SAPPI LTD (SAP) 20-F

SAPPI LTD (SAP) 

20-F 

Annual and transition report of foreign private issuers pursuant to 

sections 13 or 15(d) 

Filed on 12/30/2002 

Filed Period 09/29/2002

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As filed with the Securities and Exchange Commission on December 30, 2002 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 20-F 

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE 

SECURITIES EXCHANGE ACT OF 1934 

OR 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 


For the fiscal year ended September 29, 2002 

OR 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 


For the transition period from to 

Commission file number 1-14872 

(Exact name of Registrant as specified in its charter) 

Not Applicable 

(Translation of Registrant's name into English) 

Republic of South Africa 

(Jurisdiction of incorporation or organisation) 

48 Ameshoff Street 

Braamfontein 

Johannesburg 2001 

Republic of South Africa 

(Telephone: +27-11-407-8111) 

(Address and telephone number of principal executive offices) 

Securities registered or to be registered pursuant to Section 12(b) of the Act. 

American Depositary Shares, evidenced by 

American Depositary Receipts, each representing 

1 Ordinary Share 

(Title of each class) 

New York Stock Exchange 

Ordinary Shares, par value R1.00 per Share* 

(Name of each exchange on which registered) 

Securities registered or to be registered pursuant to Section 12(g) of the Act. 

None 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. 

None 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual 

report. 

239,071,892 Ordinary Shares 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 

during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing 

requirements for the past 90 days.

YES X NO 

Indicate by check mark which financial statements item the registrant has elected to follow. 

ITEM 17 ITEM 18 X 

* Not for trading but only in connection with the registration of the American Depositary Shares, pursuant to the requirements of the Securities and 

Exchange Commission. 

Our Use of Terms and Conventions in this Annual Report 

Accounting Periods and Principles 

Currency of Presentation and Exchange Rates 

Forward-Looking Statements 

TABLE OF CONTENTS 

PART I 

Item 1. Identity of Directors, Senior Management and Advisers 

Item 2. Offer Statistics and Expected Timetable 

Item 3. Key Information 

Item 4. Information on the Company 

Item 5. Operating and Financial Review and Prospects 

Item 6. Directors, Senior Management and Employees 

Item 7. Major Shareholders and Related Party Transactions 

Item 8. Financial Information 

Item 9. The Offer and Listing 

Item 10. Additional Information 

Item 11. Quantitative and Qualitative Disclosures About Market Risk 

Item 12. Description of Securities Other than Equity Securities 

Item 13. Defaults, Dividend Arrearages and Delinquencies 

PART II 

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 

Item 15. Controls and Procedures 

Item 16. [Reserved] 

Item 17. Financial Statements 

Item 18. Financial Statements 

Item 19. Exhibits 

PART III 

ii

OUR USE OF TERMS AND CONVENTIONS IN THIS ANNUAL REPORT 

Unless otherwise specified or the context requires otherwise in this Annual Report on Form 20-F ("Annual Report"): 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

references to "Sappi", "Sappi Group", "Group", "we", "us" and "our" are to Sappi Limited together with its subsidiaries; 

references to "southern Africa" are to the Republic of South Africa, the Kingdom of Swaziland, the Kingdom of Lesotho, the Republic of 

Namibia and the Republic of Botswana; 

references to "North America" are to the United States, Canada and the Caribbean; 

references to "Latin America" are to the countries located on the continent of South America and Mexico; 

references to "Rand" and "R" are to South African Rand and references to "SA cents" are to South African cents, the currency of South Africa; 

references to "US dollar(s)", "dollar(s)", "US$", "$" and "US cents" are to United States dollars and cents, the currency of the United States; 

references to "euro" and "€" are to the currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant 

to the Treaty establishing the European Economic Community, as amended by the Treaty on the European Union; 

references to "Guilders" and "NLG" are to Dutch Guilders, the former currency of the Netherlands; 

references to "Deutsche marks" and "DEM" are to German Deutsche marks, the former currency of Germany; 

references to "UK pounds sterling" and "GBP" are to United Kingdom pounds sterling, the currency of the United Kingdom; 

references to "m 2 " are to square metres and references to "hectares" or "ha" are to a land area of 10,000 square metres or approximately 2.47 

acres; 

references to "tonnes" are to metric tonnes (approximately 2,204.6 pounds or 1.1 short tonnes); 

references to "market share" are based upon sales volumes in a specified geographic region during the fiscal year ended September 29, 2002; and 

references to "the Potlatch acquisition" are to the acquisition on May 13, 2002 of Potlatch Corporation's coated fine paper business in an asset 

purchase. The acquisition included Potlatch's Cloquet, Minnesota pulp and paper mill as well as the brands, order book and working capital of 

the Cloquet mill and the brands, order book and inventories of Potlatch's Brainerd, Minnesota paper mill for an aggregate purchase price of 

$483 million. We did not acquire Potlatch's Brainerd mill, which Potlatch has closed. 

Except as otherwise indicated, in this Annual Report the amounts of "capacity" or "production capacity" of our facilities or machines are based upon our 

best estimates of production capacity at the date of filing of this Annual Report. Actual production by machines may differ from production capacity as a 

result of products produced, variations in product mix and other factors. 

Certain market share information and other statements presented herein regarding our position relative to our competitors with respect to the manufacture 

or distribution of particular products are not based on published statistical data or information obtained from independent third parties, but 

reflect our best estimates. We have based these estimates upon information obtained from our customers, trade and business organisations and associations 

and other contacts in our industries. 

Unless otherwise provided in this Annual Report, trademarks identified by ® are registered trademarks of Sappi Limited or our subsidiaries. 

iii 

ACCOUNTING PERIODS AND PRINCIPLES 

Unless otherwise specified, all references in this Annual Report to a "fiscal year" and "year ended" of Sappi Limited refer to a twelve-month financial 

period. All references in this Annual Report to fiscal 2002, fiscal 2001, fiscal 2000, fiscal 1999 or fiscal 1998 or the year ended September 2002, 2001, 2000, 

1999 or 1998 refer to Sappi Limited's twelve-month financial periods ended on September 29, 2002, September 30, 2001, September 27, 2000, September 29, 

1999 and September 30, 1998, respectively; references in this Annual Report to fiscal 2003 refer to the period beginning September 30, 2002 and ending 

September 28, 2003. Our Group annual financial statements included elsewhere in this Annual Report have been prepared in conformity with South African 

generally accepted accounting principles ("South African GAAP" or "SA GAAP"), which differ in certain significant respects from United States generally 

accepted accounting principles ("United States GAAP" or "US GAAP"); see note 38 to our Group annual financial statements included elsewhere in this 

Annual Report. On December 31, 1997, we acquired a 91.5% ownership interest in KNP Leykam Holding AG ("KNP Leykam"). Our Group annual financial 

statements for the year ended September 1998 include the results of KNP Leykam since its acquisition on December 31, 1997. In addition, on May 13, 2002, 

we acquired the coated fine paper business of Potlatch Corporation. Our Group annual financial statements for the year ended September 2002 include the 

results for the acquired coated fine paper business since its acquisition. 

CURRENCY OF PRESENTATION AND EXCHANGE RATES

We publish our Group annual financial statements and all financial data presented in this Annual Report in US dollars on a nominal (non-inflation 

adjusted) basis. During fiscal 2000, we changed our reporting currency from Rand to US dollars. Certain capital expenditure US dollar values disclosed in this 

Annual Report for years prior to 1998 have been converted from their base currency at either the average rate or closing rate of exchange for the applicable 

year, on a basis consistent with note 2 to our Group annual financial statements included elsewhere in this Annual Report. For information regarding the 

conversion to US dollars in fiscal 2002, 2001 and 2000, see note 2 to our Group annual financial statements included elsewhere in this Annual Report. 

FORWARD-LOOKING STATEMENTS 

In order to utilise the "Safe Harbor" provisions of the United States Private Securities Litigation Reform Act of 1995 (the "Reform Act"), we are 

providing the following cautionary statement. Except for historical information contained herein, statements contained in this Annual Report may constitute 

"forward-looking statements" within the meaning of the Reform Act. The words "believe", "anticipate", "expect", "intend", "estimate", "plan", "assume", 

"positioned", "will", "may", "should", "risk" and other similar expressions, which are predictions of or indicate future events and future trends, which do not 

relate to historical matters identify forward-looking statements. In addition, this document includes forward-looking statements relating to our potential 

exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. You should not rely on forwardlooking 

statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause 

our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by 

such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not 

iv 

limited to: the highly cyclical nature of the pulp and paper industry; pulp and paper production, production capacity and pricing levels in North America, 

Europe, Asia and southern Africa; any major disruption in production at our key facilities; changes in environmental, tax and other laws and regulations; 

adverse changes in the markets for our products; any delays, unexpected costs or other problems experienced with any business acquired or to be acquired and 

achieving expected savings and synergies; consequences of our leverage; adverse changes in the South African political situation and economy or the effect of 

governmental efforts to address present or future economic or social problems; and the impact of future investments, acquisitions and dispositions (including 

the financing of investments and acquisitions) and any delays, unexpected costs or other problems experienced in connection with dispositions. 

These factors are fully discussed in this Annual Report. For further discussion on these factors, see "Item 3—Key Information-Selected Financial Data", 

"Item 3—Key Information—Risk Factors", "Item 4—Information on the Company", "Item 5—Operating and Financial Review and Prospects—Operating 

Results", "Item 10—Additional Information—Exchange Controls" and note 33 to our Group annual financial statements included elsewhere in this Annual 

Report. You are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of the 

filing of this Annual Report and are not intended to give any assurance as to future results. We undertake 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. 

v 

PART I 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 

Not applicable. 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 


ITEM 3. KEY INFORMATION 

Selected Financial Data 

The selected financial data set forth below has been derived from our Group annual financial statements and are qualified by reference to, and should be 

read in conjunction with, our Group annual financial statements and the notes thereto, which are included elsewhere in this Annual Report, and "Item 5— 

Operating and Financial Review and Prospects". 

We prepare our Group annual financial statements according to South African generally accepted accounting principles. There are significant differences 

between these principles and those applied in the United States. You can read about the principal differences in note 38 to our Group annual financial 

statements included elsewhere in this Annual Report. 

In fiscal 2000, we changed our reporting currency from Rand to US dollars to facilitate a better understanding of our results, since a majority of our sales 

are in US dollars and the US dollar is the major currency of the pulp and paper industry. See note 2 to our Group annual financial statements included 

elsewhere in this Annual Report. 

Consolidated Income Statement Data: 

2002 


Year Ended September 


1999 

(US$ in million, except per share and number of shares data) 

1998

South African GAAP: 

Sales (1) 3,729 4,184 4,718 4,422 4,308 

Operating profit 389 446 672 395 409 

Net profit applicable to shareholders 220 138 363 114 107 

Basic earnings per share (US cents) 95 59 153 51 53 

Diluted earnings per share (US cents) 94 59 151 51 52 

Dividends per share (US cents) (2) 28 26 25 19 18 

United States GAAP: 

Sales (1) 3,729 4,184 4,718 4,422 4,308 

Operating profit (3) 400 273 704 418 456 

Net profit applicable to shareholders 236 130 366 141 78 

Basic earnings per share (US cents) 103 56 156 64 39 

Diluted earnings per share (US cents) 102 56 153 62 39 

Consolidated Balance Sheet Data: 


Total assets 4,641 4,504 4,768 5,334 6,336 

Net assets (4) 3,713 3,144 3,667 3,679 4,823 

Total long-term borrowings 1,455 1,012 1,278 1,404 2,558 

Shareholders' equity 1,601 1,503 1,618 1,436 1,466 

1 


Total assets 4,768 4,643 4,923 5,548 6,485 

Net assets (4) 3,833 3,278 3,754 3,829 4,923 

Total long-term borrowings 1,498 1,055 1,299 1,416 2,417 

Shareholders' equity 1,572 1,553 1,669 1,499 1,495 

Other Information: 


EBITDA (5) 724 590 1,050 702 778 

Adjusted EBITDA (5) 741 797 1,052 776 766 


EBITDA (5) 743 618 1,083 800 817 

Adjusted EBITDA (5) 749 623 1,093 805 823 

Other: 

Weighted average number of ordinary shares in issue (in million) 230.2 232.8 236.9 223.8 200.5 

(1) 

(2) 

(3) 

(4) 

(5) 

Sales represents the net sales value of all products sold to outside parties after the deduction of rebates. 

The dividends per share were, in each case, declared after the end of the year indicated, out of profits earned for that year. Prior to the year ended September 2000, it was our policy to 

declare cash dividends in Rand. Dividends paid in Rand have been converted to US dollars at the ruling rate of exchange at the date of the declaration of the dividend. It is now our 

policy to declare cash dividends in US dollars. For further information on our dividend policy, see "Item 8—Financial Information—Dividend Policy". 

Certain items, which are included in Non-trading loss (profit) under SA GAAP, are included in Operating profit; and others in Extraordinary items for US GAAP. For more 

information refer to note 38 to our Group annual financial statements included elsewhere in this Annual Report. 

Net assets equals total assets less current liabilities. 

"Adjusted EBITDA" represents net profit before the deduction of depreciation, cost of timber harvested, amortisation, net interest, income taxes, other expenses/income and minority 

interest. Based on our experience in the paper industry, we believe that Adjusted EBITDA and related measures of cash flow provide an important tool for measuring paper companies 

in several areas, including liquidity, operating performance and the ability to borrow money (and to make payments on borrowings). Analysts and investors in the paper industry also 

use Adjusted EBITDA for a peer group valuation measurement. However, Adjusted EBITDA is presented on a Group basis, and there are regulatory and contractual limitations on our 

businesses' ability to transfer funds among each other. We may also incur tax costs with these transfers. As a result, Adjusted EBITDA generated by one business may not be available 

to make payments on borrowings by another business. Adjusted EBITDA should not be treated as an alternative to items determined under generally accepted accounting principles 

like operating profit or cash flow from operating activities. It also does not provide an indication of liquidity or operating performance. Different companies and analysts may calculate 

Adjusted EBITDA differently, so making comparisons among companies on this basis should be done very carefully. 

The following table reconciles Net profit applicable to shareholders to EBITDA and to Adjusted EBITDA. 





(US$ in million) 


Net profit applicable to shareholders 220 138 363 114 107 

Add back: 

Depreciation, amortisation and fellings 352 351 380 381 357 

Net financing costs 74 92 97 145 216 

Taxation 78 9 197 46 81 

Minority interest — — 13 16 17 

EBITDA 724 590 1,050 702 778 

Add back: 

Non-trading loss (profit) before taxation 17 207 2 74 (12) 

1999 

1998

Adjusted EBITDA 741 797 1,052 776 766 

2 







Net profit applicable to shareholders 236 130 366 141 78 

Add back: 

Depreciation, amortisation and fellings 349 350 388 387 367 

Net financing costs 74 92 98 157 236 

Taxation 84 46 218 99 100 

Minority interest — — 13 16 36 

EBITDA 743 618 1,083 800 817 

Add back: 

Extraordinary items after taxation 6 5 10 5 6 

Adjusted EBITDA 749 623 1,093 805 823 

3 

RISK FACTORS 

In addition to other information contained in this Annual Report, you should carefully consider the following factors before deciding to invest in our 

ordinary shares and American Depositary Shares ("ADSs"). There may be additional risks that we do not currently know of or that we currently deem 

immaterial based on the information available to us. Our business, financial condition or results of operations could be materially adversely affected by any 

of these risks, resulting in a decline in the trading price of our ordinary shares and ADSs. 

Risks Related to Our Industry. 

We operate in a highly cyclical industry, which has in the past resulted in substantial fluctuations in our results 

The markets for our pulp and paper products are significantly affected by changes in industry capacity and output levels and by cyclical changes in the 

world economy. As a result of periodic supply/demand imbalances in the pulp and paper industry, these markets historically have been highly cyclical, with 

volatile pulp and paper prices. The timing and magnitude of price increases or decreases in the pulp and paper market have generally varied by region and by 

type of pulp and paper. 

The selling prices of the majority of the products manufactured and purchase prices of many of our raw materials used generally fluctuate in line with 

commodity cycles. Other than maintaining a high level of pulp integration, no hedging techniques related to our raw materials and products are applied. 

Movements in prices of pulp and paper products are difficult to predict. Also, there may be periods during which demand for our products is insufficient to 

enable us to operate our production facilities in an economical manner. A sustained period of weak demand or excess supply would be likely to adversely 

affect pulp and paper prices which could have a material adverse effect on our operating rates and financial results. 

Despite a relatively high level of pulp integration on a Group-wide basis, a significant increase in the prices for pulp or pulpwood could adversely affect 

our non-integrated and partially integrated operations if they are unable to raise paper prices sufficiently to offset the effects of increased costs. 

The majority of our fine paper sales consist of sales to merchants. The pricing of products for merchant sales can generally be changed upon between 30 

to 90 days advance notice to the merchant. Sales to converters may be subject to longer notice periods for price changes. Such notice periods generally would 

not exceed 6 to 12 months. In southern Africa, we have entered into longer-term fixed-price agreements of between 6 to 12 months duration for primarily 

packaging paper and newsprint sales with domestic customers. Such agreements accounted for less than 5% of consolidated sales during fiscal 2002. 

For further information, see "Item 4—Information on the Company—Business Overview—The Pulp and Paper Industry". 

The markets for pulp and paper products are highly competitive, and many of our competitors have advantages that may adversely affect our ability to 

compete with them. 

We compete against a large number of pulp and paper producers located around the world. A recent trend towards consolidation in the pulp and paper 

industry has created larger, more focused pulp and paper companies. Some of these companies benefit from greater financial resources or operate mills that 

are lower cost producers of pulp and paper products than our mills. We cannot assure you that each of our mills will be competitive. Furthermore, we cannot 

assure you that we will be able to take advantage of consolidation opportunities, which may arise, or that any failure to exploit opportunities for growth would 

not make us less competitive. Increased competition, including in southern Africa as import duties decrease in accordance with the terms of a free trade 

agreement 

4 

1999 

1998

etween South Africa and the European Union, could cause us to lose market share, increase expenditures or reduce pricing, any of which could have a 

material adverse effect on the results of our operations. 

The cost of complying with environmental regulation may be significant to our business. 

Our operations are subject to a wide range of environmental requirements in the various jurisdictions in which we operate. We expect to continue to incur 

significant expenditures and may face operational constraints to maintain compliance with applicable environmental laws, to upgrade equipment at our mills 

and to meet new regulatory requirements, including those in the United States, South Africa and Europe. Expenditures to comply with future environmental 

laws and regulations could have a material adverse effect on our business and financial condition. 

For further information, see "Item 4—Information on the Company—Business Overview—Environmental and Safety Matters—Environmental Matters" 

and "Item 5—Operating and Financial Review and Prospects—Operating Results". 

Insurance cover has become more restrictive, which may result in our paying significantly higher premiums and being unable to maintain the levels or 

types of insurance carried in the past. 

We have a policy of externally insuring high severity, low frequency risk and self-insuring the balance. The insurance market has experienced significant 

premium increases over the last two years and this trend appears to be continuing. Major losses to the insurance industry and an increased degree of 

consolidation, coupled with a reduction of capacity, have been the cause. Insurers have withdrawn cover for losses from acts of terrorism under the usual 

property damage policies. Although, we may have been able to secure limited cover for that risk separately, we have decided not to take separate cover for 

losses from acts of terrorism. While this decision was given careful consideration and we believe it is in line with industry practice, it is an exception from our 

normal policy and the loss we might suffer from an act of terrorism could be material to our business. 

For fiscal 2002, contrary to previous years, we were not able to cover property damage and losses from business interruption and machinery breakdown 

to full value. While we believe our insurance provides adequate coverage for reasonably foreseeable losses, we are unable to assure you that actual losses will 

not exceed our coverage or that such excess will not be material. In parallel, we are working on improved enterprise risk management to lower the risk of 

incurring losses from uncontrolled incidents. 

Risks Related to Our Business 

Our indebtedness may impair our financial and operating flexibility. 

While our ratio of net debt to capitalisation has improved in recent years, from 58% at October 1, 1997, to 37% at September 29, 2002, our net debt 

increased by $483 million as a result of our Potlatch acquisition in May 2002. At September 29, 2002, our net debt was $1,419 million. 

We are subject to South African exchange controls, which inhibit the free flow of funds from South Africa and can restrict activities of all members of 

the Sappi Group. These exchange controls have affected the geographic distribution of our debt. As a result, acquisitions in the United States and Europe were 

financed with indebtedness incurred by companies in those regions. The level of our debt has important consequences. For example, our ability to obtain 

additional financing may be limited, which could limit, among other things, our ability to exploit growth opportunities; a substantial portion of our cash flow 

from operations may be required to make debt service payments; we are exposed to increases in interest rates because a portion of our debt bears interest at 

variable rates; we may be more leveraged than certain of our competitors; we may be more vulnerable to economic downturns 

and adverse changes in our business; and our ability to withstand competitive pressure may be more limited. 

5 

In addition, certain of our financing arrangements contain covenants and conditions that significantly restrict the activities of members of our Group. 

Exchange control restrictions may restrict the transfer of funds directly or indirectly between our subsidiaries or between the parent company and our 

subsidiaries. We may also incur significant tax costs in connection with these transfers of funds. As a consequence, the ability of Sappi Limited or any of our 

subsidiaries to make scheduled payments on its debt will depend on its financial and operating performance, which will depend on various factors beyond our 

control, such as prevailing economic and competitive conditions. If Sappi Limited or any of our subsidiaries is unable to achieve operating results or 

otherwise obtain access to funds sufficient to enable it to meet its debt service obligations, it could face substantial liquidity problems. As a result, it might 

need to delay investment or dispose of material assets or operations. The timing of and the proceeds to be realised from any such disposition would depend 

upon circumstances at the time. 

There are risks related to the recently completed Potlatch Acquisition. 

The recently completed Potlatch acquisition, and any other acquisition, could result in unforeseen difficulties in integrating the acquired business with 

our existing businesses and could divert a disproportionate amount of management time and attention. In connection with the Potlatch acquisition, Sappi Fine 

Paper North America was required to negotiate new labour contracts for the Cloquet mill. As of December 2002 the new labour contracts are still being 

negotiated and employees have been working without a labour contract for over six months. We cannot assure you that the intended synergies and benefits, 

including the expected incremental increase in sales or the full benefit of the goodwill and know-how acquired, from this acquisition will be realised or that 

we will be able to negotiate a new labour contracts for Cloquet on terms that will be favourable to us. 

We have assumed Potlatch's obligations under several long-term cross-border leases involving a substantial portion of the assets we acquired. There are 

no further lease payments foreseen; however, we have agreed to indemnify other parties to the lease arrangements for specified liabilities, including tax 

liabilities, that could be substantial if they arise. In addition, we are subject to a number of risks, which could affect our use of the assets or require payment of 

substantial amounts. Potlatch has agreed generally to indemnify us against losses resulting from these risks, but we cannot assure you that Potlatch will or will 

be able to fulfil its indemnity obligations. While these lease arrangements are in place, we will be subject to significant restrictions on our use of and ability to 

transfer our rights in the leased assets. These restrictions will limit our flexibility in conducting our business and could impair our ability to operate our 

business in the most efficient manner. 

For further information on the recently completed Potlatch acquisition, see "Item 5—Operating and Financial Review and Prospects—Liquidity and 

Capital Resources—Mill Closures, Acquisitions and Dispositions" and "Item 8—Financial Information—Other Financial Information—Legal Proceedings".

Labour agreements are under negotiation at several North American mills. 

The labour contracts for Cloquet, Allentown and Westbrook are currently being negotiated, and negotiations for new labour contracts at Somerset will 

commence in January. As a result of the Potlatch acquisition, we rejected the collective bargaining agreement between the unions and Potlatch and are 

operating under terms and conditions set by Sappi pending the conclusion of negotiations. The Westbrook and Allentown contracts expired in May 2002 and 

March 2001 respectively, and the affected parties are working under contract extensions. Somerset's labour contracts will expire in January 2003, and 

negotiations will commence in early 2003. While we anticipate reaching agreements on new contracts at all affected sites, and do not expect a work stoppage 

to occur in the event that agreements 

cannot be reached and a prolonged work stoppage that results in a curtailment of output ensues at any or all such sites, our business could be adversely 

affected. Muskegon's contract will expire in June 2004. 

Fluctuations in the value of currencies, particularly the Rand and the euro, in relation to the US dollar have in the past had and could in the future have 

a significant impact on our earnings in these currencies. 

Exchange rates fluctuations have in the past, and may in the future, affect the competitiveness of our products in relation to the products of pulp and 

paper companies based in other countries. 

6 

Fluctuations in the exchange rate between currencies, particularly the Rand and euro, in relation to the US dollar have in the past significantly affected 

and could in the future significantly affect our earnings in those currencies and our shareholders' equity. We now have a negative balance in non-distributable 

reserves caused by the foreign currency translation reserve, which resulted from our change in reporting currency. This represents the cumulative translation 

effect of the strength of the US dollar on our equity in Rand and other currencies. 

Since the adoption of the euro by the European Union on January 1, 1999 (when the euro was trading at approximately $1.18 per euro), it has depreciated 

against the US dollar to approximately $0.98, $0.92 and $0.88 per euro at the end of fiscal 2002, 2001 and 2000, respectively. It reached a low of 

approximately $0.83 per euro on October 25, 2000 and, on December 11, 2002, was trading at approximately $1.01 per euro. 

In recent years, the value of the Rand against the US dollar has depreciated considerably. It has depreciated against the US dollar to approximately 

R10.54, R8.94 and R7.22 per US dollar at the end of fiscal 2002, 2001 and 2000, respectively. The Rand reached a low of approximately R13.90 per 

US dollar on December 21, 2001. Since then, it has appreciated and on December 11, 2002 was trading at approximately R8.86 per US dollar. 

For further information, see notes 16 and 33 to our Group annual financial statements included elsewhere in this Annual Report and "Item 5—Operating 

and Financial Review and Prospects—Operating Results—Overview—Inflation and Foreign Exchange". 

There are risks relating to South Africa that could affect your investment in our Company. 

We are incorporated in South Africa and own significant operations in southern Africa. As a result, there are risks relating to South Africa, which could 

affect an investment in our Company. These risks arise from the fact that we are subject to various economic, fiscal, monetary, regulatory, operational and 

political policies and factors that affect South African companies and their subsidiaries generally. See "Item 5—Operating and Financial Review and 

Prospects—South African Economic and Political Environment", "Item 5—Operating and Financial Review and Prospects—Foreign Exchange, Inflation and 

Interest Rates" and "Item 5—Operating and Financial Review and Prospects—South African Exchange Controls". Certain of these risks, for example 

regulatory and operational risks, are limited by the fact that in fiscal 2002, only 21% of our sales emanated from southern Africa, with Europe representing 

47% and North America representing 32%, and only 21% of our net operating assets were located in southern Africa, with Europe representing 39% and 

North America representing 40%. We did, however, derive 50% of our operating profit in fiscal 2002 from our South African operations. 

Several customers account for a significant amount of our revenues. 

We sell a significant portion of our products to several major customers, including Buhrmann NV, Unisource Worldwide, Inc. and International Paper 

Company. Any adverse development affecting our principal customers or our relationships with our principal customers could have an adverse effect on our 

business and results of operations. See "Item 4—Business Review—Marketing and Distribution— 

Sappi Fine Paper—Customers" and "Item 4—Business Review—Marketing and Distribution—Sappi Forest Products—Customers". 

Risks Related to Our Shares 

Your ability to sell a substantial number of ordinary shares may be restricted by the limited liquidity of shares held on the JSE Securities Exchange South 

Africa. 

The principal trading market for the ordinary shares of Sappi Limited is the JSE Securities Exchange South Africa ("JSE") (formerly the Johannesburg 

Stock Exchange). Historically, trading volumes and liquidity of shares listed on the JSE have been low in comparison with other major markets. In fiscal 

2002, 182 million ordinary shares of Sappi Limited were traded on the JSE and 48 million ADSs were traded on the New York Stock Exchange. See 

"Significant shareholders may be able to influence the affairs of our Company", "Item 7—Major Shareholders and Related Party Transactions—Major 

Shareholders", "Item 9—The Offer and Listing—Offer and Listing Details" and "Item 9—The Offer and Listing—Markets". 

Significant shareholders may be able to influence the affairs of our Company. 

7 

Although our investigation of beneficial ownership of our shares identified only four beneficial owners of more than 5% of our ordinary shares, holding a 

total of less than 28%, as shown in our shareholders' register at October 25, 2002, the four largest shareholders of record, three of which are nominees that 

hold shares for a multitude of beneficial owners, owned approximately 90.1% of our ordinary shares. See "Item 7—Major Shareholders and Related Party 

Transactions—Major Shareholders".

ITEM 4. INFORMATION ON THE COMPANY 

8 

HISTORY AND DEVELOPMENT OF THE COMPANY 

Sappi Limited is a public company incorporated in the Republic of South Africa. Its principal executive offices are located at 48 Ameshoff Street, 

Braamfontein, Johannesburg 2001, Republic of South Africa and its telephone number is +27-11-407-8111. 

Sappi Limited was founded and incorporated in 1936 in South Africa and is a corporation organised under the Companies Act 61 of 1973 of the Republic 

of South Africa. 

Until 1990, we primarily expanded our operations within southern Africa. Since 1990, we have grown through acquisitions outside of southern Africa, 

such that for fiscal 2002, 79% of our sales and 50% of our operating profit, respectively, were generated, and 79% of our net operating assets were located, 

outside southern Africa, principally in North America and Europe. In December 1994, Sappi and a group of financial investors acquired S.D. Warren 

Company, the market leader in the United States in coated woodfree paper and a major producer of other speciality paper products. It now conducts business 

as Sappi Fine Paper North America. In December 1997, we acquired a 91.5% ownership interest in KNP Leykam, the leading European producer of coated 

woodfree paper. KNP Leykam now conducts business as Sappi Fine Paper Europe. On May 13, 2002, we acquired Potlatch Corporation's coated fine paper 

business by purchasing Potlatch's Cloquet, Minnesota pulp and paper mill as well as the brands, order books and working capital of the Cloquet mill and the 

brands, order books and inventories of Potlatch's Brainerd, Minnesota paper mill for an aggregate cash purchase price of $483 million. We did not acquire 

Potlatch's Brainerd Minnesota paper mill, which Potlatch has closed. 

For information on our principal investments and capital expenditures, see the description of our business in "—Business Overview" and "Item 5— 

Operating and Financial Review and Prospects—Liquidity and Capital Resources". 

We currently have our primary listing on the JSE and have secondary listings on the New York, London and Frankfurt Stock Exchanges. 

Business Strategy 

BUSINESS OVERVIEW 

Our objective for the coming years is to build on our position as the global leader in the coated woodfree paper market, which is a rapidly growing 

market sector, as well as the dissolving pulp market and to support this with a high level of economic pulp integration. These represent our core products and 

sectors in the paper and forest products industry. The key elements of our business strategy are and have been as follows: 

Strengthen our leadership position in our core businesses through organic growth and selective acquisitions. 

Although industry consolidation both in Europe and North America has resulted in the five largest producers in each of the respective markets now 

supplying approximately 80% of the respective coated woodfree paper demand, we believe that opportunities for further consolidation remain. We intend to 

be at the forefront of this consolidation, aiming to strengthen our position in Europe, North America, and eventually Asia. We intend to focus on investment 

and acquisition opportunities that fit our strategies, that offer a potential return that exceeds our expected cost of capital and that in the medium term are more 

advantageous than buying back our shares. 

Maintain a global presence. 

One of Sappi's key strengths is our geographically diverse business base. We have a significant presence in each of Europe, North America, Africa and 

Asia, which we over the past ten years have built largely through strategic acquisitions. We will continue to pursue a strategy of geographic diversification 

supported by leading market positions. 

Maintain a high level of economic pulp integration. 

We intend to maintain a high level of economic pulp integration, which helps reduce the impact of pulp price volatility on our earnings. 

Maintain cost efficient asset base and invest to increase efficiency/productivity. 

We believe our asset base represents some of the lowest cost and most efficient assets in the coated woodfree paper sector in the world. We maintain a 

rigorous focus on costs, and actively manage our asset base, including divesting or closing non-performing assets. We have closed 13 paper machines since 

1994, including recent closures of our Mobile mill in North America and the Transcript mill in the United Kingdom. 

We maintain an investment policy that is focused on high return projects. A significant portion of our investments are designed to increase production 

capacity, reduce costs and improve product quality. 

Drive growth through innovation. 

9 

The Sappi Group operations represent the originators of many of the major innovations in the industry in the last century. We continue to maintain a 

focus on innovation through our research and development centres in Europe, North America and South Africa and have established multi-regional, multidiscipline 

teams to ensure that we transfer knowledge throughout the Group and implement best practice. Through our partnership with a leading global 

software provider, we are focused on developing unique information technology solutions that satisfy our customers' requirements and production capabilities, 

resulting in improved service delivery and operational efficiency.

THE PULP AND PAPER INDUSTRY 

The paper industry is generally divided into the printing and writing paper segment, consisting of newsprint, groundwood paper and woodfree paper, and 

the packaging segment, consisting of containerboard, boxboard and sackkraft. 

Long-term, paper and board consumption has grown in line with overall economic growth, but consumption patterns are also influenced by short-term 

economic developments. Pricing largely is influenced by the supply/demand balance for individual products, which is partially dependent on inventory levels 

in the industry. The ability to adapt capacity changes in response to shorter-term fluctuations in demand is limited, as large amounts of capital are required for 

the construction or upgrade of production facilities and as lead times are long between the planning and completion of new facilities. Industry-wide overinvestment 

in new production capacity has in the past led to situations of significant oversupply, which has caused product prices to decrease. This has been 

exacerbated by inventory speculation as purchasers have sought to benefit from the price trend. As a result, financial performance has deteriorated during 

periods of significant oversupply to again improve when demand has increased to levels that support the implementation of price increases. 

In recent years the industry has experienced significant strategic changes. The high costs associated with building new paper mills and establishing and 

growing market share has led to companies focusing on acquisition, rather than construction, of new capacity. This development has led to a reduction in 

events of significant dislocations in the supply/demand balance typically associated with the entry of 

10 

new production capacity into established markets. Another result of this trend has been a greater concentration of production capacity among fewer producers. 

Many leading industry producers now focus on fewer core grades and have divested non-core assets that are not part of the industry or which have been 

considered not consistent with long-term strategies. The regional and global market shares of leading producers have increased significantly over the past 

decade. As a result of this consolidation activity, it is generally expected that the cyclicality of the industry will be less pronounced going forward. 

The following table shows a breakdown and description of the major product categories Sappi participates in, a description of products and the typical 

uses for such products. We have produced and sold each of these products in each of our last three fiscal years. 

Major Product Categories 

Paper: 

Fine papers: 

Packaging 

products: 

Groundwood 

products: 

Pulp: 

Description and Typical Uses 

Coated paper Higher level of smoothness than uncoated paper achieved by applying a coating (typically clay based) on the surface 

of the paper. As a result, higher reprographic quality and printability is achieved. Uses include brochures, catalogues, 

corporate communications materials, direct mail promotions, educational textbooks, luxury advertising, magazine 

covers and upscale magazines. 

Uncoated paper Uses include business forms, business stationery, general printing paper, tissue and photocopy paper. 

Speciality paper Can be either coated or uncoated. Uses include bags, labels, packaging and release paper for casting textured finishes 

(e.g., artificial leather). 

Packaging paper Heavyweight grades of paper and board primarily used for packaging consumer, agricultural and industrial products. 

Uses include containerboard (corrugated shipping containers), boxboard (folding cartons, bags) and sackkraft (multiwalled 

shipping sacks). 

Newsprint Generally manufactured from groundwood or recycled pulp. May be reinforced to varying degrees by adding 

chemical pulp in the production process. Uses include advertising inserts and newspapers. Demand is highly 

dependent on newspaper circulation and advertising volume. 

Coated 

groundwood 

paper 

A coated groundwood fibre based paper, primarily used for magazines, catalogues and advertising material. 

Manufactured from mechanical pulp. 

11 

Paper pulp Main raw material used in production of printing, writing and packaging paper. Pulp is the generic term that describes the 

cellulose fibre derived from wood. These cellulose fibres may be separated by mechanical, thermo-mechanical or chemical 

processes. The chemical processes involve removing the glues (lignins) which bind the wood fibres to leave cellulose fibres. 

Paper made from chemical pulp is generally termed "woodfree". Uses include paper, paperboard and tissue. 

Dissolving pulp It is manufactured by similar processes to paper pulp, but is purified further to leave virtually pure cellulose fibres. Uses vary 

depending on the purity level. Uses for our pulp include principally viscose fibres (e.g., rayon) for clothing, carpets and other 

textiles, viscose for cellophane and moulding compounds for plastics industry and chemical additives. Acetate pulp is used to

manufacture filter tow for use in the cigarette industry. It is also used to manufacture textile filaments and plastics but these 

later markets are declining worldwide. 

Timber 

Sawn timber for construction and furniture manufacturing puposes. 

products: 

The following table sets forth selected pulp and paper prices in certain markets for the periods presented. 


Low High 



Low High 

Coated Woodfree Paper 

100 gsm delivered Germany (euro per metric tonne) (1) 890 971 895 997 869 997 

60 lb. delivered US (US$ per short tonne) (2) 720 840 800 960 860 1,000 

Uncoated Woodfree Paper 

50 lb. delivered US (US$ per short tonne) (3) 660 710 670 790 720 820 

Paper Pulp 

NBSK (US$ per metric tonne) (4) 430 500 450 710 560 710 

Dissolving Pulp 

92 alpha (US$ per metric tonne) (5) 470 525 540 765 580 740 

(1) 

(2) 

(3) 

(4) 

(5) 

Fine Paper 

100 gsm sheets, Production Price Index (PPI). 

60 lb. Coated web, PPI. 

50 lb. Offset, PPI. 

Northern Bleached Softwood Kraft Pulp CIF Northern Europe, PPI. 

Selected indicative prices, Sappi. 

Our fine paper activities are divided into coated and uncoated fine paper and speciality paper grades. Our coated woodfree paper market share in the 

United States, Europe and southern Africa is 

approximately 28%, 20% and 60%, respectively, making us the largest producer of coated woodfree paper in the world. 

12 

Coated Woodfree Paper. Coated woodfree paper has been one of the fastest growing market sectors in the paper industry through the 1980s and 1990s. 

Major end uses include high-end magazines, catalogues, brochures, annual reports and commercial printing. Coated woodfree paper is made from chemical 

pulp and is coated on one or both sides for use where high reprographic quality is required. The majority of coated woodfree paper production is coated on 

two sides, permitting quality printing on both sides of the paper. Paper that is coated on one side is used in special applications such as consumer product and 

mailing label applications. See "Item 5—Operating and Financial Review and Prospects—Markets". 

Uncoated Paper. Uncoated woodfree paper represents the largest industry woodfree paper grade in terms of both global capacity and consumption. 

Uncoated woodfree paper is used for bond/writing and offset printing papers, photocopy papers, writing tablets (e.g., legal pads), speciality lightweight 

printing paper (e.g., bibles) and thin paper. 

The market for uncoated paper products generally follows cyclical trends, which do not necessarily coincide with cycles for coated paper but are 

impacted by capacity changes in uncoated woodfree paper output levels. 

Speciality Paper. The high value-added speciality paper markets in which Sappi Fine Paper operates generally follow trends in the respective end use 

sectors in addition to changes in production capacity, output levels and cyclical changes in the world economy. Largely due to the highly specialised nature of 

speciality paper, price fluctuations have historically tended to lag and be less precipitous than price changes in the uncoated woodfree paper market. 

Packaging Products 

Our range of forest products comprises a variety of packaging papers produced in southern Africa at the Tugela, Cape Kraft and Ngodwana mills. We are 

one of the two major suppliers of packaging papers in South Africa. 

Packaging Paper. As with woodfree paper, the market for packaging papers is affected by cyclical changes in the world economy and by changes in 

production capacity and output levels. The packaging paper market, including kraft linerboard and sackkraft, has experienced price fluctuations which are 

driven by a variety of factors, including, for example, inventory levels and production supply. 

Over the past decade, kraft linerboard prices have ranged from $325 to $685 per metric tonne in Northern Europe. As of November 2002, kraft 

linerboard prices were approximately $440 per metric tonne in Northern Europe. In the southern Africa domestic market, we have entered into medium-term 

contractual commitments with certain converters. These commitments include certain volume targets and, in some cases, as is customary in the market, fixed 

prices for periods of 6 months. 

Groundwood Products 

Newsprint. The Ngodwana mill produces newsprint. The worldwide market for newsprint is a low growth sector in the paper industry and was 

adversely affected during the early 1990s by substantial increased capacity and stagnating demand from, and cost-cutting measures imposed by major 

newsprint end-users. Over the past decade, the price of newsprint has ranged from a low of $420 per metric tonne in the second quarter of 1992 to a high of 

Low 


High

$750 per metric tonne in the fourth quarter of 1995 and the first quarter of 1996. In recent years, a significant increase in industry consolidation has stabilised 

the newsprint market and reduced segment over-capacity. As a result of the slowing economy, newsprint prices started to decline in the middle of 2001 from a 

peak of $625 in April 2001, to a low of 

$445 in July 2002. As of November 2002, the price of newsprint (delivered East Coast USA) had increased to approximately $480 per metric tonne. 

13 

Coated Groundwood. Coated groundwood paper, primarily used for magazines, catalogues and advertising materials, has been one of the fastest 

growing paper grades in the paper industry in recent years. The segment is also one of the most consolidated segments of the paper industry. Demand for 

coated magazine paper is influenced by magazine circulation and demand for advertising, and by the price difference relative to coated woodfree paper and to 

uncoated groundwood paper as substitution between these grades is possible, depending on quality requirements and price levels. Western European 

producers are the leading producers of coated groundwood globally. Rapid capacity expansion by leading producers in the early 1990s led to volatile pricing 

and the development of a significant export business from Europe, primarily to North America and Asia. Pricing development has been more stable in the past 

three years, but prices have declined recently due to weaker demand and the start-up of new capacity in the industry. 

Pulp 

We produce dissolving pulp, as well as a wide range of paper pulp grades, including groundwood pulp used in newsprint, unbleached kraft pulp, 

bleached kraft pulp and bleached sulphite pulp. 

Paper Pulp. The market pulp industry is highly competitive and is sensitive to changes in industry capacity, producer inventories, demand for paper 

and cyclical changes in the world economy. The market price per metric tonne of northern bleached softwood kraft (NBSK) pulp, a pulp principally used for 

the manufacture of woodfree paper, is a benchmark widely used in the industry for comparative purposes. Over the past decade, the price of NBSK has ranged 

from $395 per metric tonne in November 1993 to $925 per metric tonne in September 1995, only to decline to $450 per metric tonne by March 1996. 

NBSK market pulp prices, which increased steadily through the second half of fiscal 1997, were adversely affected during fiscal 1998 by declining pulp 

demand resulting from the Asian economic crisis. Pulp prices at the end of 1998 were 22% lower than at the beginning of the year. During the first quarter of 

1999, pulp prices remained relatively stable at $460 per metric tonne, the lowest level since 1993. Since the end of March 1999, pulp prices increased 

significantly based on improved demand and limited net capacity growth. At the start of the third quarter of 2000, the NBSK market pulp price in Europe 

reached $710 per metric tonne. A slowdown in the world economy towards the end of 2000 resulted in NBSK market pulp prices starting to decline. 

Producers have curtailed production and producer inventories have declined. Inventories held by North American and Scandinavian producers declined to 

1.3 million metric tonnes at June 2002 from a year high of 2.0 million metric tonnes in February 2001 and stood at 1.6 million metric tonnes at the end of 

September 2002. As of December 2001, NBSK was transacting at $473 per metric tonne. NBSK pulp prices decreased to $430 per metric tonne in April 2002. 

World pulp producer and consumer inventories remain low. As at November 26, 2002, NBSK was transacting at $453 per metric tonne in Northern Europe. 

Market unbleached kraft pulp (UKP) is used in the production of packaging papers and for certain niche products such as oil and air filters. The market 

price of UKP generally follows the price trends of other paper pulp grades. 

Dissolving Pulp. Prices of dissolving pulp generally follow those of NBSK, although the cycle is generally less volatile. Viscose Staple Fibre (e.g., 

rayon) which is made from dissolving pulp, competes directly with other fibres such as cotton and polyester but can also be used as a fabric blend partner with 

other fibres. The Viscose Staple fibre prices are influenced by fashion trends, demand for non-woven fibres as well as the costs and availability of competing 

fibres. Over the past decade, the price of 92 alpha grade dissolving pulp, has ranged from a low of $470 per metric tonne in the second 

quarter of 2002 to a high of over $1,000 per metric tonne in the fourth quarter of 1995. The most recent peak in dissolving pulp prices was during the fourth 

quarter of 2000, but prices have since fallen by more than 30%. The price as at November 26, 2002 was $510 per metric tonne. 

Timber Products 

Our timber products operations are concentrated in South Africa and consist of sawn timber for the building industry and components for the furniture 

industry and packing cases. 

Business Review 

We are the world's largest producer of coated woodfree paper, with a market share of approximately 28% in the United States, 20% in Western Europe 

and greater than 60% in southern Africa. In addition, we are the world's largest producer of dissolving pulp, with a market share of approximately 15%. 

14 

We are a geographically diverse global paper company with significant manufacturing operations on three continents and sales in over 100 countries. 

During fiscal 2002, we had sales of $3,729 million, operating income of $389 million and net income of $220 million. We currently have a paper production 

capacity of approximately 5.0 million metric tonnes per annum, dissolving pulp production capacity of 600,000 metric tonnes per annum and paper pulp 

production capacity of 3.4 million metric tonnes per annum. 

Our operations are currently structured around two business units: 

• 

• 

Sappi Fine Paper, which has fine paper and related paper pulp businesses in North America, Europe and South Africa. Pursuant to the recent 

reorganisation of our North American and European fine paper shareholding, our fine paper interests are now held by Sappi Papier Holding AG 

in Austria and its worldwide activities are co-ordinated from London through Sappi Fine Paper; and 

Sappi Forest Products, which produces commodity paper products (newsprint and packaging papers), pulp (including dissolving pulp and 

hardwood and softwood pulp) and forest and timber products (including pulpwood, sawlogs and sawn timber) for southern Africa and export 

markets. Sappi Forest Products is based in Johannesburg, South Africa.

We also operate a trading network for the international marketing and distribution of our products outside our core operating regions of North America, 

Europe and southern Africa. Our trading operation, which we refer to as Sappi Trading, co-ordinates our shipping and other logistical functions for exports 

from southern Africa and North America through subsidiaries in South Africa and in the United States, respectively. The headquarters of our trading operation 

is located in Hong Kong, China. All costs associated with Sappi Trading are allocated to the two business units. 


world economy. For further information, see "—Information on the Company—Business Overview—The Pulp and Paper Industry" and "Item 5—Operating 

and Financial Review and Prospects—Operating Results". 

The chart set forth below represents the operational rather than the legal or ownership structure of Sappi as of November 2002. Units shown are not 

necessarily legal entities. 

The following table sets forth certain information with respect to our operations for, or as at the end of, the year ended September 2002. 

15 

North 

America (1) 

Sappi Fine Paper 

Europe(2) 

South 

Africa 

Sappi 

Forest 

Products 

(US$ in million, tonnes in thousands) 

Corporate 

And 

Other 

Sales volume (tonnes) 1,163 2,180 310 2,434 — 6,087 

Sales 1,197 1,744 215 573 — 3,729 

Operating profit (21) 217 34 141 18 389 

Net operating assets (3) 1,483 1,420 90 714 (36) 3,671 

(1) 

(2) 

(3) 

Includes the Cloquet mill from May 13, 2002. 

Europe includes the Nash and Transcript mills, which collectively contributed 40,400 tonnes and $48 million in sales in the year, ended September 2002. The Transcript mill has been 

closed. 

Net operating assets consist of non-current assets, current assets and current liabilities (excluding cash and cash equivalents, bank overdraft, deferred taxation and short-term loans). 

16 

Total

Overview 

SAPPI FINE PAPER 

Sappi Fine Paper's operations are co-ordinated from London through Sappi Fine Paper, which aims to facilitate the creation of an integrated business 

with a single identity, a unified sales, marketing and distribution strategy and a co-ordinated portfolio of brands and products. 

Sappi Fine Paper is the largest business sector of Sappi and contributed over 80% of our sales in fiscal 2002. It has the capacity to produce 4.2 million 

metric tonnes of paper per annum at its 15 paper and related paper pulp mills located on three continents. Sappi Fine Paper manages its business in three 

principal regions: Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi Fine Paper South Africa. Sappi Fine Paper also manages the Nash 

mill in the United Kingdom, which operates as a separate business. This mill is no longer considered a core business and it may be divested at an appropriate 

time. 

The following chart sets forth certain information with respect to the mills and principal products of Sappi Fine Paper as of November 2002. 

The following table sets forth approximate annual production capacity with respect to Sappi Fine Paper's products. 

Production capacity (000s tonnes): 

Fine paper 

North 

America 

17 

Annual Production Capacity 

Europe(1) 

South 

Africa 

Total

Coated (2) 1,298 2,545 80 3,923 

Uncoated (3) — 65 262 327 

Total 1,298 2,610 342 4,250 

Paper pulp 1,010 615 145 1,770 

Percentage paper pulp integration (4) 113% 42% 58% (4) 68% 

(1) 

(2) 

(3) 

(4) 

(5) 

Includes the Nash mill under uncoated. 

Includes coated woodfree paper, coated groundwood paper and speciality papers. 

Includes 30,000 metric tonnes of tissue manufactured at the Stanger mill in South Africa and 14,000 metric tonnes of kraft manufactured at the Enstra and Adamas mills in South 

Africa. 

Includes pulp used internally and pulp sold. 

Sappi Forest Products provides most of the additional pulp requirements of our South African fine paper operations. 

Facilities and Operations 

Sappi Fine Paper North America 

Sappi Fine Paper is a leading producer and supplier of coated woodfree paper in the United States with a market share of approximately 28%. Sappi Fine 

Paper North America also produces a variety of other fine paper, including coated speciality paper. 

Sappi Fine Paper North America is headquartered in Boston, Massachusetts, and operates four paper mills in the United States in Somerset, Maine; 

Muskegon, Michigan; Westbrook, Maine; and Cloquet, Minnesota. These four mills have a total annual production capacity of approximately 1.3 million 

metric tonnes of paper and a capacity of approximately 1.0 million metric tonnes of paper pulp, which represents approximately 113% of Sappi Fine Paper 

North American pulp requirements. This significantly reduces Sappi Fine Paper North America's exposure to fluctuations in the price of market pulp that are 

not driven by fluctuations in wood or other major raw material prices. 

Coated paper accounted for approximately 78% of Sappi Fine Paper North America's sales in fiscal 2002. Uncoated paper, speciality paper and pulp 

accounted for the remaining 22%. Sappi Fine Paper North America has exited the uncoated business with the closure of its Mobile, Alabama mill, which 

stopped paper production in October 2001 and ceased all operations at the end of March 2002. 

The following table sets forth sales by product for our North American operations, including contribution from the Mobile mill. 

2002 (2) 




Sales (US$ in million): (1) 

Coated Woodfree Paper 937 1,044 1,135 

Uncoated Woodfree Paper 63 246 271 

Speciality Paper and Other (3) 197 152 201 

(1) 

(2) 

(3) 

Total 1,197 1,442 1,607 

Includes sales of $20 million in fiscal 2002, $256 million in fiscal 2001 and $280 million in fiscal 2000 for the Mobile mill, which has been closed. 

Includes the Cloquet mill from May 13, 2002. 

Other consists primarily of market pulp. 

For the year ended September 2002, Sappi Fine Paper North America sold approximately 1,163,000 tonnes of paper and pulp products, including 

contribution from the Mobile mill. The following table sets forth the production capacity, number of paper machines, products, pulp integration and capital 

expenditures at each of our continuing mills in North America. 

Somerset 

18 

Muskegon 

Mill Locations 

Westbrook 

Production capacity (000s metric 

tonnes) 

Paper 727 260 114 232 

Market Pulp 131 — — 278 

Number of paper machines 3 2 2 2 

Products: 

Paper coated 

woodfree 

paper 

coated 

woodfree 

paper 

speciality paper and 

high bulk coated paper 

Cloquet 

coated woodfree paper 

Market Pulp — — — Bleached 

kraft pulp 

Percentage pulp integration (1) 96% 70% None 272%

Capital expenditures (October 1999— 

September 2002) (US$ in million) 

(1) 

Includes pulp sold to third parties. 

88 108 32 55 

Cloquet. On May 13, 2002, we acquired Potlatch Corporation's coated fine paper business in an asset purchase. The acquisition included Potlatch's 

Cloquet, Minnesota pulp and paper mill as well as the brands, order book and working capital of the Cloquet mill and the brands, order book and inventories 

of Potlatch's Brainerd, Minnesota paper mill for an aggregate cash purchase price of $483 million. We did not acquire Potlatch's Brainerd mill, which Potlatch 

has closed. The coated fine paper business of Potlatch sold 330,000 metric tonnes of coated paper in 2001. The Cloquet paper machines have an annual 

production capacity of 232,000 metric tonnes of coated paper, and the state-of-the-art pulp mill has an annual production capacity of 410,000 metric tonnes. In 

connection with the sale of the coated paper business, Potlatch agreed not to compete with Sappi in the production or sale of product, which competes with the 

former Potlatch business. In May 2002, the Attorney General for the State of Minnesota commenced an action alleging that an aspect of the covenant not to 

compete related to the use of Potlatch's Brainerd mill by a purchaser of the mill violated antitrust and common law. On November 26, 2002, the court 

dismissed both of the State's claims. The Attorney General has indicated that he may bring a new action if a potential purchaser for the mill is found who is 

discouraged by the covenant. The State of Minnesota has 60 days in which to file an appeal of the court's decision. See "Item 5—Operating and Financial 

Review and Prospects—Liquidity and Capital Resources—Mill Closures, Acquisitions and Dispositions" and "Item 8—Financial Information—Other 

Financial Information—Legal Proceedings". 

Cloquet has two paper machines and an offline coater, producing premium coated paper. The newest machine and coater were installed in 1988 and 

1989, respectively. The state-of-the-art pulp mill started up by Potlatch in 2000 at a total cost of $525 million is the newest pulp mill in the United States. 

Somerset. The Somerset mill is a low-cost producer and has a production capacity of approximately 727,000 metric tonnes of paper and approximately 

491,000 metric tonnes of pulp per 

19 

annum. The pulp mill was built in 1976, and Somerset became an integrated facility with the completion of Paper Machine 1 (PM1) in 1982. Each of the three 

paper machines at the Somerset facility employs Sappi Fine Paper North America's patented on-line coating and finishing technology. This technology 

combines the three steps (paper making, coating and finishing) in the manufacture of coated paper into one continuous process. It is well suited for the 

lightweight coated papers produced at Somerset because it allows the production of high gloss, consistent quality products at high speeds. 

Muskegon. Muskegon is an integrated facility with an annual capacity of approximately 260,000 metric tonnes of heavier weight coated paper and 

approximately 109,000 metric tonnes of hardwood pulp. One of Muskegon's paper machines utilises Sappi Fine Paper North America's on-line finishing 

technology to produce heavy weight coated paper. The other paper machine has on-line coating and off-line calendars (finishers) and is used primarily to 

produce cover-weight papers used for covers of books, annual reports, etc. 

Westbrook. Westbrook is Sappi Fine Paper North America's original mill, with origins dating back to 1854. It is primarily a speciality paper production 

facility with an annual capacity of 114,000 metric tonnes of coated woodfree and casting release paper. Its two paper machines primarily produce base paper, 

which is coated off-line. Westbrook also has nine speciality coaters, including three employing Sappi Fine Paper North America's patented Ultracast® 

process. This process uses an electron beam to cure coating against a finely engraved steel roll, resulting in a virtually exact replication of the roll pattern. 

Sappi Fine Paper North America also has a research and development facility at Westbrook. 

Sappi Fine Paper North America also operates a coated paper sheeting and distribution facility in Allentown, Pennsylvania, which was completed in 

1994 and has an annual sheeting capacity of approximately 100,000 metric tonnes. The Allentown facility produces sheet paper for the Somerset and 

Westbrook mills. 

Sappi Fine Paper Europe 

Sappi Fine Paper is a leading producer of coated woodfree paper in Europe with a market share of approximately 20% and a producer of commercial 

printing paper, coated groundwood paper and speciality paper used in packaging, labelling and laminating and a branded range of uncoated printing and 

business paper. Sappi Fine Paper Europe's operations consist of eight mills (excluding the Nash mill, which is separately managed, and the Transcript, 

Scotland mill, which ceased production in the quarter ended March 2002) with an aggregate annual production capacity of approximately 2.6 million metric 

tonnes of paper and 614,000 metric tonnes of related paper pulp. Sappi Fine Paper Europe's headquarters are located in Brussels, Belgium. 

The following table sets forth sales by product for our Sappi Fine Paper Europe operations, including contribution from the Nash and Transcript mills. 



Sales (US$ in million): (1) 

Coated Woodfree Paper (2) 1,524 1,648 1,731 

Uncoated Woodfree Paper 19 — 5 

Speciality Coated Paper and Other 202 133 258 

(1) 

(2) 



Total 1,744 1,781 1,994 

Includes sales for the Nash and Transcript mills. The Nash and Transcript mills collectively contributed $48 million of sales in fiscal 2002 and $78 million of sales in fiscal 2001. The 

Transcript mill has been closed. 

Includes coated mechanical paper produced at Lanaken mill. 

20

For the year ended September 2002, Sappi Fine Paper Europe sold approximately 2,180,000 tonnes of paper and pulp products. The following table sets 

forth the annual production capacity, number of paper machines, products, pulp integration and capital expenditures at each of Sappi Fine Paper Europe's 

mills in Europe. 

Alfeld 

Germany 

Ehingen 

Austria 

Gratkorn 

Mill Location 

Maastricht 

Netherlands 

Nijmegen 

Belgium 

Lanaken 

United Kingdom 

Blackburn 

Paper capacity (000s metric 

tonnes) 

345 225 820 325 240 475 115 

Number of paper machines 5 1 2 2 1 2 1 

Products coated woodfree 

paper, coated and 

uncoated specialities 

coated woodfree 

paper 


paper 


paper and coated 

specialities 


paper 

mechanical coated 

paper 


paper and cast 

coated paper 

Percentage pulp integration (1) Capital expenditures (October 

1999—September 2002) (US$ 

50% 75% 57% none none 53% none 

in million) 

94 21 103 29 45 60 7 

(1) 

Includes pulp sold to third parties. 

Alfeld. The Alfeld mill is located to the south of Hannover, Germany, and its origins date back to 1706. It has a paper production capacity of 

approximately 345,000 metric tonnes and a pulp production capacity of approximately 112,000 metric tonnes per annum. It produces coated woodfree and 

speciality paper products, which are mainly coated and have a variety of finishes. In early 1995, a major rebuild of Alfeld's Paper Machine 3 (PM3) was 

completed. Following the rebuild, Alfeld became a world leader in the production of low substance flexible packaging papers. Alfeld's PM3 employs a fully 

integrated concept of in-line coating and calendaring. The Alfeld mill produces totally chlorine-free ("TCF") bleached sulphite pulp for its own use. In early 

2002, a rebuild of Alfeld's Paper Machine 2 (PM2) was completed. Alfeld spent approximately euro 50 million on the rebuild of PM2. 

Ehingen. The Ehingen mill is located to the southeast of Stuttgart, Germany and was acquired by Hannover Papier, predecessor entity to Sappi Alfeld, 

in 1987. A paper machine with a capacity of 180,000 metric tonnes per annum of coated woodfree paper was commissioned in July 1991, expanding Ehingen 

from a market pulp mill into an integrated pulp and paper mill. During the first quarter of 1994, the construction of a high-rack warehouse was completed. As 

a result of upgrades during 1994 and 1996, Ehingen's total paper capacity was increased to 225,000 metric tonnes per annum. The pulp mill's capacity is 

currently 130,000 tonnes per annum of TCF bleached sulphite pulp. The pulp is produced mainly for internal use, but is also sold to third party customers. 

Gratkorn. Paper has been produced at the Gratkorn, Austria site for more than four centuries. A major expansion and renovation project was recently 

completed at the Gratkorn mill. As a result of this project, Gratkorn now has an annual capacity of 820,000 tonnes of triple-coated woodfree paper on just two 

paper machines and 233,000 metric tonnes of TCF chemical pulp. The machines at Gratkorn are among the largest and most efficient paper machines in the 

world. It also has an annual sheet finishing capacity of 650,000 metric tonnes. As a part of this expansion and renovation, the Gratkorn mill has been 

transformed from a five-machine mill into a two-machine mill. 

21 

Maastricht. The Maastricht, Netherlands mill has the capacity to produce over 325,000 metric tonnes per annum of coated woodfree paper and board 

and one-side coated paper used primarily for printing labels. Paper was first produced in Maastricht in 1852. Paper Machine 6 (PM6), which was installed at 

Maastricht in 1962, was first rebuilt in 1977. In 1996, PM6 underwent an extensive NLG224 million (€ 102 million) rebuild. As a result, management 

believes that PM6 and its coater are Europe's largest production facility and cost and quality leader for high basis-weight triple-coated woodfree paper and 

board for graphics applications. PM6's production complements that of the Gratkorn mill, which produces lower weight coated woodfree paper. Paper 

Machine 5 (PM5) at Maastricht was constructed in 1952. It underwent its most recent rebuild in 1995, when it was reconfigured at a total cost, including the 

related upgrade of PM5's entire line, of $13 million. Following the reconfiguration, PM5 is utilised as a dedicated one-side coated label paper machine. 

Nijmegen. The Nijmegen, Netherlands mill began operations in 1955 and operates one paper machine. The mill specialises in the production of reels of 

coated woodfree paper for web offset printing. It also produces special coated woodfree paper for use in digital printing. With an annual production capacity 

of 240,000 metric tonnes, the Nijmegen mill is one of Europe's largest suppliers of coated woodfree web offset paper. Rotary, or web, offset paper is used for 

commercial printing and publishing. The Nijmegen mill was upgraded in 2001. The upgrade increased its capacity by 40,000 metric tonnes per annum. 

Nijmegen and Neusiedler AG, an Austrian paper company, have terminated their joint venture to operate an 80,000 metric tonnes capacity sheeting 

centre in the course of 2001 and have closed the related facility. 

Lanaken. The Lanaken, Belgium mill began commercial operations in 1966. It produces coated groundwood paper and lower weight wood-containing 

coated paper for offset printing. Coated groundwood paper for web offset presses is used primarily in the production of advertising materials and magazines. 

Lanaken's two paper machines have a total annual capacity of 475,000 metric tonnes. One machine principally produces coated groundwood paper. It was 

completely overhauled in 1992, and an additional off-line coater was installed to provide triple coating capability. The other paper machine produces lowerweight 

wood-containing paper. Its capacity was increased to 285,000 metric tonnes per annum as a result of a multi-year optimisation process during the 

mid-1990s. Lanaken produces chemithermomechanical pulp (CTMP) in an integrated plant with an annual capacity of 140,000 metric tonnes. This enables the 

mill to supply approximately 53% of the fibre requirements for paper production itself. 

Blackburn. The Blackburn, England mill was established in 1875, and has been a major producer of cast coated paper. The Blackburn mill was rebuilt 

completely in 1996. In May 2000, we sold our Astralux brand of cast coated papers produced at the mill to the Favini Group in Italy. The production of cast 

coated papers at the Blackburn mill ceased at the end of May 2000. The Blackburn mill will continue to focus on its main business, the production of coated 

woodfree paper in reels.

Mill Ownership. We hold our German mills through a 99.9% interest in Sappi Alfeld, formerly known as Hannover Papier. Sappi Ehingen, which owns 

the Ehingen mill, is 95% owned by Sappi Alfeld. Notwithstanding that the remaining interests are publicly held, an agreement between Sappi Alfeld and 

Sappi Ehingen provides us with effective control over the cash flow in these businesses. We hold a 100% ownership interest in the Gratkorn, Lanaken, 

Maastricht, Nijmegen, Blackburn and Nash mills. 

Sappi Fine Paper South Africa 

Sappi Fine Paper, through Sappi Fine Paper South Africa, produces and markets a wide range of coated, uncoated and speciality papers as well as crêped 

tissue and fibreboard in South Africa. Sappi 

Fine Paper South Africa is headquartered in Johannesburg. In the uncoated paper sector, where we have a 57% market share, Sappi Fine Paper operates one 

integrated pulp and paper mill, Enstra (located near Johannesburg). Stanger (located north of Durban) uses bagasse (the fibrous residue of sugar cane) to 

produce coated woodfree paper and tissue. A smaller paper mill, Adamas (located in Port Elizabeth) utilises pulp from our pulp mills and waste paper to 

produce speciality paper and some kraft products. Sappi Fine Paper South Africa is the only producer of coated woodfree paper in South Africa. 

The following table sets forth sales by product for our Sappi Fine Paper South Africa operations. 





Sales (US$ in million): 

Coated Woodfree Paper 48 38 46 

Uncoated Woodfree Paper 142 152 156 

Speciality Paper and Other 25 39 25 

Total 215 229 227 

The following table sets forth the annual paper production capacity, number of machines, products, pulp integration and capital expenditures at each of 

the mills of Sappi Fine Paper South Africa. 

Enstra 

22 

Mill Locations 

Paper capacity (000s metric tonnes) 183 110 35 

Number of paper machines 3 2 2 

Products uncoated woodfree paper coated woodfree paper and tissue uncoated woodfree graphic 

paper 

Percentage pulp integration 66% 71% none 

Capital expenditures (October 1999— 

September 2002) (US$ in million) 11 35 2 

Enstra. The Enstra mill is the largest mill of Sappi Fine Paper South Africa, with a capacity of approximately 182,500 metric tonnes of elemental 

chlorine-free uncoated woodfree paper products per annum. In 1996, the Enstra mill completed a $96 million capital expenditure programme. This 

programme increased capacity by 50,000 metric tonnes per annum and has resulted in improved production efficiency and product quality. The product range 

at the Enstra mill caters to the business forms, scholastic, office, envelope and general printing industries. The mill has a capacity of 90,000 metric tonnes per 

annum of bleached hardwood pulp. It also has a capacity to bleach 29,000 metric tonnes per annum of softwood pulp, which it purchases at market prices. The 

mill uses an oxygen bleaching process, which is a process that was developed at the mill in the 1970s and has since become the industry standard. 

Stanger. The Stanger mill commenced operations in 1976. It is unique in South Africa in that it uses bagasse as its basic raw material to produce high 

quality matte and gloss coated art papers and tissue. Art paper is used for high quality books and magazines, brochures, annual reports and labels. A 

$26 million upgrade of the mill's paper machine was completed in August 2001, increasing the coated paper capacity to 80,000 metric tonnes per annum. The 

mill also produces 30,000 metric tonnes of tissue per annum and has a capacity of 55,000 metric tonnes of bleached bagasse pulp per annum. 

Adamas. The Adamas mill is a small speciality mill. It produces high quality, uncoated prestige papers and boards in a variety of colours and 

embossing patterns. The mill also produces packaging and industrial grades from waste paper. The mill has a capacity of 35,000 metric tonnes of paper per 

annum. This mill purchases wastepaper and bleached pulp from other members of the Sappi Group. 

Other Fine Paper Operations 

23 

Nash. The Nash mill in Hemel Hampstead, England has been operating as a paper mill since the 1800s and manufactures a variety of different grades 

of paper and board. The mill's principal products are its branded and watermarked business papers, sold under the Croxley brand name, and its wide range of 

white and coloured boards, sold under the Vanguard brand name. In 1995, a new gas boiler was installed at Nash, leading to a reduction of energy costs. The 

mill has the capacity to produce 35,000 metric tonnes of paper and board per annum. 

Marketing and Distribution 

Overview 

Stanger 

Adamas

The further integration of our international marketing and distribution efforts is one of our main strategic objectives. In order to attain this objective, we 

have adopted a system whereby the marketing and distribution of our woodfree paper products is performed by our operating business in the respective 

region, supplemented by a trading network outside these core regions. 

Our trading network, Sappi Trading, co-ordinates the international marketing and distribution of our woodfree paper products outside our core regions. 

Sappi Trading operates in Hong Kong (China), Sydney (Australia), Johannesburg (South Africa), Shanghai (China), Singapore, Zurich (Switzerland), Sao 

Paulo (Brazil), Mexico City (Mexico), Kenya and Zimbabwe. It also manages a network of agents around the world handling exports to over 100 countries. 

We sell the vast majority of our coated and uncoated woodfree paper through merchants. We also sell paper directly to converters. We generally deliver 

products sold to converters from the mill or via a distribution warehouse. Electronic business-to-business interaction has become more important to us, and we 

will continue to focus on increasing service and efficiency through business-to-business interaction. The systems and structures have been put in place to 

actively continue these efforts. 

Merchants are authorised to distribute Sappi Fine Paper's products by geographic area and to carry competitors' product lines to cover all segments of the 

market. Merchants perform numerous functions, including holding inventory, sales promotion and marketing, taking credit risk on sales and the delivery and 

distribution of the products. Merchants buy paper from Sappi Fine Paper and resell it, marking up the purchase price. A merchant may either deliver to the 

customer from its own stock or arrange for delivery directly from the mill or one of Sappi Fine Paper distribution warehouses. 


Sappi Fine Paper North America's coated paper sales system is organised in 6 regions with sales representatives located in 22 district market areas, and 3 

technical representatives located in different regions in North America supporting the sales effort. 

Approximately 2.4% of Sappi Fine Paper North America's coated woodfree paper sales for fiscal 2002 were outside North America. Sappi Fine Paper 

North America's sales outside North America are handled in southern Africa by Sappi Fine Paper South Africa, in Europe by Sappi Fine Paper Europe and 

outside southern Africa and Europe by Sappi Trading. 

In 2002, Sappi Fine Paper North America's sales force sold coated graphic paper to approximately 364 merchant distributing locations. By selling 

exclusively through merchant channels, Sappi Fine Paper 

North America believes it has created a loyal group of merchant customers. Rather than competing with merchant distributors, Sappi Fine Paper North 

America's sales force focuses on generating end-user demand, which is then serviced by the merchant distributors. 

In the United States, we market speciality paper through a dedicated speciality paper sales team directly to customers. Sappi Fine Paper North America 

also sells paper directly to large users of coated technical products utilising a dedicated sales team. The special end-use requirements often require a paper 

made to fit the customer's specific application. 


24 

As part of the formation of Sappi Fine Paper in April 1998, the sales and marketing operations of Sappi Fine Paper Europe were reorganised into graphic 

paper, comprising printing and writing paper, and speciality paper, comprising paper for labelling, packaging and other speciality uses. 

The sales division of the graphic paper unit is responsible for all sales of coated woodfree and groundwood papers in Europe. This includes European 

sales on behalf of Sappi Fine Paper North America and Sappi Fine Paper South Africa. It is also responsible for export sales to markets outside Europe. Sappi 

Fine Paper Europe's graphic products are distributed primarily by merchants. The export sales office manages exports to markets outside Europe through 

Sappi Trading, Sappi Fine Paper North America and Sappi Fine Paper South Africa. 

Sappi Fine Paper Europe's centralised logistics department was formed in early 1998. It is responsible for the development and optimisation of the 

logistics of the graphic and speciality papers business units and the re-engineering of the supply chain. 

Sappi Fine Paper South Africa 

Sappi Fine Paper South Africa has a marketing and sales and technical support team based in four major centres in South Africa. Approximately 14% of 

the sales of Sappi Fine Paper South Africa in fiscal 2002 were outside of southern Africa to markets in Europe, Africa, Asia and North and Latin America. 

The products of Sappi Fine Paper South Africa are distributed in southern Africa primarily through merchants. In addition, some large volume orders are sold 

directly to printers and converters. 

Customers 

Sappi Fine Paper sells its products to a large number of customers, many of whom have long-standing relationships with us. These customers include 

merchants, converters and other direct consumers. 

The most significant merchant customers, based on sales during fiscal 2002, include: 

• 

• 

• 

Xpedx (a division of International Paper Company), Unisource Worldwide, Inc. (a majority interest of which was sold by Georgia Pacific 

Corporation to Bain Capital Corporation during the fourth quarter of 2002) and Lindenmeyer Paper Company (owned by Central National 

Gottesman Inc.) in the United States; 

the Buhrmann Paper Merchant Division, IGEPA (Germany) and Antalis Limited (a subsidiary of the Worms & Cie) in Europe; and 

First Paper House and Haddons Star (divisions of Antalis SA (Pty) Limited) and Peters Papers and Spicers (divisions of Nampak Limited) in 

southern Africa.

Only one of these merchant distributors, the Buhrmann Paper Merchant Division, represented more than 10% of our total sales during fiscal 2002. See 

note 33 to our Group annual financial statements included elsewhere in this Annual Report for more information. 

Sappi Fine Paper's converter customers include both multinational and regional converters. The most significant converter customers, based on sales 

during fiscal 2002, include: VanLeer, Fasson, Jackstadt, VAW Flexible Packaging, Alcan, UCB Transpac, Lawson Mardon Packaging and Perstop. These 

customers use our products in the production of pressure sensitive and other types of labels as well as flexible packaging. Nampak, the CTP Group of 

companies, Paarl Media:Lithotech and Merpak are also significant converter customers. These companies use our products in the production of packaging 

products. No converter customer, however, represented more than 10% of our total sales during fiscal 2002. 

25 

Merchant sales constitute the majority of our woodfree paper sales. Pricing of products for merchant sales is generally subject to change upon notice of 

up to 90 days. Sales to converters may be subject to longer notice periods, which would generally not exceed 12 months. We have long-standing relationships 

with most of our customers, with volume and pricing generally agreed on a quarterly basis. 

Competition 

Overview 

Although the markets for pulp and paper have regional characteristics, they are highly competitive international markets involving a large number of 

producers located around the world. 

Pulp and paper are subject to relatively low tariff protection in major markets, with existing tariff protections being further reduced under the World 

Trade Organization ("WTO"). In South Africa, for example, no tariffs are imposed on imports of pulp and newsprint. Tariffs on most other paper products 

under the WTO are 7% and will decline to 5% over time. 

In 1999, South Africa entered into a free trade agreement with the European Union, which is intended to remove tariffs on 90% of bilateral trade over a 

twelve-year period. The implementation of this agreement has commenced. We do not anticipate that the agreement will have any material impact on our 

business in the short term. In the long term, however, we expect that the agreement will lead to increasing pricing pressure from imports, which could have a 

material impact on our pricing structure in South Africa. Pursuant to the agreement, import duties on coated and uncoated woodfree products from member 

states of the European Union, which currently stand at 10%, will be abolished over a period of seven to twelve years. Corresponding duties on South African 

products imported in member states of the European Union will also be phased out over the same period. 

Competition in markets for our products is primarily on the basis of quality, service, price, breadth of product line, product innovation and sales and 

distribution support. The speciality paper market puts greater emphasis on product innovation and quality as well as technical considerations. The packaging 

paper and newsprint markets place more emphasis on price. 

North America 

The major domestic coated woodfree producers which compete with Sappi Fine Paper in North America are MeadWestvaco, Stora Enso, International 

Paper Company and Appleton Papers. In addition, 25% of US consumption is supplied by foreign producers, primarily Asian and European. 

Europe 

Recent merger and acquisition activity in the European pulp and paper industry includes the acquisition of Haindl (a German magazine paper producer) 

by UPM-Kymmene and M-real's (previously Metsä-Serla) consolidation of its ownership in Zanders to over 99%. In 2000, M-real purchased Modo Paper and 

International Paper's 72% stake in Zanders. In 1999, Torraspapel SA was bought by CVC Partners (Lecta). The merger of the woodfree paper businesses of 

Svenska Cellulosa 

Aktiebolaget SCA and Mo och Domsjö AB into Modo Paper also took place in 1999. In 1998, the Swedish Company Stora Kopparbergs Bergslags AB 

("Stora") merged with the Finnish Group Enso Oy ("Enso"), which itself was created in May 1996 through a merger between the state-owned companies 

Enso-Gutzeit and Veitsiluoto. 

The market leaders in coated woodfree paper production in Europe are Sappi, M-real, Stora Enso, CVC Partners (Lecta) and UPM-Kymmene. 

Southern Africa 

Mondi Paper Company Limited is a significant competitor of Sappi Fine Paper in southern Africa in the uncoated woodfree paper sector. Coated 

woodfree imports, primarily from Europe and Asia, have gained an increased share of the southern African woodfree paper market, since sanctions and 

boycotts against South Africa ended in the early 1990s and as a result of declining import duties. A substantial part of the imports originate from Sappi Fine 

Paper's European mills. 

Overview 

26 

27 

SAPPI FOREST PRODUCTS

Sappi Forest Products, headquartered in Johannesburg, South Africa, is an integrated pulp, commodity paper and timber products producer. Sappi Forest 

Products operates five pulp and paper mills and three sawmills. It's managed in three operating divisions: Sappi Saiccor, Sappi Kraft and Sappi Forests. 

Sappi Forest Products is Africa's largest pulp and paper producer with a production capacity of 820,000 metric tonnes of paper, 600,000 metric tonnes of 

dissolving pulp and 1,085,000 metric tonnes of paper pulp per annum. It is also a major timber grower, managing or controlling through contracts about 

538,000 hectares of land. Of this land, approximately 405,000 hectares is planted with primarily pine and eucalyptus. This represents about 23% of the 

southern African timberlands and supplies approximately 62% of our southern African pulpwood and sawlog requirements. 

The following chart sets forth certain information with respect to the mills and principal products of Sappi Forest Products as of November 2002. 

The following table sets forth sales by product for Sappi Forest Products' operations: 





Sales (US $in million): 

Commodity paper products (1) 257 319 325 

Dissolving pulp (2) 193 285 341 

Paper pulp (2) 84 83 108 

Timber and timber products 39 45 116 

(1) 

(2) 

Total 573 732 890 

Includes newsprint and packaging products. 

Excludes sales related to paper pulp produced by Sappi Fine Paper facilities. 

Sappi Forest Products sold approximately 2.4 million tonnes of paper, pulp and forest products during the year ended September 2002. 

The following table sets forth annual production capacity with respect to Sappi Forest Products' products: 

Production Capacity (000s metric tonnes): 

Paper Products 

Packaging paper 685 

28

Pulp 

Newsprint 140 

Total 825 

Dissolving pulp 600 

Paper pulp (1) 1,085 

Total 1,685 

Timber products 101 (2) 

Percentage paper pulp integration 132% (3) 

(1) 

(2) 

(3) 

Excludes production capacity related to paper pulp produced by Sappi Fine Paper facilities. 

Represents 190,000 cubic metres. 

Excludes pulp produced by Sappi Saiccor. Our southern African operations are net sellers of pulp. 

Facilities and Operations 

Sappi Saiccor 

Sappi Saiccor was established in 1951 and acquired by us in 1988. Management believes that it is a low-cost producer and the world's largest single 

producer of dissolving pulp. In 1995, we completed an approximately $221 million expansion project to increase capacity by one third to approximately 

600,000 metric tonnes per annum. Capital expenditures during the period from October 1999 to September 2002 were approximately $16 million. 

Virtually all of Sappi Saiccor's dissolving pulp production is exported. The pulp we principally produce is the type used in the manufacture of a variety 

of cellulose products, including viscose staple fibres (e.g., rayon). Viscose fibres are used by the textile industry to manufacture a range of woven and nonwoven 

fabrics. Dissolving pulp is also used in the manufacture of cellulose solvent spun fibres, cellulose acetate flakes, plastic moulding powders and 

chemical additives. Acetate pulp is used to 

manufacture filter tow for use in the cigarette industry. It is also used to manufacture textile filaments and plastics but these later markets are declining 

worldwide. 

The mill's timber consumption is comprised primarily of eucalyptus hardwoods. These fast growing trees are grown in relatively close proximity to the 

mill and contribute towards Sappi Saiccor's position as a low cost producer of dissolving pulp. 

Sappi Kraft 

29 

Based upon volume sold in fiscal 2002, Sappi Kraft supplies approximately 53% of South Africa's packaging paper requirements, other than cartonboard, 

from its Ngodwana, Tugela and Cape Kraft mills. 

The following chart sets forth the annual paper production capacity, number of machines, products, pulp integration and capital expenditures at each of 

Sappi Kraft's mills in South Africa. 

Ngodwana 

Mill Locations in South Africa 

Tugela 

Cape Kraft 

Paper capacity (000s metric tonnes) 375 392 60 

Number of paper machines 2 4 1 

Products newsprint kraft linerboard, white kraft linerboard, corrugating 

top linerboard and bleached and medium, sackkraft and industrial 

unbleached pulp 

kraft linerboard and corrugating medium 

Percentage pulp integration (1) 136% 100% none (2) 

Capital expenditures (October 1999 

—September 2002) (US$ in 

million) 

(1) 

(2) 

Excludes "pulp" produced from recycled paper by the respective plants at the mills. 

Cape Kraft's raw material requirements are met from waste fibre supplied by Sappi Waste Paper. 

37 14 2 

Ngodwana. Ngodwana was expanded between 1981 and 1985 from an unbleached kraft mill with a capacity of 100,000 metric tonnes per annum to a 

modernised mill with a capacity of approximately 235,000 metric tonnes of linerboard and 140,000 metric tonnes of newsprint per annum. The linerboard 

machine also produces approximately 34,000 metric tonnes of white top linerboard per annum (included in total linerboard capacity). The mill is a low cost 

producer and is a net seller of pulp. It produces nearly 410,000 metric tonnes of bleached and unbleached pulp and 100,000 metric tonnes of groundwood pulp 

annually. The mill markets paper and excess pulp locally and in the export market. The mill is a large consumer of waste paper, which is used in the 

production of packaging paper. 

Tugela. Tugela is Sappi Kraft's largest integrated unbleached kraft mill, with a capacity of approximately 392,000 metric tonnes of packaging paper per 

annum. The mill supplies kraft linerboard and corrugating medium and most of South Africa's requirements for sackkraft, used in the production of multiwall 

sacks. Machine glazed packaging papers are also produced at the mill. The mill was upgraded in 1996 at a cost of approximately $81 million.

Cape Kraft. The Cape Kraft mill was built during 1980 and 1981 and was upgraded in 1995. The mill presently has a capacity of 60,000 metric tonnes 

of linerboard and corrugating medium per annum, 

which it sells principally to the corrugating industry in the Western Cape. The mill's raw material requirements are met from waste fibre supplied by Sappi 

Waste Paper. 

Usutu Pulp. As of October 2000, we have a 100% ownership interest in the Usutu Pulp Company Limited. Usutu Pulp began production in 1961 and 

has been managed by us since 1989. The mill was upgraded during 1995 and 1996 at a cost of approximately $69 million. During the period from 

October 1999 to September 2002, an additional $14 million was invested. The mill has a capacity of 225,000 metric tonnes of unbleached kraft pulp and 

supplies approximately 10% of the world market for unbleached market kraft pulp (based upon tonnes sold). The mill is situated in Swaziland and is 

surrounded by 60,000 hectares of forestlands, which it leases from the Swazi nation under a long-term lease extendable to 2089. The location of these 

forestlands, combined with the very compact areas the trees are planted on, provides for low wood delivery costs. See "—Supply Requirements—Southern 

Africa—Wood" for more information. 

Sappi Kraft also manages Sappi Waste Paper. Sappi Waste Paper collected approximately 240,000 metric tonnes of waste paper in fiscal 2002. Most of 

the waste paper collected was supplied to our mills. Waste represents 30% of the fibre requirements of our packaging grades. 

Sappi Forests 

30 

Sappi Forests, together with Usutu Forests, supplies or procures all of Sappi Forest Products' and Sappi Fine Paper South Africa's domestic pulpwood 

requirements of approximately 7 million metric tonnes per annum. 62% of the pulpwood comes from owned or contracted sources. Together they manage or 

control, through contracts, about 540,000 hectares of land situated in Mpumalanga (45%), KwaZulu-Natal (42%) and Swaziland (13%). Securing raw material 

for the future is a vital element in the long-term planning of Sappi Forest Products' business. Sappi Forests has an extensive research operation which 

concentrates on programmes to improve the yield per hectare of forestland used. Significant progress has been made in developing faster-growing trees with 

enhanced fibre yields. Sophisticated nurseries have been developed to accommodate the seedling requirements of Sappi Forest Products' operations. 

Approximately 40 million seedlings are grown annually at Sappi Forests' and Usutu Forests nurseries. 

Sappi Forests and Usutu Forests have invested approximately $83 million (excluding interest capitalised) in maintaining, acquiring and expanding 

plantations and an additional $6 million in other capital expenditure projects in the period from October 1999 to September 2002. 

As of October 1, 2000, following the sale of Novobord, Sappi Timber Industries ceased to exist and the mining timber and sawmill divisions were 

incorporated into Sappi Forests. The sawmill division operates three mills with a total production capacity of 190,000 cubic metres per annum of structural 

timber for the building industry and components for the furniture industry and packing cases. 

Pursuant to our strategy of disposing of non-core assets, the mining timber division, which produced mine support systems for the South African mining 

industry, was sold on October 1, 2000 to Business Venture Investment No. 336 (Pty) Ltd., a company owned by the mining timber division management. 

Marketing and Distribution 

Overview 

Each of Sappi Forest Products' divisions with major South African markets has its own marketing and sales team. Sappi Trading manages the exports of 

the Sappi Forest Products' divisions. 

Customers 

31 

Sappi Forest Products sells its products to a large number of customers, including merchants, converters and other direct customers, many of whom have 

long-standing relations with us. 

The most significant converter customers, based on sales in fiscal 2002, include: Caxton, CTP Group and Nasionale Pers, which uses Sappi Forest 

Products' newsprint; Nampak Limited; Mondipak Limited; APL (Pty) Ltd and Houers Co-operative. Mondipak (formerly Kohler) was formed as a result of a 

recent acquisition by Mondi Paper Company Limited, a significant competitor of Sappi Forest Products, of the corrugated paper business of Kohler Limited 

from Malbak. Most of the Viscose Staple Fibre manufacturers around the world purchase dissolving pulp from Sappi Forest Products, including large groups 

such as the Aditya Birla Group and Acordis. 

Approximately 57% of the total sales of Sappi Forest Products during fiscal 2002 consisted of export sales. 

Competition 

Mondi Paper Company Limited is a significant competitor in most of the markets in which Sappi Forest Products operates in southern Africa. Imports, 

primarily from Europe, have gained an increased share of the southern African paper markets since sanctions and boycotts against South Africa ended with 

the demise of apartheid in the early 1990s. Imports of kraft linerboard, corrugating medium and sackkraft are believed to be relatively minor at present. In 

respect of dissolving pulp, competitors include International Paper Company, Tembec Inc., Western Pulp Limited Partnership and Rayonier Inc. 

32 

SUPPLY REQUIREMENTS

Overview 

The principal supply requirements for the manufacture of our products are wood, pulp and energy. Large amounts of water are also required for the 

manufacture of pulp and paper products. See "—Environmental and Safety Matters—Environmental Matters—Southern Africa". We believe that we have 

adequate sources of these and other raw materials and supplies necessary for the manufacture of pulp and paper for the foreseeable future. 

North America 

Wood 

In connection with the 1998 sale of our US timberlands to Plum Creek Timber Company L.P., Sappi Fine Paper North America and Plum Creek are 

parties to a fibre supply agreement with an initial term expiring in December 2023 and with three five-year renewal options. Under the supply agreement, 

Sappi Fine Paper North America is required to purchase from Plum Creek and Plum Creek is required to sell to Sappi Fine Paper North America a guaranteed 

annual minimum of 350,000 metric tonnes of hardwood pulpwood, or approximately 12% of Sappi Fine Paper North America's annual requirements, at prices 

calculated based on a formula tied to market prices. Sappi Fine Paper North America has the option to purchase additional quantities of hardwood pulpwood 

harvested from these timberlands at prices generally higher than the ones paid for the guaranteed quantities. The remainder of Sappi Fine Paper North 

America's wood requirements is met through market purchases. 

Pulp 

Sappi Fine Paper North America's mills, taken together, are fully integrated on an economic basis with respect to hardwood pulp usage. Mills that are not 

fully integrated make market purchases, and mills that produce more pulp than they utilise make market sales. 

Sappi Fine Paper North America currently offers recycled products in most coated grade lines. It uses reprocessed fibres recovered from its existing 

operations and purchases de-inked post consumer waste pulp to meet market requirements for recycled products. 

Sappi Fine Paper North America manufactures, in aggregate, pulp and fibre equivalent to approximately 113% of its own pulp and fibre requirements. 

This vertical integration reduces its exposure to fluctuations in the market price for pulp. 

Energy Requirements 

Sappi Fine Paper North America's energy requirements are satisfied through wood and by-products derived from the pulping process, coal, oil, purchased 

electricity, purchased steam, natural gas and other sources. 

A substantial majority of Sappi Fine Paper North America's electricity requirements are satisfied through its own electricity generation or co-generation 

agreements. Historically, Sappi Fine Paper North America's power requirements at its Somerset mill were satisfied through a power purchase agreement with 

Central Maine Power ("CMP"), which was entered into in 1982 and expires in 2012. According to this agreement, the mill historically co-generated electricity 

and sold the output to CMP at market rates. Under the agreement, the Somerset mill would purchase electricity from CMP at the standard industrial tariff rate. 

Commencing on March 1, 2000, as a result of the deregulation of the Maine power industry, CMP was no longer permitted to sell power to its customers. 

Accordingly, in July 2002, Sappi Fine Paper North America entered a series of contracts with CMP and a third party energy provider. The new contracts 

provide that Somerset sell all of its excess generated power to CMP 

33 

and purchase all of its power needs beyond its generation capacity from the third party provider, each at market rates. The new agreements expire in 2012. 

Sappi Fine Paper North America also has a one-year agreement expiring on March 28, 2003, with a third party pursuant to which the Westbrook mill sells any 

excess electricity it co-generates. 

Muskegon co-generates electricity and uses the total output for its operations. In addition, it purchases stand-by power from Consumers Power Company 

at state regulated rates. 

The Cloquet mill, acquired in the Potlatch acquisition, is supplied partly with internally generated electricity. The Cloquet mill includes a hydroelectric 

facility that is licensed by the Federal Energy Regulatory Commission. The acquisition of the hydroelectric facility from Potlatch was completed on June 25, 

2002, upon receipt of approval of the Federal Energy Regulatory Commission to the transfer of the license from Potlatch to Sappi becoming final. In addition 

to generating a portion of its own power, the Cloquet mill has entered into a take-or-pay agreement to purchase a portion of its power from Minnesota Power, 

which terminates in 2008. 

Europe 

Wood 

Sappi Fine Paper Europe purchases approximately 2,500,000 cubic metres of pulpwood per annum for its pulp mills. The wood is purchased both on 

contract and in the open market. Wood supply contracts are fixed for one year in terms of volumes. Price agreements range from three months for wood chips 

to one year for logwood. 

The wood logs and wood chips used in the Gratkorn TCF pulp mill are purchased through the Papierholz Austria GmbH joint venture arrangement 

amongst Sappi, the Norske Skog Bruck mill and the Frantschach Group. We hold a 42.5% ownership interest in Papierholz. 

The wood chips used in the Lanaken CTMP plant are purchased through the Sapin S.A. joint venture arrangement with Parenco B.V. Sappi holds an 

indirect 50% interest in this joint venture. The Sapin joint venture ("Sapin") was formed on November 25, 1986, pursuant to a joint venture agreement 

between Sappi Lanaken and Parenco. Under the agreement, the parties agree to utilise the joint venture arrangement to furnish at least 25% of their respective 

wood chips requirements. Currently, Sapin is the sole supplier of wood to the Lanaken mill. 

Pulp

Sappi Fine Paper Europe produces approximately 42% of its pulp requirements. The remainder is supplied through open market purchases and, to a 

lesser extent, supply agreements. 


Sappi Fine Paper Europe's energy requirements are generally met by internally generated sources and purchases of electricity, gas and, to a lesser extent, 

oil. In Germany, Sappi Fine Paper Europe internally generates approximately 65% of the electricity used at its mills. Approximately 45% of the energy 

requirements for the Gratkorn mill are internally generated. The remaining requirements are met by purchasing electricity, oil, coal and gas in accordance with 

various supply agreements. 

Substantially all of the electricity requirements of the Maastricht mill are satisfied by a 60 megawatt combined heat/power plant operated through a joint 

venture with Mega Limburg. Any surplus electrical energy is supplied to the public electricity grid. We also hold an ownership interest of 50% in the VOF 

Warmte/Kracht joint venture, which was formed in 1992, and are obligated to purchase all of the steam and electricity requirements of the Maastricht mill 

from the joint venture 

34 

facility under a long-term supply agreement. Mega Limburg is the electricity producing arm of VOF. The Maastricht mill also purchases natural gas pursuant 

to a contract with Gasunie. 

Nijmegen mill's electricity requirements are largely satisfied by its co-generation power plant. The Nijmegen mill additionally purchases natural gas from 

Gasunie, a local supplier. 

Lanaken mill's energy requirements are generally met by purchases of natural gas and electricity. Certain of the energy requirements of the Lanaken mill 

are furnished by a combined heat and power unit constructed and operated pursuant to the Albertcentrale N.V. joint venture arrangement between Sappi, the 

Belgian power company Electrabel and Rabo Energy. Sappi holds a 49% ownership interest in the Albertcentrale facility and is obligated to purchase 85% of 

the plant's energy requirements from the joint venture facility under a long-term supply agreement. The facility commenced operations in April 1997. 


Wood 

Sappi Forest Products manages approximately 540,000 hectares of forestland in southern Africa, of which approximately 400,000 hectares are forested, 

which produces approximately 62% of the timber required for its operations. Sappi Forests owns 368,000 and leases approximately 10,000 of the hectares 

managed. Usutu Pulp owns 60,000 hectares of pine on 70,000 hectares of land that is leased from the Swazi nation on a long-term lease, which we have the 

option to extend until 2089. Sappi Forests presently has supply contracts for the timber from approximately 92,000 hectares of plantations planted by small 

growers with our technical and financial support. Approximately 7% of the timber requirements of Sappi Forest Products is bought under a long-term contract 

with Safcol, the South African state-owned forestry company. The remaining timber requirements are met through a number of significant medium-term 

contracts and open market purchases. Safcol is in the process of being privatised. In September 2000, a group backed by Mondi was awarded the tender for 

some of the Safcol plantations in KwaZulu Natal, which supplied some of our timber requirements, whereas a group backed by Hans Merensky was awarded 

the tender for the other plantations in KwaZulu Natal and the Eastern Cape. The Government has reopened the tendering process for the Mpumulanga and 

Limpopo (previously Northern Province) regions due to the successful bidder, ZAMA Resources, being disqualified due to it having committed certain 

irregularities in the initial tender. Our intention is to secure a long-term supply contract with the successful bidder. We are unable to predict whether the 

privatisation of Safcol or the purchase of Safcol's plantations in KwaZulu Natal by the group backed by Mondi will have an adverse impact on our ability to 

continue to purchase timber from Safcol. 

Pulp 

Sappi Forest Products and Sappi Fine Paper South Africa in aggregate manufacture all of the pulp required in their respective papermaking operations, 

except minimal quantities of specialised pulps, and together are a net seller of bleached and unbleached paper pulp. This vertical integration substantially 

reduces our exposure to fluctuations in the market price for pulp. 


Our energy requirements in southern Africa are met principally by purchases of gas, electricity and coal, supplemented by purchases of oil and by the use 

of internally generated biomass and by-products. Electricity is supplied by Eskom, the state-owned electricity company, or generated internally. The 

electricity generated by our plants in southern Africa is equivalent to approximately 37% of our total electricity requirements. Coal and oil are purchased on 

contract. 

Environmental Matters 

35 

ENVIRONMENTAL AND SAFETY MATTERS 

We are subject to a wide range of environmental laws and regulations in the various jurisdictions in which we operate, and these laws and regulations 

have tended to become more stringent over time. Environmental compliance is an increasingly important consideration in our businesses, and we expect to 

continue to incur significant capital expenditures and operational and maintenance costs related to reductions in air emissions (including "greenhouse gases"), 

wastewater discharges and waste management. We constantly monitor the potential for changes in the laws regulating air emissions and other pollution 

control laws and take actions with respect to our operations accordingly. See note 37 to our Group annual financial statements included elsewhere in this 

Annual Report for more information.

North America 

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 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". See note 37 to our Group annual financial statements included elsewhere in this Annual Report for a 

discussion of the financial impact of the cluster rules. 

Europe 

Our European facilities are subject to extensive environmental regulation in the various countries in which they operate. For example: 

• 

• 

• 

• 

• 

• 

South Africa 

In Germany, where two Sappi Fine Paper Europe mills are located, the Federal Emission Control Act, the Federal Water Act and the Federal 

Ground Act regulate air emissions, wastewater discharges and liability for contaminated sites, respectively. 

In the Netherlands, where two Sappi Fine Paper Europe mills are located, paper manufacturers, including Sappi, have made an agreement with 

the national government to improve environmental management and further limit emissions. 

In Austria and Belgium, water emissions and waste disposal requirements similar to those in Germany, the United Kingdom and the Netherlands 

apply to our facilities. 

In the United Kingdom, our mills received permits required under, the Pollution Prevention and Control Regulations which were enacted to 

implement the EC Directive 96/61/EC on Integrated Pollution Prevention and Control. 

At our Nijmegen mill, we are subject to a potential damage charge of approximately $203,611 (euro 208,000), representing the alleged cost of 

cleaning up contaminated pulp from the local sewer system. The proposed charge relates to a discharge of pulp from our Nijmegen mill in 2000. 

We are pursuing a settlement of this matter with the local authorities. 

The Sappi Fine Paper Europe organisation has been certified according to the international standard of environmental management systems (ISO 

14001), and the mills of Alfeld, Gratkorn and Nijmegen are registered in the European EMAS (Eco-Management and Audit Scheme) Register. 

The primary South African laws affecting our operations have been substantially revised in recent years. For example: 

• 

• 

• 

36 

The National Water Act, effective October 1998, addresses the water shortages in South Africa in a manner that will not significantly impact our 

manufacturing and forestry operations. Abstraction of water, discharge of effluent and management of forests will all be regulated under a new 

license system in which first allocations go to, among other things, human consumption, before allocations are made to agriculture, industry and 

forestry. All water use is now subject to a charge. We expect to incur additional costs over the next decade to comply with the National Water 

Act, but are unable to quantify these at this time. 

The National Environmental Management Act, effective January 1999, adopted the philosophy of integrated environmental management, which 

provides for the integration of environmental considerations into all stages of any development process. The Act includes a number of significant 

principles, such as private prosecution of companies in the interest of the protection of the environment and the establishment of aggressive waste 

reduction goals. 

We expect that The National Air Quality Management Bill ("Air Quality Bill") will become effective by the end of 2003. The Air Quality Bill 

will replace the 1965 Air Pollution Prevention Act and will impose stringent compliance standards on our operations, including those related to 

carbon dioxide and sulphur dioxide air emissions. We expect to incur additional costs to comply with the Air Quality Bill in 2004 and 2005. 

The requirements under these statutes may result in additional expenditures and operational constraints. Although we are in frequent contact with 

regulatory authorities during the phasing in of the legislation, we are uncertain as to the ultimate effect on our operations. Our current assessment of the 

legislation is that any compliance expenditures or operational constraints will not be material to our financial condition. 

Safety Matters 

The forestry, timber and pulp and paper industries involve inherently hazardous activities including, among other things, the operation of heavy 

machinery. Nearly all the countries, in which we have significant manufacturing operations including South Africa, the United States and the European 

countries, regulate health and safety in the workplace. We actively seek to reduce the frequency of accidents in our workplaces and to improve health and 

safety conditions by extensive training and educational programmes. 

In the United States, Sappi Fine Paper North America must comply with a number of federal and state regulations regarding health and safety in the 

workplace. The most important of these regulations is the Federal Occupational Safety and Health Act. 

In Europe, we participate in various governmental worker accident and occupational health insurance programmes. In Austria, Belgium, the United 

Kingdom and the Netherlands, these programmes are funded by mandatory contributions by employers and employees. In Germany, we participate in a 

similar mandatory contribution scheme controlled by the German government, which permits employer and employee participation in its administration.

In South Africa, we must comply with the Occupational Health and Safety Act (Number 85 of 1993) and related regulations. Our South African 

businesses have instituted an international safety rating system, which sets standards for safety systems and processes and facilitates the monitoring of 

compliance with applicable governmental laws and regulations. 

37 

ORGANISATIONAL STRUCTURE 

Sappi Limited is the ultimate holding company of the Sappi Group. The following table sets forth the more significant subsidiaries owned by Sappi 

Limited. 

Name of Company 

Trading Name 

Country of 

Incorporation 

Type of 

Company 

% Holding and 

Voting Power 

North America 

S.D. Warren Company Sappi Fine Paper United States Operating 100 

Sappi Cloquet LLC Sappi Fine Paper United States Operating 100 

Europe 

Sappi Alfeld AG Sappi Fine Paper Germany Operating 99 

Sappi Belgium Holding BV Sappi Fine Paper Netherlands Operating 100 

Sappi Ehingen AG Sappi Fine Paper Germany Operating 95 

Sappi Europe SA Sappi Fine Paper Belgium Operating 100 

Sappi Fine Paper plc 

Sappi Austria Produktions GmbH & 

Sappi Fine Paper United Kingdom Management 100 

Co KG 

Sappi Fine Paper Austria Operating 100 

Sappi MagnoStar GmbH Sappi Fine Paper Austria Operating 100 

Sappi Holding AG Sappi Holding AG Austria Holding 100 

Sappi International SA Sappi International SA Belgium Finance 100 

Sappi Maastricht BV Sappi Fine Paper Netherlands Operating 100 

Sappi Nijmegen BV Sappi Fine Paper Netherlands Operating 100 

Sappi Papier Holding AG Sappi Papier Holding AG or Sappi 

Fine Paper or Sappi Trading Austria Operating 100 

Sappi Lanaken Presspaper BV Sappi Fine Paper Belgium Operating 100 

Sappi U.K. Ltd. Sappi Fine Paper United Kingdom Operating 100 

Guernsey 

Lignin Insurance Co. Ltd. Lignin Insurance Co. Ltd. Guernsey Finance 100 


Sappi Manufacturing (Pty) Ltd. Sappi Manufacturing or Sappi Forest 

Products or Sappi Fine Paper or Sappi 

Kraft or Sappi Forests or Sappi 

Saiccor 

South Africa Operating 100 

Usutu Pulp Co. Ltd. Sappi Usutu Swaziland Operating 100 

Sappi Management Services (Pty) Ltd. Sappi Management Services (Pty) Ltd. South Africa Management 100 

38 

PROPERTY, PLANTS AND EQUIPMENT 

For a description of the production capacity of our mills, see "—Sappi Fine Paper—Facilities and Operations" and "—Sappi Forest Products—Facilities 

and Operations". 

For a description of the timberlands we own or have recently sold, see "—Sappi Fine Paper—Facilities and Operations—Sappi Fine Paper North 

America", "—Sappi Forest Products—Facilities and Operations—Sappi Forests" and "—Supply Requirements". 

For a description of our capital expenditures, see "Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources". 

The following table sets forth the location and use of our principal headquarters, manufacturing and distribution facilities. These facilities are owned 

unless otherwise indicated. 

Location 

Use 

Approximate 

Size (1) 

Sappi Limited 

Johannesburg, South Africa Sappi Headquarters (2) 12,471 m 2 

Sappi Fine Paper

London, England Co-ordination centre (3) 862 m2 Sappi Fine Paper North America (4) 

Boston, Massachusetts Headquarters (5) 38,620 sq ft 

Skowhegan, Maine 

(Somerset Mill) 

Manufacturing facility: coated paper, softwood and hardwood pulp 2,355 acres 

Muskegon, Michigan Manufacturing facility: coated paper and a warehouse (6) 5,185,000 sq ft 

Westbrook, Maine Manufacturing facility: speciality and high bulk coated paper and 

275 acres 

research and development facility 

Allentown, Pennsylvania Coated paper sheeting facility and distribution centre (7) 30 acres 

Atlanta, Georgia Distribution centre (8) 86,500 sq ft 

Alsip, Illinois Distribution centre (9) 1.4 ha 

Cloquet, Minnesota Manufacturing facility: coated paper and pulp (10) 650 acres 


Distribution and R&D facility 7 acres 

Brussels, Belgium Headquarters (11) 3,269 m2 Gratkorn, Austria Manufacturing facility: coated paper and pulp 1,022,869 m2 Maastricht, Netherlands Manufacturing facility: coated paper and research and development 

14.7 ha 

facility 

Nijmegen, Netherlands Manufacturing facility: coated paper 10.7 ha 

Lanaken, Belgium Manufacturing facility: coated paper and pulp 35.0 ha 

Alfeld, Germany Manufacturing facility: coated paper and pulp 332,825 m2 Ehingen, Germany Manufacturing facility: coated paper and pulp 358,092 m2 Blackburn, England Manufacturing facility: coated paper 36.7 ha 

Wesel, Germany Distribution centre 6.2 ha 

Wesel, Germany Distribution centre (9) 3,000 m2 Sappi Fine Paper South Africa 

Enstra, South Africa Manufacturing facility: uncoated paper and hardwood pulp, and the 

bleaching of softwood pulp (10) 

39 

582.7 ha 

Stanger, South Africa Manufacturing facility: coated paper, tissue and bagasse pulp (10) 55.4429 ha 

Adamas, South Africa Manufacturing facility: uncoated paper and recycled packaging paper 7.2 ha 

Other Fine Paper Operations 

Hemel Hempstead, England 

(Nash Mill) 

Manufacturing facility: business paper and printing paper and board 12 acres 

Johannesburg, South Africa 

Sappi Saiccor 

Sappi Forest Products 

Headquarters Included under Sappi Limited headquarters 

Umkomaas, South Africa Manufacturing facility: dissolving pulp (10) Sappi Kraft 

159.4 ha 

Ngodwana, South Africa Manufacturing facility: linerboard, newsprint and kraft pulp 1,282.9 ha 

Tugela, South Africa Manufacturing facility: linerboard, corrugating medium, sackkraft and industrial 

kraft 

914.4 ha 

Cape Kraft, South Africa Manufacturing facility: linerboard and corrugating medium 9.5 ha 

Bunya, Swaziland 

Manufacturing facility: kraft pulp 45.0 ha 

(Usutu Pulp Mill) 

Sappi Forests 

Barberton, South Africa 

(Lomati Sawmill) 

KwaZulu-Natal, South Africa 

(Clan Sawmill) 

Storms River, South Africa 

(Boskor Sawmill) 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

(10) 

(11) 

Sawmill 24.6 ha 



The approximate size measurement relates to, in the case of manufacturing and distribution facilities, the perimeter of the property on which the principal manufacturing or distribution 

facilities are situated and, in the case of offices, the interior offices space owned or leased. 

Subject to a lease expiring in 2005. 


All of Sappi Fine Paper North America principal properties are pledged as collateral under Sappi Fine Paper North America's credit facilities. 


Subject to a lease that operates on a month-to-month basis. 

Subject to a bailment arrangement. 

Subject to a distribution centre agreement expiring in February 2003, but automatically renewable for a further one-year term unless terminated by either party. 

Subject to a bailment arrangement. 

Substantial assets are leased pursuant to capital lease arrangements. 

Subject to leases expiring in 2003 and 2007.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 

40 

You should read the following discussion and analysis together with our Group annual financial statements, including the notes, included elsewhere in 

this Annual Report. Certain information contained in the discussion and analysis set forth below and elsewhere in this Annual Report includes forwardlooking 

statements that involve risk and uncertainties. See "Forward-Looking Statements", "Item 3—Key Information—Selected Financial Data", "Item 3— 

Key Information—Risk Factors", "Item 4—Information on the Company", "Item 10—Additional Information—Exchange Controls" and note 33 to our Group 

annual financial statements included elsewhere in this Annual Report for a discussion of important factors that could cause actual results to differ materially 

from the results described in or implied by the forward-looking statements contained in this Annual Report. 

Company and Business Overview 

We are a global Company that through acquisitions in the 1990s has been transformed into the global market leader in coated woodfree paper. Two 

acquisitions were pivotal in establishing us as a global Company, namely the acquisition in 1994 of S.D. Warren Company, now known as Sappi Fine Paper 

North America, and the acquisition in 1997 of KNP Leykam, now integrated into Sappi Fine Paper Europe. Opportunities to grow within our core businesses 

will continue to be evaluated. 

We have integrated our woodfree paper acquisitions into a single woodfree paper business, which operates under the name Sappi Fine Paper. We are 

organised into two operating business units: Sappi Fine Paper and Sappi Forest Products. 

Sappi Fine Paper generated over 80% of our sales during fiscal 2002 and 2001. Of our sales for fiscal 2002 and fiscal 2001, over 85% were made in US 

dollars, euro and other non-Rand denominated currencies. These sales provided us with a meaningful hedge against the depreciation of the Rand. See "— 

Inflation and Foreign Exchange" and note 33 to our Group annual financial statements included elsewhere in this Annual Report. Our sales by source and 

destination in fiscal 2002 were as follows: 

Sales by Source 

Sales by Destination 

North America (1) 32% 34% 

Europe 47% 44% 

Southern Africa 21% 13% 

Far East and others — 9% 

Total 100% 100% 

(1) 

Sales by destination to North America includes Latin America. 

See note 34 to our Group annual financial statements included elsewhere in this Annual Report for information regarding sales by source and destination for prior periods. 

Sappi Fine Paper has a total paper production capacity of 4.2 million metric tonnes per annum. We are the global leader in the coated woodfree paper 

business with a capacity of 3.9 million metric tonnes of coated woodfree paper per annum and with a market share of approximately 28% in the United States, 

approximately 20% in Europe and greater than 60% in southern Africa. In addition, we are the world's largest producer of dissolving pulp, with a market share 

of approximately 15%. The Sappi Group is now slightly more than 100% integrated on a net basis in terms of pulp usage, meaning that, while some of our 

facilities are market buyers of pulp and others are market sellers, in the aggregate we produce slightly more pulp than we utilise. By region, the southern 

African operations are net sellers of pulp, Sappi Fine Paper North America is fully integrated and the European operations are approximately 42% selfsufficient 

for pulp in Continental Europe, but entirely dependent on market pulp in the United Kingdom. We supply approximately 62% of the wood 

requirements for our South African businesses from sources we own or lease. Both our North American and European operations are dependent on outside 

suppliers of wood for their production requirements. 

41 

In recent years, we have sought to internationalise our shareholder base and increase our exposure in the world's major financial markets. On 

November 5, 1998, our American Depository Receipts commenced trading on the New York Stock Exchange. We believe that, as of October 25, 2002, based 

on registered addresses and disclosure by nominee companies, 48% of our shares were held beneficially in the North America, 38% of our shares were held 

beneficially in South Africa and 14% of our shares were held beneficially in Europe and elsewhere, excluding the shares owned by subsidiaries of Sappi. 

Markets 


world economy. As a result, the prices for our products have been cyclical. The pulp and paper industry has often been characterised by periods of imbalances 

between supply and demand, causing prices to be volatile. 

The market price per metric tonne of northern bleached softwood kraft ("NBSK") pulp, a pulp principally used for the manufacture of woodfree paper, is 

a benchmark widely used in the industry for comparative purposes. Over the past decade, the price of NBSK has ranged from $395 per metric tonne in 

November 1993 to $925 per metric tonne in September 1995. 

In line with the global economy, pulp demand has been muted throughout 2001 and 2002 and price fluctuations have been driven primarily by supply 

management and the consequent impact on inventories. NBSK prices started increasing in April 2002 from a trough of $435 per metric tonne reaching $490 in 

July. Since then, prices have declined to $460 per metric tonne in November 2002.

The majority of Sappi's market pulp sales consist of dissolving pulp. Dissolving pulp generally trades at a premium to NBSK due to the more technically 

demanding nature of the product. Dissolving pulp prices do, however, tend to follow the direction of changes in NBSK prices, albeit with a time lag and less 

volatility. During fiscal 1998 and the first two quarters of fiscal 1999, Sappi Forest Products dissolving pulp and unbleached kraft pulp sales to Southeast 

Asian markets were severely adversely affected by the Asian economic crisis. Asian markets have subsequently recovered. Approximately 36% and 21%, 

respectively, of the production of Usutu Pulp and Sappi Saiccor was exported to Southeast Asia during fiscal 2002. In fiscal 2002, the dissolving pulp market 

was extremely difficult as a result of weak viscose staple fibre demand and competitive pressures resulting from surplus global capacity. We curtailed 

production to approximately 70% of capacity and maintained our inventories at low levels. 

Paper price cycles have generally been less volatile than pulp price cycles. This is particularly true of coated paper, where coating make up a significant 

portion of the sheet of paper by weight. In line with pulp prices, coated woodfree paper prices in Europe and the US were at a cyclical low at the end of the 

first calendar quarter in 1999. While pulp prices increased by more than 50% to their September 2000 peak, European paper prices increased only 

approximately 20% and US prices only approximately 15%. In the first fiscal quarter of 2001, coated woodfree paper shipments in both Europe and the US 

reduced due to a slowdown in economic activity, which affected advertising expenditures and ultimately paper demand. Merchants and printers depleting 

inventories, which further depressed the apparent demand seen by paper mills, exacerbating this decrease in actual consumption. Apparent consumption of 

coated woodfree paper in fiscal 2001, as measured by shipments from producers net of imports and exports, was 14% below the previous year in the US and 

8% in Europe. Demand remained almost flat in fiscal 2002, with European apparent consumption down 0.2% and US apparent consumption down 0.6% in 

comparison to fiscal 2001. 

There continues to be significant overcapacity of coated woodfree paper due to this sustained drop in demand, but the industry has responded with a large 

amount of production curtailment to balance supply with demand. During the same period in fiscal 2001 that pulp prices decreased by 37%, European coated 

woodfree prices had decreased by approximately only 5% on average. Fiscal 2002 saw marginal further erosion of European coated woodfree prices, which 

remain under severe pressure, 

with benchmark 90gsm sheets in Germany 3% lower in September 2002 than they were in October 2001. 

42 

The North American industry was less proactive in taking downtime to match supply to demand. However during fiscal 2002 approximately 600,000 

tonnes of coated woodfree capacity in North America was closed by our competitors. Imports from Europe and Asia continued to put pressure on prices and 

volumes. Changes in the supply side in China had a resultant impact on European and Asian producers which led to sharp increases in exports to the United 

States and a serious impact on North American producers, in particular. The price of benchmark coated free sheet 601b rolls declined by 15% during fiscal 

2001 and fell an additional 8% by the end of fiscal 2002. Demand in the fourth quarter of fiscal 2002 for web product used for publications, including 

catalogues, was strong, extending order backlogs in the industry for these products. The increased lead times supported a mid-August 2002 price increase 

announcement of $40/tonne on publication grades by all major North American producers. As of November 2002, this increase had been implemented on spot 

business and non-price protected contract business. Two price announcements were made in November 2002: a further $40/tonne increase on publication 

grades and a $40/tonne increase on domestic and imported sheets. 

During fiscal 2002, we continued to manage inventories rigorously and focused on improving our service and product offering to customers in Europe. 

This enabled us to maintain margins at an acceptable level, and we believe overall it had a fractional negative impact on our market share. 

As of November 2002, the available evidence indicates that merchant and printer inventories are still low. In this respect, the industry appears to be 

structurally healthy and capacity additions have not been out of balance with historical long-term demand growth. Sustained improvements in pricing and 

demand will probably require an upturn in economic activity and advertising spending; however, even without this, an end to inventory depletion by 

merchants and printers should provide some improvement in volumes. 

The timing and magnitude of price increases and decreases in the pulp and paper market generally vary by region and type of pulp and paper. See "Item 4 

—Information on the Company—Business Overview—The Pulp and Paper Industry". 

South African Economic and Political Environment 

Sappi Limited's status as a South African company and ownership of significant operations in southern Africa result in us being subject to various 

economic, fiscal, monetary, regulatory, operational (including labour-relations) and political policies and factors that affect South African companies and their 

subsidiaries generally. The impact of certain of these policies and factors, for example regulatory and operational factors, is limited by the geographic 

diversity of our sales by source and the geographic diversity of our net operating assets, of which Europe represented 39%, North America represented 40% 

and southern Africa represented 21% at the end of fiscal 2002. 

South Africa features a highly developed sophisticated "first world" infrastructure at the core of its economy. The South African economy is expected to 

grow between 2.5%—3.0% in 2002, substantially higher than its main trading partners, Europe and the United States. South Africa currently has long-term 

foreign currency investment ratings of Baa2 from Moody's Investor Services, Inc. and BBB- from Standard & Poor's Rating Service. While exchange controls 

have been relaxed in recent years and are continuing to be relaxed, South African companies remain subject to restrictions on their ability to raise and deploy 

capital outside of the Southern African Common Monetary Area. See "—Liquidity and Capital Resources—Financing". 

Despite the democratisation of South Africa in recent years, the country continues, however, to face challenges in overcoming substantial differences in 

levels of economic and social development 

among its people, and in addressing problems such as high levels of inflation, unemployment, crime and HIV/AIDS experienced in recent years. 

43 

The government has recently taken a number of steps to increase ownership of South African business assets by Black Empowerment Entities (BEE's). 

The recent leakage of the purported draft Mining Charter, addressing the redistribution of ownership of South African mining resources, negatively impacted 

the securities markets sentiment towards mining and other resource-based enterprises. The Government and the Mining Sector responded quickly and agreed

on a charter, which is expected to result in BEE's increasing their ownership of mining resources to approximately 26% of total resources within 10 years. The 

South African constitution guarantees ownership rights of assets, and if any increase in the ownership is obtained by acquisition of existing assets, the assets 

will be sold at market price. 

Foreign Exchange, Inflation and Interest Rates 

The Sappi Group reports in US dollars. Our Group annual financial statements are prepared in conformity with SA GAAP. Since 1990, our expansion 

has been focused outside of southern Africa and during fiscal 2002 over 85% of sales was generated from sales to customers outside of southern Africa. 

We made sales in a range of foreign currencies in the fiscal years shown as follows: 



(Percentage of Sales) 

US dollar 45.3 48.6 49.5 

euro 39.1 30.2 21.7 

Rand 12.0 11.9 12.9 

Other 3.6 9.3 15.9 

Total 100.0 100.0 100.0 

The decreased proportion of US dollar denominated sales, and the increased proportion of euro denominated sales, resulted primarily from the reduced 

sales in 2002 at Sappi North America, as well as the increase in sales by Sappi Europe, in part due to increased levels of exports from Europe, as described 

above. 

The principal currencies in which our subsidiaries conduct business are the US dollar, euro and Rand. Although our reporting currency is the US dollar, a 

significant portion of our sales is made in currencies other than the dollar. In Europe and North America, sales and expenses are generally denominated in 

euro and US dollars, respectively; however, pulp purchases in Europe are primarily also denominated in US dollars. 

In southern Africa, expenses incurred are generally denominated in Rand, as are local sales. Exports to other regions, which represent approximately 

45% of sales in fiscal 2002, are denominated primarily in US dollars. 

The depreciation of the Rand or the euro against the US dollar tends to enhance the Rand value of exports from South Africa and Europe, while 

appreciation of these currencies against the US dollar tends to have the opposite impact. Since expenses are generally denominated in home currencies, the 

appreciation of the US dollar has a positive effect on gross margins on exports and domestic sales, which are priced relative to international US dollar prices. 

With regard to European exports, to the extent that they are denominated in US dollars, we have seen the opposite effect with a relative strengthening of the 

euro over the past year. European imports of pulp denominated in US dollars have benefited in terms of local currency. Our consolidated financial position, 

results of operation and cash flows may be materially affected by movements in the exchange rate between the US dollar and the respective local currencies to 

which our subsidiaries are exposed. 

44 

Since the adoption of the euro by the European Union on January 1, 1999, when the euro was trading at approximately $1.18 per euro, the euro 

depreciated against the US dollar to approximately $0.88 per euro at the end of fiscal 2000. During fiscal 2001, it reached a low of approximately $0.83 per 

euro on October 25, 2000, and recovered to approximately $0.92 per euro at the end of fiscal 2001. It strengthened further to approximately $1.01 on July 16, 

2002 and at the end of fiscal 2002, it was approximately $0.98. On December 11, 2002 it was trading at approximately $1.008. During fiscal 2000, the Rand 

traded at levels around R6.55 per US dollar, and was approximately R7.22 per US dollar at the end of fiscal 2000. At the end of fiscal 2001, the Rand 

weakened to approximately R8.94 per US dollar. The Rand reached a new low of approximately R13.90 per US dollar on December 21, 2001. The Rand has 

recovered since that low. At the end of fiscal 2002 the Rand was trading at approximately R10.54 per US dollar, and on December 11, 2002 was trading at 

approximately R8.86 per US dollar. The principal currencies in which our subsidiaries conduct business that are subject to the risks described in this 

paragraph are the US dollar, euro and Rand. 

The following table sets forth South African inflation and the average US dollar exchange rates we used in preparing the statements of income included 

in our audited Group annual financial statements for fiscal 2002, fiscal 2001 and fiscal 2000: 




Inflation (1) Exchange Rate (2, 3) 

12.5% 4.4% 5.4% 

Rand (4) 10.5393 7.9574 6.5472 

Euro (4) 0.9188 0.8855 0.9720 

(1) 

(2) 

(3) 

(4) 

South African Consumer Price Index (CPI). The CPI for fiscal 2002 is for the period from October 1, 2001 to September 30, 2002, whereas the CPI for fiscal 2001 and 2000 is for the 

calendar year. 

Source: audited Group annual financial statements of Sappi Limited. 

At December 13, 2002, based upon the Rand Noon Buying Rate and the euro Noon Buying Rate in New York City for cable transfers as certified for customs purposes by the Federal 

Reserve Bank of New York, the exchange rates were as follows: Rand 8.7375 per $1.00 and euro 0.9779 per $1.00. Source: Federal Reserve Statistical Release. 

US$1 = Rand, euro 1 = US dollar. 

During September 1998, South African prime overdraft interest rates reached a peak level of 25.5%, primarily as a result of the weakening of the Rand, 

which weakened as a result of the emerging market crisis and concomitant capital outflows from South Africa. Although the Rand has declined further against 



2000

the US dollar in fiscal 2000 and 2001, South African prime overdraft interest rates declined to 14.5% in January 2000, and declined to a level of 13.0% in 

September 2001, the lowest levels in many years. The South African inflation rate (as measured by inflation less mortgage interest rates) increased from 6.5% 

in December 2001, to 14.5% in October 2002, mainly due to the significant weakening of the Rand against the US dollar in the quarter ended December 2001. 

Accordingly, prime overdraft interest rates increased by 4% to 17% by the end of fiscal 2002. The South African Reserve Bank ("the SARB") has not ruled 

out further increases in its repurchase rate of 13.5% as at November 15, 2002, in order to bring inflation back within the target range of 3-5% for calendar 

2003. The SARB has recently relaxed its target range for calendar 2004 from 3-5% to 3-6%. Although South African interest rates impact the cost of our 

South African borrowings, the majority of our debt has been incurred by subsidiaries outside southern Africa. 

In the US and Europe inflation rates were relatively stable in recent years, and accordingly had a lesser impact on our North American and European 

businesses. During fiscal 1999, the three-month LIBOR interest rate for the US dollar remained relatively stable at a level between 5.0 and 5.5%. It reached 

6.2% in early October 1999, and increased further, exceeding 6.8%, in May 2000. It remained unchanged through to the end of fiscal 2000. Fiscal 2001 saw a 

period of significant rate reductions to 

2.6% at the end of fiscal 2001. It was 1.92% at the end of fiscal 2002 and was reduced by 0.5% to 1.42% on November 6, 2002. 

The three-month EURIBOR interest rate in Europe started fiscal 1999 at 4.1%, and decreased to 2.7% at the start of fiscal 2000. It increased sharply to 

4.9% at the end of fiscal 2000. During fiscal 2001, it decreased and was 3.7% at the end of fiscal 2001 and 3.5% at the end of fiscal 2002. On December 5, 

2002, the European Central Bank cut interest rates further by 50 basis points, as the euro-zone economy continues to falter and inflation drops. The low 

interest rates in the United States, and reduced interest rates in Europe, represents a significant interest rate differential when compared to South Africa's 

13.5% repurchase rate as determined by the SARB, and could result in further short-term strengthening of the Rand. 

We borrow in the currencies of the countries in which we invest, thus securing a natural currency hedge. As a result, finance costs are related to the 

location of our activities and not our domicile. 

Our foreign exchange policy consists of the following principal elements: 

• 

• 

• 

• 

• 

45 

All external borrowings are taken in the currency of the operating company concerned and, if not, then the exposure is fully and specifically 

hedged. 

All major capital expenditure in foreign currencies is hedged immediately on approval of the project. 

All trade debtors/creditors are hedged on a net basis from the time the transactions are consummated. 

Anticipated exposures for near-term (quarterly) trading are netted at central treasury and appropriate hedging techniques evaluated. 

Variations in this policy are from time to time considered, but are always subject to prior board approval. 

Translation risks are not hedged. We manage our foreign exchange translation exposure by financing our investments in different currencies with similar 

debt to asset ratios. This does not necessarily protect the absolute amounts of equity investment or of profit after finance costs from exchange rate movements. 

While at the end of fiscal 2002 there would appear to be an imbalance in these ratios compared to gross debt, the ratios are, however, more in line based on 

net debt and taking into account external currency swaps. For a description of our interest and exchange rate risks, see note 33 to our Group annual financial 


Financial Condition and Results of Operations 

Our operations are organised into two business units: 

Sappi Fine Paper, which consists of Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi Fine Paper South Africa; and 

Sappi Forest Products, which consists of Sappi Kraft, Sappi Saiccor and Sappi Forests. 

Sappi Trading acts as selling agent for these two business units outside their respective home regions. 

46 

The following table sets forth sales and operating income for Sappi, Sappi Fine Paper by business unit, and Sappi Forest Products, in US dollars, and as a 

percentage of sales. Operating income percentages are expressed as a percentage of sales of the applicable business unit. 

Amount 


(audited) 

% of 

Sales 


Amount 


(audited) 


% of 

Sales 

Amount 


(audited) 

% of 

Sales 

Sales: 


Sappi Fine Paper North America 1,197 32.1 1,442 34.5 1,607 34.1 

Sappi Fine Paper Europe 1,744 46.8 1,781 42.5 1,994 42.2 

Sappi Fine Paper South Africa 215 5.7 229 5.5 227 4.8 

Total 3,156 84.6 3,452 82.5 3,828 81.1 

Sappi Forest Products 573 15.4 732 17.5 890 18.9

Consolidated Sales 3,729 100.0 4,184 100.0 4,718 100.0 

Operating Income (Loss): 


Sappi Fine Paper North America (21) (1.8) 40 2.8 179 11.1 

Sappi Fine Paper Europe 217 12.4 177 9.9 252 12.6 

Sappi Fine Paper South Africa 34 15.8 31 13.5 20 8.8 

Total 230 7.3 248 7.2 451 11.8 

Sappi Forest Products 141 24.6 194 26.5 224 25.2 

Corporate 18 — 4 — (3) — 

Consolidated Operating Income 389 10.4 446 10.7 672 14.2 

Year Ended September 2002 Compared to Year Ended September 2001 

Sales 

Sales represents the net sales value of all products sold to outside parties after the deduction of rebates. 

In fiscal 2002, the volume of products sold remained flat at 6,087,000 metric tonnes compared to 6,106,000 metric tonnes in fiscal 2001. The volume of 

products sold by Sappi Fine Paper North America decreased while the volume sold by our European and South African divisions increased or remained flat 

during fiscal 2002. 

Demand for coated fine paper as measured by shipments from producers plus the net of imports and exports was flat in fiscal 2002 as compared to fiscal 

2001 in the US and Europe. Inventories have again declined in the customer chain during fiscal 2002 but appear to have reached a trough and have started to 

stabilize. European industry exports of coated fine paper increased by 26% compared to fiscal 2001. 

Published data indicated that bench mark coated fine paper prices dropped sharply in the United States and in September 2002 were 8.6% below a year 

earlier (Coated # 3 Web) whilst Europe recorded a 1.9% decline over the same period (100 gsm sheets Germany). Production curtailment continued, and 

during fiscal 2002 we reduced our output of paper and pulp by approximately 630,000 tonnes. 

47 

North American and Scandinavian pulp inventories increased during the last quarter of fiscal 2002 but remain at 1.6 million tonnes at September 2002, a 

reasonable level after the quiet summer period, representing only 27 days of supply. Pulp prices, which started moving upwards in the second quarter of 

calendar 2002, dropped again slightly in the third quarter of calendar 2002 and are continuing to drop. 

Consolidated sales decreased by $455 million (10.9%) to $3,729 million in fiscal 2002, from $4,184 million in fiscal 2001. The sales of our Fine Paper 

division decreased by $296 million and Sappi Forest Products by $159 million. This is the second consecutive year that our consolidated sales declined and is 

largely due to lower overall demand, sharply declining prices, particularly in North America, and the weakening of the Rand relative to the US dollar. The 

results of Sappi Fine Paper South Africa and Sappi Forest Products in local currency terms were, however, positively affected by the effect of the translation 

of the depreciation of the Rand against the US dollar during fiscal 2002. Management has taken various actions to close under performing facilities. The 

closure of the Mobile mill in fiscal 2001 decreased sales by $236 million in fiscal 2002. The Potlatch acquisition has favourably impacted our performance 

and sales were higher in the last two quarters of fiscal 2002 despite the continuing weak prices. 

Sappi Fine Paper. The overall volume of fine paper products sold by Sappi Fine Paper decreased by 41,000 metric tonnes (1.1%) to 3,653,000 metric 

tonnes. For Sappi Fine Paper Europe, volume increased by 12,000 metric tonnes (0.6%) to 2,180,000 metric tonnes. Volume decreased by 75,000 metric 

tonnes (6.1%) to 1,163,000 metric tonnes for Sappi Fine Paper North America in fiscal 2002, partly due to slow economic activity but also due to the closure 

of Mobile in 2001 (reduced sales by 232,600 metric tonnes in fiscal 2002), partly offset by the Potlatch acquisition (171,400 metric tonnes). For Sappi Fine 

Paper South Africa, volume increased by 22,000 metric tonnes (7.6%) to 310,000 metric tonnes in fiscal 2002, mainly due to a recovery of market position 

and an improved uncoated fine paper and tissue market in South Africa. 

Overall sales for Sappi Fine Paper decreased by $296 million (8.6%) to $3,156 million in fiscal 2002. Average prices realised in fiscal 2002 decreased by 

$71 per metric tonne (7.6%) to $864 as compared to fiscal 2001. 

For Sappi Fine Paper Europe, sales decreased by $37 million (2.1%) to $1,744 million, mainly due to lower average prices realised. Sappi Fine Paper 

Europe realised average prices of $800 per metric tonne in fiscal 2002, down 2.6% from $821 per metric tonne in fiscal 2001. This decrease was attributable 

primarily to lower selling prices and increased volumes of lower margin products sold, offset by the appreciation of the euro against the US dollar in fiscal 

2002. In euro terms, average prices realised in fiscal 2002 decreased by 6.1%. 

Sales for Sappi Fine Paper North America decreased by $245 million (17.0%) to $1,197 million, mainly due to the decrease in volume sold (net of 

closure, acquisition and reduced demand) and lower average prices realised. The average price realised for fine paper products for Sappi Fine Paper North 

America decreased by 11.6% to $1,029 per metric tonne in fiscal 2002. This decrease is attributable primarily to the slowdown of the US economy as well as 

the pressure from increased levels of imports into the US. 

For Sappi Fine Paper South Africa, sales decreased by $14 million (6.1%) to $215 million. This decrease is primarily attributable to lower selling prices 

realised, offset by the increase in volume sold. The average price realised for fine paper products in South Africa decreased by 12.7% to $694 per metric tonne 

in fiscal 2002. This price decrease is attributable primarily to the effect of the translation of the depreciation of the Rand against the US dollar during fiscal 

2002. In Rand terms, the average price realised in fiscal 2002 increased by 15.5%. 

Sappi Forest Products. The total volume of paper pulp, dissolving pulp, commodity paper products and timber products sold by Sappi Forest Products 

increased slightly to 2,434,000 metric tonnes in fiscal 

48

2002, compared to 2,412,000 metric tonnes in fiscal 2001. Sales volumes for commodity paper products and timber products increased while there were 

decreases in paper pulp and dissolving pulp volumes sold. 

Sappi Forest Products sales decreased by $159 million (21.7%) to $573 million in fiscal 2002 from $732 million in fiscal 2001. This is primarily 

attributable to lower selling prices realised, partly due to difficult market conditions and partly due to the effect of the translation of the depreciation of the 

Rand against the US dollar during fiscal 2002. The average price realised for dissolving pulp decreased by 25.6% per metric tonne in fiscal 2002. For 

commodity paper products, the average price realised decreased by 26.7% to $354 per metric tonne, whilst the average price for timber products decreased by 

17.8% to $37 per metric tonne. 

Operating Expenses 

Operating expenses include cost of goods sold and selling, general and administrative expenses. 

Operating expenses decreased by $398 million (10.6%) to $3,340 million in fiscal 2002. This decrease was mainly due to the closure of Mobile in 2001 

($266 million) and lower input costs of pulp, and also partly due to effective cost controls, lower selling, general and administrative expenses, as well as the 

effect of the translation of the depreciation of the Rand against the US dollar in respect of our southern African operations. However, these decreases were 

partially offset by additional operating expenses following the Potlatch acquisition ($127 million), $13 million of Cloquet integration costs incurred by our 

North American operations and higher external insurance costs. Operating expense per tonne decreased to $549 (10.3%) from $612 per tonne, compared to 

last year. Operating expenses as a percentage of sales at 89.6% in fiscal 2002, remained relatively flat compared to 89.3% in fiscal 2001. 

Selling, general and administrative expenses decreased by $31 million (8.5%) to $332 million in fiscal 2002, resulting primarily from the reversal of 

pending litigation accruals made in prior years, and the reduction of accruals relating to an over-cautious response to higher insurance deductibles post 

September 11, 2002. This decrease is also attributable to better management of expenses and cost cutting initiatives following the closure of Mobile in fiscal 

2001, further aided by the effect of the translation of the depreciation of the Rand against the US dollar in respect of our southern African operations. 

Operating Income 

Consolidated operating income decreased by $57 million (12.8%) to $389 million in fiscal 2002, from $446 million in fiscal 2001. This decrease in 

consolidated operating income is primarily attributable to decreases in operating income for our North American Fine Paper division and for Sappi Forest 

Products, offset mainly by increased operating income for Sappi Fine Paper Europe. Corporate operating income of $18 million (fiscal 2001—$4 million) 

relates mainly to inter-group insurance income earned by our captive insurance company in respect of risk assumed on behalf of the regions. 

Operating margin decreased to 10.4% in fiscal 2002 from 10.7% in fiscal 2001. This decrease is primarily attributable to lower average prices realised in 

most of our operations (particularly in North America) and production curtailment. 

Sappi Fine Paper. Operating income for Sappi Fine Paper decreased by $18 million (7.3%) to $230 million in fiscal 2002. This is mainly due to the 

decrease in operating income for Sappi Fine Paper North America offset by an increase for Sappi Fine Paper Europe. Operating margin was relatively flat at 

7.3% in fiscal 2002 as compared to 7.2% in fiscal 2001. 

Operating income for Sappi Fine Paper Europe increased by $40 million (22.6%) to $217 million in fiscal 2002 from $177 million in fiscal 2001. 

Operating margin increased to 12.4% in fiscal 2002 from 

49 

9.9% in fiscal 2001. This increase in operating income and operating margin was partly due to increased exports, the decrease in input costs for pulp and was 

also achieved through improved productivity and cost reductions, despite the difficult trading conditions which resulted in further production curtailment. 

Sappi Fine Paper North America generated an operating loss of $21 million in fiscal 2002 compared to an operating profit of $40 million in fiscal 2001. 

This decrease was attributable primarily to reduced demand, lower selling prices due to low-priced imports, the continued slow down of the growth of the US 

economy and the cost of integrating the Cloquet mill. Production was further curtailed to manage inventories. Although our North American business returned 

to profitability in the last quarter of fiscal 2002 as a result of stronger demand and the benefits of the Potlatch acquisition, its margins remain under pressure. 

The operating income of Sappi Fine Paper South Africa increased by $3 million (9.7%) to $34 million in fiscal 2002. This increase is partly attributable 

to higher volumes sold due to increased local demand, increased volumes of higher margin products sold and the translation of the effect of the depreciation 

of the Rand against the US dollar. As a result, operating margin increased to 15.8% in fiscal 2002 from 13.5% in fiscal 2001. 

Sappi Forest Products. Sappi Forest Products operating income decreased by $53 million (27.3%) to $141 million in 2002. This is mainly attributable 

to lower selling prices, especially for export products and production curtailment at Saiccor, because of low dissolving pulp demand. Operating margin 

decreased to 24.6% in 2002, from 26.5% in 2001. 

Year Ended September 2001 Compared to Year Ended September 2000 

Sales 

Fiscal 2001 was characterised by difficult market conditions resulting in low demand for most of our products. In fiscal 2001, the volume of products 

sold decreased by 9.4% to 6,106,000 metric tonnes from 6,740,000 metric tonnes in fiscal 2000, with a decline in our Fine Paper and Forest Products divisions 

of 0.3 and 0.4 million metric tonnes, respectively. In the United States, the industry faced the largest ever decline in demand, and the strength of the US dollar 

led to high levels of low-priced coated woodfree paper imports. Apparent consumption for coated woodfree paper as measured by shipments from producers 

net of imports and exports was down 14% from last year in the United States and down 8% in Europe. Real consumption was probably considerably better 

than apparent consumption, as most customers reduced inventories throughout the period. In North America and Europe, paper production volumes were 

curtailed throughout the year to match our order book and consumption demand.

Consolidated sales in fiscal 2001 decreased by 11.3% to $4,184 million, with a decline in our Fine Paper and Forest Products divisions of $376 million 

and $158 million, respectively. The results of Sappi Fine Paper Europe, Sappi Fine Paper South Africa and Sappi Forest Products in local currency terms 

were, however, positively affected by the depreciation of the Rand and the euro against the US dollar during fiscal 2001. 

Sappi Fine Paper. The volume of fine paper products sold by Sappi Fine Paper decreased by 7.0% to 3,694,000 metric tonnes. For Sappi Fine Paper 

Europe, volume decreased by 9.0%, to 2,168,000 metric tonnes. Sappi Fine Paper North America's volume decreased by 6.1% to 1,238,000 metric tonnes in 

fiscal 2001. For Sappi Fine Paper South Africa, volume increased by approximately 7.1%, to 288,000 metric tonnes in fiscal 2001, mainly due to a recovery 

of market position and an improved uncoated fine paper and tissue market in South Africa. 

Sales for Sappi Fine Paper decreased by 9.8% to $3,452 million in fiscal 2001. Average prices realised in fiscal 2001 decreased by 3.1% as compared to 

fiscal 2000. 

Sales for Sappi Fine Paper Europe decreased by 10.7% to $1,781 million, mainly due to the decrease in volume sold and average prices realised. Sappi 

Fine Paper Europe realised average prices of $821 per metric tonne in fiscal 2001, down 1.9% from $837 per metric tonne in fiscal 2000. This decrease was 

attributable primarily to the depreciation of the euro against the US dollar. In euro terms, average prices realised in fiscal 2001 increased by 7.7%. 

50 

Sales for Sappi Fine Paper North America decreased by 10.3% to $1,442 million, mainly due to the decrease in volume sold and average prices realised. 

The average price realised for fine paper products for Sappi Fine Paper North America decreased by 4.5% to $1,165 per metric tonne in fiscal 2001. This 

decrease is attributable primarily to the slowdown of the US economy, as well as the pressure from euro denominated imports and increased levels of exports 

into the US as a result of the strong US dollar. 

Sales for Sappi Fine Paper South Africa were virtually flat at $229 million as compared to $227 million in fiscal 2000. The average price realised for fine 

paper products in South Africa decreased by 5.8% to $795 per metric tonne in fiscal 2001. This price decrease is attributable primarily to the depreciation of 

the Rand against the US dollar during fiscal 2001. In Rand terms, the average price realised in fiscal 2001 increased by 14.5%. 

Sappi Forest Products. The volume of paper pulp, dissolving pulp, commodity paper products and timber products sold by Sappi Forest Products 

decreased by 0.4 million metric tonnes or 12.9% to 2,412,000 metric tonnes. This is primarily attributable to the disposal of Novobord in 2000 and the mining 

timber division in 2001. 

Sales by Sappi Forest Products decreased by 17.8% to $732 million in fiscal 2001. The average price realised for dissolving pulp increased by 3.5% per 

metric tonne in fiscal 2001. For commodity paper products, the average price realised increased by 4.5% to $483 per metric tonne in fiscal 2001. The average 

price for timber products decreased by 50.0% to $45 per metric tonne mainly due to a change in the mix of products sold, following the disposal of Novobord 

in 2000 and the mining timber division in 2001. 

Operating Expenses 

Operating expenses decreased by 7.6% or $308 million to $3,738 million in fiscal 2001, compared to $4,046 million in fiscal 2000. This decrease was 

attributable primarily to the lower volume of sales and the closure of Mobile in fiscal 2001. Operating expenses per metric tonne increased by only 2% to 

$612 per metric tonne in fiscal 2001, despite reduced sales volumes, from $600 per metric tonne in fiscal 2000. This relatively low increase was the result of 

cost containment and the effect of the translation of the depreciation of the euro and the Rand against the US dollar for our European and southern African 

operations. Operating expenses as a percentage of sales increased to 89.3% in fiscal 2001, as compared to 85.8% in fiscal 2000, which is primarily attributable 

to lower selling prices realised and lower sales volumes. 

Selling, general and administrative expenses amounted to $363 million in fiscal 2001, a decrease of 8.3% compared to fiscal 2000, resulting primarily 

from the 9.4% decrease in volume sold. This decrease is also attributable to the effect of the translation of the depreciation of the euro and the Rand against 

the US dollar for our European and southern African operations. 

Operating Income 

Consolidated operating income decreased by $226 million, or 33.6%, to $446 million in fiscal 2001. This decrease is primarily attributable to decreases 

in operating income for our North American and European Fine Paper divisions, as well as for Sappi Forest Products. 

Operating margin decreased to 10.7% in fiscal 2001 from 14.2% in fiscal 2000. This decrease is primarily attributable to lower sales volumes, lower 

average prices realised in most of our operations and production curtailment. 

Sappi Fine Paper. Operating income for Sappi Fine Paper decreased by 45.0% to $248 million in fiscal 2001. This is mainly due to the decrease in 

operating income for Sappi Fine Paper North America and Europe. Operating margin decreased to 7.2% in fiscal 2001 from 11.8% in fiscal 2000. 

Operating income for Sappi Fine Paper Europe decreased by 29.8% to $177 million in fiscal 2001. Operating margin decreased to 9.9% in fiscal 2001 

from 12.6% in fiscal 2000. This decrease was contained despite the difficult trading conditions resulting in production curtailment, through improved 

productivity and cost reductions, as well as the decrease in input costs for pulp. 

51 

At Sappi Fine Paper North America, operating income decreased by 77.7% to $40 million in fiscal 2001 from $179 million in fiscal 2000. This decrease 

was attributable primarily to reduced demand, low-priced imports and the continued slow down of the growth of the US economy. Production was curtailed to 

manage inventories. Operating margin decreased to 2.8% in fiscal 2001 from 11.1% in fiscal 2000. 

Operating income for Sappi Fine Paper South Africa increased by 55.0% to $31 million in fiscal 2001. This increase is partly attributable to the effect of 

the depreciation of the Rand against the US dollar. As a result, operating margin increased significantly to 13.5% in fiscal 2001 from 8.8% in fiscal 2000.

Sappi Forest Products. Operating income for Sappi Forest Products decreased by 13.4% to $194 million in fiscal 2001. This decrease is primarily 

attributable to the decrease in volumes sold and lower selling prices realised, offset by cost containment and internal efficiencies. Operating margin increased 

slightly to 26.5% in fiscal 2001 from 25.2% in fiscal 2000. 

Non-trading Profit (Loss) 

Non-trading profit (loss) represents all income and expenditure relating to activities outside what is regarded as normal trading. Non-trading profit (loss) 

includes, amongst other things, profits and losses on the disposal of fixed assets and mill closure costs when these occur. 

Non-trading loss was $17 million in fiscal 2002, $207 million in fiscal 2001 and $2 million in fiscal 2000. 

• 

• 

• 

Net Finance Costs 

Non-trading loss in fiscal 2002 consisted primarily of a non-recurring charge of $10 million in respect of the write-off of deferred finance costs 

relating to refinancing the $140 million principal amount of 14% debentures due December 2001 of S.D. Warren Company (the "North American 

14% Debentures"), a non-recurring charge of $9 million relating to the Transcript mill closure and a non-recurring charge of $4 million relating 

to the restructuring of the Usutu mill. Non-trading loss was reduced by a release of $7 million relating to an overprovision in fiscal 2001 for the 

closure costs relating to the Mobile mill closure. 

Non-trading loss in fiscal 2001 consisted primarily of a $183 million ($110 million after tax) charge for the write-off of the assets and closure 

costs relating to the Mobile mill closure, and a non-recurring charge of $9 million relating to the write-off of deferred finance costs relating to the 

refinancing of the $250 million S.D. Warren term loan and revolving credit facility in 2001. 

Non-trading loss in fiscal 2000 consisted primarily of a $21 million profit on the sale of Sappi Novobord, offset by a charge of $8 million for 

further asset impairment costs relating to our U.K. operations and a non-recurring charge of $17 million relating to the cost of refinancing the 

$232 million Sappi Fine Paper North America's 12% debt in fiscal 2000. 

Net finance costs consists of interest expense, net of interest received, interest capitalised, foreign exchange gains and losses and mark to market of 

financial instruments. 

52 

Net finance costs decreased to $74 million in fiscal 2002 from $92 million in fiscal 2001, despite the increased finance costs resulting from the 

approximately $483 million of additional indebtedness incurred to finance the Potlatch Acquisition and a $11 million charge relating to mark to market of 

financial instruments. The decrease in net finance costs in fiscal 2002 resulted primarily from the refinancing of certain higher cost loans, lower levels of debt 

for the period prior to the Potlatch acquisition and a foreign exchange gain of $4 million. 

Net finance costs decreased to $92 million in fiscal 2001 from $97 million in fiscal 2000. The reduction in finance cost in fiscal 2001 resulted primarily 

from lower levels of borrowings and the refinancing of certain higher cost loans. Cash interest cover increased to 7.2 times for fiscal 2002 compared to 6.2 

times for fiscal 2001, after having decreased from 7.3 times in fiscal 2000. 

Our policy is to capitalise the holding costs of immature forests and the pre-commissioning finance costs on major capital projects. Finance costs 

capitalised in fiscal 2002 were $29 million compared to $33 million in fiscal 2001 and $47 million in fiscal 2000. Finance costs capitalised related mainly to 

the holding cost of forests and to capitalised interest on major projects under construction. The amount of interest to be capitalised in respect of the holding 

cost of plantations is limited by actual finance costs incurred as well as the South African Producer Price Index. The reduction in interest capitalised in fiscal 

2002 is mainly due to the effect of the translation of the appreciation of the US dollar against the Rand and was furthermore limited to actual finance costs 

incurred. 

Taxation 

Total taxation amounted to $78 million in fiscal 2002, $9 million in fiscal 2001 and $197 million in fiscal 2000. Total taxation in fiscal 2002 increased 

by $69 million, mainly due to the non-recurring $73 million tax credit relating to the Mobile closure charge in fiscal 2001. Total taxation in fiscal 2001 

decreased by $188 million from fiscal 2000, mainly due to lower levels of profit and the $73 million tax credit relating to the Mobile closure charge. 

The effective tax rate was 26.1%, 6.2% and 34.4% for fiscal 2002, 2001 and fiscal 2000, respectively. The increase in the effective tax rate in fiscal 2002 

and the decrease in fiscal 2001 is mainly the result of the $73 million tax credit relating to the Mobile closure charge in fiscal 2001. The effective tax rate for 

ongoing operations excluding Mobile was approximately 25% for fiscal 2001. 

Certain of our companies are subject to taxation queries, which could give rise to additional taxation costs. While amounts have been provided for such 

costs in addition to amounts disclosed as contingent liabilities, management currently believes, based on legal counsel opinion, that no further material costs 

will arise. See note 29 to our audited Group annual financial statements included elsewhere in this Annual Report. 

Pending negotiations between Belgium and the European Commission regarding the tax status of co-ordination centres in Belgium, like Sappi 

International S.A., our Group treasury operation, there is a possibility that Belgium will be compelled to remove, or substantially amend, the beneficial tax 

regime applicable to co-ordination centres. According to the new rules proposed in a draft bill, the tax base could in future be determined on a cost plus basis 

with all costs, financial costs and personnel costs included. Withholding tax and capital duty exemptions would remain. Clarity on the acceptability of these 

proposals to the EU Commission is expected by mid-2003. 

It is generally assumed that any change in the tax status will not occur before the end of calendar 2005. The potential negative outcome of these proposed 

changes, is, based on current proposals and 

53

estimates, not expected to have a material impact on taxation payable by the Group, although we can not guarantee it. 

The South African government has recently enacted changes in the tax laws. The changes that are more relevant to us are the following. (The summary 

below includes amendments contained in the Revenue Laws Amendment Bill 67, 2002 which is expected to be promulgated before the end of 

December 2002): 

Residence-Based Taxation and the Taxation of Foreign Dividends. The South African tax system was previously based primarily on the source-based 

principle. However, in terms of legislation promulgated during fiscal 2001 and 2000, residents of South Africa became taxable in South Africa on their 

worldwide income for years of assessment commencing on or after January 1, 2001. 

A company is regarded as South African tax resident if it is incorporated, established, formed or has its place of effective management in South Africa. 

Subject to certain exemptions, the net income of a controlled foreign company ("CFC"), i.e., a foreign company, the rights to participate directly or 

indirectly in the share capital, share premium or reserves of which are more than 50% held by a South African resident or residents, is also imputed to the 

residents in the proportion of their participation rights in the CFC. For purposes of imputing the amount to be included in the SA resident shareholder(s) 

taxable income, the net income of a CFC, is calculated in accordance with South African tax principles. The net income of a CFC is not imputed to South 

African resident holders of participation rights to the extent that such income is attributable to amounts that have been or will be subject to tax on income in a 

"designated country" identified by the Minister of Finance at a statutory (not effective) rate of at least 27% in the case of amounts other than capital gains and 

13.5% in the case of capital gains. Our non-South African manufacturing activities are located in countries that are currently included in the list of such 

"designated countries", published by the Minister of Finance of South Africa. There are also other exemptions from the imputation rules e.g. where the CFC 

in question has a business establishment as defined outside of South Africa and certain other requirements are met. In principle, amounts equal to foreign 

taxes paid or payable on the CFC's income without any right of recovery by any person will be allowed as a credit against the tax payable in South Africa. 

Foreign dividends are, in principle, included in the taxable income of South African residents. However, foreign dividends will not be taxable in South 

Africa, if the profits from which the dividend was distributed are or were subject to tax in a designated country at a statutory rate of at least 27% in the case of 

amounts other than capital gains and 13.5% in the case of capital gains without any right of recovery by any person other than a right to carry over losses and 

the resident receiving the dividend holds a "qualifying interest" in the company declaring the dividend. Sappi Limited holds a qualifying interest as defined in 

all the Group's non-South African based subsidiaries. There are also other exemptions from tax on foreign dividends. 

To the extent that a South African resident company in the Sappi Group receives a taxable foreign dividend, it will in principle be permitted to credit 

against any South African tax due, foreign company and withholding taxes paid on the profits from which the foreign dividend is paid. South African 

companies are not able to claim taxable foreign dividends as a credit in the calculation of their liability for secondary tax on companies. 

Capital Gains Tax. Tax on capital gains was implemented with effect from October 1, 2001, based on increases in the values of qualifying assets after 

that date, and triggered by gains made on disposals of the relevant assets. Affected capital assets for companies include virtually all business assets. 

Companies liable to normal tax on 50% of the net capital gain. At the current corporate tax rate of 30%, the effective tax rate on net capital gains is therefore 

15%. Capital losses may only be offset against capital gains. See "Item 10—Additional Information—Taxation". 

Income Attributable to Minority Interests 

54 

Income attributable to minority interests was zero in fiscal 2002, $0.5 million in fiscal 2001, and $13 million in fiscal 2000. This reduction is mainly due 

to the acquisition of the minority interests in Leykam-Mürztaler Papier und Zellstoff Aktiengesellschaft and Usutu Pulp mill during fiscal 2000 and fiscal 

1999. See "—Liquidity and Capital Resources—Mill Closures, Acquisition and Dispositions—Acquisition of Minority Interests in Leykam-Mürztaler Papier 

und Zellstoff Aktiengesellschaft". 

Net Income 

Net income increased by $82 million (59%), to $220 million in fiscal 2002, from $138 million in fiscal 2001 principally because fiscal 2001 net income 

was negatively impacted by the non-recurring $110 million after tax charge resulting from the closure of the Mobile mill in fiscal 2001. Excluding this charge, 

fiscal 2002 net income was lower mainly due to lower selling prices. Net income was $363 million in fiscal 2000. 

Liquidity and Capital Resources 

Operations 

Net cash retained from operating activities amounted to $450 million in fiscal 2002, $543 million in fiscal 2001 and $789 million in fiscal 2000. The 

decrease in fiscal 2002 as compared to fiscal 2001 is primarily attributable to our lower levels of operating profit and an increase in working capital (increased 

receivables and decreased payables, partly offset by decreased inventories) in fiscal 2002, offset by lower finance costs paid. The increase in receivables in 

fiscal 2002 is as a result of reduced securitisation of certain receivables due to lower concentration limits. The decrease in payables is mainly due to the 

payments in fiscal 2002 in respect of the Mobile closure costs which were accrued at the end of fiscal 2001. The decrease in fiscal 2001 as compared to fiscal 

2000 is primarily attributable to our lower level of operating profit in fiscal 2001, combined with higher taxation payments, partially offset by a decrease in 

working capital (decreased receivables and inventories, offset by decreased payables) and lower finance cost payments. The increase in fiscal 2000 as 

compared to fiscal 1999 is primarily attributable to our higher level of operating profit in fiscal 2000, combined with a reduction in finance costs and partially 

offset by an increase in working capital (receivables and inventories). 

Investing 

Cash utilised in investing activities was $701 million in fiscal 2002, $303 million in fiscal 2001, and $68 million in fiscal 2000. Cash utilised in investing 

activities in fiscal 2002 related mainly to capital expenditure on non-current assets of $205 million, $483 million relating to the Potlatch acquisition, as well as 

an increase of $16 million in investments and loans. Cash utilised in investing activities in fiscal 2001 related mainly to capital expenditure investment in noncurrent 

assets of $319 million, reduced by a decrease of $12 million in investments and loans. Cash utilised in investing activities in fiscal 2000 related mainly 

to capital expenditure investment in non-current assets of $253 million, reduced by the proceeds from the sale of Sappi Novobord for $57 million, and a

decrease in investments of $91 million, reflecting the realisation of a $104 million collateral deposit which was utilised to repay indebtedness of Heritage 

Springer. 

Financing 

Net cash used in financing activities was $29 million in fiscal 2002, $90 million in fiscal 2001 and $564 million in fiscal 2000. The decrease in net cash 

used in fiscal 2002 as compared to fiscal 2001 is primarily attributable to the $831 million net proceeds from interest bearing borrowings, which includes our 

$750 million bond issue in June 2002, reduced by the $769 million net repayments of interest bearing borrowings, a decrease of $65 million in bank 

overdrafts as well as the $12 million of share buy backs. The decrease in net repayment of interest bearing borrowings is primarily due to the repayment 

55 

of the $243 million 7.5% Convertible Notes issued through Sappi BVI Finance ("the $243 million convertible notes"), the repayment of the $140 million 

North American 14% Debentures ("the $140 million debentures") in December 2001, the repayment of an approximately $162 million European Investment 

Bank loan (euro 166 million) as well as the repayment of the $250 million "B" tranche of the syndicated loan facility (described below), offset by the 

utilisation of $245 million of the "A" tranche of the syndicated loan facility (described below) at the end of fiscal 2002. The decrease in net cash used in fiscal 

2001 as compared to fiscal 2000 is primarily attributable to an increase in short-term borrowings, reduced by the effect of our share buy back programme. The 

decrease in net cash used in fiscal 2000 as compared to fiscal 1999 is primarily attributable to a smaller decrease in short-term borrowings in fiscal 2000. Net 

cash used in fiscal 2000 also reflects the acquisition of minority interests in Leykam-Mürztaler Papier und Zellstoff Aktiengesellschaft and Usutu Pulp for 

$126 million as well as the receipt of $114 million of proceeds from a global offering of our ordinary shares. 

In the third quarter of fiscal 2001, we arranged a €900 million ($770 million) syndicated loan facility, which comprises two tranches, on an unsecured 

basis at between 55 and 70 basis points above the EURIBOR rate. The "A" tranche of this facility is a €562.5 million five-year revolving credit facility for 

general corporate purposes. The "B" tranche of €337.5 million was partly utilised in September 2001 when we completed the refinancing of the S.D. Warren 

term loan and revolving credit facility ($250 million). This resulted in the write-off of $9 million of deferred finance costs and in lower ongoing cash finance 

costs. We refinanced the $140 million debentures with the remainder of the "B" tranche, short-term overdrafts and cash on hand. We have utilised the "A" 

tranche of the syndicated loan facility to pay the purchase price for the Potlatch Acquisition. This facility is at our disposal on a revolving basis until 2006. 

In June 2002, Sappi Papier Holding AG issued $500 million 6.75% Guaranteed Notes due 2012 and $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., a corporation 

incorporated in Belgium. The Notes were offered and sold within the United States to "Qualified Institutional Buyers", as defined in Rule 144 A under the 

Securities Act, and outside the United States in accordance with Regulation S under the Securities Act. The interest on the Notes is payable semi-annually on 

June 15 and December 15 of each year, commencing on December 15, 2002. The Notes are redeemable, at a premium, in whole or in part at any time by 

Sappi Papier Holding AG, Sappi Limited or Sappi International S.A.'s option. We used the proceeds of this issuance to repay permanently the "B" tranche, to 

repay short-term facilities and to make a partial repayment of the "A" tranche, thereby extending the maturity of our debt. 

As of September 2002, we had aggregate unused borrowing facilities of $777 million ($183 million in South Africa and $594 million in Europe). At the 

end of fiscal 2001, we had aggregate unused borrowing facilities of $985 million ($188 million in South Africa, $79 million in the United States and 

$718 million in Europe). The $208 million decrease in aggregate unused borrowing facilities as of September 2002 as compared to fiscal 2001 is mainly due 

to the utilisation of $245 million of the "A" tranche, the permanent repayment of the "B" tranche ($59 million), offset by an increase of $96 million of general 

short term facilities. Unused borrowing facilities at the end of fiscal 2000 were $784 million. At the end of fiscal 2002, the ratio of net debt to gross 

capitalisation was 37%, up from 30% at the end of fiscal 2001 but down from 41% immediately following the Potlatch acquisition. At the end of fiscal 2000, 

the ratio of net debt to gross capitalisation was 33%. During the year we restructured our debt profile and now have a much improved debt maturity profile. 

We have access to capital from a range of external sources. In accessing external sources of funds, consideration is given to the following factors: 

• 

• 

• 

• 

• 

• 

age profile of repayment of debt; 

cost of financing; 

availability of sources; 

availability of natural and artificial hedges against currency and/or interest rate fluctuations; 

availability of tax efficient structures to moderate financing costs; and 

56 

a target net debt to total capitalisation range of between 25% to 50%, depending on where we are in the cycle, except when we undertake large 

capital projects or acquisitions. 

Our borrowings are not seasonal and we mainly borrow in the currencies in which we operate, and accordingly our net debt and cash and cash 

equivalents are mainly denominated in US dollars, euro and Rand. See note 16 to our Group annual financial statements included elsewhere in this Annual 

Report. For a profile of our debt repayment schedule, see note 16 to our Group annual financial statements included elsewhere in this Annual Report. 

For a description of financial instruments and our treasury/funding policies, see note 3 to our Group annual financial statements included elsewhere in 

this Annual Report. 

All external loans raised in currencies other than the domestic operating currency of the entity to which the funds are applied, are immediately protected 

by forward exchange contracts. We also have a policy of maintaining a balance between fixed rate and variable rate loans that enables us to minimise, on a 

cost effective basis, the impact to reported earnings, while maintaining a reasonably competitive, market-related cost of funding. The specific balance is 

determined separately for our European, North American and southern African businesses 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. At the end of fiscal 2002, 70% of our gross debt was at fixed rates as compared to 53% 

at the end of fiscal 2001. This shift was mainly as a result of the fixed rate long-term Notes issued in June 2002. We had indicated that we would enter into 

interest rate swaps in respect of a portion of our fixed interest rate long-term debt to variable interest rate debt to reduce our interest cost. To date we have not 

swapped into variable interest rate debt because, while it would be prudent to buy a collar, the requirement that such instruments be marked to market would 

likely result in excessive volatility in quarterly earnings caused by the changes in interest rates. We will continue to monitor interest rate developments and 

take action when appropriate. See note 33 to our Group annual financial statements included elsewhere in this Annual Report. 

Our rapid expansion, mainly through acquisitions, had been demanding on our capital resources and on the profile and mix of the funding actually used. 

At September 30, 2002, our net debt, calculated using components derived under South African GAAP, was $1.4 billion, up by $293 million, or 26.0%, from 

$1.1 billion at September 30, 2001. The increase is primarily attributable to the $483 million Potlatch acquisition, offset by strong internal cash generation, 

despite the difficult market conditions. At September 27, 2000, our net debt was $1.2 billion. Of our net debt of $1.4 billion at September 30, 2002, 

$120 million is payable within one year. This is a decrease of $369 million as compared to the end of fiscal 2001, mainly as a result of applying the proceeds 

from our bond issue to redeem the $243 million 7.5% Convertible Notes which extended the maturity profile of our debt. The Group has adequate working 

capital, cash on hand and short and long-term banking facilities to meet these short-term commitments. 

There are at present some limitations on our ability to utilise facilities in any one of our divisions to finance activities, or refinance indebtedness, of any 

other division due to covenant restrictions and South African exchange controls. These limitations have been significantly reduced following the refinancing 

of our various North American debt instruments. These restrictions include limitations on our ability to significantly increase the debt of our subsidiaries. A 

constraint applicable to South African companies is the application of exchange controls, which inhibit the free flow of funds from 

57 

South Africa. See "—South African Exchange Controls". This affected the geographic distribution of our debt. As a result, our acquisitions in the United 

States and Europe were financed initially with indebtedness incurred by companies in these regions. We now have access to and have extensively utilised 

long-term borrowings of generally unsecured nature (except in the case of asset-linked finance). Interest rates reflect the long-term rates for the currencies 

being borrowed. Short-term borrowings are generally freely available at commercial rates in all countries in which we operate and are used mainly to finance 

working capital. 

We have sold approximately $300 million of non-core assets since 1998 and used the proceeds largely to reduce indebtedness. 

While reduction of net debt is a priority, opportunities to grow within our core businesses will continue to be evaluated. The financing of any future 

acquisition may involve the incurrence of additional indebtedness or the use of proceeds from asset dispositions. 

Off-Balance Sheet Arrangements 

We have entered into certain finance arrangements, in respect of which the obligations and any related assets are not included in our Group annual 

financial statements under generally accepted accounting principles. These Off-Balance Sheet Arrangements include lease arrangements described in note 28, 

securitisation facilities described in note 12 and other arrangements described in note 11, in each case to our Group annual financial statements included 

elsewhere in this Annual Report. 

Capital Expenditures 

Capital expenditures in fiscal 2002, fiscal 2001 and fiscal 2000 were as follows: 


(audited) 



(audited) 

(US$ in millions) 


(audited) 


Sappi Fine Paper North America 49 99 96 

Sappi Fine Paper Europe 96 116 78 

Sappi Fine Paper South Africa 6 35 9 

Total 151 250 183 

Sappi Forest Products 29 43 35 

Corporate — — 3 

Consolidated Total (1) 180 293 221 

(1) 

Excludes investment in timberlands. In fiscal 2002, fiscal 2001 and fiscal 2000, investment in timberlands amounted to $25 million, $28 million and 

$32 million, respectively. 

We operate in an industry that requires high capital expenditures and, as a result, we need to devote a significant part of our cash flow to capital 

expenditure programmes, including investments relating to maintaining operations. 

Capital spending for investment relating to maintaining operations during fiscal 2002, fiscal 2001 and fiscal 2000 amounted to approximately 

$85 million, $154 million and $129 million, respectively. The capital expenditure programme for these fiscal years was funded primarily through internally 

generated funds.

Our mills are generally well invested. Sappi Fine Paper North America's prior corporate parent invested approximately $1 billion on capital and 

investment expenditures from 1988 to 1994. In addition, there were approximately NLG 1,383 million of capital expenditures by KNP Leykam in the 

58 

two years preceding our acquisition of that company in December 1997, which included the commissioning of PM 11 at Gratkorn. Consequently, during fiscal 

1997 to fiscal 2002, capital spending incurred related mainly to maintaining existing operations and selected high-return capacity expansion or qualityenhancing 

projects. At Muskegon in North America, Gratkorn in Europe, and Stanger in South Africa, major projects were completed to upgrade operating 

equipment. These projects will improve product quality, reduce costs and increase capacity. Potlatch spent approximately $525 million on the Cloquet mill 

during the period 1993 to 2000, resulting in a substantially new pulp mill. Capital expenditure by Potlatch in calendar 2000 and 2001 was $15.1 million and 

$6.1 million respectively, mainly on pulp mill optimisation and general mill maintenance. Total capital spending including the investment in plantations, for 

the Sappi Group during fiscal 2002 amounted to 58% of depreciation, amortisation and fellings. Capital spending for the Sappi Group during fiscal 2003 is 

expected to approximate depreciation, amortisation and fellings and will consist partly of $188 million normal maintenance expenditure and partly of certain 

upgrade projects mainly at our North American Cloquet and Somerset mills, at our European Gratkorn mill and at our southern African Tugela mill. Capital 

spending is expected to be funded primarily through internally generated funds. For further details about our capital commitments, see note 28 to our Group 

annual financial statements included elsewhere in this Annual Report. 

Contingent Liabilities, Commitments and Contractual Obligations 

We have various obligations and commitments to make future cash payments under contracts, such as debt instruments, lease arrangements, supply 

agreements and other contracts. The following tables summarise information contained within the Group annual financial statements included elsewhere in 

this Annual Report. The tables reflect those contingent liabilities, commitments and contractual obligations that can be quantified. 

Contingent Liabilities and Commitments 

Total 

Amount of Commitment Expiration Per Period 

Less than 1 

year 

1 - 3 years 

4 - 6 years 

Guarantees (1) 66 38 27 — 1 

Other Contingent Liabilities (2) 14 8 2 2 2 

Capital Commitments (3) 228 163 65 — — 

Total 308 209 94 2 3 

Contractual Obligations 

Total 

Less than 

1 year 

Payments Due by Period 

Long-Term Debt (4) 1,502 94 161 351 896 

Capital Lease Obligations (4) 73 26 32 14 1 

Revenue commitments (5) 336 48 84 67 137 

Unconditional Purchase Obligations (6) 136 52 56 18 10 

Total 2,047 220 333 450 1,044 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

Guarantees do not include obligations recorded in our Group annual financial statements. Refer note 29. 

Other Contingent Liabilities include various lawsuits, administrative proceedings and taxation queries. Refer note 29. 

Capital commitments are in respect of fixed assets. Refer note 28. 

Refer note 16. 

Revenue Commitments are future minimum obligations under operating leases. Refer note 28. 

59 

Unconditional Purchase Obligations are obligations to transfer funds in the future for fixed or minimum amounts or quantities of goods or services at fixed or minimum prices (for 

example, as in take-or-pay contracts or throughput contracts, relating to among others, timber, power). 

Note references in the notes to the tables above are references to the notes to the Group annual financial statements included elsewhere in this Annual Report. 

Share Buy Back 

At a general meeting of shareholders held on December 15, 2000, a special resolution granting general authority for Sappi subsidiaries to purchase Sappi 

shares subject to the provisions of the South African Companies Act 61 of 1973, as amended, and the Listings Requirements of the JSE was approved. At the 

annual general meeting of shareholders held on February 25, 2002, a special resolution granting authority to Sappi or Sappi subsidiaries to permit the buy 

back of up to 10% of the issued shares of Sappi Limited in any one fiscal year, was approved. Pursuant to this approval, we or one of our subsidiaries may buy 

back shares from time to time. This authority will be 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. As at December 11, 2002, the Sappi share price was $12.83 (R112.98). 

1 - 3 

years 

4 - 6 

years 

After 

6 years 

After 

6 years

Following the approval on December 15, 2000, our cumulative buy back by Group entities, at the end of fiscal 2002, is approximately 13 million shares 

(or approximately 5.5% of our issued shares) at an average price of $7.93 (R64.16), 4.2 million of which had been utilised by the Sappi Limited Share 

Incentive Trust to meet its obligations. We held approximately 8.8 million treasury shares at the end of fiscal 2002. 

Under the JSE regulations, a company may not repurchase its shares for periods of 40 trading days prior to the announcement of half-year and full-year 

results. We apply a voluntary restriction on repurchases of 7 trading days prior to the announcement of first and third quarterly results. 

Dividends 

Sappi Limited declared total cash dividends in respect of the ordinary shares of $0.28 per share in fiscal 2002, $0.26 per share in fiscal 2001 and $0.25 

per share in fiscal 2000. Dividends paid in years prior to fiscal 2000 have been paid in South African Rand, and have been converted to US dollars at the rate 

of exchange at the date of declaration of the dividend. 

The current dividend policy of Sappi Limited is to provide regular annual dividend payments which incorporate, over time, real growth for shareholders 

by providing dividend payments varying in line with changes in the business cycle, but maintaining a long-term average dividend "cover" of three times 

earnings. Our dividends were covered 3.4, 2.3 and 6.1 times in fiscal 2002, 2001 and 2000, respectively. 

Mill Closures, Acquisitions and Dispositions 

Potlatch Acquisition. On May 13, 2002, we acquired Potlatch Corporation's coated fine paper business by purchasing Potlatch's Cloquet, Minnesota 

pulp and paper mill as well as the brands, order books and working capital of the Cloquet mill and the brands, order books and inventories of Potlatch's 

Brainerd, Minnesota paper mill for an aggregate purchase price of $483 million. The purchase consideration was funded from cash and existing Group 

facilities. We did not acquire Potlatch's Brainerd mill, which Potlatch has closed. The Brainerd mill previously had a production capacity of 140,000 metric 

tonnes of coated woodfree paper and serviced a customer base that in the future we intend to service from the Cloquet mill and other Sappi mills. The coated 

woodfree paper business of Potlatch sold 330,000 metric tonnes of coated paper in 2001. The Cloquet pulp and paper mill has a capacity of 232,000 metric 

tonnes of coated paper production capacity and a state-of-the-art pulp mill 

60 

with a production capacity of 410,000 metric tonnes. We employed approximately 200 fewer people when we acquired the Cloquet mill than were previously 

employed there. We have reimbursed Potlatch approximately $3.5 million for certain costs in respect of severance payments. 

The Cloquet mill includes a hydroelectric facility that is licensed by the Federal Energy Regulatory Commission. The acquisition of the hydroelectric 

facility from Potlatch was completed on June 25, 2002, upon the approval of the Federal Energy Regulatory Commission to the transfer of the license from 

Potlatch to Sappi becoming final. In addition to generating a portion of its own power, the Cloquet mill has entered into a co-generation agreement with 

Minnesota Power and has entered into a take-or-pay agreement to purchase a portion of its power from Minnesota Power, which terminates in 2008. 

In connection with the acquisition, we have also agreed to assume Potlatch's obligations under several long-term cross-border leases involving a 

substantial portion of the Cloquet assets we are acquiring. Under the lease arrangements, Potlatch sold assets to an unrelated third party, leased them back and 

received an upfront payment. In terms of the agreement, there are no further lease payments foreseen. See "Item 3—Key Information—Risk Factors—Risks 

Related to Our Business—There are risks related to the recently completed Potlatch Acquisition". 

Closure of Transcript Mill. On October 9, 2001, we announced the intention to close the Transcript mill in Scotland, and ceased production in the 

quarter ended March 2002. In connection with the closure, we provided a $9 million charge for the write-off of the assets and closure costs in fiscal 2002. 

This facility produced carbonless paper products which is non-core and being rapidly replaced by other products or electronic media. 

Closure of Mobile Mill. In fiscal 2001, we provided a $110 million after tax charge for the write-off of the assets and closure costs for the Mobile mill 

in Alabama and ceased production at the mill in December 2001. Of this charge, $4 million after tax was released in fiscal 2002. The Mobile mill is located on 

a multi-user site and was dependent on sharing facilities with other producers to maintain an efficient cost structure. The closure of a nearby pulp mill resulted 

in dramatically increased energy costs. Because we were unable to invest on the site without a better overall cost structure, we decided to close the mill. 

Disposal of Novobord and Mining Timber. We sold our South African particle board business, Novobord, for $57 million, effective September 2000. 

We disposed of our mining timber operations in South Africa effective October 1, 2000. 

Acquisition of KNP Leykam. On December 31, 1997, we completed the acquisition of a 91.5% ownership interest in KNP Leykam from KNP BT. The 

aggregate consideration paid in connection with the KNP Leykam acquisition amounted to approximately NLG1.8 billion. We paid part of the consideration 

through the issuance of 44,600,423 ordinary shares (which were valued at approximately NLG0.8 billion). We also issued indebtedness in the amount of 

approximately NLG1 billion, including the interest-free short-term liability referred to above. This indebtedness matured on December 31, 1999. We financed 

the settlement of this indebtedness with a syndicated two-year term loan facility of euro 343 million ($346 million) arranged by a group of international banks. 

This facility was repaid in September 2000. During February 1999, we increased our ownership interest in KNP Leykam to 92.2% and in March 2000, we 

increased this interest to 100%. 

Acquisition of Minority Interests in Leykam-Mürztaler Papier und Zellstoff Aktiengesellschaft. During September 1999, we commenced a major 

reorganisation of our North American and European fine paper businesses. The reorganisation was aimed at amalgamating these businesses under a single 

holding company, improving access to operating cash flows, centralising borrowings and improving tax and operating efficiency. The reorganisation resulted 

in the delisting of Leykam-Mürztaler from the Vienna and Frankfurt Stock Exchanges and the acquisition of the minority interests in that company 

61 

for approximately $98 million. This was funded from a portion of the proceeds to us from our global equity offering in November 1999. The acquisition of 

these minority interests increased our ownership interest in KNP Leykam to 100%. The first part of this process was successfully completed in January 2000 

when the minority interests in Leykam-Mürztaler had been reduced to 8.2%. On March 9, 2000, the shareholders of Leykam-Mürztaler approved the merger

of that company with a wholly owned subsidiary of Sappi and we subsequently paid 35 euro per share to the minority shareholders. Profits (attributable to the 

minority interest acquired) were recognised and consolidated from April 1, 2000. 

Acquisition of S.D. Warren Minority Interests. During fiscal 1997, we undertook a series of transactions for the purpose of acquiring ownership or the 

right to acquire 100% of SDW Holdings' common equity for an aggregate purchase price of $155 million. As a result of these transactions and related 

transactions during fiscal 2000, we acquired all of the minority common equity interests (including both common stock and warrants) in SDW Holdings held 

by certain investors and repaid related financings. The acquisition of the minority common equity interests of SDW Holdings was accounted for as a purchase 

transaction. 

Pension fund 

The Group has reviewed its pension fund valuations to take account of the recent significant changes in the performance and outlook of financial 

markets. Using revised and lower discount rates and assumed rates of return, the pension funds in our European business are adequately funded. There is a 

surplus in the South African fund (which has not been brought to account) but, in the UK and North American funds, a shortfall is projected. We expect the 

projected future additional annual income statement charges required to correct the projected shortfall in our North American and UK funds to be 

approximately $18 million pre-tax (5 US cents per share). 

In light of these current conditions and reduced assumptions, funding requirements will cause our North American operations to make a minimum cash 

contribution of $8 million during fiscal 2003. Based upon projections of investment performance and actuarial assumptions for the foreseeable future, it is 

likely that our North American operations will be required to make contributions in excess of this amount in each of the succeeding four years. The funding 

status of plans throughout the Group will continue to be reviewed annually. 

The estimated surplus of the South African defined benefit pension plan has not been reflected on the Group's balance sheet pending the formal actuarial 

valuation and the outcome of the statutory allocation of the surplus between the company and the members of the fund, in accordance with current legislation. 

Insurance 

The Group has an active programme of risk management in each of our 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 progressing well. Its aim is to lower the risk of incurring losses from uncontrolled incidents. 

Furthermore we follow a practice of insuring our 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. 

We have a global insurance structure and the majority of insurance is placed with our own captive insurance company which in turn reinsures the vast 

majority of the risk with third-party insurance companies. 

62 

Following the events of September 11, 2001, and losses on property damage which have seriously affected the insurance industry, the insurance market 

continues to harden. We successfully placed the renewal of our insurance cover on November 1, 2002. Self-insured deductibles for any one occurrence have 

increased to $25 million with aggregate limits of $75 million. We believe protection is in line with industry practice. For property damage and business 

interruption, in particular, we have cover comfortably in excess of what we have determined to be the maximum foreseeable losses. After careful 

consideration, 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. 

We have increased insurance cover for credit risks, which until now was restricted to the European region only. 

Critical Accounting Policies 

Our Group annual financial statements have been prepared in accordance with South African GAAP, which 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. The Group believes that the following accounting policies are critical due to 

the degree of estimation required. 

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 plan amendments 

and changes in actuarial assumptions such as discount rate, expected long-term rate of return on plan assets, 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. 

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 annual financial statements. 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 Group annual 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.

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. 

63 

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 (being the greater of the discounted expected future cash flows and the net selling price of the asset) exceeds the recoverable amount of 

the asset, we will recognise an impairment loss for the difference. Considerable management judgement is necessary to estimate discounted future cash flows. 

Accordingly, actual outcomes could vary significantly from such estimates. Factors such as changes in the planned use of buildings, machinery or equipment 

or closing of facilities or lower than anticipated sales for products could result in shortened 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. In addition, further changes in the economic and business 

environment can impact our original and ongoing assessments of potential impairment. 

Plantations. We state our plantations at the lower of cost less depletions and realisable value. Cost includes all expenditure incurred on acquisition, 

forestry development, establishment and maintenance of plantations, and finance charges. Depletions include the cost of timber felled, including finance 

charges, which is determined on the average method, plus amounts written off standing timber to cover loss or damage caused, for example, by fire, disease 

and stunted growth. Significant assumptions and estimates are used in the recording of plantation cost and depletion. Changes in the assumptions or estimates 

used in these calculations may affect the Group's results, in particular, plantation and depletion costs. The South African Accounting Practices Board issued a 

new statement AC 137 Agriculture in November 2001. This statement becomes operative for annual financial statements covering periods beginning on or 

after 1 January 2003. The objective of this statement is to prescribe the accounting treatment, financial statement presentation and disclosures related to 

agricultural activity. The Group will adopt AC 137 when it becomes effective and is currently evaluating the effects of the statement. 

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 Group 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. 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. Where management believes that it is more likely than not that the deferred tax assets will be realised through the recognition of future taxable income, 

deferred tax assets have been recognised. Although the deferred tax assets for which valuation allowances have not been provided 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. We use derivative instruments in the normal course of business to manage our exposure to fluctuations in 

interest and foreign currency rates. Derivative instruments may be designated as hedges of the exposure to variability in cash flows attributable to a forecasted 

transaction. 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 materially 

affect our reported net income and financial position. 

Provisions. Provisions are recorded when the Group has a present legal or constructive obligation as a result of past events, for which 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 pre-tax rate that reflects current market assessments of the time value of money and, where 

appropriate, the risks specific to the liability. 

The establishment of the provisions requires significant judgement by management related to the amounts to be recorded and the likelihood of future 

payment. If the amounts vary from these initial provisions the provisions may be revised materially, up or down, based on the facts. 

Changes in Accounting Policies 

64 

There were no accounting policy changes in fiscal 2002. There were a number of accounting policy changes in fiscal 2001. This was mainly due to the 

numerous changes to the South African accounting standards to harmonise with IAS. We changed our accounting policy with respect to leases, events after 

the balance sheet date (dividends), employee benefits, discontinuing operation, impairment of assets, intangible assets, provisions, contingent liabilities and 

contingent assets, business combinations, Group annual financial statements and accounting for investments in subsidiaries, financial instruments: recognition 

and measurement, government grants, consolidation: special purpose entities, and Share capital—reacquired own equity instruments (treasury shares). These 

changes had no material effect on current year and comparable period earnings, but had the effect of decreasing equity by $3 million at the beginning of fiscal 

2001. 

In fiscal 2000, we changed our accounting policy with respect to the revaluation of property, plant and equipment. All these assets are now stated at cost. 

This change had no effect on net income but had the effect of reducing equity by $58 million for both fiscal 2000 and fiscal 1999. 

Data for prior fiscal years has been restated to reflect these changes in accounting policy. 

New Accounting Standards 

For a discussion of new South African and US accounting standards, see note 38 of our Group annual financial statements included elsewhere in this 

Annual Report. 

United States GAAP Reconciliation

Our Group annual financial statements are prepared in accordance with South African GAAP, which differ from United States GAAP in certain 

significant respects. A comparison of our results for fiscal 2002, fiscal 2001 and fiscal 2000 shown under South African GAAP and after reflecting certain 

adjustments which would arise if United States GAAP were to be applied instead of South African GAAP, is as follows: 


(audited) 



(audited) 

(US$ in millions) 


(audited) 

Net income: 

South African GAAP 220 138 363 

United States GAAP 236 130 366 

Shareholders' equity: 

South African GAAP 1,601 1,503 1,618 

United States GAAP 1,572 1,553 1,669 

65 

As more fully described and quantified in note 38 to our Group annual financial statements included elsewhere in this Annual Report, the major 

differences between South African GAAP and United States GAAP relate to accounting for business combinations, pre-commissioning expenses, pension 

programmes and post-retirement medical benefits, asset impairment and sale and leaseback transactions. 

Other Items 

South African Exchange Controls 

South Africa's exchange control regulations provide for restrictions on the exporting of capital and for various other exchange control matters. 

Transactions between residents of the Common Monetary Area (comprising South Africa, the Republic of Namibia and the Kingdoms of Lesotho and 

Swaziland), on the one hand (including corporations), and non-residents of the Common Monetary Area, on the other hand, are subject to these exchange 

control regulations which are enforced by the Exchange Control Department of the South African Reserve Bank. 

The present exchange control system in South Africa is used principally to control capital movements. South African companies are generally not 

permitted to export capital from South Africa or to hold foreign currency without the approval of the South African exchange control authorities. Foreign 

investment by South African companies is also restricted. In addition, South African companies are generally required to repatriate to South Africa profits of 

foreign operations and are limited in their ability to utilise profits of one foreign business to finance operations of a different foreign business. As a result, a 

South African company's ability to raise and deploy capital outside the Common Monetary Area is restricted. The granting of loans from outside South Africa 

to Sappi Limited or its South African subsidiaries and their ability to borrow from non-resident sources is regulated. 

The South African authorities have expressed a commitment to a phased liberalisation of exchange controls and have relaxed certain exchange controls 

over recent years. 

Controls on current account transactions, with the exception of certain discretionary expenses, have been abolished. 

Authorised dealers in foreign exchange may, against the production of suitable documentary evidence, provide forward cover to South African residents 

in respect of fixed and ascertained foreign exchange commitments covering the movement of goods. 

It is not possible to predict whether existing exchange controls will be abolished, continued or modified by the South African Government in the future. 

While these restrictions have affected the manner in which we have financed our acquisitions outside South Africa and the geographic distribution of our debt, 

they have not prevented us from expanding and growing our core business abroad. For example we have approval in the event of the inability of the issuing 

vehicles, which have incurred foreign debt, and are guaranteed by Sappi Limited to pay the debt. 

Environmental Matters 

We operate in an industry subject to extensive environmental regulations which include, amongst others, the Air Quality Bill and the National Water Act. 

Typically, we do not separately account for environmental operating expenses but do not anticipate any material expenditures related to such matters. We do 

separately account for environmental capital expenditures. See note 37 to our Group annual financial statements included elsewhere in this Annual Report for 

a discussion of these matters. 

Research and Development, Patents and Licenses, etc. 

66 

Our research and development efforts have principally focused on the improvement of product quality and production processes, in accordance with our 

research and development policies. We manage technology and research and development on a "centre of excellence" basis to take advantage of particular 

skills and to provide focus. We spent approximately $20 million, $20 million and $22 million on research and development activities during fiscal 2002, fiscal 

2001 and fiscal 2000, respectively. 

North America 

Sappi Fine Paper North America has a long history of product innovation; for example, it developed both one- and two-sided coated paper. 

In addition, Sappi Fine Paper North America has a number of proprietary technologies, including the on-line finishing technology and its Ultracast® 

electron-beam technology. Sappi Fine Paper North America on-line finishing technology is used in its production of coated paper at Somerset and Muskegon. 

Sappi Fine Paper North America's Ultracast® technology is utilised in speciality papers such as release papers.

Europe 

Sappi Fine Paper Europe maintains research and development centres at its Maastricht and Gratkorn sites. These facilities work closely with the research 

facility at Sappi Fine Paper North America in order to achieve efficiencies and ensure rapid implementation of improvements. 

Sappi Fine Paper Europe's research and development centres have concentrated on developing new paper qualities for the expansion and conversion 

projects at the Gratkorn and Maastricht mills. The research and development effort has developed coated woodfree paper of outstanding quality. The paper 

developed satisfies the demands of modern high performance printing machines, while maintaining a consistent quality and shading between the paper 

produced at the Gratkorn and Maastricht mills. The Maastricht research and development centre also has overseen the introduction of triple coating through 

the use of its triple blade coating concept. More recently, the research and development centres have concentrated on optimising product characteristics in 

relation to various types of paper machines at each mill, in order to improve efficiencies and quality of production. In 1990, the Alfeld mill became the first 

mill to produce coated woodfree paper using 100% totally chlorine-free (TCF) pulp. 


Sappi Forest Products is our centre for developing technology related to plantation forestry, pulping, bleaching and related environmental technology and 

dissolving pulp technology. In the 1970s, we patented the Sapoxal oxygen bleaching process and licensed the technology in major pulp and paper 

manufacturing countries. This process facilitates the reduction or elimination of elemental chlorine in pulp bleaching. Oxygen bleaching has subsequently 

become an industry standard. We continue our research and development related to bleaching, and are currently involved in biotechnology research, which is 

being conducted in order to develop a more environmentally friendly pulping and bleaching process. One of the world's first ozone bleaching processes which 

eliminates elemental chlorine and sharply reduces other chlorine compounds was implemented at the Ngodwana mill. We are also a leader in technology 

aimed at reducing water consumption in pulp and paper mills. We are active in forestry research, particularly research related to the genetic improvement of 

plantation forests to maximise the yield of high quality pulp per hectare. Research on the modification of fibres to enhance characteristics for end products is 

also currently being conducted. 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 

Directors and Senior Management 

The Articles of Association of Sappi Limited provide that the Board of Directors (the "Board") must consist of not less than four nor more than twenty 

Directors at any time. The Board currently consists of fifteen Directors. 

67 

The business address for all of the Directors is 48 Ameshoff Street, Braamfontein, Johannesburg 2001, Republic of South Africa. All of the Directors are 

South African citizens except for Monte Haymon, Meyer Feldburg and John Chalsty (United States citizens), Wolfgang Pfarl (an Austrian citizen), Klaas de 

Kluis (a Dutch citizen) and William Sheffield (a Canadian citizen). 

Executive Directors 

Eugene van As (63), Executive Chairman. He joined Sappi in 1977 as the Managing Director of Sappi Kraft (Pty) Limited. In 1978, Mr van As was 

appointed Group Managing Director and Chief Executive Officer, Sappi Limited, becoming Executive Chairman in 1991. He is also a Director of the Council 

for Scientific and Industrial Research and Chairman of the African Self-Help Association. Mr van As was appointed to the Board of Sappi Limited on 

January 21, 1977. 

Monte Roy Haymon (65), Bachelor of Science in Chemical Engineering. Previously President and Chief Executive Officer of Sappi Fine Paper North 

America, Mr Haymon is currently Non-Executive Chairman of this company. Prior to joining Sappi he had been President and Chief Operating Officer of Ply- 

Gem Industries and, for thirteen years, President and Chief Executive Officer of Packaging Corporation of America, a division of Tenneco, Inc. Mr Haymon 

was appointed to the Board of Sappi Limited on October 10, 1995. 

John Leonard Job (57), B.Sc.Hons (Rand), Ph.D. (McGill), Executive Director and Chairman of Sappi SA Business. Dr Job joined Sappi in July 1999 

and was appointed to the Board on August 1, 1999. He has 25 years experience in the chemical industry and was formerly the Chief Executive Officer of 

Sentrachem, which was acquired by Dow Chemical in 1997. Dr Job is a Director of the National Research Foundation of South Africa. 

Wolfgang Pfarl (57), Dipl. Kfm., Chief Executive Officer of Sappi Fine Paper Europe. Mr Pfarl was appointed to his present position in December 1997 

following Sappi's acquisition 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 N.V. Koninklijke KNP BT (now Buhrmann NV) and the 

Austrian paper producer Leykam-Mürztaler. Mr Pfarl was appointed to the Board of Sappi Limited on December 31, 1997. 

William Herbert (Bill) Sheffield (54), B.Sc. (Chemistry), MBA, Chief Executive of Sappi Fine Paper plc. Prior to joining Sappi on May 1, 2001, Mr 

Sheffield spent 13 years in the newsprint business with Abitibi Consolidated most recently managing Abitibi's international business. He was a founding 

Board member of Pan Asia Paper, the Asian newsprint joint venture based in Singapore. Previous positions include Logistics, Marketing, Operating, and a 17year 

career in the North American steel sector. 

Donald Gert Wilson (45), B. Comm. CTA, Chartered Accountant (South Africa), Executive Director-Finance of Sappi Limited. He joined Sappi in 

April 1999 and was appointed to the Board on May 27, 1999. Mr Wilson has held various executive financial positions in the Barloworld Group, a South 

African based international industrial corporation, mainly within their Caterpillar earthmoving division. 

The Executive Directors are the Executive Officers of Sappi. 

68

Non-Executive Directors 

David Charles Brink (63), M.Sc. Eng. (Mining), D.Com. (hc). Mr Brink is currently the Chairman of Murray and Roberts Holdings Limited, Deputy 

Chairman of ABSA Group Limited and of ABSA Bank Limited, Chairman of Unitrans Limited, a Director of BHP Billiton plc and of BHP Billiton Limited, 

and a Director of Sanlam Limited. He was appointed a non-executive Director of Sappi Limited on March 8, 1994 and is currently Chairman of the Human 

Resources Committee and a member of the Nomination Committee of the Board of Directors of Sappi Limited. 

John Steele Chalsty (69), B.Sc. Hons (Wits), M.Sc. (Wits), MBA (Harvard). Mr Chalsty previously served as the Chairman of the Board of Directors and 

former Chief Executive Officer of Donaldson, Lufkin and Jenrette Inc. and as Vice Chairman of the New York Stock Exchange, Inc. He is a member of the 

Board of Directors of AXA Financial Inc., Occidental Petroleum Company, Metromedia and Creditex. Mr Chalsty was appointed to the Board of Directors of 

Sappi Limited on August 1, 1998. He is a member of the Audit Committee of the Board of Directors of Sappi Limited and Chairman of the Audit Committee 

of Sappi Fine Paper North America. 

Thomas Louw de Beer (Tom) (67), Chartered Accountant (South Africa). Mr de Beer was appointed Chief Executive, Finance, of General Mining and 

Finance Corporation Limited in 1978 and as Financial Director of Gencor Limited in 1983 in which capacity he remained until Gencor's unbundling in 1993. 

He is currently Chairman of Genbel South Africa Limited. He is also a Director of Genbel Securities Limited, Gensec Bank Limited and Kumba Resources 

Limited. Mr de Beer is a member of the Audit Committee and the Human Resources Committee of the Board of Directors of Sappi Limited and Chairman of 

the Audit Committee of Sappi Forest Products and Sappi Fine Paper South Africa. He was appointed to the Board of Directors of Sappi Limited on 

February 28, 1981. 

Klaas de Kluis (66), Master of Law. From January 7, 1998 until July 27, 1998, Mr de Kluis acted as Chairman of the Executive Board of N.V. 

Koninklijke KNP BT (now Buhrmann NV). He held the position of Vice Chairman of the Executive Board of N.V. Koninklijke KNP BT from March 1993 to 

April 1996. Presently he is a member of the Supervisory Boards of a number of public and private companies in the Netherlands and is a member of the Audit 

Committee of the Board of Directors of Sappi Limited and Chairman of the Audit Committee of Sappi Fine Paper Europe. Mr de Kluis was appointed to the 

Board of Directors of Sappi Limited on January 13, 1998. 

Meyer Feldberg (60), BA (Wits), MBA (Columbia), Ph.D (Cape Town). Professor 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. Since 1989 he has served as Professor of Management and Dean of Columbia Business School. He is a Director 

of major public companies including Federated Department Stores, Revlon Inc., Primedia Inc., UBS Paine Webber Funds and Select Medical Corporation. 

Professor Feldberg currently serves on the Advisory Board of the British American Business Council and was appointed to the Board of Directors of Sappi 

Limited on March 1, 2002. 

Derek Nigel Anthony Hunt-Davis (66), Chartered Accountant (South Africa), CTA (Unisa). Mr Hunt-Davis retired as an Executive Director of Sankorp 

Limited in 1994. He served as Chief Accountant and Chief Financial Officer of the Industrial Development Corporation prior to becoming Group Financial 

Director of the Premier Group Limited in 1982. Mr Hunt-Davis was appointed a non-executive Director of Sappi Limited on February 19, 1990 and is 

currently Chairman of the Audit Committee and of the Nomination Committee of the Board of Directors of Sappi Limited. 

Deenadayalen (Len) Konar (48), B.Com, MAS (Illinois), D.Com, Chartered Accountant (South Africa). Previously Professor and Head of the 

Department of Accountancy at the University of Durban-Westville. He is the patron of the Institute of Internal Auditors South Africa and a member of the 

69 

King Committee on Corporate Governance, the Securities Regulation Panel, the Corporate Governance Forum and the Institute of Directors. Companies of 

which he is a non-executive Director include Old Mutual South Africa, The South African Reserve Bank, Kumba Resources Limited, Illovo Sugar, J D Group 

and Steinhoff International Holdings. Dr Konar is currently an independent consultant in corporate investment strategy, corporate governance, risk, 

compliance and internal audit and joined the Board of Directors of Sappi Limited on March 1, 2002. Dr Konar is a member of the Audit Committee of the 

Board of Directors of Sappi Limited and member of the Audit Committee of Sappi Forest Products and Sappi Fine Paper South Africa. 

Franklin Abraham Sonn (63). A graduate of the University of the Western Cape and UNISA, Dr Sonn subsequently received honorary doctorates in law, 

education, humanities and philosophy from various institutions in Europe, North America and South Africa. Dr Sonn served as South Africa's Ambassador to 

the United States from 1995 to 1998. He currently serves as Chairman of 11 corporate Boards and is a member of the Boards of 12 other companies. He also 

serves as Chairman of numerous organisations of Civil Society and as a Trustee and Patron of many other organisations. He has recently been appointed 

Chancellor of the University of the Free State and as President of the Afrikaanse Handels Instituut. Dr Sonn was appointed to the Board of Directors of Sappi 

Limited on July 1, 1999 and is a member of the Nomination Committee of the Board of Directors of Sappi Limited. 

Andries Gert Johannes (André) Vlok (67), B.Sc, Hons B (B&A). Mr Vlok spent virtually the whole of his career with Sappi, joining as a Technical 

Assistant in 1962. He progressed through various positions within Sappi including Mill Manager and Managing Director of subsidiary companies and was 

appointed Technical Director in 1988. He was appointed a Director of Sappi on February 15, 1983. Mr Vlok retired as an Executive Director in 

December 1998, but continues to serve on the Board of Directors of Sappi Limited. 

Compensation 

See notes 39 to 41 to our Group annual financial statements contained elsewhere in this Annual Report for details on Directors remuneration, Directors 

interests and Directors participation in the Sappi Limited Share Incentive Trust. 

Board Practices 

At every annual general meeting of Sappi Limited, as near as possible to, but not less than, one third of the Directors are required to retire from office but 

are eligible for re-election. The Directors to retire are those who have been longest in office since their last election, or as between Directors who have been in 

office for an equal length of time since their last election, in the absence of agreement, determined by lot. In addition, the appointment of any Director 

appointed since the last annual general meeting will require to be confirmed, failing which the appointment will cease.

Our Executive Chairman, Eugene van As, has reached normal retirement age. The Board has decided to split the role of Chairman and Chief Executive 

Officer. The process of finding a successor to Eugene van As is well underway, but the Board is not yet ready to make an announcement. The Board has asked 

Eugene van As to continue in the role of non-executive Chairman of the Board after the new Chief Executive Officer is appointed and he has agreed to do so. 

The length of the term of 

office of Eugene van As as a Director is determined by the Board; the Board has not specified the length of his term. The following table sets forth the terms 

of office of the other Directors. 

Name 

70 

Start of term 

Latest date 

of end of 

term 

David Charles Brink 2002 2005 

John Steele Chalsty 2001 2004 

Thomas Louw de Beer 2001 2004 

Meyer Feldberg 2002 2003 

Monte Roy Haymon 2001 2004 

Derek Nigel Anthony Hunt-Davis 2000 2003 

John Leonard Job 2000 2003 

Klaas de Kluis 2000 2003 

Deenadayalen Konar 2002 2003 

Wolfgang Pfarl 2001 2004 

William Herbert Sheffield 2002 2005 

Franklin Abraham Sonn 2002 2005 

Andries Gert Johannes Vlok 2001 2004 

Donald Gert Wilson 2002 2005 

No retirement or other benefits arise from the retirement of Directors by rotation or on termination for any other reason. 

Audit Committee 

An Audit Committee of the Board was established in 1984 and assists the Board in discharging its responsibilities to safeguard the Group's assets, 

maintain adequate accounting records and develop and maintain effective systems of internal financial control. 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 (Derek Nigel Anthony Hunt-Davis (Chairman), Thomas Louw 

de Beer, John Steele Chalsty, Klaas de Kluis and Deenadayalen Konar) and is regulated by a specific mandate from the board. The adequacy of the mandate is 

reviewed and reassessed annually. The Audit Committee meets with senior management, which includes the Executive Chairman of the Board 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 Chairman on a regular basis. The Audit Committee 

Chairman attends 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. 

Nomination Committee 

The Nomination Committee is constituted as a sub-committee of the Board and consists of two independent Non-Executive Directors (Derek Nigel 

Anthony Hunt-Davis (Chairman), David Charles Brink and Franklin Abraham Sonn) and the 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. 

Human Resources Committee 

71 

The Human Resources Committee, which consists of two independent Non-Executive Directors (David Charles Brink (Chairman) and Thomas Louw de 

Beer) and the 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 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 Executive Chairman. The remuneration of the 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. 

Employees 

The following table sets forth the number of employees as at the close of each fiscal year ended September. 





North America 3,329 2,860 3,311 

Europe 5,689 5,844 5,960 

Southern Africa 2,028 2,009 2,105

Sappi Forest Products 6,261 7,231 7,646 

Sappi Trading 160 157 154 

Corporate Office 105 130 100 

Total 17,572 18,231 19,276 

North America 

At the end of September 2002, Sappi Fine Paper North America had 3,329 employees. Between September 1996 and March 2002, Sappi North America 

has implemented a number of restructuring plans which resulted in headcount reductions, job consolidations and eliminations, and the closure of a paper 

machine and a pulp mill in the Westbrook, Maine mill in 1999 and the closure of our paper mill in Mobile in May 2001. 

In March 2002, Sappi announced its intention to acquire the Potlatch Paper Division, which included the mill at Cloquet, Minnesota and the associated 

sales and marketing functions and personnel. The acquisition was completed in May 2002. The acquisition presented an opportunity to reorganise the Sappi 

Fine Paper North America Sales, Marketing, Customer Service, Research and Development and Information Technology functions. This will result in further 

headcount reductions of approximately 130 personnel. 

Approximately 65% of employees are represented by ten international unions under twelve different contracts. The labour contracts for Cloquet, 

Allentown and Westbrook are currently being negotiated. As a result of the acquisition of Potlatch Corporation's coated fine paper business, we rejected the 

collective bargaining agreement between the unions and Potlatch, and we are operating under terms and conditions set by Sappi pending the conclusion of 

negotiations for a new collective bargaining agreement. The Westbrook and Allentown contracts expired in June 2002 and March 2001 respectively, and the 

affected parties are working under contract extensions. Somerset's labour contract will expire in January 2003 and negotiations will commence in early 2003. 

We anticipate reaching agreements on new contracts at all affected sites, and do not expect a work stoppage to occur. However, in the event that agreements 

cannot be reached and a prolonged work stoppage that results in a curtailment of output ensues at any or all such sites, our business could be adversely 

affected. Muskegon's contract will expire in June 2004. 

72 

Sappi Fine Paper North America has experienced no work stoppage in the United States in the past eleven years and believes that its relationship with its 

employees is satisfactory. 

Europe 

Sappi Fine Paper Europe employed 5,689 people at the end of September 2002. A substantial number of Sappi Fine Paper Europe employees are 

represented by trade unions. 

In Germany, labour relations have been stable. There have been no strikes in either of the mills since the 1960s. Over the last several, years there has 

been a considerable reduction in the number of employees, in cooperation with the work council in each relevant mill. 

Sappi Fine Paper Europe is subject to industry-wide collective agreements which are in place with trade unions in Germany, Austria and Belgium and 

which relate to its employees in each of the relevant mills. Labour relations at all mills in those countries have been stable. Labour relations have also been 

stable at our mills in the Netherlands and in the United Kingdom, where Sappi Fine Paper Europe has entered into agreements with trade unions in each of 

these countries. 

In addition to trade unions, Sappi Fine Paper Europe also consults with various local, national and European work councils. These work councils serve 

primarily in an advisory role. However, under certain circumstances, Sappi Fine Paper Europe may be required to consult with one or more of the work 

councils before proceeding with a course of action. Furthermore, Sappi Fine Paper Europe is obligated to keep the work councils apprised of activities that 

affect the Sappi Fine Paper Europe workforce. 

In 2001, the Nijmegen mill closed its converting centre, which resulted in a reduction of 46 employees. In addition to the reduction in employee numbers 

at the Blackburn mill in May 2000, when Sappi sold the Astralux brand of cast coating papers, there has been a further reduction of 17 employees during 

2001, largely due to ongoing reductions in white-collar positions and departmental restructuring. 

Sappi Fine Paper Europe implemented a restructuring plan begun by KNP Leykam's management during 1996 and 1997 at its mills in Austria, the 

Netherlands and Belgium. This plan, together with subsequent initiatives to exploit synergies within the merged operations of KNP Leykam and Sappi Fine 

Paper Europe, have resulted in a reduction of 1,427 employees since the plan's commencement in 1996. In 1999, additional restructuring plans were 

announced for the Maastricht and Blackburn mills. During fiscal 2000, 51 and 60 employees in the Maastricht and Blackburn mills, respectively, were 

affected. 

For Austria, this period of restructuring ended in December 2000. The restructuring of Gratkorn mill with the start up of PM11 and the close down of 4 

older paper machines together with some additional cost saving programmes led to a reduction of approximately 600 employees, in the period from 1996 to 

2000. Challenges in the market which led to regular commercial standstills were managed by way of special agreements with the works council for flexible 

working time and temporary reduction in the use of external personnel and holiday workers. 

After some years of cost cutting, we are now able to focus on management and people development. The second Sappi Academy, a management trainee 

programme, was run with delegates from Europe, North America and South Africa. Performance management and succession planning processes have been 

implemented. 


Sappi employed 8,394 people in southern Africa at the end of September 2002. Of this total, Sappi Fine Paper and Sappi Forest Products employed 2,028 

and 6,261 people, respectively, with the balance 

73

eing employed by Corporate and Sappi Trading. Approximately 55% of these employees are members of trade unions of which the Chemical, Energy, Paper, 

Printing, Wood and Allied Workers Union is the largest. The reduction in employee numbers in Sappi Forest Products over the last four years is due to a 

combination of factors. The selling of non-core assets, namely Novobord and the Mining Timber Division, affected 208 and 425 employees respectively. 

Outsourcing of various forestry operations, coupled with retrenchments in the forestry sector and at certain of our Kraft mills, largely accounts for the balance. 

Due to recent restructuring and out-sourcing of various functions at our Usutu Mill in Swaziland, over 700 employees were laid off between 

September 2001 and March 2002. Over 400 of these employees have been re-employed by the companies which will be performing the various out-sourced 

functions on behalf of the Usutu Mill. 

There has been large-scale unionisation of forestry industry employees in South Africa in recent years. We believe that we generally have had 

satisfactory relations with the trade unions operating at our southern Africa mills despite experiencing industry-wide wage related strikes of limited duration. 

During July and August 2001, the pulp and paper industry experienced a 5-day industry-wide strike as a result of a wage dispute, while the sawmills 

experienced a 25-day industry-wide strike. From January 26, 2000 to February 7, 2000, our Stanger mill experienced a 13-day strike as a result of a wage 

dispute. During September 2000 and November 2000, our Usutu mill in Swaziland experienced a 4-day strike. The strike was not caused by trade union 

activity, but was the result of a national dispute with the Swaziland government on political reforms in that country. 

The high prevalence of HIV/AIDS in Africa (including South Africa) has escalated its potential negative impact on the population and South African 

business in general. The management and treatment of HIV/AIDS and its potential impact has accordingly been allocated a high priority by many companies 

in South Africa, including ourselves. Sappi, in line with other major South African Corporates, is in the process of implementing a project to extend free antiretrovirals 

to all employees for whom the treatment is medically indicated. 

Labour and employment law has changed substantially in South Africa in the past several years, recent legislation such as the Labour Relations Act 

adopted in 1996 and the Basic Conditions of Employment Act adopted in 1998 have substantially enhanced the rights of employees, including the right to 

engage in protected industrial action. 

In addition, in October 1998, the South African Parliament adopted the Employment Equity Act (Act 55 of 1998). The Employment Equity Act requires 

employers who employ 50 or more employees, to implement affirmative action measures designed to ensure that suitably qualified persons from previously 

disadvantaged groups have equal employment opportunities and are equitably represented in the workforce of such employers. The provisions of the 

Employment Equity Act which pertain to the prohibition of unfair discrimination, the monitoring by employees and trade union representatives of compliance 

with the Act, the institution of legal proceedings concerning contraventions of the Act, the protection of employee rights and the formulation of codes of good 

practice and regulations pertaining to the Act were implemented on August 9, 1999. The implementation of the balance of the Act, dealing primarily with 

affirmative action measures, commenced on December 1, 1999. As required by the Act, Sappi drafted employment equity plans after consultation with 

representative employee forums and submitted the prescribed reports to the Department of Labour during May 2000. 

The Skills Development Act (No. 97 of 1998), which came into force on September 10, 1999 provided an institutional framework to devise and 

implement workplace strategies in order to develop and improve the skills of the South African workforce. The financing of skills development is 

promulgated by means of a levy/grant scheme under the Skills Development Levies Act. 

74 

The Skills Development Act, Skills Development Levies Act, and South African Qualifications Authorities Act (No. 58 of 1995) have received 

significant attention during the past year. Equity forums established under the Employment Equity Act were mandated to serve as Learning forums, and their 

constitutions, roles and responsibilities were entrenched. The forums played a major role in preparing the Skills plans submitted to the Forest Industries 

Education & Training Authority. A skills levy of 1%, specified in accordance with the Skills Development Levies Act, was paid via Internal Revenue to the 

Forest Industries Education & Training Authority, and a successful claim for skills grants resulted in a 75% refund of this levy. 

Share Ownership 

The Sappi Limited Share Incentive Scheme 

We have offered a share purchase scheme to eligible Officers and employees since 1979. During March 1997, The Sappi Limited Share Incentive 

Scheme, as amended from time to time (the "Share Incentive Scheme"), was adopted at the Annual General Meeting of Sappi Limited. Under the Share 

Incentive Scheme, Officers or other employees of Sappi, its subsidiaries and other entities controlled or jointly controlled by Sappi selected by the Sappi 

Board of Directors are offered the opportunity to acquire shares ("Scheme Shares"), options to acquire shares ("Share Options") or rights and options to enter 

into agreements with Sappi Limited or the Sappi Limited Share Incentive Trust to acquire shares ("Allocation Shares"). Participants may also be given the 

opportunity to acquire a combination of Scheme Shares, Share Options and Allocation Shares. For a detailed description of the Share Incentive Scheme and 

recent amendments thereto, see note 32 to our Group annual financial statements included elsewhere in this Annual Report. 

As of November 29, 2002, the Directors and Executive Officers of Sappi had been granted an aggregate of 313,000 Share Options and 694,000 

Allocation Shares. None of the Directors or Executive Officers of Sappi holds more than 1% of our issued share capital. 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 

Major Shareholders 

The following table sets forth certain information with respect to the ownership of the ordinary shares, R1.00 par value, of Sappi Limited by the 

shareholders of record of Sappi Limited as of October 25, 2002, holding 5% or more of the outstanding ordinary shares. 

75

Name of Registered Holder 

Number of 

Shares 

Percentage 

Standard Bank Nominees (Transvaal) (Proprietary) Limited (1) 133,197,114 57.9 

Nedcor Bank Nominees Limited (2) 33,752,776 14.7 

Industrial Development Corporation of South Africa Limited 19,804,620 8.6 

First National Nominees (Proprietary) Limited (3) 20,574,169 8.9 

All Directors and Executive Officers as a Group (4) 1,536,312 0.7 

(1) 

(2) 

(3) 

(4) 

Standard Bank Nominees (Transvaal) (Proprietary) Limited has advised us that it holds shares for numerous clients. Standard Bank Nominees held 46.8% of our shares as of 

January 31, 2000. 

Nedcor Bank Nominees Limited has advised us that it holds shares for numerous clients. Nedcor Bank Nominees Limited held 10.7% of our shares as of January 31, 2000. 

First National Nominees (Proprietary) Limited has advised us that it holds shares for numerous clients. 

Includes shares issuable upon exercise of options granted under Sappi's Share Incentive Scheme. See "Item 6—Directors, Senior Management and Employees—Compensation". 

In addition to the changes in the ownership percentages held by our major shareholders disclosed in the footnotes to the table above, KNP BT 

Beteiligungen Deutschland GmbH (now Buhrmann International BV) held 19.9% of our shares as of September 30, 1998 and as of November 15, 2001 

disposed of its holdings, and CMB Nominees (Proprietary) Limited held 8.6% of our shares as of September 30, 1998 and holds 4.2% as of October 25, 2002. 

The authorised share capital of Sappi Limited consists of 325,000,000 shares. As of October 25, 2002, the issued share capital consisted of 239,071,892 

shares. Due to shares bought back and being held in a subsidiary company, the issued share capital was reduced to 230,177,455 as October 25, 2002. It is 

common in South Africa for shares to be held through nominees. As of October 25, 2002, the four largest shareholders of record (three of which are 

nominees) owned approximately 90.1% of the shares. Two of the fifteen members of the Board of Directors of Sappi are affiliated with those shareholders of 

record. We believe that, as of October 25, 2002, based on registered addresses and disclosure by nominee companies, 48% of our shares were held 

beneficially in North America, 38% of our shares were held beneficially in South Africa and 14% of our shares were held beneficially in Europe and 

elsewhere, excluding the shares owned by subsidiaries of Sappi. 

On October 25, 2002, there were approximately 48 registered holders (including nominees) of ADSs and 54 registered holders of shares in the United 

States. At that date, there were 42,414,708 ADSs and 13,456 shares (totalling 42,428,164 shares) registered in the name of holders with registered addresses 

in the United States (representing approximately 18.4% of the then outstanding shares). We believe, however, that more than 40% of our shares are owned 

beneficially by US holders. 

Pursuant to the Companies Amendment Act Number 37 of 1999, where securities of an issuer are registered in the name of a person and that person is 

not the holder of the beneficial interest in all of the securities held by the registered shareholder, the registered shareholder is obliged, at the end of every 

three-month period after June 30, 1999, to disclose to the issuer the identity of each person on whose behalf the registered holder holds securities and the 

number and price of securities issued by that issuer held on behalf of each such person. We authorised Cazenove South Africa (Pty) Limited to conduct a 

quarterly investigation into the beneficial ownership of Sappi Limited shares. All beneficial holdings were investigated to determine whether there are any 

shareholders which hold 5% or more of 

our shares. As a result of these investigations, we 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 October 25, 2002, the following fund managers were responsible for 5% or more of the issued share capital of Sappi 

Limited. 

Name of Fund Manager 

76 

Number of 

Shares Managed 

Percentage 

Capital Group Companies Inc. 20,802,863 9.0 

Highfields Capital Management 15,126,367 6.6 

Oppenheimer Funds Inc 14,871,200 6.5 

Sanlam Investment Managers 12,286,012 5.3 

Under South African law, there is no obligation on the part of shareholders of Sappi Limited to disclose to Sappi Limited arrangements or understandings 

that may exist between or among them with respect to the holding or voting of shares unless such arrangement or understanding constitutes an affected 

transaction under the Securities Regulation Code on Takeovers and Mergers. An "affected transaction" means, among other things, any transaction which has 

or will have the effect of vesting control of any company in any person or two or more persons acting in concert in whom control did not vest prior to such 

transaction or scheme. Control is defined with reference to a specified percentage, which is currently 35% of the entire issued share capital of a company. The 

major shareholders have no special voting rights. 

Related Party Transactions 

For information on related party transactions, see note 35 to our Group annual financial statements contained elsewhere in this Annual Report. 

ITEM 8. FINANCIAL INFORMATION 

Consolidated Financial Statements 

See "Item 18—Financial Statements" and the F-pages for the Report of the Independent Auditors. 

77

Other Financial Information 

Legal Proceedings 

We 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 America 

In April 2000, 18 individuals filed a lawsuit against our subsidiary, S.D. Warren, Kimberley-Clark Corporation and several other defendants in Somerset 

County Court, Maine. The plaintiffs alleged that they suffered personal injury as a result of hazardous waste from various sources, which was allegedly 

transported to and stored at a local landfill during the period from 1976 through 1986. Plaintiffs later amended the complaint to bring several new theories of 

liability. During August 2002 all defendants reached a settlement agreement with the plaintiffs. 

In April 2000, the Lemelson Medical, Educational and Research Foundation, Limited Partnership ("Lemelson") filed a lawsuit against Sappi and over 70 

other companies in the United States Court for the District of Arizona. The lawsuit alleged that the defendants infringed upon various machine vision and 

automatic identification patents held by Lemelson. Lemelson seeks to enjoin the defendants from further alleged acts of infringement and to collect 

unspecified damages. Sappi was formally served with a summons with respect to this lawsuit in September 2000. Sappi and Lemelson settled the lawsuit in 

August 2002. In terms of the settlement, Sappi has acquired a license to use any Lemelson patent (except certain specifically excluded ones which are not of 

use) in connection with any products or services involving wood, pulp, packaging, printing or paper. 

In connection with the recently completed Potlatch acquisition, Potlatch has agreed not to compete with us in the production of coated woodfree paper. In 

May 2002, the Attorney General for the State of Minnesota commenced an action alleging that an aspect of the covenant not to compete related to use of 

Potlatch's Brainerd mill by a purchaser of the mill violated antitrust and common law. On November 26, 2002, the court dismissed both of the State's claims. 

The Attorney General has indicated that he may bring a new action if a potential purchaser for the mill is found who is discouraged by this covenant. The 

State has 60 days in which to file an appeal of the court's decision. 

Europe 

The European Commission addressed a Statement of Objections to, among numerous other parties, Leykam-Mürztaler Papier und Zellstoff 

Aktiengesellschaft. The European Commission's objections concern alleged market sharing and pricing agreements relating to the sale of newsprint paper in 

the European Union during the period from January 1, 1994 to June 30, 1995, which was prior to our acquisition of the KNP Leykam companies in 

December 1997 and relates to a business we did not purchase. A Reply to the Statement of Objections was submitted to the European Commission on 

August 31, 1999 and Oral Hearings were held between September 27 and 29, 1999. On August 9, 2002 the European Commission decided to officially close 

their investigations into this case. All proceedings against all the companies that were targeted by this investigation were dropped. The European Commission 

concluded that the allegations of anti-competitive conduct relating to the sale of newsprint paper were unfounded. 

78 

In July 2000, the European Commission addressed a Statement of Objections to Sappi and sixteen other manufacturers of carbonless paper, alleging anticompetitive 

conduct in the European carbonless paper sector between January 1992 and March 1997. We co-operated fully with the European Commission in 

its investigations. The European Commission decided on December 20, 2001 that eleven companies infringed Article 81(1) of the EC Treaty and Article 53(1) 

of the EEA Agreement by participating in a complex of agreements and concerted practices in the sector of carbonless paper from January 1992 until 

September 1995. A fine of euro 15.12 million was imposed on Sappi, but due to Sappi's co-operation with the Commission, the fine was reduced to zero. 


In February 1995, the South African Competition Board announced that it was undertaking an investigation under the South African Maintenance and 

Promotion of Competition Act to determine whether any restrictive practice or monopoly exists in the manufacturing and marketing of paper and paper 

products in South Africa. The investigation was discontinued in April 1999. As of November 2001, we had not been notified of any new investigation under 

the new regulatory regime. 

The 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 June 19, 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 December 31, 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. A formal land claim made in respect of 

a portion of property in Lower Umfolozi, Zululand, has been withdrawn by the claimants and the Restitution of Land Rights Commissioner and will therefore 

not proceed. We have been notified of three formal Land Claims made in respect of portions of a plantation known as Lothair in the Lothair district, 

Mpumalanga area, and another made in respect of portions of a property in Sudwala, Mpumalanga. These claims have not been finalised and are still under 

investigation by the Regional Land Claims Commissioner. 

In November 2001, the South African Competition Commission (which investigates competition complaints) referred a complaint by Papercor CC to the 

South African Competition Tribunal recommending that the Tribunal find that Sappi Fine Paper South Africa contravened the South African anti-trust 

legislation in that it had required payment of a contribution towards its legal costs incurred in prior proceedings before the Competition Tribunal between 

Papercor CC and Sappi Fine Paper South Africa, as a condition to supplying paper products, in respect of which the Commission suggested Sappi Fine Paper 

South Africa is dominant in the relevant market, to Papercor CC. The Competition Commission also recommended that an administrative fine of 10% of the 

annual sales of Sappi Fine Paper South Africa from September 1, 1999 until the date on which the Tribunal makes its order be imposed. Sappi took exception 

to the Commission's complaint contending that it had failed to disclose a cause of action against Sappi. The Tribunal, in its judgement on Sappi's exception 

handed down on April 17, 2002, upheld Sappi's exception, but gave the Commission leave to amend its pleadings within 10 days. Although the Commission 

did file their amended pleadings they subsequently withdrew their complaint. However, they have now purported to commence a fresh investigation. Sappi

has lodged an appeal with the Competition Appeal Court requesting that this fresh investigation be set aside on the basis that it places Sappi in double 

jeopardy. 

Dividend Policy 

During May 1998, Sappi Limited announced that its Board of Directors had decided that in view of past volatility in the pulp and paper markets, 

dividends would in the future only be considered on an annual basis. 

79 

Prior to fiscal 2000, it was our policy to declare cash dividends in Rand. It is now our policy to declare cash dividends in US dollars. We declared a 

dividend (number 79) of 28 US cents for fiscal 2002. South African shareholders will be paid the Rand equivalent of the US dollar denominated declaration. 

The current dividend policy of Sappi Limited is to provide dividend payments which incorporate, over time, real growth for shareholders by providing 

dividend payments whose cover will vary in line with changes in the business cycle but maintaining a long-term average dividend "cover" of three times. 

(Dividend cover is calculated by dividing earnings per share by dividends per share. A dividend cover of three times therefore means a dividend pay out ratio 

of approximately 33% of net income). 

In accordance with South African company law, dividends may be declared only out of accumulated or current profits. Holders of American Depositary 

Receipts (ADRs) on the relevant record date will be entitled to receive any dividends payable in respect of the shares underlying the ADSs, subject to the 

terms of the Deposit Agreement among us, The Bank of New York and the ADR holders (the "Deposit Agreement"). There is no restriction under South 

African exchange control regulations on the free transferability of cash dividends to non-resident shareholders or ADS holders. See "Item 10—Additional 

Information—Exchange Controls". 

South African companies pay Secondary Tax on Companies at the flat rate of 12.5% in respect of the amount of dividends declared by the company less 

all dividends which accrue to the company during its relevant "dividend cycle". See "Item 10—Additional Information—Taxation". 

Significant Changes 

Except as otherwise disclosed in this Annual Report, there has occurred no significant change in our financial position since September 29, 2002. 

ITEM 9. THE OFFER AND LISTING 

Offer and Listing Details 

The table below sets forth, for the periods indicated, the high and low prices and the volume of trading activity in the shares on the JSE, as reported by 

the JSE, and the high and low prices and the volume of trading activity in the ADSs on the New York Stock Exchange ("NYSE"), as reported by the NYSE. 

80 

High 

Shares 

Low 

(SA cents per share) 

Trading 

Volume 

(in millions) 

High 

($ per ADS) 

ADSs 

Low 

Trading 

Volume 

(in millions) 

Annual highs and lows 

Fiscal 2002 16,200 7,650 181.8 15.00 8.40 48.10 

Fiscal 2001 8,700 4,380 240.1 10.37 5.75 51.64 

Fiscal 2000 7,000 3,800 160.3 11.75 6.06 34.43 

Fiscal 1999 6,450 1,800 134.5 10.44 3.22 3.00 

Fiscal 1998 3,800 1,800 84.2 — — — 

Quarterly highs and lows 


First quarter 12,700 7,650 43.3 10,75 8.40 11.80 

Second quarter 16,200 11,560 38.7 13.90 10.20 12.46 

Third quarter 15,600 12,800 43.3 15.00 12.28 9.84 

Fourth quarter 14,600 10,500 56.5 14.30 10.43 14.00 


First quarter 5,500 4,380 67.2 7.56 5.75 6.44 

Second quarter 7,500 5,100 85.5 9.73 6.75 13.56 

Third quarter 8,100 6,310 42.5 10.37 7.92 15.76 

Fourth quarter 8,700 6,200 44.5 10.36 7.57 15.88 


First quarter 6,450 4,780 43.7 11.31 7.00 11.15 

Second quarter 7,000 3,800 45.3 11.75 6.38 9.72 

Third quarter 6,000 4,050 30.2 8.63 6.06 8.56 

Fourth quarter 6,500 4,900 40.5 8.94 6.81 5.00 

Monthly highs and lows 


June 15,100 13,720 13.3 15.00 13.45 2.59

July 14,600 11,400 17.0 14.30 11.11 5.74 

August 13,500 10,500 21.2 12.50 10.43 5.13 

September 13,250 11,200 18.4 12.00 10.80 3.13 

October 12,605 10,800 14.4 12.26 10.30 3.84 

November 12,210 11,250 10.4 13.04 11.30 2.50 

On December 11, 2002, the closing price for our shares on the JSE was 11,298 SA cents per share and the closing price of the ADSs on the NYSE was 

$12.83 per ADS. 

Markets 

The principal market for the ordinary shares of Sappi Limited is the JSE. The ordinary shares of Sappi Limited are also listed on the London Stock 

Exchange and the Frankfurt Stock Exchange. In February 2000, we announced our decision to delist our shares from the Paris Bourse with effect from 

March 29, 2000. This decision was based on the low volume of shares traded, the cost of maintaining the listing and the additional reporting standards 

required by the Bourse. On November 5, 1998, ADRs evidencing ADSs of Sappi Limited commenced trading on the NYSE under the symbol "SPP". The 

Bank of New York serves as depositary ("the Depositary") with respect to the ADSs. Prior to the 

commencement of trading of the ADSs on the NYSE, our ordinary shares were traded in the United States in the over-the-counter market pursuant to a 

sponsored unrestricted American Depositary Receipt facility established in 1994. Price data relating to that trading is not considered meaningful and has not 

been included in this Annual Report. 

On October 26, 1999, Sappi and The Bank of New York amended the Deposit Agreement to change, with effect from October 27, 1999, the number of 

ordinary shares represented by each ADS from 10 ordinary shares per ADS to 1 ordinary share per ADS. The prices for ADSs set forth in the following 

paragraphs and the table above reflect this change. 

81 

Prior to our global equity offering, which was completed on November 22, 1999, trading of the ADSs on the NYSE had been sporadic with the volumes 

traded varying between zero and 231,000 ADSs per day. Since that offering, trading of the ADSs has increased substantially. The ADS price has reached a 

high of $15.00 and a low of $3.22 since trading commenced. On some days, trading volume in ADSs on the NYSE has exceeded the volume traded on the 

JSE. 

Sappi is included in the Morgan Stanley Capital International emerging market index. 

The JSE Securities Exchange South Africa 

The JSE was formed in 1887 and provides facilities for the buying and selling of a wide range of securities, including equity, corporate debt securities, 

warrants in respect of securities, as well as Krugerrands. The JSE is a self-regulatory organisation operating under the supervision of the Ministry of Finance, 

through the Financial Services Board and its representative, the Registrar of Stock Exchanges. 

The market capitalisation of South African equity securities was approximately $1,255 billion as at October 31, 2002. The actual float available for 

public trading is significantly smaller than the aggregate market capitalisation because of the large number of long-term holdings by listed holding companies 

in listed subsidiaries and associates, the existence of listed pyramid companies and cross holdings between listed companies. Liquidity on the JSE (measured 

by reference to the total market value of securities traded as a percentage of the total market capitalisation at the end of the period), was 63% for the 

12 months ended 31 October 2002. Trading is concentrated in a growing, but small number of companies. As of the end of October 2002, there were 488 

listed companies on the JSE. 

Following the introduction of the FTSE/JSE free float indices, the FTSE/JSE All Share Index only includes those companies that constitute the top 99% 

of the market capitalisation of the JSE. The three main sectors in the market are Resources, Financials and Industrials. As of October 31, 2002, the All Share 

Index included 157 companies. The Financial and Industrial Index and the Resources Index included 135 and 22 companies, respectively, and accounted for 

approximately 56% and 44%, respectively, of the total market capitalisation of the JSE. 

The JSE settles securities trades electronically through STRATE—Share Transactions Totally Electronic—the central securities depository for the 

equities market. All trades are downloaded from the JSE SETS automated trading system to the JSE's Broker Deal Accounting (BDA) system, which manages 

the settlement status of every trade. The BDA system interfaces with STRATE's system which in turn interfaces with those of the custodian banks. The JSE's 

Settlement Authority monitors all trades from time of execution to settlement to ensure performance. 

Shares may not be traded on the JSE unless they have been demateralized through STRATE. Contractual, rolling settlement has been introduced by the 

JSE in order to increase the speed, certainty and efficiency of the settlement mechanism and to fall into line with international practices. While settlement on 

the JSE is currently made five days after each trade (T + 5), the JSE in conjunction with STRATE is exploring with the industry how best to reduce the 

settlement period further to (T+3) without introducing undue risk. 

ITEM 10. ADDITIONAL INFORMATION 

Memorandum and Articles of Association 

The following description is a summary of various provisions of the Memorandum and Articles of Association of Sappi Limited, the South African 

Companies Act (the "Companies Act") and the listings requirements of the JSE, which does not purport to be complete and is qualified in its entirety by 

reference to all of the provisions of those sources. 

82

Sappi Limited is a public company incorporated in South Africa with registration number 1936/008963/06. 

Purpose of the Company 

Paragraph 3 of the Memorandum of Association of Sappi Limited establishes that the purpose of Sappi Limited is to manufacture and sell a wide range 

of pulp, paper and wood products for use in almost every sphere of economic activity. 

Directors 

At every annual general meeting of Sappi Limited, as near as possible to, but not less than one third of the Directors are required to retire from office but 

are eligible for re-election. The Directors to retire are those who have been longest in office since their last election or, as between Directors who have been in 

office for an equal length of time since their last election, in the absence of agreement, determined by lot. In addition, the appointment of any Director 

appointed at or since the last annual general meeting will require to be confirmed at the next annual general meeting, failing which the appointment will cease. 

Except as set out in the following paragraph, a Director may not vote in respect of any contract or arrangement or any other proposal in which he has any 

material interest other than by virtue of his interest in ordinary shares or debentures or other securities of Sappi Limited. A Director will not be counted in the 

quorum at a meeting in relation to any resolution on which he is barred from voting. 

A Director shall be entitled to vote and be counted in the quorum in respect of any resolution concerning any of the following matters: 

• 

• 

• 

• 

• 

the giving of any security or indemnity to him in respect of money lent or obligations incurred by him at the request of or for the benefit of Sappi 

Limited or any of its subsidiaries; 

the giving of any security or indemnity to a third party in respect of a debt or obligation of Sappi Limited or any of its subsidiaries for which he 

himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security; 

any proposal concerning an offer of shares or debentures or other securities of or by Sappi Limited or any of its subsidiaries for subscription or 

purchase in which offer he is or is to be interested as a participant in the underwriting or sub-underwriting of these securities; 

any proposal concerning any other company in which he beneficially holds less than 1% of any class of the equity share capital of that company 

or of the voting rights available to shareholders of that company; and 

any proposal concerning the adoption, modification or operation of a superannuation fund or retirement benefits scheme under which he may 

benefit and which has been approved by or is subject to and conditional upon approval of the Commissioner of Inland Revenue for taxation 

purposes. 

83 

At the discretion of the Board, there may in each year be paid out of the funds of Sappi Limited to, and divided among, the Directors who have held 

office during the year in respect of which the remuneration is to be paid, a sum, by way of remuneration for their services as Directors, not exceeding 

R3 million, which remuneration shall be paid in such proportions as shall be determined by the Directors or a majority of them. The Directors shall be paid all 

their travelling and other expenses properly and necessarily expended by them in and about the business of Sappi Limited. 

The Directors may exercise all the powers of Sappi Limited to borrow money and to mortgage or charge its undertaking and property or any part thereof 

and to issue debentures, which may be issued at par, at a discount or at a premium, and other securities. The borrowings will be restricted so as to secure that, 

except with the previous sanction of an ordinary resolution of Sappi Limited in general meeting, the aggregate principal amount outstanding of all moneys 

borrowed by Sappi Limited and/or any of its subsidiaries will not at any time exceed an amount equal to 2.5 times shareholders' equity, excluding all taxation 

and deferred taxation provisions and minority interests, as shown in the consolidated balance sheet. 

Disclosure of Interest in Shares 

The Companies Act was recently amended to require disclosure of beneficial ownership interests in the outstanding shares of a company. Pursuant to the 

Companies Amendment Act Number 37 of 1999, where securities of an issuer are registered in the name of a person and that person is not the holder of the 

beneficial interest in all of the securities held by the registered shareholder, the registered shareholder is obliged, at the end of every three-month period after 

June 30, 1999, that is, commencing on September 30, 1999, to disclose to the issuer the identity of each person on whose behalf the registered holder holds 

securities and the number and class of securities issued by that issuer held on behalf of each such person. Moreover, an issuer of securities may, by notice in 

writing, require a person who is a registered shareholder of, or whom the issuer knows or has reasonable cause to believe to have a beneficial interest in a 

security issued by the issuer, to confirm or deny whether or not such person holds that beneficial interest and, if the security is held for another person, the 

person to whom the request is made is obliged to disclose to the issuer the identity of the person on whose behalf a security is held. The addressee of the 

notice may also be required to give particulars of the extent of the beneficial interest held during the three years preceding the date of the notice. All issuers of 

securities are obliged to establish and maintain a register of the disclosures described above and to publish in their annual financial statements a list of the 

persons who hold beneficial interests equal to or in excess of 5% of the total number of securities of that class issued by the issuer together with the extent of 

those beneficial interests. 

Share Capital 

The authorised share capital of Sappi Limited consists of 325,000,000 ordinary shares, par value R1.00 per share. All the ordinary shares in issue rank 

pari passu with each other and are fully paid and not subject to calls for additional payments of any kind. The ordinary shares in Sappi Limited have been 

dematerialised under the terms of the Share Transactions Totally Electronic (STRATE) initiative of the JSE and the provisions of section 91A of the 

Companies Act relating to uncertified securities apply in respect of the dematerialised shares.

The ADSs are traded on the NYSE. The rights of holders of ADSs are governed by the Deposit Agreement pursuant to which the ADSs are issued and 

such rights differ in certain respects from the rights of holders of ordinary shares. 

Dividends 

84 

Sappi Limited in a general meeting or by the Board may, from time to time, declare a dividend to be paid to the registered holders of ordinary shares (the 

"Shareholders") according to their respective rights and interests in the profits in proportion to the number of ordinary shares held by them. No dividend on 

ordinary shares may be paid, except out of the profits of Sappi Limited, and no such dividend will bear interest. Dividends may be declared either free of, or 

subject to, the deduction of income tax and any other tax or duty which may be chargeable. Dividends are declared payable to Shareholders registered as such 

at a date subsequent to the date of the declaration of the dividend as determined by the Board. This date may not be less than 14 days after the date of the 

publication of the announcement of the declaration of the dividend. 

Sappi Limited in general meeting may not declare a dividend in excess of the amount recommended by the Board. All unclaimed dividends may be 

retained by Sappi Limited, invested or otherwise utilised by the Board for the benefit of Sappi Limited until claimed; provided that dividends unclaimed after 

a period of twelve years may be declared forfeited by the Board. Forfeited dividends revert to Sappi Limited and may be dealt with by the Directors as they 

deem fit. 

Any dividend or other sum payable in cash to a Shareholder may be transmitted by electronic bank transfer or ordinary post to the address of the 

Shareholder recorded in the register or any other address the Shareholder may previously have given to Sappi Limited in writing. Sappi Limited will not be 

responsible for any loss in transmission. 

Any dividend may be paid and satisfied, either wholly or in part, by the distribution of specific assets as the Board may at the time of declaring the 

dividend determine and direct. 

It is our policy to declare dividends in US dollars and the Board may at the time of declaring a dividend make such regulations, as they may think fit in 

regard to the payment in any currency and rate of exchange. For further information on our dividend policy, see "Item 8—Financial Information—Dividend 

Policy". 

Holders of ADSs on the relevant record date will be entitled to receive any dividends payable in respect of the ordinary shares underlying the ADSs, 

subject to the terms of the Deposit Agreement. Cash dividends will be paid by the Depositary to holders of ADSs in accordance with the Deposit Agreement. 

Voting Rights 

Subject to any rights or restrictions attached to any class of ordinary shares, every Shareholder present in person, by authorised representative or by 

proxy will have, on a show of hands, one vote only and, in the case of a poll, every Shareholder present in person, by authorised representative or by proxy 

will have one vote for every share held by him. 

Issue of Additional Shares and Pre-emption Rights 

Subject to the provisions of the Companies Act and the listing requirements of the JSE, Sappi Limited in a general meeting may allot, or may authorise 

the Board to allot, grant options over or otherwise deal with or dispose of unissued shares to such persons at such times, and generally on such terms and 

conditions, and for such consideration, whether payable in cash or otherwise, as it may decide. 

Holders of ordinary shares have no pre-emptive rights under the Articles of Association. Under the listings requirements of the JSE, however, any 

unissued ordinary shares of Sappi Limited must first be offered to existing Shareholders pro rata to their holdings of shares unless these shares are issued for 

the acquisition of assets or for such other circumstances as the JSE may approve, including the 

issue of shares for cash. It is possible to obtain specific or general approval at any general meeting of Shareholders for Directors to authorise the issue of 

shares for cash. 

85 

Sappi Limited in general meeting may upon the recommendation of the Board resolve to capitalise all or any part of the amount of the reserves of Sappi 

Limited or share premium account, which is otherwise available for distribution, by paying up unissued shares of Sappi Limited to be issued as fully paid 

capitalisation shares to shareholders, who would be entitled thereto if that amount were distributed as a dividend. 

Variation of Rights 

Whenever the capital of Sappi Limited is divided into different classes of shares, the rights attached to any class of shares in issue may be varied, 

modified or abrogated with the consent in writing of the holders of three fourths of the issued shares of that class or with a special resolution passed at a 

separate general meeting of the holders of such shares. 

The rights conferred upon the holders of the shares of any class will not, unless otherwise expressly provided by the conditions of issue of such shares, be 

deemed to be varied by the creation or issue of further shares ranking equally with them. 

Distribution of Assets on Liquidation 

If Sappi Limited is liquidated, whether voluntarily or compulsorily, the assets remaining after the payment of all the liabilities of Sappi Limited and the 

costs of winding-up shall be distributed among the Shareholders in proportion to the numbers of shares respectively held by them, subject to the rights of any 

Shareholders to whom shares have been issued on special conditions and subject to Sappi Limited's right to set-off against the liability, if any, of Shareholders 

for unpaid capital or premium. Furthermore, the liquidator, with the authority of a special resolution, may divide among the Shareholders in specie or kind, the 

whole or any part of the assets, whether or not those assets consist of property or one kind or different kinds.

Changes in Capital or Objects and Powers of Sappi Limited 

Subject to the provisions of the Companies Act, Sappi Limited may from time to time by special resolution: 

• 

• 

• 

• 

increase, consolidate, sub-divide or cancel all or any part of its capital; 

convert any of its shares, whether issued or not, into shares of another class; 

convert all or any of its paid-up shares into stock and re-convert such stock into paid-up shares; or 

convert any shares having a par value into shares having no par value and vice versa. 

Rights of Minority Shareholders and Fiduciary Duties 

Majority shareholders of South African companies have no fiduciary obligations under South African common law to minority shareholders. However, 

under the Companies Act, a shareholder may, under certain circumstances, seek relief from the court if he has been unfairly prejudiced by the company. The 

provisions in the Companies Act are designed to provide relief for oppressed shareholders without necessarily overruling the majority's decision. There may 

also be common law personal actions available to a shareholder of a company. The fiduciary obligations of Directors may differ from those in the United 

States and certain other countries. In South Africa, the common law imposes on Directors a duty to act with care, skill and diligence and a fiduciary duty to 

conduct the company's affairs honestly and in the best interests of the company. 

General Meetings of Shareholders 

86 

Sappi Limited is obliged to hold an annual general meeting not more than nine months after the end of every financial year of Sappi Limited and within 

fifteen months after the date of the last preceding annual general meeting of Sappi Limited. The Board may, whenever it thinks fit, convene a general meeting 

and must do so on the request of 100 Shareholders or of Shareholders holding at the date of request not less than one-twentieth of the total voting rights of 

Sappi Limited. 

Sappi Limited is required by law to provide at least 21 days' notice for any annual general meeting and for meetings at which special resolutions are 

proposed, and at least 14 days' notice for all other meetings. 

Notice under the Articles of Association of Sappi Limited must be in writing and must be given or served on any Shareholder or Director, as the case 

may be, either by delivery, electronic mail, telefacsimile or by sending it through the post, properly addressed, to a Shareholder at his or her address shown in 

the register of Shareholders. Any notice to Shareholders must simultaneously be given to the secretary or other suitable official of any recognised stock 

exchange on which the shares of Sappi Limited are listed in accordance with the requirements of that stock exchange. A member may by notice require Sappi 

Limited to record an address within South Africa, which shall be deemed to be his or her address for the purpose of the service of notices. Every such notice 

shall be deemed, unless the contrary is proved, to have been received, if it is delivered, on the date on which it is so delivered, if it is sent by post, on the day 

on which it is posted (and in proving such service it shall be sufficient to prove that the notice was properly addressed and duly posted), if it is sent by 

electronic mail, on the day it was sent or, if it is sent by telefacsimile, on the day on which it was successfully transmitted. 

No business may be transacted at any general meeting unless the requisite quorum is present when the meeting proceeds to business. The quorum for the 

passing of special resolutions is Shareholders holding in the aggregate not less than one fourth of the total votes of all Shareholders entitled to vote at the 

meeting, present in person or by proxy. In all other cases, the quorum is three Shareholders present in person or by proxy and entitled to vote or, if a 

Shareholder is a body corporate, represented. If within ten minutes from the time appointed for the meeting a quorum is not present, the meeting will stand 

adjourned to the same day in the next week, or if that be a public holiday the next succeeding day other than a public holiday, at the same time and place. If at 

the adjourned meeting a quorum is not present, those Shareholders who are present in person shall be a quorum. If the meeting at which a quorum is not 

present is convened upon the requisition of Shareholders, the meeting will be dissolved. 

At a general meeting, a resolution put to the vote will be decided by a show of hands unless a poll is demanded by (1) the chairman, (2) not less than five 

Shareholders having the right to vote at such meeting, (3) a Shareholder or Shareholders representing not less than one tenth of the total voting rights of all 

Shareholders having the right to vote at the meeting or (4) in accordance with the Companies Act. 

Resolutions will be carried by a majority of the votes recorded at the meeting except in the case of a special resolution which must be passed either, on a 

show of hands, by not less than three fourths of the number of Shareholders of Sappi Limited entitled to vote who are present in person or by proxy or, where 

a poll has been demanded, by not less than three fourths of the total votes to which the Shareholders present in person or by proxy are entitled. In the event of 

a tie, the chairman has the deciding vote. 

Transfer of Shares 

All ordinary shares are free from any restriction under the Articles of Association on the right to transfer, and may be transferred by instrument in writing 

in any usual common form or in the form and 

87 

signed in the manner as the Board may from time to time determine. Pursuant to the dematerialisation of shares in Sappi Limited, each Sappi shareholder will 

have an account with the Central Securities Depository. Transfer of ownership of shares will be effected by debiting the account from which transfer is 

effected and crediting the account to which transfer is effected. The transferor will be deemed to remain the holder of the shares until the name of the 

transferee is entered in the share register of Sappi Limited in respect of these shares. Only shareholders that have handed in their paper share certificates have 

an account with the Central Securities Depository. Shareholders cannot sell their shares until the shares have been dematerialised. Every instrument of transfer

presented for registration must be accompanied by the certificate representing the shares to be transferred and/or such other evidence as Sappi Limited may 

require to prove the title of the transferor or his right to transfer the shares. 

Non-South African Shareholders 

There are no limitations in the Memorandum or Articles of Association or under South African law on the right of non-South African Shareholders to 

hold or exercise voting rights attaching to any ordinary shares in Sappi Limited. 

Changes in Control 

Any person acquiring shares of Sappi will (in addition to any regulatory and legal requirements outside South Africa) need to comply with the following 

to the extent applicable. Various transactions including, without limitation, those which result in a person or a group of persons acting in concert holding 

shares entitling the holder or holders to exercise or cause to be exercised 35% or more of the voting rights at meetings of Sappi shareholders will be subject to 

the Securities Regulation Code on Takeovers and Mergers (the "Code") which is regulated by the Securities Regulation Panel. The Code imposes various 

obligations in such circumstances including the requirement of an offer to minority shareholders. A transaction will be subject to the approval of the 

competition authorities under the Competition Act No. 89 of 1998, as amended (the "Competition Act") if it results in the acquisition of "control", as defined 

in the Competition Act, and otherwise falls within the scope of the Competition Act. The Competition Act prevents a transaction falling within its scope from 

being implemented without the required approvals. To the extent applicable, the transaction will be subject to the Listings Requirements of the JSE. 

Depending on the circumstances, approvals of the Exchange Control Department of the South African Reserve Bank and other applicable regulatory 

authorities may also be required. 

Amendment of Memorandum or Articles of Association 

The Memorandum or Articles of Association may only be amended by way of a special resolution passed at a general meeting of shareholders at which 

at least 25% of the total issued share capital is present or represented and 75% of those present or represented vote in favour of the amendment. 

Material Contracts 

On July 11, 2001, Sappi Papier Holding AG as borrower, Sappi International S.A. as guarantor, ABN AMRO Bank N.V., Citibank International plc and 

JP Morgan plc as lead arrangers, Citibank International plc as agent and various financial institutions as lenders entered into a credit facility whereby the 

lenders made available to the borrower a multi-currency revolving loan and guarantee facility in a maximum aggregate amount of €562.5 million (A tranche) 

and a multi-currency term loan facility in a maximum aggregate amount of €337.5 million (B tranche) paid and not further available. 

On June 5, 2002, 6.75% Guaranteed Notes due 2012 and 7.50% Guaranteed Notes due 2032 (the Securities) were offered by Sappi Papier Holding AG 

(SPH), and were fully and unconditionally 

88 

guaranteed by Sappi Limited and Sappi International S.A (SISA), a corporation incorporated in Belgium. The interest on the Securities is payable semiannually 

on June 15 and December 15 of each year, commencing on December 15, 2002. The 2012 Securities mature on June 15, 2012 and the 2032 

Securities mature on June 15, 2032. SPH, Sappi Limited or SISA may redeem the Securities in whole or in part, at SPH's, Sappi Limited's or SISA's option, at 

any time 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. SPH, Sappi Limited and SISA have agreed to pay certain additional amounts in respect to any withholdings or deductions 

for certain types of taxes in certain jurisdictions on payments to holders of the Securities. SPH, Sappi Limited and SISA have also agreed to observe certain 

covenants with respect to the Securities and the guarantees including limitations on liens, sale and leaseback transactions and on mergers and consolidations. 

It is an event of default under each bond indenture if Sappi Limited ceases to own, directly or indirectly, a majority by vote and value of SPH's share capital. 

The Securities, which are listed on the Luxembourg Stock Exchange were not registered under the United States Securities Act of 1933, as amended or any 

state securities laws and were offered and sold within the United States only to qualified institutional buyers as defined in Rule 144A under the Securities Act 

and outside the United States in accordance with Regulation S under the Securities Act. 

On March 18, 2002 an Asset Purchase Agreement was entered into between Potlatch Corporation and Northern Holdings LLC (renamed Sappi Cloquet 

LLC) (a wholly owned subsidiary of SD Warren), whereby Sappi Cloquet acquired substantially all the assets of Potlatch Corporation's coated fine paper 

business (including Potlatch's Cloquet, Minnesota pulp and paper mill as well as the brands, order books and working capital of the Cloquet mill and the 

brands, order books and inventories of Potlatch's Brainerd, Minnesota paper mill) other than Potlatch's Brainerd mill, for an aggregate cash purchase price of 

$483 million. The Cloquet mill includes a hydroelectric facility that is licensed by the Federal Energy Regulatory Commission and a Fiber Research and 

Development Centre. In addition, we also acquired the Duluth & Northeastern Railroad Company. The Asset Purchase Agreement contains a number of 

agreements and indemnification provisions that continue to apply following the closing, including a non-compete covenant agreed to by Potlatch. See "Item 8 

—Financial Information—Other Financial Information—Legal Proceedings". In connection with the acquisition, we assumed Potlatch's obligations under 

several long-term cross border leases involving a substantial portion of the assets acquired. We also entered into the intellectual property license agreement as 

to Potlatch as well other ancillary arrangements. 

For a description of the terms of the Second Deed Amendment to The Sappi Limited Share Incentive Scheme, see note 32 to the Group annual financial 


Exchange Controls 

Introduction 

South Africa's exchange control regulations provide for restrictions on the exporting of capital and for various other exchange control matters 

Transactions between residents of the Common Monetary Area (comprising South Africa, the Republic of Namibia and the Kingdoms of Lesotho and 

Swaziland), on the one hand (including corporations), and non-residents of the Common Monetary Area, on the other hand, are subject to these exchange 

control regulations which are enforced by the Exchange Control Department of the South African Reserve Bank.

89 

The present exchange control system in South Africa is used principally to control capital movements. South African companies are generally not 

permitted to export capital from South Africa or to hold foreign currency without the approval of the South African exchange control authorities. Foreign 

investment by South African companies is also restricted. In addition, South African companies are generally required to repatriate to South Africa profits of 

foreign operations and are limited in their ability to utilise profits of one foreign business to finance operations of a different foreign business. As a result, a 

South African company's ability to raise and deploy capital outside the Common Monetary Area is restricted. The granting of loans from outside South Africa 

to Sappi Limited or its South African subsidiaries and their ability to borrow from non-resident sources is regulated. Further, where 75% or more of a South 

African company's capital, assets, earnings, voting securities, voting power, power of control or earnings are directly or indirectly controlled by or vested in 

non-residents of the Republic of South Africa, the company is designated an "affected person" and certain restrictions are placed on its ability to obtain local 

financial assistance. 

The South African authorities have expressed a commitment to a phased liberalisation of exchange controls and have relaxed certain exchange controls 

over recent years. 

Some of the more salient recent changes to the South African exchange control regulations regarding South African corporations are as follows: 

• 

• 

• 

• 

South African corporations wishing to establish new overseas ventures are permitted to transfer offshore up to R500 million to finance approved 

investments abroad and up to R2 billion to finance approved new investments in member countries of the South African Development 

Community and in other African countries. However, the approval of the Exchange Control Department of the Reserve Bank is required in 

advance. In addition, South African corporations may use part of their cash holdings in South Africa to finance up to 10% of the excess cost of 

approved new investments where the cost of these investments exceeds the aforementioned limits. In order to take advantage of this provision, 

corporations need the approval of the Exchange Control Department of the South African Reserve Bank. Any additional funds required are to be 

financed abroad by means of foreign borrowings with consideration being given to such foreign borrowings being raised with recourse to a 

guarantee from South Africa. This implies that the company's balance sheet may be used in the negotiation of such a facility. 

South African corporations which have previously transferred funds offshore to finance a new and approved investment in member countries of 

the South African Development Community and in other African countries may, in order to finance new approved expansions of such 

investment, and with the prior approval of the Exchange Control Department of the South African Reserve Bank, transfer up to an amount equal 

to the difference between R2 billion and the approved amount of South African Rands initially transferred in financing the original investment. 

South African corporations wishing to invest abroad may apply for permission to use corporate assets or share swaps to finance approved foreign 

investments. 

With South African Reserve Bank approval, South African corporations are permitted to utilise part of their cash holdings in South Africa to 

repay up to 10% of their outstanding foreign debt raised to finance approved foreign investment, provided that foreign debt has been outstanding 

for a minimum period of two years. 

Controls on current account transactions, with the exception of certain discretionary expenses, have been abolished. 

Authorised dealers in foreign exchange may, against the production of suitable documentary evidence, provide forward cover to South African residents 

in respect of fixed and ascertained foreign exchange commitments covering the movement of goods. 

90 

It is not possible to predict whether existing exchange controls will be abolished, continued or modified by the South African Government in the future. 

For further information, see "Item 5—Operating and Financial Review and Prospects—Other Items—South African Exchange Controls". 

Sales of Shares 

Under present South African exchange control regulations, the ordinary shares and ADSs of Sappi Limited are freely transferable outside the Common 

Monetary Area between non-residents of the Common Monetary Area. In addition, the proceeds from the sale of shares on the JSE Securities Exchange South 

Africa on behalf of shareholders who are not residents of the Common Monetary Area are freely remittable to such shareholders (other than former residents 

of South Africa). Share certificates held by non-residents must however be endorsed with the words "non-resident". 

Dividends 

There is no restriction under South African exchange control regulations on the free transferability of cash dividends to shareholders or ADR holders 

who have never been resident in South Africa. Dividends declared to a former resident of South Africa out of capital gains, or out of income earned from 

normal trading activities prior to the date of emigration, must be placed to the credit of a blocked account with a South African authorised dealer in foreign 

exchange. Dividends declared out of income earned from normal trading activities subsequent to the date of emigration are however remittable. See "— 

Taxation" and "Item 8—Financial Information—Dividend Policy". 

Prior to fiscal 2000, it was our policy to declare cash dividends in Rand. It is now our policy to declare cash dividends in US dollars. We declared a 

dividend (number 79) of 28 US cents for fiscal 2002. South African shareholders will be paid the Rand equivalent of the US dollar denominated declaration. 

Shareholders on the UK registry will be paid the UK pounds sterling equivalent of the US dollar denominated declaration and ADS holders will be paid in US 

dollars. Holders of ADSs on the relevant record date will be entitled to receive any dividends payable in respect of the shares underlying the ADSs, subject to 

the terms of the Deposit Agreement. Subject to exceptions provided in the Deposit Agreement, cash dividends will be paid by the Depositary to holders of 

ADSs in accordance with the Deposit Agreement. The Depositary will charge holders of ADSs, to the extent applicable, taxes and other governmental charges 

and specified fees and other expenses, including a fee not in excess of $0.02 per ADS (or portion thereof) for any cash distributions made pursuant to the 

Deposit Agreement, other than distributions of cash dividends. See "Item 8—Financial Information—Dividend Policy".

Subject to exceptions relating to former residents of South Africa, shareholders who are not residents of the Common Monetary Area who are in receipt 

of scrip dividends and who elect to dispose of the relevant shares may remit the proceeds arising from the sale of the relevant shares. 

Taxation 

Prospective investors should consult their professional advisers on the possible tax consequences of buying, holding or selling any Securities under the 

laws of their country of citizenship, residence or domicile. The discussions that follow for each jurisdiction are based upon the applicable laws and related 

interpretations in effect as of the filing date of this annual report, all of which laws and interpretations are subject to change or differing interpretations, which 

changes or differing interpretations could apply retroactively. 

South Africa 

General 

The following discussion represents the views of Werksmans, our South African counsel. 

The discussion below is based on current legislation. An extensive new Revenue Laws Amendment Bill ("the draft Bill") was recently released in draft 

form. The promulgation of the draft Bill as legislation may impact on what is stated below. 

Basis of Income Taxation 

South Africa has a dual income tax system in terms of which residents are taxed on their worldwide income and non-residents are taxed on their South 

African source (or deemed source) income. Certain categories of income and activities undertaken outside of South Africa will be exempt from taxation. 

Residence, in the case of natural persons, is established either by being ordinarily resident in South Africa or by satisfying a physical presence test in 

terms of which they become residents by virtue of them being physically present in South Africa for certain prescribed periods of time. In the case of legal 

entities, residence is established by virtue of incorporation or formation, or having its place of effective management, in South Africa. International 

headquarter companies, as defined in the Income Tax Act, 58 of 1962 ("the Tax Act"), are specifically excluded from the definition of resident. 

91 

In principle, foreign dividends received by or accruing to South African residents are subject to foreign dividends tax. In terms of the Tax Act, a foreign 

dividend will include a dividend received by or which accrued to any person from any company which is either a foreign entity (meaning a person other than a 

natural person or trust, which is (a) not a resident, or (b) which is a resident but is not being treated as a resident as a result of the application of a double 

taxation treaty), or from a company which is a resident to the extent that the dividend is declared from profits derived by such company before such company 

became a resident. There are certain exemptions from foreign dividends tax including: 

• 

• 

• 

• 

foreign dividends declared by a company listed on a stock exchange licensed in South Africa to a shareholder who, together with connected 

persons of such resident, holds less than 10% of the equity share capital of the listed company if more than 10% of the equity share capital of the 

listed company at the time of declaration is held by South African residents; 

foreign dividends declared by a company to a South African resident holding a "qualifying interest" in that company to the extent that the profits 

from which the dividend is declared are or will be subject to tax in a designated country at a statutory rate of at least 27%, or in the case of any 

capital gains of that company, at a statutory rate of at least 13.5%, (after taking account of the application of any relevant double taxation 

agreement) without any right of recovery by any person other than a right to carry over losses. A "qualifying interest" is any direct interest of at 

least 10% in the equity share capital of a company ("company 1") and any indirect interest of at least 10% held by company 1 in the equity share 

capital of any other company ("company 2") and any indirect interest of at least 10% held by company 2 in the equity share capital of any other 

company, etc. As long as the chain of 10% equity shareholding continues, the qualifying interest requirement would be met. The United States is 

one of the designated countries; 

foreign dividends declared by a company, who will be regarded as a controlled foreign entity for the purposes of the Tax Act (essentially a 

company in which residents hold more than 50% of the participation or voting rights) if the profits from which the dividend is distributed relate 

to 

92 

any amount of income of such company that has been imputed to the resident's income and taxed in the hands of the resident terms of the 

controlled foreign entity provisions; and 

foreign dividends declared by a company out of profits which arose from dividends declared to such company by a South African resident 

company. 

South African residents, who are natural persons, earning interest and dividends from foreign sources are allowed an exemption on the first R1 000 of 

such income (the exemption is firstly to be applied to foreign dividends and only if they do not exceed R1 000, the excess is to be applied to foreign interest). 

Withholding Tax on Dividends 

Sappi Limited will not be obliged to withhold any form of non-resident shareholders' tax on dividends paid to non-residents of South Africa. However, 

any future decision to re-impose a withholding tax on dividends declared by South African residents to non-resident shareholders is generally permissible 

under the terms of a reciprocal tax treaty entered into between South Africa and the United States (the "Treaty"); provided that the Treaty generally limits the 

withholding tax to 5% of the gross amount of the dividends if the beneficial owner of the shares is a company holding directly at least 10% of the voting stock 

of the company paying the dividends and to 15% of the gross amount of the dividends in all other cases. 

Income Tax and Capital Gains Tax

Profits derived from the sale of shares in a South African company will generally only be subject to income tax (at a corporate rate of 30% and a 

maximum individual rate of 40% based on a sliding scale) in South Africa if the seller carries on business in South Africa as a share dealer, and the profits are 

realised in the ordinary course of that business. 

Capital Gains Tax was introduced with effect from October 1, 2001 and has been introduced in the Income Tax Act 58 of 1962 by way of the 

incorporation of Schedule 8 therein ("Schedule 8"). Under Schedule 8, all natural persons, legal persons and trusts resident in South Africa would be liable to 

pay capital gains tax on the disposal of an asset. The definition of an asset is very wide and includes assets that are movable, immovable, corporeal or 

incorporeal but excludes certain limited items which are specifically excluded from the definition of an asset. Non-residents of South Africa will not be 

subject to capital gains tax except in respect of immovable property situated in South Africa or any interest or right in such immovable property and any assets 

of his/its permanent establishment through which a trade is being carried on in South Africa. Profits derived from the sale of South African shares held by 

non-residents as long-term investments will not be subject to capital gains tax in South Africa, provided that such shares are not an asset of the foreign 

investor's permanent establishment in South Africa, and that the foreign shareholder holds less than 20% in the company and less than 80% of the net asset 

value of such company is attributable to immovable property situated in South Africa. An ADS will be regarded as a share for the purpose of Capital Gains 

Tax in South Africa. The Treaty only permits the imposition of South African tax on capital gains of a United States resident seller from the sale of shares 

where such shares form part of the business property of a permanent establishment which the seller has in South Africa or pertain to a fixed base available to 

the seller in South Africa for the purpose of performing independent personal services. Companies will be liable to normal tax on 50% of the net capital gain. 

At the current corporate tax rate of 30%, the effective tax rate on net capital gains will therefore be 15%. 

Stamp Duty on the Shares 

South African stamp duty is payable by the company upon the issue of shares at the rate of 0.25% of the issue price. Such stamp duty will be paid by 

Sappi Limited. 

93 

On a subsequent registration of transfer of shares, South African stamp duty is generally payable for off-market transactions, meaning other than through 

a stockbroker, and a marketable securities tax ("MST") is generally payable for on-market transactions, meaning through a stockbroker, each at 0.25% of the 

higher of the consideration or the market value of the share concerned. South African stamp duty and MST is payable regardless of whether the transfer is 

executed within or outside South Africa. In respect of transactions involving dematerialised shares, uncertified securities tax will be payable at the same rate. 

There are certain exceptions to the payment of stamp duty and MST where, for example, the instrument of transfer is executed outside South Africa and 

registration of transfer is effected in any branch register kept by the relevant company, subject to certain provisions set forth in the South African Stamp 

Duties Act of 1968. Transfers of ADSs between non-residents of South Africa will not attract South African stamp duty or MST; however, if shares are 

withdrawn from the deposit facility or the relevant Deposit Agreement is terminated, stamp duty or MST will be payable on the subsequent transfer of the 

shares. An acquisition of shares from the Depositary in exchange for ADSs representing the shares will also render an investor liable to South African stamp 

duty or MST at the same rate as stamp duty or MST on a subsequent transfer of shares, upon the registration of the investor as the holder of shares on the 

company's register. 

Secondary Tax on Companies ("STC") 

This tax is paid by companies at the flat rate of 12.5% in respect of the amount of dividends declared by the company less all dividends which accrue to 

the company (but subject to certain exclusions) during its relevant "dividend cycle". "Dividend cycle" means the period commencing on the date following the 

date of accrual to a company's shareholders of the last dividend declared by that company and ending on the date on which the dividend in question accrues to 

the shareholder concerned. When a company derives profits from sources within and outside South Africa, STC on dividends declared by that company is 

calculated on the amount which bears to the net amount of the dividend, the same ratio as the sum of the net annual profits derived from— 

• 

• 

• 

South African sources or deemed South African sources; 

foreign sources which are not exempt from tax by virtue of them being subject to tax at certain prescribed rates (27% in respect of non-capital 

gains and 13.5% in respect of capital gains) in designated countries; and 

bears to its total net annual profits from all sources (which net annual profits exclude profits earned by way of dividends, other than taxable 

foreign dividends). An excess of dividends accruing to a company over dividends paid may be carried forward to subsequent dividend cycles as a 

STC credit. 

The imposition of STC effectively means that a dual corporate tax system exists in South Africa comprising a normal income tax and STC. Liability for 

STC is determined independently from normal income tax. Accordingly, a company without a normal tax liability may have a liability for STC, and vice 

versa, and may be liable for both normal tax and STC. Capitalisation shares awarded to shareholders as part of the equity share capital of a company by 

transferring reserves or undistributed profits to the company's equity share capital do not incur STC and it has become common practice for listed South 

African companies to offer capitalisation shares forming part of the equity share capital of a company in lieu of cash dividends. The capitalization shares must 

carry the right to participate to an unlimited extent in the dividends or capital of the company in order to constitute equity share capital. However, any amount 

transferred from reserves (excluding any share premium account) or undistributed profits to the equity share capital of a company is, in principle, deemed to 

be profits available for distribution to shareholders and may constitute a dividend (ie be subject to STC) on a subsequent partial reduction or redemption of 

capital, or upon reconstruction or liquidation of the company. Capitalisation shares 

94 

which do not qualify as equity shares and are awarded by a transfer of reserves or undistributed profits (other than the share premium account) are regarded as 

dividends and, as such, attract STC. Taxable foreign dividends (as well as foreign dividends exempt by virtue of the underlying profits being imputed to the 

shareholder in terms of the controlled foreign entity legislation) no longer serve to reduce a company's STC liability.

A double taxation treaty between South Africa and the United States came into effect on December 15, 1997 and was promulgated under Government 

Notice R. 1721 (Government Gazette 18553). 

United States 

Introduction 

This section, which represents the views of Cravath, Swaine & Moore, our US counsel, summarises the material US Federal income tax consequences to 

holders of our ordinary shares and ADSs as of the date of this Annual Report. The summary applies to you only if you hold our ordinary shares or ADSs, as 

applicable, as a capital asset for tax purposes (that is, for investment purposes). The summary does not cover state, local or foreign law. This summary is 

based in part upon representations of the Depositary made to Sappi and the assumption that each obligation in the Deposit Agreement and any related 

agreements will be performed in accordance with its terms. In addition, this summary does not apply to you if you are a member of a class of holders subject 

to special rules, such as: 

• 

• 

• 

• 

• 

• 

• 

• 

• 

a dealer in securities or currencies; 

a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings; 

a bank; 

a life insurance company; 

a tax-exempt organisation; 

a person that holds our ordinary shares or ADSs as part of a straddle or a hedging, integrated, constructive sale or conversion transaction for tax 

purposes; 

a person whose functional currency for tax purposes is not the US dollar; 

a person liable for alternative minimum tax; or 

a person that owns, or is treated as owning, 10% or more of any class of our ordinary shares. 

For purposes of the discussion below, you are a "US holder" if you are a beneficial owner of our ordinary shares or ADSs who or which is: 

• 

• 

• 

an individual US citizen or resident alien; 

a corporation, or entity taxable as a corporation, that was created under US law (federal or state); or 

an estate or trust whose worldwide income is subject to US Federal income tax. 

If you are not a US holder, you are a "Non-US holder" and the discussion below titled "-US Federal Income Tax Consequences to Non-US Holders" will 

apply to you. 

If a partnership holds our ordinary shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and upon the 

activities of the partnership. If you are a partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisor. 

US Federal Income Tax Consequences to US Holders 

95 

ADSs. In general, for US Federal income tax purposes, US Holders of ADRs will be treated as the beneficial owners of the ordinary shares underlying 

those ADSs. 

Distributions. The gross amount of any distribution (other than in liquidation), including the fair market value of all distributions of ordinary shares 

whenever a holder may elect to receive cash distributions in lieu of ordinary share distributions, that you receive with respect to our ordinary shares or ADSs 

(before reduction for South African income tax, if any, withheld from such distributions) generally will be includible in your gross income on the day on 

which you, in the case where you own ordinary shares, or the Depositary, in the case where you own ADSs, receive the distribution. This distribution will be 

taxed to you as a dividend (that is, ordinary income) to the extent such distribution does not exceed our current or accumulated earnings and profits, as 

calculated for US Federal income tax purposes ("E&P"). To the extent any distribution exceeds our E&P, the distribution will first be treated as a tax-free 

return of capital to the extent of your adjusted tax basis in our ordinary shares or ADSs, as applicable, and will be applied against and reduce such basis on a 

dollar-for-dollar basis (thereby increasing the amount of gain and decreasing the amount of loss recognised on a subsequent disposition of such ordinary 

shares or ADSs). To the extent that such distribution exceeds your adjusted tax basis, the distribution will be taxed as gain recognised on a sale or exchange of 

our ordinary shares or ADSs, as applicable. See "—Sale or Other Disposition of Company Ordinary Shares and ADSs", below. Because we are not a US 

corporation, no dividends-received deduction will be allowed with respect to dividends paid by us. 

Distributions on the ordinary shares and ADSs are expected to be made by Sappi Limited in US dollars, to the extent necessary. In the event that 

distributions on the ordinary shares and ADSs are made by Sappi Limited in Rand, any dividends paid in Rand generally will be includible in your gross 

income in a US dollar amount calculated by reference to the exchange rate in effect on the day you, in the case of ordinary shares, or the Depositary, in the 

case of ADSs, receive the dividend. It is anticipated that the Depositary will, in the ordinary course, convert Rand received by it as distributions on the ADSs 

into US dollars. To the extent that the Depositary does not convert the Rand into US dollars at the time that you are required to take the distribution into your

gross income for US Federal income tax purposes, you may recognise foreign exchange gain or loss, taxable as ordinary income or loss, on the later 

conversion of the Rand into US dollars. The gain or loss recognised will generally be based upon the difference between the exchange rate in effect when the 

Rand are actually converted and the "spot" exchange rate in effect at the time the distribution is taken into account. 

Dividends paid by Sappi Limited will generally be treated as foreign source income for US foreign tax credit limitation purposes. Subject to certain 

limitations, US holders may elect to claim a foreign tax credit against their US Federal income tax liability for South African tax withheld (if any) from 

dividends received in respect of our ordinary shares or ADSs, as applicable. The limitation on foreign taxes eligible for credit is calculated separately with 

respect to specific classes of income. For this purpose, dividends paid by us in respect of our ordinary shares or ADSs, as applicable, generally will be 

"passive income" or, in the case of certain types of US holders, "financial services income" and therefore any US tax imposed on these dividends cannot be 

offset by excess foreign tax credits that you may have from foreign source income not qualifying as passive income or financial service income, respectively. 

US holders that do not elect to claim a foreign tax credit may instead claim a deduction for South African tax withheld (if any). 

Sale or Other Disposition of Company Ordinary Shares and ADSs. Subject to the discussion of "passive foreign investment companies" below, 

generally speaking, in connection with the sale or other taxable disposition of our ordinary shares or ADSs, as applicable: 

• 

• 

• 

• 

you will recognise gain or loss equal to the difference (if any) between: 

the US dollar value of the amount realised on such sale or other taxable disposition; and 

your adjusted tax basis in such ordinary shares or ADSs; 

96 

any gain or loss will be capital gain or loss and will be long-term capital gain or loss if your holding period for our ordinary shares or ADSs, as 

applicable, is more than one year at the time of such sale or other taxable disposition; 

any gain or loss will generally be treated as having a United States source for United States foreign tax credit purposes; and 

your ability to deduct capital losses (if any) is subject to limitations. 

If you are a cash basis US holder who receives foreign currency (e.g., Rand) in connection with a sale or other taxable disposition of our ordinary shares 

or ADSs, as applicable, the amount realised will be based on the US dollar value of the foreign currency received with respect to such ordinary shares or 

ADSs, as determined on the settlement date of such sale or other taxable disposition. 

If you are an accrual basis US holder, you may elect the same treatment required of cash basis taxpayers with respect to a sale or other taxable 

disposition of our ordinary shares or ADSs, as applicable, provided that the election is applied consistently from year to year. Such election may not be 

changed without the consent of the Internal Revenue Service. If you are an accrual basis US holder and do not elect to be treated as a cash basis taxpayer 

(pursuant to the Treasury Regulations applicable to foreign currency transactions) for this purpose, you may have a foreign currency gain or loss for US 

Federal income tax purposes because of differences between the US dollar value of the foreign currency received prevailing on the date of the sale or other 

taxable disposition of our ordinary shares or ADSs, as applicable, and the date of payment. Any such currency gain or loss generally will be treated as 

ordinary income or loss and would be in addition to gain or loss, if any, that you recognised on the sale or other taxable disposition of our ordinary shares or 

ADSs, as applicable. 

You may incur South African stamp duty or MST in connection with a subsequent registration of transfer of ordinary shares. See "—South Africa— 

Stamp Duty on the Shares". In such case, stamp duty or MST, as applicable will not be a creditable tax for US foreign tax credit purposes, but will be 

deductible. In the case of an individual US holder, such deduction will be subject to specified limits on the deductibility of investment expenses. 

Passive Foreign Investment Company. US holders (who are not tax-exempt) would be subject to a special, adverse tax regime (that would differ in 

certain respects from that described above) if we were or were to become a passive foreign investment company for US Federal income tax purposes. 

Although the determination of whether a corporation is a passive foreign investment company is made annually, and thus may be subject to change, we do not 

believe that we are, nor do we expect to become, a passive foreign investment company. Notwithstanding the foregoing, we urge you to consult your own US 

tax advisor regarding the adverse US Federal income tax consequences of owning the stock of a passive foreign investment company and of making certain 

elections designed to lessen those adverse consequences. 

US Federal Income Tax Consequences to Non-US Holders 

Distributions. If you are a Non-US holder, you generally will not be subject to US Federal income tax on distributions made on our ordinary shares or 

ADSs unless: 

• 

• 

• 

• 

you conduct a trade or business in the United States; and 

the dividends are effectively connected with the conduct of that trade or business (and, if an applicable income tax treaty so requires as a 

condition for you to be subject to US Federal 

97 

income tax on a net income basis in respect of income from our ordinary shares or ADSs, as applicable, such dividends are attributable to a 

permanent establishment that you maintain in the United States).

If you fail the above test, you generally will be subject to tax in respect of such dividends in the same manner as a US holder, as described above. In 

addition, any effectively connected dividends received by a non-US corporation may also, under certain circumstances, be subject to an additional "branch 

profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. 

Sale or Other Disposition of Company Ordinary Shares and ADSs. If you are a Non-US holder, you will not be subject to US Federal income tax, 

including withholding tax, in respect of gain recognised on a sale or other taxable disposition of our ordinary shares or ADSs, as applicable, unless: 

• 

• 

your gain is effectively connected with a trade or business that you conduct in the United States (and, if an applicable income tax treaty so 

requires as a condition for you to be subject to US Federal income tax on a net income basis in respect of gain from the sale or other disposition 

of our ordinary shares or ADSs, as applicable, such gain is attributable to a permanent establishment maintained by you in the United States) or 

you are an individual and are present in the United States for at least 183 days in the taxable year of the sale or other disposition, and either: 

your gain is attributable to an office or other fixed place of business that you maintain in the United States; or 

you have a tax home in the United States. 

Effectively connected gains realised by a non-US corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 

rate of 30% or such lower rate as may be specified by an applicable income tax treaty. 

Backup Withholding and Information Reporting 

Payments and sale proceeds in respect of our ordinary shares or ADSs, as applicable that are made in the United States or by a US related financial 

intermediary may be subject to US information reporting rules. You will not be subject to "backup" withholding of US Federal income tax provided that: 

• 

• 

you are a corporation or other exempt recipient; or 

you provide a taxpayer identification number (which, in the case of an individual, is his or her social security number) and meet other 

information reporting and certification requirements. 

If you are a non-US holder, you generally are not subject to information reporting and backup withholding, but you may be required to provide a 

certification of your non-US status in order to establish that you are exempt. You may be subject to backup withholding if you sell your ordinary shares or 

ADSs through a US broker and you may be subject to information reporting, but not backup withholding if you sell your shares or ADSs through a broker 

with certain connections with the US. 

Amounts withheld under the backup withholding rules may be credited against your US Federal income tax liability, and you may obtain a refund of any 

excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service. 

Documents on Display 

The documents concerning Sappi Limited referred to in this Annual Report may be inspected at the registered office of Sappi Limited at 48 Ameshoff 

Street, Braamfontein, Johannesburg, Republic of South Africa. 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

The principal market risks (that is, the risk of loss arising from adverse changes in market rates and prices) to which Sappi is exposed are: 

• 

• 

• 

• 

interest rates on non-current borrowings; 

foreign exchange rates, generating translation and transaction gains and losses; 

credit risk; and 

commodity prices, affecting the cost of products. 

For a detailed description of interest rate risk, currency risk, credit risk, interest bearing debt, interest rate derivatives, fair values and foreign currency 

exchange, see note 33 to our Group annual financial statements included elsewhere in this Annual Report. 

Commodity Price Risk 

• 

• 

98 

The selling prices of the majority of products manufactured and purchase prices of many raw materials used generally fluctuate in line with commodity 

cycles. Prices of dissolving pulp generally follow those of paper pulp, although the cycle is generally less volatile. As a result, the sale of dissolving pulp also 

tends to act as a natural hedge for paper pulp. Our total pulp production capacity is over 100% of our total pulp requirements. However, there are differences 

between the types of pulp required in our paper making operations and the grades of pulp we produce, as well as regional differences. We are therefore a 

buyer as well as a seller of paper pulp. Other than maintaining a high level of pulp integration, no hedging techniques are applied. For a description of our 

level of pulp integration, see "Item 4—Information on the Company—The Pulp and Paper Industry—Pulp", "Item 4—Information on the Company— 

Business Overview—Sappi Fine Paper", "Item 4—Information on the Company—Business Overview—Supply Requirements" and "Item 5—Operating and

Financial Review and Prospects—Operating Results—Markets". Despite our present relatively high level of pulp integration on a Group-wide basis, in the 

event of significant increases in the prices of pulp integration on a Group-wide basis, our non-integrated and partially integrated operations could be adversely 

affected if they are unable to raise paper prices by amounts sufficient to maintain margins. 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 


99 

PART II 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 


ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 


ITEM 15. CONTROLS AND PROCEDURES 

As of a date (the "Evaluation Date") within 90 days prior to the date of this report, Sappi conducted an evaluation, (under the supervision and with the 

participation of its management, including the chief executive officer and chief financial officer), pursuant to Rule 13a-15 promulgated under the Securities 

Exchange Act of 1934, as amended (the "Exchange Act"), of the effectiveness of the design and operation of its disclosure controls and procedures. Based on 

this evaluation, Sappi's chief executive officer and chief financial officer concluded that as of the Evaluation Date such disclosure controls and procedures 

were reasonably designed to ensure that information required to be disclosed by Sappi in reports it files or submits under the Exchange Act is recorded, 

processed, summarised and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. 

Since the last evaluation by Sappi's management of Sappi's internal controls, there have not been any significant changes in the internal controls or in 

other factors that could significantly affect the internal controls. 

ITEM 16. [Reserved] 

ITEM 17. FINANCIAL STATEMENTS 

100 

PART III 

Sappi Limited is furnishing financial statements pursuant to the instructions of Item 18 of Form 20-F. 

ITEM 18. FINANCIAL STATEMENTS 

The following Group annual financial statements and schedules are filed as part of this Annual Report, together with the Report of the Independent 

Auditors: 

Group Annual Financial Statements of Sappi Limited 

Report of the Independent Auditors to the Board of Directors and Shareholders of Sappi Limited 

Group Income Statement for the years ended September 2002, 2001 and 2000 

Group Balance Sheet at September 2002 and 2001 

Group Cash Flow Statement for the years ended September 2002, 2001 and 2000 

Group Statement of Changes in Shareholders' Equity for the years ended September 2002, 2001 and 2000 

Notes to the Group Annual Financial Statements

Group Annual Financial Statement Schedule 

Schedule II—Valuation and Qualifying Accounts 

All other schedules are omitted because they are not applicable or because the required information is contained in the Group annual financial statements 

or notes thereto. 

ITEM 19. EXHIBITS 

101 

1.1 Memorandum and Articles of Association of Sappi Limited, as amended and restated on March 4, 1999, incorporated by reference to Exhibit 1.1 to 

the 1998 Annual Report on Form 20-F of Sappi Limited filed with the Securities and Exchange Commission on March 29, 1999. 

1.2 Special Resolution of Sappi Limited dated March 2, 2000 pursuant to the South African Companies Act effecting certain amendments to the 

Articles of Association of Sappi Limited, incorporated by reference to Exhibit 1.1 to the 1999 Annual Report on Form 20-F of Sappi Limited filed 

with the Securities and Exchange Commission on March 23, 2000. 

2.1 Specimen Ordinary Share Certificate, incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 20-F of Sappi Limited filed 

with the Securities and Exchange Commission on October 22, 1998. 

2.2 Amended and Restated Deposit Agreement among Sappi Limited, The Bank of New York, as depositary, and the Owners from time to time of 

American Depositary Receipts dated October 26, 1999. 

2.3 Form of American Depositary Receipt (included in Exhibit 2.2). 

2.4 Supplemental Shareholders' Agreement dated November 19, 1999, between Buhrmann NV, Buhrmann International BV and Sappi Limited, 

incorporated by reference to Exhibit 4.1 to the 1999 Annual Report on Form 20-F of Sappi Limited filed with the Securities and Exchange 

Commission on March 23, 2000. 

2.5 Amendment Agreement dated June 30, 2000, between Buhrmann NV, Leykam-Mürztaler Papier und Zellstoff AG (now named Sappi Papier 

Holding AG) and Sappi Limited, to the Supplemental Agreement Relating to the Sale and Purchase of Shares in KNP Leykam Holding SA and 

Leykam-Mürztaler Papier und Zellstoff AG of November 15, 1997, incorporated by reference to Exhibit 2.1 to the 2000 Annual Report on 

Form 20-F of Sappi Limited filed with the Securities and Exchange Commission on January 19, 2001. 

2.6 Long-term debt instruments not exceeding 10% of our total assets. Sappi Limited undertakes to provide the Securities and Exchange Commission 

with copies upon request. 

4.1 Sappi Limited Share Incentive Scheme, incorporated by reference to Exhibit 3.12 to the Registration Statement on Form 20-F of Sappi Limited 

filed with the Securities and Exchange Commission on October 22, 1998. 

4.2 Form of Deed of Amendment to The Sappi Limited Share Incentive Scheme dated January 19, 1998 between Sappi Limited, David Charles Brink 

and Thomas Louw de Beer, incorporated by reference to Exhibit 2.1 to the 1999 Annual Report on Form 20-F of Sappi Limited filed with the 

Securities and Exchange Commission on March 23, 2000. 

4.3 Second Deed of Amendment to The Sappi Limited Share Incentive Scheme dated March 2, 2000 between Sappi Limited, David Charles Brink and 

Thomas Louw de Beer, incorporated by reference to Exhibit 2.2 to the 1999 Annual Report on Form 20-F of Sappi Limited filed with the 

Securities and Exchange Commission on March 23, 2000. 

4.4 Agreement among KNP Leykam Zellstoff GmbH, Norske Skog Bruck GmbH, Patria Papier und Zellstoff AG and Zellstoff Pöls AG dated 

December 17, 1996, incorporated by reference to Exhibit 3.13 to the Registration Statement on Form 20-F of Sappi Limited filed with the 

Securities and Exchange Commission on October 22, 1998. 

4.5 Merchanting Agreement between N.V. Koninklijke KNP BT (now Buhrmann NV) and Sappi Limited dated December 31, 1997, incorporated by 

reference to Exhibit 3.14 to the Registration Statement on Form 20-F of Sappi Limited filed with the Securities and Exchange Commission on 

October 22, 1998. 

102 

4.6 Agreement for the Supply of Woodpulp among Speciality Pulp Trading Company Limited, Woodcourt Supplies Limited, Sappi Saiccor 

(Proprietary) Limited and Courtaulds plc dated March 9, 1998, incorporated by reference to Exhibit 3.15 to the Registration Statement on Form 20- 

F of Sappi Limited filed with the Securities and Exchange Commission on October 22, 1998. 

4.7 Contract of Sale between the South African Forestry Company Limited (SAFCOL) and Sappi Manufacturing (Pty) Limited dated May 12, 1995, 

incorporated by reference to Exhibit 3.16 to the Registration Statement on Form 20-F of Sappi Limited filed with the Securities and Exchange 

Commission on October 22, 1998. 

4.8 Credit Facility, dated July 11, 2001, among Sappi Papier Holding AG as borrower, Sappi International S.A. as guarantor, ABN AMRO Bank N.V., 

Citibank International plc and JP Morgan plc as lead arrangers, Citibank International plc as agent and various financial institutions as lenders, 

incorporated by reference to Exhibit 4.8 to the Registration Statement on Form 20-F of Sappi Limited filed with the Securities and Exchange 

Commission on December 27, 2002. 

4.9 Asset Purchase Agreement between Potlatch Corporation and Northern Holdings LLC (renamed Sappi Cloquet LLC) dated March 18, 2001. 

6.1 Computation of Earnings Per Share, incorporated by reference to note 8 of the notes to the Group annual financial statements included elsewhere in 

this Annual Report. 

7.1 An explanation of other ratios used in this Annual Report, incorporated by reference to Exhibit 7.1 to the Registration Statement on Form 20-F of 

Sappi Limited filed with the Securities and Exchange Commission on December 27, 2002. 

8.1 List of significant subsidiaries, incorporated by reference to "Item 4—Information on the Company—Organisational Structure" included elsewhere 

in this Annual Report. 

103 

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorised the undersigned to 

sign this annual report on its behalf. 

SAPPI LIMITED 

Date: December 30, 2002 By: /s/ DONALD WILSON 

I, Eugene van As, certify that: 

1. 

2. 

3. 

4. 

5. 

6. 

I have reviewed this annual report on Form 20-F of Sappi Limited; 

104 

Donald Wilson 

Executive Director—Finance 

Certification Pursuant To 

Section 302 of The Sarbanes-Oxley Act of 2002 

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make 

the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this 

annual report; 

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects 

the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in 

Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: 

a) 

b) 

c) 

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated 

subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; 

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual 

report (the "Evaluation Date"); and 

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of 

the Evaluation Date; 

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee 

of registrant's Board of Directors (or persons performing the equivalent function): 

a) 

b) 

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, 

summarise and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 

and 

The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or 

in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions 

with regard to significant deficiencies and material weaknesses. 

DATE: DECEMBER 30, 2002 

105 

By: /s/ EUGENE VAN AS 

Eugene van As 

Executive Chairman 

Certification Pursuant To 

Section 302 of The Sarbanes-Oxley Act of 2002

I, Donald Wilson, certify that: 

1. 

2. 

3. 

4. 

5. 

6. 

I have reviewed this annual report on Form 20-F of Sappi Limited; 

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make 

the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this 

annual report; 

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects 

the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in 

Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: 

a) 

b) 

c) 

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated 

subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; 

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual 

report (the "Evaluation Date"); and 

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of 

the Evaluation Date; 

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee 

of registrant's Board of Directors (or persons performing the equivalent function): 

a) 

b) 

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, 

summarise and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 

and 

The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or 

in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions 

with regard to significant deficiencies and material weaknesses. 

Date: December 30, 2002 By: /s/ DONALD WILSON 

Group Annual Financial Statements 

106 

SAPPI 

Donald Wilson 

Executive Director—Finance 

Report of the Independent Auditors to the Board of Directors and Shareholders of Sappi Limited F-2 

Group Income Statement for the years ended September 2002, 2001 and 2000 F-3 

Group Balance Sheet at September 2002 and 2001 F-4 

Group Cash Flow Statement for the years ended September 2002, 2001 and 2000 F-5 

Group Statement of Changes in Shareholders' Equity for the years ended September 2002, 2001 and 2000 F-6 

Notes to the Group Annual Financial Statements F-7 

Group Financial Statement Schedule 

Page

Schedule II—Valuation and Qualifying Accounts S-1 

F-1 

REPORT OF THE INDEPENDENT AUDITORS 

TO THE BOARD OF DIRECTORS AND 

SHAREHOLDERS OF SAPPI LIMITED 

We have audited the accompanying consolidated balance sheets of Sappi Limited and subsidiaries as at September 2002 and 2001, and the related 

consolidated income statements, cash flow statements and statements of changes in shareholders' equity for the years ended September 2002, 2001 and 2000. 

Our audit also included the financial statement schedule attached to the consolidated financial statements. These financial statements and financial statement 

schedule are the responsibility of the Company's Directors. Our responsibility is to express an opinion on these financial statements and financial statement 

schedule based on our audits. 

SCOPE 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan 

and perform the audit to obtain reasonable assurance about whether 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 audits provides a reasonable basis for our opinion. 

AUDIT OPINION 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Sappi Limited 

and subsidiaries at September 2002 and 2001 and the results of their operations and cash flows for the years ended September 2002, 2001 and 2000 in 

conformity with accounting principles generally accepted in South Africa. Also, in our opinion, such financial statement schedule, when considered in relation 

to the basic consolidated financial statements take as a whole, presents fairly in all material respects the information set forth therein. 

Accounting principles generally accepted in South Africa differ in certain respects from accounting principles generally accepted in the United States of 

America. A description of the differences and the effects of those differences are set out in note 38 to the consolidated financial statements. 

Deloitte & Touche 

Registered Accountants & Auditors 

Chartered Accountants 

Johannesburg, South Africa 

December 30, 2002 

F-2 


GROUP INCOME STATEMENT 

for the year ended September 2002 

note 



(US$ million) 

Sales 3,729 4,184 4,718 

Cost of sales 3,008 3,375 3,650 

Gross profit 721 809 1,068 

Selling, general and administrative expenses 3 332 363 396 

Operating profit 4 389 446 672 

Non-trading loss 5 17 207 2 

Net finance costs 6 74 92 97 

Profit before taxation 298 147 573 

Taxation 7 78 9 197 


Profit after taxation 220 138 376 

Income attributable to minority interests — — 13 

Net profit for the year 220 138 363 

Weighted average number of ordinary shares in issue (millions) 230.2 232.8 236.9 

Basic earnings per share (US cents) 8 95 59 153 

Diluted earnings per share (US cents) 8 94 59 151 

Dividends per share (US cents)—declared after year end 28 26 25 

F-3 

Assets 


GROUP BALANCE SHEET 

at September 2002 

note 


(US$ million) 

Non-current assets 3,639 3,344 

Property, plant and equipment 9 3,189 2,890 

Plantations 298 324 

Deferred taxation 10 6 4 

Other non-current assets 11 146 126 

Current assets 1,002 1,160 

Cash and cash equivalents 161 445 

Trade and other receivables 12 320 202 

Inventories 13 521 513 

Total assets 4,641 4,504 

Equity and liabilities 

Shareholders' equity 1,601 1,503 

Ordinary share capital and share premium 14 1,854 1,854 

Non-distributable reserves 15 (1,057) (1,005) 

Distributable reserves 804 654 

Minority interest 2 3 

Non-current liabilities 2,110 1,638 

Interest-bearing borrowings 16 1,455 1,012 

Deferred taxation 10 399 385 

Other non-current liabilities 17 256 241 

Current liabilities 928 1,360 

Interest-bearing borrowings 16 120 489 

Overdraft 5 70 

Trade and other payables 709 672 

Taxation payable 48 48 

Provisions 18 46 81 

Total equity and liabilities 4,641 4,504 

F-4 


GROUP CASH FLOW STATEMENT 



note 



US$ million 

Cash retained from operating activities 450 543 789 

Cash generated from operations 19 744 771 1,048 

—(Increase) decrease in working capital 20 (42) 51 (61) 

Cash generated from operating activities 702 822 987 

—Finance costs paid (126) (156) (182) 

—Interest income 23 31 38 

—Taxation paid 21 (89) (94) (12) 

Cash available from operating activities 510 603 831 

—Dividends paid 22 (60) (60) (42) 

Cash utilised in investing activities (701) (303) (68) 

Investment to maintain operations (123) (166) 24 

—Replacement of non-current assets 23 (110) (182) (161) 

—Proceeds on disposal of non-current assets 24 3 2 37 

—Proceeds on disposal of businesses 25 — 2 57 

—(Increase) decrease in investments and loans (16) 12 91 

Investment to expand operations (578) (137) (92) 

—Additions of non-current assets (95) (137) (92) 

—Acquisition of net assets 26 (483) — — 

Cash effects of financing activities (29) (90) (564) 

Proceeds from interest-bearing borrowings 831 402 1,023 

Repayment of interest-bearing borrowings (769) (380) (1,510) 

Decrease in other non-current liabilities (14) (8) (38) 

Redemption of minority interests — (1) (126) 

(Share buybacks) 2000: proceeds of issuance of ordinary shares (12) (94) 114 

Decrease in bank overdrafts (65) (9) (27) 

Net movement in cash and cash equivalents (280) 150 157 

Cash and cash equivalents at beginning of year 445 294 164 

Translation effects (4) 1 (27) 

Cash and cash equivalents at end of year 161 445 294 

This Cash Flow Statement is prepared in conformity with IAS 7. 

Note: Cash interest paid 122 153 213 

F-5 


GROUP STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 

Number of 

ordinary shares 


Ordinary share 

capital 

Share 

premium 

Ordinary share 

capital and 

share premium 

(US$ million) 

Non-distributable 

reserves 

Distributable 

reserves 

Balance—September 1999 224.6 103 1,720 1,823 (654) 267 1,436 

Net profit for the year — — — — — 363 363 

Transfer from distributable 

reserves — — — — 1 (1) — 

Foreign currency translation 

reserve — — — — (248) — (248) 

Dividends—US$ 0.19 per share * — — — — — (45) (45) 

Issuance of ordinary shares 14.5 2 112 114 — — 114 

Goodwill written off to equity — — — — 7 (9) (2) 

Balance—September 2000 239.1 105 1,832 1,937 (894) 575 1,618 


Total

Net profit for the year — — — — — 138 138 


reserves — — — — 7 (7) — 


reserve — — — — (118) — (118) 

Gain on revaluation of derivative 

instruments — — — — — 8 8 

Dividends—US$ 0.25 per share * — — — — — (60) (60) 

Share buybacks less transfers to 

Share Purchase Trust (9.6) (1) (82) (83) — — (83) 

Balance—September 2001 229.5 104 1,750 1,854 (1,005) 654 1,503 

Net profit for the year — — — — — 220 220 


reserves — — — — 10 (10) — 


reserve — — — — (62) — (62) 

Gain on revaluation of derivative 

instruments — — — — — 8 8 

Loss on revaluation of derivative 

instruments — — — — — (5) (5) 

Dividends—US $0.26 per share * — — — — — (60) (60) 

Share buybacks less transfers to 

Share Purchase Trust 0.7 — — — — (3) (3) 

Balance—September 2002 

Note reference: 

* 

230.2 104 1,750 1,854 (1,057) 804 1,601 

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

1. BUSINESS 

F-6 


NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 


Sappi 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 woodfree paper and dissolving pulp and the largest forest products company in Africa. The Group has manufacturing facilities in eight countries, on 

three 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 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. Sappi Papier Holding AG owns 

the Group's fine paper business in Europe and North America, and the trading business in Hong Kong. The worldwide activities of the fine paper group are 

co-ordinated from the Sappi Fine Paper offices in London. Sappi Forest Products, based in South Africa, produces commodity paper products, pulp and forest 

and timber products for southern Africa and export markets. 

2. ACCOUNTING POLICIES 

Basis of preparation 

These financial statements have been prepared in conformity with South African Statements of Generally Accepted Accounting Practice (SA GAAP). 

(Refer to note 38 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. 

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 generally accepted accounting practice 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 

14 

15

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. The Group believes that the following accounting policies are critical due to 

the degree of estimation required. 

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 plan amendments 

and changes in actuarial assumptions such as discount rate, expected long-term rate of return on plan assets, 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 

F-7 

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. 

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. 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. 

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. 

Accordingly, actual outcomes could vary significantly from such estimates. Factors such as changes in the planned use of buildings, machinery or equipment 

or closing of facilities or lower than anticipated sales for products could result in shortened 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. In addition, further changes in the economic and business 

environment can impact our original and ongoing assessments of potential impairment. 

Plantations. We state our plantations at the lower of cost less depletions and realisable value. Cost includes all expenditure incurred on acquisition, 

forestry development, establishment and maintenance of plantations, and finance charges. Depletions include the cost of timber felled, including finance 

charges, which is determined on the average method, plus amounts written off standing timber to cover loss or damage caused, for example, by fire, disease 

and stunted growth. Assumptions and estimates are used in the recording of plantation cost and depletion. Changes in the assumptions or estimates used in 

these calculations may affect the Group's results, in particular, plantation and depletion costs. The South African Accounting Practices Board issued a new 

statement AC 137 Agriculture in November 2001. This statement becomes operative for annual financial statements covering periods beginning on or after 1 

January 2003. The objective of this statement is to prescribe the accounting treatment, financial statement presentation and disclosures related to agricultural 

activity. The Group will adopt AC 137 when it becomes effective and is currently evaluating the effects of the statement. 

F-8 

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. 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. Where management believes that it is more likely than not that the deferred tax assets will be realised through the recognition of future taxable income, 

deferred tax assets have been recognised. Although the deferred tax assets for which valuation allowances have not been provided 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. We use derivative instruments in the normal course of business to manage our exposure to fluctuations in 

interest and foreign currency rates. Derivative instruments may be designated as hedges of the exposure to variability in cash flows attributable to a forecasted 

transaction. 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 materially 

affect our reported net income. 

Provisions. Provisions are recorded when the Group has a present legal or constructive obligation as a result of past events, for which 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. 

The establishment of the provisions requires significant judgement by management related to the amounts to be recorded and the likelihood of future 

payment. If the amounts vary from these initial provisions the provisions may be revised materially, up or down, based on the facts.

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 and results 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. 

Intercompany profits, transactions and balances have been eliminated. 

Investment in associates 

F-9 

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 

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. 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. 

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. Current estimates of goodwill's useful life do not exceed 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. 

Fiscal year 

The Group's financial years end on the Sunday closest to the last day of September. Until September 2000, the financial year end was the closest 

Wednesday. These financial years ended on 29 September 2002 ("year ended September 2002"), 30 September 2001 ("year ended September 2001") and 

27 September 2000 ("year ended September 2000"). 

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. 

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 

F-10 

Leased assets 

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. 

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 liability. This liability is 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. 

Plantations 

Plantations are stated at the lower of cost less depletions and realisable value. Cost includes all expenditure incurred on acquisition, forestry 

development, establishment and maintenance of plantations, and finance charges. 

Depletions include the cost of timber felled, including finance charges plus amounts written off standing timber to cover loss or damage caused, for 

example, by fire, disease and stunted growth.

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. 

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 cashgenerating 

unit exceeds its recoverable amount. 

F-11 

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. 

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. 

Inventories 

Inventories are valued at the lower of cost, determined on the first-in-first-out ("FIFO") basis, 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. 

Share repurchases 

Shares repurchased by the 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. 

Deferred taxation 

Deferred taxation is provided 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. 

F-12 

A deferred tax asset is recognised to the extent that it is probable (more likely than not) that future taxable profits will be available against which the 

associated unused tax losses and deductible temporary differences can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable 

that the related tax benefit will be realised.

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. 

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. 

The Group used the following exchange rates for financial reporting purposes: 

Selected currencies 

September 2002 

Rate at 


ZAR to one US$ 10.5400 8.9386 

GBP to one US$ 0.6427 0.6796 

EUR to one US$ 1.0216 1.0909 


Average annual rate 



ZAR to one US$ 10.5393 7.9574 6.5472 

GBP to one US$ 0.6800 0.6945 0.6371 

EUR to one US$ 1.0884 1.1293 1.0288 

F-13 

Environmental expenditures and liabilities 

Environmental expenditures that pertain to current operations or relate to future revenues are expensed or capitalised consistent with the Group'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 reasonably 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 reasonably 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 Group's potential share of the remediation costs by reference to the known or estimated volume of the Group'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. 

Revenue recognition 

Revenue is the net sales value of all products sold to third parties after the deduction of rebates (trade discounts) and customer returns (generally relates 

to damaged goods, incorrect product specifications and quality issues); and excludes value added tax. 

Revenue is recognised when risks and rewards of ownership 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 

domestic and regional shipments, transfer occurs at point of offloading the shipment into the customer warehouse. Whereas, for the majority of overseas 

shipments transfer occurs at point of loading the deep sea vessel. 

Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. 

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. 

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.

Cash and cash equivalents 

Cash and cash equivalents consist of 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. 

Financial instruments 

Measurement 

F-14 

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 approximate fair value due to the short-term nature of these instruments, based on the relevant exchange rates at balance sheet 

date. 

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. 

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 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 

F-15 

hedges affecting future transactions, 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. 

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 current service cost in respect of defined benefit plans is recognised as an expense 

in the current period. 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. Past service costs are recognised 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. An asset is only recognised to the extent that the Group is able to get a refund or 

contribution holiday. 

Post employment benefits—medical

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. 

Non-trading income or loss 

The Group's policy is to show separately, as other non-trading income or loss, certain items that are of such size, nature or incidence that their separate 

disclosure is relevant to explain the Group's performance and to make comparisons of operating margins more meaningful. 

Segment reporting 

F-16 

The primary business segments are Sappi Fine Paper and Sappi Forest Products. On a secondary segment basis, significant geographic regions have been 

identified. The basis of segment reporting is representative of the internal structure used for management reporting. 

Comparative figures 

Comparative figures have been regrouped or reclassed where necessary to give a more appropriate comparison. There has been no impact on previously 

reported net income or shareholders' equity. 

3. SELLING, GENERAL AND ADMINISTRATION EXPENSES 



(US$ million) 

Selling expenses 190 181 201 

Administration expenses 139 167 167 

Other general expenses 3 15 28 

4. OPERATING PROFIT 

Operating profit is arrived at after taking into account the items detailed below: 



332 363 396 


(US$ million) 

Leasing charges for premises 13 15 15 

Leasing charges for plant and equipment on operating leases 39 41 42 

Remuneration paid other than to bona fide employees of the Group in respect of: 21 48 46 

—technical services 6 22 20 

—administration services 15 26 26 

Auditors' remuneration: 6 5 5 

—fees for audit 3 3 3 

—fees for other services 3 2 2 

Research and development costs 20 20 22 

Employee costs 692 707 769 

F-17 

5. NON-TRADING LOSS 



(US$ million) 

Profit on sale of business — (2) (21) 

Loss (profit) on sale of property, plant and equipment 3 2 (4) 

Restructuring costs (7) 3 5 



Mill closure costs 9 183 — 

Asset impairment 4 6 8 

Deferred finance costs written off on early settlement of loans — 9 17 

Debenture redemption costs 10 — — 

Other (2) 6 (3) 

17 207 2 

Attributable tax (7) (77) (2) 

6. NET FINANCE COSTS 


10 130 — 


(US$ million) 

Gross interest and other finance costs 119 157 191 

Net foreign exchange gains (4) (1) (9) 

Net loss on marking to market of financial instruments 11 — — 

Interest received (23) (31) (38) 

Interest capitalised (29) (33) (47) 


74 92 97 

Gross interest capitalised 34 45 51 

Excess interest cost over recoverable amount—charged against net finance costs (5) (12) (4) 

Amortisation of previously capitalised interest—charged against operating profit (14) (15) (18) 

Net interest capitalised 15 18 29 

7. TAXATION 

Current taxation: 

Deferred taxation: 

F-18 



(US$ million) 

Current year 40 65 63 

Prior year (over) under provision (2) 19 9 

Other company taxes 14 4 1 

Current year 21 (58) 124 

Prior year 5 (18) — 

Attributable to a reduction in the taxation rate — (3) — 


78 9 197 

Due to the utilisation of previously unrecognised taxation losses, the taxation expense for the year has been reduced by: 11 22 33 

Reconciliation of the taxation rate: 

South African statutory taxation rate 30.0 30.0 30.0 

Foreign taxation rate differential (7.5) (17.1) 3.5 

Weighted average statutory taxation rate 22.5 12.9 33.5 

Non-taxable income (2.5) (18.2) (2.9) 

Effect of reduction in taxation rates — (2.1) — 

Deferred taxation asset not recognised 3.3 11.4 0.6 

Other taxes 1.9 1.0 0.1 

Prior year under provision 0.9 1.2 3.1 

Weighted average effective taxation rate 26.1 6.2 34.4 

8. EARNINGS PER SHARE 

% 

% 

%

Earnings 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. 

Net profit 

(US$ million) 


Shares 

(millions) 

Per share 

(US cents) 

Net profit 

(US$ million) 


Shares 

(millions) 

Per share 

(US cents) 

Net profit 

(US$ million) 


Shares 

(millions) 

Per share 

(US cents) 

Basic EPS 220 230.2 95 138 232.8 59 363 236.9 153 

Share options under 

Sappi share incentive 

scheme — 3.2 — — 2.4 — — 2.8 — 

Other share options — — — — — — 7 5.8 114 

Diluted EPS 220 233.4 94 138 235.2 59 370 245.5 151 

F-19 

The diluted EPS calculations exclude the effect of convertible guarantee notes (redeemed on 29 November 2001) and certain share options granted under 

the Sappi share incentive scheme as they would be anti-dilutive. 

Anti-dilutive elements are excluded from diluted EPS. If included anti-dilutive elements would increase the average number of shares to 235.5 million 

shares (September 2001: 250.4 million shares; September 2000: 254.6 million shares). 

9. PROPERTY, PLANT AND EQUIPMENT 


(US$ million) 


Land and buildings 

At cost 1,002 938 

Depreciation 413 376 

589 562 

Plant and equipment 

At cost 4,650 4,224 

Depreciation 2,324 2,048 

2,326 2,176 

Capitalised leased assets 

Plant & equipment at cost 616 461 

Depreciation 342 309 

274 152 

Aggregate cost 6,268 5,623 

Aggregate depreciation 3,079 2,733 

Aggregate book value 3,189 2,890 

The movement on property, plant and equipment is reconciled as follows: 

F-20 

Land and 

Buildings 

Plant and 

Equipment 


(US$ million) 

Capitalised 

leased assets 

Net book value at beginning of year 562 2,176 152 2,890 3,095 

Additions 13 165 2 180 293 

Acquired on acquisition of Cloquet 50 235 152 437 — 

Interest capitalised — 1 — 1 2 

Disposals (1) (5) — (6) (4) 

Total 


Total

Depreciation (28) (256) (26) (310) (300) 

Impairment (including Mobile closure) (4) — — (4) (114) 

Translation difference (3) 10 (6) 1 (82) 

Net book value at end of year 589 2,326 274 3,189 2,890 

Details of land and buildings are available at the registered offices of the respective companies (refer note 27 for details of encumbrances). 

10. DEFERRED TAXATION 

F-21 

Assets 


Liabilities 

(US$ million) 

Assets 


Liabilities 

Current: 

Other liabilities, accruals and prepayments 2 53 1 69 

Inventory — 2 — (6) 

Current deferred taxation asset 2 55 1 63 

Non-current: 

USA alternative minimum taxation credit carry forward — 36 — 67 

Taxation loss carryforward 58 219 64 178 

Accrued and other liabilities 7 61 7 64 

Property, plant and equipment 26 (476) 25 (443) 

Plantations (6) (83) (7) (90) 

Other—assets 1 52 10 41 

Other—liabilities — (125) (16) (132) 

Non-current deferred taxation asset (liability) 86 (316) 83 (315) 

Sub total 88 (261) 84 (252) 

Deferred taxation assets not recognised (82) (138) (80) (133) 

Total 6 (399) 4 (385) 

Net deferred taxation liability (393) (381) 

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 taxation profits in the future 

against which these losses can be recovered. 

The unrecognised deferred taxation assets relate to the following: 


(US$ million) 

Deductible temporary differences 99 64 

Taxation losses 121 149 

F-22 

The unrecognised taxation losses are split as follows per country of origin: 



220 213 

(US$ million) 

Belguim 35 37 

Germany 7 — 

United Kingdom 49 46 

Southern Africa 3 13 


Austria 27 53 

The unrecognised taxation losses shown above do not have an expiration date as at September 2002. 

The following table shows the movement in the unrecognised deferred taxation assets for the year: 


121 149 

(US$ million) 

Opening balance (213) (164) 

Unrecognised deferred taxation assets utilised (originating) during the current year 3 (44) 

Movement in foreign exchange rates (10) (5) 

Closing balance (220) (213) 

Reconciliation of net deferred taxation liability: 


(US$ million) 

Net deferred taxation liability at beginning of year (381) (463) 

Deferred taxation charge for the year (26) 76 

Amounts charged directly to equity (4) (24) 

Rate adjustment — 3 

Translation differences 18 27 

Net deferred taxation liability at end of year (393) (381) 

11. OTHER NON-CURRENT ASSETS 

F-23 




(US$ million) 

Patents 8 9 

Loan to executive share purchase trust participants 10 5 

Unlisted and other investments (including equity accounted investments)* and loans at cost which approximate Directors' 

valuation 73 60 

Post-employment benefits—pension asset (refer note 30) 21 20 

Fair value of derivative instruments 31 30 

Other 3 2 


146 126 

Patents are recorded net of accumulated amortisation of 13 12 

* 

Significant associate 

The only significant associate is described as set out below: 

In 1998, our 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 and paid us the consideration of US$ 156 million in cash which it funded through the issue of notes 

payable to a consortium of institutional investors, pledging the Plum Creek notes as collateral. The special purpose entity 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 monetarise the 

promissory notes. 

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 controlled by an unrelated investor which has significant capital at risk and is therefore not consolidated in our financial statements. Our 

investment of US$ 24 million (September 2001: US$ 23 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. 

F-24

12. TRADE AND OTHER RECEIVABLES 


(US$ million) 

Trade accounts receivable, gross 187 87 

Allowance for doubtful debts 17 14 

Trade accounts receivable, net 170 73 

Prepayments and other receivables 150 129 

Prepayments and other receivables primarily represent certain prepaid insurance, prepaid taxes, prepaid rent and other sundry receivables. 

Below is a discussion of Trade Receivables Securitisation programme: 


320 202 

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 ("SPE's") that are owned and controlled by third party financial institutions. These SPE's are funded in the Commercial Paper market. For the 

purpose of liquidity requirements, banks with a short term S&P rating of A1 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. The risk exists 

that no other bank would provide this liquidity facility, with the result that securitisation programmes will be interrupted or terminated. In such an event Sappi 

would utilise other banking facilities. These SPE's 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 2002 this amounted to US$ 58 million 

(September 2001: US$ 29 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 2002 amounted to 

US$ 365 million (September 2001: US$ 415 million). Details of these securitisation programmes at the end of fiscal 2002 and 2001 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 are not met; various credit insurance ratios. The impact on liquidity varies 

according to the terms of the agreement, generally however, future trade receivables would be placed on balance sheet until a replacement agreement was 

entered into. 

Bank 

An allowance for doubtful debts has been recorded for any trade receivables on our balance sheet which may be uncollectable. 

F-25 

Details of these securitisation facilities at September 2002 are set out below. 

Currency 

Value 

Facility 

Discount charges 

ABN-Amro US$ US$ 127 million US$ 205 million Linked to 1 month US$ LIBOR 

Creditanstalt EUR EUR 130 million EUR 140 million Linked to 3 month EURIBOR 

State Street Bank EUR EUR 59 million EUR 100 million Linked to 1 month EURIBOR 

State Street Bank US$ US$ 54 million US$ 100 million Linked to 1 month EURIBOR 

Details of these securitisation facilities at September 2001 are set out below. 

Bank 

Currency 

Value 

Facility 

Discount charges 

ABN-Amro US$ US$ 129 million US$ 207 million Linked to 1 month US$ LIBOR 

Creditanstalt EUR EUR 140 million EUR 140 million Linked to 3 month EURIBOR 

State Street Bank EUR EUR 77 million EUR 100 million Linked to 1 month EURIBOR 

State Street Bank US$ US$ 91 million US$ 100 million Linked to 1 month EURIBOR 

(Refer to note 33 for further details on credit risk.) 

13. INVENTORIES 


(US$ million) 

Raw materials 92 87 

Work in progress 51 54 

Finished goods 228 224 

Consumable stores and spares 150 148 


521 513

Included in the above is inventory written down to a net realisable value of US$ 79 million (September 2001: US$ 53 million). 

14. ORDINARY SHARE CAPITAL AND SHARE PREMIUM 

F-26 


(US$ million) 

Authorised share capital: 

325,000,000 (September 2001: 325,000,000) shares of R1 each 

Issued share capital: 

239,071,892 (September 2001: 239,071,892) shares of R1 each 104 104 

Share premium 1,750 1,750 


1,854 1,854 

Included in the issued ordinary shares above are 8,894,437 (September 2001: 9,586,124) shares held as treasury shares by Group entities, including the 

Sappi Limited Share Incentive Trust (the "Trust") and may be utilised to meet the requirements of the Trust. 


Number of shares 

The movement in the number of treasury shares is set out in the table below: 

Treasury shares at beginning of year (including Trust shares) 9,586,124 379,642 

Share buy-backs 1,102,679 11,946,600 

Treasury shares issued to participants of the Trust (1,794,366) (2,740,118) 

Treasury shares at end of year 8,894,437 9,586,124 

Under the authority granted at the annual general meeting of the Company's shareholders held on 25 February 2002, 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. 

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 25 February 2002. 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 in terms of 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 2001: 17,930,392) shares. Since 

March 1994, 7,875,844 (September 2001: 6,323,876) shares have so far been allocated to participants and paid for and 7,964,410 (September 2001: 

8,000,617) shares have been allocated to participants and not yet paid for. Shares allocated and accepted more than ten years ago may be added back to the 

number of shares that the Trust may acquire. 

The net loss on sale of treasury shares to participants written off against share premium for September 2002 was US$ 1 million (September 2001: US$ 8 

million). 

15. NON-DISTRIBUTABLE RESERVES 

F-27 



(US$ million) 

Reduction in capital arising from the transfer of share premium under a special resolution dated 14 April 1975 2 2 

Capitalisation of distributable reserves 32 32 

Legal reserves in subsidiaries 60 50 

Foreign currency translation reserve (1,151) (1,089) 


(1,057) (1,005) 

The negative balance in the Foreign Currency Translation Reserve represents the cumulative translation effect of the strength of the dollar on the Group's 

equity in rands and other currencies. 

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. 

16. INTEREST-BEARING BORROWINGS


(US$ million) 

Secured borrowings 

—Mortgage and pledge over certain assets (refer note 27) 231 298 

—Capitalised lease liabilities (refer note 27) 73 46 

Total secured borrowings 304 344 

Unsecured borrowings 1,271 1,157 

Total borrowings (refer note 33) 1,575 1,501 

Less: Current portion included in current liabilities 120 489 

The repayment profile of the interest-bearing borrowings is as follows: 


1,455 1,012 

Payable in the year ended September: 

2002 — 489 

2003 120 378 

2004 91 122 



2007 (September 2001: Thereafter) 40 371 

Thereafter 897 — 

Capitalised lease liabilities 

F-28 

1,575 1,501 

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 the present value using applicable interest 

rates. As of September 2002, 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: 

Minimum Lease 

Payments 


Interest 

Present value of 

minimum lease 

payments 

(US$ million) 


Present value of 

minimum lease 

payments 


2002 — — — 16 

2003 34 (8) 26 18 

2004 22 (5) 17 3 

2005 18 (3) 15 6 

2006 15 (2) 13 2 

2007 (September 2001: Thereafter) 1 — 1 1 

Thereafter 1 — 1 — 

Total future minimum lease payments 91 (18) 73 46 

Set out below are details of the more significant non-current interest-bearing borrowings in the Group at September 2002. 

Bank 

Redeemable bonds 

Public bond 

Public bond 

Town of Skowhegan / Michigan 

Strategic Fund / City of Westbrook 

Currency 

Interest rate 

F-29 

Outstanding value 

Security 

US$ Fixed US$ 500 million (1, 2, 3) Unsecured June 2012 

US$ Fixed US$ 250 million (1, 2, 3) Unsecured June 2032 

US$ Fixed US$ 107 million (1) Land and Buildings January 2022 

Expiry 

Financial covenants 

No financial 

covenants 

No financial 

covenants 

No financial 

covenants

Capitalised leases 

Sapned Trust Nedbank 

ABSA 

First National Bank 

First National Bank 

Secured bank term loans 

ABSA 

(1) 

(2) 

(3) 

(4) 

Bank 

ZAR 

ZAR 

ZAR 

ZAR 

ZAR 

The value outstanding equals the total facility available. 

Variable linked to 

JIBAR ZAR 142 million (1) Plant and equipment March 2005 


JIBAR ZAR 99 million (1) Plant and equipment March 2003 


JIBAR ZAR 450 million (1) Plant and equipment September 2006 

Variable, effectively 

based on market rate ZAR 50 million (1) Leased assets encumbered December 2007 

Fixed (swapped into 

variable) ZAR 130 million (1) Secured over assets August 2005 

No financial 

covenants 

Net finance cost 

cover ratio and debt 

equity ratio (4) 

No financial 

covenants 


cover ratio and debt 

equity ratio (4) 


cover (4) 

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 AG Group. 

Sappi Papier Holding AG, Sappi Limited or Sappi International S.A. 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. 

The financial covenant relates to the subsidiary company which borrowed the funds. 

Unsecured bank term loans 

Syndicated loan with agent Citibank 

Consortium of banks with agent Investec Bank 

Currency 

Interest rate 

F-30 

Outstanding value 

EUR Variable EUR 250 million (5,6) July 2006 

US$ Variable US$ 94 million (1) May 2006 

Expiry 

Financial covenants 

Net finance cost cover ratio, equity ratio and 

net debt to total capitalisation ratio (4) 

Net finance cost cover and debt to total 

capitalisation ratio (4) 

Österreichische Kontrollbank EUR Fixed EUR 210 million (1,7) December 2007 Net finance cost cover ratio and equity ratio (4) 

MLS Bank ZAR Variable ZAR 267 million (1) December 2005 Gearing ratio / interest cover (4) 

Standard Bank ZAR Variable ZAR 100 million (1) December 2006 No financial covenants 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

The value outstanding equals the total facility available. 

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 AG Group. 

Sappi Papier Holding AG, Sappi Limited or Sappi International S.A. 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. 

The financial covenant relates to the subsidiary company which borrowed the funds. 

The total revolving facility available is EUR 563 million. 

No underlying assets can be pledged as security. The disposal of assets is limited to 15% of total assets. Limitations exist on the borrowings to subsidiaries, on-lending outside of the 

Sappi Papier Holding AG Group and the merger of Group companies with outside entities. No shareholders acting in concert are allowed to own more than 35% of Sappi Limited's 

issued share capital. The borrower (Sappi Papier Holding AG) and guarantor (Sappi International S.A.) must be directly or indirectly held by Sappi Limited. 

A limitation exists on the disposal of assets. Dividends payments are limited to 40% of cumulative profits. Sappi Limited must maintain a majority holding in Sappi Papier Holding AG 

Group. 

Sappi Limited's borrowings are mainly done through three Group entities, namely, Sappi Papier Holding AG, Sappi International S.A. and Sappi 

Manufacturing (Pty) Limited. 

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$ 57 million.

Unused credit facilities 

F-31 

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. 

Geographic region 

Interest rate 


(US$ million) 

Southern Africa Variable 183 188 

Europe Variable 594 718 

North America Variable — 79 

17. OTHER NON-CURRENT LIABILITIES 


(US$ million) 

Post-employment benefits—pension obligations (refer note 30) 94 73 

Post-retirement benefits other than pension obligations (refer note 31) 93 85 

Statutory service awards 22 13 

Workmen's compensation 5 8 

Restructuring provisions (refer note 18) 4 24 

Fair value of derivative instruments 1 2 

Long service awards 10 9 

Other 27 27 

18. PROVISIONS 

Summary of movement in provisions: 




256 241 

(US$ million) 

Other provisions 

Balance at beginning of year 28 27 

Increase in provisions 7 8 

Utilised (4) (7) 

Released during the year (11) — 

Balance at end of year 20 28 

Restructuring provisions 18 46 

Purchase accounting provisions (refer note 26) 8 7 

F-32 


46 81 

Other provisions primarily represent provisions for environmental costs of US$ 8 million (September 2001: US$ 12 million) and other sundry provisions 

of US$ 12 million (September 2001: US$ 23 million). 

Releases during the financial year 

Europe 

The major amounts released during the year are summarised as follows: 

In July 2000, the European Commission addressed a Statement of Objections to Sappi and sixteen other manufacturers of carbonless paper, alleging that 

anti-competive conduct in the European carbonless paper sector between January 1992 and March 1997. We co-operated fully with the European Commission 

in its investigations. The European Commission decided on December 20, 2001 that eleven companies infringed Article 81(1) of the EC Treaty and Article 

53(1) of the EEA Agreement by participating in a complex of agreements and concerted practices in the sector of carbonless paper from January 1992 until 

September 1995. A fine of Euro 15 million was imposed on Sappi, but due to Sappi's co-operation with the Commission, the fine was reduced to zero. Due to 

the outcome of this case the US$ 5 million balance of the provision was released during the 2002 financial year. 

North America

In April 2000, 18 individuals filed a lawsuit against our subsidiary, S.D. Warren, Kimberley-Clark Corporation and several other defendants in Somerset 

County Court, Maine. The plaintiffs alleged that they suffered personal injury as a result of hazardous waste from various sources, which was allegedly 

transported to and stored at a local landfill during the period from 1976 through 1986. Plaintiffs later amended the complaint to bring several new theories of 

liability. During August 2002 all defendants reached a settlement agreement with the plaintiffs. As a result of this settlement the provision remaining at the 

beginning of the financial year of US$ 3 million was released. 

Restructuring provisions 

Severance, 

retrenchment 

& related costs 

F-33 

Lease cancel & 

penalty cost 

Asset 

impairment 

(US$ million) 

Other 

restructuring 

Total 

restructuring 

Balance at September 2000 13 — 2 18 33 

Increase in provisions 34 28 107 41 210 

Utilised (6) (5) (1) (11) (23) 

Released during the year (5) (14) (1) (4) (24) 

Transfer to pension obligations — — — (8) (8) 

Transfer to property, plant and equipment — — (107) — (107) 

Transfer to accounts receivable — — — (8) (8) 

Transfer to inventory — — — (4) (4) 

Translation effect — — — 1 1 

Balance at September 2001 36 9 — 25 70 

Increase in provisions 11 1 1 7 20 

Utilised (23) (5) — (8) (36) 

Released during the year (1) (1) — (11) (13) 

Transfer to pension obligations and other post 

retirement benefits (18) — — — (18) 

Transfer to property, plant and equipment — — (1) — (1) 

Transfer to inventory — — — (1) (1) 

Translation effect — — — 1 1 

Balance at September 2002 5 4 — 13 22 


(US$ million) 

Included in other non-current liabilities (refer note 17) 4 24 

Included in provisions 18 46 

Total restructuring provisions 22 70 

September 2002 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. The restructuring of the Cloquet mill was expected to affect 67 people of whom 48 were affected at year end. The restructuring provisions raised 

in conjunction with the acquisition amounted to US$ 4 million for severance and related costs and US$ 3 million for lease cancellation and other costs. During 

the year US$ 1 million was utilised for severances and lease cancellations. The US$ 1 million provision for fixed asset impairment was transferred to fixed 

assets and the US$ 1 million was transferred to inventory. The 

F-34 

Cloquet mill restructuring provision balance at year end was US$ 4 million for estimated severances and lease cancellations to be completed by June 2003. 

Mobile mill 

The restructuring provision at September 2002 was US$ 3 million. This remaining balance of US$ 3 million is in respect of severance and other related 

costs. The closing balance at September 2002 was the result of the utilisation of the provision by US$ 20 million, the release of US$ 3 million no longer 

required, the transfer to pension obligations & other post-retirement benefits of US$ 18 million, which relates to additional post-retirement costs as a result of 

severance. In addition to these movements a further US$ 7 million, relating to an over provision in fiscal 2001 for closure costs relating to the Mobile mill 

closure, was released. Approximately 500 employees, both salaried and hourly, were affected by the closure. Additionally, corporate restructuring at the 

headquarters in Boston and at various other sales and corporate offices resulted in approximately 100 positions being eliminated at the beginning of fiscal 

2002. This corporate restructuring results from the closure of the mill in Mobile. Approximately 332 employees were affected in the current year by the 

restructuring. 


Austria. A program was started at Gratkorn mill to outsource some utilities as well as projects to realise cost savings. It was anticipated that 538 

employees would be affected by the restructuring of whom 534 were affected by year end. No employees were affected during 2002. In the current financial 


year a further US$ 1 million was released, relating to employees not expected to make use of the opportunity to take early retirement. The balance at 

September 2002 was US$ 2 million relating to severance and related costs, which under local statute will be paid out over the next two years. No provisions 

have been utilised during the 2002 fiscal year because the employees affected have not reached the legal retirement age. It is estimated that the restructuring 

will be completed in 2004. 

Netherlands. The program that was started to reskill certain employees at the Maastricht mill for alternative employment, is anticipated to be completed 

by September 2004. It was expected to affect 40 people of whom 32 were affected by year end to bring the total affected at year end to 34. Of the provision 

balance of US$ 3 million at the beginning of the year, US$ 2 million was utilised during the year, to bring the closing balance at September 2002 to US$ 1 

million. 

The Netherlands has a further plan in place to reduce fixed costs at their mills which is estimated to be completed in January 2003. All 150 employees 

anticipated to be affected by this plan has been affected at year end, of whom 9 were affected in the current financial year. The provision at September 2002 

remains at US$ 2 million for restimated leave premium costs and legal costs. 

Belgium. Belgium has two restructuring plans in place which are estimated to be completed by the year 2009 and 2011, respectively. The first relates to 

the retirement of employees according to a collective labour agreement. This agreement was anticipated to affect a further 5 employees, bringing the total to 

29 employees, of whom all 29 were affected at year end. The increase in the restructuring provisions was US$ 1 million, for the additional 5 employees, 

which brings the balance at September 2002 to US$ 2 million. This balance represents the supplementation of benefits to the 29 employees already retired. 

The second restructuring plan's aim is to reduce fixed costs. A further 13 employees 

F-35 

were effected in the current year, which brings the total to 85 (all of whom were affected at year end). US$ 1 million of the restructuring provision was 

utilised and the balance at September 2002 was US$ 1 million. This relates to former employees supplementation on their government benefit until they reach 

retirement age. 


Blackburn mill. The project started at Blackburn mill during the previous year to change the shift system from five shifts to four shifts, is expected to 

be completed by October 2002. During the financial year, 16 people have been affected, bringing the total number affected at September 2002 to 22 

employees. The balance remaining at the end last year of US$ 1 million in respect of this project, was utilised during the year. No further plans are in place for 

this specific project. 

Wolvercote. Sappi is currently negotiating the termination of a lease agreement over premises in Wolvercote. The balance of the provision for the 

cancellation of the Wolvercote lease agreement has remained at US$ 5 million, representing the discounted estimated future lease payments for 2 years. 

Transcript mill. On October 9, 2001, the intention to close the Transcript mill in Scotland was announced. Production ceased during the quarter ended 

March 2002. In connection with the closure, we provided a US$ 9 million restructuring provision for the write-off of the assets, severance & related costs and 

other closure costs. During the financial year the provision was utilsed. We expect final closure in 2003 and no further net costs. 

September 2001 Restructuring Plans 


Mobile mill. During the financial year ended September 2001, Sappi Fine Paper North America announced the closure of the Mobile mill. The closure 

was expected to affect 500 employees, both salaried and hourly. Additionally, corporate restructuring at our headquarters in Boston and at various other sales 

and corporate offices was expected to result in approximately 100 positions being affected as a result of the closure. The closure affected 268 employees and 

costs of US$ 76 million relating to closure of operations, relocation of plant facilities, retrenchment, severance and other related costs were incurred and have 

been included in the income statement as mill closure cost in 2001. In addition to these costs an asset impairment of US$ 107 million was raised and included 

in the income statement as mill closure costs and subsequently transferred US$ 107 million impairment provisions to property, plant and equipment, US$ 8 

million to inventory and US$ 4 million to trade receivable. A further US$ 8 million was utilised for severance and lease cancellation costs incurred. US$ 14 

million was released due to the cancellation of ongoing obligations settled with the mill's power provider. The restructuring provision at September 2001 was 

US$ 50 million. 


Austria. A program was started at Gratkorn mill to outsource some utilities as well as projects to realise cost savings. It was anticipated that 538 

employees would be affected by the restructuring, of whom 534 were affected by year end. The US$ 11 million balance at the end of the previous year, was 

F-36 

reduced by the utilisation of US$ 2 million and the release of US$ 6 million (due to the reduction in the estimated number of employees to be affected) during 

2001 to bring the balance at year end to US$ 3 million. 

Belgium. Belgium has two restructuring plans in place which are estimated to be completed by the year 2009 and 2011, respectively. The first relates to 

the retirement of employees according to a collective labour agreement. This agreement was anticipated to affect 24 employees of whom, all 24 were affected 

at year end. The increase in the restructuring provisions was US$ 1 million and the balance at September 2001 was US$ 1 million. 

The second restructuring plans aim is to reduce fixed costs. The restructuring provision brought forward from the previous year of US$ 2 million remains 

unchanged at September 2001. This balance represents the supplementation of government benefits to former employees until they reach retirement age. All 

72 employees anticipated to be affected, have been affected at year end.

Netherlands. During the year, a programme was started to reskill certain employees at the Maastricht mill for alternative employment. It is expected to 

affect 40 people of whom 2 were affected by year end. The restructuring provision was increased by US$ 3 million for this programme. The provision at year 

end September 2001 was US$ 3 million for the severance, training and legal costs. 

The Netherlands has a further plan in place to reduce fixed costs at their mills, which is estimated to be completed in January 2003. The provision at year 

end for this plan was US$ 2 million. A total of 150 employees are expected to be affected by this plan, of whom 141 was already affected at year end. 


Blackburn mill. During the year, Blackburn mill changed the shift system from five shifts to four shifts. This is anticipated to affect 22 people of whom 

6 had been affected by year end September 2001. The increase in the restructuring provision was US$ 1 million, which remains on the balance sheet at year 

end. Wolvercote. The restructuring provision was increased by US$3 million to US$ 5 million for lease cancellation of the Wolvercote leased premises. This 

represents the discounted estimated future lease payments for two years. 

19. CASH GENERATED FROM OPERATIONS 

F-37 



(US$ million) 

Profit before taxation per income statement 298 147 573 

Adjustment for: 

—Depreciation 310 300 320 

—Fellings 26 30 36 

—Net finance costs 74 92 97 

—Mill closure costs — 183 — 

—Asset impairment 4 6 8 

—Other non-cash items 32 13 14 

20. (INCREASE) DECREASE IN WORKING CAPITAL 



744 771 1,048 


(US$ million) 

Decrease (increase) in inventories 47 17 (92) 

(Increase) decrease in receivables (49) 108 (1) 

(Decrease) increase in payables (40) (74) 32 

21. TAXATION PAID 



(42) 51 (61) 


(US$ million) 

Amounts unpaid at beginning of year (48) (57) (2) 

Translation effects — 3 6 

Amounts charged to the income statement (52) (88) (73) 

Amounts unpaid at end of year 11 48 57 

Cash amounts paid (89) (94) (12) 

22. DIVIDENDS PAID 



(US$ million) 

Translation effects — — 3 

Current year dividend (60) (60) (45) 

Cash amounts paid (60) (60) (42) 

23. REPLACEMENT OF NON-CURRENT ASSETS 

F-38 





(US$ million) 

Property, plant and equipment (85) (154) (129) 

Plantations (25) (28) (32) 

24. PROCEEDS ON DISPOSAL OF NON-CURRENT ASSETS 



(110) (182) (161) 


(US$ million) 

Book value of property, plant and equipment disposed of 6 4 41 

Loss on disposal (3) (2) (4) 

25. PROCEEDS ON DISPOSAL OF BUSINESSES 

The net book value of the assets and liabilities of the Group's Mining Timber operations at the date of disposal were: 



3 2 37 


(US$ million) 

—Non-current assets — — 22 

—Current assets — 3 18 

—Current liabilities — (3) (4) 

Net asset value — — 36 

Profit on disposal — 2 21 

26. ACQUISTION OF NET ASSETS 

F-39 


— 2 57 

During 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. 



(US$ million) 

Net assets acquired: 

—Property, plant and equipment 437 — — 

—Inventories 59 — — 

—Trade and other receivables 32 — — 

—Trade and other payables (31) — — 

—Provisions (12) — — 

—Other non-current liabilities (2) — — 

Total consideration 483 — — 

Satisfied by cash 483 — — 

Purchase Accounting Provisions 

Summary of provisions taken on at acquisition and subsequent movements: 

Severance & 

related costs 

Restructuring 

Lease cancel & 

penalty cost 

Total restructuring 

provisions 

Other 


Total 

provisions 

Balance at September 2000 — — — 7 7 

Utilised — — — — — 

Released during the year — — — — — 

Balance at September 2001 — — — 7 7

New at acquisition provisions 10 2 12 — 12 

Utilised (4) — (4) — (4) 

Released during the year — — — (7) (7) 

Balance at September 2002 6 2 8 — 8 


Cloquet Mill. During the financial year ended September 2002, Sappi Fine Paper North America acquired the coated fine paper business from Potlatch 

Corporation. The purchase accounting provision raised in conjunction with the acquisition of the Cloquet Mill amounted to US$ 12 million. This amount 

includes estimated costs of severances of US$ 10 million and lease cancellation costs of US$ 2 million. The restructuring of the mill was expected to affect 

116 people of whom 67 were affected at year end. Subsequent to the acquisition, cash payments of US$ 4 million have been recorded against the provisions, 

which reduced the purchase accounting provisions at September 2002 to US$ 8 million. 


F-40 

During the year ended 1998 Sappi acquired a 91.5% ownership interest in KNP Leykam, the leading European producer of coated woodfree paper. KNP 

Leykam is now wholly owned. In conjunction with the acquisition, a purchase accounting provision of US$ 7 million was raised in respect of legal costs. The 

European Commission addressed a Statement of Objections to, among numerous other parties, Leykam-Mürztaler Papier und Zellstoff Aktiengesellschaft. 

The European Commission's objections concern alleged market sharing and pricing agreements relating to the sale of newsprint paper in the European Union 

during the period from January 1, 1994 to June 30, 1995, which was prior to our acquisition of the KNP Leykam companies in December 1997 and relates to a 

business we did not purchase. A reply to the Statement of Objections was submitted to the European Commission on August 31, 1999 and Oral Hearings were 

held between September 27 and 29, 1999. On August 9, 2002 the European Commission decided to officially close their investigations into this case. All 

proceedings against all the companies that were targeted by this investigation were dropped. The European Commission concluded that the allegations of anticompetitive 

conduct relating to the sale of newsprint paper were unfounded. As a result of this outcome the US$ 7 million provision was released during the 

year ended September 2002. 

27. ENCUMBERED ASSETS 

Suspensive sale agreements are instalment sale agreements which the Group has entered into in respect of certain 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 certain 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. 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 2002 the termination value of 

this lease is approximately 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: 


(US$ million) 

Land and buildings 120 115 

Plant and equipment 497 322 

28. COMMITMENTS 

Capital commitments 

F-41 



617 437 

(US$ million) 

Contracted but not provided 55 78 

Approved but not contracted 173 109 


228 187 

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: 



(US$ million) 


2002 — 46 





2007 (September 2001: Thereafter) 31 147 

Thereafter 137 — 

Future minimum obligations under operating leases include the following two significant arrangements: 

336 336 

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. The leaseback 

is an operating lease under the applicable accounting principles. The lease expires after 15 years, and we have an option to repurchase the paper machine at its 

fair market value at the end of the lease term. 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. Under the applicable accounting principles 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. 

29. CONTINGENT LIABILITIES 

F-42 


(US$ million) 

Guarantees and suretyships 66 79 

Other contingent liabilities 14 27 

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 the Company, 

after consulting with legal counsel, that they will not have a material effect on the Company'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. These could give rise to additional taxation 

costs. However, management currently believes, based on legal counsel opinion, that no further material costs will arise. 

30. 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 

seperately from those of the Group in funds under the control of trustees. 

The total cost charged to income of US$ 4 million (September 2001: US$ 4 million) represents contributions payable to these schemes by the Group 

based on the rates specified in the rules of these schemes. As at September 2002, no contributions (September 2001: US$ Nil) 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 establised 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$ 12 million to cover the pension 

obligations of Sappi Austria. 

Actuarial valuations of all the funds are performed annually. 

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 31). 

The following table, based on the latest valuations, summarises the funded status and amounts recognised in the Group's financial statements for defined 

benefit plans for the Group's operations. 

F-43 


Assets 

exceed 

accumulated 

benefits 

Southern 

Africa 


Accumulated benefits 

exceed assets 

United 

Kingdom & 

Europe 

United 

States 

(US$ million) 

Assets 

exceed 

accumulated 

benefits 

Southern 

Africa 


Accumulated benefits 

exceed assets 

United 

Kingdom & 

Europe 

Change in benefit obligation 

Benefit obligations at beginning of year 160 429 239 171 375 207 

Service cost 8 11 6 10 11 7 

Interest cost 16 24 17 21 18 16 

Plan participants' contribution — 1 — — — — 

Amendments — 2 — 3 7 13 

Actuarial loss — 22 44 8 20 4 

Acquisitions — — 35 — — — 

Benefits paid (13) (20) (13) (17) (16) (8) 

Translation difference (24) 30 1 (36) 14 — 

Benefit obligation at end of year 147 499 329 160 429 239 

Change in plan assets 

Fair value of assets at beginning of year 183 359 193 200 343 205 

Actual return on plan assets 16 8 (29) 36 (6) (9) 

Acquisition 2 1 39 — 12 — 

Employer contribution 2 11 8 2 11 5 

Plan participants' contribution — 1 — 3 1 — 

Benefits paid (14) (16) (13) (17) (13) (8) 

Translation difference (28) 24 — (41) 11 — 

Fair value of assets at end of year 161 388 198 183 359 193 

Funded status 

Funded (Unfunded) status 14 (111) (131) 23 (70) (46) 

Unrecognised net actuarial loss (1) 37 69 89 40 30 4 

Unrecognised past service cost (1) 2 — 7 3 (2) 5 

Net prepaid (accrued) post-retirement cost 53 (42) (35) 66 (42) (37) 

Net prepaid post-retirement cost limited to recoverable 

amount (53) — — (66) — — 

United 

States 

— (42) (35) — (42) (37) 

Net pension obligation (77) (79) 

(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. 

F-44 

Refer to note 38 "Summary of differences between South African and United States Generally Accepted Accounting Principles" for further discussion on 

the pension obligations. 

Southern 

Africa 


United 

Kingdom & 

Europe 

United 

States 

(US$ million) 

Southern 

Africa 


United 

Kingdom & 

Europe 

Net periodic pension cost 

Service cost 7 12 6 8 12 7 

Interest cost 16 26 17 21 25 15 

Expected return on plan assets (19) (23) (18) (25) (26) (19) 

Amortisation of past service cost 2 — — — 1 1 

Recognised net actuarial loss — 2 — 2 — 11 

Net pension cost charged to operating income 6 17 5 6 12 15 

United 

States

Actuarial assumptions 

Discount rate (%) 11.50 5.68 6.51 13.50 5.82 7.50 

Compensation increase (%) 9.00 3.26 4.00 11.00 3.25 4.00 

Expected long-term return on assets (%) 12.50 6.08 9.00 14.50 5.98 9.25 


(US$ million) 

Reconciliation to balance sheet 

Pension asset—United Kingdom (refer note 11) (21) (20) 

Pension obligations—Europe and North America (refer note 17) 94 73 

Pension obligations—Europe and North America (included in other creditors) 8 16 

Net pension obligation included in the balance sheet 81 69 

Other (4) 10 

Net pension obligation as shown above 77 79 

31. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS 

The 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. Full provision is made for the liability. Employees are generally eligible for benefits upon retirement and 

completion of a specified number of years of service. 

Actuarial valuations of all the plans are performed annually. 

F-45 

The following schedule provides the plans' funded status and obligations for the Group. 

South Africa 


United States 

(US$ million) 

South Africa 



United States 

Change in benefit obligation 

Benefit obligation at beginning of year 28 80 30 60 

Service cost 1 2 1 3 

Interest cost 3 6 4 5 

Amendments — — — 4 

Actuarial loss — 14 — 11 

Acquisition — 6 — — 

Benefits paid (1) (4) (1) (3) 

Translation difference (5) — (6) — 

Benefit obligation at end of year 26 104 28 80 

Funded status 

Unfunded status (26) (104) (28) (80) 

Unrecognised net actuarial (gain) loss (2) 32 — 17 

Unrecognised past service cost — (1) — (1) 

Net accrued post-retirement cost (28) (73) (28) (64) 

Net-post retirement benefit obligation (101) (92) 

Net periodic post-retirement benefit cost 

Service cost 1 2 1 3 

Interest cost 3 6 4 5 

Expected return on plan assets 1 — 1 — 

Amortisation of past service cost — — — 4 

Recognised net actuarial loss — 1 — —

Net post-retirement benefit cost charged to operating income 5 9 6 12 

Actuarial assumptions 

Discount rate to estimate accumulated benefit (%) 11.50 6.51 13.50 7.50 

Health care cost trend rates to value APBO (%) 10.00 10.00 11.00 10.00 

which gradually reduce to an ultimate rate of (%) 10.00 5.00 11.00 5.00 

over a period of (years) — 5 — 5 

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 2002 by US$ 10 

million (September 2001: US$ 10 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$ 1 million (September 2001: US$ 1 million). 

F-46 


(US$ million) 

Reconciliation to balance sheet 

Post-retirement benefits other than pension (refer note 17) 93 85 

Post-retirement benefits other than pension (included in other creditors) 3 — 

Net pension obligation included in the balance sheet 96 85 

Other 5 7 

Net post retirement benefit obligation as shown above 101 92 

32. EQUITY COMPENSATION BENEFITS 

The Sappi Limited Share Incentive Trust 

Prior to the Annual General Meeting of Shareholders held on 2 March 2000 (the "General Meeting"), the aggregate number of shares which could be 

made available for the Sappi Limited Share Incentive Trust (the "Trust") was not to exceed fifteen million shares, and no single participant could acquire more 

than 1,500,000 shares, provided that in specified circumstances, both such limits would increase or reduce ratably in accordance with an increase or reduction 

in the issued ordinary share capital of Sappi Limited. 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. 

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 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 2 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 tenyear 

F-47 

period to eight years, in respect of offers made since 3 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 shall be 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. 

In terms of the rules of the Trust, a once-off opportunity was given to the participants during the year to switch from Share Options to either Trust Shares 

or Allocation Shares. The terms of vesting, exercise price or grant date are not effected if the participant elects this opportunity. 

During the year 1,944,700 allocations were offered. The allocations were accepted by the particpants as follows: 

Number of 

options/shares 

Trust Shares 533,350 

Share Options 482,000 

Allocation Shares 774,900 


1,790,250 

Declined 154,450 

Share Option and Allocation Share Option activity was as follows during the financial years ended September 2001 and 2002: 

Trust Shares 

Share Options 

F-48 

Weighted average 

exercise price (US 

$) * 

Allocation 

Share Options 

Weighted average 

exercise price (US 

$) * 

Total 

1,944,700 

Outstanding at September 2000 2,724,325 4,449,959 6.65 2,991,700 5.85 10,165,984 

Offered and accepted 220,300 791,700 6.27 606,750 6.26 1,618,750 

Paid for (1,062,519) (1,441,327) 4.13 (1,059,783) 3.61 (3,563,629) 

Returned, lapsed and forfeited (82,735) (61,153) 7.31 (76,600) 3.82 (220,488) 


Offered and accepted 533,350 482,000 12.71 774,900 13.36 1,790,250 

Paid for (147,818) (928,512) 3.38 (413,377) 3.44 (1,489,707) 

Returned, lapsed and forfeited (80,300) (211,850) 3.66 (44,600) 4.05 (336,750) 


* 

The share options are issued in South African Rands. They have been translated at the closing rate for the year of US$ 1 to ZAR 10.5400 

(September 2001: US$ 1 to ZAR 8.9386) 

The Sappi Limited Share Incentive Trust (the "Trust") has forward purchased 6,244,867 (2001: 6,244,867) Sappi Limited shares from a subsidiary of 

Sappi Limited. This subsidiary purchased the Sappi Limited shares on the open market. The delivery and payment for these shares purchased by the Trust is 

deferred until it requires the shares to meet its obligations to the participants of the Trust. 1,593,408 of the forward purchased shares were delivered to the 

Trust during the year ended September 2002. (No shares were delivered in the year ended September 2001.) 

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 973,000 

Share Options and Allocation Shares granted 150,000 

Share Options and Allocation Shares exercised (116,000) 

At end of year 1,007,000 

Share Options and Allocation Shares exercised by Executive Directors during the year had an average exercise price per share of US$ 2.84 and an 

average market price per share of US$ 13.45. 

The following table sets forth certain information with respect to the 1,007,000 Share Options and Allocation Shares granted by Sappi to Executive 

Directors: 

Issue date 

F-49 

Number of options/ 

shares 

Expiration date 

Exercise price (ZAR) 

24 February 1997 40,000 24 February 2007 34.90 

19 January 1998 49,000 19 January 2008 19.90 

27 May 1998 100,000 27 May 2008 27.90 

11 December 1998 110,000 11 December 2008 22.10 

1 April 1999 48,000 1 April 2009 21.30 

9 June 1999 48,000 9 June 2009 39.00 

21 December 1999 260,000 21 December 2007 53.85 

15 January 2001 152,000 15 January 2009 49.00 

30 March 2001 50,000 30 March 2009 61.00 

28 March 2002 150,000 28 March 2010 147.20 

1,007,000 

Loans to Executive Directors relating to Trust Shares for the year ended September 2002 were US$ 1 million (September 2001: US$ 1 million). No new 

loans have been granted to the Executive Directors since 28 March 2002. 

33. FINANCIAL INSTRUMENTS

The 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 rate risk 

interest rates on non-current borrowings; 

foreign exchange rates, generating translation and transaction gains and losses; and 

credit 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. 

Currency risk 

F-50 

Sappi's foreign exchange policy consists of the following principal elements: 

— 

— 

— 

— 

— 

— 

— 

— 

— 

Credit risk 

The majority of the borrowings in each country are made in the currency of that country. 

Sappi manages its foreign exchange translation exposure by financing its equity investments in different currencies with similar ratios of equity 

to debt finance. This does not necessarily protect the absolute amounts of equity investment or of profit after finance costs from exchange rate 

movements. 

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 non-capital imports in foreign currencies are initially netted on a global basis, with the resulting net 

exposure 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. 

Centralised control is maintained over Group net currency exposures and the use of hedging instruments. 

A significant portion of the Group's sales and accounts receivable are from major customers. 

Only one of the Group's major customers (Buhrmann Paper Merchant Division) represents more than 10% of our sales during the year ended September 

2002. The sales for the year ended September 2002 amounted to US$ 428 million (September 2001: US$ 446 million). The trade receivable balance 

outstanding on balance sheet, net of securitisation, at September 2002 was US$ 1 million (September 2001: US$ 8 million). Where appropriate, credit 

insurance has been taken out over the Group's trade receivables. 

None of the Group's other 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 

F-51

The table below provides information about Sappi's non-current borrowings that are sensitive to changes in interest rates and currency exchange 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 2003 and thereafter are based on the yield curves for each respective currency as published by Reuters on 27 September 2002. The 

information is presented in US$, which is Sappi's reporting currency. 




Expected maturity date 



(US$ equivalent in millions) 

2008+ 

Total 

Fair Value 

US Dollar 

Fixed rate — (1) (1) (1) (1) 847 843 1,048 

Average interest rate (%) — — — — — 7.05 7.09 

Variable rate 25 25 25 19 — — 94 94 

Average interest rate (%) 4.56 4.56 4.56 4.56 — — 4.56 

EUR 

Fixed rate 40 44 40 40 37 50 251 261 

Average interest rate (%) 5.32 5.47 5.38 5.39 5.33 5.21 5.35 

Variable rate 25 (1) (1) 243 — — 266 266 

Average interest rate (%) 3.54 4.83 4.83 5.16 1.82 — 5.02 

Rand 

Variable rate 30 24 39 24 4 — 121 121 


Total 

Fixed rate 40 43 39 39 36 897 1,094 1,309 


Variable rate 80 48 63 286 4 — 481 481 


Fixed and variable 120 91 102 325 40 897 1,575 1,790 

Current portion 120 120 

Long term portion 1,455 1,670 

Total Interest-bearing borrowings (refer note 16) 1,575 1,790 

The fair value of non-current borrowings is estimated by Sappi based on the market rates quoted by Reuters for non-current borrowings with fixed interest rates and on quotations provided by 

internationally recognised pricing services for notes, exchange debentures and revenue bonds. 

F-52 

The range of interest rates in respect of all non-current borrowings, comprising both fixed and floating rate obligations, is between 1.82% and 13.10%. 

At September 2002, 69.4% of Sappi's non-current borrowings were at fixed rates of interest, and 30.6% 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 2002 domestic interest rates have increased substantially from 9.79% to 13.48% for the 3-month JIBAR. 

Interest rate derivatives 

Sappi uses interest rate options, caps, swaps and interest rate & currency swaps as a means of managing interest rate risk associated with outstanding 

borrowings 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 International and US accounting standards. 

As at September 2002, Sappi had three Rand denominated interest rate swap contracts outstanding. They were for a total amount of US$ 95 million and 

had a favourable fair value of US$ 3 million. The three interest swaps converted fixed interest rates of 17.65% and 18.00%, respectively into variable rates. 

In addition, at September 2002, Sappi had two caps and one zero cost collar, with a negligible fair value. 

As at September 2002, the Group had two interest rate and currency swap contracts outstanding. They were for the total amount of US$ 480 million and 

had a negative fair value of US$ 11 million. 

F-53

The two interest and currency swaps converted future USD cash flows into respectively, EUR and GBP and converted fixed USD interest rates into 

respectively, fixed EUR and GBP interest rates. 

Instrument 

Interest Rate 

Maturity date 

Nominal value 

US$ million 

Fair value 

US$ million 

Caps: 

First National Bank 19.00% September 2003 15 — 

Nedcor 19.30% November 2005 25 — 

Collars: 

International Bank of South Africa 

—Cap 19.00% February 2003 8 — 

—Floor 14.10% February 2003 8 — 

Interest rate swaps: 

Citibank 17.65% to variable February 2003 47 — 

Citibank 17.65% to variable February 2005 48 2 

Nedcor 18.00% to variable March 2005 Amortising 1 

Interest rate and currency swaps: 

Commerzbank US $6.30% into EUR 6.21% December 2009 130 (2) 

Citibank US $6.30% into GBP 6.66% December 2009 350 (9) 

Total (8) 

The fair value of interest rate options, caps, swaps and interest rate & currency swaps 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. 

Cash flow hedges 

The above two combined Interest rate and currency swaps (IRCS) with Commerzbank and Citibank have been accounted for as cash flow hedges. With 

effect from August 2002, these swaps were designated to be cash flow hedges and the subsequent mark to market gains and losses were recognised directly in 

equity. Prior to that date they were recognised in the income statement. Two subsidiaries with reporting currencies in EUR and GBP, respectively lent US$ to 

another subsidiary which reports in US$. The IRCS convert US$ amounts and interest receivable by these two companies into EUR and GBP, which are their 

respective reporting currencies. 

The hedged risks relate to changes in cash flows associated with interest and capital receipts on the loans, arising from fluctuations in the spot US$ / 

EUR and US$ / GBP exchange rates. As the US$ cash flows have been fixed, variability in the cash flows of the loan will arise from movements in the spot 

US$ / EUR and US$ / GBP exchange rates. The spot US$ / EUR and US$ / GBP exchange rate exposures are designated as the hedged risk. 

3—Fair values 

F-54 

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 these non-current 

interest-bearing borrowings are carried at fair value. 

The fair value of these borrowings was estimated based on quotations from its investment bankers. No financial assets were carried at an amount in 

excess of fair value. 

4—Foreign currency forward exchange contracts 

The Group's foreign currency forward exchange contracts at September 2002 are detailed below. 

Contract 

Amount 


Fair 

Value 

(US$ million) 

Contract 

Amount 

US Dollar denominated—net sold (275) — (109) (7) 

Euro denominated—net (sold) purchased (6) — 56 1 


Fair 

Value 

(281) — (53) (6) 

The fair value of foreign currency contracts was estimated by the Group based upon quotations from Reuters. These foreign currency contracts will 

mature in the year ended September 2003. 

All forward currency exchange contracts and options are valued at fair value with the resultant profit or loss included in the finance costs for the period. 

34. SEGMENT INFORMATION

The Group has two reportable segments which operate as separate business units: Sappi Fine Paper and Sappi Forest Products. 

The regional information shows North America, Europe, southern Africa and the Far East. 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (refer note 2). 

F-55 

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. 










(US$ million) 

Corporate & other 

External sales 3,156 3,452 3,828 573 732 890 — — — 3,729 4,184 4,718 

Intragroup sales 379 321 295 351 466 549 — — — 730 787 844 

Total sales 3,535 3,773 4,123 924 1,198 1,439 — — — 4,459 4,971 5,562 

Operating profit 230 248 451 141 194 224 18 4 (3) 389 446 672 

Depreciation 276 259 272 33 40 48 1 1 — 310 300 320 

Amortisation and fellings 2 5 5 40 46 55 — — — 42 51 60 

Asset impairment 4 6 8 — — — — — — 4 6 8 

Other non cash expenses * 25 192 30 5 4 (16) 2 — — 32 196 14 

Capital expenditures ** 151 250 183 29 43 35 — — 3 180 293 221 

Operating assets *** 3,607 3,058 3,283 832 956 1,115 34 41 39 4,473 4,055 4,437 

Operating liabilities **** 581 577 601 123 128 156 51 48 49 755 753 806 

Net operating assets ***** 2,993 2,442 2,653 714 825 941 (36) (13) (20) 3,671 3,254 3,574 

Property, plant and equipment 2,807 2,434 2,530 381 455 564 1 1 1 3,189 2,890 3,095 

North America 


Europe 






Corporate & other 

2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 

(US$ million) 

Sales 1,197 1,442 1,607 1,744 1,781 1,994 215 229 227 573 732 890 — — — 3,729 4,184 4,718 

Operating (loss) profit (21) 40 179 217 177 252 34 31 20 141 194 224 18 4 (3) 389 446 672 

Capital expenditures ** 49 99 96 96 116 78 6 35 9 29 43 35 — — 3 180 293 221 

Net operating assets ***** 1,483 1,009 1,205 1,420 1,333 1,336 90 100 112 714 825 941 (36) (13) (20) 3,671 3,254 3,574 

Property, plant and 

equipment 1,360 987 1,101 1,364 1,348 1,337 83 99 92 381 455 564 1 1 1 3,189 2,890 3,095 

* September 2001—Including Mobile mill closure costs. 

** Capital expenditures exclude spending on plantations and the acquisition of Cloquet's net assets of $483 million. 

*** Operating assets consist of property, plant and equipment, non-current assets (excluding deferred taxation) and current assets (excluding cash). 

**** Operating liabilities consist of trade payables, other payables and provisions. 

***** Net operating assets consist of operating assets less operating liabilities, adjusted for taxation payable and dividends payable. 

F-56 

35. RELATED PARTY TRANSACTIONS 

There were no related party transactions, other than as described in note 32, for the year ended September 2002. 

The Buhrmann NV Group who were previously a related party to Sappi Limited sold its stake in Sappi Limited during the first four months of the year 

ended September 2001. (At September 2000, Buhrmann NV held 5.5% of the issued ordinary share capital of the Company. During 2000 the Sappi Group 

sold 634,946 tons (US$509 million) of products to the Buhrmann Group.) 

36. SUBSEQUENT EVENTS 

At the date of issuing this report there were no subsequent events that require disclosure. 

37. ENVIRONMENTAL MATTERS 

Sappi operates in an industry subject to extensive environmental regulations. 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$ 12 million in financial year September 2002 (September 2001: US$ 48 million, September 2000: US$ 35 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 recently 

enacted National Water Act, National Environmental Management Act, National Forests Act and the impending Air Pollution Prevention Act may result in 

significant additional expenditures and/or operational constraints, although the economic and practical effect of the implementation of these requirements on 

Sappi's operations is currently uncertain. 


Group 


Group 


In April 1998, the US Environmental Protection Agency issued final cluster rules that impose new air and water quality standards aimed at further 

reductions of pollutants from paper and pulp mills in the United States, in particular those emitting dioxin in wastewater resulting from bleaching operations. 

For Sappi Fine Paper North America's operations, compliance with the cluster rules was required beginning in April 2001. In June 1999, Sappi closed its pulp 

mill at Westbrook due largely to the expected cost of compliance (approximately US$ 50 million) with the new cluster rules. Sappi has spent approximately 

US$ 71 million in capital improvements for cluster rule compliance for required upgrades at the Somerset and Muskegon mills. These upgrades included the 

installation of elemental chlorine free (ECF) technology. 

In April 2000, 18 individuals filed a lawsuit against S.D. Warren, Kimberley-Clark Corporation and several other defendants in Somerset County Court, 

Maine. The plaintiffs allege that they suffered personal injury as a result of hazardous waste from various sources, which was allegedly transported to and 

stored at a local landfill during the period from 1976 through 1986. The lawsuit was settled in August 2002. 

F-57 

The Group's accounts are prepared in accordance with South African GAAP, which differ 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. 

a. Pension programs and post-retirement 

medical benefits 

1. Transitional rules for first time 

applications 

South African GAAP (SA GAAP) 

• The South African statement on pension 

programs and post-retirement medical benefits 

allows for immediate adoption. The related 

obligations and assets have thus been recognised 

immediately. 

2. Recognition of pension asset • An asset can be recognised only to the extent that 

the prepayment will lead to a reduction in future 

payments or a cash refund. 

3. Additional minimum liability • No requirement exists for the recognition of an 

additional minimum liability under SA GAAP. 

United States GAAP (US GAAP) 

• The US standard allows for the related 

obligations and pensions to be fully on the balance 

sheet, on a straight line basis, over a period. 

• No such limitation exists on the recognition of an 

asset. 

• An additional minimum liability test is required 

to be performed and may require an additional 

liability to be recognised. 

• 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. 

b. Accounting for business combinations • The new South African statement on business combinations is in line with the existing US standards. The 

South African statement does not require the restatement of previous business combinations as originally 

accounted for. Certain reconciling items will remain until the related entities are disposed of. The remaining 

reconciling items will continue to be amortised over time. 

• Differences which arose in the past relate to: 

1. Cost of acquisition • Cost comprises the value of shares stipulated in 

the purchase agreement, the nominal value of debt 

issued and all costs related to the acquisition. 

2. Value of assets and liabilites acquired • The fair values or book values of assets and 

liabilities in the books of the subsidiary acquired 

are recorded. 

3. Provisions raised at acquisition • Provisions are raised for start-up, restructuring, 

rationalisation and all other incidental costs. 

F-58 

• Cost includes the market value of shares issued at 

date agreement is reached and announced plus the 

present value of debt issued. Only specified related 

costs may be included in the purchase price. 

• Fair values of all assets and liabilities are 

recorded. 

• Only provide for plant closing, retrenchment 

and relocation costs related to the subsidiary 

acquired. 

4. Treatment of goodwill • Allocated to fair values of assets acquired; any • Goodwill is capitalised and amortised. 

excess is debited to reserves. Negative goodwill is Negative goodwill is deducted from the fair 

c. Pre-commissioning expenses capitalised on 

capital projects 

d. Loans to participants of executive share 

purchase trust 

taken directly to reserves. 

• All expenses incurred on capital projects, 

including finance costs and other fixed costs, are 

capitalised until the asset is fully commissioned. 

• Amounts loaned to participants to purchase the 

Company's shares are included in other noncurrent 

assets. 

• Profit is recognised on the sale of assets subject 

value of non-monetary assets. 

• Only direct, incremental costs incurred prior 

to the commencement of operations and that 

can be specifically identified and segregated 

from ordinary, recurring operating expenses, 

are capitalised as part of the fixed asset cost. 

• Reported as a reduction to shareholders' 

equity. 

e. Sale and leaseback transactions—operating 

• Profit on such sale of assets is deferred and 

leases 

to operating leaseback agreements. 

recognised in income over the lease term. 

f. Asset Impairment • An asset impairment is recognised if its carrying • An asset impairment is recognised if its 

amount exceeds the discounted estimated future carrying amount exceeds the undiscounted 

cash flows. 

estimated future 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 threshhold for impairment under US GAAP. 

g. Post-employment benefits other than pensions • The expected cost of such benefits is only • All measurable potential severance benefits 

recognised once a decision has been taken to 

terminate the services of employees. 

F-59 

are measured and recognised. 

h. Tax on 

dividends 

• Under SA GAAP, current and deferred tax assets and 

liabilities are measured at the tax rate applicable to 

undistributed profits and the income tax consequences 

of dividends are recognised when a liability to pay the 

dividends is recognised. 

• US GAAP requires that a liability for income tax that would be payable if dividends 

are declared in the future is recognised on the full amount of distributable reserves. In 

previous years a GAAP difference was not recognised for the income tax consequences 

of dividends. This change has been presented by restating previously disclosed 

amounts of net income and shareholders' equity as determined under US GAAP. 

Certain items included under Non-trading loss (refer Note 5) in the income statement under SA GAAP would be reclassified to operating loss (profit) 

under US GAAP. The total amount which would be reclassified as a loss of US$ 7 million (September 2001: loss of US$ 198 million; September 2000: profit 

of US$ 15 million). Included in these amounts are certain restructuring costs which would form part of operating (loss) profit under US GAAP. For the year 

ended September 2002, US$ 1 million relates to an inventory transfer (September 2001: US$ 8 million relates to an inventory transfer and US$ 4 million to a 

trade receivables transfer; September 2000: US$ 1 million relates to an inventory transfer). 

The remaining items included under Non-trading loss (refer Note 5) in the income statement under SA GAAP would be reclassified to extraordinary 

items under US GAAP. The total amount which would be reclassified is US$ 10 million (September 2001: US$ 9 million; September 2000: US$ 17 million). 

Reconciliation of net profit to United States GAAP 

note 

F-60 



(US$ million) 

Net profit determined under South African GAAP 220 138 363 

Adjustments in respect of: 

Pension programs and post-retirement medical benefits a 1 (1) 2 

Accounting for business combinations b 13 20 3 

Pre-commissioning expenses capitalised on capital projects c 2 3 3 

Sale and leaseback transactions e 2 3 4 

Asset impairment f — — 8 

Post-employment benefits other than pensions g — 1 (3) 

Tax on dividends h (16) (23) (8) 

Deferred taxation effect of adjustments 14 (11) (6) 

Total effect of United States GAAP adjustments 16 (8) 3 

Net profit determined under United States GAAP as restated 236 130 366 

—Basic earnings per share (US cents) 103 56 156 

—Diluted earnings per share (US cents) 102 56 153 

Reconciliation of shareholders' equity to United States GAAP 

note 



(US$ million) 

Shareholders' equity determined under South African GAAP 1,601 1,503 

Adjustments in respect of: 

Pension programs and post-retirement medical benefits a (58) 69 

Accounting for business combinations b 73 68 

Pre-commissioning expenses capitalised on capital projects c (18) (20) 

Loans to executive share purchase trust d (10) (6) 

Sale and leaseback transactions e (19) (29) 

Asset impairment f 8 13 

Post-employment benefits other than pensions g (3) (7) 

Tax on dividends h (48) (38) 

Deferred taxation effect of adjustments 49 3 

Effect of United States GAAP adjustments on minority interests (3) (3) 

Total effect of United States GAAP adjustments (29) 50 

Shareholders' equity determined under United States GAAP as restated 1,572 1,553 

F-61 


Comprehensive income 



(US$ million) 

Net profit determined under South African GAAP 220 138 363 

Other comprehensive income, net of tax 

Foreign currency translation adjustments (62) (118) (248) 

Goodwill written off — — (9) 

Gain on revaluation of derivative instruments* 8 8 — 

Loss on revaluation of derivative instruments* (5) — — 

Additional minimum pension fund liability (91) — — 

Comprehensive income 70 28 106 

* 

There have been no releases to the income statement relating to the revaluation of derivative instruments. 

There are no taxation effects applicable to the above other comprehensive income items, other than the additional pension fund liability. This was shown 

net of US$ 26 million tax. 

Accumulated other comprehensive income balances (based on South African GAAP numbers) 

Foreign 

Currency 

Translation 

Adjustments 


Goodwill 

Written Off 

Revaluation of 

Derivative 

Instruments 

(US$ million) 

Additional 

Minimum 

Pension 

Liability 

Total 

Accumulated 

Other 

Comprehensive 

Income 

Balance—September 1999 (723) (44) — — (767) 

Current period change (248) (9) — — (257) 

Balance—September 2000 (971) (53) — — (1,024) 

Current period change* (118) — 8 — (110) 

Balance—September 2001 (1,089) (53) 8 — (1,134) 

Current period change* (62) — 3 (91) (150) 

Balance—September 2002 (1,151) (53) 11 (91) (1,284) 

* 

There have been no releases to the income statement relating to the revaluation of derivative instruments. 

Potlatch acquisition 

On May 13, 2002, we acquired Potlatch Corporation's coated woodfree paper business by purchasing Potlatch's Cloquet, Minnesota pulp and paper mill 

(the "Cloquet mill") as well as the brands, order books and working capital of the Cloquet mill and the brands, order books and inventories of Potlatch's 

Brainerd, Minnesota paper mill for an aggregate cash purchase price of US$ 483 million. We did not acquire Potlatch's Brainerd mill, which Potlatch has 

closed. The Groups' results include the results of Cloquet mill for the four and a half months since acquistion on May 13, 2002. 

The acquisition of the Cloquet mill was accounted for under the purchase method of accounting. 

F-62 

Following the acquisition of the Cloquet mill, the Group completed the valuation of the assets and liabilities of the Cloquet mill during fiscal 2002. The 

valuation resulted in no goodwill. 

The following table presents pro forma results of the Group's operations for the years ended September 2002 and September 2001 as though the 

acquisition of the Cloquet mill had taken place at the beginning of each of the periods presented below: 


(US$ million) 

Sales 3,964 4,627 

Operating income 352 430 

Net profit for the year 198 126 

Basic earnings per share (US cents) 86 54 

Diluted earnings per share (US cents) 85 54 

The unaudited pro forma consolidated financial information does not purport to represent what the Group's financial position or results would actually 

have been if these transactions had occurred at such dates or to project the Group's future results of operations. 


There are certain agreement and indemnification provisions included in the Asset Purchase Agreement that continue to apply following the closing, 

including a non-compete covenant agreed by Potlatch. This could result in future costs but the likelihood of these arising is remote. 

The Sappi Limited Share Incentive Trust 

* 

Refer note 32 for details of this trust. 

The following table summarises the status of Share Options and Allocation Share Options outstanding and exercisable as of September 2002: 

Range of exercise 

price (US$) 

Share options outstanding 

Number 

Wtd avg 

remaining life 

F-63 

Wtd avg exercise 

price (US$)* 

Share options exercisable 

Number 

Wtd avg 

exercise price (US$)* 

1.89 to 2.18 885,800 70 months 2.02 594,840 2.01 

3.31 75,800 53 months 3.31 75,800 3.31 

4.65 to 6.85 1,717,217 69 months 5.01 554,697 5.05 

10.66 to 13.96 402,000 90 months 13.88 — — 

Range of exercise 

price (US$) 

Allocation Shares Options outstanding 

3,080,817 1,225,337 

Number 

Wtd avg 


Wtd avg exercise 

price (US$)* 

Allocation Shares Options exercisable 

Number 

Wtd avg 

exercise price (US$)* 

1.89 to 2.61 719,800 70 months 2.11 495,460 2.11 

3.31 to 4.65 699,990 73 months 4.30 247,918 3.85 

5.11 to 7.21 649,300 65 months 5.33 245,920 5.23 

11.56 to 13.96 709,900 90 months 13.90 — — 

2,778,990 989,298 

The share options are issued in South African Rands. They have been translated at the closing rate for the year of US$ 1 to ZAR 10.5400 (September 2001: US$ 1 to ZAR 8.9386). 

533,350 Trust shares (September 2001: 220,300) were granted at a weighted average exercise price per share of US$ 13.20 (September 2001: US$ 6.27). 

Pro forma disclosure 

The Company applies the intrinsic value-based methodology permitted by SFAS 123 in accounting for the Share Options and Allocation Share Options. 

Accordingly, no compensation expense has been recognised. The Company has adopted the disclosure-only provisions of SFAS 123. Had compensation cost 

for Share Option and Allocation Share Options awards under the Scheme been determined based on their fair value at the grant date, the Company's net profit, 

basic earnings per share and the diluted earnings per share would have been as follows: 

US GAAP net profit as reported US$ 252 million US$ 153 million 

Pro forma US GAAP net profit US$ 247 million US$ 146 million 

US GAAP basic earnings per share as reported 110 US cents 66 US cents 

Pro forma US GAAP basic earnings per share 108 US cents 63 US cents 

US GAAP diluted earnings per share as reported 108 US cents 65 US cents 

Pro forma US GAAP diluted earnings per share 106 US cents 62 US cents 

F-64 

The weighted average fair value of the Share Options granted in 2002 is estimated as US$ 4.13 (September 2001: US$ 2.40) on the date of grant. The 

exercise price was equal to the market price of the ordinary shares on the grant date for all of the Share Options granted during 2001 and 2000. The weighted 

average fair value of the Allocation Share Options granted in 2002 is estimated as US$ 4.34 (September 2001: US$ 2.39) on the date of grant. The foregoing 

impact on compensation costs, calculated in accordance with the fair value method described in SFAS 123, was determined under the Black-Scholes method 

using the following weighted average assumptions: 

Share Options 

Risk-free interest rate 5.6% 6.9% 

Expected life 5 years 5 years 

Expected volatility 40% 45% 

Expected dividends 2.4% 3.0% 

Allocation Shares 



Risk-free interest rate 5.6% 6.9% 

Expected life 3 months 3 months 

Expected volatility 40% 45% 

Expected dividends 2.4% 3.0% 





New accounting standards 

The South African Accounting Practices Board ("APB") issued statement AC 137 "Agriculture" in November 2001. This statement is effective for 

financial statements periods beginning on or after 1 January 2003. The objective of this statement is to prescribe the accounting treatment and related financial 

statement presentation and disclosures for agricultural activity, which is the management of the transformation of biological assets (living animals or plants) 

into agricultural produce or into additional biological assets. The Group will adopt AC 137 in financial year September 2004 and is currently evaluating the 

effects of the statement. 

The APB issued exposure draft ED 155 "Improvements" in May 2002 and does not yet have an effective date for implementation. This exposure draft is 

on improvements to South African Accounting Standards and proposes substantial revisions to the certain standards and lesser revisions to some others. The 

Group will adopt ED 155 when it becomes effective and is currently evaluating the effects of the exposure draft. 

The APB issued exposure draft ED 157 "Financial instruments: disclosure and presentation and Financial instruments: recognition and measurement" in 

June 2002 and does not yet have an effective date for implementation. This exposure draft proposes significant amendments to the two South African 

Accounting Standards dealing with accounting for financial instruments, AC 125 and AC 133. The Group will adopt ED 157 when it becomes effective and is 

currently evaluating the effects of the exposure draft. 

F-65 

The APB issued exposure draft ED 159 "Accounting for secondary tax on companies (STC)" in September 2002 and does not yet have an effective date 

for implementation. This exposure draft addresses the accounting treatment and disclosure requirements of STC in an entity's financial statements. The Group 

will adopt ED 159 when it becomes effective and is currently evaluating the effects of the exposure draft. 

The APB issued exposure draft ED 160 "Share-based payments" in November 2002 and does not yet have an effective date for implementation. The 

objective of this exposure 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 ED 160 when it becomes effective and is 

currently evaluating the effects of the exposure draft. 

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles". This statement is effective for financial statements for periods 

beginning on or after 15 December 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and 

supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not 

those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill 

and other intangible assets should be accounted for after they have been initially recognised in the financial statements. The Group will adopt SFAS No. 142 

in financial year September 2003 and is currently evaluating the effects of the statement. 

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement is effective for financial statements for 

periods beginning on or after 15 June 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of 

tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated with the 

retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for 

certain obligations of lessees. As used in this statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted 

law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This statement amends 

SFAS Statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". The Group will adopt SFAS No. 143 in financial year 

September 2003 and is currently evaluating the effects of the new statement. 

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement is effective for 

financial statements for periods beginning on or after 15 December 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or 

disposal of long-lived assets. This statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived 

Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects 

of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a 

business (as previously defined in that Opinion). This statement also amends ARB No. 51, "Consolidated Financial 

F-66 

Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Group will adopt SFAS No. 144 in 

financial year September 2003 and is currently evaluating the effects of the new statement. 

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and 

Technical Corrections." SFAS No. 145 requires that certain gains and losses from extinguishments of debt no longer be classified as an extraordinary item. 

SFAS No. 145 is effective for fiscal years beginning after 15 May 2002. The Group will adopt FASB No. 145 in financial year September 2003 and we do not 

expect the adoption of the new statement to have a material effect on our financial statements. 

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a 

liability for costs associated with an exit or disposal activity be recognised and measured initially at fair value only when the liability is incurred. SFAS 

No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of the new statement to have a 

material effect on our financial statements. 

39. DIRECTORS REMUNERATION 


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 year, 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. 

Director 

Country of 

Residence 

Board 

Fees 

F-67 


Committee 

Fees 

Total 

Board 

Fees 


Committee 

Fees 

DC Brink South Africa 9,393 8,539 17,932 11,562 10,493 22,055 

TL de Beer South Africa 9,393 11,386 20,779 11,562 14,012 25,574 

JS Chalsty United States 37,500 33,750 71,250 35,000 31,500 66,500 

M Feldberg* United States 22,950 — 22,950 — — — 

WE Hewitt# South Africa 4,365 — 4,365 11,562 — 11,562 

DNA Hunt-Davis South Africa 9,393 11,386 20,779 11,562 10,493 22,055 

K de Kluis Belgium 36,397 33,088 69,485 33,119 30,239 63,358 

D Konar* South Africa 5,757 506 6,263 — — — 

KR Lechmere-Oertel# South Africa 4,365 1,328 5,693 11,562 3,519 15,081 

FA Sonn South Africa 9,393 2,846 12,239 11,562 — 11,562 

AGJ Vlok South Africa 9,393 — 9,393 11,562 — 11,562 

* 

# 

Appointed in March 2002. 

Retired in February 2002. 


Director 

Country of 

Residence 

Salary 

(US$) 

158,299 102,829 261,128 149,053 100,256 249,309 

Bonuses and 

performance 

related 

payments 

Sums paid 

by way of 

expense 

allowance 


(US$) 

Contributions paid 

under a pension 

and medical aid 

scheme 

Benefit 

received from 

Credit 

Scheme 

Share 

Funding 

MR Haymon United States 785,000 161,700 — 70,992 2,020 1,019,712 

JL Job South Africa 165,466 67,794 3,840 43,984 — 281,084 

W Pfarl Belgium 439,183 199,007 — 86,517 — 724,707 

WH Sheffield** United Kingdom 565,606 117,673 43,586 121,745 30,160 878,770 

DG Wilson South Africa 133,183 80,926 2,304 35,810 — 252,223 

E van As South Africa 376,083 240,592 3,172 96,918 — 716,765 

** 

Appointed in May 2001. 


Director 

Country of 

Residence 

2,464,521 867,692 52,902 455,966 32,180 3,873,261 

Salary 

F-68 

Bonuses and 

performance 

related 

payments 

Sums paid 

by way of 

expense 

allowance 


(US$) 

Contributions paid 

under a pension 

and medical aid 

scheme 

Benefit 

received from 

Credit Scheme 

Share Funding 

MR Haymon United States 762,500 526,000 — 61,227 39,835 1,389,562 

JL Job South Africa 177,768 142,213 4,213 40,575 — 364,769 

W Pfarl Belgium 410,150 248,922 — 89,683 — 748,755 

Total 

Total 

Total

WH Sheffield** United Kingdom 230,762 — 10,574 46,368 — 287,704 

DG Wilson South Africa 144,303 125,348 1,974 33,319 — 304,944 

E van As South Africa 392,884 357,319 3,263 86,712 — 840,178 

** 


2,118,367 1,399,802 20,024 357,884 39,835 3,935,912 

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. Our 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 91% of 

annual salary if group and personal performances 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 18 months 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 eighteen month's salary and benefits 

in kind. 

40. DIRECTORS INTERESTS 

F-69 

The following table sets out the Directors' interests in 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, but for which they have not yet paid. 

Director 

Beneficial 

Direct Interests 

30 September 2002 

Vested 

Obligations 

to Purchase 

or repay loans 

Indirect 

Interests 

Beneficial 

Beneficial 

Direct Interests 

30 September 2001 

Vested 

Obligations 

to Purchase 

or repay loans 

Indirect 

Interests 

Beneficial 


DC Brink — — 10,000 — — 10,000 

TL de Beer — — — — — — 

JS Chalsty 10,000 — — 10,000 — — 

M Feldberg* — — — Appointed as Director in 2002 

WE Hewitt# Retired as Director 49,630 — — 

DNA Hunt-Davis — — — 1,000 — — 

K de Kluis 4,000 — — 4,000 — — 

D Konar* — — — Appointed as Director in 2002 

KR Lechmere-Oertel# Retired as Director 25,070 — — 

FA Sonn — — — — — — 

AGJ Vlok 25,000 — — 35,000 — — 


MR Haymon 32,920 8,000 — 32,920 53,714 — 

JL Job 1,941 21,000 — 1,941 26,000 — 

W Pfarl — 15,000 — — 12,000 — 

WH Sheffield** — 10,000 — — — — 

DG Wilson 2,992 23,000 — 2,992 13,000 — 

E van As 222,146 205,000 120,490 297,196 112,000 55,990 

TOTAL 298,999 282,000 130,490 459,749 216,714 65,990

* 

** 

# 

Appointed in March 2002. 


Retired in February 2002. 

41. DIRECTORS PARTICIPATION IN THE SAPPI LIMITED SHARE INCENTIVE TRUST 

Share options and Shares allocated 

F-70 

The following table sets out all share options (whether vested or unvested) and all other unvested share allocations to each Executive Director in terms of 

the Sappi Limited Share Incentive Trust. Non-Executive Directors do not have any Share Allocations nor Share Options. 

Director 

Number of 

shares held 

Share allocations held 


Weighted 

average of 

allocated 

price 

Weighted 

average 


Number of 

shares held 

Share allocations held 


Weighted 

average of 

allocated 

price 

Weighted 

average 



MR Haymon 111,000 R 42.00 69 months 159,000 R 37.50 80 months 

JL Job 112,000 R 73.75 77 months 113,000 R 45.68 84 months 

W Pfarl 150,000 R 61.06 73 months 163,000 R 35.43 80 months 

WH Sheffield 120,000 R 82.55 82 months 100,000 R 61.00 91 months 

DG Wilson 125,000 R 61.33 75 months 126,000 R 38.55 82 months 

E van As 225,000 R 63.52 73 months 268,000 R 35.75 76 months 

TOTAL 843,000 929,000 

Sales of Sappi Limited Share Incentive Trust shares 

Director 

Date Sold 

F-71 



Number of 

shares sold 

Allocation 

Price 

Market value at 

date of sale 

Gains on 

shares sold 

US$* 


MR Haymon 22 March 2002 48,000 R 19.90 R 159.34 582,568 

2,000 R 22.10 R 159.34 23,891 

23 May 2002 5,000 R 22.10 R 146.00 61,337 

2,000 R 56.75 R 145.36 17,547 

18,000 R 22.10 R 145.36 219,671 

26 June 2002 2,000 R 22.10 R 147.00 24,194 

3,000 R 53.85 R 147.00 27,065 

714 R 56.75 R 146.50 6,206 

9,000 R 22.10 R 146.50 108,436 

4,000 R 53.85 R 146.50 35,893 

JL Job 19 November 2001 16,000 R 39.00 R 96.20 94,892 

23 May 2002 20,000 R 53.85 R 146.50 183,465 

W Pfarl 27 March 2002 24,000 R 19.90 R 148.85 269,935 

16,000 R 22.10 R 148.85 176,886 

WH Sheffield — — — — 

DG Wilson 14 May 2002 16,000 R 21.30 R 144.98 195,735 

E van As — — — — 

TOTAL 185,714 2,027,721 

Director 

Date Sold 



Number of 

shares sold 

Allocation 

Price 

Market value at 

date of sale 

Gains on 

shares sold 

US$* 


MR Haymon 19 June 2001 13,000 R 56.75 R 71.25 23,450

JL Job 8 May 2001 16,000 R 39.00 R 75.17 72,376 

W Pfarl 6 March 2001 40,000 R 19.90 R 67.75 245,306 

WH Sheffield — — — — — 

DG Wilson 6 March 2001 16,000 R 21.30 R 69.10 98,020 

E van As 9 February 2001 45,000 R 19.90 R 60.00 227,124 

40,000 R 22.10 R 60.00 190,812 

TOTAL 170,000 857,088 

* 

Converted from South African Rands to US Dollars at the exchange rates on the date of sale. 

F-72 


GROUP FINANCIAL STATEMENT SCHEDULE 

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS 


Balance— 

beginning of 

year 

Costs and 

expenses 

Deductions 

(principally 

write-offs) 

(US$ million) 

Foreign 

currency 

translation 

difference 

Balance— 

end of 

year 

Allowance for doubtful debts: 

September 2000 14 6 (4) (5) 11 

September 2001 11 4 (1) — 14 

September 2002 14 1 2 — 17 

S-1 

QuickLinks 


OUR USE OF TERMS AND CONVENTIONS IN THIS ANNUAL REPORT 

ACCOUNTING PERIODS AND PRINCIPLES 

CURRENCY OF PRESENTATION AND EXCHANGE RATES 

FORWARD-LOOKING STATEMENTS 

PART I 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 

ITEM 3. KEY INFORMATION 

RISK FACTORS 

ITEM 4. INFORMATION ON THE COMPANY 

HISTORY AND DEVELOPMENT OF THE COMPANY 

BUSINESS OVERVIEW 

THE PULP AND PAPER INDUSTRY 

SAPPI FINE PAPER 

SAPPI FOREST PRODUCTS 

SUPPLY REQUIREMENTS 

ENVIRONMENTAL AND SAFETY MATTERS 

ORGANISATIONAL STRUCTURE 

PROPERTY, PLANTS AND EQUIPMENT 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 

ITEM 8. FINANCIAL INFORMATION

ITEM 9. THE OFFER AND LISTING 

ITEM 10. ADDITIONAL INFORMATION 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 

PART II 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 

ITEM 15. CONTROLS AND PROCEDURES 

ITEM 16. [Reserved] 

TABLE OF CONTENTS II 

SIGNATURES 

Certification Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002 

Certification Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002 


REPORT OF THE INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SAPPI LIMITED 

SAPPI GROUP INCOME STATEMENT for the year ended September 2002 

SAPPI GROUP BALANCE SHEET at September 2002 

SAPPI GROUP CASH FLOW STATEMENT for the year ended September 2002 

SAPPI GROUP STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY for the year ended September 2002 

SAPPI NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS for the year ended September 2002 

SAPPI GROUP FINANCIAL STATEMENT SCHEDULE SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS for the year ended 

September 2002

QuickLinks -- Click here to rapidly navigate through this document 

ASSET PURCHASE AGREEMENT 

between 

POTLATCH CORPORATION 

and 

NORTHERN HOLDINGS LLC, to be renamed 

Sappi Cloquet LLC 

Dated as of March 18, 2002 


EXHIBIT 4.9 

CONFORMED COPY 

ARTICLE I Purchase and Sale of Acquired Assets 

SECTION 1.01. Purchase and Sale 10 

SECTION 1.02. Acquired Assets and Excluded Assets; Acquired Coating Equipment 11 

SECTION 1.03. Assumption of Certain Liabilities 18 

SECTION 1.04. Consents of Third Parties 23 

SECTION 1.05. Closing Net Assets Determination 24 

ARTICLE II The Closing 

SECTION 2.01. Closing Date 26 

SECTION 2.02. Transactions To Be Effected at the Closing 27 

SECTION 2.03. Hydroelectric Facility Closing 28 

SECTION 2.04. Termination of Hydroelectric Transfer 30 

SECTION 2.05. Risk of Loss 31 

ARTICLE III Representations and Warranties of Seller 

SECTION 3.01. Organization, Standing and Power 31 

SECTION 3.02. Authority; Execution and Delivery; Enforceability 31 

SECTION 3.03. No Conflicts; Consents 32 

SECTION 3.04. Financial Statements; Liabilities 32 

SECTION 3.05. Assets Other than Real Property Interests 33 

SECTION 3.06. Real Property 34 

SECTION 3.07. Intellectual Property 36 

SECTION 3.08. Contracts 38 

SECTION 3.09. Inventory 41 

SECTION 3.10. Personal Property 42 

SECTION 3.11. Receivables 42 

SECTION 3.12. Investments 42 

SECTION 3.13. Permits 42 

SECTION 3.14. Insurance 43 

SECTION 3.15. Sufficiency of Acquired Assets 43 

SECTION 3.16. Taxes 43 

SECTION 3.17. Proceedings 45 

SECTION 3.18. Employee Matters 45 

SECTION 3.19. Absence of Changes or Events 46 

SECTION 3.20. Compliance with Applicable Laws 47 

SECTION 3.21. Employee and Labor Matters 48 

SECTION 3.22. Transactions with Affiliates 50 

SECTION 3.23. Effect of Transaction 50 

SECTION 3.24. Suppliers 50 

SECTION 3.25. Customers 51 

SECTION 3.26. Distributors 51 

SECTION 3.27. IRB Financings 51 

SECTION 3.28. Cross-Border Leases 51 

Page

SECTION 3.29. Railroad 51 

SECTION 3.30. Energy Generation Facilities 52 

SECTION 3.31. Product Warranties and Liabilities 53 

SECTION 3.32. Disclosure 53 

SECTION 3.33. Disclaimer of Other Representations and Warranties 54 

2 

ARTICLE IV Representations and Warranties of Purchaser 

SECTION 4.01. Organization, Standing and Power 54 

SECTION 4.02. Authority; Execution and Delivery; and Enforceability 55 

SECTION 4.03. No Conflicts; Consents 55 

SECTION 4.04. Proceedings 55 

SECTION 4.05. Railroad 56 

SECTION 4.06. Disclaimer of Other Representations and Warranties 56 

ARTICLE V Covenants 

SECTION 5.01. Covenants of Seller Relating to Conduct of Business 56 

SECTION 5.02. No Solicitation 61 

SECTION 5.03. Access to Information, Due Diligence 62 

SECTION 5.04. Confidentiality 63 

SECTION 5.05. Reasonable Efforts 64 

SECTION 5.06. Expenses; Transfer Taxes 65 

SECTION 5.07. Brokers or Finders 66 

SECTION 5.08. Collection of Receivables 66 

SECTION 5.09. Employee Matters 67 

SECTION 5.10. Supplemental Disclosure 70 

SECTION 5.11. Post-Closing Cooperation 71 

SECTION 5.12. Publicity 72 

SECTION 5.13. Records 72 

SECTION 5.14. Agreement Not To Compete 72 

SECTION 5.15. Bulk Transfer Laws 74 

SECTION 5.16. Further Assurances 74 

SECTION 5.17. Purchase Price Allocation 75 

SECTION 5.18. Names Following Closing 75 

SECTION 5.19. Assignments 75 

SECTION 5.20. Insurance. 76 

SECTION 5.21. Title Insurance and Survey 76 

SECTION 5.22. Compliance with Plant Closing Laws 76 

SECTION 5.23. IRB Financings 77 

SECTION 5.24. Cross-Border Leases 78 

SECTION 5.25. Audited Financial Statements 78 

SECTION 5.26. Acquired Coating Equipment 79 

SECTION 5.27. Financing 79 

SECTION 5.28. Nursery 80 

SECTION 5.29. Paper Supply Agreement 80 

SECTION 5.30. Wood Supply Agreement 81 

SECTION 5.31. Post-Closing Real Estate Work 81 

SECTION 5.32. Sheeters 81 

SECTION 5.33. Power Agreements 82 

SECTION 5.34. Energy Regulation 85 

ARTICLE VI Conditions Precedent 

SECTION 6.01. Conditions to Each Party's Obligation 85 

SECTION 6.02. Conditions to Obligation of Purchaser 86 

SECTION 6.03. Conditions to Obligation of Seller 90 

SECTION 6.04. Failure of Closing Conditions 91 

SECTION 6.05. Ability to Cure 91 

SECTION 6.06. Catastrophic Events 93 

ARTICLE VII Termination, Amendment and Waiver 

SECTION 7.01. Termination 93 

SECTION 7.02. Effect of Termination 94 

SECTION 7.03. Amendments and Waivers 94 

ARTICLE VIII Indemnification 

3

SECTION 8.01. Indemnification by Seller 94 

SECTION 8.02. Indemnification by Purchaser 97 

SECTION 8.03. Calculation of Losses 99 

SECTION 8.04. Termination of Indemnification 99 

SECTION 8.05. Procedures 99 

SECTION 8.06. Survival of Representations 102 

SECTION 8.07. INDEMNIFICATION IN CASE OF STRICT LIABILITY OR INDEMNITEE NEGLIGENCE 102 

SECTION 8.08. Certain to Rights of Indemnified Parties 102 

SECTION 8.09. DISCLAIMER OF WARRANTIES 103 

SECTION 8.10. Hydroelectric Facility 103 

ARTICLE IX General Provisions 

SECTION 9.01. Assignment 103 

SECTION 9.02. No Third-Party Beneficiaries 103 

SECTION 9.03. Notices 104 

SECTION 9.04. Interpretation; Exhibits and Schedules; Certain Definitions 105 

SECTION 9.05. Counterparts 106 

SECTION 9.06. Entire Agreement 107 

SECTION 9.07. Severability 107 

SECTION 9.08. Consent to Jurisdiction 107 

SECTION 9.09. Governing Law 107 

SECTION 9.10. Waiver of Jury Trial 107 

SECTION 9.11. Power of Attorney, etc. 108 

SECTION 9.12. Refunds and Remittances 108 

SECTION 9.13. Purchaser Guarantor 108 

SECTION 9.14. Enforcement of Agreement; Limitation on Damages 108 

SECTION 9.15. Schedules; Disclosure 109 

Exhibits: 

Exhibit A — Transition Services Agreement 

Exhibit B — Option Agreement 

Exhibit C — [Reserved] 

Exhibit D — License Agreement 

Exhibit E — Coated Paper Products Supply Agreement 

Exhibit F — Wood Supply Agreement 

Exhibit G — [Reserved] 

Exhibit H-1 — Cross-Border Lease Assumptions 

Exhibit H-2 — Cross-Indemnity Agreement 

Exhibit I-1 — Opinion of Pillsbury Winthrop LLP 

Exhibit I-2 — Opinion of Chadbourne & Parke 

Exhibit I-3 — Opinion of Fritz R. Kahn, P.C. 

Exhibit I-4 — Opinion of Hogan & Hartson L.L.P. 

Exhibit I-5 — Opinion of Rudy, Gassert, Yetka & Pritchett, P.A. 

Exhibit I-6 — Opinion of Ralph Davisson, Esq. 

Exhibit J — Form of Estoppel Certificate 

Exhibit K — Opinion of Cravath, Swaine & Moore 

4 

Definition 

INDEX OF DEFINITIONS 

Accounting Firm 1.05(b) 

Accounting Principles 1.05(d) 

Accrued Liability 5.09(e)(iii) 

Acquired Assets 1.02(a) 

Acquired Coating Equipment 1.02(c) 

Acquired Entities 1.02(a)(xviii) 

Acquired Interests 1.02(a)(xviii) 

Acquisition 1.01 

Active Employees 5.09(a) 

Additional Brainerd Inventory 1.02(f) 

Additional Brainerd Packaging 1.02(f) 

Additional Brainerd Production Period 1.02(f) 

Additional McCoy Silk Amount 1.02(e) 

Additional Property Amount 1.05(d) 

Additional Purchaser Document 4.06(a) 

Additional Seller Document 3.32 

Section

Adjusted Accrued Liability 5.09(e)(iv) 

Adjusted Purchase Price 1.05(c) 

Affected Employees 5.22(a) 

affiliate 9.04(b) 

Affiliate Contracts 3.22 

Affiliated Group 3.16(a) 

Agreed Principles 1.05(d) 

Ancillary Agreements 1.02(b)(vi), 2.02(c), 5.24 

Anticipated Closing Date 5.05(a) 

Applicable Law 3.03 

Assets 1.05(d) 

Assigned Contracts 1.02(a)(viii) 

Assigned Intellectual Property 1.02(a)(v) 

Assigned Permits 1.02(a)(vii) 

Assigned Technology 1.02(a)(vi) 

Assumed Liabilities 1.03(a) 

Audited Financial Statements 5.25(a) 

Balance Sheet 3.04(a) 

Base Amount 1.05(c) 

Benefit Plan 3.18(a) 

Brainerd Facility 1.02(b)(ii) 

Brainerd Participants 5.09(a) 

Business preamble 

Business Insurance Policy 5.20 

Business Property 3.06(a) 

Catastrophic Event 6.06 

Cloquet Facility preamble 

Closing 2.01 

Closing Date 2.01 

Closing Date Amount 2.02(b) 

Closing Net Assets 1.05 

5 

Code 3.16(a) 

Competing Business 5.14(b) 

Competition Condition 6.01(a) 

Competitive Activities 5.14(a)(i) 

Confidentiality Agreement 5.04 

Consent 3.03 

Contingent Workers 3.21(f) 

Continuance Notice 1.02(e) 

Continued Employees 5.09(a) 

Continuing IRB Financing 5.23 

Contracts 1.02(a)(viii) 

controlled affiliate 9.04(b) 

Creditworthiness 6.02(p) 

Cross-Border Indemnity Agreement 5.24 

Cross-Border Lease Assumptions 5.24 

Cross-Border Leases 1.02(a)(xviii) 

Cured 6.05 

Current Assets 1.05(d) 

Current Liabilities 1.05(d) 

Customer Contracts 1.03(a)(i) 

December Balance Sheet 3.04(a) 

Detrimental Activities 5.14(a)(ii) 

Discontinuance Notice 1.02(e) 

Distribution Center Facility 3.06(a) 

DOJ 5.05(b) 

Environmental Laws 3.20(b) 

ERISA 3.18(b) 

Escrow Agent 2.03(b) 

Escrow Agreement 2.03(b) 

Escrow Period 2.03(e) 

Estimated McCoy Silk Amount 1.02(e) 

Excluded Assets 1.02(b) 

Excluded Brainerd Assets 1.02(b)(ii) 

Excluded Liabilities 1.03(b) 

FERC preamble 

FERC Easement 2.03(b) 

FERC License preamble

FERC Transfer Approval 2.03(e) 

Final Order 2.03(e) 

Financial Statements 3.04(a) 

Financing 5.27 

FMLA 5.09(a) 

Force Majeure Event 6.02(p) 

FPA 3.30(a) 

Freight Cars 1.02(a)(xx) 

FTC 5.05(b) 

GAAP 1.05(d) 

Governmental Entity 3.03 

Greenhouse 5.28 

Greenhouse Activities 5.28 

6 

Greenhouse Parcel 5.28 

Hazardous Materials 3.20(b) 

HSR Act 5.05(b) 

Hydroelectric Base Amount 1.05(c) 

Hydroelectric Facility preamble 

Hydroelectric Facility Closing 2.01(b) 

Hydroelectric Facility Closing Date 2.01(b) 

Hydroelectric Facility Contract 3.08(a)(xxvii) 

Hydroelectric Facility Notice 2.03(a) 

Hydroelectric Facility Purchase Price 2.02(b) 

Hydroelectric Facility Transfer Documents 2.03(b) 

Hydroelectric Termination Date 2.04(a) 

including 9.04(b) 

Indebtedness 3.08(a)(ix) 

IRB Financings 1.02(a)(xvii) 

indemnified party 8.05(a) 

intentional breach 9.04(b) 

Insured Property 6.02(e) 

Intellectual Property 1.02(a)(v) 

Inventory 1.02(a)(ii) 

Investments 1.02(a)(ix) 

Judgment 3.03 

knowledge 9.04(b) 

KPMG 5.25(a) 

Labor Agreements 1.02(b)(x) 

Labor Contracts 1.02(b)(x) 

Leased Property 3.06(a) 

Liabilities 1.05(d) 

License Agreement 2.02(c) 

Liens 3.05(a) 

Locomotives 1.02(a)(xx) 

Losses 8.01(a) 

MP Waiver 5.33(a) 

Material Assigned Contracts 3.08(b) 

McCoy Silk 1.02(e) 

Minor Pre-Closing On-Site Liability 8.01(c) 

Net Assets 1.05(d) 

Non-Continuing Participants 5.09(a) 

Non-Current Assets 1.05(d) 

Non-Current Asset Cap 1.05(d) 

Notice of Disagreement 1.05(b) 

Nursery Activities 5.28 

Nursery Parcel 5.28 

Nursery Property 5.28 

Offer Period 5.32(b) 

Offering Materials and Presentations 3.33 

Operating and Maintenance Agreement 2.03(b) 

operation of the Brainerd Facility 9.04(b) 

Option Agreement 2.02(c) 

other bid 5.02 

7 

Owned Property 3.06(a)

Paper Supply Agreement 2.02(c) 

Participant 3.18(a) 

PBGC 5.09(e)(i) 

Pension Asset Transfer 5.09(e)(ii) 

Pension Shortfall Amount 5.09(e)(iv) 

Permits 3.13(a) 

Permitted Goods and Services 5.14(a)(i) 

Permitted Liens 3.05(a) 

person 9.04(b) 

Personal Property 1.02(a)(iii) 

Personnel 3.07(c) 

Plant Closing Laws 5.22(a) 

Power Agreements 1.02(b)(xiv) 

Power Generation Facilities 1.02(a)(xxii) 

Pre-Closing Environmental Liability 1.03(b) 

Premises 1.02(a)(i) 

Proceeding 1.03(b)(iv) 

Project Agreement 3.30(e) 

Property Leased to a Third Party 3.06(a) 

Purchase Price 1.01 

Purchaser preamble 

Purchaser 401(k) Plans 5.09(f) 

Purchaser Guarantor preamble 

Purchaser Hourly Pension Plan 5.09(e) 

Purchaser Indemnified Parties 8.01(a) 

Purchaser Material Adverse Effect 9.04(b) 

Purchaser Pension Plans 5.09(e) 

Purchaser Salaried Pension Plan 5.09(e) 

Purchaser's Actuary 5.09(e)(i) 

Purchaser Pension Plan 5.09(e)(i) 

Purchaser's Representatives 5.03 

PUHCA 3.30(f) 

PURPA 3.30(a) 

Rail Equipment 1.02(a)(xx) 

Railroad preamble 

Railroad Parcels 5.31(c) 

Railroad Property 1.02(a)(xix) 

Railroad Sub 1.02(d) 

Receivables 1.02(a)(iv) 

Records 1.02(a)(xiii) 

Relationship Agreement 2.03(b) 

Release 3.20(b) 

Repaired 3.06(d) 

Representatives 5.02 

Research Center preamble 

Retiree Medical Eligible Employees 5.09(e) 

Revised Cloquet Power Agreements 5.33 

Revised Power Agreements 5.33 

Roadway Equipment 1.02(a)(xx) 

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ROW Parcels 3.29(b) 

Scanlon Woodlot 5.31(b) 

SEC 3.30(g) 

Seller preamble 

Seller bid 5.02 

Seller 401(k) Plans 5.09(f) 

Seller Group preamble 

Seller Hourly Pension Plan 5.09(e) 

Seller Material Adverse Effect 9.04(b) 

Seller Salaried Pension Plan 5.09(e) 

Seller's Actuary 5.09(e) 

Seller Pension Plan 5.09(e)(i) 

Separation Agreements 1.03(b)(xvi) 

Sheeters 5.32(c) 

Statement 1.05 

STB 5.05(b) 

Steam Turbine Facilities 3.08(a)(xxvii) 

Steam Turbine Contract 1.02(a)(xxii) 

subsidiary 9.04(b)

Target McCoy Silk Amount 1.02(e) 

Tax 3.16(a) 

Taxing Authority 3.16(a) 

Technology 1.02(a)(vi) 

Termination Date 7.01(a)(iv) 

Third Party Claim 8.05(a) 

Transfer Amount 5.09(e)(iv) 

Transfer Notice 3.31(a) 

Transfer Price 3.31(a) 

Transfer Taxes 1.03(b)(viii) 

Transition Services Agreement 2.02(c) 

Unions 1.02(b)(x) 

Unknown Pre-Closing On-Site Environmental Liabilities 8.01(c) 

Violation 6.05 

WARN Act 5.22(a) 

WLSSD 3.06(j)(i) 

Wood Supply Agreement 2.02(c) 

Working Capital 1.05(d) 

Working Capital Limit 1.05(d) 

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ASSET PURCHASE AGREEMENT dated as of March 18, 2002, between POTLATCH CORPORATION, a Delaware corporation ("Seller"), SAPPI 

LIMITED, a corporation organized under the laws of the Republic of South Africa ("Purchaser Guarantor"), and NORTHERN HOLDINGS LLC, a 

Delaware limited liability company ("Purchaser"), to be renamed Sappi Cloquet LLC. 

Seller is engaged (a) through its Minnesota Pulp and Paper Division, in (i) the manufacture, marketing, sale and distribution of coated and uncoated 

paper manufactured at its Cloquet, Minnesota and Brainerd, Minnesota facilities or otherwise by or through its Minnesota Pulp and Paper Division and 

bleached kraft pulp manufactured at its Cloquet, Minnesota facility and related by-products and (ii) the operation of the Hydroelectric Facility (as defined 

below), (b) through its Fiber Research and Development Center, in the development of, and research with respect to, coated paper and related intellectual 

property and technology and (c) through a subsidiary, in the operation of the Duluth & Northeastern Railroad Company (such activities of Seller and its 

subsidiaries are collectively referred to herein as the "Business"). 

Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller and its subsidiaries (collectively, the "Seller Group"), all of the assets 

primarily used in or necessary for the conduct of the Business (other than the Excluded Brainerd Assets (as defined herein)), including (i) the paper mill, pulp 

mill, staff house, general office building and certain woodyards located in Cloquet, Minnesota (the "Cloquet Facility"), the woodyard located near Scanlon, 

Minnesota, the Fiber Research and Development Center located in Cloquet, Minnesota (the "Research Center"), the Cloquet Hydroelectric Project (Federal 

Energy Regulatory Commission ("FERC") Project No. P-2363) (including the FERC License covering the Cloquet Hydroelectric Project issued July 13, 1995 

[72 FERC ¶61,029], as amended (the "FERC License") and all related facilities, rights or authorizations necessary to operate and maintain the Cloquet 

Hydroelectric Project) (the "Hydroelectric Facility") and the Duluth & Northeastern Railroad Company (the "Railroad"), (ii) the order books for the Business, 

including the order book associated with Seller's facility located in Brainerd, Minnesota that Seller has determined to close and (iii) various trademarks, 

tradenames and other intellectual property used in the Business, upon the terms and subject to the conditions of this Agreement. 

Purchaser Guarantor is the indirect holder of all the membership interests in Purchaser, and will derive substantial benefits from the purchase and sale of 

the Business pursuant to this Agreement. As a condition to the execution and delivery of this Agreement by Seller, Seller has requested that Purchaser 

Guarantor agree, pursuant to Section 9.13 hereof, to cause Purchaser to comply with Purchaser's obligations hereunder until the Closing (as defined herein). 

Accordingly, the parties hereby agree as follows: 

ARTICLE I 

Purchase and Sale of Acquired Assets 

SECTION 1.01. Purchase and Sale. Subject in the case of the Hydroelectric Facility to Section 2.03 and otherwise on the terms and subject to the 

conditions of this Agreement, at the Closing (as defined in Section 2.01), Seller shall, and shall cause each other relevant member of the Seller Group to, sell, 

assign, transfer, convey and deliver to Purchaser or one or more of its designated affiliates, and Purchaser shall, or shall cause its designated affiliates to, 

purchase from the Seller Group all the right, title and interest as of the Closing of the Seller Group in, to and under the Acquired Assets (as defined in 

Section 1.02(a)) and the Acquired Coating Equipment (as defined in Section 1.02(c)), for (i) an aggregate cash purchase price of $480,000,000 (the "Purchase 

Price"), payable as set forth in Section 2.02 and subject to adjustment as set forth in Section 1.05 and (ii) the assumption of the Assumed Liabilities (as 

defined in Section 1.03(a)). The purchase and sale of the Acquired Assets and the assumption of the Assumed Liabilities is referred to in this Agreement as 

the "Acquisition". 

SECTION 1.02. Acquired Assets and Excluded Assets; Acquired Coating Equipment. (a) The term "Acquired Assets" means (x) all the business, 

properties, assets, goodwill and rights of the Seller Group of whatever kind and nature, real or personal, tangible or intangible, that are owned, leased or 

licensed by any member of the Seller Group on the Closing Date (as defined in Section 2.01) and primarily used, primarily held for use, intended to be 

primarily used (for all purposes of defining Acquired Assets, references to assets used, held for use or intended to be used in the operation or conduct of the 

Business shall be deemed to include (qualified by "primarily" where applicable) those previously used, held for use, or intended to be used and still owned, 

leased or licensed by any member of the Seller Group but only if (1) used, held for use or intended to be used in the operation or conduct of the Business at 

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any time since January 1, 2001, (2) located on the Premises on the date of the Balance Sheet or the Closing Date or (3) reflected on any Financial Statement 

(as defined in Section 3.04)) or (except with respect to the types of assets and properties described in clauses (i), (v), (vi) and (xi) below, which shall 

constitute Acquired Assets to the extent provided therein) reasonably necessary to or required in the operation or conduct of the Business other than the 

Excluded Assets (as defined in Section 1.02(b)) and (y) those assets identified on Schedule 1.02(a), including (except to the extent that any of the assets below 

are Excluded Assets and are not identified on Schedule 1.02(a)): 

(i) subject to Section 5.28, all real property, leaseholds, easements and other interests in real property of the Seller Group listed in Schedule 3.06, 

in each case together with the Seller Group's right, title and interest in all buildings, improvements and fixtures thereon and all other appurtenances 

thereto (together with the Railroad Property (as defined in Section 1.02(a)(xix), the "Premises"); 

(ii) (A) all raw materials, work-in-process, finished goods, supplies, parts, spare parts and other inventories of the Seller Group that on the Closing 

Date are located on the Premises, (B) all raw materials, work-in-process, finished goods, supplies, parts, spare parts and other inventories of the Seller 

Group (including those in transit, on consignment or in the possession of any third party or located on or at properties, other than the Brainerd Facility, 

not included in the Premises) on the Closing Date that are used, held for use, intended to be used or reasonably necessary or required in the operation or 

conduct of the Business or in connection with any Acquired Asset (other than wood fiber inventories not located on the Premises on the Closing Date), 

(C) all finished goods that on the Closing Date are located at the Brainerd Facility, (D) up to five days of average daily inventory of packaging material 

that on the Closing Date is located at the Brainerd Facility (unless Purchaser gives the notice contemplated by Section 5.29 or Seller elects to produce 

Additional Brainerd Inventory as contemplated by Section 1.02(f)) and (E) any supplies, parts, spare parts and other inventories (other than raw 

materials and work-in-process) that on the Closing Date are located at the Brainerd Facility and are primarily used, primarily held for use, or intended to 

be primarily used in connection with any Acquired Asset or the operation or conduct of the Business (other than operation of the Brainerd Facility) 

(collectively, the "Inventory"); 

(iii) all other tangible personal property and interests therein, including all machinery, equipment, furniture, furnishings and vehicles, of the Seller 

Group that (A) are primarily used, primarily held for use, intended to be primarily used or reasonably necessary or required in the operation or conduct 

of the Business or in connection with any Acquired Asset other than such other tangible personal property and interests therein that on the Closing Date 

are located at the Brainerd Facility and are not primarily used, primarily held for use, intended to be primarily used or reasonably necessary to or 

required in connection with any Acquired Asset or the operation or conduct of any aspect of the Business (other than operation of the Brainerd Facility) 

or (B) on the Closing Date are located on the Premises, in each case whether or not paid for, or whether or not an obligation is due or recordable as a 

liability (together with the Rail Equipment (as defined in Section 1.02(a)(xx)), the "Personal Property"); 

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(iv) all of the Seller Group's accounts and notes receivable, deferred charges, chattel paper and other rights to receive payments on the Closing 

Date arising out of the operation or conduct of the Business (the "Receivables"); 

(v) all patents (including all reissues, divisions, continuations, continuations-in-part and extensions thereof), patent applications, patent rights, 

trademarks, trademark registrations, trademark applications, servicemarks, trade names, trade dress, business names, brand names, domain names, 

copyrights, copyright registrations, designs, design registrations, and all rights to any of the foregoing ("Intellectual Property"), of the Seller Group that 

primarily relate or pertain to or are primarily used, primarily held for use or intended to be primarily used in the operation or conduct of the Business or 

in connection with any Acquired Asset (such Intellectual Property, as well as the right to sue for any pre-Closing infringements of such Intellectual 

Property, being the "Assigned Intellectual Property"); 

(vi) all trade secrets, confidential information, inventions, discoveries, know-how, formulae, practices, processes, procedures, ideas, specifications, 

engineering data, software, firmware, programs and source disks, source codes, designs, composition services, research records, records of invention, 

test information, market surveys and marketing know-how and all media carrying any of the aforesaid ("Technology") of the Seller Group that primarily 

relate or pertain to or are primarily used, primarily held for use or intended to be primarily used in the operation or conduct of the Business or in 

connection with any Acquired Asset (the "Assigned Technology"); 

(vii) all assignable Permits (as defined in Section 3.13) of the Seller Group that relate or pertain to or are used, held for use, intended to be used or 

reasonably necessary or required in the operation or conduct of the Business (other than Permits that relate or pertain solely to the operation of the 

Brainerd Facility and are not used, held for use, intended to be used or reasonably necessary or required in connection with any Acquired Asset or the 

operation or conduct of the Business (other than operation of the Brainerd Facility)) or in connection with any Acquired Asset (the "Assigned Permits"); 

(viii) all contracts, leases, licenses (including licenses of Intellectual Property and Technology), indentures, agreements, commitments and all other 

legally binding arrangements, whether oral or written ("Contracts"), to which any member of the Seller Group is a party or by which any member of the 

Seller Group is bound that are listed in Schedule 3.06 or 3.08 and all other Contracts (including purchase orders and sales orders) to which any member 

of the Seller Group is a party or by which any member of the Seller Group is bound that primarily relate or pertain to or are primarily used, primarily 

held for use, intended to be primarily used or reasonably necessary or required in, or that primarily arise out of, the operation or conduct of the Business 

or in connection with any Acquired Asset (the "Assigned Contracts"), including, without limitation, all rights to receive payments for products sold or 

shipped before the Closing Date, to receive goods and services purchased pursuant to such Assigned Contracts and to assert claims and take other 

actions in respect of breaches or other violations thereof, in each case except to the extent related to Excluded Liabilities (as defined in Section 1.03(b)); 

(ix) all partnership interests or any other equity interest in any corporation, company, limited liability company, partnership, joint venture, trust or 

other business association ("Investments") listed in Schedule 3.12, and all other Investments that are used, held for use, intended to be used or 

reasonably necessary or required in, or that arise out of, the operation or conduct of the Business or in connection with any Acquired Asset; 

(x) all rights in and to products sold or leased (including products returned after the Closing and rights of rescission, replevin and reclamation) in 

the operation or conduct of the Business; 

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(xi) all credits, prepaid expenses, deferred charges, advance payments, security deposits and prepaid items to the extent arising out of or relating to 

the operation or conduct of the Business or in connection with any Acquired Asset or any Assumed Liability; 

(xii) all rights, claims and credits to the extent arising out of or relating to the Business or any Acquired Asset or any Assumed Liability, including 

claims in bankruptcy, and any such items arising under insurance policies (whether or not such insurance policies are Excluded Assets) and all 

guarantees, warranties, offsets, indemnities and all other intangible property rights or claims and similar rights in favor of any member of the Seller 

Group in respect of the Business or any Acquired Asset or any Assumed Liability; 

(xiii) all sales and business records, service records, warranty records, books of account, ledgers, general, financial, tax and accounting records, 

personnel records (other than records relating to persons employed pursuant to the Labor Agreements (as defined in Section 1.02(b)(x)) and medical 

records other than medical exposure records), medical exposure records, files, invoices, inventory records, product specifications, drawings, 

engineering, maintenance, operating and production records, cost and pricing information, business plans, catalogs, quality control records, blueprints, 

research and development files, records and laboratory books, patent disclosures, patent life histories, litigation files, credit records of customers, 

customers' and suppliers' lists, other distribution lists, billing records, sales and promotional literature, manuals, MSDS sheets, lock out/tag out 

procedures, customer and supplier correspondence, track and other maps, betterment maps, surveys, track drawings, track profiles, signal diagrams and 

diagrams of railroad plant and structures (in all cases, in any form or medium), of the Seller Group that relate or pertain to or are used, held for use, 

intended to be used or reasonably necessary or required in, or that arise out of, the operation or conduct of the Business or in connection with any 

Acquired Asset or any Assumed Liability (the "Records"); 

(xiv) all computer and automatic machinery, servers, network equipment and connections, program documentation, tapes, manuals, forms, guides 

and other materials with respect thereto and related licenses and other agreements that (x) on the date of the Balance Sheet or the Closing Date are 

located on the Premises or (y) otherwise primarily relate or pertain to or are primarily used, primarily held for use, intended to be primarily used or 

reasonably necessary or required in the operation or conduct of the Business or any Acquired Asset; 

(xv) all goodwill generated by or associated with the Business, including the exclusive right to represent oneself as the successor of the Business; 

(xvi) all cash and cash equivalents reflected in Closing Net Assets (as defined in Section 1.05(a)); 

(xvii) full ownership of all machinery, equipment and other properties and assets subject to (or previously subject to) the debt financings identified 

on Schedule 1.02(a)(xvii) (the "IRB Financings") including full ownership of all such machinery, equipment, property and assets leased to (or 

previously leased to) Seller under the IRB Financings; 

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(xviii) (A) to the extent assumed by and transferred to Purchaser or a designated affiliate of Purchaser at Closing pursuant to a Cross-Border Lease 

Assumption, (x) the cross-border leases and other related documents identified on Schedule 1.02(a)(xviii) (the "Cross-Border Leases"), including, 

without limitation, all of the rights, including rights to payment, thereunder and (y) all outstanding membership interests (the "Acquired Interests") in 

BA Paper Equipment LLC, a Delaware limited liability company, and BA Paper Equipment II, LLC, a Delaware limited liability company (collectively, 

the "Acquired Entities" and each an "Acquired Entity"), along with all limited liability company or operating agreements, minutes and membership 

interest record books and seals relating to such entities and (B) full ownership of all machinery, equipment and other properties and assets subject to (or 

previously subject to) any Cross-Border Lease not assumed by and transferred to Purchaser at Closing pursuant to a Cross-Border Lease Assumption, 

including full ownership of all such machinery, equipment, property and assets leased to (or previously leased to) Seller under such Cross-Border Lease; 

(xix) all real, personal and intangible property relating to or used by the Railroad (the "Railroad Property") including (A) the continuous rail line 

entirely within the City of Cloquet, Minnesota commencing at the Railroad's roundhouse and shops at the upstream end of Dunlap Island and continuing 

to a point near the main entrance to the pulp and paper mill at the Cloquet Facility where such rail line connects to a rail line owned by The Burlington 

Northern and Santa Fe Railway Company and a rail line owned by the Canadian Pacific Railway Company, (B) the side tracks, spur tracks, connections 

and other rail properties associated therewith, including all contiguous properties, (C) the roadbed, rail, track, connections, ties, bridges, culverts, 

structures, turnouts, crossovers, wyes, pipes, conduits, wires, communications and signal facilities, parking and storage areas, yards, shops, buildings 

(and their contents) and all other fixtures and appurtenances owned by the Railroad or primarily relating to or primarily used by the Railroad; 

(xx) all locomotives (the "Locomotives"), including those set forth on Schedule 1.02(a)(xx), freight cars, cabooses, end of train devices and other 

rolling stock (the "Freight Cars") and maintenance of way equipment, including that used for rail relay, tie insertion or other heavy project work (the 

"Roadway Equipment"), owned or used by the Railroad (the Locomotives, Freight Cars and Roadway Equipment are collectively referred to as the "Rail 

Equipment"); 

(xxi) all real, personal and intangible property comprising the Hydroelectric Facility, including the dam, penstocks, powerhouse, tailrace, turbines, 

generators and all land and other structures described or depicted in FERC Exhibit A, F and G filed with FERC in Project No. P-2363-035 by Seller on 

July 3, 2001, all of which are set forth in Schedule 1.02(a)(xxi); 

(xxii) all real, personal and intangible property comprising Cloquet Pulp and Paper Mill Unit Nos. 3 and 4 Turbine/Generator Units (the "Steam 

Turbine Facilities" and, together with the Hydroelectric Facility, the "Power Generation Facilities"), including the steam turbines, generators and other 

related structures; and 

(xxiii) to the extent Section 5.33 provides for the assignment to Purchaser of Revised Cloquet Power Agreements or rights and obligations under 

Power Agreements upon receipt of an MP Waiver, such Revised Cloquet Power Agreements or rights and obligations, if any. 

(b) The term "Excluded Assets" means: 

(i) all assets identified on Schedule 1.02(b)(i); 

14

(ii) (A) the paper mill located in Brainerd, Minnesota (the "Brainerd Facility") and (except as provided in Section 1.02(a)(ii) or Section 1.02(a) 

(iii) or identified on Schedule 1.02(b)(ii)(A)) all other Personal Property and Inventory located on the Closing Date at the Brainerd Facility, 

(B) Assigned Contracts (other than Contracts listed in Schedule 3.06 or 3.08 and other than sales orders) that do not primarily relate or pertain to and are 

not primarily used, primarily held for use, intended to be primarily used or reasonably necessary or required in connection with, and that do not 

primarily arise out of or in connection with, any Acquired Asset or the operation or the conduct of the Business other than the operation of the Brainerd 

Facility (including purchase orders and supply contracts to the extent relating to production at the Brainerd Facility), and (C) subject to the grant of 

licenses pursuant to the License Agreement (as defined in Section 2.02(c)), Assigned Intellectual Property and Assigned Technology that are listed in 

Schedule 1.02(b)(ii)(C) and do not primarily relate or pertain to and are not primarily used, primarily held for use or intended to be primarily used in 

connection with, and that do not primarily arise out of or in connection with, any Acquired Asset or the operation or conduct of the Business other than 

operation of the Brainerd Facility (the assets described in clauses (A) through (C) being referred to herein as the "Excluded Brainerd Assets"); 

(iii) except as specifically provided in Section 1.02(a)(xviii), the Seller Group's corporate charters, minutes and stock record books and corporate 

seals; 

(iv) all rights, claims and credits of any member of the Seller Group to the extent arising out of or relating to any Excluded Asset or any Excluded 

Liability (as defined in Section 1.03(b)), including tax refunds and credits attributable to Taxes that constitute Excluded Liabilities, any such items 

arising under insurance policies and all guarantees, warranties, indemnities and all other intangible property rights or claims and similar rights in favor 

of any member of the Seller Group in respect of any Excluded Asset or any Excluded Liability; 

(v) except as specifically provided in Section 5.09, all the assets of the Seller's Pension Plans (as defined in Section 5.09(e)(i)); 

(vi) all rights of Seller under this Agreement and the other agreements and instruments executed and delivered in connection with this Agreement 

(the "Ancillary Agreements"); 

(vii) all records prepared for the purpose of the sale of the Business to Purchaser; 

(viii) all Records relating to the Business that form part of the Seller Group's general ledger or which do not relate primarily to the Business; 

(ix) all tax records that relate primarily to Taxes that constitute Excluded Liabilities; 

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(x) the Settlement Agreement between Seller and United Paperworkers International Union Locals 63, 79 and 164 and National Conference of 

Firemen and Oilers Local 939, effective June 15, 1999, and Labor Agreement 2001, effective as of December 31, 2001, between Paper, Allied, 

Chemical & Energy Workers International Union, affiliated with AFL-CIO-CLC, and Potlatch Corporation, Minnesota Pulp and Paper Division 

(Sample Service Department) (collectively, as in effect on the date hereof, as modified and interpreted by the Side Agreements set forth in 

Schedule 3.08 on the date hereof and specifically identified as "Side Agreements", the "Labor Agreements", and each union party to any Labor 

Agreement, a "Union" and, collectively, the "Unions") and any other Contract (other than the Settlement Agreement between the Duluth & Northeastern 

Railroad Company and the National Conference of Firemen and Oilers of the Service Employees International Union Locals 970 ("Local 970") and 939 

("Local 939") and United Transportation Union Local 1175 ("Local 1175") (Local 939 to the extent it represents employees of Duluth & Northeastern 

Railroad Company, Local 970 and Local 1175 hereinafter collectively referred to as the "Railroad Unions"), the Labor Agreement between Duluth & 

Northeastern Railroad Company and United Transportation Union Local 1175, dated as of July 1, 1999, the Labor Agreement, effective as of July 1, 

1999, between Duluth & Northeastern Railroad Company and National Firemen and Oilers conference of the Service Employees International Union 

and its Local No. 970 (collectively, the "Railroad CBAs")) with any union or its locals or any other collective bargaining representative of any employee 

of the Business or the Seller Group (collectively, the "Labor Contracts"); 

(xi) any capital stock of and any equity interest in Duluth & Northeastern Railroad Company, a corporation organized under the laws of the State 

of Minnesota; 

(xii) all amounts owed to Seller by Perry H. Koplik & Sons, Inc., pursuant to the Agency Agreement dated as of January 1, 1999; 

(xiii) all of Seller's interests in NaturTek, LLC, a limited liability company organized under the laws of the state of Delaware, and any assets owned 

by NaturTek, LLC; and 

(xiv) Amended and Restated Electric Service Agreement and Power Purchase Agreement, each between Seller and Minnesota Power, and each 

dated July 31, 2000 (the "Power Agreements"). 

(c) The term "Acquired Coating Equipment" means all assets, rights and personal property, tangible or intangible (including Intellectual Property and 

Technology and rights, claims and credits to the extent arising out of or relating to the Acquired Coating Equipment of the type described in Section 1.02(a) 

(xii)), of the Seller Group comprising the off-machine coater and "coating kitchen" (together with all parts and spare parts (including consumable parts) held 

for use in connection therewith) located at the Brainerd Facility and used by the Seller Group in the production of coated paper at the Brainerd Facility or 

reasonably necessary to or required in the operation of such off-machine coater and "coating kitchen". Purchaser acknowledges that, except as expressly set 

forth in this Agreement or the Ancillary Agreements, there are no representations or warranties of any kind, express or implied, with respect to the Acquired 

Coating Equipment, and that, except as expressly set forth in this Agreement, Purchaser is purchasing the Acquired Coating Equipment "as is" and "where is". 

(d) Notwithstanding anything to the contrary in this Agreement, any Acquired Assets that relate or pertain to or are used in the conduct or operation of 

the Railroad, including, without limitation, the Railroad Property, may, at Purchaser's determination, be purchased by an affiliate of Purchaser (the "Railroad 

Sub") to be designated by Purchaser prior to the Closing, in which case such Acquired Assets shall be separately identified and sold, assigned, transferred, 

conveyed and delivered by the Seller Group to such designated affiliate at Closing. 

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(e) Seller shall, to the extent it does not unreasonably interfere with the normal operation of the Business, use all commercially reasonable efforts to 

maximize the amount of McCoy silk grade paper ("McCoy Silk") in the Inventory constituting Acquired Assets on the Closing Date, in the proportions of 

basis weights and sizes as may be specified by Purchaser from time to time. Notwithstanding the foregoing, Seller shall not be obligated to continue such 

maximization to the extent such maximization will result in Working Capital (as defined in Section 1.05(a)) on the Closing Date exceeding $100,000,000, 

except in accordance with a Continuance Notice (as defined below) or any amendment thereto. If Seller plans to discontinue maximizing McCoy Silk because 

such maximization will result in Working Capital on the Closing Date exceeding $100,000,000, Seller shall give Purchaser written notice of such planned 

discontinuance at least five business days prior to such discontinuance (a "Discontinuance Notice"). A Discontinuance Notice shall include an estimate of the 

amount of McCoy Silk (including an estimate of the amounts of various basis weights and sizes) that will be in the Inventory constituting Acquired Assets on 

the Closing Date (the "Estimated McCoy Silk Amount") if such discontinuance occurs. Following receipt of a Discontinuance Notice, Purchaser shall be 

entitled to give Seller written notice (a "Continuance Notice") that Purchaser desires Seller to continue maximizing the amount of McCoy Silk, which notice 

shall include the additional maximum amount of McCoy Silk that Purchaser desires Seller to produce (the "Additional McCoy Silk Amount"; and, together 

with the Estimated McCoy Silk Amount, the "Target McCoy Silk Amount") in accordance with this Section 1.02(e). If Seller receives a Continuance Notice, 

Seller shall continue to maximize the amount of McCoy Silk in accordance with the first sentence of this Section 1.02(e); provided, however, that Seller shall 

not be required to continue maximizing the amount of McCoy Silk to the extent such maximization will result in the amount of McCoy Silk in the Inventory 

that is Acquired Assets on the Closing Date to exceed the Target McCoy Silk Amount. Purchaser shall have the right, at any time, to give written notice to 

Seller amending a Continuance Notice to increase the Additional McCoy Silk Amount. Seller shall use commercially reasonable efforts to keep Purchaser 

regularly informed as to the amount of McCoy Silk of various basis weights and sizes expected to be in the Inventory that is Acquired Assets on the Closing 

Date, and, to the extent it does not unreasonably interfere with the normal operation of the Business, Seller shall use commercially reasonable efforts to cause 

the amounts of various basis weights and sizes to be as may be requested by Purchaser from time to time. 

(f) If Purchaser has not provided the notice contemplated by Section 5.29 and any work-in-process inventories remain at the Brainerd Facility at 

Closing, Seller shall be entitled to continue the coated paper operations at the Brainerd Facility for up to seven days following Closing (the "Additional 

Brainerd Production Period") for the sole purpose of turning such work-in-process inventories into finished goods inventories (any such finished goods 

inventories produced during such period being referred to herein as "Additional Brainerd Inventory"). If Seller creates any Additional Brainerd Inventory, all 

such Additional Brainerd Inventory shall be transferred to Purchaser as Acquired Assets and shall be deemed for all purposes of this Agreement (including the 

determination of Closing Net Assets) to have been Inventory that constituted Acquired Assets on the Closing Date as though it had been located at the 

Brainerd Facility on the Closing Date. In addition, if Seller elects to produce Additional Brainerd Inventory, Seller shall be entitled to transfer to Purchaser as 

Acquired Assets up to five days of average daily inventory of packaging material that at the end of the Additional Brainerd Production Period is located at the 

Brainerd Facility ("Additional Brainerd Packaging"), and such Additional Brainerd Packaging shall be deemed for all purposes of this Agreement (including 

the determination of Closing Net Assets) to have been Inventory that constituted Acquired Assets on the Closing Date as though it had been located at the 

Brainerd Facility on the Closing Date (and no Additional Brainerd Inventory had been produced). 

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SECTION 1.03. Assumption of Certain Liabilities. (a) Upon the terms and subject to the conditions of this Agreement (and (x) subject to Section 2.03 

with respect to references to the Closing or Closing Date and (y) without limiting Purchaser's rights under Section 8.01), Purchaser shall assume, effective as 

of the Closing, and from and after the Closing Purchaser shall pay, perform and discharge when due, only the following liabilities, obligations and 

commitments of the Seller Group (the "Assumed Liabilities"), other than any Excluded Liabilities: 

(i) (A) all liabilities, obligations and commitments of any member of the Seller Group under the Assigned Contracts to the extent Purchaser 

receives the benefits of such Assigned Contracts and only to the extent such liabilities, obligations and commitments relate to the period from and after 

the Closing, (B) all liabilities, obligations and commitments of any member of the Seller Group under the Assigned Contracts that are Contracts 

(including sales orders) involving the obligation of any member of the Seller Group to deliver paper products or by-products for payment (the 

"Customer Contracts") to the extent Purchaser receives the benefits of such Assigned Contracts and (C) all liabilities, obligations and commitments 

relating to pre-Closing performance (other than liabilities, obligations or commitments relating to the Acquisition or arising from any default by any 

member of the Seller Group) under the Assigned Contracts (other than Customer Contracts) to the extent Purchaser receives the benefits of such 

Assigned Contracts, and only to the extent such liabilities, obligations and commitments are reflected in Closing Net Assets in accordance with this 

Agreement (and then only up to the amount so reflected and only to the extent of the amount of each category of liability set forth on the final statement 

of Closing Net Assets); 

(ii) all liabilities, obligations and commitments of any member of the Seller Group payable to trade creditors of the Business, arising in the 

ordinary course of business, but only to the extent and up to the amounts that should be reflected in Closing Net Assets in accordance with the 

Accounting Principles and only to the extent of the amount that should be so reflected for each category of liability reflected in Closing Net Assets (it 

being agreed that the final statement of Closing Net Assets shall be conclusive as to the liabilities, obligations and commitments that should be reflected 

therein for this purpose); 

(iii) liabilities, obligations and commitments arising under Benefit Plans (as defined in Section 3.18(a)) to the extent expressly provided in 

Section 5.09; 

(iv) all liabilities, obligations and commitments to the Business' customers for products manufactured on or prior to the Closing Date by the 

Business based on damage or quality claims or returns based on claims under the "Potlatch Promise" with respect to the press performance of such 

products, in each case arising in the ordinary course of business (other than any liability, obligation or commitment that arises because of a breach of 

this Agreement other than a breach of a representation or warranty) up to an aggregate amount of $400,000 (net of any proceeds to Purchaser from 

resale of any such products returned to Purchaser); 

18 

(v) any liability, obligation or commitment to any Continued Employee based on claims made after the Closing Date but arising out of or related in 

part to any injury, disability or similar condition of such Continued Employee that exists or occurs on or prior to the Closing Date (other than any such 

injury, disability or condition that constitutes a disease or illness or arises (A) to any extent from exposure or alleged exposure on or prior to the Closing 

Date to any materials or chemicals (including any Hazardous Materials) by any Continued Employee (as defined in Section 5.09) or any other employee

heretofore employed in the Business or (B) because of a breach by Seller of this Agreement or any Ancillary Agreement other than a breach of a 

representation or warranty) but as to any claim only if the aggregate liabilities, obligations and commitments in respect of such claim do not exceed 

$5,000 and, in any event, only up to an aggregate amount of $100,000 for all such claims and all such liabilities, obligations and commitments; 

(vi) subject to receipt of all consents from third parties necessary to permit the assumption thereof by Purchaser, liabilities, obligations and 

commitments arising under the Cross-Border Leases to the extent assumed by Purchaser pursuant to Cross-Border Lease Assumptions (as defined in 

Section 5.24), other than any such liabilities, obligations and commitments (A) due and payable (without giving effect to any grace or notice periods) on 

or prior to the Closing Date or arising as a result of the Acquisition or any other transaction contemplated by this Agreement or any Ancillary 

Agreement, (B) arising due to any breach by Seller of this Agreement or any Ancillary Agreement or (C) in respect of which Seller has agreed to 

provide indemnification pursuant to this Agreement or any Ancillary Agreement; and 

(vii) the specified other liabilities, obligations and commitments of any member of the Seller Group identified in Schedule 1.03(a)(vii) but only up 

to the amounts disclosed on such Schedule. 

(b) Notwithstanding Section 1.03(a), or any other provision of this Agreement or any Ancillary Agreement, and regardless of any disclosure to 

Purchaser, Purchaser shall not assume any of the following liabilities, obligations and commitments (the "Excluded Liabilities"), all of which Seller agrees 

shall be retained and paid, performed and discharged when due by the applicable member of the Seller Group (in each case subject to Section 2.03 with 

respect to references to the Closing or Closing Date): 

(i) any liability, obligation or commitment, except as specifically set forth in Section 1.03(a), relating to or arising out of the Business or any 

Acquired Asset, whether express or implied, liquidated, absolute, accrued, contingent or otherwise, or known or unknown, and based upon, relating to, 

arising out of or resulting from any fact, circumstance, occurrence, condition, act or omission occurring or existing, in whole or in part, on or prior to the 

Closing; 

(ii) any liability, obligation or commitment, whether express or implied, liquidated, absolute, accrued, contingent or otherwise, or known or 

unknown, to the extent arising out of the operation or conduct by Seller or any of its affiliates of any business other than the Business; 

(iii) any liability, obligation or commitment (A) except as specifically set forth in Section 1.03(a)(i) or Section 1.03(a)(iv), arising out of any actual 

or alleged breach of, or nonperformance under, any Contract (including any Assigned Contract), prior to the Closing, (B) accruing, or that should be or 

should have been accrued for in accordance with GAAP (as defined in Section 1.05(d)), under any Assigned Contract with respect to any period prior to 

the Closing, except to the extent and up to the amounts that should be reflected therefor in Closing Net Assets in accordance with the Accounting 

Principles and only to the extent of the amount that should be so reflected for each category of liability reflected in Closing Net Assets (it being agreed 

that the final statement of Closing Net Assets shall be conclusive as to the liabilities, obligations and commitments that should be reflected therein for 

this purpose), or (C) arising on any Contract either (x) required to be listed under any Schedule hereto and not so listed or (y) entered into in violation of 

this Agreement or any Ancillary Agreement; 

19 

(iv) except as specifically set forth in Section 1.03(a), any liability, obligation or commitment of any member of the Seller Group arising out of 

(A) any suit, action (including regulatory action) or proceeding (including under any alternative dispute resolution procedure) ("Proceeding") pending or 

threatened as of the Closing Date, (B) any Proceeding filed after the Closing to the extent based upon, relating to, arising out of or resulting from any 

fact, circumstance, occurrence, condition, act or omission occurring or existing, in whole or in part, on or prior to the Closing or (C) any actual or 

alleged violation by any member of the Seller Group or any of their affiliates of any Applicable Law (as defined in Section 3.03) prior to or on account 

of the Closing; 

(v) any account payable of any member of the Seller Group to the extent of the amount not included in Closing Net Assets (or not permitted to be 

included in Closing Net Assets); 

(vi) except as specifically set forth in Section 1.03(a), any liability, obligation or commitment that relates primarily to, or that arises primarily out 

of, any Excluded Asset, or that arises out of the distribution to, or ownership or operation by, any member of the Seller Group or any of their affiliates or 

any other person of any Excluded Asset, or that is associated with the realization of the benefits of any Excluded Asset; 

(vii) any liability, obligation or commitment for Taxes (as defined in Section 3.16), whether or not accrued, assessed or currently due and payable, 

(A) of Seller or any Affiliated Group (as defined in Section 3.16) or (B) relating to the operation or ownership of the Business or the Acquired Assets 

for any Tax period (or portion thereof) ending on or prior to the Closing Date (for purposes of this clause (vii), all real property Taxes, personal property 

Taxes and similar ad valorem obligations levied with respect to the Acquired Assets for a Tax period that includes (but does not end on) the Closing 

Date shall be apportioned between Seller and Purchaser based upon the number of days of such period included in the pre-Closing Tax period and the 

number of days of such Tax period after the Closing Date (which period shall include the Closing Date)); 

(viii) any liability, obligation or commitment for transfer, documentary, sales, use, registration, value-added and other similar Taxes (including all 

applicable real estate transfer Taxes and real property transfer gains Taxes) and related amounts (including any penalties, interest and additions to Tax) 

incurred in connection with this Agreement, the Ancillary Agreements, the Acquisition and the other transactions contemplated hereby and thereby 

("Transfer Taxes"); 

(ix) except as expressly provided in Section 5.09, any liability, obligation or commitment arising under any Benefit Plan; 

(x) any liability covered by any insurance policy maintained by Seller or any of its affiliates; 

(xi) except as expressly set forth in Section 1.03(a)(vi), any Indebtedness (as defined in Section 3.08(a)(ix)) that (i) has a term of less than one year 

and is owed to lenders (and not trade creditors) or (ii) has a term of greater than one year, including any capitalized leases; 

(xii) except to the extent specifically assumed by Purchaser pursuant to Section 1.03(a)(iv), any liability, obligation or commitment that relates to, 

or arises out of, products manufactured, shipped or sold by or on behalf of the Business or any member of the Seller Group or any of their affiliates on

or prior to the Closing Date, including any liabilities arising out of express or implied warranties, whether such liability, obligation or commitment 

relates to or arises out of losses occurring on or prior to or after the Closing Date; 

20 

(xiii) any liability, obligation or commitment relating to or arising out of infringement or misappropriation of Intellectual Property or Technology 

(other than to the extent relating to or arising out of infringements or misappropriation after Closing relating to Purchaser's use of any Acquired Asset), 

to the extent relating to or arising out of the operation of the Business or products manufactured, shipped or sold by or on behalf of the Business or any 

member of the Seller Group or any of their affiliates on or prior to the Closing Date, whether such liability, obligation or commitment relates to or arises 

out of losses occurring on or prior to or after the Closing Date; 

(xiv) except to the extent specifically assumed by Purchaser pursuant to Section 1.03(a)(v), any liability, obligation or commitment, whether now 

existing or hereafter arising, to the extent such liability, obligation or commitment is in respect of claims arising out of or related to any injury, disease 

(or illness), disability or any similar condition that exists or occurs on or prior to the Closing Date, or exposure or alleged exposure on or prior to the 

Closing Date to any materials or chemicals (including Hazardous Materials) by any person (including any Continued Employee or any other employee 

heretofore employed in the Business); 

(xv) except as expressly provided in Section 5.09 or to the extent specifically assumed by Purchaser pursuant to Section 1.03(a)(v), (A) any 

liability, obligation or commitment to the extent such liability, obligation or commitment relates to, or arises out of, the employment at or prior to 

Closing and (B) any liability, obligation or commitment that relates to, or arises out of, the termination of the employment at or prior to Closing, of, in 

each case, any employee or former employee of the Seller Group or any of their affiliates or the Business (including as a result of the transactions 

contemplated by this Agreement); 

(xvi) any liability, obligation or commitment that relates to, or that arises out of, any separation agreements listed on Schedule 1.03(b) 

(xvi) (collectively, the "Separation Agreements"), other than the payment of severance up to the amount that would be due under Section 5.09 in the 

absence of such agreement; 

(xvii) any liability, obligation or commitment to any member of the Seller Group or to any affiliate of Seller, except those identified in 

Schedule 1.03(b)(xvii); 

(xviii) any liability, obligation or commitment of any member of the Seller Group or imposed on or asserted against Purchaser (x) relating to or 

arising out of the Railroad CBAs with respect to any act or omission through the Closing or (y) relating to or arising out of the Labor Contracts; 

(xix) any liabilities, obligations and commitments in respect of costs and expenses incurred by Seller or any of its affiliates or the Business in 

respect of or relating to this Agreement, including compliance by any member of the Seller Group with the terms hereof, or in connection with the 

Acquisition and the other transactions contemplated hereby; 

(xx) all other liabilities, obligations and commitments of any affiliate of Seller other than the Acquired Entities; 

(xxi) without limiting Section 8.01(c), any Pre-Closing Environmental Liability (including Unknown Pre-Closing On-Site Environmental 

Liabilities (including Minor Pre-Closing On-Site Liabilities)); 

(xxii) if the transfer of the Hydroelectric Facility does not occur on the Closing as contemplated by Section 2.03, any liability, obligation or 

commitment relating to or arising out of the ownership or operation of the Hydroelectric Facility, after the Closing and on or prior to any Hydroelectric 

Facility Closing; and 

(xxiii) any liability, obligation or commitment arising out of, based on, or resulting from any of the matters identified on Schedule 1.03(b)(xxiii). 

21 

The term "Pre-Closing Environmental Liability" means any loss, claim, demand, requirement, lawsuit, responsibility, liability, obligation or commitment 

arising out of, based on, or resulting from (1) any of the matters disclosed on Schedule 3.13 or Schedule 3.20(b) or identified in Schedule 1.03(b)(xxi), 

(2) Environmental Laws (as defined in Section 3.20(b)) and in connection with any condition of the Acquired Assets, the Acquired Coating Equipment or 

Excluded Assets existing on or prior to the Closing Date, (3) Environmental Laws and in connection with the ownership or operation of the Business (or by 

any former owner or operator thereof) or the Acquired Assets or any Excluded Asset (or any assets previously owned or operated in connection with the 

Business by any former owner or operator thereof), in each case on or prior to the Closing Date, (4) (A) personal injury, property damage or exposure to 

Hazardous Materials (as defined in Section 3.20(b)) or (B) investigation, remediation, natural resources damages or other response actions, including claims 

related to Releases (as defined in Section 3.20(b)) into the St. Louis River or Lake Superior, in each such case, arising out of, based on or resulting from 

Environmental Laws or the presence or Release of Hazardous Materials and the ownership or operation of the Business or the Acquired Assets or any 

Excluded Asset (or any assets previously owned or operated in connection with the Business or by any former owner or operator of the Business) on or prior 

to the Closing Date or (5) the transportation, Release or recycling of Hazardous Materials or the arrangement for such activities, from, at or to any off-site 

location on or prior to the Closing Date. Pre-Closing Environmental Liability includes any Unknown Pre-Closing On-Site Environmental Liability (as defined 

in Section 8.01(c)). 

(c) Purchaser shall acquire and Seller shall transfer, or cause to be transferred, the Acquired Assets free and clear of all liabilities, obligations and 

commitments of any member of the Seller Group or any of their affiliates, other than the Assumed Liabilities, and free and clear of all Liens (as defined in 

Section 3.05), other than Permitted Liens (as defined in Section 3.05). 

(d) Seller and Purchaser acknowledge that certain expenses of the Business are paid on a periodic basis. Accordingly, the items listed below, to the 

extent not included in Closing Net Assets, shall be apportioned between Seller and Purchaser, with Seller being responsible for all such expenses attributable 

to periods on or prior to the Closing Date, and Purchaser being responsible for all expenses attributable to periods after the Closing Date:

(i) prepaid rent, tenant utility payments and all other percentage or additional rent, common area maintenance and sundry charges (including any 

HVAC charges) and commissions paid by tenants; 

(ii) utility company charges, including electricity, gas, fuel, water and sewer charges; 

(iii) real estate taxes, installments of general and special assessments and other public or private charges affecting the Premises; and 

(iv) other items typically apportioned in sale of assets transactions of the type contemplated by this Agreement. 

(e) The entities listed on Schedule 1.03(e) are the only affiliates of Seller that have title to, or use, any Acquired Asset or are subject to any obligation 

that is an Assumed Liability or are otherwise engaged in the operation or conduct of the Business. Any entity listed on such Schedule is deemed a member of 

the Seller Group. 

(f) Notwithstanding anything to the contrary in this Agreement, any Assumed Liabilities that relate to, or arise out of, the Railroad shall be assumed by, 

and shall be enforceable by the Seller Group solely against, the Railroad Sub. 

22 

(g) Notwithstanding anything to the contrary in this Agreement, if, pursuant to Section 2.03, the Hydroelectric Facility is not transferred to Purchaser at 

Closing, no Assumed Liability that relates to, or arises out of, the Hydroelectric Facility (including the Hydroelectric Facility Contracts) shall be assumed by 

Purchaser, and Purchaser shall not be required to assume any such Assumed Liability, unless and until the Hydroelectric Facility is transferred to Purchaser at 

the Hydroelectric Facility Closing (and then Purchaser shall only assume such Assumed Liabilities to the extent otherwise provided in this Agreement). 

SECTION 1.04. Consents of Third Parties. (a) Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an 

agreement to assign any asset or any claim or right or any benefit arising under or resulting from such asset if an attempted assignment thereof, without the 

consent of a third party, would constitute a breach or other contravention of the rights of such third party, would be ineffective with respect to any party to an 

agreement concerning such asset, or would in any way adversely affect the rights of any member of the Seller Group or, upon transfer, Purchaser under such 

asset. If any transfer or assignment by any member of the Seller Group to, or any assumption by Purchaser of, any interest in, or liability, obligation or 

commitment under, any asset requires the consent of a third party, then such assignment or assumption shall be made subject to such consent being obtained. 

Without limiting Section 1.04(b), to the extent any Assigned Contract may not be assigned to Purchaser by reason of the absence of any such consent, 

Purchaser shall not be required to assume any Assumed Liabilities arising under such Assigned Contract. 

(b) If any such consent is not obtained prior to the Closing (and without regard to whether Seller has Cured (as defined in Section 6.05) the failure to 

obtain such consent), Seller and Purchaser shall cooperate (at their own expense) in any lawful and reasonable arrangement reasonably proposed by Purchaser 

under which Purchaser shall obtain the economic claims, rights and benefits under the asset, claim or right with respect to which the consent has not been 

obtained in accordance with this Agreement. Such reasonable arrangement may include (i) the subcontracting, sublicensing or subleasing to Purchaser of any 

and all rights of the Seller Group against the other party to such third-party agreement arising out of a breach or cancelation thereof by the other party, and 

(ii) the enforcement by the Seller Group of such rights (at the expense of the Seller Group but with Purchaser being obligated to reimburse the relevant 

member of the Seller Group for reasonable out-of-pocket costs and expenses directly related thereto). To the extent, and only to the extent, Purchaser is able 

to receive the economic claims, rights and benefits under an asset as set forth above, Purchaser shall be responsible for the Assumed Liabilities, if any, arising 

under such asset. 

(c) If any Consent listed on Schedule 3.03 with respect to a Contract with a supplier to the Business shall not have been obtained, in addition to any 

other obligations of Seller under this Agreement, to the extent that the purchase price to Purchaser after the Closing for the products or services that are the 

subject of any such Contract is greater than would have been the case had such consent been obtained, then Seller shall, for the six month period after the 

Closing, reimburse Purchaser for any additional cost incurred by Purchaser in obtaining such product or service in the volumes set forth in such Contract, but 

only if Purchaser shall have used commercially reasonable efforts to obtain the best practicable price for such product or service. 

(d) Subsections (a), (b) and (c) above shall not be deemed to limit (i) the rights and remedies available to Purchaser or Seller hereunder or, subject to the 

provisions hereof, otherwise in the event a consent is not obtained prior to Closing or (ii) the obligations of Seller hereunder. 

23 

SECTION 1.05. Closing Net Assets Determination. (a) Seller and Purchaser shall cooperate on a timely basis in Purchaser's preparation and delivery 

to Seller within 90 days after the Closing Date of a statement (the "Statement"), certified by Purchaser's chief financial officer, setting forth Net Assets (as 

defined in Section 1.05(d)), as of the close of business on the Closing Date ("Closing Net Assets"). The Statement shall be prepared on a basis consistent with 

the Accounting Principles (as defined in Section 1.05(d)). At Purchaser's option, a physical inventory shall be conducted by Seller for the purpose of preparing 

the Statement, and Purchaser and its representatives shall have the right to observe the taking of such physical inventory. Any costs or expenses incurred in 

connection with such taking of physical inventory shall be borne by the party incurring such costs or expenses. 

(b) During the 30-day period following receipt of the Statement, Seller shall be permitted to review the working papers relating to the Statement. The 

Statement shall become final and binding upon the parties on the 30th day following delivery thereof, unless Seller gives written notice of its disagreement 

with the Statement (a "Notice of Disagreement") to Purchaser prior to such date. Any Notice of Disagreement shall (i) specify in reasonable detail the nature 

of any disagreement so asserted, (ii) only include disagreements based on mathematical errors or based on Closing Net Assets not being calculated in 

accordance with this Section 1.05 and (iii) be accompanied by a certificate of Seller's chief financial officer that he or she concurs with each of the positions 

taken by Seller in the Notice of Disagreement. If a Notice of Disagreement is received by Purchaser in a timely manner, then the Statement (as revised in 

accordance with this sentence) shall become final and binding upon Seller and Purchaser on the earlier of (A) the date Seller and Purchaser resolve in writing 

any differences they have with respect to the matters specified in the Notice of Disagreement or (B) the date any disputed matters are finally resolved in 

writing by the Accounting Firm (as defined below). During the 30-day period following the delivery of the Notice of Disagreement, Seller and Purchaser shall 

seek in good faith to resolve in writing any differences that they may have with respect to the matters specified in the Notice of Disagreement. At the end of 

such 30-day period, Seller and Purchaser shall submit to an independent accounting firm (the "Accounting Firm") for arbitration any and all matters that

emain in dispute and which were properly included in the Notice of Disagreement. The Accounting Firm shall be Ernst & Young or, if such firm is unable or 

unwilling to act, such other nationally recognized independent public accounting firm as shall be agreed upon by the parties hereto in writing. Before referring 

a matter to the Accounting Firm, the parties shall agree on procedures to be followed by the Accounting Firm (including procedures for presentation of 

evidence). If the parties are unable to agree upon procedures, the Accounting Firm shall establish such procedures, giving due regard to the intention of the 

parties to resolve disputes in a timely and cost-effective manner. The Accounting Firm's procedures may be, but need not be, those proposed by either 

Purchaser or Seller; provided, however, that the Accounting Firm shall in all cases use the Accounting Principles in resolving any dispute. The parties shall 

give the Accounting Firm access to their working papers and shall provide such other information as reasonably requested by the Accounting Firm. Seller and 

Purchaser shall jointly request the Accounting Firm to render a decision resolving the matters submitted to the Accounting Firm within 30 days following 

submission. Judgment may be entered upon the determination of the Accounting Firm in any court having jurisdiction over the party against which such 

determination is to be enforced. The fees and expenses of the Accounting Firm incurred pursuant to this Section 1.05 shall be borne 50% by Seller and 50% 

by Purchaser. 

24 

(c) The Purchase Price shall be increased by the amount by which Closing Net Assets exceeds the Base Amount (as defined below), and the Purchase 

Price shall be decreased by the amount by which Closing Net Assets is less than the Base Amount (the Purchase Price as so increased or decreased shall 

hereinafter be referred to as the "Adjusted Purchase Price"). If the Closing Date Amount (as defined in Section 2.02(b)) is more than the Adjusted Purchase 

Price, Seller shall, and if the Closing Date Amount is less than the Adjusted Purchase Price, Purchaser shall, within 10 business days after the Statement 

becomes final and binding on the parties, make payment by wire transfer to a bank account designated in writing by the party to which such payment is to be 

made (such designation to be made at least two business days prior to the date such payment is due) in immediately available funds of the amount of such 

difference, together with interest thereon at a rate equal to the rate of interest from time to time announced publicly by Citibank, N.A. as its prime rate, 

calculated on the basis of the actual number of days elapsed divided by 365, from the Closing Date to the date of payment. "Base Amount" means 

$658,800,000 less, if transfer of the Hydroelectric Facility does not occur at the Closing as contemplated by Section 2.03, the Hydroelectric Base Amount. 

"Hydroelectric Base Amount" means the amount reflected for the Hydroelectric Facility in the Balance Sheet (but not more than the Hydroelectric Facility 

Purchase Price). 

(d) The term "Net Assets" means Assets minus Liabilities; provided howeverthat (i) the following items shall be disregarded for purposes of calculating 

Net Assets: (A) Working Capital in excess of the Working Capital Limit, (B) Non-Current Assets in excess of an amount equal to the sum of the Non-Current 

Asset Cap (as defined below) plus the Additional Property Amount (as defined below), (C) any fee title to, or ownership interest in, any real property acquired 

since the date of the Balance Sheet, (D) any increase in value of an Acquired Asset as a result of the release of Liens or the cure or removal of imperfections 

in title and (E) all capital expenditures, depreciation and amortization made or accrued since the date of the Balance Sheet and (ii) the values of the Premises 

referred to in the definition of Additional Property Amount shall be the values in such definition. The terms "Assets" and "Liabilities" mean all assets, net of 

applicable reserves, and liabilities, respectively, of the Business that are Acquired Assets or Assumed Liabilities, respectively, calculated in accordance with 

United States generally accepted accounting principles ("GAAP") applied on a basis consistent with the historical accounting practices of Seller used in 

preparing the Balance Sheet (but making normal, recurring period-end adjustments consistent with the December Balance Sheet), as modified by the agreed 

principles (the "Agreed Principles") set forth on Schedule 1.05(d)(1). The foregoing principles are referred to collectively in this Agreement as the 

"Accounting Principles." The term "Working Capital" means Current Assets minus Current Liabilities. The terms "Current Assets" and "Current Liabilities" 

mean the current assets, net of applicable reserves, and current liabilities, respectively, of the Business that are Acquired Assets or Assumed Liabilities, 

respectively, calculated in accordance with the Accounting Principles, provided that any Additional Brainerd Inventory in excess of 1,500 tons shall be valued 

for purposes of calculating Working Capital at its "broke" value. The term "Non-Current Assets" means all Assets other than Current Assets. The term 

"Additional Property Amount" means the sum 

25 

of (x) $949,555 if the Premises described on Schedule 3.06 as the "Additional Buffer Parcel" was not reflected on the Balance Sheet and (y) $50,445 if the 

Nursery Property (as defined in Section 5.28) is an Acquired Asset on the Closing Date and was not reflected on the Balance Sheet. "Working Capital Limit" 

shall mean (x) $100,000,000 plus (y) if a Continuance Notice has been provided, the value (on the basis used for valuing such Inventory in Closing Net 

Assets) of the lesser of (A) the amount of McCoy Silk in the Inventory constituting Acquired Assets on the Closing Date in excess of the Estimated McCoy 

Silk Amount and (B) the Additional McCoy Silk Amount. "Non-Current Asset Cap" means $577,900,000 less, if transfer of the Hydroelectric Facility does 

not occur at Closing as contemplated by Section 2.03, the Hydroelectric Base Amount. In all instances, the Accounting Principles shall be used to calculate 

Closing Net Assets and Working Capital, whether or not in accordance with the historical accounting practices of Seller. To the extent the Accounting 

Principles permit alternate treatments of any item comprising Net Assets or Working Capital, the particular treatment required by the Agreed Principles shall 

be used and if no particular treatment is required by the Agreed Principles, the particular treatment used in the preparation of the Balance Sheet (as defined in 

Section 3.04) shall be used in the preparation of the Statement. 

(e) Seller shall not, and shall not permit any other member of the Seller Group to, and Purchaser shall not, and shall not permit any affiliate of Purchaser 

to, take any actions with respect to the accounting books and records of the Business on which the Statement is to be based that would obstruct or prevent the 

preparation of the Statement and the determination of Closing Net Assets as provided in this Section 1.05. During the period of time from and after the date of 

delivery of the Statement through the resolution of any adjustment to the Purchase Price contemplated by this Section 1.05, each party shall afford to the other 

party and any accountants, counsel or financial advisers retained by such other party, in connection with the calculation of Closing Net Assets, reasonable 

access during normal business hours to the personnel of such party and to the books and records of the Business (if within the control of such other party or 

any of its affiliates), including all accounting working papers, to the extent relevant to the calculations contemplated by this Section 1.05. 

ARTICLE II 

The Closing 

SECTION 2.01. Closing Date. (a) Subject to Section 2.01(b) with respect to the Hydroelectric Facility, the closing of the Acquisition (the "Closing") 

shall take place at the offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019, at 10:00 a.m. on May 20, 2002, or if all

conditions set forth in Article VI have not been satisfied (or to the extent permitted, waived by the party entitled to the benefit thereof), as soon as practicable 

(but in no event less than five business days) after all the conditions set forth in Article VI have been satisfied (or, to the extent permitted, waived by the 

parties entitled to the benefits thereof), or at such other place, time and date as shall be agreed between Seller and Purchaser. The date on which the Closing 

occurs is referred to in this Agreement as the "Closing Date". 

(b) The closing of the purchase and sale of the Hydroelectric Facility (the "Hydroelectric Facility Closing"), if applicable, shall take place at the offices 

of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019, at 10:00 a.m. as soon as practicable (but in no event less than five business 

days) after all the conditions set forth in Section 2.03(d) have been satisfied (or, to the extent permitted, waived by the parties entitled to the benefits thereof), 

or at such other place, time and date as shall be agreed to between Seller and Purchaser. The date on which the Hydroelectric Facility Closing occurs is 

referred to in this Agreement as the "Hydroelectric Facility Closing Date". 

SECTION 2.02. Transactions To Be Effected at the Closing. At the Closing: 

26 

(a) Seller shall deliver to Purchaser (i) such appropriately executed (and, to the extent required by Section 2.03, undated) general warranty deeds 

(in recordable form), bills of sale, assignments and other instruments of transfer relating to the Acquired Assets and the Acquired Coating Equipment in 

form and substance reasonably satisfactory to Purchaser and its counsel and (ii) such other documents as Purchaser or its counsel may reasonably 

request to demonstrate satisfaction of the conditions and compliance with the covenants set forth in this Agreement; 

(b) Purchaser shall deliver to Seller (i) payment, by wire transfer to a bank account designated in writing by Seller (such designation to be made at 

least two business days prior to the Closing Date), of immediately available funds in an amount equal to (A) the Purchase Price plus or minus (B) an 

amount equal to an estimate prepared by Seller (and reasonably satisfactory to Purchaser) and delivered to Purchaser at least two business days prior to 

the Closing Date, of any adjustment to the Purchase Price under Section 1.05 (the Purchase Price plus or minus such estimate of any adjustment under 

Section 1.05 being herein called the "Closing Date Amount") minus (C) if, pursuant to Section 2.03, the Hydroelectric Facility is not being transferred to 

Purchaser at Closing, $5,000,000 (the "Hydroelectric Facility Purchase Price"), (ii) such appropriately executed (and, to the extent required by 

Section 2.03, undated) assumption agreements and other instruments of assumption providing for the assumption of the Assumed Liabilities in form and 

substance reasonably satisfactory to Seller and its counsel and (iii) such other documents as Seller or its counsel may reasonably request to demonstrate 

satisfaction of the conditions and compliance with the covenants set forth in this Agreement; and 

(c) Seller shall, or shall cause its relevant or designated affiliates to, and Purchaser shall, or shall cause its relevant or designated affiliates to, enter 

into each of: 

(i) the Transition Services Agreement substantially on the terms and conditions set forth in Exhibit A and otherwise in form and substance 

reasonably satisfactory to Seller and Purchaser (the "Transition Services Agreement"); 

(ii) the Option Agreement substantially on the terms and conditions set forth in Exhibit B and otherwise in form and substance reasonably 

satisfactory to Seller and Purchaser (the "Option Agreement"); 

(iii) the License Agreement substantially on the terms and conditions set forth in Exhibit D and otherwise in form and substance reasonably 

satisfactory to Seller and Purchaser (the "License Agreement"); 

(iv) in the event Purchaser provides the notice contemplated by Section 5.29, the Coated Paper Products Supply Agreement substantially on 

the terms and conditions set forth in Exhibit E and otherwise in form and substance reasonably satisfactory to Seller and Purchaser (the "Paper 

Supply Agreement"); 

(v) the Wood Supply Agreement substantially on the terms and conditions set forth in Exhibit F and otherwise in form and substance 

reasonably satisfactory to Seller and Purchaser (the "Wood Supply Agreement"); 

(vi) in the event Purchaser provides the Hydroelectric Facility Notice (as defined in Section 2.03(a)) and such notice has not been rescinded 

or deemed rescinded at or prior to Closing, each of the Escrow Agreement, the Operating and Maintenance Agreement, the Relationship 

Agreement and the FERC Easement (as such terms are defined in Section 2.03(b)); and 

(vii) the engagement letter required pursuant to Section 5.25. 

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Each of the Transition Services Agreement, the Option Agreement, the Right of First Offer Agreement, the License Agreement, the Paper Supply Agreement 

(if applicable), the Wood Supply Agreement, the Escrow Agreement (if applicable), the Operating and Maintenance Agreement (if applicable), the 

Relationship Agreement (if applicable), the FERC Easement (if applicable) and the engagement letter is an "Ancillary Agreement" hereunder. 

SECTION 2.03. Hydroelectric Facility Closing. (a) Notwithstanding Section 2.01 and Section 2.02 and without limiting Purchaser's rights under 

Article VI or the obligations of Seller and Purchaser under Section 5.05, if the Final Order (as defined in Section 2.03 (e)) has not been obtained prior to 

Closing, Purchaser may by written notice to Seller at least five business days prior to Closing (the "Hydroelectric Facility Notice") elect to delay the purchase 

of the Hydroelectric Facility pursuant to the arrangements set forth in this Section 2.03 and, subject to the terms and conditions of this Agreement, proceed 

with the Closing with respect to the rest of the Business and Acquired Assets. Any Hydroelectric Facility Notice (i) shall be deemed rescinded in the event the 

Final Order is obtained at any time prior to Closing and (ii) may be rescinded by Purchaser at any time prior to Closing. If the Final Order is obtained within 

five business days prior to a scheduled Closing, either of Purchaser or Seller shall have the right, by written notice to the other party, to delay the Closing until 

the fifth business day following receipt of the Final Order. 

(b) If Purchaser delivers a Hydroelectric Facility Notice to Seller prior to Closing and such notice has not been rescinded or deemed rescinded, then at 

Closing (i) Seller shall, or shall cause its relevant affiliates to, transfer to Purchaser or its designated affiliate, all real property (excluding buildings,

improvements and fixtures thereon) related to the Hydroelectric Facility pursuant to a general warranty deed and Purchaser shall, or shall cause its designated 

affiliate to, grant to Seller an easement or a ground lease (the "FERC Easement"), solely for the benefit of Seller, reasonably satisfactory to Seller and 

Purchaser, sufficient for Seller to continue to operate the Hydroelectric Facility and having a term not shorter than the term of the Operating and Maintenance 

Agreement (as defined below); (ii) Seller shall, or shall cause its relevant affiliates to, and Purchaser shall, or shall cause its designated affiliates to, enter into 

an agreement in form and substance reasonably satisfactory to each of them (the "Relationship Agreement"), pursuant to which (A) Seller and its relevant 

affiliates will be prohibited from transferring all or any portion of the Hydroelectric Facility without the prior written consent of Purchaser, (B) Purchaser 

retains the right to transfer the real property related to the Hydroelectric Facility, subject to the ground lease or easement referred to above, (C) Seller and its 

relevant affiliates shall, to the extent permitted by applicable law, agree to transfer the Hydroelectric Facility (other than the real property transferred to 

Purchaser) to any person designated by Purchaser, subject to receipt of approval for transfer of the FERC License to such transferee and release to Seller of 

the Hydroelectric Facility Purchase Price, (D) Purchaser shall retain the right to subdivide the real property subject to the FERC Easement in order to reduce 

the amount of property subject to such easement or ground lease, provided that sufficient real property remains subject to the FERC Easement to permit Seller 

to comply with the FERC License for the Hydroelectric Facility and (E) promptly following any termination by Purchaser pursuant to Section 2.04, Purchaser 

or its designated affiliate shall transfer to Seller or its relevant affiliate all real property then subject to such easement or ground lease referred to above; Seller 

and Purchaser shall execute an Escrow Agreement in form and substance reasonably satisfactory to each of them (the "Escrow Agreement") with an Escrow 

Agent reasonably satisfactory to each of them (the "Escrow Agent"); (iii) Seller shall, or shall cause its relevant affiliates to, and Purchaser shall, or shall cause 

its designated affiliates to, enter into an agreement providing for the operation and maintenance, substantially consistent with past practice, of the 

Hydroelectric Facility by Purchaser on behalf of Seller during the Escrow Period (as defined in Section 2.03(e)) in form and substance reasonably satisfactory 

to each of them (the "Operating and Maintenance Agreement"), which Operating 

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and Maintenance Agreement (A) shall have a term of 50 years subject to automatic (unless canceled by either party on notice to be agreed) yearly renewal, 

(B) shall terminate upon the earlier to occur of a Hydroelectric Facility Closing Date and a termination by Purchaser pursuant to Section 2.04 and (C) shall 

provide that Purchaser pays all costs of operating the Hydroelectric Facility and receives, at no cost, all power generated by the Hydroelectric Facility; 

(iv) Seller shall deliver to the Escrow Agent to be held in escrow pursuant to the Escrow Agreement an appropriately executed (but undated) general warranty 

deed (with respect to any real property, buildings, improvements and fixtures not transferred at the Closing), bill of sale, assignment and other instruments of 

transfer relating to the Hydroelectric Facility in form and substance reasonably satisfactory to Purchaser and its counsel (collectively, the "Hydroelectric 

Facility Transfer Documents"); and (v) Purchaser shall deliver to the Escrow Agent, to be held in escrow pursuant to the Escrow Agreement, the 

Hydroelectric Facility Purchase Price. Upon the Hydroelectric Facility Closing or termination of the transfer of the Hydroelectric Facility pursuant to 

Section 2.04., the Relationship Agreement, FERC Easement, Escrow Agreement and Operating and Maintenance Agreement shall terminate, except as may 

otherwise be agreed by Purchaser and Seller. 

(c) On the terms and subject to the provisions of this Agreement, at the Hydroelectric Facility Closing (if any), Seller shall, and shall cause each other 

relevant member of the Seller Group to, sell, assign, transfer, convey and deliver (including by taking all action necessary to cause the Escrow Agent to date, 

as of the effective date of the FERC Transfer Approval, and release to Purchaser the Hydroelectric Facility Documents from escrow) to Purchaser or one or 

more of its designated affiliates, and Purchaser shall, or shall cause its designated affiliates to, purchase from the Seller Group all the right, title and interest as 

of the Hydroelectric Facility Closing of the Seller Group in, to and under the Hydroelectric Facility by taking all action necessary to cause the Escrow Agent 

to release the Hydroelectric Facility Purchase Price from escrow to Seller. 

(d) The obligation of Purchaser to purchase the Hydroelectric Facility at the Hydroelectric Facility Closing and the obligation of Seller to sell the 

Hydroelectric Facility at the Hydroelectric Facility Closing is subject to receipt of the Final Order and the satisfaction or waiver on or prior to the 

Hydroelectric Facility Closing Date of the conditions set forth in Sections 6.01(a) and (b) to the extent such conditions relate to the Hydroelectric Facility. The 

obligation of Purchaser to purchase the Hydroelectric Facility at the Hydroelectric Facility Closing by means of the release of the Hydroelectric Facility 

Purchase Price by the Escrow Agent to Seller is subject to (i) the satisfaction (or waiver by Purchaser) on or prior to the Hydroelectric Facility Closing Date of 

the conditions set forth in Sections 6.02(a), (b), (d), (e), (f), (g), (h), (k) and (l) to the extent such conditions relate to the Hydroelectric Facility and (ii) the 

receipt by Purchaser of an opinion dated the Closing Date of Chadbourne & Parke, energy counsel to Seller, substantially in a form reasonably satisfactory to 

Purchaser and Seller and to be attached as an exhibit to the Relationship Agreement. The obligation of Seller to sell, assign, convey, and deliver the 

Hydroelectric Facility at the Hydroelectric Facility Closing is subject to the satisfaction (or waiver by Seller) on or prior to the Hydroelectric Facility Closing 

Date of the conditions set forth in Sections 6.03(a), (b), (c), (e) and (f) to the extent such conditions relate to the Hydroelectric Facility. Neither Purchaser nor 

Seller may rely on the failure of any condition set forth in this Section 2.03(d) to be satisfied (other than receipt of the Final Order) if such failure was caused 

by such party's failure to act in good faith or to use its reasonable efforts to cause the Hydroelectric Facility Closing to occur, as required by Section 5.05. For 

purposes of this Section 2.03(d), references in the conditions set forth in Article VI to the Closing or the Closing Date shall be deemed to be references to the 

Hydroelectric Closing or the Hydroelectric Closing Date, respectively. 

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(e) During the period between the Closing and the Hydroelectric Facility Closing or termination of the transfer of the Hydroelectric Facility pursuant to 

Section 2.04, as the case may be (the "Escrow Period"), and notwithstanding any provision contained in this Agreement, Seller, its successors, or its assigns 

shall have the right to perform any and all acts required by an order of the FERC affecting the FERC License without the prior approval of Purchaser until 

FERC's order approving the transfer of the FERC License from Seller to Purchaser is issued ("FERC Transfer Approval") without any terms or conditions 

unacceptable to Purchaser and is final, in effect, and not subject to further review or appeal (the "Final Order"). 

(f) Notwithstanding any other provisions of this Agreement, the parties agree that if the Hydroelectric Facility is not transferred to Purchaser or its 

designee at the Closing, then (i) the Hydroelectric Facility shall not be deemed an Acquired Asset for purposes of Section 1.05(d) and (ii) from the Closing 

through the earliest of any Hydroelectric Facility Closing or termination of the transfer of the Hydroelectric Facility pursuant to Section 2.04 and for purposes 

of determining the transfer of Acquired Assets and the allocation of Assumed Liabilities and Excluded Liabilities related to the Hydroelectric Facility, all of 

the terms of this Agreement (including the date as of which or from which certain types of liabilities, obligations or commitments are assumed by Purchaser 

or as of which or through which certain types of liabilities, obligations or commitments are retained by the Seller Group, pursuant to Section 1.03, the date 

through which the covenants set forth in Article V apply, the date of selection of Non-continuing Participants and Continued Employees pursuant to 

Section 5.09, the dates on which the representations and warranties in Article III and IV are made, the date as to which the conditions set forth in Article VI

apply and the survival periods of representations and warranties set forth in Section 8.06) and references therein to the Closing and the Closing Date shall 

apply mutatis mutandis to the Hydroelectric Facility from Closing through the Hydroelectric Facility Closing or termination of the transfer of the 

Hydroelectric Facility pursuant to Section 2.04 as if the Hydroelectric Facility Closing Date were the Closing Date and the Hydroelectric Facility Closing 

were the Closing. 

SECTION 2.04. Termination of Hydroelectric Transfer. (a) Notwithstanding anything to the contrary in this Agreement, if the Closing occurs and the 

purchase of the Hydroelectric Facility is delayed as contemplated by Section 2.03, the obligation of Purchaser to purchase the Hydroelectric Facility (and 

assume related Assumed Liabilities) and the obligation of Seller to sell the Hydroelectric Facility may be terminated and the transfer of the Hydroelectric 

Facility contemplated by this Agreement may be abandoned at any time prior to the Hydroelectric Facility Closing: 

(i) by mutual written consent of Seller and Purchaser; and 

(ii) by Purchaser if the Hydroelectric Facility Closing does not occur on or prior to November 20, 2002 (the "Hydroelectric Termination Date"). 

(b) In the event of termination by Purchaser pursuant to this Section 2.04, written notice thereof shall forthwith be given to Seller and the transfer of the 

Hydroelectric Facility contemplated by this Agreement shall be terminated, without further action by any party. Upon any such termination, Purchaser and 

Seller (i) shall be released from their respective obligations hereunder to purchase (and assume related Assumed Liabilities) and sell the Hydroelectric 

Facility, and (ii) shall promptly take all action necessary to terminate the FERC Easement and cause the Escrow Agent to release the Hydroelectric Facility 

Documents to Seller and the Hydroelectric Purchase Price (and any earnings therefrom) to Purchaser. Subject to Section 8.10 hereof, termination of the 

transfer of the Hydroelectric Facility shall not be deemed to release any party from any other obligation hereunder or any liability for any breach by such party 

of the terms and provisions of this Agreement or to impair the right of any party to compel specific performance by any other party of its obligations under 

this Agreement. 

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SECTION 2.05. Risk of Loss. Without limiting Section 6.06, until Closing (and, in the case of the Hydroelectric Facility, until the Hydroelectric 

Facility Closing, if applicable), the applicable members of the Seller Group shall bear the risk of loss or damage to the Acquired Assets from fire, casualty or 

any other occurrence. 

ARTICLE III 

Representations and Warranties of Seller 

Seller hereby represents and warrants to Purchaser and Purchaser Guarantor, as of the date of this Agreement and as of the Closing Date, as follows: 

SECTION 3.01. Organization, Standing and Power. Each of Seller, the Duluth & Northeastern Railroad Company, each Acquired Entity and each 

other member of the Seller Group is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has 

full corporate or limited liability company power and authority (as applicable) and possesses all governmental franchises, licenses, permits, authorizations and 

approvals necessary to enable it to own, lease or otherwise hold its properties and assets and to conduct the Business and its other businesses as presently 

conducted, other than such franchises, licenses, permits, authorizations and approvals the lack of which, individually or in the aggregate, have not had and 

could not reasonably be expected to have a Seller Material Adverse Effect (as defined in Section 9.04(b)). Each of Seller, the Duluth & Northeastern Railroad 

Company and each Acquired Entity is duly qualified to do business as a foreign corporation or limited liability company (as applicable) in each jurisdiction 

where the character of the Acquired Assets held by it or the nature of the Business make such qualification necessary for it to conduct the Business as 

currently conducted by it except where the failure to qualify would not have a Seller Material Adverse Effect. Seller has delivered to Purchaser true and 

complete copies of the respective certificates of incorporation and by-laws or other organizational documents of Seller, the Duluth & Northeastern Railroad 

Company and each Acquired Entity, in each case as amended through the date of this Agreement. 

SECTION 3.02. Authority; Execution and Delivery; Enforceability. Seller has full corporate power and authority to execute this Agreement and each 

member of the Seller Group has full corporate or limited liability company power and authority (as applicable) to execute the Ancillary Agreements to which 

it is, or is specified to be, a party and to consummate the Acquisition and the other transactions contemplated hereby and thereby. The execution and delivery 

by Seller of this Agreement and by each member of the Seller Group of the Ancillary Agreements to which it is, or is specified to be, a party and the 

consummation by Seller of the Acquisition and the other transactions contemplated hereby and thereby have been duly authorized by all necessary corporate 

or limited liability company action (as applicable). Seller has duly executed and delivered this Agreement and prior to the Closing each member of the Seller 

Group will have duly executed and delivered each Ancillary Agreement to which it is, or is specified to be, a party, and this Agreement constitutes, and each 

Ancillary Agreement to which it is, or is specified to be, a party will after the Closing constitute, its legal, valid and binding obligation, enforceable against it 

in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the 

enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in 

equity. 

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SECTION 3.03. No Conflicts; Consents. The execution and delivery by Seller of this Agreement do not, the execution and delivery by each member 

of the Seller Group of each Ancillary Agreement to which it is, or is specified to be, a party will not, and the consummation of the Acquisition and the other 

transactions contemplated hereby and thereby and compliance by each member of the Seller Group with the terms hereof and thereof will not conflict with, or 

result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancelation or acceleration of 

any obligation or to loss of a material benefit under, or to increased, additional, accelerated or guaranteed rights or entitlements of any person under, or result 

in the creation of any Lien upon any of the properties or assets of Seller or any of its subsidiaries under, any provision of (i) the certificate of incorporation or 

by-laws or other organizational documents of Seller or any of its subsidiaries, (ii) except as set forth on Schedule 3.03, any Contract involving the payment by 

any party of at least $50,000 or affecting the use of any asset or assets with an aggregate original cost, replacement cost or fair market value of at least 

$50,000 or which is otherwise material to the Business or the ability of any member of the Seller Group to consummate the Acquisition or the other 

transactions contemplated hereby or by the Ancillary Agreements, to which Seller or any of its subsidiaries is a party or by which any of their respective

properties or assets is bound or (iii) any judgment, order or decree ("Judgment") or statute, law (including common law), ordinance, rule or regulation 

("Applicable Law") applicable to Seller or any of its subsidiaries or their respective properties or assets. No consent, approval, license, permit, order or 

authorization ("Consent") of, or registration, declaration or filing with, any Federal, state, local or foreign government or any court of competent jurisdiction, 

administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity") is required to be 

obtained or made by or with respect to Seller or any of its subsidiaries in connection with the execution, delivery and performance of this Agreement or any 

Ancillary Agreement or the consummation of the Acquisition or the other transactions contemplated hereby and thereby, other than (i) those set forth on 

Schedule 3.03 and (ii) those that may be required solely by reason of Purchaser's (as opposed to any other third party's) participation in the Acquisition and 

the other transactions contemplated hereby and by the Ancillary Agreements. 

SECTION 3.04. Financial Statements; Liabilities. (a) Schedule 3.04(a) sets forth the unaudited statement of financial position of the Business (other 

than the Excluded Brainerd Assets) (the "Balance Sheet") at November 30, 2001 and the unaudited statement of financial position and the related unaudited 

statements of operations, shareholders' equity and cash flows of the Business at December 31, 2001 and December 31, 2000 and for each of the years then 

ended (collectively, with the Balance Sheet, the "Financial Statements"; the unaudited statement of financial position at December 31, 2001 is referred to 

herein as the "December Balance Sheet"). Except as set forth in Schedule 3.04(a) with respect to the Balance Sheet, the Financial Statements have been and 

the Audited Financial Statements (as defined in Section 5.25), to the extent delivered at or prior to Closing, will be prepared in conformity with GAAP 

consistently applied (except in each case as described in the notes thereto and, in the case of the Balance Sheet, except for the absence of notes thereto and 

subject to normal recurring year-end adjustments) and on that basis fairly present the financial position and results of operations of the Business (other than 

the Excluded Brainerd Assets in the case of the Balance Sheet) as of the respective dates thereof and for the respective periods indicated therein. 

32 

(b) The Business does not have any liabilities or obligations of any nature (whether accrued, absolute, contingent, unasserted or otherwise), except (i) as 

reflected or reserved against in the December Balance Sheet and the notes thereto, (ii) for items set forth in Schedule 3.04(b), (iii) for liabilities and 

obligations incurred in the ordinary course of business consistent with past practice since the date of the December Balance Sheet and not in violation of this 

Agreement and which either (x) are included in the calculation of Closing Net Assets or (y) are Excluded Liabilities that could not reasonably be expected to 

have a Seller Material Adverse Effect, (iv) for Taxes, (v) for Excluded Liabilities related solely to the operation of the Brainerd Facility or the Excluded 

Brainerd Assets that could not reasonably be expected to have a Seller Material Adverse Effect, (vi) for Excluded Liabilities incurred after the date hereof not 

in violation of this Agreement that could not reasonably be expected to have a Seller Material Adverse Effect, (vii) for liabilities and obligations pursuant to 

Permitted Liens, the express terms of Material Assigned Contracts (as defined in Section 3.08(b)) and Permits listed on Schedule 3.13 and (viii) for liabilities 

and obligations incurred not in violation of this Agreement and in an amount no greater than $25,000 for any individual liability or obligation and no greater 

than $1,000,000 in the aggregate for all such liabilities and obligations. 

SECTION 3.05. Assets Other than Real Property Interests. (a) Seller or any other member of the Seller Group has good and valid title to all the 

Acquired Assets and all the Acquired Coating Equipment and each Acquired Entity has good and valid title to all of its assets, in each case free and clear of 

all mortgages, liens, security interests, charges, easements, leases, subleases, covenants, rights of way, options, claims, restrictions or encumbrances of any 

kind (collectively, "Liens"), except (i) such as are set forth in Schedule 3.05(a) or reflected on the December Balance Sheet (all of which shall be discharged 

prior to the Closing other than those specifically identified on Schedule 3.05(a) as not being discharged prior to Closing), (ii) Liens under the Cross-Border 

Leases and the IRB Financings (all of which shall be discharged prior to Closing except, in the case of Liens under Cross-Border Leases, to the extent 

Purchaser assumes the related Cross-Border Lease pursuant to a Cross-Border Lease Assumption), (iii) mechanics', carriers', workmen's, repairmen's or other 

like Liens arising or incurred in the ordinary course of business, Liens arising under original purchase price conditional sales contracts, personal property 

leases and equipment leases with third parties entered into in the ordinary course of business and liens for Taxes that are not due and payable or that may 

thereafter be paid without penalty, and (iv) other imperfections of title or encumbrances, if any, that individually or in the aggregate, do not materially impair, 

and could not reasonably be expected to materially impair, the continued use and operation of the assets to which they relate in the conduct of the Business as 

presently conducted (the Liens described in clauses (ii) (to the extent not required to be discharged prior to Closing), (iii) and (iv) above, together with the 

Liens referred to in clauses (ii) through (vi) of Section 3.06, are referred to collectively as "Permitted Liens"). 

(b) Except for the Acquired Interests, there are no equity or other membership interests in any Acquired Entity authorized, issued, reserved for issuance 

or outstanding. All Acquired Interests are duly authorized and validly issued. There are no options, warrants or other rights to acquire equity or other 

membership interests or securities (or securities convertible into or exercisable or exchangeable for equity or other membership interests or securities) from 

any Acquired Entity. Other than this Agreement and the limited liability company agreements for each Acquired Entity, the Acquired Interests are not subject 

to any voting trust agreement or other Contract, including any Contract restricting or otherwise relating to the voting, distribution rights or disposition of such 

Acquired Interests. 

(c) This Section 3.05 does not relate to real property or interests in real property, such items being the subject of Section 3.06, or to Intellectual Property, 

such items being the subject of Section 3.07. 

33 

SECTION 3.06. Real Property. (a) Schedule 3.06 sets forth a complete list of all real property and interests in real property owned in fee simple or 

any other form of ownership by Seller or any other member of the Seller Group that is located in Carlton County, Minnesota or that is otherwise primarily 

used, primarily held for use or intended to be primarily used in the operation or conduct of the Business, other than any such property or interest constituting 

an Excluded Asset (individually, an "Owned Property") and identifies any material easement or operating agreements relating thereto. Schedule 3.06 sets 

forth a complete list of all real property and interests in real property leased to Seller or any other member of the Seller Group that is located in Carlton 

County, Minnesota or that is otherwise primarily used, primarily held for use or intended to be used primarily in the operation or conduct of the Business and 

further identifies those properties leased to Seller that are distribution facilities (individually, a "Distribution Center Facility"), other than any such property or 

interest constituting an Excluded Asset (each leased property so listed on Schedule 3.06 individually, a "Leased Property") and identifies any material base 

leases, ground leases, easement agreements or operating agreements relating thereto. Schedule 3.06 sets forth a complete list of all Owned Property and 

Leased Property that are leased or subleased from any member of the Seller Group (as lessor) to or for the use or benefit of any person other than a member of 

the Seller Group (individually, a "Property Leased to a Third Party"). Seller or another member of the Seller Group has good, marketable and insurable fee 

title to all Owned Property and good and valid title to the leasehold estates in all Leased Property and either good, marketable and insurable fee title or good, 

marketable and valid title to the leasehold estates in all Property Leased to a Third Party (an Owned Property or Leased Property or Property Leased to a Third

Party being sometimes referred to herein, individually, as a "Business Property"), in each case free and clear of all Liens, except (i) Liens described in 

clause (ii) (to the extent not required to be discharged prior to Closing), (iii) or (iv) of Section 3.05(a), (ii) such as are set forth in Schedule 3.06, (iii) leases, 

subleases and similar agreements set forth in Schedule 3.08, (iv) easements, covenants, rights-of-way and other similar restrictions of record, (v) any 

conditions that may be shown by a current, accurate survey or physical inspection of any Business Property made prior to Closing and (vi) (A) zoning, 

building and other similar ordinances and governmental regulations, (B) Liens that have been placed by any developer, landlord or other third party on 

property over which Seller or any member of the Seller Group has easement rights or on any Leased Property and subordination or similar agreements relating 

thereto and (C) unrecorded easements, covenants, rights-of-way and other similar restrictions. None of the items set forth in clauses (ii) (to the extent any Lien 

set forth in Schedules 3.06 is of the type described in clause (iv), (v) or (vi)), (iv), (v) and (vi) above, individually or in the aggregate, materially impairs, or 

could reasonably be expected to materially impair, the continued use and operation of the Business Property to which they relate in the conduct of the 

Business as presently conducted. 

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(b) Subject, in the case of Leased Properties that are sales offices, to the express rights of the lessor under the express written terms of any such lease in 

the absence of default, the Seller Group now has, and on the Closing Date Purchaser or Purchaser's designated affiliate shall have, peaceful and undisturbed 

exclusive possession under all the Seller Group's leases of Leased Property; such leases are valid and in full force and effect and binding and enforceable in 

accordance with their respective terms against the relevant member of the Seller Group and, to Seller's knowledge, each other party thereto, except as the 

same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' right generally and general 

equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity, and such leases have not been amended or 

modified; and there is not, under any of such leases, any existing default, event of default or event which with notice or lapse of time or both would constitute 

a default of any member of the Seller Group or, to Seller's knowledge, of any other party thereto. Except to the extent that third party approval of the transfers 

contemplated hereby may be required by the terms of any such agreements, none of the rights of the Seller Group under any of such leases will be subject to 

termination or modification as a result of the consummation of the transactions contemplated by this Agreement. 

(c) Except as set forth on Schedule 3.06(c), all of the leases related to Property Leased to a Third Party are valid, binding and in full force and effect and 

are enforceable in accordance with their respective terms against the applicable member of the Seller Group and, to Seller's knowledge, each other party 

thereto, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' right 

generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity, and such leases have not 

been amended or modified; no such lease, nor any other agreement relating to the Business Property, contains any option or right (conditional or otherwise) to 

purchase all or any part of the Business Property or any rights therein; each applicable member of the Seller Group has performed all material obligations 

required to be performed by it to date under each such lease; and there has been no material breach or default (or event which with notice or lapse of time or 

both would constitute an event of default) under any such lease by any member of the Seller Group, or, to the knowledge of Seller, any other party thereto. 

(d) Except as set forth on Schedule 3.06(d), (i) there is adequate access between each Business Property and public roads, and there are no pending or, to 

Seller's knowledge, threatened Proceedings that could have the effect of impairing or restricting such access, and (ii) there are no material defects in the roof, 

footings, foundation, sprinkler mains, structural, mechanical and HVAC systems and masonry walls in any of the improvements upon each Business Property 

other than defects resulting from normal wear and tear that are reasonably expected to be Repaired through the ordinary course maintenance program of the 

Business prior to having any material affect on the continued conduct of the Business or the continued use of any Acquired Asset (other than by reason of 

such Repair) and all periodic maintenance has been done and is being done consistent with past practice. Set forth on Schedule 3.06(d) are all significant 

repairs or replacements of or to the Business Property constituting capital expenditures planned through December 31, 2002. As used herein, the term 

"Repaired" means repaired such that the item being repaired will be able to operate for its remaining useful life in a manner consistent with past practices. 

(e) Except as set forth in Schedule 3.06(e), none of the Premises located in the state of Minnesota comprise "agricultural land" as such terms are defined 

in each of Minnesota Statutes, Sections 500.221 and 500.24. 

(f) There are no pending or, to the knowledge of Seller, threatened condemnation proceedings relating to the Premises. 

35 

(g) Seller has not made, and has no knowledge that any other person has made, any written or verbal commitments to any governmental authority, utility 

company, school board, church or other religious body, or any homeowners association, or to any other organization, group or individual, relating to the 

Premises which would impose an obligation upon Purchaser or its successors or assigns to make any contribution or dedications of money or land or to 

construct, install, or maintain any improvements of a public or private nature on or off the Premises, other than commitments to make cash contributions that 

do not exceed $50,000 in the aggregate. 

(h) Seller has not received written or, to Seller's knowledge, oral notice, and has no knowledge that any governmental or quasi-governmental agency or 

authority intends to commence construction of any special or off-site improvements or impose any special or other assessment against the Premises or any 

part thereof. There are no impact fees or impact fee credits attributable to the Premises. 

(i) Attached hereto as Schedule 3.06(i) are Minnesota Department of Health Well Disclosure Certificates for every well located on the Premises in 

Minnesota. This disclosure is made pursuant to Minnesota Statutes, Section 103I.235. 

(j) Pursuant to Minnesota Statutes, Section 115.55, Subd. 6, Seller hereby discloses to Purchaser, the following information on how sewage generated 

at the property is managed. 

(i) With respect to the Cloquet Facility, Seller hereby discloses to Purchaser that sanitary sewage is discharged to the Western Lake Superior 

Sanitary District (the "WLSSD"), a facility permitted by the Minnesota Pollution Control Agency, and that landfill leachate, some stormwater (collected 

from certain process areas and building roof drains) and process wastewater from pulp and paper-making processes are pretreated on-site and then 

discharged to the WLSSD under WLSSD Pretreatment Permit #007.

(ii) With respect to the Railroad, Seller hereby discloses to Purchaser that sanitary sewage from the engines and the buildings are disposed of 

either in the Cloquet Facility's wastewater pre-treatment facility or the City of Cloquet's municipal wastewater treatment facility, both of which are 

licensed by the Minnesota Pollution Control Agency. 

SECTION 3.07. Intellectual Property. (a) Schedule 3.07 sets forth a true and complete list of all Intellectual Property, owned, used with the 

permission of the owner or licensor, filed by or licensed to any member of the Seller Group and used, held for use, intended to be used or reasonably 

necessary to or required in the operation or conduct of the Business (other than operation of the Brainerd Facility) or the continued use of any Acquired Asset, 

other than so-called "embedded technology" relating to equipment purchased from third party manufacturers and other than unregistered trademarks, service 

marks, trade names, trade dress, business names, brand names, domain names, designs, know-how and copyrights that, individually and in the aggregate, are 

not material to the conduct of the Business (other than operation of the Brainerd Facility) as presently conducted or the continued use of any Acquired Asset. 

With respect to all Assigned Intellectual Property that constitutes Acquired Assets and is registered or subject to an application for registration, Schedule 3.07 

sets forth a list of all jurisdictions in which such Assigned Intellectual Property that constitutes Acquired Assets is registered or registrations applied for and 

all registration and application numbers. Except as set forth in Schedule 3.07, (i) all the Assigned Intellectual Property has been duly registered in, filed in or 

issued by the appropriate Governmental Entity where such registration, filing or issuance is necessary or appropriate for the conduct of the Business as 

conducted on the date of the Balance Sheet and as presently conducted, (ii) a member of the Seller Group is (or, in the case of so-called "embedded 

technology" relating to equipment purchased from third party manufacturers, is to the knowledge of Seller), and, subject to the License Agreement, on the 

Closing Date Purchaser or Purchaser's 

36 

designated affiliate will be (or, in the case of such "embedded technology", will be to the knowledge of Seller), the sole and exclusive owner of, and such 

member of the Seller Group has (or, in the case of such "embedded technology", has to the knowledge of Seller), and on the Closing Date Purchaser or 

Purchaser's designated affiliate will have (or, in the case of such "embedded technology", will have to the knowledge of Seller), in connection with the 

Business, the right to use, execute, reproduce, display, perform, modify, enhance, distribute, prepare derivative, continuation, divisional and improvement 

works of and sublicense, without payment to any other person, all such Assigned Intellectual Property and the consummation of the Acquisition, the 

ownership of the Business by Purchaser and the other transactions contemplated hereby does not and will not conflict with, alter or impair any such rights, 

other than as is not known to Seller and could not result in any material liability or have any adverse impact on the continued conduct of the Business (other 

than operation of the Brainerd Facility) or the continued use of any Acquired Asset and (iii) during the past two years no member of the Seller Group has 

received any written or, to Seller's knowledge, oral communication from any person asserting any ownership interest in any Assigned Intellectual Property or 

Assigned Technology that constitute Acquired Assets. 

(b) No member of the Seller Group has granted any license of any kind relating to any Assigned Technology or Assigned Intellectual Property that 

constitutes Acquired Assets or the marketing or distribution thereof except as set forth in Schedule 3.07. No member of the Seller Group is bound by or a 

party to any option, license or similar Contract relating to the Intellectual Property of any other person for the use of such Intellectual Property that is 

necessary to the conduct of the Business or requires any payment, except as set forth in Schedule 3.07 and except for so-called "shrink-wrap" license 

agreements relating to computer software licensed in the ordinary course of business. Except as set forth in Schedule 3.07, the conduct of the Business as 

conducted on the date of the Balance Sheet and as presently conducted, to the extent it relies on or utilizes Technology or Intellectual Property licensed or 

used with the permission of the owner (including so-called "embedded technology" relating to equipment purchased from third party manufacturers), does not 

to the knowledge of Seller and, to the extent it otherwise relies on or utilizes Technology or Intellectual Property, does not violate, conflict with or infringe the 

Intellectual Property of any other person other than violations, conflicts and infringements not known to Seller that could not result in any material liability or 

have any adverse impact on the continued conduct of the Business (other than operation of the Brainerd Facility) or continued use of any Acquired Asset. 

Except as set forth in Schedule 3.07, (i) no claims are pending or, to the knowledge of Seller, threatened, against any member of the Seller Group by any 

person with respect to the ownership, validity, enforceability, effectiveness or use in the Business of any Intellectual Property and (ii) during the past two 

years Seller and its affiliates have not received any written or, to the knowledge of Seller, oral communication alleging that Seller or any of its affiliates has in 

the conduct of the Business violated any rights relating to Intellectual Property or Technology of any person. 

(c) No former or current member of management or key personnel of the Business, including all former and current employees, agents, consultants and 

independent contractors who have contributed to or participated in the conception and development of material Assigned Technology that constitutes 

Acquired Assets (collectively, "Personnel") has any claim against any member of the Seller Group in connection with such person's involvement in the 

conception and development of any such Assigned Technology and, to the knowledge of Seller, no such claim has been asserted or is threatened. To the 

knowledge of Seller, none of the current officers and employees of any member of the Seller Group has any patents issued or applications pending for any 

device, process, design or invention of any kind now used or needed by any member of the Seller Group in the furtherance of the Business, which patents or 

applications have not been assigned to a member of the Seller Group, with such assignment duly recorded in the United States Patent and Trademark Office. 

37 

SECTION 3.08. Contracts. (a) Except as set forth in (and, to the extent provided in Section 3.08(d), only as set forth in the relevant subsection of) 

Schedule 3.08 and except for Contracts relating solely to Excluded Assets (other than Acquired Coating Equipment) or entered into after the date hereof not in 

breach of Section 5.01 or any other provision of this Agreement, no member of the Seller Group is a party to or bound by any Contract that is primarily used, 

primarily held for use, intended primarily for use, or reasonably necessary for or required in, or that primarily arises out of, the operation or conduct of the 

Business or that binds or affects any Acquired Asset or Acquired Coating Equipment (or the use thereof) and that is: 

(i) an employment agreement or employment contract other than "at will" arrangements; 

(ii) a collective bargaining agreement or other Contract with any labor organization, union or association; 

(iii) (A) a covenant not to compete (other than pursuant to any radius restriction contained in any lease, reciprocal easement or development, 

construction, operating or similar agreement) or (B) other covenant of any member of the Seller Group restricting (x) the development, manufacture, 

marketing or distribution of the products and services of the Business or (y) the use of any Acquired Asset or Acquired Coating Equipment;

(iv) a Contract with (A) any shareholder with beneficial ownership of at least 100,000 shares of common stock of Seller or affiliate of Seller or 

(B) any current or former officer, director or employee of Seller or any of its affiliates (other than employment agreements and "at will" arrangements 

covered by clause (i) above); 

(v) a lease, sublease or similar Contract with any person under which any member of the Seller Group is a lessor or sublessor of, or makes 

available for use to any person, (A) any Business Property or (B) any portion of any premises otherwise occupied by any member of the Seller Group; 

(vi) a lease, sublease or similar Contract with any person under which (A) any member of the Seller Group is lessee of, or holds or uses, any 

machinery, equipment, vehicle or other tangible personal property owned by any person or (B) any member of the Seller Group is a lessor or sublessor 

of, or makes available for use by any person, any tangible personal property owned or leased by any member of the Seller Group, in any such case that 

has an aggregate future liability or receivable, as the case may be, in excess of $100,000 or is not terminable by such member of the Seller Group by 

notice of not more than 60 days for a cost of less than $50,000; 

(vii) (A) a continuing Contract (other than a purchase order) for the future purchase of materials, supplies or equipment that has an aggregate 

future liability in excess of $100,000 and is not otherwise disclosed pursuant to clause (xvi) below or (B) a management, service, consulting or other 

similar Contract that has an aggregate future liability in excess of $50,000; 

(viii) a license, sublicense, option or other Contract relating, in whole or in part, to any Assigned Intellectual Property or any Assigned Technology 

(including any license or other Contract under which any member of the Seller Group is licensee or licensor of any Assigned Intellectual Property or any 

Assigned Technology other than with respect to so-called "embedded technology" relating to equipment purchased from third party manufacturers and 

so called "shrink-wrap" license agreements relating to computer software licensed, in each case, by a member of the Seller Group as licensee); 

(ix) (A) a Contract under which any member of the Seller Group has borrowed any money from, or issued any note, bond, debenture or other 

evidence of indebtedness to, any person or (B) any other note, bond, debenture or other evidence of indebtedness for borrowed money issued to any 

person (collectively, "Indebtedness"); 

38 

(x) a Contract (including any so-called take-or-pay or keepwell agreement) under which (A) any person has directly or indirectly guaranteed 

indebtedness, liabilities or obligations of any member of the Seller Group or (B) any member of the Seller Group has directly or indirectly guaranteed 

indebtedness, liabilities or obligations of any other person (in each case other than endorsements for the purpose of collection in the ordinary course of 

business); 

(xi) a Contract under which any member of the Seller Group has, directly or indirectly, made any advance, loan, extension of credit or capital 

contribution to, or other investment in, any person (other than any member of the Seller Group) other than extensions of trade credit in the ordinary 

course of business and advances made in the ordinary course of business to employees of the Seller Group for travel expenses; 

(xii) a Contract granting a Lien upon any Business Property or any other Acquired Asset or any Acquired Coating Equipment other than a 

Permitted Lien; 

(xiii) a Contract providing for indemnification (other than for breach thereof) of any person with respect to liabilities relating to any current or 

former business of any member of the Seller Group or any predecessor person; 

(xiv) a power of attorney (other than a power of attorney given in the ordinary course of business with respect to routine tax matters) that would be 

binding on Purchaser or with respect to any Acquired Asset, Acquired Coating Equipment or Assumed Liability after the Closing; 

(xv) a confidentiality agreement (other than a confidentiality agreement entered into in the ordinary course of business and not with any person 

who (together with its affiliates) competes in any manner with the Business); 

(xvi) a purchase order (other than one-time purchase orders entered into in the ordinary course of business that (A) except to the extent the vendor 

has asserted terms and conditions that have not been expressly agreed to by any member of the Seller Group, are subject to the Business' standard terms 

and conditions and (B) do not (1) involve payment by any member of the Seller Group of more than $100,000 or (2) extend for a term more than 

90 days from the date of this Agreement (unless terminable without payment or penalty upon no more than 60 days' notice)) other than any Contract 

disclosed pursuant to clause (vii)(A) above; 

(xvii) a sales order (other than one-time sales orders entered into in the ordinary course of business that (A) except to the extent the buyer has 

asserted terms and conditions that have not been expressly agreed to by any member of the Seller Group, are subject to the Business' standard terms and 

conditions and (B) do not (1) involve the obligation of any member of the Seller Group to deliver products or services for payment of or having a fair 

market value of more than $100,000 or (2) extend for a term more than 90 days from the date of this Agreement (unless terminable without payment or 

penalty upon no more than 60 days' notice)); 

(xviii) a Contract (A) for the sale of any Acquired Asset (other than inventory sales in the ordinary course of business) or Acquired Coating 

Equipment, (B) for the grant of any preferential rights to purchase any Acquired Asset (other than inventory in the ordinary course of business) or 

Acquired Coating Equipment or (C) requiring the consent of any party to the transfer of any Acquired Asset or Acquired Coating Equipment and 

involving the payment by any party of at least $50,000 or affecting the use of an asset or assets with an aggregate original cost, replacement cost or fair 

market value of at least $50,000 or which are otherwise material to the Business; 

(xix) a Contract with any Governmental Entity; 

(xx) a currency exchange, interest rate exchange, commodity exchange or similar Contract; 

(xxi) a Contract for any joint venture, partnership or similar arrangement; 

39

(xxii) a Contract providing for the services of any dealer, distributor, sales representative, franchisee or similar representative; 

(xxiii) a Contract providing for the provision of advertising services that has an aggregate future liability in excess of $50,000; 

(xxiv) a Contract (other than a purchase order or a sales order) not otherwise listed on Schedule 3.08 that has an aggregate future liability to any 

person in excess of $100,000 or extends for a term more than one year from the date of this Agreement (unless terminable without payment or penalty 

upon no more than 60 days' notice); 

(xxv) a Contract under which (A) any person has the right to use all or any assets (including track, yards and other facilities) of the Railroad, or 

(B) granting any member of the Seller Group the right to use all or any portion of any rail line, rail yards, or other rail facilities of any other person; 

(xxvi) trackage rights, haulage, interchange, joint facility switching and similar Contracts; 

(xxvii) a Contract necessary for or relating to the use or operation of the Hydroelectric Facility (each a "Hydroelectric Facility Contract") or 

necessary for or relating to the use or operation of the Steam Turbine Facilities (each a "Steam Turbine Contract") or which relates to the supply of 

power to, or the sale of power, from the Cloquet Facility; or 

(xxviii) a Contract other than as set forth above to which any member of the Seller Group is a party or by which it or any of its assets or businesses 

is bound or subject that is material to the Business or the use or operation of the Acquired Assets or the Acquired Coating Equipment. 

(b) Except as set forth in Schedule 3.08, all Contracts listed or required to be listed in the Schedules (the "Material Assigned Contracts") are valid, 

binding and in full force and effect and are enforceable against the applicable member of the Seller Group and, to Seller's knowledge, the other party thereto, 

in accordance with their respective terms (in each case, other than Material Assigned Contracts that have expired or been terminated after the date hereof 

pursuant to their terms other than (x) as a result of a breach by any member of the Seller Group, (y) pursuant to any termination right arising as a result of the 

Acquisition or any of the transactions contemplated hereby or (z) as a result of any action or failure to act by any member of the Seller Group, provided that 

Purchaser is given prompt notice of such termination pursuant to Section 5.10), except as the same may be limited by bankruptcy, insolvency, reorganization, 

moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability 

is considered in a proceeding at law or in equity. Except as set forth in Schedule 3.08, each member of the Seller Group has performed all material obligations 

required to be performed by it to date under the Material Assigned Contracts, there are no material liabilities, obligations or commitments accrued under any 

Material Assigned Contract with respect to any period prior to Closing (other than those that will be discharged, paid or performed prior to Closing), and no 

member of the Seller Group is (with or without the lapse of time or the giving of notice, or both) in material breach or default in any respect thereunder and, to 

the knowledge of Seller, no other party to any Material Assigned Contract is (with or without the lapse of time or the giving of notice, or both) in breach or 

default in any respect thereunder. No member of the Seller Group has, except as disclosed in the applicable Schedule, received any written or, to Seller's 

knowledge, oral notice of the intention of any party to terminate any Material Assigned Contract. Except as specifically designated to the contrary in 

Schedule 3.08(b), complete and correct copies of all Material Assigned Contracts listed in the Schedules, together with all modifications and amendments 

thereto, have been delivered to Purchaser. 

40 

(c) Schedule 3.08 sets forth each Material Assigned Contract with respect to which the Consent of the other party or parties thereto must be obtained by 

virtue of the execution and delivery of this Agreement or the consummation of the Acquisition to avoid the invalidity of the transfer of such Contract, the 

termination thereof, a breach, violation or default thereunder or any other change or modification to the terms thereof. 

(d) With respect to Section 3.08(a), (i) the only Contracts deemed to be disclosed with respect to any of clause (ii), (iii)(A), (iii)(B)(x), (v), (vi)(B), (ix), 

(x), (xi), (xiv), (xviii), (xix), (xx), (xxi), (xxii) or (xxvii) shall be the Contracts set forth on the corresponding subsection of Schedule 3.08, (ii) Contracts 

identified on Schedule 3.08 as having not been provided to Purchaser prior to the date hereof shall be deemed to be disclosed with respect to a subsection of 

Section 3.08(a) only if set forth on the corresponding subsection of Schedule 3.08 and Purchaser shall not be deemed to have any information with respect to 

such Contract except such information as is expressly set forth in Schedule 3.08 and (iii) with respect to any subsection of Section 3.08 not listed in clause (i) 

of this Section 3.08(d), Seller has used all good faith efforts to identify on the corresponding subsection of Schedule 3.08 all Contracts of the type described in 

such subsection of Section 3.08 but, subject to Seller having used such efforts, the Contracts set forth on Schedule 3.08 that shall be deemed disclosed with 

respect to such subsection will not be limited to those set forth in the corresponding subsection of Schedule 3.08. 

SECTION 3.09. Inventory. Each item of Inventory constituting Acquired Assets, whether reflected on the Balance Sheet or subsequently procured or 

produced, (a) is free of any material defect or deficiency other than, in the aggregate for all such Inventory, defects and deficiencies at levels consistent with 

past experience of the Business, (b) is in good, usable and, as to finished goods, marketable condition (as of the Closing Date) (subject, in the case of raw 

materials and work-in-process, to the completion of the production process), all on a basis consistent with past experience of the Business and (c) is properly 

stated on the Balance Sheet (to the extent existing on the date thereof) and on the books and records of the Business at the lesser of cost and fair market value, 

with adequate (as determined in accordance with GAAP) obsolescence and defective product reserves, all as determined in accordance with GAAP. The 

quantities of each item of Inventory (whether raw materials, work-in-process or finished goods) constituting Acquired Assets were procured or produced for 

sale in the ordinary course of business and consistent with past practice (giving effect to then current market conditions) and the volume of production or 

purchases thereof and of orders therefor have been consistent with ordinary and necessary production, purchasing and orders. The quantities, type and quality 

of the Inventory constituting Acquired Assets is sufficient for the conduct of the Business (other than operation of the Brainerd Facility) by Purchaser 

following the Closing in substantially the same manner as conducted on the date of the Balance Sheet and as currently conducted by the Seller Group. Except 

as set forth in Schedule 3.09, since the date of the Balance Sheet to the date hereof, there have not been any write-downs of the value of, or establishment of 

any reserves against, any Inventory of the Business, except for write-downs and reserves in the ordinary course of business and consistent with past practice. 

41 

SECTION 3.10. Personal Property. Schedule 3.10 sets forth a list of certain Personal Property constituting Acquired Assets and includes an accurate 

description of each item of Personal Property listed thereon. Each item of material Personal Property constituting Acquired Assets is in all material respects in

good working order, is free from any material defect (other than defects resulting from normal wear and tear that are reasonably expected to be Repaired 

through the ordinary course maintenance program of the Business prior to having any material affect on the continued conduct of the Business or the 

continued use of any Acquired Asset (other than by reason of such Repair) and has been well maintained in all material respects in accordance with the past 

practice of the Business, any applicable requirements of insurance policies maintained by the Seller Group and, with respect to pressure vessels (including 

digesters), boilers (including recovery boilers), turbine generators and fire control or suppression systems, generally accepted industry practice or generally 

accepted insurance requirements. Set forth on Schedule 3.10 are all significant repairs or replacements of or to Personal Property constituting capital 

expenditures planned through December 31, 2002. The pulp equipment, paper machines, coating machines and converting equipment are capable of 

functioning and producing salable and usable products at the average daily and annual capacities and utilization rates set forth in Schedule 3.10 if managed or 

operated in accordance with current operating practices of the Business. 

SECTION 3.11. Receivables. All the Receivables constituting Acquired Assets (a) represent actual indebtedness incurred by the applicable account 

debtors, (b) have arisen from bona fide transactions in the ordinary course of business, (c) are adequately reserved and properly stated on the books and 

records of the Business in accordance with GAAP and (d) have terms of payment and age consistent with the historical practice of the Business. Except as set 

forth on Schedule 3.11, to the knowledge of Seller, all the Receivables that constitute Acquired Assets are not factored or subject to any setoff or counterclaim 

and are good and collectible at the aggregate recorded amounts thereof, net of any applicable reserves for doubtful accounts reflected on the Balance Sheet. 

Except as set forth on Schedule 3.11, since the date of the Balance Sheet to the date hereof, there have not been any write-offs as uncollectible of any 

Receivables, except for write-offs in the ordinary course of business and consistent with past practice. As of the date hereof, Seller has not received any 

written or, to Seller's knowledge, oral notice or complaint regarding any products sold or serviced for which Receivables that constitute Acquired Assets are 

currently due, other than notices and complaints received in the ordinary course of business and of a quantity, magnitude and type consistent with past 

experience of the Business. 

SECTION 3.12. Investments. Schedule 3.12 sets forth all Investments (other than Investments that are Excluded Assets) owned by any member of the 

Seller Group on the date of this Agreement that are primarily used, held primarily for use or intended to be used primarily in, or arise primarily out of, or are 

reasonably necessary to or required for the operation or conduct of the Business. 

SECTION 3.13. Permits. (a) Schedule 3.13 sets forth all certificates, licenses, permits, registrations, water rights, authorizations, applications, 

notices, filings, exemptions and approvals ("Permits") issued or granted to, or made by, any member of the Seller Group by or to Governmental Entities that 

are necessary for the conduct of the Business (other than operation of the Brainerd Facility), as conducted on the date of the Balance Sheet or as currently 

conducted, or the continued use of any Acquired Asset immediately following Closing (including under Environmental Laws). Except as set forth in 

Schedule 3.13, (i) all such Permits are validly held by a member of the Seller Group, and the Seller Group is, and has been during the past three years, in 

compliance in all material respects with all terms and conditions thereof, and (ii) during the past two years, no member of the Seller Group has received 

written or, to Seller's knowledge, oral notice of any Proceedings relating to the revocation or modification of any such Permits the loss of which, individually 

or in the aggregate, has had or could reasonably be expected to have a Seller Material Adverse Effect. 

(b) The Seller Group possesses all Permits necessary to own or hold under lease and operate the Acquired Assets and to conduct the Business as 

currently conducted. 

(c) All Permits which are held in the name of any employee, officer, director or stockholder of, or otherwise on behalf of, any member of the Seller 

Group shall be deemed included under the representations and warranties contained in this Section 3.13. 

42 

SECTION 3.14. Insurance. Members of the Seller Group maintain policies of fire and casualty, liability and other forms of insurance with respect to 

the Business in such amounts, with such deductibles and against such risks and losses as are, in Seller's judgment, reasonable for the Business. The insurance 

policies maintained by members of the Seller Group with respect to the Business are listed in Schedule 3.14. All such policies are in full force and effect, all 

premiums due and payable thereon have been paid (other than retroactive or retrospective premium adjustments that are not yet, but may be, required to be 

paid with respect to any period ending prior to the Closing Date under comprehensive general liability and workmen's compensation insurance policies), and 

no written or, to Seller's knowledge, oral notice of cancelation or termination has been received with respect to any such policy which has not been replaced 

on substantially similar terms prior to the date of such cancelation. No member of the Seller Group has received (i) any refusal of coverage under any policy 

described in Schedule 3.14, (ii) any written or, to Seller's knowledge, oral notice that any issuer of any such policy has filed for protection under applicable 

bankruptcy laws or is otherwise in the process of liquidating or has been liquidated, or (iii) any written or, to Seller's knowledge, oral notice that such policies 

are no longer in full force or effect or that the issuer of any such policy is no longer willing or able to perform its obligations thereunder. To the knowledge of 

Seller, the Business has been conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies. 

SECTION 3.15. Sufficiency of Acquired Assets. The Acquired Assets include (i) except as set forth in Schedule 3.15, all the assets reflected on the 

Financial Statements (other than (A) finished Inventory sold, (B) receivables collected, (C) "broke" disposed of, (D) cash disposed of and prepaid expenses 

realized and (E) other consumable assets used, in each case, in the ordinary course of business) and (ii) all the assets primarily relating to, or primarily used or 

primarily held for use in connection with, the Business (including operation, maintenance and repair of the Cloquet Facility, the Research Center, the Power 

Generation Facilities and the Railroad but excluding operation, maintenance and repair of the Brainerd Facility) during the past 12 months (other than the 

assets described in (A) through (E) above). The Acquired Assets (together with (x) the services to be provided pursuant to the Transition Services Agreement 

and the Wood Supply Agreement, (y) the Excluded Assets identified on Schedule 1.02(b)(i) as being Contracts specifically rejected by Purchaser and the 

Excluded Assets identified on Schedule 3.15 and (z) if the Closing occurs and the purchase of the Hydroelectric Facility is delayed as contemplated by 

Section 2.03 or a transfer of the Hydroelectric Facility is terminated pursuant to Section 2.04, the Hydroelectric Facility) are sufficient for the conduct of the 

Business (including operation, maintenance and repair of the Cloquet Facility, the Research Center, the Power Generation Facilities and the Railroad but 

excluding operation, maintenance and repair of the Brainerd Facility) by Purchaser immediately following the Closing in substantially the same manner as 

conducted on the date of the Balance Sheet and as currently conducted by the Seller Group. 

SECTION 3.16. Taxes. (a) For purposes of this Agreement: 

"Code" means the Internal Revenue Code of 1986, as amended. 

43

"Tax" or "Taxes" means all (i) Federal, state, local, foreign and other taxes, assessments, duties or similar charges of any kind whatsoever, including all 

corporate franchise, income, sales, use, ad valorem, receipts, value added, profits, license, withholding, payroll, employment, excise, property, net worth, 

capital gains, transfer, stamp, documentary, social security, payroll, environmental, alternative minimum, occupation, recapture and other taxes, and including 

any interest, penalties and additions imposed with respect to such amounts; (ii) liability for the payment of any amounts of the type described in clause (i) as a 

result of being a member of an affiliated, consolidated, combined, unitary or aggregate group (an "Affiliated Group") and (iii) liability for the payment of any 

amounts as a result of an express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in 

clause (i) or (ii). 

"Taxing Authority" means any Federal, state, local or foreign government, any subdivision, agency, commission or authority thereof, or any quasigovernmental 

body exercising any taxing authority or any other authority exercising tax regulatory authority. 

(b) No material Liens for Taxes exist with respect to any of the Acquired Assets except for statutory Liens for Taxes not yet due or payable. 

(c) Seller is not a "foreign person" within the meaning of Section 1445 of the Code. 

(d) Each member of the Seller Group has filed all sales Tax returns and paid all sales and use Taxes required to be so filed and paid. 

(e) The Acquired Entities and any affiliated, consolidated or unitary group of which they are or have ever been a member have (i) timely filed or caused 

to be filed all material Tax returns that they are required to file (taking into account applicable extensions) and all such Tax returns were true, correct and 

complete in all material respects and (ii) paid or accrued all Taxes with respect to taxable periods covered by such tax returns, and all other material Taxes for 

which the Acquired Entities are liable. 

44 

SECTION 3.17. Proceedings. (a) Schedule 3.17(a) sets forth a list of each pending or, to the knowledge of Seller, threatened Proceeding or claim 

with respect to which any member of the Seller Group has been contacted by counsel for or a representative of the plaintiff or claimant, arising out of the 

conduct of the Business or against or affecting any Acquired Asset and that (i) relates to or involves more than $50,000, (ii) presents in large degree the same 

legal and factual issues as other actions or claims and, together with such actions and claims, relates to or involves more than $250,000 or (iii) seeks any 

material injunctive relief, other than Proceedings or claims promptly disclosed to Purchaser pursuant to Section 5.10 that (x) are not required to be disclosed 

on Schedule 3.17(a) as of the date hereof, (y) relate and would give rise solely to Excluded Liabilities and (z) in the aggregate could not reasonably be 

expected to have a Seller Material Adverse Effect. Except as set forth in Schedule 3.17(a), none of the Proceedings or claims listed in Schedule 3.17(a) as to 

which there is at least a reasonable possibility of adverse determination would have, if so determined, individually or in the aggregate, a Seller Material 

Adverse Effect. Except as set forth in Schedule 3.17(a), to the knowledge of Seller, there are no unasserted claims (other than trade payables that in the 

ordinary course of business have not yet been paid) of the type that would be required to be disclosed in Schedule 3.17(a) if counsel for or a representative of 

the claimant had contacted Seller that, if asserted, would have at least a reasonable possibility of an adverse determination other than any claims promptly 

disclosed to Purchaser pursuant to Section 5.10 that (x) are not known to Seller on the date hereof, (y) relate and would give rise solely to Excluded Liabilities 

and (z) in the aggregate could not reasonably be expected to have a Seller Material Adverse Effect. To the knowledge of Seller, except as set forth in 

Schedule 3.17(a), no member of the Seller Group is a party or subject to or in default under any Judgment applicable to the conduct of the Business or any 

Acquired Asset or Assumed Liability. Except as set forth in Schedule 3.17(a), as of the date hereof there is not any Proceeding or claim by any member of the 

Seller Group pending, or which any member of the Seller Group intends to initiate, against any other person arising out of the conduct of the Business which 

involves an amount greater than $250,000. Except as set forth in Schedule 3.17(a), no member of the Seller Group has received any written or, to the 

knowledge of Seller, oral notice of the commencement of any investigation by any Governmental Entity of or affecting the conduct of the Business or any 

Acquired Asset or Assumed Liability. 

(b) Schedule 3.17(b) sets forth a list, as of the date hereof, of each pending or, to the knowledge of Seller, threatened Proceeding against any member of 

the Seller Group or any of their affiliates by or before any Governmental Entity that relates to or otherwise may give rise to any legal restraint on, or 

prohibition against, the transactions contemplated by this Agreement. 

SECTION 3.18. Employee Matters. (a) Schedule 3.18(a) contains a true, current and complete list of each benefit, employment, personal services, 

collective bargaining, compensation, incentive, stock option, restricted stock, stock appreciation right, phantom equity, change in control, severance, vacation, 

time-off, perquisite and other similar agreement, plan, policy and other arrangement (and any amendments thereto), (i) currently in effect and covering one or 

more current or former employees of, or current or former independent contractors with respect to, Seller or any of its affiliates, who principally works (or 

worked), or provides (or provided) services, for or with respect to the Business (each, a "Participant"), and maintained by Seller or any of its affiliates, or 

(ii) with respect to which Seller or any of its affiliates has or could have any liability (each, a "Benefit Plan"). 

(b) Each Benefit Plan complies with and has at all times been administered in all material respects, in accordance with all applicable laws, including the 

Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder ("ERISA"), and, to obtain taxation advantages, 

the Code and the regulations promulgated thereunder. All benefits, contributions and premiums relating to each Benefit Plan have been timely paid or made in 

all material respects, in accordance with the terms of such Benefit Plan and the terms of all applicable laws. 

(c) Except as disclosed in Schedule 3.18(c) or, for purposes of clause (ii)(D)(I) below, Schedule 3.21(d), (i) no Benefit Plan (A) provides for defined 

benefit pension benefits, or deferred compensation, (B) provides any benefits (other than on a self-pay basis or pursuant to the terms of an individual 

agreement) following termination of service or employment, (C) is a "multiemployer plan" (as defined in Section 3(37) of ERISA), or a "multiple employer 

welfare arrangement" (as defined in Section 3(40) of ERISA), (D) covers any Participant who resides or works outside the United States, (E) is a collective 

bargaining or similar agreement, or (F) has been administered in a manner contrary to its terms in any material respect, and (ii) no Participant (A) is 

represented by any union, (B) is currently receiving any disability benefits, (C) has received any loan from Seller or any of its affiliates, not including any 

loans under the salaried and hourly 401(k) plans of Seller secured by such Participants' interest in such plans, (D) has a right (I) as of the date of 

Schedule 3.21(d) to take more than four weeks of vacation (exclusive of "block" week) per year, or (II) to receive from Seller, or any of its affiliates a base 

45

annual salary along with any guaranteed bonus, or target or discretionary bonus (with respect to any single year) in excess of $125,000, (E) has received from 

Seller or any of its affiliates any discretionary severance or any severance under any formal or informal policy or practice, (F) has received or could 

reasonably be expected to receive any payment or benefit from Seller, or any of its affiliates which would not be deductible to such entity, or (G) is, or at any 

time will become, entitled to any payment, benefit or right, or any increased and/or accelerated payment, benefit or right, as a result of (I) such Participant's 

termination of employment with, or services to, Seller or any of its affiliates, or (II) the execution of this Agreement or the consummation of the transactions 

contemplated hereby. 

SECTION 3.19. Absence of Changes or Events. Except as set forth in Schedule 3.19, since the date of the Balance Sheet, there has not been any 

Seller Material Adverse Effect, except for changes after the date hereof proximately caused by (i) changes to the United States or global economic conditions 

or financial markets in general and not affecting the Business disproportionally to others in the paper industry in similar lines of business, (ii) changes 

affecting the paper industry generally and not affecting the Business disproportionally to others in the paper industry in similar lines of business or (iii) the 

effect of the announcement of the transactions contemplated hereby on customer relationships of the Business but only if the effect on the customer 

relationship is caused by an action or failure to act of Purchaser. Except as set forth in Schedule 3.19, since the date of the Balance Sheet to the date hereof, 

Seller has caused the Business to be conducted in the ordinary course and in substantially the same manner as previously conducted (including with respect to 

work-force reductions, collections of accounts receivable, payments of accounts payable, research and development efforts, advertising, sales practices 

(including promotions, discounts and concessions), legal defense efforts and legal expenditures, maintenance and repair expenditures, product quality and 

product specifications, capital expenditures, environmental expenditures and inventory levels) and has made all commercially reasonable efforts consistent 

with past practices to preserve the relationships of the Business with material customers, suppliers and distributors. Except as set forth in Schedule 3.19, since 

the date of the Balance Sheet, no member of the Seller Group has taken any action that, if taken after the date of this Agreement, would constitute a breach of 

any of subclauses (iii), (iv), (vi), (vii), (viii), (xi) an (xxii) of Section 5.01(a). 

46 

SECTION 3.20. Compliance with Applicable Laws. (a) Except as set forth in Schedule 3.20, (i) the Business has at all times been (except for any past 

non-compliance that is not known to Seller and (together with its direct and indirect effects) (x) relates and would give rise solely to Excluded Liabilities and 

(y) could not reasonably be expected to have a Seller Material Adverse Effect) and is in compliance in all material respects with all Applicable Laws 

including those relating to occupational health and safety and (ii) the current use by the Seller Group of the plants, offices and other facilities located on the 

Business Properties does not violate any local zoning or similar land use or government regulation in any material respect. Except as set forth in 

Schedule 3.20, in the past two years no member of the Seller Group has received any written or, to the knowledge of Seller, oral communication from any 

person that alleges that the Business is not in compliance in any material respect with any Applicable Law. This Section 3.20(a) does not relate to matters with 

respect to (i) possession of and compliance with Permits, which are the subject of Section 3.13, (ii) Taxes, which are the subject of Section 3.16, (iii) ERISA 

and other laws applicable to the Benefit Plans, which are the subject of Section 3.18, (iv) environmental matters, which are the subject of Section 3.20(b) and 

(v) laws regarding employment and employment practices, which are the subject of Section 3.21. 

(b) Except as set forth in Schedule 3.20(b) and in connection with the Business (other than with respect to matters that (x) relate solely to the operation 

of the Brainerd Facility, (y) relate and would give rise solely to Excluded Liabilities and (z) could not reasonably be expected to have a Seller Material 

Adverse Effect) and the Acquired Assets: (i) no member of the Seller Group has received any written or, to the knowledge of Seller, oral communication 

within the past five years that alleges any violation of, or claim under, any Environmental Law, that has not been fully and finally resolved through the 

appropriate judicial, administrative or other claims resolution process and that alleges any violation of, or claim under, any Environmental Law, or arising out 

of, based on or resulting from the presence or Release of Hazardous Materials; (ii) members of the Seller Group are in compliance with all Environmental 

Laws; (iii) members of the Seller Group have not entered into or agreed to and are not bound by or subject to any contract, decree, order or Judgment relating 

to claims, liability under or compliance with any Environmental Law or to investigation or remediation of Hazardous Materials; (iv) to the knowledge of 

Seller, there has been no treatment, storage, Release or threatened Release of any Hazardous Materials on or from any property (including any property 

included in the Acquired Assets); (v) no member of the Seller Group has received an information request regarding, nor has been named a potentially 

responsible party for, any National Priorities List or CERCLIS site (as those terms are defined under Environmental Law) or any other site under analogous 

state law; (vi) to the knowledge of Seller, there are not now and never have been any underground or above ground storage tanks on or under the Acquired 

Assets; and (vii) neither Seller nor any member of the Seller Group has knowledge of facts, conditions or circumstances that could reasonably be expected to 

lead to responsibility or liability under Environmental Laws. 

The term "Environmental Laws" means all requirements of Applicable Laws and Judgments issued, promulgated, recognized or entered into by any 

Governmental Entity, relating to the environment, pollution, health, safety, natural resources, or to the management, Release or threatened Release of, or 

exposure to, Hazardous Materials. 

The term "Hazardous Materials" means all explosive or radioactive materials or substances, hazardous or toxic substances, wastes or chemicals, 

petroleum (including crude oil or any fraction thereof) and all other materials or chemicals regulated pursuant to any Environmental Law. 

The term "Release" means any spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching, emanation or migration in, 

into, onto, or through the environment (including ambient air, surface water, groundwater, soils, sediments of any surface water body, including the St. Louis 

River or Lake Superior, land surface, subsurface strata or workplace). 

47 

(c) The occupancies and uses of the Business Properties, as well as the development, construction, management, maintenance, servicing and operation of 

the Business Properties, comply in all material respects with all Applicable Laws and are not in violation of any thereof; and all certificate(s) of occupancy 

and all other Permits required by Applicable Law for the proper use and operation of the Business Properties are in full force and effect. All material 

approvals, consents, Permits, utility installations and connections required for the development, construction, maintenance, operation and servicing of the 

Business Properties have been granted, effected, or performed and completed (as the case may be), and all fees and charges therefor have been fully paid. No 

member of the Seller Group has received written or, to the knowledge of Seller, oral notice of, or otherwise has knowledge of, any violations, Proceedings or 

Judgments (as to which any member of the Seller Group or any Business Property is a party or is bound) relating to zoning, building use and occupancy, 

traffic, fire, health, sanitation or other laws or regulations, against, or with respect to, the Business Properties. This Section 3.20(c) does not relate to matters 

with respect to (i) Taxes, which are the subject of Section 3.16, (ii) ERISA and other laws applicable to the Benefit Plans, which are the subject of

Section 3.18, (iii) environmental matters, which are the subject of Section 3.20(b) and (iv) laws regarding employment and employment practices, which are 

the subject of Section 3.21. 

SECTION 3.21. Employee and Labor Matters. (a) Except (x) as set forth in Schedule 3.21 or (y) in the case of clauses (i), (ii), (vii), (viii) or 

(xii) only, except for any matter promptly disclosed to Purchaser pursuant to Section 5.10 that (A) is not required to be disclosed on Schedule 3.21 as of the 

date hereof, (B) does not result from any action or failure to act by any member of the Seller Group or any of its employees, representatives or agents 

(including the entering into of any Labor Contract, other than the Labor Agreements), and (C) could not reasonably be expected to have a Seller Material 

Adverse Effect or (z) in the case of clause (iv) only, for any practice promptly disclosed to Purchaser pursuant to Section 5.10 that (A) is not required to be 

disclosed on Schedule 3.21 as of the date hereof, (B) relates and would give rise solely to the Excluded Liabilities and (C) could not reasonably be expected to 

have a Seller Material Adverse Effect, (i) there is no, and during the past three years there has not been any, labor strike, picketing of any nature, significant 

labor dispute, slowdown or any other concerted interference with normal operations, stoppage or lockout pending, or, to the knowledge of Seller, threatened 

against or affecting the Business; (ii) there are no union claims or demands to represent or organizational campaigns in progress with respect to the employees 

of the Seller Group related to the Business or Contingent Workers (as defined in Section 3.21(f)) and no question concerning representation of such 

individuals exists; (iii) with the sole exception of the Labor Agreements and the Railroad CBAs, there is no collective bargaining or similar agreement or any 

arrangement with any labor organization, or work rules or practices agreed to with any labor organization or employee association, applicable to employees or 

Contingent Workers related to the Business; (iv) no member of the Seller Group is engaged in any unfair labor practice in connection with the conduct of the 

Business; (v) the Business is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment 

practices, work place safety and health, terms and conditions of employment, and wages and hours; (vi) no member of the Seller Group is delinquent in any 

payments to any of the employees or Contingent Workers related to the Business for any wages, salaries, commissions, bonuses, fees or other direct 

compensation due with respect to any services performed for it to the date hereof or amounts required to be reimbursed to such employees or Contingent 

Workers; (vii) there are no formal or informal grievances, complaints or charges with respect to employment or labor matters (including, without limitation, 

charges of 

48 

employment discrimination, retaliation or unfair labor practices) related to the Business pending or, to Seller's knowledge, threatened in any judicial, 

regulatory or administrative forum, or under any dispute resolution procedure (including, but not limited to, any proceedings under any dispute resolution 

procedure under any Labor Contract or Railroad CBA), provided that Seller shall not be obligated to list grievances on Schedule 3.21 unless and until such 

grievances have been brought for resolution to Seller's Human Resources personnel or to a manager at the level of a mill department manager or above; 

(viii) to the knowledge of Seller, none of the Business' employment policies or practices is currently being audited or investigated or subject to imminent audit 

or investigation by any Federal, state or local government agency; (ix) the Business is not subject to any consent decree, court order or settlement in respect of 

any labor or employment matters; (x) the Business is, and at all times since November 6, 1986, has been, in material compliance with the requirements of the 

Immigration Reform Control Act of 1986; (xi) all employees related to the Business are employed at-will or pursuant to the Labor Agreements or Railroad 

CBAs; and (xii) no arbitration or similar proceeding with respect to employment matters with respect to the Business is pending or, to the knowledge of 

Seller, threatened and no claim therefor has been asserted. 

(b) Except as set forth on Schedule 3.21(b), during the past year, the Business has not experienced a "plant closing," "business closing," or "mass layoff" 

(as defined in the WARN Act (as defined in Section 5.22(a)) or any similar state, local or foreign law or regulation) affecting any site of employment of the 

Business (other than the Brainerd Facility) or one or more facilities or operating units within any site of employment or facility of the Business (other than the 

Brainerd Facility), without complying with the WARN Act and any similar state, local or foreign law or regulation, and, during the 90-day period preceding 

the date hereof, none of the employees of the Business has suffered an "employment loss" (as defined in the WARN Act or any similar state, local or foreign 

law or regulation). Schedule 3.21(b) sets forth for each employee who has suffered an "employment loss" during the 90-day period preceding the date hereof 

(i) the name of such employee (ii) the date of hire of such employee, (iii) such employee's regularly scheduled hours over the six month period prior to such 

"employment loss", and (iv) such employee's last job title(s), assignment(s) and department(s). 

(c) Except as set forth on Schedule 3.21(c), the Labor Agreements and the Railroad CBAs set forth the entire and complete understanding of and 

agreement between any member of the Seller Group and any Union or Railroad Union including, without limitation, concerning economic and non-economic 

terms and conditions of employment and related to the assignment of any contractual obligation by any member of the Seller Group to any other entity. 

(d) Schedule 3.21(d) sets forth the name and address of each full-time and part-time employee related to the Business (other than employees whose 

duties are related primarily to the operation of the Brainerd Facility), their respective positions, their annual rate of compensation (and current rate of accrual 

of paid time off and the level of bonus, if any, to which they may be entitled expressed as a percentage of base annual salary), and a description of their status 

(i.e., whether active or on leave of absence) as of the date of Schedule 3.21(d) (except address information which may be as of the month ended prior to the 

date of this Agreement), and contains a list of all Contingent Workers of the Business (other than Contingent Workers whose duties are related principally to 

the operation of the Brainerd Facility), except with respect to officers, the terms of whose employment is governed by a Contract listed in Schedule 3.08. To 

the extent any employee or Contingent Worker listed on Schedule 3.21(d) is on leave of absence, Schedule 3.21(d) further describes the type of leave, the date 

it commenced and the expected duration of leave. Except as set forth on Schedule 3.21(d), there are no employees on layoff, and there are no individuals not 

currently listed as employees on Schedule 3.21(d) with recall or preferential rehire rights and no employees listed on Schedule 3.21(d) have any such rights 

except pursuant to the express terms of the Labor Agreements. 

49 

(e) As of the date hereof, the Business generally enjoys good employer employee relationships. Except as set forth on Schedule 3.21(e), there is no 

policy, plan or program of paying severance pay or any form of severance compensation in connection with the termination of any employee of the Business. 

Except as set forth on Schedule 3.21(e), no employee of the Business is, to the knowledge of any member of the Seller Group, a party to or bound by any 

Contract or subject to any Judgment that may materially interfere with the use of such person's best efforts to promote the interests of the Business, or, other 

than as set forth on Schedule 3.21(e), that has had or could reasonably be expected to have a Seller Material Adverse Effect; providedthat this Section 3.21(e) 

shall not require Seller to make any inquiry to any of its employees as to whether such employee is bound by any Contract or subject to any Judgment. 

(f) Except as set forth on Schedule 3.21(f), no independent contractors, temporary employees, leased employees or any other servants or agents 

employed or used with respect to the Business is compensated other than through reportable wages paid by a member of the Seller Group (collectively,

"Contingent Workers"). To the extent that any Contingent Workers are used with respect to the Business, they are properly classified and treated in 

accordance with applicable laws and for purposes of all benefit plans and perquisites. 

SECTION 3.22. Transactions with Affiliates. Except as set forth in Schedule 3.22, none of the Contracts set forth in Schedule 3.08 between the 

Business, on the one hand, and Seller or any of its affiliates, on the other hand ("Affiliate Contracts"), will continue in effect subsequent to the Closing. Except 

as set forth in Schedule 3.22, after the Closing neither Seller nor any of its affiliates will have any interest in any property (real or personal, tangible or 

intangible) or Contract used in or necessary to conduct the Business (other than operation of the Brainerd Facility) as conducted on the date of the Balance 

Sheet or as currently conducted (other than Excluded Assets). Except as set forth in Schedule 3.22, neither Seller nor any affiliate of Seller provides any 

material services to the Business. 

SECTION 3.23. Effect of Transaction. Except as set forth in Schedule 3.23, no member of the Seller Group has received written or, to the knowledge 

of Seller, oral notice that any creditor, employee, client, customer or other person having a material business relationship with the Business intends to change 

such relationship because of the purchase and sale of the Business, the ownership of the Business by Purchaser, the entering into of this Agreement or the 

Ancillary Agreements or the consummation of any other transaction contemplated hereby or thereby, other than any notice received after the date hereof of 

such a change in a relationship with a client or customer caused by any action or failure to act by Purchaser. 

SECTION 3.24. Suppliers. Except for the suppliers named in Schedule 3.24, the Business has not purchased, from any single supplier, goods or 

services for which the aggregate purchase price exceeds 5% of the total value of goods and services purchased by the Business during its most recent full 

fiscal year. Except as set forth in Schedule 3.24 since the date of the Balance Sheet there has not been (i) to the knowledge of Seller, any material adverse 

change in the business relationship of the Business with any supplier of merchandise named in Schedule 3.24 or (ii) except for changes in volumes and prices 

in the ordinary course of business, any change in any material term (including credit terms) of the supply agreements or related arrangements with any such 

supplier. 

50 

SECTION 3.25. Customers. Except for the customers named in Schedule 3.25, the Business does not have any customer to whom it made more than 

5% of its sales during its most recent full fiscal year. Except as set forth in Schedule 3.25, since the date of the Balance Sheet, there has not been (i) to the 

knowledge of Seller, any material adverse change in the business relationship of the Business with any customer named in Schedule 3.25, other than any 

change after the date hereof resulting from the effect of the announcement of the transaction but only if caused by any action or failure to act by Purchaser, or 

(ii) except for changes in volumes and prices in the ordinary course of business, any change in any material term (including credit terms) of the sales 

agreements or related agreements with any such customer. 

SECTION 3.26. Distributors. Schedule 3.26 sets forth a list of each distributor or sales representative of the products of the Business and (i) indicates 

whether such distributor or sales representative has a written contract or oral arrangement with the Business, (ii) contains a description of the terms of such 

contract or oral arrangement with the Business with respect to territory, exclusivity and the term of the contract or arrangement and (iii) indicates the amount 

of notice, and any payments, required to terminate such distributor arrangement with the Business. Neither Seller nor any of its affiliates has entered into any 

arrangements that would adversely effect Purchaser's ability to distribute or sell any products in any jurisdiction. 

SECTION 3.27. IRB Financings. Schedule 3.27 lists all of the debt financings outstanding with respect to the Acquired Assets, and the principal 

financing documents pertaining thereto. Except as described in Schedule 3.27, Seller has the right to cause the immediate repayment, redemption or 

defeasance of all such financings and obtain the release of all related Liens on Acquired Assets and full ownership of all Acquired Assets subject to such 

financings. Neither the Acquisition nor any other transaction contemplated by this Agreement or any Ancillary Agreement will adversely affect the taxexempt 

status of, or result in a taxable event pursuant to Section 1001 of the Code to holders of, the IRB Financings. 

SECTION 3.28. Cross-Border Leases. Schedule 3.28 lists all of the cross-border lease arrangements affecting any Acquired Assets, including the 

Cross-Border Leases, and the principal documents pertaining thereto. 

SECTION 3.29. Railroad. (a) Except for (i) the railroad right-of-ways, and (ii) property contiguous to the railroad right-of-way (including trackage 

rights), identified on Schedule 3.29(a), none of the Seller Group or any Acquired Entity owns any other real property relating to the Railroad and leases no 

real property from others relating to the Railroad. 

(b) (i) Collectively, the real estate used by the Seller Group and the Acquired Entities for railroad track right-of-way (collectively, the "ROW Parcels") 

comprise an uninterrupted railroad right-of-way. All railroad tracks used by the Seller Group and the Acquired Entities as part of such uninterrupted 

railroad right-of-way are located within the boundaries of the ROW Parcels. 

(ii) The Seller Group owns, fee simple, easement, leasehold, or other interests in the ROW Parcels which, collectively, will immediately after the 

Closing be sufficient to permit the continuous operation by the Railroad Company of a railroad right-of-way consistent with present use along the ROW 

Parcels. The Seller Group owns and has good and valid title to all Railroad Equipment, including all Railroad Equipment identified on Schedule 3.10, 

free and clear of all Liens. All outstanding shares of capital stock of or other equity interests in Duluth & Northeastern Railroad Company are owned by 

Seller free and clear of all Liens (other than Liens that will be discharged on or prior to Closing). 

(c) Except as provided in Schedule 3.29(c), none of the Railroad's real property interest (including yards, locomotive facilities, or other similar 

properties) include leaseholds, easements, or other interests that terminate or are terminable by third parties in less than twenty (20) years from the date 

hereof. 

51 

(d) Each Locomotive is in operating condition and is in compliance in all material respects with all Federal Railroad Administration Requirements. Each 

Freight Car satisfies all Association of American Railroads requirements for interchange of such freight cars. On the Closing Date, all of the Rail Equipment 

will be located at the Premises in Cloquet, Minnesota.

(e) Since January 1, 1997, the Railroad has not received any inspection report or communication from the Federal Railroad Administration or any state 

or local agency identifying any failure of the Railroad Property or the Rail Equipment to comply in any respect with Applicable Law. 

SECTION 3.30. Energy Generation Facilities. (a) The Hydroelectric Facility (i) is duly licensed by FERC in accordance with the Federal Power Act 

("FPA") and (ii) is a "qualifying small power production facility" as such term is defined in the FPA and the Public Utilities Regulatory Policies Act of 1978 

("PURPA") and under 18 C.F.R. Part 292, Subpart B of the FERC regulations, and is entitled to exemption from regulation pursuant to 18 C.F.R. Part 292, 

Subpart F of the FERC regulations. The FERC License is valid and in full force and effect and there are no actions pending to rescind, modify or amend the 

FERC License. Except as set forth in Schedule 3.13, all documents filed and required to be filed with FERC with respect to the license of the Hydroelectric 

Facility have been so filed, and no documents filed by or on behalf of Seller with FERC in connection with such license contained any untrue statement of a 

material fact or omitted to state a material fact necessary in order to make the statements contained in such document not misleading under the circumstances 

in which they were made, and, subject to necessary FERC approval for the transfer of the license, the execution, delivery and performance of this Agreement 

will not contravene such license. Except as set forth in Schedule 3.13, Seller has operated the Hydroelectric Facility in compliance with the FERC license. 

The information contained in the Notice of Self Certification of Qualifying Status As a Small Power Production Facility or Application for Certification of 

Qualifying Status As a Small Power Production Facility filed with FERC in Docket No. QF 85-704 on September 17, 1985 is true and correct. All documents 

filed and required to be filed with FERC with respect to the Hydroelectric Facility's status as a qualifying small power producer have been so filed, and no 

documents filed by or on behalf of Seller with FERC in connection with such status contained any untrue statement of a material fact or omitted to state a 

material fact necessary in order to make the statements contained in such document not misleading under the circumstances in which they were made. Seller 

has operated the Hydroelectric Facility in all ways necessary to maintain its status as a qualifying small power production facility under PURPA. 

(b) Each of the Steam Turbine Facilities is a "qualifying cogeneration facility" as such term is defined in the FPA and PURPA and under 18 C.F.R. 

Part 292, Subpart B of the FERC regulations, and entitled to exemption from regulation pursuant to 18 C.F.R. Part 292, Subpart F of the FERC regulations. 

As of the Closing Date, all documents required to be filed with FERC with respect to the status of each Steam Turbine Facility as a qualifying cogeneration 

facility will have been so filed, and no documents filed by or on behalf of Seller with FERC in connection with such status contained any untrue statement of 

a material fact or omitted to state a material fact necessary in order to make the statements contained in such document not misleading under the 

circumstances in which they were made, and the execution, delivery and performance of this Agreement will not contravene such status. Seller has continued 

to operate the Steam Turbine Facilities in all ways necessary to maintain their status as a qualifying cogeneration facility. 

52 

(c) The services to be performed, the materials to be supplied and the interests, easements and other rights granted pursuant to the Hydroelectric Facility 

Contracts will enable Purchaser and its contractors and agents to operate the Hydroelectric Facility. 

(d) The services to be performed, the materials to be supplied and the interests, easements and other rights granted pursuant to the Steam Turbine 

Contracts will enable Purchaser and its contractors and agents to operate the Steam Turbine Facilities. 

SECTION 3.31. Product Warranties and Liabilities. (a) Except as set forth in Schedule 3.31, each product manufactured, shipped or sold by the 

Business has been in conformity with all applicable contractual commitments and all express and implied warranties, and the Business does not have any 

liability (and, to Seller's knowledge, there is no basis for any present or future Proceeding, hearing, investigation, charge, complaint, claim or demand against 

it giving rise to any liability) for replacement or return or discounts for inferior quality thereof or other damages in connection therewith, except for 

nonconformities and liabilities that could not reasonably be expected to have a material adverse effect on the Business' relationship with any customer or 

distributor. All liabilities for replacement or return or discounts for inferior quality of any product manufactured, shipped or sold by the Business or other 

damages in connection therewith are adequately reserved and properly stated on the books and records of the Business in accordance with GAAP. No product 

manufactured, shipped or sold by the Business is subject to any guaranty, warranty or other indemnity beyond the applicable standard terms and conditions of 

sale or beyond that implied or imposed by Applicable Law. Schedule 3.31 includes copies of the Business' standard terms and conditions of sale. 

(b) Except as set forth in Schedule 3.31, since January 1, 1999, there has been no recall ordered by any Governmental Entity or, to Seller's knowledge, 

threatened recall or investigation by any Governmental Entity of any product manufactured, shipped or sold by the Business. 

(c) For each of the years ended December 31, 2001 and December 31, 2000, the settlement cost (net of salvage value) arising out of the defective 

products provided by the Business (pulp and paper inclusive) has not exceeded 1.0% of sales for such year. 

SECTION 3.32. Disclosure. No representation or warranty of Seller contained in this Agreement or in any Ancillary Agreement, and no statement 

contained in any document delivered or to be delivered pursuant to Section 2.02 or 6.02 (each an "Additional Seller Document") or in any Schedule furnished 

or to be furnished pursuant to this Agreement, in each case by or on behalf of Seller to Purchaser or any of its representatives, contains or will contain (or, to 

the extent the relevant representation or warranty is qualified by knowledge, contains or will contain to the knowledge of Seller) any untrue statement of a 

material fact, or, to the knowledge of Seller, omits or will omit to state any material fact necessary, in light of the circumstances under which it was or will be 

made, in order to make the statements herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided 

in any such document, certificate or Schedule except, in each case, with respect to changes in customers relationships of the Business resulting from the effect 

of the announcement of the transactions contemplated hereby but only if caused by an action or failure to act by Purchaser. 

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SECTION 3.33. Disclaimer of Other Representations and Warranties. (a) No member of the Seller Group makes or has made any representations or 

warranties relating to the Business, either Acquired Entity or any member of the Seller Group or otherwise in connection with the transactions contemplated 

hereby other than those expressly made by Seller herein, in any Ancillary Agreement or in any Additional Seller Document delivered or to be delivered by or 

on behalf of Seller in connection herewith. Without limiting the generality of the foregoing, except as expressly provided in Section 5.17, no member of the 

Seller Group has made, or shall be deemed to have made, any representations or warranties in the management presentations relating to the businesses of 

Seller prepared in consultation with Goldman, Sachs & Co. on behalf of Seller and presented to Purchaser in May, 2001 or in any other presentation of the 

Business in connection with the transactions contemplated hereby, or in any other written materials delivered to Purchaser in connection with any other 

presentation (collectively, the "Offering Materials and Presentations"), and no statement contained in the Offering Materials and Presentations shall be 

deemed a representation or warranty hereunder or otherwise. No person has been authorized by any member of the Seller Group to make any representation or

warranty relating to Seller, any member of the Seller Group or otherwise in connection with the transactions contemplated hereby and, if made, such 

representation or warranty must not be relied upon as having been authorized by any member of the Seller Group. 

(b) The disclosure of any information in any schedule hereto shall not be deemed to constitute an acknowledgment that such information is required to 

be disclosed in connection with the representations and warranties made by Seller in this Agreement or is material, nor shall such information be deemed to 

establish a standard of materiality. 

ARTICLE IV 

Representations and Warranties of Purchaser 

Each of Purchaser and Purchaser Guarantor (each as to itself only) hereby represents and warrants to Seller as of the date of this Agreement and as of the 

Closing Date, as follows: 

SECTION 4.01. Organization, Standing and Power. Purchaser is duly organized, validly existing and in good standing under the laws of the 

jurisdiction in which it is organized and has full limited liability company power and authority and possesses all governmental franchises, licenses, permits, 

authorizations and approvals necessary to enable it to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted, 

other than such franchises, licenses, permits, authorizations and approvals the lack of which, individually or in the aggregate, have not had and could not 

reasonably be expected to have a Purchaser Material Adverse Effect (as defined in section 9.04(b)). Purchaser Guarantor is a corporation duly organized and 

validly existing under the laws of the Republic of South Africa. Purchaser has delivered to Seller true and complete copies of the limited liability company 

agreement of Purchaser, as amended through the date of this Agreement. 

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SECTION 4.02. Authority; Execution and Delivery; and Enforceability. Each of Purchaser and Purchaser Guarantor has full power and authority to 

execute this Agreement and the Ancillary Agreements to which it is, or is specified to be, a party and to consummate the Acquisition and the other 

transactions contemplated hereby and thereby. The execution and delivery by each of Purchaser and Purchaser Guarantor of this Agreement and the Ancillary 

Agreements to which it is, or is specified to be, a party and the consummation by Purchaser of the Acquisition and the other transactions contemplated hereby 

and thereby have been duly authorized by all necessary corporate action. Each of Purchaser and Purchaser Guarantor has duly executed and delivered this 

Agreement and prior to the Closing will have duly executed and delivered each Ancillary Agreement to which it is, or is specified to be, a party, and this 

Agreement constitutes, and each Ancillary Agreement to which it is, or is specified to be, a party will after the Closing constitute, its legal, valid and binding 

obligation, enforceable against it in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or 

similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in 

a proceeding at law or in equity. 

SECTION 4.03. No Conflicts; Consents. The execution and delivery by each of Purchaser and Purchaser Guarantor of this Agreement do not, the 

execution and delivery by Purchaser of each Ancillary Agreement to which it is, or is specified to be, a party will not, and the consummation of the 

Acquisition and the other transactions contemplated hereby and thereby and compliance by each of Purchaser and Purchaser Guarantor with the terms hereof 

and thereof will not conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of 

termination, cancelation or acceleration of any obligation or to loss of a material benefit under, or to increased, additional, accelerated or guaranteed rights or 

entitlements of any person under, or result in the creation of any Lien upon any of the properties or assets of Purchaser or Purchaser Guarantor or any of their 

respective subsidiaries under, any provision of (i) the certificate of incorporation or by-laws or other organizational documents of Purchaser or Purchaser 

Guarantor or any of their respective subsidiaries, (ii) any Contract material to the ability of Purchaser to consummate the Acquisition or the other transactions 

contemplated hereby or by the Ancillary Agreements, or of Purchaser Guarantor to perform its obligations hereunder, to which Purchaser or Purchaser 

Guarantor or any of their respective subsidiaries is a party or by which any of their respective properties or assets is bound or (iii) any Judgment or Applicable 

Law applicable to Purchaser or Purchaser Guarantor or any of their respective subsidiaries or their respective properties or assets. No Consent of or 

registration, declaration or filing with any Governmental Entity is required to be obtained or made by or with respect to Purchaser or Purchaser Guarantor or 

any of their respective subsidiaries in connection with the execution, delivery and performance of this Agreement or any Ancillary Agreement or the 

consummation of the Acquisition or the other transactions contemplated hereby and thereby, other than (i) those set forth on Schedule 4.03 and (ii) those that 

may be required by reason of the terms or nature of the Acquired Assets or the participation of the Seller Group (as opposed to those required solely by reason 

of the participation by Purchaser or Purchaser Guarantor as opposed to any other third party, including any other third party organized outside, or controlled 

by a person organized outside, the United States) in the Acquisition and other transactions contemplated hereby and by the Ancillary Agreements. 

SECTION 4.04. Proceedings. Schedule 4.04 sets forth a list, as of the date hereof, of each pending or, to the knowledge of Purchaser, threatened 

Proceeding against Purchaser or any of its affiliates by or before any Governmental Entity that relates to or otherwise may give rise to any legal restraint on or 

prohibition against, the transactions contemplated by this Agreement. 

SECTION 4.05. Railroad. Other than in connection with the transactions contemplated by this Agreement and the Ancillary Agreements, the 

Railroad Sub is not, and has at no time been, engaged in any business or activity and has no liabilities or obligations of any nature. As of the date hereof, 

neither Purchaser nor any person in control of Purchaser is a railroad subject to STB jurisdiction or in control of a railroad subject to STB jurisdiction. 

55 

SECTION 4.06. Disclaimer of Other Representations and Warranties. (a) None of Purchaser, Purchaser Guarantor or any of their respective affiliates 

makes or has made any representations or warranties relating to Purchaser, Purchaser Guarantor or any of their respective affiliates or otherwise in connection 

with the transactions contemplated hereby other than those expressly made by Purchaser or Purchaser Guarantor herein, in any Ancillary Agreement or in any 

document delivered or to be delivered pursuant to Section 2.02 or 6.03 (each an "Additional Purchaser Document") by or on behalf of Purchaser to Seller or 

any of its representatives. No person has been authorized by Purchaser, Purchaser Guarantor or any of their respective affiliates or otherwise in connection

with the transactions contemplated hereby and, if made, such representation or warranty must not be relied upon as having been authorized by Purchaser, 

Purchaser Guarantor or any of their respective affiliates. 

(b) The disclosure of any information in any schedule hereto shall not be deemed to constitute an acknowledgment that such information is required to 

be disclosed in connection with the representations and warranties made by Purchaser or Purchaser Guarantor in this Agreement or is material, nor shall such 

information be deemed to establish a standard of materiality. 

ARTICLE V 

Covenants 

SECTION 5.01. Covenants of Seller Relating to Conduct of Business. (a) Except for matters set forth in Schedule 5.01 or as otherwise expressly 

permitted, required or prohibited (other than pursuant to any ability to Cure (as defined in Section 6.05)) by the terms of this Agreement, from the date of this 

Agreement to the Closing Seller shall, and shall cause each member of the Seller Group to, conduct the Business in the usual, regular and ordinary course in 

substantially the same manner as previously conducted (including with respect to work-force reductions, collections of accounts receivable, payments of 

accounts payable, research and development efforts, sales practices (including promotions, discounts, concessions and payment terms), legal defense efforts 

and legal expenditures, maintenance and repair expenditures, product quality and product specifications, capital expenditures, environmental expenditures and 

inventory levels) and use all commercially reasonable efforts to keep intact the Business, keep available the services of the current employees of the Business 

and preserve the relationships of the Business with material customers, suppliers, licensors, licensees, distributors and others with whom the Business deals. 

In addition (and without limiting the generality of the foregoing), except as set forth in Schedule 5.01 or otherwise expressly permitted or required by the 

terms of this Agreement (other than pursuant to any ability to Cure (as defined in Section 6.05)), Seller shall not, and shall not permit any other member of the 

Seller Group to, do any of the following in connection with the Business (except any action relating solely to Excluded Assets (other than the Acquired 

Coating Equipment) or Excluded Liabilities that could not reasonably be expected to have any affect on any Acquired Asset or Assumed Liability or Acquired 

Coating Equipment, on the conduct of the Business (other than operation of the Brainerd Facility) by Purchaser following the Closing or on the ability of 

Seller to perform its obligations (without giving effect to any ability to Cure) under this Agreement and the Ancillary Agreements) without the prior written 

consent of Purchaser: 

(i) (A) adopt or amend any Benefit Plan (or any plan that would be a Benefit Plan if adopted) or enter into, adopt, extend (beyond the Closing 

Date), renew or amend any collective bargaining agreement or other Contract with any labor organization, union or association, except in each case as 

required by Applicable Law; 

56 

(ii) grant to any officer, director, employee or independent contractor any increase in compensation or benefits, except in the ordinary course of 

business and consistent with past practice or as may be required under existing agreements and except for any increases for which Seller shall be solely 

obligated; 

(iii) terminate the employment of any of the personnel of the Seller Group who principally works for or provides services to the Business; 

provided that the consent of Purchaser to any such action shall not be unreasonably withheld or delayed; 

(iv) incur or assume any liabilities, obligations or indebtedness for borrowed money or guarantee any such liabilities, obligations or indebtedness 

or otherwise take any action to incur or assume, or fail to take any action required by any obligation or duty that results in the incurrence of, any other 

material liabilities or obligations of any nature, other than in the ordinary course of business and consistent with past practice or which will be an 

Excluded Liability; provided, however, that in no event shall the Business incur, assume or guarantee any long-term indebtedness for borrowed money; 

(v) permit, allow or suffer any Acquired Asset or Acquired Coating Equipment to become subjected to any Lien of any nature whatsoever that 

would have been required to be set forth in Schedule 3.05 or 3.06 if existing on the date of this Agreement; 

(vi) cancel any material indebtedness (individually or in the aggregate) or waive any claims or rights of substantial value; 

(vii) except for dividends and distributions in cash to a member of the Seller Group or as required by the Affiliate Contracts, pay, loan or advance 

any amount to, or sell, transfer or lease any of its assets that would be Acquired Assets to, or enter into or amend or otherwise modify any agreement 

(including any Affiliate Contract) or arrangement with, Seller or any of its affiliates; 

(viii) make any change in any method of accounting or accounting practice or policy other than those required by GAAP; 

(ix) acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any 

corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets (other than inventory) that are 

material, individually or in the aggregate, to the Business and that would be Acquired Assets; 

(x) sell, lease, license or otherwise dispose of any of its assets that would be Acquired Assets, except inventory of finished goods sold, "broke" 

disposed of and other consumable assets used, in each case, in the ordinary course of business and consistent with past practice; 

(xi) acquire fee title to, or an ownership interest in, any real property that would be an Acquired Asset or enter into any lease (or renewal of any 

lease) of real property that would be an Acquired Asset, except (A) any renewals of existing leases in the ordinary course of business and consistent 

with past practice (including in respect of term), with respect to which Purchaser shall have the right to participate and (B) to cure or remove 

imperfections in title; 

(xii) modify, amend, terminate or permit the lapse (other than lapses of leases of sales offices in accordance with the terms thereof) of any lease of, 

or reciprocal easement agreement, operating agreement or other material agreement relating to, real property that would be an Acquired Asset (except 

modifications or amendments associated with renewals of existing leases in the ordinary course of business and consistent with past practice with 

respect to which Purchaser shall have the right to participate); 

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(xiii) enter into any transaction (including any employment agreement or contract but excluding the payment of wages and provision of benefits in 

accordance with existing Contracts and ordinary travel advances) with any current or former shareholder with beneficial ownership of at least 100,000 

shares of the common stock of Seller, officer, director or employee of Seller or any affiliate of Seller (or member of their families or trusts for their 

benefit); 

(xiv) enter into or amend any covenant not to compete, or enter into or amend any other covenant restricting the development, manufacture, 

marketing or distribution of the products and services of the Business; 

(xv) with respect to any Acquired Entity, declare or pay a dividend or make a distribution or redeem or otherwise acquire any of its equity or other 

interests or any other security; 

(xvi) with respect to any Acquired Entity, issue, deliver, sell, or dispose of, or authorize or propose the issuance, sale or disposition of, any equity 

or other interests or any other security or any option, warrant or right relating thereto, or any securities convertible into or exchangeable for any equity 

or other interests or any other security; 

(xvii) make any purchase commitment for the Business in excess of the normal, ordinary and usual requirements or at any price in excess of the 

then current market price or for a period of greater than 90 days; 

(xviii) enter into or amend in any material respect any continuing agreement or Contract for the distribution of any products manufactured by the 

Business (unless such agreement or Contract will be terminable by Purchaser following Closing without payment or penalty upon no more than 60 days' 

notice and any terms relating to exclusivity will be terminable by Purchaser immediately following Closing and at all times thereafter without prior 

notice, payment or penalty); provided that the consent of Purchaser to any such agreement or amendment shall not be unreasonably withheld or delayed; 

(xix) enter into or amend any continuing agreement or Contract for the so-called "toll manufacture" of products by the Business on behalf of 

parties other than any member of the Seller Group; 

(xx) enter into or amend any Contract that would be an Assigned Contract for the placement of advertising or other promotional activities, in any 

such case which has an aggregate future liability in excess of $50,000 or which, together with all other such agreements, contracts or arrangements, has 

an aggregate future liability in excess of $500,000; 

(xxi) institute, settle or agree to settle any litigation, action or proceeding before any court or governmental body or waive or surrender any rights 

related to any pending or threatened litigation, action or proceeding except for any settlement, waiver or surrender that could not impair the use of any 

Acquired Asset or the operation or conduct of the Business; provided that the consent of Purchaser to any such action shall not be unreasonably 

withheld or delayed; 

(xxii) enter into any license, option or other material agreement relating or pertaining to Assigned Intellectual Property or Assigned Technology 

that would constitute Acquired Assets or to the Intellectual Property or Technology of any third party except in respect of so-called "embedded 

technology" relating to equipment purchased from third party manufacturers or for so called "shrink-wrap" license agreements relating to computer 

software licensed in the ordinary course of business; 

(xxiii) enter into or amend any trackage rights, haulage rights, marketing agreements, joint facility agreements or other agreements affecting the 

operation of the Railroad; 

(xxiv) abandon any part of the rail lines of the Railroad; 

(xxv) take any action that limits or precludes Purchaser from (A) rejecting any Labor Contract or (B) setting any initial term or condition of 

employment for any Continued Employees; 

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(xxvi) enter into any lease, sublease or similar Contract with any person under which (A) any member of the Seller Group is lessee of, or holds or 

uses, any machinery, equipment, vehicle or other tangible personal property owned by any person in connection with the Business or (B) any member of 

the Seller Group is a lessor or sublessor of, or makes available for use by any person, any tangible personal property owned or leased by any member of 

the Seller Group that would be an Acquired Asset, in any such case that has an aggregate future liability or receivable, as the case may be, in excess of 

$100,000 or is not terminable by such member of the Seller Group by notice of not more than 60 days for a cost of less than $50,000; 

(xxvii) enter into any (A) continuing Contract that would be an Assigned Contract (other than a purchase order) for the future purchase of 

materials, supplies or equipment that has an aggregate future liability in excess of $100,000 or (B) management, service, consulting or other similar 

Contract that has an aggregate future liability in excess of $50,000; 

(xxviii) enter into any Contract under which any member of the Seller Group has, directly or indirectly, made any advance, loan, extension of 

credit or capital contribution to, or other investment in, any person (other than any member of the Seller Group) other than extensions of trade credit in 

the ordinary course of business and advances made in the ordinary course of business to employees of the Seller Group of the Seller Group for travel 

expenses; 

(xxix) enter into any Contract that would be an Assigned Contract providing for indemnification of any person with respect to liabilities relating to 

any current or former business of any member of the Seller Group or any predecessor person; 

(xxx) enter into any power of attorney (other than a power of attorney given in the ordinary course of business with respect to routine tax matters) 

that would be binding on Purchaser or with respect to any Acquired Asset or Assumed Liability after the Closing;

(xxxi) enter into any confidentiality agreement that would be an Assigned Contract (other than a confidentiality agreement entered into in the 

ordinary course of business and not with any person who (together with its affiliates) competes in any manner with the Business); 

(xxxii) enter into any sales order (other than one-time sales orders entered into in the ordinary course of business that (A) except to the extent the 

buyer has asserted terms and conditions that have not been expressly agreed to by any member of the Seller Group, are subject to the Business' standard 

terms and conditions and (B) do not extend for a term more than 120 days from the date of this Agreement (unless terminable without payment or 

penalty upon no more than 60 days' notice)); 

(xxxiii) enter into any Contract (A) for the sale of any Acquired Asset (other than inventory sales in the ordinary course of business) or Acquired 

Coating Equipment, (B) for the grant of any preferential rights to purchase any Acquired Asset (other than inventory in the ordinary course of business) 

or Acquired Coating Equipment or (C) requiring the consent of any party to the transfer of any Acquired Asset or Acquired Coating Equipment and 

involving the payment by any party of at least $50,000 or affecting the use of an asset or assets with an aggregate original cost, replacement cost or fair 

market value of at least $50,000 or which are otherwise material to the Business; 

(xxxiv) enter into any Contract with any Governmental Entity or any Contract with any person that would impose affirmative action obligations on 

Purchaser if assigned to Purchaser; 

(xxxv) enter into any currency exchange, interest rate exchange, commodity exchange or similar Contract that would be an Assigned Contract; 

59 

(xxxvi) enter into any other Contract that would be an Assigned Contract or would affect any Acquired Asset or Acquired Coating Equipment and 

is for any joint venture, partnership or similar arrangement; 

(xxxvii) enter into any other Contract that would be an Assigned Contract (other than a purchase order or a sales order) that has an aggregate 

future liability to any person in excess of $100,000 or extends for a term more than one year from the date of this Agreement (unless terminable without 

payment or penalty upon no more than 60 days' notice); 

(xxxviii) enter into any Contract under which (A) any person has the right to use all or any assets (including track, yards and other facilities) of the 

Railroad, or (B) granting any member of the Seller Group the right to use all or any portion of any rail line, rail yards, or other rail facilities of any other 

person; 

(xxxix) enter into any trackage rights, haulage, interchange, joint facility switching and similar Contracts; or 

(xxxx) commit or agree to take, in a legally binding manner, whether in writing or otherwise, to do any of, the foregoing actions. 

(b) Advise of Changes. Seller shall advise Purchaser in writing of the occurrence of any matter or event that is or could reasonably be expected to be 

material to the business, assets, condition (financial or otherwise), working capital, liabilities or results of operations of the Business promptly upon acquiring 

knowledge of any such matter or event. 

(c) Affirmative Covenants. Until the Closing, Seller shall, and Seller shall cause its affiliates to: 

(i) use commercially reasonable efforts to maintain the Acquired Assets in all material respects in good working order, free from any material 

defects (other than defects resulting from normal wear and tear that are reasonably expected to be Repaired through the ordinary course maintenance 

program of the Business prior to having any material affect on the continued conduct of the Business or the continued use of any Acquired Asset (other 

than by reason of such Repair)) and in accordance with the past practice of the Business, any applicable requirements of insurance policies maintained 

by the Seller Group and with respect to pressure vessels (including digesters), boilers (including recovery boilers), turbine generators and fire control or 

suppression systems, generally accepted industry practice or generally accepted insurance requirements, and not defer or delay any repairs, replacements 

or regularly scheduled maintenance relating to any Acquired Asset except to the extent consistent with past practice; 

(ii) upon any damage, destruction or loss to, or condemnation of, any Acquired Asset with a value (together with all other Acquired Assets 

damaged, destroyed, suffering a loss or condemned in the same or any related occurrence) in excess of $100,000, (A) promptly notify Purchaser and 

(B) consult with Purchaser as to the application of any and all insurance proceeds with respect thereto to repair, replace or restore such Acquired Asset; 

(iii) use commercially reasonable efforts to maintain its level and quality of Receivables, Inventory and supplies, raw materials and spare parts in 

the ordinary course (A) in approximately the same proportions as reflected on the Balance Sheet, subject to normal seasonality, (B) in a manner 

consistent with its past practices and (C) so as to be sufficient for the conduct of the Business (other than operation of the Brainerd Facility) by 

Purchaser following Closing in a manner consistent with past practices and the performance by Seller of its obligations under the Ancillary Agreements; 

60 

(iv) promptly notify Purchaser in writing of any written or, to Seller's knowledge, oral notice or other communication from any third party alleging 

that the consent of such third party is or may be required in connection with the execution, delivery or performance of this Agreement or any Ancillary 

Agreement or the consummation of the Acquisition or the other transactions contemplated hereby and thereby; 

(v) promptly after receiving any request for effects bargaining by any Union or Railroad Union, bargain in good faith, subject to and in accordance 

with Applicable Law, with such Union or Railroad Union the effects of the Acquisition or any other transaction contemplated by this Agreement or any 

Ancillary Agreement; 

(vi) promptly notify Purchaser in writing of (A) any write-downs of the value of, or establishment of any reserves against, any Inventory or 

Receivables of the Business and (B) any written or, to the extent Seller has knowledge, oral notice or complaint regarding any products sold or services 

rendered for which Receivables that constitute Acquired Assets are currently due (other than notices and complaints received in the ordinary course of

usiness and of a quantity, magnitude and type consistent with the past experience of the Business unless such notice or complaint could reasonably be 

expected to give rise to a liability of (including a return of products having an aggregate sale price of) $100,000 or more); and 

(vii) not take any action that would, or could reasonably be expected to, result in any of the representations or warranties of Seller in this 

Agreement becoming untrue or incorrect in any material respect. 

(d) Consultation. In connection with the continuing operation of the Business between the date of this Agreement and the Closing, Seller shall use 

reasonable efforts to consult in good faith on a regular and frequent basis with the representatives for Purchaser to report material operational developments 

and the general status of ongoing operations pursuant to procedures reasonably requested by Purchaser or such representatives. Seller acknowledges that any 

such consultation shall not constitute a waiver by Purchaser of any rights it may have under this Agreement, and that Purchaser shall not have any liability or 

responsibility for any actions of Seller or any of its officers or directors with respect to matters that are the subject of such consultations unless Purchaser 

expressly consents to such action in writing. 

SECTION 5.02. No Solicitation. Seller shall not, nor shall it authorize or permit any of its affiliates or any officer, director, employee, accountant, 

counsel, investment banker, financial advisor or other representative of Seller or any of its affiliates or any affiliate of any such person (collectively 

"Representatives") to, directly or indirectly, solicit, initiate or encourage (including by way of furnishing information) or take any other action to facilitate 

knowingly any inquiries or the making of any proposal which constitutes or may reasonably be expected to lead to an "other bid" (as defined below) from any 

person, or engage in any discussion or negotiations relating thereto or accept any "other bid" other than a "Seller bid" (as defined below). Seller shall instruct 

each of its Representatives to observe the terms of this Section 5.02. Without limiting the foregoing, it is understood that any violation of the restrictions set 

forth in the first two sentences of this Section 5.02 by any Representative, whether or not such person is purporting to act on behalf of Seller or otherwise, 

shall be deemed to be a breach of this Section 5.02 by Seller. Seller promptly shall advise Purchaser orally and in writing of any written proposal with respect 

to any "other bid" or which could lead to any "other bid" and, unless such "other bid" is a "Seller bid", the identity of the person making any such written 

proposal. Seller shall not be required to comply with requirements of the foregoing sentence in any instance to the extent that Seller's Board of Directors 

determines in good faith, based on the opinion of outside counsel, that such compliance would in such instance be inconsistent with their fiduciary duties; 

provided, however, that Seller shall promptly notify Purchaser of the fact of such determination (except to the extent the Board of Directors determines in 

good faith, based on the opinion of outside counsel, that such notice 

61 

would in such instance be inconsistent with their fiduciary duties). Seller shall not disclose to any person in connection with a Seller bid, and shall keep 

confidential and cause its affiliates and each of their respective officers, directors, employees and advisers not to disclose and to keep confidential, all 

information with respect to the Business, the Acquired Assets and the Assumed Liabilities that Seller would be required to keep confidential after Closing 

pursuant to Section 5.04(b). As used in this Section 5.02, (i) "other bid" shall mean any inquiry, proposal or offer from any person relating to the direct or 

indirect acquisition of the Business or all or any of the assets of the Business, other than (A) the transactions contemplated by this Agreement, (B) the 

acquisition of finished products, surplus equipment and Inventory in the ordinary course of business other than any acquisition that would be inconsistent with 

Seller's obligations under this Agreement or any Ancillary Agreement and (C) the acquisition of any Excluded Asset described in Section 1.02(b) and 

(ii) "Seller Bid" shall mean any proposal or offer from any person relating to (i) the acquisition by any person of Seller by virtue of a merger or similar 

business combination transaction, (ii) the acquisition by any person of capital stock of Seller or (iii) the acquisition by any person of all or substantially all of 

Seller's assets (but not any assets of the Business or any asset that would be an Acquired Asset), provided that, in each case, such acquisition in no event could 

interfere, directly or indirectly, with the ability of Purchaser and Seller to consummate the Acquisition and the other transactions contemplated hereby and by 

the Ancillary Agreements on the terms contemplated by this Agreement and the Ancillary Agreements or the ability of Seller to perform its obligations under 

this Agreement or any Ancillary Agreement. 

SECTION 5.03. Access to Information, Due Diligence. Seller shall afford, and shall cause each other member of the Seller Group to afford, to 

Purchaser, its affiliates, their respective lenders and the respective accountants, counsel, environmental consultants and other representatives of any of the 

foregoing (such entities and representatives other than Purchaser being referred to as "Purchaser's Representatives") reasonable and timely access in a manner 

that does not unreasonably interfere with the normal operations of the Business, during the period prior to the Closing, to all the employees, advisors 

(including environmental consultants), attorneys, accountants, managers, properties, books, contracts, commitments, information systems, Tax returns and 

Records of the Business, and, during such period shall furnish promptly to Purchaser and Purchaser's Representatives any information (including, with respect 

to environmental matters, all relevant records, audits, assessments, field notes, monitoring well data and other documents or information in possession of the 

Seller Group or its representatives or advisors) concerning the Business, the Acquired Assets, the Excluded Assets, the Assumed Liabilities and the Excluded 

Liabilities as Purchaser (or any Purchaser's Representative) may reasonably request. Access to employees and managers shall include, without limitation, such 

access as Purchaser may reasonably request, giving due regard to Seller's interest in maintaining the stability of its work force prior to the Closing, in order to 

communicate initial terms and conditions of employment to be offered, take applications for employment with Purchaser, make determinations regarding 

which employees should be Continued Employees and Non-Continuing Employees and, when applicable, negotiate terms and conditions of employment. 

Seller will permit, and will cause each other member of the Seller Group to permit, Purchaser and Purchaser's Representatives to conduct such studies as 

Purchaser may reasonably request, to establish the current environmental status of the Business, the Acquired Assets and to assess Assumed Liabilities and 

Excluded Liabilities arising from or related to Environmental Laws. 

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SECTION 5.04. Confidentiality. (a) Purchaser acknowledges that the information being provided to it in connection with the Acquisition and the 

consummation of the other transactions contemplated hereby is subject to the terms of a confidentiality agreement dated May 10, 2001 between Purchaser and 

Seller (the "Confidentiality Agreement"), the terms of which are incorporated herein by reference except that the provisions contained therein with respect to 

the solicitation of Seller's employees are hereby extended for an additional year. Notwithstanding anything to the contrary herein or in the Confidentiality 

Agreement, Purchaser shall be permitted to use and disclose such information to the extent necessary or appropriate in order to consummate the transactions 

contemplated by this Agreement (including in connection with making any filing or obtaining any consent or approval and as necessary to defend or prosecute 

any litigation or dispute). Effective upon the Closing, the Confidentiality Agreement (other than the provisions contained therein with respect to the 

solicitation of Seller's employees) shall terminate.

(b) (x) Seller shall keep confidential, and use reasonable efforts to cause its affiliates and each of their respective officers, directors, employees and 

advisors to keep confidential, (i) all information that is known by Seller to be confidential information regarding Purchaser, any of its affiliates or any of its or 

their businesses, products, processes or financings, being provided to it in connection with the Acquisition and the other transactions contemplated hereby or 

by the Ancillary Agreements and (ii) after the Closing (and prior to the Closing in connection with any Seller bid), all information relating to the Business, the 

Acquired Assets or the Assumed Liabilities and (y) Purchaser shall keep confidential, and use reasonable efforts to cause its affiliates and each of their 

respective officers, directors, employees and advisors to keep confidential all information that is contained in any Record constituting an Acquired Asset that 

is known by Purchaser to be confidential information relating to any business of Seller or any of its affiliates other than the Business and not relating to the 

Business, except (A) as required by law or administrative process (to the extent so required) (in which case the party required to disclose confidential 

information shall promptly notify the other party and give the other party an opportunity to oppose such disclosure), (B) as necessary to defend or prosecute 

any litigation or dispute, (C) as permitted by the License Agreement, (D) for information that is available to the public on the Closing Date, or thereafter 

becomes available to the public other than as a result of a breach of this Section 5.04(b), (E) with respect to the obligations of Seller, (x) with respect to any 

Excluded Liability or Excluded Assets or (y) as reasonably necessary in connection with any claim of Seller hereunder against Purchaser or any claim of 

Purchaser hereunder against Seller or Seller's pursuit of remedies against any third party with respect to any such claim or (F) with respect to the obligation of 

Purchaser, as reasonably necessary in connection with any claim of Purchaser hereunder against Seller or any claim of Seller hereunder against Purchaser or 

Purchaser's pursuit of remedies against any third party with respect to any such claim. The covenant set forth in this Section 5.04(b) shall terminate three years 

after the Closing Date or such later date as may be required by Seller's obligation to a third party regarding confidentiality. On and after the Closing Date, 

Seller shall grant Purchaser the right (at Purchaser's expense) to enforce the confidentiality provisions of any existing agreements with persons employed in, 

or holding any confidential information with respect to, the Business on or prior to the Closing Date (to the extent not expressly prohibited thereby). Seller 

agrees to use reasonable efforts to assist Purchaser in enforcing such provisions and agreements, irrespective of whether such employees shall have been 

terminated at such time and, if Seller is unable to grant Purchaser the right to enforce any such provision or agreement, as and to the extent requested by 

Purchaser to enforce it on Purchaser's behalf, with Purchaser responsible for all reasonable out of pocket expenses incurred by Seller in connection with such 

enforcement. 

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(c) On the Closing Date, Seller shall assign to Purchaser its rights under all confidentiality agreements entered into with any person in connection with 

any proposed sale of the Business or any of the Acquired Assets to the extent such rights are assignable and relate to the Business. Copies of such 

confidentiality agreements shall be provided to Purchaser immediately following the Closing, except to the extent expressly prohibited by the terms of such 

confidentiality agreements. Promptly following the date hereof, Seller shall use all reasonable efforts, under such confidentiality agreements, to secure the 

return or destruction of all information and materials relating to the Business, the Acquired Assets and the Assumed Liabilities provided to any such person or 

otherwise covered by such confidentiality agreements prior to the Closing Date. Seller shall, except to the extent expressly prohibited by the terms of such 

confidentiality agreements, provide Purchaser with all information reasonably requested by Purchaser regarding the status of such process, including details as 

to the information provided, the persons to which it was provided and what information has not been returned. 

(d) Each party providing any information in connection with this Agreement is not waiving, and will not be deemed to have waived or diminished, any 

of its attorney work product protections, attorney-client privileges or similar protections and privileges as a result of disclosing such information (including 

information related to pending or threatened litigation) to the other party, regardless of whether such disclosing party has asserted, or is or may be entitled to 

assert, such privileges and protections. The parties (a) share a common legal and commercial interest in all of such information that is subject to such 

privileges and protections; (b) may become joint defendants in Proceedings to which such information covered by such protections and privileges relates; 

(c) intend that such privileges and protections remain intact should any party become subject to any actual or threatened Proceeding to which such information 

covered by such protections and privileges relates; and (d) intend that after the Closing the receiving party shall have the right to assert such protections and 

privileges. No receiving party shall admit, claim or contend, in Proceedings involving either party or otherwise, that any party disclosing such information 

waived any of its attorney work-product protections, attorney-client privileges or similar protections and privileges with respect to any information, 

documents or other material disclosed to a party due to a disclosing party disclosing information (including information related to pending or threatened 

litigation) to such receiving party. 

SECTION 5.05. Reasonable Efforts. (a) On the terms and subject to the conditions of this Agreement, each party shall use its reasonable efforts to 

cause the Closing to occur, including taking all reasonable actions necessary to comply promptly with all legal requirements that may be imposed on it or any 

of its affiliates with respect to the Closing and to cause all other conditions to be satisfied. Without limiting the foregoing or the provisions set forth in 

Section 5.05(b), each party shall use its reasonable efforts to cause the Closing to occur on or prior to May 20, 2002 (the "Anticipated Closing Date"). 

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(b) Each of Seller and Purchaser shall (i) as promptly as practicable, but in no event later than five business days following the execution and delivery of 

this Agreement, file with the United States Federal Trade Commission (the "FTC") and the United States Department of Justice (the "DOJ") the notification 

and report form, if any, required for the transactions contemplated hereby and any supplemental information requested in connection therewith pursuant to the 

Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) as promptly as practicable make all filings under applicable competition laws 

and regulations of any other applicable foreign jurisdiction and (iii) as promptly as practicable make all required filings and notices to the Surface 

Transportation Board (the "STB") and FERC, including jointly filing with FERC for approval to transfer the Hydroelectric Facility (including the FERC 

License) to Purchaser. Any such notification and report form or filing and supplemental information shall be in substantial compliance with the requirements 

of the HSR Act or the applicable competition laws and regulations of any other applicable foreign jurisdiction, as the case may be. Each of Purchaser and 

Seller shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing 

or submission that is necessary under the HSR Act or applicable competition laws and regulations of any other applicable foreign jurisdiction and in 

connection with any filing with the STB and FERC, as the case may be. Seller and Purchaser shall keep each other appraised of the status of any 

communications with, and any inquiries or requests for additional information from, the FTC, the DOJ and other foreign competition regulators and the STB 

and FERC and shall comply promptly with any such inquiry or request. Each of Seller and Purchaser shall use its reasonable efforts to obtain any clearance 

required under the HSR Act or competition laws and regulations of any other applicable foreign jurisdiction and to obtain any necessary approvals or 

exceptions from the STB and FERC for the consummation of the transactions contemplated by this Agreement.

(c) Each of Seller and Purchaser shall as promptly as practicable following the execution and delivery of this Agreement cooperate to make all filings 

necessary to be made with the government agencies listed in Schedule 5.05(c). 

(d) Seller shall, and shall cause its affiliates to, use (and to continue to use after Closing) its reasonable efforts (at its own expense) to obtain, and 

Purchaser shall, and shall cause its affiliates to, cooperate (at its own expense) with Seller in obtaining, all consents from third parties including estoppel 

certificates from the landlords under the leases for the Distribution Center Facilities, necessary or appropriate to permit the transfer of the Acquired Assets to, 

and the assumption of the Assumed Liabilities by, Purchaser; provided, however, that the parties shall not be required to pay or commit to pay any amount to 

(or incur any obligation in favor of) any person from whom any such consent may be required (other than nominal filing or application fees). 

(e) For purposes of this Section 5.05, the "reasonable efforts" of Purchaser shall not require Purchaser to agree to any prohibition, limitation or other 

requirement described in Section 6.02(d) (whether or not relating to any Proceeding). 

SECTION 5.06. Expenses; Transfer Taxes. (a) Whether or not the Closing takes place, and except as otherwise specified in this Agreement, all costs 

and expenses incurred in connection with this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby shall be paid 

by the party incurring such expense, including all costs and expenses incurred pursuant to Sections 1.04 and 5.05. 

(b) All Transfer Taxes applicable to the conveyance and transfer from Seller to Purchaser of the Acquired Assets and any other transfer or documentary 

Taxes or any filing or recording fees applicable to such conveyance and transfer shall be paid by Seller. Each party shall use reasonable efforts to avail itself 

of any available exemptions from any such Taxes or fees, and to cooperate with the other parties in providing any information and documentation that may be 

necessary to obtain such exemptions. 

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(c) The costs of preparing the land title surveys covering any or all of the Premises shall be shared as follows: Seller shall pay for the preparation of the 

surveys with the minimum standard details required by the most current ALTA/ACSM guidelines; and Purchaser shall pay for the extra cost of optional 

details requested by Purchaser. Purchaser shall select and supervise the surveyor. 

(d) The cost of title insurance covering any or all of the Premises shall be shared as follows: Seller shall pay for providing current abstracts of title for all 

abstract parcels and current registered property abstracts for all Torrens parcels, including name searches and special assessment searches, and Purchaser shall 

pay all premiums and surcharges for title insurance policies and endorsements. Purchaser shall select and supervise the title insurance company. 

(e) The costs of obtaining and recording title clearance documents (including Lien releases, easement releases and Torrens orders) covering any or all of 

the Premises shall be borne by Seller. Seller shall pay the fees of escrow agents hired to hold escrows for title clearance. 

(f) The costs of recording documents conveying title from Seller to Purchaser (including deeds and assignments) covering any or all of the Premises 

shall be borne by Purchaser, except that Seller shall pay all Transfer Taxes as provided in Section 5.06(b). 

(g) Seller and Purchaser shall share equally the closing fee charged by the title insurance company. 

SECTION 5.07. Brokers or Finders. Each of Purchaser and Seller represent, as to itself and its affiliates, that no agent, broker, investment banker or 

other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions 

contemplated by this Agreement as a result of any actions by such party, except (i) as to Purchaser and its affiliates, Morgan Stanley & Co. Incorporated, 

whose fees and expenses will be paid by Purchaser and (ii) as to Seller and its affiliates, Goldman, Sachs & Co., whose fees and expenses will be paid by 

Seller. 

SECTION 5.08. Collection of Receivables. From and after the Closing, Purchaser shall have the right and authority to collect for its own account all 

Receivables and other related items that are included in the Acquired Assets and to endorse with the name of Seller any checks or drafts received with respect 

to any Receivables or such other related items. Seller shall promptly deliver to Purchaser any cash or other property received directly or indirectly by it with 

respect to the Receivables and such other related items, including any amounts payable as interest. With respect to any Receivables included in the Acquired 

Assets, each party shall have the rights and obligations set forth in Schedule 1.05(d)(1) under "Trade Receivables." 

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SECTION 5.09. Employee Matters. (a) Purchaser shall offer employment to all Participants who are Active Employees, except (i) Participants 

("Brainerd Participants") whose employment as determined in Purchaser's sole discretion relates principally to the operation of the Brainerd Facility or 

Excluded Brainerd Assets, and (ii) any other Participants ("Non-Continuing Participants") who are identified by Purchaser to Seller prior to the Closing (or, 

in the case of a Participant who as of Closing is on an approved leave of absence (other than long-term disability), and who within 90 days following the 

Closing Date presents himself or herself to Purchaser as ready, willing and able to commence active employment with Purchaser, identified by Purchaser to 

Seller following Purchaser's decision not to offer employment to such Participant) as Participants to whom Purchaser shall not offer employment. Purchaser 

shall determine in its sole discretion the terms and conditions of employment to be offered to Participants who accept such offer (collectively, the "Continued 

Employees"). "Active Employees" means each employee of or with respect to the Business who is actively at work as of the Closing, or on vacation, holiday, 

jury duty or bereavement leave. In addition, each other employee of or with respect to the Business who as of the Closing is on an approved leave of absence 

(other than long-term disability), and who within 90 days following the Closing Date presents himself or herself to Purchaser as ready, willing and able to 

commence active employment with Purchaser, shall be deemed to be an Active Employee. For the avoidance of doubt, "Active Employees" excludes each 

employee of or with respect to the Business who is on long-term disability as of the Closing. 

(b) Seller shall retain (i) sole sponsorship of, and exclusive responsibility for all liabilities and obligations under, arising out of, or relating to, each 

Benefit Plan except as provided in Section 5.09(e), and (ii) sole responsibility for all liabilities and obligations under, arising out of, or relating to, the 

employment or termination of employment of each employee of, or with respect to, the Business on or prior to the Closing (including all liabilities and 

obligations arising from effects bargaining with any Union) except that Purchaser shall reimburse Seller for any payments for severance or separation pay 

made by Seller to any Non-Continuing Participant but only up to the amounts set forth on Schedule 5.09 (with Seller retaining sole responsibility for (x) any 

excess amounts due under the Separation Agreements, (y) any amounts due to any Brainerd Participants or (z) any other payments). Seller shall use

commercially reasonable efforts to require each employee of the Business receiving any severance or separation pay or benefits in excess of the amounts 

Seller is contractually obligated to provide as of the date hereof (which shall be deemed not to include any obligations arising from effects bargaining with 

any Union) to sign a release and confidentiality agreement, including a general release of claims (including release of claims under the WARN Act), in form 

and substance reasonably acceptable to Purchaser, releasing Seller, the Seller Group, the Business and Purchaser (and their respective affiliates, shareholders, 

officers, directors, employees and agents) from all claims arising from such employee's employment or termination of employment ("Release"). 

Notwithstanding anything herein to the contrary, Purchaser's obligation to reimburse Seller for any payments for severance or separation pay made by Seller 

to any Non-Continuing Participant who Seller must use commercially reasonable efforts to require to sign a Release shall be conditioned (whether or not 

Seller uses such efforts) on Seller obtaining from such Non-Continuing Participant a fully-executed Release with respect to which all revocation and 

rescission rights have expired. Seller shall cause each Continued Employee to fully vest in respect of any benefits accrued under the Seller 401(k) Plans (as 

defined in Section 5.09(f)) effective immediately prior to the Closing. 

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(c) With respect to any "employee benefit plan" (as defined in Section 3(3) of ERISA) maintained by Purchaser, to the extent such plan is made 

available to a Continued Employee, solely for purposes of determining eligibility to participate and vesting, service with Seller or any other member of the 

Seller Group shall be treated as service with Purchaser with respect to such Continued Employee; provided, that a Continued Employee's service with Seller 

or any other member of the Seller Group shall be treated as service with Purchaser for purposes of Purchaser's severance, vacation and other paid time off 

policies that apply to such Continued Employee; provided, further, that Retiree Medical Eligible Employees (as defined in Section 5.09(g)) will not be 

eligible for Purchaser's post-retirement health and life insurance program. 

(d) Purchaser shall waive, or cause to be waived, any pre-existing condition limitation under any welfare benefit plan maintained by Purchaser in which 

Continued Employees (and their eligible dependents) will be eligible to participate after the Closing. Purchaser shall recognize, or cause to be recognized, the 

dollar amount of all expenses incurred by each Continued Employee (and his or her eligible dependents) during the calendar year in which the Closing occurs 

for purposes of satisfying such year's deductible and co-payment limitations and out-of-pocket maximums under the relevant welfare benefit plans in which 

they will be eligible to participate from and after the Closing. 

(e) (i) As soon as practicable following the Closing Date, an enrolled actuary designated by Seller ("Seller's Actuary") and an enrolled actuary 

designated by Purchaser ("Purchaser's Actuary") shall mutually determine the Accrued Liability (as defined below) of the Continued Employees under the 

Potlatch Corporation Salaried Employees' Retirement Plan (the "Seller Salaried Pension Plan") and the Potlatch Corporation Hourly Employees' Retirement 

Plan (the "Seller Hourly Pension Plan" and, together with the Seller Salaried Pension Plan, the "Seller Pension Plans"), in each case as of the end of the 

month that includes the Closing Date. In accordance with this Section 5.09(e), Seller shall cause to be transferred from the Seller Salaried Pension Plan and 

the Seller Hourly Pension Plan to a trust established as part of a defined benefit pension plan maintained by Purchaser or its affiliates intended to satisfy the 

qualification requirements of Section 401(a) of the Code and which has received a favorable determination letter from the Internal Revenue Service (the S.D. 

Warren Company Retirement Plan for Salaried Employees or such other plan as may be designated by Purchaser (the "Purchaser Salaried Pension Plan") and 

the S.D. Warren Company Central Mills Employees' Retirement plan, Plan #036, or such other plan as may be designated by Purchaser (the "Purchaser 

Hourly Pension Plan", and together with the Purchaser Salaried Pension Plan, the "Purchaser Pension Plans"), respectively), cash or other assets (or a 

combination thereof) equal to the Accrued Liability for all Continued Employees participating in the relevant Seller Pension Plan, as determined as of the end 

of the month that includes the Closing Date; provided, that any transfer of assets in a form other than cash shall be subject to approval of Purchaser in its sole 

discretion. Notwithstanding anything to the contrary in this Agreement, the transfers contemplated by this Section 5.09(e) shall be in any event not less than 

the amount determined in accordance with section 414(l) of the Code and the related regulations (including the safe harbor Pension Benefit Guaranty 

Corporation ("PBGC") assumptions and methodology as of the end of the month that includes the Closing Date), and the amount expressly called for to be 

transferred pursuant to this Section 5.09(e) shall be adjusted to the extent necessary for any governmental approval (including the IRS and the PBGC) and to 

satisfy Section 414(l) of the Code and the related regulations as well as Section 4044 of ERISA and the related regulations. The amount finally determined in 

accordance with the foregoing to be transferred from the Seller Pension Plans to the Purchaser Pension Plans shall be adjusted, as mutually determined by 

Seller's Actuary and Purchaser's Actuary, to reflect an assumed investment return on the assets of the applicable Seller Pension Plan from the end of the month 

in which the Closing Date occurs until the date of transfer equal to the average rate of the 90-day Treasury Bill on the auction date coincident with the first 

day of the calendar month in which the transfer occurs or, if there is no auction on such first day, on the next immediately preceding auction date, and shall be 

decreased by any benefit payments made to Continued Employees under the applicable Seller's Pension Plan during such period. 

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(ii) The transfer of assets from the applicable Seller's Pension Plan to the applicable Purchaser Pension Plan (as applicable, the "Pension Asset 

Transfer") shall be made as soon as practicable following the determination of the applicable amount to be transferred, but not later than 120 days following 

the Closing Date. Unless Seller and Purchaser agree otherwise, all transfers shall occur on the last business day of a month. Seller's Actuary shall be 

responsible for the required actuarial certification under Section 414(l) of the Code. The applicable Purchaser Pension Plan as of the date of the applicable 

Pension Asset Transfer shall assume all liabilities and obligations of Seller and its affiliates and the applicable Seller Pension Plan with respect to the 

Continued Employees under such Seller Pension Plan in respect of the applicable transferred assets and liabilities; provided, that Seller shall indemnify and 

hold harmless Purchaser and its subsidiaries and affiliates from any Losses (as defined in Section 8.01) attributable to any acts or omissions with respect to 

such Seller Pension Plan of Seller or its subsidiaries and affiliates, or any trustee or recordkeeper of such Seller Pension Plan, to the extent such acts or 

omissions occur prior to the date of the applicable Pension Asset Transfer or otherwise constitute a breach of fiduciary duty under Title I of ERISA in respect 

of such Seller Pension Plan; provided, further, that Seller agrees that prior to the date of the applicable Pension Asset Transfer, Seller shall remain solely 

responsible for making any benefit payments required to be made under such Seller Pension Plan for Continued Employees after the Closing Date. 

(iii) The term "Accrued Liability" shall mean the projected benefit obligation (as defined in Statement of Financial Accounting Standards No. 87) under 

each Seller Pension Plan for each Continued Employee on the basis of mutually agreed actuarial assumptions set forth in Schedule 5.09(e). The Accrued 

Liability shall be mutually agreed between Seller's Actuary and Purchaser's Actuary, and Seller shall provide Purchaser's Actuary with all information 

reasonably necessary to calculate the Accrued Liability (including any adjustments to the Accrued Liability required for any governmental approval or to 

satisfy Section 414(l) of the Code and the related regulations or Section 4044 of ERISA and the related regulations). If there is a good faith dispute between 

Seller's Actuary and Purchaser's Actuary as to the amount to be transferred to Purchaser's Pension Plan under this Agreement and such dispute remains 

unresolved for 14 days, the chief financial officers of Seller and Purchaser shall endeavor to resolve the dispute. If such dispute remains unresolved for

30 days, Seller and Purchaser shall select and appoint a third actuary who is mutually satisfactory to both Seller and Purchaser. The reasoned written decision 

of such third party actuary shall be rendered within 60 days and shall be conclusive as to any dispute for which such actuary was appointed. The cost of such 

third party actuary shall be divided equally between Seller and Purchaser. Each of Purchaser and Seller shall be responsible for the cost of its own actuary. 

Purchaser and Seller shall reasonably cooperate to make any and all filings and submissions to the appropriate governmental agencies required to be made by 

Seller or Purchaser as are appropriate in effectuating the provisions of this Section 5.09(e). 

(iv) The actual amount of assets transferred from the Seller Pension Plans to the Purchaser Pension Plans hereunder as determined in accordance with 

Section 5.09(e)(i) after taking into account all adjustments required thereunder shall be referred to herein as the "Transfer Amount". The term "Adjusted 

Accrued Liability" shall mean the Accrued Liability, as originally determined in accordance with Section 5.09(e)(iii) (without regard to any adjustments 

required for any governmental approval or to satisfy Section 414(l) of the Code and the related regulations or Section 4044 of ERISA and the related 

regulations) as of the end of the month in which the Closing Date occurs and adjusted, for investment return and benefit payments, in accordance with the 

methodology provided in the last sentence of Section 5.09(e)(i), through the date on which the Transfer Amount is actually transferred to the Purchaser 

Pension Plans. To the extent that (x) the sum of the aggregate Adjusted Accrued Liability plus $6,600,000 exceeds (y) the Transfer Amount for Continued 

Employees (such excess, the "Pension Shortfall Amount"), Seller shall pay to Purchaser, as an adjustment to the Purchase Price, within five days following the 

transfer of assets from the Seller Pension Plans to Purchaser Pension Plans, an amount in immediately available funds equal to the Pension Shortfall Amount. 

69 

(f) As soon as practicable following the Closing Date, Seller agrees to permit each Continued Employee to effect a "direct rollover" (within the 

meaning of Section 401(a)(31) of the Code) of his or her account balances under the Potlatch Corporation Salaried Employees' Savings Plan or the Potlatch 

Corporation Hourly Employees' Savings Plan (collectively, the "Seller 401(k) Plans") if such rollover is elected in accordance with Applicable Law by such 

Continued Employee. Without limiting the generality of the foregoing, each Continued Employee may elect to effect, and Purchaser agrees to cause the S.D. 

Warren Company Salaried Investment Plan and the S.D. Warren Company Hourly Investment Plan or such other plans as may be designated by Purchaser 

(collectively, the "Purchaser 401(k) Plans"), as applicable, to accept, a "direct rollover" of his or her account balances (in the form of cash or other assets 

acceptable to Purchaser), including promissory notes evidencing all outstanding loans, under the applicable Seller 401(k) Plan if such rollover is elected in 

accordance with Applicable Law by such Continued Employee; provided, that Seller is reasonably satisfied (consistent with the regulations promulgated 

under Section 401(a)(31) of the Code) that the applicable Purchaser 401(k) Plan meets the requirements for qualification under Section 401(a) of the Code and 

Purchaser is reasonably satisfied (consistent with the regulations promulgated under Section 401(a)(31) of the Code) that the applicable Seller 401(k) Plan 

meets the requirements for qualification under Section 401(a) of the Code. 

(g) Without limiting the generality of Section 5.09(b), with respect to each Continued Employee who, as of the Closing Date, has satisfied the eligibility 

requirements (including as to age and service) to receive retiree health and life insurance benefits from Seller or any other member of the Seller Group under a 

Benefit Plan or otherwise (a "Retiree Medical Eligible Employee"), Seller shall retain the sole liability and obligation to provide retiree health and life 

insurance benefits to such Continued Employee under the terms of the applicable retiree health and life insurance program, as made available to employees of 

Seller or any other member of the Seller Group generally from time to time. With respect to Continued Employees (other than Retiree Medical Eligible 

Employees), Purchaser shall provide retiree health and life insurance benefits to such employees to the extent such employees satisfy the eligibility 

requirements to receive such benefits under Purchaser's retiree health and life insurance program, as made available to Purchaser's employees generally from 

time to time. 

(h) Purchaser rejects and declines to accept or assume any liability, obligation or commitment of any member of the Seller Group relating to or arising 

out of the Labor Agreements and all other Labor Contracts. Purchaser will notify the Unions prior to the Closing of its decision to reject the Labor 

Agreements. Purchaser will establish in its sole discretion initial terms and conditions of employment for Continued Employees who are covered by the Labor 

Agreements immediately prior to the Closing. To the extent required by law, Purchaser will bargain in good faith with the Unions. 

(i) Nothing contained in this Section 5.09 or elsewhere in this Agreement shall be construed to prevent the termination by Purchaser of employment of 

any individual Participant or any change by Purchaser in the employee benefits available to any individual Participant. 

SECTION 5.10. Supplemental Disclosure. Seller shall have the continuing obligation until the Closing promptly to supplement or amend the 

Schedules with respect to any matter hereafter arising or discovered that, if existing or known at the date of this Agreement, would have been required to be 

set forth or described in the Schedules; provided, however, that no supplement or amendment to any Schedule shall have any effect for the purpose of 

determining the satisfaction of the conditions set forth in Section 6.02(a) or for purposes of determining whether any person is entitled to indemnification 

pursuant to Article VIII. 

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SECTION 5.11. Post-Closing Cooperation. (a) Purchaser and Seller shall cooperate with each other, and shall cause their officers, employees, 

agents, auditors and representatives to cooperate with each other after the Closing to ensure the orderly transition of the Business from the Seller Group to 

Purchaser and to minimize any disruption to the Business and the other respective businesses of the Seller Group and Purchaser that might result from the 

transactions contemplated hereby. After the Closing, upon reasonable notice, Purchaser and Seller shall furnish or cause to be furnished to each other and their 

employees, counsel, auditors and representatives access (including the ability to make copies), during normal business hours, to such information and 

assistance relating to the Business (to the extent within the control of such party or any of its affiliates (including the case of Seller, any member of the Seller 

Group) as is contained in any Record constituting an Excluded Asset, or is reasonably necessary for (i) financial reporting, tax and accounting matters and 

(ii) defense or prosecution of litigation and disputes. 

(b) After the Closing, upon reasonable written notice, Purchaser and Seller shall furnish or cause to be furnished to each other, as promptly as 

practicable, such information and assistance (to the extent within the control of such party) relating to the Acquired Assets (including, access to books and 

records) as is reasonably necessary for compliance with accounting and reporting requirements, filing of all Tax returns, and making of any election related to 

Taxes, the preparation for any audit by any Taxing Authority, and the prosecution or defense of any claim, suit or proceeding related to any Tax return. Seller 

and Purchaser shall cooperate with each other in the conduct of any audit or other proceeding relating to Taxes involving the Business. In the event that any 

member of the Seller Group or Purchaser shall after the Closing take any position in any Tax return, or reach any settlement or agreement on audit, which is in 

any manner inconsistent with any position taken by any member of the Seller Group in any filing, settlement or agreement made by any member of the Seller

Group prior to the Closing and such inconsistent position (i) might require the payment by Purchaser or Seller of more Tax than would have been required to 

be paid had such position not been taken or such settlement or agreement not been reached, (ii) affects the determination of useful life, basis or method of 

depreciation, amortization or accounting of any of the Acquired Assets or any of the properties, assets or rights of Purchaser or (iii) might accelerate the time 

at which any Tax must be paid by Purchaser or Seller, then Purchaser or Seller, as the case may be, shall provide timely and reasonable notice to the other 

party hereto of such position. 

(c) Each of Purchaser and each member of the Seller Group will retain all Records and other documents pertaining to the Business in existence on the 

Closing Date for a period of seven years following the Closing. No such Records or other documents shall be destroyed or disposed of by any retaining party 

during such seven year period without first advising the other party in writing and giving such party a reasonable opportunity to obtain possession thereof for 

the purposes permitted by this Section 5.11. 

(d) Each party shall reimburse the other for reasonable out-of-pocket costs and expenses incurred in assisting the other pursuant to this Section 5.11. 

Neither party shall be required by this Section 5.11 to take any action that would unreasonably interfere with the conduct of its business or unreasonably 

disrupt its normal operations (or, in the case of Purchaser, the Business). Any information relating to the Business received by Seller pursuant to this 

Section 5.11 shall be subject to Section 5.04(b). 

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SECTION 5.12. Publicity. No public release or announcement concerning the transactions contemplated hereby shall be issued by any party without 

the prior consent of the other party (which consent shall not be unreasonably withheld), except as such release or announcement may be required by law or the 

rules or regulations of any United States or foreign securities exchange, in which case the party required to make the release or announcement shall allow the 

other party reasonable time to comment on such release or announcement in advance of such issuance. In addition, neither Purchaser nor Seller shall make 

any general communication to suppliers, lenders, creditors, distributors, employees, customers or others having business or financial relationships with the 

Business pertaining to this Agreement and the transactions contemplated hereby, without the prior written approval of the other party. 

SECTION 5.13. Records. Purchaser recognizes that certain Records may contain incidental information relating primarily to subsidiaries or divisions 

of Seller other than the Business and that Seller may retain copies of the relevant portions thereof. Seller agrees that it will, and will cause its affiliates to, 

provide Purchaser at Closing with copies of any portions of Records that are Excluded Assets relating to the Business and, if any such Records are discovered 

after Closing, promptly upon such discovery. 

SECTION 5.14. Agreement Not To Compete. (a) Seller understands that Purchaser shall be entitled to protect and preserve the going concern value of 

the Business to the extent permitted by law and that Purchaser would not have entered into this Agreement absent the provisions of this Section 5.14 and, 

therefore, for a period of seven years from the Closing, Seller shall not, and shall cause each of its controlled affiliates (defined as any affiliate controlled 

directly or indirectly by Seller but exclusive of (i) any direct or indirect parent of Seller or (ii) any direct or indirect subsidiary of any such parent in which 

Seller does not have any direct or indirect equity interest or other investment) not to, directly or indirectly: 

(i) engage in activities or businesses, or establish any new businesses, anywhere in the world that are substantially in competition with the 

Business ("Competitive Activities"), including (A) manufacturing, marketing, selling or distributing coated paper or any goods or services of the type 

sold by the Business, except that Seller and its affiliates may manufacture, sell, market and distribute northern bleached kraft pulp, coated paperboard, 

uncoated paper and any goods or services (other than coated paper) not sold by the Business during the period of time that it was owned by Seller 

(collectively, "Permitted Goods and Services"), (B) soliciting any customer or prospective customer of the Business anywhere in the world to purchase 

coated paper or any goods or services sold by the Business, other than Permitted Goods and Services, from anyone other than Purchaser and its 

affiliates, and (C) assisting any person in any way to do, or attempt to do, anything prohibited by clause (A) or (B) above; and 

(ii) perform any of the following actions, activities or courses of conduct or any other action, activity or course of conduct that is substantially 

detrimental to the business reputation of the Business (collectively, "Detrimental Activities"), including (A) soliciting, recruiting or hiring any 

employees of the Business or persons who have worked for the Business (other than through general solicitation of open positions), (B) soliciting or 

encouraging any employee of the Business to leave the employment of the Business and (C) disclosing or furnishing to anyone any confidential 

information relating to the Business or otherwise using such confidential information for its own benefit or the benefit of any other person (except as 

permitted by Section 5.04). 

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(b) Section 5.14(a) shall be deemed not to be breached as a result of (i) Seller continuing the production of coated paper at the Brainerd Facility 

(x) during any Additional Brainerd Production Period, provided that all Additional Brainerd Inventory is transferred to Purchaser or (y) to the extent 

necessary to comply with its obligations or as otherwise expressly permitted under the Paper Supply Agreement, provided that Seller hereby agrees that it 

shall, immediately following the later to occur of Closing, the end of any Additional Brainerd Production Period and the fulfillment of Seller's obligations 

(and any "Additional Production Period" permitted) under the Paper Supply Agreement with respect to the production of coated paper, permanently cease the 

production of coated paper at the Brainerd Facility, (ii) the ownership by Seller or any of its controlled affiliates of less than an aggregate of 5% of any class 

of stock of a person engaged, directly or indirectly, in Competitive Activities, provided that such stock is listed on a national securities exchange, (iii) the 

acquisition and ownership after the date hereof by Seller or any of its controlled affiliates of any person that is engaged primarily in activities other than 

Competitive Activities but also engages in Competitive Activities, provided that Seller and its affiliates begin using all reasonable efforts to divest all of the 

business (the "Competing Business") engaged in Competitive Activities as soon as practicable, but in no event later than three months, after such acquisition, 

and complete such divestment as soon as practicable, but in no event later than one year after such acquisition (after which time, such Competitive Activities, 

if continuing, will be a breach of this Section 5.14) or (iv) an acquiror of Seller, or any affiliate of any such acquiror existing as of the time immediately prior 

to such acquiror's acquisition of Seller, engaging in Competitive Activities other than through Seller or any member of the Seller Group and other than as 

prohibited by Section 5.14(e). 

(c) Seller may not sell, transfer or divest any Competing Business except pursuant to the third and fourth sentences of this clause (c). Prior to any sale, 

transfer or other divestiture of a Competing Business (i) Seller shall give notice to Purchaser in writing of its or its affiliate's, as the case may be, intention to 

effect such a sale, transfer or other divestiture, and (ii) Purchaser may within 90 days after receipt of Seller's notice, make a proposal to purchase or cause its

designee to make a proposal to purchase all of the Competing Business by delivering to Seller a notice specifying the proposed manner of purchase and other 

material terms (including price and the period, if any, during which Purchaser's proposal will remain open for acceptance). If requested by Purchaser, during 

such 90-day period Seller shall permit Purchaser to conduct a customary due diligence investigation of the Competing Business and shall negotiate in good 

faith and on an exclusive basis with Purchaser regarding the purchase by Purchaser of the Competing Business. Seller or its designee, as the case may be, shall 

be free following the date of Purchaser's proposal (or if Purchaser does not make a proposal, the expiration of the 90-day period following receipt of Seller's 

notice) to sell, transfer or otherwise divest the Competing Business at a price not less than the price specified in Purchaser's proposal, and on other terms no 

less favorable to Seller than the terms specified in Purchaser's proposal. If during the period, if any, specified in Purchaser's proposal that such proposal will 

be open for consideration, Seller agrees to proceed on the basis of Purchaser's proposal, Seller and Purchaser, and their affiliates or designees, as the case may 

be, shall be legally obligated to continue in good faith to consummate the purchase upon the terms set forth in Purchaser's proposal and shall use their 

commercially reasonable efforts to secure any approvals required and to comply with all Applicable Laws in connection therewith. 

(d) Notwithstanding any other provision of this Agreement, it is understood and agreed that the remedy of indemnity payments pursuant to Article VIII 

and other remedies at law would be inadequate in the case of any breach of the covenants contained in Section 5.14(a) or (d). Purchaser shall be entitled to 

equitable relief, including the remedy of specific performance or injunctive relief, with respect to any breach or attempted breach of such covenants. 

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(e) So long as Seller's obligations pursuant to this Section 5.14 are in effect, Seller agrees that it will not, and will not permit any of its affiliates to, in a 

single transaction or through a series of related transactions, sell, convey, assign, transfer, lease or otherwise dispose of or permit the use of the Brainerd 

Facility to any person or group of persons unless, prior to or concurrently with such disposition, such person or group of persons agrees, in writing reasonably 

satisfactory to and for the express benefit of Purchaser, to be bound by Seller's obligations under and pursuant to this Section 5.14 with respect to the use and 

any subsequent disposition of the Brainerd Facility and Purchaser is provided with an original executed copy of such agreement. For purposes of this 

Section 5.14(d), any acquisition by any person of, or merger or combination with, an entity owning, directly or indirectly, the Brainerd Facility shall be 

deemed to be a transfer of the Brainerd Facility, as the case may be, and such person shall be deemed a transferee hereunder. Any purported sale, transfer, 

lease or other disposition or use of the Brainerd Facility in violation of this Section 5.14 shall be null and void. 

(f) If a final Judgment of a court or tribunal of competent jurisdiction determines that any term or provision contained in this Section 5.14 is invalid or 

unenforceable, then the parties agree that the court or tribunal will have the power (but without affecting the right of Purchaser to obtain the relief provided for 

in this Section 5.14 in any jurisdiction other than such court's or tribunal's jurisdiction) to reduce the scope, duration or geographic area of the term or 

provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and 

enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. This Section 5.14 is reasonable and necessary 

to protect and preserve Purchaser's legitimate business interests and the value of the Business and the Acquired Assets and to prevent any unfair advantage 

conferred on Seller and its successor. To the extent it may effectively do so under Applicable Law, Seller hereby waives on its own behalf and on behalf of its 

successors, any provision of law which renders any provision of this Section 5.14 invalid, void or unenforceable in any respect. 

SECTION 5.15. Bulk Transfer Laws. Purchaser hereby waives compliance by members of the Seller Group with the provisions of any so-called "bulk 

transfer law" or "bulk sales law" of any jurisdiction in connection with the sale of the Acquired Assets to Purchaser. 

SECTION 5.16. Further Assurances. (a) From time to time, as and when requested by the other party, each party shall execute and deliver, or cause 

to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions (subject to 

Section 5.05), as such other party may reasonably deem necessary or desirable to consummate the transactions contemplated by this Agreement, including 

executing and delivering such assignments, deeds, bills of sale, assumption agreements, consents, licenses and other instruments as the other party or its 

counsel may reasonably request as necessary or desirable for such purpose. 

(b) Seller shall, at Closing, ship in a commercially reasonable manner to the Premises specified by Purchaser, at Seller's sole cost and risk, all the 

tangible Acquired Assets not located at the Premises except for (i) Inventory (other than packaging material) located at the Brainerd Facility, which shall 

remain at the Brainerd Facility (at no cost to Purchaser) for a period of no longer than 90 days following the Closing Date (or, if Purchaser has given the 

notice contemplated by Section 5.29, 90 days following the final delivery of Inventory pursuant to the Paper Supply Agreement) and be maintained by Seller 

as set forth in the Transition Services Agreement, and (ii) consigned Inventory, which shall be delivered where located. 

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SECTION 5.17. Purchase Price Allocation. (a) Purchaser and Seller agree that $48,000,000 of the Purchase Price and the Assumed Liabilities shall 

be allocated to the Real Property located in the State of Minnesota and, within 120 days following the Closing Date, Purchaser shall propose to Seller for 

approval an allocation of the remaining Purchase Price and the Assumed Liabilities (which allocation shall assume that no adjustment to the Purchase Price is 

made pursuant to Section 1.05) among the Acquired Assets according to the relative fair market values of such assets on the Closing Date (which approval 

shall not be unreasonably withheld). If Seller and Purchaser are unable to agree on such allocation of the remaining Purchase Price and Assumed Liabilities, 

Seller and Purchaser shall elect an independent appraisal firm to determine such values. The conclusions of such appraisal firm shall be final and nonappealable. 

The fees and expenses of such appraisal firm shall be shared equally by Seller and Purchaser. In the event an adjustment to the Purchase Price is 

made pursuant to Section 1.05, the allocation of the Purchase Price and the Assumed Liabilities (other than with respect to the Real Property located in the 

State of Minnesota) shall be revised accordingly by Purchaser and presented to Seller for approval (which approval shall not be unreasonably withheld). 

(b) Seller and Purchaser shall be bound by such allocation of the Purchase Price and the Assumed Liabilities in preparing all Tax returns, IRS 

Form 8594 and any other Tax forms or filings, as well as in preparing any published financial statements in accordance with GAAP and neither Purchaser nor 

Seller shall take a position inconsistent therewith upon examination of any Tax return, in any Tax refund claim, or in any Tax litigation or investigation, 

without the prior written consent of the other party, except as required by applicable law. 

SECTION 5.18. Names Following Closing. (a) Immediately following the Closing, Seller shall amend or terminate any certificate of assumed name 

or d/b/a filings so as to eliminate its right to use the names set forth on Schedule 5.18(a) or any name that is confusingly similar to or includes any such

names, and none of Seller or any of its affiliates shall thereafter use those names or other names acquired by Purchaser hereunder or names confusingly 

similar thereto. 

(b) As soon as reasonably practicable (and in any event within two months) after the Closing Date, Purchaser shall cease to use any written materials, 

including without limitation, labels, packing materials, letterhead, advertising materials and forms, which include the word "Potlatch"; provided, however, 

that Purchaser may, without modification, use inventory, product literature and sales literature (but not including letterhead, business cards, invoices or the 

like) in existence as of the Closing Date until the earlier of the exhaustion of such materials or a date six months from the Closing Date. 

(c) Immediately following the Closing, Seller shall cease all use of the names, trade names and trademarks set forth on Schedule 5.18(c) or any name 

that is confusingly similar to or includes any such names, and none of Seller or any of its affiliates shall thereafter use those names, or combinations or 

variations thereof, or names confusingly similar thereto. 

SECTION 5.19. Assignments. Seller shall prepare all assignments of Assigned Intellectual Property required hereunder and provide such assignments 

to Purchaser in recordable form. Seller shall reimburse Purchaser for all filing or recordation fees and similar expenses incurred in connection with such 

assignments. 

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SECTION 5.20. Insurance. Seller shall use its reasonable efforts (a) to cause each insurance policy maintained by any member of the Seller Group 

with respect to the Business (including business interruption insurance or insurance otherwise covering loss of profits) or covering any Acquired Asset or 

Acquired Coating Equipment (each, a "Business Insurance Policy") to be amended prior to Closing to name Purchaser or Purchaser's designated affiliate as an 

additional insured, and (b) to pursue (including, after Closing, on Purchaser's behalf), and, after Closing, assist Purchaser in pursuing, any claims relating to or 

arising out of any Catastrophic Event. Seller shall, and shall cause each other member of the Seller Group to, maintain its current insurance coverage under 

each Business Insurance Policy (x) until the Closing Date, provided that if any Catastrophic Event has occurred and the Closing occurs pursuant to 

Section 6.06 despite such Catastrophic Event, Seller shall, and shall cause each other member of the Seller Group to, maintain such insurance with respect to 

such Catastrophic Event until all claims relating to or arising out of such Catastrophic Event can be finalized and, as applicable, paid and (y) in the case of any 

Business Insurance Policy covering or relating to any Acquired Coating Equipment, until all production of coated paper at the Brainerd Facility during any 

Additional Brainerd Production Period or pursuant to the Paper Supply Agreement has ceased. Purchaser acknowledges that, except as set forth in this 

Section 5.20, after the Closing Date Seller and its affiliates shall have no responsibility for obtaining or maintaining any insurance relating to the Business, 

whether relating to or arising out of occurrences prior to, at or subsequent to the Closing. 

SECTION 5.21. Title Insurance and Survey. Seller agrees that it will, and it will cause each other member of the Seller Group to, provide all 

assistance to Purchaser as Purchaser may reasonably request in connection with the issuance to Purchaser of the title insurance policy described in 

Section 6.02(e) as well as any similar title insurance policy covering any of the Premises, including the preparation, at Seller's expense, of the survey 

described in Section 6.02(e) as well as any similar survey with respect to any of the Premises. 

SECTION 5.22. Compliance with Plant Closing Laws. (a) Seller shall be responsible for complying with the Worker Adjustment and Retraining Act 

of 1988 (the "WARN Act") or any other applicable similar Federal, state or local law or regulation (collectively, the "Plant Closing Laws") with respect to any 

employee employed in connection with the Business (including Brainerd Participants), other than a Continued Employee, who suffers an "employment loss" 

(as that term is defined under the WARN Act) or a separation from employment or a reduction in hours of employment that with the passage of time 

reasonably can be expected to constitute an "employment loss" (hereinafter, "Affected Employees") prior to and through the later of the Closing Date and the 

final closing of the Brainerd Facility as contemplated by Section 5.14. Seller shall provide Purchaser with periodic reports (not less than bi-weekly) between 

the date hereof and the later of such dates, listing all individuals who, within 90 days preceding such report, became Affected Employees and shall describe 

with respect to each such Affected Employee the date on which such individual became an Affected Employee, the individual's date of hire and regularly 

scheduled hours over the preceding six months, the Affected Employee's last job title, department and job assignment, and the reason for such employment 

loss. 

(b) Purchaser shall be responsible for complying with the Plant Closing Laws with respect to the Continued Employees following the Closing Date. 

(c) Purchaser shall cooperate with Seller to provide advance notice of each anticipated employment loss as far in advance of such employment loss as 

practical under the circumstances to Participants who become Brainerd Participants and Non-Continuing Participants and are identified by Purchaser to Seller 

prior to the Closing Date. 

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SECTION 5.23. IRB Financings. (a) Seller shall, at the sole cost of Seller, cause (a) each IRB Financing (other than the IRB Financing listed on 

Schedule 5.23(a) (the "Continuing IRB Financing")) to be terminated and all bonds and other obligations thereunder repaid, redeemed or fully and irrevocably 

defeased for redemption (on the earliest permissible redemption date following the Closing Date), in each case on or before the Closing Date, (b) any related 

Liens on Acquired Assets (including any related to the Continuing IRB Financing) to be released not later than the Closing Date and (c) title to all Acquired 

Assets leased thereunder to be transferred to Purchaser in accordance herewith not later than the Closing Date, provided that, with respect to the IRB 

Financing listed on Schedule 5.23(b) (the "Sale/Leaseback IRB Financing"), Seller shall be deemed to have complied with this clause (c) if as of the Closing 

(i) Seller has an absolute and unconditional right to receive fee simple title to the Acquired Assets leased thereunder free and clear of any Lien within 30 days 

following the Closing Date, (ii) the owner of such Acquired Assets has an absolute and unconditional obligation to transfer such title to Seller within such 

period, (iii) such owner has not given any notice or taken any action denying or disaffirming such obligation, and (iv) immediately following Closing and 

until such title is transferred to Purchaser, Purchaser shall have the right to use and operate such Acquired Assets substantially as used and operated by Seller 

on the date hereof. 

(b) Seller agrees to use all commercially reasonable efforts to arrange for title to the Acquired Assets leased under the Sale/Leaseback IRB Financing to 

be transferred to Purchaser in accordance herewith not later than the Closing Date (it being understood and agreed that this obligation shall not require Seller 

to repay, redeem or defease the Sale/Leaseback IRB Financing prior to the Closing Date). In addition, if the Acquired Assets leased under the Sale/Leaseback 

IRB Financing are not delivered by the earlier of (i) the date required under the Sale/Leaseback IRB Financing and (ii) the 30th day following the Closing

Date, Seller shall take all legal action (at Seller's expense) to enforce its rights under the Sale/Leaseback IRB Financing (including bringing and pursuing 

actions against the other parties to such financing) or otherwise obtain and transfer to Purchaser such title to such Acquired Assets as soon as practicable. 

(c) Seller acknowledges and agrees that Purchaser shall not be subject to, or responsible for complying with, or have any liability in respect of, any 

restrictions, limitations, covenants or obligations imposed on Seller in connection with any IRB Financing (including the Continuing IRB Financing) or with 

respect to the operation or use of any Acquired Asset related thereto. 

(d) Upon the written request of Purchaser at any time, Seller shall, as promptly as reasonably practicable and in any event within 30 days following such 

notice (at the sole cost of Seller), cause (i) the Continuing IRB Financing to be terminated and all bonds and other obligations thereunder repaid, redeemed or 

fully and irrevocably defeased for redemption (on the earliest practicable redemption date following such notice, but not earlier than the Closing Date); 

provided, however, that Purchaser shall not be entitled to deliver any such notice prior to the Closing Date unless Purchaser has determined in good faith that 

it may change the use of the Acquired Assets related to the Continuing IRB Financing within 30 days following the Closing Date or that it may have any 

liability in respect of any restrictions, limitations, covenants or obligations imposed on Seller in connection with the Continuing IRB Financing or with respect 

to the operation or use of any Acquired Asset related thereto. Following the Closing, Purchaser shall, upon the written inquiry of Seller (but not more often 

than once per calendar quarter), use good faith efforts to provide specific information requested by Seller regarding the use of the Acquired Assets related to 

the Continuing IRB Financing to the extent such information is reasonably necessary in order for Seller to determine whether such assets are being used in a 

manner consistent with maintaining the tax exempt status of the Continuing IRB Financing; provided that Purchaser shall not have any liability in connection 

with providing, or failing to provide, such information and shall be under no obligation to monitor or inform Seller of any change in use of such Acquired 

Assets except in response to such a quarterly inquiry. 

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SECTION 5.24. Cross-Border Leases. With respect to all Cross-Border Leases with respect to which all necessary consents for their assignment have 

been delivered, at Closing Purchaser shall assume Seller's obligations, and Seller shall assign to Purchaser all of Seller's rights (including security interests) 

pursuant to assignment agreements (the "Cross-Border Lease Assumptions") on substantially the terms and conditions attached hereto as Exhibit H-1 and 

otherwise in form and substance reasonably satisfactory to Seller and Purchaser. In connection with each Cross-Border Lease Assumption, Seller shall, or 

shall cause its relevant affiliates to, and Purchase shall, or shall cause its designated affiliates to, enter into a Cross-Indemnity Agreement substantially on the 

terms and conditions set forth in Exhibit H-2 and otherwise in form and substance reasonably satisfactory to Seller and Purchaser (a "Cross-Border Indemnity 

Agreement"). Each Cross-Border Lease Assumption and Cross-Border Indemnity Agreement is an "Ancillary Agreement" hereunder. Seller shall (at its own 

expense) either cause all necessary consents for the assignment of each Cross-Border Lease to Purchaser (with no additional obligations or restrictions arising 

as a result of such transfer) or terminate such Cross-Border Lease and cause title to the subject assets to be transferred to Purchaser at Closing in accordance 

herewith, not subject to any Liens. Purchaser will (at its own expense), to the extent reasonably requested by Seller, cooperate with Seller in obtaining the 

necessary consents to the assignment. 

SECTION 5.25. Audited Financial Statements. (a) Seller shall use its commercially reasonable efforts to deliver to Purchaser prior to Closing or, if 

not delivered prior to Closing, as soon thereafter as practicable (i) the audited statement of financial position and the related statements of operations, 

shareholders' equity and cash flows of the Business (other than the Excluded Assets) at December 31, 2001 and for the year then ended (the "Audited 

Financial Statements"), in each case, meeting the requirements of Regulation S-X (part 210 of the Code of Federal Regulations) and (ii) an unqualified report 

of KPMG LLP ("KPMG") on each of the financial statements described in the preceding clause (i). Seller shall also use its commercially reasonable efforts to 

cause KPMG to be engaged by Purchaser, pursuant to an engagement letter in form and substance reasonably satisfactory to Purchaser, prior to Closing to 

consent to the use of such report as contemplated by Section 5.25(b). The first $50,000 of the cost of such audit will be borne by Purchaser, with the 

remainder (if any) of the cost borne by Seller. 

(b) Seller shall, and shall cause each other member of the Seller Group, and its and their respective officers, directors and employees and shall use 

commercially reasonable efforts to cause each of their respective accountants and advisors to, give to Purchaser and any of its affiliates and their respective 

professional advisors such assistance as shall reasonably be requested by Purchaser or any of its affiliates or professional advisors in the preparation of 

documentation, comfort letters and opinions in connection with any private placement or any registration or registered offering of any security or any periodic 

report required by Applicable Law and shall use commercially reasonable efforts to cause the consent of KPMG to the inclusion of their audit reports in any 

registration statement, prospectus or circular issued in connection with such private placement, registration or registered offering or in any such periodic 

report and such other consents as shall be reasonably required by Purchaser or any of its affiliates or professional advisors. For purposes of this Section 5.25, 

"commercially reasonable efforts" of Seller shall not include any requirement that Seller make any payments to KPMG or any of Seller's other advisors 

(except for any payments with respect to which Purchaser agrees to reimburse Seller), or dismiss or not retain KPMG or any of Purchaser's other advisors. 

Seller shall not have any liability under this Section 5.25 if, despite its commercially reasonably efforts, KPMG or any of Seller's other advisors fails to 

cooperate or provide any comfort letter, consent, opinion or other document. 

78 

SECTION 5.26. Acquired Coating Equipment. (a) From the date hereof until the removal of the Acquired Coating Equipment in accordance with 

clause (b) below, Seller shall maintain the Acquired Coating Equipment in a manner sufficient to allow Seller to fulfill its obligations under the Paper Supply 

Agreement. From Closing until the removal of the Acquired Coating Equipment in accordance with clause (b) below, Seller shall (i) take such actions (which, 

except during any Additional Brainerd Production Period or any "Additional Production Period" under the Paper Supply Agreement or as otherwise set forth 

in the Paper Supply Agreement shall be at Purchaser's cost and expense) with respect to the Acquired Coating Equipment as Purchaser may reasonably 

request and (ii) permit Purchaser and its employees, representatives, designees and agents access to the Acquired Coating Equipment at such times during 

regular business hours as Purchaser may reasonably request. Except as reasonably necessary to comply with the foregoing obligations and the terms of the 

Paper Supply Agreement, Seller shall not use or permit any other person to use the Acquired Coating Equipment and shall not permit any person access to the 

Acquired Coating Equipment (and shall use reasonable efforts to ensure no person gains access). Seller shall not move the Acquired Coating Equipment 

without Purchaser's written consent. 

(b) Purchaser shall, as soon as reasonably practicable after the latest of (i) the Closing Date, (ii) the end of any Additional Brainerd Production Period 

and (iii) the last date of production of coated paper at the Brainerd Facility pursuant to the Paper Supply Agreement, at no cost to Seller, remove, or cause to 

be removed, the Acquired Coating Equipment from the Brainerd Facility. Seller shall provide Purchaser or its designees with such access to the Brainerd

Facility as Purchaser or its designees may reasonably request to effectuate the removal of the Acquired Coating Equipment and shall otherwise cooperate with 

Purchaser in connection with such removal. Purchaser shall not be obligated to restore, or be liable for restoration of, the former site of the Acquired Coating 

Equipment (including repair of foundation or filling of holes). 

SECTION 5.27. Financing. Purchaser shall use all commercially reasonable efforts to ensure that it has, at Closing, cash available or available credit 

facilities or other financing that together are sufficient to enable it to consummate the Acquisition (collectively, "Financing"). If, on the Anticipated Closing 

Date, a condition set forth in Section 6.02(a), (b), clause (v) of (d), (g) or (o) would not be satisfied if the Closing were to occur on the Anticipated Closing 

Date, Purchaser shall, if it is not in material breach of the covenant contained in the first sentence of Section 5.27, at all times have the right to delay the 

Closing by a reasonable period (but, in any event, not later than the Termination Date) if it does not receive or believes in good faith that it may not have or 

receive sufficient funds on any scheduled Closing Date to enable it to consummate the Acquisition. In the event Purchaser would have the right to terminate 

this Agreement solely on the basis that the conditions set forth in Section 6.02(p) shall have become incapable of fulfillment, the Closing shall be delayed 

until the earlier of (x) the earliest date on which such condition (and all other conditions) can be fulfilled (or are waived) and (y) the Termination Date, and 

Purchaser shall continue to be obligated under this Section 5.27. Purchaser shall promptly notify Seller if and when it becomes aware that a Force Majeure 

will cause a failure of the condition set forth in 6.02(p). 

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SECTION 5.28. Nursery. If Seller notifies Purchaser at least 10 business days prior to the Closing Date that Seller intends to continue using the 

Premises identified as the nursery property on Schedule 5.28 (the "Nursery Property") for the propagation of trees ("Nursery Activities") and the greenhouse 

located on the Nursery Property (the "Greenhouse") for the nurturing of seedlings ("Greenhouse Activities") then (i) the Nursery Property shall not be deemed 

to be an Acquired Asset in a Premises for any purpose hereunder, and (ii) prior to the Closing Date Seller shall take all action reasonably necessary or 

requested by Purchaser in order to impose on the Nursery Property and record on the Carlton County land records, for the sole benefit of Purchaser and its 

successors and assigns, a recordable restrictive covenant limiting the use of the Nursery Property to Nursery Activities and Greenhouse Activities and 

reflecting Purchase's option right hereunder. Seller also agrees that, if it elects to so exclude the Nursery Property from the Acquired Assets, Purchaser shall 

have the irrevocable right to purchase the Nursery Property from Seller for a purchase price of $50,445 if Seller determines to cease using the Nursery 

Property for Nursery Activities and Greenhouse Activities or to use the Nursery Property for any activities other than Nursery Activities and Greenhouse 

Activities or to transfer all or any portion of the Nursery Property or grant to any person (other than a member of the Seller Group) any right to use the 

Nursery Property. Seller shall promptly notify Purchaser in writing of any such determination and Purchaser shall have 120 days from receipt of such notice to 

give a written notice to Seller electing to exercise such purchase right. If Purchaser elects to exercise such purchase right, Purchaser and Seller shall use 

commercially reasonable efforts to complete such purchase as promptly as reasonably practicable. If Purchaser does not exercise such Purchase right, Seller 

shall be entitled to remove, and Purchaser shall cooperate with Seller in removing, such restrictive covenant. The terms of such purchase shall be on 

substantially the terms of this Agreement as they would have applied to the Nursery Property if it had been included in the Premises on the Closing Date (and 

otherwise on terms and conditions reasonably satisfactory to Purchaser and Seller) and upon any such purchase the Nursery Property shall be deemed to be an 

Acquired Asset hereunder for all purposes. If Purchaser fails to timely exercise its option to purchase the Nursery Property, then Purchaser's option to 

purchase shall expire automatically and Purchaser shall execute and deliver to Seller a recordable instrument extinguishing the option and the restrictive 

covenant. If Purchaser fails to do so, Seller may file in the Carlton County land records an affidavit establishing that Purchaser's option and the restrictive 

covenant has expired. Seller shall, in consultation with Purchaser, use commercially reasonable efforts to subdivide the Nursery Property into two parcels as 

indicated on Schedule 5.28, consisting of one parcel of approximately five acres which will include the Greenhouse (the "Greenhouse Parcel") and a second 

parcel of approximately 12 acres (the "Nursery Parcel"). Appropriate easements will be provided such that there is adequate access to each parcel. Following 

any such subdivision, the provisions of this Section 5.28 and, if such subdivision is completed prior to the Closing Date, the provisions of Section 1.05(d) as 

they relate to the Nursery Property) shall apply mutatis mutandi to each parcel separately with the option price of the Greenhouse Parcel being $14,837 and 

the option price of the Nursery Parcel being $35,608. 

SECTION 5.29. Paper Supply Agreement. At least 10 days prior to Closing, Seller will provide Purchaser with an estimate of the quantity and 

product type (including basis weights and sizes) at Closing of the finished goods Inventory that will constitute Acquired Assets. In the event that Purchaser 

desires to purchase from Seller after Closing coated paper products manufactured by Seller at the Brainerd Facility, Purchaser shall, on or prior to the later of 

seven days prior to Closing and three business days after receipt of such notice, provide Seller with a written notice thereof. The notice will set forth a nonbinding 

forecast of the quantity (both in terms of total tons and tons per product type) and types of coated paper products that Purchaser expects to order for 

delivery during the term of the Paper Supply Agreement. Such notice will not commit Purchaser to purchase any specific volume or type of coated paper 

products. 

SECTION 5.30. Wood Supply Agreement. At any time prior to Closing, Purchaser may provide to Seller a binding forecast of the quantity and type 

(including the species mix) of the Wood Products (as defined in the Wood Supply Agreement) that Purchaser expects to order from Seller pursuant to the 

Wood Supply Agreement from the Closing Date until the end of the then current calendar quarter. To the extent it does not unreasonably interfere with the 

normal operations of the Business, prior to Closing Seller shall use commercially reasonable efforts to accommodate Purchaser's post-Closing wood 

procurement requirements in Seller's quarterly wood procurement planning. If, following Closing, Purchaser requests Seller to enter into longer-term wood 

supply arrangements, Seller agrees to negotiate in good faith with Purchaser with respect to establishing such arrangements (and Seller agrees that any such 

arrangements would provide Purchaser with invoicing and payment terms no less favorable to Purchaser than semi-monthly invoices payable in 30 days) 

SECTION 5.31. Post-Closing Real Estate Work. (a) If at any time before July 1, 2002, Purchaser discovers that any parcel comprising the Premises 

contains a well that has been abandoned but not sealed in accordance with Minnesota laws, Seller shall seal the well in accordance with Minnesota laws by 

October 1, 2002. 

(b) Seller shall use all commercially reasonable efforts to obtain (at Seller's expense) easements, licenses or permits assuring the perpetual right to use 

the access roads now used between the Scanlon Woodlot (Parcels WL-1 and WL-2 identified on Schedule 3.06, the "Scanlon Woodlot") and State Highway 

45 as soon as reasonably practicable. 

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(c) The parties acknowledge that titles to the railroad parcels (Parcels RR-1 through RR-5 identified in Schedule 3.06, the "Railroad Parcels") may be 

unmarketable due to the uncertainty of the locations of boundaries and right-of-way lines. Promptly after the Closing, Purchaser shall hire real estate counsel

easonably satisfactory to Seller (it being agreed that John Gassert, Esq., of Cloquet, Minnesota shall be satisfactory), to promptly commence and promptly 

complete a title registration proceeding (at Seller's expense) to establish marketable title of record for the Railroad Parcels. The proceeding shall include the 

judicial determination of boundaries and right-of-way lines with the placement of judicial landmarks. 

SECTION 5.32. Sheeters. (a) Seller agrees that it shall not sell, transfer, lease or otherwise dispose of any Sheeter except in compliance with this 

Section 5.32. Seller shall provide to Purchaser a notice (the "Transfer Notice") setting forth for each Sheeter the proposed price at which Seller is willing to 

sell such Sheeter to Purchaser (the "Transfer Price"), which price shall be set forth separately for each Sheeter and shall be payable solely in cash, and all 

other material terms and conditions on which Seller desires to sell each Sheeter, including, without limitation, that each Sheeter shall be sold or transferred 

free and clear of all liabilities, obligations or commitments of Seller or any of its affiliates and free and clear of all Liens. 

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(b) If requested by Purchaser, Seller shall negotiate in good faith and on an exclusive basis until the later of (x) 90 days following delivery of the 

Transfer Notice and (y) 30 days following the Closing Date (such period being referred to herein as the "Offer Period") to reach an agreement for the sale or 

transfer to Purchaser or its designee, as the case may be, of any Sheeter or Sheeters set forth in the Transfer Notice and shall permit Purchaser to conduct 

during the Offer Period a customary due diligence investigation of each such Sheeter. If no agreement is reached by Seller and Purchaser by the end of the 

Offer Period with respect to any Sheeter set forth in the Transfer Notice (or if Purchaser notifies Seller in writing that it is not interested in discussing the 

purchase of any such Sheeter), Seller or its subsidiary, as the case may be, may, thereafter, sell such Sheeter only for a cash consideration greater than 97% of 

the Transfer Price for such Sheeter and on other terms and conditions no less favorable, taken as a whole, to Seller or its subsidiary, as the case may be, than 

the terms and conditions set forth in the Transfer Notice. If Seller wishes to sell a Sheeter on any other terms, it must first deliver a new Transfer Notice 

setting forth the terms specified in Section 5.32(a) and follow the procedures set forth in this Section 5.32(b). 

(c) The term "Sheeters" shall mean all the assets, rights and personal property, tangible or intangible, of the Seller Group comprising the sheeters and 

cutters located at the Brainerd Facility, as described on Schedule 5.32(c) hereto. 

(d) Notwithstanding anything to the contrary in this Section 5.32, (i) Seller may negotiate for a sale of substantially all of the Brainerd Facility 

(including the Sheeters) as an entirety, (ii) may revoke any Transfer Notice with respect to a Sheeter at any time prior to execution of a definitive agreement 

being reached with respect to a sale of such Sheeter to Purchaser if a definitive agreement for the sale of such Sheeter as part of such a sale of the Brainerd 

Facility has been executed and (iii) may sell a Sheeter as part of such a sale of the Brainerd Facility without regard to the requirements of Section 5.32(b) 

regarding the terms of such sale. 

SECTION 5.33. Power Agreements. (a) Purchaser and Seller acknowledge and agree that the Power Agreements are integral and essential to the 

continued economic operation of the Cloquet Facility by Purchaser, but that the Power Agreements currently have application to multiple facilities owned and 

operated by Seller. Because the Power Agreements combine and blend for various purposes: (i) multiple and separate electrical loads; (ii) billing 

characteristics associated with multiple loads, and (iii) various liabilities and obligations of multiple industrial facilities, Purchaser and Seller agree that, as 

currently stated, neither the rights nor the obligations contained in the Power Agreements are directly assignable to Purchaser in conjunction with the 

transactions envisioned in this Agreement. In lieu of such contractual assignments, Seller shall use all commercially reasonable efforts, in consultation with 

Purchaser, to ensure that it has by no later than Closing either (i) obtained a waiver, in writing, from Minnesota Power of certain of Minnesota Power's 

contractual rights under the Power Agreements so as to permit a partial assignment from Seller to Purchaser at Closing of only those portions of Seller's rights 

and obligations under the Power Agreements which relate to the Cloquet Facility and the Power Generation Facilities and a retention by Seller of all other 

rights and obligations under the Power Agreements ("MP Waiver"); or (ii) renegotiated the Power Agreements with Minnesota Power and obtained the 

execution and delivery by Minnesota Power of a revised set of contracts covering the same subject matter as the Power Agreements, but which revised Power 

Agreements segregate the rights and obligations of Seller with respect to the Cloquet Facility and the Power Generation Facilities from the rights and 

obligations of Seller with respect to its other facilities (the "Revised Power Agreements"). If Seller obtains the MP Waiver and all requisite Consents of 

Governmental Entities (if any) with respect to the MP Waiver and the assignment of rights and 

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obligations under the Power Agreements to Purchaser prior to Closing, the rights and obligations under the Power Agreements which relate to the Cloquet 

Facility and the Power Generation Facilities shall be assigned to Purchaser by Seller as, and shall be deemed to be, Acquired Assets. If Seller renegotiates 

Revised Power Agreements pertinent only to the Cloquet Facility and the Power Generation Facilities (the "Revised Cloquet Power Agreements") and obtains 

all requisite Consents of Governmental Entities with respect to such Revised Cloquet Power Agreements and assignment thereof to Purchaser, both prior to 

Closing, such Revised Cloquet Power Agreements shall be assigned to Purchaser by Seller as, and shall be deemed to be, Acquired Assets. Seller further 

agrees to use all commercially reasonable efforts, in consultation with Purchaser, to ensure that by no later than Closing, either the MP Waiver has become 

effective and the rights and obligations of Seller Power Agreements which relate to the Cloquet Facility and the Power Generation Facilities are assigned to 

Purchaser, or the Revised Cloquet Power Agreements have become effective and are assigned to Purchaser, all requisite Consents of Governmental Entities (if 

any) with respect to the MP Waiver or the Revised Cloquet Power Agreements and the related assignment to Purchaser have been obtained and such 

assignment provides Purchaser from the Closing through December 31, 2008, not less than the following: 

(A) 

(B) 

(C) 

a net cost of electricity per kilowatt hour at the Cloquet Facility equal to the average net cost of electricity at the Cloquet Facility during calendar 

year 2001, adjusted for any differences in the level of the adjustment applicable during the period pursuant to Minnesota Power's "Fuel 

Adjustment Clause", and further adjusted for any increase in the level of base rates charged by Minnesota Power pursuant to any rate change 

permitted by the Minnesota Public Utilities Commission pursuant to Minnesota law between calendar year 2001 and the time periods covered by 

this covenant; 

a supply of firm power for the Cloquet Facility that, when combined with the capacity of the Power Generation Facilities being transferred to 

Purchaser, is at least sufficient to operate the Cloquet Facility, as configured at the time of Closing, at full capacity; 

contractual terms and conditions with respect to increases and reductions in electrical demand by Purchaser no less favorable to Purchaser than 

those contained in the contractual terms and conditions of the Power Agreements;

(D) 

(E) 

a take-or-pay obligation to Minnesota Power that is limited to an obligation to pay only for the contract demand associated with the Cloquet 

Facility and not any other facilities of Seller; and 

replacement firm power service for periods when the operation of the Power Generation Facilities are either unavailable, impracticable or 

uneconomic on terms no less favorable to Purchaser than those contained in the Power Agreements. 

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In the event that Consents of any kind are required in order to achieve the foregoing, Seller agrees to bear the entire cost of obtaining such Consents. In the 

event that Seller is unable (whether or not Seller has used all commercially reasonable efforts) to satisfy any of the requirements of this covenant (being either 

to negotiate and obtain the MP Waiver and assign to Purchaser at Closing rights and obligations under the Power Agreements or negotiate and assign to 

Purchaser at Closing the Revised Cloquet Power Agreements having all the terms and conditions specified in this Section 5.33 and to obtain all requisite 

Consents of Governmental Entities contemplated by this Section 5.33 on or prior to Closing), Seller agrees that from Closing through December 31, 2003, 

Purchaser shall be entitled to invoice Seller on a monthly basis, and Seller will be obligated to pay such invoices, in an amount sufficient to restore to 

Purchaser the cost of purchasing power from Minnesota Power that it would have experienced had all such requirements of this covenant been fulfilled in 

their entirety provided, however, that in no event shall this obligation of Seller to make Purchaser whole exceed the sum of (i) the difference between the 

application of Minnesota Power's Large Light and Power rate schedule to the average monthly 2001 billing parameters (including billing demand, energy 

usage, load factor, power factor and other similar factors) of the Cloquet Facility and the application of Minnesota Power's Large Power rate schedule to those 

same average monthly billing parameters, multiplied by the number of months between Closing and December 31, 2003; and (ii) the difference between that 

portion of the Minnesota Power monthly charges for standby and backup services invoiced to Seller during calendar year 2001 that have been allocated to the 

Cloquet Facility and Power Generation Facilities for internal budgeting and accounting purposes by Seller, and the monthly charges for standby and backup 

services invoiced by Minnesota Power to Purchaser for the Cloquet Facility and Power Generation Facilities during the period between Closing and 

December 31, 2003. Furthermore, in the event that Seller is unable (whether or not Seller has used all commercially reasonable efforts) to satisfy any of the 

requirements of this covenant by Closing, Purchaser shall have no obligation to accept from Seller either a partial assignment of the Power Agreements or an 

assignment of any Revised Cloquet Power Agreement, and Purchaser shall be free to use its sole discretion to determine how to contract for the power supply 

required by the Cloquet Facility subsequent to the Closing without impairing or reducing its right to be made whole by Seller pursuant to this paragraph. 

(b) To the extent reasonably requested by Seller, Purchaser will consult with Seller in its efforts to satisfy the requirements of this Section 5.33. In 

addition, to the extent reasonably requested by Purchaser, Seller shall permit Purchaser to participate in the negotiations regarding an MP Waiver or Revised 

Cloquet Power Agreements. Notwithstanding the foregoing, any such consultation or participation shall not be deemed to limit the requirements of, or Seller's 

obligations under, this Section 5.33 (or Purchaser's right to strictly enforce such requirement) or be deemed to impose any obligations on Purchaser. 

(c) For purposes of this Section 5.33, "commercially reasonable efforts" shall not require Seller to pay or commit to pay any amount to (or incur any 

obligation in favor of) Minnesota Power other than in respect of existing obligations (including being required to perform and remain liable for existing 

obligations under the Power Agreements) or the payment or reimbursement of ordinary transaction costs and expenses. 

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SECTION 5.34. Energy Regulation. Seller shall, prior to the Closing Date, take all action necessary to ensure that by acquiring the Hydroelectric 

Facility and the Steam Turbine Facilities and assuming under this Agreement the Project Agreement between Potlach Corporation and Minnesota Power, Inc. 

dated July 31, 2000 (including attachments) ("Project Agreement") or any rights and obligations under Power Agreements or any Revised Power Agreements, 

and performing under the Hydroelectric Facility Contracts and the Steam Turbine Contracts, Purchaser shall not become subject to regulation by the FERC 

under Part II of the FPA, except as provided in 18 C.F.R. Part 292, Subpart F of the FERC regulations, or subject to regulation by the Securities and Exchange 

Commission ("SEC") as an "electric utility company", "holding company" or "subsidiary company" under PUHCA, 15 U.S.C. § 79 et seq. 

ARTICLE VI 

Conditions Precedent 

SECTION 6.01. Conditions to Each Party's Obligation. The obligation of Purchaser to purchase and pay for the Acquired Assets and the obligation 

of Seller to sell the Acquired Assets to Purchaser is subject to the satisfaction or waiver on or prior to the Closing of the following conditions: 

(a) Governmental Approvals. (i) The waiting period under the HSR Act, if applicable to the consummation of the Acquisition, shall have expired 

or been terminated, (ii) all necessary consents and approvals under or relating to the applicable competition laws of any other applicable foreign 

jurisdiction shall have been received and all relevant waiting periods shall have expired or been terminated (collectively, the "Competition Condition"). 

All other authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any 

Governmental Entity listed on Schedule 6.01(a) or otherwise necessary for the consummation of the Acquisition shall have been obtained or filed or 

shall have occurred, including the filing and effectiveness of a notice of exemption with, or otherwise obtaining the approval of, the STB and all 

required filings with and approvals of FERC (including the Final Order); provided, however, that (x) receipt of the Final Order from FERC shall not be 

a condition to the Closing in the event Purchaser provides the Hydroelectric Facility Notice and such notice has not been rescinded or deemed rescinded 

at or prior to Closing and (y) receipt of approval of the Minnesota Public Utilities Commission to any MP Waiver or Revised Cloquet Power 

Agreements or any related assignment to Purchaser as contemplated by Section 5.33 shall not be a condition to Closing. 

(b) No Injunctions or Restraints. No Applicable Law or injunction enacted, entered, promulgated, enforced or issued by any Governmental Entity 

or other legal restraint or prohibition preventing the consummation of the Acquisition shall be in effect. 

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SECTION 6.02. Conditions to Obligation of Purchaser. The obligation of Purchaser to purchase and pay for the Acquired Assets is subject to the 

satisfaction (or waiver by Purchaser) on or prior to the Closing Date of the following conditions: 

(a) Representations and Warranties. The representations and warranties of Seller in this Agreement and the Ancillary Agreements that are 

qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, as of the date hereof and 

as of the Closing Date as though made on the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date 

(in which case such representations and warranties qualified as to materiality shall be true and correct, and those not so qualified shall be true and 

correct in all material respects, on and as of such earlier date) and Purchaser shall have received a certificate signed by an authorized officer of Seller to 

such effect; provided, however, that the failure of a representation or warranty to be true and correct at any time (other than a failure resulting from fraud 

or intentional breach) shall not constitute a failure of the condition contained in this Section 6.02(a) if such failure shall have been Cured as of the 

Closing. 

(b) Performance of Obligations of Seller. Seller shall have performed or complied in all material respects with all obligations and covenants 

required by this Agreement to be performed or complied with by Seller by the time of the Closing, and Purchaser shall have received a certificate signed 

by an authorized officer of Seller to such effect; provided, however, that the non-performance or non-compliance with an undertaking or agreement at 

any time (other than non-performance or non-compliance representing fraud or intentional breach) shall not constitute a failure of the condition 

contained in this Section 6.02(b) if such non-performance or non-compliance shall have been Cured as of the Closing. 

(c) Opinion of Seller's Counsel. Purchaser shall have received an opinion dated the Closing Date of each of (i) Pillsbury Winthrop LLP, counsel to 

Seller, substantially in the form of Exhibit I-1, (ii) Chadbourne & Parke, energy regulatory counsel to Seller substantially in the form of Exhibit I-2, 

(iii) Fritz R. Kahn, P.C., railroad counsel to Seller, substantially in the form of Exhibit I-3, (iv) Hogan & Hartson L.L.P., industrial revenue bonds 

counsel to Seller, substantially in the form of Exhibit I-4, and (v) Rudy, Gassert, Yetka & Pritchett, P.A., Minnesota counsel to Seller, substantially in 

the form of Exhibit I-5, and (vi) Ralph Davisson, Esq., general counsel of Seller, substantially in the form of Exhibit I-6. 

(d) Absence of Proceedings. There shall not be pending or threatened by any Governmental Entity any Proceeding (or by any other person any 

Proceeding that has a reasonable likelihood of success) (i) challenging or seeking to restrain or prohibit the Acquisition or any other transaction or the 

inclusion or enforcement of any covenant (including any covenant contained in Section 5.14) contemplated by this Agreement or the Ancillary 

Agreements or seeking to obtain from Purchaser or any of its affiliates in connection with the Acquisition any damages that are material in relation to 

Purchaser and its subsidiaries taken as a whole, (ii) seeking to prohibit or limit the ownership or operation by Purchaser or any of its affiliates of any 

portion of the business or assets of Purchaser (excluding the Business) or any of its affiliates or any material portion of the Business or any material 

Acquired Asset or prohibit or limit the ownership of any Acquired Coating Equipment, or to compel Purchaser or any of its affiliates to dispose of or 

hold separate any portion of the business or assets of Purchaser (excluding the Business) or any of its affiliates or any material portion of the Business or 

any material Acquired Asset or prohibit or limit the ownership of any Acquired Coating Equipment, in each case as a result of the Acquisition or any of 

the other transactions contemplated by this Agreement, (iii) seeking to impose limitations on the ability of 

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Purchaser to acquire or hold, or exercise full rights of ownership of, any material Acquired Asset or to acquire or hold any Acquired Coating Equipment 

or the ability of Purchaser to enforce any material rights (including those set forth in Section 5.14) contemplated by this Agreement or any Ancillary 

Agreement, (iv) seeking to prohibit Purchaser or any of its affiliates from effectively controlling in any material respect the Business, (v) seeking to 

require Purchaser or any of its affiliates to assume, or seeking to impose on Purchaser or any of its affiliates, any material Excluded Liability (other than 

any Labor Contract) or seeking to impose a Lien on any Acquired Assets or any other assets of Purchaser or any of its affiliates in respect of any 

material Excluded Liability (provided that the existence of any Proceeding or threatened Proceeding of the type described in this clause (v) by any 

person other than a Governmental Entity shall not constitute a failure of the condition contained in this Section 6.02(d) if it shall have been Cured as of 

the Closing) or (vi) seeking to cause Purchaser to assume a Labor Contract or any term or condition thereof if such Proceeding is based on any action or 

failure to act (whether prior to, on or after the date hereof) by a member of the Seller Group or any of its employees, representatives or agents (including 

the entering into of any Labor Contract, other than any Labor Agreement). 

(e) Title Insurance and Survey. Purchaser shall have received an ALTA Owner's Extended Coverage Title Insurance Policy with respect to each 

Owned Property listed on Schedule 6.02(e) (each an "Insured Property"), issued by an internationally recognized title insurance company, written and 

marked-up as of the Closing Date, insuring Purchaser in such amounts as Purchaser shall reasonably require and including such endorsements as are 

listed on Schedule 6.02(e) (as modified in the manner set forth on such Schedule). Such title insurance policy shall insure fee simple title, equitable title, 

easement or leasehold title (as the case may be) to each Insured Property, free and clear of all Liens and other matters other than those permitted by 

Section 3.06. Purchaser shall have received from Seller an appropriately certified ALTA/ACSM Land Title Survey, for each of the Insured Properties, 

that shall not reveal any condition not permitted by Section 3.06. 

(f) Transfer Taxes. Seller shall have prepared, executed and filed all material returns, questionnaires, applications or other documents regarding 

any Transfer Tax that is required to be filed. 

(g) Consents. Seller shall have delivered to Purchaser (i) written consents from all third parties listed on Schedule 6.02(g) (including, to the extent 

indicated on Schedule 6.02(g), consents to partial assignments of Contracts), (ii) written consents from all other parties not set forth on Schedule 3.03 as 

of the date hereof that are reasonably necessary to consummate the transactions contemplated hereby or to permit Purchaser to continue to conduct the 

Business (other than operation of the Brainerd Facility) substantially as it is being conducted on the date hereof and (iii) estoppel certificates from the 

landlords under the leases for the Distribution Center Facilities in substantially the form attached hereto as Exhibit J; provided, however, that the failure 

of Seller to deliver a consent shall not constitute a failure of the condition contained in this Section 6.02(g) if Seller is not in material breach of its 

obligations under Section 5.05(d) and such failure is Cured as of the Closing. This Agreement and the Acquisition shall have been approved by the 

South African Reserve Bank. The STB shall not have (i) imposed any conditions or requirements or denied any portion of the notice filed with it in 

connection with the Acquisition or (ii) imposed any labor protective conditions for the benefit of employees of the Railroad that have had or could 

reasonably be expected to have a Seller Material Adverse Effect.

(h) Other Documents. Seller shall have furnished to Purchaser such other customary documents relating to Seller's corporate existence and 

authority (including copies of resolutions of the board of directors of Seller), absence of Liens other than Permitted Liens, and such other matters as 

Purchaser or its counsel may reasonably request. 

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(i) Affiliate Contracts. The Affiliate Contracts listed on Schedule 3.22 will be in full force and effect with Purchaser substituted for Seller as a 

party thereto. 

(j) Ancillary Agreements. All the Ancillary Agreements listed on Schedule 6.02(j) (excluding (x) the Coated Paper Products Supply Agreement 

unless Purchaser has delivered the notice contemplated by Section 5.29 and (y) the Escrow Agreement and the Operating and Maintenance Agreement 

unless Purchaser has delivered the Hydroelectric Facility Notice and such notice has not been rescinded or deemed rescinded) shall have been executed 

and delivered by all parties thereto (other than Purchaser and its affiliates) in the form contemplated by this Agreement and shall be in full force and 

effect. No state of facts, change, development, effect, condition or occurrence that has, or could reasonably be expected to have, an adverse effect on the 

ability of any party to any Ancillary Agreement (other than Purchaser) to perform in all material respects its respective obligations thereunder shall have 

occurred or shall exist. 

(k) Permits. Purchaser shall have obtained or be reasonably satisfied with its ability to obtain promptly following the Closing all Permits 

reasonably necessary for it to conduct the Business (other than operation of the Brainerd Facility) substantially as conducted by Seller at the date hereof. 

(l) Tax Certificates. Seller shall deliver to Purchaser at the Closing a certificate in form and substance satisfactory to Purchaser, duly executed 

and acknowledged, certifying all facts necessary to exempt the transactions contemplated hereby from withholding pursuant to the provisions of the 

Foreign Investment in Real Property Tax Act. 

(m) Cross-Border Leases. Each Cross-Border Lease shall have been transferred to Purchaser or terminated in each case as set forth in 

Section 5.24. In the case of transfer, (i) Seller and each other member of the Seller Group shall have provided all notices required under each Cross- 

Border Lease Assumption for the transfer to become effective, and Purchaser shall have received written confirmation, in form and substance 

reasonably satisfactory to Purchaser, from each other party to each Cross-Border Lease Assumption confirming the effectiveness of such transfer and 

(ii) Purchaser shall have an ownership interest in all machinery, equipment and other property and assets subject to such Cross-Border Lease together 

with a first priority perfected security interest in all of the lessor's interest in such machinery, equipment and other property and assets, and such 

machinery, equipment and other property and assets shall be free of any Liens other than such Cross-Border Lease and such Liens in favor of Purchaser 

or its affiliates. In the case of termination, full ownership of all machinery, equipment and other property and assets previously subject to each 

terminated Cross-Border Lease shall have been transferred at closing by Seller to Purchaser in fee simple as an Acquired Asset free from any Liens 

other than Permitted Liens and otherwise pursuant to the terms of this Agreement. 

(n) IRB Financings. Each IRB Financing, other than the Continuing IRB Financing except to the extent required by Section 5.23, shall have been 

repaid, redeemed or fully defeased, in each case as set forth in Section 5.23, and full ownership of all machinery, equipment and other property and 

assets previously subject to any IRB Financing shall have been transferred at Closing by Seller to Purchaser in fee simple as an Acquired Asset free 

from any Liens other than Permitted Liens and otherwise pursuant to the terms of this Agreement (except to the extent permitted otherwise pursuant to 

Section 5.23 with respect to the Sale/Leaseback IRB Financing, provided that Seller has complied with its obligations under Section 5.23). 

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(o) Seller Material Adverse Effect. There shall not have occurred any Seller Material Adverse Effect during the period from the date hereof to 

Closing, other than any Seller Material Adverse Effect due to changes after the date hereof proximately caused by (i) United States or global economic 

conditions or financial markets in general and not affecting the Business disproportionally to others in the paper industry in similar lines of business, 

(ii) conditions affecting the paper industry generally and not affecting the Business disproportionally to others in the paper industry in similar lines of 

business or (iii) the effect of the announcement of the transactions contemplated hereby on customer relationships of the Business but only if the effect 

on the customer relationship is caused by an action or failure to act of Purchaser; provided, however, that the occurrence of any Seller Material Adverse 

Effect shall not constitute a failure of the condition contained in this Section 6.02(o) if such Seller Material Adverse Effect has been Cured as of the 

Closing. 

(p) Force Majeure Events Affecting Financing. There shall not have occurred, after the date hereof, any Force Majeure Event (as defined below) 

having a direct or indirect continuing effect, that (i) does not relate primarily to Purchaser or any of its affiliates or Seller or any of its affiliates or the 

Business or the paper industry generally or the economy generally and (ii) does not result directly or indirectly from any action or failure to act by 

Purchaser or any of its affiliates and (iii) individually, or when aggregated with other Force Majeure Events occurring after the date hereof and having a 

direct or indirect continuing effect, is of such major significance that Purchaser and its affiliates, for reasons other than (a) the Creditworthiness of 

Purchaser or any of its affiliates (other than to the extent affected directly or indirectly by such Force Majeure Events) or the Business or (b) the ability 

of Purchaser or any of its affiliates to satisfy any term or condition under its credit facilities related to Purchaser or any of its affiliates or their 

Creditworthiness (other than to the extent affected directly or indirectly by such Force Majeure Events) or the Business or its Creditworthiness, or 

(c) the lack of availability under, any of its credit facilities (other than to the extent affected directly or indirectly by such Force Majeure Events), are 

unable to borrow on the Closing Date funds sufficient to permit it to consummate the Acquisition, and (iv) has had, or could reasonably be expected to 

have, a similar impact on other similarly situated borrowers (and such impact is not limited to or primarily of relevance to paper industry participants or 

coated paper industry participants or the Business); provided, however, that the condition set forth in this clause (p) shall be deemed satisfied if 

Purchaser, at Closing (x) has, or has received pursuant to the Financing, funds sufficient to permit it to consummate the Acquisition or (y) is in material 

breach of Section 5.27. 

As used herein, the term "Force Majeure Event" shall mean any major event (or the acceleration, escalation or worsening of any major event 

existing on the date hereof) beyond the reasonable control of Purchaser or any of its affiliates (other than cyclicality or seasonality in the paper industry

generally, the coated paper industry generally or the economy generally), of the type which is any of the following: any order, decree, law, regulation or 

other action of any nature whatsoever of any court or Government Authority; war (whether or not declared) or hostilities, national emergency, terrorist 

action or any other national or international calamity or crisis; explosion; act of God; civil commotion; earthquake; flood; failure or disruption of service 

involving public utilities, communication facilities, funds transfer systems or commercial transport; unavailability of, or material reduction in the supply 

of, essential raw materials or intermediates; or any other similar or otherwise extraordinary event. As used herein, the term "Creditworthiness" shall 

mean, with respect to the Business or any person, the creditworthiness, the financial condition or the availability, quality or amount of collateral of the 

Business or such person, as the case may be. 

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(q) Acquired Coating Equipment. In addition to transferring to Purchaser or its designees good and marketable title to the Acquired Assets, free 

and clear of all Liens other than Permitted Liens, Seller shall have transferred to Purchaser good and marketable title to the Acquired Coating 

Equipment, free and clear of all Liens other than Permitted Liens. 

(r) Energy Regulation. Purchaser shall be reasonably satisfied that Seller shall have taken all necessary action to ensure that by acquiring the 

Hydroelectric Facility and the Steam Turbine Facilities and assuming under this Agreement the Project Agreements or any rights and obligations under 

Power Agreements or any Revised Power Agreements, and performing under the Hydroelectric Facility Contracts and the Steam Turbine Contracts, 

Purchaser shall not become subject to regulation by the FERC under Part II of the FPA, except as provided in 18 C.F.R. Part 292, Subpart F of the 

FERC regulation, or subject to regulation by the SEC as an "electric utility company", "holding company" or "subsidiary company" under PUHCA, 15 

U.S.C. § 79 et seq. 

SECTION 6.03. Conditions to Obligation of Seller. The obligation of Seller to sell, assign, convey, and deliver the Acquired Assets is subject to the 

satisfaction (or waiver by Seller) on or prior to the Closing Date of the following conditions: 

(a) Representations and Warranties. The representations and warranties of Purchaser made in this Agreement and the Ancillary Agreement that 

are qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, as of the date hereof 

and as of the Closing Date as though made on the Closing Date, except to the extent such representations and warranties expressly relate to an earlier 

date (in which case such representations and warranties qualified as to materiality shall be true and correct, and those not so qualified shall be true and 

correct in all material respects, on and as of such earlier date). Seller shall have received a certificate signed by an authorized officer of Purchaser to 

such effect. 

(b) Performance of Obligations of Purchaser. Purchaser shall have performed or complied in all material respects with all obligations and 

covenants required by this Agreement to be performed or complied with by Purchaser by the time of the Closing, and Seller shall have received a 

certificate signed by an authorized officer of Purchaser to such effect. 

(c) Transfer Taxes. Purchaser shall have prepared, executed and filed all material returns, questionnaires, applications or other documents 

regarding any Transfer Tax that is required to be filed by Purchaser prior to Closing. 

(d) Opinion of Purchaser's Counsel. Seller shall have received an opinion dated the Closing Date of Cravath, Swaine & Moore, counsel to 

Purchaser, substantially in the form of Exhibit K. 

(e) Absence of Proceedings. There shall not be pending or threatened by any Governmental Authority, any Proceeding (or by any other person any 

Proceeding that has a reasonable likelihood of success) challenging or seeking to restrain or prohibit the Acquisition or any other transaction 

contemplated by this Agreement or the Ancillary Agreements or seeking to obtain from Seller or any of its subsidiaries in connection with the 

Acquisition any damages that are material in relation to Seller and its subsidiaries taken as whole. 

(f) Other Documents. Purchaser shall have furnished to Seller such other customary documents relating to Purchaser's corporate existence and 

authority (including copies of resolutions of Purchaser's board of directors) and such other matters as Seller or its counsel may reasonably request. 

(g) Affiliate Contracts. The Affiliate Contracts listed on Schedule 3.22 will be in full force and effect with Purchaser substituted for Seller as a 

party thereto. 

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(h) Ancillary Agreements. All the Ancillary Agreements listed on Schedule 6.02(j) (excluding (x) the Coated Paper Products Supply Agreement 

unless Purchaser has delivered the notice contemplated by Section 5.29 and (y) the Escrow Agreement and the Operating and Maintenance Agreement 

unless Purchaser has delivered the Hydroelectric Facility Notice and such notice has not been rescinded or deemed rescinded) shall have been executed 

and delivered by Purchaser in the form contemplated by this Agreement and shall be in full force and effect. 

SECTION 6.04. Failure of Closing Conditions. Neither Purchaser nor Seller may rely on the failure of any condition set forth in this Article VI to be 

satisfied if such failure was caused by such party's failure to act in good faith or to use its reasonable efforts to cause the Closing to occur, as required by 

Section 5.05. If Purchaser has delivered a Hydroelectric Facility Notice and such notice has not been rescinded or deemed rescinded, neither Purchaser nor 

Seller may rely (for purposes of the Closing) on the failure of any condition set forth in this Article VI to be satisfied if the sole cause of such failure was the 

failure to obtain the Final Order prior to Closing. 

SECTION 6.05. Ability to Cure. (a) A failure of a representation or warranty of Seller to be true and correct, any non-performance or non-compliance 

by Seller with an undertaking or agreement, the existence of a pending or threatened Proceeding, any failure by Seller to deliver a consent or the occurrence of 

a Seller Material Adverse Effect (each, a "Violation") shall be deemed "Cured" to the extent permitted by and for purposes of Section 6.02 only if Seller shall 

have, in consultation with Purchaser, subject to paragraph (b) below, paid in full all such amounts and taken all such other actions as are necessary to ensure 

(or, if all Violations (in the aggregate) have had or could reasonably be expected to have a Seller Material Adverse Effect, to ensure to the reasonable 

satisfaction of Purchaser) that after giving effect to such Cure (i) Purchaser Indemnified Parties have not suffered and will not suffer any direct or indirect

Losses (including such as are or may be suffered indirectly as a current or future adverse effect on the business, assets, financial condition, or results of 

operation of the Business) or be in violation of or non-compliance with any Applicable Law by reason of such Violation (or such action by Seller to cure such 

Violation) or, in the case of a Violation of a representation or warranty, the facts and circumstances giving rise to such Violation, (ii) such Violation has not 

and will not result in any of the prohibitions, limitations or other requirements or consequences of the type described in Section 6.02(d) (whether or not 

relating to any Proceeding), and (iii) such Violation (or such action by Seller to cure such Violation), alone or together with all other Violations, has not 

impaired and will not impair (and, in the case of a Violation of a representation or warranty, the facts and circumstances giving rise to such Violation do not 

represent, as compared to the facts and circumstances disclosed pursuant to such representation or warranty on the date hereof, an impairment of) (A) the 

ability of Seller to perform its obligations under this Agreement or the Ancillary Agreements, (B) the ability of Purchaser to conduct the Business (other than 

the operation of the Brainerd Facility) substantially as conducted by Seller on the date of the Balance Sheet and the Closing Date (including Purchaser's ability 

to (x) continue uninterrupted and timely customer supply of products of the Business of the same quality as previously supplied and (y) transition production 

at the Brainerd Facility to other facilities), (C) the ability of Purchaser to continue to operate and use any material Acquired Asset, (D) the ability of Purchaser 

to establish in its sole discretion the terms and conditions of employment of the Continued Employees or (E) any material customer relationship of the 

Business. 

(b) For purposes of determining whether a Violation has been Cured, if on the Closing Date there are any Violations (or the facts and circumstances 

giving rise to such Violations) that have resulted or could reasonably be expected to result in Losses to any Purchaser Indemnified Parties, then to the extent 

such Violations can be completely Cured by a monetary payment, such Violations shall be deemed Cured if (and only if): 

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(i) where the maximum possible aggregate amount of such Losses arising from all such Violations is less than $10,000,000, Seller either (A) pays 

to Purchaser at Closing the full amount of all such possible Losses through an adjustment to the Purchase Price or (B) fully indemnifies Purchaser 

Indemnified Parties for all such Losses pursuant to Section 8.01(a)(xiii); and 

(ii) where the maximum possible aggregate amount of such Losses arising from all such Violations is equal to or greater than $10,000,000, Seller 

either (A) pays to Purchaser at Closing the full amount of all such possible Losses through an adjustment to the Purchase Price or (B) otherwise fully 

protects the Purchaser Indemnified Parties from all such Losses pursuant to arrangements reasonably satisfactory to Purchaser. 

(c) For purposes of determining whether a Violation has been Cured, Purchaser's rights under Section 1.04(b) to obtain economic claims, rights and 

benefits and under Article VIII or otherwise to seek remedies against Seller or any other person shall not be taken into account. It is understood and agreed 

that, in the case of a Violation of a representation or warranty, providing information that corrects or supplements the representation or warranty to which 

such Violation relates shall not constitute a Cure of such Violation. The Cure of any Violation (including Purchaser's explicit or implicit satisfaction with any 

such Cure) shall not be deemed to limit (i) any right of Purchaser hereunder (including its rights under Article VIII if Losses are sustained) or otherwise 

(subject to the provisions hereof) other than Purchaser's rights under Section 6.02 or (ii) the obligations of Seller hereunder. To the extent any Cure involves 

any payment or indemnification (including, without limitation, pursuant to Section 6.05(b)), such payment or indemnification shall not be subject to, or 

applied in determining the applicability of, any limitation set forth in Article VIII (including, without limitation, Section 8.01(b)). To the extent reasonably 

requested by Seller, Purchaser will consult with Seller in any efforts by Seller to Cure a Violation; provided, however, that any such consultation shall not be 

deemed to limit the requirements of this Section 6.05 with respect to whether a Violation is Cured (or Purchaser's right to strictly enforce such requirements) 

or be deemed to impose any obligations on Purchaser. 

(d) If a Violation exists with respect to a condition set forth in Section 6.02(a), (b), clause (v) of (d), (g) or (o) that, individually or in aggregate with 

other Violations, would result in such condition not being satisfied, Seller shall give written notice of all such Violations to Purchaser as promptly as 

practicable and, in any event, at least five business days prior to the Closing Date (which notice shall describe in reasonable detail the Violation as well as any 

intended Cure) and shall have the right to delay the Closing by a reasonable period (but, in any event, not later than the Termination Date) if such Violation 

can reasonably be expected to be Cured during such period. 

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(e) Except with the consent of Purchaser, a Violation constituting a failure to obtain a Consent reasonably necessary to consummate the transactions 

contemplated hereby or to permit Purchaser to continue to conduct the Business (other than operation of the Brainerd Facility) substantially as conducted on 

the date of the Balance Sheet or as currently conducted or a breach of a representation or warranty with respect to title to Acquired Assets reasonably 

necessary to consummate the transactions contemplated hereby or to permit Purchasers to continue to conduct the Business (other than operation of the 

Brainerd Facility) as conducted on the date of the Balance Sheet or as currently conducted or to Acquired Coating Equipment shall not be deemed Cured by 

any means other than obtaining such Consent or causing such representation or warranty to be correct (i) in the case of a Consent, if Seller is in material 

breach of its obligation hereunder to obtain such Consent or (ii) at any time prior to the 30th day prior to the Termination Date (after which time Seller, shall, 

subject to clause (i), have the right to Cure such Violation to the extent permitted by this Section 6.05). 

SECTION 6.06. Catastrophic Events. If there occurs after the date hereof, a catastrophic event resulting in material damage or destruction to the 

physical Acquired Assets (a "Catastrophic Event") that (i) cannot reasonably be cured through repair, replacement or restoration prior to the Termination 

Date, (ii) would have a material adverse effect on the Business and (iii) does not arise from Seller's intentional or grossly negligent breach of any obligation 

hereunder, and promptly following such Catastrophic Event Seller provides Purchaser with written notice of such Catastrophic Event (including a reasonably 

detailed description of the extent of such damage or destruction) acknowledging that Purchaser has an immediate and continuing right to terminate this 

Agreement, then Purchaser shall have until the date (in no event later than 90 days after the date of such notice) that is the later of the next scheduled Closing 

Date (or, if no Closing Date has been scheduled, the Anticipated Closing Date) and 30 days after such notice to decide if it wishes to terminate this 

Agreement. If Purchaser decides to terminate this Agreement on the basis of such damage or destruction, neither party shall have any liability arising from 

such Catastrophic Event or any breach of this Agreement resulting from such Catastrophic Event or Purchaser's election to terminate this Agreement. If 

Purchaser determines not to exercise such termination right and the Closing occurs, Purchaser's right to be indemnified under Article VIII for Losses in 

respect of breaches resulting from such Catastrophic Event, shall be limited to the amount recoverable under Seller's Business Insurance Policies relating 

thereto.

ARTICLE VII 

Termination, Amendment and Waiver 

SECTION 7.01. Termination. (a) Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated and the Acquisition 

and the other transactions contemplated by this Agreement abandoned at any time prior to the Closing: 

(i) by mutual written consent of Seller and Purchaser; 

(ii) by Seller if any of the conditions set forth in Section 6.01 or 6.03 shall have become incapable of fulfillment on or prior to the Termination 

Date (as defined below) and shall not have been waived by Seller, unless the failure of such condition is the result of a material breach of this 

Agreement by Seller; 

(iii) by Purchaser if any of the conditions set forth in Section 6.01 or 6.02 shall have become incapable of fulfillment on or prior to the 

Termination Date and shall not have been waived by Purchaser, unless the failure of such condition is the result of a material breach of this Agreement 

by Purchaser; and 

(iv) by Seller or Purchaser, if the Closing does not occur on or prior to September 20, 2002 (the "Termination Date"), for any reason other than a 

breach of this Agreement by the terminating party, including failure to fulfill any of the closing conditions. 

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(b) In the event of termination by Seller or Purchaser pursuant to this Section 7.01, written notice thereof shall forthwith be given to the other and the 

transactions contemplated by this Agreement shall be terminated, without further action by any party. If the transactions contemplated by this Agreement are 

terminated as provided herein, Purchaser shall return all documents and other material received from Seller relating to the transactions contemplated hereby, 

whether so obtained before or after the execution hereof, to Seller. 

SECTION 7.02. Effect of Termination. If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in 

Section 7.01, this Agreement shall become null and void and of no further force and effect, except for the provisions of (i) Section 5.04 relating to the 

obligation of Purchaser and Seller to keep confidential certain information and data obtained by it from the other party, (ii) Section 5.06 relating to certain 

expenses, (iii) Section 5.07 relating to finder's fees and broker's fees, (iv) Section 7.01 and this Section 7.02 and (v) Section 5.12 relating to publicity, which 

shall survive such termination. Subject to Section 9.14, nothing in this Section 7.02 shall be deemed to release any party from any liability for any breach by 

such party of the terms and provisions of this Agreement or to impair the right of any party to compel specific performance by any other party of its 

obligations under this Agreement. 

SECTION 7.03. Amendments and Waivers. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the 

parties hereto. By an instrument in writing Purchaser, on the one hand, or Seller, on the other hand, may waive compliance by the other party with any term or 

provision of this Agreement that such other party was or is obligated to comply with or perform. 

ARTICLE VIII 

Indemnification 

SECTION 8.01. Indemnification by Seller. (a) Seller shall indemnify Purchaser and its affiliates and each of their respective officers, directors, 

employees, stockholders, agents and representatives ("Purchaser Indemnified Parties") against, and hold them harmless from, any loss, liability, claim, 

diminution in value, damage or expense (including reasonable legal fees and expenses and including reasonable expenses incurred by an indemnified party by 

reason of the enforcement and protection of its rights under this Agreement) ("Losses"), arising from, in connection with or otherwise with respect to: 

(i) any breach of any representation or warranty of Seller contained in this Agreement, in any Ancillary Agreement or in any document delivered 

in connection herewith (it being agreed and acknowledged by the parties that for purposes of Purchaser's right to indemnification pursuant to this 

Section 8.01 the representations and warranties of Seller (other than the representations and warranties contained in Sections 3.03, 3.05(a) (including to 

the extent referred to in Section 3.06(a)), the last sentence of 3.06(a), 3.06(d), the first sentence of 3.07(a), 3.08(a), 3.16(e), 3.19, 3.23, 3.24, 3.25 and 

3.31) shall be deemed not qualified by any references therein to materiality generally or to whether or not any breach results or may result in a Seller 

Material Adverse Effect); 

(ii) any breach of any covenant of Seller contained in this Agreement or in any Ancillary Agreement; 

(iii) any Excluded Liability (including any Pre-Closing Environmental Liability and Unknown Pre-Closing On-Site Environmental Liability, 

except to the extent provided in Section 8.01(c) with respect to Minor Pre-Closing On-Site Environmental Liabilities), regardless of whether there has 

been any disclosure to Purchaser or a breach of any related representation or warranty; 

(iv) fraudulent transfer laws or the failure to comply with statutory provisions relating to bulk sales and transfers; 

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(v) any fees, expenses or other payments incurred or owed by Seller to any brokers, financial advisors or other comparable persons retained or 

employed by it in connection with the transactions contemplated by this Agreement or by any Ancillary Agreement; 

(vi) claims by officers and directors of any member of the Seller Group in connection with their service as officers and directors and their 

resignation or removal from office in connection with the Acquisition;

(vii) the grant, issuance, cancelation, termination or settlement of any stock appreciation rights, stock options, restricted stock, performance shares 

or units or other incentive compensation involving capital stock of Seller or any of its affiliates or the performance or value of Seller or any of its 

affiliates or their capital stock granted to employees of any member of the Seller Group; 

(viii) any Cross-Border Lease or the assignment, novation, termination or continuation of any Cross-Border Lease (including in respect of any 

obligation, including any payment obligation (including any termination payment or indemnification payment) under, or any breach by any party of its 

obligations under, any Cross-Border Lease) except to the extent specifically provided otherwise in a Cross-Border Lease Assumption with respect to 

such Cross-Border Lease; 

(ix) the termination, redemption, repayment or defeasance by Seller of any tax-exempt bond financing arrangement; 

(x) any shutdown or discontinuance of operations by Seller involving the Brainerd Facility; 

(xi) any employee protective conditions, whether imposed by the STB or predicated on the Railway Labor Act or the Labor Agreements; 

(xii) any IRB Financing (whether due to any action or failure to act by Purchaser, Seller or any other person or otherwise); 

(xiii) subject to Section 8.03(b), any Violation that is Cured, or deemed to be Cured, pursuant to Section 6.05; 

(xiv) the absence of a documented right of access to the Scanlon Woodyard assuring a perpetual right to use the access roads used on the date 

hereof between the Scanlon Woodyard and State Highway 45; 

(xv) uncertainty of the locations of boundaries and right-of-way lines with respect to the Railroad Parcels; 

(xvi) the matters described in the letter dated March 13, 2002, from Seller to FERC, included on Schedule 3.13; or 

(xvii) any failure by Seller to transfer to Purchaser title to any Acquired Asset related to the Sale/Leaseback IRB Financing within 30 days 

following the Closing Date in accordance with Section 5.23 or any inability of Purchaser to use or operate any such Acquired Asset prior to such 

transfer substantially as used and operated by Seller on the date hereof. 

(b) Seller shall not have any liability: 

(i) under clause (i) of Section 8.01(a) (or under clause (ii) of Section 8.01(a) in respect of any breach of the covenant contained in 

Section 5.01(b), 5.01(c)(vii)(A), or Section 5.10) unless the aggregate of all Losses for which it would, but for this clause (i), be liable exceeds on a 

cumulative basis an amount equal to $5,000,000, and then only to the extent of such excess; 

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(ii) under clause (i) of Section 8.01(a) (or under clause (ii) of Section 8.01(a) in respect of any breach of the covenant contained in Section 5.01(b), 

5.01(c)(vii)(A), or Section 5.10) for any individual items where the Loss relating thereto is less than $20,000 on an individual basis (or as part of a group 

of related claims, or claims that, although unrelated, originate from a common set of facts), unless the aggregate of all such Losses exceeds on a 

cumulative basis $1,000,000, and then only to the extent of such excess; 

(iii) under clause (i) of Section 8.01(a) (or under clause (ii) of Section 8.01(a) in respect of any breach of the covenant contained in 

Section 5.01(b), 5.01(c)(vii)(A), or Section 5.10) in excess of $150,000,000; or 

(iv) under Section 8.01(a)(iii) for any Losses arising out of any required assumption or any imposition of a Labor Contract or any term or 

condition thereof on Purchaser unless such assumption or imposition was caused by any action or failure to act (whether prior to, on or after the date 

hereof) by any member of the Seller Group or any of its employees, representatives or agents (including the entering into of any Labor Contract, other 

than the Labor Agreements); 

provided that (x) the foregoing limitations shall not be applicable to indemnity claims relating to representations or warranties relating to title to the Acquired 

Assets in Sections 3.05, 3.06, 3.07, 3.10 or 3.29 or in any Ancillary Agreement or any other transfer document delivered in connection herewith or relating to 

breaches under Section 3.16 (or Section 5.10, to the extent relating to Section 3.16) or Section 9(a) of the Wood Supply Agreement or Section 8(a) of the 

Paper Supply Agreement or Clause 9.1(i) of the Cross-Border Indemnity Agreement and (y) the limitation in clause (iii) shall not be applicable to indemnity 

claims relating to breaches under Section 3.15 or 3.20(b) (or Section 5.10 to the extent relating to Section 3.15 or 3.20(b); provided, further, that, anything 

herein to the contrary notwithstanding, Seller shall have no liability under Section 8.01(a)(i) or (a)(ii) for any breach of an Ancillary Agreement to the extent 

such Ancillary Agreement expressly limits Seller's liability for such breach (and then only to the extent of such limitation). 

(c) Without limiting any liability of Seller under clause (i) of Section 8.01(a), Seller shall not have any liability under clause (iii) of Section 8.01(a) for 

an Unknown Pre-Closing On-Site Environmental Liability if the aggregate of all Losses relating to such Unknown Pre-Closing On-Site Environmental 

Liability is less than $50,000 on an individual basis (or as part of a group of related claims or claims that, although unrelated, originate from a common set of 

facts) (a "Minor Pre-Closing On-Site Liability") unless the aggregate for all such Losses relating to all such Minor Pre-Closing On-Site Liabilities exceeds on 

a cumulative basis $250,000 and then Seller shall have liability for all Losses (other than such initial $250,000) relating to Unknown Pre-Closing On-Site 

Liabilities. The term "Unknown Pre-Closing On-Site Environmental Liabilities" shall mean any cost or expense of investigation or cleanup of the Premises 

after the Closing Date as a result of any loss, claim, demand, requirement, lawsuit, responsibility, liability, obligation or commitment arising out of 

Environmental Laws (other than with respect to any of the matters disclosed on Schedule 1.03(b)(xxi), Schedule 3.13 or Schedule 3.20(b) and related to any 

condition of the Premises existing on or prior to the Closing Date which condition at any time requires investigation or cleanup, but only if such loss, claim, 

demand, requirement, lawsuit, responsibility, liability, obligation or commitment relates solely to investigation or cleanup of the Premises. In the event Seller 

would be required under any Environmental Law to undertake investigation or cleanup of the Premises in respect of a Minor Pre-Closing On-Site Liability for 

which Seller would not, pursuant to this Section 8.01(c), have liability, Purchaser shall, to the extent requested in writing by Seller, undertake such 

investigation or cleanup (at its own cost and expense provided that the aggregate Losses relating to such Minor Pre-Closing On-Site Liability do not exceed 

$50,000 and subject to such $250,000 limit). For the avoidance of doubt, the aggregate Losses excluded from clause (iii) of Section 8.01(a) shall not exceed 

$250,000 and no Losses shall be excluded from clause (iii) of Section 8.01(a) in respect of any Unknown Pre-Closing On-Site Liability if the aggregate of all 

Losses related thereto exceed $50,000. 

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(d) Except as otherwise specifically provided in this Agreement, in any Ancillary Agreement or in any Additional Seller Document, Purchaser 

acknowledges that its sole and exclusive monetary remedy after the Closing with respect to any and all claims relating to this Agreement and the Ancillary 

Agreements, the Acquisition and the other transactions contemplated hereby and thereby, the Business and its assets and liabilities (other than claims of, or 

causes of action arising from, fraud or intentional breach) shall be pursuant to the indemnification provisions set forth in this Article VIII or in any Ancillary 

Agreement. In furtherance of the foregoing, Purchaser hereby waives, from and after the Closing, any and all rights, claims and causes of action (other than 

claims of, or causes of action arising from, fraud or intentional breach) for damages it may have against Seller arising under or based upon this Agreement, 

any Ancillary Agreement, any Additional Seller Document, any Applicable Law (including any relating to environmental matters) or otherwise (except 

pursuant to the indemnification provisions set forth in this Section 8.01 or in any Ancillary Agreement). 

(e) The right to indemnification under this Section 8.01 shall not be affected by any investigation (including any environmental investigation or 

assessment) conducted with respect to, or any knowledge acquired (or capable of being acquired) by Purchaser at any time, whether before or after the 

execution and delivery of the Agreement or the Closing Date with respect to the accuracy or inaccuracy of or compliance with any representation, warranty, 

covenant or obligation. 

SECTION 8.02. Indemnification by Purchaser. (a) Purchaser shall indemnify Seller, its affiliates and each of their respective officers, directors, 

employees, stockholders, agents and representatives against, and agrees to hold them harmless from, any Loss, for or on account of or arising from or in 

connection with or otherwise with respect to: 

(i) any breach of any representation or warranty of Purchaser contained in this Agreement, in any Ancillary Agreement or in any document 

delivered in connection herewith (it being agreed and acknowledged by the parties that for purposes of Seller's right to indemnification pursuant to this 

Section 8.02 the representations and warranties of Purchaser shall be deemed not qualified by any references therein to materiality generally or to 

whether or not any breach results or may result in a Purchaser Material Adverse Effect); 

(ii) any breach of any covenant of Purchaser contained in this Agreement or in any Ancillary Agreement; 

(iii) any failure by Purchaser to pay or otherwise discharge when due and payable any Assumed Liability; 

(iv) any fees, expenses or other payments incurred or owed by Purchaser to any brokers, financial advisors or other comparable persons retained or 

employed by it in connection with the transactions contemplated by this Agreement or by any Ancillary Agreement; 

(v) Purchaser's selection of Non-Continuing Employees but only to the extent related to such selection being in violation of, or being alleged to be 

in violation of, Applicable Law and such Loss is not a direct result of any act by any member of the Seller Group or any of its employees, 

representatives or agents; and 

(vi) liability under the WARN Act with respect to Affected Employees (excluding Brainerd Participants) whose "employment loss" (as defined 

under the WARN Act) (y) occurs on or within 90 days prior to the Closing Date and (z) is deemed to be part of a "plant closing" or "mass layoff" (as 

those terms are defined under the WARN Act). 

(b) Purchaser shall not have any liability: 

(i) under clause (i) of Section 8.02(a) unless the aggregate of all Losses for which it would, but for this clause (i), be liable exceeds on a 

cumulative basis an amount equal to $5,000,000, and then only to the extent of such excess; 

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(ii) under clause (i) of Section 8.02(a) for any individual items where the Loss relating thereto is less than $20,000 on an individual basis (or as 

part of a group of related claims, or claims that, although unrelated, originate from a common set of facts), unless the aggregate of all such Losses 

exceeds on a cumulative basis of $1,000,000, and then only to the extent of such excess; 

(iii) under clause (i) of Section 8.02(a) in excess of $150,000,000; 

(iv) under clause (v) of Section 8.02(a) for (x) any amounts or other benefits Seller or any member of the Seller Group agrees to pay or provide 

pursuant to effects bargaining or otherwise or (y) any Losses resulting from any failure by Seller or any member of the Seller Group to comply with 

Applicable Law or the terms of any Contract or any breach of this Agreement by Seller; 

(v) under clause (vi) of Section 8.02 (a), (x) unless Seller has complied fully with its obligation to notify Purchaser of employment losses pursuant 

to Section 5.22 and its covenant under Section 5.01(a)(iii), but only to the extent liability under or as a result of the WARN Act is greater than it would 

have been had (I) Seller complied fully with such obligations and covenant and (II) the actual number of "employment losses" had been limited to those 

notified to Purchaser and made in compliance with Section 5.01(a)(iii) and 5.22, (y) if the number of individuals who become Affected Employees 

(excluding Brainerd Participants) prior to the Closing Date is sufficient, without aggregation with the number of individuals who become Affected 

Employees on the Closing Date or Continued Employees who suffer employment losses after the Closing Date, to constitute a "plant closing" or "mass 

layoff" under the WARN Act, in which case Seller solely shall be responsible for complying with the WARN Act or (z) if Seller fails to promptly 

deliver to any Affected Employee or such Affected Employee's collective bargaining representative a notice of anticipated employment loss providing 

as much advance notice to such Affected Employee as practical upon the request of Purchaser; or 

(vi) under clause (i) or (ii) of Section 8.02(a) for any breach of an Ancillary Agreement to the extent such Ancillary Agreement expressly limits 

Purchaser's liability for such breach (and then only to the extent of such limitation). 

(c) Except as otherwise specifically provided in this Agreement, in any Ancillary Agreement or in any Additional Purchaser Document, Seller 

acknowledges that its sole and exclusive monetary remedy after the Closing with respect to any and all claims relating to this Agreement and the Ancillary 

Agreements, the Acquisition and the other transactions contemplated hereby and thereby, the Business and its assets and liabilities (other than claims of, or 

causes of action arising from, fraud or intentional breach) shall be pursuant to the indemnification provisions set forth in this Article VIII or in any Ancillary 

Agreement. In furtherance of the foregoing, Seller hereby waives, from and after the Closing, any and all rights, claims and causes of action (other than claims 

of, or causes of action arising from, fraud or intentional breach) for damages it may have against Purchaser arising under or based upon this Agreement, any

Ancillary Agreement, any Additional Purchaser Document, any Applicable Law (including any relating to environmental matters) or otherwise (except 

pursuant to the indemnification provisions set forth in this Section 8.02 or in any Ancillary Agreement). 

(d) The right to indemnification under this Section 8.02 shall not be affected by any investigation (including any environmental investigation or 

assessment) conducted with respect to, or any knowledge acquired (or capable of being acquired) by Seller at any time, whether before or after the execution 

and delivery of the Agreement or the Closing Date with respect to the accuracy or inaccuracy of or compliance with any representation, warranty, covenant or 

obligation. 

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SECTION 8.03. Calculation of Losses. (a) The amount of any Loss for which indemnification is provided under this Article VIII shall be 

(i) increased to take account of any net Tax cost incurred by the indemnified party arising from the receipt of indemnity payments hereunder (grossed up for 

such increase) and (ii) reduced to take account of any net Tax benefit realized by the indemnified party arising from the incurrence or payment of any such 

Loss. In computing the amount of any such Tax cost or Tax benefit, the indemnified party shall be deemed to recognize all other items of income, gain, loss 

deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any indemnified 

Loss. Any indemnification payment hereunder shall initially be made without regard to this paragraph and shall be increased or reduced to reflect any such net 

Tax cost (including gross-up) or net Tax benefit only after the indemnified party has actually realized such cost or benefit. For purposes of this Agreement, an 

indemnified party shall be deemed to have "actually realized" a net Tax cost or a net Tax benefit to the extent that, and at such time as, the amount of Taxes 

payable by such indemnified party is increased above or reduced below, as the case may be, the amount of Taxes that such indemnified party would be 

required to pay but for the receipt of the indemnity payment or the incurrence or payment of such Loss. Any offset made against any Receivable based upon 

or arising from any liability of Seller that Purchaser has not expressly agreed to assume pursuant to Section 1.03(a) shall be a Loss for which indemnification 

is provided hereunder. 

(b) Neither the provisions of Section 1.05 or 6.05 relating to adjustments of the Purchase Price nor the provisions of Article VI relating to Seller's ability 

to Cure shall be deemed to limit the rights of Purchaser under this Article VIII or, subject to the provisions hereof, otherwise to seek recovery of Losses from 

Seller; provided, however, that in calculating the amount of any Loss for which indemnification is provided under this Article VIII there shall be taken into 

account amounts received by Purchaser under such other provisions in respect of such Loss. 

SECTION 8.04. Termination of Indemnification. The obligations to indemnify and hold harmless any party, (i) pursuant to Section 8.01(a)(i), 8.01(a) 

(ii) with respect to Section 5.10, or 8.02(i), shall terminate when the applicable representation or warranty (or, in the case of a breach of Section 5.10, the 

representation or warranty to which such breach relates) terminates pursuant to Section 8.06 and (ii) pursuant to the other clauses of Sections 8.01 and 8.02 

shall not terminate; provided, however, that such obligations to indemnify and hold harmless shall not terminate with respect to any item as to which the 

person to be indemnified shall have, before the expiration of the applicable period, previously made a claim by delivering a notice of such claim pursuant to 

Section 8.05 to the party to be providing the indemnification. 

SECTION 8.05. Procedures. (a) Third Party Claims. A party entitled to any indemnification provided for under this Agreement (the "indemnified 

party") in respect of, arising out of or involving a claim made by any person against the indemnified party (a "Third Party Claim"), shall notify the 

indemnifying party in writing of the Third Party Claim, and include with such notice copies of all notices and documents (including court papers) received by 

the indemnified party relating to the Third Party Claim, promptly after receipt by such indemnified party of written notice of the Third Party Claim; provided, 

however, that failure to give such notification, or to include copies of all such notices and documents, shall not affect the indemnification provided hereunder 

except to the extent the indemnifying party shall have been actually prejudiced as a result of such failure (except that the indemnifying party shall not be liable 

for any expenses incurred by the indemnified party during the period in which the indemnified party failed to give such notice). Notwithstanding the 

foregoing, claims of the type covered by Section 8.05(e) and claims relating to the replacement or return of products manufactured on or prior to the Closing 

Date by the Business shall not be considered Third Party Claims. 

(b) Participation; Assumption. If a Third Party Claim is made against an indemnified party, the indemnifying party may participate in the defense 

thereof, but the indemnified party shall control such defense and shall be entitled to select the counsel for the defense. The indemnifying party shall be 

responsible for paying all fees and expenses incurred in connection with the defense. 

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Notwithstanding the foregoing, if the indemnifying party acknowledges in writing its obligation to indemnify the indemnified party hereunder against 

any Losses that may result from such Third Party Claim, then the indemnifying party shall at any time be entitled to assume and control the defense of such 

Third Party Claim at its expense and through counsel of its choice reasonably acceptable to the indemnified party; provided, however, that if there exists or is 

reasonably likely to exist a conflict of interest that would make it inappropriate in the reasonable judgment of the indemnified party for the same counsel to 

represent both the indemnified party and the indemnifying party, then the indemnified party shall be entitled to retain its own counsel, at the expense of the 

indemnifying party, provided that in any case the indemnifying party shall not be obligated to pay the expenses of more than one separate counsel (together 

with local counsel) for all indemnified parties, taken together. In addition, subject to Section 8.05(a) hereof, the indemnifying party shall be liable for the fees 

and expenses of counsel employed by the indemnified party for any period during which the indemnifying party has failed to assume the defense thereof. In 

case the indemnifying party assumes control of the defense of a Third Party Claim the indemnified party may still participate in such defense at its own 

expense. 

In the event the indemnifying party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the 

indemnified party shall cooperate with the indemnifying party in such defense and make available to the indemnifying party, all pertinent records, materials 

and information in the indemnified party's possession or under the indemnified party's control relating thereto as is reasonably required by the indemnifying 

party and shall make employees available on a mutually convenient basis to provide additional information and explanation of any material provided 

hereunder, with the indemnifying party being obligated to reimburse the indemnified party for out-of-pocket costs and expenses directly related thereto. 

Similarly, in the event the indemnified party is, directly or indirectly, conducting the defense against any such Third Party Claim, the indemnifying party shall 

cooperate with the indemnified party in such defense and make available to the indemnified party (at the expense of the indemnifying party) all such records, 

materials and information in the indemnifying party's possession or under the indemnifying party's control relating thereto as is reasonably required by the 

indemnified party and shall make employees available on a mutually convenient basis to provide additional information and explanation of any material

provided hereunder. The indemnifying party, if it shall have assumed the defense of a Third Party Claim, or the indemnified party, if the indemnifying party 

shall not have assumed such control, shall not settle or compromise such Third Party Claim without the indemnified party's or indemnifying party's, as the 

case may be, prior written consent (which consent shall not be unreasonably withheld or delayed). If the indemnifying party assumes the defense of a Third 

Party Claim, the indemnified party shall agree to any settlement or compromise of a Third Party Claim that the indemnifying party may recommend and that 

by its terms obligates the indemnifying party to pay the full amount of the liability in connection with such Third Party Claim, which releases the indemnified 

party completely in connection with such Third Party Claim and that would not otherwise adversely affect the indemnified party. 

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Notwithstanding the foregoing, the indemnifying party shall not be entitled to assume the defense of any Third Party Claim (and shall be liable for the 

fees and expenses of counsel incurred by the indemnified party in defending such Third Party Claim) if the Third Party Claim seeks an order, injunction or 

other equitable relief or relief for other than money damages against the indemnified party that the indemnified party reasonably determines, after conferring 

with its outside counsel, cannot be separated from any related claim for money damages. If such equitable relief or other relief portion of the Third Party 

Claim can be so separated from that for money damages, the indemnifying party shall be entitled to assume the defense of the portion relating to money 

damages. 

(c) Payments. The indemnification required by Sections 8.01 and 8.02 shall be made by periodic payments of the amount thereof during the course of 

the investigation or defense, as and when bills are received or Loss is incurred. All claims under Sections 8.01 and 8.02 other than Third Party Claims shall be 

governed by Section 8.05(d). 

(d) Other Claims. In the event any indemnified party should have a claim against any indemnifying party under Section 8.01 or 8.02 that does not 

involve a Third Party Claim being asserted against or sought to be collected from such indemnified party, the indemnified party shall deliver notice of such 

claim with reasonable promptness to the indemnifying party. Subject to Sections 8.04 and 8.06, the failure by any indemnified party so to notify the 

indemnifying party shall not relieve the indemnifying party from any liability that it may have to such indemnified party under Section 8.01 or 8.02, except to 

the extent that the indemnifying party demonstrates that it has been actually prejudiced by such failure. The indemnifying party shall notify the indemnified 

party with reasonable promptness following its receipt of such notice whether it disputes its liability to the indemnified party under Section 8.01 or 8.02, and 

the indemnifying party shall pay any undisputed amount of such liability to the indemnified party on demand or, in the case of any notice in which the amount 

of the claim (or any portion thereof) is estimated, on such later date when the amount of such claim (or such portion thereof) becomes finally determined. 

(e) Environmental Procedures. To the extent any indemnified party has a claim for Pre-Closing Environmental Liability that will require investigation or 

cleanup of contamination from Hazardous Materials or for Unknown Pre-Closing On-Site Environmental Liabilities and the indemnifying party has 

acknowledged in writing its obligation to indemnify the indemnified party hereunder, such indemnifying party shall have a reasonable right to review and 

comment upon any investigation or cleanup plan or report before it is submitted to any Governmental Entity for approval. The indemnified party shall review 

such comments in good faith and shall provide to the indemnifying party copies of all correspondence with any Governmental Entity relating to the proposed 

investigation or cleanup. Any investigation or cleanup proposed or to be performed pursuant to this paragraph shall be performed in accordance with the 

requirements of the applicable Governmental Entity and, provided that the indemnifying party has acknowledged in writing its obligation to the indemnified 

party, the indemnified party shall not agree to any order or implement any cleanup plan without the prior written consent of the indemnifying party, which 

consent shall not be unreasonably withheld, conditioned or delayed. The indemnifying party's obligation hereunder with respect to any particular claim shall 

terminate upon the earlier of (i) the receipt of a notice from the applicable Governmental Entity that the remedial activities are complete and that no further 

action is required or (iii) receipt of sampling results reasonably acceptable to the indemnified party indicating that the Hazardous Materials being addressed 

are below applicable regulatory cleanup levels. 

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SECTION 8.06. Survival of Representations. The representations and warranties contained in this Agreement and in any document delivered in 

connection herewith shall survive the Closing solely for purposes of Article VIII and shall terminate at the close of business on the second anniversary of the 

Closing Date, except for (i) the representations and warranties contained in Section 3.16, which shall survive until 60 days after the expiration of the statute of 

limitations (giving effect to extensions thereof) for the relevant Tax, (ii) the representations and warranties contained in Sections 3.07 (other than as to title to 

Assigned Intellectual Property and Assigned Technology), 3.17, 3.18, 3.20(a) and 3.20(c), which shall survive for six years after the Closing Date, (iii) the 

representations and warranties contained in Section 3.20(b) which shall survive for ten years after the Closing Date and (iv) the representations and warranties 

in Sections 3.01, 3.02, 4.01, 4.02, 5.07 and the representations and warranties relating to title to the Acquired Assets in Sections 3.05, 3.06, 3.07, 3.10 and 

3.29 and in any transfer document delivered in connection herewith, each of which shall survive as long as Applicable Law permits the underlying claim. 

SECTION 8.07. INDEMNIFICATION IN CASE OF STRICT LIABILITY OR INDEMNITEE NEGLIGENCE. THE INDEMNIFICATION 

PROVISIONS IN THIS ARTICLE VIII SHALL BE ENFORCEABLE REGARDLESS OF WHETHER THE LIABILITY IS BASED UPON PAST, 

PRESENT OR FUTURE ACTS, CLAIMS OR LEGAL REQUIREMENTS (INCLUDING ANY PAST, PRESENT OR FUTURE BULK SALES LAW, 

ENVIRONMENTAL LAW, FRAUDULENT TRANSFER ACT, OCCUPATIONAL SAFETY AND HEALTH LAW OR PRODUCTS LIABILITY, 

SECURITIES OR OTHER LEGAL REQUIREMENT) AND REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON FROM WHOM 

INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE SOLE, CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF 

THE PERSON SEEKING INDEMNIFICATION OR THE SOLE OR CONCURRENT STRICT LIABILITY IMPOSED UPON THE PERSON SEEKING 

INDEMNIFICATION. 

SECTION 8.08. Certain to Rights of Indemnified Parties. In the event Seller shall have paid an indemnity claim asserted by Purchaser under 

Section 8.01 and Purchaser possesses any claim, demand or right in respect of such indemnity claim against a vendor or supplier of the Business, Seller shall 

be fully subrogated to the rights of the Purchaser against such vendor or supplier in respect of such indemnity claim (to the extent of such payment). In the 

event Seller shall have paid an indemnity claim asserted by Purchaser under Section 8.01 and Purchaser was assigned as an Acquired Asset any right, claim or 

credit in respect of such indemnity claim arising under an insurance policy maintained by any member of the Seller Group, Purchaser shall, at the request of 

Seller, assign to Seller Purchaser's rights under such insurance policy in respect of such indemnity claim (to the extent of such payment). In the event any 

indemnifying party shall have paid a claim asserted by any indemnified party under Section 8.01 or 8.02, the indemnified party will use good faith efforts to

provide information reasonably requested by the indemnifying party to the indemnifying party in connection with such claim. Except as specifically set forth 

in this Section 8.08, no indemnifying party shall be subrogated to the rights of any indemnified party in respect of any claim except to the extent provided by 

Applicable Law (and the indemnified party shall have no obligation in respect of any such subrogation except as provided in the preceding sentence). 

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SECTION 8.09. DISCLAIMER OF WARRANTIES. PURCHASER ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS 

AGREEMENT OR THE ANCILLARY AGREEMENTS OR ANY ADDITIONAL SELLER DOCUMENT, THERE ARE NO REPRESENTATIONS OR 

WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO THE BUSINESS OR ACQUIRED ASSETS. WITHOUT LIMITING THE 

GENERALITY OF THE FOREGOING, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE ANCILLARY AGREEMENTS, 

THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SELLER 

ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE ANCILLARY AGREEMENT OR ANY 

ADDITIONAL PURCHASER DOCUMENT, THERE ARE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, 

MADE BY PURCHASER. 

SECTION 8.10. Hydroelectric Facility. Anything herein to the contrary notwithstanding, if the obligation of Seller to sell the Hydroelectric Facility 

is terminated in accordance with Section 2.04 hereof, then Seller shall not have any liability under Section 8.01(a)(i) hereunder in respect of any breach of a 

representation or warranty hereunder to the extent relating to the Hydroelectric Facility. 

ARTICLE IX 

General Provisions 

SECTION 9.01. Assignment. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by Purchaser or Seller 

(including by operation of law in connection with a merger or consolidation of Purchaser or Seller) without the prior written consent of the other parties 

hereto. Notwithstanding the foregoing, (a) Purchaser may assign its right to purchase the Acquired Assets (including separately assigning its right to purchase 

the Railroad Property, Rail Equipment and other Acquired Assets relating to the Railroad) or any of its other rights or any portion thereof hereunder to one or 

more affiliates of Purchaser without the prior written consent of Seller, provided such affiliate agrees in form and substance reasonably satisfactory to Seller 

to assume the obligations of Purchaser hereunder following the Closing, and (b) Purchaser may assign its rights hereunder by way of security and such 

secured party may assign such rights by way of exercise of remedies and (c) Purchaser may assign its rights to indemnity, in whole or in part, to any purchaser 

of all or any of the Acquired Assets; provided, however, that no assignment shall limit or affect the assignor's obligations hereunder. Any attempted 

assignment in violation of this Section 9.01 shall be void. 

SECTION 9.02. No Third-Party Beneficiaries. Except as provided in Article VIII, this Agreement is for the sole benefit of the parties hereto and their 

permitted assigns and nothing herein expressed or implied shall give or be construed to give to any person, other than the parties hereto and such assigns, any 

legal or equitable rights hereunder. 

103 

SECTION 9.03. Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered 

by hand or sent by facsimile or sent, postage prepaid, by overnight or express courier service and shall be deemed given when so delivered by hand or 

facsimile, or if sent by overnight or express courier service, three business days after being sent, as follows: 

(i) if to Purchaser, 

Northern Holdings LLC/Sappi Cloquet LLC 

225 Franklin Street, 28th Floor 

Boston, MA 02110 

Telephone: (617) 423-7300 

Telecopy: (617) 368-6580 

Attention: President 

with a concurrent copy to: 


S.D. Warren Company 

225 Franklin Street, 28th Floor 

Boston, MA 02110 

Telephone: (617) 423-7300 

Telecopy: (617) 368-6580 

Attention: General Counsel 


Sappi Limited 

48 Ameshoff Street 

P.O. Box 31560 

2017 Braamfontein 

South Africa 

Telephone: +27 (11) 407-8111 

Telecopy: +27 (11) 403-1493 

Attention: Corporate Counsel 

with a concurrent copy to:

Cravath, Swaine & Moore 

Worldwide Plaza 

825 Eighth Avenue 

New York, NY 10019 

Telephone: (212) 474-1000 

Telecopy: (212) 474-3700 

Attention: Paul Michalski, Esq.; and 

(ii) if to Seller, 

Potlatch Corporation 

601 West Riverside Avenue 

Suite 1100 

Spokane, WA 99201 

Telephone: (509) 835-1500 

Telecopy: (509) 835-1561 

Attention: Ralph M. Davisson, Esq. 


Pillsbury Winthrop LLP 

50 Fremont Street 

San Francisco, CA 94105 

Telephone: (415) 983-7480 

Telecopy: (415) 983-1200 

Attention: Blair W. White, Esq. 


Pillsbury Winthrop LLP 

One Battery Park Plaza 

New York, NY 10004 

Telephone: (212) 858-1213 

Telecopy: (212) 858-1500 

Attention: Kenneth E. Adelsberg, Esq. 

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SECTION 9.04. Interpretation; Exhibits and Schedules; Certain Definitions. (a) The headings contained in this Agreement, in any Exhibit or 

Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of 

this Agreement. All Exhibits and Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in 

full herein. Any capitalized terms used in any Schedule or Exhibit but not otherwise defined therein, shall have the meaning as defined in this Agreement. 

When a reference is made in this Agreement to a Section, Exhibit or Schedule, such reference shall be to a Section of, or an Exhibit or Schedule to, this 

Agreement unless otherwise indicated. 

(b) For all purposes hereof: 

"affiliate" but not a "controlled affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is 

controlled by, or is under common control with, such first person. 

"including" means including, without limitation. 

"intentional breach" means a breach arising out of or resulting from an intentional act (or an intentional failure to act) entered into (or not taken) with the 

intent to breach or with actual knowledge (of the person entering into or not taking the action or of any other person having actual knowledge that such action 

is to be taken or not taken) that a breach will occur. 

"knowledge" of Seller, or the Seller Group, means the knowledge, after due investigation (which shall not require any consultation with or review of any 

documents at or with any third party other than employees, officers, directors, advisors, counsel, accountants, representatives and agents of Seller and all other 

members of the Seller Group) of any of any of the persons listed on Schedule 9.04(b). 

"operation of the Brainerd Facility" means the physical operation of the Brainerd Facility and not the conduct of the Business as carried on at the 

Brainerd Facility. 

"or" is not exclusive. 

105 

"person" means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, Governmental Entity or other entity. 

"Purchaser Material Adverse Effect" means any state of facts, change, development, effect, condition or circumstance that has been or could reasonably 

be expected to be material and adverse to the ability of Purchaser to perform its obligations under this Agreement and the Ancillary Agreements or on the 

ability of Purchaser to consummate the Acquisition and the other transactions contemplated hereby. 

"Seller Material Adverse Effect" means any state of facts, change, development, effect, condition or circumstance that (a) has been or could reasonably 

be expected to be material and adverse to (i) the (A) business, (B) assets, (C) financial condition, or (D) results of operations of the Business (other than 

operation of the Brainerd Facility) taken as a whole, (ii) the ability of Seller to consummate the Acquisition and the other transactions contemplated hereby, 

(iii) the ability of Seller to perform its obligations under this Agreement or any Ancillary Agreement, (iv) the ability of Purchaser to conduct the Business

(other than operation of the Brainerd Facility) substantially as conducted by Seller on the date of the Balance Sheet or the Closing Date (including Purchaser's 

ability to (x) continue uninterrupted and timely customer supply of products of the Business of the same quality as previously supplied and (y) transition 

production at the Brainerd Facility to other facilities), (v) the ability of Purchaser to continue to operate and use any material Acquired Asset, (vi) the ability 

of Purchaser to establish in its sole discretion the terms and conditions of employment of the Continued Employees, but only to the extent the adverse effect 

on such ability was caused by any action or failure to act (whether prior to, on or after the date hereof) by a member of the Seller Group or any of its 

employees, representatives or agents (including the entering into of any Labor Contract, other than any Labor Agreement, or the failure to comply with any 

Applicable Law or Labor Contract) or (vii) any material customer relationship of the Business or (b) has resulted or could reasonably be expected to result in 

any of the prohibitions, limitations or other requirements or consequences of the type described in Section 6.02(d) (whether or not relating to any Proceeding). 

For purposes of analyzing whether any state of facts, change, development, effect, condition or occurrence is "material" or constitutes a "material adverse 

effect" or "material adverse change" for any purpose under this Agreement, (x) the analysis of materiality shall not be limited to a long-term perspective (and 

whether any state of facts, change, development, effect, condition or occurrence is or might be short-term, temporary or cyclical in nature shall not be 

dispositive of its materiality), (y) each of the matters contained in (a)(i)(A) through (a)(i)(E) above are intended to be separate and distinct but shall be 

considered in light of their impact on the ongoing Business and (z) Section 9.15(c) shall be given effect. 

"subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is 

sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity 

interests of which) is owned directly or indirectly by such first person or by another subsidiary of such person. 

SECTION 9.05. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same 

agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other parties. 

106 

SECTION 9.06. Entire Agreement. This Agreement, the Ancillary Agreements and the Confidentiality Agreement, along with the Schedules and 

Exhibits thereto, contain the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior 

agreements and understandings relating to such subject matter. Neither party shall be liable or bound to any other party in any manner by any representations, 

warranties or covenants relating to such subject matter except as specifically set forth herein or in the Ancillary Agreements or the Confidentiality Agreement. 

SECTION 9.07. Severability. If any provision of this Agreement (or any portion thereof) or the application of any such provision (or any portion 

thereof) to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, 

illegality or unenforceability shall not affect any other provision hereof (or the remaining portion thereof) or the application of such provision to any other 

persons or circumstances. 

SECTION 9.08. Consent to Jurisdiction. Each party irrevocably submits to the jurisdiction of (a) the Supreme Court of the State of New York, New 

York County, and (b) the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising 

out of this Agreement, any Ancillary Agreement or any transaction contemplated hereby or thereby. Each party agrees to commence any such action, suit or 

proceeding either in the United States District Court for the Southern District of New York or if such suit, action or other proceeding may not be brought in 

such court for jurisdictional reasons, in the Supreme Court of the State of New York, New York County. Purchaser will promptly appoint CSC Corporation 

System as its authorized agent and Seller will promptly appoint CT Corporation, as its authorized agent. Each party represents and warrants that its authorized 

agent will agree to act as agent for service of process, and each party agrees to take any and all action, including, without limitation, the filing of any and all 

documents and instruments, which may be necessary to establish and continue such appointment (or appointment of a substitute authorized agent, in which 

case notice of such substitution shall be given to all other parties hereto) in full force and effect for a period of ten years from the Closing Date. Each party 

agrees that any process, summons, notice or document by U.S. registered mail to its authorized agent's address set forth above shall be effective service of 

process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction in this Section 9.08. Each party 

irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement, any Ancillary 

Agreement or the transactions contemplated hereby and thereby in (i) the Supreme Court of the State of New York, New York County, or (ii) the United 

States District Court for the Southern District of New York, and hereby and thereby further irrevocably and unconditionally waives and agrees not to plead or 

claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. 

SECTION 9.09. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York 

applicable to agreements made and to be performed entirely within such State, without regard to the conflicts of law principles of such State (to the extent that 

the application of the laws of another jurisdiction would be required thereby). 

SECTION 9.10. Waiver of Jury Trial. Each party hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by 

jury in respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement, any Ancillary Agreement or any transaction 

contemplated hereby or thereby. Each party (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, 

that such other party would not, in the event of litigation, seek to enforce that foregoing waiver and (b) acknowledges that it and the other parties hereto have 

been induced to enter into this Agreement and the Ancillary Agreements, as applicable, by, among other things, the mutual waivers and certifications in this 

Section 9.10. 

107 

SECTION 9.11. Power of Attorney, etc. (a) Effective upon the Closing, Seller hereby constitutes and appoints Purchaser and its successors, legal 

representatives and assigns the true and lawful attorneys of Seller with full power of substitution, in the name of Seller, but on behalf of and for the benefit of 

Purchaser and its successors, legal representatives and assigns, and at the expense of Purchaser: (i) to demand and receive from time to time any and all 

Receivables and other items directly related to Receivables that are included in the Acquired Assets and to make endorsements and give receipts and releases 

for and in respect of the same and any part thereof; and (ii) to do all such acts and things in relation to the matters set forth in the preceding clause (i) as 

Purchaser and its successors, legal representatives or assigns shall deem desirable. Seller hereby agrees that the appointment hereby made and the powers 

hereby granted are coupled with an interest and are and shall be irrevocable by it in any manner or for any reason. Seller shall deliver to Purchaser at the 

Closing an acknowledged power of attorney to the foregoing effect executed by Seller.

(b) Effective upon the Closing, Purchaser shall have the right to receive and open all mail, packages and other communications addressed to any 

member of the Seller Group relating to the Business, and Seller agrees promptly to deliver to Purchaser any such mail, packages or other communications 

received directly or indirectly by any member of the Seller Group. Purchaser shall promptly deliver to Seller all mail, packages and other communications 

received by it which relate to any member of the Seller Group but do not relate to the Business. 

SECTION 9.12. Refunds and Remittances. After the Closing, if Seller receives any refund or other amount which is an Acquired Asset or related to 

an Acquired Asset or is otherwise properly due and owing to Purchaser in accordance with the terms of this Agreement, Seller shall promptly remit, or shall 

cause to be remitted, such amount to Purchaser at the address set forth in Section 9.04. After the Closing, if Purchaser or its affiliates receive any refund or 

other amount which is related to claims (including workers' compensation), litigation, insurance or other matters for which Seller is responsible hereunder, 

and which amount is an Excluded Asset, Purchaser shall promptly remit, or cause to be remitted, such amount to Seller at the address set forth in Section 9.04. 

SECTION 9.13. Purchaser Guarantor. Subject to and effective only upon its receipt of the approval of the South African Reserve Bank, Purchaser 

Guarantor agrees to cause Purchaser to comply with Purchaser's obligations hereunder until the Closing. As of and effective automatically upon the Closing, 

Purchaser Guarantor shall be released from all obligations and liabilities under this Agreement. Purchaser Guarantor agrees to use its commercially reasonable 

efforts to obtain the requisite approval of the South African Reserve Bank as promptly as possible. 

SECTION 9.14. Enforcement of Agreement; Limitation on Damages. (a) Each party acknowledges and agrees that the other party would be 

irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any breach of this 

agreement by Seller could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to 

which any party may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to 

temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting 

any bond or other undertaking. 

108 

(b) IF THE CLOSING DOES NOT OCCUR (WHETHER OR NOT THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 7.01), (I) NO 

PARTY HERETO SHALL BE ENTITLED TO RECOVER ANY CONSEQUENTIAL DAMAGES IN RESPECT OF A BREACH BY ANY OTHER 

PARTY HERETO, EXCEPT IN RESPECT OF AN INTENTIONAL BREACH OR GROSSLY NEGLIGENT BREACH BY SUCH OTHER PARTY AND 

(II) NO PARTY HERETO SHALL HAVE ANY LIABILITY HEREUNDER IN EXCESS OF $150,000,000 IN THE AGGREGATE, EXCEPT IN 

RESPECT OF AN INTENTIONAL OR GROSSLY NEGLIGENT BREACH. 

SECTION 9.15. Schedules; Disclosure. (a) The information in the Schedules constitutes (i) exceptions to particular representations, warranties, 

covenants and obligations of Seller as set forth in this Agreement or (ii) descriptions or lists of assets and liabilities and other items referred to in this 

Agreement. If there is any inconsistency between the statements in this Agreement and those in the Schedules (other than an exception expressly set forth as 

such in a Schedule with respect to a specifically identified representation or warranty), the statements in this Agreement will control. 

(b) The statements in the Schedules, and those in any supplement thereto, relate only to the provisions in the Section or, subject to Section 3.08(d), 

subsection of this Agreement to which they expressly relate and not to any other provision in this Agreement. 

(c) For purposes of analyzing whether any particular representation or warranty made to a party has been breached (including for purposes of analyzing 

such party's rights under Article VI or Article VIII) or analyzing the conditions under Article VI to a party's obligations hereunder (including, in each case, for 

purposes of analyzing whether any state of facts, change, development, effect, condition or occurrence is "material" or constitutes a "material adverse effect" 

or "material adverse change"), such party shall be deemed to have no knowledge of (i) with respect to any particular representation or warranty made to such 

party, any state of facts, change, development, effect, condition or occurrence that is not disclosed in the Schedule (or subsection of a Schedule) that expressly 

relates to such representation or warranty and (ii) otherwise, any information other than the representations and warranties made to such party contained in 

this Agreement, any Ancillary Agreement or any document delivered in connection herewith. 

IN WITNESS WHEREOF, Seller, Purchaser and Purchaser Guarantor (as to Section 9.13 only) have duly executed this Agreement as of the date first 

written above. 

109 

POTLATCH CORPORATION 

By: /s/ L. PENDLETON SIEGEL 

NORTHERN HOLDINGS LLC 

L. Pendleton Siegel 

Chairman and Chief Executive Officer 

By: /s/ KATHLEEN A. WALTERS 

Kathleen A. Walters 

President and CEO 

SAPPI LIMITED 

as Purchaser Guarantor and only with respect to Article IV and Section 9.13 

By: /s/ EUGENE VAN AS

QuickLinks 

EXHIBIT 4.9 


INDEX OF DEFINITIONS 

ARTICLE I Purchase and Sale of Acquired Assets 

ARTICLE II The Closing 

ARTICLE III Representations and Warranties of Seller 

ARTICLE IV Representations and Warranties of Purchaser 

ARTICLE V Covenants 

ARTICLE VI Conditions Precedent 

ARTICLE VII Termination, Amendment and Waiver 

ARTICLE VIII Indemnification 

ARTICLE IX General Provisions 

Eugene van As 

Executive Chairman

SAPPI LTD (SAP) 20-F

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