sappi 2004 annual report - ShareData · curriculum vitae. Board of directors 10 Sappi at a glance 8 A ‘snapshot’ of Sappi’s operations. Chairman’s statement 14 The past year

sappiLIFE WITH PRINT

ANNUAL REPORT 2004

sapp

i 2004 annual repo

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www.sappi.com

Listings: JSE Securities Exchange South Africa (JSE) – SAP . . . New York Stock Exchange – SPP . . . London Stock Exchange – SAZ . . . Frankfurt Stock Exchange – SPI

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rate Affairs, 2

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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


• 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.


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.


• 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


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


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



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


Corporate head office


Forest Products mills (5)

Fine Paper sales offices (4)

Sappi Trading offices (3)

Forest Product sales offices (9)


Southern Africa

Central Africa

Australia

Asia

Europe


Paper mill – joint venture (1)

Sappi Trading offices (4)


Sales offices (19)


you discovered a whole new world LIFE WITH PRINT


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.


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



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


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


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


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


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.


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


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.


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


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


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


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.


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


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.


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


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.


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.


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

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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 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.”


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

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Jan03

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Jan04

** Prices are list prices. Actual transaction prices could differ from prices depictedin the graph.


Coated woodfree prices – USA (East Coast)(US$/short ton **)No. 3 – 60 lb rolls

Jan93

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Paper remembers you packing your passport and


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


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 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


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.


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.


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.


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.


bottom and worked your way up LIFE WITH PRINT

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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,


sustainable development review continued


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.


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.


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


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.


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.



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


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


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


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


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


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



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.



The currency profile of our gross debt at the end of 2004 and 2003 is detailed below:


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:


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).



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


Paper remembers looking back


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



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.


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


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



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.


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


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


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


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


(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


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

share statistics


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


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


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:


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


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


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

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

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.



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


directors’ report continued


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.


US$ million note 2004 2003

sappi limited


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

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



sappi limited


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

group statement of changes in shareholders’ equity


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)


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)


Dividends – US$0.29 per share * – – – – – (66) (66)


Note reference: 17 18 * Dividends relate to the previous financial year’s earnings but were declared subsequent to year-end.


ZAR million 2004 2003

sappi limited


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

group balance sheet in rands convenience translation

as at September 2004


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


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


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).


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


notes to the group annual financial statements


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


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


notes to the group annual financial statements continued


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


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.

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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.


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.

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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.


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.

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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


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.

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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


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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


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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.



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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.

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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.




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).



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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

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)




sappi limited



13. Deferred taxation (continued)Reconciliation of deferred taxation

Deferred taxation balances at beginning of year


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 liabilities * (453) (487)



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.


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.


sappi limited



sappi limited



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

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.)


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.


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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).


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

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


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




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)


Kontrollbank EUR Fixed EUR400 million EUR396 million (5, 7) December 2010 ratio and equity ratio (4)


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.

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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


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

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


Included in other non-current liabilities (refer note 20) 3 3

Included in provisions 7 8

Total restructuring provisions 10 11


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




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


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


sappi limited



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.


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


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


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


sappi limited


sappi limited



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


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


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

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



sappi limited



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

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.


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



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.


2004 2003


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


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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


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


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

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.


2004 2003

US$ million South Africa United States South Africa United States

sappi limited



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).


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


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


sappi limited



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)


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)


* 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.


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


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




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


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




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)



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


sappi limited



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.


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

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



sappi limited



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.


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


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




40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)


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


40. Summary of differences between South African and United States Generally Accepted AccountingPrinciples (continued)


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




40. Summary of differences between South African and United States Generally Accepted Accounting Principles (continued)


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


40. Summary of differences between South African and United States Generally Accepted AccountingPrinciples (continued)


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




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


sappi limited


US$ million note 2004 2003(As restated)

sappi limited



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


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


sappi limited



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.


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


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




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.


sappi limited



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

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 – – –


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.


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

– 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


sappi limited



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



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


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


(2) Retired as executive director in November 2003

sappi limited




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


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


condensed company income statement


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


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



condensed company income statement

condensed company balance sheetat September 2004


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 – –


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


Dividends * – – – – – (659) (659)



Dividends * – – – – – (484) (484)


* This dividend relates to the previous financial year’s earnings but was declared subsequent to year-end.




sappi limited


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)


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


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

– 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.


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




Other members




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




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

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


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

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.


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

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.


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

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)


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

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


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

(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


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

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.


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.

Documents

sappi 2004 annual report - ShareData · curriculum vitae. Board of directors 10 Sappi at a glance 8 A ‘snapshot’ of Sappi’s operations. Chairman’s statement 14 The past year