coated fine paper capacity utilisation is very high in North America
and climbing in Europe. Demand for our products is strong,
advertising spend is rising in our major markets and prices for
coated paper are showing upward momentum. We have
announced further price increases in North America since the
end of the financial year and we expect them to be effective in
the first calendar quarter of the coming year.
When we announced our fourth quarter results for 2004 in
November, we cautioned shareholders that a number of factors
would depress earnings in our first financial quarter of 2005.
These include the continuing strengthening of the Rand against the
US Dollar which reduces margins in our South African business at
least in the short-term, the non-cash effect of a change in South
African Statements of Generally Accepted Accounting Practice for
secondary tax on companies relating to the announced dividend,
the unexpected repairs that had to be conducted after a routine
maintenance shut at the Somerset pulp mill in North America and
the continued pressure on input costs from high energy prices.
However, while the strength of the Rand against the Dollar
continues to place pressure on price realisation in South Africa,
we are hopeful of seeing upward momentum in prices in Europe
and particularly in the United States, which, together with the
strong action we are taking to offset rising costs with vigorous
planned cost savings and profit improvement initiatives, should
enable margins to begin to rise.
I would like to thank all of Sappi’s employees and my executive
colleagues for their hard work, perseverance and fortitude. I know
that I can rely on the same enthusiastic response to the
challenges in the year ahead. Whilst the year will be challenging
I am confident that barring unexpected changes in world markets
and provided the Rand/Dollar exchange rate for the year returns
to the average level of last year, there should be a substantial
improvement in the earnings of the group.
1,600
1,400
1,200
1,000
800
600
400
200
0
Debt maturity profile(US$m)
06
174
07
56
05
364
08
59
09
34
There-after
1,37
0
sappi limited page 24
sappi fine paper review
OverviewSappi Fine Paper is the world’s leading producer of coated fine
paper with manufacturing assets in North America, Europe and
South Africa. Some 63% of the group’s sales by value derive from
coated fine paper. Sappi Fine Paper has 24% market share in
North America and 20% in Europe. In 2004, the Fine Paper
division represented 81% of total group sales and 3% of group
operating income, and contributed US$6 million to operating
income in the 2004 year.
Sappi Fine Paper’s main product line is high quality, branded
coated fine paper, but it also supplies uncoated graphic and
business paper, coated and uncoated speciality paper, and
casting release paper used in the manufacture of artificial leather
and textured polyurethane applications. Its customers in 100
countries include leading printers, advertisers, publishers and
designers.
Sappi Fine Paper currently produces over four million metric tons
annually at four mills in North America, eight in Europe and
three in South Africa. This geographic reach was extended to
China in October 2004, with Sappi announcing that it had
taken a 34% equity stake in the Jiangxi Chenming joint venture.
Jiangxi Chenming is building a 350,000/year light-weight coated
paper machine, a mechanical (BTMP) pulp mill and a de-inked
pulp plant, and construction is due to be completed in mid-2005.
The project is located 700 km south-west of Shanghai, and
well-serviced by road, rail and barge transport.
Markets and operationsThe financial year started at a low point for Sappi Fine Paper,
with downward pressure on prices and weak demand in all its
major markets. While demand picked up steadily over the year,
prices remained low. This improved in the final quarter with
price increases, particularly in North America, being achieved.
Other factors that significantly affected performance over the
year were the strong performance of the Rand against the
US Dollar, and the dramatic escalation in the crude oil price.
This directly affected energy costs, and had an indirect impact
on other transport and some raw material costs. Sappi Fine
In the United States alone, more than 10,000 companiesmarket their goods and services through almost 14,000different catalogs. Americans who shop from catalogsmake an average of 15 purchases a year. The averageorder is US$135. Grand total of catalog sales in 2003 wereestimated at US$133 billion.The DMA Report; Economic Impact – US Direct Marketing Today, 2003
and Yankelovich Report, 2002
“Global demand forpaper is on theincrease. Demand hasdoubled over the lastdecade.”
sappi limited page 25
Paper was also affected by continued high wood costs in
North America.
The beginning of the financial year was the tail end of a three-year
worldwide advertising recession. Demand for fine paper was weak
and prices came under pressure, with price erosion continuing
until May 2004. Despite earlier improvements in economic
conditions and in several leading indicators such as advertising
spend growth, the recovery in the coated fine paper market only
became evident in the second half of the financial year.
We closed a high-cost paper machine at Westbrook Mill in the
early part of the year. The pre-tax charge taken for closure costs
in 2004 was US$16 million. A further US$32 million was written
off in 2003.
From February, Sappi North America’s order book started to
strengthen notably. The low point for prices in this region was
reached in May 2004. We announced price increases of
US$60 per short ton for web products in June and US$50 per
short ton for lower-priced sheet grades in June. We started to
realise these price increases during our fourth financial quarter
and they will be fully implemented as pricing agreements with
our customers expire. Further increases of US$60 per short ton
of web and US$50 per short ton for most sheet grades were
announced during the year and are being implemented. Most of
these increases will be realised by the second financial quarter
of 2005.
Lower maintenance costs and a focus on price management in
the final quarter helped the improvement in operating profits,
despite higher wood and energy costs. The rapid increase in
crude prices has also affected other input costs.
We are implementing an upgrade of our SAP system in North
America and completed the implementation of one of the mills
during the year. Once the system is fully implemented we
expect visible benefits from improved order planning and
customer service.
North America contributed 36% to divisional sales (2003: 39%)
but made an operating loss of US$92 million (2003: US$11 million
profit).
We had strong sales volume growth in Europe in the year of
6.9% compared to industry-wide coated fine paper growth of
6.8%. However, the region continued to show a surplus of
supply compared to demand as a result of which prices
remained low. However, rapid demand growth in the later months
Going forward, we intend to exploit our coating expertise to realise profitableopportunities in the adjacent coated paper markets we already operate in,as well as across the coated paper spectrum. This will include value addinggrowth opportunities in coated groundwood and coated specialities markets.
** Prices are list prices. Actual transaction prices could differ from prices depicted in the graph.
Source: Pulp and Paper Week, RISI
Coated woodfree prices – Germany(Euro/metric ton **)90 g/m2 sheets
Jan93
Jan94
Jan95
Jan96
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
1,200
1,000
800
600
400
200
0
Jan04
** Prices are list prices. Actual transaction prices could differ from prices depictedin the graph.
Source: Pulp and Paper Week, RISI
Coated woodfree prices – USA (East Coast)(US$/short ton **)No. 3 – 60 lb rolls
Jan93
Jan94
Jan95
Jan96
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
1,400
1,200
1,000
800
600
400
200
0
Jan04
Paper remembers you packing your passport and
sappi limited page 26
North America 36%
Southern Africa 8%
Europe 56%
Share of division’ssales by product
Coated fine paper 79%
Uncoated fine paper 6%
Speciality paper 15%and other
Share of division’snet operating assets
North America 43%
Southern Africa 5%
Europe 52%
Share of division’ssales
Share of division’soperating profit(US$m)
100
80
60
40
20
0
-20
-40
-60
-80
-100
-120
15.0
-92.
0
83.0
North America
Southern Africa
Europe
sappi fine paper review continued
seeing what the world has to offer LIFE WITH PRINT
sappi limited page 27
of Sappi’s financial year increased reported operating rates. Price
increases announced in our final quarter are being implemented in
the first quarter of our new financial year.
Europe contributed 56% of divisional sales (2003: 54%) and
US$83 million to operating profit in the 2004 financial year
(2003: US$118 million).
The strong South African Rand and a buoyant domestic economy
dominated Sappi Fine Paper’s operations in this region. The
strengthening of the Rand in 2003 had a negative effect on the
business, making imported products cheaper. However, Sappi
Fine Paper South Africa rallied in 2004, claiming back market
share through improved marketing strategies and working closely
with customers.
All the South African mills achieved record performances in terms
of capacity or tons produced during the year, despite the pressure
on margins from the strong local currency and import parity.
South Africa, which is the smallest of all the operations in terms of
tons produced, contributed 8% to divisional sales (2003: 8%) and
US$15 million to operating profit in the 2004 financial year (2003:
US$35 million).
OutlookSappi’s order book for the North American region is strong and
the prospect for demand growth seen in the second half of the
2004 year is expected to continue. Higher prices will have a
favourable impact on the business, particularly from the second
financial quarter.
The European market is expected to enjoy continued strong
advertising spending and demand in the printing and publishing
sectors. In addition to an increase in shipments from paper mills,
Sappi’s global position – capacity (’000 tons)Coated woodfree paper
Source: EMGE, September 2004
Sappi 3,360
Stora Enso 2,920
M-Real 2,352
APP 1,930
Lecta (CVC) 1,520
UPM 1,490
Oji Paper 1,330
Nippon Unipac 1,260
Burgo 1,190
MeadWestvaco 945
customer inventories remain at relatively low levels indicating an
increase in end-user demand. A price increase announced for the
end of the last quarter is expected to be fully implemented in the
new calendar year.
The strength of the Rand against the US Dollar continues to place
pressure on margins in South Africa despite good demand for
products. Wood costs in North America remain high and the
current oil price is putting inflationary pressure on our energy and
certain raw material costs.
The overall outlook for our Fine Paper business is positive. Prices
are currently rising in the US and we anticipate European
increases in the new calendar year. We are taking vigorous action
to help offset sharp raw material cost increases and we therefore
expect margins to improve in the year ahead.
Capital expenditure for 2005 is suspected to be at a similar level
to the previous year.
sappi limited page 28
Sappi Forest Products, the pulp, packaging and newsprint
business based in South Africa, is the world’s largest producer of
chemical cellulose (dissolving pulp). It provides the group with a
pulp revenue stream that hedges the pulp purchases of Sappi
Fine Paper, reducing exposure to volatile world pulp prices.
The division owns and manages 540,000 hectares of plantations,
bleached and unbleached kraft pulp, containerboard, packaging
paper, newsprint and sawn timber.
Sappi Forest Products comprises the following business units:
• Sappi Saiccor, producing 15% of the world’s chemical
cellulose (dissolving pulp).
• Sappi Kraft, which has important market shares in
South Africa:
– Packaging paper 58%
– Newsprint 43%
• Sappi Forests, the plantations and sawmills.
The division contributed 19% (2003: 17%) to total group sales
and US$191 million to the group operating profit (2003:
US$113 million), reflecting the strong performance of Sappi
Forest Products in financial 2004, despite the impact of the
strengthening of the Rand.
During the financial year, Sappi Forest Products continued to
focus on cost reductions. Fixed costs were managed at 2003
levels. Production improvements achieved over the year at
Ngodwana Mill put the mill ahead of scheduled output on an
annualised basis. The region has started the implementation of
updated SAP systems to assist the business in optimising the
planning and production of orders in a manner so as to best
utilise available production capacity.
We have been involved in initiatives aimed at empowering
previously disadvantaged people and communities for many
years. Broad-based Black Economic Empowerment has afforded
the company the opportunity to quantify these efforts, and set
new targets for our future endeavours.
Posters very rapidly build up brand awareness across abroad audience. The awareness also remains high after along period – 50% of the people who immediately afterthe campaign said that they had seen the brand, stillremembered the campaign 6 months later.Clear Channel, Ipsos – Inside Marketing
Can print build anadvertiser’s brand? Theanswer is a very profitableYES. In Europe 52% of alladvertising spend is innewspapers andmagazines.Zenith Optimedia Research 2003
sappi forest products review
sappi limited page 29
Markets and operationsThe South African economy continued to show robust growth
during the year and domestic demand for our newsprint and
packaging paper was strong. Particular influences were increased
advertising spending, which buoyed demand for newsprint, robust
conditions in the cement industry, which strengthened demand for
our sackkraft (used to package building materials and agricultural
produce), and a government-led campaign against plastic bags,
which has driven demand for substitute paper bags. Similarly, our
export markets reflected GDP growth in most of the major
economies.
Our chemical cellulose (dissolving pulp) business, which is 100%
export based, enjoyed strong demand and prices increased
significantly in US Dollar terms during the year. The strong
demand was as a result of the closure of a competitor’s capacity
as well as high cotton prices that increased the demand for
viscose. Saiccor Mill ran at full production capacity for the year
and stock levels were managed downwards, resulting in a strong
sales performance, improving on the previous best sales result.
The continued strength of the Rand took its toll on our
performance. The Rand realisation from our exports was
Share of division’snet operating assets
Saiccor 11%
Forests 47%
Kraft 42%
Share of division’ssales by product
Paper 44%
Forests 8%
Pulp 48%Kraft 54%
Forests 8%
Share of division’ssales
Saiccor 38%
** Prices are list prices. Actual transaction prices could differ from prices depicted in the graph.
Source: Pulp and Paper Week, RISI
Northern bleached softwood kraft pulp(US$/metric ton **)CIF Northern Europe
Jan93
Jan94
Jan95
Jan96
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
1,200
1,000
800
600
400
200
0
Jan04
** Prices are list prices. Actual transaction prices could differ from prices depictedin the graph.
Source: Pulp and Paper Week, RISI
Kraft linerboard 175 g+(US$/metric ton **)CIF Northern Europe
Jan93
Jan94
Jan95
Jan96
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
800
700
600
500
400
300
200
100
0
Jan04
A particular focus of our capital expenditure this year will be on completingthe debottlenecking of Saiccor Mill to increase production of chemicalcellulose (dissolving pulp). We continue to investigate further expansionopportunities for this business.
sappi limited page 30
impacted, and so too were Rand prices in the South African
market, as a result of the increased threat of imports.
Fair value adjustments relating to plantations was a new feature of
our results as a result of the implementation of a new accounting
standard for agriculture. This requires plantations to be revalued
at each reporting date at fair value and for the movements to be
reflected in the income statement. During the year the fair value
gain on our plantations increased by US$70 million, primarily as a
result of higher pulpwood prices in South Africa and our reduced
costs of delivering wood to the market as a result of productivity
improvements.
A number of transport-related initiatives were undertaken to
improve the cost of delivered fibre to our mills, covering the
loading and road and rail transport of timber. These initiatives are
expected to provide long-term benefits to our mills. The Road
Network Analysis initiative is a first in the industry. Improved
silviculture practices, superior genetic material and matching
species to optimal sites has improved fibre yield.
OutlookDemand in the South African markets is expected to remain
buoyant in line with the growth in the economy. Global demand
for pulp appears strong, and pulp prices are again increasing after
a period of reducing prices towards the end of our financial year.
The strength of the Rand remains a major factor in the prospects
of our South African businesses. We will continue to improve our
efficiencies to help offset the margin squeeze caused by currency
movements. However, at current exchange rates and market
prices, margins will come under severe pressure in the short term.
The sharp deterioration in the value of the US Dollar versus other
currencies is likely to lead to upward pressure in commodities
priced in Dollars, including our pulp and paper, which will help
restore our margins in the medium term.
A particular focus of our capital expenditure this year will be on
completing the debottlenecking of Saiccor Mill to increase
production of chemical cellulose (dissolving pulp). We continue
to investigate further expansion opportunities for this business.
sappi forest products review continued
Paper remembers you started at the
Approach to Sustainable Development It is our strategic objective to become the outstanding company in
the pulp and paper sector. This requires that we provide superior
returns to our shareholders. We also recognise that in order to
achieve this objective we need higher performance levels in every
sphere, including sustainable development.
At Sappi, our approach to sustainable development is to
concentrate on the responsible execution of our core business
activities. In keeping with “Prosperity, People, Planet”, the three
key elements inherent in the concept of sustainable development,
we aim to create wealth while building human capability and
striving for continuous improvement in the environmental field.
Our challenge is to demonstrate to shareholders and employees
that our commitment to sustainable development makes sound
business sense by raising our performance standards, including
financial results and shareholder returns.
In the year under review, we published our first sustainability
report “Towards Sustainability”. In May 2004, we were listed on
the Social Responsibility Index developed by the JSE Securities
Exchange South Africa (“JSE”) – of a total of 160 companies
listed on the JSE, only 74 were included in the index. We also
established a Group Sustainability Management Team tasked
with the incorporation of sustainable development into our normal,
measurable business practices.
Furthermore, we are becoming increasingly involved in sustainable
development issues related to the pulp and paper industry as a
whole through our membership of the World Business Council on
Sustainable Development (WBCSD). We also have observer status
in the WBCSD’s Sustainable Forest Products Initiative (SFPI). This
initiative relates to aspects of forest certification, illegal logging, as
well as climate and energy issues.
sappi limited page 31
bottom and worked your way up LIFE WITH PRINT
Magazines are able to speak to their readers on anindividual level. The portability of a magazine makes it anconstant companion. It’s there when you’re ready and itplays by your schedule. Magazine readers spend anaverage of 54 minutes examining each issue. MRI, Fall 2002
Customer Publishing(magazines that areproduced specifically by anorganisation for itscustomers) is a $5 billionindustry worldwide that isgrowing at a remarkablerate.
sustainable development review
In striving to become the outstanding company in our sector, our
approach to sustainable development is founded on certain
fundamentals: entrenching sound governance; improving our role
in environmental management and health and safety systems;
developing the potential of all our people; communicating with our
stakeholders; being welcomed by the communities in which we
operate and delivering superior shareholder returns.
We will soon issue our next Sustainability Report. For the
purposes of this annual report, we have included a summary of
our approach to people and planet.
PeopleHuman Resources development We endeavour to be a caring company that values and rewards
performance. Our aim is to attract, develop and retain the best
people within a diverse, multi-cultural workplace. Regional human
resource committees ensure that this aim is fulfilled and also that
remuneration is in line with markets and company performance.
Freedom of association is protected and promoted and
discrimination of any form is not tolerated. Comprehensive
disciplinary and grievance mechanisms are also in place.
Labour relationsWe recognise that trade unions and the right to bargain
collectively are a normal part of labour/management relations.
Employees are free to join trade unions and group-wide union
membership currently averages approximately 59%.
In South Africa, the industry settled wage negotiations through
mediation. In conjunction with unions we are also planning on
offering relevant training to develop union members. In terms of
an industry-wide agreement, bargaining unit members can now
also participate in performance management reviews.
In Europe we negotiate wages by country. Consequently, we have
five collective labour agreements in place. Representatives from
the various mills sit on the Sappi European Works Council and
facilitate dialogue between employees and management.
In North America, we have agreements in place with nine of the
12 unions at our sites. With effect from August 2004, we have
negotiated a one-year contract extension with union members
at Muskegon Mill. However, since 2002, despite intensive
negotiations with the major union at Westbrook and Somerset
Mills, we have been operating without contracts.
Employee relationsRegular communication with employees is conducted largely
through the group intranet, print-based communications such as
mill, divisional, regional and global newsletters and briefing groups.
Health and safetyOur approach to health and safety is based on five fundamental
principles:
• Integrated health and safety planning and management
• Training at every level
• Participative information and control structures
• Adherence to international best practice and safety standards
such as OHSAS 18001 and
• A zero accident target
SafetyFormal health and safety committees, comprising management
and worker representatives elected by their peers, exist at major
operations. Dedicated safety and risk management teams ensure
that local and international best practice systems such as OHSAS
18001 and legislation are integrated into everyday operating
procedures in a real, measurable way. These give us valuable
tools for prioritising safety issues and managing safety effectively.
The group ended the year with a 27.5% improvement in lost time
injury frequency rate (LTIFR). The good LTIFR results were,
however, overshadowed by three fatal accidents in the group,
one each being recorded at Cloquet, Enstra and Saiccor mills.
Both Enstra Mill and Ehingen Mill achieved one million lost time
injury free man hours in the last quarter of financial 2004.
Sappi’s annual global Safety Awards programme, created in
1999, demonstrates our commitment to maintaining a safe
working environment for all our employees.
The competition comprises two sections: best achievement based
on injury index and best improvement based on incident
frequency rate. In 2004 the international award was awarded to
Sappi’s Allentown Distribution Centre in North America, who also
shared the most improved award with Sappi Saiccor Mill in South
Africa. The programme provides us with a benchmark which
measures safety performance against the same criteria in
operating units around the world.
HealthEach region and mill has a specific occupational health plan,
sappi limited page 32
sustainable development review continued
sappi limited page 33
determined according to needs. Globally, both occupational
health and safety risks are measured and monitored on an
ongoing basis through Common Audit Process (CAP) audits.
Training related to occupational heath and safe work practices is
a foundation of our occupational health focus and is reinforced by
educational pamphlets, posters, videos and industrial theatre.
There are comprehensive general health and well-being
programmes in place in our operations around the world. Health
programmes include health monitoring and initiatives focused on
issues such as diabetes, heart health and sexually transmitted
diseases. Well-being programmes include alcohol awareness,
trauma counselling and stress management.
HIV/AIDSWhile the problem of HIV/AIDS is global, the southern African
region has one of the highest rates of infected and affected
individuals. As a significant component of our business as well as
almost half of our employees, is based in this region, in 1992 we
established a comprehensive programme to mitigate the risks
posed to employees and the organisation.
Establishing levels of infection is essential both in ascertaining the
effectiveness of education and awareness programmes and in
planning reaction to the disease. Against this backdrop, we have
promoted voluntary counselling and testing programmes (VCTs) as
part of our healthcare service. In 2004, we achieved a significant
increase in the number of employees utilising the VCT programme.
This in turn has led to an increase in the number the of employees
participating in the HIV/AIDS managed care programmes.
Since 2002, our medical care for employees has included treatment
to prevent mother to child transmission. Anti-retroviral treatment
was offered to HIV-infected employees from the beginning of 2003.
Knowledge, Attitude and Practices (KAP) studies conducted at
our offices and mills ensure that our HIV/AIDS programmes
remain dynamic, and can be modified in accordance with the
particular needs of each unit.
Training and development Our people underpin our ability not just to service our global
markets with the highest quality products, but to do so more
efficiently and effectively than any other pulp and paper company.
Therefore the underlying principle of all our training and
development initiatives is to unlock the potential of all our people.
Leadership performance and assessmentLeadership is a core element of our strategic direction of
becoming the outstanding company in the pulp and paper sector.
Increasingly, leadership is recognised as a skill that is transferable.
With this in mind, in 2004 we continued to roll out our six core
leadership competencies: leading others, strategic thinking,
operational delivery, driving change, commercial insight and self-
awareness. Supporting these are a set of behavioural anchors.
These anchors give people in management positions a clear
understanding of what leadership competencies are expected of
them at the various levels of management and help them to
structure their development plans appropriately.
In order to gauge the skills gap within our leadership profile, we
initiated and completed a “360 degree” feedback process for the
70 top-ranking people in the company, not only according to pre-
determined competencies, but also by their colleagues.
Our broad approach in developing leaders, and our succession
policy focuses on people who could succeed in any number of
roles, not only one specific role.
This plan is facilitated by our comprehensive talent review and
performance management systems which operates throughout
the group and helps people identify their strengths, weaknesses
and developmental needs from both a personal and
organisational point of view.
Training initiativesIn 2004, the global annual average number of training hours per
employee was 36 (2003: 32) and this is expected to increase to
40 in 2005. Training in this context ranges from ABET (Adult Basic
Education and Training) to technical training.
To develop our young, promising employees, in 2004 we re-
aligned the regional Sappi academies into the Sappi Leadership
Academy which incorporates a global standard across the group
focused on developing the core leadership competencies. This
18 month course is divided into three phases with 12 selected
participants from each of the three regions (North America,
Europe and South Africa).
Sappi Achievement AwardsBeing a performance-driven company means recognising and
rewarding good performance. The annual Sappi Achievement
Awards are presented in South Africa and Europe to those Sappi
Being a performance-driven company means recognising and rewardinggood performance.
sappi limited page 34
community has 68% ownership, meets two of the key
developmental challenges facing South Africa: the alleviation of
poverty and skills transfer (through permanent jobs in the lodge),
on the one hand and the preservation of our natural resources (the
environmentally sensitive Maputaland Forest Reserve) on the other.
Further details of this and other projects are contained in our 2004
Sustainability Report.
PlanetEnvironmental performanceWe acknowledge that the manufacturing processes of pulp and
paper are resource intensive activities which can have major
environmental impacts if not properly managed, while tree farms
can have a negative impact on biodiversity.
In order to mitigate these impacts, we strive for continuous
environmental improvement by benchmarking to globally
recognised standards; managing impact and mapping and
monitoring our progress. Our aim is to move beyond standard
environmental compliance.
sustainable development review continued
Paper remembers the view from the
employees who demonstrate innovation and creativity in their
particular area. This year’s South African award winner was
honoured for his innovation that will revolutionise the replacement
process for precipitators (used to reduce dust or particles in
exhaust streams from boilers), not only in Sappi, but worldwide.
Corporate Social InvestmentThe major part of Sappi’s Corporate Social Investment (CSI) is
allocated to South Africa because of the socio-economic circum-
stances in the country in general and the needs of the communities
around Sappi operations in particular. The aim of each of our CSI
projects is to work in partnership with worthy causes to create
meaningful change. Education, the promotion of entrepreneurial
skills, the environment and the needs of vulnerable groups are key
focus areas in the group’s social investment portfolio.
The Thonga Beach Lodge at Mabibi in KwaZulu Natal, South Africa,
which is part of the SappiWWF TreeRoutes Partnership is just one
of our innovative CSI projects. The lodge, in which the local
sappi limited page 35
top opened your eyes to new ideas
is thus the first company in Africa and one of the first multi-sited
forestry companies in the world to have an integrated
management system that is certified to ISO 9001, ISO 14001,
OHSAS 18001 and FSC standards.
All timber grown on Sappi owned and managed land carries
the FSC label. In addition, we have developed a group FSC
certification scheme for our contracted private timber growers
which achieved certification in June 2004. Approximately 20%
of Sappi Forests’ contracted farmers producing 80% of the
contracted timber was subjected to a strict auditing process
and were then certified through the scheme. Plans are in
progress to help our other contractors achieve certification.
Where timber sourced by Sappi Forests is not FSC certified,
it must comply with stringent criteria established by ourselves.
Criteria includes that the timber must not originate from
indigenous forests and must be legally registered with the
Department of Water Affairs and Forestry.
All seven Sappi Fine Paper mills in Europe are fully certified in
terms of ISO 9001, ISO 14001 and EMAS (Eco Management and
Audit Scheme). We were the first pulp and paper company in
Europe to achieve combined ISO 9001 and ISO 14001
certification across our entire organisation. In Europe, our mills
at Alfeld, Ehingen and Gratkorn are PEFC* chain-of-custody
certified.
In North America, all four pulp and paper mills voluntarily apply
ISO 14001 standards and are in the process of qualifying their
environmental management systems for ISO 14001 certification,
with a goal of certification by the end of 2005.
Work in progressOur progress in the environmental field is the responsibility of the
environmental cluster (a team of experts) who report to the Global
Technology Management Team. This cluster specifically focuses
on water consumption, effluent treatment, emission reduction and
Global standardsIn addition to working within the frameworks of relevant national
legislation and regulations, we are committed to implementing
internationally recognised environmental management systems.
We also participate in various certification programmes.
These systems and programmes are important for environmentally
conscious companies and consumers against the backdrop of
unsubstantiated product claims and illegal logging taking place in
many countries around the world. These have made sustainability
of forest resources a key concern for the industry and for end-
users of paper and forest products.
Standards – fibre sourcesIn February 2003 Sappi Forests underwent a fully integrated
audit by a consortium of external audits and was subsequently
awarded ISO 9001*, ISO 14001* and FSC* certification for all
its activities on all its sites of operation. In March 2004,
OHSAS 18001* certification was also achieved. Sappi Forests
In North America and Europe, where we do not own or manage
land or forests, we have a strict procurement policy, requiring
suppliers to comply with environmental laws and land
management policies.
In North America, Sappi is an active participant in the
Sustainable Forestry Initiative (SFI) programme sponsored by
the American Forest and Paper Association (AF&PA). Timber
sourced from Canada is certified by the Canadian Standards
Association (CSA-Z809). In Europe, the fibre we source is
certified by the Programme for the Endorsement of Forest
Certification Systems (PEFC)*.
Standards – millsAll our pulp and paper mills in southern Africa are certified to
the ISO 14001, with the exception of Cape Kraft and Usutu Mills
which certifications are due in 2005. In 2004, Enstra, Saiccor and
Ngodwana Mills all achieved FSC chain-of-custody certification.
LIFE WITH PRINT
In addition to working within the frameworks of relevant national legislationand regulations, we are committed to implementing internationally recognisedenvironmental management systems.
sappi limited page 36
compliance, solid waste disposal and the efficient use of energy.
This cluster has compiled a database of over 80 parameters on
environmental performance in these focus areas. This gives a
clear picture of each mill’s environmental performance and allows
for comparisons to be made between like processes across the
group and within our industry. This benchmarking facilitates
investigation into unsatisfactory performance and the transfer of
the attributes of efficient processes to the less efficient ones. The
cluster has also identified the best technologies most suitable for
each particular type of mill which will assist in reducing its
environmental impact.
Work in progress includes several innovative programmes to
reduce our solid waste by finding other uses for it such as bark
composting. Cutting-edge water treatment technologies are also
a key focus area and pilot-scale projects are under way in this
regard. We are also looking at ways of reducing effluent through
the use of enzymes.
We share international concern about greenhouse gases and are
developing a comprehensive strategy for the group.
In the year under review, we continued with our successful tree
improvement programmes focusing on improving growth and
volume- and fibre yield. Optimising fibre yield reduces the energy
and chemicals required to process the fibre into paper, which has
positive impacts along the total supply and value chain.
Environmental expenses and investmentWhile we currently account separately for environmental capital
expenditure, environmental operating expenses are considered to
be part of normal operating costs.
Footnotes *
* Developed by the International Organisation for Standardisation (ISO),
ISO 9000 is a series of standards focused on quality management
systems, while the ISO 14001 series is focused on environmental
performance and management.
* In terms of the Forest Stewardship Council (FSC) scheme, there are two
types of certification. In order for land to achieve FSC endorsement, its
forest management (FM) practices must meet the FSC’s ten principles
and other assorted criteria. For producers of forest products, including
paper manufacturers like Sappi, chain-of-custody (COC) certification
involves independent verification of the supply chain, which identifies and
tracks the timber through all stages of the production process from the
tree farm to the end product.
* PEFC has become the world’s largest forest certification umbrella
organisation with 27 independent national schemes in membership from
all over the world, delivering hundreds of millions of tons of wood to the
marketplace from tens of millions of hectares of certified forests. Using
multi-stakeholders processes, the organisation develops forest
management certification standards and schemes for sustainable
forestry management.
* OHSAS is an international health and safety standard aimed at
minimising occupational health and safety risks firstly, by conducting a
variety of analyses and secondly, by setting standards.
sustainable development review continued
sappi limited page 37
Sales 4,728 4,299
Other income not included in sales:
Income from investments 27 30
Less: Paid to suppliers for materials and services 3,170 2,778
Total value added 1,585 1,551
Distributed as follows:
To employees as salaries, wages and other benefits 932 837
To lenders of capital as interest 139 143
To shareholders as dividends 66 65
To governments as taxation 73 53
Total value added distributed 1,210 1,098
Portion of value added reinvested to sustain and expand the business 375 453
Total value added distributed and reinvested 1,585 1,551
Taxation
Paid in taxes to governments (including US$48 million (September 2003:
US$30 million) direct taxes on income) 73 53
Collected on behalf of, and paid over to governments:
– Employees’ taxation deducted from remuneration paid 156 129
– Net value added taxation (VAT) (113) (37)
Total 116 145
US$ million 2004 2003
for the year ended September 2004
2004: Value added distributed amongst our stakeholders and reinvested in the business
To employees as salaries, wages and other benefits – 58.7%
Reinvested to grow the business – 23.7%
To lenders of capital as interest – 8.8%
To governments as taxation – 4.6%
To shareholders as dividends – 4.2%
value added statement
sappi limited page 38
Highlights– EPS at 43 US cents (Headline EPS – 45 US cents)
– Demand strengthened
– US coated paper prices improving
– Raw material cost pressure
– Net debt to total capitalisation at 32% (2003: 31%)
– Average debt maturity profile – 8.6 years
– Dividend 30 US cents (2003: 29 US cents)
Operating reviewThe following table sets out sales and operating income by
business unit and by region (operating income percentages
expressed of sales of the applicable business unit and region):
management’s discussion and analysis of results(incorporating financial director’s report)
September September2004 % of 2003 % of
US$ million sales US$ million sales
Sales:Sappi Fine Paper
Sappi Fine Paper North America 1,373 29.0 1,384 32.2
Sappi Fine Paper Europe 2,127 45.0 1,903 44.2
Sappi Fine Paper South Africa 311 6.6 270 6.3
Total Sappi Fine Paper 3,811 80.6 3,557 82.7
Sappi Forest Products 917 19.4 742 17.3
Group sales 4,728 100.0 4,299 100.0
Operating profit/(loss):Sappi Fine Paper
Sappi Fine Paper North America (92) (6.7) 11 0.8
Sappi Fine Paper Europe 83 3.9 118 6.2
Sappi Fine Paper South Africa 15 4.8 35 13.0
Total Sappi Fine Paper 6 0.2 164 4.6
Sappi Forest Products 191 20.8 113 15.2
Corporate (9) – (5) –
Group operating profit 188 4.0 272 6.3
Year ended September 2004 (“2004”) Comparedto Year ended September 2003 (“2003”)
SalesGroup sales increased by US$429 million to US$4,728 million in
2004 from US$4,299 million in 2003 (10.0%). The sales of our
Fine Paper division increased by US$254 million and Forest
Products by US$175 million. This increase is primarily due to the
translation of our results from local currencies to US Dollar for
reporting purposes (US$479 million) which tends to distort
comparisons between periods when currencies are volatile. During
2004 the US Dollar weakened by 12.5% on average against the
Euro, and by 19.8% on average against the Rand. Sales also
sappi limited page 39
increased due to higher volumes sold (US$285 million) across all
regions, offset by lower selling prices realised in local currencies
(US$335 million). The year under review has been subject to
further declining prices, particularly in Europe, and margins
remained under pressure in all our regions, except in our Forest
Products division. The total volume of products sold (in metric
tons) in 2004 increased by 0.5 million tons to 7.2 million tons.
Volumes sold increased for both Fine Paper (0.2 million tons) and
Forest Products (0.3 million tons). The increase in volumes for
Fine Paper was largely at our European operations, while the
increase for Forest Products is mainly due to higher volumes of
chemical cellulose (dissolving pulp) (10.3%) and timber products
(18.5%) sold.
Sappi Fine PaperThe total volume sold by Sappi Fine Paper (including pulp) in 2004
increased by 234,000 tons (6.0%) to 4.1 million tons. Sappi Fine
Paper Europe’s volumes increased by 155,000 tons to 2.4 million
tons (6.9%), in line with industry-wide coated fine paper growth of
6.8%. For Sappi Fine Paper North America, volumes increased by
61,000 tons (4.4%), to 1.4 million tons. Industry demand for coated
fine paper in North America grew by 3.5% in 2004. In 2004, Sappi
Fine Paper South Africa claimed back market share lost in 2003
and increased volumes by 18,000 tons to 318,000 tons.
Total sales for Sappi Fine Paper increased by US$254 million
(7.1%) to US$3,811 million in 2004. This increase is due to the
currency translation effect (US$297 million) and increased volumes
(US$209 million), reduced by lower selling prices in local currency
(US$252 million). Average prices realised in US Dollar terms in
2004 increased mainly as a result of the currency translation
effect, by US$10 per ton (1.1%) to US$918 per ton as compared
to 2003.
Sales for Sappi Fine Paper North America decreased by
US$11 million (0.8%) to US$1,373 million in 2004. Selling prices
were lower (US$73 million) offset by increased volumes
(US$62 million). The average price realised decreased by 5.0%
to US$951 per ton in 2004, mainly due to weak markets for
coated paper in North America in the earlier part of 2004, as well
as the pressure from continued imports into the US.
Sappi Fine Paper Europe sales increased by US$224 million
(11.8%) to US$2,127 million in 2004. This increase is due to the
currency translation effect (US$236 million) and increased volumes
(US$131 million), reduced by lower selling prices in Euro terms
(US$143 million). The average price realised in US Dollar terms
was US$891 per ton in 2004, up 4.6% from US$852 per ton in
2003. In Euro terms average prices were 7.1% lower due to the
continued surplus of supply compared to demand for coated fine
paper in Europe, particularly in the early part of the year.
Operating rates improved through the year.
Sappi Fine Paper South Africa sales increased by US$41 million
(15.2%) to US$311 million in 2004. This increase is mainly due
to the currency translation effect (US$62 million) and partly due to
increased volumes (US$16 million), offset by lower selling prices in
Rand terms (US$36 million). The average price realised for fine
paper products in South Africa in US Dollar terms increased by
8.7% to US$978 per ton in 2004, as a result of the currency
translation effect, while in Rand terms, average prices
decreased by 12.4% in 2004, as a result of the pressure of
continued imports into South Africa caused by the Rand’s
strength against the US Dollar.
Sappi Forest ProductsTotal sales volumes for Sappi Forest Products increased by 10.3%
to 3.0 million tons in 2004. There were increases in volumes of
chemical cellulose (10.3%) and commodity paper products (1.4%)
while paper pulp volumes were 5.5% lower. The increased
chemical cellulose (dissolving pulp) volume was as a result of the
closure of competitor capacity as well as the increased demand in
the viscose staple industry, fuelled by higher prices for cotton,
which is a competing product. Sappi Forest Product’s sales
increased by US$175 million (23.6%) to US$917 million in 2004.
This increase is attributable mainly to the currency translation effect
(US$181 million), and increased volumes (US$76 million), partly
offset by lower selling prices in Rand terms (US$82 million). The
average price for chemical cellulose (dissolving pulp) increased by
21.9% in 2004, in line with NBSK prices, to which it is linked.
Operating expensesGroup operating expenses (comprising cost of goods sold, selling,
general and administrative expenses and other expenses)
increased by US$513 million (12.7%) to US$4,540 million in 2004.
This increase was mainly due to the currency translation effect of
US$429 million of which Europe represented US$227 million and
southern African operations US$202 million. Operating expenses
for Sappi Fine Paper North America increased by US$92 million,
primarily as a result of increased volumes (US$61 million) and
partly as a result of increased wood costs (US$20 million), and
energy costs (US$5 million). Operating expenses in North America
sappi limited page 39
were further increased by restructuring charges of US$20 million.
Operating expenses in our European operations increased by
1.8% in Euro terms, despite the 6.9% increase in volume sold,
this was mainly due to lower fixed costs as a result of improved
productivity and cost reduction initiatives. Operating expenses at
Sappi Fine Paper South Africa increased by 1.4% in Rand terms.
Forest Products’ operating expenses decreased by 7.3% in Rand
terms. Excluding the fair value adjustment for plantations under
the new accounting standard AC137, the operating expenses
increased by 1.6% in Rand terms.
Selling, general and administrative expenses (SG&A), which are
included in the group operating expenses discussed above,
increased by US$87 million (28.0%) to US$403 million in 2004 of
which US$30 million was as a result of the currency translation
effect, US$32 million due to restructuring charges and
US$8 million due to additional bad debt provisions in Europe.
SG&A expenses in 2003 were favourably affected by a
US$10 million once-off relief from the Sappi Fine Paper North
America pension plan amendment.
Other expenses (profit) which are included in the group operating
expenses described above represent all profit and expenditure
relating to activities outside that which is regarded as normal
trading. Other expenses of US$4 million in 2004 (2003:
US$27 million) relate mainly to the write-off of assets at all of
our divisions. The 2003 expense related mainly to the asset
impairment and related inventory write-off at Westbrook Mill.
Operating profitGroup operating profit decreased by US$84 million (30.9%) to
US$188 million. The operating profit for our Fine Paper division
decreased by US$158 million while Forest Products increased by
US$78 million.
management’s discussion and analysis of resultscontinued
Paper remembers you
sappi limited page 40
The group operating margin was 4.0% compared to 6.3% in
2003. This reflects the continuing difficult trading conditions in our
major fine paper markets, resulting in lower selling prices realised
in our European and North America Fine Paper operations and is
also partly attributable to the currency translations effect on the
costs of our European and southern African operations.
Sappi Fine PaperOperating profit for Sappi Fine Paper decreased by
US$158 million (96.3%) to US$6 million. This is due to the
decrease in operating profit for Sappi Fine Paper North America
(US$103 million), Sappi Fine Paper Europe (US$35 million) and
Sappi Fine Paper South Africa (US$20 million). Operating margin
decreased to zero as compared to 4.6% in 2003.
Sappi Fine Paper North America incurred an operating loss of
US$92 million in 2004 compared to an operating profit of
US$11 million the prior year. This decrease in operating profit
reflecting the continuing difficult trading conditions in the US in 2004,
which resulted in lower average selling prices realised. Operating
profit was also negatively impacted in 2004 by high raw material
and energy costs and by a US$20 million restructuring charge.
Operating profit for Sappi Fine Paper Europe decreased
by US$35 million (29.7%) to US$83 million in 2004.
Operating margin decreased to 3.9% from 6.2% in 2003.
These decreases reflect the difficult trading conditions in
Europe and were primarily due to lower average prices realised
in Euro terms. Improved productivity and cost reductions
decreased operating expense per ton in Euro terms by 4.8%
in 2004. This offset, to some extent, the reduction in operating
profit and operating margin.
The operating profit of US$15 million in 2004 for Sappi Fine Paper
South Africa decreased from US$35 million in 2003. Selling prices
in Rand terms decreased by 12.4%, while cost per ton in Rand
terms decreased by 4.7%. Operating margin in 2004 decreased
to 4.8% from 13.0% in 2003, mainly due to the decrease in
average selling prices realised in Rand terms.
Sappi Forest ProductsSappi Forest Products operating profit increased by US$78 million
(69.0%) to US$191 million in 2004. This is mainly attributable to
higher average selling prices realised, which increased on average
by 11.9%, and also to the 10.3% increase in volumes sold. The
fair value adjustment for plantations under the new accounting
standard AC137 had the effect of increasing operating profit by
US$70 million. In Rand terms and excluding the effect of AC137,
operating expenses per ton were contained at 2003 levels.
Operating margin increased to 20.8% in 2004, from 15.2%
in 2003.
CorporateCorporate operating losses increased by US$4 million as a result
of the inclusion of the UK pension costs, which in the prior year
and up to the closure of the London office were included in the
Fine Paper results.
Net finance costsNet finance costs consist of gross interest and other finance
costs, interest received, interest capitalised, foreign exchange
gains and losses and the mark-to-market effects of financial
instruments. Net finance costs were US$110 million in 2004
compared to US$111 million in 2003. Gross interest cost
decreased by US$17 million over 2003 to US$133 million as
spent some time just taking it easy
sappi limited page 41sappi limited page 41
LIFE WITH PRINT
sappi limited page 42
a result of a full year’s benefit of having swapped fixed rate debt
to floating rates during our 2003 financial year. During the current
year we concluded an additional US$107 million of fixed to
variable interest rate swaps. The benefit of the swaps was
reduced by an increase in interest rates as benchmark swap rates
increased by 96 basis points from 2003. Increased average net
debt in 2004 (from US$1,455 million to US$1,538 million) also
adversely affected interest costs.
Net finance costs also included a US$11 million loss relating to
mark-to-market adjustments on financial instruments (2003:
US$6 million gain) driven by movements in interest rates and
exchange rates.
Cash interest cover decreased to 5.5 times in 2004 compared
to 5.8 times for 2003, after having decreased from 7.2 times in
2002. The reduction in 2004 is mainly due to lower profits and
cash flow.
Finance costs of US$2 million were capitalised in 2004 and 2003.
Finance costs capitalised relate mainly to the capitalised interest
on major projects under construction. Following the adoption of
the new accounting standard on plantations AC137, we no longer
capitalise interest to the holding costs of plantations. For further
information see note 2 of our group annual financial statements
included in this annual report.
TaxationThe 2004 taxation credit of US$20 million compared to a charge of
US$18 million in 2003. The effective tax rate this year was negative
26.3% (2003: 11.9%). The decrease in tax paid and in the effective
tax rate in 2004 was primarily the result of the geographical split
of profits and losses and the utilisation of previously unrecognised
tax losses. Our North American operations, where the nominal tax
rate is 39.5%, reported a net loss before tax of US$140 million.
The tax rate benefited further from the reversal of tax provisions
previously raised for exposures that have now been resolved and
the reduction of the Austrian tax rate from 34% to 25%. The
impact of all these adjustments was US$26 million. This was
however offset by the reversal of net deferred tax assets of
US$20 million in Europe and southern Africa.
Sappi International SA (“SISA”), our group treasury, operates in
Belgium under a co-ordination centre licence, granted by the
Belgium government that includes an alternative method of
calculating the taxation liability of a co-ordination centre. This
licence was renewed in July 2003 and preserves the tax status until
at least the end of our 2005 financial year. The possibility exists that
this deadline may be extended further. The Belgian government is
currently investigating various possibilities to retain the presence of
the existing co-ordination centres. In the absence of a further
extension of the Sappi licence, or alternative initiatives by Belgium,
there is a possibility that the current licence benefits will be
substantially amended, impacting the beneficial tax regime
applicable to co-ordination centres. In the meantime, Belgium has
approved legislation for an alternative co-ordination centre regime.
According to the new rules the tax base will be determined on a
cost plus basis, replacing the current method. The EU Commission
has approved these new rules. Existing co-ordination centres have
the choice to migrate from the current co-ordination centre rules to
the new regime once the existing licence expires. Sappi has not yet
taken a decision in this regard, pending a full review of the rules.
Sappi is also investigating other possibilities to retain the current
benefits. As the existing licence expires in December 2005, a final
decision will be taken during the course of the current financial year.
Net profitNet profit decreased by US$45 million (32.0%) to US$98 million
from US$143 million in 2003, mainly due to low prices in local
operating currencies, the effect of the strong Rand on our South
African margins and higher wood and energy costs, especially in
our North American operations. Net profit was also negatively
impacted by restructuring charges of US$22 million after tax but
positively impacted by US$47 million following the implementation
of AC137 in 2004. Net profit was also favourably impacted by net
tax credits of US$6 million, described above.
Earnings per share decreased by 30.7% to 43 US cents per share
in 2004 from 62 US cents in 2003, while headline earnings per
share decreased by 34.8% to 45 US cents per share in 2004 from
69 US cents in 2003.
Financial reportingChange in accounting policiesDuring 2004 we changed our accounting policy with regard to
the accounting treatment of plantations.
We previously stated our plantations at the lower of cost less
depletions and realisable value. Cost included all expenditure
incurred on acquisition, forestry development, establishment and
maintenance of plantations, and finance charges. Following the
adoption of AC137 Agriculture, we now no longer capitalise
management’s discussion and analysis of resultscontinued
sappi limited page 43sappi limited page 43
silvicultural expenses and finance costs to plantations nor do we
amortise plantations to the income statement. Movements in the
fair value of plantations now impact operating profit. The
implementation of this policy enhanced net profit before tax by
US$66 million and net profit after tax by US$47 million this year. It
had the effect of reducing net profit before tax by US$8 million and
reducing net profit after tax by US$6 million for last year. The new
policy will lead to increased volatility from one reporting period to
the next and will result in a new US GAAP reconciling item.
Critical accounting policiesOur group financial statements have been prepared in accordance
with South African GAAP. Certain accounting policies are
considered by management to be critical to an understanding of
our group financial statements because their application requires
significant judgement and reliance on estimations of matters that
are inherently uncertain. Actual results may differ from these
estimates under different assumptions or conditions. These critical
accounting policies are described in note 2 of our group financial
statements included in this annual report.
Off-balance sheet arrangements We have entered into certain asset-related finance arrangements
that we believe have been structured such that various obligations,
which are significant, and related assets are not included in our
financial statements under generally accepted accounting
principles. These off-balance sheet arrangements include lessor
arrangements (note 30), securitisation facilities (note 16) and an
equity accounted investment (note 14) described in the notes to our
group financial statements included in this annual report.
Reconciliation of South African GAAP to UnitedStates GAAPThe group reconciles its results annually with United States
Generally Accepted Accounting Principles (GAAP) (see note 40
to the group financial statements).
Below is an abridged version of the reconciliation:
2004 2003US$ million US$ million
Net Income
Net income under
South African GAAP 98 143
United States GAAP
reconciling items (46) 11
Net income under
United States GAAP 52 154
Basic earnings per share under
United States GAAP (US cents) 23 68
US$ million US$ million
Shareholders’ equity
Shareholders’ equity under
South African GAAP 2,119 1,945
United States GAAP
reconciling items (122) (28)
Shareholders’ equity under
United States GAAP 1,997 1,917
Liquidity and capital resourcesCash flowCash retained from operating activities was US$345 million in
2004 compared to US$421 million in 2003.
During 2004 we generated cash from operations of US$601 million
compared to US$645 million in 2003. The US$44 million reduction
is a result of lower profits before tax of US$83 million reduced by
an increase in adjustments for non-cash items of US$39 million.
The major changes in non-cash items compared to 2003 are:
• Increased depreciation and fellings charges of US$69 million
due to increased additions to fixed assets as well as the effect
of currency translation.
• Increased provisions of US$86 million, mainly relating to
increased pension and post-retirement benefit provisions.
• Fair value gains on plantations of US$83 million, due to timber
price increases and reduced transport costs.
• Lower asset impairment and machine closure costs of
US$32 million (2003: Sappi Fine Paper North America
(principally related to the Westbrook machine closure)).
During 2004, working capital increased by US$50 million
compared to a US$79 million increase in 2003.
The US$50 million increase in working capital consists of:
• US$27 million increase in inventories relating to our European
operations primarily due to the replenishing of stock levels at
year-end.
• US$38 million increase in receivables related mainly to an
increase in trade receivables of US$54 million at our North
American operations due to an earlier cut-off date used for
securitisation purposes. Trade receivables at our European
operations decreased by US$17 million due to lower net sales
compared to 2003.
• US$15 million increase in payables consisted largely of an
increase in other payables at our North American operations
(US$54 million) due to collections of securitised receivables on
behalf of State Street Bank. Trade and other payables at our
Forest Products division decreased by US$40 million due to
lower capital and interest accruals.
The decrease of US$7 million in finance costs paid in 2004 was
mainly due to the benefit of the fixed to variable interest rate
swaps.
Taxation paid in 2004 was US$64 million higher than 2003. This
was impacted by a tax refund of US$58 million received by our
North American operations in 2003. No similar refund was
received in 2004.
Cash utilised in investing activities was US$356 million in 2004
compared to US$310 million in 2003. Cash utilised in investing
activities in 2004 related mainly to capital expenditure on non-
current assets of US$331 million as well as an increase of
US$27 million in investments and loans, mainly due to top up
payments made to the European pension fund.
Cash capital expenditure, excluding acquisitions, increased in
2004 to US$331 million from US$297 million in the prior year,
of which US$42 million was the result of currency translation
movements. The US$331 million consisted of US$219 million
relating to expenditure to maintain operations and US$112 million
to expenditure to expand operations. Capital expenditure
to maintain operations of US$219 million is higher than
US$165 million spent in 2003 and includes the group software
upgrade and certain head office expenditure.
The capital expenditure of US$112 million in 2004 to expand
operations included:
• Projects at our European operations amounting to
US$39 million, in particular a new sheeter and woodyard
upgrade at Gratkorn Mill.
• US$68 million at our Forest Product division, including
US$17 million at Ngodwana Mill for a de-bottlenecking
project, as well as US$22 million at the Tugela Mill to reduce
production costs.
Our capital expenditure programme varies from year to year, and
high expenditure in one year is not necessarily indicative of future
capital expenditure.
Capital structure and financingAt September 2004 our gross debt, which is all interest-bearing
borrowings plus overdraft, decreased to US$2,068 million, from
US$2,075 million in the prior year. Cash and cash equivalents
decreased by US$100 million from last year, mainly due to lower
cash generation. Accordingly our net debt increased by
US$93 million to US$1,584 million from US$1,491 million last
year of which US$63 million was a result of currency translation
movements. At the end of 2004, the ratio of net debt to total
capitalisation was 32%, up from 31% at the end of 2003.
management’s discussion and analysis of resultscontinued
sappi limited page 44
The currency profile of our gross debt at the end of 2004 and 2003 is detailed below:
September September2004 % of 2003 % of
US$ million total US$ million total
US Dollar 884 42.8 975 47.0Euro 832 40.2 835 40.2South African Rand 352 17.0 265 12.8
Total 2,068 100.0 2,075 100.0
The desired currency profile is achieved by defining the underlying currency of the debt instrument and by applying foreign exchange cover.
Where external loans are raised in currencies other than the domestic functional currency of the entity to which the funds are applied, the
currency exposure is covered by forward exchange contracts or currency swaps.
The maturity profile of our gross debt at the end of 2004 and 2003 is detailed below:
September September2004 % of 2003 % of
US$ million total US$ million total
2004 – – 333 16.1
2005 375 18.1 243 11.7
2006 174 8.4 98 4.7
2007 56 2.8 45 2.2
2008 59 2.9 48 2.3
2009 (2003: Thereafter) 34 1.6 1,308 63.0
Thereafter 1,370 66.2 – –
Total 2,068 100.0 2,075 100.0
The maturity profile of our debt with an average time to maturity of 8.6 years reflects the long-term nature of our assets (2003: 9.8 years).
We have a policy of maintaining a balance between fixed and
variable rate loans that enables us to minimise, on a cost effective
basis, the impact on reported earnings while maintaining a
reasonably competitive, market-related cost of funding. The
specific balance is determined by currency to reflect more
accurately the relevant interest rate environments. We monitor
market conditions and may utilise interest rate derivatives to alter
the existing balance between fixed and variable interest loans in
response to changes in the market. At the end of 2004, 42% of
our gross debt was at fixed rates compared with 45% in 2003.
See note 35 to our group annual financial statements included in
this annual report.
During 2004, Sappi Manufacturing obtained additional banking
facilities of ZAR590 million (approximately US$92 million), which
were fully utilised at the end of September 2004. ZAR400 million
of this debt is at floating rates, 47.5bps above the JIBAR rate,
and ZAR190 million at a fixed rate of 10.91%. The facilities were
obtained primarily to replace other maturing debt.
In May 2003, Sappi Papier Holding GmbH (“SPH”) raised a facility
of EUR500 million (US$575 million), repayable in two tranches,
from Oesterreichische Kontrollbank (“OeKB”). Tranche A (“OeKB
A tranche”) of EUR100 million (US$115 million) is repayable on
31 December 2004 and Tranche B (“OeKB B tranche”) of
EUR400 million (US$460 million) on 31 December 2010. The
OeKB A tranche bears interest at the OeKB floating rate plus a
margin of 0.5% and the OeKB B tranche bears interest at a fixed
rate of 4.10%. Interest is payable quarterly in arrears on both
tranches. The proceeds were partly used to repay the
US$287 million outstanding balance of the 2001 EUR900 million
syndicated loan A tranche, and US$87 million of other short-term
debt. The balance of US$201 million was invested with several
financial institutions in short-term deposits.
In June 2002, SPH issued US$500 million 6.75% Guaranteed
Notes due 2012 and US$250 million 7.50% Guaranteed Notes
due 2032 (“the Notes”), both fully and unconditionally guaranteed
on an unsecured basis by each of Sappi Limited and Sappi
International S.A. (“SISA”), which is incorporated in Belgium.
The interest on the Notes is payable semi-annually on 15 June and
15 December of each year, which commenced on 15 December,
2002. The Notes are redeemable, at a premium, in whole or in
part at any time at SPH, Sappi Limited or SISA’s option. Between
March and July 2003 we concluded contracts to swap the fixed
rate exposure to floating rates. Based on current short-term
interest rates the benefit of the reduced finance cost resulting
from the swaps has increased by approximately US$11 million
to US$19 million in the 2004 financial year. To the extent that
short-term rates increase, the benefit will reduce accordingly and
could result in additional interest cost if rates increase significantly.
The group has adequate cash on hand and short and long-term
banking facilities to meet its short-term commitments. At the end
of 2004, Sappi’s divisions had aggregate unused borrowing
facilities available of US$1,275 million (US$283 million in South
Africa, US$987 million in Europe and US$5 million in Asia) (2003:
US$1,118 million) of which US$723 million is committed (2003:
US$646 million). The US$157 million increase in unused facilities
is due to translation impacts as a result of exchange rate
movements. In addition, at the end of September 2004 the group
had cash and cash equivalents on hand of US$484 million (2003:
US$584 million).
sappi limited page 45
sappi limited page 46
Foreign exchangeSappi made sales in a range of currencies in 2004 and 2003. The
percentage of sales was as follows:
September September2004 2003
% %
(Percentage of Sales)
US Dollar 42.3 46.7
Euro 38.3 36.6
South African Rand 14.8 13.2
Other 4.6 3.5
100.0 100.0
The principal currencies in which our subsidiaries conduct
business are the US Dollar, Euro and Rand. In Europe and
North America, sales and expenses are generally denominated
in Euro and US Dollar, respectively. Pulp purchases in Europe
are mainly also denominated in US Dollars. The decreased
proportion of the US Dollar denominated sales and increased
proportion of Euro and Rand denominated sales in 2004, is
primarily the result of the strengthening of the Rand and Euro
against the US Dollar.
In southern Africa, local sales are denominated in Rands,
and exports, which represent approximately 45% of sales,
are denominated mainly in US Dollars. Expenses incurred
are generally denominated in Rands. The appreciation of the
Rand tends to reduce the Rand value of exports from South
Africa and has a negative effect on gross margins of export
and such domestic sales which are priced relative to
international Dollar prices.
The average Dollar rate depreciated by 12.5% against the Euro
in 2004 (2003: 17.6%), and by 19.8% against the Rand, (2003:
appreciated by 21.0%). The Rand has regained much of its value
management’s discussion and analysis of resultscontinued
Paper remembers looking back
sappi limited page 47
the Rand proceeds of the US Dollar exports. Furthermore, prices in
the local market are also influenced by import parity competition.
Should the Rand continue at the current levels or further strengthen
against the US Dollar, we would anticipate that these operations will
incur losses during the new financial year.
– would you have changed anything?
lost during 2002. The year-end Dollar rate depreciated by 9.8% in
2004 (2003: 17.2%) against the Euro and by 7.3% against the
Rand (2003 – Dollar – by 32.4%). Since the 2004 year-end, the
Rand further strengthened by approximately 7% to a level of
approximately ZAR5.81 on 02 December 2004. The profitability of
certain of our southern African operations is directly dependent on
The following table sets out the US Dollar exchange rates used in preparing our group financial statements:
Income statement Balance sheet
2004 2003 2004 2003
Average rates % change Closing rates % change
Exchange rate
US Dollar/SA Rand 6.6824 8.3300 19.8 6.4290 7.1288 9.8
Euro/US Dollar 1.2152 1.0804 12.5 1.2309 1.1475 7.3
The group generally borrows in currencies of the countries in which it invests, thus securing a natural currency hedge. As a result, finance
costs are related to the location of our investments and not the corporate domicile.
Our foreign exchange policy consists of the following principle
elements:
– External borrowings are taken in the functional currency of the
operating company concerned and, if not, then the exposure is
fully and specifically hedged. Wherever appropriate we aim to
apply hedge accounting treatment to avoid volatility in our results
due to mark-to-market effects of such hedging instruments.
– Any debtors or creditors not in the operating currency of the mill
are hedged. Sales are hedged from the time of invoicing,
purchases from the time of capex approval in the case of capex,
and on all other purchases at the time the order is placed.
– These exposures are hedged through our central treasury,
where external hedging instruments are contracted after netting
the various exposures.
– Variations in this policy are considered from time to time, but
any deviations from the central treasury policy are always
subject to prior board approval.
Translation risks are not hedged. We currently manage our debt to
equity ratios by maintaining a balanced debt portfolio by currency.
We are considering a change in this policy with a view to hedging
cash flows.
Capital expendituresCapital expenditures (1) in 2004 and 2003 consisted of the
following:
September September2004 2003
US$ million US$ million
Sappi Fine Paper
Sappi Fine Paper North America 75 78
Sappi Fine Paper Europe 102 104
Sappi Fine Paper South Africa 10 13
Total 187 195
Sappi Forest Products 146 101
Corporate 1 1
Consolidated Total 334 296
Of the US$334 million of capital expenditure in 2004
(2003: US$296 million), approximately US$219 million were
investments to maintain operations (2003: US$165 million).
The capital expenditure to expand operations during 2004
LIFE WITH PRINT
sappi limited page 48
management’s discussion and analysis of resultscontinued
included major projects at our southern African Tugela and Ngodwana mills as well as the Gratkorn Mill in Europe. Total capital expenditure
amounted to 82% of depreciation in 2004 and was similar to the 84% in 2003. Capital spending for the Sappi group during 2005 is expected
to be at a similar proportion of depreciation.
Other events/factorsPensions and post-retirement benefits other than pensions
The group provides various post-retirement benefits to its active and retired employees worldwide, including pension, post-retirement
health and other life benefits.
The unfunded status of the company’s pension plans increased marginally by US$6 million from the deficit of US$333 million as of
September 2003 to a deficit of US$339 million as of September 2004. Post-retirement benefit liabilities (other than pension) increased
US$17 million (to US$172 million) since September 2003.
Benefit obligations and fair value of plan assets across the regions are as follows:
September 2004 September 2003Benefit Fair value Benefit Fair value of
(US$ million) obligation of plan assets obligation plan assets
Pensions 1,420 1,081 1,274 941
Post-retirement benefits other than pensions 172 – 155 –
Actual returns for the various regional pension funds during 2004 were significantly better than actuarial projections, which improved asset
levels as of September 2004. However, discount rates in all funds, except in the United Kingdom, have been adjusted downwards,
reflecting lower prevailing interest rates. The lower discount rates across the regions increased liabilities by US$43 million, thereby having
a negative effect on the funded status of the group’s plans from September 2003 to September 2004.
The key assumptions used to compile plan assets and liabilities at September 2004 were as follows:
Europe United States United Kingdom South Africa2004 2003 2004 2003 2004 2003 2004 2003
Discount rate 4.63 4.97 5.65 5.85 5.50 5.25 9.00 9.50
Return on assets 5.20 5.50 8.50 8.50 5.50 6.00 10.18 10.00
Benefit increase rate 2.00 2.00 0.00 0.00 2.50 2.50 5.00 5.00
Salary increase 3.14 3.10 3.75 4.00 4.00 4.00 6.00 7.00
As a result of the foregoing, the group’s net periodic pension expense in 2005 is expected to be in line with 2004 levels of US$61 million.
Employer contributions for pensions are expected to rise by approximately US$9 million to US$63 million primarily due to increases in
North American and South African funding requirements offset by lower required contributions in Europe.
A 1% increase in discount rates would decrease the pension liability by approximately US$182 million and the related pension cost by
approximately US$14 million after tax per annum.
A 1% increase in the healthcare cost trend rates would increase the accumulated other post-retirement benefit obligation by US$13 million
and the aggregate of the service and interest cost components of net periodic other post-retirement benefit cost by US$2 million after tax
per annum.
sappi limited page 49
For further information see note 32 and 33 to our group annual
financial statements included elsewhere in this annual report.
Share buy-backFollowing an initial approval by our shareholders on 15 December
2000 of purchases by our subsidiaries of Sappi common shares,
at the annual general meeting of shareholders held on 01 March
2004, a special resolution granting authority to Sappi Limited or
Sappi subsidiaries to buy back up to 10% of the issued shares of
Sappi Limited in any one year, was approved. Pursuant to this
approval, Sappi Limited or its subsidiaries may buy back shares
from time to time. This authority is valid until the next annual
general meeting. Under the South African Companies Act,
subsidiaries may not hold more than 10% of the issued share
capital of the parent company.
Following the initial approval in December 2000, our cumulative
buy back by group entities, at the end of 2004, is approximately
18.2 million shares (or approximately 7.6% of our issued shares)
at an average price of US$9.39 (ZAR74.34) per share, of which
6.3 million shares had been utilised by the Sappi Limited Share
Incentive Trust to meet its obligations. During 2004 we acquired
approximately 1.0 million shares for a total consideration of
approximately US$12.7 million. We held approximately
12.6 million treasury shares (or approximately 5.6% of our issued
shares) at September 2004. As at 02 December 2004, the Sappi
share price was US$13.54 (ZAR7.785 cents).
In terms of the current JSE Securities Exchange South Africa’s
listing requirements a company may not repurchase its shares
during a closed period, which is defined as the period between
the end of a financial reporting period and the publication of the
results for that period; and any period during which the company
is trading under a cautionary announcement.
Restructuring and closuresMill ClosureWe announced the closure of the number 14 paper line at our
Westbrook Mill in Maine, North America in November 2003. This
followed our decision to take out capacity to improve the supply
demand balance in the United States. The machine that was
closed was our highest cost paper machine. In the last quarter of
fiscal 2003 we wrote off the assets and related inventory and took
a charge of US$19 million after tax (US$32 million pre-tax). We
also incurred a further charge of approximately US$16 million pre-
tax in the first quarter of fiscal 2004 in respect of severance,
retrenchment and related costs. The total number of employees
affected by this closure was 145 people.
RestructuringDuring this year we completed the restructuring initiatives
announced in November 2003. We restructured the Fine Paper
division to simplify reporting lines, and as a result the chief executive
officers of Sappi Fine Paper Europe and North America now report
directly to the chief executive officer of Sappi Limited. As a
consequence the Fine Paper office in London was closed, and
the position of chief executive officer for Sappi Fine Paper no
longer exists. A pre-tax expense of US$5 million was incurred for
the closure during 2004.
In addition, in order to counteract the effect of rapidly
increasing benefit costs, we also reduced our staffing levels by
a further 85 people in North America, 49 people in Europe and
211 people at our Forest Products operations during 2004.
We incurred a pre-tax charge of US$11 million during 2004 in
respect of this.
DividendsIn November 2004 Sappi Limited declared dividends in respect
of ordinary shares of 30 US cents per share (2003: 29 US cents
per share).
We aim to declare annual dividends, which, over time, incorporate
real growth for shareholders. To this end dividend cover in each
year will vary in line with changes in the business cycle, but our
current intention is to maintain a long-term average of three times
earnings. Our dividends were covered 1.4 and 2.2 times in 2004
and 2003, respectively.
Performance against financial objectivesGroup objectives for operating performances shown on pages
[52 and 53], are Dollar-based and are expressed as returns
in percentages which recognise the current economic factors
of the countries in which we operate and the expectations of
our investors. These percentages are reviewed from time to
time in light of changing circumstances, in particular with regard
to risk free interest rates, market risk premiums, inflation and the
cost of debt. The objectives are long-term in nature and have
therefore not been reviewed downwards to reflect current low
interest rates, particularly in the United States.
InsuranceThe group has an active programme of risk management in each
of its geographical operating regions to address and to reduce
exposure to property damage and business interruption. All
production and distribution units are audited regularly and are
sappi limited page 50
America participated in a price fixing conspiracy with other
manufacturers of publication paper. The cases filed in federal
courts assert a violation of the federal antitrust laws, while the
cases filed in state courts allege violations of state antitrust and
unfair competition statutes. These lawsuits seek injunctive relief,
as well as treble damages and other costs associated with the
litigation. We have filed motions to dismiss or demurrers in
several of these cases. Other than the motions to dismiss,
responsive pleadings have not been filed to the complaints in
any of the cases.
In late July 2003, our subsidiary SD Warren Company was served
with a lawsuit in the Muskegon County Circuit Court brought by
10 Muskegon residents. The plaintiffs claim that pollutants, air
contaminants, noise, dust, debris and bad odours have materially
injured their persons and property, for which they are now seeking
monetary damages, injunctive relief and attorney fees. The
attorneys for the plaintiffs attempted to have the case certified as
a class action, but this certification was defeated in June 2004.
The plaintiffs then amended the complaint to add an additional
54 plaintiffs.
EuropeOn 25 and 26 May 2004 the EU Commission carried out an
unannounced inspection visit at Sappi Fine Paper Europe’s
headquarters in Brussels in the context of what appears to be
an industry wide antitrust examination. The EU Commission
has copied and taken away a substantial quantity of business
documents. In its decision to authorise the inspection visit, the
EU Commission alleges that Sappi Fine Paper Europe was
involved in anti-trust infringing collusive action with competitors.
The EU Commission’s investigation is at a very early stage and
could last for several years.
In June 2003, an anti-dumping case was initiated by the Indian
authorities against coated paper imports in the calendar year 2002
from the European Union and Indonesia. Sappi Fine Paper Europe
has decided to co-operate with the Indian investigating authorities
and submitted a questionnaire response to them, which appears
to have been accepted as being accurate. The Indian investigating
authorities have to comply with the mandatory deadline of
17 December 2004 to come to a final decision as to whether to
impose anti-dumping duties against Sappi and the other European
exporters concerned. By co-operating Sappi hopes to minimise
(or even avoid) any such duties in order to safeguard its exports to
India, which could adversely impact the ability of these importers to
compete effectively in the Indian market.
subject to risk assessments, which receive the attention of senior
management. The risk programmes are co-ordinated at group
level in order to achieve a harmonisation of methods. Work on
improved enterprise risk management is ongoing and aims to
lower the risk of incurring losses from uncontrolled incidents.
Sappi follows a practice of insuring its assets against unavoidable
loss arising from catastrophic events. These include fire, flood,
explosion, earthquake and machinery breakdown. Insurance also
covers the business interruption costs which may result from
these events. Specific environmental risks are also insured. In line
with the previous years the board decided not to take separate
cover for losses from acts of terrorism, which is consistent with
current practice in the paper manufacturing industry.
Sappi has a global insurance structure and the majority of
insurance is placed with its own captive insurance company
which in turn re-insures the vast majority of the risk with third-
party insurance companies.
The events of 11 September 2001, and property damage losses
seriously affected the insurance industry, and led to significant
premium increases over the last few years in some of the
components of our insurance structure. Sappi has successfully
placed the renewal of its 2005 insurance cover at rates lower than
2004. Self-insured deductibles for any one property damage
occurrence have remained at US$25 million, with an unchanged
aggregate limit of US$40 million. For property damage and
business interruption, there generally does not seem to be cost-
effective cover available to full value. However, the directors believe
that the loss limit cover of US$1 billion should be adequate for
what they have determined as the reasonably foreseeable loss for
any single claim.
Insurance cover for credit risks currently applies to Sappi’s North
American, European and South African domestic trade receivables.
LitigationWe become involved from time to time in various claims and
lawsuits incidental to the ordinary course of our business. We
are not currently involved in legal proceedings which, either
individually or in the aggregate, are expected to have a material
adverse effect on our business, assets or properties.
North AmericaA number of class actions have been filed in federal and state
courts alleging that Sappi Limited and Sappi Fine Paper North
management’s discussion and analysis of resultscontinued
sappi limited page 51sappi limited page 51
Southern AfricaThe Restitution of Land Rights Act (Act 22 of 1994), as amended,
provides for the restoration of rights in land or other equitable
redress to persons or communities dispossessed of their land
rights after 19 June 1913 as a result of old laws or practices
discriminating on the basis of race. The legislation empowers the
Minister of Land Affairs to expropriate land in order to restore it to
a successful claimant provided that there is just and equitable
compensation to the owner of the land. Claims under the Act
were required to be filed on or before 31 December 1998 and are
presently being processed by the Commission on Restitution of
Land Rights and adjudicated upon by the Land Court. This
process is expected to continue for many years. As one of the
largest land owners in South Africa, we anticipate that a
substantial number of claims may affect land we own. The
process of determining the extent of claims filed in respect of our
land and the potential impact of these claims on our South African
operations continues. To date, we have been notified of seven
formal Land Claims made in respect of portions of Sappi
plantations in the Mpumalanga area, and 10 others made in
respect of portions of Sappi plantations in KwaZulu Natal. These
claims have not been finalised and are still under investigation by
the Regional Land Claims Commissioner.
Subsequent eventsJoint venture with Shandong Chenming PaperHoldings LimitedIn October 2004 Sappi announced that it had reached an
agreement to acquire 34% of Jiangxi Chenming Paper Company
Limited (“Jiangxi Chenming”) in a joint venture with Shandong
Chenming Paper Holdings Limited (“Shandong Chenming”)
(47.2%), together with Jiangxi Paper Industry Company Limited
(3.8%), Shinmoorim Paper Manufacturing Company Limited of
South Korea (7.5%), and the International Finance Corporation
(“IFC”) (7.5%). Sappi's equity contribution will be approximately
US$60 million. This transaction is subject to customary regulatory
approvals and we anticipate that this should be concluded by
December 2004.
Jiangxi Chenming is constructing a 350,000 ton per year light-
weight coated paper machine, together with a bleached thermo
mechanical pulp (BTMP) mill and de-inking plant and ancillary
power plant and transportation infrastructure in Nanchang, the
capital of Jiangxi Province which is located in southeast China.
The total cost of the project is an estimated US$487 million and
construction is well advanced with the mill scheduled to start
delivering paper in the first half of 2005. The mill is the sole asset
of the company.
The IFC has been mandated to arrange the debt financing for the
project, which is without recourse to Sappi. The IFC will hold
7.5% of the equity and has also approved US$60 million in long-
term debt for its own account.
Sappi will nominate the Chief Financial Officer of Jiangxi
Chenming.
sappi limited page 52
financial performance
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
EBITDA* and operating profit **(US$m)
00 01 02 03 04
239 40
2
272
188
670 65
3667
740
590
1,03
7
Operating profit
EBITDA
* In connection with the U.S. Securities Exchange Commission ("SEC")requirements relating to "Conditions for Use of Non-GAAP FinancialMeasures", we have reconciled EBITDA to net profit and have calculated EBITDA to exclude interest (net finance costs), taxes, depreciation and amortisation (including fellings). We use EBITDA as an interna measure of performance and believe it is a useful andcommonly used measure of financial performance in addition to operating profit and other profitability measures under SA GAAP. EBITDA is not a measure of performance under SA GAAP. EBITDAshould not be construed as an alternative to operating profit as anindicator of the company's operations in accordance with SA GAAP.EBITDA is also presented to assist our shareholders and the investment community in interpreting our financial results. This financial measure is regularly used as a means of comparison of companies in our industry by removing certain differences betweencompanies such as depreciation methods, financing structures andtaxation regimes. Different companies and analysts may calculate EBITDA differently, so making comparisons among companies onthis basis should be done very carefully.
The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137– Agriculture (IAS 41).Comparative amounts for 2001(Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information.
** The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 – Agriculture (IAS 41) and circular 3/2004 issued by the South African Institute of Chartered Accountants. Comparative amounts for 2001 (Income statement) and 2000 (Income statementand Balance sheet) were not restated for AC137 due to insufficientavailable information.
180
160
140
120
100
80
60
40
20
0
Earnings growth *(US cents)
00 01 02 03 04
Earnings per share
Headline earnings per share
153
152
59
114
96 102
62
69
43 45
* The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information.
1,200
1,000
800
600
400
200
0
Net asset value per share *(US cents)
00 01 02 03 04
804 85
1
1,05
4
1,11
5
859
* Net asset value includes plantations and net deferred tax liability. The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information. The comparative amounts were also reclassified betweencurrent tax and deferred tax.
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Net debt(US$m)
00 01 02 03 04
1,12
6
1,41
9
1,49
1
1,58
4
1,27
0
500
450
400
350
300
250
200
150
100
50
0
Capital expenditure compared todepreciation, amortisation and fellings *(US$m)
00 01 02 03 04
Depreciation
Fellings
320
3624
300
3021
310
262
352
421
408
552
334
296
180
293
221
32
28
3
1
Amortisation
Capex – Fixed assets
Capex – Plantations
0
sappi limited page 53
performance against financial objectives
16
14
12
10
8
6
4
2
0
Operating profit to sales †
(%)
00 01 02 03 04
5.7 6.
3
4.0
10.8
Current target range
Objective – To achieve an average operating profit to sales marginof 12 – 15%
† The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 – Agriculture (IAS 41) and circular 3/2004 issued by the South African Institute of Chartered Accountants. Comparative amounts for 2001 (Income statement) and 2000 (Income statementand Balance sheet) were not restated for AC137 due to insufficientavailable information.
14.2
25
20
15
10
5
0
Return on equity (ROE) †
(%)
00 01 02 03 04
15.9
*
8.1
4.8
23.8
14.3 Current
objective
Objective – To provide shareholders with an after-tax return in dollarearnings that, on average, exceeds the American risk-free rate byat least 5 percentage points. (Current objective > 11%)
* ROE before Mobile closure costs
† The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137– Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information.
20
18
16
14
12
10
8
6
4
2
0
Operating profit to average net assets(RONA) †
(%)
00 01 02 03 04
6.7
4.2
11.9
Current target
Objective – To achieve a group average return of operating profit to average net assets of 5 percentage points above LIBOR (or its equivalent) in the currencies in which we are invested.(Current objective > 12%)
† The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 – Agriculture (IAS 41) and circular 3/2004 issued by the South African Institute of Chartered Accountants. Comparative amounts for 2001 (Income statement) and 2000 (Income statementand Balance sheet) were not restated for AC137 due to insufficientavailable information.
18.3
7.1
18
16
14
12
10
8
6
4
2
0
Net operating profit after current taxto average net assets (NOPAT) † º
(%)
00 01 02 03 04
6.2
3.1
Current WACC
Objective – To achieve a NOPAT return on net assets that on averageexceeds the weighted average cost of capital (WACC).(Current objective > 9%)
† The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 - Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information.
º Comparative amounts have been reclassified between deferred taxand current tax.
16.3
4.2
10.3
0.6
0.5
0.4
0.3
0.2
0.1
0
Net debt/total capitalisation †
00 01 02 03 04
Current target range
Objective – To operate within a target range of 0.25:1 and 0.50:1,exceeding this only when large capital projects or acquisitions areundertaken.
† Total capitalisation includes plantations and current tax liability.The comparative information was restated to take into account theeffects of implementation of the new plantation accounting standardAC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information. The comparative amounts were reclassified between current tax and deferred tax.
0.36
0.31 0.32
0.32
0.30
sappi limited page 54
Annual September September September September Septembercompound 2004 2003 2002 2001 2000 growth (%) US$ million US$ million US$ million US$ million US$ million
Income statement and cash flow Sales 0.1 4,728 4,299 3,729 4,184 4,718
Operating profit (1) (27.2) 188 272 402 239 670
Net finance costs (excluding
capitalised interest) (6.5) 110 111 102 125 144
Depreciation, amortisation and
fellings (2) 5.2 465 395 338 351 380
Profit before taxation (2) (39.3) 78 161 300 147 573
Net taxation (2) (20) 18 79 9 197
Income attributable to
minority interests (100.0) – – – – 13
Net profit for the year (2) (27.9) 98 143 221 138 363
Headline earnings (2) (27.2) 101 157 234 265 360
Cash generated by operations (2) (13.0) 601 645 722 771 1,048
EBITDA (4) (10.9) 653 667 740 590 1,037
Balance sheet Non-current assets (2) 5.9 4,526 4,242 3,633 3,335 3,600
Current assets 6.2 1,580 1,575 1,094 1,219 1,241
Total assets (2) 6.0 6,106 5,817 4,727 4,554 4,841
Current liabilities (3) 6.2 1,524 1,361 1,050 1,449 1,200
Total capital employed (2) 5.9 4,582 4,456 3,677 3,105 3,641
Net debt 5.7 1,584 1,491 1,419 1,126 1,270
Statistics Number of ordinary shares (millions)
In issue at year-end (5) (1.3) 226.5 226.9 230.2 229.5 239.1
Weighted average number of
shares in issue during the year (5) (1.1) 226.3 229.1 230.2 232.8 236.9
Share performance: per share (in US cents) Basic earnings (2) (27.1) 43 62 96 59 153
Diluted earnings (2) (26.9) 43 62 95 59 151
Headline earnings (2) (26.2) 45 69 102 114 152
Diluted headline earnings (2) (26.3) 44 68 100 112 149
Ordinary dividend declared (5) 4.7 30 29 28 26 25
Net asset value (7) 6.7 1,115 1,054 851 804 859
Ordinary dividend cover (times) (6) 1.4 2.2 3.4 2.3 6.1
five-year review
sappi limited page 55
September September September September September2004 2003 2002 2001 2000
US$ million US$ million US$ million US$ million US$ million
Returns (%) Operating profit to sales (1) 4.0 6.3 10.8 5.7 14.2
Operating profit to average net
assets (RONA) (1) 4.2 6.7 11.9 7.1 18.3
Net profit to average ordinary
shareholders’ equity (ROE) (8) 4.8 8.1 14.3 15.9 23.8
Ratios Net debt/ total capitalisation (9) 0.32 0.31 0.36 0.30 0.32
Net debt/ equity ratio (2) 0.75 0.77 0.89 0.75 0.76
Current asset ratio 1.04 1.16 1.04 0.84 1.03
Cash interest cover (times) (2) 5.5 5.8 7.1 6.2 7.3
Number of employees 16,010 16,939 17,572 18,231 19,276
Exchange rates US$ per one Euro
exchange rate – closing 1.2309 1.1475 0.9789 0.9167 0.8777
US$ per one Euro
exchange rate – average
(12 month) 1.2152 1.0804 0.9188 0.8855 0.9720
ZAR to one US$ exchange rate
– closing 6.4290 7.1288 10.5400 8.9386 7.2240
ZAR to one US$ exchange rate
– average (12 month) 6.6824 8.3300 10.5393 7.9574 6.5472
Net profit to EBITDA (4) reconciliation Net profit for the year 98 143 221 138 363
Net finance costs 110 111 102 92 97
Net taxation (20) 18 79 9 197
Depreciation and amortisation (including fellings) 465 395 338 351 380
EBITDA (4) 653 667 740 590 1,037
sappi limited page 56
(1) The comparative information was restated to take into account the effects of implementation of the new plantation accounting standard AC137 –
Agriculture (IAS 41) and circular 3/2004 issued by the South African Institute of Chartered Accountants. Comparative amounts for 2001 (Income
statement) and 2000 (Income statement and Balance sheet) were not restated for AC137 due to insufficient available information.
(2) The comparative information was restated to take into account the effects of implementation of the new plantation accounting standard AC137 –
Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance sheet) were not restated for AC137
due to insufficient available information.
(3) Comparative amounts have been reclassified between deferred tax and current tax.
(4) In connection with the U.S. Securities Exchange Commission (“SEC”) requirements relating to “Conditions for Use of Non-GAAP Financial Measures”,
we have reconciled EBITDA to net profit and have calculated EBITDA to exclude interest (net finance costs), taxes, depreciation and amortisation
(including fellings). We use EBITDA as an internal measure of performance and believe it is a useful and commonly used measure of financial
performance in addition to operating profit and other profitability measures under SA GAAP. EBITDA is not a measure of performance under SA GAAP.
EBITDA should not be construed as an alternative to operating profit as an indicator of the company’s operations in accordance with SA GAAP. EBITDA
is also presented to assist our shareholders and the investment community in interpreting our financial results. This financial measure is regularly used
as a means of comparison of companies in our industry by removing certain differences between companies such as depreciation methods, financing
structures and taxation regimes. Different companies and analysts may calculate EBITDA differently, so making comparisons among companies on this
basis should be done very carefully. The comparative information was restated to take into account the effects of implementation of the new plantation
accounting standard AC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income statement and Balance
sheet) were not restated for AC137 due to insufficient available information.
(5) Net of treasury shares (refer note 17).
(6) The dividends for all the financial years were declared subsequent to year-end. The comparative information for the ordinary dividend cover was
restated to take into account the effects of implementation of the new plantation accounting standard AC137 – Agriculture (IAS 41).
(7) Net asset value includes plantation and net deferred tax liability. The comparative information was restated to take into account the effects of
implementation of the new plantation accounting standard AC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000
(Income statement and Balance sheet) were not restated for AC137 due to insufficient available information. The comparative amounts were also
reclassified between current tax and deferred tax.
(8) September 2001 – ROE before Mobile Mill closure costs. The comparative information was restated to take into account the effects of implementation
of the new plantation accounting standard AC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000 (Income
statement and Balance sheet) were not restated for AC137 due to insufficient available information.
(9) Total capitalisation includes plantations and current tax liability. The comparative information was restated to take into account the effects of
implementation of the new plantation accounting standard AC137 – Agriculture (IAS 41). Comparative amounts for 2001 (Income statement) and 2000
(Income statement and Balance sheet) were not restated for AC137 due to insufficient available information. The comparative amounts were reclassified
between current tax and deferred tax.
Note:
Definitions for various terms and ratios used above are included in the Glossary on page 162.
five-year review continued
sappi limited page 57
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Sales(US$m)
Sep00
Sep01
Sep02
Sep03
Sep04
4,72
8
4,29
9
3,72
94,18
44,71
8
25,000
20,000
15,000
10,000
5,000
0
Number of employees
Sep00
Sep01
Sep02
Sep03
Sep04
16,0
10
16,9
39
17,5
72
18,2
31
19,2
76
350
300
250
200
150
100
50
0
Sales per employee(US$’000)
Sep00
Sep01
Sep02
Sep03
Sep04
295
254
21222
9245
Shareholding Number Number % of shares– ordinary shares in issue of shareholders % of shares* in issue
1 – 5,000 5,660 86.93 3,019,683 1.33
5,001 – 10,000 198 3.04 1,449,717 0.64
10,001 – 50,000 356 5.47 8,822,421 3.90
50,001 – 100,000 114 1.75 7,915,737 3.50
100,001 – 1,000,000 146 2.24 34,727,817 15.33
Over 1,000,000 37 0.57 170,556,011 75.30
6,511 100.00 226,491,386 100.00
Shareholder spread % of shares– Type of shareholder in issue
Non-public 0.18
group directors 0.17
Associates of group directors 0.01
Trustees of the company’s share and retirement funding schemes 0.00
Public 99.82
100.00
* The number of shares excludes 12,580,506 treasury shares held by the group.
Sappi has a primary listing on the JSE Securities Exchange South Africa and secondary listings on the New York Stock Exchange, London
Stock Exchange and Frankfurt Stock Exchange.
A large number of shares are held by nominee companies on behalf of beneficial shareholders. Pursuant to Section 140A of the
South African Companies Act, 1973, as amended, the directors have investigated the beneficial ownership of shares in Sappi Limited
including those which are registered in the nominee holdings and these investigations have to date revealed the following beneficial holders
of more than 5% of the issued share capital of Sappi Limited:
Shares %
Public Investment Commissioner (SA) 27,156,668 11.99
Industrial Development Corporation (SA) 17,704,620 7.82
Further, as a result of these investigations, the directors have ascertained that some of the shares registered in the names of the nominee
holders are managed by various fund managers and that, as of September 2004, the following fund managers were responsible for
managing 5% or more of the share capital of Sappi Limited:
Shares %
Rand Merchant Bank (SA) 25,016,654 11.05
Old Mutual (Global) 17,849,405 7.88
Capital group (Global) 13,194,984 5.83
Sanlam Investment Managers (SA) 12,031,819 5.31
share statistics
page 58 sappi limited at September 2004
sappi limited page 59sappi limited page 59
sappi limited
share statistics
for the year ended September 2004
September September September September September Share statistics 2004 2003 2002 2001 2000
Ordinary shares in issue (millions) 226.5 226.9 230.2 229.5 239.1
Net asset value per share (US cents) * 1,115 1,054 851 804 859
Number of shares traded (millions)
JSE 304.25 245.80 180.70 240.10 160.30
New York 51.56 45.89 47.90 51.64 34.43
Value of shares traded
JSE (ZAR million) 28,608.9 25,603.2 22,647.1 14,806.1 8,922.5
New York (US$ million) 707.1 586.8 562.0 456.9 296.8
Percentage of issued shares traded 157.1 128.6 99.3 147.3 91.1
Market price per share
– year-end JSE (South African cents) 9,040 9,556 12,240 7,760 5,350
New York (US$) 14.11 13.32 11.56 8.80 7.31
– highest JSE (South African cents) 10,450 12,950 16,200 8,700 7,000
New York (US$) 16.13 14.52 15.00 10.37 11.75
– lowest JSE (South African cents) 7,720 8,550 7,650 4,380 3,800
New York (US$) 12.60 10.30 8.40 5.75 6.06
Earnings yield (%) ** 3.20 5.15 8.79 13.13 20.51
Dividend yield (%) *** 2.13 2.16 2.41 3.00 3.37
Price/earnings ratio ** 31.24 19.42 11.38 7.62 4.88
Total market capitalisation (US$ million) *** 3,185 3,040 2,673 1,992 1,772
* Including net deferred tax liability. The comparative information was restated to take into account the effects of implementation of the new plantation accounting standard.AC137 – Agriculture (IAS 41).
** Based on financial year-end closing prices on the JSE Securities Exchange South Africa. The comparative information was restated to take into account the effects of implementation of the new plantation accounting standard AC137 – Agriculture (IAS 41).
*** Based on financial year-end closing prices on the JSE Securities Exchange South Africa.
Note:Definitions for various terms and ratios used above are included in the Glossary on page 162.
Sappi share price(SA cents per share)
Value of Sappi shares tradedon the JSE SecuritiesExchange South Africa(ZAR million)
Sappi ADR price(US$ per share)
Value of Sappi ADRs traded on theNew York Stock Exchange(US$ million)
Lowest
Highest
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
01
8,70
04,
380
02
16,2
007,
650
03
12,9
508,
550
04
10,4
507,
720
00
7,00
03,
800
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
04
28,6
09
03
25,6
03
02
22,6
47
01
14,8
06
00
8,92
3
Lowest
Highest
18
16
14
12
10
8
6
4
2
0
01
10.3
75.
75
02
15.0
08.
40
03
14.5
210
.30
04
16.1
312
.60
00
11.7
56.
06
800
700
600
500
400
300
200
100
0
04
707.
1
03
586.
8
02
562.
0
01
456.
9
00
296.
8
sappi limited page 60
The group endorses the Code of Corporate Practices and
Conduct as contained in the South African King II Report which
was issued in 2002, and complies substantially with the principles
incorporated in that report. The group maintains listings on the
JSE Securities Exchange (South Africa), New York Stock
Exchange (NYSE), London Stock Exchange and Frankfurt Stock
Exchange and complies substantially with the regulations and
codes of those exchanges to the extent required.
The board of directorsThe board currently comprises four executive and ten non-executive
directors who collectively determine major policies and strategies.
Eight can be classified as independent non-executive directors in
terms of the King II Report definitions and the NYSE rules.
Messrs van As and Haymon are not classified as independent as
a period of three years has not passed since they were executive
directors of the company. Except for Messrs van As and Haymon,
the non-executive directors derive no benefits from the company
for their services as directors other than their fees.
The non-executive directors’ business experience enables them
to evaluate strategy and act in the group’s best interest and act
as a balance to the executive directors. A policy has been
implemented that outlines the division of responsibilities at board
level. The board meets regularly, at least every quarter, to carry
out its functions. Its main functions include: to confirm its strategy
and direct the group accordingly, to take decisions of a material
nature reserved for the board’s deliberation, to monitor the
activities and performance of executive management, to provide
for board and management succession, and to provide
information on the business of the company to shareholders and
stakeholders. The chairman meets routinely with the non-
executive directors to discuss his performance and any other
issues. We are currently developing an evaluation process for the
board and the various board sub-committees.
The board has adopted a charter that deals with the role,
composition, sub-committees, frequency of meetings, annual
work plan and annual evaluation of the board. The following sub-
committees will be constituted in the new financial year:
• Human Resources Committee;
• Compensation Committee (formerly part of the Human
Resources Committee);
• Nomination and Governance Committee (formerly the
Nomination Committee), and
• Sustainability Committee.
The functions of Chairman (Mr van As – non-executive director)
and Chief Executive Officer (Mr Leslie – executive director) are
separated.
All the directors may seek independent professional advice if
necessary and have access to the services of the company
secretary who is responsible to ensure both the effective
functioning of the board and the proper administration of board
proceedings.
The board met seven times during the current financial year and
the attendance was as follows:
corporate governance
sappi limited page 61
01 Oct 07 Nov 30 Jan 07 May 08 June 08 & 09 July 28 July2003 2003 2004 2004 2004 2004 2004
E van As (Chairman) ✓ ✓ ✓ ✓ ✓ ✓ ✓
JCA Leslie ✓ ✓ ✓ ✓ ✓ ✓ ✓
MR Haymon ✓ ✓ ✓ ✓ ✓ ✓ ✓
JL Job ✓ ✓ ✓ ✓ ✓ ✓ ✓
W Pfarl ✓ ✓ ✓ ✓ ✓ ✓ ✓
WH Sheffield ✓ ✓ Resigned in November 2003
DG Wilson ✓ ✓ ✓ ✓ ✓ ✓ ✓
DC Brink ✓ ✓ ✓ ✓ – ✓ ✓
JS Chalsty ✓ ✓ ✓ Retired in March 2004
TL de Beer ✓ ✓ ✓ Retired in March 2004
DNA Hunt-Davis ✓ ✓ ✓ Retired in March 2004
M Feldberg ✓ ✓ ✓ ✓ – – ✓
K de Kluis ✓ ✓ ✓ ✓ ✓ ✓ ✓
D Konar ✓ ✓ ✓ ✓ ✓ ✓ ✓
FA Sonn ✓ ✓ ✓ ✓ ✓ ✓ ✓
JE Healey Appointed in July 2004 ✓ ✓
B Radebe Appointed in May 2004 ✓ – ✓ ✓
HC Mamsch Appointed in January 2004 ✓ ✓ ✓ ✓
Audit CommitteeAn Audit Committee of the board was established in 1984 and
assists the board in discharging its duties relating to the:
• safeguarding of assets;
• operation of adequate systems and control processes;
• reviewing of financial information and the preparation of
accurate financial reporting and statements in compliance
with all applicable legal requirements and accounting
standards;
• oversight of the external auditor’s qualifications and
experience; and
• oversight of the performance of the internal audit functions
and the external auditor.
The Audit Committee approves the external auditor’s engagement
letter, nature and scope of the audit and the audit fee.
It also oversees the financial reporting process and is concerned
with compliance with accounting policies, group policies, legal
requirements and internal controls within the group. It interacts
with and evaluates the effectiveness of the external and internal
audit process and reviews compliance with the group’s code of
ethics. The Audit Committee consists of five independent non-
executive directors of the board and is directed by a specific
mandate from the board and has satisfied its responsibilities for
the year in terms of the mandate. The adequacy of the mandate
is reviewed annually. The Audit Committee meets with senior
management, which includes the Chief Executive Officer and the
Executive Director – Finance, at least four times a year. The
external and internal auditors attend these meetings and have
unrestricted access to the committee and its chairman. The
external and internal auditors meet privately with the Audit
Committee on a regular basis. The Audit Committee chairman is
available at the annual general meeting. Subsidiary company
Audit Committees exist in all major regions and are chaired by
independent non-executive directors. These committees have a
mandate from the group’s Audit Committee, to whom they report
on a regular basis and they now meet at least four times per year.
Dr Konar has been designated as the Audit Committee’s financial
expert as required by the Sarbanes-Oxley Act of 2002.
The Audit Committee met five times during the current financial
year and the attendance was as follows:
sappi limited page 62
06 Nov 26 Nov 29 Jan 06 May 27 July2003 2003* 2004 2004 2004
K de Kluis (Chairman) ✓ ✓ ✓ ✓ ✓
DNA Hunt-Davis ✓ ✓ ✓ Retired in March 2004
JS Chalsty ✓ ✓ ✓ Retired in March 2004
TL de Beer ✓ ✓ ✓ Retired in March 2004
D Konar ✓ ✓ ✓ ✓ ✓
DC Brink Appointed in January 2004 ✓ ✓ ✓
* Joint Audit Committee/Disclosure Committee Meeting
Following his retirement Mr Hunt-Davis attended the group Audit
Committee in an advisory capacity and also chaired the North
American Audit Committee. Messrs Healey and Mamsch attended
the May and July meetings as invitees, and will join as members
from the 2005 financial year.
Nomination CommitteeThe Nomination Committee is constituted as a subcommittee of
the board and consists of three non-executive directors (one of
whom serves as chairman) and the non-executive Chairman of
the group. The committee considers the composition of the
board, retirements and appointments of additional and
replacement non-executive directors and makes appropriate
recommendations to the board. A policy detailing the procedures
for appointments to the board is in place and the committee
operates in terms of a written mandate from the board. The
committee met twice during the year and consisted of Messrs
Brink and, van As, Hunt-Davis, Prof Feldberg and Dr Sonn.
The attendance at the meetings was as follows:
06 Nov 05 Feb2003 2004
E van As ✓ ✓
DNA Hunt-Davis (1) ✓ ✓
DC Brink ✓ –
M Feldberg (2) ✓
FA Sonn ✓ ✓
(1) Retired 01 March 2004
(2) Appointed to committee in January 2004
Human Resources CommitteeThe Human Resources Committee, which consists of two non-
executive directors (one of whom serves as chairman) and the
non-executive Chairman of the group, is constituted as a
subcommittee of the board and operates within the terms of
reference set by the board. The Chief Executive Officer attends
meetings by invitation to assist the committee in the carrying out
of its duties. The responsibilities of the committee are, inter alia,
to determine human resource policy and strategy as well as the
remuneration and incentives in respect of those executives
reporting directly to the non-executive Chairman. The
remuneration of the non-executive Chairman is determined by
the non-executive directors of the committee. Human resources
committees exist for all the company’s major operating
subsidiaries outside of southern Africa. Directors’ emoluments are
disclosed in the Notes 41 to 43 of the group annual financial
statements. The committee met three times during the year and
consisted of Prof Feldberg and Messrs Brink and van As. The
attendance was as follows:
06 Nov 07 July 27 July2003 2004 2004
E van As (Chairman) ✓ ✓ ✓
TL de Beer ✓ Retired March 2004
DC Brink ✓ ✓ ✓
M Feldberg (1) ✓ ✓
(1) Appointed to committee in January 2004
Financial statementsThe directors are responsible for overseeing the preparation and
for the final approval of the group annual financial statements. The
auditors are responsible for auditing the group annual financial
statements and expressing an opinion thereon in the course of
executing their statutory duties. While management are
responsible for the preparation of the annual financial statements,
the directors believe that suitable accounting policies are
consistently applied and supported by reasonable and prudent
judgements and estimates, have been used in the preparation of
the annual financial statements, which fairly present the state of
affairs of the group. In this process, appropriate accounting
standards have been applied and adequate accounting records
corporate governance continued
sappi limited page 63
have been maintained. The going concern basis has been
adopted in preparing the annual financial statements. Based on
the financial position of the group at the financial year-end, the
directors see no reason to believe that the group will not continue
to be a going concern in the foreseeable future. Quarterly results
are reviewed by the group’s external auditors and the Audit
Committee prior to their submission to the board.
Internal controlsThe board is responsible for the group’s systems of internal
financial and operational control. The group’s internal controls and
systems are designed to provide reasonable, but not absolute,
assurance as to the integrity and reliability of the annual financial
statements, that assets are adequately safeguarded against
material loss and that transactions are properly authorised and
recorded. Such controls are based on established written policies
and procedures which are monitored throughout the group and
are applied by trained, skilled personnel with an appropriate
segregation of duties through clearly defined lines of accountability
and delegation of authority. The control system includes
comprehensive reporting and analysis of actual results against
approved standards and budgets. All employees are required to
maintain the highest ethical standards in ensuring that the
company’s business practices are conducted in a manner which
in all reasonable circumstances is above reproach.
As part of an ongoing process, reviews were undertaken across
the group of the effectiveness of various elements of the group’s
internal controls, procedures and systems. Where potential
improvements were identified, they are being addressed. The
reviews enabled management to further strengthen the group’s
controls and the results of the reviews did not indicate any
material breakdown in the functioning of these controls,
procedures and systems during the year under review. A material
breakdown is defined as a critical weakness in process or
financial systems which would result in a material loss,
contingency or uncertainty requiring disclosure in the published
annual financial statements.
Section 404 of the Sarbanes-Oxley Act published in the United
States of America requires companies listed on the NYSE to
complete a comprehensive evaluation and report on the
effectiveness of their controls over financial reporting. A Sarbanes-
Oxley project team was established during the year to respond to
the requirements of section 404 of the Sarbanes-Oxley Act of
2002. The project manager reports on a monthly basis to the
Sarbanes-Oxley Steering Committee and at least quarterly to the
group Audit Committee.
Disclosure controlsDisclosure controls and procedures include controls and
procedures designed to ensure that information required to be
disclosed by the group in the reports that it files or submits is
accumulated and communicated to the group’s management,
including the Chief Executive Officer and Executive Director –
Finance, as appropriate to allow timely decisions regarding
required disclosure. The group has implemented disclosure
controls and procedures as deemed appropriate by management.
A Disclosure Committee of management meets to review all
external financial reports prior to their release.
Risk managementThe company has adopted a continuous, systematic, enterprise-
wide risk management process which aims to ensure that all
material risks are identified, evaluated and addressed. Ownership
of the process is at a regional management level, with support
being provided by the Group Risk Management Team, which
addresses finance, business, operations, legal, human resources,
information technology and communication and reputation risks.
This risk assessment process aims to maximise long-term
shareholder value, to protect our people, our assets and the
environment, and to protect the reputation and the Sappi brand
name. The group Risk Management Team reviews the
effectiveness of the risk management process and reports back
to the Chief Executive Officer and the board on an annual basis.
The group is currently evaluating its risk management processes
in terms of the COSO framework to enhance the overall risk
management framework.
At our key business locations and particularly at our mills,
documented and tested business continuity plans exist which will
allow the company to continue its critical business in the event of
a potentially disastrous incident.
Internal auditThe group’s internal audit department has a current complement
of 22 persons, 18 are experienced and qualified, and four are in-
training. It has a specific mandate from the Audit Committee and
independently appraises the adequacy and effectiveness of the
group’s systems, financial internal controls and accounting
records, reporting its findings to local and divisional management,
the external auditors as well as the respective Audit Committees.
The Group Internal Audit Manager as head of the department,
reports to the Executive Director – Finance on a functional basis
and has direct access to the chairman of the Audit Committee
sappi limited page 64
and the Chief Executive Officer. The internal audit coverage plan is
based on a risk assessment performed at each operating unit.
The coverage plan is updated annually based on the risk
assessment and results of the audit work performed. This ensures
that the audit coverage is focused on identified areas of high risk.
The internal auditors meet privately with the Audit Committee on a
regular basis.
Worker participation and employmentequityThe group is committed to promoting a racially, culturally and
ethnically diverse workplace. We promote fair employment
practices and comply with employment equity legislation in the
countries in which we operate. The group encourages open
dialogue, employee participation and a culture of engagement
with all our stakeholders.
Code of ethicsThe group’s code of ethics requires all employees within the group
to act with the utmost good faith and integrity in all transactions
and with all stakeholders with whom they interact. It commits the
company and employees to sound business practices and
compliance with legislation. “Ethics lines” have been implemented
for all the regions in which the group operates. This service
operated by various independent companies, enables employees
to report environmental, safety, ethics, accounting, auditing,
control issues or other concerns. All reported matters are followed
up by Group Internal Audit.
We have acquired an online competition law training programme,
which can be accessed through the internet at any time and is
designed to teach participants about competition laws, establish
a protocol of acceptable behaviour and give guidance on how to
react in sensitive circumstances.
As the company is listed on the New York Stock Exchange and
has securities registered under the USA Securities Exchange Act
of 1934, it is subject to the United States of America Foreign
Corrupt Practices Act (“FCPA”). The company has ensured that
all aspects of the FCPA have been addressed in its policies.
Legal compliance programmeDuring the year the group undertook a thorough review and
analysis of the laws and regulations applicable to most aspects
of its business in the various countries in which it operates.
Based on this review and analysis, the Audit Committee has
adopted a new Legal Compliance Programme designed to
increase awareness of, and enhance compliance with, applicable
legislation. The new programme will become effective in fiscal
2005. A Group Compliance Officer has been appointed who
reports quarterly to the group Audit Committee.
Insider tradingThe company has a code of conduct for dealing in company
securities. No employee of Sappi in possession of material non
public information in respect of Sappi Limited or any of its
subsidiaries, nor any member of his/her family or household may,
at any time, buy or sell securities of Sappi Limited or its
subsidiaries, or engage in any other action to take advantage of
such information. All officers, directors and employees who have
access to unpublished price-sensitive information are precluded
from trading in Sappi Limited securities during “closed periods”,
which apply from the end of the financial quarters in March, June,
September and December respectively, until two full business
days after the release of the results for the respective quarters.
Prior to dealing in Sappi Limited securities (even outside closed
periods), clearance should be obtained from the Sappi Limited
Chairman through the Sappi Limited Group Secretary. In practice
the Chairman clears the transactions by directors and the
Chairman himself requires the clearance of the Audit Committee
Chairman for his own transactions.
Sustainability reportingThe group acknowledges that it operates within a community
and values a good working relationship with its stakeholders.
The group consistently strives to strengthen links through regular
communication with all stakeholders which conforms with the
criterion of timeous, objective, relevant and transparent
communication. The group’s first Sustainability Report was
published during the current financial year and the second will
be made available to stakeholders by March 2005.
Investor relations and stakeholdercommunicationThe group’s investor relations management, together with the
Executive directors make regular presentations to analysts, ratings
agencies and institutional investors on the company’s
performance and strategy.
The corporate communications department maintains regular
contact with relevant stakeholders and utilises the company
website (www.sappi.com) as a means of distributing relevant
information.
corporate governance continued
sappi limited page 65
sappi limited
66 Auditor’s report
66 Directors’ approval
66 Secretary’s certificate
67 Directors’ report
70 Group income statement
71 Group balance sheet
72 Group cash flow statement
73 Group statement of changes in shareholders’ equity
74 Group income statement in Rands (convenience
translation)
75 Group balance sheet in Rands (convenience
translation)
76 Notes to the group annual financial statements
76 Business (note 1)
76 Accounting policies (note 2)
86 Changes in accounting policies (note 3)
87 Cost of sales; Selling general and administrative
expense; Other expenses (notes 4 to 6)
88 Operating profit (note 7)
88 Taxation (note 8)
89 Earnings per share and headline earnings per
share (note 9)
90 Dividends (note 10)
91 Property, plant and equipment (note 11)
92 Plantations (note 12)
92 Deferred taxation (note 13)
95 Other non-current assets (note 14)
95 Inventories (note 15)
96 Trade and other receivables (note 16)
97 Ordinary share capital and share premium
(note 17)
98 Non-distributable reserves (note 18)
98 Interest-bearing borrowings (note 19)
102 Other non-current liabilities (note 20)
103 Provisions (note 21)
106 Cash flow statement notes (notes 22 to 28)
109 Encumbered assets (note 29)
110 Commitments (note 30)
111 Contingent liabilities (note 31)
111 Post-employment benefits – pensions (note 32)
115 Post-retirement benefits other than pensions (note 33)
117 Equity compensation benefits (note 34)
119 Financial instruments (note 35)
125 Segment information (note 36)
126 Related party transactions (note 37)
127 Events after balance sheet date (note 38)
127 Environmental matters (note 39)
128 Summary of differences between South African and
United States Generally Accepted Accounting
Principles (note 40)
136 Directors’ remuneration (note 41)
139 Directors’ interests (note 42)
140 Directors’ participation in the Sappi Limited Share
Incentive Trust (note 43)
147 Company auditor’s report
148 Condensed company income statement
148 Condensed company balance sheet
149 Condensed company cash flow statement
149 Condensed company statement of changes in
shareholders’ equity
150 Notes to the condensed company financial statements
151 Investments
annual financial statements
page 66 sappi limited
Report of the independent auditor to themembers of Sappi LimitedWe have audited the group annual financial statements of Sappi
Limited set out on pages 67 to 73 and pages 76 to 146 for the
year ended 26 September 2004. These financial statements are
the responsibility of the company's directors. Our responsibility is
to express an opinion on these financial statements based on our
audit.
ScopeWe conducted our audit in accordance with statements of South
African Auditing Standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance that the
financial statements are free of material misstatement. An audit
includes:
• examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements;
• assessing the accounting principles used and significant
estimates made by management; and
• evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
OpinionIn our opinion the financial statements fairly present, in all material
respects, the financial position of the group at 26 September
2004 and the results of its operations and cash flows for the year
then ended in accordance with South African Statements of
Generally Accepted Accounting Practice and in the manner
required by the Companies Act in South Africa.
Deloitte & Touche
Registered Accountants and Auditors
Chartered Accountants (SA)
Johannesburg
06 December 2004
72 Group cash flow statement
73 Group statement of changes in shareholders' equity
74 Group income statement in Rands
75 Group balance sheet in Rands
76 Notes to the group annual financial statements
148 Condensed company financial statements
151 Investments
The above statements were approved by the board of directors
on 06 December 2004 and were signed on its behalf by:
JCA Leslie DG Wilson
Chief Executive Officer Executive Director – Finance
Sappi Limited
sappi limited
auditor’s report
directors’ approvalThe directors and officers of the company are responsible to the
extent respectively indicated for the annual financial statements
which are submitted to shareholders in general meeting.
The directors are principally responsible for the overall co-
ordination of the preparation and for the final approval of such
submission. The initial preparation is the responsibility of the
company's officers. The auditors are responsible for auditing the
annual financial statements in the course of executing their
statutory duties.
The report and annual financial statements of the group and the
company appear on the following pages:
67 Directors' report
70 Group income statement
71 Group balance sheet
Sappi Management Services (Pty) Ltd
DJ O'Connor
Group Secretary
06 December 2004
secretary’s certificateIn terms of Section 268G(d) of the Companies Act,
1973, as amended, I certify that the company has
lodged with the Registrar all such returns as are
required by the Companies Act.
sappi limited page 67
sappi limited
directors’ report
In addition Sappi reconciles its reporting annually with US GAAP
and incorporates this reconciliation in its annual report on Form
20-F submission to the Securities and Exchange Commission in
the United States. The significant differences are included in note
40 of the group financial statements.
As the majority of the group’s sales are in US Dollars and the
US Dollar is the major trading currency of the pulp and paper
industry, the group reports its results in US Dollars in order to
facilitate a better understanding of its results.
Share capitalThere were no changes either to the authorised or the issued
share capital of Sappi.
At 30 September 2004 the authorised and issued share capital of
the company was as follows:
Authorised:
325,000,000 ordinary shares of
ZAR1 each ZAR325 million
Issued:
239,071,892 ordinary shares of
ZAR1 each US$35 million
Share premium US$836 million
Purchase of shares by a subsidiaryThrough a wholly-owned subsidiary the Sappi group acquired
approximately 1.0 million Sappi shares on the open market of the
JSE Securities Exchange South Africa during the year for a total
consideration of approximately US$12.7 million. This accords
with Sappi’s stated intention, announced on 09 November 2000,
and the approval given at the annual general meeting of the
company’s shareholders held on 01 March 2004, for Sappi or a
wholly-owned Sappi subsidiary to acquire Sappi shares. Some of
the shares, which have been repurchased, have been, and will
continue to be, utilised to meet the requirements of the Sappi
Limited Share Incentive Trust from time to time. During the year,
approximately 0.7 million treasury shares were issued to
participants of the Sappi Limited Share Incentive Trust for a
consideration of approximately US$6 million. Refer to note 17
of the group annual financial statements for additional details
relating to these treasury shares.
Your directors submit their report for the year ended
September 2004.
Business of Sappi Limited (“Sappi” or “thecompany”) and its subsidiary companies (“the group”)The group manufactures and sells a wide range of pulp, paper
and wood products for use in almost every sphere of economic
activity. The group conducts its business through two business
units, namely:
– Sappi Fine Paper and
– Sappi Forest Products
Sappi Fine Paper has manufacturing and marketing facilities in
Europe, North America and South Africa and produces mainly
high quality branded coated fine paper. It also manufactures
uncoated graphic and business paper, coated and uncoated
specialities paper, and casting release paper used in the
manufacture of artificial leather and textured polyurethane
applications. Sappi Forest Products, based in South Africa,
produces packaging paper and newsprint, pulp, chemical
cellulose (dissolving pulp), and forest and timber products for
southern Africa and export markets. Sappi Trading operates a
trading network for the international marketing and distribution of
our products outside our core operating regions of North America,
Europe and southern Africa.
A review of the business and operations of the operating
companies appears on pages 24 to 30.
Reporting periodThe group’s financial period ends on the Sunday closest to the
year-end date and results are reported as if at the year-end date.
Generally Accepted Accounting Practice (GAAP)As a South African company Sappi’s financial reporting is based
on South African GAAP. The board has considered the application
of alternative accounting standards, but has elected to retain the
standards in use in view of the fact that the majority of the trading
in Sappi shares takes place on the JSE Securities Exchange
South Africa.
These group financial statements have accordingly been prepared
in accordance with the statements of Generally Accepted
Accounting Practice approved by the South African Accounting
Practices Board.
for the year ended September 2004
page 68 sappi limited
FinancingDuring the 2004 financial year, Sappi increased its variable debt
by swapping further fixed rate debt to floating rates. The fixed to
floating debt ratio at September 2004 was 42:58, compared to
45:55 in September 2003. Sappi’s business cycle has a strong
correlation with the interest rate cycle. In addition, over time,
floating rates are lower than fixed rates. For these reasons we
have a preference for floating rates.
In South Africa, additional debt of ZAR590 million (approximately
US$92 million) was raised in fiscal 2004, primarily to refinance
maturing debt and to extend the average time to maturity of the
South African debt.
The Sappi group debt maturity profile is well spread, with a total
average time to maturity of 8.6 years.
DividendsThe directors have declared a dividend (number 81) of 30 US cents
per share (2003: 29 US cents) for the year ended September 2004.
The record date for the dividend is 07 January 2005 and payment
will be made on 10 January 2005.
The Sappi Limited Share Incentive Trust (“the Trust”) In March 1997, shareholders approved the adoption of a new
share incentive scheme for employees, called “The Sappi Limited
Share Incentive Trust”, to replace The Sappi Limited Share
Purchase Scheme which was introduced in 1979.
10,000,000 ordinary shares (being the maximum number of
shares which could be allocated in terms of the Trust as at the
date of its adoption) were allocated to the Trust and were placed
under the control of the directors for specific issue in future.
Subsequently an amendment was passed at the annual general
meeting in March 2000, to provide that the maximum number of
shares which may be allocated in terms of the Trust be fixed at
7.5% of the entire issued share capital of the company from time
to time. Based on the existing share capital, the maximum
number of shares available for allocation to the Trust at present is
17,930,392 shares. Please refer to note 34 of the group annual
financial statements for further information about the Trust.
The Sappi Limited Performance Share IncentivePlan (“the Plan”)The directors are proposing that Sappi should adopt The Sappi
Limited Performance Share Incentive Plan in addition to the
existing share scheme mentioned in the above paragraph. The
salient features of the Plan may be found on page 158 and a
proposed resolution by shareholders to adopt the Plan is
contained in the Notice of meeting on page 152.
Borrowing facilitiesGroup gross borrowings amount to US$2.1 billion (September
2003: US$2.1 billion). The company’s articles of association allow
net borrowings of up to US$6.7 billion. Details of the non-current
term borrowings are set out in note 19 of the group annual
financial statements.
InsuranceThe group has an active programme of risk management in each
of its geographical operating regions to address and to reduce
exposure to property damage and business interruption. All
production and distribution units are audited regularly and are
subject to risk assessments, which receive the attention of senior
management. The risk programmes are co-ordinated at group
level in order to achieve a harmonisation of methods. Work on
improved enterprise risk management is ongoing and aims to
lower the risk of incurring losses from uncontrolled incidents.
Sappi follows a practice of insuring its assets against unavoidable
loss arising from catastrophic events. These include fire, flood,
explosion, earthquake and machinery breakdown. Insurance also
covers the business interruption costs which may result from
these events. Specific environmental risks are also insured. In line
with the previous years the board decided not to take separate
cover for losses from acts of terrorism, which is consistent with
current practice in the paper manufacturing industry.
Sappi has a global insurance structure and the majority of
insurance is placed with its own captive insurance company
which in turn reinsures the vast majority of the risk with third-party
insurance companies.
The events of 11 September 2001 and property damage losses
seriously affected the insurance industry and led to significant
sappi limited
for the year ended September 2004
directors’ report continued
sappi limited page 69
sappi limited
premium increases over the last few years in some of the
components of our insurance structure. However, Sappi
successfully placed the renewal of its 2005 insurance cover at
rates lower than 2004. Self-insured deductibles for any one
property damage occurrence have remained at US$25 million,
with an unchanged aggregate limit of US$40 million. For property
damage and business interruption, there generally does not seem
to be cost-effective cover available to full value, however the
directors believe that the loss limit cover of US$1 billion to be
adequate for what they have determined as the reasonably
foreseeable loss for any single claim.
Insurance cover for credit risks currently applies to Sappi’s North
American, European and South African domestic trade receivables.
LitigationWe become involved from time to time in various claims and
lawsuits incidental to the ordinary course of our business. We are
not currently involved in legal proceedings which, either individually
or in the aggregate, are expected to have a material adverse effect
on our business, assets or properties. (See page 50.)
Subsequent eventsJoint venture with Shandong Chenming Paper Holdings
Limited
In October, Sappi announced that it had reached an agreement to
acquire 34% of Jiangxi Chenming Paper Company Limited in a
joint venture with Shandong Chenming Paper Holdings Limited
(47.2%), together with Jiangxi Paper Industry Company Limited
(3.8%), Shinmoorim Paper Manufacturing Company Limited of
South Korea (7.5%), and the International Finance Corporation
(7.5%). The transaction was subject to customary regulatory
approvals. Sappi’s equity contribution will be approximately
US$60 million.
General authority to permit the company or anysubsidiary to acquire Sappi sharesThe board is proposing that the general authority granted at the
annual general meeting on 03 March 2002 to permit Sappi and/or
subsidiary companies of Sappi to acquire Sappi shares, be
renewed at the forthcoming annual general meeting. Appropriate
resolutions will be submitted to the forthcoming annual general
meeting. Further details are set out in the notice to members on
page 152.
Directors and secretariesThe names of the directors appear on page 10. The secretaries
and their business and postal addresses also appear on
page 164 of this report. At the year-end there were 14 directors,
four of whom were executive directors. Eight of the 10 non-
executive directors were independent.
Messrs JS Chalsty, TL de Beer and DNA Hunt-Davis retired as
directors at the annual general meeting on 01 March 2004.
Mr JE Healey and Ms B Radebe were appointed to the board
during the year. In terms of the company’s articles of association,
it will be necessary to confirm their appointments at the
forthcoming annual general meeting.
In terms of the company’s articles of association Messrs
DC Brink, M Feldberg, MR Haymon, W Pfarl and Dr FA Sonn will
retire by rotation from the board at the forthcoming annual general
meeting. In seeking re-election last year, Mr Haymon indicated
that he intended to serve for only one year and he will
consequently not be seeking re-election. Messrs Brink, Feldberg,
Pfarl and Dr Sonn are all eligible for re-election and have offered
themselves for re-election.
Personal details of Mr Healey and Ms Radebe as well as those
of Messrs Brink, Feldberg, Pfarl and Dr Sonn are set out in the
notice to members on page 155.
The beneficial interest of directors in the shares of the company
(including options and rights and options in terms of The Sappi
Limited Share Incentive Scheme) are disclosed in notes 42 and
43 of the group annual financial statements.
A register of interests of directors and other executives in shares
of the company is available to shareholders and the public on
request.
Subsidiary companiesDetails of the company’s significant subsidiaries are given in
Annexure A on page 151.
Special resolutionsA full list of the special resolutions passed by the company and its
subsidiaries during the year will be made available to shareholders
on request.
page 70 sappi limited
US$ million note 2004 2003
sappi limited
for the year ended September 2004
group income statement
Sales 4,728 4,299
Cost of sales 4 4,133 3,684
Gross profit 595 615
Selling, general and administrative expenses 5 403 316
192 299
Other expenses 6 4 27
Operating profit 7 188 272
Net finance costs 110 111
Gross interest and other finance costs 133 150
Interest received (27) (30)
Interest capitalised (2) (2)
Net foreign exchange gains (5) (1)
Net loss (gain) on marking to market of financial instruments 11 (6)
Profit before taxation 78 161
Taxation 8 (20) 18
Net profit for the year 98 143
Weighted average number of ordinary shares in issue (millions) 226.3 229.1
Basic earnings per share (US cents) 9 43 62
Diluted earnings per share (US cents) 9 43 62
Headline earnings per share (US cents) 9 45 69
Diluted headline earnings per share (US cents) 9 44 68
Dividends per share (US cents) – declared after year-end 10 30 29
sappi limited page 71
US$ million note 2004 2003
sappi limited
group balance sheet
as at September 2004as at September 2004
AssetsNon-current assets 4,526 4,242
Property, plant and equipment 11 3,670 3,554
Plantations 12 548 432
Deferred tax assets 13 46 41
Other non-current assets 14 175 153
Other financial assets 35 87 62
Current assets 1,580 1,575
Inventories 15 765 701
Trade and other receivables 16 323 282
Other financial assets 35 7 7
Prepaid income taxes 1 1
Cash and cash equivalents 484 584
Total assets 6,106 5,817
Equity and liabilitiesShareholders' equity 2,119 1,945
Ordinary share capital and share premium 17 871 793
Non-distributable reserves 18 366 299
Distributable reserves 882 853
Non-current liabilities 2,463 2,511
Interest-bearing borrowings 19 1,693 1,742
Deferred tax liabilities 13 453 487
Other non-current liabilities 20 317 282
Current liabilities 1,524 1,361
Interest-bearing borrowings 19 364 170
Overdraft 11 163
Trade and other payables 986 889
Taxation payable 137 112
Provisions 21 26 27
Total equity and liabilities 6,106 5,817
page 72 sappi limited
US$ million note 2004 2003
sappi limited
for the year ended September 2004
group cash flow statement
Cash retained from operating activities 345 421
Cash generated from operations 22 601 645
– Increase in working capital 23 (50) (79)
Cash generated from operating activities 551 566
– Finance costs paid 24 (136) (143)
– Interest income 27 30
– Taxation (paid) received 25 (31) 33
Cash available from operating activities 411 486
– Dividends paid (66) (65)
Cash utilised in investing activities (356) (310)
Investment to maintain operations (244) (178)
– Replacement of non-current assets 26 (219) (165)
– Proceeds on disposal of non-current assets 27 2 8
– Increase in investments and loans (27) (21)
Investment to expand operations (112) (132)
– Additions of non-current assets (112) (132)
– Acquisition of net assets 28 – –
Cash effects of financing activities (121) 147
Proceeds from interest-bearing borrowings 490 1,542
Repayment of interest-bearing borrowings (433) (1,351)
(Decrease) increase in other non-current liabilities (3) 5
Redemption of minority interests – (7)
Share buybacks (13) (55)
(Decrease) increase in bank overdrafts (162) 13
Net movement in cash and cash equivalents (132) 258
Cash and cash equivalents at beginning of year 584 253
Translation effects 32 73
Cash and cash equivalents at end of year 484 584
sappi limited page 73
sappi limited
group statement of changes in shareholders’ equity
for the year ended September 2004
Ordinary share
capital Non-Number Ordinary and distrib- Distrib-
of ordinary share Share share utable utableUS$ million shares capital premium premium reserves reserves Total
Balance – September 2002
– As reported 230.2 22 550 572 227 802 1,601
Change in accounting policy
(refer to note 3) – – 3 (7) (4)
Balance – September 2002 230.2 22 550 572 230 795 1,597
Net movements not recognised through
the income statement (3.3) 10 211 221 69 (20) 270
Transfer from distributable reserves – – – – 4 (4) –
Foreign currency translation reserve – 10 258 268 65 (1) 332
Gain on revaluation of hedging
instruments – – – – – 5 5
Deferred tax arising on gain on
revaluation of hedging instruments – – – – – (5) (5)
Loss on revaluation of hedging
instruments – – – – – (20) (20)
Deferred tax arising on loss on
revaluation of hedging instruments – – – – – 6 6
Share buy-backs less transfers to
Sappi Limited Share Incentive Trust (3.3) – (47) (47) – (1) (48)
Net profit for the year – – – – – 143 143
Dividends – US$0.28 per share * – – – – – (65) (65)
Balance – September 2003 226.9 32 761 793 299 853 1,945
Net movements not recognised through
the income statement – 3 75 78 67 (3) 142
Transfer from distributable reserves – – – – 5 (5) –
Foreign currency translation reserve – 3 84 87 62 1 150
Loss on revaluation of hedging
instruments – – – – – (2) (2)
Deferred tax arising on revaluation of
hedging instruments – – – – – 3 3
Share buybacks less transfers to
Sappi Limited Share Incentive Trust – – (9) (9) – – (9)
Net profit for the year – – – – – 98 98
Dividends – US$0.29 per share * – – – – – (66) (66)
Balance – September 2004 226.9 35 836 871 366 882 2,119
Note reference: 17 18 * Dividends relate to the previous financial year’s earnings but were declared subsequent to year-end.
page 74 sappi limited
ZAR million 2004 2003
sappi limited
for the year ended September 2004
group income statement in rands convenience translation
Sales 31,594 35,811
Cost of sales 27,618 30,688
Gross profit 3,976 5,123
Selling, general and administrative expenses 2,693 2,632
1,283 2,491
Other expenses 27 225
Operating profit 1,256 2,266
Net finance costs 735 925
Profit before taxation 521 1,341
Taxation (134) 150
Net profit for the year 655 1,191
Weighted average number of ordinary shares in issue (millions) 226.3 229.1
Basic earnings per share (SA cents) 287 516
Diluted earnings per share (SA cents) 287 516
Headline earnings per share (SA cents) 301 575
Diluted headline earnings per share (SA cents) 294 566
Dividends per share (SA cents) – declared after year-end 186 202
Note:
The income statement has been expressed in Rands for information purposes. The translation to South African Rands from United States Dollars has been
calculated at an average rate for the year of US$1 to ZAR6.6824 (September 2003: US$1 to ZAR8.3300), except for dividends which have been translated at
the rate of exchange on the date of declaration.
sappi limited page 75
ZAR million 2004 2003
sappi limited
group balance sheet in rands convenience translation
as at September 2004
AssetsNon-current assets 29,097 30,241
Property, plant and equipment 23,594 25,336
Plantations 3,523 3,080
Deferred tax assets 296 292
Other non-current assets 1,125 1,091
Other financial assets 559 442
Current assets 10,158 11,227
Inventories 4,918 4,997
Trade and other receivables 2,077 2,010
Other financial assets 45 50
Prepaid income taxes 6 7
Cash and cash equivalents 3,112 4,163
Total assets 39,255 41,468
Equity and liabilitiesShareholders’ equity 13,623 13,866
Non-current liabilities 15,834 17,900
Interest-bearing borrowings 10,884 12,418
Deferred tax liabilities 2,912 3,472
Other non-current liabilities 2,038 2,010
Current liabilities 9,798 9,702
Interest-bearing borrowings 2,340 1,212
Overdraft 71 1,162
Trade and other payables 6,339 6,338
Taxation payable 881 798
Provisions 167 192
Total equity and liabilities 39,255 41,468
Note:
The balance sheet has been expressed in Rands for information purposes. The translation to South African Rands from United States Dollars has been
calculated at the closing rate for the year of US$1 to ZAR6.4290 (September 2003: US$1 to ZAR7.1288).
page 76 sappi limited
1. BusinessSappi Limited, a corporation organised under the laws of the
Republic of South Africa (the “company” and, together with its
consolidated subsidiaries, “Sappi” or the “group”), was formed in
1936 and is a major, vertically integrated international pulp and
paper producer. Sappi is the world’s largest producer of coated
fine paper and chemical cellulose (dissolving pulp). The group has
manufacturing facilities in nine countries, on four continents, and
customers in over 100 countries across the globe.
The group is composed of its Sappi Fine Paper and Sappi Forest
Products business units. Sappi Fine Paper has manufacturing and
marketing facilities in North America, Europe and South Africa and
produces mainly high quality branded coated fine paper. It also
manufactures uncoated graphic and business paper, coated and
uncoated speciality paper, and casting release paper used in the
manufacture of artificial leather and textured polyurethane
applications. Sappi Forest Products, based in South Africa,
produces commodity paper products, pulp, chemical cellulose
(dissolving pulp) and forest and timber products for southern
Africa and export markets. Sappi Trading operates a trading
network for the international marketing and distribution of our
products outside our core operating regions of North America,
Europe and southern Africa.
2. Accounting policiesBasis of preparation
These financial statements have been prepared in conformity
with South African Statements of Generally Accepted Accounting
Practice (SA GAAP). (Refer to note 40 for a summary of the
material differences between SA GAAP and United States
Generally Accepted Accounting Principles). The principal
accounting policies of the group have been applied consistently
with the previous year, except for the change set out in note 3.
The financial statements are prepared on the historical cost basis,
except for plantations and certain financial instruments which are
recorded at fair value.
The group reports in US Dollars to facilitate a better
understanding of its results, since the majority of its sales are in
US Dollars and the US Dollar is the major currency of the paper
and pulp industry. Sappi Limited, the holding company, reports in
South African Rands.
Critical accounting policies and estimates
The preparation of financial statements in conformity with SA
GAAP requires management to make estimates and assumptions
about future events that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities.
Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates
requires the exercise of judgement based on various assumptions
and other factors such as historical experience, current and
expected economic conditions, and in some cases, actuarial
techniques. The group constantly re-evaluates these significant
factors and makes adjustments where facts and circumstances
dictate. Historically, actual results have not significantly deviated
from those determined using the estimates described above,
except for post-employment benefits. The group believes that the
following accounting policies are critical due to the degree of
estimation required.
Asset impairments
The group periodically evaluates its long-lived assets for
impairment, including identifiable intangibles and goodwill,
whenever events or changes in circumstance indicate that the
carrying amount of the asset may not be recoverable. Our
judgements regarding the existence of impairment indicators are
based on market conditions and operational performance of the
business. Future events could cause management to conclude
that impairment indicators exist.
In order to assess if there is any impairment, we estimate the future
cash flows expected to result from the use of the asset and its
eventual disposition. If the carrying amount exceeds the recoverable
amount (being the greater of the discounted expected future cash
flows and the net selling price of the asset) of the asset, we will
recognise an impairment loss for the difference. Considerable
management judgement is necessary to estimate discounted future
cash flows, including judgements and estimates as to future
product pricing, raw material costs, volumes of product sold,
appropriate pre-tax discount rates (weighted average cost of
capital), changes in the planned use of machinery or equipment or
closing of facilities. Actual circumstances or outcomes could vary
significantly from such estimates, including as a result of changes in
the economic and business environment. These variances could
result in changes in useful lives or impairment. These changes can
have either a positive or negative impact on our estimates of
impairment and can result in additional charges.
sappi limited
for the year ended September 2004
notes to the group annual financial statements
sappi limited page 77
sappi limited
Goodwill impairment tests are performed annually to compare the
fair value of each of our reporting units (cash generating units) to
its carrying amount. Goodwill impairment testing is conducted at
reporting unit levels of our business and is based on a cash flow-
based valuation model to determine the fair value of the reporting
unit. The assumptions used in estimating future cash flows were
based upon our business forecasts and incorporated external
information from industry sources, where applicable. Actual
outcomes could vary significantly from our business forecasts.
Changes in certain of these estimates could have a material effect
on the estimated fair value of the reporting unit. In addition to the
judgements described in the preceding paragraph that are
necessary in estimating future cash flows, significant judgements
in estimating discounted cash flows also include the selection of
the post-tax discount rate (weighted average cost of capital) and
the terminal value (net present value at end of period where there
is a willing buyer and seller) multiple used in our valuation model.
The discount rate used in our valuation model considered a
targeted debt and equity mix, a market risk premium, and other
factors consistent with valuation methodologies. The terminal
value multiple used in our valuation model considered the
valuations for comparable companies.
Based on the results of the impairment evaluation described
above, the recorded goodwill was not impaired as the fair value
of each reporting unit exceeded the carrying value. Small changes
to the valuation model would not significantly impact the results
of our valuation; however, if future cash flows were materially
different to our forecasts, then the assessment of the potential
impairment of the carrying value may be impacted.
Deferred taxation
The group estimates its income taxes in each of the jurisdictions
in which it operates. This process involves estimating its current
tax liability together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet.
The group then assesses the likelihood that the deferred tax
assets will be recovered from future taxable income, and, to the
extent recovery is not likely, a valuation allowance is established.
In recognising deferred tax assets the company considers profit
forecasts including the effect of exchange rate fluctuations on
sales and external market conditions. Where it is probable that
a position may be successfully challenged, based on reported
challenges by revenue authorities of similar positions taken by
other taxpayers, as well as items already raised by revenue
authorities during audits, but for which resolution has not yet been
reached, a valuation allowance or tax provision is raised for the
tax on the probable adjustment. Management’s judgement is
required in determining the provision for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded
against the net deferred tax assets. Deferred tax assets have
been recognised where management believes there are sufficient
taxable temporary differences or convincing other evidence that
sufficient taxable profits will be available to realise deferred tax
assets. Although the deferred tax assets for which valuation
allowances have not been recognised are considered realisable,
actual amounts could be reduced if future taxable income is not
achieved. This can materially affect our reported net income and
financial position.
Hedge accounting for financial instruments
For the purposes of hedge accounting, we classify hedges into
two categories: (a) fair value hedges which hedge the exposure
to changes in the fair value of a recognised asset or liability; and
(b) cash flow hedges, which hedge exposure to variability in cash
flows that are either attributable to a particular risk associated with
a recognised asset or liability or a forecasted transaction. The
financial instruments that are used in hedging transactions are
assessed both at inception and quarterly thereafter to ensure they
are effective in offsetting changes in either the fair value or cash
flows of the related underlying exposures. Hedge accounting is
mainly used for debt instruments to hedge interest rate and
foreign currency risk exposures. We do not use hedge accounting
for trading transactions.
In relation to fair value hedges, which meet the conditions for
hedge accounting, any gain or loss from remeasuring the hedging
instrument to fair value is recognised immediately against income.
Any gain or loss on the hedged item attributable to the hedged
risk is adjusted against the carrying amount of the hedged item
and recognised against income. The designation of a derivative
instrument as a fair value hedge in this manner can affect our
reported net income. External market data is applied in
remeasuring the hedging financial instrument.
In relation to cash flow hedges, which meet the conditions for
hedge accounting, the portion of the gain or loss on the hedging
page 78 sappi limited
instrument that is determined to be an effective hedge is
recognised directly in shareholders’ equity and the ineffective
portion is recognised in income. The gains or losses, which are
recognised directly in shareholders’ equity, are transferred to
income in the same period in which the hedged transaction
affects income. The designation of a derivative instrument as a
cash flow hedge in this manner can also materially affect our
reported net income. External market data is applied in measuring
the hedge effectiveness of the financial instrument. Hedge
ineffectiveness is recognised immediately against income. The net
gain, after taxation, on revaluation of hedging instruments deferred
in equity was US$1 million (fiscal 2003 US$14 million net loss and
fiscal 2002 US$3 million net gain).
Plantations
We state our plantations at their fair value. Fair value is deter-
mined using the present value method for immature timber and
the standing value method for mature timber. All changes in fair
value are recognised in income in the period in which they arise.
Land, logging roads and related facilities are accounted for under
property, plant and equipment. The trees are accounted for as
plantations. Land is not depreciated. Logging roads and related
facilities are depreciated at various rates over a period of 3 to 10
years depending on expected life of each road or related facility.
Trees are generally felled at the optimum age when ready for
intended use. At the time the tree is felled it is taken out of
plantations (non-current assets) and accounted for under
inventory (current assets).
Assumptions and estimates are used in the recording of plantation
volumes, cost per ton, and depletion. Changes in the
assumptions or estimates used in these calculations may affect
the group’s results, in particular, plantation and depletion costs.
A major assumption and estimation is the growth estimation. The
inputs to our growth model are complex and involve estimations,
all of which are regularly updated. Our growth models are based
on an extensive permanent sample plot network laid out to cover
the variations in growth found on our plantations. We calculate
indicative yields when new material is introduced.
Depletions include the fair value of timber felled, which is
determined on the average method, plus amounts written off
standing timber to cover loss or damage caused by, for example,
fire, disease, hazardous weather conditions and stunted growth.
Depletions are accounted for on a cost per ton allocation method.
Tons are calculated using the projected growth to rotation age
and extrapolated to current age on a straight line basis.
The fair value of immature timber (softwood less than eight years
and hardwood less than five years) is the discounted value of the
expected delivered market price for estimated timber volumes less
cost of delivery and estimated maintenance costs up to when the
timber becomes usable by our own mills. The discount rate used
is the applicable pre-tax weighted average cost of capital. The fair
value of mature timber is based on the market price for estimated
timber volumes less cost of delivery.
Cost of delivery includes all costs associated with getting the
harvested agricultural produce to the market, being harvesting,
loading, transport and allocated fixed overheads.
The group is exposed to financial risks arising from climatic
changes, disease and other natural risks such as fire, flooding and
storms and human-induced losses arising from strikes, civil
commotion and malicious damage. These risks are covered by an
appropriate level of insurance as determined by management. In
addition, management focuses close attention to good husbandry
techniques and fire-fighting methods. The plantations have an
integrated management system that is certified to ISO 9001,
ISO 14001, OHSAS 18001 and FSC standards.
For further information see note 12.
Post-employment benefits
The group accounts for its pension benefits and its other post-
retirement benefits using actuarial models. These models use an
attribution approach that generally spreads individual events over
the service lives of the employees in the plan. Examples of
“events” are changes in actuarial assumptions such as discount
rate, expected long-term rate of return on plan assets (net of fund
administration costs), and rate of compensation increases. The
principle underlying the required attribution approach is that
employees render service over their service lives on a relatively
consistent basis and, therefore, the income statement effects of
pension benefits or post-retirement healthcare benefits are earned
in, and should be expensed in the same pattern.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 79
sappi limited
Numerous estimates and assumptions are required, in the
actuarial models, to determine the proper amount of pension and
other post-retirement liabilities to record in the group’s
consolidated financial statements and set the expense for the next
fiscal year. These include discount rate, return on assets, salary
increases, health care cost trends, longevity and service lives of
employees. Although there is authoritative guidance on how to
select these assumptions, our management and its actuaries
exercise some degree of judgement when selecting these
assumptions. Selecting different assumptions, as well as actual
versus expected results, would change the net periodic benefit
cost and funded status of the benefit plans recognised in the
financial statements.
The impact on the future financial results of the group in relation to
post-employment benefits is dependent on economic conditions,
employee demographics and investment performance.
A 1% increase in discount rates would decrease the pension
liability by approximately US$182 million and the related pension
cost by approximately US$14 million after tax per annum.
A 1% increase in the health care cost trend rates would increase
the accumulated other post-retirement benefit obligation by
US$13 million and the aggregate of the service and interest cost
components of net periodic other post-retirement benefit cost by
US$2 million after tax per annum.
For further information see notes 32 and 33.
Provisions
Provisions are required to be recorded when the group has a
present legal or constructive obligation as a result of past events,
for which it is probable that an outflow of economic benefits will
occur, and where a reliable estimate can be made of the amount
of the obligation.
Best estimates, being the amount that the group would rationally
pay to settle the obligation, are recognised as provisions at
balance sheet date. Risks, uncertainties and future events, such
as changes in law and technology, are taken into account by
management in determining the best estimates.
Where the effect of discounting is material, provisions are
discounted. The discount rate used is the pre-tax rate that reflects
current market assessments of the time value of money and,
where appropriate, the risks specific to the liability, all of which
requires management judgement.
The establishment and review of the provisions requires significant
judgement by management as to whether or not there is a
probable obligation and as to whether or not a reliable estimate
can be made of the amount of the obligation, which requires
judgements as to the likelihood of future payment. All provisions
are reviewed at each balance sheet date.
Various uncertainties can result in obligations not being
considered probable or estimable for significant periods of time.
As a consequence, potentially material obligations may have no
provisions and a change in facts or circumstances that results in
an obligation becoming probable or estimable can lead to a need
for the establishment of material provisions. In addition, where
estimated amounts vary from initial estimates the provisions may
be revised materially, up or down, based on the facts.
The group periodically restructures its business units for
productivity and business improvement initiatives and records
charges for reductions in its workforce, the closure of
manufacturing facilities, and other actions related thereto. These
events require estimates of liabilities for employee separation
payments and related benefits, equipment removal, environmental
clean-up and other costs. The actual costs incurred could differ
materially from those estimated at balance sheet date.
The group is required to record provisions for estimated
environmental liabilities, based on current interpretations of
environmental laws and regulations, when expenditures are
considered probable and can be reasonably estimated. These
estimates reflect management assumptions and judgements as to
the probable nature, magnitude and timing of required investigations,
remediation and monitoring activities, changes in governmental
regulations, insurance recoveries and the contributions by other
potentially responsible parties. These assumptions and
judgements are subject to various uncertainties which could result
in estimated costs that could materially differ from the actual
costs incurred.
The group is required to record provisions for legal contingencies
when the contingency is probable of occurring and the amount of
the loss can be reasonably estimated. Liabilities provided for legal
matters require judgements regarding projected outcomes and
page 80 sappi limited
ranges of losses based on historical experience and
recommendations of legal counsel. Litigation is however
unpredictable and actual costs incurred could differ materially
from those estimated at the balance sheet date.
Principal accounting policies
The principal accounting policies followed by the group, which
have been consistently applied, are summarised as follows:
Basis of consolidation
The consolidated financial statements incorporate the assets,
liabilities, results and cash flow information of the operations of the
company and its subsidiaries. Subsidiaries are those entities over
whose financial and operating policies the group has the power to
exercise control, so as to obtain benefits from their activities. The
results of subsidiaries acquired or disposed of during the year are
included from the effective date of acquisition until the effective
date of disposal. Subsidiaries acquired are accounted for using
the purchase method.
The consolidated financial statements also incorporate the assets,
liabilities, results and cash flow information of special purpose
entities where the group controls the entity.
At the date of acquisition, the assets and liabilities of the subsidiary
are measured at their fair values. Goodwill is recognised when the
cost of acquisition exceeds the fair value of the identified net
assets. Negative goodwill is recognised if the cost of acquisition
is less than the fair value of the net identified assets.
Where required, the financial statements of subsidiaries are
adjusted to bring the accounting policies in line with those used
by the group.
All significant intercompany profits, transactions and balances
have been eliminated.
Borrowing costs
Borrowing costs that are directly attributable to qualifying assets
are capitalised. Qualifying assets are those that necessarily take a
substantial period of time to prepare for their intended use or sale.
Capitalisation continues up to the date that the assets are
substantially ready for their intended use or sale. Capitalisation is
suspended during extended periods in which active development
is interrupted.
All other borrowing costs are recognised in net profit or loss in the
period in which they are incurred.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with
insignificant interest rate risk and original maturities of three
months or less. Similar investments with maturities beyond three
months are considered short-term marketable securities.
Comparative figures
Comparative figures have been regrouped or reclassified where
necessary to give a more appropriate comparison as well as
certain restatements related to a revised accounting policy are
detailed in the relevant notes. Refer to note 3 for details of the
impact the change in accounting policy has had on the previously
stated net income and equity. Refer to the accounting policy on
other income and expenses for details on the restatement of
items previously disclosed as non-trading income or loss.
Discontinuing operations
A discontinuing operation results from the sale or abandonment of
an operation that represents a separate major line of business and
of which the assets, net profit or loss and activities can be
distinguished physically, operationally and for financial reporting
purposes.
Dividends
Dividends declared and accrued are included in the statement of
changes in equity in the year in which they are declared. Taxation
costs incurred on dividends are recognised in the year in which
the dividend is declared.
Employee benefits
Post-employment benefits – pensions
The policy of the group is to provide retirement benefits for its
employees.
The group’s contributions to defined contribution plans in respect
of service during a particular period are recognised as an expense
in that period.
The projected unit credit method is used in determining the
present value of the defined benefit obligation and related current
service cost. The current service cost in respect of defined benefit
plans is recognised as an expense in the current period.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 81
sappi limited
Experience adjustments, the effects of changes in actuarial
assumptions and plan amendments in respect of existing
employees in defined benefit plans are recognised as an expense
or income over the expected remaining working lives of those
employees where the cumulative amount exceeds 10% of the
greater of the fair value of the plan assets and the present value of
the defined benefit obligation. Gains or losses on the curtailment
or settlement of a defined benefit plan are recognised in the
income statement when the group is demonstrably committed to
the curtailment or settlement. Past service costs are recognised
immediately to the extent that the benefits are already vested, and
otherwise are amortised on a straight-line basis over the vesting
period of those benefits. The effects of plan amendments in
respect of retired employees in defined benefit plans are
measured at the present value of the effect of the amendments
and recognised as an expense or income. The amount
recognised in the balance sheet represents the present value of
the defined benefit obligation adjusted for unrecognised actuarial
gains and losses and unrecognised past service costs, reduced
by the fair value of the plan assets. Any resulting asset is limited
to unrecognised actuarial losses and past service costs, plus the
present value of available refunds and reductions in future
contributions to the plan. To the extent that there is an uncertainty
as to the entitlement to the surplus, no asset is recorded.
Post-employment benefits – medical
The projected unit credit method is used in determining the
present value of post-employment medical benefits. The
estimated cost of retiree health care and life insurance benefit
plans is accrued during the participants’ actual service periods up
to the dates they become eligible for full benefits. Experience
adjustments, the effects of changes in actuarial assumptions and
plan amendments in respect of existing employees are treated in
a similar manner as described in the preceding paragraph.
Workmen’s compensation insurance
Sappi Fine Paper North America has a combination of self-insured
and insured workers’ compensation programs. The self-insurance
claim liability for workers’ compensation is based on claims
reported and actuarial estimates of adverse developments and
claims incurred but not reported.
Equity compensation benefits
The group grants share options to certain employees under an
employee share plan. Costs incurred in administering the scheme
are expensed as incurred. No compensation cost is recognised in
these financial statements for options or shares granted to
employees from employee share plans.
Environmental expenditures and liabilities
Environmental expenditures that pertain to current operations or
relate to future revenues are expensed or capitalised consistent
with the company’s capitalisation policy. Expenditures that result
from the remediation of an existing condition caused by past
operations, and do not contribute to current or future revenues,
are expensed. Environmental accruals are recorded based on
current interpretation of environmental laws and regulations when
it is probable that a liability has been incurred and the amount of
such liability can be reliably estimated. Amounts accrued do not
include third-party recoveries. Liabilities are recognised for
remedial activities when the clean-up is probable and the cost can
be reliably estimated. All available information is considered
including the results of remedial investigation/feasibility studies
(“RI/FS”). In evaluating any disposal site environmental exposure,
an assessment is made of the company’s potential share of the
remediation costs by reference to the known or estimated volume
of the company’s waste that was sent to the site and the range of
costs to treat similar waste at other sites if a RI/FS is not available.
Financial instruments
Financial assets and financial liabilities are recognised on the
balance sheet when the group becomes a party to the contractual
provisions of the instrument.
Measurement
Financial instruments are initially measured at cost, which includes
transaction costs. Subsequent to initial recognition these
instruments are measured as set out below.
Investments
Listed investments are carried at market value, which is calculated
by reference to stock exchange quoted selling prices at the close
of business on the balance sheet date. Other investments are
measured at fair value.
Trade and other receivables
Trade and other receivables originated by the group are stated at
cost less provision for doubtful debts.
Cash and cash equivalents
Cash and cash equivalents are stated at cost which approximate
fair value due to the short-term nature of these instruments.
page 82 sappi limited
Trade and other payables
Trade and other payables are stated at cost.
Financial liabilities
Non-derivative financial liabilities are recognised at amortised cost,
comprising original debt less principal payments and
amortisations.
Derivative instruments
Derivative instruments are measured at fair value.
Gains and losses on subsequent measurement
Gains and losses arising from a change in the fair value of
financial instruments that are not part of a hedging relationship are
included in net profit or loss in the period in which the change
arises.
For the purposes of hedge accounting, hedges are classified into
two categories: (a) fair value hedges which hedge the exposure to
changes in the fair value of a recognised asset or liability; and (b)
cash flow hedges, which hedge exposure to variability in cash
flows that is either attributable to a particular risk associated with
a recognised asset or liability or a forecasted transaction. Hedges
of a net investment in a foreign entity are accounted for in a
similar manner as is done for cash flow hedges.
In relation to fair value hedges which meet the conditions for
hedge accounting, any gain or loss from remeasuring the hedging
instrument to fair value is recognised immediately against income.
Any gain or loss on the hedged item attributable to the hedged
risk is adjusted against the carrying amount of the hedged item
and recognised against income.
In relation to cash flow hedges and hedges of a net investment in
a foreign entity which meet the conditions for hedge accounting,
the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge is recognised directly in
shareholders’ equity and the ineffective portion is recognised
against income. For cash flow hedges and hedges of a net
investment in a foreign entity, the gains or losses which are
recognised in shareholders’ equity are transferred to income in
the same period in which the hedged transaction affects income.
Where the hedged transaction results in the recognition of an
asset or a liability, then at the time the asset or liability is
recognised, the associated gains or losses that had previously
been recognised in shareholders’ equity are included in the initial
measurement of the acquisition cost or other carrying amount of
the asset or liability.
Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer qualifies for
hedge accounting. At that time, any cumulative gain or loss on the
hedging instrument is recognised in equity is retained in equity until
the forecasted transaction occurs. If a hedged transaction is
no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to net profit or loss for the period.
Derivatives embedded in other financial instruments or non-
derivative host contracts are treated as separate derivatives
when their risks and characteristics are not closely related to
those of the host contract and the host contract is not carried
at fair value with unrealised gains or losses reported in the
income statement.
Fiscal year
The group’s financial years end on the Sunday closest to the last
day of September. These financial years ended on 26 September
2004 (“year ended September 2004”) and 28 September 2003
(“year ended September 2003”).
Foreign currencies
Foreign currency transactions
Transactions in foreign currencies are recorded at the rates of
exchange ruling on the transaction date. Monetary items
denominated in foreign currencies are translated at rates of
exchange ruling at balance sheet date. Gains and losses and
costs associated with foreign currency transactions are taken to
income in the period to which they relate.
Financial statements of entities reporting in currencies other
than the US Dollar
The financial statements are translated to US Dollars as follows:
– Assets and liabilities at rates of exchange ruling at balance sheet
date.
– Income, expenditure and cash flow items at average rates.
Differences arising from the translation of the opening net
investment at the rates ruling at balance sheet date and income
and expenditure at average rates are taken directly to reserves.
On disposal of the operation these translation differences are
recognised as income or expenses in the period when the
operation is disposed.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 83
sappi limited
Goodwill and fair value adjustments arising on the acquisition of
a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the closing rate.
The group used the following exchange rates for financial
reporting purposes:
Rate at
September 2004 September 2003
ZAR to one US$ 6.4290 7.1288
GBP to one US$ 0.5550 0.6035
EUR to one US$ 0.8124 0.8715
Average annual rate
September 2004 September 2003
ZAR to one US$ 6.6824 8.3300
GBP to one US$ 0.5598 0.6243
EUR to one US$ 0.8229 0.9256
Convenience translations
The consolidated income statement and the consolidated balance
sheets have been expressed in South African Rands for
information purposes.
For this purpose the consolidated income statement was
translated at the average rate for the year and the consolidated
balance sheet at the rate of exchange ruling at balance sheet date.
Goodwill
Goodwill arising on consolidation represents the excess of the
cost of acquisition over the group’s interest in the fair value of the
identifiable assets and liabilities of a subsidiary at the date of
acquisition. Goodwill is recognised as an asset and amortised on
a straight-line basis following an assessment of its foreseeable life.
The goodwill which arose on the buy-out of minorities is being
amortised over a period of 20 years.
On disposal of a subsidiary, the attributable amount of
unamortised goodwill is included in the determination of the profit
or loss on disposal.
Government grants
Government grants are recognised as income over the periods
necessary to match them with the related costs which they are
intended to compensate.
Impairment
The carrying amounts of the group’s assets are reviewed at each
balance sheet date to determine whether there is any indication of
impairment. If there is any indication that an asset may be
impaired, its recoverable amount is estimated. The recoverable
amount is the higher of its net selling price and its value in use.
In assessing value in use, the expected future cash flows from the
asset are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the
weighted average cost of capital and the risks specific to the
asset. An impairment loss is recognised whenever the carrying
amount of an asset exceeds its recoverable amount.
For an asset that does not generate cash inflows that are largely
independent of those from other assets, the recoverable amount
is determined for the cash-generating unit to which the asset
belongs. An impairment loss is recognised in the income
statement whenever the carrying amount of the cash-generating
unit exceeds its recoverable amount.
A previously recognised impairment loss is reversed if the
recoverable amount increases as a result of a change in the
estimates used to determine the recoverable amount, but not to
an amount higher than the carrying amount that would have been
determined (net of depreciation) had no impairment loss been
recognised in prior years. For goodwill, a recognised impairment
loss is not reversed unless the impairment loss was caused by a
specific external event of an exceptional nature that is not
expected to recur and the increase relates clearly to the reversal
of the effect of that specific event.
Intangible assets
Research and development
Research costs are expensed against income in the year in which
they are incurred.
Development costs which relate to the design and testing of new
improved materials, products or processes are recognised as an
asset to the extent that it is expected that such assets will
generate future economic benefits. Such assets are amortised on
a straight-line basis over their estimated useful lives. To date all
development costs have been expensed.
Patents
Patents acquired are capitalised at cost and amortised on a
straight-line basis over their estimated useful lives, which is on
average 10 years.
page 84 sappi limited
Inventories
Inventories are valued at the lower of cost, determined on a first in
first out (“FIFO”) basis for finished goods and weighted average
basis for raw materials, work-in-progress, consumable stores and
spares, and net realisable value. All damaged or substandard
materials and obsolete, redundant or slow moving inventories are
written down to their estimated net realisable values.
The cost of raw materials, consumable stores and spares is the
delivered landed cost, while the cost of work in progress and
finished goods includes both direct costs and production overheads.
Net realisable value is the estimated selling price in the ordinary
course of business, less the costs of completion and selling
expenses.
Investment in associates
An associate is an enterprise in which the group has a long-term
investment in the equity capital and has the power to exercise
significant influence over, but not control, the financial and
operating policies of the enterprise.
The results and assets and liabilities of associates are incorporated
in these financial statements using the equity method of
accounting. The share of the associates’ retained income is
determined from their latest audited financial statements. The
carrying amount of such investments is reduced to recognise any
impairment in the value of individual investments. At the date of
acquisition, the group’s share of the assets and liabilities of the
associate are measured at their fair values. Goodwill is recognised
when the cost of acquisition exceeds the fair value of the identified
net assets. Negative goodwill is recognised if the cost of
acquisition is less than the fair value of the net identified assets.
Where a group enterprise transacts with an associate of the
group, unrealised profits and losses are eliminated to the extent
of the group’s interest in the relevant associate, except where
unrealised losses provide evidence of an impairment of the asset
transferred.
Leased assets
Leases are classified as finance leases when substantially all risks
and rewards of ownership are transferred to the lessee. Property,
plant and equipment acquired under finance leases are capitalised
at the lower of fair value and the present value of the minimum
lease payments at the date of acquisition. The corresponding
liability is disclosed as a capitalised lease liability. All other leases
are classified as operating leases.
Capitalised leased assets are depreciated on a straight-line basis
over the lesser of the lease term and the effective useful life of
the asset.
Finance costs are accrued and expensed annually, based on the
effective rate of interest applied consistently to the remaining
balance of the liability and are included in the related liabilities.
These liabilities are reduced as and when payments are made in
terms of the agreements.
Operating leases, mainly for the rental of premises and certain
office equipment, are not capitalised and rentals are expensed
on a straight-line basis over the lease term.
Offset
Financial assets or liabilities are offset and disclosed on a net
basis in the balance sheet when legal right of setoff exists and
there is either an intention and ability to settle on a net basis or
to realise the asset and settle the liability at the same time.
Other income or expenses
The group’s policy is to show separately, as other income or
expenses, certain items that are of such size, nature or incidence
that their separate disclosure is relevant to explain the group’s
performance. Previously these items, entitled non-trading income
or loss, were excluded from operating profit. Circular 3/2004
issued by the South African Institute of Chartered Accountants
requires the inclusion of these items. Consequently, operating
profit has been restated to take these requirements into account.
This resulted in a decrease in operating profit of US$27 million
for the year ended September 2003.
Plantations
Plantations are stated at fair value. Fair value is determined using
the present value method for immature timber and the standing
value method for mature timber. All changes in fair value are
recognised in income in the period in which they arise.
The fair value of immature timber (softwood less than eight years
and hardwood less than five years) is the discounted value of
the expected delivered market price for estimated timber volumes
less cost of delivery and estimated maintenance costs up to
when the timber becomes usable by our own mills. The discount
rate used is the applicable pre-tax weighted average cost of
capital. The fair value of mature timber is based on the market
price for estimated timber volumes less cost of delivery.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 85
sappi limited
Cost of delivery includes all costs associated with getting the
harvested agricultural produce to the market, being harvesting,
loading, transport and allocated fixed overheads.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and impairment losses.
Cost includes all costs incurred to bring the plant to the location
and condition for its intended use and includes financing costs,
up to the date of commissioning.
Depreciation is calculated on a straight-line basis over the
effective useful lives of the assets. No depreciation is provided on
land. The effective useful lives of the major categories of property,
plant and equipment are:
Production buildings 10 – 45 years
Other buildings 9 – 45 years
Plant – pulp and paper mill equipment,
major items 10 – 20 years
– other 5 – 15 years
Motor vehicles 4 – 5 years
Office equipment 3 – 10 years
The gain or loss arising on the disposal or scrapping of an asset is
recognised in the income statement and is the difference between
the proceeds and the carrying value of the assets.
Provisions
Provisions are recognised when the group has a present legal or
constructive obligation as a result of past events, for which it is
probable that an outflow of economic benefits will occur, and
where a reliable estimate can be made of the amount of the
obligation. Where the effect of discounting is material, provisions
are discounted. The discount rate used is a pre-tax rate that
reflects current market assessments of the time value of money
and, where appropriate, the risks specific to the liability.
Provisions for restructuring costs are recognised when the group
has a detailed formal plan for the restructuring and a valid
expectation exists by those affected that the restructuring will be
carried out due to the starting of implementation of the plan or the
announcement of the main features to those affected by the plan.
Revenue recognition
Revenue is the net sales value of all products sold to third parties
after the deduction of rebates, including trade discounts and
customer returns (which generally relate to damaged goods,
incorrect product specifications and quality issues) but excluding
turnover-based taxes.
Revenue is recognised when risks and rewards of ownership
inherent to the goods have been transferred to the customer,
costs can be measured reliably and receipt of the future economic
benefits is probable. Transfers of risks and rewards vary
depending on the individual terms of the contract of sale. For the
majority of local and regional sales, transfer occurs at the point of
offloading the shipment into the customer warehouse, whereas for
the majority of export sales transfer occurs when the goods have
been loaded onto the relevant carrier, unless the contract of sales
specifies different delivery terms.
Shipping and handling costs, such as freight to our customers’
destinations, are included in Cost of Sales in the consolidated
income statement. These costs, when included in the sales price
charged for our products, are recognised in net sales.
Interest income is accrued on a time basis, by reference to the
principal outstanding and at the interest rate applicable.
Segment reporting
The primary business segments are Sappi Fine Paper and Sappi
Forest Products. On a secondary segment basis, significant
geographic regions have been identified based on the location of
assets. The basis of segment reporting is representative of the
internal structure used for management reporting.
Share repurchases
Shares repurchased by the parent company are cancelled. Shares
held by subsidiaries are treated as treasury shares and are
presented as a reduction of equity. Gains or losses on disposals
of treasury shares are accounted for directly in equity.
Software development costs
Internal and external costs incurred in the planning or conceptual
development of software for internal use are expensed as
incurred.
Once the planning or conceptual development of software has
been achieved, and the project has reached the application or
3. Changes in accounting policiesDuring the year the group adopted the following new standard. Comparative figures have been restated accordingly.
Agriculture: AC137
This statement prescribes the accounting treatment for plantations. The effect of adopting this statement, is that silviculture
and finance costs are no longer capitalised to plantations nor are plantations amortised to the income statements.
Plantations are recorded at fair value in the balance sheet with the movements therein being recorded in the income statement.
The comparative amounts have been appropriately restated.
The effects of this change in accounting policy on shareholders’ equity and net profits are as follows:
Increase (decrease)2004 2003 2002 and prior years
US$ million Gross Taxation Net Gross Taxation Net Gross Taxation Net
Effect on opening
balances of
Shareholders' equity (18) 5 (13) (7) 3 (4) (9) 3 (6)
Effect on net profit for
the year 66 (19) 47 (8) 2 (6) 2 (1) 1
page 86 sappi limited
development stage, the following costs are capitalised: external
direct costs of materials and services used in the project; payroll
and payroll-related costs for employees who are directly
associated with and who devote time to the project (to the extent
of the time spent directly on the project); and interest cost
incurred in the development of the project. The capitalised
software costs are amortised on a straight-line basis from the
date of commissioning over its expected useful life with a
maximum of 5 years.
Training and routine maintenance costs are expensed as incurred.
Taxation
Income tax expense represents the sum of current and deferred
tax. Income tax is recognised in the income statement, except to
the extent that it relates to items recorded directly in equity, in
which case it is recognised in equity.
The charge for current tax is based on the results for the year as
adjusted for items which are non-assessable or disallowed. It is
calculated using tax rates that have been or substantively enacted
at balance sheet date.
Deferred taxation is provided for using the balance sheet liability
method, based on temporary differences. Temporary differences
are differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their tax base.
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. Deferred tax is charged to
the income statement except to the extent that it relates to a
transaction that is recognised directly in equity, or a business
combination that is an acquisition. The effect on deferred tax of
any changes in tax rates is recognised in the income statement,
except to the extent that it relates to items previously charged or
credited directly to equity.
A deferred tax asset is recognised to the extent that there are
sufficient taxable temporary differences or convincing other
evidence that sufficient taxable profits will be available to realise
the deferred tax asset. The carrying amount of deferred tax assets
is reviewed at each balance sheet date and reduced to the extent
that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 87
4. Cost of salesIncluded in cost of sales are the following items:
Delivery charges 427 363
Fair value adjustment (gains) loss on plantations
Changes in volumes
Fellings 55 42
Growth (54) (46)
1 (4)
Change in fair value (71) 4
(70) –
The above fair value adjustments have been partially offset by silviculture costs 39 30
5. Selling, general and administrative expensesSelling expenses 144 134
Administrative expenses 199 170
General expenses 60 12
403 316
6. Other expensesLoss (profit) on sale and write-off of property, plant and equipment 4 (1)
Restructuring costs – (1)
Mill closure costs – (3)
Asset impairments * – 32
4 27
Attributable tax (1) (11)
3 16
* September 2003: Includes related inventory
US$ million 2004 2003
sappi limited
page 88 sappi limited
7. Operating profitOperating profit is arrived at after taking into account
the items detailed below:
Leasing charges for premises 20 20
Leasing charges for plant and equipment on operating leases 45 42
Remuneration paid other than to bona fide employees of the
company in respect of: 34 32
– technical services 14 13
– administration services 20 19
Auditors’ remuneration: 8 6
– audit and related services 6 4
– tax services 2 2
Research and development costs 21 19
Employee costs 932 837
Amortisation 2 1
8. TaxationCurrent taxation:
– Current year * 31 25
– Prior year under (over) provision 11 (28)
– Other company taxes 6 21
Deferred taxation: (refer note 13)
– Current year * (36) (54)
– Prior year (30) 54
– Attributable to a reduction in the taxation rate (2) –
(20) 18
Due to the utilisation of previously unrecognised taxation assets,
the taxation expense for the year has been reduced by: * 27 51
US$ million 2004 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
8. Taxation (continued)Reconciliation of the taxation rate: * % %
South African statutory taxation rate 30.0 30.0
Foreign taxation rate differential in profit-making jurisdictions (11.1) (11.7)
Average statutory tax rate 18.9 18.3
Loss-making jurisdictions (42.8) (7.1)
(Non-taxable income) non-deductible expenses (1.7) 3.4
Effect of reduction in taxation rates (3.5) –
Deferred taxation asset not recognised 59.0 9.6
Utilisation of previously unrecognised taxation assets (34.6) (31.7)
Other taxes 3.5 2.4
Prior year (over) under provision (25.1) 16.1
Average effective taxation rate (26.3) 11.0
Unutilised credits in respect of Secondary Tax on Companies (STC) 306 300
No STC liability was provided on the dividends declared for the periods under
review as the company has unutilised secondary taxation credits.
* Comparative amounts have been reclassified between deferred tax and current tax.
9. Earnings per share and headline earnings per shareEarnings per share (EPS)
EPS is based on the group’s net profit divided by the weighted average number of shares in issue during the year under review.
2004 2003Net profit Shares Per share Net profit Shares Per share
US$ million millions US cents US$ million millions US cents
Basic EPS 98 226.3 43 143 229.1 62
Share options under Sappi
Limited Share Incentive Trust – 1.9 – 2.4
Diluted EPS 98 228.2 43 143 231.5 62
The diluted EPS calculations exclude the effect of certain share options granted under the Sappi share incentive scheme as they
would be anti-dilutive.
sappi limited page 89
US$ million 2004 2003
sappi limited
page 90 sappi limited
9. Earnings per share and headline earnings per share (continued)Headline earnings per shareHeadline earnings per share is based on the group’s headline earnings divided by the weighted average number of shares in issueduring the year.
Reconciliation between net profit and headline earnings:
2004 2003Net profit Shares Per share Net profit Shares Per share
US$ million millions US cents US$ million millions US cents
Net profit as reported 98 226.3 43 143 229.1 62Reconciling items, gross– (Profit) loss on disposal of
business and fixed assets – – (6) –– Write-off of assets 4 – 5 –– Mill closure costs, restructuring
and asset impairments – – 25 –Total tax effect on reconciling items (1) – (10) –
Headline EPS 101 226.3 45 157 229.1 69Share options under Sappi Limited Share Incentive Trust – 1.9 – 2.4
Diluted Headline EPS 101 228.2 44 157 231.5 68
Note:
Definition for headline earnings is included in the Glossary on page 162.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
10. DividendsDividend No 80 paid on 12 January 2004: 29 US cents per share (2003: 28 US cents; 2002: 26 US cents), net of dividend attributable to treasury shares 66 65
On 08 November 2004, the directors declared a dividend (number 81) of 30 US cents per share to be paid to shareholders on 10 January 2005. This dividend was declared after year-end and was not included as a liability in these financial statements.
In compliance with the requirements of STRATE, the JSE Securities Exchange South Africa’s electronic settlement system which is applicable to Sappi, the salientdates in respect of the dividend will be as follows:
Last day to trade to qualify for dividend Friday, 31 December 2004Date on which shares commence trading ex-dividend Monday, 03 January 2005Record date Friday, 07 January 2005Payment date Monday, 10 January 2005
There will not be any dematerialisation nor rematerialisation of Sappi Limited share certificates from 03 January to 07 January 2005, both days inclusive.
US$ million 2004 2003
sappi limited page 91
US$ million 2004 2003
sappi limited
11. Property, plant and equipmentLand and buildings
At cost 1,267 1,180
Depreciation 589 520
678 660
Plant and equipment
At cost 5,902 5,530
Depreciation 3,217 2,914
2,685 2,616
Capitalised leased assets
Plant and equipment at cost 815 727
Depreciation 508 449
307 278
Aggregate cost 7,984 7,437
Aggregate depreciation 4,314 3,883
Aggregate book value 3,670 3,554
The movement on property, plant and equipment is reconciled as follows:
Land and Plant and Capitalised 2004 2003US$ million buildings equipment leased assets Total Total
Net book value at beginning of year 660 2,616 278 3,554 3,189
Additions 17 264 53 334 296
Interest capitalised – 2 – 2 2
Disposals (3) (2) – (5) (7)
Depreciation (36) (334) (38) (408) (352)
Impairment (including Westbrook closure) – – – – (22)
Translation difference 40 139 14 193 448
Net book value at end of year 678 2,685 307 3,670 3,554
Details of land and buildings are available at the registered offices of the respective companies
(refer note 29 for details of encumbrances).
page 92 sappi limited
US$ million 2004 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
12. PlantationsValue of plantations at beginning of year 450 298
Revaluation of plantations to fair value (effect of change in accounting policy) (18) (6)
Restated fair value of plantations at beginning of year (Refer to note 3) 432 292
Acquisitions – 1
Gains arising from growth * 62 51
Gains (loss) arising from fair value changes 71 (4)
Harvesting – agriculture produce (fellings) (55) (42)
Fire and hazardous weather conditions damages (12) (5)
Translation difference 50 139
Fair value of plantations at end of year 548 432
* Includes transfers to inventory.
Sappi manages the establishment, maintenance and harvesting of its plantations on a compartmentalised basis. These comprise
pulpwood and sawlogs and are managed in such a way so as to ensure that the optimum fibre balance is supplied to its paper and
pulping operations in southern Africa. Sappi manages approximately 542,000 (2003: 540,000) hectares of plantations, on which
stand approximately 39,421,000 (2003 39,518,000) tons of timber.
2004 2003US$ million Assets Liabilities Assets Liabilities
13. Deferred taxationDeferred Tax Liabilities
Current:
Other liabilities, accruals and prepayments (66) 38 2 (60)
Inventory (3) (3) – (11)
Current deferred taxation (liability) asset (69) 35 2 (71)
Non-current:
USA alternative minimum taxation
credit carry forward – 15 – 15
Taxation loss carry forward * 254 183 98 241
Accrued and other liabilities 7 44 16 42
Property, plant and equipment (42) (464) (2) (499)
Plantations (13) (154) (10) (119)
Other – assets 7 28 6 23
Other – liabilities (8) (140) 1 (119)
Non-current deferred taxation asset (liability) 205 (488) 109 (416)
Sub total 136 (453) 111 (487)
Deferred taxation assets not recognised * (90) – (70) –
Total deferred taxation asset (liability) 46 (453) 41 (487)
* Comparative amounts have been reclassified between current and deferred tax.
sappi limited page 93
US$ million 2004 2003
sappi limited
13. Deferred taxation (continued)Negative asset and liability positions reflect the impact of taxation assets
and liabilities arising in different taxation jurisdictions, which cannot be netted
against taxation assets and liabilities arising in other taxation jurisdictions.
The recognised deferred taxation assets relate mostly to unused taxation
losses. It is expected that there will be sufficient taxable profits in the future
against which these losses can be recovered.
The unrecognised deferred taxation assets relate to the following:
Deductible temporary differences * 8 21
Taxation losses * 82 49
90 70
The unrecognised taxation losses are split as follows by country of origin:
Belgium * 16 –
United Kingdom 51 49
Southern Africa * 15 –
Austria * – –
82 49
The unrecognised taxation losses shown above do not have an expiration
date as at September 2004.
The following table shows the movement in the unrecognised deferred
taxation assets for the year *
Opening balance (70) (102)
Unrecognised deferred taxation assets (originating) utilised during the current year (14) 39
Movement in foreign exchange rates (6) (7)
Closing balance (90) (70)
* Comparative amounts have been reclassified between deferred tax and current tax.
page 94 sappi limited
US$ million 2004 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
13. Deferred taxation (continued)Reconciliation of deferred taxation
Deferred taxation balances at beginning of year
Deferred tax assets 41 6
Deferred tax liabilities * (487) (367)
(446) (361)
Deferred taxation release for the year * 66 –
Current:
Other liabilities, accruals and prepayments 6 (113)
Inventory 5 (11)
Non-current:
USA alternative minimum taxation credit carry forward – (21)
Taxation loss carry forward 100 111
Accrued and other liabilities (10) (13)
Property, plant and equipment 1 5
Plantations (23) –
Other – assets (17) (20)
Other – liabilities (29) 1
Deferred taxation assets not recognised 33 61
Amounts charged directly to equity 8 1
Rate adjustment 2 –
Translation differences * (37) (86)
Deferred taxation balances at end of year (407) (446)
Deferred tax assets 46 41
Deferred tax liabilities * (453) (487)
* Comparative amounts have been reclassified between deferred tax and current tax.
sappi limited page 95
14. Other non-current assetsPatents 5 6
Goodwill 4 4
Loans to the Sappi Limited Share Incentive Trust participants 14 16
Unlisted and other investments (including equity accounted investments) (1)
and other loans (2) 78 76
Post-employment benefits – pension asset (refer note 32) 74 46
Other – 5
175 153
Patents are recorded net of accumulated amortisation of 16 15
(1) In 1998, Sappi’s interests in timberlands located in Maine and certain equipment and machinery were sold to a third party timber company, Plum
Creek, in exchange for cash of US$3 million and three promissory notes receivable in the aggregate amount of US$171 million. A special purpose
entity, in which we indirectly hold 90% of the equity, acquired the notes receivable from the company in exchange for a note of US$156 million and
an equity contribution. The special purpose entity repaid us the note of US$156 million, which it funded through the issue of notes payable to a
consortium of institutional investors, pledging the Plum Creek notes as collateral. The qualifying special purpose entity is bankruptcy remote and
serves to protect the investors in the notes from any credit risk relating to Sappi Limited by isolating cash flows from the Plum Creek notes
receivable. The structure was set up to raise funding using the promissory notes as collateral in a manner that would not result in either debt or
the Plum Creek notes being reflected on our balance sheet. This would not be the case if we monetised the promissory notes through an issuance
of secured notes directly or by an entity that was required to be consolidated in our financial statements under the applicable accounting principles.
Interest is collected quarterly on the Plum Creek Notes and paid semi-annually to the entity’s noteholders. The entity earns annual profits on the
interest spread between the notes receivable and notes payable. There are three tranches of notes receivable and notes payable with term dates
of February 2007, 2009 and 2011. We have not guaranteed the obligations of the entity and the holders of the notes payable issued by the entity
have no recourse to us.
The entity is not consolidated in our financial statements because we have taken the position that it is controlled by an unrelated investor which has
sufficient equity capital at risk to support such a position. Our investment of US$20 million (September 2003: US$21 million) in the entity is included
in our financial statements on an equity-accounted basis. This is the maximum amount of our exposure to any possible loss and we have no funding
commitments for the entity.
(2) Unlisted investments and other loans are stated at cost which approximates directors’ valuation.
US$ million 2004 2003
15. InventoriesRaw materials 124 121
Work in progress 68 59
Finished goods 374 342
Consumable stores and spares 199 179
765 701
Included in the above are raw materials of US$15 million (September 2003: US$6 million), work in progress of US$18 million
(September 2003: US$13 million), finished goods of US$98 million (September 2003: US$58 million) and consumable stores of
US$28 million (September 2003: US$23 million) which have been written down to net realisable value. An amount of US$2 million
in respect of the finished goods inventory write-down for the prior year was reversed in the current year.
US$ million 2004 2003
sappi limited
page 96 sappi limited
US$ million 2004 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
16. Trade and other receivablesTrade accounts receivable, gross 254 165
Allowance for doubtful debts 37 26
Trade accounts receivable, net 217 139
Prepayments and other receivables 106 143
323 282
Prepayments and other receivables primarily represent prepaid insurance, prepaid rent and other sundry receivables.
Below is a discussion of Trade Receivables Securitisation programme:
To improve our cash flows in a cost-effective manner, we sell between 86% and 90% of our eligible trade receivables on a non-
recourse basis to special purpose entities (“SPEs”) that are owned and controlled by third party financial institutions. These SPEs
are funded in the Commercial Paper market. For the purpose of liquidity requirements, banks with a short-term (Standard & Poor’s)
S&P rating of at least A1 and a short-term Moody’s rating of at least P-1 (and equivalent rating from any other rating agency, if any)
provide a standby liquidity facility to meet these liquidity needs. In the event that such a bank is downgraded, a replacement bank
with a rating of A1 needs to be appointed to ensure continuity of the securitisation programme. On some programmes, the
downgraded bank can be required to deposit the unused portion of its commitment to avoid replacement. These SPEs are not
limited to transactions with us but securitise assets on behalf of their sponsors for a diverse range of unrelated parties. We have a
servicing agreement with the entities acquiring our receivables, acting as agent for the collection of cash and administration of the
trade receivables sold.
We retain some of the economic risk in the receivables we transfer to these entities via first tier loss provisions, which limits our loss
exposure on the receivables to a predetermined amount. To this extent, the receivables remain on our balance sheet. As at
September 2004 this amounted to US$53 million (September 2003: US$63 million). We have no obligation to repurchase any
receivables which may default and do not guarantee the recoverability of any amounts over and above the first tier loss provisions
mentioned above. The total amount of trade receivables sold at the end of September 2004 amounted to US$470 million
(September 2003: US$450 million). Details of these securitisation programmes at the end of fiscal 2004 and 2003 are disclosed in
the tables below.
If these securitisation facilities were to be terminated, we would discontinue further sales of trade receivables and would not incur
any losses in respect of receivables previously sold in excess of our first tier loss amounts. There are a number of events which may
trigger termination of the facility, amongst others, an unacceptable amount of defaults; terms and conditions of the agreements not
being met; or breaches of various credit insurance ratios (not applicable to all programs). The impact on liquidity varies according to
the terms of the agreement; generally however, future trade receivables would be recorded on balance sheet until a replacement
agreement was entered into.
An allowance for doubtful debts has been recorded for any trade receivables which may be uncollectable.
sappi limited page 97
sappi limited
16. Trade and other receivables (continued)Details of these securitisation facilities at September are set out below:
Bank Currency Value Facility Discount charges
2004
ABN-Amro US$ US$186 million US$227 million Linked to 1 month US$ LIBOR
Creditanstalt EUR EUR108 million EUR140 million Linked to 3 month EURIBOR
State Street Bank EUR EUR68 million EUR100 million Linked to 1 month EURIBOR
State Street Bank US$ US$68 million US$100 million Linked to 1 month LIBOR
2003
ABN-Amro US$ US$175 million US$205 million Linked to 1 month US$ LIBOR
Creditanstalt EUR EUR127 million EUR140 million Linked to 3 month EURIBOR
State Street Bank EUR EUR54 million EUR100 million Linked to 1 month EURIBOR
State Street Bank US$ US$67 million US$100 million Linked to 1 month LIBOR
(Refer to note 35 for further details on credit risk.)
US$ million 2004 2003
17. Ordinary share capital and share premiumAuthorised share capital:
325,000,000 (September 2003: 325,000,000) shares of ZAR1 each
Issued share capital:
239,071,892 (September 2003: 239,071,892) shares of ZAR1 each 35 32
Share premium 836 761
871 793
Included in the issued ordinary shares above are 12,580,506 (September 2003: 12,228,791)
shares held as treasury shares by group entities, including the Sappi Limited Share Incentive
Trust (the “Trust”). These may be utilised to meet the requirements of the Trust.
Number of shares
2004 2003
The movement in the number of treasury shares is set out in the table below:
Treasury shares at beginning of year (including Trust shares) 12,228,791 8,894,437
Share buy-backs 966,317 4,204,999
Treasury shares issued to participants of the Trust (614,602) (870,645)
Treasury shares at end of year 12,580,506 12,228,791
Under the authority granted at the annual general meeting of the company’s shareholders held on 01 March 2004, the company’s
directors were authorised to issue the balance of unissued shares to such person or persons on such terms and conditions as
they may determine. The authority expires at the next annual general meeting, unless renewed thereat.
page 98 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
17. Ordinary share capital and share premium (continued)Sappi has a general authority to purchase its shares up to a maximum of 10% of the issued ordinary share capital in any one
financial year. This is in terms of the annual general meeting of shareholders on 01 March 2004. The general authority is subject to
the Listings Requirements of the JSE Securities Exchange South Africa and the Companies Act No. 61 of 1973 of South Africa,
as amended.
In terms of the rules of the Trust, the maximum number of shares which may be acquired by the Trust are calculated at 7.5% of
Sappi Limited’s entire issued ordinary share capital from time to time. At present the amount that can be allocated is 17,930,392
(September 2003: 17,930,392) shares. Since March 1994, 6,386,210 (September 2003: 8,803,544) shares have been allocated to
participants and paid for and 9,006,757 (September 2003: 8,819,529) shares have been allocated to participants and not yet paid
for. Shares allocated and accepted more than ten years ago are added back to the number of shares that the Trust may acquire.
The net after tax loss on sale of treasury shares to participants written off against share premium for September 2004 was
US$2 million (September 2003: minimal).
US$ million 2004 2003
18. Non-distributable reservesReduction in capital arising from the transfer of share premium under a special
resolution dated 14 April 1975 1 1
Capitalisation of distributable reserves 41 38
Legal reserves in subsidiaries 79 68
Foreign currency translation reserve 245 192
366 299
The amounts recorded as “Capitalisation of distributable reserves” and
“Legal reserves in subsidiaries” represent equity of the company that is not
available for distribution as a result of appropriations of equity by subsidiaries
and legal requirements, respectively.
19. Interest-bearing borrowingsSecured borrowings
– Mortgage and pledge over certain assets (refer note 29 for details of
encumbered assets) 182 212
– Capitalised lease liabilities (refer note 29 for details of encumbered assets) 110 78
Total secured borrowings 292 290
Unsecured borrowings 1,765 1,622
Total borrowings (refer note 35) 2,057 1,912
Less: Current portion included in current liabilities 364 170
1,693 1,742
sappi limited page 99
US$ million 2004 2003
sappi limited
19. Interest-bearing borrowings (continued)The repayment profile of the interest-bearing borrowings is as follows:
Payable in the year ended September:
2004 – 170
2005 364 243
2006 174 98
2007 56 45
2008 59 48
2009 (September 2003: Thereafter) 34 1,308
Thereafter 1,370 –
2,057 1,912
Capitalised lease liabilities
Capital (finance) leases are primarily for plant and equipment. Lease terms generally range from 5 to 10 years with options to make
early settlements or renew at varying terms. At the time of entering into capital lease agreements, the commitments are recorded at
their present value using applicable interest rates. As of September 2004, the aggregate amounts of minimum lease payments and
the related imputed interest under capitalised lease contracts payable in each of the next five financial years and thereafter are
as follows:
2004 2003Present value of Present value of
Minimum lease minimum lease minimum leaseUS$ million payments Interest payments payments
Payable in the year ended
September:
2004 – – – 32
2005 46 (10) 36 25
2006 35 (6) 29 19
2007 13 (4) 9 1
2008 14 (4) 10 1
2009 4 (3) 1 –
Thereafter 37 (12) 25 –
Total future minimum lease
payments 149 (39) 110 78
page 100 sappi limited
19. Interest-bearing borrowings (continued)Set out below are details of the more significant non-current interest-bearing borrowings in the group at September 2004.
Principal
Interest amount
Currency rate outstanding Balance sheet value Security Expiry Financial covenants
Redeemable
bonds
Public bond US$ Variable (6) US$500 million US$487 million (2, 3, 5) Unsecured June 2012 No financial covenants
Public bond US$ Variable (6) US$250 million US$243 million (2, 3, 5) Unsecured June 2032 No financial covenants
Town of Land and
Skowhegan US$ Variable (6) US$35 million US$35 million (5) buildings October 2015 No financial covenants
Town of Land and
Skowhegan US$ Variable (6) US$28 million US$29 million (5) buildings November 2013 No financial covenants
Michigan
Strategic
Fund/City of Land and
Westbrook US$ Variable (6) US$44 million US$46 million (5) buildings January 2022 No financial covenants
Capitalised
leases
First National Plant and
Bank ZAR Fixed ZAR252 million ZAR252 million (1) equipment September 2006 No financial covenants
Plant and
Standard Bank ZAR Fixed ZAR196 million ZAR196 million (1) equipment September 2008 No financial covenants
Rand Merchant
Bank ZAR Fixed ZAR174 million ZAR174 million (1) Buildings September 2015 No financial covenants
Plant and
Sapned Trust ZAR Variable (6) ZAR61 million ZAR61 million (1) equipment March 2005 No financial covenants
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 101
Principal
Interest amount
Currency rate outstanding Balance sheet value Security Expiry Financial covenants
Unsecured bank
term loans
Consortium of banks Net finance cost cover
with agent Investec and debt to total
Bank US$ Variable US$44 million US$44 million (1) May 2006 capitalisation ratio (4)
Österreichische Net finance cost cover
Kontrollbank EUR Fixed EUR140 million EUR140 million (1, 7) December 2007 ratio and equity ratio (4)
Österreichische Net finance cost cover
Kontrollbank EUR Fixed EUR400 million EUR396 million (5, 7) December 2010 ratio and equity ratio (4)
Österreichische Net finance cost cover
Kontrollbank EUR Variable EUR100 million EUR100 million (5, 7) December 2004 ratio and equity ratio (4)
Commercial Paper ZAR Variable ZAR490 million ZAR490 million (8) October 2004 No financial covenants
ABSA ZAR Variable ZAR200 million ZAR200 million (1) October 2006 No financial covenants
Standard Bank ZAR Variable ZAR200 million ZAR200 million (1) October 2006 No financial covenants
Standard Bank ZAR Fixed ZAR190 million ZAR190 million (1) September 2009 No financial covenants
Gearing ratio/
ABSA ZAR Fixed ZAR168 million ZAR168 million (1) December 2005 interest cover (4)
(1) The value outstanding equals the total facility available.
(2) In terms of the agreement, limitations exist on liens, sale and leaseback transactions and mergers and consolidation. Sappi Limited must maintain a
majority holding in Sappi Papier Holding GmbH Group.
(3) Sappi Papier Holding GmbH, Sappi Limited or Sappi International SA may at any time redeem the June 2012 and 2032 public bonds the (“Securities”)
in whole or in part at a redemption price equal to the greater of (i) 100% of the principal amount of the Securities to be redeemed and (ii) a make-whole
amount based upon the present values of remaining payments at a rate based upon yields of specified US treasury securities plus 25 basis points, with
respect to the 2012 Securities, and 30 basis points, with respect to the 2032 Securities, together with, in each case, accrued interest on the principal
amount of the securities to be redeemed to the date of redemption.
(4) The financial covenant relates to the subsidiary company which borrowed the funds.
(5) The principal value of the loans/bonds corresponds to the amount of the facility, however, the outstanding amount has been adjusted by the discounts
paid upfront and the fair value adjustments relating to hedge accounting.
(6) Fixed rates have been swapped into variable rates. These swaps are subject to hedge accounting in order to reduce as far as possible the fair value
exposure. Changes in fair value of the underlying debt which are attributable to changes in credit spread have been excluded from the hedging relationship.
(7) A limitation exists on the disposal of assets. Dividend payments are limited to 40% of cumulative profits. Sappi Limited must maintain a majority holding
in Sappi Papier Holding GmbH Group.
(8) The facility of this unsecured loan is ZAR1 billion.
Sappi Limited’s borrowings are done through three group entities, namely, Sappi Papier Holding GmbH, Sappi International SA and Sappi Manufacturing
(Pty) Limited.
sappi limited
page 102 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
19. Interest-bearing borrowings (continued)Financial instruments and other loans
The group also has financial instruments and other loans with various banks, expiry dates and security, in various currencies at fixed
and variable interest rates for amounts totalling US$90 million.
Unused credit facilities
Set out below is a synopsis of the unused credit facilities by geographic region at September. These facilities are at various banks in
various currencies with various expiry dates. These available facilities are all unsecured.
Committed facilities
US$ millionCurrency Interest rate 2004 2003
Commercial Paper * ZAR Variable 31 –
Syndicated loan ** EUR Variable 692 646
723 646
* Commercial paper programme sponsored by Investec for a committed liquidity facility of ZAR200 million for each further issue. The remainder of the
unutilised portion of the total ZAR1 billion facility has been included under uncommitted facilities disclosed below.
** Syndicated loan with a consortium of banks with Citibank as agent with a total revolving facility available of EUR563 million, which are subject to net
finance cost cover and debt to total capitalisation ratio financial covenants. The facility expires in July 2006.
Uncommitted facilities
US$ millionGeographic region Currency Interest rate 2004 2003
Southern Africa ZAR Variable 252 179
Europe EUR Variable 200 198
USD Variable 95 95
Asia USD Variable 5 –
552 472
US$ million 2004 2003
20. Other non-current liabilitiesPost-employment benefits – pension obligations (refer note 32) 142 108
Post-retirement benefits other than pension obligations (refer note 33) 106 93
Workmen’s compensation 3 5
Restructuring provisions (refer note 21) 3 3
Fair value of derivative instruments 17 27
Long service awards 14 14
Other 32 32
317 282
sappi limited page 103
US$ million 2004 2003
sappi limited
21. ProvisionsSummary of provisions:
Other provisions
Balance at beginning of year 16 20
Increase in provisions 2 –
Released during the year (1) –
Transfer to accruals – (5)
Translation effect 1 1
Balance at end of year 18 16
Restructuring provisions 7 8
Purchase accounting provisions (refer note 28) 1 3
26 27
Other provisions primarily represent provisions for environmental costs of US$5 million (September 2003: US$4 million) and other
sundry provisions of US$13 million (September 2003: US$12 million).
Severance,US$ million retrenchment Lease cancel Other TotalRestructuring provisions and related costs and penalty cost restructuring restructuring
Balance at September 2002 5 4 13 22
Increase in provisions – – 4 4
Utilised (2) (2) (3) (7)
Released during the year (2) (3) (6) (11)
Transfer from receivables 1 1 – 2
Translation effect – – 1 1
Balance at September 2003 2 – 9 11
Increase in provisions 20 3 3 26
Utilised (17) (2) (6) (25)
Released during the year (1) – (2) (3)
Translation effect – – 1 1
Balance at September 2004 4 1 5 10
US$ million 2004 2003
Included in other non-current liabilities (refer note 20) 3 3
Included in provisions 7 8
Total restructuring provisions 10 11
page 104 sappi limited
21. Provisions (continued)September 2004 restructuring plans
Sappi Fine Paper North America
Westbrook Mill: In November 2003, Sappi Fine Paper North America announced the shutdown of one of its coated paper machines
at Westbrook Mill. This restructuring plan was expected to affect 145 people. As at September 2004, all 145 employees had been
affected by this plan. The severance, retrenchment and related costs provision was increased by US$7 million and the lease
cancellation and penalty cost provision was increased by US$1 million during the year. An amount of US$6 million relating to the
severance, retrenchment and related costs was utilised and US$1 million was utilised to provide for lease cancellation and penalty
costs during the year. As a result, the balance remaining in respect of the severance and related costs provision amounted to
US$1 million as at September 2004.
Regional head office: During the year the severance, retrenchment and related costs provision was increased by US$4 million and
an amount of US$2 million of this provision was utilised during this period. This plan was expected to affect 85 people. As at
September 2004, 69 people had already been affected by this plan. As at September 2004, the balance remaining on this provision
amounted to US$2 million.
Cloquet Mill: During the financial year ended September 2002, Sappi Fine Paper North America acquired the coated fine paper
business from Potlatch Corporation. In addition to the restructuring plan discussed under Purchase Accounting provision (refer to
note 28), a further restructuring plan affecting Cloquet Mill was embarked on. This plan was expected to affect 8 people at the
beginning of the year but this was revised to 5 people during the year. All 5 people had been affected by September 2004. An
amount of US$1 million was utilised during the year to provide for severance, retrenchment and other related costs. This provision
was fully utilised during the year bringing the balance remaining on this provision to nil.
Sappi Fine Paper Europe
Austria: The Gratkorn Mill restructuring plan was completed during June 2004 in the current year. The remaining balance of
US$1 million was released during the year.
Netherlands: The plan introduced during the previous year for the reduction in fixed costs in the Netherlands continued in the current
year. The total number of employees affected by this plan was changed from 25 to 33 people and 30 people were affected by this
plan during the current year. The provision was increased by US$1 million as a result of the additional 8 employees added to the
plan. An amount of US$1 million of the provision was released because some employees were no longer eligible for benefits under
the plan and partly because of changes in government directives relating to these types of redundancy payments. The estimated
completion date has subsequently been revised from July 2004 to September 2008.
During the current year a plan was introduced to merge certain departments that could benefit from shared services. The total
number of people expected to be affected by this plan was 41 and by September 2004, a total of 12 people had already been
affected by this plan. A provision of US$2 million was made of which US$1 million was utilised for severance payments. A portion of
the provision was released during the year due to changes in the government directive mentioned previously. The provision was
increased by US$1 million for other restructuring costs. The estimated completion date for the plan is September 2005. The balance
remaining on these provisions at year-end amounted to US$4 million.
Belgium: The restructuring plans in place from last year were continued in the current year. The expected completion dates for the
plans are 2014 and 2009 respectively. The provision was increased as a result of changes in estimates. The total number of people
anticipated to be affected by the plan was 105 people of which 72 have been affected by year-end. An amount of US$1 million was
utilised during the current year to supplement employee benefits until they reach normal retirement age. At year-end the balance
remaining on these provisions amounted to US$2 million.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 105
21. Provisions (continued)Sappi Fine Paper Europe (continued)
Germany: The Alfeld Mill in Germany has a restructuring plan in place for the reduction of employees in the administration area.
The total number of employees expected to be affected by this plan was 10 people and by year-end, 7 people had already by
affected during the current year. This plan was expected to be completed by 2007.
United Kingdom – Wolvercote: The closure and termination of a lease agreement over the premises in Wolvercote was finalised
during the current year. During the year US$1 million was released. The remaining balance of US$4 million was utilised during
the year.
Fine Paper London office closure
During November 2003 it was announced that the Fine Paper London office would be closed in the current year. The total number
of employees affected by this closure was 8 people. A provision of US$6 million was made for the closure. During the current year
an amount of US$3 million was utilised for severance, retrenchment and other costs. US$2 million was utilised to provide for other
restructuring and lease cancellation costs. At year-end, the balance remaining on the provision was US$1 million and this provision
will be utilised to provide for future lease cancellation and penalty costs.
Forest Products
During the year Forest Products implemented a restructuring plan to reduce costs. The total number of employees expected to be
affected by this plan was 211. At the end of September 2004, all 211 employees had been affected by the plan. The provision
was increased by US$4 million during the year. The provision of US$4 million was utilised in full during the year.
September 2003 restructuring plans
Sappi Fine Paper North America
Cloquet Mill: During the financial year ended September 2002, Sappi Fine Paper North America acquired the coated fine paper
business from Potlatch Corporation. In addition to the restructuring plan discussed under Purchase Accounting provision (refer
to note 28), a further restructuring plan affecting the Cloquet Mill, which was expected to affect 67 people, was embarked on.
(This restructuring plan affected other Sappi employees in addition to those previously employed by Potlatch.) At the end of the
prior year 28 people had been affected by this plan. During the year cash payments of US$1 million were made relating to
severance and other lease cancellation costs. In addition, the estimates for severance and related costs were revised. This relates
primarily to employees who voluntarily terminated their employment prior to their expected separation date under the plan. The
total number of individuals impacted by this severance programme was reduced to 43 people as a result. A further result of this,
was a release of US$2 million of the provision during the year, bringing the closing balance at September 2003 to US$1 million.
As at September 2003, 35 people’s employment contracts have been terminated.
Mobile Mill: During fiscal year 2003, Sappi Fine Paper North America made cash payments of US$1 million for severance and other
exit related costs. In addition, the company revised its estimates regarding contractual obligations for mill support services and
other exit related costs and released US$3 million of the provision no longer required. As of September 2003, Sappi Fine Paper
North America has completed its severance obligations to affected employees and all other costs relating to the closure of the
Mobile Mill and exit of the uncoated fine paper business.
sappi limited
page 106 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
21. Provisions (continued)Sappi Fine Paper Europe
Austria: The programmes were started at the Gratkorn Mill, in previous years, to realise cost savings continued in the current year.
It was originally anticipated that 538 employees would be affected by the restructuring. This has now been revised to 534, of which
all employees have been affected. During the current financial year a further US$1 million was released as a result of severance
benefits which have expired according to the agreement. The balance at September 2003 was US$1 million. This is expected to
be utilised in full during the year ended September 2004.
Netherlands: The programme that was started to reskill certain employees at the Maastricht Mill for alternative employment during
the prior year was completed in the current year. The total number of employees affected by this plan were 40. The provision of
US$1 million at the beginning of the year was utilised during the current year. The Netherlands had a further plan in place to reduce
fixed costs at their mills, which was also completed during the year. The number of employees affected were 150. The provision
balance of US$2 million at the beginning of the year was released during the current year.
During the current year, the Netherlands introduced a second plan for the reduction of fixed costs. The total number of employees to
be effected by this plan are 25 of which none had been affected by year-end. The programme is expected to be completed in July
2004. The provision balance at year-end amounts to US$2 million.
Belgium: Belgium has two restructuring plans in place. The first relates to the retirement of employees according to a collective
labour agreement. The total number of employees affected by this plan were 29. No further employees will be affected. The balance
of this provision at year-end of US$1 million is to be utilised for supplementing the benefits of the 29 employees already retired.
The second restructuring plan’s aim is to reduce fixed costs. The total number of employees already affected by this plan is 85.
The remaining balance at year-end of US$2 million is to be utilised as supplementation on their government benefit until they reach
retirement age.
United Kingdom – Wolvercote: Sappi is currently negotiating the termination of a lease agreement over premises in Wolvercote.
The provision balance at year-end of US$3 million is expected to cover the termination costs. The termination was expected to be
completed in 2004. US$2 million was released from the provision during the year.
US$ million 2004 2003
22. Cash generated from operationsProfit before taxation per income statement 78 161
Adjustment for:
– Depreciation 408 352
– Fellings 55 42
– Net finance costs 110 111
– Other asset impairments and machine and mill closure costs – 32
– Fair value adjustment gains on plantations (125) (42)
– Other non-cash items 75 (11)
601 645
sappi limited page 107
23. Increase in working capital(Increase) decrease in inventories (27) (93)
(Increase) decrease in receivables (38) (12)
Increase in payables 15 26
(50) (79)
24. Finance cost paidGross interest and other finance costs (133) (150)
Net foreign exchange gains 5 1
Net (gain) loss on marking to market of financial instruments (11) 6
Non-cash movements included in items above 3 –
(136) (143)
25. Taxation (paid) receivedAmounts unpaid at beginning of year * (111) (41)
Translation effects * (9) (22)
Amounts charged to the income statement (48) (18)
Reversal of non-cash movements 1 3
Amounts unpaid at end of year * 136 111
Cash amounts (paid) received (31) 33
* Comparative amounts have been reclassified between deferred tax and current tax.
26. Replacement of non-current assetsProperty, plant and equipment (219) (164)
Plantations – (1)
(219) (165)
27. Proceeds on disposal of non-current assetsBook value of property, plant and equipment disposed of 5 7
(Loss) profit on disposal (3) 1
2 8
US$ million 2004 2003
sappi limited
page 108 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
28. Acquisition of net assetsDuring May 2002 the group acquired the net assets of the Potlatch fine paper division for a cash consideration of US$483 million.
This transaction has been accounted for by the purchase method of accounting.
Purchase accounting provisions
Summary of provisions taken on at acquisition and subsequent movements:
RestructuringSeverance and Lease cancel
US$ million related costs and penalty cost Total provisions
Balance at September 2002 6 2 8
Utilised (1) (2) (3)
Transfer to property, plant and equipment (2) – (2)
Balance at September 2003 3 – 3
Utilised (2) – (2)
Balance at September 2004 1 – 1
September 2004
Sappi Fine Paper North America
Cloquet Mill. During the current year, Sappi Fine Paper North America made cash payments and revised its estimates for severance
and related costs to US$2 million. As at September 2004, 90 employees had been affected by this plan.
September 2003
Sappi Fine Paper North America
Cloquet Mill. During the financial year ended September 2002, Sappi Fine Paper North America acquired the coated fine paper
business from Potlatch Corporation. The restructuring of the mill was expected to affect 116 people of whom 67 were affected at
the end of the prior year, this has subsequently been adjusted to 60. (This plan affected only people previously employed by Potlatch
Corporation.) During the current year, Sappi Fine Paper North America made cash payments of US$3 million for severance and other
lease cancellation costs. In addition, the company revised its estimates for severance and related costs primarily for employees who
voluntarily terminated their employment prior to their expected separation date under the plan, reducing the total number of
individuals impacted by this severance programme to 97. As of September 2003, 78 people have been affected.
sappi limited page 109
US$ million 2004 2003
sappi limited
29. Encumbered assetsSuspensive sale agreements are instalment sale agreements which the group has
entered into in respect of certain property, plant and equipment and the assets
purchased are encumbered as security for the outstanding liability until such
time as the liability is discharged.
In addition, the group uses a substantial portion of the plant and machinery at its
Cloquet Mill in terms of a capitalised lease. The group has the right to acquire full
ownership of these assets at the end of the lease term at the fair market value.
Early termination of the lease may occur under three different scenarios; namely,
under Scenario A payment would be made by Sappi as a result of the following
events: voluntary early termination, termination due to default and total loss of
plant and equipment without substitution; under Scenario B payment would be
made by Sappi as a result of changes in statute rendering the agreement illegal
or unenforceable; and under Scenario C the lease naturally expires or early
termination is triggered by the lessor. As at September 2004 the termination
value of this lease is approximately US$13 million (September 2003: US$14 million).
The book values of assets which are mortgaged, hypothecated or subject to a
pledge as security for borrowings, subject to third party ownership in terms of
capitalised leases or suspensive sale agreements are as follows:
Land and buildings 166 131
Plant and equipment 583 528
749 659
page 110 sappi limited
US$ million 2004 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
30. CommitmentsCapital commitments
Contracted but not provided 76 86
Approved but not contracted 198 193
274 279
The capital expenditure will be financed by funds generated by the business,
existing cash resources and borrowing facilities available to the group.
Revenue commitments
Future minimum obligations under operating leases:
Payable in the year ended September:
2004 – 60
2005 56 50
2006 48 44
2007 41 37
2008 34 32
2009 (September 2003: Thereafter) 21 123
Thereafter 71 –
271 346
Future minimum obligations under operating leases include the following two significant arrangements:
Sale and Lease Back of the Somerset Paper Machine. In 1997 we sold one of our paper machines at our Somerset Mill for
US$150 million and entered into a leaseback arrangement. This transaction diversified our sources of funding and provides a
longer-term horizon to our repayment profile. We have taken the position the leaseback is an operating lease under the applicable
accounting principles. The lease term expires after 15 years, and we have an option to either return the paper machine; renew the
lease for at least 2 years, but for no longer than 80% of its remaining useful life; or repurchase it at its fair market value at the end
of the lease term. An option exists to repurchase the paper machine at an earlier date of 29 January 2008 for the original purchase
price multiplied by a factor of 50.10%. To exercise the option, we must provide notice of between 180 and 360 days prior to the
early buyout date. There is no right of refusal associated with the early buyout option. The future minimum obligations under this
lease are included in the amounts presented above.
Westbrook Cogeneration Agreement. In 1982 a cogeneration facility was installed adjacent to our Westbrook Mill at a cost of
US$86 million, to supply steam and electricity to the mill on a take-or-pay basis. We have taken the position that this is an operating
lease. An unrelated investor owns the facility. The agreement expires in 2008 and we have an option to purchase the facility at the
end of the basic term or any renewal term, at its fair market value at that time. We also have a right of first refusal to buy the facility
should the owner elect to sell it. The future minimum obligations under this arrangement are included in the amounts presented
above.
sappi limited page 111
US$ million 2004 2003
sappi limited
31. Contingent liabilitiesGuarantees and suretyships 68 47
Other contingent liabilities 15 24
The group is involved in various lawsuits and administrative proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these suits and proceedings cannot be predicted with certainty, it is
the present opinion of management, after consulting with legal counsel, that they are not expected to have a material effect on the
group’s consolidated financial position, results of operations or cash flows.
Other contingent liabilities mainly relate to taxation queries to which certain group companies are subject. The reduction in other
contingent liabilities reflects management’s revised estimate of reasonably possible losses which could arise from taxation queries
to which certain group companies are subject. These could give rise to additional taxation costs. Management does not currently
expect further material costs to arise.
32. Post-employment benefits – pensions
Defined contribution plans
The group operates a number of defined contribution retirement benefit plans covering all qualifying employees. The assets of the
schemes are held separately from those of the group in funds under the control of trustees.
The total cost charged to income of US$13 million (September 2003: US$11 million) represents contributions payable to these
schemes by the group based on the rates specified in the rules of these schemes. As at September 2004 and September 2003
no contributions were due in respect of the current reporting period that had not yet been paid over to the schemes.
Defined benefit plans
The group operates a number of defined benefit pension schemes covering full-time permanent employees. Such plans have been
established in accordance with applicable legal requirements, customs and existing circumstances in each country. Benefits are
generally based upon compensation and years of service. With the exception of our German and Austrian operations, the assets
of these schemes are held in separate trustee administered funds which are subject to varying statutory requirements in the particular
countries concerned. In terms of these requirements, periodic actuarial valuations of these funds are performed by independent
actuaries. Sappi Papier Holding AG holds bonds, which are restricted, to the value of US$13 million to cover the pension obligations
of Sappi Austria. The German and Austrian plans are wholly unfunded. As at September 2004, the present value of the defined
benefit obligation of the German plan was US$59 million (September 2003: US$53 million) and the Austrian plan was US$57 million
(September 2003: US$53 million). The expected contributions for 2005 are US$63 million.
Actuarial valuations of the European and North American funds are performed annually. An actuarial review is performed annually for
the South African and United Kingdom funds, with an actuarial valuation being performed on a tri-annual basis.
Group companies have no other significant post-employment benefit liabilities except for the health care benefits provided to persons
in the United States and in South Africa (refer note 33).
The following table, based on 26 September 2004 valuations estimates, summarises the funded status and amounts recognised in
the group’s financial statements for defined benefit plans for the group’s operations.
The United Kingdom, Europe and United States pension obligations were measured at the end of September as well as the North
American plan assets. The South African pension obligation and plan assets of South Africa, Europe and United Kingdom were
measured at the end of August and projected to September. There were no material changes or other changes in circumstances
up to balance sheet date.
page 112 sappi limited
2004 2003
Accumulated benefits exceed assets Accumulated benefits exceed assets
Southern United United Southern United United
US$ million Africa Kingdom Europe States Africa Kingdom Europe States
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
32. Post-employment benefits – pensions (continued)Change in benefit obligationBenefit obligations at beginning of year 237 166 490 381 147 148 373 329Current service cost 14 2 13 11 11 2 11 10Past service cost 1 – (11) 4 – (3) – –Fund administration costs – – – – – 1 – –Interest cost 24 9 25 22 22 8 23 21Plan participants’ contribution – 1 1 – – 1 – –Amendments – – – – (3) – – –Actuarial (gain) loss 1 (9) 29 11 2 5 33 37Loss on curtailment and settlement – – – 3 – – – –Benefits paid (33) (6) (24) (18) (16) (6) (17) (16)Translation difference 25 15 36 – 74 10 67 –
Benefit obligation at end of year 269 178 559 414 237 166 490 381
Accumulated benefit obligation atend of year 281 178 522 372 238 166 454 350
Change in plan assetsFair value of assets at beginning of year 221 127 356 237 161 112 276 198Expected return on plan assets 22 7 20 20 26 7 20 18Actuarial gain (loss) on plan assets 10 4 6 7 (34) 2 (6) 18Acquisition – – – – – – – –Employer contribution 6 5 33 10 5 4 32 19Plan participants’ contribution 4 1 1 – 3 1 – –Benefits paid (33) (6) (19) (18) (16) (6) (13) (16)Gain on curtailment and settlements – – – (1) – – – –Translation difference 24 12 25 – 76 7 47 –
Fair value of assets at end of year 254 150 422 255 221 127 356 237
Funded status(Unfunded) funded status (15) (28) (137) (159) (16) (39) (134) (144)Unrecognised net actuarial loss (1) 35 45 88 105 41 57 61 106Unrecognised past service cost (1) – – (7) 5 – – – 4Asset not recognised (25) – – – (27) – – –Unrecognised transitional liability 2 – – – – – – –
Net (accrued) prepaid post-retirement cost (3) 17 (56) (49) (2) 18 (73) (34)
Net pension obligation (91) (91)
(1) On an ongoing basis, any changes in the above assumptions lead to actuarial gains or losses which are not recognised immediately unless thecumulative unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of the plan assets.Any excess is recognised over the expected average remaining working lives of the participating employees. Any actuarial gains or losses that donot breach the 10% limits do not need to be recognised.
Refer to note 40 “Summary of differences between South African and United States Generally Accepted Accounting Principles” forfurther discussion on the pension obligations.
sappi limited page 113
2004 2003
Southern United United Southern United United
US$ million Africa Kingdom Europe States Africa Kingdom Europe States
sappi limited
32. Post-employment benefits – pensions (continued)Net periodic pension cost
Current service cost 10 2 13 11 8 2 11 10
Past service cost 1 – (4) 1 (3) (3) – –
Fund administration costs – – – – – 1 – –
Interest cost 24 9 25 22 22 8 23 21
Expected return on plan assets (22) (7) (20) (20) (26) (7) (20) (18)
Amortisation of past service cost 1 – – 1 1 – – 1
Recognised net actuarial loss 1 4 (1) 4 1 3 1 5
Loss on curtailment and settlement – – – 6 – – – –
Net pension cost charged to cost of
sales and selling, general and
administrative expenses 15 8 13 25 3 4 15 19
The actual return on plan assets was
US$96 million (September 2003:
US$51 million).
Actuarial assumptions at balance
sheet date:
Discount rate (%) 9.00 5.50 4.63 5.65 9.50 5.25 4.97 5.85
Compensation increase (%) 6.00 4.00 3.14 3.75 7.00 4.00 3.10 4.00
Expected long-term return on assets (%) 10.18 5.50 5.20 8.50 10.00 6.00 5.50 8.50
Actuarial assumptions used to
determine pension expense:
Discount rate (%) 9.50 5.25 4.97 5.85 11.50 5.50 5.75 6.51
Compensation increase (%) 7.00 4.00 3.10 4.00 9.00 4.00 2.97 4.00
Expected long-term return on assets (%) 10.00 6.00 5.50 8.50 12.50 6.25 5.52 9.00
2004 2003
Reconciliation to balance sheet
Prepaid pension costs – (refer note 14) (74) (46)
Pension obligations – Europe and North America (refer note 20) 142 108
Pension obligations – Europe and North America (included in other creditors) 23 29
Net pension obligation included in the balance sheet 91 91
page 114 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
32. Post-employment benefits – pensions (continued)In determining the expected long-term return assumption on plan assets, Sappi considers the relative weighting of plan assets to
various asset classes, the historical performance of total plan assets and individual asset classes and economic and other indicators
of future performance. Peer data and historical returns are reviewed to check for reasonableness and appropriateness. In addition,
Sappi may consult with and consider the opinions of financial and other professionals in developing appropriate return benchmarks.
Plan fiduciaries set investment policies and strategies for the local trusts. Long-term strategic investment objectives include
preserving the funded status of the trust and balancing risk and return while keeping in mind the regulatory environment in each
region. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting long-
term strategic targets and rebalancing assets periodically. Target vs. actual weighted average allocations (by region) below:
2004 2003
Southern United United Southern United United
Target asset allocation by Region Africa Kingdom Europe States Africa Kingdom Europe States
% % % % % % % %
Equity 40 – 55 35.0 15.0 58.5 40 – 55 35.0 15.0 60.0
Debt Securities 15 – 30 59.0 80.0 26.5 15 – 30 59.0 80.0 30.0
Real Estate 0.0 6.0 0.0 0.0 0.0 6.0 0.0 0.0
Other 5 – 20 0.0 5.0 15.0 5 – 20 0.0 5.0 10.0
2004 2003
Southern United United Southern United United
Actual asset allocation by Region Africa Kingdom Europe States Africa Kingdom Europe States
% % % % % % % %
Equity 57.7 41.0 14.5 58.8 51.0 39.0 15.0 61.9
Fixed Income 25.3 50.0 80.9 26.8 24.3 53.0 80.0 31.1
Real Estate 0.0 7.0 0.0 0.0 0.0 6.0 0.0 0.0
Other 17.0 2.0 4.6 14.4 24.7 2.0 5.0 7.0
The company plans to meet all required contributions for pension plans in 2005 – totalling an expected US$64 million.
Expected benefit payments for pension benefits are as follows
2004
US$ million Southern United United
Payable in the year ending September: Africa Kingdom Europe States
2005 11 6 25 22
2006 11 7 28 20
2007 11 7 29 21
2008 12 7 31 21
2009 12 7 32 22
Years 2010 – 2014 69 38 175 120
sappi limited page 115
sappi limited
33. Post-retirement benefits other than pensionsThe group sponsors defined benefit post-retirement plans that provide certain health care and life insurance benefits to eligible
retired employees of the United States and South African operations. Employees are generally eligible for benefits upon retirement
and completion of a specified number of years of service. The expected employer contribution for 2005 is US$16 million.
Actuarial valuations of all the plans are performed annually.
The United States post-employment obligation was measured at the end of September 2004. The South African post-employment
obligation was measured at the end of June 2004; no material movements occurred between this date and September in the
assumptions used to determine the liability.
The following schedule provides the plans’ funded status and obligations for the group.
2004 2003
US$ million South Africa United States South Africa United States
Change in benefit obligation
Benefit obligation at beginning of year 53 102 31 104
Current service cost 1 3 1 3
Past service cost – (1) – –
Interest cost 5 6 5 6
Plan amendments – – – (14)
Actuarial loss – 4 2 9
Loss on curtailment and settlements – 4 – –
Benefits paid (3) (7) (2) (6)
Translation difference 5 – 16 –
Benefit obligation at end of year 61 111 53 102
Accumulated benefit obligation at end of year
Funded status
Unfunded status (61) (111) (53) (102)
Unrecognised net actuarial loss (1) 10 40 10 39
Unrecognised past service cost – (5) – (4)
Net accrued post-retirement cost (51) (76) (43) (67)
Net post-retirement benefit obligation (127) (110)
(1) On an ongoing basis, any changes in the above assumptions lead to actuarial gains or losses which are not recognised immediately unless the
cumulative unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of the plan assets.
Any excess is recognised over the expected average remaining working lives of the participating employees. Any actuarial gains or losses that do
not breach the 10% limits do not need to be recognised.
page 116 sappi limited
2004 2003
US$ million South Africa United States South Africa United States
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
33. Post-retirement benefits other than pensions (continued)Net periodic post-retirement benefit cost
Current service cost 1 3 1 3
Past service cost – – – (10)
Interest cost 5 6 5 6
Amortisation of past service cost – (1) – –
Recognised net actuarial loss – 2 – 1
Loss on curtailments and settlements – 6 – –
Net pension cost charged to cost of sales and selling,
general and administrative expenses 6 16 6 –
Actuarial assumptions at balance sheet date:
Discount rate (%) 9.00 5.65 9.50 5.85
Health care cost trend rates (%) 6.50 10.00 7.50 10.00
which gradually reduce to an ultimate rate of (%) 6.50 5.00 7.50 5.00
over a period of (years) – 5 – 5
Actuarial assumptions used to determine net
periodic benefit cost:
Discount rate (%) 9.50 5.85 11.50 6.51
Health care cost trend rates (%) 7.50 10.00 10.00 10.00
The health care cost trend rates assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed
health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement benefit obligation
(APBO) as of September 2004 by US$13 million (September 2003: US$11 million) and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for the year then ended by US$2 million (September 2003: US$2 million).
US$ million 2004 2003
Reconciliation to balance sheet
Post-retirement benefits other than pension (refer note 20) 106 93
Post-retirement benefits other than pension (included in other creditors) 21 17
Net pension obligation included in the balance sheet 127 110
The company plans to meet all required contributions for pension plans in 2005 – totalling an expected US$12 million
Expected benefit payments for pension benefits are as follows
Payable in the year ending September:
2005 12
2006 12
2007 12
2008 13
2009 14
2010 to 2015 72
135
sappi limited page 117
34. Equity compensation benefitsThe Sappi Limited Share Incentive Trust
The annual general meeting of Shareholders held on 02 March 2000 (the “General Meeting”), approved an amendment to the first
limit, increasing the aggregate number of shares that may be issued under the Trust to a number corresponding to 7.5% of the
issued ordinary share capital of Sappi Limited from time to time.
Under the rules of the Trust, participants may be offered the opportunity to acquire ordinary shares (“Trust shares”). This entails that
Trust shares are sold by the Trust to participants on the basis that ownership thereof passes to the participant on conclusion of the
contract but the purchase price is not payable immediately. Trust shares are registered in the name of the participants and will be
pledged in favour of the Trust as security of payment for payment of debt. Subject to certain limitations, a participant’s outstanding
share debt will bear interest at such rate as determined by the board of directors. Dividends on Trust shares are paid to the Trust
and will be applied in the payment of such interest. Trust shares may only be released to participants as described below.
Under the rules of the Trust, participants may be offered options to acquire ordinary shares (“Share options”). This entails that
employees are offered options to purchase or subscribe for shares. Each share option will confer to the holder the right to purchase
or subscribe for one ordinary share. This is based on the terms and conditions of the Trust. Share options may only be released to
participants as described below.
Under the rules of the Trust, participants may be granted options to enter into agreements with the company to acquire ordinary
shares (“Allocation shares”). These options need to be exercised by the employee within 12 months, failing which the option will
automatically lapse. The exercise of the option must be accompanied by a deposit as determined by the board (if any). The
participant will be entitled to take delivery of and pay for allocation shares which are subject to the rules as described below.
Certain managerial employees are eligible to participate in the Trust. The amount payable by a participant for Trust Shares, Share
Options or Allocation Shares is the closing price at which shares are traded on the JSE Securities Exchange South Africa on the
trading date immediately preceding the date upon which the board authorised the grant of the opportunity to acquire relevant
Trust Shares, Share Options or Allocation Shares, as the case may be, to a participant. Pursuant to a recent resolution of the
board of directors of Sappi (the “board”) passed in accordance with the rules of the Trust, Trust Shares may be released from
the Trust to participants, Share Options may be exercised by participants and Allocation Shares may be delivered to participants
as follows:
(i) 20% of the total number of shares after one year has elapsed from the date of acceptance by the participant of the grant;
(ii) up to 40% of the total number of shares after two years have elapsed from the date of acceptance by the participant of the grant;
(iii) up to 60% of the total number of shares after three years have elapsed from the date of acceptance by the participant of the grant;
(iv) up to 80% of the total number of shares after four years have elapsed from the date of acceptance by the participant of the grant and
(v) the balance of the shares after five years have elapsed from the date of acceptance by the participant of the grant; provided that
the board may, at its discretion, anticipate or postpone such dates. Prior to the General Meeting held on 02 March 2000, the Trust
provided that Share Options will lapse, among other reasons, if they remain unexercised after the tenth anniversary of the
acceptance and that Trust Shares and Allocation Shares must be paid for in full by participants by no later than the tenth
anniversary of the acceptance. However, the General Meeting approved an amendment to decrease the aforesaid ten-year period
to eight years, in respect of offers made since 03 December 1999. The board has resolved that the benefits under the Trust of
Participants will be accelerated in the event of a change of control of the company, as defined in the Trust, becoming effective (a)
if, in concluding the change of control, the board in office at the time immediately prior to the proposed change of control being
communicated to the board ceases to be able to determine the future employment conditions of the group’s employees or (b)
unless the change of control is initiated by the board. Participants are entitled to require such acceleration by written notice
to the company within a period of 90 days after the date upon which such change of control becomes effective.
sappi limited
page 118 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
34. Equity compensation benefits (continued)During the year 1,839,100 allocations were offered. The allocations were accepted by the participants as follows:
Trust Shares 43,500
Share Options 1,248,250
Allocation Shares 479,650
1,771,400
Declined 67,700
1,839,100
Trust shares, share options and allocation shares activity was as follows during the financial years ended September 2004 and 2003:
Weighted Weightedaverage average
Trust Share exercise Allocation exerciseshares options price (ZAR) * shares price (ZAR) * Total
Outstanding at September 2002 2,104,603 3,080,817 55.55 2,778,990 67.74 7,964,410
Offered and accepted 135,150 1,215,100 113.89 463,150 112.88 1,813,400
Paid for (191,405) (490,855) 35.79 (245,440) 36.41 (927,700)
Returned, lapsed and forfeited 1,569 (5,400) 78.62 (26,750) 105.96 (30,581)
Outstanding at September 2003 2,049,917 3,799,662 76.49 2,969,950 76.95 8,819,529
Offered and accepted 43,500 1,248,250 79.25 479,650 79.25 1,771,400
Paid for (215,705) (485,952) 38.74 (218,300) 34.12 (919,957)
Returned, lapsed and forfeited (43,500) (416,365) 77.74 (204,350) 113.64 (664,215)
Outstanding at September 2004 1,834,212 4,145,595 82.05 3,026,950 77.02 9,006,757
* The share options are issued in South African Rands.
The fair value of Trust shares held at September 2004 was US$9.9 million (September 2003: US$8 million).
Share options and allocation shares to executive directors, which are included in the above figures, are as follows:
Number of options/shares
At beginning of year 1,331,000
Share options and Allocation shares granted 175,000
Share options and Allocation shares exercised/declined (159,000)
At end of year 1,347,000
Share options and allocation shares exercised by executive directors during the year had an average exercise price per share of
US$5.59 and an average market price per share of US$13.31.
sappi limited page 119
34. Equity compensation benefits (continued)The following table sets forth certain information with respect to the 1,347,000 Share options and Allocation shares granted by
Sappi to executive directors:
Issue date Number of options/shares Expiry date Exercise price (ZAR)
24 February 1997 40,000 24 February 2007 34.90
19 January 1998 30,000 19 January 2008 19.90
27 May 1998 100,000 27 May 2008 27.90
11 December 1998 60,000 11 December 2008 22.10
01 April 1999 48,000 01 April 2009 21.30
09 June 1999 44,000 09 June 2009 39.00
21 December 1999 230,000 21 December 2007 53.85
15 January 2001 125,000 15 January 2009 49.00
28 March 2002 105,000 28 March 2010 147.20
30 January 2003 250,000 30 January 2011 115.00
13 February 2003 140,000 13 February 2011 112.83
14 January 2004 175,000 14 January 2012 79.25
1,347,000
Refer to note 43 for further information on directors participation in the Sappi Limited Share Incentive Trust Loans to executive
directors relating to Trust shares at September 2004 totalled US$0.2 million (September 2003: US$1 million). No new loans have
been granted to the executive directors since 28 March 2002.
35. Financial instrumentsThe group’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, certain investments, accounts
payable, borrowings and derivative instruments.
1. Risk management objectives and policies
The principal market risks (that is the risk of loss arising from adverse changes in market rates and prices) to which Sappi is exposed
through financial instruments are:
– interest rates on interest-bearing borrowings;
– foreign exchange rates, generating translation and transaction gains and losses;
– fair value fluctuations on derivative instruments and fixed-rate borrowings; and
– credit risk.
A treasury committee consisting of senior management of the group meets regularly to review net currency, interest rate, derivative
instruments, group funding, credit insurance and monetary investment risks and exposures. Treasury management strategies are
also evaluated and revised where necessary.
Interest rate risk
Sappi has a policy of maintaining a balance between fixed rate and variable rate loans that enables it to minimise, on a cost effective
basis, the impact on reported earnings while maintaining a reasonably competitive, market-related cost of funding. The specific
balance is determined separately for the European, North American and southern African businesses of Sappi to reflect more
accurately the different interest rate environments in which these businesses operate. We monitor market conditions and may utilise
interest rate derivatives to alter the existing balance between fixed and variable interest loans in response to changes in the interest
rate environment.
sappi limited
page 120 sappi limited
35. Financial instruments (continued)Currency risk
Sappi’s foreign exchange policy consists of the following principal elements:
– The majority of the borrowings in each country are made in the currency of that country.
– Translation risks are not hedged. In the past we managed our relative debt and equity ratios by financing our investments in
different currencies with similar debt to asset ratios. This approach changed a few years ago due to changes in our finance
arrangements.
– All external borrowings raised in currencies other than the domestic operating currency of the borrowing entity are immediately and
continuously protected by forward exchange contracts.
– All consummated (i.e. invoiced) sales and purchases in foreign currencies are initially netted on a global basis, with the resulting net
exposure generally being covered by forward exchange contracts against subsequent fluctuations in exchange rates.
– Hedging against trading transactions not yet invoiced is limited. Deviations from these rules require specific board approval.
The limitations referred to relate to:
– material capital expenditures for which forward exchange contracts are always taken out as and when the expenditure is
committed; and
– anticipated exports and imports where the purchase of forward exchange contracts/currency options is restricted to a maximum
period of six months.
– No speculative positions are permitted.
Credit risk
A significant portion of the group’s sales and accounts receivable are from major customers. Where appropriate, credit insurance has
been taken out over the group’s trade receivables.
None of the group’s other receivable financial instruments represent a concentration of credit risk because the group has dealings
with a variety of major banks and customers world-wide.
2. Interest rate risk and currency risk
Interest-bearing borrowings
The table below provides information about Sappi’s non-current borrowings that are sensitive to changes in interest rates. The table
presents principal cash flows by expected maturity dates. The average fixed effective interest rates presented below are based on
weighted average contract rates applicable to the amount expected to mature in each respective year. Forward looking average
variable effective interest rates for the financial years ended September 2005 and thereafter are based on the yield curves for each
respective currency as published by Reuters on 24 September 2004. The information is presented in US$, which is the group’s
reporting currency.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 121
35. Financial instruments (continued)Expected maturity date
Total 2004 2003
Carrying Fair Fair
US$ equivalent in million 2005 2006 2007 2008 2009 2010+ Value Value Value
US DollarFixed rate – – – – – – – – 104
Average interest rate (%) – – – – – – – – –Variable rate (1) 26 17 (1) (1) (1) 844 884 922 812
Average interest rate (%) 5.52 5.57 2.58 2.58 2.58 8.35 8.25EuroFixed rate 49 50 46 48 4 501 698 745 724
Average interest rate (%) 5.46 5.48 5.42 5.43 7.46 4.11 4.50Variable rate (1) 123 – – – – – 123 123 115
Average interest rate (%) 4.84 – – – – – 4.84RandFixed rate 42 45 11 12 31 25 166 131 42
Average interest rate (%) 11.24 11.22 11.59 11.68 10.93 11.33 11.24Variable rate (1) 124 62 – – – – 186 186 145
Average interest rate (%) 9.34 9.73 – – – – 9.47TotalFixed rate 91 95 57 60 35 526 864 876 870
Average interest rate (%) 8.10 8.23 6.64 6.65 10.53 4.45 5.79Variable rate (1) 273 79 (1) (1) (1) 844 1,193 1,231 1,072
Average interest rate (%) 6.96 8.82 2.34 2.58 2.58 8.35 8.09
Fixed and variable 364 174 56 59 34 1,370 2,057 2,107 1,942
Current portion 364 364 170Long-term portion 1,693 1,743 1,772
Total Interest-bearing borrowings (refer note 19) 2,057 2,107 1,942
The fair value of non-current borrowings is estimated by Sappi based on the rates from market quotations for non-current borrowings with fixed interest rates and on quotations provided by internationally recognised pricing services for notes, exchange debentures and revenue bonds.
(1) Includes fixed rate loans where fixed-for-floating rate swap contracts have been used to convert the exposure to floating rates. Some of the swaps do
not cover the full term of loans.
The range of interest rates in respect of all non-current borrowings comprising both fixed and floating rate obligations, is between 2.34% and 11.68% (depending on currency). At September 2004, 42.0% of Sappi’s non-current borrowings were at fixed rates of interest, and 58.0% were at floating rates. Floating rates of interest are based on LIBOR (London Interbank Offered Rate), on EURIBOR (European Interbank Offered Rate) and on JIBAR (Johannesburg Interbank Agreed Rate). Fixed rates of interest are based on contract rates.
Sappi’s southern African operations have in the past been particularly vulnerable to adverse changes in short-term domestic interest rates, as a result of the volatility in interest rates in South Africa. During 2004 domestic interest rates have decreased from 9.18% to 7.25% for the 3-month JIBAR.
sappi limited
page 122 sappi limited
35. Financial instruments (continued)Interest rate derivatives
Sappi uses interest rate options, caps, swaps and interest rate and currency swaps as a means of managing interest rate risk
associated with outstanding debt entered into in the normal course of business. Sappi does not use these instruments for
speculative purposes. Interest rate derivative financial instruments are subject to hedge accounting, where applicable and as
appropriate under South African and US accounting standards.
As at September 2004, Sappi had two Rand denominated interest rate swap contracts outstanding. They were for a total amount of
US$88.3 million and had a favourable fair value of US$2.4 million. The two interest swaps converted fixed interest rates of 17.65%
and 18.00%, respectively into variable rates.
In addition to the four existing USD interest swaps converting fixed rates of 6.75% and 7.5% into variable rates, Sappi entered into
three additional USD interest rate swap contracts in 2004 for the total amount of US$106.6 million, converting USD fixed interest
rates of 5.90%, 7.38% and 6.65% respectively, into 6-month USD Libor rates. All swaps are subject to hedge accounting in order to
reduce as much as possible the fair value exposure. As the critical terms of the swaps match the critical terms of the underlying
debt, the hedge is highly effective. Changes in the fair value of the underlying debt, attributable to changes in the credit spread are
excluded from the hedging relationship.
At September 2004, Sappi had in total seven USD swap contracts outstanding for a total amount of US$856.6 million and had a
total fair value of US$11.5 million.
In addition, as at September 2004, Sappi had one cap with a fair value of zero.
At September 2004, Sappi had an interest rate and currency swap contract outstanding for the amount of US$350.0 million with
a fair value of US$66.1 million. This swap converts future USD cash flows into GBP and fixed USD interest rates into GBP interest
rates.
As at September 2004 the South African operations had one IRCS contract outstanding for the amount of US$44.3 million with
a negative fair value of US$10.8 million, swapping USD cash flows into ZAR and converting variable USD interest rates into ZAR
variable interest rates.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 123
35. Financial instruments (continued)Fair value *
favourableNominal value (unfavourable)
Instrument Interest Rate Maturity date US$ million US$ million
Caps:
19.3% November 2005 41 –
Interest rate swaps:
17.65% to variable August 2005 78 5
18.00% to variable March 2005 54 (2)
6.75% to variable June 2012 250 1
6.75% to variable June 2012 200 (1)
6.75% to variable June 2012 50 1
7.50% to variable June 2012 250 4
5.90% to variable November 2013 28 2
7.38% to variable July 2014 44 2
6.65% to variable October 2014 35 2
Interest rate and currency swaps:
US Dollar 6.30% into
Pound Sterling 6.66% December 2009 350 66
US Dollar LIBOR + 2.20%
into Rand JIBAR + 1.99% February 2006 44 (11)
Total 69
* This refers to the carrying value.
The fair value of interest rate options, caps, swaps and IRCS is the estimated amount that Sappi would pay or receive to terminate
the agreement at the balance sheet date, taking into account current interest rates and the current creditworthiness of the
counterparties.
sappi limited
page 124 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
35. Financial instruments (continued)3. Fair values
All financial instruments are carried at fair value or amounts that approximate fair value, except the non current interest-bearing
borrowings at fixed rates of interest. The carrying amounts for cash, cash equivalents, accounts receivable, certain investments,
accounts payable and current portion of interest-bearing borrowings approximate fair value due to the short-term nature of these
instruments. Where these fixed rates of interest have been hedged into variable rates of interest, and where hedge accounting has been
applied, then the non-current interest-bearing borrowings are carried at fair value. The fair value of these borrowings was estimated
based on quotations from the company’s investment bankers. No financial assets were carried at an amount in excess of fair value.
US$ million 2004 2003
Other financial assets include the fair value of the following derivative instruments
Non-current 87 62
Interest rate swaps 9 15
Interest rate and currency swaps 78 44
Swaptions – 3
Current 7 7
Interest rate swaps 7 –
Foreign currency forward exchange contracts – 7
94 69
4. Foreign currency forward exchange contracts
The group’s foreign currency forward exchange contracts at September 2004 are detailed below.
2004 2003Fair value * Fair value *
(unfavourable) (unfavourable) US$ million Contract amount favourable Contract amount favourable
Foreign currency
Bought: US Dollar 60 – 53 (1)
Euro 63 1 123 –
Sold: US Dollar (131) 1 (120) 8
Euro (427) (4) (384) (1)
(435) (2) (328) 6
* This refers to the carrying value.
The fair value of foreign currency contracts was estimated by the group based upon market quotations. These foreign currency
contracts will mature during the year ended September 2005.
All forward currency exchange contracts and options are valued at fair value with the resultant profit or loss included in the net
finance costs for the period.
sappi limited page 125
sappi limited
36. Segment informationFor management purposes, the group has two reporting segments which operate as separate business units: Sappi Fine Paper
and Sappi Forest Products. These divisions are the basis on which the group reports its primary segment information. Sappi Fine
Paper produces coated and uncoated fine paper and speciality paper grades. Sappi Forest Products produces commodity paper
products, pulp and forest and timber products. The regional information shows North America, Europe and southern Africa.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (refer
note 2). The group accounts for intragroup sales and transfers as if the sales or transfers were to third parties, that is, at current
market prices. All such sales and transfers are eliminated on consolidation.
Sappi Fine Paper Sappi Forest Products Corporate and other GroupUS$ million 2004 2003 2004 2003 2004 2003 2004 2003
External sales (1) 3,811 3,557 917 742 – – 4,728 4,299
Intragroup sales 471 468 508 418 – – 979 886
Total sales 4,282 4,025 1,425 1,160 – – 5,707 5,185
Operating profit (2) (3) 6 164 191 113 (9) (5) 188 272
Depreciation 343 307 64 44 1 1 408 352
Amortisation and fellings (3) 2 – 55 43 – – 57 43
Asset impairment (4) – 32 – – – – – 32
Other non-cash expenses (3) 75 1 (107) (33) (20) (22) (52) (54)
Capital expenditures 187 195 146 101 1 – 334 296
Total assets 4,059 3,953 1,641 1,459 406 405 6,106 5,817
Operating assets (5) 3,980 3,866 1,561 1,275 35 51 5,576 5,192
Operating liabilities (6) 733 622 221 231 58 63 1,012 916
Net operating assets (7) (8) 3,177 3,176 1,296 1,007 (46) (19) 4,427 4,164
Property, plant and equipment 2,890 2,926 779 627 1 1 3,670 3,554
SappiSappi Fine Paper Forest Products
North Southern Southern CorporateAmerica Europe Africa Africa and other Group
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
Sales (1) 1,373 1,384 2,127 1,903 311 270 917 742 – – 4,728 4,299
Operating
(loss) profit (2) (3) (92) 11 83 118 15 35 191 113 (9) (5) 188 272
Capital expenditures 75 78 102 104 10 13 146 101 1 – 334 296
Operating assets (5) 1,671 1,687 2,101 1,990 208 189 1,561 1,275 35 51 5,576 5,192
Net operating
assets (7) (8) 1,351 1,438 1,673 1,607 153 131 1,296 1,007 (46) (19) 4,427 4,164
Property, plant
and equipment 1,226 1,287 1,527 1,512 137 127 779 627 1 1 3,670 3,554
page 126 sappi limited
US$ million 2004 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
36. Segment information (continued)Sales by geographical location of customers
North America 1,468 1,517
Europe 1,951 1,737
Southern Africa 694 574
Asia and other 615 471
4,728 4,299
(1) Sales where the products is manufactured.
(2) Operating profit has been restated for SAICA circular 3/2004.
(3) Restated for AC137. Refer to note 3.
(4) September 2003 – Including Westbrook paper machine 14 impairment costs.
(5) Operating assets consist of property, plant and equipment, non-current assets (excluding deferred taxation) and current assets (excluding cash).
(6) Operating liabilities consist of trade payables, other payables and provisions.
(7) Net operating assets consist of operating assets less operating liabilities, adjusted for taxation payable and dividends payable.
(8) Comparative amounts have been reclassified between deferred tax and current tax.
37. Related party transactionsShareholders
The company’s shares are widely held by shareholders across the world. The principal shareholders of the company are disclosed
in this annual report on page 58.
Directors
Details relating to executive and non-executive directors’ remuneration, interests and participation in the Sappi Limited Share
Incentive Trust are disclosed in notes 41 and 43.
Interest of directors in contracts
None of the directors have a material interest in any transaction with the company or any of its subsidiaries, other than those on a
normal employment basis.
Managerial employees
Details regarding the participation of certain managerial employees in the Sappi Limited Share Incentive Trust are disclosed in
note 34.
Subsidiaries
Details of income from subsidiaries are disclosed in the Condensed company income statement on page 148. Details of investments
in subsidiaries are disclosed in Annexure A on page 151.
sappi limited page 127
38. Events after balance sheet dateJoint venture with Shandong Chenming Paper Holdings Limited
In October 2004 Sappi announced that it had reached an agreement to acquire 34% of Jiangxi Chenming Paper Company Limited (“Jiangxi Chenming”) in a joint venture with Shandong Chenming Paper Holdings Limited (“Shandong Chenming”) (47.2%), together with Jiangxi Paper Industry Company Limited (3.8%), Shinmoorim Paper Manufacturing Company Limited (“Shinmoorim”) of SouthKorea (7.5%), and the International Finance Corporation (“IFC”) (7.5%). Sappi’s equity contribution will be approximately US$60 million.This transaction is subject to customary regulatory approvals.
Jiangxi Chenming is constructing a 350,000 ton per year light-weight coated paper machine, together with a bleached thermo mechanical pulp (BTMP) mill and de-inking plant and ancillary power plant and transportation infrastructure in Nanchang, the capital of Jiangxi Province which is located in southeast China. The total cost of the project is an estimated US$487 million and constructionis well advanced with the mill scheduled to start delivering paper in the first half of 2005. The mill is the sole asset of the company.
The IFC has been mandated to arrange the debt financing for the project, which is without recourse to Sappi. The IFC will hold 7.5% of the equity and has also approved US$60 million in long-term debt for its own account.
Sappi will nominate the Chief Financial Officer of Jiangxi Chenming.
39. Environmental mattersSappi operates in an industry subject to a wide range of environmental laws and regulations in the various jurisdictions in which it operates, and these laws and regulations have tended to become more stringent over time. Typically, Sappi does not separately account for environmental operating expenses but does not anticipate any material expenditures related to such matters. Sappi does separately account for environmental capital expenditures. Sappi spent approximately US$14.4 million in financial year September 2004 (September 2003: US$18 million, September 2002: US$12 million) on capital projects that control air or water emissions or otherwise create an environmental benefit. Amounts to be spent in future years will depend on changes to existing environmental requirements and the availability of new technologies to meet such requirements.
In South Africa, requirements under the National Water Act, National Environmental Management Act and the Air Quality Bill mayresult in significant additional expenditures and/or operational constraints. Although we are uncertain as to the ultimate effect on our South African operations, our current assessment of the legislation is that any compliance expenditures or operational constraints will not be material to our financial condition.
Sappi Fine Paper North America is subject to stringent environmental laws in the United States. These laws include the Federal Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and their respective state counterparts. In April 1998, pursuant to its authority under the Clean Air Act and Clean Water Act, the US Environmental Protection Agency (“USEPA”) issued final regulations that impose air and water quality standards aimed at further reductions of air and water pollutants from certain pulp and paper mills, particularly those emitting wastewater resulting from bleaching operations. These regulations are generally referred to as the “cluster rules”. Sappi Fine Paper North America incurred US$71 million in capital improvements for cluster rule compliance at its Somerset and Muskegan mills. Sappi Fine Paper North America expects to incur between US$5 million to US$10 million in environmental compliance expenditure for the fiscal year ending September 2005.
In December 2003, Sappi Fine Paper North America received a notice of violation and a finding of violation from the USEPA, alleging violations of the Clean Air Act’s new source performance standards in connection with repairs performed at the Muskegon Mill in the early 1990s. Sappi Fine Paper North America has had discussions with the USEPA and asserted defences to the EPA’s allegations, and continues to pursue resolution of this matter.
In late July 2003, our subsidiary SD Warren Company was served with a lawsuit in the Muskegon County Circuit Court brought by ten Muskegon residents. The plaintiffs claim that pollutants, air contaminants, noise, dust, debris and bad odours have materially injured their persons and property, for which they are now seeking monetary damages, injunctive relief and attorney fees. The attorneys for the plaintiffs attempted to have the case certified as a class action, but this certification was defeated in June 2004. The plaintiffs then amended the complaint to add an additional fifty four plaintiffs.
sappi limited
page 128 sappi limited
40. Summary of differences between South African and United States Generally Accepted AccountingPrinciplesThe group’s accounts are prepared in accordance with South African GAAP, which differs in certain material respects from United
States GAAP. These differences relate principally to the following items, and the effects on net profit and shareholders’ equity are
shown in the following tables.
South African GAAP (SA GAAP) United States GAAP (US GAAP)
a. Pension programmes and post- SA GAAP requires the post- Upon the first time adoption of US GAAP
retirement medical benefits employment obligation or asset to in 1996, the group had to amortise on a
1. Transitional rules for initial applications be recognised immediately on straight line basis the original obligation
adoption of the standard. over a number of years equal to the
difference between: (a) the period from
the effective date of the relevant US
accounting standards to 1996; and
(b) 15 years. Subsequent changes in the
obligation or assets after initial adoption
are recognised in the year in which the
change occurs.
2. Recognition of pension asset Post-employment benefit assets can No such limitation exists under US GAAP.
only be recognised to the extent that
the asset will lead to a reduction in
future payments or a cash refund.
3. Additional minimum liability No requirement exists for the recognition An additional minimum liability test is
of an additional minimum liability under required to be performed and may require
SA GAAP. an additional liability to be recognised when
the accumulated benefit obligation exceeds
the plan assets.
An intangible asset is recognised for the
amount of the liability, limited to the
unrecognised prior service cost. The excess
is reported, net of related tax benefits, in
equity. This amounted to US$18 million at
September 2004 (September 2003:
US$4 million).
4. Recognition of past service costs The introduction of, or change in benefits The introduction of, or change in benefits
related to vested benefits to, a defined benefit plan should be to, a defined benefit plan should be
recognised as an income or expense recognised over the remaining service
immediately to the extent that the period or life expectancy of the
benefits are already vested. employees.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 129
40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)
South African GAAP (SA GAAP) United States GAAP (US GAAP)
b. Accounting for business combinations Past business combinations were treated differently under SA and US GAAP due to
differing standards at the time of the transactions. Differences will remain until the
related entities are disposed of as neither US GAAP nor SA GAAP required restatement
of previous business combinations when the accounting standards were changed.
Fair value differences are amortised over time. Differences which arose in the past
relate to:
1. Cost of acquisition Cost comprised the value of shares Cost includes the market value of shares
stipulated in the purchase agreement, issued at the date agreement is reached
the nominal value of debt issued and all and announced plus the present value of
costs related to the acquisition. debt issued. Only specified related costs
may be included in the purchase price.
2. Value of assets and liabilities acquired SA GAAP allowed either fair value or All assets and liabilities acquired are
book value to be assigned to the assets required to be recorded at fair value.
and liabilities recorded in the accounting
records of the entity that was acquired.
3. Provisions raised at acquisition. Provisions were raised for start-up, Only recognise the costs of a plan to
restructuring, rationalisation and all (1) exit an activity of an acquired company,
other incidental costs. (2) involuntary terminate employees of an
acquired company, or (3) relocate employees
of an acquired company as liabilities
assumed in a purchase business combination.
4. Treatment of goodwill Goodwill was allocated to the fair Goodwill is capitalised, but from
values of the assets acquired. The 01 October 2002, is no longer amortised
excess of fair value of net assets and is subject to an impairment test
acquired over the cost of the acquired at least annually. Negative goodwill was
entity (commonly referred to as deducted from the fair value of the
negative goodwill) was taken non-current assets. Goodwill included
directly to reserves. under US GAAP amounts to US$174 million
(September 2003: US$174 million).
sappi limited
page 130 sappi limited
40. Summary of differences between South African and United States Generally Accepted AccountingPrinciples (continued)
South African GAAP (SA GAAP) United States GAAP (US GAAP)
c. Pre-commissioning expenses All expenses incurred on capital Only direct, incremental costs incurred prior
capitalised on capital projects projects,including finance costs and to the commencement of operations and
other fixed costs, are capitalised until that can be specifically identified and
the asset is fully commissioned. segregated from ordinary, recurring operating
expenses, are capitalised as part of the start-
up cost.
d. Loans to participants of Sappi Amounts loaned to participants to Amounts loaned to participants to purchase
Limited Share Incentive Trust purchase the company’s shares are the company’s shares where the shares are
included in other non-current assets. held as security for the repayment of the loan
are reported as a reduction to shareholders
equity.
e. Sale and leaseback transactions Profit is recognised on the sale of Profit on such sale of assets is deferred and
– operating leases assets subject to operating leaseback recognised in income over the lease term.
agreements.
f. Asset impairments An asset impairment is recognised if To determine whether an asset impairment
its carrying amount exceeds the exists, the undiscounted cash flows are
discounted estimated future cash flows. compared to the carrying amount of the
asset. Recognition of an asset impairment is,
however, based on fair value, which is
generally estimated based on discounted
cash flows.
As a result of the difference in these policies, there may be an impairment recorded in
certain periods under SA GAAP which do not meet the threshold for impairment under
US GAAP.
g. Plantations Plantations are stated at their fair value, Plantations are recorded at cost less
with the fair value being determined as depletions. Costs include all expenditure
the delivered market price less cost incurred on acquisition, forestry
of delivery. The change in fair value is development, establishment and
recognised in income in the period in maintenance, and finance charges.
which it arises. Depletions mainly include the cost of fellings.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 131
40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)
South African GAAP (SA GAAP) United States GAAP (US GAAP)
h. Other
1. Operating lease payments Lease payments under operating lease US GAAP has always required rental on
arrangements entered into prior to operating lease to be charged as an
01 October 2000 are expensed as paid. expense on a straight-line basis, unless
The current SA GAAP accounting another systematic and rational basis is
treatment does not differ from the more representative of the time pattern in
current treatment under US GAAP. which use benefit is derived from the
leased property, in which case that basis
shall be used.
i. Income tax Under SA GAAP, current and deferred US GAAP requires that an additional
tax assets and liabilities are measured liability be accrued for the estimated
at the tax rate applicable to undistributed income tax (Secondary Tax on
profits and the income tax consequences Companies) that would be payable upon
of Secondary Tax on Companies (STC) distribution of relevant undistributed
on dividends are recognised when a reserves, including those of its subsidiaries.
liability to pay the dividends is recognised. Under US GAAP, deferred taxes have
been calculated using the distributed rate.
j. Net presentation of assets and liabilities SA GAAP states that financial assets US GAAP restricts the ability to offset
and liabilities should be offset and the to where the right of set off exists
net amount reported in the balance sheet between two parties (that is, where
when an enterprise: (a) has a legally a debtor-creditor relationship exists),
enforceable right to set off the recognised however, US GAAP does not permit
amounts; and (b) intends either to settle set off under three party netting
on a net basis, or to realise the asset agreements. Consequently, the relevant
and settle the liability simultaneously. assets and liabilities would be increased
by US$176 million for September 2004
(September 2003: US$134 million) in a
US GAAP balance sheet, with no effect
on net income or shareholders’ equity.
sappi limited
page 132 sappi limited
40. Summary of differences between South African and United States Generally Accepted AccountingPrinciples (continued)
South African GAAP (SA GAAP) United States GAAP (US GAAP)
k. Stock compensation
1. Stock options with an exercise price less Under IAS (SA GAAP), no compensation Under US GAAP, the group follows the
than the quoted market value of the expense is recorded on stock options methodology in APB Opinion 25,
underlying stock on the date of grant granted. Accounting for Stock. This intrinsic value
of the stock options are recorded as deferred
compensation within shareholders’ equity and
recognised in the profit and loss account
(income statement) over the vesting period of
the stock options. The stock options issued
are recorded as share issue premium.
2. Repricing of stock options for Under IAS (SA GAAP), no US GAAP requires companies to record an
credit sale scheme. compensation expense is recorded initial expense upon conversion of recourse
on stock options granted. loans to non-recourse loans and apply
variable plan accounting thereafter.
Previously long-term liabilities were overstated under US GAAP due to incorrect computation of imputed interest on a zero coupon
bond entered into in December 1997 and settled in December 1999. The US GAAP reconciliation has been restated for this
overstatement. US GAAP equity was previously US$1,909 million in 2003 and has increased by US$8 million. The effect on
US GAAP net income, basic earnings per share and diluted earnings per share is negligible for each of the periods presented.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 133
40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)Reconciliation of net profit to United States GAAP
Net profit determined under South African GAAP 98 143
Adjustments in respect of:
Pension programs and post-retirement medical benefits a (15) (15)
• Initial transitional rules application (2) 1
• Recognition of pension asset (12) (2)
• Recognition of past service costs related to vested benefits (1) (14)
Accounting for business combinations b 22 33
• Valuation of assets and liabilities and other 2 14
• Treatment of goodwill 20 19
Pre-commissioning expenses capitalised on capital projects c 2 1
Sale and leaseback transactions e 12 3
Plantations g (66) 8
Other h 1 –
Income tax i (7) (8)
Stock compensation k (6) –
Deferred taxation effect of adjustments 11 (11)
Total effect of United States GAAP adjustments (46) 11
Net profit determined under United States GAAP 52 154
– Basic earnings per share (US cents) 23 68
– Weighted average number of shares (millions) 225.0 227.6
– Diluted earnings per share (US cents) 23 67
– Diluted weighted average number of shares (millions) 226.9 230.0
US$ million note 2004 2003
sappi limited
page 134 sappi limited
US$ million note 2004 2003(As restated)
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)Reconciliation of shareholders’ equity to United States GAAP
Shareholders’ equity determined under South African GAAP 2,119 1,945
Adjustments in respect of:
Pension programs and post-retirement medical benefits a (144) (63)
• Initial transitional rules application 7 8
• Recognition of pension asset 74 78
• Additional minimum liability (221) (136)
• Recognition of past service costs related to vested benefits (4) (13)
Accounting for business combinations b 133 111
• Cost of acquisition (3) (3)
• Valuation of assets and liabilities and other 47 45
• Treatment of goodwill 89 69
Pre-commissioning expenses capitalised on capital projects c (19) (20)
Loans to executive share purchase trust d (15) (16)
Sale and leaseback transactions e (9) (20)
Asset impairments f 8 7
Plantations g (49) 18
Other h (2) (3)
Income tax i (97) (79)
Stock compensation k (7) –
Deferred taxation effect of adjustments 79 37
Total effect of United States GAAP adjustments (122) (28)
Shareholders’ equity determined under United States GAAP 1,997 1,917
sappi limited page 135
40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)New accounting standards
The Accounting Practices Board (“APB”) issued statement AC138 “First-time adoption of IFRS” in August 2003. This statement
applies when an entity adopts International Financial Reporting Standards (“IFRS”) for the first time by an explicit and unreserved
statement of compliance with IFRS. This statement is applicable for an entity that applies IFRS for the first time in its financial
statements, for a period beginning on or after 01 January 2004. It sets out the procedures that an entity must follow when it adopts
IFRS for the first time as the basis for preparing its general purpose financial statements. Under the new JSE Listing Rules the group
needs to apply IFRS only for the year ended 30 September 2006. We are currently evaluating the impact on the group’s financial
statements, but do not expect the first-time adoption of IFRS in line with this statement to have a material effect on our financial
statements.
The APB issued statement IFRS 2 (AC139) “Share-based payments” in February 2004 and will be effective for the group’s 2006
year-end. The objective of this statement is to ensure that an entity recognises all share-based payment transactions in its financial
statements, measured at fair value, so as to provide high quality, transparent and comparable information to users of financial
statements. The group will adopt AC139 when it becomes effective and is currently evaluating the effects of the statement.
The APB issued statement IFRS 3 (AC140) “Business combinations” in March 2004 and will be effective for the group’s 2005
year-end. The objective of this statement is to improve the quality of, and seek international convergence on, the accounting for
business combinations. The group will adopt AC140 when it becomes effective and do not expect the adoption of the new
statement to have a material effect on our financial statements.
The APB issued statement IFRS 5 (AC142) “Disposal of non-current assets and presentation of discontinued operations” in March
2004 and will be effective for the group’s 2006 year-end. The objective of this statement is to improve the information in financial
statements about assets and disposal groups that are to be disposed of and discontinued operations. The group will adopt
AC142 when it becomes effective and is currently evaluating the effects of the statement.
The APB issued statement AC501 “Accounting for South African secondary tax on companies (STC)” in November 2003. This
statement is effective for the group’s 2005 year-end. This statement addresses the accounting treatment and disclosure requirements
of STC in an entity’s financial statements. The group will adopt AC501 when it becomes effective. This will result in an increase in
shareholders’ equity and deferred tax assets of US$38 million at September 2004 and an increase in taxation expense of approximately
US$9 million in the year ending September 2005.
The APB issued Exposure Draft (“ED”) ED169 “Changes in decommissioning, restoration and similar liabilities” in September 2003
and does not yet have an effective date for implementation. The objective of this exposure draft is to address the accounting for
changes in decommissioning, restoration and similar liabilities. The group will adopt ED169 when it becomes effective and is currently
evaluating the effects of the exposure draft, but do not expect it to have a material effect on our financial statements.
The APB issued ED172 “Determining whether an arrangement contains a lease” in January 2004 and does not yet have an effective
date for implementation. The objective of this exposure draft is to provide guidance for when certain arrangements should be
accounted for as a lease. The group will adopt ED172 when it becomes effective and is currently evaluating the effects of the
exposure draft, but do not expect it to have a material effect on our financial statements.
The APB issued its improved standards under the “Improvements project” in December 2003. This project is on improvements to
South African Accounting Standards and proposes substantial revisions to certain standards and lesser revisions to some others.
The group will adopt the reissued standards in financial year March 2006 and is currently evaluating the effects of these reissued
statements.
sappi limited
page 136 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
41. Directors’ remunerationNon-executive directors
Directors are normally remunerated in the currency of the country in which they live or work from. The remuneration is translated into
US Dollars (the group’s reporting currency) at the average exchange rates prevailing during the reporting year. Directors’ fees are
established in local currencies to reflect market conditions in those countries. Non-executive directors’ fees reflect their services as
directors and services on various sub-committees on which they serve, and the quantum of committee fees depends on whether
the director is an ordinary member or a chairman of the committee.
The extreme volatility of currencies, in particular the Rand/US Dollar exchange rate in the past few years, caused severe distortion of
the relative fees paid to individual directors.
Non-executive directors’ fees are proposed by the Executive Committee, agreed by the Human Resources Committee, and
approved by the board.
2004 2003
Consul- Consul-
Board Committee Travel tancy/ Board Committee Travel tancy
Director fees fees allowance Retainer Total fees fees allowance fees Total
US$
DC Brink 23,944 27,061 8,000 – 59,005 19,208 18,007 6,000 – 43,215
TL de Beer (6) 11,972 21,699 4,000 – 37,671 19,208 32,413 6,000 – 57,621
JS Chalsty (6) 20,000 15,000 4,000 – 39,000 40,000 35,000 10,000 – 85,000
M Feldberg 40,000 15,000 8,000 – 63,000 40,000 – 6,000 – 46,000
MR Haymon (1) 40,000 – 10,000 63,750 113,750 30,000 – 6,000 86,250 122,250
JE Healey (2) 10,000 3,333 4,000 – 17,333 – – – – –
DNA Hunt-Davis (6) 11,972 13,468 4,000 – 29,440 19,208 29,612 6,000 – 54,820
K de Kluis 47,337 72,344 8,000 – 127,681 42,405 55,740 8,000 – 106,145
D Konar 23,944 22,447 8,000 – 54,391 19,208 12,005 6,000 – 37,213
HC Mamsch (3) 35,503 3,948 2,000 – 41,451 – – – – –
B Radebe (4) 9,976 – 4,000 – 13,976 – – – – –
FA Sonn 23,944 7,482 8,000 – 39,426 19,208 6,002 6,000 – 31,210
E van As 95,774 – 8,000 124,705 228,479 – – – – –
AGJ Vlok (5) – – – – – 9,604 – 4,000 – 13,604
394,366 201,782 80,000 188,455 864,603 258,049 188,779 64,000 86,250 597,078
(1) Appointed as non-executive director in January 2003, retired as executive director in December 2002.
(2) Appointed in July 2004.
(3) Appointed in January 2004.
(4) Appointed in May 2004.
(5) Retired in March 2003.
(6) Retired in March 2004.
sappi limited page 137
41. Directors’ remuneration (continued)Executive directors (5)
2004
US$
MR Haymon (2) – – – – – –
JL Job 385,766 129,663 2,682 104,469 – 622,580
JCA Leslie (1) 932,056 296,999 7,003 240,939 – 1,476,997
W Pfarl 618,672 104,706 – 139,790 – 863,168
WH Sheffield (4) (6) 1,427,678 259,279 2,341 4,147 11,093 1,704,538
DG Wilson 222,908 110,755 5,764 60,988 – 400,415
E van As (3) 106,199 431,508 973 28,212 – 566,892
3,693,279 1,332,910 18,763 578,545 11,093 5,634,590
2003
US$
MR Haymon (2) 182,307 – – 8,343 7,547 198,197
JL Job (8) 221,434 180,347 3,917 61,227 – 466,925
JCA Leslie (1) 382,864 – 601 103,265 – 486,730
W Pfarl 541,853 347,876 – 120,392 – 1,010,121
WH Sheffield (4) 644,178 387,640 19,222 180,635 61,398 1,293,073
DG Wilson 175,832 140,150 4,008 48,441 – 368,431
E van As (3) 517,835 433,752 4,630 136,309 – 1,092,526
2,666,303 1,489,765 32,378 658,612 68,945 4,916,003
(1) Appointed as executive director in April 2003.
In terms of his contract with the company, Mr Leslie receives Sappi Limited shares as a performance bonus, should the
Shareholder Return on the shares in Sappi Limited equal or exceed a comparator group of other international pulp and paper
companies for each of the three year periods ending December 2003, December 2004 and December 2005. Depending on the
quantum by which the shareholder return exceeds the comparator group in each four year grouping, Mr Leslie could receive up
to 16,667 shares. At December 2003 he received 16,667 shares.The company has also guaranteed Mr. Leslie a minimum annual
pension subject to various conditions being met.
(2) Retired as executive director in December 2002, appointed as non-executive director in January 2003.
(3) Relinquished his executive duties in June 2003. From that date until November 2003, Mr van As participated in ensuring a smooth transition
to Mr Leslie, the new Chief Executive Officer.
(4) Resigned as executive director in November 2003.
(5) Executive directors are paid remuneration packages which aim to be competitive in the countries in which they live and work, and they are generally
paid in the currency of those countries.
(6) The portion of salary relating to termination is US$1,313,743.
(7) Bonuses and performance related payments are in respect of the previous year’s performance paid in the current year.
(8) In terms of his contract with the company, Dr Job will receive 12,000 restricted shares, which will vest equally over a two-year period ending December 2004 and
December 2005.
Contributions Benefit
Bonuses and Sums paid paid under received
performance- by way pension and from Credit
related of expense medical aid Scheme Total
Director Salary payments (7) allowance scheme Share Funding US$
sappi limited
page 138 sappi limited
41. Directors’ remunerationOur pay philosophy aims to provide executives with remuneration which allows them to enjoy similar and appropriate standards of
living and at the same time to create wealth equally no matter where they live and work.
Whilst the payment of executives in different currencies creates perceived inequities, due attention is given to ensure that internal
equity exists and is maintained, through comparisons against cost of living indices and the manner in which pay is structured in
the various countries.
Bonus and performance related payments are based on corporate and individual performance. Under this, executives may be
awarded up to 110% of their annual salary if group and personal performance objectives as agreed by the Human Resources
Committee are met. Bonuses relate to amounts paid in the current year, but based on the previous year’s performance.
Average exchange rates for the year concerned are again applied in the tables in converting the currency of payment into
US Dollars.
Details of directors’ service contracts
The executive directors have service contracts with notice periods of two years or less. These notice periods are in line with
international norms for executive directors.
The non-executive directors do not have service contracts with the company.
None of the directors have provisions for pre-determined compensation on termination of their contracts exceeding two years’ gross
remuneration and benefits in kind.
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 139
sappi limited
42. Directors’ interestsThe following table sets out the directors’ interests in the shares in Sappi Limited. For the purpose of this table, directors’ interests are those in shares owned either directly or indirectly as well as those shares in respect of which directors have vested obligations to purchase shares or repay loans in terms of the Sappi Limited Share Incentive Trust.
2004 2003Indirect Indirect
Direct interests interests Direct interests interests
Vested Vestedobligations to obligations to
purchase or purchase orBeneficial repay loans Beneficial Beneficial repay loans Beneficial
Non-Executive DirectorsDC Brink – – 10,000 – – 10,000TL de Beer (7) – – – 5,000 – –JS Chalsty (7) – – – 10,000 – –M Feldberg – – – – – –MR Haymon (5) 27,420 – – 30,420 – –JE Healey (2) – – – – – –DNA Hunt-Davis (7) – – – – – –K de Kluis 4,000 – – 4,000 – –D Konar – – – – – –HC Mamsch (3) – – – – – –B Radebe (4) – – – – – –FA Sonn – – – – – –AGJ Vlok (Retired as director in 2003) – – – – – –
Executive DirectorsJL Job – 83,000 – 1,941 46,000 –JCA Leslie (1) 16,667 – – – – –W Pfarl – 15,000 – – 26,000 –WH Sheffield (6) – – – – 23,000 –DG Wilson 2,992 59,000 – 2,992 41,000 –E van As 119,170 430,000 223,466 119,170 300,000 223,466
Total 170,249 587,000 233,466 173,523 436,000 233,466
(1) Appointed in April 2003
(2) Appointed in July 2004
(3) Appointed in January 2004
(4) Appointed in May 2004
(5) Retired as executive director in December 2002, appointed as non-executive director in January 2003
(6) Resigned as executive director in November 2003
(7) Retired as non-executive director in March 2004
Changes in directors’ interests in Sappi Limited shares after year-endOn 26 November 2004 Mr van As paid for 230,000 shares in terms of obligations under the Sappi Limited Share Incentive Scheme.These are now held as direct beneficial interests. In addition 119,170 shares which were held as direct beneficial and 127,789 shares which were held as indirect beneficial were transferred to a fund in which he has an indirect beneficial interest.
There have been no other changes in the above interests since 26 September 2004.
Directors’ interests in contractsThe directors have certified that they had no material interest in any significant transaction with either the company or any of its subsidiaries. Therefore there is no conflict of interest with regard to directors’ interests in contracts.
page 140 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
43. Directors’ participation in the Sappi Limited Share Incentive TrustShare options and allocation shares
The following table sets out all share options (whether vested or unvested) and all other unvested allocation shares granted to, and
exercised by, each executive director in terms of the Sappi Limited Share Incentive Trust during the year ended September 2004.
Details of sales are included in the second table. Non-executive directors do not have any Allocation shares or Share options.
Executive directors who retire have 12 months in which to settle their Share options and Allocation shares, unless extension is
granted by the Human Resources Committee of the board of directors.
Executive directors
JL Job JCA Leslie W Pfarl
Allocated Number of Allocated Number of Allocated Number ofprice shares price shares price shares
Outstanding at September 2003
Number of shares held 163,000 250,000 165,000
Issue 21 – – – – – –
Issue 22 – – – – ZAR19.90 16,000
Issue 22a – – – – – –
Issue 23 – – – – ZAR22.10 44,000
Issue 23a ZAR39.00 48,000 – – – –
Issue 24 ZAR53.85 30,000 – – ZAR53.85 50,000
Issue 25 ZAR49.00 25,000 – – ZAR49.00 25,000
Issue 25a – – – – – –
Issue 26 ZAR147.20 30,000 – – – –
Issue 27 ZAR112.83 30,000 – – ZAR112.83 30,000
Issue 27a – – ZAR115.00 250,000 – –
Offered and accepted
Issue 28 ZAR79.25 15,000 ZAR79.25 100,000 ZAR79.25 30,000
Issue 28a – – – – – –
Paid for
Number of shares 4,000 – 60,000
Weighted average allocated price ZAR39.00 – ZAR21.51
Returned, lapsed and forfeited
Number of shares – – –
Weighted average allocated price – – –
sappi limited page 141
sappi limited
WH Sheffield (1) DG WIlson E van As Total 2004 Total 2003
Allocated Number of Allocated Number of Allocated Number of Number of Number ofprice shares price shares price shares shares shares
95,000 178,000 480,000 1,331,000 1,007,000
– – – – ZAR34.90 40,000
– – – – ZAR19.90 30,000
– – – – ZAR27.90 100,000
– – – – ZAR22.10 60,000
– – ZAR21.30 48,000 – –
– – ZAR53.85 50,000 ZAR53.85 100,000
– – ZAR49.00 25,000 ZAR49.00 50,000
ZAR61.00 50,000 – – – –
ZAR147.20 15,000 ZAR147.20 25,000 ZAR147.20 50,000
ZAR112.83 30,000 ZAR112.83 30,000 ZAR112.83 50,000
– – – – – –
420,000
– ZAR79.25 30,000 – 175,000
– – –
40,000 – – 104,000 66,000
ZAR61.00 – – –
55,000 – – 55,000 30,000
ZAR112.78 – – –
page 142 sappi limited
43. Directors’ participation in the Sappi Limited Share Incentive Trust (continued)
JL Job JCA Leslie W Pfarl
Allocated Number of Allocated Number of Allocated Number ofprice shares price shares price shares
Outstanding at September 2004
Number of shares held 174,000 350,000 135,000
Issue 21 – – – – – –
Issue 22 – – – – – –
Issue 22a – – – – – –
Issue 23 – – – – – –
Issue 23a ZAR39.00 44,000 – – – –
Issue 24 ZAR53.85 30,000 – – ZAR53.85 50,000
Issue 25 ZAR49.00 25,000 – – ZAR49.00 25,000
Issue 25a – – – – – –
Issue 26 ZAR147.20 30,000 – – – –
Issue 27 ZAR112.83 30,000 – – ZAR112.83 30,000
Issue 27a – – ZAR115.00 250,000 – –
Issue 28 ZAR79.25 15,000 ZAR79.25 100,000 ZAR79.25 30,000
Issue 28a – – – – – –
Expiry dates
Issue 21 – – –
Issue 22 – – –
Issue 22a – – –
Issue 23 – – –
Issue 23a 09 Jun 09 – –
Issue 24 21 Dec 07 – 21 Dec 07
Issue 25 15 Jan 09 – 15 Jan 09
Issue 25a – – –
Issue 26 28 Mar 10 – –
Issue 27 13 Feb 11 – 13 Feb 11
Issue 27a – 30 Jan 11 –
Issue 28 14 Jan 12 14 Jan 12 14 Jan 12
Changes in executive directors’ share options and allocation shares after year-end
On 26 November Mr van As paid for 230,000 allocation shares expiring on 30 November 2004.
There have been no further movements in the above share options and allocation shares since 26 September 2004.
(1) Resigned as executive director in November 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 143
WH Sheffield (1) DG WIlson E van As Total 2004 Total 2003
Allocated Number of Allocated Number of Allocated Number of Number of Number ofprice shares price shares price shares shares shares
– 208,000 480,000 1,347,000 1,331,000
– – – – ZAR34.90 40,000
– – – – ZAR19.90 30,000
– – – – ZAR27.90 100,000
– – – – ZAR22.10 60,000
– – ZAR21.30 48,000 – –
– – ZAR53.85 50,000 ZAR53.85 100,000
– – ZAR49.00 25,000 ZAR49.00 50,000
– – – – – –
– – ZAR147.20 25,000 ZAR147.20 50,000
– – ZAR112.83 30,000 ZAR112.83 50,000
– – – – – –
– – ZAR79.20 30,000 – –
– – – – – –
– – 30 Nov 04
– – 30 Nov 04
– – 30 Nov 04
– – 30 Nov 04
– 01 Apr 09 –
– 21 Dec 07 30 Nov 06
– 15 Jan 09 30 Nov 06
– – –
– 28 Mar 10 30 Nov 06
– 13 Feb 11 30 Nov 06
– – –
– 14 Jan 12 –
sappi limited
page 144 sappi limited
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
43. Directors’ participation in the Sappi Limited Share Incentive Trust (continued)
Sales of Sappi Limited Share Incentive Trust sharesFor the year ended September 2004
Market Gains onNumber of Allocation value at shares sold
DIrector Date sold shares sold price date of sale US$ (1)
Executive directors
MR Haymon – Trust shares (2) – – – – –
MR Haymon – Share Options (2) – – – – –
JL Job Share Options 09 March 2004 4,000 ZAR39.00 ZAR92.50 32,574
MIS Bonus 09 March 2004 1,941 ZAR0.00 ZAR92.50 27,399
W Pfarl Options 12 December 2003 16,000 ZAR19.90 ZAR84.97 162,063
Options 12 December 2003 44,000 ZAR22.10 ZAR84.97 430,536
WH Sheffield (3) Trust shares 26 April 2004 40,000 ZAR61.00 ZAR94.50 202,612
Option 26 April 2004 40,000 ZAR61.00 ZAR94.50 199,468
Total 145,941 1,054,652
(1) Converted from South African Rands to US Dollars at the exchange rates on the date of sale
(2) Retired as executive director in December 2002, appointed as non-executive director in January 2003
(3) Resigned as executive director in November 2003
sappi limited page 145
Sales of Sappi Limited Share Incentive Trust sharesFor the year ended September 2003
Market Gains onNumber of Allocation value at shares sold
Date sold shares sold price date of sale US$ (1)
13 December 2002 6,000 ZAR22.10 ZAR112.00 60,670
13 December 2002 4,000 ZAR53.85 ZAR112.00 25,417
27 March 2003 6,000 ZAR19.90 ZAR99.00 62,586
27 March 2003 8,000 ZAR53.85 ZAR97.44 43,547
16 May 2003 6,000 ZAR22.10 ZAR94.10 57,085
22 May 2003 1,000 ZAR22.10 ZAR93.00 9,320
22 May 2003 3,000 ZAR19.90 ZAR93.00 28,945
23 May 2003 3,000 ZAR22.10 ZAR95.50 28,898
28 May 2003 2,000 ZAR22.10 ZAR97.00 19,349
28 May 2003 3,000 ZAR53.85 ZAR97.00 15,876
04 June 2003 4,000 ZAR53.85 ZAR104.25 24,909
05 June 2003 4,000 ZAR53.85 ZAR105.28 25,418
06 June 2003 2,000 ZAR53.85 ZAR104.10 12,417
22 August 2003 1,000 ZAR53.85 ZAR98.00 5,959
27 March 2003 3,000 ZAR19.90 ZAR99.00 29,737
27 March 2003 5,000 ZAR22.10 ZAR92.60 44,164
16 May 2003 1,000 ZAR22.10 ZAR94.10 9,047
16 May 2003 6,000 ZAR53.85 ZAR94.10 30,234
22 August 2003 21,000 ZAR53.85 ZAR98.17 125,663
08 August 2003 23,000 ZAR49.00 ZAR93.50 137,539
15 August 2003 5,000 ZAR49.00 ZAR95.20 31,288
22 August 2003 2,000 ZAR49.00 ZAR98.70 13,430
– – – – –
– – – – –
– – – – –
119,000 841,498
sappi limited
page 146 sappi limited
43. Directors’ participation in the Sappi Limited Share Incentive Trust (continued)Shares issued that have not yet been fully paid for
The following table sets out details of shares issued to each executive director in terms of the Sappi Limited Share Incentive Trust
that have not yet been fully paid for.
Shares issued not yet fully paid for Shares issued not yet fully paid for
at September 2004 at September 2003
Weighted Weighted Weighted Weighted
Number average of average Value of average of average Value of
of shares allocated remaining outstanding Number of allocated remaining outstanding
Director held price life loan (ZAR) shares held price life loan (ZAR)
Executive directors
WH Sheffield (1) – – – – 50,000 ZAR61.00 67 months 3,023,853
WH Sheffield (1) – – – – 15,000 ZAR147.20 78 months 2,208,000
E van As (2) 24,813 ZAR56.75 2 months 1,362,000 24,813 ZAR56.75 26 months 1,362,000
Total 24,813 1,362,000 89,813 6,593,853
(1) Resigned as executive director in November 2003
(2) Retired as executive director in November 2003
sappi limited
for the year ended September 2004
notes to the group annual financial statements continued
sappi limited page 147
sappi limited
Report of the independent auditor to themembers of Sappi LimitedThe condensed annual financial statements of Sappi Limited set
out on pages 148 to 151 have been derived from the annual
financial statements of the company for the year ended
September 2004. We have audited the annual financial
statements in accordance with statements of South African
Auditing Standards. In our report dated 06 December 2004, we
expressed an unqualified opinion on the financial statements from
which the condensed financial statements were derived.
Audit opinionIn our opinion, the accompanying condensed financial statements
are consistent, in all material respects, with the annual financial
statements from which they were derived.
For a better understanding of the scope of our audit and the
company’s financial position, the results of its operations and cash
flows for the period, the condensed financial statements should
be read in conjunction with our audit report and the annual
financial statements from which they were derived.
Deloitte & Touche
Registered Accountants and Auditors
Chartered Accountants (SA)
Johannesburg
06 December 2004
company auditor’s report
page 148 sappi limited
Operating loss 1 (9) (43)Income from subsidiaries – dividends 294 590Net finance income 2 5 16
Profit before taxation 290 563Taxation – Current 131 (4)Taxation – Deferred (13) –
Net profit for the year 172 567
ZAR million note 2004 2003
sappi limited
for the year ended September 2004
condensed company income statement
AssetsNon-current assets 9,483 9,710
Property, plant and equipment 5 2Investments in subsidiaries (Annexure A) 6,897 6,879Related party receivables (Annexure A) 2,447 2,699Loan to Executive Share Purchase Trust 121 130Deferred tax asset 13 –
Current assets 40 28
Receivables 1 5Related party receivables (Annexure A) 39 23
Total assets 9,523 9,738
Equity and liabilitiesShareholders’ equity 9,187 9,499
Ordinary share capital 239 239Share premium 6,427 6,427Non-distributable reserves 7 7Distributable reserves 2,514 2,826
Non-current liabilities
Related party payables (Annexure A) 87 83
Current liabilities 249 156
Trade and other payables 42 49Related party payables (Annexure A) 11 19Taxation payable 196 88
Total equity and liabilities 9,523 9,738
ZAR million 2004 2003
condensed company income statement
condensed company balance sheetat September 2004
sappi limited page 149
Profit before taxation 290 563
Adjustments for non-cash items:
Subsidiary transactions 214 99
Other 2 2
Cash generated by operations 506 664
Decrease in working capital (3) 4
Taxation paid (22) (3)
Dividends paid (484) (659)
Cash utilised in operating activities (3) 6
Increase in non-current assets 3 (6)
Cash and cash equivalents at end of year – –
ZAR million 2004 2003
sappi limited
condensed company cash flow statement
condensed company statement of changes inshareholders’ equity
Ordinaryshare Non-
Ordinary capital distri- Distri-Number of share Share and share butable butable
ZAR million ordinary shares capital premium premium reserves reserves Total
Balance – September 2002 239.1 239 6,427 6,666 7 2,918 9,591
Net profit for the year – – – – – 567 567
Dividends * – – – – – (659) (659)
Balance – September 2003 239.1 239 6,427 6,666 7 2,826 9,499
Net profit for the year – – – – – 172 172
Dividends * – – – – – (484) (484)
Balance – September 2004 239.1 239 6,427 6,666 7 2,514 9,187
* This dividend relates to the previous financial year’s earnings but was declared subsequent to year-end.
for the year ended September 2004
page 150 sappi limited
ZAR million 2004 2003
sappi limited
for the year ended September 2004
notes to the condensed company financialstatements
1. Operating lossThe operating loss is arrived at after taking into account the items detailed below:
Depreciation 2 2
Technical and administrative services paid other than
to bona fide employees of the company 29 24
Auditors’ remuneration 8 7
– fees for audit and related services 5 5
– fees for tax services 3 2
2. Net finance incomeInterest paid 5 –
Interest received (8) (16)
Net foreign exchange losses (2) –
(5) (16)
sappi limited page 151
Book value Loan to Loan from
Effective holding of investment subsidiary subsidiary
2004 2003 2004 2003 2004 2003 2004 2003
Annexure A ZAR ZAR ZAR ZAR ZAR ZAR
Investments in subsidiaries Share capital % % million million million million million million
Set out below are the more significant
subsidiaries or those that have a loan
with Sappi Limited
Southern Africa
Sappi Management Services
(Pty) Ltd M ZAR100 100 100 – – 289 283 – –
Sappi Manufacturing (Pty) Ltd O ZAR12,026,250 100 100 1,851 1,851 1,289 1,559 – –
Sappi Share Facilitation (Pty) Ltd O ZAR1,000 100 100 – – 868 849 – –
Usutu Pulp Company Ltd O SZL10,000,000 100 100 – – – – – –
America
S.D. Warren Company O US$1,000 100 100 – – – – (10) (8)
Sappi Cloquet LLC O –* 100 100 – – – – – –
Europe
European Paper Holdings SA H EUR81,432,128 100 100 104 104 – – – –
Sappi Alfeld GmbH O EUR31,200,000 100 100 – – – – – –
Sappi Austria Produktions
GmbH & Co. KG O EUR35,000 100 100 – – – – – –
Sappi Ehingen GmbH O EUR20,800,000 100 100 – – – – – –
Sappi Europe SA O EUR15,130,751 100 100 – – – – (1) (11)
Sappi Fine Paper plc M GBP50,000 100 100 1 1 – – – –
Sappi Holding AG H EUR72,700 100 100 557 539 37 11 – –
Sappi International SA F EUR1,779,482,103 100 100 4,674 4,674 – 2 – –
Sappi Lanaken NV O EUR51,377,000 100 100 – – – – – –
Sappi Lanaken Presspaper NV O EUR39,162,921 100 100 – – – – – –
Sappi Maastricht BV O EUR31,992 100 100 – – – – – –
Sappi Magnostar GmbH O EUR36,336 100 100 – – – – – –
Sappi Nijmegen BV O EUR59,037 100 100 – – – – – –
Sappi Papier Holding AG O EUR72,700 100 100 – – – – – –
Sappi U.K. Ltd O GBP74,020,000 100 100 – – 2 10 – –
Other
Brocas Ltd H US$3,385,401 100 100 9 9 – – (79) (79)
Lignin Insurance Co. Ltd F GBP400,000 100 100 – – – 1 – –
Various other companies 8 8 1 7 (8) (4)
7,204 7,186 2,486 2,722 (98) (102)
Write down of investment in
subsidiaries (307) (307) – – – –
6,897 6,879 2,486 2,722 (98) (102)
Holding Companies H
Operating Companies O
Finance Companies F
Management Companies M
* No issued share capital, only additional paid in capital of US$125 million
sappi limited
investments
as at September 2004
page 152 sappi limited
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR
IMMEDIATE ATTENTION
If you are in any doubt as to what action you should take, please
consult your stockbroker, banker, attorney, accountant or other
professional adviser immediately.
Sappi Limited
(Registration No 1936/008963/06)
(“Sappi”)
NOTICE TO SHAREHOLDERS
The sixty-eighth annual general meeting of Sappi will be held in
the auditorium, ground floor, 48 Ameshoff Street, Braamfontein,
Johannesburg on Monday, 07 March 2005, at 11:00:
1. to receive and consider the financial statements for the year
ended September 2004;
2. to confirm the appointment of the directors appointed
subsequent to the last annual general meeting (Please see
note 1);
3. to re-elect directors retiring in terms of Sappi’s articles of
association (Please see note 2);
4. to consider and if deemed fit to pass with or without
modification the resolutions marked A to F below;
5. to transact such other business as may be transacted at an
annual general meeting.
ResolutionsA. Special resolution number 1: General approval to permit
Sappi and Sappi subsidiaries to acquire Sappi shares
“Resolved as a general approval that Sappi Limited (“Sappi”)
and/or any subsidiary of Sappi (“subsidiary”) are authorised
in terms of Sappi’s articles of association to acquire Sappi
shares in terms of sections 85 and 89 of the Companies Act
61 of 1973 (“the Act”) and of the Listings Requirements of the
JSE Securities Exchange South Africa (“JSE”). In terms of the
current JSE Listings Requirements:
– any such acquisition of Sappi shares shall be effected:
– either through the order book operated by the JSE
trading system or on the open market of any other
stock exchange on which Sappi shares are listed;
– without any prior understanding or arrangement
between Sappi or a subsidiary and the counterparty;
– this general authority shall only be valid until Sappi’s next
annual general meeting; provided that it shall not extend
beyond fifteen months from the date of passing of this
special resolution;
– at any point in time Sappi or a subsidiary may only
appoint one agent to effect any repurchase;
– Sappi or a subsidiary may only undertake a repurchase if,
after such repurchase, Sappi still complies with sections
3.37 to 3.41 of the JSE Listings Requirements concerning
shareholder spread requirements;
– Sappi or a subsidiary may not repurchase Sappi shares
during a prohibited period as defined in section 3.67 of
the JSE Listings Requirements;
– an announcement will be published as soon as Sappi
and/or a subsidiary has/have acquired Sappi shares
constituting, on a cumulative basis, 3% of the number
of Sappi shares in issue on the date of registration of
this special resolution and for each subsequent 3%
purchased thereafter, containing full details of such
acquisition;
– acquisitions in the aggregate in any one financial year by
Sappi and subsidiaries may not exceed 20% of the
number of Sappi shares in issue at the commencement of
such financial year. However, Sappi and subsidiaries will
not in any year acquire more than 10% of the number of
Sappi shares in issue at the commencement of such
financial year;
– the maximum premium at which Sappi shares may be
purchased is 10% of the weighted average of the market
value of Sappi shares for the five business days
immediately preceding the date of the relevant
transactions.”
The effect of and the reason for the special resolution is to grant
to Sappi and subsidiaries, a general approval in terms of the
Companies Act 61 of 1973 for the acquisition by Sappi and/or
subsidiaries of Sappi shares. It is Sappi’s intention to act under
the general authority if prevailing circumstances (including market
conditions) so warrant.
The Sappi board, having considered the impact which a purchase
of 10% of the Sappi shares would have on Sappi and the Sappi
group (“group”), is of the opinion that for a period of twelve
months after the date of this notice:
– Sappi and the group will be able in the ordinary course of
business to pay their debts;
sappi limited
notice to shareholders
sappi limited page 153
sappi limited
– the assets of Sappi and the group will be in excess of the
liabilities of Sappi and the group respectively;
– the working capital, ordinary capital and reserves of Sappi
and the group will be adequate.
Section 11.26(b) of the JSE Listings Requirements requires the
following disclosure, part of which is included in the 2004 annual
report:
– directors and management (section 11.26(b)(i)) – pages
10 to 13 and 161 of the 2004 annual report;
– major shareholders of Sappi (section 11.26(b)(ii)) – page 58
of the 2004 annual report;
– material changes (section 11.26(b)(iii)) – there have been no
material changes in the affairs or financial position of the
group between 26 September 2004 and the date of this
notice;
– directors’ interests in Sappi shares (section 11.26(b)(iv)) –
page 139 of the 2004 annual report;
– share capital of Sappi (section 11.26(b)(v)) – page 67 of the
2004 annual report;
– directors’ responsibility statement (section 11.26(b)(vi)) – the
directors, whose names appear on pages 10 to 13 of the
2004 annual report, collectively and individually accept full
responsibility for the accuracy of information pertaining to
special resolution number 1, certify that to the best of their
knowledge and belief there are no facts that have been
omitted which would make any statement false or misleading,
that all reasonable enquiries to ascertain such facts have been
made and that the 2004 annual report and this notice contain
all such information;
– litigation statement (section 11.26(b)(vii)) – page 69 of the
2004 annual report.
B. Ordinary resolution number 1: Adoption of Performance
Share Incentive Plan
“Resolved that The Sappi Limited Performance Share
Incentive Plan in the form of the draft tabled at the general
meeting at which this ordinary resolution is proposed and
initialled by the Chairman for the purposes of identification,
is adopted by Sappi Limited.”
It is becoming increasingly common in the international and
South African markets for long-term incentives to be based
on performance hurdles. In this way the interests of
executives, managers and shareholders are better aligned.
The allocation of shares under this scheme will apply to a
small number of senior executives and managers
(approximately fifty). Share grants will be conditional
on prescribed performance hurdles being met over a four-
year period. The directors of Sappi recommend that
The Sappi Limited Performance Share Incentive Plan be
adopted. The salient features of The Sappi Limited
Performance Share Incentive Plan are set out on page 158
of the 2004 annual report. The Sappi Limited Performance
Share Incentive Plan will lie open for inspection at the
company’s registered office for a period of fourteen days
prior to the date of the annual general meeting. It is intended
that the existing Sappi Limited Share Incentive Scheme will
be continued for eligible executives, managers and other
employees.
C. Ordinary resolution number 2: Approval to sell treasury
shares for cash
“Resolved as a specific approval that subject to the provisions
of the Companies Act 61 of 1973 and the Listings
Requirements of the JSE Securities Exchange South Africa
any subsidiary of Sappi Limited (“Sappi”) (“subsidiary”) is
authorised to sell at the price at which the participant or
executive and manager is allowed to acquire Sappi shares
and to transfer to:
– The Sappi Limited Share Incentive Scheme and, subject
to the passing of ordinary resolution number 1, The Sappi
Limited Performance Share Incentive Plan (collectively,
“the Schemes”) those numbers of Sappi shares
repurchased by that subsidiary (but not exceeding
22,500,000, being the maximum number of Sappi shares
available to the Schemes) as may be required by the
Schemes when a participant to whom the Sappi shares
will be allocated has been identified;
– executives and managers of Sappi that number of the
Sappi shares repurchased by that subsidiary as may be
required to satisfy the requirements of employment
contracts in terms of which Sappi shares are awarded to
executives and managers.”
Under the JSE Listings Requirements, ordinary resolution number
2 must be passed by a 75% majority of the votes cast (excluding
votes cast by any parties participating in the specific issue for
cash and their associates) by all shareholders present or
represented by proxy at the general meeting convened to approve
ordinary resolution number 2.
page 154 sappi limited
Ordinary resolution number 2 grants to any subsidiary the power
to sell to The Sappi Limited Share Incentive Scheme and The
Sappi Limited Performance Share Incentive Plan (collectively the
“Schemes”) or to executives and managers that number of the
Sappi shares (“treasury shares”) repurchased by such subsidiary
as may be necessary to satisfy requirements of the Schemes and
employment contracts. Rather than issue new shares, Sappi
utilises and intends in future to utilise treasury shares to satisfy
the requirements of the Schemes and employment contracts if
prevailing circumstances so warrant.
D. Ordinary resolution number 3: Control of unissued shares
“Resolved that 24,000,000 of the total of the:
– authorised but unissued shares in the capital of Sappi
Limited (“Sappi”) namely 85,928,108 Sappi shares; and
– 7,000,000 Sappi shares repurchased by a subsidiary of
Sappi,
be placed under the control of the directors with authority in
their discretion to issue and allot all or part of that total of
Sappi shares, subject to the provisions of sections 221 and
222 of the Companies Act 61 of 1973 and of the Listings
Requirements of the JSE Securities Exchange South Africa.”
No issue of these shares is contemplated at present. No issue will
be made which could effectively transfer control of Sappi without
prior approval of shareholders in general meeting.
E. Ordinary resolution number 4: Increase in directors’ fees
“Resolved that, until otherwise determined by Sappi in general
meeting, with effect from 01 October 2004, the remuneration
of the non-executive directors for their services as such shall
be as follows:
Sappi board fees
Chairperson
If South African resident ZAR700,000pa*
If European resident GBP120,000pa*
If USA resident US$180,000pa*
Directors
If South African resident ZAR175,000pa
If European resident GBP30,000pa
If USA resident US$45,000pa
* Inclusive of all committee fees
Sappi Audit Committee fees
Chairperson
If South African resident ZAR175,000pa
If European resident GBP30,000pa
If USA resident US$45,000pa
Other members
If South African resident ZAR87,500pa
If European resident GBP15,000pa
If USA resident US$22,500pa
Regional audit committees
Chairperson
If South African resident ZAR22,500 per meeting
If European resident GBP3,850 per meeting
If USA resident US$5,500 per meeting
Other members
If South African resident ZAR11,500 per meeting
If European resident GBP1,650 per meeting
If USA resident US$2,750 per meeting
Human resources, compensation*, sustainability* and
nomination and governance** committees and any
additional committees
Chairperson
If South African resident ZAR110,000pa
If European resident GBP16,500pa
If USA resident US$27,500pa
Other members
If South African resident ZAR55,000 pa
If European resident GBP11,500 pa
If USA resident US$16,500 pa
* Newly created committees
** Previously the Nomination Committee
Travel compensation
For more than 10 flight hours return US$2,200 per meeting”
Ordinary resolution number 4 increases the remuneration which
Sappi may pay its non-executive directors for their services as
directors and board committee members by approximately
10% since 01 October 2002 being the effective date of the
last increase by the board. This is equivalent to an increase of
4.9% per annum over the past two years. The responsibility of
non-executive directors has increased substantially flowing from
legislative, regulatory and corporate governance requirements.
sappi limited
notice to shareholderscontinued
sappi limited page 155
sappi limited
The proposed increases are considered reasonable in the
circumstances. It is planned to review the fees annually in the
future. The Chairman’s fees are set at four times the directors’
fees and include fees in respect of all committees on which he
serves either as a member or ex officio.
In the past a total fixed amount has been available for payment
to all non-executive directors for their services as such in terms
of article 18.5 of Sappi’s articles of association. The board has
used its discretion in allocating this fixed amount (currently
US$500,000) to non-executive directors. The remuneration of
non-executive directors for extra services rendered as members
of the board or of various committees of the board has been
paid in terms of article 18.7 of Sappi’s articles of association
which provides that any director who is required to perform
extra services or reside abroad or shall otherwise be specially
occupied about Sappi’s business, shall be entitled to receive
remuneration to be fixed by the directors either as an addition to
or in substitution for any director’s fee paid to him.
With Sappi’s fees paid to directors in various currencies the past
practice is no longer considered appropriate due to fluctuations
in exchange rates and resultant difficulties in establishing an
accurate maximum amount for board fees. It is now considered
more appropriate to fix the remuneration for each board and
committee member at Sappi’s annual general meetings. The
practice has been and will continue to be that directors’ fees are
paid to non-executive directors only.
F. Ordinary resolution number 5: Signature of documents
“Resolved that any director of Sappi Limited is authorised to
sign all such documents and do all such things as may be
necessary for or incidental to the implementation of the
resolutions passed at the 2004 annual general meeting.”
A shareholder entitled to attend and vote is entitled to appoint
one or more proxies to attend, to speak and on a poll to vote
in his stead. A proxy need not be a shareholder. For the
convenience of shareholders a form of proxy is enclosed.
The attached form of proxy is only to be completed by a
shareholder who:
– holds Sappi shares in certificated form, or
– has dematerialised his Sappi shares (ie, has replaced the
paper share certificates with electronic records of
ownership under the JSE’s electronic settlement system,
STRATE) and who is recorded in the sub-register in “own
name” dematerialised form (ie, a shareholder who has
specifically instructed his Central Securities Depository
Participant (“CSDP”) or broker to hold his Sappi shares in
his own name on Sappi’s sub-register).
A shareholder who has dematerialised his Sappi shares and
who is not registered as an “own name” dematerialised
shareholder and who wishes to attend the annual general
meeting, must either instruct his CSDP or broker to provide
him with a letter of representation to enable him to attend
such meeting; or alternatively, should he wish to vote but not
to attend the annual general meeting, he must provide his
CSDP or broker with his voting instructions in terms of the
relevant custody agreement entered into between him and his
CSDP or broker. Such shareholders must not complete the
attached form of proxy.
When authorised to do so in terms of their mandates or
instructed to do so by the owner on behalf of whom they hold
dematerialised shares in Sappi, CSDPs or brokers recorded in
Sappi's sub-register or their nominees should vote by either
appointing a duly authorised representative to attend and vote
at the 2005 annual general meeting or by completing the
attached form of proxy and returning it to one of the
addresses indicated on the form of proxy in accordance with
the instructions thereon.
Sappi Management Services (Pty) Limited
Secretaries: per DJ O’Connor
48 Ameshoff Street
Braamfontein, Johannesburg, 2001
06 December 2004
Notes
1. Confirmation of appointment of the directors appointed
since the last annual general meeting
– JE Healey (63) (independent) (USA)
BSc (Public Accounting) Pace University (1964), Honorary
Doctor of Commercial Science Pace University (2000)
James Edward Healey joined the Sappi Limited board
page 156 sappi limited
with effect from July 2004. Mr Healey has held various
senior financial positions in a career spanning 37 years.
He began his career as an auditor with Ernst & Young and
from 1973 until his retirement at the end of 2000, he held
various financial positions in the consumer goods industry.
He became Vice President and Treasurer of Bestfoods,
formerly CPC International Inc in 1995. In 1997 he moved
to Nabisco Holdings Inc, one of the world’s largest snack
food manufacturers, as Executive Vice President and
Chief Financial Officer, a position from which he retired
at the end of 2000. He is a member of the board of
directors of Interchange Financial Services Corp. He is
currently a member of the Audit Committee of the board
of directors of Sappi Limited.
– B Radebe (44) (independent) (SA)
BA (Political Science) Botswana University. In the last 16
years, Brigette Radebe has worked in a broad range of
sectors across industry and commerce with a particular
focus in mining. She is currently the Executive
Chairperson of Mmakau Mining making her the only
woman to head a deep-level hard rock mining company
in South Africa. She founded that business in 1995 and
has turned it into a leading player in the mining
management industry. Ms Radebe chairs the SA Mining
Development Association, which represents and develops
South Africa’s small and junior miners. She was closely
involved in developing the Mineral & Petroleum Resources
Development Act and the Mining Charter, and until last
year chaired the International Women’s Forum in South
Africa, which focuses on leadership foundation
programmes for professional women. She is also a
director of the Leadership Foundation IWF, Washington,
and serves on the boards of The National Research
Foundation and the New Africa Mining Fund. Ms Radebe
joined the Sappi Limited board in May 2004.
2. Directors retiring by rotation who are seeking re-election
– DC Brink (65) (independent) (SA)
David Charles Brink, MSc Eng (mining), DCom (hc),
Graduate Diploma in Company Direction. He was
appointed a non-executive director of Sappi Limited in
March 1994 and is currently a member of the Audit
Committee, of the Human Resources Committee and the
Nomination Committee of the board of directors of Sappi
Limited. He is Chairman of Unitrans Limited and Deputy
Chairman of Absa Bank Limited and Absa Group Limited.
He is a director of Sanlam Limited, and BHP Billiton
Limited and Plc, where he is Chairman of the Health,
Safety and Environment Committee and also a member
of the Risk Management and Audit Committee. Mr Brink
is currently a board member of the National Business
Initiative, he is co-chairman of the Business Trust and is
also a Founder Member of the Independent Director’s
Initiative. He serves on the Board of Trustees of the SA
Nature Foundation. Mr Brink retired as Chairman of
Murray & Roberts at the end of 2003.
– M Feldberg (63) (independent) (USA)
BA (Wits), MBA (Columbia), PhD (Cape Town). Professor
Meyer Feldberg’s career has included a number of
teaching and leadership positions in the business schools
of the universities of Cape Town, Northwestern and
Tulane. In 1986, he was appointed president and Chief
Executive Officer of the Illinois Institute of Technology.
From 1989 to 2004, he served as Professor of
Management and Dean of Columbia Business School. He
is currently Dean Emeritus and the Sanford C Bernstein
Professor of Leadership and Ethics at Columbia Business
School. Professor Feldberg serves on the Advisory board
of the British American Business Council and has served
on the Council of Competitiveness in Washington DC. In
2001, the International Centre in New York honoured
Professor Feldberg as a distinguished foreign-born
American who has made a significant contribution to
American life. He is a director of many major public
companies including Federated Department Stores Inc,
Revlon Inc, PRIMEDIA Inc, UBS Funds and Select
Medical Corporation. Professor Feldberg was appointed
to the board of directors of Sappi Limited in March 2002
and is currently a member of the Human Resources
Committee and of the Nomination Committee of the
board of directors of Sappi Limited.
– W Pfarl (60) (Austria)
Dipl Kfm, Chief Executive Officer of Sappi Fine Paper
Europe. Wolfgang Pfarl was appointed to his present
position in December 1997 following Sappi's acquisition
sappi limited
notice to shareholderscontinued
sappi limited page 157
sappi limited
of KNP Leykam. In 1989, he was appointed Chairman of
the Executive board of Leykam-Mürztaler and became
Executive Chairman of KNP Leykam after the merger
in 1993 of the fine paper production activities of NV
Koninklijke KNP BT (now Buhrmann NV) and the
Austrian paper producer Leykam-Mürztaler. Mr Pfarl
was appointed to the board of Sappi Limited in
December 1997.
– FA Sonn (65) (independent) (SA)
Franklin Abraham Sonn, BA, HDip Ed (Hons) FIAC. He
was appointed to the board of directors of Sappi Limited
in July 1999 and is currently a member of the Nomination
Committee of the board of directors of Sappi Limited. He
was the former Rector of Peninsula Technikon for 17
years and appointed democratic South Africa’s first
ambassador to the United States from 1995 to 1998. He
returned to South Africa in 1999. He is the recipient of
eleven honorary doctorates in law, education, humanities
and philosophy from various institutions in South Africa,
Europe and North America. His current board positions
include amongst others, African Star Ventures (Pty) Ltd
as executive chairman, Steinhoff Group Holdings Ltd,
Macsteel Holdings (Pty) Ltd, Capespan Group Holdings
Ltd, ABSA Group Ltd, ABSA Bank Ltd and ABSA
Personal Bank, New Africa Capital Ltd and Pioneer Food
Group Ltd. He was appointed Chancellor of the University
of the Free State in 2002 and serves as deputy President
of the Chamber of Commerce and Industry in South
Africa (CHAMSA) and as Chairman, Trustee and Patron
to numerous organisations of Civil Society.
page 158 sappi limited
sappi limited
performance share incentive plan
1 Salient features of the Sappi LimitedPerformance Share Incentive Plan(“the Plan”)
1.1 Number of shares to be made available for the
purposes of the Plan
1.1.1 The aggregate number of shares (“Shares”) which may be
acquired by all participants (“Participants”) under the Plan,
together with the Sappi Limited Share Incentive Scheme
adopted by Sappi Limited (“the company”) on 05 March
1997 (“Existing Plan”), shall not exceed 22,500,000
Shares which constitute 9.41% of the company’s issued
share capital as at 06 December 2004.
1.1.2 The aggregate number of Shares which may be acquired
by any one Participant under the Plan and the Existing
Plan shall not exceed 1,000,000 Shares which constitute
0.41% of the company’s issued share capital as at
06 December 2004.
1.1.3 The number of Shares referred to in 1.1.1 and 1.1.2 shall
be increased or reduced in direct proportion to any
increase or reduction of the Shares in the company’s
issued share capital on any conversion, redemption,
consolidation, sub-division and/or any rights or
capitalisation issue of Shares.
1.1.4 The percentages set out in 1.1.1 and 1.1.2 shall not be
exceeded without the prior approval of the shareholders
of the company in general meeting and the approval of
the JSE Securities Exchange South Africa (“JSE”).
1.2 The Sappi Limited Performance Share Incentive Trust
1.2.1 The Plan will be administered and implemented by a trust
to be formed and known as “The Sappi Limited
Performance Share Incentive Trust" (“the Trust”). The
board of directors of the company (“the board”) is entitled
to appoint, remove and replace the trustees of the trust
(“Trustees”). There shall at all times be at least two
Trustees in office and a maximum of three Trustees in
office. The Trustees may not be participants under the
Plan.
1.2.2 Subject to the provisions of section 38 of the Companies
Act 61 of 1973, as amended, (“Companies Act”) the Trust
will be funded out of its own resources, loans by
members of the Sappi group, loans by third parties
and/or any other resources which is available to the Trust.
The Trust will be entitled to recover such funding from
members of the Sappi group.
1.3 Participants and manner of participation
1.3.1 Participants in the Plan will be officers and other
employees (including any present or future director
holding salaried employment or office) of the company
and any body corporate or other undertaking which is or
would be a subsidiary of the company in terms of the
Companies Act (“the Sappi group”), as selected by the
board from time to time.
1.3.2 Participants will be awarded conditional contracts
(“Conditional Contracts”) to acquire Shares for no cash
consideration.
1.4 Conditional Contracts
The salient features of the Plan relating to Conditional
Contracts are set out hereunder.
1.4.1 The Trustees shall, on behalf of the company and if the
board so directs, offer employees (“Eligible Employees”)
Conditional Contracts to acquire Shares for no cash
consideration.
1.4.2 Conditional Contracts shall lapse if they are not accepted
by Participants within 30 days, unless re-instated by the
board or a committee nominated by the board for this
purpose.
1.4.3 If the performance criteria from time to time determined
by the Human Resources Committee or Compensation
Committee of the Board (“Performance Criteria”)
applicable to each Conditional Contract, are met or
exceeded, then Participants shall be entitled to receive
such number of Shares as specified in the Conditional
Contract for no cash consideration after the fourth
sappi limited page 159
sappi limited
anniversary of the date on which the board resolves to
award a Conditional Contract to that Participant
(“Allocation Date”). The Performance Criteria shall entail
a benchmarking of the company’s performance against
an appropriate peer group of companies.
1.4.4 Unless otherwise determined at the time of awarding a
Conditional Contract, the board may by resolution, cause
the four year period referred to in 1.4.3 to be anticipated
or, with the consent of a Participant adversely affected
thereby, postponed to such extent as the board may
determine.
1.4.5 If the board determines that the Performance Criteria
embodied in a Conditional Contract have not been
satisfied or exceeded, the number of Shares to be allotted
and issued and/or transferred to a Participant under and
in terms of such Conditional Contract shall be adjusted
downwards.
1.4.6 Until such time as a Participant becomes entitled to have
Shares allotted and issued and/or transferred to him or
her, the Participant shall not receive any dividends and/or
exercise any voting rights attached to such Shares
awarded to him or her.
1.4.7 If a Participant’s employment with the Sappi group
terminates as a result of:
1.4.7.1 (a) disability or ill health (as certified by an appropriate
medical practitioner nominated by the Trustees); or
(b) the transfer/sale of the undertaking or part undertaking
which such Participant is employed; or (c) his or her lawful
dismissal for operational reasons in accordance with
Labour Relations Act 66 of 1995; or (d) the member
of the Sappi group by which he or she is employed
ceasing to be a member of the Sappi group; or (e) his or
her death; or (f) his or her retirement at normal age; or (g)
any other reason approved by the board, then such
Participant (or in the case of his or her death, a beneficiary
nominated by such Participant) shall be entitled, on the
fourth anniversary of the Allocation Date (and not before
then irrespective of the date of this termination of
employment), to receive such number of Shares as
calculated in accordance with the following formula:
A = B x C/D
Where:
A = the number of Shares which would have been
allotted and issued or transferred (as the case may
be) to the Participant had he been in the employ of
the Sappi group after the expiry of four years;
B = a number equal to the number of Shares specified in
the Conditional Contract relating to such Participant;
C = a number equal to the number of days that have
passed from the Allocation date until the date of
termination of employment of the Participant for any
reason specified in 1.4.7.1, and
D = 1 460;
1.4.7.2 any reason other than a reason contemplated in 1.4.7.1
(including his voluntary resignation or his early retirement
or his lawful dismissal (eg his lawful dismissal for
dishonest, fraudulent or grossly negligent conduct)), then
his Conditional Contract shall automatically lapse
and cease to be of any further force or effect and he shall
forfeit all of his rights to any Shares.
The board is entitled to treat participants more favourably
than set out in this 1.4.7.
1.4.8 The company shall allot and issue and/or transfer all
Shares to which participants become entitled and procure
the listing thereof within a reasonable time (not exceeding
30 days) after the acquisition thereof by a Participant.
Shares allotted and issued and/or transferred as aforesaid
shall rank pari passu with the shares of the company then
in issue.
1.5 General Provisions
1.5.1 Provision is made for appropriate adjustments to be
made to the rights of Participants in the event that the
company, inter alia, undertakes a rights offer, is a party
to a scheme of arrangement affecting the structuring of
its issued share capital or reduces its share capital.
page 160 sappi limited
sappi limited
performance share incentive plancontinued
1.5.2 If:
1.5.2.1 the company undergoes a change in control after an
Allocation Date other than a change in control initiated by
the board itself; or
1.5.2.2 the person/s (or those persons acting in concert) who
have control of the company as at an Allocation Date,
take/s any decision, pass/es any resolution and/or take/s
any action the effect of which is to delist the company
from the JSE and the company becomes aware of such
decision, resolution and/or action,
the company is obligated to notify every Participant
thereof on the basis that such Participant may within a
period of one month (or such longer period as the board
may permit) take delivery of those shares which he would
have been entitled to had the Performance Criteria been
achieved.
1.5.3 The board and the Trustees may, with the approval of the
JSE, amend the Plan; provided that no such amendment
affecting the following matters shall be competent unless
sanctioned by the company in general meeting:
1.5.3.1 the eligibility of Participants for participation under the
Plan;
1.5.3.2 the calculation of the total number of Shares which may
be acquired for the purposes of or pursuant to the Plan;
1.5.3.3 the calculation of the maximum number of Shares which
may be acquired by any Participant in terms of the Plan.
1.5.4 Subject to the provisions of the Plan and the approval
of the board, the Trustees shall be entitled to make and
establish such rules and regulations, and to amend the
same from time to time, as they may deem necessary or
expedient for the proper implementation and
administration of the Plan.
1.5.5 It shall be competent for the board and the Trustees to
establish further plans based on the Plan or to implement
the Plan with such modifications as may be necessary or
desirable to take account of the securities laws, exchange
control laws and the tax laws of jurisdictions outside
South Africa in which Participants are employed.
1.5.6 The Plan shall terminate if there are no longer any
Conditional Contracts in force and the board and the
Trustees so resolve. Upon such termination, the assets
(if any) of the Trust shall be realised and the surplus
remaining after the discharge of the Trust’s liabilities shall
be paid over to the company. Any deficit arising from the
winding up of the Trust shall be born by the company, to
the extent not recovered from members of the Sappi
group.
1.5.7 The board shall ensure that a summary appears in the
annual financial statements of the company of the number
of Shares awarded subject to Performance Criteria, any
changes in such numbers during the financial year under
review, the number of Shares held by the Trust which may
be acquired by Eligible Employees and the number of
Shares under the control of the board for allotment and
issue in terms of the Plan.
1.5.8 Subject to all applicable laws, Eligible Employees may
if the board deems it to be appropriate be granted the
opportunity to participate in the Plan by way of American
Depository Shares (as opposed to Shares), in which
event Eligible Employees may be awarded Conditional
Contracts to be given American Depository Shares
(as opposed to Shares).
sappi limited page 161
sappi limited
divisional and corporate management
Sappi LimitedSappi Head OfficeChief Executive Officer, Jonathan Leslie (54)
Finance – Executive Director, Donald Wilson (47)
Group Financial Controller, Laurence Newman (48)
Group Internal Audit Manager, Wayne Reid (36)
Group Treasurer, Kaj Burchardi (62)
Group Chief Information Officer, Guido Lauwers (48)
Group Corporate Counsel, Mark Thompson (52)
Group Head Corporate Affairs, André Oberholzer (38)
Group Head Human Resources, Lucia Swartz (47)
Group Head Strategic Development, Robert Hope (52)
Group Investor Relations Manager, Richard Boorman (32)
Group Technical Director, John Job (59)
Sappi Fine PaperChief Executive Officer Sappi Fine Paper Europe,
Wolfgang Pfarl (60)
Chief Executive Officer Sappi Fine Paper North America,
Ronee Hagen (58)
Managing Director Sappi Fine Paper South Africa,
Albert Lubbe (56)
Chief Financial Officer, Mike Turner (51)
Marketing and Sales Director, Henri Zondag (47)
Sappi Fine Paper EuropeChief Executive Officer, Wolfgang Pfarl (60)
Chief Financial Officer, Hubert Gebreiter (57)
Human Resources Director, Rainer Neumann (42)
Information Technology Director, Dennis de Baar (37)
Manufacturing, Research and Development Director,
Rudolf Thummer (56)
Marketing Sales Graphic Director, Marco Eikelenboom (37)
Purchasing Director Raw Materials, Victor Kamm (45)
Purchasing Director Technical Goods and Utilities,
Werner Reiter (50)
Speciality Papers Director, Theo Reijnen (57)
Logistics Director, Alex Thiel (43)
Sappi Fine Paper North AmericaPresident and Chief Executive Officer, Ronee Hagen (58)
Commercial Printing Vice President, Bob Weeden (53)
Corporate Development Director, Anne Ayer (39)
General Counsel, Sarah Manchester (39)
Human Resources Vice President, Jim Mullen (61)
Manufacturing Vice President, Robert Taylor (56)
Publishing and Corporate Communications Executive Vice
President, Jennifer Miller (49)
Release Business Vice President, Paul Leslie-Smith (41)
Sales and Business Development Vice President, Kevin Clark (45)
Supply Chain Vice President, Mike Darland (51)
Technology Vice President, Ray Parent (54)
Vice President and Chief Financial Officer, Annette Luchene (42)
Vice President and Chief Information Officer, Bob Wittstein (44)
Sappi Fine Paper South AfricaManaging Director, Albert Lubbe (56)
Finance Director, Albert Dreyer (42)
Marketing Director, Graeme Kirkup (36)
Sappi Forest ProductsChief Executive Officer, André Wagenaar (59)
Finance Director, Jan Labuschagne (44)
Human Resources Director, Brian Dick (54)
Strategic Projects Director, Andrea Rossi (50)
Technical Director, Bertus van der Merwe (51)
Sappi Forests Managing Director, Dinga Mncube (44)
Sappi Kraft Managing Director, Michael Spallart (42)
Sappi Saiccor Managing Director, Alan Tubb (54)
Sappi TradingManaging Director, Hugh Martin (57)
Finance Director, Henri Kirsten (51)
page 162 sappi limited
sappi limited
glossary
Industry definitionsbleached pulp – pulp that has been bleached by means
of chemical additives to make it suitable for fine paper production
chemical cellulose (dissolving pulp) – highly purified chemical
pulp intended primarily for conversion into chemical derivatives of
cellulose and used mainly in the manufacture of viscose staple
fibre, solvent spin fibre and filament
chemical pulp – a generic term for pulp made from wood fibre
that has been produced in a chemical process
coated fine paper – coated paper made from chemical pulp.
Also referred to as coated free sheet
coated papers – papers that contain a layer of coating material
on one or both sides. The coating materials of pigments and
binders which act as a filler to improve the printing surface of the
paper
corrugating medium – paperboard made from chemical and
semi-chemical pulp, or waste paper, that is to be converted to a
corrugated board by passing it through corrugating cylinders.
Corrugating medium between layers of linerboard form the board
from which corrugated boxes are produced
fibre – fibre is generally referred to as pulp in the paper industry.
Wood is treated chemically or mechanically to separate the fibres
during the pulping process
fine paper – paper usually produced from chemical pulp for
printing and writing purposes and consisting of coated and
uncoated paper
kraft paper – packaging paper (bleached or unbleached) made
from kraft pulp
kraft pulp – chemical wood pulp produced by digesting wood by
means of the sulphate pulping process
linerboard – the grade of paperboard used for the exterior
facings of corrugated board. Linerboard is combined with
corrugating medium by converters to produce corrugated board
used in boxes
market pulp – pulp produced for sale on the open market, as
opposed to that produced for own consumption in an integrated
mill
mechanical pulp – pulp produced by means of the mechanical
grinding or refining of wood or wood chips
NBSK – Northern Bleached Softwood Kraft pulp. One of the main
varieties of market pulp, mainly produced from spruce trees in
Scandinavia, Canada and north eastern USA. The price of NBSK
is a benchmark widely used in the pulp and paper industry for
comparative purposes
newsprint – paper produced for the printing of newspapers
mainly from mechanical pulp and/or recycled waste paper
packaging paper – paper used for packaging purposes
pulpwood – wood suitable for producing pulp – usually not of
sufficient standard for saw-milling
release paper – backing paper for self-adhesives and/or paper
used to impart designs on or to polymers, eg artificial leather
sackkraft – kraft paper used to produce multiwall paper sacks
speciality paper – a generic term for a group of papers intended
for commercial and industrial use such as flexible packaging,
metallised base paper, coated bag paper, etc.
tons – term used in this report to denote a metric ton of 1,000kg
uncoated woodfree paper – printing and writing paper made
from bleached chemical pulp used for general printing,
photocopying and stationery, etc. Referred to as uncoated as it
does not contain a layer of pigment to give it a coated surface
woodfree paper – paper made from chemical pulp
sappi limited page 163
sappi limited
Financial definitionscash interest cover – cash generated by operations divided by
net finance costs (before capitalised interest)
current asset ratio – current assets divided by current liabilities
dividend yield – dividends per share, which were declared after
year-end, in US cents divided by the financial year-end closing
prices on the JSE Securities Exchange South Africa converted to
US cents using the closing financial year-end exchange rate
earnings yield – headline earnings per share divided by the
financial year-end closing prices on the JSE Securities Exchange
South Africa converted to US cents using the closing financial
year-end exchange rate
EBITDA – earnings before interest, tax, depreciation and
amortisation (including fellings)
fellings – the amount amortised to the income statement,
representing the standing cost of the plantations harvested
headline earnings – as defined in circular 7/2002 issued by the
South African Institute of Chartered Accountants, separates from
earnings all items of a capital nature. It is not necessarily a
measure of sustainable earnings. It is a listing requirement of the
JSE Securities Exchange South Africa to disclose headline
earnings per share
net asset value – shareholders’ equity plus net deferred tax
net assets – total assets less current liabilities
net debt – current and non-current interest-bearing borrowings,
and bank overdraft (net of cash, cash equivalents and short-term
deposits)
net debt/equity ratio – current and non-current interest-bearing
borrowings, and bank overdraft (net of cash, cash equivalents and
short-term deposits), divided by shareholders’ equity plus minority
interest
net debt/total capitalisation – current and non-current interest-
bearing borrowings, and bank overdraft (net of cash, cash
equivalents and short-term deposits), divided by shareholders’
equity plus minority interest, non-current liabilities, current interest-
bearing borrowings and overdraft
NOPAT – net operating profit after current tax
price/earnings ratio – the financial year-end closing prices on the
JSE Securities Exchange South Africa converted to US cents
using the closing financial year-end exchange rate divided by
headline earnings per share
ROE – return on average equity. Net profit divided by average
shareholders’ equity
RONA – operating profit divided by average net assets
RONOA – operating profit divided by average net operating
assets, which are total assets (excluding deferred taxation and
cash) less current liabilities (excluding interest-bearing borrowings
and bank overdraft)
total capital employed – total assets less current liabilities
total market capitalisation – ordinary number of shares in issue
(excluding treasury shares held by the group) multiplied by the
financial year-end closing prices on the JSE Securities Exchange
South Africa converted to US cents using the closing financial
year-end exchange rate
page 164 sappi limited
sappi limited
shareholders’ diary
Annual general meeting 07 March 2005First and third quarter reports released January and July 2005Second quarter and half-year report released May 2005Financial year-end September 2005Preliminary results for the fourth quarter and year released, dividend announced November 2005Annual report posted to shareholders December 2005
Sappi LimitedReg No 1936/008963/06JSE code: SAPISIN code: ZAE 000006284NYSE code: SPPLSE code: SAZFWB® code: SPI
Group SecretaryDenis O’Connor
SecretariesSappi Management Services (Pty) Limited48 Ameshoff Street2001 Braamfontein South AfricaPO Box 315602017 Braamfontein South Africa
Telephone +27 (0)11 407 8111Telefax +27 (0)11 403 1493e-Mail denis.o’[email protected] www.sappi.com
Transfer SecretariesSouth AfricaComputershare Investor Services 2004 (Pty) Limited70 Marshall Street2001 Johannesburg PO Box 610512107 Marshalltown
Telephone +27 (0)11 370 5000Telefax +27 (0)11 370 5487e-Mail [email protected]
United KingdomCapita RegistrarsThe Registry34 Beckenham RoadBeckenhamKent, BR3 4TUDX 91750Beckenham West
Telephone +44 (0)208 639 2157Telefax +44 (0)208 639 2342e-Mail [email protected]
United States ADR DepositoryThe Bank of New YorkInvestor Relations PO Box 11258Church Street StationNew York, NY 10286-1258
Telephone (US only) 1 888 BNYADRSTelephone +1 610 382 7836Telefax +1 212 571 3050e-Mail [email protected] www.stockury.com
Corporate AffairsAndré Oberholzer – Group HeadTelephone +27 (0)11 407 8111Telefax +27 (0)11 403 8236e-Mail [email protected]
administration
sappi limited page 165
Sappi Limited
(Registration No 1936/008963/06)
(“Sappi”)
For use by shareholders who:
– hold shares in certificated form; or
– have dematerialised their shares (ie have replaced the paper share certificates representing the shares with electronic records of
ownership under the JSE’s electronic settlement system (STRATE Limited) and are recorded in the subregister in “own name”
dematerialised form) (ie shareholders who have specifically instructed their Central Securities Depository Participant (“CSDP”) to hold
their shares in their own name on Sappi’s subregister).
at the annual general meeting.
If you are unable to attend the sixty-eighth annual general meeting of the members convened for 11:00 on Monday, 07 March 2005, you
should complete and return this form of proxy as soon as possible, but in any event to be received by not later than 11:00 South African
time on Thursday, 03 March 2005, either to Computershare Investor Services 2004 (Pty) Limited, 70 Marshall Street, Johannesburg, 2001,
Republic of South Africa, PO Box 61051, Marshalltown, 2107, or to Capita Registrars, The Registry, 34 Beckenham Road, Beckenham,
Kent BR3 4TU, United Kingdom.
Shareholders who have dematerialised their shares and are not registered as “own name” dematerialised shareholders and who wish to
attend the annual general meeting, must instruct their CSDP or broker to provide them with the relevant letter of representation to enable
them to attend such meeting, or, alternatively, should they wish to vote but not to attend the annual general meeting, they must provide
their CSDP or broker with their voting instructions in terms of the relevant custody agreement entered into between them and the CSDP
or broker.
Such shareholders must not complete this form of proxy.
I/We
of
being a shareholder(s) of Sappi holding ordinary shares in Sappi and entitled to vote at the abovementioned annual
general meeting, do hereby appoint
of
or failing him/her
of
or failing him/her
of
or failing him/her, the chairman of the meeting as my/our proxy to attend and speak and, on a poll, to vote for me/us and on my/our behalf
at the annual general meeting of Sappi to be held at 11:00 on Monday, 07 March 2005.
sappi limited
proxy formfor annual general meeting
page 166 sappi limited
Number of shares
For Against Abstain
Confirmation of appointment of directors appointed since the last annual general meeting*
Confirmation of appointment of Mr JE Healey
Confirmation of appointment of Ms B Radebe
Re-election of retiring directors*
Re-election of Mr DC Brink
Re-election of Prof M Feldberg
Re-election of Mr W Pfarl
Re-election of Dr FA Sonn
Special resolution number 1 – a general approval for Sappi and its subsidiaries to acquire Sappi Limited shares
Ordinary resolution number 1 – adoption of the Sappi Limited Performance Share Incentive Plan
Ordinary resolution number 2 – specific approval to utilise treasury shares for The Sappi Share Incentive Scheme,The Sappi Limited Performance Share Incentive Plan and, where applicable, for awards of Sappi shares to executives and manager in terms of their employment contracts
Ordinary resolution number 3 – placing 24,000,000 of the unissued ordinary shares in the authorised share capital of Sappi and placing 7,000,000 Sappi shares repurchased by a subsidiary of Sappi, under the control of the directors of Sappi with the authority to allot and issue same in terms of the Companies Act and the Listings Requirements of the JSE Securities Exchange South Africa
Ordinary resolution number 4 – increase in directors' fees
Ordinary resolution number 5 – authority for directors to sign all documents and do all such things necessary to implement the above resolutions
Insert “X” in the appropriate block if you wish to vote all your shares in the same manner. If not, insert the number of votes in theappropriate block. If no indication is given, the proxy will vote as he/she thinks fit.
Signed at on 2005
Assisted by me (where applicable)
Each shareholder is entitled to appoint one or more proxies (who need not be shareholders of Sappi) to attend, speak and, on a poll,
vote in place of that shareholder at the annual general meeting.
*Refer notes to notice of meeting on page 152.
Please see overleaf.
sappi limited
proxy form continued
sappi limited page 167
sappi limited
notes to the proxy
The form of proxy must only be used by certificated shareholders or shareholders who hold dematerialised shares in their “own name”.
Other shareholders are reminded that the onus is on them to communicate with their CSDP or broker.
Instructions on signing and lodging the annual general meeting proxy form
1. A deletion of any printed matter and the completion of any blank spaces need not be signed or initialled. Any alteration must be
signed, not initialled.
2. The chairman shall be entitled to decline to accept the authority of the signatory:
2.1 under a power of attorney; or
2.2 on behalf of a company,
if the power of attorney or authority has not been deposited at the office of the company’s transfer secretaries, Computershare
Investor Services 2004 (Pty) Limited, 70 Marshall Street, Johannesburg, 2001, Republic of South Africa, or Capita Registrars,
The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU, United Kingdom, by not later than 11:00 South African time on
Thursday, 03 March 2005.
3. The signatory may insert the name(s) of any person(s) whom the signatory wishes to appoint as his/her proxy in the blank spaces
provided for that purpose.
4. When there are joint holders of shares and if more than one of such joint holders be present or represented, the person whose
name stands first in the register in respect of such shares or his/her proxy, as the case may be, shall alone be entitled to vote in
respect thereof.
5. The completion and lodging of the form of proxy will not preclude the signatory from attending the meeting and speaking and
voting in person thereat to the exclusion of any proxy appointed in terms hereof should such signatory wish to do so.
6. Forms of proxy may be deposited at the office of the company’s transfer secretaries, Computershare Investor Services 2004
(Pty) Limited, 70 Marshall Street, Johannesburg, 2001, Republic of South Africa, or Capita Registrars, The Registry, 34 Beckenham
Road, Beckenham, Kent BR3 4TU, United Kingdom, by not later than 11:00 South African time on Thursday, 03 March 2005.
7. If the signatory does not indicate in the appropriate place on the face hereof how he/she wishes to vote in respect of a particular
resolution, his/her proxy shall be entitled to vote as he/she deems fit in respect of that resolution.
8. The chairman of the annual general meeting may reject any proxy form which is completed other than in accordance with these
instructions, provided that he may accept such proxy forms when he is satisfied as to the manner in which a member wishes to
vote.
page 168 sappi limited
sappi limited
notes
4 Financial highlights
6 Global operations
8 Sappi at a glance
10 Board of directors
14 Chairman’s statement
18 Chief executive officer’s report
24 Sappi Fine Paper review
28 Sappi Forest Products review
31 Sustainable development review
37 Value added statement
38 Management’s discussion and analysis of results
(incorporating financial director’s report)
52 Financial performance
54 Five-year review
58 Share statistics
60 Corporate governance
65 Detailed index to annual financial statements
152 Notice to members
161 Divisional and corporate management
162 Glossary
164 Shareholders’ diary
164 Administration
165 Proxy form
167 Notes to the proxy
IBC Sappi Printer of the Year competition (Inside
Back Cover)
www.sappi.com
How can something that does not move be so moving? How can something that
makes no sound say so much? That’s the power of print. In its finished form, print
has the ability to touch each and every emotion we have. It can make us laugh.
Make us cry. Make us think in ways we’ve never thought before. And because of
that, our relationship with print is one of the most meaningful and influential we will
have in our lives.
annual report 04
Sappi paper used in the annual report:Cover: Printed on Magno Satin 300g/m2 produced at Sappi Maastricht Mill in the NetherlandsText pages 1 – 32 Printed on Magno Satin 150g/m2 produced at Sappi Gratkorn Mill in AustriaText pages 33 – 64 Printed on McCoy Silk Text 100lb/148g/m2 produced at Sappi Cloquet Mill in North AmericaText pages 64 – 168 Printed on Enigma Polar White 120g/m2 produced at Sappi Adamas Mill in South Africa
Paper remembers from the very beginning,
“During every Olympics, our idea of excellence is reshaped,” said Jonathan Leslie, Sappi Chief Executive Officer, at
the gala event in Cape Town in October. “There is always an athlete who performs faster, higher, stronger. Similarly,
every year, at the Sappi International Printer of the Year awards, printers from around the world reshape our ideas
of excellence, raising the bar and performing beyond expectation.”
G R A P H I C O R 3 1 3 0 5
OverviewFor twenty-six years Sappi has promoted excellence in printing by
honouring and celebrating printers through the Sappi Printer of
the Year competition. As Sappi expanded globally, so did the
competition. Today the Sappi International Printer of the Year
awards is the world’s most prestigious print competition.
The competition has run for twenty six-years in South Africa (more
recently the whole of Africa); eleven years in Europe; seven years
in North America and four years in the Sappi Trading region (Asia,
Australasia, Central and South America). It has been held seven
times at the international level.
Worldwide, nearly 6,000 entries from more than 50 countries were
entered in this year’s four qualifying regional Printer of the Year
competitions. An independent panel of judges at each regional
competition selects bronze, silver and gold award winners in each
of the print categories, such as Annual Reports, Calendars and
Posters, Books, Magazines etc. Until 2004, a single regional
winner was selected from these gold award winning entries. The
overall Sappi International Printer of the Year winner was selected
from the four regional winners.
To further build on the success of the competition, from 2005
multiple Sappi Printers of the Year will be announced at each
regional and at the international event, reflecting the print
excellence in each of the qualifying categories.
2004 Sappi International Printer of the Year and Sappi North American Printer of the Year
Category BrochuresPrinter Anderson Lithograph, USAEntry title Cadillac XLR 2004
Sappi African Printer of the Year
Category Calendars and postersPrinter Ultra Litho, South AfricaEntry title The Big 5
Sappi Trading Printer of the Year
Category BooksPrinter Pragati Offset, IndiaEntry title ‘88 Husains in Oils
Sappi European Printer of the Year
Category BrochuresPrinter Fontegrafica, ItalyEntry title The world is a stage
Sappi Printer of the Year
sappiLIFE WITH PRINT
ANNUAL REPORT 2004
sapp
i 2004 annual repo
rt
www.sappi.com
Listings: JSE Securities Exchange South Africa (JSE) – SAP . . . New York Stock Exchange – SPP . . . London Stock Exchange – SAZ . . . Frankfurt Stock Exchange – SPI
© S
app
i Co
rpo
rate Affairs, 2
00
4.