<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 APRIL 4, 1999
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 April 30, 1999....6,303,736
<PAGE> 2
SYLVAN INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Part I - FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Balance Sheets
April 4, 1999 and January 3, 1999...............................................................3
Condensed Consolidated Statements of Income, Three Months
Ended April 4, 1999 and March 29, 1998..........................................................5
Condensed Consolidated Statements of Cash Flows, Three
Months Ended April 4, 1999 and March 29, 1998 ..................................................6
Notes to Condensed Consolidated Financial Statements
April 4, 1999 .................................................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................14
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
PART I-FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
April 4, 1999 January 3, 1999
------------- ---------------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,070 $ 6,497
Trade accounts receivable, net of allowance
for doubtful accounts of $835 and $710, respectively 11,365 12,630
Inventories 9,667 9,820
Prepaid income taxes and other expenses 1,668 1,459
Other current assets 3,759 1,505
Deferred income tax benefit 856 856
- ----------------------------------------------------------------------------------------------
Total current assets 33,385 32,767
Property, plant and equipment, net 51,850 53,439
Intangible assets, net of accumulated amortization
of $3,413 and $3,249, respectively 11,487 12,218
Other assets, net of accumulated amortization
of $285 and $272, respectively 1,333 4,126
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 98,055 $102,550
==============================================================================================
</TABLE>
The accompanying notes are an itegral part of these financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
April 4, 1999 January 3, 1999
------------- ---------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 3,141 $ 825
Accounts payable - trade 3,668 5,341
Accrued salaries, wages and other employee benefits 2,304 2,504
Other accrued liabilities 2,167 2,150
Income taxes payable 2,989 3,041
- ----------------------------------------------------------------------------------------------------
Total current liabilities 14,269 13,861
- ----------------------------------------------------------------------------------------------------
Long-term and revolving-term debt 32,024 34,586
- ----------------------------------------------------------------------------------------------------
Other long-term liabilities:
Other employee benefits 899 1,054
Other 1,261 1,437
- ----------------------------------------------------------------------------------------------------
Total other long-term liabilities 2,160 2,491
- ----------------------------------------------------------------------------------------------------
Minority interest 1,367 1,348
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares
authorized, 6,671,601 and 6,637,201 shares issued and
6,321,236 and 6,387,336 shares outstanding
at April 4, 1999 and January 3, 1999, respectively 7 7
Common capital contributed in excess of par 16,736 16,443
Retained earnings 42,928 41,657
Less: Treasury stock, at cost, 350,365 and 249,865 shares
at April 4, 1999 and January 3, 1999, respectively (3,606) (2,318)
--------- ---------
56,065 55,789
Cumulative translation adjustment (4,427) (2,122)
Pension adjustment (3,403) (3,403)
- ----------------------------------------------------------------------------------------------------
Accumulated other comprehensive deficit (7,830) (5,525)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 48,235 50,264
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 98,055 $ 102,550
====================================================================================================
</TABLE>
The accompanying notes are an itegral 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
April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
NET SALES $ 22,115 $ 21,988
- ----------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 12,948 12,459
Selling, administration, research and development 5,586 4,915
Depreciation 1,364 1,228
- ----------------------------------------------------------------------------------------------
19,898 18,602
- ----------------------------------------------------------------------------------------------
OPERATING INCOME 2,217 3,386
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 535 528
OTHER INCOME (EXPENSE) 79 (2)
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,761 2,856
PROVISION FOR INCOME TAXES 471 900
- ----------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 1,290 1,956
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 19 23
- ----------------------------------------------------------------------------------------------
NET INCOME $ 1,271 $ 1,933
==============================================================================================
NET INCOME PER SHARE - BASIC $ 0.20 $ 0.30
==============================================================================================
NET INCOME PER SHARE - DILUTED $ 0.20 $ 0.30
==============================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 6,360,284 6,450,771
==============================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 6,388,075 6,539,391
==============================================================================================
</TABLE>
The accompanying notes are an itegral 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
April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,271 $ 1,933
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,546 1,386
Employee benefits (217) (790)
Trade accounts receivable 790 246
Inventories (159) (898)
Prepaid expenses and other assets 567 201
Accounts payable and accrued liabilities (1,364) (456)
Other 28 259
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,462 1,881
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net expenditures for property, plant and equipment (1,744) (1,293)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (1,744) (1,293)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (189) (116)
Net borrowings (repayments) under revolving credit line 354 (217)
Proceeds from exercise of stock options 293 103
Purchase of treasury shares (1,288) (63)
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (830) (293)
- ----------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (315) (391)
- ----------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (427) (96)
CASH AND CASH EQUIVALENTS, beginning of period 6,497 5,567
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 6,070 $ 5,471
==============================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 644 $ 633
Income taxes paid 78 647
</TABLE>
The accompanying notes are an itegral part of these financial statements.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sylvan Inc. and Subsidiaries
April 4, 1999
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
-------
These condensed consolidated financial statements of Sylvan Inc. 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 January 3, 1999.
Cash
----
The company maintains a French franc denominated cash balance of
approximately FF15.0 million with a U.S. bank in support of a loan
advanced by a European bank. This balance is reported under "Other Current
Assets" as of April 4, 1999.
Inventories
-----------
Inventories at April 4, 1999 and January 3, 1999 consisted of the
following:
<TABLE>
<CAPTION>
April 4, 1999 January 3, 1999
------------- ---------------
(in thousands) (unaudited)
<S> <C> <C>
Growing crops and compost material $ 4,992 $ 4,882
Stores and other supplies 1,627 1,632
Mushrooms and spawn on hand 3,048 3,306
-------- --------
$ 9,667 $ 9,820
======== ========
</TABLE>
Earnings Per Common Share
-------------------------
Earnings per share for the three months ended April 4, 1999 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 1,261,750 shares of the company's
common stock have been granted and options for a total of 526,808 of these
shares have been exercised as of April 4, 1999.
The following table reconciles the number of shares utilized in the
earnings per share calculations for the three months ended April 4, 1999
and March 29, 1998.
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended
(unaudited) April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
Net income (in thousands) $1,271 $1,933
======== ======
Earnings per common share - basic $ .20 $ .30
======== ======
Earnings per common share - diluted $ .20 $ .30
======== ======
Common shares - basic 6,360,284 6,450,771
Effect of dilutive securities: stock options 27,791 88,620
--------- ---------
Common shares - diluted 6,388,075 6,539,391
========= =========
</TABLE>
Options to purchase 342,333 shares in the three months ended April 4, 1999
were outstanding, but were not included in the computation of diluted
earnings per share because the options' exercise prices were higher than
the average market price of the company's common shares for the period.
There were no shares excluded at March 29, 1998.
Reclassifications
-----------------
Certain reclassifications have been made to the prior-year condensed
consolidated financial statements to conform to the current-year
presentation.
2. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The company has a Revolving Credit Agreement with two commercial banks,
dated August 6, 1998. It provides for revolving credit loans on which the
aggregate outstanding balance available to the company may not initially
exceed $55.0 million. This aggregate outstanding balance will decline over
the life of the agreement as follows:
Maximum Aggregate
Period Beginning Outstanding Balance
---------------- -------------------
August 6, 2003 $50.0 million
August 6, 2004 45.0 million
Outstanding borrowings under the agreement bear interest at either the
Prime Rate or LIBOR (plus an applicable margin) at the company's option.
On April 4, 1999, the company had outstanding borrowings under the
agreement of $30.0 million. The revolving credit loans mature on August 5,
2005.
The agreement provides for the maintenance of various financial covenants
and includes limitations as to incurring additional indebtedness and the
granting of security interests to third parties. Obligations under the
agreement are guaranteed by certain wholly owned subsidiaries of the
company.
The company has a French franc denominated loan of FF15.0 million.
Interest is payable based on a formula that utilizes a Paris Interbank
Offered Rate plus an applicable margin. Repayment is due in January 2000.
This loan is supported by a compensating cash balance maintained in a U.S.
bank.
The company's majority-owned Dutch subsidiary has a long-term plant and
equipment and overdraft facility with a Dutch bank. At April 4, 1999, term
loans amounting to 3.3 million Dutch guilders were outstanding under this
agreement.
8
<PAGE> 9
3. COMPREHENSIVE INCOME:
Comprehensive income consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
(unaudited, in thousands) April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
Net income $ 1,271 $1,933
Other comprehensive income (loss):
Foreign currency translation adjustment (2,305) (618)
------- ------
Comprehensive income (loss) $(1,034) $1,315
======= ======
</TABLE>
4. BUSINESS SEGMENT INFORMATION:
The company has two reportable business segments: spawn, which includes
spawn-related products, and fresh mushrooms. The company is the world's
leading producer and distributor of spawn to mushroom growers.
Spawn-related products include casing inoculum, nutritional supplements and
disease-control agents. The fresh mushrooms business segment is comprised
of a large, regional producer of fresh mushrooms. During the quarter ended
April 4, 1999, the company made no changes in the basis of segmentation or
in the basis of measurement of segment profit or loss from that reported in
the January 3, 1999 financial statements.
<TABLE>
<CAPTION>
Three Spawn Fresh
Months Products Mushrooms
(unaudited, in thousands) Ended Segment Segment Total
----- ------- ------- -----
<S> <C> <C> <C> <C>
Total revenues 1999 $15,092 $7,326 $22,418
1998 14,019 8,218 22,237
Intersegment revenues 1999 303 -- 303
1998 249 -- 249
Segment operating income 1999 2,913 303 3,216
1998 3,225 1,019 4,244
</TABLE>
Reconciliation to Consolidated Financial Data
<TABLE>
<CAPTION>
Three Months Ended
(unaudited, in thousands) April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
Total revenues for reportable segments $22,418 $22,237
Elimination of intersegment revenues (303) (249)
------- -------
Total consolidated revenues $22,115 $21,988
======= =======
Segment operating income $ 3,216 $ 4,244
Unallocated corporate expenses (999) (858)
Interest expense, net (535) (528)
Other income (expense) 79 (2)
------- -------
Consolidated income before income taxes $ 1,761 $ 2,856
======= =======
</TABLE>
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 April 4, 1999 and March 29, 1998)
CONSOLIDATED REVIEW
Net Sales
- ---------
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Net sales $22,115 $21,988 1
</TABLE>
Net sales for the three months ended April 4, 1999 were $22.1 million, slightly
higher than the net sales of $22.0 million reported for the first quarter of
1998. International sales continued to increase as a percentage of sales to 52%
for the first quarter of 1999 versus 46% for the corresponding period of 1998.
Higher international sales expose the company to larger currency fluctuations.
The U.S. dollar was approximately 3% stronger for the first quarter of 1999
versus the same period in 1998. Additionally, since fiscal year-end 1998, the
U.S. dollar strengthened 7% on average against the company's major foreign
trading currencies.
Operating Costs and Expenses
- ----------------------------
<TABLE>
<CAPTION>
(dollars in thousands)
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Cost of sales $12,948 $12,459 4
Selling, administration, 5,586 4,915 14
research and development
Depreciation 1,364 1,228 11
</TABLE>
The company's cost of sales, expressed as a percentage of sales, was 58.5% for
the first quarter of 1999 versus 56.7% for the corresponding period of 1998.
Variations in production yields, which increased the fixed cost components at
the Quincy fresh mushroom operation, comprise the majority of this fluctuation.
The selling, administration, research and development expenses increased to $5.6
million, or 25.3% of sales, for the first quarter of 1999 from $4.9 million, or
22.4% of sales, for the corresponding period in 1998. The majority of the
period-over-period increase was attributable to increased professional fees,
additional bad debt reserves, the May 1998 acquisition of International
Mushrooms Ltd. (IML), and increased employee medical insurance amounts,
particularly related to the close-out of a self-insured program. This elevated
level of selling, administration, research and development expense is not
expected to continue into the second quarter. At $1.4 million, depreciation
expense was $136,000 higher than for the first quarter of 1998.
Interest Expense
- ----------------
The company's net interest expense for the first quarter of 1999 was $535,000,
which was 1% higher than in the corresponding 1998 quarter. The effective
borrowing rate for the 1999 quarter was 6.7%, as compared with 6.9% for the
first quarter of 1998. Higher levels of indebtedness between periods were
slightly offset by the lower effective interest rate.
10
<PAGE> 11
Income Tax Expense
- ------------------
The effective income tax rate was 27% in the first quarter of 1999, which was
slightly higher than the 26% effective income tax rate for fiscal year 1998.
During the first quarter of 1998 the company recorded an effective tax rate of
32%. This rate was in anticipation of a higher proportion of the company's total
taxable income to be derived from North American operations; however, due to the
strong European earnings and lower than anticipated Quincy earnings, a lower
effective tax rate resulted.
BUSINESS SEGMENTS
Spawn Products Segment
- ----------------------
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Sales, including intersegment $15,092 $14,019 8
Operating expenses 12,179 10,794 13
Operating income 2,913 3,225 (10)
</TABLE>
Net sales of spawn and spawn-related products were $15.1 million for the three
months ended April 4, 1999, or 8% higher than the corresponding period in 1998.
Spawn product sales volume, measured in units, increased 7%, with a 3% increase
in the Americas and a 9% increase in overseas markets. Strong volume increases
were achieved during the quarter, especially in the United Kingdom, Ireland,
Canada, France, Poland and South Africa. Some of the increases in the United
Kingdom and Ireland were due to the May 1998 acquisition of IML in markets
already served by the company. The European U.S. dollar equivalent selling price
was 2% higher in the 1999 three-month period than for the corresponding 1998
period. The American selling price was 1% higher in 1999 than in the first
quarter of 1998 due to a second-quarter 1998 price increase. The effect of this
price increase was somewhat offset by continued consolidation of the U.S.
mushroom industry. Sales of disease-control agents and nutritional supplements,
which accounted for 11% of consolidated net sales for the first quarter of 1999,
were consistent with the same period of 1998.
Operating expenses increased by 13% to $12.2 million during the first quarter of
1999 versus $10.8 million in the corresponding 1998 period. Within operating
expenses, cost of sales increased by 12% to $7.5 million, or 49.7% of sales, for
the first quarter of 1999 as compared with $6.7 million, or 47.9% of sales, for
the corresponding quarter of 1998. This increase was primarily due to the 7%
increase in volume of units sold. Other factors included the May 1998 IML
acquisition, which added a higher cost of sales percentage, and costs incurred
for the new blender installation in the Australian operation. The IML facility
will receive production upgrades in the fourth quarter of 1999, which will lower
its cost of sales percentage. The remaining operating expenses increased by 15%
to $4.7 million for the current quarter from $4.1 million in 1998, which as a
percentage of sales, increased to 31% in 1999 from 29% in 1998.
Operating income declined to 19.3% of sales during the first quarter of 1999
versus 23.0% for the corresponding period of 1998.
Fresh Mushrooms Segment
- -----------------------
<TABLE>
<CAPTION>
(dollars in thousands)
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Sales $7,326 $8,218 (11)
Operating expenses 7,023 7,199 (2)
Operating income 303 1,019 (70)
</TABLE>
11
<PAGE> 12
Sylvan's net mushroom sales decreased during the current quarter to $7.3 million
as compared with $8.2 million for the same period in 1998. This decrease was due
to 10% fewer pounds sold and a 1% decrease in average selling price per pound.
The percentage of mushrooms sold through the fresh channel was 92% for the first
quarter of 1999 and 94% for the corresponding quarter of 1998. Increased
competition in the southeastern United States during 1998 and 1999 has created a
softer market. This market condition is expected to continue.
Beginning in the second quarter and predominantly during the second half of
1998, Quincy experienced production inefficiencies that contributed to
production yield reductions, spreading a cost structure that is primarily fixed
in nature over fewer pounds. These production inefficiencies continued into the
first two months of 1999; however, Quincy did show substantial improvement in
March. The fresh mushroom cost of sales was $5.4 million, or 74.3% of sales, for
the first quarter of 1999 versus $5.7 million, or 69.8% of sales, for the
corresponding period of 1998.
The fresh mushroom operating income of 4% as a percentage of sales, or $.3
million, was lower than the 12% operating margin, as compared to sales, for the
corresponding quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended April 4,
1999 was $2.5 million, as compared with $1.9 million for the first quarter of
1998. Significant balance sheet changes were concentrated in three areas: trade
accounts receivable, prepaid expenses and other assets, and accounts payable and
accrued liabilities. Trade accounts receivable contributed $.8 million to
operating cash flow for the quarter, as compared with $.2 million in the prior
year quarter. The spawn products segment experienced a reduction in its trade
accounts receivable balance through management's effort to reduce overall
receivable exposures. Prepaid expenses and other assets decreased by $.6 million
in the current quarter, as compared with a decrease of $.2 million in the 1998
corresponding period. The majority of the 1999 decrease was due to the reduction
of employee-related prepaids in France and the reduction of advances paid to
suppliers by Quincy. Accounts payable and accrued liabilities decreased by $1.4
million in the first quarter of 1999, primarily due to payments made to
contractors which had been retained pending the satisfactory completion of
equipment startup tests at the French inoculum laboratory. The corresponding
1998 decrease of accounts payable and accrued liabilities was $.5 million.
Cash used in investing activities was $1.7 million for the first quarter of
1999, as compared with $1.3 million for the corresponding 1998 period.
Significant capital projects in the 1999 quarter included the continued
construction of a spawn production facility in South Africa, a replacement of
the Australian blender and the upgrading of chilling equipment at Quincy.
Capital expenditures in 1999 are expected to total between $6 million and $10
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.
Available credit under the company's revolving credit arrangement was $25.0
million as of April 4, 1999. Term debt and revolving credit increased $.2
million during the first quarter of 1999, as compared with a decrease of $.3
million in the corresponding 1998 quarter. The company repurchased 100,500
shares of its common stock during the first quarter of 1999 at an average
purchase price of $12.82 per share. By comparison, 5,100 shares were repurchased
during the first quarter of 1998 at an average price of $12.24 per share.
YEAR 2000 ISSUES
State of Readiness: Sylvan is currently executing an overall Year 2000
compliance strategy through an evaluation conducted by its business systems
department. The program consists essentially of addressing issues related to
four identified primary risk areas. These are:
12
<PAGE> 13
o business information systems;
o issues related to the company's products and customers;
o issues related to third-party product and service providers; and
o issues related to the company's facilities.
Business Information Systems: The business information systems program involves
an ongoing assessment of the potential exposures of general computer systems
utilized by each of Sylvan's sales, production and administrative subsidiaries.
The company believes that, as a result of software upgrades and computer system
purchases, Sylvan's computer systems should either not have a Year 2000 problem
or should have been warranted to be Year 2000 compliant by third-party vendors
during 1999.
Company Products and Customers: Exposures in production process areas relate
almost entirely to the presence of imbedded operating systems for spawn
production blenders and mushroom compost processing operations. A Year 2000
review has been conducted and the company believes that its mushroom compost
processing systems and other imbedded systems in the United States are Year 2000
compliant. Software modifications will be required for several blender systems
and for some European imbedded systems. These are expected to become available
and implemented during 1999.
Because the company is in a narrowly structured industry, a substantial portion
of its revenues is derived from a limited number of customers worldwide and, to
some extent, Sylvan's business is dependent upon the efforts of those entities
to address their own Year 2000 issues. However, the company believes that, due
to the fungible nature of the raw materials, supplies and services utilized by
Sylvan's customers and the relative ease of access to their customers and
markets, the risks of Year 2000 related disruptions for such third parties are
small and are not likely to have a material adverse effect on the company's
business, results of operations, equity or financial condition. However, the
company will continue to monitor this and other issues raised herein and respond
accordingly.
Third-Party Product and Service Providers: The review of issues relating to the
Year 2000 compliance of Sylvan's third-party product and service providers is in
process. It includes defining inventory management processes, planning a
third-party compliance assessment and identifying potential contingency plans or
remediation strategies. The company believes that, due to their fungible nature,
Year 2000 risk exposures relating to most of the raw materials and operating
supplies used in the production of the company's products are low. Issues could
exist with respect to the company's ability to obtain certain limited use items
from third parties such as packaging for spawn products. The necessity for
contingency plans will be evaluated and, if such plans appear warranted, those
plans will be revisited and revised as necessary.
Facilities: A preliminary review of issues related to the Year 2000 compliance
of Sylvan's facilities infrastructure has been completed and no major problems
or significant risks are currently anticipated.
Year 2000 Cost: The total cost for the company's Year 2000 compliance efforts is
currently estimated to be approximately $70,000. The majority of these costs
relate to computer system installations and software upgrades and have been, or
will be, capitalized and charged to expense over the estimated useful life of
the associated software and hardware. The remaining costs have been and will be
charged directly to expense. Additional costs could be incurred if significant
remediation activities are required, particularly with respect to third-party
suppliers, but the company does not anticipate that such costs will be material
at this time.
Risks and Contingency Plans: Based on the Year 2000 compliance work conducted to
date and described above, the company's most significant risk in its most likely
worst case scenario appears to be that, upon completion of its review of its
third-party product and service providers, certain of these suppliers may not be
compliant. Future operating results could be adversely affected, if such product
and service providers in fact do not become compliant in a timely manner and
cannot provide Sylvan with the products and services that it requires in a
timely and cost-effective manner and if the company is not able to obtain an
inventory of such items as spawn product packaging to deal with the Year 2000
compliance problems of bag vendors. However, the company
13
<PAGE> 14
believes that the vendor management process which is currently being developed
and undertaken will identify these potential risks.
At this time, a formal contingency plan for dealing with third-party product and
service providers who are not Year 2000 compliant has not been developed because
Sylvan does not believe that these issues are sufficiently material to warrant
it and the company anticipates that potential supply interruptions can be
avoided as described below. Nevertheless, the company will review this matter
during the course of its continued evaluation of potential risks and exposures.
The company believes that the raw materials, operating supplies and packaging
supplies that it requires are readily available from a number of suppliers and
that its service needs are not significantly different from those of other
companies. The company also believes that, for most if not all of its suppliers
who may be identified as being noncompliant, various remediation strategies may
be employed with particular suppliers as an alternative to switching suppliers.
These remediation strategies include, but are not limited to, increasing
purchases from suppliers in question prior to January 1, 2000 to provide a
safety stock.
EURO CURRENCY
Currently, Sylvan does not believe that the conversion to the Euro will have a
material impact on its business or financial condition. A single currency, the
Euro, was introduced in Europe on January 1, 1999. Of the 15 member countries of
the European Union, 11 agreed to adopt the Euro as their legal currency on that
date. Fixed conversion rates between the existing currencies of these 11
countries and the Euro were established as of that date. The existing currencies
are scheduled to remain legal tender as denominations of the Euro until at least
January 1, 2002. During this transition period, parties may settle transactions
using either the Euro or a participating country's legal currency.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding future performance of
the company. These "forward-looking statements" are based on currently available
competitive, financial and economic data and the company's operating plans, but
they are inherently uncertain. Events could turn out to be significantly
different from what is expected, depending upon such factors as mushroom raw
material production and growing process inconsistencies, 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material change since the end of the fiscal year.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1998, the company's Quincy subsidiary was served with a complaint filed
in the Circuit Court of the Second Judicial Circuit of Florida for Gadsden
County. The complaint seeks compensation, including loss of earnings, for a
group of approximately 60 former Quincy employees who allege that they were
illegally terminated in March 1996 as a result of their participation in
collective bargaining activities. The company responded to the complaint in the
same court and the proceedings have been stayed by agreement of the parties. The
company believes that the complaint and its claims are without merit, but
settlement discussions were undertaken with the claimants and a tentative
agreement has been negotiated. The company believes that the outcome will not
have a material adverse effect on the company's financial position, results of
operations or cash flows.
There are no other material pending legal proceedings to which Sylvan or any of
its subsidiaries is a party, or of which any of their property is subject, other
than ordinary, routine litigation incidental to their respective businesses.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Sylvan Inc.'s annual meeting of shareholders was held on April 29, 1999. 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 2000:
<TABLE>
<CAPTION>
Number of Votes
For Withheld
--- --------
<S> <C> <C>
William L. Bennett 5,368,733 561,739
Monir K. Elzalaki 5,370,593 559,879
Virgil H. Jurgensmeyer 5,371,949 558,523
Donald T. Pascal 5,372,432 558,040
Dennis C. Zensen 5,368,950 561,522
</TABLE>
In addition, the shareholders approved an amendment and restatement of the 1990
Stock Option Plan to provide for an increase to 1,700,000 in the number of
shares of the company's common stock which are available for the granting of
options. Votes received in favor of the amendment totaled 3,847,234; votes
against totaled 1,629,383; and the number of abstentions totaled 114,257.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
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: May 6, 1999 SYLVAN INC.
By: /s/ Donald A. Smith
---------------------------
Donald A. Smith
Chief Financial Officer
By: /s/ Fred Y. Bennitt
---------------------------
Fred Y. Bennitt
Secretary/Treasurer
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000861291
<NAME> SYLVAN, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> APR-04-1999
<CASH> 6,070
<SECURITIES> 0
<RECEIVABLES> 12,200
<ALLOWANCES> 835
<INVENTORY> 9,667
<CURRENT-ASSETS> 33,385
<PP&E> 81,434
<DEPRECIATION> 29,584
<TOTAL-ASSETS> 98,055
<CURRENT-LIABILITIES> 14,269
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 48,228
<TOTAL-LIABILITY-AND-EQUITY> 98,055
<SALES> 22,115
<TOTAL-REVENUES> 22,115
<CGS> 12,948
<TOTAL-COSTS> 19,898
<OTHER-EXPENSES> (79)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 535
<INCOME-PRETAX> 1,761
<INCOME-TAX> 471
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,271
<EPS-PRIMARY> 0.20<F1>
<EPS-DILUTED> 0.20<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>
