Year-end Report - Twelve months ended December 31, 2001

Year-end Report - Twelve months ended December 31, 2001 (All financial data pertaining to the year 2000 is pro forma) · The operating result amounted to a loss of SEK 889 M, SEK 39 M more than earlier announced. The deviation is due to higher costs of non- recurring nature related to provisions for inventory obsolescence, claims and disputes. · Non-recurring expense of SEK 589 M was charged against earnings during the fourth quarter of 2001. For the full-year 2001 non-recurring expenses of SEK 644 M was charged against earnings including previous communicated expenses for disputes. These expenses include SEK 332 M related to the implementation of the action program. · Unanticipated inventory reductions and extended credit periods on the part of certain major Pergo customers resulted in a critical cash situation during December 2001. · Pergo is carrying out a new 2:1 rights issue at a subscription price of SEK 11 per share. The issue proceeds amount to SEK 394 M before issue expenses. The issue is being supported by shareholders representing slightly less than 65% of voting rights and capital. · The condition for the rights issue decision regarding Pergo's loan financing has been fulfilled. Under the condition that the Extraordinary General Meeting on February 7, 2002 resolves to implement the rights issue, Pergo's lenders have taken a decision on increased credit facilities of SEK 200 M. ¤ Implementation of a powerful action program, with a projected annual earnings improvement of at least SEK 500 M within two years, was initiated. QIV: Oct-Dec Full year * Net Sales SEK 968 (1028) M SEK 3729 (3632) M - Europe: SEK 305 (303) M SEK 1243 (1258) M -North America: SEK 605 (676) M SEK 2304 (2218) M * Operating SEK -701 (-197) M SEK -889 (-225) M profit/loss: * Profit/loss SEK -716 (-212) M SEK -937 (-272) M before tax: Net sales and earnings Net sales during the year amounted to SEK 3 729 M (3 632), which after elimination of foreign-exchange effects, was a 7% decline, compared with the preceding year. The decline was due to lower prices as well as lower sales to major European retail chains and specialty stores in North America. Sales to specialty stores in Europe exceeded last year's sales, and US specialty stores also show a positive trend for the second half- year following a weak start. After elimination of foreign-exchange effects, net sales to The Home Depot are in line with those of last year. After strong growth during the first half-year, sales to The Home Depot declined toward the end of the year due to a substantial one-time reduction in The Home Depot's inventory. Sales for the quarter, after elimination of foreign-exchange effects, declined by 13%, compared with the preceding year. The decline is attributable to the inventory reduction by The Home Depot, reduced sales to major chains in Europe and lower prices. Sales to specialty stores in Europe remained significantly higher than during the corresponding period in the preceding year. Sales to the contract market in Europe and the specialty trade in the U.S. were also higher than for the corresponding period in 2000. The steep decline in gross margin for the year was caused by continued price pressure and under-utilization of capacity in Pergo's production plants. Non-recurring expenses of SEK 146 M has also been charged to the gross margin. An operating loss of SEK 889 M (loss: 225) was reported for the full year. The operating loss before cost of non-recurring nature amounted SEK 245 M (profit: 70) The steep decline in gross margin for the year was caused by continued price pressure and under-utilization of capacity in Pergo's production plants. Earnings were charged with restructuring costs of SEK 332 M in connection with the ongoing action program, and with an additional SEK 312 M for other expenses of a non-recurring nature. The latter pertain mainly to provisions for inventory obsolescence in connection with implemented changes and possible bad- debt losses. Also included are costs incurred for disputes, including patent disputes in the US. Foreign-exchange movements had only a marginal impact on profit during the year, since the positive effect of a stronger USD was neutralized by larger purchases in EUR, which also increased in value relative to SEK. During the second quarter, 50% of the coming year's estimated transaction exposure in USD and 75% of GBP and CHF were hedged through forward contracts. In addition, 25% of the next year's estimated transaction exposure in USD was hedged through forward contracts. The effect on profit of this hedging in the year amounted to an expense of SEK 18 M, of which SEK 7 M occurred during the reporting period. North America Due to the elimination of inventory at The Home Depot the sales in North America in the fourth quarter amounted to SEK 605 M compared to SEK 676 M in the corresponding period in the preceding year. Reception among specialty stores of the new product lines launched in the spring continued to be positive. The sales from stores of Pergo's products increased noticeably during the third and fourth quarters, although from a low level. However, delivery problems and a general decline in trade following the terror attack in September led to a lower growth in sales. The Home Depot's retail sales remained strong during the fourth quarter. However, inventory reductions at The Home Depot in connection with the launch of our new product lines, and the decision to eliminate stocks at its distribution centers, had a negative effect on Pergo's deliveries. This new product launch that was planned to take place during late autumn is now projected to be complete by February 2002. When the launch of the new product lines is completed, The Home Depot and the specialty stores will have different product lines. This differentiation is expected to have a positive impact on sales. Europe Sales in the fourth quarter amounted to SEK 305 M, i.e. the same level as in the corresponding period in the preceding year. Flooring products, like other infrequently purchased goods, were negatively affected by the economic decline in Europe. The separate product programs, which were developed during the period for the primary distribution channels - specialty stores, chain stores and the contract market - have been well received. Direct laminate flooring with glue-free joints, which are manufactured by the associated company Witex, were launched during the first quarter. During the third quarter, a new kitchen flooring line was introduced to specialty stores and a new product program for the contract market was also introduced. The positive market reception was also reflected in increased volumes to specialty stores and the contract market. However, delivery delays, due in part to start-up problems at the plant in Trelleborg, resulted in sales of the new products not reaching the expected levels. The delivery situation has also resulted in abnormally high logistics and freight costs. Measures were implemented to solve these problems. Production and distribution The transformation of production to handle direct laminate flooring and flooring with glue-free joints continues. During the second quarter, two production lines for flooring with glue-free joints were placed in service in Trelleborg. At the US production unit in Garner, North Carolina, a revamped production line for flooring with glue-free joints was placed into service during the third quarter, and an additional production line will be installed during the first quarter of next year. This investment also includes an expansion of the plant. Through the distribution centers in Trelleborg, Sweden, which are intended for Europe and placed in operation at the beginning of the year, and Garner in the US, which is expected to begin operation in mid- 2002, distribution of Pergo's products will increase in efficiency. Both distribution centers have long-term lease contracts based on market conditions. Action program A significantly higher product cost compared with competitors due to a late adaptation to new product technology and that the company in general has had excessively high costs has resulted in weak profitability in recent years. Consequently, Pergo initiated a comprehensive action program in autumn 2001. The objective is to improve profitability annually by at least SEK 500 M over a two-year period. The action program encompasses the entire Group and will involve reduction of fixed costs and improved efficiency in distribution, product assortment, the supply chain and tied-up capital. During 2001, extensive changes in the product program were introduced, which were favorably received by customers. Newly developed process technology will be placed in operation during the first half of 2002. This will enable the utilization of existing equipment for producing products in the higher quality classes similar to those produced using the cost-effective DL technology. Negotiations have been initiated regarding personnel cutbacks at all production units. In addition, an overview of the existing production structure is under way. The market organizations in Europe and the US will undergo far-reaching efficiency enhancement through simplification of the structure and fewer decision levels. Operations in Latin America will be restructured. The action program will require sizable restructuring costs, which in all material aspects has been charged against 2001 earnings. In total these charges including write-downs amounts to SEK 332 M. New share issue The Board of Directors of Pergo decided to carry out a new issue of Pergo shares in the amount of SEK 394 M, before issue expenses, with preferential rights for the Company's shareholders. The Board's issue decision, which is conditional on approval by an Extraordinary General Meeting to be held February 7, 2002, means that the Company's shareholders may subscribe for two new shares for each old share held, at a subscription price of SEK 11 per share. The issue will mean an increase in share capital of a maximum SEK 357,948,600, through issuance of a maximum of 35,794,860 shares in the Company. This capital injection is to be used to provide Pergo with sufficient financial resources and liquidity to implement the aforementioned action program. The additional capital will also facilitate Pergo's active participation in the ongoing structural transformation in the industry. Pergo's issue decision at the time it was announced publicly on January 8 was conditional on the requisite credit decisions from Pergo's lenders, Svenska Handelsbanken and Nordea Bank Sverige AB. Accordingly, in consultation with the company's lenders Pergo has set new terms for its loan financing. In brief, the credit decision means that the lenders will (i) provide new loans of SEK 200 M as the need may arise, (ii) retain the existing credit agreements, and (iii) provide any bridging financing until proceeds from the new share issue are received. The board of directors concludes that the decisions regarding the loan financing fulfill the above mentioned condition for the rights issues decision. The total available credits and credit facilities to be granted will amount to about SEK 990 M. Shareholders representing 58.5% of shares outstanding in Pergo favor the decision and intend to subscribe for their proportion of the new share issue, including AB Custos, Sydsvenska Kemi AB, a number of representatives of the Wendt family, Nordea's funds, the 3rd AP Fund, 2nd AP Fund, 6th AP Fund and the Bank of Sweden's Jubileumsfond. Other shareholders representing an additional 6.0% of shares outstanding in Pergo support the new issue. Disputes Patent disputes involving glue-free joints are currently in progress between a number of parties, including Pergo. In addition, a certain supplier has made claims against Pergo due to not insignificant reductions in the volume of sales to Pergo. Due provision has been made for possible charges against 2001 earnings. These disputes and claims are presently considered not to have a major negative impact on Pergo's operations. Investments During the year, the Group made investments totaling SEK 266 M (290). The investments in the plant in Trelleborg included the rebuilding of milling lines for production of glue-free joints and completion of investment in a new milling line which begun during 2000. At the plant in Garner, North Carolina, a rebuilt line for glue-free joints was placed in operation during the third quarter, with an additional production line to be installed during the first quarter of 2002. This investment also encompasses an expansion of the plant. The investments included an acquisition of Pergo Declam AB's factory building in Perstorp, Sweden from Perstorp AB for SEK 40 M. Working capital/capital employed Working capital has decreased by SEK 634 M since year-end. This development is almost exclusively attributable to charges of a non- recurring nature including provisions related to the action program. Overall, these measures reduce working capital by SEK 579 M. Capital employed at the end of the period amounted to SEK 1,642 M, a decrease of SEK 317 M since the beginning of the year. Capital employed declined less than working capital due to major investments during the year and capitalized loss carry forwards. Financial position/cash flow The continued negative cash flow from ongoing operations, and the major investments, resulted in net debt increasing by SEK 407 M since year- end, amounting to SEK 647 M at the end of the period. With the previously described action program, Pergo is estimated also to report a negative cash flow in 2002 from ongoing operations. Cash flow is estimated not to be positive until 2003. Total credits granted amounted to SEK 840 M at year-end, which includes SEK 90 M in construction loans relating to the expansion of the plant in Garner in the US. At year-end, SEK 730 M of the granted facilities were utilized. During January 2002, Pergo's lenders decided in favor of expanding credit facilities, to retain the existing credit agreement and to provide the required bridging financing. The decision is contingent on the new share issue being approved at the Extraordinary General Meeting to be held February 7, 2002. Total available credits and credit facilities to be granted will then amount to about SEK 990 M. Financial net During the year, net financial items was charged with approximately SEK 7 M for set-up costs and costs of mortgages in connection with external loan financing. The financial net was also charged with a capital loss of SEK 15 M in connection with sales of shares. Tax The reported tax amounts to SEK +231 M, whereof the major part consists of deferred tax on loss carry forwards, which are judged to be usable within the foreseeable future. Personnel At the end of the year the Group had 939 (1,083) employees, of whom 607 were in Europe and 277 in North America. The decrease of 144 employees since year-end was due mostly to employees who left the Group as a result of dismissal notices issued at the factory in Perstorp during the preceding year. A decision to reduce personnel has been made at year-end 2001, with slightly more than 100 employees expected to leave the Group during the first quarter of 2002. Revised accounting principles During the report period, certain discounts, attributable to sales in North America, which in prior periods had been classified as cost of goods sold, have now instead been stated as to reduce net sales. This change in accounting principle affects neither earnings nor shareholders' equity. Prior periods have been adjusted in accordance with this new accounting principle. During the report period, the accounting principle governing IT investments was also revised. The former principle was based on external expenses for investments in information-technological infrastructure having been classified as a prepaid expense and accrued over a three- year period. Effective fourth quarter 2001, license fees are capitalized which are attributable to the aforementioned investments as an intangible fixed asset, with an estimated economic life of five years. All other expenses attributable to this type of investment are expensed as they are incurred. This revised accounting principle has a negative effect on shareholders' equity in the amount of SEK 61 M for the years 2001 and 2000, apportioned as SEK 5 M for 2001 and SEK 56 M for 2000. Prior periods have been adjusted in accordance with this new accounting principle. Parent Company The Parent Company did not conduct any business prior to January 1, 2001. In conjunction with the formation of the Group, the Company's restricted reserves increased from SEK 0.1 M to SEK 217 M, of which SEK 179 M is share capital, through a new share issue. At the same time SEK 1,303 M was received through an unconditional shareholders' contribution, which means that the Company was capitalized with a total amount of SEK 1,520 M. The Parent Company incurred an operating loss of SEK 130 M for 2001. The loss after financial items amounted to SEK 79 M. At year-end 2001, 11 persons were employed in the Parent Company (which includes Group management and certain Group-wide functions). Options program At an Extraordinary General Meeting on August 17, 2001, a decision was taken to introduce a stock options program for senior executives. The program consists of 920,000 stock options. The dilution effect on full subscription corresponds to about 4.9% of the share capital and voting rights. The stock options may be exercised from June 1, 2004 to August 31, 2004, under the condition that the holder is still employed by the Group by the time of exercise. The strike price before adjustment for the rights issue is SEK 55 per share. To compensate for the social costs that the options program may entail if the share price increase, the Company has entered a stock swap agreement. Proposed dividend The Board proposes that the Annual General Meeting vote no dividend for fiscal 2001. Outlook for 2001 Pergo is implementing an extensive action program, which is projected to improve earnings by at least SEK 500 M annually within a two-year period, and enable the Company to eventually reach the operating and financial objectives set. The objective is that Pergo shall attain an operating result of SEK 50 M in 2002, which means that more than half the overall earnings improvement is expected to be achieved this year. Cash flow from ongoing operations is calculated to be negative during 2002. Trelleborg, January 28, 2002 The Board of Directors Review report This year-end report has been reviewed by us in accordance with the recommendation regarding review of interim reports issued by the Swedish Institute of Authorized Public Accountants (FAR). The year-end report has been prepared according to the principles of going concern on the condition that the proposed new share issue is carried out. A review is considerably limited in scope compared with an audit. Nothing has come to our attention that causes us to believe that the year-end report does not comply with the requirements of the Exchange and Clearing Operations Act and the Annual Accounts Act. Trelleborg, January 28, 2002 Anders Scherman Hans Bjerke Authorized Public Accountants, Ernst & Young AB At the Perstorp Annual General Meeting on June 12, 2001, Pergo's share capital was distributed to the Perstorp shareholders. Trading of the Pergo share on the Stockholm Exchange's O-List commenced on June 19, 2001. In connection with preparation of the consolidated financial accounts the "new" Pergo Group is considered to have been formed as of January 1, 2001; accordingly, Group results include income and expenses of all companies for the entire period January 1 - December 31, 2001. In connection with formation of the Group, shares in subsidiaries have been acquired at book values within the Perstorp Group and not at market values, with the result that neither goodwill nor negative goodwill has arisen. The difference between acquisition value and acquired capital has been charged directly to shareholders' equity. The capitalization of Pergo has been implemented with effect from January 1, 2001. The Year-end Report has been prepared in accordance with the recommendations of the Swedish Financial Accounting Standards Council. The 2001 Annual Report will be released in late March 2002. The Annual Report will be available at Pergo AB, Strandridaregatan 8 in Trelleborg, Sweden. In addition, the Annual Report will be available at Pergo's website, www.pergo.com. The Annual General Meeting is scheduled to be held at 3 pm on April 11, 2002, Söderslätts Auditorium, Trelleborg. Future financial reports (preliminary dates): Interim report, three months ended March 31, to be released on April 22, 2002 Interim report, six months ended June 30, to be released on July 22, 2002 Interim report, nine months ended September 30, to be released on October 28, 2002 Pergo AB (publ) Corporate Communications For further information, please contact: Raimo Issal, CEO, Annette Kumlien, CFO Phone Number: +46 410 36 31 00 ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/01/29/20020129BIT00380/bit0001.doc The Full Year-End Report http://www.waymaker.net/bitonline/2002/01/29/20020129BIT00380/bit0002.pdf The Full Year-End Report