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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ____________
COMMISSION FILE NO. 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)
Registrant's telephone number, including area code: (724) 352-7520
Securities registered pursuant Name of each exchange
to Section 12(b) of the Act: on which registered:
Title of each class Not applicable
-------------------
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
------ -----
The aggregate market value of voting stock held by non-affiliates of the
registrant at June 30, 2002 (the last day of the registrant's second fiscal
quarter of 2002) was approximately $47,081,398. As of that date, the last sale
price of the registrant's common stock was $13.00 per share. Solely for purposes
of this calculation, shares beneficially owned by directors and executive
officers have been excluded.
Indicated below is the number of shares outstanding of each of the registrant's
classes of common stock as of February 28, 2003.
Class Outstanding
----- -----------
COMMON STOCK, PAR VALUE $.001 PER SHARE 5,131,131
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into which
Document the Document is Incorporated
-------- ----------------------------
PROXY STATEMENT TO SHAREHOLDERS PART III, ITEMS 10, 11, 12 AND 13
PART I
ITEM 1. BUSINESS
Sylvan Inc. (Sylvan, the company) is the successor to the business of a
Pennsylvania corporation that was chartered in 1937. Sylvan, through its
subsidiaries, 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 was organized as a Delaware
corporation on March 27, 1989, under the name of Sylvan Foods Holdings, Inc. It
became a Securities and Exchange Commission registrant in August 1990 pursuant
to the irrevocable distribution by the company's then majority shareholder, The
Prospect Group, Inc., of the shares of the company that it owned to its
shareholders. The company changed its name to Sylvan Inc. in July 1994 in
conjunction with the change of its state of incorporation to Nevada from
Delaware. The company's principal executive offices are at 333 Main Street, P.O.
Box 249, Saxonburg, PA 16056-0249.
Sylvan has two reportable business segments: Spawn Products and Fresh Mushrooms.
Spawn-related products include casing inoculum, nutritional supplements and
disease-control agents. The Fresh Mushrooms Segment is comprised of Quincy
Farms, a large, regional producer of fresh mushrooms.
Spawn Operations: Spawn products accounted for 71% of the company's total sales
in 2002 and 79% of its operating income. Spawn is produced by a process whereby
carefully maintained mushroom cultures are introduced into specific nutrient
media to produce inoculum suitable for commercial spawn production. The inoculum
is then combined with a sterile, grain-based substrate in a manner that promotes
the colonization of the mushroom cultures throughout the substrate. The
resulting culture-enriched substrate is measured into sterilized plastic bags
and the filled bags are incubated in environmentally controlled growing rooms.
Once the incubation is complete, the bags are refrigerated until they are
shipped to customers who then initiate their crop production cycle by adding
this seed-like material to the composted growing medium from which the mushrooms
grow.
The company conducts its operations through subsidiaries in North America,
Europe, Australia and South Africa, and is a leading producer and distributor of
mushroom spawn and various spawn-related products in each of the markets in
which it has a presence. End-stage spawn production in most of the company's
manufacturing facilities takes place in specialized pressure vessels in plants
that are operated pursuant to rigorous quality-control standards. Two plants are
located in the United States and one each in England, Ireland, the Netherlands,
France, Hungary, Australia, South Africa and Canada. Sylvan's Dutch and
Australian plants function under arrangements whereby certain prominent mushroom
growers in each respective country possess minority ownership of the operating
company. A similar ownership structure is expected to be implemented in 2003
with respect to the Canadian plant.
The company also operates two state-of-the-art spawn inoculum production plants.
These facilities, located in Kittanning, Pennsylvania, and Langeais, France,
incorporate the industry's most advanced production techniques and each is
capable of supplying all of the company's inoculum requirements. In addition,
the company produces nutritional supplements for mushroom compost at a plant in
Des Moines, Iowa. The value of backlog orders for spawn products is
insignificant.
The company's investment in biotechnical research has resulted in refinements of
techniques for genetic analysis of mushroom strains and its research programs
have produced some strains that possess commercial suitability. Another
successful product is Sylvan's casing inoculum (CI), a mushroom production
additive that is applied to the top layer of mushroom compost. It enables
mushroom farmers to get more crops per year from their investment in raw
materials and equipment by shortening the mushroom growing cycle and reducing a
crop's exposure to disease. In addition, Sylvan has distribution rights for
products produced by others, such as compost ingredients, pest-control agents
and disease-control agents that are targeted for use by mushroom growers.
The company's production experience and research capabilities lend themselves to
a variety of commercially viable microbial production applications. Sylvan
produces red yeast rice, a nutraceutical product which is sold at wholesale and
retail levels, and is supplying a Japanese company with dried Agaricus mushrooms
for use in a beverage that is marketed in the Far East. It also collaborates
with chemical, biotechnological and pharmaceutical companies in the course of
evaluating and promoting its capabilities beyond the mushroom industry. The
value of backlog orders for biological products is insignificant.
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Fresh Mushrooms Operations: The Fresh Mushrooms Segment of Sylvan's business
accounted for 29% of the company's total sales in 2002 and 21% of its operating
income. Sylvan operates a mushroom farm located in Quincy, Florida, that is one
of the most modern and efficient mushroom production operations in North
America. The facility includes a computer-controlled production system and it
serves a strategic role for Sylvan as a resource for production process
innovations. Included as part of the Quincy operation are four satellite
mushroom growing facilities; two commenced operations in mid-2001 and two
commenced operations in early 2003. Each facility is leased to an independent
third party. These parties are obligated to purchase their requirements of
ready-to-grow mushroom compost from Quincy and to sell their crops of mushrooms
to Quincy.
Mushrooms are grown indoors in a continuous production process that employs a
temperature- and humidity-controlled environment. Compost, produced from a
carefully formulated and monitored mixture of hay or straw, water and various
organic supplements, is pasteurized and spawn is added to it. The spawn
colonizes the compost and, after about four to five weeks, grows into
harvestable mushrooms that are packaged and shipped to customers.
In January 2000, Sylvan began selling all of its mushrooms to a leading U.S.
mushroom marketing organization that packages and distributes them throughout
the eastern United States. Prior to this contract, the mushrooms were sold to
supermarkets, food processors and distributors in the mideastern and
southeastern United States. The value of backlog orders for mushroom products is
insignificant.
PERSONNEL
On December 29, 2002, Sylvan had approximately 850 full-time employees, of whom
about 720 were engaged in production activities and 130 in supervision, sales
and administration. On December 30, 2001, Sylvan had approximately 900 full-time
employees, of whom about 750 were engaged in production activities and 150 in
supervision, sales and administration.
The employees of the company's French subsidiary are subject to a national,
industry-wide collective bargaining agreement. In addition, harvesting and
packaging employees of its Quincy subsidiary are subject to a collective
bargaining agreement with the United Farm Workers. The remainder of the
company's workforce is not subject to collective bargaining arrangements.
Management believes that its employee relations are good.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The amounts of revenue, operating income and asset-related expenditures
attributable to each of the company's industry segments are set forth in Note 8
of the consolidated financial statements that are filed as part of this annual
report.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of revenue and long-lived assets attributable to each of the
company's geographic areas are set forth in Note 8 of the company's consolidated
financial statements that are filed as part of this annual report.
MAJOR CUSTOMER
Most of Sylvan's Fresh Mushrooms Segment sales in 2002, 2001, and 2000 were to
one customer. C And C Carriage Mushroom Company became the purchaser and
marketer of the company's mushrooms beginning in January 2000. The $24.1
million, $23.0 million, and $20.8 million of fresh mushrooms that C And C
purchased from the Quincy subsidiary for fiscal years 2002, 2001, and 2000,
represented 27%, 27%, and 24%, respectively, of Sylvan's consolidated net sales.
C And C is not affiliated with Sylvan or any of its subsidiaries and the
purchase and marketing contract, dated January 14, 2000, carries an initial term
of five years.
COMPETITIVE CONDITIONS
Spawn Products: Sylvan believes that there are seven companies in the United
States and three companies in Canada that produce and market almost all of the
spawn used by North American mushroom growers. Among these companies, Sylvan's
principal North American competitor is Lambert Spawn Company, which increased
its production capacity in 2001. In addition, Amycel, Inc. (a division of
Monterey Mushrooms, Inc.) is a major spawn producer in the United States, but
much of its production is consumed by its mushroom production affiliates. Sylvan
believes that its principal European competitors are
3
Italspawn (Italy) and Le Lion (France). Numerous smaller spawn producers operate
in the United States, Canada and in almost every European country. Sylvan
competes in the spawn market with strict quality, consistency and reliability
standards and through its availability of broad-based, post-sale product support
services to mushroom growers.
The company's microbial production applications compete with those of chemical,
biotechnological and pharmaceutical companies worldwide. In particular, Chinese
growers produce dried Agaricus mushrooms that are similar to those that Sylvan
sells to a customer in Japan and are able to sell them at a price that is lower
than Sylvan's. The red yeast rice wholesale and retail market is extremely
competitive. In addition, its production and sales could be subject to
additional regulatory pressures.
Fresh Mushrooms: Sylvan believes that the top producer of mushrooms in the
United States is currently Monterey Mushrooms, Inc. Sylvan's production levels
are comparable to those of a group of 10 regional producers of substantial size.
The balance of the U.S. industry is fragmented, comprised of 118 smaller
producers throughout the country. Quality, supply consistency and price are the
principal competitive factors in the mushroom business. Although brand names
have been established, competition is principally at the grocery retailer or
wholesaler level, rather than at the consumer level. In order to more
efficiently market their mushrooms, quite a few growers of various sizes have
joined together to form marketing ventures. Sylvan believes that currently six
or seven such organizations represent the sales of more than 50% of North
American fresh mushroom production. Competition outside of North America is
characterized primarily by the importation of processed mushroom products into
the United States and Canada. However, processed mushrooms are not a material
factor in Sylvan's current operations because Sylvan's mushrooms compete
primarily in the fresh mushroom market. Due to the fragility of fresh mushrooms,
Sylvan believes that the fresh mushroom market in the United States is somewhat
protected from direct non-North American competition. Fresh mushrooms have
limited shelf life, which, together with the relatively high cost of
refrigerated transportation, causes markets to be regional in nature. However,
for the same reasons, imbalances of supply and demand, from time to time, can
and do induce price fluctuations.
SEASONALITY
Spawn and spawn-related product sales are not seasonal, except to the extent
that they correlate to a mushroom grower's expectations of consumer demand for
mushrooms. Since mushrooms are grown indoors, mushroom production is not
particularly sensitive to many of the problems normally associated with
agricultural crops, such as production seasonality and dependence on weather.
However, mushrooms are susceptible to bacterial, fungal and viral contamination
that can reduce yields and affect sales and earnings for periods of weeks or
months. In addition, mushroom prices are typically softened by the increased
availability of a variety of fresh fruits and vegetables during the summer
months.
RESEARCH
In 2002, Sylvan's research and development expenditures totaled $2.0 million, as
compared with $1.7 million in 2001 and $1.8 million in 2000. These expenditures
were focused on improving the consistency, reliability and customer satisfaction
for the company's existing products, the development of new products, and the
support of Sylvan's bioproducts operations. The company also utilizes contracted
research efforts for specific studies that may be commercially useful, but fall
outside of the scope of its expertise or capabilities. None of these projects
currently constitute a material proportion of the company's ongoing business.
PATENTS
The company does not believe that its ability to maintain or improve its
competitive position is dependent upon its patents. However, the company holds
several non-U.S. patents that cover a process and apparatus for the cultivation
of cells on solid substrates. The patents were issued in various years from 1982
to 1986. In addition, Sylvan has patented several new mushroom strains,
technologies and processes that facilitate mushroom breeding and may be capable
of enhancing the company's strain development and improvement efforts. The
company also holds two process patents relating to the production of its
nutritional supplements that were issued in 1988 and 1991. The company possesses
several Swiss patents that embody a process for commercially producing spawn and
spawn-related products and using a variety of nutrient substrates as incubation
material for spawn. The process is not currently employed by the company.
4
ENVIRONMENTAL MATTERS
Certain phases of the mushroom production process create discharges of
conventional pollutants and other organic materials. Expenditures will routinely
be required in order to enable the company's Quincy subsidiary to comply with
existing and future environmental laws and regulations.
FINANCIAL INFORMATION
Information regarding Sylvan's financial performance is set forth herein
beginning on page 24.
AVAILABILITY OF INFORMATION ON THE COMPANY'S WEBSITE
Sylvan maintains a multipurpose Internet website. Its address is
www.sylvaninc.com. A link to a third-party SEC filings website is maintained on
the Sylvan website with access provided through the "Investors" tab. The
company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports that are filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are available as soon as
they are posted by the SEC. In addition, individuals wanting copies of the
company's annual report to shareholders and any other reports filed or furnished
by the company with the SEC may request copies. The reports will be furnished
free of charge. Requests should be made in writing to the company at P.O. Box
249, Saxonburg, PA 16056-0249.
ITEM 2. PROPERTIES
The following table lists by business segment the locations and floor areas of
Sylvan's principal operating properties. The company believes that each of these
properties is in good condition and suitable for the purposes for which they are
being utilized. Although it is not specifically detailed below, various
production facilities are used from time to time by the bioproducts division,
based on the nature of the work to be performed and the availability of
production capacity.
SPAWN PRODUCTS SEGMENT
Acquired/ Expanded/
Location Floor area (ft.2) constructed renovated
-------- ----------------- ----------- ---------
Spawn production: Kittanning, Pennsylvania 50,000 1981 2001
Dayton, Nevada 46,000 1992 2001
Langeais, France 115,000 1991 -
Yaxley, England 74,000 1992 1995
Horst, the Netherlands 54,500 1994 1997
Budapest, Hungary 29,000 1997 -
Navan, Ireland 26,000 1998 1999
Pretoria, South Africa 17,000 1999 -
Windsor, Australia 12,000 1996 -
Leamington, Ontario, Canada 26,000 2001 -
Inoculum production and research: Kittanning, Pennsylvania 18,000 1996 2001
Langeais, France 15,000 1998 -
Spawn distribution: Kennett Square, Pennsylvania 41,000 1999 2002
Quality assurance: Kittanning, Pennsylvania 20,000 1997 -
Langeais, France 12,000 1991 -
Compost supplement production: Des Moines, Iowa 18,000 1997 -
Mushroom casing production: Budapest, Hungary 20,000 2000 -
FRESH MUSHROOMS SEGMENT
Fresh mushroom production,
including satellite farms: Quincy, Florida 465,000 1981 2002
5
The spawn plants in the Netherlands and Australia are owned by the company
along with joint venture partners in each country. The company owns the
remainder of its principal operating properties, except for those in Des Moines,
Iowa, and Budapest, Hungary (the mushroom casing production facility), which are
leased. The company also leases small administrative offices in Pennsylvania,
California, and Switzerland, and some supplemental cold storage facilities that
serve several North American and overseas market areas. Construction loans
relating to the spawn plants in Ireland and the Netherlands have been
collateralized with mortgages. The company owns four satellite mushroom growing
facilities in Quincy, Florida, that are leased to and operated by independent
third parties.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Sylvan or any of its
subsidiaries is a party, or of which any of their property is subject, other
than ordinary, routine litigation incidental to their respective businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the last quarter of
the 2002 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names and ages of the executive officers of the
company, indicating the positions and offices currently held by each person.
There is no arrangement or understanding between any executive officer and any
other person pursuant to which he was selected as an officer and no family
relationship exists among the company's officers and directors. The annual
appointment of officers is scheduled to occur on May 28, 2003 at the
organizational meeting of the board of directors, following the annual meeting
of shareholders.
Name Age Position
---- --- --------
Dennis C. Zensen 64 Chairman of the Board,
President and Chief Executive Officer of Sylvan
Donald A. Smith 41 Chief Financial Officer of Sylvan
Fred Y. Bennitt 58 Secretary/Treasurer of Sylvan
Monir K. Elzalaki 47 President of Sylvan America, Inc.
Gregory J. Verhagen 42 President of Quincy Farms
Gary D. Walker 55 President of Sylvan Bioproducts, Inc.
Michael A. Walton 53 Managing Director of Sylvan's European Operations
Biographical Information
Mr. Zensen was elected chairman of Sylvan in July 1990 and has served as a
director, president and chief executive officer of Sylvan since April 1989.
Mr. Smith was appointed chief financial officer of Sylvan in December 1998. He
joined the company in 1996 as manager of financial planning and analysis and was
named corporate controller in October 1997. Prior to that, he served as chief
financial officer of the company's Sylvan America, Inc. subsidiary from 1994 to
1996 and as controller of the company's former Moonlight Mushrooms, Inc.
subsidiary from 1989 through 1993.
Mr. Bennitt has served as secretary/treasurer of Sylvan since April 1989. His
service with Sylvan's predecessor company began in 1971.
6
Mr. Elzalaki was named president of the company's Pennsylvania spawn production
subsidiary in March 1992 and president of the company's Nevada spawn production
subsidiary in December 1992 at the time of its creation. He joined the
Pennsylvania company as its director of sales and marketing in April 1990 and
served as vice president and general manager from September 1990 until his
appointment as president.
Mr. Verhagen was appointed president of the company's Quincy Farms subsidiary in
January 2000, having served as its general manager since May 1999. For four
years prior to that time, he served in various senior management positions for
Money's Mushrooms, Ltd.
Mr. Walker was appointed president of Sylvan Bioproducts in 1998, after serving
as manager and developer of the company's bioproducts business since the
beginning of 1994. He joined Sylvan in 1992 and served as the president of its
Moonlight subsidiary until its closure in December 1993.
Mr. Walton was named managing director of Sylvan's European operations in 1995.
He joined Sylvan in connection with its acquisition of Hauser Champignonkulturen
AG in June 1992. At the time, he was serving as managing director of Hauser's UK
subsidiaries and continued in that capacity until his present appointment.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Sylvan's common stock trades on The Nasdaq Stock Market under the symbol "SYLN."
Set forth below are the high and low sales prices for Sylvan's common stock for
2002 and 2001, as reported by The Nasdaq Stock Market.
2002 High Price Low Price
---- ---------- ---------
1st Qtr. 12.30 11.05
2nd Qtr. 13.26 11.21
3rd Qtr. 14.00 11.69
4th Qtr. 12.23 10.18
2001 High Price Low Price
---- ---------- ---------
1st Qtr. 15.00 9.13
2nd Qtr. 13.00 11.00
3rd Qtr. 13.15 11.31
4th Qtr. 12.00 10.85
(b) Holders of Common Equity
As of February 28, 2003, there were approximately 1,200 shareholders of record
of Sylvan common stock.
(c) Dividends
Sylvan has never paid and does not intend to pay cash dividends in the future.
The company currently has a policy of retaining its earnings to fund operations,
expansion and the purchase of treasury shares. The company's revolving credit
agreement contains financial covenants that permit, but limit, the payment of
dividends by Sylvan.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are a Five-Year Summary of Selected Financial Data and Quarterly
Results of Operations with respect to Sylvan.
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FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
------------------------------ Fiscal Year Ended -------------------------------
(In millions except share data) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales $ 88.2 $ 85.9 $ 85.9 $ 89.8 $ 89.8
Operating income 9.1 11.0 11.5 10.6 11.1
Net income 4.7 5.8 6.7 6.1 6.3
Net income per common share - basic (1) 0.86 1.06 1.18 1.00 0.98
Net income per common share - diluted (1) 0.86 1.05 1.18 1.00 0.97
Weighted average shares - basic 5,402,859 5,500,799 5,658,860 6,112,007 6,440,287
Weighted average shares - diluted 5,454,700 5,551,673 5,665,974 6,130,694 6,533,740
Earnings before interest, taxes, depreciation
and amortization (EBITDA) 14.9 17.2 17.4 16.9 16.9
BALANCE SHEET DATA:
Total assets $ 106.8 $ 107.1 $ 105.8 $ 109.5 $ 102.6
Long-term debt and other
long-term liabilities 49.7 45.5 47.7 51.8 38.4
Shareholders' equity 47.3 50.9 49.5 47.2 50.3
Working capital 24.6 23.2 23.0 22.8 18.9
Net cash provided by operations 12.7 10.7 9.7 13.0 10.2
Net cash used in investing 6.1 8.7 6.2 12.2 9.8
Net cash (used in) provided by financing (6.8) (1.8) (5.2) 1.4 0.1
Cash dividends per common share -- -- -- -- --
(1) Earnings per share for the year may be different than the sum of the
quarterly earnings per share due to rounding.
QUARTERLY RESULTS OF OPERATIONS
First Second Third Fourth
(Unaudited, in thousands except share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
2002:
Net sales $ 20,918 $ 21,388 $ 22,275 $ 23,610
Gross profit 8,840 8,834 8,663 9,745
Net income 1,216 985 1,109 1,360
Net income per common share - basic 0.22 0.18 0.20 0.26
Net income per common share - diluted 0.22 0.18 0.20 0.25
Weighted average shares - basic 5,432,052 5,435,171 5,439,697 5,304,318
Weighted average shares - diluted 5,481,924 5,499,634 5,502,408 5,334,800
2001:
Net sales $ 20,881 $ 21,074 $ 21,848 $ 22,108
Gross profit 8,969 8,880 8,955 9,289
Net income 1,177 1,372 1,508 1,773
Net income per common share - basic 0.21 0.25 0.27 0.33
Net income per common share - diluted 0.21 0.25 0.27 0.32
Weighted average shares - basic 5,517,556 5,522,172 5,523,618 5,439,849
Weighted average shares - diluted 5,552,575 5,580,688 5,584,890 5,485,552
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
COMPARISON OF 2002 WITH 2001
NET SALES
Net sales for 2002 were $88.2 million, a $2.3 million increase from the $85.9
million for 2001. Net sales in the Fresh Mushrooms Segment increased $1.9
million and net sales in the Spawn Products Segment increased $0.4 million. On
average, the U.S. dollar was approximately 4.5% weaker in 2002, when measured
against the company's applicable foreign currencies, than in 2001. The effect of
this weakening increased net sales and operating income during 2002, as compared
with 2001, by approximately $2.4 million and $200,000, respectively.
International sales, as a percentage of net sales, were 48.7% in 2002 and 50.2%
in 2001.
Spawn Products: Net sales of spawn and spawn-related products were $64.0
million, as compared with $63.6 million for 2001. Foreign currency translation
fluctuations had the effect of increasing sales on a year-over-year comparison
by $2.4 million. Sales of disease-control agents and nutritional supplements
increased $1.5 million, or 10.9%, and accounted for 17.9% of Sylvan's
consolidated net sales. Spawn product sales volume decreased 3.7%, with a 6.7%
decrease in the Americas and a 2.0% decrease in overseas markets, decreasing net
sales by $1.9 million. The volume decrease in the Americas related to the
continued changing of market conditions in the mushroom industry, which began
in 2001 and increased competitive pressures. The volume decreases in the
overseas markets related to the closure of mushroom farms in the United Kingdom
and a reduction in plantings during the fourth quarter of 2002 in the
Netherlands. The average local market price in international locations decreased
1.9% due to lower volumes sold in territories with higher selling prices. The
effect of this territorial shift in 2002 was a decrease in net sales of
approximately $0.7 million. The average overseas U.S. dollar equivalent selling
price was 3.4% higher during 2002, as compared with 2001, due to the weakening
of the U.S. dollar. The selling price in the Americas was essentially unchanged.
Net sales of the bioproducts division decreased $0.7 million due to increased
Chinese competition for sales of a specialized variety of mushroom.
On August 16, 2002, the U.S. Department of Agriculture released its annual
statistical report on mushrooms covering the fiscal year July 2001 through June
2002. The Department reported that the amount of Agaricus growing area planted
was virtually equal to the prior fiscal year and 9.6% lower than the fiscal year
ended June 2000. Sylvan experienced additional price and payment-term
competition in the United States during the second half of 2001 coinciding with
the reduction in the growing area planted. The competitive situation intensified
during the second half of 2002.
Fresh Mushrooms: Net sales of fresh mushrooms increased 8.1% during 2002 to
$25.5 million, as compared with $23.6 million for 2001. This increase was due to
a 4.3% increase in the number of pounds sold and a 0.6% higher selling price per
pound. Quincy Farms generated an increase in its yield per square foot and an
improvement in the quality of its mushrooms. The first two satellite farms,
which commenced operations during the second quarter of 2001, purchased $1.3
million of ready-to-grow mushroom compost and sold approximately $3.0 million of
high-quality mushrooms to Quincy for immediate resale to its third-party
marketer. In December 2002 and January 2003, Quincy completed two additional
satellite farms. These additions are expected to improve operating profit for
2003.
COST OF SALES
The company's cost of sales, expressed as a percentage of net sales, was 59.1%
for 2002 and 58.0% for 2001. Lower margins were experienced in the Fresh
Mushrooms Segment and in the Spawn Products Segment.
Spawn Products: The cost of sales, as a percentage of net sales, was 54.0% for
2002, as compared with 53.2% for 2001. Spawn production during 2002 was 4.0%
lower than for 2001, spreading costs that are primarily fixed in nature over
fewer units. The company also increased sales of disease-control agents and
nutritional supplements, which have a lower margin than mushroom spawn. The
overall discard rate for spawn production was 4.8% in 2002 and 5.8% in 2001.
Fresh Mushrooms: The cost of sales percentage was 68.9% for 2002 and 67.7% for
2001. The cost of sales percentage increased due to an increase in the purchase
and immediate resale of mushrooms from the satellite farms which provide a small
gross margin. However, Quincy was able to improve yield efficiencies and
increase operating income in 2002. In
9
addition, the sale of ready-to-grow mushroom compost to the satellite farms
contributed to the improved financial performance. The cost of sales percentage
is expected to increase for 2003 correlating to the increase in the purchase and
immediate resale of mushrooms from the satellite farms, but the company
anticipates an increase in operating income related to this structure.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased to $19.4 million, or 22.0% of net
sales, as compared with $18.0 million, or 21.0%, for 2001. Of the increase in
selling and administrative expenses for 2002 versus 2001, $1.1 million consisted
primarily of a $0.4 million increase in the allowance for doubtful accounts, a
$0.4 million increase in salaries, benefits and insurance, and an approximately
$0.3 million increase for professional fees related to the strategic evaluation
completed during 2002. In addition, the weakening of the U.S. dollar had the
effect of increasing selling and administrative expenses by $0.3 million during
2002, as compared with 2001. The company also recorded $0.2 million of net
periodic benefit income during 2002 from a pension plan of a former subsidiary.
The net periodic pension expense for 2003 is expected to be $0.7 million.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 14.2% in 2002 to $2.0 million, when
compared with $1.7 million in 2001. The company increased mushroom breeding
activities during 2002 in cooperation with a Dutch research organization. The
company expects Research and Development expenses for 2003 to be similar to 2001
expenditures.
DEPRECIATION EXPENSE
Depreciation expense was $5.6 million in 2002, an increase of 5.0% over the $5.4
million reported for 2001. Most of this increase related to the relatively
weaker U.S. dollar.
INTEREST EXPENSE
Net interest expense for 2002 was $1.9 million, 26.3% lower than the interest
expense recorded for 2001. The effective interest rate for 2002 was 5.0%, as
compared with 6.7% for 2001. Also during 2002, the company recorded interest
income of $12,000 related to hedge instruments under SFAS No. 133. During 2002,
the company had variable-to-fixed interest rate swaps in place to manage
interest rate risk that increased the average borrowing rate 1.5%. During 2001,
swaps increased the average borrowing rate 0.6%.
INCOME TAX EXPENSE
The company's overall effective tax rate for 2002 was 33.5%. The effective tax
rate for 2001 was 29.5%. The 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.
RESULTS OF OPERATIONS
COMPARISON OF 2001 WITH 2000
NET SALES
Net sales were $85.9 million for both 2001 and 2000. A $1.6 million increase in
the Fresh Mushrooms Segment sales was offset by a decrease in the Spawn Products
Segment sales. On average, the U.S. dollar was approximately 5% stronger, when
measured against the company's applicable foreign currencies, than for 2000. The
effect of this strengthening decreased sales and operating income during 2001,
as compared with 2000, by approximately $2.7 million and $225,000, respectively.
International sales, as a percentage of net sales, were 50% in 2001 and 51% in
2000.
Spawn Products: Net sales of spawn and spawn-related products were $63.6
million, a 3% decrease when compared with the net sales of $65.2 million for
2000. This decrease was due to four offsetting factors. First, sales of
disease-control agents and nutritional supplements increased $1.6 million, or
13%, and accounted for 17% of Sylvan's consolidated net sales. Second, spawn
product sales volume decreased 4%, with a 16% decrease in the Americas,
countered by a 4% increase in overseas
10
markets. Most of the volume decrease in the Americas related to changing market
conditions in the mushroom industry. Third, foreign currency translation
fluctuations had the effect of reducing sales on a year-over-year comparison by
$2.7 million. Fourth, the effect of 2001 local market price increases in
international locations was approximately $1.2 million.
The August 17, 2001 U.S. Department of Agriculture annual statistical report on
mushrooms, covering the fiscal year July 2000 through June 2001, reported a 10%
reduction in the amount of Agaricus growing area planted. This reduction,
combined with additional farm closings in the third and fourth quarters of 2001,
decreased Sylvan's available market in the United States by approximately 15%.
The J.B. Swayne customer base, which was acquired in November 1999, was
substantially unaffected. Sylvan experienced additional price and payment-term
competition in the United States during the second half of 2001.
The overseas U.S. dollar equivalent selling price was 4% lower during 2001, as
compared with 2000, due to the strengthening of the U.S. dollar. The selling
price in the Americas decreased by less than 1%.
Fresh Mushrooms: Net sales of fresh mushrooms increased 7% during 2001 to $23.6
million, as compared with $22.0 million for 2000. This increase was due to a 3%
increase in the number of pounds sold and a 1% higher selling price per pound.
Quincy Farms generated an increase in its yield per square foot and an
improvement in the quality of its mushrooms. The first two satellite farms,
which commenced operations during the second quarter of 2001, purchased $0.7
million of ready-to-grow mushroom compost and sold approximately $1.3 million of
high-quality mushrooms to Quincy for immediate resale to its third-party
marketer.
The southeastern United States, the market for Quincy's production, experienced
lower demand for fresh mushrooms by restaurants, convention centers and other
components of the food service industry after September 11, 2001. As a result,
Quincy's average selling price per pound decreased approximately 4% from
pre-September 11 pricing.
COST OF SALES
The company's cost of sales, expressed as a percentage of net sales, was 58.0%
for 2001 and 55.8% for 2000. Improved margins in the Fresh Mushrooms Segment
were more than offset by lower margins in the Spawn Products Segment.
Spawn Products: The cost of sales, as a percentage of net sales, was 53.2% for
2001, as compared with 50.5% for 2000. The increase was due to two factors.
First, spawn production in the Americas during 2001 was 13.3% lower than for
2000, spreading costs that are primarily fixed in nature over fewer units.
Second, the company generated sales increases of disease-control agents and
nutritional supplements, which have a lower margin than mushroom spawn. The
overall discard rate for spawn production was 5.8% in both 2001 and 2000.
Fresh Mushrooms: The cost of sales percentage was 67.7% for 2001 and 68.1% for
2000. Quincy improved yield efficiencies, spreading growing area costs that are
primarily fixed in nature over more pounds. In addition, the sale of
ready-to-grow mushroom compost to the satellite farms contributed to the
improved financial performance.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased to $18.0 million, or 21.0% of net
sales, as compared with $19.5 million, or 22.7%, for 2000. Approximately $0.4
million of this decrease related to three nonrecurring items recorded in the
Spawn Products Segment during the first quarter of 2000. The strengthening of
the U.S. dollar had the effect of decreasing selling and administrative expenses
by $0.4 million during 2001, as compared with 2000. The remaining decrease of
$0.7 million in selling and administrative expenses, for 2001 versus 2000, was
the result of a reduction in general administrative expenditures, some of which
related to the incorporation of the Swayne acquisition into Sylvan's North
American spawn operations. The company recorded $0.6 million of net periodic
benefit income during 2001 from a pension plan of a former subsidiary.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 2% in 2001 to $1.7 million, when
compared with $1.8 million in 2000.
11
DEPRECIATION EXPENSE
Depreciation expense was $5.4 million in 2001, an increase of 3% over the $5.2
million reported for 2000. This increase resulted from new capital assets placed
into service.
INTEREST EXPENSE
Net interest expense for 2001 was $2.5 million, virtually equal to the interest
expense for 2000. The effective interest rate for 2001 was 6.7%, as compared
with 6.9% for 2000. During 2001, the company recorded interest expense of
$132,000 related to SFAS No. 133. The effective borrowing rate for 2001,
excluding the effect of SFAS No. 133, was 6.3%. During 2001, the company had
variable-to-fixed interest rate swaps in place to manage interest rate risk that
increased the average borrowing rate 0.61%. During 2000, swaps decreased the
average borrowing rate 0.45%.
INCOME TAX EXPENSE
The company's overall effective tax rate for 2001 was 29.5%. In 2000, the
company reported an overall effective tax rate of 22%. Excluding the benefit of
a net operating loss carryforward recorded from a merger of two subsidiaries,
the rate for 2000 was 28%. This higher effective tax rate for 2001 was the
result of a larger portion of the company's taxable income being derived from
higher tax-rate jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Sylvan evaluates its liquidity and capital resources position by comparing its
investment opportunities with its cash position, operating cash flow trends and
credit availability. Available credit under the company's $55.0 million
revolving credit agreement was $18.0 million as of December 29, 2002. The
agreement provides for a $5.0 million reduction of the total credit amount in
2003 and an additional $5.0 million reduction in 2004.
Net cash provided by operating activities was $12.7 million in 2002, as compared
with $10.7 million in 2001 and $9.7 million for 2000. 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" in the
accompanying consolidated balance sheets as of December 30, 2001. This reduction
of the cash balance increased net cash provided by operating activities by $2.2
million.
Cash used in investing activities was $6.1 million for 2002, as compared with
$8.7 million and $6.2 million during 2001 and 2000, respectively. Most of the
cash used in investing activities was for capital expenditures, net of proceeds
from the sale of assets, which totaled $6.1 million in 2002, $8.6 million in
2001 and $6.1 million in 2000. Most of the growth capital expenditures for 2002
and 2001 were related to two business-growth projects: Quincy's satellite farms
($3.0 million) and the Canadian spawn plant ($2.7 million). Maintenance capital
for 2002 was $3.4 million.
Net capital expenditures in 2003 are not expected to exceed $4.0 million for
existing operations, with additional expenditures as may be required for
acquisitions or new initiatives.
During 2002, cash of $6.8 million was used in financing activities, as compared
with $1.8 million and $5.2 million during 2001 and 2000, respectively. During
2002, the company purchased 333,321 shares of Sylvan stock at an average price
of $10.60 per share. By comparison, 107,271 and 215,235 shares were purchased at
average prices of $11.37 and $9.37 during 2001 and 2000, respectively. In the
fourth quarter of 2002, the company announced a three-year stock buyback
program to purchase a total of 1.3 million shares. The company purchased 310,000
shares under this program in 2002. Management expects to continue the purchase
program during 2003, subject to price and share availability conditions that
make such purchases financially beneficial and appropriate.
Net payments to reduce debt and revolving credit obligations were $3.6 million
in 2002, as compared with $0.7 million in 2001 and $3.3 million in 2000. The
decreases in outstanding debt related primarily to the positive cash flows from
operations in excess of capital additions and Sylvan share purchases. The
company routinely assesses its requirements for additional capital investments
as it experiences continued growth in its operations. The revolving credit
facility and net operating cash flows are expected to provide sufficient funding
for projected 2003 capital expenditures.
12
The recent declines in equity markets and interest rates have had a negative
impact on the company's pension plan liability and fair value of plan assets. As
a result, the accumulated benefit obligation exceeded the fair value of plan
assets at the end of 2002, which resulted in a $9.5 million charge to
shareholders' equity.
The company was not in compliance with one of the financial covenants of its
revolving credit agreement as of December 29, 2002 due to the recording of the
$9.5 million minimum pension liability adjustment to "Accumulated Other
Comprehensive Income" during 2002. In the first quarter of 2003, the company and
its banks signed an amendment to the revolving credit agreement to adjust for
the recording of the minimum pension liability adjustment and waive the loan
covenant violation. The adjustment and waiver are effective as of December 29,
2002 and continue through August 5, 2005.
Sylvan has never paid and does not intend to pay cash dividends in the future.
The company currently has a policy of retaining its earnings to fund operations,
expansion and the purchase of treasury shares. The company's revolving credit
agreement contains financial covenants that permit, but limit, the payment of
dividends by Sylvan.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements. While the technical corrections to existing
pronouncements are not substantive in nature, they may change accounting
practice. The provisions of this standard related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. The provisions of this standard
related to the rescission of SFAS No. 4 should be applied in fiscal years
beginning after May 15, 2002. All other provisions of this standard must be
applied for financial statements issued on or after May 15, 2002. The adoption
of this pronouncement did not have a material impact on the company.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires that liabilities associated with exit or disposal activities initiated
after adoption be recognized and measured at fair value when incurred as opposed
to on the date an entity commits to the exit or disposal plans. The provisions
of this standard are effective for activities initiated after December 31, 2002.
The adoption of this pronouncement is not expected to have a material impact on
the company.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based compensation. While the Statement does not amend SFAS
No. 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of the Statement are applicable to
all companies with stock-based compensation. The provisions of this standard are
effective for fiscal years ending after December 15, 2002. The adoption of this
pronouncement did not have a material impact on the company as no change was
made to the method of accounting for stock-based compensation.
In January 2003, the Financial Accounting Standards Board issued FIN No. 46,
"Consolidation of Variable Interest Entities". FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. It requires that companies determine whether a non-consolidated
entity is a variable interest entity, as defined by FIN No. 46, and which
company is the primary beneficiary of the variable interest entity's activities.
The consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003 and apply to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. The company is currently evaluating the impact of adopting this
interpretation.
EURO CURRENCY
The euro was introduced in Europe on January 1, 1999. Of the 15 member countries
of the European Union, 11 agreed to adopt it as their legal currency on that
date. Fixed conversion rates between the existing currencies of these 11
countries and the euro were established as of that date. The final conversion to
the euro on January 1, 2002 did not have a material impact on Sylvan's business
or financial condition.
13
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make judgments, estimates,
and assumptions regarding uncertainties that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Areas of uncertainty that require
judgments, estimates, and assumptions include the accounting for derivatives,
environmental matters, the testing of goodwill and other intangible assets for
impairment, pensions and other postretirement benefits, and tax matters.
Management uses historical experience and all available information to make
these judgments and estimates, and actual results will differ from those
estimates and assumptions that are used to prepare the company's financial
statements. Despite these inherent limitations, management believes that
Management's Discussion and Analysis (MD&A) and the financial statements and
related footnotes provide a fair presentation. A discussion of the judgments and
uncertainties associated with accounting for derivatives can be found in the
Market Risks section of the MD&A.
A summary of the company's significant accounting policies is included in Note 1
to the Consolidated Financial Statements. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
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 impairment tests 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, the company retained a
professional services firm to complete the initial assessment to test for
transitional goodwill impairment as of December 31, 2001 and a subsequent
assessment as of September 29, 2002. The assessments determined that there was
no goodwill impairment. During the fiscal year ended December 30, 2001, the
company recorded goodwill amortization of approximately $0.5 million.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under its
provisions, all tangible long-lived assets, whether to be held and used or to be
disposed of by sale or other means, will be tested for recoverability whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable. Sylvan adopted this pronouncement on December 31, 2001. The
adoption of this pronouncement did not have a material impact on the company.
Other areas of significant judgments and estimates include the liabilities and
expenses for pensions and other postretirement benefits. These amounts are
determined using actuarial methodologies and incorporate significant
assumptions, including the rate used to discount the future estimated liability
and the long-term rate of return on plan assets. The rate used to discount
future estimated liabilities is determined considering the rates available at
year-end on debt instruments that could be used to settle the obligations. The
long-term rate of return is estimated by considering historical returns and
expected returns on current and projected asset allocations and is generally
applied to a five-year average market value of assets. Effective October 31,
2002, Sylvan reduced the assumption for the expected long-term return on plan
assets to 8.5% from 9.0%.
The recent declines in equity markets and interest rates have had a negative
impact on the company's pension plan liability and fair value of plan assets. As
a result, the accumulated benefit obligation exceeded the fair value of plan
assets at the end of 2002, which resulted in a $9.5 million charge to
shareholders' equity.
Sylvan is a global company and records an estimated liability for income taxes
based on what it determines will likely be paid in the various tax jurisdictions
in which it operates. Management uses its best judgment in the determination of
these amounts; however, the liabilities ultimately realized and paid are
dependent on various matters and may differ from the amounts recorded. An
adjustment to the estimated liability would be recorded through income in the
period in which it becomes probable that the amount of the actual liability
differs from the amount recorded.
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage this risk, the company enters into
various contracts and options. A discussion of accounting policies for
derivative instruments is included in Note 1 to Sylvan's consolidated financial
statements which are filed herewith.
Foreign Currency Exchange Rate Risk: Note 8 of the consolidated financial
statements sets forth revenues for three years based on the location of the
company's customers. Sylvan has foreign currency exposures related to buying,
selling, and financing in currencies other than the U.S. dollar. This exposes
the company's future earnings, assets, liabilities, cash flow and financial
instruments that are denominated in foreign currencies.
Sylvan believes that its most significant financial instrument rate exposure
relates to its activities in Europe. As of December 29, 2002, the net fair value
liability of euro denominated financial instruments was approximately $15.5
million. The potential fair value loss of a hypothetical 10% adverse change in
the currency exchange rate would be approximately $1.6 million.
Interest Rate Risk: The company is subject to market risk from exposure to
changes in interest rates based on its financing practices. This risk is managed
by entering into a variety of financial instruments to maintain a desired level
of exposure. The net fair value liability at December 29, 2002 of all financial
instruments subject to interest rate exposures was approximately $36.5 million.
The table below provides information about the company's financial instruments
that are sensitive to interest rates. For debt obligations, the table presents
principal cash flow and related weighted average interest rates according to
their expected maturity dates. For interest rate swaps, the table presents
notional amounts and weighted average interest rates according to their expected
maturity dates. Weighted average interest rates are based on the LIBOR rate in
effect at the reporting date. No future rate assumptions have been made. The
average received rate for interest rate swaps in 2002 was 1.60%, as compared
with 2.25% for 2001. This decrease was the result of market rate reductions.
Expected Maturity Date for Periods Ended December
-------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
-------- -------- --------- -------- --------- ---------- -------- ----------
(In thousands)
Liabilities
Long-term debt
Fixed rate $ 226 $ 84 $ 457 $ 62 $ 62 $ 465 $ 1,356 $ 1,356
Average interest rate 7.12% 6.74% 6.68% 6.20% 6.20% 6.20%
Variable rate -- -- 37,028 -- -- -- $ 37,028 $ 36,459
Average interest rate -- -- 3.20% -- -- --
Interest rate swaps
Fixed-to-variable rate $ 5,000 $ 10,000 $ 15,000 $ (1,322)
Average pay rate 5.02% 5.48% 5.33%
Average receive rate 1.60% 1.60%
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
From time to time in this annual report, references are made to expectations
that are capable of influencing Sylvan's future financial performance, such as
the profit contribution and cost of sales impact of the satellite farms, changes
in capital expenditures and in research and development expenditures, the
continuation of the company's share purchase program, cash flows from operations
and bank borrowings, and future interest rate sensitivity. Events could turn out
to be significantly different from what is expected. The following factors,
among others, in some cases have affected and in the future could affect the
company's financial performance and could cause actual results to differ
materially from those expressed or implied in such forward-looking statements:
- - pricing or product initiatives of the company's competitors;
- - changes in exchange risks with respect to currencies used in the company's
markets;
- - the loss of key executives or other employees of the company;
- - failure to achieve production yield expectations;
- - the loss of a major customer;
- - market-driven fluctuations of the values of assets in the defined benefit
plan of a former subsidiary of the company; and
- - acts of terrorism or war or concerns of the public about such acts or
threats of such acts.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required is set forth as Exhibits beginning on page 24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this item is set forth
under the caption "Election of Directors" in Sylvan's Proxy Statement to
be filed pursuant to Regulation 14A and is incorporated herein by
reference.
The information regarding executive officers required by this item is
set forth in Part I of this Form 10-K. The information required by Item
405 of Regulation S-K is set forth under the caption, "Section 16(a)
Beneficial Ownership Reporting Compliance" in Sylvan's Proxy Statement
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Management Compensation and Benefit Plans" in Sylvan's Proxy Statement
to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the captions
"Common Stock Ownership of Certain Beneficial Owners" and "Common Stock
Ownership of Directors and Executive Officers" in Sylvan's Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Board Member Transactions with the Company" in Sylvan's Proxy Statement
to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Sylvan's principal executive officer and its principal financial
officer, based on an evaluation as of a date within 90 days of the
filing date of this report, have concluded that Sylvan's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) are adequate and effective to ensure that material
information relating to the company and its consolidated subsidiaries
would be made known to them by others within those entities.
(b) Changes in internal controls.
There were no substantive changes in Sylvan's internal controls or in
other factors that could significantly affect these controls and
procedures subsequent to the date of the evaluation.
17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2). FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and financial statement schedule listed in the
accompanying Index to Financial Statements, Schedules and Exhibits are
filed as part of this annual report.
(3). EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
3.3 Articles of Incorporation of S. F. Nevada, Inc. (Exhibit 3.3 to
the company's Form 10-Q for the quarter ended October 3, 1999*)
3.4 Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods
Holdings, Inc. with exhibit (Exhibit 3.4 to the company's Form
10-Q for the quarter ended October 3, 1999*)
3.5 Bylaws (Exhibit 3.5 to the company's Form 10-Q for the quarter
ended October 3, 1999*)
Compensation Plans and Arrangements
10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan (Exhibit
3.3.2 to the company's Form 10-K for the year ended January 3,
1993*)
10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for
Nonemployee Directors (Exhibit 10.1.3 to the company's Form 10-K
for the year ended January 2, 1994*)
10.12 Sylvan Inc. 1990 Stock Option Plan (amended and restated)
(Exhibit 10.12 to the company's Form 10-Q for the quarter ended
October 3, 1999*)
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 (Exhibit 10.1 to the company's Form 10-Q
for the quarter ended September 27, 1998*)
10.2.2 Revolving Credit Note, dated August 6, 1998, payable to Mellon
Bank, N.A. in the amount of $25,000,000 (Exhibit 10.2 to the
company's Form 10-Q for the quarter ended September 27, 1998*)
10.2.3 Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO
Bank, Pittsburgh Branch, in the amount of $25,000,000 (Exhibit
10.3 to the company's Form 10-Q for the quarter ended September
27, 1998*)
10.2.4 Promissory Note, dated August 6, 1998, payable to Mellon Bank,
N.A. in the amount of $5,000,000 (Exhibit 10.4 to the company's
Form 10-Q for the quarter ended September 27, 1998*)
10.2.5 Mellon Global Cash Management ABS Agreement, dated August 6,
1998, by and between Sylvan Inc. and Mellon Bank, N.A. (Exhibit
10.5 to the company's Form 10-Q for the quarter ended September
27, 1998*)
10.2.6 Guaranty and Suretyship Agreement, dated August 6, 1998, by and
between Sylvan Inc. and Mellon Bank, N.A. (Exhibit 10.6 to the
company's Form 10-Q for the quarter ended September 27, 1998*)
18
10.2.7 Guaranty and Suretyship Agreement, dated August 6, 1998, by and
between Sylvan Foods, Inc. and Mellon Bank, N.A. (Exhibit 10.7
to the company's Form 10-Q for the quarter ended September 27,
1998*)
10.2.8 Guaranty and Suretyship Agreement, dated August 6, 1998, by and
between Sylvan America, Inc. (a Pennsylvania corporation) and
Mellon Bank, N.A. (Exhibit 10.8 to the company's Form 10-Q for
the quarter ended September 27, 1998*)
10.2.9 Guaranty and Suretyship Agreement, dated August 6, 1998, by and
between Sylvan America, Inc. (a Nevada corporation) and Mellon
Bank, N.A. (Exhibit 10.9 to the company's Form 10-Q for the
quarter ended September 27, 1998*)
10.2.10 Guaranty and Suretyship Agreement, dated August 6, 1998, by and
between Quincy Corporation and Mellon Bank, N.A. (Exhibit 10.10
to the company's Form 10-Q for the quarter ended September 27,
1998*)
10.2.11 Index of Other Exhibits to the Revolving Credit Agreement
(Exhibit 10.11 to the company's Form 10-Q for the quarter ended
September 27, 1998*)
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 (Exhibit 10.5.1 to the company's Form 10-K for the
year ended January 2, 2000*)
10.5.2 Index of Exhibits to the C And C Agreement referenced above
(Exhibit 10.5.2 to the company's Form 10-K for the year ended
January 2, 2000*)
10.40 Collective Bargaining Agreement, dated January 21, 2001, between
Quincy Corporation and the United Farm Workers of America,
AFL-CIO (Exhibit 10.40 to the company's Form 10-K for the year
ended December 31, 2000*)
10.41 Letter dated October 12, 2001 from Mellon Bank, advising the
company of Mellon's assignment and transfer to Citizens
Financial Group, Inc. of all of Mellon's right, title and
interest in and to the Revolving Credit Agreement, dated August
6, 1998, between the company and Mellon (Exhibit 10.41 to the
company's Form 10-K filed for the year ended December 30, 2001*)
10.43 Employment Continuation Agreement with Dennis C. Zensen, dated
September 24, 2002 (Exhibit 10.43 to the company's Form 10-Q
filed for the quarter ended September 29, 2002**)
10.44 Employment Continuation Agreement with Monir K. Elzalaki, dated
September 21, 2002 (Exhibit 10.44 to the company's Form 10-Q
filed for the quarter ended September 29, 2002**)
10.45 Employment Continuation Agreement with Donald A. Smith, dated
September 19, 2002 (Exhibit 10.45 to the company's Form 10-Q
filed for the quarter ended September 29, 2002**)
10.46 Employment Continuation Agreement with Gary D. Walker, dated
September 24, 2002 (Exhibit 10.46 to the company's Form 10-Q
filed for the quarter ended September 29, 2002**)
10.47 Manager's Service Agreement with Michael A. Walton, dated April
17, 1988 (Exhibit 10.47 to the company's Form 10-Q filed for the
quarter ended September 29, 2002**)
10.48 Amendment No. 1 to Revolving Credit Agreement, dated as of
December 29, 2002, among Sylvan Inc., a Nevada corporation,
Sylvan Foods (Netherlands) BV, a Dutch corporation, the banks
listed on the signature page and Citizens Bank of Pennsylvania,
as agent for the Banks and for the Issuing Bank under the
Original Agreement, filed herewith
19
11 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
21 Subsidiaries of the Registrant
99 Statement of Dennis C. Zensen, chairman, president and chief
executive officer of Sylvan Inc. and Donald A. Smith, chief
financial officer of Sylvan Inc., as required by Section 906 of
the Sarbanes-Oxley Act of 2002
- ------------------
* Incorporated by reference.
** Management contract.
(b) REPORTS ON FORM 8-K
None
20
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.
SYLVAN INC.
By: /s/ DENNIS C. ZENSEN
----------------------------------------
Dennis C. Zensen March 27, 2003
President and CEO ---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ DENNIS C. ZENSEN Chairman of the Board of March 27, 2003
- ------------------------------------- Directors, President and ----------------------
Dennis C. Zensen Chief Executive Officer
(Principal Executive Officer)
/s/ DONALD A. SMITH Chief Financial Officer March 27, 2003
- ------------------------------------- (Principal Financial and ----------------------
Donald A. Smith Accounting Officer)
/s/ WILLIAM L. BENNETT Director March 27, 2003
- ------------------------------------- ----------------------
William L. Bennett
/s/ MONIR K. ELZALAKI President, Sylvan America, Inc. March 27, 2003
- ------------------------------------- Director ----------------------
Monir K. Elzalaki
/s/ VIRGIL H. JURGENSMEYER Director March 27, 2003
- ------------------------------------- ----------------------
Virgil H. Jurgensmeyer
/s/ NELSON OBUS Director March 27, 2003
- ------------------------------------- ----------------------
Nelson Obus
21
CERTIFICATIONS
I, Dennis C. Zensen, Chairman of the Board, President and Chief Executive
Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Sylvan Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
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
annual 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.
March 27, 2003 /s/ DENNIS C. ZENSEN
-------------------------------------
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
22
I, Donald A. Smith, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Sylvan Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
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
annual 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.
March 27, 2003 /s/ DONALD A. SMITH
----------------------------------------
Chief Financial Officer
(Principal Financial Officer)
23
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
Consent of Independent Auditor (Ernst & Young LLP) 27
Consent of Independent Auditor (Arthur Andersen LLP) 28
Report of Independent Auditor (Ernst & Young LLP) 29
Report of Independent Public Accountants (Arthur Andersen LLP) 30
Consolidated Balance Sheets at December 29, 2002 and December 30, 2001 31
Consolidated Statements of Income for the Years Ended December 29, 2002,
December 30, 2001 and December 31, 2000 33
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 29, 2002, December 30, 2001, and December 31, 2000 34
Consolidated Statements of Cash Flows for the Years Ended
December 29, 2002, December 30, 2001, and December 31, 2000 35
Notes to Consolidated Financial Statements 36
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 29, 2002, December 30, 2001, and December 31, 2000 54
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)
10.2.2 Revolving Credit Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
amount of $25,000,000 (d)
10.2.3 Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO Bank,
Pittsburgh Branch, in the amount of $25,000,000 (d)
10.2.4 Promissory Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
amount of $5,000,000 (d)
24
10.2.5 Mellon Global Cash Management ABS Agreement, dated August 6, 1998, by and
between Sylvan Inc. and Mellon Bank, N.A. (d)
10.2.6 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan Inc. and Mellon Bank, N.A. (d)
10.2.7 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan Foods, Inc. and Mellon Bank, N.A. (d)
10.2.8 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan America, Inc. (a Pennsylvania corporation) and Mellon Bank, N.A. (d)
10.2.9 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan America, Inc. (a Nevada corporation) and Mellon Bank, N.A. (d)
10.2.10 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Quincy Corporation and Mellon Bank, N.A. (d)
10.2.11 Index of Other Exhibits to the Revolving Credit Agreement referenced in Exhibit 10.2.1 (d)
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 (h)
10.44 Employment Continuation Agreement with Monir K. Elzalaki, dated September 21, 2002 (h)
10.45 Employment Continuation Agreement with Donald A. Smith, dated September 19, 2002 (h)
10.46 Employment Continuation Agreement with Gary D. Walker, dated September 24, 2002 (h)
10.47 Manager's Service Agreement with Michael A. Walton, dated April 17, 1988 (h)
10.48 Amendment No. 1 to Revolving Credit Agreement, dated as of December 29, 2002, among
Sylvan Inc., a Nevada corporation, Sylvan Foods (Netherlands) BV, a Dutch corporation, the
banks listed on the signature page and Citizens Bank of Pennsylvania, as agent for the Banks
and for the Issuing Bank under the Original Agreement 55
21 Subsidiaries of the Registrant 61
99 Statement of Dennis C. Zensen, chairman, president and chief executive officer of Sylvan Inc. 62
and Donald A. Smith, chief financial officer of Sylvan Inc., as required by Section 906 of the
Sarbanes-Oxley Act of 2002
- ------------------
25
(a) This exhibit was previously filed with the company's Form 10-Q report
for the quarter ended October 3, 1999 and is incorporated herein by
reference.
(b) This exhibit was previously filed with the company's Form 10-K for the
year ended January 3, 1993 and is incorporated herein by reference.
(c) This exhibit was previously filed with the company's Form 10-K for the
year ended January 2, 1994 and is incorporated herein by reference.
(d) This exhibit was previously filed as one of Exhibits 10.1 through 10.11
to the company's Form 10-Q report for the quarter ended September 27,
1998 and is incorporated herein by reference.
(e) This exhibit was previously filed with the company's Form 10-K for the
year ended January 2, 2000 and is incorporated herein by reference.
(f) This exhibit was previously filed with the company's Form 10-K for the
year ended December 31, 2000 and is incorporated herein by reference.
(g) This exhibit was previously filed with the company's Form 10-K for the
year ended December 30, 2001 and is incorporated herein by reference.
(h) This exhibit was previously filed with the company's Form 10-Q for the
quarter ended September 29, 2002 and is incorporated herein by
reference.
26
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-46797 and No. 33-86332) pertaining to the 1990 Stock Option
Plan of Sylvan Inc., and in the Registration Statement (Form S-8 No. 33-83962)
pertaining to the 1993 Stock Option Plan for Nonemployee Directors of Sylvan
Inc. of our reports dated January 31, 2003, with respect to the consolidated
financial statements and schedule of Sylvan Inc. included in the Annual Report
for the fiscal year ended December 29, 2002.
/s/ Ernst & Young LLP
March 27, 2003
27
INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP
Section 11 (a) of the Securities Act of 1933, as amended (the "Securities Act"),
provides that if part of a registration statement at the time it becomes
effective contains an untrue statement of a material fact, or omits a material
fact required to be stated therein or necessary to make the statements therein
not misleading, any person acquiring a security pursuant to such registration
statement (unless it is proved that at the time of such acquisition such person
knew of such untruth or omission) may assert a claim against, among others, an
accountant who has consented to be named as having certified any part of the
registration statement or as having prepared any report for use in connection
with the registration statement.
Sylvan Inc. dismissed Arthur Andersen LLP ("Arthur Andersen") as its independent
auditors, effective May 31, 2002. For additional information, see the company's
current report on Form 8-K dated May 31, 2002. After reasonable efforts, the
company has been unable to obtain Arthur Andersen's written consent to the
incorporation by reference into the company's registration statements (Form S-8
File No.s 33-46797, 33-86332 and 33-83962) and the related prospectuses (the
"Registration Statements") of Arthur Andersen's audit report with respect to the
company's consolidated financial statements as of December 30, 2001 and for the
two years in the period then ended. Under these circumstances, Rule 437 under
the Securities Act permits the company to file the Annual Report on Form 10-K,
which is incorporated by reference into the Registration Statements, without a
written consent from Arthur Andersen. As a result, with respect to transactions
in the company's securities pursuant to the Registration Statements that occur
subsequent to the date this Annual Report is filed with the Securities and
Exchange Commission, Arthur Andersen will not have any liability under Section
11(a) of the Securities Act for any untrue statements of a material fact
contained in the financial statements audited by Arthur Andersen or any
omissions of a material fact required to be stated therein and thus no claim
could be asserted against Arthur Andersen under Section 11(a) of the Securities
Act.
28
REPORT OF INDEPENDENT AUDITOR
To the Board of Directors and Shareholders of Sylvan Inc.:
We have audited the accompanying consolidated balance sheet of Sylvan Inc. (a
Nevada corporation) and subsidiaries as of December 29, 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
fiscal year then ended. Our audit also included the financial statement schedule
listed in the index in Item 15(a)(2) for the year ended December 29, 2002. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Sylvan Inc. and subsidiaries as of
December 30, 2001, and for the two fiscal years then ended were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated February 1, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sylvan Inc. and subsidiaries as
of December 29, 2002, and the results of their operations and their cash flows
for the fiscal year then ended in conformity with accounting principles
generally accepted in the United States. Also in our opinion, the related
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As more fully discussed in Note 1 to the consolidated financial statements,
effective December 31, 2001, Sylvan Inc. adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142).
As discussed above, the consolidated financial statements of Sylvan Inc. as of
December 30, 2001, and for the two fiscal years then ended were audited by other
auditors who have ceased operations. As described in Note 1, these financial
statements have been revised to include the transitional disclosures required by
SFAS No. 142, which was adopted by the company as of December 31, 2001. Our
audit procedures with respect to the disclosures in Note 1 with respect to 2001
and 2000 included (a) agreeing the previously reported net income to the
previously issued financial statements and the adjustments to reported net
income representing amortization expense (including any related tax effects)
recognized in those periods related to goodwill as a result of initially
applying Statement No. 142 to the company's underlying records obtained from
management, and (b) testing the mathematical accuracy of the reconciliation of
adjusted net income to reported net income, and the related earnings-per-share
amounts. In our opinion, the disclosures for 2001 and 2000 in Note 1 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.
/s/ Ernst & Young LLP
January 31, 2003
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Sylvan Inc.:
We have audited the accompanying consolidated balance sheets of Sylvan Inc. (a
Nevada corporation) and Subsidiaries as of December 30, 2001 and December 31,
2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 30, 2001. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sylvan Inc. and
Subsidiaries as of December 30, 2001 and December 31, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
February 1, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the company's Annual Report on Form 10-K for the year ended
December 30, 2001. This audit report has not been reissued by Arthur Andersen
LLP in connection with this Annual Report Form 10-K. See Consent of Arthur
Andersen LLP (page 28) for further discussion.
30
CONSOLIDATED BALANCE SHEETS
SYLVAN INC. AND SUBSIDIARIES
ASSETS
================================================================================
IN THOUSANDS
DEC. 29, 2002 DEC. 30, 2001
-------------------------- --------------------------
Current Assets:
Cash and cash equivalents $ 5,624 $ 5,072
Trade accounts receivable, net of allowance for doubtful
accounts of $795 and $440, respectively 14,399 13,133
Inventories 11,425 10,119
Prepaid income taxes and other expenses 1,495 1,437
Other current assets 1,494 4,206
-------------------------- --------------------------
TOTAL CURRENT ASSETS 34,437 33,967
-------------------------- --------------------------
Property, Plant and Equipment:
Land and improvements 3,987 3,711
Buildings 43,699 38,021
Equipment 56,895 51,014
-------------------------- --------------------------
104,581 92,746
Less-Accumulated depreciation (45,794) (38,470)
-------------------------- --------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 58,787 54,276
-------------------------- --------------------------
INTANGIBLE ASSETS, net of accumulated amortization
of $4,691 and $4,078, respectively 12,321 11,036
OTHER ASSETS, net of accumulated amortization
of $597 and $491, respectively 1,261 7,811
-------------------------- --------------------------
TOTAL ASSETS $ 106,806 $ 107,090
========================== ==========================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
CONSOLIDATED BALANCE SHEETS
SYLVAN INC. AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY
===============================================================================
IN THOUSANDS EXCEPT SHARE DATA
DEC. 29, 2002 DEC. 30, 2001
-------------------------- --------------------------
Current Liabilities:
Current portion of long-term debt $ 223 $ 2,430
Accounts payable - trade 3,895 3,833
Accrued salaries, wages and employee benefits 2,771 2,635
Other accrued liabilities 1,413 905
Income taxes payable 1,545 942
-------------------------- --------------------------
TOTAL CURRENT LIABILITIES 9,847 10,745
-------------------------- --------------------------
LONG-TERM AND REVOLVING-TERM DEBT 38,162 37,255
-------------------------- --------------------------
Other Long-Term Liabilities:
Other employee benefits 9,538 1,362
Other 256 5,162
-------------------------- --------------------------
TOTAL OTHER LONG-TERM LIABILITIES 9,794 6,524
-------------------------- --------------------------
MINORITY INTEREST 1,741 1,680
Shareholders' Equity:
Common stock, voting, par value $.001, 10,000,000 shares
authorized, 6,728,405 and 6,694,272 shares issued
in 2002 and 2001, respectively 7 7
Additional paid-in capital 17,284 17,055
Retained earnings 64,965 60,296
Less-Treasury stock, at cost, 1,597,274 and 1,263,953
shares in 2002 and 2001, respectively (16,669) (13,136)
-------------------------- --------------------------
65,587 64,222
Accumulated other comprehensive loss (18,325) (13,336)
-------------------------- --------------------------
TOTAL SHAREHOLDERS' EQUITY 47,262 50,886
-------------------------- --------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 106,806 $ 107,090
========================== ==========================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
32
CONSOLIDATED STATEMENTS OF INCOME
SYLVAN INC. AND SUBSIDIARIES
===============================================================================
IN THOUSANDS EXCEPT SHARE DATA
2002 2001 2000
-------------------- -------------------- --------------------
NET SALES $ 88,192 $ 85,911 $ 85,947
-------------------- -------------------- --------------------
Operating Costs and Expenses:
Cost of sales 52,109 49,818 47,937
Selling and administrative 19,416 18,006 19,500
Research and development 1,965 1,721 1,763
Depreciation 5,642 5,375 5,233
-------------------- -------------------- --------------------
79,132 74,920 74,433
-------------------- -------------------- --------------------
OPERATING INCOME 9,060 10,991 11,514
INTEREST EXPENSE, NET 1,865 2,532 2,529
OTHER EXPENSE 3 19 155
-------------------- -------------------- --------------------
INCOME BEFORE INCOME TAXES 7,192 8,440 8,830
-------------------- -------------------- --------------------
Provision (Benefit) for Income Taxes:
Current 2,082 2,216 2,206
Deferred 324 274 (226)
-------------------- -------------------- --------------------
2,406 2,490 1,980
-------------------- -------------------- --------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 4,786 5,950 6,850
-------------------- -------------------- --------------------
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 117 121 168
-------------------- -------------------- --------------------
NET INCOME $ 4,669 $ 5,829 $ 6,682
==================== ==================== ====================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,402,859 5,500,799 5,658,860
==================== ==================== ====================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,454,700 5,551,673 5,665,974
==================== ==================== ====================
NET INCOME PER SHARE - BASIC $ 0.86 $ 1.06 $ 1.18
==================== ==================== ====================
NET INCOME PER SHARE - DILUTED $ 0.86 $ 1.05 $ 1.18
==================== ==================== ====================
The accompanying notes to consolidated financial statements are
an integral part of these statements.
33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SYLVAN INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------
IN THOUSANDS EXCEPT SHARE DATA
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----------------- ---------------- ----------------
BALANCE, Jan. 2, 2000 $ 7 $ 16,801 $ 47,785
Net income - - 6,682
Foreign currency translation
adjustment - - -
----------------- ---------------- ----------------
Comprehensive income
Exercise of 10,000 stock options
and compensation expense, net
of tax - 104 -
Purchase of treasury stock - - -
Issuance of treasury stock - (20) -
----------------- ---------------- ----------------
BALANCE, Dec. 31, 2000 7 16,885 54,467
Net income - - 5,829
Foreign currency translation
adjustment - - -
Unrealized losses on derivatives
designated and qualified as cash
flow hedges, net of tax - - -
----------------- ---------------- ----------------
Comprehensive income - - -
Exercise of 12,671 stock options
and compensation expense, net
of tax - 170 -
Purchase of treasury stock - - -
----------------- ---------------- ----------------
BALANCE, Dec. 30, 2001 7 17,055 60,296
Net income - - 4,669
Foreign currency translation
adjustment - - -
Unrealized losses on derivatives
designated and qualified as cash
flow hedges, net of tax - - -
Minimum pension liability
adjustment, net of tax
tax - - -
----------------- ---------------- ----------------
Comprehensive loss - - -
Exercise of 34,133 stock options
and compensation expense, net
of tax - 229 -
Purchase of treasury stock - - -
----------------- ---------------- ----------------
BALANCE, DEC. 29, 2002 $ 7 $ 17,284 $ 64,965
================= ================ ================
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK LOSS EQUITY
----------------- ---------------- ----------------
BALANCE, Jan. 2, 2000 $ (10,166) $ (7,203) $ 47,224
Net income - - 6,682
Foreign currency translation
adjustment - (2,705) (2,705)
----------------- ---------------- ----------------
Comprehensive income 3,977
Exercise of 10,000 stock options
and compensation expense, net
of tax 53 - 157
Purchase of treasury stock (2,017) - (2,017)
Issuance of treasury stock 213 - 193
----------------- ---------------- ----------------
BALANCE, Dec. 31, 2000 (11,917) (9,908) 49,534
Net income - - 5,829
Foreign currency translation
adjustment - (3,092) (3,092)
Unrealized losses on derivatives
designated and qualified as cash
flow hedges, net of tax - (336) (336)
----------------- ---------------- ----------------
Comprehensive income - - 2,401
Exercise of 12,671 stock options
and compensation expense, net
of tax - - 170
Purchase of treasury stock (1,219) - (1,219)
----------------- ---------------- ----------------
BALANCE, Dec. 30, 2001 (13,136) (13,336) 50,886
Net income - - 4,669
Foreign currency translation
adjustment - 5,042 5,042
Unrealized losses on derivatives
designated and qualified as cash
flow hedges, net of tax - (519) (519)
Minimum pension liability
adjustment, net of tax
tax - (9,512) (9,512)
----------------- ---------------- ----------------
Comprehensive loss - - (320)
Exercise of 34,133 stock options
and compensation expense, net
of tax - - 229
Purchase of treasury stock (3,533) - (3,533)
----------------- ---------------- ----------------
BALANCE, DEC. 29, 2002 $ (16,669) $ (18,325) $ 47,262
================= ================ ================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
SYLVAN INC. AND SUBSIDIARIES
===============================================================================
IN THOUSANDS
2002 2001 2000
----------------------- ----------------------- -----------------------
CASH FLOWS FROM OPERATIONS:
Net income $ 4,669 $ 5,829 $ 6,682
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 5,872 6,114 5,998
Employee benefits 216 373 (193)
Trade accounts receivable (152) (753) (183)
Inventories (470) 1 (697)
Prepaid expenses and other assets 3,008 (852) (900)
Accounts payable, accrued expenses
and other liabilities 620 (35) (1,072)
Minority interest 108 157 319
Other (1,133) (155) (212)
----------------------- ----------------------- -----------------------
NET CASH PROVIDED BY OPERATIONS 12,738 10,679 9,742
----------------------- ----------------------- -----------------------
CASH FLOWS FROM INVESTING:
Expenditures for property, plant and equipment (6,144) (8,744) (7,012)
Proceeds from sale of fixed assets - 145 908
Earn-out payment on prior period acquisition - (125) (125)
----------------------- ----------------------- -----------------------
NET CASH USED IN INVESTING (6,144) (8,724) (6,229)
----------------------- ----------------------- -----------------------
CASH FLOWS FROM FINANCING:
Principal payments on long-term debt (2,393) (285) (72)
Proceeds from long-term debt borrowings - 49 172
Net repayments under revolving credit loan (1,224) (509) (3,350)
Proceeds from exercise of stock options 335 134 87
Purchase of treasury shares (3,533) (1,219) (2,017)
----------------------- ----------------------- -----------------------
NET CASH USED IN FINANCING (6,815) (1,830) (5,180)
----------------------- ----------------------- -----------------------
EFFECT OF EXCHANGE RATES ON CASH 773 (424) (563)
----------------------- ----------------------- -----------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 552 (299) (2,230)
CASH AND CASH EQUIVALENTS, BEGINNING OF
FISCAL YEAR 5,072 5,371 7,601
----------------------- ----------------------- -----------------------
CASH AND CASH EQUIVALENTS, END OF
FISCAL YEAR $ 5,624 $ 5,072 $ 5,371
======================= ======================= =======================
Supplemental Disclosure of Cash Flow Data:
Interest paid $ 1,942 $ 2,402 $ 2,651
Income taxes paid 2,052 2,394 2,153
The accompanying notes to consolidated financial statements are an integral part
of these statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SYLVAN INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING PERIOD
The company maintains its accounting records on a 52-53 week fiscal year ending
the Sunday nearest December 31. The 2002, 2001 and 2000 fiscal years were 52
weeks.
PRINCIPLES OF CONSOLIDATION
The accounts of majority-owned or controlled subsidiaries are included in the
company's statements only for the period subsequent to their acquisition. All
material intercompany transactions and balances have been eliminated in
consolidation.
BASIS OF PRESENTATION
The financial statements are prepared in conformity with generally accepted
accounting principles in the United States and require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results will differ from those estimates.
CASH AND CASH EQUIVALENTS
All cash equivalents are stated at cost, which approximates market. The company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. 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" in the
accompanying consolidated balance sheets as of December 30, 2001.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
The company's property, plant and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives.
Upon disposal of property items, the asset and related accumulated depreciation
accounts are relieved of the amounts recorded therein for such items and any
resulting gain or loss is reflected in income.
For financial reporting purposes, the company considers its depreciable assets
to have the following useful lives:
Land improvements 10-20 years
Buildings 30-40 years
Equipment 2-15 years
36
The company owns four satellite mushroom growing facilities, which have an
aggregate cost of $3.4 million and accumulated depreciation of $117,000, based
on a 20-year estimated useful life. Each of the facilities is leased to an
unrelated third party for $140,000 per year. The leases have a one-year term and
may be extended for an additional five years. The lessees have the right to
purchase the satellite assets at Sylvan's original cost of construction after
the completion of the first year's lease term.
The satellite farms purchased $1.3 million of ready-to-grow mushroom compost in
2002 and $0.7 million in 2001. The satellites also sold to Quincy, for immediate
resale to its third-party marketer, $3.0 million of high-quality mushrooms in
2002 and $1.3 million in 2001.
REPAIR AND MAINTENANCE
Repair and maintenance costs are expensed as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
REVENUE RECOGNITION
The company recognizes revenue when the title and risk of loss of the goods sold
pass to the customer at the time of shipment.
EARNINGS PER COMMON SHARE
Earnings per share were calculated using the weighted average number of shares
outstanding during the period and including the effect of stock options
outstanding.
The following table reflects the calculation of earnings per share:
IN THOUSANDS EXCEPT SHARE DATA
FISCAL YEAR ENDED
----------------------------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------------------ ------------------------ ------------------------
Basic Earnings Per Share:
Net income $ 4,669 $ 5,829 $ 6,682
Average shares outstanding 5,402,859 5,500,799 5,658,860
------------------------ ------------------------ ------------------------
Earnings per share $ 0.86 $ 1.06 $ 1.18
------------------------ ------------------------ ------------------------
Diluted Earnings Per Share:
Net income $ 4,669 $ 5,829 $ 6,682
Average shares outstanding 5,402,859 5,500,799 5,658,860
Effect of stock options 51,841 50,874 7,114
------------------------ ------------------------ ------------------------
Diluted average shares
outstanding 5,454,700 5,551,673 5,665,974
------------------------ ------------------------ ------------------------
Earnings per share $ 0.86 $ 1.05 $ 1.18
======================== ======================== ========================
Options to purchase approximately 295,000, 305,000 and 638,000 shares of common
stock for the fiscal years ended 2002, 2001 and 2000, respectively, were
outstanding, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the company's common shares for the respective years.
37
FOREIGN CURRENCY TRANSLATION
The financial statements of all foreign operations are translated using the
standards established by Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation." Assets and liabilities of non-U.S.
operations are translated into U.S. dollars using year-end exchange rates, while
revenues and expenses are translated at the average exchange rates for the year.
The resulting net translation adjustments are recorded as a separate component
of shareholders' equity. Transaction gains and losses are reflected in income.
FOREIGN CURRENCY EXCHANGE RISK MANAGEMENT
The company evaluates and hedges foreign currency exchange risk exposure on a
transaction-by-transaction basis. As of December 29, 2002, the company had no
outstanding foreign currency exchange contracts.
INTEREST RATE RISK MANAGEMENT
The company uses interest rate swap agreements to convert a portion of its
floating rate debt to a fixed-rate basis, thus reducing the impact of interest
rate changes on future results. The company has these agreements with its banks
as counterparties. The agreements replace the floating (euro rate) LIBOR basis
with a 90-day fixed LIBOR basis as described in the table below. At the end of
each 90-day period, the company and its counterparties make appropriate payments
to settle the difference between the floating rate LIBOR and the fixed rate
LIBOR. When the floating rate LIBOR exceeds the fixed rate LIBOR at the
beginning of a 90-day term, the counterparties will pay the difference between
the rates for the appropriate notional amount to the company. Conversely, when
the fixed rate exceeds the floating rate, the company will pay its
counterparties. Amounts receivable or payable under these swap agreements are
recorded as an adjustment to interest expense. The company's contractual swap
agreements as of December 29, 2002 are as follows:
LIBOR
EFFECTIVE FAIR FIXED MAXIMUM
NOTIONAL AMOUNT DATE EXPIRATION DATE MARKET VALUE RATE RATE
- --------------------- --------------------- -------------------- ------------------ -------------- ------------------
$ 10,000,000 February 25, 2000 August 25, 2007 $ (1,141,789) 5.48% 7.00%
5,000,000 October 4, 1999 October 6, 2003 (179,960) 5.02% -
Effective January 1, 2001, the company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended. The transition
adjustment on January 1, 2001 resulted in a net charge of $56,000 (after tax),
which was recorded in "Accumulated Other Comprehensive Loss."
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, as determined by the
counterparties, is recorded in the balance sheet, with the offset to
"Accumulated Other Comprehensive Loss," net of tax. The company expects to
expense $36,000 in 2003 related to these derivative instruments, based on
interest rates at December 29, 2002.
38
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the amount at which the instruments could be exchanged
in a transaction between willing parties. The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
instruments. Additionally, interest rate swaps are recorded at fair value in
accordance with SFAS No. 133.
Valuations for long-term debt are determined based on borrowing rates currently
available to the company for loans with similar terms, currencies and maturities
and were as follows:
IN THOUSANDS DEC. 29, 2002 DEC. 30, 2001
-------------------------- ---------------------------
Fair value $ 37,809 $ 39,162
Carrying amount
38,385 39,685
The company's financial instruments are not held for trading purposes.
COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss consisted of the
following:
IN THOUSANDS DEC. 29, 2002 DEC. 30, 2001
--------------------------- --------------------------
Foreign currency translation adjustments $ (7,958) $ (13,000)
Unrealized losses on derivatives and qualified
cash flow hedges, net of tax of $441 (855) (336)
Minimum pension liability adjustment,
net of tax of $4,902 (9,512) -
--------------------------- --------------------------
Total accumulated other comprehensive income $ (18,325) $ (13,336)
=========================== ==========================
INTANGIBLE ASSETS
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. The company also completed its annual assessment to test
for transitional goodwill impairment as of September 29, 2002. No impairment
loss resulted from either assessment.
39
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 -- (127) (120)
Currency Translation $1,891 -- (486) -- 1,405
-------- -------- -------- -------- --------
December 29, 2002 $15,998 $1,014 $(4,262) $(429) $12,321
======== ======== ======== ======== ========
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.
Amortization expense for intangible assets was $127,000 for the fiscal year
ended December 29, 2002. Estimated amortization expense for the five succeeding
years is as follows:
(in thousands)
2003 127
2004 122
2005 67
2006 67
2007 65
40
Actual results of operations for the fiscal year ended December 29, 2002 and the
pro forma results for the fiscal years ended December 30, 2001 and December 31,
2000, had Sylvan applied the non-amortization provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" in 2001 and 2000, are as follows:
FISCAL YEAR ENDED
(in thousands except per share data) DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------------------- ------------------------- -------------------------
Reported net income $ 4,669 $ 5,829 $ 6,682
Add back: Goodwill amortization,
Net of tax - 363 361
------------------------- ------------------------- -------------------------
Adjusted net income $ 4,669 $ 6,192 $ 7,043
========================= ========================= =========================
Basic earnings per share:
Reported net income $ 0.86 $ 1.06 $ 1.18
Add back: Goodwill amortization - 0.07 0.06
------------------------- ------------------------- -------------------------
Adjusted net income $ 0.86 $ 1.13 $ 1.24
========================= ========================= =========================
Diluted earnings per share:
Reported net income $ 0.86 $ 1.05 $ 1.18
Add back: Goodwill amortization - 0.07 0.06
------------------------- ------------------------- -------------------------
Adjusted net income $ 0.86 $ 1.12 $ 1.24
========================= ========================= =========================
RECENT PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements. While the technical corrections to existing
pronouncements are not substantive in nature, they may change accounting
practice. The provisions of this standard related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. The provisions of this standard
related to the rescission of SFAS No. 4 should be applied in fiscal years
beginning after May 15, 2002. All other provisions of this standard must be
applied for financial statements issued on or after May 15, 2002. The adoption
of this pronouncement did not have a material impact on the company.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires that liabilities associated with exit or disposal activities initiated
after adoption be recognized and measured at fair value when incurred as opposed
to on the date an entity commits to the exit or disposal plans. The provisions
of this standard are effective for activities initiated after December 31, 2002.
The adoption of this pronouncement is not expected to have a material impact on
the company.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based compensation. While the Statement does not amend SFAS
No. 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of the Statement are applicable to
all companies with stock-based compensation. The provisions of this standard are
effective for fiscal years ending after December 15, 2002. The adoption of this
pronouncement did not have a material impact on the company as no change was
made to the method of accounting for stock-based compensation.
41
In January 2003, the Financial Accounting Standards Board issued FIN No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. It requires that companies determine whether a non-consolidated
entity is a variable interest entity, as defined by FIN No. 46, and which
company is the primary beneficiary of the variable interest entity's activities.
The consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003 and apply to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. The company is currently evaluating the impact of adopting this
interpretation.
2. INVENTORIES:
Inventories are summarized as follows:
IN THOUSANDS
DEC. 29, 2002 DEC. 30, 2001
========================== ==========================
Growing crops and compost material $ 4,975 $ 5,466
Stores and other supplies 2,039 1,493
Finished products 4,411 3,160
-------------------------- --------------------------
$ 11,425 $ 10,119
========================== ==========================
3. LONG-TERM DEBT, BORROWING AND LEASE 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 average borrowings under this agreement were $34.7 million during
2002. The maximum aggregate outstanding balance will decline over the life of
the agreement as follows:
PERIOD BEGINNING MAXIMUM AGGREGATE 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 December
29, 2002, the company had outstanding borrowings under the agreement of $37.0
million.
42
The revolving credit loans mature on August 5, 2005. The company intends to
extend the terms of the revolving credit agreement or secure a similar
arrangement through August 2007, which is concurrent with the expiration date of
the longest-term interest rate swap.
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.
The company was not in compliance with one of the financial covenants as of
December 29, 2002 due to the recording of a $9.5 million minimum pension
liability adjustment to "Accumulated Other Comprehensive Income" during 2002. In
the first quarter of 2003, the company and its banks signed an amendment to the
revolving credit agreement to adjust for the recording of the minimum pension
liability adjustment and waive the loan covenant violation. The adjustment and
waiver are effective as of December 29, 2002 and continue through August 5,
2005.
The company has several additional loan obligations. The outstanding balances
related to these loans totaled approximately $1.4 million as of December 29,
2002 and as of December 30, 2001. Interest rates on these loans vary.
The company had a French-franc denominated loan of FF16.2 million ($2.2 million)
that was repaid in January 2002.
The company incurred approximately $1.9 million in gross interest expense during
2002, including $12,000 of interest income related to interest hedges accounted
for under SFAS No. 133. The weighted average interest rate was 5.0%. The
contractual principal payments due under the company's loan agreements are as
follows:
IN THOUSANDS
2003 $ 223
2004 87
2005 37,486
2006 62
2007 62
Thereafter 465
----------------------
TOTAL $ 38,385
======================
The company has entered into various noncancelable operating leases expiring at
various dates through August 31, 2005, primarily for production and office
space. During the fiscal years ended December 29, 2002, December 30, 2001 and
December 31, 2000, rental expense included in the statements of income was
$461,000, $590,000, and $567,000, respectively.
Future minimum lease commitments for all noncancelable leases are as follows:
IN THOUSANDS
2003 $ 485
2004 116
2005 49
43
4. ACCRUED SALARIES, WAGES AND EMPLOYEE BENEFITS:
Accrued salaries, wages and employee benefits were composed of the following:
IN THOUSANDS
DEC. 29, 2002 DEC. 30, 2001
========================== ==========================
Accrued compensation $ 2,086 $ 2,030
Accrued vacation 622 533
Other 63 72
-------------------------- --------------------------
TOTAL $ 2,771 $ 2,635
========================== ==========================
5. INCOME TAXES:
The company files a consolidated U.S. federal income tax return with its wholly
owned U.S. subsidiaries. The company does not provide for federal income taxes
on unremitted earnings of non-U.S. subsidiaries.
The amounts of income before income taxes attributable to domestic and foreign
operations were as follows:
IN THOUSANDS
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
-------------------------- -------------------------- --------------------------
Domestic $ 2,180 $ 3,405 $ 3,308
Foreign 5,012 5,035 5,522
-------------------------- -------------------------- --------------------------
TOTAL $ 7,192 $ 8,440 $ 8,830
========================== ========================== ==========================
The provision (benefit) for income taxes consisted of the following:
IN THOUSANDS
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
========================== ========================== ==========================
Current:
Federal $ 819 $ 970 $ 861
State 2 23 (78)
Foreign 1,261 1,223 1,423
Deferred 419 192 266
Change in Valuation Allowance (95) 82 (492)
-------------------------- -------------------------- --------------------------
$ 2,406 $ 2,490 $ 1,980
========================== ========================== ==========================
44
A reconciliation between income taxes computed by applying the statutory U.S.
federal income tax rate to income before income taxes and the actual provision
for income taxes is as follows:
IN THOUSANDS
FISCAL YEAR ENDED
------------------------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
======================== ======================== ==========================
Income tax at U.S. federal statutory rate $ 2,445 $ 2,869 $ 3,002
State income taxes, net of federal income
tax benefit 97 37 (5)
Foreign taxes at rates other than effective
U.S. rates (201) (488) (462)
Net (permanent benefits) nondeductible charges (35) (24) (67)
Change in tax valuation allowance (95) 82 (492)
Other, net 195 14 4
------------------------ ------------------------ --------------------------
TOTAL PROVISION FOR INCOME TAXES $ 2,406 $ 2,490 $ 1,980
======================== ======================== ==========================
Temporary differences which generate significant portions of the company's
deferred tax assets and liabilities as of December 29, 2002 and December 30,
2001 were as follows:
IN THOUSANDS
DEC. 29, 2002 DEC. 31, 2001
=========================== ==========================
Postretirement benefits other than pensions $ 347 $ 344
Depreciation (3,122) (3,407)
Pension liability (asset) 2,637 (2,213)
Net operating loss carryforwards 1,981 2,285
Other, net 12 247
--------------------------- --------------------------
Total 1,855 (2,744)
Less-Valuation allowance (1,357) (1,452)
--------------------------- --------------------------
NET DEFERRED TAX ASSETS (LIABILITIES) $ 498 $ (4,196)
=========================== ==========================
Included in net deferred tax liabilities as of December 29, 2002 are unrealized
tax benefits amounting to approximately $2.0 million related to net operating
loss carryforwards. The realization of these tax benefits is contingent on
future taxable net income being generated by certain foreign and domestic
operations. A $0.5 million state tax benefit resulted from the merger of two of
the company's subsidiaries in the fourth quarter of 2000. The life of the
carryforwards is determined by various foreign and state taxation jurisdictions.
Approximately $0.3 million of the net operating losses has an indefinite
carryforward period. The remaining $1.7 million of net operating losses will
expire between 2003 and 2017. The company has recognized a valuation allowance
that reduces the carrying value of unrealized net deferred tax benefits relating
to net operating loss carryforwards to offset the deferred tax benefits that may
not be realized.
45
6. STOCK OPTIONS:
In June 1991, the shareholders approved a stock option plan (the 1990 Plan) for
employees and others who perform substantial services for the company. In April
1999, the shareholders approved an amendment and restatement of the 1990 Plan to
provide for an increase to 1,700,000 in the number of shares of the company's
stock which are available for the granting of options. In June 1993, the
shareholders approved a stock option plan (the 1993 Plan) for nonemployee
directors of the company, covering 100,000 shares of common stock. The company
accounts for both plans under the Accounting Principles Board Opinion No. 25,
under which no compensation cost is recognized for options granted at fair
market value. Had compensation cost for these plans been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
company's net income and earnings per share (EPS) would have been reduced to the
following pro forma amounts:
IN THOUSANDS EXCEPT PER SHARE DATA
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------
2002 2001 2000
======================= ======================= =======================
Net Income: As Reported $ 4,669 $ 5,829 $ 6,682
Pro Forma 4,601 5,024 5,964
Diluted EPS: As Reported $ 0.86 $ 1.05 $ 1.18
Pro Forma 0.84 0.91 1.05
The company's Board of Directors, through its Stock Option and Compensation
Committee, may grant options under the 1990 Plan. Grants under the 1993 Plan are
nondiscretionary. The Committee has granted options (net of cancellations) for
1,287,081 shares through December 29, 2002 under the 1990 Plan and 88,000 shares
have been granted under the 1993 Plan. Under both plans, the option exercise
price equals the stock's market price on the date of grant. The 1990 Plan
options are exercisable one year from the grant date in installments over a
period of three years and expire after ten years. The 1993 Plan options are
exercisable six months from the grant date and expire ten years after the grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants made in 2002, 2001 and 2000, respectively: risk-free
interest rates of 3.17%, 3.62% and 5.74%; no expected dividend yields; expected
lives of 8.0 years; expected volatility of 34%, 34% and 34%.
46
A summary of the status of the company's stock option plans as of December 29,
2002, December 30, 2001, and December 31, 2000, and changes during the years
then ended, is presented in the tables below:
SHARES IN THOUSANDS
2002 2001
--------------------------------------- --------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
=============== ===================== ============== =====================
Outstanding at beginning of year 827 $ 11.22 841 $ 11.21
Granted 22 11.40 3 12.50
Exercised (34) 9.18 (13) 10.05
Forfeited (24) 12.14 (4) 12.74
--------------- --------------------- -------------- ---------------------
OUTSTANDING AT END OF YEAR 791 11.27 827 11.22
--------------- --------------------- -------------- ---------------------
Exercisable at end of year 747 11.42 703 11.60
Weighted average fair value of options granted $ 5.12 $ 5.73
2000
--------------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
============== =====================
Outstanding at beginning of year 859 $ 11.54
Granted 132 8.75
Exercised (10) 8.75
Forfeited (140) 11.08
-------------- ---------------------
OUTSTANDING AT END OF YEAR 841 11.21
-------------- ---------------------
Exercisable at end of year 570 11.64
Weighted average fair value of options granted $ 4.50
As of December 29, 2002, the characteristics of the stock options under both
plans were as follows:
RANGES OF EXERCISE PRICES
------------------------------------------------------------
$8.625-$12.875 $13.00-$15.00
--------------------------- --------------------------
Outstanding Options:
Number 603,540 188,000
Weighted average exercise price $ 10.46 $ 13.93
Weighted average remaining
contractual life (in years) 5.1 5.6
Exercisable Options:
Number 559,240 188,000
Weighted average exercise price $ 10.57 $ 13.93
Nonexercisable Options:
Number 52,300 -
Weighted average exercise price $ 9.25 $ -
7. EMPLOYEE BENEFITS:
The company has a noncontributory defined benefit pension plan covering
substantially all of the former employees of a former operation and certain
employees of Sylvan Foods, Inc. and Sylvan America, Inc., wholly owned
subsidiaries of the company. The company's funding policy is to contribute
annually an amount that satisfies the minimum funding requirement under the
Employee Retirement Income Security Act and that is also deductible for federal
income tax purposes.
The accumulated benefit obligations as of December 29, 2002 and December 30,
2001 were $33.4 million and $30.1 million, respectively, all of which were fully
vested. The plan's assets consist primarily of U.S. government obligations,
temporary deposits, common stocks and corporate obligations.
47
The plan's funded status and amounts recognized in the company's consolidated
financial statements, together with certain accumulated postretirement medical
benefit obligations, are set forth in the following tables:
IN THOUSANDS
PENSION BENEFITS
------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------------ ------------------- -------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 30,085 $ 30,252 $ 30,109
Interest cost 2,171 2,174 2,176
Actuarial (gain) loss 3,481 - 302
Benefits paid (2,368) (2,341) (2,335)
------------------ ------------------- -------------------
BENEFIT OBLIGATION AT END OF YEAR $ 33,369 $ 30,085 $ 30,252
================== =================== ===================
Change in plan assets:
Fair value of plan assets at beginning
of year $ 30,220 $ 33,849 $ 34,362
Actual return on plan assets (2,240) (1,288) 1,822
Employer contributions - - -
Benefits paid (2,368) (2,341) (2,335)
------------------ ------------------- -------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 25,612 $ 30,220 $ 33,849
================== =================== ===================
Reconciliation of funded status:
Funded status $ (7,757) $ 135 $ 3,597
Unrecognized net actuarial (gain)/loss 14,414 6,372 2,307
Unrecognized prior service
Cost - - -
------------------ ------------------- -------------------
PREPAID (ACCRUED)
BENEFIT LIABILITY $ 6,657 $ 6,507 $ 5,904
================== =================== ===================
OTHER BENEFITS
-------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------------- ------------------- -------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 931 $ 985 $ 1,044
Interest cost 53 69 71
Actuarial (gain) loss (164) (17) (41)
Benefits paid (85) (106) (89)
------------------- ------------------- -------------------
BENEFIT OBLIGATION AT END OF YEAR $ 735 $ 931 $ 985
=================== =================== ===================
Change in plan assets:
Fair value of plan assets at beginning
of year $ - $ - $ -
Actual return on plan assets - - -
Employer contributions 85 106 89
Benefits paid (85) (106) (89)
------------------- ------------------- -------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ - $ - $ -
=================== =================== ===================
Reconciliation of funded status:
Funded status $ (735) $ (931) $ (985)
Unrecognized net actuarial (gain)/loss (117) 43 60
Unrecognized prior service
Cost (44) (49) (56)
------------------- ------------------- -------------------
PREPAID (ACCRUED)
BENEFIT LIABILITY $ (896) $ (937) $ (981)
=================== =================== ===================
48
IN THOUSANDS
PENSION BENEFITS
------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------------ ------------------- -------------------
AMOUNTS RECOGNIZED ON THE CONSOLIDATED
BALANCE SHEET
Prepaid pension cost (included
in "Other Assets" in the
Consolidated Balance
Sheet) $ - $ 6,507 $ 5,904
Accrued benefit liability
(included in "Other
Employee Benefits" in the
Consolidated Balance
Sheet) (7,757) - -
Accumulated other
comprehensive loss 14,414 - -
------------------ ------------------- -------------------
NET AMOUNT $ 6,657 $ 6,507 $ 5,904
================== =================== ===================
Weighted-average assumptions as of
October 31 of each fiscal year:
Discount rate 6.80% 7.50% 7.50%
Expected return on plan assets 8.50% 9.00% 9.00%
Components of net periodic pension cost
(income):
Interest cost $ 2,171 $ 2,174 $ 2,176
Expected return on plan assets (2,450) (2,778) (2,824)
Amortization of prior service
Cost - - -
Recognized net actuarial
(gain)/loss 129 - -
------------------ ------------------ -------------------
NET PERIODIC
BENEFIT COST
(INCOME) $ (150) $ (604) $ (648)
================== =================== ===================
Assumed health care cost trend:
Initial trend rate
Ultimate trend rate
Year ultimate trend reached
OTHER BENEFITS
-------------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------------- ------------------- -------------------
AMOUNTS RECOGNIZED ON THE CONSOLIDATED
BALANCE SHEET
Prepaid pension cost (included
in "Other Assets" in the
Consolidated Balance
Sheet) $ - $ - $ -
Accrued benefit liability
(included in "Other
Employee Benefits" in the
Consolidated Balance
Sheet) - - -
Accumulated other
comprehensive loss - - -
------------------- ------------------- -------------------
NET AMOUNT $ - $ - $ -
=================== =================== ===================
Weighted-average assumptions as of
October 31 of each fiscal year:
Discount rate 6.80% 7.50% 7.50%
Expected return on plan assets - - -
Components of net periodic pension cost
(income):
Interest cost $ 53 $ 69 $ 71
Expected return on plan assets - - -
Amortization of prior service
Cost (6) (6) (6)
Recognized net actuarial
(gain)/loss (4) - -
------------------- ------------------- -------------------
NET PERIODIC
BENEFIT COST
(INCOME) $ 43 $ 63 $ 65
=================== =================== ===================
Assumed health care cost trend:
Initial trend rate 10.00% 6.56% 6.95%
Ultimate trend rate 5.00% 5.00% 5.00%
Year ultimate trend reached 2008 2005 2005
A one-percentage-point change in the assumed health care cost trend rates would
have the following effects:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
------------------------------ -------------------------------
Effect on total of service and
interest cost components for
2002 $ 1 $ (1)
Effect on 2002 postretirement
benefit obligation 6 (5)
49
Additionally, during 1999 certain hourly paid workers at the company's Quincy
Farms subsidiary became participants in a union-sponsored, collectively
bargained, multi-employer pension plan to which the company makes contributions
based on negotiated fixed amounts per hour per employee. Expenses recorded in
connection with this plan for fiscal years 2002, 2001 and 2000 were $35,000,
$38,000 and $30,000, respectively.
The collective bargaining agreement, dated January 21, 2001, with the union
representing certain hourly workers of Quincy Farms contains a profit sharing
bonus provision. The contract covers the 2001, 2002 and 2003 fiscal years. The
bonus pool is calculated on Quincy's incremental operating income greater than
base amounts. Expense recorded for this plan was $23,000 during 2002 and $85,000
during 2001.
8. NATURE OF OPERATIONS AND 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. The Fresh Mushrooms Segment is comprised
of Quincy Farms, a large, regional producer of fresh mushrooms.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The company evaluates the
performance of each segment based on profit or loss from operations. The company
accounts for intersegment sales at a transfer price that approximates an
arms-length sale to an unrelated third party.
The company's reportable segments are strategic business units that offer
different products and serve different customers. They are managed separately
since each business requires different technology, techniques and marketing
strategies.
50
IN THOUSANDS
SPAWN FRESH TOTAL REPORTABLE
PRODUCTS SEGMENT MUSHROOMS SEGMENT SEGMENTS
----------------------- ---------------------- ----------------------
Total Revenues 2002 $ 63,996 $ 25,517 $ 89,513
2001 $ 63,559 $ 23,621 $ 87,180
2000 $ 65,199 $ 22,035 $ 87,234
Intersegment Revenues 2002 $ 1,321 $ - $ 1,321
2001 $ 1,269 $ - $ 1,269
2000 $ 1,287 $ - $ 1,287
Depreciation Expense 2002 $ 4,195 $ 1,409 $ 5,604
2001 $ 3,793 $ 1,549 $ 5,342
2000 $ 3,578 $ 1,623 $ 5,201
Operating Income 2002 $ 10,567 $ 2,879 $ 13,446
2001 $ 11,849 $ 2,642 $ 14,491
2000 $ 13,368 $ 2,135 $ 15,503
Net Fixed Asset Expenditures 2002 $ 3,219 $ 2,925 $ 6,144
2001 $ 6,330 $ 2,236 $ 8,566
2000 $ 5,191 $ 911 $ 6,102
Assets 2002 $ 85,166 $ 19,812 $ 104,978
2001 $ 79,700 $ 19,040 $ 98,740
2000 $ 76,462 $ 21,565 $ 98,027
51
RECONCILIATION TO CONSOLIDATED FINANCIAL DATA
IN THOUSANDS
2002 2001 2000
======================= ======================= =======================
Revenues:
Total for reportable segments $ 89,513 $ 87,180 $ 87,234
Elimination of intersegment revenues (1,321) (1,269) (1,287)
----------------------- ----------------------- -----------------------
TOTAL CONSOLIDATED REVENUES $ 88,192 $ 85,911 $ 85,947
======================= ======================= =======================
Depreciation Expense:
Total for reportable segments $ 5,604 $ 5,342 $ 5,201
Unallocated corporate expenses 38 33 32
----------------------- ----------------------- -----------------------
TOTAL CONSOLIDATED DEPRECIATION
EXPENSE $ 5,642 $ 5,375 $ 5,233
======================= ======================= =======================
Operating Income:
Total for reportable segments $ 13,446 $ 14,491 $ 15,503
Unallocated corporate expenses (4,386) (3,500) (3,989)
----------------------- ----------------------- -----------------------
TOTAL CONSOLIDATED OPERATING
INCOME $ 9,060 $ 10,991 $ 11,514
======================= ======================= =======================
Net Fixed Asset Expenditures:
Total for reportable segments $ 6,144 $ 8,566 $ 6,102
Unallocated corporate expenditures - 33 2
----------------------- ----------------------- -----------------------
TOTAL CONSOLIDATED NET FIXED
ASSET EXPENDITURES $ 6,144 $ 8,599 $ 6,104
======================= ======================= =======================
Assets:
Total for reportable segments $ 104,978 $ 98,740 $ 98,027
Prepaid pension asset from former operation - 6,507 5,904
Unallocated corporate assets 1,828 1,843 1,843
----------------------- ----------------------- -----------------------
TOTAL CONSOLIDATED ASSETS $ 106,806 $ 107,090 $ 105,774
======================= ======================= =======================
GEOGRAPHIC ANALYSIS OF NET LONG-LIVED ASSETS
IN THOUSANDS
OTHER FOREIGN
UNITED STATES FRANCE NETHERLANDS COUNTRIES TOTAL
-------------------- ------------------- -------------------- ------------------------ ---------------
2002 $ 26,994 $ 11,202 $ 4,896 $ 15,695 $ 58,787
2001 26,161 9,219 4,457 14,439 54,276
2000 25,225 8,560 5,089 13,662 52,536
52
GEOGRAPHIC ANALYSIS OF REVENUES BASED ON LOCATION OF CUSTOMER
IN THOUSANDS
OTHER FOREIGN
UNITED STATES FRANCE NETHERLANDS COUNTRIES TOTAL
----------------------- ----------------- --------------------- ------------------------ ---------------
2002 $ 45,273 $ 6,390 $ 9,536 $ 26,993 $ 88,192
2001 40,660 6,779 8,880 29,592 85,911
2000 41,703 7,440 8,778 28,026 85,947
The majority of Sylvan's Fresh Mushrooms Segment sales were to C And C Carriage
Mushroom Company. C And C began purchasing and marketing all of Quincy's
production in January 2000. C And C is not affiliated with Sylvan or any of its
subsidiaries and the purchase and marketing contract, dated January 14, 2000,
carries an initial term of five years.
No other single customer accounted for 10% or more of Sylvan's sales during the
fiscal years ended December 29, 2002, December 30, 2001 or December 31, 2000.
The majority of the company's $14.4 million in trade accounts receivable are
from regional mushroom growers and composters. Approximately $2.2 million of the
receivable is due from C And C and is partially secured by a letter of credit
for $1.25 million.
Sylvan sells its products to customers primarily in North America and Europe.
Credit sales are also made to customers in Australia, Asia, Africa and South
America. Many of these customers are privately held businesses with limited
capital resources. The company performs ongoing credit evaluations of customers,
and generally does not require collateral. Allowances are maintained for
potential credit losses and such losses have been within management's
expectations.
9. RELATED-PARTY TRANSACTIONS:
During fiscal years 2002, 2001 and 2000, a nonemployee director's business
interests purchased spawn and spawn-related products at fair market value
totaling $493,000, $589,000 and $621,000, respectively. These business interests
purchased mushrooms and services at fair market value totaling $5,000 in 2001
from the company's subsidiaries.
53
Schedule II
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001
AND DECEMBER 31, 2000
(In Thousands)
----------Additions-----------
Balance at Charged to Deductions Balance
Beginning Costs and from at End
Description of Period Expenses Recoveries Reserves (a) Other (b) of Period
- -----------------------------------------------------------------------------------------------------------------------
Year ended
December 29, 2002-
Allowance for
doubtful
accounts $440 $492 $0 ($194) $57 $795
===== ===== === ====== ==== ====
Year ended
December 30, 2001-
Allowance for
doubtful
accounts $497 $107 $0 ($125) ($39) $440
===== ===== === ====== ===== ====
Year ended
December 31, 2000-
Allowance for
doubtful
accounts $826 $251 $0 ($558) ($22) $497
===== ===== === ====== ===== ====
(a) Represents uncollected accounts charged against the allowance.
(b) Represents the effect of currency translation adjustments.
54