-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UJk8hX9tPkPx7Q6FZNUEdAKaiY+xTBvmYzjneqYbRP2e0/C73DFLuBP7VxVB25e6 LkAmaWTBEg/qH3MbyIXZGg== 0000950128-02-000297.txt : 20020415 0000950128-02-000297.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950128-02-000297 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYLVAN INC CENTRAL INDEX KEY: 0000861291 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 251603408 STATE OF INCORPORATION: NV FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18339 FILM NUMBER: 02579919 BUSINESS ADDRESS: STREET 1: 333 MAIN STREET STREET 2: P.O. BOX 249 CITY: SAXONBURG STATE: PA ZIP: 16056-0249 BUSINESS PHONE: 724-352-75 MAIL ADDRESS: STREET 1: 333 MAIN STREET STREET 2: P.O. BOX 249 CITY: SAXONBURG STATE: PA ZIP: 16056-0249 FORMER COMPANY: FORMER CONFORMED NAME: SYLVAN FOODS HOLDINGS INC DATE OF NAME CHANGE: 19930328 10-K405 1 j9336901e10-k405.txt PERIOD ENDED 12-31-2001 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 30, 2001 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 incorporation or organization) Identification No.) 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 to Name of each exchange on Section 12(b) of the Act: 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 ---- ---- 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] The aggregate market value of voting stock held by non-affiliates of the registrant at February 28, 2002 was approximately $41,058,000. On that date, the last sale price of the registrant's common stock was $11.65 per share. Solely for purposes of this calculation, shares beneficially owned by directors and executive officers have been excluded. However, such exclusion is not intended to be, nor is it to be deemed, a determination or an admission by the registrant that such directors and officers are, in fact, affiliates of the registrant. Indicated below is the number of shares outstanding of each of the registrant's classes of common stock as of February 28, 2002. Outstanding on Class February 28, 2002 ----- ------------------ COMMON STOCK, PAR VALUE $.001 PER SHARE 5,425,452 DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into which Document the Document is Incorporated -------- ---------------------------- DEFINITIVE 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, 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. Sylvan's growth strategy calls for devoting increased capital and management resources to supplying its spawn and related products and services to suitable markets throughout the world and utilizing its production technology for products outside of the mushroom industry. Spawn Operations: Spawn products accounted for 73% of the company's total sales in 2001 and 82% 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 containers and the filled containers are incubated in environmentally controlled growing rooms. Once the incubation is complete, the containers 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 2002 with respect to the Canadian plant. In addition, the company operates one bioproducts facility in the United States. 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, which is sold at wholesale and resale 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 2 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. Fresh Mushrooms Operations: The Fresh Mushrooms Segment of Sylvan's business accounted for 27% of the company's total sales in 2001 and 18% 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. It serves a strategic role for Sylvan as a resource for production process innovations. The facility includes an advanced computer-controlled production system. Included as part of the Quincy operation are two satellite mushroom growing facilities that commenced operation in mid-2001. Each facility is leased to an unrelated third party. These parties are obligated to purchase their requirements of ready-to-grow mushroom trays 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 mid-eastern and southeastern United States. The value of backlog orders for mushroom products is insignificant. PERSONNEL 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. On December 31, 2000, Sylvan had approximately 960 full-time employees, of whom about 800 were engaged in production activities and 160 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 9 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 9 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 2001 and 2000 were to one customer. C And C Carriage Mushroom Company became the majority purchaser and marketer of the company's mushrooms beginning in January 2000. The $23.0 million and $20.8 million of fresh mushrooms that C And C purchased from the Quincy subsidiary represented 27% and 24% of Sylvan's consolidated net sales for fiscal years 2001 and 2000, respectively. 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 and Le Lion. 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 its 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 11 regional producers of substantial size. The balance of the U.S. industry is fragmented, comprised of about 120 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 2001, Sylvan's research and development expenditures totaled $1.7 million, as compared with $1.8 million in 2000 and $1.6 million in 1999. 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, over the last five years, Sylvan has patented several new mushroom strains and several 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 23. 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. SPAWN PRODUCTS SEGMENT
Floor area Acquired/ Expanded/ Location (ft.2) constructed renovated -------- ---------- ----------- --------- Spawn production: Kittanning, Pennsylvania 50,000 1981 2001 Dayton, Nevada 42,000 1992 2001 Langeais, France 115,000 1991 - Yaxley, England 74,000 1992 1995 Horst, the Netherlands 54,500 1994 1997 Budapest, Hungary 26,200 1997 - Navan, Ireland 26,000 1998 1999 Pretoria, South Africa 15,500 1999 - Windsor, Australia 12,000 1996 - Leamington, Ontario, Canada 25,800 2001 - Inoculum production and research: Kittanning, Pennsylvania 18,000 1996 2001 Langeais, France 15,000 1998 - Bioproducts production: Kennett Square, Pennsylvania 41,000 1999 - 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 17,000 2000 - FRESH MUSHROOMS SEGMENT Fresh mushroom production, including satellite farms: Quincy, Florida 408,000 1981 2001
The spawn plants in the Netherlands and Australia are owned by the company along with joint venture partners in each country. The company owns all of its principal operating properties except for those in Des Moines, Iowa, and Budapest, Hungary (mushroom casing production) that it leases. The company also leases several small administrative and/or sales offices in Pennsylvania and California and some supplemental cold storage facilities to serve several North American and overseas market areas. Construction loans relating to the spawn plants in England, Ireland and the Netherlands have been collateralized with mortgages. The two satellite mushroom growing facilities that Sylvan owns in Quincy, Florida, are leased to and operated by unrelated third parties. 5 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 2001 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 30, 2002 at the organizational meeting of the board of directors, following the annual meeting of shareholders. Name Age Position ---- --- -------- Dennis C. Zensen 63 Chairman of the Board, President and Chief Executive Officer of Sylvan Donald A. Smith 40 Chief Financial Officer of Sylvan Fred Y. Bennitt 57 Secretary/Treasurer of Sylvan Monir K. Elzalaki 46 President of Sylvan America, Inc. Gregory J. Verhagen 41 President of Quincy Farms Gary D. Walker 54 President of Sylvan Bioproducts, Inc. Michael A. Walton 52 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. 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 Quincy's general manager since May 1999. For the four years prior to that time, he served in various senior management positions for Money's Mushrooms, Ltd. 6 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 as president of its Moonlight subsidiary until Moonlight closed 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 (Hauser) 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 2001 and 2000, as reported by The Nasdaq Stock Market. 2001 High Price Low Price ---- ---------- --------- 1st Qtr. 15.000 9.125 2nd Qtr. 13.000 11.000 3rd Qtr. 13.150 11.310 4th Qtr. 12.000 10.850 2000 High Price Low Price ---- ---------- --------- 1st Qtr. 10.000 7.563 2nd Qtr. 10.250 7.938 3rd Qtr. 10.750 8.438 4th Qtr. 10.000 8.000 (b) Holders of Common Equity At year-end 2001, there were approximately 1,500 shareholders of record of Sylvan common stock. (c) Dividends Sylvan has never paid cash dividends and 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. 7 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
--------------------------- Fiscal Year Ended ------------------------------ (In millions except share data) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Net sales $ 85.9 $ 85.9 $ 89.8 $ 89.8 $ 81.6 Operating income 11.0 11.5 10.6 11.1 11.5 Net income 5.8 6.7 6.1 6.3 6.5 Net income per common share - basic 1.06 1.18 1.00 0.98 1.01 Net income per common share - diluted 1.05 1.18 1.00 0.97 1.01 Weighted average shares - basic 5,500,799 5,658,860 6,112,007 6,440,287 6,395,971 Weighted average shares - diluted 5,551,673 5,665,974 6,130,694 6,533,740 6,406,544 Earnings before interest, taxes, depreciation and amortization (EBITDA) 17.2 17.4 16.9 16.9 16.5 BALANCE SHEET DATA: Total assets $ 107.1 $ 105.8 $ 109.5 $ 102.6 $ 93.7 Long-term debt and other long-term liabilities 45.5 47.7 51.8 38.4 36.4 Shareholders' equity 50.9 49.5 47.2 50.3 44.0 Working capital 23.2 23.0 22.8 18.9 16.9 Net cash provided by operations 10.7 9.7 13.0 10.2 10.4 Net cash used in investing 8.7 6.2 12.2 9.8 11.6 Net cash (used in) provided by financing (1.8) (5.2) 1.4 0.1 4.1 Cash dividends per common share -- -- -- -- --
QUARTERLY RESULTS OF OPERATIONS
First Second Third Fourth (Unaudited, in thousands except share data) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------- 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 2000: Net sales $ 22,459 $ 20,740 $ 20,988 $ 21,762 Gross profit 10,184 9,229 9,290 9,310 Net income 1,414 1,296 1,586 2,388 Net income per common share - basic 0.25 0.23 0.28 0.42 Net income per common share - diluted 0.25 0.23 0.28 0.42 Weighted average shares - basic 5,690,424 5,663,883 5,666,718 5,614,415 Weighted average shares - diluted 5,690,424 5,666,211 5,672,815 5,621,674
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 53% 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 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. On August 17, 2001, the U.S. Department of Agriculture released its annual statistical report on mushrooms covering the fiscal year July 2000 through June 2001. The Department reported an 11% 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, has been 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 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 $0.7 million of ready-to-grow mushroom trays and sold approximately $1.3 million 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 trays to the satellite farms contributed to the improved financial performance. 9 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. 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. Sylvan expects a higher effective tax rate for 2002. RESULTS OF OPERATIONS COMPARISON OF 2000 WITH 1999 NET SALES Net sales for 2000 were $85.9 million, a 4% decrease when compared with 1999 net sales of $89.8 million. This $3.9 million change was the result of increased spawn and spawn-related product sales, net of international currency translation fluctuations, and operational changes in the Fresh Mushrooms Segment. International sales, as a percentage of net sales, decreased to 51% in 2000, as compared with 52% for 1999. During 2000, the U.S. dollar strengthened 14%, on average, against the company's major foreign trading currencies. This had the effect of reducing net sales by $8.0 million, operating income by $0.9 million and the diluted earnings per share by approximately eleven cents. Spawn Products: Net sales of spawn and spawn-related products were $65.2 million in 2000, a 5% increase when compared with net sales of $61.9 million for 1999. Excluding the effect of the strengthened U.S. dollar during 2000, the Spawn Products Segment sales increased 19% during the year. Overall, spawn product sales volume increased 15%, with a 33% increase in the Americas, primarily due to the November 1999 Swayne acquisition, and a 5% increase in overseas markets. The overseas U.S. dollar equivalent selling price was 13% lower, primarily due to the strengthening of the U.S. dollar. The average selling price in the Americas was 4% lower than in 1999 due to the inclusion of the sales of the J.B. Swayne Spawn Company, which had an overall lower pricing structure. In addition, consolidation of the mushroom industry, as evidenced by 10 the acquisition of Vlasic Farms by a Canadian company and the formation of regional marketing alliances, has generated increased volume discounts, resulting in a lower average net selling price. Sales of disease-control agents and nutritional supplements increased 10%, accounting for 15% and 13% of consolidated net sales for 2000 and 1999, respectively. Fresh Mushrooms: Net sales of fresh mushrooms decreased during 2000 by 24% to $22.0 million. This decrease was due to two offsetting factors. First, marketing changes occurred within the Fresh Mushrooms Segment beginning on January 16, 2000. On January 14, 2000, Quincy entered into a marketing contract to sell all of the mushrooms directly from its harvesting area to a third party, which then packages and distributes the mushrooms on its own behalf. Since Quincy no longer performs value-added commercial enhancements, such as slicing and packaging, and does not distribute its products to wholesalers and retailers, it receives a lower price per pound for mushrooms sold. This new structure resulted in an $8.8 million decrease in sales. Second, during 2000 Quincy experienced improved production yields when compared with 1999, which provided an increase of 8% in the number of pounds sold. After adjusting for the effect of the marketing change, Quincy's sales would have increased by $1.7 million. The United States Department of Agriculture reported little change in fresh mushroom sales in the United States for the 1999-2000 season, reflecting a 2% increase in pounds sold and a 1% decrease in the average selling price. The USDA crop reports also indicated that sales of processed mushrooms decreased 3% in the 1999-2000 period over the 1998-1999 period. COST OF SALES The company's cost of sales, expressed as a percentage of net sales, was 55.8% for 2000 and 58.7% for 1999. Increased production efficiencies were realized in the Fresh Mushrooms Segment, on a year-versus-year basis, due to higher production yields and the new marketing contract. Spawn Products: The cost of sales, as a percentage of net sales, was 50.5% for 2000, as compared with 49.7% for 1999. The increase was due to two factors. First, the Swayne spawn production facility, which was acquired on November 30, 1999, was operational during all of 2000 versus one month in 1999. The production method at this facility had a much higher cost structure due to a more labor-intensive process. Second, the higher proportion of nutritional supplement and disease-control agent sales has a higher cost of sales percentage than spawn products. During 2000, the overall discard rate for spawn production was 5.8%, as compared with 6.0% for 1999. Fresh Mushrooms: The cost of sales percentage was 68.1% for 2000 and 75.2% for 1999. Under the marketing contract, mushrooms are sold directly from the harvesting area; therefore, Quincy is no longer performing commercial enhancement and distribution activities. Quincy also had improved yield efficiencies, spreading a growing area cost structure that is primarily fixed in nature over more pounds. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses, as a percentage of net sales, were 22.7% and 21.7% for 2000 and 1999, respectively. Most of this increase was related to three items recorded in the Spawn Products Segment during the first quarter of 2000: a write-off of pre-construction costs associated with scope revisions and a management change in the company's Hungarian composting project ($0.2 million), a loss on the sale of a small mushroom farm ($0.1 million) that was acquired as part of the May 1998 purchase of International Mushrooms Ltd., and a nonrecurring expense ($0.1 million) for non-income related taxes. In addition, ongoing costs were incurred by operating the sales and administrative facilities of Swayne, which was acquired in November 1999. The company recorded $0.6 million of net periodic benefit income during 2000 from a pension plan of a former subsidiary. The Fresh Mushrooms Segment realized annual cost savings of $0.8 million related to wages, employee benefits, and general building overhead that were assumed by an outside party under the terms of the marketing contract. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased 11% in 2000 to $1.8 million, when compared with $1.6 million in 1999. Sylvan intends to devote a larger portion of its research and development expenditures to its Bioproducts operation in 2001. 11 DEPRECIATION EXPENSE Depreciation expense was $5.2 million in 2000, a 5% decrease over the $5.5 million reported for 1999. This change was primarily due to the strengthening of the U.S. dollar, which had the effect of decreasing depreciation expense by $0.3 million. INTEREST EXPENSE Net interest expense for 2000 was $2.5 million, as compared with $2.2 million for 1999. The increase resulted from higher interest rates and higher average borrowings for 2000. The average effective borrowing rate for 2000 was 6.9%, as compared with 6.4% for 1999. OTHER INCOME (EXPENSE) The company reported a net $0.2 million other expense total for 2000. Most of this expense was related to foreign exchange losses on cross-currency intercompany transactions. INCOME TAX EXPENSE The company's overall effective tax rate for 2000 was 22%. This rate included the $0.5 million net operating loss carryforward benefit from the merger of two subsidiaries. Excluding the effect of this benefit, the company's effective tax rate for 2000 was 28%, as compared with 26% for 1999. A higher effective tax rate is expected for 2001 as a 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 $18.9 million as of December 30, 2001. The agreement provides for a reduction of the total credit amount over a six-year period, with the first reduction to $50.0 million effective August 6, 2003. Net cash provided by operating activities was $10.7 million in 2001, as compared with $9.7 million in 2000 and $13.0 million in 1999. The 2000 cash flows were lower than in a typical year due to the timing of $1.0 million of construction invoice payments. The unusually high 1999 cash flows included tax refunds received from several jurisdictions, changes in the funding of certain employee benefits and delayed construction payments pending final work to be completed to Sylvan's satisfaction. Approximately $0.6 million of the $0.8 million cash flow used by trade accounts receivable in 2001 related to the Americas' spawn operations. In response to a competitor offering extended payment terms, customers began to take longer to pay their invoices. Cash used by investing activities was $8.7 million for 2001, as compared with $6.2 million and $12.2 million during 2000 and 1999, respectively. The higher 1999 level resulted from the expenditure of $4.6 million for the Swayne acquisition. Capital expenditures, net of proceeds from the sale of assets, totaled $8.6 million in 2001, $6.1 million in 2000 and $7.7 million in 1999. Most of the increase in capital expenditures between 2001 and 2000 was related to two business-growth projects: the satellite farms ($1.4 million) and the Canadian spawn plant ($2.3 million). Maintenance capital for 2001 was $4.1 million. Net capital expenditures in 2002 are expected to total between $4.0 million and $6.0 million for existing operations, with additional expenditures as may be required for acquisitions or new initiatives. During 2001, cash of $1.8 million was used in financing activities, as compared with $5.2 million used in financing activities and $1.4 million provided by financing activities during 2000 and 1999, respectively. During 2001, the company purchased 107,271 shares of Sylvan stock at an average price of $11.37 per share. By comparison, 215,235 and 716,900 shares were purchased at average prices of $9.37 and $10.95 during 2000 and 1999, respectively. Management expects to continue the purchase program during 2002, subject to price and share availability conditions that make such purchases financially beneficial and appropriate. 12 Term debt and revolving credit obligations decreased by $0.7 million in 2001, compared with a decrease of $3.3 million in 2000 and an increase of $8.9 million in 1999. The decrease in 2001 primarily related to foreign currency translation reductions, while the decrease in 2000 primarily related to the positive cash flows of operations in excess of capital additions and Sylvan share purchases. Most of the increase in 1999 related to the acquisition of Swayne and the purchase of Sylvan stock, offset by the positive cash flow of operations after capital additions. 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 2002 expenditures. Sylvan has never paid cash dividends and 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 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 January 2002, the company retained a professional services firm to complete the initial assessment to test for transitional goodwill impairment. Management does not believe that an initial impairment loss will result. In compliance with SFAS No. 142, the first step of this assessment will be completed by June 30, 2002. During the 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. EURO CURRENCY A single 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. 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 that are filed herewith. Foreign Currency Exchange Rate Risk: Note 9 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 30, 2001, the net fair value liability of euro denominated financial instruments was approximately $15.6 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 30, 2001 of all financial instruments subject to interest rate exposures was approximately $35.6 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 13 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 2000 was 6.62%, as compared with 2.25% for 2001. This decrease was the result of market rate reductions.
Expected Maturity Date for Periods Ended December ------------------------------------------------------------------------ 2002 2003 2004 2005 2006 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (In thousands) Liabilities Long-term debt Fixed rate $2,430 $ 168 $ 66 $ 448 $ 53 $ 447 $ 3,612 $ 3,612 Average interest rate 5.31% 6.83% 6.61% 6.69% 6.20% 6.20% Variable rate -- -- -- 36,073 -- -- $36,073 $35,550 Average interest rate -- -- -- 3.42% -- -- Interest rate swaps Fixed-to-variable rate $5,000 $10,000 $15,000 $ (641) Average pay rate 5.02% 5.48% 5.33% Average receive rate 2.25% 2.25%
FORWARD-LOOKING AND CAUTIONARY STATEMENTS From time to time in this annual report, references are made to expectations regarding Sylvan's future financial performance, such as the impact of competition in the U.S. spawn market, effective tax rate increases, the continuation of the company's share purchase program, capital expenditures, and the cash flows from operations and bank borrowings. 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: o pricing or product initiatives of the company's competitors; o changes in exchange risks with respect to currencies used in the company's markets; o the loss of key executives or other employees of the company; o failure to achieve production yield and quality expectations; o the loss of a major customer; o changes in a specific country's or region's political or economic conditions; and o acts of terrorism or war or concerns of the public about such acts or threats of such acts. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required is set forth as Exhibits beginning on page 23. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 14 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 definitive 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 caption "Security Ownership of Certain Beneficial Owners and Management" in Sylvan's definitive 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 "Transactions with the Company" in Sylvan's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. 15 PART IV ITEM 14. 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., previously filed as Exhibit 3.3 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 as Exhibit 3.4 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 as Exhibit 3.5 on November 12, 1999 with the company's Form 10-Q quarterly report for the period ended October 3, 1999 and incorporated herein by reference Compensation Plans and Arrangements 10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan, previously filed as Exhibit 3.3.2 on April 2, 1993 with the company's Form 10-K annual report for the fiscal year ended January 3, 1993 and incorporated herein by reference 10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors, previously filed on April 1, 1994 with the company's Form 10-K annual report for the fiscal year ended January 2, 1994 and incorporated herein by reference 10.12 Sylvan Inc. 1990 Stock Option Plan (amended and restated), previously filed on November 12, 1999 with the company's Form 10-Q quarterly report for the period ended October 3, 1999 and incorporated herein by reference Material Contracts 10.2.1 Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc., a Nevada corporation, Sylvan Foods (Netherlands) B.V., a Dutch corporation, as Borrowers, the Banks party thereto from time to time and Mellon Bank, N.A., a national banking association, as issuing bank and as agent for the Banks thereunder, previously filed as Exhibit 10.1 on November 10, 1998 with Sylvan's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 10.2.2 Revolving Credit Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the amount of $25,000,000, previously filed on November 10, 1998 as Exhibit 10.2 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 10.2.3 Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO Bank, Pittsburgh Branch, in the amount of $25,000,000, previously filed on November 10, 1998 as Exhibit 10.3 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 10.2.4 Promissory Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the amount of $5,000,000, previously filed on November 10, 1998 as Exhibit 10.4 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 16 10.2.5 Mellon Global Cash Management ABS Agreement, dated August 6, 1998, by and between Sylvan Inc. and Mellon Bank, N.A., previously filed on November 10, 1998 as Exhibit 10.5 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 10.2.6 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Sylvan Inc. and Mellon Bank, N.A., previously filed on November 10, 1998 as Exhibit 10.6 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 10.2.7 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Sylvan Foods, Inc. and Mellon Bank, N.A., previously filed on November 10, 1998 as Exhibit 10.7 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 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., previously filed on November 10, 1998 as Exhibit 10.8 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 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., previously filed on November 10, 1998 as Exhibit 10.9 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and incorporated herein by reference 10.2.10 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Quincy Corporation and Mellon Bank, N.A., previously filed on November 10, 1998 as Exhibit 10.10 with the company'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 on November 10, 1998 as Exhibit 10.11 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 as Exhibit 10.5.1 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 as Exhibit 10.40 with the company's Form 10-K annual report for the fiscal year ended December 31, 2000 and incorporated herein by reference 10.41 Letter dated October 12, 2001 from Mellon Bank, advising the company of Mellon's assignment and transfer to Citizens Financial Group, Inc., or to a wholly owned banking subsidiary of Citizens, 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, referenced in Exhibits 10.2.1 through 10.2.11, above 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 (B) REPORTS ON FORM 8-K None 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 20th day of March 2002. By /s/ DENNIS C. ZENSEN --------------------------- Dennis C. Zensen 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 20, 2002 - -------------------------------------- Directors, President and --------------------------- Dennis C. Zensen Chief Executive Officer (Principal Executive Officer) /s/ DONALD A. SMITH Chief Financial Officer March 20, 2002 - -------------------------------------- (Principal Financial and --------------------------- Donald A. Smith Accounting Officer) /s/ WILLIAM L. BENNETT Director March 20, 2002 - -------------------------------------- --------------------------- William L. Bennett /s/ MONIR K. ELZALAKI President, Sylvan America, Inc. March 20, 2002 - -------------------------------------- Director --------------------------- Monir K. Elzalaki /s/ VIRGIL H. JURGENSMEYER Director March 20, 2002 - -------------------------------------- ---------------------------- Virgil H. Jurgensmeyer /s/ NELSON OBUS Director March 20, 2002 - -------------------------------------- --------------------------- Nelson Obus
18 INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Exhibit No. Description Page No. - ----------- ----------- -------- Consent of Independent Public Accountants 21 Report of Independent Public Accountants 22 Consolidated Balance Sheets at December 30, 2001 and December 31, 2000 23 Consolidated Statements of Income for the Years Ended December 30, 2001, December 31, 2000 and January 2, 2000 25 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 30, 2001, December 31, 2000 and January 2, 2000 26 Consolidated Statements of Cash Flows for the Years Ended December 30, 2001, December 31, 2000 and January 2, 2000 27 Notes to Consolidated Financial Statements 28 Schedule II - Valuation and Qualifying Accounts for the Years Ended December 30, 2001, December 31, 2000 and January 2, 2000 43 Report of Independent Public Accountants on Financial Statement Schedule 44 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)
19 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 45 21 Subsidiaries of the Registrant 52
- ------------------ (a) This exhibit was previously filed on November 12, 1999 with the company's Form 10-Q quarterly report for the period ended October 3, 1999 and is incorporated herein by reference. (b) This exhibit was previously filed on April 2, 1993 with the company's Form 10-K annual report for the fiscal year ended January 3, 1993 and is incorporated herein by reference. (c) This exhibit was previously filed on April 1, 1994 with the company's Form 10-K annual report for the fiscal year ended January 2, 1994 and is incorporated herein by reference. (d) This exhibit was previously filed on November 10, 1998 as one of Exhibits 10.1 through 10.11 with the company's Form 10-Q quarterly report for the period ended September 27, 1998 and is incorporated herein by reference. (e) This exhibit was previously filed on March 27, 2000 with the company's Form 10-K annual report for the fiscal year ended January 2, 2000 and is incorporated herein by reference. (f) This exhibit was previously filed on March 23, 2001 with the company's Form 10-K annual report for the fiscal year ended December 31, 2001 and is incorporated herein by reference. 20 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in Sylvan Inc.'s Form 10-K of our reports dated February 1, 2002 included or incorporated by reference in the Company's previously filed registration statements on Form S-8 (No. 33-46797 and No. 33-86332), including the prospectuses therein, relating to the Company's 1990 Stock Option Plan and on Form S-8 (No. 33-83962), including the prospectus therein, relating to the Company's 1993 Stock Option Plan for Nonemployee Directors. /s/ ARTHUR ANDERSEN LLP Pittsburgh, Pennsylvania, March 20, 2002 21 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 22 CONSOLIDATED BALANCE SHEETS SYLVAN INC. AND SUBSIDIARIES
ASSETS - -------------------------------------------------------------------------------------------------- IN THOUSANDS DEC. 30, 2001 DEC. 31, 2000 ------------- ------------- Current Assets: Cash and cash equivalents $ 5,072 $ 5,371 Trade accounts receivable, net of allowance for doubtful accounts of $440 and $497, respectively 13,133 12,740 Inventories 10,119 10,398 Prepaid income taxes and other expenses 1,437 1,420 Other current assets 4,206 1,634 --------- --------- TOTAL CURRENT ASSETS 33,967 31,563 --------- --------- Property, Plant and Equipment: Land and improvements 3,711 3,693 Buildings 38,021 35,540 Equipment 51,014 48,072 --------- --------- 92,746 87,305 Less- Accumulated depreciation (38,470) (34,769) --------- --------- TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 54,276 52,536 --------- --------- INTANGIBLE ASSETS, net of accumulated amortization of $4,078 and $3,404, respectively 11,036 11,899 OTHER ASSETS, net of accumulated amortization of $491 and $407, respectively 7,811 9,776 --------- --------- TOTAL ASSETS $ 107,090 $ 105,774 --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these statements. 23 CONSOLIDATED BALANCE SHEETS SYLVAN INC. AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------- IN THOUSANDS EXCEPT SHARE DATA DEC. 30, 2001 DEC. 31, 2000 ------------- ------------- Current Liabilities: Current portion of long-term debt $ 2,430 $ 192 Accounts payable - trade 3,833 4,108 Accrued salaries, wages and employee benefits 2,635 2,653 Other accrued liabilities 905 896 Income taxes payable 942 690 --------- --------- TOTAL CURRENT LIABILITIES 10,745 8,539 --------- --------- LONG-TERM AND REVOLVING-TERM DEBT 37,255 39,871 --------- --------- Other Long-Term Liabilities: Other employee benefits 1,362 1,056 Other 5,162 5,215 --------- --------- TOTAL OTHER LONG-TERM LIABILITIES 6,524 6,271 --------- --------- MINORITY INTEREST 1,680 1,559 Shareholders' Equity: Common stock, voting, par value $.001, 10,000,000 shares authorized, 6,694,272 and 6,681,601 shares issued in 2001 and 2000, respectively 7 7 Additional paid-in capital 17,055 16,885 Retained earnings 60,296 54,467 Less-Treasury stock, at cost, 1,263,953 and 1,156,682 shares in 2001 and 2000, respectively (13,136) (11,917) --------- --------- 64,222 59,442 Accumulated other comprehensive income (13,336) (9,908) --------- --------- TOTAL SHAREHOLDERS' EQUITY 50,886 49,534 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 107,090 $ 105,774 --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these statements. 24 CONSOLIDATED STATEMENTS OF INCOME SYLVAN INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------ IN THOUSANDS EXCEPT SHARE DATA 2001 2000 1999 ----------- ----------- ----------- NET SALES $ 85,911 $ 85,947 $ 89,841 ----------- ----------- ----------- Operating Costs and Expenses: Cost of sales 49,818 47,937 52,722 Selling and administrative 18,006 19,500 19,474 Research and development 1,721 1,763 1,583 Depreciation 5,375 5,233 5,506 ----------- ----------- ----------- 74,920 74,433 79,285 ----------- ----------- ----------- OPERATING INCOME 10,991 11,514 10,556 INTEREST EXPENSE, NET 2,532 2,529 2,231 OTHER INCOME (EXPENSE) (19) (155) (1) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 8,440 8,830 8,324 ----------- ----------- ----------- Provision for Income Taxes: Current 2,216 2,206 1,823 Deferred 274 (226) 308 ----------- ----------- ----------- 2,490 1,980 2,131 ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 5,950 6,850 6,193 ----------- ----------- ----------- MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 121 168 65 ----------- ----------- ----------- NET INCOME $ 5,829 $ 6,682 $ 6,128 ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,500,799 5,658,860 6,112,007 ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,551,673 5,665,974 6,130,694 ----------- ----------- ----------- NET INCOME PER SHARE - BASIC $ 1.06 $ 1.18 $ 1.00 ----------- ----------- ----------- NET INCOME PER SHARE - DILUTED $ 1.05 $ 1.18 $ 1.00 ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 25 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY SYLVAN INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------ IN THOUSANDS EXCEPT SHARE DATA ACCUMULATED OTHER TOTAL ADDITIONAL COMPRE- SHARE- COMMON PAID-IN RETAINED TREASURY HENSIVE HOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME EQUITY ------ -------- -------- -------- --------- -------- BALANCE, Jan. 3, 1999 $ 7 $ 16,443 $ 41,657 $ (2,318) $ (5,525) $ 50,264 Net income -- -- 6,128 -- -- 6,128 Foreign currency translation adjustment -- -- -- -- (5,081) (5,081) Minimum pension liability adjustment -- -- -- -- 3,403 3,403 -------- -------- -------- -------- -------- -------- Comprehensive income 4,450 Exercise of 34,400 stock options, net of tax -- 358 -- -- -- 358 Purchase of treasury stock -- -- -- (7,848) -- (7,848) -------- -------- -------- -------- -------- -------- BALANCE, Jan. 2, 2000 7 16,801 47,785 (10,166) (7,203) 47,224 Net income -- -- 6,682 -- -- 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 -- 104 -- 53 -- 157 Purchase of treasury stock -- -- -- (2,017) -- (2,017) Issuance of treasury stock -- (20) -- 213 -- 193 -------- -------- -------- -------- -------- -------- BALANCE, Dec. 31, 2000 7 16,885 54,467 (11,917) (9,908) 49,534 Net income -- -- 5,829 -- -- 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 -- -- -- 170 Purchase of treasury stock -- -- -- (1,219) -- (1,219) -------- -------- -------- -------- -------- -------- BALANCE, DEC. 30, 2001 $ 7 $ 17,055 $ 60,296 $(13,136) $(13,336) $ 50,886 -------- -------- -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS SYLVAN INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------- IN THOUSANDS 2001 2000 1999 -------- -------- -------- CASH FLOWS FROM OPERATIONS: Net income $ 5,829 $ 6,682 $ 6,128 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 6,114 5,998 6,226 Employee benefits 373 (193) 706 Trade accounts receivable (753) (183) (248) Inventories 1 (697) (562) Prepaid expenses and other assets (852) (900) (427) Accounts payable, accrued expenses and other liabilities (35) (1,072) (860) Minority interest 157 319 111 Other (155) (212) 1,879 -------- -------- -------- NET CASH PROVIDED BY OPERATIONS 10,679 9,742 12,953 -------- -------- -------- CASH FLOWS FROM INVESTING: Expenditures for property, plant and equipment (8,744) (7,012) (7,813) Proceeds from sale of fixed assets 145 908 144 Payment for acquisition, net of cash acquired -- -- (4,574) Earn-out payment on prior period acquisition (125) (125) -- -------- -------- -------- NET CASH USED IN INVESTING (8,724) (6,229) (12,243) -------- -------- -------- CASH FLOWS FROM FINANCING: Principal payments on long-term debt (285) (72) (823) Proceeds from long-term debt borrowings 49 172 -- Net (repayments) borrowings under revolving credit loan (509) (3,350) 9,756 Proceeds from exercise of stock options 134 87 293 Purchase of treasury shares (1,219) (2,017) (7,848) -------- -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING (1,830) (5,180) 1,378 -------- -------- -------- EFFECT OF EXCHANGE RATES ON CASH (424) (563) (984) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (299) (2,230) 1,104 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,371 7,601 6,497 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,072 $ 5,371 $ 7,601 -------- -------- -------- Supplemental Disclosure of Cash Flow Data: Interest paid $ 2,402 $ 2,651 $ 2,429 Income taxes paid 2,394 2,153 1,190 Supplemental Schedule of Noncash Investing and Financial Activities: Acquisition of Businesses: Fair value of assets acquired $ -- $ -- $ 4,879 Cash paid for assets or capital stock -- -- (4,574) -------- -------- -------- LIABILITIES ASSUMED $ -- $ -- $ 305 -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 27 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 2001, 2000 and 1999 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 preparation of financial statements in conformity with generally accepted accounting principles requires 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 could 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. In addition, the company maintains 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 is reported under "Other Current Assets" and "Other Assets" in the accompanying consolidated balance sheets as of December 30, 2001 and December 31, 2000, respectively. 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 28 The company owns two satellite mushroom growing facilities, which have an aggregate cost of $1.4 million and accumulated depreciation of $38,000, based on a 20-year estimated useful life. Each of the facilities is leased to an unrelated third party for $100,000 per year. The leases have an initial 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. 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. 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 YEAR ENDED ---------------------------------------------- DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000 ------------- ------------- ------------ Basic Earnings Per Share: Net income $ 5,829 $ 6,682 $ 6,128 Average shares outstanding 5,500,799 5,658,860 6,112,007 ---------- ---------- ---------- Earnings per share $ 1.06 $ 1.18 $ 1.00 ========== ========== ========== Diluted Earnings Per Share: Net income $ 5,829 $ 6,682 $ 6,128 Average shares outstanding 5,500,799 5,658,860 6,112,007 Effect of stock options 50,874 7,114 18,687 ---------- ---------- ---------- Diluted average shares outstanding 5,551,673 5,665,974 6,130,694 ---------- ---------- ---------- Earnings per share $ 1.05 $ 1.18 $ 1.00 ========== ========== ==========
Options to purchase approximately 305,000, 638,000 and 570,000 shares of common stock for the fiscal years ended 2001, 2000 and 1999, 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. 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. 29 FOREIGN CURRENCY EXCHANGE RISK MANAGEMENT The company evaluates and hedges foreign currency exchange risk exposure on a transaction-by-transaction basis. As of December 30, 2001, 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 30, 2001 are as follows:
FAIR LIBOR NOTIONAL EFFECTIVE EXPIRATION MARKET FIXED MAXIMUM AMOUNT DATE DATE VALUE RATE RATE - ------------- ----------------- --------------- ---------- ---- ------- $ 10,000,000 February 25, 2000 August 25, 2007 $ (443,238) 5.48% 7.00% $ 5,000,000 October 4, 1999 October 4, 2002 (140,074) 5.02% --
Additionally, the counterparty to the $5 million swap presented above has the ability to extend the swap on October 4, 2002 for an additional one-year period. The fair market value of this swaption as of December 30, 2001 was ($57,790). 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, 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 2002 related to these derivative instruments, based on interest rates at December 30, 2001. 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. 30 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. 30, 2001 DEC. 31, 2000 ------------- ------------- Fair Value $ 39,162 $ 39,506 Carrying Amount 39,685 40,063
The company's financial instruments are not held for trading purposes. COMPREHENSIVE INCOME The components of accumulated other comprehensive income consisted of the following:
IN THOUSANDS DEC. 30, 2001 DEC. 31, 2000 ------------- ------------- Foreign currency translation adjustments $(13,000) $ (9,908) Unrealized losses on derivatives and qualified cash flow hedges, net of tax (336) -- -------- -------- Total accumulated other comprehensive income $(13,336) $ (9,908) ======== ========
INTANGIBLE ASSETS Intangible assets consist of the excess of cost over net assets of acquired companies and are being amortized over 30 years or less. Subsequent to its acquisitions, the company continually evaluates whether later events and circumstances have occurred that indicate that the remaining estimated useful life of intangible assets may warrant revision, or that the remaining balance of intangible assets may not be recoverable. The company's evaluations have not resulted in any revision to intangible assets or their related amortization periods. RECENT PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 eliminates amortization of goodwill and amortization of indefinitely-lived intangible assets and provides for 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 January 2002, the company retained a professional services firm to complete the initial assessment to test for transitional goodwill impairment. Management does not believe that an initial impairment loss will result. In compliance with SFAS No. 142, the first step of this assessment will be completed by June 30, 2002. During the 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. 31 RECLASSIFICATIONS Certain reclassifications have been made to the prior-year financial statements to be consistent with the current-year presentation. 2. ACQUISITIONS: In November 1999, the company acquired most of the assets of the J.B. Swayne Spawn Company of Kennett Square, Pennsylvania, a modern production facility that distributed its product within North America. The purchase price, after two contingent consideration payments of $125,000, was $4.8 million. This acquisition has been accounted for as a purchase transaction in accordance with APB No. 16. As a result of the two contingent payments and the completion of the final purchase allocations, the purchase price exceeded the fair value of the net assets acquired by $1.5 million. Had the acquisition taken place at the beginning of 1999, the pro forma impact on sales, net income and diluted earnings per share would not have been materially different from the amounts reported. 3. INVENTORIES: Inventories are summarized as follows:
IN THOUSANDS DEC. 30, 2001 DEC. 31, 2000 ------------- ------------- Growing crops and compost material $ 5,466 $ 5,521 Stores and other supplies 1,493 1,410 Finished products 3,160 3,467 ------- ------- $10,119 $10,398 ======= =======
4. 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 $37.3 million during 2002. This aggregate outstanding balance will decline over the life of the agreement as follows: PERIOD MAXIMUM AGGREGATE 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 December 30, 2001, the company had outstanding borrowings under the agreement of $36.1 million. 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. 32 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. In 1995, the company obtained Dutch guilder financing for the acquisition of plant and machinery in the Netherlands. As of December 30, 2001, approximately $0.7 million was outstanding on this loan, which has a term of 15 years and a fixed rate of interest of 6.2%. The company has granted a security interest over certain Dutch assets to secure these borrowings. The company has a French-franc denominated loan of FF16.2 million ($2.2 million). Interest is payable based on a formula that utilizes a Paris Interbank Offer Rate plus an applicable margin. Repayment was due in January 2002. As of December 30, 2001, the loan was supported by a compensating cash balance maintained at a U.S. bank. The company incurred approximately $2.6 million in gross interest expense during 2001, including $132,000 of interest charges related to interest hedges accounted for under SFAS No. 133. The weighted average interest rate was 6.7%. The contractual principal payments due under the company's loan agreements are as follows: IN THOUSANDS 2002 $ 2,430 2003 168 2004 66 2005 36,521 2006 53 Thereafter 447 -------- TOTAL $ 39,685 ======== 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 years ended December 30, 2001, December 31, 2000 and January 2, 2000, rental expense included in the statements of income was $590,000, $567,000, and $432,000, respectively. Future minimum lease commitments for all noncancelable leases are as follows: IN THOUSANDS 2002 $ 461 2003 121 2004 92 2005 44 2006 -- Thereafter -- ------ TOTAL $ 718 ====== 33 5. ACCRUED SALARIES, WAGES AND EMPLOYEE BENEFITS: Accrued salaries, wages and employee benefits were composed of the following:
IN THOUSANDS DEC. 30, 2001 DEC. 31, 2000 ------------- ------------- Accrued compensation $2,030 $1,798 Accrued vacation 533 648 Other 72 207 ------ ------ TOTAL $2,635 $2,653 ====== ======
6. 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 YEAR ENDED ------------------------------------------------ DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000 ------------- ------------- ------------ Domestic $3,405 $3,308 $1,992 Foreign 5,035 5,522 6,332 ------ ------ ------ TOTAL $8,440 $8,830 $8,324 ====== ====== ======
The provision (benefit) for income taxes consisted of the following:
IN THOUSANDS YEAR ENDED --------------------------------------------------- DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000 ------------- ------------- ------------ Current: Federal $ 970 $ 861 $ 388 State 23 (78) (112) Foreign 1,223 1,423 1,547 Deferred 192 266 407 Change in Valuation Allowance 82 (492) (99) ------- ------- ------- $ 2,490 $ 1,980 $ 2,131 ======= ======= =======
34 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 YEAR ENDED ----------------------------------------------------- DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000 ------------- ------------- ------------ Income tax at U.S. federal statutory rate $ 2,869 $ 3,002 $ 2,830 State income taxes, net of federal income tax benefit 37 (5) (74) Foreign taxes at rates other than effective U.S. rates (488) (462) (471) Net (permanent benefits) nondeductible charges (24) (67) (34) Change in tax valuation allowance 82 (492) (99) Other, net 14 4 (21) ------- ------- ------- TOTAL PROVISION FOR INCOME TAXES $ 2,490 $ 1,980 $ 2,131 ======= ======= =======
Temporary differences which generate significant portions of the company's deferred tax assets and liabilities as of December 30, 2001 and December 31, 2000 were as follows:
IN THOUSANDS DEC. 30, 2001 DEC. 31, 2000 ------------- ------------- Postretirement benefits other than pensions $ (344) $ (371) Depreciation 3,407 3,522 Prepaid pension asset 2,213 2,007 Net operating loss carryforwards (2,285) (2,035) Other, net (247) (489) ------- ------- Total 2,744 2,634 Less- Valuation allowance 1,452 1,370 ------- ------- NET DEFERRED TAX LIABILITIES $ 4,196 $ 4,004 ------- -------
Included in net deferred tax liabilities at December 30, 2001 are unrealized tax benefits amounting to $2.3 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 $0.4 million of the net operating losses has an indefinite carryforward period. The remaining $1.9 million of net operating losses will expire between 2002 and 2016. 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. 35 7. 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 YEAR ENDED --------------------------------------- 2001 2000 1999 -------- --------- -------- Net Income: As Reported $ 5,829 $ 6,682 $ 6,128 Pro Forma 5,024 5,964 5,500 Diluted EPS: As Reported $ 1.05 $ 1.18 $ 1.00 Pro Forma 0.91 1.05 0.90
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 1,289,083 shares through December 30, 2001 under the 1990 Plan and 87,000 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 2001, 2000 and 1999, respectively: risk-free interest rates of 3.62%, 5.74% and 5.85%; no expected dividend yields; expected lives of 8.0 years; expected volatility of 34%, 34% and 32%. 36 A summary of the status of the company's stock option plans at December 30, 2001, December 31, 2000, and January 2, 2000, and changes during the years then ended, is presented in the table and narrative below:
SHARES IN THOUSANDS 2001 2000 1999 ----------------- ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ --------- ------ -------- Outstanding at beginning of year 841 $ 11.21 859 $ 11.54 769 $ 11.69 Granted 3 12.50 132 8.75 136 9.99 Exercised (13) 10.05 (10) 8.75 (34) 8.53 Forfeited (4) 12.74 (140) 11.08 (12) 12.62 ---- ------- ----- ------- ----- ------- OUTSTANDING AT END OF YEAR 827 11.22 841 11.21 859 11.54 ---- ------- ----- ------- ----- ------- Exercisable at end of year 703 11.60 570 11.64 556 11.27 Weighted average fair value of options granted $ 5.73 $ 4.50 $ 5.04
As of December 30, 2001, 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 632,270 194,334 Weighted Average Exercise Price $ 10.40 $ 13.92 Weighted Average Remaining Contractual Life (in years) 5.7 6.6 Exercisable Options: Number 508,941 194,334 Weighted Average Exercise Price $ 10.71 $ 13.92 Nonexercisable Options: Number 123,329 -- Weighted Average Exercise Price $ 9.11 $ --
8. 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 at December 30, 2001 and December 31, 2000 were $30.1 million and $30.3 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. 37 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 OTHER BENEFITS -------------------------------------------- ------------------------------------------- DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000 DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000 ------------- ------------- ------------ ------------- ------------- ------------ Change in benefit obligation: Benefit obligation at beginning of year $ 30,252 $ 30,109 $ 33,886 $ 985 $ 1,044 $ 716 Interest cost 2,174 2,176 2,132 69 71 71 Actuarial (gain) loss -- 302 (3,595) (17) (41) 357 Benefits paid (2,341) (2,335) (2,314) (106) (89) (100) --------- -------- -------- ------ ------- -------- BENEFIT OBLIGATION AT END OF YEAR $ 30,085 $ 30,252 $ 30,109 $ 931 $ 985 $ 1,044 -------- -------- -------- ------ ------- -------- Change in plan assets: Fair value of plan assets at beginning of year $ 33,849 $ 34,362 $ 33,867 $ -- $ -- $ -- Actual return on plan assets (1,288) 1,822 2,809 -- -- -- Employer contributions -- -- -- 106 89 100 Benefits paid (2,341) (2,335) (2,314) (106) (89) (100) -------- --------- -------- ------ ------- -------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 30,220 $ 33,849 $ 34,362 $ -- $ -- $ -- -------- -------- -------- ------- ------- -------- Reconciliation of funded status: Funded status $ 135 $ 3,597 $ 4,253 $ (931) $ (985) $ (1,044) Unrecognized net actuarial loss 6,372 2,307 1,003 43 60 100 Unrecognized prior service cost -- -- -- (49) (56) (61) -------- --------- ------- ------ ------- -------- PREPAID (ACCRUED) BENEFIT LIABILITY $ 6,507 $ 5,904 $ 5,256 $ (937) $ (981) $ (1,005) -------- --------- -------- ------ ------- -------- Weighted-average assumptions as of October 31 of each fiscal year: Discount rate 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% Expected return on plan assets 9.00% 9.00% 9.00% -- -- -- Components of net periodic pension cost (income): Interest cost $ 2,174 $ 2,176 $ 2,132 $ 69 $ 71 $ 71 Expected return on plan assets (2,778) (2,824) (2,755) -- -- -- Amortization of prior service cost -- -- -- (6) (6) (6) Recognized net actuarial loss -- -- 52 -- -- 5 -------- --------- -------- ------ ------- -------- NET PERIODIC BENEFIT COST (INCOME) $ (604) $ (648) $ (571) $ 63 $ 65 $ 70 -------- --------- -------- ------ ------- --------
38
IN THOUSANDS PENSION BENEFITS OTHER BENEFITS --------------------------------------------- --------------------------------------------- DEC. 30, DEC. 31, JAN. 2, DEC. 30, DEC. 31, JAN. 2, 2001 2000 2000 2001 2000 2000 -------------- ------------- -------------- ------------- -------------- -------------- Assumed health care cost trend: Initial trend rate 6.56% 6.95% 7.34% Ultimate trend rate 5.00% 5.00% 5.00% Year ultimate trend reached 2005 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 2001 $ 6 $ (5) Effect on 2001 postretirement benefit obligation 80 (70)
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 2001, 2000 and 1999 were $38,000, $30,000 and $33,000, 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 during 2001 was $85,000. 9. 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. 39
IN THOUSANDS SPAWN FRESH TOTAL PRODUCTS MUSHROOMS REPORTABLE SEGMENT SEGMENT SEGMENTS -------- --------- ---------- Total Revenues 2001 $ 63,559 $ 23,621 $ 87,180 2000 65,199 22,035 87,234 1999 61,945 29,176 91,121 Intersegment Revenues 2001 $ 1,269 $ -- $ 1,269 2000 1,287 -- 1,287 1999 1,280 -- 1,280 Depreciation Expense 2001 $ 3,793 $ 1,549 $ 5,342 2000 3,578 1,623 5,201 1999 3,824 1,624 5,448 Operating Income 2001 $ 11,849 $ 2,642 $ 14,491 2000 13,368 2,135 15,503 1999 12,930 1,425 14,355 Net Fixed Asset Expenditures 2001 $ 6,330 $ 2,236 $ 8,566 2000 5,191 911 6,102 1999 7,171 487 7,658 Assets 2001 $ 79,700 $ 19,040 $ 98,740 2000 76,462 21,565 98,027 1999 79,166 23,385 102,551
40 RECONCILIATION TO CONSOLIDATED FINANCIAL DATA
IN THOUSANDS 2001 2000 1999 --------- --------- --------- Revenues: Total for reportable segments $ 87,180 $ 87,234 $ 91,121 Elimination of intersegment revenues (1,269) (1,287) (1,280) --------- --------- --------- TOTAL CONSOLIDATED REVENUES $ 85,911 $ 85,947 $ 89,841 --------- --------- --------- Depreciation Expense: Total for reportable segments $ 5,342 $ 5,201 $ 5,448 Unallocated corporate expenses 33 32 58 --------- --------- --------- TOTAL CONSOLIDATED DEPRECIATION EXPENSE $ 5,375 $ 5,233 $ 5,506 --------- --------- --------- Operating Income: Total for reportable segments $ 14,491 $ 15,503 $ 14,355 Unallocated corporate expenses (3,500) (3,989) (3,799) --------- --------- --------- TOTAL CONSOLIDATED OPERATING INCOME $ 10,991 $ 11,514 $ 10,556 --------- --------- --------- Net Fixed Asset Expenditures: Total for reportable segments $ 8,566 $ 6,102 $ 7,658 Unallocated corporate expenditures 33 2 11 --------- --------- --------- TOTAL CONSOLIDATED NET FIXED ASSET EXPENDITURES $ 8,599 $ 6,104 $ 7,669 --------- --------- --------- Assets: Total for reportable segments $ 98,740 $ 98,027 $ 102,551 Prepaid pension asset from former operation 6,507 5,904 5,256 Unallocated corporate assets 1,843 1,843 1,688 --------- --------- --------- TOTAL CONSOLIDATED ASSETS $ 107,090 $ 105,774 $ 109,495 --------- --------- ---------
GEOGRAPHIC ANALYSIS OF NET LONG-LIVED ASSETS
IN THOUSANDS OTHER FOREIGN UNITED STATES FRANCE NETHERLANDS COUNTRIES TOTAL ------------- ------- ----------- ------------- -------- 2001 $ 26,161 $ 9,219 $ 4,457 $ 14,439 $ 54,276 2000 25,225 8,560 5,089 13,662 52,536 1999 25,669 8,683 5,624 14,273 54,249
41 GEOGRAPHIC ANALYSIS OF REVENUES BASED ON LOCATION OF CUSTOMER
IN THOUSANDS OTHER FOREIGN UNITED STATES FRANCE NETHERLANDS COUNTRIES TOTAL ------------- ------- ----------- ------------- -------- 2001 $ 40,660 $ 6,779 $ 8,880 $ 29,592 $ 85,911 2000 41,703 7,440 8,778 28,026 85,947 1999 43,543 8,037 9,822 28,439 89,841
Most of Sylvan's Fresh Mushrooms Segment sales in 2001 and 2000 were to C And C Carriage Mushroom Company. C And C began purchasing and marketing all of Quincy's production in January 2000. The $23.0 million and $20.8 million of fresh mushrooms purchased from Quincy represented 27% and 24% of Sylvan's consolidated net sales in 2001 and 2000, respectively. 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 years ended December 30, 2001, December 31, 2000 or January 2, 2000. The majority of the company's $13.1 million in trade accounts receivable are from regional mushroom growers and composters. Approximately $2.0 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. 10. RELATED-PARTY TRANSACTIONS: During fiscal years 2001, 2000 and 1999, a nonemployee director's business interests purchased spawn and spawn-related products at fair market value totaling $589,000, $621,000 and $659,000, respectively. These business interests purchased mushrooms and services at fair market value totaling $5,000 in 2001 and $83,000 in 1999 in trading with the company's subsidiaries. 42 Sxhedule II SYLVAN INC. AND SUBSIDIARIES (THE COMPANY) ------------------------------------------ VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 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 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 ===== ===== ===== ===== ===== ===== Year ended January 2, 2000- Allowance for doubtful accounts $ 710 $ 524 $ 0 ($379) ($ 29) $ 826 ===== ===== ===== ===== ===== =====
(a) Represents uncollected accounts charged against the allowance. (b) Represents the effect of currency translation adjustments. 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Sylvan Inc. We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Sylvan Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 1, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index in Item 14(a)2 of this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Pittsburgh, Pennsylvania, February 1, 2002 44 EX-10.41 3 j9336901ex10-41.txt LETTER RE: REVOLVING CREDIT AGREEMENT Exhibit 10.41 MELLON MELLON BANK October 12, 2001 Sylvan Inc. 333 Main Street Post Office Box 249 Saxonburg, PA 16056 Re: Revolving Credit Agreement, dated as of August 6, 1998, by and among SYLVAN INC., ET AL. (collectively, the "Borrower"), MELLON BANK, N.A. ("Mellon Bank") and the other financial institutions party thereto from time to time (together with any related agreements, documents (including any and all notes issued to Mellon pursuant thereto), certificates, exhibits and schedules and any amendments, modifications or other supplements thereto, the "Agreement") Dear Sir or Madam: As you are aware, Mellon Financial Corporation ("Mellon Financial") recently entered into an agreement to sell to Citizens Financial Group, Inc. ("Citizens") among other things, regional retail banking operations and related lines of business including, without limitation, its consumer lending, business banking, auto dealer floor plan lending, and a portion of its middle market lending (the "Transaction"). Pursuant to the Agreement, we are providing you with notice of the Transaction and requesting your consent to the transfer of all of Mellon Bank's right, title and interest in, to and under the Agreement to Citizens or a wholly owned banking subsidiary of Citizens (the "Citizens Entity") in connection with the Transaction. Mellon Financial and Citizens expect to close the Transaction as soon as possible. From and after the closing of the Transaction and the receipt of all necessary consents, all of Mellon Bank's rights, duties and obligations arising under the Agreement from and after the closing of the Transaction shall inure to the benefit of and be enforceable by Citizens as if Citizens were an original party to the Agreement. In furtherance of that result, Mellon Bank hereby agrees to execute, and to cause Citizens or the Citizens Entity to execute, the attached form of assignment/transfer agreement (the "Transfer Agreement") (with the blanks appropriately completed), at the closing of the Transaction (the "Effective Date") and deliver, and cause Citizens or the Citizens Entity to deliver, the same to you after such closing. In addition, you agree that from and after the Effective Date, you shall look only to Citizens or the Citizens Entity for performance of all of Mellon Bank's obligations under the Agreement arising from and after the date on which the Agreement is assigned by Mellon Bank to Citizens or the Citizens Entity. A Mellon Financial Company 45 Accordingly, we request that, by no later than OCTOBER 31, 2001, you consent to the execution and delivery by Mellon Bank and Citizens or the Citizens Entity of the Transfer Agreement and to the transfer of all of Mellon Bank's right, title and interest in, to and under the Agreement to Citizens or the Citizens Entity pursuant thereto by having an authorized representative of your organization sign on the signature line provided below. Once executed, please return this original executed letter to the following address: Peter F. Giamporcaro, Esq. Reed Smith LLP 2500 One Liberty Place 1650 Market Street Philadelphia, Pennsylvania 19103 Furthermore, by consenting to the foregoing, you hereby acknowledge that Mellon Bank, upon (a) the execution and delivery of all documents as described above, (b) the receipt of all necessary consents, and (c) the payment of all processing fees, if any, required under the Agreement, will have satisfied all of its obligations under the Agreement related to the transfer of its right, title and interest in, to and under the Agreement, and you hereby waive any notice period requirements under the Agreement in connection with such transfer. In connection with the Transaction, Citizens or the Citizens Entity will acquire from Mellon Financial a risk participation with respect to: (i) outstanding letters of credit, if any, issued by Mellon Bank prior to the closing of the Transaction for the account of the Borrower or the Borrower's affiliates; and (ii) derivative contracts (including interest rate swap agreements, hedge agreements, etc.), if any, entered into by and between Mellon Bank and the Borrower or the Borrower's affiliates prior to the closing of the Transaction. Under these participation agreements, Citizens or the Citizens Entity will provide funds to Mellon Bank equal to amounts owing by the Borrower or the Borrower's affiliates to Mellon Bank under such derivative contracts and/or letters of credit, but not paid by the Borrower or its affiliates when due. By signing on the first signature line below, the Borrower hereby acknowledges and consents to the foregoing participation arrangements, to the extent such consent is required, and agrees that if Citizens or the Citizens Entity makes a payment to Mellon Bank under the participation agreements, the corresponding payment obligation of the Borrower or its affiliates in the same amount under the derivative contracts and/or letters of credit shall be deemed to be obligations to Citizens or the Citizens Entity and, to the extent a lien on collateral has been granted by the Borrower or its affiliates to Mellon Bank, Borrower hereby confirms that the grant of the security interest in such collateral shall run in favor of both Mellon Bank and Citizens or Citizens Entity, as their interests may appear, and shall-secure such payment obligations by the Borrower or its affiliates to both Mellon Bank and Citizens or the Citizens Entity. By signing this consent, the Borrower also is consenting, on behalf of the Borrower and its affiliates, to the transfer from Mellon Bank to Citizens or the Citizens Entity of all agreements, if any, relating to lockbox, automatic borrowing, ACH origination or other cash management or ancillary services provided by Mellon Bank to the Borrower or its affiliates. 46 If you require additional information, please telephone Mark T. Latterner immediately at 412-236-1226. As noted above, we would like to complete this process by NO LATER THAN OCTOBER 31, 2001. We greatly appreciate your efforts in helping us meet our goal. Thank you. Sincerely, /s/ MARK LATTERNER Mark Latterner Vice President CONSENT PAGE IMMEDIATELY FOLLOWS 47 CONSENTED TO AND AGREED AS OF THIS 17th DAY OF October, 2001: MELLON BANK, N.A., in its capacity as Agent By: /s/ MARK LATTERNER - ------------------------------------------- Name: Mark Latterner - ------------------------------------------- Title: V.P. - ------------------------------------------- ABN AMRO BANK N.V. (PGH BRANCH), in its capacity as Bank By: - ------------------------------------------- Name: - ------------------------------------------- Title: - ------------------------------------------- SYLVAN INC., in its capacity as Borrower By: /s/ DONALD A. SMITH - ------------------------------------------- Name: Donald A. Smith - ------------------------------------------- Title: Chief Financial Officer - ------------------------------------------- SYLVAN FOODS (NETHERLANDS) B.V., in its capacity as Borrower By: /s/ DONALD A. SMITH - ------------------------------------------- Name: Donald A. Smith - ------------------------------------------- Title: Authorized Signer - ------------------------------------------- 48 TRANSFER SUPPLEMENT THIS TRANSFER SUPPLEMENT, dated as of the date specified in Item 1 of Schedule I hereto, among the Transferor Bank specified in Item 2 of Schedule I hereto (the "Transferor Bank"), each Purchasing Bank specified in Item 3 of Schedule I hereto (each a "Purchasing Bank") and MELLON BANK, N.A., as Agent for the Banks and the Issuing Bank under the Credit Agreement described below. Recitals: A. This Transfer Supplement is being executed and delivered in accordance with Section 9.12(c) of the Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc., a Nevada corporation (the "Company"), Sylvan Foods (Netherlands) B.V., a Dutch corporation ("SFNBV") (the Company and SFNBV being referred to collectively as the "Borrowers"), the Banks party thereto from time to time, the Issuing Bank named therein, and Mellon Bank, N.A., as Agent for the Banks and the Issuing Bank (as the same may be amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition have the meaning specified in the Credit Agreement. B. Each Purchasing Bank (if it is not already a Bank) wishes to become a Bank party to the Credit Agreement. C. The Transferor Bank is selling and assigning to each Purchasing Bank, and each Purchasing Bank is purchasing and assuming, a certain portion of the Transferor Bank's rights and obligations under the Credit Agreement, including, without limitation, the Transferor Bank's Revolving Credit Commitment and Loans owing to it and any Revolving Credit Note held by it (the "Transferor Bank's Interests"). NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. TRANSFER EFFECTIVE NOTICE. Upon receipt by the Agent of seven counterparts of this Transfer Supplement (to each of which is attached a fully completed Schedule I and Schedule II), and each of which has been executed by the Transferor Bank, by each Purchasing Bank and by any other Person required by Section 9.12(c) of the Credit Agreement to execute this Transfer Supplement, the Agent will transmit to each Borrower, the Transferor Bank and each Purchasing Bank a transfer effective notice, substantially in the form of Schedule III to this Transfer Supplement (a "Transfer Effective Notice"). The date specified in such Transfer Effective Notice as the date on which the transfer effected by this Transfer Supplement shall become effective (the "Transfer Effective Date") shall be the fifth Business Day following the date of such Transfer Effective Notice or such other date as shall be agreed upon among the Transferor Bank, the Purchasing Bank, the Agent and the Borrowers. From and after the close of business at the Agent's Office on the Transfer Effective Date each Purchasing Bank (if not already a Bank party to the Credit Agreement) shall be a Bank party to the Credit Agreement for all purposes thereof having the respective interests in the Transferor Bank's Interest reflected in this Transfer Supplement. 2. PURCHASE PRICE; SALE. At or before 12:00 Noon, local time at the Transferor Bank's office specified in Schedule III, on the Transfer Effective Date, each Purchasing Bank shall pay to the Transferor Bank, in immediately available funds, an amount equal to the purchase price, as agreed 49 between the Transferor Bank and such Purchasing Bank (the "Purchase Price"), of the portion being purchased by such Purchasing Bank (such Purchasing Bank's "Purchased Percentage") of the Transferor Bank's Interest. Effective upon receipt by the Transferor Bank of the Purchase Price from a Purchasing Bank, the Transferor Bank hereby irrevocably sells, assigns and transfers to such Purchasing' Bank, without recourse, representation or warranty (express or implied) except as set forth in Section 6 hereof, and each Purchasing Bank hereby irrevocably purchases, takes and assumes from the Transferor Bank such Purchasing Bank's Purchased Percentage of the Transferor Bank's Interest. The Transferor Bank shall promptly notify the Agent of the receipt of the Purchase Price from a Purchasing Bank ("Purchase Price Receipt Notice"). Upon receipt by the Agent of such Purchase Price Receipt Notice, the Agent shall record in the Register the information with respect to such sale and purchase as contemplated by Section 9.12(d) of the Credit Agreement. 3. PRINCIPAL, INTEREST AND FEES. All principal payments, interest, fees and other amounts that would otherwise be payable from and after the Transfer Effective Date to or for the account of the Transferor Bank in respect of the Transferor Bank's Interest shall, instead, be payable to or for the account of the Transferor Bank and the Purchasing Banks, as the case may be, in accordance with their respective interests as reflected in this Transfer Supplement. 4. CLOSING DOCUMENTS. Concurrently with the execution and delivery hereof, the Transferor Bank will request that the Borrower provide to each Purchasing Bank (if it is not already a Bank party to the Credit Agreement) conformed copies of all documents delivered to such Transferor Bank on the Closing Date in satisfaction of conditions precedent set forth in the Credit Agreement. 5. FURTHER ASSURANCES. Each of the parties to this Transfer Supplement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Transfer Supplement. 6. CERTAIN REPRESENTATIONS AND AGREEMENTS. By executing and delivering this Transfer Supplement, the Transferor Bank and each Purchasing Bank confirm to and agree with each other and the Agent and the Banks as follows: (a) Other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned hereby free and clear of any adverse claim, the Transferor Bank makes no representation or warranty and assumes no responsibility with respect to (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of the Credit Agreement, any Note or any Security Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, received under or in connection with, the Credit Agreement, any Note or any Security Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Security Documents or otherwise from time to time. (b) The Transferor Bank makes no representation or warranty and assumes no responsibility with respect to (i) the performance or observance of any of the terms or conditions of the Credit Agreement, any Note or any Security Document on the part of the Company, any Borrower or any other Person, (ii) the business, operations, condition (financial or otherwise) or 50 prospects of the Company, any Borrower or any other Person, or (iii) the existence of any Event of Default or Potential Default. (c) Each Purchasing Bank confirms that it has received a copy of the Credit Agreement, each Note and each of the other Loan Documents, together with copies of the financial statements referred to in Section 3.06 thereof, the most recent financial statements delivered pursuant to Section 5.01 thereof, if any, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to enter into this Transfer Supplement. Each Purchasing Bank confirms that it has made such analysis and decision independently and without reliance upon the Agent, the Transferor Bank or any other Bank. (d) Each Purchasing Bank, independently and without reliance upon the Agent, the Transferor Bank or any other Bank, and based on such documents and information as it shall deem appropriate at the time, will make its own decisions to take or not take action under or in connection with the Credit Agreement, any Note or any Security Document. (e) Each Purchasing Bank irrevocably appoints the Agent to act as Agent for such Purchasing Bank under the Agreement and the Security Documents, all in accordance with Article IX of the Credit Agreement and the other provisions of the Credit Agreement and the Security Documents. (f) Each Purchasing Bank agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement and the Security Documents are required to be performed by it as a Bank. 7. SCHEDULE II. Schedule II hereto sets forth the revised Commitment Amount of the Transferor Bank and each Purchasing Bank as well as administrative information with respect to each Purchasing Bank. 8. GOVERNING LAW. This Transfer Supplement shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania, without regard to principles of choice of law. 9. COUNTERPARTS. This Transfer Supplement may be executed on any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Transfer Supplement to be executed by their respective duly authorized officers on Schedule I hereto as of the date set forth in Item I of Schedule I hereto. 51 EX-21 4 j9336901ex21.txt SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Sylvan Inc., a Nevada corporation, has the domestic and international subsidiaries listed below. All are wholly owned except as noted. Certain international subsidiaries are not named because they are not significant in the aggregate. Sylvan Inc. has no parent.
State/Country of Incorporation ------------------------------ Quincy Corporation Florida Somycel S.A. France Sylvan Africa (Pty) Ltd. South Africa Sylvan America, Inc. Nevada Sylvan America, Inc. Pennsylvania Sylvan Bioproducts, Inc. Pennsylvania Sylvan Communications, Inc. California Sylvan Denmark Denmark Sylvan Export Corporation Barbados Sylvan Foods, Inc. Pennsylvania Sylvan Foods (France) S.A. France Sylvan Foods (Netherlands) B.V. the Netherlands Sylvan Holdings Pty Ltd. (a) Australia Sylvan Horst B.V. (b) the Netherlands Sylvan Hungaria Kft. Hungary Sylvan Hungary Compost Producing and Trading Ltd. Hungary Sylvan Ireland Ireland Sylvan Italia S.r.l. Italy Sylvan Nederlands B.V. the Netherlands Sylvan Pilz AG Switzerland Sylvan Spawn Canada, Ltd. Canada Sylvan Polska Sp. z.o.o. Poland Sylvan Spawn Laboratory Hungary Ltd. Hungary Sylvan Spawn Limited England Sylvan Tarim Urunleri Sanayi Ve Ticaret Limited Sirketi (c) Turkey Tartarin S.A. France White Queen Ltd. England
- ------------------ (a) 49% ownership (b) 75% ownership (c) 60% ownership 52 -----END PRIVACY-ENHANCED MESSAGE-----