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SAPPI LIMITED
INCORPORATED IN THE REPUBLIC OF SOUTH AFRICA UNDER REGISTRATION NUMBER 05/08963/06 REGISTERED OFFICE:
48 AMESHOFF STREET BRAAMFONTEIN JOHANNESBURG 2001 SOUTH AFRICA SAPPI THE WORD FOR FINE PAPER LETTER TO SHAREHOLDERS NEW YORK STOCK EXCHANGE LISTING - 1998 SAPPI NEW YORK STOCK EXCHANGE LISTING
SAPPI WILL SHORTLY REACH A NEW MILESTONE IN THE HISTORY OF THE COMPANY BY LISTING ITS SHARES ON THE NEW YORK STOCK EXCHANGE (NYSE). THE COMPANY'S PRIMARY LISTING WILL REMAIN IN JOHANNESBURG BUT ITS SHARES WILL NOW BE TRADED NOT ONLY IN LONDON, PARIS AND FRANKFURT BUT ALSO IN NEW YORK (IN THE FORM OF AMERICAN DEPOSITARY RECEIPTS).
THE UNITED STATES IS THE WORLD'S LARGEST PULP AND PAPER MANUFACTURING NATION AND THE NYSE IS THE LEADING MARKET FOR PULP AND PAPER SHARES. LISTING ON THE NYSE WILL MAKE SAPPI SHARES MORE ACCESSIBLE TO US INVESTORS, MANY OF WHOM ARE PRECLUDED FROM OR RELUCTANT TO INVEST IN SHARES WHICH ARE NOT LISTED IN THE UNITED STATES.
MORE THAN 50% OF SAPPI'S SHARES ARE ALREADY OWNED BY INTERNATIONAL INVESTORS. THE LISTING ON THE NYSE IS EXPECTED TO FURTHER INTERNATIONALISE THE SHAREHOLDER BASE AND IMPROVE THE LIQUIDITY AND TRADEABILITY OF SAPPI SHARES AND THIS SHOULD BE TO THE BENEFIT OF ALL SHAREHOLDERS.
SAPPI DOES NOT PLAN TO RAISE NEW CAPITAL AT THE TIME OF ITS LISTING IN NEW YORK. HOWEVER, THE ABILITY TO ACCESS THE WORLD'S LARGEST FINANCIAL MARKET SHOULD MAKE IT EASIER TO RAISE NEW CAPITAL IN THE FUTURE.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (SEC) REGISTRATION
AS PART OF THE PROCESS OF LISTING ON THE NYSE, THE COMPANY IS REQUIRED TO REGISTER WITH THE SEC. THIS PROCESS IS DESIGNED TO ENSURE THAT INVESTORS HAVE ADEQUATE INFORMATION ABOUT A COMPANY PRIOR TO MAKING AN INVESTMENT DECISION. THE REQUIRED DISCLOSURE ALSO ENABLES INVESTORS TO COMPARE FINANCIAL INFORMATION AND OTHER DATA WITH OTHER COMPANIES REGISTERED WITH THE SEC. TO ENSURE UNIFORM FINANCIAL REPORTING, NON-US COMPANIES REGISTERED WITH THE SEC ARE REQUIRED TO SUBMIT A RECONCILIATION OF KEY FINANCIAL INFORMATION WITH THAT WHICH WOULD HAVE BEEN PRESENTED ACCORDING TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP).
US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: (US GAAP)
US GAAP DIFFERS FROM ACCOUNTING PRINCIPLES APPLIED IN MOST OTHER COUNTRIES. IT DEFINES WHAT INFORMATION SHOULD BE INCLUDED IN FINANCIAL REPORTS AND
ESTABLISHES RULES FOR ARRIVING AT FINANCIAL RESULTS. LESS DISCRETION IS ALLOWED TO MANAGEMENT OR THE COMPANY'S AUDITORS.
THE STANDARDS APPLIED BY US GAAP ARE GENERALLY MORE STRICT PARTICULARLY CONCERNING THE TIMING OF INCOME RECOGNITION. FOREIGN COMPANIES REGISTERING IN THE UNITED STATES OFTEN EXPERIENCE SIGNIFICANT DIFFERENCES BETWEEN EARNINGS REPORTED IN TERMS OF THEIR LOCAL ACCOUNTING STANDARDS AND THOSE REPORTED UNDER US GAAP, SOMETIMES RESULTING IN PROFITS PREVIOUSLY REPORTED TURNING INTO MATERIAL LOSSES. RECONCILIATION WITH US GAAP
RECONCILING SAPPI'S REPORTED INCOME TO US GAAP ALSO INCLUDES SIGNIFICANT VARIANCES FROM INCOME REPORTED UNDER SOUTH AFRICAN STANDARDS. THE MAJORITY OF THESE INVOLVE THE TIMING OF INCOME RECOGNITION, NAMELY, WHEN AS OPPOSED TO WHETHER A PROFIT OR LOSS HAS BEEN MADE.
US GAAP RECONCILIATIONS HAVE BEEN COMPLETED FOR SAPPI FOR 1996 AND 1997, AS WELL AS THE FIRST SIX MONTHS TO MARCH 1998. THESE SHOW SIGNIFICANT DECREASES IN EARNINGS PER SHARE FOR THE YEARS 1996 AND 1997, WHILST FOR THE FIRST SIX MONTHS TO MARCH 1998, THE RECONCILIATION SHOWS MARGINALLY HIGHER EARNINGS PER SHARE THAN THOSE PREVIOUSLY REPORTED.
TO ASSIST SHAREHOLDERS IN UNDERSTANDING WHY THIS IS SO, WE PROVIDE, BELOW, DATA ON A SAMPLE OF RECONCILING ITEMS. WITH THE EXCEPTION OF THOSE RELATING TO GOODWILL AND DEFERRED EQUITY, ALL RELATE TO TIMING DIFFERENCES. FOR CLARITY, WE HAVE STATED BOTH SAPPI'S ACCOUNTING POLICIES UNDER SOUTH AFRICAN GENERALLY ACCEPTED ACCOUNTING PRACTICES (SA GAAP) AND THE EQUIVALENT US GAAP TREATMENT. 1. ITEM PRECOMMISSIONING COSTS IN RESPECT OF CAPITAL PROJECTS.
SAPPI ACCOUNTING POLICY CAPITALISE TOTAL NET COSTS INCURRED TO THE DATE THE ASSET IS CONSISTENTLY PRODUCING 80% OF DESIGN CAPACITY. AMORTISE OVER THE USEFUL LIFE OF THE ASSET.
US GAAP TREATMENT CAPITALISE ONLY DIRECT INCREMENTAL COSTS UNTIL THE COMMENCEMENT OF OPERATIONS. AMORTISE OVER A SHORT PERIOD. 2. ITEM PROVISION FOR PLANT MAINTENANCE.
SAPPI ACCOUNTING POLICY CHARGE CURRENT INCOME WITH PROVISIONS TO MEET FUTURE MAJOR MAINTENANCE PROJECTS.
US GAAP TREATMENT NO CURRENT PROVISION FOR FUTURE MAINTENANCE EXPENDITURE IS PERMITTED. COSTS ARE CHARGED TO REVENUE AS INCURRED.
3. ITEM INTEREST CAPITALISED ON TIMBERLAND INVENTORY.
SAPPI ACCOUNTING POLICY CAPITALISE INTEREST HOLDING COSTS OF ALL TIMBERLAND INVENTORY.
US GAAP TREATMENT CAPITALISE INTEREST HOLDING COSTS OF THOSE TIMBERLAND INVENTORIES WHICH EXCLUDE MATURE TIMBER. 4. ITEM DEFERRED TAXATION.
SAPPI ACCOUNTING POLICY PARTIAL METHOD. PROVIDE ONLY TO THE EXTENT THAT A FUTURE LIABILITY FOR TAX IS EXPECTED TO MATERIALISE IN THE MEDIUM TERM. US GAAP TREATMENT COMPREHENSIVE METHOD. PROVIDE FOR THE FULL POTENTIAL LIABILITY FOR TAX, HOWEVER DISTANT.
5. ITEM PROFIT ON SALE OF ASSETS UNDER OPERATING LEASES.
SAPPI ACCOUNTING POLICY PROFIT REPORTED ON SALE OF THE ASSETS.
US GAAP TREATMENT PROFIT REPORTED OVER THE LIFE OF OPERATING LEASES. 6. ITEM PROCEEDS OF INSURANCE CLAIMS IN RESPECT OF DAMAGE TO FIXED ASSETS. SAPPI ACCOUNTING POLICY PROCEEDS APPLIED TO REDUCE VALUE OF FIXED ASSETS. US GAAP TREATMENT PROCEEDS CREDITED TO INCOME AS RECEIVED. 7. ITEM REVALUATION OF FIXED ASSETS.
SAPPI ACCOUNTING POLICY REVALUED AMOUNT AMORTISED OVER THE USEFUL LIFE OF THE ASSETS.
US GAAP TREATMENT ASSET REVALUATIONS ARE NOT PERMITTED - THEREFORE THERE IS NO SUBSEQUENT CHARGE TO INCOME. 8. ITEM GOODWILL ARISING ON ACQUISITION.
SAPPI ACCOUNTING POLICY WRITTEN OFF AGAINST RESERVES.
US GAAP TREATMENT AMORTISED AGAINST PROFITS OVER APPROPRIATE PERIOD FUTURE PROFITS. DEFERRED EQUITY
OVER THE LAST FIVE YEARS, SAPPI HAS ENTERED INTO THREE SEPARATE TRANSACTIONS IN WHICH IT IS COMMITTED TO ACQUIRE MINORITY SHAREHOLDINGS IN SUBSIDIARIES AND TO SETTLE THE PURCHASE PRICE IN THE FORM OF SAPPI LIMITED SHARES OR IN CASH AT SAPPI'S OPTION. THE INTENTION, IN ALL CASES, WAS TO SETTLE - USING SHARES. SAPPI HAS ACCORDINGLY ACCOUNTED FOR THESE TRANSACTIONS AS DEFERRED EQUITY, I.E. IT HAS STATED ITS EARNINGS PER SHARE ON A FULLY DILUTED BASIS AS IF THOSE SHARES HAD ALREADY BEEN ISSUED AT SHARE PRICES PREVAILING AT OR NEAR THE END OF THE REPORTING PERIOD.
US GAAP APPROACHES THESE TRANSACTIONS IN A DIFFERENT WAY. ALL THREE
TRANSACTIONS ARE TREATED IN THE SAME WAY UNDER SA GAAP, BUT UNDER US GAAP TWO OF THE TRANSACTIONS ARE TREATED AS MINORITY SHAREHOLDERS' INTERESTS AND THE THIRD AS DEBT. THE LATTER CHANGES THE DEBT TO EQUITY RATIO MATERIALLY. THE US GAAP EFFECT IS THAT REPORTED INCOME IS REDUCED BY THE RETURN ON THE
INVESTMENTS. ON THE OTHER HAND, THE NUMBER OF SHARES USED TO CALCULATE THE EARNINGS PER SHARE IS NOT INCREASED OVER THOSE ACTUALLY IN ISSUE.
BECAUSE OF THE LOW EARNINGS IN 1996 AND 1997, THE PROPORTION OF OPERATING PROFIT ABSORBED BY THESE ADJUSTMENTS IS HIGH. THE EFFECT IS MUCH LESS IN BETTER PERIODS SUCH AS THE FIRST HALF OF 1998. EARNINGS PER SHARE EFFECT (SA CENTS)
FIRST HALF 1996 1997 1998
ORIGINALLY REPORTED (SA GAAP) 230 172 161
RECONCILED TO US GAAP 113 41 162 DEBT/EQUITY RATIO EFFECT
SEPTEMBER MARCH
1997 1998
DEBT/EQUITY (SA GAAP COMPONENTS) 0,82 0,96
DEBT/EQUITY (US GAAP COMPONENTS) 1,39 1,51
DEBT IS DEFINED AS NET DEBT COMPRISING LONG AND SHORT-TERM DEBT, NET OF CASH AND CASH EQUIVALENTS. EQUITY IS DEFINED AS SHAREHOLDERS' EQUITY PLUS MINORITY INTERESTS.
WHILST THE SEC REGISTRATION DOCUMENT IS FILED WITH THE COMMISSION AND NOT CIRCULATED TO SHAREHOLDERS, WE FELT WE SHOULD MAKE THESE DIFFERENCES KNOWN TO SHAREHOLDERS. THE COMPANY WILL CONTINUE TO REPORT ITS RESULTS UNDER SA GAAP AND FILE AN ANNUAL RECONCILIATION TO US GAAP WITH THE SEC AS REQUIRED FOR FOREIGN COMPANIES. I HOPE YOU WILL FIND THAT THIS DOCUMENT GIVES YOU CLARITY ON THE PROCESS AND UNDERSTANDING OF THE RECONCILIATION. EUGENE VAN AS EXECUTIVE CHAIRMAN
