10-Q 1 j9113501e10-q.txt SYLVAN, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-18339 SYLVAN INC. (Exact name of registrant as specified in its charter) NEVADA 25-1603408 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 333 MAIN STREET, P.O. BOX 249, SAXONBURG, PA 16056-0249 (Address of principal executive offices) (Zip Code) (724) 352-7520 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of common stock outstanding as of October 19, 2001...5,433,219 SYLVAN INC. AND SUBSIDIARIES INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets, September 30, 2001 and December 31, 2000...........................................3 Condensed Consolidated Statements of Income, Three Months Ended September 30, 2001 and October 1, 2000.......................................5 Condensed Consolidated Statements of Income, Nine Months Ended September 30, 2001 and October 1, 2000.......................................6 Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2001 and October 1, 2000.......................................7 Notes to Condensed Consolidated Financial Statements, September 30, 2001.................................................................8 Item 2. Management's Discussion and Analysis..............................................12 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................17 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................................17 Item 6. Exhibits and Reports on Form 8-K..................................................17
PART I - FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS Sylvan Inc. and Subsidiaries (In thousands)
September 30, 2001 December 31, 2000 ------------------ ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 5,462 $ 5,371 Trade accounts receivable, net of allowance for doubtful accounts of $496 and $497, respectively 12,677 12,740 Inventories 10,268 10,398 Prepaid income taxes and other expenses 1,840 1,420 Other current assets 4,295 1,634 -------------------------------------------------------- -------- -------- Total current assets 34,542 31,563 Property, plant and equipment, net 54,850 52,536 Intangible assets, net of accumulated amortization of $3,351 and $2,925, respectively 11,216 11,899 Other assets, net of accumulated amortization of $465 and $407, respectively 7,016 9,776 -------------------------------------------------------- -------- -------- TOTAL ASSETS $107,624 $105,774 ======================================================== ======== ========
The accompanying notes are an integral part of these financial statements. 3 CONDENSED CONSOLIDATED BALANCE SHEETS Sylvan Inc. and Subsidiaries (In thousands except share data)
September 30, 2001 December 31, 2000 ------------------ ----------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,485 $ 192 Accounts payable - trade 3,933 4,108 Accrued salaries, wages and employee benefits 2,327 2,653 Other accrued liabilities 1,345 896 Income taxes payable 701 690 ---------------------------------------------------------------------------- --------- --------- Total current liabilities 10,791 8,539 ---------------------------------------------------------------------------- --------- --------- Long-term and revolving-term debt 38,351 39,871 ---------------------------------------------------------------------------- --------- --------- Other long-term liabilities 6,606 6,271 ---------------------------------------------------------------------------- --------- --------- Minority interest 1,653 1,559 SHAREHOLDERS' EQUITY: Common stock, voting, par value $0.001, 10,000,000 shares authorized, 6,692,272 and 6,681,601 shares issued at September 30, 2001 and December 31, 2000, respectively 7 7 Additional paid-in capital 17,033 16,885 Retained earnings 58,522 54,467 Less: Treasury stock, at cost, 1,178,753 and 1,156,682 shares at September 30, 2001 and December 31, 2000, respectively (12,162) (11,917) --------- --------- 63,400 59,442 Accumulated other comprehensive income (13,177) (9,908) ---------------------------------------------------------------------------- --------- --------- Total shareholders' equity 50,223 49,534 ---------------------------------------------------------------------------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 107,624 $ 105,774 ============================================================================ ========= =========
The accompanying notes are an integral part of these financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF INCOME Sylvan Inc. and Subsidiaries (Unaudited, in thousands except share data)
-------------Three Months Ended-------------- September 30, 2001 October 1, 2000 -------------------- ------------------ NET SALES $ 21,848 $ 20,988 ---------------------------------------------------------------------------- ----------- ----------- OPERATING COSTS AND EXPENSES: Cost of sales 12,893 11,698 Selling, administration, research and development 4,703 4,920 Depreciation 1,370 1,331 ---------------------------------------------------------------------------- ----------- ----------- 18,966 17,949 ---------------------------------------------------------------------------- ----------- ----------- OPERATING INCOME 2,882 3,039 INTEREST EXPENSE, NET, INCLUDING AMORTIZATION OF DEBT ISSUANCE COST 604 694 OTHER INCOME (EXPENSE) (90) (37) ---------------------------------------------------------------------------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,188 2,308 PROVISION FOR INCOME TAXES 656 670 ---------------------------------------------------------------------------- ----------- ----------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 1,532 1,638 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 24 52 ---------------------------------------------------------------------------- ----------- ----------- NET INCOME $ 1,508 $ 1,586 ============================================================================ =========== =========== NET INCOME PER SHARE - BASIC $ 0.27 $ 0.28 ============================================================================ =========== =========== NET INCOME PER SHARE - DILUTED $ 0.27 $ 0.28 ============================================================================ =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,523,618 5,666,718 ============================================================================ =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,584,890 5,672,815 ============================================================================ =========== ===========
The accompanying notes are an integral part of these financial statements. 5 CONDENSED CONSOLIDATED STATEMENTS OF INCOME Sylvan Inc. and Subsidiaries (Unaudited, in thousands except share data)
--------------Nine Months Ended----------- September 30, 2001 October 1, 2000 ------------------ ----------------- NET SALES $ 63,803 $ 64,186 ---------------------------------------------------------------- ----------- ----------- OPERATING COSTS AND EXPENSES: Cost of sales 36,999 35,485 Selling, administration, research and development 14,877 16,242 Depreciation 4,056 4,079 ---------------------------------------------------------------- ----------- ----------- 55,932 55,806 ---------------------------------------------------------------- ----------- ----------- OPERATING INCOME 7,871 8,380 INTEREST EXPENSE, NET, INCLUDING AMORTIZATION OF DEBT ISSUANCE COST 1,847 2,029 OTHER INCOME (EXPENSE) (96) (109) ---------------------------------------------------------------- ----------- ----------- INCOME BEFORE INCOME TAXES 5,928 6,242 PROVISION FOR INCOME TAXES 1,778 1,809 ---------------------------------------------------------------- ----------- ----------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 4,150 4,433 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 94 138 ---------------------------------------------------------------- ----------- ----------- NET INCOME $ 4,056 $ 4,295 ================================================================ =========== =========== NET INCOME PER SHARE - BASIC $ 0.73 $ 0.76 ================================================================ =========== =========== NET INCOME PER SHARE - DILUTED $ 0.73 $ 0.76 ================================================================ =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,521,115 5,673,675 ================================================================ =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,576,493 5,676,043 ================================================================ =========== ===========
The accompanying notes are an integral part of these financial statements. 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Sylvan Inc. and Subsidiaries (Unaudited, in thousands)
--------------Nine Months Ended----------- September 30, 2001 October 1, 2000 ------------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,056 $ 4,295 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,610 4,717 Employee benefits (316) (116) Trade accounts receivable (198) 617 Inventories (53) (321) Prepaid expenses and other assets (366) (917) Accounts payable and accrued liabilities 429 (211) Other (219) 616 ---------------------------------------------------------- ------- ------- Net cash provided by operating activities 7,943 8,680 ---------------------------------------------------------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment (7,557) (5,594) Proceeds from sale of fixed assets 93 849 ---------------------------------------------------------- ------- ------- Net cash used in investing activities (7,464) (4,745) ---------------------------------------------------------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (202) (383) Proceeds from long-term debt borrowings 49 172 Net borrowings (repayments) under revolving credit line 289 (4,313) Proceeds from exercise of stock options 112 87 Purchase of treasury shares (245) (960) ---------------------------------------------------------- ------- ------- Net cash provided by (used in) financing activities 3 (5,397) ---------------------------------------------------------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH (391) (437) ---------------------------------------------------------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 91 (1,899) CASH AND CASH EQUIVALENTS, beginning of period 5,371 7,601 ---------------------------------------------------------- ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 5,462 $ 5,702 ========================================================== ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA: Interest paid $ 1,726 $ 1,862 Income taxes paid 1,853 1,662
The accompanying notes are an integral part of these financial statements. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SYLVAN INC. AND SUBSIDIARIES SEPTEMBER 30, 2001 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: GENERAL These condensed consolidated financial statements of Sylvan Inc. are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period. These statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the company's Annual Report to Shareholders and its Form 10-K for the year ended December 31, 2000. CASH The company maintains a French-franc denominated cash balance of approximately FF16.2 million with a U.S. bank in support of a loan advanced by a European bank. This balance is reported under "Other Current Assets" as of September 30, 2001. INVENTORIES Inventories at September 30, 2001 and December 31, 2000 consisted of the following: (in thousands) September 30, 2001 December 31, 2000 ------------------ ----------------- Growing crops and compost material $ 5,606 $ 5,521 Stores and other supplies 1,476 1,410 Finished products 3,186 3,467 ------- ------- $10,268 $10,398 ======= ======= RECENT PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under its provisions, all goodwill and other intangible assets will no longer be routinely amortized under a straight-line basis of estimated useful life. Instead, they will be subject to assessments for impairment by applying a fair-value-based test. 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 that the carrying amount may not be recoverable. SFAS No. 142 and SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The company has not completed the process of evaluating the impact that will result from their adoption. EARNINGS PER COMMON SHARE Earnings per share were calculated using the weighted average number of shares outstanding during the period, including the effect of stock options outstanding. Pursuant to the company's 1990 and 1993 stock option plans, options for a total of 1,376,083 shares of the company's common stock have been granted and options for a total of 547,479 of these shares have been exercised as of September 30, 2001. 8 The following table reconciles the number of shares utilized in the earnings per share calculations for the three and nine months ended September 30, 2001 and October 1, 2000.
Three Months Ended Nine Months Ended (in thousands) Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000 -------------- ------------ -------------- ------------ Net income $ 1,508 $ 1,586 $ 4,056 $ 4,295 ========== ========== ========== ========== Earnings per common share - basic $ 0.27 $ 0.28 $ 0.73 $ 0.76 ========== ========== ========== ========== Earnings per common share - diluted $ 0.27 $ 0.28 $ 0.73 $ 0.76 ========== ========== ========== ========== Common shares - basic 5,523,618 5,666,718 5,521,115 5,673,675 Effect of dilutive securities: stock options 61,272 6,097 55,378 2,368 ---------- ---------- ---------- ---------- Common shares - diluted 5,584,890 5,672,815 5,576,493 5,676,043 ========== ========== ========== ==========
Options to purchase approximately 305,000 shares of common stock in the three and nine months ended September 30, 2001, and 637,000 and 639,000 shares of common stock in the three and nine months ended October 1, 2000, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market prices of the company's common shares for the respective periods. RECLASSIFICATIONS Certain reclassifications have been made to the October 1, 2000 financial statements to be consistent with the September 30, 2001 presentation. 2. LONG-TERM DEBT AND BORROWING ARRANGEMENTS: The company has a Revolving Credit Agreement with two commercial banks, dated August 6, 1998. It provides for revolving credit loans on which the aggregate outstanding balance available to the company may not initially exceed $55.0 million. This aggregate outstanding balance will decline over the life of the agreement as follows: Maximum Aggregate Period Beginning Outstanding Balance ---------------- ------------------- August 6, 2003 $50.0 million August 6, 2004 45.0 million Outstanding borrowings under the agreement bear interest at either the Prime Rate or LIBOR (plus an applicable margin) at the company's option. On September 30, 2001, the company had outstanding borrowings under the agreement of $37.1 million. The revolving credit loans mature on August 5, 2005. The agreement provides for the maintenance of various financial covenants and includes limitations as to incurring additional indebtedness and the granting of security interests to third parties. Obligations under the agreement are guaranteed by certain wholly owned subsidiaries of the company. The company has a French-franc denominated loan of FF16.2 million. Interest is payable based on a formula that utilizes a Paris Interbank Offered Rate plus an applicable margin. Repayment is due in January 2002. This loan is supported by a compensating cash balance maintained in a U.S. bank. The company's majority-owned Dutch subsidiary has a long-term plant and equipment and overdraft facility with a Dutch bank. At September 30, 2001, a term loan amounting to 1.8 million Dutch guilders was outstanding under this agreement. 9 3. COMPREHENSIVE INCOME: Comprehensive income consisted of the following:
Three Months Ended Nine Months Ended (in thousands) Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000 -------------- ------------ -------------- ------------ Net income $ 1,508 $ 1,586 $ 4,056 $ 4,295 Other comprehensive income: Foreign currency translation adjustments 1,002 (2,786) (2,715) (4,864) Unrealized losses on derivatives designated and qualified as cash flow hedges, net of tax (460) -- (554) -- ------- ------- ------- ------- $ 2,050 $(1,200) $ 787 $ (569) ======= ======= ======= =======
The components of accumulated other comprehensive income consisted of the following:
(in thousands) September 30, 2001 December 31, 2000 ------------------ ----------------- Foreign currency translation adjustments $(12,623) $ (9,908) Unrealized losses on derivatives designated and qualified as cash flow hedges, net of tax (554) -- -------- --------- Total accumulated other comprehensive income $(13,177) $ (9,908) ======== =========
On January 1, 2001, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was adopted by the company, resulting in the recording of current assets of $68,000, long-term assets of $272,000, current liabilities of $66,000, long-term liabilities of $190,000 and a decrease in accumulated other comprehensive income of $56,000. Floating-to-fixed interest rate swap agreements, designated as cash flow hedges, hedge the company's floating rate debt and mature at various times through August 2007. The fair value of these contracts is recorded in the balance sheet, with the offset to accumulated other comprehensive loss, net of tax. Based upon interest rates at September 30, 2001, the company expects to recognize net current liabilities of $36,000 into earnings in the next 12 months, related to derivative instruments. 4. BUSINESS SEGMENT INFORMATION: Sylvan is a worldwide producer and distributor of mushroom products, 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, fungal nutritional supplements and disease-control agents. During the quarter and nine months ended September 30, 2001, the company made no changes in the basis of segmentation or in the basis of measurement of segment profit or loss from that reported in the December 31, 2000 financial statements. 10
Three Spawn Fresh Total Months Products Mushrooms Reportable (in thousands) Ended Segment Segment Segments ----- ------- ------- -------- Total revenues 2001 $ 16,069 $ 6,097 $ 22,166 2000 16,065 5,247 21,312 Intersegment revenues 2001 318 -- 318 2000 324 -- 324 Operating income 2001 3,047 561 3,608 2000 3,550 367 3,917
Nine Spawn Fresh Total Months Products Mushrooms Reportable (in thousands) Ended Segment Segment Segments ----- ------- ------- -------- Total revenues 2001 $ 47,059 $ 17,690 $ 64,749 2000 48,489 16,681 65,170 Intersegment revenues 2001 946 -- 946 2000 984 -- 984 Operating income 2001 8,625 1,905 10,530 2000 9,781 1,622 11,403
RECONCILIATION TO CONSOLIDATED FINANCIAL DATA:
Three Months Ended Nine Months Ended (in thousands) Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000 -------------- ------------ -------------- ------------ Total revenues for reportable segments $ 22,166 $ 21,312 $ 64,749 $ 65,170 Elimination of intersegment revenues (318) (324) (946) (984) -------- -------- -------- -------- Total consolidated revenues $ 21,848 $ 20,988 $ 63,803 $ 64,186 ======== ======== ======== ======== Total operating income for reportable segments $ 3,608 $ 3,917 $ 10,530 $ 11,403 Unallocated corporate expenses (726) (878) (2,659) (3,023) Interest expense, net (604) (694) (1,847) (2,029) Other income (expense) (90) (37) (96) (109) -------- -------- -------- -------- Consolidated income before income taxes $ 2,188 $ 2,308 $ 5,928 $ 6,242 ======== ======== ======== ========
11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS SYLVAN INC. AND SUBSIDIARIES RESULTS OF OPERATIONS (Three Months Ended September 30, 2001 and October 1, 2000) CONSOLIDATED REVIEW NET SALES (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $21,848 $20,988 4 Net sales for the three months ended September 30, 2001 increased by 4% to $21.8 million, as compared with $21.0 million for the three months ended October 1, 2000. Fresh Mushrooms net sales increased 16%, or $0.9 million, while net sales of the Spawn Products Segment remained unchanged. The U.S. dollar was approximately 3% stronger, when measured against the company's applicable foreign currencies, than for the third quarter of 2000. The effect of this strengthening decreased sales for the current quarter by approximately $0.4 million. International sales were 48% of total sales for each of the quarters ended September 30, 2001 and October 1, 2000. OPERATING COSTS AND EXPENSES
(in thousands) 2001 2000 % Change ---- ---- -------- Cost of sales $12,893 $11,698 10 Selling, administration, research and development 4,703 4,920 (4) Depreciation 1,370 1,331 3
The company's cost of sales, expressed as a percentage of net sales, was 59.0% for the third quarter of 2001, as compared with 55.7% for the third quarter of 2000. The Fresh Mushrooms Segment decreased its cost of sales percentage, while the Spawn Products Segment cost of sales percentage increased. Selling, administration, research and development expenses decreased to $4.7 million, or 21.5% of net sales, as compared with $4.9 million, or 23.4% for the corresponding 2000 period. INTEREST EXPENSE The company's net interest expense for the third quarter of 2001 was $604,000, 13% lower than for the corresponding 2000 quarter. This decrease resulted from lower average interest rates during the third quarter of 2001, when compared with the prior year third quarter. The effective rate for the current quarter was 5.9%, as compared with 6.9% for the third quarter of 2000. The current quarter interest expense included a benefit of $0.1 million related to ineffective interest rate hedge transactions. INCOME TAX EXPENSE The effective income tax rate was 30% for the third quarter of 2001, as compared with 29% for the corresponding 2000 quarter. 12 BUSINESS SEGMENTS SPAWN PRODUCTS
(in thousands) 2001 2000 % Change ---- ---- -------- Net sales, including intersegment $16,069 $16,065 -- Operating expenses 13,022 12,515 4 Operating income 3,047 3,550 (14)
Net sales of spawn and spawn-related products were $16.1 million for both the September 30, 2001 and October 1, 2000 quarters. Sales of disease-control agents and fungal nutritional supplements increased by $0.9 million during the current quarter, as compared with the corresponding 2000 quarter. Spawn product sales volume decreased by 4%, with a 16% decrease in the Americas, countered by a 4% increase in overseas markets. Most of the volume decrease in the Americas related to changing market conditions in the mushroom industry and increased competition. Approximately 20% of the Americas' decrease related to the reduction in sales to a customer that filed for bankruptcy protection during the fourth quarter of 2000 and closed five of its eight U.S. farms. An additional two unrelated farms closed in the third quarter of 2001. Most of these farms were long-time Sylvan customers. The J. B. Swayne customer base, which was acquired in November 1999, has been substantially unaffected. Sylvan also continued to experience increased price and payment-term competition in the United States, during the quarter ended September 30, 2001, from a competitor who has increased capacity and decreased costs by modernizing production methods. Increased competition is expected to continue into 2002. On August 17, 2001, the U.S. Department of Agriculture released its annual statistical report on mushrooms. The report reflected an 11% reduction in the amount of Agaricus growing area. This, along with the farm closures mentioned above, reduces Sylvan's overall U.S. market by approximately 10%. The overseas U.S. dollar equivalent selling price was 2% lower during the current quarter, as compared with the corresponding quarter of 2000, due to the strengthening of the U.S. dollar. The selling price in the Americas decreased by 1% during the current quarter. Sales of disease-control agents and fungal nutritional supplements, which accounted for 17% of the consolidated net sales for the third quarter of 2001, were 30% higher than for the third quarter of 2000. Operating expenses were $13.0 million for the current quarter, a 4% increase, as compared with the third quarter of 2000. Within operating expenses, cost of sales was 53.6% of net sales, as compared with 49.7% for the corresponding 2000 quarter. This increase was due to two factors. First, sales of disease-control agents and fungal nutritional supplements increased by 30% on a quarter-over-quarter basis. These products have lower margins than spawn. Second, spawn production in the Americas during the 2001 third quarter was 14% lower than for the corresponding 2000 quarter; spreading a cost structure that is primarily fixed in nature over fewer units. The remaining operating expenses decreased by 3% to $4.7 million. Approximately one-half of this decrease was due to the continued strengthening of the U.S. dollar. Operating income, as a percentage of net sales, was 19% for the third quarter of 2001, as compared with 22% for the quarter ended October 1, 2000. Operating income was negatively impacted by the strengthening of the U.S. dollar, with an effect of $50,000. FRESH MUSHROOMS (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $ 6,097 $ 5,247 16 Operating expenses 5,536 4,880 13 Operating income 561 367 53 13 Net sales of fresh mushrooms increased during the current quarter to $6.1 million, as compared with $5.2 million for the corresponding period of 2000. This increase was due to a 3% increase in the number of pounds sold and a 7% higher price per pound. Quincy Farms experienced 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 $0.3 million of cased, ready-to-grow mushroom trays and sold approximately 700,000 pounds of mushrooms to Quincy for immediate resale to a third-party marketer. Cost of sales was $4.3 million, or 70.2% of net sales, for the quarter ended September 30, 2001, as compared with $3.7 million, or 70.8%, for the quarter ended October 1, 2000. The cost of sales, as a percentage of net sales, decreased during the quarter ended September 30, 2001, as compared with the quarter ended October 1, 2000. The improved cost of sales percentage was primarily due to the combination of higher market prices and increased production yields, which reduced the average cost per pound. Fresh Mushrooms operating income for the quarter ended September 30, 2001 was $0.6 million, or 9% of net sales, and was 53% greater than for the corresponding period of 2000. Operating income for the quarter ended October 1, 2000 was $0.4 million, or 7% of net sales. Lower per pound prices are expected in the fourth quarter of 2001 and at the beginning of 2002 due to the post-September 11 tourism decline in the southeastern United States and the resulting decrease in the use of fresh mushrooms by restaurants and other food service industry components. Sylvan believes that the earnings impact will be transitory. RESULTS OF OPERATIONS (Nine Months Ended September 30, 2001 and October 1, 2000) CONSOLIDATED REVIEW NET SALES (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $63,803 $64,186 (1) Net sales for the nine months ended September 30, 2001 were $63.8 million, a 1% decrease when compared with the $64.2 million for the corresponding 2000 period. Fresh Mushrooms net sales increased 6%, or $1.0 million, while net sales of Spawn Products decreased 3%, or $1.4 million. At September 30, 2001, the U.S. dollar was approximately 7% stronger, when measured against the company's applicable foreign currencies, than for the nine months ended October 1, 2000. The effect of this strengthening was a decrease in sales of approximately $2.6 million for the nine months ended September 30, 2001, when compared with the first nine months of 2000. International sales for the current nine-month period were 48% of total sales, as compared with 47% for the nine months ended October 1, 2000. OPERATING COSTS AND EXPENSES
(in thousands) 2001 2000 % Change ---- ---- -------- Cost of sales $36,999 $35,485 4 Selling, administration, research and development 14,877 16,242 (8) Depreciation 4,056 4,079 (1)
The company's cost of sales, expressed as a percentage of net sales, was 58.0% for the first nine months of 2001, as compared with 55.3% for the corresponding 2000 period. Improved margins in the Fresh Mushrooms Segment were more than offset by lower margins in the Spawn Products Segment. Selling, administration, research and development expenses decreased to $14.9 million, or 23.3% of net sales, as compared with $16.2 million, or 25.3%, for the corresponding 2000 period. 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, administration, research and development expenses by $0.3 million during the nine months ended September 30, 2001, as compared with the nine months ended October 1, 2000. The remaining decrease of $0.7 million in selling, 14 administration, research and development expenses, for the nine months of 2001 versus the corresponding 2000 period, was a result of a reduction in general administrative expenditures. INTEREST EXPENSE The company's net interest expense for the nine months ended September 30, 2001 was $1.8 million, 9% lower than for the corresponding nine-month period of 2000. This decrease resulted from lower interest rates. The effective borrowing rate for the current period was 6.6%, as compared with 6.9% for the first nine months of 2000. INCOME TAX EXPENSE The effective income tax rate was 30% for the first nine months of 2001, as compared with 29% for the corresponding 2000 period. BUSINESS SEGMENTS SPAWN PRODUCTS
(in thousands) 2001 2000 % Change ---- ---- -------- Net sales, including intersegment $47,059 $48,489 (3) Operating expenses 38,434 38,708 (1) Operating income 8,625 9,781 (12)
Net sales of spawn and spawn-related products were $47.1 million for the nine months ended September 30, 2001; a 3% decrease, when compared with $48.5 million for the nine months ended October 1, 2000. Spawn product sales volume decreased by 5%, with a 16% decrease in the Americas and a 4% increase in overseas markets. Most of the volume decrease in the Americas related to changing market conditions in the mushroom industry and increased competition. Approximately one-third of the Americas' decrease was related to the reduction of sales to a customer that filed for bankruptcy protection during the fourth quarter of 2000 and closed five of its eight U.S. farms. An additional two unrelated farms closed in the third quarter of 2001. Most of these farms were long-time Sylvan customers. The J. B. Swayne customer base, which was acquired in November 1999, has been substantially unaffected. On August 17, 2001, the U.S. Department of Agriculture released its annual statistical report on mushrooms. The report reflected an 11% reduction in the amount of Agaricus growing area. This, along with the farm closures mentioned above, reduces Sylvan's overall U.S. market by approximately 10%. The Americas also experienced increased price and payment-term competition in the United States during the nine-month period ended September 30, 2001. Increased competition is expected to continue into 2002. The overseas U.S. dollar equivalent selling price was 6% lower during the nine months ended September 30, 2001, as compared with the corresponding period of 2000, due to the strengthening of the U.S. dollar. The selling price in the Americas decreased by less than 1% for the nine-month period of 2001, as compared with the corresponding period of 2000. Sales of disease-control agents and fungal nutritional supplements, which accounted for 17% of the consolidated net sales for the nine months of 2001, were 18% higher than for the nine months ended October 1, 2000. Operating expenses were $38.4 million for the nine months ended September 30, 2001 and $38.7 million for the nine months ended October 1, 2000. Within operating expenses, cost of sales was 53.2% of net sales, as compared with 50.0% for the corresponding 2000 period. This increase was due to two factors. First, spawn production in the Americas during the first nine months of 2001 was 15% lower than for the prior year corresponding period; spreading a cost structure that is primarily fixed in nature over fewer units. Second, the company also experienced increased sales of disease-control agents and fungal nutritional supplements, 15 which have a lower margin than mushroom spawn. The remaining operating expenses decreased by 7% to $14.3 million. This decrease was due to unusually high first quarter 2000 charges and the continued strengthening of the U.S. dollar. Operating income for the first nine months of 2001 was $8.6 million, as compared with $9.8 million for the corresponding period of 2000. As a percentage of net sales, operating income was 18% for the first nine months of 2001, as compared with 20% for the corresponding 2000 period. Operating income was negatively impacted by the strengthening of the U.S. dollar, with an effect of approximately $0.3 million. FRESH MUSHROOMS (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $17,690 $16,681 6 Operating expenses 15,785 15,059 5 Operating income 1,905 1,622 17 Net sales of fresh mushrooms increased during the nine months ended September 30, 2001 to $17.7 million, as compared with $16.7 million for the corresponding period of 2000. This increase was due to a 4% increase in the number of pounds sold and a 2% higher price per pound. In addition, the first two satellite farms commenced operations during the quarter ended July 1, 2001. These facilities purchased $0.4 million of cased, ready-to-grow mushroom trays and sold approximately 875,000 pounds of mushrooms to Quincy for immediate resale to a third-party marketer. The Fresh Mushrooms cost of sales was $11.9 million, or 67.5% of net sales, for the nine months ended September 30, 2001, as compared with $11.3 million, or 67.5%, for the nine months ended October 1, 2000. Fresh Mushrooms operating income for the nine months ended September 30, 2001 was $1.9 million, or 11% of net sales, and was 17% greater than for the corresponding period of 2000. Operating income for the nine months ended October 1, 2000 was $1.6 million, or 10% of net sales. Lower per pound prices are expected in the fourth quarter of 2001 and at the beginning of 2002 due to the post-September 11 tourism decline in the southeastern United States and the resulting decrease in the use of fresh mushrooms by restaurants and other food service industry components. Sylvan believes that the earnings impact will be transitory. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended September 30, 2001 was $7.9 million, as compared with $8.7 million for the corresponding nine-month period of 2000. Trade accounts receivable used $0.2 million during the nine months ended September 30, 2001, as compared with the $0.6 million, which was provided during the corresponding nine-month period of 2000. Approximately $0.5 million of this $0.8 million change in cash flows between years related to the Americas' spawn operations. Spawn customers began to take longer to pay their invoices as a result of a competitor offering extended payment terms. Cash used by investing activities was $7.5 million for the nine months ended September 30, 2001, as compared with $4.7 million used during the corresponding period of 2000. During 2001, approximately $4.0 million was expended on growth opportunities, including $1.4 million for the Quincy Farms' satellite project, $1.8 million for the company's new Canadian spawn production facility and $0.3 million for the expansion of the company's Nevada spawn plant growing room. The remaining $3.5 million of maintenance capital expenditures included $0.8 million for chilling and other equipment for Quincy, $0.7 million for cleanroom improvements and $0.5 million for production growing frames in France, and $0.1 million for Bioproducts' research facilities. Additional capital expenditures anticipated for the fourth quarter will include approximately $1.0 million for the new Canadian spawn plant and $0.3 million for conversion of the Kennett Square facility for bioproducts production. Sylvan began bioproducts production during the second quarter of 2001 in the Kennett Square facility and it will undergo continued conversion through the remainder of 2001. This conversion provides the Bioproducts group with a dedicated building and production equipment without the need for a large capital investment. Total capital expenditures in 2001 are expected to total between $8.0 million and $9.5 million for existing operations, of which approximately $4.0 million will be for maintenance capital, with 16 additional expenditures as required for any acquisitions or new initiatives. The company routinely assesses its requirements for additional capital investments and believes that it has sufficient cash resources from current cash balances, internally generated funds and available bank credit facilities to meet its ongoing capital needs. Available credit under the company's revolving credit arrangement was $17.9 million as of September 30, 2001. Term and revolving credit increased by $0.1 million during the nine months ended September 30, 2001, as compared with a decrease of $4.5 million during the corresponding period of 2000. Most of this change related to funding requirements of a higher level of capital expenditures and increased U.S. federal income tax payments during 2001. During the nine months ended September 30, 2001, the company purchased 22,071 shares of Sylvan common stock at an average price of $11.10 per share. By comparison, 99,400 shares were purchased during the first nine months of 2000 at an average price of $9.66 per share. Management expects to continue the share purchase program, subject to share availability and cost considerations. During the first three weeks of October 2001, the company purchased 80,300 shares of Sylvan common stock. EURO CURRENCY Sylvan does not believe that the conversion to the Euro from existing local currencies has a material impact on its business or financial condition. FORWARD-LOOKING AND CAUTIONARY STATEMENTS From time to time in this report and in other written reports and oral statements, references are made to expectations regarding future performance of the company. These "forward-looking statements" are based on currently available competitive, financial and economic data and the company's operating plans, but they are inherently uncertain. Events could turn out to be significantly different from what is expected, depending upon such factors as mushroom growing process inconsistencies, specific pricing or product initiatives of the company's competitors, competitive conditions in the U.S. mushroom market, in general, changes in currency and exchange risks, loss of a major customer, changes in a specific country's or region's political or economic conditions and acts of terrorism or war (wherever located around the world). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information presented under this item in the company's Form 10-K for the fiscal year ended December 31, 2000 has not changed materially. Information relating to the sensitivity to foreign currency exchange rate changes of the company's firmly committed sales transactions, in addition to what is presented in Item 2 of this filing, is omitted because it is an immaterial portion of total sales. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which Sylvan or any of its subsidiaries is a party, or of which any of their property is subject, other than ordinary, routine litigation incidental to their respective businesses. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K 17 3.3 Articles of Incorporation of S. F. Nevada, Inc. - previously filed on November 12, 1999 with the company's Form 10-Q Quarterly Report for the period ended October 3, 1999 and incorporated herein by reference 3.4 Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods Holdings, Inc. with exhibit - previously filed on November 12, 1999 with the company's Form 10-Q Quarterly Report for the period ended October 3, 1999 and incorporated herein by reference 3.5 Bylaws - previously filed on November 12, 1999 with the company's Form 10-Q Quarterly Report for the period ended October 3, 1999 and incorporated herein by reference Compensation Plans and Arrangements 10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan, previously filed as Exhibit 3.3.2 on April 2, 1993 with the company's Form 10-K Annual Report for the fiscal year ended January 3, 1993 and incorporated herein by reference 10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors, previously filed on April 1, 1994 with the company's Form 10-K Annual Report for fiscal year ended January 2, 1994 and incorporated herein by reference 10.12 Sylvan Inc. 1990 Stock Option Plan (amended and restated), previously filed on November 12, 1999 with the company's Form 10-Q Quarterly Report for the period ended October 3, 1999 and incorporated herein by reference Material Contracts 10.2.1 Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc., a Nevada corporation, Sylvan Foods (Netherlands) B.V., a Dutch corporation, as Borrowers, the Banks party thereto from time to time and Mellon Bank, N.A., a national banking association, as issuing bank and as agent for the Banks thereunder, together with various annexes, exhibits and schedules and various related documents, previously filed as Exhibits 10.1 through 10.10 on November 10, 1998 with Sylvan's Form 10-Q Quarterly Report for the period ended September 27, 1998 and incorporated herein by reference 10.2.11 Index of Other Exhibits to the Revolving Credit Agreement, previously filed as Exhibit 10.11 on November 10, 1998 with Sylvan's Form 10-Q Quarterly Report for the period ended September 27, 1998 and incorporated herein by reference 10.5.1 Agreement, dated January 14, 2000, by and between C And C Carriage Mushroom Co., t/a Modern Sales Company, and Quincy Corporation, previously filed on March 27, 2000 with the company's Form 10-K Annual Report for the fiscal year ended January 2, 2000 and incorporated herein by reference 10.5.2 Index of Exhibits to the C And C Agreement referenced above, previously filed on March 27, 2000 with the company's Form 10-K Annual Report for the fiscal year ended January 2, 2000 and incorporated herein by reference 10.40 Collective Bargaining Agreement, dated January 21, 2001, between Quincy Corporation and the United Farm Workers of America, AFL-CIO, previously filed on March 23, 2001 with the company's Form 10-K Annual Report for the fiscal year ended December 31, 2000 and incorporated herein by reference 18 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 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 7, 2001 SYLVAN INC. ----------------------- By: /s/ DONALD A. SMITH ------------------------------------ Donald A. Smith Chief Financial Officer By: /s/ FRED Y. BENNITT ------------------------------------ Fred Y. Bennitt Secretary/Treasurer 19