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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 THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 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 (IRS Employer Identification No.)
of 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 October 30, 2002...5,441,131
SYLVAN INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets,
September 29, 2002 and December 30, 2001........................................................3
Condensed Consolidated Statements of Income, Three Months
Ended September 29, 2002 and September 30, 2001.................................................5
Condensed Consolidated Statements of Income, Nine Months
Ended September 29, 2002 and September 30, 2001.................................................6
Condensed Consolidated Statements of Cash Flows, Nine Months
Ended September 29, 2002 and September 30, 2001.................................................7
Notes to Condensed Consolidated Financial Statements,
September 29, 2002..............................................................................8
Item 2. Management's Discussion and Analysis...........................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................19
Item 4. Controls and Procedures........................................................................19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................19
Item 6. Exhibits and Reports on Form 8-K..............................................................20
Signatures..............................................................................................21
Certifications..........................................................................................22
Index to Exhibits.......................................................................................25
Exhibits................................................................................................27
PART I - FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In thousands)
September 29, 2002 December 30, 2001
------------------ -----------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 5,338 $ 5,072
Trade accounts receivable, net of allowance
for doubtful accounts of $541 and $440, respectively 13,524 13,133
Inventories 11,199 10,119
Prepaid income taxes and other expenses 1,819 1,437
Other current assets 1,728 4,206
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 33,608 33,967
Property, plant and equipment, net 57,064 54,276
Intangible assets, net of accumulated amortization
of $4,464 and $4,078, respectively 11,822 11,036
Other assets, net of accumulated amortization
of $566 and $491, respectively 7,865 7,811
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 110,359 $ 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)
September 29, 2002 December 30, 2001
------------------ -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 232 $ 2,430
Accounts payable - trade 3,993 3,833
Accrued salaries, wages and employee benefits 3,048 2,635
Other accrued liabilities 1,922 905
Income taxes payable 1,423 942
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 10,618 10,745
- -------------------------------------------------------------------------------------------------------------------------
Long-term and revolving-term debt 35,007 37,255
- -------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities:
Other 1,943 1,362
Deferred income taxes 4,914 5,162
- -------------------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 6,857 6,524
- -------------------------------------------------------------------------------------------------------------------------
Minority interest 1,687 1,680
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $0.001, 10,000,000 shares authorized,
6,728,405 and 6,694,272 shares issued at
September 29, 2002 and December 30, 2001, respectively 7 7
Additional paid-in capital 17,390 17,055
Retained earnings 63,604 60,296
Less: Treasury stock, at cost, 1,287,274 and 1,263,953 shares
at September 29, 2002 and December 30, 2001, respectively (13,407) (13,136)
-------- --------
67,594 64,222
Accumulated other comprehensive deficit (11,404) (13,336)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 56,190 50,886
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 110,359 $ 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--------------
September 29, 2002 September 30, 2001
------------------ ------------------
NET SALES $ 22,275 $ 21,848
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 13,612 12,893
Selling, administration, research and development 4,990 4,703
Depreciation 1,453 1,370
- -------------------------------------------------------------------------------------------------------------------------
20,055 18,966
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,220 2,882
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 490 604
OTHER INCOME (EXPENSE) (3) (90)
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,727 2,188
PROVISION FOR INCOME TAXES 579 656
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 1,148 1,532
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 39 24
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,109 $ 1,508
=========================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.20 $ 0.27
=========================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.20 $ 0.27
=========================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 5,439,697 5,523,618
=========================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,502,408 5,584,890
=========================================================================================================================
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)
------------Nine Months Ended--------
September 29, 2002 September 30, 2001
------------------ ------------------
NET SALES $ 64,582 $ 63,803
- ------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 38,244 36,999
Selling, administration, research and development 15,732 14,877
Depreciation 4,268 4,056
- ------------------------------------------------------------------------------------------------------------------
58,244 55,932
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 6,338 7,871
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 1,366 1,847
OTHER INCOME (EXPENSE) 60 (96)
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 5,032 5,928
PROVISION FOR INCOME TAXES 1,661 1,778
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 3,371 4,150
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 63 94
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,308 $ 4,056
======================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.60 $ 0.73
======================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.60 $ 0.73
======================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 5,435,607 5,521,115
======================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,494,988 5,576,493
======================================================================================================================
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)
------------Nine Months Ended----------
September 29, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,308 $ 4,056
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,428 4,610
Employee benefits 689 (316)
Trade accounts receivable 210 (198)
Inventories (591) (53)
Prepaid expenses and other assets 2,267 (366)
Accounts payable and accrued liabilities 1,332 429
Other (970) (219)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,673 7,943
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (4,772) (7,557)
Proceeds from sale of fixed assets - 93
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,772) (7,464)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (2,343) (202)
Proceeds from long-term debt borrowings - 49
Net (repayments) borrowings under revolving credit line (3,492) 289
Proceeds from exercise of stock options 312 112
Purchase of treasury shares (271) (245)
- --------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (5,794) 3
- --------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH 159 (391)
- --------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS 266 91
CASH AND CASH EQUIVALENTS, beginning of period 5,072 5,371
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 5,338 $ 5,462
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 1,483 $ 1,726
Income taxes paid 1,557 1,853
The accompanying notes are an integral part of these financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SYLVAN INC. AND SUBSIDIARIES
SEPTEMBER 29, 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. The
consolidated balance sheet of December 30, 2001 was derived from the
audited balance sheet included in the most recent Form 10-K.
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 September 29, 2002 and December 30, 2001 consisted of the
following:
(in thousands) September 29, 2002 December 30, 2001
------------------ -----------------
Growing crops and compost material $ 5,012 $ 5,466
Stores and other supplies 2,125 1,493
Finished products 4,062 3,160
------- ---------
$11,199 $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 583,612 of these shares
have been exercised as of September 29, 2002.
8
The following tables reconcile the number of shares utilized in the
earnings per share calculations for the three and nine months ended
September 29, 2002 and September 30, 2001.
Three Months Ended Nine Months Ended
(in thousands) Sept. 29, 2002 Sept. 30, 2001 Sept. 29, 2002 Sept. 30, 2001
-------------- -------------- -------------- --------------
Net income $ 1,109 $ 1,508 $ 3,308 $ 4,056
========== ========== ========== ==========
Earnings per common share
- basic $ 0.20 $ 0.27 $ 0.60 $ 0.73
========== ========== ========== ==========
Earnings per common share
- diluted $ 0.20 $ 0.27 $ 0.60 $ 0.73
========== ========== ========== ==========
Common shares - basic 5,439,697 5,523,618 5,435,607 5,521,115
Effect of dilutive securities:
Stock options 62,711 61,272 59,381 55,378
---------- ---------- ---------- ----------
Common shares - diluted 5,502,408 5,584,890 5,494,988 5,576,493
========== ========== ========== ==========
Options to purchase approximately 298,000 shares of common stock in the
three and nine months ended September 29, 2002, and 305,000 shares of
common stock in the three and nine months ended September 30, 2001, 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. The company plans to complete its annual
assessment to test for transitional goodwill impairment during the fourth
quarter of 2002.
Sylvan's intangible assets, which relate solely to its Spawn Products
Segment, are as follows:
Gross Carrying Amount Accumulated Amortization
Cultures Cultures
(in thousands) Goodwill and Other Goodwill and Other Net
--------- --------- ----------- ----------- --------
December 30, 2001 $ 14,107 $ 1,007 $ (3,776) $ (302) $ 11,036
Additions - 7 - (96) (89)
Impairment - - - - -
Disposals - - - -
Currency Translation 1,165 - (290) - 875
-------- -------- -------- -------- --------
September 29, 2002 $ 15,272 $ 1,014 $ (4,066) $ (398) $ 11,822
======== ======== ======== ======== ========
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 $96,000 for the
three and nine months ended September 29, 2002, respectively. Estimated
amortization expense for the remainder of 2002 and the five succeeding
years is as follows:
(in thousands)
2002 (remainder) $ 32
2003 127
2004 122
2005 67
2006 67
2007 65
Actual results of operations for the three and nine months ended September
29, 2002 and the pro forma results for the three and nine months ended
September 30, 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 Nine Months Ended
(in thousands except per share data) Sept. 29, 2002 Sept. 30, 2001 Sept. 29, 2002 Sept. 30, 2001
-------------- -------------- -------------- --------------
Reported net income $ 1,109 $ 1,508 $ 3,308 $ 4,056
Add back: Goodwill amortization,
net of tax - 84 - 251
--------- ---------- ---------- ---------
Adjusted net income $ 1,109 $ 1,592 $ 3,308 $ 4,307
======== ======== ======== ========
Basic earnings per share:
Reported net income $ 0.20 $ 0.27 $ 0.60 $ 0.73
Add back: Goodwill amortization - 0.02 - 0.05
--------- ---------- ---------- ---------
Adjusted net income $ 0.20 $ 0.29 $ 0.60 $ 0.78
========= ========= ========= =========
Diluted earnings per share:
Reported net income $ 0.20 $ 0.27 $ 0.60 $ 0.73
Add back: Goodwill amortization - 0.02 - 0.04
--------- ---------- ---------- ---------
Adjusted net income $ 0.20 $ 0.29 $ 0.60 $ 0.77
========= ========== ========== =========
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 September 29, 2002, the company had outstanding borrowings under the
agreement of $33.9 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 September 29, 2002,
a term loan amounting to 0.8 million euros ($0.8 million) was
outstanding under this agreement.
3. COMPREHENSIVE INCOME:
Comprehensive income consisted of the following:
Three Months Ended Nine Months Ended
(in thousands) Sept. 29, 2002 Sept. 30, 2001 Sept. 29, 2002 Sept. 30, 2001
-------------- -------------- -------------- --------------
Net income $ 1,109 $ 1,508 $ 3,308 $ 4,056
Other comprehensive income:
Foreign currency translation
adjustment (275) 1,002 2,472 (2,715)
Unrealized income (losses) on
derivatives and qualified cash
flow hedges, net of tax (390) (460) (540) (554)
------- ------- ------- -------
Total comprehensive income $ 444 $ 2,050 $ 5,240 $ 787
======= ======= ======= =======
The components of accumulated other comprehensive deficit consist of the
following:
(in thousands) SEPTEMBER 29, 2002 DECEMBER 30, 2001
------------------ -----------------
Unrealized losses on derivatives and
qualified cash flow hedges, net of tax $ (876) $ (336)
Foreign currency translation adjustments (10,528) (13,000)
-------- --------
Total accumulated other comprehensive deficit $(11,404) $(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 September 29, 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 nine months ended September 29, 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
Three Spawn Fresh Total
Months Products Mushrooms Reportable
(in thousands) Ended Segment Segment Segments
----- ------- ------- --------
Total revenues 2002 $16,404 $ 6,204 $22,608
2001 16,069 6,097 22,166
Intersegment revenues 2002 333 - 333
2001 318 - 318
Operating income 2002 2,718 436 3,154
2001 3,047 561 3,608
Nine Spawn Fresh Total
Months Products Mushrooms Reportable
(in thousands) Ended Segment Segment Segments
----- ------- ------- --------
Total revenues 2002 $46,812 $18,759 $65,571
2001 47,059 17,690 64,749
Intersegment revenues 2002 989 - 989
2001 946 - 946
Operating income 2002 7,674 2,001 9,675
2001 8,625 1,905 10,530
RECONCILIATION TO CONSOLIDATED FINANCIAL DATA:
Three Months Ended Nine Months Ended
(in thousands) Sept. 29, 2002 Sept. 30, 2001 Sept. 29, 2002 Sept. 30, 2001
-------------- -------------- -------------- --------------
Total revenues for reportable segments $ 22,608 $ 22,166 $ 65,571 $ 64,749
Elimination of intersegment revenues (333) (318) (989) (946)
-------- -------- -------- --------
Total consolidated revenues $ 22,275 $ 21,848 $ 64,582 $ 63,803
======== ======== ======== ========
Total operating income for reportable
segments $ 3,154 $ 3,608 $ 9,675 $ 10,530
Unallocated corporate expenses (934) (726) (3,337) (2,659)
Interest expense, net (490) (604) (1,366) (1,847)
Other income (expense) (3) (90) 60 (96)
-------- -------- -------- --------
Consolidated income before income
taxes $ 1,727 $ 2,188 $ 5,032 $ 5,928
======== ======== ======== ========
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 was composed of the board's
outside members and was organized for the purpose of selecting an advisor. On
October 15, 2002, as a result of Sylvan's evaluation of strategic alternatives,
the company announced that it intends to repurchase up to 1.3 million shares of
its common stock over a 36-month period.
RESULTS OF OPERATIONS (Three Months Ended September 29, 2002 and September 30,
2001)
CONSOLIDATED REVIEW
NET SALES
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Net sales $ 22,275 $ 21,848 2
Net sales increased 2% to $22.3 million, when compared with $21.8 million for
the corresponding 2001 quarter. Net sales of the Fresh Mushrooms Segment
increased $0.1 million and net sales of the Spawn Products Segment increased
$0.3 million. The U.S. dollar was approximately 10% weaker, when measured
against the company's applicable foreign currencies, than for the third quarter
of 2001. This weakening resulted in increased sales of approximately $1.1
million and increased operating income of $0.1 million during the 2002 quarter,
when compared with the third quarter of 2001. International sales, as a
percentage of net sales, were 50% in the third quarter of 2002 and 48% in the
corresponding quarter of 2001.
OPERATING COSTS AND EXPENSES
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Cost of sales $ 13,612 $ 12,893 6
Selling, administration,
research and development 4,990 4,703 6
Depreciation 1,453 1,370 6
The company's cost of sales, expressed as a percentage of net sales, was 61.1%
for the third quarter of 2002, as compared with 59.0% for the third quarter of
2001. The cost of sales percentage increased in both the Fresh Mushrooms Segment
and the Spawn Products Segment. Selling, administration, research and
development expenses increased 6% to $5.0 million, when compared with the $4.7
million reported for the third quarter of 2001. This increase consisted of the
following:
Increased professional fees and insurance $ 0.2 million
Decreased periodic pension benefit (detailed below) 0.1 million
Weaker U.S. dollar 0.1 million
Decreased amortization expense (detailed below) (0.1) million
The company recorded $37,500 and $151,000 of net periodic benefit income during
the quarters ended September 29, 2002 and September 30, 2001, respectively, from
a pension plan of a former subsidiary. This decrease related to plan asset
performance in 2001. The company expects additional decreases in the net
13
periodic benefit income in 2003 due to weak plan asset performance in 2002.
Pension plan contributions will be required if plan asset performance continues
to decline.
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 quarter ended September 29, 2002. During
the quarter ended September 30, 2001, the company recorded goodwill amortization
of approximately $125,000.
INTEREST EXPENSE
Net interest expense for the third quarter of 2002 decreased 19% to $490,000,
from $604,000 for the third quarter of 2001. The effective interest rate for the
third quarter of 2002 was 5.7%, as compared with 5.9% for the third quarter of
2001. The company recorded interest expense of $43,000 in the third quarter of
2002 and a benefit of $45,000 in the third quarter 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 third 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 $ 16,404 $ 16,069 2
Operating expenses 13,686 13,022 5
Operating income 2,718 3,047 (11)
Net sales of spawn and spawn-related products increased 2% to $16.4 million,
when compared with the $16.1 million reported for the third quarter of 2001.
However, after adjusting for the weaker U.S. dollar, which increased net sales
by $1.1 million on a quarter-over-quarter comparison, net sales decreased by 5%.
Spawn product sales volume decreased 4%, with a 9% 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
and increased competition in the United States. Sales of disease-control agents
and nutritional supplements increased 8% and accounted for 18% of Sylvan's
consolidated net sales for the third quarter of 2002.
The overseas U.S. dollar equivalent selling price increased 7% during the third
quarter of 2002, as compared with the corresponding quarter of 2001, primarily
due to the weakening of the U.S. dollar. After adjusting for the weaker U.S.
dollar, the overseas selling price decreased 3% due to lower volumes sold in the
UK and Irish markets, which are higher-priced territories. This 3% decrease in
average selling price had the effect of reducing operating income by $325,000.
The selling price in the Americas increased 2%. The company intends to implement
price reductions for some of its products during the fourth quarter of 2002, in
order to meet competitive pressures and preserve its share of its spawn products
markets. The company believes that the changes could reduce Sylvan's Spawn
Products Segment sales and operating income.
Operating expenses increased 5% to $13.7 million for the third quarter of 2002.
Most of the increase was due to the weaker U.S. dollar that had the effect of
increasing operating expenses by $0.6 million. Within operating expenses, cost
of sales was 55.5% of net sales, as compared with 53.6% for the corresponding
2001 quarter. Sales volumes decreased on Sylvan's more profitable spawn and CI
and increased on its less profitable disease-control agents and nutritional
supplements. The overall discard rate for spawn production was 5.9% for the
third quarter of 2002, as compared with 4.9% for the corresponding quarter of
2001.
14
Operating income decreased 11% to $2.7 million, as compared with $3.0 million
for the corresponding 2001 quarter. The decrease is directly attributable to the
change in product mix which was detailed earlier. Operating income, as a
percentage of net sales, was 17% for the third quarter of 2002, as compared with
19% for the third quarter of 2001. Operating income increased $0.1 million 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, increased
$80,000 due to a reduction in overhead costs that was initiated during the first
six months of 2002.
FRESH MUSHROOMS
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Sales $6,204 $6,097 2
Operating expenses 5,768 5,536 4
Operating income 436 561 (22)
Net sales of fresh mushrooms and compost, for the third quarter of 2002
increased 2% to $6.2 million. The number of pounds sold and the average selling
price per pound were virtually unchanged from the prior-year third quarter.
Sylvan's first two satellite farms, which commenced operations during the second
quarter of 2001, purchased $0.4 million of ready-to-grow mushroom trays from
Quincy, $0.1 million more than in the corresponding 2001 quarter, and sold
approximately $0.7 million of mushrooms to Quincy for immediate resale to its
third-party wholesaler.
Operating expenses for the third quarter of 2002 increased $0.2 million to $5.8
million, when compared with the $5.5 million for the third quarter of 2001.
Within operating expenses, cost of sales, as a percentage of net sales, for the
third quarter of 2002 was 72.6%, as compared with 70.2% for the 2001 third
quarter. Quincy's return per square foot, for the third quarter of 2002, did not
meet expectations due to lower yields at the main farm, a lower average selling
price for cannery product, and an increase in harvesting costs and related
overhead expenses. The Fresh Mushrooms Segment operating income for the third
quarter was 7% of net sales, as compared with 9% for the third quarter of 2001.
RESULTS OF OPERATIONS (Nine Months Ended September 29, 2002 and September 30,
2001)
CONSOLIDATED REVIEW
NET SALES
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Net sales $ 64,582 $ 63,803 1
Net sales for the nine months ended September 29, 2002 increased 1% to $64.6
million, as compared with $63.8 million for the corresponding 2001 period. Net
sales of the Fresh Mushrooms Segment increased $1.1 million, while net sales of
the Spawn Products Segment decreased $0.2 million. On average, for the first
nine months of 2002, the U.S. dollar was approximately 3% weaker, when measured
against the company's applicable foreign currencies, than for the first nine
months of 2001. This weakening resulted in increased sales of approximately $0.9
million and increased 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 nine months ended September 29,
2002 and September 30, 2001.
15
OPERATING COSTS AND EXPENSES
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Cost of sales $38,244 $36,999 3
Selling, administration,
research and development 15,732 14,877 6
Depreciation 4,268 4,056 5
The company's cost of sales, expressed as a percentage of net sales, was 59.2%
for the first nine months of 2002, as compared with 58.0% for the corresponding
2001 period. The cost of sales percentage increased in both the Fresh Mushrooms
Segment and the Spawn Products Segment. Selling, administration, research and
development expenses increased $0.9 million to $15.7 million. This increase
consisted primarily of the following:
Increased professional fees $ 0.3 million
Decreased periodic pension benefit (detailed below) 0.3 million
Increased bad debt and warranty reserves 0.2 million
Severance charges 0.2 million
Increased insurance expense 0.2 million
Weaker U.S. dollar 0.1 million
Decreased amortization expense (detailed below) (0.4) million
The company recorded approximately $115,000 and $450,000 of net periodic benefit
income during the first nine 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 expects additional decreases in the net
periodic benefit income in 2003 due to weak plan asset performance in 2002.
Pension plan contributions will be required if plan asset performance continues
to decline.
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 nine months ended September 29, 2002.
During the first nine months of 2001, the company recorded goodwill amortization
of approximately $375,000.
INTEREST EXPENSE
Net interest expense for the nine months ended September 29, 2002 decreased 26%
to $1,366,000. The effective interest rate for the first nine months of 2002 was
5.2%, as compared with 6.6% for the corresponding 2001 period. The company
recorded interest expense of $16,000 in the first nine months of 2002 and
$22,000 in the first nine 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 nine months ended September 29,
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.
16
BUSINESS SEGMENTS
SPAWN PRODUCTS
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Sales, including intersegment $ 46,812 $ 47,059 (1)
Operating expenses 39,138 38,434 2
Operating income 7,674 8,625 (11)
Net sales of spawn and spawn-related products were $46.8 million for the nine
months ended September 29, 2002, as compared with $47.1 million for the
corresponding 2001 period. The weaker U.S. dollar had the effect of increasing
sales on a period-over-period comparison by $0.9 million. Spawn product sales
volume decreased 2%, with a 7% decrease in the Americas and a 1% 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 and increased
competition in the United States. Sales of disease-control agents and
nutritional supplements increased 6% and accounted for 17% of Sylvan's
consolidated net sales for the first nine months of 2002.
The overseas U.S. dollar equivalent selling price increased 1% during the first
nine months of 2002, as compared with the corresponding 2001 period, primarily
due to the weakening of the U.S. dollar. After adjusting for the weaker U.S.
dollar, the overseas selling price decreased 2%, primarily due to lower volumes
sold in the UK and Irish markets, which are higher-priced territories. This 2%
decrease in average selling price had the effect of reducing operating income by
$450,000. The selling price in the Americas was virtually unchanged. The company
intends to implement price reductions for some of its products during the fourth
quarter of 2002, in order to meet competitive pressures and preserve its share
of its spawn products markets. The company believes that the changes could
reduce Sylvan's Spawn Products Segment sales and operating income.
Operating expenses increased 2% to $39.1 million for the first nine months of
2002. Most of the increase was due to the weaker U.S. dollar that had the effect
of increasing operating expenses by $0.5 million. Within operating expenses,
cost of sales was 54.0% of net sales, as compared with 53.2% for the
corresponding 2001 period. Sales volumes decreased on Sylvan's more profitable
spawn and CI and increased on its less profitable disease-control agents and
nutritional supplements. The overall discard rate for spawn production was 4.9%
for the nine months ended September 29, 2002, as compared with 5.1% for the
corresponding period of 2001.
Operating income for the first nine months of 2002 was $7.7 million, as compared
with $8.6 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 nine months 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 $280,000
primarily due to a reduction in its sales of a specialized variety of mushroom.
FRESH MUSHROOMS
(in thousands) 2002 2001 % CHANGE
---- ---- --------
Sales $ 18,759 $ 17,690 6
Operating expenses 16,758 15,785 6
Operating income 2,001 1,905 5
Net sales of fresh mushrooms and compost, for the nine months ended September
29, 2002, increased 6% to $18.8 million. The number of pounds sold increased 4%
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 $0.9 million of ready-to-grow mushroom trays from Quincy and sold
approximately $1.9 million of mushrooms to Quincy for immediate resale to its
third-party wholesaler.
17
Operating expenses for the first nine months of 2002 increased $1.0 million to
$16.8 million, when compared with the $15.8 million for the first nine months of
2001. Within operating expenses, cost of sales, as a percentage of net sales,
for the first nine months of 2002 was 69.0%, as compared with 67.5% for the
corresponding 2001 period. The Fresh Mushrooms Segment operating income was $2.0
million, or 11% of net sales, for the first nine months of 2002 and $1.9
million, or 11%, for the first nine months of 2001. Quincy's return per square
foot, for the first nine months of 2002, did not meet expectations due to lower
yields at the main farm and an average lower selling price for cannery product.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended September
29, 2002 was $10.7 million, as compared with $7.9 million for the corresponding
nine months of 2001. In January 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
January of 2002.
Cash used by investing activities was $4.7 million for the nine months ended
September 29, 2002, as compared with $7.5 million during the corresponding
period of 2001. During the first nine months of 2002, approximately $1.9 million
was expended on growth opportunities, primarily for the Canadian spawn
production facility and satellite growing facilities at Quincy. The remaining
$2.8 million was for maintenance capital expenditures. By comparison, during the
first nine months of 2001, approximately $4.0 million was for growth
opportunities and $3.5 million was for maintenance capital expenditures.
Capital expenditures in 2002 are expected to total between $6.0 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 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 $21.1
million as of September 29, 2002. Term and revolving credit decreased $5.8
million during the nine months ended September 29, 2002, as compared with an
increase of $0.1 million during the corresponding period of 2001. Approximately
$2.2 million 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 nine months of 2002, the company purchased 23,321 shares of
Sylvan common stock at an average price of $11.60 per share. By comparison,
22,071 shares were purchased during the first nine months of 2001 at an average
price of $11.10 per share. Management suspended Sylvan's share purchase program
during the exploration of strategic alternatives mentioned earlier. On October
15, 2002, the company announced that it intends to repurchase up to 1.3 million
shares of its common stock over a 36-month period.
18
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
References are made in this report to expectations regarding capital
expenditures, share repurchases, net periodic pension benefit income, 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, spawn pricing or product initiatives of the company's
competitors, competitive conditions in the mushroom market, changes in currency
and exchange risks, the loss of a major customer, changes in a specific
country's or region's political or economic conditions, or the variability of
the U.S. public equity and bond markets.
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.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Sylvan's Chief Executive Officer and Chief Financial Officer have evaluated the
company's disclosure controls and procedures as of October 31, 2002, and they
concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to October 31, 2002.
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.
19
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
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
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
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
20
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
10.43 Employment Continuation Agreement with Dennis C. Zensen, dated
September 24, 2002, filed herewith
10.44 Employment Continuation Agreement with Monir K. Elzalaki, dated
September 21, 2002, filed herewith
10.45 Employment Continuation Agreement with Donald A. Smith, dated
September 19, 2002, filed herewith
10.46 Employment Continuation Agreement with Gary D. Walker, dated
September 24, 2002, filed herewith
10.47 Manager's Service Agreement with Michael A. Walton, dated April
17, 1988, filed herewith
(b) Reports on Form 8-K
None
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: November 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
21
CERTIFICATIONS
Pursuant to 18 U.S.C. Section 1350, the undersigned officers of Sylvan Inc.
hereby certify that the company's quarterly report on Form 10-Q for the quarter
ended September 29, 2002, fully complies with the requirements of Section 13(a)
or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the
information contained in the report fairly presents, in all material respects,
the financial condition and results of operations of the company.
Dated: November 12, 2002 By: /s/ Dennis C. Zensen
--------------------- --------------------------------------
Dennis C. Zensen
Chairman, President and Chief
Executive Officer
Dated: November 12, 2002 By: /s/ Donald A. Smith
--------------------- --------------------------------------
Donald A. Smith
Chief Financial Officer
22
I, Dennis C. Zensen, Chairman of the Board, President and Chief Executive
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sylvan Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. 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) 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 quarterly
report is being prepared;
b) 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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. 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 functions):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether 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.
November 12, 2002 /s/ Dennis C. Zensen
--------------------------------------------
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
23
I, Donald A. Smith, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sylvan Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. 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) 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 quarterly
report is being prepared;
b) 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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. 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 functions):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether 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.
November 12, 2002 /s/ Donald A. Smith
--------------------------------------------
Chief Financial Officer
(Principal Financial Officer)
24
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
3.3 Articles of Incorporation of S. F. Nevada, Inc. (a)
3.4 Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods Holdings, Inc. with exhibit (a)
3.5 Bylaws (a)
10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan (b)
10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors (c)
10.12 Sylvan Inc. 1990 Stock Option Plan, as amended and restated (a)
10.2.1 Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc.,
a Nevada corporation, and 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 (d)
10.2.11 Index of Other Exhibits to the Revolving Credit Agreement referenced in Exhibit 10.2.1 (d)
25
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 (e)
10.5.2 Index of Exhibits to the Agreement referenced in Exhibit 10.5.1 (e)
10.40 Collective Bargaining Agreement, dated January 21, 2001, between Quincy Corporation
and the United Farm Workers of America, AFL-CIO (f)
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 (g)
10.43 Employment Continuation Agreement with Dennis C. Zensen, dated September 24, 2002 27
10.44 Employment Continuation Agreement with Monir K. Elzalaki, dated September 21, 2002 38
10.45 Employment Continuation Agreement with Donald A. Smith, dated September 19, 2002 49
10.46 Employment Continuation Agreement with Gary D. Walker, dated September 24, 2002 60
10.47 Manager's Service Agreement with Michael A. Walton, dated April 17, 1988 71
- ------------------
(a) This exhibit was previously filed on November 12, 1999 with the
company's Form 10-Q quarterly report for the period ended October
3, 1999 and is incorporated herein by reference.
(b) This exhibit was previously filed on April 2, 1993 with the
company's Form 10-K annual report for the fiscal year ended
January 3, 1993 and is incorporated herein by reference.
(c) This exhibit was previously filed on April 1, 1994 with the
company's Form 10-K annual report for the fiscal year ended
January 2, 1994 and is incorporated herein by reference.
(d) This exhibit was previously filed on November 10, 1998 as one of
Exhibits 10.1 through 10.11 with the company's Form 10-Q quarterly
report for the period ended September 27, 1998 and is incorporated
herein by reference.
(e) This exhibit was previously filed on March 27, 2000 with the
company's Form 10-K annual report for the fiscal year ended
January 2, 2000 and is incorporated herein by reference.
(f) This exhibit was previously filed on March 23, 2001 with the
company's Form 10-K annual report for the fiscal year ended
December 31, 2001 and is incorporated herein by reference.
(g) This exhibit was previously filed on March 20, 2002 with the
company's Form 10-K annual report for the fiscal year ended
December 30, 2001 and is incorporated herein by reference.
26