<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
FOR QUARTERLY PERIOD ENDED MARCH 30, 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)
828 South Pike Road, Sarver, PA 16055
(Address of principal executive offices) (Zip Code)
(412) 295-3910
(Registrant's telephone number, including area code)
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 May 5, 1997
- ------------------------------ --------------------------
Common Stock - $.001 Par Value 6,392,200
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SYLVAN INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
March 30, 1997 and December 29, 1996...........................................................3
Condensed Consolidated Statements of Income, Three Months
Ended March 30, 1997 and March 31, 1996........................................................5
Condensed Consolidated Statements of Cash Flows, Three
Months Ended March 30, 1997 and March 31, 1996.................................................6
Notes to Condensed Consolidated Financial Statements
March 30, 1997 ................................................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K...............................................................13
</TABLE>
<PAGE> 3
Item 1. - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
March 30, 1997 December 29, 1996
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,560 $ 4,220
Trade accounts receivable, net of allowance
for doubtful accounts of $944 and $1,031, respectively 9,622 10,336
Inventories 7,851 7,367
Deferred income tax benefit 509 509
Prepaid expenses and other current assets 1,347 1,705
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 23,889 24,137
Property, plant and equipment, net 47,084 47,705
Intangible assets, net of accumulated amortization
of $2,353 and $2,255, respectively 9,282 10,093
Other assets, net of accumulated amortization
of $1,267 and $1,213, respectively 4,607 4,977
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 84,862 $ 86,912
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
March 30, 1997 December 29, 1996
-------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 2,731 $ 3,484
Current portion of long-term debt 3,139 523
Accrued salaries, wages and other employee benefits 2,363 3,179
Accrued interest 268 443
Other accrued liabilities 3,049 3,515
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 11,550 11,144
- --------------------------------------------------------------------------------------------------------------------
Long-term and revolving term debt 28,408 30,168
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities:
Postretirement medical benefits 1,096 1,046
Other employee benefits 981 1,172
Other 1,098 1,208
- --------------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 3,175 3,426
- --------------------------------------------------------------------------------------------------------------------
Minority interest 1,000 934
CONTINGENT LIABILITIES (See Note 2)
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares authorized,
6,498,425 and 6,480,092 shares issued and 6,392,200 and 6,373,867 shares
outstanding at March 30, 1997 and December 29, 1996, respectively 6 6
Common capital contributed in excess of par 14,556 14,377
Retained earnings 30,371 28,838
Less: Treasury stock, at cost, 106,225 and 106,225 shares
at March 30, 1997 and December 29, 1996, respectively (414) (414)
Cumulative translation adjustment (1,262) 961
Pension adjustment (2,528) (2,528)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 40,729 41,240
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 84,862 $ 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
March 30, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
NET SALES $ 19,913 $ 20,137
- -------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 11,499 11,267
Selling, administration, research and development 4,660 4,703
Depreciation 1,103 1,036
- -------------------------------------------------------------------------------------------------------------------
17,262 17,006
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,651 3,131
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 500 573
OTHER INCOME 29 121
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,180 2,679
PROVISION FOR INCOME TAXES 626 811
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 1,554 1,868
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES (21) (6)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,533 $ 1,862
===================================================================================================================
NET INCOME PER SHARE $ 0.24 $ 0.29
===================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES (See Note 1) 6,477,937 6,418,939
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sylvan Inc. and Subsidiaries
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 30, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,533 $ 1,862
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,255 1,197
Deferred income taxes (48) (18)
Noncash interest cost of employee benefits (41) 100
Net (gain) on sale of assets (7) (5)
Stock option compensation expense 0 79
Trade accounts receivable 715 268
Inventories (484) (534)
Prepaid expenses and other assets 1,386 959
Accounts payable and accrued liabilities (1,456) (1,636)
Postretirement medical and other employee benefits (916) (943)
Minority interest 66 44
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,003 1,373
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net expenditures for property, plant and equipment (1,888) (1,782)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,888) (1,782)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (118) (646)
Net borrowings under revolving credit line 1,420 2,037
Net proceeds from exercise of stock options 175 376
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,477 1,767
- --------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (1,252) (857)
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 340 501
CASH AND CASH EQUIVALENTS, beginning of period 4,220 5,375
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 4,560 $ 5,876
+++++++===================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 513 $ 612
Income taxes paid 315 225
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sylvan Inc. and Subsidiaries
March 30, 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 cash balances 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 March 30, 1997 and December 29, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 30, 1997 December 29, 1996
--------------- -----------------
<S> <C> <C>
Growing crops and compost material $ 3,881 $ 3,759
Stores and other supplies 1,870 1,634
Mushrooms and spawn on hand 2,100 1,974
------- -------
$ 7,851 $ 7,367
======= =======
</TABLE>
Earnings Per Common Share
Earnings per share for the three months ended March 30, 1997 was
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
940,417 shares of the Company's Common stock have been granted, and
options for a total of 353,632 of these shares have been exercised as of
March 30, 1997.
Reclassifications
Certain reclassifications have been made to the prior-year condensed
consolidated financial statements to conform to the current-year
presentation.
7
<PAGE> 8
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement on 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 than 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 the
first quarter of 1997 to the earnings per share calculations, the basic
and diluted earnings per share for the three months ended March 30, 1997
would have been $0.24 and $0.24 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 (the Bank) which was amended and restated on 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:
<TABLE>
<CAPTION>
Maximum Aggregate
Year 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>
8
<PAGE> 9
Outstanding borrowings under the Agreement bear interest at either the
Prime Rate or LIBOR (plus an 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 borrow up to the U.S. dollar equivalent of $6.0 million,
denominated in Dutch guilders. Such borrowings may only be made outside
the United States.
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 March 30, 1997, the
Company had outstanding borrowings under the Agreement of $25.5 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 the agreement of 7.63% plus the
applicable margin. The balance of long-term debt continues to be 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
January 1998.
The Company's majority-owned Dutch subsidiary has a long-term plant and
equipment and overdraft facility with a Dutch bank. At March 30, 1997,
term loans amounting to 5.1 million Dutch guilders (approximately $2.7
million) were outstanding under this agreement.
9
<PAGE> 10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sylvan Inc. and Subsidiaries
RESULTS OF OPERATIONS (Three Months Ended March 30, 1997 and March 31, 1996)
Net Sales
First quarter 1997 net sales were $19.9 million, 1.1% below the first quarter
of 1996. The decline resulted from changes in foreign currency translation
rates used to convert foreign currency-denominated sales to U.S. dollar
equivalents, and from lower revenues at the Company's fresh mushroom operation.
Period-to-period spawn sales volume, measured in unit shipments, increased 12%
in Europe and 4% in the Americas, for an overall 8% growth rate. The French
market and the Mexico/South America territories recorded strong improvement.
The unit selling prices in Europe, as expressed in the applicable local
currencies, did not change from the first quarter of 1996 to the first quarter
of 1997. However, the approximately 7% lower foreign currency translation
rates effected a quarter-to-quarter sales reduction of more than $500,000.
Spawn selling price in the Americas was 1% lower than that of the prior-year
period. Sales from the fresh mushroom operation were 8% lower in the 1997
quarter, due to a 6% reduction in sales units and a 2% decline in average
selling price. The percentage of total mushrooms produced that is sold through
the fresh market distribution channel was the same for both the 1997 quarter
and the comparable 1996 quarter.
As a component of total sales, sales from fresh mushrooms in the first quarter
of 1997 accounted for 37%, 2% lower than first quarter 1996. Sales outside of
the United States were 43% of total sales in the 1997 period, as compared with
41% in the 1996 quarter. Sales of agricultural chemicals, compost nutritional
supplements and other products were 2% higher in the 1997 quarter than in the
year-ago quarter, with the largest gain recorded in sales of Sylvan-produced
biological products used outside of the mushroom industry.
Operating Costs and Expenses
Cost of sales for the first quarter of 1997 was $11.5 million, or 57.7% of
sales, as compared with $11.3 million, or 56.0%, for the first quarter of 1996.
Reduced production levels at the Company's fresh mushroom operation in the
current period, as well as lower average selling prices in that product line,
contributed to the increase. If fresh mushroom operations are excluded from the
comparison, the cost of sales percentage for the 1997 period was 0.4% higher
than the first quarter 1996 period's percentage.
Selling, general, administration, and research and development costs for the
first quarter of 1997 were $4.7 million, or 23.4% of sales, the same as 1996's
first-quarter percentage. Research and development expenses declined 25%, as
certain quality control efforts became part of production protocols, and the
Company's nutritional supplement product moved to production. Professional fee
expenditures increased in first quarter 1997 compared with first quarter 1996,
due to higher legal and public relations expenditures for U.S. operations.
These expense levels are expected to reduce on a
10
<PAGE> 11
comparative basis during 1997. Depreciation expense was $1.1 million in the
current quarter, an increase of $68,000, or 6.5%, as compared with the first
quarter 1996, reflecting the startup of the Company's Pennsylvania spawn
inoculum production facility and Australian spawn production facility.
Interest Expense and Other Income
The Company's effective borrowing rate was 7.4% for first quarter 1997, 14%
lower than the 8.6% rate recorded for first quarter 1996. The principal
differences relate primarily to lower base borrowing rates in 1997, as well as
a reduced margin above the base borrowing rate, which resulted from an
amendment to the Company's Revolving Credit Agreement in June 1996. Other
income was $92,000 lower in the 1997 period than in the first quarter of 1996.
During first quarter 1996, the Company's French subsidiary benefited from a
recovery of an insurance claim.
Income Tax Expense
The Company provided for income taxes for first quarter 1997 using an effective
income rate of 29%. The rate is based on actual first-quarter results, as well
as an expectation as to how much income and in which tax jurisdiction the
Company will earn income for the remainder of 1997. For first quarter 1996, the
Company's tax provision was calculated using an effective tax rate of 30.3%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first quarter of 1997
increased by $0.6 million, as compared with first quarter 1996. Working capital
changes were the primary cause of the increase. Accounts receivable and
inventory changes produced net cash flow of $231,000 in the 1997 first quarter,
as compared with a use of cash of $266,000 in the year-ago period. Year-to-year
accounts receivable reductions of approximately $400,000 resulted from the
effect of changes in foreign currency translation rates. Changes in prepaid
expenses and other asset balances contributed $1.4 million in the 1997 quarter,
compared with $1.0 million in the 1996 period. Payments related to
postretirement liabilities decreased significantly in the current quarter,
following the settlement in the fourth quarter of 1996 of liabilities relating
to certain retirees of the Company's former Moonlight Mushrooms, Inc.
subsidiary. Workers' compensation payments were $173,000 in the 1997 quarter,
compared with $628,000 in the first quarter of 1996. This decrease results from
efforts in 1996 and 1995 to aggressively settle Moonlight's employee benefits
liabilities, and is consistent with management's expectation that total
expenditures in fiscal 1997 will amount to approximately $500,000. These
employee benefit expenditures decreases were offset by the timing of
expenditures in respect of certain other year-end employee benefit payments and
medical claims.
Included in current maturities of long-term debt is a loan from a French bank
amounting to 15 million French francs (approximately $2.7 million), which was
entered into in 1995. Repayment of this loan is due January 1998. The Company
expects to renew this loan for an additional two years from the maturity date,
or to refinance the loan under the existing offshore revolving credit facility.
11
<PAGE> 12
Capital expenditures in the first quarter of 1997 totaled $1.9 million,
slightly higher than the $1.8 million reported for first quarter 1996. Larger
projects in the 1997 period included the ongoing construction of a spawn
production and distribution facility in Hungary, construction of a quality
control and spawn product testing facility in the United States, purchase of
compost supplement production equipment and replacement of mushroom production
equipment. Capital expenditures related to expansion were approximately 50% of
the total, with the remainder representing asset replacement expenditures. The
Company believes that it has sufficient cash resources from current cash
balances, internally generated funds and available bank credit facilities to
meet its ongoing capital needs.
12
<PAGE> 13
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
13
<PAGE> 14
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: May 6, 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
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000861291
<NAME> SYLVAN INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 4,560
<SECURITIES> 0
<RECEIVABLES> 10,566
<ALLOWANCES> 944
<INVENTORY> 7,851
<CURRENT-ASSETS> 23,889
<PP&E> 68,040
<DEPRECIATION> 20,956
<TOTAL-ASSETS> 84,862
<CURRENT-LIABILITIES> 11,550
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 40,723
<TOTAL-LIABILITY-AND-EQUITY> 84,862
<SALES> 19,913
<TOTAL-REVENUES> 19,913
<CGS> 11,499
<TOTAL-COSTS> 17,262
<OTHER-EXPENSES> (29)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 500
<INCOME-PRETAX> 2,180
<INCOME-TAX> 626
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,533
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
