-----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, AKcEIhK4wPOkZClaIOzMzNpXzSP0VoAspJOM1DLCNMlUbakGJm9wMDefLn1luD7Z uw6lMbHNabxTWDt2M4MvHg== 0000950128-04-000334.txt : 20040326 0000950128-04-000334.hdr.sgml : 20040326 20040326150130 ACCESSION NUMBER: 0000950128-04-000334 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18339 FILM NUMBER: 04692673 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-K 1 j0500401e10vk.txt SYLVAN, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 28, 2003 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 SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None Not applicable
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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of voting stock held by non-affiliates of the registrant at June 29, 2003 (the last day of the registrant's second fiscal quarter of 2003) was approximately $35,190,000. As of that date, the last sale price of the registrant's common stock was $10.58 per share. Solely for purposes of this calculation, shares beneficially owned by directors and executive officers have been excluded. Indicated below is the number of shares outstanding of each of the registrant's classes of common stock as of March 11, 2004.
CLASS OUTSTANDING ----- ----------- Common Stock, par value $.001 per share 5,155,131
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH DOCUMENT THE DOCUMENT IS INCORPORATED -------- ---------------------------- Proxy Statement to Shareholders Part III, Items 10, 11, 12, 13 and 14
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 an international producer and distributor of products for the mushroom industry, specializing in spawn (the equivalent of seed for mushrooms) and spawn-related products and services, and is a major grower of fresh mushrooms in the United States. The company was organized as a Delaware corporation on March 27, 1989, under the name of Sylvan Foods Holdings, Inc. It became a Securities and Exchange Commission registrant in August 1990 pursuant to the irrevocable distribution by the company's then majority shareholder, The Prospect Group, Inc., of the shares of the company that it owned to its shareholders. The company changed its name to Sylvan Inc. in July 1994 in conjunction with the change of its state of incorporation to Nevada from Delaware. The company's principal executive offices are at 333 Main Street, P.O. Box 249, Saxonburg, PA 16056-0249. Sylvan has two reportable business segments: Spawn Products and Fresh Mushrooms. Spawn-related products include casing inoculum, nutritional supplements and disease-control agents. The Fresh Mushrooms Segment is comprised of Quincy Farms, a large, regional producer of fresh mushrooms, which operates in the southeastern part of the United States. Spawn Operations: Spawn products accounted for 69% of the company's total sales in 2003 and 76% of its operating income. Spawn is produced by introducing carefully maintained mushroom cultures into specific nutrient media to produce inoculum suitable for commercial spawn production. The inoculum is then combined with a sterile, grain-based substrate in a manner that promotes the colonization of the mushroom cultures throughout the substrate. The resulting culture-enriched substrate is measured into sterilized plastic bags and the filled bags are incubated in environmentally controlled growing rooms. Once the incubation is complete, the bags are refrigerated until they are shipped to customers who then initiate their crop production cycle by adding this seed-like material to the composted growing medium from which the mushrooms grow. The company conducts its operations through subsidiaries in North America, Europe, Australia and South Africa, and is a leading producer and distributor of mushroom spawn and various spawn-related products in each of the markets in which it has a presence. End-stage spawn production in most of the company's manufacturing facilities takes place in specialized pressure vessels in plants that are operated pursuant to rigorous quality-control standards. Two plants are located in the United States and one each in England, Ireland, the Netherlands, France, Hungary, Australia, South Africa and Canada. Sylvan's Dutch, Australian and Canadian plants function under arrangements whereby certain prominent mushroom growers in each respective country possess minority ownership of the operating company. In the course of examining site alternatives and operational factors relating to the construction of a spawn plant in these countries, the company undertook discussions with its mushroom-grower customers in each one. These discussions resulted in indications of interest on the part of some of these customers to become involved in the financing of the project in their country and participating in the plant's operation. As a result, 51% of the Australian production company, 25% of the Dutch production company, and 20% of the Canadian production company are owned by such growers. The company owns the remainder of each production company. 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 2 others, such as compost ingredients, pest-control agents and disease-control agents that are targeted for use by mushroom growers. The company's production experience and research capabilities lend themselves to a variety of commercially viable microbial production applications. Sylvan produces red yeast rice, a nutraceutical product which is sold at wholesale and retail levels, and is supplying a Japanese company with dried Agaricus mushrooms for use in a beverage that is marketed in the Far East. It also collaborates with chemical, biotechnological and pharmaceutical companies in the course of evaluating and promoting its capabilities beyond the mushroom industry. The value of backlog orders for biological products is insignificant. Fresh Mushrooms Operations: The Fresh Mushrooms Segment of Sylvan's business accounted for 31% of the company's total sales in 2003 and 24% of its operating income. Sylvan operates a mushroom farm located in Quincy, Florida, that is one of the most modern and efficient mushroom production operations in North America. The facility includes a computer-controlled production system and it serves a strategic role for Sylvan as a resource for production process innovations. Included as part of the Quincy operation are four satellite mushroom growing facilities; two commenced operations in mid-2001 and two commenced operations in early 2003. Each facility is leased to an independent third party. These parties are obligated to purchase their requirements of ready-to-grow mushroom compost from Quincy and to sell their crops of mushrooms to Quincy. Mushrooms are grown indoors in a continuous production process that employs a temperature- and humidity-controlled environment. Compost, produced from a carefully formulated and monitored mixture of hay or straw, water and various organic supplements, is pasteurized and spawn is added to it. The spawn colonizes the compost and, after about four to five weeks, grows into harvestable mushrooms that are packaged and shipped to customers. In January 2000, Sylvan began selling all of its mushrooms to a leading U.S. mushroom marketing organization, C And C Carriage Mushroom Company, trading as Modern Mushroom Sales Company and a wholly owned subsidiary of Modern Mushrooms, Inc., which packages and distributes them throughout the eastern United States. Prior to this contract, the mushrooms were sold to supermarkets, food processors and distributors in the mideastern and southeastern United States. The value of backlog orders for mushroom products is insignificant. PERSONNEL On December 28, 2003, Sylvan had approximately 890 full-time employees, of whom about 740 were engaged in production activities and 150 in supervision, sales and administration. On December 29, 2002, Sylvan had approximately 900 full-time employees, of whom about 745 were engaged in production activities and 155 in supervision, sales and administration. The employees of the company's French subsidiary are subject to a national, industry-wide collective bargaining agreement and to two facility collective bargaining agreements. In addition, harvesting and packaging employees of its Quincy subsidiary are subject to a collective bargaining agreement with the United Farm Workers. The remainder of the company's workforce is not subject to collective bargaining arrangements. Management believes that its employee relations are good. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The amounts of revenue, operating income and asset-related expenditures attributable to each of the company's industry segments are set forth in Note 8 of the consolidated financial statements that are included as part of this annual report. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The amounts of revenue and long-lived assets attributable to each of the company's geographic areas are set forth in Note 8 of the company's consolidated financial statements that are included as part of this annual report. 3 MAJOR CUSTOMER Most of Sylvan's Fresh Mushrooms Segment sales were to one customer. C And C Carriage Mushroom Company became the purchaser and marketer of the company's mushrooms beginning in January 2000. The $25.9 million, $24.1 million, and $23.0 million of fresh mushrooms that C And C purchased from the Quincy subsidiary for fiscal years 2003, 2002, and 2001, respectively, represented 27% of Sylvan's consolidated net sales for each year. 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. In addition, Amycel, Inc. (a division of Monterey Mushrooms, Inc.) is a major spawn producer in the United States and Europe. Much of Amycel's production in the United States is consumed by its mushroom production affiliates. In addition to Amycel, Sylvan believes that its other principal European competitors are Euromycel (France), Italspawn (Italy) and Le Lion (France). Numerous smaller spawn producers operate in the United States, Canada and in almost every European country. Sylvan competes in the spawn market with strict quality, consistency and reliability standards and through its availability of broad- based, post-sale product support services to mushroom growers. The company's microbial production applications compete with those of chemical, biotechnological and pharmaceutical companies worldwide. In particular, Chinese growers produce dried Agaricus mushrooms that are similar to those that Sylvan sells to a customer in Japan and are able to sell them at a price that is lower than Sylvan's. The red yeast rice wholesale and retail market is extremely competitive. In addition, its production and sales could be subject to additional regulatory pressures. Fresh Mushrooms: Sylvan believes that the top producer of mushrooms in the United States is currently Monterey Mushrooms, Inc. Sylvan's production levels are comparable to those of a group of 10 regional producers of substantial size. The balance of the U.S. industry is fragmented, comprised of 116 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. 4 RESEARCH In 2003, Sylvan's research and development expenditures totaled $1.5 million, as compared with $2.0 million in 2002 and $1.7 million in 2001. These expenditures were focused on improving the consistency, reliability and customer satisfaction for the company's existing products, the development of new products, and the support of Sylvan's bioproducts operations. The company also utilizes contracted research efforts for specific studies that may be commercially useful, but fall outside of the scope of its expertise or capabilities. None of these projects currently constitute a material proportion of the company's ongoing business. PATENTS The company does not believe that its ability to maintain or improve its competitive position is dependent upon its patents. However, the company holds several non-U.S. patents that cover a process and apparatus for the cultivation of cells on solid substrates. The patents were issued in various years from 1982 to 1986. In addition, Sylvan has patented several new mushroom strains, technologies and processes that facilitate mushroom breeding and may be capable of enhancing the company's strain development and improvement efforts. The company also holds two process patents relating to the production of its nutritional supplements that were issued in 1988 and 1991. The company possesses several Swiss patents that embody a process for commercially producing spawn and spawn-related products and using a variety of nutrient substrates as incubation material for spawn. The process is not currently employed by the company. 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. Quincy averaged approximately $50,000 per year over the past five years in environmental compliance costs. On September 23, 2003, the company's Sylvan Bioproducts, Inc. subsidiary received an administrative order from the Borough of Kennett Square, Pennsylvania, alleging that Sylvan Bioproducts failed to comply with certain wastewater sampling and reporting requirements under the terms of a water contribution permit issued to the company for its facility in Kennett Square. A fine of $105,109 was assessed by the order. The company believes that the requirements were substantially fulfilled and it filed an appeal to the Order on October 1, 2003. Discussions have been undertaken with the Borough and the company believes that the dispute will be resolved in a manner that will have no material impact on the company's financial statements or results of operations. MERGER DISCLOSURE DISCUSSION As previously announced on November 16, 2003, Sylvan entered into a definitive agreement with Snyder Associated Companies, Inc. of Kittanning, Pennsylvania, which will result in a merger between Sylvan and a Snyder affiliate. The Sylvan Board of directors, upon the unanimous recommendation of its special committee of independent directors, approved the merger and the agreement. The merger is subject to certain conditions, including the approval by a majority of the shareholders of Sylvan. Sylvan expects to be able to convene a meeting of its shareholders for that purpose in the second quarter of 2004 and, if approved by Sylvan's shareholders, the transaction is expected to be completed shortly thereafter. The merger agreement currently provides for a termination date of May 1, 2004 if the merger has not been completed by that date. The company intends to discuss an extension of this date with Snyder Associated Companies, Inc. 5 FINANCIAL INFORMATION Information regarding Sylvan's financial performance is set forth herein beginning on page 21. AVAILABILITY OF INFORMATION ON THE COMPANY'S WEBSITE Sylvan maintains a multipurpose Internet website. Its address is www.sylvaninc.com. A link to a third-party SEC filings website is maintained on the Sylvan website with access provided through the "Investors" tab. The company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports that are filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available as soon as they are posted by the SEC. In addition, individuals wanting copies of the company's annual report to shareholders and any other reports filed or furnished by the company with the SEC may request copies. The reports will be furnished free of charge. Requests should be made in writing to the company at P.O. Box 249, Saxonburg, PA 16056-0249. ITEM 2. PROPERTIES The following table lists by business segment the locations and floor areas of Sylvan's principal operating properties. The company believes that each of these properties is in good condition and suitable for the purposes for which they are being utilized. Although it is not specifically detailed below, various production facilities are used from time to time by the bioproducts division, based on the nature of the work to be performed and the availability of production capacity. SPAWN PRODUCTS SEGMENT
ACQUIRED/ EXPANDED/ LOCATION FLOOR AREA (FT.(2)) CONSTRUCTED RENOVATED ---------------------------- ------------------- ----------- --------- Spawn production: Kittanning, Pennsylvania 50,000 1981 2001 Dayton, Nevada 46,000 1992 2001 Langeais, France 115,000 1991 -- Yaxley, England 74,000 1992 1995 Horst, the Netherlands 54,500 1994 1997 Budapest, Hungary 29,000 1997 -- Navan, Ireland 26,000 1998 1999 Pretoria, South Africa 17,000 1999 -- Windsor, Australia 12,000 1996 -- Leamington, Ontario, Canada 26,000 2001 -- Inoculum production and research: Kittanning, Pennsylvania 18,000 1996 2001 Langeais, France 15,000 1998 -- Spawn distribution: Kennett Square, Pennsylvania 41,000 1999 2002 Quality assurance: Kittanning, Pennsylvania 20,000 1997 -- Langeais, France 12,000 1991 -- Compost supplement production: Des Moines, Iowa 18,000 1997 -- Mushroom casing production: Budapest, Hungary 20,000 2000 -- FRESH MUSHROOMS SEGMENT Fresh mushroom production, including satellite farms: Quincy, Florida 465,000 1981 2002
The spawn plants in the Netherlands, Australia and Canada are owned by the company along with joint venture partners in each country. The company is the sole owner of the remainder of its principal operating properties, except for the plants in Des Moines, Iowa, and Budapest, Hungary (the mushroom casing 6 production facility), which are leased, and the land on which the plants in Ireland and South Africa are located. The company also leases small administrative offices in Pennsylvania, California, and Switzerland, and some supplemental cold storage facilities that serve several North American and overseas market areas. The lease for the facility in Iowa provides for a rental payment of $119,000 per year, with a month-to-month term. The land lease for the plant in Ireland terminates in 985 years. Based on current exchange rates, the annual lease payments approximate $2,000. The lease for the buildings that house Sylvan's mushroom casing production operation in Hungary expires in September 2005 and is renewable for succeeding five-year terms. The current annual rent is approximately $93,000. The land lease for the South African plant terminates in 2048 and is renewable for additional ten-year terms thereafter. Based on current exchange rates, the current annual lease payment approximates $4,500. Payments under this lease increase approximately $200 per year throughout the term. The company also owns four satellite mushroom growing facilities in Quincy, Florida, that are leased to and operated by independent third parties. Construction loans relating to the plants in Ireland and the Netherlands have been collateralized with mortgages. ITEM 3. LEGAL PROCEEDINGS On November 17, 2003, a complaint was filed in the District Court, Clark County, Nevada, by Alan Kahn, an alleged shareholder, on behalf of himself and purportedly on behalf of similarly situated shareholders. The case has been transferred by stipulation to the District Court, Washoe County, Nevada. The complaint alleges generally that Sylvan and its directors breached their fiduciary and other duties to the plaintiff, by entering into the merger agreement with Snyder Associated Companies, Inc. that the company announced in November 2003. The complaint further alleges that by entering into the merger agreement, Sylvan and its directors failed to disclose material non-public information relating to the valuation of Sylvan's assets, the extent of future earnings and expected increases of profitability. The plaintiff seeks the following relief: (a) an order that the action be certified as a class action; (b) a declaration that the defendants have breached their fiduciary and other duties; (c) an order requiring the defendants to undertake measures to assess Sylvan's net worth; and (d) an injunction enjoining the consummation of the merger. Sylvan is vigorously defending these allegations. On January 22, 2004, Sylvan filed a motion to dismiss the complaint for failure to state a claim upon which relief may be granted. The plaintiff filed a brief in opposition to Sylvan's motion to dismiss on February 19, 2004. Sylvan filed a reply to plaintiff's brief in opposition on March 12, 2004. The motion is pending before the Court. On September 23, 2003, the company's Sylvan Bioproducts, Inc. subsidiary received an administrative order from the Borough of Kennett Square, Pennsylvania, alleging that Sylvan Bioproducts failed to comply with certain wastewater sampling and reporting requirements under the terms of a water contribution permit issued to the company for its facility in Kennett Square. A fine of $105,109 was assessed by the order. The company believes that the requirements were substantially fulfilled and it filed an appeal to the Order on October 1, 2003. Discussions have been undertaken with the Borough and the company believes that the dispute will be resolved in a manner that will have no material impact on the company's financial statements or results of operations. There are no other 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 There were no matters submitted to a vote of security holders during the three months ended December 28, 2003. However, Sylvan Inc.'s annual meeting of shareholders was held on December 29, 2003. At the meeting, the following individuals, constituting the full board, were elected directors of the company to serve for a term of one year, expiring in 2004. 7
NUMBER OF VOTES -------------------- FOR WITHHELD --------- -------- William L. Bennett.......................................... 3,577,417 39,325 Monir K. Elzalaki........................................... 3,235,248 381,494 Jeanine C. Heller........................................... 3,235,131 381,611 Virgil H. Jurgensmeyer...................................... 3,577,417 39,325 Nelson Obus................................................. 3,556,917 59,825 Dennis C. Zensen............................................ 3,235,248 381,494
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.
NAME AGE POSITION - ---- --- -------- Dennis C. Zensen............ 65 Chairman of the Board, President and Chief Executive Officer of Sylvan Donald A. Smith............. 42 Chief Financial Officer of Sylvan Fred Y. Bennitt............. 59 Secretary/Treasurer of Sylvan Monir K. Elzalaki........... 48 President of Sylvan America, Inc. Gregory J. Verhagen......... 43 President of Quincy Farms Gary D. Walker.............. 56 President of Sylvan Bioproducts, Inc. Michael A. Walton........... 54 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 its general manager since May 1999. For four years prior to that time, he served in various senior management positions for Money's Mushrooms, Ltd. Mr. Walker was appointed president of Sylvan Bioproducts in 1998, after serving as manager and developer of the company's bioproducts business since the beginning of 1994. He joined Sylvan in 1992 and served as president of its Moonlight subsidiary until its closure in December 1993. Mr. Walton was named managing director of Sylvan's European operations in 1995. He joined Sylvan in connection with its acquisition of Hauser Champignonkulturen AG in June 1992. At the time, he was serving as managing director of Hauser's UK subsidiaries and continued in that capacity until his present appointment. 8 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 2003 and 2002, as reported by The Nasdaq Stock Market.
2003 HIGH PRICE LOW PRICE ---- ---------- --------- 1st Qtr..................................................... $10.65 $8.85 2nd Qtr..................................................... 11.50 9.37 3rd Qtr..................................................... 10.61 9.85 4th Qtr..................................................... 12.25 9.75
2002 HIGH PRICE LOW PRICE ---- ---------- --------- 1st Qtr..................................................... $12.30 $11.05 2nd Qtr..................................................... 13.26 11.21 3rd Qtr..................................................... 14.00 11.69 4th Qtr..................................................... 12.23 10.18
(b) Holders of Common Equity As of March 8, 2004, there were approximately 800 shareholders of record of Sylvan common stock. (c) Dividends Sylvan has never paid and does not intend to pay cash dividends in the future. The company currently has a policy of retaining its earnings to fund operations, expansion and the purchase of treasury shares. The company's revolving credit agreement contains financial covenants that permit, but limit, the payment of dividends by Sylvan. 9 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. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
FISCAL YEAR ENDED -------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (IN MILLIONS EXCEPT SHARE DATA) INCOME STATEMENT DATA: Net sales...................... $ 95.0 $ 88.2 $ 85.9 $ 85.9 $ 89.8 Operating income............... 5.7 9.1 11.0 11.5 10.6 Net income..................... 2.8 4.7 5.8 6.7 6.1 Net income per common share -- basic (1)................... 0.55 0.86 1.06 1.18 1.00 Net income per common share -- diluted (1)................. 0.55 0.86 1.05 1.18 1.00 Weighted average shares -- basic............. 5,140,322 5,402,859 5,500,799 5,658,860 6,112,007 Weighted average shares -- diluted........... 5,163,852 5,454,700 5,551,673 5,665,974 6,130,694 BALANCE SHEET DATA: Total assets................... $ 113.9 $ 106.8 $ 107.1 $ 105.8 $ 109.5 Long-term debt and other long- term liabilities............ 44.0 48.0 43.8 46.1 50.4 Shareholders' equity........... 57.0 47.3 50.9 49.5 47.2 Working capital................ 26.9 24.6 23.2 23.0 22.8 Net cash provided by operations.................. 9.8 12.7 10.7 9.7 13.0 Net cash used in investing..... 3.1 6.1 8.7 6.2 12.2 Net cash (used in) provided by financing................... (7.6) (6.8) (1.8) (5.2) 1.4 Cash dividends per common share....................... -- -- -- -- --
- --------------- (1) Earnings per share for the year may be different than the sum of the quarterly earnings per share due to rounding. QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- (UNAUDITED, IN THOUSANDS EXCEPT SHARE DATA) 2003: Net sales.................................. $ 22,382 $ 23,587 $ 23,822 $ 25,197 Gross profit............................... 8,591 8,548 8,683 9,699 Net income................................. 833 467 839 700 Net income per common share -- basic....... 0.16 0.09 0.16 0.14 Net income per common share -- diluted..... 0.16 0.09 0.16 0.14 Weighted average shares -- basic........... 5,131,131 5,132,345 5,144,131 5,153,680 Weighted average shares -- diluted......... 5,144,419 5,161,591 5,160,833 5,191,580 2002: Net sales.................................. $ 20,918 $ 21,388 $ 22,275 $ 23,610 Gross profit............................... 8,840 8,834 8,663 9,745 Net income................................. 1,216 985 1,109 1,360 Net income per common share -- basic....... 0.22 0.18 0.20 0.26 Net income per common share -- diluted..... 0.22 0.18 0.20 0.25 Weighted average shares -- basic........... 5,432,052 5,435,171 5,439,697 5,304,318 Weighted average shares -- diluted......... 5,481,924 5,499,634 5,502,408 5,334,800
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS COMPARISON OF 2003 WITH 2002 NET SALES Net sales for 2003 were $95.0 million, a $6.8 million increase from the $88.2 million for 2002. Net sales in the Fresh Mushrooms Segment increased $4.0 million and net sales in the Spawn Products Segment increased $2.8 million. On average, the U.S. dollar was approximately 16.9% weaker in 2003, when measured against the company's applicable foreign currencies, than in 2002. The effect of this weakening increased net sales during 2003, as compared with 2002, by approximately $6.0 million. International sales, as a percentage of net sales, were 48.9% in 2003 and 48.7% in 2002. Spawn Products: Net sales of spawn and spawn-related products were $66.8 million, as compared with $64.0 million for 2002. Foreign currency translation fluctuations had the effect of increasing sales on a year-over-year comparison by $6.0 million. Sales of disease-control agents and nutritional supplements decreased $0.5 million, or 2.9%, and accounted for 16.1% of Sylvan's consolidated net sales. Spawn product sales volume decreased 4.6%, with a 6.8% decrease in overseas markets and a 0.5% decrease in the Americas, decreasing net sales by $2.0 million. Most of the volume decrease in the overseas markets was associated with a reduction in sales in France due to competitive conditions and in the United Kingdom due to mushroom farm closures. The average local market price in international locations decreased 2.2% due to lower volumes sold in territories with higher selling prices. The effect of this territorial shift in 2003 was a decrease in net sales of approximately $0.6 million. The average overseas U.S. dollar equivalent selling price was 17.1% higher during 2003, as compared with 2002, due to the weakening of the U.S. dollar. The selling price in the Americas decreased 5.3% in 2003, as compared with 2002, due to adjustments in the pricing structure of some products in order to compete with the lower-priced offerings of other suppliers. Net sales of the bioproducts division increased $1.4 million, from $1.3 million in 2002 to $2.7 million in 2003, primarily due to sales growth for the dried Agaricus mushroom product. On August 15, 2003, the U.S. Department of Agriculture released its annual statistical report on mushrooms covering the fiscal year July 2002 through June 2003. The Department reported that the amount of Agaricus growing area planted was virtually equal to the prior fiscal year and was 2.1% lower than the fiscal year ended June 2001. Fresh Mushrooms: Net sales of fresh mushrooms increased 15.7% during 2003 to $29.5 million, as compared with $25.5 million for 2002. This increase in sales was primarily due to three factors. The completion of two additional satellite farms caused sales of ready-to-grow mushroom compost to increase from $1.3 million in 2002 to $3.6 million in 2003. Also, Quincy experienced a 5.2% increase in the number of pounds sold and a 2.3% higher selling price per pound. COST OF SALES The company's cost of sales, expressed as a percentage of net sales, was 62.6% for 2003 and 59.1% for 2002. Lower margins were experienced in the Fresh Mushrooms Segment and in the Spawn Products Segment. Spawn Products: The cost of sales, as a percentage of net sales, was 56.8% for 2003, as compared with 54.0% for 2002. Spawn production during 2003 was 5.8% lower than for 2002, spreading costs that are primarily fixed in nature over fewer units. The overall discard rate for spawn production was 5.8% in 2003 and 4.8% in 2002. Fresh Mushrooms: The cost of sales percentage was 72.9% for 2003 and 68.9% for 2002. The cost of sales percentage increased due to an increase in the purchase and immediate resale of mushrooms from the satellite farms which provide a small gross margin. Quincy purchased approximately $6.9 million of high-quality mushrooms from its satellite farms in 2003, as compared with $2.9 million in 2002, which were 11 immediately resold to its third-party marketer. The segment's operating income in 2003 was virtually equal to 2002. The positive performance of the company's satellite farms, as well as the sale of ready-to-grow mushroom compost to the satellite farms, helped minimize the adverse effect of higher labor costs. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased to $22.1 million, or 23.3% of net sales, as compared with $19.4 million, or 22.0%, for 2002. This increase consisted primarily of $1.4 million in professional fees related to merger activities, and was partially offset by a $0.4 million decrease in salaries and benefits expense that resulted from staffing reductions. In addition, the weakening of the U.S. dollar had the effect of increasing selling and administrative expenses by $1.1 million during 2003, as compared with 2002. The variance also included an increase over the prior year of $0.8 million, from a benefit of $0.1 million in 2002 to an expense of $0.7 million in 2003, in net periodic benefit expense related to the pension plan of a former subsidiary. The net periodic pension expense for 2004 is expected to be $0.5 million. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased 22.3% in 2003 to $1.5 million, when compared with $2.0 million in 2002, primarily due to the assignment of some of European personnel to the performance of quality control duties, which is included in cost of sales. The company expects Research and Development expenses for 2004 to be similar to 2003 expenditures. DEPRECIATION EXPENSE Depreciation expense was $6.1 million in 2003, an increase of 9.5% over the $5.6 million reported for 2002. Most of this increase related to the relatively weaker U.S. dollar. OPERATING INCOME Operating income decreased $3.4 million, from $9.1 million in 2002 to $5.7 million in 2003, as a result of the cumulative effects of the items discussed above. Also, the weakening of the U.S. dollar had the effect of increasing operating income by approximately $0.9 million in 2003. INTEREST EXPENSE Net interest expense for 2003 was $1.6 million, 16.4% lower than the interest expense recorded for 2002. This decrease in interest expense was mainly the result of a corresponding decrease in outstanding debt levels, which dropped from $38.4 million in 2002 to $33.7 million in 2003. Also, the effective interest rate for 2003 was 4.4%, as compared with 5.0% for 2002. During 2003, the company recorded other comprehensive income of $175,000 net of tax related to hedge instruments under SFAS No. 133. In 2003, the company had variable- to-fixed interest rate swaps in place to manage interest rate risk that increased the average borrowing rate 1.6%. Swaps increased the average borrowing rate 1.5 % in 2002. INCOME TAX EXPENSE The company's overall effective tax rate for 2003 was 33.0%. The effective tax rate for 2002 was 33.5%. The lower effective tax rate for 2003 was the result of a smaller portion of the company's taxable income being derived from higher tax-rate jurisdictions. Included in net deferred tax liabilities as of December 28, 2003 are unrealized tax benefits amounting to approximately $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. The life of the carryforwards is determined by various foreign and state taxation jurisdictions. Approximately $0.3 million of the net operating losses has an indefinite carryforward period. The remaining $2.0 million of net operating losses will expire between 2004 and 2018. The company has recognized a valuation allowance of $1.6 million 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. 12 RESULTS OF OPERATIONS COMPARISON OF 2002 WITH 2001 NET SALES Net sales for 2002 were $88.2 million, a $2.3 million increase from the $85.9 million for 2001. Net sales in the Fresh Mushrooms Segment increased $1.9 million and net sales in the Spawn Products Segment increased $0.4 million. On average, the U.S. dollar was approximately 4.5% weaker in 2002, when measured against the company's applicable foreign currencies, than in 2001. The effect of this weakening increased net sales, as compared with 2001, by approximately $2.4 million. International sales, as a percentage of net sales, were 48.7% in 2002 and 50.2% in 2001. Spawn Products: Net sales of spawn and spawn-related products were $64.0 million, as compared with $63.6 million for 2001. Foreign currency translation fluctuations had the effect of increasing sales on a year-over-year comparison by $2.4 million. Sales of disease-control agents and nutritional supplements increased $1.5 million, or 10.9%, and accounted for 17.9% of Sylvan's consolidated net sales. Spawn product sales volume decreased 3.7%, with a 6.7% decrease in the Americas and a 2.0% decrease in overseas markets, decreasing net sales by $1.9 million. The volume decrease in the Americas related to the continued changing of market conditions in the mushroom industry, which began in 2001 and increased competitive pressures. The volume decreases in the overseas markets were related to the closure of mushroom farms in the United Kingdom and a reduction in plantings during the fourth quarter of 2002 in the Netherlands. The average local market price in international locations decreased 1.9% due to lower volumes sold in territories with higher selling prices. The effect of this territorial shift in 2002 was a decrease in net sales of approximately $0.7 million. The average overseas U.S. dollar equivalent selling price was 3.4% higher during 2002, as compared with 2001, due to the weakening of the U.S. dollar. The selling price in the Americas was essentially unchanged. Net sales of the bioproducts division decreased $0.7 million due to increased Chinese competition for sales of a specialized variety of mushroom. In its annual statistical report on mushrooms covering the fiscal year July 2001 through June 2002, the U.S. Department of Agriculture reported that the amount of Agaricus growing area planted was virtually equal to the prior fiscal year and 9.6% lower than the fiscal year ended June 2000. Sylvan experienced additional price and payment-term competition in the United States during the second half of 2001 coinciding with the reduction in the growing area planted. The competitive situation intensified during the second half of 2002. Fresh Mushrooms: Net sales of fresh mushrooms increased 8.1% during 2002 to $25.5 million, as compared with $23.6 million for 2001. This increase was due to a 4.3% increase in the number of pounds sold and a 0.6% higher selling price per pound. Quincy Farms generated an increase in its yield per square foot and an improvement in the quality of its mushrooms. The first two satellite farms, which commenced operations during the second quarter of 2001, purchased $1.3 million of ready-to-grow mushroom compost and sold approximately $3.0 million of high-quality mushrooms to Quincy for immediate resale to its third-party marketer. In December 2002 and January 2003, Quincy completed two additional satellite farms. Satellite farms are independently owned small scale mushroom growing and harvesting facilities. The compost that they use to grow their mushrooms is prepared, seeded, transported and sold to them by Quincy, but they are geographically separated from the Quincy operation. The mushrooms are harvested by the operators of the satellite facilities and transported to the Quincy site where they are purchased from the operators and packaged and distributed by C And C Carriage (Modern Mushrooms). COST OF SALES The company's cost of sales, expressed as a percentage of net sales, was 59.1% for 2002 and 58.0% for 2001. Lower margins were experienced in the Fresh Mushrooms Segment and in the Spawn Products Segment. Spawn Products: The cost of sales, as a percentage of net sales, was 54.0% for 2002, as compared with 53.2% for 2001. Spawn production during 2002 was 4.0% lower than for 2001, spreading costs that are 13 primarily fixed in nature over fewer units. The company also increased sales of disease-control agents and nutritional supplements, which have a lower margin than mushroom spawn. The overall discard rate for spawn production was 4.8% in 2002 and 5.8% in 2001. Fresh Mushrooms: The cost of sales percentage was 68.9% for 2002 and 67.7% for 2001. The cost of sales percentage increased due to an increase in the purchase and immediate resale of mushrooms from the satellite farms which provide a small gross margin. However, Quincy was able to improve yield efficiencies and increase operating income in 2002. In addition, the sale of ready-to-grow mushroom compost to the satellite farms contributed to the improved financial performance. The cost of sales percentage is expected to increase for 2003 correlating to the increase in the purchase and immediate resale of mushrooms from the satellite farms, but the company anticipates an increase in operating income related to this structure. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased to $19.4 million, or 22.0% of net sales, as compared with $18.0 million, or 21.0%, for 2001. Of the increase in selling and administrative expenses for 2002 versus 2001, $1.1 million consisted primarily of a $0.4 million increase in the allowance for doubtful accounts, a $0.4 million increase in salaries, benefits and insurance, and an approximately $0.3 million increase for professional fees related to the strategic evaluation completed during 2002. In addition, the weakening of the U.S. dollar had the effect of increasing selling and administrative expenses by $0.3 million during 2002, as compared with 2001. The company also recorded $0.2 million of net periodic benefit income during 2002 from a pension plan of a former subsidiary. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased 14.2% in 2002 to $2.0 million, when compared with $1.7 million in 2001. The company increased mushroom breeding activities during 2002 in cooperation with a Dutch research organization. DEPRECIATION EXPENSE Depreciation expense was $5.6 million in 2002, an increase of 5.0% over the $5.4 million reported for 2001. Most of this increase related to the relatively weaker U.S. dollar. OPERATING INCOME Operating income decreased $1.9 million, from $11.0 million in 2001 to $9.1 million in 2002, as a result of the cumulative effects of the items discussed above. Also, the weakening of the U.S. dollar had the effect of increasing operating income by approximately $0.2 million in 2002. INTEREST EXPENSE Net interest expense for 2002 was $1.9 million, 26.3% lower than the interest expense recorded for 2001. The effective interest rate for 2002 was 5.0%, as compared with 6.7% for 2001. Also during 2002, the company recorded interest income of $12,000 related to hedge instruments under SFAS No. 133. During 2002, the company had variable-to-fixed interest rate swaps in place to manage interest rate risk that increased the average borrowing rate 1.5%. During 2001, swaps increased the average borrowing rate 0.6%. INCOME TAX EXPENSE The company's overall effective tax rate for 2002 was 33.5%. The effective tax rate for 2001 was 29.5%. The higher effective tax rate for 2002 was the result of a larger portion of the company's taxable income being derived from higher tax-rate jurisdictions. 14 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. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk on page 19 for a discussion of management of foreign currency and interest rate risk. Available credit under the company's $50.0 million revolving credit agreement was $17.6 million as of December 28, 2003. The agreement originally provided for a total credit amount of $55.0 million with a $5.0 million reduction of the total credit amount in 2003 and an additional $5.0 million reduction in 2004. Net cash provided by operating activities was $9.8 million in 2003, as compared with $12.7 million in 2002 and $10.7 million for 2001. During the first quarter of 2002, the company reduced "Other Current Assets" by approximately $2.2 million due to the release of cash that had been collateralized to support a loan from a European bank. This loan was repaid in the first quarter of 2002. Cash used in investing activities was $3.1 million for 2003, as compared with $6.1 million and $8.7 million during 2002 and 2001, respectively. Most of the cash used in investing activities was for capital expenditures, net of proceeds from the sale of assets, which totaled $3.1 million in 2003, $6.1 million in 2002 and $8.6 million in 2001. The majority of the growth capital expenditures for 2003 were related to Quincy's satellite farms ($0.4 million). Maintenance capital for 2003 was $2.6 million. Net capital expenditures in 2004 are not expected to exceed $4.0 million for existing operations, with additional expenditures as may be required for acquisitions or new initiatives. During 2003, cash of $7.6 million was used in financing activities, as compared with $6.8 million and $1.8 million during 2002 and 2001, respectively. Net payments to reduce debt and revolving credit obligations were $7.9 million in 2003, as compared with $3.6 million in 2002 and $0.7 million in 2001. The decreases in outstanding debt related primarily to the positive cash flows from operations in excess of capital additions. Sylvan purchased 333,321 and 107,271 shares of its stock at average prices of $10.60 and $11.37 during 2002 and 2001, respectively. During 2003, the company purchased no shares of Sylvan stock. The three-year stock buyback program to purchase a total of 1.3 million shares, that was instituted in the fourth quarter of 2002, was suspended in 2003. 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 2004 capital expenditures. Sylvan has never paid and does not intend to pay cash dividends in the future. The company currently has a policy of retaining its earnings to fund operations, expansion and the purchase of treasury shares. The company's revolving credit agreement contains financial covenants that permit, but limit, the payment of dividends by Sylvan. 15 CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS Below are tables that summarize the company's contractual obligations and commercial commitments on December 28, 2003:
PAYMENTS DUE BY PERIOD ----------------------------------------------------- LESS THAN AFTER TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS ------- --------- --------- --------- ------- (IN THOUSANDS) Contractual Obligations: Long-Term Debt................................ $33,658 $ 110 $32,917 $148 $483 Interest on Long-Term Debt.................... 2,539 1,392 918 95 134 Capital Lease Obligations..................... -- -- -- -- -- Operating Lease Obligations................... 1,660 738 804 100 18 Purchase Obligations.......................... 733 733 -- -- -- Other Long-Term Obligations................... 872 235 220 200 217 Research Contract............................. 1,011 301 609 101 -- ------- ------ ------- ---- ---- TOTAL CONTRACTUAL CASH OBLIGATIONS............ $40,473 $3,509 $35,468 $644 $852 ======= ====== ======= ==== ====
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ---------------------------------------------------- LESS THAN AFTER TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS ------ --------- --------- --------- ------- Other Commercial Commitments: Standby Letter of Credit........................ $1,000 $-- $1,000 $-- $--
The tables above include all the company's contractual obligations and off-balance sheet arrangements and associated interest when appropriate. The company used contractual and variable interest rates existing at December 28, 2003 to determine interest obligations associated with Long-Term Debt. The interest rates range from 2.5% to 8.5%. Variable interest rates are subject to changes based on interest rate market conditions. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 also requires enhanced disclosures in the company's interim and annual filings. The provisions of FIN 45 are effective for financial statements issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of both interim and fiscal years after December 15, 2002. The adoption of FIN 45 did not have a material impact on the company's financial statements or results of operations. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." In December 2003, the FASB revised FIN 46 to clarify certain provisions and modify its effective date. FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. It requires that companies determine whether a non-consolidated entity is a variable interest entity, as defined by FIN 46, and which company is the primary beneficiary of the variable interest entity's activities. The requirements of FIN 46 apply to all variable interest entities held no later than the end of the interim reporting period ending after March 15, 2004. Variable interest entities held in special purpose entities shall apply FIN 46 no later than the end of the reporting period ending after December 15, 2003. The company is currently evaluating the impact of this interpretation. 16 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain instances, and for hedging relationships designated after June 30, 2003. In addition, except in those certain instances, all provisions of this Statement should be applied prospectively. The application of SFAS No. 149 did not have a material effect on the company's financial statements or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The provisions of SFAS No. 150 require issuers to classify as liabilities, or assets in some circumstances, certain classes of freestanding financial instruments that embody obligations for the issuer. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the company's financial statements or results of operations. CRITICAL ACCOUNTING POLICIES The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates, and assumptions include the accounting for derivatives, environmental matters, the testing of goodwill and other intangible assets for impairment, pensions and other postretirement benefits, and tax matters. Management uses historical experience and all available information to make these judgments and estimates, and actual results will differ from those estimates and assumptions that are used to prepare the company's financial statements. Despite these inherent limitations, management believes that Management's Discussion and Analysis (MD&A) and the financial statements and related footnotes provide a fair presentation. A discussion of the judgments and uncertainties associated with accounting for derivatives can be found in Item 7A. Quantitative and Qualitative Disclosures about Market Risk. A summary of the company's significant accounting policies is included in Note 1 to the Consolidated Financial Statements, included herein. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company's operating results and financial condition. In addition to the significant accounting policies described in Note 1 to the Consolidated Financial Statements, the company believes the following discussion addresses its critical accounting policies: - the company recognizes revenue when the title and risk of loss of the goods pass to the customers at the time of shipment; - the company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of the company's customers were to deteriorate, resulting in an inability to make payments, additional allowances may be required; - the company writes down its inventory to the lower of cost (first-in, first-out method) or market, which includes an estimate for obsolete or excess inventory based upon assumptions about future demand and market conditions; and - the company monitors the recoverability of the carrying value of its long-lived assets. An impairment charge would be recognized when the expected net undiscounted future cash flows from an asset's use (including any proceeds from disposition) are less than the asset's carrying value, and the asset's carrying value exceeds its fair value. 17 In order to manage interest rate exposure, the company utilizes interest rate swaps under its fair value hedging strategy in order to convert a portion of its floating rate debt to fixed-rate basis. Accordingly, changes in the fair value of these derivatives, along with changes in the fair value of the hedged debt obligations that are attributable to the hedged risk, are recognized in current period earnings. Based on the amount of floating rate debt converted to fixed as of December 28, 2003, a variance of 10% in the related interest rate would cause annual interest expense related to this debt to change by approximately $50,000. The company is subject to various environmental laws and regulations that govern the discharge of wastewater, which may require that we investigate and remediate the effects of such discharge at our operations. Environmental liabilities are recorded when our liability is probable and the costs are reasonably estimable. The company's outstanding environmental liability at December 28, 2003 was $25,000. The company believes that an accounting estimate related to asset impairment is a "critical accounting estimate" as it is susceptible to change from period to period, because it requires management to make assumptions about cash flows over future years. These assumptions impact the amount of an impairment, which would have an impact on the income statement. Management's assumptions about future cash flows require significant judgment because actual operating levels have fluctuated in the past and are expected to do so in the future. Goodwill and indefinitely lived intangible assets are reviewed annually for impairment, or more frequently if impairment indicators arise. The company performs this annual impairment test in the fourth quarter of each fiscal year. The goodwill impairment test requires a comparison of the fair value of the company's reporting unit that has goodwill associated with its operations with its carrying amount, including goodwill. If this comparison reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all recognized and unrecognized assets and liabilities. The company believes that an accounting estimate related to the goodwill impairment is a "critical accounting estimate" because the underlying assumptions used for the discounted cash flow can change from period to period and these changes could cause a material impact to the income statement. Management's assumptions about discount rates, inflation rates and other internal and external economic conditions require significant judgment based on fluctuating rates and anticipated future revenues. Additionally, SFAS No. 142 requires that the goodwill be analyzed for impairment on an annual basis using the assumptions that apply at the time the analysis is updated. Other areas of significant judgments and estimates include the liabilities and expenses for pensions and other postretirement benefits. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability and the long-term rate of return on plan assets. The rate used to discount future estimated liabilities is determined considering the rates available at year-end on debt instruments that could be used to settle the obligations. Lowering the discount rate by 0.5% (from 6.10% to 5.60%) would increase the company's projected benefit obligation as of December 28, 2003 by approximately $2.1 million. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations and is generally applied to a five-year average market value of assets. Effective October 31, 2002, Sylvan reduced the assumption for the expected long-term return on plan assets to 8.5% from 9.0%. Pension expense increases as the expected long-term rate of return decreases. Therefore, had Sylvan assumed an expected long-term rate of return of 8.5% for all of 2002, the company's pension expense for 2002 would have been approximately $145,000 higher than the amount recorded. Sylvan is a global company and records an estimated liability for income taxes based on what it determines will likely be paid in the various tax jurisdictions in which it operates. Management uses its best judgment in the determination of these amounts; however, the liabilities ultimately realized and paid are dependent upon various matters and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the amount recorded. Included in net deferred tax liabilities as of December 28, 2003 are unrealized tax benefits amounting to approximately $2.3 million related to net operating loss carryforwards. The realization of these tax benefits is contingent on future taxable net income being generated 18 by certain foreign and domestic operations. The life of the carryforwards is determined by various foreign and state taxation jurisdictions. Approximately $0.3 million of the net operating losses has an indefinite carryforward period. The remaining $2.0 million of net operating losses will expire between 2004 and 2018. The company has recognized a valuation allowance of $1.6 million that reduces the carrying value of unrealized net deferred tax benefits relating to net operating loss carryforward to offset the deferred tax benefits that may not be realized. MERGER DISCLOSURE DISCUSSION As previously announced on November 16, 2003, Sylvan entered into a definitive agreement with Snyder Associated Companies, Inc. of Kittanning, Pennsylvania, which will result in a merger between Sylvan and a Snyder affiliate. The Sylvan Board of directors, upon the unanimous recommendation of its special committee of independent directors, approved the merger and the agreement. The merger is subject to certain conditions, including the approval by a majority of the shareholders of Sylvan. Sylvan expects to be able to convene a meeting of its shareholders for that purpose in the second quarter of 2004 and, if approved by Sylvan's shareholders, the transaction is expected to be completed shortly thereafter. The merger agreement currently provides for a termination date of May 1, 2004 if the merger has not been completed by that date. The company intends to discuss an extension of this date with Snyder Associated Companies, Inc. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risk from changes in foreign currency exchange rates and interest rates. In order to manage this risk, the company enters into various contracts and options. A discussion of accounting policies for derivative instruments is included in Note 1 to Sylvan's consolidated financial statements which are included herein. Foreign Currency Exchange Rate Risk: Note 8 of the consolidated financial statements sets forth revenues for three years based on the location of the company's customers. Sylvan has foreign currency exposures related to buying, selling and financing in currencies other than the U.S. dollar. This exposes the company's future earnings, assets, liabilities, cash flow and financial instruments that are denominated in foreign currencies. Sylvan believes that its most significant financial instrument rate exposure relates to its activities in Europe. As of December 28, 2003, the net fair value liability of euro denominated financial instruments was approximately $11.1 million. The potential fair value loss of a hypothetical 10% adverse change in the currency exchange rate would be approximately $1.1 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 28, 2003 of all financial instruments subject to interest rate exposures was approximately $32.4 million. The table below provides information about the company's financial instruments that are sensitive to interest rates. For debt obligations, the table presents principal cash flow and related weighted average interest rates according to their expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates according to their expected maturity dates. Weighted average interest rates are based on the LIBOR rate in effect at the reporting date. No future rate assumptions have been made. The average received rate for interest 19 rate swaps in 2003 was 1.24%, as compared with 1.60% for 2002. This decrease was the result of market rate reductions.
EXPECTED MATURITY DATE FOR PERIODS ENDED DECEMBER -------------------------------------------------------------------------------- 2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE ------ ------- ------- ------- ----- ---------- ------- ---------- (IN THOUSANDS) Liabilities Long-term debt Fixed rate........... $ 110 $ 456 $ 74 $ 74 $ 74 $483 $ 1,271 $ 1,271 Average interest rate............... 6.20% 6.66% 6.20% 6.20% 6.20% 6.20% Variable rate........ -- 32,387 -- -- -- -- $32,387 $32,223 Average interest rate............... -- 2.81% -- -- -- -- Interest rate swaps Fixed-to-variable rate............... $5,000 $10,000 $15,000 $(1,029) Average pay rate..... 1.35% 5.48% 3.65% Average receive rate............... 1.18% 1.27%
FORWARD-LOOKING AND CAUTIONARY STATEMENTS From time to time in this annual report, references are made to expectations capable of influencing Sylvan's future financial performance, such as the profit contribution and cost of sales impact of the satellite farms, changes in capital expenditures and in research and development expenditures, the continuation of the company's share purchase program, cash flows from operations and bank borrowings, and future interest rate sensitivity. Events could turn out to be significantly different from what is expected. The following factors, among others, in some cases have affected and in the future could affect the company's financial performance and could cause actual results to differ materially from those expressed or implied in such forward-looking statements: - pricing or product initiatives of the company's competitors; - changes in exchange risks with respect to currencies used in the company's markets; - the loss of key executives or other employees of the company; - failure to achieve production yield expectations; - the loss of a major customer; - market-driven fluctuations of the asset values in the defined benefit plan of a former subsidiary of the company; and - acts of terrorism, war or concerns of the public about such acts or threats of such acts. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Sylvan Inc: We have audited the accompanying consolidated balance sheets of Sylvan Inc. and subsidiaries (the Company) as of December 28, 2003 and December 29, 2002, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule for the years ended December 28, 2003 and December 29, 2002 listed in the index in Item 15(a) of this Registration Statement. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements and schedule of Sylvan Inc. and subsidiaries as of December 30, 2001, and for the year then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and schedule in their reports dated February 1, 2002. 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 financial statements referred to above present fairly, in all material respects, the financial position of Sylvan Inc. and subsidiaries as of December 28, 2003 and December 29, 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Also in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As more fully discussed in Note 1 to the consolidated financial statements, effective December 31, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). As discussed above, the consolidated financial statements of Sylvan Inc. as of December 30, 2001, and for the year then ended were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142, which was adopted by the Company as of December 31, 2001. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustment to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill as a result of initially applying Statement No. 142 to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings per share amounts. In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole. /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania February 2, 2004 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 This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the company's Annual Report on Form 10-K for the year ended December 30, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this Annual Report Form 10-K. See Information Regarding the Consent of Arthur Andersen LLP (page 47) for further discussion. 22 SYLVAN INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DEC. 28, 2003 DEC. 29, 2002 -------------- -------------- (IN THOUSANDS EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 5,849 $ 5,624 Trade accounts receivable, net of allowance for doubtful accounts of $1,059 and $795, respectively.............. 15,901 14,399 Inventories............................................... 12,514 11,425 Prepaid income taxes and other expenses................... 1,868 1,495 Other current assets...................................... 1,468 1,494 -------- -------- TOTAL CURRENT ASSETS................................... 37,600 34,437 -------- -------- Property, Plant and Equipment: Land and improvements..................................... 4,420 3,987 Buildings................................................. 48,034 43,699 Equipment................................................. 63,760 56,895 -------- -------- 116,214 104,581 Less -- Accumulated depreciation............................ (55,080) (45,794) -------- -------- TOTAL PROPERTY, PLANT AND EQUIPMENT, NET............... 61,134 58,787 -------- -------- INTANGIBLE ASSETS, net of accumulated amortization of $5,472 and $4,691, respectively.................................. 13,999 12,321 OTHER ASSETS, net of accumulated amortization of $694 and $597, respectively........................................ 1,132 1,261 -------- -------- TOTAL ASSETS........................................... $113,865 $106,806 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt......................... $ 110 $ 223 Accounts payable -- trade................................. 5,739 3,895 Accrued salaries, wages and employee benefits............. 2,649 2,771 Other accrued liabilities................................. 1,164 1,413 Income taxes payable...................................... 999 1,545 -------- -------- TOTAL CURRENT LIABILITIES.............................. 10,661 9,847 -------- -------- LONG-TERM AND REVOLVING-TERM DEBT........................... 33,548 38,162 -------- -------- Other Long-Term Liabilities: Other employee benefits................................... 10,208 9,538 Other..................................................... 230 256 -------- -------- TOTAL OTHER LONG-TERM LIABILITIES...................... 10,438 9,794 -------- -------- MINORITY INTEREST........................................... 2,195 1,741 Shareholders' Equity: Common stock, voting, par value $.001, 10,000,000 shares authorized, 6,752,405 and 6,728,405 shares issued in 2003 and 2002, respectively............................ 7 7 Additional paid-in capital................................ 17,524 17,284 Retained earnings......................................... 67,804 64,965 Less -- Treasury stock, at cost, 1,597,274 shares in 2003 and 2002.................................................. (16,669) (16,669) -------- -------- 68,666 65,587 Accumulated other comprehensive loss........................ (11,643) (18,325) -------- -------- TOTAL SHAREHOLDERS' EQUITY............................. 57,023 47,262 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $113,865 $106,806 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 23 SYLVAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
2003 2002 2001 ---------- ---------- ---------- (IN THOUSANDS EXCEPT SHARE DATA) NET SALES................................................ $ 94,988 $ 88,192 $ 85,911 ---------- ---------- ---------- Operating Costs and Expenses: Cost of sales.......................................... 59,467 52,109 49,818 Selling and administrative............................. 22,134 19,416 18,006 Research and development............................... 1,526 1,965 1,721 Depreciation........................................... 6,179 5,642 5,375 ---------- ---------- ---------- 89,306 79,132 74,920 ---------- ---------- ---------- OPERATING INCOME......................................... 5,682 9,060 10,991 INTEREST EXPENSE, NET.................................... 1,560 1,865 2,532 OTHER INCOME (EXPENSE)................................... 417 (3) (19) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............................... 4,539 7,192 8,440 ---------- ---------- ---------- Provision for Income Taxes: Current................................................ 1,455 2,082 2,216 Deferred............................................... 43 324 274 ---------- ---------- ---------- 1,498 2,406 2,490 ---------- ---------- ---------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES........................................... 3,041 4,786 5,950 ---------- ---------- ---------- MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES........................................... 202 117 121 ---------- ---------- ---------- NET INCOME............................................... $ 2,839 $ 4,669 $ 5,829 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES................. 5,140,322 5,402,859 5,500,799 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES................................................. 5,163,852 5,454,700 5,551,673 ========== ========== ========== NET INCOME PER SHARE -- BASIC............................ $ 0.55 $ 0.86 $ 1.06 ========== ========== ========== NET INCOME PER SHARE -- DILUTED.......................... $ 0.55 $ 0.86 $ 1.05 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. 24 SYLVAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL COMMON PAID-IN RETAINED TREASURY ACCUMULATED OTHER SHAREHOLDERS' STOCK CAPITAL EARNINGS STOCK COMPREHENSIVE LOSS EQUITY ------ ----------- -------- -------- ------------------- ------------- (IN THOUSANDS EXCEPT SHARE DATA) 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 Net income................... -- -- 4,669 -- -- 4,669 Foreign currency translation adjustment................. -- -- -- -- 5,042 5,042 Unrealized losses on derivatives designated and qualified as cash flow hedges, net of tax......... -- -- -- -- (519) (519) Minimum pension liability adjustment, net of tax..... (9,512) (9,512) ------- Comprehensive loss....... (320) Exercise of 34,133 stock options and compensation expense, net of tax........ -- 229 -- -- -- 229 Purchase of treasury stock... -- -- -- (3,533) -- (3,533) ------ ------- ------- -------- -------- ------- BALANCE, Dec. 29, 2002....... 7 17,284 64,965 (16,669) (18,325) 47,262 Net income................... -- -- 2,839 -- -- 2,839 Foreign currency translation adjustment................. -- -- -- -- 6,884 6,884 Unrealized gains on derivatives designated and qualified as cash flow hedges, net of tax flow hedges, net of tax......... -- -- -- -- 175 175 Minimum pension liability adjustment, net of tax..... (377) (377) ------- Comprehensive income..... 9,521 Exercise of 24,000 stock options and compensation expense, net of tax........ -- 240 -- -- -- 240 ------ ------- ------- -------- -------- ------- BALANCE, Dec. 28, 2003....... $ 7 $17,524 $67,804 $(16,669) $(11,643) $57,023 ====== ======= ======= ======== ======== =======
The accompanying notes to consolidated financial statements are an integral part of these statements. 25 SYLVAN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
2003 2002 2001 ------- ------- ------- (IN THOUSANDS) CASH FLOWS FROM OPERATIONS: Net income................................................ $ 2,839 $ 4,669 $ 5,829 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization............................. 6,394 5,872 6,114 Employee benefits......................................... 140 216 373 Trade accounts receivable................................. (76) (152) (753) Inventories............................................... 81 (470) 1 Prepaid expenses and other assets......................... 138 3,008 (852) Accounts payable, accrued expenses and other liabilities............................................ 342 620 (35) Income Taxes Payable...................................... (126) (634) 152 Derivatives............................................... (200) (521) (336) Minority interest......................................... 261 108 157 Other..................................................... 35 22 29 ------- ------- ------- NET CASH PROVIDED BY OPERATIONS........................... 9,828 12,738 10,679 ------- ------- ------- CASH FLOWS FROM INVESTING: Expenditures for property, plant and equipment............ (3,109) (6,144) (8,744) Proceeds from sale of fixed assets........................ -- -- 145 Earn-out payment on prior period acquisition.............. -- -- (125) ------- ------- ------- NET CASH USED IN INVESTING................................ (3,109) (6,144) (8,724) ------- ------- ------- CASH FLOWS FROM FINANCING: Principal payments on long-term debt...................... (254) (2,393) (285) Proceeds from long-term debt borrowings................... -- -- 49 Net repayments under revolving credit loan................ (7,600) (1,224) (509) Proceeds from exercise of stock options................... 240 335 134 Purchase of treasury shares............................... -- (3,533) (1,219) ------- ------- ------- NET CASH USED IN FINANCING................................ (7,614) (6,815) (1,830) ------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH............................ 1,120 773 (424) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 225 552 (299) CASH AND CASH EQUIVALENTS, BEGINNING OF FISCAL YEAR......... 5,624 5,072 5,371 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF FISCAL YEAR............... $ 5,849 $ 5,624 $ 5,072 ======= ======= ======= Supplemental Disclosure of Cash Flow Data: Interest paid............................................. $ 1,758 $ 1,942 $ 2,402 Income taxes paid......................................... 2,024 2,052 2,394
The accompanying notes to consolidated financial statements are an integral part of these statements. 26 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2003, 2002 and 2001 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 intercompany transactions and balances have been eliminated in consolidation. BASIS OF PRESENTATION The financial statements are prepared in conformity with generally accepted accounting principles in the United States and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results 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. 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
The company owns four satellite mushroom growing facilities, which have an aggregate cost of $3.8 million and accumulated depreciation of $304,000, based on a 20-year estimated useful life. Each of the facilities is leased to an unrelated third party for $140,000 per year. The leases have a one-year term and may be extended for an additional five years. The lessees have the right to purchase the satellite assets at Sylvan's original cost of construction after the completion of the first year's lease term. The satellite farms purchased $3.6 million of ready-to-grow mushroom compost in 2003 and $1.3 million in 2002. The satellites also sold to Quincy, for immediate resale to its third-party marketer, $6.9 million of high-quality mushrooms in 2003 and $2.9 million in 2002. 27 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REPAIR AND MAINTENANCE Repair and maintenance costs are expensed as incurred. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and were $1.5 million, $2.0 million and $1.7 million for 2003, 2002 and 2001, respectively. WARRANTY COSTS Warranty costs are accrued based on management's best estimates of the replacement costs related to spawn products and historical warranty experience. Actual costs will vary from these estimates. The following table reconciles the changes in the company's spawn product warranty reserves:
DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- (IN THOUSANDS) Beginning Balance............................... $275 $281 $221 Expense Accrual................................. 323 112 70 Warranty Expenditures........................... 323 118 10 ---- ---- ---- Ending Balance.................................. $275 $275 $281 ==== ==== ====
REVENUE RECOGNITION The company recognizes revenue when it is realized and earned. The company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been shipped to the customer and title and risk of loss of the goods has passed to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. Any allowances or discounts are reflected as a reduction to sales at the time of shipment and any returns are reflected as a reduction to sales at the time of return. 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. 28 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table reflects the calculation of earnings per share:
FISCAL YEAR ENDED --------------------------------------------- DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- (IN THOUSANDS EXCEPT SHARE DATA) Basic Earnings Per Share: Net income...................................... $ 2,839 $ 4,669 $ 5,829 Average shares outstanding...................... 5,140,322 5,402,859 5,500,799 ---------- ---------- ---------- Earnings per share.............................. $ 0.55 $ 0.86 $ 1.06 ========== ========== ========== Diluted Earnings Per Share: Net income...................................... $ 2,839 $ 4,669 $ 5,829 Average shares outstanding...................... 5,140,322 5,402,859 5,500,799 Effect of stock options......................... 23,530 51,841 50,874 ---------- ---------- ---------- Diluted average shares outstanding.............. 5,163,852 5,454,700 5,551,673 ---------- ---------- ---------- Earnings per share.............................. $ 0.55 $ 0.86 $ 1.05 ========== ========== ==========
Options to purchase approximately 446,000, 295,000 and 305,000 shares of common stock for the fiscal years ended 2003, 2002 and 2001, 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. FOREIGN CURRENCY EXCHANGE RISK MANAGEMENT The company evaluates and hedges foreign currency exchange risk exposure on a transaction-by-transaction basis. As of December 28, 2003, 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 fixed LIBOR basis as described in the table below. 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 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 29 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payable under these swap agreements are recorded as an adjustment to interest expense. The company's contractual swap agreements as of December 28, 2003 are as follows:
LIBOR FIXED MAXIMUM NOTIONAL AMOUNT EFFECTIVE DATE EXPIRATION DATE FAIR MARKET VALUE RATE RATE - --------------- ----------------- --------------- ----------------- ----- ------- $10,000,000 February 25, 2000 August 25, 2007 $(969,310) 5.48% 7.00% $5,000,000 March 14, 2003 March 14, 2004 $ (5,120) 1.35% --
Effective January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended. The transition adjustment on January 1, 2001 resulted in a net charge of $56,000 (after tax), which was recorded in "Accumulated Other Comprehensive Loss." Floating-to-fixed interest rate swap agreements, designated as cash flow hedges, hedge the company's floating rate debt and mature at various times through August 2007. The fair value of these contracts, as determined by the counterparties, is recorded in the balance sheet, with the offset to "Accumulated Other Comprehensive Loss," net of tax. The company expects to expense $36,000 in 2004 related to these derivative instruments, based on interest rates at December 28, 2003. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the amount at which the instruments could be exchanged in a transaction between willing parties. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of these instruments. Additionally, interest rate swaps are recorded at fair value in accordance with SFAS No. 133. Valuations for long-term debt are determined based on borrowing rates currently available to the company for loans with similar terms, currencies and maturities and were as follows:
DEC. 28, 2003 DEC. 29, 2002 ------------- ------------- (IN THOUSANDS) Fair value.................................................. $33,494 $37,809 Carrying amount............................................. 33,658 38,385
The company's financial instruments are not held for trading purposes. COMPREHENSIVE LOSS The components of accumulated other comprehensive loss consisted of the following:
DEC. 28, 2003 DEC. 29, 2002 ------------- ------------- (IN THOUSANDS) Foreign currency translation adjustments.................... $ (1,074) $ (7,958) Unrealized losses on derivatives and qualified cash flow hedges, net of tax of $350 and $441, respectively......... (680) (855) Minimum pension liability adjustment, net of tax of $5,095 and $4,902, respectively.................................. (9,889) (9,512) -------- -------- Total accumulated other comprehensive income................ $(11,643) $(18,325) ======== ========
INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 eliminates amortization of goodwill and amortization of indefinitely lived intangible assets and provides for an impairment test to be performed at least annually. The impairment test is 30 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a two-step process performed to analyze whether or not goodwill has been impaired. Step one requires the fair value be compared to book value. If the fair value is higher than the book value, no impairment is indicated and there is no need to perform the second step of the process. If the fair value is lower than the book value, step two must be evaluated. Step two requires that a hypothetical purchase price allocation analysis be done to reflect a current book value of goodwill. This current value is then compared to book value of the goodwill. If the current fair value is lower than the book value, an impairment is recorded. Sylvan adopted this pronouncement on December 31, 2001, which was the first day of Sylvan's 2002 fiscal year. During the quarter ended March 31, 2002, a professional services firm retained by the company conducted an assessment to test the transitional goodwill impairment. The company also completed annual assessments to test for goodwill impairment as of the first day of the fiscal fourth quarter of 2002 and 2003. No impairment loss resulted from the assessments. In all assessments, step one of the process determined fair value exceeded book value. Sylvan's intangible assets, which relate solely to its Spawn Products Segment, are as follows:
GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION ------------------- ------------------- CULTURES CULTURES AND AND GOODWILL OTHER GOODWILL OTHER NET -------- -------- -------- -------- ------- (IN THOUSANDS) December 29, 2002...................... $ 15,998 $1,014 $ (4,262) $(429) $12,321 Additions.............................. -- -- -- (127) (127) Currency Translation................... 2,457 2 (654) -- 1,805 -------- ------ -------- ----- ------- December 28, 2003...................... $ 18,455 $1,016 $ (4,916) $(556) $13,999 ======== ====== ======== ===== =======
In connection with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," Sylvan reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The remaining useful lives of the cultures range from seven to ten years and the other intangible assets range from two to five years. Amortization expense for intangible assets was $127,000 for the fiscal year ended December 28, 2003. Estimated amortization expense for the five succeeding years is as follows:
(IN THOUSANDS) 2004........................................................ $122 2005........................................................ 67 2006........................................................ 67 2007........................................................ 65 2008........................................................ 59
31 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Actual results of operations for the fiscal years ended December 28, 2003 and December 29, 2002 and the pro forma results for the fiscal year ended December 30, 2001, had Sylvan applied the non-amortization provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" in 2001, are as follows:
FISCAL YEAR ENDED --------------------------------------------- DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- (IN THOUSANDS EXCEPT PER SHARE DATA) Reported net income............................. $2,839 $4,669 $5,829 Add back: Goodwill amortization, Net of tax..... -- -- 363 ------ ------ ------ Adjusted net income........................... $2,839 $4,669 $6,192 ====== ====== ====== Basic earnings per share: Reported net income........................... $ 0.55 $ 0.86 $ 1.06 Add back: Goodwill amortization............... -- -- 0.07 ------ ------ ------ Adjusted net income............................. $ 0.55 $ 0.86 $ 1.13 ====== ====== ====== Diluted earnings per share: Reported net income........................... $ 0.55 $ 0.86 $ 1.05 Add back: Goodwill amortization............... -- -- 0.07 ------ ------ ------ Adjusted net income............................. $ 0.55 $ 0.86 $ 1.12 ====== ====== ======
STOCK OPTIONS The company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees in the Consolidated Statements of Income. However, the company does recognize compensation expense, as required, if the initial term of an award is extended. Compensation expense recorded related to term extensions has been immaterial. The following table reflects pro forma net income and earnings per share had the Company elected to Adopt the fair value approach of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation":
2003 2002 2001 ------ ------ ------ (IN THOUSANDS EXCEPT PER SHARE DATA) Net income as reported..................................... $2,839 $4,669 $5,829 Total stock-based employee compensation determined under the fair value method for all awards.................. (191) (102) (1,142) Tax benefit of fair value method...................... 63 34 337 ------ ------ ------ Pro forma net income....................................... $2,711 $4,601 $5,024 Basic earnings per share As reported.............................................. $ 0.55 $ 0.86 $ 1.06 Pro forma................................................ $ 0.53 $ 0.85 $ 0.91 Diluted earnings per share As reported.............................................. $ 0.55 $ 0.86 $ 1.05 Pro forma................................................ $ 0.53 $ 0.84 $ 0.91
32 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in the future. RECENT PRONOUNCEMENTS In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 also requires enhanced disclosures in the company's interim and annual filings. The provisions of FIN 45 are effective for financial statements issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of both interim and fiscal years after December 15, 2002. The adoption of FIN 45 did not have a material impact on the company's financial statements or results of operations. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." In December 2003, the FASB revised FIN 46 to clarify certain provisions and modify its effective date. FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. It requires that companies determine whether a non-consolidated entity is a variable interest entity, as defined by FIN 46, and which company is the primary beneficiary of the variable interest entity's activities. The requirements of FIN 46 apply to all variable interest entities held no later than the end of the interim reporting period ending after March 15, 2004. Variable interest entities held in special purpose entities shall apply FIN 46 no later than the end of the reporting period ending after December 15, 2003. The company is currently evaluating the impact of this interpretation. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain instances, and for hedging relationships designated after June 30, 2003. In addition, except in those certain instances, all provisions of this Statement should be applied prospectively. The application of SFAS No. 149 did not have a material effect on the company's financial statements or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The provisions of SFAS No. 150 require issuers to classify as liabilities, or assets in some circumstances, certain classes of freestanding financial instruments that embody obligations for the issuer. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the company's financial statements or results of operations. 33 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVENTORIES: Inventories are summarized as follows:
DEC. 28, 2003 DEC. 29, 2002 ------------- ------------- (IN THOUSANDS) Growing crops and compost material.......................... $ 5,683 $ 4,975 Stores and other supplies................................... 2,005 2,039 Finished products........................................... 4,826 4,411 ------- ------- $12,514 $11,425 ======= =======
3. LONG-TERM DEBT, LEASE AND COMMERCIAL COMMITMENTS: The company has a Revolving Credit Agreement with two commercial banks, dated August 6, 1998, and amended, in part, December 29, 2002. It provides for revolving credit loans on which the aggregate outstanding balance available to the company could not initially exceed $55.0 million. The average borrowings under this agreement were $35.5 million during 2003. The maximum aggregate outstanding balance declines over the life of the agreement as follows:
MAXIMUM AGGREGATE PERIOD BEGINNING OUTSTANDING BALANCE - ---------------- ------------------- August 6, 2003.............................................. $50.0 million August 6, 2004.............................................. 45.0 million
Outstanding borrowings under the agreement bear interest at either the Prime Rate or LIBOR (plus an applicable margin), at the company's option. On December 28, 2003, the company had outstanding borrowings under the agreement of $32.4 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. The agreement provides for the maintenance of various financial covenants and includes limitations as to incurring additional indebtedness and the granting of security interests to third parties. Obligations under the agreement are guaranteed by certain wholly owned subsidiaries of the company. The company was not in compliance with one of the financial covenants as of December 29, 2002 due to the recording of a $9.5 million minimum pension liability adjustment to "Accumulated Other Comprehensive Income" during 2002. In the first quarter of 2003, the company and the banks signed an amendment to the revolving credit agreement to adjust for the recording of the minimum pension liability adjustment and waiving the loan covenant violation. The adjustment and waiver were effective as of December 29, 2002 and continue through August 5, 2005. The company has several additional loan obligations. The outstanding balances related to these loans, consisting primarily of a mortgage on the company's Netherlands facility for $0.8 million and a loan from the minority shareholders of the company's Netherlands subsidiary for $0.4 million, totaled approximately $1.3 million as of December 28, 2003 and $1.4 million as of December 29, 2002. Interest rates on these loans vary. The company had a French-franc denominated loan of FF16.2 million ($2.2 million) that was repaid in January 2002. The company incurred approximately $1.6 million in gross interest expense during 2003, including $187,000 of interest income related to interest hedges accounted for under SFAS No. 133. The weighted 34 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) average interest rate was 4.4%. The contractual principal payments due under the company's loan agreements are as follows:
IN THOUSANDS 2004........................................................ $ 110 2005........................................................ 32,843 2006........................................................ 74 2007........................................................ 74 2008........................................................ 74 Thereafter.................................................. 483 ------- TOTAL....................................................... $33,658 =======
The company has entered into various noncancelable operating leases expiring at various dates through August 31, 2005, primarily for production and office space. During the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001, rental expense included in the statements of income was $485,000, $461,000, and $590,000, respectively. 4. ACCRUED SALARIES, WAGES AND EMPLOYEE BENEFITS: Accrued salaries, wages and employee benefits were composed of the following:
DEC. 28, 2003 DEC. 29, 2002 ------------- ------------- IN THOUSANDS Accrued compensation........................................ $1,783 $2,086 Accrued vacation............................................ 671 622 Other....................................................... 195 63 ------ ------ TOTAL....................................................... $2,649 $2,771 ====== ======
5. INCOME TAXES: The company files a consolidated U.S. federal income tax return with its wholly owned U.S. subsidiaries. The company does not provide for federal income taxes on unremitted earnings of non-U.S. subsidiaries, since the company assumes that there will be no repatriation. Undistributed earnings of the company's foreign subsidiaries amounted to approximately $40 million at December 28, 2003. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability. 35 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amounts of income before income taxes attributable to domestic and foreign operations were as follows:
FISCAL YEAR ENDED --------------------------------------------- DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- IN THOUSANDS Domestic........................................ $ (645) $2,180 $3,405 Foreign......................................... 5,184 5,012 5,035 ------ ------ ------ TOTAL........................................... $4,539 $7,192 $8,440 ====== ====== ======
The provision (benefit) for income taxes consisted of the following:
FISCAL YEAR ENDED --------------------------------------------- DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- IN THOUSANDS Current: Federal....................................... $ 13 $ 819 $ 970 State......................................... 45 2 23 Foreign....................................... 1,521 1,261 1,223 Deferred........................................ (281) 419 192 Change in Valuation Allowance................... 200 (95) 82 ------ ------ ------ $1,498 $2,406 $2,490 ====== ====== ======
The foreign tax provision is for local country taxes. The company does not provide for federal income taxes on unremitted earnings of non-U.S. subsidiaries since the company assumes that there will be no repatriation. 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:
FISCAL YEAR ENDED --------------------------------------------- DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- IN THOUSANDS Income tax at U.S. federal statutory rate....... $1,543 $2,445 $2,869 State income taxes, net of federal income tax benefit....................................... 45 97 37 Foreign taxes at rates other than effective U.S. rates......................................... (241) (201) (488) Net (permanent benefits) nondeductible charges....................................... (49) (35) (24) Change in tax valuation allowance............... 200 (95) 82 Other, net...................................... -- 195 14 ------ ------ ------ TOTAL PROVISION FOR INCOME TAXES................ $1,498 $2,406 $2,490 ====== ====== ======
36 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences which generate significant portions of the company's deferred tax assets and liabilities as of December 28, 2003 and December 29, 2002 were as follows:
DEC. 28, 2003 DEC. 29, 2002 ------------- ------------- IN THOUSANDS Postretirement benefits other than pensions................. $ 306 $ 347 Depreciation................................................ (3,336) (3,122) Pension liability........................................... 2,934 2,637 Net operating loss carryforwards............................ 2,305 1,981 Other, net.................................................. (95) 12 ------- ------- Total....................................................... 2,114 1,855 Less-Valuation allowance.................................... (1,557) (1,357) ------- ------- NET DEFERRED TAX ASSETS..................................... $ 557 $ 498 ======= =======
Included in net deferred tax liabilities as of December 28, 2003 are unrealized tax benefits amounting to approximately $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. The life of the carryforwards is determined by various foreign and state taxation jurisdictions. Approximately $0.3 million of the net operating losses has an indefinite carryforward period. The remaining $2.0 million of net operating losses will expire between 2004 and 2018. The company has recognized a valuation allowance of $1.6 million 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. 6. STOCK OPTIONS: In June 1991, the shareholders approved a stock option plan (the 1990 Plan) for employees and others who perform substantial services for the company. In April 1999, the shareholders approved an amendment and restatement of the 1990 Plan to provide for an increase to 1,700,000 in the number of shares of the company's stock which are available for the granting of options. In June 1993, the shareholders approved a stock option plan (the 1993 Plan) for nonemployee directors of the company, covering 100,000 shares of common stock. The company accounts for both plans under the Accounting Principles Board Opinion No. 25, under which no compensation cost is recognized for options granted at fair market value. Had compensation cost for these plans been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the company's net income and earnings per share (EPS) would have been reduced to the following pro forma amounts:
FISCAL YEAR ENDED --------------------------------------------- DEC. 28, 2003 DEC. 29, 2002 DEC. 30, 2001 ------------- ------------- ------------- IN THOUSANDS EXCEPT PER SHARE DATA Reported net income............................. $2,839 $4,669 $5,829 Deduct: Stock option compensation cost, net of tax........................................ (128) (68) (805) ------ ------ ------ Pro forma net income.......................... $2,711 $4,601 $5,024 ====== ====== ====== Diluted earnings per share: Reported net income........................... $ 0.55 $ 0.86 $ 1.05 Deduct: Stock option compensation cost........ (.02) (.02) (.14) ------ ------ ------ Pro forma net income.......................... $ 0.53 $ 0.84 $ 0.91 ====== ====== ======
37 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1,277,084 shares through December 28, 2003 under the 1990 Plan and 88,000 shares have been granted under the 1993 Plan. Under both plans, the option exercise price equals the stock's market price on the date of grant. The 1990 Plan options are exercisable one year from the grant date in installments over a period of three years and expire after ten years. The 1993 Plan options are exercisable six months from the grant date and expire ten years after the grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants made in 2002 and 2001, respectively: risk-free interest rates of 3.17% and 3.62%; no expected dividend yields; expected lives of 8.0 years; expected volatility of 34% and 34%. No grants were made in 2003. A summary of the status of the company's stock option plans as of December 28, 2003, December 29, 2002, and December 30, 2001, and changes during the years then ended, is presented in the tables below:
2003 2002 2001 ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- SHARES IN THOUSANDS Outstanding at beginning of year......... 791 $11.27 827 $11.22 841 $11.21 Granted.................................. -- -- 22 11.40 3 12.50 Exercised................................ (24) 8.77 (34) 9.18 (13) 10.05 Forfeited................................ (10) 11.87 (24) 12.14 (4) 12.74 --- ------ --- ------ --- ------ OUTSTANDING AT END OF YEAR............... 757 11.35 791 11.27 827 11.22 --- ------ --- ------ --- ------ Exercisable at end of year............... 751 11.36 747 11.42 703 11.60 Weighted average fair value of options granted................................ $ -- $ 5.12 $ 5.73
As of December 28, 2003, 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................................................... 572,469 185,000 Weighted average exercise price.......................... $ 10.53 $ 13.95 Weighted average remaining contractual life (in years)... 4.3 4.6 Exercisable Options: Number................................................... 566,142 185,000 Weighted average exercise price.......................... $ 10.52 $ 13.95 Nonexercisable Options: Number................................................... 6,327 -- Weighted average exercise price.......................... $ 11.20 $ --
7. EMPLOYEE BENEFITS: The company has a noncontributory defined benefit pension plan covering substantially all of the former employees of a former operation and certain employees of Sylvan Foods, Inc. and Sylvan America, Inc., wholly owned subsidiaries of the company. The company's funding policy is to contribute annually an amount 38 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that satisfies the minimum funding requirement under the Employee Retirement Income Security Act and that is also deductible for federal income tax purposes. The accumulated benefit obligations as of December 28, 2003 and December 29, 2002 were $36.1 million and $33.4 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. PLAN ASSET ALLOCATION The weighted average asset allocations, as of November 2, 2003, 2002, 2001, by asset category, are as follows:
2003 2002 2001 ---- ---- ---- Equity Securities........................................... 60% 59% 43% Debt Securities............................................. 39% 40% 56% Real Estate................................................. -- -- -- Other....................................................... 1% 1% 1% --- --- --- TOTAL....................................................... 100% 100% 100% === === ===
INVESTMENT POLICY To develop the expected long-term rate of return on assets assumption, the company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 8.5% long-term rate of return on assets assumptions.
POLICY TARGET POLICY RANGE ------------- ------------- ASSET CLASS Large Capitalization Stocks................................. 25% 15%-35% Mid Capitalization Stocks................................... 10% 5%-15% Small Capitalization Stocks................................. 5% 5% International Equities...................................... 10% 10% Core Bonds.................................................. 50% 30%-60% --- TOTAL....................................................... 100% ===
The above asset mix will be net of cash equivalents, used as appropriate for distribution and/or liquidity needs. This asset mix may drift from the target allocations due to market movements. The total portfolio is rebalanced regularly to achieve the manager's target allocations. The plan does not invest in shares of Sylvan Inc. common stock. CONTRIBUTIONS The minimum required contribution for 2004 is expected to be $114,912. This assumes that pension funding relief is granted effective for the 2004 plan year. Sylvan expects to contribute approximately $115,000 to the pension plan during 2004. 39 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PLAN STATUS 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:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ DEC. 28, DEC. 29, DEC. 30, DEC. 28, DEC. 29, DEC. 30, 2003 2002 2001 2003 2002 2001 -------- -------- -------- -------- -------- -------- IN THOUSANDS Change in benefit obligation: Benefit obligation at beginning of year................................ $33,369 $30,085 $30,252 $ 735 $ 931 $ 985 Interest cost......................... 2,181 2,171 2,174 45 53 69 Actuarial (gain) loss................. 2,961 3,481 -- 97 (164) (17) Benefits paid......................... (2,387) (2,368) (2,341) (120) (85) (106) ------- ------- ------- ----- ----- ----- BENEFIT OBLIGATION AT END OF YEAR..... $36,124 $33,369 $30,085 $ 757 $ 735 $ 931 ======= ======= ======= ===== ===== ===== Change in plan assets: Fair value of plan assets at beginning of year............................. $25,612 $30,220 $33,849 $ -- $ -- $ -- Actual return on plan assets.......... 3,902 (2,240) (1,288) -- -- -- Employer contributions................ 200 -- -- 120 85 106 Benefits paid......................... (2,387) (2,368) (2,341) (120) (85) (106) ------- ------- ------- ----- ----- ----- FAIR VALUE OF PLAN ASSETS AT END OF YEAR................................ $27,327 $25,612 $30,220 $ -- $ -- $ -- ======= ======= ======= ===== ===== ===== Reconciliation of funded status: Funded status......................... $(8,797) $(7,757) $ 135 $(757) $(735) $(931) Unrecognized net actuarial (gain)/loss......................... 14,984 14,414 6,372 5 (117) 43 Unrecognized prior service cost....... -- -- -- (59) (44) (49) ------- ------- ------- ----- ----- ----- PREPAID (ACCRUED) BENEFIT LIABILITY... $ 6,187 $ 6,657 $ 6,507 $(811) $(896) $(937) ======= ======= ======= ===== ===== =====
40 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ DEC. 28, DEC. 29, DEC. 30, DEC. 28, DEC. 29, DEC. 30, 2003 2002 2001 2003 2002 2001 -------- -------- -------- -------- -------- -------- IN THOUSANDS AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEET Prepaid pension cost (included in "Other Assets" in the Consolidated Balance Sheet)...................... $ -- $ -- $ 6,507 $ -- $ -- $ -- Accrued benefit liability (included in "Other Employee Benefits" in the Consolidated Balance Sheet)......... (8,797) (7,757) -- -- -- -- Additional minimum pension liability...................... 14,984 14,414 -- -- -- -- ------- ------- ------- ------ ------ ----- NET AMOUNT............................ $ 6,187 $ 6,657 $ 6,507 $ -- $ -- $ -- ======= ======= ======= ====== ====== ===== Weighted-average assumptions as of October 31 of each fiscal year: Discount rate......................... 6.10% 6.80% 7.50% 6.10% 6.80% 7.50% Expected return on plan assets........ 8.50% 8.50% 9.00% -- -- -- Components of net periodic pension cost (income): Interest cost......................... $ 2,181 $ 2,171 $ 2,174 $ 46 $ 53 $ 69 Expected return on plan assets........ (1,927) (2,450) (2,778) -- -- -- Amortization of prior service cost.... -- -- -- (6) (6) (6) Recognized net actuarial (gain)/loss......................... 416 129 -- (4) (4) -- ------- ------- ------- ------ ------ ----- NET PERIODIC BENEFIT COST (INCOME).... $ 670 $ (150) $ (604) $ 36 $ 43 $ 63 ======= ======= ======= ====== ====== ===== Assumed health care cost trend: Initial trend rate.................... 11.00% 10.00% 6.56% Ultimate trend rate................... 5.00% 5.00% 5.00% Year ultimate trend reached........... 2011 2008 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 2003................ $1 $(1) Effect on 2003 postretirement benefit obligation.............................. 5 (5)
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003. It introduces a prescription drug benefit under Medicare (Medicare Part D) that provides several options for Medicare eligible participants and employers, including a federal subsidy to companies that elect to provide a retiree prescription drug benefit which is at least actuarially equivalent to Medicare Part D. The Act establishes a two-year transitional period to allow for the possibility that companies may amend existing plans. There are many uncertainties regarding the eventual regulations required to implement the Act as well as the Act's overall affect on plan participant's health care costs. Therefore, the effects of the Act are 41 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) not reflected in the accumulated postretirement benefit obligation as of December 28, 2003 or in the 2003 net periodic postretirement benefit cost. Sylvan is currently evaluating the provisions of the Act and its potential impact to our postretirement medical plans. Because of the fixed and limited nature of the plans, Sylvan does not believe the Act will result in any material obligation or cost change. 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 2003, 2002 and 2001 were $24,000, $35,000 and $38,000, respectively. The collective bargaining agreement, dated January 21, 2001, with the union representing certain hourly workers of Quincy Farms contains a profit sharing bonus provision. The contract covers the 2001, 2002 and 2003 fiscal years. The bonus pool is calculated on Quincy's incremental operating income greater than base amounts. Expense recorded for this plan was $23,000 during 2002 and $85,000 during 2001. No expense was recorded in 2003. 8. NATURE OF OPERATIONS AND BUSINESS SEGMENT INFORMATION: Sylvan is a worldwide producer and distributor of products for the mushroom industry, specializing in spawn (the equivalent of seed for mushrooms) and spawn-related products and services, and is a major grower of fresh mushrooms in the United States. The company has two reportable business segments: Spawn Products, which includes spawn-related products, services and bioproducts, and Fresh Mushrooms. Spawn-related products include casing inoculum, nutritional supplements and disease-control agents. The Fresh Mushrooms Segment is comprised of Quincy Farms, a large, regional producer of fresh mushrooms. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The company evaluates the performance of each segment based on profit or loss from operations. The company accounts for intersegment sales at a transfer price that approximates an arms-length sale to an unrelated third party. The company's reportable segments are strategic business units that offer different products and serve different customers. They are managed separately since each business requires different technology, techniques and marketing strategies. 42 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPAWN PRODUCTS FRESH MUSHROOMS TOTAL REPORTABLE SEGMENT SEGMENT SEGMENTS ---------------- ----------------- ---------------- IN THOUSANDS Total Revenues........................ 2003 $66,768 $29,544 $ 96,312 2002 $63,996 $25,517 $ 89,513 2001 $63,559 $23,621 $ 87,180 Intersegment Revenues................. 2003 $ 1,324 $ -- $ 1,324 2002 $ 1,321 $ -- $ 1,321 2001 $ 1,269 $ -- $ 1,269 Depreciation Expense.................. 2003 $ 4,605 $ 1,546 $ 6,151 2002 $ 4,195 $ 1,409 $ 5,604 2001 $ 3,793 $ 1,549 $ 5,342 Operating Income...................... 2003 $ 9,186 $ 2,849 $ 12,035 2002 $10,567 $ 2,879 $ 13,446 2001 $11,849 $ 2,642 $ 14,491 Net Fixed Asset Expenditures.......... 2003 $ 1,739 $ 1,370 $ 3,109 2002 $ 3,219 $ 2,925 $ 6,144 2001 $ 6,330 $ 2,236 $ 8,566 Assets................................ 2003 $92,597 $19,640 $112,237 2002 $85,166 $19,812 $104,978 2001 $79,700 $19,040 $ 98,740
43 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECONCILIATION TO CONSOLIDATED FINANCIAL DATA
2003 2002 2001 -------- -------- -------- IN THOUSANDS Revenues: Total for reportable segments............................... $ 96,312 $ 89,513 $ 87,180 Elimination of intersegment revenues........................ (1,324) (1,321) (1,269) -------- -------- -------- TOTAL CONSOLIDATED REVENUES................................. $ 94,988 $ 88,192 $ 85,911 ======== ======== ======== Depreciation Expense: Total for reportable segments............................... $ 6,151 $ 5,604 $ 5,342 Unallocated corporate expenses.............................. 28 38 33 -------- -------- -------- TOTAL CONSOLIDATED DEPRECIATION EXPENSE..................... $ 6,179 $ 5,642 $ 5,375 ======== ======== ======== Operating Income: Total for reportable segments............................... $ 12,035 $ 13,446 $ 14,491 Unallocated corporate expenses.............................. (6,353) (4,386) (3,500) -------- -------- -------- TOTAL CONSOLIDATED OPERATING INCOME......................... $ 5,682 $ 9,060 $ 10,991 ======== ======== ======== Net Fixed Asset Expenditures: Total for reportable segments............................... $ 3,109 $ 6,144 $ 8,566 Unallocated corporate expenditures.......................... -- -- 33 -------- -------- -------- TOTAL CONSOLIDATED NET FIXED ASSET EXPENDITURES............. $ 3,109 $ 6,144 $ 8,599 ======== ======== ======== Assets: Total for reportable segments............................... $112,237 $104,978 $ 98,740 Prepaid pension asset from former operation................. -- -- 6,507 Unallocated corporate assets................................ 1,628 1,828 1,843 -------- -------- -------- TOTAL CONSOLIDATED ASSETS................................... $113,865 $106,806 $107,090 ======== ======== ========
GEOGRAPHIC ANALYSIS OF NET LONG-LIVED ASSETS
OTHER FOREIGN UNITED STATES FRANCE NETHERLANDS COUNTRIES TOTAL ------------- ------- ----------- ------------- ------- IN THOUSANDS 2003......................... $25,780 $12,871 $5,344 $17,139 $61,134 2002......................... 26,994 11,202 4,896 15,695 58,787 2001......................... 26,161 9,219 4,457 14,439 54,276
GEOGRAPHIC ANALYSIS OF REVENUES BASED ON LOCATION OF CUSTOMER
OTHER FOREIGN UNITED STATES FRANCE NETHERLANDS COUNTRIES TOTAL ------------- ------ ----------- ------------- ------- IN THOUSANDS 2003.......................... $52,580 $4,863 $11,113 $26,432 $94,988 2002.......................... 45,273 6,390 9,536 26,993 88,192 2001.......................... 40,660 6,779 8,880 29,592 85,911
44 SYLVAN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Most of Sylvan's Fresh Mushrooms Segment sales were to C And C Carriage Mushroom Company. C And C began purchasing and marketing all of Quincy's production in January 2000. C And C is not affiliated with Sylvan or any of its subsidiaries and the purchase and marketing contract, dated January 14, 2000, carries an initial term of five years. No other single customer accounted for 10% or more of Sylvan's sales during the fiscal years ended December 28, 2003, December 29, 2002 or December 30, 2001. The majority of the company's $15.9 million in trade accounts receivable are from regional mushroom growers and composters. Approximately $2.3 million of the receivable is due from C And C and is partially secured by a letter of credit for $1.25 million. Sylvan sells its products to customers primarily in North America and Europe. Credit sales are also made to customers in Australia, Asia, Africa and South America. Many of these customers are privately held businesses with limited capital resources. The company performs ongoing credit evaluations of customers, and generally does not require collateral. Allowances are maintained for potential credit losses and such losses have been within management's expectations. 9. RELATED-PARTY TRANSACTIONS: During fiscal years 2003, 2002 and 2001, a nonemployee director's business interests purchased spawn and spawn-related products at fair market value totaling $766,000, $493,000 and $589,000, respectively. These business interests purchased mushrooms and services at fair market value totaling $5,000 in 2001 from the company's subsidiaries. 10. MERGER DISCLOSURE DISCUSSION As previously announced on November 16, 2003, Sylvan entered into a definitive agreement with Snyder Associated Companies, Inc. of Kittanning, Pennsylvania, which will result in a merger between Sylvan and a Snyder affiliate. The Sylvan Board of directors, upon the unanimous recommendation of its special committee of independent directors, approved the merger and the agreement. The merger is subject to certain conditions, including the approval by a majority of the shareholders of Sylvan. Sylvan expects to be able to convene a meeting of its shareholders for that purpose in the second quarter of 2004 and, if approved by Sylvan's shareholders, the transaction is expected to be completed shortly thereafter. The merger agreement currently provides for a termination date of May 1, 2004 if the merger has not been completed by that date. The company intends to discuss an extension of this date with Snyder Associated Companies, Inc. 45 CONSENT OF ERNST & YOUNG LLP The Board of Directors and Stockholders Sylvan Inc. We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-46797 and No. 33-86332) pertaining to the 1990 Stock Option Plan of Sylvan Inc., and in the Registration Statement (Form S-8 No. 33-83962) pertaining to the 1993 Stock Option Plan for Nonemployee Directors of Sylvan Inc., of our report dated February 2, 2004, with respect to the consolidated financial statements and schedule of Sylvan Inc. included in this Annual Report (Form 10-K) for the year ended December 28, 2003. /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania March 23, 2004 46 INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section 11 (a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. Sylvan Inc. dismissed Arthur Andersen LLP ("Arthur Andersen") as its independent auditors, effective May 31, 2002. For additional information, see the company's current report on Form 8-K dated May 31, 2002. After reasonable efforts, the company has been unable to obtain Arthur Andersen's written consent to the incorporation by reference into the company's registration statements (Form S-8 File No.s 33-46797, 33-86332 and 33-83962) and the related prospectuses (the "Registration Statements") of Arthur Andersen's audit report with respect to the company's consolidated financial statements as of December 30, 2001 and for the two years in the period then ended. Under these circumstances, Rule 437 under the Securities Act permits the company to file the Annual Report on Form 10-K, which is incorporated by reference into the Registration Statements, without a written consent from Arthur Andersen. As a result, with respect to transactions in the company's securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report is filed with the Securities and Exchange Commission, Arthur Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen or any omissions of a material fact required to be stated therein and thus no claim could be asserted against Arthur Andersen under Section 11(a) of the Securities Act. 47 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Sylvan's principal executive officer and principal financial officer have evaluated the effectiveness of Sylvan's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of December 29, 2003. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Sylvan's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Sylvan in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to provide reasonable assurance that information required to be disclosed by Sylvan in such reports is accumulated and communicated to Sylvan's management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Controls There was no change in Sylvan's "internal control over financial reporting" (as such term is defined in Rule 13A-15(f) under the Exchange Act) that occurred during the quarter ended December 29, 2003, and that has materially affected, or is reasonably likely to materially affect, Sylvan's internal control over financial reporting. 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. Sylvan has not adopted a Code of Ethics for Senior officers as defined in Item 406 of Regulation S-K because of the proposed merger with an affiliate of Snyder Associated Companies, which will result in Sylvan being a privately held company. Sylvan expected that the merger would be completed sooner than is currently anticipated. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Management Compensation and Benefit Plans" in Sylvan's Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the captions "Common Stock Ownership of Certain Beneficial Owners" and "Common Stock Ownership of Directors and Executive Officers" in Sylvan's Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. 48 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the caption "Board Member Transactions with the Company" in Sylvan's Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is set forth under the caption "Other Information" in Sylvan's Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (A)(1) AND (2). FINANCIAL STATEMENTS AND SCHEDULES Included as Item 8 (3). EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
3.3 Articles of Incorporation of S. F. Nevada, Inc. (Exhibit 3.3 to the company's Form 10-Q for the quarter ended October 3, 1999*) 3.4 Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods Holdings, Inc. with exhibit (Exhibit 3.4 to the company's Form 10-Q for the quarter ended October 3, 1999*) 3.5 Bylaws (Exhibit 3.5 to the company's Form 10-Q for the quarter ended October 3, 1999*) Compensation Plans and Arrangements 10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan (Exhibit 3.3.2 to the company's Form 10-K for the year ended January 3, 1993*) 10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors (Exhibit 10.1.3 to the company's Form 10-K for the year ended January 2, 1994*) 10.12 Sylvan Inc. 1990 Stock Option Plan (as amended and restated) (Exhibit 10.12 to the company's Form 10-Q for the quarter ended October 3, 1999*) Material Contracts 10.2.1 Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc., a Nevada corporation, Sylvan Foods (Netherlands) B.V., a Dutch corporation, as Borrowers, the Banks party thereto from time to time and Mellon Bank, N.A., a national banking association, as issuing bank and as agent for the Banks thereunder (Exhibit 10.1 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.2 Revolving Credit Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the amount of $25,000,000 (Exhibit 10.2 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.3 Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO Bank, Pittsburgh Branch, in the amount of $25,000,000 (Exhibit 10.3 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.4 Promissory Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the amount of $5,000,000 (Exhibit 10.4 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.5 Mellon Global Cash Management ABS Agreement, dated August 6, 1998, by and between Sylvan Inc. and Mellon Bank, N.A. (Exhibit 10.5 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.6 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Sylvan Inc. and Mellon Bank, N.A. (Exhibit 10.6 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.7 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Sylvan Foods, Inc. and Mellon Bank, N.A. (Exhibit 10.7 to the company's Form 10-Q for the quarter ended September 27, 1998*)
49
10.2.8 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Sylvan America, Inc. (a Pennsylvania corporation) and Mellon Bank, N.A. (Exhibit 10.8 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.9 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Sylvan America, Inc. (a Nevada corporation) and Mellon Bank, N.A. (Exhibit 10.9 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.10 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between Quincy Corporation and Mellon Bank, N.A. (Exhibit 10.10 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.2.11 Index of Other Exhibits to the Revolving Credit Agreement (Exhibit 10.11 to the company's Form 10-Q for the quarter ended September 27, 1998*) 10.5.1 Agreement, dated January 14, 2000, by and between C And C Carriage Mushroom Co., t/a Modern Sales Company, and Quincy Corporation (Exhibit 10.5.1 to the company's Form 10-K for the year ended January 2, 2000*) 10.5.2 Index of Exhibits to the C And C Agreement referenced above (Exhibit 10.5.2 to the company's Form 10-K for the year ended January 2, 2000*) 10.41 Letter dated October 12, 2001 from Mellon Bank, advising the company of Mellon's assignment and transfer to Citizens Financial Group, Inc. of all of Mellon's right, title and interest in and to the Revolving Credit Agreement, dated August 6, 1998, between the company and Mellon (Exhibit 10.41 to the company's Form 10-K filed for the year ended December 30, 2001*) 10.43 Employment Continuation Agreement with Dennis C. Zensen, dated September 24, 2002 (Exhibit 10.43 to the company's Form 10-Q filed for the quarter ended September 29, 2002**) 10.44 Employment Continuation Agreement with Monir K. Elzalaki, dated September 21, 2002 (Exhibit 10.44 to the company's Form 10-Q filed for the quarter ended September 29, 2002**) 10.45 Employment Continuation Agreement with Donald A. Smith, dated September 19, 2002 (Exhibit 10.45 to the company's Form 10-Q filed for the quarter ended September 29, 2002**) 10.46 Employment Continuation Agreement with Gary D. Walker, dated September 24, 2002 (Exhibit 10.46 to the company's Form 10-Q filed for the quarter ended September 29, 2002**) 10.47 Manager's Service Agreement with Michael A. Walton, dated April 17, 1988 (Exhibit 10.47 to the company's Form 10-Q filed for the quarter ended September 29, 2002**) 10.48 Amendment No. 1 to Revolving Credit Agreement, dated as of December 29, 2002, among Sylvan Inc., a Nevada corporation, Sylvan Foods (Netherlands) BV, a Dutch corporation, the banks listed on the signature page and Citizens Bank of Pennsylvania, as agent for the Banks and for the Issuing Bank under the Original Agreement (Exhibit 10.48 to the Company's Form 10-K filed for the year ended December 29, 2002*) 10.49 Agreement and Plan of Merger, dated November 16, 2003, among Sylvan Inc., Snyder Associated Companies, Inc. and SAC Holding Co., filed herewith 10.50 Collective Bargaining Agreement, dated January 21, 2004, between Quincy Corporation and the United Farm Workers of America, AFL-CIO, filed herewith 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 31 Rule 13a-14(a) Certification of Dennis C. Zensen 31 Rule 13a-14(a) Certification of Donald A. Smith 32 Section 1350 Certification of Dennis C. Zensen 32 Section 1350 Certification of Donald A. Smith
- --------------- * Incorporated by reference. ** Management contract. 50 (B) REPORTS ON FORM 8-K During the three months ended December 28, 2003, Sylvan filed and furnished the following reports on Form 8-K: On November 13, 2003, the company furnished a current report containing a press release, dated November 12, 2003, reporting earnings for the quarter ended September 28, 2003, and providing a financial outlook. On November 17, 2003, the company filed a current report containing a press release, dated November 16, 2003, announcing that Sylvan had entered into a definitive agreement with Snyder Associated Companies, Inc. that will result in a merger between Sylvan and a Snyder affiliate. On November 18, 2003, the company filed a current report containing a merger agreement, dated November 16, 2003, among Sylvan Inc., Snyder Associated Companies, Inc. and SAC Holding Co. 51 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYLVAN INC. By: /s/ DENNIS C. ZENSEN March 26, 2004 ---------------------------------- 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 26, 2004 - -------------------------------------- Directors, President and Chief Dennis C. Zensen Executive Officer (Principal Executive Officer) /s/ DONALD A. SMITH Chief Financial Officer (Principal March 26, 2004 - -------------------------------------- Financial and Accounting Officer) Donald A. Smith /s/ WILLIAM L. BENNETT Director March 26, 2004 - -------------------------------------- William L. Bennett /s/ MONIR K. ELZALAKI President, Sylvan America, Inc. March 26, 2004 - -------------------------------------- Director Monir K. Elzalaki /s/ JEANINE C. HELLER Director March 26, 2004 - -------------------------------------- Jeanine C. Heller /s/ VIRGIL H. JURGENSMEYER Director March 26, 2004 - -------------------------------------- Virgil H. Jurgensmeyer /s/ NELSON OBUS Director March 26, 2004 - -------------------------------------- Nelson Obus
52 INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- ----------- -------- Report of Independent Auditors (Ernst & Young LLP) 21 Report of Independent Public Accountants (Arthur Andersen 22 LLP) Consolidated Balance Sheets at December 28, 2003 and 23 December 29, 2002 Consolidated Statements of Income for the Years Ended 24 December 28, 2003, December 29, 2002 and December 30, 2001 Consolidated Statements of Changes in Shareholders' Equity 25 for the Years Ended December 28, 2003, December 29, 2002, and December 30, 2001 Consolidated Statements of Cash Flows for the Years Ended 26 December 28, 2003, December 29, 2002, and December 30, 2001 Notes to Consolidated Financial Statements 27 Consent of Independent Auditors (Ernst & Young LLP) 46 Information Regarding the Consent of Independent Auditor 47 (Arthur Andersen LLP) Schedule II -- Valuation and Qualifying Accounts for the 55 Years Ended December 28, 2003, December 29, 2002 and December 30, 2001 3.3 Articles of Incorporation of S. F. Nevada, Inc. (a) 3.4 Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods (a) Holdings, Inc. with exhibit 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 (c) Nonemployee Directors 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 (d) 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 10.2.2 Revolving Credit Note, dated August 6, 1998, payable to (d) Mellon Bank, N.A. in the amount of $25,000,000 10.2.3 Revolving Credit Note, dated August 6, 1998, payable to ABN (d) AMRO Bank, Pittsburgh Branch, in the amount of $25,000,000 10.2.4 Promissory Note, dated August 6, 1998, payable to Mellon (d) Bank, N.A. in the amount of $5,000,000 10.2.5 Mellon Global Cash Management ABS Agreement, dated August 6, (d) 1998, by and between Sylvan Inc. and Mellon Bank, N.A. 10.2.6 Guaranty and Suretyship Agreement, dated August 6, 1998, by (d) and between Sylvan Inc. and Mellon Bank, N.A. 10.2.7 Guaranty and Suretyship Agreement, dated August 6, 1998, by (d) and between Sylvan Foods, Inc. and Mellon Bank, N.A. 10.2.8 Guaranty and Suretyship Agreement, dated August 6, 1998, by (d) and between Sylvan America, Inc. (a Pennsylvania corporation) and Mellon Bank, N.A. 10.2.9 Guaranty and Suretyship Agreement, dated August 6, 1998, by (d) and between Sylvan America, Inc. (a Nevada corporation) and Mellon Bank, N.A. 10.2.10 Guaranty and Suretyship Agreement, dated August 6, 1998, by (d) and between Quincy Corporation and Mellon Bank, N.A. 10.2.11 Index of Other Exhibits to the Revolving Credit Agreement (d) referenced in Exhibit 10.2.1 10.5.1 Agreement, dated January 14, 2000, by and between C And C (e) Carriage Mushroom Co., t/a Modern Sales Company, and Quincy Corporation
53
EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- ----------- -------- 10.5.2 Index of Exhibits to the Agreement referenced in Exhibit (e) 10.5.1 10.41 Notification letter, dated October 12, 2001, regarding (f) Mellon Bank's transfer to Citizens Financial Group, Inc. of its right, title and interest in the Revolving Credit Agreement, dated August 6, 1998 10.43 Employment Continuation Agreement with Dennis C. Zensen, (g) dated September 24, 2002 10.44 Employment Continuation Agreement with Monir K. Elzalaki, (g) dated September 21, 2002 10.45 Employment Continuation Agreement with Donald A. Smith, (g) dated September 19, 2002 10.46 Employment Continuation Agreement with Gary D. Walker, dated (g) September 24, 2002 10.47 Manager's Service Agreement with Michael A. Walton, dated (g) April 17, 1988 10.48 Amendment No. 1 to Revolving Credit Agreement, dated as of (h) December 29, 2002, among Sylvan Inc., a Nevada corporation, Sylvan Foods (Netherlands) BV, a Dutch corporation, the banks listed on the signature page and Citizens Bank of Pennsylvania, as agent for the Banks and for the Issuing Bank under the Original Agreement 10.49 Agreement and Plan of Merger, dated November 16, 2003, among 56 Sylvan Inc., Snyder Associated Companies, Inc. and SAC Holding Co. 10.50 Collective Bargaining Agreement, dated January 21, 2004, 118 between Quincy Corporation and the United Farm Workers of America, AFL-CIO 21 Subsidiaries of the Registrant 138 31 Rule 13a-14(a) Certification of Dennis C. Zensen 139 31 Rule 13a-14(a) Certification of Donald A. Smith 140 32 Section 1350 Certification of Dennis C. Zensen 141 32 Section 1350 Certification of Donald A. Smith 142
- --------------- (a) This exhibit was previously filed with the company's Form 10-Q report for the quarter ended October 3, 1999 and is incorporated herein by reference. (b) This exhibit was previously filed with the company's Form 10-K for the year ended January 3, 1993 and is incorporated herein by reference. (c) This exhibit was previously filed with the company's Form 10-K for the year ended January 2, 1994 and is incorporated herein by reference. (d) This exhibit was previously filed as one of Exhibits 10.1 through 10.11 to the company's Form 10-Q report for the quarter ended September 27, 1998 and is incorporated herein by reference. (e) This exhibit was previously filed with the company's Form 10-K for the year ended January 2, 2000 and is incorporated herein by reference. (f) This exhibit was previously filed with the company's Form 10-K for the year ended December 30, 2001 and is incorporated herein by reference. (g) This exhibit was previously filed with the company's Form 10-Q for the quarter ended September 29, 2002 and is incorporated herein by reference. (h) This exhibit was previously filed with the company's Form 10-K for the year ended December 29, 2002 and is incorporated herein by reference. 54 SCHEDULE II SYLVAN INC. AND SUBSIDIARIES (THE COMPANY) VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
ADDITIONS ----------------------- BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND FROM AT END DESCRIPTION OF PERIOD EXPENSES RECOVERIES RESERVES(A) OTHER(B) OF PERIOD - ----------- ---------- ---------- ---------- ----------- -------- --------- (IN THOUSANDS) Year ended December 28, 2003 -- Allowance for doubtful accounts................. $795 $239 $0 $ (99) $124 $1,059 ==== ==== == ===== ==== ====== Year ended December 29, 2002 -- Allowance for doubtful accounts................. $440 $492 $0 $(194) $ 57 $ 795 ==== ==== == ===== ==== ====== Year ended December 30, 2001 -- Allowance for doubtful accounts................. $497 $107 $0 $(125) $(39) $ 440 ==== ==== == ===== ==== ======
- --------------- (a) Represents uncollected accounts charged against the allowance. (b) Represents the effect of currency translation adjustments. 55 EX-10.49 3 j0500401exv10w49.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 10.49 AGREEMENT AND PLAN OF MERGER DATED AS OF NOVEMBER 16, 2003 AMONG SYLVAN INC., SNYDER ASSOCIATED COMPANIES, INC. AND SAC HOLDING CO. 56 TABLE OF CONTENTS ---------------
PAGE ---- ARTICLE 1 DEFINITIONS Section 1.01. Definitions.....................................................................60 ARTICLE 2 THE MERGER Section 2.01. The Merger......................................................................65 Section 2.02. Closing; Effective Time.........................................................65 Section 2.03. Effects of the Merger...........................................................66 Section 2.04. Conversion of Shares............................................................66 Section 2.05. Surrender and Payment...........................................................66 Section 2.06. Stock Options...................................................................68 Section 2.07. Adjustments.....................................................................69 Section 2.08. Withholding Rights..............................................................69 Section 2.09. Lost Certificates...............................................................69 ARTICLE 3 THE SURVIVING CORPORATION Section 3.01. Articles of Incorporation.......................................................70 Section 3.02. Bylaws..........................................................................70 Section 3.03. Directors and Officers..........................................................70 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 4.01. Corporate Existence and Power...................................................70 Section 4.02. Corporate Authorization.........................................................71 Section 4.03. Governmental Authorization......................................................71 Section 4.04. Non-contravention...............................................................72 Section 4.05. Capitalization..................................................................72 Section 4.06. Subsidiaries....................................................................73 Section 4.07. SEC Filings.....................................................................74 Section 4.08. Financial Statements............................................................74 Section 4.09. Disclosure Documents............................................................75 Section 4.10. Absence of Certain Changes......................................................75 Section 4.11. No Undisclosed Material Liabilities.............................................77 Section 4.12. Compliance with Laws and Court Orders...........................................77 Section 4.13. Litigation......................................................................77 Section 4.14. Finders' Fees...................................................................78
57 Section 4.15. Opinions of Financial Advisors..................................................78 Section 4.16. Taxes...........................................................................78 Section 4.17. Labor and Employment Matters....................................................80 Section 4.18. Employee Benefit Plans..........................................................81 Section 4.19. Environmental Matters...........................................................83 Section 4.20. State Takeover Statutes; No Rights Agreement....................................84 Section 4.21. Insurance.......................................................................84 Section 4.22. Intellectual Property...........................................................84 Section 4.23. Contracts and Commitments.......................................................85 Section 4.24. Real Property...................................................................87 Section 4.25. Minority Investments............................................................88 Section 4.26. Disclaimer of Other Representations and Warranties..............................88 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT Section 5.01. Corporate Existence and Power...................................................88 Section 5.02. Corporate Authorization.........................................................89 Section 5.03. Governmental Authorization......................................................89 Section 5.04. Non-contravention...............................................................89 Section 5.05. Disclosure Documents............................................................90 Section 5.06. Finders' Fees...................................................................90 Section 5.07. Financing.......................................................................90 Section 5.08. Agreements With Shareholders....................................................91 ARTICLE 6 COVENANTS OF THE COMPANY Section 6.01. Conduct of the Company..........................................................91 Section 6.02. Stockholder Meeting; Proxy Material.............................................94 Section 6.03. No Solicitation; Other Offers...................................................95 Section 6.04. Tax Matters.....................................................................97 Section 6.05. Access to Information...........................................................97 Section 6.06. Notices of Certain Events.......................................................98 Section 6.07. Disclosure Schedule.............................................................98 ARTICLE 7 COVENANTS OF PARENT Section 7.01. Notices of Certain Events.......................................................99 Section 7.02. Obligations of Merger Subsidiary...............................................100 Section 7.03. Voting of Shares...............................................................100 Section 7.04. Director and Officer Liability.................................................100 Section 7.05. Agreements With Shareholders...................................................102
58 ARTICLE 8 COVENANTS OF PARENT AND THE COMPANY Section 8.01. Reasonable Efforts.............................................................103 Section 8.02. Certain Filings................................................................104 Section 8.03. Public Announcements...........................................................104 Section 8.04. Further Assurances.............................................................104 Section 8.05. Confidentiality................................................................104 Section 8.06. Takeover Statute...............................................................105 ARTICLE 9 CONDITIONS TO THE MERGER Section 9.01. Conditions to Obligations of Each Party........................................106 Section 9.02. Conditions to the Obligations of Parent and Merger Subsidiary..................106 Section 9.03. Conditions to the Obligations of the Company...................................107 ARTICLE 10 TERMINATION Section 10.01. Termination...................................................................108 Section 10.02. Effect of Termination.........................................................110 ARTICLE 11 MISCELLANEOUS Section 11.01. Notices.......................................................................111 Section 11.02. Survival of Representations and Warranties and Covenants......................112 Section 11.03. Amendments or Supplements and Waivers.........................................112 Section 11.04. Expenses......................................................................112 Section 11.05. Binding Effect; Benefit; Assignment...........................................114 Section 11.06. Governing Law.................................................................114 Section 11.07. Jurisdiction..................................................................114 Section 11.08. WAIVER OF JURY TRIAL..........................................................114 Section 11.09. Counterparts; Effectiveness...................................................115 Section 11.10. Entire Agreement..............................................................115 Section 11.11. Captions......................................................................115 Section 11.12. Severability..................................................................115 Section 11.13. Enforcement of Agreement......................................................115 Section 11.14. Interpretation................................................................116
59 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is dated as of November 16, 2003, among Sylvan Inc., a Nevada corporation (the "COMPANY"), Snyder Associated Companies, Inc., a Pennsylvania Corporation ("PARENT"), and SAC Holding Co., a Pennsylvania corporation and a wholly-owned subsidiary of Parent ("MERGER SUBSIDIARY"). Capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in Section 1.01 below. W I T N E S S E T H: WHEREAS, the respective Boards of Directors of Parent, Merger Subsidiary and the Company have each determined that it is advisable and in the best interests of their respective stockholders for Parent to acquire the Company by means of a merger of Merger Subsidiary with and into the Company upon the terms and subject to the conditions set forth herein; and WHEREAS, substantially concurrently herewith and as a condition and inducement to the willingness of Parent and Merger Subsidiary to enter into this Agreement, Parent and certain stockholders of the Company have entered into the Voting Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations and warranties made herein and of the mutual benefits to be derived therefrom, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01. Definitions. (a) The following terms, as used herein, have the following meanings: "ACQUISITION PROPOSAL" means, other than the transactions contemplated by this Agreement, any offer or proposal by a Third Party relating to, or any Third Party indication of interest in, (A) any acquisition or purchase, direct or indirect, of 20% or more of the consolidated assets of the Company and its Subsidiaries, taken as a whole, or over 20% of the voting securities of the Company or any of its Subsidiaries whose assets, individually or in the aggregate, constitute more than 20% of the consolidated assets of the Company, (B) any tender offer (including a self-tender offer) or exchange offer that, if consummated, would result in such Third Party's beneficially owning 20% or more of any class of equity or voting securities of the Company or any of its Subsidiaries whose assets, individually or in the aggregate, constitute more than 20% of the consolidated assets of the Company or (C) a merger, consolidation, share exchange, business 60 combination, sale of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving the Company or any of its Subsidiaries whose assets, individually or in the aggregate, constitute more than 20% of the consolidated assets of the Company. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person, where "CONTROL" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities or otherwise. "BALANCE SHEET" means the consolidated balance sheet of the Company and its Subsidiaries as of December 29, 2002 and the footnotes thereto set forth in the Company 10-K. "BALANCE SHEET DATE" means December 29, 2002. "BUSINESS DAY" means a day, other than Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. "CODE" means the Internal Revenue Code of 1986. "COMMON STOCK" means the common stock, $0.001 par value per share, of the Company. "COMPANY 10-K" means the Company's annual report on Form 10-K filed with the SEC for the fiscal year ended December 29, 2002, as amended. "CURRENT SEC DOCUMENTS" means, collectively, (i) the Company 10-K, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended March 30, 2003 and June 30, 2003, and (iii) all of its other reports, statements, schedules and registration statements filed with the SEC since December 29, 2002. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA AFFILIATE" of any entity means any other entity that, together with such entity, would be treated as a single employer under Section 414 of the Code. "GOVERNMENTAL AUTHORITY" means any court, administrative agency or commission or other federal, state, local or foreign governmental or regulatory authority, agency, body or instrumentality. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976. 61 "INDEBTEDNESS" of any Person means, without duplication: (i) indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which such Person is liable, contingently or otherwise, as obligor or otherwise, and any commitment by which such Person assures a creditor against loss, including contingent reimbursement obligations with respect to letters of credit (other than trade payables and other current liabilities incurred in the ordinary course of business consistent with past practices); (ii) indebtedness guaranteed in any manner by such Person, including a guarantee in the form of an agreement to repurchase or reimburse; (iii) obligations under capitalized leases in respect of which such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person assures a creditor against loss; and (iv) indebtedness due to stockholders or other holders of equity in such Person. "INTELLECTUAL PROPERTY" shall mean all of the following in any jurisdiction throughout the world: (i) patents, patent applications and patent disclosures; (ii) trademarks, service marks, trade dress, trade names, corporate names, logos and slogans (and all translations, adaptations, derivations and combinations of the foregoing) and Internet domain names, together with all goodwill associated with each of the foregoing; (iii) copyrights and copyrightable works; (iv) registrations and applications for any of the foregoing; (v) trade secrets, confidential information, know how and inventions; (vi) computer software (including but not limited to source code, executable code, data, databases and documentation); and (vi) all other intellectual property. "KNOWLEDGE OF THE COMPANY", "THE COMPANY'S KNOWLEDGE" or any other similar knowledge qualification in this Agreement means to the actual knowledge of the officers of the Company identified on Schedule 1.01(a). "LIEN" means, with respect to any property or asset, any mortgage, lien (statutory or otherwise), pledge, charge, security interest, encumbrance or other similar claim of any kind in respect of such property or asset. "MATERIAL ADVERSE EFFECT" means any change, event, occurrence, effect or fact that, individually or in the aggregate with all other changes, events, occurrences, effects and/or facts, has or is reasonably likely to have a material adverse effect on (A) the condition (financial or otherwise), business, assets, operations or results of operations of the Company and its Subsidiaries, taken as whole, except any such effect resulting from or arising in connection with (i) this Agreement or the Merger or the transactions contemplated hereby or any announcement thereof, (ii) changes or conditions affecting any industry in which the Company or its Subsidiaries operate generally which changes or conditions do not affect the Company or its Subsidiaries disproportionately relative to other entities operating in such industries, (iii) changes in economic, regulatory or political conditions generally or (iv) the announcement, commencement or 62 continuation of any war or armed hostilities or the occurrence of any act or acts of terrorism; or (B) the Company's ability to consummate the transactions contemplated by this Agreement or to perform its obligations under this Agreement. "NRS" means Chapters 78 and 92A of the Nevada Revised Statutes. "1933 ACT" means the Securities Act of 1933. "1934 ACT" means the Securities Exchange Act of 1934. "PABCL" means the Pennsylvania Business Corporation Law, 15 Pa. Cons. Stat. Section 1101 et seq. "PARENT MATERIAL ADVERSE EFFECT" means a material adverse effect on either Parent's or Merger Subsidiary's ability to consummate the transactions contemplated by this Agreement or to perform its obligations under this Agreement. "PERSON" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "SEC" means the Securities and Exchange Commission. "STOCK PURCHASE AGREEMENT" means that certain Stock Purchase Agreement executed substantially concurrently herewith among Parent, Merger Subsidiary and Steel Partners II, L.P. "SUBSIDIARY" means, with respect to any Person, any corporation a majority of the total voting power of shares of stock of which is entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or any partnership, limited liability company, association or other business entity a majority of the partnership or other similar ownership interest of which is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. "THIRD PARTY" means any Person as defined in this Agreement or in Section 13(d) of the 1934 Act, other than Parent and its Affiliates and their respective advisors and agents (acting in such capacity). "VOTING AGREEMENT" means that certain Voting Agreement executed substantially concurrently herewith among Parent, Wynnefield Partners Small 63 Cap Value, L.P., Wynnefield Partners Small Cap Value, L.P. I, Wynnefield Small Cap Value Offshore Fund, Ltd. and Nelson Obus. Any reference in this Agreement to a statute shall be to such statute, as amended from time to time, and to the rules and regulations promulgated thereunder. (b) Each of the following terms is defined in the Section set forth opposite such term:
TERM SECTION ------------------------------------------------------------------- ----------- "Agreement" Preamble "Articles of Merger" 2.02 "Certificates" 2.05 "Closing" 2.02 "COBRA" 4.18 "Combination Statute" 4.20 "Common Stockholder Approval" 6.02 "Common Stockholder Meeting" 6.02 "Company" Preamble "Company Disclosure Schedule" 6.07 "Company Intellectual Property" 4.23 "Company Policy" 7.04(b) "Company Proxy Statement" 4.09 "Company Securities" 4.05 "Company Stock Option" 2.06 "Company Subsidiary Securities" 4.06 "Controlling Interest Statute" 4.20 "Effective Time" 2.02 "EGTRRA" 4.18 "Employee Plans" 4.18 "End Date" 10.01 "Environmental Laws" 4.19 "Exchange Agent" 2.05 "Financial Statements" 5.07 "Foreign Plan" 4.18 "GAAP" 4.08 "GUST" 4.18 "Indemnified Person" 7.04 "Leased Premises" 4.26 "Merger" 2.01 "Merger Consideration" 2.04 "Merger Subsidiary" Preamble "Minority Investment" 4.06 "Multiemployer Plan" 4.18
64
TERM SECTION ------------------------------------------------------------------- ----------- "Owned Real Property" 4.24(d) "Parent" Preamble "Payment Event" 11.04 "Permits" 4.12 "Preferred Stock" 4.05 "Real Property Leases" 4.26 "SEC Documents" 4.07 "Special Committee" 4.02 "Superior Proposal" 6.03 "Superior Proposal Agreement" 10.01 "Surviving Corporation" 2.01 "Takeover Statutes" 4.20 "Tax Asset" 4.16 "Tax Return" 4.16 "Tax" 4.16 "Taxes" 4.16 "Taxing Authority" 4.16 "Title IV Plan" 4.18 "United States Bank" 2.05 "WARN Act" 4.17
ARTICLE 2 THE MERGER Section 2.01. The Merger. (a) Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the NRS and the PaBCL, at the Effective Time, Merger Subsidiary shall be merged (the "MERGER") with and into the Company, whereupon the separate existence of Merger Subsidiary shall cease, and the Company shall be the surviving corporation (the "SURVIVING CORPORATION"). The address of the Company is 333 Main Street, P.O. Box 249, Saxonburg, Pennsylvania 16056-0249, and its jurisdiction of incorporation is Nevada. The address of Merger Subsidiary is c/o Cohen & Grigsby, P.C., 11 Stanwix Street, 15th Floor, Pittsburgh, Pennsylvania 15222, and its jurisdiction of incorporation is Pennsylvania. (b) From and after the Effective Time, the Surviving Corporation shall possess all the rights, powers, privileges and franchises and be subject to all of the obligations, liabilities, restrictions and disabilities of the Company and Merger Subsidiary, all as provided under the NRS and the PaBCL. Section 2.02. Closing; Effective Time. Subject to the provisions of Article 9, the closing of the Merger (the "CLOSING") shall take place in New York at the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 65 10017, as soon as practicable, but in no event later than 10:00 a.m. New York City time on the second business day after the date on which each of the conditions set forth in Article 9 has been satisfied or waived by the party or parties entitled to the benefit of such conditions (other than conditions that by their terms can be satisfied only at the Closing, but subject to the satisfaction of such conditions), or at such other place, at such other time or on such other date as Merger Subsidiary and the Company may mutually agree. At the Closing, Merger Subsidiary and the Company shall cause articles of merger (the "ARTICLES OF MERGER") to be executed and filed with the Secretary of State of the State of Nevada in the form required by, and executed in accordance with, the applicable provisions of the NRS and with the Secretary of State of the Commonwealth of Pennsylvania in the form required by, and executed in accordance with, the applicable provisions of the PaBCL. The Merger shall become effective as of the date of the filing of, and at the time (if any) indicated in, the Articles of Merger or upon such other date and time as the parties shall agree should be and are specified in the Articles of Merger (the "EFFECTIVE TIME"). Section 2.03. Effects of the Merger. The Merger shall have the effects set forth in Section 92A.250 of the NRS and Section 1929 of PaBCL. Section 2.04. Conversion of Shares. At the Effective Time by virtue of the Merger and without any action on the part of the holder of any shares of Common Stock or any shares of capital stock of Merger Subsidiary: (a) each share of Common Stock held as treasury stock or owned by Parent or any Subsidiary of Parent, including Merger Subsidiary, immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto; (b) each share of common stock, no par value, of Merger Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock, no par value, of the Surviving Corporation with the same rights, powers and privileges as the shares so converted; and (c) each share of Common Stock issued and outstanding immediately prior to the Effective Time shall, except as otherwise provided in Section 2.04(a), be converted into the right to receive in cash from Parent an amount equal to $12.25 (the "MERGER CONSIDERATION"). Section 2.05. Surrender and Payment. (a) Prior to the Effective Time, Parent shall appoint an agent reasonably acceptable to the Company (the "EXCHANGE AGENT") for the purpose of exchanging certificates representing shares of Common Stock (the "CERTIFICATES") for the Merger Consideration, and Parent and Exchange Agent shall enter into an exchange agreement which shall, 66 in form and substance, be reasonably acceptable to the Company. Prior to the Effective Time, Parent shall deposit or cause to be deposited with the Exchange Agent in a separate fund established for the benefit of the holders of shares of Common Stock, cash sufficient to pay the aggregate Merger Consideration required to be paid for all of the Certificates at the Effective Time. Any cash deposited with the Exchange Agent shall not be used for any purpose other than as set forth in this Article 2 and shall be invested by the Exchange Agent as directed by Parent or the Surviving Corporation in: (A) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America with a remaining term at the time of acquisition thereof not in excess of 90 days, (B) money market accounts or certificates of deposit maturing within 90 days of the acquisition thereof and issued by a bank or trust company organized under the laws of the United States of America or a State thereof having a combined capital surplus in excess of $500,000,000 (a "UNITED STATES BANK"), (C) commercial paper issued by a domestic corporation and given a rating of no lower than A1 by Standard & Poor's Corporation and P1 by Moody's Investors Service, Inc. with a remaining term at the time of acquisition thereof not in excess of 90 days or (D) demand deposits with any United States Bank. The earnings and interest thereon shall be paid to Parent or as Parent directs. As soon as reasonably practicable (but not more than five Business Days) after the Effective Time, Parent shall send, or shall cause the Exchange Agent to send, to each holder of record of shares of Common Stock at the Effective Time, a letter of transmittal and instructions for use in effecting the surrender of a Certificate in exchange for payment of the applicable Merger Consideration (which shall (i) be in a form reasonably acceptable to each of Parent and the Company and (ii) specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Certificates to the Exchange Agent) for use in such exchange. (b) Each holder of shares of Common Stock that have been converted into the right to receive the Merger Consideration shall be entitled to receive, upon surrender to the Exchange Agent of a Certificate, together with a properly completed letter of transmittal and such other documents as may reasonably be required by the Exchange Agent, the applicable Merger Consideration in respect of the Common Stock represented by a Certificate. Such payment of the Merger Consideration, without any interest thereon, shall be sent to such holder of shares of Common Stock promptly after receipt of such Certificate and letter of transmittal and other documents by the Exchange Agent. Until so surrendered or transferred, as the case may be, each such Certificate shall represent after the Effective Time for all purposes only the right to receive such Merger Consideration. (c) If any portion of the Merger Consideration is to be paid to a Person other than the Person in whose name the surrendered Certificate is registered, it shall be a condition to such payment that (i) either such Certificate shall be 67 properly endorsed or shall otherwise be in proper form for transfer and (ii) the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such Certificate or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) After the Effective Time, there shall be no further registration of transfers of shares of Common Stock. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for the Merger Consideration provided for, and in accordance with the procedures set forth, in this Article 2. (e) Any portion of the Merger Consideration deposited with the Exchange Agent pursuant to Section 2.05(a) that remains unclaimed by the holders of shares of Common Stock six months after the Effective Time shall be returned to Parent, upon demand, and any such holder who has not exchanged shares of Common Stock for the Merger Consideration in accordance with this Section 2.05 prior to that time shall thereafter look only to Parent or the Surviving Corporation for payment of the Merger Consideration without any interest thereon. Notwithstanding the foregoing, none of Parent, Merger Subsidiary, the Company or the Exchange Agent shall be liable to any holder of shares of Common Stock for any Merger Consideration paid to a public official pursuant to any applicable abandoned property, escheat or similar laws. Any Merger Consideration remaining unclaimed by holders of shares of Common Stock five years after the Effective Time (or such earlier date, immediately prior to such time when any Merger Consideration would otherwise escheat to or become property of any Governmental Authority) shall become, to the extent permitted by applicable law, the property of the Surviving Corporation free and clear of any claims or interest of any Person previously entitled thereto. Section 2.06. Stock Options. (a) At or immediately prior to the Effective Time, by virtue of the Merger and without any further action on the part of the Company or the holder of each outstanding unexpired and unexercised option to purchase shares of Common Stock (a "COMPANY STOCK OPTION"), each Company Stock Option granted under any employee stock option or compensation plan or arrangement of the Company, whether or not exercisable or vested, shall be canceled, and, in exchange for such cancelled Company Stock Option, Parent shall pay or shall cause the Surviving Corporation to pay each holder at or promptly after the Effective Time for each such option so surrendered an amount, if any, in cash determined by multiplying (i) the excess (if any) of the Merger Consideration over the applicable exercise price of such Company Stock Option by (ii) the number of shares of Common Stock such holder could have purchased (assuming full vesting of all options) had such holder exercised such Company Stock Option in full immediately prior to the Effective Time. The foregoing provisions of this Section 2.06 shall not apply to Company Stock Options held by 68 any member of the Company's management who has agreed in writing with Parent or Merger Subsidiary not to so surrender his or her Company Stock Option for such payment. (b) Prior to the Effective Time, the Company shall use its reasonable efforts (without the expenditure of any material funds) to obtain any consents from holders of options to purchase shares of Common Stock granted under the Company's stock option or compensation plans or arrangements that the Company deems reasonably necessary to accomplish the transactions contemplated by Section 2.06(a). Section 2.07. Adjustments. If, during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of Common Stock shall occur, including by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon (including any dividend or distribution of securities convertible into Common Stock) with a record date during such period, the Merger Consideration and any other amounts payable pursuant to this Agreement shall be appropriately adjusted. References to the Merger Consideration elsewhere in this Agreement shall be deemed to refer to the Merger Consideration as it may have been adjusted pursuant to this Section 2.07. Section 2.08. Withholding Rights. Each of the Exchange Agent, the Surviving Corporation and Parent shall be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Article 2 such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign tax law. Any amounts so withheld shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Common Stock in respect of which such deduction and withholding was made. Section 2.09. Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond, in such reasonable amount as the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue, in exchange for such lost, stolen or destroyed Certificate, the Merger Consideration to be paid in respect of the shares of Common Stock represented by such Certificate, as contemplated by this Article 2. 69 ARTICLE 3 THE SURVIVING CORPORATION Section 3.01. Articles of Incorporation. The articles of incorporation of Merger Subsidiary, as in effect immediately prior to the Effective Time, as attached hereto as Exhibit B, shall be the articles of incorporation of the Surviving Corporation, with such amendments as are required to comply with the laws of the state of Nevada, until thereafter amended in accordance with its terms and applicable law, except that the name of the Surviving Corporation in such articles of incorporation shall be changed to Sylvan Inc. Section 3.02. Bylaws. The bylaws of Merger Subsidiary, as in effect immediately prior to the Effective Time, as attached hereto as Exhibit C, shall be the bylaws of the Surviving Corporation, with such amendments as are required to comply with the laws of the state of Nevada, until thereafter amended in accordance with its terms, the articles of incorporation of the Surviving Corporation and applicable law. Section 3.03. Directors and Officers. From and after the Effective Time, until the earlier of their resignation or removal or until their respective successors are duly elected or appointed in accordance with the bylaws of the Surviving Corporation and applicable law, (i) the directors of Merger Subsidiary immediately prior to the Effective Time shall be the directors of the Surviving Corporation and (ii) the officers of Merger Subsidiary immediately prior to the Effective Time shall be the officers of the Surviving Corporation. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent that: Section 4.01. Corporate Existence and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power and authority to own and use its properties and assets and to carry on its business as now being conducted. The Company is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or license necessary, except for those jurisdictions where the failure to be so qualified does not have a Material Adverse Effect. The Company has made publicly available true and complete copies of the articles of incorporation and bylaws of the Company as currently in effect. The Company is not in violation of, or default under, any material provision of its articles of incorporation or bylaws. 70 Section 4.02. Corporate Authorization. (a) The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby are within the Company's corporate powers and, except for the required approval of the Company's stockholders in connection with the consummation of the Merger, have been duly authorized by all necessary corporate action on the part of the Company. The affirmative vote of the holders of a majority of the outstanding shares of Common Stock is the only vote of the holders of any of the Company's capital stock necessary to approve the Merger, this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming due and valid authorization, execution and delivery of this Agreement by Parent and Merger Subsidiary, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that such enforceability (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (b) Prior to the execution and delivery of this Agreement, at a meeting duly called and held, the special committee of independent directors of the Board of Directors of the Company (the "SPECIAL COMMITTEE") has (i) unanimously approved and adopted the Merger and this Agreement and the transactions contemplated hereby and (ii) unanimously resolved to recommend that the full Board of Directors of the Company approve and adopt the Merger and this Agreement and the transactions contemplated hereby and recommend approval and adoption of the Merger and this Agreement and the transactions contemplated hereby by the Company's stockholders. (c) Prior to the execution and delivery of this Agreement, at a meeting duly called and held, the Company's Board of Directors has (i) approved and adopted the Merger and this Agreement and the transactions contemplated hereby, (ii) resolved to recommend approval and adoption of the Merger and this Agreement by the Company's stockholders and (iii) directed that this Agreement be submitted to the Company's stockholders for their approval. Section 4.03. Governmental Authorization. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby require no consent, permit, authorization or action by or in respect of, or filing with, any Governmental Authority, other than (i) the filing of Articles of Merger with respect to the Merger with the Nevada Secretary of State and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, (ii) compliance with any applicable requirements of the HSR Act, (iii) compliance with any applicable requirements of the 1934 Act and (iv) any actions 71 or filings the failure of which to take or make do not have a Material Adverse Effect. Section 4.04. Non-contravention. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby do not and will not (i) result in any violation or breach of any provision of the articles of incorporation or bylaws (or equivalent governing documents) of the Company or any of its Subsidiaries, (ii) assuming compliance with the matters referred to in Section 4.03 and the receipt of Company Stockholder Approval, result in a violation or breach of any provision of any applicable law, statute, ordinance, rule, regulation, judgment, injunction, order or decree, (iii) require any consent by any Person under, constitute a default under, or cause or permit the termination, cancellation, acceleration or the loss of any benefit to which the Company or any of its Subsidiaries is entitled under any provision of any agreement or other instrument binding upon the Company or any of its Subsidiaries or any license, franchise, permit or other similar authorization relating to the assets or business of the Company or its Subsidiaries or (iv) result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries, except for such violations or breaches referred to in clause (ii) and for such failures to obtain any such consent, defaults, terminations, cancellations, accelerations, losses or Liens referred to in clauses (iii) and (iv) that do not have a Material Adverse Effect. Section 4.05. Capitalization. (a) The authorized capital stock of the Company consists of (i) 10,000,000 shares of Common Stock and (ii) 1,000,000 shares of preferred stock, par value $0.01 per share (the "PREFERRED STOCK"). As of October 31, 2003, (i) 5,155,131 shares of Common Stock were issued and outstanding, (ii) no shares of Preferred Stock were issued or outstanding, (iii) 1,597,274 shares of Common Stock were issued and held by the Company in its treasury and (iv) 1,365,081 shares of Common Stock were subject to outstanding Company Stock Options (of which options to purchase an aggregate of 705,129 shares of Common Stock were exercisable) and (v) 134,919 additional shares of Common Stock are reserved for issuance under the Employee Plans. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and not subject to preemptive rights. No Subsidiary of the Company owns any shares of capital stock of the Company. (b) Except as set forth in Section 4.05(a) or in Section 4.05(b) of the Company Disclosure Schedule and for changes since October 31, 2003 resulting from the exercise of Company Stock Options outstanding on such date, there are no authorized, issued or outstanding (i) shares of capital stock or voting securities of the Company, (ii) securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company or (iii) options, warrants, calls, preemptive rights, subscriptions or other rights to acquire from the 72 Company, or other obligation of the Company to issue, any shares of capital stock, voting securities or securities convertible into or exchangeable for shares of capital stock or voting securities of the Company (the items in clauses (i), (ii), and (iii) being referred to collectively as the "COMPANY SECURITIES"). There are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of the Company Securities. With respect to any Company Securities of the type set forth in clauses (ii) and (iii) above, Section 4.05(b) of the Company Disclosure Schedule sets forth the following information: the holder, the number of shares covered, the exercise or conversion price, any vesting restrictions (and the amount vested) and the expiration date. Except as set forth in Section 4.05(b) of the Company Disclosure Schedule, there are no agreements with respect to the voting or transfer of capital stock of the Company or any of its Subsidiaries to which the Company or any of its Subsidiaries is a party. Section 4.06. Subsidiaries. (a) Each Subsidiary of the Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own and use its properties and assets and to carry on its business as now being conducted except, in each case, where the failure to be so incorporated, existing or in good standing does not have a Material Adverse Effect. Each such Subsidiary is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or license necessary, except for those jurisdictions where failure to be so qualified does not have a Material Adverse Effect. All Subsidiaries of the Company and their respective jurisdictions of incorporation are identified on Section 4.06(a) of the Company Disclosure Schedule. Section 4.06(a) of the Company Disclosure Schedule also correctly sets forth the name of each Subsidiary of the Company, the jurisdiction of its incorporation, the Persons owning the outstanding capital stock of such Subsidiary and the amounts of such capital stock so owned. No Subsidiary of the Company is in violation of or default under any of the provisions of its articles of incorporation, bylaws or similar organizational documents, except for such violations or defaults as do not have a Material Adverse Effect. (b) Except as set forth on Section 4.06(b) of the Company Disclosure Schedule, all of the outstanding shares of capital stock of, or other voting securities or ownership interests in, each Subsidiary of the Company, are duly authorized, validly issued, fully paid and non assessable and are owned by the Company, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such shares of capital stock or other voting securities or ownership interests) other than restrictions imposed by federal and state securities laws. There are no outstanding (i) securities of the Company or any of its 73 Subsidiaries convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of the Company or (ii) options, warrants, calls, preemptive rights, subscriptions or other rights to acquire from the Company or any of its Subsidiaries, or other obligation of the Company or any of its Subsidiaries to issue, any shares of capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any shares of capital stock or other voting securities or ownership interests in, any Subsidiary of the Company (the items in clauses (i) and (ii) being referred to collectively as the "COMPANY SUBSIDIARY SECURITIES"). There are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of the Company Subsidiary Securities. (c) Section 4.06(c) of the Company Disclosure Schedule sets forth the name and jurisdiction of each Person that is not a Subsidiary of the Company but in which the Company directly or indirectly holds any equity or other ownership interest in excess of fifteen percent of outstanding equity interests in such Person (each, a "MINORITY INVESTMENT"). There are no outstanding obligations of the Company or any of its Subsidiaries to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Minority Investment. Section 4.07. SEC Filings. (a) The Company has filed with the SEC true and complete copies of all forms, reports, schedules, statements and other documents required to be filed by it since December 31, 2000 under the 1934 Act or the 1933 Act (the documents referred to in this Section 4.07(a), collectively, the "SEC DOCUMENTS"). (b) As of its filing date, each SEC Document complied as to form in all material respects with the applicable requirements of the 1933 Act and the 1934 Act, as the case may be. (c) As of its filing date (or, if amended or superceded by a filing prior to the date of this Agreement, on the date of such filing), each SEC Document did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Section 4.08. Financial Statements. (a) The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company and its Subsidiaries included in the SEC Documents (i) complied as to form, in all material respects, with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and (ii) fairly present, in all material respects, in conformity with United States generally accepted accounting principles applied on a consistent basis ("GAAP") (except as 74 may be indicated in the notes thereto), the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject to normal year end adjustments in the case of any unaudited interim financial statements). (b) Attached to Section 4.08(b) of the Company Disclosure Schedule are the unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 28, 2003, and the related statements of income and cash flows (or the equivalent) for the nine-month period then ended. Such financial statements fairly present, in all material respects, in conformity with GAAP (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its Subsidiaries as of the date thereof and their consolidated results of operations and cash flows for the period then ended (subject to normal year-end adjustments). (c) Section 4.08(c) of the Company Disclosure Schedule sets forth the principal amounts of any material Indebtedness of the Company and its Subsidiaries as of September 28, 2003. Section 4.09. Disclosure Documents. The proxy or information statement of the Company to be filed with the SEC in connection with the Merger (the "COMPANY PROXY STATEMENT") and any amendments or supplements thereto will, when filed, comply as to form in all material respects with the applicable requirements of the 1934 Act. At the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time such stockholders vote on approval and adoption of this Agreement, the Company Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 4.09 will not apply to statements or omissions included in the Company Proxy Statement based upon information furnished in writing to the Company by Parent or its representatives specifically for use therein. Section 4.10. Absence of Certain Changes. Since the Balance Sheet Date, except as disclosed in Current SEC Documents and except as set forth in Section 4.10 of the Company Disclosure Schedule or as may be affected after the date hereof by actions permitted to be taken pursuant to Section 6.01, the business of the Company and its Subsidiaries has been conducted in the ordinary course consistent with past practices, and since the Balance Sheet Date, except as disclosed in Current SEC Documents or as set forth in Section 4.10 of the Company Disclosure Schedule, there has not been: (a) any Material Adverse Effect; 75 (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company, or any repurchase, redemption or other acquisition by the Company or any of its Subsidiaries of any outstanding shares of capital stock or other securities of, or other ownership interests in, the Company or any of its Subsidiaries; (c) any amendment of any material term of any outstanding security of the Company or any of its Subsidiaries; (d) any incurrence, assumption or guarantee by the Company or any of its Subsidiaries of any Indebtedness other than in the ordinary course of business and in amounts and on terms consistent with past practices; (e) any making of any material loan, advance or capital contributions to or investment in any Person other than loans, advances or capital contributions to or investments made in the ordinary course of business consistent with past practices; (f) any transaction or commitment made, or any contract or agreement entered into, by the Company or any of its Subsidiaries relating to its assets or business, in either case, material to the Company and its Subsidiaries, taken as a whole, other than transactions and commitments in the ordinary course of business consistent with past practices and those contemplated by this Agreement; (g) any change in any method of accounting or accounting principles or practice by the Company or any of its Subsidiaries, except for any such change required by reason of a concurrent change in GAAP or Regulation S-X under the 1934 Act; (h) any (i) grant of any severance or termination pay to (or amendment to any existing arrangement with) any director, officer or key employee of the Company or any of its Subsidiaries; (ii) increase in benefits payable under any existing severance or termination pay policies or employment agreements; (iii) entering into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or key employee of the Company or any of its Subsidiaries; (iv) establishment, adoption or amendment (except as required by applicable law) of any collective bargaining, bonus, profit sharing, thrift, pension, retirement, deferred compensation, compensation, stock option, restricted stock or other material benefit plan or arrangement covering any director, officer or employee of the Company or any of its Subsidiaries; or (v) increase in compensation, bonus or other benefits payable to any director, officer or key employee of the Company or any of its Subsidiaries other than increases in the ordinary course of business consistent with past practice. 76 Section 4.11. No Undisclosed Material Liabilities. Except as set forth in Section 4.11 of the Company Disclosure Schedule, there are no liabilities or obligations of the Company or any of its Subsidiaries of any kind, other than: (a) liabilities or obligations disclosed and provided for in the Balance Sheet or in the notes thereto or in the Current SEC Documents; (b) liabilities not required under GAAP to be shown on the Balance Sheet or in the notes thereto for reasons other than the contingent nature thereof or the difficulty of determining the amount thereof; (c) liabilities or obligations under this Agreement; (d) liabilities or obligations incurred in connection with the transactions contemplated by this Agreement; (e) liabilities or obligations incurred in the ordinary course of business since the Balance Sheet Date and which do not have a Material Adverse Effect; (f) liabilities disclosed in, related to or arising under any agreements, instruments or other matters disclosed in this Agreement or any Schedule hereto; and (g) other liabilities or obligations that do not have a Material Adverse Effect. Section 4.12. Compliance with Laws and Court Orders. The Company and each of its Subsidiaries is, and has been, in compliance with, and to the Knowledge of the Company is not under investigation with respect to and has not been threatened to be charged with or given notice of any violation of, any applicable law, statute, ordinance, rule, regulation, judgment, injunction, order or decree of any Governmental Authority, except for failures to comply or violations that do not have a Material Adverse Effect. The Company and its Subsidiaries have in effect all Federal, state, local and foreign governmental approvals, authorizations, licenses, and permits, including all authorizations under Environmental Laws ("PERMITS"), necessary for them to own, lease or operate their properties and assets and to carry on their businesses as now being conducted, and there has occurred no default under, or violation of, any such Permit, except for the lack of Permits and for defaults under, or violations of, Permits which lack, default or violation does not have a Material Adverse Effect. Section 4.13. Litigation. Except as disclosed in the Current SEC Documents, and for any action, suit, investigation or proceeding relating to, arising out of or resulting from the transactions contemplated by this Agreement, the announcement of this Agreement or the announcement of such transactions, (a) there is no action, suit, claim, litigation, investigation, arbitration or 77 proceeding pending against, or, to the Knowledge of the Company, threatened against, the Company, its Subsidiaries or any of its properties, assets or businesses, or to the Knowledge of the Company, any of the Company's or any Subsidiary's current or former directors or officers or any other Person whom the Company or any Subsidiary has agreed to indemnify before any court or any arbitrator, or before or by any Governmental Authority that has a Material Adverse Effect and (b) there are no outstanding orders, judgments, injunctions, awards or decrees of, or enforceable by, any Governmental Authority against the Company, its Subsidiaries, any of its properties, assets or businesses, or to the Knowledge of the Company, any of the Company's or its Subsidiaries' current or former directors or officers or any other Person whom the Company or any Subsidiary has agreed to indemnify that have a Material Adverse Effect. Section 4.14. Finders' Fees. Except for Lane, Berry & Co. International, LLC and Morgan Joseph & Co., Inc., a true and correct copy of whose engagement agreements have been provided to Parent, there is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of the Company or any of its Subsidiaries who might be entitled to any fee or commission from the Company or any of its Affiliates in connection with the transactions contemplated by this Agreement. Section 4.15. Opinions of Financial Advisors. The Special Committee has received the opinions of Lane, Berry & Co. International, LLC and Morgan Joseph & Co., Inc., financial advisors to the Special Committee, to the effect that, as of the date of this Agreement, the Merger Consideration is fair to the holders of the Common Stock from a financial point of view, copies of the written opinions of which will be delivered to Parent after receipt thereof by the Company. Section 4.16. Taxes. Except as set forth in Section 4.16 of the Company Disclosure Schedule and except for failures, violations, inaccuracies, omissions or proceedings which do not have a Material Adverse Effect: (a) all Tax Returns required by applicable law to be filed with any Taxing Authority by, or on behalf of, the Company or any of its Subsidiaries have been filed when due in accordance with all applicable laws, and all such Tax Returns were, at the time of filing, true and complete in all material respects; (b) there are no Liens for Taxes (other than Taxes not yet due and payable) upon any of the assets of the Company or any of its Subsidiaries; (c) the Company and each of its Subsidiaries has paid (or has had paid on its behalf) or has withheld and remitted to the appropriate Taxing Authority all Taxes shown as due and payable on its Tax Return, or, where payment is not yet due, has established (or has had established on its behalf) in accordance with GAAP an adequate accrual for all Taxes through the end of the last period for 78 which the Company and its Subsidiaries ordinarily record items on their respective books; (d) there is no claim, audit, action, suit, proceeding or investigation now pending or, to the Company's Knowledge, threatened in writing against or with respect to the Company or its Subsidiaries in respect of any Tax; (e) during the two-year period ending on the date of this Agreement, neither the Company nor any of its Subsidiaries was a distributing corporation or a controlled corporation in a transaction intended to be governed by Section 355 of the Code; (f) neither the Company nor any of its Subsidiaries is a party to any understanding or arrangement described in Section 6111(d) of the Code, or participated in a "reportable transaction" as defined in Treasury Regulations Section 1.6011-4(b), in each case after the applicable Effective Time; (g) neither the Company nor any of its Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency; and (h) neither the Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). (i) Section 4.16 of the Company Disclosure Schedule contains a list, as of the date of this Agreement, of all jurisdictions (whether foreign or domestic) in which the Company or any of its Subsidiaries currently files Tax Returns. (j) "TAX" means (i) any tax, governmental fee or other like assessment or charge of any kind whatsoever (including, but not limited to, withholding on amounts paid to or by any Person), together with any interest, penalty, addition to tax or additional amount imposed by any governmental authority (a "TAXING AUTHORITY") responsible for the imposition of any such tax (domestic or foreign), and any liability for any of the foregoing as transferee, (ii) in the case of the Company or any of its Subsidiaries, liability for the payment of any amount of the type described in clause (i) as a result of being or having been before the Effective Time a member of an affiliated, consolidated, combined or unitary group, or a party to any agreement or arrangement, as a result of which liability of the Company or any of its Subsidiaries to a Taxing Authority is determined or taken into account with reference to the activities of any other Person, and (iii) liability of the Company or any of its Subsidiaries for the payment of any amount as a result of being party to any Tax Sharing Agreement or with respect to the payment of any amount imposed on any Person of the type described in clauses (i) or (ii) as a result of any existing express or implied agreement or arrangement (including, but not limited to, an indemnification agreement or arrangement). 79 "TAX RETURN" means any report, return, document, declaration or other information or filing required to be supplied to any Taxing Authority with respect to Taxes, including information returns, any documents with respect to or accompanying payments of estimated Taxes, or with respect to or accompanying requests for the extension of time in which to file any such report, return, document, declaration or other information. "TAX ASSET" means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction or any other credit or tax attribute that could be carried forward or back to reduce Taxes (including without limitation deductions and credits related to alternative minimum Taxes). Section 4.17. Labor and Employment Matters. (a) Except as set forth in Section 4.17(a) of the Company Disclosure Schedule, with respect to the Company and its Subsidiaries: (i) there is no collective bargaining agreement or relationship with any labor organization; (ii) no labor organization or group of employees has filed any representation petition or made any written demand for recognition; (iii) to the Company's Knowledge, no union organizing or decertification efforts are underway or threatened; (iv) no labor strike, work stoppage, slowdown, or other material labor dispute has occurred, and none is underway or, to the Company's Knowledge, threatened; (v) there is no workman's compensation liability, experience or matter that has a Material Adverse Effect; (vi) there is no employment related charge, complaint, grievance, investigation, inquiry or obligation of any kind, pending or, to the Company's Knowledge, threatened in any forum, relating to an alleged violation or breach by the Company or its Subsidiaries (or its officers or directors) of any law, regulation or contract which has a Material Adverse Effect; and (vii) to the Company's Knowledge, no employee or agent of the Company or its Subsidiaries has committed any act or omission giving rise to any liability for any violation or breach identified in subsection (vi) above which, in each case, has a Material Adverse Effect. (b) Except as set forth in Section 4.17(b) of the Company Disclosure Schedule, (i) there are no employment contracts or severance agreements with any senior manager or officer of the Company or its Subsidiaries and (ii) there are no material written personnel policies, rules or procedures applicable to employees of the Company or its Subsidiaries. (c) With respect to the transactions contemplated hereby, any notice required under any law or collective bargaining agreement has been given, and all bargaining, obligations with any employee representative has been, or prior to the Closing will be, satisfied. Within the past three years, the Company has not implemented any plant closing or layoff of employees that creates liability under the Worker Adjustment and Retraining Notification Act of 1988, as amended, or any similar foreign, state or local law, regulation or ordinance (collectively, the 80 "WARN ACT"), and no such action will be implemented without advance notification to Parent. Section 4.18 Employee Benefit Plans. (a) Section 4.18 of the Company Disclosure Schedule contains a list identifying each (i) "employee benefit plan," as defined in Section 3(3) of ERISA, (ii) material employment, severance or similar contract, plan, arrangement or policy, or (iii) other material plan or arrangement providing for compensation, bonuses or incentive compensation, profit sharing, stock option or stock related rights, deferred compensation, vacation benefits, insurance (including any self insured arrangements), health or medical benefits, employee assistance program, disability or sick leave benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post employment or retirement benefits (including compensation, pension, health, medical or life insurance benefits) which is maintained, administered or contributed to by the Company or any ERISA Affiliate of the Company and covers any employee or former employee of the Company or any of its Subsidiaries, or with respect to which the Company or any of its Subsidiaries has any material liability (collectively, "EMPLOYEE PLANS"). (b) Except as set forth on Section 4.18(b) of the Company Disclosure Schedule, as of December 31, 2002, the fair market value of the assets of each Employee Plan subject to Title IV of ERISA (other than a "MULTIEMPLOYER PLAN", as defined below) (a "TITLE IV PLAN") exceeded the present value of the pension benefit obligations accrued under such Title IV Plan calculated pursuant to FASB No. 87. No "accumulated funding deficiency", as defined in Section 412 of the Code, has been incurred with respect to any Employee Plan subject to such Section 412, whether or not waived. No "reportable event", within the meaning of Section 4043 of ERISA, other than a reportable event that does not have a Material Adverse Effect and no event described in Section 4062 or 4063 of ERISA, has occurred in connection with any Employee Plan. Neither the Company nor any ERISA Affiliate of the Company has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Sections 4069 or 4212(c) of ERISA or incurred, or reasonably expects to incur prior to the Closing Date, (i) any liability under Title IV of ERISA arising in connection with the termination of, or a complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA or (ii) any liability under Section 4971 of the Code that in either case could become a liability of the Company or any Subsidiary of the Company or Parent or any of its ERISA Affiliates after the Closing Date. (c) All contributions (including employer contributions and employee salary reduction contributions) that are due have been made within the time periods prescribed by ERISA and the Code to each Employee Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been made to each Employee Plan or accrued in accordance with 81 past practice and custom. All premiums or other payments for all periods ending on or before the Closing Date with respect to each Employee Plan have been paid or accrued in accordance with past practice and custom. (d) Except as set forth in Section 4.18(d) of the Company Disclosure Schedule, none of the Company, any Subsidiary or any ERISA Affiliate of the Company or any Subsidiary has ever contributed to any multiemployer plan, as defined in Section 3(37) of ERISA (a "MULTIEMPLOYER PLAN"). None of the Company, any Subsidiary or any ERISA Affiliate has incurred any liability on account of a partial withdrawal or complete withdrawal (within the meaning of Section 4205 and 4203 of ERISA, respectively) from any Multiemployer Plan that has a Material Adverse Effect, no such liability has been asserted, and to the Knowledge of the Company, there are no events or circumstances which could result in any such partial or complete withdrawal. None of the Company, its Subsidiaries or any ERISA Affiliate is bound by any contract or agreement or has any obligation or liability under Section 4204 of ERISA. (e) Each Employee Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter, or has pending or has time remaining in which to file, an application for such determination from the Internal Revenue Service, and to the Knowledge of the Company, there is no event or condition which would be reasonably likely to result in the revocation or non issuance of any such favorable determination letter. All such Employee Plans have been or will be timely amended for the requirements of the tax legislation commonly known as "GUST" and "EGTRRA" and have been or will be submitted to the Internal Revenue Service for a favorable determination letter on the GUST requirements within the applicable remedial amendment period. To the Knowledge of the Company, each Employee Plan that is not a Multiemployer Plan, has been funded, administered and maintained in material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to such Employee Plan and according to the terms of any applicable collective bargaining agreement. (f) No events have occurred with respect to any Employee Plan that could be reasonably likely to result in payment or assessment by or against the Company of any excise taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E or 5000 of the Code. No fiduciary (within the meaning of Section 3(21) of ERISA) has any material liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any Employee Plan. No action, suit, proceeding, hearing or investigation with respect to the administration or the investment of the assets of any Employee Plan (other than routine claims for benefits) is pending or to the Knowledge of the Company, threatened. 82 (g) Except as set forth in Section 4.18(g) of the Company Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (either alone or together with any other event) entitle any employee or independent contractor of the Company or any of its Subsidiaries to severance pay or accelerate the time of payment or vesting or trigger any payment of funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or trigger any other material obligation pursuant to, any Employee Plan. (h) Except as set forth in Section 4.18(h) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has any liability in respect of post-retirement health, medical or life insurance benefits for retired, former or current employees of the Company or its Subsidiaries except as required to avoid excise tax under Section 4980B of the Code ("COBRA") or as may be required under other applicable law. The Company, each Subsidiary and each ERISA Affiliate has complied in all material respects with COBRA and any other similar state law. (i) Each employee benefit plan that is a plan maintained and administered in a jurisdiction other than the U.S. ("FOREIGN PLAN") has been maintained, funded and administered in accordance with the laws of such foreign jurisdiction. There are no material unfunded liabilities with respect to any Foreign Plan. Section 4.19. Environmental Matters. Except as set forth in the Current SEC Documents: (a) no material written notice, order, complaint or penalty has been received by the Company or any of its Subsidiaries arising out of any statute, law (including common law), regulation or rule, in each case as in effect on the date hereof, that relate to pollution or the protection of the environment or to the affects of pollutants or environmental contaminants, noise, odor or radiation on human health, natural resources or the environment ("ENVIRONMENTAL LAWS"), and there are no judicial, administrative or other actions, suits or proceedings pending or, to the Company's Knowledge, threatened which allege a material violation by the Company or any of its Subsidiaries of any Environmental Laws; (b) the Company and each of its Subsidiaries have all Permits necessary for their operations to comply, in all material respects, with all applicable Environmental Laws and are in compliance, in all material respects, with the terms of such permits; and (c) the operations of the Company and each Subsidiary are in compliance, in all material respects, with the terms of applicable Environmental Laws. 83 Section 4.20. State Takeover Statutes; No Rights Agreement. Article XIV of the Articles of Incorporation of the Company is effective (a) under NRS 78.434(1) to render the provisions of NRS 78.411 through 78.444, inclusive (the "COMBINATION STATUTE") inapplicable to the Merger, this Agreement, the Voting Agreement and the Stock Purchase Agreement and the transactions contemplated hereby and thereby; and (b) under NRS 78.378(1) to render the provisions of NRS 78.378 through 78.3793, inclusive (the "CONTROLLING INTEREST STATUTE") inapplicable to the Merger, this Agreement, the Voting Agreement and the Stock Purchase Agreement and the transactions contemplated hereby and thereby. To the Company's Knowledge after consultation with the Company's outside legal counsel, no other state takeover statute or similar statute or regulation applies to or purports to apply to the Merger, this Agreement, the Voting Agreement or the Stock Purchase Agreement or the transactions contemplated hereby or thereby (any such statute or regulation, together with the Combination Statute and the Controlling Interest Statute, collectively, "TAKEOVER STATUTES"). The Company does not have any stockholder or shareholder rights plan or agreement or any similar type of anti-takeover agreement. Section 4.21. Insurance. Section 4.21 of the Company Disclosure Schedule sets forth a complete and correct list of all material insurance policies in effect as of the date hereof providing coverage in favor of the Company or its Subsidiaries or any of their respective properties. Each such policy is in full force and effect, no notice of termination, cancellation or reservation of rights has been received with respect to any such policy, to the Knowledge of the Company there is no default with respect to any provision contained in any such policy, and there has not been any failure to give any notice or present any claim under such policy in a timely fashion or in the manner or detail required by any such policy, except for any such failures to be in full force and effect, any such terminations, cancellations, reservations or defaults, or any such failures to give notice or present claims which do not have a Material Adverse Effect. Section 4.22. Intellectual Property. (a) Section 4.22(a) of the Company Disclosure Schedule sets forth a complete and correct list of all material Intellectual Property owned or licensed by the Company and used by the Company or any of its Subsidiaries in the conduct of their respective businesses (the "COMPANY INTELLECTUAL PROPERTY"). (b) The Company or one of its Subsidiaries owns and possesses all, right, title and interest in and to, or has a valid and enforceable license to use pursuant to a written license agreement, (i) all Company Intellectual Property and (ii) all Intellectual Property necessary for the operation of the Company's and its Subsidiaries' businesses as presently conducted except, in each case, where the failure to own or possess such license or rights does not have a Material Adverse Effect. 84 (c) The Company Intellectual Property is not subject to any Liens, and is not subject to any restrictions or limitations regarding use or disclosure other than pursuant to a written license agreement set forth on Section 4.22(a) of the Company Disclosure Schedule. (d) To the Knowledge of the Company, neither the Company nor any of its Subsidiaries has infringed, misappropriated or otherwise conflicted with any Intellectual Property of any Third Party except for such infringements, misappropriations or conflicts that do not have a Material Adverse Effect. The Company has not received any notices regarding any of the foregoing (including, without limitation, any demands or offers to license any Intellectual Property from any Third Party). (e) To the Knowledge of the Company, no Third Party has infringed, misappropriated or otherwise conflicted with any of the Company Intellectual Property except for such infringements, misappropriations or conflicts that do not have a Material Adverse Effect. (f) To the Knowledge of the Company, all of the Company Intellectual Property is valid and enforceable and none of the Company Intellectual Property has been misused, no claim by any third party contesting the validity, enforceability, use or ownership of any of the Company Intellectual Property Rights has been made, is currently outstanding or is threatened, except, in each case, as does not have a Material Adverse Effect. Section 4.23. Contracts and Commitments. (a) Except as specifically contemplated by this Agreement and except as set forth on Section 4.23(a) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party to or bound by: (i) any agreement or indenture relating to the borrowing of money (other than intra-company borrowings), except for any such agreement or indenture (A) with an outstanding principal amount not exceeding $50,000 or (B) entered into subsequent to the date of this Agreement as permitted by Section 6.01; (ii) any agreement for the purchase by the Company or any of its Subsidiaries of materials, supplies, goods, services, equipment or other assets requiring annual payments of $100,000 or more that cannot be terminated on not more than 90 days' notice; (iii) any sales, distribution or other similar agreement for the sale by the Company or any of its Subsidiaries of materials, supplies, goods, services, equipment or other assets requiring annual payments of $100,000 or more that cannot be terminated on not more than 90 days' notice; 85 (iv) any agreement relating to the licensing of material Intellectual Property by the Company or any of its Subsidiaries to a Third Party or by a Third Party to the Company or any of its Subsidiaries; (v) any lease or agreement under which it is lessee of, or holds or operates, any personal property owned by any other party calling for payments in excess of $50,000 annually; (vi) any lease or agreement under which it is lessor of or permits any Third Party to hold or operate any material property, real or Personal, owned or controlled by it; (vii) any collective bargaining, union or similar agreement; (viii) any settlement, conciliation or similar agreement pursuant to which outstanding obligations of the Company and/or its Subsidiaries exist amounting to, or in excess of, $25,000; (ix) any contract which prohibits it from freely engaging in its business as presently conducted and as presently proposed to be conducted anywhere in the world; or (x) any other agreement material to the Company, its Subsidiaries or their businesses, not entered into in the ordinary course of business consistent with past practices. (b) Except as disclosed on Section 4.23(b) of the Company Disclosure Schedule, (i) no contract or commitment required to be disclosed on Section 4.23(a) of the Company Disclosure Schedule has, to the Knowledge of the Company, been breached or canceled by the other party thereto and (ii) the Company and each of its Subsidiaries have performed all material obligations required to be performed by them in connection with the contracts or commitments required to be disclosed on Section 4.23(a) of the Company Disclosure Schedule and are not in material default under or in material breach of any contract or commitment required to be disclosed on Section 4.23(a) of the Company Disclosure Schedule, and no event has occurred which with the passage of time or the giving of notice or both would result in a material default or material breach of a material term or condition thereunder. Each agreement required to be disclosed on Section 4.23(a) of the Company Disclosure Schedule is legal, valid, binding, enforceable and in full force and effect, except to the extent that such enforceability (i) may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights generally and (ii) is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 86 Section 4.24. Real Property. (a) Section 4.24(a) of the Company Disclosure Schedule lists all real property owned by the Company and its Subsidiaries (the "OWNED REAL PROPERTY"). The Company, or its Subsidiaries as the case may be, has good, marketable and insurable title to the Owned Real Property, free and clear of any Lien that would materially interfere with the present use of such property. (b) With respect to the Owned Real Property: (i) there are no material leases, subleases, licenses, concessions or other material agreements or arrangements, written or oral, granting to any party or parties the right of use or occupancy of any material portion of the parcel of such Property except in favor of the Company and its Subsidiaries; (ii) there are no outstanding options or rights of first refusal to purchase such Property, or any material portion thereof or material interest therein; and (iii) there are no parties (other than the Company and its Subsidiaries) in possession of a material portion of such Property. (c) With respect to the Owned Real Property Leases: (i) to the Company's Knowledge, none of the other parties thereto have exercised any renewal or extension right which materially extends the term of such Owned Real Property Leases; and (ii) to the Company's Knowledge, none of the other parties thereto have exercised any option, right of first refusal or any other unexpired right to purchase or otherwise acquire such Owned Real Property or any material portion thereof or any material interest therein. (d) "Owned Real Property Leases" means all leases, licenses or other agreements (written or oral) pursuant to which the Company or any of its Subsidiaries conveys or grants to any Person a material leasehold estate in, or right to use or occupy, any material Owned Real Property or portion thereof. (e) Section 4.24(e) of the Company Disclosure Schedule lists all material real property leased by the Company and its Subsidiaries (such property is referred to herein as the "LEASED PREMISES"). All leases under which the Company and its Subsidiaries lease the Leased Premises (the "REAL PROPERTY LEASES") are, in all material respects, valid, binding and enforceable against the Company and its Subsidiaries and, to the Company's Knowledge, the other parties thereto, in accordance in accordance with their terms; (i) no party thereto is in breach or default under any Real Property Lease; (ii) there are no existing defaults with respect to the Company or any of its Subsidiaries or, to the Company's Knowledge, the other parties thereto or any condition or event with the giving of notice or lapse of time would constitute a default by the Company's or any of its Subsidiaries thereunder; (iii) there are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any party or parties the right of use or occupancy of any portion of the parcel of such Leased Premises except in favor of the Company; and (iv) there are no parties (other than the Company and its Subsidiaries) in possession of such Leased Premises thereunder, 87 subject only to such exceptions, in each case, as do not have a Material Adverse Effect. Section 4.25. Minority Investments. Notwithstanding anything contained to the contrary herein, all of the representations and warranties contained in this Article 4 relating to any Subsidiary of the Company are, to the Knowledge of the Company, true and correct in all respects (as such representations and warranties may be otherwise explicitly qualified in each such representation and warranty) with respect to each Minority Investment as if each Minority Investment was a Subsidiary (it being understood that the Company Disclosure Schedule shall therefore include, to the Knowledge of the Company, all disclosures in respect of each Minority Investment (as if each Minority Investment was a Subsidiary) to make the representations and warranties contained herein true and correct in all respects). Section 4.26. Disclaimer of Other Representations and Warranties. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 4, THE COMPANY MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AND THE COMPANY HEREBY DISCLAIMS ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES, WHETHER BY THE COMPANY, ANY SUBSIDIARY OF THE COMPANY, OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OR ANY OTHER PERSON, WITH RESPECT TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO PARENT, MERGER SUBSIDIARY, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR REPRESENTATIVES, OR ANY OTHER PERSON, OF ANY DOCUMENTATION OR OTHER INFORMATION BY THE COMPANY, ANY SUBSIDIARY OF THE COMPANY, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR REPRESENTATIVES, OR ANY OTHER PERSON, WITH RESPECT TO ANY OF THE FOREGOING. Article 5 REPRESENTATIONS AND WARRANTIES OF PARENT Parent represents and warrants to the Company that: Section 5.01. Corporate Existence and Power. Each of Parent and Merger Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own and use its properties and assets and to carry on its business as now being conducted. Parent has heretofore made available to the Company true and complete copies of the articles/certificate of incorporation and bylaws of Parent and Merger Subsidiary as currently in effect. Neither Parent nor Merger Subsidiary is in violation of, or default under, any material provision of its respective articles/certificate of 88 incorporation or bylaws. Since the date of its incorporation, Merger Subsidiary has not engaged in any activities other than in connection with, or as contemplated by, this Agreement. Section 5.02. Corporate Authorization. The execution, delivery and performance by Parent and Merger Subsidiary of this Agreement and the consummation by Parent and Merger Subsidiary of the transactions contemplated hereby are within the corporate powers of Parent and Merger Subsidiary and have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by Parent and Merger Subsidiary and, assuming due and valid authorization, execution and delivery of this Agreement by the Company, constitutes a valid and binding obligation of Parent and Merger Subsidiary enforceable against Parent and Merger Subsidiary in accordance with its terms, except that such enforceability (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights generally and (ii) is subject to general principles of equity. Section 5.03. Governmental Authorization. The execution, delivery and performance by Parent and Merger Subsidiary of this Agreement and the consummation by Parent and Merger Subsidiary of the transactions contemplated hereby require no material action by or in respect of, or filing with, any Governmental Authority other than (i) the filing of Articles of Merger with respect to the Merger with the Nevada Secretary of State, (ii) compliance with any applicable requirements of the HSR Act, (iii) compliance with any applicable requirements of the 1934 Act and (iv) actions or filings, the failure of which to take or make would not, individually or in the aggregate, be reasonably likely to have a Parent Material Adverse Effect. Section 5.04. Non-contravention. The execution, delivery and performance by Parent and Merger Subsidiary of this Agreement and the consummation by Parent and Merger Subsidiary of the transactions contemplated hereby do not and will not (i) result in any violation or breach of any provision of the articles/certificate of incorporation or bylaws of Parent or Merger Subsidiary, (ii) assuming compliance with the matters referred to in Section 5.03, result in a violation or breach of any provision of any applicable law, statute, ordinance, rule, regulation, judgment, injunction, order or decree, (iii) require any consent or other action by any Person under, constitute a default under, or cause or permit the termination, cancellation, acceleration or the loss of any benefit to which Parent or any of its Subsidiaries is entitled under any provision of any agreement or other instrument binding upon Parent or any of its Subsidiaries or any governmental license, franchise, permit or other similar authorization relating to, the assets or business of Parent and its Subsidiaries (it being understood that the consummation 89 by Parent of the transactions contemplated hereby may require the consent of Parent's lenders under Parent's credit agreements; and Parent represents and warrants to the Company that all such consents will be obtained prior to the consummation of such transactions); (iv) result in the creation or imposition of any Lien on any asset of Parent or any of its Subsidiaries, except for such violations or breaches referred to in clause (ii) and for such failures to obtain any such consent or other action, defaults, terminations, cancellations, accelerations, losses or Liens referred to in clauses (iii) and (iv) that would not, individually or in the aggregate, be reasonably likely to have a Parent Material Adverse Effect. Section 5.05. Disclosure Documents. None of the information provided or to be provided by Parent specifically for inclusion in the Company Proxy Statement or any amendment or supplement thereto, at the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to the Company's stockholders and at the time the Company's stockholders vote on approval and adoption of this Agreement, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Section 5.06. Finders' Fees. There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of Parent who is entitled to any fee or commission from Parent or any of its Affiliates in connection with the transactions contemplated by this Agreement. Section 5.07. Financing. (a) Parent has previously provided to the Company the unaudited consolidated balance sheet as of December 31, 2002 of Parent and its Subsidiaries and the unaudited consolidated balance sheet of Parent and its Subsidiaries as of September 30, 2003, and the related statements of income and cash flows for the 9-month period then ended (collectively, the "FINANCIAL STATEMENTS"); provided that the financial statements of the consolidated entities were reviewed by Parent's independent auditors. The Financial Statements fairly present, in all material respects, in conformity with GAAP, the consolidated financial position of the Parent and its Subsidiaries as of the date thereof and their consolidated results of operations and cash flows for the period then ended. Since December 31, 2002 the business of Parent and its Subsidiaries has been conducted in the ordinary course consistent with past practices and there has not been any event, occurrence, development or state of circumstances or facts which, individually or in the aggregate, would be reasonably likely to have a Parent Material Adverse Effect. (b) Immediately after giving effect to the transactions contemplated by this Agreement, (i) none of Parent or any of its Subsidiaries will have incurred debts beyond its ability to pay such debts as they mature or become due, (ii) the then present fair salable value of the assets of Parent and each of its Subsidiaries 90 will exceed the amount that will be required to pay its respective probable liabilities (including the probable amount of all contingent liabilities) and their respective debts as they become absolute and matured, (iii) the assets of each of the Parent and each of its Subsidiaries, in each case at a fair valuation, will exceed its respective debts (including the probable amount of all contingent liabilities) and (iv) none of Parent or any of its Subsidiaries will have unreasonably small capital to carry on its business as presently conducted or as proposed to be conducted. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of Parent or its Subsidiaries or the Company or its Subsidiaries. (c) Parent (i) at the Closing will have sufficient funds available to pay the aggregate Merger consideration and any expenses incurred by the Parent or Merger Subsidiary in connection with the transactions contemplated by this Agreement; (ii) has, and at the Closing will have, the resources and capabilities (financial or otherwise) to perform its obligations hereunder; and (iii) has not incurred any obligation, commitment, restriction or liability of any kind, absolute or contingent, present or future, which would impair or adversely affect such resources and capabilities. Section 5.08. Agreements With Shareholders. Except for the Voting Agreement and the Stock Purchase Agreement, true and correct copies of such agreements having been provided to the Company, there are no agreements, arrangements or other understandings, written or oral, between Parent, Merger Subsidiary or any of their Affiliates on the one hand, and any holder of Common Stock, on the other hand, with respect to the voting or transfer of such Common Stock, except that there are nonbinding understandings as to the matters set forth in the exceptions clause of Section 7.05. ARTICLE 6 COVENANTS OF THE COMPANY The Company agrees that: Section 6.01. Conduct of the Company. Except as set forth in Section 6.01 of the Company Disclosure Schedule or in connection with the transactions contemplated by this Agreement, from the date hereof until the Effective Time, the Company shall, and shall cause its Subsidiaries to, conduct its businesses in the ordinary course consistent with past practice and shall use commercially reasonable efforts to preserve intact their current business organizations and relationships with Third Parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, other than as set forth in Section 6.01 of the Company Disclosure Schedule, from the 91 date hereof until the Effective Time, the Company shall not, and shall cause its Subsidiaries not to, without Parent's prior written consent: (a) amend, adopt or propose any change to its articles of incorporation or bylaws or other comparable charter or organizational documents; (b) (i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property), in respect of, any of its capital stock (other than to the Company or a wholly owned Subsidiary of the Company), (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (other than the issuance of shares of Common Stock upon the exercise of options to purchase shares of Common Stock outstanding on the date of this Agreement and in accordance with their present terms) or (iii) purchase, redeem or otherwise acquire any shares of capital stock of the Company or its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (c) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock, any other securities or any securities convertible into, or any rights, warrants, options, calls, conversion rights, stock appreciation rights, redemption rights, repurchase rights, preemptive rights, subscriptions or other rights, enter into any commitments, agreements, arrangements or undertakings of any kind to acquire, any securities of the Company (other than (i) the issuance of shares of Common Stock upon the exercise of Company Stock Options outstanding on the date of this Agreement and in accordance with their present terms or (ii) the granting of options to acquire Common Stock pursuant to any existing contractual obligations shown on Section 4.05(b) of the Company Disclosure Schedule); (d) acquire or agree to acquire (i) by merging or consolidating with (or adopting a plan of recapitalization, restructuring or other reorganization), or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof or (ii) any assets, except purchases of assets in the ordinary course of business and except for capital expenditures (which are covered in Section 6.01(g) below); (e) sell, lease, license, mortgage or otherwise encumber or otherwise dispose of any of its material properties or assets, except (i) pursuant to existing contracts or commitments and (ii) for sales in the ordinary course of business consistent with past practices; (f) (i) incur any Indebtedness for borrowed money or guarantee any such indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or its Subsidiaries, 92 guarantee any debt securities of another Person, enter into any "keep well" or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing, except for borrowings incurred in the ordinary course of business consistent with past practices or (ii) make any loans, advances or capital contributions to, or investments in, any other Person, other than extensions of credit to customers and advances to employees, in each case in the ordinary course of business consistent with past practices; (g) make or agree to make any new capital expenditure or expenditures, except for those (i) the items set forth on Section 6.01(g) of the Company Disclosure Schedule or in the Company's fiscal 2003 operating budget (a copy of which has been provided to Parent) or (ii) not otherwise described in clause (i) which, in the aggregate, do not exceed $250,000; (h) except as set forth on Section 6.01(h) of the Company Disclosure Schedule, discharge, settle, assign or satisfy any claims, whether or not pending before a Governmental Authority, in excess of $100,000 in the aggregate, or waive any material benefits of, or agree to modify in any respect materially adverse to the Company, any confidentiality agreements to which the Company or any of its Subsidiaries is a party, other than any such agreement entered into pursuant to Section 6.03(b)(ii) in connection with an Acquisition Proposal; (i) except in the ordinary course of business consistent with past practices, modify, amend or terminate any material contract or agreement to which the Company or any of its Subsidiaries is a party or waive, release or assign any material rights or claims thereunder, in any such case in a manner reasonably likely to have an adverse effect in excess of $25,000 to the Company or any of its Subsidiaries; (j) other than with respect to contracts terminable upon no more than 90 days' notice without penalty, enter into any new contract or agreement, or modify, amend, terminate or renew any existing contract or agreement to which the Company or any of its Subsidiaries is a party, other than (i) as otherwise provided in this Section 6.01, (ii) in the ordinary course of business or (iii) if the dollar value of such new contract or agreement, or existing contract or agreement as so amended, modified, terminated or renewed, is or would be less than $50,000; (k) fail to maintain all material insurance policies as currently in effect or allow any of such policies to lapse; (l) except as required to comply with applicable law or as expressly contemplated by this Agreement, (i) adopt, enter into, terminate or amend any collective bargaining agreement or Employee Plan for the benefit or welfare of any current or former employee, officer or director, (ii) increase in any manner 93 the compensation or fringe benefits of, or pay any bonus to, any director, officer or employee (except for increases of cash compensation or bonuses to such persons, other than executive officers, reasonably consistent with past practices), (iii) pay any benefit not provided for under any Employee Plan or any other benefit plan or arrangement of the Company, (iv) increase in any manner the severance or termination pay of or obligation to any employee, (v) enter into any employment, consulting, severance, termination or indemnification agreement, arrangement or understanding with any current or former officer or director or (vi) except as permitted in clause (ii), grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or Employee Plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock or the removal of existing restrictions in any Employee Plans or agreements or awards made thereunder); (m) form any direct or indirect subsidiaries of the Company; (n) except as required by GAAP, make any change in accounting methods, principles or practices; (o) knowingly or willfully take any action that would cause any representation and warranty of the Company hereunder to no longer be true and correct; or (p) authorize any of, or agree or commit to do any of, the foregoing actions. Section 6.02. Stockholder Meeting; Proxy Material. The Company shall cause a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") to be duly called and held as soon as reasonably practicable following the clearance of the Company Proxy Statement by the SEC for the purpose of voting on the approval and adoption of this Agreement and the Merger. The Board of Directors of the Company shall recommend approval and adoption of this Agreement and the Merger by the Company's stockholders and include such recommendation in the Company Proxy Statement; provided that the Board of Directors of the Company may elect not to make, may withdraw or may modify in a manner adverse to Parent such recommendation (including, without limitation, by approving, recommending or endorsing a Superior Proposal) if the Board of Directors of the Company determines in good faith after considering advice from outside counsel, that such action is required to comply with its fiduciary duties under law. Unless the Board of Directors of the Company has withdrawn or modified its recommendation in compliance with this Agreement, the Company shall use its reasonable efforts to solicit from its stockholders proxies in favor of the approval and adoption of this Agreement and the Merger. In connection with such meeting, the Company shall (i) promptly prepare and file with the SEC, use 94 its reasonable efforts to have cleared by the SEC and thereafter mail to its stockholders as promptly as practicable the Company Proxy Statement and all other proxy materials for such meeting, (ii) subject to (A) the proviso to the second sentence of this Section 6.02 and (B) Section 6.03(b), use its reasonable efforts to obtain the necessary approvals by its stockholders of this Agreement and the Merger (the "COMPANY STOCKHOLDER APPROVAL") and (iii) otherwise comply with all legal requirements applicable to such meeting, including establishing a record date (which date shall be as soon as practicable following the date of the SEC's clearance of the Company Proxy Statement). No amendment to the Company Proxy Statement shall be made by the Company without consultation with Parent. Section 6.03. No Solicitation; Other Offers. (a) From and after the execution of this Agreement by all of the parties hereto until the earlier of the Effective Time and the termination of this Agreement pursuant to Article 10, neither the Company nor any of its Subsidiaries shall, and the Company and its Subsidiaries shall instruct its or their officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors not to, directly or indirectly, (i) solicit, initiate, encourage or knowingly take any action designed to facilitate, or that could reasonably be expected to lead to, the submission of any Acquisition Proposal, (ii) engage in any discussions or negotiations with, or furnish any non-public information relating to the Company or any of its Subsidiaries to, any Third Party that to the Knowledge of the Company is seeking to make, or has made, an Acquisition Proposal, (iii) agree to, approve or recommend any Acquisition Proposal or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal (subject to the provisions of Section 6.03(b) below), or (iv) (A) amend or grant any waiver or release under any standstill or similar agreement with respect to any class of equity securities of the Company or any of its Subsidiaries or (B) enter into any agreement with respect to an Acquisition Proposal (other than a confidentiality agreement pursuant to Section 6.03(b)(ii)). (b) Notwithstanding the foregoing, the Special Committee or the Board of Directors of the Company, directly or indirectly through advisors, agents or other intermediaries, may, in response to an unsolicited, bona fide Acquisition Proposal, from a Third Party which the Special Committee or the Board of Directors of the Company determines in good faith has sufficient financial resources available to it to consummate such a transaction, that the Special Committee of the Company's Board of Directors determines in good faith is reasonably likely to result in a Superior Proposal (provided such Acquisition Proposal is not received in violation of Section 6.03(a)), if the Special Committee or the Company's Board of Directors determines in good faith (after consultation with its financial and legal advisors) that such action is necessary for the Special Committee or the Company's Board of Directors to comply with its fiduciary duties under applicable law, (i) engage in negotiations or discussions with the 95 Third Party making such Acquisition Proposal, (ii) furnish to such Third Party non public information relating to, and afford access to the business, properties, assets, books and records of, the Company or any of its Subsidiaries pursuant to an executed confidentiality agreement containing terms and conditions at least as restrictive in the aggregate as contained in that certain confidentiality agreement dated as of April 30, 2003 between Snyder Associated Companies, Inc. and the Company, (iii) amend or grant any waiver referred to in Section 6.03(a)(iv)(A) and/or (iv) enter into a Superior Proposal Agreement in accordance with Section 10.01(d)(ii). Nothing contained herein shall prevent the Board of Directors of the Company from (i) taking any action that any court of competent jurisdiction orders the Company to take, (ii) making with respect to an Acquisition Proposal a "stop look and listen" communication of the nature contemplated in, and otherwise in compliance with, Rule 14d-9(f) under the 1934 Act as a result of receiving an Acquisition Proposal or (iii) with regard to an Acquisition Proposal, complying with Rules 14e-2(a) or 14d-9 under the 1934 Act or making such disclosure to the Company's stockholders as, in the good faith judgment of the Special Committee or the Company's Board of Directors (after consultation with its legal advisors), is necessary for the Company's Board of Directors to comply with its fiduciary duties under applicable law. (c) The Board of Directors of the Company shall not take any of the actions referred to in clauses (i) through (iv) of the first sentence of Section 6.03(b) or in the proviso to the second sentence of Section 6.02 unless the Company delivers to Parent no later than 24 hours prior to the taking of such action a written notice advising Parent that it will take such action. In addition, the Company shall notify Parent promptly (but in no event later than 48 hours) after receipt by the Company (or any of its advisors) of any Acquisition Proposal or of any request for information relating to the Company or any of its Subsidiaries or for access to the business, properties, assets, books or records of the Company or any of its Subsidiaries (other than such components of such businesses, properties or assets that are generally accessible to the public) by any Third Party that to the Knowledge of the Company may be considering making, or has made, an Acquisition Proposal. The Company shall provide such notice orally and in writing and shall identify the Third Party making, and the material terms and conditions of, any such Acquisition Proposal, indication or request. The Company shall keep Parent informed in all material respects, on a prompt basis, of the status and material details of any such Acquisition Proposal, indication or request. The Company shall, and shall cause its Subsidiaries and the advisors, employees and other agents of the Company and any of its Subsidiaries to, cease immediately and cause to be terminated any and all existing activities, discussions or negotiations, if any, with any Third Party conducted prior to the execution of this Agreement by all parties hereto with respect to any Acquisition Proposal and request the return or destruction of all information provided to Third Parties pursuant to a confidentiality agreement. 96 "SUPERIOR PROPOSAL" means any bona fide, unsolicited written Acquisition Proposal to acquire, directly or indirectly, at least a majority of the outstanding shares of Common Stock or 50% or more of the consolidated assets of the Company and its Subsidiaries and otherwise on terms that the Special Committee or the Board of Directors of the Company determines in good faith by a majority vote (after consultation with a reputable financial advisor), are more favorable and provide greater value to the Company's stockholders than the Merger and for which financing, to the extent required, is then fully committed or reasonably determined to be available by the Special Committee or the Board of Directors of the Company. Section 6.04. Tax Matters. (a) Except as otherwise required by applicable law or with the consent of Parent (which consent shall not be unreasonably withheld or delayed), neither the Company nor any of its Subsidiaries shall make or change any Tax election, change any annual Tax accounting period, adopt or change any method of tax accounting, file any amended Tax Returns or claims for Tax refunds, enter into any closing agreement with a Taxing Authority or settle or compromise any Tax claim, audit or assessment if any such action or omission, considered in the aggregate, would have the effect of materially increasing the Tax liability or reducing any material Tax Asset of the Company or any of its Subsidiaries. (b) All transfer, documentary, sales, use, stamp, registration, value added and similar Taxes and fees (including any penalties and interest) imposed upon the Company or any of its Subsidiaries in connection with the Merger (including any real property transfer tax and any similar Tax) shall be paid by the Company when due, and the Company shall, at its own expense, file all necessary Tax returns and other documentation with respect to all such Taxes and fees, and, if required by applicable law, the Company shall join in the execution of any such Tax returns and other documentation. Section 6.05. Access to Information. From the date of this Agreement until the Effective Time, subject to applicable law, upon reasonable notice and during normal business hours, the Company shall (i) give to Parent, its officers, employees, counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, employees, contracts, books and records of the Company and its Subsidiaries, (ii) furnish to Parent, its officers, employees, counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Persons may reasonably request and (iii) instruct its employees, counsel, financial advisors, auditors and other authorized representatives to cooperate with Parent in its investigation. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company and its Subsidiaries. No information or knowledge obtained in any investigation pursuant to this Section shall affect or be deemed to modify any 97 representation or warranty made by any party hereunder or any condition to the obligations of the parties hereto. Section 6.06. Notices of Certain Events. The Company shall promptly notify Parent in writing of: (a) any Material Adverse Effect; (b) any change which makes it likely that any representation and warranty set forth in this Agreement regarding the Company or any of its Subsidiaries is not or will not be true at the Closing; (c) the occurrence or non occurrence of any event the occurrence or non occurrence of which would be likely to cause any condition to the obligations of Parent to effect the transactions contemplated by this Agreement not to be satisfied; (d) the material failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it pursuant to this Agreement which would be likely to result in any condition to the obligations of Parent to effect the transactions contemplated by this Agreement not to be satisfied; (e) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (f) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; and (g) any actions, suits, claims, investigations or proceedings commenced or, to the Company's Knowledge, threatened against, relating to or involving or otherwise affecting the Company or any of its Subsidiaries, as the case may be, that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 4.12, 4.13, 4.16, 4.17, 4.18 or 4.19, as the case may be, or that relate to the consummation of the transactions contemplated by this Agreement; provided, however, that the delivery of any notice pursuant to this Section 6.06 shall not cure any breach of any representation or warranty or otherwise limit or affect the rights and remedies available to Parent. Section 6.07. Disclosure Schedule. On the date of this Agreement, the Company has delivered to Parent a schedule (the "COMPANY DISCLOSURE SCHEDULE"). The Company Disclosure Schedule constitutes an integral part of 98 this Agreement. A matter set forth in one item of the Company Disclosure Schedule need not be set forth in any other item of the Company Disclosure Schedule so long as its relevance to the other sections or subsections of the Company Disclosure Schedule or section of the Agreement is reasonably apparent on the face of the information disclosed in the Company Disclosure Schedule. The fact that any item of information is disclosed in the Company Disclosure Schedule shall not be construed to mean that such information is required to be disclosed by this Agreement. Such information and the dollar thresholds set forth herein shall not be used as a basis for interpreting the terms "material" or "Material Adverse Effect" or other similar terms in this Agreement. ARTICLE 7 COVENANTS OF PARENT Parent agrees that: Section 7.01. Notices of Certain Events. Parent shall promptly notify the Company in writing of: (a) any Parent Material Adverse Effect; (b) any change which makes it likely that any representation and warranty set forth in this Agreement regarding the Parent or Merger Subsidiary is not or will not be true at the Closing; (c) the occurrence or non occurrence of any event the occurrence or non occurrence of which would be likely to cause any condition to the obligations of the Company to effect the transactions contemplated by this Agreement not to be satisfied; (d) the material failure of Parent or Merger Subsidiary to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it pursuant to this Agreement which would be likely to result in any condition to the obligations of the Company to effect the transactions contemplated by this Agreement not to be satisfied; (e) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (f) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; and 99 (g) any actions, suits, claims, investigations or proceedings commenced or, to Parent's knowledge, threatened against, relating to or involving or otherwise affecting Parent or Merger Subsidiary that relate to the consummation of the transactions contemplated by this Agreement; provided, however, that the delivery of any notice pursuant to this Section 7.01 shall not cure any breach of any representation or warranty or otherwise limit or affect the rights and remedies available to Company. Section 7.02. Obligations of Merger Subsidiary. Parent shall take all action necessary to cause Merger Subsidiary to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. Section 7.03. Voting of Shares. Parent shall vote all shares of Common Stock beneficially owned by it or any of its Subsidiaries in favor of adoption of this Agreement at the Common Stockholder Meeting. Section 7.04. Director and Officer Liability. Parent shall cause the Surviving Corporation, and the Surviving Corporation hereby agrees, to do the following: (a) From and after the Effective Time, the Surviving Corporation shall, and Parent shall cause the Surviving Corporation to, indemnify and hold harmless any Person who is now, or has been at any time prior to the date of this Agreement or who becomes such prior to the Effective Time, an officer or director of the Company or any of its Subsidiaries (each, an "INDEMNIFIED PERSON") to the fullest extent permitted by applicable law and under the Company's articles of incorporation and bylaws in effect on the date hereof, from and against, and defend any Indemnified Person from and reimburse any Indemnified Person for, any and all losses, claims, damages, costs, expenses (including reasonable attorneys' fees), fines, liabilities and judgments and amounts that are paid in settlement arising out of or in connection with any claim, action, suit, proceeding or investigation (A) to the extent based on, or arising out of, the fact that such Person is or was a director or officer of the Company or any of its Subsidiaries pertaining to any action or omission existing or occurring at or prior to the Effective Time and whether asserted or claimed prior to, at or after the Effective Time or (B) to the extent based on, or arising out of, or pertaining to, this Agreement or the transactions contemplated hereby. The Surviving Corporation will, and Parent will cause the Surviving Corporation to, promptly advance all documented, reasonable out of pocket expenses (including reasonable attorneys' fees) of each Indemnified Person in connection with any such claim, action, suit, investigation or proceeding with respect to which such Indemnified Person is seeking indemnification hereunder as such reasonable out of pocket expenses are incurred (subject to having received an undertaking from such 100 Indemnified Person to reimburse such expenses if it is subsequently determined that the Indemnified Person is not entitled to indemnification under applicable law). Upon receipt by an Indemnified Person of actual notice of a claim, action or proceeding against such Indemnified Person in respect of which indemnity may be sought pursuant to this Section 7.04(a), such Indemnified Person shall promptly notify the Surviving Corporation with respect thereto. In addition, an Indemnified Person shall promptly notify the Surviving Corporation after any action is commenced (by way of service with a summons or other legal process giving information as to the nature and basis of the claim) against such Indemnified Person. In any event, failure so to notify the Surviving Corporation shall not relieve the Surviving Corporation or Parent from any liability which the Surviving Corporation or Parent may have on account of this indemnity or otherwise, except to the extent the Surviving Corporation or Parent shall have been materially prejudiced by such failure. The Surviving Corporation may, at its election, and, if requested by an Indemnified Person, shall, assume the defense of and control any litigation or proceeding in respect of which indemnity may be sought hereunder, including the employment of counsel reasonably satisfactory to the Indemnified Person and the payment of the fees and expenses of such counsel, in which event, except as provided below, the Surviving Corporation shall not be liable for the fees and expenses of any other counsel retained by an Indemnified Person in connection with such litigation or proceeding. The Indemnified Person may assume the defense of and control any such litigation or proceeding in the event that the Surviving Corporation is not in good faith pursuing the defense of such matter. In any such litigation or proceeding the defense of which the Surviving Corporation shall have so assumed and be pursuing in good faith, any Indemnified Person shall have the right to participate in (but not control) such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Surviving Corporation and such Indemnified Person shall have mutually agreed in writing to the retention of such counsel or (ii) the named parties to any such litigation or proceeding (including any impleaded parties) include the Surviving Corporation and such Indemnified Person and representation of both parties by the same counsel would, in the good faith opinion of counsel to the Surviving Corporation, be inappropriate due to actual or potential differing interests between the Surviving Corporation and such Indemnified Person. In any litigation or proceeding of which the Surviving Corporation shall have assumed the defense, the Surviving Corporation shall not settle such matter without the prior written consent of the Indemnified Person (which consent shall not be unreasonably withheld or delayed) and no Indemnified Person shall be required to agree to settle such matter unless such settlement (x) includes an unconditional release of such Indemnified Person from all liability arising out of or in connection with such matter, (y) does not include any admission of fault, culpability or a failure to act by, or on behalf of, such Indemnified Person or payment of any money by 101 such Indemnified Person and (z) does not result in the imposition against such Indemnified Person of injunctive or other equitable relief. The Surviving Corporation shall not be liable for any settlement of any litigation or proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Surviving Corporation agrees to indemnify the Indemnified Person from and against any loss or liability by reason of such settlement or judgment. (b) For six years after the Effective Time, Parent or the Surviving Corporation shall maintain in effect the Company's current directors' and officers' liability policy (the "COMPANY POLICY") or provide officers' and directors' liability insurance in respect of acts or omissions occurring prior to the Effective Time covering each such Indemnified Person currently covered by the Company Policy (a copy of which has been heretofore delivered to Parent) on terms, with respect to coverage and amount, no less favorable than those of the Company Policy in effect on the date of this Agreement; provided, however, that in no event shall Parent or the Surviving Corporation be required to expend in any one year an amount in excess of 300% of the annual premiums currently paid by the Company for such insurance; and, provided, further, that if the annual premiums of such insurance coverage exceed such amount, Parent or the Surviving Corporation shall be obligated to obtain a policy with the greatest coverage available for a cost not exceeding such amount. (c) If Parent, the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Parent or the Surviving Corporation, as the case may be, shall assume all of the obligations set forth in this Section 7.04. (d) The rights of each Indemnified Person under this Section 7.04 shall be in addition to any rights to indemnification and exculpation of personal liability that such Person may have under the articles of incorporation or bylaws of the Company or the articles/certificate of incorporation or bylaws of any of its Subsidiaries, or under any applicable laws or under any agreement of any Indemnified Person with the Company or any of its Subsidiaries. These rights shall survive consummation of the Merger and are intended to benefit, and shall be enforceable by, each Indemnified Person, his or her heirs and his or her personal representatives. Section 7.05. Agreements With Shareholders. From the date hereof until the Effective Time, Parent shall not, and shall cause its Affiliates and Merger Subsidiary not to, (i) enter into any agreement, arrangement or understanding, 102 written or oral, with any holder of Common Stock with respect to the voting or transfer of such Common Stock, other than the Voting Agreement and the Stock Purchase Agreement or (ii) modify or amend the Voting Agreement or the Stock Purchase Agreement, except Merger Subsidiary and its Affiliates may enter into agreements with Dennis Zensen, members of management and Virgil Jurgensmeyer pursuant to which Dennis Zensen, members of management and Virgil Jurgensmeyer agree to transfer to Merger Subsidiary all or a portion of the shares owned by such persons at a price that is equal to or higher than is being paid by all other investors in the Surviving Corporation. ARTICLE 8 COVENANTS OF PARENT AND THE COMPANY The parties hereto agree that: Section 8.01. Reasonable Efforts. (a) Subject to the terms and conditions of this Agreement, Company and Parent shall use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including, without limitation, (i) preparing and filing as promptly as practicable with any Governmental Authority or other Third Party all documentation to effect all necessary filings, notices, petitions, statements, registrations, submissions of information, applications and other documents, (ii) obtaining and maintaining all approvals, consents, registrations, permits, authorizations and other confirmations required to be obtained from any Governmental Authority that are necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (iii) using all reasonable efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby and using all reasonable efforts to defend any litigation seeking to enjoin, prevent or delay the consummation of the transactions contemplated hereby or seeking material damages in connection with this Agreement or the transactions contemplated hereby and (iv) executing and delivering any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purpose of, this Agreement. (b) In furtherance and not in limitation of the foregoing, each of Parent and Company shall make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby as promptly as practicable and in any event within ten Business Days after the date of this Agreement and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR 103 Act and to take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable. (c) Prior to making any application to or filing with a Governmental Authority or other entity in connection with this Agreement (other than the Notification and Report Form pursuant to the HSR Act ), each party shall provide the other party with drafts thereof and afford the other party a reasonable opportunity to comment on such drafts. Section 8.02. Certain Filings. The Company and Parent shall cooperate with one another (a) in connection with the preparation of the Company Proxy Statement, (b) in determining whether any action by or in respect of, or filing with, any Governmental Authority is required in connection with the consummation of the transactions contemplated by this Agreement and (c) in taking such actions or making any such filings, furnishing information required in connection therewith or with the Company Proxy Statement. Section 8.03. Public Announcements. Parent and the Company shall consult with each other before issuing any press release or making any other public statement with respect to this Agreement or the transactions contemplated hereby and, except as may be required by applicable law, order of a court of competent jurisdiction or any listing agreement with or rule of any national securities exchange or association (in which case the party proposing to issue such press release or make such public statement shall use its reasonable efforts to consult in good faith with the other party before issuing such press release or making any such public statement), shall not issue any such press release or make any such other public statement without the consent of the other party (which consent shall not be unreasonably withheld or delayed). Section 8.04. Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of the Company or Merger Subsidiary, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company or Merger Subsidiary, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. Section 8.05. Confidentiality. Prior to the Effective Time and after any termination of this Agreement, each of Parent and the Company shall hold, and shall use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning the 104 other party furnished to it or its Affiliates in connection with the transactions contemplated by this Agreement, except to the extent that such information was (i) previously known on a nonconfidential basis by such party from a source other than the other party or its Subsidiaries or their advisors, provided that to such party's knowledge such source was not prohibited from disclosing such information to such party by a contractual, legal or fiduciary obligation to the other party or its Subsidiaries or their advisors, (ii) in the public domain through no fault of such party or (iii) later lawfully acquired by such party on a non-confidential basis from sources other than the other party or its Subsidiaries or their advisors, provided that to such party's knowledge, after due inquiry, such source is not prohibited from disclosing such information to such party by a contractual, legal or fiduciary obligation to the other party or its Subsidiaries or their advisors; provided that each of Parent and the Company may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such party informs such Persons of the confidential nature of such information and directs them to treat it confidentially. Notwithstanding any other provision of this Agreement, each of Parent and the Company may disclose the tax treatment and tax structure of the transactions contemplated by this Agreement (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information, except as otherwise required by applicable securities laws). Moreover, notwithstanding any other provision of this Agreement, there shall be no limitation on Parent's or the Company's ability to consult any tax adviser, whether or not independent from Parent, Company or their respective Affiliates, regarding the tax treatment or tax structure of the transactions contemplated by this Agreement. Each of Parent and the Company shall satisfy its obligation to hold any such information in confidence if it exercises the same care with respect to such information as it would take to preserve the confidentiality of its own similar information. If this Agreement is terminated, each of Parent and the Company shall, and shall use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to, destroy or deliver to the other party, upon request, all documents and other materials, and all copies thereof, that it or its Affiliates obtained, or that were obtained on their behalf, from the other party in connection with this Agreement and that are subject to such confidence. Section 8.06. Takeover Statute. If any "fair price", "moratorium", "control share acquisition" or other form of anti takeover statute or regulation shall become applicable to the transactions contemplated hereby, each of the Company, Parent and Merger Subsidiary and the members of their respective Boards of Directors shall grant such approvals and take such actions as are reasonably necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and 105 otherwise act to eliminate or minimize the effects of such statute or regulation on the transactions contemplated hereby. ARTICLE 9 CONDITIONS TO THE MERGER Section 9.01. Conditions to Obligations of Each Party. The obligations of the Company, Parent and Merger Subsidiary to consummate the Merger are subject to the satisfaction or waiver (to the extent permitted by applicable law) at or prior to the Effective Time of the following conditions: (a) this Agreement shall have been approved and adopted by the stockholders of the Company in accordance with the NRS; (b) no provision of any applicable law or regulation and no judgment, injunction, order or decree of a court of competent jurisdiction shall be in effect prohibiting, restricting, or preventing the consummation of the Merger; (c) any applicable waiting period (and any extension thereof) under the HSR Act relating to the Merger shall have expired or been terminated; and (d) all actions by or in respect of, or filings with, any Governmental Authority required to permit the consummation of the Merger, the failure to obtain which have a Material Adverse Effect or would have a Parent Material Adverse Effect, shall have been taken, made or obtained. Section 9.02. Conditions to the Obligations of Parent and Merger Subsidiary. The obligations of Parent and Merger Subsidiary to consummate the Merger are subject to the satisfaction or waiver (to the extent permitted by applicable law) at or prior to the Effective Time of the following further conditions: (a) the Company shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Effective Time; (b) the representations and warranties of the Company contained in this Agreement and in any certificate or other writing delivered by the Company pursuant hereto shall be true and correct (determined without regard to any materiality or material adverse effect qualification contained in any representation or warranty) at and as of the Effective Time, as if made at and as of such time (except to the extent a representation or warranty is made as of a time other than the Effective Time, in which case such representation or warranty shall be true and correct at and as of such time), with only such exceptions as do not in the aggregate have a Material Adverse Effect; 106 (c) since June 30, 2003, there shall not have been any change, circumstance or event which constitutes or has resulted in a Material Adverse Effect (either individually or in the aggregate); (d) there shall not be pending any suit, action or proceeding by any Governmental Authority (i) seeking to place limitations on the ownership of shares of Common Stock (or shares of common stock of the Surviving Corporation) by Parent or Merger Subsidiary or seeking to obtain from the Company, Parent or Merger Subsidiary any damages that are material in relation to the Company, (ii) seeking to prohibit or materially limit the ownership or operation by the Company, the Subsidiaries of the Company or Parent of any material portion of any business or of any assets of the Company, the Subsidiaries of the Company or Parent, or to compel the Company, the Subsidiaries of the Company or Parent to dispose of or hold separate any material portion of any business or of any assets of the Company, the Subsidiaries of the Company or Parent, as a result of the Merger or (iii) seeking to prohibit Parent from effectively controlling in any material respect the business or operations of the Company and its Subsidiaries; and (e) Parent shall have received a certificate signed by an executive officer of the Company certifying as to the fulfillment of the conditions specified in Sections 9.02(a), 9.02(b) and 9.02(c). (f) No Takeover Statute, including any such statute contemplated by Section 8.06 hereof shall apply to or be triggered by the Merger, this Agreement, the Voting Agreement or the transactions contemplated hereby or thereby. Section 9.03. Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger are subject to the satisfaction or waiver (to the extent permitted by applicable law) at or prior to the Effective Time of the following further conditions: (a) each of Parent and Merger Subsidiary shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Effective Time; (b) the representations and warranties of Parent and Merger Subsidiary contained in this Agreement and in any certificate or other writing delivered by Parent or Merger Subsidiary pursuant hereto shall be true and correct (determined without regard to any materiality or material adverse effect qualification contained in any representation or warranty) at and as of the Effective Time, as if made at and as of such time (except to the extent a representation or warranty is made as of a time other than the Effective Time, in which case such representation or warranty shall be true and correct at and as of such time), with 107 only such exceptions as would not in the aggregate reasonably be expected to have a Parent Material Adverse Effect; and (c) the Company shall have received a certificate signed by an executive officer of Parent and Merger Subsidiary certifying as to the fulfillment of the conditions specified in Section 9.03(a) and Section 9.03(b). ARTICLE 10 TERMINATION Section 10.01. Termination. This Agreement may be terminated and the Merger may be abandoned, at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the stockholders of the Company): (a) by mutual written agreement of the Company, Parent and Merger Subsidiary; (b) by either the Company or Parent, if: (i) the Merger has not been consummated on or before May 1, 2004 (the "END DATE"); provided, however, that the right to terminate this Agreement pursuant to this clause (i) shall not be available to any party whose willful or intentional breach of this Agreement has been the primary cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (ii) (A) there shall be any United States law or regulation in effect that makes consummation of the Merger illegal or otherwise prohibited or (B) any judgment, injunction, order or decree of any court or governmental body having competent jurisdiction enjoining the Company, Merger Subsidiary or Parent from consummating the Merger is entered, and such judgment, injunction, order or decree shall have become final and nonappealable; or (iii) this Agreement shall not have been approved and adopted in accordance with the NRS by the Company's stockholders at the Company Stockholder Meeting (or any postponement or adjournment thereof) by reason of the failure to obtain the required vote of the Company's stockholders; (c) by Parent, if: (i) at any time prior to the adoption and approval of this Agreement by the Company's stockholders, the Board of Directors of the 108 Company or the Special Committee shall have failed to make or withdrawn, or modified in a manner adverse to Parent, its approval or recommendation (including, without limitation, by approving, recommending or endorsing an Acquisition Proposal) of this Agreement or the Merger; or failed to reconfirm its recommendation within five Business Days after a written request to do so (it being understood that only two such requests may be made) or the Board of Directors of the Company or the Special Committee shall have resolved to take any of the foregoing actions; (ii) the Company Stockholder Meeting is not held within 30 Business Days following the clearance of the Company Proxy Statement by the SEC or if the Company Stockholder Meeting is canceled, adjourned or delayed except as expressly contemplated by this Agreement or agreed to by Parent in writing; provided, however, that Parent shall not have the right to terminate this Agreement pursuant to this clause (ii) if such failure to hold, cancellation, adjournment or delay of the Company Stockholder Meeting results, directly or indirectly, from an injunction, judgment, order or other obligation imposed by a Governmental Authority; (iii) a breach of any representation or warranty or failure to perform any covenant or agreement on the part of the Company set forth in this Agreement shall have occurred that would cause the conditions set forth in Section 9.02(a) and Section 9.02(b) not to be satisfied, and such condition is incapable of being satisfied by the End Date; or (iv) (A) the Special Committee or the Board of Directors of the Company authorizes the Company, subject to complying with the terms of this Agreement, to enter into a binding written agreement concerning a transaction that constitutes a Superior Proposal (a "SUPERIOR PROPOSAL AGREEMENT"), and the Company notifies Parent, in writing and at least three Business Days prior to such termination, of its intention to enter into such a Superior Proposal Agreement (which notice shall include a description of all material terms and conditions thereof); and (B) Parent does not make, within two Business Days of receipt of the Company's written notification of its intention to enter into such a Superior Proposal Agreement, an offer to enter into an amendment to this Agreement such that the Special Committee or the Board of Directors of the Company determines, in good faith after consultation with its financial advisors, that this Agreement as so amended is at least as favorable, from a financial point of view, to the stockholders of the Company as the Superior Proposal. The Company agrees to notify Parent promptly if its intention to enter into a Superior Proposal Agreement referred to in its notification shall change at any time after giving such notification. 109 (d) by the Company, if: (i) a breach of any representation or warranty or failure to perform any covenant or agreement on the part of Parent or Merger Subsidiary set forth in this Agreement shall have occurred that would cause the condition set forth in Section 9.03(a) and Section 9.03(b) not to be satisfied, and such condition is incapable of being satisfied by the End Date; or (ii) (A) the Board of Directors of the Company authorizes the Company, subject to complying with the terms of this Agreement, to enter into a Superior Proposal Agreement and the Company notifies Parent, in writing and at least three Business Days prior to such termination of its intention to enter into such a Superior Proposal Agreement (which notice shall include a description of all material terms and conditions thereof); (B) Parent does not make, within two Business Days of receipt of the Company's written notification of its intention to enter into such a Superior Proposal Agreement, an offer to enter into an amendment to this Agreement such that the Special Committee or the Board of Directors of the Company determines, in good faith after consultation with its financial advisors, that this Agreement as so amended is at least as favorable, from a financial point of view, to the stockholders of the Company as the Superior Proposal; and (C) the Company substantially simultaneously with such termination pursuant to this clause 10.01(d)(ii) pays to Parent in immediately available funds the amounts required to be paid pursuant to Section 11.04(b). The Company agrees to notify Parent promptly if its intention to enter into a Superior Proposal Agreement referred to in its notification shall change at any time after giving such notification. The party desiring to terminate this Agreement pursuant to this Section 10.01 (other than pursuant to Section 10.01(a)) shall give notice of such termination to the other party. Section 10.02. Effect of Termination. If this Agreement is terminated pursuant to Section 10.01, this Agreement shall become void and of no effect without liability of any party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party hereto; provided that nothing contained in this Section 10.02 shall relieve any party from any liability for any willful or intentional breach of this Agreement, such party shall be fully liable for any and all liabilities and damages incurred or suffered by the other party as a result of such breach. Notwithstanding the foregoing, the provisions of this Section 10.02 and Sections 8.05, 11.04, 11.06, 11.07 and 11.08 shall survive any termination hereof pursuant to Section 10.01. 110 ARTICLE 11 MISCELLANEOUS Section 11.01. Notices. All notices, requests, claims, demands and other communications to any party hereunder shall be in writing (including facsimile transmission) and shall be given, if to Parent or Merger Subsidiary, to: Snyder Associated Companies, Inc. P.O. Box 1022 Kittanning, PA 16201 Attention: Mark A. Snyder Facsimile No.: (724) 545-2989 with a copy to: Cohen & Grigsby, P.C. 11 Stanwix Street, 15th Floor Pittsburgh, PA 15222 Attention: Charles C. Cohen Facsimile No.: (412) 209-0672 if to the Company, to: Sylvan Inc. 330 Main Street, P.O. Box 249 Saxonburg, PA Attention: Dennis Zensen Facsimile No.: (724) 352-7550 with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: Leonard Kreynin Facsimile No.: (212) 450-3800 or to such other address or facsimile number as such party may hereafter specify for the purpose by notice to the other parties hereto. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) upon confirmation of receipt if sent by facsimile or personal delivery, (ii) one business day following the date sent when sent by 111 overnight delivery and (iii) five business days following the date mailed when mailed by registered or certified mail return receipt requested and postage prepaid. Section 11.02. Survival of Representations and Warranties and Covenants. (a) The representations, warranties and agreements contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time or the termination of this Agreement. (b) Notwithstanding anything to the contrary contained in Section 11.02(a) above, the covenants and agreements of the parties to be performed after the Effective Time contained in this Agreement shall survive the Effective Time in accordance with their respective terms. Section 11.03. Amendments or Supplements and Waivers. (a) Subject to applicable law, at any time prior to the Effective Time, this Agreement may be amended or supplemented in any and all respects, whether before or after the Company Stockholder Approval, by written agreement of the parties hereto, by action taken by their respective Boards of Directors, with respect to any of the terms contained in this Agreement; provided, however, that following the Company Stockholder Approval there shall be made no amendment that by law requires further approval of the stockholders of the Company without the further approval by such stockholders. Subject to applicable law, any provision of this Agreement may be waived prior to the Effective Time if, but only if, such waiver is in writing and is signed by each party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 11.04. Expenses. (a) Except as otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense. (b) If a Payment Event (as hereinafter defined) occurs, the Company shall pay Parent (by wire transfer of immediately available funds) a fee equal to $2,000,000 plus all documented, out of pocket expenses reasonably incurred by Parent, Merger Subsidiary and their Affiliates in connection with this Agreement and the Merger in an amount not to exceed $500,000 (the "EXPENSE REIMBURSEMENT"), (i) if pursuant to (x) or (z) below within two Business Days of the occurrence of such Payment Event or (ii), if pursuant to (y) below, substantially simultaneously with the occurrence of such Payment Event. 112 "PAYMENT EVENT" means (x) the termination of this Agreement pursuant to Section 10.01(c)(i) or Section 10.01(c)(ii), (y) the termination of this Agreement pursuant to Section 10.01(c)(iv) or Section 10.01(d)(ii) or (z) the consummation of any of the transactions described in clauses (A) through (D) of this definition within 12 months of the termination of this Agreement pursuant to Section 10.01(b)(iii) if prior to the Company Stockholder Meeting, there shall have been made a bona fide Acquisition Proposal pursuant to which stockholders of the Company would receive cash, securities or other consideration having an aggregate value, when taken together with the value of any securities of the Company or its Subsidiaries otherwise held by such stockholders after such event, in excess of $12.25 per share of Common Stock and which bona fide Acquisition Proposal shall have been publicly announced and outstanding at the time of the Company Stockholder Meeting: (A) the Company merges with or into, or is acquired, directly or indirectly, by merger or otherwise by, a Third Party; (B) a Third Party, directly or indirectly, acquires more than 50% of the total assets of the Company and its Subsidiaries, taken as a whole; (C) a Third Party, directly or indirectly, acquires more than 50% of the outstanding shares of Common Stock; or (D) the Company adopts or implements a plan of liquidation, recapitalization or share repurchase relating to more than 50% of the outstanding shares of Common Stock or an extraordinary dividend relating to more than 50% of such outstanding shares or 50% of the assets of the Company and its Subsidiaries, taken as a whole, provided that no Payment Event shall be considered to have occurred as described in this clause (z) unless in connection with the transaction described in clauses (A), (B), (C) or (D) the stockholders of the Company shall have received, within 12 months of such termination of this Agreement, cash, securities or other consideration having an aggregate value, when taken together with the value of any securities of the Company or its Subsidiaries otherwise held by such stockholders after such event, in excess of $12.25 per share of Common Stock. (c) In the event that this Agreement is terminated pursuant to Section 10.01(b)(iii), Parent shall be entitled to receive the Expense Reimbursement (by wire transfer of immediately available funds) from the Company within two Business Days after such termination. (d) Parent and Merger Subsidiary agree that the payments set forth in Sections 11.04(b) and 11.04(c) to the extent that such payment is payable and is actually paid, shall be the sole and exclusive remedy of Parent and Merger Subsidiary upon a termination of this Agreement pursuant to Sections 10.01(b)(iii), 10.01(c)(i), 10.01(c)(ii), 10.01(c)(iv) or 10.01(d)(ii) and such remedy shall be limited to the sum stipulated in Sections 11.04(b) and 11.04(c), regardless of the circumstances giving rise to such termination. The Company acknowledges that the agreements contained in Sections 11.04(b) and 11.04(c) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent would not enter into this Agreement. 113 Accordingly, if the Company fails promptly to pay the amounts due pursuant to Sections 11.04(b) and 11.04(c), as the case may be, the Company shall pay to Parent interest on the amounts set forth in Sections 11.04(b) and 11.04(c), as the case may be, at the prime rate of Bank One, N.A. in effect on the date such payment was required to be made. Section 11.05. Binding Effect; Benefit; Assignment. (a) The provisions of this Agreement shall be binding upon and, except as provided in Section 7.04, shall inure to the benefit of the parties hereto and their respective successors and assigns. Except as provided in Section 7.04, no provision of this Agreement is intended to confer any rights, benefits, remedies, obligations or liabilities hereunder upon any Person other than the parties hereto and their respective successors and assigns. (b) No party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of each other party hereto, except that Parent or Merger Subsidiary may transfer or assign, in whole or from time to time in part, to one or more of their Affiliates, the right to enter into the transactions contemplated by this Agreement, but any such transfer or assignment shall not relieve Parent or Merger Subsidiary of its obligations hereunder. Section 11.06. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law rules of such state, except to the extent the NRS or PaBCL is applicable thereto. Section 11.07. Jurisdiction. The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought in any federal court located in the State of New York or any New York state court, and each of the parties hereby irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 11.01 shall be deemed effective service of process on such party. Section 11.08. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO 114 TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 11.09. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be deemed to be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by all of the other parties hereto. Section 11.10. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, among the parties with respect to the subject matter of this Agreement. Section 11.11. Captions. The captions and table of contents herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. Section 11.12. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. Section 11.13. Enforcement of Agreement. The parties hereto agree that money damages or other remedies at law would not be sufficient or adequate remedy for any breach or violation of, or a default under, this Agreement by them and that in addition to all other remedies available to them, each of them shall be entitled to the fullest extent permitted by law to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including, without limitation, specific performance, without bond or other security being required. 115 Section 11.14. Interpretation. When a reference is made in this Agreement to a Section or Schedule, such reference shall be to a Section of, or a Schedule to, this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". * * * * 116 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. SYLVAN INC. By: /s/ Donald A. Smith ----------------------------------- Name: Donald A. Smith Title: Chief Financial Officer SNYDER ASSOCIATED COMPANIES, INC. By: /s/ Elmer A. Snyder ----------------------------------- Name: Elmer A. Snyder Title: President SAC HOLDING CO. By: /s/ Elmer A. Snyder ----------------------------------- Name: Elmer A. Snyder Title: President 117 EX-10.50 4 j0500401exv10w50.txt COLLECTIVE BARGAINING AGREEMENT EXHIBIT 10.50 COLLECTIVE BARGAINING AGREEMENT BETWEEN QUINCY CORPORATION, INC. AND UNITED FARM WORKERS OF AMERICA, AFL-CIO JANUARY 21, 2004 PREAMBLE The Employer, the Union and employees recognize the obligations of its members to work towards efficient operation of the Employer and the demands of the Employer's customers. Therefore, it is the purpose of this Agreement to obtain a maximum efficiency in the operations of the Employer; to eliminate all interruptions of work and interference in operations; to secure a prompt and fair disposition of grievances; and to set forth other conditions of employment during the life of this Agreement. I. PARTIES THIS AGREEMENT is between QUINCY CORPORATION, INC. (hereinafter referred to as the "Employer") and its successors, provided that such successor is at least fifty one percent (51%) owned by existing shareholders of the Employer as of the date of this agreement, and UNITED FARM WORKERS OF AMERICA, AFL-CIO, (hereinafter referred to as the "Union"). II. RECOGNITION/UNION RIGHTS AND OBLIGATIONS COMPANY/UNION COOPERATION A. The Employer does hereby recognize the Union as the sole labor organization representing the rights of its employees described in Attachment A, hereafter collectively called "workers". B. The Employer further recognizes the rights and obligations of the Union to negotiate wages, hours and other terms and conditions of employment and to administer this Agreement on behalf of the covered employees. The Employer will inform all employees immediately upon their employment of its policies and commitments as set forth above. The Employer will hand out a notice to new employees immediately upon their employment regarding the collective bargaining agreement and the commitment of Employees, Employer and Union working together in partnership. 118 C. Neither the Employer nor its representatives will interfere with the right of any worker to join and assist the Union. The Employer agrees that employees will secure no advantage, no more favorable consideration nor any form of special privilege because of non-participation in Union activities. Further, the Employer agrees with and recognizes the right of workers to support and participate in collective bargaining and contract administration functions. D. The Union agrees with the objective of achieving the highest level of employee performance and production consistent with safety, good health, fair treatment and respect and to use its best efforts to effectuate the same with employees. III. HOURS OF WORK, OVERTIME, WAGES AND BENEFITS A. Wage rates for specific job classifications are set forth in Article XXVI. B. Overtime: Except for employees covered by the harvesting incentive pay system, hourly employees shall receive time and one-half (1 1/2) their regular rate of pay for all hours worked over forty (40) in a given seven (7) day calendar week. Employees covered by the harvesting incentive pay system do not earn overtime but are eligible for holiday pay premium as provided in Article XXVII below. C. Meal time breaks shall be one-half (1/2) hour. D. Pay Periods and Pay Days: Employees will be paid on a weekly basis and will receive their paycheck every Thursday. E. Employees shall have paid rest periods of fifteen (15) minutes each, which insofar as practical, shall be in the middle of each continuous four (4) hour work period. The afternoon breaks will be in accordance with this language. IV. UNION SECURITY A. The Employer agrees, upon written authorization from the employee, to deduct union dues and assessments from the employee's paycheck each week and remit to the Union's designee. The deductions will commence the first paycheck ten (10) working days after the Employer receives the employee's written dues authorization. Any change in union dues shall become effective the next paycheck ten (10) working days after the Employer has received a certification of the change signed by the Union's President. Employees may revoke their union dues authorization by written order of revocation to the Employer and to the Union. Beginning on February 15, 2001, such written order of revocation may only be submitted between February 15 and Feb. 22 or between Aug. 15 and Aug. 22 of each year. A notice to employees shall be given each employee in the bargaining unit employed at the signing of this agreement and to each new employee when hired. The Employer will cease making 119 such deductions from the next paycheck ten (10) working days after notice of said revocation is received in writing from the employee. The Employer shall provide a monthly summary report containing the names of the members, Social Security numbers, payroll periods covered, gross wages, total hours worked per worker and amount of dues and assessments deducted during such pay periods from each member. B. Dues and assessments shall be deducted on a weekly basis and remitted to UFW, Membership Department, P.O. Box 62, Keene, CA 93531. C. The Union agrees to indemnify and hold the Employer harmless against any and all claims, suits or other forms of liability arising out of the deductions of money for Union dues and assessments from an employee's pay. The Union assumes full responsibility for the disposition of the moneys so deducted once it has been remitted to the UFW's Membership Department. V. HIRING A. The Union will provide a list of applicants to the Employer for consideration when new or additional employees are needed in the areas referred to in Attachment A. The company will provide a list of vacancies, when they become available, to the local UFW representative via fax. 1. UFW representative will be notified via fax and be given the opportunity to meet with new employees during orientation. B. Promotion and Job Bidding. In the event a permanent vacancy in a job classification in the bargaining unit arises, which the Employer decides to fill, the following procedures shall apply. 1.) The Employer will post the job for seven (7) working days on bulletin boards and otherwise announce the vacancy consistent with the Employer past practice, including allowing non-bargaining unit employees to bid bargaining unit jobs and vice versa. 2.) Employees who wish to be considered for the posted vacancy must apply in writing during the posting period to the Employer's designee. 3.) If the employer's designee decides to temporarily fill the position while the permanent assignment is being made, he may do so with any qualified employee, provided experience gained during such temporary assignment shall not be determinative in filling the vacancy permanently. 4.) The Employer's designee will consider all timely applications from qualified employees and fill the vacancy based on: a. Qualifications and ability to perform the work. b. Past disciplinary records. Employer will review employees past two (2) years performance to determine past disciplinary actions, 120 if an employee has less than two (2) years service, the lesser seniority period will be the look back period for all applicants. c. Job Classification seniority. When factors a and b are relatively equal, Job Classification seniority shall be given primary consideration. VI. SENIORITY A. Probationary Period. A newly hired employee in the bargaining unit will be considered a probationary employee for the first ninety (90) calendar days of employment. During the probationary period, the Employer retains the right to layoff, terminate, transfer, or discipline such employee subject only to the law and the employee shall have no recourse to the grievance or arbitration procedure provided herein. After successful completion of the probationary period, the employee shall be placed on the seniority list as of his date of hire. Annual leave shall accrue during probation and may be taken as earned under the same conditions applicable to non-probationary employees. No accrual of benefits will be paid to employees who do not complete probation. B. Farm Seniority. Farm seniority shall be the time of cumulative service as an employee of the Employer. C. Job Classification Seniority. Job Classification seniority shall be the time of cumulative service on the active payroll of the Employer working within a designated job classification. An approved leave of absence will qualify as part of cumulative service. D. Priority. Where two or more employees have the same seniority date or dates, under sections B and C of this article, the seniority dates shall be determined by the employee's birthday. E. Regaining Seniority. If a former employee is rehired, he will establish a new Job Classification seniority. Credit for Medical Insurance, Pension and Section 401(K) Plan participation shall not be restored unless allowed by the particular Plan. F. Promotions Within the Unit. When an employee is promoted to a different position within the bargaining unit, he shall be on a trial period for thirty (30) days during which time he may elect to return to the position from which promoted. However, if the prior position has been filled, the returning employee will be placed in another position but with no reductions in the rate of pay he was receiving initially prior to the promotion. Upon successful completion of the trial period, job classification seniority shall accumulate from the date of promotion. If prior to the end of the 30-day period the employee is removed and returned to his 121 former or similar open position, he shall be given Job Classification seniority credit for the time spent in the job to which he was promoted. G. If any employee decides to transfer out of the bargaining unit, he must return within thirty (30) days to keep his job classification seniority. H. Seniority List. Upon the execution of this Agreement, the Employer shall prepare a seniority list for bargaining unit employees which shall show Farm and Job Classification seniority. The Employer will provide the Union with a copy within a reasonable time period. After the initial list a seniority list will be provided to the Union within five (5) working days of a written request but no more than once during a calendar quarter. I. Layoff. In the event of a permanent layoff, the layoff will be by Farm seniority. In the event of a temporary layoff, the layoff will be by Job Classification seniority. J. Employees will be recalled in inverse order of layoff. Employees recalled must be satisfactorily able to perform the job at the time of recall. VII. GRIEVANCE AND ARBITRATION A. A grievance is defined as any difference between the Employer and any employee or the Union involving the interpretation or application of the provisions of this Agreement, or a claim of a violation of this Agreement. Whenever a grievance arises between the Employer and the employee or the Union, the matter will be handled in accordance with the following procedure: B. Informal. Except in cases involving disciplinary action which shall proceed immediately to Step 1, the employee shall meet to discuss the grievance informally with his immediate supervisor and attempt to resolve the grievance before it may be filed in Step 1. The employee must request this meeting not more than ten (10) business days after the occurrence which gives rise to the grievance. Failure of the employee to request a meeting within the time set shall be deemed a waiver of the grievance and it shall not be subject to further processing under this Article or otherwise. A Union steward may be present if the Employee requests; however, the employee shall have the right to adjust his grievance with or without the assistance of the Union. C. Step 1: Within ten (10) business days after the meeting in the informal step, the grievance shall be reduced to writing and signed by the employee and presented to his or her immediate supervisor. The written grievance must include: a. A statement of the grievance and a summary of the facts on which the grievance is based. 122 b. The remedy requested. c. The Article and Section of the Agreement which the grievant claims has been violated. D. Step 2: Within ten (10) business days of presentation of the written, signed grievance, the employee, one local representative of the Union, and the Employer's designee shall meet and/or discuss the grievance. A second meeting will then be held with the employee's manager, or the next level of management above the grievant's immediate supervisor, whichever applies, the Employer's designee, and one local representative of the Union to meet and/or discuss the grievance. The management representative will respond in writing within ten (10) business days of the conclusion of these two meetings and/or discussions E. Step 3: If the grievance is not settled in Step 2 above, within ten (10) business days of receipt of the Employer's response in Step 2, the Union shall notify the Employer in writing of its appeal of the grievance to Step 3. Within ten (10) business days of delivery of the written notice of appeal to Step 3, the Union and the Employer's designee shall meet and/or discuss the grievance. The designee shall respond in writing within ten (10) business days after the meeting or discussion. Failure of the parties to meet to discuss the grievance within the time provided in Steps 1, 2 and 3 of the grievance procedure or failure of the Employer to respond at any step shall be deemed a denial of the grievance. The Union must then proceed to the next step within the time limits, just as if the Employer had denied the grievance in writing on the last day for a response. Failure of the Employer to respond at any step shall not in any way restrict the Employer's or the Union's right to raise any issue or present any evidence it deems appropriate in support of its position in any subsequent arbitration or other administrative or judicial proceedings. F. Arbitration. Any signed, written grievance which is not settled pursuant to sections B, C, D and E of this article, shall be submitted to binding arbitration upon the request of either party. Arbitration proceedings must be initiated by serving a written request for arbitration by the Union or the Employer within forty-five (45) working days of the response of the Employer under Step 3 above or the last day on which the Employer could have responded to Step 3, whichever occurs first. G. Selection of Arbitrator. As soon after the request for arbitration is served as is conveniently possible, the parties shall meet or confer by telephone in order to select an arbitrator to hear and decide the grievance. If the parties are unable to agree on an arbitrator, the party requesting arbitration shall request the American Arbitration Association to supply the parties with a panel of seven (7) arbitrators. Within five (5) working days after the receipt of such panel, the parties will meet or confer by telephone or in person to select an arbitrator. The Union and the Employer shall each have the right to alternatively strike three (3) names from the list. The name remaining shall be the arbitrator. Subject to section H of this article, the arbitrator 123 selected shall decide the dispute and such decision shall be final and binding on the parties and the employees. The expenses of the arbitrator shall be paid equally among the parties. However, each party shall be responsible for its own attorneys' fees, any court reporting services it wishes to use, and the wages of employees, whether they be witnesses, potential witnesses, representatives, or grievant, it utilizes in any arbitration proceeding. H. Authority of Arbitrator. The jurisdiction of the arbitrator is limited and confined to the interpretation and application of the specific provisions of this Agreement to the grievance. The arbitrator shall in no way alter, amend, or modify the terms of this Agreement. When any employee has been disciplined for one or more of the rules and regulations of the Employer and said discipline is subjected to this Article, the arbitrator shall deny the grievance if he is satisfied by a preponderance of the evidence that the employee violated such rule or regulation. Under no circumstances may an arbitrator award back wages or monetary relief to any employee for a period more than ten (10) working days prior to the submission of the grievance to Step 1. Monetary awards shall be limited to the amount of the back wages and benefits the employee would have otherwise earned less unemployment compensation and other earnings. No relief may be granted to any employee who has not timely filed a grievance as required above. The arbitrator may not consider more than one (1) grievance without the agreement of both parties; provided, multiple grievances properly raise the same issues which have been properly appealed. The arbitrator shall have no power to establish wage scales or fringe benefits or to change the established wage scale or schedule of fringe benefits. I. Finality of Decision. The decision of the arbitrator shall be supported by substantial evidence on the record as a whole and shall be final and binding on the employees, the Employer and Union. J. Time Limits. The time limits set forth above are to be considered of the essence to the grievance and arbitration procedure. The failure of the employee or the Union to meet any time limit set forth therein shall be deemed to constitute waiver of the grievance and acceptance of the Employer's position. The time limits in sections B, C, D and E of this article may be extended in writing by mutual consent of the parties. K. Limitations. The party referring a grievance to arbitration shall have the burden of proof, except the Employer shall have the burden of proof in disciplinary grievances unless this Agreement provides otherwise. L. Precedent. In order to encourage prompt resolution of grievances, agreements and compromises of grievances made under this section shall not be cited by either party as precedent in any subsequent arbitration proceeding without the consent of the other party. 124 M. Witnesses. Each party shall be responsible for the pay of the representatives and witnesses it uses in arbitration or preparation therefore. Time spent by witnesses called to testify by the Union in an arbitration proceeding will not be counted as time worked. VIII. NO STRIKE CLAUSE For the duration of this Agreement, the Union, its officers, representatives, members and the Employer's employees covered by this Agreement, shall not authorize or condone, nor shall they take part in or participate in any strike, slow down, picketing, stoppages of work, boycott or other interruption of or interference with the Employer's business or its operation at any location. Failure or refusal on the part of any employee to comply with any provision of this Article shall be cause for disciplinary action, up to and including discharge. If there is a dispute as to whether an employee violated this Article, the only issue that may be grieved shall be whether the employee violated the Article. Upon proof the arbitrator shall uphold the Employer's disciplinary decision. The Employer agrees that it will not lock-out employees for the duration of this Agreement so long as the Union or the employees do not violate their obligations as set forth in this Article. IX. RIGHT OF ACCESS TO COMPANY PROPERTY A. Duly authorized and designated representatives of the Union shall have the right of access to Employer property in connection with the administration of this Agreement or other normal Union affairs in designated areas. In areas of operation, access will be granted to observe operations with prior written approval of Quincy or Modern representatives. B. The Employer shall recognize the Union stewards for handling grievances with the Employer, provided Union stewards must be employees of the Employer on the active payroll. The Employer agrees that the choice and removal of Union stewards is otherwise a function of the Union. The Union shall notify the Employer in writing who the current Union stewards or alternate stewards are and shall furnish the Employer written notice of any new appointments or changes in stewards. The selection of an employee as Union steward shall in no way relieve the employee from carrying out his or her usual and assigned duties in the same manner as is expected of all other employees. The number of Union stewards should be limited to one (1) chief and two (2) stewards. Alternates may be substituted when a steward is absent for an extended period of time. 125 C. Stewards shall not leave their jobs while on shift for the purpose of investigating, presenting, handling or settling grievances with management except by permission of the Employer's designee. All such activities handled during the steward's working time will be paid for by the Employer, however, the stewards will, whenever possible, handle activities during non-working time. The Employer shall not be responsible for the wages of any steward while they are involved in arbitration under this Agreement. Activities of stewards shall in no way interfere with the operation of the Employer. D. The Employer will allow no more than five (5) UFW officials to visit the Employer's property provided the Union receives prior approval in writing by the Employer for each visit. During any visit, the Employer will have one or more of its representatives present to accompany the UFW officials. The Union officials will not in any fashion interfere with the work of the employees. X. DISCIPLINE AND DISCHARGE A. Cooperation and Support. The Union agrees to support all the rules and regulations of the Employer. Those rules will be supplied to the Union's local President and the UFW. B. Quincy Farms Rules. For the best interests of the Employer and its employees, all employees will abide by the rules, regulations and policies of the Employer. Violation of any of the Employer's rules, or for just cause, shall be considered cause for disciplinary action up to and including discharge. The Employee may grieve and arbitrate any action under this section. XI. NON-DISCRIMINATION In accordance with the policies of the Employer and the Union, it is agreed that there shall be non-discrimination against any employee because of race, age, creed, color, religion, sex, sexual orientation, national origin, political belief, disability, marital status, language spoken or activities on behalf of participation or non-participation in any UFW activities.. XII. LEAVES OF ABSENCE A. General Leaves. At the Employer's sole discretion, an employee who has used all accumulated unused annual leave may be granted a leave of absence for good reason without pay which in no event shall exceed thirty (30) days, unless a longer leave is allowed by law. Leaves of absence for personal reasons will be granted only when the services of the employee are not immediately required and there are other employees capable of doing the work. 126 B. Activities During Leaves. Leaves of absence will not be granted for the purposes of allowing employees to take another position temporarily, try out new work, or venture into business for himself. Engaging in any of these activities during a leave of absence will result in termination for the employee. C. Return From Leave of Absence. Upon returning to work from an authorized leave of absence under this Article, an employee shall be entitled to the job he left, or a job similar to the one he left. If such job or jobs have been eliminated or another employee has been permanently transferred to take over such job or jobs, the Employer shall have the right to place the returning employee in any job which it deems him capable of performing. D. Union Activities. Should an employee wish time off to attend Union conventions or training sessions, he shall file a written request just as he would when requesting other leave without pay, but not less than ten (10) days before the requested leave is to begin. Such leaves may be no longer than five (5) working days and no one steward may take more than ten (10) working days off a calendar year for such leaves. The Employer's designee will review a properly filed request and grant the leave request if in his discretion he determines such leave will not be operationally inconvenient. All such leaves will be without pay. E. Long Term Leave. An employee may request a leave of up to one year to conduct Union business, subject to written request procedures listed above. F. Family Medical Leave Act. The employer agrees to abide by the Family Medical Leave Act when supporting documents are provided as required by law. XIII. INS The Employer agrees to notify the Union of immigration status issues pertaining to members of the bargaining unit which arise during the term of this Agreement. In carrying out its obligations under immigration law, the Employer shall abide by all applicable laws and regulations. To the extent the Union seeks to assist bargaining unit members on immigration related issues, the Employer will work cooperatively with the Union to the extent such cooperation is consistent with applicable federal immigration laws and regulations. XIV. SSA LANGUAGE When the Employer receives written notice from the Social Security Administration concerning the verification of Social Security numbers, the Employer shall promptly fax said notice to the Union. The Employer shall provide a minimum of thirty (30) days following written notice to each such employee to correct his or her records before terminating the employee. 127 XV. MAINTENANCE OF STANDARDS Employer agrees that all terms and conditions of employment for employees relating to wages, hours of work and general working conditions shall be maintained at no less than the highest standards in effect as of the date of this agreement. XVI. BARGAINING UNIT WORK Supervisors and other persons not included in the bargaining unit shall not perform any work covered by this Agreement except for instruction, training, testing equipment, experimental and developmental work, emergencies, or other occasional and incidental types of work which does not deprive bargaining unit workers of work or avoid the recall of bargaining unit workers for work they would normally perform. XVII. MANAGEMENT RIGHTS All inherent and common law management functions and prerogatives which the Employer has not expressly modified or restricted by this Agreement are retained and vested exclusively in the Employer and are not subject to arbitration under this Agreement. The Employer specifically reserves the exclusive right in accordance with its judgment to reprimand, suspend and otherwise discipline employees; to discharge employees for just cause, which includes violation of company regulations and policies; to hire, promote, demote, transfer, layoff and recall employees to work; to determine the starting and quitting times, and the number of hours and shifts to be worked; to maintain the efficiency of employees; to close down the operation or any part thereof, or expand, reduce, alter, combine, transfer, assign or cease any job, department, operation, or service; to control and regulate the use of machinery, equipment and other property of the Employer; including but not limited to transferring or subcontracting with satellite growers for the cultivation, growing and harvesting of mushrooms provided that such subcontracting is not conducted on the company's existing property; to determine the number, location and operation of stations and divisions and departments thereof; to assign work and overtime; to determine the size and composition of the work force; to make or change rules, procedures, policies and practices not in conflict with the provisions of this Agreement; to assign or reassign equipment, jobs and work locations; to set schedules, hours and days of work; to establish standards of conduct and work for employees; to introduce new or improved production, maintenance, services and packing methods, materials, machinery and equipment and otherwise generally manage the business; and to direct the work force. The Employer's failure to exercise any function hereby reserved to it, or its exercising 128 any such function in a particular way, shall not be deemed a waiver of its rights. XVIII. RECORDS AND PAY PERIODS A. The Employer shall keep full and accurate records, including total hours worked, piece rate or incentive rate records, total wages and total deductions. Employees shall be furnished a copy of the itemized deductions, hourly rates, hours worked and total wages each payday which shall include the employee's piece rate production records. B. The employee may request to examine time sheets, piece rate records and other records that pertain to the employee's wages. A Union representative may be present at the employee's request. XIX. BULLETIN BOARD The Employer shall provide bulletin boards placed at such locations as shall be mutually agreed. The bulletin board will not be used for solicitation. The Union agrees to provide Quincy Farms designee with a copy of all posted material prior to the time such material is posted. XX. MODIFICATION No provision or term of this Agreement may be amended, modified, changed, altered or waived except by written document executed by the parties hereto. XXI. SAVINGS CLAUSE If any part of this Agreement is, or is hereafter found to be, in contravention of the laws or regulations of the United States or of any state having jurisdiction, such part shall be superseded by the appropriate provisions of such law or regulation so long as the same is in effect, but all other provisions of this Agreement shall continue in full force and effect. XXII. JDLC PENSION PLAN Commencing on March 31, 1999 the Employer shall contribute to the Juan De La Cruz Farm Workers Pension Plan in the amount of five cents ($.05) for each hour worked by all employees covered under this agreement. The monthly contributions to the Juan De La Cruz Farm Workers Pension Plan, together with a monthly summary report, shall be forwarded to the administrator of the plan no later than the fifteenth (15th) day of the following month at P.O. Box 92861, Los Angeles, CA 90009, or other such address designated in writing by the plan administrator. 129 XXIII. MEDICAL PLAN The Employer agrees to continue to offer eligible employees the existing Blue Cross Medical Plan, however the Employer retains the right to modify the plan and employee contributions if the total cost to the company increases by more than fifty thousand dollars ($50,000) during a twelve (12) month period. In the event that the increase for the second twelve (12) month period is less than fifty thousand dollars ($50,000), the employer agrees to carry over the unused portion of the increase to the third twelve (12) month period. The Employer agrees that if faced with a sizable increase it will inform the Union and discuss possible alternatives. XXIV. DISCLOSURE When the Employer eliminates, adds or modifies rules and regulations or forms that apply to wages, hours and working conditions, it will make bargaining unit employees aware of same and provide the Union a copy of the applicable rule, regulation or form. The Employer will notify the Union of changes in rules and regulations, so they can assist with communications when appropriate. XXV. PROFIT SHARING A. All employees of Quincy Corporation who are employed at the end of each of the years covered by this agreement are eligible for a profit sharing bonus. The first period will be January 1, 2004 through December 31, 2004 and the bonus (if any) will be paid on or before March 15, 2005. The second period will be January 1, 2005 through December 31, 2005 and the bonus (if any) will be paid on or before March 15, 2006. The third period will be January 1, 2006 through December 31, 2006 and the bonus (if any) will be paid on or before March 15, 2007. The bonus (if any) will be calculated as follows: The following percentage of Quincy Corporation's audited before interest and tax earnings for each of the periods covered by this agreement will be established as a bonus pool amount: $0 to $3,000,000 0% Above $3,000,000 10% of excess
B. The bonus pool amount will be divided by the total wages for the applicable period paid to employees of Quincy Corporation who are employed at the end of each respective period and the result is the bonus multiplier. C. Each employee's total wages paid during the applicable period will be multiplied by the bonus multiplier to determine the employee's bonus. 130 D. The Employer shall submit every six (6) months operating statements to the Union within forty-five (45) days of the end of each six (6) month period. The Employer shall also submit its annual operating statement for 2004, 2005 and 2006 to the Union within sixty (60) days of the end of the fiscal year. There shall be no inter- company charges initiated during 2004, 2005 and 2006 that have the effect of reducing the bonus pool amount. The Employer will not change accounting assumptions or practices, except as required to conform to government regulations or generally accepted accounting principles; and in no event shall such assumptions or practices be changed to reduce the bonus pool amount. The Employer agrees to provide for an independent audit of the Employer specifically designed to verify the bonus pool amount. This independent audit will be paid for by the Employer and a copy will be addressed to the Union. E. If for any reason the Employer is sold, the eligible employees are fully vested in the prorated share of the profits for the period the profit sharing plan is in effect. Such prorated share will be paid to the eligible employees within thirty (30) days after the completion of the sale of the Employer. XXVI. WAGES Year One: (01/21/04 - 01/20/05) Bargaining unit hourly paid employees will receive a twenty-five cents ($.25) per hour wage increase effective January 18, 2004. The Incentive Harvesters who are paid by the pound will receive an increase per pound picked that will be equivalent to the hourly increase. Night Shift Farm Operations will receive an additional $.10 per hour increase for night shift premium. This will bring their night shift premium to $.30 per hour. Year Two: (01/21/05 - 01/20/06) Hourly paid employees will receive a twenty cents ($.20) per hour wage increase effective the first pay period of 2005. The Incentive Harvesters who are paid by the pound will receive an increase per pound picked that will be equivalent to the hourly increase. Year Three: (01/21/06 - 12/31/06) Hourly paid employees will receive a twenty cents ($.20) per hour wage increase made retroactive to the first pay period of 2006. The Incentive Harvesters who are paid by the pound will receive an increase per pound picked that will be equivalent to the hourly increase. 131 XXVII. HOLIDAYS AND OVERTIME Because of the nature of the mushroom business, it will be necessary to work holidays. The company shall pay hourly employees not covered by the harvesting pay system one and one-half (1-1/2) times an employee's regular straight time hourly rate for hours worked on the following recognized holidays: NEW YEAR'S DAY, MARTIN LUTHER KING, JR.'S OBSERVED BIRTHDAY, MEMORIAL DAY, FOURTH OF JULY, LABOR DAY, THANKSGIVING DAY, and CHRISTMAS DAY. Employees covered by the harvesting pay system will be paid the normal incentive pay earned during hours worked on these designated holidays plus an additional 1/2 their base hourly rate for such holiday hours. If you are scheduled to work on a Holiday and fail to do so without a valid excuse you will be subject to disciplinary action on the first occurrence. A second occurrence within a twelve (12) month period will result in suspension. Repeat offenders outside of a twelve (12) month period will be terminated. XXVIII. VACATIONS/SICK/PERSONAL DAYS Vacation benefits for regular employees shall be granted on the following basis:
YEARS OF CONTINUOUS VACATION SERVICE VACATION DAYS PAY* 1 One week (5) days 2% 3 Two weeks (10) days 4% 10 Three weeks (15) days 6%
*Percent of gross W-2 earnings for the preceding employment year for the first year of service and for the preceding calendar year for all subsequent years of service. A vacation is not earned until an employee reaches his anniversary date. Vacation benefits will be granted only after an employee's anniversary date. Vacations must be scheduled one (1) month in advance and approved by your supervisor. Seniority shall govern in the selection of vacations insofar as practicable to do so under current operating conditions. Certain departments have a maximum limit on how many people can be gone from work at any given time. Vacation benefits shall not be allowed to accumulate from one vacation period to the next A carryover may be allowed for up to three (3) months if a vacation request was 132 denied due to scheduling and confirmed by employees supervisor. Quincy Farms will provide all hourly employees with two (2) paid personal/sick days per year. The requirements are: 1. Must have been employed at least ninety (90) days. 2. Sick/Personal days will be based on a calendar year. 3. Sick/Personal days cannot be taken prior to, on the day of, or after a holiday. 4. Sick/Personal days cannot be taken in conjunction with vacation or any other leave. 5. There will be no accrual of sick/personal days. 6. Employees will be paid eight (8) hours @ five dollars and fifteen cents ($5.15) per hour for each sick/personal day. 7. Sick/Personal day payment will be made each year in the pay periods closest to June 15th and December 15th. 8. Call in requirements are necessary for sick days and personal days (if not scheduled in advance). If employee does not call in, the day will be treated as an unexcused absence. 9. Form must be completed for each day you take. Notify your Supervisor. XXIX. SAFETY The Employer and the Union agree that any material change made to the Employer's existing Safety Manual will be discussed, prior to any change, with the Safety Committee. XXX. DURATION This agreement shall remain in full force and effect from January 21, 2004 and expiring on December 31, 2006. XXXI. COMMENCEMENT OF NEGOTIATIONS Beginning at least three months prior to the expiration of this agreement, Quincy and the UFW will meet and will use their good faith best efforts to negotiate a new agreement that will promote a relationship that will benefit everyone concerned. 133 UNITED FARM WORKERS OF QUINCY CORPORATION d/b/a AMERICA, AFL-CIO QUINCY FARMS /s/ ARTURO S. RODRIGUEZ /s/ G.J. VERHAGEN - ------------------------------ -------------------------------- Arturo S. Rodriguez, President Greg J. Verhagen, President 3/2/04 1/29/04 - ------------ ------------- Date Date /s/ EVELIA MENJIVAR /s/ BOBBY J. WEATHERFORD - ------------------------------ -------------------------------- Evelia Menjivar, Contract Administrator/UFW Bobby J. Weatherford, CFO 2/5/04 1/27/04 - ------------ ------------- Date Date NEGOTIATING COMMITTEE Name/Date /s/ RAMON C. MENDOZA 2/5/04 - ---------------------------------------------------------- /s/ WILLIE B. DILWORTH 2/5/04 - ---------------------------------------------------------- /s/ DIANNE STARKE 2/5/04 - ---------------------------------------------------------- /s/ BLANCA GUERRA 2/5/04 - ---------------------------------------------------------- /s/ JEANNETTE JAMES 2/5/04 - ---------------------------------------------------------- /s/ RONALD K. ANDERSON 2/5/04 - ---------------------------------------------------------- 134 ADDENDUM NUMBER 1 TO CONTRACT DATED JANUARY 21, 2004 BETWEEN QUINCY CORPORATION, INC. AND UNITED FARM WORKERS OF AMERICA, AFL-CIO The Parties agree as follows: Quincy Farms agrees to not reduce the current production capacity or square feet planted or produced at Quincy Farms during the term of the contract dated January 21, 2004. UNITED FARM WORKERS OF QUINCY CORPORATION d/b/a AMERICA, AFL-CIO QUINCY FARMS /s/ ARTURO S. RODRIGUEZ /s/ G.J. VERHAGEN - -------------------------------- -------------------------------- Arturo S. Rodriguez, President Greg J. Verhagen, President 3/2/04 1/29/04 - ------------- ------------- Date Date /s/ EVELIA MENJIVAR /s/ BOBBY J. WEATHERFORD - -------------------------------- -------------------------------- Evelia Menjivar, Contract Administrator/UFW Bobby J. Weatherford, CFO 1/29/04 1/27/04 - ------------- ------------- Date Date 135 ADDENDUM NUMBER 2 TO CONTRACT DATED JANUARY 21, 2004 BETWEEN QUINCY CORPORATION, INC. AND UNITED FARM WORKERS OF AMERICA, AFL-CIO The Parties agree as follows: During the term of the contract dated January 21, 2004, Quincy Farms agrees to remain as the employer of those bargaining unit employees who are hired to provide services in the packing and shipping department that currently is being leased to Modern Mushroom Company. This addendum shall not be construed to provide to any current or future bargaining unit employees in the packing and shipping department guaranteed employment for a specific term or period of time. UNITED FARM WORKERS OF QUINCY CORPORATION d/b/a AMERICA, AFL-CIO QUINCY FARMS /s/ ARTURO S. RODRIGUEZ /s/ G. J. VERHAGEN - -------------------------------- -------------------------------- Arturo S.Rodriguez, President Greg J. Verhagen, President 3/2/04 1/29/04 - ------------- ------------- Date Date /s/ EVELIA MENJIVAR /s/ BOBBY J. WEATHERFORD - -------------------------------- -------------------------------- Evelia Menjivar, Contract Administrator/UFW Bobby J. Weatherford, CFO 1/29/04 1/27/04 - ------------- ------------- Date Date 136 ADDENDUM NUMBER 3 TO CONTRACT DATED JANUARY 21, 2004 BETWEEN QUINCY CORPORATION, INC. AND UNITED FARM WORKERS OF AMERICA, AFL-CIO The Parties agree as follows: Quincy Farms agrees to meet with the local union representative to develop a new safety incentive program. The union will have input into number of people on the committee, number of meetings, etc. UNITED FARM WORKERS OF QUINCY CORPORATION d/b/a AMERICA, AFL-CIO QUINCY FARMS /s/ ARTURO S. RODRIGUEZ /s/ G. J. VERHAGEN - -------------------------------- -------------------------------- Arturo S.Rodriguez, President Greg J. Verhagen, President 3/2/04 1/29/04 - ------------- ------------- Date Date /s/ EVELIA MENJIVAR /s/ BOBBY J. WEATHERFORD - -------------------------------- -------------------------------- Evelia Menjivar, Contract Administrator/UFW Bobby J. Weatherford, CFO 1/29/04 1/27/04 - ------------- ------------- Date Date 137 EX-21 5 j0500401exv21.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 Fungisem, S.A. (a) Spain Sylvan Holdings Pty Ltd. (b) Australia Sylvan Horst B.V. (c) 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 (d) Turkey Tartarin S.A. France White Queen Ltd. England
- --------------------------- (a) 50% ownership (b) 49% ownership (c) 75% ownership (d) 60% ownership 138 EX-31 6 j0500401exv31.txt SECTION 302 CERTIFICATIONS EXHIBIT 31 CERTIFICATION I, Dennis C. Zensen, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Sylvan Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report, based on such evaluations; and c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 26, 2004 /s/ DENNIS C. ZENSEN ------------------------------- Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) 139 EXHIBIT 31 CERTIFICATION I, Donald A. Smith, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Sylvan Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report, based on such evaluations; and c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 26, 2004 /s/ DONALD A. SMITH ------------------------------- Chief Financial Officer (Principal Financial Officer) 140 EX-32 7 j0500401exv32.txt SECTION 906 CERTIFICATIONS EXHIBIT 32 STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Sylvan Inc. hereby certifies that the company's annual report on Form 10-K for the year ended December 28, 2003 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the company. Dated: March 26, 2004 /s/ DENNIS C. ZENSEN --------------------- ----------------------------------- Dennis C. Zensen Chairman, President and Chief Executive Officer 141 EXHIBIT 32 STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Sylvan Inc. hereby certifies that the company's annual report on Form 10-K for the year ended December 28, 2003 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the company. Dated: March 26, 2004 /s/ DONALD A. SMITH --------------------- ----------------------------------- Donald A. Smith Chief Financial Officer 142 -----END PRIVACY-ENHANCED MESSAGE-----