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
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.
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.
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.
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.
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
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
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.
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.
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.
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.
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.
PART II
ITEM 5.
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.
(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.
ITEM 6.
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
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(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
ITEM 7.
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
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.
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
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.
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.
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
rate swaps in 2003 was 1.24%, as compared with 1.60% for 2002. This decrease was the result of market rate reductions.
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.
ITEM 8.
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
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.
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these statements.
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes to consolidated financial statements are an integral part of these statements.
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these statements.
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
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:
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.
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:
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.
SYLVAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects the calculation of earnings per share:
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
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:
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:
The company's financial instruments are not held for trading purposes.
COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss consisted of the following:
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
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:
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:
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:
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":
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.
SYLVAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES:
Inventories are summarized as follows:
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:
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
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:
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:
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.
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:
The provision (benefit) for income taxes consisted of the following:
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:
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:
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:
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:
As of December 28, 2003, the characteristics of the stock options under both plans were as follows:
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
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:
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.
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.
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:
SYLVAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
SYLVAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SYLVAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION TO CONSOLIDATED FINANCIAL DATA
GEOGRAPHIC ANALYSIS OF NET LONG-LIVED ASSETS
GEOGRAPHIC ANALYSIS OF REVENUES BASED ON LOCATION OF CUSTOMER
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.
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
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.
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
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.
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.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the captions "Common Stock Ownership of Certain Beneficial Owners" and "Common Stock Ownership of Directors and Executive Officers" in Sylvan's Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 13.
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.
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.
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
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* Incorporated by reference.
** Management contract.
(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.
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.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
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(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.
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
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(a) Represents uncollected accounts charged against the allowance.
(b) Represents the effect of currency translation adjustments.