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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-18339
SYLVAN INC.
(Exact name of registrant as specified in its charter)
NEVADA 25-1603408
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 MAIN STREET, P.O. BOX 249, SAXONBURG, PA 16056-0249
(Address of principal executive offices) (Zip Code)
(724) 352-7520
(Registrant's telephone number, including area code)
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
--- ---
Number of shares of common stock outstanding as of August 2, 2002...5,437,831
SYLVAN INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets,
June 30, 2002 and December 30, 2001.............................................................3
Condensed Consolidated Statements of Income, Three Months
Ended June 30, 2002 and July 1, 2001............................................................5
Condensed Consolidated Statements of Income, Six Months
Ended June 30, 2002 and July 1, 2001............................................................6
Condensed Consolidated Statements of Cash Flows, Six Months
Ended June 30, 2002 and July 1, 2001............................................................7
Notes to Condensed Consolidated Financial Statements,
June 30, 2002...................................................................................8
Item 2. Management's Discussion and Analysis...........................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................18
Item 4. Submission of Matters to a Vote of Security Holders............................................19
Item 6. Exhibits and Reports on Form 8-K...............................................................19
PART I - FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In thousands)
June 30, 2002 December 30, 2001
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,595 $ 5,072
Trade accounts receivable, net of allowance
for doubtful accounts of $537 and $440, respectively 13,099 13,133
Inventories 11,048 10,119
Prepaid income taxes and other expenses 1,910 1,437
Other current assets 1,698 4,206
- --------------------------------------------------------------------------------------------
Total current assets 33,350 33,967
Property, plant and equipment, net 56,901 54,276
Intangible assets, net of accumulated amortization
of $4,444 and $4,078, respectively 11,844 11,036
Other assets, net of accumulated amortization
of $542 and $491, respectively 7,811 7,811
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $109,906 $107,090
============================================================================================
The accompanying notes are an integral part of these financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In thousands except share data)
June 30, 2002 December 30, 2001
------------- -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 239 $ 2,430
Accounts payable - trade 4,772 3,833
Accrued salaries, wages and employee benefits 2,687 2,635
Other accrued liabilities 1,444 905
Income taxes payable 1,478 942
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 10,620 10,745
- --------------------------------------------------------------------------------------------------------------
Long-term and revolving-term debt 35,302 37,255
- --------------------------------------------------------------------------------------------------------------
Other long-term liabilities:
Other employee benefits 1,421 1,362
Other 5,144 5,162
- --------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 6,565 6,524
- --------------------------------------------------------------------------------------------------------------
Minority interest 1,703 1,680
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $0.001, 10,000,000 shares authorized,
6,725,105 and 6,694,272 shares issued at
June 30, 2002 and December 30, 2001, respectively 7 7
Additional paid-in capital 17,360 17,055
Retained earnings 62,496 60,296
Less: Treasury stock, at cost, 1,287,274 and 1,263,953 shares
at June 30, 2002 and December 30, 2001, respectively (13,407) (13,136)
-------- --------
66,456 64,222
Accumulated other comprehensive deficit (10,740) (13,336)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 55,716 50,886
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 109,906 $ 107,090
==============================================================================================================
The accompanying notes are an integral part of these financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sylvan Inc. and Subsidiaries
(Unaudited, in thousands except share data)
-------Three Months Ended------
June 30, 2002 July 1, 2001
------------- ------------
NET SALES $ 21,388 $ 21,074
- --------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 12,554 12,194
Selling, administration, research and development 5,570 5,005
Depreciation 1,421 1,309
- --------------------------------------------------------------------------------------------------------------------
19,545 18,508
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,843 2,566
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 447 625
OTHER INCOME (EXPENSE) 62 41
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,458 1,982
PROVISION FOR INCOME TAXES 471 594
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 987 1,388
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 2 16
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 985 $ 1,372
====================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.18 $ 0.25
====================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.18 $ 0.25
====================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 5,435,171 5,522,172
====================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,499,634 5,580,688
====================================================================================================================
The accompanying notes are an integral part of these financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sylvan Inc. and Subsidiaries
(Unaudited, in thousands except share data)
----------Six Months Ended---------
June 30, 2002 July 1, 2001
------------- ------------
NET SALES $ 42,307 $ 41,954
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 24,632 24,105
Selling, administration, research and development 10,741 10,174
Depreciation 2,815 2,686
- -------------------------------------------------------------------------------------------------------------------------
38,188 36,965
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 4,119 4,989
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 877 1,243
OTHER INCOME (EXPENSE)
64 (6)
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,306 3,740
PROVISION FOR INCOME TAXES 1,082 1,122
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 2,224 2,618
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 24 70
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,200 $ 2,548
=========================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.40 $ 0.46
=========================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.40 $ 0.46
=========================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 5,433,561 5,519,864
=========================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,491,152 5,566,012
=========================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sylvan Inc. and Subsidiaries
(Unaudited, in thousands)
-------Six Months Ended--------
June 30, 2002 July 1, 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,200 $ 2,548
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,922 3,056
Employee benefits (104) (446)
Trade accounts receivable 670 410
Inventories (433) (535)
Prepaid expenses and other assets 2,237 (436)
Accounts payable and accrued liabilities 1,668 1,253
Other (321) 122
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,839 5,972
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (2,905) (5,846)
Proceeds from sale of fixed assets - 89
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,905) (5,757)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (2,298) (164)
Net (repayments) borrowings under revolving credit line (3,385) 848
Proceeds from exercise of stock options 282 105
Purchase of treasury shares (271) (102)
- --------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (5,672) 687
- --------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH 261 (678)
- --------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 523 224
CASH AND CASH EQUIVALENTS, beginning of period 5,072 5,371
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 5,595 $ 5,595
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 1,012 $ 1,168
Income taxes paid 954 1,334
The accompanying notes are an integral part of these financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SYLVAN INC. AND SUBSIDIARIES
JUNE 30, 2002
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
-------
These condensed consolidated financial statements of Sylvan Inc. are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim period. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the company's Annual Report to
Shareholders and its Form 10-K for the year ended December 30, 2001.
Cash
----
As of December 30, 2001, the company maintained a French-franc denominated
cash balance of approximately FF16.2 million ($2.2 million) with a U.S.
bank in support of a loan advanced by a European bank. This balance was
reported under Other Current Assets as of December 30, 2001. The loan was
repaid in January 2002 and the cash balance was applied to a principal
reduction of debt.
Inventories
-----------
Inventories at June 30, 2002 and December 30, 2001 consisted of the
following:
(in thousands) June 30, 2002 December 30, 2001
--------------- -----------------
Growing crops and compost material $ 4,983 $ 5,466
Stores and other supplies 1,664 1,493
Finished products 4,401 3,160
--------- ---------
$ 11,048 $ 10,119
========= =========
Earnings Per Common Share
-------------------------
Earnings per share were calculated using the weighted average number of
shares outstanding during the period, including the effect of stock
options outstanding. Pursuant to the company's 1990 and 1993 stock option
plans, options for a total of 1,384,749 shares of the company's common
stock have been granted and options for a total of 580,312 of these shares
have been exercised as of June 30, 2002.
8
The following tables reconcile the number of shares utilized in the
earnings per share calculations for the three and six months ended June
30, 2002 and July 1, 2001.
Three Months Ended Six Months Ended
(in thousands) June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Net income $ 985 $ 1,372 $ 2,200 $ 2,548
========== ========= ========= =========
Earnings per common share - basic $ 0.18 $ 0.25 $ 0.40 $ 0.46
========== ========== ========== ==========
Earnings per common share - diluted $ 0.18 $ 0.25 $ 0.40 $ 0.46
========== ========== ========== ==========
Common shares - basic 5,435,171 5,522,172 5,433,561 5,519,864
Effect of dilutive securities:
stock options 64,463 58,516 57,591 46,148
---------- ---------- ---------- ----------
Common shares - diluted 5,499,634 5,580,688 5,491,152 5,566,012
========== ========== ========== ==========
Options to purchase approximately 298,000 shares of common stock in the
three and six months ended June 30, 2002, and 306,000 and 333,000 shares
of common stock in the three and six months ended July 1, 2001,
respectively, were outstanding, but were not included in the computation
of diluted earnings per share because the exercise prices of these options
were greater than the average market prices of the company's common shares
for the respective periods.
Recent Pronouncements
---------------------
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
(Goodwill and Other Intangible Assets). SFAS No. 142 eliminates
amortization of goodwill and amortization of indefinitely lived intangible
assets and provides for an impairment test to be performed at least
annually. Sylvan adopted this pronouncement on December 31, 2001, which
was the first day of Sylvan's 2002 fiscal year. During the quarter ended
March 31, 2002, a professional services firm retained by the company
conducted an assessment to test for transitional goodwill impairment. No
initial impairment loss resulted.
Sylvan's intangible assets, which relate solely to its Spawn Products
Segment, are as follows:
June 30, 2002 December 30, 2001
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------- -------- -------- --------
Goodwill $ 15,281 $ (4,078) $ 14,107 $ (3,776)
Cultures and other
intangible assets 1,007 (366) 1,007 (302)
-------- -------- -------- --------
$ 16,288 $ (4,444) $ 15,114 $ (4,078)
======== ======== ======== ========
In connection with the adoption of SFAS No. 142 (Goodwill and Other
Intangible Assets), Sylvan reassessed the useful lives and the
classification of its identifiable intangible assets and determined that
they continue to be appropriate. The remaining useful lives of the
cultures range from eight to eleven years and the other intangible assets
range from three to six years.
9
Amortization expense for intangible assets was $32,000 and $64,000 for the
three and six months ended June 30, 2002, respectively. Estimated
amortization expense for the remainder of 2002 and the five succeeding
years is as follows:
(in thousands)
2002 (remainder) $ 64
2003 127
2004 122
2005 67
2006 67
2007 65
Actual results of operations for the three and six months ended June 30,
2002 and the pro forma results for the three and six months ended July 1,
2001, had Sylvan applied the non-amortization provisions of SFAS No. 142
(Goodwill and Other Intangible Assets) in 2001, are as follows:
Three Months Ended Six Months Ended
(in thousands except per share data) June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Reported net income $ 985 $ 1,372 $ 2,200 $ 2,548
Add back: Goodwill amortization,
net of tax - 87 - 178
--------- --------- --------- ---------
Adjusted net income $ 985 $ 1,459 $ 2,200 $ 2,726
========= ========= ========= =========
Basic earnings per share:
Reported net income $ 0.18 $ 0.25 $ 0.40 $ 0.46
Add back: Goodwill amortization - 0.01 - 0.03
--------- --------- --------- ---------
Adjusted net income $ 0.18 $ 0.26 $ 0.40 $ 0.49
========= ========= ========= =========
Diluted earnings per share:
Reported net income $ 0.18 $ 0.25 $ 0.40 $ 0.46
Add back: Goodwill amortization - 0.01 - 0.03
--------- --------- --------- ---------
Adjusted net income $ 0.18 $ 0.26 $ 0.40 $ 0.49
========= ========= ========= =========
2. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The company has a Revolving Credit Agreement with two commercial banks,
dated August 6, 1998. It provides for revolving credit loans on which the
aggregate outstanding balance available to the company may not initially
exceed $55.0 million. The maximum aggregate outstanding balance will
decline over the life of the agreement as follows:
Maximum Aggregate
Period Beginning Outstanding Balance
---------------- -------------------
August 6, 2003 $50.0 million
August 6, 2004 45.0 million
Outstanding borrowings under the agreement bear interest at either the
Prime Rate or LIBOR (plus an applicable margin) at the company's option.
On June 30, 2002, the company had outstanding borrowings under the
agreement of $34.1 million. The revolving credit loans mature on August 5,
2005. The agreement provides for the maintenance of various financial
covenants and includes limitations as to incurring additional indebtedness
and the granting of security interests to third parties. Obligations under
the agreement are guaranteed by certain wholly owned subsidiaries of the
company.
10
As of December 30, 2001, the company had a French-franc denominated loan
of FF16.2 million ($2.2 million) that was repaid in January 2002.
The company's majority-owned Dutch subsidiary has a long-term plant and
equipment and overdraft facility with a Dutch bank. At June 30, 2002, a
term loan amounting to 0.8 million euros was outstanding under this
agreement.
3. COMPREHENSIVE INCOME:
Comprehensive income consisted of the following:
Three Months Ended Six Months Ended
(in thousands) June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Net income $ 985 $ 1,372 $ 2,200 $ 2,548
Other comprehensive income:
Foreign currency translation
adjustment 3,169 (783) 2,746 (3,717)
Unrealized income (losses) on
derivatives and qualified cash
flow hedges, net of tax (243) 107 (150) (94)
------- ------- ------- -------
Total comprehensive income (loss) $ 3,911 $ 696 $ 4,796 $(1,263)
======= ======= ======= =======
The components of accumulated other comprehensive deficit consist of the
following:
(in thousands) June 30, 2002 December 30, 2001
------------- -----------------
Unrealized losses on derivatives and
qualified cash flow hedges, net of tax $ (486) $ (336)
Foreign currency translation adjustments (10,254) (13,000)
-------- --------
Total accumulated other comprehensive deficit $(10,740) $(13,336)
======== ========
Floating-to-fixed interest rate swap agreements, designated as cash flow
hedges, hedge the company's floating rate debt and mature at various times
through August 2007. The fair value of these contracts is recorded in the
balance sheet, with the offset to Accumulated Other Comprehensive Deficit,
net of tax. Based on interest rates at June 30, 2002, the company expects
to expense $36,000 in the next 12 months related to derivative
instruments.
4. BUSINESS SEGMENT INFORMATION:
Sylvan is a worldwide producer and distributor of products for the
mushroom industry, specializing in spawn (the equivalent of seed for
mushrooms) and spawn-related products and services, and is a major grower
of fresh mushrooms in the United States. The company has two reportable
business segments: Spawn Products, which includes spawn-related products,
services and bioproducts; and Fresh Mushrooms. Spawn-related products
include casing inoculum, nutritional supplements and disease-control
agents. During the quarter and six months ended June 30, 2002, the company
made no changes in the basis of segmentation or in the basis of
measurement of segment profit or loss from that reported in the December
30, 2001 financial statements.
11
(in thousands) Three Spawn Fresh Total
Months Products Mushrooms Reportable
Ended Segment Segment Segments
---- ------- ------- -------
Total revenues 2002 $15,401 $ 6,316 $21,717
2001 15,364 6,031 21,395
Intersegment revenues 2002 329 - 329
2001 321 - 321
Operating income 2002 2,390 748 3,138
2001 2,681 826 3,507
(in thousands) Six Spawn Fresh Total
Months Products Mushrooms Reportable
Ended Segment Segment Segments
---- ------- ------- -------
Total revenues 2002 $30,407 $12,555 $42,962
2001 30,990 11,592 42,582
Intersegment revenues 2002 655 - 655
2001 628 - 628
Operating income 2002 4,957 1,565 6,522
2001 5,578 1,344 6,922
Reconciliation to Consolidated Financial Data:
----------------------------------------------
Three Months Ended Six Months Ended
(in thousands) June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Total revenues for reportable segments $ 21,717 $ 21,395 $ 42,962 $ 42,582
Elimination of intersegment revenues (329) (321) (655) (628)
-------- -------- -------- --------
Total consolidated revenues $ 21,388 $ 21,074 $ 42,307 $ 41,954
======== ======== ======== ========
Total operating income for reportable
segments $ 3,138 $ 3,507 $ 6,522 $ 6,922
Unallocated corporate expenses (1,295) (941) (2,403) (1,933)
Interest expense, net (447) (625) (877) (1,243)
Other income (expense) 62 41 64 (6)
-------- -------- -------- --------
Consolidated income before income
taxes $ 1,458 $ 1,982 $ 3,306 $ 3,740
======== ======== ======== ========
5. COMMITMENTS:
In March 2002, the company committed approximately $250,000 per year,
over a four-year period, to sponsor research projects at a European
facility.
12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SYLVAN INC. AND SUBSIDIARIES
GENERAL
During the second quarter of 2002, the company announced that it had retained an
investment banking firm to evaluate strategic plans and business alternatives
designed to enhance Sylvan's shareholder value. The action was recommended by a
special committee of the board of directors that is composed of the board's
outside members and was organized for the purpose of selecting an advisor. This
evaluation is ongoing.
RESULTS OF OPERATIONS (Three Months Ended June 30, 2002 and July 1, 2001)
CONSOLIDATED REVIEW
Net Sales
- ---------
(in thousands) 2002 2001 % Change
---- ---- --------
Net sales $21,388 $21,074 1
Net sales were $21.4 million for the second quarter of 2002, as compared with
$21.1 million for the corresponding 2001 quarter. Net sales of the Fresh
Mushrooms Segment increased $0.3 million, while net sales of the Spawn Products
Segment remained virtually unchanged. On average, for the second quarter of
2002, the U.S. dollar was approximately 5% weaker, when measured against the
company's applicable foreign currencies, than for the second quarter of 2001.
This weakening resulted in increased sales of approximately $0.5 million and
increased operating income of $45,000 during the 2002 quarter, when compared
with the second quarter of 2001. International sales, as a percentage of net
sales, were 47% in the quarter ended June 30, 2002 and 46% in the corresponding
quarter of 2001.
Operating Costs and Expenses
- ----------------------------
(in thousands) 2002 2001 % Change
------- ------- -------
Cost of sales $12,554 $12,194 3
Selling, administration,
research and development 5,570 5,005 11
Depreciation 1,421 1,309 9
The company's cost of sales, expressed as a percentage of net sales, was 58.7%
for the second quarter of 2002, as compared with 57.9% for the second quarter of
2001. The Fresh Mushrooms Segment cost of sales percentage increased, while the
Spawn Products Segment cost of sales percentage decreased. Selling,
administration, research and development expenses were $5.6 million for the
second quarter of 2002, a $0.6 million increase from the $5.0 million reported
for the second quarter of 2001. This increase consisted of the following: a $0.2
million increase in professional fees, a $0.2 million increase in bad debt and
warranty reserves, a $0.1 million increase in research and development expenses,
a $0.1 million decrease in the net periodic pension benefit (detailed below),
$0.1 million in severance charges and a $0.1 million decrease in amortization
(detailed below).
The company recorded $37,500 and $151,000 of net periodic benefit income during
the quarters ended June 30, 2002 and July 1, 2001, respectively, from a pension
plan of a former subsidiary. This decrease related to plan asset performance in
2001. The company adopted the provisions of SFAS No. 142 (Goodwill and Other
Intangible Assets) at the beginning of the current fiscal year. No goodwill
amortization was recorded during
13
the quarter ended June 30, 2002. During the quarter ended July 1, 2001, the
company recorded goodwill amortization of approximately $125,000.
Interest Expense
- ----------------
Net interest expense for the second quarter of 2002 decreased 28% to $447,000,
from $625,000 for the second quarter of 2001. The effective interest rate for
the second quarter of 2002 was 5.3%, as compared with 6.4% for the second
quarter of 2001. The company recorded interest expense of $18,000 in the second
quarter of 2002 and $78,000 in the second quarter of 2001 related to SFAS No.
133 (Accounting for Derivative Instruments and Hedging Activities).
Income Tax Expense
- ------------------
The effective income tax rate was 32% for the second quarter of 2002, as
compared with 30% for the corresponding 2001 quarter. This higher effective tax
rate for 2002 was the result of a larger portion of the company's taxable income
being derived from higher-tax-rate jurisdictions.
BUSINESS SEGMENTS
Spawn Products
- --------------
(in thousands) 2002 2001 % Change
---- ---- --------
Sales, including intersegment $15,401 $15,364 0
Operating expenses 13,011 12,683 3
Operating income 2,390 2,681 (11)
Net sales of spawn and spawn-related products were $15.4 million for both the
second quarter of 2002 and the second quarter of 2001. The weaker U.S. dollar
had the effect of increasing sales on a quarter-over-quarter comparison by $0.5
million. Spawn product sales volume decreased 2%, with a 4% decrease in the
Americas and a 1% decrease in overseas markets. Most of the volume decrease in
the Americas was associated with a reduction in the amount of Agaricus growing
area planted. Sales of disease-control agents and nutritional supplements
increased 5% and accounted for 19% of Sylvan's consolidated net sales for the
second quarter of 2002.
The overseas U.S. dollar equivalent selling price increased 4% during the second
quarter of 2002, as compared with the corresponding quarter of 2001, primarily
due to the weakening of the U.S. dollar. The selling price in the Americas
increased 1%.
Operating expenses increased 3% to $13.0 million for the second quarter of 2002.
This increase consisted of a $0.2 million increase in bad debt and warranty
reserves and a $0.1 million increase in research and development expenses. Bad
debt reserves were increased due to the generally weak condition of the U.S.
mushroom industry. Warranty reserves were increased to coincide with the
beginning of production at Sylvan's new Canadian facility. Within operating
expenses, cost of sales was 53.7% of net sales, as compared with 54.3% for the
corresponding 2001 quarter. The overall discard rate for spawn production was
4.3% for the second quarter of 2002, as compared with 6% for the corresponding
quarter of 2001.
Operating income for the second quarter of 2002 was $2.4 million, as compared
with $2.7 million for the corresponding 2001 quarter. Operating income, as a
percentage of net sales, was 16% for the second quarter of 2002, as compared
with 17% for the second quarter of 2001. Operating income increased $45,000 due
to the weakening of the U.S. dollar. The operating income of the company's
bioproducts division, a component of the Spawn Products Segment, decreased
$140,000 due to a reduction in its sales of a specialized variety of mushroom.
14
Fresh Mushrooms
- ---------------
(in thousands) 2002 2001 % Change
------ ------ --------
Sales $6,316 $6,031 5
Operating expenses 5,568 5,205 7
Operating income 748 826 (9)
Net sales of fresh mushrooms for the second quarter of 2002 increased 5% to $6.3
million. The number of pounds sold increased 3% and the average selling price
per pound decreased 1%, as compared with the second quarter of 2001.
Sylvan's first two satellite farms, which commenced operations during the second
quarter of 2001, purchased $0.3 million of ready-to-grow mushroom trays from
Quincy and sold approximately $0.6 million of high-quality mushrooms to Quincy
for immediate resale to its third-party wholesaler.
Operating expenses for the second quarter of 2002 increased $0.4 million to $5.6
million, when compared with the $5.2 million for the second quarter of 2001.
This increase consisted of a $0.2 million increase in costs to produce mushrooms
due to lower yields per square foot, a $0.1 million increase in maintenance
expenses, and a $0.4 million increase in purchased product, offset by a $0.2
million decrease in production overhead expenses and a $0.1 million increase in
lease revenue from the satellite farms. Within operating expenses, cost of
sales, as a percentage of net sales, for the second quarter of 2002 was 67.8%,
as compared with 63.8% for the 2001 second quarter, due to the items detailed
above. The Fresh Mushrooms Segment operating income for the quarter was $0.7
million, or 12% of net sales, as compared with $0.8 million, or 14%, for the
second quarter of 2001.
RESULTS OF OPERATIONS (Six Months Ended June 30, 2002 and July 1, 2001)
CONSOLIDATED REVIEW
Net Sales
- ---------
(in thousands) 2002 2001 % Change
---- ---- --------
Net sales $42,307 $41,954 1
Net sales for the six months ended June 30, 2002 increased 1% to $42.3 million,
as compared with $42.0 million for the corresponding 2001 period. Net sales of
the Fresh Mushrooms Segment increased $1.0 million, while net sales of the Spawn
Products Segment decreased $0.6 million. On average, for the first six months of
2002, the U.S. dollar was approximately 1% stronger, when measured against the
company's applicable foreign currencies, than for the first six months of 2001.
This strengthening resulted in decreased sales of approximately $0.2 million and
decreased operating income of $45,000 during the 2002 period, when compared with
the corresponding 2001 period. International sales, as a percentage of net
sales, were 48% in both the six months ended June 30, 2002 and July 1, 2001.
Operating Costs and Expenses
- ----------------------------
(in thousands) 2002 2001 % Change
---- ---- --------
Cost of sales $24,632 $24,105 2
Selling, administration,
research and development 10,741 10,174 6
Depreciation 2,815 2,686 5
15
The company's cost of sales, expressed as a percentage of net sales, was 58.2%
for the first six months of 2002, as compared with 57.5% for the corresponding
2001 period. The Fresh Mushrooms Segment cost of sales percentage increased,
while the Spawn Products Segment percentage remained virtually unchanged.
Selling, administration, research and development expenses increased $0.6
million to $10.7 million. This increase consisted primarily of the following: a
$0.2 million increase in professional fees, a $0.2 million decrease in the net
periodic pension benefit (detailed below), $0.1 million in severance charges and
a $0.2 million decrease in amortization (detailed below).
The company recorded approximately $75,000 and $300,000 of net periodic benefit
income during the first six months of 2002 and 2001, respectively, from a
pension plan of a former subsidiary. This decrease related to plan asset
performance in 2001. The company adopted the provisions of SFAS No. 142
(Goodwill and Other Intangible Assets) at the beginning of the current fiscal
year. No goodwill amortization was recorded during the six months ended June 30,
2002. During the first six months of 2001, the company recorded goodwill
amortization of approximately $250,000.
Interest Expense
- ----------------
Net interest expense for the six months ended June 30, 2002 decreased 29% to
$877,000. The effective interest rate for the first six months of 2002 was 5.0%,
as compared with 6.5% for the corresponding 2001 period. The company recorded
interest income of $28,000 in the first six months of 2002 and interest expense
of $68,000 in the first six months of 2001 related to SFAS No. 133 (Accounting
for Derivative Instruments and Hedging Activities).
Income Tax Expense
- ------------------
The effective income tax rate was 33% for the six months ended June 30, 2002, as
compared with 30% for the corresponding 2001 period. This higher effective tax
rate for 2002 was the result of a larger portion of the company's taxable income
being derived from higher-tax-rate jurisdictions.
BUSINESS SEGMENTS
Spawn Products
- --------------
(in thousands) 2002 2001 % Change
---- ---- --------
Sales, including intersegment $30,407 $30,990 (2)
Operating expenses 25,450 25,412 0
Operating income 4,957 5,578 (11)
Net sales of spawn and spawn-related products were $30.4 million for the six
months ended June 30, 2002, as compared with $31.0 million for the corresponding
2001 period. The stronger U.S. dollar had the effect of reducing sales on a
period-over-period comparison by $0.2 million. Spawn product sales volume
decreased 1%, with a 6% decrease in the Americas and a 2% increase in overseas
markets. Most of the volume decrease in the Americas was associated with a
reduction in the amount of Agaricus growing area planted. Sales of
disease-control agents and nutritional supplements increased 5% and accounted
for 17% of Sylvan's consolidated net sales for the first six months of 2002.
The overseas U.S. dollar equivalent selling price decreased 2% during the first
six months of 2002, as compared with the corresponding 2001 period, primarily
due to the strengthening of the U.S. dollar. The selling price in the Americas
decreased 1%.
Operating expenses for the first six months of 2002 and 2001 were virtually
equal. However, 2002 included the $0.2 million increase in bad debt and warranty
reserves and the $0.1 million increase in research and development expenses
mentioned in the second quarter comparisons. Within operating expenses, cost of
16
sales was 53.2% of net sales, as compared with 53.1% for the corresponding 2001
period. The overall discard rate for spawn production was 4.5% for the six
months ended June 30, 2002, as compared with 5.2% for the corresponding period
of 2001.
Operating income for the first six months of 2002 was $5.0 million, as compared
with $5.6 million for the corresponding 2001 period. Operating income, as a
percentage of net sales, was 16% for the 2002 period, as compared with 18% for
the first six months of 2001. Operating income decreased $45,000 due to the
strengthening of the U.S. dollar. The operating income of the company's
bioproducts division, a component of the Spawn Products Segment, decreased
$360,000 due to a reduction in its sales of a specialized variety of mushroom.
Fresh Mushrooms
- ---------------
(in thousands) 2002 2001 % Change
---- ---- --------
Sales $12,555 $11,592 8
Operating expenses 10,990 10,248 7
Operating income 1,565 1,344 16
Net sales of fresh mushrooms for the six months ended June 30, 2002 increased 8%
to $12.6 million. The number of pounds sold increased 5% and the average selling
price per pound decreased 1%.
Sylvan's first two satellite farms, which commenced operations during the second
quarter of 2001, purchased $0.6 million of ready-to-grow mushroom trays from
Quincy and sold approximately $1.2 million of high-quality mushrooms to Quincy
for immediate resale to its third-party wholesaler.
Operating expenses for the first six months of 2002 increased $0.75 million to
$11.0 million, when compared with the $10.25 million for the first six months of
2001. This increase consisted of a $0.2 million increase in costs to produce
mushrooms due to lower yields per square foot, a $0.1 million increase in
maintenance expenses, and a $1.0 million increase in purchased product, offset
by a $0.35 million decrease in production overhead expenses and a $0.2 million
increase in lease revenue from the satellite farms. Within operating expenses,
cost of sales, as a percentage of net sales, for the first six months of 2002
was 67.2%, as compared with 66.1% for the corresponding 2001 period. The Fresh
Mushrooms Segment operating income was $1.6 million, or 12% of net sales, as
compared with $1.3 million, or 12%, for the first six months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 2002
was $8.8 million, as compared with $6.0 million for the corresponding six months
of 2001. During the first six months of 2002, the company reduced Other Current
Assets approximately $2.2 million due to the release of cash, which was
collateralized to support a loan from a European bank. This loan was repaid in
the first quarter of 2002.
Cash used by investing activities was $2.9 million for the six months ended June
30, 2002, as compared with $5.8 million used during the corresponding period of
2001. During the first six months of 2002, approximately $0.9 million was
expended on growth opportunities, primarily for the Canadian spawn production
facility and satellite growing facilities at Quincy. The remaining $2.0 million
was for maintenance capital expenditures. By comparison, during the first six
months of 2001, approximately $2.9 million was for growth opportunities and $2.9
million was for maintenance capital expenditures.
Capital expenditures in 2002 are expected to total between $5.0 million and $7.0
million for existing operations, $3.0 million to $4.0 million of which is
allocated for maintenance capital, with additional expenditures as required for
any acquisitions or new initiatives. The company routinely assesses its
requirements for additional capital investments and believes that it has
sufficient cash resources from current
17
cash balances, internally generated funds and available bank credit facilities
to meet its ongoing capital needs.
Available credit under the company's revolving credit arrangement was $20.9
million as of June 30, 2002. Term and revolving credit decreased $5.7 million
during the six months ended June 30, 2002, as compared with an increase of $0.7
million during the corresponding period of 2001. Most of this change related to
the repayment of a European bank loan supported by the cash deposit mentioned
earlier and positive cash flow in excess of expenditures for property, plant and
equipment.
During the first six months of 2002, the company purchased 23,321 shares of
Sylvan common stock at an average price of $11.60 per share. By comparison,
10,000 shares were purchased during the first six months of 2001 at an average
price of $10.19 per share. Management has suspended Sylvan's share purchase
program during the ongoing exploration of strategic alternatives mentioned
earlier.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
References are made in this report to expectations regarding capital
expenditures, future cash availability and the future performance of the
company, in general. These "forward-looking statements" are based on currently
available competitive, financial and economic data and the company's operating
plans, but they are inherently uncertain. Events could turn out to be
significantly different from what is expected, depending upon such factors as
mushroom growing process inconsistencies, specific pricing or product
initiatives of the company's competitors and competitive conditions in the
mushroom market in general, changes in currency and exchange risks, a loss of a
major customer, or changes in a specific country's or region's political or
economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information presented under this item in the company's Form 10-K for the
fiscal year ended December 30, 2001 has not changed materially. Information
relating to the sensitivity to foreign currency exchange rate changes of the
company's firmly committed sales transactions is omitted because it is an
immaterial portion of total sales.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
There are no material pending legal proceedings to which Sylvan or any of its
subsidiaries is a party, or to which any of their property is subject, other
than ordinary, routine litigation incidental to their respective businesses.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Sylvan Inc.'s annual meeting of shareholders was held on May 30, 2002. At the
meeting, the following individuals, constituting the full board, were elected
directors of the company to serve for a term of one year, expiring in 2003.
-----Number of Votes----
For Withheld
--- --------
William L. Bennett 5,015,935 32,535
Monir K. Elzalaki 4,076,314 972,156
Virgil H. Jurgensmeyer 5,013,435 35,035
Nelson Obus 5,020,436 28,034
Dennis C. Zensen 4,295,477 752,993
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
3.3 Articles of Incorporation of S.F. Nevada, Inc. - previously
filed on November 12, 1999 with the company's Form 10-Q
quarterly report for the period ended October 3, 1999 and
incorporated herein by reference
3.4 Articles of Merger of S.F. Nevada, Inc. and Sylvan Foods
Holdings, Inc. with exhibit - previously filed on November 12,
1999 with the company's Form 10-Q quarterly report for the
period ended October 3, 1999 and incorporated herein by
reference
3.5 Bylaws - previously filed on November 12, 1999 with the
company's Form 10-Q quarterly report for the period ended
October 3, 1999 and incorporated herein by reference
Compensation Plans and Arrangements
10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan,
previously filed as Exhibit 3.3.2 on April 2, 1993 with the
company's Form 10-K annual report for the fiscal year ended
January 3, 1993 and incorporated herein by reference
10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for
Nonemployee Directors, previously filed on April 1, 1994 with
the company's Form 10-K annual report for the fiscal year ended
January 2, 1994 and incorporated herein by reference
10.12 Sylvan Inc. 1990 Stock Option Plan (amended and restated),
previously filed on November 12, 1999 with the company's Form
10-Q quarterly report for the period ended October 3, 1999 and
incorporated herein by reference
Material Contracts
10.2.1 Revolving Credit Agreement, dated as of August 6, 1998, by and
among Sylvan Inc., a Nevada corporation, Sylvan Foods
(Netherlands) B.V., a Dutch corporation, as Borrowers, the Banks
party thereto from time to time and Mellon Bank, N.A., a
national banking association, as issuing bank and as agent for
the Banks thereunder, together with various annexes, exhibits
and schedules and various related documents, previously filed as
Exhibits 10.1 through 10.10 on November 10, 1998 with Sylvan's
Form 10-Q quarterly report for the period ended September 27,
1998 and incorporated herein by reference
19
10.2.11 Index of Other Exhibits to the Revolving Credit Agreement,
previously filed as Exhibit 10.11 on November 10, 1998 with
Sylvan's Form 10-Q quarterly report for the period ended
September 27, 1998 and incorporated herein by reference
10.5.1 Agreement, dated January 14, 2000, by and between C And C
Carriage Mushroom Co., t/a Modern Sales Company, and Quincy
Corporation, previously filed on March 27, 2000 with the
company's Form 10-K annual report for the fiscal year ended
January 2, 2000 and incorporated herein by reference
10.5.2 Index of Exhibits to the C And C Agreement referenced above,
previously filed on March 27, 2000 with the company's Form 10-K
annual report for the fiscal year ended January 2, 2000 and
incorporated herein by reference
10.40 Collective Bargaining Agreement, dated January 21, 2001, between
Quincy Corporation and the United Farm Workers of America,
AFL-CIO, previously filed on March 23, 2001 with the company's
Form 10-K annual report for the fiscal year ended December 31,
2000 and incorporated herein by reference
10.41 Notification letter, dated October 12, 2001, regarding Mellon
Bank's transfer to Citizens Financial Group, Inc. of its right,
title and interest in the Revolving Credit Agreement, dated
August 6, 1998, previously filed on March 20, 2002 with the
company's Form 10-K annual report for the fiscal year ended
December 30, 2001 and incorporated herein by reference
10.42 Statement re computation of per share earnings is not required
because the relevant computation can be clearly determined from
the material contained in the financial statements included
herein
99.2 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350)
(b) Reports on Form 8-K
Report on Form 8-K filed on June 7, 2002, reporting the dismissal of Arthur
Andersen LLP as the company's independent accountant and the engagement
of Ernst & Young LLP as the company's independent accountant for 2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 2002 SYLVAN INC.
-----------------------
By: /s/ DONALD A. SMITH
------------------------------------
Donald A. Smith
Chief Financial Officer
By: /s/ FRED Y. BENNITT
------------------------------------
Fred Y. Bennitt
Secretary/Treasurer
20