SYLN Sylvan Inc. (MM)

Sylvan Inc. Announces Third Quarter Results Three-Month Comparison SAXONBURG, Pa., Nov. 12 /PRNewswire-FirstCall/ -- Sylvan Inc. today reported net income of $839,000, or $.16 per share, for the quarter ended September 28, 2003, as compared with $1,109,000, or $.20 per share, for the third quarter of 2002. Consolidated operating income for the 2003 quarter decreased 26%, when compared with the corresponding 2002 quarter, reflecting an 11% decrease in operating income from the Spawn Products Segment, a 12% increase in operating income from the Fresh Mushrooms Segment and a 35% increase in unallocated corporate expenses. Unallocated corporate expenses for the quarter ended September 28, 2003 were $1,263,000, as compared with $934,000 for the third quarter of 2002. The increase in corporate expenses included expenses related to the activities of the company's special committee of independent directors that was organized by the company's board in April 2003 when it received an indication of interest by a group of Sylvan Inc. senior officers and private investors to acquire shares of Sylvan's common stock. The costs incurred by the committee during the quarter approximated $170,000, primarily for legal and financial advisory services. Approximately $70,000 of comparable costs were incurred during the third quarter of 2002 in the course of a similar committee's evaluation of strategic plans and business alternatives. The activities of the committee are detailed later in this announcement. In addition, the company recorded a net periodic pension expense of $167,500 during the quarter from a pension plan of a former subsidiary, as compared with a net periodic pension benefit of $37,500 for the corresponding 2002 quarter. Segment Information (In thousands) Spawn Products Segment Fresh Mushrooms Segment 2003 2002 % Change 2003 2002 % Change Net Sales $16,759 $16,404 + 2 $7,397 $6,204 + 19 Operating Income 2,422 2,718 - 11 488 436 + 12 Spawn Products Segment Net sales of spawn and spawn-related products increased 2%. The effect of a weaker U.S. dollar on overseas sales increased net sales on a quarter-over- quarter comparison by $1.9 million. Spawn product sales volume decreased 5%, with a 3% increase in the Americas and a 9% decrease in overseas markets. Most of the volume decrease in the overseas markets resulted from a reduction in sales in France due to challenging competitive conditions and in the United Kingdom due to mushroom farm closures. Sales of disease-control agents and nutritional supplements decreased 3% and accounted for 16% of Sylvan's consolidated net sales for the third quarter. The overseas U.S. dollar-equivalent selling price was 13% higher during the third quarter of 2003, as compared with the corresponding quarter of 2002, primarily due to the weakening of the U.S. dollar. Overseas local currency selling prices decreased approximately 1% due to the loss of sales in higher- priced territories. The selling price in the Americas decreased 7% as a result of adjustments to the pricing structure of some products in order to compete with the lower-priced spawn offerings of other suppliers. Operating expenses increased 5% when compared with the third quarter of 2002. The effect of a weaker U.S. dollar increased operating expenses on a quarter-over-quarter comparison by $1.7 million. Within operating expenses, cost of sales was 57% of net sales, as compared with 56% for the corresponding 2002 quarter. Spawn production in overseas markets was 9% lower than for the third quarter of 2002, spreading costs that are primarily fixed in nature over fewer units. Operating income, as a percentage of net sales, was 15% for the third quarter of 2003, as compared with 17% for the corresponding 2002 quarter. Operating income was positively impacted by the weakening of the U.S. dollar, with an effect of approximately $225,000. The company's bioproducts division recorded net sales of $625,000 for the third quarter of 2003, as compared with $290,000 for the third quarter of 2002. Operating income for the third quarter of 2003 was $95,000, as compared with a $15,000 operating loss for the third quarter of 2002. Fresh Mushrooms Segment Net sales of fresh mushrooms increased to $7.4 million during the third quarter, as compared with $6.2 million for the corresponding quarter of 2002. The number of pounds sold increased 9% and the average selling price per pound increased 2%. Quincy experienced improved production yields on a square-foot basis due to the additional satellite growing facilities. The Fresh Mushrooms Segment's cost of sales was $5.6 million, or 75% of net sales, for the quarter ended September 28, 2003, as compared with $4.5 million, or 73%, for the 2002 third quarter. The increase in the cost of sales percentage primarily relates to increased purchases of fresh mushrooms from the satellite farms for immediate resale to the third-party marketer. The segment's operating income for the quarter was $488,000, or 7% of net sales, and was 12% higher than the amount reported for the third quarter of 2002. Nine-Month Comparison Net income for the nine months ended September 28, 2003 was $2,139,000, or $.41 per share, as compared with $3,308,000, or $.60 per share, for the corresponding period of 2002. Consolidated operating income for the 2003 nine-month period decreased 29%, when compared with the corresponding 2002 period, reflecting a 14% decrease in operating income from the Spawn Products Segment, a 1% increase in operating income from the Fresh Mushrooms Segment and a 23% increase in unallocated corporate expenses. Unallocated corporate expenses for the nine months ended September 28, 2003 were $4,092,000, as compared with $3,337,000 for the first nine months of 2002. This increase in corporate expense can be attributed primarily to activities of the special committee and increased pension expense, as detailed below. During the first nine months of 2003, the company incurred costs of approximately $450,000 related to the activities of the company's special committee of independent directors. Approximately $165,000 in comparable costs were incurred during the first nine months of 2002 in the course of a comparable committee's evaluation of strategic plans and business alternatives. The company recorded a net periodic pension expense of $502,500 during the nine months ended September 28, 2003 from a pension plan of a former subsidiary, as compared with a net periodic pension benefit of $112,500 for the nine months ended September 29, 2002. This expense increase was related to poor plan asset performance and a decrease in the plan's discount rate assumption. Segment Information (In thousands) Spawn Products Segment Fresh Mushrooms Segment 2003 2002 % Change 2003 2002 % Change Net Sales $48,895 $46,812 + 4 $21,887 $18,759 + 17 Operating Income 6,610 7,674 -14 2,013 2,001 + 1 Spawn Products Segment Net sales of spawn and spawn-related products increased 4%. The effect of a weaker U.S. dollar on overseas sales increased net sales on a nine-month over nine-month comparison by $6.7 million. Spawn product sales volume decreased 6%, with a 9% decrease in overseas markets and virtually no change in the Americas. Most of the volume decrease in the overseas markets resulted from a reduction in sales in France due to challenging competitive conditions and in the United Kingdom due to mushroom farm closures. Sales of disease- control agents and nutritional supplements increased 2% and accounted for 16% of Sylvan's consolidated net sales for the nine-month period. The overseas U.S. dollar-equivalent selling price was 18% higher during the first nine months of 2003, as compared with the corresponding period of 2002, primarily due to the weakening of the U.S. dollar. Overseas local currency selling prices decreased approximately 2%. The selling price in the Americas decreased 6% as a result of adjustments to the pricing structure of some products in order to compete with the lower-priced spawn offerings of other suppliers. Operating expenses increased 8% when compared with the first nine months of 2002. The effect of a weaker U.S. dollar increased operating expenses on a nine-month over nine-month comparison by $6.1 million. Within operating expenses, cost of sales was 57% of net sales, as compared with 54% for the corresponding 2002 period. Spawn production in overseas markets was 14% lower than for the first nine months of 2002, spreading costs that are primarily fixed in nature over fewer units. Inventory levels were also reduced in response to the lower sales volumes. Operating income, as a percentage of net sales, was 14% for the first nine months of 2003, as compared with 16% for the first nine months of 2002. Operating income was positively impacted by the weakening of the U.S. dollar, with an effect of approximately $610,000. The company's bioproducts division recorded net sales of $1.9 million for the nine-month period ended September 28, 2003, as compared with $1.0 million for the first nine months of 2002. Operating income for the first nine months of 2003 was $433,000, as compared with an operating loss of $393,000 for the first nine months of 2002. Fresh Mushrooms Segment Net sales of fresh mushrooms increased during the first nine months of 2003 to $21.9 million, as compared with $18.8 million for the corresponding period of 2002. The number of pounds sold increased 7% and the average selling price per pound increased 1%. Quincy experienced improved production yields on a square-foot basis due to the additional satellite growing facilities. The cost of sales in the Fresh Mushrooms Segment was $15.9 million, or 73% of net sales, for the nine months ended September 28, 2003, as compared with $12.9 million, or 69%, for the first nine months of 2002. The increase in the cost of sales percentage primarily relates to increased purchases of fresh mushrooms from the satellite farms for immediate resale to the third-party marketer. The segment's operating income for the first nine months of 2003 was $2.0 million, or 9% of net sales, and was 1% higher than the amount reported for the first nine months of 2002. Outlook Sylvan Chairman and CEO Dennis C. Zensen commented, "Our fresh mushroom and bioproducts operations continued to meet our expectations and provided good contributions during the third quarter of 2003. However, our spawn products operations experienced decreased sales volume due to mushroom farm closures and very competitive market conditions. Although we see some positive indications now, we believe that it is too early to predict when spawn volumes will increase." Activities of the Special Committee The special committee of independent directors referenced earlier in this press release was organized by Sylvan's board of directors in April 2003. At that time, the board authorized the committee to evaluate the indication of interest that was submitted on April 16, 2003, by a group of senior officers and private investors to acquire Sylvan's common shares for $11.00 per share. The indication of interest was withdrawn on June 16, 2003, but the committee is continuing to assess and evaluate alternative courses of action. It has not announced any decision or determination with respect to a course of action. The committee expects to complete its evaluation during 2003. In April 2003, Sylvan postponed its 2003 annual meeting of shareholders to provide the special committee with sufficient time to evaluate alternatives. Although the committee is continuing these evaluations, the company has tentatively scheduled an annual meeting for Monday, December 22, 2003. Sylvan's board of directors set Thursday, November 20, 2003, as the record date for purposes of determining which shareholders are eligible to vote at the meeting. The alternatives evaluation process being conducted by the special committee could necessitate a rescheduling of the meeting. The company will notify its shareholders if and when a rescheduling is required. About Sylvan A leader in fungal technology, Sylvan Inc. is a preeminent worldwide producer and distributor of products for the mushroom industry, specializing in spawn (the equivalent of seed for mushrooms) and other spawn-related products and services, and is a major grower of fresh mushrooms in the United States. Forward-Looking Statement Mr. Zensen's comment contains a forward-looking statement. The references to sales volumes are based on currently available competitive data. However, expectations are inherently uncertain. Events could turn out to be significantly different, depending upon such factors as mushroom growing process consistencies, competitive conditions in the mushroom market in general, pricing and product initiatives of the company's spawn business competitors, changes in currency and exchange risks and acts of terrorism or war or concerns of the public about such acts or threats of such acts. Conference Call Sylvan will not conduct a conference call to discuss results for the third quarter of 2003. SYLVAN INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (In thousands except share data) Three Months Ended Nine Months Ended Sept. 28, 2003 Sept. 29, 2002 Sept. 28, 2003 Sept. 29, 2002 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net sales $23,822 $22,275 $69,791 $64,582 Operating costs and expenses: Cost of sales 15,139 13,612 43,969 38,244 Selling, administration, research and development 5,500 4,990 16,618 15,732 Depreciation 1,536 1,453 4,673 4,268 22,175 20,055 65,260 58,244 Operating income 1,647 2,220 4,531 6,338 Interest expense 401 490 1,224 1,366 Other income 100 (3) 120 60 Income before income taxes 1,346 1,727 3,427 5,032 Income tax expense 453 579 1,139 1,661 Minority interest 54 39 149 63 Net income $839 $1,109 $2,139 $3,308 Diluted earnings per share $0.16 $0.20 $0.41 $0.60 Equivalent diluted shares 5,160,833 5,502,408 5,155,192 5,494,988 Condensed Consolidated Balance Sheets (In thousands) Assets Sept. 28, Dec. 29, Liabilities Sept. 28, Dec. 29, 2003 2002 and Equity 2003 2002 (Unaudited) (Unaudited) Cash and equivalents $6,118 $5,624 Short-term debt $122 $223 Accounts Accounts payable 3,835 3,895 receivable, net 15,095 14,399 Other current Inventories 12,010 11,425 liabilities 6,399 5,729 Other current Total current assets 3,912 2,989 liabilities $10,356 $9,847 Total current Long-term debt 35,260 38,162 assets $37,135 $34,437 Other long-term liabilities 10,135 9,794 Fixed assets, net 59,640 58,787 Minority interest 2,176 1,741 Other assets 14,384 13,582 Shareholders' equity 53,232 47,262 Total Total liabilities assets $111,159 $106,806 and equity $111,159 $106,806 DATASOURCE: Sylvan Inc. CONTACT: Don Smith of Sylvan Inc., +1-724-352-7520 Web site: http://www.sylvaninc.com/

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