<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-18339
SYLVAN INC.
(Exact name of registrant as specified in its charter)
Nevada 25-1603408
------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
333 Main Street, P.O. Box 249, Saxonburg, PA 16056-0249
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 352-7520
--------------
(Registrant's telephone number, including area code)
828 South Pike Road, Sarver PA 16055
------------------------------------
(Former address--changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
----- -------------------------------
Common Stock- $.001 Par Value 6,440,159
<PAGE> 2
SYLVAN INC. AND SUBSIDIARIES
INDEX
Part I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Condensed Consolidated Balance Sheets
September 28, 1997 and December 29, 1996.......................................................3
Condensed Consolidated Statements of Income, Three Months
Ended September 28, 1997 and September 29 , 1996...............................................5
Condensed Consolidated Statements of Income, Nine Months
Ended September 28, 1997 and September 29 , 1996...............................................6
Condensed Consolidated Statements of Cash Flows, Nine
Months Ended September 28, 1997 and September 29, 1996.........................................7
Notes to Condensed Consolidated Financial Statements
September 28, 1997.............................................................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................11
Part II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
</TABLE>
<PAGE> 3
Item 1. - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
September 28, 1997 December 29, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $5,463 $4,220
Trade accounts receivable, net of allowance
for doubtful accounts of $946 and $1,031, respectively 10,602 10,336
Inventories 7,720 7,367
Deferred income tax benefit 509 509
Prepaid expenses and other current assets 1,779 1,705
- -------------------------------------------------------------------------------------------------------------------
Total current assets 26,073 24,137
Property, plant and equipment, net 48,169 47,705
Intangible assets, net of accumulated amortization
of $2,549 and $2,255, respectively 8,771 10,093
Other assets, net of accumulated amortization
of $1,408 and $1,213, respectively 4,364 4,977
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $87,377 $86,912
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
September 28, 1997 December 29, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $3,676 $3,484
Current portion of long-term debt 2,994 523
Accrued salaries, wages and other employee benefits 2,914 3,179
Accrued interest 256 443
Other accrued liabilities 3,709 3,515
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 13,549 11,144
- -------------------------------------------------------------------------------------------------------------------------
Long-term and revolving term debt 27,413 30,168
- -------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities:
Postretirement medical benefits 921 1,046
Other employee benefits 754 1,172
Other 880 1,208
- -------------------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 2,555 3,426
- -------------------------------------------------------------------------------------------------------------------------
Minority interest 1,190 934
CONTINGENT LIABILITIES (See Note 2)
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares authorized,
6,569,785 and 6,480,092 shares issued and 6,429,360 and 6,373,867 shares
outstanding at September 28, 1997 and December 29, 1996, respectively 7 6
Common capital contributed in excess of par 15,401 14,377
Retained earnings 33,349 28,838
Less: Treasury stock, at cost, 140,425 and 106,225 shares
at September 28, 1997 and December 29, 1996, respectively (792) (414)
Cumulative translation adjustment (2,767) 961
Pension adjustment (2,528) (2,528)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 42,670 41,240
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $87,377 $86,912
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sylvan Inc. and Subsidiaries
(Unaudited, In Thousands Except Share Data)
<TABLE>
<CAPTION>
---------- Three Months Ended ------------
September 28, 1997 September 29 1996
------------------ -----------------
<S> <C> <C>
NET SALES $20,540 $19,728
- --------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 12,039 11,424
Selling, administration, research and development 4,406 4,629
Depreciation 1,154 1,057
- --------------------------------------------------------------------------------------------------------------------
17,599 17,110
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,941 2,618
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 525 477
OTHER INCOME (EXPENSE) (15) (95)
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,401 2,046
PROVISION FOR INCOME TAXES 700 579
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 1,701 1,467
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES (61) (48)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $1,640 $1,419
====================================================================================================================
NET INCOME PER SHARE $0.25 $0.22
====================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES (See Note 1) 6,486,084 6,414,811
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sylvan Inc. and Subsidiaries
(Unaudited, In Thousands Except Share Data)
<TABLE>
<CAPTION>
------------ Nine Months Ended -----------
September 28, 1997 September 29, 1996
------------------ ------------------
<S> <C> <C>
NET SALES $60,018 $58,595
- ------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 34,890 33,370
Selling, administration, research and development 13,623 13,819
Depreciation 3,388 3,132
- ------------------------------------------------------------------------------------------------------------------
51,901 50,321
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 8,117 8,274
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 1,535 1,635
OTHER INCOME (EXPENSE) (27) 110
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,555 6,749
PROVISION FOR INCOME TAXES 1,888 1,802
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 4,667 4,947
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES (156) (124)
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $4,511 $4,823
==================================================================================================================
NET INCOME PER SHARE $0.70 $0.75
==================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES (See Note 1) 6,452,939 6,431,713
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sylvan Inc. and Subsidiaries
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
------------ Nine Months Ended -----------
September 28, 1997 September 29, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,511 $4,823
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,877 3,644
Deferred income taxes (71) (36)
Noncash interest cost of employee benefits (123) 181
Net gain on sale of assets (14) (4)
Stock option compensation expense 0 158
Trade accounts receivable (266) (354)
Inventories (353) (473)
Prepaid expenses and other assets 1,373 (2,391)
Accounts payable and accrued liabilities (59) (991)
Postretirement medical and other employee benefits (684) (1,135)
Minority interest 256 166
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,447 3,588
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net expenditures for property, plant and equipment (6,661) (5,949)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,661) (5,949)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (310) (5,878)
Net borrowings under revolving credit line 779 9,577
Net proceeds from exercise of stock options 923 931
Repurchase of outstanding common stock (379) (133)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,013 4,497
- ---------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (1,556) (1,232)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,243 904
CASH AND CASH EQUIVALENTS, beginning of period 4,220 5,375
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $5,463 $6,279
=====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $1,590 $1,544
Income taxes paid 1,630 1,744
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sylvan Inc. and Subsidiaries
September 28, 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
-------
These condensed consolidated financial statements of Sylvan Inc.
("Sylvan") (the "Company") are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results
of operations for the interim period. These statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report to Shareholders and its Form
10-K for the year ended December 29, 1996.
Cash
----
The Company maintains a cash balance of approximately $3.2 million with a
U.S. bank in support of a letter of credit issued to a European bank.
This balance is reported under "Other Assets."
Inventories
-----------
Inventories at September 28, 1997 and December 29, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 28, 1997 December 29, 1996
------------------ -----------------
<S> <C> <C>
Growing crops and compost material $ 3,831 $ 3,759
Stores and other supplies 2,026 1,634
Mushrooms and spawn on hand 1,863 1,974
------- -------
$ 7,720 $ 7,367
======= =======
</TABLE>
Earnings Per Common Share
-------------------------
Earnings per share for the three months and nine months ended September
28, 1997 were calculated using the weighted average number of shares
outstanding during the period and included the effect of stock options
outstanding. Pursuant to the Company's 1990 and 1993 Stock Option Plans,
options for a total of 942,417 shares of the Company's Common stock have
been granted, and options for a total of 424,992 of these shares have
been exercised as of September 28, 1997.
8
<PAGE> 9
Reclassifications
-----------------
Certain reclassifications have been made to the prior-year condensed
consolidated financial statements to conform to the current-year
presentation.
New Accounting Pronouncement
----------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). SFAS No. 128 differs from current accounting guidance in
that earnings per share is classified as basic earnings per share and
diluted earnings per share, compared with primary earnings per share and
fully diluted earnings per share under current standards. Basic earnings
per share differs from primary earnings per share in that it includes
only the weighted average common shares outstanding and does not include
any dilutive securities in the calculation. Diluted earnings per share
under the new standard differs in certain calculations from fully diluted
earnings per share under the existing standards. Adoption of SFAS No. 128
is required for interim and annual periods ending after December 15,
1997. Had the Company applied the provisions of SFAS No. 128 in 1997 to
the earnings per share calculations, both the basic and diluted earnings
per share for the three months and nine months ended September 28, 1997
would have been unchanged at $0.25 and $0.70, respectively.
2. CONTINGENT LIABILITIES:
Certain of the Company's subsidiaries are self-insured for employee
medical benefits claims up to a limit of $50,000 per occurrence and also
for claims filed under Pennsylvania workers' compensation laws. Workers'
compensation claims for medical and lost wages in excess of $350,000 are
covered by an insurance policy.
3. FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of non-U.S. operations are translated into U.S.
dollars using period-end exchange rates, while revenues and expenses are
translated at average exchange rates throughout the quarter. The
resulting net translation adjustments are recorded as a separate
component of shareholders' equity.
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The Company has a Revolving Credit Agreement (the "Agreement") with a
commercial bank dated June 1, 1996. It provides for revolving credit
loans on which the aggregate outstanding balance available to the Company
may not initially exceed $45.0 million, but this aggregate outstanding
balance will decline over the life of the Agreement as follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
Maximum Aggregate
Period Beginning Outstanding Balance
---------------- -------------------
<S> <C>
June 1, 1996 $45.0 million
June 1, 1998 40.0 million
June 1, 1999 35.0 million
June 1, 2001 25.0 million
June 1, 2002 20.0 million
</TABLE>
Outstanding borrowings under the Agreement bear interest at either the
Prime Rate or LIBOR (plus the applicable margin), at the Company's
option.
The revolving credit loans mature on May 31, 2003. Within and under the
same terms and conditions as the revolving credit loan facility, the
Company may also make borrowings outside of the United States of up to
the U.S. dollar equivalent of $6.0 million, denominated in Dutch
guilders.
In addition to certain other limitations, the Agreement provides for the
maintenance of various financial covenants, including limitations as to
incurring additional indebtedness, granting security interests to third
parties, spending for capital projects and paying dividends. The Company
has pledged to the lending banks a security interest in the capital stock
of its subsidiaries.
The Company utilized monies under the Agreement to repay term loans
outstanding under a previous loan agreement and has allocated $2.0
million of its credit capacity to support standby letters of credit which
the Company has obtained in connection with the self-insurance of its
subsidiaries' workers' compensation claims. On September 28, 1997, the
Company had outstanding borrowings under the Agreement of $24.9 million.
The Company has one interest rate swap agreement which applies to $5.0
million of the Company's total long-term debt. The Company agreed to pay
a fixed interest rate over the life of this agreement of 7.63% plus the
applicable margin. The balance of long-term debt is subject to variable
interest rate pricing.
The Company has an agreement with a French bank which enables it to
borrow 15 million French francs at an interest rate based on a Paris
Interbank Offered Rate (plus the applicable margin) with repayment due in
January 1998.
The Company's majority-owned Dutch subsidiary has a long-term plant and
equipment and overdraft facility with a Dutch bank. At September 28,
1997, term loans amounting to 4.7 million Dutch guilders (approximately
$2.4 million) were outstanding under this agreement.
10
<PAGE> 11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sylvan Inc. and Subsidiaries
RESULTS OF OPERATIONS (Three Months Ended September 28, 1997 and September 29,
1996)
Net Sales
- ---------
Net sales for the three months ended September 28, 1997 increased by 4% over
the comparable period in 1996. Sales of spawn and spawn-related products were
comparable to the corresponding 1996 period, as an overall unit growth of 4%
was offset by the foreign currency translation effects of a strengthening of
the U.S dollar against the Company's major trading currencies. Sales unit
growth of 11% was recorded in Europe, while sales in the Americas declined by
7%, reflecting the weak mushroom market in the eastern United States. Local
currency selling prices in foreign markets were slightly higher in the 1997
period, although these increases are not reflected in U.S. dollar revenue
gains, as the strengthening of the U.S. dollar during 1997 resulted in a 10%
reduction in U.S. dollar translated selling price as compared to 1996. The
Americas recorded a 1% decrease in selling prices during the 1997 period as
compared with the 1996 period, as customers continue to fully utilize volume
pricing programs. Revenues derived from non-U.S. customers were 47% of net
sales. Fresh mushroom sales increased to 38% of net sales, compared with 35% in
1996, and fresh mushroom sales revenue increased by 12%. Mushroom unit volumes
increased by 11% and the average realized price per pound increased by 1%. The
proportion of mushrooms sold through fresh distribution channels increased to
96%. Sales of nutritional supplements and chemicals increased by 21%, with
strong growth in European chemical sales. Supplement sales decreased in the
Americas due primarily to the weak mushroom market in the eastern United
States. The Company began commercial trials of Sylvan-produced supplements
during the quarter and expects to begin selling these products in the fourth
quarter of 1997.
Operating Costs and Expenses
- ----------------------------
Cost of sales increased to 58.6% of net sales, compared with 57.9% in the
prior-year quarter. The primary reasons for this increase were start-up costs
from the new Iowa supplement production facility, lower utilization of the
American spawn production facilities, and increased CI production in Europe.
Supplement production facility start-up costs of $53,000 were recorded during
the quarter, as the Iowa facility began production. The American spawn
operations were adversely affected by decreased production volumes, which
increased the fixed costs component on a per-unit basis. Europe's cost of sales
increased slightly as more CI, the companion product of spawn, was produced to
meet the increased demand. Raw material costs for CI are higher, on a per unit
basis, than for spawn. Quincy's cost of sales as a percentage of sales for the
1997 quarter was equivalent to the prior-year quarter. Selling, administration,
and research and development expenses decreased to 21.5% of net sales in the
current quarter from 23.5% in the prior-year quarter due to reduced spending
levels in research and development. Selling and administrative expenses were
comparable to the prior-year quarter in U.S. dollars. Local currency travel and
related expenses increased in connection with expanding market development
activities. Depreciation expense increased by $0.1 million over the prior-year
quarter, as new spawn production facilities became operational.
11
<PAGE> 12
Interest Expense
- ----------------
Net interest expense of $0.5 million for the third quarter of 1997 was 10%
above the expense reported in the corresponding prior-year period. Interest
income, which is netted against interest expense, decreased as compared with
the 1996 period, due to lower average cash balances held during the 1997
quarter. The Company's average borrowing was approximately $0.8 million lower
and the average cost of funds was 7.5% in the 1997 quarter as compared with
7.7% in the prior-year quarter.
Income Tax Expense
- ------------------
The effective income tax rate in the third quarter of 1997 was 29%, compared
with 28% in the corresponding 1996 quarter. This increase reflects a higher
effective income tax rate in France due to an increase in income tax rates.
RESULTS OF OPERATIONS (Nine Months Ended September 28, 1997 and September 29,
1996)
Net Sales
- ---------
Net sales for the nine months ended September 28, 1997 were 2% higher than
reported in the comparable prior-year period. Sales of spawn and spawn-related
products increased by 2% during the current period, with 13% unit growth
recorded in Europe which was offset by the strengthening of the U.S. dollar.
The strength of the U.S. dollar against the Company's major trading foreign
currencies reduced the average U.S. dollar selling price by 9% in Europe. The
mix of local currencies contributed a 1% increase in the U.S. dollar average
selling price. The Americas recorded a 3% decrease in unit sales due to the
weak mushroom market in the eastern United States and a 2% decrease in selling
prices as customers continue to fully utilize volume pricing programs. Revenues
derived from non-U.S. customers were 46% of net sales. Product mix in the 1997
period was essentially the same as in the nine months ended September 29, 1996,
with mushroom sales increasing less than 1% as a percent of total sales.
Mushroom units sold were 5% higher than in the 1996 period and the average
price per pound sold decreased by 4%. Increased advertising allowances, which
decrease average selling price, were offered to combat a weaker mushroom market
in 1997. Quincy increased the percentage of mushrooms distributed through the
fresh channels to 94%, up 2% from the corresponding 1996 period. Sales of
nutritional supplements and chemicals increased by 12%. A decrease in
supplement sales was more than offset by a strong increase in chemical sales.
Sales of Sylvan-produced supplements should begin in the fourth quarter of
1997. Sales of biological products for use outside the mushroom industry
increased to $0.4 million for the 1997 period, as compared with $0.2 million
for the comparable 1996 period.
12
<PAGE> 13
Operating Costs and Expenses
- ----------------------------
Cost of sales for the nine months ended September 28, 1997 was 58.1% of net
sales, compared with 57.0% in the comparable 1996 period. The Americas were
adversely affected by decreased spawn production volumes which increased the
fixed cost components on a per unit basis. This increased the consolidated cost
of sales percentage. On the other hand, Europe's cost of sales percentage
decreased due to higher utilization of production facilities as sales
increased. Start-up costs recorded during the nine months increased the
consolidated cost of sales percentage as the new Iowa supplement production
facility began production. Mushroom business cost of sales percentage increased
2.1%, or 0.9% on a consolidated basis, over the corresponding 1996 period. This
is due to production cutbacks implemented at the end of the first quarter of
1996, which increased the fixed cost component of cost of sales. Increases in
sales of purchased products also contributed to the higher cost of sales
percentage due to the lower margin on these sales. Selling, administration, and
research and development expenses were 22.7% of net sales in 1997, compared
with 23.6% in the prior-year period. Higher selling and administrative expenses
due to increased legal fees and travel relating to market development were
offset by lower research and development costs. Depreciation expense was $0.3
million higher in the current period, reflecting the effects of new spawn
production facilities which became operational during 1997.
Interest Expense
- ----------------
Net interest expense for the nine months ended September 28, 1997 was $1.5
million, compared with $1.6 million in the comparable period in 1996. Average
borrowings were approximately $1.0 million higher in the 1997 period. The
Company's average cost of funds was 7.4%, compared with 8.0% in the 1996
period. The Company paid a reduced spread above its selected prime rate or
LIBOR option during the current period.
Income Tax Expense
- ------------------
The effective income tax rate for the nine months ended September 28, 1997 was
29%, compared with 27% in the corresponding period in 1996. This increase
reflects a higher effective income tax rate in France due to an increase in
income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.4 million for the nine months
ended September 28, 1997, an increase of $4.8 million over the nine months
ended September 29, 1996. Significant changes in the level of prepaid expenses
and other assets comprised the bulk of this movement. Prepaid expenses and
other assets decreased by $1.4 million in 1997, compared with an increase of
$2.4 million in the comparable period in 1996. The increase reported in 1996
resulted largely from the payment of $1.2 million into an escrow account
relating to the settlement of certain employee benefit liabilities and the
timing of advance payments to suppliers in respect of raw materials purchases.
The U.S. dollar, measured in terms of the currencies in the Company's major
foreign markets, strengthened by approximately 13% in the 1997 period. The
effect of these currency translation changes is reflected
13
<PAGE> 14
in the $3.7 million reduction in the cumulative translation account component
of shareholders' equity, as a stronger U.S. dollar reduces the U.S. dollar
equivalent value of foreign currency-denominated net assets. The Company holds
approximately 80% of its cash balances in overseas foreign currency-denominated
accounts to support non-U.S. working capital and capital investment needs. As
of September 28, 1997, the Company had no outstanding foreign currency exchange
contracts.
Net working capital (comprised of net trade accounts receivable, inventories
and accounts payable and accrued expenses) increased by $0.7 million in 1997,
compared with an increase of $1.8 million in 1996. Increases in spawn and
related product sales in Europe, together with initial inventory production at
new and expanded manufacturing facilities (particularly in Hungary and the
United Kingdom), were the main factors responsible for this increase. The
increase in net working capital in 1996 was largely due to decreases in trade
accounts payable caused by the timing of the completion of several capital
projects during the year. Payments relating to postretirement medical and other
employee benefits in 1997 amounted to $0.4 million for workers' compensation,
compared with $1.5 million in 1996, and $0.1 million for postretirement
employee benefits, compared with $0.4 million in 1996.
Capital expenditures in the nine months ended September 28, 1997 amounted to
$6.7 million, an increase of $0.7 million over the corresponding period in
1996. Significant expenditures to date include the completion of a spawn
production and distribution facility in Hungary, the construction of a quality
control and product testing facility in Pennsylvania, the in-progress addition
of a second spawn production blender at the Company's Horst, Holland, facility
and investment in a nutritional supplement production facility in Iowa. The
Company expects capital expenditures in 1997 to total approximately $8.0
million, the current limitation under the Revolving Credit Agreement. The
Company believes that it has sufficient cash resources from existing cash
balances, internally generated funds and available bank credit facilities to
meet its ongoing capital requirements. Payments to repurchase common stock
under the Company's Stock Repurchase Plan were $0.4 million for the nine months
ended September 28, 1997.
Term debt and revolving credit obligations increased by $0.5 million in the
nine months ended September 28, 1997, compared with an increase of $3.7 million
in the comparable prior-year period. Certain transactions occurred in 1996,
including the payment of $1.2 million into an escrow account relating to the
settlement of certain employee benefit liabilities and the expansion of U.S.
spawn inoculum facilities that significantly increased obligations under the
U.S. revolving credit agreement. The Company presently is a party to one
fixed-for-variable interest rate swap agreement for a notional amount of $5
million. This swap agreement expires November 28, 1997. The Company anticipates
that it will enter into additional fixed-for-variable interest rate swap
agreements during the fourth quarter of 1997.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
-----------------
Other than ordinary routine litigation incidental to their respective
businesses, there are no material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of their property
is the subject.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(11) Statement re computation of per share earnings is not
required because the relevant computation can be clearly
determined from the material contained in the financial
statements included herein.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None
15
<PAGE> 16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 4, 1997 SYLVAN INC.
-------------------
By: /s/ WILLIAM P. MOONEY
------------------------
William P. Mooney
Chief Financial Officer
(Principal Financial Officer
and Chief Accounting Officer)
By: /s/ FRED Y. BENNITT
------------------------
Fred Y. Bennitt
Secretary/Treasurer
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000861291
<NAME> SYLVAN INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
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