<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMENDMENT NUMBER 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 28, 1998
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)
(724) 352-7520
(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
----- -----
Number of shares of common stock outstanding as of July 31, 1998... 6,452,333
<PAGE> 2
SYLVAN INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Part I - FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Balance Sheets
June 28, 1998 and December 28, 1997............................................................3
Condensed Consolidated Statements of Income, Three Months
Ended June 28, 1998 and June 29, 1997..........................................................5
Condensed Consolidated Statements of Income, Six Months
Ended June 28, 1998 and June 29, 1997..........................................................6
Condensed Consolidated Statements of Cash Flows, Six
Months Ended June 28, 1998 and June 29, 1997...................................................7
Notes to Condensed Consolidated Financial Statements
June 28, 1998 ................................................................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................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>
June 28, 1998 December 28, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,863 $ 5,567
Trade accounts receivable, net of allowance
for doubtful accounts of $708 and $812, respectively 10,923 13,435
Inventories 10,066 8,723
Deferred income tax benefit 856 686
Prepaid expenses and other current assets 3,131 1,792
- ----------------------------------------------------------------------------------------------------
Total current assets 29,839 30,203
Property, plant and equipment, net 50,247 47,628
Intangible assets, net of accumulated amortization
of $2,840 and $2,647, respectively 11,955 11,466
Other assets, net of accumulated amortization
of $1,621 and $1,473, respectively 3,833 4,383
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 95,874 $ 93,680
====================================================================================================
</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>
June 28, 1998 December 28, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 4,855 $ 5,643
Current portion of long-term debt 789 448
Accrued salaries, wages and other employee benefits 2,993 3,323
Accrued interest 165 300
Other accrued liabilities 4,458 3,550
- -----------------------------------------------------------------------------------------------------
Total current liabilities 13,260 13,264
- -----------------------------------------------------------------------------------------------------
Long-term and revolving term debt 31,841 32,690
- -----------------------------------------------------------------------------------------------------
Other long-term liabilities:
Postretirement medical benefits 1,193 1,037
Other employee benefits 436 730
Other 1,146 1,054
- -----------------------------------------------------------------------------------------------------
Total other long-term liabilities 2,775 2,821
- -----------------------------------------------------------------------------------------------------
Minority interest 1,138 914
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares
authorized, 6,618,714 and 6,589,784 shares issued and
6,458,749 and 6,449,344 shares outstanding at June 28,
1998 and December 28, 1997, respectively 7 7
Common capital contributed in excess of par 15,935 15,638
Retained earnings 38,733 35,320
Less: Treasury stock, at cost, 159,965 and 140,440 shares
at June 28, 1998 and December 28, 1997, respectively (1,073) (792)
------- -------
53,602 50,173
Cumulative translation adjustment (3,592) (3,032)
Pension adjustment (3,150) (3,150)
- -----------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (6,742) (6,182)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 46,860 43,991
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,874 $ 93,680
=====================================================================================================
</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 -----
June 28, 1998 June 29, 1997
------------- -------------
NET SALES $ 20,971 $ 19,565
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING COSTS AND EXPENSES:
Cost of sales 12,206 11,351
Selling, administration, research and development 4,839 4,557
Depreciation 1,262 1,131
- -----------------------------------------------------------------------------------------
18,307 17,039
- -----------------------------------------------------------------------------------------
OPERATING INCOME 2,664 2,526
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 534 511
OTHER INCOME (EXPENSE) (38) (46)
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,092 1,969
PROVISION FOR INCOME TAXES 535 562
- -----------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 1,557 1,407
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 77 69
- -----------------------------------------------------------------------------------------
NET INCOME $ 1,480 $ 1,338
=========================================================================================
NET INCOME PER SHARE - DILUTED $ 0.23 $ 0.21
=========================================================================================
NET INCOME PER SHARE - BASIC $ 0.23 $ 0.21
=========================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES (See Note 1) 6,575,834 6,385,455
=========================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (See Note 1) 6,460,989 6,385,455
=========================================================================================
</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>
------- Six Months Ended -----
June 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C>
NET SALES $ 42,959 $ 39,478
- -----------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 24,665 22,850
Selling, administration, research and development 9,755 9,217
Depreciation 2,490 2,234
- -----------------------------------------------------------------------------------------
36,910 34,301
- -----------------------------------------------------------------------------------------
OPERATING INCOME 6,049 5,177
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 1,062 1,010
OTHER INCOME (EXPENSE) (39) (13)
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,948 4,154
PROVISION FOR INCOME TAXES 1,435 1,188
- -----------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 3,513 2,966
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 99 95
- -----------------------------------------------------------------------------------------
NET INCOME $ 3,414 $ 2,871
=========================================================================================
NET INCOME PER SHARE - DILUTED $ 0.52 $ 0.45
=========================================================================================
NET INCOME PER SHARE - BASIC $ 0.53 $ 0.45
=========================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES (See Note 1) 6,557,142 6,387,952
=========================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (See Note 1) 6,455,880 6,386,730
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Sylvan Inc. and Subsidiaries
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
------ Six Months Ended -----
June 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,414 $ 2,871
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,831 2,560
Deferred income taxes 10 (74)
Noncash interest cost of employee benefits (221) (82)
Net gain on sale of assets (13) (5)
Trade accounts receivable 3,027 426
Inventories (1,155) (493)
Prepaid expenses and other assets (754) 1,240
Accounts payable and accrued liabilities (2,000) (1,194)
Postretirement medical and other employee benefits (596) (966)
Income taxes payable 582 598
Minority interest 99 170
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,224 5,051
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisition, net of cash acquired (1,619) 0
Net expenditures for property, plant and equipment (2,808) (4,627)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,427) (4,627)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (242) (200)
Net (repayments) borrowings under revolving credit line (1,026) 1,163
Common stock transactions, net 16 (135)
- -------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,252) 828
- -------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (249) (1,856)
- -------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (704) (604)
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, beginning of period 5,567 4,220
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 4,863 $ 3,616
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 1,582 $ 1,158
Income taxes paid 1,332 1,081
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES:
The Company purchased 90% of the capital stock of International Mushrooms
Limited (an Irish corporation) for 3,230,968 Dutch guilders (approximately $1.6
million). In conjunction with this acquisition, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 4,492
Cash paid for the capital stock (1,619)
------------
Liabilities assumed $ 2,873
============
</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
June 28, 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
These condensed consolidated financial statements of Sylvan Inc. (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 28, 1997.
Cash
The Company maintains a cash balance of approximately $2.5 million with a
U.S. bank in support of a loan advanced by a European bank. This balance
is reported under "Other Assets."
Inventories
Inventories at June 28, 1998 and December 28, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
June 28, 1998 December 28, 1997
-------------- -----------------
<S> <C> <C>
Growing crops and compost material $ 4,928 $ 3,757
Stores and other supplies 1,795 2,023
Mushrooms and spawn on hand 3,343 2,943
------- -----
$10,066 $ 8,723
======= =======
</TABLE>
Earnings Per Common Share
Earnings per share for the three months and six months ended June 28, 1998
and June 29, 1997 were calculated in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per
Share," using the weighted average number of shares outstanding during the
period and including the effect of stock options outstanding. Pursuant to
the Company's 1990 and 1993 Stock Option Plans, options for a total of
1,149,417 shares of the Company's common stock have been granted and
options for a total of 473,921 of these shares have been exercised as of
June 28, 1998.
The following tables reconcile the number of shares utilized in the
earnings per share calculations for the three months and six months ended
June 28, 1998 and June 29, 1997.
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended
June 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C>
Net income (in thousands) $1,480 $1,338
====== ======
Earnings per common share - diluted $ 0.23 $ 0.21
Earnings per common share - basic $ 0.23 $ 0.21
====== =======
Common shares - basic 6,460,989 6,385,455
Effect of dilutive securities:
Stock options 114,845 0
--------- ---------
Common shares - diluted 6,575,834 6,385,455
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 28, 1998 June 29,1997
------------- ------------
<S> <C> <C>
Net income (in thousands) $3,414 $2,871
====== ======
Earnings per common share - diluted $ 0.52 $ 0.45
Earnings per common share - basic $ 0.53 $ 0.45
====== ======
Common shares - basic 6,455,880 6,386,730
Effect of dilutive securities:
Stock options 101,262 1,222
--------- ---------
Common shares - diluted 6,557,142 6,387,952
========= =========
</TABLE>
For the quarter ended June 29, 1997, and for the six-month periods ended
June 28, 1998 and June 29, 1997, options to purchase approximately
427,000, 88,000 and 90,000 shares of common stock, 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 periods.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS
No. 133 will be effective for all fiscal quarters and fiscal years
beginning after June 15, 1999.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 revises an employer's disclosure requirements
about pension and other postretirement benefit plans, but does not change
the valuation or recognition of those plans. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits to
the extent practicable; requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis; and eliminates certain disclosure requirements. SFAS
No. 132 will be effective for the Company's financial statements for the
year ended January 3, 1999.
9
<PAGE> 10
Reclassifications
Certain reclassifications have been made to the prior-year condensed
consolidated financial statements to conform to the current-year
presentation.
2. CONTINGENT LIABILITIES:
Certain of the Company's subsidiaries are self-insured 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:
Maximum Aggregate
Year Beginning Outstanding Balance
-------------- -------------------
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
Outstanding borrowings under the Agreement bear interest at either the
Prime Rate or LIBOR (plus the applicable margin) at the Company's option.
On June 28, 1998, the Company had outstanding borrowings under the
Agreement of $26.6 million. The revolving credit loans mature on May 31,
2003.
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. Spending for capital
projects and paying dividends are subject to annual limitations. The
Company has pledged to the lending banks a security interest in the
capital stock of its subsidiaries.
The Company has two interest rate swap agreements which apply to $10.0
million of the Company's total long-term debt. The Company agreed to pay a
fixed interest rate over the life of the agreements of 6.08% and 6.03%
plus the applicable margin. The balance of long-term debt is subject to
variable interest rate pricing.
The Company has a French franc denominated loan of $2.5 million. Interest
is payable based on a formula that utilizes a Paris Interbank Offered Rate
plus the applicable margin. Repayment is due in January 2000. This loan is
supported by a compensating cash balance maintained in a U.S. bank.
10
<PAGE> 11
The Company's majority-owned Dutch subsidiary has a long-term plant and
equipment and overdraft facility with a Dutch bank. At June 28, 1998, term
loans amounting to 4.0 million Dutch guilders (approximately $2.0 million)
were outstanding under this agreement.
5. COMPREHENSIVE INCOME:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
quarter ended March 29, 1998. This accounting standard requires the
reporting of all changes in the equity of an enterprise that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. Prior to the
issuance of this standard, some of those changes in equity were displayed
in the income statement, while others were included directly in balances
within a separate component of equity in a statement of financial
position.
<TABLE>
<CAPTION>
Three Months Ended
June 28, 1998 June 29, 1997
------------- -------------
(unaudited, in thousands)
<S> <C> <C>
Net income $1,480 $1,338
Other comprehensive income:
Foreign currency translation adjustment 236 (1,020)
------ ------
Comprehensive income $1,716 $ 318
====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 28, 1998 June 29, 1997
------------- -------------
(unaudited, in thousands)
<S> <C> <C>
Net income $3,414 $ 2,871
Other comprehensive income:
Foreign currency translation adjustment (382) (3,243)
------ -------
Comprehensive income (loss) $3,032 $ (372)
====== =======
</TABLE>
11
<PAGE> 12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sylvan Inc. and Subsidiaries
RESULTS OF OPERATIONS (Three Months Ended June 28, 1998 and June 29, 1997)
Net Sales
Net sales for the three months ended June 28, 1998 were $21.0 million, a 7%
improvement over the second quarter of 1997. Spawn sales volume, measured in
units, increased by 3% with a 12% increase in Europe. The American spawn sales
volume decreased by 8% with continued lower demand in the United States and
Canada. The local currency unit selling prices were essentially unchanged in
Europe, while a mid-quarter price increase in the United States increased the
average selling price in the Americas by 1%. Sales of nutritional supplements
and disease-control agents increased by 74% over the corresponding 1997 quarter.
The French acquisition in December 1997 accounts for most of this increase.
North American mushroom revenues decreased by 1% on a 3% decrease in the average
selling price and a 2% increase in total pounds sold. The percentage of
mushrooms sold through the fresh channel was 89% for the current quarter, 6%
lower than the 95% for the second quarter of 1997. This percentage will
fluctuate with variations in quality, availability of supply and competitive
market practices. Fresh mushroom sales accounted for 36% of total sales, down
from 39% for the second quarter of 1997. Sales outside the United States were
47% of total sales for the quarter ended June 28, 1998, as compared with 44% for
the corresponding 1997 quarter.
Operating Costs and Expenses
Cost of sales was $12.2 million, or 58.2% of sales, for the current quarter, as
compared with $11.4 million, or 58.0% of sales, for the corresponding 1997
quarter. Increased European spawn production levels, which decreased the fixed
costs component on a per-unit basis, were offset by decreased production levels
in the United States. Selling, general, administrative, and research and
development costs continue to trend lower as a percent of sales. The second
quarter costs were $4.8 million, or 23.1% of sales, as compared with $4.6
million, or 23.3% of sales, for the corresponding 1997 quarter. Depreciation
expense was $1.3 million, or $131,000 higher than the second quarter of 1997.
Interest Expense
The Company's net interest expense for the second quarter of 1998 was $534,000,
or 5% higher than the corresponding 1997 quarter. The effective borrowing rate
for the current quarter was 6.8%, as compared with 7.5% for the second quarter
of 1997. Increased base borrowing was partially offset by the lower effective
borrowing rate.
Income Tax Expense
The effective income tax rate was 26% in the current quarter, as compared with
29% in the corresponding 1997 quarter. This decrease reflects a lower proportion
of the Company's total taxable income derived from North American operations.
RESULTS OF OPERATIONS (Six Months Ended June 28, 1998 and June 29, 1997)
Net Sales
Net sales for the six months ended June 28, 1998 were $43.0 million, or 9%
higher than the corresponding 1997 period. Spawn sales volume, measured in
units, increased by 3%, with a 12% increase in Europe and an 8% decrease in the
Americas. Lower volume sales in the United States and Canada account for the
American decrease. The local currency
12
<PAGE> 13
unit selling prices were essentially unchanged in both the European and American
markets. Overall realized selling prices were 2% lower due to the currency
translation effect of the stronger U.S. dollar. Sales of nutritional supplements
and disease-control agents increased by 87% over the corresponding 1997 period,
with the December 1997 French acquisition accounting for most of the increase.
North American mushroom revenues were 6% higher on a 5% increase in total pounds
sold. The percentage of mushrooms sold through the fresh channel was 92%, 2%
lower than the 94% for the corresponding 1997 period. Fresh mushroom sales
accounted for 37% of total sales, down from 38% for the 1997 period.
Operating Costs and Expenses
Cost of sales was 57.4% of sales for the six months ended June 28, 1998, as
compared with 57.9% of sales for the corresponding 1997 period. European spawn
production levels increased, which decreased the fixed costs component on a
per-unit basis. American production levels decreased, which conversely increased
the fixed cost component on a per-unit basis. Selling, general, administrative,
and research and development costs were 22.7% of sales, as compared with 23.3%
of sales for the corresponding 1997 period. Depreciation expense increased by
$256,000 to $2.5 million for the current six-month period.
Interest Expense
Net interest expense for the six months ended June 28, 1998 was $1.1 million, or
$52,000 higher than the corresponding 1997 period. The effective borrowing rate
was 6.9%, compared with 7.4% for the 1997 period. Increased base borrowing was
partially offset by the lower effective borrowing rate.
Income Tax Expense
The effective income tax rate for the current six-month period and for the
corresponding 1997 period was 29%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 28, 1998
was $5.2 million, an increase of $0.2 million over the six months ended June 29,
1997. Net trade accounts receivable decreased, contributing $3.0 million to net
cash flow, as compared with a contribution of $0.4 million in the 1997 period.
The majority of the net decrease resulted from the collection of trade
receivables by a recently acquired French subsidiary. Inventory levels increased
by $1.2 million in 1998, compared with an increase of $0.5 million in 1997.
Inventory levels increased significantly in the North American spawn business
and increased slightly in overseas operations, consistent with expected seasonal
trends. Prepaid expenses and other assets increased by $0.8 million in 1998,
compared with a decrease of $1.2 million in 1997. North American prepaid
expenses increased, but were slightly offset by a decrease in assets denominated
in French francs, as the U.S. dollar continued to strengthen against major
trading currencies. Accounts payable and accrued liabilities decreased by $2.0
million in 1998, compared with a decrease of $1.2 million in 1997. Most of the
net decrease in 1998 resulted from the settlement of trade payables in a
recently acquired French subsidiary. Cash expenditures relating to workers'
compensation liabilities were $0.4 million in the 1998 period, compared with
$0.2 million in the six months ended June 29, 1997.
Capital expenditures in the six months ended June 28, 1998 amounted to $2.8
million, compared with $4.6 million in the 1997 six-month period. Significant
capital projects undertaken so far in 1998 include the completion of an
additional spawn growing room at the Company's Netherlands facility, the
installation of a computer control system for an inoculum blender in
Pennsylvania and the ongoing construction of a new inoculum facility in France.
In addition, in May 1998, the Company acquired 90% of the stock of International
Mushrooms Limited, a company incorporated in the Republic of Ireland, for $1.6
million. Capital expenditures in 1998 are expected to total between $7 million
and $8 million. 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.
13
<PAGE> 14
Available credit under the Company's revolving credit arrangement was $13.4
million as of June 28, 1998. Term debt and revolving credit obligations
decreased by $1.3 million, compared with an increase of $1.0 million in the six
months ended June 29, 1997. Transactions under the Company's stock repurchase
plan amounted to $0.3 million in both the six months ended June 28, 1998 and the
six months ended June 29, 1997.
Forward-Looking and Cautionary Statements
In the Liquidity and Capital Resources section of this report, reference is made
to expectations regarding the Company's future cash resources. This
"forward-looking statement" is inherently uncertain and events could turn out to
be significantly different from what is expected, depending upon such factors as
pricing or product initiatives of the Company's competitors, changes in currency
and exchange risks, or changes in a specific country's or region's political or
economic conditions.
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 4.- Submission of Matters to a Vote of Security Holders
Sylvan Inc.'s annual meeting of shareholders was held on May 6, 1998. At the
meeting, the following persons, constituting the full board, were elected
directors of the Company to serve for a term of one year, expiring in 1999:
<TABLE>
<CAPTION>
----Number of Votes---
For Withheld
--- --------
<S> <C> <C>
William L. Bennett 5,379,382 65,920
Virgil H. Jurgensmeyer 5,379,499 65,803
Richard F. Lazzarini, Jr. 5,377,536 67,766
Donald T. Pascal 5,379,382 65,920
Dennis C. Zensen 5,379,449 65,853
</TABLE>
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: July 31, 1998 SYLVAN INC.
-----------------
By: /s/ DONALD A. SMITH
-----------------------------
Donald A. Smith
Corporate Controller
(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> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 4,863
<SECURITIES> 0
<RECEIVABLES> 11,631
<ALLOWANCES> 708
<INVENTORY> 10,066
<CURRENT-ASSETS> 29,839
<PP&E> 76,110
<DEPRECIATION> 25,863
<TOTAL-ASSETS> 95,874
<CURRENT-LIABILITIES> 13,260
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 46,853
<TOTAL-LIABILITY-AND-EQUITY> 95,874
<SALES> 42,959
<TOTAL-REVENUES> 42,959
<CGS> 24,665
<TOTAL-COSTS> 36,910
<OTHER-EXPENSES> 39
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,062
<INCOME-PRETAX> 4,948
<INCOME-TAX> 1,435
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,414
<EPS-PRIMARY> 0.52<F1>
<EPS-DILUTED> 0.53<F1>
<FN>
<F1>The Company adopted SFAS No. 128, "Earnings per Share" in 1997.
"EPS Primary" has been completed as Basic earnings per share and
"EPS Diluted" has been completed as Diluted earnings per share.
</FN>
</TABLE>
